UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
   
o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
   
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
2010

OR
   
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to                    .


OR
   
o SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-15060
UBS AG
(Exact Name of Registrant as Specified in Its Charter)
Switzerland
(Jurisdiction of Incorporation or Organization)
Bahnhofstrasse 45
CH-8001 Zurich, Switzerland
and
Aeschenvorstadt 1
CH-4051 Basel, Switzerland
(Address of Principal Executive Offices)
Sarah M. Starkweather
UBS AG
677 Washington Boulevard
Stamford, CT 06901
Telephone: (203) 719-3000
Fax: (203) 719-0680
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Please see page 3.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Please see page 4.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Please see page 4.
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of 31 December 2009:2010:

 

Ordinary shares, par value CHF 0.10 per share: 3,558,112,753*3,830,840,513 ordinary shares (including 37,553,87238,892,031 treasury shares)
*As of December 31, 2009, UBS had outstanding mandatory convertible notes (“MCNs”) in the face amount of CHF 13 billion. Upon their conversion on 5 March 2010, these MCNs led to the issuance of 272,651,005 new shares out of conditional capital.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
   
Yesþ Noo
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
   
Yeso Noþ
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
   
Yesþ Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405205 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
   
Yesoþ Noþo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check One):
     
Large accelerated filerþ Accelerated filero Non-accelerated filero
Indicate by check mark which basis of accounting the registrant has used to prepare the financial
statements included in this filing.
     
U.S. GAAPo International Financial Reporting
Standards
as issued by the International
Accounting
Standards Boardþ		 Othero
If “Other” has been checked in response to the previous question, indicate by check mark which
financial statement item the registrant has elected to follow.
   
Item 17o Item 18o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as
(as defined in Rule 12b-2 of the Exchange Act)
   
Yeso
 Noþ
 
 

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Securities registered or to be registered pursuant to Section 12(b) of the Act:
   
  Name of each exchange on
Title of each class which registered
Ordinary Shares (par value of CHF 0.10 each) New York Stock Exchange
 
$300,000,000 Floating Rate Noncumulative Trust Preferred Securities New York Stock Exchange
 
$300,000,000 Floating Rate Noncumulative Company Preferred Securities New York Stock Exchange*
 
$1,000,000,000 6.243% Noncumulative Trust Preferred Securities New York Stock Exchange
 
$1,000,000,000 6.243% Noncumulative Company Preferred Securities New York Stock Exchange*
 
Subordinated Guarantee of UBS AG with respect to each of the
Noncumulative Company Preferred Securities above		 New York Stock Exchange*
 
$30,000,000 PPNs due April 2010 NYSE Alternext US
$31,000,000 PPNs due May 2010NYSE Alternext US
$23,000,000 PPNs due June 2010NYSE Alternext US
$10,000,000 PPNs due July 2010NYSE Alternext US
$7,750,000 PPNs due August 2010NYSE Alternext US
$12,660,000 PPNs due September 2010NYSE Alternext US
$8,000,000 PPNs due November 2010NYSE Alternext US
 
$17,842,000 PPNs due October 2011 NYSE Alternext US
 
$100,000,000 E-TRACS UBS Bloomberg CMCI Food ETN due April 2038 NYSE Arca
 
$50,000,000 E-TRACS UBS Bloomberg CMCI Agriculture ETN due April 2038 NYSE Arca
 
$50,000,000 E-TRACS UBS Bloomberg CMCI Energy ETN due April 2038 NYSE Arca
 
$100,000,000 E-TRACS UBS Bloomberg CMCI Total Return ETN due April 2038 NYSE Arca
 
$100,000,000 E-TRACS UBS Bloomberg Gold ETN due April 2038 NYSE Arca
 
$50,000,000 E-TRACS UBS Bloomberg CMCI Industrial Metals due April 2038NYSE Arca
$50,000,000 E-TRACS UBS Bloomberg CMCI Livestock ETN due April 2038NYSE Arca
$50,000,000 E-TRACS UBS Bloomberg CMCI Silver ETN due April 2038NYSE Arca
$50,000,000 E-TRACS UBS Long Platinum ETN due May 2018NYSE Arca
$50,000,000 E-TRACS UBS Short Platinum ETN due May 2018NYSE Arca
$100,000,000 E-TRACS UBS S&P 500 Gold Hedged Index ETN due January 2040NYSE Arca
$100,000,000 E-TRACS Dow Jones-UBS Commodity Index Total Return ETN due October 2039NYSE Arca
$100,000,000 E-TRACS Linked to the Alerian MLP Infrastructure Index due April 2, 2040 NYSE Arca

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  Name of each exchange on
Title of each class which registered
$50,000,000100,000,000 1xMonthly Short E-TRACS UBS Bloomberg CMCI Livestock ETNLinked to the Alerian MLP Infrastructure Total Return Index due April 2038NYSE Arca
$50,000,000 E-TRACS UBS Bloomberg CMCI Silver ETN due April 2038NYSE Arca
$50,000,000 E-TRACS UBS Long Platinum ETN due May 2018NYSE Arca
$50,000,000 E-TRACS UBS Short Platinum ETN due May 2018NYSE Arca
$100,000,000 E-TRACS UBS S&P 500 Gold Hedged Index ETN due JanuaryOctober 1, 2040 NYSE Arca
 
$100,000,000 2xMonthly Leveraged Long E-TRACS Linked to the Alerian MLP Infrastructure Index due July 9, 2040NYSE Arca
$100,000,000 E-TRACS Dow Jones-UBS CommodityLinked to the Alerian Natural Gas MLP Index Total Returndue July 9, 2040NYSE Arca
$100,000,000 E-TRACS Linked to the Wells Fargo® MLP Index due October 29, 2040
NYSE Arca
$100,000,000 E-TRACS Daily Long-Short VIX ETN due October 2039November 30, 2040 NYSE Arca
* Not for trading, but solely in connection with the registration of the corresponding Trust Preferred Securities.
* Not for trading, but solely in connection with the registration of the corresponding Trust Preferred Securities.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Auction Rate Securities Rights Series A-1, A-2, B-1, B-2, C-1, C-2 and G (non-transferable)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements that constitute “forward-looking statements”, including but not limited to management’s outlook for UBS’s financial performance and statements relating to the anticipated effect of transactions and strategic initiatives on UBS’s business and future development. While these forward-looking statements represent UBS’s judgments and expectations concerning the matters described, a number of risks, uncertainties and other important factors could cause actual developments and results to differ materially from UBS’s expectations. These factors include, but are not limited to: (1) future developments in the markets in which UBS operates or to which it is exposed, including movements in securities markets,prices or liquidity, credit spreads, currency exchange rates and interest rates; (2)rates and the effect of the current economic environment or otherconditions and market developments on the financial position or creditworthiness of UBS’s customersclients and counterparties; (3)(2) changes in the availability of capital and funding, including any changes in UBS’s credit spreads and ratings; (3) the ability of UBS to retain earnings and reduce its risk-weighted assets in order to comply with recommended Swiss capital requirements without adversely affecting its business; (4) the consequences of the recent Swiss court decision relating to the provision of certain UBS client data tochanges in financial regulation in Switzerland, the US, Internal Revenue Service,the UK and other major financial centers which may impose constraints on or necessitate changes in the scope and location of UBS’s business activities and in its legal and booking structures, including possible effectsthe imposition of more stringent capital and liquidity requirements, incremental tax requirements and constraints on UBS’s 2009 settlements with US authoritiesremuneration, some of which may affect UBS in a different manner or degree than they affect competing institutions; (5) the liability to which UBS may be exposed due to legal claims and on its businesses; (5)regulatory investigations, including those stemming from market dislocation and losses incurred by clients and counterparties during the financial crisis; (6) the outcome and possible consequences of pending or future actionsinquiries or inquiriesactions concerning UBS’s cross-border banking business by tax or regulatory authorities in various other jurisdictions; (6)(7) the degree to which UBS is successful in effecting organizational changes and implementing strategic plans, and whether those changes and plans will have the effects intended; (7)(8) UBS’s ability to retain and attract the employees that are necessary to generate revenues and to manage, support and control its businesses; (8) possible political, legal and regulatory developments, including the effect of more stringent capital and liquidity requirements, constraints on remuneration and the imposition of additional legal or regulatory constraints on UBS’s activities; (9) changes in accounting standards or policies, and accounting determinations affecting the recognition of gain or loss, the valuation of goodwill and other matters; (10) limitations on the effectiveness of UBS’s internal processes for risk management, risk control, measurement and modeling, and of financial models generally; (11) changes in the size, capabilities and effectiveness of UBS’s competitors;competitors, including whether UBS will be successful in keeping pace with competitors in updating its technology, particularly in trading businesses; and (12) the occurrence of operational failures, such as fraud, unauthorized trading and systems failures, either within UBS or within a counterparty; and (13) technological developments. In addition, actual results could depend on other factors that we have previously indicated could adversely affect ourcounterparty. Our business and financial performance which are containedcould 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 elsewhere in this report and in documents furnished by UBS and other filings made by UBS with the SEC.SEC, including UBS’s Annual Report on Form 20-F for the year ended 31 December 2010. UBS is not under any obligation to (and expressly disclaims any obligation to) update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise.
The effect of future changes in accounting standards
Included in the Notes to the Financial Statements is a description of the expected effect of IFRS accounting standards that have been issued but have not yet been adopted. Although we believe that description includes all significant matters that have been approved, the International Accounting Standards Board has a large number of projects in process that could result in significant new accounting standards or significant changes to existing standards. This increased level of activity includes normal ongoing development and efforts to improve the existing body of accounting standards, and also is in response to a number of perceived deficiencies in accounting standards. We believe it is likely that several new accounting standards will be issued in the near future, and that those new standards could have a significant effect on our reported results of operations and financial position, but we cannot predict the precise nature or amounts of any such changes.

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PART I
Item 1.Identity of Directors, Senior Management and Advisors.
Item 1.   Identity of Directors, Senior Management and Advisors.
     Not required because this Form 20-F is filed as an annual report.
Item 2.Offer Statistics and Expected Timetable.
Item 2.   Offer Statistics and Expected Timetable.
     Not required because this Form 20-F is filed as an annual report.
Item 3.Key Information.
Item 3.   Key Information
A—Selected Financial Data.
     Please seeSelected financial dataFinancial Dataon pages 400406 to 403409 andStatement of changes in equityon pages 258268 to 260270 of the Financial information report.Annual Report 2010 of UBS AG (the “Annual Report”) which is annexed hereto and forms an integral part hereof.
     The noon purchase rate for the Swiss franc on 28 February 2011 was 1.0747 USD per 1 CHF. See page 406 of the Annual Report for additional exchange rate information.
(a) Ratio of Earnings to Fixed ChargesCharges.
     Please see page 403409 of the Financial information reportAnnual Report and Exhibit 7 to this Form 20-F.
B—Capitalization and Indebtedness.
     Not required because this Form 20-F is filed as an annual report.
C—Reasons for the Offer and Use of Proceeds.
     Not required because this Form 20-F is filed as an annual report.
D—Risk Factors.
     Please see pages 25 to 2930 of the Strategy, performance and responsibility report.Annual Report.
Item 4.Information on the Company.
Item 4.   Information on the Company.
A—History and Development of the Company.Company
 
1-3 Please seeCorporate informationon page 6 of the Annual Report 2008.
Report.
4-6 Please seeThe making of UBSon page 2018 andKey factors affecting our financial position and results of operations in 20092010on pages 3132 to 3233 of the Strategy, performance and responsibility report.
Annual Report.
7 None.Not applicable.
B—Business Overview.
1, 2, 5, 71,2,5,7 Please refer to the UBS business divisions and Corporate Center reportAnnual Report on pages 7475 to 7677 (as to Wealth Management) and pages 81 to 82 (as to Retail & Corporate) with respect to Wealth Management & Swiss Bank, pages 8085 to 8287 with respect to Wealth Management Americas, pages 8692 to 9096 with respect to Global Asset

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Management, pages 95102 to 97103 with respect to the Investment Bank, and pages 103109 to 104110 with respect to the Corporate Center. For a breakdown of revenues by category of activity and geographic market for each of the last three financial years, please refer to Notes 2a and 2b to the Financial information reportconsolidated financial statements (the “Financial Statements”) contained in the Annual Report,Segment reportingon pages 283293 to 286296 andSegment reporting by geographic locationon page 287,297, respectively.
3 Please refer toSeasonal characteristicson page 3233 of the Strategy, performance and responsibility report.
Annual Report.
4 Not applicable.

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6 None.
8 Please seeRegulation and supervisionon pages 210215 to 212217 of the Corporate governance and compensation report.Annual Report.
C—Organizational Structure.
     Please see Note 34 to the Financial Statements,Significant subsidiaries and associates,on pages 350362 to 353365 of the Financial information report.Annual Report.
D—Property, Plant and Equipment.
     Please seeProperty, plant and equipmenton page 404410 of the Financial information report.Annual Report.
Information Required by Industry Guide 3
     Please seeInformation required by industry guide 3on pages 405411 to 418424 of the Financial information report.
     Under the headingsImpaired and non-performing loans andLoss history statistics on pages 413 and 418, respectively, of the Financial information report, figures as to impaired loans at 31 December 2008 are shown without adjustment for the new threshold we implemented in 2009 for designating a reclassified security as an “impaired loan”. SeeImpaired loans, allowances and provisions and footnote 5 to theAllowances and provisions for credit losses table appearing on pages 125 and 126, respectively, of the Risk and treasury management report for an explanation.
     Adjusting for the new threshold, at 31 December 2008 the Group had CHF 2,731 million in “other impaired loans” (not CHF 4,442 million as stated on page 413 of the Financial information report).
     The 31 December 2008 figures in theLoan history statistics table on page 418 of the Financial information report would be adjusted as follows: “Impaired loans” is 7,434 (not 9,145), “Impaired loans as a percentage of gross loans” is 1.8 (not 2.2), “Allowances and provisions for credit losses as a percentage of impaired loans” is 41.3 (not 33.6) and “Allocated allowances as a percentage of impaired loans” is 39.1 (not 31.8). In addition, we would add a footnote to the table, referencing the “Impaired loans” line for 31 December 2009 and 2008, reading as follows:
Excludes reclassified securities with adverse cash flow estimate revisions cumulatively below 5% of the carrying value at classification date, adjusted for redemptions. 31.12.08 numbers have been adjusted to reflect this change.
Annual Report. See alsoSelected financial dataon pages 400406 to 403409 of the Financial information reportAnnual Report for the return on equity attributable to UBS shareholders, return on average equity, return on average assets, dividend payout ratio and ratio of average equity to average assets.
Item 4.A.Unresolved Staff Comments.
Item 4A.   Unresolved Staff Comments.
     None.No material unresolved comments.
Item 5.Operating and Financial Review and Prospects.
Item 5.   Operating and Financial Review and Prospects.
A—Operating Results.
     Please seeFinancial performanceon pages 3031 to 5253 of the Strategy, performance and responsibility report.Annual Report. For a discussion of operating results by business division, please refer to the UBS business divisionsAnnual Report, page 74 and Corporate Center report, pages 7778 to 7980 (as to Wealth Management) and pages 83 to 84 (as to Retail & Corporate) with respect to Wealth Management & Swiss Bank, pages 8388 to 8591 with respect to Wealth Management Americas, pages 9197 to 94101 with respect to Global Asset Management, pages 98104 to 102108 with respect to the Investment Bank and pages 105110 to 107111 with respect to the Corporate Center.
     For information regarding the impact of foreign currency fluctuations, seeCorporate currency managementon page 151154 of the Risk and treasury management report.
     Please also seeExposure to monoline insurersandExposure to auction rate securitieson pages 139 to 141 of the Risk and treasury management report.Annual Report.
B—Liquidity and Capital Resources.
     We believe that our working capital is sufficient for the company’s present requirements. UBS liquidityLiquidity and capital management is undertaken at UBS as an integrated asset and liability management

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function. For a detailed discussion, please seeLiquidity and funding managementon pages 143147 to 149152 andCapital managementon pages 152155 to 157159 of the Risk and treasury management report.Annual Report.
     For a discussion of UBS’s borrowings and cash flows, please seeBalance sheeton pages 44 to 4647 andCash flowson page 5253 of the Strategy, performance and responsibility report.Annual Report.
     Please see alsoInterest rate and currency managementon pages 150153 to 151154 andShares and capital instrumentson pages 158160 to 160162 of the Risk and treasury management reportAnnual Report and Note 19 to the Financial Statements,Financial liabilities designated at fair value and debt issued,on pages 301312 to 302313 of the Financial information report.

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     For a discussion of UBS’s long-term credit ratings, please seeCredit Ratingson pages 147 to 148 of the Risk and treasury management report.Annual Report.
C—Research and Development, Patents and Licenses, etc.
     Not applicable.
D—Trend Information.
     Please seeCurrent market climate and industry driverson pages 2220 to 2421 of the Strategy, performance and responsibility report.Annual Report.
E—Off-balance Sheet Arrangements.
     Please seeOff-balance sheet arrangementson pages 4748 to 5152 of the Strategy, performance and responsibility reportAnnual Report and Notes 24 and 25 to the Financial Statements,Pledgeable off-balance-sheet securitiesandOperating lease commitments,respectively, on pages 316 to 317page 329 of the Financial information report.Annual Report.
F—Tabular Disclosure of Contractual Obligations.
     Please seeContractual obligationson page 5152 of the Strategy, performanceAnnual Report.
Item 6.   Directors, Senior Management and responsibility report.
Item 6.Directors, Senior Management and Employees.
Employees.
A—Directors and Senior Management.
1, 2, 31,2,3 Please see pages 191 to 194 and pages 198 to 201 and pages 205 to 209 of the Corporate governance and compensation report.
Annual Report.
4 and 5
4,5 None.
B—Compensation.
1 Please see pages 227240 to 238250 ofCompensation and shareholdingsin the Corporate governance and compensation reportAnnual Report and also Note 31 to the Financial Statements,Equity participation and other compensation plans,on pages 341351 to 346358 and Note 32 to the Financial Statements,Related parties,on pages 347359 to 349361 of the Financial information report.
Annual Report.
2 Please see Note 30 to the Financial Statements,Pension and other post-employment benefits plans,on pages 335345 to 340350 of the Financial information report.Annual Report.
C—Board Practices.practices.
1 Please see pages 191 to 195 and pages 198 to 201 in209 of the Corporate governance and compensation report.
Annual Report.
2 Please see Clauses on change of control on page 205pages 240 to 250 of the Corporate governance and compensation report, pages 228 to 230 ofCompensation and shareholdingsin the Corporate governance and compensation reportAnnual Report and Note 32 to the Financial Statements,Related parties,on pages 347359 to 349361 of the Financial Information report.Annual Report.

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3 Please seeAudit Committeecommitteeon page 195201 andHuman Resources and Compensation Committeeon page 196202 of the Corporate governance and compensation report.Annual Report.
D—Employees.

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     Please seeOur employeeson pages 5354 to 5758 of the Strategy, performance and responsibility report.Annual Report.
E—Share Ownership.
     Please seeShares and options held by the Board of Directors and Group Executive Boardon pages 231243 to 237250 in the Corporate governance and compensation report,Annual Report, Note 31 ofto the Financial Statements,Equity participation and other compensation plans,on pages 341351 to 346358 of the Financial information reportAnnual Report and “Equity holdings” in Note 32 to the Financial Statements,Related parties,on pages 347 to 349page 359 of the Financial information report.Annual Report.
Item 7.Major Shareholders and Related Party Transactions.
Item 7.   Major Shareholders and Related Party Transactions.
A—Major Shareholders.
     Please seeGroup structure and shareholderson pages 187 to 188page 191 of the Corporate governance and compensation report.Annual Report. At December 31, 2009,2010, the portion of UBS ordinary shares held in the United States was 281,524,630265,029,075 by 1,0641,128 record holders.
B—Related Party Transactions.
     Please seeLoanson page 238241 ofCompensation and shareholdingsin the Corporate governance and compensation report,Annual Report, Note 32 to the Financial Statements,Related parties,on pages 347359 to 349361 of the Financial information reportAnnual Report andLoans granted to members of the BoD on 31 December 2008/20092009/2010andLoans granted to members of the GEB on 31 December 2008/20092009/2010on page 392399 of the Financial information report.Annual Report.
The aforementioned loans (a) were made in the ordinary course of business, (b) were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and (c) did not involve more than the normal risk of collectability or present other unfavorable features.
C—Interests of Experts and Counsel.
     Not applicable because this Form 20-F is filed as an annual report.
Item 8.Financial Information.
Item 8.   Financial Information.
A—Consolidated Statements and Other Financial Information.
     Please see Item 18 of this Form 20-F. Please refer toDistributions to shareholderson page 160 of the Risk and treasury management report
1,2,3,4,5,6Please see Item 18 of this Form 20-F.
7Information on material legal and regulatory proceedings is in Note 21 to the Financial Statements,Provisions and contingent liabilities, on pages 314 to 319 of the Annual Report. For developments during the year, please see also the Financial Information section in each of our quarterly reports: First Quarter 2010 Report, filed on Form 6-K dated May 4, 2010 (Note 15,Litigation); Second Quarter 2010 Report, filed on Form 6-K dated July 27, 2010 (Note 15,Litigation); Third Quarter 2010 Report, filed on Form 6-K dated October 26, 2010 (Note 15,Litigation and regulatory matters); and Fourth Quarter 2010 Report, filed on Form 6-K dated February 8, 2011 (Note 14,Litigation and regulatory matters,and Note 15,Other contingent liabilities). The Notes in each such Quarterly Report speak only as of their respective dates.

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8Please refer toDistributions to shareholderson page 162 of the Annual Report for a description of UBS’s dividend policy.
B—Significant Changes.
     UBS is not aware of any significant change that has occurred since the date of the annual financial statements included in this Form 20-F. Please seeKey factors affecting our financial position and results of operations in 20092010on pages 3132 to 3233 of the Strategy, performance and responsibility reportAnnual Report and Note 33 to the Financial Statements,Events after the reporting period,on page 350362 of the Financial information reportAnnual Report.
Item 9.The Offer and Listing.
Item 9.   The Offer and Listing.
A—Offer and Listing Details.
1, 2, 3, 5, 6, 71,2,3,5,6,7 Not required because this Form 20-F is filed as an annual report.
4 Please seeStock exchange priceson page 163165 of the Risk and treasury management report.Annual Report.
B—Plan of Distribution.
     Not required because this Form 20-F is filed as an annual report.

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C—Markets.
     UBS’s shares are listed and traded on the SIX Swiss Exchange (but traded on SWX Europe),and the New York Stock Exchange and the Tokyo Stock Exchange. The symbols are shown on page 161163 of the Risk and treasury management report.Annual Report.
(a) Trading on SWX EuropeSIX Swiss Exchange
     Since JulyFrom 2001 to 2009, Swiss blue chip stocks have not beenwere traded on the SIX Swiss Exchange (formerly SWX Swiss Exchange). All trading in the shares of members of the Swiss Market Index now takes place on SWX Europe (formerly virt-x) in London, a subsidiary wholly owned by the SIX Group, although these stocks remainremained listed on the SIX Swiss Exchange. In 2009, trading of blue chip stocks and ETFs was repatriated to Switzerland.
     SWX Europe is wholly owned by the SIX Group. ItSwiss Exchange is a cross-border platform providing a pan-European blue-chip market. It addresses the increasing requirement for equity investment to be conducted on a sectoral basis across Europe rather than being limited to national markets.
     SWX Europe is a Recognized Overseas Investment Exchange supervised by the Financial Services Authority in the United Kingdom.FINMA. It is delivered on the modern, scalable SIX trading platform.
     TradingSIX Swiss Exchange is possibleopen from Monday to Friday, except on all targetSwiss public holidays. Exchange days as specified byare also clearing days. This means that trading takes place and that trades can be forwarded to the European Central Bank. The openingcentral counterparty (CCP) or central securities depository (CSD) for clearing and settlement. Exchange hours are 06:006 a.m. to 22:00 CET and the trading10 p.m. CET. Clearing hours are 09:008 a.m. to 17:306:15 p.m. CET. During the after-hours trading phase from 17:30 to 22:00 CET and in the pre-trading phase from 06:00 to 09:00 CET, orders can be entered or deleted. From 09:00 CET, once the opening price is set, trading begins. Orders are executed automatically according to established rules that match bid and ask prices. Regardless of their size or origin, incoming orders are executed on a price/time priority, i.e., in the order of price (first priority) and time received (second priority). Depending on the type of transaction, the order and trade details are also transmitted to data vendors (Reuters, Bloomberg, Telekurs, etc.).
     In most cases, each trade triggers an automatic settlement instruction which is routed through one of three central securities depositories (CSD); SIS SegaInterSettle AG, CrestCo or Euroclear. Members can choose to settle from one or more accounts within these CSD’s and when counterparties have selected different CSD’s, settlement will be cross-border. Additionally, SWX Europe offers a choice of Central Counterparties (CCP) for cross-border trading.
     All trades executed through the order book settle on a uniform “T+3” basis, meaning that delivery and payment of exchange transactions occur three business days after the trade date. The buyer is able to ask SWX EuropeSIX Swiss Exchange to enforce settlement if the seller has not delivered within three business days of the intended settlement date.
     Any transaction executed under the rules of SWX EuropeSIX Swiss Exchange must be reported to SWX Europe.SIX Swiss Exchange. Order book executions are automatically reported by the trading system. There are separate provisions for the delayed reportingpublication of certain qualifying trades. Individual elements of portfolio trades must be reported within one hour while block trades and enlarged risk trades must be reported when the business is substantially (80%) complete, or by the end of order book trading that day, unless the trade is agreed one hour or less before the market close, when the trade must be reported by the end of order book trading on the following market day. Block trades and enlarged risk trades are subject to minimum trade size criteria. During normal trading hours, all other transactions must be reported within three minutes. The enlarged risk trades provisions enable a member to protect a client’s interest while the member works a large trade on behalf of the client. The block trade provisions allow a member a publication delay when the member has executed a large transaction for a client; the delay gives the member time in which to offset the risk of the large trade.
     In the event of extraordinary situations such as large price fluctuations and other situations likely to hamper fair and orderly trading, SWX EuropeSIX Swiss Exchange may take whatever measures it deems necessary

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to maintain fair and orderly markets. A listed security may be suspended, the opening of trading in that security may be delayed or continuous trading may be interrupted.

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(b) Trading on the New York Stock Exchange
     UBS listed its shares on the New York Stock Exchange (the “NYSE”) on May 16, 2000.
     As of 31 December 2009,2010, the securities of more than 2,300 operating corporations with a total combined market valuation of approximately USD 18.716.3 trillion were listed on the NYSE, including nearly 500519 non-U.S. issuers from 47 countries.
     The NYSE is open Monday through Friday, 9:30 A.M. to 4:00 P.M., EST.
     The NYSE is an agency auction market. Trading at the NYSE takes place by open bids and offers by Exchange members, acting as agents for institutions or individual investors. Buy and sell orders meet directly on the trading floor, and prices are determined by the interplay of supply and demand. In contrast, in the U.S. over-the-counter market, the price is determined by a dealer who buys and sells out of inventory.
     At the NYSE, each listed stock is assigned to a single post where the specialist manages the auction process. NYSE members bring all orders for NYSE-listed stocks to the Exchange floor either electronically or through a floor broker. As a result, the flow of buy and sell orders for each stock is funneled to a single location.
     This heavy stream of diverse orders is one of the great strengths of the NYSE. It provides liquidity — liquidity—the ease with which securities can be bought and sold without wide price fluctuations.
     When an investor’s transaction is completed, the best price will have been exposed to a wide range of potential buyers and sellers.
     Every transaction made at the NYSE is under continuous surveillance during the trading day. Stock Watch, a computer system that searches for unusual trading patterns, alerts the NYSE’s regulatory personnel to possible insider trading abuses or other prohibited trading practices. The NYSE’s other regulatory activities include the supervision of member firms to enforce compliance with financial and operational requirements, periodic checks on brokers’ sales practices, and the continuous monitoring of specialist operations.
(c) Trading on the Tokyo Stock Exchange
     The volume of UBS shares traded on the Tokyo Stock Exchange (TSE) is negligible in comparison to the volume on SWX Europe or on the NYSE.
     On 4 February 2010 UBS AG’s Board of Directors resolved to delist the firm’s shares from the TSE. Pending the TSE’s approval of the delisting application, we expect de-listing to take place in the second quarter of 2010.
D—Selling Shareholders.
     Not required because this Form 20-F is filed as an annual report.
E—Dilution.
     Not required because this Form 20-F is filed as an annual report.
F—Expenses of the Issue.
     Not required because this Form 20-F is filed as an annual report.
Item 10.Additional Information.
Item 10.   Additional Information.

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A—Share Capital.
     Not required because this Form 20-F is filed as an annual report.
B—Memorandum and Articles of Association.
     Please see the Articles of Association of UBS AG and the Organization Regulations of UBS AG (Exhibits 1.1 and 1.2, respectively, ofto this Form 20-F).
     Set forth below is a summary of the material provisions of our Articles of Association, which we call the “Articles” throughout this document, Organization Regulations and the Swiss Code of Obligations relating to our shares. This description does not purport to be complete and is qualified in its entirety by references to Swiss law, including Swiss company law, and to the Articles and Organization Regulations.
     The shares are registered shares with a par value of CHF 0.10 per share. The shares are fully paid up.
     Each share carries one vote at our shareholders’ meetings. Voting rights may be exercised only after a shareholder has been recorded in our share register as a shareholder with voting rights. Registration with voting rights is subject to certain restrictions. See “— Transfer of Shares” and “—Shareholders’ Meeting”.
     The Articles provide that we may elect not to print and deliver certificates in respect of registered shares. Shareholders may, however, following registration in the share register, request at any time that we print and deliver such certificates freeissue a written statement in respect of charge.their shares.
Transfer of Shares
     The transfer of shares is effected by corresponding entry in the books of a bank or depository institution following an assignment in writing by the selling shareholder and notification of such assignment to us by the bank or depository institution. The transfer of shares further requires that the purchaser file a share registration form in order to be registered in our share register as a shareholder. Failing such registration, the purchaser may not vote at or participate in shareholders’ meetings.
     A purchaser of shares will be recorded in our share register with voting rights upon disclosure of its name, citizenship and address. However, we may decline a registration with voting rights if the shareholder does not declare that it has acquired the shares in its own name and for its own account. If the shareholder refuses to make such declaration, it will be registered as a shareholder without voting rights.
     There is no limitation under Swiss law or our Articles on the right of non-Swiss residents or nationals to own or vote our shares.
Shareholders’ Meeting
     Under Swiss law, annual ordinary shareholders’ meetings must be held within six months after the end of our fiscalfinancial year, which is 31 December. Shareholders’ meetings may be convened by the Board of Directors (BoD) or, if necessary, by the statutory auditors, with twenty-days’twenty days’ advance notice. The BoD is further required to convene an extraordinary shareholders’ meeting if so resolved by a shareholders’ meeting or if so requested by shareholders holding in aggregate at least 10% of our nominal share capital. Shareholders holding shares with an aggregate par value of at least CHF 62,500 have the right to request that a specific proposal be put on the agenda and voted upon at the next

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shareholders’ meeting. A shareholders’ meeting is convened by publishing a notice in the Swiss Official Commercial Gazette (Schweizerisches Handelsamtsblatt) at least twenty days prior to such meeting.
     The Articles do not require a minimum number of shareholders to be present in order to hold a shareholders’ meeting.
     Resolutions generally require the approval of an “absolute majority” of the votes cast at a shareholders’ meeting. Shareholders’ resolutions requiring a vote by absolute majority include:

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 • amendmentsAmendments to the Articles;
 • electionsElections of directors and statutory auditors;
 
• approvalApproval of the annual report and the consolidated statements of accounts;
 
• approvalApproval of the annual financial statements and the resolution on the use of the balance sheet profit (declaration of dividend);
 
• decisionsDecisions to discharge directors and management from liability for matters disclosed to the shareholders’ meeting; and
 
• passingPassing resolutions on matters which are by law or by the Articles reserved to the shareholders’ meeting (e.g., the ordering of an independent investigation into the specific matters proposed to the shareholders’ meeting).
     Under the Articles, a resolution passed at a shareholders’ meeting with a supermajority of at least two thirds of the Shares represented at such meeting is required to:
 • changeChange the limits on BoD size in the Articles;
 
• removeRemove one fourth or more of the members of the BoD; or
 
• deleteDelete or modify the above supermajority voting requirements.
     Under Swiss corporate law, a resolution passed by at least two thirds of votes represented and an absolute majority of the par value of the shares represented must approve:
 • aA change in our stated purpose in the Articles;
 
• theThe creation of shares with privileged voting rights;
 
• aA restriction ofon transferability;
 • anAn increase in authorized capital;
 
• anAn increase ofin capital out of equity against contribution in kind, for the purpose of acquisition and granting of special rights;
 
• changesChanges to pre-emptive rights;
 • aA change of domicile of the corporation; or
 
• dissolutionDissolution of the corporation without liquidation.
     At shareholders’ meetings, a shareholder can be represented by his or her legal representative or under a written power of attorney by another shareholder eligible to vote, by a corporate proxy, by the independent proxy or by a custodial proxy. Votes are taken electronically, by written ballot or by a show of hands. If a written ballot is requested by at least 3% of the votes present at the shareholders’ meeting or such ballot is ordered by the Chairman of the meeting, a written ballot will be conducted.
Net Profits and Dividends
     Swiss law requires that at least 5% of the annual net profits of a corporation must be retained as general reserves for so long as these reserves amount to less than 20% of the corporation’s nominal share capital. Any net profits remaining are at the disposal of the shareholders’ meeting, except that, if

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an annual dividend exceeds 5% of the nominal share capital, then 10% of such excess must be retained as general reserves.
     Under Swiss law, dividends may be paid out only if the corporation has sufficient distributable profits from previous business years or if the reserves of the corporation are sufficient to allow distribution of a dividend. In either event, dividends may be paid out only after approval by the shareholders’ meeting. The BoD may propose that a dividend be paid out, but cannot itself set the dividend. The auditors must confirm that the dividend proposal of the BoardBoD conforms with statutory law. In practice, the shareholders’ meeting usually approves the dividend proposal of the BoD.
     Dividends are usually due and payable after the shareholders’ resolution relating to the allocation of profits has been passed. Under Swiss law, the statue of limitations in respect of dividend payments is five years.
     U.S. holders of shares will receive dividend payments in U.S. dollars, unless they provide notice to our U.S. transfer agent, Mellon Investor Services, that they wish to receive dividend payments in Swiss francs.

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Mellon Investor Services will be responsible for paying the U.S. dollars or Swiss francs to registered holders, and for withholding any required amounts for taxes or other governmental charges. If Mellon Investor Services determines, after consultation with us, that in its judgment any foreign currency received by it cannot be converted into U.S. dollars or transferred to U.S. holders, it may distribute the foreign currency received by it, or an appropriate document evidencing the right to receive such currency, or in its discretion hold such foreign currency for the accounts of U.S. holders.
Preemptive Rights
     Under Swiss law, any share issue, whether for cash or non-cash consideration or for no consideration, is subject to the prior approval of the shareholders’ meeting. Shareholders of a Swiss corporation have certain preemptive rights to subscribe for new issues of shares in proportion to the nominal amount of shares held. The Articles or a resolution adopted at a shareholders’ meeting with a supermajority may, however, limit or suspend preemptive rights in certain limited circumstances.
Borrowing Power
     Neither Swiss law nor the Articles restrict in any way our power to borrow and raise funds. No shareholders’ resolution is required.
Conflicts of InterestsInterest
     Swiss law does not have a general provision on conflicts of interests.interest. However, the Swiss Code of Obligations requires directors and members of senior management to safeguard the interests of the corporation and, as such, imposes a duty of care and a duty of loyalty on directors and officers. This rule is generally understood as disqualifying directors and senior officers from participating in decisions that directly affect them. Directors and officers are personally liable to the corporation for any breach of these provisions. In addition, Swiss law contains a provision under which payments made to a shareholder or a director or any person associated therewith, other than at arm’s length, must be repaid to us if the shareholder or director was acting in bad faith.
     In addition, our Organization Regulations prohibit any member of the BoD from participating in discussions and decision-making regarding a matter as to which he or she has a conflict of interest.

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Repurchase of Shares
     Swiss law limits a corporation’s ability to hold or repurchase its own shares. We and our subsidiaries may only repurchase shares if we have sufficient free reserves to pay the purchase price and if the aggregate nominal value of the shares does not exceed 10% of our nominal share capital. Furthermore, we must create a special reserve on our balance sheet in the amount of the purchase price of the acquired shares. Such shares held by us or our subsidiaries do not carry any rights to vote at shareholders’ meetings.
Notices
     Notices to shareholders are made by publication in the Swiss Official Gazette of Commerce. The BoD may designate further means of communication for publishing notices to shareholders.
     Notices required under the listing rules of the SIX Swiss Exchange will be published in two Swiss newspapers in German and French. We or the SIX Swiss Exchange may also disseminate the relevant information on the online exchange information systems.
Registration and Business Purpose
     We are registered as a corporation in the commercial registers of Canton Zurich and Canton Basle-City under the registration number CH-270.3.004.646-4 and have registered offices in Zurich and Basel, Switzerland.

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     Our business purpose, as set forth in our Articles, is the operation of a bank, with a scope of operations extending to all types of banking, financial, advisory, trading and service activities in Switzerland and abroad.
Duration, Liquidation and Merger
     Our duration is unlimited.
     Under Swiss law, we may be dissolved at any time by a shareholders’ resolution which must be passed by (1) an absolute majority of the shares represented at the meeting in the event we are to be dissolved by way of liquidation, or (2) a supermajority of at least two thirds of the votes represented and an absolute majority of the par value of the shares represented at the meeting in other events (for example, in a merger where we are not the surviving entity). Dissolution by court order is possible if we become bankrupt.
     Under Swiss law, any surplus arising out of a liquidation (after the settlement of all claims of all creditors) is distributed to shareholders in proportion to the paid-up nominal value of shares held.
Disclosure of Principal Shareholders
     Under the applicable provisions of the new Swiss Stock Exchange Act, shareholders and shareholders acting in concert with third parties who reach, exceed or fall below the thresholds of 3%, 5%, 10%, 15%, 20%, 25%, 33 1/3%, 50% or 66 2/3% of the voting rights of a Swiss listed corporation must notify the corporation and the SIX Swiss Exchange on which such shares are listed of such holdings, whether or not the voting rights can be exercised. Following receipt of such notification, the corporation has the obligation to inform the public. The corporation must disclose in an attachment to the balance sheet the identity of any shareholders who own in excess of 5% of its shares.

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Mandatory Tender Offer
     Under the Swiss Stock Exchange Act, shareholders and groups of shareholders acting in concert who acquire more than 33 1/3% of the voting rights of a listed Swiss company will have to submit a takeover bid to all remaining shareholders. A waiver from the mandatory bid rule may be granted by our supervisory authority. If no waiver is granted, the mandatory takeover bid must be made pursuant to the procedural rules set forth in the Swiss Stock Exchange Act and implementing ordinances.
Other
     Ernst & Young Ltd, Aeschengraben 9, CH-4051 Basel, Switzerland, have been appointed as statutory auditors and as auditors of the consolidated accounts of UBS. The auditors are subject to confirmation by the shareholders at the ordinary general meeting on an annual basis.
     Please seeCapital structureon pages 189193 to 190,195,Shareholders’ participation rightson pages 203196 to 204197 andElection and terms of officeon page 195202 of the Corporate governance and compensation report.Annual Report.
C—Material Contracts.
Please see Note 21 to the Financial StatementsProvisions and litigationon pages 303 to 306 of the Financial information report.     None.
D—Exchange Controls.
     There are no restrictions under UBS’s Articles of Association or Swiss law, presently in force, that limit the right of non-resident or foreign owners to hold UBS’s securities freely. There are currently no Swiss foreign exchange controls or other Swiss laws restricting the import or export of capital by UBS or its

15

subsidiaries. In addition, there are currently no restrictions under Swiss law affecting the remittance of dividends, interest or other payments to non-resident holders of UBS securities.
E—Taxation.
     This section outlines the material Swiss tax and U.S. federal income tax consequences of the ownership of UBS ordinary shares by a U.S. holder (as defined below) who holds UBS ordinary shares as capital assets. It is designed to explain the major interactions between Swiss and U.S. taxation for U.S. persons who hold UBS shares.
     The discussion does not address the tax consequences to persons who hold UBS ordinary shares in particular circumstances, such as tax-exempt entities, banks, financial institutions, life insurance companies, broker-dealers, traders in securities that elect to use a mark-to-market method of accounting for securities holdings, holders liable for alternative minimum tax, holders that actually or constructively own 10% or more of the voting stock of UBS, holders that hold UBS ordinary shares as part of a straddle or a hedging or conversion transaction or holders whose functional currency for U.S. tax purposes is not the U.S. dollar. This discussion also does not apply to holders who acquired their UBS ordinary shares through a tax-qualified retirement plan, nor generally to unvested UBS ordinary shares held under deferred compensation arrangements.
     The discussion is based on the tax laws of Switzerland and the United States, including the U.S. Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations under the Internal Revenue Code, published rulings and court decisions, as in effect on the date of this document, as well as the Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income, which we call the “Treaty,” all of which may be subject to change or change in interpretation, possibly with retroactive effect.

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     For purposes of this discussion, a “U.S. holder” is any beneficial owner of UBS ordinary shares that is for U.S. federal income tax purposes:
 • aA citizen or resident of the United States,
States;
 • aA domestic corporation or other entity taxable as a corporation,
corporation;
 • anAn estate, the income of which is subject to U.S. federal income tax without regard to its source,source; or
 • aA trust, if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust.
     The discussion does not generally address any aspects of Swiss taxation other than income and capital taxation or of U.S. taxation other than federal income taxation. Holders of UBS shares are urged to consult their tax advisors regarding the U.S. federal, state and local and the Swiss and other tax consequences of owning and disposing of these shares in their particular circumstances.
(a) Ownership of UBS Ordinary Shares-Swiss Taxation
Dividends and Distributions
     Dividends paid by UBS to a holder of UBS ordinary shares (including dividends on liquidation proceeds and stock dividends) are in principle subject to a Swiss federal withholding tax at a rate of 35%. The
     Until the end of 2010, the Par Value Principle was applicable. Under the Par Value Principle any distribution, which was not a repayment of the par value of the shares, was subject to Swiss withholding tax.
     Starting 1 January 2011, the Par Value Principle was replaced by the Capital Contribution Principle. Under the Capital Contribution Principle, the repayment of capital contributions, including share premiums made by the shareholders after December 31, 1996 is in principle no longer subject to Swiss withholding tax must be withheld fromif certain requirements regarding the gross distribution, and be paid to thebooking of these capital contributions are met. The Swiss Federal Tax Administration.Administration issued guidelines on how the Capital Contribution Principle has to be applied. Nevertheless certain aspects are still unclear and disputed respectively.
     A U.S. holder that qualifies for Treaty benefits may apply for a refund of the withholding tax withheld in excess of the 15% Treaty rate (or for a full refund in case of qualifying retirement arrangements). The claim for refund must be filed with the Swiss Federal Tax Administration, Eigerstrasse 65, CH-3003 Berne, Switzerland no later than December 31 of the third year following the end of the calendar year in which the income subject to withholding was due. The form used for obtaining a refund is Swiss Tax Form 82 (82 C for companies; 82 E for other entities; 82 I for individuals; 82 R for regulated investment companies), which may be obtained from any Swiss Consulate General in the United States or from the Swiss Federal

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Tax Administration at the address above. The form must be filled out in triplicate with each copy duly completed and signed before a notary public in the United States. The form must be accompanied by evidence of the deduction of withholding tax withheld at the source.
     Mellon Investor Services, the registrar for UBS AG shares in the United States, is offering tax reclamation services for the cash dividends.
     Repayment of capital in the form of a par value reduction is not subject to Swiss withholding tax.
Transfers of UBS Ordinary Shares
     The purchase or sale of UBS ordinary shares, whether by Swiss resident or non-resident holders (including U.S. holders), may be subject to a Swiss securities transfer stamp duty of up to 0.15%

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calculated on the purchase price or sale proceeds if it occurs through or with a bank or other securities dealer in Switzerland as defined in the Swiss Federal Stamp Tax Act.Act in Switzerland or the Principality of Liechtenstein. In addition to the stamp duty, the sale of UBS ordinary shares by or through a member of a recognized stock exchange may be subject to a stock exchange levy.
     Capital gains realized by a U.S. holder upon the sale of UBS ordinary shares are not subject to Swiss income or gains taxes, unless such U.S. holder holds such shares as business assets of a Swiss business operation qualifying as a permanent establishment for the purposes of the Treaty. In the latter case, gains are taxed at ordinary Swiss individual or corporate income tax rates, as the case may be, and losses are deductible for purposes of Swiss income taxes.
(b) Ownership of UBS Ordinary Shares-U.S. Federal Income Taxation
Dividends and DistributionDistributions
     Subject to the passive foreign investment company rules discussed below, U.S. holders will include in gross income the gross amount of any dividend paid, before reduction for Swiss withholding taxes, by UBS out of its current or accumulated earnings and profits, as determined for U.S. federal income tax purposes, as ordinary income when the dividend is actually or constructively received by the U.S. holder. Distributions in excess of current and accumulated earnings and profits, as determined for U.S. federal income tax purposes, will be treated as a return of capital to the extent of the U.S. holder’s basis in its UBS ordinary shares and thereafter as capital gain.
     Dividends paid to a noncorporate U.S. holder in taxable years beginning before January 1, 20112013 that constitute qualified dividend income will be taxable to the holder at a maximum rate of 15%, provided that the holder has a holding period in the shares of more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meets other holding period requirements. Dividends paid by UBS with respect to the shares will generally be qualified dividend income.
     For U.S. federal income tax purposes, a dividend will include a distribution characterized as a repayment of capital in the form of a par value reduction, if the distribution is made out of current or accumulated earnings and profits, as described above.
     Dividends will generally be income from sources outside the United States for foreign tax credit limitation purposes, and will, depending on the holder’s circumstances, be either “passive” or “general” income for purposes of computing the foreign tax credit allowable to the holder. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15% rate. The dividend will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations.
     The amount of the dividend distribution included in income of a U.S. holder will be the U.S. dollar value of the Swiss franc payments made, determined at the spot Swiss franc/U.S. dollar rate on the date such dividend distribution is includible in the income of the U.S. holder, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend distribution is included in income to the date such

17

dividend distribution is converted into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. Such gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.
     Subject to U.S. foreign tax credit limitations, the nonrefundable Swiss tax withheld and paid over to Switzerland will be creditable or deductible against the U.S. holder’s U.S. federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15% tax rate. To the extent a refund of the tax withheld is available to

18

a U.S. holder under the laws of Switzerland or under the Treaty, the amount of tax withheld that is refundable will not be eligible for credit against the U.S. holder’s U.S. federal income tax liability, whether or not the refund is actually obtained. See “(a) Ownership of UBS Ordinary Shares — Shares—Swiss Taxation” above, for the procedures for obtaining a tax refund.
     Stock dividends to U.S. holders that are made as part of a pro rata distribution to all shareholders of UBS generally will not be subject to U.S. federal income tax. Whether a stock dividend is considered to be such a nontaxable pro rata distribution for U.S. federal income tax can be a complex inquiry. In order for U.S. holders that receive a stock dividend subject to Swiss tax but not U.S. tax to receive the benefit of the foreign tax credit associated with that tax, such holder must have other foreign source income.
Transfers of UBS Ordinary Shares
     Subject to the passive foreign investment company rules discussed below, a U.S. holder that sells or otherwise disposes of UBS ordinary shares generally will recognize capital gain or loss for U.S. federal income tax purposes equal to the difference between the U.S. dollar value of the amount realized and the tax basis, determined in U.S. dollars, in the UBS ordinary shares. Capital gain of a non-corporate U.S. holder that is recognized in taxable years beginning before January 1, 20112013 is generally taxed at a maximum rate of 15% if the UBS ordinary shares were held for more than one year. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.
Passive Foreign Investment Company Rules
     UBS believes that UBS ordinary shares should not be treated as stock of a passive foreign investment company for U.S. federal income tax purposes, but this conclusion is a factual determination made annually and thus may be subject to change. In general, UBS will be a passive foreign investment company with respect to a U.S. holder if, for any taxable year in which the U.S. holder held UBS ordinary shares, either (i) at least 75% of the gross income of UBS for the taxable year is passive income or (ii) at least 50% of the value, determined on the basis of a quarterly average, of UBS’s assets is attributable to assets that produce or are held for the production of passive income (including cash). If UBS were to be treated as a passive foreign investment company, then unless a U.S. holder were to make a mark-to-market election with respect to the UBS ordinary shares, gain realized on the sale or other disposition of UBS ordinary shares would in general not be treated as capital gain. Instead, a U.S. holder would be treated as if the holder had realized such gain and certain “excess distributions” ratably over the three preceding taxable years or, if shorter, the holder’s holding period for the shares and would be taxed at the highest tax rate in effect for each such year to which the gain was allocated, together with an interest charge in respect of the tax attributable to each such year. With certain exceptions, a holder’s UBS ordinary shares will be treated as stock in a passive foreign investment company if UBS was a passive foreign investment company at any time during the holder’s holding period in the UBS ordinary shares. In addition, dividends received from UBS would not be eligible for the preferential tax rate applicable to qualified dividend income if UBS were to be treated as a passive foreign investment company either in the taxable year of the distribution or the preceding taxable year, but would instead be taxable at rates applicable to ordinary income.
F—Dividends and Paying Agents.
     Not required because this Form 20-F is filed as an annual report.
G—Statement by Experts.
     Not required because this Form 20-F is filed as an annual report.

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H—Documents on Display.
     UBS files periodic reports and other information with the Securities and Exchange Commission. You may read and copy any document that we file with the SEC on the SEC’s website, www.sec.gov, or at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 (in the United States) or at +1 202 942 8088 (outside the United States) for further information on the operation of its public reference room. Much of this additional information may also be found on the UBS website at www.ubs.com/investors.
I—Subsidiary Information.
     Not applicable.
Item 11.Quantitative and Qualitative Disclosures About Market Risk.
Item 11.   Quantitative and Qualitative Disclosures About Market Risk.
(a) Quantitative Information About Market Risk.
     Please seeMarket riskon pages 130134 to 136140 of the Risk and treasury management report.Annual Report.
(b) Qualitative Information About Market Risk.
     Please seeMarket riskon pages 130134 to 136140 of the Risk and treasury management report.Annual Report.
(c) Interim Periods.
     Not applicable.
Item 12.Description of Securities Other than Equity Securities.
Item 12.   Description of Securities Other than Equity Securities.
     Not required because this Form 20-F is filed as an annual report.
PART II
Item 13.Defaults, Dividend Arrearages and Delinquencies.
Item 13.   Defaults, Dividend Arrearages and Delinquencies.
     There has been no material default in respect of any indebtedness of UBS or any of its significant subsidiaries or any arrearages of dividends or any other material delinquency not cured within 30 days relating to any preferred stock of UBS AG or any of its significant subsidiaries.
Item 14.Material Modifications to the Rights of Security Holders and Use of Proceeds.
Item 14.   Material Modifications to the Rights of Security Holders and Use of Proceeds.
     Not applicable.
Item 15.Controls and Procedures.
Item 15.   Controls and Procedures.
(a) Disclosure Controls and Procedures.
     Please seeUS regulatory disclosure requirementson pages 208213 to 209214 of the Corporate governance and compensation report.Annual Report. See also Exhibit 12 to this Form 20-F.

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(b) Management’s Annual Report on Internal Control over Financial Reporting.
     Please seeManagement’s report on internal control over financial reportingon page 249259 of the Financial information report.Annual Report.

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(c) Attestation Report of the Registered Public Accounting Firm.
     Please seeReport of independent registered public accounting firm on internal control over financial reportingon pages 250260 to 251261 of the Financial information report.Annual Report.
(d) Changes in Internal Control over Financial Reporting.
     None.
Item 15.T.Controls and Procedures.
Item 15T.   Controls and Procedures.
     Not applicable.
Item 16.A.Audit Committee Financial Expert.
Item 16A.   Audit Committee Financial Expert.
     Please seeAudit Committeecommitteeon page 195202 andCompliance with NYSE listing standards on corporate governanceon pages 213218 to 214219 of the Corporate governance and compensation report.Annual Report.
Item 16.B.Code of Ethics.
Item 16B.   Code of Ethics.
     Please see “CodeThe Code of Business Conduct and Ethics” underIndependenceEthics (the “Code”) was substantially rewritten in January 2010. As rewritten, the Code is strengthened and updated based on international standards and best practices. It sets up clear requirements rather than merely statements of Directorsintention. It contains new provisions on page 213 ofcross-border business and tax compliance, as well as expanded provisions to improve corporate responsibility—fair dealing and fair competition, diversity and equal opportunity, health and safety, protecting the Corporate governanceenvironment, respecting human rights, and compensation report.community investment. Finally, the Code includes new requirements for training, annual certification and disciplinary consequences for all employees.
     The code of business conduct and ethics is published on our website underhttp://www.ubs.com/1/e/about/code_of_conduct.htmlinvestors/corporategovernance/business_conduct.html.
Item 16.C.Principal Accountant Fees and Services.
Item 16C.   Principal Accountant Fees and Services.
     Please seeAuditorson pages 206211 to 207212 of the Corporate governance and compensation report. Fees forAnnual Report. None of the non-audit services disclosed in the table on page 211 were approved by the Audit Committee pursuant to paragraph (c)(7)(i)(C ) of Rule 2-01 of Regulation S-X were CHF 34,000 and are included under “Total non-audit” (item audit-related fees, relating to assurance and attest services) inS-X.
Item 16D.   Exemptions from the table on page 206.
Item 16.D.Exemptions from the Listing Standards for Audit Committee.
Listing Standards for Audit Committees.
     Not applicable.
Item 16.E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
Item 16E.   Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
     Please seeTreasury share activitieson page 159161 of the Risk and treasury management report.Annual Report. The 2007/2010 share buyback program remainedhad been suspended throughout 2009,since 2008, and expired on 8 March 2010.2010 without being replaced by a new program. Throughout 20092010 and at the time of expiration of the program, the unutilized volume of shares under the program was 174.1 million shares.

21

Item 16.F.Change in Registrant’s Certifying Accountant.
Item 16F.   Changes in Registrant’s Certifying Accountant.
     Not applicable.
Item 16.G.Corporate Governance.
Item 16G.   Corporate Governance.
     Please seeCompliance with NYSE listing standards on corporate governanceon pages 213218 to 214219 of the Corporate governance and compensation report.Annual Report.
PART III
Item 17.Financial Statements.
Item 17.   Financial Statements.
     Not applicable.

20

Item 18.Financial Statements.
Item 18.   Financial Statements.
     Please see the Financial Statements and the Notes to the Financial Statements on pages 249259 to 370378 of the Financial information report.Annual Report.
Item 19.Item 19.   Exhibits.
Exhibit
NumberDescription
1.1.Articles of Association of UBS AG.
1.2.Organization Regulations of UBS AG.
2(b).Instruments defining the rights of the holders of long-term debt issued by UBS AG and its subsidiaries.
We agree to furnish to the SEC upon request, copies of the instruments, including indentures, defining the rights of the holders of our long-term debt and of our subsidiaries’ long-term debt.
4.1Deferred Prosecution Agreement between the United States of America and UBS AG, dated February 18, 2009.
4.2Settlement Agreement among the United States of America, the US Internal Revenue Service and UBS AG, dated August 19, 2009, relating to the John Doe summons. (Incorporated by reference to UBS AG’s Report of Foreign Private Issuer on Form 6-K filed November 3, 2009)
7.Statement regarding ratio of earnings to fixed charges.
8.Significant Subsidiaries of UBS AG.
Please see Note 34 to the Financial StatementsSignificant subsidiaries and associateson pages 350 to 353 of the Financial information report.
12.The certifications required by Rule 13(a)-14(a) (17 CFR 240.13a-14(a)).
13.The certifications required by Rule 13(a)-14(b) (17 CFR 240.13a-14(b)) and Section 1350 of Chapter 63 of Title 18 of the U.S. Code (18 U.S.C. 1350).
15.Consent of Ernst & Young Ltd.

21

SIGNATURES
     The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
UBS AG
/s/ Oswald Grübel  
Name:  Oswald Grübel 
Title:  Group Chief Executive Officer 
Date: March 15, 2010 /s/ John Cryan  
Name:  John Cryan 
Title:  Group Chief Financial Officer 

22

INDEX TO EXHIBITS
   
Exhibit  
Number Description
1.1.1.1 Articles of Association of UBS AG.* (Incorporated by reference to UBS AG’s Report of Foreign Private Issuer on Form 6-K filed October 5, 2010)
   
1.2.1.2 Organization Regulations of UBS AG.* (Incorporated by reference to UBS AG’s Report of Foreign Private Issuer on Form 6-K filed August 4, 2010)
   
2(b). Instruments defining the rights of the holders of long-term debt issued by UBS AG and its subsidiaries.
   
  We agree to furnish to the SEC upon request, copies of the instruments, including indentures, defining the rights of the holders of our long-term debt and of our subsidiaries’ long-term debt.
   
4.1 Deferred Prosecution Agreement between the United States of America and UBS AG, dated February 18, 2009.*2009 (incorporated by reference to Exhibit 4.1 to UBS AG’s Annual Report on Form 20-F for the fiscal year ended December 31, 2009).
   
4.2Settlement Agreement among the United States of America, the US Internal Revenue Service and UBS AG, dated August 19, 2009, relating to the John Doe summons. (Incorporated by reference to UBS AG’s Report of Foreign Private Issuer on Form 6-K filed November 3, 2009)
7.7 Statement regarding ratio of earnings to fixed charges.*

22

   
8.Exhibit
NumberDescription
8 Significant Subsidiaries of UBS AG.
   
  Please see Note 34 to the Financial StatementsSignificant subsidiaries and associates,on pages 350362 to 353365 of the Financial information report.Annual Report.
   
12.12 The certifications required by Rule 13(a)-14(a) (17 CFR 240.13a-14(a)).*
   
13.13 The certifications required by Rule 13(a)-14(b) (17 CFR 240.13a-14(b)) and Section 1350 of Chapter 63 of Title 18 of the U.S. Code (18 U.S.C. 1350).*
   
15.15 Consent of Ernst & Young Ltd.*
* Filed as exhibit herewith

23

SIGNATURES
     The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused the undersigned to sign this annual report on its behalf.
UBS AG
/s/ Oswald Grübel  
Name:  Oswald Grübel 
Title:  Chief Executive Officer 
/s/ John Cryan  
Name:  John Cryan 
Title:  Chief Financial Officer 
March 15, 2011

24

INDEX TO EXHIBITS
Exhibit
NumberDescription
1.1Articles of Association of UBS AG. (Incorporated by reference to UBS AG’s Report of Foreign Private Issuer on Form 6-K filed October 5, 2010)
1.2Organization Regulations of UBS AG. (Incorporated by reference to UBS AG’s Report of Foreign Private Issuer on Form 6-K filed August 4, 2010)
2(b)Instruments defining the rights of the holders of long-term debt issued by UBS AG and its subsidiaries.
We agree to furnish to the SEC upon request, copies of the instruments, including indentures, defining the rights of the holders of our long-term debt and of our subsidiaries’ long-term debt.
4.1Deferred Prosecution Agreement between the United States of America and UBS AG, dated February 18, 2009 (incorporated by reference to Exhibit 4.1 to UBS AG’s Annual Report on Form 20-F for the fiscal year ended December 31, 2009).
7Statement regarding ratio of earnings to fixed charges.
8Significant Subsidiaries of UBS AG.
Please see Note 34 to the Financial StatementsSignificant subsidiaries and associates,on pages 362 to 365 of the Annual Report.
12The certifications required by Rule 13(a)-14(a) (17 CFR 240.13a-14(a))
13The certifications required by Rule 13(a)-14(b) (17 CFR 240.13a-14(b)) and Section 1350 of Chapter 63 of Title 18 of the U.S. Code (18 U.S.C. 1350).
15Consent of Ernst & Young Ltd.

25

1 | Strategy,

(UBS LOGO)
Annual Report 2010

(KEY GRAPHIC)

Ourperformance and responsibility

2 | UBS business divisions and Corporate Center
3 | Risk and treasury management
4 | Corporate governance and compensation
5 | Financial information
(IMAGE)
in 2010

 

 

 

 Contents

Contents

   
2
 Letter to shareholders
5
 UBS reporting at a glanceInformation sources
61.
 Other sources of information
7Strategy, performance
and responsibility
Contacts
   
1.
Strategy, performance
and responsibility
1210
 Strategy and structure
16
UBS corporate governance
2018
 The making of UBS
2220
 Current market climate and industry drivers
22
Regulatory developments
25
 Risk factors
3031
 Financial performance
3132
 Measurement and analysis of performance
35
 Accounting and reporting structure changes
37
 UBS results
44
 Balance sheet
4748
 Off-balance sheet
5253
 Cash flows
5354
 Our employees
5859
 Corporate responsibility
   
2.
 UBS business divisions and
and Corporate Center
   
74
 Wealth Management & Swiss Bank
8085
 Wealth Management Americas
8692
 Global Asset Management
95102
 Investment Bank
103109
 Corporate Center
   
3.
 Risk and treasury
management
   
112116
 Risk management and control
116120
 Credit risk
130134
 Market risk
137141
 Operational risk
139143
 Risk concentrations
142146
 Treasury management
143147
 Liquidity and funding management
150153
 Interest rate and currency management
152155
 Capital management
158160
 Shares and capital instruments
161163
 UBS shares in 20092010
164166
 Basel II Pillar 3
4.
Corporate governance
and compensation
186
Corporate governance
187
Group structure and shareholders
189
Capital structure
191
Board of Directors
198
Group Executive Board
203
Shareholders’ participation rights
205
Change of control and defense measures
206
Auditors
208
Information policy
210
Regulation and supervision
213
Compliance with New York Stock Exchange
listing standards on corporate governance
215
Compensation and shareholdings
216
Compensation governance
227
2009 compensation for the Board of Directors and Group Executive Board
231
Shares and options held by the Board of Directors and Group Executive Board (at end of 2009)
5.
Financial
information
244
Introduction and accounting principles
245
Critical accounting policies
249
Consolidated financial statements
263
Notes to the consolidated financial statements
371
UBS AG (Parent Bank)
371
Parent Bank review
372
Parent Bank financial statements
374
Notes to the Parent Bank financial statements
399
Additional disclosure required
under SEC regulations
399
A – Introduction
400
B – Selected financial data
404
C – Information on the company
405
D – Information required by industry guide 3
EX-1.1
EX-1.2
EX-4.1
 EX-7
 EX-12
 EX-13
 EX-15


1

Annual Report 2009
Letter to shareholders

Dear Shareholders,
At our Annual General Meeting in April 2009, we laid out our priorities for the bank: strengthening our capital base, reducing risk and costs and returning UBS to profitability. By the end of 2009 we delivered on each of these objectives and, importantly, we reported a net profit in the fourth quarter. In November 2009, we set out a clear strategic direction and redefined what UBS stands for. The achievements of 2009 and our renewed strategic focus have created a firm basis on which to build a stronger, more profitable UBS and to regain your trust.
     The net loss attributable to UBS shareholders for 2009 was CHF 2.7 billion, a considerable reduction from the CHF 21.3 billion loss recorded in the prior year. This improvement was due to much lower losses on residual risk positions in the Investment Bank and reduced operating expenses for the Group. The result for 2009 included a number of significant items, namely an own credit loss of CHF 2.0 billion which occurred as a result of the markets’ perception of our improved creditworthiness, charges relating to the sale of UBS Pactual of CHF 1.4 billion, restructuring charges of CHF 0.8 billion, and a CHF 0.3 billion gain on the mandatory convertible notes converted in August 2009. Excluding these significant items, the underlying pre-tax result for the year was a profit of CHF 1.4 billion. The Group’s net profit attributable to shareholders for the fourth quarter was CHF 1.2 billion, including a positive contribution from each of our business divisions.
     The global economy experienced one of its most difficult years in 2009, with the financial crisis evolving into one of the worst post-war recessions. Governments and central banks took further action to stabilize markets and stimulate the economy, helping to restore investor confidence worldwide. As the economic outlook gradually improved, stock prices began to recover, starting at the end of the first quarter of 2009 and continuing into the second half of 2009.
At the end of 2009 our invested asset base was CHF 2,233 billion, broadly in line with the figure for year-end 2008.This result reflects the strong investment performance we delivered to our clients across our three asset gathering business divisions, which more than offset unacceptably high outflows. However, the Group’s average invested asset base for the year was down significantly, and this was the primary driver of reduced profits in these businesses. In Wealth Management & Swiss Bank, average invested assets were 20% below the 2008 average and together with
interest margin pressure and lower client activity, led to a 25% decline in revenues. Although this was partly offset by over CHF 1.5 billion of cost reductions, profits for 2009 fell by 35% to CHF 3.9 billion compared with 2008. Global Asset Management reported a profit of CHF 438 million in 2009, 67% lower than in 2008 due to lower revenues on a lower average invested asset base and a CHF 191 million net goodwill impairment charge associated with the sale of UBS Pactual. Wealth Management Americas revenues fell 12% in the year, compared with an 11% decline in average invested assets. The pre-tax profit for 2009 was CHF 32 million.
     In our Investment Bank, the pre-tax result for 2009 was a loss of CHF 6.1 billion compared with a pre-tax loss of CHF 34.3 billion for 2008. The improvement reflects a significant reduction in losses on residual risk positions.
During 2009, we laid out the steps necessary to rebuild the bank,and reached a number of important milestones on the bank’s road to recovery. In April, we set headcount and cost reduction targets for 2010. By the end of 2009, we had largely achieved these targets. Headcount was reduced by 12,500 to reach our 65,000 target, and fixed costs were reduced by over CHF 3 billion compared with the prior year. We continued to reduce our risks and balance sheet, and by the end of 2009 both were more than 30% lower than the year before. In June, we further strengthened our capital base through the issuance and placement of CHF 293 million shares from authorized capital. Combined with lower risk weighted assets, this resulted in a BIS tier 1 ratio of 15.4% at the end of 2009 compared with 11.0% one year earlier. Our FINMA leverage ratio also improved to 3.9% from 2.5% one year ago. In the third quarter, we reached two significant milestones: The Swiss government exited its investment in UBS with a profit of CHF 1.2 billion; and we agreed to a settlement with the US tax authorities in relation to the John Doe summons.
During the fourth quarter we set a clear strategic direction to rebuild the firm.At our Investor Day in November, we outlined our new strategy and the targets we have established for ourselves. Our goals are to strengthen our position as a leading global wealth management business, to be a leading client-focused investment bank and to be economically profitable in every segment, market and business in which we operate. We aim to improve our operating performance substantially, building toward our medium-term target of CHF 15 billion of annual profit before tax.


2

(IMAGE)

3

Annual Report 2009

Our efforts to reposition the firm are taking place alongside ongoing regulatory changes.Proposed changes relating to capital adequacy and liquidity requirements, efforts to mitigate the “too big to fail” risk, financial products regulation, compensation guidelines, or the US “Volcker” proposals may have profound consequences for the industry as a whole. In preparation for dealing with a future financial crisis, relevant financial authorities will meet and share information to ensure that adequate contingency plans have been put into place to prevent serious domestic or international financial instability that would have an adverse impact on the real economy. We will maintain flexibility in our business model to adjust to future regulatory change.
We are continuing to meet our obligations under the settlement with the US Internal Revenue Service (IRS) relating to the John Doe summons proceeding. Based upon our compliance with the terms of the settlement, the IRS has withdrawn the summons with respect to all accounts other than the approximately 4,450 accounts for which the IRS requested information under the US/Swiss tax treaty. The recent decision by the Swiss Federal Administrative Court, under which certain account information cannot be provided to the IRS, is a matter to be resolved by the Swiss and US Governments as contemplated by the terms of the settlement. We will continue to comply fully with our obligations, including providing information to the Swiss Federal Tax Administration and completing the exit of the US cross-border
business out of non-SEC registered entities. Further, we continue to recommend to our current and former US clients, to the extent applicable to their circumstances, the disclosure of their offshore assets to the IRS.
Outlook –In 2010, we expect to see the full effects of the progress we have made in improving operating efficiency, reducing risk and rebuilding and re-focusing our businesses. We are confident the steps we are taking to reduce client outflows in our wealth and asset management business divisions will be effective, but in the immediate future we still expect to report net outflows with some pressure on margins. We expect that the Investment Bank’s performance for the year as a whole will improve, in part because its residual risk positions will have a much reduced effect on results. Our Group results are heavily dependent on market vitality, and more favorable market conditions in January and February 2010 have benefited most of our businesses.
15 March 2010
UBS
 
(IMAGE)
(IMAGE)
Kaspar VilligerOswald J. Grübel
Chairman of the BoDGroup Chief Executive Officer


4

UBS reporting at a glance

Annual publications
Annual report (SAP no. 80531)
Published in both German and English, this single volume report provides a description of:
–UBS’s strategy, performance and responsibility
–the strategy and performance of the business divisions and the Corporate Center
–risk and treasury management
–corporate governance and executive compensation
–financial information, including the financial statements
Review (SAP no. 80530)
The booklet contains key information on UBS’s strategy and financials. It is published in English, German, French and Italian.
Compensation Report (SAP no. 82307)
Compensation for senior management and the Board of Directors (executive and non-executive members) is discussed here. It is published in English and German.
Quarterly publications
Letter to shareholders
The letter provides a quarterly update from executive management on our strategy and performance. The letter is published in English, German, French and Italian.
Financial report (SAP no. 80834)
This report provides a detailed description of our strategy and performance for the respective quarter. It is published in English.
How to order reports
These reports are available in PDF format on the internet atwww.ubs.com/investors/topicsin the Financial information section. Printed copies can be ordered from the same website by accessing the order/subscribe panel on the left-hand side of the screen. Alternatively, they can be ordered by quoting the SAP number and the language preference where applicable, from UBS AG, Information Center, P.O. Box, CH-8098 Zurich, Switzerland.


5

Annual Report 2009
Other sources of information

Website
The “Analysts & Investors” section atwww.ubs.com/investorsprovides the following information on UBS: financial information (including SEC results related filings); corporate information; UBS share price charts and data and dividend information; the UBS event calendar and dividend information; and the latest presentations by management for investors and financial analysts. Information on the internet is available in English and German, with some sections in French and Italian.
Result presentations
Our quarterly results presentations are webcast live. A playback of the most recent presentation is downloadable atwww.ubs.com/presentations.
Messaging service / UBS news alert
On thewww.ubs.com/newsalertswebsite, it is possible to subscribe to receive news alerts about UBS via SMS or e-mail. Messages are sent in English, German, French or Italian and it is possible to state theme preferences for the alerts received.
Form 20-F and other submissions to the US Securities and Exchange Commission
We file periodic reports and submit other information about UBS to the US Securities and Exchange Commission (SEC). Principal among these filings is the annual report on Form 20-F, filed pursuant to the US Securities Exchange Act of 1934.
     The filing of Form 20-F is structured as a “wrap-around” document. Most sections of the filing can be satisfied by referring to parts of the annual report. However, there is a small amount of additional information in Form 20-F which is not presented elsewhere, and is particularly targeted at readers in the US. Readers are encouraged to refer to this additional disclosure.
     Any document that we file with the SEC is available to read and copy on the SEC’s website,www.sec.gov,or at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, DC, 20549. Please call the SEC by dialing 1-800-SEC-0330 for further information on the operation of its public reference room. Much of this additional information may also be found on the UBS website atwww.ubs.com/investors,and copies of documents filed with the SEC may be obtained from our Investor Relations team atwww.ubs.com/investors.


Corporate information
The legal and commercial name of the company is UBS AG. The company was formed on 29 June 1998, when Union Bank of Switzerland (founded 1862) and Swiss Bank Corporation (founded 1872) merged to form UBS.
UBS AG is incorporated and domiciled in Switzerland and operates
under Swiss Company Law and Swiss Federal Banking Law as an Aktien-gesellschaft, a corporation that has issued shares of common stock to investors.
The addresses and telephone numbers of our two registered offices are: Bahnhofstrasse 45, CH-8001 Zurich, Switzerland, phone +41-44-234 11 11;
and Aeschenvorstadt 1, CH-4051 Basel, Switzerland, phone +41-61-288 50 50. UBS AG shares are currently listed on the SIX Swiss Exchange, the New York Stock Exchange and the Tokyo Stock Exchange (TSE). We expect to de-list our shares from the TSE in the near future.


6

Contacts
Switchboards
For all general queries.Zurich+41-44-234 1111
London+44-20-7568 0000
New York+1-212-821 3000
Hong Kong+852-2971 8888  
   
   
   
Investor Relations4.
 
UBS’s Investor Relations team supports
institutional, professional and retail
investors from our offices in ZurichCorporate governance
and New York.

www.ubs.com/investors
Hotline+41-44-234 4100UBS AG
New York+1-212-882 5734Investor Relations
Fax (Zurich)+41-44-234 3415P.O. Box
CH-8098 Zurich, Switzerlandcompensation
   
190
 Corporate governance
191
 Group structure and shareholders
193
 sh-investorrelations@ubs.comCapital structure
196
Shareholders’ participation rights
198
Board of Directors
205
Group Executive Board
210
Change of control and defense measures
211
Auditors
213
Information policy
215
Regulation and supervision
218
Compliance with NYSE listing standards on corporate
governance
220
Compensation
222
Compensation governance
224
Total Reward Principles
227
Overview of our compensation model
232
Deferred variable compensation plans
237
Compensation funding and expenses
240
2010 compensation for the Group Executive Board and Board of Directors 240
   
Media Relations5.
 
UBS’s Media Relations team supportsFinancial
global media and journalists from
offices in Zurich, London, New York
and Hong Kong.

www.ubs.com/media
Zurich+41-44-234 8500mediarelations@ubs.com
London+44-20-7567 4714ubs-media-relations@ubs.com
New York+1-212-882 5857mediarelations-ny@ubs.com
Hong Kong+852-2971 8200sh-mediarelations-ap@ubs.cominformation
   
Shareholder Services254
 
UBS Shareholder Services, a unit of
the Company Secretary, is responsible for
the registration of the global registered
shares.		Hotline+41-44-235 6202UBS AG
Fax+41-44-235 3154Shareholder Services
P.O. Box
CH-8098 Zurich, Switzerland
sh-shareholder-services@ubs.com
Introduction and accounting principles
US Transfer Agent255
 
Critical accounting policies
For all global registered share-related
queries in the US.

www.melloninvestor.com259
 Calls from the USConsolidated financial statements
273
 +866-541 9689Notes to the consolidated financial statements
379
 BNY Mellon Shareowner ServicesUBS AG (Parent Bank)
Calls outside the US
379
 +1-201-680 6578Parent Bank review
380
 480 Washington BoulevardParent Bank financial statements
Fax
383
 +1-201-680 4675Notes to the Parent Bank financial statements
405
 Jersey City, NJ 07310, USAAdditional disclosure required under SEC regulations
405
 A – Introduction
406
 sh-relations@melloninvestor.comB – Selected financial data
410
 C – Information on the company
411
D – Information required by industry guide 3


71  

Annual Report 2010
Letter to shareholders

Dear Shareholders,

2010 was a year of substantial improvement for us.We achieved a net profit attributable to UBS shareholders of CHF 7.5 billion1, compared with a loss of CHF 2.7 billion in 2009. Our return on equity for 2010 improved to 16.7% from negative 7.8% at the end of 2009. We believe that providing outstanding levels of execution and delivering sustainable profitability are the cornerstones on which we can build a successful future, and that the progress we made during 2010 has enhanced our reputation with stakeholders.

Sustaining this progress will require us to continue to act with discipline and integrity, and to maintain a sharp focus on achieving our targets.During the year we increased revenues by CHF 9 billion compared with 2009, while at the same time reducing overall risk levels. We maintained discipline over our cost base, achieving our targeted fixed costs of less than CHF 20 billion. Our clients have once again entrusted us with net new money, with net inflows stabilizing in the second half of the year. Profits for 2010 were a key driver of the increase in our Basel II tier 1 capital ratio, which stood at an industry-leading 17.8% at the year-end. While our results for 2010 showed a marked improvement, we have far greater ambitions. In 2011 we will continue to build further on our achievements.

Most of our business divisions showed an improvement compared with 2009.InWealth Management,client confidence remained subdued in volatile markets, affecting overall transaction volumes. Market rates of interest also remained low during the year. Against this backdrop, Wealth Management’s pre-tax profit increased to CHF 2,308 million compared with CHF 2,280 million in 2009, mainly as a result of reduced operating expenses. Total operating income declined marginally on lower interest income reflecting the interest rate environment as well as the effects of foreign exchange on our results, particularly the decrease in the value of the euro and US dollar against the Swiss franc. Fee income decreased on a lower average asset base, but trading income increased reflecting the work we have done to further strengthen our advisory relationship with clients. Invested assets declined by 7% as foreign exchange movements and outflows more than offset positive investment performance. Operating expenses declined by 3% mainly reflecting reduced personnel and restructuring costs.

InRetail & Corporate,pre-tax profit increased by 9% to CHF 1,772 million compared with 2009. Total operating income remained broadly stable, with net interest income impacted by low market interest rates. Operating expenses were reduced by 8%, reflecting cost-cutting measures initiated in 2009.

Wealth Management Americasreported a pre-tax loss of CHF 130 million compared with a pre-tax profit of CHF 32 million in 2009. The result belies the considerable operational progress made during the year, the benefits of which were more than offset by a significant increase in litigation provisions. We believe the restructuring of this business over the past year will allow us to leverage our strong competitive positioning going forward. Retaining talent within the business is key, and we are encouraged that financial advisors with us for more than one year delivered a strong performance, especially in the fourth quarter. Operating income was flat, with improved managed account fees and higher mutual fund revenues offset by a decrease in municipal trading income. Net new money trends in the business are encouraging, with the business delivering positive net new money in the second half of the year.

In 2010,Global Asset Managementcontinued to build on its already sound investment track record with a pre-tax profit of CHF 516 million, an increase of 18% compared with 2009. This was achieved despite a decrease in invested assets as positive investment performance and net new money inflows were more than offset by negative currency effects. Operating income was down by 4% due to lower performance fees and lower revenues also reflecting the sale of UBS Pactual. Operating expenses decreased by 9%.

OurInvestment Bankcontributed most to the improvement in our 2010 results, recording a pre-tax profit of CHF 2,197 million compared with a pre-tax loss of CHF 6,081 million in 2009. This was primarily due to a reversal of losses in our fixed income, currencies and commodities business and reflects the rebuild of our credit business where revenues rose significantly. In 2010 we recorded considerably lower net credit loss expenses and lower own credit losses, partly offset by an increase in operating expenses.

We continued to maintain tight control over our risks and balance sheet alongside improvements in profitability over the year.Risk-weighted assets were reduced by 4% during the year to CHF 199 billion, and, on 31 December 2010, our balance sheet stood at CHF 1,317 billion, down 2% compared with the prior year. The increase in our regulatory capital, together with a reduction in risk-weighted assets, led to an improvement of our BIS tier 1 capital ratio to 17.8% compared with 15.4% at the end of 2009.

During 2010 the regulatory landscape shifted substantially with the expectation of more stringent regulatory requirements becoming a reality.New global regulatory pro-



1 Our 2010 results were adjusted after the issuance of our fourth quarter 2010 report. The adjustment, which increased the net profit attributable to UBS shareholders by CHF 373 million, is explained in Note 33 to the financial statements included in our Annual Report 2010.

2

(PHOTO OF KASPER VILLIGER AND OSWALD J. GRUBEL)

Strategy, performance and responsibility

Information assured according to the Global Reporting Initiative (GRI)
Content of the sections “Our employees” and “Corporate responsibility” has been assured by SGS Société Générale de Surveillance SA (SGS) using the Global Reporting Initiative Sustainability Reporting Guidelines, as evidenced in the SGS Assurance Statement on page 69. The scope of the assurance also includes text and data on the website of UBS. Both the relevant texts in the 2009 annual report and on the website are referenced in the GRI index published onwww.ubs.com/gri.

Strategy and performance
–UBS is a client-focused financial services firm that offers a strong combination of wealth management, asset management and investment banking services on a global and regional basis.
–We aim to generate sustainable earnings, create value for our shareholders and be economically profitable in every segment, market and business in which we operate.
             
UBS key figures 
  As of or for the year ended
CHF million, except where indicated 31.12.09  31.12.08  31.12.07 
 
             
Group results
            
 
Operating income  22,601   796   31,721 
 
Operating expenses  25,162   28,555   35,463 
 
Operating profit before tax (from continuing and discontinued operations)  (2,569)  (27,560)  (3,597)
 
Net profit attributable to UBS shareholders  (2,736)  (21,292)  (5,247)
 
Diluted earnings per share (CHF)1
  (0.75)  (7.63)  (2.41)
 
             
Key performance indicators, balance sheet and capital management2
            
 
Performance
            
 
Return on equity (RoE) (%)  (7.8)  (58.7)  (10.5)
 
Return on risk-weighted assets, gross (%)  9.9   1.2   8.6 
 
Return on assets, gross (%)  1.5   0.2   1.3 
 
Growth
            
 
Net profit growth (%)3
  N/A   N/A   N/A 
 
Net new money (CHF billion)4
  (147.3)  (226.0)  140.6 
 
Efficiency
            
 
Cost/income ratio (%)  103.0   753.0   111.0 
 
Capital strength
            
 
BIS tier 1 ratio (%)5
  15.4   11.0     
 
FINMA leverage ratio (%)5
  3.93   2.45     
 
Balance sheet and capital management
            
 
Total assets  1,340,538   2,014,815   2,274,891 
 
Equity attributable to UBS shareholders  41,013   32,531   36,875 
 
BIS total ratio (%)5
  19.8   15.0     
 
BIS risk-weighted assets5
  206,525   302,273     
 
BIS tier 1 capital5
  31,798   33,154     
 
             
Additional information
            
 
Invested assets (CHF billion)  2,233   2,174   3,189 
 
Personnel (full-time equivalents)  65,233   77,783   83,560 
 
Market capitalization6
  57,108   43,519   108,654 
 
Long-term ratings
            
 
Fitch, London  A+   A+  AA 
 
Moody’s, New York  Aa3  Aa2  Aaa 
 
Standard & Poor’s, New York  A+   A+  AA 
 
1 Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in the “Financial information” section of this report.  2 For the definitions of our key performance indicators refer to the “Measurement and analysis performance” section of this report.  3 Not meaningful if either the current period or the comparison period is a loss period.  4 Excludes interest and dividend income.  5 Refer to the “Capital management” section of this report.  6 Refer to the “UBS shares in 2009” section of this report.

Our strategic priorities
We are concentrating on:
–further strengthening our position as a leading client-focused bank for high net worth and ultra high net worth clients around the world;
–continuing to be a leading firm across all client segments in Switzerland; and
–being a top tier bank in growth regions where we choose to operate.
Re-focusing the business portfolio
We will further integrate our wealth management, asset management and investment banking businesses to generate more value, reflecting our commitment to comprehensively serve our clients across all segments. The Investment Bank will be more client focused building on its strong, less capital intensive flow and fee businesses. We will continue to build our onshore operations in our wealth management business, and continue to further grow our ultra high net worth business. Our managers within Global Asset Management are concentrating on driving a sustained improvement in investment performance and increasing overall efficiency.
Transforming the way we operate
Our transformation is geared towards exercising the full potential of our strengths based on three strategic guidelines: reputation, integration and execution.
Our reputation is our most valuable asset and is ultimately defined by the actions and decisions we make every day. To restore and safeguard our reputation, we have introduced more disciplined and effective governance processes.
Further integration is a key factor in delivering on our financial targets, serving our clients in a comprehensive manner, and driving efficiencies across our businesses. This will be achieved through a series of measures, including new management processes, upgrading client coverage and enhancing structures and processes for further cost and capital efficiency.
We are committed to execution at the highest standards, ensuring consistent high-quality delivery, and to building a performance-oriented culture that will help to retain, develop and attract the best talent at all levels.
Measures taken in 2009
In addition to stabilizing our financial condition, we have already undertaken several adjustments to governance and structures during the last few months to initiate and drive our transformation.
Establishment of Investment Products & Services
On 21 January 2010, we announced the establishment of the new Investment Products & Services (IPS) unit. IPS brings together product specialists from various business divisions involved in product development, coverage / sales support and execution for Wealth Management & Swiss Bank clients under one roof.
Formation of UBS Switzerland
We are the leading bank for retail and corporate clients and a leading asset management business in Switzerland. In 2009, we have further adjusted the governance structure to include a new executive committee: UBS Switzerland. The integrated management team of UBS Switzerland comprises all businesses active in Switzerland including retail, wealth management, corporate and institutional, investment banking and the asset management business.
Corporate Center
In 2009, we integrated our Group-wide shared service and control functions into the Corporate Center. Our goal is to improve effectiveness and efficiency on a sustainable basis, provide simple service delivery models and strengthen cost management by creating global and Group-wide cost-cutting measures. These shared services are overseen by the Group Chief Operating Officer. In parallel, the control functions were centralized under the Group Chief Financial Officer, Group Chief Risk Officer and Group General Counsel. This new centralized organizational structure provides a platform from which we can increase efficiency and enhance shareholder value.
Risk management and control
Risk reduction remained a priority in 2009. As a result of our risk reduction initiatives, we ended the year with risk exposures commensurate with our risk capacity, although legacy risks remain significant and are targeted for continued reduction. Effective risk management and control are essential to our success and we have made further progress in implementing the risk renewal program we initiated in 2008. In addition, the implementation of the settlement agreement relating to the cross-border investigation remains a focus of management attention.


Strategy, performance and responsibility
Strategy and structure
Strategy and structure
UBS is a client-focused financial services firm that offers a strong combination of wealth management, asset management and investment banking services on a global and regional basis. By delivering a full range of advice, products and services to our private, corporate and institutional clients, we aim to generate sustainable earnings, create value for our shareholders and be economically profitable in every segment, market and business in which we operate.

UBS business model and aspiration
UBS AG is the parent company of the UBS Group (Group). The operational structure of the Group comprises the Corporate Center and four business divisions: Wealth Management & Swiss Bank, Wealth Management Americas, Global Asset Management and the Investment Bank.
     In aspiring to be a leading client-focused bank, we are concentrating on:
–further strengthening our position as a leading bank for high net worth and ultra high net worth clients around the world;
–continuing to be a leading firm across all client segments in Switzerland; and
–being a top tier bank in growth regions where we choose to operate.
     We aim to have a leading investment bank with a client-centric business model that focuses on flow and advice activities, leveraging our traditional strengths and maximizing the creation of shareholder value by working closely in conjunction with our wealth management and asset management businesses.
Wealth Management & Swiss Bank
Wealth Management & Swiss Bank focuses on delivering comprehensive financial services to high net worth and ultra
high net worth individuals around the world – except to those served by Wealth Management Americas – as well as private and corporate clients in Switzerland. We provide clients in over 40 countries, including Switzerland, with financial advice, products and tools to fit their individual needs. UBS has a leading position across all client segments in Switzerland.
Wealth Management Americas
Wealth Management Americas provides advice-based relationships through financial advisors who deliver a fully integrated set of products and services specifically designed to address the needs of ultra high net worth, high net worth and core affluent individuals and families. It includes the former Wealth Management US business unit, as well as the domestic Canadian business and the international business booked in the United States.
Global Asset Management
Global Asset Management is a large-scale asset manager with well diversified businesses across regions, capabilities and distribution channels. It offers investment capabilities and investment styles across all major traditional and alternative asset classes. These include equities, fixed income, currency, hedge fund, real estate, infrastructure and private equity investment capabilities that can also be combined in multi-asset strategies.


12

Strategy, performance and responsibility

Investment Bank
The Investment Bank provides securities and other financial products and research in equities, fixed income, rates, foreign exchange and precious metals. It also provides advisory services and access to the world’s capital markets for corporate, institutional, intermediary and alternative asset management clients.
Corporate Center
The Corporate Center seeks to ensure that the business divisions operate as a coherent and effective whole by providing and managing support and control functions for the business divisions and the Group in such areas as risk control, finance, legal and compliance, funding, capital and balance sheet management, management of foreign currencies, communication and branding, human resources, information technology, real estate, procurement, corporate development and service centres.
èRefer to the “Reporting structure” and “UBS business divisions and Corporate Center” sections of this report for more information on our businesses
UBS competitive profile
Our business mix reflects decades of continuous development, organic growth and acquisitions. As a leader in the wealth management industry in terms of total invested assets, we offer a combination of asset gathering (i.e. wealth management and asset management) and investment banking services in local and regional markets. Specifically, we are a leading wealth manager in Switzerland, Europe, and Asia Pacific, and also in main growth markets such as the Middle East and Latin America. In the US, we are a leading wealth
management service provider and are the biggest foreign-owned wealth manager. Furthermore, we have the largest ultra high net worth business globally in terms of invested assets. Our investment bank is a strong corporate and institutional clients business, and holds leading positions in businesses such as equities, foreign exchange and money markets and advisory, adding to the attractiveness of our overall business portfolio.
     In the Asia Pacific region, we operate leading investment banking, wealth management and asset management businesses, with CHF 214 billion of invested assets making us the biggest foreign asset gatherer at the end of 2009.
UBS strategy
At our Investor Day in November 2009, we outlined strategic objectives to improve financial performance and reposition the firm for sustainable profitability in earnings and shareholder value. We aim to achieve this by re-focusing our business portfolio to fully capitalize on our strengths, and by substantially transforming the way we operate.
Re-focusing the business portfolio
We will further integrate our wealth management, asset management and investment banking businesses to generate more value, reflecting our commitment to comprehensively serve our clients across all segments. The Investment Bank will be more client focused building on its strong, less capital intensive flow and fee businesses (e.g. cash equities, foreign exchange and money markets, and advisory). This will also strengthen additional components, including the rates and credit business in fixed income, currencies and commodities. We will continue to build our onshore opera-


13

Strategy, performance and responsibility
Strategy and structure

tions in our wealth management business, and continue to further grow our ultra high net worth business. Our managers within Global Asset Management are concentrating on driving a sustained improvement in investment performance and increasing overall efficiency.
èRefer to the “UBS business divisions and Corporate Center” section of this report for more information on the business division strategies
Transforming the way we operate
Our transformation is geared towards exercising the full potential of our strengths based on three strategic guidelines: reputation, integration and execution.
     Our reputation is our most valuable asset and is ultimately defined by the actions and decisions we make every day. To restore and safeguard our reputation, we have introduced more disciplined and effective governance processes.
     Further integration is a key factor in delivering on our financial targets, serving our clients in a comprehensive manner, and driving efficiencies across our businesses. This will be achieved through a series of measures, including new management processes, upgrading client coverage and enhancing structures and processes for further cost and capital efficiency.
     We are committed to execution at the highest standards, ensuring consistent high-quality delivery externally and internally, and to building a performance-oriented culture that will help to retain, develop and attract the best talent at all levels.
Measures taken
In addition to stabilizing our financial condition, we have already undertaken several adjustments towards improved governance and structures during the last few months that facilitate our transformation process.
Establishment of Investment Products & Services
On 21 January 2010, we announced the establishment of the new Investment Products & Services (IPS) unit. IPS brings together product specialists from various business divisions involved in product development, coverage / sales support and execution for Wealth Management & Swiss Bank clients under one roof. By making this change, we are making product specialists and expertise more accessible to our clients.
Formation of UBS Switzerland
We are the leading bank for retail and corporate clients and a leading asset management business in Switzerland. In 2009, we have further adjusted the governance structure to include a new executive committee: UBS Switzerland. The integrated management team of UBS Switzerland comprises all businesses active in Switzerland including retail, wealth management, corporate and institutional, investment banking and the asset management business. The integration of these businesses defines our commitment to the Swiss market and will help deliver comprehensive financial advice, products and tools to our clients.
Corporate Center
In 2009, we integrated our Group-wide shared service and control functions into the Corporate Center. Our goal is to improve effectiveness and efficiency on a sustainable basis, provide simple service delivery models and strengthen cost management by creating global and Group-wide cost-cutting measures. These shared services are overseen by the Group Chief Operating Officer (COO). In parallel, the control functions were centralized under the Group Chief Financial Officer (CFO), Group Chief Risk Officer (CRO) and Group General Counsel (GC). This new centralized organizational structure provides a platform from which we can increase efficiency and enhance shareholder value.
èRefer to the “Corporate Center” section of this report for more information


14

Strategy, performance and responsibility

Risk management and control
Risk reduction remained a priority in 2009. As a result of our risk reduction initiatives, we ended the year with risk exposures commensurate with our risk capacity, although legacy risks remain significant and are targeted for continued reduction. Effective risk management and control are essential to our success and we have made further progress in implementing the risk renewal program we initiated in 2008. In addition, the implementation of the settlement agreement relating to the cross-border investigation remains a focus of management attention
Performance measures and management
We manage our businesses based on our new key performance indicators (KPI) framework introduced in 2009, which is used to monitor our risk-adjusted performance and the delivery of returns to shareholders. Senior management compensation was adjusted accordingly to ensure that management accountability and consistency is in alignment with long-term economic profitability.
èRefer to the “Measurement and analysis of performance” section of this report for more information on key performance indicators
èRefer to the “Compensation and shareholdings” section of this report for more information on senior management compensation


15

Strategy, performance and responsibility
Strategy and structure
UBS corporate governance

As mandated by Swiss banking law, UBS operates under a strict dual board structure comprising the Board of Directors and the Group Executive Board. The competencies of these two bodies and other relevant roles have been reviewed by the Board of Directors throughout 2009, resulting in a revised version of the “Organization Regulations of UBS AG” which came into effect on 1 November 2009.
Board of Directors
The Board of Directors (BoD) is our most senior body. Under the leadership of the Chairman, it decides on the strategy of the Group upon recommendation of the Group Chief Executive Officer (CEO), exercises the ultimate supervision over management and is responsible for the appointment and dismissal of all Group Executive Board (GEB) members, the Company Secretary and the Head of Group Internal Audit as well as supervises and sets appropriate risk management and control principles for the firm. With the exception of its current Chairman, Kaspar Villiger, all members of the BoD are independent.
èRefer to the “Corporate governance” section of this report for more information about the BoD
From left:Rainer-Marc FreyMember Risk CommitteeSally BottChairman Human Resources and Compensation Committee and Member Corporate Responsibility CommitteeAnn F. GodbehereMember Audit Committee and Corporate Responsibility CommitteeBruno GehrigMember Governance and Nominating Committee and Human Resources and Compensation CommitteeMichel DemaréMember Audit CommitteeHelmut PankeMember Human Resources and Compensation Committee and Risk CommitteeSergio Marchionne Senior Independent Director and Member Governance and Nominating CommitteeKaspar VilligerChairman of the Board of Directors     Oswald J. GrübelGroup Chief Executive Officer

posals were finalized by the Basel Committee on Banking Supervision early this year, and the Swiss Federal Council published draft legislation for Swiss banks based on the recommendations of the Swiss Expert Commission and designed to address the “too big to fail” issue. These proposals are due to be debated in the Swiss Parliament later this year. We will continue to evaluate the impacts of these changes, especially the effect that they may have on the profitability of our businesses, and, where necessary, we will take appropriate action. As previously stated, we will retain earnings in order to meet the recommended future capital requirements.

Recent quarters have demonstrated that our results for certain divisions, and for the Group as a whole, are highly sensitive to regulatory, legal and tax developments.In 2011, we believe that we may have opportunities to recognize further deferred tax assets in our results. We also expect that provisions for litigation and other contingencies will continue to affect us, although the timing and magnitude of these developments are not predictable.

In the current environment it is more important than ever that we focus on our clients’ needs.During the year we continued to implement our global and integrated bank strategy. We



3

Annual Report 2010
Letter to shareholders

improved the way in which we deliver our products and services to clients, which in turn should help us achieve further revenue growth. As part of this strategy we established our Investment Products and Services unit. We believe that this unit will play a crucial role, ensuring that our clients receive fast and efficient access to products and services tailored to their individual needs. Alongside this we set up our Global Family Office Group, catering to the often complex needs of many of the world’s wealthiest families.

We continued our tradition of supporting the local communities in which we live and work.We believe that our success stems not only from our employees’ skills and resources and from our relationships with our clients, but also from a healthy social environment. All over the world, our regional Community Affairs teams organize a wide variety of charitable activities in addition to direct donations made by the firm. Across all of our business regions, our employees continue to play a very active role in our community investment efforts, in particular through their volunteering activities. In 2010, our employees spent nearly 81,000 hours volunteering. We support their commitment by offering up to two working days a year for volunteering efforts, and also match employee donations to selected charities. In 2010 we also announced our support of the UBS Kids Cup, an athletics competition in Switzerland involving up to 70,000 children aged 7 to 15, helping to promote health and well-being.

During the year there were signs of improved client confidence in UBS.Building on this momentum, in August we launched our new brand campaign, our first global campaign for two years. The “We will not rest” campaign conveys our commitment to and focus on our clients at every level of the organization.

The ultimate responsibility for the firm’s strategy and the supervision of its executive management rests with the Board of Directors.We welcome the announcement that Joseph Yam, founder and former Chief Executive of the Hong Kong Monetary Authority, has been nominated for election to the Board. His expected appointment following the 2011 Annual General Meeting should further strengthen UBS’s Board of Directors, allowing us to benefit from his considerable experience. We recently announced that Sally Bott has resigned from the Board. We would like to express our gratitude to Sally for her outstanding contributions and great commitment during the past two and a half years.

2010 was a year of substantial improvement in our financial performance and our financial condition, and we would like to take this opportunity to thank you, our shareholders, for your continued support, and all of our employees for their hard work and commitment.In 2011, we are confident that we can consolidate the progress already made throughout the firm, helping to deliver our goal of long-term sustainable profitability for our shareholders.

15 March 2011

Yours sincerely,

UBS

(-s- Villiger)
(-s- Grubel)
Kaspar VilligerOswald J. Grübel
Chairman of theGroup Chief
Board of DirectorsExecutive Officer



4

Information sources

Reporting publications

Annual publications:Annual report (SAP no. 80531): Published in both English and German, this single volume report provides a description of: our UBS Group strategy, performance and responsibility; the strategy and performance of the business divisions and the Corporate Center; risk and treasury management; corporate governance and senior management and Board of Directors compensation; and financial information, including the financial statements.Review (SAP no. 80530): The booklet contains key information on our strategy and financials. It is published in English, German, French and Italian.Compensation Report (SAP no. 82307): The report discusses compensation for senior management and the Board of Directors (executive and non-executive members). It is published in English and German.

Quarterly publications:Letter to shareholders: The letter provides a quarterly update from executive management on our strategy and performance. The letter is published in English, German, French and Italian.Financial report (SAP no. 80834): The quarterly financial report provides an update on our strategy and performance for the respective quarter. It is published in English.

How to order reports

The annual and quarterly publications are available in PDF format on the internet atwww.ubs.com/investors/topicsin the “Financial information” section. Printed copies can be ordered from the same website by accessing the order / subscribe panel on the left-hand side of the screen. Alternatively, they can be ordered by quoting the SAP number and the language preference where applicable, from UBS AG, F2AL-AUL, P.O. Box, CH-8098 Zurich, Switzerland.

Other information

Website: The “Analysts & Investors” section atwww.ubs.com/ investorsprovides the following information on UBS: financial in-

formation (including SEC results-related filings); corporate information, including UBS share price charts and data and dividend information; the UBS event calendar; and presentations by management for investors and financial analysts. Information on the internet is available in English and German, with some sections in French and Italian.

Result presentations: Our quarterly results presentations are webcast live. A playback of most presentations is downloadable atwww.ubs.com/presentations.

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

Form 20-F and other submissions to the US Securities and Exchange Commission: We file periodic reports and submit other information about UBS to the US Securities and Exchange Commission (SEC). Principal among these filings is the annual report on Form 20-F, filed pursuant to the US Securities Exchange Act of 1934. The filing of Form 20-F is structured as a “wraparound” document. Most sections of the filing can be satisfied by referring to parts of the annual report. However, there is a small amount of additional information in Form 20-F which is not presented elsewhere, and is particularly targeted at readers in the US. Readers are encouraged to refer to this additional disclosure. Any document that we file with the SEC is available to read and copy on the SEC’s website,www.sec.gov,or at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, DC, 20549. Please call the SEC by dialing +1-800-SEC-0330 for further information on the operation of its public reference room. Much of this additional information may also be found on the UBS website atwww.ubs.com/investors,and copies of results-related filings with the SEC may be obtained from our Investor Relations team atwww.ubs.com/investors.



5

Annual Report 2010

Corporate information
The legal and commercial name of the company is UBS AG. The company was formed on 29 June 1998, when Union Bank of Switzerland (founded 1862) and Swiss Bank Corporation (founded 1872) merged to form UBS.
UBS AG is incorporated and domiciled in Switzerland and operates under Swiss Company Law and Swiss Federal Banking Law as an Aktiengesellschaft, a corporation that has issued shares of common stock to investors.
The addresses and telephone numbers of our two registered offices are: Bahnhofstrasse 45, CH-8001 Zurich, Switzerland, phone +41-44-234 11 11; and Aeschenvorstadt 1, CH-4051 Basel, Switzerland, phone +41-61-288 50 50.

UBS AG shares are currently listed on the SIX Swiss Exchange and the New York Stock Exchange.



Contacts
Switchboards
For all general queries.
Zurich +41-44-234 1111
London +44-20-7568 0000
New York +1-212-821 3000
Hong Kong +852-2971 8888

Investor Relations

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

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

Office of the Company Secretary

The Company Secretary receives queries on compensation and related issues addressed to members of the Board of Directors.
UBS AG, Office of the Company Secretary
P.O. Box, CH-8098 Zurich, Switzerland
sh-company-secretary@ubs.com
Hotline +41-44-234 3628
Fax +41-44-234 6603

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

US Transfer Agent

For all global registered share-related queries in the US.
BNY Mellon Shareowner Services
480 Washington Boulevard
Jersey City, NJ 07310, USA
sh-relations@melloninvestor.com
www.melloninvestor.com
Calls from the US +866-541 9689
Calls outside the US +1-201-680 6578
Fax +1-201-680 4675



Corporate calendar

Publication of first quarter 2011 results
Tuesday, 26 April 2011
Annual General Meeting
Thursday, 28 April 2011
Publication of second quarter 2011 results
Tuesday, 26 July 2011
Publication of third quarter 2011 results
Tuesday, 25 October 2011

Imprint

Publisher: UBS AG, Zurich and Basel, Switzerland | www.ubs.com
Languages: English/German | SAP-No. 80531E

© UBS 2011. The key symbol and UBS are among the registered
and unregistered trademarks of UBS. All rights reserved.

Printed in Switzerland on chlorine-free paper with mineral
oil-reduced inks. Paper production from socially responsible and
ecologically sound forestry practices.
(MYCLIMATE LOGO)



6

Strategy, performance and responsibility

Information assured according to the Global Reporting Initiative (GRI)

Content of the sections “Our employees” and “Corporate responsibility” has been assured by SGS Société Générale de Surveillance SA (SGS) using the GRI Sustainability Reporting Guidelines, as evidenced in the SGS Assurance Statement on page 70. The assurance by SGS also covered text and data on the website of UBS. Both the relevant text in the Annual Report 2010 and on the website are referenced in the GRI Index (www.ubs.com/gri), which defines the scope of the assurance. SGS has confirmed the level of assurance as GRI A+.

Strategy and performance

–We are a client-focused financial services firm that offers a strong combination of wealth management, asset management and investment banking services on a global and regional basis.
–We aim to generate sustainable earnings and create value for our shareholders.

Our strategic priorities

We are concentrating on:
–further strengthening our position as a leading bank for high net worth and ultra high net worth clients around the world;
–continuing our leadership across all client segments in Switzerland;
–attaining a top-tier position in the growth regions in which we choose to operate; and
–remaining a leading investment bank with a client-centric business model, focusing on flow trading and advice, leveraging our traditional strengths and maximizing our scope by working in close conjunction with our wealth management and asset management businesses.

Re-focusing the business portfolio

We will further foster collaboration between our wealth management, asset management and investment banking businesses, reflecting our commitment to serve our clients comprehensively across all segments. We believe this will improve our operating and financial results and will generate more shareholder value. From a geographic perspective, we want to leverage our strong existing global footprint. We are continuously investing in our Asia Pacific businesses as well as other growth markets such as the Middle East and Latin America.

Transforming the way we operate

Our transformation is geared towards exploiting the full potential of our strengths based on our three strategic guidelines of reputation, integration and execution.

Our reputation is our most valuable asset. It is ultimately defined by the actions and decisions we take every day. In order to restore and safeguard our reputation, we have introduced more disciplined and effective governance processes.

Integration is a key factor in serving our clients and driving efficiencies across our businesses, and is essential to our ability to achieve our financial targets. Integration is being achieved through a series of measures, including several dedicated client-related initiatives around the globe, and related improvements in client coverage and management processes.

We are committed to execution at the highest standards, ensuring consistent high-quality delivery to clients as well as within the firm. Furthermore, we are further developing our performance-oriented culture to help us to attract, develop and retain top industry talent.



             
UBS key figures 
  As of or for the year ended 
CHF million, except where indicated 31.12.10  31.12.09  31.12.08 
 
             
Group results
            
 
Operating income  31,994   22,601   796 
 
Operating expenses  24,539   25,162   28,555 
 
Operating profit from continuing operations before tax  7,455   (2,561)  (27,758)
 
Net profit attributable to UBS shareholders  7,534   (2,736)  (21,292)
 
Diluted earnings per share (CHF)1
  1.96   (0.75)  (7.63)
 
             
Key performance indicators, balance sheet and capital management2
            
 
Performance
            
 
Return on equity (RoE) (%)  16.7   (7.8)  (58.7)
 
Return on risk-weighted assets, gross (%)  15.5   9.9   1.2 
 
Return on assets, gross (%)  2.3   1.5   0.2 
 
Growth
            
 
Net profit growth (%)3
  N/A   N/A   N/A 
 
Net new money (CHF billion)4
  (14.3)  (147.3)  (226.0)
 
Efficiency
            
 
Cost / income ratio (%)  76.5   103.0   753.0 
 
Capital strength
            
 
BIS tier 1 ratio (%)5
  17.8   15.4   11.0 
 
FINMA leverage ratio (%)5
  4.45   3.93   2.45 
 
Balance sheet and capital management
            
 
Total assets  1,317,247   1,340,538   2,014,815 
 
Equity attributable to UBS shareholders  46,820   41,013   32,531 
 
BIS total ratio (%)5
  20.4   19.8   15.0 
 
BIS risk-weighted assets5
  198,875   206,525   302,273 
 
BIS tier 1 capital5
  35,323   31,798   33,154 
 
             
Additional information
            
 
Invested assets (CHF billion)  2,152   2,233   2,174 
 
Personnel (full-time equivalents)  64,617   65,233   77,783 
 
Market capitalization6
  58,803   57,108   43,519 
 
1Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in the “Financial information” section of this report.  2For the definitions of our key performance indicators refer to the “Measurement and analysis of performance” section of this report.3Not meaningful if either the current period or the comparison period is a loss period.4Excludes interest and dividend income.5Refer to the “Capital management” section of this report.6Refer to the “UBS shares in 2010” section of this report.

The 2010 results and the balance sheet in this report differ from those presented in our fourth quarter 2010 report issued on 8 February 2011. The net impact of adjustments made subsequent to the publication of the unaudited fourth quarter 2010 financial report on net profit attributable to UBS shareholders was a gain of CHF 373 million, which increased basic and diluted earnings per share by CHF 0.10.

èRefer to “Note 33 Events after the reporting period” in the “Financial information” section of this report for more information

Strategy, performance and responsibility
Strategy and structure

Strategy and structure

UBS draws on its 150-year heritage to serve private, institutional and corporate clients worldwide, as well as retail clients in Switzerland. We combine our wealth management, investment banking and asset management businesses with our Swiss operations to deliver superior financial solutions. Headquartered in Zurich and Basel, Switzerland, UBS has offices in more than 50 countries, including all major financial centers, and employs approximately 65,000 people. Under Swiss company law, UBS is organized as an Aktiengesellschaft, a corporation that has issued shares of common stock to investors.

UBS business model and aspiration

UBS AG is the parent company of the UBS Group (Group). The operational structure of the Group comprises the Corporate Center and four business divisions: Wealth Management & Swiss Bank, Wealth Management Americas, Global Asset Management and the Investment Bank.

In aspiring to be a leading client-focused financial services firm, we are concentrating on:
–further strengthening our position as a leading bank for high net worth and ultra high net worth clients around the world;
–continuing our leadership across all client segments in Switzerland;
–attaining a top-tier position in the growth regions in which we choose to operate; and
–remaining a leading investment bank with a client-centric business model, focusing on flow trading and advice, leveraging our traditional strengths and maximizing our scope by working in close conjunction with our wealth management and asset management businesses.

Wealth Management & Swiss Bank
Wealth Management & Swiss Bank focuses on delivering comprehensive financial services to high net worth and ultra high net worth individuals around the world – except to those served by

Wealth Management Americas – as well as private and corporate clients in Switzerland. Our Wealth Management business unit provides clients in over 40 countries, including Switzerland, with financial advice, products and tools to fit their individual needs. Our Retail & Corporate business unit provides individual and business clients with an array of banking services, such as deposits and lending, and maintains a leading position across its client segments in Switzerland.

Wealth Management Americas
Wealth Management Americas provides advice-based solutions through financial advisors who deliver a fully integrated set of products and services specifically designed to address the needs of ultra high net worth, high net worth and core affluent individuals and families. It includes the domestic United States business (Wealth Management US), the domestic Canadian business and international business booked in the United States.

Global Asset Management
Global Asset Management is a large-scale asset manager with businesses diversified across regions, capabilities and distribution channels. It offers investment capabilities and styles across all major traditional and alternative asset classes including equities, fixed income, currency, hedge fund, real estate and infrastructure that can also be combined into multi-asset strategies. The fund



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services unit provides legal fund set-up and accounting and reporting for retail and institutional funds.

Investment Bank

The Investment Bank provides securities and other financial products and research in equities, fixed income, rates, foreign exchange and commodities. It also provides advisory services and access to the world’s capital markets for corporate and institutional clients, sovereign and governmental bodies, financial intermediaries, alternative asset managers and private investors.

Corporate Center

The Corporate Center provides and manages support and control functions for the Group in such areas as risk control, finance, legal and compliance, funding, capital and balance sheet management, management of non-trading risk, communication and branding, human resources, information technology, real estate, procurement, corporate development and service centres. Most costs and personnel of the Corporate Center are allocated to the business divisions.
èRefer to the “Accounting and reporting structure changes” and “UBS business divisions and Corporate Center” sections of this report for more information on our businesses

UBS’s competitive profile

Our business mix reflects decades of continuous development, organic growth and acquisitions. As a leader in the wealth management industry in terms of total invested assets, we offer a combination of wealth management, investment banking and asset management and services in local and regional markets. Specifically, we are a leading wealth manager in Switzerland, Europe, and the Asia Pacific region and are well positioned in

main growth markets such as the Middle East and Latin America. In the US, we are a leading wealth management service provider and are the biggest foreign-owned wealth manager. Furthermore, we have the largest ultra high net worth business globally in terms of invested assets. Our Investment Bank maintains a strong presence among global corporate and institutional clients, and holds leading positions in equities, foreign exchange, money markets, mergers and acquisitions and financial advisory services. In the Asia Pacific region, we operate leading investment banking, wealth management and asset management businesses.

UBS’s strategy

At the end of 2009, we established strategic objectives to improve our financial performance and reposition the firm in order to generate sustainable profitability and increased shareholder value. These strategic objectives and the related medium-term financial targets were reiterated at our Investor Day in November 2010. Our strategy is built on two primary pillars: re-focusing our business portfolio to fully capitalize on our strengths, and transforming the way we operate, exploiting the full potential of our strengths based on our three strategic guidelines of reputation, integration and execution. We are delivering against this strategy and have made progress in improving our financial performance during 2010.

Re-focusing the business portfolio

We will further foster collaboration between our wealth management, asset management and investment banking businesses, reflecting our commitment to serve our clients comprehensively across all segments. We believe this will improve our operating and financial results and will generate more shareholder value.



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responsibility Strategy and structure

The Investment Bank’s strategy is centered on an aligned and integrated client-centric business model, built around flow trading and advice, and is supported by a disciplined risk control framework. The existing capabilities in equities and fixed income, currencies and commodities have been unified into one integrated securities platform to better serve our clients. We will continue to review the Investment Bank’s business mix to take into account changes in law affecting certain businesses, increased capital requirements and market developments.
In Wealth Management, we are focusing on capturing growth opportunities in Asia, the emerging markets and the ultra high net worth segment, while transforming our cross-border business and building on our onshore presence in key markets. Our Retail & Corporate business unit aims to further strengthen our leading position in Switzerland, working together with our other businesses.
The geographic and stylistic diversification of Global Asset Management is at the core of our efforts to deliver superior investment performance for clients and capture growth opportunities. Additionally, we are working to expand on our strong third-party institutional business.
In Wealth Management Americas, we have shifted from a scale-driven model to one based on advice, led by our financial advisors and focused on high net worth and ultra high net worth
clients. We believe this shift in strategy will lead to sustainable profitability.
From a geographic perspective, we want to leverage our strong existing global footprint. We are continuously investing in our Asia Pacific businesses as well as other growth markets such as the Middle East and Latin America. For example, in April 2010, we announced that we would acquire the Brazilian brokerage firm, Link Investimentos (subject to regulatory approval), a key milestone in our efforts to re-build our presence in Brazil and expand our footprint in Latin America.
èRefer to the “UBS business divisions and Corporate Center” section of this report for more information on the business division strategies

Transforming the way we operate

Our transformation is geared towards exploiting the full potential of our strengths based on our three strategic guidelines of reputation, integration and execution.
Our reputation is our most valuable asset. It is ultimately defined by the actions and decisions we take every day. In order to restore and safeguard our reputation, we have introduced more disciplined and effective governance processes. The resolution of the US-cross-border issue in November 2010 was one important



UBS Switzerland

We are committed to our Swiss home market. Switzerland is the only country in which retail, corporate and institutional banking, wealth and asset management as well as investment banking are present. We strive to be the leading bank with regard to client satisfaction, employee engagement and sustainable profitability. Within the Swiss market, we maintain a leading position in all of our businesses.

Through our network of over 300 branches including around 4,700

client-facing staff, we reach approximately 80% of Swiss wealth. We serve every third household, every third wealthy individual and almost half of all Swiss companies.

Our strategy leverages our strengths and leading position in Switzerland and our integrated bank model allows us to offer a very broad range of products and services to our clients. For example, we can offer our private clients banking products and services needed throughout

their lives, ensuring the stability and continuity of the relationship. The same holds true for our corporate and institutional clients. We also offer our clients in Switzerland access to our global asset gathering and investment banking expertise.

UBS Switzerland operates with an integrated management team consisting of the heads of all Swiss business segments and support functions.



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step in this process. Also, we launched a new corporate identity program in 2010, including the world-wide brand campaign “We will not rest”, and a corresponding sponsorship strategy to raise our brand awareness.

Integration is a key factor in serving our clients and driving efficiencies across our businesses and is essential to our ability to achieve our financial targets. Integration is being achieved through a series of measures, including several dedicated client-related initiatives around the globe, and related improvements in client coverage and management processes. For example, we have established our Investment Products and Services (IPS) unit, bringing together experts from Wealth Management & Swiss Bank, Global Asset Management and the Investment Bank under one roof. IPS efficiently delivers high quality investment content and channels market and product ideas to our client advisors and clients in a prompt and efficient way, raising the quality of service for our Wealth Management clients.
We are committed to execution at the highest standards, ensuring consistent high-quality delivery to clients as well as within the firm. Furthermore, we are further developing our performance-oriented culture to help us to attract, develop and retain top industry talent. As part of this effort, we have introduced new performance review tools and processes that allow us to identify problem areas and to initiate corrective measures.



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Strategy and structure

Board of Directors

(PHOTO 1 OF BOARD OF DIRECTORS)

(KEY TO PHOTOS OF BOARD OF DIRECTORS)

1 Kaspar VilligerChairman of the Board of Directors, Chairperson of the Corporate Responsibility Committee and Governance and Nominating Committee  2 Michel DemaréIndependent Vice Chairman, member of the Audit Committee and Governance and Nominating Committee  3 Axel P. LehmannMember of the Risk Committee  4 Rainer-Marc FreyMember of the Audit Committee and Risk Committee  5 Bruno GehrigMember of the Governance and Nominating Committee and Human Resources and Compensation Committee  6 Ann F. GodbehereMember of the Audit Committee and Corporate Responsibility CommitteeDavid SidwellChairman Risk Committee7William G. ParrettChairmanChairperson of the Audit CommitteeAxel P. Lehmann8 Helmut Panke Ad-interim Chairperson of the Human Resources and Compensation Committee and member of the Risk Committee  9 Wolfgang MayrhuberMember of the Corporate Responsibility Committee and Human Resources and Compensation Committee  10 David SidwellSenior Independent Director, Chairperson of the Risk CommitteePeter R. VoserMember Governance

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(PHOTO 2 OF BOARD OF DIRECTORS)

The Board of Directors (BoD) is our most senior body. Under the leadership of the Chairman, it determines the strategy of the Group based upon the recommendations of the Group Chief Executive Officer (Group CEO). It exercises ultimate supervision of management and Nominating Committeeis responsible for the appointment and dismissal of all Group Executive Board (GEB) members, the Company Secretary and the head of Group Internal Audit as well as supervising and setting appropriate risk management and control principles for the firm. With the exception of its current Chairman, Kaspar Villiger, all members of the BoD are independent.

èRefer to the “Corporate governance” section of this report for more information about the BoD
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Strategy and structure

Group Executive Board

(PHOTO 1 OF GROUP EXECUTIVE BOARD)

(KEY TO PHOTOS OF BOARD OF DIRECTORS)

1 Oswald J. GrübelGroup Chief Executive Officer  2 John CryanGroup Chief Financial Officer and ad-interim Chairman and CEO of UBS Group Europe, Middle East & Africa  3 Markus U. DiethelmGroup General Counsel  4 John A. FraserChairman and CEO of Global Asset Management  5 Maureen MiskovicGroup Chief Risk Officer  6 Chi-Won Yoonco-Chairman and co-CEO of UBS Group Asia Pacific  7 Ulrich KörnerGroup Chief Operating Officer and CEO of Corporate Center  8 Robert J. McCannCEO of Wealth Management Americas  9 Lukas GähwilerCEO of UBS Switzerland and co-CEO of Wealth Management & Swiss Bank  10 Carsten KengeterChairman and CEO of the Investment Bank  11 Alexander Wilmot-Sitwellco-Chairman and co-CEO of UBS Group Asia Pacific  12 Jürg ZeltnerCEO of UBS Wealth Management and co-CEO of Wealth Management & Swiss Bank  13 Philip J. LoftsCEO of UBS Group Americas

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Strategy, performance and responsibility

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(PHOTO 2 OF GROUP EXECUTIVE BOARD)

Strategy, performance and responsibility
Strategy and structure

Group Executive Board

Management of the firm is delegated by the BoD to the GEB. Under the leadership of the Group CEO, the GEB has executive management responsibility for the Group and its businesses. It assumes overall responsibility for the development of the Group and business division strategies and the implementation of approved strategies.

è Refer to the “Corporate governance” section of this report for more information about the GEB
From left:Philip J. LoftsGroup Chief Risk OfficerUlrich KörnerGroup Chief Operating Officer and CEO Corporate CenterJohn A. FraserChairman and CEO Global Asset ManagementMarkus U. Diethelm Group General CounselRobert WolfChairman and CEO, UBS Group Americas/President Investment BankAlexander Wilmot-Sitwellco-CEO Investment BankFrancesco MorraCEO UBS Switzerland, Wealth Management & Swiss BankJürg ZeltnerCEO Wealth Management, Wealth Management & Swiss BankChi-Won YoonChairman and CEO Asia PacificCarsten Kengeterco-CEO Investment BankRobert J. McCannCEO Wealth Management AmericasOswald J. GrübelGroup Chief Executive OfficerJohn CryanGroup Chief Financial Officer
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The making of UBS

The making of UBS

The firms that have comeWhen, in 1998, the Union Bank of Switzerland and the Swiss Bank Corporation (SBC) merged to make up today’sform UBS, they could look back on a long and diverseillustrious history. BothBy 1962, the two Swiss predecessor banks andUnion Bank of Switzerland had already celebrated its 100th anniversary, as Bank in Winterthur, its first forebear, was founded in 1862. SBC passed its centenary in 1972, tracing its origins back to the Basler Bankverein founded in 1872. The historical roots of PaineWebber, Group Inc. (PaineWebber) came into beingacquired by UBS in the second half of the 19th century, while S.G. Warburg’s roots2000, go back to 1934. But it1879, while S. G. Warburg, one of the major pillars upon which today’s Investment Bank was built, commenced operations in the 1990s when our current identity began1946, with its roots going back to form.1934.
In the early 1990s, the two Swiss banks that came to form the current UBS, Swiss Bank Corporation (SBC)SBC and Union Bank of Switzerland were both commercial banks operating mainly out of Switzerland. The two banks shared a similar vision: to become a world leader in wealth management and a global bulge-bracket investment bank with a strong position in global asset management, while remaining an important commercial and retail bank in Switzerland.
Union Bank of Switzerland, the largest and best-capitalized Swiss bank of its time, opted to pursue a strategy of organic growth, or expansion by internal means. In contrast, SBC, then the third-largest Swiss bank, decided to take another route by starting a joint venture with O’Connor, a leading US derivatives firm that was fully acquired by SBC in 1992. O’Connor was noted for its young, dynamic and innovative culture, meritocracy and team orientation.team-oriented approach. It brought state-of-the-art risk management
and derivatives technology to SBC. In 1994, SBC acquired Brinson Partners, one of the leading US-based institutional asset management
firms. Both the O’Connor and Brinson transactions represented fundamental steps in the development of the firm.
The next major move was in 1995, when SBC acquired S.G. Warburg, the British merchant bank. The deal helped SBC fill SBC’sa strategic gapsgap in corporate finance, brokerage and research and, most importantly, brought with it an institutional client franchise, which is still crucial to today’s equities business.
The 1998 mergercombination of SBC and Union Bank of Switzerland brought together these two leading Swiss financial institutions, creatinginto the firm we know today created a leading global wealth manager and improvingimproved the new firm’s chancesprospects of becoming a global bulge bracketbulge-bracket investment bank and a leading global institutional asset manager.
Still, in order to become a truly global player in investment banking and wealth management, UBS needed to establish a significant presence in the key US market.United States. UBS advanced toward this objective when it acquired PaineWebber in 2000.
Since the acquisition of PaineWebber, UBS’s main priority has been to develop and grow organically. Smallerorganically, but smaller acquisitions have helped to accelerate and complement the firm’s growth. Today, UBS has significant scale in its areas of focus, with strong positions in large, mature markets as well as a growing presence in emerging markets.
è Refer to www.ubs.com/history for more information


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Strategy, performance and responsibility

21(FLOWCHART)

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Current market climate and industry drivers

Current market climate and industry drivers

The recent crisisquest for greater systemic stability continues and its aftermath will have enduring effects onresilience has been tested once again by the financial services industry.

euro crisis.

Financial crisis and global recession

The global economy experienced one of its most difficult years in 2009. The financial crisis originated with the sub-prime crisis in 2007-2008, and evolved into one of the worst recessions in the post-war era. For the first time in many decades, the world’s gross domestic product (GDP) deflated in real terms, as both developed and emerging economies suffered from falling international trade volumes and shrinking industrial production. The sharp contraction in growth of the global economy resulted in a further correction in asset prices in the early part of the year as global stock prices plummeted to historical lows. The crisis spreadEmergence from the financial sector to other industries, leading to a rapid risecrisis amid continued
uncertainties

Global growth accelerated in the unemployment ratefirst half of 2010, as businesses reducedcompanies restocked their employment levels to adjust toinventories and improved consumer confidence kick-started spending. Monetary policies remained expansionary in nature given the changes in global demand.

     The adverse macroeconomic scenarios triggered by the financial crisis pushed governments and central banks around the world to further step up their fiscal policy efforts during 2009. In addition to maintaining interest rates at record lows, and further enlarging the scope of so-called “unconventional monetary measures” such as the purchase of distressed assets from financial institutions, the policy focus shifted to fiscal stimulus packages to provide support to the goods and services sector. The increase in public expenditure, coupled with a drop in tax revenues as a resultcontinuing fragility of the economic decline, led to greatly increased public deficits, particularlyrecovery. Emerging economies exited the crisis relatively unscathed and with improved economic, financial and fiscal positions in comparison with developed economies. Re-leveraging started across emerging markets at a time when de-leveraging was the norm in most developed markets, and China overtook Japan as the biggest Asian economy.
Following turbulence in some emerging market bond markets earlier in the US and Europe.
     In the course of the second quarter, global growth reached record lows, and only during the summer did signs of stabilization in the global economy begin to emerge, particularly within the industrial production sector. As the economic outlook gradually began to improve there was a recovery in stock prices, which started by the end of first quarter of 2009 and continuedyear, renewed macro concerns in the second half of 2009, taking2010 largely revolved around European sovereign credit risks. At their November meeting in Seoul, G20 leaders failed to reconcile their differences with respect to exchange rate policy and the yearly gainsfiscal route map going forward, limiting their agreement to “indicative guidelines” on how to rein in current account imbalances.
Although re-regulation aimed at increasing the stability of the global stock indexes to more than 20%. Emerging markets’ stocks – particularly in Asia – experienced the strongest rebound as they were leading the unfolding recovery. The rebound in asset prices that occurred during the year was not restricted to stocks but also extended to the credit security markets. Overall, the recovery in asset prices provided private and institutional investors with very good returns compared with the losses experienced in 2008.
     As the global outlook improved, the financial services industry benefited from the recovery in asset prices. Improved
liquidity conditions in capital markets allowed financial institutions to raise capital in order to bolster funds, reinforcing their capital positions. However, despite the overall improvement observed duringsystem remained a major topic of discussion throughout the year, the financial sector remained under pressure asG20 moved more slowly and cautiously than expected, mainly due to the lasting effectsdiffering views among members. The main achievement was the agreement on Basel III rules and the endorsement of the Financial Stability Board’s route map for the regulation of systemically important financial crisis were further exacerbated byinstitutions.
Macro uncertainties continued to overshadow the growing impactguardedly optimistic banking sector fundamentals that appeared to be recovering faster than anticipated in the first half of the global recession on banks’ balance sheets.
Macroeconomic perspectives
The overall economic outlook of most economists for 2010 is cautiously optimistic, as global growth returned2010. Market conditions in the second half of 20092010 deteriorated, particularly with respect to client activity levels and is expectedfixed income businesses. As the global economy readjusted to tempered growth, financial markets continued their rollercoaster ride. During 2010, the hoarding of cash, which resulted in record highs at the end of the crisis, had somewhat reversed.

Euro crisis
Europe’s sovereign debt crisis resulted in a major dip in confidence in the euro. The situation had its origins as much in the establish-

ment and subsequent development of the common currency itself as in the effects of the financial market crisis. When the global recession struck in 2008, much of the debt accumulated mostly (but not exclusively) in the private sectors of some European Monetary Union (EMU) countries became unsustainable. The governments faced falling tax revenues, rising social outlays and costs for supporting their economies and their failing financial institutions. Public debt-to-gross domestic product (GDP) ratios in the EMU rose by around 20 percentage points on average. The weaker and most severely affected countries saw their annual public deficits swell to double-digit levels as a percentage of GDP. Holders of government bonds grew increasingly nervous about their investments, triggering today’s sovereign debt crisis in Europe.

The response to the Greek crisis included a EUR 110 billion rescue loan package to prevent a debt default, fiscal austerity measures to regain investors’ confidence and structural reforms to improve throughoutcompetitiveness. Defaulting and restructuring debt was not seriously considered for fear of spreading Greece’s problems to other high-debt / high-deficit countries and the year. However, cautionwestern European banking sector.
The crisis flared up again in November – in Ireland. In contrast to Greece, Ireland’s fiscal profile had been among the soundest in the Eurozone. But low interest rates sparked a veritable credit binge and one of the world’s biggest housing bubbles, financed in large part by Irish banks. Since this bubble burst in 2008, the Irish banking system has been expressed as this recovery appears “abnormal” when compared with previous economic cycles. in serious disarray. Holders of Irish debt became increasingly nervous about the situation, and the country agreed to a loan program totaling EUR 85 billion.
The economic recovery seen so far remains weak when compared with previous recoveries following recessionsimmediate market reaction to the Irish rescue package was anything but reassuring. In fact, the markets’ concern spread not only to the more obvious candidates like Portugal and Spain, but also to Italy, Belgium and even France. Only at the start of 2011 did a closing of ranks among the EU political leaders allow the containment of the magnitude experienced in 2009. In “normal” recoveries,immediate euro crisis, although the underlying fundamental issues remain.

Macroeconomic perspectives

The global growth sharply increases following the downturn, often surpassing the pre-crisis growth rate, and then eventually falls back to its long-term growth rate. In the current market environment, the return to pre-crisis growth ratesrecovery, while weak, appears to be taking longer to materialize, mostly as a result of deleveraging inincreasingly self-sustaining. We believe that the private and corporate sectors. Secondly,global economy has the ongoing economic recovery also appears to be uneven from a geographical point of view. While emerging markets are expected to show the strongest performance, growth in advanced economies is predicted to remain low as the household and

(BAR CHART)
potential



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to grow at between 3% and responsibility

4% in the medium term, a moderate rate of growth compared with previous recovery years. However, this global figure masks distinct regional discrepancies. The US is likely to show slower growth than during the period 1982–2007. Among the factors responsible for this are the de-leveraging of the private sector, re-regulation of financial intermediaries, the surge of public debt and the subsequent need to repair the public sector balance sheet. A subdued recovery remains the most likely US scenario as the stimulus-induced boom has come to a definite end. Generally, spare capacity in the western world will only be slowly re-absorbed, keeping inflation rates in most countries subdued (with the notable exception of the UK), while requiring further monetary easing, including via asset purchases (i.e. quantitative easing).
(BAR CHART)

corporate sectorsIn Europe, we are seeing decoupling between regions as well as fragmentation within them. Germany and other northern European countries have benefited most from the global recovery and the euro’s depreciation, while the south is lagging behind and is under austerity pressure. This major divergence will likely continue to repairchallenge the euro.
In Asia, some developments seem to flag potential risks, such as incipient asset bubbles in specific market segments and an acceleration of inflation in some countries. Most Asian countries have started to tighten their balance sheets. Unemployment rates are expectedmonetary and credit policies. Other large emerging markets (e.g. Brazil) can rely on robust domestic demand in order to remain high and only begin declining later during the year,maintain stable growth, though some risk of overheating exists as global economic recovery is firmly established in advanced economies.a result.

Industry drivers

A number of drivers are expected to have a significant impact on banks’ earnings andas well as the structure of the financial services industry in the short-to medium-term.industry. The most relevant factorsfactor over the coming years will be the new business environment arising out of regulatory reform. This is likely to have far reaching and transformational consequences for markets, firm structures and business models.

èRefer to the “Regulatory developments” section for more information

Changing business models
Changes in regulation are described below.

Deleveraging
The financial servicesexpected to have a profound effect on banks’ business models. In view of the pressure that the new capital requirements and other regulatory principles, as stipulated by the Basel Committee and other bodies, will put on asset inventory-based future returns, the industry experienced massive deleveraging in 2009. Banksis currently reassessing its business portfolios and models. This is particularly true in the case of fixed income. However, structural changes are unlikely to happen in the short term.

Increasing role of emerging market banks
Emerging market banks came out of the global financial crisis in much better shape than their peers in developed markets, given their limited exposure to the US sub-prime market. As such, their capital position, on average, is already well above the Basel minimal requirement for 2019. Global emerging market banks are also strongly funded with deposits, which, together with a mostly supportive macro outlook, make them well positioned to capture future growth. In 2010, a number of emerging market countries enacted additional regulations for local banks. These include higher reserve requirements (China, India, Indonesia, and Turkey), more stringent provisioning (India, Indonesia and Mexico), compulsory lending (Korea), banking taxes (Hungary) and mortgage restrictions (China, Hong Kong, India, Malaysia, Poland and Thailand).

Demographics
The demographic dividend brought by a fall in child dependency and a rise in the share of the working population has been exhausted in western countries, and will soon be exhausted in a few developing countries (e.g. China). For most of the developing world this point lies 20–30 years ahead. Countries that have lost the demographic dividend will confront fiscal and social stresses from increases in the old age dependency ratio. In Japan, today there are 3.4 people working for every person over 65. By 2050, it is estimated the ratio will be 1.3. In Western Europe continuedthe ratio would fall from nearly four to decrease their balance sheetstwo. Many pension funds – particularly pay-as-you-go public pensions – are underfunded, leaving many with insufficient retirement income. As baby-boomers retire, they will roll over trillions of assets from defined contribution plans and raiseindividual retirement accounts to other accounts. The need for stable income will increase the demand for fixed income investments and target date funds.

Development of major currencies versus the Swiss franc

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Regulatory developments

Regulatory developments

Banking sector re-regulation remained high on the agenda throughout 2010. The pace of regulatory reform often varies among countries, raising the prospect of an uneven playing field among banks. Regulatory reforms will have a significant impact on capital to reinforce their financial position. While the deleveraging process withinlevels, future revenue and earnings, and ultimately investment returns for the banking sector is likelyas a whole. In particular, the impact will be felt in certain business areas, such as fixed income.

Global capital and liquidity standard – Basel III

The enhanced Basel II framework (increased weighting of market risks) and Basel III capital requirements mandate that banking businesses will have to continue forbe underpinned by a higher quantity and quality of capital going forward. The definition of core tier 1 capital (common equity) will be more restrictive. Risk-weighted assets (RWA) will rise significantly, notably at banks with large trading portfolios, due to the introduction of additional charges as well as increased calibration percentages. It will take some time to implement fully the Basel reforms and further capital might be raised in the futureglobal standards, and, as a result, the focus is on local regulations and their comparison. It is apparent that the pace of ongoing regulatory changes,change varies considerably from country to country, and it appearsis likely that financial sector leverage level has fallen substantially fromthere will be different rules in different jurisdictions.

On 26 July 2010, the levelsGroup of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision (BCBS), reached just before the crisis erupted. On the other hand, deleveraging ina broad agreement on the overall economy has only just begun. The reduction in household sector debt, which has already commenced in some countries, has been partly offset by an increase in government debt, leaving the overall debt level mostly unchanged. Mostdesign of the financial crises experienced in the last few decades have typically been followed by prolonged deleveraging episodes involving a substantial reduction in the debt-to-GDP ratio in the private sector, the public sector or simultaneously in both sectors.
     Most past episodes of deleveraging have had a negative impact on growth,capital and lower real economy returns will negatively impact the profitability of the financial services industry in the next few years.
Emerging markets
Emerging markets were also impactedliquidity reform package proposed by the global recession in 2009. Exporters of manufactured goods were hit by falling global trade volumes and reduced imports in advanced economies. Commodity producers and exporters were hit by falling prices as the boom in commodity prices in the early 2000s suddenly came to an end. Economic growth slowed markedly, and governments intervened to support domestic demand through public expenditures and increased credit supply to state-controlled and private corporations. However, due to the better shape of household and corporation balance sheets when compared with most advanced economiesBasel Committee. On 12 September 2010, proposed strengthened capital requirements as well as the fiscalintroduction of a global liquidity standard were announced.
On 16 December, the BCBS followed up with the publication of four comprehensive documents. The new proposed rules seek to strengthen the banking sector’s resilience under financial and monetary policy stimulus, emerging markets – particularly Brazil, Asiaeconomic stress, improve risk management and governance and enhance transparency. Also, guidance on the countercyclical capital buffer was provided for national authorities (up to 2.5% in the form of common equity), which aims to protect the banking sector from periods of excess aggregate credit growth. On 13 January 2011, the BCBS followed up with additional criteria for tier 1 and tier 2 capital to ensure that all classes of capital absorb losses at the point of non-viability.
The minimum common equity tier 1 ratio will be 4.5%, the minimum tier 1 capital ratio 6% and the Middle East – performed relatively well duringminimum total capital ratio 8%. In addition, banks will be required to hold a capital conservation buffer of 2.5% and a countercyclical buffer of up to 2.5% in the crisis. Thanksform of common equity to solid macro fundamentals, most emerging economies werewithstand future periods of stress. Therefore the firsttotal capital requirement includ-

ing buffers amounts 10.5–13%.These requirements will be phased-in from 2013 to emergethe end of 2018. The risk-based capital requirements are supplemented by a tier 1 leverage ratio of 3% that will be tested from 2013 to 2016, with a view to perform a final calibration and implementation as of 1 January 2018.

Regarding liquidity, the slumpBCBS proposes two metrics: the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR). Both the LCR and the NSFR will be subject to an observation period and will include a review clause to address any unintended consequences. Observation periods for the LCR and NSFR will start in 2011 and 2012, with minimum standards to be introduced in 2015 and 2018, respectively. The two ratios are conceptually in line with our internal frameworks. The LCR is broadly consistent with the metric in the liquidity regime as introduced by the Swiss Financial Market Supervisory Authority (FINMA) and the Swiss National Bank (SNB) as of mid 2010.

Basel II market risk framework

Further to the publication of the enhanced Basel II market risk framework in July 2009, the BCBS has issued certain adjustments to the revision in June 2010. For a transition period of two years, the capital charges for non-correlation trading securitization positions may be based on the larger of the capital charges for net long and net short positions instead of the sum of net long and net short positions. Also, for correlation trading securitization positions, banks applying an internally developed model are subject to a floor of at least 8% of the capital charge for specific risk according to the standardized measurement method. Finally, the BCBS agreed to a coordinated start-date of not later than 31 December 2011.

èRefer to the “Treasury management” section of our 2009 Annual Report for the 2009 developments of the Basel II market risk framework

Systemically important financial institutions

Regulatory attention is clearly focused on the question of systemically important financial institutions. However, at present, an in-



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ternationally agreed framework does not exist. The Financial Stability Board, in cooperation with the BCBS and national authorities, is expected to provide more detail over the course of 2011 according to the year. This performanceroadmap submitted to the G20 leaders in November 2010. Examples of measures include more demanding capital and liquidity rules and resolution frameworks to ensure that all financial institutions can be dissolved without destabilizing the system and without exposing taxpayers to the risk of loss. They also include a cross-border coordination framework and more intense supervisory oversight.

Swiss Commission of Experts on “Too big to fail”
and public consultation

Of special relevance for UBS is expectedthe “too big to continue throughoutfail” discussion in Switzerland. On 4 October 2010, the Commission of Experts appointed by the Swiss Federal Council presented its final report, proposing measures to be applied to systemically relevant banks, with recommendations for increased capital requirements (including a return to sustained growth specifically in Asialeverage ratio) and other emerging markets.

     Therefore,organizational measures aimed at safeguarding the economic crisis overcontinuation of important Swiss banking services at the last year has beenpoint of a driving forcebank’s non-viability. These measures are supplemented by strict liquidity requirements and a limitation of interdependencies and concentration risks in the economic and geographic power shift from advanced to emerging economies which was already well under way before the financial crisis hit the global economy. Banks that have built a significant presence in emerging markets, and serve a wide range of institutional and private clients in those economies, may benefit if the emerging markets’ share of global profits for the financial services industry continues to grow.sector. The proposals include:
1.Capital: Common equity of at least 10% of RWA and additional capital equivalent instruments (contingent convertibles [CoCos]) of 9% of RWA. The CoCos would automatically convert into common equity in the event that the capital ratios of the issuing bank fall below certain predefined thresholds (trigger levels). Of the 9% capital equivalent instruments, the Commission of Experts recommended that 3% consist of CoCos with a trigger at a 7% common equity capital ratio. Alternatively, this 3% may also be held in the form of common equity. The remaining 6% would be issued as CoCos with a lower trigger, set at a 5% common equity capital ratio. This progressive component would be variable, based on the bank’s degree of systemic importance, and depend on market share in Swiss systemic functions and total balance sheet size of the bank. These proposed capital requirements exceed the proposed Basel III minimum standards. The calibration of the three components was based on the assumption that RWA would increase to approximately CHF 400 billion under Basel III. The 6% progressive component, calibrated as at the end of 2009, is based on a balance sheet total of approximately CHF 1,500 billion and a market share of around 20%. Furthermore, the Commission recommended a leverage ratio (minimum capital level as a proportion of the balance sheet) as an additional capital rule. The timeframe for the imple-

Re-regulation of the financial services industry
International organizations and national regulators have increased their focus on revising the regulatory framework of the financial services industry as conditions within the industry continue to improve and short-term governmental finan-
mentation of the Swiss capital requirements is the same as it is for the Basel III standards.
2.Liquidity: Proposals concerning liquidity requirements largely correspond to the FINMA principles that were effective as of 30 June 2010. It has been proposed that the agreed-upon FINMA principles should be given legal form. The FINMA liquidity regulations require banks to hold a balance of highly liquid assets sufficient to offset the projected outflows under the stress scenario for a period of 30 days. Similar to the FINMA liquidity regime, our established internal liquidity stress tests consider a severe stress scenario. We believe that our internal model enables us to sustain our business in stress conditions for a period substantially beyond the minimum regulatory horizon.
3.Risk diversification: The measures presented by the Commission to improve risk diversification are similar to the adjustments envisaged in other jurisdictions, notably the European Union. One objective of these measures is to reduce the degree of interconnectedness within the banking sector, and thus limit the dependence of other banks on systemically important banks.
4.Organization: The Commission stressed that it is the responsibility of a systemically important bank to organize itself in such a way that maintenance of the Swiss systemically important functions would be guaranteed in the event of a crisis. No specific structural measures were recommended by the Commission for systemically important banks.
     On 22 December 2010, the Swiss Federal Council launched a consultation on the “too big to fail” legislative proposals. The draft contains the measures recommended by the Commission of Experts which form the heart of the proposals. There were two additional elements compared with the Commission’s final report: (i) proposed legal changes to grant tax relief for the Swiss capital market, and (ii) a paragraph that empowers the Federal Council to rule on variable compensation for bank employees in case of future government support for a bank. The consultation is scheduled to end on 23 March 2011 and, after consolidation, the papers will enter the parliamentary process with a view to conclude the debate in 2011. The Swiss administration took strides to further clarify the measures stipulated by the Commission, while the abovementioned four main pillars remained in place.
     The revised legislation would require each systemically relevant institution such as UBS to develop a plan to ensure the continuation of systemically relevant functions within Switzerland in the event that the institution approaches insolvency. It would empower FINMA to impose far-reaching structural changes, including among other things the separation of lines of business into separate legal entities and restrictions on intragroup funding and guarantees, should any such institution be deemed to have failed to develop an adequate plan.


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Strategy, performance and responsibility
Current market climateRegulatory developments

Regulatory developments in other jurisdictions

Other notable regulatory initiatives include the Dodd-Frank Wall Street Reform and industry drivers

cial support is gradually withdrawn. The G-20 has stipulated broad guidelines of re-regulationConsumer Protection Act in the US, which are being specified by the Financial Stability Board, the International Monetary Fund and the Basel Committee on Banking Supervision. As some countries are starting to implement regulatory changes, others are still debating on what is the best way forward. For instance, the Swiss Financial Market Supervisory Authority (FINMA) has already introduced increased capital requirements and liquidity constraints for the largest Swiss banks. While the international organizations are trying to achieve an international level playing field, there is a growing risk that jurisdictions will implement regulations at different times and levels of intensity. This could lead to fragmentation of the regulatory framework and disparities of conditions between countries, with a risk of national ring-fencing tendencies.
     The expected significant tightening of regulatory requirements pertaining toimpacts the financial services industry whether globally coordinated or not,by addressing, among other issues, systemic risk oversight, bank capital standards, the liquidation of failing systemically significant financial institutions, over-the-counter derivatives, the ability of deposit-taking banks to engage in proprietary trading activities and invest in hedge funds and private equity (the so-called Volcker rule), consumer and investor protection, hedge fund registration, securitization, investment advisors, shareholder “say on pay,” the role of credit-rating agencies, and more. The details of these regulations will likely reducedepend on the profitabilityfinal regulations ultimately adopted by various agencies and oversight boards in 2011.
The European Commission ran a consultation on technical details of certain businesses. This will eventually leada possible EU framework for bank recovery and resolution until 3 March 2011. The Commission intends to changesproceed gradually towards a comprehensive EU framework for troubled and failing banks in the competitivefollowing phases: legislative proposal for a harmonized EU regime for crisis prevention and bank recovery and

resolution; further harmonization of bank insolvency regimes; and creation of an integrated resolution regime. The consultation paper runs through the lifecycle of a financial institution, detailing conditions for prevention, early intervention and resolution.
The landscape for banking in the UK will be shaped by the findings of the Independent Commission on Banking (ICB), which was tasked with finding ways to promote financial services industry. Financial institutionsstability and advisory businesses with low capital intensity that will be fastercompetition, and more efficient in adapting themselves to the new regulatory environment are likely to outperform in the medium-term.
Rising taxation as public deficits soar
One of the legacies of the global crisis is higher public debt in most of the developed world. As a result of the financial crisis, there has been a substantial transfer of private debt to the public sector. Higher public debts are most likely to become a dominant policy issue over the medium-term as governments will have to deal with the fiscal structural adjustments required to reduce the debt. The fiscal challenges that have emerged from the financial crisis are further aggravat-
ed by the impact of demographic changes in public finance, which is expected to growpublish an interim report in most advanced economiesspring before submitting its final report in September 2011. The UK re-emphasized its “living will” instrument and, after having assessed documents established by six pilot banks, rolled out a comprehensive list of required items in some emerging markets.
     Fiscal restructuring will likely bephase two. The regulations include a long process. It may be many years before public sector debt is brought back to pre-crisis levels. Governments will utilizebridge bank tool for deposit-taking banks and a mix of measures, including structural reforms to pension and healthcare eligibility as well as a revision of tax rates and coverage. Inspecial administration regime that focuses on the coming years, the pre-crisis trend of falling tax rates on individuals’ income will probably reverse, reducing the disposable income of individuals. If this occurs, clients can be expected to become more focused on effective tax planning in hopes of reducing their tax burden. Banks and financial institutions capable of providing this type of expertise may be able to retainrecovery or attract more clients.
Global capital flows and offshore centers
In the pre-crisis period, offshore centers benefited from soaring cross-border capital flows as they have been the financial platforms often used by investors for global investments. One implicationwind-down of the global crisis has beenwhole group in the case of investment banks. The UK government’s proposed bank levy is intended to encourage banks to move to less risky forms of funding. The levy will not become law until later in 2011 but it is proposed to take effect from 1 January 2011. Having applied the draft legislation to UBS’s 31 December 2010 balance sheet position, we estimate that the levy would result in a dramatic drop in global capital flows, as investors were more aversecharge of approximately CHF 75 million to taking risks and were more domestically oriented. Financial institutions reduced their exposure to foreign markets proportionally more than to their domestic markets. In the course of 2009, global capital flows began to recover as investors gradually increased their risk appetite, particularly in relation to assets located in emerging markets. However, it could take many years for global capital flows to return to pre-crisis levels.
     Offshore centers are also under increasing policy pressure, as governments around the world are urging for more transparency concerning income produced on assets held by investors abroad. Banks with an established broad presence in onshore markets are likely to be impacted less than other banks relying exclusively on offshore business.100 million per annum.


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Strategy, performance and responsibility

Risk factors

Certain risks, including those described below, canmay impact our ability to carry outexecute our business strategiesstrategy and directly affect our business activities, financial condition, results of operations and prospects. Because the business of a broad-based international financial services firm such as UBS is inherently exposed to risks that only become apparent with the benefit of hindsight, risks of which we are not presently aware could also materially affect our business activities, financial condition, results of operations and prospects. The sequence in which the risk factors are presented below is not indicative of their likelihood of occurrence or the potential magnitude of their financial consequences.

Our reputation is key to the success of our business

Our reputation has been severely damaged by our very large losses during the financial crisis and by the US cross-border matter. This has resulted in client attrition in different parts of our business and has negatively affected our financial performance. Restoring our reputation is essential to maintaining our relationships with clients, investors, regulators and the general public, as well as with our employees. Accordingly, it is critical to the success of our strategic plans. Reputational damage is difficult to reverse. The process is slow and success can be difficult to measure. We have taken what we believe are very important steps to restore our reputation, but it is possible that it will take longer to repair than we expect, particularly if further events were to occur that cause additional damage to our reputation. Any failure to restore or further damage to our reputation could have a material adverse effect on our operational results and financial condition. Even if our reputation is restored, we may not progress quickly enough to achieve our medium-term goals.
Regulatory changes may adversely affect our business and ability to execute our strategic plans

In the wake of the recent financial crisis, regulators and legislators arehave proposed and adopted, or continue to actively consideringconsider, a wide range of measures designed to address the perceived causes of the crisis and to limit the systemic risks posed by major financial institutions. Potential changesThese measures include:

– significantly higher regulatory capital requirements
– changes in the definition and calculation of regulatory capital, including in the capital treatment of certain capital instruments issued by UBS and other banks
– changes in the calculation of risk-weighted assets
– new or significantly enhanced liquidity requirements
– requirements to maintain liquidity and capital in multiple jurisdictions where activities are conducted
– limitations on principal trading activities
–limitations on risk concentrations and maximum levels of risk
– taxes and government feeslevies that would effectively limit balance sheet growth
– a variety of measures constraining, taxing or imposing additional requirements relating to compensation
– requirements to adopt structural and other changes designed to reduce systemic risk and to make major financial institutions easier to wind down or disassemble
– outright size limitations

A number of measures have been adopted (or in the case of Basel III, the framework established) and will be implemented in the next several years, or in some cases are subject to legislative action or to further rulemaking by regulatory authorities before final implementation. As a result, there is a high level of uncertainty regarding a number of the measures described above. The timing and implementation of changes could have a material and adverse effect on our business.

Notwithstanding attempts by regulators to coordinate their efforts, the proposals differ by jurisdiction and therefore enhanced

regulation may be imposed in a manner that makes it more difficult to manage a global institutions. institution. The absence of a coordinated approach is also likely to disadvantage certain banks, such as UBS, as they attempt to compete with less strictly regulated peers based in other jurisdictions.

Swiss authorities have expressed concern about the systemic risks posed by itsthe two largest Swiss banks, particularly in relation to the size of the Swiss economy and governmental resources. Swiss regulatory change efforts are generally proceeding more quickly than those in other major jurisdictions, and the Swiss Financial Market Supervisory Authority (FINMA), the Swiss National Bank (SNB) and the Swiss Federal Council have proposed requirements that would be more onerous and restrictive for major Swiss banks, such as UBS, than those adopted, proposed or publicly espoused by regulatory authorities in other major global banking centers. Following the July 2010 announcement of the broad agreement reached by the Basel Committee on Banking Supervision on total risk-based capital requirements amounting to 10.5%, the Commission of Experts appointed by the Swiss Federal Council issued a report in October 2010 recommending total risk-based capital of 19% for the two big Swiss banks. The measures recommended by the Commission of Experts, which also included requirements designed to reduce interconnectedness in the banking sector and organizational requirements, have now been incorporated into legislative proposals that are scheduled to be considered in 2011 by the Swiss Parliament. The organizational measures included in the draft legislation would require each systemically relevant institution to develop a plan to ensure the continuation of systemically relevant functions within Switzerland, in the event that the institution approaches insolvency. It would empower FINMA to impose more far-reaching structural changes, such as the separation of lines of business into dedicated legal entities and restrictions on intra-group funding and guarantees, should any institution be deemed to have failed to develop an adequate plan. Senior Swiss regulatory officials have made public statements suggesting that broader structural changes of this kind should be adopted or at least seriously considered by the two big Swiss banks in any event.
This may lead to more stringentburdensome regulations applicable to major banks headquartered in Switzerland in comparison with those based elsewhere. The potential regulatory and legislative developments in Switzerland and in other jurisdictions in which we have operations may have a material adverse effect on our ability to execute our strategic plans, on the profitability or viability of certain business lines globally or in particular locations, and on our ability to compete with other financial institutions. They could also have an impact on our legal structure or our business model.



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Strategy, performance and responsibility
Risk factors

We are exposedOur reputation is critical to possible further reductionthe success of our business

Damage to our reputation can have fundamental negative effects on our business and prospects. As the events of the past few years have demonstrated, our reputation is critical to the success of our strategic plans. Reputational damage is difficult to reverse. The process is slow and success can be difficult to measure. This was demonstrated in recent years as our very large losses during the financial crisis, the US cross-border matter and other matters seriously damaged our reputation. This was an important factor in our loss of clients and client assets across our asset-gathering businesses, and to a lesser extent in our wealth managementloss of and asset management businesses

In 2008difficulty in attracting staff. These developments had short-term and 2009,also more lasting adverse effects on our financial performance. We recognized that restoring our reputation would be essential to maintaining our relationships with clients, investors, regulators and the general public, as well as with our employees. Although there is evidence that the steps we experienced substantial net outflowshave taken in the past couple of years to restore our reputation have been effective, our reputation has not been fully restored, and we remain vulnerable to the risk of further reputational damage. 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.

Our capital strength is important in supporting our client assetsfranchise; changes in capital requirements are likely to constrain certain business activities in our wealth managementInvestment Bank

Our capital position, as measured by the BIS tier 1 and asset management businesses. This resulted fromtotal capital ratios, is determined by (i) risk-weighted assets (RWA) (balance sheet, off-balance sheet and other market and operational risk positions, measured and risk-weighted according to regulatory criteria) and (ii) eligible capital. Both RWA and eligible capital are subject to change. Eligible capital would be reduced if we experience net losses, as determined for the purpose of the regulatory capital calculation. Eligible capital can also be reduced for a number of different factors,other reasons, including certain reductions in the ratings of securitization exposures, adverse currency movements directly affecting the value of equity and prudential adjustments that may be required due to the valuation uncertainty associated with certain types of positions. RWA, on the other hand, are driven by our business activities and by changes in the risk profile of our exposures. For instance, substantial losses,market volatility, a widening of credit spreads (the major driver of our value-at-risk), a change in regulatory treatment of certain positions, adverse currency movements, increased counterparty risk or a deterioration in the damageeconomic environment could result in a rise in RWA. Any such reduction in eligible capital or increase in RWA could potentially reduce our capital ratios, and such reductions could be material.

The required levels and calculation of our regulatory capital and the calculation of our RWA are also subject to changes in regulatory requirements or the interpretation thereof.

We are subject to regulatory capital requirements imposed by FINMA, under which we have higher RWA than would be the case under BIS guidelines. Forthcoming changes in the calculation of RWA under Basel III and FINMA requirements will significantly increase the level of our reputation,RWA and therefore have an adverse effect on our capital ratios. We have identified steps that we can take to mitigate the losseffects of client advisors andthe changes in the RWA calculation, but there is a risk that we will not be successful in doing so, either because we are unable to carry out fully the actions we have planned or because other business or regulatory developments concerning our cross-border private banking business. As somecounteract the benefit of these factors can onlymitigating steps. We have also announced that we intend to build our capital base by retaining earnings and by not paying dividends either in 2010 or for some time to come, but there is a risk that we will not have sufficient earnings to increase the level of our capital as quickly as we have planned or as may be addressed over an extended periodnecessary to satisfy new capital requirements.
In addition to the risk-based capital requirements, FINMA has introduced a minimum leverage ratio, which must be achieved by 1 January 2013 at the latest. The leverage ratio operates separately from the risk-based capital requirements, and accordingly under certain circumstances could constrain our business activities even if we are able to satisfy the risk-based capital requirements.
Changes in the Swiss requirements for risk-based capital or leverage ratios, whether pertaining to the minimum levels required for large Swiss banks or to the calculation thereof (including changes made to implement the recent recommendations of time, we may continuethe Swiss Commission of Experts), could have a material adverse effect on our business and ability to experience net outflowsexecute our strategic plans or pay dividends in the future. This is particularly the case if our plans to take mitigating actions to reduce risk-weighted assets and to satisfy future capital requirements through retained earnings are not successful. Moreover, changes in the calculation and level of client assets. This maycapital requirements, coupled in some cases with other regulatory changes, are likely to render uneconomic certain capital-intensive businesses conducted in our Investment Bank, or to make their effective returns so low that they might no longer be viable. If some business activities of the Investment Bank are significantly reduced or discontinued, this could adversely affect the results of our wealth management and asset management businesses.competitive position, particularly if competitors are subject to different requirements under which those activities would remain sustainable.

We hold proprietary risk positions that may be adversely affected by conditions in the financial markets

UBS, like many other financial market participants, was severely affected by the financial crisis that began in 2007. The deterioration of financial markets since the beginning of the



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Strategy, performance and responsibility
Risk factors

crisis was extremely severe by historical standards, and we recorded substantial losses on fixed income trading positions, particularly in 2008 and to a lesser extent in 2009. We have drastically reduced our risk exposures from 2008 through 2010, in part due tothrough transfers in 2008 and 2009 to a fund controlled by the SNB.Swiss National Bank. We do, however, continue to hold sizeable legacy risk positions that are exposed to the general systemic and counterparty risks that were exacerbated by the financial crisis.



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Strategy, performance and responsibility

The continued illiquidity of most of these legacy risk positions is likely to makemakes it increasingly difficult to reduce our exposures to them.

legacy risk exposures.
During the marketfinancial crisis, we incurred large losses (realized and mark to market) on our holdings of securities related to the US residential mortgage market. Although our exposure to that market was reduced dramatically infrom 2008 and 2009,through 2010, we remain exposed to a smaller degree to such losses, most notably through monoline-insured positions. Monoline insurers have been adversely
The financial crisis also caused market dislocations that affected, by their exposureand to US residential mortgage-linked products, and we have recorded large credit valuation adjustments on our claims against them. If the financial condition of monoline insurers or their perceived creditworthiness deteriorates further, we would have to record further material credit valuation adjustments on the CDSs bought from them.
     The market dislocation also affecteda degree still affect, other asset classes. In 2008 and 2009, we recorded markdowns on other assets carried at fair value, including auction rate securities (ARS), leveraged finance commitments, commercial mortgages in the US and non-US mortgage-backed and asset-backed securities (ABSs)(ABS). We have a very large inventory of ARS which is likelysubject to increase as a resultchanges in market values. The portion of our partially satisfied commitmentARS inventory that has been reclassified as loans and receivables is subject to repurchase client-owned ARS.possible impairment due to changes in market interest rates and other factors. We hold positions related to real estate in countries other than the US, including a very substantial Swiss mortgage portfolio, and we could suffer losses on these positions. In addition, further market dislocation or continued weak financial conditions could result in further writedowns on our assets carried at fair value or in the impairment of assets classified as or reclassified to loans or receivables. Wewe are also exposed to risk in our prime brokerage, reverse repo and lombard lending activities, as the value or liquidity of the assets against which we provide financing may decline rapidly.

Performance in the financial services industry depends on the economic climate

The financial services industry prospers in conditions of economic growth, stable geopolitical conditions, capital markets that are transparent, liquid and buoyant capital markets and positive investor sentiment. An economic downturn, inflation or a severe financial crisis (as seen in 2008 and to a lesser extent in 2009)the last few years) can negatively affect our revenues and ultimately our capital base.

A market downturn can be precipitated by a number of factors, including geopolitical events, changes in monetary
or fiscal policy, trade imbalances, natural disasters, pandemics, civil unrest, war or terrorism. Because financial markets are global and highly interconnected, even local and regional events can have widespread impactimpacts well beyond the countries in which they occur. A crisis could develop, regionally or globally, as a result of disruptions in emerging markets which are susceptible to macroeconomic and geopoliticalpolitical developments, or as a result of the failure of a major market participant. We have material exposures to certain emerging market economies, both as a wealth manager and as an investment bank. As our presence and business in emerging markets increases, and as our strategic plans depend more heavily upon our ability to generate growth and revenue in the emerging markets, we become more exposed to these risks. The bond market dislocations affecting the sovereign debt of certain European countries, particularly in 2010, demonstrate that such developments even in more developed markets can have similarly unpredictable and destabilizing effects. Adverse developments of this kindthese kinds have affected our businesses in a number of ways, and may continue to have further adverse effects on our businesses as follows:

– a general reduction in business activity and market volumes would affect fees, commissions and margins from market-making and customer-drivenclient-driven transactions and activities;
– 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;
– reduced market liquidity limits trading and arbitrage opportunities and impedes our ability to manage risks, impacting both trading income and performance-based fees;
– assets we own and account for as investments or trading positions could continue to fall in value;
– impairments and defaults on credit exposures and on trading and investment positions could increase, and losses may be exacerbated by falling collateral values; and
– if individual countries impose restrictions on cross-border payments or other exchange or capital controls, we could suffer losses from enforced default by counterparties, be unable to access our own assets, or be impeded in – or prevented from – managing our risks.

Because UBS has very substantial exposures to other major financial institutions, the failure of any such institution could have a material effect on UBS.

The developments mentioned above can materially affect the performance of both our business units and of UBS as a whole. There is also a related risk that the carrying value of goodwill of a business unit might suffer impairments and deferred tax assets levels may need to be adjusted.
     In addition, interest rate increases triggered by central banks may adversely affect

Our global presence subjects us to risk from currency fluctuations

We prepare our consolidated financial statements in Swiss francs. However, a substantial portion of our assets, liabilities, invested assets, revenues and expenses are denominated in other currencies, particularly the economyUS dollar, the euro and the British pound. Accordingly, changes in foreign exchange rates, particularly between the Swiss franc and the US dollar (US dollar revenue represents the major part of our businessnon-Swiss franc revenue) have an effect on our reported income and funding costs.

invested asset levels. During 2010, a strengthening of the Swiss franc, especially against the US dollar and euro, had an adverse effect on our revenues and invested assets. Since exchange rates are subject to constant change, sometimes from completely unpredictable reasons, our results are subject to risks associated with changes in the relative values of currencies.

We are dependent upon our risk management and control processes to avoid or limit potential losses in our trading and counterparty credit businesses

Controlled risk-taking is a major part of the business of a financial services firm. Credit is an integral part of many of our retail, wealth management and Investment Bank activities. This includes



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Strategy, performance and responsibility
Risk factors

lending, underwriting and derivatives businesses and positions. Changes in interest rates, credit spreads, equity prices, foreign exchange levels and other market fluctuations can adversely affect our earnings. Some losses from risk-taking



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Strategy, performance and responsibility

activities are inevitable, but to be successful over time, we must balance the risks we take against the returns we generate. We must therefore diligently identify, assess, manage and control our risks, not only in normal market conditions but also as they might develop under more extreme (“stressed”)(stressed) conditions, when concentrations of exposures can lead to severe losses.
As seen during the recent market crisis, we are not always able to prevent serious losses arising from extreme or sudden market events that are not anticipated by our risk measures and systems. Value-at-Risk (VaR),Value-at-risk, a statistical measure for market risk, is derived from historical market data, and thus by definition could not have predicted the losses seen in the stressed conditions induring the past few years.financial crisis. Moreover, stress loss and concentration controls and the dimensions in which we aggregate risk to identify potentially highly correlated exposures proved to be inadequate. Notwithstanding the steps we have taken to strengthen our risk management and control 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 negative trends proves to be inadequate or incorrect;
– markets move in ways that are unexpectedwe do not expect – in terms of their speed, direction, severity or correlation – and our ability to manage risks in the resultant environment is therefore affected;
– third parties to whom we have credit exposure or whose securities we hold for our own account are severely affected by events not anticipated by our models, and we accordingly suffer defaults and impairments beyond the level implied by our risk assessment; or
– collateral or other security provided by our counterparties proves inadequate to cover their obligations at the time of their default.

We also manage risk on behalf of our clients in our asset and wealth management businesses. Our performance in these activities could be harmed by the same factors. If 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 management or withdrawal of mandates.

If we decide to support a fund or another investment that we sponsor in our asset or wealth management business (such as the property fund to which Wealth Management & Swiss Bank has exposure), we might, depending on the facts and circumstances, incur charges that could increase to material levels.
Investment positions, such as equity holdings made as a part of strategic initiatives and seed investments made at the inception of funds that we manage, may also be affected by market risk factors. These investments are often not liquid and
are generally 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 assets rely on models. For some
of the inputs to these models there is no observable source

Where possible, we mark our trading book assets at their quoted market price in an active market. In the current environment, suchSuch price information ismay not be available for certain instruments and we therefore apply valuation techniques to measure such instruments. Valuation techniques use “market observable inputs” where available, derived from similar assets in similar and active markets, from recent transaction prices for comparable items or from other observable market data. ForIn the case of positions offor which some or all of the reference data are not observable or have limited observability, we use valuation models with non-market observable inputs. There is no single market standard for valuation models inof this area.type. Such models have inherent limitations; different assumptions and inputs would generate different results, and these differences could have a significant impact on our financial results. We regularly review and update our valuation models to incorporate all factors that market participants would consider in setting a price, including factoring in current market conditions. Judgment is an important component of this process. Changes in model inputs or in the models themselves, or failure to make the changes necessary to reflect evolving market conditions, could have a material adverse effect on our financial results.

Credit ratingsWe are exposed to possible further reduction in client
assets in our wealth management and liquidityasset management
businesses

In 2008 and 2009, we experienced substantial net outflows of client assets in our wealth management and asset management businesses. Our wealth management businesses continued to experience net outflows in the first half of 2010, albeit at significantly reduced levels. The net outflows resulted from a number of different factors, including our substantial losses, the damage to our reputation, the loss of client advisors, difficulty in recruiting qualified client advisors and developments concerning our cross-border private banking business. Some of these factors have been successfully addressed, but others, such as the long-term changes affecting the cross-border private banking business model, will continue to affect client flows for an extended period of time. If we again experience material net outflows of client assets, the results of our wealth management and asset management businesses are likely to be adversely affected.

Liquidity and funding management are critical to
our ongoing performance

Moody’s Investors Service, Fitch Ratings and Standard & Poor’s lowered our long-term credit rating several times in 2008 and 2009. Further reductions

Reductions in our credit rating couldratings can increase our funding costs, in particular with regard to funding from wholesale unsecured sources. Some



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Strategy, performance and responsibility

sources, and can affect the availability of thesecertain kinds of funding. In addition, as we experienced in 2008 and 2009, ratings downgrades have requiredcan require us to post additional collateral or make additional cash payments or post additional collateral, and additional reductions in the credit ratings could have similar effects.under master trading agreements relating to our derivatives businesses. Our credit ratings also have an impact on the performance of our businesses. Alongcontribute, together with our capital strength and reputation, our credit ratings contribute to maintaining client and counterparty confidence in us.

confidence.
A substantial part of our liquidity and funding requirements is met using short-term unsecured funding sources, including wholesale and retail deposits and the regular issuance of money market securities. The volume of these funding sources has generally been stable, but maycould change in the future due, among other things, to general market


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Strategy, performance and responsibility
Risk factors

disruptions. Any such change could occur quicklyquickly.
Due to recent changes in Swiss regulatory requirements, and without notice. We may bedue to liquidity requirements imposed by certain jurisdictions in which we operate, we have been required to maintain substantially higher levels of liquidity overall than hashad been our usual practice due to possible changes in regulatory requirements. This could have an adverse impact on the attractiveness ofpast. Like increased capital requirements, higher liquidity requirements make certain lines of business, particularly in the Investment Bank, less attractive and may reduce our overall ability to generate profits.
è Refer to the “Risk and treasury management” section of this report for more information on our approach to liquidity and funding management
Our capital strength is important in supporting our client franchise
Our capital position, as measured by the BIS tier 1 and total capital ratios, is determined by (i) risk-weighted assets (RWAs) (balance sheet, off-balance sheet and other market and operational risk positions, measured and risk-weighted according to regulatory criteria) and (ii) eligible capital. Both RWAs and eligible capital are subject to change. Eligible capital, for example, could experience a reduction resulting from financial losses, acquired goodwill or as a result of foreign exchange movements. RWAs, on the other hand, will be driven by our business activities and by changes in the risk profile of these assets. They could furthermore be subject to a change in regulatory requirements or the interpretation thereof. For instance, substantial market volatility, a widening of credit spreads (the major driver of our VaR), a change in regulatory treatment of certain positions, stronger foreign currencies, increased counterparty risk or a deterioration in the economic environment could result in a rise in RWAs or a change in capital requirements, thereby potentially reducing our capital ratios. We are subject to regulatory capital requirements imposed by the Swiss Financial Market Supervisory Authority (FINMA), under which we have higher RWA than would be the case under BIS guidelines. Forthcoming changes in the calculation of RWAs under FINMA requirements are expected to increase the level of our RWAs and therefore have an adverse effect on our capital ratios. In addition, FINMA has introduced a minimum leverage ratio which is being progressively implemented and will be fully applicable in 2013. Changes by FINMA in the tier 1 and total capital requirements or in the leverage ratio requirement, whether pertaining to the minimum levels required for large Swiss banks or to the calculation thereof (including changes made to implement the proposed Basel III standards), could have a material adverse effect on our business and ability to execute our strategic plans or pay dividends in the future.

Operational risks may affect our business

All of our businesses are dependent on our ability to process a large number of complex transactions across multiple and

diverse markets in different currencies, and to comply with the requirements of the many different legal and regulatory regimes.regimes to which we are subject. 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, unauthorized trading, fraud, systems failuresystem failures and failure of security and physical protection, are appropriately controlled. If our internal controls fail or prove ineffective in identifying and remedying such risks, we could suffer operational failures that might result in material losses.

Legal claims and regulatory risks and restrictions
arise in the conduct of our business

In

Due to the ordinary coursenature of our business, we are subject to regulatory oversight and liability risk. We are involved in a variety of claims, disputes, legal proceedings and government investigations in jurisdictions where we are active. These types of 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 these matters cannot be predicted and they could adversely affect our future business. We continue to be subject to government inquiries and investigations, and are involved in a number of litigationsliti-

gations and disputes, related tomany of which arose out of the financial crisis. These matters concern, among other things, our valuations, accounting classifications, disclosures, investment suitability, writedowns underwriting and contractual obligations, as well as our role as an underwriterobligations. We are also subject to potentially material exposure in securities offerings forconnection with claims relating to US RMBS and mortgage loan sales, the Madoff investment fraud, Lehman principal protection notes and other issuers.

matters.
We have been in active dialogue with our regulators concerning the remedial actions that we are taking to address deficiencies in our risk management and control, funding and certain other processes and systems. We will for some timecontinue to be subject to increased scrutiny by FINMA and our other major regulators, and accordingly will beare subject to regulatory measures that might affect the implementation of our strategic plans.
     In February 2009, we entered into a Deferred Prosecution Agreement (DPA) with the US Department of Justice (DOJ) and a Consent Order with the US Securities and Exchange Commission in connection with our cross-border private banking services provided to US private clients. In addition, a petition for enforcement of a civil summons issued by the US Internal Revenue Service (IRS), seeking information concerning our cross-border business, including records located in Switzerland, was filed by the civil division of the DOJ. In August 2009, we entered into a settlement agreement with the IRS and the DOJ. Pursuant to this agreement and a related agreement between the US and Switzerland, the summons enforcement proceeding will be dismissed if certain requirements are satisfied. It is not yet clear what effect, if


28

Strategy, performance and responsibility

any, the recent Swiss court decision prohibiting the provision of certain UBS client data to the IRS may have on our 2009 settlements with US authorities and our businesses.
     Tax and regulatory authorities in a number of other jurisdictions have also requested information relating to the cross-border wealth management services provided by UBS and other financial institutions. These governmental actions, and our responses to them, could adversely affect the future profitability of our international wealth management businesses.
è Refer to “Note 21 Provisions and litigation”contingent liabilities” in the “Financial information” section of this report for more information on legal proceedings in which UBS is involvedand regulatory matters

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

The financial services industry is characterized by intense competition, continuous innovation, detailed (and sometimes fragmented) regulation and ongoing consolidation. We face competition at the level of local markets and individual business lines, and from global financial institutions that are comparable to UBS in their size and breadth. Barriers to entry in individual markets are being eroded by new technology. We expect these trends to continue and competition to increase in the future.

Our competitive strength and market position could be eroded if we are unable to identify market trends and developments, do not respond to them by devising and implementing adequate business strategies or are unable to attract or retain the qualified people needed to carry them out. The changes recently introduced in our balance sheet management, funding framework and risk management and control, as well as possible new or enhanced regulatory requirements, may constrain the revenue contribution of certain lines of business. For example, parts of the Investment Bank’s fixed income, currencies and commodities (FICC) business may be affected as they require substantial funding and are capital-intensive.
     FollowingThe amount and structure of our employee compensation are affected not only by our business results but also by competitive factors and regulatory guidance. Constraints on the losses incurred in 2008, we significantly reduced the variableamount of employee compensation, granted to our employees for that year. Thishigher levels of deferral and other factorsclaw-backs and performance conditions may adversely affectedaffect our ability to retain and attract key employees, whichand may in turn negatively affectedaffect our revenues in a number of business lines in 2009. The amount of variable compensation granted forperformance. For the performance years 2009 was higher than in 2008, butand 2010, the portion of vari-
ablevariable compensation granted in the form of deferred shares was much higher than in the past, and the percentage of compensation deferred was higher than that of mostmany of our competitors. We continue to be subject to the risk that key employees will be attracted by competitors and decide to



29

Strategy, performance and responsibility
Risk factors

leave UBS, or that we may be less successful than our competitors in attracting qualified employees. This riskAlthough changes in regulatory requirements and pressure from regulators and other stakeholders affect not only UBS but also arises in connection with the increasing legislation, regulation and regulatory pressure relating to remuneration in general and variable compensation in particular. Although this affects many if not all of theother major international banks, the constraints are likely toand pressures differ by jurisdiction, and therefore less regulated competitorsthis may tend to have angive some of our peers a competitive advantage.

Our global presence exposes usWe are exposed to risks arising from being subject tothe different
regulatory, legal and tax regimes as well as from currency fluctuationapplicable to our
global businesses

We operate in more than 50 countries, earn income and hold assets and liabilities in many different currencies and are subject to many different legal, tax and regulatory regimes.

Our ability to execute our global strategy depends on obtaining and maintaining local regulatory approvals. This includes the approval of acquisitions or other transactions and the ability to obtain and maintain the necessary licenses to operate in local markets. Changes in local tax laws or regulations and their enforcement may affect the ability or the willingness of our clients to do business with the bank, or the viability of our strategies and business model. In

The effects of taxes on our financial accountsresults are significantly
influenced by changes in our deferred tax assets
and final determinations on audits by tax authorities

The deferred tax assets we accrue taxes,have recognized on our balance sheet as of 31 December 2010 in respect of prior years’ tax losses are based on profitability assumptions over a five-year horizon. If the business plan earnings and assumptions in future periods sub-

stantially deviate from the current outlook, the amount of deferred tax assets may need to be adjusted in the future. This could include write-offs of deferred tax assets through the income statement if actual results come in substantially below the business plan forecasts and/or if future business plan forecasts are substantially revised downwards.

In the coming years, our effective tax rate will be highly sensitive both to our performance and to the development of new business plan forecasts. Currently unrecognized deferred tax assets in the UK and especially the US could be recognized if our actual and forecasted performance in those countries is strong enough to justify further recognition of deferred tax assets under the governing accounting standard. Our results in recent periods have demonstrated that changes in the recognition of deferred tax assets can have a very significant effect on our reported results. If, for example, the Group’s performance in the UK and especially in the US is strong, we could be expected to write up additional US and/or UK deferred tax assets in the coming years. The effect of doing so would reduce the Group’s effective tax rate, possibly to zero or below. Conversely, if our performance in those countries does not justify additional deferred tax recognition, but nevertheless supports our maintaining current deferred tax levels, we expect the Group’s effective tax rate to be in the range of 20% or slightly higher.
Additionally, the final effect of income taxes on earningswe accrue in the accounts is often only determined after the completion of tax audits (which generally takes a number of years) or the expirationexpiry of statutes of limitations. In addition, changes in tax laws,to, and judicial interpretation of, tax laws or policies and practices of tax authorities could cause the amount of taxes ultimately paid by UBS to materially differ materially from the amount accrued.
     Because we prepare our accounts in Swiss francs and a substantial portion of our assets, liabilities, assets under management, revenues and expenses are denominated in other currencies, changes in foreign exchange rates, particularly between the Swiss franc and the US dollar and to a much lesser extent between the Swiss franc and the Euro and UK sterning (US dollar income represents the major part of our non-Swiss-franc income), have an effect on our reported income and shareholders’ equity.



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Strategy, performance and responsibility
Financial performance
Strategy, performance and responsibility

Financial performance

Our performance is reported in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. This section provides a discussion and analysis of our results for 2009,2010, commenting on the underlying operational performance of the business, with a focus on continuing operations.

UBS key figures

             
  As of or for the year ended
CHF million, except where indicated
  31.12.10   31.12.09   31.12.08 
 
             
Group results
            
 
Operating income  31,994   22,601   796 
 
Operating expenses  24,539   25,162   28,555 
 
Operating profit from continuing operations before tax  7,455   (2,561)  (27,758)
 
Net profit attributable to UBS shareholders  7,534   (2,736)  (21,292)
 
Diluted earnings per share (CHF)1
  1.96   (0.75)  (7.63)
 
             
Key performance indicators, balance sheet and capital management2
            
 
Performance
            
 
Return on equity (RoE) (%)  16.7   (7.8)  (58.7)
 
Return on risk-weighted assets, gross (%)  15.5   9.9   1.2 
 
Return on assets, gross (%)  2.3   1.5   0.2 
 
Growth
            
 
Net profit growth (%)3
  N/A   N/A   N/A 
 
Net new money (CHF billion)4
  (14.3)  (147.3)  (226.0)
 
Efficiency
            
 
Cost / income ratio (%)  76.5   103.0   753.0 
 
Capital strength
            
 
BIS tier 1 ratio (%)5
  17.8   15.4   11.0 
 
FINMA leverage ratio (%)5
  4.45   3.93   2.45 
 
Balance sheet and capital management
            
 
Total assets  1,317,247   1,340,538   2,014,815 
 
Equity attributable to UBS shareholders  46,820   41,013   32,531 
 
BIS total ratio (%)5
  20.4   19.8   15.0 
 
BIS risk-weighted assets5
  198,875   206,525   302,273 
 
BIS tier 1 capital5
  35,323   31,798   33,154 
 
             
Additional information
            
 
Invested assets (CHF billion)  2,152   2,233   2,174 
 
Personnel (full-time equivalents)  64,617   65,233   77,783 
 
Market capitalization6
  58,803   57,108   43,519 
 
             
 
  As of or for the year ended 
   
CHF million, except where indicated
  31.12.09   31.12.08   31.12.07 
 
             
Group results
            
 
Operating income  22,601   796   31,721 
 
Operating expenses  25,162   28,555   35,463 
 
Operating profit before tax (from continuing and discontinued operations)  (2,569)  (27,560)  (3,597)
 
Net profit attributable to UBS shareholders  (2,736)  (21,292)  (5,247)
 
Diluted earnings per share (CHF)1
  (0.75)  (7.63)  (2.41)
 
             
Key performance indicators, balance sheet and capital management2
            
 
Performance
            
 
Return on equity (RoE) (%)  (7.8)  (58.7)  (10.5)
 
Return on risk-weighted assets, gross (%)  9.9   1.2   8.6 
 
Return on assets, gross (%)  1.5   0.2   1.3 
 
Growth
            
 
Net profit growth (%)3
  N/A   N/A   N/A 
 
Net new money (CHF billion)4
  (147.3)  (226.0)  140.6 
 
Efficiency
            
 
Cost/income ratio (%)  103.0   753.0   111.0 
 
Capital strength
            
 
BIS tier 1 ratio (%)5
  15.4   11.0     
 
FINMA leverage ratio (%)5
  3.93   2.45     
 
Balance sheet and capital management
            
 
Total assets  1,340,538   2,014,815   2,274,891 
 
Equity attributable to UBS shareholders  41,013   32,531   36,875 
 
BIS total ratio (%)5
  19.8   15.0     
 
BIS risk-weighted assets5
  206,525   302,273     
 
BIS tier 1 capital5
  31,798   33,154     
 
 
Additional information
            
 
Invested assets (CHF billion)  2,233   2,174   3,189 
 
Personnel (full-time equivalents)  65,233   77,783   83,560 
 
Market capitalization6
  57,108   43,519   108,654 
 
Long-term ratings
            
 
Fitch, London  A+   A+  AA 
 
Moody’s, New York Aa3  Aa2  Aaa 
 
Standard & Poor’s, New York  A+   A+  AA 
 
1 Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in the “Financial information” section of this report.  2 For the definitions of our key performance indicators refer to the “Measurement and analysis of performance” section of this report.  3 Not meaningful if either the current period or the comparison period is a loss period.  4 Excludes interest and dividend income.  
5 Refer to the “Capital management” section of this report.  6 Refer to the “UBS shares in 2009”2010” section of this report.

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Strategy, performance and responsibility


Financial performance

Measurement and analysis of performance

Key factors affecting our financial position and results
of operations in 20092010

–In 2009, the2010, we generated a net lossprofit attributable to UBS shareholders for 2009 wasof CHF 7.5 billion, a significant improvement over the net loss of CHF 2.7 billion a considerable reduction from the CHF 21.3 billion loss recorded in the prior year.2009. This improvementincrease was primarily due to mucha significant improvement in fixed income, currencies and commodities revenues from a loss in 2009. In addition, a reduction in credit loss expense, as well as significantly lower own credit losses on residual risk positionsfinancial liabilities designated at fair value supported the result. Operating expenses were slightly lower than in the Investment Bank2009, when we recorded higher restructuring costs and reduced operating expenses for the Group. The result for 2009 included a number of significant items, namely an own credit loss of CHF 2.0 billion which occurred as a result of the markets’ perception of our improved creditworthiness, charges relatinggoodwill impairment charge related to the sale of UBS Pactual ofPactual. Further, we reduced fixed costs excluding bonus and significant non-recurring items to CHF 1.419.9 billion restructuring charges of CHF 0.8 billion, and a CHF 0.3 billion gain on the mandatory convertible notes converted in August 2009. Excluding these significant items, the underlying pre-tax result for the year was a profit of CHF 1.4 billion. The Group’s net profit attributable to shareholders for the fourth quarter was CHF 1.2 billion, including a positive contribution from each of our business divisions.
–At the end of 2009 our invested asset base was CHF 2,233 billion, broadly2010, in line with the figureour communicated target of below CHF 20 billion, despite increased costs for year-end 2008. However, the Group’s average invested asset base for the year was down significantly, and this was the primary driver of reduced profits in our asset gathering business divisions. Net new money outflows in 2009litigation provisions compared with 2009. Diluted earnings per share were CHF 89.8 billion for Wealth Management & Swiss Bank,1.96 in 2010, compared with negative CHF 107.1 billion0.75 in 2008; CHF 11.6 billion for Wealth Management Americas, compared with CHF 15.9 billion; and CHF 45.8 billion for Global Asset Management, compared with CHF 103.0 billion.
–At year-end 2009, the BIS tier 1 ratio amounted to 15.4% and the total capital ratio to 19.8%, up from 11.0% and 15.0%, respectively, on 31 December 2008. BIS risk-weighted assets declined from CHF 302.3 billion in December 2008 to CHF 206.5 billion in December 2009, while eligible tier 1 capital decreased from CHF 33.2 billion to CHF 31.8 billion over the same period, reflecting the effects of losses incurred during 2009 and further negative impacts on equity, only partially offset by the positive effects from issues of capital instruments.
–Our total assets stood at CHF 1,341 billion on 31 December 2009, down CHF 674 billion (33%) from CHF 2,015 billion on 31 December 2008. This decline was due to significant market driven reductions in replacement values (RVs) on both sides of the balance sheet.2009.
–Due to the significant improvement in our credit spreads in 2009 compared with 2008, the Investment Bank incurred an own credit charge to income of CHF 2,023 million compared with a gain of CHF 2,032 million recognized in 2008.
–In 2009, we experienced a net credit loss expense of CHF 1,832 million, of which CHF 1,698 million related to the Investment Bank and CHF 133 million to Wealth Management & Swiss Bank. Impairment charges of the Investment Bank include an impairment of CHF 425 million for reclassified securities. In comparison, we recorded a net credit loss expense of CHF 2,996 million in 2008.
èRefer to the “Credit risk” section of this report for more information
–We recognized a net income tax benefit of CHF 443381 million for 2009, which2010. This mainly related to an increase inreflects the recognition of additional deferred tax assets for taxin respect of losses followingand temporary differences in a number of foreign locations, taking into account updated forecast taxable profit assumptions over the five-year horizon used for recognition purposes. This was partly offset by a Swiss net deferred tax expense as Swiss tax losses for which deferred tax assets have previously been recognized were used against profits for the year, which was itself partly offset by an upward revaluation of Swiss deferred tax assets taking into account revised forecast profit assumptions. In 2008,2009, the net income tax benefit was CHF 6,837 million, which mainly reflected an increase in deferred tax assets for tax losses.
–On 16 October 2008, we reached an agreement with the Swiss National Bank (SNB) to transfer, in one or more sales, certain illiquid and other positions from our balance sheet to a separate fund entity owned and controlled by the SNB. In December 2008, USD 16.4 billion of positions were transferred to the fund followed by the transfer of the remaining USD 22.2 billion of positions in March and April 2009. The purchase price was determined by the SNB based on valuations made by independent experts and reflected the value of these positions on 30 September 2008. The purchase price for the overall portfolio was, in the aggregate, approximately USD 1 billion lower than the market value we assigned to these positions on 30 September 2008. Of this USD 1 billion, USD 0.7 billion was accounted for in our results for 2008, and the remaining balance was recognized in the income statement in first quarter 2009. The impact of the SNB transaction on the income statement for 2009 was a charge of CHF 115 million, which comprised a CHF 232 million charge due to the price difference recognized in first quarter 2009, and was offset by a net valuation gain of CHF 117 million on our option to acquire the fund’s equity.
–On 18 February 2009, we announced the settlement of the US cross-border case with the US Department of Jus-443 million.


31

Strategy, performance and responsibility
Financial performance

tice (DOJ) and the US Securities and Exchange Commission (SEC), by entering into a deferred prosecution agreement with the DOJ and a consent order with the SEC. As part of these settlement agreements, we agreed to pay CHF 917 million (USD 780 million). This had no impact on our 2009 results as the cost for the settlement had been fully charged in 2008. Subsequently, on 19 August 2009, we also announced the formal signing of a settlement agreement with the IRS and the DOJ to resolve the “John Doe” summons litigation. The agreement does not call for any payment by us. Moreover, it resolves all issues relating to the alleged breaches of our Qualified Intermediary Agreement with the IRS as set forth in the Notice of Default dated 15 May 2008.
è Refer to “Note 21 Provisions and litigation” In22 Income taxes” in the “Financial Information”information” section of this report for more information
–As our credit spreads continued to tighten in 2010, the principal termsInvestment Bank incurred an own credit charge on financial liabilities designated at fair value of CHF 548 million compared with a charge of CHF 2,023 million recognized in 2009.
èRefer to “Note 27 Fair value of financial instruments” in the “Financial information” section of this settlement agreementreport for more information
–In 2010, we recorded a gain on our option to acquire the equity of the SNB StabFund of CHF 745 million compared with CHF 117 million in 2009, following higher asset valuations supporting a higher valuation of the SNB StabFund.
–In January 2010, UBS closed the sale of its investments in several associated entities owning office space in New York. A significant portion of the office space is leased by the Group until 2018. The sales price was CHF 187 million with a resulting

gain on sale of CHF 180 million recorded in the first quarter. In the fourth quarter, we recognized a gain of CHF 158 million from the sale of a property in Zurich.
–In 2010, we incurred a credit loss expense of CHF 66 million, of which CHF 64 million occurred in Wealth Management & Swiss Bank. The net credit loss expense in the Investment Bank was nil. In 2009, we recorded an overall credit loss expense of CHF 1,832 million, mainly in the Investment Bank.
èRefer to the “Risk and treasury management” section of this report for more information
–During 2010, we incurred net restructuring charges of CHF 113 million compared with CHF 791 million in 2009.
èRefer to “Note 38 Reorganizations and disposals” in the “Financial information” section of this report for more information
–Charges related to the UK Bank Payroll Tax in 2010 amounted to CHF 200 million.
–Other comprehensive income attributable to UBS shareholders was negative CHF 1,659 million in 2010 due to: (1) losses in the currency translation account of CHF 909 million (net of tax) mainly related to the Swiss franc carrying value of investments in US, Eurozone and British subsidiaries; (2) fair value losses on financial investments available-for-sale of CHF 607 million (net of tax) predominantly relating to our fixed-interest bearing long-term bond portfolio, which consists of US and UK government bonds; and (3) changes in the replacement values of interest rate swaps designated as hedging instruments of negative CHF 143 million (net of tax).
èRefer to the “Statement of comprehensive income” in the “Financial information” section of this report for more information
–At the end of 2010, our invested asset base was CHF 2,152 billion, down from CHF 2,233 billion at year-end 2009. This decline was mainly due to unfavorable currency effects, as both the US dollar and the related agreement entered intoeuro fell sharply in value against the Swiss franc. In local currencies, the overall market performance was positive. During 2010, net new money stabilized, and over the last two quarters we achieved net inflows for the overall Group. Wealth Management & Swiss Bank recorded net new money outflows of CHF 10.0 billion in full-year 2010, compared with net outflows of CHF 89.8 billion in 2009; Wealth Management Americas’ net new money outflows declined to CHF 6.1 billion in 2010 from CHF 11.6 billion in 2009; Global Asset Management full year net new money flows turned positive to CHF 1.8 billion, compared with net outflows of CHF 45.8 billion in 2009.
–We ended 2010 with an industry-leading Basel II tier 1 capital ratio of 17.8%, up from 15.4% at the same timeend of 2009. Our BIS tier 1 capital increased by CHF 3.5 billion during 2010 to CHF


32

Strategy, performance and responsibility

35.3 billion, due to the governments of SwitzerlandCHF 7.5 billion net profit attributable to UBS shareholders and the USreversals of own credit losses of CHF 0.5 billion. These effects were partially offset by a redemption of hybrid tier 1 capital of CHF 1.5 billion, increased tier 1 deductions of CHF 1.0 billion, negative effects relating to share-based compensation net of tax of CHF 0.9 billion, as well as currency effects of CHF 0.6 billion and other effects of CHF 0.5 billion. Risk-weighted assets decreased by CHF 7.7 billion during 2010 to CHF 198.9 billion as of 31 December 2010.
–Our total balance sheet assets stood at CHF 1,317 billion on 31 December 2010, down CHF 23 billion compared with year-end 2009. Our funded asset volume, which excludes positive replacement values, remained relatively unchanged, declining by CHF 3 billion in 2010.
èRefer to the “Risk and treasury management” section of this report for more information
– On 15 April 2009, we announced cost-saving measures to be executed throughout 2009. We consolidated all Group-wide infrastructure and service operations in5 March 2010, the Corporate Center and centralized our finance, risk control, and legal and compliance functions. In addition, we reduced the number of employees to 65,233 as of 31 December 2009 from approximately 76,200 as of the end of March 2009. The total restructuring charge incurred in 2009 was CHF 791 million, including CHF 491 million in Personnel expenses, mainly for severance payments, CHF 256 million in General and administrative expenses, primarily for real-estate-related costs, and CHF 45 million of depreciation and impairment losses on property and equipment.
–On 20 April 2009, we announced the agreement to sell our Brazilian financial services business, UBS Pactual, to BTG Investments, LP. The transaction was completed on 18 September 2009. The consideration includedmandatory convertible notes with a combination of a cash payment and a transfer of liabilities to BTG Investments. The cash consideration amounted to USD 620 million, of which USD 420 million was paid at closing, and USD 200 million plus accrued interest will be paid 12 months after the closing. The liabilities transferred to BTG Investments consisted primarily of the presentnotional value of CHF 13 billion issued in March 2008 to the residual payment obligationGovernment of USD 1.6 billion owed to former Pactual partners, which was incurred when we acquired Pactual in 2006Singapore Investment Corporation Pte. Ltd. and was due in 2011. In 2009,an investor from the overall impact of the transaction on our profit before tax was a net charge of CHF 1,403 million, including a goodwill impairment charge of CHF 1,123 million, a CHF 498 million pre-tax loss on the completion of the sale, and was partly offset byMiddle East were converted into UBS Pactual’s pre-tax operational profits in 2009 of CHF 218 million. In addition, a deferred tax benefit of CHF 243 million was recognized.
–On 25 June 2009, we placed 293,258,050 newly issued shares from authorized capital with a small number of large institutional investorsshares. The notes were converted at a price of CHF 13.0047.68 per share. After deducting costs associated with the placement, the amount of new equity capital raised was approximately CHF 3.8 billion.
–On 19 August 2009, the Swiss Confederation announced the conversion of its CHF 6 billion mandatory convertible notes (MCNs). Upon conversion on 25 August 2009, weAs a result, UBS issued 332,225,913272,651,005 new shares with a nominal value of CHF 0.10 each from existing conditional capital. The liability
èRefer to “Note 26 Capital increase and mandatory convertible notes” in the negative replacement value recorded on the balance sheet“Financial information” section of this report for the principal amount and the embedded derivative component of the MCNs were reclassified to equity. The conversion of the MCNs resulted in an overall increase in equity of CHF 6,718 million for 2009. Prior to the conversion of the MCNs, the embedded derivative component was re-measured to fair value resulting in a gain of CHF 341 million for 2009. In addition, the Swiss Confederation waived its right to receive future coupon payments on the converted MCNs for a cash amount of approximately CHF 1.8 billion. The impact on our income statement resulting from this waiver was not material, but the payment reduced our BIS tier 1 capital by CHF 1.4 billion.more information

Seasonal characteristics

Our main businesses do not generally show significant seasonal patterns, although 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 are only slightly impacted by seasonal components, such as asset withdrawals that tend to occur in the fourth quarter and by lower client activity levels related to the summer and end-of-year holiday season.

seasons.

Performance measures

Key performance indicators

In the beginning of 2009, we implemented a new KPI framework. ItOur key performance indicators (KPI) framework focuses on key drivers of total shareholder return (TSR), which measures the total return of a UBS share, i.e. both the dividend yield and the capital appreciation of the share price. This performance measure also represents the ultimate measure of performance for shareholders.
     ComplementaryThe KPI framework is reviewed by our senior management on a regular basis to ensure that it is always aligned to the TSR, the economic profit (EP) is an internal measure which is calculated broadly by subtracting the cost of equity from the annual net profit attributable to shareholders. EP is only realized when the return on equity achieved is greater than our cost of equity. In order to offset accounting entries which distort the economic perspective, the EP calculation is adjusted for items that do not reflectchanging business performance.


32

Strategy, performance and responsibility
conditions.
Group/business division key performance indicators
Key performance indicators
DefinitionGroupWealth
Management
& Swiss Bank		Wealth Management AmericasGlobal Asset Management
Investment Bank
Net profit growth (%)
Change in net profit attributable to UBS shareholders from continuing operations between current and comparison periods/net profit attributable to UBS shareholders from continuing operations of comparison periodX
Pre-tax profit growth (%)
Change in business division performance before tax between current and comparison periods/business division performance before tax of comparison periodXXXX
Cost/income ratio (%)
Operating expenses/operating income before credit loss (expense) or recoveryXXXXX
Return on equity (%)
Net profit attributable to UBS shareholders on a year-to-date basis (annualized as applicable)/average equity attributable to UBS shareholders (year-to-date basis)X
Return on attributed equity (%)
Business division performance before tax on a year-to-date basis (annualized as applicable)/average attributed equity (year-to-date basis)X
Return on assets, gross (%)
Operating income before credit loss (expense) or recovery on a year-to-date basis (annualized as applicable)/average total assets (year-to-date basis)XX
Return on risk-weighted assets, gross (%)
Operating income before credit loss (expense) or recovery on a year-to-date basis (annualized as applicable)/average risk-weighted assets (year-to-date basis)X
FINMA leverage ratio (%)
BIS tier 1 capital/average adjusted assets as per definition by FINMAX
BIS tier 1 ratio (%)
BIS tier 1 capital/BIS risk-weighted assetsX
Net new money (CHF billion)
Inflow of invested assets from new and existing clients less outflows from existing clients or due to client defectionXXXX
Gross margin on invested assets (bps)
Operating income before credit loss (expense) or recovery (annualized as applicable) /average invested assetsX1XX
Impaired lending portfolio as a % of total lending portfolio, gross
Impaired lending portfolio, gross/total lending portfolio, grossX2
Average management VaR (1-day, 95% confidence, five years of historical data)
Value-at-Risk (VaR) expresses maximum potential loss measured to a 95% confidence level, over a 1-day time horizon and based on five years of historical dataX
1 For international clients only. 2 For Swiss clients only.

The Group and business divisions are now managed based on this new KPI framework, which emphasizes risk awareness, effective risk and capital management, sustainable profitability, and client focus. Both Group and business division KPIsKPI are used to determinetaken into account in

determining variable compensation of executives and personnel.
è Refer to the discussion of “Compensation and shareholdings” in the “Corporate governance and compensation”“Compensation” section of this report for more information on total shareholder return
The Group and business division KPIsKPI are explained in the “Group and “Group/business division key performance indicators” table. In 2009, we disclosed for
Retail & Corporate no longer reports “Net new money” as a key performance indicator. As net new money does not assist the first timeassessment of the management
VaR (1-day, 95% confidence, and five yearsperformance of historical data) for the Group and the Investment Bank. This newthis business, our senior management VaR methodology is an enhancement compared with the previous management VaR (10-day, 99% confidence, and five years of historical data) as wedoes not consider that it reflects the way that trading risks are viewed and managed by the business, and canto be more directly compared with mark to market revenues. All changes to this new management VaR have been approved by FINMA. The previously reported KPI regulatory VaR (10-day, 99% confidence, and five years of historical data) for the Investment Bank was replaced by the new management VaR as of fourth quarter 2009.


33

Strategy, performance and responsibility
Financial performance
a meaningful KPI.

Client / Client/invested assets reporting

We report two distinct metrics for client funds:
– The measure “client assets” encompasses all client assets managed by or deposited with us, including custody-only assets and assets held for purely transactional purposes.
– The measure “invested assets” is a more restrictive term and includes all client assets managed by or deposited with us for investment purposes.

     Of the two, invested assets is our central measure and includes, for example, discretionary and advisory wealth management portfolios, managed institutional assets, managed fund assets and wealth management securities or brokerage accounts. It excludes all assets held for purely transactional and custody-only purposes, as we only administer the assets and do not offer advice on how these assets should be invested. Non-bankable assets (for example, art collections) and deposits from third-party banks for funding or trading purposes are excluded from both measures.

Net new money in a reported period is the net amount of invested assets that are entrusted to us by new andor existing clients less those withdrawn by existing clients andor clients who terminated their relationship with us. Negative net new money means that there are more outflows than
inflows. Interest and dividend income from invested assets is not counted as net new money inflow. However, in Wealth Management Americas we show net new money including interest and dividend income only from the Wealth Management US business for purposes of comparison with US peers. Market and currency movements, as well as fees, commissions and interest on loans charged, are excluded from net new money as are the effects of any acquisition or divestment of a UBS subsidiary or business. Reclassifications between invested assets and client assets as a result of a change in the service level delivered are treated as net new money inflows or outflows. The Investment Bank does not track invested assets and net new money. However, when a client is transferred from the Investment Bank to another business division, this produces net new money even though client assets were already with UBS.
When products are managed in one business division and sold by another, they are counted in both the investment management unit and the distribution unit. This results in double counting within our total invested assets, as both units provide an independentindepen-



33

Strategy, performance and responsibility
Financial performance

dent service to their respective client, add value and generate revenues. Most double counting arises when mutual funds are managed by Global Asset Management and sold by Wealth Management & Swiss Bank and Wealth Management Americas. The business divisions involved count these funds as invested 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 254225 billion of invested assets were double counted in 20092010 (CHF 273254 billion in 2008)2009).
èRefer to “Note 35 Invested assets and net new money” in the “Financial information” section of this report for more information


Group / business division key performance indicators

Wealth Management &
Swiss Bank
WealthGlobal
WealthRetail &ManagementAssetInvestment
Key performance indicatorsDefinitionGroupManagementCorporateAmericasManagementBank
Net profit growth (%)
Change in net profit attributable to UBS shareholders from continuing operations between current and comparison periods / net profit attributable to UBS shareholders from continuing operations of comparison periodl
Pre-tax profit growth (%)
Change in business division performance before tax between current and comparison periods / business division performance before tax of comparison periodlllll
Cost / income ratio (%)
Operating expenses / operating income before credit loss (expense) or recoveryllllll
Return on equity (%)
Net profit attributable to UBS shareholders on a year-to-date basis (annualized as applicable) / average equity attributable to UBS shareholders (year-to-date basis)l
Return on attributed equity (%)
Business division performance before tax on a
year-to-date basis (annualized as applicable) / average
attributed equity (year-to-date basis)		l
Return on assets, gross (%)
Operating income before credit loss (expense) or recovery on a year-to-date basis (annualized as applicable) / average total assets (year-to-date basis)ll
Return on risk-weighted assets, gross (%)
Operating income before credit loss (expense) or recovery on a year-to-date basis (annualized as applicable) /average risk-weighted assets (year-to-date basis)l
FINMA leverage ratio (%)
BIS tier 1 capital / average adjusted assets as per
definition by FINMA		l
BIS tier 1 ratio (%)
BIS tier 1 capital / BIS risk-weighted assetsl
Net new money (CHF billion)1
Inflow of invested assets from new and existing clients less outflows from existing clients or due to client defectionllll
Gross margin on
invested assets
Operating income before credit loss (expense) or recovery (annualized as applicable) / average invested assetslll
Impaired lending portfolio as a % of total lending portfolio, gross
Impaired lending portfolio, gross / total lending
portfolio, gross		l
Average management VaR (1-day, 95% confidence, five years of historical data)
Value-at-risk (VaR) expresses maximum potential loss measured to a 95% confidence level, over a 1-day time horizon and based on five years of historical datal
1 Retail & Corporate no longer reports “Net new money” as a KPI.

34

Strategy, performance and responsibility

Accounting and reporting structure changes

IAS 1 (revised) Presentation

Wealth Management & Swiss Bank reorganization

From 2010 onwards, the internal reporting of Financial Statements

Effective 1 January 2009,Wealth Management & Swiss Bank to the Group Executive Board was revised International Accounting Standard (IAS) 1 affectedin order to better reflect the presentation of owner changes in equitymanagement structure and of comprehensive income. We continued to present owner changes in equity in the “statement of changes in equity”, but detailedresponsibilities. Segregated financial information relating to non-owner changes in equity, such as foreign exchange translation, cash flow hedges and financial investments available-for-sale, is presented in the “Statement of comprehensive income”.
     When implementing these amendments, we also adjusted the format of our “statement of changes in equity” and replaced the “statement of recognized income and expense” in the financial statements of previous years with a “statement of comprehensive income”. Preferred securities issued by consolidated trusts arenow reported as “equity attributable to minority interests”, as they are equity instruments held by third parties. As these securities make up the largest part of our equity attributable to minority interests, we disclose movement information in a separate table.
     We also re-assessed our accounting treatment of dividends from trust preferred securities. for:
–“Wealth Management”, encompassing all wealth management business conducted out of Switzerland and in our Asian and European booking centers;
–“Retail & Corporate”, including services provided to Swiss retail private clients, small and medium enterprises and corporate and institutional clients.

In 2009, in line with the classification of trust preferred securities as equity instruments, we recognize liabilities for the full dividend payment obligation once a coupon payment becomes mandatory, i.e. when it is triggered by a contractually determined event. In the income statement, the same amount is reclassified from net profit attributable to UBS shareholders to net profit attributable to minority interests.

IFRS 8 Operating Segments
Effective as of 1 January 2009, we adoptedthis revised internal reporting structure and IFRS 8Operating Segments, Wealth Management and Retail & Corporate are now presented in our external financial reports as separate business units and reportable segments. Prior periods presented have been restated to conform to the new presentation format.

Allocation of additional Corporate Center costs to reportable segments

From 2010 onwards, almost all costs incurred by the Corporate Center related to shared services and control functions are allocated to the reportable segments, which replaced IAS 14Segment Reporting.Underdirectly and indirectly receive the requirementsvalue of the new standard, our external segment reporting is nowservices, either based on a full cost recovery or on a periodically agreed flat fee. The allocated costs are shown in the internal management reporting to the GEB (or the “chief operating decision maker”), which makes decisions on the allocation of resources and assesses the performancerespective expense lines of the reportable segments.segments in “Note 2a Segment reporting” in the “Financial information” section, and in the “UBS business divisions and Corporate Center” section of this report.

Up to and including 2009, certain costs incurred by the Corporate Center were presented as Corporate Center expenses and not charged to the business divisions. This change in allocation policy has been applied prospectively and prior year numbers have not been restated.
The incremental charges to the business divisions made in 2010 mainly relate to control functions. If figures for each quarter of 2009 had been presented on the basis of the allocation methodology applied for 2010, the estimated impact on operating ex-

penses and performance before tax would have been as shown in the table below.

The “Corporate Center” column of the table in “Note 2a Segment reporting” has been renamed “Treasury activities and other corporate items”.
èRefer to “Note 1a) 33) Segment reporting” in the “Financial information” section of this report for more details

Cash collateral from derivative transactions and prime brokerage receivables and payables

From 2010 onwards, we have changed the presentation of cash collateral from derivative transactions and prime brokerage receivables and payables to improve transparency.

Cash collateral receivables and payables on derivatives are presented in the new balance sheet linesCash collateral receivables on derivative instrumentsandCash collateral payables on derivative instrumentsby transferring the amounts out ofDue from banksandLoans, andDue to banksandDue to customers, respectively. Prime brokerage receivables and prime brokerage payables have been transferred out ofDue from banksandLoanstoOther assets, and out ofDue to banksandDue to customerstoOther liabilities, respectively. These changes in presentation impacted neither our income statement nor total assets and liabilities. The respective tables, notes and other information in the “Financial information” section of this report were adjusted accordingly.
The table on the next page shows the reclassifications for 2009 and 2008.

Personnel expenses

In accordance2010, we reclassified certain elements ofOther personnel expensestoVariable compensation – otherin order to align the presentation with the new structure announced in February 2009, we disclosed four reportable segments. TheseFINMA definition of variable compensation.

In addition, amounts previously reported underSalaries and variable compensationare presented for the first time on the following separate lines:Salaries, Variable compensation – discretionary bonus, Variable compensation – otherandWealth Management Americas: financial advisor compensation.



                             
Corporate Center cost allocation impact on 2009 figures 
          Wealth          Total    
  Wealth Management &  Management  Global Asset  Investment  business  Corporate 
  Swiss Bank Americas  Management  Bank  divisions  Center 
  Wealth  Retail &                     
CHF million Management  Corporate                     
 
Estimated increase in 2009 operating expenses and decrease in performance before tax  128   96   84   44   288   640   (640)
 

35

Accounting changes in 2010

Strategy, performance and laterresponsibility
Financial performance

                         
Cash collateral from derivative transactions and prime brokerage receivables and payables 
  31.12.09 31.12.08 
  Before      After  Before      After 
CHF million reclassification  Reclassification  reclassification  reclassification  Reclassification  reclassification 
 
Due from banks  46,574   (29,770)  16,804   64,451   (46,757)  17,694 
 
Cash collateral receivables on derivatives instruments  0   53,774   53,774   0   85,703   85,703 
 
Loans  306,828   (40,351)  266,477   340,308   (48,852)  291,456 
 
Other assets  7,336   16,347   23,682   9,931   9,906   19,837 
 
Due to banks  65,166   (33,244)  31,922   125,628   (48,806)  76,822 
 
Cash collateral payables on derivatives instruments  0   66,097   66,097   0   92,937   92,937 
 
Due to customers  410,475   (71,212)  339,263   465,741   (103,102)  362,639 
 
Other liabilities  33,986   38,359   72,344   42,998   58,971   101,969 
 

Furthermore, we reclassified the pension costs related to bonus toPension and other post-employment benefit plans. Previously, those amounts were reported underSocial security. Prior period amounts have been adjusted accordingly. The change in the presentation did not impact our personnel expenses. The related amounts are disclosed in the footnotes to “Note 6 Personnel expenses” in the “Financial information” section of this report.

IFRS 9 Financial Instruments

In November 2009, the International Accounting Standards Board (IASB) has initiated a comprehensive project to replace IAS 39Financial instruments: recognition and measurement.The first phase of this project has been completed by issuing IFRS 9Financial Instruments.Phase two and three address the classification and measurement of financial liabilities, impairment of financial assets at amortized cost, hedge accounting and derecognition of financial instruments. The IASB plans to complete phase two and three during 2010, although mandatory application is not expected before 1 January 2013.

In November 2009, the IASB issued IFRS 9Financial instruments,Instruments, which includes revised guidance on the classification and measurement of
financial assets. UnderIn October 2010, the revisedIASB updated IFRS 9Financial Instrumentsto include guidance on financial liabilities and derecognition of financial instruments and amended IFRS 7Financial Instruments: Disclosureto include disclosures about transferred financial assets. The publication of IFRS 9Financial Instrumentsrepresents the completion of the first part of a multi-stage project to replace IAS 39Financial Instruments: Recognition and Measurement.
The standard requires all financial assets to be classified on the basis of the entity’s business model for managing the financial assets, and the contractual cash flow characteristics of the financial asset. A financial asset is to be accounted for at amortized cost only if it is held within athe following criteria are met: (i) the objective of the business model whose objective is to hold assets in order to collectthe financial asset for the collection of the contractual cash flows; and (ii) the contractual cash flows andunder the contractual terms of the financial asset give rise on specified dates to contractual cash flows that areinstrument solely represent payments of principal and interest oninterest. If a financial asset meets the principal amount outstanding.
criteria to be measured at amortized cost, 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. Non-traded equity

instruments may be accounted for at fair value through equity, but the subsequent release of amounts booked directly to equity into theother comprehensive income statement(OCI). Such a designation is available on initial recognition on an instrument-by-instrument basis and is irrevocable. There is no longer permitted.subsequent recycling of realized gains or losses from OCI to profit or loss. All other financial assets are measured at fair value through profit or loss.

The accounting for and presentation of financial liabilities and for derecognition of financial instruments have been transferred from IAS 39Financial Instruments:Recognition and Measurementto IFRS 9Financial Instruments. The guidance is unchanged with one exception: the accounting for financial liabilities designated at fair value through profit or loss. The requirements stipulated in IAS 39Financial Instruments: Recognition and Measurementregarding the classification and measurement of financial liabilities have been retained, including the related application and implementation guidance. The two existing measurement categories for financial liabilities remain unchanged. The criteria for designating a financial liability at fair value through profit or loss also remain unchanged. For financial liabilities designated at fair value through profit or loss, changes in fair value due to changes in an entity’s own credit risk are directly recognized in OCI instead of in profit or loss. There is no subsequent recycling of realized gains or losses from OCI to profit or loss. For financial liabilities that are required to be measured at fair value through profit or loss, i.e. all derivatives and trading portfolio liabilities, all fair value movements will continue to be recognized in profit or loss.
We are currently assessing the impact of the new
standard on our financial statements. It is likely that a number of financial assets currently accounted for at amortized cost will be accounted for at fair value through profit or loss under the new standard because a) their contractual cash flows do not comprise solely payments of principal and interest on the principal, and/or b) we do not hold the assets with the intention to collect contractual cash flows they generate. Certain debt securities currently classified as available-for-sale may satisfy the criteria for “amortized cost” accounting; debt securities available-for-sale failing these criteria will be accounted for at fair value. The effective date for mandatory adoption is 1 January 2013, with early adoption permitted. The IFRS 7Financial Instruments: Disclosureamendments are applicable for annual accounting periods beginning on or after 1 July 2011. We did not adopt IFRS 9Financial Instrumentsfor the year ended 31 December 2009.2010.



3536

Strategy, performance and responsibility

UBS results

                 
Income statement 
  For the year ended % change from 
CHF million 31.12.10  31.12.09  31.12.08  31.12.09 
 
                 
Continuing operations
                
 
Interest income  18,872   23,461   65,679   (20)
 
Interest expense  (12,657)  (17,016)  (59,687)  26 
 
Net interest income  6,215   6,446   5,992   (4)
 
Credit loss (expense) / recovery  (66)  (1,832)  (2,996)  96 
 
Net interest income after credit loss expense  6,149   4,614   2,996   33 
 
Net fee and commission income  17,160   17,712   22,929   (3)
 
Net trading income  7,471   (324)  (25,820)    
 
Other income  1,214   599   692   103 
 
Total operating income  31,994   22,601   796   42 
 
Personnel expenses  16,920   16,543   16,262   2 
 
General and administrative expenses  6,585   6,248   10,498   5 
 
Depreciation of property and equipment  918   1,048   1,241   (12)
 
Impairment of goodwill  0   1,123   341   (100)
 
Amortization of intangible assets  117   200   213   (42)
 
Total operating expenses  24,539   25,162   28,555   (2)
 
Operating profit from continuing operations before tax  7,455   (2,561)  (27,758)    
 
Tax expense / (benefit)  (381)  (443)  (6,837)  14 
 
Net profit from continuing operations  7,836   (2,118)  (20,922)    
 
                 
Discontinued operations
                
 
Profit from discontinued operations before tax  2   (7)  198     
 
Tax expense  0   0   1     
 
Net profit from discontinued operations  2   (7)  198     
 
                 
Net profit  7,838   (2,125)  (20,724)    
 
Net profit attributable to non-controlling interests  304   610   568   (50)
 
from continuing operations  303   600   520   (50)
 
from discontinued operations  1   10   48   (90)
 
Net profit attributable to UBS shareholders
  7,534   (2,736)  (21,292)    
 
from continuing operations  7,533   (2,719)  (21,442)    
 
from discontinued operations  1   (17)  150     
 
                 
Performance by business division
                
 
Wealth Management  2,308   2,280   3,631   1 
 
Retail & Corporate  1,772   1,629   2,382   9 
 
Wealth Management & Swiss Bank  4,080   3,910   6,013   4 
 
Wealth Management Americas  (130)  32   (823)    
 
Global Asset Management  516   438   1,333   18 
 
Investment Bank  2,197   (6,081)  (34,300)    
 
Treasury activities and other corporate items  793   (860)  19     
 
Operating profit from continuing operations before tax
  7,455   (2,561)  (27,758)    
 

37

Strategy, performance and responsibility
Financial performance

segments are

2010

Results

In 2010, we reported a Group net profit attributable to shareholders of CHF 7,534 million, a profit before tax from continuing operations of CHF 7,455 million and a profit before tax from discontinued operations of CHF 2 million. In 2009, we recorded a net loss attributable to shareholders of CHF 2,736 million.

Operating income

Total operating income was CHF 31,994 million in 2010, up from CHF 22,601 million in 2009. Net interest income was CHF 6,215 million compared with CHF 6,446 million in the prior year. Net trading income was positive CHF 7,471 million compared with negative CHF 324 million in 2009.

Net interest income includes income from interest margin-based activities (loans and deposits) as well as income earned as a result of trading activities (for example, coupon and dividend income). The dividend income component of interest income is volatile, depending on the composition of the trading portfolio. Net interest and trading income is analyzed below under the relevant business divisions – Wealth Management & Swiss Bank, Wealth Management Americas, Global Asset Management andactivities in order to provide a more comprehensive explanation of the movements.

Net income from trading businesses
Net income from trading businesses, including lending activities of the Investment Bank. WhileBank, was CHF 7,508 million for full-year 2010 compared with CHF 382 million in the Corporate Center does not meet the requirements ofprior year.

The Investment Bank’s fixed income, currencies and commodities’ (FICC) trading revenues improved due to an operating segment, it is also shown separately. Segment information from prior periods has been restated to conform to the requirementsincrease in credit trading revenues, which was partially offset by decreases in trading revenues in our macro and emerging markets businesses. A major part of the new standard.
     As our reportable segment operations are mainly financial,improvement was due to de-risking and reduction of the total interest income and expense for all reportable segments is presented on a net basis. Based on the present arrangement of revenue-sharing agreements, our total intersegmentresidual positions portfolio. Equities trading revenues, are immaterial. Apart from that, the segment assets are disclosed without the intercompany balances in lineexcluding own credit, decreased compared with the internal management reporting.previous year, primarily in the derivatives and equity-linked business.
An own credit loss on financial liabilities designated at fair value of CHF 548 million was recorded in 2010, compared with a CHF 2,023 million loss in 2009. This was due to continuing but comparatively less tightening of our credit spreads in 2010. Debit valuation adjustments on derivatives in the Investment Bank’s FICC business were positive CHF 155 million compared with negative CHF 1,882 million in 2009. This resulted from the widening of overall credit spreads in the second quarter, partially offset by a tightening of the credit spreads in the third and fourth quarters.
è Refer to “Note 1 Summary27 Fair value of significant accounting policies” and “Note 2a Segment reporting” in the “Financial information” section of this report for more details on the basis on which the segment information is prepared and reconciled to the amounts presented in our income statement and balance sheet
Allocation of Shared Services Costs in Segment Disclosures
From 2009 onwards, Information Technology Infrastructure and Group Offshoring costs managed by the Corporate Center are allocated to the direct cost lines personnel expenses, general and administrative expenses and depreciation in the respective business division income statements, based on appropriate internally determined allocation keys. In the Corporate Center income statement, costs allocated to the business divisions are deducted from the respective cost lines. In previous reports, these costs were presented as an expense on the lineServices (to)/from other business divisionswithin each business division and an offsetting corresponding amount on that line in the Corporate Center. The new presentation format provides greater transparency by allocating costs of shared services and control functions managed by the Corporate Center to direct cost lines in divisional income statements. Comparative periods have been adjusted.
èRefer to “Note 1a33 Segment reporting”financial instruments” in the “Financial information” section of this report for more information on own credit

Net income from interest margin businesses
Net income from interest margin businesses was CHF 4,624 million compared with CHF 5,053 million in the prior year. This de-

crease was primarily attributable to lower margins and negative currency effects.

Net income from treasury activities and other
Net income from treasury activities and other was CHF 1,554 million compared with CHF 687 million in 2009. Income from treasury activities was nearly unchanged from last year. A CHF 745 million gain on the valuation of our option to acquire the SNB StabFund’s equity was recorded in 2010, compared with a CHF 117 million gain in the prior year. Additionally, 2009 included a net gain of CHF 297 million (including interest expenses) on the valuation of the mandatory convertible notes (MCN) issued in December 2008 and converted in August 2009.

Credit loss expenses
In 2010, we reported net credit loss expenses of CHF 66 million. This included CHF 172 million of impairment charges taken on reclassified and acquired securities, partially offset by recoveries on certain loan positions. The net credit loss expenses in 2009 amounted to CHF 1,832 million.

The net credit loss expenses of the Investment Bank were nil in 2010, compared with net credit loss expenses of CHF 1,698 million in 2009. Credit loss expenses of CHF 172 million in relation to reclassified and acquired securities were primarily related to impairments on our student loan auction rate securities inventory, offset by recoveries on certain loan positions.
Wealth Management & Swiss Bank reported net credit loss expenses of CHF 64 million for 2010, compared with CHF 133 million in 2009.
èRefer to the “Risk management and control” section of this report for more information on our general principles for allocating shared servicerisk management approach, method of credit risk measurement and control function costs managed by the Corporate Centerdevelopment of credit risk exposures

Net fee and commission income
Net fee and commission income was CHF 17,160 million, compared with CHF 17,712 million in the previous year. Income declined slightly in all major fee categories except for portfolio management and advisory fees, as outlined below:
–Underwriting feeswere CHF 1,912 million compared with CHF 2,386 million in the prior year, due to a decline in both equity and debt underwriting fees. The decrease in equity underwriting fees resulted from an overall market slowdown. Debt underwriting fees declined due to lower revenues in the Investment Bank’s debt capital market business.
–Mergers and acquisitions and corporate finance fees were CHF 857 million, a decrease from CHF 881 million in the prior year. This was due to reduced market activity as deal appetite remained subdued in the first half of 2010.
–Net brokerage feesfell 8% to CHF 3,837 million mainly due to low transaction volumes and margin compression in 2010.
–Investment fund feeswere CHF 3,898 million, a 3% decrease compared with the prior year. Lower asset based commission



38

Strategy, performance and responsibility
                 
Net interest and trading income 
  For the year ended % change from 
CHF million 31.12.10  31.12.09  31.12.08  31.12.09 
 
                 
Net interest and trading income
                
 
Net interest income  6,215   6,446   5,992   (4)
 
Net trading income  7,471   (324)  (25,820)    
 
Total net interest and trading income
  13,686   6,122   (19,828)  124 
 
                 
Breakdown by businesses
                
 
Net income from trading businesses1
  7,508   382   (27,203)    
 
Net income from interest margin businesses  4,624   5,053   6,160   (8)
 
Net income from treasury activities and other  1,554   687   1,214   126 
 
Total net interest and trading income
  13,686   6,122   (19,828)  124 
 
1 Includes lending activities of the Investment Bank.
                 
Credit loss (expense) / recovery 
  For the year ended % change from 
CHF million 31.12.10  31.12.09  31.12.08  31.12.09 
 
Wealth Management  11   45   (388)  (76)
 
Retail & Corporate  (76)  (178)  (4)  (57)
 
Wealth Management & Swiss Bank  (64)  (133)  (392)  (52)
 
Wealth Management Americas  (1)  3   (29)    
 
Investment Bank  01  (1,698)  (2,575)  (100)
 
of which: related to reclassified securities2
  (133)   (425)  (125)  (69)
 
of which: related to acquired securities
  (39)   (18)  0   117 
 
Treasury activities and other corporate items  0   (5)  0   (100)
 
UBS
  (66)  (1,832)  (2,996)  (96)
 
1 Credit loss expenses related to reclassified and acquired securities were offset by recoveries on certain loan positions.  2 Refer to “Note 29b Reclassification of financial assets” in the “Financial information” section of this report.
                 
Net fee and commission income 
  For the year ended % change from 
CHF million 31.12.10  31.12.09  31.12.08  31.12.09 
 
Equity underwriting fees  1,157   1,590   1,138   (27)
 
Debt underwriting fees  755   796   818   (5)
 
Total underwriting fees
  1,912   2,386   1,957   (20)
 
M&A and corporate finance fees  857   881   1,662   (3)
 
Brokerage fees1
  4,930   5,400   7,150   (9)
 
Investment fund fees  3,898   4,000   5,583   (3)
 
Portfolio management and advisory fees  5,959   5,863   7,667   2 
 
Insurance-related and other fees  361   264   317   37 
 
Total securities trading and investment activity fees
  17,918   18,794   24,335   (5)
 
Credit-related fees and commissions  448   339   273   32 
 
Commission income from other services  850   878   1,010   (3)
 
Total fee and commission income
  19,216   20,010   25,618   (4)
 
Brokerage fees paid1
  1,093   1,231   1,164   (11)
 
Other1
  964   1,068   1,524   (10)
 
Total fee and commission expense
  2,057   2,299   2,689   (11)
 
Net fee and commission income
  17,160   17,712   22,929   (3)
 
of which: net brokerage fees1
  3,837   4,169   5,985   (8)
 
1 In 2010, we corrected the amounts presented in previous periods on the lines Brokerage fees, Brokerage fees paid, Other and Net brokerage fees. Amounts previously disclosed have been decreased as follows: Brokerage fees by CHF 817 million and CHF 1,059 million for the years ended 31 December 2009 and 31 December 2008, respectively; Brokerage fees paid by CHF 517 million and CHF 599 million for the years ended 31 December 2009 and 31 December 2008, respectively; Other and Net brokerage fees by CHF 300 million and CHF 460 million for the years ended 31 December 2009 and 31 December 2008, respectively. The total of Net fee and commission income and consequently Net profit attributable to UBS shareholders are not affected by this correction.

39

Strategy, performance and responsibility
Financial performance

 fees on UBS funds were partly offset by higher fees on third-party funds and sales-based commission income.
–Portfolio management and advisory feesincreased 2% to CHF 5,959 million, mainly due to higher portfolio management fees in our Wealth Management Americas business division. This was partly offset by lower portfolio management fees in Global Asset Management, primarily resulting from lower performance fees in its alternative and quantitative investments business, and by lower portfolio management and advisory fees in Wealth Management & Swiss Bank and the Investment Bank.
–Other commission expensefell 10% to CHF 964 million, mainly due to lower commissions paid for payment transactions, other services and management advisory.

Other income

Other income was CHF 1,214 million in 2010, compared with CHF 599 million in the previous year. Other income in 2010 included a CHF 180 million gain from the sale of investments in associates owning real estate in New York, a gain of CHF 158 million from the sale of a property in Zurich, CHF 324 million gains from the disposal of loans and receivables (including sales and issuer redemptions of auction rate securities), a CHF 69 million demutualization gain from our stake in the Chicago Board Options Exchange, and a negative CHF 45 million valuation adjustment on a property fund held by Wealth Management & Swiss Bank.
è Refer to “Note 1b Changes in accounting policies, comparability and other adjustments”5 Other income” in the “Financial information” section of this report for changes to segment disclosures due to a different presentation of ITI and Group offshore cost allocationsmore information


Changes to the reporting structure

Operating expenses

Total operating expenses were CHF 24,539 million in 2010,

compared with CHF 25,162 million in 2009. Operating expenses in 2010 included CHF 113 million of net restructuring charges, while operating expenses in 2009 included goodwill impairment charges of CHF 1,123 million and restructuring charges of CHF 791 million.

Personnel expenses

Wealth Management & SwissPersonnel expenses were CHF 16,920 million, up from CHF 16,543 million in the prior year. Personnel expenses recorded in 2010 included discretionary variable compensation expenses of CHF 4.1 billion, of which CHF 1.5 billion relates to variable compensation brought forward from prior years. The discretionary bonus pool granted to employees for the performance year 2010 was CHF 4.2 billion, 11% lower than in the previous year. Of this amount, CHF 2.6 billion is recognized in the income statement in 2010, and CHF 1.6 billion will be deferred to future periods. Other personnel expenses in 2010 included a charge of CHF 0.2 billion for the UK Bank Payroll Tax.
Commencing first quarterOther variable compensation was CHF 310 million in 2010 we will amend our internal reporting of Wealth Management & Swiss Bank and presentcompared with CHF 830 million in our external financial reports two separate business units:2009. The decrease was mainly due to restructuring-related severance costs recognized in 2009.
–è “Wealth Management” will encompassRefer to the domestic and international wealth management business conducted in Switzerland, and all wealth management businesses“Compensation” section of our other booking centers in Asia and Europe.this report for more information

–è “Retail & Corporate” will include services providedRefer to Swiss retail private clients, small businesses, as well as corporatethe “Accounting and institutional clients.reporting structure changes” section and to “Note 6 Personnel expenses” in the “Financial information” section of this report for more information on the changes in presentation of certain personnel expenses in 2010 and related adjustment of prior periods’ amounts
Corporate Center
In 2009, we integrated our Group-wide shared service

General and control functions intoadministrative expenses

General and administrative expenses were CHF 6,585 million in 2010 compared with CHF 6,248 million in 2009. Marketing and public relations expenses increased primarily due to the Corporate Center. Headcountcosts associated with sponsoring and costsbranding campaigns related to the global re-launch of the centralized functions are re-allocatedUBS brand. Other general and administrative expenses increased due to higher litigation provisions, partially offset by lower restructuring provisions. Costs of outsourcing IT and other services as well as travel and entertainment were higher compared with the business divisions for which the respective services are performed.
Accordingly we will change the quarterly disclosure commencing first quarter 2010 as follows:prior year. These increases were partly offset by reduced spending on occupancy, rent and maintenance of IT and other equipment, telecommunications and postage, administration and professional fees.
–è We will continueRefer to provide Corporate Center income statement data“Note 7 General and additional information onwww.ubs.com/ investors.
–Significant items and treasury-related income data will be explainedadministrative expenses” in the “Group results”“Financial information” section in our quarterly reports, which will no longer include a specific “Corporate Center” section.of this report for more information

Depreciation, amortization and impairment of goodwill

Depreciation was CHF 918 million in 2010, compared with CHF 1,048 million in 2009. Amortization of intangible assets was CHF 117 million compared with CHF 200 million in the prior year. No goodwill impairment charges were recorded in 2010. A goodwill impairment charge of CHF 1,123 million relating to the sale of UBS Pactual was recorded in 2009.

Income tax

We recognized a net income tax benefit in our income statement of CHF 381 million for 2010. This included a deferred tax benefit of CHF 605 million and current tax expenses of CHF 224 million.

The deferred tax benefit reflects the recognition of additional deferred tax assets in respect of tax losses and temporary differences in a number of foreign locations including the US (tax benefit of CHF 1,161 million) and Japan (tax benefit of CHF 98 million), taking into account updated taxable profit forecast assumptions over the five-year time horizon used for recognition purposes. This was partly offset by a Swiss net deferred tax expense. Swiss tax losses, for which deferred tax assets have previously been recognized, were used against profits for the year (tax expenses of CHF 1,409 million). This was partly offset by an upward revaluation of Swiss deferred tax assets taking into account revised profit forecast assumptions (tax benefit of CHF 741 million).
The current tax expenses relate to tax expenses in respect of taxable profits of Group entities, partially offset by tax benefits arising from the agreement on prior year positions with tax authorities in various locations.
The tax benefit for the year in the income statement is CHF 320 million higher than that in our fourth quarter 2010 report issued on 8 February 2011.



3640

Strategy, performance and responsibility

èRefer to “Note 33 Events after the reporting period” in the “Financial information” section of this report for more information
During 2009, we recognized a net income tax benefit in our income statement of CHF 443 million. This reflected a deferred tax benefit mainly relating to the recognition of additional deferred tax assets in respect of tax losses, partly offset by current tax expenses relating to taxable profits of Group entities.

Net profit attributable to non-controlling interests

Net profit attributable to non-controlling interests for 2010 was CHF 304 million, compared with CHF 610 million for 2009. This decrease was primarily the consequence of the attribution in 2009, rather than in 2010, of CHF 132 million of net profit to non-controlling interests in connection with certain dividends payable in 2010 on hybrid capital instruments classified as non-owner equity. This attribution was made out of 2009’s net profit following a determination that a triggering event had occurred that caused the 2010 dividend payments to become obligatory under the terms of these hybrid capital instruments. The triggering event was the cash payment made by UBS in 2009 to the Swiss Confederation in consideration of the Confederation’s waiver of its right to receive future coupon payments on the mandatory convertible notes due in 2011.

Strategy, performanceHad the 2010 dividend payments been applied to net profit in 2010 rather than in 2009, the net profit attributed to non-controlling interests would have been CHF 478 million in 2009 and responsibilityCHF 436 million in 2010.

Comprehensive income attributable to UBS shareholders

Comprehensive income attributable to UBS shareholders includes all changes in equity (including net profit) attributed to UBS shareholders during a period, except those resulting from investments by and distributions to shareholders as well as equity settled share-based payments. Items included in comprehensive income, but not in net profit, are reported under other comprehensive income (OCI). Most of those items will be recognized in net profit when the underlying item is sold or realized.

Comprehensive income attributable to UBS shareholders in 2010 was CHF 5,875 million, including net profit attributable to UBS shareholders of CHF 7,534 million, partially offset by other comprehensive income attributable to UBS shareholders of negative CHF 1,659 million.

OCI attributable to UBS shareholders was negative in 2010 due to: (1) losses in the currency translation account of CHF 909 million (net of tax) related to the Swiss franc carrying value of investments in subsidiaries whose reporting currencies are other than Swiss francs; (2) fair value losses on financial investments available-for-sale of CHF 607 million (net of tax); and (3) changes in the replacement values of interest rate swaps designated as hedging instruments of negative CHF 143 million (net of tax). Foreign currency translation-related OCI losses attributable to UBS shareholders of CHF 1,501 million (net of tax) in 2010 largely resulted from the strengthening of the Swiss franc against the US dollar, British pound and euro. We have foreign operations conducted through entities with these functional currencies. These losses in foreign currency translation were partially offset by an out-of-period credit of CHF 592 million resulting from the correction of prior period misstatements. Fair value losses on financial investments available-for-sale predominantly relate to our fixed-interest bearing long-term bond portfolio, which consists of US and UK government bonds. During the fourth quarter, the fair value of this portfolio decreased, mostly due to rising market interest rates. On a net basis, the fair value movement of US dollar, euro and British pound fix-receiver and fixed-payer interest rate swaps designated in cash flow hedges was slightly negative during the year.
UBS results
èRefer to the “Statement of comprehensive income” section and “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for more information

Invested assets

Total invested assets were CHF 2,152 billion on 31 December 2010, a decrease of 4% from CHF 2,233 billion on 31 December 2009. Positive market developments were more than offset by negative currency effects and net new money outflows.



Income statement
                 
Invested assets 
  As of % change from 
CHF billion 31.12.10  31.12.09  31.12.08  31.12.09 
 
Wealth Management  768   825   833   (7)
 
Retail & Corporate  136   135   122   1 
 
Wealth Management & Swiss Bank
  904   960   955   (6)
 
Wealth Management Americas
  689   690   644   0 
 
Traditional investments  487   502   493   (3)
 
Alternative and quantitative investments  34   41   41   (17)
 
Global real estate  36   39   40   (8)
 
Infrastructure  1   1   1   0 
 
Global Asset Management
  559   583   575   (4)
 
Total
  2,152   2,233   2,174   (4)
 
                 
 
  For the year ended % change from 
CHF million
  31.12.09   31.12.08   31.12.07   31.12.08 
 
                 
Continuing operations
                
 
Interest income  23,461   65,679   109,112   (64)
 
Interest expense  (17,016)  (59,687)  (103,775)  (71)
 
Net interest income  6,446   5,992   5,337   8 
 
Credit loss (expense) / recovery  (1,832)  (2,996)  (238)  (39)
 
Net interest income after credit loss expense  4,614   2,996   5,099   54 
 
Net fee and commission income  17,712   22,929   30,634   (23)
 
Net trading income  (324)  (25,820)  (8,353)  99 
 
Other income  599   692   4,341   (13)
 
Total operating income  22,601   796   31,721     
 
Personnel expenses  16,543   16,262   25,515   2 
 
General and administrative expenses  6,248   10,498   8,429   (40)
 
Depreciation of property and equipment  1,048   1,241   1,243   (16)
 
Impairment of goodwill  1,123   341   0   229 
 
Amortization of intangible assets  200   213   276   (6)
 
Total operating expenses  25,162   28,555   35,463   (12)
 
Operating profit from continuing operations before tax  (2,561)  (27,758)  (3,742)  91 
 
Tax expense  (443)  (6,837)  1,369   94 
 
Net profit from continuing operations  (2,118)  (20,922)  (5,111)  90 
 
                 
Discontinued operations
                
 
Profit from discontinued operations before tax  (7)  198   145     
 
Tax expense  0   1   (258)  (100)
 
Net profit from discontinued operations  (7)  198   403     
 
                 
Net profit  (2,125)  (20,724)  (4,708)  90 
 
Net profit attributable to minority interests  610   568   539   7 
 
from continuing operations  600   520   539   15 
 
from discontinued operations  10   48   0   (79)
 
Net profit attributable to UBS shareholders
  (2,736)  (21,292)  (5,247)  87 
 
from continuing operations  (2,719)  (21,442)  (5,650)  87 
 
from discontinued operations  (17)  150   403     
 
                 
Performance by business division
                
 
Wealth Management & Swiss Bank  3,910   6,013   8,543   (35)
 
Wealth Management Americas  32   (823)  621     
 
Global Asset Management  438   1,333   1,454   (67)
 
Investment Bank  (6,081)  (34,300)  (16,669)  82 
 
Corporate Center  (860)  19   2,310     
 
Operating profit from continuing operations before tax
  (2,561)  (27,758)  (3,742)  91 
 

3741

Strategy, performance and responsibility
Financial performance

2009

Results

In 2009, we reported a Group net loss attributable to shareholders (“attributable loss”) of CHF 2,736 million, – a loss before tax of CHF 2,561 million from continuing operations and a loss before tax of CHF 7 million from discontinued operations. In 2008, we recorded ana net loss attributable lossto shareholders of CHF 21,292 million.

Operating income

Total operating income was CHF 22,601 million in 2009, up from CHF 796 million in 2008. Net interest income at CHF 6,446 million was up 8% compared with CHF 5,992 million a year earlier. Net trading income was negative CHF 324 million compared with negative CHF 25,820 million in 2008.

     Net interest income includes income earned as a result of trading activities (for example, coupon and dividend income) as well as income from interest margin-based activities (loans and deposits). The dividend income component of interest income is volatile from period to period, depending on the composition of the trading portfolio. In order to provide a better explanation of the movements in net interest income and net trading income, their total is analyzed below under the relevant business activities.
In 2009, we reviewed our approach to calculating and booking of own credit ofon derivative liabilities and financial liabilities designated at fair value. As of the transition date of 1 January 2009, changes resulting from this review increasedled to an increase in our 2009 net trading income byof CHF 143 million, made up of a CHF 365 million credit to Netnet income from trading busi-
nesses businessesand a charge of CHF 222 million to Netnet income from treasury activities and other.other.

Net income from trading businesses

Net income from trading businesses, including lending activities of the Investment Bank, was positive CHF 382 million for the full-year 2009. This compares2009, compared with negative CHF 27,203 million in the prior year, with the2008. The improvement was mainly due to lower losses on residual risk positions in the Investment Bank’s fixed income, currencies and commodities (FICC) area of the Investment Bankbusiness in 2009.
Trading revenues from the FICC business improved from the previous year,2008, due to lower losses on residual risk positions as mentioned above.
Equities trading revenues (excluding own credit) improved from the previous year.2008. Equity-linked revenues increased significantly as all regions benefitted from improvements in valuations and liquidity. Proprietary trading revenues improved with a strong performance recorded across all geographical regions.
In 2009, the Investment Bank recorded a loss on own credit from financial liabilities designated at fair value of CHF 2,023 million as our credit spread narrowed in 2009, compared with a gain of CHF 2,032 million in 2008. This change was partially impactedaffected by the abovementioned change in the approach to calculating and booking of own credit. The cumulative own credit gain on existing financial liabilities designated at fair value still held as of 31 December 2009, amounted to approximately CHF 0.9 billion. Own credit charges in future periods can exceed the cumulative own credit gain on existing financial liabilities designated at fair value.
è Refer to “Note 27 Fair value of financial instruments” in the “Financial information” section of this reportour Annual Report 2009 for more information on own credit


Net interest and trading income
                   
 
   For the year ended  % change from 
 
CHF million
   31.12.09   31.12.08   31.12.07    31.12.08 
 
Net interest income   6,446   5,992   5,337    8 
 
Net trading income   (324)  (25,820)  (8,353)   99 
 
Total net interest and trading income
   6,122   (19,828)  (3,016)     
 
                   
Breakdown by businesses
                  
 
Net income from trading businesses1
   382   (27,203)  (10,658)     
 
Net income from interest margin businesses
   5,053   6,160   6,230    (18)
 
Net income from treasury activities and other
   687   1,214   1,412    (43)
 
Total net interest and trading income
   6,122   (19,828)  (3,016)     
 
1 Includes lending activities of the Investment Bank.

38

Strategy, performance and responsibility

Net income from interest margin businesses
Net income from interest margin businesses decreased 18% to CHF 5,053 million in 2009 from CHF 6,160 million.million in 2008. This

decrease was primarily attributable to lower margins on loans and liabilities.

Net income from treasury activities and other

Net income from treasury activities and other was CHF 687 million in 2009 compared with CHF 1,214 million driven byin 2008 due to a net gain of CHF 297 million (including interest expenses) on the valuation of the MCNsmandatory convertible notes (MCN) issued in December 2008 and converted in August 2009, and a gain of CHF 117 million on the revaluation of our option to acquire the SNB StabFund’sStab-Fund’s equity. In comparison, 2008 included an accounting gain of CHF 3,860 million related to the MCNsMCN issued in March 2008, which was offset by the CHF 3.4 billion negative impact of the transaction with the Swiss National Bank and the abovementioned MCNsMCN issued in December 2008, resulting in a total gain of CHF 0.4 billion.

Credit loss expenses

In 2009, we experienced net credit loss expenses of CHF 1,832 million, of which CHF 425 million were due to impairment charges taken on reclassified securities in the Investment Bank. In comparison, we recorded net credit loss expenses of CHF 2,996 million in 2008.
The Investment Bank recorded net credit loss expenses of CHF 1,698 million forin 2009, compared with net credit loss expenses of CHF 2,575 million in 2008. Excluding the credit loss expenses from reclassified securities of CHF 425 million, the net credit loss expenses amounted to CHF 1,273 million in 2009.
Wealth Management & Swiss Bank reported net credit loss expenses of CHF 133 million for 2009, compared with CHF 392 million in 2008. Releases of allowances against lombard loans in 2009 contributed to this positive development.
è Refer to the “Risk management and control” section of this reportour Annual Report 2009 for more information on our risk management approach, method of credit risk measurement and the development of credit risk exposures in 2009

Net fee and commission income

Net fee and commission income was CHF 17,712 million in 2009, down 23% from CHF 22,929 million.million in 2008. Income declined in all major fee categories except for underwriting fees, as outlined below:
– Underwriting feesincreased 22% to CHF 2,386 million, driven bydue to a 40% increase in equity underwriting fees, offset by a 3% decrease in debt underwriting fees.
– Mergers and acquisitions and corporate finance fees fell 47% to CHF 881 million due to reduced market activity as deal appetite remained subdued.
– Net brokerage feesfell 31%30% to CHF 4,4694,169 million mainly due to a reduction in equity trading volumes.
– Investment fund feesfell 28% to CHF 4,000 million as a result of lower asset basedasset-based fees on both own and third/partythird-party funds.



42

Strategy, performance and responsibility

– Portfolio management and advisory feesfell 24% to CHF 5,863 million, mainly due to the decreased average asset base, especially in the wealth management businesses.
– Insurance-related and other fees, at CHF 264 million in 2009, decreased by 17% from a year earlier. That was mainly due to lowerOther commission income from insurance products.
–Commission income from other services decreased 13%expensefell 30% to CHF 878 million, mainly in the wealth management businesses.
–Other commission expense fell 31% to CHF 1,3681,068 million, mainly due to lower commissions paid to distribution partners.


Credit loss (expense) / recovery
                  
 
  For the year ended  % change from 
 
CHF million
  31.12.09   31.12.08   31.12.07    31.12.08 
 
Wealth Management & Swiss Bank  (133)  (392)  30    (66)
 
Wealth Management Americas  3   (29)  (2)     
 
Investment Bank1
  (1,698)  (2,575)  (266)   (34)
 
of which: related to reclassified securities  (425)  (125)       240 
 
Corporate Center  (5)             
 
UBS
  (1,832)  (2,996)  (238)   (39)
 

1 Includes credit loss expense of CHF 588 million (31.12.08: CHF 1,205 million) related to reclassified leveraged finance positions.

39

Strategy, performance and responsibility
Financial performance
Net fee and commission income
                   
 
   For the year ended  % change from 
 
CHF million
   31.12.09   31.12.08   31.12.07    31.12.08 
 
Equity underwriting fees   1,590   1,138   2,564    40 
 
Debt underwriting fees   796   818   1,178    (3)
 
Total underwriting fees
   2,386   1,957   3,742    22 
 
M&A and corporate finance fees   881   1,662   2,768    (47)
 
Brokerage fees1
   6,217   8,209   10,211    (24)
 
Investment fund fees   4,000   5,583   7,422    (28)
 
Portfolio management and advisory fees2
   5,863   7,667   9,454    (24)
 
Insurance-related and other fees   264   317   423    (17)
 
Total securities trading and investment activity fees
   19,611   25,394   34,020    (23)
 
Credit-related fees and commissions   339   273   279    24 
 
Commission income from other services   878   1,010   1,017    (13)
 
Total fee and commission income
   20,827   26,677   35,316    (22)
 
Brokerage fees paid1
   1,748   1,763   2,540    (1)
 
Other   1,368   1,984   2,142    (31)
 
Total fee and commission expense
   3,116   3,748   4,682    (17)
 
Net fee and commission income
   17,712   22,929   30,634    (23)
 
of which: net brokerage fees
   4,469   6,445   7,671    (31)
 
1 In 2009, we restated the amounts presented in previous periods on the lines Brokerage fees andBrokerage fees paid.Amounts previously disclosed for both lines have decreased by CHF 146 million for the year ended 31 December 2008, and by CHF 70 million for the year ended 31 December 2007.Net fee and commission incomeis not affected. 2 Includes fiduciary and custodian fees, which were presented as separate lines in previous reports.

Other income
Other income was CHF 599 million in 2009 compared with CHF 692 million in the previous year.2008. Other income in 2009 includesincluded a loss of CHF 498 million related to the sale of UBS Pactual, foreign exchange gains of CHF 430 million on other divestments of subsidiaries, a gain of CHF 304 million on the buyback of subordinated debt and impairment charges of financial investments available-for-sale of CHF 349 million.
è Refer to “Note 5 Other income” in the “Financial information” section of this reportour Annual Report 2009 for more information

Operating expenses

Total operating expenses were down 12% to CHF 25,162 million in 2009 from CHF 28,555 million in 2008.

Total restructuring charges of CHF 791 million were incurred in 2009, including CHF 491 million in Personnelpersonnel expenses, mainly for severance payments, CHF 256 million in Generalgeneral and administrative expenses, primarily for real-estate related costs, and CHF 45 million of depreciation and impairment losses on property and equipment.

Personnel expenses

Personnel expenses were CHF 16,543 million in 2009 compared with CHF 16,262 million in the previous year.2008. Headcount reductions were partially offset by salary increases. VariableDiscretionary variable compensation recognized in the income statement in 2009 was CHF 3.02.8 billion. VariableDiscretionary variable compensation of CHF 3.23.0 billion for 2009 and brought forward from prior years will be recog-
nizedwas partially recognized in the income statement in 2010 and later,the remaining part will be recognized in future periods, subject to the vesting conditions of the respective awards granted. It includesincluded a charge for performance (and retention) awards that arewere to be granted, or arewere expected to be granted, in 2010 in relation to the 2009 performance year but which, as of the balance sheet date, had in fact not been granted. The 2009 results dodid not include a provision for bank payroll tax in the UK.
èRefer to “Note 31 Equity participation and other compensation plans” in the “Financial information” section of this report for more information about deferred compensation related to non-vested awards granted up to and including 31 December 2009
Contractors’ expenses, at CHF 275 million, were down 35% from 2008. This was due to a substantial reduction of employed contractors and a favorable foreign exchange impact. Insurance and socialSocial security contributions increased 21%22% to CHF 851804 million in 2009, due to our equity compensation plan. Contributions to retirementPension and other post-employment benefit plans increased CHF 1516 million to CHF 941 million, other988 million. Other personnel expenses decreased 16%21%, mainly due to headcount reduction and lower training, recruitment and travelling costs.

General and administrative expenses

General and administrative expenses declined 40% to CHF 6,248 million.million in 2009. All general and administrative expense categories decreased in 2009 primarily as a result of theour cost reduction programs. Further,Furthermore, 2008 included provisionprovisions for auc-


40

Strategy, performance and responsibility

tionauction rate securities of CHF 1,464 million and provisions in relation to the US cross-border casematter of CHF 917 million. LargestThe largest reductions in absolute terms were in travel and entertainment expenses, and in professional fees.
è Refer to “Note 21 Provisions and litigation” in the “Financial information” section of this reportour Annual Report 2009 for more information about provisions

Depreciation, amortization and impairment of goodwill

Depreciation of property and equipment declined CHF 16% to CHF 1,048 million.million in 2009. Amortization of intangible assets was CHF 200 million compared with CHF 213 million in 2008.
A goodwill impairment charge of CHF 1,123 million was recorded in 2009, relating to the sale of UBS Pactual. In 2008 a goodwill impairment charge of CHF 341 million was recorded relating to the Investment Bank’s exit from the municipal securities business.

Income tax

We recognized a net income tax benefit in our income statement of CHF 443 million for the full-year 2009. This includesincluded a deferred tax benefit of CHF 960 million, which reflectsreflected the recognition of additional deferred tax assets in respect of tax losses and temporary differences in certain locations, includ-

ingincluding the US (CHF 373 million) and Japan (CHF 127 million), taking into account updated profit forecast profit assumptions over the five-year time horizon used for recognition purposes. In addition, it reflectsreflected the release of a deferred tax liability of CHF 243 million relating to UBS Pactual prior to its sale during the year.2009. This deferred tax benefit iswas partially offset by a current tax charge of CHF 517 million, which mainly relatesrelated to entities with taxable profits.
During 2008, we recognized a net income tax benefit in our income statement of CHF 6,837 million, which mainly reflected a CHF 6,126 million impact from the increase in deferred tax assets on tax losses.

Invested assets

Total invested assets stood atwere CHF 2,233 billion on 31 December 2009, an increase of 3% from CHF 2,174 billion on 31 December 2008. Positive market developments were nearly offset by net new money outflows, a reduction of invested assets related to divestments, and negative currency translation effects. On 31 December 2009, CHF 960 billion of invested assets were attributable to Wealth Management & Swiss Bank, CHF 690 billion were attributable to Wealth Management Americas and CHF 583 billion were attributable to Global Asset Management.



Invested assets
                 
 
  As of % change from 
 
CHF billion
  31.12.09   31.12.08   31.12.07   31.12.08 
 
Swiss clients  337   325   455   4 
 
International clients  624   631   937   (1)
 
Wealth Management & Swiss Bank
  960   955   1,392   1 
 
Wealth Management Americas
  690   644   906   7 
 
Institutional  346   335   522   3 
 
Wholesale intermediary  237   240   369   (1)
 
Global Asset Management
  583   575   891   1 
 
UBS
  2,233   2,174   3,189   3 
 

41

Strategy, performance and responsibility
Financial performance

2008
Results
In 2008, we reported a Group net loss attributable to the shareholders (“attributable loss”) of CHF 21,292 million – a loss of CHF 21,442 million from continuing operations and a profit of CHF 150 million from discontinued operations. In 2007, we recorded an attributable loss of CHF 5,247 million.
Operating income
Total operating income was CHF 796 million in 2008, down from CHF 31,721 million in 2007. Net interest income at CHF 5,992 million was up 12% compared with CHF 5,337 million a year earlier. Net trading income was negative CHF 25,820 million, sharply down from negative CHF 8,353 million in 2007.
Net income from trading businesses
Net income from trading businesses dropped to negative CHF 27,203 million for full-year 2008. This compares with negative CHF 10,658 million in the prior year, with the decline mainly due to losses on disclosed risk concentrations in the FICC area of the Investment Bank.
     Within FICC, trading losses were experienced in difficult markets marked by a significant increase in volatility and an extreme scarcity of liquidity, which negatively affected many trades and positions. Real estate and securitization, and credit and proprietary strategies all had a significant negative impact on FICC trading revenues. These losses obscured good results in select areas, notably foreign exchange and money markets, which had a strong year with revenues up from 2007. Rates had positive revenues but were down from the prior year.
     Trading revenues from equities were down from the previous year, mainly as a result of lower revenues in derivatives, especially in Europe and Asia. The Equity-linked business saw negative revenues in difficult equity and credit markets. The exchange-traded derivatives business was up as it benefited from significant volatility in the market. Prime brokerage services had a solid performance but revenues were down overall from 2007 as clients deleveraged their positions. Proprietary trading contributed a limited loss for the year.
     In 2008, the Investment Bank recorded a gain on own credit from financial liabilities designated at fair value of CHF 2,032 million, resulting from the widening of our credit spread, which was partly offset by the effects of redemptions and repurchases of such liabilities.
èRefer to “Note 27 Fair value of financial instruments” in the “Financial Information” section of our 2008 annual report for more information
     In 2007, the Investment Bank recorded a gain of CHF 659 million on own credit.
Net income from interest margin businesses
Net income from interest margin businesses decreased 1% to CHF 6,160 million from CHF 6,230 million. This slight decrease was primarily due to lower income from mortgages.
Net income from treasury activities and other
Net income from treasury activities and other was CHF 1,214 million compared with CHF 1,412 million. Gains from the accounting treatment of the MCNs issued in March and in December 2008 were offset by negative income from the transaction with the Swiss National Bank.
Credit loss expenses
A credit loss expense of CHF 2,996 million was recorded in full-year 2008, compared with a credit loss expense of CHF 238 million in full-year 2007. The difference mainly reflects impairment charges taken on reclassified financial assets in fourth quarter 2008 and a further deterioration of the credit environment.
     Net credit loss expense at Wealth Management & Swiss Bank amounted to CHF 392 million in 2008 compared with a net credit loss recovery of CHF 30 million in 2007. This result was mainly due to provisions made for lombard loans in 2008, particularly in the fourth quarter. The Investment Bank recorded a net credit loss expense of CHF 2,575 million in 2008, compared with a net credit loss expense of CHF 266 million in 2007. This increase mainly reflects impairment charges taken on reclassified instruments in fourth quarter 2008, of which the majority related to leveraged finance commitments.
èRefer to the “Risk management and control” section of this report for more information on our risk management approach, method of credit risk measurement and the development of credit risk exposures
Net fee and commission income
Net fee and commission income was CHF 22,929 million, down 25% from CHF 30,634 million. Income declined in all major fee categories, as outlined below:
–Underwriting fees fell 48% to CHF 1,957 million, driven by a 56% decline in equity underwriting fees and a 31% decline in debt underwriting fees.
–Mergers and acquisitions and corporate finance fees fell 40% to CHF 1,662 million, in an environment of reduced market activity and lower mandated deal volumes.
–Net brokerage fees fell 16% to CHF 6,445 million, mainly due to lower client transaction volumes in the wealth management businesses and the Investment Bank’s cash equities and Asian equity derivatives business.
–Investment fund fees fell 25% to CHF 5,583 million due to lower asset-based fees from the asset management and wealth management businesses.


42

Strategy, performance and responsibility

–Portfolio management and advisory fees fell 19% to CHF 7,667 million mainly due to the lower asset base in the wealth management businesses and reduced performance fees in the asset management business.
–Insurance-related and other fees, at CHF 317 million in 2008, decreased by 25% from a year earlier mainly due to lower commission income from life insurance products at Wealth Management Americas.
Other income
Other income decreased to CHF 692 million from CHF 4,341 million. The main driver was the sale of our 20.7% stake in Julius Baer during 2007, which gave rise to the recognition in 2007 of a CHF 1,950 million pre-tax gain, attributed to the Corporate Center. 2008 included a gain of CHF 168 million from the sale of our stake in Adams Street Partners and a gain of CHF 360 million on the sale of our stake in Bank of China, partly offset by losses of CHF 192 million due to currency translation differences on partial disposals of an investment in a consolidated investment fund.
Operating expenses
Total operating expenses were down 19% to CHF 28,555 million from CHF 35,463 million. The decline was mainly due to significantly reduced variable compensation, partly offset by provisions for auction rate securities and the provision made in connection with the US cross-border case.
Personnel expenses
Personnel expenses decreased 36% to CHF 16,262 million from CHF 25,515 million. This was primarily due to lower accruals on variable compensation, mainly in the Investment Bank, as well as lower salary costs due to reduced personnel levels. Full-year results for 2007 included accruals for share-based compensation for performance during the year. These were not reflected in full-year 2008 as they are being amortized over the vesting period of these awards starting with 2009.
     Contractors’ expenses, at CHF 423 million, were down 33% from 2007. This was due to a lower number of contractors employed, mainly at the Investment Bank. Insurance and social security contributions declined 45% to CHF 706 million in 2008, driven by reduced variable compensation.
Contributions to retirement benefit plans increased CHF 4 million to CHF 926 million as changes in contributions to various plans largely offset each other. At CHF 2,000 million in 2008, other personnel expenses increased 2%, mainly due to severance payments relating to the reduction in personnel levels.
General and administrative expenses
At CHF 10,498 million, general and administrative expenses increased CHF 2,069 million from CHF 8,429 million. This increase was mainly due to provisions of CHF 1,464 million related to auction rate securities, the provision of CHF 917 million made in connection with the US cross-border case and restructuring charges. These offset cost reductions in all other categories during 2008. In absolute terms, the largest reductions came from lower travel and entertainment expenses, reduced costs from outsourcing of IT and other services and lower marketing and public relations expenses.
Depreciation, amortization and impairment of goodwill
Depreciation of property and equipment declined CHF 2 million to CHF 1,241 million. Amortization of intangible assets declined to CHF 213 million from CHF 276 million.
     A goodwill impairment charge of CHF 341 million was recorded in 2008 relating to the Investment Bank’s exit from the municipal securities business. There was no goodwill impairment charge for full-year 2007.
Income tax
We recognized an income tax benefit in the income statement of CHF 6,837 million for 2008, which mainly reflects the CHF 6,126 million impact from the recognition of incremental deferred tax assets on available tax losses.
     The incremental deferred tax assets mainly relate to Swiss tax losses incurred during 2008, primarily due to the writedown of investments in US subsidiaries, but was reduced by a decrease in the deferred tax assets recognized for US tax losses.
     The Swiss tax losses can be utilized to offset taxable income in Switzerland arising in the seven years following the year in which the losses are incurred.
     We recognized a net income tax expense of CHF 1,369 million for full-year 2007.


43

Strategy, performance and responsibility
Financial performance

Balance sheet

Balance sheet

 
             
% change from 
CHF million 31.12.10  31.12.09  31.12.09 
  
Assets
            
 
Cash and balances with central banks  26,939   20,899   29 
 
Due from banks  17,133   16,804   2 
 
Cash collateral on securities borrowed  62,454   63,507   (2)
 
Reverse repurchase agreements  142,790   116,689   22 
 
Trading portfolio assets  167,463   188,037   (11)
 
Trading portfolio assets pledged as collateral  61,352   44,221   39 
 
Positive replacement values  401,146   421,694   (5)
 
Cash collateral receivables on derivative instruments  38,071   53,774   (29)
 
Financial assets designated at fair value  8,504   10,223   (17)
 
Loans  262,877   266,477   (1)
 
Financial investments available-for-sale  74,768   81,757   (9)
 
Accrued income and prepaid expenses  5,466   5,816   (6)
 
Investments in associates  790   870   (9)
 
Property and equipment  5,467   6,212   (12)
 
Goodwill and intangible assets  9,822   11,008   (11)
 
Deferred tax assets  9,522   8,868   7 
 
Other assets  22,681   23,682   (4)
 
Total assets
  1,317,247   1,340,538   (2)
 
             
Liabilities
            
 
Due to banks  41,490   31,922   30 
 
Cash collateral on securities lent  6,651   7,995   (17)
 
Repurchase agreements  74,796   64,175   17 
 
Trading portfolio liabilities  54,975   47,469   16 
 
Negative replacement values  393,762   409,943   (4)
 
Cash collateral payables on derivative instruments  58,924   66,097   (11)
 
Financial liabilities designated at fair value  100,756   112,653   (11)
 
Due to customers  332,301   339,263   (2)
 
Accrued expenses and deferred income  7,738   8,689   (11)
 
Debt issued  130,271   131,352   (1)
 
Other liabilities  63,719   72,344   (12)
 
Total liabilities
  1,265,384   1,291,905   (2)
 
             
Equity
            
 
Share capital  383   356   8 
 
Share premium  34,393   34,824   (1)
 
Cumulative net income recognized directly in equity, net of tax  (6,534)  (4,875)  (34)
 
Retained earnings  19,285   11,751   64 
 
Equity classified as obligation to purchase own shares  (54)  (2)    
 
Treasury shares  (654)  (1,040)  37 
 
Equity attributable to UBS shareholders
  46,820   41,013   14 
 
Equity attributable to non-controlling interests  5,043   7,620   (34)
 
Total equity
  51,863   48,633   7 
 
Total liabilities and equity
  1,317,247   1,340,538   (2)
 
Balance sheet
             
 
          % change from 
   
CHF million
  31.12.09   31.12.08   31.12.08 
 
             
 
Assets
            
 
Cash and balances with central banks  20,899   32,744   (36)
 
Due from banks  46,574   64,451   (28)
 
Cash collateral on securities borrowed  63,507   122,897   (48)
 
Reverse repurchase agreements  116,689   224,648   (48)
 
Trading portfolio assets  188,037   271,838   (31)
 
Trading portfolio assets pledged as collateral  44,221   40,216   10 
 
Positive replacement values  421,694   854,100   (51)
 
Financial assets designated at fair value  10,223   12,882   (21)
 
Loans  306,828   340,308   (10)
 
Financial investments available-for-sale  81,757   5,248     
 
Accrued income and prepaid expenses  5,816   6,141   (5)
 
Investments in associates  870   892   (2)
 
Property and equipment  6,212   6,706   (7)
 
Goodwill and intangible assets  11,008   12,935   (15)
 
Deferred tax assets  8,868   8,880   0 
 
Other assets  7,336   9,931   (26)
 
Total assets
  1,340,538   2,014,815   (33)
 
             
Liabilities
            
 
Due to banks  65,166   125,628   (48)
 
Cash collateral on securities lent  7,995   14,063   (43)
 
Repurchase agreements  64,175   102,561   (37)
 
Trading portfolio liabilities  47,469   62,431   (24)
 
Negative replacement values  409,943   851,864   (52)
 
Financial liabilities designated at fair value  112,653   101,546   11 
 
Due to customers  410,475   465,741   (12)
 
Accrued expenses and deferred income  8,689   10,196   (15)
 
Debt issued  131,352   197,254   (33)
 
Other liabilities  33,986   42,998   (21)
 
Total liabilities
  1,291,905   1,974,282   (35)
 
             
Equity
            
 
Share capital  356   293   22 
 
Share premium  34,786   25,250   38 
 
Net income recognized directly in equity, net of tax  (4,875)  (4,335)  (12)
 
Revaluation reserve from step acquisitions, net of tax  38   38   0 
 
Retained earnings  11,751   14,487   (19)
 
Equity classified as obligation to purchase own shares  (2)  (46)  96 
 
Treasury shares  (1,040)  (3,156)  67 
 
Equity attributable to UBS shareholders
  41,013   32,531   26 
 
Equity attributable to minority interests  7,620   8,002   (5)
 
Total equity
  48,633   40,533   20 
 
Total liabilities and equity
  1,340,538   2,014,815   (33)
 

44

Strategy, performance and responsibility

2010 asset development

(BAR CHART)

()1 Including cash collateral receivables on derivative instruments.
31.12.09

Balance sheet development

31.12.10 vs. 31.12.08:

31.12.09
Our total assets stood at CHF 1,317 billion on 31 December 2010, down CHF 23 billion (2%) from CHF 1,341 billion on 31 December 2009, down CHF 674 billion (33%) from CHF 2,015 billion on 31 December 2008. These shifts were due to significant reductions2009. The reduction occurred mainly in replacement values (RVs)(RV), which decreased to a similar extent on both sides of the balance sheet, as market and currency movements drove down positive replacement valuesRV 5% to CHF 401 billion, and negative RV by 4% to CHF 394 billion. Our funded asset volume, which excludes positive RV, remained relatively unchanged, declining by CHF 4323 billion in 2010. Nevertheless, our asset composition changed as cash collateral receivables on derivative instruments dropped by CHF 16 billion to CHF 42238 billion, and negative replacement valuesfinancial investments available-for-sale fell by CHF 4427 billion to CHF 410 billion. Excluding positive replacement values, our total75 billion, and trading portfolio assets dropped CHF 242 billion in 2009. Collateral trading assets felldeclined by CHF 1673 billion to CHF 180 billion, trading portfolio assets fell by CHF 80 billion to CHF 232 billion, and lending assets fell by CHF 66 billion to CHF 385229 billion. These declines were partly partially

Balance sheet development – assets

(BAR CHART)

1 Total balance sheet excluding positive replacement values.  2 Including cash collateral receivables on derivative instruments.

2010 liabilities and equity development

(BAR CHART)

1 Including cash collateral payables on derivative instruments.

offset by an increaseincreases in financial investments available-for-sale,collateral trading assets, which grewrose by CHF 7725 billion to CHF 82205 billion, while lending assets remained stable around CHF 315 billion.

Currency effects for 20092010 included athe strengthening of the Swiss franc against the Japanese yen,euro, British pound, and the US dollar, and euro whileweakening of the Swiss franc weakened against UK sterling.the Japanese yen. These effects deflated theour balance sheet, excluding positive replacement values,RV, by roughly CHF 10 billion, implying an underlying assets reduction of effectively CHF 23170 billion.
     ExcludingTo a large extent, the total asset reduction occurred in the Investment Bank, as the abovementioned change in positive replacement values and lower balances in current accounts arising from collateralized derivative over-the-counter (OTC) transactions (variation margins) contributed significantly to the Investment Bank significantly reduced itsbusiness division’s CHF 25 billion decline to CHF 967 billion. Wealth Management’s balance sheet assets fell by CHF 25816 billion during 2009 to CHF 99294 billion. Global Asset Management’s balance sheet assets decreased by

Balance sheet development – liabilities and equity

(BAR CHART)

1 Total balance sheet excluding negative replacement values.  2 Percentages based on total balance sheet size excluding negative replacement values.  3 Including cash collateral payables on derivative instruments.  4 Including financial liabilities designated at fair value.

45

Strategy, performance and responsibility
Financial performance

CHF 4 billion to CHF 20 billion.16 billion, and Wealth Management Americas’ balance sheet increasedassets decreased by CHF 143 billion to CHF 53 billion and the Corporate Center’s balance sheet increased by CHF 8 billion to CHF 2750 billion. The balance sheet asset size of Wealth ManagementRetail & Swiss Bank remained relatively stable atCorporate increased by CHF 24815 billion to CHF 153 billion. Treasury activities and other corporate items rose by CHF 10 billion to CHF 37 billion.

Balance sheet positions disclosed in this section represent year-end positions. Intra-quarter balance sheet positions may be different.
èRefer to the table “FINMA leverage ratio calculation” in the “Capital management” section of this report for our average month-end balance sheet size for the fourth quarter 2010 and 2009

Lending and borrowing

Lending

Lending
Cash and balances with central banks was CHF 2127 billion on 31 December 2009,2010, an increase of CHF 6 billion from the prior year-end, related to an increase in overnight deposits with central banks. Loans to customers decreased CHF 4 billion to CHF 263 billion due to currency effects, which lowered our loan portfolio by CHF 10 billion. On a decreasecurrency adjusted basis, loans to customers increased CHF 6 billion, predominantly in our wealth management businesses, where they grew by CHF 12 billion. Volume growth occurred across all major products, including lombard lending, fixed-term loans, and current accounts. This was partly offset by a reduction of student loan auction rate securities and our loan to the RMBS Opportunities Master Fund, LP (BlackRock).
èRefer to the “Risk and treasury management” section for more information

Borrowing

Overall, our unsecured borrowing declined by CHF 10 billion to CHF 605 billion. Financial liabilities designated at fair value stood at CHF 101 billion on 31 December 2010, a drop of CHF 12 billion from the prior year-end, due to a decline in overnight deposits with central banks.Due from banksdecreased CHF 18 billion to
CHF 47 billion, related to lower variation margins deposited for derivative instruments.Loans to customersdecreased CHF 33 billion to CHF 307 billion. The CHF 21 billion decrease in loans in the Investment Bank was spread across all major products, including fixed-term loans, which were partly reduced due to the final transfer under the SNB transaction in early April, and lower variation margins deposited for derivative instruments. The loan book of Wealth Management & Swiss Bank declined by CHF 9 billion, with the majority of the decline in lombard lending.
Borrowing
The reduction of the Investment Bank’s assets led to lower funding needs. Overall, unsecured borrowing declined by CHF 171 billion to CHF 720 billion. Interbank borrowing (Due to banks) was CHF 65 billion on 31 December 2009, down CHF 60 billion from 31 December 2008mainly due to asset reductionscurrency effects, which reduced the outstanding balance of equity-linked and decreased variation margins for derivative instruments.Money market paper issuance was CHF 52 billion in 2009, a reduction of CHF 60 billion from the prior year, as we decreased our reliance on these funding sources in line with our overall lower funding needs.credit-linked notes. Customer deposits (Due(due to customers)customers) amounted to CHF 410332 billion, a decrease of CHF 557 billion for the year, orcompared with 2009, however, grew by CHF 5117 billion on a currency-adjusted basis. Wealth Management & Swiss Bank clientbasis, mainly related to an increase in our wholesale deposits. Our wealth management businesses cash deposits declinedgrew by CHF 113 billion on a currency-adjusted basis, with reductions in fixed deposits and fiduciary investments and was partially offset by inflows/shifts into current accounts, savings and personal accounts, and callpension fund investment accounts from fiduciary investments and fixed-term deposits. Investment Bank deposits declinedInterbank borrowing (due to banks) was CHF 4741 billion on 31 December 2010, up CHF 10 billion from 31 December 2009, to an almost equal extent due to our short-term wholesale and were mainly driven by lower business funding needs, a decline inour Retail & Corporate business. Money market paper issuance was CHF 56 billion at year-end

2010, an increase of CHF 4 billion from the prime brokerage business and lower variation margins received for derivative instruments.Long-termprior year-end, while long-term debtdeclined by CHF 6 billion to CHF 8074 billion, mainly related to the conversion by the Swiss Confederation of the MCN issued in December 2008,currency effects, which resulted incontributed to a shift of long-term debt to equity attributable to UBS shareholders.Financial liabilities designated at fair valuestood at CHF 113 billion on 31 December 2009, an increasereduction of CHF 11 billion from 31 December 2008.8 billion.
è Refer to “Note 26 Capital increases and mandatory convertible notes” in the “Financial information” section of this report for more information
èRefer to “Liquidity and funding management” section of this report for more information on long-term debt issuance

Repurchase/Repurchase / reverse repurchase agreements and
securities borrowing/borrowing / lending

The secured lending on the asset side of the balance sheet consisting of the sums of cash

Cash collateral on securities borrowed and reverse repurchase agreements declinedincreased year-on-year by CHF 25 billion to CHF 180205 billion on 31 December 2009. The CHF 167 billion decline occurred almost entirely in the Investment Bank,2010. This increase was partly



45

Strategy, performance and responsibility
Financial performance

due to a strategic shiftincreased trading balances in the composition of our liquidity reserve into debt instruments (see “Financial investments available-for-sale” below) and the matched book was reduced as part of its overall balance sheet reduction. The matched book is a repurchase agreement portfolio comprised of assets and liabilities with equal maturities and equal value so that the market risks substantially cancel each other out. Furthermore, as part of the Investment Bank’s balance sheet reduction measures, its trading short positions were reduced CHF 15 billion, which resulted in lowerto higher short-coverings via reverse repurchase agreements and securities borrowing transactions.
In a matched book, the dealer reverses collateral from one customer and repos it to another customer at a different rate generating additional profit from mismatching maturities.
A significant amount of trading assets areis funded viarepurchase agreements,so,agreements. Therefore, in addition to the increase in the matched book, reduction, the yearly decreaseincrease in the Investment Bank’s trading assets also contributed to the droprise in repurchase agreements. These reductionsincreases are reflected on the liability side of the balance sheet, where repurchase agreements and securities lent against cash collateral declinedgrew by CHF 449 billion standingin 2010 and stood at CHF 7281 billion on 31 December 2009.2010.

Trading portfolio

Further reductions were achieved in thetrading

Trading portfoliowhich assets declined by CHF 803 billion during 2009. At the end of 2009, the trading portfolio stoodto stand at CHF 232 billion.229 billion on 31 December 2010. The majority of thethis decrease is related to thecurrency effects and trading inventory held for regulatory requirements within our wealth management business. The Investment Bank’s overall balance sheet reductions, including USD 6.6 billion of illiquid assets transferred to the SNB StabFund. Money market paper was reducedtrading portfolio grew by CHF 469 billion, partly related to the rebalancingprimarily as a result of our liquidity reserve. Other debt instruments decreased byan increase in holdings of money market papers (mainly treasury bills) of CHF 3311 billion and traded loans decreased byprecious metals (mainly silver and palladium) of CHF 6 billion. These decreases were2 billion, partially offset by precious metalsdebt instruments, which increaseddeclined by CHF 7 billion.

5 billion (mainly US government paper and corporate debt).

Replacement values

Thepositiveand thenegative replacement values(RVs) (RV) of derivative instruments decreaseddeveloped roughly in parallel, decreasing by CHF 43221 billion (51%(5%) and CHF 44216 billion (52%(4%), respectively, and ending the year2010 at CHF 422401 billion and CHF 410394 billion, mainly due to movements in interest rates, credit spreads and currencies.

respectively. Decreases in positive and negative RVsRV occurred in interest ratecredit derivative contracts, which dropped by CHF 160 billion and CHF 165 billion, mainly due to upward shifts in interest rate curves across all major currencies, specifically the US dollar, and a slight reduction in underlying contract volumes.
     Foreign exchange contracts declined by CHF 12423 billion (positive RVs) and CHF 126 billion (negative RVs) mainly due to currency movements, which outweighed the slight increase in notional values of the underlying contract volumes.
     Positive and negative RVs of credit derivative contracts declined by CHF 119 billion and CHF 114 billion respectively, due to a tightening of credit spreads



46

Strategy, performance and responsibility

spreads. Interest rate contracts dropped by CHF 11 billion due to a steepening in interest rate yield curves, specifically those denominated in euro and a reduction of notional valuesBritish pound. These declines were partially offset by approximately one third, largelyforeign exchange contracts, which grew by CHF 16 billion, related to trade compression and “tear-up” initiatives in 2009.

     Lastly, positive and negative RVsthe strengthening of commodity, including precious metals contracts,the Swiss franc against major currencies.

Financial investments available-for-sale

Financial investments available-for-sale declined by CHF 19 billion and CHF 18 billion, and equity/index contracts by CHF 10 billion and CHF 19 billion, respectively.

Financial investments available-for-sale
Financial investments available-for-sale grew by CHF 777 billion to CHF 8275 billion in 2009.2010, reflecting currency effects. The increase is mainly due to our strategic decision to rebalance our liquidity reserve which led to a shift from reverse repurchase agreements and trading portfolio (see above) into debt instruments available-for-sale. Thesemajority of these instruments include high-qualityhighly liquid short-term securities issued by governments and government-controlled institutions in various currencies, mainly US dollars, euro and British pound. It also includes a portfolio of US and UK government bonds with a face amount of CHF 15 billion and a weighted average maturity of approximately eight years.

Other assets / other liabilities

Commencing in the US dollarfourth quarter of 2010, UBS has changed the presentation of prime brokerage receivables and euro.payables and cash collateral from derivative transactions to improve transparency. Prime brokerage receivables and prime brokerage payables have been transferred out ofDue from banksandLoanstoOther assets, and out ofDue to banks andDue to customerstoOther liabilities, respectively.Cash collateral receivables and payables on derivatives are presented in the new balance sheet linesCash collateral receivables on derivative instrumentsandCash collateral payables on derivative instrumentsby transferring the amounts out ofDue from banksandLoans, andDue to banksandDue to customers, respectively. In the aforementioned waterfall graphs,Cash collateral receivable and payable on derivative instrumentsare shown inOther assetsandOther liabilities. Comparative periods have been adjusted accordingly.

èRefer to the “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for more information

Shareholders’ equity

On 31 December 2009,Equity2010, equity attributable to UBS shareholderswas CHF 41.046.8 billion, representing an increase of CHF 8.55.8 billion compared with 31 December 2008.2009. The increase in 20092010 reflects thea net profit of CHF 3.87.5 billion, of shareholders’ equity the firm generated through our share placement in the second quarter and CHF 6.7 billion from the conversion by the Swiss Confederation in August 2009 of the MCNs issued in December 2008, and waspartially offset by the Group’s full-year lossnegative effects recognized in equity (including currency translation effects) of CHF 2.71.7 billion.

è Refer to the “Shares and capital instruments” section of this report for more information



4647

Strategy, performance and responsibility


Financial performance

Off-balance sheet

Off-balance sheet arrangements

Off-balance sheet arrangements include purchased and retained interests and derivatives, as well as other involvements in non-consolidated entities and structures originated by us or set up by third parties.

Generally, these arrangements either meet the financial needs of clients or offer investment opportunities through entities that are not controlled by us.
In the normal course of business, we also enter into arrangements that, under IFRS, lead to either de-recognition of financial assets and liabilities for which we have transferred substantially all risks and rewards (financial assets), or for which the financial liabilities are extinguished, orextinguished.
In addition, we enter into arrangements where the non-recognition of financial assets (and liabilities) received for whichare not recognized on the balance sheet

because we have not assumed the related risks and rewards (financial assets) and/or because we did not become party to the contractual provisions of the financial instruments. We recognize these types of arrangements on the balance sheet only to the extent of itstheir involvement, which, for example, may be in the form of derivatives, guarantees, financing commitments or servicing rights.

When we, through these arrangements, incur an obligation or become entitled to an asset, we recognize them on the balance sheet, with the resulting loss or gain recorded in the income statement or equity (other comprehensive income).sheet. It should be noted that in many instances the amount recognized on the balance sheet does not represent the full gain or loss potential inherent in such arrangements. Generally, these arrangements either meet the financial needs of customers or offer investment opportunities through entities that are not controlled by us.
The following paragraphs discuss several distinct areas of off-balance sheet arrangements. Additional disclosure on
certain areas of off-balance sheet arrangements can be found in other sections of this report, as indicated in the “Disclosure overview” table.table below.



Off-balance sheet arrangements, risks, consolidation and fair value measurements
Disclosure in the annual report
Contractual obligationsStrategy, performance and responsibility, section “Off-balance sheet”
Credit guarantees, performance guarantees, loan commitments, underwriting commitments, forward starting transactions and similar instrumentsStrategy, performance and responsibility, section “Off-balance sheet”
Guarantees issued by UBS AG to subsidiariesFinancial information, “Note 41 Supplemental guarantor information required under SEC rules”
Other contingent liabilitiesFinancial information, “Note 21 Provisions and contingent liabilities”
Derivative financial instrumentsFinancial information, “Note 23 Derivative instruments and hedge accounting”
Risk and treasury management, section “Basel II Pillar 3 disclosures”
Credit derivativesFinancial information, “Note 23 Derivative instruments and hedge accounting”
Risk and treasury management, section “Basel II Pillar 3 disclosures”
LeasesFinancial information, “Note 25 Operating lease commitments”
Non-consolidated securitization vehicles – non-agency transactionsStrategy, performance and responsibility, section “Off-balance sheet”
Support to non-consolidated investment fundsStrategy, performance and responsibility, section “Off-balance sheet”
Securitizations (banking book only)Risk and treasury management, section “Basel II Pillar 3 disclosures”
Risk concentrationsRisk and treasury management, section “Risk concentrations”
Credit risk informationRisk and treasury management, section “Credit risk”
Market risk informationRisk and treasury management, section “Market risk”
Liquidity risk informationRisk and treasury management, section “Liquidity and funding management”
ConsolidationFinancial information, “Note 1 Summary of significant accounting policies”
Fair value measurementsFinancial information, “Note 27 Fair value of financial instruments”

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Strategy, performance and responsibility

Risk positions

Our risk concentrations and other relevant risk positions are disclosed in detail in the audited parts of the “Risk management and control” section of this report. TheseAs of 31 December 2010 these positions includeincluded exposures to monoline insurers and student loan auction rate securities. The quantitative summary about each of these risk positions includes exposures of on- and off-balance sheet arrangements.
The importance and the potential impact of such risk positions (with respect to liquidity, capital resources or market and credit risk support), including off-balance sheet structures, are also described in the “Risk and treasury management” section of this report.

Liquidity facilities and similar obligations

On 31 December 20092010 and 31 December 2008,2009, we had no significant exposure through liquidity facilities and guarantees to structured investment vehicles, conduits and other similar types of special purpose entities (SPEs)(SPE). Losses resulting from such obligations were not significant in 20092010 and 2008.2009.

Non-consolidated securitization vehicles and collateralized
debt obligations

Up to and including 2008, we sponsored the creation of SPEsSPE that facilitate the securitization of acquired residential and commercial mortgage loans, other financial assets and


Off-balance sheet arrangements, risks,
Disclosure in the annual report
consolidation and fair value measurements
Contractual obligationsStrategy, performance and responsibility, section “Off-balance sheet”
Credit guarantees, performance guarantees, undrawn irrevocable credit facilities, and similar instrumentsStrategy, performance and responsibility, section “Off-balance sheet”
Derivative financial instrumentsFinancial information, “Note 23 Derivative instruments and hedge accounting”
Risk and treasury management, section “Basel II Pillar 3 disclosures”
Credit derivativesFinancial information, “Note 23 Derivative instruments and hedge accounting”
Risk and treasury management, section “Basel II Pillar 3 disclosures”
LeasesFinancial information, “Note 25 Operating lease commitments”
Non-consolidated securitization vehicles – non-agency transactionsStrategy, performance and responsibility, section “Off-balance sheet”
Support to non-consolidated investment fundsStrategy, performance and responsibility, section “Off-balance sheet”
Securitizations (banking book only)Risk and treasury management, section “Basel II Pillar 3 disclosures”
Risk concentrationsRisk and treasury management, section “Risk concentrations”
Credit risk informationRisk and treasury management, section “Credit risk”
Market risk informationRisk and treasury management, section “Market risk”
Liquidity risk informationRisk and treasury management, section “Liquidity and funding management”
ConsolidationFinancial information, “Note 1 Summary of significant accounting policies”
Fair value measurementsFinancial information, “Note 27 Fair value of financial instruments”

47

Strategy, performance and responsibility
Financial performance

related securities. We also securitized customers’clients’ debt obligations (ain transactions involving SPE which issued collateralized debt obligationobligations (CDO), which typically refersrefer to a security that is collateralized by a pool of bonds, loans, equity, derivatives or other assets) in transactions involving SPEs which issued CDOs.assets. A securitization transaction of this kind generally involves the transfer of assets into a trust or corporation in return for the receipt of beneficial interests in the form of securities. Financial assets held by such trusts and corporations are no longer reported in our consolidated financial statements once their risks and rewards are transferred to a third-party, e.g. in a sales transaction.third-party.
è Refer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for more information about ouron accounting policies regarding securitization activities



     In 2009, we
                         
Non-consolidated securitization vehicles and collateralized debt obligations – non-agency transactions1 
CHF billion Total SPE assets Involvements in non-consolidated SPE held by UBS 
              Purchased and    
              retained interests    
  Original principal  Current principal  Delinquency  held by UBS2  Derivatives held by UBS 
As of 31 December 2010 outstanding  outstanding  amounts  Carrying value  Fair value  Nominal value 
 
                         
Originated by UBS
                        
 
CDOs
                        
 
Residential mortgage  5.3   3.9   0.0   0.7   0.0   0.9 
 
Commercial mortgage  0.0   0.0   0.0   0.0   0.1   1.3 
 
Other ABS  0.0   0.0   0.0   0.0   0.0   0.1 
 
Securitizations
                        
 
Residential mortgage  2.9   1.7   0.1   0.1   0.0   2.4 
 
Commercial mortgage  22.1   19.3   2.1   0.1   0.0   0.0 
 
Other ABS  0.9   1.0   0.0   0.0   0.0   0.0 
 
Total
  31.2   25.9   2.2   0.9   0.0   4.6 
 
                         
Not originated by UBS
                        
 
CDOs
                        
 
Residential mortgage  43.7   20.1   0.1   0.4   0.0   0.1 
 
Commercial mortgage  13.4   8.8   0.0   0.8   0.0   0.0 
 
Other ABS  78.9   64.7   0.0   5.5   0.3   2.3 
 
Securitizations
                        
 
Residential mortgage  625.1   212.6   38.4   1.3   (1.1)  4.1 
 
Commercial mortgage  608.4   515.5   63.7   2.3   0.0   0.0 
 
Other ABS  946.0   607.7   20.1   3.5   0.0   0.0 
 
Total
  2,315.5   1,429.4   122.3   13.8   (0.7)  6.4 
 
1 The total pool assets held by non-consolidated investment vehicles where UBS is involved are reflected under “Total SPE assets”. The involvement of UBS in these vehicles is disclosed under the column “Involvements in non-consolidated SPE held by UBS”. UBS involvement may be in the form of purchased and retained interests or derivatives. “Total SPE assets” include information which UBS could gather after making exhaustive efforts but excludes data which UBS was unable to obtain (in sufficient quality), especially for structures originated by third parties.  2 Includes loans and receivables measured at amortized cost in the amount of CHF 0.8 billion originated by UBS and CHF 7.8 billion for structures not originated by UBS and trading assets measured at fair value in the amount of CHF 6.0 billion for structures not originated by UBS.

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Strategy, performance and responsibility
Financial performance

We did not sponsor the creation of SPEs that facilitated the securitization of acquired residential and commercial mortgage loans,any abovementioned SPE, and did not securitize CDOsissue or sponsor the issue of new CDO in transactions involving SPEs. In 2008, only few of such securitization structures were originated.SPE in 2009 and 2010. Certain retained interests relating to 20072008 and earlier issuances (mainly instru-
mentsinstruments linked to the US mortgage market) could not be sold in 2008 and 2007 and continuecontinued to be retained in 2009 due to illiquid markets.2010. However, the volume and size of retained interests are significantlywere further reduced atas of 31 December 2009, mainly due to2010, compared with the following actions:prior year.
–sale of positions to the SNB StabFund owned and controlled by the Swiss National Bank in 2009 and in 2008 (total volume of USD 38.7 billion; 2009: USD 22.2 billion; 2008: USD 16.4 billion);
–sale of a portfolio of US residential mortgage-backed securities for proceeds of USD 15 billion to the RMBS Opportunities Master Fund, LP, an entity managed by BlackRock Financial Management, Inc.;
–substantial downsizing of our residual risk positions within our FICC business in 2009 and 2008, which included a significant reduction of real estate and securitization activities.
Our involvements in non-consolidated securitization vehicles and CDOsCDO disclosed in this section are typically managed on a portfolio basis alongside hedges and other offsetting financial instruments. The “Non-consolidated securitization


Non-consolidated securitization vehicles and collateralized debt obligations – non-agency transactions1
                         
CHF billion Total SPE assets Involvements in non-consolidated SPEs held by UBS 
              Purchased and    
              retained interests    
  Original  Current      held by UBS2  Derivatives held by UBS 
  principal  principal  Delinquency   
As of 31 December 2009 outstanding  outstanding  amounts  Carrying value  Fair value  Nominal value 
 
                         
Originated by UBS3
                        
 
CDOs and CLOs
                        
 
Residential mortgage  6.3   4.1   0.0   0.9   0.8   2.6 
 
Commercial mortgage  0.0   0.0   0.0   0.0   (0.6)  0.7 
 
Other ABS  0.0   0.0   0.0   0.0   0.0   0.1 
 
Securitizations
                        
 
Residential mortgage  5.7   2.3   0.2   0.0   0.0   3.9 
 
Commercial mortgage  21.3   21.1   0.9   0.0   0.0   0.0 
 
Other ABS  1.8   0.4   0.1   0.0   0.0   3.2 
 
Total
  35.1   27.9   1.2   0.9   0.2   10.5 
 
                         
Not originated by UBS
                        
 
CDOs and CLOs
                        
 
Residential mortgage  130.0   59.4   9.7   2.8   0.1   0.1 
 
Commercial mortgage  7.6   3.3   0.0   0.7   0.2   0.9 
 
Other ABS  78.6   38.8   0.1   3.9   0.6   2.7 
 
Securitizations
                        
 
Residential mortgage  872.5   338.8   69.7   1.8   (1.8)  7.6 
 
Commercial mortgage  656.9   552.6   21.7   3.8   0.0   0.0 
 
Other ABS  692.8   521.2   19.8   3.5   0.0   0.0 
 
Total
  2,438.4   1,514.1   121.0   16.5   (0.9)  11.3 
 
1 Includes all purchased and retained interests and derivatives held by UBS which are considered involvements in non-consolidated securitization vehicles and CDOs. This implies, for example, that UBS would include an insignificant involvement in such a vehicle into the table (under “Involvements in non-consolidated SPEs held by UBS”), whereas the pool assets held by such vehicle would be included under “Total SPE assets”. The size of the pool assets of such vehicle can be very high, but relates to third parties, if UBS’s involvement is insignificant. The “Total SPE assets” include information which UBS could gather after making exhaustive efforts but excludes data which UBS was unable to receive (in sufficient quality), especially for structures originated by third parties. 2 Includes loans and receivables measured at amortized cost in the amount of CHF 0.9 billion originated by UBS and CHF 11.9 billion for structures not originated by UBS and trading assets measured at fair value in the amount of CHF 4.6 billion for structures not originated by UBS. 3 Structures originated by UBS include transactions within the scope of US GAAP, Financial Accounting Standard 140, paragraph 17.

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Strategy, performance and responsibility

vehicles and collateralized debt obligations – non-agency transactions” table does not include these offsetting factors, and does not represent a measure of risk.
èRefer to the “Risk management and control” section of this report for information on our risk positions as well as the BlackRock transaction
Our involvement in vehicles whose residential and commercial mortgage securities are backed by an agency of the US government – for example the Government National Mortgage Association, the Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporation – is not included in the abovementionedabove-mentioned table, due to the comprehensive involvement of the US government in these organizations and their significantly lower risk profile.
The numbers in the table are different from the numbers disclosed on securitizations in the “Basel II Pillar 3” section of this report, predominantly due to different scopes (for example Pillar 3 disclosures are on banking book positions only, and the consolidation status is different for several vehicles), and to some extent, due to a different measurement basis.

Consolidation of securitization vehicles and CDOs

collateralized debt
obligations
We continually evaluate whether triggering events require the reconsideration of the consolidation conclusions made at the inception of our involvement with securitization vehicles and CDOs.CDO.
     During 2009 and 2008, due to adverse market conditions, various non-consolidated vehicles inAs of 31 December 2010 there were no holdings which we held a majority stake in super senior securities were declared to have breached default provisions pursuant torequired reconsideration of the entities’ governing documents. In these instances, various contingent decision-making rights became immediately vested in the super-senior class holders. As a consequence, we determined that in certain instances, the rights arising from such events caused us to be in control of these entities, and affected needed to be consolidated. The consolidation had no material incremental impact on our income statement and balance sheet.assessment.
è Refer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for further information on consolidation of securitization vehicles and CDO

Risks resulting from non-consolidated securitization vehicles
vehicles and CDOscollateralized debt obligations

The “Risk management and control” section of this report provides detailed disclosure of our main risk concentrations, as well as risks associated with our involvement in consolidated and non-consolidated US mortgage securitization vehicles and CDOs.CDO.

Support to non-consolidated investment funds

In the ordinary course of business, we issue investment certificates to third parties that are linked to the perfor-
manceperformance of non-consolidated investment funds. Such investment funds are originated either by us or by third parties. For hedging purposes, we generally invest in the funds to which our obligations from the certificatescertifi-

cates are linked. Risks resulting from these contracts are considered minimal, as the full performance of the funds is passed ontoon to third parties.
In 2009 and 2008, as a result of the financial markets crisis which caused declining asset values, market illiquidity and de-leveraging by investors, we supported several non-consolidated investment funds that we manage in our wealth and asset management businesses. We provided this support primarily to facilitate redemption requests of fund investments by clients. Material support was provided in the form of collateralized financing, direct acquisition of fund units and purchases of assets from the funds. The support we provided to these investment funds was made where there were regulatory or other legal requirements or other exceptional considerations.
     In 2009, we acquired units from non-consolidated funds that we manage in the amount of CHF 0.2 billion. Guarantees granted to third parties in the context of such non-consolidated funds and collateralized financing provided to such funds were immaterial as of 31 December 2009. Impairments on fund units held accounted as financial investments available-for-sale amounted to CHF 0.2 billion in 2009; other losses incurred as a result of fund support were immaterial in 2009.
     During 2008, material support was provided as follows: fund units were acquired in the amount of CHF 0.8 billion; assets purchased from such funds amounted to CHF 0.7 billion; and fully collateralized financing provided to the funds was CHF 2.4 billion as of 31 December 2008. Guarantees granted to third-parties in the context of these non-consolidated funds were immaterial as of 31 December 2008. Losses incurred in 2008 as a result of such fund support were immaterial.
Acquired fund units and fund assets are generally accounted for as financial investments available-for-sale, and are included in the respective risk disclosures in the “Risk management and control” section of this report. Financing
As a result of the recovery in financial markets, direct acquisitions of fund units were immaterial in 2010. Purchases of assets from the funds that we manage and guarantees granted to third parties in the context of such non-consolidated funds were also immaterial. Collateralized financing provided to such funds was CHF 0.8 billion as of 31 December 2008 was included2010. Losses incurred on fund units accounted as financial investments available-for-sale amounted to CHF 73 million in the credit risk disclosures.2010.
In addition, in the ordinary course of business, our wealth and asset management businesses provide short-term funding facilities to investment funds that we manage. This bridges time lags in fund unit redemptions and subscriptions. These bridge financings did not incur in 2010 and are not expected to incur material losses.losses in the future.
     Depending on market developments in 2010 and beyond, itIt is possible that we may decide in future to provide financial support to one or more of our investment funds. Such decisions willa decision would be taken on a case-by-case basis depending upon market and otherwould be based on legal or regulatory requirements or extraordinary circumstances prevailing at the time. The risks incurred by providing such support will depend on the type of


49

Strategy, performance and responsibility
Financial performance

support and the riskiness of the assets held by the fund(s) in question. If we were to provide extensive financial support to some of our investment funds, losses incurred as a result of such support could become material.

Guarantees and similar obligations

In the normal course of business we issue: various forms of guarantees; commitments to extend credit; standby and other letters of credit to support our customers;clients; commitments to enter into repurchase agreements;forward 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.
On 31 December 2009,2010, the exposure to credit risk (gross values less sub-participations) for credit guarantees and similar instruments was CHF 16.015.4 billion compared with CHF 18.516.0 billion one year earlier. Fee income from issuing guarantees is not material to total revenues.



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Strategy, performance and responsibility

Guarantees represent irrevocable assurances, subject to the satisfaction of certain conditions, that we will make payment in the event that customersclients 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 customers but have not yet been drawn on by them, theclients. The majority of whichthese unutilized credit lines range in maturity from one month to five years. If customers fail to meet their obligations, our maximum amount at risk is the contractual amount of these instruments. The risk is similar to the risk
involved in extending loan facilities and is subject to the same risk management and control framework. For the year ended 31 December 2009,2010, we recognized net credit losses of CHF 43 million (CHF 4 million; andmillion for the yearsyear ended 31 December 2008 and 2007, we recognized net credit loss recoveries of CHF 18 million and CHF 3 million, respectively,2009) related to obligations incurred for contingencies and commitments. Provisions recognized for guarantees, documentary credits and similar instruments were CHF 130 million as of 31 December 2010 and CHF 90 million as of 31 December 2009 and CHF 31 million as of 31 December 2008.2009.
We enter into partial sub-participations to mitigate the risks from commitments and contingencies. A sub-participation is an agreement by another party to take a share of the loss in the event that the obligation is not fulfilled by the obligor and, where applicable, to fund a part of the credit facility. We retain the contractual relationship with the obligor, and the sub-participant has only an indirect relationship. We will only enter into sub-participation agreements with banks to which we ascribe a credit rating equal to or better than that of the obligor.
Furthermore, we provide representations, warranties and indemnifications to third parties in connection with numerous transactions, such as asset securitizations.

Clearinghouse and future exchange memberships

We are a member of numerous securities and futures exchanges and clearinghouses. In connection with some of those memberships, we may be required to pay a share of the financial obligations of another member who defaults,


Commitments

The table below shows the maximum committed amount of commitments.
                         
  31.12.09  31.12.08 
      Sub-          Sub-    
CHF million Gross  participations  Net  Gross  participations  Net 
 
Credit guarantees and similar instruments  11,180   (222)  10,958   13,124   (344)  12,780 
 
Performance guarantees and similar instruments  3,484   (582)  2,902   3,596   (446)  3,150 
 
Documentary credits  2,406   (288)  2,117   2,979   (415)  2,564 
 
Total commitments
  17,070   (1,092)  15,977   19,699   (1,205)  18,494 
 
Undrawn irrevocable credit facilities
  59,328   (1,793)  57,534   60,316   (1,920)  58,396 
 

50

Strategy, performance and responsibility

or otherwise be exposed to additional financial obligations as a result. While the membership rules vary, obligations generally would arise only if the exchange or clearinghouse had exhausted its resources. We consider the probability of a material loss due to such obligations to be remote.

Swiss deposit insurance

Swiss banking law and the deposit insurance system require Swiss banks and securities dealers to jointly guarantee an amount of up to CHF 6 billion for privileged client deposits in the event that a Swiss bank or securities dealer becomes insolvent. For the period from 1 July 20092010 to 30 June 2010,2011, FINMA estimates our share in the deposit insurance system to be CHF 1.0 billion. The deposit insurance is a guarantee and exposes us to additional risk which is not reflected in the “Maximum exposure to credit risk” table in “Note 29c Measurement categories of financial assets and financial liabilities” in the “Financial information” section of this report. AtAs of 31 December 2009,2010, we consider the probability of a material loss from our obligation to be remote.

Private equity funding commitments, equity and equity debt
underwriting commitments

We enter into commitments to fund external private equity funds and investments, which typically expire within fiveone to tenfive years. The commitments generally require us to fund external



                         
Financial liabilities not recognized on balance sheet 
                         
The table below shows the maximum irrevocable amount of guarantees, commitments and forward starting transactions. 
       
  31.12.10 31.12.09 
      Sub-          Sub-    
CHF million Gross  participations  Net  Gross  participations  Net 
 
Guarantees
                        
 
Credit guarantees and similar instruments  8,612   (401)  8,212   11,180   (222)  10,958 
 
Performance guarantees and similar instruments  3,362   (506)  2,856   3,484   (582)  2,902 
 
Documentary credits  4,561   (255)  4,306   2,406   (288)  2,117 
 
Total guarantees
  16,535   (1,162)  15,374   17,070   (1,092)  15,977 
 
Commitments
                        
 
Loan commitments  56,851   (1,475)  55,376   59,328   (1,793)  57,534 
 
Underwriting commitments  404   (196)  208   2,251   (556)  1,695 
 
Total Commitments
  57,255   (1,671)  55,584   61,579   (2,349)  59,229 
 
Forward starting transactions1
                        
 
Reverse repurchase agreements  39,036           43,020         
 
Securities borrowing agreements  454           904         
 
Repurchase agreements  22,468           18,044         
 
Securities lending agreements  783           47         
 
1 From 2010 onwards, collateralized forward starting transactions (cash to be paid in the future by either UBS or the counterparty) are presented in this table; the comparative period has been adjusted accordingly.

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Strategy, performance and responsibility
Financial performance

private equity funds and investments at market value at the time the commitments are drawn. The amount committed to fund these investments aton 31 December 2010 and 31 December 2009 and
31 December 2008 was CHF 0.30.1 billion and CHF 0.50.3 billion, respectively. Equity underwriting commitments in the Investment Bank aton 31 December 2010 and 31 December 2009 and 31 December 2008 amounted to CHF 1.70.2 billion and CHF 0.41.7 billion, respectively. Debt underwriting commitments entered into by Wealth Management Americas were not material.

Contractual obligations

The table below includes contractual obligations as of 31 December 2009.

2010.
All contracts included in this table, with the exception of purchase obligations (those where we are committed to purchasing

determined volumes of goods and services), are either recognized as liabilities on our balance sheet or, in the case of operating leases, disclosed in “Note 25 Operating lease commitments” in the “Financial information” section of this report.
The following liabilities are recognized on the balance sheet and excluded from the table: provisions (as disclosed in “Note 21 Provisions and litigation”contingent liabilities” in the “Financial information” section of this report), current and deferred tax liabilities (refer to “Note 22 Income taxes” in the “Financial information” section of this report for more information), liabilities to employees for equity participation plans, settlement and clearing accounts and amounts due to banks and customers.
Within purchase obligations, the obligation to employees under the mandatory notice period is excluded (this is the period in which we must pay to employees leaving the firm contractually-agreed salaries).


Contractual obligations
                               
Contractual obligationsContractual obligations 
 Payment due by period  Payment due by period 
CHF million < 1 year 1–3 years 3–5 years > 5 years  < 1 year 1-3 years 3-5 years > 5 years 
Long-term debt 42,759 46,796 31,515 71,357 
Long-term debt obligations 36,742 47,582 32,387 58,279 
Capital lease obligations 57 83 0 0 
Finance lease obligations 46 55 
Operating leases 989 1,655 1,214 2,113 
Operating lease obligations 862 1,387 1,018 1,818 
Purchase obligations 302 113 39 23  438 376 191 36 
Other liabilities 538 5 0 0  484 1 
Total
 44,645 48,652 32,768 73,493   38,572  49,401  33,596  60,133 

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Strategy, performance and responsibility
Financial performance
Strategy, performance and responsibility

Cash flows

2010

As of 31 December 2010, the level of cash and cash equivalents declined to CHF 140.8 billion, down CHF 24.2 billion from CHF 165.0 billion at the end of 2009.

Operating activities

Operating activities generated a cash inflow of CHF 12.0 billion in 2010 compared with a cash inflow of CHF 54.5 billion in 2009. Operating cash inflows (before changes in operating assets and liabilities and income taxes paid, net of refunds) totaled CHF 8.8 billion in 2010, a decrease of CHF 1.0 billion from 2009. Net profit improved CHF 10.0 billion compared with 2009.

Cash flowsinflow of CHF 2.4 billion was generated by the net decrease in operating assets; a cash inflow of CHF 1.2 billion was reflected in the operating liabilities. Net payments to tax authorities related to income taxes were CHF 0.5 billion in 2010, almost unchanged from the previous year.

Investing activities

Net cash flow used in investing activities was CHF 25.7 billion compared with cash flow used in investing activities of CHF 20.6 billion in 2009.

2009The net cash outflow for the purchase and disposal of property and equipment was CHF 0.3 billion. The net investment in financial investments available-for-sale was CHF 25.6 billion. Disposals of subsidiaries and associates in 2010 generated a cash inflow of CHF 0.3 billion.
On
èRefer to “Note 36 Business combinations” and “Note 38 Reorganizations and disposals” in the “Financial information” section of this report for more information about our investing activities

Financing activities

In 2010, financing activities generated net cash inflows of CHF 1.8 billion. This reflected the cash outflow for redemptions and dividends paid for preferred securities reflected in non-controlling interests of CHF 2.1 billion, the issuance of CHF 78.4 billion of long-term debt and the long-term debt repayments, which totaled CHF 77.5 billion. The money market papers issued generated a net cash inflow of CHF 4.5 billion. In 2009, UBS had a net cash outflow of CHF 54.2 billion from financing activities.

2009

As of 31 December 2009, the level of cash and cash equivalents declined to CHF 165.0 billion, down CHF 14.7 billion from CHF 179.7 billion at the end of 2008.

Operating activities

Operating activities generated a cash inflow of CHF 54.5 billion in 2009 compared with a cash inflow of CHF 77.0 billion in 2008. Operating cash inflows (before changes in operating assets and liabilities and income taxes paid)paid, net of refunds) totaled CHF 9.9 billion in 2009, an increase of CHF 81.5 billion from 2008. Net profit improved by CHF 18.6 billion compared with 2008.

Cash inflow of CHF 95.1127.7 billion was generated by the net decrease in operating assets, while a cash outflow of CHF 50.082.5 billion was reflected in the operating liabilities. Net Paymentspayments to tax authorities related to income taxes were CHF 0.5 billion in 2009, down CHF 0.4 billion from a year earlier.the previous year.

Investing activities

Net cash flow used in investing activities was CHF 20.6 billion compared with an overall cash outflowflow used in investing activities of CHF 1.7 billion in 2008.

The net cash outflow for the purchase and disposal of property and equipment was CHF 0.7 billion. The net investment ofin financial investments available-for-sale was CHF 20.1 billion, an increase due to our strategic decision to rebalance our liquidity reserve which led to a shift from reverse repurchase agreements and trading portfolio. Disposals of subsidiaries and associates in 2009 generated a cash inflow of CHF 0.3 billion mainly related to the sale of UBS Pactual.

è

Refer to “Note 36 Business combinations” and “Note 38 Reorganizations and disposals” in the “Financial information” section of this report for more information about our investing activities
Financing activities

In 2009, financing activities generated net cash outflows of CHF 54.2 billion. This reflected the net repayment of money market paper of CHF 60.0 billion, the issuance of CHF 67.1 billion inof long-term debt and the long-term debt repayments, which totaled CHF 65.0 billion. That outflow was partly offset by inflows attributable to capital issuances of CHF 3.7 billion. In 2008, weUBS had a net cash outflow of CHF 5.6 billion from financing activities.

2008
On 31 December 2008, the level of cash and cash equivalents rose to CHF 179.7 billion, up CHF 30.6 billion from CHF 149.1 billion at the end of 2007.
Operating activities
Operating activities generated a cash inflow of CHF 77.0 billion in 2008 compared with a cash outflow of CHF 52.1 billion in 2007. Operating cash outflows (before changes in operating assets and liabilities and income taxes paid) totaled CHF 71.7 billion in 2008, a decrease of CHF 67.9 billion from 2007. Net profit decreased CHF 16.0 billion compared with 2007.
     Cash inflow of CHF 394.1 billion was generated by the net decrease in operating assets, while a cash outflow of CHF 244.5 billion was reflected in the operating liabilities. The increase in cash was used to fund the operating liabilities. Net payments to tax authorities were CHF 0.9 billion in 2008, down CHF 2.8 billion from a year earlier.
Investing activities
Net cash flow used in investing activities was CHF 1.7 billion compared with an overall cash inflow of CHF 2.8 billion in 2007. The net cash outflow for investments in subsidiaries and associates was CHF 1.5 billion, compared with CHF 2.3 billion in 2007, due to the acquisitions of Caisse Centrale de Réescompte Group and Vermogens Groep and a net increase in the purchase of property and equipment of CHF 1.1 billion. The net investment of financial investments available-for-sale was CHF 0.7 billion, whereas in 2007 divestments generated cash inflows of CHF 6.0 billion. Disposals of subsidiaries and associates in 2008 generated a cash inflow of CHF 1.7 billion.
Financing activities
In 2008, financing activities generated cash outflows of CHF 5.6 billion. This reflected the net repayment of money market paper of CHF 40.6 billion and the issuance of CHF 103.1 billion in long-term debt – the latter significantly outpacing long-term debt repayments, which totaled CHF 92.9 billion. That outflow was partly offset by inflows attributable to capital issuances of CHF 23.1 billion, including CHF 15.6 billion from rights issues and CHF 7.6 billion from MCNs. In 2007, UBS had a net cash inflow of CHF 74.6 billion from financing activities. The difference between the two years was mainly due to the fact that net long-term debt repayments and money market papers repaid increased by CHF 111.6 billion and were only partially compensated by the cash increase due to the capital issuances.



5253

Strategy, performance and responsibility

Strategy, performance and responsibility
Our employees

Our employees

We rely on the

The excellence, inspiration client focus and commitment of our employees are critical to implementing our business strategy and to meeting the needs of our clients. Our commitment to our employees is reflected in the investment we make in managing talent, and in the development of our performance-oriented culture and our leadership.

Our workforce

In 2010, we focused on enhancing integration across the firm and investing in our workforce by making a number of improvements to the way we managed our employees. For example, we instituted measures to further develop our performance-oriented culture and revised our Code of Business Conduct and Ethics (the Code) to clearly set out the principles and practices we expect all our employees to follow. Additionally, we launched a corporate university to provide more training opportunities and promote continuous development.

During 2010, our employees were responsible for helping to rebuild our businesses and were fully engaged in regaining client trust. We judiciously invested in recruiting, managing, training and retaining talented employees who have the skills, experience and drive to meet our clients’ needs and buildgrow our businesses. For employees, the breadth of our businesses, global

Internal mobility encourages integration, collaboration and business innovation, and supports individual career opportunities and a collaborative, performance-oriented culture offer a platform for individual success.
Investing in our employees
Competitive strength in the financial services industry depends, more than anything else, on the expertise, talent and commitment of a firm’s employees. Therefore, engaging, developing and retaining a high-impact workforce is a priority for UBS. In 2009, we began to rebuild our leadership ranks in every business division.development. We also continued to invest in our workforce to help ensure we have the range of skills and experience necessary to meet client needs now, and to grow our businesses when market conditions improve.
     Our largely decentralized Human Resources (HR) function was restructured in 2009 to be simpler, leaner and more concretely focused on business priorities. We also implemented several human capital-related initiatives in 2009continue to support employee mobility across regions and business divisions. In 2010, 489 employees moved to roles in a different region, compared with 910 in 2009. During the firm’s transformation, including measures to more closely align compensationcourse of the year, 1,290 employees transferred between business divisions, compared with sustainable performance and support appropriate and controlled risk taking.993 in 2009.
Employee turnover, or terminations as a percentage of average overall headcount, was 14.6% in 2010. Employee-initiated turnover was 8.9%, down 0.8% from 2009. In addition, the UBS Business University, a corporate learning and education platform, was launched in January 2010.
Our workforce
Personnelgeneral, employee levels decreased in most businessesstabilized over the course of the year, with the number of people employed on 31 December 20092010 at 65,233,64,617, down 12,550616 or 16%1% from year-end 2008. This was the result of personnel reductions in the various business divisions, as well as reductions from the sale of UBS Pactual, UBS’s India Service Centre and 56 branches in Wealth Management Americas. Consistent with the announcement made on 15 April 2009, we expect personnel numbers to be reduced to approximately 65,000 in 2010.2009. In 2009,2010, our personnelemployees worked in 57 countries, with approximately 37%36% of our staff employed in Switzerland,the Americas, 36% in the Americas, 16%Switzerland, 17% in Europe, the Middle East and Africa and 11% in Asia Pacific.
     Internal job mobility encourages integration, collaboration and business innovation, as well as individual career development. We continued to support employee transfers across regions and business divisions in 2009 where business needs justified the transfers. In 2009, 910 employees moved to roles in a different region, versus 1,285 in 2008. During the course of the year, 993 employees transferred between business divisions, versus 784 in 2008. Additionally, during 2009, we worked to redeploy employees who were dis-
placed in the firm’s restructuring process. Of all the new roles in 2009, approximately 12% were sourced through internal job postings, while another 39% were filled by employees who found new roles within the firm through their own networks. To further support career development and mobility, Individual Development Plans are encouraged for all staff. A global career management site was relaunched in early 2010 to integrate all of the firm’s career assessment, development and planning elements.
(BAR GRAPH)
(BAR GRAPH)


                 
Personnel by region 
  As of % change from 
Full-time equivalents 31.12.10  31.12.09  31.12.08  31.12.09 
 
Switzerland  23,284   24,050   26,406   (3)
 
UK  6,634   6,204   7,071   7 
 
Rest of Europe  4,122   4,145   4,817   (1)
 
Middle East /Africa  137   134   145   2 
 
USA  22,031   22,702   27,362   (3)
 
Rest of Americas  1,147   1,132   1,984   1 
 
Asia Pacific  7,263   6,865   9,998   6 
 
Total
  64,617   65,233   77,783   (1)
 
                 
Personnel by business division 
  As of % change from 
Full-time equivalents 31.12.10  31.12.09  31.12.08  31.12.09 
 
Wealth Management  15,663   15,408   17,910   2 
 
Retail & Corporate  12,089   12,140   13,105   0 
 
Wealth Management & Swiss Bank
  27,752   27,548   31,016   1 
 
Wealth Management Americas
  16,330   16,925   20,623   (4)
 
Global Asset Management
  3,481   3,471   3,914   0 
 
Investment Bank
  16,860   15,666   19,132   8 
 
Treasury activities and other corporate items
  194   1,624   3,098   (88)
 
Total
  64,617   65,233   77,783   (1)
 
of which: personnel managed centrally
  19,406   19,993   23,997   (3)
 

5354

Strategy, performance and responsibility

Recruiting new employees

We are committed to retaining and responsibility
Ourdeveloping highly qualified employees

Recruiting personnel
and to actively recruiting new talent to build our businesses. In 2009, we selectively recruited personnel in2010, our key marketsrecruiting efforts focused on meeting the growing demand for staff while also workingcontinuing to reduce costs, increasethe cost of hiring through increased emphasis on internal hiring, greater efficiency in recruiting operations and improvereductions in external recruiting costs. Positions we desire to fill increased 145% from 2009, with 136% growth in the rationumber of front-officepositions that were actually filled in 2010.
We strive to back-office personnel. Several strategic hires were madecreate a timely, professional and positive experience for candidates. In 2010, we filled 9,101 positions across the firm. Hiring was most visible in 2009 to accelerate and support our turnaround, including the Group CEO, Group COO, Head of Corporate Development, Head of Wealth Management Americas and senior-level hires in growth areas within the Investment Bank, with 2,360 positions filled in 2010. A top priority for 2010 was to hire experienced client and risk management functions.financial advisors across our strategic growth areas. In 2010, Wealth Management & Swiss Bank hired around 300 client advisors globally, while 278 experienced financial advisors were hired in Wealth Management Americas.
In 2009, 4332010, 773 university graduates joined UBS as part of our undergraduate and MBA graduate training programs. TheAn additional 988 interns were hired globally over the course of the year, while our apprenticeship program in Switzerland hired 300 apprentices287 apprentices.
Several new recruiting initiatives were launched in 2009.2010 to ensure there is a continuous and visible presence on our target campuses, consistent with our commitment to graduate hiring. We continue to provide unique educational opportunities for graduates that include business-specific activities.
Developing

Strengthening and sustaining aour diverse workforce

A workforce of individuals from widely different backgrounds, cultures and life experiences is indispensableessential in today’s global business environment. This is in part because having a diverse employee base and inclusive work environment increases the performance and engagement of our employees. In 2009,2010, our workforce was comprised of citizens from 150 countries.147 countries; the average age of our employees was 38 years; and the average length of employment with the firm was 8.6 years. Diversity in gender, ethnicity, age and other factors supportsupports first-hand understanding of regional markets, and segments and sensitivity to local customs. Competitivecustoms and awareness of other personal preferences. We believe that we also gain a competitive advantage is also achieved from more subtle differences in background, experience and thought. These elements provide the perspective from which our employees can anticipate needs and generate unique solutions for our increasingly diverse client base worldwide. Additionally,In the end, our long-term recovery will be supported bysuccess depends on equal employment opportunity and having the best people in the right roles,roles.
Building and diversity efforts help ensure that characteristics unrelated to performance do not get in the way.
     Achievingmaintaining a world-class workforce of high-talenthighly talented individuals demands an open-minded, inclusive and respectful workingwork-

ing culture, merit-based career advancement and a sense of individual contribution. The scope of our diversity initiatives is global, with regional teams translating this commitment into action by working with local business and HR leaders. In addition, more than 20 employee networks help to build cross-business relationships and strengthen our inclusive culture.

     Over the past number ofrecent years, we have promoted diversity in three stages: (i) raising basic awareness; (ii) integrating diversity into the employee lifecycleexperience through recruiting, perfor-
manceperformance management and retention; and (iii) working to ensure that diversity ultimately becomes a self-sustaining part of the workplace our culture.
The scope of our diversity strategy and initiatives is both global and regional. As part of our global top-down accountability strategy in 2010, senior management and Human Resources (HR) jointly developed divisional diversity goals relating to representation, retention and work environment/culture. While we have made significant progressit is premature to quantify accomplishments, particularly in recent years, our efforts to further strengthen our diversity in 2009 were sometimes impacted bythe first year after the firm’s restructuring, particularly when entirequantitative and qualitative methods will be used to monitor progress in 2011.
Regional diversity teams translate our global commitment into action by working with local business or support areasand HR leaders on business-aligned plans linked to regional talent strategies. In 2010, initiatives that were restructured or sold. In 2009, initiatives werepreviously launched in Europe, the US and several other regions to help createmade progress in creating a culture in which men and women thrive equally in their careers, where gender differences are a strength,an asset, and where different working styles and practices allowenable us to improve our service to clients. In one initiative piloted in the UK, France and Germany, we focused on hiring and developing talented professional women, working with them to create individual development plans, assigning sponsors and providing educational opportunities. Other regional diversity initiatives included a US Women’s Leadership Conference, where approximately 300 women employees participated in an all-day workshop focusing primarily on individual career development.

Gender distribution by geographical region1

(BAR GRAPH)
1 Calculated on the basis that a person (working full-time or part-time) is considered one headcount in this graph only. This accounts for the total UBS end-2010 employee number of 66,782 in this graph, which excludes staff from UBS card center, Hotel Seepark Thun, Wolfsberg and Widder Hotel.



55

Strategy, performance and responsibility
Our employees

                         
Gender distribution by employee category1 
  Officers Non-officers Total 
As of 31.12.10 Number  %  Number  %  Number  % 
 
Male  32,068   72.0   9,680   43.5   41,748   62.5 
 
Female  12,474   28.0   12,560   56.5   25,034   37.5 
 
Total  44,542   100.0   22,240   100.0   66,782   100.0 
 
1 Calculated on the basis that a person (working full-time or part-time) is considered one headcount (in this table only). This accounts for the total UBS end-2010 employee number of 66,782 in this table, which excludes staff from UBS card center, Hotel Seepark Thun, Wolfsberg and Hotel Widder.

Global network guidelines enable employees to set up or join employee networks / affinity groups in any of our operating regions. We have more than 20 employee networks to help build cross-business relationships and strengthen our inclusive culture.

Regarding the role of equal employment opportunity, our HR policies and processes have global coverage and outline our commitment to non-discrimination and equal opportunity for all employees.
In 2010, we received a 100% rating in the Human Rights Campaign Foundation’s 2010 Corporate Equality Index (US), Top 25 Most LGBT Friendly Corporations in the World in the International Gay & Lesbian Chamber of Commerce (IGLCC) Index 2010, the National Black MBA-WGC “Corporate Sponsor” award (US), the Equal Opportunity for Women in the Workplace Agency (EOWA) Employer of Choice For Women awardcitation (Australia), and UBS Japan was awarded “Qualified Employer who Supports the Tokyo Labor Bureau award for supportingGrowth of the growth of future generations. We also were shortlisted for the Disability Champion Award 2009 by the Employers’ Forum on Disability (UK)Future Generations” (through 2012).
(BAR GRAPH)


Gender distribution by employee category1
                         
 
As of 31.12.09 Officers  Non-officers  Total 
  Number  %  Number  %         
 
Male  31,557   72.8   10,537   43.6   42,094   62.3 
 
Female  11,817   27.2   13,607   56.4   25,424   37.7 
 
Total  43,374   100.0   24,144   100.0   67,518   100.0 
 
1 Calculated on the basis that a person (working full-time or part-time) is considered one headcount in this table only. This accounts for our total year-end 2009 employee number of 67,518 in this table. Normally, we express employee numbers in terms of full-time equivalents (FTEs), which is measured as a percentage of the standard hours normally worked by permanent full-time staff. When calculated according to FTEs, the year-end 2009 total is 65,233.

54

Managing performance

Strategy, performanceHelping employees perform at their highest level is a year-round process that plays a key role in strengthening our performance-oriented culture. We believe employees are better motivated, more committed and responsibility

Performance management
Effectivemore productive if they participate in effective performance management supports and enables the drive, commitment and consistent execution by our employees that is essential to achieving results for clients and UBS alike. We believe that the foundation for this is an ongoing employee-manager dialogue, with demonstrable performance as the basis for meritocracy. All employees therefore participate inprocesses. Since 1996, we have employed a year-round performance management process that assesses demonstrated results and behaviors and is supported by ongoing employee-manager dialogue.

Our approach to people management

(CHART)

In 2010, we made a number of critical changes to our performance management process. There are two fundamentally new elements: an evaluation process that clearly differentiates an employee’s performance relative to peers and allocates compensation accordingly, and significantly more transparent communication to employees about all of our performance management processes. Notably, an employee’s overall compensation will now be more transparently linked with the value of their individual achievements against specific objectives. This process supports staff development, links behaviorcontributions. These changes are expected to business goals and helps ensure employees have the skills required to meet their clients’ needs and implementdrive even stronger performance at all levels, enable better delivery of our strategic objectives. Assessments focus both on achievements and on behavioral expectations that are linked to corporate strategy and values, respectively. For example, evaluations for allultimately contribute to our long-term sustainable profitability. In 2010, 97% of eligible employees include an assessment of “client focus,” but the specific behaviors required vary significantly according to function, rank or role. The performanceparticipated in this process.
Performance management process for our most senior executives is essentially the same aseven more rigorous than for all other employees. AchievingInput from peers is required, and a more comprehensive evaluation is completed based on key achievements, business performance, risk management, leadership skill and specific financial targets plays a significant role; leadership is also explicitly reviewed.targets. In 2009,2010, we enhanced our performance monitoring atmanagement procedures for key risk takers/controllers. By the nature of their role, these individuals have been determined to be able to materially commit, deliver or control the firm’s resources and/or exert significant influence over UBS’s risk profile. We now ensure that a holistic evaluation is conducted by relevant control functions on an annual basis. A sample of senior management and key risk-taker performance objectives are also reviewed annually.
We have Group-wide ranks (Non-Officer, Authorized Officer, Associate Director, Director, Executive Director and Managing Director) and salary ranges that are applicable to all levels,employees. In 2010, we standardized our rank and further strengthenedrole classification model, with all business divisions and the Corporate Center following the same model. Global role profiles now form the basis for all of our focus on effective risk managementHR processes and enable us to create and implement more clearly defined career paths for all employees.

Compensation

We strive to provide our employees with market-competitive pay and incentives. Our approach recognizes the need to compensate individuals for their business performance within the overall performance management framework.context of increasingly competitive market conditions, a fast-changing commercial environment and evolving regulatory oversight. At the same time, ensuring the long-term success of the firm is our foremost priority.
Our compensation structure is designed to be appropriately balanced between fixed and variable elements. Emphasis is



56

Strategy, performance and responsibility

placed on the variable component as an incentive to excel and to foster a performance-driven culture, while supporting appropriate and controlled risk taking. Our Total Reward Principles are the foundation of our compensation programs. We always take a holistic view of employee compensation within a total reward framework that takes into account base salary, discretionary incentives and benefits.

è Refer to the “Compensation and shareholdings”“Compensation” section of this report for more information on compensation and incentives and employee share ownership

Employee share ownership

We support employee share ownership in principle because we believe that personal accountability for business actions and decisions can be encouraged through equity-based awards that vest and/or become unrestricted over time. In 2010, we changed some terms of Equity Plus, our voluntary equity-based program. Under the new program terms, employees are able to purchase shares at market price and receive one free share for every three shares purchased. These free shares vest within three years, subject to continued employment at UBS.
Leadership developmentOn 31 December 2010, current employees held an estimated 6% of UBS shares outstanding (including approximately 4% in unvested/blocked shares), based on all known share holdings from employee participation plans, personal holdings and learningindividual retirement plans. At the end of 2010, an estimated 55% of all employees held UBS shares, while an estimated 50% held UBS stock options.

Education and talent development

We take a structured approach to both leadership development and business education understanding that these capabilities are important factors in ensuring high-quality client serviceto ensure our employees have the knowledge and long-termskills required to meet our business success.needs and support our strategic goals. In August 2009, the GEB approved the formation ofJanuary 2010, we launched the UBS Business University, a global and largely virtual corporate university that brings all educational opportunities under one virtual umbrella. Creating a corporate university will significantly increase the efficiency ofintegrates our learning activities under one umbrella. The Business University effectively aligns all training and processes while eliminating duplication. It shouldeducation elements across the firm and promotes a culture of continuous development. Having one Group-wide learning organization also help to further reduceleverages the expertise within our various former learning organizations, increases efficiency, eliminates duplication and significantly reduces training costs, combinewhile focusing on positively impacting business results.

One of the Business University’s primary goals is to enhance the ability of our senior leaders and exploit the existing knowledge withinkey talent to build a unique and effective leadership culture and put our strategy into practice. A series of leadership development offerings, executive coaching and new hire programs equip our current and future leaders to deliver results to clients and colleagues.
A comprehensive business education offering is provided through more than 70 role-specific learning organizationspathways. These learning pathways consist of a structured sequence of activities that help ensure consistent training across similar job roles worldwide. Client-facing staff participate in specialized advisory and sales training that enables them to more effectively meet clients’ needs. They also engage in training that fosters cross-divisional collaboration so that clients can benefit from solutions reflecting all our business divisions. Programs like these help drive our one-firm approach and leverage best practices. The launchour unique product offerings.
All of our employees can access a broad range of professional development training, including learning modules on understanding, managing and controlling risk, general finance and mandatory legal and compliance topics.
In 2010, our employees participated in a total of 453,000 training experiences across all of the university in January 2010 marked an important step in aligning our leadership development and learning efforts across the firm.Business University’s offerings, averaging almost seven training experiences per employee.
     Leadership and business faculties are at the core of the new learning structure. The leadership faculty focuses on building leadership and managerial skills and on implementing a common leadership strategy and culture across the firm. The business faculty focuses on initiatives that are designed to grow employees’ business skills and competencies to best serve clients and manage risk. All learning pathways for business-critical functions include components from legal, risk and compliance, sales and advisory, and products and finance. A single global learning platform simplifies administration while allowing employees to plan their training and complete e-learning modules.
We also invest in talent development and succession planning for the most critical roles across the company.firm. An annual firm-wide talent review helps to identify and then build the skills and competencies of key talentemployees who are recognized to have leadership potential. In addition, potential successors for senior leadership roles are identified and tracked on a firm-wide basis.

Building a leadership culture

In 2010, the UBS Business University worked closely with the Group Executive Board (GEB) and the business divisions to put our new strategy into practice, and to further develop our leadership culture. The Business University also supported the design, development and roll out of our GEB-sponsored “Leading UBS forward” employee training program (which will continue into 2011). The program raises awareness and understanding of our strategy and identity, our values and our strategic principles. Face-to-face workshops open to all employees are led by “ambassadors” who are nominated senior employees from across the firm.



55

UBS values

Truth

Accuracy | Authenticity | Certainty
We behave with respect and integrity | We are accurate, realistic and accountable | We always act fairly and abide by the law

Clarity

Ease | Simplicity | Directness
We make it easy to do business with UBS | We are concise, precise and to the point | We are reliable and consistent

Performance

Achievement | Execution | Attainment
We will always give our best | We will perform to the highest professional standards | We will lead the market through superior service and execution



57

Strategy, performance and responsibility
Our employees

These sessions provide an opportunity for everyone to better understand key components of our strategy, commit to changing our culture, and embed our values in their daily work.

Commitment

Meeting the needs of clients is a core objective. Our corporate valuesobjective for UBS, and relationships based on respect, trust and mutual understanding are the foundation for our success. The Code sets out the principles and practices that enables usall employees are expected to befollow. It also underscores the critical importance of responsible corporate behavior. In 2010, we put in place a goodprocess to affirm the Code and provided training to all employees. We are committed to upholding our corporate citizenvalues of truth, clarity and responsible employer in addition to realizing long-term profitability and business growth. These valuesperformance. They are integrated into our corporate decision making and people management processes, as well asand are aimed at shaping the daily interactions amongactions of our employees.

Employee assistance

We are dedicated to assistingbeing an attractive and supportive employer. Employee benefits such as insurance, pension, retirement and time off are competitive in our local markets. We also offer additional, innovative benefits to employees with professionalwhere practical. One example is that we encourage and personal matters, andsupport our employees’ efforts to being a conscientious employer. Examples of this commitment can be foundvolunteer in the firm’s Employee Assistance Programs (EAPs),many communities in which we operate.
To help employees better manage life and in the COACH and Social Partnership Agreement for Employees in Switzerland (SOVIA CH)work issues, we offer employee assistance programs in Switzerland.
     EAPs are available(EAP) in a number of locations globally.locations. In the UK, the EAP program is a confidential 24/7 service that givesprovides access to specialist support including telephoneon topics such as finances, family, bereavement and face-to-face counseling. The overall UKlegal / consumer rights. A health and wellbeingwell-being program provides an on-site General Practitionergeneral practitioner, physiotherapist and dentist as well as occupational health services an on-site physiotherapist, on-site dentist and an emergency back-up childcare and eldercare facility.
In the US, the EAP, known as the Work / Life Assistance Program, provides around-the-clock counseling and referral services to employees and their families to assist them in resolving issues that may affect their health, personal life, or job performance. The program also provides information about work-life effectiveness and offers referral services for child care, prenatal care, summer care, adoption, academic services and adult care. We also provide on-site childcare at our Stamford, Connecticut site and emergency / back-up child care in most other US locations.
Employee assistance initiatives in Asia Pacific are generally conducted on a country-by-country basis. In Hong Kong, for example, consultants from an external EAP provider work with employees and their immediate family members on issues of work and life stress, family, mental health, personal development or other personal or work-related challenges.
In Switzerland, we offer professional assistance for current and retired employees, as well as family members, is provided through our HR Social Counseling and HR Retiree Services functions. Services include counseling for personal issues, difficulties in the workplace, sickness, financial difficulties and retirement. The EAP programAs an additional, complementary service for employees, an internal Ombudsman’s Office was opened in July 2010. HR Health Care considers local health and safety matters and coordinates the UBS Care Team. Work days

lost to accident or illness are tracked, with 18,915 and 103,635 days respectively accounted for in 2010.

In Switzerland, we have a long-standing initiative called COACH to help redeploy employees within UBS, or help them find jobs outside the firm in the US provides information, referrals and confidential counseling for adoption, child care, academic services, elder care and issues regarding work performance and personal conflicts.
     Theevent of a restructuring. Advisors in the COACH transfer and severance process helps employees in Switzerland who are displaced by restructuring. COACH advisors provide support and assistance in finding a new jobs,job by working closely with our internal recruitment center and outside employment services. During the COACH process, employees retain full salary and benefits, and financial assistance is available for job-related training, if needed.
     PersonnelStaff below the Director level of director are eligible to participatefor the Social Partnership Agreement for employees in the SOVIA CH program.Switzerland (SOVIA CH). SOVIA CH lays out the terms and conditions for implementing redundancies among employees whose jobs are subject to the Agreement on Conditions of Employment for Bank Staff. SOVIA CH governs the requirements and procedures for internal hiring, job transfers, and, when needed, severance. The aim is to implement necessary job cuts and operational changes in a responsible manner, making full use of our internal labor market, and to offer targeted, relevant support and career advice to these employees.

Employee representation

As part of our commitment to being a responsible employer, we partner with all of our employee representation bodies to create an active dialogue between employees and management. In 2010, we worked with the European works councils to implement changes in our performance management processes, entering into local consultations where appropriate.
The UBS Employee Forum (UBSEF) was established in 2002, and has representation from 18 countries across Europe, notably Austria, France, Germany, Luxembourg, Switzerland and the UK. The UBSEF facilitates the open exchange of views and information between employees and management on pan-European issues that have the potential to impact our regional performance, prospects orand operations, in Europe. Itand fulfills EU Directive 94/45 on the establishment of a European Works Council. Local forums also exist in a number of locations across Europe to address local issues such as health and safety, changes to workplace conditions, pension arrangements and consultation on collective redundancies and business transfers. The UK Employee Forum (UKEF),
In Switzerland, for example, focuses on our economic, financial and social activities in the UK which are of con-


UBS values
Truth
Accuracy | Authenticity | Certainty
We behave with respect and integrity | We are accurate, realistic and accountable | We always act fairly and abide by the law
Clarity
Ease | Simplicity | Directness
We make it easy to do business with UBS | We are concise, precise and to the point | We are reliable and consistent
Performance
Achievement | Execution | Attainment
We will always give our best | We will perform to the highest professional standards | We will lead the market through superior service and execution


56

Strategy, performance and responsibility

cern to UK employees. The UKEF may also be used for defining any workforce agreements affecting UK employees. It is made up of elected UK permanent employee representatives for each business area and division that has employees in the UK and appointed management representatives.
     In Switzerland, Employee Representation Committee (ERC) representatives partnerpartners with UBS management in the annual salary negotiations, and they are involvedrepresents employee interests on specific topics outlined in employee matters, including healththe collaboration and safety, social securityco-determination clauses of personnel regulations. It also fosters an open dialogue between employees and pension issues.management through a variety of channels and activities. ERC employee representatives are elected to represent the interests of employees whose work contracts are governed by Swiss law and the Agreement on Conditions of Employment for Bank Staff. The UK Employee Forum (UKEF), which is formed from elected representatives from all of our UK businesses and appointed management representatives, focuses on local economic, financial and social activities of concern to UK employees. It may also be used for defining workforce agreements affecting UK employees.
Collectively, the UBSEF, including the ERC also fosters an open dialogue between management and employees through a varietyUKEF, represents over 40% of channels and activities.our global workforce.
Select 2009 awards
Excellence and Innovation in Corporate Learning: Measurement (Corporate University Xchange Awards 2009)
Top 100 Graduate Employers
(The Times High Fliers 2007-2009)
Ranked No. 8 for “Best Places to Intern: 2009”
(Bloomberg BusinessWeek 2009)



5758

Strategy, performance and responsibility
Corporate responsibility
Strategy, performance and responsibility

Corporate responsibility

Responsibility and sustainability were

In 2010, we took strides to enhance our key themesperformance in 2009, as we continued to contend with the effectsall areas of the major financial crisis we experienced in 2007 and 2008. We have, as detailed elsewhere incorporate responsibility. An important foundation for this report, assumed responsibility to resolve key issues arising from the crisis.

In response to the lessons learned from the financial crisis and the latest international regulatory provisions that followed from the crisis, we have reviewed and revised important processes, pertaining to, in particular, corporate governance, risk management, compliance, personnel management (including compensation and performance measurement) and the centralization of responsibilities and competencies. These changes are highlighted byprogress was the revision of constitutional documents such as theour Code of Business Conduct & Ethics and Ethics. It underscores the UBS Values, which accentuate the crucial significancecritical importance of responsible corporate behavior, aand defines how we are to behave when dealing with our stakeholders.

In 2010, we made major steps in delivering on our commitment to our key driverprinciples, including our values of sustainable value for the companytruth, clarity, and performance; our strategic principles of reputation, integration, and performance; and our stakeholders.

     As a leading financial services firm, we are interested in the concerns and expectations of a diverse group of stakeholders, ranging from clients, investors and employees, to the communities in which we have a presence as well as our regulators. With regard to corporate responsibility, in 2009, weobjectives. We continued to address key stakeholder expectationsour societal commitments and concernsresponsibilities by contributing to the fight against money laundering, corruption and terrorist financing (AML), executing our environmental management program, implementing our human rights statement and by undertaking community investment activities. Under the guidance of the UBS Corporate Responsibility Committee (CRC), a BoDBoard of Directors (BoD) committee, various initiatives were instigated (includinginitiated pertaining to the drafting
implementation of the newour Code of Business Conduct & Ethics), with theirand Ethics (the Code). The CRC, which directed revisions to the Code in 2009, monitored its subsequent introduction and implementation continuing into 2010.
across the firm, including mandatory employee certification and web-based training processes.
è Refer to www.ubs.com/responsibility for more information on the contents of this section

Governance, strategy, and commitments

Corporate responsibility governance

The CRC is mandated to review and assess how we should meet the existing and evolving corporate responsibilitycontinually reviews stakeholders’ expectations of our stakeholders.firm with regard to corporate responsibility. Having assessed the potential consequences for the Group, the Committee recommends the appropriate actions to take in order to meet those ex-

pectations. The CRC thus supports the BoD’s efforts to ensure and advance our reputation for responsible corporate conduct. Headed by the Chairman of the BoD, the committee includes twoincluded three other BoD members. It is advised by a panel consisting of members of the GEBGroup Executive Board (GEB) and other senior managers. The members of the advisory panel participate in committee meetings and implement its recommendations.

     The financial crisis has emphasized that success depends upon behaving responsibly towards and interacting honestly and transparently with our stakeholders. In recent meetings,As a key element of its mandate, the CRC focused on lessons drawn from the crisisreviews and recommended actions on a range of topics accordingly.
     In addition to the mandate pertaining to the expectations ofoversees our stakeholders, the CRC also monitors and reviews our


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corporate responsibility policies and regulationsguidelines, as well as the implementation of our corporate responsibility activities and commitments. The GEB is responsible for the development of our Group and business division strategies, as well as implementing approved new strategies. These include strategies including those pertaining to corporate responsibility, while various committees or boards are concerned with tasks and activities pertaining to particular aspects of corporate responsibility.
One example is the Environmental & Human Rights Committee, which is made up of, among others, both Group and divisional environmental representatives. They are responsible for overseeingoversee the adoption of our environmental policy and for providingprovide guidance to the differentour business divisions in their adoption ofsupporting the “UBS Statement on Human Rights”. In 2009,2010, this committee reviewed a number of significant environmental and social issues, and also initiatedoversaw the revisiondevelopment of our environmental policy. Endorsed by the GEB, the revised policy was brought in line with the new Code of Business Conduct & Ethics of UBS and continues to embody our commitment to the environment. It seeks to ensure that we provide clients with a range of financial products and services that address environmental challenges, identify and manage environmental risks, and are continuing to improve our environmental performance and resource efficiency. The policy is implemented through a global environmental management system certified according to ISO 14001, the international environmental management standard.position on certain controversial activities (see below).
è Refer to www.ubs.com/environment for more information on our environmental and human rights governance



Corporate Responsibility at UBS

(CHART)

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Corporate responsibility

Led by the Head of Global AML Compliance, our efforts to fight money laundering, corruption and theterrorist financing of terrorism are supported by a network of expert global business teams. We are streamlining our policies and processes to enhance consistency between business divisions, as well as

(IMAGE)
to assess threats and risks within the business. We have developed extensive policies intended to prevent, detect and report money laundering, corruption and terrorist financing. These policies seek to protect the firm and our reputation from those who may intendbe intending to use UBS to legitimize their ill-gotten gains through UBS.
illicit assets.
è Refer to the discussion on combating financial crime below for more information on our AML activities

The global diversity team supports senior management and HR business partners in developing diversity-related strategies and goals for each business division. The implementation of these strategies and goals is monitored by the GEB. The global diversity team also coordinates regional efforts and integration into the HR process. Regional diversity heads, along with senior business managers, consider and decide ondesign diversity /and business-aligned plans that are linked to regional and divisional business and talent strategies. They are also responsibleprovide regional support for advising and supporting regional diversity boards, or their regional equivalent,divisional management in assessing the progress made on relevant issues. The global diversity team coordinatesobjectives. Additionally, regional effortsdiversity heads support our numerous employee networks, including the development and integration into the HR process.

coordination of diversity-related events which support regional diversity initiatives.
è Refer to the “Our employees” section of this report for more information on labor standards and diversity programs


Community affairs at UBS are founded on a global strategy defined by the GEB, and are based on a global community affairs guideline. Activities are governed by a central framework and regional guidelines and embedded in UBS’s regional structures. Every region has a dedicated community affairs team which coordinates charitable commitments by our firm and our employees. The Corporate Center ensures global coordination of these activities and also provides a central reporting structure to collate community investment data from across UBS as a whole.

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èRefer to the discussion on community investment below for more information on our charitable and related activities

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Corporate responsibility

External commitments and initiatives
In implementing environmental and social standards and conventions into our business practices, we benefit from participating in various external initiatives, including the UN Global Compact and its local network in Switzerland,Switzerland; the Wolfsberg Group,Group; the UNEP Finance Initiative and(UNEP FI); the UN Principles for Responsible Investment (UNPRI); and the VfU (Association for Environmental Management and Sustainability in Financial Institutes). In relationNovember 2010, we hosted the annual UNEP FI / VfU Roundtable, which took place in Switzerland for the first time. At the event, key sustainability topics such as climate change and human rights as well as related topics, ranging from environmental, social and governance (ESG) ratings to sustainability education at universities, were considered and discussed among representatives from financial institutions and various stakeholders.
In June 2010, UBS participated in the triennial UN Global Compact Leaders Summit which, chaired by the UN Secretary-General, brought together 1,200 representatives from companies and civil society, government and the United Nations to explore the role of responsible business in achieving more sustainable and inclusive markets.
As part of expanding our external commitments, we publicly acknowledgedconcluded a three-year partnership with the significanceSmith School of Enterprise and the looming climate crisis by supportingEnvironment at Oxford University. The partnership supports our work towards achieving our own environmental commitments, as well as enhances our focus on the Compact’s “Seal the Deal!” campaign calling for a fair, balanced and effective post-Kyoto climate agreement. In his testimonial for “Seal the Deal!”, UBS’s Chairmanclient-related aspects of the BoD confirmed a cornerstone of our climate change strategy in that we seek to help clients address risks and take advantage of opportunities presented by climate change and other global environmental challenges we face. In particular, we will continue to fund and participate in the transition to a low carbon economy.Smith School’s multi-year research project on low-carbon mobility.
     We also recently joined the Global Corporate Volunteer Council (G-CVC), an initiative of the International Association for Volunteer Efforts (IAVE). G-CVC is a network for companies with leading international employee volunteer programs, which aims to showcase best practices in corporate volunteering, and raise awareness of the impact of employee engagement in communities around the world.

External ratings, assurance and awards

Our performance and efforts were reflected in key external ratings and rankings, which take into account of sustainability issues. We were named an index component for the Dow Jones Sustainability Index (DJSI) World, and are a member of the FTSE4Good index series. We have been a continuous member of both indices



Our corporate responsibility governance process

(CHART)

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since their inception. With regard to the three dimensions ratedIn 2010, we increased our total score for the DJSI – economic, environmental, and social – we scored wellWorld, mainly due to substantially improved performance in the socialeconomic dimension and are one of the financial sector’s leadersan increased performance in the environmental dimension. A lower score

We also featured in the economic dimension – a refectionCarbon Disclosure Project’s Carbon Performance Leadership Index (CPLI) for 2010. The CPLI comprises 48 companies within the FTSE Global Equity Index Series (Global 500) that have demonstrated commitment to strategy, governance, stakeholder communications, and, above all, emissions reduction in their disclosures to the Carbon Disclosure Project. The companies featured in the CPLI have the distinction of a challenging period for us during 2008having the leading carbon performance scores among all Global 500 companies, indicating both high degrees of maturity in their climate change initiatives and 2009 – meant, however, that we dropped outachievement of their objectives. Our inclusion in the DJSI STOXX, a second Dow Jones Sustainability Index.
     We ranked amongCPLI reflects the leaders in a benchmark report on climate strategies within banks, as published by Sustainable Asset Management (SAM). The report shows that we are among the top 5% of banks, which have, compared with manysuccess of our peers, comprehensively integrated the issue of climate change into core business processes.strategy, which was launched in 2006.
In 1999, we were the first bank to obtain ISO 14001 certification for our worldwide environmental management system. The management system covers the entire scope of our products, services and in-house operations, which may give rise to an environmental impact. It is audited annually and re-certified every three years by SGS.SGS, a leading inspection, verification, testing and certification company. These comprehensive audits (24 audit days and 163 employees in the 2008 re-certification) verify that appropriate policies and processes are in place to manage environmental issues, and that they are executed in day-to-day practice. In 2009,2010, SGS confirmed
that a well-performing environmental management system, integrated in the organization and suitable for managing environmental risks and improving environmental performance on a continual basis, was put intois in place.
We took second placeearned top-three places in each of the key rankings for brokerage firms in the rankings for “Leading Brokerage Firm for Socially Responsible Investment (SRI) Research” in the 20092010 Thomson Reuters Extel and UKSIF Socially Responsible Investing & Sustainability Survey.Survey: “Socially Responsible Investment (SRI) Research”, “Long-Term Thematic Research”, “Corporate Governance Research”, “Renewable Energy Research”, and “Integrated Research on Climate Change”.
In May 2009,January 2010, our UK operations were awarded the Carbon Trust Standard for “reducing CO2 emissions year-on-year”. In the US, Environmental Protection Agency (EPA) awarded UBS Towerour building at One North Wacker Drive, Chicago, with the Energy Star Award for superior energy efficiency and environmental protection. In June 2009, our office building on 1285 Avenue of the Americas in New York received theCity was awarded Leadership in Energy and Environmental Design (LEED) for Existing Buildings CI Gold certification for their fit-out of the 12th floor. In Chicago, we improved our standard at 1 North Wacker to Silver Certification.certification.
Finally, in late 2009,2010, we received two awardsranked fourth globally and second in Switzerland in the annual CSR Online Awards. The global survey examines the websites of 91 DJSI member companies, to see how they are used as platforms for communicating corporate social responsibility. According to the survey results, our useadoption of the web as a strategic tool forweb-based reporting, where our corporate responsibility communications. We came second in the first global survey of “online CSR communications”website serves as our sustainability report, allows us to present vast and first in the national survey for Switzerland. The surveys confirmed the significance of our website for communicating withdetailed corporate social responsibility information to stakeholders who wish to gain a comprehensive understanding of our corporate responsibility efforts.
è Refer to the “Our employees” section of this report for information on diversity awards

Stakeholder dialogue and capacity building

Dialogue with external parties is an important contributor toin our understanding and approach to corporate responsibility. In 2009,2010, communications with experts and stakeholders covered a series of topics ranging from generalbroad (e.g. individual vs. corporate responsibility)implementation of the Code) to more specific (e.g. environmental and social issues, pertaining to particular industries).including, for instance, discussions with non-governmental organizations on the topic of human rights.
Input on the corporate responsibility strategy and activities we pursue areis also regularly sought from employees. An internal, cross-divisional network of experts plays a particularly important role, with ourits members providing critical input on stakeholder expectations and concerns. These contributions are provided to the CRC and add valuable features to the information gathered through other established monitoring channels.

Training and awareness raising

awareness-raising
Equally, to advance employees’ awareness of our corporate responsibility processes, activities, commitments and relevant topics, these are integrated into internalThrough education offerings and broader awareness raising activities.awareness-raising activities we ensure that our employees are aware of the importance of UBS’s social commitments. General information is published on our intranet and on the corporate responsibility website. In 2009, nearly 10,000 employees participated in2010, training and awareness-raising activities dealing withfocused on the Code (notably a mandatory web-based training), and ensured that all employees were made aware of the firm’s corporate responsibility.responsibility strategy and activities. Furthermore, 4,140some 10,000 employees participated in training on environmental issues, with 3,047over 8,600 receiving general education on our environmental policy and programs, and 1,093nearly 1,400 employees receiving spe-


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cialistspecialist training targeted atwithin their area of expertise and impact. Awareness of corporate responsibility was also raisedEmployee speaker sessions, exhibitions and lunchtime training sessions have been delivered in induction programs via an intranet-based presentation.all regions alongside specific technical training for the environmental team. Employees are also required to undergo regular training in AML-related issues; this may includeissues, which includes online training, awareness campaigns orand seminars.

Responsible banking

The financial crisis has shown that an overly dominant focus on short-term thinking resulted in too many compromises on quality and sustainability. A fundamental lesson has therefore been to re-focus on long-term thinking. While actions centered on the short-term undoubtedly have their place, the overall focus must be on sustainable banking.

We have set our focusare focused on earning the trust of our stakeholders, aiming for more sustainable earnings and creating long-term shareholder value. In ensuring that banking activities are undertaken in a responsible manner, and that products and services are suited to the needs and requirements of our clients, we aim to fulfill the heightened expectations of clients and stakeholders.

Combating financial crime

We believe it is of utmost importance to actively prevent potentially irresponsible or harmful actions. First and foremost, this means that our employees must uphold the law, adhere to relevant regulations, and behave in a responsible and principled manner.
In 2009,2010, we made forceful strides to ensure that all employees are conscious of their responsibilities and of the importance of abiding by the law in all of their actions. We have clearly laid out a solid foundation for this via new risk and compliance processes and the publication of a new Code of Business Conduct & Ethics in January 2010, and have also instigated an in-depth process of communicating to and with employees about their responsibilities.
     We continued to strengthen our efforts to both prevent and combat financial crime. TakingBy taking responsibility to preserve the integrity of the financial system, and our own operations, we are committed to assisting in the fight against money laundering, corruption and terrorist financing. We employ a rigorous risk-based approach to ensure our policies and procedures



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Corporate responsibility

correspond with those risks, and that relationships thatwhich are classified as higher risk are dealt with appropriately. We adhere to strict know-your-clients regulations, which do not, however, seek to undermine clients’ legitimate right to privacy. Ongoing due diligence and monitoring is undertaken to assist in the identification of suspicious activities, including the utilization ofusing advanced technology to assist in the identification of transaction patterns or unusual dealings which, if discovered, are promptly escalated to management or control functions.

As part of our extensive and ongoing efforts to prevent money laundering, corruption and terrorist financing, the internal global AML policies were reviewed in 2009, and enhancements to address more specific risks in relation to corruption and terrorist financing will bewere implemented globally in 2010. As part of our review of trade financing prohibitions regarding certain war materials, these were expanded from nuclear, biological and chemical weapons and anti-personnel land mines to include cluster bombs, depleted uranium for military purposes as well as components of all such weapons.
We are a founding member of the Wolfsberg Group, an association of 11 global banks established in 2000, which aimaims to develop financial services industry standards and related products for Know Your Customer,Know-Your-Customer, Anti-Money Laundering and Counter Terrorist Financing policies. The Group continues to update existing publications it has produced over the last nine years, and a revised version of the Trade Finance Principles will be published in 2011. Together with the other members of the Group, we havecontinue to engage actively engaged with the Financial Action Task Force (FATF), which is an inter-governmental body that develops and promotes national and international policies to combat money laundering and terrorist financing in the context of its consultation processes with the private sector. Special attention has been placed on developing a risk-based approach to money laundering, implementing guidelines around WeaponsAt the end of Mass Destruction Proliferation Finance,2010, the FATF announced that it is reviewing the 40+9 FATF Recommendations, and actively contributing to the revision of FATF Recommendation 9 (“Customer due diligenceWolfsberg Group will provide comments and record-keeping”),feedback within the consultation process, which states that financial institutions, intermediaries or other third parties must perform certain aspects of the customer due diligence process.will extend into early 2011.

Managing environmental and social risks

Environmental and social risk is broadly defined as the possibility that we encounterpotential reputational or financial damage as the result ofresulting from transactions, products, services or investments that involve a party associated with environmentally or socially sensitive activities, or that we are exposedpotential exposure to risks such asrelating to environmental liabilities, human rights infringements, or changes in regulations.

Our environmental policy

(CHART)

We seek to identify, manage and control these environmental and social risks in our business transactions. However, not all products and services we provide have the same risk potential:potential. Therefore, we therefore take a risk-based approach to environmental and social risk management, and regularly analyze our portfolio of products and services to assess their respective environmental and social risk potential. With our current business profile and operating environment, our potential for material risk is greater within the context of our lending, and capital markets and mergers businesses, as well as our direct real estate and infrastructure investments. For these products and services, we have designed procedures and tools for the identification, assessment and management of environmental and social risks. These procedures and tools are integrated intoin the business divisions’ standard risk management processes, such


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Corporate responsibility

as due diligence on transactions or investments, helping to ensureand ensuring that material environmental and social risks are identified, assessed and escalated in a timely fashion.
     For example, Wealth Management & Swiss Bank and Wealth Management Americas have introduced a standardized check to identify material environmental risk in their lending to all relevant clients. Transactions with significant environmental risk undergo a detailed environmental assessment. In 2009, nearly 100,000 lending transactions in Switzerland were subject to an environmental risk check,terms of which 24 were referred toapproval processes, the business division’s environmental risk competence centerdivisions are responsible for detailed assessment. In the Investment Bank, the environmental risk framework covers all banking activities including debt and equity underwriting, financial advisory services and lending. Investment Bank personnel identify potential environmental risks in the initial due diligence phase and alert the Investment Bank’s Environmental Advisory Group (EAG) in case of significant potential risks. Assessments by lawyers and / or external consultants are routinely sought for certain sectors and products. The EAG works with the relevant business and control functions to assess the risks, determine any mitigating measures and direct further due diligence as required (69 transactions in 2009). In this way, the relevant senior business committee may fully consider the potential environmental risk in the course of its review of the transaction and / or client. Global Asset Management has put environmental due diligence processes in place for their real estate and infrastructure funds. In 2009, all properties acquired or developed by Global Real Estate for their direct investment vehicles were subject to a thorough environmental due diligence process, in accordance with local regulations and internal best practice guidance. Similar processes are in operation in Infrastructure Asset Management.
     Some of our clients operate in sectors that are considered to be particularly environmentally and socially sensitive. To support the consistent identification and assessment of risk, and for determining whether the identified risks are acceptable (in 2010, the business divisions referred 194 transactions to their environmental and socialrisk functions for a detailed environmental assessment). In the event that any such identified risks (including human rights) acrossare also determined to create potential firm-wide reputational risk, they are escalated to the Group we have developed internal industry sector guidelines. The sector guidelines currently cover chemicals, oil and gas, utilities, infrastructure, forestry products and biofuels and metals and mining. These guidelines are being adopted by each of our business divisions in transactional and client due diligence processes. These guidelines provide an overview of key environmental and social issues that arise in the various life cycles of the sector, and summarize industry standards in dealing with them.representative for approval. We believe that our commitment to our clients and to society requires us to search for solutions whenever possible. We seek to help clients to move towards more environmentally and socially responsible practices by engaging with them. This can benefit their business and decrease financial and reputational risk. However, where engagement is not possible or successful, we may decline the transaction altogether.
Some of our clients operate in sectors characterized by ongoing environmental and social challenges. To support the consistent identification and assessment of such risks, we developed internal industry sector guidelines in 2009. The guidelines currently cover six sectors: chemicals, forestry products and biofuels, infrastructure, metals and mining, oil and gas, and utilities. These guidelines have been adopted by each of our business divisions in transactional and client due diligence processes.
In 2010, we decided to further strengthen our environmental and social risk management (including human rights) by identifying controversial activities where we will not do business, or only do business under stringent pre-established guidelines. Therefore we will not knowingly provide financial services to corporate clients, nor will we purchase goods or services from suppliers, where the use of proceeds, primary business activity, or acquisition target involves the following environmental and social risks:
Extractive industries, heavy infrastructure, forestry and plantations operations that risk severe environmental damage to or through:
–Endangered species of wild flora and fauna listed in Appendix 1 of the Convention on International Trade in Endangered Species;


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–High conservation value forests as defined by the six categories of the Forestry Stewardship Council (FSC);
–Illegal use of fire: uncontrolled and/or illegal use of fire for land clearance;
–Illegal logging including purchase of illegal harvested timber (logs or roundwood);
–Palm oil production unless a member in good standing of the Roundtable on Sustainable Palm Oil and actively seeking to enhance certification of its production;
–Wetlands: on the RAMSAR list; and
–World heritage sites as classified by UNESCO.

All commercial activities that engage in, or threaten:
–Child labor: according to ILO-conventions 138 (minimum age) and 182 (worst forms);
–Forced labor: according to ILO-convention 29;
–Indigenous peoples’ rights in accordance with IFC Performance Standard 7; and
–Diamond mining and trading of rough diamonds unless Kimberly Process certified.

We also require enhanced due diligence and approval processes in certain other areas, such as coal mining practices that use mountain top removal (MTR) in the US Appalachian Mountains as an extraction method. As part of this review, we assess to what extent companies rely on MTR mining for their revenue generation, and we need to be satisfied that the client is committed to reducing its exposure to this form of mining over time.

Finally, Global Asset Management decided not to invest in companies involved in the production of weapons banned under the 2010 Convention on Cluster Munitions and the 2008 Convention on Anti-Personnel Mines. The policy applies and has been implemented for its actively managed Switzerland and Luxemburg domiciled retail and institutional funds.

Products and services

Equally important to the management ofmanaging environmental and social issues is the provision ofproviding financial products and services, which help clients manage their environmentally and socially-related business opportunities and risks. We seek to help investors benefit from related market opportunities, and by integrating environmental and social considerations, where relevant, in research and investment analysis. This offering currently stretches across our businesses in wealth management, investment banking, asset management, retail, and commercial banking. It includes SRI funds, research and advisory services provided to private and institutional clients, access to the world’s capital markets for renewable energy firms and, in Switzerland, “eco” mortgages.
Taking environmental, social and governance (ESG)ESG issues into account in investment processes is of increasing interest to clients and consultants across all of our investment areas. InSince 2009, Global Asset Management took another step in demonstratinghas demonstrated commitment to ESG by becomingas a signatory to the UN Principles for Responsible Investment (UNPRI). UNPRI is a global investor initiative that is designed toThe Principles provide a voluntary framework forby which all investors can incorporate ESG is-

sues into their decision-making and ownership practices to better integrationalign their objectives with those of ESG issues into mainstream investment practice.society at large.
     Also in 2009, we decided to establishAs part of a new competence center withinholistic service offering, our Wealth Management & Swiss Bank and Wealth Management Americas business division, which drawsdivisions have established combined teams for philanthropy and expandsvalues-based investing/SRI. The teams provide thought leadership, advice, products and solutions to assist our clients and prospects in delivering positive change through their philanthropy and investments.
Building on our resourcesexisting SRI practice, we experienced increased client demand and expertise in the areas of philanthropyhave expanded our SRI offering by providing investment management and SRI. In a “one-stop” approach, the competence center will providescreening services. These services include sustainability-focused alternatives to conventional products, mission-related investing for donor-advised funds and private foundations, values-based portfolio management, such as mandate solutions for private clients with a unique opportunity to access a comprehensive rangestrong focus on sustainability across all asset classes, portfolio review and proposals for the integration of philanthropic, SRI and values-based wealth management services.sustainability into stock or bond selection.
Finally, our senior scientific advisor, Sir David King, continued to advise on all scientific matters with particular emphasis on global climate change and the challenges it poses to sustainable economic growth. Our clients benefit from Sir David’s expertise, and can get further insight into a variety of timely scientific topics through a quarterly series of science-focused bulletins. In 2009,2010, these bulletins included briefs on climate change biofuels and mobility. Sir David also discussed energy efficiency and low carbon technologies in the November issue of the UBS Investor’s Guide.air travel.

Investment products and advisory

In 2009,2010, we continued to expand ouroffer SRI offeringfunds and segregated mandates in response to growingsustained demand from a number of markets including the launch of two new SRI products, the UBS (Lux) Equity SICAV – Sustainable Global Leaders and the UBS (Lux) Equity SICAV – Climate Change. Ourglobally. The offering is diverse and includes products managed according to ESG criteria and theme-based approaches. The ESG offering includes an all cap SRI Global Equity strategy,approaches, which was among the first of its kind. The theme-based approach focusesare focused on innovative companies providing solutions to the challenges of climate change, water scarcity and demographic change. We offer a


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range of products focusing on each individual theme and the flagship UBS (Lux) Equity Fund Global Innovators, which spans all three themes.
Additionally, we offer customized client portfolios in the form of segregated mandates / mandates/institutional accounts based on “negative” screening, which exclude certain controversial stocks or sectors based on their negative social or environmental impact, as perceived by the client. Our global platform and investment research capabilities enable us to offer such tailor-made solutions. In addition to fund management services, we provide stock-broking and account management services to alternative energy and SRI fund managers.
Finally, we also offer SRI portfolio management solutions to selected private client segments. Thisthis offering combines internal and external SRI expertise and includes SRI-focused portfolios in Switzerland and SRI-managed accounts in the US, where ESG criteria are embedded into the fundamental investment process, or where clients have the ability to identify and exclude securities from ownership based on issue-oriented screens. This allows private clients to customize mandates to their particular social policy criteria. OurIn addition, our open architecture approach also allows clients to invest in SRI bond, equity and microfinance products from leading third-party providers.



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Corporate responsibility

In past years, we experienced increasing client demand for SRI and expanded our SRI product offering. As per 31 December 2009,2010, SRI invested assets had gone up towere CHF 26.8525.7 billion, representing 1.2% of our total invested assets.

Engagement and voting rights

The Global Asset Management SRI team in Switzerland engages in dialogue with companies represented in the SRI funds they manage. The analysts and portfolio managers provide positive and negative feedback on relevant ESG issues that may impact investment performance, as part of regular communication with corporate management teams. When controversial information on the company’s environmental and social performance is received, the SRI analysts contact the company and provide
management with a chance to demonstrate what measures have been taken to solve the issues. If the company can demonstrate how it is dealing with the problem, and what progress has already been achieved, an investment is possible. These engagement activities are, in addition to the positive screening processes, applied to the SRI funds.
We believe that voting rights have economic value and should be treated accordingly. In the UK, the asset management businessGlobal Asset Management, wherever possible, seeks to influence the corporate responsibility and corporate governance practices of the companies it invests in. Where we have been given the discretion to vote on behalf of our clients, we will exercise our delegated fiduciary responsibility by voting in a manner we believe will most favorably impact the value of their investments. Good corporate governance should, in the long term, lead towards both better corporate performance and improved shareholder value. As such, we expect board members of companies in which we have invested to act in the service of their shareholders, view themselves as stewards of the company, exercise appropriate judgment and practice diligent oversight of the management of the company.
In 2010, Global Asset Management in Switzerland launched UBS Voice, a free service enabling holders of Swiss institutional funds to express voting preferences ahead of the shareholders’ assembly of major Swiss corporations, to be used as additional input in the voting decision of the funds management company.

Research

Our SRI research teams analyze emerging socio-economicfocus on a range of ESG issues, with a view to understanding what impact developing secular trends such as demographics, resource constraints, and environmental trends and assess theirother potential impact on investment markets and companies’ share prices. Identifying material SRI issues is challenging. As such, three things help determine which environmental and social issues are critical: society’s perception of what is important;constraints might have upon the nature of the competitive pressures facing firms in an industry;sectors and how costs and benefits are (or will be) distributed between stakeholders.companies covered by our analysts.
Our SRI research teams were established in each of our business divisions to serve their respective clients. In the Investment Bank, the equity research team writes recommendations and reports for institutional investment clientslaunched major UBS publications on renewable energy, the carbon markets and the impact ofwater in 2006, climate change on companies in a wide range of sectors. SRI


Socially responsible investments invested assets1
                     
                  % change 
       For the year ended  from 
CHF billion, except where indicated
 GRI2  31.12.09   31.12.08   31.12.07   31.12.08 
 
UBS
      2,233   2,174   3,189   3 
 
UBS SRI products and mandates
                    
 
positive criteria  FS11   2.72   2.12   5.20   28 
 
exclusion criteria  FS11   22.44   14.05   33.33   60 
 
Third-party
  FS11   1.69   1.85   1.08   (9)
 
Total SRI invested assets
  FS11   26.853  18.03   39.61   49 
 
Proportion of total invested assets (%)4
      1.20%  0.83%  1.24%    
 
1 All figures are based on the level of knowledge as of January  2010. 2 Global Reporting Initiative (see also www.globalreporting.org). FS stands for the performance indicators defined in the GRI Financial Services Sector Supplement.  35.5% of reported assets have newly been included in 2009 due to adjustments in the reporting process and boundaries. 4 Total SRI / UBS’s invested assets.

Positive criteria:apply to the active selection of companies, focusing on how a company’s strategies, processes and products impact its financial success, the environment and society. This includes best-in-class or thematic investments.
Exclusion criteria:companies or sectors are excluded based on environmental, social or ethical criteria, for example, companies involved in weapons, tobacco, gambling, or companies with high negative environmental impacts. This also includes faith – based investing consistent with principles and values of a particular religion.
Third-party:Our open product platform gives clients access to socially responsible investment products from third-party providers. This includes both positive and exclusion criteria, and microfinance investments.



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Corporate responsibility

and sustainability research is provided by a dedicated team. In 2008, the SRI and sustainability research team initiated dedicated coverage of corporate governance issues2007, and corporate governance wasin 2008. In 2010, the themeteam launched the ESG Analyzer, a publication that helps clients take ESG issues into consideration at every stage of our 2009 SRI conference. In addition to publishing regular research reports on the topic, we have incorporated selected governance data within some of our research tools.investment process. In the asset management business, an internal SRI research team manages portfolios around themes such as climate change/energy efficiency, water and demographics. The SRI research team in our wealth management business conducts SRI research and provides advice to private clients on SRI investment solutions.
Client interest in some aspects of SRI – for instance climate change, demographics and water – has grown, and so has research coverage. The SRI teams regularly collaborate with analysts in other teams to write about emerging SRI themes, and relevant research content is regularly published by a growing number of specialists within the mainstream research effort.

Financing and advisory services

OurIn 2010, we announced the formation of the Renewable Energy and Cleantech Group (RECG) within the investment banking department and the environmental markets group (EMG) within global capital markets to further focus our efforts and build upon our successes in this important sector. RECG provides capital raising and strategic advisory services to renewable energy investment banking business arranges financing and provides strategic and financial advisory services forcleantech companies around the world, including those in the solar, wind wave and other renewable energybiofuels sectors. EMG will work with cleantech, utility, and industrial clients on the application of environmental policy analytics to financial decision making.
Since 2006, we have led over 35 financing transactions, raising more than USD 20 billion, and advised on over a dozen strategic



                     
Socially responsible investments invested assets1 
                  % change 
     For the year ended from 
CHF billion, except where indicated
 GRI2   31.12.10   31.12.09   31.12.08   31.12.09 
 
UBS
      2,152   2,233   2,174   (4)
 
UBS SRI products and mandates
                    
 
positive criteria  FS11   2.00   2.72   2.12   (36)
 
exclusion criteria  FS11   21.27   22.44   14.05   (6)
 
Third-party3
  FS11   2.40   1.69   1.85   30 
 
Total SRI invested assets
  FS11   25.674  26.85   18.03   (5)
 
Proportion of total invested assets (%)5
      1.19   1.20   0.83     
 
1The terms Socially Responsible Investing and Values-Based Investing are used interchangeably. All figures are based on the level of knowledge as of January 2011.  2 Global Reporting Initiative (see also www.globalreporting.org). FS stands for the Performance Indicators defined in thesethe GRI Financial Services Sector Supplement.  3 SRI products from third-party providers apply either positive or exclusion criteria or a combination thereof.  4 2.4% of reported assets have newly been included in 2010 due to adjustments in the reporting boundaries.  5 Total SRI / UBS’s invested assets.

Socially responsible investments:are products that consider environmental, social or ethical criteria alongside financial returns. SRI can take various forms, including positive screening, exclusion or engagement.
Positive criteria:apply to the active selection of companies, focusing on how a company’s strategies, processes and products impact its financial success, the environment and society. This includes best-in-class or thematic investments.
Exclusion criteria:one or several sectors raising over USD 24 billionare excluded based on environmental, social or ethical criteria, for example, companies involved in weapons, tobacco, gambling, or companies with high negative environmental impacts. This also includes faith-based investing consistent with principles and values of a particular religion.



64

Strategy, performance and responsibility

transactions for renewable energy companies worldwide. In 2009,and cleantech companies. During 2010, we acted as the joint lead underwriter and joint lead manager forled the USD 2.6 billion644 million initial public offering of the wind power developer and operator, China LongyuanDatang Renewable Power Group. With over 3,300 mega-watts of installed wind capacity as of September 2009, and targeting 6,500 mega-watts by the end of 2010, Longyuan Power is theCompany, China’s second largest wind power companygeneration company; advised Hanwha Chemical Corporation on their USD 370 million acquisition of a 49.9% stake in AsiaSolar-fun, one of the world’s leading manufacturers of solar modules; and led equity financings totaling USD 355 million for GT Solar, a major provider of manufacturing equipment to the fifth largest in the world.solar sector.

Carbon trading

In cap and trade emissions markets, such as the EU Emissions Trading Scheme (EU ETS), companies have annual caps on the amount of emissions their facilities are allowed to produce. Companies whothat are able to reduce their emissions below their cap have the ability to sell their unused quota to other entities, thereby creating an emissions market. Through the use of financialfinancial. instruments, we are able to help clients manage their exposure to the emissions markets. UBS Exchange Traded Derivatives (ETD) is an active member of the major emission exchanges in Europe and North America, and offers execution and full service clearing for contracts on EU ETS allowances, (EUA), UN Certified Emissions Reductions, (CER), Regional Greenhouse Gas Initiative allowances, Chicago Carbon Exchange (CCX) carbon financial instruments and permits for nitrogen oxide and sulfur dioxide.

Corporate responsibility in operations

We havecontinue to build on a long takenheritage of managing our internal environmental impact, which, since the 1970s, has focused on increasing energy efficiency, reducing consumption of paper and other resources, actively managing waste volumes and encouraging our employees to replace air travel with more sustainable options. Now delivering the program through a very keennetwork of global, regional and active interest in lowering thelocal environmental footprint of our operations and in our supply chain. Following the establishment of our first energy functional unit in the late 1970s,specialists, we were also the first Swiss bank to establish the position ofmanage an environmental officer in the 1980s. Years later, we persistmanagement system accredited to improve the environmental efficiency of our operations.

ISO 14001 and have greenhouse gas emissions data externally verified to ISO 14064.

Environmental and CO2 footprints

We directly impact the environment in a number of ways: our businesses consume electricity;electricity and fossil fuels; employees travel for business purposes, and use paper and generate waste in the course of their work; and offices require heating and cooling systems. Improving the use of these resources can reduce costs and enhance environmental performance; therefore, we have a series of measures to efficiently manage our environmental impact.

CO2 strategy and emission reduction

In February 2006, the GEB decided to set a Group-wide CO2emission reduction target of 40% below 2004 levels by 2012. We seek to achieve this target by:
– adopting in-house energy efficiency measures that reduce energy consumption in the buildings we operate;
– increasing the proportion of renewable energy used to avoidlimiting emissions at source; and

– offsetting and neutralizingoff setting CO2 emissions that cannot be reduced by other means.means (i.e. business air travel).
     These measures allowed us toAs a result, we further increase the share of renewable energy we purchase, and reducereduced our 20092010 CO2emissions, by 31% compared with an overall global reduction now reaching 33.5% below 2004 levels, another step toward achieving the 40% reduction target by 2012.
(BAR GRAPH)


64

Strategy, performance and responsibility
our 2012 target.

Energy consumption and efficiency
Energy consumption represents an important environmental impact area, and is the biggest contributor to our overall greenhouse gas emissions. In line with our wider business strategy, improvements in energy efficiency have helped to reduce both emissions and costs. Energy consumption is down 6% (59 gigawatt hours)year-on-year through a combination of tighterbuilding portfolio management, more dynamic building controls, data center and work station efficiency and reduced occupancy.improved employee housekeeping. Our IT-driven initiatives contributed significantly to these energy savings, most notably through a server consolidation program, and the server efficiency program.early phase of our Desktop Transformation Program that is deploying the latest in business PC hardware and software.

Renewable energy

In addition to our energy efficiency programs, we seek to improve theare reducing our use of carbon-intensive energy mix purchased by including a higherhigh proportion of renewable energy. The percentage of renewable energy and district heating purchases increased from 24%was 43% in 2004 to 51% in 2009. In Switzerland, for example, the percentage of electricity sourced from renewable sources increased to almost 100%. We also purchase renewable energy credits (RECs) in the US electricity markets, which accounted for 18% of our electricity consumption in the US in 2009.2010.

Business travel and offsetting

CO2 emissions
WeHaving experienced a significant reduction (approximately 40%) in business relatedbusiness-related travel in 2009 due to difficult market conditions and a focus on reducing costs. Although travelcosts, it is essential for a global financial services firmencouraging to see that, strongly believes in personalized client relationships, our previous investments in video conferencing infrastructure have enabled employees to substantially reduce travel for internal meetings.
     We have also seen a shift to high speed rail to replace short hauldespite an improving business landscape, employee air travel in Europe. Guidelines have also been developed2010 has remained low and not returned to help us reduce the environmental impact when running client events2008 levels. We continue to actively promote audio and conferences.
     Carbon emissions resulting from business travel have been offset as in previous years, and we partner with a number of specialists to carefully select global projects that match our criteria for delivering carbon offsets and contributing to the local community. In 2009, we selected projects in Brazil, India, Turkey and China.
Paper and waste
In 2006, we set firm-wide targets to reduce our paper and waste consumption. The goal of reducing paper consumption per employee by 5% for 2009 was exceeded significantly with the average amount of paper used per employee down 31% since 2006. This reduction was particularly strong in 2009, due to a combination of significantly lower publication volumes and the success of e-documents and double-sided printing initiatives.
     The share of paper from recycled sources is slightly under our goal of 20%, though our overall environmental footprint from paper use has been improved by increasing the share of Forest Stewardship Council (FSC) certified paper from 0% in 2006 to 17% in 2009.
     The waste recycling ratio remained at a low level of around 54%, partially due to the consequence of reduced paper consumption.
Supply chain management
Maintaining our infrastructure, ranging from offices across IT infrastructure to more mundane components such as stationery, would not be possible without the products and services from a substantial range of suppliers and vendors around the world. In 2009, we spent over CHF 6.3 billion purchasing a wide range of products and services from suppliers and contractors. We are committed to responsible supply management, and for many years have established processes to manage environmental and human rights issues in relevant areas of our supply chain. In line with our ambition to achieve continuous improvement in our supply chain, we have developed a guideline which provides Group-wide assistance on identifying, assessing and monitoring supplier practicesvideo conferencing, investing in the areaslatest ‘telepresence’ technology to further improve quality and user experience. Recognizing the benefits of humanface-to-face meetings in a sector where building lasting client relationships is essential, we

Our greenhouse gas (GHG) footprint

(BAR CHART)



65

Strategy, performance and labor rights, the environment and corruption. Examples of human rights issues that have been included are avoidance of child and forced labor, non-discrimination, remuneration, hours of work, freedom of association, humane treatment, and health and safety. In 2008, we started implementing this guideline and have gradually broadened its application to new contracts and contract renewals with suppliers over the course of 2009. Since its introduction, approximately 400 suppliers have been screened according to the guideline’s social and environmental criteria, and responsible supply chain require-

responsibility

Corporate responsibility

Environmental indicators per full-time employee

                  
                    
 Unit 2009 Trend 2008 2007  Unit  2010 Trend 2009 2008 
Direct and intermediate energy kWh / FTE  11,986  à 11,792 11,942  kWh / FTE  12,633 ì 11,986 11,792 
Business travel Pkm / FTE  7,016  â 10,281 12,685  Pkm / FTE  8,743 é 7,016 10,281 
Paper consumption kg / FTE  130  â 167 190  kg / FTE  119 î 130 167 
Waste kg / FTE  265  â 298 299  kg / FTE  251 î 265 298 
Water consumption m3 / FTE  31.9  á 28.1 26.7  m3 / FTE  33.3 è 31.9 28.1 
CO2 footprint
 t / FTE  3.12  à 3.07 3.43  t / FTE  3.66 é 3.12 3.07 
Legend:FTE = full-time employee; kWh = kilowatt-hour;kilowatt hour; Pkm = person kilometer; kg = kilogram; m3 = cubic meter; t = ton

65

Strategy, performancecontinue to encourage employees to blend travel and responsibility
Corporate responsibilitytechnology to optimize work-life balance and environmental impact.
For travel within Europe, we see a continued shift towards high speed rail travel in preference to air. The marketing and events team have adopted the environmental guidelines for client conferences and now consider the impact of delegate travel, hotels, venue features and catering as part of their logistics and planning.
Environmental indicators1
                         
      20092  20082 20072
           
      Absolute         Absolute Absolute
    GRI3  normalized4 Data quality5  Trend6  normalized4 normalized4
 
Total direct and intermediate energy consumption7
     957 GWh  ***   æ  1,016 GWh 981 GWh
 
Total direct energy consumption8
 EN3  132 GWh  **   à  127 GWh 130 GWh
 
natural gas      84.6%  **   à   83.3%  83.3%
 
heating oil      10.9%  ***   â   12.2%  12.1%
 
fuels (petrol, diesel, gas)      4.5%  ***   à   4.5%  4.6%
 
renewable energy (solar power, etc.)      0.05%  ***   á   0.03%  0.03%
 
Total intermediate energy purchased9
 EN4  825 GWh  ***   æ  890 GWh 851 GWh
 
electricity from gas-fired power stations      10.6%  **   à   11.7%  12.3%
 
electricity from oil-fired power stations      2.9%  ***   â   3.7%  4.2%
 
electricity from coal-fired power stations      17.5%  **   à   18.4%  18.6%
 
electricity from nuclear power stations      9.5%  **   æ   11.1%  13.6%
 
electricity from hydroelectric power stations      28.0%  ***   ä   25.8%  25.5%
 
electricity from other renewable resources      23.6%  ***   à   23.1%  22.0%
 
district heating      7.8%  ***   á   6.2%  3.8%
 
Share of renewable energy and district heating
     51%  ***   ä  48%  45%
 
Total business travel
 EN29  560 m Pkm  ***   â  886 m Pkm 1,042 m Pkm
 
rail travel10
      3.7%  **   à   3.5%  3.3%
 
road travel10
      1.0%  **   á   0.6%  0.5%
 
air travel      95.3%  ***   à   96.0%  96.2%
 
Number of flights (segments)
      258,396  ***   â  398,369  446,274
 
Total paper consumption
 EN1   10,349 t  ***   â  14,403 t  15,593 t
 
post-consumer recycled EN2   16.7%  ***   à   16.2%  10.5%
 
new fibers FSC11
      17.1%  ***   à   16.6%  10.7%
 
new fibers ECF + TCF11
      65.9%  ***   à   66.8%  78.6%
 
new fibers chlorine bleached      0.4%  **   ä   0.4%  0.2%
 
Total waste
 EN22   21,183 t  ***   â  25,644 t  24,589 t
 
valuable materials separated and recycled      54.4%  ***   à   54.6%  56.3%
 
incinerated      12.5%  ***   â   14.3%  15.8%
 
landfilled      33.1%  **   à   31.1%  27.9%
 
Total water consumption
 EN8   2.55 m m3  **   à   2.42 m m3  2.19 m m3
 
Greenhouse Gas (GHG) Emissions in CO2e
                        
 
Direct GHG emissions (Scope 1)12
  EN16   25,723 t  ***   à   26,490 t  26,701 t
 
Gross indirect GHG emissions (Gross Scope 2)12
  EN16   298,338 t  **   à   313,582 t  311,808 t
 
Gross other indirect GHG emissions (Gross Scope 3)12
  EN17   87,867 t  ***   â   129,364 t  149,323 t
 
Total Gross GHG Emissions
      411,928 t  ***   â   469,436 t  487,832 t
 
GHG reductions from renewable energy13
      99,248 t  ***   æ   109,238 t  93,127 t
 
CO2e offsets (business air travel)14
      63,579 t  ***   â   96,000 t  113,000
 
Total Net GHG Emissions (GHG Footprint)15
      249,101 t  ***   æ   264,197 t  281,705 t
 
Legend:GWh = giga watt hour; Pkm = person kilometer; t = ton; m3 = cubic meter; m = million;Once again in 2010, we have offset CO2e = CO2 equivalents
1 All figures are based on the level of knowledge as of January 2010.  2 Reporting period: 2009 (1 July 2008–30 June 2009), 2008 (1 July 2007–30 June 2008), 2007 (1 July 2006–30 June 2007)  3 Global Reporting Initiative (see alsowww.globalreporting.org). EN stands for the Environmental Performance Indicators as defined in the GRI.  4 Non-significant discrepancies emissions resulting from 100% are possible due to roundings.  5 Specifies the estimated reliability of the aggregated data and corresponds approximately to the following uncertainty (confidence level 95%): up to 5%–***, up to 15%–**, up to 30%–*. Uncertainty is the likely difference between a reported valuebusiness travel. Working with reputable intermediaries and a real value.  6 Trend: atpanel of internal specialists, we select projects which meet our carbon volume requirements while providing positive community benefits. Schemes selected include a *** / ** / * data quality, the respective trend is stable (à) if the variance equals 5 / 10 / 15%, low decreasing / increasing (æ,ä) if it equals 10 / 20 / 30%gold standard wind power project in Turkey and decreasing / increasing if the variance is bigger than 10 / 20 / 30% (a hydro power project in Brazil.

âPaper and waste,á).  7 Refers

We are making a conscious effort to energy consumed within the operational boundaries of UBS.  8 Refers to primary energy purchased which is consumed within the operational boundaries of UBS (oil, gas, fuels).  9 Refers to energy purchased that is produced by converting primary energy and consumed within the operational boundaries of UBS (electricity and district heating).  10 Rail and road travel: Switzerland only.  11 Paper produced from new fibers. FSC stands for Forest Stewardship Council, ECF for Elementary Chlorine Free and TCF for Totally Chlorine Free.  12 Refers to ISO 14064 and the “GHG (greenhouse gas) protocol initiative” (www.ghgprotocol.org), the international standards for GHG reporting: scope 1 accounts for direct GHG emissions by UBS; gross scope 2 accounts for indirect GHG emissions associated with the generation of imported / purchased electricity (grid average emission factor), heat or steam; gross scope 3 accounts for other indirect GHG emissions associated with business travel,continuously reduce our paper consumption and waste disposal.  13 GHG savingsgeneration. Double sided printing and copying is now default in many of our offices and, combined with an ongoing shift towards the distribution of electronic documents, has resulted in a reduction in paper used per employee of 37% since 2006. The share of office paper from Forest Stewardship Council or recycled sources has increased to 43%, with a new target for this to exceed 50% by consuming electricitythe end of 2012. The waste recycling ratio remained flat at 54%. The implementation of bin-less offices in many larger locations will contribute to achieving our ambitious 2012 target of 70%.

Supply chain management

In 2010, we spent over CHF 7.3 billion purchasing products and services ranging from renewable sources.  14 Offsets from third-party GHG reduction projects measuredoffice maintenance across IT infrastructure to components such as stationery. Responsible supply chain management (RSCM) principles continue to embed UBS ethics and values with our suppliers, contractors, service partners and project teams. As part of this commitment we are continuing to improve our ability to identify, assess and monitor supplier practices in CO2 equivalents (CO2e). These offsets neutralize GHG emission from our business air travel.  15 GHG footprint equals gross GHG emissions minus GHG reductions from renewable energythe areas of human and CO2e offsets.

66

Strategy, performancelabor rights, the environment and responsibility

mentscorruption. In 2010, 265 suppliers were screened according to social and environmental criteria, 114 procurement and sourcing officers were trained, and responsible supply chain requirements were included in the arrangement with relevant suppliers who were awarded contracts. Also since 2008, approximately 260 procurementin 2010, we integrated RSCM principles into our global supply chain policy and sourcing officers have been trained oninto the relevance and application of the new guideline. The centralization of all units performing supply management activities withincentralized Supply & Demand Management (SDM) in the Corporate Center in 2009 further contributed to a stringent implementation of the guideline when interacting with our suppliers.organization.

Community investment

In 2009, we continued

We are continuing the well-established tradition of supporting the advancement and empowerment of organizations and individuals within the communities we do business in. From an early focus on direct cash donations, we have progressed to a position where our community investment program encompasses employee volunteering, matched-giving schemes, in-kind donations, disaster relief efforts and/and / or partnerships with community groups, educational institutions and cultural organizations in all of our business regions.

Community affairs

Community affairs at UBS are founded on a global strategy defined by the GEB, and are based on a global community affairs guideline. Activities are governed in a decentralized fashion. Every region has a dedicated community affairs team which reports directly to senior management. With regional guidelines in place, the teams coordinate charitable commitments by our firm and our employees. The Corporate Center ensures global coordination of these activities and also provides a central reporting structure to collate community investment data from across UBS as a whole.
In 2009, we set clear savings goals across the firm; these also had an impact on the activities of the regional community affairs functions. Direct2010, direct cash donations by UBS and our affiliated foundations to carefully selected non-profit partner organizations and charities were lower than in previous years totaling nearlytotaled CHF 27 million,27.6 million. These donations were assigned, primarily, to our continuing community affairsCommunity Affairs key themes, “Empower-
ment“Empowerment through Education” and “Building Stronger Communities”, with some contributions to other activities, includingin particular disaster relief. In response to the devastating earthquake in Haiti, UBS and its employees donated over CHF 3 million to a number of organizations providing disaster relief. The funds have been used to rebuild schools and hospitals, as well as provide basic needs to many Haitians. These donations combined with other significant activities, notably the volunteering activities of employees, have continued to provide substantial benefit to projects and people around the world (as highlighted in the examples given on the next page)below).
Across all business regions, our employees continue to play a very active role in our community investment efforts, in particular, through their volunteering activities. In 2009, more than 9,2002010, over 11,300 employees spent almost 78,800nearly 81,000 hours volunteering. We support their commitment by offering up to two working days a year for volunteering efforts, and also match employee donations to selected charities.
In Switzerland, our community investment efforts are also advanced by the UBS Culture Foundation, the UBS Foundation for Social Issues and Education, and the association A Helping Hand from UBS Employees. In 2009,2010, these organizations have again made valuable contributions to important societalsocial causes, including fostering humanities and the creative arts, supporting communities in need, and helping disabled and disadvantaged people.



66

Strategy, performance and responsibility

Environmental indicators1

                         
 
           20102       20092  20082
 
      Absolute  Data      Absolute  Absolute 
  GRI3  normalized4  quality5  Trend6  normalized4  normalized4 
 
Total direct and intermediate energy consumption7
     859 GWh   ***   ê  957 GWh  1,016 GWh 
 
Total direct energy consumption8
  EN3  137 GWh   **   è  132 GWh  127 GWh 
 
natural gas      82.6%   **   è   84.6%   83.3% 
 
heating oil      15.0%  ***   é   10.9%   12.2% 
 
fuels (petrol, diesel, gas)      2.3%   ***  ê   4.5%   4.5% 
 
renewable energy (solar power, etc.)      0.02%   ***  ê   0.05%   0.03% 
 
Total intermediate energy purchased9
  EN4  722 GWh   ***  ê  825 GWh  890 GWh 
 
electricity from gas-fired power stations      16.3%   **   é   10.6%   11.7% 
 
electricity from oil-fired power stations      4.1%   ***   é   2.9%   3.7% 
 
electricity from coal-fired power stations      17.1%   **   è   17.5%   18.4% 
 
electricity from nuclear power stations      11.5%   **   é   9.5%   11.1% 
 
electricity from hydroelectric power stations      29.1%   ***   è   28.0%   25.8% 
 
electricity from other renewable resources      13.5%   ***   ê   23.6%   23.1% 
 
district heating      8.5%   ***   ì   7.8%   6.2% 
 
Share of renewable energy and district heating
      43%   ***   ê   51%   48% 
 
Total business travel
  EN29  595 m Pkm  ***   ì  560 m Pkm  886 m Pkm 
 
rail travel10
      1.9%  ***   ê   3.7%   3.5% 
 
road travel10
      0.5%   **   ê   1.0%   0.6% 
 
air travel      97.6%   ***   è   95.3%   96.0% 
 
Number of flights (segments)
      258,766   ***   è   258,396   398,369 
 
Total paper consumption
  EN1   8,076 t   ***   ê   10,349 t   14,403 t 
 
post-consumer recycled  EN2   21.9%   ***   é   16.7%   16.2% 
 
new fibers FSC11
      20.9%   ***   é   17.1%   16.6% 
 
new fibers ECF +TCF11
      57.0%   ***   ê   65.9%   66.8% 
 
new fibers chlorine bleached      0.3%   **   ê   0.4%   0.4% 
 
Total waste
  EN22   17,053 t   ***   ê   21,183 t   25,644 t 
 
valuable materials separated and recycled      53.7%   ***   è   54.4%   54.6% 
 
incinerated      18.1%   ***   é   12.5%   14.3% 
 
landfilled      28.2%   **   î   33.1%   31.1% 
 
Total water consumption
  EN8   2.27 m m3   **   î   2.55 m m3  2.42 m m3
 
Greenhouse Gas (GHG) Emissions in CO2e
                        
 
Direct GHG emissions (Scope 1)12
  EN16   27,153 t   **   è   25,723 t   26,490 t 
 
Gross indirect GHG emissions (Gross Scope 2)12
  EN16   253,556 t   ***   ê   298,338 t   313,582 t 
 
Gross other indirect GHG emissions (Gross Scope 3)12
 EN17   89,957 t   ***   è   87,867 t   129,364 t 
 
Total Gross GHG Emissions
      370,666 t   ***   ê   411,928 t   469,436 t 
 
GHG reductions from renewable energy13
      61,889 t   ***   ê   99,248 t   109,238 t 
 
CO2e offsets (business air travel)14
      69,152 t   ***   ì   63,579 t   96,000 t 
 
Total Net GHG Emissions (GHG Footprint)15
      239,624 t   ***   è   249,101 t   264,197 t 
 
Legend:GWh = gigawatt hour; Pkm = person kilometer; t = ton; m3 = cubic meter; m = million; CO2e = CO2 equivalents

1 All figures are based on the level of knowledge as of January 2011.2 Reporting period: 2010 (1 July 2009–30 June 2010), 2009 (1 July 2008–30 June 2009), 2008 (1 July 2007–30 June 2008).3 Global Reporting Initiative (see also www.globalreporting.org). EN stands for the Environmental Performance Indicators as defined in the GRI.4 Non-significant discrepancies from 100% are possible due to roundings.5 Specifies the estimated reliability of the aggregated data and corresponds approximately to the following uncertainty (confidence level 95%): up to 5%–***, up to 15%–**, up to 30%–*. Uncertainty is the likely difference between a reported value and a real value.6 Trend: at a ***/**/* data quality, the respective trend is stable (è) if the variance equals 5/10/15%, low decreasing/increasing (î,ì) if it equals 10/20/30% and decreasing/increasing if the variance is bigger than 10/20/30% (é,ê).7 Refers to energy consumed within the operational boundaries of UBS.8 Refers to primary energy purchased which is consumed within the operational boundaries of UBS (oil, gas, fuels).9 Refers to energy purchased that is produced by converting primary energy and consumed within the operational boundaries of UBS (electricity and district heating).10 Rail and road travel: Switzerland only.11 Paper produced from new fibers. FSC stands for Forest Stewardship Council, ECF for Elementary Chlorine Free and TCF for Totally Chlorine Free.12 Refers to ISO 14064 and the “GHG (greenhouse gas) Protocol Initiative” (www.ghgprotocol.org), the international standards for GHG reporting: scope 1 accounts for direct GHG emissions by UBS; gross scope 2 accounts for indirect GHG emissions associated with the generation of imported/purchased electricity (grid average emission factor), heat or steam; gross scope 3 accounts for other indirect GHG emissions associated with business travel, paper consumption and waste disposal.13 GHG savings by consuming electricity from renewable sources.14 Offsets from third-party GHG reduction projects measured in CO2 equivalents (CO2e). These offsets neutralize GHG emission from our business air travel.15 GHG footprint equals gross GHG emissions minus GHG reductions from renewable energy and CO2e offsets.

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Strategy, performance and responsibility
Corporate responsibility

Client foundation

Charitable organizations and projects across the globe —– usually in regions withoutwhere UBS does not maintain a UBS business presence —– also benefit from the dynamic activitiessupport of our client foundation, the UBS Optimus Foundation, a nonprofit charitable organization which invests donations intooffers UBS clients a numberbroad range of programs and organizations. The foundation focuses onoptions for engaging in humanitarian activities. In 2010, the key themes of “Education and Child Protection” and “Global Health Research”. The UBS Optimus foundation celebrated itsFoundation’s tenth anniversary atyear, Optimus can look back with justifiable pride on a success story of growth and continuous development. Now one of Switzerland’s largest charitable foun-

dations, it has contributed over CHF 80 million to more than 170 projects in over 60 countries. All of the end of 2009, and proudly looked back at a successful year inprojects which it donated CHF 22 million in supportsupports are dedicated to improving the lives of 93 projects and two major initiatives in Africa, Asia Pacific, Europe and North and South America. Over the past ten years, the UBS Optimus Foundation has supported 146 projects in 63 countries with a total of more than CHF 79 million. For its anniversary year, it has set itself ambitious targets to further expand the benefits it extends to charitable projectschildren around the globe.

world. Employing a sophisticated funding strategy, it plays a key role in bringing about positive social change in the areas which it targets: “global health” and “education and protection”. As UBS bears all the administrative costs related to Optimus, clients can be sure that 100% of every donation they make goes directly to the projects themselves.



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Strategy, performance and responsibility
Corporate responsibility

 
Examples of UBSUBS’s community investment activities across the globe

Americas (I):– In 2010, we launched two unique programs. UBS brought the Big Apple Circus to Stamford, Connecticut. ThePower Lunchliteracy mentorship program celebrates non-profit circus is committed to invigorating the communities it serves by sharing the joys of a decade long partnership. Over the past ten years over 1,400classical circus, and providing a range of community and educational outreach programs to local hospitals and schools. UBS clients, employees from UBS Americas have volunteered from sixty to ninety minutes each week to read aloud to at-risk public elementary school students. Studies have shown that student-reading skills are enhanced through the use of mentor relationships. The program began with Everybody Wins, a non-profit organization based in New York City, and has served children in Chicago, IL, Jersey City, NJ, Los Angeles, CA, New York, NY, Stamford, CTtheir friends and Weehawken, NJ. Over 1,600 students have participated in the reading programfamilies, as well as local residents, enjoyed 25 performances over the last decade; they have beensummer. Leveraging our long-standing Art Basel Miami Beach (ABMB) sponsorship, we launched miART, an art education program created to support the recipientslocal Miami community year-round. MiART engaged more than 150 middle school students in ABMB through interactive activities, and will bring art education to underserved youth artists through a year-long mentoring program. The creation of approximately 50,000 volunteer hours. “The fact thata fundraising website to benefit miART and art supply drives in local UBS supports these programs means a lot to me, and helps connect me to the firm and to the UBS culture”, says Maryellen Frank, a UBS employee who has participated inPower Lunchsince its inception. “I have been here almost 20 years, and the constant connection between the firm and the community is something to be very proud of.”
Americas (II): In October 2009, Wealth Management Americas organized an Employee Giving Campaign, a new addition to its Building Brighter Futures program, which aims to make schools and other education-based community organizations into dynamic learning centers. The primary goal of the Campaign was to raise funds for educational organizationsbranches provided employees with the firm matching employee donations dollar for dollar, and 29 charities were nominated byopportunity to support this program.

One of our employees. By making a significant monetary contribution (nearly USD 600,000) towardssignature volunteer efforts is the enhancement of school buildings, and the gathering

of various resources to offer students the chance to achieve success, we have made a difference in the lives of the children and families involved. October 2009 was alsoannual Building Brighter Futures’ Community Engagement Month. Its goal is to cultivate school and civic collaboration to help transform schools or education-focused organizations into dynamic learning centers. Through our partnershipMonth in October in the US. More than 25 communities participated in 2010, with the Hands On Network, a non-profit organization focusing ongoal of supporting community service, over 1,100needs in the areas of education, the economy and the environment. Over 1,300 UBS employees participated in locally-driven volunteer activities. SinceAdditionally, we have longstanding volunteer partnerships with the launch of Community Engagement MonthSpecial Olympics and the Power Lunch reading program, which operates in 2007, over 5,700 employees, their friendsfour US cities. According to Maryellen Frank, an eleven-year veteran Power Lunch volunteer, “there are some days when it

doesn’t feel possible to break away from the office and their families have volunteered acrosschange your focus, but when you walk into the country.

room and your young reading partner’s face lights up, it’s all worthwhile. Spending that hour truly giving yourself has its own benefits. I usually return to the desk refreshed and ready for action.”

Asia Pacific: In order to maximize the impact of– Building upon our grantsground-breaking Community Leadership Experience, developed in partnership with Charities Aid Foundation India in 2008, UBS subsequently developed and launched a program for Singapore and Tokyo, we are now workingnon-profit sector leaders in partnership with the Community FoundationCentre for Non-Profit Leadership in 2009. Now in its second year, the Experience program combines a two-day residential retreat workshop with one-to-one partnering between UBS senior executives and executives of Singaporenon-governmental organizations. The opportunity for both sets of leaders to interact and Social Venture Partners Tokyo. With both partners, we are ableshare experiences has proven to strengthen the capacity of community organizations to meet local needs and provide corporate philanthropic leadership. Through the creation ofbe highly successful, resulting in a donor-advised fund in Singapore in 2009, we will continue to support our existing community partners. “UBS’s leadership in corporate responsibility in Singapore is a great example for other corporations”, says Stanley Tan, Chairmandeeper understanding of the Community Foundationchallenges faced by the community in Singapore. Additional workshops focusing on common human resource issues, such as talent recruitment and retention, have also been organized as part of Singapore. “Their strategic approach to the commitment of funds and employee skills are a tremendous investment in our community.” In Tokyo, promising social entrepreneurs have the opportunity to apply for funding through a competitive process, with the successful projects receiving strategic business counseling as well as funding.

Experience program.

Europe, Middle East and Africa:Africa

– Throughout the region, we continue to support education and regeneration efforts, particularly in areas close to where we conduct our business. In MilanPoland, over 75% of staff were engaged in support for low income and Paris, employees are involveddisadvantaged communities, and entered into an innovative arrangement with col-

leagues in projects supportingLuxembourg to increase our contribution. In the development and educationUK, this year the firm was amongst a very small number of young adults from disadvantaged communities. In London, our efforts were recognized by thefirms to receive three Business in the Community Example of Excellence AwardNational Big Tick Awards for Project Shoreditch, a targeted and collaborative regeneration partnership involving UBS, Deutsche Bank, Linklaters, and community partners East London Business Alliance and Shoreditch Trust. Project Shoreditch has placed over 5,000 employee volunteers with organizations in the Shoreditch area, and leveraged over GBP 450,000 in in-kind support. Carsten Kengeter, co-CEO of the Investment Bank, joined a group of 30 colleagues to take part in an employee volunteering project in Shoreditch, working with students at The Bridge Academy, Hackney,our Community Affairs program; our flagship EMEA Community Affairs partnership raising student aspirations by taking part in practical and group work.

Switzerland: Young Enterprise Switzerland (YES) develops and supervises practice-oriented economic education programs for students, with the aimBridge Academy – a local secondary school sponsored by UBS; and our employee volunteering regeneration partnership through Project Shoreditch (in Hackney, East London). In addition, a long-standing community partnership dating back to 1992 was awarded the prestigious Dragon Award by the Lord Mayor of connectingLondon. The partnership reflects UBS’s overall commitment to corporate responsibility, encompassing financial contributions, employee expertise, capacity building and creating links to other community initiatives. It has led to a significant impact on the economy with schools.of a disadvantaged area of the UK, encouraging inward investment of GBP 1.5 million.

Switzerland– In October, more than 180 employees participated in the traditional Finance Forum sponsored walk on the shores of Lake Zurich. They were joined by 1,100 colleagues from other Swiss financial and IT firms. With CHF 50,000 raised in just two hours, our employees achieved the highest amount of all participating companies. The non-profit organization focuses on young people who are empoweredtotal amount raised by the walk (CHF 187,000) was donated to network in economic relations, act entrepreneurially,the Swiss Multiple Sclerosis Society which supports research into this disease and be responsibleadvises and successful in finding their way within the global economy. Thanks to a quadrennial partnership, YES and UBS jointly enhance the powerhelps families of innovation and competitivenessafflicted children free of young Swiss students.

charge.
è Refer towww.ubs.com/communityfor more information on our community investment activities



 

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Strategy, performance and responsibility
()

69

Strategy, performance and responsibility
Corporate responsibility

(SGS LOGO)
ASSURANCE STATEMENT

SGS STATEMENT ON ASSURANCE OF UBS GRI Sustainability Disclosure 2010

SCOPE

SGS was commissioned by UBS to conduct an independent assurance of the GRI based Sustainability Disclosure for 2010. The scope of our engagement was limited to the GRI disclosure requirements and indicators as contained in the GRI index published atwww.ubs.com/gri. The scope of the assurance, based on the SGS Sustainability Report Assurance methodology, included all text and 2010 data in accompanying tables, contained in the printed Annual Report 2010 and referenced information on the webpage of UBS as quoted in the GRI index. Earlier data were not included in this assurance process.

CONTENT

The information in the report and on the webpage and its presentation are the responsibility of the directors or governing body and the management of the organization. SGS has not been involved in the preparation of any of the material included in the GRI index and acted as an independent assuror of the data and text using the Global Reporting Initiative Sustainability Reporting Guidelines 2006 as a standard. The content of this Assuror’s Statement and the opinion(s) it gives is the sole responsibility of SGS.

ASSUROR INDEPENDENCE AND COMPETENCIES

The SGS Group of companies is the world leader in inspection, testing and verification, operating in more than 140 countries and providing services including management systems and service certification; quality, environmental, social and ethical auditing and training; environmental, social and sustainability report assurance. SGS affirm our independence from UBS, being free from bias and conflicts of interest with the organization, its subsidiaries and stakeholders. The assurance team was assembled based on their knowledge, experience and qualifications for this assignment.

METHODOLOGY

The SGS Group has developed a set of protocols for the Assurance of Sustainability Reports based on current best practice guidance provided in the Global Reporting Initiative Sustainability Reporting Guidelines (2006). In a separate engagement, SGS has certified the environmental management system in accordance with ISO 14001:2004 and verified the greenhouse gas emissions in accordance with ISO 14064. The assurance comprised a combination of pre-assurance research; interviews with relevant employees; documentation and record review and validation with external bodies and/or stakeholders where relevant. Financial data drawn directly from independently audited financial accounts has not been checked back to its source as part of this assurance process.

OPINION

On the basis of the methodology described, we are satisfied that nothing has come to our attention that causes us not to believe that the information and data contained within the Disclosure referenced in the GRI index 2010 is accurate, reliable and provides a fair and balanced representation of UBS’s sustainability activities in 2010. We are satisfied that the Sustainability Disclosure as referenced in the GRI index meets the requirements of level A+ of the GRI (2006), as declared. At the same time it fulfills the requirements for Communication on Progress (COP) under the UN Global Compact. Recommendations regarding the further development of the sustainability disclosure and management system at UBS were communicated to the firm in an internal report.

SIGNED FOR AND ON BEHALF OF SGS

(-s- DR. CHRISTINE JASCH)
(-s- ELVIRA BIERI)
Dr. Christine JaschElvira Bieri
Lead auditor, SGSLead auditor, SGS
Zurich, 18 February 2011WWW.SGS.COM


70

UBS business
divisions and
Corporate Center

 

UBS business divisions and
Corporate Center

–Starting from 2010, external reporting of Wealth Management & Swiss Bank was revised to better reflect management structure and responsibilities, and was split into two business units: Wealth Management and Retail & Corporate.
–The Investment Products and Services (IPS) unit was created to provide comprehensive service to Wealth Management clients with complex needs using the capabilities and expertise of the entire firm.
–In the Investment Bank, the implementation of the securities platform to unify our capabilities in equities and fixed income, currencies and commodities combined previously distinct trading and sales activities into a holistic business with the goal of improving our market position and overall client service.
–In the first half of the year, we took an important step to expand our presence into emerging markets by agreeing to acquire Link Investimentos, one of the largest independent broker-dealers in Brazil.
–The Global Family Office unit was established as a joint venture between Wealth Management and the Investment Bank to provide a cross-divisional platform for the delivery of integrated products and services.

                 
Performance from continuing operations before tax 
  For the year ended % change from 
CHF million 31.12.10  31.12.09  31.12.08  31.12.09 
 
Wealth Management  2,308   2,280   3,631   1 
 
Retail & Corporate  1,772   1,629   2,382   9 
 
Wealth Management & Swiss Bank  4,080   3,910   6,013   4 
 
Wealth Management Americas  (130)  32   (823)    
 
Global Asset Management  516   438   1,333   18 
 
Investment Bank  2,197   (6,081)  (34,300)    
 
Treasury activities and other corporate items  793   (860)  19     
 
Operating profit from continuing operations before tax
  7,455   (2,561)  (27,758)    
 

Wealth Management & Swiss Bank

Wealth Management –In 2010, pre-tax profit increased 1% to CHF 2,308 million from CHF 2,280 million in 2009, mainly due to a 3% decrease in operating expenses. Total operating income in 2010 was CHF 7,356 million, down 2% from CHF 7,471 million a year earlier. Operating expenses declined 3% to CHF 5,049 million from CHF 5,191 million.

During 2010, net new money outflows declined to CHF 12.1 billion from CHF 87.1 billion in 2009. International wealth management net new money outflows declined significantly to CHF 12.9 billion from CHF 79.9 billion. While Europe saw ongoing net outflows, net inflows were recorded in the Asia Pacific region as well as globally from ultra high net worth clients. Swiss wealth management reported net inflows of CHF 0.8 billion in 2010 compared with CHF 7.2 billion net outflows the year before.

Retail & Corporate –In 2010, pre-tax profit increased 9% to CHF 1,772 million compared with CHF 1,629 million in 2009, mainly due to a decrease in operating expenses. Total operating income in 2010 was CHF 3,870 million, down 1% from CHF 3,918 million a year earlier. Operating expenses declined 8% to CHF 2,098 million from CHF 2,289 million as a result of cost-cutting measures initiated in 2009.

Wealth Management Americas

Wealth Management Americas reported a pre-tax loss of CHF 130 million in 2010 compared with a pre-tax profit of CHF 32 million in 2009, due to higher litigation provisions. Operating income of CHF 5,564 million was essentially flat compared with CHF 5,550 million in 2009, but increased 4% in US dollar terms. In 2010, operating expenses increased 3% to CHF 5,694 million from CHF 5,518 million, and included CHF 162 million in restructuring charges compared with CHF 152 million in restructuring charges in 2009.

Net new money outflows for Wealth Management Americas were CHF 6.1 billion in 2010 compared with CHF 11.6 billion in the prior year. The Wealth Management US business saw net new money outflows of CHF 5.5 billion in 2010 compared with CHF 9.8 billion in 2009. We experienced net new money outflows during the first half of 2010, but reported net new money inflows in the second half of 2010 due to improved financial advisor retention and improved net new money inflows from financial advisors employed with UBS for more than one year.

Global Asset Management

Pre-tax profit for 2010 was CHF 516 million compared with CHF 438 million in 2009. Excluding a net goodwill impairment charge of CHF 191 million related to the sale of UBS Pactual in 2009, the pre-tax profit for 2010 would have decreased by CHF 113 million compared with 2009. Total operating income was CHF 2,058 million in 2010, compared with CHF 2,137 million in 2009. Total operating expenses were CHF 1,542 million in 2010, compared with CHF 1,698 million in 2009.

Net new money inflows were CHF 1.8 billion in 2010 compared with net outflows of CHF 45.8 billion in 2009. Net inflows from third parties were CHF 18.2 billion in 2010 compared with net outflows of CHF 5.1 billion in 2009. Net outflows from clients of our wealth management businesses were CHF 16.4 billion in 2010 compared with net outflows of CHF 40.7 billion in 2009.

Investment Bank

In 2010, we recorded a pre-tax profit of CHF 2,197 million compared with a pre-tax loss of CHF 6,081 million in 2009, primarily as a result of increased revenues in fixed income, currency and commodities, a significant reduction in net credit loss expenses and lower own credit losses. Total operating income in 2010 was CHF 12,010 million compared with CHF 3,135 million in the prior year. Net credit loss expense in 2010 was nil compared with net credit loss expense of CHF 1,698 million in 2009. Total operating expenses were CHF 9,813 million in 2010, compared with CHF 9,216 million in 2009.

Investment banking revenues were CHF 2,414 million in 2010, marginally down from CHF 2,466 million in the previous year. Revenues in equities were CHF 4,469 million, down 9% from CHF 4,937 million in 2009. Revenues in the fixed income, currencies and commodities business were positive CHF 5,675 million in 2010 compared with negative CHF 547 million in 2009, when the business was materially affected by losses on residual risk positions.

Corporate Center

The Corporate Center allocates operating expenses to the business divisions according to service consumption. In 2010, the Corporate Center had a cost base excluding variable compensation of just below CHF 7.5 billion. The Corporate Center has improved Group-wide cost management, and has implemented simple service delivery models with clear responsibilities. At the end of 2010, across all shared services functions, the Corporate Center had approximately 19,400 employees.



UBS business divisions and Corporate Center


Wealth Management & Swiss Bank

Wealth Management & Swiss Bank is

                 
Business division reporting 
  As of or for the year ended % change from 
CHF million, except where indicated 31.12.10  31.12.09  31.12.08  31.12.09 
 
Income  11,291   11,523   15,413   (2)
 
Credit loss (expense) / recovery  (64)  (133)  (392)  (52)
 
Total operating income
  11,226   11,390   15,021   (1)
 
Personnel expenses  4,778   5,197   5,430   (8)
 
General and administrative expenses  2,101   2,017   3,295   4 
 
of which: impact from US cross-border case
          917     
 
Services (to) / from other business divisions  (61)  (90)  (73)  32 
 
Depreciation of property and equipment  309   289   323   7 
 
Amortization of intangible assets  19   67   33   (72)
 
Total operating expenses
  7,147   7,480   9,008   (4)
 
Business division performance before tax
  4,080   3,910   6,013   4 
 
of which: impact from US cross-border case
          (917)    
 
of which: business division performance before tax excluding US cross-border case
  4,080   3,910   6,930   4 
 
                 
Key performance indicators1
                
 
Pre-tax profit growth (%)  4.3   (35.0)  (29.6)    
 
Cost / income ratio (%)  63.3   64.9   58.4     
 
Net new money (CHF billion)2
  (10.0)  (89.8)  (107.1)    
 
                 
Additional information
                
 
Average attributed equity (CHF billion)3
  9.0   9.0   9.5   0 
 
Return on attributed equity (RoaE) (%)  45.3   43.4   63.3     
 
BIS risk-weighted assets (CHF billion)  43.4   48.6   62.3   (11)
 
Return on BIS risk-weighted assets, gross (%)  24.3   21.7   22.3     
 
Goodwill and intangible assets (CHF billion)  1.5   1.6   1.7   (6)
 
Invested assets (CHF billion)  904   960   955   (6)
 
Client assets (CHF billion)  1,799   1,844   1,711   (2)
 
Personnel (full-time equivalents)  27,752   27,548   31,016   1 
 
1 For the definitions of our key performance indicators, refer to the “Measurement and analysis of performance” section of this report.  2 Excludes interest and dividend income.  3 Refer to the “Capital management” section of this report for more information about the equity attribution framework.

74

UBS business divisions and
Corporate Center

Wealth Management
Business description

With a presence in over 40 countries and headquartered in Switzerland, Wealth Management provides clients with financial advice, products and employs more than 27,500 personnel in 44 countries. We delivertools to fit their individual needs.

Business

Wealth Management delivers comprehensive financial services to wealthy private clients around the world – except to those served by Wealth Management Americas – as well asAmericas. Our clients benefit from the entire spectrum of UBS resources, ranging from asset management to retailestate planning and corporate clientsfinance advice, in Switzerland. Clients are provided with advice and financialaddition to the specific wealth management products and services outlined below. An open product platform provides clients with access to fit their individual needs.

a wide array of products from third-party providers that complement our product lines.
New reporting structure
Commencing in first quarterWith CHF 768 billion of invested assets at the end of 2010, we will change the internal reporting of Wealth Management & Swiss Bank and present in our external financial reports two separate business units: “Wealth Management” and “Retail & Corporate”.
Performance in 2009
Wealth Management & Swiss Bank pre-tax profit fell 35% to CHF 3,910 million, compared with CHF 6,013 million in 2008. The decline in profit was driven by a drop in operating income, resulting from lower asset-based fees, reduced interest income due to margin pressure and decreased transaction income, partly offset by a 17% decline in operating expenses from our cost-saving measures.
Net new moneyoutflows were CHF 89.8 billion compared with CHF 107.1 billion in the previous year. The outflows in 2009 reflect clients withdrawing assets from UBS, due to the effectsare one of the financial market turbulence on our operating performance and reputation.
Invested assetswere CHF 960 billion on 31 December 2009, an increase of CHF 5 billion from 31 December 2008, as higher equity markets were partially offset by net new money outflows.
Wealth Management Americas
Wealth Management Americas is among the leadinglargest wealth managers in the region based on invested assetsworld.

Strategy and includesclients

Our goal is to be the former Wealth Management US business unit, the domestic Canadian business and the international business booked in the United States. Formed from the reorganizationbank of the Global Wealth Management & Business Banking business division in 2009, Wealth Management Americas is headquartered in Weehawken, New Jersey, where most corporate and operational functions are located. The client-facing organization consists of the branch network in the US, Puerto Rico and Canada, with 7,084 financial advisors.

Wealth Management Americas provides advice-based relationships through its financial advisors, who deliver a fully-integrated set of wealth management solutions designed to address the needs of core affluent, high net worth and ultra high net worth individuals and families.
Performance in 2009
Wealth Management Americas reported a pre-tax profit of CHF 32 million in 2009 compared with a pre-tax loss of CHF 823 million in 2008. The 2009 results were negatively impacted by restructuring charges of CHF 152 million.
In 2009, net new money outflows were CHF 11.6 billion compared with CHF 15.9 billion in the prior year. Following strong net new money inflows in first quarter 2009 due to recruitment of experienced financial advisors, we experienced net new money outflows during the remainder of the year.
Wealth Management Americas had CHF 690 billion in invested assets on 31 December 2009, up 7% from CHF 644 billion on 31 December 2008. This increase was principally driven by positive market performance. The gross margin on invested assets was 81 basis points in 2009, down from 82 basis points in 2008.


Performance from continuing operations before tax
                 
 
  For the year ended  % change from 
     
CHF million
  31.12.09   31.12.08   31.12.07   31.12.08 
 
Wealth Management & Swiss Bank  3,910   6,013   8,543   (35)
 
Wealth Management Americas  32   (823)  621     
 
Global Asset Management  438   1,333   1,454   (67)
 
Investment Bank  (6,081)  (34,300)  (16,669)  82 
 
Corporate Center  (860)  19   2,310     
 
UBS
  (2,561)  (27,758)  (3,742)  91 
 

Global Asset Management
Global Asset Management offers a diverse range of investment capabilities and services from a boutique-like structure encompassing all major asset classes including equities, fixed income, asset allocation, currency, risk management, hedge funds, real estate, infrastructure, private equity and fund administration.
Invested assets totaled CHF 583 billion on 31 December 2009, making Global Asset Management one of the larger institutional asset managers and hedge fund of funds managers in the world. It is also one of the largest mutual fund managers in Europe and the largest in Switzerland.
Performance in 2009
Pre-tax profitfor full year 2009 was CHF 438 million compared with CHF 1,333 million in 2008. Excluding a net goodwill impairment charge in 2009 of CHF 191 million related to the sale of UBS Pactual, restructuring costs in 2009 of CHF 48 million and a gain of CHF 168 million from the sale of our minority stake in Adams Street Partners in third quarter 2008, pre-tax profit would have decreased 42% to CHF 677 million.
Net new moneyoutflows were CHF 45.8 billion for full year 2009 compared with outflows of CHF 103.0 billion for full year 2008. Excluding money market flows, net new money outflows were CHF 33.6 billion in 2009 compared with CHF 124.2 billion in 2008. Net outflows from clients of our wealth management businesses were CHF 40.7 billion (around 90% of total net outflows) in 2009 compared with CHF 47.1 billion in 2008.
Investment Bank
The Investment Bank has three distinct but aligned business areas:
–Equities
–Fixed income, currencies and commodities (FICC)
–the Investment banking department (IBD)
Equities and FICC comprise the securities business, offering primary and secondary access to the securities and foreign exchange markets, prime brokerage services as well as securities, economic, strategic and quantitative research.
IBD provides advice on mergers and acquisitions and restructurings, and raises capital mainly for corporate and sovereign clients in the debt and equity markets. Additionally, as part of a number of broader alignment initiatives across our business divisions, IBD plays a lead role in marketing the Group to corporates, leveraging their senior client relationships.
Performance in 2009
In 2009, we recorded a pre-tax loss of CHF 6,081 million compared with a pre-tax loss of CHF 34,300 million in 2008, primarily due to a reduction in losses on residual risk positions. During this period: equities revenues decreased 5% to CHF 4,937 million; FICC revenues increased to negative CHF 547 million from negative CHF 31,895 million; investment banking revenues were down 14% to CHF 2,466 million; and operating expenses decreased 7% to CHF 9,216 million.


UBS business divisions and Corporate Center
Wealth Management & Swiss Bank
Wealth Management & Swiss Bank
Business description
Wealth Management & Swiss Bank is a leading global provider of financial serviceschoice for wealthy private clients, and is the leading bank for retail and corporate clients in Switzerland.

Business
Wealth Management & Swiss Bank is headquartered in Switzerland and employs more than 27,500 personnel in 44 countries.individuals worldwide. We deliver comprehensive financial services to wealthy private clients around the world – except to those served by Wealth Management Americas – as well as to retail and corporate clients in Switzerland. Clients are provided with advice and financial products and services to fit their individual needs. Our Wealth Management & Swiss Bank business division comprises three businesses: Wealth Management, Swiss Retail and Swiss Corporate & Institutional Clients.
Strategy and clients
Through ourWealth Management business, we offer sophisticated products and services to private clients, focusing in three client segments:particular on the ultra high net worth clients with investable assets of more than CHF 50 million;and high net worth clients with investable assets of CHF 2 million to CHF 50 million; and core affluent clients with investable assets of CHF 250,000 to CHF 2 million.client segments. In addition, to servicing wealthy private clients directly, we also provide wealth management solutions, products and services to financial intermediaries.
We believe we are well positioned to capture growth opportunities in all markets, particularly in Asia, emerging markets and the global ultra high net worth segment, all areas where we expect to see the fastest market growth. Due to our strong local presence in leading global financial centers, we are in an excellent position to respond to increasing client demand for providing services in more than one jurisdiction (multi-shoring). Given our posi-

     We are
tion as one of the largest banks for ultra high net worth and ultra high net worth clients, aroundwe aim to grow faster than the world. The industry is facing increased regulationaverage global wealth market, while increasing our profitability through enhanced gross margins and istargeted investments.
We continue to build on our integrated client service model to identify investment opportunities that are tailored to individual client needs, and we intend to continue growing our client advisor base as we target 4,700 advisors in the focusmedium term, especially in growth regions. In an increasingly complex regulatory environment, we will pursue the highest levels of tax authorities. This particularly influences the way we conduct cross-border businesscompliance through extensive employee training and puts pressure on margins, profitabilityinvestment in risk management processes and net new money flows. By managing all markets for sustainable profitability we are consolidating our strong global presence.standards.
In our cross-border businesses,business, we are focusingconcentrating on areas with the greatest market potential while continuing to ensure the highest levels of compliance.potential. In Asia Pacific, we are directing our cross-border businesscontinue to focus on Hong Kong and Singapore, the leading financial centers withinin the region, specifically Hong Kong and Singapore. Furthermore,region. In emerging markets, we are building on our strengths in emerging markets, and are focusing on key markets in the Middle East, Latin America and Central and Eastern Europe.
     We will To capture the full opportunity these markets present, we have organized emerging markets as a dedicated business and enhanced our local presence with several new Wealth Management offices. In Europe, we continue to buildsupport our cross-border business by focusing on the quality of our client service delivery and country-specific product offerings.
In our onshore business, in markets which offer attractive growth prospects with a more differentiated approach, aswe continue to enhance our already strong domestic presence in the current legalkey European and regulatory climateAsian markets. In Switzerland we are strengthening our position by consistently implementing our structured advisory process. We understand the domesticdistinct needs of our clients and aim to deliver superior service.


Invested assets by client domicile

(CHART)

Invested assets by client wealth management

(CHART)



75

UBS business steadily gains importance. divisions and Corporate Center
Wealth Management & Swiss Bank

We will place particular emphasis onhave made substantial progress towards managing our non-Swiss European locations for profitability. In the
attractive markets in Asia and Europe where we already have a strong local presence. To strengthen our leading position in SwitzerlandPacific region, we will further enhanceinvest in our well-established presences in Hong Kong, Singapore, Taiwan, Australia and Japan. In addition, we are focusing on long-term growth opportunities in locations such as China, where we are making use of UBS’s distinct market presence, which includes a stake in the wayfully licensed brokerage house, UBS Securities Co. Limited.
Our overall long-term industry outlook for growth within the global wealth market is positive. From a regional perspective, Asia, Latin America, Central and Eastern Europe and the Middle East are expected to grow the fastest, based on economic development and entrepreneurial wealth creation, depending however on political stability. In the established European markets, we deliver our products and servicesexpect the onshore business to high net worth andgrow faster than the cross-border business. Finally, the ultra high net worth clients.
     We want to bemarket segment shows the best bankpotential forretail clients in Switzerland. Serving one out the strongest growth rate of three householdsall client segments.

Organizational structure

Wealth Management is headquartered in Switzerland with a presence in 44 countries and approximately 200 wealth management and representative offices, half of which are outside Switzerland, mostly in Europe, Asia Pacific, Latin America and the Middle East. As of the end of 2010, Wealth Management employed more than 300 branches has set us on15,500 personnel worldwide, including approximately 4,200 client advisors. The Wealth Management business unit is governed by an executive committee, and is primarily organized along regional lines with the right path towards achieving this goal. To best serve our clients, we have developedbusiness areas Asia Pacific, Europe, Global Emerging Markets, Global Established Markets, Switzerland and Global Ultra High Net Worth Clients – supported by a life-cycle based offering where with each life-cycle stage, our clients receive dedicated productsglobal Investment Products and services to meet their specific needs. In order to maximize the quality of serviceServices unit and level of convenience we offer our clients, we will continue to upgrade our multi-channel offerings including local branches, e-banking capabilities and automated teller machines. To fully leverage our presence in the marketplace, we will continue investing in our branch network.central functions.

     In

Corporate & Institutional Clients (CIC)Competitors, our goal is to differentiate ourselves by leveraging our capabilities as an integrated bank. We serve almost one out of every two Swiss companies by offering strategic advisory and execution services for multinationals, corporations, institutional clients and financial institutions, which makes us a leading CIC business. In addition, we are able to provide our clients with local and international banking services across all business divisions. Within CIC, we also serve the small and medium-sized enterprises (SMEs) with local market expertise across all regions by delivering tailored products and services.

Competitors

Our major global competitors within wealth management include Credit Suisse, Julius Baer, HSBC, BNP/Fortis, Barclays and Citigroup. In domestic markets, we compete primarily with the private banking operations of large local banks such as Coutts in the UK, Deutsche Bank AG in Germany and Unicredit in Italy.

     In

Products and services

As a global integrated firm, UBS has the necessary expertise to identify appropriate investment opportunities for clients and the local presence to provide them. We have brought together experts from our Investment Bank, Global Asset Management and Wealth Management & Swiss retail banking business our major competitors are Credit Suisse, Raiffeisen, the cantonal banks, and Postfinance as well as other regional or local Swiss banks.

     In the Swiss corporate and institutional business our main competitors are Credit Suisse, the cantonal banks, and foreign banks in Switzerland.


74

UBSBank business divisions to create a new unit called Investment Products and Corporate Center

(BAR GRAPH)
1 Including structuredServices (IPS), with approximately 2,150 employees at the end of 2010. IPS provides access to UBS’s services and expertise for clients and client advisors through an integrated and efficient organization. In addition, IPS develops investment products and alternative investments.
Products and services,
based on the capabilities of the entire firm, to satisfy our clients’ needs. Wealth Management thus leverages the knowledge and product and service offerings from Global Asset Management and the Investment Bank to provide expert financial advice in supportingthat supports clients throughout the different stages of their lives.
By aggregating private investment flows into institutional-size flows, we are in a position to offer our Wealth Management clients access to investments that would otherwise only be available to institutional clients. Expertise is sourced either from within UBS or from approved third-party providers.
The recent financial crisis fundamentally altered financial market dynamics and client expectations. As a result, clients are demanding a more active relationship with their client advisor, and investment performance has significantly gained importance. To accommodate the external market. Bothneeds of our clients, we are able to offer services across a full



Invested assets by asset class

(CHART)
1 Including structured products and alternative investments.

Invested assets by currency

(CHART)



76

UBS business divisions and
Corporate Center

investment spectrum from execution only to discretionary and non-discretionary mandates are offered.mandates. Clients who opt for a discretionary mandate delegate the management of their assets including investment decisions, to a team of professional portfolio managers who work according to an agreed investment strategy.managers. Clients who prefer to be actively involved in the management of their assets can choose a non-discretionaryan advisory mandate, wherein which investment professionals provide analysis and monitoring of portfolios, together with tailor-made proposals to support investment decisions. ClientsOur clients can also trade athe full range of financial instruments from single securities, such as equities and bonds, to various investment funds, structured products and alternative investments. WeAdditionally, we offer structured lending, corporate finance and wealth planning advice on topicsclient needs such as funding for education, gift giving, inheritance and succession,succession. For our ultra high net worth clients, we are able to offer institutional-like servicing with special access to our Investment Bank and also offer corporate finance adviceGlobal Asset Management offerings.

Our integrated client service model allows client advisors to supportanalyze their client’s financial situation, and develop and implement systematic tailored investment strategies. These strategies are regularly reviewed and based on individual client profiles, which comprise all important investment criteria such as the client’s life cycle needs, risk appetite and performance expectations. To ensure that the best solutions are presented to our clients, inwe continuously train our client advisors and provide them with ongoing support.
With the processobjective to further optimize our clients’ financial returns the new function of disposinga Chief Investment Officer (CIO) has been established as of their corporate assets.
     As a next step of integration across1 March 2011. The CIO reports directly to the business divisions, we implemented a new organizational unit within Wealth Management called Investment ProductsCEO and Services. Product specialistsis mandated to oversee our global investment strategy and policy in Wealth Management,close collaboration with IPS as well as Global Asset Management and the Investment Bank are combined to further align product innovation, distributionBank. The CIO function will be responsible for defining and after-sales service.
(PIE CHART)
     Ourretail clients can access services such as a comprehensive selection of cash accounts, savingsproposing appropriate investment allocations and retirement products, investment fundsstrategies and solutions, residential mortgages, life insurance and advisory services through our multi-channel offering in Switzerland. Our clients also receive these services in tailored life-cycle solutions in combination with individual financial advice.
     We offer our SwissCorporate & Institutional Clients a comprehensive set of products and services. By providing accessfor communicating them across the global Wealth Management organization, especially to our global sector specialists fromclient advisors and product managers.

The foundations of our Investment Bank, we can provide strategic advice in the field of mergers and acquisitions. Additionally, we advise company owners with regard to succession planning and provide professional support in liquidity and cash management. For clients with a high share of euro-denominated transactions, we are the only bank in Switzerland to offer so called Eurogateway accounts, which concentrate euro payment streams in Switzerland, thereby optimizing costs. In Switzerland, we are a leading provider for financing solutions as we offer access to capital markets (equity and debt capital), syndicated and structured credits, private placements, factoring, leasing and traditional financing solutions. Finally, we offer global custody services for institutional clients who want to consolidate multiple-agent bank custodies into a single, cost-efficient global custodial relationship.

Organizational structure
During 2009, the Global Wealth Management & Business Banking business division was reorganized into two new business divisions: Wealth Management Americas and Wealth Management & Swiss Bank, which comprises all wealth management business booked outside the Americas and the Swiss retail and corporate client business.service platform
(CHART)
     In 2009, the governance structure of Wealth Management & Swiss Bank was further adjusted to include two new execu-



7577

UBS business divisions and Corporate Center
Wealth Management & Swiss Bank

Business performance

                 
Business unit reporting 
  As of or for the year ended % change from 
CHF million, except where indicated
  31.12.10   31.12.09   31.12.08   31.12.09 
 
Recurring income  5,411   5,696   8,061   (5)
 
Non-recurring income  1,934   1,731   2,440   12 
 
Income  7,345   7,427   10,502   (1)
 
Credit loss (expense) / recovery  11   45   (388)  (76)
 
Total operating income
  7,356   7,471   10,114   (2)
 
Personnel expenses  3,153   3,360   3,503   (6)
 
General and administrative expenses  1,264   1,182   2,357   7 
 
of which: impact from US cross-border case
          917     
 
Services (to) / from other business divisions  449   428   409   5 
 
Depreciation of property and equipment  163   154   181   6 
 
Amortization of intangible assets  19   67   33   (72)
 
Total operating expenses
  5,049   5,191   6,483   (3)
 
Business unit performance before tax
  2,308   2,280   3,631   1 
 
of which: impact from US cross-border case
          (917)    
 
of which: business unit performance before tax excluding US cross-border case
  2,308   2,280   4,548   1 
 
                 
Key performance indicators1
                
 
Pre-tax profit growth (%)  1.2   (37.2)  (40.5)    
 
Cost / income ratio (%)  68.7   69.9   61.7     
 
Net new money (CHF billion)2
  (12.1)  (87.1)  (96.0)    
 
Gross margin on invested assets (bps)3
  92   91   99   1 
 
                 
Swiss wealth management
                
 
Income  1,543   1,488   2,081   4 
 
Net new money (CHF billion)2
  0.8   (7.2)  (23.0)    
 
Invested assets (CHF billion)  137   140   137   (2)
 
Gross margin on invested assets (bps)  112   110   120   2 
 
                 
International wealth management
                
 
Income  5,802   5,939   8,420   (2)
 
Net new money (CHF billion)2
  (12.9)  (79.9)  (73.0)    
 
Invested assets (CHF billion)  631   685   697   (8)
 
Gross margin on invested assets (bps)3
  88   88   95   0 
 
                 
Additional information
                
 
Average attributed equity (CHF billion)4
  4.4   4.4   5.1   0 
 
Return on attributed equity (RoaE) (%)  52.5   51.8   71.5     
 
BIS risk-weighted assets (CHF billion)  16.9   17.9   25.1   (6)
 
Return on BIS risk-weighted assets, gross (%)  41.4   37.4   35.0     
 
Goodwill and intangible assets (CHF billion)  1.5   1.6   1.7   (6)
 
Invested assets (CHF billion)  768   825   833   (7)
 
Client assets (CHF billion)  920   1,005   1,010   (8)
 
Client advisors (full-time equivalents)  4,172   4,286   5,435   (3)
 
Personnel (full-time equivalents)  15,663   15,408   17,910   2 
 
(FLOW CHART)

tive committees, Wealth Management1 For the definitions of our key performance indicators, refer to the “Measurement and UBS Switzerland, which are led by one divisional Executive Committee.
     Wealth Management is present in 44 countries with approximately 200 wealth managementanalysis of performance” section of this report.  2 Excludes interest and representative offices, halfdividend income.  3 Excludes negative valuation adjustments on a property fund (2010: CHF 45 million, 2009: CHF 155 million, 2008: CHF 9 million).  4 Refer to the “Capital management” section of which are outside Switzerland. We are largely active in Asia Pacific, Switzerland, Europe and in international cross-border business. Our Wealth Management clients are served by approximately 4,200 client advisors, of whichthis report for more information about 900 are working for Swiss Wealth Management.
     The integrated management team of UBS Switzerland comprises all businesses active in Switzerland including retail, wealth management, corporate & institutional, investment banking and the asset management business. We are committed to our Swiss home market and this integrated approach allows us to drive efficiency across all businesses.equity attribution framework.
With our regional approach, we are able to extend the knowledge of the entire bank to local clients and markets. This allows cross-divisional client coverage, client referrals across all businesses and systematic client development.
     Commencing in first quarter 2010, we will change the internal reporting of Wealth Management & Swiss Bank and present in our external financial reports two separate business units:
–“Wealth Management” encompasses the domestic and international wealth management business conducted out of Switzerland, and all wealth management businesses in our Asian and European booking centers.
–“Retail & Corporate” includes services provided to Swiss retail private clients, small businesses, as well as corporate and institutional clients.
èPrior to publication of first quarter 2010 results, UBS will publish restated business division results on www.ubs.com/investors showing quarterly and annual results for 2008 and 2009 under the new reporting structure


7678

UBS business divisions and
Corporate Center

2010

Results

In 2010, pre-tax profit increased 1% to CHF 2,308 million from CHF 2,280 million in 2009, mainly due to a 3% decrease in operating expenses. Operating income was down 2% as the result was negatively affected by low market interest rates and the strengthening of the Swiss franc against major currencies.

Operating income

Total operating income in 2010 was CHF 7,356 million, down 2% from CHF 7,471 million a year earlier. Recurring income decreased 5% on lower asset-based fees, reflecting a 4% lower average asset base. Interest income was down due to pressure from the low interest rate environment and the decrease in value of the euro and US dollar against the Swiss franc in 2010. This was partly offset by a shift of treasury-related revenues from Retail & Corporate to Wealth Management from second quarter 2010 onwards, impacting interest and trading income.
Non-recurring income increased 12% to CHF 1,934 million from CHF 1,731 million as trading income increased and as 2009 included higher revaluation adjustments on a property fund. Credit loss recoveries were CHF 11 million in 2010, down from CHF 45 million in 2009.

Operating expenses

Operating expenses declined 3% to CHF 5,049 million from CHF 5,191 million. Personnel expenses decreased 6% reflecting a reduction of average personnel levels by 9% and restructuring expenses of CHF 190 million in 2009. General and administrative expenses, at CHF 1,264 million, were up CHF 82 million from CHF 1,182 million a year earlier, mainly due to a CHF 40 million charge to reimburse the Swiss government for costs incurred in connection with the US cross-border matter, increased litigation provisions, and higher sponsoring and branding costs related to the global re-launch of the UBS brand. Charges for services from other business divisions, and Corporate Centerat CHF 449 million in 2010, were slightly up from CHF 428 million in the previous year. Depreciation was CHF 163 million in 2010, compared with CHF 154 million a year earlier. Amortization of intangible assets was CHF 19 million, down from CHF 67 million in 2009, mainly reflecting the impair-

Business performance
Business division reporting
                 
 
  As of or for the year ended      % change from 
CHF million, except where indicated
  31.12.09   31.12.08   31.12.07   31.12.08 
 
Swiss clients income  6,228   7,714   8,493   (19)
 
International clients income  5,295   7,698   9,195   (31)
 
Income  11,523   15,413   17,689   (25)
 
Credit loss (expense) / recovery  (133)  (392)  30   (66)
 
Total operating income
  11,390   15,021   17,718   (24)
 
Personnel expenses  5,197   5,430   6,356   (4)
 
General and administrative expenses  2,017   3,295   2,514   (39)
 
of which: impact from US cross-border case
      917         
 
Services (to) / from other business divisions  (90)  (73)  (43)  (23)
 
Depreciation of property and equipment  289   323   334   (11)
 
Amortization of intangible assets  67   33   15   103 
 
Total operating expenses
  7,480   9,008   9,176   (17)
 
Business division performance before tax
  3,910   6,013   8,543   (35)
 
of which: impact from US cross-border case
      (917)        
 
of which: business division performance before tax excluding US cross-border case
  3,910   6,930   8,543   (44)
 
                 
Key performance indicators1
                
 
Pre-tax profit growth (%)  (35.0)  (29.6)  15.7     
 
Cost / income ratio (%)  64.9   58.4   51.9     
 
Net new money (CHF billion)2
  (89.8)  (107.1)  120.4     
 
Impaired lending portfolio as a % of total lending portfolio, gross (Swiss clients)  1.0   1.0   1.0     
 
Gross margin on invested assets (bps) (international clients)3
  86   96   103   (10)
 
                 
Additional information
                
 
Average attributed equity (CHF billion)  9.0   9.5       (5)
 
Return on attributed equity (RoaE) (%)  43.4   63.3         
 
BIS risk-weighted assets (CHF billion)4
  48.6   62.3       (22)
 
Return on BIS risk-weighted assets, gross (%)  21.7   22.3         
 
Goodwill and intangible assets (CHF billion)  1.6   1.7   1.8   (6)
 
Recurring income  8,830   11,613   13,194   (24)
 
Invested assets (CHF billion)  960   955   1,392   1 
 
Client assets (CHF billion)  1,844   1,711   2,535   8 
 
Personnel (full-time equivalents)  27,548   31,016   32,378   (11)
 
                 
Swiss clients
                
 
Net new money (CHF billion)2
  (20.1)  (41.9)  15.2     
 
Invested assets (CHF billion)  337   325   455   4 
 
                 
International clients
                
 
Net new money (CHF billion)2
  (69.7)  (65.2)  105.2     
 
Invested assets (CHF billion)  624   631   937   (1)
 
Client advisors (full-time equivalents)  3,182   4,236   4,253   (25)
 

ment of intangible assets related to invested asset outflows in UBS (Bahamas) Ltd. in 2009.

è
Refer to “Note 1 For Summary of significant accounting policies” in the definitions of UBS’s key performance indicators, refer to the “Measurement and analysis of performance”“Financial information” section of this report. 2 Excludes interest and dividend income. 3 Excludes valuation adjustmentsreport for more information on a property fund (2009: CHF 155 million, 2008: CHF 9 million). 4 BIS risk-weighted assets (RWA) are accordingallocation of additional Corporate Center costs to Basel II.
the business divisions in 2010

77Development of invested assets

Net new money

During 2010, all regions and client segments saw an improvement of their net new money situation and net outflows declined to CHF 12.1 billion compared with CHF 87.1 billion in 2009. International wealth management net new money outflows declined significantly to CHF 12.9 billion from CHF 79.9 billion. While Europe saw ongoing net outflows, partially due to discussions regarding tax treaties, net inflows were recorded in the Asia Pacific region as well as globally from ultra high net worth clients. Swiss wealth management reported net inflows of CHF 0.8 billion in 2010 compared with CHF 7.2 billion net outflows the year before. Net new money for 2010 includes inflows of CHF 3.7 billion resulting from transfers of Investment Bank clients to Wealth Management, as part of the Global Family Office initiative.

Invested assets

Invested assets were CHF 768 billion on 31 December 2010, a decrease of CHF 57 billion from 31 December 2009, as positive equity market performance was more than offset by adverse currency effects with a 16% decline in value of the euro and an 11% decline in value of the US dollar against the Swiss franc, and net new money outflows in 2010. In Wealth Management, 31% of invested assets were denominated in euros and 31% in US dollars at the end of 2010.

Gross margin on invested assets

The gross margin on invested assets increased 1 basis point to 92 basis points. The computation of the gross margin excludes the negative valuation adjustments on a property fund. The recurring income margin was down 1 basis point to 68 basis points, due to lower interest income reflecting ongoing pressure from the low interest rate environment. The non-recurring income margin was up 2 basis points to 24 basis points, mainly due to higher brokerage fees following higher client activity.



79

UBS business divisions and Corporate Center
Wealth Management & Swiss Bank

2009

Results

In 2009, pre-tax profit fell 35%37% to CHF 3,9102,280 million, compared with CHF 6,0133,631 million in 2008. The decline in profit was driven bydue to a 24% drop26% reduction in operating income, resulting from lower asset-based fees, reduced interest income due to margin pressure and decreased transaction income, partly offsetwhich was only partially compensated by a 17% decline20% cut in operating expenses resulting from our cost-savingcost-cutting measures. A provision of CHF 917 million in connection withrelation to the US cross-border case was included in the results of the previous year.

for 2008.

Operating income

Total operating income in 2009 was CHF 11,3907,471 million, down 24%26% from CHF 15,02110,114 million a year earlier. Recurring income decreased 24%29% on lower asset-based fees, reflecting a 20%22% lower average asset base, as well as a lower interestbase. Interest income was down due to margin pressure. pressure from the low interest rate environment.
Non-recurring income fell by 29% due to lower brokerage fees, reflecting reduced client transaction activity levels. Moreover, the decreaseactivity. Income was due toalso impacted by higher internal funding-related interest charges and revaluation adjustments of CHF 155 million foron a property fund. Credit loss expenses decreasedimproved significantly to net recoveries of CHF 13345 million from CHF 392388 million net credit losses in the previous year, as 2008, was especially impacted bywhich included provisions made for lombard loans.

Operating expenses

At CHF 7,480 million,In 2009, operating expenses in 2009 declined 17%20% to CHF 5,191 from CHF 9,0086,483 million one-yearone year earlier, as a result of cost-savingcost-cutting measures. Excluding the restructuring charges of CHF 322254 million booked in 2009, and the abovementioned provision in 2008 relating to the US cross-border case, operating expenses declined 12%11%. Personnel expenses decreased 9%10% excluding restructuring charges, due to an 11%a 14% reduction inof overall personnel, levels, which mostly took place towards the end of the year.2009. General and administrative expenses, at CHF 2,0171,182 million, were down 39%significantly from CHF 3,2952,357 million a year earlier, mainly due to the abovementioned 2008 provision related to

the US cross-border case as well as a result of cost-saving measures. Net charges tocase. Charges for services from other business divisions, at

CHF 90428 million in 2009, were slightly up 23% from CHF 73409 million in the previous year, mainly reflecting lower charges for IT infrastructure.year. Depreciation was CHF 289154 million in 2009, compared with CHF 323181 million a year earlier. Amortization of intangible assets was CHF 67 million, up from CHF 33 million in 2008, mainly reflecting the impairment of intangible assets related to invested asset outflows in UBS (Bahamas) Ltd.

Development of invested assets

Net new money

Net new money outflows in 2009 were CHF 89.887.1 billion compared with CHF 107.196.0 billion in the previous year. Total net new money outflows comprised CHF 20.1 billionAside from Swiss clients and CHF 69.7 billion from international clients, compared with 2008 outflows of CHF 41.9 billion and CHF 65.2 billion, respectively. The outflows in 2009 reflect clients withdrawing assets from UBS, due to the effects of the financial market turbulence, on our operating performance and reputation. Net new money levels were also negatively affected bythese outflows mainly reflected reputational issues, client advisor attrition as well as by the discussions regarding Switzerland’s banking secrecy and proposed tax treaties. In addition, invested assets of
Outflows from Swiss wealth management declined significantly in 2009 to CHF 22.87.2 billion from CHF 23.0 billion in 2008. Outflows from international clients were affected by the Italian tax amnesty, of which we were able to retain CHF 14.3 billion.79.9 billion compared with CHF 73.0 billion in 2008.

Invested assets

Invested assets were CHF 960825 billion on 31 December 2009, an increasea decrease of CHF 58 billion from 31 December 2008, as higher equity markets were partiallypositive market performance was more than offset by net new money outflows, and a 3% decrease of the US dollar against the Swiss franc in the course of 2009. In Wealth Management, 36% of invested assets were denominated in euros and 31% in US dollars at the end of 2009.

Gross margin on invested assets (international clients only)

The gross margin on invested assets declined 108 basis points to a total of 8691 basis points. ThisThe computation of the gross margin excludes the abovementionednegative valuation adjustments on a property fund. The recurring income margin was down 97 basis points to a total of 6369 basis points, as clients increased their allocation to lower-margin cash products. In addition,deposit margins and volumes decreased and theas well as lombard loan volume went down.decreased. The nonrecurringnon-recurring income margin was also down, decreasing 1 basis point to 2322 basis points, mainly due to lower brokerage fees reflecting decreased client transaction activity levels.



7880

UBS business divisions and
Corporate Center

Retail & Corporate
Business description

Through our network of 300 branches in Switzerland, we deliver comprehensive financial services to retail, corporate and institutional clients.

Business

Retail & Corporate delivers comprehensive financial services to retail, corporate and institutional clients in Switzerland. With CHF 879 billion in client assets at the end of 2010, we are the leading bank in Switzerland for retail, corporate and institutional clients. We are market leaders in the retail and corporate loan market in Switzerland, with a highly collateralized loan book of CHF 135 billion on 31 December 2010 as shown in the “Loan portfolio, gross” chart.

The Retail & Corporate business is closely embedded within the integrated bank delivery model of UBS Switzerland, covering also Wealth Management, Asset Management and Investment Banking in Switzerland.
èRefer to the “Strategy and structure” section of this report for more information on UBS Switzerland

Strategy and clients

Our goal is to be the bank of choice for retail clients in Switzerland by delivering value-added services. We serve one out of three households in Switzerland with over 300 branches, 1,250 automated teller machines and self-service terminals, e-banking services and customer service centers. We are continuously refining our suite of life-cycle based offerings, which offer our clients dedicated products and services to fulfill their evolving requirements. We will continue to invest in our physical and electronic channels in order to improve the client experience – we use technology to complement, rather than replace, the traditional physi-

cal branch network. We are refurbishing our branches by introducing new concepts to welcome and serve customers as well as to reflect our new brand identity.

In Switzerland, our corporate and institutional clients (CIC) are comprised of multinationals, corporations, institutional clients and financial institutions, as well as small and medium enterprises (SME). We strive to be their preferred partner for all of their complex needs and contribute to their long-term success. As a leading CIC business, we serve almost one of two Swiss companies, more than 85% of the 1000 largest corporates as well as one out of every three pension funds in Switzerland, including 75 of the largest 100. Combining the integrated bank approach with our local market expertise across all Swiss regions, we are able to serve our clients best by offering the expertise of the entire bank while generating opportunities to cross-sell and increase referrals.

Organizational structure

Retail & Corporate is a core element of UBS Switzerland’s integrated bank delivery model which allows us to extend the expertise of the entire bank to our Swiss retail, corporate and institutional clients.

To ensure consistent delivery throughout Switzerland, we have aligned the regional organization structures of our different business segments. In July 2010, the Swiss network was organized into ten geographical regions. Each region is aligned across the different business segments, and is led by management teams who are also responsible for delivering the integrated bank locally.

Loan portfolio, gross

(PIE CHART)



81

UBS business divisions and Corporate Center
Wealth Management & Swiss Bank

Competitors

In the Swiss retail banking business, our competitors are Credit Suisse, Raiffeisen, the cantonal banks, PostFinance, as well as other regional and local Swiss banks.

In the Swiss corporate and institutional business, our main competitors are Credit Suisse, the cantonal banks, and foreign banks in Switzerland.

Products and services

Our retail clients have access to services such as a comprehensive selection of cash accounts, payments, savings and retirement products, investment fund solutions, residential mortgages, life insurance and advisory services. These services can be

tailored to clients’ individual life-cycle solutions in combination with financial advice. We offer our Swiss corporate and institutional clients a comprehensive set of products and services. In Switzerland, we are a leading provider of financing solutions, as we offer access to capital markets (equity and debt capital), syndicated and structured credit, private placements, trade finance, factoring, leasing and traditional financing solutions. By providing access to global sector specialists within the Investment Bank, we can provide strategic advice in the field of mergers and acquisitions. Additionally, we advise company owners on succession planning, and provide professional support in liquidity and cash management. Finally, we offer global custody services for institutional clients who want to consolidate multiple-agent bank custodies into a single, cost-efficient global custodial relationship.



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2008
UBS business divisions and
Corporate Center

Business performance

                 
Business unit reporting 
  As of or for the year ended % change from 
CHF million, except where indicated 31.12.10  31.12.09  31.12.08  31.12.09 
 
Net interest income  2,422   2,681   3,207   (10)
 
Non-interest income  1,524   1,415   1,704   8 
 
Income  3,946   4,096   4,911   (4)
 
Credit loss (expense) / recovery  (76)  (178)  (4)  (57)
 
Total operating income
  3,870   3,918   4,907   (1)
 
Personnel expenses  1,625   1,836   1,927   (11)
 
General and administrative expenses  836   835   938   0 
 
Services (to) / from other business divisions  (509)  (518)  (482)  2 
 
Depreciation of property and equipment  146   136   142   7 
 
Amortization of intangible assets  0   0   0     
 
Total operating expenses
  2,098   2,289   2,524   (8)
 
Business unit performance before tax
  1,772   1,629   2,382   9 
 

Key performance indicators1

                
 
Pre-tax profit growth (%)  8.8   (31.6)  (2.5)    
 
Cost / income ratio (%)  53.2   55.9   51.4     
 
Impaired lending portfolio as a % of total lending portfolio, gross (%)  0.9   1.1   1.2     
 

Additional information

                
 
Average attributed equity (CHF billion)2
  4.6   4.6   4.4   0 
 
Return on attributed equity (RoaE) (%)  38.5   35.4   53.8     
 
BIS risk-weighted assets (CHF billion)  26.5   30.8   37.1   (14)
 
Return on BIS risk-weighted assets, gross (%)  13.7   12.3   12.5     
 
Goodwill and intangible assets (CHF billion)  0.0   0.0   0.0     
 
Net new money (CHF billion)3
  2.0   (2.7)  (11.1)    
 
Invested assets (CHF billion)  136   135   122   1 
 
Client assets (CHF billion)  879   840   701   5 
 
Personnel (full-time equivalents)  12,089   12,140   13,105   0 
 
1 For the definitions of our key performance indicators, refer to the “Measurement and analysis of performance” section of this report.  2 Refer to the “Capital management” section of this report for more information about the equity attribution framework.  3 Excludes interest and dividend income.

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UBS business divisions and Corporate Center
Wealth Management & Swiss Bank

2010

Results

In 2008,2010, pre-tax profit fell 30%increased 9% to CHF 6,0131,772 million compared with CHF 8,5431,629 million in 2007. This was partially2009, mainly due to an 8% decrease in operating expenses. Operating income was slightly lower compared with the abovementioned provision related to the US cross-border case. Excluding the impact of this provision, the pre-tax result would have fallen 19%, mainly reflecting theprevious year as reduced interest income was only partly offset by lower asset base and client transaction activity as well as higher credit loss expenses in line with the turbulence of the financial market.

expenses.

Operating income

Total operating income in 20082010 was CHF 15,0213,870 million, down 15%1% from CHF 17,7183,918 million a year earlier. RecurringInterest income was down 10%, mainly as low market interest rates continued to exert downward pressure on interest margins. In addition, interest income decreased 12%as approximately 30% of treasury related revenues were allocated from Retail & Corporate to Wealth Management from second quarter 2010 onwards. These effects were only partially compensated by higher volumes in certain products and improved margins on lower asset-based fees reflecting an 11% decrease in average invested assets. Non-recurringnew mortgage loans.
Non-interest income fell by 15% due to lowerwent up 8% as higher client activity increased brokerage fees reflecting decreased client transaction activity levels. Creditand commission income as well as brokerage-related foreign exchange trading income. Net credit loss expenses were impacted by provisions made for lombard loans, increasing significantlyCHF 76 million in 2010, a decline of CHF 102 million compared with 2009.

Operating expenses

Operating expenses declined 8% to CHF 3922,098 million from net credit loss recoveriesCHF 2,289 million, a result of CHF 30 millioncost-cutting measures initiated in the previous year. The deterioration2009. Personnel expenses decreased 11%, reflecting a 4% reduction in financial markets seen especially in fourth quarter 2008, resulted in a decrease in the value of collateral supporting some loans.
Operating expenses
At CHF 9,008 million, operatingaverage personnel levels and related restructuring expenses in 2008 were down 2% from CHF 9,176 million one-year earlier, despite the abovementioned provision relating to the US cross-border case. Excluding the impact of this provision, the operating expenses would have decreased 12%, mainly due to lower variable compensation. This resulted in lower personnel expenses, which fell 15% to CHF 5,430 million in 2008, compared with CHF 6,356 million one-year earlier.2009. General and administrative expenses were stable at CHF 3,295 million, were up 31% from CHF 2,514 million in 2007 due to the abovementioned provisions related to the US cross-border case.836 million. Net charges to other business divisions, at CHF 73509 million in 2008,2010, were up 70%down 2% from CHF 43518 million the previous year, mainly reflecting
lower charges for IT infrastructure.largely due to business realignments between Wealth Management and Retail & Corporate. Depreciation was CHF 323146 million in 2008, slightly down from2010 compared with CHF 334136 million one-year earlier. Amortization of intangible assets was CHF 33 million, up CHF 18 million from 2007.in 2009.
èRefer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for more information on allocation of additional Corporate Center costs to the business divisions in 2010

Development of invested assets

Net new money
Net new money outflows were CHF 107.1 billion in contrast to inflows of CHF 120.4 billion in the previous year, partly due to the effect of deleveraging by clients. Total net new money outflows comprised CHF 41.9 billion from Swiss clients and CHF 65.2 billion from international clients, compared with inflows a year earlier of CHF 15.2 billion and CHF 105.2 billion, respectively. This reflected slower wealth creation in a tougher economic climate, a near absence of corporate events creating large one-time increases in entrepreneurial wealth, the impact of deleveraging of private client portfolios and clients withdrawing assets from UBS, due to the effects of the financial market turbulence on our operating performance and reputation.

Invested assets

Invested assets were CHF 955136 billion on 31 December 2008, a decrease2010, an increase of CHF 4371 billion from 31 December 2007. This was a result of lower2009, reflecting higher equity markets and net new money outflows. Moreover, major currencies declined considerably against the Swiss francinflows, partly offset by adverse currency effects.

2009

Results

In 2009, pre-tax profit fell 32% to CHF 1,629 million compared with CHF 2,382 million in 2008. The decline in profit was due to a 17% decline in revenues and higher credit loss expenses. This was only partly compensated by a 9% reduction in operating expenses from cost-cutting measures.

Operating income

Total operating income in 2009 was CHF 3,918 million, down 20% from CHF 4,907 million a year earlier. Interest income decreased 16% as low market interest rates exerted downward pressure on deposit interest margins.
Non-interest income fell 17%, partly as a result of lower client activity affecting brokerage fees and commission income as well as brokerage related foreign exchange trading income. Net credit loss expenses increased to CHF 178 million from CHF 4 million in the courseprevious year, mainly reflecting credit losses with a small number of 2008.corporate clients.

Operating expenses

Gross margin on invested assets (international clients only)
The gross margin on invested assetsAt CHF 2,289 million, operating expenses in 2009 declined 7 basis points to9% from CHF 2,524 million one year earlier as a totalresult of 96 basis points. This excludescost-cutting measures. Personnel expenses decreased 5%, reflecting a 7% reduction in average personnel levels, which mostly took place towards the abovementioned valuation adjustments on a property fund. The recurring income margin was down 5 basis points to a totalend of 72 basis points as clients increased their allocation to lower-margin cash products. In addition, margins for mortgagesthe year. General and savings productsadministrative expenses, at CHF 835 million, were down and the lombard loan volume decreased. The non-recurring income margin was also down, decreasing 2 basis points to 24 basis points, mainly11% from CHF 938 million one year earlier due to lower brokerage feescost-cutting measures. Net charges to other business divisions, at CHF 518 million in 2009, were up 7% from CHF 482 million the previous year. Depreciation was CHF 136 million in 2009, down CHF 6 million from CHF 142 million a year earlier.

Development of invested assets

Invested assets

Invested assets were CHF 135 billion on 31 December 2009, an increase of CHF 13 billion from 31 December 2008, reflecting decreased client transaction activity levels.higher equity markets.



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UBS business divisions and Corporate Center
Wealth Management Americas

Wealth Management Americas

Business description

Wealth Management Americas provides advice-based relationships through its financial advisors, who deliver a fully-integrated set of wealth management solutions designed to address the needs of core affluent, high net worth and ultra high net worth individuals and families. It includes the former Wealth Management US business unit, as well as the domestic Canadian business and the international business booked in the United States.

Business

Wealth Management Americas is among the leading wealth managers in the regionAmericas based on invested assets, and includes the former Wealth Management US business, unit, the domestic Canadian business and the international business booked in the United States. On 31 December 2009,2010, the business division had CHF 690689 billion in invested assets.

Strategy and clients

Our vision is to be the best wealth management business in the Americas. In order to achieve this goal, we must be both client-focused and advisor-centric. Due to our competitive positioning, we believe we are large enough to be relevant and small enough

Strategy

to be nimble, enabling us to combine the advantages of both large and boutique players. By partnering with financial advisors serving high net worth and ultra high net worth clients, our goal is to become a trusted, differentiated and superior provider of financial solutions.

Wealth Management Americas focuses on deliveringWe deliver a fully-integrated set of advice-based wealth management solutions and advice-based wealth management services through our financial
advisors to meet the needs of our target client segments: ultra high net worth (more than USD 10 million in investable assets), high net worthclients (USD 1 million to USD 10 million in investable assets) and ultra high net worth clients (more than USD 10 million in investable assets), while also serving the core affluentneeds of the core-affluent (USD 250,000 to USD 1 million in investable assets). where appropriate. We are committed to providing advice to our clients by employing the best professionals in the industry, delivering the highest standard of execution and running a streamlined and efficient business.
     In 2009, we continued to develop our high net worth segment-specific offerings. With dedicated advisor teams focusing on the ultra high net worth segment, our Private Wealth Management unit now provides a targeted, advice-based and process-driven platform. With a foundation of nine dedicated offices and nine satellite offices across the



Geographical presence in key markets

(MAP)(MAP)

8085

UBS business divisions and Corporate Center

(BAR GRAPH)
1 Includes structured products and alternative investments.
(PIE GRAPH)

US, Private Wealth advisors who have access to an exclusive set of tools and capabilities through Private Wealth Management support our goals of ultra high net worth segment growth, productivity, and consistent client experience.
Americas

Organizational structure

Formed from the reorganization of the Global Wealth Management & Business Banking business division in 2009,

Wealth Management Americas is headquartered in Weehawken, New Jersey, where most corporate and operational functions are located. The client-facing organization consists of the branch networknetworks in the US, Puerto Rico and Canada, with 7,0846,796 financial advisors as of 31 December 2009.

     On 27 October 2009, Robert J. McCann was appointed as Chief Executive Officer of Wealth Management Americas2010. Most corporate and Memberoperational functions of the Group Executive Board of UBS AG.
     Significant recent acquisitions and business transfers include:
–February 2007, acquisition of McDonald Investments’s private client branch network.
–October 2008, transfer of the Investment Bank’s municipal securities operations serving private clients to the former Wealth Management US business unit (following the decision in June 2008 that the Investment Bank would exit the institutional municipal securities business).
–March 2009, entered into an agreement to sell 56 branches to Stifel, Nicolaus & Company, Incorporated. The sale was completed in four separate closings in the second half of 2009.
–September 2009, completed the sale of UBS’s Brazilian financial services business, UBS Pactual, to BTG investments, LP.
Legal structure
division are located in the home office in Weehawken, New Jersey.
In the US and Puerto Rico, the business divisionWealth Management Americas operates through direct and indirect subsidiaries of UBS AG. Securities and operations activities are conducted primarily through two registered broker-dealers, which during 2009 consisted of UBS Financial Services Inc., and UBS Financial Services Incorporated of Puerto Rico, UBS International Inc. and UBS Services USA LLC. On 31 December 2009, UBS International Inc. and UBS Services USA LLC were merged into UBS Financial Services Inc., reducing the number of registered broker-dealers to two.Rico. Our banking services in the US include those conducted through the UBS AG branches and UBS Bank USA, a federally regulatedfederally-regulated Utah bank, which provides Federal Deposit Insurance Corporation (FDIC)-insured- insured deposit accounts, and enhanced collateralized lending services.services and mortgages.
The business division’s Canadian wealth management and banking operations are conducted through UBS Bank (Canada).
CompetitorsSignificant recent acquisitions and business transfers include:
–March 2009: agreement to sell 56 branches to Stifel, Nicolaus
& Company, Incorporated. The sale was completed in four separate closings in the second half of 2009.
–September 2009: completed the sale of UBS’s Brazilian financial services business, UBS Pactual, to BTG Investments, LP.
–October 2010: transfer of investment management responsibility for the US hedge funds business from Wealth Management Americas to Global Asset Management’s alternative and quantitative investments business. This formed part of a new joint venture between the two business divisions, which aims to deliver attractive hedge fund and fund of hedge funds solutions to Wealth Management Americas’ clients.

Competitors

Wealth Management Americas competes with national full-service brokerage firms, domestic and global private banks, regional broker-dealers, independent broker-dealers, registered investment 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. In 2008 and 2009,Our main competitors include the financial crisis triggered consolidation within the industry that directly impacted our major competitors including Citi Global Wealth Management, Merrill Lynch Global Wealth Management, Morgan Stanley Global Wealth Management Group and Wachovia Securi-



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UBS business divisions and Corporate Center
Wealth Management Americas

ties. Specifically, Merrill Lynch was acquired bywealth management businesses of Bank of America, effective 1 January 2009, and Wachovia Corporation was acquired by Wells Fargo, effective 31 December 2008. In June 2009, Morgan Stanley, and Citi formed Morgan Stanley Smith Barney, a joint venture combining Morgan Stanley’s Global Wealth Management Group and Citi’s Smith Barney in the US, Quilter in the UK, and Smith Barney Australia.
Wells Fargo.

Products and services

Wealth Management Americas offers clients a full array of wealth management servicessolutions that focus on the individual investmentfinancial needs of each client. Comprehensive planning supports clients through the various stages of their lives, including education funding, charitable giving, tax management strategies, estate strategies, insurance, retirement, and trusts and foundations with corresponding product offerings for each stage. Our advisors work closely with internal consultants 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, whowhich provides research guidance to help support the clients’ investment decisions.

Our offerings are designed to meet a wide variety of investment objectives, including capital appreciation,wealth accumulation and preservation, income generation and diversification of portfolio concentration.diversification. To
address the full range of our clients’ investment needs, we also offer competitive lending and cash management services includingsuch as the ResourceRe-



Invested assets by asset class

(BAR CHART)
1Includes structured products and alternative investments.

Invested assets by client wealth

(PIE CHART)



86

UBS business divisions and
Corporate Center

source Management Account (RMA) product, credit cards,, FDIC-insured deposits, securities-backed lending, mortgages and mortgages. credit cards.

Additionally, Corporate Employee Financial Services provides comprehensive, personalized stock optionbenefit plan and other related services to many of the largest US corporations and their executives. For corporate and institutional clients, we offer a robust suite of solutions, including equity compensation, administration, investment consulting, defined benefit and contribution programs and cash management services.
Our clients can choose the type of relationship they prefer to have the option ofwith us via asset-based orpricing, transaction-based pricing for their relationships. Clients who choose asset-based pricingor 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, in the account, andwhile clients with discretionary advisory programs direct investment professionals to manage a portfolio on their behalf. Depending on the type of discretionary program, the client can give investment discretion to a qualified financial advisor, a team of our investment professionals or a third-party investment manager. Separately, mutual fund advisory programs are also offered, in whichwhereby a financial advisor works with the client to create a diversified portfolio of mutual funds guided by a research-driven asset allocation framework.
     Transaction-based pricing offers access toFor clients who favor individual securities, we offer a broad range of transaction products, including individual securities such as equitiesequity and fixed income instruments. To complement portfolio strategies,In addition, qualified clients may take advantage of structured products and alternative investment offerings.offerings to complement their portfolio strategies.
All of these solutions are supported by a dedicated markets execution group. This group partners with the Investment Bank and Global Asset Management in order to access the resources of the entire firm as well as third-party investment banks and asset management firms.



8287

UBS business divisions and Corporate Center
Business performance
Business division reporting
                  
 
  As of or for the year ended      % change from 
CHF million, except where indicated
  31.12.09   31.12.08   31.12.07    31.12.08 
 
Income  5,546   6,278   7,153    (12)
 
of which: ARS settlement impact
      (172)         
 
Credit loss (expense) /recovery  3   (29)  (2)     
 
Total operating income
  5,550   6,249   7,151    (11)
 
Personnel expenses  4,231   4,271   5,060    (1)
 
General and administrative expenses  1,017   2,558   1,209    (60)
 
of which: ARS settlement impact
      1,464          
 
Services (to)/from other business divisions  4   16   28    (75)
 
Depreciation of property and equipment  170   162   163    5 
 
Impairment of goodwill  34   0   0      
 
Amortization of intangible assets  62   65   70    (5)
 
Total operating expenses
  5,518   7,072   6,530    (22)
 
Business division performance before tax
  32   (823)  621      
 
of which: ARS settlement impact
      (1,636)         
 
of which: business division performance before tax excluding ARS settlement impact
  32   813   621    (96)
 
                  
Key performance indicators1
                 
 
Pre-tax profit growth (%)2
  N/A   N/A   12.1      
 
Cost /income ratio (%)  99.5   112.6   91.3      
 
Net new money (CHF billion)3
  (11.6)  (15.9)  35.9      
 
Gross margin on invested assets (bps)  81   82   77    (1)
 
                  
Additional information
                 
 
Average attributed equity (CHF billion)  8.8   7.8        13 
 
Return on attributed equity (RoaE) (%)  0.4   (10.6)         
 
BIS risk-weighted assets (CHF billion)4
  22.8   26.9        (15)
 
Return on BIS risk-weighted assets, gross (%)  23.5   28.9          
 
Goodwill and intangible assets (CHF billion)  4.2   4.5   4.8    (7)
 
Recurring income  3,256   4,076   4,455    (20)
 
Invested assets (CHF billion)  690   644   906    7 
 
Client assets (CHF billion)  737   682   1,018    8 
 
Personnel (full-time equivalents)  16,925   20,623   21,180    (18)
 
Financial advisors (full-time equivalents)  7,084   8,607   8,693    (18)
 
                  
Additional information (only Wealth Management US)
                 
 
Net new money (CHF billion)3
  (7.6)  (10.6)  26.6      
 
Net new money including interest and dividend income (CHF billion)5
  11.5   11.7   51.5      
 
                  
Business division reporting excluding PaineWebber acquisition costs6
                 
 
Business division performance before tax
  155   (689)  841      
 
Cost/ income ratio (%)  97.3   110.4   88.5      
 
Average attributed equity (CHF billion)  5.2   4.2        24 
 
1 For the definitions of our key performance indicators, refer to the “Measurement and analysis of performance” section of this report. 2 Not meaningful if either the current period or the comparison period is a loss period. 3 Excludes interest and dividend income. 4 BIS risk-weighted assets (RWA) are according to Basel II. 5 For purposes of comparison with US peers. 6 Acquisition costs represent goodwill and intangible assets funding costs and intangible assets amortization costs related to the acquisition of the PaineWebber retail brokerage business in 2000.

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Wealth Management Americas

Business performance

                 
Business division reporting 
  As of or for the year ended % change from 
CHF million, except where indicated
  31.12.10   31.12.09   31.12.08   31.12.09 
 
Recurring income  3,472   3,256   4,076   7 
 
Non-recurring income  2,093   2,290   2,201   (9)
 
Income  5,565   5,546   6,278   0 
 
of which: ARS settlement impact
          (172)    
 
Credit loss (expense) / recovery  (1)  3   (29)    
 
Total operating income
  5,564   5,550   6,249   0 
 
Personnel expenses  4,225   4,231   4,271   0 
 
Financial advisor compensation1
  2,068   1,828   2,130   13 
 
Compensation commitments and advances related to recruited FAs2
  599   599   305   0 
 
Salaries and other personnel costs  1,558   1,804   1,836   (14)
 
General and administrative expenses  1,223   1,017   2,558   20 
 
of which: ARS settlement impact
          1,464     
 
Services (to) / from other business divisions  (6)  4   16     
 
Depreciation of property and equipment  198   170   162   16 
 
Impairment of goodwill  0   34   0   (100)
 
Amortization of intangible assets  55   62   65   (11)
 
Total operating expenses
  5,694   5,518   7,072   3 
 
Business division performance before tax
  (130)  32   (823)    
 
of which: ARS settlement impact
          (1,636)    
 
of which: business division performance before tax excluding ARS settlement impact
  (130)  32   813     
 
                 
Key performance indicators3
                
 
Pre-tax profit growth (%)4
  N/A   N/A   N/A     
 
Cost / income ratio (%)  102.3   99.5   112.6     
 
Net new money (CHF billion)5
  (6.1)  (11.6)  (15.9)    
 
Gross margin on invested assets (bps)  80   81   82   (1)
 
                 
Additional information
                
 
Average attributed equity (CHF billion)6
  8.0   8.8   7.8   (9)
 
Return on attributed equity (RoaE) (%)  (1.6)  0.4   (10.6)    
 
BIS risk-weighted assets (CHF billion)  23.8   22.8   26.9   4 
 
Return on BIS risk-weighted assets, gross (%)  23.8   23.5   28.9     
 
Goodwill and intangible assets (CHF billion)  3.7   4.2   4.5   (12)
 
Invested assets (CHF billion)  689   690   644   0 
 
Client assets (CHF billion)  738   737   682   0 
 
Personnel (full-time equivalents)  16,330   16,925   20,623   (4)
 
Financial advisors (full-time equivalents)  6,796   7,084   8,607   (4)
 
                 
Additional information (only Wealth Management US)
                
 
Net new money (CHF billion)5
  (5.5)  (9.8)  (11.4)    
 
Net new money including interest and dividend income (CHF billion)7
  13.1   10.0   11.9     
 
                 
Business division reporting excluding PaineWebber acquisition costs8
                
 
Business division performance before tax
  (21)  155   (689)    
 
Cost / income ratio (%)  100.4   97.3   110.4     
 
Average attributed equity (CHF billion)  4.6   5.2   4.2   (12)
 
1 Financial advisor compensation consists of grid-based compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated based on financial advisor productivity, firm tenure, assets and other variables.  2 Compensation commitments and advances related to recruited financial advisors (FAs) represents costs related to compensation commitments and advances granted to financial advisors at the time of recruitment, which are subject to vesting requirements.  3 For the definitions of our key performance indicators, refer to the “Measurement and analysis of performance” section of this report.  4 Not meaningful if either the current period or the comparison period is a loss period.  5 Excludes interest and dividend income.  6 Refer to the “Capital management” section of this report for more information about the equity attribution framework.  7 For purposes of comparison with US peers.  8 Acquisition costs represent goodwill and intangible assets funding costs and intangible asset amortization costs related to UBS’s 2000 acquisition of the PaineWebber retail brokerage business.

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2010

Results

Wealth Management Americas reported a pre-tax loss of CHF 130 million in 2010 compared with a pre-tax profit of CHF 32 million in 2009. In 2010, Wealth Management Americas incurred restructuring charges of CHF 162 million, while 2009 included restructuring charges of CHF 152 million and net goodwill impairment charges of CHF 19 million related to the sale of UBS Pactual. Excluding these items, pre-tax performance would have declined to a profit of CHF 32 million in 2010 from CHF 203 million in 2009, primarily resulting from a significant increase in litigation provisions in 2010 to CHF 320 million from CHF 54 million in 2009.

Operating income

Operating income of CHF 5,564 million was essentially flat compared with CHF 5,550 million in 2009, but increased 4% in US dollar terms. Recurring income increased 7% to CHF 3,472 million due to higher revenues from managed accounts and mutual funds related to higher average invested assets. Recurring income increased to 62% of operating income from 59% in 2009. Non-recurring income decreased 9% to CHF 2,093 million due to lower municipal trading income, partly offset by higher commission income and a demutualization gain from Wealth Management Americas’ stake in the Chicago Board Options Exchange.

Operating expenses

Operating expenses increased 3% to CHF 5,694 million from CHF 5,518 million. In 2010, operating expenses included CHF 162 million in restructuring charges compared with CHF 152 million in restructuring charges in 2009. Additionally, 2009 included CHF 34 million in goodwill impairment charges related to the sale of UBS Pactual (of which CHF 15 million was charged to the Corporate Center, as this was related to foreign exchange exposures managed by Group Treasury).
ResultsPersonnel expenses were CHF 4,225 million in 2010, down slightly from CHF 4,231 million in the previous year. In US dollar terms, personnel expenses increased 4%. Excluding CHF 35 million in restructuring charges in 2010 and CHF 71 million in restructuring charges in 2009, personnel expenses would have increased 1% from the previous year. This increase was due primarily to higher financial advisor compensation related to higher revenue production and the introduction of the GrowthPlus incentive compensation program in 2010, partly offset by lower salaries and other per-

sonnel costs, resulting from restructuring initiatives in 2010 and 2009. Expenses for compensation commitments and advances related to recruited financial advisors were flat from 2009, but increased 4% in US dollar terms. Compensation advance balances were CHF 3,112 million as of 31 December 2010, down 4% from 31 December 2009, but increased 7% in US dollar terms.

Non-personnel expenses increased 14% to CHF 1,470 million from CHF 1,287 million in 2009, principally due to higher litigation provisions, which increased to CHF 320 million in 2010 from CHF 54 million in 2009. Non-personnel expenses included CHF 127 million in restructuring charges in 2010 related to real estate writedowns, while 2009 included restructuring charges of CHF 82 million and the abovementioned goodwill impairment charges. In addition, non-personnel costs included a shift of expenses from the Corporate Center to the business divisions in 2010.
èRefer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for more information on allocation of additional Corporate Center costs to the business divisions in 2010

Development of invested assets

Net new money

Net new money outflows for Wealth Management Americas were CHF 6.1 billion in 2010 compared with CHF 11.6 billion in the prior year.
The Wealth Management US business saw net new money outflows of CHF 5.5 billion in 2010 compared with CHF 9.8 billion in 2009. We experienced net new money outflows during the first half of 2010, mainly due to financial advisor attrition and limited recruiting of experienced financial advisors. Net new money turned positive in the second half of 2010 due to improved financial advisor retention and improved net new money inflows from financial advisors employed with UBS for more than one year. Including interest and dividend income, net new money inflows for the Wealth Management US business improved to CHF 13.1 billion from CHF 10.0 billion in 2009. Including interest and dividend income only from Wealth Management US, Wealth Management Americas had net new money inflows of CHF 12.5 billion in 2010, compared with CHF 8.2 billion in 2009.
In 2010, Wealth Management Americas recorded CHF 2.2 billion of net new money inflows related to the inclusion of invested assets of certain retirement plan assets not custodied at UBS, as discussed below in the “Invested assets” section.



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Invested assets

Invested assets were CHF 689 billion on 31 December 2010, essentially flat from CHF 690 billion on 31 December 2009. In US dollar terms, invested assets increased 12% primarily due to positive market performance in the second half of 2010. During the course of the year, Wealth Management Americas conducted a review of its invested assets reporting and determined that, going forward, certain retirement plan assets custodied away from UBS should be included in invested assets. As a result, invested assets increased by CHF 22 billion at year end and net new money inflows increased by CHF 2.2 billion.

Gross margin on invested assets

The gross margin on invested assets was 80 basis points in 2010, down from 81 basis points in 2009, the result of a slight increase in income compared with a 2% increase in average invested assets. The recurring income margin increased 2 basis points to 50 basis points due to higher fees from managed accounts and mutual funds. The non-recurring margin decreased 3 basis points to 30 basis points due to a decrease in municipal trading income.



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2009

Results

Wealth Management Americas reported a pre-tax profit of CHF 32 million in 2009 compared with a pre-tax loss of CHF 823 million in 2008. The 2009 results were negatively impacted byincluded restructuring charges of CHF 152 million and a net goodwill impairment charge of CHF 19 million related to the sale of UBS Pactual. Our performance in 2008 was negatively impacted byincluded CHF 1,636 million in charges and trading losses related to auction rate securities (ARS). Excluding these items, pre-tax performance would have been a profit of CHF 203 million in 2009 compared with a profit of CHF 813 million in 2008.

Operating income

In 2009, operating income decreased 11% to CHF 5,550 million from CHF 6,249 million in 2008. Excluding ARS-related trading losses of CHF 172 million in 2008, operating income would have declined 14%. Recurring income wasdecreased 20% to CHF 3,256 million, 20% lower than the previous year due to lower managed accountsaccount fees related to an 11% decrease in average invested assets, and lowerwhile interest income due todeclined resulting from lower interest spreads. Recurring income declined to 59% of operating income from 65% in 2008. Non-recurring income increased 4% due to a CHF 35 million interest credit from the Investment Bank, resulting from a change in the UBS Bank USA investment portfolio strategy and higher municipal trading income, partly offset by lower commission revenue related to lowerreduced transactional activity. In addition, 2008 was negatively impacted byincluded the abovementioned trading losses related to ARS.

Operating expenses

Operating expenses decreased 22% to CHF 5,518 million from CHF 7,072 million. In 2009, operating expenses included CHF 152 million in restructuring charges and CHF 34 million in goodwill impairment charges related to the sale of UBS Pactual (of which CHF 15 million was charged to the Corporate Center, as this was related to foreign exchange exposures managed by Group Treasury), while 2008 expenses included CHF 1,464 million in charges related to the ARS settlement. Excluding these charges, operating expenses would have decreased 5%. Personnel expenses were CHF 4,231 million in 2009, down 1% from CHF 4,271 million in the previous year. Excluding CHF 71 million in restructuring charges in 2009, personnel expenses would have decreased 3% from the previous year. This was a result of lowerreduced salaries related to a decrease in headcount and lower revenue-based financial advisor compensation andrelated to lower revenue. This decrease was partly offset by higher incentivean increase in costs for compensation commitments and advances related to recruited financial advisors, as a result of increased financial advisor recruiting in the second half of 2008 through the first quarter of 2009. Accordingly, compensation advance balances related to recruited financial advisors increased 61% to CHF 3,253 million at 31 De-

compensation as well as higher recruiting related costs.

cember 2009 from 31 December 2008. Non-personnel expenses declined 54% to CHF 1,287 million from CHF 2,801 million in 2008, but would have decreased 11% excluding CHF 82 million in restructuring costs that were mainly related to real estate writedowns, the abovementioned goodwill impairment charges and ARS-related charges in 2008. The decline was also due to cost-cutting measures in general, including reduced general and administrative expenses.

Development of invested assets

Net new money

In 2009, net new money outflows for Wealth Management Americas were CHF 11.6 billion compared with CHF 15.9 billion in the prior year. The former Wealth Management US business unit’sbusiness’ net new money outflows were CHF 7.69.8 billion in 2009, compared with CHF 10.611.4 billion in 2008. Following strong net new money inflows in first quarter 2009 due to recruitment of experienced financial advisors, weWealth Management US experienced net new money outflows during the remainder of the year due to financial advisor attrition and limited recruiting of experienced financial advisors as a result of reputational issues. Including interest and dividends, net new money inflows for the former Wealth Management US business unit in 2009 were CHF 11.510.0 billion, compared with CHF 11.711.9 billion in 2008.
Invested assets
Including interest and dividend income only from Wealth Management US, Wealth Management Americas had net new money inflows of CHF 8.2 billion in 2009, compared with CHF 7.4 billion in 2008.

Invested assets

Invested assets were CHF 690 billion in invested assets on 31 December 2009, up 7% from CHF 644 billion on 31 December 2008. This increase was principally driven bydue to positive market performance, and was partly offset by a reduction of CHF 24 billion related to the sale of branches to Stifel, Nicolaus & Company, Incorporated and the sale of UBS Pactual, as well as net new money outflows. In addition, invested assets were impacted by negative currency translation effects due to a 3% depreciation of the US dollar versus the Swiss franc.

Gross margin on invested assets

The gross margin on invested assets was 81 basis points in 2009, down from 82 basis points in 2008. The decrease iswas a result of a 12% decline in income compared with an 11% decrease in average invested assets. The recurring income margin declined 5 basis points to 48 basis points, corresponding to a 20% decrease in recurring income. The nonrecurringnon-recurring margin increased 4 basis points to 33 basis points, driven bydue to an increase in municipal trading income and a CHF 35 million interest credit from the Investment Bank which was attributed(attributed to a change in the UBS Bank USA investment portfolio strategy,strategy), while 2008 included the abovementioned trading losses related to ARS.



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2008
Results
In 2008, we recorded a pre-tax loss of CHF 823 million compared with a pre-tax profit of CHF 621 million in 2007. Driving the decline were total ARS-related charges of CHF 1,636 million in 2008. Excluding these charges, the pre-tax result would have increased 31%. In US dollar terms and excluding ARS-related charges, the pre-tax performance would have increased 51%, driven by resilient operating income growth during a challenging environment coupled with a decline in expenses, including lower accruals for variable compensation.
Operating income
In 2008, total operating income was CHF 6,249 million, down 13% from CHF 7,151 million in 2007. Excluding currency effects and ARS-related trading losses, operating income increased 3% from 2007. The increase in operating income reflected stronger net interest income related to an increase in deposit balances, and a positive impact of the new equity attribution framework introduced in first quarter 2008, and was partly offset by lower transactional revenue and an increase in credit loss expense.
Operating expenses
Total operating expenses rose 8% to CHF 7,072 million in 2008 from CHF 6,530 million in 2007. Excluding ARS-related charges, operating expenses declined 14%. In US dollar terms and excluding ARS-related expenses, operating expenses declined 1%. In US dollar terms, personnel expenses decreased 3%, driven primarily by lower accruals for variable compensation, and were partly offset by higher costs related to financial advisor recruitment and higher severance costs related to non-financial advisor staff reductions. Excluding ARS-related expenses, non-personnel costs (including general and administrative expenses, depreciation and amortiza-
tion expenses and services provided to and received from other business divisions), in US dollar terms, increased 5% due to increases in insurance costs, occupancy, legal fees, and depreciation costs, and were partly offset by lower provisions (non-ARS-related), lower service charges from other business divisions and reduced discretionary spending on travel, marketing, and consulting fees.
Development of invested assets
Net new money
In 2008, net new money outflows were CHF 15.9 billion compared with inflows of CHF 35.9 billion in 2007, with net new money outflows concentrated in the second and third quarters. Net new money at the former Wealth Management US business unit reflected an outflow of CHF 10.6 billion compared with an inflow of CHF 26.6 billion in 2007. The outflows reflected the financial market turbulence and its impact on our operating performance as well as reputational issues which led to an increase in financial advisor attrition and clients diversifying assets away from the firm. Including interest and dividends, the former Wealth Management US business unit had net new money inflows in 2008 of CHF 11.7 billion, compared with outflows of CHF 51.5 billion in 2007.
Invested assets
Wealth Management Americas had CHF 644 billion in invested assets on 31 December 2008, down 29% from CHF 906 billion on 31 December 2007. This was a result of declining markets over the year, net new money outflows and the negative impact of currency translation.
Gross margin on invested assets
The gross margin on invested assets was 82 basis points in 2008, up from 77 basis points in 2007. The increase was mainly a result of a 5 basis point increase in the recurring income margin to 53 basis points, while the non-recurring margin was unchanged at 29 basis points.


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Global Asset Management


Business description

Global Asset Management is a large-scale asset manager with well diversified businesses well-diversified across regions, capabilities and distribution channels. It offersWe offer investment capabilities and investment styles across all major traditional and alternative asset classes. These include equities, fixed income, currency, hedge fund, real estate infrastructure and private equityinfrastructure investment capabilities thatwhich can also be combined ininto multi-asset strategies.

The fund services unit provides professional services including legal fund set-up, accounting and reporting for traditional investment funds and alternative funds.

Business

Global Asset Management offers a diverse range of investment capabilities and services from a boutique-like structure, encompassing all major asset classes, including equities, fixed income, asset allocation, currency, risk management, hedge funds, real estate and infrastructure private equityas well as asset allocation, risk management and fund administration.administration services. Invested assets totaled CHF 583559 billion on 31 December 2009,2010, making Global Asset Management one of the larger institutionalglobal asset managers andmanagers. We are among the largest hedge fund of funds and real estate investment managers in the world. It is alsoworld, one of the largestbiggest mutual fund managers in Europe and the largest in Switzerland. The “Key focus areas”“Business structure” chart shows the investment, distribution and support structure of the business division.

Revenues and key performance indicators are reported according to two principal asset management client segments: institutional (for example, corporateGlobal Asset Management’s business lines: traditional investments (equities, fixed income and public pension plans, governmentsmulti-asset (global investment solutions)), alternative and their central banks)quantitative investments, global real estate, infrastructure and wholesale intermediary (financial intermediaries, including UBS’s wealth management businesses, and third parties).fund services. The bar charts on the following pages show the breakdown of invested assets and revenues across these segments, andas well as by regions and asset classes.channels.

Strategy

As the financial crisis recedes, significant renewed growth in the asset management industry is anticipated. The fundamental drivers of growth in the industry, such as the need to save for retirement and the increase in savings in emerging economies, remain in place and appear to be reaccelerating.

Global Asset Management is focused on seizingdelivering consistent long-term investment performance and capitalizing on the expected growth opportunities that growth within the asset management industry. The industry outlook remains strong with three main drivers: the financial crisis has reduced the assets of both the retired and the working population, creating a pressing need for increased savings rates; emerging markets will bring. continue to drive the growth of the mutual funds industry and retirement schemes in these markets; and as governments focus on reducing deficits, they will need to reduce support for benefits and pensions and will face increased pressure for privatizing infrastructure assets.

The diversification of theour business across geographies, capabilities and distribution channels in recent years, and an improvement in investment performanceplaces us in a number of capabilities, providegood position to benefit from shifting market dynamics and provides a solid foundation for future growth.capturing these growth opportunities.
Our key strategic objective is to monetize our improvedgood long-term investment performance, both through both gaining new client assets and improving our retention of existing client assets.
     In pursuit of our strategic objective, weWe are working to expandbuild on our third-partystrong third party institutional business, while launching intensified third party wholesale



Business structure

(CHART)
1 Works in close coordination with region heads and wholesale distribution,the Pan Asia Institutional team.  2 Reports to increase our cooperationUBS Group functional head.

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initiatives in the Americas and in Europe. Through increased collaboration with theUBS’s wealth management businesses, andwe expect to leveragebenefit from their return to growth. We continue to capitalize on our existing strongestablished positions in emerging markets, notably in China, South Korea and the Middle East.



East and will build our presence in Brazil following the completion of the acquisition of Link Investimentos.

Key focus areas

(CHART)
1 Reports to UBS Group functional head.

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Organizational structure

Our business division has main offices in London, Chicago, Frankfurt, Hartford, Hong Kong, New York, Paris, Singapore, Sydney, Tokyo Toronto and Zurich, and employs around 3,500 personnel in 2524 countries.

Global Asset Management operates through UBS AG, or through its subsidiaries.

Significant recent acquisitions and business transfers

–In May 2007, UBS announced the closure of Dillon Read Capital Management (DRCM). The business was formed in June 2005 and officially launched in June 2006. The business had two arms – one managing existing proprietary assets transferred from the Investment Bank, the other managing outside investor assets. As the development of the business did not meet original expectations, it was closed in May 2007.
–In July 2007, UBS purchased a 51% stake in Daehan Investment Trust Management Company Ltd. (DIMCO) from Hana Daetoo Securities (formerly Daehan Investment & Securities Company Ltd.), a wholly-owned subsidiary of Hana Financial Group. DIMCO was renamed UBS Hana Asset Management Company Ltd. internationally, and Hana UBS Asset Management in Korea.
– In February 2008, UBS acquired 100% of the Caisse Centrale de Réescompte (CCR) Group in France from Commerzbank. The asset management business of CCR currently operates as CCR Asset Management.
– In August 2008, UBS sold its 24.9% stake in Adams Street Partners to its remaining shareholders. The transaction closed on 6 August 2008 resulting in a net gain of CHF 168 million.
– In September 2009, UBS completed the sale of its Brazilian financial services business, UBS Pactual, including its asset management business, UBS Pactual Asset Management.
–In December 2009, the real estate investment management business of Wealth Management & Swiss Bank was transferred to Global Asset Management.
–In April 2010, UBS announced that it had agreed to acquire Link Investimentos, one of the largest independent broker-dealers in Brazil.
–In October 2010, UBS increased its holding from 51.0% to 94.9% in UBS Real Estate Kapitalanlagegesellschaft mbH (KAG), a Global Asset Management continuesjoint venture with Siemens in Munich, Germany. We purchased our original stake in Siemens’ real estate business in January 2005.
–In October 2010, investment management responsibility for the US hedge fund business was transferred from Wealth Management Americas to serve BrazilGlobal Asset Management’s alternative and other Latin American markets through its Americas distribution team.quantitative investments business. This formed part of a new joint venture between the two business divisions, which aims to deliver attractive hedge fund and fund of hedge funds solutions to Wealth Management Americas’ clients.

Invested assets by region1

Competitors(BAR CHART)
1 Assets represented are totals for the Global Asset Management business division worldwide. The regional split is primarily based on the client servicing location.

Competitors

Our competitors range frominclude global firms with wide-ranging capabilities, (suchsuch as Fidelity Investments, AllianceBernstein Investments, BlackRock, JP Morgan Asset Management, Deutsche Asset Management and Goldman Sachs Asset Management), toManagement. Many of our other competitors are regional or local firms specializing in particular asset classes. Many of our competitors are specialist niche players who focus mainly on one asset class, particularly in the real estate, hedge fund or infrastructure and regional private equity investment areas.

The asset management industry is undergoing a period of consolidation and polarizationbecoming increasingly polarized into either large-scale firms or niche specialists. Large-scale firms, like our Global Asset Management, business division, offer well-diversified investment capabilities across all major asset classes and have a global presence as well as a broad global distribution network.

Products and services

The “Investment capabilities and services” chart illustrates our offering, which can be delivered in the form of segregated, pooled and advisory mandates, along with a range of more than 500 registered investment funds, exchange-traded funds and other investment vehicles across all major asset classes.



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Investment capabilities and services
Alternative andGlobalGlobal investment
Equities
Fixed incomequantitative investmentsreal estatesolutionsInfrastructureFund services
Core/valueGlobalSingle-manager
hedge funds		GlobalGlobalDirect investmentAlternative funds
GlobalCountry and regionalCountry and regionalCountry and regionalInvestment funds
Country and regionalSector specificMulti-manager
hedge funds		Income, core, value-added
and opportunistic strategies		Asset allocation
Emerging marketsEmerging marketsCurrency management
SpecialistHigh yieldQuantitativeMulti-manager fundsReturn and risk targeted
Long / shortStructured creditInfrastructure
fund of funds		Listed securitiesStructured portfolios
HALOLiquidity / short durationFarmlandRisk management and
advisory services
GrowthIndexedPrivate equity
fund of funds
Global
Country and regionalActive commodities,
multi-manager
Structured
Structured alpha
Structured beta and
indexing

– 
Equitiesoffers a full spectrum of investment styles with varying risk and return objectives. It has three investment pillars with distinct strategies, including core/core / value (portfolios managed according to a price to intrinsic value philosophy), growth investors (a(portfolios of quality global growth manager)growing companies that we believe to be undervalued in the market) and structured equities (strategies that employ proprietary analytics and quantitative methods)methods, including passive).
– 
Fixed incomeoffers a diverse range of global, regional and local market-based investment strategies that cover a wide range of benchmarks. Its capabilities include “core” government and corporate bond strategies, complemented by extended strategies such as high-yield and emerging market debt.


Invested assets by region1

(BAR CHART)
1 Assets represented are totals for the Global Asset Management business division worldwide. The regional split is primarily based on the client servicing location.

Institutional/wholesale intermediary revenues

(BAR CHART)



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– 
Alternative and quantitative investmentshas two primary business lines – multi-manager (or fund of funds) and single manager. The former constructs portfolios of hedge funds and other alternative investments operated by third-party managers, allowing clients to have diversified exposure to a range of hedge funds, private equity and infrastructure strategies. O’Connor is a key provider of single-managersingle manager global hedge funds.
– 
Global real estateactively manages real estate investments in Asia, Europe and the US, andas well as across the major real estate sectors. Its capabilities are focused on core and value-added strategies but also include other strategies across the risk/return spectrum. These are offered on a global, regional and country basis and through open- and closed-end private funds, customizedIt offers direct investment, structures, fundsfund of funds individually managed accounts and publicly traded real estate securities.
securities strategies.
– 
Global investment solutionsoffers asset allocation, currency, manager research and risk management services. It manages a wide array of domestic, regional and global balanced portfolios, currency mandates, structured portfolios, multi-manager and absolute return strategies. Through its strategic investment advisory services, it supports clients in a wide range of investment-related functions, including investment policy setting, integrated asset liability solutions, multi-manager approaches, investment outsourcing and investment outsourcing.
fiduciary management.
– 
Infrastructureoriginates and private equityis involved in the origination and management ofmanages specialist fundsstrategies that invest directly in infrastructure and other private assets globally.
– 
Fund services,the global fund administration business, provides professional services, including legal set-up,setup, reporting and accounting for retail and institutional investment funds, hedge funds and other alternative funds.


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(BAR CHART)

Clients

Global Asset Management has a client base located throughout the world. As of 31 December 2010, approximately 60% of invested assets originated from institutional clients (for example, corporate and public pension plans, governments and their central banks), with the remainder from wholesale clients (financial intermediaries, including UBS’s wealth management businesses, and third parties).

Distribution of our capabilities and services to both client segments relies upon our regional business structure, as detailed in the “Business structure” chart (Americas, Asia Pacific, Switzerland and Europe). Through regional distribution, we are able to leverage the full resources of our global investment platforms and functions to provide clients with relevant investment management products and services, client servicing and reporting at a local level. In October 2010, a Global Sovereign Markets group was established to deliver an integrated global approach to this client segment and ensure that sovereign institutions receive the dedicated advisory, investment and training solutions they require.

Investment performance 2009

From March onwards, 2009 was largely characterized by varying degrees of recovery2010

Investment markets were volatile in most financial markets, with some volatility along the way. Many2010 yet two-thirds of our key actively-managed traditional strategies delivered strong results, further improving their long-term records. By contrast, some of our actively managed equity strategies faced the greatest head-winds as many equity markets, notably the US, became highly sentiment-driven. This created a difficult environment for our active managers focusing on fundamental analysis to seek to generate outperformance.

After performing well in 2009, core / value large cap equity strategies struggled to match their gains in 2010, a year when the best returning stocks were typically less responsive to com-

pany fundamentals than to broad economic factors. As a result, core / value large cap strategies such as US, pan-European, emerging markets, Asia (ex-Japan) and Australia underperformed their benchmarks and peers, although the margin of underperformance was much smaller than the margin of outperformance in 2009. Both UK value and Canadian large cap equity strategies also underperformed in 2010. Some large cap core / value strategies did extend their favorable performance into 2010, including global, global ex-US, a high alpha emerging markets strategy and global and European concentrated alpha strategies. Swiss large cap equities performed positively as well. Small cap strategies in the core / value pillar tended to perform extremely well, especially European, US and Swiss small cap strategies. Still, on a three-year basis, well over half of key core / value strategies were well positioned to benefit from the recovery, and the initial performance improvementahead of 2008 grew into a substantial and sustained improvement in 2009 across many strategies.

     Among core/value equity strategies, a high proportion delivered returns that equaled or exceeded their benchmarks for 2009 and, in– most cases,of them by significantly more than normal expectations for actively managed strategies. This built on the generally improved performance in 2008, and most strategies continued to improve their relative standings compared with our peers. Global, US, European, Australian and Asian emerging markets strategies saw improved performance versus benchmarks as a result of broad-based stock selection gains, which in many cases, were reported on a consistent quarter-by-quarter basis throughout the year. In addition to these core large cap traditional strategies, most global and regional small cap, concentrated and long-short strategies, and global sustainable and responsible investment strategies performed especially well. UK strategies performed at benchmark or better for the year. Canadian strategies delivered disappointing returns during the year, but their medium- and long-term records remain solid.
notable margin.
The majority of growth equities strategies exceededextended their solid 2009 performance by exceeding their benchmarks during the year.in 2010. Notable leaders versus peers were theEuropean and small cap (both US and ex-US) growth strategies. After a very strong 2009, US large cap select growth and Global (ex US) small cap growth strategies, bothtrailed modestly by comparison in 2010, but not nearly to the extent of which greatly exceeded both their benchmarks and peers. Longer-term performanceits outperformance in 2009. Outperformance on a since-inception basis remains across the entire range of growth strategies with long-term (three-year plus) records.
In structured equities, platformstrategies relying strongly on input from fundamental stock analysis, which performed extremely well in 2009, underperformed benchmarks in 2010. While US fundamental equity market neutral had a disappointing year, it remained strong, with allahead of peers on a since-inception basis. Conversely, strategies outpacingrelying specifically on quantitatively-derived insights performed ahead of benchmarks in 2010, and many also outperformed on a three-year or since-inception basis. Passive / exchange traded funds (ETF) strategies met their respective benchmarks since inception.objectives in 2010.
(BAR CHART)



88

Invested assets by business line

(BAR CHART)

Invested assets by channel

(BAR CHART)



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Investment capabilities and services
Alternative and
quantitativeGlobalGlobal investmentInfrastructure and
EquitiesFixed incomeinvestmentsreal estatesolutionsprivate equityFund services
Core /valueGlobalSingle managerGlobalGlobalDirect infrastructureAlternative funds
GlobalCountry and regionalhedge fundsCountry and regionalCountry and regionalinvestmentinvestment funds
Country and regionalSector specificMulti-managerPrivate strategiesAsset allocationGlobal and regional
Emerging marketsEmerging marketshedge fundsReal estate securitiesCurrency management
SpecialistHigh yieldQuantitativeAgricultureReturn and risk targeted
Long /shortStructured creditInfrastructureStructured portfolios
HALOLiquidity/short durationfund of fundsRisk management and
Growth investorsindexedPrivate equityadvisory services
Globalfund of funds
Country and regionalActive commodities,
Structured equitiesmulti-manager
Systematic alpha
Quantitative equities
Index and
portfolio construction
solutions
(including passive)

     Among structured equities strategies, all key systematic alpha strategies exceeded performance objectives for the year. Particularly strong results were achieved in global, UK and Swiss small and midcap strategies. The US fundamental equity market neutral strategy generated positive absolute returns, as did quantitative equities’ global equity market neutral strategy. Among long-only strategies, quantitative equities’ global and US active strategies were ahead of benchmark, while the Japan and European strategies trailed their benchmarks. Enhanced index strategies mostly lagged
benchmarks with the exception of Japan. Passive strategies continued to add value in line with their risk objectives.
     Global bond markets had another dramatic year in 2009, most notably the corporate bond markets where yield spreads (the difference in yield versus government bonds) peaked in March at record levels. From the first quarter onwards, investment grade, high yield and emerging market bond yield spreads reduced dramatically, resulting in record high total returns from these fixed income asset classes. A combination of this market environment and portfolio posi-


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tioning ledIn global fixed income markets, yields generally fell over the year, leading to Significanthigh total returns for most bond markets. Our fixed income strategies performed very well, and a large majority of key strategies outperformed their benchmark indices for the year and improved their longer-term records. This outperformance of UK, US,for the year was consistent across regions and strategies, and was evident in the traditional strategies (such as global sovereign,sovereign), in local bond strategies (such as Australian, Canadian, Euro, Japanese, Swiss, UK and US), in higher alpha and newer strategies (such as emerging market bondmarkets and Asian bonds) and in absolute return strategies (such as currency alpha and modest outperformancefixed income opportunities). Two thirds of Japanese bond strategies. The performance of manyour key strategies was substantially stronger thanwere also ahead of or in the previous year. High yield strategies underperformed their benchmarks but achieved positive total returnsline with peers for the year. Money market funds continued to achieve their capital preservation objectives.
The performance of multi-asset strategies includingwas positive in 2010, building on a strong 2009 and improving longer-term records. Benchmarked strategies finished the global securities composite and dynamicyear in line with or above their reference indices overall, comparing favorably with peers’ performance. Dynamic alpha absolute return strategies was stronglyturned positive duringtowards the end of the year. Asset allocation, currency management and security selection all contributed to this result. Multi-asset strategies had been positioned for a recovery in risky assets such as equities, and thusleading to a strong result in the final quarter following a period of more volatile markets. These strategies benefited from the upswing in equity markets that started in early Marchstrong currency and continuedasset allocation, while stock selection results were mixed overall. The stand-alone active currency strategy posted strong returns throughout the year. As in 2008, the active currency strategy performed strongly during 2009. GlobalSimilarly strong performance came from global and regional convertible bondsbond strategies, which ended the year well ahead of benchmark, delivering a very strong performance.benchmarks. The majority of multi-manager investment solutions also delivered positive returns relative to benchmark over the year. Strategic investment advisory services, including investment outsourcing, asset liability investment solutions and strategic alternatives advisory gained further traction and brought in new clients during the year.
In alternative and quantitative investments, hedge funds rebounded stronglycontinued to produce attractive absolute and risk adjusted returns, building on the strong performance rebound seen in 2009. The O’Connor single manager businessfunds posted positive returns across allits core funds, with the exception of currency and rates, with the key
O’Connor multi-strategy fund materiallystrategies, outperforming itsmost peers and relevant benchmarks. At year end, most funds were above pre-existing high water marks.on a risk adjusted basis. In the multi-manager business, positive returns were posted across virtually all core strategies.strategies, with particularly strong performance versus peers from the funds managed by the alternative investment solutions team.
     Investment performancePerformance of the direct real estate flagship funds generally picked up during the year.improved in 2010. The flagship UK strategy improved in absolute terms but underperformed versus benchmark. All Germany-based Eurozone strategies produced positiveachieved strong absolute returns and markedly improved performance relative to benchmark. Returns of the European core flagship strategies remained positive. The Swiss composite (consisting of the fourfive UBS Swiss listed real estate funds) and also outperformed their benchmark. Although absolute performance of the US fund was negative, it substantially outperformed its benchmark. Performance ofThe US core fund delivered very strong absolute returns for 2010 and outperformed its benchmark for the year. The flagship J-REIT (managed in partnership with Mitsubishi Corporation) wasalso produced positive both in absolute returns and relative terms. Performance foroutperformed versus benchmark by a wide margin. The performance of real estate securities strategies was mixed versus benchmarks, however, they all postedbenchmarks. The fund of funds strategies continued to gather momentum, delivering positive absolute returns for the year. The fund of funds strategy gathered momentum over the second half of the year when positive returns were delivered.
     The last year was challenging for the infrastructure and private equity sector as a whole. The flagship UBS International Infrastructure Fund’s portfolio performed well despite unprecedented market challenges, althoughFund made significant progress investing its capital during the year. In March 2010, the fund acquired the right to develop Collgar Wind Farm Pty Ltd, a greenfield renewable energy project in Australia. The project is under construction and was ahead of schedule at the end of the periodyear. An additional transaction announced in April 2010 – Njord Gas Infrastructure, that was formed to hold a regulatory decision forstake in Gassled, which owns the UK water sector adversely impacted one investment inNorwegian gas transport infrastructure, the portfolio. The Middle East fund, managed in partnership with Invest AD, formerly Abu Dhabi Investment Company, reached firstworld’s largest offshore gas transmission system – has received government approval and is expected to reach financial close in May 2009 with up to USD 250 million in commitments, with final close expected in 2010.2011.


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Business performance

                 
Business division reporting 
  As of or for the year ended % change from 
CHF million, except where indicated
  31.12.10   31.12.09   31.12.08   31.12.09 
 
Net management fees1
  1,918   1,904   2,756   1 
 
Performance fees  141   233   149   (39)
 
Total operating income2
  2,058   2,137   2,904   (4)
 
Personnel expenses  1,096   996   946   10 
 
General and administrative expenses  400   387   462   3 
 
Services (to) / from other business divisions  (5)  (74)  88   93 
 
Depreciation of property and equipment  43   36   44   19 
 
Impairment of goodwill  0   340   0   (100)
 
Amortization of intangible assets  8   13   33   (38)
 
Total operating expenses
  1,542   1,698   1,572   (9)
 
Business division performance before tax
  516   438   1,333   18 
 
                 
Key performance indicators3
                
 
Pre-tax profit growth (%)  17.8   (67.1)  (8.3)    
 
Cost / income ratio (%)  74.9   79.5   54.1     
 
                 
Information by business line
                
 
Income
                
 
Traditional investments  1,259��  1,319   1,859   (5)
 
Alternative and quantitative investments  325   405   430   (20)
 
Global real estate  258   185   277   39 
 
Infrastructure  14   13   15   8 
 
Fund services  202   214   322   (6)
 
Total operating income
  2,058   2,137   2,904   (4)
 
                 
Gross margin on invested assets (bps)
                
 
Traditional investments  25   26   29   (4)
 
Alternative and quantitative investments  88   102   69   (14)
 
Global real estate  68   47   63   45 
 
Infrastructure  130   114   218   14 
 
Total gross margin
  36   37   39   (3)
 
                 
Net new money (CHF billion)4
                
 
Traditional investments  4.2   (40.6)  (88.9)    
 
Alternative and quantitative investments  (3.2)  (6.7)  (14.8)    
 
Global real estate  0.6   1.4   (0.3)    
 
Infrastructure  0.1   0.1   1.0     
 
Total net new money
  1.8   (45.8)  (103.0)    
 
                 
Invested assets (CHF billion)
                
 
Traditional investments  487   502   493   (3)
 
Alternative and quantitative investments  34   41   41   (17)
 
Global real estate  36   39   40   (8)
 
Infrastructure  1   1   1   0 
 
Total invested assets
  559   583   575   (4)
 
1 Net management fees include transaction fees, fund administration revenues (including interest and trading income from lending business divisions and Corporate Centerforeign exchange hedging as part of the fund services offering), gains or losses from seed money and co-investments, funding costs and other items that are not performance fees.  2
Business performance
Business division reporting
                 
 
  As of or for the year ended  % change from 
CHF million, except where indicated
  31.12.09   31.12.08   31.12.07   31.12.08 
 
Institutional fees  1,273   1,6591  2,370   (23)
 
Wholesale intermediary fees  863   1,246   1,724   (31)
 
Total operating income
  2,137   2,904   4,094   (26)
 
Personnel expenses  996   946   1,883   5 
 
General and administrative expenses  387   462   593   (16)
 
Services (to) / from other business divisions  (74)  88   73     
 
Depreciation of property and equipment  36   44   72   (18)
 
Impairment of goodwill  340   0   0     
 
Amortization of intangible assets  13   33   19   (61)
 
Total operating expenses
  1,698   1,572   2,640   8 
 
Business division performance before tax
  438   1,333   1,454   (67)
 
                 
Key performance indicators2
                
 
Pre-tax profit growth (%)  (67.1)  (8.3)  10.2     
 
Cost/income ratio (%)  79.5   54.1   64.5     
 
Net new money (CHF billion)3
  (45.8)  (103.0)  (15.7)    
 
Gross margin on invested assets (bps) (institutional)  37   38   44   (3)
 
Gross margin on invested assets (bps) (wholesale intermediary)  36   41   47   (12)
 
                 
Additional information
                
 
Average attributed equity (CHF billion)  2.8   3.0       (7)
 
Return on attributed equity (RoaE) (%)  15.9   44.4         
 
BIS risk-weighted assets (CHF billion)4
  4.1   8.5       (52)
 
Return on BIS risk-weighted assets, gross (%)  37.7   41.2         
 
Goodwill and intangible assets (CHF billion)  1.7   2.2   2.3   (23)
 
Invested assets (CHF billion)  583   575   891   1 
 
Personnel (full-time equivalents)  3,471   3,914   3,785   (11)
 
                 
Institutional
                
 
Net new money (CHF billion)3
  (12.7)  (55.6)  (16.3)    
 
of which: money market funds
  2.1   6.0   6.7     
 
Invested assets (CHF billion)  346   335   522   3 
 
of which: money market funds
  45   42   32   7 
 
                 
Wholesale intermediary
                
 
Net new money (CHF billion)3
  (33.1)  (47.4)  0.6     
 
of which: money market funds
  (14.3)  15.2   4.8     
 
Invested assets (CHF billion)  237   240   369   (1)
 
of which: money market funds
  67   80   70   (16)
 
1 Includes a gain of CHF 168 million on the sale of a minority stakenon-controlling interest in Adams Street Partners.Partners in 2008.  23 For the definitions of our key performance indicators, refer to the “Measurement and analysis of performance” section of this report.  34 Excludes interest and dividend income.4 BIS risk-weighted assets (RWA) are according to Basel II.

9197

UBS business divisions and Corporate Center
Global Asset Management

                 
Business division reporting (continued) 
  As of or for the year ended % change from 
CHF million, except where indicated
  31.12.10   31.12.09   31.12.08   31.12.09 
 
                 
Assets under administration by fund services
                
 
Assets under administration (CHF billion)1
  390   406   425   (4)
 
Net new assets under administration (CHF billion)2
  (0.8)  (59.7)  (61.1)    
 
Gross margin on assets under administration (bps)  5   5   6   0 
 
                 
Additional information
                
 
Average attributed equity (CHF billion)3
  2.5   2.8   3.0   (11)
 
Return on attributed equity (RoaE) (%)  20.6   15.9   44.4     
 
BIS risk-weighted assets (CHF billion)  3.5   4.1   8.5   (15)
 
Return on BIS risk-weighted assets, gross (%)  56.8   37.7   41.2     
 
Goodwill and intangible assets (CHF billion)  1.5   1.7   2.2   (12)
 
Personnel (full-time equivalents)  3,481   3,471   3,914   0 
 
1 This includes UBS and third-party fund assets, for which the fund services unit provides legal fund set-up and registration services, valuation, accounting and reporting and shareholder services.  2 Inflows of assets under administration from new and existing funds less outflows from existing funds or fund defection.  3 Refer to the “Capital management” section of this report for more information about the equity attribution framework.

2010

Results

Pre-tax profit for 2010 was CHF 516 million compared with CHF 438 million in 2009. Excluding a net goodwill impairment charge of CHF 191 million related to the sale of UBS Pactual in 2009, the pre-tax profit for 2010 would have decreased by CHF 113 million compared with 2009.

Operating income

Total operating income was CHF 2,058 million in 2010, compared with CHF 2,137 million in 2009. Lower performance fees and revenues following the sale of UBS Pactual were partly offset by reduced co-investment losses in real estate and lower operational losses.

Operating expenses

Total operating expenses were CHF 1,542 million in 2010, compared with CHF 1,698 million in 2009. Excluding the abovementioned goodwill impairment and restructuring charges of CHF 48 million during the year 2009, operating expenses would have increased by CHF 83 million in 2010, mainly due to increased personnel expenses. The increase was partly offset by reduced non-personnel expenses as a result of cost-saving initiatives in 2009 and lower expenses following the sale of UBS Pactual. In addition, non-personnel costs included an additional allocation of expenses to the business divisions from the Corporate Center in 2010.
Personnel expenses were CHF 1,096 million in 2010 compared with CHF 996 million in 2009, mainly due to increased expenses for prior years’ deferred variable compensation, partly offset by lower fixed compensation costs as a result of headcount reductions in 2009 and reduced expenses following the sale of UBS Pactual.

General and administrative expenses were CHF 400 million in 2010, compared with CHF 387 million in 2009, mainly due to higher sponsoring and branding costs related to the global re-launch of the UBS brand. The increase was partly offset by lower expenses following the sale of UBS Pactual.
Net charges to other business divisions were CHF 5 million in 2010, compared with CHF 74 million in 2009. Excluding a charge to the Corporate Center of CHF 149 million in 2009, we would have recorded net charges from other business divisions of CHF 75 million. The total 2009 goodwill impairment charge related to the sale of UBS Pactual was CHF 340 million, of which CHF 149 million was charged to the Corporate Center, as this was related to foreign exchange exposures managed by Group Treasury.
èRefer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for more information on allocation of additional Corporate Center costs to the business divisions in 2010

Development of invested assets

Net new money

Net new money inflows were CHF 1.8 billion in 2010 compared with net outflows of CHF 45.8 billion in 2009. Net inflows from third parties were CHF 18.2 billion in 2010 compared with net outflows of CHF 5.1 billion in 2009. Net outflows from clients of our wealth management businesses were CHF 16.4 billion in 2010 compared with net outflows of CHF 40.7 billion in 2009. Net new money in 2010 included CHF 2.5 billion resulting from a transfer of investment management responsibility for the US hedge fund business from Wealth Management Americas to Global Asset Management’s alternative and quantitative investments business.



98

UBS business divisions and
Corporate Center

2009Excluding money market flows, net new money inflows were CHF 8.2 billion in 2010 compared with net outflows of CHF 33.6 billion in 2009. Net inflows from third parties were CHF 16.2 billion in 2010 compared with net outflows of CHF 6.8 billion in 2009. Net outflows from clients of our wealth management businesses were CHF 8.1 billion in 2010 compared with net outflows of CHF 26.9 billion in 2009.
Some of the inflows and outflows relating to clients of our wealth management businesses are also reported as net new money in- and outflows for the Wealth Management & Swiss Bank and Wealth Management Americas business divisions.

Invested assets

Total invested assets were CHF 559 billion on 31 December 2010, compared with CHF 583 billion on 31 December 2009. Negative currency effects were only partly offset by positive market movements and net new money inflows.

Gross margin on invested assets

The gross margin was 36 basis points in 2010 compared with 37 basis points in 2009, reflecting lower performance fees primarily in alternative and quantitative investments, partly offset by lower co-investment losses in real estate and lower operational losses.

Results by business line

Traditional investments

Revenues were CHF 1,259 million compared with CHF 1,319 million, as lower operational losses were more than offset by decreased revenues following the sale of UBS Pactual in 2009.
Thegross marginwas 25 basis points compared with 26 basis points in the prior year, mainly due to lower performance fees and decreased revenues following the sale of UBS Pactual.
Net new money inflows were CHF 4.2 billion compared with net outflows of CHF 40.6 billion in the prior year. Excluding money market flows, net new money inflows were CHF 10.6 billion compared with net outflows of CHF 28.4 billion in the prior year. Equities saw net inflows of CHF 7.5 billion compared with net outflows of CHF 8.2 billion. Fixed income saw net inflows of CHF 9.7 billion compared with net outflows of CHF 5.6 billion. Multi-asset saw net outflows of CHF 6.3 billion compared with net outflows of CHF 14.5 billion.
Invested assets were CHF 487 billion on 31 December 2010, compared with CHF 502 billion on 31 December 2009. The net decrease reflects negative currency effects, partly offset by positive market movements and net new money inflows.

Alternative and quantitative investments

Revenues were CHF 325 million compared with CHF 405 million due to lower performance fees, which also resulted in agross marginof 88 basis points compared with 102 basis points.
Net new money outflows were CHF 3.2 billion compared with net outflows of CHF 6.7 billion. Net new money in 2010 included CHF 2.5 billion related to the transfer of investment management responsibility for US hedge fund business from Wealth Management Americas to alternative and quantitative investments. Note that these are reported as invested assets in both business divisions as Wealth Management Americas continues to advise the clients of these funds.
Invested assets were CHF 34 billion on 31 December 2010, compared with CHF 41 billion on 31 December 2009 due to negative currency effects and net new money outflows, partly offset by positive market movements.

Global real estate

Revenues were CHF 258 million compared with CHF 185 million, mainly due to lower co-investment losses and higher performance fees.
Consequently, thegross marginwas 68 basis points compared with 47 basis points.
Net new money inflows were CHF 0.6 billion compared with net inflows of CHF 1.4 billion.
Invested assets were CHF 36 billion on 31 December 2010, a decrease of CHF 3 billion from 31 December 2009, due to negative currency effects and market movements, partly offset by net new money inflows.

Infrastructure

Revenues were CHF 14 million compared with CHF 13 million.
Net new money inflows were CHF 0.1 billion, unchanged from the prior year.
Invested assets were CHF 1 billion on 31 December 2010, mostly unchanged from 31 December 2009.

Fund services

Revenueswere CHF 202 million compared with CHF 214 million, mainly due to lower administrative fees due to lower average assets under administration and lower interest income.
Thegross margin on assets under administration was 5 basis points, unchanged from the prior year.
Net new assets under administration outflows were CHF 0.8 billion compared with net outflows of CHF 59.7 billion in 2009.
Totalassets under administration were CHF 390 billion compared with CHF 406 billion, due to negative currency effects and net new assets outflows, partly offset by positive market movements.



99

UBS business divisions and Corporate Center
Global Asset Management

2009

Results

Pre-tax profit for full year 2009 was CHF 438 million compared with CHF 1,333 million in 2008. Excluding a net goodwill impairment charge in 2009 of CHF 191 million related to the sale of UBS Pactual, restructuring costs in 2009 of CHF 48 million and a gain of CHF 168 million from the sale of our minority stakenon-controlling interest in Adams Street Partners in 2008, pre-tax profit would have decreased 42% to CHF 677 million.

Operating income

Total operating income was CHF 2,137 million in 2009 compared with CHF 2,904 million in 2008.Institutional revenues were CHF 1,273 million in 2009 compared with CHF 1,659 million in 2008 due to lower management fees associated with a 21% decrease of thelower average invested assets base and reduced income following the sale of UBS Pactual in 2009, which2009. This was partly offset by higher performance fees in alternative and quantitative investments as well as lower operational losses. Additionally, 2008 institutional revenues included a gain of CHF 168 million from the sale of UBS’s minority stakeour non-controlling interest in Adams Street Partners.

Wholesale intermediary revenues were CHF 863 million in 2009 compared with CHF 1,246 million in 2008, due to lower management fees associated with a lower average invested assets base, lower performance fees from some funds and reduced income following the sale of UBS Pactual in 2009.

Operating expenses
Total operating expenses were CHF 1,698 million in 2009 compared with CHF 1,572 million in 2008. Excluding a net goodwill impairment charge in 2009, and restructuring charges during the whole period, operating expenses would have declined 7% to CHF 1,459 million. This resulted from lower general and administrative expenses, and was partly offset by higher accruals of variablefor performance-related compensation driven bydue to higher performance fees in alternative and quantitative investments. In 2009, operating expenses included CHF 340 million in goodwill impairment charges related to the sale of UBS Pactual (of which CHF 149 million was charged to the Corporate Center as this was related to foreign exchange exposures managed by Group Treasury).
General and administrative expenses were CHF 387 million in 2009 compared with CHF 462 million in 2008, mainly due to lower entertainment expenses, marketing costs, IT costs and professional fees as a result of ongoing cost-saving measures and reduced expenses following the sale of UBS Pactual.
Net charges to other business divisions were CHF 74 million in 2009, compared with a net charge from other business divisions of CHF 88 million in 2008. Excluding the abovementioned charge to the Corporate Center of CHF
149 million, allocated costs were down by CHF 13 million, or 15%, from 2008 mainly due to lower allocated costs from service providers as a result of ongoing cost-saving measures and reduced charges following the sale of UBS Pactual.
Depreciation of property and equipment atwas CHF 36 million in 2009, was down by CHF 8 million as a result of lower depreciation charges on premises, IT and software.

Development of invested assets

Net new money

Net new money outflows were CHF 45.8 billion for full year 2009 compared with outflows of CHF 103.0 billion for full year 2008. Excluding money market flows, net new money outflows were CHF 33.6 billion in 2009 compared with CHF 124.2 billion in 2008. Net outflows from clients of our wealth management businesses were CHF 40.7 billion (around 90% of total net outflows) in 2009 compared with CHF 47.1 billion in 2008. Some of the inflows and outflows relating to clients of our wealth management businesses are also reported as net new money in- and outflows for the Wealth Management & Swiss Bank and Wealth Management Americas business divisions.

Institutional net new money outflows were CHF 12.7 billion in 2009 compared with CHF 55.6 billion in 2008. Excluding money market flows, outflows were CHF 14.8 billion in 2009 compared with CHF 61.6 billion in 2008. Net outflows were reported in alternative and quantitative investments, multi-asset, equities, fixed income and real estate.

Wholesale intermediary net new money outflows were CHF 33.1 billion in 2009 compared with CHF 47.4 billion in 2008. Excluding money market flows, outflows of net new money were CHF 18.8 billion in 2009 compared with CHF 62.6 billion in 2008. Outflows were mainly reported in multiasset, equities and fixed income, and were partly offset by inflows in real estate.
Invested assets
Total invested assets were CHF 583 billion on 31 December 2009 compared with CHF 575 billion on 31 December 2008.Institutional invested assets were CHF 346 billion on 31 December 2009 compared with CHF 335 billion on 31 December 2008. The net increase reflectsreflected the positive impact of financial market developments, and positive currency fluctuations and was partly offset by the exclusion of UBS Pactual assets and net new money outflows.Wholesale intermediary invested assets were CHF 237 billion on 31 December 2009 compared with CHF 240 billion on 31 December 2008. The net decrease reflects net new money outflows and the exclusion of UBS Pactual assets, and was partly offset by the positive impact of financial market developments and CHF 4.2 billion related to the transfer of the real estate investment management business from Wealth Management & Swiss Bank.


92

Bank and was partly offset by the exclusion of UBS Pactual assets coupled with net new money outflows.

UBS business divisions and Corporate Center

Gross margin on invested assets
The gross margin oninstitutional invested assets was 37 basis points in 2009, compared with 3839 basis points in 2008. The calculation of 2008 gross margin included a CHF 168 million gain from the sale of our minority stakenon-controlling interest in Adams Street Partners in 2008. The 2009 gross margin was sup-
portedsupported by higher performance fees, primarily in alternative and quantitative investments, and lower operational losses.losses, partly offset by reduced income following the sale of UBS Pactual.

Results by business line

Traditional investments

     The gross margin onwholesale intermediaryRevenues invested assets was 36 basis pointswere CHF 1,319 million in 2009 compared with 41 basis pointsCHF 1,859 million in 2008. This was mainly2008 due to lower performancemanagement fees associated with a lower average invested assets base and reduced income following the sale of UBS Pactual.


93

UBS business divisions and Corporate Center
Global Asset ManagementPactual in 2009, partly offset by lower operational losses in 2009. Revenues in 2008 also included a gain of CHF 168 million from the sale of our non-controlling interest in Adams Street Partners.

2008
Results
Pre-tax profit for full year 2008 Thegross marginwas CHF 1,333 million26 basis points compared with CHF 1,454 million29 basis points in 2007. Excluding costs related to the closure of Dillon Read Capital Management (DRCM) in 2007, and aprior year. The 2008 gross margin included the abovementioned gain from the sale of the minority stakeour non-controlling interest in Adams Street Partners in 2008, full-year pre-tax profit would have decreasedPartners. The 2009 gross margin was also favorably impacted by CHF 501 million.lower operational losses.
Operating income
Total operating income was CHF 2,904 million in 2008 compared with CHF 4,094 million in 2007, mainly due to a significant decline in equity market valuations and relative strengthening of the Swiss franc against major currencies, especially the US dollar.Institutionalrevenues were CHF 1,659 million in 2008 compared with CHF 2,370 million in 2007. Excluding the gain from the sale of the minority stake in Adams Street Partners, institutional revenues would have declined by CHF 879 million due to lower performance fees from alternative and quantitative investments and the Brazilian asset management business and lower management fees from the lower average invested assets base.Wholesale intermediary revenues were CHF 1,246 million in 2008 compared with CHF 1,724 million in 2007 due to lower management fees from the lower average invested assets base, and lower performance fees from the Brazilian asset management business.
Operating expenses
Total operating expenses were CHF 1,572 million in 2008 compared with CHF 2,640 million in 2007. Excluding CHF 212 million in DRCM restructuring costs in 2007, total operating expenses would have declined 35% or CHF 856 million. This decline mainly reflects lower accruals for variable compensation resulting from lower revenues, changes in the forfeiture provisions of future share-based awards and cost-saving measures. The expenses were partly offset by the first-time inclusion of the acquisition in France of the CCR Group, and the full-year impact of the acquisition in Korea of 51% of Daehan Investment Trust Management Company Ltd.
     General and administrative expenses were CHF 462 million in 2008 compared with CHF 593 million in 2007. The 22% decrease was due to lower provisions and lower travel and entertainment expenses, and was partly offset by higher IT costs, the inclusion of the acquisition in France and the full-year impact of the acquisition in Korea.
     Services (to)/from other business divisions increased by CHF 15 million to CHF 88 million in 2008.
     Depreciation of property and equipment was CHF 44 million in 2008 compared with CHF 72 million in 2007. Excluding the impact of the DRCM restructuring costs in 2007, depreciation of property and equipment would have been
virtually flat despite the inclusion of the acquisition in France and the full-year impact of the acquisition in Korea.
Development of invested assets
Net new money
Net new money outflows were CHF 103.040.6 billion for full year 2008 compared with net outflows of CHF 15.7 billion for full year 2007. Net outflows from clients of our wealth management businesses accounted CHF 47.1 billion of these full year 2008 outflows. Some of the inflows and outflows related to clients of our wealth management businesses are also reported as net new money in- and outflows for the Wealth Management & Swiss Bank and Wealth Management Americas business divisions. We also experienced reputational damage which impacted flows other than from the wealth management businesses.
Institutional net new money outflows were CHF 55.688.9 billion in 2008 compared with CHF 16.3 billion in 2007. Excluding money market flows, outflows were CHF 61.6 billion in 2008 compared with CHF 23.0 billion in 2007. Net outflows were reported in multi-asset, fixed income, equities and alternative and quantitative investments.
Wholesale intermediary net new money outflows were CHF 47.4 billion in 2008, compared with inflows of CHF 0.6 billion in 2007.the prior year. Excluding money market flows, net new money outflows were CHF 62.6 28.4



100

UBS business divisions and
Corporate Center

billion in 2008 compared with net outflows of CHF 4.2110.1 billion in 2007, and were mainly reported in multi-asset, equities and fixed income.

the prior year. Equities saw net outflows of CHF 8.2 billion compared with net outflows of CHF 31.5 billion. Fixed income saw net outflows of CHF 5.6 billion compared with net outflows of CHF 30.9 billion. Multi-asset saw net outflows of CHF 14.5 billion compared with net outflows of CHF 48.6 billion.
Invested assets
Total invested assets were CHF 575502 billion on 31 December 20082009, compared with CHF 891493 billion on 31 December 2007.Institutional invested assets were CHF 335 billion on 31 December 2008 compared with CHF 522 billion on 31 December 2007, reflecting2008. The net increase reflects the negativepositive impact of financial market developments and positive currency fluctuations, partly offset by the exclusion of UBS Pactual assets coupled with net new money outflows.

Alternative and quantitative investments

Revenues were CHF 405 million compared with CHF 430 million due to lower net management fees associated with a lower average invested assets base. Performance fees were up by CHF 87 million.
Thegross marginwas 102 basis points compared with 69 basis points primarily due to higher performance fees.
Net new money outflows were CHF 6.7 billion compared with net outflows of CHF 14.8 billion.
Invested assetswere CHF 41 billion on 31 December 2009, unchanged from 31 December 2008. The positive impact of financial market developments was offset by net new money outflows and negative currency fluctuations.

Global real estate

Wholesale intermediaryRevenues Invested assets were CHF 240185 million compared with CHF 277 million due to losses from co-investments and lower management fees associated with a lower average invested assets base.

This also resulted in a lowergross marginof 47 basis points compared with 63 basis points.
Net new money inflows were CHF 1.4 billion compared with net outflows of CHF 0.3 billion.
Invested assets were CHF 39 billion, a decrease of CHF 1 billion from 31 December 2008 due to the negative impact of market developments, mostly offset by CHF 4.2 billion related to the transfer of the real estate investment management business from Wealth Management & Swiss Bank and net new money inflows.

Infrastructure

Revenues were CHF 13 million, down by CHF 2 million from the prior year, predominantly a result of swings in exchange rates.
Net new money inflows were CHF 0.1 billion compared with net inflows of CHF 1.0 billion.
Invested assets were CHF 1 billion on 31 December 20082009, unchanged from 31 December 2008.

Fund services

Revenues were CHF 214 million compared with CHF 369322 million, mainly due to a lower average base of assets under administration and lower interest income.
Thegross margin on assets under administration was 5 basis points compared with 6 basis points.
Net new assets under administration outflows were CHF 59.7 billion on 31 December 2007, reflecting thecompared with net outflows of CHF 61.1 billion.
Totalassets under administration were CHF 406 billion compared with CHF 425 billion due to net new assets outflows and negative currency fluctuations, partly offset by positive impact of financial market developments, net new money outflows and, to a lesser extent, currency fluctuations.developments.
Gross margin on invested assets
The gross margin oninstitutional invested assets was 38 basis points in 2008 compared with 44 basis points in 2007. This was mainly due to lower performance fees from both alternative and quantitative investments and UBS Pactual, and a change in asset-mix to lower-margin money market funds.
     The gross margin onwholesale intermediary invested assets was 41 basis points in 2008 compared with 47 basis points in 2007. This was mainly due to lower performance fees from UBS Pactual and a change in asset mix to lower-margin products.



94101

UBS business divisions and Corporate Center

UBS business divisions and Corporate Center
Investment Bank

Investment Bank

Business description

The Investment Bank provides a broad range of products and services to corporate and institutional clients, governments,sovereign and governmental bodies, financial intermediaries, alternative asset managers and private investors. The productsProducts and services offered include advice, research, market accesssecurities sales, trading and execution, capital raising, advisory services and investment research across all major capital markets.

Business

The Investment Bank has three distinct butand aligned business areas:

– Equities
equities
– Fixedfixed income, currencies and commodities (FICC)
– the Investmentinvestment banking department (IBD)
     Co-operationThe equities and alignment between the FICC and equities business areas has recently been strengthened in order to optimize our infrastructure and services offered to clients. Together they now comprisebusinesses are organized under the securities business offeringarea to foster a higher degree of alignment and co-operation across our sales and trading businesses. Together, equities and FICC offer access to the primary and secondary access to the securities andmarkets, foreign exchange markets,and prime brokerage services as well as securities,research on equities, fixed income, commodities, and economic, strategic and quantitative research. IBD provides advice on mergers and acquisitions and restructurings, and raises capital mainly for corporate, institutional and sovereign clients in the debt and equity markets. Additionally, as part of a number of broader alignment initiatives across our business divisions, IBD plays a lead role in marketing the Group to corporates, leveraging theirits senior client relationships.

Strategy

As

Our strategy is centered on an aligned and integrated client-centric business model built around flow and advice, and is supported by a result of the losses suffered in 2007disciplined risk control framework. Our business involves risk-taking to facilitate and 2008, we have taken significant steps to reposition and rebuild the business. As part of this process, the balance sheet, risk-weighted assets, operating expenses and headcount have all been reduced. In addition we have established new leadership roles in some key areas to implement the new client-centric strategy, which focuses on flowintermediate client transactions. However, our trading and advice. Client service and operational excellence are key to its success, and a flexible and scalable infrastructure is being developed in order to deliver this. Trading strategies are now focused on high volume client flow businesses, and are subject to tight balance sheet and risk limits.

limits, which are controlled by our risk framework.
     We areIn supporting our strategy, we have created a securities platform to unify our capabilities in equities and FICC. Our securities strategy is focused on enhancingdelivering performance across asset classes, giving clients easier access to the entire firm and protecting our traditional strengths; growing our businesscreating value in selected products and regions; and expanding our cooperation with, and deliverythe process. We continued to partner divisions.
     In FICC, we are rebuilding and growinggrow our credit, rates and emerging markets businesses, while maintainingleveraging both existing and new talent as part of our rebuild in FICC. On a market-leadingselective basis, and marked against hurdle rates and strict criteria, we have re-entered certain businesses relevant to our strategy. We also developed further capabilities in the commodities business. In equities, in addition to enhancing our position in foreign exchange and money mar-
kets. Incash equities, we are targeting growth in equity derivatives, exchange-traded derivatives (ETD) and prime brokerage, while enhancing our strengths in cash equities.brokerage.
In IBD, iswe are focused on maintaining a leadingstrengthening our market position in the Americas, while we continue to be among the leaders in Europe, the Middle East and Africa, and the Asia Pacific regions, while rebuilding our market position in the Americas.regions.

Organizational structure

The Investment Bank is headquartered in London and employs approximately 15,700 personnel in over 30 countries. It is comprised of the three business areas which are functionally run on a global basis: equities, FICC and IBD. IBD’sdescribed above. Additionally, the global capital markets business is a joint venture between securities and IBD, which consists of two separate joint ventures:areas: equity capital markets with equities, and debt capital markets with FICC.markets. Global leveraged finance is anothera joint venture between IBD and FICC whichand includes the global syndicated finance business.

Significant recent acquisitions and business transfers
Key acquisitions and business transfers We employ approximately 17,000 personnel in over the past three years include:
–the April 2007 acquisition of a 20% stake in UBS Securities, China; and
–the September 2009 sale of our Brazilian financial services business, UBS Pactual.
Legal structure
30 countries.
We operate through branches and subsidiaries of UBS AG. Securities activities in the US are conducted through UBS Securities LLC, a registered broker-dealer.

Significant recent acquisitions, disposals and business transfers

Competitors
The industry has seen significant global consolidation as a result ofKey acquisitions and business transfers over the financial crisis, with firms such as Lehman Brothers filing for bankruptcy and others, like Bear Stearns, being sold. At the same time, there has been an emergence of smaller boutique investment banking advisory and securities firms. past three years include:
–the sale of our Brazilian financial services business, UBS Pactual in 2009; and
–the agreement to acquire Link Investimentos, a Brazilian financial services firm, announced in 2010.

Competitors

Our main competitors continue to be the major global investment banks, including Bank of America/America / Merrill Lynch, Barclays Capital, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan Chase and Morgan Stanley.

Products and services

Securities

The implementation of the securities organizational structure combined previously distinct trading and sales activities into a holistic business with the goal of improving our market position and overall client service. We aligned certain sales functions across equities and FICC products, resulting in a coordinated securities distribution platform with enhanced cross-asset delivery and specialist skills. Across securities, we also aligned some of our key capabilities, including global capital markets, quantitative analysis and prime services activity as well as a central treasury and trading function for the securities business. Securities research provides in-depth investment analysis across various asset classes on more than 3,000 companies worldwide, or about 80% of the global



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UBS business divisions and
Corporate Center

Productsmarket capitalization across 55 markets. In addition, we have a specialist research function offering quantitative analysis, socially responsible investing, alternative research, valuation and servicesaccounting, and special situations analysis.

Equities

Equities
Our equities business area isWe are a leading participant in the globalworld’s primary and secondary markets for equity, equity-linked and equity derivative products. It distributes, trades, financesWe distribute, trade, finance and clearsclear cash equity and equity-linked products. ItWe also distributesdistribute new equity and equity-linked issues, and providesprovide research on companies, industry sectors, geographicalgeographic markets and macroeconomic trends.trends as part of securities research. Equities has made significant investments inthe technology required to support multi-instrument electronic execution for direct market access trading. We have aligned the prime brokerage, exchange-traded derivatives and fixed income clearing businesses within an integrated prime services organization, to provide a more seamless client relationship management toexperience, improve client service efficiency and position our business efficiency. The business area alsofor increased transparency and regulatory changes in over-the-counter (OTC) derivative products.
Equities has global product and functional management, multi-regional operations as well as a strongand strongly embedded local presenceexpertise in all major developed and developing markets.
The main business lines of the equities business area are:
– 
Cash equities provides clients with investment advisory, trade execution offerings and related advice, andconsultancy services, together with comprehensive access to the primary markets, corporate management.management and subject matter expertise. We provide full-service trade execution for single stockstocks and portfolios, deliver capital commitment, block trading, small cap execution services, commission management services, and a full suite of advanced electronic trading strategies, and platforms and analytics and commission management services.
analytical tools.
– 
Equity researchDerivatives and equity-linked provides in-depth analysis on more than 3,000 companies worldwide,provide exchange-traded and structured or over 80% of the global markets capitalization. In addition, we have a specialist research offering in economics, macro asset allocation, equity strategy, quantitative analysis, socially responsible investing, commodities, alternative research and valuation and accounting.
–
Derivatives provides standardized products and customized solutions to our clients. In addition to products with returns linked to equities or equity indices, we also offer derivative products linked to hedge funds, mutual funds, and real estate and commodity indices in a variety of formats such as over-the-counter, securitized, fund-wrapped and exchange-traded.
We also offer a full range of convertible products, synthetic and structured products, and global access to primary and secondary markets.
– 
Prime brokerageservices providesoffers an integrated global services,prime brokerage business, including multi-asset class clearing and custody, capital consultancy, securities lending and equity swaps execution. The exchange-traded derivatives business is part of this product suite, including execution and clearing services and access to 70 global exchanges. These services are provided through a client-centric service model to hedge funds, banks, asset management and other financial services clients.
–
Exchange-traded derivatives provides execution and clearing services with access to approximately 70 global exchanges to hedge funds, banks, asset managers,clients, including corporations, commodity trading andtraders, wealth management clients as well as tofirms and aggregators.

Fixed income, currencies and commodities

The FICC business area delivers products and solutions to corporate, institutional and public sector clients in all major markets, as well as to private clients via targeted intermediaries. In response2010, to changesadd product diversity and better service clients across the entire

fixed income product suite, we selectively re-entered the market in global markets and client
demand, FICC was significantly restructured in 2009 to improve client service, simplify its operating model, strengthen risk management and leverage competitive advantages.certain (previously exited) products, including several commodities products. The main business lines of the FICC business area are:
– 
Macro consists of the foreign exchange, money market and interest rate sales and trading businesses.businesses, as well as cash and collateral trading. We provide a range of foreign exchange, precious metals, treasury, and liquidity management solutions to institutional and private clients via targeted intermediaries. Interest rate activities include standardized rate-driven products and services such as interest rate derivatives trading, underwriting and trading of government and agency securities.
– 
Credit sales and trading encompasses the origination, underwriting,under-writing, trading and distribution of primary cash and synthetic products across the credit transactions.spectrum – bonds, derivatives, notes and loans. We are also active across all major markets in corporate lending, secondary trading and market-making in high yieldof flow and investment grade bonds,structured credit instruments, securitized products and loans, in both cash and derivative products.
are focused on providing tailored solutions for our clients. In partnership with IBD, we also provide capital markets debt financing and liability risk management solutions to corporates and institutions.
– 
TheEmergingemerging markets business offers local investors in Central and Eastern Europe, the Middle East, Latin America and selected Asian countries access to international markets, and offersprovides international investors with an opportunity to add exposure via our onshore presence in key locations. We also provide liquidity in the local markets across foreign exchange, credit, rates and structured products. We have a local market presence in Central and Eastern Europe and Asia, and access to Latin American markets through our emerging markets hub in Stamford.
     In early 2010, we began the process of re-integrating residual risk positions into the FICC business. The positions will be managed on separate books to be unwound or exited as needed. As part of this process, and following a thorough front-to-back review process, certain businesses will be re-entered. The focus will be on products that are liquid, price-observable and hedgeable. The businesses approved for re-entry include the secondary trading of Asian emerging market convertible bond strips, asset-backed securities, commercial mortgage-backed securities and collateralized loan obligations and structured credit/correlation trading; other proposals are also being considered.

Investment banking department

IBD provides strategic advice and a range of capital markets execution services to corporate clients, financial institutions, financial sponsors, sovereign clients, wealth funds and hedge funds. With a presence in all major financial markets, investment banking coverage is based on a wide ranging matrix of country, sector and product banking professionals.
The main business lines of the IBD business area are:
– 
Theadvisory groupassists in acquisitions and sale processes, and also advises on strategic reviews and corporate restructuring solutions.
– 
Global capital markets is a joint venture with the securities business. It offers financing and advisory services that cover all forms of capital raising including debt and equity capital, andas well as risk management solutions. It comprises the equity capital markets business, aligned with equities, whose products include initial public offerings, secondary offerings and equity linkedequity-linked transactions; and the debt capital markets business,
aligned with FICC, whose products include commercial paper, medium-term notes, senior debt, high-yield debt, subordinated debt and hybrid capital. All our financing products are provided alongside risk management solutions, which include derivatives, structured finance, ratings advisory services and liability management.


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products include commercial paper, medium-term notes, senior debt, high yield debt, subordinated debt and hybrid capital. The aforementioned financing products are provided alongside risk management solutions, which include derivatives, structured finance, ratings advisory services and liability management.
– 
Global leveraged finance provides event-driven (acquisition, leveraged buy-out)buyout) loans, and bond and mezzanine leveraged finance to corporate customers and financial sponsors. With a presence in all major financial markets, investment banking coverage is based on a comprehensive matrix of country, sector and product banking professionals.



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Business performance

Business division reporting
                                
Business division reportingBusiness division reporting 
 As of or for the year ended      % change from  As of or for the year ended % change from 
CHF million, except where indicated
  31.12.09  31.12.08 31.12.07 31.12.08  31.12.10 31.12.09 31.12.08 31.12.09 
Investment banking
  2,466  2,880 6,637  (14) 2,414 2,466 2,880  (2)
Advisory  858  1,609 2,696  (47)
Advisory revenues 846 858 1,609  (1)
Capital market revenues  2,514  1,844 4,262 36  1,994 2,514 1,844  (21)
Equities  1,609  977 2,784 65  1,020 1,609 977  (37)
Fixed income, currencies and commodities  904  866 1,478 4  974 904 866 8 
Other fee income and risk management  (906)  (573)  (321)  (58)  (426)  (906)  (573) 53 
Sales and trading
  4,390   (26,712)  (7,833) 
Securities
 10,144 4,390  (26,712) 131 
Equities  4,937  5,184 9,002  (5) 4,469 4,937 5,184  (9)
Fixed income, currencies and commodities  (547)  (31,895)  (16,835) 98  5,675  (547)  (31,895) 
Total Investment Bank income
  6,856   (23,832)  (1,197) 
Total income
 12,558 6,856  (23,832) 83 
Credit loss (expense)/recovery1
  (1,698)  (2,575)  (266)  (34)
Credit loss (expense) / recovery1
 0  (1,698)  (2,575)  (100)
Total Investment Bank operating income excluding own credit
  5,158   (26,407)  (1,463) 
Total operating income excluding own credit
 12,558 5,158  (26,407) 143 
Own credit2
  (2,023) 2,032 659   (548)  (2,023) 2,032 73 
Total Investment Bank operating income as reported
  3,135   (24,375)  (804) 
Total operating income as reported
 12,010 3,135  (24,375) 283 
Personnel expenses  5,568  5,182 11,633 7  6,743 5,568 5,182 21 
General and administrative expenses  2,628  3,830 3,800  (31) 2,693 2,628 3,830 2 
Services (to) / from other business divisions  (147) 41  (171)  64  (147) 41 
Depreciation of property and equipment  360  447 431  (19) 278 360 447  (23)
Impairment of goodwill  749  341 0 120  0 749 341  (100)
Amortization of intangible assets  59  83 172  (29) 34 59 83  (42)
Total operating expenses
  9,216  9,925 15,865  (7) 9,813 9,216 9,925 6 
Business division performance before tax
  (6,081)  (34,300)  (16,669) 82  2,197  (6,081)  (34,300) 
    
Key performance indicators3
    
Pre-tax profit growth (%)4
  N/A  N/A N/A  N/A N/A N/A 
Cost / income ratio (%)5
  190.7  N/A N/A  81.7 190.7 N/A 
Return on attributed equity (RoaE) (%)  (24.1)  (128.2)  8.7  (24.1)  (128.2) 
Return on assets, gross (%)  0.4   (1.2)  (0.2)  1.2 0.4  (1.2) 
Average VaR (1-day, 95% confidence, 5 years of historical data)6
  55  79  (30)
Average VaR (1-day, 95% confidence, 5 years of historical data) 56 55 79 2 
    
Additional information
    
Total assets (CHF billion)  992.0  1,680.3 1,922.8  (41)
Total assets (CHF billion)6
 966.9 992.0 1 680.3  (3)
Average attributed equity (CHF billion)  25.3  26.8  (6)
Average attributed equity (CHF billion)7
 25.3 25.3 26.8 0 
BIS risk-weighted assets, gross (CHF billion)7
  122.4  195.8  (37)
BIS risk-weighted assets, gross (CHF billion) 119.3 122.4 195.8  (3)
Return on BIS risk-weighted assets, gross (%)  3.1   (10.0)  9.7 3.1  (10.0) 
Goodwill and intangible assets (CHF billion)  3.5  4.6 5.6  (24) 3.2 3.5 4.6  (9)
Compensation ratio (%)5
  115.2  N/A N/A  56.1 115.2 N/A 
Impaired lending portfolio as a % of total lending portfolio, gross  3.8  2.6 0.4 
Impaired lending portfolio as a % of total lending portfolio, gross (%) 5.5 8.0 6.0 
Personnel (full-time equivalents)  15,666  19,132 23,739  (18) 16,860 15,666 19,132 8 
1 Includes CHF 1,013172 million in credit losses from impairment charges onrelated to reclassified financial instruments for 2009.and acquired securities in 2010.  2 Represents own credit changes of financial liabilities designated at fair value through profit or loss. The cumulative own credit gain for such debt held at 31 December 20092010 amounts to CHF 0.90.2 billion. This gain has reduced the fair value of financial liabilities designated at fair value through profit or loss recognized on our balance sheet. Refer to “Note 27 Fair value of financial instruments” in the “Financial information” sectionfinancial statements of this report for more information.  3 For the definitions of our key performance indicators, refer to the “Measurement and analysis of performance” section of this report.  4 Not meaningful if either the current period or the comparison period is a loss period.  5 Neither the cost/cost / income nor the compensation ratio are meaningful if revenues in the Investment Bank are negative.  6 As announced in our third quarter 2009Based on third-party view, i.e. without intercompany balances.  7 Refer to the “Capital management” section of this report we received approval fromfor more information about the Swiss Financial Market Supervisory Authority (FINMA) to change the calibration of our management VaR from a 10-day 99% measure to a 1-day 95% measure. This measure is reported as a key performance indicator with comparatives provided as at 31.12.2008. 7 BIS risk-weighted assets (RWA) are according to Basel II.equity attribution framework.

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2010

Results

In 2010, we recorded a pre-tax profit of CHF 2,197 million compared with a pre-tax loss of CHF 6,081 million in 2009, primarily as a result of increased revenues in FICC, a significant reduction in net credit loss expenses and lower own credit losses on financial liabilities designated at fair value.

Operating income

Total operating income in 2010 was CHF 12,010 million compared with CHF 3,135 million in the prior year. This was mainly a result of increased revenues in the FICC business, a significant reduction in net credit loss expense and lower own credit losses on financial liabilities designated at fair value, and was partly offset by lower revenues in the equities business.

Credit loss expense / recovery

The net credit loss expense in 2010 was nil compared with net credit loss expense of CHF 1,698 million in 2009. In 2010, we recorded CHF 172 million credit loss expenses related to reclassified and acquired securities which were offset by recoveries on certain legacy leveraged finance and asset backed loan positions.
èRefer to the “Risk management and control” section of this report for more information on our risk management approach, method of credit risk measurement and the development of credit risk exposures

Own credit

The own credit on financial liabilities designated at fair value reduced significantly to a loss of CHF 548 million from a loss of CHF 2,023 million. While our credit spreads tightened in both years, the effect in 2010 was less pronounced than in 2009.
èRefer to “Note 27 Fair value of financial instruments” in the “Financial information” section of this report for more information on own credit

Operating income by business segment

Investment banking

Investment banking revenues were CHF 2,414 million in 2010, marginally down from CHF 2,466 million in the previous year.
Advisory revenues decreased slightly to CHF 846 million from CHF 858 million. While the overall market fee pool increased year on year, our market share declined.
Capital markets revenues were down 21% to CHF 1,994 million from CHF 2,514 million. Equity capital markets revenues were CHF 1,020 million, down 37% from CHF 1,609 million due to reduced market activity in the first half of 2010 following uncertainty over sovereign risk in Europe, and lower revenues in Asia Pacific as domestic Chinese banks took a greater share of fees than in 2009. Fixed income capital market revenues were CHF

974 million, up 8% from CHF 904 million, mainly due to a strong leverage capital market fees pool and market share gain.

Other fee income and risk management revenues were negative CHF 426 million compared with negative CHF 906 million, primarily due to the absence in 2010 of large losses as recorded in 2009, due to an overall stabilization of the credit markets.

Securities

Securities revenues were CHF 10,144 million, compared with CHF 4,390 million in 2009. Revenues of Equities and FICC are analyzed in the respective sections below.

Equities

Revenues in equities were CHF 4,469 million, down 9% from CHF 4,937 million in 2009.
Cash revenues were CHF 1,776 million, compared with CHF 1,959 million due to lower commission income as a result of decreased client activity in the US, offsetting stronger performance in EMEA.
Derivatives and equity-linked revenues were CHF 1,580 million, in line with last year. Derivatives revenues were up as a result of improved client flows and structured products performance in Asia Pacific, partly offset by lower revenues in EMEA due to the sovereign debt crisis, creating a lack of both liquidity and client flow. Equity-linked revenues were down after a strong performance in 2009.
Within the prime services business, revenues were CHF 1,036 million compared with CHF 1,058 million. Prime brokerage revenues declined due to lower average spreads whilst exchange-traded derivatives revenues marginally improved.
Other equities revenues were CHF 77 million compared with CHF 341 million, largely due to lower proprietary trading revenues partially offset by reduced funding and hedging costs.

Fixed income, currencies and commodities

Revenues were positive CHF 5,675 million in 2010 compared with negative CHF 547 million in 2009, when the FICC business was materially affected by losses on residual risk positions.
In credit, revenues rose significantly to positive CHF 2,304 million, up from negative CHF 1,932 million. The turnaround was largely due to the rebuild across the trading and sales businesses, particularly in structured credit and client solutions, as well as lowering of negative revenues from the legacy risk portfolio (the exposure to which was also reduced during this period), and the selective re-entry into previously exited products.
In macro, revenues of CHF 2,249 million were down from CHF 2,933 million in 2009. The decrease mainly stemmed from lower revenues in the rates and foreign exchange businesses, which were affected by a significant decline in market spreads, low interest rate volatility, reduced client activity and general de-risking, particularly in the second half of 2010.
Emerging markets revenues decreased to CHF 521 million from CHF 1,162 million as divesture of UBS Pactual, spread compres-



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sion experienced across foreign exchange and credit markets, and uncertainties over European sovereign debt impacted liquidity and overall client volumes.

Other FICC revenues were positive CHF 601 million compared with negative CHF 2,710 million. The 2010 revenues included CHF 737 million from residual risk positions due to a reduced credit valuation adjustment requirement and net gains on sale.

Operating expenses

Operating expenses increased 6% to CHF 9,813 million in 2010 from CHF 9,216 million in the previous year.
Personnel expenses increased 21% to CHF 6,743 million from CHF 5,568 million, mainly due to increased variable compensation as a result of amortization of prior years’ awards, increased number of employees and a UK Bank Payroll Tax charge of CHF 190 million.
General and administrative expenses increased to CHF 2,693 million in 2010 from CHF 2,628 million in 2009. This was largely due to an increase in legal provisions as well as higher sponsoring and branding costs related to the global re-launch of the UBS

brand. These costs were partially offset by a reduction in professional fees.

Net charges from other business divisions were CHF 64 million, compared with a net charge to other business divisions of CHF 147 million.
Depreciation reduced 23% to CHF 278 million in 2010 from CHF 360 million in 2009. Depreciation in 2009 included costs associated with a restructuring charge.
Goodwill impairment charges were nil in 2010 compared with a charge of CHF 749 million in 2009, related to the sale of UBS Pactual.
Amortization of intangible assets was CHF 34 million compared with CHF 59 million in 2009.
In addition, non-personnel costs included an additional allocation of expenses from the Corporate Center to the business divisions in 2010.
èRefer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for more information on allocation of additional Corporate Center costs to the business divisions in 2010



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2009

Results

In 2009, we recorded a pre-tax loss of CHF 6,081 million compared with a pre-tax loss of CHF 34,300 million in 2008, primarily due to a reduction in losses on residual risk positions. The 2009 result was also affected by a loss of CHF 2,023 million on own credit from financial liabilities designated at fair value as our credit spreads narrowed

Operating income

Total operating income in 2009 compared with awas positive CHF 2,0323,135 million, gainup from negative CHF 24,375 million in 2008. For full-year 2009, equities and IBD revenues were down from 2008, asmainly due to substantially reduced losses on risk positions within the businesses suffered losses of key personnel in the early part of the year. FICC business.

Credit loss expense / recovery

We recorded net credit loss expenses of CHF 1,698 million for 2009, compared with net credit loss expenses of CHF 2,575 million in 2008. Excluding the credit loss expenses from reclassified securities of CHF 425 million, our net credit loss expenses amounted to CHF 1,273 million in 2009.
èàRefer to the “Risk management and control” section of this report for more information on our risk management approach, method of credit risk measurement and the development of credit risk exposures

Own credit

The own credit loss on financial liabilities designated at fair value was CHF 2,023 million as our credit spreads narrowed in 2009, compared with a CHF 2,032 million gain in 2008.
è Refer to “Note 27 Fair value of financial instruments” in the “Financial information” section of this report for more information on own credit
     Our operating expenses decreased

Operating income by CHF 709 million compared with 2008, mainly reflecting lower non-personnel costs.

Operating income
Total operating income in 2009 was positive CHF 3,135 million, up from negative CHF 24,375 million in 2008, mainly due to substantially reduced losses on risk positions within the FICC area.
Equities
Revenues in equities were CHF 4,937 million in 2009, down 5% from CHF 5,184 million in 2008. Equity market conditions continued to be difficult in 2009, impacting our overall business performance, as did the loss of some key personnel in the first part of the year. We have made a number of strategic hires since then. Cash equity revenues were impacted by lower market volumes and a loss in market share. Derivatives revenues were down. Prime brokerage revenues declined due to a weaker dividend season and lower client balances in the first half of 2009. A decline in exchange-traded derivatives revenues was driven by weaker volumes and less favorable interest and margin balances. Equity-linked revenues improved significantly after a weak 2008 as all regions benefited from improvements in valuations and liquidity. Proprietary trading revenues also substantially improved with a strong performance recorded across all geographical regions.
segment

Fixed income, currencies and commodities
Revenues were negative CHF 547 million in 2009, up from negative CHF 31,895 million a year earlier. The FICC result continued to be affected by losses on residual risk positions

which had a material impact particularly in the first and second quarters, but decreased significantly in the second half of the year. Despite the overall loss, all core FICC businesses contributed positive revenues as the businesses were rebuilt, funding costs were normalized, and liquidity improved.
     Credit revenues improved in 2009 as key hires were engaged and residual risk positions were steadily reduced. The macro rates business was negatively impacted by movements in our credit spreads on the valuation of our derivative positions. Foreign exchange and money markets revenues were in line with the previous year. Emerging markets revenues increased despite the sale of UBS Pactual, as all regions continued to perform well, most notably in Eastern Europe, Middle East and Africa.
     As we continued to reduce our residual risk positions, we incurred losses related to the liquidation of these positions. Losses on credit valuation adjustments for exposure to mono-line insurers arising from purchased credit default protection totaled CHF 0.8 billion for the year. Losses from credit valuation adjustments incurred in the first quarter of 2009 were only partially offset by gains in the rest of the year, resulting from commutation of a number of trades in the second and third quarter. Other areas which incurred losses in the first quarter had a less material impact on the remainder of the year.
Investment banking
Revenues of the investment banking department were CHF 2,466 million in 2009, down 14% from CHF 2,880 million in the previous year. Mergeryear primarily due to reduced advisory revenues partially offset by increases in capital market revenues.
Mergers and acquisitions activity remained subdued during the year with global mergers and acquisitions volumes reaching their lowest annual total since 2004, according to Thomson Reuters. This resulted in reducedAs a result, advisory revenues across all regions, downdecreased 47% to CHF 858 million. The decline was only partially offset by amillion across all regions.
Capital market revenues improved 36% improvement in capital markets revenues.2009. Equity capital markets revenues were up 65% to CHF 1,609 million with Europe, the Middle East, Africa and the Asia Pacific region performing well, as investors turned to the equity market for financing, increasing total market volumes by 42% compared with 2008, according to Dealogic. Fixed income capital markets revenues increased 4% to CHF 904 million as global issuance levels rose in 2009 by 38% compared with 2008, based on Dealogic’s debt capital markets classification.

Securities

Securities revenues were CHF 4,390 million compared with negative CHF 26,712 million in 2008. Revenues of Equities and FICC are analyzed in the respective sections below.

Equities

Revenues in equities were CHF 4,937 million in 2009, down 5% from CHF 5,184 million in 2008. Equity market conditions were difficult in 2009, impacting our overall business performance, as did the loss of some key personnel in the first part of the year. We made a number of strategic hires during the second half of the year.
Cash equity revenues were impacted by lower market volumes and a loss in market share.
Derivatives and equity-linked revenues were up compared with 2008. Equity-linked revenues increased significantly as all regions benefited from improvements in valuations and liquidity, partly offset by lower derivatives revenues.
Within the prime services business, revenues in both prime brokerage and exchange-traded derivatives declined. Reductions in prime brokerage revenues were due to a weaker dividend season and lower client balances in the first half of 2009. Declines in exchange-traded derivatives were due to weaker volumes and less favorable interest and margin balances.
Other equities revenues, including proprietary trading, improved with a strong performance recorded across all geographical regions.

Fixed income, currencies and commodities

Revenues were negative CHF 547 million in 2009, up from negative CHF 31,895 million a year earlier. The FICC result continued to be affected by losses on residual risk positions, which had a material impact particularly in the first half of 2009, but decreased significantly in the second half of the year. Despite the overall loss, the core FICC businesses contributed positive revenues in 2009 as the businesses were rebuilt, funding costs were normalized, and liquidity improved.
Credit revenues improved in 2009 as key hires were engaged and residual risk positions were steadily reduced.
In macro, rates business was impacted by movements in our credit spreads on the valuation of our derivative positions. Foreign exchange and money markets revenues were in line with 2008.
Emerging markets revenues increased despite the sale of UBS Pactual, as all regions continued to perform well, most notably in Eastern Europe, the Middle East and Africa.
As we continued to reduce our residual risk positions, we incurred losses related to the liquidation of these positions. Losses on credit valuation adjustments for exposure to monoline insurers arising from purchased credit default protection totaled CHF 0.8 billion in 2009. Losses from credit valuation adjustments incurred in the first quarter of 2009 were only partially offset by gains in the rest of the year, resulting from commutation of a number of



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trades in the second and third quarters. Other areas which incurred losses in first quarter 2009 had a less material impact on the remainder of the year.

Operating expenses

Operating expenses declined to CHF 9,216 million in 2009, a 7% decrease from CHF 9,925 million the previous year.in 2008.
Personnel expenses atwere CHF 5,568 million in 2009, increaseda 7% increase from onethe previous year earlier, and were driven by increasedprimarily due to higher variable compensation. Salary increases were partly offset by headcount reductions and reduced restructuring costs.
General and administrative expenses decreased to CHF 2,628 million in 2009 from CHF 3,830 million in 2008. This iswas largely due to reduced legal provisions and real estate re-


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structuringrestructuring provisions, along with continuing reductions in professional fees, travel and entertaining and market data services resulting from headcount reductions and cost-cutting measures.

Net charges to other business divisions were CHF 147 million in 2009, compared with a net charge from other business divisions in 2008 of CHF 41 million.
Depreciation reduced 19% to CHF 360 million in 2009 from CHF 447 million in 2008, as real-estatereal estate restructuring charges were lower in 2009. Amortization of intangible assets atwas CHF 59 million in 2009 was down fromcompared with CHF 83 mil-
lion a year earlier.million in the prior year. A goodwill impairment charge of CHF 749 million related to the sale of UBS Pactual was incurred in 2009 (of which CHF 328 million was charged to the Corporate Center as this was related to foreign exchange exposures managed by Group Treasury), compared with a CHF 341 million goodwill impairment charge relating to the exit of the municipal securities business in 2008.
Included in the 2009 operating expenses is a restructuring charge of CHF 226 million, consisting of CHF 102 million of personnel expenses and CHF 123 million of costs related to real estate.


100108

UBS business divisions and
UBS business divisions and
Corporate Center

2008
Results
In 2008, we recorded a pre-tax loss of CHF 34,300 million compared with a pre-tax loss of CHF 16,669 million in 2007, primarily due to the losses on risk positions within the FICC area. For full-year 2008, equities and investment banking revenues were down from a record year in 2007. A credit loss expense of CHF 2,575 million was recorded in 2008, mainly due to impairment charges taken on reclassified financial assets compared with CHF 266 million in 2007. In 2008, we recorded a gain on own credit from financial liabilities designated at fair value of CHF 2,032 million, resulting from the widening of our credit spread, which was partly offset by the effects of redemptions and repurchases of such liabilities.
     Operating expenses for 2008 decreased significantly from 2007, mainly reflecting lower variable compensation.
Operating income
Total operating income in 2008 was negative CHF 24,375 million, down from negative CHF 804 million a year earlier.
Equities
Revenues, at CHF 5,184 million in 2008, were down 42% from CHF 9,002 million in 2007. The overall business performance was impacted in 2008 as equities continued to experience difficult market conditions. Cash equity revenues were marginally lower as declines in revenues across Asia Pacific and Europe were only partially offset by growth in the US. Derivatives revenues were down as market volatility, depressed client volumes, lack of liquidity and highly correlated markets impacted performance across all regions, particularly in the fourth quarter. Equity-linked revenues were down, with most regions impacted by declines in valuations, falling equity markets and reduced liquidity. Prime brokerage services had a solid performance, but revenues were down overall as a strong first half-year performance was offset by deterioration in the second half of the year. Exchange-traded derivatives revenues increased, as the business benefited from strong first and fourth quarters that were driven by significant volatility in the market. Proprietary trading revenues were negative for the year, reflecting the significant change in market conditions.
Fixed income, currencies and commodities
Revenues were negative CHF 31,895 million, down from negative CHF 16,835 million a year earlier. Consequences of the global financial crisis, including forced liquidations, government bail-outs and consolidation in the banking sector, negatively affected the majority of the FICC businesses. Credit recorded losses in both client and proprietary trading
as a result of the significant turbulence in the markets and subsequent severe lack of liquidity. The negative emerging markets result was due to losses in Asia Pacific.
     These negative effects were only partially offset by positive results in certain areas. Rates experienced a solid year, driven by derivatives and government bonds in Europe and rates derivatives in both Asia Pacific and the US. Foreign exchange and money markets produced a strong year as it capitalized on volatile markets and strong client flows. The short-term interest rate business benefited from market movements to generate an exceptional result. The foreign exchange distribution business posted very good results across all regions, benefiting from strong client flows seeking to access liquidity in the market. Structured products posted positive revenues due to strong client interest in structured funding solutions.
Investment banking
Revenues of the investment banking department at CHF 2,880 million in 2008, decreased 57% from CHF 6,637 million in the previous year. Market activity slowed significantly during the year, resulting in reduced advisory revenues across the regions, down 40% to CHF 1,609 million. Market volatility in both equity and debt capital markets led to lower capital markets revenues, down 65% to CHF 977 million and 41% to CHF 866 million respectively.
Operating expenses
Operating expenses declined by CHF 5,940 million to CHF 9,925 million in 2008, a 37% decrease from CHF 15,865 million the previous year.
     Personnel expenses, at CHF 5,182 million in 2008, decreased 55% from a year earlier, due to significantly lower variable compensation and lower salary costs, and were partly offset by restructuring charges. Share-based compensation was down significantly from 2007, mainly due to reduced variable compensation. Full-year results for 2007 included accruals for share-based compensation during the year. These are not reflected in full-year 2008 as, starting in 2009, they are being amortized over the vesting period of these awards.
     General and administrative expenses increased slightly to CHF 3,830 million in 2008 from CHF 3,800 million in 2007. Reductions in travel and entertainment, IT and other outsourcing costs were more than offset by increases in occupancy costs due to real estate restructuring, and by legal provisions.
     Net charges from other business divisions were CHF 41 million in 2008, compared with a net charge to other business divisions in 2007 of CHF 171 million. This increase reflects the end of a private equity performance fee received in 2007, an IT data center restructuring fee and increased allocations from Wealth Management & Swiss Bank reflecting higher operating volumes.


101

UBS business divisions and Corporate Center
Investment Bank

     Depreciation rose 4%, to CHF 447 million in 2008 from CHF 431 million in 2007, as the real-estate restructuring charges mentioned above resulted in additional depreciation costs. Amortization of intangible assets, at CHF 83 million in 2008, was down from CHF 172 million a year earlier. A goodwill impairment charge of CHF 341 million relating to the exiting of the municipal securities business by the
Investment Bank was recognized in second quarter 2008. There was no goodwill impairment charge for full-year 2007.
     Included in the operating expenses is a restructuring charge of CHF 737 million recorded in fourth quarter 2008, consisting of CHF 435 million of personnel expenses and CHF 302 million of costs related to real estate.


102

UBS business divisions and Corporate Center
UBS business divisions and Corporate Center
Corporate Center

Corporate Center

Business description
Description

The Corporate Center seeks to ensure that we operateUBS operates as a coherent and effective whole, by providing and managing support and control functions for the business divisions and the Group, in suchthe areas asof risk, finance (including funding, capital and balance sheet management and management of foreign currencies)non-trading risk), legal and compliance, information technology, human resources, real estate, procurement, communication and branding, human resources, information technology, real estate, procurementcorporate development, security and service centres.

centers.

Aims and objectives

The Corporate Center assists our business divisions and regions through provision of Group-level control in the areas of finance, risk and legal and compliance, as well as through a global corporate shared services organization comprising support and logistics functions. We strive to maintain an appropriate balance between risk and return, in our businesses, while establishing and controllingcontrol our corporate governance processes, including compliance with relevant regulations. Each functional head in the Corporate Center has authority acrossover all businesses forin their area of responsibility, including the authority to issue Group-wide policies for that area.

     On 1 April 2009, we announced that we would be integrating ourThe integration of Group-wide shared service functions (information technology, supply management,human resources, real estate, human resources,procurement, communication and branding, corporate development, security and offshoring) as well as the control functions (finance, risk and legal and compliance) into the Corporate Center. The objectives of this integration were to improve effectiveness and efficiency of the control and shared services functions on a sustainable basis, to strengthen cost management by creating global and Group-wide cost responsibilities and to provide simple service delivery models with clear responsibilities. A new Corporate Center governance model was implemented, and corresponding organizational structures were put in place including respective management nominations. Within six months, the transformation was successfully completed in 2009. The focus in 2010 was on centralization, governance and the set-up of business-aligned shared services. The result was a new global corporate shared services organization supporting the business divisions and regions was created under the leadership of the Group Chief Operating Officer (COO). In parallel, the control functions were centralized under the Group Chief Financial Officer (CFO), the Group Chief Risk Officer (CRO), and the Group General Counsel (Group GC)(GC). In total, approximately 15,000 employees were transferred

As a result, we have moved further towards sustainable efficiency improvements, effective execution and integrated intoincreased service quality. We have improved our cost management for global and Group-wide cost responsibilities, and have implemented simple service delivery models with clear responsibilities. A new investment governance process is in place to provide oversight, review and approval of programs in the investment portfolio, and those in the pipeline. This is part of a global service level agreement framework, ensuring alignment of investments with the Group’s strategic priorities.
At the end of 2010, across all shared services functions, the Corporate Center. As part of this integration, significant efficiency improvement and cost-saving potentials have been identified, and initial cost-cutting measures were implemented in the course of 2009. HeadcountCenter had approximately 19,400 employees. Almost all headcount and costs of the centralized functions are re-allocated to the business divisions for which the respective services are performed. A global service level agreement framework providesThe new governance
and process ensures cost transparency and consistency across service providers and consumers.consumers (the business divisions).
The integration of the control and support functions into the Corporate Center creates athe foundation to enhance thefor superior Group-wide effectiveness and efficiency, of the new Corporate Center, as the operating models of individual functions and cross-functional synergies will beare optimized. Overall, the integrated structure helps us to maintain a strong, independent control function and provides a strong platform from which we can increase efficiency, create synergies for revenue growth and enhance shareholder value.


109

UBS business divisions and Corporate Center
Corporate Center

è

Refer to the “UBS reporting structure and accounting changes” section of this report for more information on changes to the quarterly disclosure of the Corporate Center in 2010
Organizational structure

The Corporate Center consists of the control functions Group Finance, Group Risk, and Group General Counsel, andin addition to the shared services functions human resources, information technology, premises, supply and demand management, communication and branding, corporate development and Group offshoring.

functions.

Group Chief Financial Officer

(Group CFO)
The Group CFO is responsible for transparency in, and appraisal of, the financial performance of the UBS Group (Group) and business divisions, the Group’s financial reporting, forecasting, planning and controlling processes, and for providing advice on financial aspects of strategic projects and transactions.transactions in collaboration with Corporate Development. The Group CFO has management responsibility overmanages the divisional and Group financial control functions. The Group CFO is responsible for the managementmanages and control ofcontrols our tax affairs and for treasury and capital management, including management and control of funding and liquidity risk and ouras well as regulatory capital ratios. After consultation with the audit committee,Audit Committee, the Group CFO makes proposals to the Board of Directors (BoD) regarding the standards for accounting we have adopted, and defines the standards for financial reporting and disclosure. Together with the Group CEO,Chief Executive Officer (CEO), the Group CFO provides external certifications under sections 302 and 404 of the Sarbanes-Oxley Act 2002, and in coordination with the Group CEO, manages relations with analysts, investors and investors.


103

the rating agencies.

UBS business divisions and Corporate Center
Corporate Center

Group Chief Operating Officer
(Group COO)
The Group COO is responsible for the management and performance of the infrastructure andshared service functions of the UBS Group, and is responsible forincluding the management and control of Group-wide information technology, supply and demand management,procurement, real estate and corporate administrative services, human resources, corporate development andstrategy, communications and branding as well as for physical and information security and offshoring services of

UBS. TheIn addition, the Group COO supports the Group CEO in strategy development and key strategic issues, and assumes responsibility for managingissues. The Group COO also acts as the operations in ways consistent with the strategic goals and performance targetsCEO of the UBS Group.

Corporate Center, and oversees the business and strategic planning of the shared services.

Group Chief Risk Officer

(Group CRO)
The Group CRO is responsible for the developmentdeveloping and implementation ofimplementing principles and appropriate independent control frameworks for credit, market, country and operational risks within the UBS Group. In particular, the Group CRO is responsible for the formulationformulates and implementation ofimplements the frameworks for risk capacity / appetite, risk measurement, portfolio controls and risk reporting; and has manage-

mentmanagement responsibility over the divisional and Groupfirm-wide risk control functions. The Group CRO is responsible for the implementation ofimplements the risk control mechanisms as determined by ourthe BoD, the risk committeeBoD Risk Committee or the Group CEO. In addition, the Group CRO approves transactions, positions, exposures, portfolio limits and provisions in accordance with the delegated risk control authorities, that are delegated, and monitors and challenges the bank’sfirm’s risk-taking activities.

Group General Counsel

(Group GC)
The Group GC has Group-wide responsibility for legal and compliance matters, policies and processes and for managing the legal and compliance function. The Group GC has responsibilityis responsible for establishing a Group-wide management and control process for our relationship with regulators, in close cooperation with the Group CRO and the Group CFO where relevant, and for maintaining the relationships with our key regulators with respect to legal and compliance matters. The Group GC is further responsible for reporting legal and compliance risks and material litigation, for managing litigation and special and regulatory investigations, and for ensuring that we meet relevant regulatory and professional standards in the conduct of our business.



104

Corporate Center cost savings

The Corporate Center allocates operating expenses to the business divisions according to service consumption.

In 2010, the Corporate Center had a cost base excluding variable compensation of just below CHF 7.5 billion which includes personnel costs of CHF 3.2 billion. The retained total operating expenses relate to Group governance functions and

Group items which cannot be allocated to specific business divisions.

As mentioned in the text describing the Corporate Center, the integration of the control and support functions has created a superior foundation for Group-wide efficiencies. In 2010, the Corporate Center was able to reduce its cost base excluding variable compensation before

allocation by CHF 605 million from the previous year, primarily as a result of lower personnel costs in IT and lower real estate-related costs.

The business divisions fully benefited from the reduced cost base through lower allocations.



110

Results

Treasury activities and other corporate items reporting

From 2010 onwards, almost all costs incurred by the Corporate Center related to shared services and control functions are allocated to the reportable segments, which directly and indirectly receive the value of the services, either based on a full cost recovery or on a periodically agreed flat fee.

UBS
èRefer to “Note 1a 33) Segment reporting” and “Note 1b Allocation of additional Corporate Center costs to reportable segments” in the “Financial information” section of this report for more information
The allocated costs are shown in the respective expense lines of the reportable segments in “Note 2a Segment reporting” in the “Financial information” section, and in the “UBS business divisions and Corporate Center
Center” section of this report.
Results
The Corporate Center reporting table was renamed to “Treasury activities and other corporate items” to reflect the changes

                 
 
  As of or for the year ended      % change from 
CHF million, except where indicated
  31.12.09   31.12.08   31.12.07   31.12.08 
 
Income  394   998   3,562   (61)
 
Credit loss (expense) / recovery  (5)  0   0     
 
Total operating income
  389   998   3,562   (61)
 
Personnel expenses  551   433   583   27 
 
General and administrative expenses  199   353   312   (44)
 
Services (to) / from other business divisions  306   (73)  114     
 
Depreciation of property and equipment  193   265   243   (27)
 
Amortization of intangible assets  0   0   0     
 
Total operating expenses1
  1,250   979   1,252   28 
 
Performance from continuing operations before tax  (860)  19   2,310     
 
Performance from discontinued operations before tax  (7)  198   145     
 
Performance before tax
  (867)  217   2,455     
 
                 
Additional information
                
 
BIS risk-weighted assets (CHF billion)2
  8.5   8.8       (3)
 
Personnel (full-time equivalents)3
  1,624   3,097   2,479   (48)
 
1 Includes

in presentation of the Corporate Center information. It predominantly includes the results of treasury activities, e.g. from the management of structural foreign exchange risks and interest rate risks, residual operating expenses forsuch as those associated with the Company Secretary,functioning of the Group Executive Board and the Board of Directors, and Group Internal Audit.  2 BIS risk-weighted assets (RWA) are according to Basel II.  3 Personnel numbers exclude full-time equivalents from private equity (part of Corporate Center): 0 for 2009, 1 for 2008, 3,843 for 2007.

105

UBS business divisions and Corporate Center
Corporate Center
2009
Results
Pre-tax profit from continuing operations declined to negative CHF 860 million from positive CHF 19 million.
Operating income
Total operating income decreased by CHF 609 million to CHF 389 million, mainly due to own credit related allocations of negative revenues to the Corporate Center, of which CHF 222 million wereother costs related to 2008. In addition, the Corporate Center reportedorganizational management, as well as a CHF 498 million loss on the closinglimited number of the UBS Pactual sale in 2009, which was largely related to foreign exchange losses.specifically defined items. These losses were partly offset by a net gain of CHF 297 million onitems include the valuation of the mandatory convertible notes (MCNs) issued in December 2008 and converted in August 2009, a gain of CHF 117 million on the revaluation of ourUBS’s option to acquire the SNB StabFund’s equity an additional foreign exchange gain of CHF 430 million due to the deconsolidation and liquidation of subsidiaries and a gain of CHF 304 million on the buyback of subordi-

nated debt. In comparison, 2008 included an accounting gain of CHF 3,860 million related to the MCNs issued in March 2008, which was offset by the CHF 3.4 billion negative impact of the transaction between UBS and the Swiss National Bank and the placement of the abovementioned MCNs with the Swiss Confederation resulting in a total gain of CHF 0.4 billion.
Operating expenses
Total operating expenses increased to CHF 1,250 million from CHF 979 million, mainly due to a goodwill impairment charge of CHF 492 million relating to the sale of UBS Pactual, which was reallocated to the Corporate Center from the business divisions. Excluding this charge, operating expenses would have decreased by CHF 221 million, mainly due to the credit related to the UBS Pactual operating result which was transferred to the Corporate Center from the business divisions; the release of a provision related to a resolved tax claim in connection with the acquisition of PaineWebber,such as capital taxes, as well as reduced advertising and sponsoring expenditures. These items were partly offset by higher restructuringthe difference between actually incurred Corporate Center costs and accruals for variable compensation in 2009.


106

UBS business divisions and Corporate Center

2008
Results
The Corporate Center recorded a result from continuing operations of positive CHF 19 million in full-year 2008, down from a gain of CHF 2,310 million in 2007. This decline related mainly to a charge of CHF 3.4 billion following a transaction between UBS and the Swiss National Bank (SNB) in fourth quarter 2008. This charge reflected a net loss arising from the acquisition of the equity purchase option, and the impact of the contingent issuance of UBS shares in connection with the transaction. The total charge also included the fair valuation impact of the MCNs placed with the Swiss Confederation. The quarterly revaluation of the call component of the MCNs was reflected in a corresponding fluctuation in the results of the Corporate Center. This fluctuation was subjectperiodically agreed flat fees charged to the volatility of our share price and continued until the conversion of the MCNs into UBS shares. The loss from the SNB transaction was reported in the Corporate Center as it benefited the whole bank and not just the Investment Bank. For this purpose, at the 27 November 2008 Extraordinary General Meeting, shareholders approved the creation of conditional capital in the maximum amount of 365 million shares. Furthermore, 2008 was impacted by losses resulting from cash flow hedge ineffectiveness, due to the accelerated amortization of gains recorded until November 2007.business divisions.
èRefer to the discussion of “Net income from treasury activities and other” in the “UBS results” section of this report for more information on significant items and treasury-related income
     On the positive side, a gain of CHF 3,860 million due to the accounting treatment of the MCNs issued in first quarter 2008, and a gain of CHF 174 million on the sale of our stake in Bank of China in the fourth quarter assisted the 2008 result.
Operating income
Total operating income decreased to CHF 998 million in 2008 from CHF 3,562 million in 2007, largely due to the abovementioned SNB transaction and fair valuation of the MCNs in fourth quarter 2008, losses on swaps not fully eligible for hedge accounting, losses of CHF 192 million due to currency translation differences on partial disposals of an investment in a consolidated investment fund, and a gain from the sale of our stake in Bank of China. The 2007 result was due to the CHF 1,950 million gain from the sale of our 20.7% stake in Julius Baer. In addition, the contribution from the former Industrial Holdings decreased to CHF 22 million in 2008, compared with CHF 689 million in 2007.
Operating expenses
Total operating expenses were CHF 979 million in 2008, down CHF 273 million from CHF 1,252 million in 2007, predominantly due to a sharp reduction of accruals for variable compensation, declined advertising and sponsoring costs, lower project costs as well as decreased travel activities in 2008. These were partly offset by higher real estate restructuring provisions and a fair value adjustment in corporate real estate in 2008.



                 
  As of or for the year ended % change from 
CHF million, except where indicated 31.12.10  31.12.09  31.12.08  31.12.09 
 
Income  1,135   394   998   188 
 
Credit loss (expense) / recovery  0   (5)  0   (100)
 
Total operating income
  1,135   389   998   192 
 
Personnel expenses  78   551   433   (86)
 
General and administrative expenses  168   199   353   (16)
 
Services (to) / from other business divisions  8   306   (73)  (97)
 
Depreciation of property and equipment  89   193   265   (54)
 
Amortization of intangible assets  0   0   0     
 
Total operating expenses
  343   1,250   979   (73)
 
Performance from continuing operations before tax  793   (860)  19     
 
Performance from discontinued operations before tax  2   (7)  198     
 
Performance before tax
  795   (867)  217     
 

Additional information

                
 
BIS risk-weighted assets (CHF billion)  8.9   8.5   8.8   5 
 
Personnel (full-time equivalents)  194   1,624   3,097   (88)
 

107111

 

Risk and treasury
  management

Audited information according to IFRS 7 and IAS 1

Risk disclosures provided in line with the requirements of theInternational Financial Reporting Standard 7 (IFRS 7) Financial Instruments: Disclosures,and disclosures on capital required by theInternational Accounting Standard 1 (IAS 1) Financial Statements: Presentation form part of the financial statements audited by UBS’sour independent registered public accounting firm Ernst & Young Ltd., Basel. This information (the audited texts, tables and graphs) is marked by a bar on the left-hand side throughout this report and is incorporated by cross-reference into the financial statements of this report.



    Risk management and control

–Disciplined risk management and control are essential to our success. In 2010, we continued to make significant investments in our infrastructure, processes, methodologies and people to ensure that our risk frameworks are sufficiently robust to support our risk appetite and business aspirations.
–Our risk appetite is established within our risk capacity as determined by a complementary set of firm-wide risk metrics, and is approved under Board of Directors (BoD) authority. It is administered and enforced by a detailed limit framework of portfolio and position limits at both UBS Group (Group) and business division levels.

In 2010, increased risk taking was authorized for incremental trading activity, particularly to support client flow activity, and also for loan underwriting. Outside of these two areas, the core risk profile of the firm remained largely unchanged.

Reduction of our residual risk positions remained a priority in 2010. We further reduced our exposures to monoline insurers, student loan auction rate securities and certain restructured legacy leveraged finance positions, thereby decreasing our impaired loan portfolio.



 

    Treasury management

–We continued to maintain focus on asset quality and building up capital by increasing our tier 1 capital by CHF 3.5 billion and to further strengthen and safeguard our liquidity position by raising over CHF 15 billion equivalent of public benchmark bonds.
–We have re-defined treasury interactions between business divisions and desks, improved tools and reporting, and introduced a new Group-wide funds transfer pricing process.

Our total assets stood at CHF 1,317 billion on 31 December 2010, down CHF 23 billion (2%) from CHF 1,341 billion on 31 December 2009. The reduction occurred mainly in replacement values as market and currency movements drove down positive replacement values by CHF 21 billion (to CHF 401 billion). Our funded asset volume, which excludes positive replacement values, remained relatively unchanged, declining by CHF 3 billion in 2010.

In 2010, we continued to maintain a sound liquidity position and a diversified portfolio of funding sources, despite the potential uncertain impact of developments in financial regulatory reforms and the significant market volatility caused by uncertainties regarding the global macroeconomic environment, including certain European fiscal and sovereign debt concerns.

Over the course of 2010, as investors became gradually more risk tolerant, credit spreads and incremental funding costs for most global financial Institutions, including UBS, generally narrowed throughout the yield curve. We raised over CHF 15 billion equivalent of public benchmark bonds with an average maturity of 5.5 years. This exceeded the combined amount of public benchmark bonds and other long-term straight debt which matured, or was redeemed, during 2010. Our customer cash deposits in our wealth and asset management business divisions at year-end 2010 were stable compared with the prior year-end when adjusted for currency effects.

In response to the prolonged low yields, treasury supported and implemented measures to improve Wealth Management & Swiss Bank’s margin income through income-generating fixed receiver swap and bond portfolios.

Group Treasury continued to earn interest income on equity through its portfolio of interest rate products and managed the currency effects on equity and key ratios. Profits and losses in foreign currencies were hedged to protect shareholder value.

At year-end 2010, our BIS tier 1 ratio was 17.8%, and the BIS total capital ratio was 20.4%. While overall BIS risk-weighted assets declined by CHF 7.7 billion to CHF 198.9 billion, our BIS tier 1 capital increased by CHF 3.5 billion to CHF 35.3 billion. Our financial stability allowed us to call and redeem tier 1 and tier 2 instruments in 2010. Nevertheless, the BoD has decided to further bolster capital and has therefore not proposed any dividend for the financial year 2010.

We continued to use the equity attribution framework to guide our businesses in the allocation of resources to opportunities that are expected to provide the best risk-adjusted profitability contributions.

As of 31 December 2010, we had a total of 3.8 billion shares issued, an increase of 273 million shares compared with 31 December 2009. The conversion of CHF 13 billion in mandatory convertible notes on 5 March 2010 led to an issuance of 273 million shares from conditional capital.



Risk and treasury management
Risk management and control

–

Risk reduction remained a priority in 2009. As a result of our risk reduction initiatives, we ended the year with risk exposures commensurate with our risk capacity, although legacy risks remain significantmanagement and are targeted for continued reduction. Effectivecontrol

Disciplined risk management and control are essential to our successsuccess. In 2010 we continued to make significant investments in our infrastructure, processes, methodologies and we have made further progresspeople to ensure that our risk frameworks are sufficiently robust to support our risk appetite and business aspirations. Our risk appetite is established within our risk capacity as determined by a complementary set of firm-wide risk metrics, and is approved under Board of Directors authority. It is administered and enforced by a detailed limit framework of portfolio and position limits at both Group and business division levels. Each element of our risk control framework plays a key role in implementing the decision-making processes within the firm. All material risks are reported to the respective authority holders at least monthly. In 2010, increased risk-taking was authorized for incremental trading activity, particularly to support client flow activity, and also for loan underwriting. Outside of these two areas, the core risk renewal program we initiated in 2008. In addition, the implementationprofile of the settlement agreements relating to the US cross-border investigation remains a focus of management attention. Regulatory and tax authorities in a number of countries are focusing on cross-border banking activities, and we have launched a number of initiatives to improve the effectiveness of the policy and control frameworkfirm remained largely unchanged. Reduction of our cross-border wealth management business globally.

residual risk positions remained a priority in 2010. We further reduced our risk exposure,which was reflected in declines in our stress loss measures as well as decreases in our credit and market risk portfolios. We also reduced our exposures to residual risk positions. Our reduction in risk exposures contributed to significant decreases in the size of our balance sheet and risk-weighted assets.
We made further progress in implementing our risk renewal program.This has resulted in enhanced risk governance (including changes in risk management and control personnel), improved risk infrastructure and processes and the associated capabilities to capture, represent and monitor risks. We have also changed the firm’s capital optimization model and enhanced our funding and balance sheet management.


Treasury management
– We continued to further strengthen and safeguard our liquidity position and adjusted funding targets while our focus was maintained on continuing asset reductions. Combined with the broad diversity of our funding sources, our contingency planning processes and our global scope, these measures have enabled us to maintain a balanced asset / liability profile throughout the recent market dislocation. Additionally, signs of our return towards financial stability included the successful tender for certain subordinated notes in March and, in August, the exit of the Swiss Confederation’s stake in UBS through conversion of the mandatory convertible notes and immediate placement of shares in the market.

In 2009 we experienced a decline in customer deposits and net new money outflows in our asset gathering divisions. The effects of client deposit outflows, as well as the temporary reduction in access to wholesale term debt markets during the first few months of 2009, were readily compensated by funding from alternative sources and ongoing balance sheet reductions.
Ourtotal assets declinedby 33% to CHF 1,341 billion on 31 December 2009, which led to a further improvement of our FINMA leverage ratio from 2.45% to 3.93%.
Ourfunding sourceswere broadened by accessing an important new investor base through our inaugural European covered bond program.
At year-end 2009, our BIS tier 1 ratio amounted to 15.4% and the BIS total capital ratio to 19.8%. We achieved this by continued de-risking of our assets, which is reflected in our 32% BIS risk-weighted assets reduction. Eligible tier 1 capital decreased from CHF 33.2 billion to CHF 31.8 billion. We were able to almost compensate the effects of losses incurred during 2009 and further negative impacts on equity, by the issuance of newly created shares in June.


Risk and treasury management
Risk management and control
Risk management and control
Risk reduction remained a priority in 2009. We further reduced our risk exposures, which was reflected in declines in our stress loss measures as well as decreases in our credit and market risk portfolios. We also reduced our exposures to residual risk positions such as monoline insurers, student loan auction rate securities and somecertain restructured legacy leveraged finance commitments. Our reduction in risk exposures contributed to significant decreases in the size ofpositions, thereby decreasing our balance sheet and risk-weighted assets. As a result of our risk reduction initiatives, we ended the year with risk exposures commensurate with our risk capacity, although legacy risks remain significant and are targeted for continued reduction. Effective risk management and control are essential to our success and we have made further progress in implementing the risk renewal program we initiated in 2008. In addition, the implementation of the settlement agreements relating to the US cross-border investigations remains a focus of management attention. Regulatory and tax authorities in a number of countries are focusing on cross-border banking activities, and we have launched a number of initiatives to improve the effectiveness of the policy and control framework of our cross-border wealth management business globally.
impaired loan portfolio.

Summary of key developments in 20092010

The most important developments that took place in 20092010 with regard to risk management and control include:

– A significant reductionOn a net basis (new credit loss expenses minus recoveries), credit losses at the Group level were CHF 66 million, significantly down from CHF 1,832 million in 2009. Our Swiss and international loan portfolios were materially unchanged.
–Our impaired loan portfolio decreased by CHF 2.7 billion, primarily due to sales of certain restructured legacy leveraged finance positions, without the incurrence of any meaningful incremental costs to the firm.
–During the second half of the year, our market risk exposures duringprofile increased moderately from previously low levels (on both an absolute basis and a relative basis to our peers) in line with our previously communicated growth plans in the Investment Bank. This is reflected in the development of our value-at-risk (VaR) and market risk related risk-weighted assets (RWA).
–After repurchasing USD 7.6 billion at par value of outstanding client holdings of student loan auction rate securities (ARS) in 2010, our remaining purchase commitment at the end of the year was reflectedimmaterial with a par value of USD 63 million. Despite the material buy-backs, our inventory of student loan ARS decreased by net USD 0.6 billion to USD 9.8 billion, as a result of significant redemptions and sales in our stress loss measures as well as reductions in our average and period-end Value-at-Risk (VaR), a decrease in our credit risk portfolios and lower exposures to residual risk positions. the secondary market.
–We commuted several trades with a notional value of approximately USD 7 billion with several monoline insurers, which contributed toalong with an increase in the fair values or the remaining insured assets resulted in a reduction inof our net exposuresexposure to monoline insurers after credit valuation adjustments (CVA) to USD 2.3 billion (excluding hedges)1.6 billion. Based on fair values, only 2% of our remaining portfolio of assets hedged with monoline insurers related to US residential mortgage-backed securities collateralized debt obligations (RMBS CDO). Approximately USD 1.6 billion at par of our aggregate exposures to student loan auction rate securities were either redeemed by issuers or sold in the secondary market. Our legacy leveraged finance positions were also reduced through sales and writedowns.
–The decrease in our risk exposures contributed to significant reductions in our balance sheet by 33% to CHF 1,341 billion and our risk-weighted assets by 32% to CHF 206.5 billion at 31 December 2009 compared with the end73% of the prior year.remaining assets were collateralized loan obligations (CLO), the vast majority of which were rated AA and above.

– Our credit loss expensessovereign exposures are subject to limits and are actively managed under an established country risk control framework. As a result, sovereign exposures are commensurate with the rating of each country and the size of each economy. Sovereign exposures of industrialized European countries rated AA and below were approximately 40% lower at CHF 1.8 billion for 2009 compared with CHF 3.0 billion formaterially reduced on a gross and net basis during the prior year.
In addition, we do not have material sovereign risk exposures in the Middle East and North African region.
– We significantly enhancedhave made further significant enhancements to our firm-wide risk measures and tools. Our stress testing framework which comprises portfolio-specific stress tests as well as combined firm-wide stress tests. Our firm-wide stress testing captures all major risks acrosshas continued to evolve, including the development of new scenarios to capture our business divisionsrisk exposure to extreme market events and is one of the most critical inputs for discussions between management, our Board of Directors (BoD) and our regulators on the risk profile of our firm. We carried
out a stress test specified by the Swiss Financial Market Supervisory Authority (FINMA) which was designed to assess the resilience of the large Swiss banks in the event of a severe economic downturn, and FINMA reported on 2 October 2009, “that even after the effect of a severe stress event they (the two large systemically relevant banking groups in Switzerland which includes UBS) would still maintain a stable capital base with a Tier 1 capital ratio over 8%.”
–We changed the calibration of our management VaR from a 10-day 99% measure to a 1-day 95% measure. We consider that a 1-day 95% VaR reflects the way that trading risks are viewed and managed by the business and can be more directly compared with mark-to-market revenues.
macroeconomic developments.
– AsSince the start of 2009, the Swiss Financial Market Supervisory Authority (FINMA) has conducted regular stress tests on the two large Swiss banks. In July 2010, FINMA carried out a resultstress test which assumed a severe global recession and very sharp, specific shocks for certain European countries. FINMA’s analysis showed that UBS “would have a tier 1 ratio of management’s investigation intoat least 8% under the losses we experienced in 2007 and 2008, we launched a comprehensive remediation program in the Investment Bank. We made further progress in implementing this program and developing sustainable solutions. Our remediation activity has resulted in enhanced risk governance including changes in risk management and control personnel, and we have improved our risk infrastructure and processes and the associated capabilities to capture, represent and monitor risks. We have also changed the firm’s capital optimization model and enhanced our funding and balance sheet management.
stress events tested.”
– In connectionanticipation of the enhanced Basel II framework, we further enhanced our risk appetite framework by making it more comprehensive and relevant to the current financial environment. New measures supplementing the current market risk capital have been introduced, enabling compliance with the settlements relatingenhanced Basel II requirements.
–Over the last two years, we took comprehensive steps to the US cross-border matter, we establishedhelp ensure that our compensation plans and processes were redesigned and implemented in such a governance and control framework designedway to ensure that we performappropriate risk-taking. Risk awareness, assessment and management were integrated into our compensation framework. They now form a basis for designing our compensation plans, determining the obligations assumed in those settlementsoverall bonus pool, allocating individual bonuses, and to manage related matters includingidentifying and monitoring performance and compensation of key risk takers and controllers across the exit from the affected US cross-border business activities. We have alsoorganization.


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  – establishedWe made significant investments in our risk IT platforms during 2010, particularly in the Investment Bank, where we are designing and building a new standards, controlsplatform for risk aggregation. Key improvements being introduced include enhanced data quality and training programsdetail, automated reporting with ad-hoc analysis and drilldown capability, and re-engineered analytics for conducting cross-border business globallymore accurate VaR calculations. Work in compliance with applicable laws and regulations. Additional measures to address operational risks related to that business are being developed and put into effect under our Risk Effectiveness Project, including the communication of clear compliance expectations by senior management and the implementation of new disciplinary processes.this area is ongoing.
  – Our emphasis on risk awareness has been actively strengthened through the greater empowermentIn order to standardize methodology, processes and tools for credit monitoring across our wealth management locations, we began global deployment of our Control functions by our BoD and Group Chief Executive Officer (CEO).
–Our Total Reward Principles, which summarize the compensation structurea new monitoring solution for our employees, include a focus on sustainable profitability as well as effective risk and capital management. Risk Control is actively involvedthis business. Additionally, in our compensation processesGlobal Asset Management business, we commenced deployment of a third-party risk measurement application, which are designed to support appropriatewill facilitate improved reporting and controlledprovide our portfolio managers with enhanced risk taking by our businesses.management models.
    è Refer to the “Credit risk”, “Market risk”, “Operational risk”, “Risk concentration”concentrations” and “Liquidity and funding management” sections of this report for more information
    è Refer to the “Compensation and shareholdings”“Compensation” section of this report for more information on our compensation practices
èRefer to “Note 21 Provisions and litigation” in the “Financial information” section of this report for more information in connection with the US cross-border matter
       
  Risk management and control principles
       
(Audited)(Audited) We have five key principles which are intended tothat support the firm in achieving an appropriate balance between risk and return. These principles are:return:
 – 
Protection of financial strengthby controlling our overall risk exposures and assessing potential risk concentrations at the position and portfolio levels, and in combinationas well as across all risk types and business divisions.
  – 
Reputation protection,which depends among other things, on the effective managementa sound risk culture characterized by a holistic and controlintegrated view of risk, performance and reward, including effectively managing and controlling risks. Our risk culture demands that all employees make protecting the protection of ourfirm’s reputation an overriding concern.
a priority.
  – 
Business managementManagement is accountable for all risks in their business, and is responsible for the continuous and active management of their respective risk exposureexposures to ensure that risk and return are balanced.
  – 
Independent control functions oversee the risk-taking activities of riskthrough risk control functions which monitorthe business, the effectiveness of business risk management in the business and oversee risk-taking activities.
the mitigation of operational risks.
  – 
Disclosure of riskto provide comprehensive transparent and periodictransparent reporting to senior management, the BoD,Board of Directors (BoD), shareholders, regulators, rating agencies and other stakeholders.
       
(Audited)     Our risk management and control principles are implemented viathrough a risk management and control framework. TheThis framework comprises qualitative elements such as policies and authorities, and quantitative components including risk measurement methodologies and risk limits.
    In addition, the framework is dynamic and continuously adapted as our businesses and the market environment evolve. It includes clearly defined processes to deal with new business initiatives as well as large and complex transactions.
       
      The framework is dynamicRisk management and is adapted as the firm’s businesses and the market environment evolve. It includes clearly defined processes to deal with new business initiatives and complex or unusual transactions.control responsibilities
       
(Audited)    The risk assessment and management oversight performed by the BoD considers evolving best practices and is intended to conform to statutory requirements as is the related disclosure in this section.
Risk management and control responsibilities
(Audited)(Audited) Key roles and responsibilities related tofor risk management and control are:
 – The BoD is responsible for determining the firm’s risk principles, risk appetite and major portfolio limits, including thetheir allocation of certain of these limits to the business divisions. The BoD is supported by a BoD Risk Committee (RC), which monitors and oversees the firm’s risk profile and the implementation of the risk framework as established by the BoD. The BoD Risk CommitteeRC also assesses and approves the firm’s key risk measurement methodologies and control principles.methodologies.
  – The Group Executive Board (GEB) is responsible for the implementation ofimplements the risk framework, controls the firm’s risk profile and approves all major risk policies.
  – The Group CEOChief Executive Officer (Group CEO) is responsible for the results of the firm, has risk control authority over transactions, positions and exposures, and is also responsible for the allocation ofallocates portfolio limits toapproved by the BoD within the business divisions.
  – The business divisiondivisional CEOs are accountable for the results of their respective business divisions which includes responsibility for the active and continuous management ofincluding actively managing their risk exposures, to ensureand ensuring that risks and returns are balanced.
  – The Group Chief Risk Officer (CRO)(Group CRO) reports directly to the Group CEO and has functional and management authority over risk control throughout the firm. Risk Control provides independent oversight of risk and is responsible for implementing the risk control processes for credit, country, market, investment and operational risks. This includes establishing methodologies to measure and assess risk, setting risk limits and developing and operating an appropriate risk control infrastructure. The risk control process is supported by a framework of policies and authorities, which are delegated to Risk Control Officers, corresponding withto their experience and scope of responsibilities.


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Risk management and control

 
(Audited)
 – The Group Chief Financial Officer (CFO)(Group CFO) is responsible for ensuring that disclosure of our financial performance is clear and transparent and meets regulatory requirements and corporate governance standards. The Group CFO is also responsible for implementing the risk management and control frameworks for capital management, liquidity, funding and tax.
  – The Group General Counsel (GC)(Group GC) is responsible for implementing the firm’s risk management and control principles for legal matters and for ensuring compliance with all laws and regulations in each of the jurisdictions in which we operate.matters.
     
  
Risk categories
     
  The risks faced by our businesses can be broken down into three different categories: primary risks, consequential risks and business risks.
Primary and consequential risks result from our business activities and are subject to independent risk control. Primary risks consist of credit risk, country risk, market risk (including issuer risk) and investment risk. Consequential risks consist of operational risk, which includes legal, compliance and tax risks, and liquidity and funding risks, legal and compliance risks and tax risks. Further details onDefinitions of primary and consequential risks are provided below:


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Risk management and control

     
(Audited)
(Audited)		 – 
Credit risk–risk: the risk of loss resulting from the failure of a client or counterparty to meet its contractual obligations.
 – 
Country risk–risk: the risk of loss resulting from country-specific events. It includes transfer risk, whereby a country’s authorities prevent or restrict the payment of an obligation, as well as systemic risk events arising from country-specific political or macroeconomic developments.
  – 
Market risk and investment risks–risks: the risk of loss resulting from changes in market variables, whether to our trading positions or financial investments.
  – 
Operational risk–risk: the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external causes, whether deliberate, accidental or natural. This includes risks related to legal, and compliance and tax matters.
  – 
Liquidity and funding risks–risks: the risk that we might be unable to either meet our payment obligations when due or to borrow funds in the market at an acceptable price to fund actual or proposed commitments.
       
      BusinessFinally, business risks arise from the commercial, strategic and economic risks inherent in our business activities and itactivities. It is management’s responsibility to manage these risks.
    è 
Refer to the “Credit risk”, “Market risk”, “Operational risk” and “Liquidity and funding management” sections of this report for a description of the control frameworks for these risk categories
       
  Risk measurement
     
(Audited)(Audited) A variety of methodologies and measuresmeasurements are applied to quantify the risks of our portfolios and risk concentrations. Risks that are not wellproperly reflected by standard measures are subject to additional controls, which may include pre-approval of transactions and specific restrictions. Models to quantify risk are generally developed by dedicated units within the firm-wide and business division-facing control functions. We require that valuationvaluations and risk models which could impact the firm’s books and records be independently verified and subjected to ongoing monitoring and control by the Group CRO and Group CFO Organizations.organizations.
       
  Statistical loss and stress loss
       
  We assess potential future losses using two complementary types of risk measures: statistical loss and stress loss.
       
  Statistical loss
  Statistical loss measures include VaR, Expected Lossexpected loss (EL) and Earnings-at-Riskearnings-at-risk (EaR). VaR estimates the losses which could potentially be realized over a set time period at an established level of confidence. EL is used to measure the average annual costs that are expected to arise from our credit portfolios and from operational risks. EaR comprises ais comprised of core of statistical measures overlaid with management judgment, and measures the potential shortfall in our earnings which could potentially be realized over a set time period at an established level of confidence.

in our earnings, which could potentially be realized over a set time period at an established level of confidence.
è è
Refer to the “Credit risk”, “Market risk” and “Operational risk” sections of this report for a description of the firm’sour key statistical loss measures
Stress loss
As a complement to our statistical loss measures, we perform stress testing. Stress loss is the loss that could result from extreme events under specified scenarios. We use stress testing to quantify our exposures to extreme and unusual market movements and to enable us to identify, understand and manage our potential vulnerabilities and risk concentrations. During 2009 we significantly enhanced our stress testing framework, which incorporates a comprehensive range of portfolio-specific stress tests as well as combined firm-wide stress tests.
    Portfolio-specific stress tests are measures that focus on risks of specific portfolios within the business divisions. Our portfolio stress loss measures are characterized by past events but also include forward-looking elements. Our stress scenarios for trading risks were enhanced in 2009 to more accurately capture the liquidity characteristics of different markets and positions. Our stress frameworks include a scenario which re-


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RiskTo complement our statistical loss measures and treasury managementbetter understand our risk capacity and appetite, we also perform stress testing. Stress loss is the loss that could result from extreme events under specified scenarios. We use stress testing to quantify our exposures to plausible yet extreme and unusual market movements, and to enable us to identify, understand and manage our potential vulnerabilities and risk concentrations. Our stress testing framework incorporates a comprehensive range of portfolio-specific stress tests as well as combined firm-wide stress tests.

flectsPortfolio-specific stress tests are measures that focus on risks of specific portfolios within the business divisions. Our portfolio stress loss measures are characterized by past events but also include forward-looking elements. The stress scenarios for trading risks capture the liquidity characteristics of different markets and positions. Our stress frameworks include a scenario which reflects the extreme market conditions that were experienced at the height of the financial crisis in the fourth quarter of 2008.
Combined firm-wide stress tests were further developed in 2009 to capture the firm’stesting (CST) captures firm-wide exposure to a number of global systemic events, including a severe global recession. These stress tests are based on forward-looking macro-economicmacroeconomic and market event scenarios calibrated to different levels of severity. The evolution of economic variables and market indicators under these scenarios is defined and applied to our entire risk portfolio. The impact of primary, consequential and business risks is assessed with the aim of calculating the loss and capital implications wereshould these stress scenarios to be realized.
Stress test results are included in risk reporting and are fully integrated intoimportant inputs for the risk control, risk appetite and business planning processes of the firm. Our firm-wide stress testing, which captures all major risks across our business divisions, is one of the key inputs for discussions between senior management, ourthe BoD and regulators with regard to our regulators on the risk profile of our firm. In 2009 we carried out a FINMA specified stress test which was designed to assess the resilience of the two large Swiss banks in the event of a severe economic downturn, encompassing a deep worldwide recession, accompanied by a significant deterioration in the financial and property markets. FINMA reported on 2 October 2009 “that even after the effect of a severe stress event they [the two large systemically relevant banking groups in Switzerland which includes UBS] would still maintain a stable capital base with a Tier 1 capital ratio over 8%.”profile. We continue to provide detailed stress analyses to FINMA in accordance with their requirements.
     OurThe stress scenarios are reviewed, updated and expanded regularly in the context of the macro-economicmacroeconomic and geopolitical environment by a committee comprised of representatives from the business divisions, Risk Control and Economic Research. Our stress testing therefore attempts to provide a control framework that is forward-looking and responsive to changing market conditions. However, the market moves experienced in actualreal stress events may differ from moves envisaged in our scenario specifications.
Most major financial firms employ stress tests, but their approaches vary significantly, and there are no industry standards



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defining stress scenarios or the way they are applied to a firm’s positions. Consequently, comparisons of stress results between firms can be misleading and, therefore, we, like most of our peers, we do not publish quantitative stress test results.

èRefer to the “Credit risk” and “Market risk” sections of this report for a description of our key stress loss measures

Group risk appetite framework

Our risk appetite framework was enhanced in 2009. We have establishedestablishes risk appetite objectives in respect of earnings and capital levels that we seek to maintain, even after experiencing severe losses over a defined time horizon. In order to monitor

our risk profile against our risk appetite, we use our two complementary firm-wide risk measurement frameworks;frameworks: EaR (together with its extension, Capital-at—Risk or CaR)capital-at–risk (CaR)) and Combined Stress Testing (CST).CST. Both frameworks capture risks across all of our business divisions and from all major risk categories, –including primary risks, consequential risks and business risks. These measures are significant components of our risk control, capital management and business planning processes, andwhich are described in more detail as follows:
below.
– EaR is measured as the potential shortfall in earnings at a 95% confidence level and is evaluated over both 3-monththree-month and 1-yearone-year periods.
– CaR extends EaR to consider the impact on BIS tier 1 capital of a more severe earnings shortfall and is measured at confidence levels higher thanfrom 95% to 99.9%.
– CST was incorporated into the risk appetite framework in 2009 to supplementsupplements EaR and CaR. As described underin the “Stress loss” section above, our firm-wide stress tests evaluate the impact across our risk portfolios, (andand thereby on our earnings and capital)capital, based on specified macro-economicmacroeconomic stress scenarios.

    Our risk appetite is establishedapproved by the BoD. Risk appetite is based on our risk capacity, which is in turn based on our capital and budgetedforecasted earnings resources. Our overall risk appetite is set as an upper limit covering the aggregate risk exposure for each risk appetite objective, (takingtaking into account inherent limitations in the precision of risk exposure measures that focus on extreme market and economic events).events. Comparison of the firm’s risk exposure with our risk capacity under prevailing operating conditions as well as prospective business plans serves as an input to the risk limit framework. This comparison is also a key tool to support management decisions on potential adjustments to the risk profile of our firm.

     Risk reduction remained a priority for the firm in 2009, and we further reduced our risk exposure which was reflected in our stress measures and decreases in our market and credit risk portfolios, including reductions in our residual risk positions. As a result, we ended the year with risk exposures commensurate with our operating risk capacity.
è Refer to the “Credit risk”, “Market risk” and “Risk concentration” sections of this report for more information on our risk exposures

Risk disclosures

The measures of risk exposure that we use may differ depending on the purposes for which exposures are calculated: financial accounting under IFRS,International Financial Reporting Standards (IFRS), determination of our required regulatory capital or our internal management of the firm.management. The exposures detailed in the “Credit risk” and “Market risk” sections below are typically based on our internal management view of risk exposure.

è Refer to the “Basel II Pillar 3” section of this report for further information on the exposures we use in the determination of our required regulatory capital



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Risk management and control

Credit risk

   
(Audited)
(AUDITED)
 Credit risk is the risk of loss resulting from the failure of a client or counterparty to meet its contractual obligations to UBS. This can be caused by factors directly related to the counterparty, such as business or management problems, or fromwhich cause failures in the settlement process, for example, in foreign exchange transactions where we have honoredfulfilled our obligation but the counterparty fails to deliver the counter-value (“settlement risk”)(settlement risk). Alternatively, it can be triggered by economic or political difficulties in the country in which a counterparty or issuer of a security is based or where it has substantial assets (“country risk”)(country risk).
   
  Sources of credit risk
   
(Audited)
(AUDITED)
 Credit risk arises from traditional banking products such as loans, loan commitments to lend and contingent liabilitiesguarantees (for example, letters of credit). Credit risk also arises from traded products including over-the-counter (OTC) derivative transactions, exchange-traded derivatives, as well as from “traded products”: OTC derivative contracts; exchange-traded derivatives; and securities financing transactions such as repurchase agreements (repos and reverse repos) and securities borrowing and lending transactions. The risk control processes applied to these products are generally the same, although the accounting treatment may vary as products can be carried at amortized cost or(loans and receivables), at fair value through profit and loss (instruments held for trading, instruments designated at fair value) or at fair value through other comprehensive income (available-for-sale instruments) depending on the product type and the nature of the exposure. A form of credit risk also arises on securities and other obligations in tradable form, as their fair values are affected by changing expectations regarding the probability of issuers failing to meet these obligations or when actual failures occur. Where these securities and obligations are held in connection with a trading activity, we view the risk as a market risk.
Debt securities not held in connection with a trading activity are reported as debt investments at the end of this section. Many of the business activities of Wealth Management & Swiss Bank and the Investment Bank expose us to credit risk, while credit risk exposures from Wealth Management Americas and Global Asset Management are less material. Wealth Management & Swiss Bank offers private and corporate clients in Switzerland and wealth management clients internationally (except those served by Wealth Management Americas) a variety of credit products. The Investment Bank provides corporate, institutional, intermediary and alternative asset management clients access to a full range of credit and capital markets instruments across many product classes, and engages with other professional counterparties in trading and risk management activities.
   
  Credit risk control
   
  Limits and controls
(Audited)
(AUDITED)
 Limits are established for individual counterparties and their counterparty groups covering banking and traded products, as
(Audited)well as settlement amounts. These limits put constraintsapply not only onto the current outstanding amount, but also onto contingent commitments and the potential future exposure of traded products. Credit engagements may not be entered into without the appropriate approvals and adherence to limits.
 
(AUDITED)
      In the Investment Bank, a distinction is made between exposures intended to be held to maturity (“take and hold exposures”)(take-and-hold exposures) and those which are intended to be held for a short term, pending distribution or risk transfer (“temporary exposures”)(temporary exposures).

     Credit risk concentrations can arise if clients are engaged in similar activities, are located in the same geographical region or have comparable economic characteristics, such thatfor 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 seek to establish limits andand/or operational controls to constrain risk concentrations at portfolio and sub-portfolio levels for example with regard to sector exposures, country risk orand specific product exposures.
   
  Risk mitigation
(AUDITED)
 We actively manage the credit risk in our portfolios by taking collateral against exposures and utilizing credit hedging. In Wealth Management & Swiss Bank, the majority of loans are extended on a secured basis. For real estate financing, a mortgage over the property is taken to secure the claim. Commercial loans may also be secured by mortgages on business premises or other real estate. We apply measures to evaluate collateral and determine maximum loan-to-value ratios including an assessment of income cover.
    “Lombard loans”
     Lombard loans are made against the pledge of eligible marketable securities or cash. The Investment Bank also takes collateral in the form of marketable securities and cash in its OTC derivatives and securities financing businesses. Discounts (“haircuts”)(haircuts) are generally applied to reflectthe market value of the collateral reflecting the quality, liquidity and value volatility of the underlying collateral. Exposure and collateral values are continuously monitored, and margin calls or close-out procedures are enforced when the market value of collateral falls below a predefined trigger level. Concentrations within individual collateral portfolios and across clients are also monitored where relevant and may affect the haircut applied to a specific collateral pool.

     Our OTC derivatives trading is generally conducted under bilateral International Swaps and Derivatives Association (ISDA), or ISDA-equivalent, master trading agreements, which allow for the close-out and netting of all transactions in the event of default. We also have two-way collateral agreements with major market participants under which either party can be required to provide collateral in the form of


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(Audited)cash or marketable securities when the exposure exceeds a predefined level. Our OTC derivatives activity with lower-rated counterparties is typically conducted under one-way collateral agreements where only the counterparty is required to provide us with collateral. For certain counterparties, like hedge funds, we may also use two-way collateral agreements. We have clearly defined processes for entering into netting and collateral


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(Audited)agreements, including the requirement to have a legal opinion regardingon the enforceability of contracts in relevant jurisdictions in the case of insolvency.
         WePrimarily in the Investment Bank, we actively manage the credit risk of our portfolios using credit hedging, primarily in the Investment Bank, with the aim of reducing its concentrations totoward specific counterparties, sectors or portfolios. Hedging measures include single namesingle-name credit default swaps (CDS), index CDS, credit linkedcredit-linked notes and total return swaps. Single nameSingle-name CDS are generally executed under bilateral netting and collateral agreements with high-grade market counterparties. We observe strict standards for recognizing credit hedges; for example, we usually do not typically recognize credit risk mitigants such as proxy hedges (credit protection on a correlated but different name) or index CDS for the purposes of monitoring exposures against limits. Buying credit protection creates credit exposure against the hedge provider. We monitor our exposures to credit protection providers and the effectiveness of credit hedges as part of our overall credit exposures to the relevant counterparties. Where there is significant correlation between a counterparty and the hedge provider (so-called “wrong-way risk”)wrong-way risk), our policy is to discourage such activity, but in any event, not to recognize any hedge benefit in credit risk measures.
      è è
Refer to the “Basel II Pillar 3” section of this report for more information on credit derivatives
     
  
Credit risk measurement
     
(Audited) (Audited) We have developed tools and models to measure credit risk. Exposures to individual counterparties are measured based on three generally accepted parameters: probability of default, exposure at default and loss given default. These parameters are the basis for the majority of our internal measures of credit risk, and are key inputs tofor the regulatory capital calculation under the Advanced Internal Rating-Basedadvanced internal ratings-based (advanced IRB) approach of the framework governing international convergence of capital measurement known as Basel II. We also use models to derive the portfolio credit risk measures of expected loss, statistical loss and stress loss.
     
  
Probability of default
  The probability of default (PD) is an estimate of the likelihood of a counterparty defaulting on its contractual obligations. This probability is assessed using rating tools tailored to the various categories of counterparties. These categories are also calibrated to our proprietaryinternal credit rating scale (“Masterscale”)(masterscale) designed to ensure a consistent assessment of default probabilities across counterparties. We regularly assess the performance of our rating tools and adjust our
model parameters as necessary. In addition to using ratings for credit risk measurement, we use them as an important input to determine credit risk approval authorities.
      In the Investment Bank, rating tools are applied byto broad segments including banks, sovereigns, corporates, funds, hedge funds and commercial real estate. We determine our choice of the relevant assessment criteria, (forfor example, financial ratios and
qualitative factors)factors, for the rating tools on the basis of various statistical analyses, externally available information and expert judgment.
      Within our retail and corporate banking business in Switzerland, we rate our business and corporate clients in the small-to-medium enterprise (SME) segment (SMEs) using statistically developed scorecards. The underlying data used in our scorecards is predominantly based on a combination of clients’ financial information, relating to clients, qualitative criteria and our credit loss history over several years. In order toTo rate our large corporate clients domiciled in Switzerland, Wealth Management & Swiss Bank uses templates established for this segment by our Investment Bank. We assess the probability of default from loans secured on owner-occupied or investment properties with a model that takes loan-to-value ratios and debt service capacity of the obligor into account. We rate lombard loan exposures by means of a model simulating potential changes in the value of the collateral, and the probability that it may bebecome lower than the loan amount.
      Our Masterscalemasterscale expresses default probabilities that we determine through our various rating tools by means of distinct classes, whereby each class incorporates a range of default probabilities. Counterparties migrate between rating classes as our assessment of their probability of default changes.
      The ratings of the major credit rating agencies, and their equivalentequivalents on our Masterscalemasterscale, are shown in the “UBS internal rating scale and mapping of external ratings” table. The mapping is based on the long-term average of one-year default rates that we observed for each external rating grade. Observed defaults by rating agencies may vary through economic cycles, and we do not necessarily expect the actual number of defaults in our equivalent rating band to equal the rating agencies average in any given period. We periodically assess the long-term average default rates of credit rating agencies’ grades, and we adjust their mapping to our masterscale as necessary to reflect any material changes.
         
(Audited)(Audited) 
UBS internal rating scale and mapping
of external ratings
 UBS   Moody’s
internalMoody's Investor Standard & Poor’sPoor's
 Ratingrating Description Services equivalent equivalent
  
 
0 and 1
 Investment grade Aaa AAA
  
 
2
   Aa1 to Aa3 AA+ to AA–
  
 
3
   A1 to A3 A+ to A–
  
 
4
   Baa1 to Baa2 BBB+ to BBB
  
 
5
   Baa3 BBB–
  
 
6
 Sub-investment grade Ba1 BB+
  
 
7
   Ba2 BB
  
 
8
   Ba2 BB
  
 
9
   Ba3 BB–
  
 
10
   B1 B+
  
 
11
   B2 B
  
 
12
   B3 B–
  
 
13
   Caa to C CCC to C
  
 
14
 Defaulted D D
  


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Risk management and control

rates that we observed for each external rating grade. Observed defaults by rating agency 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 agency average in any given period. We periodically assess the long-term average default rates of credit rating agencies’ grades and we adjust their mapping to our Masterscale as necessary to reflect any material changes.

Exposure at default

Exposure at default (EaD) represents the amount that we expect to be owed by a counterparty at the time of default. We derive EaD from our current exposure to the counterparty and the possible future development of that exposure.
The EaD of a loan is the drawn or face value of the loan. For loan commitments and contingent liabilities,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 the time the counterparty defaults. For securities financing transactions, we assess the net amount that may be owed to us or that we may owe to others, taking into account the impact of market moves over the potential time it takes to close out all our positions. For exchange-traded derivatives, our calculation of EaD takes into accountaccounts for daily cash margining. We derive the EaD for OTC derivatives by modeling the potential development of replacement values of the portfolio of trades by counterparty (“potential(potential credit exposure”), after taking into accountexposure) less the values of legally enforceable netting agreements. For collateralized OTCs,OTC derivatives, our potential credit exposure takes into accountis based on the development of collateral values and models the price correlation between the various instruments.
When measuring individual counterparty exposure against credit limits, we consider the maximum likely exposure measured to a high confidence level over the full life of outstanding obligations. However, when aggregating 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 monitor the performance of our exposure models by backtesting and benchmarking them, whereby model outcomes are compared against actual results based on our internal experience as well as externally observed results.
We assess our exposures where there is a material correlation between the factors driving the credit quality of the counterparty and those driving the potential future value of our traded product exposure (“wrong-way risk”)(wrong-way risk), and we have established specific controls to address these risks.

Loss given default

We determine loss given default (LGD) based on the likely recovery rate of claims against defaulted counterparties,
which is a function of the type of counterparty and any credit mitigation or support by way of security interest or guarantee.guarantees. LGD estimates include loss of principal and interest and other amounts, such as workout costs, including the cost of carrying an impaired position during the workout process. In our Investment Bank, LGD estimates are based on an assessment of key risk drivers such as industry segment, collateral and seniority of a claim andas well as a country’s legal environment and bankruptcy procedures, supported by our internal loss data and external information where available. In our Swiss portfolio,other lending portfolios, the LGD differs by counterparty and collateral type and is statisticallystatis-

tically estimated based on our internal loss data. Where we hold collateral, such as marketable securities or a mortgage over a property, loan-to-value ratios are a key factor in determining LGD.

Expected loss

Credit losses are an inherent cost of doing business, but the occurrence and amount of credit losses can be erratic. In order to quantify future credit losses that may be implicit in our current portfolio, we use the concept of expected loss (EL).
EL is a statistical measure which we useused to estimate the average annual costs that we expect to experience on average from positions in our current credit portfolio that become impaired. The EL for a given credit facility is a function of the three components described above: PD, EaD and LGD. We aggregate the ELsEL for individual counterparties to derive our expected portfolio credit losses.
EL is athe basis for quantifying credit risk in all our portfolios. It is also the starting point for the measurement of our portfolio statistical loss and stress loss and may be used as an input to value certain products.
è 
Refer to the discussion on “Impairment and default
– distressed claims” below for more information

Statistical and stress loss

We use a statistical modeling approach to estimate the loss profile of our credit portfolios over a one-year period to a specified level of confidence. The mean value of this loss distribution is the expected loss andEL, with the variation around it is driven bydue to systematic default relationships amongstamong counterparties within, and between, segments and which is sensitive to concentration risks on individual counterparties and groups.groups of counterparties. The results of this analysis provide an indication of the level of risk in our portfolio and the way it may develop over time.
Stress loss is a scenario-based measure which complements our statistical modeling approach. We use it to assess our potential loss in various stress scenarios in which we assumebased on the assumption that one or more of the three key credit risk parameters will deteriorate substantially. We run stress tests on a regular basis and use them to monitor our portfolios and identify potential risk concentrations. For certain of our portfolios and segments, stress loss may also be subject to limits.


118

èRefer to the discussion on stress loss in this section for more information

Risk and treasury management

Composition of credit risk – UBS Group

The exposures detailed in the tables in this section are based on our management view of credit risk.

     The “Credit exposure by business division” table shows a breakdown of our banking and traded product exposures before and after allowances and provisions, CVA and specific hedges. Portfolio hedges, such as index CDS, are not included in this analysis. Banking product exposures are shown on a nominal basis, without applying credit conversion factors. Exposures to OTC de-



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rivatives are shown in the table as net positive replacement values after the application of legally enforceable netting agreements and the deduction of cash collateral. Exchange-traded derivatives (ETD) exposures take into account initial and variation margins. Securities financing exposures are shown net of the collateral we received. Comparative figures for 2009 are also shown on this basis.
Our total credit exposure before deductions amounted to CHF 445 billion on 31 December 2010, compared with CHF 451 billion at the end of 2009. Our banking product exposures remained materially unchanged at CHF 356 billion as of 31 December 2010. Our traded products exposures, which arise largely in our Investment Bank, declined by CHF 7 billion to CHF 89 billion as of 31 December 2010, due to the decrease of CHF 11 billion in the replacement values of OTC derivatives. The largest component of our credit exposure before deductions as of 31 December 2010 was our loan portfolio, accounting for CHF 242 billion or 54% of our total credit exposure. Of this, CHF 202 billion was attributable to Wealth Management & Swiss Bank.
Further information on the composition and credit quality of Wealth Management & Swiss Bank’s loan portfolio and the Investment Bank’s banking products and OTC derivatives portfolios is provided in this section. Analysis of our Investment Bank and Wealth Management & Swiss Bank portfolios is based on net exposure (i.e. after deduction of hedges) because we actively utilize credit hedging to manage our risks in these portfolios.
è Refer to “Note 1b Changes in accounting policies, comparability and other adjustments” for more information on the reclassification of cash collateral from derivative transactions and prime brokerage receivables and payables
èRefer to the “Basel II Pillar 3” section of this report for more information on the credit exposures used in the determination of our required regulatory capital and additional information on credit derivatives
 
è Refer to “Note 23 Derivative instruments and hedge accounting”accounting“ and “Note 29c Measurement categories of financial assets and liabilities”liabilities“ in the “Financial information” section of this report for further information on IFRS required disclosures on derivatives and credit risk
The table “Credit exposure by business division” shows a breakdown of our banking and traded product exposures before and after impairments, credit valuation adjustments and specific hedges. Portfolio hedges such as index CDS are not included for this analysis. Exposures to OTC derivatives are shown in the table as net positive replacement values after the application of legally enforceable netting agreements and the deduction of cash collateral. ETD exposures take into account initial and variation margin, and securities financing exposures are shown net of the collateral we received. Comparatives for 2008 are also shown on this basis.
Our total credit exposure before deductions amounted to CHF 451 billion on 31 December 2009, a significant de-

crease of CHF 123 billion since the end of 2008. This decrease reflects the measures we took in 2009 to actively reduce our risk exposures in addition to market movements which drove down the positive replacement values of our derivatives. Our banking product exposures decreased by CHF 40 billion to CHF 355 billion at 31 December 2009 mainly driven by reductions in loans and balances with central banks. Our traded products exposures, which arise largely in our Investment Bank, reduced by CHF 82 billion to CHF 96 billion at 31 December 2009 due to the significant decrease of CHF 68 billion in the replacement values of OTC derivatives. The largest component of our credit exposure before deductions at 31 December 2009 was our lending portfolio (due from banks and loans) at CHF 262 billion or 58% of our total credit exposure. Of this, CHF 200 billion was attributable to Wealth Management & Swiss Bank.

Further information on the composition and credit quality of Wealth Management & Swiss Bank’s lending portfolio and the Investment Bank’s lending and OTC derivatives portfolios is provided in this section. Analysis of our Wealth Management & Swiss Bank’s portfolios is typically based on gross exposure (i.e. before deduction of hedges) as the majority of our exposure is secured by collateral or mortgages against property. Analysis of our Investment Bank’s portfolios is generally based on net exposure (i.e. after deduction of hedges) because we actively utilize credit hedging to manage our risks in this portfolio.







                                           
(Audited) 
Credit exposure by business division
   Wealth Management & Wealth Management                        
    Swiss Bank
 Americas
 Investment Bank
 Other1
 UBS
  CHF million  31.12.09   31.12.08   31.12.09   31.12.08   31.12.09   31.12.08   31.12.09   31.12.08   31.12.09   31.12.08 
   
  Balances with central banks  8,589   17,629   0   0   9,525   11,528   0   0   18,114   29,157 
   
  Due from banks  2,683   5,510   1,074   1,096   13,959   12,044   282   382   17,998   19,032 
   
  Loans  197,178   206,704   21,496   19,479   25,351   43,806   101   730   244,126   270,719 
   
  Contingent claims  11,908   14,282   385   405   4,881   4,056   141   149   17,315   18,892 
   
  Undrawn irrevocable credit facilities  7,236   2,775   498   13   49,356   54,201   0   0   57,090   56,990 
   
  Banking products  227,594   246,899   23,453   20,994   103,0722  125,6362  524   1,2613  354,643   394,7893
   
  OTC Derivatives  3,583   5,637   44   63   58,121   124,393   947   817   62,695   130,910 
   
  Exchange traded derivatives  1,059   1,281   611   948   14,933   21,560   0   0   16,603   23,789 
   
  Securities financing transactions  0   2,942   185   91   16,939   20,203   0   844   17,124   24,080 
   
  Traded products  4,642   9,860   840   1,102   89,993   166,157   947   1,661   96,422   178,780 
   
  Total credit exposure  232,236   256,759   24,293   22,096   193,065   291,793   1,471   2,922   451,065   573,569 
   
  Total credit exposure, net4  230,173   255,565   24,289   22,071   141,838   229,597   1,466   2,922   397,766   510,155 
   
  
1 Includes Global Asset Management and Corporate Center.  2 IB banking products excluding money market and nostro accounts amount to CHF 82,084 million (31.12.2008: CHF 105,595 million).  3 Does not include financial assets designated at fair value for an amount of CHF 961 million.   4 Net of allowances, provisions, credit valuation adjustments, hedges.
                                 
(Audited) Credit exposure by business division
 
    Wealth Management & Wealth Management                  
    Swiss Bank Americas Investment Bank Other1 UBS
  CHF million 31.12.10  31.12.09  31.12.10  31.12.09  31.12.10  31.12.09  31.12.10  31.12.09  31.12.10  31.12.09 
   
  Balances with central banks 10,727  8,589        13,732  9,525        24,459  18,114 
   
  Due from banks 2,678  2,679  2,157  1,074  13,924  13,959  315  282  19,075  17,993 
   
  Loans 201,942  197,178  22,472  21,496  17,6792 25,3512 158  86  242,2502 244,1112
   
  Guarantees 10,505  11,908  370  385  4,820  4,881  123  141  15,819  17,315 
   
  Loan commitments 7,276  7,236  1,066  498  46,216  49,356        54,558  57,090 
   
  Banking products3 233,128  227,590  26,065  23,453  96,3714 103,0724 596  509  356,161  354,624 
   
  OTC derivatives 4,048  3,583  56  44  47,452  58,121  284  947  51,840  62,695 
   
  Exchange-traded derivatives 978  1,059  1,114  611  14,599  14,933        16,691  16,603 
   
  Securities financing transactions       156  185  20,279  16,939        20,435  17,124 
   
  Traded products 5,026  4,642  1,326  840  82,330  89,993  284  947  88,966  96,422 
 �� 
  Total credit exposure 238,155  232,232  27,391  24,293  178,701  193,065  880  1,456  445,127  451,046 
   
  Total credit exposure, net5 236,488  230,169  27,389  24,289  143,364  141,838  876  1,451  408,117  397,747 
   
  
1Includes Global Asset Management, treasury activities and other corporate items.  2 Does not include reclassified and acquired securities.  3 Excludes loans designated at fair value.  4 IFRS Banking products including securities and internal risk adjustments were CHF 119,177 million (31.12.09: CHF 128,919 million).  5 Net of allowances, provisions, CVA and hedges.

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Risk management and control

Composition of credit risk – business divisions

Wealth Management & Swiss Bank


The total gross banking products exposure of Wealth Management & Swiss Bank was CHF 233 billion on 31 December 2010, compared with CHF 228 billion on 31 December 2009 down by CHF 19 billion since the end of 2008.2009. The high quality of this portfolio is illustrated by the rating and LGDloss given default distributions shown in the “Wealth Management & Swiss Bank: distribution of grossnet banking products exposure across UBS internal rating and loss given default buckets” table. Approximately 60% of Wealth Management & Swiss Bank’s banking product portfolio is rated investment grade, andwith over 80% of it is categorized in the lowest LGD bucket of 0 – 0–25%. The reduction in exposures rated 0 related largely to a reduction in our balances with central banks.
     AtAs of 31 December 2009,2010, Wealth Management & Swiss Bank’s gross lendingloan portfolio (comprised of due from banks and loans) decreasedhad increased slightly to CHF 200202 billion,

compared with CHF 212197 billion aton 31 December 2008. The decrease resulted largely from lower lombard lending due to continued deleveraging2009, mainly in our Asia Pacific region, with exposure increases in local currencies cushioned by our clients. Over 90%the strengthening of the Swiss franc. Of Wealth Management & Swiss Bank’s lendingloan portfolio, 92% was secured by collateral, of which CHF 142144 billion was secured by real estate and CHF 3943 billion by marketable securities. The majority of the real estate exposure is secured by a diversified portfolio of Swiss residential property (single and multi-family homes), which have typically exhibited a low risk profile.

Wealth Management & Swiss Bank’s gross unsecured loan portfolio amounted to CHF 15.615.4 billion aton 31 December 2009 down by CHF 2.7 billion since2010, with half of this portfolio rated as investment grade. Approximately 55% of the endunsecured portfolio related to cash-flow-based lending to corporate counterparties, and 32% of 2008, andthe unsecured loans related to public authorities, mainly in Switzerland, as of 31 December 2010.



Wealth Management & Swiss Bank:
distribution of grossnet banking products exposure across UBS internal rating and loss given default (LGD) buckets

                                 
 
CHF million 31.12.09 31.12.08 
      Loss given default (LGD) buckets Weighted      Weighted 
  Gross    average  Gross  average LGD 
UBS internal rating exposure  0–25%  26–50%  51–75%  76–100%  LGD (%)  exposure  (%) 
 
0  3,713   5   3,708           38   13,625   39 
 
1  6,024   28   5,987   9       39   5,232   39 
 
2  29,084   25,523   3,432   129       22   27,750   21 
 
3  23,351   18,503   4,367   481       22   29,938   22 
 
4  24,978   21,502   3,261   214       12   24,830   14 
 
5  48,491   43,013   5,017   460       12   50,657   13 
 
6  41,797   38,265   2,540   991   1   13   44,346   13 
 
7  18,160   15,577   2,348   233   1   15   18,735   15 
 
8  15,256   12,738   2,078   439   1   16   14,810   17 
 
9  10,651   7,652   1,993   7   999   22   9,447   23 
 
10  2,092   1,478   613           21   1,875   20 
 
11  1,179   897   281           20   1,990   19 
 
12  224   167   56       1   21   155   19 
 
13  76   48   28           21   93   30 
 
Total non-defaulted
  225,076   185,398   35,710   2,965   1,003   17   243,483   18 
 
Investment grade  135,641   108,575   25,773   1,294           152,032     
 
Sub-investment grade  89,434   76,823   9,937   1,671   1,003       91,451     
 
Defaulted1
  2,518                       3,416     
 
Gross banking products exposure
  227,594   185,398   35,710   2,965   1,003       246,899     
 
Net banking products exposure2
  225,531   N/A   N/A   N/A   N/A       245,705     
 
                                         
CHF million, except where indicated  31.12.10 31.12.09 
  Moody’s          LGD buckets          
  Investor  Standard &                      Weighted      Weighted 
  Services  Poor’s                      average      average 
UBS internal rating equivalent  equivalent  Exposure  0–25%  26–50%  51–75%  76–100%  LGD (%)  Exposure  LGD (%) 
 
  Aaa to  AAA to                                 
Investment grade Baa3  BBB−   140,194   113,509   25,961   712   11   16   134,626   18 
 
Sub-investment grade          89,888   80,398   7,378   1,118   995   12   89,434   15 
 
of which: 6–9
 Ba1 to Ba3  BB+ to BB−   86,867   78,027   6,761   1,084   995   11   85,864   15 
 
of which: 10–12
 B1 to B3  B+ to B−   2,967   2,333   601   33       17   3,494   20 
 
of which: 13
 Caa & lower  CCC & lower   55   38   16   1       20   76   21 
 
Total non-defaulted
          230,082   193,907   33,339   1,830   1,006   14   224,061   17 
 
Defaulted1
          1,379                       1,465     
 
Net banking products exposure2
          231,461                       225,526     
 
1 Includes CHF 2483 million of off-balance sheet items.items (31.12.09: CHF 4 million). Due to the applied risk calculation approach for default positions, no LGD is assigned.  2 NetGross exposure before deduction of allowances and provisions for credit losses amounting toof CHF 817 million (31.12.09: CHF 1,053 millionmillion) and credit hedges notional amount of CHF 849 million (31.12.09: CHF 1,010 million.million) is CHF 233,128 million (31.12.09: CHF 227,590 million).


                 
Wealth Management & Swiss Bank: composition of loan portfolio, gross 
CHF million 31.12.10  31.12.09 
 
Secured by residential property  122,815   60.8%  122,106   61.9%
 
Secured by commercial / industrial property  20,766   10.3%  20,378   10.3%
 
Secured by securities  42,993   21.3%  39,136   19.8%
 
Unsecured loans  15,367   7.6%  15,558   7.9%
 
Total loans, gross
  201,942   100.0%  197,178   100.0%
 
Total loans, net of allowances and credit hedges
  201,012       196,064     
 

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half of this portfolio is rated investment grade. Approximately 60% of the unsecured portfolio related to cash-flow based lending to corporate counterparties and 20% of the unsecured loans related to loans to central or local governments at 31 December 2009.

Wealth Management Americas

The total gross banking products exposure of Wealth Management Americas increased to CHF 26 billion on 31 December 2010, compared with CHF 23 billion on 31 December 2009 compared with CHF 21 billion on 31 December 2008.2009. This portfolio consists mainly of loans secured by marketable securities. These loans are of high quality, with 88%93% (88% in 2009) rated as investment grade.



Wealth Management & Swiss Bank: composition of lending portfolio, gross
         
 
CHF million
  31.12.09   31.12.08 
 
Secured by residential property  122,106   121,551 
 
Secured by commercial/industrial property  20,378   20,181 
 
Secured by securities  39,136   46,743 
 
Lending to banks  2,683   5,510 
 
Unsecured loans  15,558   18,228 
 
Total lending portfolio, gross
  199,861   212,214 
 
Total lending portfolio, net1
  198,714   211,044 
 
1 Net of allowances and credit hedges.

Wealth Management & Swiss Bank: unsecured loans (excluding mortgages) by industry sector

        
     
CHF million
  31.12.09  31.12.08  31.12.10  31.12.09 
Construction  263  302  252  263 
Financial institutions  895  2,045  642  895 
Hotels and restaurants  74  61  59  74 
Manufacturing  2,599  2,700  2,172  2,599 
Private households  1,984  2,941  1,842  1,984 
Public authorities  4,176  4,533  4,895  4,176 
Real estate and rentals  778  878  889  778 
Retail and wholesale  1,778  2,249  1,551  1,778 
Services  2,768  2,287  2,776  2,768 
Other  243  232  288  243 
Total
  15,558  18,228  15,367  15,558 

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Risk management and control

Investment Bank

The “Investment Bank: credit exposure by industry segmentbanking products and rating”OTC derivatives exposure” table shows the Investment Bank’s credit exposures to banking products and OTC derivatives before and after allowances credit valuation adjustmentsand provisions, CVA and specific hedges.hedges based on our internal risk view. Portfolio hedges, such as index CDS, are not included forin this analysis. The gross banking product exposures shown in this table exclude nostro accounts and money market balances, which are included in the “Credit exposure by business division” table.
     AlmostApproximately 90% of the Investment Bank’s net OTC derivative portfolio was traded with counterparties rated investment grade, the majority of which were banks and regulated financial institutions wherewith which trading was conducted on a collateralized basis. 64%

Approximately 60% of the Investment Bank’s net banking products portfolio was rated investment grade, with the majority of exposures related to its lending activities with corporates and other non-banks.
     The “Net banking products exposure to corporates and other non-banks” table provides additional information on this portfolio, and provides a bridge from the Investment Bank’s total banking products (loans, contingent claims and undrawn irrevocable credit facilities) according to IFRS to our internal management view of this exposure. The subsequent tables provide additional analysis of the portfolio by our internal rating and LGD, industry sector and geographical region.
The Investment Bank’s net banking products exposure to corporates and other non-banks decreased byremained stable at CHF 17.741.6 billion to CHF 41.3 billion atas of 31 December 2009 as a result of reduced lending activity, sales and writedowns of residual leveraged finance positions.2010. The Investment Bank continued to actively manage the credit risk on this portfolio and atas of 31 December 20092010 it held CHF 3929 billion of single namesingle-name CDS hedges against its exposures to corporates and other non-banks.


Investment Bank: credit exposure by industry segment and rating
                 
 
  Banking products OTC derivatives 
CHF million 31.12.09  31.12.08  31.12.09  31.12.08 
 
Total exposure1
  82,084   105,595   58,121   124,393 
 
less: allowances / credit valuations adjustment (CVA)  (1,520)  (1,526)  (4,475)  (9,907)
 
less: credit protection bought (credit default swaps, notional)  (39,314)  (45,106)  (5,741)  (5,506)
 
Net exposure after allowances and after application of credit hedges
  41,250   58,963   47,905   108,980 
 
of which: banks and regulated financial institutions
  4,283   4,447   20,373   45,131 
 
of which: sovereigns and supranationals
  1,053   1,043   7,435   16,820 
 
of which: corporates
  20,825   28,727   3,119   9,554 
 
of which: monoline insurers
          2,730   6,153 
 
of which: others
  15,088   24,746   14,248   31,322 
 
of which: investment grade
  26,273   39,659   42,883   100,345 
 
of which: sub-investment grade
  14,977   19,304   5,022   8,635 
 
1 Banking products: risk view; OTC derivatives: net replacement value, includes the impact of netting agreements (including cash collateral) in accordance with Swiss Federal Banking law, based on the IFRS scope of consolidation.
 
Investment Bank: net banking products exposure to corporates and other non-banks
 
CHF million
          31.12.09   31.12.08 
 
Loans          90,700   111,798 
 
Contingent claims and undrawn irrevocable credit facilities          56,228   62,391 
 
Total (IFRS view)
          146,928   174,189 
 
less: internal risk adjustments margin accounts, cash collateral posted, other1
          (36,455)  (40,129)
 
less: internal risk adjustments reclassified securities2
          (19,255)  (21,840)
 
less: internal risk adjustments acquired auction rate securities
          (7,982)  (4,500)
 
less: internal risk adjustments traded loan commitments and funded risk participations
          (1,152)  (2,125)
 
Gross banking products exposure3
          82,084   105,595 
 
less: specific allowances for credit losses and loan loss provisions4
          (1,520)  (1,526)
 
Net banking products exposure
          80,564   104,069 
 
less: credit protection bought (credit default swaps)
          (39,314)  (45,106)
 
Net banking products exposure to corporates and other non-banks, after application of credit hedges
      41,250   58,963 
 
1 Includes margin accounts for ETD transactions, cash collateral posted by us against negative replacement values for OTC derivatives, cash / current accounts from prime brokerage (cash legs) and valuation differences caused by a different exposure treatment in Risk Control than in IFRS.  2 Includes reclassified auction rate securities in the amount of CHF 8.2 billion (31.12.08: CHF 8.4 billion).  3 IB banking products including money market and nostro accounts amount to CHF 103,072 million (31.12.2008: CHF 125,636 million).  4 Does not include other allowances for credit losses for an amount of CHF 188 million (31.12.08: CHF 226 million).

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Risk and treasury management

The Investment Bank’s net banking products exposure to corporates and other non-banks continued to be diversified across


Investment Bank: banking products and OTC derivatives exposure1

             
  Banking products OTC derivatives
CHF million
 31.12.10  31.12.09  31.12.10  31.12.09 
 
Total exposure, before deduction of allowances and provisions, CVA and hedges 70,8852 82,0842 47,452  58,121 
 
less: allowances, provisions and CVA
 (124) (1,520) (2,224) (4,475)
 
less: credit protection bought (credit default swaps, notional)
 (29,154) (39,314) (3,683) (5,741)
 
Net exposure after allowances and provisions, CVA and hedges
 41,608  41,250  41,546  47,905 
 
1 Banking products: risk view, excludes central banks, due from banks, securities and internal risk adjustments. OTC derivatives: net replacement value includes the impact of netting agreements (including cash collateral) in accordance with Swiss Federal Banking law, based on the IFRS scope of consolidation.   2 Banking products including money market and nostro accounts amounted to CHF 96,371 million (31.12.09: CHF 103,072 million).

Investment Bank: distribution of net banking products exposure to corporates and other
non-banks, across UBS internal rating and loss given default buckets

                         
CHF million, except where indicated 31.12.10 31.12.09 
        LGD buckets Weighted     Weighted
  Moody's Investor Standard & Poor’s           average     average
UBS internal rating Services equivalent equivalent Exposure 0 – 25% 26 – 50% 51 – 75% 76 – 100% LGD (%) Exposure LGD (%)
 
Investment grade Aaa to Baa3 AAA to BBB– 25,603 7,755 11,417 2,636 3,795 43  26,273  39 
 
Sub-investment grade     16,005 6,690 6,619 2,181 515 33  14,977  34 
 
of which: 6 – 9
 Ba1 to Ba3 BB+ to BB– 6,812 2,322 3,555 824 111 36  6,896  36 
 
of which: 10 – 12
 B1 to B3 B+ to B– 8,285 3,880 2,826 1,258 321 31  5,338  27 
 
of which: 13 & defaulted
 Caa & lower CCC & lower 908 488 238 100 83 35  2,743  42 
 
Net banking products exposure to corporates and other non-banks, after application of credit hedges 41,608 14,444 18,036 4,817 4,310 39  41,250  37 
 
                         
Investment Bank: distribution of net OTC derivatives exposure, across UBS internal rating and loss given default buckets
 
CHF million, except where indicated 31.12.10 31.12.09 
        LGD buckets Weighted     Weighted
  Moody's Investor Standard & Poor’s           average     average
UBS internal rating Services equivalent equivalent Exposure 0 – 25% 26 – 50% 51 – 75% 76 – 100% LGD (%) Exposure LGD (%)
 
Investment grade Aaa to Baa3 AAA to BBB– 37,552 8,877 24,640 2,591 1,444 36  42,883  34 
 
Sub-investment grade     3,994 607 1,709 133 1,545 54  5,022  48 
 
of which: 6 – 9
 Ba1 to Ba3 BB+ to BB– 2,302 386 1,005 120 791 55  2,382  62 
 
of which: 10 –12
 B1 to B3 B+ to B– 889 41 673 9 166 53  1,066  22 
 
of which: 13 & defaulted
 Caa & lower CCC & lower 803 180 31 4 588 70  1,574  60 
 
Net OTC derivatives exposure, after application of credit hedges 41,546 9,484 26,349 2,724 2,989 39  47,905  37 
 

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Risk and treasury management

industry sectors and basedsectors. Based on our assessment, the vast majority of the sub-investment grade exposures in this portfolio had a loss given defaultan LGD of 0–50% on 31 December 2009.

2010.
è 
Refer to “Note 29b Reclassification of financial assets” in the “Financial information” section of this report for more information on reclassified securities including carrying values of student loan auction rate securities, monoline protected assets and US commercial real estate positions




Investment Bank: distribution of net banking products exposure to corporates and other non-banks, across UBS internal rating and loss given default buckets
                                 
 
CHF million 31.12.09 31.12.08
                      Weighted      Weighted 
      Loss given default (LGD) buckets average      average 
UBS internal rating Exposure  0–25%  26–50%  51–75%  76–100%  LGD (%)  Exposure  LGD (%) 
 
Investment grade  26,273   9,850   10,689   3,107   2,628   39   39,659   36 
 
Sub-investment grade  14,977   6,492   5,571   2,330   583   34   19,304   31 
 
of which: 6  1,407   102   942   302   62   47   2,199   32 
 
of which: 7  2,044   1,210   339 �� 338   157   33   2,307   43 
 
of which: 8  1,293   342   705   228   18   37   1,370   45 
 
of which: 9  2,151   896   965   265   26   31   3,811   19 
 
of which: 10  1,486   525   720   139   102   32   1,674   36 
 
of which: 11  2,168   1,104   661   396   7   30   4,422   28 
 
of which: 12  1,684   1,287   277   65   55   18   687   23 
 
of which: 13  357   158   133   63   3   31   221   21 
 
of which: defaulted  2,386   870   830   535   151   44   2,612   33 
 
Net banking products exposure to corporates and other non-banks, after application of credit hedges
  41,250   16,342   16,260   5,437   3,211   37   58,963   35 
 
Investment Bank: banking products exposure1by industry sector
         
 
CHF million
  31.12.09   31.12.08 
 
Chemicals  1,347   3,072 
 
Electricity, gas, water supply  2,120   3,685 
 
Financial institutions  16,316   25,716 
 
Manufacturing  6,695   7,978 
 
Mining  2,284   2,588 
 
Public authorities  2,657   3,246 
 
Retail and wholesale  1,530   1,855 
 
Transport, storage and communication  4,057   5,794 
 
Other  4,243   5,030 
 
Total
  41,250   58,963 
 
1 Net banking products exposure to corporates and other non-banks, after application of credit hedges.
Investment Bank: banking products exposure1 by geographical region
         
 
CHF million
  31.12.09   31.12.08 
 
Switzerland  543   1,437 
 
Other Europe  6,759   9,354 
 
North America  29,222   42,100 
 
Latin America  152   1,550 
 
Asia/Pacific  4,014   3,833 
 
Africa/Middle East  559   689 
 
Total
  41,250   58,963 
 
1 Net banking products exposure to corporates and other non-banks, after application of credit hedges.

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Risk and treasury management
Risk management and control
Loan to BlackRock fund

In the second quarter of 2008, we sold a portfolio of US residential mortgage backedmortgage-backed securities (RMBSs)(RMBS) for proceeds of USD 15 billion to the RMBS Opportunities Master Fund, LP (the “RMBS fund”)(RMBS fund), a special purpose entity managed by BlackRock Financial Management, Inc. The RMBS fund was capitalized with approximately USD 3.75 billion in equity raised by BlackRock from third-party investors and an eight-year amortizing USD 11.25 billion senior secured loan provided by UBS.
The RMBS fund amortizes the loan through monthly payments drawn from amounts collected in respect offrom the underlying assets. These collections are allocated to the payment of interest and principal of the loan and to the holders of equity interests in the RMBS fund in accordance with the terms of the loan agreement. Allocations to equity holders may be
reduced or suspended in the event of

specified declines in the aggregate notional balance of the portfolio, and we may assume control of the underlying assets in the event of a specified further decline in the notional balance.

As of 31 December 2009,2010, the loan had a balance outstanding of USD 5.7 billion (USD 7.1 billion (USD 9.2 billion aton 31 December 2008)2009), taking into account amounts held in escrow. This loan balance is also reflected in the Investment Bank’s credit exposures shown in the tables on the previous pages. Collections have been slower in 2009 than in 2008, primarily due to lower levels of voluntary prepayments and reductions in floating rate interest payments, in addition to the fact that the portfolio has amortized over time. The aggregate notional balance of the RMBS fund’s assets collateralizing the loan on 31 December 20092010 was USD
16.0 13.4 billion. By notional balance, the portfolio was comprised primarily of Alt-A (52%(53%) and sub-prime (32%(33%) credit grades. In terms of priority, the portfolio was dominated by senior positions (92%(95%).
The RMBS fund is not consolidated in our financial statements. We continue to monitor the RMBS fund and its performance and will reassess the consolidation status if events warrant and deterioration of the underlying RMBS mortgage pools indicates that the equity investors in the fund no longer receive the majority of the risks and rewards. We also continue to assess the loan to the RMBS fund to determine whether it has been impaired. Developments through the year ended 31 December 20092010 have not altered our conclusion that consolidation is not required, and the loan is not considered impaired.impaired and that consolidation is not required.



                 
Investment Bank: net banking products and OTC derivatives exposure by industry sector1 
  Banking products OTC derivatives 
CHF million
  31.12.10   31.12.09   31.12.10   31.12.09 
 
Banks  2,608   3,655   13,409   9,982 
 
Chemicals  1,046   1,347   179   267 
 
Electricity, gas, water supply  2,380   2,120   155   150 
 
Non-bank financial institutions  13,054   12,661   20,778   29,171 
 
Manufacturing  8,021   6,695   524   710 
 
Mining  3,707   2,284   94   562 
 
Public authorities  1,921   2,657   49   51 
 
Retail and wholesale  2,722   1,530   861   982 
 
Transport, storage and communication  4,537   4,057   581   642 
 
Other  1,611   4,243   4,916   5,389 
 
Total
  41,608   41,250   41,546   47,905 
 
1 Banking products: exposure to corporates and other non-banks after risk-transfer, and after application of credit hedges. OTC derivatives: net replacement values include the impact of netting agreements (incl. cash collateral) in accordance with Swiss Federal Banking law, based on the IFRS scope of consolidation.
                 
Investment Bank: net banking products and OTC derivatives exposure by geographical region 
  Banking products OTC derivatives 
CHF million
  31.12.10   31.12.09   31.12.10   31.12.09 
 
Switzerland  348   543   1,804   1,759 
 
Rest of Europe  5,291   6,759   19,874   22,286 
 
North America  32,721   29,222   15,764   19,907 
 
Latin America  34   152   185   123 
 
Asia Pacific  2,658   4,014   3,338   3,236 
 
Middle East and Africa  556   559   580   594 
 
Total
  41,608   41,250   41,546   47,905 
 

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Risk management and control

Credit loss expenses
Under IFRS our credit loss expenses charged to the income statement represent the total credit losses actually experienced in the period from banking products and securities financing transactions.
    In 2009, we experienced net credit loss expenses of CHF 1,832 million, of which CHF 425 million was due to impairment charges taken on reclassified securities in the Investment Bank. In comparison, we recorded net credit loss expenses of CHF 2,996 million in 2008.
    The Investment Bank recorded net credit loss expenses of CHF 1,698 million for 2009, compared with net credit loss expenses of CHF 2,575 million in 2008. Excluding the credit loss expenses from reclassified securities of CHF 425 million, the Investment Bank’s net credit loss expenses amounted to CHF 1,273 million in 2009.
    Wealth Management & Swiss Bank reported net credit loss expenses of CHF 133 million for 2009, compared with CHF 392 million in 2008. Releases of allowances made against lombard loans in 2009 contributed to this positive development.
è
Refer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for more information on “incurred loss” concept
   
  Impairment and default – distressed claims
   
(Audited)
(Audited)
 With respect to distressed claims resulting from banking products, we distinguish between loans that are “past due” and those that are “impaired”. We consider a loan to be past due when a contractual payment has been missed. We consider a loan as impaired if it is probable that we will not fully recover all contractual payments due under the loan as a result of the borrower’s inability, or unwillingness, to meet its obligations after realization of available collateral. Past due but not impaired loans are those that have suffered missed payments, but are not considered impaired because we expect to collect all amounts due under the contractual terms of the loans or the equivalent value.
We also assess derivative counterparties and claims from securities financing transactions for default and impairment using generally the same principles and processes thatas we use for banking products.
      We have established processes to ensure that the carrying values of impaired claims are determined in compliance with IFRS requirements. Our credit controls applied to valuation and workoutwork-out are the same for both amortized cost and fair-valued credit products. WeWith exception of a part of the mortgage portfolio and small unsecured retail account overdrafts, we assess each identified case and ourindividually. Our workout strategy and estimation of recoverable amounts are independently approved.
     None of the portfolios with collective loan loss provisions are included in the totals of impaired loans in the tables shown in the composition of credit risk for business divisions in the “Credit risk” section of this report.
(Audited)
     We also 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 obligations where the individual impaired items cannot yet be identified.
    Our portfolios considered impaired on a collective basis are not included in the totals of impaired loans in the tables shown in the discussion of the composition of credit risk for business divisions in the “Credit risk” section of this report.
(Audited)    Our assessment of collective impairment differs depending on the nature of the underlying obligations. In our retail and corporate banking business in Switzerland, where delayed payments are routinely observed, we typically review individual positions for impairment only after they have been in arrears for a certain time. To cover the time lag between the occurrence of an impairment event and its identification, we establish collective loan loss allowances based on the expected loss for the portfolio over the average period between trigger events and the identification of individual impairment. Collective loan loss allowances of this kind are typically not required for our investment banking businesses because we continuously monitor individual counterparties and exposures to identify impairment events at an early stage.
      Additionally, for all of our portfolios we assess whether there have been any unforeseen developments which might result in impairments but that cannot beare not immediately identified.observable. These events could be stress situations, such as a natural disaster or a country crisis, or they could result from structural changes in the legal or regulatory environment. To determine whether an event-driven collective impairment exists, we use a set of global economic drivers to regularly assess the most vulnerable countries and review the impact of any potential impairment event.
  
    The recognition of impairment in our financial statements depends on the accounting treatment of the claim. For products
(Audited)
carried at amortized cost, impairment is recognized through the creation of an allowance or provision which is charged to the income statement as a credit loss expense. For products recorded at fair value, such as derivatives, impairmenta deterioration of the credit quality is recognized through a credit valuation adjustment, which isCVA charged to the income statement through theNet trading incomeline.
      è è
Refer to “Note 27a Valuation principles” in the “Financial information” section of this report for more information on credit valuation adjustments
CVA
     
  Impaired loans, allowances and provisions
  
The credit risk exposures reported in the table “Allowances and provisions for credit losses” table represent the IFRS balance sheet view of our gross lending portfolio comprisingbanking products portfolio. This comprises the balance sheet line itemsBalances with central banks,Due from banksandLoans.Loansas well as the off-balance sheet itemsGuaranteesandLoan commitments. The table also shows the IFRS reported allowances and provisions for credit losses and impairments as well as our impaired lending portfolio.impairments.
      The table shows that our allowances and provisions for credit losses, excluding collective loan loss provisions (CLLP) of CHF 47 million, decreased by 8.4%56% to CHF 2,6801,193 million aton 31 December 20092010 from CHF 2,9272,720 million (excluding CLLP of CHF 49 million) at the end of 2008.2009.
      As reported in second quarter 2009, we implemented a threshold for designatingWe consider a reclassified security as an impaired loan. Under this policy a reclassified security is considered impairedloan if the carrying value at the balance sheet date is,


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Risk and treasury management
Risk management and control
                                 
  Allowances and provisions for credit losses
   
  CHF million Wealth Management &
Swiss Bank		 Wealth Management
Americas
  
Investment Bank		 Others1 UBS
             
  As of 31.12.09  31.12.08  31.12.09  31.12.08  31.12.09  31.12.08  31.12.09  31.12.08  31.12.09  31.12.08 
   
  Due from banks 2,683  5,510  1,074  1,096  42,568  57,485  282  382  46,606  64,473 
   
  Loans 197,178  206,704  21,496  23,981  90,700  111,798  101  730  309,475  343,213 
   
  
of which: related to reclassified securities2
             19,255  21,840        19,255  21,840 
   
  Total lending portfolio, gross3 199,861  212,214  22,569  25,077  133,268  169,282  383  1,113  356,081  407,685 
   
  Allowances for credit losses (1,034)  (1,169) (4)  (25) (1,642)  (1,733) 0  0  (2,680)  (2,927)
   
  
of which: related to reclassified securities
             (162)  (130)       (162)  (130)
   
  Total lending portfolio, net4 198,827  211,044  22,566  25,052  131,625  167,550  383  1,113  353,402  404,758 
   
  Impaired lending portfolio, gross5 1,805  2,959  4  39  5,056  4,436  0  0  6,865  7,434 
   
  
of which: related to reclassified securities
             1,090  200        1,090  200 
   
  Estimated liquidation proceeds of collateral for impaired loans (530)  (1,576) 0  (18) (1,670)  (945) 0  0  (2,200)  (2,539)
   
  
of which: related to reclassified securities
             (958)  (94)       (958)  (94)
   
  Impaired lending portfolio, net of collateral 1,275  1,383  4  21  3,386  3,491  0  0  4,665  4,895 
   
  Allocated allowances for impaired lending portfolio 984  1,146  4  25  1,642  1,733  0  0  2,630  2,904 
   
  Other allowances and provisions 49  24  0  0  0  0  0  0  49  24 
   
  Total allowances and provisions for credit losses in lending portfolio 1,034  1,169  4  25  1,642  1,733  0  0  2,680  2,927 
   
  Allowances and provisions for credit losses outside of lending portfolio 19  24  0  0  117  119  5  0  141  143 
   
                                 
  Ratios                              
   
  Allowances and provisions as a % of total lending portfolio, gross 0.5  0.6  0.0  0.1  1.2  1.0  0.0  0.0  0.8  0.7 
   
  Impaired lending portfolio as a % of total lending portfolio, gross 0.9  1.4  0.0  0.2  3.8  2.6  0.0  0.0  1.9  1.8 
   
  Impaired lending portfolio excluding reclassified securities as a % of total lending portfolio, gross excluding reclassified securities             3.5  2.9        1.7  1.9 
   
  Allocated allowances as a % of impaired lending portfolio, gross 54.5  38.7  100.0  64.1  32.5  39.1  0.0  0.0  38.3  39.1 
   
  Allocated allowances as a % of impaired lending portfolio, net of collateral 77.2  82.9  100.0  119.0  48.5  49.6  0.0  0.0  56.3  59.3 
   
  1 Includes Global Asset Management and the Corporate Center.  2 This excludes reclassified loan underwriting positions with a value of CHF 1,789 million as of 31.12.09(31.12.08: CHF 3,713 million), which are included in the risk view of loan exposures.  3 Excludes loans designated at fair value, but includes margin accounts for exchange-traded derivatives transactions, cash collateral delivered for OTC derivatives and cash current accounts from prime brokerage (cash leg) of total CHF 70,121 million (of whichDue from banks:CHF 29,770 million, of whichLoans:CHF 40,351 million) (31.12.08: CHF 95,610 million of which due from banks: CHF 46,757 million, of which loans: CHF 48,853 million).  4 Reconciles to the balance sheet carrying values ofDue from banksandLoans,which are reported net of allowances for credit losses.  5 Excludes reclassified securities with adverse cash flow estimate revisions cumulatively below 5% of the carrying value at reclassification date, adjusted for redemptions. 31.12.08 numbers have been adjusted to reflect this change.

                   
(Audited) Impaired assets by type of financial instrument
  
 CHF million Impaired exposure  Estimated liquidation
proceeds of collateral		  Specific allowances,
provisions and credit
valuation adjustments		  Net impaired exposure 
   
  Impaired loans  6,865   (2,200)  (2,630)  2,035 
   
  Impaired contingent claims  350       (90)  260 
   
  Defaulted derivatives contracts  4,607       (3,061)  1,546 
   
  Defaulted securities financing transactions  98   (47)  (51)  0 
   
  Total 31.12.09  11,920   (2,247)  (5,831)  3,841 
   
  Total 31.12.081  13,947   (2,539)  (7,252)  4,156 
   
  1 Impaired exposure was restated from CHF 15,658 million originally reported in our Annual Report for 2008, estimated liquidation proceeds of collateral was restated from CHF 3,930 million. In 2009, we implemented a threshold for designating a reclassified security as an “impaired loan”. Under this policy, a reclassified security is considered impaired if the carrying value at balance sheet date is on a cumulative basis 5% or more below the carrying value at reclassification date adjusted for redemptions.

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on a cumulative basis, 5% or more below the carrying value at the reclassification date adjusted for redemptions. In order to ensure year-on-year comparability, we have restated our 31 December 2008 Investment Bank and the Group gross impaired lending portfolio accordingly.
      Our gross impaired lendingloan portfolio decreased to CHF 6,8654,172 million on 31 December 20092010 from CHF 7,4346,829 million on 31 December 2008.2009.
      The ratio of the impaired lendingloan portfolio to the total lendingloan portfolio (both measured gross) was 1.9%1.6% on 31 December 20092010 compared with 1.8%2.5% on 31 December 2008.2009. For loans excluding securities the ratio was 0.9% on 31 December 2010 compared with 2.3% on 31 December 2009.
(Audited)
(Audited)		     We reclassified loans and receivables with a carrying amountamounts of CHF 5839 million and CHF 22458 million from impaired to performing during 20092010 and 2008,2009 respectively. This reclassification occurred because the loans had either been renegotiated and the new terms and conditions met normal market criteria for the quality of the obligor and type of loan, or because the financial position of the obligor improved, enabling it to repay any past due amounts such that we deemed future principal and interest to be fully collectible in accordance with the original contractual terms.
  
    Collateral held against our impaired loansloan portfolio mainly consisted of real estate and multi-asset-backed securities. 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 underOther assetsat the end of 20092010 and 20082009 amounted to CHF 24590 million and CHF 280245 million, respectively.
      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.


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Allowances and provisions for credit losses 
                  Allowances and provisions  Estimated liquidation    
CHF million, except where indicated IFRS exposure, gross Impaired exposure1 for credit losses2 proceeds of collateral Impairment ratio (%) 
As of 31.12.10  31.12.09  31.12.10  31.12.09  31.12.10  31.12.09  31.12.10  31.12.09  31.12.10  31.12.09 
 
                                         
UBS Group
                                        
 
Balances with central banks  24,459   18,114                           0.0   0.0 
 
Due from banks  17,158   16,836   21   36   24   32           0.1   0.2 
 
Loans  263,964   269,124   4,172   6,829   1,039   2,598   2,286   2,200   1.6   2.5 
 
of which: related to reclassified securities3
  11,719   19,255   1,574   1,090   221   162   1,376   958   13.4   5.7 
 
of which: related to acquired securities
  9,673   7,982   351   119   52   17   313   105   3.6   1.5 
 
of which: related to other loans
  242,572   241,887   2,247   5,620   766   2,419   597   1,137   0.9   2.3 
 
Guarantees  16,535   17,070   160   141   96   78   7       1.0   0.8 
 
Loan commitments  56,851   59,328   142   209   34   12   5       0.2   0.4 
 
Banking products
  378,967   380,472   4,495   7,215   1,193   2,720   2,298   2,200   1.2   1.9 
 
                                         
Investment Bank
                                        
 
Balances with central banks  13,732   9,525                           0.0   0.0 
 
Due from banks  12,007   12,802                           0.0   0.0 
 
Loans  39,392   50,364   2,838   5,056   348   1,642   1,926   1,670   7.2   10.0 
 
of which: related to reclassified securities3
  11,719   19,255   1,574   1,090   221   162   1,376   958   13.4   5.7 
 
of which: related to acquired securities
  9,673   7,982   351   119   52   17   313   105   3.6   1.5 
 
of which: related to other loans
  18,000   23,127   913   3,847   76   1,463   237   607   5.1   16.6 
 
Guarantees  5,536   4,635   67   117   43   66           1.2   2.5 
 
Loan commitments  48,509   51,593   95   209   26   1           0.2   0.4 
 
Banking products
  119,177   128,919   3,000   5,382   417   1,708   1,926   1,670   2.5   4.2 
 
                                         
Wealth Management & Swiss Bank
                                        
 
Balances with central banks  10,727   8,589                           0.0   0.0 
 
Due from banks  2,678   2,678   21   36   24   32           0.8   1.3 
 
Loans  201,942   197,178   1,333   1,769   689   952   360   530   0.7   0.9 
 
Guarantees  10,505   11,908   93   24   49   9   7       0.9   0.2 
 
Loan commitments  7,276   7,236   47       8   11   5       0.6   0.0 
 
Banking products
  233,128   227,589   1,494   1,829   770   1,004   372   530   0.6   0.8 
 
                  ��                      
Wealth Management
                                        
 
Balances with central banks  463   5,614                           0.0   0.0 
 
Due from banks  456   419                           0.0   0.0 
 
Loans  67,104   61,935   166   295   126   165   45   141   0.2   0.5 
 
Guarantees  2,391   3,554                           0.0   0.0 
 
Loan commitments  983   1,107                           0.0   0.0 
 
Banking products
  71,397   72,629   166   295   126   165   45   141   0.2   0.4 
 
                                         
Retail & Corporate
                                        
 
Balances with central banks  10,265   2,975                           0.0   0.0 
 
Due from banks  2,222   2,260   21   36   24   32           0.9   1.6 
 
Loans  134,838   135,244   1,167   1,474   563   788   315   390   0.9   1.1 
 
Guarantees  8,114   8,354   93   24   49   8   7       1.1   0.3 
 
Loan commitments  6,293   6,129   47       8   11   5       0.7   0.0 
 
Banking products
  161,732   154,961   1,328   1,534   644   839   327   390   0.8   1.0 
 
1 Excludes reclassified securities with adverse cash flow estimate revisions cumulatively below 5% of the carrying value at reclassification date, adjusted for redemptions.  2 Excludes CHF 47 million collective loan loss allowances (31.12.09: CHF 49 million).  3 Refer to “Note 29b Reclassification of financial assets” in the “Financial information” section of this report.

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(Audited) Impaired assets by type of financial instrument1 
           Specific allowances, Estimated liquidation   
 CHF million Impaired exposure provisions and CVA proceeds of collateral Net impaired exposure 
   31.12.10  31.12.09  31.12.10  31.12.09  31.12.10  31.12.09  31.12.10  31.12.09 
   
  Impaired loans (incl. due from banks)  4,193   6,865   (1,064)2  (2,630)2  (2,286)  (2,200)  844   2,035 
   
  Impaired guarantees and loan commitments  301   350   (130)  (90)  (12)      159   260 
   
  Defaulted derivatives transactions  1,915   4,607   (1,130)  (3,061)          785   1,546 
   
  Defaulted securities financing transactions  59   98   (46)  (51)  (13)  (47)  0   0 
   
  Total  6,468   11,920   (2,370)  (5,831)  (2,310)  (2,247)  1,788   3,841 
   
   
  
1 Includes impaired Due from banks, Loans, Guarantees, Loan commitments, Securities financing transactions and OTC derivatives with specific CVA.  2 Excludes CHF 47 million collective loan loss allowances (31.12.09: CHF 49 million).

 
(Audited)     The table “Impaired assets by type of financial instrument” includes impaired loans, impaired off-balance sheet claimsloan commitments, guarantees and defaulted derivativesderivative and repurchase/reverse
(Audited)repo contracts,securities financing transactions, which are subject to the same workout and recovery processes. Our impaired assets decreased significantly by CHF 2.05.5 billion to CHF 11.96.5 billion aton 31 December 2009.2010, mainly due to sales of legacy loan positions.
      After deducting allocated specific allowances, provisions and credit valuation adjustmentsCVA of CHF 5.82.4 billion and the estimated liquidation proceeds of collateral of CHF 2.22.3 billion, net impaired assets amounted to CHF 3.81.8 billion in 2009.as of 31 December 2010.
    è Refer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for more information on the reclassification of the cash collateral from derivative transactions as well as prime brokerage receivables and payables
èRefer to “Note 9b Due from banks and loans” in the “Financial information” section of this report for more information on the changes in allowances and provisions for credit losses
Past due but not impaired loans
The table below shows a breakdown of our total loan balances on loans where payments have been missed but which we do not consider impaired because we expect to collect the amounts due. The loan balances in the table relate to our Wealth Management & Swiss Bank, where delayed payments are routinely observed. The past due but not impaired categorization is not typically applicable to our Investment Bank lending businesses because we continuously monitor individual counterparties and exposures to identify impairment events at an early stage, including missed payments.
    Compared with 31 December 2008, our past due but not impaired loan exposures decreased by 47% to CHF 0.9 billion on 31 December 2009. This decrease resulted primarily from recoveries in lombard lending exposures and lower levels of excesses experienced by Wealth Management & Swiss Bank in 2009. Our past due but not impaired loans in the greater-than-90-day category related primarily to mortgage loans. However, our overall past due but not impaired levels on mortgage loans were not significant in the context of the size of the mortgage portfolio.

Past due but not impaired loans

The table below shows a breakdown of our total loan balances where payments have been missed but which we do not consider impaired because we expect to collect the full amounts due. The loan balances in the table relate to our Wealth Management & Swiss Bank division, where delayed payments are routinely observed. We currently have no past due but not impaired loans in the Investment Bank.
Compared with 31 December 2009, our past due but not impaired loan exposures decreased 9% to CHF 0.8 billion on 31 December 2010. This reduction resulted primarily from decreases in the category 1-60 days that were only partially compensated by higher past due exposures in the greater-than-60 day categories in 2010, especially in the last quarter of the year. Our past due but not impaired loans in the greater-than-90-day category related primarily to mortgage loans. Half of the mortgage exposure is monitored and closely supervised by our recovery unit. However, our overall past due but not impaired levels on mortgage loans were not significant compared with the size of the mortgage portfolio.



         
(Audited) Past due but not impaired loans
  
 CHF million 31.12.09  31.12.08 
   
  1–10 days 138  522 
   
  11–30 days 62  89 
   
  31–60 days 78  272 
   
  61–90 days 17  331 
   
  > 90 days 635  547 
   
  
of which: past due but not impaired mortgage loans > 90 days
 511  425 
   
  Total 930  1,761 
   
           
(Audited) Past due but not impaired loans 
 CHF million 31.12.10  31.12.09 
   
  1 – 10 days  62   138 
   
  11 – 30 days  59   62 
   
  31 – 60 days  30   78 
   
  61 – 90 days  20   17 
   
  > 90 days  678   635 
   
  
of which: mortgage loans
  468   511 
   
  Total  849   930 
   
               
  Past due but not impaired mortgage loans
   
  CHF million 31.12.09
 31.12.08
    Total mortgage
exposure		 of which: past due
but not impaired
> 90 days		 Total mortgage
exposure		 of which: past due
but not impaired
> 90 days		 
   
  Total 130,348 511  128,441  425 
   
                 
Past due but not impaired mortgage loans 
CHF million 31.12.10 31.12.09 
  Total  of which:  Total  of which: 
  mortgage  past due > 90 days  mortgage  past due > 90 days 
  exposure  but not impaired  exposure  but not impaired 
 
Total
  133,343   468   130,348   511 
 

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Settlement risk

Settlement risk arises in transactions involving exchange of value whenwhere we must honorfulfill our obligation to deliver without first being able to determine with certainty that we will receive the counter-value.countervalue. We use multilateral and bilateral agreements with counterparties to reduce our actual settlement volumes.

Our most significant source of settlement risk is foreign exchange transactions. UBS is a member of Continuous Linked Settlement (CLS), a foreign exchange clearing house which allows transactions to be settled on a delivery versus paymentdelivery-versus-payment basis, thereby significantly reducing foreign exchange-related settlement risk relative to the volume of business.
The avoidancemitigation of settlement risk through CLS membership and other means, such as payment netting, does not eliminate our credit risk onin foreign exchange transactions resulting from changes in exchange rates prior to settlement. We measure and control such counterparty risk onin forward foreign exchange transactions as part of our overall credit risk onmanagement of OTC derivatives.

Country risk

Country risk is the risk of loss arising from country-specific events. We have ana well established country risk control framework to actively manage and limit, as necessary, our trading, risk, lending, risk, issuer risk and investment risk in a country.risk. This framework is intended to ensure that our exposure to a certain country is commensurate with the credit rating we as-

signassign to it, and that it is not disproportionate to our overall country risk profile.
We assign ratings to all countries where we have exposure. Sovereign ratings express the probability of a country risk event that would lead to impairment of our claims. The default probabilities that we use, and our mapping of external ratings of the major rating agencies, are based on our counterparty rating classes as described in Probabilitythe “Probability of defaultdefault” section above. With respect toIn our country ratings,rating scale, the rating classes 10 to 13 are designated “very high risk” while the, i.e. countries in default with regard to selective obligations, or with heightened political, macroeconomic and/or systemic risks. The lowest rating class contains countries in default.
outright default and a state of economic collapse. For all countriescoun-

tries rated three3 and below, we set country risk ceilings approved either by the BoD or under delegated authority.authority by the Group CEO or Group CRO. A country risk ceiling applies to all our exposures to counterparties or issuers of securities and financial investments in the respective country. Our country risk measures cover cross-border transactions and investments as well as our local operations, branches and subsidiaries in countries where the risk is material. We may limit the extension of credit, transactions in traded products or positions in securities based on a country ceiling, even if our exposure to a counterparty is otherwise acceptable.

Losses due to counterparty or issuer defaults resulting from multiple insolvencies (systemic risk) or general prevention or restriction of payments by authorities (transfer risk) are the most significant effects of a country crisis. For internal 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 and equity markets and asset prices or a sharp depreciation of the currency.
Additional information on our exposures to countries that we categorize as emerging markets is provided in the “Emerging markets net exposure by UBS internal country rating category” and “Emerging markets net exposure by major geographical area and product type” tables.
We use stress testing to assess the potential financial impact of a severe emerging markets crisis. This involves identifying countries that may potentially be subject to a crisis event, determining potential losses and making assumptions about recovery rates depending on the types of transactions involved and their economic importance to the affected countries.

Country risk exposure

Exposures to sovereign of industrialized European countries
rated AA and below

The table “Largest five exposures to sovereign of industrialized European countries rated AA and below” shows our five largest gross exposures and the respective net amounts to the sovereign of those countries.



                 
Largest five exposures to sovereign1of industrialized European countries rated AA and below2 
CHF million Gross exposure Net exposure3 
As of 31.12.10  31.12.09  31.12.10  31.12.09 
 
Italy, sovereign  2,812   7,872   395   3,534 
 
Belgium, sovereign  473   2,889   473   2,863 
 
Iceland, sovereign  123   0   123   0 
 
Greece, sovereign  38   317   31   290 
 
Portugal, sovereign  29   91   25   0 
 
1 Includes central governments, agencies and central banks.  2 Traded products exposures are measured on a net replacement value basis.  3 Net of credit hedges.

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Emerging market countries

Our net exposures to emerging market countries amounted to CHF 20.1 billion on 31 December 2010, compared with CHF 17.8 billion on 31 December 2009.
Based on the main country rating categories, 87% of our emerging market country exposures on 31 December 2010 were rated investment grade, compared with 82% on 31 December 2009. The table “Emerging markets net exposure by major geographical area and product type” shows the five largest emerging market country exposures in each major geographical area

by product type on 31 December 2010 compared with 31 December 2009.
The overall credit and market risk exposure in the Middle East and the North African region was relatively modest. Of the CHF 2.6 billion shown for the entire region Middle East and Africa in the table below, CHF 2 billion relate specifically to Middle Eastern and North African countries, which includes the larger positions in Saudi Arabia and the United Arab Emirates. Our exposures in the countries that have been directly affected by political turmoil since the beginning of 2011 are immaterial.


Emerging markets net1 exposure by UBS internal country rating category2

       
CHF million
 31.12.10  31.12.09 
 
Investment grade 17,567  14,659 
 
Sub-investment grade 2,521  3,132 
 
Total
 20,088  17,791 
 
         
 
CHF million
  31.12.09   31.12.08 
 
Investment grade  18,847   24,616 
 
Sub-investment grade  3,568   8,095 
 
Distressed  3   4 
 
Total
  22,418   32,715 
 
1 Net of credit hedges.   2 As of 31.12.10 OTC derivatives exposures are measured on a net replacement value basis instead of the previously applied close-out period measurement. Exposures as of 31.12.09 show restated replacement value numbers (31.12.09 disclosed total exposure was CHF 22,418 million).

Emerging markets net1 exposure by major geographical area and product type2

                               
CHF million Total Banking products Traded products Financial investments Tradable assets
As of 31.12.10  31.12.09  31.12.10  31.12.09  31.12.10  31.12.09  31.12.10  31.12.09  31.12.10  31.12.09 
 
Emerging Europe
 2,177  1,608  651  575  178  178  30  25  1,318  830 
 
Russia
 1,090  951  212  254  29  57  0  0  849  640 
 
Hungary
 318  45  20  17  39  14  0  0  259  14 
 
Turkey
 249  157  156  104  42  31  2  0  49  22 
 
Poland
 156  95  17  8  62  43  0  0  77  44 
 
Ukraine
 87  74  32  37  0  0  27  25  28  12 
 
Other
 277  286  214  155  6  33  1  0  56  98 
 
Emerging Asia
 11,937  10,969  4,784  4,119  2,443  2,652  121  166  4,589  4,032 
 
Hong Kong
 2,597  1,791  950  602  565  784  0  0  1,082  405 
 
India
 2,519  1,468  919  648  32  45  0  0  1,568  775 
 
China
 2,267  2,714  1,007  1,362  605  442  120  166  535  744 
 
South Korea
 1,495  2,111  592  452  588  1,021  0  0  315  638 
 
Taiwan
 1,433  1,399  451  659  343  202  0  0  639  538 
 
Other
 1,626  1,486  865  396  310  158  1  0  450  932 
 
Emerging America
 3,387  2,729  263  308  620  203  30  35  2,474  2,183 
 
Brazil
 1,699  1,142  119  150  471  117  0  0  1,109  875 
 
Mexico
 951  913  36  39  95  77  23  11  797  786 
 
Venezuela
 218  102  0  1  0  0  0  0  218  101 
 
Chile
 155  64  42  32  38  0  0  0  75  32 
 
Argentina
 134  55  24  20  0  0  7  23  103  12 
 
Other
 230  453  42  66  16  9  0  1  172  377 
 
Middle East and Africa
 2,587  2,485  969  1,129  819  826  0  1  799  529 
 
United Arab Emirates
 608  444  223  202  130  140  0  1  255  101 
 
Saudi Arabia
 606  576  110  168  488  395  0  0  8  13 
 
South Africa
 589  514  163  269  39  172  0  0  387  73 
 
Israel
 214  326  125  145  40  17  0  0  49  164 
 
Kuwait
 130  116  32  58  98  51  0  0  0  7 
 
Other
 440  509  316  287  24  51  0  0  100  171 
 
Total
 20,088  17,791  6,667  6,131  4,060  3,859  181  227  9,180  7,574 
 
                                         
 
CHF million Total Banking products Traded products Financial investments Tradable assets
As of  31.12.09   31.12.08   31.12.09   31.12.08   31.12.09   31.12.08   31.12.09   31.12.08   31.12.09   31.12.08 
 
Emerging Europe  2,117   3,706   664   1,454   542   1,177   136   211   775   864 
 
Emerging Asia  13,725   16,460   4,299   3,594   4,949   7,059   652   879   3,825   4,928 
 
Emerging America  3,077   6,802   309   1,491   485   2,157   100   167   2,183   2,987 
 
Middle East/Africa  3,499   5,747   1,131   1,338   1,894   3,980   23       451   429 
 
Total  22,418   32,715   6,403   7,877   7,870   14,373   911   1,257   7,234   9,208 
 
Temporary exposures1
  340   738                                 
 
1 Net of credit hedges.   12 Temporary As of 31.12.10, OTC derivatives exposures are loan underwritings which are held short-term, pending syndication, sale or hedging. They are not included inmeasured on a net replacement value basis instead of the regional subtotals or overall total.previously applied close-out period measurement. Exposures as of 31.12.09 show restated replacement value numbers (31.12.09 disclosed exposure was CHF 22,418 million).

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    Additional information on our exposures to countries that we categorize as emerging markets is provided in the “Emerging markets exposure by UBS internal country rating category” and “Emerging markets exposure by major geographical area and product type” tables.
    We use stress testing to assess the potential financial impact of a severe emerging markets crisis. This involves identifying countries that may potentially be subject to a crisis event, determining potential losses and making assumptions about recovery rates depending on the types of transactions involved and their economic importance to the affected countries.
Country risk exposure
Our exposures to emerging market countries amounted to CHF 22.4 billion on 31 December 2009, compared with CHF 32.7 billion on 31 December 2008. The reduction of CHF 10.3 billion in our total emerging markets exposure occurred across all markets.
    Based on the main country rating categories, 84% of our emerging market country exposures (excluding those which are temporary exposures) on 31 December 2009 were rated investment grade, compared with 75% on 31 December 2008. The change in our risk profile in these markets was due to the fact that a large proportion of the exposure reduction was related to sub-investment grade countries, in particular Brazil, following the sale of UBS Pactual. The table “Emerging markets exposure by major geographical area and product type” analyzes our emerging market country exposures by major geographical area and product type on 31 December 2009 compared with 31 December 2008. Our
temporary exposures arising from loan underwriting in these markets are shown separately in the table.
     
  Debt investments
  
     
(Audited)(Audited) 
Debt investments classified foraccording to IFRS asFinancial investments available-for-saleare measured at fair value through equity, and can be broadly categorized as money market instruments and debt securities which are mainlyprimarily held for statutory, regulatory or liquidity reasons. Debt investments may also include non-performing loans which were purchased in the secondary market by the Investment Bank.
 
    The risk control framework that we applyapplied to debt instruments classified asFinancial investments available-for-salevaries dependingdepends 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 which may includesuch as interest rate sensitivity analysis, and firm-wide earnings-at-risk, capital-at-risk and combined stress test metrics.
  
(Audited) Composition of debt investments
 
Debt financial instruments classified asFinancial investments available-for-saleincreased significantlydecreased to CHF 73.4 billion on 31 December 2010 compared with CHF 80.4 billion aton 31 December 2009 compared with CHF 3.6 billion at 31 December 2008. This increase resulted from the strategic decision to rebalance our liquidity reserve, which led to a shift from repurchase agreements and trading portfolios into debt instruments available-for-sale.2009. These instruments primarily comprised highly liquid short-term securities issued by governments and government-controlled institutions. This position includes our strategic investment portfolio, managed by Group Treasury.
      è è
Refer to “Note 13 Financial investments available-for-sale” in the “Financial information” section of this report for more information
     èRefer to the “Non-trading portfolios” section of this report for more information
    èRefer to the “Treasury management” section of this report for more information on Group Treasury’s risk management activities


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Market risk

   
(Audited)
 Risk and treasury management
Risk management and control
Market risk
(AUDITED)
Market risk is the risk of loss resulting from changes in market variables. There are two broad categories of market variables: general market risk factors and specific components. General market risk factors include interest rates, equity index levels, exchange rates, commodity prices and general credit spreads. The volatility of these risk factors and the correlations between them are also general market risk factors. Specific components relate to the prices of debt and equity instruments, which result from factors and events particular to individual companies or entities.
Sources of market risk
We take general and specific market risks both in our trading activities and in some non-trading businesses.
Trading
portfolios
Most of our market risk arises from our trading activities in the Investment Bank, which includeincluding market-making, facilitation of client business and associated position taking in cash and derivative markets for equities, fixed income, interest rates, foreign exchange and commodities.
    Our trading businesses are subject to multiple market risk limits. Traders are required to manage their risks within these limits, which may involve utilizing hedging and risk mitigation strategies. These strategies can expose the firm to ad-
(AUDITED)
ditionaladditional risks as the hedge instrument and the position being hedged may not always move in parallel (often referred to as “basis risk”)basis risk). We also actively manage such basis risks. Management and Risk Control may also give instructions forto reduce the risk, to be reduced, even when limits are not exceeded.
     The
    Our asset management and wealth management businesses carry small trading positions, principally to support client activity. The market risk from these positions is not material to UBS as a whole.
Non-trading
portfolios
Non-trading books may arise in any business division of the firm. Market risk exposures – primarily general interest rate and foreign exchange risks – may arise from non-trading activities such as retail banking and lending in our wealth management businesses, and retail and corporate banking business in Switzerland, the Investment Bank’s lending businesses and our treasury activities, (primarilyprimarily from funding, balance sheet, liquidity and capital management needs).needs. Equity and certain debt investments, including our strategic investment portfolio, can also give rise to specific market risks.
     In the Investment Bank, non-trading
    Non-trading foreign exchange risks are managed under market risk limits, and non-tradingwith the exception of Group Treasury management of consolidated capital activity. Non-trading interest rate risk is either
(Audited)managed under market risk limits, or subject to specific monitoring. For example, the market risks associated with the portfolio of assets that were reclassified toLoansmonitoring and receivablesfromHeld-for-tradingis reported in firm-wide EaR, CaR and CST metrics.


130

Risk and treasury management
      
(AUDITED)è 
fourth quarter 2008 and first quarter 2009 are subject to specific monitoring, which includes interest rate and credit spread sensitivity analysis, as well as being reported in firm-wide earnings-at-risk, capital-at-risk and combined stress test metrics.
     In our other business divisions, exposures to market risks also arise from non-trading activities, the largest being the interest rate risks arising from customer deposits and mortgage business in Wealth Management & Swiss Bank. These market risks are generally transferredRefer to the Investment Bank or Group Treasury, which manage the positions as part“Non-trading portfolios” section of their trading risk portfolios within their allocated market risk limits. Market risks that are retained by our other business divisions are not significant relative to the firm’s overall risk, and exposures are either subject to market risk measures and controls or specific monitoring.
     In addition to managing market risks transferred from other business divisions, Group Treasury also assumes market risk from its funding, balance sheet, liquidity and capital management responsibilities. The risks resulting from these activities are either covered by market risk limits allocated to Group Treasury or subject to specific monitoring.
this report for more information
 è 
Refer to the “Treasury management” section of this report for more information on Group Treasury’s risk management activities
   
  
Market risk limits
   
(AUDITED)(Audited) We haveestablished a limit framework to control our market risks. We have two major portfolio measures of market risk –risk: VaR and stress loss – whichloss. Both are common to all our busi-
(AUDITED)
nessbusiness divisions and subject to limits that are approved by the BoD.
    In the Investment Bank, these portfolio measures are complemented by concentration and other supplementary limits on portfolios, asset classes and products, and also cover exposures to general market risk factors and single namesingle-name risk. Single nameSingle-name risk (or issuer risk) is a measure of our exposure to the tradable instruments (debt, equity and derivatives) of a single issuer (or issuer group) were that issuer to be subject to a credit event including default. Our concentration and other supplementary limits take a variety of forms, including values (market or notional) and risk sensitivities, which are measures of exposure to a given risk factor such as interest rates, credit spreads, equity indices, foreign exchange rates or volatilities. These limits take into account the extent of market liquidity and volatility, available operational capacity, valuation uncertainty, and, for our single namesingle-name exposures, the credit quality of issuers.
    Our exposures from security underwriting commitments are subject to the same concentration measures and controls as secondary market positions. Underwriting commitments are also generally reviewed by our Commitment Committee, which includes representationrepresentatives from both business and control functions. Underwriting commitments are approved under specific delegated risk management and risk control authorities.
    Market risk limits are set for each of the business divisions and Group Treasury. The limit framework in the Investment Bank is more detailed than in the other business divisions, reflecting the nature and magnitude of the risks it takes.


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 Risk and treasury management
Risk management and control

 
Value-at-risk definition and limitations
Trading portfolios
   
(AUDITED) For the purposes of our disclosure, VaR is used to quantify market risk exposures in our trading portfolios.
Value-at-risk definition and limitations
(Audited)As a statistical measure of market risk, representingVaR represents the market risk losses that potentially could be realized over a set time horizon at an established level of confidence. This assumes no change in our trading positions over the relevant time horizon. We use a


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(Audited)single VaR model for both internal management purposes and for determining market risk regulatory capital requirements, although the confidence levels and time horizons differ.
       Our VaR model is approved by FINMA and ongoing significant revisions toof our VaR methodology and model are also subject to regulatory approval.
(AUDITED)
(Audited)
      The firm’s VaR model makes use of five years ofuses historical data covering a five-year period and is calibrated to a 1-day 95% measure for our internal management purposes. However, in accordance with Basel II and FINMA requirements, we use a 1-day 99% VaR for backtesting and a 10-day 99% VaR for determining market risk regulatory capital. We calculate VaR on a daily basis on our end-of-day positions. Our VaR calculation is based on the application of historical changes in market risk factors
(AUDITED)
directly to our current positions – a method known as historical simulation.
     Actual realized losses may differ from those implied by our VaR. All VaR measures are subject to limitations and must be interpreted accordingly. The limitations of VaR include the following:
 – The five-year historical period used in creating our VaR measure will include fluctuations in market rates and prices that differ from those observedthat will occur in future periods. In particular, the use of a five-year window means that sudden increases in market volatility will not tend to increase VaR as quickly as the use of shorter historical observation periods, but the impact of the increase will impact our VaR for a longer period of time.
(Audited)
 – The VaR measure is calibrated to a specified level of confidence and may not indicate potential losses beyond this confidence level.
 – The 1-day time horizon in the VaR measure, (oror 10-day in the case of regulatory VaR)VaR, may not fully capture the market risk of positions that cannot be closed out or hedged within the specified period.



                                   
(AUDITED) UBS: Value-at-Risk (1-day, 95% confidence, 5 years of historical data)
  Year ended 31.12.09 Year ended 31.12.08
CHF million Min.  Max.  Average  31.12.09  Min.  Max.  Average  31.12.08 
 
Business divisions
                                
 
Investment Bank  43   75   55   54   57   105   79   74 
 
Wealth Management & Swiss Bank1
  0   0   0   0             
 
Wealth Management Americas1
  2   3   3   3   0   3   1   3 
 
Global Asset Management  0   1   0   0   0   2   1   1 
 
Corporate Center  2   16   5   4   3   25   9   6 
 
Diversification effect  2   2   (8)  (7)  2   2   (11)  (6)
 
Total management VaR3
  44   78   55   54   59   106   79   78 
 
Diversification effect (%)          (13)  (11)          (12)  (7)
 
1 Split of former Global Wealth Management & Business Banking into Wealth Management & Swiss Bank and WM Americas not available for 2008, therefore all 2008 Global Wealth Management & Business Banking figures are shown under WM Americas.  2 As the minimum and maximum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification effect.  3 Includes all positions subject to internal management VaR limits.
                                   
(AUDITED) Investment Bank: Value-at-Risk (1-day, 95% confidence, 5 years of historical data)
  Year ended 31.12.09 Year ended 31.12.08
CHF million Min.  Max.  Average  31.12.09  Min.  Max.  Average  31.12.08 
 
Risk type
                                
 
Equities  13   36   22   21   18   63   38   19 
 
Interest rates  16   38   24   23   27   85   46   31 
 
Credit spreads  33   65   46   50   35   88   56   61 
 
Foreign exchange  2   12   6   4   5   15   8   9 
 
Energy, metals & commodities  2   5   4   3   3   13   6   5 
 
Diversification effect  1   1   (47)  (47)  1   1   (75)  (51)
 
Total management VaR2
  43   75   55   54   57   105   79   74 
 
Diversification effect (%)          (46)  (47)          (49)  (41)
1 As the minimum and maximum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification effect. 2 Includes all positions subject to internal management VaR limits.
 

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(AUDITED) – In certain cases, VaR calculations approximate the impact of changes in risk factors on the values of positions and portfolios. This may happen because the number of risk factors included in the VaR model is necessarily limited –limited; for example, yield curve risk factors do not exist for all future dates.
 – The effect of extreme market movesmovements is subject to estimation errors which may result from non-linear interaction effects, andas well as the potential for actual volatility and correlation levels to differ from assumptions implicit in the VaR calculations.
 
     We continue to review the performance of our VaR implementation, which includesincluding a review of risks not included in VaR. We will continue to enhance our VaR model in order to more accurately capture the relationships between the market risks associated with our risk positions, as well as the revenue impact of large market movements foron particular trading positions.
Value at risk developments in 2009
We made a number of changes to our VaR model and methodology in 2009, while also changing the scope of the regu-
(AUDITED)latory and internal management VaR to better reflect our underlying risks.
     These changes were approved by FINMA and are summarized below.
(AUDITED)–In third quarter 2009, we changed the calibration of our management VaR from a 10-day 99% measure to a 1-day 95% measure. We consider that a 1-day 95% measure reflects the way that trading risks are viewed and managed by the business and can be more directly compared with daily mark-to-market revenues. We continue to use a 10-day 99% VaR to determine regulatory capital and a 1-day 99% measure to backtest our VaR model in accordance with Basel II and FINMA requirements.
–We increased the scope of regulatory VaR in third quarter 2009 to incorporate a significant proportion of our market risk exposures to credit valuation adjustments (CVA). CVA is the mark-to-market cost of protection required to hedge credit risk from counterparties in our over-the-counter derivatives portfolio. This change more accurately represents the underlying risk exposures alongside their related hedges in our regulatory VaR. The same enhance-




UBS: Value-at-Risk (10-day, 99% confidence, 5 years of historical data)
                                 
  Year ended 31.12.09 Year ended 31.12.08
CHF million Min.  Max.  Average  31.12.09  Min.  Max.  Average  31.12.08 
 
Business divisions
                                
 
Investment Bank  179   541   315   286   240   601   374   485 
 
Wealth Management & Swiss Bank1
  0   1   0   0             
 
Wealth Management Americas1
  15   32   21   30   1   17   4   16 
 
Global Asset Management  0   7   2   1   1   7   2   6 
 
Corporate Center  2   67   14   7   3   93   26   10 
 
Diversification effect  2   2   (37)  (23)  2   2   (34)  (25)
 
Total regulatory VaR
  187   545   315   301   246   609   373   492 
 
Diversification effect (%)          (11)  (7)          (8)  (5)
 
1 Split of former Global Wealth Management & Business Banking into Wealth Management & Swiss Bank and WM Americas not available for 2008, therefore all 2008 Global Wealth Management & Business Banking figures shown under WM Americas.  2 As the minimum and maximum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification effect.


Investment Bank: Value-at-Risk (10-day, 99% confidence, 5 years of historical data)
                                 
  Year ended 31.12.09 Year ended 31.12.08
CHF million Min.  Max.  Average  31.12.09  Min.  Max.  Average  31.12.08 
 
Risk type
                                
 
Equities  55   115   71   57   82   185   131   117 
 
Interest rates  64   149   98   116   112   364   198   131 
 
Credit spreads  216   489   332   322   151   613   322   412 
 
Foreign exchange  4   55   27   27   12   58   28   30 
 
Energy, metals & commodities  9   25   16   12   14   60   30   22 
 
Diversification effect  1   1   (229)  (248)  1   1   (335)  (226)
 
Total regulatory VaR
  179   541   315   286   240   601   374   485 
 
Diversification effect (%)          (42)  (46)          (47)  (32)
 
1 As the minimum and maximum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification effect.

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Risk management and control
UBS: Value-at-Risk (1-day, 99% confidence, 5 years of historical data)1
                                      
      Year ended 31.12.09   Year ended 31.12.08 
CHF million     Min.  Max.  Average  31.12.09   Min.  Max.  Average  31.12.08 
 
Investment Bank  Regulatory VaR2   63   167   103   78    96   210   132   162 
 
UBS
  Regulatory VaR2   64   170   104   79    97   207   133   163 
 
1 10-day 99% regulatory VaR and 1-day 99% regulatory VaR results are calculated separately from underlying positions and historical market moves. They cannot be inferred from each other.  2 Backtesting is based on 1-day 99% regulatory VaR.

       
(AUDITED)   ment was implemented for our management VaR during third quarter 2008. Monoline CVA and related exposures were not included as part
(Audited)Group: value-at-risk (1-day, 95% confidence, 5 years of this implementation and also remain outside the scope of management VaR.historical data)
  –Concurrently with the abovementioned changes, we changed our VaR methodology to an equivalent expected tail loss (ETL) measure. The ETL measure considers the overall distribution of losses in the VaR tail to determine the VaR loss at any given confidence level. We therefore consider the ETL measure to be more stable and to better identify losses around the VaR tail than a pure quantile measure based on a single observation in the VaR distribution.
   The tables in this section show our 1-day 95% management VaR, 10-day 99% management VaR and 1-day 99% backtesting VaR forFor the Group andyear ended 31.12.10For the Investment Bank. We have provided additional granularity in the tables related to the Investment Bank by splitting out VaR for interest rate risk and credit spread risk. As at 31 December 2008 we disclosed an aggregate VaR for our interest rate and credit spread risk.year ended 31.12.09
(AUDITED)CHF million, except where indicatedMin.  The Max.Average31.12.10Min.Max.Average31.12.09
Business divisions
Investment Bank’s averageBank4278566843755554
Wealth Management & Swiss Bank00000000
Wealth Management Americas13212333
Global Asset Management00000100
Treasury activities and other corporate items2228521654
Diversification effect11(10)(7)11(8)(7)
Total management VaR, Group24276576844785554
Diversification effect (%)(15)(9)(13)(11)
1 As the minimum and maximum occur on different days for different business divisions, it is not meaningful to calculate a portfolio diversification effect.   2 Includes all positions subject to internal management VaR limits.
(Audited)Investment Bank: value-at-risk (1-day, 95% confidence, 5 years of historical data)
For the year ended 31.12.10For the year ended 31.12.09
CHF million, except where indicatedMin.Max.Average31.12.10Min.Max.Average31.12.09
Risk type
Equities1137191713362221
Interest rates1344242316382423
Credit spreads4270555933654650
Foreign exchange2157621264
Energy, metals & commodities28372543
Diversification effect11(51) decreased(43)11(47)(47)
Total management VaR, Investment Bank24278566843755554
Diversification effect (%)(48)(39)(46)(47)
1 As the minimum and maximum occur on different days for different risk types, it is not meaningful to CHF 55 million in 2009 compared with CHF 79 million in 2008. Period-endcalculate a portfolio diversification effect.   2 Includes all positions subject to internal management VaR was also lower at CHF 54 million at 31 December 2009 compared with CHF 74 million at 31 December 2008.limits.

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Risk management and control

       
  Value-at-risk developments in 2010
The tables in this section show our 1-day 95% management VaR for the Group and the Investment Bank.
(Audited)    The Investment Bank’s average management VaR (1-day 95%) increased slightly to CHF 56 million in 2010 compared with CHF 55 million in 2009. Period-end VaR was higher at CHF 68 million on 31 December 2010 compared with CHF 54 million on 31 December 2009. This decreaseincrease was driven by our activea result of the execution of the growth plans in the Investment Bank as the market risk reduction across all risk types in 2009.profile increased from previously low levels. Credit spread VaR remained the dominant component of the Investment Bank’s VaR.
(AUDITED) VaR for the Group as a whole followed a similar pattern toas the Investment BankBank’s VaR.
èRefer to “Note 27c Fair value of financial instruments” in the “Financial information” section of this report for valuation sensitivities on certain portfolios and positions
       
(AUDITED) Backtesting
(Audited) Backtesting compares 1-day 99% regulatory VaR calculated for positions at the close of each business day with the revenues which actually arise on those positions on the following business day. Our backtesting revenues exclude non-trading revenues, such as fees and commissions and estimated revenues from intraday trading. A backtesting exception occurs when backtesting revenues are negative and the absolute value of those revenues is greater than the previous day’s VaR.
      We experienced one backtesting exception in 2010 compared with four backtesting exceptions in 2009 compared with 50 backtesting exceptions2009. This exception was due to extreme market moves which followed the announcement of the European Central Bank’s financial aid package for certain European countries in 2008. This significant reduction resulted among other reasons from improvements made in the granularity of risk representation in our VaR model (particularly related to credit spread risk) and more frequent update of VaR parameters as well as lower market volatility experienced in 2009.


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(BAR GRAPH)
1 Backtesting revenues exclude non-trading revenues, such as commissions and fees, and revenues from intraday trading.
May 2010.
      The first histogram abovechart on the right-hand side shows dailythe 12-month development of 1-day 99% VaR against backtesting revenues in the Investment Bank for the whole of 2009. In2010. The histogram on the second histogram,right-hand side shows the daily backtestingInvestment Bank’s full trading revenues are compared with the corresponding VaR over the same 12-month period for days when backtesting revenues were negative. A positive resultdistribution in this histogram represents a loss less than VaR while a negative result represents a loss greater than VaR and therefore a backtesting exception.2010.
      We investigate all backtesting exceptions and any exceptional revenues on the profit side of the VaR distribution. In addition, we report all backtesting results to senior business management, the Group CROChief Risk Officer (Group CRO) and business division CROs.
(Audited)(Audited)     Backtesting exceptions are also reported to internal and external auditors and to the relevant regulators.
(BAR GRAPH)
Investment Bank: development of backtesting revenues1 against value-at-risk
(GRAPH)
1 Excludes non-trading revenues, such as commissions and fees, and revenues from intraday trading.
Investment Bank: all revenue distribution1 Backtesting revenues exclude non-trading revenues, such as commissions and fees, and revenues from intraday trading. Analysis for loss only.
(GRAPH)
1 Includes all revenues from business areas which have trading activities.


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Non-trading portfolios
(Audited)
For the purposes of our disclosure, the market risks associated with our non-trading portfolios are quantified using sensitivity analysis. This includes an aggregate measure of our exposures to interest rate risk in the banking book and specific sensitivity information for certain significant portfolios and positions that are not included in our management VaR.
Interest rate risk in the banking book
The banking book consists ofAvailable-for-sale instruments, Loans and receivables,certainInstruments designated at fair value through profit or loss,derivatives measured at fair value through profit or loss and derivatives employed for cash flow hedge accounting purposes, as well as related funding transactions. These positions may impact other comprehensive income or profit or loss, due to differences in accounting treatment.
    All interest rate risk is subject to independent risk control. When not included in our VaR measure, interest rate risk is subject to specific monitoring, which may include interest rate sensitivity analysis, EaR, CaR and CST metrics. Interest rate risk sensitivity figures are provided for the impact of a 1-basis-point parallel increase in yield curves on present values of future cash flows, irrespective of accounting treatment.
(Audited)
    Our largest banking book interest rate risk exposures arise primarily from activities such as retail banking and lending in our Wealth Management & Swiss Bank division, as well as our treasury activities, which are mainly hedged.
    The interest rate risks arising in the Wealth Management & Swiss Bank are transferred either by means of back-to-back transactions or, in the case of products with no contractual maturity date or direct market-linked rate, via “replicating” portfolios from the originating business into one of two centralized interest rate risk management units: Group Treasury or the Investment Bank’s fixed income, currencies and commodities (FICC) unit. These units manage the risks as part of their risk portfolios within their allocated market risk limits and controls, on an integrated basis, exploiting the netting potential across interest rate risks from different sources.
    The Investment Bank’s portfolio of assets that were reclassified toLoans and receivablesfromHeld-for-tradingin the fourth quarter of 2008 and the first quarter of 2009, and certain other debt
(Audited)
securities held asLoans and receivables,also give rise to non-trading interest rate risk.
    Interest rate risk within Wealth Management Americas arises from the business division’s investment portfolio in addition to its lending and deposit products offered to clients.
    Interest rate risk is closely measured, monitored and managed within approved risk limits and controls. Interest rate risk management incorporates the effects of natural risk offsets inherent within the balance sheet of Wealth Management Americas.
(Audited)    The interest sensitivity of non-contractual maturity products is modeled using historical behavior patterns from a complete interest rate cycle.
    Group Treasury manages two main types of interest rate risk positions. One type is the risk transferred from Wealth Management & Swiss Bank’s banking operations (mentioned above). The other type arises from investing or funding non-monetary corporate balance sheet items that have indefinite lives such as equity and goodwill. For these items we have defined specific target durations based on which we fund and invest as applicable. These targets are defined by replication portfolios, which establish rolling benchmarks to execute against. The table below captures any residual risk in the Group Treasury books against these benchmarks. This activity and associated sensitivities of these replication portfolios are further discussed in the Group Treasury section.
    In addition to its regular risk management activities, Group Treasury has been executing transactions that aim to economically hedge negative effects on the firm’s net interest income stemming from the extraordinarily low yield environment. These positions are the cause of the significant increase of our interest rate risk in the banking book compared to 2009.
    èRefer to “Group Treasury” section for more information on investment of equity
    The impact of an adverse parallel shift in interest rates of 200 basis points on our banking book interest rate risk exposures is significantly below the threshold of 20% of eligible regulatory capital specified by regulators. This is designed to identify banks that may be required to hold additional regulatory capital against this risk.
(Audited)
Interest rate sensitivity of available-for-sale bond investments
In addition to the above economic risk view which also considers off-setting positions, we provide below the accounting view of


           
(Audited) Impact of a 1-basis-point parallel increase in yield curves on present value of future cash flows1 
CHF million 31.12.10  31.12.09 
 
CHF  (0.7)  (0.3)
 
EUR  (2.1)  (0.2)
 
GBP  (2.9)  (0.3)
 
USD  (10.7)  (0.8)
 
Other  (0.3)  (0.1)
 
Total impact on interest rate-sensitive banking book positions
  (16.6)  (1.8)
 
1 Does not include interest rate sensitivities in respect of our inventory of student loan ARS or our commitment to purchase client holdings of student loan ARS. From an economic perspective these exposures are not materially affected by parallel shifts in USD interest rates, holding other factors constant.

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Risk management and control

(Audited)
debt investments classified according to IFRSas Financial investments available-for-sale,which are measured at fair value through other comprehensive income. Debt financial instruments classified asFinancial investments available-for-saleamounted to CHF 73.4 billion on 31 December 2010. A 1-basis-point increase in the respective yields of the IFRS debt instruments available-for-sale portfolio would have decreased equity by approximately CHF 15 million from fair value changes posted to OCI. This estimation excludes economic off-setting positions and is included in the above table on interest rate-sensitivities in the banking book, together with partially offsetting hedge and funding effects, or in disclosed VaR.
èRefer to “Note 13 Financial investments available-for-sale” in the “Financial information” section of this report for more information
èRefer to “Debt investments” in the “Credit risk” section of this report for more information
(Audited)Interest rate sensitivity of interest rate swaps designated in cash flow hedges
To the extent effective, interest rate swaps designated in cash flow hedges are accounted for at fair value through equity under IFRS. Amounts deferred in equity are released to the income statement according to the occurrence of the underlying hedged interest cash flows. Interest rate swaps designated in cash flow hedges are denominated in USD, EUR, GBP, CHF and CAD. At 31 December 2010, fair values of interest rate swaps amounted to CHF 5.4 billion (positive replacement values) and CHF 3.4 billion (negative replacement values). The impact on other comprehensive income under IFRS of a 1-basis-point increase of underlying LIBOR curves would have decreased equity by approximately CHF 21 million. This estimation excludes economic offsetting positions and is included in the above table on interest rate sensitivities in the banking book, together with partially offsetting hedge and funding effects.
Non-trading portfolios – valuation and sensitivity information by instrument category
This section includes a description of the valuation of certain significant product categories and related valuation techniques and models. In addition, sensitivity information is provided for certain significant instrument categories that are excluded from management VaR as disclosed in the “Risk and treasury management” section of this report.
Credit valuation adjustments on monoline credit
protection
UBS previously entered into negative basis trades with monolines, whereby they provided CDS protection against UBS-held underlyings, including residential and commercial mortgage-backed securities collateralized debt obligations (RMBS and CMBS CDO), trans-
(Audited)actions with CLO, and asset-backed securities collateralized debt obligations (ABS CDO). Since the start of the financial crisis, the CVA relating to these monoline exposures have been a source of valuation uncertainty, given market illiquidity and the contractual terms of these exposures relative to other monoline-related instruments.
    CVA amounts related to monoline credit protection are based on a methodology that uses CDS spreads on the monolines as a key input in determining an implied level of expected loss. Where a monoline has no observable CDS spread, a judgment is made on the most comparable monoline or combination of monolines, and the corresponding spreads are used instead. For RMBS CDO, CMBS CDO, and CLO asset categories, cash flow projections are used in conjunction with current fair values of the underlying assets to provide estimates of expected future exposure levels. For other asset categories, future exposure is derived from current exposure levels.
    To assess the sensitivity of the monoline CVA calculation to alternative assumptions, the impact of a 10% increase in monoline CDS spreads (e.g. from 1,000 basis points to 1,100 basis points for a specific monoline) was examined. On 31 December 2010, such an increase would have resulted in an increase in the monoline credit valuation adjustment of approximately USD 45 million (CHF 42 million) compared with USD 77 million or CHF 80 million on 31 December 2009.
    The sensitivity of the monoline CVA to a decrease of one percentage point in the monoline recovery rate assumptions (e.g. from 35% to 34% for a specific monoline, conditional on default occurring) is estimated to result in an increase of approximately USD 9 million (CHF 8 million) in the CVA, compared with USD 26 million or CHF 27 million on 31 December 2009. The sensitivity to credit spreads and recovery rates is substantially linear.
US reference-linked notes
The US reference-linked notes (RLN) consist of a series of transactions whereby UBS purchased credit protection, predominantly in note form, on a notional portfolio of fixed income assets. The referenced assets are comprised of USD asset-backed securities (ABS). These are primarily commercial mortgage-backed securities and subprime residential mortgage-backed securities and/or corporate bonds and loans across all rating categories. While the assets in the portfolio are marked-to-market, the credit protection embodied in the RLN is fairly valued using a market standard approach to the valuation of portfolio credit protection (Gaussian copula). This approach is intended to effectively simulate correlated defaults within the portfolio, where the expected losses and defaults of the individual assets are closely linked to the observed market prices (spread levels) of those assets. Key assumptions of the model include correlations and recovery rates. UBS applies fair value adjustments related to potential uncertainty in each of these


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(Audited)parameters, which are only partly observable. In addition, UBS applies fair value adjustments for uncertainties associated with the use of observed spread levels as the primary inputs. These fair value adjustments are calculated by applying shocks to the relevant parameters and revaluing the credit protection. These shocks for correlation, recovery and spreads are set to various levels depending on the asset type and/or region and may vary over time depending on the best judgment of the relevant trading and control personnel. Correlation and recovery shocks are generally in the reasonably possible range of 5 to 15 percentage points. Spread shocks vary more widely and depend on whether the underlying protection is funded or unfunded to reflect cash or synthetic basis effects.
    On 31 December 2010, the fair value of the US RLN credit protection was approximately USD 629 million (CHF 588 million) compared with USD 1,431 million (CHF 1,481 million) on 31 December 2009. This fair value includes fair value adjustments which were calculated by applying the shocks described above of approximately USD 31 million (CHF 29 million). This compares with USD 71 million (CHF 74 million) on 31 December 2009. The fair value adjustments may also be considered a measurement of sensitivity.
Non-US reference-linked notes
The same valuation model and approach to the calculation of fair value adjustments are applied to the non-US RLN credit protection and the US RLN credit protection as described above, except that the spread is shocked by 10% for European corporate names.
    On 31 December 2010, the fair value of the non-US RLN credit protection was approximately USD 660 million (CHF 616 million) compared with USD 1,050 million (CHF 1,087 million) on 31 December 2009. This fair value includes fair value adjustments which were calculated by applying the shocks described above of approximately USD 72 million (CHF 67 million) compared with USD 105 million (CHF 109 million) on 31 December 2009. This adjustment may also be considered a measurement of sensitivity.
Option to acquire equity of the SNB StabFund
UBS’s option to purchase the SNB StabFund’s equity is recognized on the balance sheet as a derivative at fair value (positive replacement values) with changes to fair value recognized in profit or loss. On 31 December 2010, the fair value (after adjustments) of the call option held by UBS was approximately USD 1,906 million (CHF 1,781 million) compared with USD 1,174 million (CHF 1,216 million) on 31 December 2009.
    The model incorporates cash flow projections for all assets within the fund across various scenarios. It is calibrated to market levels by setting the spread above the one-month Libor rates used
(Audited)to discount future cash flows such that the model-generated price of the underlying asset pool equals UBS’s assessed fair value of the asset pool. The model incorporates a model reserve (fair value adjustment) to address potential uncertainty in this calibration. On 31 December 2010, this adjustment was USD 250 million (CHF 234 million) compared with USD 262 million (CHF 271 million) on 31 December 2009.
    On 31 December 2010, a 100-basis-point increase in the discount rate would have decreased the option value by approximately USD 167 million (CHF 156 million), and a 100-basis-point decrease would have increased the option value by approximately USD 188 million (CHF 176 million).
     
  Stress loss
     
  As aTo complement to VaR and other measures of market risk, we also run macro stress scenarios, combining various market moves to reflect the most common types of potential stress events, andas well as more targeted stress tests for our concentrated exposures and vulnerable portfolios. Targeted stress tests are typically applied to specific asset classes or to specific markets and products. We enhancedcontinued to enhance our market risk stress framework in 20092010, in order to increase the scope and granularity of ourthe analysis. This included updating stressOur scenarios to more accurately capture the liquidity characteristics of different markets, asset classes and positions, and implementing a stress scenario to reflect the extreme market conditions that were experienced at the height of the financial crisis in fourth quarter 2008.positions.
      Our market risk stress testing framework attemptsis designed to provide a control framework that is forward-looking and responsive to changing market conditions. Our stress scenarios are therefore reviewed regularly in the context of the macro-economicmacroeconomic and geopolitical environment by a committee comprised of representatives from the business divisions, Risk Control and Economic Research. In response to changing market conditions and new developments around the world, we develop and run ad hoc stress scenarios to assess the potential impact on our portfolio.
  è

 Refer to the discussion on stress loss in the “Risk management and control”this section of this reportfor more information
     
  Equity investments
     
(Audited)(Audited) 
Under IFRS, equity investments not in the trading book may be classified asFinancial investments available-for-sale, Financial assets designated at fair value through profit or lossorInvestments in associates.
We make investments for a variety of purposes, including revenue generation or as part of strategic initiatives. Other investments, such as exchange and clearing house memberships, are held into support of our business activities. We may also make investments in funds that we manage, in order to fund or “seed” them at inception, or to demonstrate alignment of our interests with those of


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Risk management and control

(Audited)
investors. We have also boughtbuy, and may beare sometimes required by agreement to buy, securities and units from funds that we have sold to clients. These may include purchases of illiquid assets such as interests in hedge funds.
  We maycan make direct investments in a variety of entities or buy equity holdings in both listed and unlisted companies, whereif such investments tend to beare illiquid. The fair value of equity investments tends to be dominated by factors specific
(Audited)to the individual stocks, and our equity investments are generally intended to be held for the medium-medium or long-termlong term and may be subject to lock-up agreements. For these reasons, we generally do not generally control these exposures using the market risk measures applied to trading activities. Such equity investments are, however, subject to risk controls, including pre-approval of new investments by business management and risk control,Risk Control and regular monitoring and reporting. They are also included in our firm-wide earnings-at-riskEaR, CaR and capital-at-risk, and combined stress testCST metrics.
     Investments made as part of an ongoing business are also subject to our standard controls, including portfolio and concentration limits. Seed money and co-investments in UBS-managed funds made by Global Asset Management are, for example, subject to a portfolio limit. All investments must be approved according toby delegated authorities and are monitored and reported to senior management.
 
     Under IFRS, equity investments may be classified asFinancial investments available-for-sale, Financial assets designated at fair value through profit or lossorInvestments in associates.
    
(Audited) Composition of equity investments
 
AtOn 31 December 2010, we held equity investments totaling CHF 3.0 billion, of which CHF 1.4 billion were classified asFinancial investments available-for-sale, CHF 0.9 billion asFinancial assets designated at fair valueand CHF 0.8 billion asInvestments in associates.
    As of 31 December 2009, we held equity investments totaling CHF 3.1 billion, of which CHF 1.4 billion were classified asFinancial investments available-for-sale, CHF 0.8 billion asFinancial assets designated at fair valueand CHF 0.9 billion asInvestments in associates.associates.
 
     As of 31 December 2008, we held equity investments totaling CHF 3.7 billion, of which CHF 1.7 billion were classified asFinancial investments available-for-sale,CHF 1.1 billion asFinancial assets designated at fair valueand CHF 0.9 billion asInvestments in associates.
 
    The vast majority of the CHF 0.80.9 billion ofFinancial assets designated at fair valuerepresented the assets of trust entities associated with employee compensation schemes. They are broadly offset by liabilities to plan participants included inOther liabilities.liabilities. The equivalent positions aton 31 December 20082009 amounted to CHF 1.10.8 billion.
  è Refer to “Note 12 Financial assets designated at fair value” in the “Financial information” section of this report for further information
  è Refer to “Note 13 Financial investments available-for-sale” in the “Financial information” section of this report for further information
  è Refer to “Note 14 InvestmentInvestments in associates” in the “Financial information” section of this report for further information


136140

Risk and treasury management

Operational risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, peoplehuman error and systems (for example, failed IT systems or fraud perpetrated by an employee),failure, or from external causes whether deliberate,(deliberate, accidental or natural. We monitornatural). Events may be manifested as direct financial losses or indirectly in the form of revenue forgone as a result of business suspension. They may also result in damage to our reputation and to our franchise causing longer term financial consequences. Managing risk is a core element of our business activities, and operational risk is an inevitable consequence of being in business. Our aim is not to eliminate every source of operational risk, but to provide a framework that supports the identification and assessment of all material operational risks and their potential concentrations in order to achieve an appropriate balance between risk and return.
Management and risk committees are the extent possible, controlgoverning bodies responsible for oversight and mitigate them to levels consideredactive discussion of risk management activities, including the question of whether or not the cost of mitigating actions is adequately balanced against the acceptable by senior management. level of operational risk. Management, in all functions, is responsible for establishing an appropriate operational risk management environment, including the establishment and maintenance of robust internal controls and a strong risk culture.
The Group Head of Operational Risk Control (ORC) is responsible for the effective design of the operational risk framework.
Operational risk framework
All the firm’s functions (whether business, control or logistics functions) must manage the operational risks that arise from their activities. The basis of our operational risk framework is that all functions adequately define their roles(ORF) and responsibilities to ensure they have adequate segregation of duties, complete coverage of risks and clear accountability. From this analysis,monitors its implementation in the functions develop control objectives and standards based on the types of operational risk events that might arise from their activities ranging, for example, from daily reconciliation problems to potentially severe events such as fraud. We recognize that we cannot eliminate all our operational risks because errors and accidents will happen, and that even where it is possible to eliminate certain risks, it is not always cost effective to do so.
     Our functions apply controls to monitor compliance and assess the operating effectiveness of their control frameworks in a number of ways. These include self-certification by staff, monitoring a wide range of metrics (for example, the number and characteristics of client complaints, deal cancellations and corrections, un-reconciled items on cash and customer accounts and systems failures) and analysis of internal and external audit findings. As major financial and non-financial operational risk events occur, we evaluate their causesbusiness divisions and the implications for our control framework. This includes an assessmentCorporate Center. The Group Head of events affecting third parties that may be relevant to our businesses, provided that sufficient information is publicly available.
     All this information is reviewed by functional managers to assess the operational risk exposure of their function and to determine the actions needed to address any specific issues. These issues are captured in a risk inventory, which forms the basis of operational risk reporting to senior management.
     Operational risk control units, reporting functionallyORC reports to the Group HeadRisk Chief Operating Officer, who is a member of the Risk Executive Committee, and chairs the ORC Management Committee, composed of the Heads of Operational Risk Control confirmfrom each business division including the effectiveness ofCorporate Center. The ORC Management Committee is the implementation of themain decision-making committee for all operational risk framework matters.

Operational risk framework

The operational risk framework sets general requirements for managing and perform independent oversightcontrolling operational risk, including implementation by divisional and functional management. The framework

requires that all material operational risks be identified, appropriately measured, monitored, controlled and reported.
A comprehensive operational risk classification taxonomy exists, which defines all operational risks arising from business activities. It enables a common understanding, and provides a standard and consistent categorization of operational risks across all business divisions and the Corporate Center. The operational risk taxonomy forms the backbone of operational risk assessment and reporting. Critically, it provides a transparent link to the health of the conclusions reachedinternal control environment. Relevant operational risk indicator data, for example internal and external loss events, are assigned to taxonomy categories, which are:
–theft, fraud and unauthorized activity
–employment-related risks
–business practices
–operating and legal entity governance
–client selection and monitoring
–investment suitability, maintenance and servicing
–data confidentiality and protection
–product risks and business due diligence
–transaction processing and operational reliability
–technology risks
–vendors and offshoring
–valuation and reporting
–primary risk management and control
As a consequence of the legal and regulatory environment we operate in, many of the above categories include significant litigation and regulatory exposures.
The operational risk appetite applied to our business activities is expressed through the establishment of quantitative constraints, such as operating limits and an internal control environment with associated performance thresholds, and / or qualitative constraints such as standards and requirements as set by functional management.policy.
Senior management is required to maintain a robust and comprehensive set of internal controls, and must continuously assess both their design and operational adequacy. The operational risk framework assesses both the aggregated impact of recorded deficiencies on the firm’s operational risk profile and the adequacy


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Risk management and control

of remediation efforts undertaken. Senior management considers whether the current level of operational risk is acceptable, and, if not, must adapt their business activities or adjust the internal control environment accordingly.
Material operational risks and significant internal control deficiencies are identified and reported at least quarterly to stakeholders, including the BoD, GEB, divisional/regional/local management, Group Internal Audit, external auditors and regulators.

Operational risk measurement

We have developed a model for the quantification of our operational risk, which meets the regulatory capital standard specified by the Basel II Advanced Measurement Approachadvanced measurement approach (AMA). Our model has two main components:components. The expected loss component is a statistical measure based on our own historical loss experiences (collected since 2002), and is used primarily to determine the expected loss portion of our capital requirement. The unex-

–The expected loss component is a statistical measure based on our own historical loss experiences (which have been collected since 2002) and is used primarily to determine the expected loss portion of our capital requirement.
–The unexpected
pected loss component is based on a set of generic scenarios that represent categories of operational risks that are relevant to our firm. The scenarios used are based on analysis of generic scenarios representing categories of operational risks that are relevant to the firm. The scenarios are reviewed extensively on an annual basis by internal experts, using internal and external event information, information about the prevailing business environment and our own internal control environment. This component is used to determine the unexpected loss portion of our capital requirement.
The ORC owns and manages the AMA process that determines operational risk regulatory capital and the allocation of capital to the business divisions and the Corporate Center.
We calculate our operational risk regulatory capital requirement using the AMA model for the consolidated Group and the parent bank in accordance with the requirements of FINMA.FINMA requirements. For regulated subsidiaries, the basic indicator or standardized approaches are adopted as agreed with local regulators.
Currently, we do not reflect mitigation through insurance or any other risk transfer mechanism in our AMA model.
è Refer to the “Capital management” section of this report for more information on the development of RWA for operational risk


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Risk and treasury management
Risk management and control
Risk management and control renewal program

In third quarter 2008, FINMA concluded its investigation into the causes of the significant writedowns that we incurred in 2007 and 2008. It confirmed our own conclusions in all material respects and we developed a comprehensive and detailed plan to eliminate the weakness we identified.
We have made further progress in completing remediation activities and
developing sustainable solutions in 2009. This includes strategic planning and business reviews (including enhancements to our new business approval process); integrated executive reporting combining risk, treasury and financial information; changes to the risk governance framework and the Risk Management and Control organization; enhancements to our risk measurement and methodologies;
changes to our capital optimization model; improvements in front office controls around trade capture and valuation; and enhancements to our funding and balance sheet management.
Remediation activities will continue in certain areas requiring more significant or strategic changes to processes, systems and infrastructure.


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Risk and treasury management

Risk concentrations

     
  Risk concentrations
     
(Audited)(Audited) A risk concentration exists where: (i) a position in financial instruments is affected by changes in a group of correlated factors, or a group of positions isare affected by changes in the same risk factor or a group of correlated factors; and (ii) the exposure could, in the event of large but plausible adverse developments, result in significant losses.
     The identification of risk concentrations requires judgment, as potential future developments cannot be predicted and may vary from period to period. In determining whether we have a risk concentration, we consider a number of elements, both individually and collectively. These elements include: the shared characteristics of the instruments and counterparties; the size of the position or group of positions; the sensitivity of the 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 in whichwhere the instruments are traded, and the availability and effectiveness of hedges or other potential risk mitigants.mitigating factors. The value of a hedge instrument may not always move in line with the position being hedged, and this mismatch is referred to as basis risk.
     If we identify a risk concentration, we assess it to determine whether it should be reduced or mitigated, and we also evaluate the available means to do so. Our identified risk concentrations are subject to increased monitoring.
     
  Identified risk concentrations
     
(Audited)(Audited) Based on our assessment of our portfolios and asset classes with potential for material loss in a stress scenario relevant to the current environment, we believe that our exposures to monoline insurers and student loan auction rate securities shown below can be considered as risk concentrations onas of 31 December 2009, according to2010, in accordance with the abovementioned definition.
     It is possible that material losses could occur on asset classes, positions and hedges other than those disclosed in this section of the report, particularly if the correlations that emerge in a stressed environment differ markedly from those we anticipated. We are exposed to price risk, basis risk, credit spread risk and default risk andas well as other idiosyncratic and correlation risks on both our equities and fixed income inventories. We also have price risk on our option to acquire the SNB StabFund’s equity.
  In addition, we have lending, counterparty and country risk exposures that could sustainresult in significant losses if economic conditions were to worsen.
  è èRefer to the discussion of credit risk, market risk and operational risk above for more information on the risks to which we are exposed
   
 Previously disclosed risk concentrations
   
(Audited)
In 2009, we significantly reduced exposures to our residual leveraged finance commitments, which were defined as loan commitments entered into with the intent to syndicate or distribute that we assigned an internal credit rating corresponding with external corporate credit ratings of BB– or worse at the time of reporting. We achieved these reductions through both sales and writedowns, and as a result our remaining positions in leveraged finance commitments are no longer considered as a risk concentration. We previously reported exposures on 31 December 2008 to leveraged finance commitments of USD 4.0 billion, net of cumulative gross writedowns, impairment charges and effective hedges.
 Exposure to monoline insurers
(Audited) 
The vast majority of our direct exposures to monoline insurers arise from OTC derivative contracts,transactions, mainly CDSsCDS purchased to hedge specific positions. The “Exposure to monoline insurers by rating” table shows the CDS protection we boughtpurchased from monoline insurers to hedge specific positions. It illustrates the notional amounts of the protection held, the fair value of the underlying instruments and the fair value of the CDSsCDS both prior to and after the CVA taken on these contracts. As a result of trade commutations, and because a significant portion of the underlying assets are classified asLoans and receivablesfor accounting purposes, the change in CVA reported in the table does not equal the profit andor loss associated with this portfolio during the year toended 31 December 2009.2010.
  Our exposure    Exposure under CDS contracts with monoline insurers is calculated as the sum of the fair values of individual CDSsCDS after credit valuation adjustments.CVA. Changes in CVA result from changes in CDS fair value. This, in turn, depends onarises from changes in the valuationfair value of the instruments against which protection has been bought. A positive fair value, or a valuation gain, on the CDS is recognized if the fair value of the instrument it is intended to hedge decreases. Changes in CVA are driven by changes in CDS fair valuepurchased, and also byfrom movements in monoline credit spreads.
  We    UBS actively reduced our exposures to monoline insurers in 20092010 by commuting trades with several monoline insurers.trades. The trade commutations related primarily to US RMBS collateralized debt obligations (CDOs)CDO that we had substantially written down on a fair value basis. Combined with the improved performance and composition of the portfolio, the fair values of our remaining assets hedged with monoline insurers increased over the period, with a corresponding decrease in the fair values of the related CDSs. As atCDS. On 31 December 2009,2010, based on fair values, approximately 75%73% of the remaining assets were


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Risk and treasury management
Risk management and control

(Audited)
collateralized loan obligations (CLOs)(CLO), 20%25% were collateralized mortgage-backed securitiesCMBS and other asset-backed securities, and 5%only 2% related to US RMBS CDOs.CDO. The vast majority of ourthe CLO positions were rated AA and above.
  As at    On 31 December 2009,2010, the total fair value of CDS protection purchased from monoline insurers decreased significantly to USD 1.6 billion (USD 2.3 billion (USD 5.3 billion aton 31 December
(Audited)2008) 2009) after cumulative CVAsCVA of USD 1.1 billion (USD 2.8 billion (USD 7.0 billion aton 31 December 2008)2009). These exposures do not take into account any hedging benefits.
  In addition to credit protection boughtpurchased on the positions detailed in the table, above, weon 31 December 2010 UBS held direct derivative exposure to monolinesmonoline insurers of USD 329240 million after CVAsCVA of 199 million on 31 December 2009.USD 143 million.
  è èRefer to “Note 27c Fair value of financial instruments”the discussion on credit valuation adjustments on monoline credit protection in the “Financial information”this section of thisthe report for more information on CVA valuation and sensitivities


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Risk and treasury management
Risk management and control

                       
(Audited) Exposure to monoline insurers, by rating1 
   31.12.10 
           Fair value of      Fair value of 
       Fair value  CDS prior to  Credit  CDS after 
   Notional  of underlying  credit valuation  valuation  credit valuation 
   amount3  assets  adjustment  adjustment  adjustment 
         Column 3     Column 5 
 USD million Column 1  Column 2  (=1–2)  Column 4  (=3–4) 
   
  
Credit protection on US sub-prime residential mortgage-
backed securities (RMBS) CDO, all from monolines rated
sub-investment grade (BB and below)2
  750   204   546   385   161 
   
  
Credit protection on other assets2
  11,156   9,0024  2,153   702   1,451 
   
  
of which: from monolines rated investment grade (BBB and above)
  2,288   1,935   353   68   285 
   
  
of which: from monolines rated sub-investment grade (BB and below)
  8,868   7,067   1,800   634   1,166 
   
  
Total 31.12.10
  11,906   9,206   2,699   1,087   1,612 
   
  Total 31.12.09  14,187   9,083   5,103   2,795   2,308 
   
  
1 Excludes the benefit of credit protection purchased from unrelated third parties.  2 Categorization based on the lowest insurance financial strength rating assigned by external rating agencies.  3 Represents gross notional amount of CDS purchased as credit protection.  4 Includes USD 5.8 billion (CHF 5.4 billion) at fair value / USD 5.6 billion (CHF 5.3 billion) at carrying value of assets that were reclassified to Loans and receivables from Held for trading in the fourth quarter of 2008. Refer to “Note 29b Reclassification of financial assets” in the “Financial information” section of this report.

   
  
(Audited)Exposure to student loan auction rate securities
(Audited)
 
Auction rate securities held by the Investment Bank
Approximately USD 1.68.6 billion at par value of student loan auction rate securities (ARS)ARS were redeemed by issuers, or sold by us in the secondary market, in 2009.

2010.
    We have committed to restore liquidity to certain client holdings of ARS. This commitment is in line with previously announced agreements in principle with various US state agencies, as well as the final settlements entered into with the Massachusetts Securities Division, the US Securities and Exchange Commission and the New York State Attorney General. We repurchased USD 3.77.6 billion at par value of student loan ARS in 2009,2010, including approximately USD 0.54 billion of student loan ARS where we accelerated the repurchase from our clients in order to facilitate redemptions with issuers or resales. Combined with other redemptions directly with clients and amortizations, this resulted in an overall decrease of USD 3,9587,754 million to USD 7,817 million asin the maximum repurchase amount at par of 31 December 2009 compared with 31 December 2008, in our commitment to repurchase student loan ARS from clients as described below.

required by the regulatory settlements (as shown in the table “Client holdings: student loan ARS”) compared with a reduction of USD 3,958 million in 2009. On 31 December 2010,
(Audited)
our outstanding repurchase commitment was USD 63 million. This concerns institutional client holdings of student loan ARS, and the relevant buy-back window will close on 2 July 2012.
Our inventory of student loan ARS increaseddecreased by USD 1,985563 million to USD 10,3479,784 million in 2009as of 31 December 2010 as a result of the abovementioned redemptions, resales and amortizations. These were largely offset by student loan ARS repurchased in the period which were partially offset by
(Audited)the abovementioned redemptions, resales and amortizations.

Atperiod. On 31 December 20092010, approximately 69%77% of the collateral underlying our inventory of student loan ARS was backed by Federal Family Education Loan Program (FFELP) collateral,, which was reinsured by the US Department of Education for not less than 97% of principal and interest. All of our student loan ARS positions are held asLoans and receivablesand are subject to an impairment test that includes a detailed review of the quality of the underlying collateral. Impairment charges incurred on our inventory of student loan ARS in 20092010 were not significant.

USD 145 million (CHF 148 million). Approximately 90%62% of the USD 7,81763 million student loan ARS that we committed to purchase from clients were backed by FFELP-guaranteedFFELP guaranteed collateral.

As at 31 December 2009, we also held inventory with a carrying value of USD 1,423 million in US municipal ARS, USD 1,097 million in US taxable		(Audited)auction preferred securities (APS) and USD 2,729 million in US tax-exempt APS. The vast majority of our inventory of municipal ARS were rated investment grade with approximately 85% rated A or higher. The vast majority of our inventory of taxable and tax-exempt APS were rated AAA. On 31 December 2009, we had not incurred any impairment charges on our inventory of municipal ARS or taxable and tax-exempt APS. As at 31 December 2008, we held USD 451 million in US municipal ARS, USD 782 million in US taxable APS and USD 3,167 million in US tax-exempt APS.

Commitment to repurchase client auction rate securities
We have committed to restore liquidity to certain client holdings of ARS. This commitment is in line with previously announced agreements in principle with various US state agencies, and the final settlements entered into with the Massachusetts Securities Division, the US Securities and Exchange Commission and the New York State Attorney General. The table on the next page shows the maximum repurchase


140144

Risk and treasury management
                       
(Audited) Exposure to monoline insurers, by rating1
 USD million 31.12.09
           Fair value of      Fair value of 
           CDSs prior to  Credit valuation  CDSs after 
       Fair value of  credit valuation  adjustment as of  credit valuation 
   Notional amount3  underlying CDOs4  adjustment5   31.12.09  adjustment 
   Column 1  Column 2  Column 3 (=1-2)  Column 4  Column 5 (=3-4) 
  
 
Credit protection on US sub-prime residential mortgage-backed securities (RMBS) CDOs high grade2
  2,352   457   1,895   1,463   432 
  
 
of which: from monolines rated investment grade (BBB and above)
  0   0   0   0   0 
  
 
of which: from monolines rated sub-investment grade (BB and below)
  2,352   457   1,895   1,463   432 
  
 
Credit protection on other assets2
  11,835   8,6266   3,208   1,332   1,876 
  
 
of which: from monolines rated investment grade (BBB and above)
  2,345   1,911   433   72   361 
  
 
of which: from monolines rated sub-investment grade (BB and below)
  9,490   6,715   2,775   1,260   1,514 
  
 
Total 31.12.09
  14,187   9,083   5,103   2,795   2,308 
  
 Total 31.12.08  21,535   9,204   12,329   6,994   5,335 
  
 
1 Excludes the benefit of credit protection purchased from unrelated third parties.  2 Categorization based on the lowest insurance financial strength rating assigned by external rating agencies.  3 Represents gross notional amount of credit default swaps (CDSs) purchased as credit protection.  4 CDOs: collateralized debt obligations.  5 CDSs: credit default swaps.  6 Includes USD 5.6 billion (CHF 5.8 billion) at fair value/USD 6.0 billion (CHF 6.2 billion) at carrying value of assets that were reclassified toLoans and receivables fromHeld-for-tradingin fourth quarter 2008 and first quarter 2009. Refer to “Note 29b Reclassification of financial assets” in the “Financial information” section of this report for more information.
                       

(Audited)
amount at par of student loan ARS required by the regulatory settlements, which would occur over various time periods according to client type, but not later than 2 July 2012.
Over the same time periods, we also committed to repurchase from clients up to a maximum amount of USD 374 million of municipal ARS, and USD 212 million of taxable and tax-exempt APS at par value on 31 December 2009. As at 31 December 2008, we
           
(Audited) Student loan ARS inventory 
   Carrying value 
  USD million 31.12.10  31.12.09 
   
  US student loan ARS  9,7841  10,347 
   
  
1 Includes USD 4.5 billion net of allowances of USD 0.2 billion (CHF 4.2 billion, net of allowances of CHF 0.2 billion) at carrying value of student loan ARS that were reclassified to Loans and receivables from Held for trading in fourth quarter 2008. Refer to “Note 29b Reclassification of financial assets” in the “Financial information” section of this report for more information.
           
(Audited) Client holdings: student loan ARS 
   Par value of maximum required purchase 
  USD million 31.12.10  31.12.09 
   
  US student loan ARS  63   7,817 
   
(Audited)
had committed to repurchase from clients up to a maximum of USD 2,041 million of municipal ARS and USD 1,723 million of taxable and tax-exempt APS.
We anticipate that the maximum required repurchase amount of ARS is likely to decline over time, as issuers refinance their debt obligations and we work with issuers, industry peers and US government officials on restructuring initiatives and redemption opportunities.
(Audited)
In future periods, we will no longer disclose our inventory of and commitments to repurchase municipal ARS and taxable and tax-exempt APS, as we do not consider that they involve material risk exposure.
We will continue to disclose our inventory of and commitment to repurchase student loan ARS as our assessment of this exposure indicates that we consider it a risk concentration.


          
(Audited) 
Student loan auction rate securities inventory
   Carrying value as of  Carrying value as 
 USD million 31.12.09  of 31.12.08 
  
 US student loan auction rate securities 10,3471  8,362 
  
 
1 Includes USD 7.5 billion (CHF 7.7 billion) at carrying value of student loan auction rate securities that were reclassified toLoans and receivables fromHeld-for-tradingin fourth quarter 2008 and first quarter 2009. Refer to “Note 29b Reclassification of financial assets” in the “Financial information” section of this report for more information.

                   
(Audited) Client holdings: student loan auction rate securities
      Buy-back period  
   Par value of maximum          Par value of maximum 
   required purchase as of  Remaining unpurchased  Holdings of Institutional  required purchase as of 
   31.12.09   holdings of private clients   clients   31.12.08  
 USD million     period ends 4.1.11  30.6.10–2.7.12     
        
 US student loan auction rate securities  7,817   93   7,724   11,775 
  

141145

Risk and treasury management
Treasury management

Treasury management

Group treasury is responsible for overseeingTreasury oversees the balance sheet and the usage of our critical financial resources including capital, liquidity and funding, capital and balance sheet.funding. Treasury manages key portions of these resources including the interest rate and currency risks arising from balance sheet and capital management activities.

Liquidity management

Stressed market conditions experienced in the latter half of 2008, continued in the first few months of 2009 but then began to ease noticeably in the second half of the year as the effects of central bank support and government assistance were felt in the market. High credit spreads contracted and the general tone of the money markets improved as flows in longer-term tenors increased.
     We

In 2010, we continued to further strengthen and safeguard ourmaintain a sound liquidity position and adjusted funding targets while our focus was maintained on continuing asset reductions. Combined with the broad diversitya diversified portfolio of our funding sources, our contingency planning processesdespite the potential uncertain impact of developments in financial regulatory reforms and ourthe significant market volatility caused by uncertainties regarding the global scope, these measures have enabled us to maintain a balanced asset/liability profilemacroeconomic environment, including certain European fiscal and sovereign debt concerns.

Funding management

Over the course of 2010, as investors became gradually more risk tolerant, credit spreads and incremental funding costs for most global financial institutions, including UBS, generally narrowed throughout the recent market dislocation. Additionally, signsyield curve. We raised over CHF 15 billion equivalent of public benchmark bonds with an average maturity of 5.5 years. This exceeded the combined amount of public benchmark bonds and other long-term straight debt which matured, or was redeemed, during 2010. Adjusting for currency effects, our return towards financial stability includedcustomer cash deposits in our wealth and asset management business divisions at year-end 2010 were stable compared with year-end 2009.

Interest rate and currency management

The interest rate risk management responsibility for Wealth Management & Swiss Bank transactions executed in Switzerland was transferred to Group Treasury. The interest rate risk arising from this is managed by Group Treasury to optimize risk capture, management and netting potential. In response to the successful tender for certain subordinated notesprolonged low yields, treasury supported and implemented measures to improve Wealth Management & Swiss Bank’s margin income through income-generating fixed receiver swap and bond portfolios. Group Treasury continued to earn interest income on equity through its portfolio of interest rate products and managed the currency effects on equity and key ratios. Profits and losses in March and, in August, the exit of the Swiss Confederation’s stake in UBS through conversion of the mandatory convertible notes (MCNs) and immediate placement of shares in the market.

Funding management
Despite challenging conditions throughout 2009, we maintained our accessforeign currencies were hedged to funding primarily as a result of our broadly diversified funding base. In addition, we accessed an important new investor base through our inaugural European covered bond program.
protect shareholder value.

Capital ratios, risk-weighted assets and eligible capital

At year-end 2009, the

On 31 December 2010, our BIS tier 1 ratio amounted to 15.4%was 17.8% and the total capital ratio to 19.8%was 20.4%, up from 11.0%15.4% and 15.0%19.8%, respectively,re-

spectively, on 31 December 2008.2009. BIS risk-weighted assets declined from CHF 302.3206.5 billion inat the end of December 20082009 to CHF 206.5198.9 billion inat the end of December 2009,2010, while eligible tier 1 capital decreasedincreased from CHF 33.231.8 billion to CHF 31.835.3 billion over the same period, reflectingperiod.

Equity attribution

Group Treasury uses our equity attribution framework to guide our businesses in the effectsallocation of losses incurred during 2009 and further negative impacts on equity, only partially offset byresources to opportunities that are expected to provide the positive effects from issues of capital instruments.

best risk-adjusted profitability contributions.

Shares

As of 31 December 2009,2010, we had a total of 3,558,112,7533,830,840,513 shares issued. In 2009,2010, the issued shares were increased by a total of 625,532,204272,727,760 shares. This was mainly due to the issuance of newly created shares for a share placement with institutional investors in June (293,258,050 shares placed atour capital raising as CHF 13 each),billion in convertible notes (MCN) issued in 2008 expired on 5 March 2010. The notes were mandatorily converted into 272,651,005 newly issued shares, which represented 7.7% of our issued share capital at the early conversion of MCNs by the Swiss Confederation in August (332,225,913 shares) plustime. Additionally there were a small number of exercises of conditional capital due to exercises of employee options (48,241(76,755 shares).

Financial resource governance

Our Group Asset and Liability Management Committee (Group ALCO) promotes the usage of our assets and liabilities in line with our overall UBS Group (Group) strategy as defined by the Board of Directors (BoD) and the Group Executive Board (GEB), our regulatory commitments and the interests of our shareholders and other stakeholders. The remaining CHF 13 billion MCNs will expire on 5 March 2010 leadingGroup ALCO manages the balance sheet of the business divisions through allocation and monitoring of targets. In addition, the Group ALCO manages our liquidity, funding and capital by taking into account their business performance, overall risk profile as well as market conditions.

Group Treasury provides Group ALCO with monthly reporting of our financial resources (e.g. balance sheet, capital, liquidity and funding) in order for them to an expected issuance of 272,651,005 shares from conditional capital.oversee and monitor our asset and liability management policies and processes to ensure their effectiveness under prevailing and prospective conditions.



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Risk and treasury management

Liquidity and funding management

   
(AUDITED)
(Audited)		 We define liquidity risk as the risk of being unable to raisegenerate sufficient funds from assets to meet payment obligations when they fall due. Funding risk is the risk of being unable, on an ongoing basis, to borrow funds in the market at an acceptable price to fund actual or proposed commitments and thereby support our current business and desired strategy. Liquidity and funding are not the same, but they are closely related and both are critical for a financial institution.
      Liquidity and funding must be continuously managed to ensure that we can successfully adjust to sudden adverse changes in market conditions or our operating environment, whether it issuch changes consist of a general market crisis, a localized difficulty affecting a smaller number of institutions, or a problem unique to an individual firm. An institution that is unable to meet its liabilities when they fall due may collapse,fail, even though it is not insolvent, because it is unable to borrow sufficient funds on an unsecured basis, or does not have sufficient high quality assets to borrow against or liquid assets to sell to raise immediate cash.
   
  Market liquidity overview: 20092010
The first few months of 2009 saw a continuation of the stressed financial market conditions that had prevailed throughout the latter part of 2008. Economic fundamentals continued to deteriorate, developing into the worst economic recession in the post-war era; average credit spreads for high-quality corporate bonds reached historically high levels; most markets remained fragile and suffered from very limited liquidity and the banking and wider financial sector remained under considerable pressure. For the financial sector, access to financing from the public term-debt markets was mostly limited to government-guaranteed bonds. On the back of large amounts of additional special central bank support and government assistance, signs of improvement emerged during the second quarter and high credit spreads for financial institutions contracted. The general tone of the money markets began to improve noticeably during the second quarter, with flows no longer being effectively limited to very short tenors. Public term-debt markets became broadly accessible to banks for unsecured bond issuances for the first time since late third quarter 2008, across various currencies and a range of tenors. More signs of stabilization emerged in the third quarter on improved earnings in the financial sector, leading to further declines in financial institutions’ credit spreads and improved access to public debt markets. Volumes of new long-term debt issuance increased, particularly in senior unsecured debt and covered bonds, while government-guaranteed bond issuances contracted.
    The policy responses by governments and central banks mirrored market developments during the year. The focus had initially remained on maintaining the extraordinary measures designed to reinforce country-specific financial systems and support their economies. As the year progressed, declines were registered in utilization levels of these facilities. With the intensity of the financial crisis beginning to abate during the first half of the year, and as signs of stabilization gradually emerged, policymakers around the world began to shift their attention toward tightening their regulatory capital and liquidity frameworks with a view to reducing the systemic risks posed by the largest financial institutions. There are many new regulatory and legislative initiatives applicable to large financial firms that have been proposed in Switzerland, the US, UK, European Union and other jurisdictions where we operate. These proposals and their interactions may significantly impact our future liquidity and funding management processes, if and when they are enacted.
Our measures taken in managing out of the crisis
Despite challenging conditions throughout 2009, we maintained our access to funding with a broadly diversified funding base, and continued with measures to further strengthen and safeguard our liquidity position. Throughout this period, funding targets were adjusted and focus was maintained on continuing asset reductions. Combined with the broad diversity of funding sources, global scope and contingency planning processes, these measures enabled us to maintain a balanced asset and liability profile. We also maintain a substantial multi-currency portfolio of unencumbered high-quality short-term assets, and also have unutilized secured liquidity facilities available with several major central banks. In addition to these centralized Group resources, like many other internationally active banks, we maintain several additional dedicated liquidity reserves where these are required by local regulation. Additionally, we have taken significant steps during 2009 including further de-risking and reducing the balance sheet, including the completion of the remaining transfers of assets to the SNB StabFund announced in 2008, and the sale of UBS Pactual, as well as additional medium- and long-term debt issuance, including accessing an important new investor base through our inaugural European covered bond program. The successful tender for certain subordinated notes in March and, in August, the exit of the Swiss Confederation’s stake in UBS through conversion of the MCNs and immediate placement of shares in the market were widely regarded as additional signs of our return to financial stability.


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Risk and treasury management
Treasury management

     
      While furtherRelative to the latter part of 2009, the beginning of 2010 was characterized by much more favorable market conditions, with a surge in public long-term debt issuance by financial institutions. However, markets subsequently became more volatile and issuance conditions deteriorated into and during the second quarter as increasing concerns regarding sovereign debt in several European countries led to heightened risk aversion and fears of contagion, driving up banks’ credit risk premia and funding spreads. Risk aversion persisted into the early summer amid concerns about the global economy, the pending release of the EU banks’ stress test results, the debate on central bank support and the uncertain impact of global financial regulatory reform. Market liquidity and funding conditions for banks began to improve again following the release of the EU banks’ stress test results in July, and continued to remain relatively favorable throughout the third quarter and into the early part of the fourth quarter, albeit with reduced activity in debt issuance. Certain financial institutions’ funding spreads widened noticeably late in the year due to renewed European sovereign credit concerns and uncertainty around the potential success of continued quantitative easing efforts by major central banks.
    We saw continued signs of stabilization during 2010, with overall quarterly net new money inflows in the market emerged throughout 2009,second half of the year, while customer cash deposits in our wealth and although access to wholesale term funding improved, we continued to experienceasset management business divisions at year-end 2010 were stable compared with the prior year-end when adjusted for currency effects. This is a declinenotable change from the declines in customer cash deposits and net new money outflows that these businesses experienced in our client-asset-gathering divisions. Regarding the net outflows of client assets, only the cash deposit component of these constitutes a direct loss of funding for us. We were able to readily compensate for the effects of these outflows, as well as for the periodic reductions in access to wholesale term debt markets, through ample funding from alternative sources within our diversified funding base and our ongoing balance sheet asset reductions. As part of these asset reductions, the funded balance sheet mainly in the Investment Bank was reduced by CHF 242 billion compared with year-end 2008.2009.
      è èRefer to the “Balance Sheet”sheet” section of this report for more information
     
  ImplementationContinuing implementation of the new liquidity and funding risk management framework
     
  Following the approval of our funding model by the Group ALCO, a new internal funds transfer pricing curve has been implemented. We made progress in implementingfurther developed the architecture of the strategic models that focus on the stressed liquidity and the operational cash ladders that are used to monitor the liquidity profile of the firm. In 2011 we will begin regional implementation of the new liquidity and funding risk management framework which was approved by the BoD in late 2008. Significant enhancements to our existing systems and tools used for liquidity and funding management were implemented, allowing us to forecast more accurately potential liquidity and funding demands under both going concern and stressed conditions. The Group Asset and Liability Management Committee (Group ALCO) was established as the primary body for managing our financial resources. Furthermore, governance over the liquidity and funding management process was improved and documented in a complete overhaul of our policies. In addition to balance sheet targets, new supply side limits were introduced to control the funding of the balance sheet, and additional limits on the off-balance sheet exposures were implemented. Our liquidity reserve, a pool of highly liquid cash and cash equivalent assets, was put under the direct management of Group Treasury.model.
      Further strategic work is underway to improve the operational setup of the liquidity and funding management process and to refine the funds transfer pricing mechanism. We are also reviewing the technical landscape of our liquidity and funding risk management tools, and have projects underway to upgrade our systems infrastructure.è
 Refer to “Note 27 Fair value of financial instruments” in the “Financial information” section of this report for more information
     
  Liquidity approach
     
(AUDITED)(Audited) Our approach to liquidity management, which covers all UBS branches and subsidiaries, aims to ensure that we will always have sufficient liquidity to meet liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking sustained damage to our various businesses.
 
(AUDITED)     Central to the integrated framework is an assessment and regular testing of all material, known and expected cash flows and the level of high-grade collateral that could be used to raise additional funding. Limits are set at Group and Division level by the BoD and the Group ALCO. These limits are monitored by Group Treasury, which reports the results and trends on a regular basis to the BoD Risk Committee and the Group ALCO. Contingency plans for a liquidity crisis are incorporated into our wider crisis management process.
    Our major sources of liquidity are channeled through entities that are fully consolidated. The liquidity position and asset and liability profile are continuously tracked. This involves monitoring the balance sheet contractual and behavioral maturity profiles and projecting and modeling the liquidity exposures of the firm under a variety of potential scenarios – encompassing both normal and stressed market conditions. Limits are set at Group and business division level by the BoD, the Group ALCO, the Group Chief Financial Officer (Group CFO) and the Group Treasurer. These limits are monitored by Group Treasury, which reports the results and trends on a regular basis to the BoD Risk Committee and the Group ALCO.
    Our major sources of liquidity are channeled through entities that are fully consolidated. The liquidity position and asset and liability profile are continuously tracked. We consider the possibility that our access to markets could be impacted by a stress event affecting some, or all, parts of our business. The results are factored into our overall contingency plans. Contingency plans for a liquidity crisis are then incorporated into our wider crisis management process.
     
  Liquidity management
  We manage our liquidity position in order to be able to survive a UBS-specific liquidity crisis combined with a generally stressed market environment. This is complemented by our funding risk management, which aims to achieve the optimal liability structure to finance our businesses cost-efficientlyreliably and reliably.cost-efficiently.


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Risk and treasury management
Treasury management

(Audited)     Our business activities generate asset and liability portfolios whichthat are intrinsically highly diversified with respect to market, product and currency. This reduces our exposure to individual funding sources, and also provides a broad range of investment opportunities, which in turn reduces liquidity risk.
      Our funding diversification and global scope in turn help protect our liquidity position in the event of a crisis. We adopt a centralized approach to liquidity and funding management to exploit these advantages in full. The liquidity and funding process is undertaken jointly by Group Treasury and the foreign exchange and money market (FXMM) unit within the Investment Bank’s fixed income, currencies and commodities (FICC) business area. Group Treasury establishes a comprehensive control framework, while FICC undertakes operational cash and collateral management within the established limits.
      This centralization permits close control of both our global cash position and itsour stock of high-quality liquid securities. Our treasury processes also ensure that the firm’s general access to wholesale cash markets is concentrated in FICC. Funds raised externally are largely channeled into FICC, including the proceeds of debt securities issued by UBS, an activity for which Group Treasury is responsible. FICC in turn meets all internal demands for funding by channeling funds from units generating surplus cash to those requiring fi-


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nance. In this way, we reduce our external borrowing and usein need of available credit capacity, and present a consistent and coordinated face to the market.financing.
       
  Liquidity modeling, controls and contingency planning
(AUDITED)(Audited) For the purpose of monitoring our liquidity situation, we employ the following main measures:
  – 
Acash ladderwhich is used to manage our funding requirements on a daily basis within limits that are set by the Group ALCO, the Group CFO and the Group Treasurer. This cumulative cash ladder shows the daily liquidity position – the net cumulative funding requirement for a specific day – projected for each business day from the current day forward three months.
  – 
Astressedversion of thecash ladderwhich is overlaid with behavioral assumptions that model a severe UBS-specific liquidity crisis combined with a generally stressed market environment. This stress scenario is updatedrun daily and used to monitorproject potential outflows out toover a one-month time horizon.
  – 
Acontractual maturity gapanalysis of our assets and liabilities out toover a one-year time horizon.
  – 
Abehavioral maturity gapanalysis under an assumed UBS-specific liquidity crisis combined with a generally stressed market environment out toover a one-year time horizon.
  – 
Acash capital modelwhich measures the amount of stable funding in relation to the amount and composition of our assets.
    All of these tools and models are reviewed and enhanced regularly to ensure that latest business developments are incorporated.
      The breakdown of the contractual maturitymaturities of our assets and liabilities serves as a starting point for stress testing analyses. A partial breakdown as of year-end is shown in the “Maturity analysis” table at the end of this section. This maturity analysis is an accounting view. Itcontractual view does not fully represent a liquidity risk management perspective, which would alsoand is thus adjusted to include behavioral stress analysescomponents and a more detailed breakdown of asset and liability types.
 
(Audited)     The liquidity crisis scenario combines a firm-specific crisis with market disruption and focuses on a time horizon extending up to one year. This UBS-specific scenario envisages large drawdowns on otherwise stable client deposits which are predominantly due contractually on demand, an inability to renew or replace maturing unsecured wholesale funding and limitedthe reduced capacity to generate liquidity from trading assets. Liquidity crisis scenario analysis and contingency planning supports the liquidity management process so that immediate corrective measures, such as the use of a liquidity buffer to absorb potential sudden liquidity shortfalls, can be put into effect.
(AUDITED)     Since a liquidity crisis could have a myriad of causes, we focus on a scenario that encompasses potential stress effects across all markets, currencies and products.
      The assessment includes the likelihood of maturing assets and liabilities being rolled over in a UBS-specific crisis within an otherwise stressed market environment, and gauges the extent to which the potential crisis-induced shortfall could be covered by available funding. This would be raised on a
(AUDITED)secured basis against available collateral, which includes securities eligible for pledging at the major central banks, or by selling inventory. In both cases we apply crisis-level discounts to the value of assets. We assume that we would generally be unable to renew any of our wholesale unsecured debt, including all our maturing money market paper (CHF 5256 billion outstanding on 31 December 2009)2010). Since liquidity needs may also result from commitments and contingencies, including credit lines extended to secure the liquidity needs of customers,clients, we regularly monitor undrawn committed credit facilities and other latent liquidity risks and factor these into the scenario analysis. Particular emphasis is placed on potential drawdowns of committed credit lines.
      If our credit ratingratings were to be downgraded, “rating trigger” clauses, especially in derivative contracts,transactions, could result in an immediate cash outflow due to the unwinding of derivative positions or the need to deliver additional collateral. Based on our credit ratings as of 31 December 2010, additional collateral or termination payments pursuant to agreements with certain counterparties of approximately CHF 0.7 billion and CHF 1.9 billion would have been required in the event of a one-notch and two-notch reduction, respectively, in our long-term credit ratings. At year-end 2010 our long-term senior debt ratings were as follows: Moody’s Aa3 (outlook: negative); Standard and Poor’s A+ (outlook: stable); and Fitch Ratings A+ (outlook: stable).
      We also take into account the potential impact on our net liquidity position of adverse movements in the replacement value of our OTCover-the-counter (OTC) derivative transactions, which are subject to collateral arrangements. Given the diversity of our derivatives business and that of our counterparties, there is not necessarily a direct correlation between the factors influencing net replacement values with each counterparty and a UBS-specific crisis scenario.
    è Refer to the “Note 23 Derivative instruments and hedge accounting” in the “Financial information” section of this report for more information


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Risk and treasury management

   
  Liquidity limits and controls
(AUDITED)
(Audited)
 Liquidity and funding limits and targets are set by the BoD, the Group ALCO, the Group CFO and the Group Treasurer, taking into consideration our business model and strategy, the prevailing market conditions and our tolerance for risk. The principles underlying our limit and target framework aim to maximize and sustain the value of our business franchise and appropriatelymaintain an appropriate balance in the asset/liability structure in light of prevailing market conditions.structure. Structural limits and targets focus on the compositionstructure and profilecomposition of the balance sheet, while supplementary limits and targets are designed to drive the utilization and allocation of funding resources. Together the limits and targets focus on structural liquidity risk for terms from intra-dayperiods out to one year, including stress testing, and on the liability mix, including diversification by source, counterparty, currency and tenor. Group Treasury is responsible for the oversight of the liquidity and funding limits and targets. Performance versus limits and targets is monitored and regularly communicated to senior management. On an annual basis these limits and targets are reviewed and reconfirmed by the respective authorities.
      To complement and support the limit framework, Group Treasury and members of our regional and divisional treasuries monitor the markets in which we operate for potential threats and regularly report significant findings to Group Treasury.threats.
(AUDITED)
(Audited)
     We have contingency plans for liquidity crisis management, thea cornerstone of which are our substantial liquidity


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Treasury management

(AUDITED)
reserves, including a large multi-currency portfolio of unencumbered high-quality short-term assets and available and unutilized liquidity facilities at several major central banks.
      The liquidity contingency plan is an integral part of the global crisis management concept, which covers all types of crisis events. Its implementation falls under the responsibility of a corespecial crisis


team with representatives from Group Treasury, FICC and related areas, including the functions responsible for payments and settlements, market and credit risk control, collateral and margin management, and information technology and infrastructure. Our global management model lends itself naturally to efficient liquidity crisis management. Should a crisis require contingency funding measures to be invoked, Group Treasury is responsible for coordinating liquidity generation with representatives from FICC and the relevant business areas.

New Swiss regulatory liquidity regime

During 2010, the Swiss Financial Market Supervisory Authority (FINMA) and the Swiss National Bank (SNB) introduced a revised liquidity regime for big banks which came into effect on 30 June 2010, designed to ensure stability within the Swiss financial industry. The new regime is broadly consistent with international proposals for liquidity regulations, particularly the principles written by the Basel Committee for Banking Supervision. The core element of the new liquidity regime is a severe stress scenario that combines a general financial market crisis with creditors’ loss of trust in the bank. The new liquidity regulations require the banks to hold liquid assets sufficient to offset the projected outflows under the stress scenario for a period of 30 days. Our established internal liquidity stress tests consider a stress scenario similar in nature to that used by the new FINMA liquidity regime. We believe this will enable us to sustain our business for a period substantially beyond the minimum regulatory horizon.

èRefer to the functions responsible“Regulatory developments” section of this report for payments and settlements, market and credit risk control,more information



(Audited)
UBS asset funding
(ASSET FUNDING CHART)
1 Including compound debt instruments – OTC.  2 Including cash collateral and margin management, and information technology and infrastructure. Our centralized global management model lends itself naturally to efficient liquidity crisis management. Should a crisis require contingency funding measures to be invoked, Group Treasury takes responsibility for coordinating liquidity generation together with representatives from FICC and the relevant business areas.on derivative transactions.

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Risk and treasury management
Treasury management

   
  Funding
   
(AUDITED)(Audited)
 Our wealth management businesses continue to represent valuable and cost-efficient sources of funding. TheseAt year-end 2010, these businesses contributed CHF 323304 billion, or 79%92%, of the CHF 410332 billion total customer deposits shown in the “UBS asset funding” graph. Compared with the CHF 307263 billion of net loans as of 31 December 2009,2010, customer deposits provided 134%126% coverage compared with 140%an adjusted 127% on 31 December 2008.2009. In the fourth quarter of 2010, we changed the presentation of cash collateral from derivative transactions and prime brokerage receivables and payables. These positions are no longer included in customer and interbank deposits, but are now shown as part of “other liabilities” in the “UBS asset funding” graph.
    In terms of secured funding (i.e. repurchase agreements and securities lent against cash collateral received), we borrowborrowed less cash on a collateralized basis than we lend,lent, leading to a surplus of net securities sourced – shown as the CHF 108124 billion cash-equivalent surplus in the “UBS asset funding” graph. Furthermore, funding
    Funding is also provided through numerous short-, medium- and long-term funding programs, which provide specialized investmentsoffer customized investment opportunities to institutional and private clients in Europe, the US and Asia.clients. These programs can efficiently raise funds globally, further reducing our de-
(AUDITED)
(FLOWCHART)
(AUDITED)
pendencedependence on any particular source. A maturity breakdown of our long-term straight debt portfolio of CHF 64 billion is shown at the end of this section.
      Through broad diversification of our funding sources (byby market, product and currency),currency, we maintain a well-balanced portfolio of liabilities, which provide protection in the event of market disruptions. This together with our centralized funding management, enables us to efficiently fund our business activities.
   
  Funding approach
  Medium- and long-term fundingFunding activities are planned by assessing the overall liquidity and funding profile of the balance sheet. The ability to continue to fund ongoing business activities through periodssheet, taking account of difficult market conditions is also factored in. Since the beginning of 2007, prior to the outbreak of the recent financial crisis, we have maintained our funding profile through public issuance of senior, straight, and long-term debt. As part of these continuing diversification efforts, in third quarter 2009, we launched our inaugural covered bond program, from which we issued euro-denominated bonds that are indirectly covered by a pool of prime, Swiss franc-denominated Swiss residential mortgages originated and serviced by UBS AG through our branch network in Switzerland.
    In addition to continuing to raise medium- and long-term funds through medium-term notes and private placements, during 2009 we raised over CHF 11 billion through benchmark public senior debt issuance, following the CHF 24 billion raised from these sources during 2008. This included two covered bonds totaling around the equivalent of CHF 4.5 billion under the aforementioned new covered bond program. We raised a further CHF 6 billion through Swiss covered bond (Pfandbrief) issuances via the Swiss Mortgage Bond Bank during 2009. Additionally, the placement of new shares from authorized capital in June 2009 generated approximately CHF 3.8 billion of long-term funds.
    To ensure that a well-balanced and diversified liability structure is preserved, Group Treasury routinely monitors our funding status and reports its findings on a monthly basis to the Group ALCO. A key measure employed among our main analysis tools is the assessment of our “cash capital” position, this concept is designed to ensure that illiquid assets can be financed by long-term sources of funding.
    The cash capital supply consists of long-term sources of funds: unsecured funding with remaining time to maturity of at least one year; shareholders’ equity; and core deposits – the portion of customer deposits deemed to have a “behavioral” maturity of at least one year. Cash capital consumption reflects the illiquid portion of the assets which could not be transformed into cash by secured funding. For a given asset, the illiquid portion is the difference (the “haircut”) between the carrying value of an asset on the balance sheet, and its effective cash value when used as collateral in a secured funding transaction.stable


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funding needed to support ongoing business activities through periods of difficult market conditions.

RiskDuring 2010, we raised over CHF 15 billion equivalent of public benchmark bonds with an average maturity of 5.5 years, including nearly CHF 3 billion equivalent of covered bond issuance. The amount of public bond issuance exceeded the CHF 11 billion equivalent of long-term straight debt (CHF 6 billion of which was from public benchmark bonds) that matured during 2010, plus CHF 3 billion equivalent of subordinated and treasury management
hybrid tier 1 debt that was redeemed during 2010. Additionally, we continued to raise medium- and long-term funds through medium-term notes and private placements throughout the year.
                                         
UBS: funding by product and currency
  All currencies CHF EUR USD Others 
In %
  31.12.09   31.12.08   31.12.09   31.12.08   31.12.09   31.12.08   31.12.09   31.12.08   31.12.09   31.12.08 
 
Securities lending  1.0   1.4   0.0   0.0   0.2   0.4   0.5   0.6   0.3   0.4 
 
Repurchase agreements  8.1   10.2   1.0   0.9   1.4   1.6   4.5   6.7   1.2   1.1 
 
Interbank  8.2   12.5   0.8   0.8   2.6   4.9   2.4   4.9   2.4   1.8 
 
Money market paper  6.5   11.1   0.2   0.3   0.6   1.0   5.0   8.6   0.7   1.2 
 
Retail savings/deposits  12.8   9.1   8.4   6.0   0.8   0.1   3.6   3.0   0.0   0.0 
 
Demand deposits  23.7   14.8   4.8   2.8   5.1   3.1   10.5   6.8   3.3   2.1 
 
Fiduciary  5.4   6.1   0.3   0.3   1.5   2.0   2.9   3.0   0.6   0.7 
 
Time deposits  9.9   16.3   0.8   1.6   1.3   2.7   4.8   8.9   3.0   3.1 
 
Long-term debt1
  24.3   18.6   3.2   2.7   9.7   6.0   7.8   5.1   3.6   4.8 
 
Total
  100.0   100.0   19.4   15.4   23.4   21.7   42.0   47.6   15.2   15.3 
 
To ensure that a well-balanced and diversified liability structure is preserved, Group Treasury routinely monitors our funding status and reports its findings on a monthly basis to the Group ALCO. A key measure employed among our main analysis tools is the assessment of our “cash capital” position; this concept is designed to ensure that illiquid assets can be financed by stable sources of funding.
1 Including financial liabilities designatedThe cash capital supply consists of long-term sources of funds: unsecured funding with remaining time to maturity of at fair value.least one year; shareholders’ equity; and core deposits – the portion of customer deposits deemed to have a “behavioral” maturity of at least one year. Cash capital consumption reflects the illiquid portion of the assets which could not be transformed into cash by secured funding. For a given asset, the illiquid portion is the difference (the haircut) between the carrying value of an asset on the balance sheet and its effective cash value when used as collateral in a secured funding transaction.

We also regularly monitor our main funding portfolios for any concentration risks.



                                         
UBS: funding by product and currency 
  All currencies CHF EUR      USD Other 
In %1 31.12.10  31.12.09  31.12.10  31.12.09  31.12.10  31.12.09  31.12.10  31.12.09  31.12.10  31.12.09 
 
Securities lending  0.9   1.0   0.0   0.0   0.2   0.2   0.6   0.5   0.1   0.3 
 
Repurchase agreements  9.6   8.1   1.0   1.0   1.4   1.4   6.4   4.5   0.8   1.2 
 
Interbank  5.3   4.0   1.1   0.7   0.6   0.5   1.3   1.1   2.3   1.7 
 
Money market paper  7.2   6.5   0.2   0.2   0.7   0.6   5.7   5.0   0.6   0.7 
 
Retail savings / deposits  13.4   12.8   9.3   8.4   0.8   0.8   3.3   3.6   0.0   0.0 
 
Demand deposits  15.6   14.7   5.9   4.7   3.1   3.7   4.5   4.4   2.1   2.0 
 
Fiduciary  3.9   5.4   0.2   0.3   1.1   1.5   2.1   2.9   0.6   0.6 
 
Time deposits  9.6   9.9   0.5   0.8   1.2   1.3   5.3   4.8   2.6   3.0 
 
Long-term debt  22.4   24.3   3.2   3.2   8.0   9.7   8.0   7.8   3.2   3.6 
 
Cash collateral payables on derivative transactions2
  7.5   8.3   0.2   0.2   3.2   3.0   3.2   3.6   0.9   1.5 
 
Prime brokerage payables2
  4.7   4.8   0.1   0.0   0.5   0.5   3.4   3.8   0.7   0.5 
 
Total
  100.0   100.0   21.5   19.4   20.7   23.4   43.9   42.0   13.9   15.2 
 
1 As a percent of total funding sources defined as the CHF 782 billion on the balance sheet comprising Repurchase agreements, Securities lending against cash collateral received, Due to banks, Money market paper issued, Due to customers, Long-term debt (including financial liabilities at fair value) and Cash collateral on derivative transactions and Prime brokerage payables.  2 UBS has changed presentation of cash collateral for derivative transactions and prime brokerage receivables and payables. These positions are no longer included in interbank and demand deposits, but are shown on separate lines in the table above.

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Risk and treasury management

UBS: funding by product type1

(PIE CHART)
1 Excluding trading portfolio liabilities, negative replacement values, other liabilities and equity.

UBS: funding by currency1

(PIE CHART)
1 Excluding trading portfolio liabilities, negative replacement values, other liabilities and equity.



Funding position and diversification

We continuecontinued to maintain a balanced portfolio of liabilities that is broadly diversified by market, product and currency. The vast product offerings and global scope of our business activities are the primary reasons for funding stability.our financial flexibility. Funding is provided through numerous short-, medium- and long-term funding programs in Europe, the US and Asia, which provide specialized investments to institutional and private clients. Our domestic retail and global wealth management businesses are also a valuable source of funding.
The overall composition of our funding sources at the end of 20092010 is shown in the “UBS: funding by product and currency” table above and the pie-charts below.above. These funding sources amounted to CHF 792782 billion on the balance sheet, down from CHF 1,007792 billion a year before, and comprise repurchase agreements, securities lending against cash collateral received, due to banks, money market paper issued, due to customers and long-term debt including financial liabilities at fair value. While thevalue, cash collateral payables on derivative instruments and prime brokerage payables. The overall composition wasremained broadly similar to the prior year-end, there was a discernible shift away from time deposits, short-term money
market paper and interbank debt towards higher proportions of demand deposits, long-term debt and savings deposits. Money market paper issuance accounted for 7%with around 22% of our funding sources on 31 December 2009, compared with 11% a year before, and at the same time the relative share of short-term interbank borrowing dropped to 8% from 13%. Customer time and demand deposits (excluding fiduciary deposits) accounted for 34%, up from 31% on 31 December 2008, and savings deposits for 13%, up from 9% on 31 December 2008, of these funding sources. Compared with the prior year-end, the proportion of funding from fiduciary deposits was down slightly to 5% from 6%. The proportion of our fundingstemming from long-term debt including(including financial liabilities designated at fair valuevalue) and a further 39% from customer time deposits, retail savings/deposits and customer demand deposits. Of the remainder, around 10% was up to 24% from 19% a year earlier, reflecting our continued increased focus on medium- to long-term debt issuances. During 2009, we decreased our secured funding, with the proportion declining to 9%approximately 12% was from 11% at prior year-end, primarily through decreased repurchase agreements.interbank borrowing and money-market paper issuance, 12% from cash margin on derivatives and prime brokerage, and around 4% from fiduciary deposits.

Credit Ratings

ratings
Credit ratings generally affect the cost and availability of funding, in particular with regard toespecially funding from wholesale


UBS: funding unsecured sources. Our credit ratings can also influence the performance of some of our businesses as well as contributing to maintaining levels of client and counterparty confidence. Important factors used by product type1

(PIE CHART)
1 Excluding trading portfolio liabilities, negative replacement values, other liabilities and equity.rating agen-

UBS:cies to assess a firm’s creditworthiness and determine its credit ratings include stability and quality of earnings, capital adequacy, risk profile and management, liquidity management, diversification of funding sources, asset quality and corporate governance. Credit ratings reflect the opinions of the rating agencies and can therefore be changed at any time.

Maturity breakdown of long-term straight debt portfolio

The “Long-term straight debt – contractual maturities” graph shows a contractual maturity breakdown of our long-term straight debt portfolio, and therefore excludes all structured debt, which is predominantly booked as financial liabilities designated at fair value. The long-term straight debt portfolio amounted to CHF 70 billion on 31 December 2010, up by currency1CHF 6 billion from a year earlier. It is composed of CHF 61 billion of senior debt including both publicly and privately placed notes and bonds as well as Swiss cash bonds, and CHF 9 billion of subordinated debt. Of the

Long-term straight debt – contractual maturities

(PIE CHART)
1 Excluding trading portfolio liabilities, negative replacement values, other liabilities and equity.(BAR CHART)



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Credit ratings

       
positions shown in the graph, CHF 10 billion, or 14%, will mature within one year, down from 17% a year earlier. The equivalent of CHF 1.5 billion of subordinated debt with a contractual maturity date in 2016 has an early call date during 2011.
    The abovementioned CHF 70 billion long-term straight debt forms part of the CHF 130 billion shown on theDebt issuedline on the balance sheet.
    è Refer to “Note 19 Financial liabilities designated at fair value and debt issued” in the “Financial information” section of this report for more information
       
As of 31.12.09Standard & Poor’sMoody’sFitch Ratings
RatingOutlookRatingOutlookRatingOutlook
Short-term debt ratingA–1stableP–1negativeF1+stable
Long-term senior debt ratingA+stableAa3negativeA+stable

unsecured sources. Our credit ratings can also influence the performance of some of our businesses and contribute to maintaining client and counterparty confidence. Important factors used by rating agencies to assess a firm’s creditworthiness and determine its credit ratings include stability and quality of earnings, capital adequacy, risk profile and management, liquidity management, diversification of funding sources, asset quality and corporate governance. Credit ratings reflect opinions of the rating agencies and can be changed at any time.
    Our short-term credit ratings from all three major rating agencies (Standard & Poor’s, Moody’s and Fitch Ratings) were unchanged and affirmed in 2009. Moody’s Investors
(BAR GRAPH)
Service downgraded our long-term senior unsecured debt rating from Aa2 to Aa3 in November 2009, while Fitch Ratings and Standard & Poor’s long-term senior unsecured debt ratings remained unchanged during 2009 at A+. The table above summarizes our short- and long-term debt ratings as of 31 December 2009.
Maturity breakdown of long-term straight debt portfolio
The graph on the left-hand side shows a contractual maturity breakdown of our long-term straight debt portfolio, and therefore excludes all structured debt, which is predominantly booked as Financial liabilities designated at fair value. The long-term straight debt portfolio amounted to CHF 64 billion on 31 December 2009, and is part of the CHF 131 billion shown on the Debt issued line on the balance sheet (which in addition includes money market paper issued). It is composed of CHF 53 billion of senior debt including both publicly and privately placed notes and bonds as well as Swiss cash bonds, and CHF 11 billion of subordinated debt. Of the positions shown in the graph, CHF 11 billion, or 17%, will mature during 2010.
(Audited) Maturity analysis of financial liabilities
(AUDITED)
 Contractual maturity information of our assets and liabilities serves as a starting point for the stress testing analyses which are described above. Following IFRS guidance, the disclosure of contractual maturities includes financial liabilities only. Our liquidity risk management framework includes, beside many other measures, a behavioral stress analysis, a more


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(Audited)(Audited)
 earlier. Our liquidity risk management framework includes a behavioral stress analysis, which involves a more detailed breakdown and assessment of asset and liability positions, and it also considers cash inflows from assetsflows as well as outflows from various off-balance sheet exposures.
     The contractual maturities of our non-derivative and non-trading financial liabilities as of 31 December 20092010 presented in the table below are based on the earliest date on which we arecould be required to pay. The total amounts that contractually ma-
(Audited)
turingmature in each time-band are also shown for 31 December 2008.2009. Derivative positions and trading liabilities, which predominantly includemade up of short sale transactions, are assigned to the columnOn demand “On demand” as management believes that such presentationthis provides the most accurately reflectsaccurate reflection of the short-term nature of trading activities. The contractual maturity may extend over significantly longer periods.


                               
(Audited)
 Maturity analysis of financial liabilities1 
           Due  Due  Due       
       Due  between  between  between       
       within  1 and 3  3 and 12  1 and 5  Due after    
 CHF billion On demand2  1 month2  months2  months2  years3  5 years3  Total 
  
                              
 
Financial liabilities recognized on balance sheet
                          
  
 Due to banks  50.3   7.1   1.9   3.2   1.3   1.4   65.2 
  
 Cash collateral on securities lent  8.0   0.0   0.0   0.0   0.0   0.0   8.0 
  
 Repurchase agreements  7.2   46.6   6.6   3.8   0.0   0.0   64.2 
  
 
Trading portfolio liabilities4 5
  47.5   0.0   0.0   0.0   0.0   0.0   47.5 
  
 
Negative replacement values4
  409.9   0.0   0.0   0.0   0.0   0.0   409.9 
  
 Financial liabilities designated at fair value  0.0   2.3   4.7   22.3   44.7   38.7   112.7 
  
 Due to customers  261.6   119.8   14.5   13.6   0.9   0.1   410.5 
  
 Accrued expenses and deferred income  0.0   8.5   0.0   0.0   0.0   0.0   8.5 
  
 Debt issued  0.0   21.9   15.8   26.5   36.9   30.4   131.4 
  
 Other liabilities  21.7   7.4   0.0   0.0   0.0   0.0   29.1 
  
 
Total 31.12.09
  806. 3   213.5   43.4   69.4   83.8   70.6   1,286.9 
  
 Total 31.12.08  1,212.3   449.4   80.6   60.7   75.9   87.0   1,965.9 
  
                              
 
Financial liabilities not recognized on balance sheet
                        
  
 Irrevocable loan commitments  57.2   1.1   0.3   0.5   0.2   0.0   59.3 
  
 Guarantees  16.1   0.3   0.2   0.2   0.1   0.1   17.1 
  
 Underwriting commitments  0.0   1.8   0.2   0.2   0.0   0.0   2.3 
  
 
Total 31.12.09
  73.3   3.2   0.8   0.9   0.3   0.1   78.6 
  
 Total 31.12.08  59.9   0.2   0.0   0.1   0.1   0.0   60.3 
  
 
1 Only financial instruments (as disclosed in note 29a) are required to be disclosed in the maturity analysis, therefore, not all numbers in the table reconcile to the line items in the balance sheet. The differences relate to accrued expenses, deferred income and other liabilities and also comprise, deferred tax liabilities, provisions and liabilities from employee compensation plans.  2 Our liquidity risk management focus is on short and mid-term cash flows. In these time periods, the carrying values of non-derivative financial liabilities largely approximate the undiscounted cash flows.  3 Represents carrying values.  4 Carrying value is fair value. Management believes that this best represents the cash flows that would have to be paid if these positions had to be settled or closed out. Refer to “Note 23 Derivative instruments and hedge accounting” in the “Financial information” section of this report for undiscounted cash flows of derivatives designated in hedge accounting relationships.  5 Contractual maturities of trading portfolio liabilities are: CHF 45.9 billion due within one month; and CHF 1.6 billion due between one month and one year.
                               
(Audited) Maturity analysis of financial liabilities1 
           Due  Due  Due       
        Due  between  between  between       
        within  1 and 3  3 and 12  1 and 5  Due after    
  CHF billion On demand2  1 month2  months2  months2  years3  5 years3  Total 
   
                               
  Financial liabilities recognized on balance sheet                            
   
  Due to banks  22.4   14.4   2.2   1.0   1.5   0.1   41.5 
   
  Cash collateral on securities lent  6.6   0.0                   6.7 
   
  Repurchase agreements  7.0   51.4   11.4   4.9   0.0       74.8 
   
  Trading portfolio liabilities4, 5  55.0                       55.0 
   
  Negative replacement values4  393.8                       393.8 
   
  Cash collateral payables on derivative instruments  58.9                       58.9 
   
  Financial liabilities designated at fair value      2.0   4.2   20.1   45.7   28.7   100.8 
   
  Due to customers  200.2   113.0   8.7   9.7   0.5   0.1   332.3 
   
  Accrued expenses and deferred income      7.6                   7.6 
   
  Debt issued      20.1   21.4   28.4   34.5   25.9   130.3 
   
  Other liabilities  18.1   41.6                   59.7 
   
  Total 31.12.10  762.1   250.2   47.9   64.1   82.2   54.8   1,261.3 
   
  Total 31.12.09  806.3   213.5   43.4   69.4   83.8   70.6   1,286.9 
   
                               
  Financial liabilities not recognized on balance sheet6                            
   
  Commitments                            
   
  Loan commitments  54.2   1.5   0.5   0.5   0.2   0.0   56.9 
   
  Underwriting commitments  0.0   0.2   0.0   0.0   0.2   0.0   0.4 
   
  Total commitments  54.2   1.7   0.5   0.5   0.4   0.0   57.3 
   
  Guarantees  14.9   0.3   0.2   0.7   0.4   0.1   16.5 
   
  Forward starting transactions                            
   
  Reverse repurchase agreements  11.3   26.8   0.2   0.7   0.0   0.0   39.0 
   
  Securities borrowing agreements  0.0   0.4   0.0   0.0   0.0   0.0   0.5 
   
  Total 31.12.10  80.4   29.2   0.9   1.9   0.8   0.1   113.3 
   
  Total 31.12.09  87.6   32.0   1.3   1.0   0.5   0.1   122.6 
   
  
1 Only financial instruments (as disclosed in “Note 29a Measurement categories of financial assets and financial liabilities” in the “Financial information” section of this report) are required to be disclosed in the maturity analysis, therefore, not all numbers in the table reconcile to the line items in the balance sheet. The differences relate to accrued expenses, deferred income and other liabilities and also comprise, deferred tax liabilities, provisions and liabilities from employee compensation plans.  2 Our liquidity risk management focus is on short and mid-term cash flows. In these time periods, the carrying values of non-derivative financial liabilities largely approximate the undiscounted cash flows.  3 Represents carrying values.  4 Carrying value is fair value. Management believes that this best represents the cash flows that would have to be paid if these positions had to be settled or closed out. Refer to “Note 23 Derivative instruments and hedge accounting” in the “Financial information” section of this report for undiscounted cash flows of derivatives designated in hedge accounting relationships.  5 Contractual maturities of trading portfolio liabilities are: CHF 53.7 billion due within one month (2009: CHF 45.9 billion); and CHF 1.2 billion due more than one month (2009: CHF 1.6 billion).  6 The table below shows the maximum irrevocable amount of Guarantees, Commitments and Forward starting transactions.

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Interest rate and currency management

   
  Management of non-trading interest rate risk
   
(Audited)
(Audited)
 Our largest non-trading interest rate exposures arise within our wealth management business divisions. TheseWith the exception of the Wealth Management Americas business, the inherent interest rate risk exposures are transferred from the originating business into one of two centralized interest rate risk management units: Group Treasury or the Investment Bank’s FICC unit. These units manage the risks on an integrated basis, exploitingmaximizing the full netting potential across risks from different sources.
  Risks from fixed-maturity, short-term    The interest rate risk management responsibility for Wealth Management & Swiss franc and all non-Swiss francBank transactions are generally transferred to FICC. Risks from Swiss franc transactions with fixed maturities greater than one year areexecuted in Switzerland was transferred to Group Treasury by individual back-to-back transactions. TheseTreasury. The fixed-rate products do not contain embedded options, such as early prepayment, which would allow clients to prepay at par. All prepayments are therefore subject to market-based unwinding costs. Transactions executed outside of Switzerland continue to be transferred predominantly to FICC.
     Current and savings accounts and many other retail products of Wealth Management & Swiss Bank have no contractual maturity date or direct market-linked rate, and therefore their interest rate risk cannot be transferred by simple back-to-back transactions. Instead, they are transferredmanaged on a pooled basis via “replicating” portfolios. A replicating portfolio is a series of loans or deposits at market rates and fixed terms between the originating business unit and Group Treasury, structured to approximate, on average, the implied behavioral interest rate cash flow and repricing behavior of the pooled client transactions. The portfolios are rebalanced monthly. Their structure and parameters are based on long-term market observations and client behavior, and are regularly reviewed and adjusted as necessary. The originating business units are thus immunized as farmuch as possible against market interest rate movements, but retain and manage their own product margin.
     A significant amount of interest rate risk also arises from the financing of non-monetary-related balance sheet items, such as the financing of bank property and equity investments in associated companies. These risks are generally transferred to Group Treasury through replicating portfolios which, in this case, are designed to approximate the tenor profile mandated by senior management.
(Audited)     Group Treasury manages its residual open interest rate exposures, taking advantage of any offsets that arise between positions from different sources, within its approved market risk limits which include VaRvalue-at-risk (VaR) and stress loss. The preferred risk management instrument isinstruments are interest rate swaps, for which there is a liquid and flexible market. All transactions are executed via the Investment Bank. Group Treasury does not directly access the external market.market for swap transactions.
    In addition to its regular risk management activities, Group Treasury executes transactions that aim to hedge negative effects on the Bank’s net interest income stemming from the prolonged period of extraordinarily low yields. As part of this strategy, UBS acquired in October and November 2010 approximately CHF 10 billion face amount of US Treasury securities and approximately CHF 5 billion face amount of UK Government bonds, with a weighted average maturity of approximately 8 years at the end of 2010. The portfolio is held on the balance sheet and is classified for accounting purposes as available-for-sale. The difference between the market value of these securities and their amortized cost does not affect net profit, but is included in the calculation of comprehensive income and accordingly affects our shareholders’ equity and our regulatory capital. In the fourth quarter of 2010, we charged CHF 545 million (pre-tax) against other comprehensive income as a result of reductions in the market value of this portfolio. Assuming that we continue to hold these securities, future changes in their market value will affect our other comprehensive income and capital. If we hold the securities until their maturity, the effect of market value changes would reverse over time back to amortized cost plus accrued interest at maturity.
  è Refer to the “Market risk” section of this report for further detailsmore information on our market risk measures and controls
   
  Market risk arising from management of
consolidated capital
   
(Audited)
 The relationship between our
(Audited)Key ratios on capital and RWA, BIS tier 1 ratio, isrisk-weighted assets (RWA) are monitored by regulators and analysts and is aare key indicatorindicators of our financial strength.


                                 
Group Treasury: value-at-risk (1-day, 95% confidence, 5 years of historical data) 
  Year ended 31.12.10 Year ended 31.12.09 
CHF million Min.  Max.  Average  31.12.10  Min.  Max.  Average  31.12.09 
 
Interest rates  2   18   6   4   1   7   3   3 
 
Foreign exchange  0   18   5   2   0   15   3   2 
 
Diversification effect  1   1   (2)  (1)  1   1   (1)  (1)
 
Total management VaR
  2   22   8   5   2   16   5   4 
 
1 As the minimum and maximum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification effect.

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(Audited)
     The majority of our capital and many of our assets are denominated in Swiss francs, but we also hold RWA and some eligible capital in other currencies, primarily US dollar, eurodollars, euros and UK sterling.British pounds. Any significant depreciation of the Swiss franc against these currencies would adversely impact our BIS tier 1 ratio.key ratios. Group Treasury’s mandate is to minimize adverse currency impacts on this ratio.these ratios.
  On an overall Group basis,    Group Treasury’s target profileto hedge the key ratios is based on a currency mix whichof capital that broadly reflects the currency distribution of theour consolidated RWA. As the Swiss franc depreciates or appreciates against these currencies, the consolidated RWA increaseincreases or decreasedecreases relative to our capital. These currency fluctuations also lead to foreign currency translation gains or losses on consolidation, which are recorded through equity. Thus, our consolidated equity rises or falls in line with the fluctuations in the RWA, stabilizing the BIS tier 1 ratio.RWA. The capital of the parent bank itself is held predominantly in Swiss francs in order to avoid any significant effects of currency fluctuations on its standalone financial results.
  Furthermore, Group Treasury has the mandate to generate a stable interest income flow from the capital. The capital of the parent bank and its subsidiaries is placed via interest-bearing cash deposits internally within our entity network. Group Treasury further maintains a portfolio of interest rate swaps to achieve a target tenor profile and return on invested equity.
  To provide a benchmark for investments of equity, Group Treasury defines a replicating portfolio of target tenors and currencies. The effective investment positionpositions created by both internal cash deposits and interest rate swaps are then measured against this benchmark tenor replication portfolio. Mismatches between the two are measured, together with other non-trading interest rate risk positions, against Group Treasury’s market risk limits (VaR and stress loss).
  The structural    Non-trading foreign currency exposures (to hedge our BIS tier 1 ratio)exchange risks are controlled by senior management but are not subject to internalmanaged under market risk limits, and are not included inwith the exception of Group Treasury’s reported VaR.Treasury management of consolidated capital activity.
      On 31 December 2009,2010, our consolidated equity was deployedinvested, according to target, as follows: in Swiss francs (including most of the capital of the parent bank)Parent Bank) with an average duration of approximately three years and an interest ratefair value sensitivity of CHF 8.0


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Group Treasury: Value-at-Risk (1-day, 95% confidence, 5 years of historical data) 
  Year ended 31.12.09 Year ended 31.12.08 
CHF million Min.  Max.  Average  31.12.09  Min.  Max.  Average  31.12.08 
 
Interest rates  1   7   3   3   2   9   5   5 
 
Foreign exchange  0   15   3   2   1   24   7   3 
 
Diversification effect  1   1   (1)  (1)  1   1   (3)  (2)
 
Total management VaR
  2   16   5   4   3   25   9   6 
 
1 As the minimum and maximum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification effect.

9.5 million per basis point; in US dollars with an average duration of approximately four years and a sensitivity of CHF 7.1 million per basis point; in euros with an average duration of approximately three years and a sensitivity of CHF 1.00.9 million per basis point; and in UK sterlingBritish pounds with a duration of approximately three years and a sensitivity of CHF 0.4 million per basis point. The interest rate sensitivity of these positions issensitivities directly relatedrelate to the chosen duration – targetingdurations. Targeting significantly shorter tenors would reduce the apparent interest rate sensitivityreduces fair value sensitivities, but would leadleads to greater fluctuationsvolatility in the interest income.
   
  Corporate currency management
   
(Audited)(Audited)
 Our corporate currency management activities are designed to reduce the impact of adverse currency fluctuations on our reported financial results in Swiss francs, given regulatory constraints. We specifically focus on three principal areas of currency risk management: matchCurrency matched funding and investment of investments in non-Swiss franc assets and liabilities; sell-down of non-Swiss franc profits and losses; and selective hedging of anticipated non-Swiss franc profits and losses.
  
 MatchCurrency matched funding and investment of non-Swiss franc
assets and liabilities
 For monetary balance sheet items and non-core investments, we follow the principle of matching the currency of our assets with the same currency of the liabilities from which fund them,they are funded, at least as far as it is practical and efficient to do so. A US dollar asset is thus is typically funded in US dollars, while a euro
(Audited)
liability is typically offset by an asset in euros. This avoids profits and losses arising from the retranslation of foreign currency assets and liabilities at the prevailing exchange rates to the Swiss franc at quarter ends.quarter-ends.
  
 Sell-down of reported profits and losses
 For accounting purposes, reported profit and losses are translated each month from their original transaction currencies into Swiss francs at exchange rates fixed at the prevailing month end.month-end. In order to eliminate earnings volatility on the retranslation of previously recognized earnings in foreign currencies, Group Treasury centralizes the profits and losses arising in the parent bank and sells or buys them for Swiss francs. Our other operating entities follow a similar monthly sell-down process into their own reporting currencies. Retained earnings in operating entities with a reporting currency other than the Swiss franc are integrated and managed as part of our consolidated equity.
   
  Hedging of anticipated future reported profits and losses
  Our corporate currency management executes a dynamic and cost-efficient hedging strategy to protect anticipated future profit and losses in foreign currencies against a negative impact ofpossible adverse trends of foreign exchange rates from one reporting period to the next. At any point in time, Group Treasury may hedge according to market perception part or all of the anticipated next three months’ earnings. Although intended to hedge future earnings, these transactions are accounted for as open currency positions and are subject to internal market risk VaR and stress loss limits.


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Treasury
Risk and treasury management

Capital management

     
(Audited)(Audited) SufficientEligible capital must be available to support business activities, in accordance with both our own internal assessment and the requirements of our regulators, in particular our lead regulator FINMA.
      We aim to maintain sound capital ratios at all times, and we therefore consider not only the current situation but also projected developments in both our capital basebusiness and capital requirements.regulatory developments. The main tools by which we employ to manage our capital ratios areare: the active management of own shares, capital instruments, dividends and risk-weighted assets (RWAs).RWA.
     
  Capital adequacy management
     
(Audited)(Audited) EnsuringOngoing compliance with minimum regulatory capital requirements and target capital ratios is central to our capital adequacy management. In this ongoing process, we manage towards tier 1 and total capital target ratios. In the target setting process we take into account the regulatory minimum capital requirements, regulators’ expectations that we hold additional capital abovecurrent and future minimum requirements set by regulators as well as their “buffer” expectations. Furthermore, we consider our own internal assessment of aggregate risk exposure in terms of capital-at-risk, the views of rating agencies and comparisons with peer institutions considering our business mix and market presence.institutions.
  è Refer to the “Risk management and control” section of this report for more information on earnings-at-risk and capital-at-risk
     
  Regulatory requirements
     
(Audited)(Audited) We are subject to FINMA regulatory capital requirements, which result in higher RWA than under BIS guidelines.
  è Refer to the additional capital management disclosure in the “Basel II Pillar 3” section of this report
(Audited)(Audited)     To allow for comparability, published RWA are determined in accordance with the BIS guidelines. For the determination of the eligible capital, there arewere no differences between the BIS guidelines and FINMA regulations.regulations as of 31 December 2010.
  In 2009,    During 2010, we complied with all externally imposed capital requirements.
      The Basel III revisions will have a negative impact on capital (mainly due to the exclusion of deferred tax assets, pension assets and hybrid tier 1 capital instruments for the calculation of common equity) and also mean significantly higher RWA. As a result, our common equity ratio would be materially lower than our current BIS tier 1 ratio, if Basel III requirements were effective immediately. It is therefore important to also consider the Basel III transitional arrangements, which effectively phase in the impacts on capital over several years.
èRefer to the “Regulatory developments” section of this report for more information
  
  Regulatory developmentsCapital ratios and RWA
  In July 2009, the Basel Committee on Banking Supervision (the Committee) published the revised Basel II market risk framework and issued enhancements to the Basel II framework. Swiss banks are expected to comply with the revised requirements by 1 January 2011.(BAR CHART)


     The revisions to the Basel II market risk framework aim to address perceived shortcomings in the current VaR framework, most notably by introducing new capital requirements to incorporate effects of “stressed markets”. This is achieved by introducing a new incremental risk charge that accounts for default and migration risk of trading book positions and a stressed VaR requirement taking into account a one-year observation period relating to significant losses, which must be calculated in addition to the VaR based on the most recent one-year observation period. Furthermore, securitization positions, even though held for trading, will attract banking book capital charges.

The enhanced Basel II framework introduces higher risk weights for resecuritization exposures, to better reflect the inherent risk in these products, and requires banks to conduct more rigorous credit analyses of externally rated securitization exposures. The Committee also issued valuation guidance for all illiquid positions accounted for at fair value.
Additionally, the Group of Central Bank Governors and Heads of Supervision (the oversight body of the Committee) met in September 2009 to review a comprehensive set of measures to strengthen the regulation, supervision and risk management of the banking sector. In December 2009, the Committee issued a package of proposals to strengthen global capital and liquidity regulations to promote a more resilient banking sector. Based on the above, the Committee initiated a comprehensive impact assessment of the capital and liquidity standards, which will be carried out in the first half of 2010. The Committee will also consider appropriate transition and grandfathering arrangements. Together, these measures are intended to promote a better balance between financial innovation, economic efficiency, and sustainable growth in the long run.
As disclosed in our 2008 financial report, FINMA introduced a minimum leverage ratio and higher target capital ratios for the two largest Swiss banks. Public statements by FINMA officials and by the Swiss National Bank suggest that Swiss authorities are actively considering what further measures should be taken to reduce the systemic risk associated with Switzerland’s two largest banks, including measures relating to capital, liquidity and structure. It would be premature to conclude whether these considerations will lead to further changes, and what effect such changes might have on our business and strategic direction. We continue to monitor all regulatory developments and will take necessary steps as required.



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Risk and treasury management

     
  BIS Capitalcapital ratios
     
  The BIS capital ratios compare eligible capital (tier 1 and total capital) with total RWA.
      At year-end 2009, theOn 31 December 2010, our BIS tier 1 capital ratio amounted tostood at 17.8% (up from 15.4% and theon 31 December 2009), our BIS core tier 1 capital ratio stood at 15.3% (up from 11.9% on 31 December 2009), while our BIS total capital ratio towas 20.4% (up from 19.8%, up from 11.0% and 15.0%, respectively, on 31 December 2008. In this period, RWA declined2009). Our BIS tier 1 capital increased by CHF 3.5 billion to CHF 206.535.3 billion, while RWA decreased to CHF 198.9 billion from CHF 302.3 billion, while tier 1 capital decreased to CHF 31.8 billion from CHF 33.2206.5 billion.
  è Refer to the discussiondiscussions on “Capital adequacy”adequacy management” and “Eligible capital” in this section for more information
     
  Capital requirements
     
(Audited)(Audited) Our capital requirements are based on our consolidated financial statements in accordance with IFRS,International Financial Reporting Standards (IFRS), adjusted for regulatory differences. Under IFRS, subsidiaries and special purpose entities that are directly or indirectly controlled by UBS must be consolidated, whereas for regulatory capital purposes, different consolidation principles apply. For example, subsidiaries that are not active in the banking and finance business are not consolidated.
  è Refer to the additional capital management disclosure in the “Basel II Pillar 3” section of this report for more information
  On 31 December 20092010, BIS RWA were CHF 206.5198.9 billion, compared with CHF 302.3206.5 billion at year-end 2008.2009. The analysis by component is as follows:


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  Credit risk
  RWA for credit risk amounted to CHF 119.9 billion on 31 December 2010, compared with CHF 140.5 billion on 31 December 2009, compared with CHF 222.6 billion on 31 December 2008.2009. The reduction was primarily related to lower derivatives RWA of CHF 42.17.9 billion and reduced loan bookdrawn exposure RWA of CHF 25.88.7 billion, as well as a reduction in residential mortgage RWA of CHF 2.6 billion. The loan book decreaseThese decreases occurred mainly in the Investment Bank and Wealth Management & Swiss Bank. Further,The weakening of several major currencies against the Swiss franc has been a significant contributor to most of these RWA declined for security finance transactions, committed credit lines and guarantees as well as seed money exposures. In addition, a CHF 2.0 billion RWA reduction stemmed from the UBS Pactual sale.reductions.
  è Refer to the “Credit risk” section of this report for more information

(LINE GRAPH)

Non-counterparty related assets

RWA for non-counterparty related assets amounted to CHF 7.0 billion on 31 December 2009, compared with CHF 7.4 billion on 31 December 2008.

Market risk

In 2009, RWA for market risk decreased by CHF 14.8 billion to CHF 12.9 billion on 31 December 2009. This was due to the inclusion of credit valuation adjustments in regulatory VaR, reduced risk positions in the trading book as well as lower regulatory VaR multipliers.
   
Non-counterparty related assets
RWA for non-counterparty related assets amounted to CHF 6.2 billion on 31 December 2010, compared with CHF 7.0 billion on 31 December 2009.
Market risk
In 2010, RWA for market risk increased by CHF 7.9 billion to CHF 20.8 billion on 31 December 2010. This was due to an increase in average regulatory VaR exposures, primarily resulting from increased credit spread risk.
è Refer to the “Market risk” section of this report for furthermore information

Operational risk

RWA for operational risk increased to CHF 46.1 billion on 31 December 2009 from CHF 44.7 billion on 31 December 2008. This was related to the recognition of the US cross-border case and the regular scenario recalibration of operational risk events during 2009, which were partly offset by comparably low other operational risk losses experienced during 2009.
   
Operational risk
RWA for operational risk increased to CHF 51.9 billion on 31 December 2010 from CHF 46.1 billion on 31 December 2009, as agreed with FINMA.
è Refer to the “Operational risk” section of this report for furthermore information



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  Eligible capital
     
(Audited)
(Audited)		 Eligible capital, the capital available to support RWA, consists of tier 1 and tier 2 capital. To determine eligible tier 1 and total capital, specific adjustments must be made to equity attributable
(Audited)to our shareholders as defined by IFRS and as shown on our balance sheet. The most notable adjustments are the deductions for goodwill, intangible assets, investments in unconsolidated entities engaged in banking and financial activities and own credit effects on liabilities designated at fair value.
  
 Tier 1 capital
 BIS tierTier 1 capital amounted to CHF 35.3 billion on 31 December 2010, compared with CHF 31.8 billion on 31 December 2009, down froman increase of CHF 33.23.5 billion. The positive contributors to this increase were the CHF 7.5 billion on 31 December 2008. The decrease in BISnet profit attributable to UBS shareholders and the reversals of own credit losses of CHF 0.5 billion. These effects were partially offset by a redemption of hybrid tier 1 capital of CHF 1.41.5 billion, is attributable to the CHF 2.7 billion loss recognized under IFRS, CHF 1.8 billionincreased tier 1 deductions of own shares related components, CHF 2.8 billion capital impact related to coupon payments in connection with the mandatory convertible notes (MCNs) issued in March 2008 and the MCNs issued in December 2008, of which the latter was redeemed in August 2009. Further CHF 1.0 billion was due(securitization exposures and other deduction items), negative effects relating to changes in tier 1 deduction itemsshare-based compensation net of tax of CHF 0.9 billion, as well as currency effects of CHF 0.6 billion and CHF 0.2 billion from other effects including FX. These negative impacts were partly offset by the CHF 3.8 billion share issuance in June 2009, an adjustment for capital purposes of CHF 2.1 billion for losses on own credit and the positive effect of CHF 1.2 billion from the sale of UBS Pactual.0.5 billion.
  
 Hybrid tier 1 capital
 These instruments are perpetual and can only be redeemed if they are called by the issuer after having received regula-
(Audited)toryregulatory approval. The payment of interest is subject to compliance with minimum capital ratios and other requirements. Any missed payment is non-cumulative. As of 31 December 2009,2010, our hybrid tier 1 instruments amounted to CHF 4.9 billion, down from CHF 7.2 billion.billion as of 31 December 2009. Under IFRS, these instruments are accounted for as equity attributable to minoritynon-controlling interests.
    
 Tier 2 capital
 These instruments consist mainly of our subordinated long-term debt that ranks senior to both our shares and hybrid tier 1 instruments but is subordinated to all our senior obligations. Tier 2 capital net of tier 2 deductions accounted for CHF 9.15.2 billion in total capital as of year-end 2009.2010. In 2010, we redeemed a floating rate EUR 1.2 billion subordinated bond.
  è Refer to the “Shares and capital instruments” section of this report for details about our issuance of capital securities during 2009, including hybrid tier 1 instruments and tier 1 instrumentsmore information
Transfer of capital within UBS Group
Under Swiss company law, UBS is organized as a limited company, a corporation that has issued shares of common stock to investors. UBS AG is the parent company of UBS Group. The legal entity structure of the Group is designed to support our businesses within an efficient legal, tax, regulatory and funding framework. We enter into intragroup transactions in order to provide funding and capital to individual UBS entities. As of 31 December 2009, we were not aware of any material restrictions, or other major impediments, concerning the transfer of funds or regulatory capital within the Group apart from those which apply to these entities by way of local laws and regulations.


                
Capital adequacyCapital adequacy Capital adequacy 
CHF million, except where indicated 31.12.09 31.12.08  31.12.10 31.12.09 
BIS core tier 1 capital 30,420 24,574 
BIS tier 1 capital 31,798 33,154  35,323 31,798 
of which: hybrid tier 1 capital
 7,224 7,393 
BIS total capital 40,542 40,941 
BIS total capital 40,941 45,367 
BIS core tier 1 capital ratio (%) 15.3 11.9 
BIS tier 1 capital ratio (%) 15.4 11.0  17.8 15.4 
BIS total capital ratio (%) 19.8 15.0  20.4 19.8 
BIS risk-weighted assets 206,525 302,273  198,875 206,525 
of which: credit risk1
 140,494 222,563  119,919 140,494 
of which: non-counterparty related risk
 7,026 7,411  6,195 7,026 
of which: market risk
 12,861 27,614  20,813 12,861 
of which: operational risk
 46,144 44,685  51,948 46,144 
1 Includes securitization exposures and equity exposures not part of the trading book and capital requirements for settlement risk (failed trades).
1 Includes securitization exposures and equity exposures not part of the trading book and capital requirements for settlement risk (failed trades).

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(Audited) Capital components 
 CHF million 31.12.10  31.12.09 
  
  BIS core tier 1 capital prior to deductions1  46,365   40,144 
   
  
of which: paid-in share capital
  383   356 
   
  
of which: share premium, retained earnings, currency translation differences and other elements
  45,982   39,788 
   
  Less: treasury shares / deduction for own shares2  (2,993)  (2,424)
   
  Less: goodwill & intangible assets  (9,822)  (11,008)
   
  Less: securitization exposures3  (2,385)  (1,506)
   
  Less: other deduction items4  (744)  (632)
   
  BIS core tier 1 capital  30,420   24,574 
   
  Hybrid tier 1 capital  4,903   7,224 
   
  
of which: non-innovative capital instruments
  1,523   1,785 
   
  
of which: innovative capital instruments
  3,380   5,438 
   
  BIS tier 1 capital  35,323   31,798 
   
  Upper tier 2 capital  110   50 
   
  Lower tier 2 capital  8,239   11,231 
   
  Less: securitization exposures3  (2,385)  (1,506)
   
  Less: other deduction items4  (744)  (632)
   
  BIS total capital  40,542   40,941 
   
  
1 “BIS core tier 1 capital prior to deductions” plus “Hybrid tier 1 capital” less “treasury shares / deduction for own shares” equals “Total equity / gross tier 1 including hybrid tier 1 instruments” in the “Reconciliation of IFRS equity to BIS tier 1 capital” table.  2 Consists of: i) net long position in own shares held for trading purposes; ii) own shares bought for unvested or upcoming share awards; and iii) accruals built for upcoming share awards.  3 Includes a 50% deduction of the fair value of UBS’s option to acquire the SNB StabFund’s equity (CHF 1,781 million on 31.12.10 and CHF 1,216 million on 31.12.09).  4 Positions to be deducted as 50% from tier 1 and 50% from total capital mainly consist of: i) net long position of non-consolidated participations in the finance sector; ii) expected loss on advanced internal ratings-based portfolio less general provisions (if difference is positive); and iii) expected loss for equities (simple risk weight method).

Transfer of capital within UBS Group

Under Swiss company law, UBS is organized as an “Aktiengesellschaft”, a corporation that has issued shares of common stock to investors. UBS AG is the parent company of the Group. The legal entity structure of the Group is designed to support our businesses within an efficient legal, tax, regulatory and treasury managementfunding framework. We enter into intragroup transactions in order to provide funding and capital to individual UBS entities. As of 31 December 2010, we were not aware of any material restrictions, or other major impediments, concerning the transfer of funds or regulatory capital within the Group apart from those which apply to these entities by way of local laws and regulations.
           
(Audited)
 Capital components 
 CHF million 31.12.09  31.12.08 
  
 BIS tier 1 capital prior to deductions  47,367   48,758 
  
 
of which: paid-in share capital
  356   293 
  
 
of which: share premium, retained earnings, currency translation differences and other elements
  39,788   41,072 
  
 
of which: non-innovative hybrid tier 1 capital instruments
  1,785   1,810 
  
 
of which: innovative hybrid tier 1 capital instruments
  5,438   5,583 
  
 
Less: treasury shares/deduction for own shares1
  (2,424)  (1,488)
  
 
Less: goodwill&intangible assets
  (11,008)  (12,950)
  
 
Less: other deduction items2
  (2,138)  (1,167)
  
 
BIS tier 1 capital
  31,798   33,154 
  
 Upper tier 2 capital  50   1,090 
  
 Lower tier 2 capital  11,231   12,290 
  
 
Less: other deduction items2
  (2,138)  (1,167)
  
 
BIS total capital
  40,941   45,367 
  
 
1 Consists of: i) net long position in own shares held for trading purposes; ii) own shares bought for unvested or upcoming share awards and iii) accrual build for upcoming share awards.
2 Positions to be deducted as 50% from tier 1 and 50% from total capital mainly consist of: net long position of non-consolidated participations in the finance sector; expected loss on advanced internal rating-based portfolio less general provisions (if difference is positive); expected loss for equities (simple risk weight method); first loss positions from securitization exposures.

IFRS equity to BIS tier 1 capital

The main differences between IFRS equity attributable to shareholders and tier 1 capital result from:
– An increase in BIS share premium of which CHF 3.7 billion stems from the MCNs issued in March 2008 and the outstanding accrual related to the MCN coupon of CHF 0.2 billion.
–The difference of CHF 1.20.4 billion inNet income recognized directly in equity, net of taxiswas due to fair value changes recorded directly in equity under IFRS fromFinancial investments available-for-saleand cash flow hedges (reduction ofhedge effects, which are reversed for BIS purposes and thereby reduced the amount by CHF 1.6 billion).1.1 billion. This was partly offset by CHF 0.4 billion of net positive foreign currency translation effects and the reclassification for BIS purpose of fair value changes relating toAvailable-for-sale securities of CHF 0.3 billion.



               
(Audited) Reconciliation of IFRS equity to BIS tier 1 capital 
   31.12.10 
 CHF million IFRS view1  Reconciliation items  BIS view 
   
  Share capital  383   0   383 
   
  Share premium  34,393   (8)  34,386 
   
  Net income recognized directly in equity, net of tax  (6,534)  (406)  (6,940)
   
  Retained earnings  19,285   (857)  18,428 
   
  Equity classified as obligation to purchase own shares  (54)  54   0 
   
  Equity attributable to non-controlling interests  5,043   (33)  5,010 
   
  Treasury shares / deduction for own shares2  (654)  (2,339)  (2,993)
   
  Total equity / gross tier 1 including hybrid tier 1 instruments  51,863   (3,588)  48,274 
   
  Less: goodwill, intangible assets and other deduction items          (12,952)3
   
  Less: accrual for expected future dividend payments          0 
   
  Eligible tier 1 capital          35,323 
   
  
1 International Financial Reporting Standards (IFRS).  2 Generally, treasury shares are fully deducted from equity under IFRS, whereas for capital adequacy purposes this position covers the following: i) net long position in own shares held for trading purposes; ii) own shares bought for unvested or upcoming share awards; and iii) accruals built for upcoming share awards.  3 “Other deduction items” include primarily 50% of the deductions for net long position of non-consolidated participations in the finance sector; expected loss on advanced internal ratings-based approach portfolio less general provisions (if difference is positive): expected loss for equities (simple risk weight method); and first loss positions from securitization exposures.

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  billion of foreign currency translation differences due to a different regulatory scope of consolidation.
– The increaseRetained earnings were lower under the BIS view than under IFRS by CHF 0.9 billion, primarily due to CHF 0.2 billion of BIS share premium of CHF 3.7 billion resulted in an equivalent reduction of thelife-to-date IFRS retained earnings which were reduced for gains on own credit net of tax of CHF 0.8 billion related to the application of the fair value option under IAS 39which are reversed for BIS purposes and CHF 0.20.3 billion relatedattributable to different regulatorydifferences in the scope of consolidation. The remainder is due to multiple factors, e.g. differences in measurement and recognition principles between IFRS and BIS, including a deduction for unrealized losses on available-for-sale securities.
– Removing minority interests of CHF 0.3 billion for regulatory purposes not eligible as tier 1 capital.
–
A negative adjustment inTreasury shares/deduction for own sharesof CHF 1.42.3 billion, mainly due to accrualsthe different calculation of the capital deduction relating to share-based compensation.
FINMA leverage ratio
FINMA requires a minimum leverage ratio of 3% at a Group level and expects that, in normal times, the ratio will be well above this. This target is to be achieved by 1 January 2013 at the latest.
    On 31 December 2010, our Group FINMA leverage ratio improved to 4.45%, compared with the 31 December 2009 ratio of 3.93%. During the year, average total assets prior to deductions decreased by CHF 27.7 billion to CHF 1,398.5 billion. The average total adjusted assets fell by CHF 15.2 billion to CHF 794.2 billion. The table below shows the FINMA leverage ratio calculation for upcoming share awards.the Group.
Equity attribution framework
The equity attribution framework reflects our overarching objectives of maintaining a strong capital base and guiding businesses toward activities with the best balance of profit potential, risk and capital usage. In June 2010, the key principles underlying the equity attribution framework received BoD approval.
(Audited)    Within this framework, the BoD attributes equity to the businesses after considering their risk exposure, RWA usage, asset size, goodwill and intangible assets.


     
(Audited)
Reconciliation of International Financial Reporting Standards equity to BIS tier 1 capital
      31.12.09
CHF millionIFRS view1Reconciliation itemsBIS viewThe design of the equity attribution framework enables us to:
  
Share capital3560356
Share premium34,7863,88838,674
Net income recognized directly in equity, net of tax(4,875)(1,214)(6,089)
Revaluation reserve from step acquisitions, net of tax38038
Retained earnings11,751(4,687)7,064
Equity classified as obligation to purchase own shares(2)20
Equity attributable to minority interests7,620(295)7,325
Treasury shares/deduction for own shares2
(1,040)(1,384)(2,424)
Total equity/gross tier 1 including MCNs and hybrid tier 1 instruments
48,633(3,690)44,944
Less: goodwill, intangible assets and other deduction items(13,146)3
Less: accrual for expected future dividend payments0
Eligible BIS tier 1 capital
31,798
1  International Financial Reporting Standards (IFRS).   2  Generally, treasury shares are fully deducted from equity under IFRS, whereas for capital adequacy purposes this position covers the following: i) net long position in own shares held for trading purposes; ii) own shares bought for unvested or upcoming share awards; and iii) accrual build for upcoming share awards.  3 “Other deduction items” include primarily 50% of the deductions for net long position of non-consolidated participations in the finance sector, expected loss on advanced internal rating-based approach portfolio less general provisions (if difference is positive); expected loss for equities (simple risk weight method); first loss positions from securitization exposures.

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FINMA leverage ratio
As disclosed in our 2008 financial report, FINMA introduced a minimum leverage ratio of 3% on Group level and expects that, in normal times, the ratio will be well above this. The FINMA leverage ratio is being progressively implemented until it is fully applicable on 1 January 2013.
     On 31 December 2009, our Group FINMA leverage ratio improved to 3.93%, compared with the 31 December 2008 ratio of 2.45%. During the year, average total assets prior to deductions decreased by CHF 785.5 billion, or 36%, to CHF 1,426.2 billion as a result of our continued efforts to reduce the balance sheet size. The reduction in average total adjusted assets was even more pronounced, falling by 40% to CHF 809.4 billion, more than compensating for the 4% decrease in BIS tier 1 capital (as discussed earlier within this section). The table below shows the FINMA leverage ratio calculation for the Group.
Equity attribution framework
In first quarter 2008, we implemented a new framework for attributing equity capital to our businesses. This reflects our overarching objectives of maintaining a strong capital base and guiding businesses towards activities with the best balance among profit potential, risk and capital usage. Within this framework, the Group Asset and Liability Management Committee (Group ALCO) attributes equity to the businesses after considering their risk exposure, asset size, goodwill and intangible assets.
     The design of the equity attribution framework enables us to:
– Calculate and assess return on attributed equity (RoaE)(RoE) in each of our businesses. RoaE and return on BIS RWA arebusiness divisions. RoE is disclosed for all business groupsdivisions and units.
 
– Integrate Group-wide capital management activities with those at business groupdivision and business unit levels.
 
– Measure current period and historical performance in a consistent manner across business divisions and business units.
 
– Make better comparisons between our businesses and those of our competitors.
     The framework operates as follows: First, each business is attributed an amount of equity equal to the average book value of goodwill and intangible assets, as reported for that business division or business unit according to IFRS. Next, the Group ALCO considers a number of factors that drive required capital, including:
(Audited)    The framework operates as follows: First, each business is attributed an amount of equity equal to the average book value of goodwill and intangible assets, as reported for that business division or business unit according to IFRS. Second, the BoD considers a number of factors that drive required capital, including:
– Equity requirements based on aggregated risk exposure, including the potential for losses exceeding our earnings capacity as defined by the firm’s risk-based capital. At certain other institutions, this factor is sometimes referred to as “Economic Capital”“economic capital”.
 
– Regulatory capital requirements which are based on RWA usage of the businesses.and a target capital ratio for each business.
 
– The assetAsset size of the businesses is capitalized withand a specifictarget leverage ratio.
     After reviewing the results of this formulaic approach, the Group ALCO makes adjustments to the final tangible equity


FINMA leverage ratio calculation
         
CHF billion, except where indicated Average 4Q09  Average 4Q08 
 
Total assets (IFRS) prior to deductions1
  1,426.2   2,211.7 
 
Less: netting of replacement values2
  (420.9)  (653.5)
 
Less: loans to Swiss clients (excluding banks)3
  (161.4)  (165.5)
 
Less: cash and balances with central banks  (22.1)  (26.0)
 
Less: other4
  (12.4)  (14.6)
 
Total adjusted assets
  809.4   1,352.1 
 
BIS tier 1 capital (at year-end)  31.8   33.2 
 
FINMA leverage ratio (%)
  3.93   2.45 
 
ratio for each business.
1 Total assets are calculated as
    After reviewing the averageresults of this formulaic approach, the month-end valuesGroup ALCO recommends and the BoD makes adjustments to the final tangible equity attribution to reflect the amount of equity it believes is appropriate for the three months in the calculation period.  2 Includes the impact of netting agreements (including cash collateral) in accordance with Swiss Federal Banking law,each business. This assessment is based on the IFRS scopeexpectations of consolidation.  3 Includes mortgage loansthe business’s clients and the business environment, including allowing for sufficient capital to international clients for properties located in Switzerland.  4 Refersupport the business’s underlying risks and sustain extreme stress scenarios. The amount of equity attributed to all the businesses corresponds to the “Capital components” tableamount that we believe is required to maintain a strong capital base and support our businesses adequately. If the total equity attributed to the businesses differs from the Group’s actual equity during a given period, the surplus or deficit is reflected in this section for more informationTreasury activities and other corporate items. The BoD currently makes equity attribution decisions on deductions of assets from BIS tier 1 capital.a quarterly basis.


         
FINMA leverage ratio calculation 
CHF billion, except where indicated Average 4Q10  Average 4Q09 
 
Total assets (IFRS)1
  1,398.5   1,426.2 
 
Less: netting of replacement values2
  (410.1)  (420.9)
 
Less: loans to Swiss clients (excluding banks)3
  (161.6)  (161.4)
 
Less: cash and balances with central banks  (20.1)  (22.1)
 
Less: other4
  (12.4)  (12.4)
 
Total adjusted assets
  794.2   809.4 
 
BIS tier 1 capital (at year-end)  35.3   31.8 
 
FINMA leverage ratio (%)
  4.45   3.93 
 
1 Total assets are calculated as the average of the month-end values for the three months in the calculation period.  2 Includes the impact of netting agreements (including cash collateral) in accordance with Swiss Federal Banking law, based on the IFRS scope of consolidation.  3 Includes mortgage loans to international clients for properties located in Switzerland.  4 Refer to the “Capital components” table for more information on deductions of assets from BIS tier 1 capital.

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attribution to reflect the amount of equity it believes is appropriate for each business. This assessment is based on the expectations of the business’s clients and the business environment, including allowing for sufficient capital to support the business’s underlying risks and sustain extreme stress scenarios. The amount of equity attributed to all the businesses corresponds to the amount that we believe is required to maintain a strong capital base and support our businesses adequately. If the total equity attributed to the businesses differs from the Group’s actual equity during a particular period, the surplus or deficit is reflected in the Corporate Center.
The amount of equity attributed to each division is an important input into the calculation of economic profit for that division. That is, broadlyBroadly speaking, economic profit equals profits minus the product of attributed equity multiplied byand the cost of equity.
As outlined in the table “Average attributed equity”, the amount of average equity attributed to the Investment Bank was reducedand Treasury activities and other corporate items increased by CHF 3.0 billion and CHF 2.0 billion respectively from the fourth quarter of 2009 to the fourth quarter of 2010. The Investment Bank increase was influenced by an expected moderate increase in the size of its assets and RWA over time.
In addition, the increases in both the Investment Bank and in Treasury activities and other corporate items were due to lower risk exposures from fourth quarter 2008a refinement of our methodology. Previously, we had not explicitly taken account of the equity burden related to fourth quarter 2009. During the same period, the average equity attributed to Wealth Management Americas decreased by CHF 1 billion, while Global Asset Management’s average attributed equity was reduced by CHF 0.5 billion.
     If equity attributable to minority interests (which primarily consists of tier 1 capital instruments issued by us) were included, then our total equity would roughly equaldeductions in the equity attributedattribution framework. In the calculation of the RWA driver, we now convert these tier 1 deductions to the business divisions, as shownequivalent amount of tangible equity and add that to the amount of tangible equity needed to support reported RWA for each division. Similarly, in the table below.calculation of the asset driver, we now convert these tier 1 deductions to the equivalent amount of tangible equity and add that to the amount of tangible equity needed to support the reported leverage ratio denominator for each division.
We continue to use both internal assessments of risk (as reflected in the UBS Risk-Based Capital framework) and regulatory measures of risk as drivers, as we believe that both play a role in the amount of equity needed to strongly support each division and UBS as a whole. In addition, we believe it is useful for top management and the BoD to compare equity requirements derived from internal risk measures with equity requirements derived from regulatory capital requirements and standards.
Further, the equity attribution framework continues to be forward-looking. Therefore, with regard to the RWA and asset drivers, we will be taking into account during 2011 the impacts of the enhanced Basel II framework and Basel III requirements.


Average attributed equity
         
CHF billion 4Q09  4Q08 
 
Wealth Management&Swiss Bank
  9.0   9.0 
 
Wealth Management Americas  8.0   9.0 
 
Global Asset Management  2.5   3.0 
 
Investment Bank  24.0   26.0 
 
Corporate Center  1.0   1.0 
 
Surplus/(Deficit)  (4.2)  (8.5)
 
Average equity attributable to UBS shareholders  40.3   39.5 
 
         
Average excess total equity
        
 
CHF billion
  4Q09   4Q08 
 
Average equity attributable to UBS shareholders  40.3   39.5 
 
Average equity attributable to minority interests  7.7   8.2 
 
Pro forma average total equity
  47.9   47.7 
 
Average equity attributed to business divisions and CC  44.5   48.0 
 
Average excess total equity
  3.4   (0.3)
 
         
Average attributed equity 
CHF billion 4Q10  4Q09 
 
Wealth Management  4.4   4.4 
 
Retail & Corporate  4.6   4.6 
 
Wealth Management & Swiss Bank  9.0   9.0 
 
Wealth Management Americas  8.0   8.0 
 
Global Asset Management  2.5   2.5 
 
Investment Bank  27.0   24.0 
 
Treasury activities and other corporate items  3.0   1.0 
 
Average equity attributed to the business divisions
  49.5   44.5 
 
Surplus / (deficit)  (2.2)  (4.2)
 
Average equity attributable to UBS shareholders
  47.3   40.3 
 

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Shares and capital instruments

Shares

UBS shares and tier 1 capital

The majority of our tier 1 capital comprises share premium and retained earnings attributed to UBS shareholders. As of 31 December 2009,2010, total IFRS equity attributable to our shareholders amounted to CHF 41,01346,820 million, and was represented by a total of 3,558,112,7533,830,840,513 shares issued, UBS shares, of which 37,553,872 (1.1%38,892,031 (1.0%) were held by us. UBS.
In 2010, the shares issued were increased by a total of 272,727,760 shares due to the conversion of CHF 13 billion mandatory convertible notes (MCN) on 5 March 2010, leading to an issuance of 272,651,005 shares from conditional capital. In addition, the exercise of employee options led to the issuance of 76,755 shares.
Each share has a par value of CHF 0.10, and generally entitles the holder to one vote at the shareholders’ meeting and to a proportionate share of the dividend that is distributed.distributed dividends. There are no preferential rights for shareholders and no other classes of shares are issued by the Parent Bank directly.
     In 2009, the shares issued were increased by a total of 625,532,204. This increase was due to the issuance of newly created shares for a share placement with institutional investors in June (293,258,050 shares placed at CHF 13 each), the early conversion of MCNs by the Swiss Confederation in August (332,225,913 shares) plus a small number of exercises of employee options (48,241 shares).
èRefer to the “Shareholders’ participation rights” section of this report for more information
Under Swiss company law, shareholders must approve in a shareholders’ meeting any increase in the total number of issued shares, which may arise from an ordinary share capital increase or the creation of conditional or authorized capital. The table
below lists all shareholder-approved issuanceissuances of shares in existence as per year end 2009. We have as anat year-end 2010. It is our objective to source growth and dividends from retained earnings and not to dilute shares by the issuance of additional shares unless it is warranted by stressed financial market conditions or fromby regulators.

Holding of UBS shares

We hold

UBS holds own shares for two main purposes: in Group Treasury to cover employee share and option programs and in the Investment Bank, to a limited extent, for trading purposes where itthe Investment Bank engages in market-making activities in UBS shares and related derivative products.

The holding of treasury shares on 31 December 2009 decreased2010 increased to 37,553,87238,892,031 or 1.1%1.0% of shares issued, from 61,903,12137,553,872 or 2.1%1.1% on the same date one year prior.
     In 2009, a limited number of employee options were exercised and an additional 88.7 million new options were granted. As of 31 December 2009, 27.72010, employee options and stock appreciation rights to receive 5.2 million shares were exercisable. Shares held in treasury or newly shares issued are delivered to the employee at exercise. On 31 December 2010, 25.8 million shares were available to cover employee share delivery obligationsfor this purpose, and an additional 150149.9 million unissued shares in conditional share capital arewere assigned to cover future employee option exercises. At year-end 2009,2010, the shares available covered all exercisable in-the-money employee obligations.



Shares issued
For the year ended
Number of shares31.12.09
Balance at the beginning of the year
2,932,580,549
Issue of shares for capital increase (conversion December 2008 MCN)332,225,913
Issue of shares for capital increase (share placement)293,258,050
Issue of shares for employee options48,241
Balance at the end of the year
3,558,112,753
Shareholder-approved issuance of shares
             
      Year approved by    
  Maximum number of  shareholder general  % of shares issued 
  shares to be issued  meeting  31.12.09 
 
Authorized capital
            
 
Capital increase  5,001,246   2008   0.14 
 
Conditional capital
            
 
March 2008 mandatory convertible notes  277,750,000   2008   7.81 
 
SNB warrants  100,000,000   2009   2.81 
 
Employee equity participation plans of UBS AG  149,994,296   2006   4.22 
 
Employee stock ownership plan of former PaineWebber  29,350   2000   0.00 
 

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The presentation in the table below“Treasury share activities” shows the purchase of our shares by treasuryGroup Treasury and does not include the activities of the Investment Bank.

Treasury shares held by the Investment Bank

The Investment Bank, acting as liquidity provider to the equity index futures market and as a market makermarket-maker in our shares and derivatives, has issued derivatives linked to ourUBS stock. Most of these instruments are classified as cash-settled derivatives and are primarily issued to meet client demand and for trading purposes. To hedge the economic exposure, a limited number of our shares are held by the Investment Bank.



Shares

For the year ended
Number of shares31.12.10
Balance at the beginning of the year
3,558,112,753
Issue of shares for capital increase (conversion of MCN in March 2010)272,651,005
Issue of shares for employee options76,755
Balance at the end of the year
3,830,840,513

Shareholder-approved issuance of shares

             
      Year approved by    
  Maximum number of  shareholder general  % of shares issued 
  shares to be issued  meeting  31.12.10 
 
Conditional capital
            
 
SNB warrants  100,000,000   2009   2.61 
 
Employee equity participation plans of UBS AG  149,920,712   2006   3.91 
 
Conversion rights / warrants granted in connection with bonds  380,000,000   2010   9.92 
 
Total  629,920,712       16.44 
 

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Capital instruments

In order to improve the quality of capital, regulators are proposing new requirements for capital instruments and creating a new category of capital instruments: contingent convertible bonds (CoCo). The changes proposed are designed to increase the resilience against a financial crisis and are expected to maintain the banks in crisis as going concerns. Regulators view these instruments as additional protection against systemic risks of large banks.

èRefer to the “Regulatory developments” section of this report for more information

Mandatory convertible notes

As part of the measures taken to strengthen our capital base in 2008, we issued two MCNs, withMCN. The first had a principal amountsamount of CHF 13 billion inand consisted of private placements with two financial investorsinvestors. The second was placed with the Swiss Confederation and had a principal amount of CHF 6 billion to the Swiss Confederation.
billion. The CHF 6 billion issued to the Swiss ConfederationMCN was converted early into 332,225,913 UBS shares on 25 August 2009, whereas the remaining2009. The CHF 13 billion convertible
notes will expireMCN expired on 5 March 2010, leading to the expected issuanceand was mandatorily converted into 273 million of 272,651,005newly issued shares, from conditional capital to the holdersrepresenting 7.7% of the mandatory convertible notes.our then issued share capital.

Hybrid tier 1 capital

Hybrid tier 1 instruments represent innovative and non-innovative perpetual instruments. They are accounted for under minoritynon-controlling interests in the IFRS equity. We did not issue hybrid tier 1 instruments in 2009. As of 31 December 2009, we have CHF 7,224 million of such instruments in various currencies outstanding. Hybrid tier 1 instruments are perpetual instruments which can only be redeemed if they are called by the issuer.issuer after having received regulatory approval. If such a call is not exercised at the respective call date, the terms might include a change from fixed to floating coupon payments and, in the case of innovative instruments only, a limited step-up of the interest rate. Non-innovative instruments do not have a step-up of the interest rate and are therefore viewed as having a higher equity characteristic for regulatory capital purposes. The instruments are issued either through trusts or our subsidiaries and rank senior to our shares in dissolution. Payments under the instruments are subject to adherence to our minimum capital ratios.ratios and other requirements. Any missed payment is non-cumulative. We did not issue hybrid tier 1 instruments in 2010 but redeemed USD 1.5 billion of trust preferred securities. As of 31 December 2010, we had CHF 4,903 million of such instruments in various currencies outstanding.



Treasury share activities

                 
  Treasury shares purchased for employee share    
  and option participation plans and acquisitions1  Total number of shares
          Number of shares    
Month of purchase Number of shares  Average price in CHF  (cumulative)  Average price in CHF 
 
January 2009  0   0.00   0   0.00 
 
February 2009  4,982,914   10.93   4,982,914   10.93 
 
March 2009  15,000,000   12.00   19,982,914   11.73 
 
April 2009  0   0.00   19,982,914   11.73 
 
May 2009  0   0.00   19,982,914   11.73 
 
June 2009  0   0.00   19,982,914   11.73 
 
July 2009  0   0.00   19,982,914   11.73 
 
August 2009  672,876   16.02   20,655,790   11.87 
 
September 2009  2,661,037   18.85   23,316,827   12.67 
 
October 2009  0   0.00   23,316,827   12.67 
 
November 2009  0   0.00   23,316,827   12.67 
 
December 2009  1,050,000   16.03   24,366,827   12.81 
 
                 
  Treasury shares purchased for employee share and    
  option participation plans and acquisitions1 Total number of shares 
Month of purchase Number of shares  Average price in CHF  Number of shares (cumulative)  Average price in CHF 
 
January 2010  0   0.00   0   0.00 
 
February 2010  45,000,000   14.20   45,000,000   14.20 
 
March 2010  33,580,113   15.13   78,580,113   14.60 
 
April 2010  0   0.00   78,580,113   14.60 
 
May 2010  0   0.00   78,580,113   14.60 
 
June 2010  0   0.00   78,580,113   14.60 
 
July 2010  0   0.00   78,580,113   14.60 
 
August 2010  900,000   16.93   79,480,113   14.63 
 
September 2010  0   0.00   79,480,113   14.63 
 
October 2010  0   0.00   79,480,113   14.63 
 
November 2010  3,110,000   15.72   82,590,113   14.67 
 
December 2010  670,000   15.70   83,260,113   14.68 
 
1 This table excludes market-making and related hedging purchases by UBS. The table also excludes UBS shares purchased by investment funds managed by usUBS for clients in accordance with specified investment strategies that are established by each fund manager acting independently of UBS; and also excludes UBS shares purchased by pension and retirement benefit plans for ourUBS employees, which are managed by a board of UBS management and employee representatives in accordance with Swiss law guidelines. UBS’s pension and retirement benefit plans purchased 1,391,35053,000 UBS shares during the year and held 4,095,8501,638,000 UBS shares as atof 31 December 2009.2010.

Conversion price and number of shares

                             
      Amount              Conversion price per  Conversion into 
  Coupon  (CHF billion)  Issuance date  Conversion period /maturity  UBS share (CHF)  number of UBS shares 
 
MCNs
  9%   13  5 March 2008 6 September 2008 5 March 2010  47.681  272,651,005 
 
                             
      Amount              Conversion price per  Conversion into 
  Coupon  (CHF billion)  Issuance date  Conversion period / maturity  UBS share (CHF)  number of UBS shares 
 
MCN
  9%  13  5 March 2008  6 September 2008  5 March 2010   47.681  272,651,005 
 
1 Adjusted for dilution effects onof the capital increase in June 2009.increase.

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Treasury management

Tier 2 capital

The major element in tier 2 capital consists of subordinated long-term debt. Tier 2 instruments have been issued in various currencies and with a range of maturities across capital markets globally. They accounted for CHF 11,2318,239 million in total eligible capital as of year-end 2009.2010. Tier 2 instruments rank senior to both our shares and to hybrid tier 1 instruments but are subordinated to all our senior obligations. In 2010, we redeemed EUR 1.2 billion floating rate subordinated notes.

Distributions to shareholders

The decision whether to pay a dividend, and the level of the dividend, are dependent on our targeted capital ratios and its cash flow generation. In line with Swiss law, a dividend may only be paid out of an annual profit. The decision on dividend payments is proposed by the BoD to the shareholders and is subject to their approval at the Annual General Meeting. The BoD has decided to further bolster capital and has therefore not to proposeproposed any dividend for the financial year 2009.

2010.



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Risk and treasury management

UBS shares in 20092010

UBS share price chart vs Dow Jones Banks Titans 30 Index

(BAR CHART)

(PERFORMANCE GRAPH)
UBS share price chart vs DJ Banks Titans 30 Index

UBS shares are listed on the SIX Swiss Exchange (SIX) and the New York Stock Exchange (NYSE) and. As of 16 April 2010, UBS shares have been delisted from the Tokyo Stock Exchange (TSE). Only a small volume of UBS shares has been traded on the TSE in recent years. On 4 February 2010 UBS AG’s Board of Directors decided to delist the firm’s shares from the TSE. Pending the TSE’s approval of the delisting application, we expect de-listing to take place in the second quarter of 2010.

Exchange.
è 
     èRefer to the “Capital structure” section of this report for more information on UBSour shares, including par value, type and rights of security
Over the course of 2009,2010, UBS shares rose 8%declined 4% on the SIX Swiss Exchange and 11%but rose 6% in US dollar terms on the NYSE,
underperforming outperforming the global banking sector as measured by the Dow Jones Banks Titans 30 Index which increased 35%declined 4%. The MSCI World and the S&P 500 were up 28% and 26%, respectively.

Share liquidity

During 2009,2010, the daily average volume in UBS shares on the SIX Swiss Exchange was 20.316.4 million shares. On the NYSE, it was 0.91.2 million shares. The SIX Swiss Exchange trades a higher volume of UBS shares, and as such, it is expected to remain the main factor determining the movement in our share price.



Market capitalization1
CHF billion
(BAR CHART)
1 Market capitalization is calculated based on the total UBS ordinary shares issued multiplied by the UBS share price at period end. The total UBS ordinary shares issued as of 31 December 2009 and as of 31 December 2008 do not reflect the 272.7 million UBS shares to be issued through the conversion of mandatory convertible notes placed with two investors in March 2008. In addition, the total UBS ordinary shares as of 31 December 2008 do not reflect the 332.2 million shares issued through the conversion of mandatory convertible notes issued in December 2008 and converted in August 2009. Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in the “Financial information” section of this report for more information.
Ticker symbols
Trading exchangeBloombergReuters
SIX Swiss ExchangeUBSN VXUBSN.VX
New York Stock ExchangeUBS USUBS.N
Tokyo Stock Exchange8657 JP8657.T
Security identification codes
ISINCH0024899483
Valoren2.489.948
CusipCINS H89231 33 8


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Risk and treasury management
Treasury management

During the hours in which both the SIX Swiss Exchange and NYSE are simultaneously open for trading (currently 3:30 p.m. to 5:30 p.m. Central European Time), price differences are likely to be arbitraged away by professional market-makers. The NYSE price will therefore typically be expected to depend on both the SIX Swiss Exchange price
and the prevailing US dollar/Swiss franc exchange rate. When the SIX Swiss Exchange is closed for trading, traded volumes will typically be lower. However, the specialist firm making a market in UBS shares on the NYSE is required to facilitate sufficient liquidity and maintain an orderly market in UBS shares.

Ticker symbols

Trading exchangeBloombergReuters
SIXUBSN VXUBSN.VX
NYSEUBS UNUBS.N

Security identification codes

ISINCH0024899483
Valoren2.489.948
CusipCINSH89231338



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Risk and treasury management
Treasury management

UBS share data

             
  As of 
Registered shares 31.12.10  31.12.09  31.12.08 
 
Total ordinary shares issued  3,830,840,513   3,558,112,753   2,932,580,549 
 
Treasury shares  38,892,031   37,553,872   61,903,121 
 
Weighted average shares (for basic EPS calculations)1
  3,789,732,938   3,661,086,266   2,792,023,098 
 
Weighted average shares (for diluted EPS calculations)  3,838,332,049   3,661,841,214   2,793,174,654 
 
             
  For the year ended 
CHF 31.12.10  31.12.09  31.12.08 
 
EPS
            
 
Basic EPS  1.99   (0.75)  (7.63)
 
Basic EPS from continuing operations  1.99   (0.74)  (7.68)
 
Diluted EPS  1.96   (0.75)  (7.63)
 
Diluted EPS from continuing operations  1.96   (0.74)  (7.69)
 
             
     As of 
Registered shares 31.12.09  31.12.08  31.12.07 
 
Total ordinary shares issued  3,558,112,753   2,932,580,549   2,073,547,344 
 
Treasury shares  37,553,872   61,903,121   158,105,524 
 
Weighted average shares (for basic EPS calculations)  3,661,086,266   2,792,023,098   2,182,836,078 
 
Weighted average shares (for diluted EPS calculations)  3,661,841,214   2,793,174,654   2,184,303,404 
 
             
  For the year ended 
CHF 31.12.09  31.12.08  31.12.07 
 
Earnings per share (EPS)
            
 
Basic EPS  (0.75)  (7.63)  (2.40)
 
Basic EPS from continuing operations  (0.74)  (7.68)  (2.59)
 
Diluted EPS  (0.75)  (7.63)  (2.41)
 
Diluted EPS from continuing operations  (0.74)  (7.69)  (2.59)
 
1 Earnings per share.

UBS shares and market capitalization

                 
  As of % change from 
  31.12.10  31.12.09  31.12.08  31.12.09 
 
Share price (CHF)  15.35   16.05   14.84   (4)
 
Market capitalization (CHF million)1
  58,803   57,108   43,519   3 
 
1 Market capitalization is calculated based on the total UBS ordinary shares issued multiplied by the UBS share price at period end. The total UBS ordinary shares issued as of 31 December 2009 do not reflect the 272.7 million UBS shares issued through the conversion of MCN placed with two investors in March 2008, and converted in March 2010. In addition, the total UBS ordinary shares as of 31 December 2008 do not reflect the 332.2 million shares issued through the conversion of MCN issued in December 2008, and converted in August 2009. Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in the “Financial information” section of this report for more information.

Trading volumes

                 
  As of  % change from 
  31.12.09  31.12.08  31.12.07  31.12.08 
 
Share price (CHF)  16.05   14.84   46.60   8 
 
Market capitalization (CHF million)1
  57,108   43,519   108,654   31 
 
             
  For the year ended 
1,000 shares 31.12.10  31.12.09  31.12.08 
 
SIX total  4,166,417   5,105,358   7,174,486 
 
SIX daily average  16,403   20,340   28,584 
 
NYSE total  296,517   222,052   539,856 
 
NYSE daily average  1,177   881   2,134 
 
1 Market capitalization is calculated based on the total UBS ordinary shares issued multiplied by the UBS share price at period end. The total UBS ordinary shares issued as of 31 December 2009 and as of 31 December 2008 do not reflect the 272.7 million UBS shares to be issued through the conversion of mandatory convertible notes placed with two investors in March 2008. In addition, the total UBS ordinary shares as of 31 December 2008 do not reflect the 332.2 million shares issued through the conversion of mandatory convertible notes issued in December 2008 and converted in August 2009. Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in the “Financial information” section of this report for more information.
Source: Thomson Reuters
Trading volumes
             
  For the year ended 
1000 shares 31.12.09  31.12.08  31.12.07 
 
SIX Swiss Exchange total  5,105,358   7,174,486   4,079,863 
 
SIX Swiss Exchange daily average  20,340   28,584   16,451 
 
NYSE total  222,052   539,856   304,446 
 
NYSE daily average  881   2,134   1,213 
 
Source: Thomson Reuters

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Risk and treasury management

Stock exchange prices1

                         
  SIX Swiss Exchange New York Stock Exchange 
  High (CHF)  Low (CHF)  Period end (CHF)  High (USD)  Low (USD)  Period end (USD) 
 
                         
2010
  18.60   13.31   15.35   18.48   12.26   16.47 
 
Fourth quarter 2010
  17.83   14.92   15.35   18.48   14.99   16.47 
 
December  16.27   15.12   15.35   16.87   15.42   16.47 
 
November  17.46   14.92   15.03   18.15   14.99   15.07 
 
October  17.83   16.43   16.66   18.48   16.78   17.02 
 
Third quarter 2010
  18.53   13.94   16.68   18.47   13.04   17.03 
 
September  18.53   16.59   16.68   18.47   16.94   17.03 
 
August  18.34   16.51   17.18   17.64   16.08   16.83 
 
July  18.00   13.94   17.80   17.19   13.04   16.97 
 
Second quarter 2010
  18.60   14.15   14.46   17.75   12.26   13.22 
 
June  16.25   14.15   14.46   14.53   12.26   13.22 
 
May  17.32   14.56   15.53   15.77   12.58   13.33 
 
April  18.60   16.31   16.87   17.75   15.13   15.42 
 
First quarter 2010
  17.50   13.31   17.14   16.84   12.40   16.28 
 
March  17.47   14.78   17.14   16.41   13.65   16.28 
 
February  14.94   13.31   14.81   13.98   12.40   13.86 
 
January  17.50   14.01   14.03   16.84   12.85   13.01 
 
                         
2009
  19.65   8.20   16.05   19.31   7.06   15.51 
 
Fourth quarter 2009  19.34   14.76   16.05   19.18   15.03   15.51 
 
Third quarter 2009  19.65   12.50   18.97   19.31   11.25   18.31 
 
Second quarter 2009  17.51   10.56   13.29   15.82   9.40   12.21 
 
First quarter 2009  17.00   8.20   10.70   15.31   7.06   9.43 
 
                         
2008
  45.98   10.67   14.84   46.40   8.33   14.30 
 
Fourth quarter 2008  24.00   10.67   14.84   21.30   8.33   14.30 
 
Third quarter 2008  25.76   15.18   18.46   23.07   12.22   17.54 
 
Second quarter 2008  35.11   20.96   21.44   36.02   20.41   20.66 
 
First quarter 2008  45.98   21.52   25.67   46.40   22.33   28.80 
 
                         
2007
  71.95   42.69   46.60   66.26   43.50   46.00 
 
Fourth quarter 2007  61.05   42.69   46.60   58.01   43.50   46.00 
 
Third quarter 2007  66.88   53.67   55.67   62.34   49.84   53.25 
 
Second quarter 2007  71.55   63.72   65.46   66.26   58.73   60.01 
 
First quarter 2007  71.95   59.76   64.21   64.30   55.40   59.43 
 
                         
2006
  71.06   53.23   65.86   63.39   48.34   60.33 
 
Fourth quarter 2006  71.06   62.88   65.86   63.39   58.50   60.33 
 
Third quarter 2006  66.52   53.23   66.52   59.77   48.34   59.31 
 
Second quarter 2006  66.97   54.31   59.32   61.70   49.36   54.85 
 
First quarter 2006  64.05   55.60   63.39   55.55   48.66   54.99 
 
1 Historical share price adjusted for the rights issue and stock dividend 2008.
                         
  SIX Swiss Exchange New York Stock Exchange 
  High (CHF)  Low (CHF)  Period end (CHF)  High (USD)  Low (USD)  Period end (USD) 
 
                         
2009
  19.65   8.20   16.05   19.31   7.06   15.51 
 
Fourth quarter 2009
  19.34   14.76   16.05   19.18   15.03   15.51 
 
December  16.67   15.56   16.05   16.49   15.03   15.51 
 
November  17.86   14.76   15.58   17.60   15.36   15.69 
 
October  19.34   16.90   17.30   19.18   16.47   16.59 
 
Third quarter 2009
  19.65   12.50   18.97   19.31   11.25   18.31 
 
September  19.64   17.66   18.97   19.31   16.64   18.31 
 
August  19.65   14.95   19.54   18.55   14.10   18.32 
 
July  15.94   12.50   15.61   14.80   11.25   14.74 
 
Second quarter 2009
  17.51   10.56   13.29   15.82   9.40   12.21 
 
June  16.40   12.95   13.29   15.82   12.17   12.21 
 
May  17.51   14.12   15.93   15.82   12.92   15.03 
 
April  16.27   10.56   15.95   14.25   9.40   13.64 
 
First quarter 2009
  17.00   8.20   10.70   15.31   7.06   9.43 
 
March  13.69   8.20   10.70   12.35   7.06   9.43 
 
February  14.33   9.35   11.06   12.37   8.08   9.05 
 
January  17.00   11.22   14.64   15.31   10.00   12.45 
 
                         
2008
  45.98   10.67   14.84   46.40   8.33   14.30 
 
Fourth quarter 2008  24.00   10.67   14.84   21.30   8.33   14.30 
 
Third quarter 2008  25.76   15.18   18.46   23.07   12.22   17.54 
 
Second quarter 2008  35.11   20.96   21.44   36.02   20.41   20.66 
 
First quarter 2008  45.98   21.52   25.67   46.40   22.33   28.80 
 
                         
2007
  71.95   42.69   46.60   66.26   43.50   46.00 
 
Fourth quarter 2007  61.05   42.69   46.60   58.01   43.50   46.00 
 
Third quarter 2007  66.88   53.67   55.67   62.34   49.84   53.25 
 
Second quarter 2007  71.55   63.72   65.46   66.26   58.73   60.01 
 
First quarter 2007  71.95   59.76   64.21   64.30   55.40   59.43 
 
                         
2006
  71.06   53.23   65.86   63.39   48.34   60.33 
 
Fourth quarter 2006  71.06   62.88   65.86   63.39   58.50   60.33 
 
Third quarter 2006  66.52   53.23   66.52   59.77   48.34   59.31 
 
Second quarter 2006  66.97   54.31   59.32   61.70   49.36   54.85 
 
First quarter 2006  64.05   55.60   63.39   55.55   48.66   54.99 
 
                         
2005
  56.39   41.19   55.38   49.30   38.47   47.58 
 
Fourth quarter 2005  56.39   46.52   55.38   49.30   40.73   47.58 
 
Third quarter 2005  49.84   43.60   48.69   43.49   38.55   42.75 
 
Second quarter 2005  45.68   41.37   44.27   43.06   38.47   38.93 
 
First quarter 2005  46.70   41.19   44.71   45.10   39.61   42.20 
 
1 Historical share price adjusted for the rights issue and stock dividend 2008.

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Basel II Pillar 3

Introduction
We operate under the

The Basel II capital adequacy framework. This framework consists of three pillars, each of which focuses on a different aspect of capital adequacy. Pillar 1 provides a framework for measuring minimum capital requirements for the credit, market and operational risks faced by banks. Pillar 2 addresses the principles of the supervisory review process, emphasizing the need for a qualitative approach to supervising banks. The aim of Basel II Pillar 3 is to encourage market discipline by requiring banks to publish a range of disclosures on risk and capital.

The Swiss Financial Market Supervisory Authority (FINMA) requires us to publish comprehensive quantitative and qualitative Pillar 3 disclosures at least annually, as well as an update of quantitative disclosures and any significant changes to qualitative information at least semi-annually.
This section presents our Basel II Pillar 3 disclosures as of 31 December 20092010 and consists mainly of quantitative disclosures complemented with explanatory texts where needed.
è QualitativeRefer to the “Risk management and control” and “Treasury management” sections of this report for more information on qualitative disclosures related to our risk management and control, definitions and risk exposures as well as to capital management can be found in the “Risk management and control” and “Treasury management” sections of this report



Overview of disclosures

The following

This table provides an overview of our Basel II Pillar 3 disclosures:

disclosures in our Annual Report 2010.
  
Basel II Pillar 3 requirementDisclosure in the annual report
    
 
Basel II Pillar 3 requirement
Disclosure in the Annual Report 2010
Capital structure  “Capital management” section of this report
 
 Capital adequacy  “Capital management” and “Basel II Pillar 3” sections of this report
 
Risk management objectives, policies and methodologies (qualitative disclosures)
(qualitative disclosure)		  “Risk management and control” section of this report
 
 Credit risk  “BaselRisk management and control” and “Basel II Pillar 3” section of this report
sections 
 Investment positions  “Basel II Pillar 3” section of this report
 
 Market risk  “Risk management and control” section of this report
and “Basel II Pillar 3” sections 
 Securitization  “Basel II Pillar 3” section of this report
 
 Operational risk  “Risk management and control” section of this report
 
 Interest rate risk in the banking book  “Basel II Pillar 3”Risk management and control” section of this report

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Description of riskRisk exposure measures and capital requirements
In certain cases, our

Our Pillar 3 disclosures may differ from the way we manage our risks and how these risks are disclosed in our quarterly reports and in other sections of this annual report.

Measures of risk exposure may differ depending on the purpose for which exposures are calculated: financial accounting under International Financial Reporting Standards (IFRS), determination of our required regulatory capital or our internal management of the firm. Our Basel II Pillar 3 disclosures are generally based on the measures of risk exposure that are used to calculate the regulatory capital that is required to underpin those risks.
The table below provides a more detailed summary of the approaches we use for the main risk categories for the determination of required regulatory capital.
The naming conventions for the “Exposure segments” used in the following tables are based on the Bank for International Settlements (BIS) rules and differ from those under Swiss and EU regulations. For example, “Sovereigns” under the BIS naming convention equateequates to “Central governments and central banks” as used under the Swiss and EU regulations. Similarly, “Banks” equateequates to “Institutions” and “Residential mortgages” equateequates to “Claims secured on residential real estate.” The table on the next page provides a more detailed summary of the approaches we use for the main risk categories for the determination of regulatory capital.
Additional capital management disclosures
Although we determine published risk-weighted assets (RWA) according to the Basel II Capital Accord (BIS guidelines), our calculationcalcu-

lation of the regulatory capital requirement is based on the regulations of FINMA, which are more conservative and therefore resultingresult in higher RWA.
Generally, the scope of consolidation for purposes of calculating these regulatory capital requirementspurposes follows the IFRS consolidation rules for subsidiaries directly or indirectly controlled by UBS AG which are active in the banking and finance business, but excludes subsidiaries in other sectors. The significant operating subsidiary companies in the UBS Group (Group) consolidated for IFRS purposes are listed in“Note “Note 34 Significant subsidiaries and associates”in the “Financial information” section of this report. More specifically, the main differences in the basis of consolidation for IFRS and regulatory capital purposes relate to the following entity types and apply regardless of our level of control:
–Real estate and commercial companies as well as collective investment schemes are not consolidated for regulatory capital purposes but are risk-weighted.
–Insurance companies are not consolidated for regulatory capital purposes but are deducted from capital.
–Securitization vehicles are not consolidated for regulatory capital purposes but are treated under the securitization framework.
–Joint ventures that are controlled by two ventures are fully consolidated for regulatory capital purposes, whereas they are valued under equity method accounting for IFRS.


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Category
  UBSOur approach
 
Credit risk  Under the Advanced Internal Ratings Based (Advancedadvanced internal ratings-based (advanced IRB) approach applied for the majority of our businesses, credit risk weights are determined by reference to internal counterparty ratings and loss given default estimates. We use internal models, approved by FINMA, to measure the credit risk exposures to third parties on over-the-counter derivatives and repurchase-style (repo-style) transactions. For a subset of our credit portfolio, we apply the Standardizedstandardized approach based on external ratings.
 
Non-counterparty related risk  Non-counterparty related assets such as our premises, other properties and equipment require capital underpinningunder-pinning according to prescribed regulatory risk weights.
 
Settlement risk  Capital requirements for failed transactions are determined according to the rules for failed trades and non-delivery-versus-payment transactions under the BIS Basel II framework.
 
Equity exposures outside
trading book		  Simple risk weight method under the advanced IRB approach.
 
Market risk  Regulatory capital requirement is derived from our Value at Riskvalue-at-risk (VaR) model, which is approved by FINMA.
 
Operational risk  We have developed a model to quantify operational risk which meets the regulatory capital standard under the Basel II Advanced Measurement Approachadvanced measurement approach (AMA).
 
Securitization exposures  Securitization exposures in the banking book are assessed using the Ratings Basedadvanced IRB approach, under the IRB, applying risk weights based on external ratings.

capital purposes relate to the following entity types and apply regardless of our level of control:
– Real estate and commercial companies as well as collective investment schemes are not consolidated for regulatory capital purposes but are risk-weighted.
 
–Insurance companies are not consolidated for regulatory capital purposes but are deducted from capital.
–Securitization vehicles are not consolidated for regulatory capital purposes but are treated under the securitization framework.
–Joint ventures that are controlled by two ventures are fully consolidated for regulatory capital purposes, whereas they are valued under equity method accounting for IFRS.

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Capital

The “Detailed segmentation of BIS risk-weighted assets” table below provides a granular breakdown of our risk-weighted assets.RWA. The table also shows the Net Exposurenet exposure at Default (“Net EAD”)default (EaD) per category for the current disclosure period, which forms the basis for the calculation of the risk-weighted assets.

RWA.
è 
For further information on risk-weighted assets or the determination of the eligible capital, please referRefer to the “Capital management” section of this report
for more information on risk-weighted assets and the determination of eligible capital


Detailed segmentation of BIS risk-weighted assets
                     
  31.12.09  31.12.08 
  Net EAD      Basel II RWA      
CHF million     Advanced1 Standardized2 Total  Total 
 
Credit risk  585,549   95,161   32,057   127,218   208,459 
 
Sovereigns
  128,957   6,680   380   7,060   10,196 
 
Banks
  109,049   16,651   1,654   18,305   28,209 
 
Corporates
  165,246   56,377   26,802   83,179   148,062 
 
Retail
                    
 
Residential mortgages
  119,859   12,332   1,166   13,498   14,650 
 
Lombard lending
  58,723   2,682   0   2,682   4,502 
 
Other retail
  3,714   441   2,055   2,496   2,840 
 
Securitization exposures  31,277   8,515       8,515   6,202 
 
Non-counterparty related risk  19,499       7,026   7,026   7,411 
 
Settlement risk (failed trades)  128   30   73   103   256 
 
Equity exposures outside trading book  1,303   4,6573      4,657   7,646 
 
Market risk      12,8614      12,861   27,614 
 
Operational risk      46,1445      46,144   44,685 
 
Total BIS risk-weighted assets
  637,756   167,369   39,156   206,525   302,273 
 
Additional risk-weighted assets according to FINMA regulations6
              19,1036  32,620 
 
Total FINMA risk-weighted assets
              225,6287  334,893 
 
1 Internal ratings-based.  2 BIS defined standardized approach.  3 Simple risk weight method.  4 Value-at-Risk approach.  5 Advanced measurement approach (AMA).  6 Reflects an additional charge of 10% on credit risk RWA for exposures treated under the standardized approach, a FINMA surcharge of 200% for RWA of non-counterparty related assets and additional FINMA capital requirements for market risk.  7 As of 31 December 2009, the FINMA tier 1 ratio amounts to 14.1% and the FINMA total capital ratio to 18.1%. Taking into account the effects from the transitional provisions of the capital floor, which require that during the year 2009 Basel II capital requirements have to amount to at least 80% of Basel I capital requirements, FINMA RWA would increase by CHF 3.3 billion, resulting in a FINMA tier 1 ratio of 13.9% and a FINMA total capital ratio of 17.9%.

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Credit risk

The tables in this section provide details on the exposures used to determine the firm’s credit risk regulatory capital. The parameters applied under the advanced IRB approach are generally based on the same methodologies, data and systems used by the firm for internal credit risk quantification, except where certain treatments are specified by regulatory requirements. These include, for example, the application of regulatory prescribed floors and multipliers,multi-

pliers, and differences with respect to eligibility criteria and exposure definitions. The exposure information presented in this section differs therefore from that disclosed in the “Risk management and control” section of this report. Similarly the regulatory capital prescribed measure of credit risk exposure also differs to that required under IFRS.

With respect to the calculation of derivative exposures for determining our required regulatory capital, we have received approval from FINMA to apply the Effective Expected Positive Exposure (EPE)effective expected positive exposure as defined in Annex 4 to the Basel II framework. For a minor part of the derivatives portfolio, we also apply the Current Exposure Methodcurrent exposure method (based on the replacement value of derivatives in combination with a regulatory-prescribed add-on).
The regulatory net credit exposure detailed in the tables in this section is shown as the Basel II EADEaD after applying collateral, netting and other eligible risk mitigants permitted by the relevant regulations. This section also presents information on impaired and defaulted assets in a segmentation which is consistent with the regulatory capital calculation.
èRefer to the “Financial information” section of this report for more information



                     
Detailed segmentation of BIS risk-weighted assets 
  31.12.10 31.12.09 
  Net EaD  Basel II RWA 
      Advanced  Standardized       
CHF million     IRB approach  approach  Total  Total 
 
Credit risk  541,565   84,419   24,677   109,096   127,218 
 
Sovereigns
  112,036   6,190   386   6,577   7,060 
 
Banks
  75,469   12,979   1,548   14,528   18,305 
 
Corporates
  167,718   51,689   19,853   71,542   83,179 
 
Retail
                    
 
Residential mortgages  120,298   10,090   782   10,871   13,498 
 
Lombard lending  62,355   3,074   0   3,074   2,682 
 
Other retail  3,688   397   2,107   2,504   2,496 
 
Securitization exposures  21,211   7,0851      7,085   8,515 
 
Non-counterparty related risk  19,704       6,195   6,195   7,026 
 
Settlement risk (failed trades)  65   18   29   47   103 
 
Equity exposures outside trading book  1,061   3,6912      3,691   4,657 
 
Market risk      20,8133      20,813   12,861 
 
Operational risk      51,9484      51,948   46,144 
 
Total BIS RWA
  583,606   167,975   30,900   198,875   206,525 
 
Additional RWA according to FINMA regulations              16,1355  19,103 
 
Total FINMA RWA
              215,0106  225,628 
 
1 On 31 December 2010, approximately CHF 3 billion of the securitization exposures were deducted from capital and therefore do not generate RWA.  2 Simple risk weight method.  3 VaR approach.  4 Advanced measurement approach.  5 Reflects an additional charge of 10% on credit risk RWA for exposures treated under the standardized approach, a FINMA surcharge of 200% for RWA of non-counterparty-related assets and additional FINMA requirements for market risk.  6 As of 31 December 2010, the FINMA tier 1 ratio amounts to 16.4% and the FINMA total capital ratio to 18.9%. Taking into account the effects from the transitional provisions of the capital floor, which require 5% of the total FINMA RWA, FINMA RWA would increase by CHF 10.8 billion, resulting in a FINMA tier 1 ratio of 15.6% and a FINMA total capital ratio of 18.0%.

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Credit risk exposures and risk-weighted assets

This table shows the average exposure and the derivation of risk-weighted assetsRWA from the regulatory gross credit exposure.

                                                
 Average regulatory Risk-weighted   Average regulatory 
 Exposure risk-weighting2 assets  Exposure risk weighting2 RWA 
 Average Less: regulatory    Average regulatory Less: regulatory   
 regulatory gross Regulatory gross credit risk offsets Regulatory net  gross credit Regulatory gross credit risk offsets Regulatory net 
CHF million credit exposure credit exposure and adjustments1 credit exposure  exposure credit exposure and adjustments1 credit exposure 
Cash and balances with central banks 28,634 18,114  (98) 18,016  4% 662  35,509 24,446 24,446  5% 1,323 
Due from banks 27,789 26,842  (8,948) 17,893  20% 3,490  16,359 15,472  (5,343) 10,130  27% 2,715 
Loans 272,384 259,131  (10,183) 248,948  19% 48,363  250,093 247,086  (5,431) 241,655  16% 37,861 
Financial assets designated at fair value 10,613 9,386  (4,829) 4,557  33% 1,481  8,484 7,576  (3,711) 3,865  45% 1,721 
Off-balance sheet3
 43,961 42,407  (344) 42,064  27% 11,417  41,252 38,724  (263) 38,460  31% 11,763 
Banking products
 383,382 355,880  (24,402) 331,478  20% 65,413  351,697 333,305  (14,748) 318,557  17% 55,383 
Derivatives 118,749 96,063 96,063  39% 37,454  86,680 73,879 73,879  41% 30,554 
Cash collateral receivables on derivative instruments 14,906 9,549 9,549  21% 1,960 
Securities financing 52,327 40,756 40,756  10% 4,147  53,402 48,735 48,735  8% 4,078 
Traded products
 171,076 136,819 136,819  30% 41,601  154,988 132,162 132,162  28% 36,592 
Trading portfolio assets 27,172 25,803 25,803  28% 7,257  7,785 6,772 12 6,783  84% 5,682 
Financial investments available-for-sale4
 35,623 79,680 79,680  2% 1,957  72,911 72,961 72,961  2% 1,202 
Accrued income and prepaid expenses 5,855 5,369  (69) 5,299  88% 4,663  5,544 5,152  (51) 5,101  83% 4,252 
Other assets 7,454 6,485  (14) 6,472  98% 6,326  12,462 22,822  (16,820) 6,002  100% 5,985 
Other products
 76,104 117,336  (83) 117,253  17% 20,204  98,701 107,707  (16,860) 90,847  19% 17,120 
Total 31.12.10
 605,386 573,174  (31,608) 541,565  20% 109,096 
Total 31.12.09
 630,562 610,036  (24,487) 585,549  22% 127,218  630,562 610,036  (24,487) 585,549  22% 127,218 
Total 31.12.08 715,064  (33,116) 681,947  31% 208,459 
1 Regulatory credit risk offsets and adjustments mainly include margin accounts for derivatives.  2 The derivation of risk-weighted assetsRWA is based on the various credit risk parameters of the Advanced Internal Ratings Based (Advanced IRB)advanced IRB approach and the Standardizedstandardized approach, respectively.  3 Includes contingent claimsguarantees and undrawn irrevocable credit facilities.loan commitments.  4 Financial investments available-for-sale excludeExcludes equity positions. Includes high-quality liquid short-term securities issued by governments and government-controlled institutions following our strategic decision to rebalance our liquidity reserve, which led to a shift from repurchase agreements and trading positions into debt instruments available-for-sale.

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Regulatory gross credit exposure by geographical region

This table provides a breakdown of our portfolio by major types of credit exposure according to classes of financial instruments and also by geographical regions. The latter distribution is based on the legal domicile of the customer.

                                                              
 Africa/ Total regulatory    Total regulatory Total regulatory 
 Switzer- Other North Latin Asia/ Middle gross credit Total regulatory  Rest of North Latin Asia Middle East gross credit net credit 
CHF million land Europe America1 America Pacific East exposure net exposure  Switzerland Europe America1 America Pacific and Africa exposure exposure 
Cash and balances with central banks 2,974 7,525 4,195 3,420  18,114  18,016  10,255 4,200 477 9,514 24,446 24,446 
Due from banks 642 17,392 4,384 169 3,889 365  26,842  17,893  1,127 6,127 3,068 88 4,865 197 15,472 10,130 
Loans 158,684 22,420 58,381 3,741 12,662 3,242  259,131  248,948  159,359 19,132 49,071 4,420 11,430 3,673 247,086 241,655 
Financial assets designated at fair value 1,760 7,255 345 25  9,386  4,557  2 1,358 5,771 48 374 23 7,576 3,865 
Off-balance sheet 6,850 8,914 24,014 638 1,630 361  42,407  42,064  6,702 7,032 22,892 386 1,225 487 38,724 38,460 
Banking products
 169,151 58,012 98,229 4,549 21,947 3,993  355,880  331,478  177,445 37,850 81,279 4,942 27,408 4,380 333,305 318,557 
Derivatives 6,192 44,131 33,694 488 10,467 1,091  96,063  96,063  6,296 33,083 26,015 491 7,151 842 73,879 73,879 
Cash collateral receivables on derivative instruments 90 6,294 2,597 13 527 27 9,549 9,549 
Securities financing 7,176 14,266 12,282 37 6,786 210  40,756  40,756  8,737 16,189 15,815 510 6,963 520 48,735 48,735 
Traded products
 13,368 58,396 45,976 525 17,253 1,301  136,819  136,819  15,124 55,565 44,427 1,014 14,642 1,390 132,162 132,162 
Trading portfolio assets 11,601 4,947 245 8,932 77  25,803  25,803  2,716 2,736 172 1,133 14 6,772 6,783 
Financial investments available-for-sale2
 655 24,765 50,175 3 3,950 132  79,680  79,680  3,205 21,721 41,208 2 6,722 102 72,961 72,961 
Accrued income and prepaid expenses 365 718 4,087 21 159 19  5,369  5,299  320 807 3,849 16 150 10 5,152 5,101 
Other assets 3,744 1,108 1,295 2 309 27  6,485  6,472  3,392 8,456 8,840 2 1,819 313 22,822 6,002 
Other products
 4,765 38,193 60,504 270 13,350 255  117,336  117,253  6,917 33,700 56,633 192 9,824 440 107,707 90,847 
Total regulatory gross credit exposure 31.12.10
 199,486 127,115 182,340 6,149 51,874 6,209 573,174 541,565 
Total regulatory gross credit exposure 31.12.09
 187,283 154,601 204,709 5,344 52,550 5,548  610,036  585,549  187,283 154,601 204,709 5,344 52,550 5,548 610,036 585,549 
Total regulatory gross credit exposure 31.12.08 208,777 184,294 257,654 8,887 48,037 7,415  715,064  681,947 
1 North America includesIncludes the Caribbean.  2 Financial investments available-for-sale excludeExcludes equity positions.

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Regulatory gross credit exposure by counterparty type

This table provides a breakdown of our portfolio by major types of credit exposure according to classes of financial instruments and also by counterparty type. The classification of counterparty type applied here is also used for the grouping of the balance sheet.

The counterparty type is different from the Basel II defined exposure segments used in certain other tables in this section.
                                                
 Public entities Total    Public entities Total Total 
 (including Banks and regulatory    (including Banks and regulatory regulatory 
 Private sovereigns and multilateral gross credit Total regulatory  Private sovereigns and multilateral gross credit net credit 
CHF million individuals Corporates1 central banks) institutions exposure net exposure  individuals Corporates1 central banks) institutions exposure exposure 
Cash and balances with central banks 17,931 183  18,114  18,016  2 24,133 311 24,446 24,446 
Due from banks 96 26,745  26,842  17,893  141 15,331 15,472 10,130 
Loans 154,793 96,793 7,544  259,131  248,948  158,067 81,826 7,194 247,086 241,655 
Financial assets designated at fair value 4,982 27 4,376  9,386  4,557  4,323 22 3,231 7,576 3,865 
Off-balance sheet 3,259 36,882 1,045 1,221  42,407  42,064  2,666 34,363 459 1,236 38,724 38,460 
Banking products
 158,052 138,658 26,644 32,526  355,880  331,478  160,733 120,513 31,950 20,110 333,305 318,557 
Derivatives 1,363 45,418 18,338 30,943  96,063  96,063  1,409 36,680 14,052 21,738 73,879 73,879 
Cash collateral receivables on derivative financial instruments 4,210 267 5,072 9,549 9,549 
Securities financing 172 21,615 7,691 11,279  40,756  40,756  104 28,054 7,099 13,478 48,735 48,735 
Traded products
 1,535 67,033 26,030 42,222  136,819  136,819  1,513 68,944 21,418 40,288 132,162 132,162 
Trading portfolio assets 8,652 16,760 391  25,803  25,803  6,372 312 87 6,772 6,783 
Financial investments available-for-sale2
 2 7,638 69,120 2,920  79,680  79,680  1 3,246 64,446 5,268 72,961 72,961 
Accrued income and prepaid expenses 4,043 1,118 40 168  5,369  5,299  3,638 1,123 227 163 5,152 5,101 
Other assets 1,380 4,231 123 751  6,485  6,472  1,266 21,008 204 345 22,822 6,002 
Other products
 5,425 21,639 86,043 4,230  117,336  117,253  4,905 31,749 65,189 5,864 107,707 90,847 
Total regulatory gross credit exposure 31.12.10
 167,150 221,206 118,556 66,261 573,174 541,565 
Total regulatory gross credit exposure 31.12.09
 165,012 227,330 138,717 78,977  610,036  585,549  165,012 227,330 138,717 78,977 610,036 585,549 
Total regulatory gross credit exposure 31.12.08 165,016 344,012 89,627 116,408  715,064  681,947 
1 Includes corporates and non-banksAlso includes non-bank financial institutions.  2 Financial investments available-for-sale excludeExcludes equity positions.
è
Refer to the “Financial information” section of this report for more information. The counterparty type is different from the Basel II defined exposure segments used in certain other tables in this section

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Basel II Pillar 3
Regulatory gross credit exposure by residual contractual maturity

This table provides a breakdown of our portfolio by major types of credit exposure according to classes of financial instruments and also by maturity. The latter distribution is based on the residual contractual tenor.

                                                
 Total    Total Total 
 regulatory Total regulatory  regulatory regulatory 
 Due in Due over Due over gross credit net credit  Due in Due over Due over gross credit net credit 
CHF million 1 year or less 1 year to 5 years 5 years Other1 exposure exposure  1 year or less 1 year to 5 years 5 years Other1 exposure exposure 
Cash and balances with central banks 18,114  18,114  18,016  24,446 24,446 24,446 
Due from banks 3,008 299 130 23,405  26,842  17,893  3,036 215 75 12,146 15,472 10,130 
Loans 101,202 77,379 40,942 39,607  259,131  248,948  102,183 73,551 38,921 32,431 247,086 241,655 
Financial assets designated at fair value 1,059 6,040 1,339 949  9,386  4,557  846 4,944 1,761 25 7,576 3,865 
Off-balance sheet 10,127 29,934 1,605 741  42,407  42,064  9,318 27,657 1,635 114 38,724 38,460 
Banking products
 115,395 113,651 44,016 82,817  355,880  331,478  115,383 106,367 42,393 69,162 333,305 318,557 
Derivatives 34,959 24,551 36,553  96,063  96,063  27,148 17,009 29,722 73,879 73,879 
Cash collateral receivables on derivative financial instruments 9,549 9,549 9,549 
Securities financing 9,338 2 116 31,300  40,756  40,756  10,084 11 6 38,634 48,735 48,735 
Traded products
 44,297 24,553 36,669 31,301  136,819  136,819  37,232 17,020 29,728 48,183 132,162 132,162 
Trading portfolio assets 17,466 6,476 1,846 15  25,803  25,803  1,072 2,440 2,185 1,074 6,772 6,783 
Financial investments available-for-sale2
 71,888 6,971 819 1  79,680  79,680  47,486 8,208 17,236 30 72,961 72,961 
Accrued income and prepaid expenses 5,369  5,369  5,299  5,152 5,152 5,101 
Other assets 6,485  6,485  6,472  22,822 22,822 6,002 
Other products
 89,355 13,447 2,665 11,870  117,336  117,253  48,559 10,649 19,421 29,078 107,707 90,847 
Total regulatory gross credit exposure 31.12.10
 201,173 134,036 91,542 146,423 573,174 541,565 
Total regulatory gross credit exposure 31.12.09
 249,047 151,651 83,350 125,988  610,036  585,549  249,047 151,651 83,350 125,988 610,036 585,549 
Total regulatory gross credit exposure 31.12.08 247,904 171,558 125,600 170,001  715,064  681,947 
1 Includes positions without an agreed residual contractual maturity, for example loans without a fixed term, on which notice of termination has not been given.  2 Financial investments available-for-sale excludeExcludes equity positions.

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Derivation of regulatory net credit exposure

This table provides a derivation of the regulatory net credit exposure from the regulatory gross credit exposure according to the advanced IRB approach and the Standardizedstandardized approach. The table also provides a breakdown according to Basel II defined exposure segments.

                                
 Advanced IRB Standardized Total Total  Advanced IRB Standardized     
CHF million approach1 approach 31.12.09 31.12.08  approach approach Total 31.12.10 Total 31.12.09 
Total regulatory gross credit exposure
 463,836 146,200  610,036  715,064  462,221 110,953 573,174 610,036 
Less: regulatory credit risk offsets and adjustments2
  (18,310)  (6,176)  (24,487)  (33,116)
Less: regulatory credit risk offsets and adjustments1
  (26,008)  (5,601)  (31,608)  (24,487)
Total regulatory net credit exposure
 445,526 140,024  585,549   436,214 105,352 541,565 
Total 31.12.08 592,107 89,841   681,947 
Total 31.12.09 445,526 140,024 585,549 
    
Breakdown of the regulatory net credit exposure by exposure segmentBreakdown of the regulatory net credit exposure by exposure segment 
Corporates 128,146 37,100  165,246  286,321  140,979 26,739 167,718 165,246 
Sovereigns 36,163 92,794  128,957  70,089  43,562 68,475 112,036 128,957 
Banks 103,280 5,769  109,049  142,473  69,809 5,660 75,469 109,049 
Retail    
Residential mortgages 118,213 1,646  119,859  118,540  118,604 1,694 120,298 119,859 
Lombard lending 58,723  58,723  60,099  62,355 62,355 58,723 
Other retail 1,000 2,715  3,714  4,426  905 2,784 3,688 3,714 
Total regulatory net credit exposure
 445,526 140,024  585,549   436,214 105,352 541,565 
Total 31.12.08 592,107 89,841   681,947 
Total 31.12.09 445,526 140,024 585,549 
1 Internal rating-based.  2 Regulatory credit risk offsets and adjustments mainly include margin accounts for derivatives.

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Risk and treasury management


Basel II Pillar 3

Regulatory gross credit exposure covered by guarantees and credit derivatives

This table provides a breakdown of collateral information, showing exposures covered by guarantees and

This table provides a breakdown of collateral information, showing exposures covered by guarantees as well as those covered by credit derivatives, according to Basel II defined exposure segments. These are defined as follows:

– Corporates: consists of all exposures that do not fit into any of the other exposure segments below. It includes private commercial entities such as corporations, partnerships or proprietorships, insurance companies, funds, exchanges and clearing houses.
– Sovereigns (“Central(Central governments and central banks”banks under Swiss and EU regulations): consists of exposures relating to sovereign states and their central banks, the Bank for International Settlement (BIS), the International Monetary Fund (IMF), the European Union including the European Central Bank and eligible multilateral development banks (MDB).
banks.
– Banks (“Institutions”(Institutions under Swiss and EU regulations): consists of exposures towards banks, i.e. legal entities holding a banking license. It also includes those securities firms that are subject to supervisory and regulatory arrangements comparable to those applied to banks accord-

  ingapplied to banks according to the Basel II Revised Framework,revised framework, including, in particular, risk-based capital requirements. Basel II also defines this regulatory exposure segment such that it contains exposures to public sector entities with tax raisingtax-raising power or whose liabilities are fully guaranteed by a public entity.
– Residential mortgages (“Claims(claims secured on residential real estate”estate under Swiss and EU regulations): consists of residential mortgages, regardless of exposure size, if the obligor owns and occupies or rents out the mortgaged property.
– Lombard lending: loans which are made against the pledge of eligible marketable securities or cash.
– Other retail: consists of exposures to small businesses, private clients and other retail customers without mortgage financing.

The collateral amounts in the table reflect the values used for determining regulatory capital. However, we utilize credit hedging to reduce concentrated exposure to individual names or sectors or in specific portfolios, which is not fully reflected in the regulatory numbers in this section.



                
 Exposure covered by Exposure covered by  Exposure covered by Exposure covered by 
CHF million guarantees1 credit derivatives  guarantees1 credit derivatives 
Exposure segment
  
Corporates 3,359 23,991  3,621 19,821 
Sovereigns 334 47  127 
Banks 380 940  401 282 
Retail  
Residential mortgages 11 0  9 
Lombard lending 611 0  496 
Other retail 50 0  44 
Total regulatory gross credit exposure 31.12.10
 4,697 20,103 
Total regulatory gross credit exposure 31.12.09
 4,746 24,978  4,746 24,978 
Total regulatory gross credit exposure 31.12.08 4,302 28,368 
1 Includes guarantees and stand-by-lettersstand-by letters of credit provided by third parties, mainly banks.

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Risk and treasury management
Basel II Pillar 3

Advanced IRB approach

Advanced IRB1approach: regulatory net credit exposure by UBS-internal rating

This table provides a breakdown of the regulatory net credit exposure of our credit portfolio (including loan commitments) using the advanced IRB approach according to our internal rating classes.

                                                     
 UBS-internal rating Total Total  UBS-internal rating 
 Investment grade Sub-investment grade Defaulted2 regulatory regulatory  Total Total   
 net credit net credit  regulatory of which: regulatory of which: 
 exposure exposure  Investment net credit loan net credit loan 
CHF million 0/1 2/3 4/5 6–8 9–13 31.12.09 31.12.08 
 grade Sub-investment grade Defaulted1  exposure commitments  exposure commitments 
Regulatory net credit exposure-weighted average PD  0.009%  0.057%  0.279%  0.955%  5.742%  0.548%  0.484%
CHF million, except               
where indicated 0 / 1 2 / 3 4 / 5 6–8 9–13 31.12.10 31.12.09
Regulatory net credit
exposure-weighted average
probability of default		  0.008%  0.057%  0.272%  0.926%  5.255%  0.542%  0.548% 
   
 
Exposure segment
    
Corporates 4,187 45,381 31,940 26,991 14,306 5,341  128,146  237,704  5,915 57,873 30,056 28,503 15,583 3,048 140,979 12,034 128,146 11,706 
Sovereigns 18,491 17,103 465 26 71 8  36,163  45,270  21,811 20,523 680 255 284 9 43,562 135 36,163 187 
Banks 5,069 86,579 10,036 1,330 231 35  103,280  130,493  5,422 52,374 10,123 1,635 207 49 69,809 15,407 103,280 17,292 
Retail    
Residential mortgages 1 5,425 53,979 52,732 5,477 599  118,213  116,539  4,615 55,609 52,785 5,121 473 118,604 890 118,213 858 
Lombard lending 50,462 4,630 2,812 703 116  58,723  60,099  54,392 5,378 1,564 984 37 62,355 167 58,723 133 
Other retail 135 70 768 18 9  1,000  2,002  142 46 694 12 11 905 1,000 4 
Total 31.12.10
 33,148 189,919 101,893 85,436 22,192 3,626 436,214 
of which: loan commitments
 388 18,293 3,901 2,294 3,659 98 28,633 
Total 31.12.09
 27,748 205,085 101,119 84,659 20,805 6,109  445,526   27,748 205,085 101,119 84,659 20,805 6,109 445,526 
Total 31.12.08 61,691 261,108 134,083 102,651 24,929 7,644   592,107 
of which: loan commitments
 512 20,239 4,597 2,004 2,657 171 30,179 
1 Internal rating-based.  2 Values of defaulted derivative contractstransactions are based on replacement values, including “add-ons” used in the calculation of regulatory capital.

Advanced IRB1approach: exposure-weighted average loss given default (LGD) by UBS-internal rating

This table provides a breakdown of the net exposure-weighted average loss given default (LGD) for our credit portfolio exposures calculated using the advanced IRB approach, according to our internal rating classes. Undrawn commitments included in the advanced IRB approach are CHF 57.8 billion with an EAD of CHF 30.2 billion and an average regulatory risk-weighting of 27%.

                             
  UBS-internal rating 
                      Regulatory net credit 
  Investment Sub-investment exposure-weighted 
  grade grade average LGD 
in % 0 / 1  2 / 3  4 / 5  6–8  9–13  31.12.10  31.12.09 
 
                             
Regulatory net credit exposure-weighted average LGD                    
 
Corporates  38   29   32   27   26   30   31 
 
Sovereigns  38   46   45   40   91   42   44 
 
Banks  18   30   39   44   58   31   29 
 
Retail                            
 
Residential mortgages
  10   10   10   10   10   10   10 
 
Lombard lending
      20   20   20   20   20   20 
 
Other retail
      20   10   40   15   35   35 
 
Average 31.12.10
  35   28   20   17   23   24     
 
Average 31.12.09  35   29   20   18   21       25 
 
                             
  UBS-internal rating  Regulatory  Regulatory 
  Investment grade Sub-investment grade  net credit  net credit 
                      exposure-  exposure- 
                      weighted average  weighted average 
                      LGD (%)  LGD (%) 
CHF million 0/1  2/3  4/5  6–8  9–13  31.12.09  31.12.08 
 
       
Regulatory net credit exposure-weighted average LGD (%)            
 
Corporates  39   34   32   32   25   31   35 
 
Sovereigns  38   50   64   37   30   44   37 
 
Banks  23   28   38   41   47   29   26 
 
Retail                            
 
Residential mortgages  10   10   10   10   11   10   11 
 
Lombard lending      20   20   20   20   20   20 
 
Other retail      20   12   40   16   35   40 
 
Average 31.12.09
  35   29   20   18   21   25     
 
Average 31.12.08  25   28   26   21   26       26 
 
1 Internal rating-based.

170173

Risk and treasury management


Basel II Pillar 3

Advanced IRB1approach: exposure-weightedexpose-weighted average risk weight by UBS-internal rating

This table provides a breakdown of the net exposure-weighted average risk-weightrisk weight for our credit portfolio exposures calculated using the advanced IRB approach according to our internal rating classes.

                             
  UBS-internal rating Regulatory net  Regulatory net 
  Investment grade Sub-Investment grade credit exposure-  credit exposure- 
                      weighted average  weighted average 
                      risk weight (%)  risk weight (%) 
CHF million 0/1  2/3  4/5  6–8  9–13  31.12.09  31.12.08 
 
 
Regulatory net credit exposure-weighted average risk weight (%)
 
Corporates  15   17   36   59   83   42   39 
 
Sovereigns  3   32   60   65   106   17   19 
 
Banks  8   11   40   79   154   15   17 
 
Retail                            
 
Residential mortgages  1   2   5   12   29   10   10 
 
Lombard lending      3   11   6   30   4   6 
 
Other retail      3   6   51   24   42   43 
 
Average 31.12.09
  5   12   19   28   68   20     
 
Average 31.12.08  8   13   28   35   87       24 
 
1 Internal rating-based.

171

                             
  UBS-internal rating 
                      Regulatory net credit 
  Investment Sub-investment exposure-weighted 
  grade grade average risk weight 
in % 0 / 1  2 / 3  4 / 5  6–8  9–13  31.12.10  31.12.09 
 
                             
Regulatory net credit exposure-weighted average risk weight                    
 
Corporates  9   12   35   49   87   35   42 
 
Sovereigns  2   20   40   61   310   13   17 
 
Banks  6   12   38   82   208   18   15 
 
Retail                            
 
Residential mortgages
  1   2   5   10   23   8   10 
 
Lombard lending
      3   11   20   31   5   4 
 
Other retail
      3   5   51   24   41   42 
 
Average 31.12.10
  4   10   17   25   74   18     
 
Average 31.12.09  5   12   19   28   68       20 
 

Risk and treasury management
Basel II Pillar 3

Standardized approach
The standardized approach is generally applied where it is not possible to use the advanced IRB approach and/and / or where an exemption from the advanced IRB approach has been granted by FINMA. The standardized approach requires banks to use risk assessments prepared by External Credit Assessment Institutions (ECAI) or Export Credit Agencies to determine the risk weightings applied to rated counterparties.
We use ECAI risk assessments we use to determine the risk weightings for the following classes of exposure:

– Centralcentral governments and central banks;
banks
– Regionalregional governments and local authorities;
authorities
– Multilateralmultilateral development banks;
banks
– Institutions; and
institutions
– Corporates.corporates
We selected three FINMA-recognized external credit assessment institutions for this purpose –purpose: Moody’s Investors Service, Standard and Poor’s Ratings Group and Fitch Group. The mapping of external ratings to the standardized approach risk weights is determined by FINMA and published on its website.


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Risk and treasury management

Regulatory gross and net credit exposure by risk weight under the standardized approach1

This table provides a breakdown of the regulatory gross and net credit exposure by risk-weightrisk weight for our credit portfolio exposures treated under the standardized approach, according to Basel II defined exposure segments.

                                                      
 Total exposure  Total exposure  Total exposure Total exposure 
CHF million 0% >0–35% 36–75% 76–100% 150% 31.12.09 31.12.08  0% >0–35% 36–75% 76–100% 150% 31.12.10 31.12.09 
 
Regulatory gross credit exposure
    
Corporates 1 12,988 904 27,179 1,087  42,159  53,651  163 8,134 799 22,066 380 31,541 42,159 
Sovereigns2
 92,174 300 369  92,843  24,885 
Sovereigns1
 68,036 65 399 68,500 92,843 
Banks 1 4,156 2,640 23  6,821  13,654  2 4,413 1,331 22 5,767 6,821 
Retail    
Residential mortgages 961 685  1,646  2,065  463 1,217 675 4 2,359 1,646 
Lombard lending    
Other retail 2,704 27  2,731  2,476  2,758 28 2,785 2,731 
Total 31.12.10
 68,201 13,075 6,104 23,161 411 110,953 
Total 31.12.09
 92,176 17,444 7,209 28,256 1,115  146,200   92,176 17,444 7,209 28,256 1,115 146,200 
Total 31.12.08 23,884 14,773 8,732 47,731 1,612   96,731 
 
   
Regulatory net credit exposure3   
Regulatory net credit exposure2
 
Corporates 1 12,988 904 22,120 1,087  37,100  48,618  163 8,134 799 17,278 365 26,739 37,100 
Sovereigns2
 92,174 300 320  92,794  24,818 
Sovereigns1
 68,036 65 373 68,475 92,794 
Banks 1 4,140 1,605 23  5,769  11,979  2 4,306 1,331 22 5,660 5,769 
Retail    
Residential mortgages 961 685  1,646  2,001  463 1,227 4 1,694 1,646 
Lombard lending    
Other retail 2,688 27  2,715  2,424  2,756 28 2,784 2,715 
Total 31.12.10
 68,201 12,968 6,113 17,673 397 105,352 
Total 31.12.09
 92,176 17,428 6,157 23,148 1,115  140,024   92,176 17,428 6,157 23,148 1,115 140,024 
Total 31.12.08 23,884 14,165 7,550 42,630 1,611   89,841 
1 The risk weights are based on regulatory values or external ratings.  2 Includes high-quality liquid short-term securities issued by governments and government-controlled institutions following our strategic decision to rebalance our liquidity reserve, which led to a shift from repurchase agreements and trading positions into debt instruments available-for-sale.institutions.  32 For traded products, the regulatory gross credit exposure is equal to the regulatory net credit exposure.

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Risk and treasury management
Eligible financial collateral recognized under standardized approach
 

This table provides a breakdown of the financial collateral, which is eligible for recognition in the regulatory capital calculation under the standardized approach, according to Basel II defined exposure segments.

                 
  Regulatory net credit exposure  Eligible financial collateral recognized in 
CHF million under standardized approach capital calculation1 
  31.12.10  31.12.09  31.12.10  31.12.09 
 
Exposure segment
                
 
Corporates  26,739   37,100   7,252   20,852 
 
Sovereigns  68,475   92,794   26   60 
 
Banks  5,660   5,769   1,948   4,916 
 
Retail                
 
Residential mortgages
  1,694   1,646   664     
 
Lombard lending
                
 
Other retail
  2,784   2,715   2   18 
 
Total
  105,352   140,024   9,891   25,847 
 
                 
  31.12.09  31.12.08 
  Regulatory net credit  Eligible financial  Regulatory net credit  Eligible financial collateral 
  exposure under  collateral recognized in  exposure under  recognized in capital 
CHF million standardized approach  capital calculation1  standardized approach  calculation1 
 
Exposure segment
                
 
Corporates  37,100   20,852   48,618   8,911 
 
Sovereigns  92,794   60   24,818   1,148 
 
Banks  5,769   4,916   11,979   5,942 
 
Retail                
 
Residential mortgages  1,646       2,001   64 
 
Lombard lending                
 
Other retail  2,715   18   2,424   648 
 
Total
  140,024   25,847   89,841   16,713 
 
1 The eligible financial collateral reflects the impact of the application of regulatory haircuts. For traded products it is the difference between the IFRS reported values and the regulatory net credit exposure.
Impairment, default and credit loss
Impaired assets by region
This table provides a breakdown of credit exposures arising from impaired assets and allowances/provisions by geographical region, based on the legal domicile of the customer. Impaired asset exposures include loans, off-balance sheet claims, securities financing transactions and derivative contracts.
                             
              Exposure net          Total allowances, 
          Specific  of specific      Total allowances,  provisions and 
          allowances,  allowances,      provisions and  specific credit 
          provisions and  provisions and  Collective  specific credit  valuation 
  Regulatory gross      credit valuation  credit valuation  allowances and  valuation  adjustments 
CHF million credit exposure  Impaired assets1 adjustments  adjustments  provisions  adjustments  31.12.08 
 
Switzerland  187,283   1,480   (836)  644   (49)  (885)  (873)
 
Other Europe  154,601   2,364   (1,185)  1,179       (1,185)  (1,138)
 
North America2
  204,709   7,375   (3,584)  3,791       (3,584)  (4,808)
 
Latin America  5,344   37   (25)  12       (25)  (56)
 
Asia / Pacific  52,550   575   (121)  454       (121)  (361)
 
Africa / Middle East  5,548   90   (80)  10       (80)  (41)
 
Total 31.12.09
  610,036   11,920   (5,831)  6,090   (49)  (5,881)    
 
Total 31.12.08  715,064   13,9473  (7,252)  6,695   (23)      (7,275)
 
1 Values of defaulted derivative contracts (CHF 4,607 million) are based on replacement values and do not include “add-ons” used in the calculation of regulatory capital.  2 North America includes the Caribbean.  3 Restated from CHF 15,658 million originally reported in Annual Report 2008. In 2009, we implemented a threshold for designating a reclassified security as an “impaired loan”. Under this policy, a reclassified security is considered impaired if the carrying value at balance sheet date is on a cumulative basis 5% or more below the carrying value at reclassification date adjusted for redemptions.

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Risk and treasury management
Basel II Pillar 3

Impairment, default and credit loss

As illustrated in the tables below, our impaired assets decreased 46% on 31 December 2010 compared with 31 December 2009, mainly due to sales of legacy loan positions and reductions in our impaired derivative exposures.

Impaired assets by exposure segmentregion

 

This table shows a breakdown of credit exposures arising from impaired assets and allowances/allowances / provisions according to Basel II defined exposure segments. Impaired asset exposures include loans, off-balance sheet claims, securities financing transactions, and derivative contracts.

transactions.
                             
                  Total      Total allowances, 
          Specific      allowances,      provisions and 
          allowances,      provisions and      specific credit 
          provisions and  Collective  specific credit      valuation 
  Regulatory gross  of which  credit valuation  allowances and  valuation      adjustments 
CHF million credit exposure  impaired assets1 adjustments  provisions2  adjustments2  Write-offs3 31.12.08 
 
Corporates  200,573   11,201   (5,470)      (5,470)  (1,990)  (6,777)
 
Sovereigns  130,060   14   (10)      (10)  (2)  (12)
 
Banks  96,851   53   (42)      (42)  (7)  (20)
 
Retail                            
 
Residential mortgages  119,980   320   (92)      (92)      (103)
 
Lombard lending  58,798   262   (147)      (147)        
 
Other retail  3,774   71   (71)      (71)  (42)  (340)
 
Not allocated segment4
              (49)  (49)  (5)  (23)
 
Total 31.12.09
  610,036   11,920   (5,831)  (49)  (5,881)  (2,046)    
 
Total 31.12.08  715,064   13,9475  (7,252)  (23)  (7,275)  (868)  (7,275)
 
                             
              Impaired assets          Total allowances, 
              net of specific      Total allowances,  provisions and 
          Specific allowances,  allowances,      provisions and  specific credit 
          provisions and  provisions and  Collective  specific credit  valuation 
  Regulatory gross      credit valuation  credit valuation  allowances and  valuation  adjustments 
CHF million credit exposure  Impaired assets1  adjustments  adjustments  provisions2  adjustments2  31.12.09 
 
Switzerland  199,486   1,178   (561)  617   (47)  (609)  (885)
 
Rest of Europe  127,115   738   (267)  471       (267)  (1,185)
 
North America3
  182,340   4,125   (1,444)  2,681       (1,444)  (3,584)
 
Latin America  6,149   31   (25)  6       (25)  (25)
 
Asia Pacific  51,874   359   (41)  318       (41)  (121)
 
Middle East and Africa  6,209   37   (32)  5       (32)  (80)
 
Total 31.12.10
  573,174   6,468   (2,370)  4,097   (47)  (2,418)    
 
Total 31.12.09  610,036   11,920   (5,831)  6,090   (49)      (5,881)
 
1 Values of defaulted derivative contractstransactions (CHF 4,6071,915 million) are based on replacement values and do not include “add-ons” used in the calculation of regulatory capital.  2 Collective credit valuation adjustments of CHF 1.3 billion723 million are partially included in the upper tier 2 capital and are therefore not included in this table.  3 Includes the Caribbean.

Impaired assets by exposure segment

This table provides a breakdown of movements in the specific and collective allowances and provisions for impaired assets, including changes in the credit valuation allowance for derivatives.

                             
                          Total allowances, 
                  Total allowances,      provisions and 
          Specific allowances,      provisions and      specific credit 
          provisions and  Collective  specific credit  Write offs for the  valuation 
  Regulatory gross      credit valuation  allowances and  valuation  year ended  adjustments 
CHF million credit exposure  Impaired assets1  adjustments  provisions2  adjustments2  31.12.10  31.12.09 
 
Corporates  190,504   5,912   (2,083)      (2,083)  (1,470)  (5,470)
 
Sovereigns  112,172   14   (10)      (10)  (1)  (10)
 
Banks  83,491   32   (30)      (30)      (42)
 
Retail                            
 
Residential mortgages
  120,962   252   (68)      (68)      (92)
 
Lombard lending
  62,355   159   (120)      (120)  (1)  (147)
 
Other retail
  3,690   99   (59)      (59)  (33)  (71)
 
Not allocated segment3
              (47)  (47)      (49)
 
Total 31.12.10
  573,174   6,468   (2,370)  (47)  (2,418)  (1,505)    
 
Total 31.12.09  610,036   11,920   (5,831)  (49)  (5,881)  (2,046)  (5,881)
 
1 Values of defaulted derivative transactions (CHF 1,915 million) are based on replacement values and do not include “add-ons” used in the calculation of regulatory capital.  2 Collective credit valuation adjustments of CHF 723 million are partially included in the upper tier 2 capital and therefore not included in this table.  3 The write-offs refer to the period from 1 January 2009 to 31 December 2009.  4 Collective loan loss allowances and provisions are not allocated to individual counterparties and thus also not to exposure segments.5 Restated from CHF 15,658 million originally reported in Annual Report 2008. Effective 1 April 2009, we implemented a threshold for designating a reclassified security as an “impaired loan”. Under this policy, a reclassified security is considered impaired if the carrying value at balance sheet date is on a cumulative basis 5% or more below the carrying value at reclassification date adjusted for redemptions.

176

Risk and treasury management

Changes in allowances, provisions and specific credit valuation adjustments for defaulted derivatives

This table provides a breakdown of movements in the specific and collective allowances and provisions for impaired assets, including changes in the credit valuation allowance for defaulted derivatives.
                        
 Specific                                   
 allowances and Total specific      Specific credit Total specific     
 provisions for Specific credit allowances, For the For the  Specific allowances valuation allowances,     
 banking products valuation provisions and Collective twelve-month twelve-month  and provisions for adjustments for provisions and Collective For the 
 and securities adjustments for credit valuation allowances and period ended period ended  banking products and defaulted credit valuation allowances and For the year year ended 
CHF million financing derivatives adjustments provisions1 31.12.09 31.12.08  securities financing derivatives adjustments provisions1 ended 31.12.10 31.12.09 
            
Opening balance as at 1.1.09
 3,047 4,205 7,252 23  7,275  Opening balance as at 1.1.08 1,981 
 Opening balance
 
Opening balance as of 1.1.10
 2,771 3,060 5,831 49 5,881 as of 1.1.09 7,275 
Write-offs  (2,046)  (2,046)  (2,046)  (868)  (1,505)  (1,505)  (1,505)  (2,046)
Recoveries (on written-off positions) 52 52  52  44  79 79 79 52 
Increase/(decrease) in allowances, provisions and specific credit valuation adjustments2
 1,806  (722) 1,084 26  1,110  7,545 
Increase / (decrease) in allowances,
provisions and specific credit
valuation adjustments2
 68  (1,681)  (1,613)  (2)  (1,615) 1,110 
Foreign currency translations and other adjustments  (37)  (423)  (460)  (460)  (867)  (173)  (249)  (421)  (421)  (460)
Transfers  (51)  (51)  (51)  (561)  (51)
Closing balance as at 31.12.09
 2,771 3,060 5,831 49  5,881  Closing balance as at 31.12.08 7,275 
 Closing balance
 
Closing balance as of 31.12.10
 1,240 1,130 2,370 47 2,418 as of 31.12.09 5,881 
1 Collective credit valuation adjustments of CHF 1.3 billion723 million are partially included in the upper tier 2 capital and therefore not included in this table.  2 Total actual credit loss (credit loss expense and changes in specific credit valuation adjustments recognized in net trading income).

174

Risk and treasury management
Total expected loss and actual credit loss
This table provides a breakdown of the one-year expected loss estimate on our credit portfolios (including lending, derivative and securities financing portfolios) calculated as of 31 December 2009, and the actual IFRS credit loss amount (including credit valuation adjustments on derivatives) charged against our income statement in 2010, according to Basel II defined exposure segments of the advanced IRB approach. Comparison between our expected and actual losses has certain limitationsas the two measures are not directly comparable. In particular our expected loss estimate is an annualized average expected loss measure which takes into account our historical loss experience, whereas actual loss represents our credit loss expense charged to the income statement incurred in the financial year. The difference in our expected and actual loss amounts resulted primarily from credit recoveries affecting the net actual losses in 2010.
                     
  Expected loss  Actual credit (loss) / recovery and credit valuation adjustments 
      For the year ended  For the year ended 
  31.12.09  31.12.10 31.12.09 
          Specific credit  Total actual credit  Total actual credit 
          valuation adjust-  (loss) / recovery and  (loss) / recovery 
      Actual credit  ments for de-  credit valuation  and credit valuation 
CHF million Total expected loss  (loss) / recovery  faulted derivatives  adjustments  adjustments 
 
Corporates1
  (359)  (83)  1,660   1,577   (1,093)
 
Sovereigns  (8)              1 
 
Banks  (37)  5   21   26   (22)
 
Retail                    
 
Residential mortgages
  (84)  1       1   (1)
 
Lombard lending
  (19)  5       5   52 
 
Other retail
  (5)  (2)      (2)  (30)
 
Not allocated2
      7       7   (17)
 
Total
  (512)  (66)  1,681   1,615   (1,110)
 
Total expected loss and actual credit loss1

This table provides a breakdown of the one-year expected loss estimate on our credit portfolios (including lending, derivative and securities financing portfolios) calculated at 31 December 2008 and the actual IFRS credit loss amount (including credit valuation adjustments on derivatives) charged against our income statement in 2009, according to Basel II defined exposure segments of the advanced IRB approach. Comparison between our expected and actual losses has certain limitations as the two measures are not directly comparable. In particular our expected loss estimate is an annualized average expected loss measure which takes into account our historical loss experience whereas actual loss represents our credit loss expense charged to the income statement incurred in the financial year.
     The difference in our expected and actual loss amounts resulted primarily from credit losses incurred on the portfolio of multi-asset-backed securities held by the Investment Bank that were reclassified fromHeld-for-tradingtoLoans and receivablesin fourth quarter 2008 and first quarter 2009. The related Includes actual credit losses on these assets are reported under “Corporate” exposures in the table below and are not considered part of our core lending portfolio for the purpose of our expected loss estimation. Excluding the credit losses related to the reclassified securities portfolio, our expected and actual losses were more closely aligned. We regularly assess the performance of our expected loss estimate and do not consider it necessary to materially alter our estimation process for expected loss for 2010.


                     
  Expected loss  Actual credit loss and credit valuation adjustments 
CHF million 31.12.08  31.12.09 31.12.08 
          Specific credit  Total actual  Total actual 
          valuation adjustments  credit loss and  credit loss and 
          for defaulted  credit valuation  credit valuation 
  Total expected loss  Actual credit loss  derivatives  adjustments  adjustments 
 
Corporates1
  610   1,815   (722)  1,093   6,681 
 
Sovereigns  13   (1)      (1)    
 
Banks  57   22       22   547 
 
Retail                  
 
Residential mortgages  87   1       1   (1)
 
Lombard lending  34   (52)      (52)  308 
 
Other retail  11   30       30   34 
 
Not specified2
      17       17   (24)
 
Total
  8123  1,832   (722)  1,110   7,545 
 
1 Includes credit losses from reclassified securities, which amounted to CHF 425172 million.  2 Includes changes in collective loan loss allowances and provisions.3 Does not include CHF 43 million IRB equity EL treated under the simple risk-weight method.

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Basel II Pillar 3

Other credit risk tables

Our credit derivative trading is predominately on a collateralized basis. This means that our credit exposures arising from our derivatives activities with collateralized counterparties 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 higher credit ratings (for example a large bank or broker-dealer) is typically under an International Swaps and Derivatives Association (ISDA) master trading agreement (MTA) and credit exposures to those counter-parties from credit default swaps (CDS), together with exposures from other OTC derivatives, are netted and included in the calculation of the collateral required to be posted. Trading with lower rated counterparties (for example, hedge funds) would also generally require an initial margin to be posted by the counterparty.
We therefore receive collateral from or post collateral to our counterparties based on our open net receivable or net payable from OTC derivative activities. Under the terms of the ISDA MTA and like forms, that collateral (which generally takes the form of cash or highly liquid fixed income securities) is available to cover any amounts due under those derivative transactions.

Settlement risk (including payment risk) of CDS has been mitigated to some extent by the development of a market-wide credit event auction process which has resulted in a widespread shift to the cash settlement of CDS following a credit event on a reference entity. During 2009 and 2008, we participated in various industry-wide compression and “tear up” initiatives which reduced notional values and operational risks by terminating existing transactions and in certain cases replacing them with a smaller number of new transactions.
We have not experienced any significant losses from failed settlements on CDS contracts in 2010 and 2009.
The vast majority of our CDS trading activity is conducted by the Investment Bank. The “Credit derivatives portfolio (split by counterparty)” table provides further analysis of the Investment Bank’s CDS counterparties based on notional amount of CDS protection purchased and sold. The analysis shows that the vast majority of the Investment Bank’s CDS counterparties are market professionals. Based on the same notional measure, approximately 97% of these counterparties were rated investment grade and approximately 99% of the CDS activity was traded on a collateralized basis.


Credit exposure of derivative instruments

This table provides an overview of our credit exposures arising from derivatives. Exposures are provided based on the balance sheet carrying values of derivatives as well as regulatory net credit exposures. The net balance sheet credit exposure differs from the regulatory net credit exposures because of differences in valuation methods and the netting and collateral deductions used for accounting and regulatory capital purposes. Specifically, net current credit exposure is derived from gross positive replacement values, whereas regulatory net credit exposure is calculated using our internal credit valuation models.
                
CHF million 31.12.09 31.12.08  31.12.10 31.12.09 
Gross positive replacement values  424,548  860,943  401,146 424,548 
Netting benefits recognized1
  (313,172)  (651,756)  (301,515)  (313,172)
Collateral held  (38,012)  (51,765)  (41,592)  (38,012)
Net current credit exposure
  73,364  157,422  58,039 73,364 
    
Regulatory net credit exposure (total counterparty credit risk)2
  96,063  190,047  73,879 96,063 
of which treated with internal models (effective expected positive exposure (EPE))2
  79,111  164,707 
of which: treated with internal models (effective expected positive exposure [EPE])2
 60,843 79,111 
of which treated with supervisory approaches (current exposure method)2
  16,952  25,340 
of which: treated with supervisory approaches (current exposure method)2
 13,036 16,952 
   
 
Breakdown of the collateral held
    
Cash collateral  34,049  46,967  36,520 34,049 
Securities collateral and debt instruments collateral (excluding equity)  3,243  4,246  4,837 3,243 
Equity instruments collateral  95  121  120 95 
Other collateral  625  430  115 625 
Total collateral held
  38,012  51,765  41,592 38,012 
1 Derivatives exposure based on accounting definition (consolidation scope for capital) measured as gross positive replacement values with netting benefits from negative replacement values with the same counterparty.  2 Derivatives exposure is defined as regulatory net credit risk exposure.

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Risk and treasury management

Credit derivatives1, 2

This table provides an overview of our credit derivative portfolio by product group using notional values. The table also provides a breakdown of credit derivative positions used to manage our own credit portfolio (banking book for regulatory purposes) risks and those arising through intermediation activities (trading book for regulatory capital purposes).
                                 
  Regulatory banking book Regulatory trading book Total 
  Protection  Protection      Protection  Protection          
Notional amounts, CHF million bought  sold  Total  bought  sold  Total  31.12.10  31.12.09 
 
Credit default swaps  28,650   2,602   31,252   1,162,631   1,110,666   2,273,297   2,304,549   2,466,954 
 
Total return swaps  0   0   0   4,597   4,334   8,931   8,931   11,123 
 
Total 31.12.10
  28,650   2,602   31,252   1,167,228   1,115,000   2,282,228   2,313,480     
 
Total 31.12.093
  36,353       36,353   1,254,586   1,187,139   2,441,725       2,478,077 
 
                                 
  Regulatory banking book Regulatory trading book Total 
  Protection  Protection      Protection  Protection          
Notional amounts, CHF million bought  sold  Total  bought  sold  Total  31.12.09  31.12.08 
 
Credit Default Swaps  22,043   527   22,571   1,262,541   1,181,843   2,444,383   2,466,954   3,617,457 
 
Total Return Swaps      62   62   6,354   4,707   11,061   11,123   24,044 
 
Total 31.12.09
  22,043   589   22,633   1,268,895   1,186,550   2,455,445   2,478,077   3,641,502 
 
1 Notional amounts of credit derivatives are based on accounting definitions and do not include any netting benefits. For capital underpinning of the counterparty credit risk of derivative positions, the effective expected positive exposure (or exposure according to current exposure method) is taken.

176

Risk and treasury management2

     Our credit derivative trading is predominately on a collateralized basis. This means that our credit exposures arising from our derivatives activities with collateralized counterparties Notional amounts 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 higher credit ratings (for example a large bank or broker-dealer) is typically under an ISDA master trading agreement (MTA) and credit exposures to those counterparties from CDS, together with exposures from other OTC derivatives, are netted and included in the calculation of the collateral required to be posted. Trading with lower rated counterparties (for example, hedge funds) would also generally require an initial margin to be posted by the counterparty.
     We therefore receive collateral from or post collateral to our counterpartiesreported based on our open net receivable or net payable from OTC derivative activities. Underregulatory scope of consolidation and do not include options and warrants.  3 The reporting of notional amounts split between banking book and regulatory trading book have been aligned to reflect the termsallocation used for capital calculation under Pillar 1. As of the ISDA MTA31 December 2009, total regulatory banking book notional amounts were previously reported as CHF 22,633 million, of which CHF 22,043 million was protection bought and like forms, that collateral (which generally takes the form of cash or highly liquid fixed income securities) is available to cover any amounts due under those derivative contracts.
     Settlement risk (including payment risk) of CDS has been mitigated to some extent by the development of a market wide credit event auction process which has resulted in a widespread shift to the cash settlement of CDS following a credit event on a reference entity. During 2009 and 2008, we participated in various industry-wide compression and “tear up” initiatives which reduced notional values and operational risks by terminating existing transactions and in certain cases replacing them with a smaller number of new transactions.
     We have not experienced any significant losses from failed settlements on CDS contracts in 2009 and 2008.
     The vast majority of our CDS trading activity is conducted by the Investment Bank. The “CDS Portfolio (split by counterparty)” table provides further analysis of the Investment Bank’s CDS counterparties based on notional amount of CDSCHF 589 million was protection purchased and sold. The analysis shows that the vast majority of the Investment Bank’s CDS counterparties are market professionals. Based onAt the same date, total regulatory trading book notional measure, approximately 98%amounts as of these counterparties31 December 2009 were rated investment gradepreviously reported as CHF 2,455,445 million, of which CHF 1,268,895 million was protection bought and approximately 98% of the CDS activityCHF 1,186,550 million was traded on a collateralized basis.protection sold.


CDSCredit derivatives portfolio (split by counterparty)1

                        
 % of total notional % of buy notional % of sell notional 
             31.12.10 31.12.09 31.12.10 31.12.09 31.12.10 31.12.09 
 % of total notional % of buy notional % of sell notional 
 
Portfolio segment
  
Developed markets commercial banks 64 63 66  59 64 58 63 60 66 
Broker-dealers, investment and merchant banks 28 28 28  25 28 25 28 25 28 
Hedge funds 1 1 2  2 1 1 1 3 2 
All other 7 8 4  15 7 17 8 12 4 
1 Counterparty analysis based on notional CDS exposures of the Investment Bank sourced from credit risk systems.

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Basel II Pillar 3

Investment positions

Equities disclosure for banking book positions
This table provides an overview of our equity investments held in the banking book for regulatory capital purposes. The calculation of equity investment exposure for financial accounting under IFRS differs from that required for regulatory capital purposes. The table illustrates these two measures of exposure as well as the key differences between them.
         
  Book value
CHF million 31.12.09  31.12.08 
 
         
Equity investments
        
 
Financial investments available-for-sale  1,351   1,681 
 
Financial assets designated at fair value  841   1,079 
 
Investments in associates  870   892 
 
Total equity investments under IFRS
  3,062   3,653 
 
Realized gains and (losses), net
  77   815 
 
Unrealized gains and (losses), net
  466   421 
 
Consolidation scope adjustment  (30)  (80)
 
Other positions designated equity exposures under BIS  743   405 
 
Total equity exposure under BIS
  3,774   3,978 
 
of which: to be risk weighted
        
 
publicly traded
  1,452   1,423 
 
privately held
  1,110   1,681 
 
of which: deducted from equity
  1,212   874 
 
Capital requirement according to simple risk weight method
  373   612 
 
Total capital charge
  1,585   1,486 
 
Unrealized gains included in tier 2
  50   69 
 

The IFRS view differs from the regulatory capital view primarily due to: (i) differences in the basis of valuation in that IFRS is based on “fair value accounting” whereas “lower of cost or market value” (LOCOM) or “cost less impairment” are used for regulatory capital purposes; (ii) positions may be treated under a different framework to determine regulatory capital (for example tradable assets treated under Market Riskmarket risk VaR); and (iii) differences in the scope of

consolidation for IFRS, for example special purpose entities consolidated for IFRS but not for regulatory capital purposes.
Also shown in the table “Equities disclosure for banking book positions” are net realized and unrealized gains and losses.losses and latent revaluation gains. The firm had no unrealized gains andlatent revaluation losses that were not recognized either on the balance sheet or in the statement of income relating toavailable-for-sale investmentsdesignated at fair value.investments. In addition, there was no significant disparity between the share prices of investment positions held in publicly quoted entities and their fair value.


Equities disclosure for banking book positions

This table provides an overview of our equity investments held in the banking book for regulatory capital purposes. The calculation of equity investment exposure for financial accounting under IFRS differs from that required for regulatory capital purposes. The table illustrates these two measures of exposure as well as the key differences between them.

         
  Book value 
CHF million 31.12.10  31.12.09 
 
         
Equity investments
        
 
Financial investments available-for-sale  1,359   1,351 
 
Financial assets designated at fair value  856   840 
 
Investments in associates  790   870 
 
Total equity investments under IFRS
  3,006   3,062 
 
Regulatory capital adjustment  281   713 
 
Total equity exposure under BIS
  3,287   3,774 
 
of which: to be risk weighted
        
 
publicly traded
  390   1,452 
 
privately held
  1,513   1,110 
 
of which: deducted from equity
  1,384   1,212 
 
RWA according to simple risk weight method  3,691   4,657 
 
Capital requirement according to simple risk weight method  295   373 
 
Total capital charge
  1,679   1,585 
 
         
Net realized gains / (losses) and latent gains from equities
        
 
Net realized gains / (losses) from disposals  270   70 
 
Latent revaluation gains  68   111 
 
of which: included in tier 2 capital
  31   50 
 

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Risk and treasury management

Market risk

Risk-weighted assets attributable to market risk increased to CHF 20.8 billion as of 31 December 2010, compared with CHF 12.9 billion as of 31 December 2009. We increased our trading risk expo-

sure, as we took on more trading risk in line with the execution of our already communicated growth plans in the second half of 2010. The market risk regulatory capital requirement is 8% of the respective RWA. Market risk regulatory capital and RWA are derived from our VaR model and subject to regulatory determined multipliers.


Group: value-at-risk (10-day, 99% confidence, 5 years of historical data)

This table provides a breakdown of the Group’s minimum, maximum, average and period-end regulatory VaR by business division.

                                 
  For the year ended 31.12.10 For the year ended 31.12.09 
CHF million Min.  Max.  Average  31.12.10  Min.  Max.  Average  31.12.09 
 
Business divisions
                                
 
Investment Bank  132   546   306   389   179   541   315   286 
 
Wealth Management & Swiss Bank  0   1   1   1   0   1   0   0 
 
Wealth Management Americas  13   30   21   14   15   32   21   30 
 
Global Asset Management  0   1   1   1   0   7   2   1 
 
Treasury activities and other corporate items 5   71   22   13   2   67   14   7 
 
Diversification effect  1   1   (27)  (17)  1   1   (37)  (23)
 
Total regulatory VaR, Group
  140   561   323   401   187   545   315   301 
 
Diversification effect (%)          (8)  (4)          (11)  (7)
 
1 As the minimum and maximum occur on different days for different business divisions, it is not meaningful to calculate a portfolio diversification effect.

Investment Bank: value-at-risk (10-day, 99% confidence, 5 years of historical data)

This table provides a breakdown of the Investment Bank’s minimum, maximum, average and period-end regulatory VaR by risk type.

                                 
  For the year ended 31.12.10 For the year ended 31.12.09 
CHF million Min.  Max.  Average  31.12.10  Min.  Max.  Average  31.12.09 
 
Risk type
                                
 
Equities  47   133   68   64   55   115   71   57 
 
Interest rates  54   138   95   96   64   149   98   116 
 
Credit spreads  225   635   422   386   216   489   332   322 
 
Foreign exchange  8   88   28   41   4   55   27   27 
 
Energy, metals and commodities  5   44   12   43   9   25   16   12 
 
Diversification effect  1   1   (319)  (242)  1   1   (229)  (248)
 
Total regulatory VaR, Investment Bank
  132   546   306   389   179   541   315   286 
 
Diversification effect (%)          (51)  (38)          (42)  (46)
 
1 As the minimum and maximum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification effect.

Group: value-at-risk (1-day, 99% confidence, 5 years of historical data)1

This table provides a breakdown of the Group’s minimum, maximum, average and period-end regulatory backtesting VaR by business division.

                                     
 
   For the year ended 31.12.10 For the year ended 31.12.09 
CHF million     Min.  Max.  Average  31.12.10  Min.  Max.  Average  31.12.09 
 
Investment Bank Regulatory VaR2   57   110   82   93   63   167   103   78 
 
Group
 Regulatory VaR2   58   114   84   94   64   170   104   79 
 
1 10-day 99% regulatory VaR and 1-day 99% regulatory VaR results are calculated separately from underlying positions and historical market moves. They cannot be inferred from each other.  2 Backtesting is based on 1-day 99% regulatory VaR.

181

Risk and treasury management


Basel II Pillar 3

Securitization

Sources

Objectives, roles and control of risks resulting from
securitization structures

involvement
The majority of our exposurespositions that are categorized as securitizations (according to the regulatory definition of such exposures) were held by the Investment Bank in the portfolio of assets reclassified toLoans and receivablesfromHeld-for-tradingHeld for tradingin the fourth quarter of 2008 and the first quarter of 2009. As atof 31 December 2009,2010, this portfolio included CDOsCDO and CLOsCLO with CDS protection purchased from monoline insurers, US commercial mortgage-backed securities, the US reference-linked note program and student loan ARS. We also continued to repurchase student loan ARS from itsour clients in 20092010 as a result of the firm’sour commitment to restore liquidity to client holdings of these securities. Repurchased student loan ARS were also categorized as securitization exposures. From a risk control perspective these portfolios are subject to specific monitoring, which may include interest rate and credit spread sensitivity analysis, as well as inclusion in firm-wide earnings-at-risk, capital-at-risk and combined stress test metrics.
We intend to exit residual risk positions where appropriate. As part of our hedging strategy, in 2010 we completed the securitization of a portfolio of counterparty credit risk resulting from OTC derivatives.
è 
Refer to the “Exposurediscussion on exposure to student loan auction rate securities” sidebarsecurities in the “Risk management and control” section of this report for more information
 
è 
Refer to “Note 29b Reclassification of financial assets” in the “Financial information” section of this report for more information
We also held certain securitization positions (according to the regulatory definition of securitizations) that were managed under the market risk framework at 31 December 2009.2010. A market risk treatment was applied to these positions for determining regulatory capital.

Regulatory treatment of securitization structures

The disclosures in this section mainly include exposures related to student loan ARS, CDOsCDO and CLOsCLO with CDS protection purchased from monoline insurers, US commercial mortgage-backed securities and the global reference-linked note
programs and counterparty credit risk exposures resulting from OTC derivatives, as these exposures were treated under the securitization approach for determining regulatory capital aton 31 December 2009.2010.

We generally applied the Ratings Based Approachratings-based approach to securitization exposurespositions in the banking book using Moody’s, Standard & Poor’s and Fitch’s Ratings. Under the Ratings Based Approach,ratings-based approach, the amount of capital is capped at the capital requirement that would be assessed against the underlying assets had they not been securitized. This treatment has been applied mainly to the US and European reference-linked note program and for the purposes of determining regulatory capital and Pillar 3 disclosure theythe underlying exposures are reported under the standardized approach.approaches. The related exposurespositions are therefore not included in the tables below.
UBS applied the supervisory formula to the securitization of a portfolio of counterparty credit risk resulting from OTC derivatives where an external rating was not sought.
The counterparty risk of interest rate or foreign currency derivatives with securitization vehicles are treated under the advanced Internal Ratings BasedIRB approach and are therefore not part of this disclosure.

Accounting Policies

policies
For IFRS purposes, we treat originated securitized exposures as sales, i.e. they are derecognized from our balance sheet provided that specific de-recognitionderecognition criteria are met and we do not consolidate the transferee (as described in “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report). A gain or loss on sale is recognized when exposures are derecognized. Derivatives used for synthetic securitizations are accounted for in line with the abovementioned note.
Securitization positions that are classified as trading assets for IFRS purposes are valued at fair value as described in “Note 27 Fair value of financial instruments” in the “Financial information” section of this report. Securitization positions that have been redesignated from tradingTrading assetsto loansLoans and receivablesare valued at amortized cost less impairment as described in “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report.

Good practice guidelines

On 18 December 2008, the European Banking Federation, the Association for Financial Markets in Europe, the European Savings Banks Group and the European Association of Public Banks and Funding Agencies published the “Industry good practice guidelines on Pillar 3 disclosure requirement for securitization”, which was slightly revised in 2009/2010. UBS is in compliance with all material aspects of these guidelines.



179182

Risk and treasury management
Risk and treasury management
Basel II Pillar 3
Securitization exposures retained or purchased
This table provides a breakdown of securitization exposures purchased or retained, split by asset type and risk weighting band, irrespective of our role (i.e. originator or investor) in the securitization transaction. The table shows securitization exposures used to determine regulatory capital, which generally equates to the IFRS book value. Additional granularity by asset type has been provided for securitization exposures at 31 December 2009. Where available, exposures at 31 December 2008 are shown on a similar basis. The increase in capital charges in 2009 compared to 2008 resulted mainly from downgrades.
          
Exposure Type  Exposure amount
CHF million  31.12.09  31.12.08 
 
Commercial mortgages   3,316   N/A 
 
CDOs and CLOs   9,565   N/A 
 
Student Loans   18,010   21,543 
 
Other   2,182   13,5921
 
Total
   33,074   35,135 
 

1 Also contains commercial mortgages, CDOs and CLOs.

Capital charge for securitization exposures retained or purchased
                     
   Exposure amount   Capital charge   Exposure amount   Capital charge 
CHF million  31.12.09   31.12.09   31.12.08   31.12.08 
 
over 0–10%   9,047    57    10,492    62 
 
over 10–15%   13,236    139    16,551    176 
 
over 15–20%   4,511    75    5,533    94 
 
over 20–35%   2,560    71    464    13 
 
over 35–50%   222    9    253    11 
 
over 50–75%   295    17    321    19 
 
over 75–100%   504    43    1,181    100 
 
over 100–250%   289    61    24    5 
 
over 250–1,250%   613    209    10    17 
 
deducted from capital   1,797    1,797    306    306 
 
Total
   33,074    2,478    35,135    803 
 

Securitization activity during the period
year
We did not securitizeThe table below shows exposures which we have securitized during the year. It also shows any exposures during 2009. In 2008 we securitized exposures totaling CHF 1.5 billion. These were part ofgains or losses recognized on sales into these traditional securitization structures which comprised residential and commercial mortgages. Exposurefor regulatory capital purposes. The exposure values disclosed are based on the transaction date and were accounted for at fair value pre-securitization hence the(the resulting gain or loss wasis not significant. At the point of securitization, we retained certain securitization exposures (typically senior tranches) for all traditional and synthetic securitizations we transacted.significant).
                             
  Originator Sponsor 
                  Realized       
                  gains / losses       
                  on traditional       
  Traditional Synthetic securitizations  Traditional  Synthetic 
  Securitization  No securitization  Securitization  No securitization             
CHF million positions retained  positions retained  positions retained  positions retained             
 
Residential mortgages                            
 
Commercial mortgages                            
 
Credit card receivables                            
 
Leasing                            
 
Loans to corporates or SMEs                            
 
Consumer loans                            
 
Student loans                            
 
Trade receivables                            
 
Re-securitizations                            
 
Other          1,715                 
 
Total 31.12.10
  0   0   1,715   0   0   0   0 
 
Total 31.12.09  0   0   0   0   0   0   0 
 

Total outstanding exposures securitized via synthetic securitizations

Prior to 2008 we securitized exposures via synthetic securitizations as part– securitization position retained / ongoing involvement
The table below provides a breakdown of our global reference linked note program. The global reference linked note program mainly consistedthe inventory of multi-asset securitization structures which referenced residential mortgages, credit card receivables, corporate debt and other asset backed securities. Totalthe total outstanding exposures (basedwhich we have securitized. The exposure values disclosed are based on exposures used to determine
the amounts referenced in the transaction.
                 
  Originator Sponsor 
CHF million Traditional  Synthetic  Traditional  Synthetic 
 
Residential mortgages                
 
Commercial mortgages                
 
Credit card receivables                
 
Leasing                
 
Loans to corporates or SMEs                
 
Consumer loans                
 
Student loans                
 
Trade receivables                
 
Re-securitizations      1,677         
 
Other      1,715         
 
Total 31.12.10
  0   3,392   0   0 
 
Total 31.12.09  0   1,677   0   0 
 

183

regulatory capital) that were part of synthetic securitizations decreased to CHF 3.2 billion at 31 December 2009 compared with CHF 10.7 billion at 31 December 2008. This decrease mainly related to

Risk and treasury management
Basel II Pillar 3

Impaired or past due securitized exposures

The table below provides a reductionbreakdown of the underlying securitization pools from asset sales.
Amount of impaired/past due assets securitized – synthetic securitizations
CHF 102 millioninventory of outstanding impaired or past due exposures had been securitized by UBS via a synthetic securitization as of 31 December 2009 compared with CHF 212 million as of 31 December 2008.which we have securitized. The exposure values are based on the amounts referenced in the transaction and are included when a credit event has occurred.transaction.
             
  Originator Sponsor 
  Securitization  No securitization     
CHF million positions retained  positions retained     
 
Residential mortgages            
 
Commercial mortgages            
 
Credit card receivables            
 
Leasing            
 
Loans to corporates or SMEs            
 
Consumer loans            
 
Student loans            
 
Trade receivables            
 
Re-securitizations  165         
 
Other            
 
Total 31.12.10
  165   0   0 
 
Total 31.12.09  102   0   0 
 

Losses recognized on originated transactions during the period

from retained or purchased securitization positions
LossesThe table below provides a breakdown of CHF 34 million as of 31 December 2009 (CHF 1.2 billion as of 31 December 2008) had beenlosses we have recognized by UBS on securitization tranchespositions purchased or retained, that result from a securitization originated by us, after taking into


180

Risk and treasury management

account the offsetting effects of any credit protection that is an eligible risk mitigation instrument for the retained or repurchased tranche.position. We partially report such exposurespositions on a fair value and partially on an amortizeda cost less impairment basis. These losses mainly include losses related to the global reference-linked note program.
Interest rate risk
         
CHF million Originator  Sponsor 
 
Residential mortgages  23     
 
Commercial mortgages  3     
 
Credit card receivables        
 
Leasing        
 
Loans to corporates or SMEs        
 
Consumer loans        
 
Student loans        
 
Trade receivables        
 
Re-securitizations  29     
 
Other  11     
 
Total 31.12.10
  66   0 
 
Total 31.12.09  34   0 
 

184

Risk and treasury management

Securitization positions retained or purchased

The table below provides a breakdown of securitization positions we have purchased or retained, irrespective of our role in the banking book
Sources and control of interest rate risk in the banking book
Our largest non-trading interest rate risksecuritization transaction. The table shows securitized exposures arise primarily from activities such as retail banking and lending in our Wealth Management & Swiss Bank division, as well as our treasury activities. The Investment Bank’s portfolio of assets that were reclassifiedused toLoans and receivablesfromHeld-for-tradingin fourth quarter 2008 and first quarter 2009, and certain other debt securities held asLoans and receivablesalso give rise to non-trading interest rate risk.
     The interest rate risks arising from the Wealth Management & Swiss Bank are transferred either by means of back-to-back transactions or a replicating portfolio from the origi-
nating business into one of two centralized interest rate risk management units: Group Treasury or the Investment Bank’s FICC unit. These units manage the risks on an integrated basis, exploiting the full netting potential across interest rate risks from different sources.
     All interest rate risk is subject to independent risk control. When not included in our VaR measure, interest rate risk is subject to specific monitoring, which may include interest rate sensitivity analysis, earnings-at-risk, capital-at-risk and combined stress test metrics.
Risk profile
Interest rate risk sensitivity figures are provided for the impact of a one basis point change in interest rates, which is one of the ways in which non-trading interest rate risks are assessed for internal risk management purposes. In addition, the impacts of an adverse parallel shift in interest rates of 200 basis points on our non-trading interest rate risk exposures is significantly below the threshold of 20% of eligible determine regulatory capital, specified by regulators to identify banks that may be required to hold additional regulatory capital against this risk.


Impact of one basis point parallel increase ofwhich generally equals the yield curves
This table shows the impact of a one basis point parallel increase of the yield curves on our interest-rate-sensitive bankingIFRS book positions as at 31 December 2009.value.
     
CHF million 31.12.09 
 
CHFResidential mortgages  (0.31,045)
 
EURCommercial mortgages  (0.22,100)
 
GBPCredit card receivables  (0.353)
 
USDLeasing  (0.8130)
Loans to corporates or SMEs0
Consumer loans4
Student loans9,475
Trade receivables0
Re-securitizations6,679
 
Other  (0.14,715)
 
Total impact on interest-rate-sensitive banking book positions31.12.10
  (1.824,201)
Total 31.12.0933,074
 

181Capital charge for securitization positions retained or purchased

The table below provides a breakdown of securitization positions we have purchased or retained, irrespective of our role in the securitization transaction.
CHF million
over 0 – 10%43
over 10 – 15%69
over 15 – 20%47
over 20 – 35%49
over 35 – 50%8
over 50 – 75%17
over 75 – 100%43
over 100 – 250%185
over 250 – 1,250%106
Total 31.12.10
567
Total 31.12.09681

185

Risk and treasury management
Basel II Pillar 3

Deductions from eligible capital related to securitization positions retained or purchased

The table below provides a breakdown of securitization positions we have purchased or retained, irrespective of our role in the securitization transaction, by securitization position type.
CHF million
Residential mortgages238
Commercial mortgages266
Credit card receivables0
Leasing57
Loans to corporates or SMEs0
Consumer loans1
Student loans1,489
Trade receivables0
Re-securitizations808
Other131
Total 31.12.10
2,990
Total 31.12.091,797

Early amortization treatment

We do not have securitization structures that are subject to the early amortization treatment.

186

Corporate
governance and
compensation

Information according to articles 663bbis and 663c (paragraph three)
of theSwiss Code of Obligations
Disclosures provided in line with the requirements of articles 663bbis and 663c (paragraph three) of theSwiss Code of Obligations’“Supplementary disclosures for companies whose shares are listed on a stock exchange: compensations and participations” are also included in the audited financial statements of this report. This information is marked by a bar on the left-hand side throughout this section.

 

 

Corporate governance

– Our corporate governance principles are designed to support UBS towards sustainable profitability and protect the interests of our shareholders, as well as to create value for shareholders and stakeholders

Dual-boardDual board structure

UBS operates under a strict dual board structure: the Board of Directors (BoD) and the Group Executive Board (GEB). This results in a clear separation of duties and responsibilities. The BoD is responsible for the UBS Group’s (Group) direction as well as monitoring and supervising the business. All BoD members of the BoD are independent with the exception of the full-time Chairman. Shareholders elect each member of the BoD, which in turn appoints the Chairman.

The GEB, which members are appointed by the BoD, is responsible for the executive management and is accountable to the BoD for the overall financial results of the Group. The GEB is led by the Group Chief Executive Officer (Group CEO).

Developments in 20092010 that strengthened our leadership capacity

The “OrganizationOrganization Regulations of UBS AG and its annexes”annexes were revised to implement all applicable regulatory requirements and further enhance the authority of the executive management andmanagement. In addition, they simultaneously accentuate the supervisory role of the BoD and its committees.

various Committees and reflect the newly separated roles of the Vice Chairman and the Senior Independent Director.

The BoD is ultimately responsible for the financial success of the Group, and thus decides on the business strategy of the Group upon recommendation of the Group CEO and the GEB. The BoD is responsible for approving theour annual report and quarterly financial statements of UBS and the Group,as reviewed and proposed by the Audit Committee together with executive management, external auditors and Group Internal Audit.Audit and external auditors. Furthermore, the BoD is responsible for

approving the firm’sour risk capacitiescapacity and appetite, taking into account the proposals and alternatives suggested by the Risk Committee.

Operational Group structure

The operational structure of the Group is comprised of the Corporate Center and four business divisions: Wealth Management & Swiss Bank, Wealth Management Americas, Global Asset Management and the Investment Bank.

Shareholder participation

At

We are committed to shareholder participation in our decision-making process. Our directly registered shareholders, as well as US shareholders registered via nominee companies, regularly receive written information about our activities and performance and are personally invited to shareholder meetings. We fully subscribe to the Extraordinary General Meeting held on 27 February 2008, ourprinciple of equal treatment of all shareholders, approvedwho range from large investment institutions to individual investors, and regularly inform them about the creationdevelopment of conditional capital through the issuancecompany of a maximum of 277,750,000 shares to satisfy the settlement in shares of CHF 13 billion in mandatory convertible notes, with a maturity date of 5 March 2010. To satisfy the conversion, we expect to deliver 272,651,005 shares on 5 March 2010 to two financial investors.

Atwhich they are co-owners.

In addition, the Annual General Meeting (AGM) held on 15 April 2009,offers shareholders the opportunity to raise any questions regarding our shareholders approveddevelopment and the creationevents of conditional capital through the issuance of 100,000,000 shares forrespective year under review. BoD and GEB members, as well as the potential exercise of warrants grantedinternal and external auditors, are present to answer these questions.

Transparency report

In October 2010, we published the “Transparency report to the Swiss National Bank (SNB)shareholders of UBS”, in connection withwhich is a comprehensive review of the loan grantedevents that took place during the financial crisis. In publishing this report, the BoD responded to the report publicized by the SNB tocontrol committee of the SNB StabFund.

In addition, atSwiss parliament in May 2010. The transparency report is supported by two reports from independent experts who assessed the AGM held on 15 April 2009, our shareholders approved the creation of authorized capital, out of which 293,258,050 new shares where issued on 25 June 2009events from a legal and were placed with a small number of institutional investors.
According to International Financial Reporting Standards (IFRS), equity attributable to UBS shareholders amounted to CHF 41.0 billion on 31 December 2009.
historic perspective.



 

Compensation and shareholdings

2010 compensation at a glance

– Revised Total Reward Principles were approved byOur foremost priority is to encourage and reward behavior that contributes to sustainable profitability and therefore the Boardlong-term success of Directors and implemented during 2009our firm.
–New compensation guidelines were implemented to focus on risk awareness, deferred pay, variable compensation and forfeiture conditions

Total Reward Principles
The Total Reward Principles summarize the compensation structure for all UBS employees, building on our strategy of enhancing reputation, integration and execution. They are designed to align employees’ interests with those of shareholders – the creation of long-term value and sustainable shareholder returns.
They reflect recent regulatory developments but also focus on long-standing drivers including reward for performance, sustainable profitability, effective risk and capital management, outstanding client focus and teamwork and sound governance practices.
Compensation for 2009
New compensation guidelines were implemented for the Group Executive Board (GEB) including awards granted under the Cash Balance Plan, Performance Equity Plan and Incentive Performance Plan.
Following the announcement of our financial results for 2009, the first tranche of the Conditional Variable
Compensation Plan has been forfeited as the critical performance condition – a net profit for 2009 – was not met.
Key talent, risk and performance management
We are focusing on attracting and retaining key talent throughout the business divisions using a “pay for performance” guiding principle. Our new compensation guidelines also take into account a range of performance factors including delivering sustainable profitability, effective risk and capital management, client focus and teamwork. The guidelines will align compensation with the creation of sustainable shareholder returns through sound risk taking and promote a performance-driven culture.
The 2010 non-binding vote on the compensation report
We value the opinions of our shareholders and, at the AGM to be held in April 2010, we will provide shareholders with an opportunity to express their views through a non-binding vote on this compensation report. We believe that this vote presents a meaningful way of involving our shareholders in compensation matters.


Compensation authorities
Compensation recommendations
Recipientsdeveloped byApproved byCommunicated by
    
 – In order to align employee incentives with the interests of our shareholders, we pay a significant part of our employees’ variable compensation in the form of deferred awards, mostly in UBS shares, which are subject to strict forfeiture rules.

Bonuses granted for 2010

In making UBS’s compensation decisions for 2010, the BoD and the GEB have carefully balanced all the relevant factors such as our improved business performance, industry compensation trends and regulatory requirements. From a shareholder’s perspective, it is essential to weigh the short-term potential for raising profitability against the long-term

requirement to retain and attract key staff. Although our financial performance in 2010 was markedly better than in 2009, with an increase in profitability of CHF 10 billion, given the considerations outlined above, the bonus pool for 2010 was set at CHF 4,245 million, 11% lower than it was last year.





High levels of deferred bonuses for Group Executive Board members

At least 76% of a GEB member’s bonus, including 60% in equity (under the Performance Equity Plan [PEP] and the Senior Executive Equity Ownership Plan [SEEOP]), is deferred and at risk of forfeiture for periods of up to five years. Moreover, the vest-

ing of these awards is subject to the fulfillment of specific performance conditions. A maximum of 24% in cash (under the Cash Balance Plan [CBP]) is paid out immediately, subject to a cap of CHF / USD 2 million.





                         
      Variable cash compensation               
      under CBP     Effective         
            Annual bonus  deferrals     Contributions   
      Immediate  Deferred  in equity under  in % of bonus  Benefits  to retirement  Total
CHF, except where indicated
  Base salary  cash  cash  SEEOP & PEP  for 2010  in kind  benefits plans  compensation
                         
Group CEO
Oswald J. Grübel		  3,000,000  0  0  0  N/A  25,600  0  3,025,600
                         
Highest paid GEB-member:
Carsten Kengeter		  874,626  1,002,496  2,339,158  5,012,481  88%  92,547  0  9,321,308
                         
GEB
aggregate pay		  14,705,894  15,588,145  14,451,756  45,059,852  79%  381,851  843,402  91,030,900

– 
Chairman ofAs in 2009, the BoD
Chairman ofGroup CEO has decided to waive the HRCC1HRCCHRCCbonus.
 – 
Group CEO
ChairmanThe highest paid GEB member in 2010 was Carsten Kengeter, with a total compensation of the BoD / HRCCBoDHRCCCHF 9.3 million: 88% of his bonus was deferred, with 28% in deferred cash and 60% in deferred equity vesting over three to five years.
 – 
MembersIn total, the compensation for GEB members in office on 31 December 2010 was CHF 91.0 million, compared with a total of the GEB
Group CEOHRCCGroup CEO
Independent BoD members
(remuneration system and fees)
Chairman of the BoD / HRCCBoDChairman of the BoDCHF 68.7 million in 2009.
 – 
The Chairman of the BoD, Kaspar Villiger, chose to waive a substantial part of the share award and instead to accept a limited number of 26,940 UBS shares with a fair value of CHF 500,000. In addition, he decided to maintain the voluntary reduction in his annual base salary from CHF 2 million to CHF 850,000. Kaspar Villiger is the highest paid member of the BoD, with total compensation of CHF 1,491,308.
 Variable compensation recommendations– 
Recipientsdeveloped byApproved byCommunicated by
Employees (excl. GEB)
Respective member ofFees for the GEB together with functional management teamDivisional pools: HRCC
Overall: Board of Directors		Line Manager
independent BoD members remained unchanged in 2010.
1The Human Resources and Compensation Committee.



 

Corporate governance and compensation
Corporate governance

Corporate governance

Our corporate governance principles are designed to support UBS towardsour objective of sustainable profitability, as well as to create value and protect the interests of our shareholders, as well as to create value for shareholders and stakeholders. We use the term “corporate governance” when referring to the organizational structure of UBS and operational practices of our management.

We are subject to, and fully comply with, the following regulatory requirements regarding corporate governance: the Swiss Code of Obligations (CO) articles 663bbis and 663c (paragraph three) regarding transparency of compensation paid to members of the BoDBoard of Directors (BoD) and senior management; the SIX Swiss Exchange’s (SIX) “Directive on Information Relating to Corporate Governance”,; the Swiss Financial Market Supervisory Authority’s (FINMA) “Circular 2010/1 Remuneration schemes” (FINMA Circular 2010/1); and the standards established in the Swiss Code of Best Practice for Corporate Governance, including the appendix on executive compensation.

In addition, as a foreign company with shares listed on the New York Stock Exchange (NYSE), we comply with all corporate governance standards applicable to foreign listed companies.
This section of our annual report provides the information required as set forth by the following regulatory requirements:
– The SIX “Directive on Information Relating to Corporate Governance”, with regard to: Group structure and shareholders; capital structure; Board of Directors (BoD);BoD; Group Executive Board (GEB); compensation, shareholdings and loans; shareholders’ participation rights; change of control and defense measures; auditors and information policy.
– 
Articles 663bbis and 663c (paragraph three) of the CO, “Supplementary disclosures for companies whose shares are listed on a stock exchange: compensations and participations”, with regard to remuneration, share and option ownership and loans.
These disclosures are also included in the audited financial statements of this report. This information is marked by a bar on the left-hand side throughout this section.

–The FINMA Circular 2010/1, with regard to the BoD’s duty to annually report on the implementation of the remuneration policy.
– The NYSE “Corporate Governance Listing Standards” with regard to foreign listed companies: independence of directors, BoD committeesCommittees and differences from the NYSE standards applicable to US domestic issuers.
In addition to the regulatory requirements mentioned above, this section of the report summarizes the regulatory and supervisory environment of UBS in our principal locations, and provides a list of all members of our BoD and
Group Executive Board (GEB). GEB. Updates have been made to the sections discussing the BoD, GEB, and compensation and shareholdings. These updates follow a revision of the “OrganizationOrganization Regulations of UBS AG and its annexes”annexes (Organization Regulations), which was conducted by the BoD throughout the summer and autumn of 2009. 2010.
On 1 November 2009,August 2010, the revised Organization Regulations came into effect. The Organization Regulations enhanceThey implement the authority ofFINMA Circular 2010/1, stating that the executive managementtotal compensation for GEB members is subject to approval by the BoD, upon recommendation by the BoD’s Human Resources and simultaneously accentuateCompensation Committee (HRCC), and any severance payments exceeding CHF 2 million must also be approved by the supervisory role of the BoD. The BoD’s Strategy Committee, always intended to be a temporary committee, has been dissolved with its responsibilities distributed to the full BoD. In addition, they further align the Executive Committee (EC) ofresponsibilities and authorities between the GEB was disbanded in October 2009 at which timeBoD and the full GEB assumed its responsibilities. The Organization Regulations additionally specify which powers of the GEB are delegated to the new Group Asset and Liability Management Committee (Group ALCO). The, by allocating the approval authority to the BoD for determination of cost of equity for the UBS Group ALCO is responsible(Group) and its business divisions, and for setting strategiesthe attribution of equity to maximize the financial performance of the Group and is subject toits business divisions. Furthermore, they reflect the guidelines, constraints and risk tolerances set by the BoD. It is also responsible for managing the balance sheetnewly separated roles of the business divisions through allocation and for the monitoring of limits as well as managing liquidity, funding and capital; and is responsible for promoting a one-firm financial management culture. The Group Chief Operating Officer (Group COO) role has been added to the GEB level, integrating the Group-wide infrastructure and service functions into the Corporate Center,Vice Chairman and the roles and responsibilities of the Group functional heads have been adapted to reflect the integration of control function management (finance, risk, legal & compliance) across the Group.Senior Independent Director (SID).
è 
Refer towww.ubs.com/governance for more details
on the Organization Regulations


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Group structure and shareholders

UBS Group legal entity structure

Under Swiss company law, UBS AG is organized as a limited company,company: a corporation that has issued shares of common stock to investors. UBS AG is the Parent Bank of the UBS Group (Group).

Group.
Our legal entity structure is designed to support our businesses within an efficient legal, regulatory, tax and funding framework. Neither theour business divisions of UBS nor the Corporate Center are separate legal entities: they primarily operate out of the Parent Bank, UBS AG, through its branches worldwide. This structure is designed to capitalize on the increased business opportunities and cost efficiencies offered by the use of a single legal platform, and to enable the flexible and efficient use of capital. Where it is neither possible nor efficient to operate out of the Parent Bank, businesses operate through local subsidiaries. This can be the case when required for legal, tax or regulatory rules require itpurposes, or as a result of additional legal entities joiningjoin the Group through acquisition.

Operational Group structure

On 31 December 2009,2010, the operational structure of the Group comprised the Corporate Center and the four business divisions: Wealth Management & Swiss Bank, Wealth Management Americas, Global Asset Management and the Investment Bank. In this report, performance is reported according to this structure.

èRefer to the “UBS business divisions and Corporate Center” section of this report for more information

Listed and non-listed companies belonging to the Group (consolidated entities)

The Group includes a number of subsidiaries,consolidated entities, none of which, however, are listed companies.

companies other than UBS AG.
è 
Refer to “Note 34 Significant subsidiaries and associates” in the “Financial information” section of this report for details of significant operating subsidiary companies of the Group

Significant shareholders

On 1 January 2010, The Capital Group Companies, Inc., Los Angeles, disclosed according to

Under the Federal Act on Stock Exchanges and Securities Trading of 24 March 1995, as amended (the Swiss Stock Exchange Act a holding of 5.09% of the total share capital of UBS AG.
      On 1 December 2009, BlackRock Inc.Act), New York, disclosed according to the Swiss Stock Exchange Act, a holding of 3.45% of the total share capital of UBS AG.

     The “Significant shareholders” table on the next page provides information about shareholders who, acting in their capacity as nominees for other investors or beneficial owners, were registered in our share register with 3% or more of the total share capital on 31 December 2009, 2008 and 2007.
     According to our “Regulation on the Registration of Shares”, voting rights of nominees are restricted to 5%, but clearing and settlement organizations are exempt from this restriction. Ownership of UBS shares is widely spread. The additional tables on the following page provide information about the distribution of our shareholders by category and geographical location. This information relates only to registered shareholders and cannot be assumed to be representative of our entire investor base. Only shareholders registered in the share register as “shareholders with voting rights” are entitled to exercise voting rights.
     Under the Swiss Stock Exchange Act, anyone holding shares in a company listed in Switzerland, or holding derivative rights related to shares of such a company, has to notify the company and the stock exchangeSIX if the holding attains, falls below or exceeds one of the following thresholds: 3, 5, 10, 15, 20, 25, 331/3, 50, or 662/3% of the voting rights, whether they are exercisable or not. The detailed disclosure requirements and the methodology for calculating the thresholds are defined in the “OrdinanceOrdinance of the Swiss Financial Market Supervisory Authority on Stock Exchanges and Securities Trading”Trading (the Ordinance). In particular, the ordinanceOrdinance takes into account all future potential share obligations irrespective of their possible contingent nature, and prohibits the netting of so-called acquisition positions (in particular shares, conversion rights and acquisition rights or obligations) with disposal positions (i.e. rights or obligations to sell). It further requires that each such position be calculated separately, and be reported as soon as it reaches one of the abovementioned thresholds. Nominee companies which cannot autonomously decide how voting rights are exercised, are not obligated to notify UBS and the SIX in case they reach, exceed or fall below the threshold percentages.
In addition, pursuant to the CO, UBS must disclose in its notes to the financial statements the identity of any shareholder with a threshold.
     At year-end 2009, we owned UBS registered shares corresponding to lessholding of more than 3%5% of the total share capital of UBS AG. At
According to disclosure notifications filed with UBS AG and the same time, we had disposal positions relatingSIX, on 8 June 2010, The Capital Group Companies, Inc., Los Angeles, disclosed a holding of 4.90% of the total share capital of UBS AG. On 12 March 2010, the Government of Singapore, Singapore, as beneficial owner, disclosed under the Swiss Stock Exchange Act, a holding by the Government of Singapore Investment Corp. of 6.45% of the total share capital of UBS AG. On 17 December 2009, BlackRock Inc., New York, disclosed according to 643,788,775 voting rightsthe Swiss Stock Exchange Act, a holding of 3.45% of the total share capital of UBS AG. In accordance with the Swiss Stock



               
(Audited) Significant shareholders 
 Shareholders registered in the UBS shares register with 3% or more of shares issued 
  In % of shares issued 31.12.10  31.12.09  31.12.08 
   
  Chase Nominees Ltd., London  10.70   11.63   7.19 
   
  DTC (Cede & Co.), New York1  7.32   8.42   9.89 
   
  Government of Singapore Investment Corp., Singapore  6.41 less than 3 less than 3 
   
  Nortrust Nominees Ltd., London  3.79   3.07 less than 3 
   
  1 DTC (Cede & Co.), New York, “The Depository Trust Company”, is a US securities clearing organization.

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Corporate governance

Exchange Act, the percentages indicated above were calculated in relation to the share capital reflected in the Articles of Association of UBS AG corresponding(Articles of Association) at the time of the respective disclosure notification. Information on disclosures under the Swiss Stock Exchange Act can be found on the following website of the SIX:  http://www.six-exchange-regulation.com/obligations/disclosure/
major_shareholders_en.html.

According to 18.09%our share register, the shareholders (acting in their own name or in their capacity as nominees for other inves-

tors or beneficial owners) listed in the “Significant shareholders” table below, were registered with 3% or more of the total voting rights of UBS AG. They consisted mainly of 8.84% of voting rights attached to employee optionsshare capital on 31 December 2010, 2009 and 7.66% of voting rights arising from the mandatory convertible notes issued by UBS in March 2008.

Cross shareholdings

We have no cross shareholdings in excess of a reciprocal 5% of capital or voting rights with any other company.



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Corporate governance

            
(Audited) 
Significant shareholders1
  
 In % of shares issued 31.12.09  31.12.08   31.12.07
   
  Chase Nominees Ltd, London 11.63  7.19   7.99
   
  DTC (Cede & Co.), New York2 8.42  9.89   14.15
   
  Mellon Bank N.A., Everett 3.21  less than 3   less than 3
   
  Nortrust Nominees Ltd, London 3.07  less than 3   less than 3
   
  1 Lists shareholders registered in our share register with 3% or more of the total share capital at the relevant reference dates.  2 DTC (Cede & Co.), New York, “The Depository Trust Company” is a US securities clearing organization.

                   
  
Distribution of UBS shares1
 On 31 December 2009 Shareholders registered Shares registered 
 Number of shares registered Number  %  Number  % of shares issued 
  1–100  42,351   11.7   2,497,703   0.1 
   
  101–1,000  208,118   57.3   94,609,316   2.7 
   
  1,001–10,000  103,827   28.6   278,983,450   7.8 
   
  10,001–100,000  8,025   2.2   191,103,931   5.4 
   
  100,001–1,000,000  608   0.2   169,169,180   4.8 
   
  1,000,001–5,000,000  94   0.0   202,775,659   5.7 
   
  5,000,001–35,581,127 (1%)  32   0.0   313,629,304   8.8 
   
  1–2%  1   0.0   54,622,566   1.5 
   
  2–3%  0   0.0   0   0.0 
   
  3–4%  2   0.0   223,676,913   6.3 
   
  4–5%  0   0.0   0   0.0 
   
  Over 5%  21  0.0   713,346,857   20.0 
   
  Total registered  363,060   100.0   2,244,414,879   63.1 
   
  Unregistered2          1,313,697,874   36.9 
   
  Total shares issued          3,558,112,7533  100.0 
   
  1 On 31 December 2009, Chase Nominees Ltd., London, was entered as a trustee/nominee holding 11.63% of all shares issued. DTC (Cede & Co.), New York, the US securities clearing organization, was registered with 8.42% of all shares issued.  2 Shares not entered in the share register at 31 December 2009.  3 400,665,834 registered shares do not carry voting rights.

                   
  
Shareholders: type and geographical distribution1
   
    Shareholders Shares
        
  On 31 December 2009 Number   %  Number   % 
   
  Individual shareholders  353,827   97.5   562,329,116   15.8 
   
  Legal entities  8,682   2.4   469,388,746   13.2 
   
  Nominees, fiduciaries  551   0.1   1,212,697,017   34.1 
   
  Unregistered          1,313,697,874   36.9 
   
  Total 363,060  100.0  3,558,112,753  100.0 
   
                   
  Switzerland  327,674   90.3   836,731,688   23.5 
   
  Europe  20,436   5.6   831,206,788   23.4 
   
  North America  7,316   2.0   499,420,433   14.0 
   
  Other countries  7,634   2.1   77,055,970   2.2 
   
  Unregistered          1,313,697,874   36.9 
   
  Total  363,060   100.0   3,558,112,753   100.0 
   

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Corporate governance and compensation

Capital structure

Capital

Under Swiss company law, shareholders must approve in a shareholders’ meeting any increase in the total number of issued shares, which may arise from an ordinary share capital increase, or the creation of conditional or authorized capital. At year-end 2009, 3,558,112,7532010, 3,830,840,513 shares were issued with a par value of CHF 0.10 each, leading to ordinary share capital of CHF 355,811,275.30.383,084,051.30. This includes 293,258,050272,651,005 shares issued for a capital increasein 2010 out of authorizedconditional share capital 332,225,913 shares issued to the Swiss Confederation upon conversion of the MCNsCHF 13 billion in mandatory convertible notes (MCN) on 5 March 2010; and 48,24176,755 (of which 3,171 under former PaineWebber employee option plans) shares issued for employee option exercises out of conditional capital, all of which took effect in 2009.

2010.

Conditional share capital

At year-end 2009,2010, the following conditional share capital of CHF 15,002,364.60 was available to settle employee option exercises, corresponding to a maximum of 150,023,646 shares.
     In 2000, conditional capital was created in connection with the acquisition of PaineWebber Group Inc. (PaineWebber), to cover option rights previously granted by PaineWebber to its employees. Additionally, at the Annual General Meeting (AGM) held in 2006, shareholders approved conditional capital in the amount of 150 million UBS shares to be used for employee option grants. Options under both plans are exercisable at any time between their vesting and expiration date. Shareholders have no pre-emptive rights. In 2009, options on 48,241 shares were exercised under the PaineWebber option plans, and 22,824 options expired under the PaineWebber option plans without being exercised. No options were settled with conditional capital shares in 2009 under our employee stock option plans.BoD:
     At the Extraordinary General Meeting (EGM) held on 27 February 2008, our shareholders approved the creation of conditional capital through the issuance of a maximum of 277,750,000 shares to satisfy the settlement in shares of CHF 13 billion in MCNs, with a maturity date of 5 March 2010. To satisfy the conversion, we expect to deliver 272,651,005 shares on 5 March 2010 to two financial investors.
      At the AGM held on 15 April 2009, our shareholders approved the creation of conditional capital through the issuance of 100,000,000 shares for the potential exercise of warrants granted to the Swiss National Bank (SNB), in connection with the loan granted by the SNB to the SNB StabFund.
–At the Annual General Meeting (AGM) held in 2006, shareholders approved conditional capital in the maximum amount of 150,000,000 shares to be used for employee option grants. Options are exercisable at any time between their vesting and expiration dates. Shareholders have no pre-emptive rights. In 2010, options on 73,584 shares were exercised under the option plans with a total of 149,920,712 conditional capital shares being available to satisfy further exercises of options.
–At the AGM held in 2010, shareholders approved conditional capital in the amount of up to 380,000,000 fully paid registered shares, with a nominal value of CHF 0.10 each, through the exercise of conversion rights and / or warrants granted in connection with the issuance of bonds or similar financial instruments by UBS. Shareholders have no pre-emptive rights. The owners of conversion rights and / or warrants shall be entitled to subscribe to the new shares. At year-end 2010, the BoD had not made use of the allowance to issue bonds or warrants with conversion rights covered by conditional share capital.
–At the AGM held on 15 April 2009, our shareholders approved the creation of conditional capital for the potential issuance of 100,000,000 shares in the event of exercise of warrants granted to the Swiss National Bank (SNB) in connection with the loan granted by the SNB to the SNB StabFund.
è 
Refer to “Note 38 Reorganizationsthe “Shares and disposals” in the “Financial information”capital instruments” section of this report for more information
on conditional share capital

Authorized share capital

The BoD has no authorized share capital available.

At the 27 February 2008 EGM, our shareholders authorized the creation of 103,700,000 shares, and of that, 98,698,754 shares were issued in 2008 as stock dividends for 2007 to UBS shareholders, with a remaining authorization to issue 5,001,246 shares until 27 February 2010.

Changes of shareholders’ equity

and shares
According to International Financial Reporting Standards (IFRS), equity attributable to UBS shareholders amounted to CHF 41.046.8 billion on 31 December 2009.2010 (CHF 41.0 billion in 2009, and CHF 32.5 billion in 2008). The UBS Group shareholders’ equity was represented by 3,830,840,513 issued shares on 31 December 2010 (2009: 3,558,112,753; 2008: 2,932,580,549).
è 
Refer to the “Statement of changes in equity” in the “Financial information”information (consolidated financial statements)” section of this report for more information on changes in shareholders’ equity over the last three years

Shares and participation certificates and capital securities

We have only one unified class of shares issued. Our shares are issued in registered form, and are traded and settled as global registered shares. Each registered share has a par value of CHF 0.10 and carries one vote. Votingvote subject to the restrictions set out under “Transferability, voting rights may, however, only be exercised if the holder expressly declares that he or she acquired these shares in his or her own name and for his or her own account.nominee registration”. Global registered shares provide direct and equal ownership for all shareholders, irrespective of the country and stock exchange on which they are traded.

Ownership of UBS shares is widely spread. The additional tables on the following page provide information about the distribution of our shareholders by category and geographical location. This information relates only to registered shareholders and cannot be assumed to be representative of our entire investor base nor the actual beneficial ownership. Only shareholders registered in the share register as “shareholders with voting rights” are entitled to exercise voting rights.
è 
Refer to the “Shareholders’ participation rights” section of this report for more information
On 31 December 2009, 1,843,749,0452010, 2,208,919,126 shares carried voting rights, 400,665,834395,870,008 shares were entered in the share


Ordinary share capital
               
 
  Share capital in CHF  Number of shares  Par value in CHF 
 
On 31 December 2007
  207,354,734   2,073,547,344   0.10 
 
On 31 December 2008
  293,258,055   2,932,580,549   0.10 
 
Issue of shares for capital increase (MCNs conversion)  33,222,591   332,225,913   0.10 
 
Issue of shares for capital increase (private placement)  29,325,805   293,258,050   0.10 
 
Issue of shares out of employee options exercised from conditional capital  4,824   48,241   0.10 
 
On 31 December 2009
  355,811,275   3,558,112,753   0.10 
 

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Corporate governance

register without voting rights, and 1,313,697,8741,226,051,379 shares were not registered. All 3,558,112,7533,830,840,513 shares were fully paid up and eligible for dividends. There are no preferential rights for shareholders, and no other classes of shares are issued by the Parent Bank directly.
At year-end 2010, we owned UBS registered shares corresponding to less than 3% of the total share capital of UBS. At the same time, we had disposal positions relating to 508,052,477 voting rights of UBS, corresponding to 13.26% of the total voting rights of UBS. They consisted mainly of 9.66% of voting rights on shares deliverable in respect of employee awards. The calculation methodology for the disposal position is based on the Ordinance of the Swiss Financial Market Supervisory Authority on Stock Exchanges and Securities Trading, which takes into account all future potential share delivery obligations irrespective of the contingent nature of the delivery.
We did not issue anyhave no participation certificates or capital instruments in 2009.outstanding.



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Corporate governance

                 
Distribution of UBS shares 
On 31 December 2010 Shareholders registered Shares registered 
Number of shares registered Number  %  Number  % of shares issued 
 
1–100  40,896   11.5   2,401,727   0.1 
 
101–1,000  200,705   56.3   91,565,192   2.4 
 
1,001–10,000  104,236   29.2   286,103,960   7.5 
 
10,001–100,000  9,856   2.8   242,026,391   6.3 
 
100,001–1,000,000  725   0.2   191,357,995   5.0 
 
1,000,001–5,000,000  95   0.0   223,378,963   5.8 
 
5,000,001–38,308,405 (1%)  26   0.0   245,584,542   6.4 
 
1–2%  1   0.0   63,760,200   1.7 
 
2–3%  2   0.0   177,912,038   4.6 
 
3–4%  1   0.0   145,038,407   3.8 
 
4–5%  0   0.0   0   0.0 
 
Over 5%  31  0.0   935,659,719   24.4 
 
Total registered  356,546   100.0   2,604,789,134   68.0 
 
Unregistered2
          1,226,051,379   32.0 
 
Total shares issued
          3,830,840,5133  100.0 
 
     At year-end 2009, we had CHF 7,224 million in preferred securities outstanding, which count as hybrid tier 1 capital under Swiss regulatory rules. Outstanding tier 2 capital securities accounted for CHF 11,231 million in total capital on On 31 December 2009.2010, Chase Nominees Ltd., London, was entered as a trustee / nominee holding 10.70% of all shares issued. DTC (Cede & Co.), New York, the US securities clearing organization, was registered with 7.32% of all shares issued.  2 Shares not entered in the share register as of 31 December 2010.  3 Of the total shares issued, 395,870,008 registered shares do not carry voting rights.
                 
Shareholders: type and geographical distribution 
  Shareholders Shares 
On 31 December 2010 Number  %  Number  % 
 
Individual shareholders  347,790   97.5   634,936,250   16.6 
 
Legal entities  8,194   2.3   716,304,953   18.7 
 
Nominees, fiduciaries  562   0.2   1,253,547,931   32.7 
 
Unregistered          1,226,051,379   32.0 
 
Total
  356,546   100.0   3,830,840,513   100.0 
 
Switzerland  319,928   89.7   840,192,284   21.9 
 
Europe  20,130   5.7   948,210,958   24.8 
 
North America  8,574   2.4   486,694,537   12.7 
 
Other countries  7,914   2.2   329,691,355   8.6 
 
Unregistered          1,226,051,379   32.0 
 
Total
  356,546   100.0   3,830,840,513   100.0 
 
             
Ordinary share capital 
  Share capital in CHF  Number of shares  Par value in CHF 
 
On 31 December 2008
  293,258,055   2,932,580,549   0.10 
 
Issue of shares for capital increase (MCNs conversion)  33,222,591   332,225,913   0.10 
 
Issue of shares for capital increase (private placement)  29,325,805   293,258,050   0.10 
 
Issue of shares out of employee options exercised from conditional capital  4,824   48,241   0.10 
 
On 31 December 2009
  355,811,275   3,558,112,753   0.10 
 
Issue of shares for capital increase (MCNs conversion)  27,265,100   272,651,005   0.10 
 
Issue of shares for capital increase (private placement)  0   0   0.10 
 
Issue of shares out of employee options exercised from conditional capital  7,676   76,755   0.10 
 
On 31 December 2010
  383,084,051   3,830,840,513   0.10 
 

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Transferability, voting rights and nominee registration

We do not apply any restrictions or limitations on the transferability 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 “ArticlesArticles of Association of UBS AG” (Articles of Association).

Association.
We have special provisions for the registration of fiduciaries and nominees. Fiduciaries and nominees are entered in the share register with voting rights up to a total of 5% of all shares issued, if they agree to disclose upon our request, beneficial owners holding 0.3% or more of all UBS shares. An exception to the 5% voting limit rule exists for securities clearing organizations such as The Depository Trust Company in New York.
èRefer to the “Shareholders’ participation rights” section of this report for more information

ConvertibleCapital instruments

On 31 December 2010, there were no contingent capital securities or convertible bonds outstanding requiring the issuance of new shares. We had CHF 4,903 million principal amount of deeply subordinated capital instruments outstanding, which count as hybrid

tier 1 capital under Swiss regulatory rules, and optionsCHF 8,239 million principal amount of outstanding tier 2 capital securities (mainly subordinated bonds). We did not issue any capital instruments in 2010.

Options

In connection with the loan granted by the SNB to the SNB Stab-Fund, we have issued warrants granted to the SNB sourced by conditional capital for which 100,000,000 shares were approved by our shareholders. The warrants are exercisable only if the SNB incurs a loss on its loan to the fund.

On 31 December 2009,2010, there were 263,561,259 employee options and stock appreciation rights outstandingoutstanding. Delivery obligations equivalent to purchase 290 million shares, of which options to purchase 142 million5,235,741 shares were exercisable. We satisfy share delivery obligations under
source our option-based participationcompensation plans either by purchasing UBS shares in the market, or through the issuance of new shares out of conditional capital. Shares held in treasury or newly issued shares are delivered to the employee at exercise. On 31 December 2009, 27.7 million2010, 25,842,908 treasury shares were available to cover 27.2 million employee share delivery obligations,for this purpose, and an additional 150 million149,920,712 unissued shares in conditional share capital were assigned to cover future employee option exercises. At year-end 2009,2010, the shares available covered all exercisable employee obligations.
     The Investment Bank, acting as liquidity provider to the equity futures market and as a market-maker in UBS shares and derivatives, issues derivatives linked to UBS stock. Most of these instruments are classified as cash-settled derivatives and are held for trading purposes only. To hedge the economic exposure, a limited number of UBS shares are held by the Investment Bank.
     On 5 March 2008, we issued CHF 13 billion of MCNs as approved at the 27 February 2008 EGM. The notes were placed with two financial investors (Government of Singapore Investment Corporation and one other investor), and pay interest of 9% per annum until conversion into UBS shares, which must take place on or before 5 March 2010. The conversion of the MCNs is expected to increase the number of shares issued on 5 March 2010 by 272,651,005, reflecting adjustments due to the ordinary capital increase approved by our shareholders at the 23 April 2008 AGM, assuming no further dilutive events occur until conversion. The terms of the MCNs contain standard market provisions for the adjustment of the conversion price if any dilutive events occur between issuance and maturity, such as capital increases at a discount, an excess amount of dividends in cash or in specie, and similar events.
è 
Refer to the discussion on shares“Shares and capital instruments in the “Treasury management”instruments” section of the 2008 annualthis report for more information on the MCNs
options



190195

Corporate governance and compensation
Corporate governance

Shareholders’ participation rights

We are committed to shareholder participation in our decision- making process. More than 350,000 directly registered shareholders, as well as some 90,000 US shareholders registered via nominee companies, regularly receive written information about our activities and performance and are personally invited to shareholder meetings.

èRefer to the “Information policy” section of this report for more information

Relationships with shareholders

We fully subscribe to the principle of equal treatment of all shareholders, who range from large investment institutions to individual investors, and regularly inform them about the development of the company of which they are co-owners.

The AGM offers shareholders the opportunity to raise any questions regarding our development and the events of the year that is under review. BoD and GEB members, as well as the internal and external auditors, are present to answer these questions.

Voting rights, restrictions and representation

We place no restrictions on share ownership and voting rights. Nominee companies and trustees, who normally represent a large number of individual shareholders, may hold an unlimited number of shares, but we have provisions according to which voting rights are limited to a maximum of 5% of outstanding UBS shares in order to avoid the risk of unknown shareholders with large stakes being entered in the share register. Securities clearing organizations, such as The Depository Trust Company in New York, are not subject to the 5% voting limit.

In order to be recorded in the share register with voting rights, shareholders must confirm that they acquired UBS shares in their own name and for their own account. Nominee companies and trustees are required to sign an agreement confirming their willingness to disclose, upon our request, individual beneficial owners holding more than 0.3% of all issued shares.

All shareholders registered with voting rights are entitled to participate in shareholder meetings. If they do not wish to attend in person, they can issue instructions to accept, reject or abstain on each individual item on the meeting agenda, either by giving instructions to an independent proxy designated by UBS, as required under Swiss company law, or by appointing UBS, another bank or another registered shareholder of their choice to vote on their behalf. Nominee companies normally submit the proxy material to the beneficial owners and transmit the collected votes to UBS.

Statutory quorums

Shareholder resolutions, the election and reelection of BoD members and the appointment of the Group and statutory auditors are decided at the AGM by an absolute majority of the votes cast, excluding blank and invalid ballots. Swiss company law requires that, for certain specific issues, a majority of two-thirds of the votes represented at the AGM, and the absolute majority of the par value of shares represented at the AGM, must vote in favor of the resolution. These issues include, among others, the creation of shares with privileged voting rights, the introduction of restrictions on the transferability of registered shares, conditional and authorized capital increases, and restrictions or exclusion of shareholders’ pre-emptive rights.

The Articles of Association also requires a two-thirds majority of votes represented for any change to its provisions regarding the number of BoD members, and any decision to remove one-fourth or more of the BoD members.
Votes and elections are normally conducted electronically to clearly ascertain the exact number of votes cast. Voting by a show of hands remains possible if a clear majority is predictable. Shareholders representing at least 3% of the votes represented may still request that a vote or election take place electronically or by written ballot. In order to allow shareholders to clearly express their views on all individual topics, each item on the agen-



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da is put to vote separately and BoD elections are made on a person-by-person basis.

Convocation of general meetings of shareholders

The AGM normally takes place each year in April, but in any case within six months of the close of the financial year. A personal invitation including a detailed agenda and explanation of each motion is sent to every registered shareholder at least 20 days ahead of the scheduled AGM. The meeting agenda is also published in the Swiss Official Gazette of Commerce and in selected Swiss newspapers as well as on the internet at www.ubs.com/agm.

Extraordinary General Meetings (EGM) may be convened whenever the BoD or the statutory auditors consider it necessary. Shareholders individually or jointly representing at least 10% of the share capital may, at any time, ask in writing that an EGM be convened to deal with a specific issue put forward by them. Such a request may also be brought forward during the AGM.

Placing of items on the agenda

Shareholders individually or jointly representing shares with an aggregate par value of CHF 62,500 may submit proposals for matters to be placed on the agenda for consideration at the shareholders’ meeting.

We publish the deadline for submitting such proposals in the Swiss Official Gazette of Commerce and on our website www.ubs.com/agm. Requests for items to be placed on the agenda must include the actual motions to be put forward, together with a short explanation, if necessary. The BoD formulates opinions on the proposals, which are published together with the motions.

Registrations in the share register

The general rules for being entered with voting rights in our Swiss or US share registers also apply before general meetings of shareholders. There is no “closing of the share register” in the days before the meeting. Registrations, including the transfer of voting rights, are processed for as long as technically possible, normally until two days before the meeting.


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Corporate governance

Board of Directors

The BoD, under the leadership of the Chairman, decides on the strategy of the Group upon recommendation of the Group Chief Executive Officer (Group CEO), exercises the ultimate supervision over thesenior management, and electsappoints all members of the GEB.GEB members. The BoD also approves theall financial statements for issue. Shareholders elect each member of the BoD, which in turn appoints its Chairman, at least one Vice Chairman, andSID, the members of its various committees.

the BoD Committees and their respective Chairpersons.

Members of the Board of Directors

This section provides information on the composition of the BoD on 31 December 2009. It shows each member’s functions in UBS, nationality, year of initial appointment to the BoD, professional history, education, and date of birth. Also included are other activities and functions, such as mandates on boards of important corporations, organizations and foundations, permanent functions for important interest groups and official functions and political mandates.

At the AGM held on 1514 April 2009, Peter R. Voser,2010, Kaspar Villiger, Michel Demaré, David Sidwell, Sally Bott, Rainer-Marc Frey, Bruno Gehrig, Ann F. Godbehere, Axel P. Lehmann, Helmut Panke and William

G. Parrett were reelected as their terms of office expired. Sergio Marchionne and Peter Kurer did not stand for reelection. Ernesto Bertarelli, Gabrielle Kaufmann-Kohler and Joerg WolleR. Voser tendered their resignation. Kaspar Villiger, Michel Demaré, Ann F. Godbehere and Axel P. Lehmann wereWolfgang Mayrhuber was elected to theirhis first term on the BoD. Following their election, the BoD and Kaspar Villiger replaced Peter Kurerappointed Michel Demaré as full-time Chairman of the BoD. On 29 September 2009, Sergio Marchionne, Vice Chairman and Senior Independent Director, and Peter R. Voser announced that they will not stand for reelection at the AGM on 14 April 2010.David Sidwell as SID. On 7 December 200922 July 2010, UBS nominated Wolfgang Mayrhuber,Joseph Yam, former Chief Executive Officer of Deutsche Lufthansa AG,the Hong Kong Monetary Authority, for election to its Board of Directorsthe BoD at its 2010 Annual General Meeting.the 2011 AGM. On 31 December 2009,2010, with the exception of the non-independent Chairman, Kaspar Villiger, all BoD members of the BoD were considered independent by the BoD. Sally Bott resigned from the BoD effective on 11 February 2011.

The following biographies provide information on the BoD members on 31 December 2010.



      
 
(PHOTO OF KASPAR VILLIGER)
(PHOTO OF KASPAR VILLIGER)
Kaspar Villiger
Swiss, born 5 February 1941
UBS AG, Bahnhofstrasse 45, CH-8098 Zurich

Functions in UBS
Chairman of the Board of Directors / chair of the
Governance and Nominating Committee /
chairDirectors/Chairperson of the Corporate Responsibility Committee/Chairperson of the Governance and Nominating Committee

Year of initial appointment: 2009		  
Professional history and education
Kaspar Villiger was elected to the BoDBoard of Directors (BoD) at the 2009 AGMAnnual General Meeting (AGM) and was thereafter appointed Chairman of the BoD. He chairs the Governance and NominatingCorporate Responsibility Committee and the Corporate ResponsibilityGovernance and Nominating Committee. Mr. Villiger was elected Federal Councilor in 1989, and served as the Minister of Defense and Head of the Federal Military Department. HeDepartment until 1995. Subsequently, he served as Finance Minister and Head of the Federal Department of Finance from 1995 until he stepped down at the end of 2003. Simultaneously,In addition to Federal Councilor, he served as President of the Swiss Confederation, in 1995 and 2002. In 2004, he was elected to the boards of Nestlé, Swiss Re and the Neue Zürcher Zeitung, all of which he resigned from in 2009 when he took on the position of Chairman of UBS. As co-owner of the Villiger Group, Mr. Villiger managed the Swiss parent firm, Villiger Söhne AG, from 1966 until 1989. In addition, Mr. Villiger held several political positions, first in the parliament of the canton of Lucerne and, from 1982 until 1989, in the Swiss Parliament. He graduated from the Swiss Federal Institute of Technology (ETH) in Zurich with a degree in mechanical engineering in 1966.
 
 
(PHOTO OF SERGIO MARCHIONNE)
Sergio Marchionne
Canadian and Italian, born 17 June 1952
Fiat S.p.A., Via Nizza 250, I-10126 Turin

Functions in UBS
Independent Vice Chairman and Senior Independent Director / member of the Governance and Nominating Committee

Year of initial appointment: 2007
  
Professional history and education
Sergio Marchionne was elected to the BoD at the 2007 AGM, and was appointed independent Vice Chairman and Senior Independent Director in 2008. He is a member of the Governance and Nominating Committee. Mr. Marchionne is the Chief Executive Officer (CEO) of Fiat S.p.A., where he has been a member of the board since 2003. He is the CEO of Fiat Group Automobiles as well as of Chrysler Group LLC. He is also the Chairman of CNH Case New Holland, a Fiat Group company. From 1983 to 1985, he worked as a chartered accountant and tax specialist for Deloitte & Touche in Canada. From 1985 to 1988, he was Group Controller and then became Director of Corporate Development at Lawson Mardon Group of Toronto. In 1989 and 1990, he served as the Executive Vice President of Glenex Industries. In the following two years, Mr. Marchionne acted as Vice President of Finance and Chief Financial Officer (CFO) of Acklands Ltd. He returned to Lawson Mardon Group in 1992 as the Vice President of Legal and Corporate Development and CFO. The company was acquired by Alusuisse Lonza in 1994. Following the acquisition, he became CEO in 1996. Upon the completion of the merger of Alusuisse with Alcan Inc., he acted as CEO and Chairman of the spin-off, Lonza Group, until 2002. In 2002, Mr. Marchionne was appointed CEO of the Société Générale de Surveillance (SGS) Group of Geneva. Mr. Marchionne studied philosophy at the University of Toronto, business at the University of Windsor, and law at Osgoode Hall Law School in Toronto. He is a lawyer and a chartered accountant.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Mr. Marchionne is the Chairman of SGS and a member of the BoD of Philip Morris International Inc. He is also a member of the European Automobile Manufacturers’ Association (ACEA).
 

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Corporate governance
      
 
(PHOTO OF SALLY BOTT)
Sally Bott
American (US), born 11 November 1949
BP plc, 1 St. James’s Square,
GB-London SW1Y 4PD

Functions in UBS
Chair of the Human Resources and
Compensation Committee / member of the Corporate Responsibility Committee

Year of initial appointment: 2008
  
Professional history and education
Sally Bott was elected to the BoD at the October 2008 EGM. She chairs the Human Resources and Compensation Committee and is a member of the Corporate Responsibility Committee. Sally Bott serves as the Group Human Resources (HR) Director of BP plc, which she joined in early 2005, and is a member of BP’s Group Executive Committee. Ms. Bott has spent most of her career in financial services. Between 2000 and 2005, she was a Managing Director at Marsh & McLennan Companies, a US-based global risk and insurance services business, and Head of Global HR for Marsh Inc. She was at Barclays Bank from 1994 to 2000, first as Barclays de Zoete Wedd HR Director and then as Group HR Director from 1997 to 2000. In 1970 she joined Citibank out of college as a research analyst in the economics department. She was credit trained and worked in the finance function. She moved into HR in 1978 and worked as an HR Director in most of Citibank’s wholesale bank and investment banking businesses for the next 15 years. She was the Global HR Director of the wholesale bank from 1990 to 1993. Ms. Bott studied at Manhattanville College in the US and graduated with a bachelor’s degree in economics.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Ms. Bott is a member of the board of the Royal College of Music in London and the Carter Burden Center for the Aging in New York City.
 
 
(PHOTO OF MICHEL DEMARé)
(PHOTO OF MICHEL DEMARé)
Michel Demaré
Belgian, born 31 August 1956
ABB Ltd., Affolternstrasse 44, P.O. Box 5009,
CH-8050 Zurich


FunctionFunctions in UBS
MemberIndependent Vice Chairman/member of the Audit Committee/member of the Governance and Nominating Committee

Year of initial appointment: 2009
  
Professional history and education
Michel Demaré was elected to the BoD at the 2009 AGM, and in April 2010 appointed independent Vice Chairman. He is a member of the Audit Committee and the Governance and Nominating Committee. Mr. Demaré joined ABB in 2005 as CFOChief Financial Officer (CFO) and as a member of the Group Executive Committee. In addition, he became President of Global Markets in November 2008. Between February and September 2008, he acted as the interim CEO of ABB. Mr. Demaré joined ABB from Baxter International Inc., a global healthcare company, where he was CFO Europe from 2002 to 2005. Prior to this role, he spent 18 years at the Dow Chemical Company, holding various treasury and risk management positions in Belgium, France, the US and Switzerland. Between 1997 and 2002, he was the CFO of the Global Polyolefins and Elastomers division. Mr. Demaré began his career as an officer in the multinational banking division of Continental Illinois National Bank of Chicago, and was based in Antwerp. He graduated with an MBA from the Katholieke Universiteit Leuven, Belgium, and holds a degree in applied economics from the Université Catholique de Louvain, Belgium.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Mr. Demaré is a member of the IMD Foundation Board in Lausanne.
 
 

198

(PHOTO OF RAINER-MARC FREY)
Corporate governance and compensation
(PHOTO OF DAVID SIDWELL)
David Sidwell
American (US) and British, born 28 March 1953
UBS AG, Bahnhofstrasse 45, CH-8098 Zurich

Functions in UBS
Senior Independent Director/Chairperson of the Risk Committee

Year of initial appointment: 2008
Professional history and education
David Sidwell was elected to the BoD at the 2008 AGM. In April 2010, he was appointed Senior Independent Director, and chairs the Risk Committee. Mr. Sidwell was Executive Vice President and CFO of Morgan Stanley between 2004 and 2007. Before joining Morgan Stanley, he was with 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 New York. Mr. Sidwell graduated from Cambridge University and is a chartered accountant qualifying in the Institute of Chartered Accountants in England and Wales.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Mr. Sidwell is a Director and Chairperson of the Risk Policy and Capital Committee of Fannie Mae, Washington D.C., and a Senior Advisor at Oliver Wyman, New York. He is a trustee of the International Accounting Standards Committee Foundation, London, the Chairman of the board of Village Care, New York, and is a Director of the National Council on Aging, Washington D.C.
(PHOTO OF SALLY BOTT)
Sally Bott
American (US), born 11 November 1949
UBS AG, Bahnhofstrasse 45, CH-8098 Zurich

Functions in UBS
Chairperson of the Human Resources and Compensation Committee/member of the Corporate Responsibility Committee/member of the Governance and Nominating Committee, resigned with effect on 11 February 2011

Year of initial appointment: 2008
Professional history and education
Sally Bott was elected to the BoD at the October 2008 Extraordinary General Meeting (EGM). Until her resignation with effect on 11 February 2011, she chaired the Human Resources and Compensation Committee. Furthermore, she was a member of the Corporate Responsibility Committee and the Governance and Nominating Committee. Ms. Bott served as the Group Human Resources (HR) Director of BP plc, from 2005 until 2011, and was member of BP’s Group Executive Committee. As of April 2011, Ms. Bott will be the Head of Human Resources at Barclays plc. Ms. Bott has spent most of her career in financial services. Between 2000 and 2005, she was a Managing Director at Marsh & McLennan Companies and Head of Global HR for Marsh Inc. She was at Barclays Bank from 1994 to 2000, first as Barclays de Zoete Wedd HR Director and then as Group HR Director from 1997 to 2000. In 1970, she joined Citibank out of college as a research analyst in the economics department where she was credit trained and worked in the finance function. She moved into HR in 1978, and worked as an HR Director in most of Citibank’s wholesale bank and investment banking businesses for the next 15 years. She was the Global HR Director of the wholesale bank from 1990 to 1993. Ms. Bott studied at Manhattanville College, and graduated with a bachelor’s degree in economics.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Ms. Bott is a member of the board of the Carter Burden Center for the Aging in New York City.
(PHOTO OF RAINER-MARC FREY)
Rainer-Marc Frey
Swiss, born 10 January 1963
Horizon21, Poststrasse 4, CH-8808 PfäffikonOffice of Rainer-Marc Frey, Seeweg 39,
CH-8807 Freienbach


FunctionFunctions in UBS

Member of the Audit Committee/member of the
Risk Committee

Year of initial appointment: 2008
  
Professional history and education

Rainer-Marc Frey was elected to the BoD at the October 2008 EGM and is a member of the Audit Committee and the Risk Committee. Mr. Frey is the founder and Chairman of the investment management company Horizon21. He is the Chairman of Horizon21 as well as of its related entities and subsidiaries. In 1992, he founded RMF Investment Group, one of the first hedge fund groups in Europe, and was appointed CEO.CEO of RMF Investment Group. RMF was acquired by Man Group plc in 2002. Between 2002 and 2004, he held a number of senior roles within Man Group and was the largest individual shareholder. From 1989 to 1992, Mr. Frey served as a director at Salomon Brothers in Zurich, Frankfurt and London, where he was primarily involved with equity derivatives. Between 1987 and 1989, he worked for Merrill Lynch covering equity, fixed income and swaps markets. He holds a degree in economics from the University of St. Gallen.

Other activities and functions

Mandates on boards of important corporations, organizations and foundations or interest groups:
Mr. Frey is a member of the BoDboard of DKSH Group, Zurich, and a member of the Advisory Board of Invision Private Equity AG, Zug. He is a member of the BoDas well as of the Frey Charitable Foundation, Freienbach.
 
 

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Corporate governance
      
 
(PHOTO OF BRUNO GEHRIG)
(PHOTO OF BRUNO GEHRIG)
Bruno Gehrig
Swiss, born 26 December 1946
Swiss International Air Lines AG,
Obstgartenstrasse 25, CH-8302 Kloten


UBS AG, Bahnhofstrasse 45, CH-8098 Zurich

Functions in UBS
Member of the Governance and Nominating Committee / member of the Human Resources and Compensation Committee

Year of initial appointment: 2008		  
Professional history and education
Bruno Gehrig was elected to the BoD at the October 2008 EGM and is a member of the Governance and Nominating Committee and the Human Resources and Compensation Committee. From 2003 to 2009, Mr. Gehrig was Chairman of Swiss Life Holding. Between 1996 and 2003, he worked at the Swiss National Bank, starting as a member of the Governing Board and becoming Vice Chairman in 2000. From 1992 to 1996, he was a professor of banking and finance at the University of St. Gallen and concurrently served as a member of the Swiss Federal Banking Commission. Between 1989 and 1991, he held the position of CEO at Bank Cantrade Private Banking Group.AG. Mr. Gehrig worked for the former Union Bank of Switzerland (UBS) between 1981 and 1989, where he started as a chief economist before assuming responsibility for securities sales and trading. He studied economics at the University of Bern, where he completed his PhD studies, and then continued on to postgraduate studies at the University of Rochester, New York. He was an assistant professor at the University of Bern and received an honorary doctorate from the University of Rochester.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Mr. Gehrig is the Vice Chairman of the BoDboard of Swiss International Air Lines and the Vice Chairman and Chairperson of the Remuneration Committee of Roche Holding Ltd., Basel, and the Chairman of the Swiss Air Transport Foundation, Zug.Basel.
 
 
(PHOTO OF ANN F GODBEHERE)
(PHOTO OF ANN F. GODBEHERE)
Ann F. Godbehere
Canadian and British, born 14 April 1955
UBS AG, Bahnhofstrasse 45, CH-8098 Zurich

Functions in UBS

Member of the Audit Committee / member of the Corporate Responsibility Committee

Year of initial appointment: 2009		  
Professional history and education
Ann F. Godbehere was elected to the BoD at the 2009 AGM and is a member of the Audit Committee and the Corporate Responsibility Committee. Ms. Godbehere was appointed CFO and Executive Director of Northern Rock in February 2008, serving in these roles during the initial phase of the business’ public ownership – she left at the end of January 2009. Prior to this role, she served as CFO of Swiss Re Group from 2003 to 2007. Ms. Godbehere was CFO of the Property and Casualty division in Zurich for two years, before this she served as CFO of the Life & Health division in London for three years. From 1997 to 1998, Ms. Godbehere was CEO of Swiss Re Life & Health in Canada. In 1996 and 1997, she was CFO of Swiss Re Life & Health North America. She is a certified general accountant, and in 2003, was made a fellow of the Certified General Accountants Association of Canada in 2003.Canada.



Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Ms. Godbehere is a board member and Chairperson of the Audit Committees of Prudential plc, Rio Tinto plc and Rio Tinto Limited.Limited in London. She is on the board of Lloyd’s managing agency, Atrium Underwriters Ltd. and Atrium Underwriting Group Ltd., which were acquired in 2007 by Ariel Holdings Ltd.London. She is also a member of the board and Chairperson of the Audit Committee of Ariel Holdings an insurance and reinsurance company.Ltd., Bermuda.
 
 
(PHOTO OF AXEL P LEHMANN)
(PHOTO OF AXEL P. LEHMANN)
Axel P. Lehmann
Swiss, born 23 March 1959
Zurich Financial Services, Mythenquai 2,
CH-8002 Zurich

Function in UBS

Member of the Risk Committee

Year of initial appointment: 2009		  
Professional history and education

Axel P. Lehmann was elected to the BoD at the 2009 AGM and is a member of the Risk Committee. He has been the Group Chief Risk Officer of Zurich Financial Services (Zurich) since January 2008. In addition, he is2008, and was responsible for Group IT.IT until 2010. In September 2004, Mr. Lehmann was appointed CEO of Zurich American Insurance Company and the North America Commercial business division in Schaumburg, Illinois. He became a member of Zurich’s Group Executive Committee and CEO of its Continental Europe business division in 2002. He2002, and subsequently was subsequently put in charge, in 2004, of integrating Continental Europe,UK, Ireland and South Africa in the UK and Ireland to create, in 2004, thenewly created Europe General Insuranceinsurance business division, of which he was the CEO. Mr. Lehmann became a member of the Group Management Board, responsible for Group-wide business development functions in 2000. A year later,division. In 2001, he took over the responsibility for Northern, Central and Eastern Europe and was appointed CEO of the Zurich Group Germany. In 2000, Mr. Lehmann became a member of the Group Management Board where he was responsible for Group-wide business development functions. Before he joined Zurich in 1996, he was Head of Corporate Planning and Controlling for Swiss Life in Zurich. Mr. Lehmann was a lecturer at several universities and institutes. In 1990, he became Vice President of the Institute of Insurance Economics and the European Center at the University of St. Gallen, and was responsible for consulting and management development. He holds a PhD and a master’s degree in business administration and economics from the University of St. Gallen. He is a graduate of the Wharton Advanced Management Program and an honorary professor of business administration and service management at the University of St. Gallen.

Other activities and functions

Mandates on boards of important corporations, organizations and foundations or interest groups:
Mr. Lehmann is Chairman of the Boardboard of the Institute of Insurance Economics at the University of St. Gallen and Viceis Chairman of the Chief Risk Officer Forum.
 
 

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Corporate governance and compensation
Corporate governance and compensation
      
 
(PHOTO OF WOLFGANG MAYRHUBER)
Wolfgang Mayrhuber
Austrian, born 22 March 1947
Deutsche Lufthansa AG,
Flughafen Frankfurt am Main 302,
D-60549 Frankfurt am Main

Functions in UBS
Member of the Corporate Responsibility Committee/member of the Human Resources and Compensation Committee

Year of initial appointment: 2010
(PHOTO OF HELMUT PANKE)Professional history and education
Wolfgang Mayrhuber was elected to the BoD at the 2010 AGM and is a member of the Corporate Responsibility Committee and the Human Resources and Compensation Committee. He was Chairman of the Executive Board and CEO of Deutsche Lufthansa AG from 2003 to 2010. In 2002, he was elected Deputy Chairman of the Executive Board, and in 2001, he was appointed to the Executive Board with responsibility for the passenger airline business. From 1994 to the end of 2000, he was Chairman of the Executive Board of the newly founded Lufthansa Technik AG. After holding a variety of management positions in the maintenance, repair and overhaul division, he was appointed Executive Vice President and Chief Operating Officer Technical in 1992. In 1970, he joined Lufthansa as an engineer at the engine overhaul facility in Hamburg. Mr. Mayrhuber studied mechanical engineering at the Technical College in Steyr, Austria, and at the Bloor Collegiate Institute in Canada, until 1965. In 1990, he completed an Executive Management Training course at the Massachusetts Institute of Technology.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Mr. Mayrhuber is Chairman of the supervisory board and Chairperson of the Mediation Committee, the Nomination Committee and the Executive Committee of Infineon Technologies AG, as well as a member of the supervisory boards of Munich Re Group, BMW Group, Lufthansa Technik AG and Austrian Airlines AG. Furthermore, he serves on the board of SN Airholding SA / NV, Brussels, and HEICO Corporation, Hollywood, FL.
(PHOTO OF HELMUT PANKE)
Helmut Panke
German, born 31 August 1946
BMW AG, Petuelring 130, D-80788 Munich

Functions in UBS

Member of the Risk Committee and as of 11 February 2011 ad-interim Chairperson of the Human Resources and Compensation Committee / member of the Risk Committee

Year of initial appointment: 2004		  
Professional history and education

Helmut Panke was elected to the BoD at the 2004 AGM andAGM. He is a member of the Risk Committee and, as of 11 February 2011, ad-interim Chairperson of the Human Resources and Compensation Committee and the Risk Committee. Between 2002 and 2006, Mr. Panke was Chairman of the Board of Management at BMW, Munich.BMW. In 1982, he joined BMW’s Research and Development division as Head of Planning and Controlling. He subsequently assumed management functions in corporate planning, organization and corporate strategy. Before his appointment as Chairman, he was a member of BMW’s Board of Management from 1996. Between 1993 and 1996, he was Chairman and CEO of BMW Holding Corporation in the US. Mr. Panke graduated from the University of Munich with a PhD in physics, and was on special research assignment at the University of Munich and the Swiss Institute for Nuclear Research before joining McKinsey & Company in Dusseldorf and Munich as a consultant.

Other activities and functions

Mandates on boards of important corporations, organizations and foundations or interest groups:
Mr. Panke is a member of the BoDboard of Microsoft Corporation (Chairperson of the Antitrust Compliance Committee) and Singapore Airlines Ltd. He is a member of the Supervisory Boardsupervisory board of Bayer AG, Germany.AG.
 
 
(PHOTO OF WILLIAM G PARRETT)
(PHOTO OF WILLIAM G. PARRETT)
William G. Parrett
American (US), born 4 June 1945
UBS AG, Bahnhofstrasse 45, CH-8098 Zurich

Function in UBS

ChairChairperson of the Audit Committee

Year of initial appointment: 2008		  
Professional history and education

William G. Parrett was elected to the BoD at the October 2008 EGM and chairs the Audit Committee. Mr. Parrett served his entire career with Deloitte Touche Tohmatsu, a global organization of member firms that employs 160,000 people in nearly 140 countries.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. Mr. Parrett founded Deloitte’s US National Financial Services Industry Group in 1995 and its Global Financial Services Industry Group in 1997, both of which he led as Chairman. In his 40 years of experience in professional services, Mr. Parrett served public, private, governmental, and state-owned clients worldwide, in order to help Deloitte achieve superior financial performance and growth.worldwide. Mr. Parrett has a bachelor’s degree in accounting from St. Francis College, New York, and is a certified public accountant.

Other activities and functions

Mandates on boards of important corporations, organizations and foundations or interest groups:
Mr. Parrett is an independent Director of the Eastman Kodak Company, the Blackstone Group LP, and Thermo Fisher Scientific Inc., in all of which he chairs the Audit Committee. He is also the Immediate Past Chairman of the BoDboard of the United States Council for International Business and United Way Worldwide. He is a Carnegie Hall Board of Trustees member and is also a member of the International Chamber of Commerce Executive Committee.member.
 
 
(PHOTO OF DAVID SIDWELL)
David Sidwell
American (US) and British, born 28 March 1953
UBS AG, Bahnhofstrasse 45, CH-8098 Zurich

Function in UBS
Chair of the Risk Committee

Year of initial appointment: 2008
  
Professional history and education
David Sidwell was elected to the BoD at the 2008 AGM and chairs the Risk Committee. Mr. Sidwell was Executive Vice President and CFO of Morgan Stanley in New York between March 2004 and October 2007. Before joining Morgan Stanley, he was with JPMorgan Chase & Co., New York, where in his 20 years of service, he held a number of different positions including Controller and CFO of the Investment Bank. Prior to this, he was with Price Waterhouse in both London and New York. Mr. Sidwell graduated from Cambridge University and is a chartered accountant qualifying in the Institute of Chartered Accountants in England and Wales.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Mr. Sidwell is a Director of the Federal National Mortgage Association (Fannie Mae) and a Senior Advisor at Oliver Wyman. He is a trustee of the International Accounting Standards Committee Foundation, London, the Chairman of the BoD of Village Care of New York, a not-for-profit organization, and a Director of the National Council on Aging.
(PHOTO OF PETER R VOSER)
Peter R. Voser
Swiss, born 29 August 1958
Royal Dutch Shell plc, 2501 AN, NL-The Hague

Function in UBS
Member of the Governance and Nominating Committee

Year of initial appointment: 2005
  
Professional history and education
Peter R. Voser was elected to the BoD at the 2005 AGM and is a member of the Governance and Nominating Committee. As of July 2009, Mr. Voser has been serving as the CEO and an executive BoD member of Royal Dutch Shell plc, where he also acted as CFO from 2004 to 2009. Between 2002 and 2004, he was CFO of ABB in Switzerland. Between 1982 and 2002, he worked for the Royal Dutch / Shell Group, holding various assignments in Switzerland, the UK, Argentina and Chile. Mr. Voser graduated in business administration from the University of Applied Sciences in Zurich.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Mr. Voser is a member of the BoD of the Swiss Federal Audit Oversight Authority.

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Corporate governance

Elections and terms of office

In accordance with article 19 (paragraph one) of the “ArticlesArticles of Association, of UBS AG” (Articles of Association), all BoD members are to be elected on an individual basis for a one-year term of office. As a result, shareholders must confirm the entire membership of the BoD on a yearly basis beginning withat the next AGM, which will take place on 1428 April 2010.

2011.
BoD members are normally expected to serve for a minimum of three years. No BoD member should continue to serve beyond the AGM held in the calendar year following his or her sixty-fifth65th birthday; however, the BoD can extend this age limit.

Organizational principles and structure

The competenciesOrganization Regulations were revised and are valid as of executive management have been increased1 August 2010. Major changes consisted of separating the roles of the Vice Chairman and simultaneously, the supervisory roleSID, integrating the requirements of the FINMA Circular 2010/1, and enhancing the approval authority of the BoD has been accentuated, duewith regard to the revised Organization Regulations. The BoD’s ultimate responsibilitycost of equity for strategicUBS and financial success includes deciding on theits business strategy of the Group upon recommendation of the Group CEO, and taking into account the proposals and alternatives presented by the GEB. Furthermore, the BoD is responsible for appointing and dismissing all GEB members, the Company Secretary and the Head of Group Internal Audit, and approving the firm’s risk capacities and appetite, taking into account the proposals and alternatives suggested by the Risk Committee (RC).

divisions.
Following each AGM, the BoD meets to appoint its Chairman, one or more Vice Chairmen,Chairman, SID, the Senior Independent Director and theBoD Committees members and chairs of its committees. Thetheir respective Chairpersons. At the same meeting, the BoD appoints a Company Secretary, who acts as secretary to the BoD and its committees.Committees.
According to the Articles of Association, the BoD meets as often as business requires, but must meet at least six times a year. A total of 2316 meetings were held in 2009,2010, of which seveneight included GEB members and 16eight were without GEB participation. On average, 93%92% of BoD members were present at BoD meetings without GEB participation, and 95%96% at meetings with GEB participation. The duration of these meetingseach meeting was 31/2four hours on average. In addition, the BoD met for a one-day BoD seminar.
     Each committee chairAt each BoD meeting, each Committee Chairperson provides the full BoD with regular updates on the current activities of his or her committee and onCommittee as well as important committeeCommittee issues.
At least once per year, the BoD reviews its own performance as well as the performance of each of its committees.Committees. This review is based on an assessment of the BoD as conducted by the Governance and Nominating Committee (GNC), as well as a self-assessment of the BoD committees,Committees, and seeks to determine whether the BoD and its committeesCommittees are functioning effectively and efficiently.
The following committeesCommittees assist the BoD in the performance of its responsibilities. These committeesCommittees and their charters are described in the Organization Regulations, which are published onwww.ubs.com/governance.governance.

Audit Committee

The Audit Committee (AC) comprises at least three independent BoD members, with all members having been determined by the BoD to be fully independent and financially literate. On 31 December 2009,2010, the AC consisted of William G. Parrett, the chairperson,Chairman, as well as Michel Demaré, Rainer-Marc Frey and Ann F. Godbehere. All members have accounting and financial management

expertise and are considered to be “financial experts” according to the rules established by the US Sarbanes-Oxley Act of 2002.
The committeeAC itself does not itself perform audits, but monitors the work of the auditors who in turn are responsible for auditing UBS’s and the Group’s financial statements and for reviewing the quarterly financial statements. The function of the AC is to serve as an independent and objective body with oversight of: (i) the Group’s accounting policies, financial reporting and disclosure controls and procedures, (ii) the quality, adequacy and scope of external audit, (iii) UBS’s compliance with financial reporting requirements, (iv) management’s approach to internal controls with respect to the production and integrity of the financial statements and disclosure of the financial performance, and (v) the performance of Group Internal Audit in conjunction with the Chairman and the RC.Risk Committee (RC). For these purposes, the AC has the authority to meet with regulators and external bodies in consultation with the Group CEO.
The AC, together with the external auditors and Group Internal Audit reviews the annual report and quarterly financial statements of UBS and the Group as proposed by the management with external auditors, management and Group Internal Audit in order to recommend their approval, including any adjustments the committee considersconsidered to be appropriate to the BoD.
Periodically, and at least annually, the AC assesses the qualifications, expertise, effectiveness, independence and performance of the external auditors and their lead audit partner, in order to support the BoD in reaching a decision in relation toon the appointment or removal of the external auditors and the rotation of the lead audit partner. The BoD then submits these proposals at the AGM.
During 2010, the AC held a total of six meetings and ten calls. The AC met 14 times in 2009 formeetings had an average duration of 21/2three and a half hours inand the presence ofcalls lasted approximately 45 minutes. Participation at these events averaged 97%. Also present at the meetings were the Group CEO, the Group Chief Financial Officer (CFO) each time, and with(Group CFO), the Head of Group Internal Audit, the representativesHead of Group Tax & Accounting Policy, the Head of Group Controlling & Accounting and Ernst & Young Ltd., Basel, (Ernst & Young), our external auditors. The calls were conducted in the presence of the external auditorsAC members and other GEB members participating in mosta combination of the meetings. Participation atGroup CFO, the meetings averaged 98%.Head of Group Tax & Accounting Policy and the Head of Group Controlling & Accounting. Joint AC/RC sessions are held every quarter. In addition, the AC held one session with FINMA.
The committeeAC reports back to the BoD about its discussions with our external auditors. Once per year, the lead representatives of the external auditors take part in a BoD meeting, presenting the long-form report of our external auditors present their long-form report to the BoD, as required by the Swiss Financial Market Supervisory Authority (FINMA).


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Corporate governanceFINMA.

Corporate Responsibility Committee
The Corporate Responsibility Committee (CRC) supports the BoD in fulfilling its duty to safeguard and advance the Group’s reputation for responsible corporate conduct,conduct. It reviews and to assess developments inassesses stakeholder concerns and expectations for responsible corporate conduct and their possible consequences for UBS.UBS, and recommends appropriate actions to the BoD. The committeeCRC comprises at least three independent BoD members and, on 31 December 2009, 2010,



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Kaspar Villiger chaired the committeeCommittee with Sally Bott, and Ann F. Godbehere and Wolfgang Mayrhuber as its additional members. The committeeCRC is advised and supported by a number of senior business representatives. It met twice for 9070 minutes in 2009,2010, and all committee88% of CRC members were present.
In 2010, the UBS Code of Business Conduct and Ethics (the Code) was revised and approved by the BoD and GEB. All employees were required to participate in a comprehensive online training session covering the content of the Code.
è 
Refer to the “Corporate responsibility” section of this report for more information on corporate responsibility

Governance and Nominating Committee

The GNC supports the BoD in fulfilling its duty to establish best practices in corporate governance across the Group; to conduct ana BoD annual assessment of the Chairman and the BoD as a whole;self-assessment; to establish and maintain a process for appointing new BoD members; and to manage the succession of the Chairman and the Group CEO. The committeeGNC comprises at least three independent BoD members and, on 31 December 2009,2010, Kaspar Villiger chaired the committeeGNC with Sally Bott, Michel Demaré and Bruno Gehrig Sergio Marchionne and Peter R. Voser as its additional members. In 2009, 112010, seven meetings were held with an average participation of 86%93% of members and a duration averaging over one hour. Of these 11 meetings, oneNo meeting was held with external advisors.

Human Resources and Compensation Committee

The Human Resources and Compensation Committee (HRCC)HRCC is responsible for the following functions: (i) to supportsupporting the BoD in its duties to set guidelines on compensation and benefits, (ii) to approveapproving the total individual compensation for the Chairman and the GEBnon-independent BoD members, as well as the Company Secretary and Head of Group Internal Audit, (iii) proposing, together with the Chairman, to provide the BoD with a proposal for total individual compensation for the independent BoD members and Group CEO for approval by the BoD, (iv) proposing to scrutinize executive performance and to supervise succession planningthe BoD for all GEB members (other thanapproval, upon the recommendation from the Group CEO).CEO, the total individual compensation for GEB members. The HRCC also reviews the compensation disclosure included in this report.
The committeeHRCC comprises at least threefour independent BoD members and, on 31 December 2009,2010, Sally Bott chaired the committeeHRCC with Bruno Gehrig, Wolfgang Mayrhuber and Helmut Panke as its additional members. In 2009, 142010, 10 meetings were held with an average participation of 98%88% of members and a duration of over one hour.100 minutes. Of those meetings, nine were held with external advisors, and one was held as a seminar with the participation of the Chairman and the Group Head HR.CEO. After Sally Bott’s resignation, effective as of 11 February 2011, Helmut Panke assumed responsibility as ad-interim Chairperson of the HRCC.
è 
Refer to the “Compensation and shareholdings”governance” section of this report for more information on the Human Resources and Compensation Committee’s decision-making procedures

Risk Committee

The RC is responsible for assistingoverseeing and supporting the BoD in reviewing the bank’sfulfilling its duty to supervise and set appropriate risk management and control framework,principles in the area of (i) risk management and control, including (i) credit, market, country and operational risks, (ii) treasury and capital management, including funding and liquidity,li-

quidity, and (iii) balance sheet management, including in each case any consequentconsequential reputational risk. The RC assists the BoD in establishing the bank’s risk capacity and risk appetite, and in overseeing the bank’s risk profile. For these purposes, the RC receives all relevant information from the GEB and other members of management.has the authority to meet with regulators and external bodies in consultation with the Group CEO.
The committeeRC comprises four independent BoD members and, on 31 December 2009,2010, David Sidwell chaired the committeeRC with Rainer-Marc Frey, Axel P. Lehmann and Helmut Panke as its additional members. The committee met 14 timesDuring 2010, the RC held a total of nine meetings and three calls, with an average participation rate of 98%, averaging97% of members. The average meeting duration was over fourfive and a half hours in duration.and the calls lasted over 50 minutes. The AC Chairperson regularly attends part or all of the meetings. Also present were the Chairman, the Group CEO, the Group CFO, andthe Group CRO were present at all meetings. Other regular attendees includedChief Risk Officer (Group CRO), the CEO orGroup General Counsel (Group GC), the co-CEOs of the Investment Bank, the Head of Group Internal Audit and CEO of Wealth ManagementErnst & Business Banking or co-CEOs of Wealth Management & Swiss Bank. Eight of theseYoung. In addition, two joint meetings between the RC and the HRCC were held with representatives ofto discuss factoring risk into the external auditors also in attendance. Two special sessions werecompensation framework. Annually, one session is held with the Governing Board of the SNB and at least one session will continue to be held on an annual basis. In addition,with FINMA. The RC Chairperson additionally met one special session was heldtime with FINMA, and at least one meeting will continue to be held on an annual basis.
Strategy Committee
The Strategy Committee was constituted on 1 July 2008, taking over the strategic responsibilities of the former Chairman’s Office. While it met extensively in 2008, no meetings took place in 2009. As it was always intended to be a temporary committee, it was disbanded on 25 June 2009 and its responsibilities were transferred to the full BoD.Financial Services Authority (FSA).

Roles and responsibilities of the Chairman of the
Board of Directors

Kaspar Villiger, the Chairman, has entered into a full-time employment contract with UBS in connection with his service on the BoD.

The Chairman coordinates the tasks within the BoD, calls BoD meetings and sets their agendas. Under the leadership of the Chairman, the BoD decides on the strategy of the


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Group upon recommendation of the Group CEO, exercises the ultimate supervision over the executivesmanagement and electsappoints all GEB members.
The Chairman presides over theall AGMs and EGMs, and works with the committee chairsCommittee Chairpersons to coordinate the work of all committees.Committees. Together with the Group CEO, the Chairman is responsible for ensuring effective communication with shareholders and other stakeholders, including government officials, regulators and regulators.public organizations. This is in addition to establishing and maintaining a close working relationship with the Group CEO and the other GEB members, providing advice and support while respecting the fact that day-to-day management responsibility is delegated to the GEB.

Roles and responsibilities of the Senior Independent Director

At least once per year,Vice Chairman and the Senior Independent Director

The BoD appoints a Vice Chairman and an SID. Both the Vice Chairman and the SID must be independent. The Vice Chairman is required to lead the BoD in the absence of the Chairman as well as provide support and advice to the Chairman. At least twice a year, the SID organizes and leads a meeting of the independent BoD members without the presence of the Chairman. In 2009, six2010,



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Corporate governance

one independent BoD meetings weremeeting was held averaging 90for a duration of 60 minutes. A second meeting was scheduled to take place in December 2010, but was postponed until February 2011. The Senior Independent DirectorSID reports to the Chairman on the evaluation of the Chairman’s performance, and acts as a contact point for shareholders wishing to engage in discussions with an independent BoD member.

Important business connections of independent members of the Board of Directors with UBS

As a global financial services provider and a major bank in Switzerland, we have business relationships with many large companies, including those in which our BoD members assume management or independent board responsibilities. The nature of the relationships between UBS and companies whose chair, chief executive or other officer is a member of our BoD is not considered to compromise the BoD members’ capacity for independent judgment. Furthermore, no independent BoD member has personal business relationships with UBS that could compromise his or her independence.

All relationships and transactions with UBS BoD members and their affiliated companies are conducted in the ordinary course of business, and are on the same terms as those prevailing at the time for comparable transactions with non-affiliated persons.

Checks and balances: Board of Directors and
Group Executive Board

We operate under a strict dual board structure, as mandated by Swiss banking law. The separation of responsibilities between the

BoD and executive managementthe GEB is clearly defined in the Organization Regulations. The BoD decides on the strategy of the Group upon recommendation of the Group CEO, and supervises and monitors the business, whereas the GEB, headed by the Group CEO, has executive management responsibility. The functions of Chairman of the BoD and Group CEO are assigned to two different people, thus ensuring a separation of power. This structure establishes checks and balances and preserves the institutional independence of the BoD from the day-to-day management of the firm, for which responsibility is delegated to the GEB under the leadership of the Group CEO. No member of one board may be a member of the other.
Supervision and control of executive managementthe GEB remains with the BoD. The authorities and responsibilities of the two bodies are governed by the Articles of Association and the Organization Regulations, including the latter document’s “Annex B – Responsibilities and authorities”.
è Refer to www.ubs.com/governance for more details on checks and balances for the BoD and GEB

Transparency report

On 14 October 2010, we published the “Transparency report to the shareholders of UBS”, which is a comprehensive review of the

crisis we have faced in recent years. In publishing this report, the BoD was responding to the report published by the control Committee of the Swiss parliament in May 2010.
The report explains why UBS incurred losses during the financial crisis, particularly in connection with positions in the US real estate market. The report gives shareholders and interested members of the public an opportunity to gain a detailed picture of the events that took place. In addition, it sheds light on the problems in the cross-border wealth management business with US clients. The analysis is based on numerous internal and external investigations, the results of which are summarized in the report. The report further describes the wide ranging and significant changes made in order to prevent similar mistakes from recurring. Finally, the BoD presents the reasons for its decision to refrain from taking legal action against the former management. The transparency report is supported by two reports from independent experts: the first by Prof. em. Dr. iur. Peter Forstmoser, LL.M., Attorney-at-law titled, “Statement of Opinion on the UBS AG Transparency Report of October 2010 and the Resolution by the UBS AG Board of Directors to Refrain from the Initiation of Liability Litigation” and the second by Dr. Tobias Straumann, University of Zurich titled, “The UBS Crisis in Historical Perspective”. The reports assess the events of recent years from, on the one hand, a legal perspective, and on the other hand, an economic and historic one.
èRefer to www.ubs.com/transparencyreport for more information

Information and control instruments vis-à-vis the
Group Executive Board

The BoD is kept informed of the activities of the GEB in various ways. The minutes of the GEB meetings are made available to the BoD members. At BoD meetings, the Group CEO and GEB members regularly update the BoD on important issues.

At BoD meetings, BoD members may request from BoD or GEB members any information about matters concerning UBS that they require to fulfill their duties. Outside meetings, BoD members may request information from other BoD and GEB members, in which case such requests must be approved by the Chairman.
Group Internal Audit independently, objectively and systematically assesses the adherence to our strategy, effectiveness of governance, risk management and control processes at Group, divisional and regional levels, and monitors compliance with legal, regulatory and statutory requirements, as well as with internal policies and contracts. This internal audit organization, which is independent from management, reports significant findings to the Chairman and the RC. The AC must be informed of the results of the internal audit.audits.
In February 2009,2010, our internal compliance function provided an annual compliance report to the BoD. This report is required by sections 109 and 112 of the FINMA Circular 08/24 of FINMA on the supervision and internal controls at banks.
è Refer to the “Risk management and control” section of this report for more information



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Corporate governance and compensation

Group Executive Board

UBS operates under a strict dual board structure, as required by Swiss banking law. The management of the business is delegated by the BoD to the GEB.

Members of the Group Executive Board

The information and changes in the boxes below provides details2010

Lukas Gähwiler was named CEO of UBS Switzerland on the composition1 April 2010, replacing Francesco Morra who stepped down on that date.

As of 1 November 2010, Carsten Kengeter became sole Head of the GEB on 31 December 2009. It shows each member’s functions withinInvestment Bank. At the same time, Alexander Wilmot-Sitwell was appointed co-Chairman and co-CEO of Asia Pacific (APAC). Together with Chi-Won Yoon, he leads the APAC region. John Cryan was appointed Chairman and CEO of UBS nationality, year of initial appointment to the GEB, professional history, education,AG London Branch and date of birth. It also includes other activities and functions, such as mandates on boards of important corporations, organizations and foundations, permanent functions for important interest groupsUBS Limited in November 2010, as well as official functionsChairman and political mandates.CEO of UBS Group Europe, Middle East and Africa (EMEA) on

Changes

an interim basis. Mr. Cryan took on these responsibilities in addition to the Group Executive Board in 2009

Oswald J. Grübel was named Group CEO on 26 February 2009, replacing Marcel Rohner who stepped downhis existing role as Group CFO.
On 22 October 2010, the BoD appointed Philip Lofts as CEO, on that date.
     On 1 April 2009, Ulrich Körner was appointedUBS Group COOAmericas, and Walter H. Stürzinger steppedMaureen Miskovic as Group CRO and GEB member. Robert Wolf asked to step down from the GEB on that date. In this newly createdat the end of 2010, but will remain in his role Ulrich Körner is responsible for the managementas Chairman of UBS Group Americas and performance of the infrastructure as well as service functions for the Group and leads the Corporate Center. The Group control functions (finance, risk, and legal and compliance) were centralized as part of the integration of the Group-wide infrastructure, services and control functions. This transformation took place in several steps and was finalized in October 2009.
     On 27 April 2009, Jerker Johansson resigned as CEOPresident of the Investment Bank. Carsten KengeterHe will focus full-time on client relationships and Alexander Wilmot-Sitwell became co-CEOsbusiness transactions in the Americas. All three changes were effective as of 1 January 2011.
John Cryan will step down from his Group CFO position and from the Investment Bank.GEB on 1 June 2011. On 25 June 2009, Chi-Won Yoon became3 December 2010, the BoD appointed Sergio Ermotti as Chairman and CEO Asia Pacific, replacing Rory Tapner. On 27 October 2009, Marten Hoekstra stepped downof UBS Group EMEA and GEB member as CEO of Wealth Management Americas1 April 2011, and was replaced by Robert J. McCann.Tom Naratil as Group CFO and GEB member as of 1 June 2011.
The following biographies provide information on the GEB members on 31 December 2010.



      
 
(PHOTO OF OSWALD J. GRüBEL)
(PHOTO OF OSWALD J. GRüBEL)
Oswald J. Grübel
German, born 23 November 1943
UBS AG, Bahnhofstrasse 45,
CH-8098 Zurich

Function in UBS

Group CEO

Year of initial appointment: 2009		  
Professional history and education

Oswald J. Grübel was named UBS Group CEOChief Executive Officer (Group CEO) and a member of the Group Executive Board (GEB) in February 2009. Before joining UBS, he was the CEO of Credit Suisse Group and Credit Suisse. HeSuisse and stepped down from this role in May 2007. From 2002 to 2004, he was CEO of Credit Suisse Financial Services, and co-CEO of Credit Suisse Group from 2003 until 2004. Mr. Grübel was a member of the Credit Suisse Group Executive Board of Credit Suisse from 1997 to 2001, and again from 2002 to 2007. From 1991 until 1997, he was a member of the Group Executive Board of Credit Suisse and was responsible for equities, fixed income, global foreign exchange, money markets and asset / liability/liability management in Zurich. Before that he was a member of the Financière Credit Suisse First Boston Group Executive Board in Zug. In 1970, Mr. Grübel joined White Weld Securities and became its CEO in 1978.1975. From 1961 to 1970, he worked for Deutsche Bank where he completed his training as a banker.

Other activities and functions

Mandates on boards of important corporations, organizations and foundations or interest groups:
Mr. Grübel is a board member of the Spanish residential estate La Zagaleta, of the Swiss AmericanSwiss-American Chamber of Commerce, the Institute of International Finance and the Financial Services Forum. He is a member of the Shanghai International Financial Advisory Council, the Institut International d’Etudes Bancaires and the International Monetary Conference.
 
 
(PHOTO OF JOHN CRYAN)
(PHOTO OF JOHN CRYAN)
John Cryan
British, born 16 December 1960
UBS AG, Bahnhofstrasse 45,
CH-8098 Zurich

FunctionFunctions in UBS

Group CFO
CEO UBS AG London Branch and UBS Limited
Chairman and CEO UBS Group Europe Middle East
and Africa (EMEA) ad interim

Year of initial appointment: 2008		  
Professional history and education

John Cryan was appointed CEO of UBS AG London Branch and UBS Limited in November 2010 as well as Chairman and CEO of UBS Group Europe, Middle East and Africa (EMEA) on an interim basis. Mr. Cryan took on these responsibilities in addition to his existing role as Group Chief Financial Officer (Group CFO). He was appointed Group CFO and became a GEB member of the Group Executive Board (GEB) in September 2008. In 2002, he became the European Head of the Financial Institutions Group of the UBS Investment Bank and three years later he was made its Global Head. A former employee of Arthur Andersen LLP, Mr. Cryan joined S.G. Warburg & Co. in London in 1987. Since 1992, he has specialized in providing strategic and financial advice to a wide range of companies in the financial services sector globally. Mr. Cryan graduated in 1981 with an MA with honors from the University of Cambridge.
 
 

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Corporate governance
      
 
(PHOTO OF MARKUS U. DIETHELM)
(PHOTO OF MARKUS U. DIETHELM)
Markus U. Diethelm
Swiss, born 22 October 1957
UBS AG, Bahnhofstrasse 45,
CH-8098 Zurich

Function in UBS

Group General Counsel

Year of initial appointment: 2008		  
Professional history and education

Markus U. Diethelm was appointed Group General Counsel of UBS and a GEB member in September 2008. From 1998 until 2008, he served as Swiss Re’s Group Chief Legal Officer at Swiss Re, and was appointed to its Group Executive Board in 2007. Prior to that, he was at the Los Angeles-based law firm Gibson, Dunn & Crutcher, focusingand focused on corporate matters, securities transactions, litigation and regulatory investigations while working out of the firm’s Brussels and Paris offices. From 1989 until 1992, he practiced at New York’s Shearman & Sterling law firm in New York, specializing in mergers and acquisitions, and inacquisitions. In 1988, he worked at Paul, Weiss, Rifkind, Wharton & Garrison in New York, as a foreign associate. He startedafter starting his career in 1983 with Bär & Karrer. Mr. Diethelm holds a law degree from the University of Zurich and a master’s degree and PhD from Stanford Law School. He is a qualified attorney-at-law in Switzerland and admitted to the Zurich and New York Bar.State Bar Associations.

Other activities and functions

Mandates on boards of important corporations, organizations and foundations or interest groups:
Mr. Diethelm is the Chairman of the Swiss-American Chamber of Commerce’s Legal Committee and member of the Swiss Advisory Council of the American Chamber of Commerce.Swiss Foundation.
 
 
(PHOTO OF JOHN A. FRASER)
(PHOTO OF JOHN A. FRASER)
John A. Fraser
Australian and British, born 8 August 1951
UBS AG, Bahnhofstrasse 45,
CH-8098 Zurich

Functions in UBS

Chairman and CEO Global Asset Management
Chairman UBS Saudi Arabia

Year of initial appointment: 2002		  
Professional history and education

John A. Fraser was appointed Chairman and CEO of the Global Asset Management business division in late 2001. Prior to that,December 2001, and became a GEB member in July 2002. Since 2008, he has been the Chairman of UBS Saudi Arabia. Before 2001, he was President and Chief Operating Officer (COO) of UBS Asset Management and Head of Asia Pacific. In 2008, he became Chairman of UBS Saudi Arabia.Pacific (APAC). From 1994 to 1998, he was the Executive Chairman and CEO of the Australia funds management business. Before joining UBS, Mr. Fraser spent over 20 years in various positions at the Australian Treasury, including two international postings in Washington DC,D.C., first, at the International Monetary Fund and second, as a minister (economic)Economic Minister at the Australian Embassy. He was the Deputy Secretary (economic)(Economic) of the Australian Treasury from 1990 to 1993. Mr. Fraser graduated from Monash University, in AustraliaMelbourne, in 1972, and holds a first-class honors degree in economics.

Other activities and functions

Mandates on boards of important corporations, organizations and foundations or interest groups:
Mr. Fraser is a non-executive Chairpersonmember of the Victorian FundsPresident’s Advisory Council of the European Fund and Asset Management Corporation, Melbourne, and isAssociation, a member of the Board of Governors of the Marymount International School at Kingston-upon-Thames in the UK.UK and Chairman of the Victorian Funds Management Corporation, Melbourne.
 
 
(PHOTO OF LUKAS GäHWILER)
Lukas Gähwiler
Swiss, born 4 May 1965
UBS AG, Bahnhofstrasse 45, CH-8098 Zurich

Functions in UBS
CEO UBS Switzerland and co-CEO
Wealth Management & Swiss Bank

Year of initial appointment: 2010
(PHOTO OF CARSTEN KENGETER)Professional history and education
Lukas Gähwiler became a GEB member in April 2010, and was appointed CEO of UBS Switzerland and co-CEO of Wealth Management & Swiss Bank. In his role as CEO of UBS Switzerland he is responsible for all businesses including retail and wealth management, corporate and institutional banking, investment banking and asset management in UBS’s home market. Before joining UBS, he held the position of Chief Credit Officer with Credit Suisse since 2003, and was 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 the Credit Suisse Private and Corporate Business Unit. Previously, he held various front-office positions in Switzerland and North America. Mr. Gähwiler earned a bachelor’s degree in business administration from the University of Applied Sciences in St. Gallen. He completed an MBA program in corporate finance at the International Bankers School in New York, as well as the Advanced Management Program at Harvard Business School.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Mr. Gähwiler is a member of the boards of the Zurich Chamber of Commerce and the Opernhaus AG as well as Vice Chairman of the Swiss Finance Institute.

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(PHOTO OF CARSTEN KENGETER)
Carsten Kengeter
German, born 31 March 1967
UBS AG, Bahnhofstrasse 45,
CH-8098 Zurich

FunctionFunctions in UBS

Co-CEOChairman and CEO Investment Bank

Year of initial appointment: 2009		  
Professional history and education

Carsten Kengeter was appointed co-CEOChairman and CEO of the UBS Investment Bank andin November 2010, after having been appointed its co-CEO in April 2009, when he became a member of the GEB in April 2009.member. He joined UBS in December 2008, and served as the joint Global Head of Fixed Income, Currencies & Commodities (FICC) of the UBS Investment Bank until January 2010. Previously,He has been on the Governing Board of UBS Limited since March 2009. Mr. Kengeter worked for Goldman Sachs as the co-Head of Asia (ex-Japan) Securities division in Hong Kong.Kong since 2006. In 2003, he co-headed the European FICC and Structured Equities Distribution in London, and in 2002, he became partner and Head of the FICC German Region in Frankfurt. In 2000, he was made Head of the European and Asian CDOCollateralized Debt Obligation business in London, and before that he was in derivatives marketing in Frankfurt. From 1992 to 1997, Mr. Kengeter worked for Barclays de Zoete Wedd, and was responsible for setting up itsthe credit derivatives trading desk. He graduated as Diplom-Betriebswirt from FHFachhochschule Reutlingen, holds a bachelor’s in business administration from Middlesex University and a finance and accounting MSMSc from the London School of Economics and Political Science.Economics.
 
 
(PHOTO OF ULRICH KöRNER)
(PHOTO OF ULRICH KöRNER)
Ulrich Körner
German and Swiss, born 25 October 1962
UBS AG, Bahnhofstrasse 45,
CH-8098 Zurich

Functions in UBS

Group Chief Operating Officer and
CEO Corporate Center

Year of initial appointment: 2009		  
Professional history and education

Ulrich Körner was appointed Group Chief Operating Officer (COO)(Group COO) and CEO Corporate Center, and was made a GEB member of the GEB in April 2009. In this function, he leads the Corporate Center. Mr. Körner was previously with Credit Suisse from 1998, and served as a member of the Credit Suisse Group executive management in his last six years where he heldExecutive Board from 2003 to 2008, holding various management positions including CFO and COO. Most recently,From 2006 to 2008 and before joining UBS, he was responsible for the entire Swiss client business as CEO of the Switzerland region. Mr. Körner received a PhD from the University of St. Gallen in business administration, and served several years as an auditor for Price Waterhouse and as a management consultant for McKinsey & Company.

Other activities and functions

Mandates on boards of important corporations, organizations and foundations or interest groups:
Mr. Körner is Vice Chairman of the Committee of the Governing Board of the Swiss Bankers Association, Chairman of the Widder Hotel, Zurich, and Vice President of the BoDboard of Lyceum Alpinum Zuoz,Zuoz. He is Deputy Chairman of the Supervisory Board of UBS Deutschland AG, member of the Foundation Board of the UBS Pension Fund, member of the Financial Service Chapter Board of the Swiss-American Chamber of Commerce and member of the advisory board of the SwissDepartment of Banking Institute ofand Finance at the University of Zurich.
 
 

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Corporate governance
      
 
(PHOTO OF PHILIP J. LOFTS)
(PHOTO OF PHILIP LOFTS)
Philip J. Lofts
British, born 9 April 1962
UBS AG, Bahnhofstrasse 45,
CH-8098 Zurich

Function in UBS

Group Chief Risk OfficerCRO until 31 December 2010
CEO UBS Group Americas as of 1 January 2011

Year of initial appointment: 2008		  
Professional history and education

Philip J. Lofts was appointed CEO of UBS Group Americas in January 2011. He became a GEB member in November 2008. From 2008 until 2010, he was Group Chief Risk Officer (CRO) in November 2008.(Group CRO). He has been with UBS for over 20 years. In 2008, he became the Group Risk COO after having previously been the Group Chief Credit Officer for three years. Before this, Mr. Lofts worked for the Investment Bank in a number of business and risk control positions in Europe, Asia PacificAPAC and the US. He successfully completed his A-levels at Cranbrook School. From 1981 to 1984, he was a trainee at Charterhouse Japhet plc, a merchant bank acquired by the Royal Bank of Scotland in 1985.

Other activities and functions

Mandates on boards of important corporations, organizations and foundations or interest groups:
Mr. Lofts is a board member of the University of Connecticut Foundation.
 

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(PHOTO OF ROBERT J. MCCANN)
(PHOTO OF ROBERT J. MCCANN)
Robert J. McCann
American (US), and Irish, born 15 March 1958
UBS AG, Bahnhofstrasse 45,
CH-8098 Zurich

Function in UBS

CEO Wealth Management Americas

Year of initial appointment: 2009		  
Professional history and education

Robert J. McCann was appointed CEO of Wealth Management Americas and became a GEB member of the GEB in October 2009. Before joining UBS, he worked for Merrill Lynch & CompanyCo. as Vice Chairman and President of the Global Wealth Management Group. In 2003, he served as Vice Chairman of Distribution and Marketing for AXA Financial. He started his career with Merrill Lynch in 1982, working in various positions in capital markets and research. From 1998 to 2000, he was the Global Head of Global Institutional Debt and Equity Sales. In 2000, he became the COO of Global Markets and Investment Banking, and from 2001 to 2003, he was the Head of Global Securities Research and Economics. Mr. McCann graduated with a bachelor’s in economics from Bethany College, West Virginia. He holds an MBA from Texas Christian University, Fort Worth, and completed the Advanced Management Program at Harvard Business School.University.

Other activities and functions

Mandates on boards of important corporations, organizations and foundations or interest groups:
Mr. McCann is a board member of the American Ireland Fund, and is Vice Chairman of the Bethany College Board of Trustees. He is a member of the No Greater Sacrifice Advisory Board, and is Chairman of the Executive Advisory Board of Sponsors for Educational Opportunity.Washington D.C.
 
 
(PHOTO OF FRANCESCO MORRA)
(PHOTO OF ALEXANDER WILMOT-SITWELL)
Francesco MorraAlexander Wilmot-Sitwell
Swiss and Italian,British, born 31 August 196716 March 1961
UBS AG, Bahnhofstrasse 45,
CH-8098 Zurich

FunctionFunctions in UBS

CEOCo-Chairman and co-CEO UBS Switzerland, Wealth
Management & Swiss BankGroup APAC

Year of initial appointment: 20092008		  
Professional history and education

Francesco Morra was appointed CEO of UBS Switzerland, Wealth Management & Swiss Bank, and became a member of the GEB in 2009. In November 2007 he was appointed Head of Wealth Management Western Europe, Mediterranean, Middle East and Africa. In addition, as of September 2008, he was responsible for the business unit Latin America, Caribbean & Canada. Mr. Morra joined UBS in 2005 as the Head of Wealth Management Italy and as a member of the former Group Managing Board (GMB). Before joining UBS, he held various management positions at the Boston Consulting Group between 1992 and 2005. He holds a master’s and PhD in economics from the University of St. Gallen.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. Morra is Vice Chairman of the Swiss Bankers Association and Swiss Finance Institute. He is on the Committee of the Zurich Chamber of Commerce.
(PHOTO OF ALEXANDER WILMOT-SITWELL)
Alexander Wilmot-Sitwell
British, born 16 March 1961
UBS AG, Bahnhofstrasse 45,
CH-8098 Zurich

Function in UBS
Co-CEO Investment Bank

Year of initial appointment: 2008
Professional history and education
Alexander Wilmot-Sitwell was appointed co-Chairman and co-CEO of UBS Group APAC in November 2010. He became a GEB member in February 2008. From 2009 to 2010, he served as co-CEO of the UBS Investment Bank, in April 2009. He became a member of the GEB in February 2008 and servedfrom 2005 to 2009 as the joint Global Head of Investment Banking andBanking. From 2008 to 2010, he was Chairman and CEO of UBS Group Europe, Middle East & Africa. In 2006, Mr. Wilmot-Sitwell became a member of the former GMB.EMEA. He joined the firm in 1996 as the Head of Corporate Finance in South Africa and moved to London in 1998 as Head of UK Investment Banking. Mr. Wilmot-Sitwell previously worked for Warburg Dillon Read and served as the Head of Corporate Finance at SBC Warburg in South Africa. Mr. Wilmot-Sitwell graduated from Bristol University with a degree in modern history.

Other activities and functions

Mandates on boards of important corporations, organizations and foundations or interest groups:
Mr. Wilmot-Sitwell is Vice President of the Save the Children Fund, London.
 
 

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(PHOTO OF ROBERT WOLF)
(PHOTO OF ROBERT WOLF)
Robert Wolf
American (US), born 8 March 1962
UBS AG, Bahnhofstrasse 45,
CH-8098 Zurich

Functions in UBS

Chairman and CEO UBS Group Americas, /
CEO until 31 December 2010
President
Investment Bank

Year of initial appointment: 2008		  
Professional history and education

Robert Wolf was appointed President of the UBS Investment Bank in 20072007. He was Chairman and CEO of UBS Group Americas and was a GEB member from March 2008 until the end of 2010. Since January 2011 he has been the Chairman of UBS Group Americas. He was COO of the UBS Investment Bank from 2004 to 2008. Since 2007, he has also served as Chairman and CEO of UBS Group Americas. Prior to that, Mr. Wolf served as the Global Head of Fixed Income from 2002 to 2004, and previously as Global Head of Credit Trading, Research and Distribution. He joined Union Bank of Switzerland (UBS) in 1994, after spending approximately 10 years at Salomon Brothers in fixed income. In 1984, Mr. Wolf graduated from the Wharton School of the University of Pennsylvania with a degree in economics.

Other activities and functions

Mandates on boards of important corporations, organizations and foundations or interest groups:
Mr. Wolf is a member of President Obama’s Economic Recovery Advisory Board. He is a member of the Undergraduate Executive Board of the Wharton School, the University of Pennsylvania Athletics Board of Overseers, and the Financial Services Round Table. Mr. Wolf is also a member of the Council on Foreign Relations and the Committee Encouraging Corporate Philanthropy. He is on the board and in the Leadership Council of the Multiple Myeloma Research Foundation, Norwalk,Foundation. He serves on the Board of Trusteesboard of the Children’s Aid Society, New York, and the Partnership New York City. He is a member ofCity, and the Robert F. Kennedy Center for Justice & Human Rights Leadership Council.
 

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(PHOTO OF CHI-WON YOON)
(PHOTO OF CHI-WON YOON)
Chi-Won Yoon
American (US),Korean, born 2 June 1959
UBS AG, Bahnhofstrasse 45,
CH-8098 Zurich

Functions in UBS

ChairmanCo-Chairman and CEO Asia Pacificco-CEO UBS Group APAC

Year of initial appointment: 2009		  
Professional history and education

Chi-Won Yoon becameis co-Chairman and co-CEO of UBS Group APAC. From June 2009 to November 2010, he served as sole Chairman and CEO of UBS Asia Pacific (APAC)AG, APAC and is a GEB member of the GEB insince June 2009. He continuesPrior to serve APAC’shis current role, Mr. Yoon served as Head of UBS’s securities businesses such asbusiness in APAC: Asia Equities which he headed fromoversaw since 2004, to 2009 and APAC FICC which he was brought in to lead in February 2009. In 1997, when he first joined the firm, he served as Head of Equity Derivatives. Mr. Yoon who joined UBS in 1997, began his career in financial services eleven years earlier. He workedin 1986, working first at Merrill Lynch in New York and then at Lehman Brothers in New York and Hong Kong. Before embarking on a Wall Street career, Mr. Yoon worked as an electrical engineer in satellite communications. In 1982, Mr. Yoon earned a bachelor’s degree in electrical engineering from the Massachusetts Institute of Technology (MIT), and in 1986, a master’s degree in management from MIT’s Sloan School of Management. He was born in Korea.

Other activities and functions

Mandates on boards of important corporations, organizations and foundations or interest groups:
Mr. Yoon is on the Asian Executive Board of MIT’s Sloan School of Management.
 
 
(PHOTO OF JüRG ZELTNER)
(PHOTO OF JüRG ZELTNER)
Jürg Zeltner
Swiss, born 4 May 1967
UBS AG, Bahnhofstrasse 45,
CH-8098 Zurich

FunctionFunctions in UBS

CEO UBS Wealth Management and
co-CEO Wealth Management & Swiss Bank

Year of initial appointment: 2009		  
Professional history and education

Jürg Zeltner was appointed CEO UBS Wealth Management and co-CEO of Wealth Management & Swiss Bank, and became a GEB member of the GEB in February 2009. In November 2007, he was appointed Head of Wealth Management North, East & Central Europe and became a member of the former GMB in the same year.Europe. From 2005 to 2007, he was CEO of UBS Deutschland, Frankfurt. PriorFrankfurt, and prior to that, he held various management positions in the former Wealth Management division of UBS. Between 1987 and 1998, Mr. Zeltner was with SBC in various roles within the Private and Corporate Client division in Berne, New York and Zurich. He graduated from the School of Economics and Business Administration in Berne, and completed the Advanced Management Program at Harvard Business School.

Other activities and functions

Mandates on boards of important corporations, organizations and foundations or interest groups:
Mr. Zeltner is a board member of the German SwissGerman-Swiss Chamber of Commerce and the UBS Optimus Foundation.
 

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Corporate governance

Responsibilities, authorities and organizational
principles of the Group Executive Board

Under the leadership of the Group CEO, the GEB has executive management responsibility for the Group and its business. It assumes overall responsibility for the development of 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 management and control principles, for approving the core risk policies as proposed by the Group Chief Risk Officer (Group CRO),CRO, the Group CFO and the Group General Counsel (Group GC)GC, as well as for controlling the risk profile of the Group as a whole as determined by the BoD and the RC. The GEB plays a key role in proposing the human resources policy and the compensation principles of the Group. In 2009,2010, the GEB held in total 21 meetings of which 11 were jointly with the Executive Committee and 4 were jointly with the EC and the Group ALCO.

20 meetings.
è Refer to the Organization Regulations, which are available at www.ubs.com/governance, for more information on the authorities of the GEB

Responsibilities and authorities of the former
Executive Committee and the new Group Asset and
Liability Management Committee

The EC,Group ALCO, established by the GEB in January 2009, was disbanded in October 2009. The EC consistedis responsible for setting strategies to maximize the financial performance of the Group, CEO, the Group CFO, the Group COO, the Group CRO and the Group GC. Under the leadership of the Group CEO, the EC was responsible for allocating the Group’s financial resourcesis subject to the business divisions – i.e. capital, termsguidelines, constraints and availability of funding, risk capacity and parameters – in each case within the limitstolerances set by the BoD. Additionally,The Group ALCO is also responsible for managing the EC set the performance targetsbalance sheet of the business divisions monitoredthrough allocation and evaluated them. Under the guidancemonitoring of limits as well as managing liquidity, funding and capital; and promoting a one-firm financial management culture. The Organization Regulations additionally specify which powers of the Group CEO, the EC prepared proposals for approval by the BoD and supported the BoD in its decision-making process. The EC had overall responsibility for implementing our risk management and control principles, allocating risk capacityGEB are delegated to the business divisions and controlling our overall risk profile.Group ALCO. In 2009, the EC held eight meetings on its own; 11 jointly with the GEB and four with the GEB and the Group ALCO.

     The GEB has delegated certain duties and responsibilities to the new Group ALCO, as specified in the Organization Regulations. The Group ALCO promotes the usage of our assets and liabilities in line with our strategy, regulatory commitments and interests of shareholders and other stakeholders. In 2009,2010, the Group ALCO held one meeting on its own and four jointly with the GEB and the EC.
10 meetings.

Management contracts

We have not entered into management contracts with any third parties.



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Shareholders’ participation rights

We are committed to shareholder participation in our decision-making process and aim to make such participation as easy as possible. More than 300,000 directly registered shareholders, as well as some 90,000 US shareholders registered via nominee companies, regularly receive written information about our activities and performance and are personally invited to shareholder meetings.
èRefer to the “Information policy” section of this report for further information on these documents

Relationships with shareholders

We fully subscribe to the principle of equal treatment of all shareholders, who range from large investment institutions to individual investors, and regularly inform them about the development of the company of which they are co-owners.

The AGM offers shareholders the opportunity to raise any questions regarding our development and the events of the year that are under review. Members of the BoD and GEB, as well as the internal and external auditors, are present to answer these questions.

Voting rights, restrictions and representation

We place no restrictions on share ownership and voting rights. Nominee companies and trustees, who normally represent a large number of individual shareholders, may hold an unlimited number of shares, but voting rights are limited to a maximum of 5% of outstanding UBS shares in order to avoid the risk of unknown shareholders with large stakes being entered in the share register. Securities clearing organizations, such as The Depository Trust Company in New York, are not subject to the 5% voting limit.

In order to be recorded in the share register with voting rights, shareholders must confirm that they acquired UBS shares in their own name and for their own account. Nominee companies and trustees are required to sign an agreement confirming their willingness to disclose, upon our request, individual beneficial owners holding more than 0.3% of all issued shares.
All shareholders registered with voting rights are entitled to participate in shareholder meetings. If they do not wish to attend in person, they can issue instructions to accept, reject or abstain on each individual item on the meeting agenda either by giving instructions to an independent proxy designated by UBS, as required under Swiss company law, or by

appointing UBS, another bank or another registered shareholder of their choice to vote on their behalf. Nominee companies normally submit the proxy material to the beneficial owners and transmit the collected votes to UBS.

Statutory quorums

Shareholder resolutions, the election and reelection of members of the BoD and the appointment of the Group and statutory auditors are decided at the AGM by an absolute majority of the votes cast, excluding blank and invalid ballots. Swiss company law requires that, for certain specific issues, a majority of two-thirds of the votes represented at the meeting must vote in favor of the resolution. These issues include, among others, the creation of shares with privileged voting right, the introduction of restrictions on the transferability of registered shares, conditional and authorized capital increases, and restrictions or exclusion of shareholders’ pre-emptive rights.

The Articles of Association also requires a two-thirds majority of votes represented for any change to its provisions regarding the number of BoD members, and any decision to remove one-fourth or more of the members of the BoD.
Votes and elections are normally conducted electronically to clearly ascertain the exact number of votes cast. Voting by a show of hands remains possible if a clear majority is predictable. Shareholders representing at least 3% of the votes represented may still request that a vote or election take place electronically or by written ballot. In order to allow shareholders to clearly express their views on all individual topics, each item on the agenda is put to vote separately and BoD elections are made on a person-by-person basis.

Convocation of general meetings of shareholders

The AGM normally takes place each year in April, but in any case within six months of the close of the financial year. A personal invitation including a detailed agenda and explanation of each motion is sent to every registered shareholder at least 20 days ahead of the scheduled meeting. The meeting agenda is also published in various Swiss newspapers and on the internet atwww.ubs.com/agm.

EGMs may be convened whenever the BoD or the statutory auditors consider it necessary. Shareholders individually or jointly representing at least 10% of the share capital may, at any time, ask in writing that an EGM be convened to deal



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Corporate governance and compensation
Corporate governance

with a specific issue put forward by them. Such a request may also be brought forward during the AGM.

Placing of items on the agenda

Shareholders individually or jointly representing shares with an aggregate par value of CHF 62,500 may submit proposals for matters to be placed on the agenda for consideration at the shareholders’ meeting.

We publish the deadline for submitting such proposals in the Swiss Official Gazette of Commerce and on our websitewww.ubs.com/agm.Requests for items to be placed on the agenda must include the actual motions to be put forward,

together with a short explanation, if necessary. The BoD formulates opinions on the proposals, which are published together with the motions.

Registrations in the share register

The general rules for being entered with voting rights in our Swiss or US share registers also apply before general meetings of shareholders. There is no “closing of the share register” in the days before the meeting. Registrations, including the transfer of voting rights, are processed for as long as technically possible, normally until two days before the meeting.



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Corporate governance and compensation

Change of control and defense measures

We refrain from restrictions that would hinder developments initiated in, or supported by, the financial markets. We also do not have any specific defenses in place to prevent hostile takeovers.

Duty to make an offer

An investor who acquires more than 331/1/3% of all voting rights (directly, indirectly or in concert with third parties), whether they are exercisable or not, is required to submit a takeover offer for all shares outstanding, according to Swiss stock exchange law. We have not elected to change or opt out of this rule.

Clauses on change of control

TheNeither the service agreements and employment contractsagreement with the Chairman of the BoD, andnor the employment contracts with the GEB members, do not contain change of control clauses, except for two agreements with GEB members. In one clause, a change of control would reduce the employment notice of termination period from six to two months, and in the other clause, which wasclauses.

applicable only until 1 March 2010, compensation plan awards would be treated as if employment had ceased due to “mutually agreed termination”.

All new employment agreements with GEB members contain a notice of termination period of six months, and no existing GEB member hasexcept for one which contains a 12-month notice of termination period longer than 12 months.period. During the notice of termination period, GEB members are entitled to their salary and continuation of existing employment benefits.
In case of a change of control, the HRCC may, however, accelerate the vesting of restricted shares and amend the vesting date or lapse date of options for all employees.
According to the agreement we have entered into with the Swiss National Bank (SNB)SNB, in connection with the transfer of certain illiquid and other positions to a fund owned and controlled by the SNB, in the event of a change in control of UBS, the SNB has the right, but not the obligation, to require that we purchase the loan the SNB provided to the fund at its outstanding principal amount plus accrued interest, and that we purchase the fund’s equity at 50% of its value at the time.



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Auditors

Audit is an integral part of corporate governance. While safeguarding their independence, the external auditors closely coordinate their work with Group Internal Audit. The AC, and ultimately the BoD, supervises the effectiveness of audit work.

External, independent auditors

At the 20092010 AGM, Ernst & Young Ltd., Basel, (Ernst & Young) were reelectedre-elected as principal auditors for the Group for a further one-year term of office. Ernst & Young assume virtually all auditing functions according to laws, regulatory requests and the “ArticlesArticles of Association of UBS AG”.Association. The Ernst & Young lead partner in charge of the UBS audit has been Andrew Mclntyre since 2005, who will be replaced in 2010 by Jonathan Bourne duesince 2010 and his incumbency is limited to a five-year rotation requirement;five years. Andreas Blumer has acted as the global engagement partner since 2004, and his incumbency is limited2004. He will be replaced in 2011 by Andreas Loetscher due to seven years.a seven-year rotation requirement. Ernst & Young will be proposed for reelection at the AGM in 2010.2011.

At the 2009 AGM, the former BDO Visura, Zurich, now BDO AG was appointed as special auditor for a three-year term of office. The special auditors provide audit opinions independently from the principal auditors in connection with capital increases.

Fees paid to external independent auditors

The fees (including expenses) paid to our principal auditors Ernst & Young, are set forth in the table below. In addition, Ernst & Young received CHF 33,206,000 in 2010 (CHF 37,030,000 in 2009 (CHF 31,561,000 in 2008)2009) for services performed on behalf of our

investment funds, many of which have independent fund boards or trustees.

Audit work includes all services necessary to perform the audit in accordance with applicable laws and generally accepted auditing standards, as well as other assurance services that conventionally only the principal auditor can provide. These include statutory and regulatory audits, attest services, and the review of documents to be filed with regulatory bodies.
Audit-related work comprises assurance and related services that traditionally are performed by the principal auditor, such as attest services related to financial reporting, internal control reviews, performance standard reviews, consultation concerning financial accounting and reporting standards and due diligence investigations on transactions in which we propose to engage.
Tax work involves services performed by professional staff in Ernst & Young’s tax division, and includes tax compliance, tax consultation and tax planning in respect to our own affairs.




Fees paid to external auditors

UBS paid the following fees (including expenses) to its external auditors Ernst & Young Ltd.:

         
  For the year ended 
 
in CHF thousand 31.12.09  31.12.08 
 
         
Audit
        
 
Global audit fees  45,276   45,848 
 
Additional services classified as audit (services required by law or statute, including work of a non-recurring nature mandated by regulators)  8,856   9,918 
 
Total audit
  54,132   55,766 
 
         
Non-audit
        
 
Audit-related fees  7,405   8,430 
 
of which assurance and attest services
  3,142   3,143 
 
of which control and performance reports
  4,023   4,622 
 
of which advisory on accounting standards, transaction consulting including due diligence, other
  240   665 
 
Tax advisory  509   504 
 
Other  279   1,246 
 
Total non-audit
  8,193   10,180 
 

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Corporate governance and compensation

     “Other”“Other” services are approved on an exceptional basis only. In 2008 and 2009, theyThey mainly comprisedcomprise on-call advisory services.services; in addition, 2010 included non-recurring expenses.

Pre-approval procedures and policies

To ensure Ernst & Young’s independence, all services provided by them have to be pre-approved by the AC. A pre-approval may be granted either for a specific mandate, or in the form of a bucket pre-approval authorizing a limited and well-defined type and amount of services.



Fees paid to external auditors

UBS paid the following fees (including expenses) to its external auditors Ernst & Young Ltd.:

         
  For the year ended 
in CHF thousand 31.12.10  31.12.09 
 
         
Audit
        
 
Global audit fees  46,939   45,276 
 
Additional services classified as audit (services required by law or statute, including work of a non-recurring nature mandated by regulators)  11,604   8,856 
 
Total audit
  58,543   54,132 
 
         
Non-audit
        
 
Audit-related fees  7,225   7,405 
 
of which assurance and attest services
  3,073   3,142 
 
of which control and performance reports
  4,058   4,023 
 
of which advisory on accounting standards, transaction consulting including due diligence, other
  94   240 
 
Tax advisory  521   509 
 
Other  1,152   279 
 
Total non-audit
  8,898   8,193 
 

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Corporate governance

The AC has delegated pre-approval authority to its Chairman;Chairperson; hence the Group CFO submits all proposals for services by Ernst & Young to the ChairmanChairperson of the AC for approval, unless there is a bucket pre-approval in place. At each quarterly meeting, the AC is informed of the approvals granted by its ChairmanChairperson and of services authorized under bucket pre-approvals.

Group Internal Audit

Group Internal Audit, with 313 personnel worldwide on 31 December 2009,2010, performs the internal auditing function for the entire Group. Group Internal Audit supports

the BoD and its committeesCommittees in discharging their governance responsibilities by independently assessing the effectiveness of our system of internal controls and our compliance with statutory, legal and regulatory requirements. All reports with key issues are provided to the

Group CEO, the GEB members of the GEB responsible for the business divisions and other responsible management. In addition, the Chairman of the BoD, the RC and the AC are regularly informed about important issues. Group Internal Audit closely cooperates with internal and external legal advisors and risk control units on investigations into major control issues.

To maximize its independence from management, the Head of Group Internal Audit, James P. Oates, reports directly to the Chairman of the BoD and to the RC. Group Internal Audit has unrestricted access to all accounts, books, records, systems, property and personnel, and must be provided with all information and data needed to fulfill its auditing duties. The RC may order special audits to be conducted. BoD members, BoD committeesCommittees or the Group CEO may submit requests for such audits to the RC.
Coordination and close cooperation with the external auditors enhance the efficiency of Group Internal Audit’s work.



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Corporate governance and compensation

Information policy

We provide regular information to our shareholders and to the financial community.

Financial results will be published as follows

   
 
First quarter 20102011 4 May 2010 26 April 2011
 
Second quarter 20102011 2726 July 2010 2011
 
Third quarter 20102011 2625 October 2010 2011
 

The Annual General Meeting of shareholders will
take place as follows

   
 
20102011 1428 April 2010 2011
 
20112012 20 April 2011 3 May 2012
 

We meet with institutional investors worldwide throughout the year, and regularly hold results presentations, special investor seminars, road shows, and individual and group meetings. Where possible, meetings involve senior management as well as members of the investor relations team. We make use of diverse technologies such as webcasting, audio links and cross-location video-conferencing to widen our audience and maintain contact with shareholders around the world.

Once a year, unless they explicitly choose not to, registered shareholders receive a summary of our annual report in the form of an annual review.a review booklet. It provides an overview of the firm, andour strategy as well as our activities during the year as well asand some key financial information. Each quarter, shareholders are mailed a brief update on our quarterly financial performance. Shareholders can also request our complete financial reports, produced on a quarterly and annual basis, free of charge.
To ensure fair access to and dissemination of our financial information, we make our publications available to all shareholders at the same time.
è Refer to www.ubs.com/investors for a complete set of published reporting documents, the corporate calendar, access to recent webcasts and a selection of senior management industry conference presentations
èRefer to www.ubs.com/investors for future financial report publication dates

Financial disclosure principles

Based on discussions with analysts and investors, we believe that the market rewards companies that provide clear, consistent and informative disclosure about their business. Therefore, we aim to communicate our strategy and results in a manner that allows shareholders and investors to gain an understanding of how our company works, what our

growth prospects are and what risks

our strategy and results might entail. Feedback from analysts and investors is continually assessed and, where relevant,we consider appropriate, reflected in our quarterly and annual reports. To continue to achieve these goals, we apply the following principles in our financial reporting and disclosure:
– Transparencyin disclosure enhances understanding of the economic drivers and builds trust and credibility.
– Consistencyin disclosure within each reporting period and between reporting periods.
– Simplicityin disclosure allows readers to gain an understanding of the performance of our businesses.
– Relevancein disclosure avoids information overload by focusing on what is required by regulation or statute and is relevant to our stakeholders.
– Best practicein line with industry norms, leading the way to improved standards where possible.

Financial reporting policies

We report our results after the end of every quarter, including a breakdown of results by business division and extensive disclosures relating to credit and market risk.

Our financial statements are prepared according to IFRS as issued by the International Accounting Standards Board.
è Refer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for a detailed explanation of the basis of UBS’s accounting

We are committed to maintaining the transparency of our reported results and to ensuring that analysts and investors can make meaningful comparisons with previous periods. If there is a major reorganization of our business divisions, or if changes to accounting standards or interpretations lead to a material change in the Group’s reported results, our results are restated for previous periods when required by applicable accounting standards, to show how they would have been reported according to the new basis and provide clear explanations of all relevant changes.

US regulatory disclosure requirements

As a “foreign private issuer”, we must file reports and other information, including certain financial reports, with the US Securities and Exchange Commission (SEC) under the US federal securities laws. We file an annual report on Form 20-F, and submit our quarterly financial reports and other material information, including materials sent to shareholders in connection with AGMs and EGMs, under cover of Form 6-K to the SEC. These reports as well as materials sent to shareholders in connection with AGMs and EGMs, are all available atwww.ubs.com/investors.investors and also on the SEC’s website at www.sec.gov.



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Corporate governance

On 31 December 2009, an

An evaluation was carried out under the supervision of management including the Group CEO and Group CFO, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15e)13a–15e) under the US Securities Exchange Act of 1934. Based upon that evaluation, the Group CEO and Group CFO concluded that our disclosure controls and procedures were effective as of that date.31 December 2010. No significant changes have been made in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

In accordance with Section 404 of the US Sarbanes-Oxley Act of 2002, our management is responsible for establishing and maintaining adequate internal control over financial reporting. The financial statements of this report contain management’s assessment of the effectiveness of internal control over financial reporting, as perof 31 December 2009.2010. The external auditors’ report on this assessment is also included in this report.



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Corporate governance and compensation

Corporate governance and compensation

Regulation and supervision

As a Swiss-registered company, our home country regulator and consolidated supervisor is FINMA. However, our operations are global and are therefore regulated and supervised by the relevant authorities in each of the jurisdictions in which we conduct business. The next sections describe the regulation and supervision of our business in Switzerland, our home market, and the regulatory and supervisory environments in the US and the UK, our next two largest areas of operations.

Regulation and supervision in Switzerland

Swiss Federal Legislation

We are regulated by the Swiss Federal Law relating to Banks and Savings Banks of 8 November 1934, as amended, and the related Implementing Ordinance of 17 May 1972, as amended, which are together known as the Federal Banking Law. Depending on the license obtained under this law, banks in Switzerland may engage in a full range of financial services activities, including commercial banking, investment banking and asset management. Banking groups may also engage in insurance activities, but these must be undertaken through a separate subsidiary. The Federal Banking Law establishes a framework for supervision by FINMA.
Switzerland implemented the internationally agreed capital adequacy rules of the Basel Capital Accord (Basel II) by means of the Capital Adequacy Ordinance of 29 September 2006, and subsequent FINMA circulars. Switzerland imposes a more differentiated and tighter regime than the internationally agreed rules, including more stringent risk weights. Capital requirements for the two large banks, UBS and Credit Suisse, exceed the Swiss minimum due to a mandatory capital buffer under Basel II. The revised decree on capital requirements issued at the end of 2008 increased the risk-based buffer and complemented it with a leverage ratio requirement, i.e. a minimum ratio of capital and balance sheet assets. On 1 January 2010, the FINMA Circular 2010/1 entered into force. In drawing up the FINMA Circular 2010/1, FINMA took into account the results of the consultation process and international developments, in particular the latest standards issued by the Financial Stability Board. In the course of 2010, the Swiss Federal Council and FINMA incorporated the Basel II enhancements issued by the Basel Committee on Banking Supervision on 13 July 2009 in the Capital Adequacy Ordinance and related circulars. The enhancements strengthen the Basel II rules governing trading book capital, and enhance the three pillars of the Basel II framework. The revised Capital Adequacy Ordinance, together with the FINMA circulars, entered into force on 1 January 2011.
è Refer to the “Capital management” section of this report for more details about capital requirements, and to the “Regulatory developments” section of this report for more information on Basel III
The Federal Act of 10 October 1997 on the Prevention of Money Laundering in the Financial Sector (Anti-Money Laundering Act, AMLA) lays down a common standardstan-

dard for due diligence obligations for the whole financial sector, which must be met to prevent money laundering.
In our capacity as a securities broker, we are governed by the Swiss Federal Law on Stock Exchanges and Securities Trading of 24 March 1995, as amended.Exchange Act. FINMA is the competent supervisory authority.

Regulation by the Swiss Financial Market Supervisory Authority

FINMA is strongly involved in the shaping of the legislative framework for banks, especially through the following mechanisms:
– FINMA has substantial influence on the drafting of Swiss federal acts and ordinances from the Federal Council or the parliament (e.g. the Ordinance on the Money Laundering Reporting Office dated 25 August 2004, as amended).parliament.
– On a more technical level, FINMA is empowered to issue its own ordinances and circulars, 55circulars.
èRefer to the “Regulatory developments” section of which are presently effective. These include,this report for example, FINMA-Circular 08/38more information on Market Behavior, FINMA-Circular 08/24 on Supervision and Internal Controls at Banks, and FINMA-Circular 09/1 on Guidelines on Asset Management.the legislative framework

Self-regulation by the SIX Swiss Exchange and the
Swiss Bankers Association

Certain aspects of securities brokering, such as the organization of trading, are subject to self-regulation through the SIX, Swiss Exchange, under the overall supervision of FINMA. Examples are:
–the Listing Regulations of 24 January 1996, as amended on 1 July 2009, and the General Conditions dated 31 March 2009; and
–the Directive on the Disclosure of Management Transactions of 29 October 2008.

Furthermore, we are also an issuer of listed shares subject to self-regulation by the SIX.

FINMA also officially endorses self-regulatory guidelines issued by the banking industry (through the Swiss Bankers Association), making them an integral part of banking regulation. Examples are:
–Directives on Fiduciary Investments, 2009;
–Agreement on the Swiss banks’ Code of Conduct with regard to the Exercise of Due Diligence, 2008;
–Directives on the Independence of Financial Research, 2008;
–Guidelines on the Simplified Prospectus for Structured Products, 2007;
–Agreement of Swiss Banks on Deposit Insurance, 2005; and
–Guidelines on the Handling of Dormant Accounts, Custody Accounts and Safe-Deposit Boxes Held in Swiss
Banks, 2000.

Two-tier system of supervision and direct supervision of UBS
and Credit Suisse

Generally, supervision in Switzerland is based on a division of tasks between FINMA and a number of authorized audit



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firms. Under this two-tier supervisory system, FINMA has the responsibility for overall supervision and enforcement measures while the authorized audit firms carry out official duties on behalf of and subject to, sanctions imposed by FINMA. The responsibility of external auditors encompasses the audit of financial statements, the reviewing of banks’ compliance with all prudential requirements and on-site audits.

Because of theirits importance to the Swiss financial system, UBS and Credit Suisse areis directly supervised by dedicated teams at FINMA. The regime of direct supervision is regulated by the FINMA-CircularFINMA Circular 08/9 on the Supervision of Large Banking Groups. Supervisory tools include schedules of meetings with management and information exchange encompassing all control and business areas, independent assessments through review activities, and a regular exchange of views with internal audit functions, external auditors and important host supervisors.
Direct supervisionWe are directly supervised by the FINMA team “Supervision of UBS”, which is performed by FINMA’s Supervision of Large Banks section, which assigns a dedicated supervisory team to each of the two large banking groups. These firm-specific teams are supported by teams specifically monitoring the investment banking wealthactivities, risk management, and asset management businesses across the large banking groups,solvency and the Risk Management,capital aspects.



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compensation
Corporate governance

Disclosures to the Swiss National Bank

While Switzerland’s banks are primarily supervised by FINMA, compliance with liquidity rules is also monitored by the SNB. A substantially revised liquidity regime for the Large Banking Groups entered into force on 30 June 2010. Furthermore, FINMA is entitled to share information with the SNB to enable the SNB to fulfill its obligations, namely with respect to financial stability. The SNB also takes a direct interest in the stress testing practice of both large banks. Liquidity regulation is currently being reformed.UBS.
è Refer to the “Liquidity and funding management” section of this report for more details aboutinformation on liquidity requirements

Regulation and supervision in the US

Banking regulation

Our operations in the US are subject to a variety of regulatory regimes. We maintain branches of UBS AG in California,several states including Connecticut, Florida, Illinois and New York. TheThese branches located in California, Florida and New York are federally licensed either by the Office of the Comptroller of the Currency. Branches located in Connecticut and Illinois are licensed byCurrency or the state banking authority of the state in which the branch is located. Each US branch is subject to regulation and examination by its licensing authority. We also maintain state and federally chartered trust companies and other limited purpose banks, which are regulated by state regulators or the Office of the Comptroller of the Currency. In addition, the Board of Governors of the Federal Reserve System exercises examination and regulatory authority over our state-licensed US branches. Only the deposits of our subsidiary

bank located in the state of Utah are insured by the Federal Deposit Insurance Corporation. The regulation of our US branches and subsidiaries imposes restrictions on the activities of those branches and subsidiaries, as well as prudential restrictions, such as limits on extensions of credit to a single borrower, including UBS subsidiaries and affiliates.

The licensing authority of each US branch of UBS AG has the authority, in certain circumstances, to take possession of the business and property of UBS located in the state of the office it licenses. Such circumstances generally include violations of law, unsafe business practices and insolvency. As long as we maintain one or more federal branches, the Office of the Comptroller of the Currency also has the authority to take possession of the US operations of UBS AG under generally similar circumstances, as well as in the event that a judgment against a federally licensed branch remains unsatisfied, and this federal power may pre-empt the state insolvency regimes that would otherwise be applicable to our state-licensed branches. As a result, if the Office of the Comptroller of the Currency exercised its authority over the US branches of UBS, AG, pursuant to federal law in the event of a UBS insolvency, all US assets of the US branches of UBS AG would most likelygenerally be applied first to satisfy creditors of these US branches as a group, and then made available for application pursuant to any Swiss insolvency proceeding.
In addition to the direct regulation of our US banking offices, because we operate US branches, we are subject to oversight regulation by the Board of Governors of the Federal Reserve System under various laws (including the International Banking Act of 1978 and the Bank Holding Company Act of 1956). On 10 April 2000, UBS AG was designated a “financial holding company” under

the Bank Holding Company Act of 1956. Financial holding companies may engage in a broader spectrum of activities than bank holding companies or foreign banking organizations that are not financial holding companies, including underwriting and dealing in securities. To maintain our financial holding company status, (i) UBS, our US subsidiary federally chartered trust company and our US subsidiary bank located in Utah are required to meet certain capital ratios, (ii) our US branches, our US subsidiary federally chartered trust company, and our US subsidiary bank located in Utah are required to meet certain examination ratings, and (iii) our subsidiary bank in Utah is required to maintain a rating of at least “satisfactory” under the Community Reinvestment Act of 1997.
A major focus of US governmental policy relating to financial institutions in recent years has been aimed at fighting money laundering and terrorist financing. Regulations applicable to UBS and our subsidiaries impose obligations to maintain effective policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their clients. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing could have serious consequences for the firm, both in legal terms and in terms of our reputation.



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Corporate governanceA notable recent regulatory initiative is the Dodd-Frank Wall Street Reform and compensation
Corporate governance

Consumer Protection Act, which impacts the financial services industry by addressing, among other issues, systemic risk oversight, bank capital standards, the liquidation of failing systemically significant financial institutions, OTC derivatives, the ability of deposit-taking banks to engage in proprietary trading activities and invest in hedge funds and private equity (the so-called Volcker rule), consumer and investor protection, hedge fund registration, securitization, investment advisors, shareholder “say on pay,” the role of credit-rating agencies, and more. The details of these regulations and their impact on UBS’s operations will depend on the final regulations ultimately adopted by various agencies and oversight boards in 2011.

US regulation of other US operations

In the US, UBS Securities LLC and UBS Financial Services Inc., as well as our other US-registered broker-dealer entities, are subject to regulations that cover all aspects of the securities business, including: sales methods; trade practices among broker-dealers; use and safekeeping of clients’ funds and securities; capital structure; record-keeping; the financing of clients’ purchases; and the conduct of directors, officers and employees.
These entities are regulated by a number of different government agencies and self-regulatory organizations, including the SEC and the Financial Industry Regulatory Authority (FINRA). Depending on the specific nature of a broker-dealer’s business, it mayEach such entity also beis regulated by some or all of the NYSE, the Municipal Securities Rulemaking Board, the US Department of the Treasury, the Commodities Futures Trading Commission and other exchanges of which it may be a member.member, depending on the specific nature of the respective broker-dealer’s business. In addition, the US states, provinces and territories have local securities commissions that regulate and monitor activities in the interest of investorin-



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vestor protection. These regulators have a variety of sanctions available, including the authority to conduct administrative proceedings that can result in censure, fines, the issuance of cease-and-desist orders or the suspension or expulsion of the broker-dealer or its directors, officers or employees.
Created in July 2007 through the consolidation of the National Association of Securities Dealers and the member regulation, enforcement and arbitration functions of the NYSE, FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services.
FINRA covers a broad spectrum of securities businesses, including: registering and educating industry participants; examining securities firms; writing rules; enforcing those rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering a dispute resolution fo-

rumforum for investors and registered firms. It also performs market regulation under contract for the NASDAQ Stock Market, the American Stock Exchange and the Chicago Climate Exchange.

Many of the provisions of the Dodd-Frank Act discussed above will affect the operation of these non-banking entities, as well as UBS’s US banking operations. Again, the impact of this statute on UBS’s operations will depend on the final regulations ultimately adopted by various agencies and oversight boards in 2011.

Regulation and supervision in the UK

Our operations in the UK are regulated by the Financial Services Authority (FSA),FSA, which establishes a regime of rules and guidance governing all relevant aspects of financial services businesses.

The FSA has established a risk-based approach to supervision and has a wide variety of supervisory tools available to it, includinginclud-

ing regular risk assessments, on-site inspections (which may relate to an industry-wide theme or be firm-specific) and the ability to commission reports by skilled persons (who may be the firm’s auditors, IT specialists, lawyers or other consultants as appropriate). The FSA also has an extremely wide set of sanctions which it may impose under the Financial Services and Markets Act 2000, broadly similar to those available to US regulators.
Some of our subsidiaries and affiliates are also regulated by the London Stock Exchange and other UK securities and commodities exchanges of which we are a member. We are also subject to the requirements of the UK Panel on Takeovers and Mergers, where relevant.
Financial services regulation in the UK is conducted in accordance with European Union directives which require, among other things, compliance with certain capital adequacy standards, client protection requirements and conduct of business rules (such as the Markets in Financial Instruments Directive). These directives apply throughout the European Union and are reflected in the regulatory regimes of the various member states. The standards, rules and requirements established under these directives are broadly comparable in scope and purpose to the regulatory capital and client protection requirements imposed under applicable US law.

The UK government has committed to changing the current regulatory structures, including splitting responsibility for prudential regulation and conduct of business regulation and the replacement of the FSA with new regulatory bodies reporting to the Bank of England. Her Majesty’s Treasury has published a Consultation Paper and draft legislation is expected in early 2011.


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Corporate governance

Compliance with NYSE listing standards on corporate governance

As a Swiss company listed on the NYSE, we comply with the NYSE corporate governance standards for foreign private issuers.

Independence of directors

Based on the listing standards of the NYSE, our BoD has established specific criteria for defining the independence of our external members. Each external director has to personally confirm his or her compliance with the criteria, which are published on our website underwww.ubs.com/governance.

All current external members have been confirmed by the BoD as having no material relationship with UBS, either directly or as a partner, controlling shareholder or executive officer of a company that has a relationship with UBS. Currently all BoD members of the BoD are external, with the exception of the Chairman. Each of the external members has also met all the BoD and NYSE requirements with respect to independence.
The NYSE has more stringent independence requirements for members of audit committees. All threefour members of our AC are external BoD members who, in addition to satisfying the above criteria, do not:not receive, directly or indirectly, any consulting, advisory or other compensatory fees from UBS other than in their capacity as directors; do not hold, directly or indirectly, UBS shares in excess of 5% of the outstanding capital; orand (except as noted below) do not serve on the audit committees of more than two other public companies. These members are William G. Parrett,Michel Demaré, Rainer-Marc Frey, Ann F. Godbehere and Michel Demaré.William G. Parrett. The NYSE guidelines allow for an exemption for AC members to sit on more than three audit committees of public companies, provided that all BoD members of the BoD determine that the candidate has the time and the availability to fulfill his or her obligations. Considering the credentials of William G. Parrett, and the fact that he has retired from his executive functions, the BoD has granted this exemption in his case.

Board of Directors and its committeesCommittees

We operate under a strict dual board structure mandated by Swiss banking law. No GEB member of the GEB may also be a BoD member of the BoD and vice versa. This structure ensures the institutional independence of the entire BoD from the day-to-day management.

UBS has established committeesCommittees for the following BoD mandates: audit; human resources and compensation; governance and nominating; risk and corporate responsibility.

è Refer to the “Board of Directors” section of this report for further information on these committees –Committees including their mandates, responsibilities and authorities, – as well as their activities during 20092010

In addition, the BoD elects at least oneappoints a Vice Chairman whoand an SID. Both the Vice Chairman and the SID must be independentindependent. Michel Demaré is the Vice Chairman and who acts asDavid Sidwell is the Senior Independent Director. Sergio MarchionneSID. Both assumed these roles in 2009. Mr. Marchionne will not stand for reelection to the BoD at the AGMtheir role in April 2010. The BoD may elect another Vice Chairman who does not need to be independent, but has not done so this time. More details about the responsibilities and authorities of the Vice Chairman functionand the SID can be found in the Organization Regulations, which are published onatwww.ubs.com/governance.governance.
The BoD has adopted Organization Regulations that constitute our corporate governance guidelines, which include all matters required by the NYSE rules. The BoD has also adopted a “Codethe UBS Code of Business Conduct and Ethics”Ethics (the Code). Both the Organization Regulations and the “Code of Business Conduct and Ethics”Code are available on our website atwww.ubs.com/governance.governance. In addition, the AC has established rules for the handling of complaints related to accounting and auditing matters, the internal policies on “Whistleblowing Protection for Employees” and “Compliance with Attorney Standards of Professional Conduct”.

Differences from corporate governance standards relevant to US listedUS-listed companies

According to the NYSE listing standards on corporate governance, foreign private issuers haveare required to disclose any significant ways in which their corporate governance practices differ from those to be followed by domestic companies.

Responsibility of the Audit Committee for appointment,
compensation, retention and oversight
of the independent auditors
Our

The AC has been assigned all the abovementioned responsibilities, except for appointment of the independent auditors, which are elected by the shareholders as per Swiss company law. The AC assesses the performance and qualification of the external auditorsaudi-



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tors and submits its proposal for appointment, re-appointment or removal to the full BoD, which brings its proposal to the shareholders for vote at the AGM.



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Corporate governance

Discussion of risk assessment and risk management policies by
the Risk Committee

In accordance with our Organization Regulations, the RC has the authority to define our risk principles and risk capacity. The RC is responsible for monitoring our adherence to those risk principles and for monitoring whether business and control units run appropriate systems for the management and control of risks.

Assistance by the Risk Committee of the internal audit function

Both the Chairman and the RC have the responsibility for and authority to supervise the internal audit function.

Responsibility of the Human Resources and Compensation
Committee for oversight of management and evaluation by the Board
of Directors

Performance evaluations of our senior management, comprising the Group CEO and the GEB members, of the GEB, are completed by the Chairman of the BoD and the HRCC and reported to the full BoD. All BoD committeesCommittees perform a self-assessment of their activities and report back to the full BoD.

The BoD has direct responsibility and authority to evaluate its own performance, without preparation by a BoD committee.Committee.

Proxy statement reports of the Audit and Human Resources
and Compensation Committees

Under Swiss company law, all reports addressed to shareholders are provided and signed by the full BoD, which has ultimate responsibility vis-a-visvis-à-vis shareholders. The committeesCommittees submit their reports to the full BoD.

Shareholders’ votes on Equity Compensation Plans

Swiss company law authorizes the BoD to approve compensation plans. Though Swiss law does not allocate such authority to the AGM, it requires that Swiss companies determine capital in their articles of association and each increase of capital is required to be submitted for shareholders’ approval. This means that, if equity-based compensation plans result in a need for a capital increase, AGM approval is mandatory. If, however, shares for such plans are purchased in the market, shareholders do not have the authority to vote on their approval.



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Corporate governance and compensation

Compensation
  Advisory vote

Compensation

Our foremost priority is to encourage and shareholdings

The UBS Total Reward Principles are designedreward behavior that contributes to sustainable profitability and therefore the long-term success of our firm. In order to align employee incentives with the interests of our shareholders, we pay a significant part of our employees’ interests with thosevariable compensation in the form of shareholders – the creation of long-term value and sustainable shareholder returns. These principles, reproduceddeferred awards, mostly in full at the end of the report,UBS shares, which are established bysubject to strict forfeiture rules.

Letter from the Human Resources and Compensation Committee of the Board of Directors

Dear shareholders,

In recent years, UBS has fundamentally reshaped its approach to compensation. Our priority remains to attract and provideretain talented professionals to enable us to further develop our business. At the same time, it is critical to encourage and reward behavior that contributes to sustainable profits. This is a fundamental prerequisite for the long-term success of our firm, which is in the best interests of our shareholders and other stakeholders.

During 2010, in collaboration with our regulators, we introduced measures to meet our main compensation objectives of better integrating risk within the compensation process and further aligning financial incentives with the long-term profitability of the firm. These measures include identifying our key risk-takers and controllers, individuals in our organization, who by the nature of their role, can materially commit or control the firm’s resources, and/or exert influence over the firm’s risk profile, and adopting appropriate measures regarding their compensation. We also made refinements to deferred compensation for certain other categories of employees.

Furthermore, in response to your concerns last year, we not only made a number of

adjustments to our compensation model, outlined in detail below, but also worked to improve the related disclosure. This year’s report provides greater transparency, especially with regard to our compensation structure and plans.

Focus on long-term profitability

To align employee incentives with the long-term profitability of the firm, we pay a significant part of compensation in the form of deferred equity that can be forfeited or reduced if employees violate internal and external regulations or guidelines or behave in a way that causes financial and reputational harm. This is a central pillar of our compensation system.

For 2010, we raised the proportion of a Group Executive Board (GEB) member’s bonus paid in deferred equity from 50% to 60%, while at the same time reducing the portion of cash paid out immediately to a GEB member from 30% to 24%. As a result, at least 76% of a GEB member’s bonus, including part of the cash bonus, is deferred and at risk of forfeiture for up to five years. Apart from GEB members, approximately 8,000 employees across all of UBS’s business divisions receive bonuses in the form of deferred equity under the Equity Ownership Plan (EOP). Under this plan, 60% of their bonus is deferred as UBS shares over three years.

For 2010, the vesting of EOP awards for very senior and high-earning employees was made dependent on the profitability of the employee’s business division over the vesting period, or, in the case of Corporate Center employees, on the profitability of the UBS Group (Group) as a whole. We also introduced cash deferrals (for periods of up to three years) for Investment Bank employees whose total compensation exceeds CHF 1 million. Furthermore, we have reduced the use of leverage in our compensation plans.

Addressing risk in compensation decisions

While acknowledging that risk is a necessary and inherent part of our business, we are committed to ensuring that inappropriate risk-taking is not rewarded. The risks we take, along with those that emerge during the course of business, must be promptly recognized, measured, and effectively managed. Risk is a crucial consideration at every stage in the compensation process. Risk awareness, assessment and management are an important basis both for 2009determining the overall bonus pool and for allocating individual bonuses. To fully consider all risk-related issues with regard to compensation, practices.the Human Resources and Compensation Committee (HRCC) has



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Letter from



held two joint meetings over the last year with the Board of Directors’ (BoD) Risk Committee.

In a significant step toward strengthening our risk culture, and in line with regulatory guidance, we adopted stringent measures with regard to the performance assessment and compensation for risk-takers and controllers. Risk-takers are subject to an additional performance evaluation by the control functions, 60% of their bonus is deferred over three years and the vesting of their equity awards is subject to financial performance conditions.

Striking the right balance

In making UBS’s compensation decisions for 2010, the BoD and the GEB have carefully balanced all the relevant factors such as our improved business performance, industry compensation trends and regulatory requirements. From a shareholder’s perspective, it is essential to weigh the short-term potential for raising profitability against the long-term requirement to retain and attract key staff. Although our financial performance in 2010 was markedly better than in 2009, with an increase in profitability of CHF 10 billion, given the considerations outlined above, the bonus pool for 2010 was set at CHF 4,245 million, 11% lower than it was last year.

While we believe that our current compensation system strikes the balance we seek, and are confident that the approach we have established is the right one, going forward we will continue adapting it to meet our requirements and those of our stakeholders, including ensuring that it complies with all applicable rules and regulations. By maintaining a focus on risk management throughout our business and encouraging sustainable business conduct, we are convinced that we are well-placed to execute our business strategy and achieve our goals.

-s- Helmut Panke
Helmut Panke
Ad-interim Chairman of the Human
Resources and Compensation Committee
of the Board of Directors

Dear Shareholders
Throughout 2009, the new UBS has faced the crucial challenge of rebuilding its key businesses, regaining the trust of shareholders and clients and establishing and developing the pursuit of its longer term strategy to bring about sustained profitability. All these factors taken together have underscored the need to attract and retain key talent, which is critical to attaining our strategic goals. At the same time, the increased competitive market pressures, extensive regulatory oversight and a rapidly changing commercial environment have also continued. Our approach to providing both a robust and impactful compensation and talent framework has certainly been affected by these often competing pressures.
At the start of 2009, in response to lessons learned from the financial crisis, UBS acted as a forerunner in implementing a new executive compensation framework. The framework, which is now in place, incorporates significant deferral for senior management and places more emphasis on compensation at risk. We also integrated the focus on “economic profit” as a key driver of compensation accruals. During the year, and building on work already started in 2008, we revised the Total Reward Principles, which summarize the compensation principles for all UBS employees. These principles focus
on a number of long-standing drivers including risk awareness, effective risk and capital management, sustainable profitability, and client focus. They also highlight the importance of deferred pay, and include additional forfeiture clauses in order to better align employee compensation with medium and longer-term shareholder value.
Rewards based on longer-term risk-adjusted performance, especially for key senior management, has increased in importance. Thus for 2009 performance year, the first awards have recently been granted to GEB members under the Performance Equity Plan and the Cash Balance Plan introduced at last year’s AGM. In addition the Incentive Performance Plan has been introduced as a key long-term performance and retention tool in 2010. The IPP is specifically designed to reward participants whose performance can be linked to adding sustainable value to UBS over the next five years.
We will again hold an advisory vote on compensation at the AGM in April 2010. Shareholder participation in compensation matters remains crucial and, as such, shareholders will be asked to vote on the 2009 compensation report.
The HRCC and the full BoD are committed to reinforcing the relationship between compensation and
long-term performance. We continually assess the alignment of our compensation framework with shareholder interests, the ability of that framework to withstand a fluctuating market and its effectiveness at supporting the execution of the firm’s people strategy. We have closely followed international developments in compensation, and are compliant with the frameworks defined by the Financial Stability Board and FINMA, as well as those in other jurisdictions where we have a substantial presence. In 2009, we extended our HRCC charter to reflect a greater scope of responsibility, particularly in relation to business risks.
While developments in this area continue, we are confident that our compensation framework for 2009, and the resultant overall compensation program achieved the appropriate balance between the demands of our strategic goals, our economic positioning, general market conditions and the need to effectively reward and incent our talent – the most important resource to achieving our long-term goals.

-s- Sally Bott

Sally Bott
Chairman of the HRCC



 

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Advisory vote
Corporate governance and compensation
Compensation and shareholdings

Compensation governance

Our compensation governance principles include appropriate checks and balances and are designed to support long-term value creation. They have great strategic importance in shaping the direction and success of the firm, supporting its ability to attract and retain the best talent.

UBS’s corporate governance model complies with the applicable laws, rules and regulations, including the FINMA Circular 2010 / 1 that sets minimum standards for the design, implementation and disclosure of remuneration schemes at financial firms.
The BoD has the ultimate responsibility for approving the compensation strategy proposed by the HRCC, including compensation for GEB members. The HRCC is a separate BoD committee that determines the appropriate level of resources for compensation matters.

Human Resources and Compensation Committee

The HRCC is composed of threefour independent members of the BoD.BoD members. On 31 December 2009,2010, the members were Sally Bott, (committee chair),who chaired the committee, Bruno Gehrig, Wolfgang Mayrhuber and Helmut Panke. Hostettler & Partner AG providedThe committee held 10 meetings in 2010. Upon Sally Bott’s

resignation from the BoD, effective 11 February 2011, Helmut Panke was appointed ad-interim Chairperson of the HRCC.

During the year, the HRCC received independent external advice from Hostettler, Kramarsch & Partner AG. Furthermore, market data was considered from Towers Watson and, in relation to the committee and Towers Perrin supported the committee with market data during the year.Performance Equity Plan, from PricewaterhouseCoopers.

AuthoritiesResponsibilities and responsibilitiesauthorities of the HRCC

The HRCC is responsible for reviewingreviews the Total Reward Principles annually and for submitting themsubmits any amendments to the BoD. Additionally, on behalf ofBoD for final approval. In addition, the BoD, the committee has the following key areas of responsibility:

HRCC:
– reviewingreviews and approvingapproves the design of the total compensation framework, including compensation strategy, programs and plans on behalf of the BoD;
–reviews variable compensation funding throughout the year on behalf of the BoD and proposing significant changes to plans and new plansproposes the final bonus pool to the BoD for approval;
–defining the relationship between compensation and performance;

–reviewing variable incentive funding throughout the year and proposing the final outcome to the BoD for approval;
–approving base salaries and annual incentive awards for GEB members, excluding the Group CEO whose compensation needs to be approved by the BoD upon recommendation by the HRCC;
–proposing individual GEB appointments to the BoD and approving the associated employment agreements; and
– workingtogether with the GovernanceGroup CEO, proposes base salaries and Nominating Committee and the full BoD on reviewing succession plansannual bonuses for GEB members includingto the Group CEO.BoD, which approves the total compensation of the GEB.



Compensation authorities

 In addition,
The BoD has the ultimate responsibility for approving the compensation strategy proposed by the HRCC, charter was amended in 2009 to reflecta separate committee that determines the changing regulatory environment, in particular the need to reviewappropriate level of resources for compensation structures with human resources (HR)matters.
(CHART)
1 Additional performance condition applies.

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Corporate governance and compensation

The responsibilities and the risk management function to ensure they do not encourage excessive or unnecessary risk-taking.
     Authoritiesauthorities for compensation-related decisions, illustrated in the table, are governed by the “Organization Regulations of UBS AG” (Organization Regulations),set out in “Annex B – Responsibilities and authorities”,authorities,” and “Annex C – Charter forof the committeesCommittees of the Board of Directors of UBS AG” of the Organization Regulations of UBS AG (Organizational Regulations).

Inclusion of the Risk Committee

Compensation plans can have considerable influence in ensuring prudent and controlled risk-taking at financial institutions. In recognition of this fact, a key principle in the FINMA Circular 2010 / 1 is that a firm’s risk control functions and experts must be involved in designing and implementing compensation plans.

In line with this principle, the RC assumes an essential role in supporting the BoD to ensure that compensation plans are aligned with UBS’s business strategy, and that policies are designed to enhance risk awareness. The structure is shown below.RC supervises and sets appropriate risk management and control principles, including those relating to credit, market, country and operational risk; treasury and capital management; and balance sheet management. In doing so, it also examines the possibility of reputational risk.
The RC held two meetings with the HRCC in 2010. Helmut Panke also sits on the RC, thereby providing a valuable risk perspective in considering compensation-related issues.


Compensation authorities

RecipientsCompensation recommendations
developed by		Approved byCommunicated by
 Chairman of the BoD
 Chairman of the HRCC1 HRCC HRCC
 Group CEO
 Chairman of the BoD/HRCC BoD HRCC
 Members of the GEB
 Group CEO HRCC Group CEO
 Independent BoD members
 (remuneration system and fees)
 Chairman of the BoD/HRCC BoD Chairman of the BoD
Recipients
Variable compensation recommendations
 developed by		Approved byCommunicated by
 Employees (excl. GEB)
 Respective member of the GEB together
 with functional management team		 Divisional pools: HRCC
 Overall: Board of Directors		 Line Manager
1 The Human Resources and Compensation Committee.
Further changes to the Organizational Regulations have been approved regarding the RC mandate. This will expand the committee’s involvement with compensation issues to include receiving briefings from management regarding how risk has been factored into the compensation process and reviewing whether the risk-related aspects of the compensation process have been adhered to.

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Decision-making process for Group Executive Board Member Total Compensationmember compensation

One of the most importantHRCC’s main responsibilities of the HRCC is to decide and approvemake recommendations for the actual amount of variable cash and equity compensation to be awarded to each GEB member for the 2010 performance during 2009.year. These recommendations are submitted to the BoD for approval. This process relies on a detailed and balanced review, of not only of the performance of the Group, performance, but also that of the relevant business division and also the impact of specific individuals. It considers Group and divisional performance information, (economic profit,including risk- adjusted profitability and other financial and non-financial factors such as leadership effectiveness, strategy execution reputation impact, etc.)and reputational impact. It also takes into account performance assessmentsinformation from the Board,businesses, initial compensation recommendations from the Group CEO, contractual and related commitmentsemployment contract terms, and relevant laws and regulations, together with relevant market data.

Final decisions regardingdata, such as that relating to industry compensation for each of the members reflected both management and the HRCC’s desire to appropriately recognize performance in this difficult year but also to be necessarily constrained in light of absolute and relative overall performance.
trends.

The 2010 non-bindingShareholders’ advisory vote on the compensation report

We value the opinions of our shareholders and, at the AGM to be held in April 2010,shareholders. As such, we will provide, shareholders withas we have done the past two years, an opportunity for shareholders to express their views through aan advisory vote on this compensation report. Asreport at the ultimate decision on compensation is legally within the powers of the BoD,AGM in April 2011. While such a vote is non-binding and advisory in nature. We believe that thisnature and not legally binding, we encourage our shareholders to participate in the vote presentsas we regard it as a meaningful way of involving our shareholdersthem in the compensation matters. Wediscussion and take its outcome seriously. Shareholders also encourage shareholdershave the opportunity to shareraise questions at the AGM, and can address their views regarding ourquestions about compensation programs andor related matters directly withissues at any time to BoD members by contacting the Company Secretary. Contact details are provided at the beginning of this report.

In addition to the advisory vote held at our AGM, UBS also holds separate meetings with key investors and proxy advisors on a regular basis to respond to questions that they might have, including those relating to compensation issues.



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Compensation and shareholdings

Total Reward Principles

In September 2009, revised Group-wideOur approach to compensation is underpinned by what we call our “Total Reward Principles.” They establish a framework for integrating risk control and managing performance. At the same time, they specify how we structure compensation and the necessary bonus pool funding, that is, the amount of funds available in a given year for the payment of bonuses. They reflect our longstanding focus on pay for performance, sustained profitability, sound governance and strong risk awareness, and build on the UBS strategy of enhancing the firm’s reputation, increasing client focus and teamwork, and improving integration and execution. At the same time, they give full effect to the relevant regulatory requirements.

The Total Reward Principles were approvedbroadly revised in September 2009 to support our new business strategy and to reflect new regulatory developments. We remain fully committed to these principles. As such, they were reaffirmed by the BoD following a review byHRCC in September 2010. Over the GEBcourse of the year, we took further measures to implement these principles to ensure that our main performance and a proposal bycompensation objectives are achieved and that the HRCC. governance and processes with respect to compensation are firmly in place.

Total Reward Principles

The four Total Reward Principles summarize the compensation structure for all UBS employees. While the principles reflect recent regulatory developments, they also focus on long-standing drivers including reward for performance, sustainable profitability, effectiveestablish a framework that integrates risk control and capital management, outstanding client focus and teamwork as well as sound governance practices.performance. They also build on our strategy of enhancing reputation, integrationspecify how we structure compensation and execution.provide necessary funding.
The reward structure aims to:(CHART)
–align reward with sustainable performance;
–support appropriate and controlled risk taking;
–foster effective individual performance management and communication; and
–attract and engage a diverse, talented workforce.

Align reward with sustainable performance
Within the context of

Throughout UBS, as a whole and the markets in which we operate, the sustainable performance of an employee’s business division is a key componentfactor in determining compensation. Our assessment of reward. In consideringperformance goes beyond whether financial objectives have been achieved and takes into account the Grouplong-term risk impact of employee actions.

Variable compensation funding is primarily based on risk-adjusted profitability, that is, a measure of profitability adjusted to consider risk associated with particular transactions. This performance metric, which takes into account the cost of capital, not only supports our own internal objectives and business divisionstrategy, but also meets regulatory standards.
Our framework is flexible and enables members of management to apply their individual judgment and discretion. Adjustments may be made based on considerations relating to risk, quality and reliability of earnings, relative industry performance, a range of factors will be taken into account including financial results, risk, capital usage,future strategic plans, and market positioningcompetitiveness. Progress against business performance targets and the views of shareholdersforegoing considerations that affect annual variable compensation funding is regularly reviewed and other stakeholders. Assessment will focus on both current key performance indicators, andmonitored by the long-term actions that preserve and improve our ability to deliver value in the future.
Business division reward recommendations are determined in consultation betweendivisional Chief Executive Officers, the Group CEO and the CEO(s) of each division, as advisedHRCC. The proposed bonus pool is approved by the Group CFO, Group Head HR and, where appropriate, Group Risk. Proposals recommended byBoD. Risk control functions are also involved in the Group CEOreviews of certain senior employees to ensure that any related-risk issues are reviewed by the HRCC and final approval is provided by the BoD.fully considered.
èRefer to the “Compensation Governance” section for more information about responsibilities and authorities for compensation-related decisions

Support appropriate and controlled risk takingrisk-taking
Rewards are consistent with our risk framework and tolerance. Performance

Our compensation system provides incentives that take specific account of risk. Our performance reviews recognize thethat different businesses have different risk profileprofiles, and nature of each business, includingthat additional factors such asshould be considered, including the fact that earnings may vary in quality and time-horizonover time. All employees are expected to demonstrate an appropriate understanding of earnings, the nature of the relevant industry segmenttheir business and competitive trends.

Employees are rewardedits associated risks, to consider their actions in light of UBS’s reputation and risk appetite, and to accept responsibility for achievement against a range of financialall risks that arise, which includes taking steps to manage and non-financial objectives, and not onlymitigate them.
To keep our employees focused on the basis of individual revenues. Extraordinary profits, as well as losses, are examined in the contextlong-term profitability of the track recordfirm, we require that a significant part of an employee’s performance, risk management and market conditions, and measurementbonus be deferred for up to three years if his or her total compensation exceeds a certain threshold. In the case of performanceGEB members, we re-



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quire deferral of up to five years. The deferred portion will be adjusted for activities and future risks that are not adequately reflectedforfeited in annual profits. Rewards determined forcertain cases, including if an employee acts contrary to the firm’s interests during the deferral period by contributing to significant financial losses or restatements, causing reputational harm, or breaching risk compliance andpolicy, legal or regulatory requirements, all of which constitute “harmful acts”.

To monitor risk effectively, control functions, areprimarily Legal & Compliance, Risk Control, Finance and Operational Risk, must be able to carry out their work independently. As such, compensation for these functions is determined independently from the revenue producers that they oversee, supervise or support.
As previously mentioned, in 2010 we took a significant step forward in strengthening our risk culture by identifying the risk-takers and support.controllers (risk-takers) in our organization, based on specific regulatory guidance, and adopting specific measures regarding their compensation. Risk-takers are the most senior members of management, together with selected individuals who, by the nature of their role, have been determined to be able to materially commit or control the firm’s resources and/or exert significant influence over its risk profile, whether they are in front office, control or logistics functions (e.g. Supply and Demand Management, IT and Human Resources). The deferral rate of 60% under the Equity Ownership Plan is applied to their annual bonus, with this portion being deferred over three years. Moreover, the vesting of this deferred portion of their bonus is contingent on the profitability of the business division in which they work, or, in the case of Corporate Center employees, on the profitability of the Group as a whole. Due to the significant influence they exert, risk-takers are subject to an additional evaluation by the relevant control functions.

Foster effective individual performance management and communication
Beyond

We evaluate performance rigorously to ensure that compensation is fairly and appropriately allocated. We base it not only on the contribution employees make to UBS’s business results, and achievement of individual performance objectives, rewardsbut also take into account:on whether they:
– observingobserve our corporate values and principles;
– implementingimplement our strategy of enhancing reputation and improving integration and execution;
– demonstratingdemonstrate leadership ofwhen it comes to our clients, business, people and change;
– leading and supportinglead or support effective collaboration and team work;teamwork;
–operate with a high level of integrity and in compliance with UBS policies;
– actively managingmanage risk and professional behavior;strike an appropriate balance between risk and reward; and
– finding the appropriate balance between riskexhibit professional and reward.ethical behavior.



218

Corporate governanceTo further reinforce the link between performance and pay, we adjusted how we assess and compensate our employees for 2010. They are now assessed not just absolutely against defined objectives, but also on a relative basis against their peers within UBS. This enables us to further differentiate performance, and consequently compensation, in a more objective, transparent and disciplined manner.

Attract and engage a diverse, talented workforce

Our reward structure is designedneed to provideattract and retain talented, competent employees with rewardsunderpins our compensation policies. We offer market-competitive compensation that are appropriately balancedstrikes an appropriate balance between fixed and variable elements, that are competitive within the market and are paid out over an appropriate period of time.

Given the importance of these principles, they are reproduced in their entirety at the end of this report. As previously mentioned, these principles form the foundation for our overall compensation framework and program in 2009.

Components of compensation

In general, total compensation comprises an annual base salary, reflecting the individual’s role, skills and knowledge, local market-based benefits and, where applicable, a discretionary incentive award.elements. Base salary levels are sufficientsalaries must be high enough to allow for a flexible discretionary incentive policy. Discretionary annual incentives may vary from yearpolicy when it comes to year, particularly for senior revenue producersvariable compensation. Our variable compensation encourages employees to perform and more highly paid employees. Discretionary incentive awards may be split between immediate cash and long-term awards to be granted inentrepreneurial, while at the form of either deferred UBS equity or deferred cash. The proportion of deferred incentive awards generally vest over three years,same time placing an emphasis on strong risk awareness and increase with total compensation in order to maintain focus on our long-term profitability and continued responsible behavior of the employee. Stock options and/or appreciation rights may be awarded as part of total reward to recognize the capabilities of key employees who are expected to carry out our strategic objectives. For employees in senior positions, reward focus is founded on sustainable long-term profitability that may require the application of multi-year performance conditions to recognize outstanding performance. Guaranteed incentive awards are used only exceptionally and are generally limited to a one-year duration.

measured risk-taking.
èRefer to the “Overview of our compensation model” section of this report for more information about our compensation system



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Cash and equity incentives

Compensation plan awards

This section describes key features of the deferred compensation plans that are used to deliver variable incentive awards to members of the GEB and other employees.

Cash Balance Plan
The CBP applies to GEB members only and is designed as one of several tools to ensure that GEB compensation is directly and tightly linked to performance over the longer term. This ensures that the effect of risk events which occur after grant are fully captured “over the life of the instrument”. As such, the CBP relies on a cash deferral system. Generally, 50% of a GEB member’s variable incentive is delivered via the CBP.

Of that amount, the plan allows for a maximum payout of only 60% in March 2010, and is subject to an additional cash-cap. A minimum of 40% of a cash incentive award is deferred and paid out during the two following years subject to forfeiture, i.e. the entire cash incentive is only paid out over a three-year period.
The forfeiture provisions allow for unvested awards to be reduced (including to nil) in certain events including termination for cause, certain financial losses, behavior that contributes substantially to a material restatement of financial results or to harm to UBS’s reputation, breaches of legal or regulatory requirements or of risk and compliance policies, and a number of other events such as solicitation of staff or clients and disclosure of proprietary information. Therefore, if an executive leaves UBS, any remaining balance in the plan will be kept at risk until the time called for by the plan.

Performance Equity Plan
The PEP applies to GEB members and is one of two deferred equity components that comprise the remaining 50% of their variable incentive award. This plan focuses on creating mid- to long-term added value over a three-year period. At the start of the performance period, executives are granted a certain number of restricted performance shares that, subject to the achievement of predefined economic profit and total shareholder return targets at a Group level cliff vest after three years.

The number of vested shares can be between zero and two times the number of the initially granted shares, and depends on achievement against two referenced performance targets:
–Economic profit (EP)is a market-recognized standard for measuring risk-adjusted profit. It is an internal measure which is broadly calculated by subtracting the cost of equity from the annual net profit attributable to UBS shareholders. EP is only realized when the return on capital achieved is greater than the firm’s cost of capital.

–Total shareholder return (TSR)measures the total return of a UBS share, i.e. both the dividend yield and the capital appreciation of the share price. TSR is measured over a three-year period relative to the Dow Jones Banks Titans 30 Index©, a global index comprising the top 30 companies in the banking sector as defined by Dow Jones. The Dow Jones Banks Titans 30 Index© has been chosen as a TSR measure because of its relevance to UBS (banking), its transparency (known listed companies), and its sector coverage (30 leading global banks assessed by market capitalization, revenues, and net profit), as well as for its objectivity and independence (managed by Dow Jones).

 The three-year target performance levels were set after consideration of our strategic business plan.

Vesting is subject to continued employment with UBS. The awards are also subject to forfeiture in certain circumstances, including in the event of certain harmful acts, such as breaches of legal, regulatory and compliance standards or behavior that contributes substantially to a material financial loss, restatement or reputational risk.

Incentive Performance Plan
The IPP, which applies to GEB members and certain other senior employees, is designed to be aligned with the long-term performance and value of UBS shares. The award is granted to senior key talent who are actively leading the drive to achieve sustained profitability at UBS and who are expected to contribute most significantly to our long-term future and economic success. The IPP acknowledges the strategic importance of retaining our key talents, returning to leading performance levels in all of our businesses and growing the UBS share price.

Participants are granted a certain number of restricted performance shares that cliff vest after five years. The number of vested shares can be between one and three times the number of initially granted performance shares, depending on the achievement of the share price target (i.e. share price at the end of the five-year performance period adjusted for dividends). Vesting is subject to continued employment with UBS. The awards are subject to the same forfeiture provisions outlined above in relation to PEP awards.

Equity Ownership Plan/Senior Executive Equity Ownership Plan
Eligible employees receive a portion of their annual variable compensation above a certain threshold in the form of a mandatory Equity Ownership Plan (EOP) award. This award can be in actual UBS shares or in notional UBS shares. For



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certain employees in the Global Asset Management business only, a percentage of their variable incentive award that would have been delivered in UBS shares was instead granted over a specifically created Alternative Investment Vehicle. The vesting and forfeiture provisions of these awards mirror those of EOP.

EOP awards vest in one-third increments over a three-year vesting period, subject to certain conditions. In early 2009, and again in 2010, a small number of senior employees received a portion of their variable compensation in UBS shares or notional UBS shares under the related Senior Executive Equity Ownership Plan (SEEOP). These shares vest in one-fifth increments over a five-year vesting period, subject to certain conditions.
For awards granted in 2010 for the 2009 performance year, we decided to raise the deferral level in keeping with industry trends and regulatory considerations and our desire to enhance further the link between pay and longer term performance and alignment with shareholder interests. Participation in the deferral program affected all employees with total compensation over a threshold. Further a “cash-cap” on variable cash payments was also introduced for this year. In addition, the forfeiture provisions of EOP and SEEOP have been broadened to include forfeiture in the event of certain harmful acts, such as breach of legal, regulatory and

compliance standards or individual behavior that contributes substantially to a material financial loss, restatement or reputational risk.

Conditional Variable Compensation Plan
As part of the constrained 2008 compensation program, the firm implemented CVCP as a one-time forward looking compensation plan. Under this program awards were granted to certain employees (excluding GEB members) in second quarter 2009. These awards constituted a contingent right to receive cash at vesting, subject to the satisfaction of predefined performance conditions, and were scheduled to vest in three equal tranches over a three-year period.

Under the CVCP, a tranche is forfeited if either the Group or the relevant business division has no profit in the financial year preceding the year of vesting (or if there is any government recapitalization during the vesting period). Following the announcement of the UBS financial results for 2009, the first tranche of the CVCP award has been forfeited as the critical performance condition – a net profit for 2009 defined according to IFRS – was not met. For 2009, 9,500 employees forfeited CVCP awards amounting to approximately CHF 300 million. The remaining two tranches will continue to vest, subject generally to continued employment with UBS and to the defined requirements being met in subsequent years.



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Variable compensation funding framework

Benchmarking against peers

Overview

Following approvalWe benchmark our compensation and benefit levels against those of the revised Total Reward Principles,our peers. With respect to compensation for GEB members, we also reviewed the framework usedrefer to fund variable compensation. This year, we amended our variable compensation funding framework to explicitly further take into consideration factors such as profitability after deducting costa peer group of capital and also the underlying business risk.

The variable compensation pool for each division iscompanies that are selected based on the fully costed economic profit performance together with relevant key performance indicatorscomparability of their size, geographic and product and services scope, and staffing and pay strategy, among other qualitative measures. This includes market-driven needs mainly evaluated by competitive benchmarking. These adjustments are necessary in certain business areas where the economic contribution is currently insufficient, but where we decide, based on our long-term strategy, to remain and build our business. The use of performance-driven pool funding, based on risk-adjusted profit, is in line with our view of how to set the most effective compensation strategies and also with new regulatory requirements.

Market driven pool funding

Within UBS, not all units achieved a satisfactory level of economic contribution in 2009. However, achievement of our strategic goals including offering a greater integrated firm to our clients calls for us to continue investment in these lines of business. Different businesses are at different stages of development and different places on a profitability spectrum. Further, competitors are emerging from the global economic crisis at differing paces which is creating significant compensation tension. Our compensation system needs to be able to anticipate and respond to these pressures in

order to maintain our ability to attract and retain key talent. We need to be able to react decisively by maintaining the flexibility to pay top-performing individuals adequately and appropriately by taking into account predefined personal objectives, and achievements against other relevant key performance indicators, as set out in the Total Reward Principles.

Benchmarking against peers

Compensation and benefit levels are primarily result-driven and further benchmarked against appropriate peers.factors. These companies, which are selected for the similarity of their core businesslarge European and US banks operating internationally, are our main competitors when it comes to that of UBS, as well as for comparable size, geographic distribution, business strategy and performance. Typically, these are also the companies from which we are most likely to hire and to which we are most likely to lose employees. When benchmarking GEB members, generally ten peers are considered to represent the most relevant labor market for compensation namelyhiring. They are: Bank of America, Merrill Lynch, Barclays, Citigroup, Credit

Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorganJP Morgan Chase and Morgan Stanley and RBS. Stanley.

In the view of the HRCC, our executive compensation structure is positioned appropriatelyappropriate relative to these peers.our peer group. We review the peer group regularly to ensure that the firms that constitute it remain relevant benchmarks for our purposes.

As for compensation for other employees, given the diversity of our businesses, the companies we use as benchmarks

vary with and are dependent on the relevant business divisions and locations, as well as the nature of the positions involved. For certain businesses or positions, in particular those below the GEB, additional competitorswe may be takentake into account including other major international banks, the large Swiss private banks, private equity firms, and hedge funds whichand non-financial firms. Furthermore, we also benchmark employee compensation internally for comparable roles within and across business divisions and locations.




Comparability assessment against main peers1
Benchmarking ensures that our executive compensation is appropriate relative to our peer group. The key benchmarking criteria are increasingly becoming attractive alternatives for our employees.
However, market data is only one of several factorssummarized in the compensation decision-making process. Market data informs but does not directly drive any individual decision on compensation.following table.

(CHART)



1 Source: Towers Watson.  2 Size: impacts management complexity regardless of product and geographic scope. Expressed in terms of revenue, profitability, assets and employee base.  3 Product and services scope: impacts pay strategy, pay levels / approach and importantly, risk profile.  4 Geographic scope: impacts the definition of executive roles and management complexity.  5 Headquarters location: is a key factor in determining peer group choices.  6 Competitors for talent: influences decisions relating to competitive requirements for pay structure and levels.  7 Regulatory environment: increasingly impacts pay structures (including deferral requirements) for executives.  8 Staffing and pay strategy: to identify peers with similar pay and staffing strategies.

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Compensation frameworkOverview of our compensation model

Compensation structure

ChairmanOur compensation model is consistent with and supports our Total Reward Principles. It rewards appropriate risk-taking and behavior that produces sustainable results. To encourage employees to act with the long-term interests of the Boardfirm in mind, which also serves the best interests of Directorsour shareholders, we pay a significant part of our variable compensation in the form of equity that is deferred over several years.

All UBS employees

The total compensation employees receive has two elements: a fixed element, which is generally the base salary, and a discretionary variable element, which is the bonus. In determining employees’ pay, and in benchmarking pay both internally and externally, we focus on total compensation, rather than its individual elements, as it presents a more comprehensive picture of an employee’s pay.

The amount of bonus that an employee receives depends on various factors, including our overall performance, the performance of the employee’s business division, and his or her individual performance both in absolute terms as well as relative to his or her peers.
We do not impose an absolute cap on total compensation or set a maximum multiple between the lowest and highest total compensation levels in our organization. To do so would under-

mine our commitment to providing market-competitive compensation. By not capping total compensation, we have the flexibility required to respond to different circumstances, such as changing business and market conditions or retention needs.

Base salary

Since 2009,The base salary reflects an employee’s particular skill set, role and experience while taking market practices into consideration. Base salaries are fixed amounts of cash, typically paid monthly or semi- monthly. We review base salaries annually to ensure they remain competitive, comparing them with the relevant internal and external benchmarks.
Adjustments are made when there is a significant change in job responsibility. Furthermore, we make annual adjustments to base salaries that reflect performance and respond to movements in the marketplace.
Following our annual salary review, we have decided to increase base salaries for 2011, with effect from March 2011, by a total of CHF 350 million or 5% over the previous year. This compares with a base salary increase made for 2010 of approximately 4%. The increases for 2011 apply to employees whose responsibilities increased, who demonstrated strong performance and whose base salary fell short of the market standard. The increase also reflects a regulatory trend favoring a change in the industry compensation mix.



Compensation overview

A balanced mix of base and variable compensation rewards appropriate risk-taking and behavior that produces sustainable business results. A significant part of our compensation is paid in the form of deferred equity.

(CHART)

1 The base salary of the Chairman of the BoD has, in principle, received a fixed base salary comprisingconsists of cash and the right to receive a pre-determinedfixed number of UBS shares that vest after four years. Thisshares.  2 Bonuses granted to risk-takers and controllers are also based on an additional evaluation of these employees’ performance, in which their risk-taking activities are specifically considered.  3 All employees with a total compensation package does not include any variableof CHF / USD 250,000 or performance-dependent component, but does keep the Chairman’s pay alignedmore are eligible.  4 Additional profitability performance condition for risk-takers and controllers, Group Managing Directors and other employees with sustainable added value through its share component. However, although the initial quantity of shares is pre-determined, those shares nevertheless remain subject to forfeiture if there istotal bonus > CHF / USD 2 million.  5 DCP replaces a loss-making year during the vesting period.
èRefer to the “2009 compensation for the Board of Directors and Group Executive Board” section of this report for details of the Chairman’s compensation for 2009
The process to determine the overall compensation for the Chairmanpart of the BoD startscash bonus for certain Investment Bank employees with an annual performance assessment by the full BoD (excluding the Chairman) and is then based on a recommendation to the full Board from the HRCC. Pay levels for comparable roles outside of UBS are also taken into account.

Independent members of the Board of Directors

Reflecting their independent status, the remuneration of independent members of the BoD includes no variable component, and is therefore not dependent on the financial perfor-

mance of the Group. Fees for independent members are reviewed annually. The HRCC reviews a proposal by the Chairman of the BoD, and then submits a recommendation to the full BoD. Fees are paid 50% inadditional cash anddeferrals.  6 At least 50% in blocked UBS shares. However, members can elect to have 100% of their remunerationbase fee is paid in blocked UBS shares. These shares are attributed with a price discount of 15% and restricted from sale for four years from the date they are granted. None of the independent members of the BoD have a contract with UBS that provides benefits upon the termination of their term of office.

Group Executive Board

Members of the GEB are entitled to a fixed salary. In addition, they may receive variable compensation under the CBP, the PEP and/or the IPP to be granted in 2010.
The table below gives an overview of the compensation structure, including details of awards granted in February 2010, with regard to the 2009 performance year.

All UBS employees

Base salary

Base salaries reflect each individual’s role, skills and knowledge, as well as our need to remain competitive in the relevant labor market. Base salaries comprise a fixed amount of cash, and any adjustments are limited to significant changes in job responsibility or market conditions.



Compensation structure

(COMPENSATION STRUCTURE TALE)

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Compensation and shareholdings

     During 2009,Bonus

At UBS, bonuses are strongly tied to performance. We have reinforced the banking industry faced increasing regulatory pressureprinciple of “pay for performance” by introducing key changes in 2010 to ensureour Core Cycle process, through which we manage performance and reward our employees. In principle, the majority of permanent employees may be considered for an annual discretionary bonus. The amount of bonus awarded depends on an individual’s performance and role, as well as the performance of the Group and the relevant business division. Hence, bonus levels can fluctuate significantly from year to year, such that salaries compriseit is possible that an individual receives no bonus in a sufficient proportiongiven year.
èRefer to the “Our employees” section of this report for more information on the Core Cycle process
While employees have specific key performance indicators against which they are assessed that are relevant for the determination of bonuses, we do not assign weightings to specific performance indicators in determining an individual’s bonus.
At UBS, it is well-established practice to award part of the bonus in UBS shares deferred for up to three, or in the case of GEB members, five years. Over the deferral period, these deferred amounts are forfeited if employees commit harmful acts. For 2010, our deferral threshold remained unchanged: bonuses awarded to employees with a total remuneration, while still allowingcompensation, that is, a firm to operate a flexible incentive policy. We recognized this risk-based requirement and increased employee base salary levelsand bonus, of CHF 250,000 or more, are partially deferred. Above this level, employees receive a portion of their annual bonus in certain partsshares granted under the Equity Ownership Plan (EOP). Furthermore, we place a cap of CHF/USD 2 million on the amount that can be paid out immediately in cash.
For 2010, for employees across all business divisions and locations, the bonus was, on average, approximately 59% of the business where thisbase salary. Among GEB members, it was, deemed both necessaryon average, 510% of a GEB member’s salary. As stated, bonuses are fully discretionary and appropriate. While we need to pay competitivelydo not set a fixed ratio between the bonus and base salary. The ratios stated above are based on the size of the bonus pool for 2010.
èRefer to the discussion in the “Deferred variable compensation plans” section of this report for more information

Compensation for financial advisors in relation toWealth Management Americas

In line with the market nevertheless, we believe that a policy which encourages a general increase in fixed remuneration simply in order to reduce the proportion of variable remuneration would only increase fixed costs, and is notpractice in the long-term interestUS for brokerage, the compensation system for financial advisors in Wealth Management Americas is based on commissions. The commissions, paid monthly, are based on revenue and other strategic performance measures and objectives. We adjust payout rates if financial advisors make repeated or significant client account or transaction errors. In addition to these commissions, advisors may also qualify for year-end awards, most of shareholders.which are deferred over either a six- or ten-year period. The size of these awards may be based on length of service, the amount of net new money brought in, or the amount of revenue generated from Wealth Management-based services or products. For 2010, we paid a total of CHF 2,667 million in compensation to financial advisors in Wealth Management Americas.

BenefitsOther variable compensation

In ordera few cases, we may offer additional incentives to help attractsupport hiring or retention, particularly at senior levels. These include replacement payments to compensate employees for deferred awards forfeited as a result of joining UBS; guarantees, which are fixed incentives, either in cash or in equity awarded under a plan, paid regardless of future events, though in most cases tied to one or more performance conditions and retainlimited to one year; sign-on payments, offered to important top-level candidates to increase the bestchances of their accepting an offer; and retention payments, made to key senior employees to induce them to stay, particularly during critical periods for the firm.
Employment contracts for those holding the rank of Director and above generally contain a notice period of between two and six months, depending on the location, which such employees must serve and during which time they are paid their base salary. We provide for severance payments in each local market where we operate, we provide employee benefits thatredundancy cases when employees are competitive within eachasked to leave as part of these markets. Changes, terminations and the introduction of new benefitsa retrenchment program or reduction in force. These are governed by location-specific severance policies. In the procedures containedvery exceptional cases that special pay-



               
(Audited) Severance and sign-on payments1
 
 These payments were made to certain GEB members, Group Managing Directors (replacing the former Group Managing Board in February 2010), and to certain key risk-takers and controllers in 2010.
             
   31.12.10 
           Of which expenses to 
       Of which expenses  be recognized in 
   Total  recognized in 2010  2011 and later 
  
 
Sum of all sign-on payments, in CHF million2
  95   55   40 
  
 
of which related to replacement awards and guarantees for the first year, in CHF million
  82   46   36 
  
 Number of beneficiaries  19         
  
 
Sum of all severance payments, in CHF million
  13   13   N/A 
  
 Number of beneficiaries  7         
  
 Number of departing managers  18         
  
 1 For the purpose of this table we consider replacement awards and guarantees as sign-on payments.  2 Includes sign-on payments agreed in 2010 and awards granted in 2010. Awards granted are included with their fair value at the date of grant.

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Corporate governance and compensation

ments are made outside the circumstances described, or where substantial severance payments are made, a further stringent approval process applies.

With the exception of severance payments made in redundancy cases, all the payments described above, though typical in our industry, are only offered in exceptional circumstances. They are highly restricted, take into account the specific circumstances of each case and are normally one-time payments with substantial deferral. They require the approval of the divisional Chief Executive Officers and HR heads, and, in certain circumstances, the Group Head of HR, Group CEO or the HRCC. Furthermore, such payments may be forfeited should an employee subsequently act in a manner detrimental to the interests of the firm.

Pensions and benefits

The main aim of pensions is to give employees and their dependents a level of security after their retirement or in the Organization Regulations. We consider benefits to be a supplemental elementevent of total compensation and those offereddisability or death. While pension plans may vary substantially fromacross locations in accordance with local requirements, pension plan rules in any one location to location.
Generally there are no special benefits for GEB members; they receivegenerally the same benefits asfor all other employees in thethat location, and business where they work.

Pensions

In Switzerland, our general pension plan is made up of two defined contribution elements: one plan covering base salary and the other covering variable compensation. Management shares the same retirement plan benefits as all other employees.
Outside Switzerland, we provide appropriately-designed local pension plans in which employees and executives participate on an equal basis. In the US, employees and management can choose to participate in a 401(k)-defined contribution plan which is open to all employees. In addition, some employees and management participate in legacy defined benefit plans that are no longer available to new hires. In the UK, employees and executives either participate in a pension plan operated on a defined contribution basis or participate in a legacy defined benefit plan which was open to all employees but is now unavailable for new hires.including management.
è Refer to “Note 30 Pension and other post-retirementpost-employment benefit plans” in the “Financial information”Information” section of this report for detailsmore information

As part of our efforts to attract and retain the best employees, our total compensation includes, in addition to a base salary and bonus, certain benefits such as health insurance and retirement benefits. These benefits vary depending on the location, but are competitive within each of the markets in which we operate.

Employee share purchase program

To enable our employees to invest in UBS and have a personal stake in the success of the firm, our employee share purchase program, the Equity Plus Plan, allows employees to contribute between 1%–30% of their base salary and / or 1%–35% of their bonus toward the purchase of UBS shares. All employees except those holding the rank of Managing Director and above are eligible to participate. Employees purchase UBS shares at market price, but receive one share for free for every three shares purchased through the program. These free shares vest after three years, with vesting subject to continued employment at UBS.

Risk-takers and controllers

Our risk-takers and controllers are a group of around 200 individuals who, by the nature of their role, have been determined to be able to materially commit or control the firm’s resources and / or exert significant influence over its risk profile, whether they are in the front office, logistics or control functions. Risk-taker activities are closely monitored, and risk-takers are subject to an additional level of performance evaluation by the control functions. Additionally, their compensation is adjusted to reflect the individual

risks that they take, and a deferral rate of 60% is applied to their annual bonus granted under the applicable plans. Furthermore, the vesting of their deferred awards is contingent on the profitability of the business division in which they work, or, in the case of Corporate Center employees, on the profitability of the Group as a whole. Like all other employees, risk-takers also face forfeiture or reduction of the deferred portion of their compensation if they commit harmful acts.

èRefer to the various retirement benefit plans establisheddiscussion “Support appropriate and controlled risk-taking” in Switzerlandthe “Total Reward Principles” section of this report for more information

While we comply with the relevant Swiss Financial Market Supervisory Authority (FINMA) requirements regarding risk-takers, we are currently seeking guidance from regulators across the European Union regarding the implementation of the Capital Requirements Directive issued by the European Commission, which contains some rules relating to compensation. In the UK, for instance, the Financial Services Authority (FSA) has already issued a revised remuneration code. In line with guidance from the FSA, we have identified senior management and employees whose professional activities could have a material impact on the firm’s risk profile in the UK, so-called “Code staff”. Of the approximately 100 Code staff, about half are also part of our wider population of risk-takers and controllers. Code staff compensation is generally similar to those of risk-takers. However, due to specific FSA requirements, 50% of Code staff bonuses that are paid out immediately are delivered in shares. Furthermore, any shares granted to Code staff under the EOP for their performance in 2010 will be subject to an additional six-month blocking period upon vesting.

Group Executive Board

Bonus

GEB members receive a fixed salary. In addition, they are eligible to receive a bonus. While GEB bonuses are at the discretion of the BoD, they are strongly tied to the overall performance of the Group and dependent on the available bonus pool funding.
èRefer to the discussion in the “Compensation funding and other major marketsexpenses” section of this report for more information

At least 76% of a GEB member’s bonus is deferred. Of the annual bonus, 40% is awarded in cash under the Cash Balance Plan (CBP): a maximum of 24% is paid out immediately, subject to a cash cap of CHF/USD 2 million. Vesting of the deferred cash portion is in equal installments over the following two years, with the amount vesting dependent on the return on equity achieved by the Group (Group RoE) in the financial year prior to vesting. The remaining 60% of a GEB member’s bonus is paid in equity, with 20% delivered under the Performance Equity Plan (PEP) and 40% under the Senior Executive Equity Ownership Plan (SEEOP). CBP awards vest over two years, PEP awards after three years, and



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Compensation

2010 compensation framework for GEB members
Of the annual bonus, 40% is paid in cash and 60% in equity; and 76% of a GEB member’s bonus is deferred.

Illustrative example
(CHART)
1 Subject to possible change, dependent on plan rules.  2 Subject to cash cap of CHF / USD 2 million.  3 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.

SEEOP awards over five years. The deferred portion of all these awards is subject to forfeiture under certain conditions.

For 2010, 40% of a GEB member’s annual bonus was delivered under the SEEOP, a plan that has existed since 2003 but which has been updated over the years to include stricter forfeiture provisions and a performance condition that enables the firm to reduce awards when an individual’s business division is unprofitable. Part of the equity component of a GEB member’s bonus for 2009 was delivered under the Incentive Performance Plan (IPP), a one-time share plan introduced that year for senior employees to support the firm’s five-year strategic turnaround plan. The IPP has been discontinued this year, thereby reducing the use of leverage in our compensation system. Unlike the IPP, the SEEOP does not provide for upward adjustments to the number of shares delivered on vesting. The overall reduction in the leverage element in our compensation plans further discourages excessive risk-taking.
èRefer to the “Deferred Variable Compensation Plans” section for more information

Cash and equity incentivesShare retention

“Pay for performance” is the guiding principle of the UBS reward policy. In accordance with the Total Reward Principles, variable compensation awards take into account a range of performance factors including delivering sustainable profitability, effective risk and capital management,

client focus, teamwork and sound governance. Since performance can vary, the amount of variable compensation an individual receives can also vary considerably from year to year.

For many years, we have awarded a portion of variable remuneration in the form of UBS shares that are deferred over three (and, in case of senior management, five) years. This approach applies to all employees earning above a certain threshold, not only to executives and other senior employees. These awardsTo further align employees’their interests with those of our shareholders, GEB members are required to retain long-term ownership of UBS shares. Each must hold a minimum of 200,000 shares, while the Group CEO is required to hold 300,000 shares. These shareholdings are to be built up within a maximum period of five years from the date a GEB member is appointed and must be retained for as long as he or she remains in office. The number of UBS shares held by fully exposing employeeseach GEB member is determined by adding any vested or unvested shares to fluctuations in the UBS share price. In 2008, we announced the development of the CBP and PEP for management, and the first awards under these plans were granted in 2010 with regard to the 2009 performance year.privately held shares.



230

During 2009, a further review was carried out and as a result, the following changes are being introduced in spring 2010 (for the 2009 performance year):
–an increase in the amount to be deferred into UBS shares for higher-paid staff above a fixed threshold;
–a reduction in the fixed threshold;
–a limit on the amount of the incentive that may be paid out immediately in cash;
–the inclusion of additional forfeiture provisions applying to unvested shares in the event of material financial losses, restatement, breach of risk or compliance parameters,
Corporate governance and reputational risk; and
–the introduction of the IPP with a five-year performance period for senior employees (including GEB members).compensation

Employment contractscontract terms

Employment contracts are determined locally within each jurisdiction, andfor GEB members do not contain any extended notice periods orprovide for “golden parachutes”, that is, special severance terms. Provisions are regularly reviewed in accordance with changing legislation and market conditions.
During 2009,terms, including supplementary contributions to pension plans. The notice periodsperiod in employment contracts for new GEB members werewas reduced in 2009 from twelve12 to six months in lineto reflect changing industry practice, thereby reducing UBS’s contractual obligations to GEB members who leave, including our obligations with international trends.regard to their compensation. Under the newemployment contracts for GEB members, any variable incentivebonus paid up to the date of termination is fully discretionary, and based on Group, business division and personal performance during the executive’s period of employment. Any variablediscretionary cash incentivebonus will generally be delivered viaawarded under the CBP. Equity awards delivered in prior years areVesting of deferred bonuses to GEB members is not accelerated at termination, exceptwhen they leave the firm, although exceptions may be made in casecases of death or disability, but continuedisability.

Benefits

Benefits for GEB members are in line with local practices for all other employees.

Board of Directors

Chairman of the BoD

Since 2009, the Chairman of the BoD has received a fixed salary that consists of cash and the right to vestreceive a fixed number of UBS shares that are blocked for four years. There is no variable or performance-related component in the Chairman’s compensation package. However, the share component ensures that his pay is aligned with the long-term performance of the firm. The Chair-

man’s employment contract does not provide for special severance terms, including supplementary contributions to pension plans.

The Chairman’s compensation is at the discretion of the HRCC, which conducts an annual assessment and takes into consideration pay levels for comparable roles outside of UBS.

Independent BoD members

Independent BoD members receive fixed base fees for their services in line with those of our peers globally, with 50% of their fees in cash and the other 50% in blocked UBS shares that are granted with a 15% discount and restricted from sale for four years. Alternatively, they may choose to have 100% of their compensation paid in blocked UBS shares. In addition, independent BoD members receive fees known as committee retainers dependent on a pro-rata basistheir workload in serving on the firm’s various board committees. The Senior Independent Director and the Vice Chairman of the BoD receive an additional payment of CHF 250,000. In accordance with their role, independent BoD members do not receive bonuses or benefits.
Base fees received by independent BoD members are subject to an annual review: a rangeproposal is submitted by the Chairman of forfeiture provisions after the period of employment has ended. We do not include “golden parachutes” – ex gratia payments dueBoD to termination of employment – in contracts with GEB members.

Regulatory framework

Emerging and increasingly complex regulations inthe HRCC, which then submits a number of jurisdictions now impactrecommendation to the way in which UBS and our peers are able to pay employees. We believe that our com-full BoD.
èRefer to the “2010 compensation for the Group Executive Board and the Board of Directors” section of this report for more information



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Corporate governance and compensation

pensation practices for 2009 already materially comply with the relevant rules and guidelines issued by the G-20, as well as by FINMA, the US Federal Reserve, the UK FSA and other jurisdictions in which we have a substantial presence. These rules require that material portions of compensation, in par-

ticular for senior management and risk-takers, are principally deferred into UBS shares over at least a three-year period. These awards are also required to be subject to forfeiture linked to conduct that contributes to substantial future underperformance or restatement of financial results.



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Compensation

Deferred variable compensation plans

Apart from the need to attract talented and shareholdingsmotivated professionals, the key focus in designing our variable compensation plans has been and continues to be on maintaining a close link between pay and long-term sustainable performance.

2009 performance

BesidesUnder our present compensation model, all of our variable compensation plans featuremalus (forfeiture) provisions. These provisions, which UBS was among the first in the industry to incorporate in its compensation system, require that a significant part of an employee’s bonus be deferred over several years and enable the firm to forfeit the deferred portion if an employee commits certain harmful acts. As such, the firm maintains the right not to pay deferred awards, which allows us to meet our overriding objective of rewarding behavior that contributes to sustainable profitability and, conversely, to withdraw incentives in cases when employees act against the interests of the firm.

In 2010, we made a number of adjustments to keep pace with industry compensation trends. Significantly, 60% of the bonus that a GEB member receives is now in the form of deferred equity, compared with 50% last year. In the case of certain categories of employees, including GEB members, risk-takers and employees whose total UBS and market performance,bonus exceeds CHF/USD 2 million, the vesting of their deferred awards was made contingent on the profitability of the business division in which they work. This serves to ensure a direct connection between their pay and individualthe long-term performance are key criteria in our employee reward process.

Business division performance

When considering compensation funding for 2009, the HRCC took into account a thorough assessment of business divisional performance as well as the improvementtheir business. Besides this, employees in the stability, security and risk positionInvestment Bank whose compensation exceeds CHF 1 million are subject to cash deferrals (for up to three years), leading to a reduction in their immediate cash payout. We have also reduced the use of leverage with the discontinuation of the firm and overall improvement in underlying Group profitability throughout the year.

In December 2009, each divisional CEO met individually with the Group CEO, Group CFO and Group Head HR for a detailed assessmentIncentive Performance Plan (IPP).


Overview of their incentive accruals in light of the above data, expected business results and other factors such as market positioning and business protection.

Based on the outcomes of these discussions as well as the results and trends evidenced by the Group and divisional financial results, the HRCC proposed to the BoD the final annual variable compensation poolplans

Compensation is closely linked to long-term sustainable performance. All of our variable compensation plans featuremalusprovisions. A substantial part of variable compensation is deferred and at risk of forfeiture for 2009 and approved the individual divisional pools.

èRefer to the “UBS business divisions and Corporate Center” section of this report for more information on the performance of UBS’s business divisions

Individual performanceseveral years.

Individual performance is formally assessed each year by measuring achievement against personal objectives. These objectives are focused on a range of financial and non-financial areas such as:
–contribution to Group and business division results;
–exceptional contribution in cooperating across all businesses;
–strategic leadership skills and potential;
–outstanding professional and technical expertise;
–a commitment to UBS;
–adherence to corporate values and principles;
–active risk management; and
–the creation of shareholder value.

For employees in senior or key positions, performance against each objective and key performance indicators is rigorously evaluated, not only by an individual’s immediate superior but also by peers and subordinates. This 360-degree assessment is qualitative and quantitative - comprising financial and operational results for the year, as well as indicators of future performance.



(SENIOR EXECUITVE EQUITY)

226232

Corporate governance and compensation
 

2009Variable compensation for the Board of Directors and
Group Executive Boardplans 2010

Cash Balance Plan (CBP)

Plan type – Deferred cash plans

BoardEligible employees:CBP awards are granted annually toGEB members.

Description: Generally, 40% of Directors remuneration

Chairmana GEB member’s annual bonus consists of cash awarded under the CBP. A maximum of 24% of the Boardtotal bonus is paid out immediately, subject to a cap of Directors

CHF/USD 2 million. The total compensation awardedbalance is deferred and paid out in two equal installments over two years, subject to the Chairmanperformance condition described below.

The amount of cash delivered on vesting depends on the return on equity achieved by the Group during the vesting period. If the Group RoE is below 6%, no adjustment will be made to the amount of cash delivered upon vesting. If the Group RoE exceeds 6%, the unvested amount will be increased in line with the RoE achieved, though any such increase may not exceed 20%. If the Group RoE is negative, the unvested amount will be decreased accordingly, up to a maximum of 100%, and no vesting will occur in that given year.

Restrictions:The CBP containsmalus provisions so that the deferred amount is partially or fully forfeited if a harmful act is committed. Even after a GEB member has left the firm, the deferred portion of the BoD, Kaspar Villiger, whoCBP award continues to be at risk of forfeiture. In addition, the award is forfeited if a GEB member voluntarily terminates his or her employment and joins another financial services organization.

Changes in 2010:The cap on the amount of cash that can be paid out immediately is set at CHF/USD 2 million. This was elected atraised from the mid-April AGM 2009, forprevious level of CHF/USD 1 million in line with industry practice.

(GRAPHIC OF CHF 100)

The amount of cash delivered on vesting was made dependent on the 2009 financial year was CHF 676,571.

AlthoughGroup RoE achieved during the compensation framework provides for the Chairman of the BoD to receive a pre-determined fixed number of UBS shares investing period.

In addition to the existing forfeiture provisions, awards granted from 2011 onward are now also forfeited if a GEB member voluntarily terminates his base salary, Kaspar Villiger has elected not to receive a share awardor her employment and he has decided to voluntarily reduce his annual base salary from CHF 2 million to CHF 850,000.joins another financial services organization.



Highest paid member of the Board of DirectorsSenior Executive Equity Ownership Plan (SEEOP)

Due to the voluntary reduction by the Chairman of the Board, the highest paid member of the BoD is David Sidwell, Chairman of the RC, with total fees of CHF 725,000 (base fee of CHF 325,000 and RC retainer of CHF 400,000).

Plan type – UBS share plans

Remuneration for the former Chairman of the
Board of DirectorsEligible employees:

Peter Kurer, former Chairman of the BoD, did not stand for reelection at the AGM on 15 April 2009, and retired from UBS as of April 2009. He received his base salary until the termination date of 30 April 2009. For ongoing advisory requirements and assistance in the handoverSEEOP awards are granted annually to his successor, Peter Kurer received a flat salary of CHF 1,000,000. For 2009, as was the case for 2007 and 2008, he did not receive any discretionary incentive or fixed share awards. After assessing his tenure as Chairman and the specific organizational transition requirements, the HRCC deemed it appropriate to approve a onetime contribution of CHF 3,332,000 into the UBS pension fund on his behalf to cover the deficit in his pension fund.

Independent members of the Board of Directors

The table “Remuneration details and additional information for independent members of the BoD” shows remuneration for independent members of the BoD between the 2009 and 2010 AGMs. Fees for 2009 to 2010 remained unchanged except for the chair of the HRCC, whose remuneration was increased due to the additional workload associated with the extensive plan, policy and regulatory changes introduced during 2009.
GEB members.

Group Executive Board compensationDescription:

In 2009, total compensation for members of the GEB in their capacity as such, reflected not only the individual performance of each executive, but also the improved operating performance of each business division and the overall UBS Group. The HRCC also considered the relevant external competitive market and the steps required to ensure that the firm makes further significant strives in 2010 towards its strategic objectives.

The total compensation for the highest-paid member of the GEB this year, Carsten Kengeter, amounted to CHF 13 million for the financial year 2009. The majority of this was granted SEEOP awards are in the form of notionalUBS shares that vest in equal installments over 3-5five years.
After Carsten Kengeter was hired The SEEOP is similar to the EOP, described below, but has a longer vesting period to reflect the additional level of commitment and long-term performance expected of GEB members.

Restrictions:SEEOP awards are subject to forfeiture in September 2008, he joinedthe event of a harmful act, if the business division to which a GEB member belongs makes a loss or if his or her employment is terminated voluntarily or for cause.

Changes in December 20082010:We introduced a performance condition for SEEOP awards, making the vesting of such awards contingent on the profitability of a GEB member’s business division, or, if the GEB member in question does not head a division, on the profitability of the Group as a memberwhole. If the business division (or Group) suffers a loss in a given performance year, then the portion of the former Group Managing Board and Global co-Head of Fixed Income, Currencies and Commodities (FICC). He was further promotedSEEOP award due to vest the GEB as co-CEOfollowing year will generally be reduced by 10%–50%, depending on the extent of the Investment Bank, together with Alexander Wilmot-Sitwell, on 27 April 2009, and maintained his FICC role in parallel until early 2010. He was previously a Partner and Co-Head of Goldman Sachs’ Securities division for Asia (ex-Japan), and represented aloss.

(GRAPHIC OF CHF 100)



                                 
(ADVISOR BAR)
 Compensation details and additional information for executive members of the BoD 
 CHF, except where indicateda 
             Annual              
   For the     Annual  incentive  Discretionary      Contributions    
   year Base  incentive  award (shares  award (options  Benefits  to retirement    
 Name, function1 ended salary  award (cash)  – fair value)c  – fair value)d  in kinde  benefits plans1  Total 
  
 Kaspar Villiger, Chairman 2009  602,083   0   0   0   74,488   0   676,571 
    
   2008                            
   
  Peter Kurer, former Chairman 2009  666,667   0   0   0   37,561   89,780   794,008 
     
    2008  1,333,333   0   0   0   58,267   174,047   1,565,647 
   
  Marcel Ospel, former Chairman 2009                            
     
    2008  666,667   0   0   0   80,755   87,023   834,445 
   
  Stephan Haeringer,
former Executive Vice Chairman		 2009                            
    
   2008  1,125,000   0   0   0   108,846   195,802   1,429,648 
   
  
1 2009: Kaspar Villiger was the only non-indendendent member in office on 31 December 2009; Peter Kurer did not stand for reelection at the AGM on 15 April 2009. 2008: Peter Kurer was the only executive member in office on 31 December 2008; Marcel Ospel did not stand for reelection at the AGM on 23 April 2008 and Stephan Haeringer stepped down during the year as a member of the BoD, and both of these payments are pro-rata for the four and nine months, respectively, in their functions.

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Compensation

Performance Equity Plan (PEP)

Plan type – UBS share plans

Eligible employees:PEP awards are granted annually toGEB members.

Description:At the beginning of the three-year performance period, GEB members are granted a certain number of restricted performance shares. The actual number of UBS shares delivered at the end of the period can be between zero and shareholdingstwo times the number of performance shares granted initially, depending on whether performance targets relating to economic profit (EP) and relative total shareholder return (TSR) have been achieved. EP is a measure of risk-adjusted profit that takes into account the cost of risk capital and is only realized when the entire return on capital that is achieved is higher than the firm’s cost of capital. TSR measures the total return of a share to an investor, that is, both capital appreciation of the share price and the dividend yield. We measure our TSR over a three-year period relative to the companies in the Dow Jones Bank Titans 30 Index, an index representing 30 leading companies in the global banks sector.

To determine the number of UBS shares delivered upon vesting, it is necessary to first determine the EP multiplier to be used, as well as the TSR multiplier. The EP multiplier changes in line with the level of three-year cumulative EP achieved. The TSR multiplier used depends on the relative ranking achieved by UBS among the companies in the Dow Jones Banks Titans 30 Index at the time of vesting. As was the case last year, a 100% multiplier will be applied if UBS is ranked 15th among the companies in the index. The EP multiplier may range from 50%–150% and the TSR multiplier may range from 50%–133%, but if both measures are below the lowest threshold no shares will vest.

Once the EP and TSR multipliers have been established, to calculate the number of shares delivered upon vesting:
–the EP multiplier is multiplied with the TSR multiplier; and
–the resulting figure is then multiplied with the number of performance shares granted initially.

(GRAPHIC OF CHF 100)

Restrictions:PEP awards are subject to forfeiture in the event of a harmful act or if employment has been terminated voluntarily or for cause.

Changes in 2010:No changes were made to the plan’s design. Performance targets are set annually.



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Equity Ownership Plan (EOP)

Plan type – UBS share plans / Equity Ownership Plan – fund linked

Eligible employees:The EOP is a mandatory bonus deferral plan forall employees with a total compensation of CHF/USD 250,000 or more. In 2010, around 8,000 employees received EOP awards. These employees include risk-takers, Group Managing Directors (GMD) and employees whose total bonus exceeds CHF/USD 2 million. EOP awards are granted annually.

Description:Employees with a total compensation (that is, base salary and bonus) of CHF/USD 250,000 or more receive 60% of their bonus above that level in UBS shares that are deferred over three years under the EOP.

To align their compensation with the performance of the funds that they manage, Global Asset Management employees receive their EOP awards in the form of cash, the amount of which is dependent on the value of the relevant underlying Global Asset Management funds at the time of vesting. The vesting and forfeiture provisions of these awards are the same as for EOP awards made in the form of UBS shares.

Restrictions:EOP awards are subject to forfeiture in the event of a harmful act or if employment is terminated voluntarily or for cause.

EOP awards made to risk-takers, GMD and employees whose total bonus exceeds CHF/USD 2 million will only vest in full if the business division to which the employee belongs is profitable. If the business division incurs an operating loss in a given year, then the deferred portion of the EOP award due to vest in the following year will be partially forfeited. The amount forfeited depends on the extent of the loss and generally ranges from 10%–50% of the award portion due to vest. In the case of Corporate Center employees, their awards are conditional on the profitability of the Group as a whole.

(GRAPHIC OF CHF 100)

Changes in 2010:We introduced a performance condition for awards granted to risk-takers, GMD and employees whose total bonus exceeds CHF/USD 2 million, making the vesting of their deferred awards contingent on the profitability of their respective business division, or, if such employees belong to the Corporate Center, on the profitability of the Group as a whole.



Deferred Cash Plan (DCP)

Plan type – Deferred cash plans

Eligible employees:DCP awards were granted toInvestment Bank employees whose total compensation exceeds CHF 1 million.

Description:Although the mandatory bonus deferral plan (for total compensation above CHF/USD 250,000) or more applies to all employees, certain Investment Bank employees are subject to additional cash deferrals on the 40% cash component of their bonus. The DCP is a cash award denominated either in USD or CHF. It vests in equal installments in the three subsequent years following its grant. The CHF/USD 2 million cap on the amount of cash that can be paid out immediately applies.

Restrictions:DCP awards are subject to forfeiture in the event of a harmful act or if employment is terminated voluntarily or for cause.

(GRAPHIC OF CHF 100)



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Corporate governance and compensation
Compensation

Discontinued deferred compensation plans

The following table sets out the details of discontinued compensation plans, including those under which stock options, stock appreciation rights and other instruments were granted in the past. UBS has not granted any options since 2009. The strike price for stock options awarded under prior compensation plans has not been reset.
èRefer to Note 31 “Equity participation and other compensation plans” in the “Financial Information” section of this report for more information

PerformanceRestrictions/Time frame and
PlanYear grantedEligible employeesInstrumentconditionsother conditionsvesting terms
Incentive
2010 onlyGEB members andPerformance sharesDependent on shareSubject to continuedVests in full at the end
Performance Plan
other senior employeesprice at the end of theemployment andof five years. Number
(IPP)
(approximately 900five-year periodharmful act provisions.of shares that vest can
employees)be between one and
three times the number
of performance shares
initially granted.
Vests in one-third
Conditional Variable
2009 onlySelected employeesCashNo financial lossSubject to continuedinstallments over a
Compensation Plan
(approximately 9,500incurred and no needemployment andthree-year period.
(CVCP)
employees), excludingfor additional capitalharmful act provisions.
GEB membersinjection by
governmentTranche forfeited if the
Group or relevant
business division fails to
achieve a profit in the
year preceding the year
of vesting, or if there is
any government
recapitalization during
the vesting period. The
first tranche of the
CVCP was forfeited as
the net profit
prerequisite was not
satisfied for the
performance year 2009.
The second tranche of
the CVCP is to vest on
12 April 2011 following
the announcement of
UBS's 2010 profit (paid
to employees in all
business divisions except
Wealth Management
Americas, which record-
ed a full-year loss).
Key Employee Stock
2002-2009Selected employeesShare-settled stockNoneSubject to continuedVests in full at the end
Appreciation Rights
(approximately 17,000appreciation rightsemployment,of the three-year
Plan (KESAP) and
employees between(SARs) or stock optionsnon-solicitation ofperiod. SARs and
Key Employee Stock
2002 and 2009)with a strike price notclients and employeesoptions expire 10 years
Option Plan (KESOP)
less than the fairand non-disclosure offrom the date of grant.
market value of a UBSproprietary information.Awards are settled by
share on the date ofthe delivery of UBS
grantshares, except in
countries where this is
not permitted by law.
Senior Executive
2002-2009GEB members andSARs or stock optionsNoneSubject to continuedVests in full at the end
Stock Appreciation
Group Managing Boardwith a strike price notemployment,of the three-year
Rights Plan (SESAP)
less than 110% of thenon-solicitation ofperiod. SARs and
and Senior
fair market value of aclients and employeesoptions expire 10 years
Executive Stock
UBS share on the dateand non-disclosure offrom the date of grant.
Option Plan (SESOP)
of grantproprietary information.Awards are settled by
the delivery of UBS
shares, except in
countries where this is
not permitted by law.

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Corporate governance and compensation

Compensation funding and expenses

How we determine our bonus pool

Each business division plans its bonus pool annually based on the funding framework and process that has been agreed by the HRCC. The “management pool” is the amount that a business division proposes to award its employees for their performance in a given performance year after consideration of all relevant factors. These proposed pools are submitted to the Group CEO and the HRCC for review, and approved by the full BoD. A detailed description of this process is provided below. By comparison, the expenses charged to the profit and loss account for any given year include compensation expense, that is, accruals, for bonuses awarded for the latest performance year recognized in the current year, as well as amortization of deferred awards granted in prior years, that is, prior awards that have not yet vested.

Profitability

Profitability is the main basis of our compensation funding framework. At business division level, this is measured as profit before tax and before bonus, adjusted for a cost of capital charge, thereby taking into consideration the cost of equity allocated to that business.
Bonus pool funding based on risk-adjusted profit supports the firm’s overall objective of sustainable profitability. At the same time, it is consistent with the regulatory requirements established by FINMA, the FSB and our other regulators.

Funding rates and initial bonus pools

We derive the initial divisional bonus pools by multiplying the so-called divisional compensation funding rate with the divisional adjusted contribution before bonus. In 2010, we introduced funding rates that are directly linked to the level of profitability in each division. As profits within a business division increase, the proportion of profits allocated for the payment of bonuses is lowered.
Our funding rate model or approach allows us to protect the firm

in years of downturn or recovery by retaining key employees, while providing additional shareholder return in good years by preventing excessive capital usage for compensation. As such, we optimize shareholder return in the longer term by adapting our compensation funding in line with the profitability situation of our businesses.

Management discretion

While profitability is the main factor in determining the size of our bonus pool, and while we apply funding rates that provide an initial basis for determining divisional bonus pools, management may still apply its discretion and make adjustments to further assess the overall quality of earnings by looking at relevant key performance indicators and other qualitative measures, including risk factors. Furthermore, we recognize the strategic importance of maintaining a competitive position in the labor market, and may also make adjustments to variable compensation funding determined by competitive benchmarking. This involves studying our market position, both from a performance and a compensation perspective, together with industry compensation trends, including at senior management levels, based on a comparison among peer groups and across regions. Such management discretion is an important element of the funding framework, enabling us to achieve a balanced outcome that considers all the relevant factors.
Corporate Center employees are rewarded based on their individual performance, along with the performance and profitability of the Group as a whole. Compensation for control and logistics functions is determined independently. It is not based on the performance of the revenue producers these functions support, and is contained within the costs allocated to the business divisions.

Review and approval process

The proposed divisional bonus pools and the underlying contribution before bonus, together with other relevant performance indicators and input from Group Risk, are reported to the Group CEO. The HRCC reviews the rationale behind the divisional bonus pools.



Sustainable profitability is key to compensation funding

Primary basis for funding across UBS is profitability. The following describes the process by which we determine our bonus pools.

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Compensation

Business performance over the last two years

Our performance reflected an improvement of CHF 10 billion, with 2010 profit before tax of CHF 7,455 million compared with a loss of CHF 2,561 million in 2009.

UBS achieved a profit before tax of CHF 7,455 million in 2010, compared with a loss of CHF 2,561 million in 2009. The Investment Bank returned to profitability and contributed CHF 8,278 million to the CHF 10 billion improvement in UBS’s operating profit. UBS ended 2010 with an industry-leading BIS tier 1 capital ratio of 17.8%. Client confidence in our business is growing, as demonstrated by increased business volumes as well as improvements in net new money. We also continued to control our costs and achieved our CHF 20 billion fixed costs target for the year.

Operating profit from continuing operations before tax

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è Refer to the “UBS business divisions and Corporate Center” section for more information on 2010 business division financial performance

It also considers performance indicators and risk factors specific to each business division when assessing performance and earnings quality, before recommending the size of the final bonus pool to the BoD.

At a business division level, each CEO proposes funding and allocation to the Group CEO, taking into account input from Group Risk. Performance against agreed indicators, both qualitative and quantitative, as well as risk factors specific to each business division, are considered when assessing performance and earnings quality.

Bonuses granted in 2010

Despite our improved performance in 2010, our bonus pool of CHF 4,245 million for 2010 is 11% lower than that for 2009, reflecting factors such as the market environment, our need to further improve our profitability, and our performance relative to the rest of the industry.

The following table shows the amount of bonus awarded to employees for the performance year 2010, together with the number of beneficiaries for each type of award granted. In the



                                           
(Audited) Total bonus pool1 
           Expenses deferred  Accounting          Number of 
   Expenses to 2011 and later adjustment Total beneficiaries 
  
CHF million, except where indicated
  2010   2009   2010   2009   2010   2009   2010   2009   2010   2009 
   
  Cash discretionary bonus  2,079   2,245   0   0   0   0   2,079   2,245   51,522   51,747 
   
  Deferred cash plans  64   44   236   45   0   0   300   89   576   54 
   
  UBS share plans  440   276   1,271   1,827   60   107   1,771   2,210   7,516   10,690 
   
  UBS share option plans  0   33   0   34   0   0   0   67   0   7,552 
   
  Equity Ownership Plan – fund-linked  28   34   67   134   0   0   95   168   579   582 
   
  
Total discretionary bonus
  2,611   2,632   1,574   2,040   60   107   4,245   4,779         
   
  
1 Refer to “Note 31 Equity participation and other compensation plans” in the “Financial information” section of this report for more information.

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very strong strategic hirecase of deferred cash and share awards, the final amount paid to an employee is influenced by forfeiture provisions and any performance conditions to which these awards are subject. The deferred share award amount is based on the fair value of these awards at the date of grant.

The accounting adjustment column in the table shows the difference between the bonus amount granted to employees and the expensed fair value amount according to the IFRS 2 accounting standard. The relevant accounting rule provides for a discount to reflect that the fair value of shares that have vested for accounting purposes, but are still subject to sale or transfer restrictions, is lower than the market value of unrestricted shares. For example, an EOP award vests for accounting purposes immediately when an employee retires, while the shares remain blocked over the original vesting period. In this case, the expensed fair value of the blocked EOP award is lower than the current market value. Where a performance condition under the EOP applies, the expensed fair value also includes a discount reflecting the probability of forfeiture as a result of failing to meet the performance condition.

Total personnel expenses for 2010

The following table shows our total personnel expense for 2010, and includes salaries, pension and other personnel costs, social security contributions and variable compensation. Variable compensation includes discretionary cash bonuses paid in 2011 for the Investment Bank. Carsten Kengeter’s drive, leadershipperformance year 2010, the amortization of unvested deferred awards granted in previous years and impact have materially contributedthe cost of deferred awards granted to employees who are eligible for retirement at the date of grant.
The bonus pool reflects the value of discretionary bonuses granted relating to the 2010 performance year, including awards that are paid out immediately and those that are deferred. To

Reconciling the overall bonus pool in 2010 with bonus expense

Bonus pool awarded for the 2010 performance year and bonus expenses recognized in the 2010 profit and loss account.

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determine our variable compensation expense, several adjustments are required in order to reconcile the bonus pool to the accounting costs recognized in the Group’s financial statements prepared under IFRS:
–reduction for the unrecognized future amortization of unvested deferred awards granted in 2011 for the performance year 2010; and
–addition for the amortization of unvested deferred awards granted in previous years.

As an increasingly large part of compensation consists of deferred awards, the amortization of unvested deferred awards granted in previous years became a more significant part of the 2010 accounting costs, and will increase in 2011.

èRefer to “Note 31 Equity participation and other compensation plans” in the “Financial information” section of this report for more information



               
(Audited) Personnel expenses 
 CHF million 31.12.10  31.12.09  31.12.08 
  
 Salaries  7,033   7,383   7,775 
   
  Variable compensation – discretionary bonus expense  4,0821  2,809   1,674 
   
  Variable compensation – other  3102  830   1,025 
   
  Contractors  232   275   423 
   
  Social security  826   804   660 
   
  Pension and other post-employment benefit plans  724   988   972 
   
  
Wealth Management Americas: financial advisor compensation3
  2,667   2,426   2,435 
   
  
Other personnel expenses4
  1,047   1,027   1,298 
   
  
Total personnel expenses
  16,9205  16,543   16,262 
   
  
1 Includes expensing of current year bonuses of CHF 2,611 million and expensing of deferred awards of CHF 1,471 million relating to bonuses for previous years.  2 Includes replacement awards of CHF 107 million, forfeitures of CHF (167) million, guaranteed bonuses of CHF 135 million, severance payments of CHF 69 million and UBS’s Equity Plus Plan of CHF 80 million.  3 Consists of grid-based compensation linked directly to compensable revenues generated by financial advisors, and supplemental compensation calculated based on financial advisor productivity, firm tenure, assets and other variables. Also includes costs related to compensation commitments and advances granted to financial advisors at the time of recruitment, which are subject to vesting requirements.  4 Includes employee mandatory insurance programs and family allowances, recruitment, training and related travel costs, the cost of employee anniversary awards, the costs of international assignees, and relocation costs.  5 Personnel expenses (including fixed and variable compensation) recognized in the profit and loss statement 2010 of CHF 16,920 million (less charges and credits that derive from remuneration for previous financial years of CHF 2,069 million plus expenses deferred to 2011 and later from the pool 2010 of CHF 2,609 million) amount to CHF 17,460 million.

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Compensation

2010 compensation for the Group Executive Board and Board of Directors

Group Executive Board compensation

In 2010, total compensation for GEB members reflected the individual performance of each executive in the context of each business division’s improved operating performance, overall Group progress toward our medium-term strategic goals and the significant turnaround in the FICC business, toGroup’s profitability. In setting compensation levels, the effective unwinding of a large portionHRCC and the BoD also considered the collective achievements of the legacy positionsGEB in advancing our strategy, the relevant external competitive market and the firm’s relative performance.

In total, the compensation for GEB members in office on December 2010 was CHF 91.0 million, compared with a total of CHF 68.7 million in 2009. There were 13 GEB members on 31 December 2010, the same number as at the end of 2009. Aggregate compensation made to GEB members who stepped down in 2010 was CHF 3.3 million, compared with CHF 41.3 million in 2009. It should be noted that GEB employment contracts were revised between 2009 and 2010 to further limit UBS’s contractual obligations to GEB members who leave. The changes include reducing the overall effortnotice period for new GEB members from 12 to transformsix months, as well as making any bonus payments for the year in which a GEB member leaves on a fully discretionary, rather than pro rata, basis.
The highest paid GEB member in 2010 was Carsten Kengeter, with a total compensation of CHF 9.3 million. As shown in the table “Total compensation for all GEB members”, 88% of his bonus was deferred, with 28% in deferred cash and 60% in deferred equity vesting over three to five years.
Carsten Kengeter was appointed sole CEO of the Investment Bank in November 2010, having previously held this position jointly with Alexander Wilmot-Sitwell from January to October 2010. In 2010, the Investment Bank returned to profitability with a full-year profit before tax of CHF 2.2 billion, an improvement of CHF 8.3 billion as a whole. The resulting compensation is fully supported bycompared with 2009. Significant progress was made in positioning the HRCCInvestment Bank for the future through rebuilding selected businesses in light of the skillsFixed Income Currencies and experience that he possesses,Commodities (FICC) business area, increasing the commitments made at his hiring in December 2008,alignment between FICC and the accomplishments achieved during 2009.leading Equities franchise, increasing market share in the advisory and capital markets activities and implementing an integrated, flow- and advisory-based client-centric business model. During 2010 residual risk positions were actively managed and reduced.
TheIn 2010, the Group CEO, Oswald J. Grübel, would have beenwas contractually entitled contractually to an incentive award. However,a bonus, given the level of Group profitability achieved, the improvement in results over the previous year and the significant progress towards the Group’s medium-term strategic goals. As in 2009, the Group CEO decided to waive the bonus. His decision is based on what he believes is appropriate for the firm at this point in light of UBS’s performance, he decided notthe further progress still required to accept any incentive awards for 2009, areach the long-term

goals set out in the firm’s overall strategy. His decision which was endorsedhas been gratefully accepted and agreed to by the HRCC.

Remuneration for members of the Group Executive Board who
stepped down during 2009

During 2009, Marcel Rohner, Jerker Johansson, Raoul Weil, Walter H. Stürzinger, Rory Tapner and Marten Hoekstra stepped down from the GEB. Their total awards of approximately CHF 39 million are heavily influenced by contractual obligations.
Marcel Rohner stepped down as Group CEO on 26 February 2009. In honoring the twelve-month notice period of his contract, he received his annual salary of CHF 1,500,000. For 2009, as also for 2008, he did not receive any discretionary incentive awards. After assessing his tenure as Group CEOHRCC and the specific organizational transition requirements, the HRCC deemed it appropriate to approve a one-time contribution of CHF 1,200,000 into the UBS pension fund on his behalf to cover the deficit in his pension fund.
BoD.

Base salary

Base salaries are fixed for all GEB members and reviewed annually by the HRCC. Any adjustments are limited to significant changes in market rates or to movements in the foreign exchange (FX) raterates relative to the Swiss franc. Following its review in 2009, the committeeThe HRCC decided not to change the Swiss franc amount for 2010, but adjusted the salary for GEB members who are paid in other currencies due to movements in the FX rates.

Benefits

There were no material changes to GEB benefits during 2009.are in line with previous years.
è Refer to “Note 30 Pension and other post-retirement benefit plans”post-employment benefits” in the “Financial information”Information” section of this reportthe Annual Report 2010 for details on the various retirementpost-employment benefit plans established in Switzerland and other major markets
 
è Refer to the “2009 performance”“Compensation funding and “Variableexpenses” and “Overview of our compensation funding framework”model” sections for information concerning the committee’s determination of variable incentive awardsthe discretionary bonus for 2009,2010, and to the “Cash and equity incentives”“Deferred variable compensation plans” section for details of the compensation plans awarded to GEB members

Compensation to former membersBoard of Directors compensation

Chairman of the Board of
Directors

For 2010, the total compensation awarded to the Chairman of the BoD, Kaspar Villiger, was CHF 1,491,308. Our compensation framework provides for the Chairman to receive a base salary, 200,000 UBS shares, blocked for four years, as well as benefits in kind. Such shares are not designed or intended as variable compensation. Kaspar Villiger chose to waive a substantial part of the share award and Group Executive Boardinstead to accept a limited number of 26,940 UBS shares with a fair value of CHF 500,000. In addition, he decided to maintain the voluntary reduction in his annual base salary from CHF 2 million to CHF 850,000. The HRCC gratefully accepted and agreed with Kaspar Villiger’s decision.

Highest paid BoD member

The Chairman of the BoD, Kaspar Villiger, is the highest paid BoD member, with total compensation of CHF 1,491,308.

Independent BoD members

The table “Remuneration details and additional information for independent BoD members” shows the compensation received



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by independent BoD members between the 2010 and 2011 AGM. Fees for 2010 to 2011 remained unchanged.

Compensation for former BoD and GEB members

Compensation and benefits in kind paid to former members of the BoD and the GEB members amounted to CHF 77,722 for 2010 and reflect legacy agreements still honored by UBS. These benefits have been discontinued for any member of the BoD and the GEB member who stepped down after 1 January 2008.

Transactions in 2010

In accordance with the applicable rules and regulations, management transactions in UBS shares by BoD and GEB members are publicly disclosed. Transactions which require reporting are those involving all types of financial instruments whose price is primarily influenced by the price of UBS shares.

From 1 January until 31 December 2010, one share purchase was disclosed with a total value of CHF 1,501,830. Swiss stock


exchange rules do not require disclosure of individual names of GEB or BoD members making such transactions.

UBS executives receive a substantial portion of their compensation in UBS equity-based awards. For this reason, management transactions generally see sales outweighing purchases. Blackout periods and synchronized dates for unblocking or vesting of shares or options granted as compensation may lead to transactions being concentrated in short time periods.
In addition, three BoD members chose to receive their full pay in UBS shares. These shares, representing a value of CHF 1,062,500, will be allocated in March 2011.

Loans

BoD and GEB members are granted loans, fixed advances and mortgages. Such loans were made in the ordinary course of business, on substantially the same terms as those granted to other employees, including interest rates and collateral, and did not involve more than the normal risk of collectability or contain other unfavorable features.

èRefer to “Note 32 Related parties” in the “Financial information” section of this report for information concerning loans granted to current and former executives

List of tables
     
Page
(ADVISOR BAR)Total compensation for all GEB members
 242

  ExplanationShare and option ownership of the tables outlining compensationGEB members on 31 December 2009 / 2010
243
Compensation details and additional information for non-independent BoD members
244
Remuneration details and additional information for independent BoD members
244
Total payments for all BoD members
245
Share holdings of executiveBoD members of
  theon 31 December 2009 / 2010
245
Compensation paid to former BoD and GEB members
246
Total of all vested and unvested shares held by GEB members and non-independent BoD members
246
Total of the GEB:all blocked and unblocked shares held by independent BoD members
246
Vested and unvested options held by GEB members on 31 December 2009 / 2010
247
Loans granted to GEB members on 31 December 2009 / 2010
250
Loans granted to BoD members on 31 December 2009 / 2010
250



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Compensation

                                         
(Audited) Total compensation for all GEB members
  
         Variable cash                        
 CHF, except where indicateda compensation under CBP  
                                 Contribu-     
   For                             tions to     
   the             Annual  Annual  Annual     retirement     
   year     Immediate  Deferred  bonus  bonus under  bonus  Benefits  benefits     
 Name, function ended Base salary  cashb  cashb, 3  under PEPc  SEEOPd  under IPPc  in kinde  plansf  Total 
   
  Oswald J. Grübel, Group CEO 2010  3,000,000   0   0   0   0   –   25,600   0   3,025,600 
   
  Carsten Kengeter, CEO Investment Bank (highest-paid) 2010  874,626   1,002,496   2,339,158   1,670,827   3,341,654   –   92,547   0   9,321,308 
   
  Carsten Kengeter, CEO Investment Bank (highest-paid) 2009  669,092   3,002,082   2,001,388   6,155,869   –   1,349,336   0   12,545   13,190,312 
   
  Aggregate of all GEB members who                                      
  were in office on 31 December 20101 2010  14,705,894   15,588,145   14,451,756   15,019,951   30,039,901   –   381,851   843,402   91,030,900 
   
  Aggregate of all GEB members who                                      
  were in office on 31 December 20091 2009  12,000,055   15,440,827   10,293,884   13,453,4244  –   15,696,333   270,971   1,551,068   68,706,566 
   
  Aggregate of all GEB members who                                      
  stepped down during 20102 2010  755,950   1,380,000   920,000   0   0   –   78,817   118,334   3,253,101 
   
  Aggregate of all GEB members who                                      
  stepped down during 20092 2009  2,447,544   23,065,858   15,377,239   0   –   0   215,151   171,122   41,276,914 
   
  
1 Number and distribution of GEB members: 13 GEB members in office on 31 December 2010 and on 31 December 2009 respectively.   2 Number and distribution of former GEB members for 2010 includes Francesco Morra (three months in office, including a notice period of six months); and 2009 includes Marcel Rohner (two months in office), Walter H. Stürzinger and Raoul Weil (three months in office), Jerker Johansson (four months in office), Rory Tapner (six months in office) and Marten Hoekstra (10 months in office).   3 In 2010, for John Cryan, Carsten Kengeter and Alexander Wilmot-Sitwell, deferred cash includes blocked shares.   4 Included in the share awards are SEEOP awards at a fair value of GBP 4,655,950 and EOP awards at a fair value of GBP 1,594,250.
     
(Audited)Explanation of the tables outlining compensation details for GEB members and non-independent BoD members
 a. Local currencies are converted into CHF using the exchange rates as detailed in “NoteNote 39 Currency“Currency translation rates” in the “Financial information” section of this report.
  
b. The entireOf the cash incentiveaward, 60% is only paid out immediately (representing 24% of a GEB member’s total annual bonus). The balance is paid out in equal installments of 20%, each over a three-year periodthe subsequent two years, and is subject to forfeiture.
  
c. Values perValue of each performance share at grant: CHF 18.70 for PEP awards granted in 2011 relating to the performance year 2010; CHF 16.30 for PEP awards granted in 2010 relating to the performance year 2009; and CHF 22.20 for IPP awards granted in 2010 relatedrelating to the performance year 2009. These values are based on the performance share valuation which will be usedvaluations for accounting purposes under IFRS 2. The valuation was carried out by PricewaterhouseCoopers and takeswhich take into account the relevant performance conditions targets set, and the range of possible outcomes for these.these conditions.
  d. No options wereSEEOP is a pre-existing compensation plan that has been updated and re-introduced. SEEOP awards vest in equal installments over five years and are subject to forfeiture. The grant date accounting value per share granted under SEEOP in 2010 for2011 relating to the performance year 2009.2010 at grant is CHF 18.43 or USD 19.94 (actual shares) and CHF 18.30 or USD 19.80 (notional shares).
  e. Benefits in kind – car leasing, company car allowance, staff discount on banking products and services,are all valued at market price, for example, health and welfare benefits and general expense allowances – are all valued at market price.allowances.
  f. Swiss executives participate in the same pension plan as all other employees. Under this plan, employees receive a company contributionUBS makes contributions to the plan, which covers compensation of up to CHF 820,800. The retirement benefits consist of a pension, a bridging pension and a one-off payout of accumulated capital. Employees must also contribute to the plan. This figure excludes the mandatory employer’s social security contributions (AHV, ALV), but includes the portion attributed to the employer’s portion of the legal BVG requirement. The employee contribution is included in the base salary and annual incentive award components.
     
    In both the US and the UK, executives participatesenior management participates in the same pension plans as all other employees. In the US, there are separate pension plans for Wealth Management Americas compared with the plans differ between the twoother business divisions. For each business division thereThere are generally two different types of pension plans. The grandfathered plans, which are no longer open to new hires, operate depending(depending on the abovementioned distinction by business division,division) either on a cash balance basis or a career average salary basis and participantsbasis. Participants accrue a pension based on their annual compensation limited to USD 250,000 (or USD 150,000 for Wealth Management Americas employees). The principal plans for new hires are defined contribution plans. In the defined contribution plan, participants receive companyplans, UBS makes contributions to the plan based on compensation and limited to USD 245,000. US management may also participate in a 401(k) defined contribution plan (open to all employees), which provides a limited company matching contribution for employee contributions. In the UK, management participates in either the principal pension plan, which operates on a defined contribution basis and is limited to an earnings cap of GBP 100,000, or a grandfathered defined benefit plan which provides a pension onupon retirement based on career average base salary (uncapped)(individual caps introduced as of 1 July 2010).

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(Audited) Remuneration details and additional information for independent members of the BoD
 		 
 CHF, except where indicateda 
               For the                          
     HR & Governance & Corporate     period                     Share    
   Audit Compensation Nominating Responsibility Risk Strategy AGM to     Committee  Benefits  Additional      percent-  Number of 
 Name, function1 Committee Committee Committee Committee Committee Committee AGM Base fee  retainer(s)  in kind  payments  Total  age3  shares4,5 
          
  Sergio Marchionne,     M       2009/2010  325,000   100,000   0   250,0006  675,000   100   51,845 
          
  Senior Independent
Director, Vice Chairman		     M     M 2008/2009  325,000   200,000   0   250,0006  775,000   100   76,228 
          
  Ernesto Bertarelli,             2009/2010                            
          
  former member   M M       2008/2009  325,000   200,000   0   0   525,000   100   51,596 
          
  Sally Bott,   C   M     2009/2010  325,000   350,000   0   0   675,000   50   27,261 
          
  member2   M   M     2008/2009  162,500   75,000   0   0   237,500   50   12,280 
          
  Michel Demaré, M           2009/2010  325,000   200,000   0   0   525,000   50   21,203 
          
  member             2008/2009                            
          
  Rainer-Marc Frey,         M   2009/2010  325,000   200,000   0   0   525,000   100   40,301 
          
  member2         M M 2008/2009  162,500   150,000   0   0   312,500   50   16,158 
          
  Bruno Gehrig,   M M       2009/2010  325,000   200,000   0   0   525,000   50   21,203 
          
  member2 M           2008/2009  162,500   100,000   0   0   262,500   50   13,572 
          
  Ann F. Godbehere, M     M     2009/2010  325,000   250,000   0   0   575,000   50   23,222 
          
  member             2008/2009                            
          
  Gabrielle Kaufmann-             2009/2010                            
          
  Kohler, former member     C M     2008/2009  325,000   250,000   0   0   575,000   50   29,731 
          
  Axel P. Lehmann,         M   2009/2010  325,000   200,000   0   0   525,000   100   40,301 
          
  member             2008/2009                            
          
  Rolf A. Meyer,             2009/2010                            
          
  former member2 M M         2008/2009  162,500   150,000   0   0   312,500   50   16,158 
          
  Helmut Panke,   M     M   2009/2010  325,000   300,000   0   0   625,000   50   25,242 
          
  member   M     M   2008/2009  325,000   300,000   0   0   625,000   50   32,316 
          
  William G. Parrett, C           2009/2010  325,000   300,000   0   0   625,000   50   25,242 
          
  member2 M           2008/2009  162,500   100,000   0   0   262,500   50   13,572 
          
  David Sidwell,         C   2009/2010  325,000   400,000   0   0   725,000   50   29,281 
          
  member       M C   2008/2009  325,000   450,000   0   0   775,000   50   40,072 
          
  Peter Spuhler, former             2009/2010                            
          
  member2             2008/2009  162,500   0   0   0   162,500   100   15,945 
          
  Peter R.Voser,     M      2009/2010  325,000   100,000   0   0   425,000   50   17,164 
          
  member C         M 2008/2009  325,000   400,000   0   0   725,000   50   37,487 
          
  Lawrence A. Weinbach,             2009/2010                            
          
  former member2 M           2008/2009  162,500   100,000   0   0   262,500   50   13,572 
          
  Joerg Wolle,             2009/2010                            
          
  former member   C M       2008/2009  325,000   300,000   0   0   625,000   50   32,316 
   
  Total 2009                                6,425,000         
   
  Total 2008                                6,437,500         
   
  Legend: C = Chairperson of the respective committee; M = Member of the respective committee                                  
 
  
1 There were 11 independent BoD members in office on 31 December 2009. Michel Demaré, Ann F. Godbehere and Axel P. Lehmann were appointed at the AGM on 15 April 2009 and Ernesto Bertarelli, Gabrielle Kaufmann-Kohler and Joerg Wolle stepped down from the BoD at the AGM on 15 April 2009. There were 11 independent BoD members in office on 31 December 2008. David Sidwell was appointed at the AGM on 23 April 2008, and Rolf A. Meyer, Peter Spuhler and Lawrence A. Weinbach stepped down from the BoD at the EGM on 2 October 2008. Sally Bott, Rainer-Marc Frey, Bruno Gehrig and William G. Parrett were appointed at the EGM on 2 October 2008.  2 Remuneration for 2008/2009 is for six months only, as such members either stepped down or were appointed on 2 October 2008.  3 Fees are paid 50% in cash and 50% in restricted UBS shares. However, independent BoD members can elect to have 100% of their remuneration paid in restricted UBS shares.  4 For 2009, shares valued at CHF 14.57 (average price of UBS shares at SIX Swiss Exchange over the last 10 trading days of February 2010) included a price discount of 15%, for a new value of discount price CHF 12.38. These shares are blocked for four years. For 2008, shares valued at CHF 11.38 (average price of UBS shares at virt-x, now SIX Swiss Exchange, over the last 10 trading days of February 2009) included a price discount of 15%, discount price for a new value of CHF 9.67. These shares are blocked for four years.  5 Number of shares is reduced in case of the 100% election to deduct social I security contribution. All remuneration payments are submitted to social security contribution/withholding tax.  6 This payment is associated with the Senior Independent Director function.
 
  In addition, for 2008/2009 only, one-off cash payments were made to the Chairmen of the RC (CHF 500,000), the GNC (CHF 300,000) and the HRCC (CHF 200,000). These payments reflect the substantial workload of setting up the new RC, and expanding the mandate of the GNC and the HRCC.
                             
(Audited) Share and option ownership of GEB members on 31 December 2009 / 2010
  
                Potentially      Potentially 
     Number of        conferred     conferred 
     unvested  Number of  Total  voting  Number of  voting 
   For the shares /  vested  number of  rights  options  rights 
 Name, function1 year ended at risk2  shares  shares  in %  held3  in %4 
   
  Oswald J. Grübel, Group Chief Executive Officer 2010  0   0   0   0.000   4,000,000   0.181 
     
    2009  –   –   0   0.000   4,000,000   0.217 
   
  John Cryan, Group Chief Financial Officer 2010  221,879   185,975   407,854   0.018   382,673   0.017 
     
    2009  –   –   235,929   0.013   382,673   0.021 
   
  Markus U. Diethelm, Group General Counsel 2010  178,619   75,700   254,319   0.012   0   0.000 
     
    2009  –   –   112,245   0.006   0   0.000 
   
  John A. Fraser, 2010  326,702   316,541   643,243   0.029   1,088,795   0.049 
     
  Chairman and CEO Global Asset Management 2009  –   –   480,464   0.026   1,088,795   0.059 
   
  Lukas Gähwiler, CEO UBS Switzerland and co-CEO 2010  110,000   850   110,850   0.005   0   0.000 
     
  Wealth Management & Swiss Bank 2009  –   –   –       –     
   
  Carsten Kengeter, CEO Investment Bank 2010  916,201   363,047   1,279,248   0.058   905,000   0.041 
     
    2009  –   –   516,909   0.028   905,000   0.049 
   
  Ulrich Körner, Group Chief Operating Officer and 2010  177,592   95,597   273,189   0.012   0   0.000 
     
  CEO Corporate Center 2009  –   –   0   0.000   0   0.000 
   
  Philip J. Lofts, Group Chief Risk Officer 2010  200,009   144,603   344,612   0.016   577,723   0.026 
     
    2009  –   –   179,234   0.010   577,723   0.031 
   
  Robert J. McCann, CEO Wealth Management Americas 2010  138,598   540,866   679,464   0.031   0   0.000 
     
    2009  –   –   602,481   0.033   0   0.000 
   
  Francesco Morra, former CEO UBS Switzerland5 2010  –   –   –       –     
     
    2009  –   –   153,860   0.008   325,086   0.018 
   
  Alexander Wilmot-Sitwell, co-Chairman and 2010  274,739   213,613   488,352   0.022   353,807   0.016 
     
  co-CEO Group Asia Pacific 2009  –   –   286,767   0.016   353,807   0.019 
   
  Robert Wolf, Chairman and CEO, UBS Group Americas / 2010  242,805   635,382   878,187   0.040   948,473   0.043 
     
  President Investment Bank 2009  –   –   785,631   0.043   948,473   0.051 
   
  Chi-Won Yoon, co-Chairman and 2010  184,858   318,332   503,190   0.023   623,253   0.028 
     
  co-CEO Group Asia Pacific 2009  –   –   367,573   0.020   623,253   0.034 
   
  Jürg Zeltner, CEO UBS Wealth Management and 2010  113,609   9,405   123,014   0.006   205,470   0.009 
     
  co-CEO Wealth Management & Swiss Bank 2009  –   –   16,502   0.001   205,470   0.011 
   
  
1 This table includes vested and unvested shares and options held by GEB members, including related parties.   2 Includes shares granted under PEP and IPP. The actual number of shares vesting in the future will be calculated under the terms of the plans. Refer to “Deferred variable compensation plans” in this section for more information on both plans.   3 Refer to “Note 31 Equity participation and other compensation plans” in the “Financial information” section of this report for more information.   4 No conversion rights are outstanding.   5 GEB member who stepped down during 2010.

229243

Advisory vote

Corporate governance and compensation
Compensation and shareholdings

         
(Audited) Total payments to all members of the BoD 
   For the   
 CHF, except where indicateda year ended Total 
   
  Aggregate of all members of the BoD 2009  7,895,579 
   
  Aggregate of all members of the BoD 2008  10,267,240 
   
                             
(Audited) Compensation details and additional information for non-independent BoD members
  
 CHF, except where indicateda
  
                     Contributions    
   For the     Annual bonus  Annual      to retirement     
 Name, function1 year ended Base salary  (cash)  share award  Benefits in kinde  benefits plansf  Total
   
  Kaspar Villiger, Chairman 2010  850,000   0   500,0002  141,308   0   1,491,308 
     
    2009  602,083   0   0   74,488   0   676,571 
   
  Peter Kurer, former Chairman 2010  –   –   –   –   –   – 
     
    2009  666,667   0   0   37,561   89,780   794,008 
   
  
1 2010: Kaspar Villiger was the only non-independent member in office on 31 December 2010 and 31 December 2009, respectively. Peter Kurer did not stand for reelection at the AGM on 15 April 2009.  2 These shares are blocked for four years.
                                 
 
(Audited) Total compensation for all members of the GEB 
 CHF, except where indicateda 
         Annual              Contributions    
         incentive  Annual  Annual      to retirement    
   For the     award CBP  incentive  incentive  Benefits  benefits    
 Name, function year ended Base salary  and cashb  award PEPc  award IPPc  in kinde  plansf  Total 
   
  Carsten Kengeter, co-CEO Investment Bank (highest-paid) 2009  669,092   5,003,470   6,155,869   1,349,336   0   12,545   13,190,312 
   
  Marcel Rohner, Group Chief Executive Officer (highest-paid) 2008  1,500,000   0   0   0   161,768   152,934   1,814,702 
   
  
Aggregate of all members of the GEB who were in office on 31 December 20091
 2009  12,000,055   25,734,711   13,453,4243  15,696,333   270,971   1,551,068   68,706,562 
   
  
Aggregate of all members of the GEB who were in office on 31 December 20081
 2008  7,815,943   0   0   0   457,652   817,315   9,090,911 
   
  
Aggregate of all members of the GEB who stepped down during 20092
 2009  2,447,544   38,443,097   0   0   215,151   171,122   41,276,914 
   
  
Aggregate of all members of the GEB who stepped down during 20082
 2008  1,614,871   0   0   0   234,838   258,423   2,108,132 
   
  
1 Numbers and distribution of GEB members in 2009: 13 GEB members in office on 31 December. 2008: 12 GEB members in office on 31 December.  2 Number and distribution of GEB members in 2009: includes two months in office as a GEB member for Marcel Rohner, three months in office for Walter H. Stürzinger and Raoul Weil, four months in office for Jerker Johansson, six months in office for Rory Tapner and ten for Marten Hoekstra. 2008: includes four months in office as a GEB member for Peter Kurer, eight months in office for Marco Suter and ten months for Joe Scoby.  3 Included in the share awards are SEEOP awards at a fair value of GBP 4,655,950 and EOP awards at a fair value of GBP 1,594,250.
                 
 
(Audited) Compensation paid to former members of the BoD and GEB1 
 CHF, except where indicateda 
   For the     Benefits    
 Name, function year ended Compensation  in kind  Total 
   
  Georges Blum, former member of the BoD 2009      92,399   92,399 
     
  (Swiss Bank Corporation) 2008      101,579   101,579 
   
  Franz Galliker, former member of the BoD 2009      10,659   10,659 
     
  (Swiss Bank Corporation) 2008      69,596   69,596 
   
  Walter G. Frehner, former member of the BoD 2009      25,371   25,371 
     
  (Swiss Bank Corporation) 2008      74,663   74,663 
   
  Hans (Liliane) Strasser, former member of the BoD 2009      9,758   9,758 
     
  (Swiss Bank Corporation) 2008      32,673   32,673 
   
  Robert Studer, former member of the BoD 2009      18,751   18,751 
     
  (Union Bank of Switzerland) 2008      126,208   126,208 
   
  Alberto Togni, former member of the BoD 2009  320,136   355,983   676,119 
     
  (UBS) 2008  318,461   427,949   746,410 
   
  Philippe (Alix) de Weck, former member of the BoD 2009      93,135   93,135 
     
  (Union Bank of Switzerland) 2008      109,703   109,703 
   
  
Aggregate of all former members of the GEB2
 2009  0   18,293   18,293 
     
    2008  0   171,180   171,180 
   
  Aggregate of all former members of the BoD and GEB 2009  320,136   624,349   944,485 
     
    2008  318,461   1,113,551   1,432,012 
   
  1 Compensation or remuneration that is connected with the former members’ activity on the BoD or GEB, or that is not at market conditions.  2 Includes two former GEB members.
                                                
(Audited) Remuneration details and additional information for independent BoD members
  
 CHF, except where indicateda
  
       Human           For the                            
     Resources & Governance & Corporate     period                     Share     
    Audit Compensation Nominating Responsibility Risk AGM to     Committee  Benefits  Additional      percen-  Number of 
 Name, function1  Committee Committee Committee Committee Committee AGM Base fee  retainer(s)  in kind  payments  Total  tage2  shares3,4 
   
  Michel Demaré,  M     M        2010 / 2011  325,000   300,000       250,0005  875,000   100   52,631 
     
  Vice Chairman  M              2009 / 2010  325,000   200,000   0   0   525,000   50   21,203 
   
  David Sidwell,              C  2010 / 2011  325,000   400,000       250,0005  975,000   50   30,893 
     
  Senior Independent Director              C  2009 / 2010  325,000   400,000   0   0   725,000   50   29,281 
   
  Sally Bott,     C  M  M     2010 / 2011  325,000   450,000           775,000   50   24,556 
     
  member     C     M     2009 / 2010  325,000   350,000   0   0   675,000   50   27,261 
   
  Rainer-Marc Frey,  M           M  2010 / 2011  325,000   400,000           725,000   100   43,583 
     
  member              M  2009 / 2010  325,000   200,000   0   0   525,000   100   40,301 
   
  Bruno Gehrig,     M  M        2010 / 2011  325,000   200,000           525,000   50   16,634 
     
  member     M  M        2009 / 2010  325,000   200,000   0   0   525,000   50   21,203 
   
  Ann F. Godbehere,  M        M     2010 / 2011  325,000   250,000           575,000   50   18,219 
     
  member  M        M     2009 / 2010  325,000   250,000           575,000   50   23,222 
   
  Axel P. Lehmann,              M  2010 / 2011  325,000   200,000           525,000   100   31,519 
     
  member              M  2009 / 2010  325,000   200,000   0   0   525,000   100   40,301 
   
  Sergio Marchionne,                 2010 / 2011                  –         
     
  former Senior Independent Director, former Vice Chairman        M        2009 / 2010  325,000   100,000   0   250,0005  675,000   100   51,845 
   
  Wolfgang Mayrhuber,     M     M     2010 / 2011  325,000   150,000           475,000   50   15,050 
     
  member                 2009 / 2010                  –         
   
  Helmut Panke,     M        M  2010 / 2011  325,000   300,000           625,000   50   19,803 
     
  member     M        M  2009 / 2010  325,000   300,000   0   0   625,000   50   25,242 
   
  William G. Parrett,  C              2010 / 2011  325,000   300,000           625,000   50   19,803 
     
  member  C              2009 / 2010  325,000   300,000   0   0   625,000   50   25,242 
   
  Peter R. Voser,                 2010 / 2011                  –         
     
  former member        M        2009 / 2010  325,000   100,000   0   0   425,000   50   17,164 
   
  Total 2010                                   6,700,000    
   
  Total 2009                                   6,425,000     
   
  
Legend:C = Chairperson of the respective Committee; M = Member of the respective Committee
                                          
  
1 There were 10 independent BoD members in office on 31 December 2010. Wolfgang Mayrhuber was appointed at the AGM on 14 April 2010 and Sergio Marchionne and Peter Voser stepped down from the BoD at the AGM on 14 April 2010. There were 11 independent BoD members in office on 31 December 2009. Michel Demaré, Ann F. Godbehere and Axel P. Lehmann were appointed at the AGM on 15 April 2009 and Ernesto Bertarelli, Gabrielle Kaufmann-Kohler and Joerg Wolle stepped down from the BoD at the AGM on 15 April 2009.   2 Fees are paid 50% in cash and 50% in blocked UBS shares. However, independent BoD members can elect to have 100% of their remuneration paid in blocked UBS shares.   3 For 2010, shares valued at CHF 18.56 (average price of UBS shares at SIX Swiss Exchange over the last 10 trading days of February 2011), included a price discount of 15%, for a new value of discount price CHF 15.78. These shares are blocked for four years. For 2009, shares valued at CHF 14.57 (average price of UBS shares at SIX Swiss Exchange over the last 10 trading days of February 2010), included a price discount of 15%, for a new value of discount price CHF 12.38. These shares are blocked for four years.   4 Number of shares is reduced in case of the 100% election to deduct social security contribution. All remuneration payments are submitted to social security contribution / withholding tax.   5 This payment is associated with the Vice Chairman or the SID function, respectively.

230244

Corporate governance and compensation
 
         
(Audited) Total payments to all BoD members 
 CHF, except where indicateda For the year ended Total 
  
  Aggregate of all BoD members 2010  8,191,310 
     
    2009  7,895,579 
   
             
(Audited) Share holdings of BoD members on 31 December 2009 / 2010 
 Name, function1 For the year ended Number of shares held  Voting rights in % 
  
  Kaspar Villiger, Chairman 2010  22,500   0.001 
     
    2009  22,500   0.001 
   
  Michel Demaré, Vice Chairman 2010  23,703   0.001 
     
    2009  2,500   0.000 
   
  David Sidwell, Senior Independent Director 2010  69,354   0.003 
     
    2009  40,073   0.002 
   
  Sally Bott, member 2010  39,542   0.002 
     
    2009  12,281   0.001 
   
  Rainer-Marc Frey, member 2010  56,459   0.003 
     
    2009  16,158   0.001 
   
  Bruno Gehrig, member 2010  37,775   0.002 
     
    2009  16,572   0.001 
   
  Ann F. Godbehere, member 2010  23,222   0.001 
     
    2009  0   0.000 
   
  Axel P. Lehmann, member 2010  58,452   0.003 
     
    2009  18,151   0.001 
   
  Sergio Marchionne, 2010  –     
     
  
former Senior Independent Director, former Vice Chairman2
 2009  164,154   0,009 
   
  Wolfgang Mayrhuber, member 2010  0   0.000 
     
    2009  –     
   
  Helmut Panke, member 2010  89,529   0.004 
     
    2009  64,287   0.003 
   
  William G. Parrett, member 2010  42,815   0.002 
     
    2009  17,573   0.001 
   
  
Peter R. Voser, former member2
 2010  –     
     
    2009  68,310   0.004 
   
  
1 This table includes vested, unvested, blocked and unblocked shares held by BoD members, including related parties. No options were granted in 2009 and 2010.  2 BoD members who stepped down at the 2010 AGM.

Shares and options held by the Board of Directors and Group Executive
Board (at end of 2009)

                           
(Audited) Share and option ownership of members of the BoD on 31 December 2008/2009 
   For the Number of  Voting rights  Number of  Potentially conferred  Type and quantity 
 Name, function1 year ended shares held  in %  options held  voting rights in %2  of options3 
   
  Kaspar Villiger, Chairman 2009  22,500   0.001   0   0.000       
     
    2008  –       –           
   
  Sergio Marchionne, 2009  164,154   0.009   0   0.000       
     
  Senior Independent Director, Vice Chairman 2008  87,926   0.005   0   0 000       
   
  
Ernesto Bertarelli, former member4
 2009  –       –           
     
    2008  89,434   0.005   0   0.000       
   
  Sally Bott, member 2009  12,281   0.001   0   0.000       
     
    2008  1   0.000   0   0.000       
   
  Michel Demaré, member 2009  2,500   0.000   0   0.000       
     
    2008  –       –           
   
  Rainer-Marc Frey, member 2009  16,158   0.001   0   0.000       
     
    2008  0   0.000   0   0.000       
   
  Bruno Gehrig, member 2009  16,572   0.001   0   0.000       
     
    2008  3,000   0.000   0   0.000       
   
  Ann F. Godbehere, member 2009  0   0.000   0   0.000       
     
    2008  –       –           
   
  
Gabrielle Kaufmann-Kohler, former member4
 2009  –       –           
     
    2008  18,713   0.001   0   0.000       
   
  
Peter Kurer, former Chairman4
 2009  –       –           
     
    2008  416,088   0.025   372,995   0.022  xli:  85,256 
                      xlvii:  95,913 
                      lvi:  95,913 
                      lxiv:  95,913 
   
  Axel P. Lehmann, member 2009  18,151   0.001   0   0.000       
     
    2008  –       –           
   
  Helmut Panke, member 2009  64,287   0.003   0   0.000       
     
    2008  31,971   0.002   0   0.000       
   
  William G. Parrett, member 2009  17,573   0.001   0   0.000       
     
    2008  4,000   0.000   0   0.000       
   
  David Sidwell, member 2009  40,073   0.002   0   0.000       
     
    2008  1   0.000   0   0.000       
   
  Peter R. Voser, member 2009  68,310   0.004   0   0.000       
     
    2008  30,823   0.002   0   0.000       
   
  
Joerg Wolle, former member4
 2009  –       –           
     
    2008  41,509   0.002   0   0.000       
   
  
1 This table includes vested, unvested, blocked and unblocked shares and options held by members of the BoD including related parties.  2 No conversion rights are outstanding.  3 Refer to “Note 31 Equity participation and other compensation plans” in the “Financial information” section of this report for more information on stock option plans.  4 Members of the BoD who stepped down at the AGM 2009.

231245

  Advisory vote
Corporate governance and compensation
Compensation and shareholdings
                           
(Audited) Share and option ownership of members of the GEB on 31 December 2008/2009 
                     Type and 
   For the Number of  Voting rights  Number of  Potentially conferred  quantity of 
 Name, function1 year ended shares held  in %  options held  voting rights in %2  options3 
   
  Oswald J. Grübel, 2009  0   0.000   4,000,000   0.217  lxx:  4,000,000 
     
  Group Chief Executive Officer 2008  –       –           
   
  Marcel Rohner, 2009  –       –           
     
  
former Group Chief Executive Officer4
 2008  711,366   0.042   1,055,043   0.063  xxxii:  31,971 
                      xli:  213,140 
                      xlvii:  277,082 
                      lvi:  319,710 
                      lxiv:  213,140 
   
  John Cryan, 2009  235,929   0.013   382,673   0.021  iii:  21,362 
  Group Chief Financial Officer                   iv:  20,731 
                      vii:  20,725 
                      xii:  5,454 
                      xiii:  5,294 
                      xvi:  5,292 
                      xxi:  23,626 
                      xxiii:  23,620 
                      xxvi:  23,612 
                      xxviii  5,526 
                      xxix:  5,524 
                      xxx:  5,524 
                      xxxviii:  17,072 
                      xl:  17,068 
                      xlii:  17,063 
                      xliv:  14,210 
                      xlv:  14,210 
                      xlvi:  14,207 
                      liii:  5,330 
                      liv:  5,328 
                      lv:  5,326 
                      lxi:  17,762 
                      lxii:  17,762 
                      lxiii:  17,760 
                      lxvi:  53,285 
     
    2008  235,929   0.014   382,673   0.023  iii:  21,362 
                      iv:  20,731 
                      vii:  20,725 
                      xii:  5,454 
                      xiii:  5,294 
                      xvi:  5,292 
                      xxi:  23,626 
                      xxiii:  23,620 
                      xxvi:  23,612 
                      xxviii  5,526 
                      xxix:  5,524 
                      xxx:  5,524 
                      xxxviii:  17,072 
                      xl:  17,068 
                      xlii:  17,063 
                      xliv:  14,210 
                      xlv:  14,210 
                      xlvi:  14,207 
                      liii:  5,330 
                      liv:  5,328 
                      lv:  5,326 
                      lxi:  17,762 
                      lxii:  17,762 
                      lxiii:  17,760 
                      lxvi:  53,285 
   
  Markus U. Diethelm, 2009  112,245   0.006   0   0.000       
     
  Group General Counsel 2008  112,245   0.007   0   0.000       
   
  John A. Fraser, 2009  480,464   0.027   1,088,795   0.059  viii:  76,380 
  Chairman and CEO Global Asset Management                   xix:  127,884 
                      xxv:  127,884 
                      xliii:  170,512 
                      xlviii:  202,483 
                      lvi:  213,140 
                      lxiv:  170,512 
   
                 
(Audited) Compensation paid to former BoD and GEB members1 
 CHF, except where indicateda 
   For the         
 Name, function year ended Compensation  Benefits in kind  Total 
   
  Georges Blum, former BoD member 2010  0   0   0 
     
  (Swiss Bank Corporation) 2009  0   92,399   92,399 
   
  Franz Galliker, former BoD member 2010  0   0   0 
     
  (Swiss Bank Corporation) 2009  0   10,659   10,659 
   
  Walter G. Frehner, former BoD member 2010  0   0   0 
     
  (Swiss Bank Corporation) 2009  0   25,371   25,371 
   
  Hans (Liliane) Strasser, former BoD member 2010  0   0   0 
     
  (Swiss Bank Corporation) 2009  0   9,758   9,758 
   
  Robert Studer, former BoD member 2010  0   0   0 
     
  (Union Bank of Switzerland) 2009  0   18,751   18,751 
   
  Alberto Togni, former BoD member 2010  0   20,493   20,493 
     
  (UBS) 2009  320,136   355,983   676,119 
   
  Philippe (Alix) de Weck, former BoD member 2010  0   0   0 
     
  (Union Bank of Switzerland) 2009  0   93,135   93,135 
   
  
Aggregate of all former GEB members2
 2010  0   57,229   57,229 
     
    2009  0   18,293   18,293 
   
  Aggregate of all former BoD and GEB members 2010  0   77,722   77,722 
     
    2009  320,136   624,349   944,485 
   
  
1 Compensation or remuneration that is connected with the former member’s activity on the BoD or GEB, that is not at market conditions.  2 Includes one former GEB member in 2010 and one former GEB member in 2009.
                               
(Audited) Total of all vested and unvested shares held by GEB members and non-independent BoD members1 
       Of which    
   Total  vested  Of which vesting 
             2011   2012   2013   2014   2015 
   
  
Shares held on 31 December 2010
  4,409,345   2,922,411   582,787   411,339   282,754   105,027   105,027 
   
                               
             2010   2011   2012   2013   2014 
   
  
Shares held on 31 December 2009
  3,760,095   1,971,557   1,078,664   397,046   222,601   90,227   0 
   
  1 Includes related parties.
                               
  No individual BoD or GEB member holds 1% or more of all shares issued.
                           
(Audited) Total of all blocked and unblocked shares held by independent BoD members1
       Of which    
   Total  unblocked  Of which blocked until
             2011   2012   2013   2014 
   
  
Shares held on 31 December 2010
  440,851   46,010   4,266   9,349   127,970   253,256 
   
                           
             2010   2011   2012   2013 
   
  
Shares held on 31 December 2009
  420,059   123,053   6,232   13,352   35,737   241,685 
   
  1 Includes related parties.
                           
  No individual Board member holds 1% or more of all shares issued.

232246

Corporate governance and compensation
 

                           
(Audited) Share and option ownership of members of the GEB on 31 December 2008/2009 (continued) 
                     Type and 
   For the Number of  Voting rights  Number of  Potentially conferred  quantity of 
 Name, function1 year ended shares held  in %  options held  voting rights in %2  options3 
   
  John A. Fraser, 2008  561,216   0.035   1,144,808   0.068  i:  56,013 
  Chairman and CEO Global Asset Management                   viii:  76,380 
                      xix:  127,884 
                      xxv:  127,884 
                      xliii:  170,512 
                      xlviii:  202,483 
                      lvi:  213,140 
                      lxiv:  170,512 
   
  Marten Hoekstra, 2009  –       –           
     
  
former CEO Wealth Management US4
 2008  245,397   0.015   684,168   0.041  ii:  8,679 
                      vi:  8,421 
                      ix:  8,421 
                      xi:  8,823 
                      xiv:  4,262 
                      xv:  8,563 
                      xviii:  8,561 
                      xxxiii:  42,628 
                      xliii:  53,285 
                      xlviii:  53,285 
                      lvi:  85,256 
                      lxiv:  154,931 
                      lxvii:  239,053 
   
  Jerker Johansson, 2009  –       –           
     
  
former Chairman and CEO Investment Bank4
 2008  521,544   0.031   753,410   0.045  lxviii:  745,990 
                      lxix:  7,420 
   
  Carsten Kengeter, 2009  516,909   0.028   905,000   0.049  lxxi:  905,000 
     
  co-CEO Investment Bank 2008  –       –           
   
  Ulrich Körner, 2009  0   0.000   0   0.000       
     
  Group Chief Operating Officer 2008  –       –           
   
  Philip J. Lofts, 2009  179,234   0.010   577,723   0.031  iii:  11,445 
  Group Chief Risk Officer                   iv:  11,104 
                      vii:  11,098 
                      xii:  1,240 
                      xiii:  5,464 
                      xvi:  1,199 
                      xxi:  9,985 
                      xxiii:  9,980 
                      xxvi:  9,974 
                      xxviii:  1,833 
                      xxix:  1,830 
                      xxx:  1,830 
                      xxxviii:  35,524 
                      xl:  35,524 
                      xlii:  35,521 
                      xlvii:  117,090 
                      lvi:  117,227 
                      lxiv:  85,256 
                      lxvii:  74,599 
     
    2008  186,434   0.011   577,723   0.034  iii:  11,445 
                      iv:  11,104 
                      vii:  11,098 
                      xii:  1,240 
                      xiii:  5,464 
                      xvi:  1,199 
                      xxi:  9,985 
                      xxiii:  9,980 
                      xxvi:  9,974 
                      xxviii:  1,833 
                      xxix:  1,830 
                      xxx:  1,830 
                      xxxviii:  35,524 
                      xl:  35,524 
                      xlii:  35,521 
                      xlvii:  117,090 
                      lvi:  117,227 
                      lxiv:  85,256 
                      lxvii:  74,599 
   
(Audited)
Vested and unvested options held by GEB members on 31 December 2009 / 20101
                         
  Total                
For the number of  Number of  Year of  Vesting  Expiry  Strike 
year ended options held2  options3  grant  date  date  price 
 
                         
Oswald J. Grübel, Group Chief Executive Officer
 
2010  4,000,000   4,000,000   2009   26/02/2009   25/02/2014  CHF 10.10 
 
2009  4,000,000   4,000,000   2009   26/02/2009   25/02/2014  CHF 10.10 
 
                         
John Cryan, Group Chief Financial Officer
 
2010  382,673   21,362   2002   31/01/2003   31/01/2012  CHF 36.49 
       
       20,731   2002   31/01/2004   31/01/2012  CHF 36.49 
       
       20,725   2002   31/01/2005   31/01/2012  CHF 36.49 
       
       5,454   2002   28/02/2003   28/02/2012  CHF 36.65 
       
       5,294   2002   28/02/2004   28/02/2012  CHF 36.65 
       
       5,292   2002   28/02/2005   28/02/2012  CHF 36.65 
       
       23,626   2003   01/03/2004   31/01/2013  CHF 27.81 
       
       23,620   2003   01/03/2005   31/01/2013  CHF 27.81 
       
       23,612   2003   01/03/2006   31/01/2013  CHF 27.81 
       
       5,526   2003   01/03/2004   28/02/2013  CHF 26.39 
       
       5,524   2003   01/03/2005   28/02/2013  CHF 26.39 
       
       5,524   2003   01/03/2006   28/02/2013  CHF 26.39 
       
       17,072   2004   01/03/2005   27/02/2014  CHF 44.32 
       
       17,068   2004   01/03/2006   27/02/2014  CHF 44.32 
       
       17,063   2004   01/03/2007   27/02/2014  CHF 44.32 
       
       14,210   2005   01/03/2006   28/02/2015  CHF 47.58 
       
       14,210   2005   01/03/2007   28/02/2015  CHF 47.58 
       
       14,207   2005   01/03/2008   28/02/2015  CHF 47.58 
       
       5,330   2006   01/03/2007   28/02/2016  CHF 65.97 
       
       5,328   2006   01/03/2008   28/02/2016  CHF 65.97 
       
       5,326   2006   01/03/2009   28/02/2016  CHF 65.97 
       
       17,762   2007   01/03/2008   28/02/2017  CHF 67.00 
       
       17,762   2007   01/03/2009   28/02/2017  CHF 67.00 
       
       17,760   2007   01/03/2010   28/02/2017  CHF 67.00 
       
       53 285   2008   01/03/2011   28/02/2018  CHF 32.45 
 
2009  382,673   21,362   2002   31/01/2003   31/01/2012  CHF 36.49 
       
       20,731   2002   31/01/2004   31/01/2012  CHF 36.49 
       
       20,725   2002   31/01/2005   31/01/2012  CHF 36.49 
       
       5,454   2002   28/02/2003   28/02/2012  CHF 36.65 
       
       5,294   2002   28/02/2004   28/02/2012  CHF 36.65 
       
       5,292   2002   28/02/2005   28/02/2012  CHF 36.65 
       
       23,626   2003   01/03/2004   31/01/2013  CHF 27.81 
       
       23,620   2003   01/03/2005   31/01/2013  CHF 27.81 
       
       23,612   2003   01/03/2006   31/01/2013  CHF 27.81 
       
       5,526   2003   01/03/2004   28/02/2013  CHF 26.39 
       
       5,524   2003   01/03/2005   28/02/2013  CHF 26.39 
       
       5,524   2003   01/03/2006   28/02/2013  CHF 26.39 
       
       17,072   2004   01/03/2005   27/02/2014  CHF 44.32 
       
       17,068   2004   01/03/2006   27/02/2014  CHF 44.32 
       
       17,063   2004   01/03/2007   27/02/2014  CHF 44.32 
       
       14,210   2005   01/03/2006   28/02/2015  CHF 47.58 
       
       14,210   2005   01/03/2007   28/02/2015  CHF 47.58 
       
       14,207   2005   01/03/2008   28/02/2015  CHF 47.58 
                         
  Total                
For the number of  Number of  Year of  Vesting  Expiry  Strike 
year ended options held2  options3  grant  date  date  price 
 
                         
John Cryan, Group Chief Financial Officer (continued)
 
2009  382,673   5,330   2006   01/03/2007   28/02/2016  CHF 65.97 
       
       5,328   2006   01/03/2008   28/02/2016  CHF 65.97 
       
       5,326   2006   01/03/2009   28/02/2016  CHF 65.97 
       
       17,762   2007   01/03/2008   28/02/2017  CHF 67.00 
       
       17,762   2007   01/03/2009   28/02/2017  CHF 67.00 
       
       17,760   2007   01/03/2010   28/02/2017  CHF 67.00 
       
       53,285   2008   01/03/2011   28/02/2018  CHF 32.45 
 
                         
Markus U. Diethelm, Group General Counsel
 
2010  0                     
 
2009  0                     
 
                         
John A. Fraser, Chairman and CEO Global Asset Management
 
2010  1,088,795   76,380   2002   31/01/2005   31/01/2012  USD 21.24 
       
       127,884   2002   28/06/2005   28/06/2012  CHF 37.90 
       
       127,884   2003   31/01/2006   31/01/2013  USD 22.53 
       
       170,512   2004   01/03/2007   27/02/2014  USD 38.13 
       
       202,483   2005   01/03/2008   28/02/2015  USD 44.81 
       
       213,140   2006   01/03/2009   28/02/2016  CHF 72.57 
       
       170,512   2007   01/03/2010   28/02/2017  CHF 73.67 
 
2009  1,088,795   76,380   2002   31/01/2005   31/01/2012  USD 21.24 
       
       127,884   2002   28/06/2005   28/06/2012  CHF 37.90 
       
       127,884   2003   31/01/2006   31/01/2013  USD 22.53 
       
       170,512   2004   01/03/2007   27/02/2014  USD 38.13 
       
       202,483   2005   01/03/2008   28/02/2015  USD 44.81 
       
       213,140   2006   01/03/2009   28/02/2016  CHF 72.57 
       
       170,512   2007   01/03/2010   28/02/2017  CHF 73.67 
 
                         
Lukas Gähwiler, CEO UBS Switzerland and
co-CEO Wealth Management & Swiss Bank
 
2010  0                     
 
2009  –                     
 
                         
Carsten Kengeter, CEO Investment Bank
 
2010  905,000   905,000   2009   01/03/2012   27/12/2019  CHF 40.00 
 
2009  905,000   905,000   2009   01/03/2012   27/12/2019  CHF 40.00 
 
                         
Ulrich Körner, Group Chief Operating Officer and CEO Corporate Center
 
2010  0                     
 
2009  0                     
 
                         
Philip J. Lofts, Group Chief Risk Officer
 
2010  577,723   11,445   2002   31/01/2003   31/01/2012  CHF 36.49 
       
       11,104   2002   31/01/2004   31/01/2012  CHF 36.49 
       
       11,098   2002   31/01/2005   31/01/2012  CHF 36.49 
       
       1,240   2002   28/02/2003   28/02/2012  CHF 36.65 
       
       5,464   2002   28/02/2004   28/02/2012  CHF 36.65 
       
       1,199   2002   28/02/2005   28/02/2012  CHF 36.65 

1 This table includes options held by GEB members, including related parties.  2 No conversion rights are outstanding.  3 Refer to “Note 31 Equity participation and other compensation plans” in the “Financial information” section of this report for more information.

233247

  Advisory vote
Corporate governance and compensation
Compensation

(Audited)

Vested and shareholdingsunvested options held by GEB members on 31 December 2009 / 20101 (continued)

                           
(Audited) Share and option ownership of members of the GEB on 31 December 2008/2009 (continued) 
                     Type and 
   For the Number of  Voting rights  Number of  Potentially conferred  quantity of 
 Name, function1 year ended shares held  in %  options held  voting rights in %2  options3 
   
  Robert J. McCann, 2009  602,481   0.033   0   0.000       
     
  CEO Wealth Management Americas 2008  –       –           
   
  Franco Morra, 2009  153,860   0.008   325,086   0.018  lvi:  43,911 
  CEO UBS Switzerland                   lxiv:  66,866 
                      lxvii:  114,309 
                      lxxii:  100,000 
     
    2008  –       –           
   
  Walter H. Stürzinger, 2009  –       –           
     
  
former Chief Operating Officer, Corporate Center4
 2008  296,886   0.018   372,995   0.022  xx:  31,971 
                      xli:  63,942 
                      xlvii:  85,256 
                      lvi:  95,913 
                      lxiv:  95,913 
   
  Rory Tapner, 2009  –       –           
     
  
former Chairman and CEO Asia Pacific4
 2008  827,809   0.049   1,379,533   0.082  vii:  281,862 
                      xix:  213,140 
                      xxxi:  213,140 
                      xli:  170,512 
                      xlvii:  159,855 
                      lvi:  170,512 
                      lxiv:  170,512 
   
  Raoul Weil, 2009  –       –           
     
  former Chairman and CEO Global Wealth 2008  315,698   0.019   432,409   0.026  xix:  53,285 
  
Management & Business Banking4
                   xlvii:  102,281 
                      lvi:  127,884 
                      lxiv:  148,959 
   
  Alexander Wilmot-Sitwell, 2009  286,767   0.016   353,807   0.019  xlvi:  53,282 
  co-CEO Investment Bank                   xlix:  2,130 
                      liii:  35,524 
                      liv:  35,524 
                      lv:  35,521 
                      lxiv:  106,570 
                      lxvii:  85,256 
     
    2008  304,655   0.018   353,807   0.021  xlvi:  53,282 
                      xlix:  2,130 
                      liii:  35,524 
                      liv:  35,524 
                      lv:  35,521 
                      lxiv:  106,570 
                      lxvii:  85,256 
   
  Robert Wolf, 2009  785,631   0.043   948,473   0.051  xxv:  287,739 
  Chairman and CEO, UBS Group Americas/                   xliii:  213,140 
  President Investment Bank                   xlviii:  127,884 
                      lvi:  106,570 
                      lxiv:  106,570 
                      lxvii:  106,570 
     
    2008  827,307   0.049   948,473   0.056  xxv:  287,739 
                      xliii:  213,140 
                      xlviii:  127,884 
                      lvi:  106,570 
                      lxiv:  106,570 
                      lxvii:  106,570 
   
                         
  Total                
For the number of  Number of  Year of  Vesting  Expiry  Strike 
year ended options held2  options3  grant  date  date  price 
 
                         
Philip J. Lofts, Group Chief Risk Officer (continued)
 
2010  577,723   9,985   2003   01/03/2004   31/01/2013  CHF 27.81 
       
       9,980   2003   01/03/2005   31/01/2013  CHF 27.81 
       
       9,974   2003   01/03/2006   31/01/2013  CHF 27.81 
       
       1,833   2003   01/03/2004   28/02/2013  CHF 26.39 
       
       1,830   2003   01/03/2005   28/02/2013  CHF 26.39 
       
       1,830   2003   01/03/2006   28/02/2013  CHF 26.39 
       
       35,524   2004   01/03/2005   27/02/2014  CHF 44.32 
       
       35,524   2004   01/03/2006   27/02/2014  CHF 44.32 
       
       35,521   2004   01/03/2007   27/02/2014  CHF 44.32 
       
       117,090   2005   01/03/2008   28/02/2015  CHF 52.32 
       
       117,227   2006   01/03/2009   28/02/2016  CHF 72.57 
       
       85,256   2007   01/03/2010   28/02/2017  CHF 73.67 
       
       74,599   2008   01/03/2011   28/02/2018  CHF 35.66 
 
2009  577,723   11,445   2002   31/01/2003   31/01/2012  CHF 36.49 
       
       11,104   2002   31/01/2004   31/01/2012  CHF 36.49 
       
       11,098   2002   31/01/2005   31/01/2012  CHF 36.49 
       
       1,240   2002   28/02/2003   28/02/2012  CHF 36.65 
       
       5,464   2002   28/02/2004   28/02/2012  CHF 36.65 
       
       1,199   2002   28/02/2005   28/02/2012  CHF 36.65 
       
       9,985   2003   01/03/2004   31/01/2013  CHF 27.81 
       
       9,980   2003   01/03/2005   31/01/2013  CHF 27.81 
       
       9,974   2003   01/03/2006   31/01/2013  CHF 27.81 
       
       1,833   2003   01/03/2004   28/02/2013  CHF 26.39 
       
       1,830   2003   01/03/2005   28/02/2013  CHF 26.39 
       
       1,830   2003   01/03/2006   28/02/2013  CHF 26.39 
       
       35,524   2004   01/03/2005   27/02/2014  CHF 44.32 
       
       35,524   2004   01/03/2006   27/02/2014  CHF 44.32 
       
       35,521   2004   01/03/2007   27/02/2014  CHF 44.32 
       
       117,090   2005   01/03/2008   28/02/2015  CHF 52.32 
       
       117,227   2006   01/03/2009   28/02/2016  CHF 72.57 
       
       85,256   2007   01/03/2010   28/02/2017  CHF 73.67 
       
       74,599   2008   01/03/2011   28/02/2018  CHF 35.66 
 
                         
Robert J. McCann, CEO Wealth Management Americas
 
2010  0                     
 
2009  0                     
 
                         
Francesco Morra, former CEO UBS Switzerland4
 
2010  –                     
 
2009  325,086   43,911   2006   01/03/2009   28/02/2016  CHF 72.57 
       
       66,866   2007   01/03/2010   28/02/2017  CHF 73.67 
       
       114,309   2008   01/03/2011   28/02/2018  CHF 35.66 
       
       100,000   2009   01/03/2012   27/02/2019  CHF 11.35 
 
                         
Alexander Wilmot-Sitwell, co-Chairman and co-CEO Group Asia Pacific
 
2010  353,807   53,282   2005   01/03/2008   28/02/2015  CHF 47.58 
       
       2,130   2005   04/03/2007   04/03/2015  CHF 47.89 
                         
  Total                
For the number of  Number of  Year of  Vesting  Expiry  Strike 
year ended options held2  options3  grant  date  date  price 
 
                         
Alexander Wilmot-Sitwell, co-Chairman und co-CEO Group Asia Pacific (cont.)
 
2010  353,807   35,524   2006   01/03/2007   28/02/2016  CHF 65.97 
       
       35,524   2006   01/03/2008   28/02/2016  CHF 65.97 
       
       35,521   2006   01/03/2009   28/02/2016  CHF 65.97 
       
       106,570   2007   01/03/2010   28/02/2017  CHF 73.67 
       
       85,256   2008   01/03/2011   28/02/2018  CHF 35.66 
 
2009  353,807   53,282   2005   01/03/2008   28/02/2015  CHF 47.58 
       
       2,130   2005   04/03/2007   04/03/2015  CHF 47.89 
       
       35,524   2006   01/03/2007   28/02/2016  CHF 65.97 
       
       35,524   2006   01/03/2008   28/02/2016  CHF 65.97 
       
       35,521   2006   01/03/2009   28/02/2016  CHF 65.97 
       
       106,570   2007   01/03/2010   28/02/2017  CHF 73.67 
       
       85,256   2008   01/03/2011   28/02/2018  CHF 35.66 
 
                         
Robert Wolf, Chairman and CEO, UBS Group Americas/
President Investment Bank
 
2010  948,473   287,739   2003   31/01/2006   31/01/2013  USD 22.53 
       
       213,140   2004   01/03/2007   27/02/2014  USD 38.13 
       
       127,884   2005   01/03/2008   28/02/2015  USD 44.81 
       
       106,570   2006   01/03/2009   28/02/2016  CHF 72.57 
       
       106,570   2007   01/03/2010   28/02/2017  CHF 73.67 
       
       106,570   2008   01/03/2011   28/02/2018  CHF 35.66 
 
2009  948,473   287,739   2003   31/01/2006   31/01/2013  USD 22.53 
       
       213,140   2004   01/03/2007   27/02/2014  USD 38.13 
       
       127,884   2005   01/03/2008   28/02/2015  USD 44.81 
       
       106,570   2006   01/03/2009   28/02/2016  CHF 72.57 
       
       106,570   2007   01/03/2010   28/02/2017  CHF 73.67 
       
       106,570   2008   01/03/2011   28/02/2018  CHF 35.66 
 
                         
Chi-Won Yoon, co-Chairman and co-CEO Group Asia Pacific
 
2010  623,253   11,577   2002   31/01/2002   31/01/2012  USD 21.24 
       
       11,229   2002   31/01/2004   31/01/2012  USD 21.24 
       
       11,227   2002   31/01/2005   31/01/2012  USD 21.24 
       
       2,252   2002   28/02/2002   28/02/2012  USD 21.70 
       
       6,446   2002   29/02/2004   28/02/2012  USD 21.70 
       
       2,184   2002   28/02/2005   28/02/2012  USD 21.70 
       
       8,648   2003   01/03/2004   31/01/2013  USD 20.49 
       
       8,642   2003   01/03/2005   31/01/2013  USD 20.49 
       
       8,635   2003   01/03/2006   31/01/2013  USD 20.49 
       
       4,262   2003   28/02/2005   28/02/2013  USD 19.53 
       
       3,374   2003   01/03/2004   28/02/2013  USD 19.53 
       
       3,371   2003   01/03/2005   28/02/2013  USD 19.53 
       
       3,371   2003   01/03/2006   28/02/2013  USD 19.53 
       
       6,200   2004   01/03/2005   27/02/2014  CHF 44.32 
       
       4,262   2004   27/02/2006   27/02/2014  CHF 44.32 
       
       6,198   2004   01/03/2006   27/02/2014  CHF 44.32 
       
       6,195   2004   01/03/2007   27/02/2014  CHF 44.32 
       
       10,659   2005   01/03/2006   28/02/2015  CHF 47.58 

1 This table includes options held by GEB members, including related parties.  2 No conversion rights are outstanding.  3 Refer to “Note 31 Equity participation and other compensation plans” in the “Financial information” section of this report for more information.  4 GEB member who stepped down during 2010.



234248

Corporate governance and compensation
  

                           
(Audited) Share and option ownership of members of the GEB on 31 December 2008/2009 (continued) 
                     Type and 
   For the Number of  Voting rights  Number of  Potentially conferred  quantity of 
 Name, function1 year ended shares held  in %  options held  voting rights in %2  options3 
   
  Chi-Won Yoon, 2009  367,573   0.020   623,253   0.034  i:  11,577 
  Chairman and CEO Asia Pacific                   v:  11,229 
                      viii:  11,227 
                      x:  2,252 
                      xiv:  6,446 
                      xvii:  2,184 
                      xxii:  8,648 
                      xxiv:  8,642 
                      xxvii:  8,635 
                      xxxiv:  4,262 
                      xxxv:  3,374 
                      xxxvi:  3,371 
                      xxxvii:  3,371 
                      xxxvii:  6,200 
                      xxxix:  4,262 
                      xl:  6,198 
                      xlii:  6,195 
                      xliv:  10,659 
                      xlv:  10,657 
                      xlvi:  10,654 
                      liii:  21,316 
                      liv:  21,314 
                      lv:  21,311 
                      lxi:  8,881 
                      lxii:  8,880 
                      lxiii:  8,880 
                      lxvi:  42,628 
                      lxxii:  350,000 
     
    2008  –       –           
   
  Jürg Zeltner, 2009  16,502   0.001   205,470   0.011  iii:  809 
  CEO Wealth Management                   iv:  784 
                      vii:  784 
                      xlii:  4,972 
                      xliv:  7,106 
                      xlv:  7,103 
                      xlvi:  7,103 
                      xlix:  93 
                      l:  161 
                      li:  149 
                      lii:  127 
                      liii:  7,106 
                      liv:  7,103 
                      lv:  7,103 
                      lvii:  110 
                      lviii:  242 
                      lix:  230 
                      lx:  221 
                      lxi:  7,105 
                      lxii:  7,105 
                      lxiii:  7,103 
                      lxv:  223 
                      lxvii:  42,628 
                      lxxii:  90,000 
     
    2008  –       –           
   
  
1 This table includes vested and unvested shares and options held by members of the GEB, including related parties.  2 No conversion rights are outstanding.  3 Refer to “Note 31 Equity participation and other compensation plans” in the “Financial information” section of this report for more information.  4 GEB members who stepped down during 2009.
(Audited)

235Vested and unvested options held by GEB members on 31 December 2009 / 20101 (continued)

                         
  Total                
For the number of  Number of  Year of  Vesting  Expiry  Strike 
year ended options held2  options3  grant  date  date  price 
 
                         
Chi-Won Yoon, co-Chairman und co-CEO Group Asia Pacific (continued)
 
2010  623,253   10,657   2005   01/03/2007   28/02/2015  CHF 47.58 
       
       10,654   2005   01/03/2008   28/02/2015  CHF 47.58 
       
       21,316   2006   01/03/2007   28/02/2016  CHF 65.97 
       
       21,314   2006   01/03/2008   28/02/2016  CHF 65.97 
       
       21,311   2006   01/03/2009   28/02/2016  CHF 65.97 
       
       8,881   2007   01/03/2008   28/02/2017  CHF 67.00 
       
       8,880   2007   01/03/2009   28/02/2017  CHF 67.00 
       
       8,880   2007   01/03/2010   28/02/2017  CHF 67.00 
       
       42,628   2008   01/03/2011   28/02/2018  CHF 32.45 
       
       350,000   2009   01/03/2012   27/02/2019  CHF 11.35 
 
2009  623,253   11,577   2002   31/01/2002   31/01/2012  USD 21.24 
       
       11,229   2002   31/01/2004   31/01/2012  USD 21.24 
       
       11,227   2002   31/01/2005   31/01/2012  USD 21.24 
       
       2,252   2002   28/02/2002   28/02/2012  USD 21.70 
       
       6,446   2002   29/02/2004   28/02/2012  USD 21.70 
       
       2,184   2002   28/02/2005   28/02/2012  USD 21.70 
       
       8,648   2003   01/03/2004   31/01/2013  USD 20.49 
       
       8,642   2003   01/03/2005   31/01/2013  USD 20.49 
       
       8,635   2003   01/03/2006   31/01/2013  USD 20.49 
       
       4,262   2003   28/02/2005   28/02/2013  USD 19.53 
       
       3,374   2003   01/03/2004   28/02/2013  USD 19.53 
       
       3,371   2003   01/03/2005   28/02/2013  USD 19.53 
       
       3,371   2003   01/03/2006   28/02/2013  USD 19.53 
       
       6,200   2004   01/03/2005   27/02/2014  CHF 44.32 
       
       4,262   2004   27/02/2006   27/02/2014  CHF 44.32 
       
       6,198   2004   01/03/2006   27/02/2014  CHF 44.32 
       
       6,195   2004   01/03/2007   27/02/2014  CHF 44.32 
       
       10,659   2005   01/03/2006   28/02/2015  CHF 47.58 
       
       10,657   2005   01/03/2007   28/02/2015  CHF 47.58 
       
       10,654   2005   01/03/2008   28/02/2015  CHF 47.58 
       
       21,316   2006   01/03/2007   28/02/2016  CHF 65.97 
       
       21,314   2006   01/03/2008   28/02/2016  CHF 65.97 
       
       21,311   2006   01/03/2009   28/02/2016  CHF 65.97 
       
       8,881   2007   01/03/2008   28/02/2017  CHF 67.00 
       
       8,880   2007   01/03/2009   28/02/2017  CHF 67.00 
       
       8,880   2007   01/03/2010   28/02/2017  CHF 67.00 
       
       42,628   2008   01/03/2011   28/02/2018  CHF 32.45 
       
       350,000   2009   01/03/2012   27/02/2019  CHF 11.35 
 
                         
Jürg Zeltner, CEO UBS Wealth Management and
co-CEO Wealth Management & Swiss Bank
 
2010  205,470   809   2002   31/01/2003   31/01/2012  CHF 36.49 
       
       784   2002   31/01/2004   31/01/2012  CHF 36.49 
       
       784   2002   31/01/2005   31/01/2012  CHF 36.49 
       
       4,972   2004   01/03/2007   27/02/2014  CHF 44.32 
                         
  Total                
For the number of  Number of  Year of  Vesting  Expiry  Strike 
year ended options held2  options3  grant  date  date  price 
 
                         
Jürg Zeltner, CEO UBS Wealth Management and
co-CEO Wealth Management & Swiss Bank (continued)
 
2010  205,470   7,106   2005   01/03/2006   28/02/2015  CHF 47.58 
       
       7,103   2005   01/03/2007   28/02/2015  CHF 47.58 
       
       7,103   2005   01/03/2008   28/02/2015  CHF 47.58 
       
       93   2005   04/03/2007   04/03/2015  CHF 47.89 
       
       161   2005   06/06/2007   06/06/2015  CHF 45.97 
       
       149   2005   09/09/2007   09/09/2015  CHF 50.47 
       
       127   2005   05/12/2007   05/12/2015  CHF 59.03 
       
       7,106   2006   01/03/2007   28/02/2016  CHF 65.97 
       
       7,103   2006   01/03/2008   28/02/2016  CHF 65.97 
       
       7,103   2006   01/03/2009   28/02/2016  CHF 65.97 
       
       110   2006   03/03/2008   03/03/2016  CHF 65.91 
       
       242   2006   09/06/2008   09/06/2016  CHF 61.84 
       
       230   2006   08/09/2008   08/09/2016  CHF 65.76 
       
       221   2006   08/12/2008   08/12/2016  CHF 67.63 
       
       7,105   2007   01/03/2008   28/02/2017  CHF 67.00 
       
       7,105   2007   01/03/2009   28/02/2017  CHF 67.00 
       
       7,103   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 
       
       90,000   2009   01/03/2012   27/02/2019  CHF 11.35 
 
2009  205,470   809   2002   31/01/2003   31/01/2012  CHF 36.49 
       
       784   2002   31/01/2004   31/01/2012  CHF 36.49 
       
       784   2002   31/01/2005   31/01/2012  CHF 36.49 
       
       4,972   2004   01/03/2007   27/02/2014  CHF 44.32 
       
       7,106   2005   01/03/2006   28/02/2015  CHF 47.58 
       
       7,103   2005   01/03/2007   28/02/2015  CHF 47.58 
       
       7,103   2005   01/03/2008   28/02/2015  CHF 47.58 
       
       93   2005   04/03/2007   04/03/2015  CHF 47.89 
       
       161   2005   06/06/2007   06/06/2015  CHF 45.97 
       
       149   2005   09/09/2007   09/09/2015  CHF 50.47 
       
       127   2005   05/12/2007   05/12/2015  CHF 59.03 
       
       7,106   2006   01/03/2007   28/02/2016  CHF 65.97 
       
       7,103   2006   01/03/2008   28/02/2016  CHF 65.97 
       
       7,103   2006   01/03/2009   28/02/2016  CHF 65.97 
       
       110   2006   03/03/2008   03/03/2016  CHF 65.91 
       
       242   2006   09/06/2008   09/06/2016  CHF 61.84 
       
       230   2006   08/09/2008   08/09/2016  CHF 65.76 
       
       221   2006   08/12/2008   08/12/2016  CHF 67.63 
       
       7,105   2007   01/03/2008   28/02/2017  CHF 67.00 
       
       7,105   2007   01/03/2009   28/02/2017  CHF 67.00 
       
       7,103   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 
       
       90,000   2009   01/03/2012   27/02/2019  CHF 11.35 

1 This table includes options held by GEB members, including related parties.  2 No conversion rights are outstanding.  3 Refer to “Note 31 Equity participation and other compensation plans” in the “Financial information” section of this report for more information.


249

  Advisory vote
Corporate governance and compensation
Compensation and shareholdings
                           
(Audited) Vested and unvested options held by independent members of the BoD and 
 by members of the GEB on 31 December 2008/2009 
 Type Number of options  Year of grant  Vesting date  Expiry date  Subscription ratio  Strike price 
   
  i  11,577   2002   31.01.2002   31.01.2012   1:1  USD 21.24 
   
  ii  8,679   2002   31.01.2002   31.07.2012   1:1  USD 21.24 
   
  iii  33,616   2002   31.01.2003   31.01.2012   1:1  CHF 36.49 
   
  iv  32,619   2002   31.01.2004   31.01.2012   1:1  CHF 36.49 
   
  v  11,229   2002   31.01.2004   31.01.2012   1:1  USD 21.24 
   
  vi  8,421   2002   31.01.2004   31.07.2012   1:1  USD 21.24 
   
  vii  314,469   2002   31.01.2005   31.01.2012   1:1  CHF 36.49 
   
  viii  87,607   2002   31.01.2005   31.01.2012   1:1  USD 21.24 
   
  ix  8,421   2002   31.01.2005   31.07.2012   1:1  USD 21.24 
   
  x  2,252   2002   28.02.2002   28.02.2012   1:1  USD 21.70 
   
  xi  8,823   2002   28.02.2002   28.08.2012   1:1  USD 21.70 
   
  xii  6,694   2002   28.02.2003   28.02.2012   1:1  CHF 36.65 
   
  xiii  10,758   2002   28.02.2004   28.02.2012   1:1  CHF 36.65 
   
  xiv  10,708   2002   29.02.2004   28.02.2012   1:1  USD 21.70 
   
  xv  8,563   2002   29.02.2004   28.08.2012   1:1  USD 21.70 
   
  xvi  6,491   2002   28.02.2005   28.02.2012   1:1  CHF 36.65 
   
  xvii  2,184   2002   28.02.2005   28.02.2012   1:1  USD 21.70 
   
  xviii  8,561   2002   28.02.2005   28.08.2012   1:1  USD 21.70 
   
  xix  394,309   2002   28.06.2005   28.06.2012   1:1  CHF 37.90 
   
  xx  31,971   2002   28.06.2005   28.12.2012   1:1  CHF 37.90 
   
  xxi  33,611   2003   01.03.2004   31.01.2013   1:1  CHF 27.81 
   
  xxii  8,648   2003   01.03.2004   31.01.2013   1:1  USD 20.49 
   
  xxiii  33,600   2003   01.03.2005   31.01.2013   1:1  CHF 27.81 
   
  xxiv  8,642   2003   01.03.2005   31.01.2013   1:1  USD 20.49 
   
  xxv  415,623   2003   31.01.2006   31.01.2013   1:1  USD 22.53 
   
  xxvi  33,586   2003   01.03.2006   31.01.2013   1:1  CHF 27.81 
   
  xxvii  8,635   2003   01.03.2006   31.01.2013   1:1  USD 20.49 
   
  xxviii  7,359   2003   01.03.2004   28.02.2013   1:1  CHF 26.39 
   
  xxix  7,354   2003   01.03.2005   28.02.2013   1:1  CHF 26.39 
   
  xxx  7,354   2003   01.03.2006   28.02.2013   1:1  CHF 26.39 
   
  xxxi  213,140   2003   31.01.2006   31.01.2013   1:1  CHF 30.50 
   
  xxxii  31,971   2003   31.01.2006   31.07.2013   1:1  CHF 30.50 
   
  xxxiii  42,628   2003   31.01.2006   31.07.2013   1:1  USD 22.53 
   
  xxxiv  4,262   2003   28.02.2005   28.02.2013   1:1  USD 19.53 
   
  xxxv  3,374   2003   01.03.2004   28.02.2013   1:1  USD 19.53 
   
  xxxvi  3,371   2003   01.03.2005   28.02.2013   1:1  USD 19.53 
   
  xxxvii  3,371   2003   01.03.2006   28.02.2013   1:1  USD 19.53 
   
  xxxviii  58,796   2004   01.03.2005   27.02.2014   1:1  CHF 44.32 
   
  xxxix  4,262   2004   27.02.2006   27.02.2014   1:1  CHF 44.32 
   
  xl  58,790   2004   01.03.2006   27.02.2014   1:1  CHF 44.32 
   
  xli  532,850   2004   28.02.2007   27.02.2014   1:1  CHF 48.69 
   
  xlii  63,751   2004   01.03.2007   27.02.2014   1:1  CHF 44.32 
   
  xliii  436,937   2004   01.03.2007   27.02.2014   1:1  USD 38.13 
   
  xliv  31,975   2005   01.03.2006   28.02.2015   1:1  CHF 47.58 
   
  xlv  31,970   2005   01.03.2007   28.02.2015   1:1  CHF 47.58 
   
  xlvi  85,246   2005   01.03.2008   28.02.2015   1:1  CHF 47.58 
   
  xlvii  837,477   2005   01.03.2008   28.02.2015   1:1  CHF 52.32 
   
  xlviii  383,652   2005   01.03.2008   28.02.2015   1:1  USD 44.81 
   
  xlix  2,223   2005   04.03.2007   04.03.2015   1:1  CHF 47.89 
   
  l  161   2005   06.06.2007   06.06.2015   1:1  CHF 45.97 
   
  li  149   2005   09.09.2007   09.09.2015   1:1  CHF 50.47 
   
           
(Audited) Loans granted to GEB members on 31 December 2009 / 2010 
 CHF, except where indicateda 
 Name, function1 For the year ended  Loans2
  
 
Jürg Zeltner, CEO UBS Wealth Management, co-CEO Wealth Management & Swiss Bank3
  2010   5,739,862 
   
  
Jürg Zeltner, CEO UBS Wealth Management, co-CEO Wealth Management & Swiss Bank3
  2009   5,800,202 
   
  Aggregate of all GEB members  2010   20,696,569 
    
     2009   15,356,483 
   
  
1 No loans have been granted to related parties of the GEB members at conditions not customary in the market.  2 All loans granted are secured loans.  3 GEB member with the highest loan granted.
           
(Audited) Loans granted to BoD members on 31 December 2009 / 2010 
 CHF, except where indicateda 
 Name, function1 For the year ended  Loans2
  
 Kaspar Villiger, Chairman  2010   0 
    
     2009   0 
   
  Michel Demaré, Vice Chairman  2010   850,000 
    
     2009   850,000 
   
  David Sidwell, Senior Independent Director  2010   0 
    
     2009   0 
   
  
Sergio Marchionne, former Senior Independent Director, former Vice Chairman3
  2010   – 
    
     2009   0 
   
  Sally Bott, member  2010   0 
    
     2009   0 
   
  Rainer-Marc Frey, member  2010   0 
    
     2009   0 
   
  
Bruno Gehrig, member4
  2010   798,000 
    
     2009   798,000 
   
  Ann F. Godbehere, member  2010   0 
    
     2009   0 
   
  Axel P. Lehmann, member  2010   0 
    
     2009   0 
   
  Wolfgang Mayrhuber, member  2010   0 
    
     2009   0 
   
  Helmut Panke, member  2010   0 
    
     2009   0 
   
  
William G. Parrett, member4
  2010   0 
    
     2009   1,260,731 
   
  
Peter R. Voser, member3
  2010   – 
    
     2009   0 
   
  Aggregate of all BoD members  2010   1,648,000 
    
     2009   2,908,731 
   
  
1 No loans have been granted to related parties of BoD members at conditions not customary in the market.  2 All loans granted are secured loans.  3 BoD members who stepped down at the 2010 AGM.  4 Secured loans granted prior to their election to the BoD.

236

Corporate governance and compensation
                           
(Audited) Vested and unvested options held by independent members of the BoD and 
 by members of the GEB on 31 December 2008/2009 (continued) 
 Type Number of options  Year of grant  Vesting date  Expiry date  Subscription ratio  Strike price 
   
  lii  127   2005   05.12.2007   05.12.2015   1:1  CHF 59.03 
   
  liii  69,276   2006   01.03.2007   28.02.2016   1:1  CHF 65.97 
   
  liv  69,269   2006   01.03.2008   28.02.2016   1:1  CHF 65.97 
   
  lv  69,261   2006   01.03.2009   28.02.2016   1:1  CHF 65.97 
   
  lvi  1,376,036   2006   01.03.2009   28.02.2016   1:1  CHF 72.57 
   
  lvii  110   2006   03.03.2008   03.03.2016   1:1  CHF 65.91 
   
  lviii  242   2006   09.06.2008   09.06.2016   1:1  CHF 61.84 
   
  lix  230   2006   08.09.2008   08.09.2016   1:1  CHF 65.76 
   
  lx  221   2006   08.12.2008   08.12.2016   1:1  CHF 67.63 
   
  lxi  33,748   2007   01.03.2008   28.02.2017   1:1  CHF 67.00 
   
  lxii  33,747   2007   01.03.2009   28.02.2017   1:1  CHF 67.00 
   
  lxiii  33,743   2007   01.03.2010   28.02.2017   1:1  CHF 67.00 
   
  lxiv  1,415,142   2007   01.03.2010   28.02.2017   1:1  CHF 73.67 
   
  lxv  223   2007   02.03.2009   02.03.2017   1:1  CHF 67.08 
   
  lxvi  95,913   2008   01.03.2011   28.02.2018   1:1  CHF 32.45 
   
  lxvii  662,415   2008   01.03.2011   28.02.2018   1:1  CHF 35.66 
   
  lxviii  745,990   2008   01.03.2011   07.04.2018   1:1  CHF 36.46 
   
  lxix  7,420   2008   01.03.2011   06.06.2018   1:1  CHF 28.10 
   
  lxx  4,000,000   2009   26.02.2009   25.02.2014   1:1  CHF 10.10 
   
  lxxi  905,000   2009   01.03.2012   27.12.2019   1:1  CHF 40.00 
   
  lxxii  540,000   2009   01.03.2012   27.02.2019   1:1  CHF 11.35 
   
   
   
                           
(Audited) Total of all blocked and unblocked shares held by independent members of the BoD1
   Total  Of which unblocked  Of which blocked until
        
         2010  2011  2012  2013 
   
  
Shares held on 31 December 2009
  420,059   123,053   6,232   13,352   35,737   241,685 
   
                           
   
             2009   2102   2011   2012 
   
  
Shares held on 31 December 2008
  307,378   177,027   12,126   13,592   30,193   74,440 
   
  1 Includes related parties.

No individual BoD member holds 1% or more of all shares issued.

                               
(Audited) Total of all vested and unvested shares held by the non-independent members of the BoD 
 and members of the GEB1
   Total  Of which vested  Of which vesting 
          2010  2011  2012  2013  2014 
   
  
Shares held on 31 December 2009
  3,760,095   1,971,557   1,078,664   397,046   222,601   90,227   0 
   
    Total  Of which vested  Of which vesting
           
             2009   2010   2011   2012   2013 
   
  
Shares held on 31 December 2008
  5,562,574   2,955,211   1,058,881   595,638   461,376   319,776   171,692 
   
  1 Includes related parties.

No individual BoD or GEB member holds 1% or more of all shares issued.

237

Advisory vote
Corporate governance and compensation
Compensation and shareholdings

Group Executive Board

Replacement of forfeited awards for former employer compensation

Oswald J. Grübel and Robert J. McCann joined UBS during 2009. Oswald J. Grübel voluntarily waived his deferred PIP awards from Credit Suisse upon joining UBS in order to avoid any possible conflicts of interest in his new role. The HRCC decided to grant new awards of a similar value at the time in recognition of his commitment to UBS. In order to partly reflect the highly leveraged Credit Suisse PIP units, he received 4 million UBS stock appreciation rights, with a strike price of CHF 10.10 and fair value of CHF 13,120,000 at grant date of 26 February 2009.
Robert J. McCann was granted 602,481 shares with a grant date fair market value of USD 10 million. In line with market practice, the award for Robert J. McCann was granted as a replacement for compensation and benefits forfeited from his previous employment, as a result of joining UBS.

Transactions in 2009

In accordance with applicable rules and regulations, management transactions in UBS shares by members of the BoD and the GEB are publicly disclosed. Transactions which require reporting are those involving all types of financial instruments whose price is primarily influenced by UBS shares.

As the SIX Swiss Exchange repatriated the share trading of the SWX Europe from London to Zurich as of 4 May 2009, the Swiss reporting regime for management transactions became

applicable, while up to that date the EU requirements (paragraph 15a of the German Securities Trading Act) regarding the reporting of management transactions, were applicable.

From 1 January to 3 May 2009, no share purchases or sales were reported by either BoD or GEB members or closely associated persons.
From 4 May until 31 December 2009, two share purchases were disclosed with a total value of CHF 401,219 as well as one share sale with a total value of CHF 1,200,800. Individuals’ names and transactions made by persons closely associated with the BoD or GEB are not required to be disclosed anymore under the Swiss reporting regime.
UBS executives generally receive a substantial portion of their compensation in UBS equity-based awards. For this reason, management transactions generally see sales outweighing purchases. Blackout periods and synchronized dates for unblocking or vesting of shares or options granted as compensation may lead to transactions being concentrated in short time periods.
In addition, three members of the BoD chose to receive their full remuneration in UBS shares. These shares, representing a value of CHF 1,929,753, will be allocated in March 2010.

Loans

The members of the BoD and GEB are granted loans, fixed advances and mortgages at arm’s length market terms.

èRefer to “Note 32 Related parties” in the “Financial information” section of this report for information concerning loans granted to current and former executives



238

Corporate governance and compensation
Corporate governance and compensation
Total Reward Principles

(UBS KEYS)

Total Reward Principles

(ABSTRACT)
The Total Reward Principles summarize the compensation structure for all UBS employees. While they reflect recent regulatory developments, they also focus on long-standing drivers including reward for performance, sustainable profitability, strong management of risk and capital, understanding client focus and teamwork, and sound governance. They also build on the UBS strategy of enhancing reputation, integration and execution. These Principles have been reviewed by the Group Executive Board and by the Board of Directors’ Human Resources and Compensation Committee and were approved by the UBS Board of Directors on 28 September 2009.

Overview

Reward is a key driver of behavior, motivation and culture, and can materially impact both reputation and financial results.

Within UBS our reward structure is aligned with our strategic priorities which bind the interests of employees with those of our shareholders. Employees are encouraged to identify and create sustainable value and profitability, and to build a strong client franchise both for their business and for UBS as a whole.

At UBS we reward behavior that helps to build and protect the firm’s reputation by focusing on sound risk and management practices. We believe in strong integration and excellence of execution, within an environment where all employees are able to achieve the highest standards of performance.

All UBS employees will be rewarded on the basis of their individual and team performance, and that of their business division, within the context of UBS as a whole and the markets in which we operate. UBS’s reward structure aims to:

Align reward with sustainable performance by encouraging a culture of integration and collaboration, a sense of engagement and long-term alignment with clients and shareholders, and quality execution of their orders.

Support appropriate and controlled risk taking consistent with UBS’s risk tolerance thereby protecting our capital, investors and reputation, and enhancing the quality of our financial results.

Foster effective individual performance management and communication by rigorously evaluating performance and ensuring the appropriate use of reward.

Attract and engage a diverse, talented workforce by providing attractive career opportunities underpinned by reward that is competitive in the market.

Align reward with sustainable performance

Within the context of UBS as a whole and the markets in which we operate, the sustainable performance of an employee’s business division is a key component of reward.

In considering UBS and business division performance, a range of factors will be taken into account including risk, capital usage, and market positioning. Assessment will focus on both current key performance indicators and the long-term actions that preserve and improve UBS’s ability to deliver future value.

Reward funding is not purely formulaic; discretion and judgment will be applied to ensure all relevant factors including market conditions are taken into account.

–Business division reward recommendations are determined in consultation between the UBS Group CEO and the CEO(s) of each division as advised by the Group CFO, Group Head HR and, where appropriate, Group Risk.
–Proposals recommended by the Group CEO are reviewed by the independent Human Resources and Compensation Committee of the Board of Directors.
–Final approval is provided by the UBS Board of Directors.
–The UBS Group CEO and Board of Directors take into account the Group and business division financial results as well as the views of shareholders and other stakeholders.



239

  Advisory vote
Corporate governance and compensation
Total Rewards Principles

Support appropriate and controlled risk taking

Reward will be consistent with UBS’s risk framework and tolerance.

Performance reviews recognize the different risk profile and nature of each business including additional factors such as the quality and time horizon of earnings, the nature of the relevant industry segment, and competitive trends.
–Employees are rewarded for achievement against a range of financial and non-financial objectives and not only on the basis of individual revenues.
–Extraordinary profits, as well as losses, are examined in the context of the track record of an employee’s performance, risk management and market conditions.
–Measurement of performance will be adjusted for activities and future risks that are not adequately reflected in annual profits.
–Reward for risk, compliance and control functions is determined independently from the revenue producers they supervise and support.

Faster effective individual performance management and communication

Rigorous evaluation of individual performance combined with effective communication ensures a link between achievement of business objectives and reward across UBS.

Beyond contribution to business results and achievement of individual performance objectives, rewards will also take into account:
–observing UBS’s corporate values and principles;
–implementing UBS’s strategy of enhancing reputation, integration and execution;
–demonstrating leadership of our clients, business, people and change;
–leading or supporting effective collaboration and teamwork;
–operating with strong integrity and complying with UBS policies;
–actively managing risk and professional behavior; and
–finding the appropriate balance between risk and reward.

Attract and engage a diverse, talented workforce

The UBS reward structure is designed to provide talented employees with reward that is appropriately balanced between fixed and variable elements, competitive in the market, and paid out over an appropriate period.

In general, total compensation comprises an annual base salary, reflecting the individual’s role, skills and knowledge, local market-based benefits and, where applicable, a discretionary incentive award.
–Base salary levels should be sufficient to allow a flexible discretionary incentive policy.
–Discretionary annual incentives can be highly variable from year to year particularly for senior revenue producers and more highly paid employees.

Discretionary incentive awards may be split between immediate cash and long-term awards that can be granted in the form of either deferred UBS equity or deferred cash.
–The proportion of deferred incentive generally increases with total compensation in order to maintain focus on long-term profitability of the firm and continued responsible behavior.
–Deferred awards generally vest over at least three years.
–Deferred awards are subject to forfeiture under certain circumstances, including if an employee’s conduct or judgment results in material financial loss or restatement of results, breach of risk or compliance policies, or significant harm to the firm’s business or reputation.

Stock options and/or stock appreciation rights may be awarded as part of total reward, to recognize the potential of key employees who are expected to drive the achievement of our strategic objectives.

Other reward programs may also be considered to further support the needs of our diverse global business, subject to considerations such as cost, risk and prevailing market and regulatory requirements. As such:
–For senior leaders, our reward focus is founded on sustainable long-term profitability that may require the application of multi-year performance conditions to recognize outstanding performance.
–Guaranteed incentive awards are used only exceptionally and are generally limited to one-year duration.



This document provides a summary only and may be supplemented by more detailed global or local policies. At UBS we are committed to full and proper disclosure of our remuneration policies, of which these Principles form a part, and we provide an annual advisory vote to shareholders at our AGM.

UBS AG
P.O. Box
CH-8098 Zurich

www.ubs.com

250

Financial
information

 

 

 

 

 

 

 

 

 

 

 

 

Financial information

Table of contents

     
244 Introduction and accounting principles
245 Critical accounting policies
     
249 Consolidated financial statements
     
249 Management’s report on internal control
over financial reporting
250 Report of independent registered public accounting
firm on internal control over financial reporting
252 Report of the statutory auditor and the independent
registered public accounting firm on the consolidated
financial statements
255 Income statement
256 Statement of comprehensive income
257 Balance sheet
258 Statement of changes in equity
261 Statement of cash flows
     
263 Notes to the consolidated financial statements
263
 1 Summary of significant accounting policies
283
 2a Segment reporting
287
 2b Segment reporting by geographic location
     
288 Income statement notes
288
 3 Net interest and trading income
289
 4 Net fee and commission income
290
 5 Other income
290
 6 Personnel expenses
290
 7 General and administrative expenses
291
 8 Earnings per share (EPS) and shares outstanding
     
292 Balance sheet notes: assets
292
 9a Due from banks and loans (held at amortized cost)
293
 9b Allowances and provisions for credit losses
293
 10 Cash collateral on securities borrowed and lent,
repurchase and reverse repurchase agreements
294
 11 Trading portfolio
295
 12 Financial assets designated at fair value
296
 13 Financial investments available-for-sale
296
 14 Investments in associates
297
 15 Property and equipment
298
 16 Goodwill and intangible assets
300
 17 Other assets
254Introduction and accounting principles
255Critical accounting policies
259Consolidated financial statements


       
 259  Management’s report on internal control over financial reporting
 260  Report of independent registered public accounting firm on internal control over financial reporting
 262  Report of the statutory auditor and the independent registered public accounting firm on the consolidated financial statements
 265  Income statement
 266  Statement of comprehensive income
 267  Balance sheet
 268  Statement of changes in equity
 271  Statement of cash flows
       
 273  Notes to the consolidated financial statements
 273  1 
Summary of significant accounting policies
 293  2a 
Segment reporting
 297  2b 
Segment reporting by geographic location
       
 298  Income statement notes
 298  3 
Net interest and trading income
 299  4 
Net fee and commission income
 300  5 
Other income
 300  6 
Personnel expenses
 300  7 
General and administrative expenses
 301  8 
Earnings per share (EPS) and shares outstanding
       
 302  Balance sheet notes: assets
 302  9a 
Due from banks and loans (held at amortized cost)
 303  9b 
Allowances and provisions for credit losses
 303  10 
Cash collateral on securities borrowed and lent, reverse repurchase and repurchase agreements, and derivative instruments
 304  11 
Trading portfolio
 306  12 
Financial assets designated at fair value
 307  13 
Financial investments available-for-sale
 308  14 
Investments in associates
 308  15 
Property and equipment
 309  16 
Goodwill and intangible assets
 311  17 
Other assets
     
301 Balance sheet notes: liabilities
301
 18 Due to banks and customers
301
 19 Financial liabilities designated at fair value and debt issued
303
 20 Other liabilities
303
 21 Provisions and litigation
307
 22 Income taxes
309
 23 Derivative instruments and hedge accounting
     
316 Off-balance-sheet information
316
 24 Pledgeable off-balance-sheet securities
316
 25 Operating lease commitments
     
318 Additional information
318
 26 Capital increases and mandatory convertible notes
318
 27 Fair value of financial instruments
330
 28 Pledged assets and transferred financial assets
which do not qualify for derecognition
331
 29 Measurement categories of financial assets
and financial liabilities
335
 30 Pension and other post-employment benefit plans
341
 31 Equity participation and other compensation plans
347
 32 Related parties
350
 33 Events after the reporting period
350
 34 Significant subsidiaries and associates
354
 35 Invested assets and net new money
355
 36 Business combinations
358
 37 Discontinued operations
360
 38 Reorganizations and disposals
361
 39 Currency translation rates
362
 40 Swiss banking law requirements
363
 41 Supplemental guarantor information required
under SEC rules
       
 312  Balance sheet notes: liabilities
 312  18 
Due to banks and customers
 312  19 
Financial liabilities designated at fair value and debt issued
 314  20 
Other liabilities
 314  21 
Provisions and contingent liabilities
 320  22 
Income taxes
 322  23 
Derivative instruments and hedge accounting
       
 329  Off-balance-sheet information
 329  24 
Pledgeable off-balance-sheet securities
 329  25 
Operating lease commitments
       
 330  Additional information
 330  26 
Capital increase and mandatory convertible notes
 330  27 
Fair value of financial instruments
 340  28 
Pledged assets and transferred financial assets which do not qualify for derecognition
 341  29 
Measurement categories of financial assets and financial liabilities
 345  30 
Pension and other post-employment benefit plans
 351  31 
Equity participation and other compensation plans
 359  32 
Related parties
 362  33 
Events after the reporting period
 362  34 
Significant subsidiaries and associates
 365  35 
Invested assets and net new money
 366  36 
Business combinations
 367  37 
Discontinued operations
 367  38 
Reorganizations and disposals
 368  39 
Currency translation rates
 368  40 
Swiss banking law requirements
 370  41 
Supplemental guarantor information required under SEC rules


242252

Financial information

   
371
379 UBS AG (Parent Bank)
   
371
379 Parent Bank review
   
372
380 Parent Bank financial statements
372
380 Income statement
373
381 Balance sheet
373
382 Statement of appropriation of retained earnings
   
374
383 Notes to the Parent Bank financial statements
374
383 Accounting policies
   
376
385 Additional income statement information
376
385 Net trading income
376
385 Extraordinary income and expenses
   
377
386 Additional balance sheet information
377
386 Allowances and provisions
377
Statement of shareholders’ equity
378
Share capital
379
Off-balance-sheet and other information
379
 Assets pledged or assigned as security for own
obligations and assets subject to reservation of title
379
386Allowances and provisions
387Statement of shareholders’ equity
387Share capital and significant shareholders
388Shareholders registered in the UBS shares register with 3% or more of shares issued
388Other assets
388Other liabilities
389Off-balance-sheet and other information
389 Commitments and contingent liabilities
379
389 Derivative instruments
380
389 Fiduciary transactions
380
390 Due to UBS pension plans
380
390 Transactions with related parties
380
390 Outsourcing
380
390Dispensations in statutory financial statements
390 Personnel
380
Significant shareholders
   
381
391 Corporate governance and compensation report
381
391Total compensation for all GEB members
392Share and option ownership of GEB members
393 Compensation details and additional information for
executive non-independent BoD members of the BoD
382
393 Remuneration details and additional information for
independent BoD members of the BoD
383
394 Total payments to all BoD members of the BoD
383
394 Total compensation for all members of the GEB
384
 Share and option ownershipholdings of BoD members of the BoD
385
395 Compensation paid to former members of the BoD and GEB members
386
396 Share and option ownership of members of the GEB
390
 Vested and unvested options held by independentGEB members
of the BoD and by members of the GEB
392
399 Loans granted to GEB members of the BoD
392
399 Loans granted to BoD members of the GEB
   
393
400 Report of the statutory auditor on the financial statements
395
402 Confirmations of the auditors concerning conditional
capital increase
   
399
405 Additional disclosure required under SEC regulations
   
399
405 A – Introduction
   
400
406 B – Selected financial data
401
407 Key figures
402
408 Income statement data
403
409 Balance sheet data
403
409 Ratio of earnings to fixed charges
   
404
410 C – Information on the company
404
410 Property, plant and equipment
   
405
411 D – Information required by industry guide 3
405
411 Selected statistical information
405
411 Average balances and interest rates
407
413 Analysis of changes in interest income and expense
409
415 Deposits
410
416 Short-term borrowings
410
416 Contractual maturities of investments in debt investments
instruments available-for-sale
411
417 Due from banks and loans (gross)
412
418 Due from banks and loan maturities (gross)
413
419 Impaired and non-performing loans
414
420 Cross-border outstandings
415
421 Summary of movements in allowances and provisions
for credit losses
416
422 Allocation of the allowances and provisions for credit losses
417
423 Due from banks and loans by industry sector (gross)
418
424 Loss history statistics


243253

Financial information

Introduction and accounting principles

The financial information section of UBS’s Annual Report 20092010 comprises: a) the critical accounting policies applied when preparing the consolidated financial statements of UBS Group, b) the audited consolidated financial statements of UBS Group (the “Financial Statements”) for 2010, 2009 and 2008, and 2007, prepared according toin accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), c) the audited financial statements of UBS AG, the Parent Bank, for 20092010 and 2008,2009, prepared in order to meet Swiss regulatory requirements and in compliance with Swiss Federal Banking Law, and d) additional disclosures required under SEC regulations.

The basis of accounting of UBS’s Group financial statements is described in Note 1 to the financial statements. Except where otherwise explicitly stated, all financial data are in Swiss francs (CHF), all financial information is presented on a consolidated basis under IFRS, and all references to “UBS” refer to the UBS Group and not to the Parent Bank. UBS AG, the Swiss Parent Bank, includes branches worldwide and owns all the UBS companies, directly or indirectly. All references to 2010, 2009 2008 and 20072008 refer to the UBS Group and the Parent Bank’s fiscal years ended 31 December 2010, 2009 2008 and 2007,2008, respectively. The financial statements for the UBS Group and the Parent Bank have been audited by Ernst & Young Ltd.



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Critical accounting policies

Basis of preparation and selection of policies

UBS prepares its Financial Statements in accordance with IFRS as issued by the International Accounting Standards Board. The application of certain of these accounting principles requires considerable judgment based upon estimates and assumptions that involve significant uncertainty at the time they are made. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Changes in assumptions may have a significant impact on the Financial Statements in the periods where assumptions are changed. Accounting policies that are deemed critical to UBS’s results and financial position, in terms of materiality of the items to which the policy is applied, and which involve significant assumptions and estimates, are discussed in this section. A broader and more detailed description of the accounting policies that UBS employs is shown in Note 1 to the Financial Statements.

The application of assumptions and estimates means that any selection of different assumptions would cause the reported results to differ. UBS believes that the assumptions it has made are appropriate, and that UBS’s Financial Statements therefore present the financial position and results fairly in all material respects. The alternative outcomes discussed below are presented solely to assist the reader in understanding UBS’s Financial Statements, andStatements. They are not intended to suggest that other assumptions would be more appropriate.
Many of the judgments that UBS makes when applying accounting principles depend on an assumption, which UBS believes to be correct, that UBS maintains sufficient liquidity to hold positions or investments until a particular trading strategy matures, – i.e. that UBS does not need to realize positions at unfavorable prices in order to fund immediate cash needs. Liquidity is discussed in more detail in the “Liquidity and funding management” section of this report.

Fair value of financial instruments

The fair values of financial instruments where no active market exists or where quoted prices are not otherwise available are determined by using valuation techniques. In these cases, the fair values are estimated fromusing observable data in respect of similar financial instruments or usingas well as models. Where market observable inputs are not available, inputs are estimated based on appropriate assumptions. Where valuation techniques or models are used to determine fair values, they are periodically reviewed and validated by qualified person-

nelpersonnel independent of those thatwho sourced them. Models are calibrated to ensure that outputs reflect actual data and comparative market prices. To the extent practical,Where practicable, models use only observable data; however, areas such as default rates, volatilities and correlations require management to make estimates.

The valuation techniques or models employed may not fully reflect all of the factors relevant to the positions UBS holds. Valuations are therefore adjusted, where appropriate, to allow for additional factors including model risks,risk, liquidity risk and credit risk. UBS uses different approaches to calculate the credit risk, depending on the classification of a financial instrument at fair value. A credit valuation adjustment (CVA) approach based on an expected exposure profile is used to adjust the fair value ofPositive replacement values to reflect counterparty credit risk if deemed necessary. Correspondingly, a debit valuation adjustment (DVA) approach is applied to incorporate the own credit risk in the fair value of uncollateralizedNegative replacement values.values. The own credit risk forFinancial liabilities designated at fair valueis calculated using UBS’s senior debtthe funds transfer price (FTP) curve.

As of 31 December 2009,2010, financial assets and financial liabilities for which valuation techniques or models are used and whose inputs are observable (level 2) amounted to CHF 487496 billion and CHF 505 billion, respectively.each. Financial assets and financial liabilities whose valuations include significant unobservable inputs (level 3) amounted to CHF 3825 billion and CHF 28 billion, respectively.each.
Changes in assumptions for input factors would affect the reported fair value of financial instruments. If management had used reasonably possible alternative assumptions for UBS’s level 3 instruments accounted for at fair value through profit or loss, the fair value of these assetscash instruments would have been up to CHF 4.10.6 billion higher or lower andon 31 December 2010. Similarly, the fair value of these liabilitiesderivative instruments would have been up to CHF 3.31.2 billion higher or lower than the amounts recognized on UBS’s balance sheet aton 31 December 2009.2010. Favorable valuation changes for assets would be offset to a significant degree by unfavorable changes in liabilities and vice versa, as a consistent use of different assumptions and estimates would prevent a simultaneous favorable or unfavorable valuation change of assets and liabilities.
The valuation of financial instruments is described in detail in Note 27.

Goodwill impairment test

Goodwill allocated to the Investment Bank on 31 December 2010 amounted to CHF 3.0 billion, to Wealth Management Americas CHF 3.3 billion, to Wealth Management CHF 1.4 billion and to Global Asset Management CHF 1.4 billion.

The situation inrecoverable amount is determined using a discounted cash flow model, which uses inputs that consider features of the financial markets made it necessary during 2009banking business and its regulatory environment. The recoverable amount is calculated by estimating streams of earnings available to monitor closely whether there was indicationshareholders over the next five years, discounted to their present values. The terminal value reflecting all periods beyond the fifth year is calculated on the basis of the forecast of



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thatfifth-year profit, the cost of equity and the long-term growth rate. For the 2010 test, the discount rates and long-term growth rates used to calculate the present values of the cash generating units remained unchanged. The recoverable amount of a segment is the sum of discounted earnings available to shareholders from the first five individually forecast years and the terminal value.

The carrying amount for each segment is determined by reference to the Equity Attribution framework. Within this framework, which is described in the Treasury management section of this report, management attributes equity to the businesses after considering their risk exposure, asset size, goodwill allocated to itsand intangible assets. Until the end of 2009, the carrying amount for each segment was determined by a roll-forward of the historic carrying amount. The change in methodology for determining the carrying amount of the cash-generating units from the roll-forward approach to the Equity Attribution framework was impaired. At 31 December 2009, equity attributable to UBS shareholders stood at CHF 41 billion. UBS’s market capitalization, excludingmade in 2010 as the shares to be issued upon conversionprinciples underlying the Equity Attribution framework were approved by the Board of Directors during the year. Moreover, the framework became embedded in the Bank for purposes of measuring the performance of each of its businesses. This new methodology is aligned with the 2010 business planning process, the inputs from which are used in calculating the recoverable amounts of the MCNs, amountedrespective cash-generating units.
The same impairment test model is applied to CHF 57 billion at 31 December 2009. all segments carrying goodwill. The model used to determine the recoverable amount is most sensitive to changes in the forecast earnings available to shareholders in years one to five, the cost of equity and to changes in the long-term growth rate. The applied long-term growth rate is based on real growth rates and expected inflation. Earnings available to shareholders are estimated based on forecast results, which take into account business initiatives and planned capital investments. Valuation parameters used within the Group’s impairment test model are linked to external market information, where applicable.
On the basis of the impairment testing methodology described in Note 16 and Note 1a) 20), UBS concluded that the year-end 20092010 balances of goodwill allocated to all its segments remain recoverable. Goodwill allocated to
In addition, a stress test was performed employing the Investment Bank at 31 December 2009 amounted to CHF 3.3 billion (CHF 4.3 billion at 31 December 2008), to Wealth Management Americas CHF 3.7 billion (CHF 3.8 billion at 31 December 2008), to Wealth Management & Swiss Bank CHF 1.5 billion (CHF 1.5 billion at 31 December 2008) and to Global Asset Management CHF 1.6 billion (CHF 2.0 billion at 31 December 2008).
In its review of the year-end 2009 goodwill balance, UBS specifically considered the performance outlook of its Investment Bank and Wealth Management Americas divisions and the underlying business operations to resolve whether the recoverable amounts for these units cover their carrying amounts. Based on the estimatedsame discounted cash flows these units are expected to generate from their businesses, discounted back to their present value using a discount rate that reflects the risk profiles of the underlying activities, UBS concluded that goodwill allocated to the Investment Bank and Wealth Management Americas remained recoverable on 31 December 2009.flow model. The conclusion was reached on the basis of the forecast results included in the latest 5 year business plan. The forecasts areearnings used were based on an expectation thateconomic stress scenario. The stressed values exceeded the economic environment will gradually improve over the next three years and reach an average growth level thereafter. The fair value obtained from the model calculation was subject to a stress test by decreasing forecast cash flows by one-third and at the same time increasing the discount rate by 3.5 percentage points. The stresscarrying values covered the book value of all business divisions, including the Investment Bank and Wealth Management Americas. However, if the regulatory pressure on the banking industry intensifies and conditions in the financial markets further deteriorate and turn out to be worse than anticipated in UBS’s performance forecasts, the goodwill carried in these business divisions may need to bebecome impaired in future periods.
The same model is applied to all segments carrying goodwill. It is most sensitive to changes in the forecast earnings available to shareholders in years one to five, to the cost of equity and to changes in the long-term growth rate. The applied long-term growth rate is based on actual growth rates and expected inflation. Both applied growth rates and discount rates are disclosed by cash-generating units in Note 16. Earnings available to shareholders are estimated based on forecast results, business initiatives and planned capital investments and returns to shareholders. Valuation parameters used within the Group’s impairment test model are linked to external market information, where applicable.quarters.

Management believes that reasonable changes in key assumptions used to determine the recoverable amounts of all segments will not result in an impairment situation.

Impairment of loans and receivables measured at amortized cost

Loan impairment allowances represent management’s best estimate of losses incurred in the lending portfolio at the balance

sheet date. The lendingloan portfolio, which is measured at amortized cost less impairment, is comprisedconsists of financial assets presented on the balance sheet line itemsDue from banks and Loans, including reclassified securities. In addition, irrevocable loan commitments are also tested for impairment as described below.

Credit loss expense is recognized if there is objective evidence that the Group will be unable to collect all amounts due according to the original contractual terms or the equivalent value. A financial asset or group of financial assets is impaired only if a loss event occurred after the initial recognition of the financial asset(s), but not later than at the balance sheet date (“incurred loss model”). Management is required to exercise judgment in making assumptions and estimations when calculating impairment losses both on a counterparty-specific level and collectively.
The impairment loss is the difference between the carrying value of the financial asset and the estimated recoverable amount. The estimated recoverable amount is the present value, using the loan’s original effective interest rate (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 for measuring any impairment loss is the current EIR. An allowance for credit losses is reported as a reduction of the carrying value of the financial asset on the balance sheet.
Reclassified and acquired securities:UBS periodically revises its estimated cash flows associated with the portfolio of reclassified securities backed by multiple assets. Adverse revisions in cash flow estimates related to credit events are recognized in profit or loss as credit loss expenses. IncreasesFor reclassified securities, increases in estimated future cash receipts as a result of increased recoverability are recognized as an adjustment to the effective interest rateEIR on the loan from the date of change.
AtOn 31 December 2009,2010, UBS’s gross lendingloan portfolio was CHF 356264 billion; the related allowances amounted to CHF 2.71.1 billion. Impairment charges presented as net credit loss expense were CHF 1.8 billion66 million in 2009,2010, of which CHF 1.0 billion172 million related to reclassified financial assets. Refer to Note 9b for details.securities (reclassified and acquired).
UBS’s policy on allowances and provisions for credit losses is described in Note 1a) 11).

Reclassification of financial assets

The International Accounting Standards Board published an amendment to International Accounting Standard 39 (IAS 39Financial Instruments: Recognition and Measurement)on 13



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October 2008, under which eligible financial assets, subject to certain conditions being met, may be reclassified out of the“Held for trading”category if the firm has the intent and ability to hold them for the foreseeable future or until maturity.

In 2008 and first quarter 2009, financial assets with a fair value on their reclassification dates of CHF 26 billion and CHF 0.6 billion, respectively, were reclassified out of“Trading portfolio assets”to “Loans and receivables”.
In 2009, the reclassified financial assets generated interest and other income of CHF 1.6 billion, which was partially offset by an impairment charge of CHF 1.0 billion recognized as credit loss expense. Had these financial assets not been reclassified, a trading gain of CHF 4.7 billion would have been recognized instead. Refer to Note 29b for details.

Consolidation of Special Purpose Entities

UBS sponsors the formation of Special Purpose Entities (SPEs) primarilyand interacts with non-sponsored SPEs for a variety of reasons, including to allow clients to hold investments in separate legal entities,obtain or be exposed to allow clientsspecific risk and reward profiles, to jointly invest in alternative assets, for asset securitization transactions and for buyingbe provided funding or sellingto sell or purchase credit protection.risk. In accordance with IFRS, UBS does not consolidate SPEs that it does not control. In order to determine whether UBS controls an SPE or not UBS has to make judgments about risks and rewards and assess the ability to make operational decisions for the SPE in question. In many instances, elements are present that, considered in isolation, indicate control or lack of control over an SPE, but when considered together make it difficult to reach a clear conclusion. When assessing whether UBS has to consolidatecontrols an SPE, it evaluates a range of factors, including whether (a) the activities of the SPE are being conducted on UBS’s behalf according to its specific business needs so that UBS obtains the benefits from the SPE’s operations, or (b) UBS has decision-making powers to obtain the majority of the benefits of the activities of the SPE, or UBS has delegated these decision-making



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powers by setting up an autopilot mechanism, or (c) UBS has the rights to obtain the majority of the benefits of the activities of an SPE and therefore may be exposed to risks arising from the activities of the SPE, or (d) UBS retains the majority of the residual or ownership risks related to the SPE or its assets in order to obtain the benefits from its activities. UBS consolidatesIn many instances, elements are present that, considered in isolation, indicate control or lack of control over an SPE, if its assessmentbut when considered together require a significant degree of judgment to reach a conclusion. The exposure to volatility in profits and the relevant factors indicates that UBS controlsabsorption of risks and rewards, as well as the SPE.

SPEs usedability to allow clients to hold investmentsare structures that allow one or more clients to invest in an asset or set of assets, which are generally purchased bymake operational decisions for the SPE in question are generally the open market and not transferred from UBS. The risks and rewards of the assets held by the SPE reside with the clients. Typically, UBS will receive service and commission fees for creation of the SPE, or because it acts as investment manager, custodian orfactors to which most weight is given in some other function. Many of these SPEs are single-investor or family trusts while

others allowreaching a broad number of investors to invest in a diversified asset base through a single share or certificate. These latter SPEs range from mutual funds to trusts investing in real estate. The majority of UBS’s SPEs are created for client investment purposes and are not consolidated. However, UBS consolidates investment funds in certain cases where it provides financial support to a fund. In these instances UBS generally assumes the majority or a significant portion of the risks of the fund, which, combined with UBS’s role as investment manager, makes it the party that can exercise control over the entity.

SPEs used to allow clients to jointly invest in alternative assets,e.g. feeder funds, for which generally no active markets exist, are often in the form of limited partnerships. Investors are the limited partners and contribute all or the majority of the capital, whereas UBS serves as the general partner. In that capacity, UBS is the investment manager and has sole discretion over investment and other administrative decisions, but has no or only a nominal amount of capital invested. UBS typically receives service and commission fees for UBS’s services as general partner but does not, or only to a minor extent, participates in the risks and rewards of the vehicle, which reside with the limited partners. In most instances, limited partnerships are not consolidated under IFRS because UBS’s legal and contractual rights and obligations indicate that UBS does not have the power to govern the financial and operating policies of these entities and concurrently does not have the objective of obtaining benefits from its activities through such power.
SPEs used for securitizationare created when UBS has assets (for example, a portfolio of loans) which it sells to an SPE, and the SPE in turn sells interests in the assets as securities to investors. Consolidation of these SPEs depends mainly on whether UBS retains the majority of the benefits or risks of the assets in the SPE.
UBS does not consolidate SPEs for securitization if it has no control over the assets and no longer retains any significant exposure (for gain or loss) to the income or investment returns on the assets sold to the SPE or the proceeds of their liquidation. This type of SPE is a bankruptcy-remote entity – if UBS were to go bankrupt, the holders of the securities would clearly be owners of the asset, while if the SPE were to go bankrupt, the securities holders would have no recourse to UBS.
SPEs for credit protectionare set up to allow UBS to sell the credit risk on portfolios, which may or may not be held by UBS, to investors. They exist primarily to allow UBS to have a single counterparty (the SPE), which sells credit protection to it. The SPE in turn has investors who provide it with capital and participate in the risks and rewards of the credit events that it insures. UBS generally consolidates SPEs used for credit protection.
conclusion.
UBS’s policy on consolidation of SPEs is further described in Note 1a) 3).



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Equity compensation

UBS recognizes shares, performance shares, options and share-settled stock appreciation rights (SARs) awarded to employees as compensation expenseexpenses based on their fair value at grant date. The performance shares, options and SARs that UBS issues to its employees have features that make them incomparable to options and SARs onnot directly comparable with UBS’s shares traded in active markets. Accordingly, UBS cannot determine the fair value by reference to a quoted market price, but UBS ratherinstead estimates itfair value by using ansuitable option valuation model.models. The model, a Monte Carlo simulation, requiresmodels require inputs such as interest rates, expected dividends, share price volatility measures and specifichistorical employee exercise behavior patterns based on statistical data.

Some of the model inputs UBS uses are not market observable and have to be estimated or derived from available data. Use of different estimates would produce different option and SAR values,valuations, which in turn would result in higher or lower compensation expense being recognized.
Several recognized valuation models exist, but none can be singled out as the best or most correct. The modelmodels UBS applies hashave been selected because it isthey are able to handle some of the specific features included in the options and SARsvarious instruments granted to UBS’s employees. If UBS waswere to use a different model,models, the option and SAR values produced would be different,differ, even if it used the same inputs.
Using both different inputs and a different valuation model could have a significant impact on the fair value of employee options and SARs, which could be either higher or lower than the values produced by the model UBS applies and the inputs it haswere used.
Further information on UBS equity compensation plans is disclosed in Note 1a) 24) and Note 31 to the Financial Statements.

Deferred taxes

Deferred tax assets arise from a variety of sources, the most significant being: a) tax losses that can be carried forward to be utilized against profits in future years; and b) expenses recognized in UBS’s income statement but disallowed in the tax returnthat are not deductible until the associated cash flow occurs.flows occur.

UBS records a valuation allowance to reduce its deferred tax assets to the amount which can be recognized in line with the relevant accounting standards. The level of deferred tax asset recognition is influenced by management’s assessment of UBS’s futurefu-

ture profitability having regard to relevant business plan forecasts. At each balance sheet date, existing assessments are reviewed and, if necessary, revised to reflect changed circumstances. In a situation where recent losses have been incurred, the relevant accounting standards require convincing evidence that there will be sufficient future profitability.

At 31 December 2009, the recognized deferred tax assets amounted to CHF 8.9 billion, which included an amount of CHF 8.2 billion in respect of tax losses (mainly in Switzerland and the US) that can be utilized to offset taxable income in future years.
Swiss tax losses can be carried forward for seven years, and US federal tax losses for twenty years.20 years and UK and Jersey tax losses for an unlimited period. The deferred tax assets recognized aton 31 December 20092010 have been based on future profitability assumptions over athe five-year time horizon, as adjusted to take into account the recognition criteria of IAS 12. The level of deferred tax assets recognized may, however, need to be adjusted in the future in the event of changes toin those profitability assumptions. On 31 December 2010, the recognized deferred tax assets amounted to CHF 9.5 billion, which included an amount of CHF 8.9 billion in respect of tax losses (mainly in Switzerland and the US) that can be utilized to offset taxable income in future years. Refer to Note 22 for further details.
UBS’s policy on deferred taxes is further described in more detail in Note 1a) 21).

Hedge accounting

The Group uses derivative instruments as part of its asset and liability management activities to manage exposures particularly to interest rate and foreign currency risks, including exposures arising from forecast transactions. If derivative and non-derivative instruments meet certain criteria, they are designated as fair value hedges, cash flow hedges or net investment hedges. The designation of derivatives as hedging instruments is at the discretion of UBS.

At the time a financial instrument is designated as a hedge, the Group formally documents the relationship between the hedging instrument(s) and hedged item(s), including the risk management objectives and strategy in undertaking the hedge transaction 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 of the hedged items.
Changes in the fair value of derivatives that qualify as fair value hedges are recorded in the income statement along with the change in the fair value of the hedged item attributable to the hedged risk. The effective portion of changes in the fair value of derivatives that qualify as cash flow hedges is recognized in equity and transferred to profit or loss in the same periods in which the hedged cash flows affect profit or loss. Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges.
The Group discontinues hedge accounting when it determines that a hedging instrument is not, or has ceased to be, highly effective as a hedge; when the derivative expires or is sold, terminated or exercised; when the hedged item matures, is sold or repaid; or



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when a forecast transaction is no longer deemed highly probable. In certain circumstances, the Group may decide to discontinue hedge accounting even though the mentioned criteria for discontinuing are not fulfilled. De-designated hedging derivatives are treated as held for trading from the de-designation date.

Further information on hedge accounting is disclosed in Note 1a) 15) and Note 23.

Provisions

Provisions are recognized when 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 to settle the obligation and the amount can be reliably estimated.

When a provision is recognized, its amount may need to be estimated as the exact amount of the obligation is often unknown. The estimate is based on all available information and reflects the amount that in management’s opinion represents the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. Future events that may affect the amount required to settle the obligation are reflected in the amount provided, whenever there is sufficient objective evidence that such future events will occur. UBS revises existing provisions up or down as soon as it is able to quantify the amounts more accurately. Management is required to exercise judgment in making assumptions and estimations when calculating provisions.
Provisions are classified in Note 21 into the following categories: operational risks, litigation, restructuring and other. Operational risks includes provisions resulting from security risks and transaction processing risks. Litigation includes provisions for claims related to legal, liability and compliance risks. Other includes reinstatement costs for leasehold improvement, provisions for onerous lease contracts, provisions for employee benefits and other items.

    Further details of UBS’s policy on provisions are contained in Note 1a) 26).

Pension and other post-employment benefit plans

The defined benefit obligation at the end of the year and the net periodic pension cost for the year depend on the expected future benefit promises that are determined using a number of economic and demographic assumptions. The economic assumptions include the discount rate, the expected salary increase, the expected return on plan assets as well as the rate of pension increase.

The discount rate is determined by reference to rates of return on high-quality fixed-income investments of appropriate term at the measurement date. For the Swiss pension plan, this assumption decreased to 2.8% in 2010 compared with 3.3% in 2009 and reflects the decline in the Swiss franc interest rate observed in the market.
The assumption for salary increases reflects the long-term expectations for salary growth and takes into account inflation, seniority, promotion and other relevant factors such as supply and demand in the labor market. For the Swiss pension plan, the assumption for 2010 remained stable in comparison with 2009.
The expected return on plan assets is the long-term average return that is expected on the pension assets. This assumption takes into account the expected returns for each asset class, e.g. equities, debt instruments and real estate. For the Swiss pension plan, the assumption for 2010 was 4.3% compared with 4.5% in 2009.
The assumption for pension increases reflects the long-term expectations of pension increases. For the Swiss pension plan, this assumption decreased to 0.3% in 2010 compared with 0.5% in 2009.
More information on Pension and other post-employment benefit plans (including the assumptions for the international pension plans) is given in Note 30 and Note 1a) 23).



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Financial information
Consolidated financial statements

Consolidated financial statements

Management’s report on internal control
over financial reporting

The Board of Directors and management of UBS AG (UBS) are responsible for establishing and maintaining adequate internal control over financial reporting. UBS’s internal control over financial reporting is designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board.

UBS’s internal control over financial reporting includes those policies and procedures that:
– Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets;
– Provide reasonable assurance that transactions are recorded as necessary to permit preparation and fair presentation of financial statements, and that receipts and expenditures of the company are being made only in accordance with authorizations of UBS management; and
– Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

UBS management assessed the effectiveness of UBS’s internal control over financial reporting as of 31 December 2010 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management believes that, as of 31 December 2010, UBS’s internal control over financial reporting was effective.
The effectiveness of UBS’s internal control over financial reporting as of 31 December 2010 has been audited by Ernst & Young Ltd, UBS’s independent registered public accounting firm, as stated in their report appearing on pages 260 to 261, which expressed an unqualified opinion on the effectiveness of UBS’s internal control over financial reporting as of 31 December 2010.



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Consolidated financial statements

(ERNST & YOUNG LOGO)




Ernst & Young Ltd
Aeschengraben 9
CH-4002 Basel
Phone+41 58 286 86 86
Fax+41 58 286 86 00
www.ey.com/ch

To the General Meeting of

UBS AG, Zurich and Basel

Basel, 3 March 2011

Report of independent registered public accounting firm on
internal control over financial reporting

We have audited the internal control over financial reporting of UBS AG and its subsidiaries as of 31 December 2010, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). UBS AG’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in Management’s Report on Internal Control Over Financial Reporting on page 259. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

(MEMBER OF THE SWISS INSTITUTE OF CERTIFIED ACCOUNTANTS AND TAX CONSULTANTS GRAPHIC)

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Financial information

(ERNST & YOUNG LOGO)
2

In our opinion, UBS management assessed the effectiveness of UBS’sAG and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as of 31 December 20092010, based on the COSO criteria.

We also have audited, in accordance with Swiss law, Swiss Auditing Standards, International Standards on Auditing and the standards of the Public Company Accounting Oversight Board (United States of America), the consolidated balance sheets of UBS AG and its subsidiaries as of 31 December 2010 and 2009, and the related consolidated income statements and consolidated statements of comprehensive income, changes in equity and cash flows for each of the three years in the period ended 31 December 2010 and notes thereto, of UBS AG and our report dated 3 March 2011 expresses an unqualified opinion thereon.
Ernst & Young Ltd
-s- Jonathan Bourne
-s- Dr. Andreas Blumer
Jonathan BourneDr. Andreas Blumer
Licensed Audit ExpertLicensed Audit Expert
(Auditor in Charge)

261

Financial information
Consolidated financial statements

(ERNST & YOUNG LOGO)




Ernst & Young Ltd
Aeschengraben 9
CH-4002 Basel
Phone+41 58 286 86 86
Fax+41 58 286 86 00
www.ey.com/ch

To the General Meeting of

UBS AG, Zurich and Basel

Basel, 3 March 2011

Report of the statutory auditor and the independent registered public accounting firm on the consolidated financial statements

As statutory auditor, we have audited the consolidated financial statements of UBS AG and its subsidiaries which are comprised of the consolidated balance sheets as of 31 December 2010 and 2009, and the related consolidated income statements and consolidated statements of comprehensive income, changes in equity and cash flows, and notes thereto, for each of the three years in the period ended 31 December 2010 on pages 265 to 378.

Board of Directors’ responsibility

The Board of Directors is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board, and the requirements of Swiss law. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances.

Auditor’s responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Swiss law, Swiss Auditing Standards, International Standards on Auditing and the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of the accounting policies used

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Financial information

(ERNST & YOUNG LOGO)
2

and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of UBS AG and its subsidiaries at 31 December 2010 and 2009, and the consolidated results of operations and the cash flows for each of the three years in the period ended 31 December 2010 in accordance with IFRS, as issued by the International Accounting Standards Board, and comply with Swiss law.

Report on other legal and regulatory requirements

We confirm that we meet the Swiss legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence (article 728 Code of Obligations (CO) and article 11 AOA) and that there are no circumstances incompatible with our independence.
In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists, which has been designed for the preparation of consolidated financial statements in accordance with the instructions of the Board of Directors.
In accordance with Swiss law, we recommend that the consolidated financial statements submitted to you be approved.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States of America), the internal control over financial reporting of UBS AG and its subsidiaries as of 31 December 2010, based on criteria set forthestablished inInternal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management believes that, as of 31 December 2009, UBS’s internal control over financial reporting was effective.
The effectiveness of UBS’s internal control over financial reporting as of 31 December 2009 has been audited by Ernst & Young Ltd, UBS’s independent registered public accounting firm, as stated in their, and our report appearing on pages 250 to 251, which expresseddated 3 March 2011 expresses an unqualified opinion on the effectiveness of UBS’sthe Group’s internal control over financial reporting as of 31 December 2009.reporting.
Ernst & Young Ltd
-s- Jonathan Bourne
-s- Dr. Andreas Blumer
Jonathan BourneDr. Andreas Blumer
Licensed Audit ExpertLicensed Audit Expert
(Auditor in Charge)


249

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Consolidated financial statements

(LETTER)

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()

251

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Consolidated financial statements


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()

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Financial information

Financial information
Consolidated financial statements

Income statement

                      
Income statement 
   For the year ended % change from     For the year ended % change from 
CHF million, except per share data Note 31.12.09 31.12.08 31.12.07 31.12.08  Note 31.12.10 31.12.09 31.12.08 31.12.09 
  
Continuing operations
  
Interest income 3  23,461 65,679 109,112  (64) 3 18,872 23,461 65,679  (20)
Interest expense 3  (17,016)  (59,687)  (103,775)  (71) 3  (12,657)  (17,016)  (59,687) 26 
Net interest income 3  6,446 5,992 5,337 8  3 6,215 6,446 5,992  (4)
Credit loss (expense)/recovery  (1,832)  (2,996)  (238)  (39)
Credit loss (expense) / recovery  (66)  (1,832)  (2,996) 96 
Net interest income after credit loss expense  4,614 2,996 5,099 54  6,149 4,614 2,996 33 
Net fee and commission income 4  17,712 22,929 30,634  (23) 4 17,160 17,712 22,929  (3)
Net trading income 3  (324)  (25,820)  (8,353) 99  3 7,471  (324)  (25,820) 
Other income 5  599 692 4,341  (13) 5 1,214 599 692 103 
Total operating income  22,601 796 31,721  31,994 22,601 796 42 
Personnel expenses 6  16,543 16,262 25,515 2  6 16,920 16,543 16,262 2 
General and administrative expenses 7  6,248 10,498 8,429  (40) 7 6,585 6,248 10,498 5 
Depreciation of property and equipment 15  1,048 1,241 1,243  (16) 15 918 1,048 1,241  (12)
Impairment of goodwill 16, 38  1,123 341 0 229  16 0 1,123 341  (100)
Amortization of intangible assets 200 213 276  (6) 16 117 200 213  (42)
Total operating expenses  25,162 28,555 35,463  (12) 24,539 25,162 28,555  (2)
Operating profit from continuing operations before tax  (2,561)  (27,758)  (3,742) 91  7,455  (2,561)  (27,758) 
Tax expense 22  (443)  (6,837) 1,369 94 
Tax expense / (benefit) 22  (381)  (443)  (6,837) 14 
Net profit from continuing operations  (2,118)  (20,922)  (5,111) 90  7,836  (2,118)  (20,922) 
  
Discontinued operations
  
Profit from discontinued operations before tax 37  (7) 198 145  37 2  (7) 198 
Tax expense 22  0 1  (258)  (100) 22 0 0 1 
Net profit from discontinued operations  (7) 198 403  2  (7) 198 
  
Net profit  (2,125)  (20,724)  (4,708) 90  7,838  (2,125)  (20,724) 
Net profit attributable to minority interests 610 568 539 7 
Net profit attributable to non-controlling interests 304 610 568  (50)
from continuing operations  600 520 539 15  303 600 520  (50)
from discontinued operations  10 48 0  (79) 1 10 48  (90)
Net profit attributable to UBS shareholders
  (2,736)  (21,292)  (5,247) 87  7,534  (2,736)  (21,292) 
from continuing operations  (2,719)  (21,442)  (5,650) 87  7,533  (2,719)  (21,442) 
from discontinued operations  (17) 150 403  1  (17) 150 
  
Earnings per share (CHF)
  
Basic earnings per share 8  (0.75)  (7.63)  (2.40) 90  8 1.99  (0.75)  (7.63) 
from continuing operations  (0.74)  (7.68)  (2.59) 90  1.99  (0.74)  (7.68) 
from discontinued operations  0.00 0.05 0.18  (100) 0.00 0.00 0.05 
Diluted earnings per share 8  (0.75)  (7.63)  (2.41) 90  8 1.96  (0.75)  (7.63) 
from continuing operations  (0.74)  (7.69)  (2.59) 90  1.96  (0.74)  (7.69) 
from discontinued operations  0.00 0.05 0.18  (100) 0.00 0.00 0.05 

255265

Financial information
Consolidated financial statements

Statement of comprehensive income

                       
Statement of comprehensive income 
 For the year ended  For the year ended 
CHF million 31.12.09 31.12.08 31.12.07  31.12.10 31.12.09 31.12.08 
Net profit
  (2,125)  (20,724)  (4,708) 7,838  (2,125)  (20,724)
  
Other comprehensive income
  
Foreign currency translation
  
Foreign currency translation movements, before tax  (35)  (4,509)  (1,405)  (2,044)  (35)  (4,509)
Foreign exchange amounts reclassified to the income statement from equity  (259) 202 108  237  (259) 202 
Income tax relating to foreign currency translation movements  22  (17) 39  121 22  (17)
Subtotal foreign currency translation movements, net of tax  (272)  (4,324)  (1,258)  (1,686)1  (272)  (4,324)
Financial investments available-for-sale
  
Net unrealized gains/(losses) on financial investments available-for-sale, before tax  157  (903) 1,578 
Net unrealized gains / (losses) on financial investments available-for-sale, before tax  (499) 157  (903)
Impairment charges reclassified to the income statement from equity  70 47 14  72 70 47 
Realized gains reclassified to the income statement from equity  (147)  (645)  (3,423)  (357)  (147)  (645)
Realized losses reclassified to the income statement from equity  1 6 7  153 1 6 
Income tax relating to net unrealized gains/(losses) on financial investments available-for-sale  (54) 341 421 
Income tax relating to net unrealized gains / (losses) on financial investments available-for-sale 13  (54) 341 
Subtotal net unrealized gains/(losses) on financial investments available-for-sale, net of tax  27  (1,154)  (1,403)
Subtotal net unrealized gains / (losses) on financial investments available-for-sale, net of tax  (618)1 27  (1,154)
Cash flow hedges
  
Effective portion of changes in fair value of derivative instruments designated as cash flow hedges, before tax  78 2,001 369  927 78 2,001 
Net unrealized (gains)/losses reclassified to the income statement from equity  (756) 178 172 
Net realized (gains) / losses reclassified to the income statement from equity  (1,108)  (756) 178 
Income tax effects relating to cash flow hedges  257  (520)  (130) 38 257  (520)
Subtotal changes in fair value of derivative instruments designated as cash flow hedges  (421) 1,659 411   (143)  (421) 1,659 
Total other comprehensive income  (667)  (3,818)  (2,250)  (2,447)  (667)  (3,818)
  
Total comprehensive income
  (2,792)  (24,542)  (6,958) 5,391  (2,792)  (24,542)
Total comprehensive income attributable to minority interests  484  (77) 269 
Total comprehensive income attributable to non-controlling interests  (484) 484  (77)
Total comprehensive income attributable to UBS shareholders
  (3,276)  (24,465)  (7,227) 5,875  (3,276)  (24,465)
1 Other comprehensive income attributable to UBS shareholders related to foreign currency translations is negative CHF 909 million and related to financial investments available-for-sale is negative CHF 607 million.

256266

Financial information

Balance sheet

                               
Balance sheet 
     % change from       % change from 
CHF million Note 31.12.09 31.12.08 31.12.08  Note 31.12.10 31.12.09 31.12.08 31.12.09 
  
Assets
  
Cash and balances with central banks  20,899 32,744  (36) 26,939 20,899 32,744 29 
Due from banks 9  46,574 64,451  (28) 9 17,133 16,804 17,694 2 
Cash collateral on securities borrowed 10  63,507 122,897  (48) 10 62,454 63,507 122,897  (2)
Reverse repurchase agreements ��10  116,689 224,648  (48) 10 142,790 116,689 224,648 22 
Trading portfolio assets 11  188,037 271,838  (31) 11 167,463 188,037 271,838  (11)
Trading portfolio assets pledged as collateral 11  44,221 40,216 10  11 61,352 44,221 40,216 39 
Positive replacement values 23  421,694 854,100  (51) 23 401,146 421,694 854,100  (5)
Cash collateral receivables on derivative instruments 10 38,071 53,774 85,703  (29)
Financial assets designated at fair value 12  10,223 12,882  (21) 12 8,504 10,223 12,882  (17)
Loans 9  306,828 340,308  (10) 9 262,877 266,477 291,456  (1)
Financial investments available-for-sale 13  81,757 5,248  13 74,768 81,757 5,248  (9)
Accrued income and prepaid expenses  5,816 6,141  (5) 5,466 5,816 6,141  (6)
Investments in associates 14  870 892  (2) 14 790 870 892  (9)
Property and equipment 15  6,212 6,706  (7) 15 5,467 6,212 6,706  (12)
Goodwill and intangible assets 16  11,008 12,935  (15) 16 9,822 11,008 12,935  (11)
Deferred tax assets 22  8,868 8,880 0  22 9,522 8,868 8,880 7 
Other assets 17  7,336 9,931  (26) 17 22,681 23,682 19,837  (4)
Total assets
  1,340,538 2,014,815  (33) 1,317,247 1,340,538 2,014,815  (2)
  
Liabilities
  
Due to banks 18  65,166 125,628  (48) 18 41,490 31,922 76,822 30 
Cash collateral on securities lent 10  7,995 14,063  (43) 10 6,651 7,995 14,063  (17)
Repurchase agreements 10  64,175 102,561  (37) 10 74,796 64,175 102,561 17 
Trading portfolio liabilities 11  47,469 62,431  (24) 11 54,975 47,469 62,431 16 
Negative replacement values 23  409,943 851,864  (52) 23 393,762 409,943 851,864  (4)
Cash collateral payables on derivative instruments 10 58,924 66,097 92,937  (11)
Financial liabilities designated at fair value 19  112,653 101,546 11  19 100,756 112,653 101,546  (11)
Due to customers 18  410,475 465,741  (12) 18 332,301 339,263 362,639  (2)
Accrued expenses and deferred income  8,689 10,196  (15) 7,738 8,689 10,196  (11)
Debt issued 19  131,352 197,254  (33) 19 130,271 131,352 197,254  (1)
Other liabilities 20, 21, 22  33,986 42,998  (21) 20, 21, 22 63,719 72,344 101,969  (12)
Total liabilities
  1,291,905 1,974,282  (35) 1,265,384 1,291,905 1,974,282  (2)
  
Equity
  
Share capital  356 293 22  383 356 293 8 
Share premium  34,786 25,250 38  34,393 34,824 25,288  (1)
Net income recognized directly in equity, net of tax  (4,875)  (4,335)  (12)
Revaluation reserve from step acquisitions, net of tax  38 38 0 
Cumulative net income recognized directly in equity, net of tax  (6,534)  (4,875)  (4,335)  (34)
Retained earnings  11,751 14,487  (19) 19,285 11,751 14,487 64 
Equity classified as obligation to purchase own shares  (2)  (46) 96   (54)  (2)  (46) 
Treasury shares  (1,040)  (3,156) 67   (654)  (1,040)  (3,156) 37 
Equity attributable to UBS shareholders
  41,013 32,531 26  46,820 41,013 32,531 14 
Equity attributable to minority interests  7,620 8,002  (5)
Equity attributable to non-controlling interests 5,043 7,620 8,002  (34)
Total equity
  48,633 40,533 20  51,863 48,633 40,533 7 
Total liabilities and equity
  1,340,538 2,014,815  (33) 1,317,247 1,340,538 2,014,815  (2)

257267

Financial information
Consolidated financial statements

Statement of changes in equity

                
Statement of changes in equity 
 Equity classified                 
 as obligation  Equity classified 
 Share Share Treasury to purchase  as obligation to 
CHF million capital premium shares own shares  Share capital Share premium Treasury shares purchase own shares 
Balance at 1 January 2007
 211 12,640  (10,214)  (185)
Balance at 1 January 2008
 207 12,471  (10,363)  (74)
Issuance of share capital  86 
Acquisition of treasury shares  (7,169)   (367) 
Disposition of treasury shares 4,605  7,574 
Cancellation of second trading line treasury shares  (4) 2,415 
Net premium/(discount) on treasury share and own equity derivative activity  (560) 
Premium on shares issued and warrants exercised 12 
Employee share and share option plans 898 
Tax benefits from deferred compensation awards  (557) 
Dividends 
Equity classified as obligation to purchase own shares – movements 111 
Preferred securities 
New consolidations and other increases 
Deconsolidations and other decreases 
Total comprehensive income for the year recognized in equity 
Balance at 31 December 2007
 207 12,433  (10,363)  (74)
Issuance of share capital 86 
Acquisition of treasury shares  (367) 
Disposition of treasury shares 7,574 
Net premium/(discount) on treasury share and own equity derivative activity  (4,626) 
Net premium / (discount) on treasury share and own equity derivative activity  (4,626) 
Premium on shares issued and warrants exercised 20,003  20,003 
Employee share and share option plans  (1,961)   (1,961) 
Tax benefits from deferred compensation awards  (176)   (176) 
Transaction costs related to share issuances, net of tax  (423)   (423) 
Dividends  
Equity classified as obligation to purchase own shares – movements 28  28 
Preferred securities  
New consolidations and other increases  
Deconsolidations and other decreases  
Total comprehensive income for the year recognized in equity  
Balance at 31 December 2008
 293 25,250  (3,156)  (46) 293 25,288  (3,156)  (46)
Issuance of share capital 63  63 
Acquisition of treasury shares  (476)   (476) 
Disposition of treasury shares 2,592  2,592 
Net premium/(discount) on treasury share and own equity derivative activity  (1,268) 
Net premium / (discount) on treasury share and own equity derivative activity  (1,268) 
Premium on shares issued and warrants exercised 10,599  10,599 
Employee share and share option plans 291  291 
Tax benefits from deferred compensation awards 1  1 
Transaction costs related to share issuances, net of tax  (87)   (87) 
Dividends1
  
Equity classified as obligation to purchase own shares – movements 44  44 
Preferred securities  
New consolidations and other increases  
Deconsolidations and other decreases  
Total comprehensive income for the year recognized in equity  
Balance at 31 December 2009
 356 34,786  (1,040)  (2) 356 34,824  (1,040)  (2)
Issuance of share capital 27 
Acquisition of treasury shares  (1,574) 
Disposition of treasury shares 1,960 
Net premium / (discount) on treasury share and own equity derivative activity  (43) 
Premium on shares issued and warrants exercised  (27) 
Employee share and share option plans  (104) 
Tax benefits from deferred compensation awards  (8) 
Transaction costs related to share issuances, net of tax  (113) 
Dividends1
 
Equity classified as obligation to purchase own shares – movements  (52)
Preferred securities 
New consolidations and other increases  (136) 
Deconsolidations and other decreases 
Total comprehensive income for the year recognized in equity 
Balance at 31 December 2010
 383 34,393  (654)  (54)
1 Includes dividend payment obligations for preferred securities.

258268

Financial information
                                 
  
          Financial      Revaluation  Total equity       
          investments      reserve  attributable       
  Retained  Foreign currency  available-  Cash flow  from step  to UBS  Minority    
  earnings  translation  for-sale  hedges  acquisitions  shareholders  interests  Total equity 
 
   47,728   (1,614)  2,876   (443)  38   51,037   6,089   57,126 
 
                       0       0 
 
                       (7,169)      (7,169)
 
                       4,605       4,605 
 
   (2,411)                  0       0 
 
                       (560)      (560)
 
                       12       12 
 
                       898       898 
 
                       (557)      (557)
 
   (4,275)                  (4,275)  (400)  (4,675)
 
                       111       111 
 
                       0   996   996 
 
                       0   101   101 
 
                       0   (104)  (104)
 
   (5,247)  (986)  (1,405)  411       (7,227)  269   (6,958)
 
   35,795   (2,600)  1,471   (32)  38   36,875   6,951   43,826 
 
                       86       86 
 
                       (367)      (367)
 
                       7,574       7,574 
 
                       (4,626)      (4,626)
 
                       20,003       20,003 
 
                       (1,961)      (1,961)
 
                       (176)      (176)
 
                       (423)      (423)
 
   (16)                  (16)  (361)  (377)
 
                       28       28 
 
                       0   1,618   1,618 
 
                       0   12   12 
 
                       0   (141)  (141)
 
   (21,292)  (3,709)  (1,124)  1,659       (24,465)  (77)  (24,542)
 
   14,487   (6,309)  347   1,627   38   32,531   8,002   40,533 
 
                       63       63 
 
                       (476)      (476)
 
                       2,592       2,592 
 
                       (1,268)      (1,268)
 
                       10,599       10,599 
 
                       291       291 
 
                       1       1 
 
                       (87)      (87)
 
                       0   (849)  (849)
 
                       44       44 
 
                       0   (7)  (7)
 
                       0   3   3 
 
                       0   (13)  (13)
 
   (2,736)  (136)  17   (421)      (3,276)  484   (2,792)
 
   11,751   (6,445)  364   1,206   38   41,013   7,620   48,633 
 
Financial information

259

                             
  
                  Total equity       
      Foreign currency  Financial investments  Cash flow  attributable to  Non-controlling    
  Retained earnings  translation  available-for-sale  hedges  UBS shareholders  interests  Total equity 
 
   35,795   (2,600)  1,471   (32)  36,875   6,951   43,826 
 
                   86       86 
 
                   (367)      (367)
 
                   7,574       7,574 
 
                   (4,626)      (4,626)
 
                   20,003       20,003 
 
                   (1,961)      (1,961)
 
                   (176)      (176)
 
                   (423)      (423)
 
   (16)              (16)  (361)  (377)
 
                   28       28 
 
                   0   1,618   1,618 
 
                   0   12   12 
 
                   0   (141)  (141)
 
   (21,292)  (3,709)  (1,124)  1,659   (24,465)  (77)  (24,542)
 
   14,487   (6,309)  347   1,627   32,531   8,002   40,533 
 
                   63       63 
 
                   (476)      (476)
 
                   2,592       2,592 
 
                   (1,268)      (1,268)
 
                   10,599       10,599 
 
                   291       291 
 
                   1       1 
 
                   (87)      (87)
 
                   0   (849)  (849)
 
                   44       44 
 
                   0   (7)  (7)
 
                   0   3   3 
 
                   0   (13)  (13)
 
   (2,736)  (136)  17   (421)  (3,276)  484   (2,792)
 
   11,751   (6,445)  364   1,206   41,013   7,620   48,633 
 
                   27       27 
 
                   (1,574)      (1,574)
 
                   1,960       1,960 
 
                   (43)      (43)
 
                   (27)      (27)
 
                   (104)      (104)
 
                   (8)      (8)
 
                   (113)      (113)
 
                   0   (305)  (305)
 
                   (52)      (52)
 
                   0   (1,529)  (1,529)
 
                   (136)  6   (130)
 
                   0   (264)  (264)
 
   7,534   (909)  (607)  (143)  5,875   (484)  5,391 
 
   19,285   (7,354)  (243)  1,063   46,820   5,043   51,863 
 

269

Financial information
Consolidated financial statements

Statement of changes in equity (continued)

           
Statement of changes in equity (continued) 
             
Preferred securities1Preferred securities1 Preferred securities1 
 For the year ended  For the year ended 
CHF million 31.12.09 31.12.08 31.12.07  31.12.10 31.12.09 31.12.08 
Balance at the beginning of the year
  7,381 6,381 5,633  7,254 7,381 6,381 
Issuances 1,618 996  1,618 
Redemptions  (7)   (1,529)  (7) 
Foreign currency translation  (120)  (618)  (248)  (818)  (120)  (618)
Balance at the end of the year
  7,254 7,381 6,381  4,907 7,254 7,381 
1 Represents equity attributable to minoritynon-controlling interests. Increases and offsetting decreases of equity attributable by minorityto non-controlling interests due to dividends are excluded from this table.
                     
                
 For the year ended % change from  For the year ended % change from 
Number of shares 31.12.09 31.12.08 31.12.07 31.12.08  31.12.10 31.12.09 31.12.08 31.12.09 
  
Shares issued
  
Balance at the beginning of the year 2,932,580,549 2,073,547,344 2,105,273,286 41  3,558,112,753 2,932,580,549 2,073,547,344 21 
Issuance of share capital 625,532,204 859,033,205 1,294,058  (27)
Cancellation of second trading line treasury shares  (33,020,000) 
Issuance of shares 272,727,760 625,532,204 859,033,205  (56)
Balance at the end of the year
 3,558,112,753 2,932,580,549 2,073,547,344 21  3,830,840,513 3,558,112,753 2,932,580,549 8 
  
Treasury shares
  
Balance at the beginning of the year 61,903,121 158,105,524 164,475,699  (61) 37,553,872 61,903,121 158,105,524  (39)
Acquisitions 33,566,097 13,398,118 102,074,942 151  105,824,816 33,566,097 13,398,118 215 
Disposals  (57,915,346)  (109,600,521)  (75,425,117) 47   (104,486,657)  (57,915,346)  (109,600,521)  (80)
Cancellation of second trading line treasury shares  (33,020,000) 
Balance at the end of the year
 37,553,872 61,903,121 158,105,524  (39) 38,892,031 37,553,872 61,903,121 4 

Shares issued

On 25 June 2009, UBS increased its share capital by issuing 293,258,050 new registered shares. The shares were placed with a small number of large institutional investors. The shares were issued out of authorized capital which had been approved at5 March 2010, the Annual General Meeting of shareholders (AGM) on 15 April 2009.

On 19 August 2009, the Swiss Confederation announced the conversion of its UBS mandatory convertible notes (MCNs). Upon conversion on 25 August 2009, with a notional value of CHF 13 billion issued in March 2008 to the Government of Singapore Investment Corporation Pte. Ltd. and an investor from the Middle East were converted into UBS shares. The notes were converted at a price of CHF 47.68 per share. As a result, UBS issued 332,225,913272,651,005 new shares with a nominal value of CHF 0.10 each from existing conditional capital.
On 27 February 2008 the extraordinary general meeting of shareholders approved the creation of a maximum of CHF 10,370,000 The MCNs were treated as equity instruments and recognized in authorized capital allowing the distribution of a stock dividend. That resulted in the issuance of 98,698,754 shares.
On 23 April 2008, the AGM of shareholders approved a capital increase that resulted in the issuance of 760,295,181 fully paid registered shares.

All issued shares are fully paid.
For further information on the capital increase and theShare premium. The conversion of the MCNs resulted in 2009, refer a reclassification of CHF 27 million fromShare premiumto “Note 26 Capital increases and mandatory convertible notes” in the financial statements.Share capital.

Conditional share capital

On 31 December 2009, a maximum of 29,3502010, 149,920,712 shares could have been issued against the future exercise of options from former PaineWebber employee option plans and 149,994,296 shares could have been issuedwere available for issue to fund UBS’s employee share option programs. In addition, conditional capital of up to 277,750,000100,000,000 shares was available for the UBS share delivery obligation due to the issuance of the March 2008 mandatory convertible notes (MCNs) and conditional capital of up to 100,000,000 shares is available in connection with the transaction with the Swiss National Bank (SNB). transaction. Furthermore, on 14 April 2010 the Annual General Meeting of UBS AG approved the creation of conditional capital up to a maximum amount of 380,000,000 shares for conversion rights/warrants granted in connection with the issuance of bonds or similar financial instruments. These sharespositions are shown as conditional share capital in the UBS AG (Parent Bank) disclosure.



260270

Financial information

Statement of cash flows

             
Statement of cash flows 
  For the year ended 
CHF million 31.12.09  31.12.08  31.12.07 
 
             
Cash flow from/(used in) operating activities
            
 
Net profit  (2,125)  (20,724)  (4,708)
 
Adjustments to reconcile net profit to cash flow from/(used in) operating activities
            
 
Non-cash items included in net profit and other adjustments:            
 
Depredation of property and equipment  1,048   1,241   1,253 
 
Impairment of goodwill/amortization of intangible assets  1,323   554   282 
 
Credit loss expense/(recovery)  1,832   2,996   238 
 
Share of net profits of associates  (37)  6   (120)
 
Deferred tax expense/(benefit)  (960)  (7,020)  (371)
 
Net loss/(gain) from investing activities  425   (797)  (4,085)
 
Net loss/(gain) from financing activities  8,355   (47,906)  3,779 
 
Net (increase)/decrease in operating assets:            
 
Net due from/to banks  (57,328)  (16,561)  (60,762)
 
Reverse repurchase agreements and cash collateral on securities borrowed  162,822   236,497   173,433 
 
Trading portfolio, net replacement values and financial assets designated at fair value  11,118   350,099   60,729 
 
Loans/due to customers  (23,705)  (183,476)  36,168 
 
Accrued income, prepaid expenses and other assets  2,214   7,512   (2,408)
 
Net increase/(decrease) in operating liabilities:            
 
Repurchase agreements, cash collateral on securities lent  (41,351)  (220,935)  (271,060)
 
Accrued expenses, deferred income and other liabilities  (8,629)  (23,592)  19,217 
 
Income taxes paid  (505)  (887)  (3,663)
 
Net cash flow from/fused in) operating activities
  54,497   77,007   (52,078)
 
             
Cash flow from/(used in) investing activities
            
 
Purchase of subsidiaries and associates  (42)  (1,502)  (2,337)
 
Disposal of subsidiaries and associates  296   1,686   885 
 
Purchase of property and equipment  (854)  (1,217)  (1,910)
 
Disposal of property and equipment  163   69   134 
 
Net (investment in)/divestment of financial investments available-for-sale  (20,127)  (712)  5,981 
 
Net cash flow from/(used in) investing activities
  (20,563)  (1,676)  2,753 
 
             
Cash flow from/(used in) financing activities
            
 
Net money market papers issued/(repaid)  (60,040)  (40,637)  32,672 
 
Net movements in treasury shares and own equity derivative activity  673   623   (2,771)
 
Capital issuance  3,726   23,135   0 
 
Dividends paid  0   0   (4,275)
 
Issuance of long-term debt, including financial liabilities designated at fair value  67,062   103,087   110,874 
 
Repayment of long-term debt, including financial liabilities designated at fair value  (65,024)  (92,894)  (62,407)
 
Increase in minority interests1
  3   1,661   1,094 
 
Dividends paid to/decrease in minority interests  (583)  (532)  (619)
 
Net cash flow from/(used in) financing activities
  (54,183)  (5,557)  74,568 
 
Effects of exchange rate differences  5,529   (39,186)  (12,228)
 
Net increase/(decrease) in cash and cash equivalents
  (14,721)  30,588   13,015 
 
Cash and cash equivalents at the beginning of the year  179,693   149,105   136,090 
 
Cash and cash equivalents at the end of the year
  164,973   179,693   149,105 
 
Cash and cash equivalents comprise:
            
 
Cash and balances with central banks  20,899   32,744   18,793 
 
Money market papers2
  98,432   86,732   77,215 
 
Due from banks with original maturity of less than three months  45,642   60,217   53,097 
 
Total
  164,973   179,693   149,105 
 
             
  For the year ended 
CHF million 31.12.10  31.12.09  31.12.08 
 
             
Cash flow from / (used in) operating activities
            
 
Net profit  7,838   (2,125)  (20,724)
 
Adjustments to reconcile net profit to cash flow from / (used in) operating activities
            
 
Non-cash items included in net profit and other adjustments:            
 
Depreciation of property and equipment  918   1,048   1,241 
 
Impairment of goodwill / amortization of intangible assets  117   1,323   554 
 
Credit loss expense / (recovery)  66   1,832   2,996 
 
Share of net profits of associates  (81)  (37)  6 
 
Deferred tax expense / (benefit)  (605)  (960)  (7,020)
 
Net loss / (gain) from investing activities  (531)  425   (797)
 
Net loss / (gain) from financing activities  1,125   8,355   (47,906)
 
Net (increase) / decrease in operating assets:            
 
Net due from / to banks  9,022   (41,766)  (41,589)
 
Reverse repurchase agreements and cash collateral on securities borrowed  (25,048)  162,822   236,497 
 
Trading portfolio, net replacement values and financial assets designated at fair value  21,212   11,118   350,099 
 
Loans / due to customers  (3,429)  (316)  (156,486)
 
Accrued income, prepaid expenses and other assets  608   (4,208)  31,871 
 
Net increase / (decrease) in operating liabilities:            
 
Repurchase agreements, cash collateral on securities lent  9,277   (41,351)  (220,935)
 
Net cash collateral on derivative instruments  (988)  (11,916)  6,316 
 
Accrued expenses, deferred income and other liabilities  (7,039)  (29,242)  (56,232)
 
Income taxes paid, net of refunds  (498)  (505)  (887)
 
Net cash flow from / (used in) operating activities
  11,963   54,497   77,007 
 
             
Cash flow from / (used in) investing activities
            
 
Purchase of subsidiaries and associates  (75)  (42)  (1,502)
 
Disposal of subsidiaries and associates  307   296   1,686 
 
Purchase of property and equipment  (541)  (854)  (1,217)
 
Disposal of property and equipment  242   163   69 
 
Net (investment in) / divestment of financial investments available-for-sale  (25,631)  (20,127)  (712)
 
Net cash flow from / (used in) investing activities
  (25,698)  (20,563)  (1,676)
 
             
Cash flow from / (used in) financing activities
            
 
Net money market papers issued / (repaid)  4,459   (60,040)  (40,637)
 
Net movements in treasury shares and own equity derivative activity  (1,456)  673   623 
 
Capital issuance  (113)  3,726   23,135 
 
Issuance of long-term debt, including financial liabilities designated at fair value  78,418   67,062   103,087 
 
Repayment of long-term debt, including financial liabilities designated at fair value  (77,497)  (65,024)  (92,894)
 
Increase in non-controlling interests1
  6   3   1,661 
 
Dividends paid to / decrease in non-controlling interests  (2,053)  (583)  (532)
 
Net cash flow from / (used in) financing activities
  1,764   (54,183)  (5,557)
 
Effects of exchange rate differences  (12,181)  5,529   (39,186)
 
Net increase / (decrease) in cash and cash equivalents
  (24,151)  (14,721)  30,588 
 
Cash and cash equivalents at the beginning of the year  164,973   179,693   149,105 
 
Cash and cash equivalents at the end of the year
  140,822   164,973   179,693 
 
Cash and cash equivalents comprise:
            
 
Cash and balances with central banks  26,939   20,899   32,744 
 
Money market papers2
  77,998   98,432   86,732 
 
Due from banks with original maturity of less than three months3
  35,885   45,642   60,217 
 
Total
  140,822   164,973   179,693 
 
1 Includes issuance of preferred securities of CHF 1,617 million and CHF 996 million for the yearsyear ended 31 December 2008 and 31 December 2007, respectively.  2008.  2 Money market papers are included in the balance sheet under “TradingTrading portfolio assets”, “Tradingassets, Trading portfolio assets pledged as collateral”collateral and “FinancialFinancial investments available-for-sale”.available-for-sale. CHF 39,768 million, CHF 57,116 million CHF 19,912 million and CHF 7,88119,912 million were pledged at 31 December 2010, 31 December 2009 and 31 December 2008, and 31 December 2007, respectively.  The previously disclosed amounts of pledged money market papers have been adjusted to include3 Includes positions recognized in the balance sheet under “Trading portfolio assets pledged as collateral”.Due from banks and Cash collateral receivables on derivative instruments.

261271

Financial information
Consolidated financial statements

Statement of cash flows (continued)

             
Statement of cash flows (continued) 
  For the year ended 
CHF million 31.12.09  31.12.08  31.12.07 
 
             
Additional information
            
 
Cash received as interest  23,844   68,232   103,828 
 
Cash paid as interest  19,597   62,284   97,489 
 
Cash received as dividends on equities (incl. associates)  1,090   2,779   5,313 
 
             
Significant non-cash investing and financing activities 
  For the year ended 
CHF million 31.12.09  31.12.08  31.12.07 
 
Deconsolidation of UBS Pactual            
 
Financial investments available -for-sale  14         
 
Property and equipment  31         
 
Goodwill and intangible assets  731         
 
Debt issued  1,393         
 
Deconsolidation of private equity investments            
 
Property and equipment      33   24 
 
Goodwill and intangible assets      22     
 
Acquisition of Caisse Centrale de Réescompte Group (CCR)            
 
Property and equipment      5     
 
Goodwill and intangible assets      405     
 
Debt issued      114     
 
Acquisition of VermogensGroep            
 
Property and equipment      2     
 
Goodwill and intangible assets      173     
 
Acquisition of McDonald Investments branch network            
 
Property and equipment          3 
 
Goodwill and intangible assets          262 
 
Acquisition of Daehan Investment Trust Management Company            
 
Property and equipment          2 
 
Goodwill and intangible assets          224 
 
Minority interests          60 
 
             
  For the year ended 
CHF million 31.12.10  31.12.09  31.12.08 
 
             
Additional information
            
 
Cash received as interest  17,344   23,844   68,232 
 
Cash paid as interest  12,606   19,597   62,284 
 
Cash received as dividends on equities (incl. associates)  1,395   1,090   2,779 
 

262Significant non-cash investing and financing activities

There were no significant items in 2010.

         
  For the year ended 
CHF million 31.12.09  31.12.08 
 
Deconsolidation of UBS Pactual        
 
Financial investments available-for-sale  14     
 
Property and equipment  31     
 
Goodwill and intangible assets  731     
 
Debt issued  1,393     
 
Deconsolidation of private equity investments        
 
Property and equipment      33 
 
Goodwill and intangible assets      22 
 
Acquisition of Caisse Centrale de Réescompte Group (CCR)        
 
Property and equipment      5 
 
Goodwill and intangible assets      405 
 
Debt issued      114 
 
Acquisition of VermogensGroep        
 
Property and equipment      2 
 
Goodwill and intangible assets      173 
 

272

Financial information

Financial information
Notes to the consolidated financial statements

Notes to the consolidated financial statements

Note 1 Summary of significant accounting policies

a) Significant accounting policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

1) Basis of accounting

UBS AG and subsidiaries (“UBS” or the “Group”) provide a broad range of financial services includingincluding: advisory 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 merger was accounted for using the uniting of interests method of accounting.
The consolidated financial statements of UBS (the “Financial Statements”) are prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB), and are stated in Swiss francs (CHF), the currency of Switzerland where UBS AG is incorporated. On 43 March 2010,2011, the Board of Directors approved them for issue.
Disclosures under IFRS 7Financial Instruments:Disclosures about the nature and extent of risks and capital disclosures under IAS 1Presentation of Financial Statementshave been included in the audited parts of the “Risk and treasury management” section. Several IFRS 7 credit risk relatedrisk-related disclosures are provided in Note 29c and several market risk related disclosures are provided in Note 27c.29c.

2) Use of estimates in the preparation of the Financial Statements

In preparing the Financial Statementsfinancial statements in conformity with IFRS, management is required to make estimates and assumptions that affect reported income, expenses, assets, liabilities and disclosure of contingent assets and liabilities. Use of available information and application of judgment are inherent in the formation of estimates. Actual results in the future could differ from such estimates, and the differences may be material to the Financial Statements.

3) Subsidiaries

The Financial Statements comprise those of the parent company (UBS AG) and its subsidiaries, including controlled special purpose entities (SPEs), presented as a single economic entity. UBS controls an entity if it has the power to govern the financial and

operating policiespolicies. This is generally accompanyingaccompanied by a shareholding of more than one-half of the voting rights. Subsidiaries, including special purpose entities,SPEs that are directly or indirectly controlled by the Group, are consolidated from the date on which control is transferred to the Group. Subsidiaries to be divested are consolidated up to the date of disposal (i.e. loss of control).

Equity attributable to non-controlling interests (formerly minority interestsinterests) is presented inon the consolidated balance sheet within equity, separatelyand is separate from equity attributable to UBS shareholders.Net profit attributable to minoritynon-controlling interestsis shown separately in the income statement.

When UBS acquires a subsidiary, the purchase method of accounting is used to account for the acquisition of a subsidiary. The cost of acquisition is measured at the fair value of the consideration given at the date of exchange, together with costs directly attributable to that acquisition. The acquired identifiable assets or liabilities and contingent liabilities are measured at fair value at the date of acquisition. Any excess of the cost of acquisition over the fair value of UBS’s share of the identifiable assets, liabilities and contingent liabilities is recorded as goodwill. If the cost of acquisition is less than the fair value of UBS’s share of identifiable assets, liabilities and contingent liabilities of the business acquired, the difference is recognized immediately in the income statement.
The Group sponsors the formation of entities, which may or may not be directly or indirectly owned subsidiaries, for the purpose of asset securitization transactions and structured debt issuance, andin order to accomplish certain narrow and well defined objectives. These companies may acquire assets directly or indirectly from UBS or its affiliates. Some of these companies are bankruptcy-remote entities whose assets are not available to satisfy the claims of creditors of the Group or any of its subsidiaries. UBS also has employee benefit trusts that are used in connection with share-based payment arrangements and deferred compensation schemes. Such trusts and other special purpose entitiesSPEs are consolidated in the Group’s Financial Statements when the substance of the relationship between the Group and the company indicates that the company is controlled by the Group.
The following circumstances may indicate a relationship in which, in substance, UBS controls and consequently consolidates the SPE:
– the activities of the SPE are being conducted on behalf of UBS according to its specific business needs so that UBS obtains benefits from the SPE’s operations;



263

Financial information
Notes to the consolidated financial statements

– UBS has the decision-making powers to obtain the majority of the benefits of the activities of the SPE or, by setting up an “autopilot” mechanism, UBS has delegated these decision makingdecision-making powers;
– UBS has rights to obtain the majority of the benefits of the SPE and therefore may be exposed to risks incident toassociated with the activities of the SPE; or
– UBS retains the majority of the residual or ownership risks related to the SPE or its assets in order to obtain benefits from its activities.

SPEs that are used to allow clients to hold investmentsare structures that allow one or more clients to invest in specific risk and reward profiles or assets. Typically, UBS will receive service and commission fees for the creation of the SPE, or because UBS acts as investment manager, custodian or in some other function. Some of these SPEs are single-investor or family trusts while others allow a large number of investors to invest in a diversified asset base through a single share, note or certificate. The majority of UBS’s SPEs are created for client investment purposes and are not consolidated. However, UBS consolidates SPEs in certain cases, in which UBS absorbs the majority of the risks and rewards or has unilateral liquidation rights.

SPEs used for securitizationare created when UBS has assets (for example, a portfolio of loans) which it sells to an SPE, and the SPE in turn sells interests in the assets as securities to investors. Consolidation of these SPEs depends mainly on whether UBS retains the majority of the risks and rewards of the assets in the SPE.



273

Financial information
Notes to the consolidated financial statements

Note 1 Summary of significant accounting policies (continued)

UBS does not consolidate SPEs for securitization if it has no control over the assets and if it no longer retains any significant exposure (for gain or loss) to the income or investment returns on the assets sold to the SPE or the proceeds of their liquidation. This type of SPE is known as a bankruptcy-remote entity: if UBS were to go bankrupt, the holders of the securities would clearly be owners of the asset, while if the SPE were to go bankrupt, the securities holders would have no recourse against UBS.

SPEs used for credit protectionare set up to allow UBS to sell and purchase the credit risk on portfolios, which may or may not be held by UBS, to investors. They exist primarily to allow UBS to have a single counterparty (the SPE) to which it sells. The SPE in turn has investors who provide it with capital and also participate in the risks and rewards of the credit events that it insures. UBS generally consolidates SPEs that are used for credit protection when, for instance, UBS receives benefits from funding or has unilateral liquidation rights.
Employee benefit trustsare used in connection with share-based payment arrangements and deferred compensation schemes. Such trusts are consolidated when the substance of the relationship between UBS and the entity indicated that the entity is controlled by UBS.
UBS continuously evaluates whether triggering events require the reconsideration of the consolidation conclusionsdecisions that were made at inception of its involvement with special purpose entities,the SPE. This is especially the case in relation to securitization vehicles and collateralized debt obligations (CDOs). Triggering events generally include items such as restructurings,are usually caused by restructuring, the vesting of potential rights and acquisition or the disposal or expiration of interests. In these circumstances, special purpose entities may or may not be consolidated or deconsolidated depending on how the conditions have changed.
Intercompany transactions, balances and unrealized gains or losses on transactions between the Group companies are eliminated.
Consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances. Intercompany transactions, balances and unrealized gains or losses on transactions between the Group companies are eliminated.
Business combinations completed after 1 January 2010 are accounted for using the acquisition method. As of the acquisition date UBS recognizes the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values. For each business combination, UBS measures the non-controlling interests in the acquiree that are present ownership interests and provide entitlement to a proportionate share of the net assets in the event of liquidation either at fair value or at the proportionate share of the acquiree’s identifiable net assets. All other components of the non-controlling interests are measured at their acquisition-date fair values. The cost of an acquisition is the aggregate of the assets transferred, the liabilities incurred to former owners of the acquiree and the equity instruments issued, measured at acquisition-date fair values. Acquisition-related costs are expensed as incurred.
Any contingent consideration to be transferred by UBS is recognized at fair value at the acquisition date. Subsequent changes

in the fair value of the contingent consideration which is deemed to be an asset or liability will be recognized either in profit or loss. If the contingent consideration is classified as equity, it is not remeasured until it is finally settled within equity.

Goodwill is recognized as a separate asset. It is initially measured at cost, being the 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. If the fair value of the net assets of the subsidiary acquired exceeds the aggregate of the amounts specified above, the difference is recognized in profit or loss on the acquisition date.
The accounting treatment of business combinations completed prior to 1 January 2010 was different in the following aspects:
–Transaction costs directly attributable to the acquisition formed part of the acquisition costs.
–The non-controlling interest was measured as a proportion of the acquiree’s identifiable net assets.
–Contingent consideration was recognized if, and only if, UBS had a present obligation, economic outflow was likely and a reliable estimate was determinable. Subsequent adjustments to the contingent consideration were recognized as part of goodwill.

Assets and liabilities of subsidiaries are classified as “held for sale” if their carrying amount will be recovered principally through a sale transaction rather than through continuing use - -– see partsitems 19) and 28). Major lines of business and subsidiaries that were acquired exclusively withfor the intent forpurpose of resale are presented as discontinued operationsoperations. This information is presented in the statement of comprehensive income infor the period when the sale occurred oroccurred. It may also be presented when it becomes highly probable that a sale will occur within 12 months – see partitem 28).

4) Associates and jointly controlled entities

Investments in associates in which UBS has a significant influence are accounted for under the equity method of accounting. Significant influence is normally evidenced when UBS owns between 20% toand 50% of a company’s voting rights. Investments in associates are initially recorded at cost, and the carrying amount is increased or decreased to recognize the Group’s share of the investee’s net profit or loss (including net profit or loss recognized directly in equity) after the date of acquisition.
Interests in jointly controlled entities, in which UBS and one or more third parties have joint control, are accounted for under the equity method. A jointly controlled entity is subject to a contractual agreement between UBS and one or more third parties, which establishes joint control over its economic activities. Interests in such entities are reflected underInvestments in associateson the balance sheet, and the related disclosures are included in the disclosures for associates. UBS holds certain interests in jointly controlled real estate entities.



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Note 1 Summary of significant accounting policies (continued)

Investments in associates and interests in jointly controlled entities are classified as “held for sale” if their carrying amount will be recovered principally through a sale transaction rather than through continuing use – see partsitems 19) and 28).

5) Recognition and derecognition of financial instruments

UBS recognizes financial instruments on its balance sheet when the Group becomes a party to the contractual provisions of the instrument.
UBS acts as trustee and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions. These assets and the related income are excluded from UBS’s financial statements, as they are not assets of UBS, unless the recognition criteria for the assets are satisfied.

Financial assets

UBS enters into transactions where it transfers financial assets recognized on its balance sheet but retains either all risks and rewards of the transferred financial assets or a portion of them. If all or substantially all risks and rewards are retained, the transferred financial assets are not derecognized from the balance sheet. Transfers of financial assets with retention of all or substantially all risks and rewards include for example, securities lending and repurchase transactions described in this Note under partsitems 13) and 14). They furtheralso include transactions where financial assets are sold to a third party with a concurrent total rate of return swap on the transferred assets to retain all their risks and rewards. These types of transactions are accounted for as secured financing transactions.
In transactions where substantially all of the risks and rewards of ownership of a financial asset are neither retained nor transferred, UBS derecognizes the financial asset if control over the asset is lost. The rights and obligations retained in the transfer are recognized separately as assets and liabilities as appropriate. In transfers where control over the financial asset is retained, the Group continues to recognize the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. Examples of such transactions are transfers of financial assets involving guarantees, writing put options, acquiring call options, or specific types of swaps linked to the performance of the asset.

Financial liabilities

UBS removes a financial liability from its balance sheet when it is extinguished, i.e. when the obligation specified in the contract is discharged, or cancelled or expires. WhereWhen 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 a derecognition of the original liability and recognition of a new liability. The difference in the respective carrying amounts is recognized in profit or loss.
UBS acts as trustee and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefit plans and other institu-



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tions. These assets and income arising therefrom are excluded from UBS’s financial statements, as they are not assets of UBS, provided the recognition criteria are not satisfied.

6) Determination of fair value

The fair value principles applied when determining fair value are considered significant accounting policies. Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm’s length transaction. Details of the determination of fair value of financial instruments, fair value hierarchy, valuation techniques and inputs by products, day 1 profit or loss and other related fair value disclosures are disclosed in Note 27.

7) Trading portfolio assets and liabilities

An acquired non-derivative financial asset or liability is classified at acquisition as held for trading and presented in the trading portfolio if it is (a) acquired or incurred principally for the purpose of selling or repurchasing it in the near term; or (b) part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking.
The trading portfolio includes non-derivative financial instruments (including those with embedded derivatives) and commodities. Financial instruments which are considered derivatives in their entirety are generally presented on the balance sheet asPositive and Negative replacement values(refer to item 15)). UBS’s trading portfolio assets and liabilities (refer to Note 11) include proprietary positions, hedge positions and client business-related positions (provided the recognition criteria mentioned in item 5) are satisfied.
Trading portfolio assets consist of debt instruments (including those in the form of securities, money market paper, traded corporate and bank loans), equity instruments (including those in the form of securities), assets held under unit-linked contracts and precious metals and other commodities owned by the Group (“long” positions). Trading portfolio liabilities consist of obligations to deliver financial instruments such as debt and equity instruments which the Group has sold to third parties but does not own (“short” positions). The trading portfolio includes non-derivative financial instruments (including those with embedded derivatives) and commodities. Financial instruments which are considered derivatives in their entirety are generally presented on the balance sheet asPositive and Negative replacement values,refer to part 15). UBS’s trading portfolio assets and liabilities (refer to Note 11) include proprietary positions, hedge positions and client business-related positions (provided the recognition criteria mentioned in part 5) are satisfied).
The trading portfolio is carried at fair value. Gains and losses realized on disposal or redemption and unrealized gains and losses from changes in the fair value of trading portfolio assets and liabilities are reported asNet trading income.income. Interest and dividend income and expense on trading portfolio assets or liabilities are included inInterest and dividend incomeorInterest and dividend expense.expense
An acquired non-derivative financial asset or liability is classified at acquisition as held for trading and presented in the trading portfolio if it is (a) acquired or incurred principally for the purpose of selling or repurchasing it in the near term; or (b) part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking..
The Group uses settlement date accounting when recording trading financial asset transactions. From the date the purchase transaction is entered into (trade date), UBS recognizes any unrealized profits and losses arising from revaluing that contract to fair value inNet trading income.income. The corresponding receivable or payable is presented on the balance sheet as aPositiveorNegative replacement value.value. When the

transaction is consummated (settlement date), a 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. When the Group becomes party to a sales contract of



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Notes to the consolidated financial statements

Note 1 Summary of significant accounting policies (continued)

a financial asset classified in its trading portfolio, unrealized profits and losses are no longer recognized from the date the sales transaction is entered into (trade date) and it derecognizes the asset on the day of its transfer (settlement date).

Trading portfolio assetstransferred to external parties that do not qualify for derecognition (see partitem 5)) are reclassified on UBS’s balance sheet fromTrading portfolio assetstoTrading portfolio assets pledged as collateral, if the transferee has received the right to sell or repledge them.
Following an amendment to IAS 39 in 2008 (refer to Note 1b and Note 29b), subject to certain conditions being met, financial assets may be reclassified from the“Held for trading”category to the“Loans and receivables”category if the firm has the intent and ability to hold them for the foreseeable future or until maturity. UBS applied this option in fourth quarter 2008 and first quarter 2009 and reclassified several illiquid financial assets (such as purchased asset-backed securities, including mortgage-backed securities (MBS), originated by third parties) to the category “loans and receivables”, as a result of which these instruments to be no longer fair valued through profit or loss but rather accounted for at amortized cost less impairment.

8) Financial assets and Financial liabilities designated at fair value through profit or loss (“Fair Value Option”)

A financial instrument may only be designated at fair value through profit or loss at inception and this designation cannot subsequently be changed. Financial assets (refer to Note 12) and financial liabilities (refer to Note 19) designated at fair value are presented in separate lines on the face of the balance sheet.
The conditions for applying the fair value option are met when
a) they are hybrid instruments which consist of a debt host and an embedded derivative component, or
b) they are items that are part of a portfolio which is risk managed on a fair value basis and reported to senior management on that basis, or
c) the application of the fair value option reduces or eliminates an accounting mismatch that would otherwise arise.
Hybrid instruments which fall under criterion a) above include i) bonds and compound debt liabilities issued, ii) compound debt liabilities – OTC, and iii) hybrid financial assets from reverse repurchase agreements. Bonds and compound debt liabilities issued and OTC generally include embedded derivative components which, for example, refer to an underlying equity price, interest rate, commodities price or index.



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Notes to the consolidated financial statements

UBS has designated most of its issued hybrid debt instruments asFinancial liabilities designated at fair valuethrough profit or loss. These instruments includeare based predominantly on the following categories of underlyings:
– Credit-linked:bonds, notes linked to the performance (coupon and/and / or redemption amount) of single names (such as a company or a country) or a basket of reference entities.
– Equity-linked:bonds, notes that are linked to a single stock, a basket of stocks or an equity index.
– Rates-linked:bonds, notes linked to a reference interest rate, interest rate spread or formula.

Besides hybrid instruments, the fair value option is also applied to certain loans and loan commitments which are substantially hedged with credit derivatives. The application of the fair value option to these instruments reduces an accounting mismatch, as loans would have been otherwise accounted for at amortized cost or as financial investments available-for-sale (refer to partitem 9)), whereas the hedging credit protection is accounted for as a derivative instrument at fair value through profit or loss.

UBS has also applied the fair value option to a hedge fund investment and a structured reverse repurchase agreement which are part of portfolios managed on a fair value basis. Fair value changes related to financial instruments designated at fair value through profit or loss are recognized inNet trading income.income.
Interest income and interest expense on financial assets and liabilitieslia-

bilities designated at fair value through profit or loss are included inInterest income on financial assets designated at fair valueorInterest on financial liabilities designated at fair value.value. Refer to Note 3.

UBS applies the same recognition and derecognition principles to financial instruments designated at fair value as to financial instruments held for trading (refer to partsitems 5) and 7)).

9) Financial investments available-for-sale

Financial investments available-for-saleare non-derivative financial assets that are not classified as held for trading, designated at fair value through profit or loss, or loans and receivables. They are recognized on a settlement date basis.
Financial investments available-for-sale include highly liquid short term debt securities, strategic equity investments, certain investments in real estate funds as well as instruments that, in management’s opinion, may be sold in response to or in anticipation of needs for liquidity or changes in interest rates, foreign exchange rates or equity prices.Financial investments available-for-saleconsist mainly of highly liquid short term debt securities issued by government and government-controlled institutions, generally with residual maturities of less than three months. In addition, certain equity instruments, including private equity investments as well as debt instruments and non-performing loans acquired in the secondary market are classified as financial investments available-for-sale.

Highly liquid debt securities are mainly issued by government and government-controlled institutions.
Financial investments available-for-saleare initially recognized at fair value including direct transaction costs and are subsequently measured at fair value. Unrealized gains or losses are reported inEquity, net of applicable income taxes, until such investments are sold, collected or otherwise disposed of, or until any such investment is determined to be impaired. Unrealized gains or losses before tax are presented separately in Note 13. However, foreign exchange translation gains or losses associated with monetary instruments such as debt securities are recognized inNet trading income,whereas foreign exchange translation gains or losses associated with non-monetary instruments such as equity securities are part of the overall fair value change of the assets and recognized directly inEquity. On disposal of an investment, the accumulated unrealized gain or loss included inEquityis transferred toNet profitfor the period and reported inOther income.income. Gains and losses on disposal are determined using the average cost method and are included in the income statement.
Interest and dividend incomeon financial investments available-for-sale are included inInterest and dividend incomefrom financial investments available-for-sale. available-for-sale.
UBS assesses at each balance sheet date whether there are indicators of impairment of an available-for-sale investment. An available-for-sale investment is impaired when there is objective evidence that as a result of one or more events that occurred after the initial recognition of the investment, the estimated future cash flows of the investment have been affected. For equity investments available-for-sale, a significant or prolonged decline in fair value below itsthe original cost is considered to be objective evidence of impairment. For debt investments available-for-sale, objective evidence of impairment includes, for example, a signifi-



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Note 1 Summary of significant accounting policies (continued)

cant financial difficulty of the issuer or counterparty, default or delinquency in interest or principal payments or probability that the borrower will enter bankruptcy or financial re-organization. If a financial investment available-for-sale is determined to be impaired, the related cumulative net unrealized loss previously recognized inEquityis included inNet profitfor the periodand reported as a deduction fromOther income. To the extent impairments of financial investments available-for-sale are covered by fair value decreases of the current year-to-date period, impairments areincome. Any further loss is directly recognized in the income statement. To the extent impairments relate to fair value decreases of previous periods, amounts are released from other comprehensive income to the income statement and separately presented in the statement of comprehensive income.

After the recognition of impairment on a financial investment available-for-sale, increases in fair value of equity instruments are reported inEquityand increases in fair value of debt instruments up to original cost are recognized inOther income, provided that the fair value increase has been triggered by a specificis related to an event (as defined by IFRS).occurring after the impairment loss was recorded.
UBS applies the same recognition and derecognition principles to financial assets available-for-sale as“Financial instruments designated at fair value”or“Held-for-trading” to those “Held-for-trading”, except that unrealized gains or losses between trade date and settlement date are recognized inEquity (refer to partsitems 5) and 7)).

10) Loans and receivables
For an overview of financial assets and financial liabilities accounted for as

“Loans and receivables”,refer to the measurement categories presented in Note 29.



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“Loans and receivables”are non-derivative financial assets with fixed or determinable payments whichthat are not quoted in an active market, not classified as held-for-trading, not designated as at fair value through P&Lprofit and loss or available-for-sale, and are not those for which the Group may not recover substantially all of its initial net investment, other than because of credit deterioration.
“Loans and receivables” include:
– originated loans where money is provided directly to the borrower, participation in a loan from another lender and purchased loans (certain purchased non-performing loans are also classified as financial investment available-for-sale at inception) initially classified as “loans“Loans and receivables”;
– securities initially classified as“Loans “Loans and receivables” and reclassified securities previously “Held-for-trading” (refer to Note 29b) due to illiquid markets such as Auction Rate Securities;
– reclassified securities previously“Held-for-trading”(refer to Note 29b; and
–reclassified loans such as leverage finance loans previously “held-for-trading”“Held-for-trading” (refer to Note 29b).

For an overview of financial assets and financial liabilities accounted for as “Loans and receivables”, refer to the measurement categories presented in Note 29.

In the fourth quarter of 2008 and the first quarter of 2009, UBS reclassified certain debt financial assets from the category“Held-for-trading” “Held-for-trading” to“Loans “Loans and receivables”,mainly due to illiquid markets for these instruments (refer to Note 1b, Note 29b and Note 9a and 9b). When a financial asset is reclassified from “held-for-trading”“Held-for-trading” to “loans“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 or amortized cost basis, as applicable.

Loans are recognized when cash is advanced to borrowers. They are initially recorded at fair value, which is the cash given to originate or purchase the loan, plus any direct transaction costs, and are subsequently measured at amortized cost using the effective interest rate (EIR) method.
Interest on loans is included inInterest earned on loans and advancesand is recognized on an accrual basis. Fees and direct costs relating to loan origination, refinancing or restructuring and to loan commitments are deferred and amortized toInterest earned on loans and advancesover the life of the loan using the straight-line method, which approximates the effective interest rateEIR method. Fees received for commitments that are not expected to result in a loan are included in Credit-related fees and commissions over the commitment period. Loan syndication fees where UBS does not retain a portion of the syndicated loan are credited to commission income.

Renegotiated loans

Subject to assessment on a case by casecase-by-case basis, UBS may either restructure a loan or take possession of collateral. Restructuring may involve extending the payment arrange-

mentsarrangements and agreeing to new loan conditions. Once the terms have been renegotiated, any impairment is measured using the effective interest rate (EIR)EIR as calculated before the modification of terms and the loan is not considered as past due. Management continuously reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to impairment assessment, calculated using the loan’s original EIR. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current EIR.

Commitments

Letters of credit, guarantees and similar instruments commit UBS to make payments on behalf of third parties under specific circumstances. These instruments, as well as undrawn irrevocable credit facilities, and irrevocable forward starting reverse repurchase agreements and securities borrowing transactions, carry credit risk and are included in the exposure to credit risk table in Note 29c, with their gross maximum exposure to credit risk less provisions.

11) Allowance and provision for credit losses

An allowance or provision for credit losses (refer to Note 9b) is established if there is objective evidence that the Group will be unable to collect all amounts due on a claim according to the original contractual terms or the equivalent value. A “claim” means a loan or receivable carried at amortized cost, or a commitment such as a letter of credit, a guarantee, a commitment to extend credit or other credit products.
Objective evidence of impairment include:includes, for example, a significant financial difficulty of the issuer or counterparty; default or delinquency in interest or principal payments; or probability that the borrower will enter bankruptcy or financial re-organization.
–significant financial difficulty of the issuer or counterparty; or
–default or delinquency in interest or principal payments; or
–probability that the borrower will enter bankruptcy or financial re-organization.



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Notes to the consolidated financial statements

Note 1 Summary of significant accounting policies (continued)

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 inOther liabilities.liabilities. Additions to allowances and provisions for credit losses are made throughCredit loss expense.expense.
Allowances and provisions for credit losses are evaluated at a counterparty-specific level and collectively based on the following principles:
Counterparty-specific:Counterparty-specific: A claim is considered impaired when management determines that it is probable that the Group will not be able to collect all amounts due according to the original contractual terms or the equivalent value.
Individual credit exposures are evaluated based on the borrower’s character, overall financial condition, resources and payment record; the prospects for support from any financially responsible guarantors; and, where applicable, the realizable value of any collateral.
The estimated recoverable amount is the present value, using the loan’s original effective interest rate,EIR, of expected



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Notes to the consolidated financial statements

future cash flows, including amounts that may result from restructuring or the liquidation of collateral. Impairment is measured and allowances for credit losses are established for the difference between the carrying amount and the estimated recoverable amount.

Upon impairment, the accrual of interest income based on the original terms of the claim is discontinued, but the increase of the present value of impaired claims due to the passage of time is reported asInterest income.income.
All impaired claims are generally reviewed and analyzed at least annually. Any subsequent changes to the amounts and timing of the expected future cash flows compared with the prior estimates result in a change in the allowance for credit losses and are charged or credited toCredit loss expense.expense.
An allowance for impairment is reversed only when the credit quality has improved to such an extent that there is reasonable assurance of timely collection of principal and interest in accordance with the original contractual terms of the claim or equivalent value.
Awrite-offis made when all or part of a claim is deemed uncollectible or forgiven. Write-offs are charged against previously established allowances for credit losses or directly toCredit loss expenseand reduce the principal amount of a claim. Recoveries in part or in full of amounts previously written off are credited toCredit loss expense.expense. A restructuring of a financial asset could result in the original loan being derecognized and a new loan being recognized. The new loan is measured at fair value at initial recognition. Any allowance taken against the original loan is removed by increasing write-offs. The gross counterparty exposure, however, may remain unaffected, if the rights existing prior to the restructuring have not been legally waived.
A loan is classified asnon-performingwhen the payment of interest, principal or fees is overdue by more than 90 days and there is no firm evidence that it will be made good by later payments or the liquidation of collateral, insolvency proceedings have

commenced against the firm, or obligations have been restructured on concessionary terms.

Collectively:Collectively: All loans for which no impairment is identified onat a counterparty-specific level are grouped into sub-portfolios with similaron the basis of the Bank’s internal credit grading system that considers credit risk characteristics 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 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 on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows 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 are reviewed regularly to reduce any differences between loss estimated and actual loss experience. Allowances from collective assessment of impairment are recognized asCredit loss expenseand 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. At 31 December 2010, the collective loan loss allowances represented 3.7% of the total allowances and provisions for credit losses (refer to Note 9b).
Reclassified securities:and acquired securities: UBS periodically revises its estimated cash flows associated with the portfolio of reclassified securities backed by multiple assets. Adverse revisions in cash flowsflow estimates related to credit events are recognized in profit or loss as credit loss expenses. IncreasesFor reclassified securities, increases in estimated

future cash receipts as a result of increased recoverability are recognized as an adjustment to the effective interest rateEIR on the loan from the date of change.

12) Securitization structures set up by UBS

UBS securitizes various financial assets, which generally results in the sale of these assets to special purpose entities, which in turn issue securities to investors. UBS’s involvement in securitization structures significantly declined in 2008 and remained low in 2009. UBS applies the policies set out in partitem 3) in determining whether the respective special purpose entity must be consolidated and those set out in partitem 5) in determining whether derecognition of transferred financial assets is appropriate. The following statements mainly apply to transfers of financial asset transfersassets, which are considered true sales to non-consolidated entities.qualified for derecognition.
Gains or losses on securitization are generally recognized when the derecognition criteria are satisfied and are classified inNet 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



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Note 1 Summary of significant accounting policies (continued)

are primarily recorded inTrading portfolio assetsand carried at fair value. Gains or losses on securitization are recognized inNet trading income,which is generally when the derecognition criteria are satisfied. Typically, the Group seeks to exit its risk in retained interests shortly after close of the securitization. Synthetic securitization structures typically involve derivative financial instruments for which the principles set out in partitem 15) apply.

UBS acts as structurer and placement agent in various MBS and other ABS securitizations. In such capacity, UBS purchases collateral on its own behalf or on behalf of customers during the period prior to securitization. UBS typically soldsells the collateral into designated trusts at the close of the securitization and underwrites the offerings to investors, earning fees for its placement and structuring services. 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 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 tranches, but for several of them substantially no observable information is available.

13) Securities borrowing and lending

Securities borrowing and securities lending transactions are generally entered into on a collateralized basis. In such transactions, UBS typically lends or borrows securities in exchange for securities or cash collateral. Additionally, UBS borrows securities from its clients’ custody accounts in exchange for a fee. The majority of securities lending and borrowing agreements involve shares, and the remainder typically involve bonds and notes. The transactions are normally conducted un-



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Financial information

derunder standard agreements employed by financial market participants and are undertaken with counterparties subject to UBS’s normal credit risk control processes. UBS monitors the market value of the securities received or delivered on a daily basis and requests or provides additional collateral or returns or recalls surplus collateral in accordance with the underlying agreements.

The securities which have been transferred, whether in a borrowing/lending transaction or as collateral, are not recognized on or derecognized from the balance sheet unless the risks and rewards of ownership are also transferred. In such transactions where UBS transfers owned securities and where the borrower is granted the right to sell or repledge them, the securities are reclassified on the balance sheet fromTrading portfolio assetstoTrading portfolio assets pledged as collateral.collateral. Cash collateral received is recognized with a corresponding obligation to return it (Cash(Cash collateral on securities lent)lent). Cash collateral delivered is derecognized with a corresponding receivable reflecting UBS’s right to receive it back (Cash(Cash collateral on securities borrowed)borrowed). Securities received in a lending or borrowing transaction are disclosed as off-balance sheet items if UBS has the right to resell or repledge them, with securities that UBS has actually resold or repledged also disclosed separately (see Note 24). Additionally, the sale of securities received in a borrowing or lending transaction triggers the recognition of a trading liability (short sale).

Consideration exchanged in financing transactions (i.e. interest received or paid) is recognized on an accrual basis and recorded asInterest incomeorInterest expense.expense.

14) Repurchase and reverse repurchase transactions

Securities purchased under agreements to resell (Reverse(Reverse repurchase agreements)agreements) and securities sold under agreements to repurchase (Repurchase agreements)(Repurchase agreements) are generally treated as collateralized financing transactions. Nearly all repurchase and reverse repurchase agreements involve debt instruments, such as bonds, notes or money market paper. The transactions are 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 the market value of the securities received or delivered on a daily basis and requests or provides additional collateral or returns or recalls surplus collateral in accordance with the underlying agreements.
In a reverse repurchase agreement, the cash delivered is derecognized and a corresponding receivable, including accrued interest, is recorded in the balance sheet lineReverse repurchase agreements, recognizing UBS’s right to receive itthe cash back. In a Repurchaserepurchase agreement, the cash received is recognized and a corresponding obligation, including accrued interest, is recorded in the balance sheet lineRepurchase agreements.agreements. Securities received under reverse repurchase agreements and securities delivered under repurchase agree-

mentsagreements are not recognized on or derecognized from the balance sheet, unless the risks and rewards of ownership are obtained or relinquished. In repurchase agreements where UBS transfers owned securities and where the recipient is granted the right to resell or repledge them, the securities are reclassified in the balance sheet fromTrading portfolioassetstoTrading portfolio assets pledged as collateral.collateral. Securities received in a reverse repurchase agreement are disclosed as off-balance sheet items if UBS has the right to resell or repledge them, with securities that UBS has actually resold or repledged also disclosed separately (see Note 24). Additionally, the sale of securities received in reverse repurchase transactions triggers the recognition of a trading liability (short sale).

Interest earned on reverse repurchase agreements and interest incurred on repurchase agreements is recognized as interest income or interest expense over the life of each agreement.
The Group offsets reverse repurchase agreements and repurchase agreements with the same counterparty, maturity, currency and Central Securities Depository (CSD) for transactions covered by legally enforceable master netting agreements when net or simultaneous settlement is intended.

15) Derivative instruments and hedge accounting

Derivatives are initially recognized at fair value at the date the derivative contract is entered into and are subsequently remeasured to fair value. The resulting gainmethod of recognizing fair value gains or loss is recognized in profitlosses depends on whether derivatives are held for trading or loss unlessare



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Notes to the derivative is consolidated financial statements

Note 1 Summary of significant accounting policies (continued)

designated and effective as a hedging instrument, in which eventinstruments. If designated as hedging instruments, the timingmethod of the recognition in profitrecognizing gains or losslosses depends on the nature of the hedge relationship.risk being hedged.

Derivative instruments are reported on the balance sheet asPositive replacement valuesorNegative replacement values (except(except for futures, 100% daily-margined exchange tradedexchange-traded options and London Clearing House (LCH) interest rate swaps). Where the Group enters into derivatives for trading purposes, gains and losses are recognized inNet trading income.income. Credit losses incurred on over-the-counter (OTC) derivatives are also reported inNet trading income.income.
Futures and LCH Interestinterest rate swaps with daily margining and 100% daily margined exchange tradeddaily-margined exchange-traded options, and certain credit derivatives contracts are transacted and measured at fair value. They do not have a replacement value as the variation margin, expressing the cumulative market movements each day, is settled daily on a cash basis. Any unpaid variation margin represents a receivable or payable with fixed amount and settlement date and is presented on the balance sheet underDue from banksand loans LoansorDue to banksand customers.Due to customers. The daily cash settlement (i.e. change in market value) is booked toNet trading income.income.

Hedge accounting

The Group also uses derivative instruments as part of its asset and liability management activities to manage exposures



269

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Notes to the consolidated financial statements

to interest rate, foreign currency and credit risks, including exposures arising from forecast transactions. The Group applies eitherIf derivative and non-derivative instruments meet certain criteria specified below, they are designated as hedging instruments in hedges of the change in fair value of recognized assets or liabilities (‘fair value hedges’); hedges of the variability in future cash flows attributable to a recognized asset or liability, or a highly probable forecast transaction (‘cash flow hedge accounting when transactions meet the specified criteria to obtain hedge accounting treatment.hedges’); or hedges of a net investment in a foreign operation (‘net investment hedges’).

At the time a financial instrument is designated as a hedge, the Group formally documents the relationship between the hedging instrument(s) and hedged item(s), including the risk management objectives and strategy in undertaking the hedge transaction together withand 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 of the hedged items. UBS regards a hedge as highly effective if the following criteria are met: a) at inception of the hedge and throughout its life, the hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk, and b) actual results of the hedge are within a range of 80% to 125%. In the case of hedging a forecast transaction, the transaction must have a high probability of occurring and must present an exposure to variations in cash flows that could ultimately affect the reported net profit or loss. The Group

discontinues hedge accounting when it determines that a derivativehedging 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 a forecast transaction is no longer deemed highly probable.

Hedge ineffectiveness represents the amount by which the changes in the fair value of the hedging derivativeinstrument 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 derivativeinstrument differ from changes (or expected changes) in the present value of future cash flows of the hedged item. Such ineffectiveness is recorded in current period earnings inNet trading income.income.

Fair value hedges

For qualifying fair value hedges, the change in the fair value of the hedging derivativeinstrument is recognized in the income statement. Those changesstatement along with the change in the fair value of the hedged item that areis attributable to the risks hedged withrisk. In fair value hedges of interest rate risk, the derivative instrument are reflected in an adjustment to the carrying value of the hedged item, which is also recognized in the income statement. The fair value change of the hedged item attributable to the hedged risk is reflected in the carrying value of the hedged item. For a portfolio hedge of interest rate risksrisk, the equivalent change in fair value is reported separately from the hedged portfolioreflected in a separate line withinOther assets or Other liabilities as appropriate.. If the hedge relationship is terminated for reasons other than the derecognition of the hedged item, the difference between the carrying value of the hedged item at that point and the value at which it would have been carried had the hedge never existed (the “unamortized fair

value adjustment”) is in the case of interest-bearing instruments, amortized to the income statement over the remaining term of the original hedge, while for non-interest-bearing instruments that amount is immediately recognized in earnings.until maturity. If the hedged item isinterest-bearing instruments are derecognized, e.g. due to sale or repayment, the unamortized fair value adjustment is recognized immediately in profit or loss.

Cash flow hedges

A fair value gain or loss associated with the effective portion of a derivative designated as a cash flow hedge is recognized initially inEquity.Equity. When the cash flows that the derivative is hedging materialize, resulting in income or expense, then the associated gain or loss on the hedging derivative is simultaneously transferred fromEquitytothe corresponding income or expense line item.
If a cash flow hedge for a forecast transaction is deemed to be no longer effective, or if the hedge relationship is terminated, the cumulative gain or loss on the hedging derivative previously reported inEquityremains there until the committed or forecast transaction occurs or is no longer expected to occur, at which point it is transferred to profit or loss.

Hedges of net investments in foreign operations

Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Gains or losses on the hedging instrument relating to the effective portion of the hedge are recognized directly inEquity (and(and presented in the statement of



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Note 1 Summary of significant accounting policies (continued)

changes in equity and statement of comprehensive income underForeign currency translation)translation), while any gains or losses relating to the ineffective portion are recognized in the income statement. On disposal of the foreign operation, the cumulative value of any such gains or losses recognized directly inEquityis reclassified to the income statement.

Economic hedges which do not qualify for hedge accounting

Derivative instruments which are transacted as economic hedges but do not qualify for hedge accounting are treated in the same way as derivative instruments used for trading purposes, i.e. realized and unrealized gains and losses are recognized inNet trading incomeexcept that, in certain cases, the forward points on short duration foreign exchange contracts are reported inNet interest income.income. Refer to Note 23 for more information on “economic hedges”.

Embedded derivatives

A derivative may be embedded in a “host contract”. Such combinations are known as hybrid instruments and arise predominantly from the issuance of certain structured debt instruments. If the host contract is not carried at fair value with changes in fair value reported in the income statement, theThe 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



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loss, if (a) the host contract is not carried at fair value with changes in fair value reported in the income statement, (b) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract, and (c) the embedded derivative actually meets the definition of a derivative. Bifurcated embedded derivatives are presented on the same balance sheet line as the host contract, and are shown in Note 29 in the“Held “Held for trading”category, reflecting the measurement and recognition principles applied.

Typically, UBS applies the fair value option to hybrid instruments (see partitem 8)), in which case bifurcation 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 customers can borrow money at defined terms and conditions.
Loan commitments that can be cancelled by UBS at any time (without giving a reason) according to their general terms and conditions are recognized neither recognized on-balance sheet nor off-balance sheet. Upon a loan draw down by the counterparty, the amount of the loan is accounted for as“Loans and receivables”receivables(refer to partitem 10)).
Irrevocable loan commitments (where UBS has no right to withdraw the loan commitment once communicated to the beneficiary or that iswhich are revocable only due to automatic cancellation upon the deterioration in a borrower’s creditworthiness) are classified into the following categories:

– Derivative loan commitments(loan (loan commitments that can be settled net in cash or by delivering or issuing an otheranother financial instrument) or if there is evidence that UBS is selling similar loans resulting from its loan commitments before or shortly after origination (refer to partitem 15)).
– Loan commitments designated at fair value through profit and loss (“Fair value option”)(refer (refer to partitem 8)).
– Below market loan commitments.Below market loan commitments are recognized at fair value and subsequently measured at the higher of the initially recognized liability at fair value less cumulative amortization and a provision (refer to partitem 26)). UBS uses them only in specific situations (e.g. restructuring, insolvency).
– Other loan commitments.Other loan commitments are not recorded in the balance sheet. However, a provision is recognized if it is probable that a loss has been incurred and a reliable estimate of the amount of the obligation can be made (refer to partitem 26)). Other loan commitments include irrevocable forward starting reverse repos and irrevocable securities borrowing agreements.

17) Cash and cash equivalents

For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months’ maturity from the date of acquisition including cash and non-restricted balances with central banks, treasury bills, balancesdue from banks with an original maturity of less than three months included inDue from banksandCash collateral receivables on derivative instruments, as well as money market paper included inTrading portfolio assetsandFinancial investments available-for-sale.available-for-sale.

18) Physical commodities

Physical commodities (precious metals, base metals, energy and other commodities) held by UBS as a result of its broker-trader activities are accounted for at fair value less costs to sell and recognized within theTrading portfolio.portfolio assets. Changes in fair value less costs to sell are recorded inNet trading income.income.

19) Property and equipment

Property and equipment includes own-used properties, investment properties, leasehold improvements, IT, software and communication and other machines and equipment.
With the exception of investment properties,Property and equipment is carried at cost, less accumulated depreciation and accumulated impairment losses, and is periodically reviewed for impairment. The useful life of property and equipment is estimated on the basis of the economic utilization of the asset.

Classification for own-used property

Own-used property is defined as property held by the Group for use in the supply of services or for administrative purposes, whereas investment property is defined as property held to earn rental income and/or for capital appreciation. If a property of the Group



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Notes to the consolidated financial statements

Note 1 Summary of significant accounting policies (continued)

includes a portion that is own-used and another portion that is held to earn rental income or for capital appreciation, the classification is based on whether or not these portions can be sold separately. If the portions of the property can be sold separately, they are separately accounted for as own-used property and investment property. If the portions cannot be sold separately, the whole property is classified as own-used property unless the portion used by the Group is minor. The classification of property is reviewed on a regular basis to account for major changes in its usage.

Investment property

Investment property is carried at fair value with changes in fair value recognized in the income statement in the period of change. UBS employs internal real estate experts to determine the fair value of investment property by applying recognized valuation techniques. In cases where prices of recent market transactions of comparable properties are available, fair value is determined by reference to these transactions.

Leasehold improvements

Leasehold improvements are investments made to customize buildings and offices occupied under operating lease contracts to make them suitable for the intended purpose. The present value of estimated reinstatement costs to bring a leased property into its original condition at the end of the lease, if required, is capitalized as part of the total leasehold improvements costs. At the same time, a corresponding liability is recognized to reflect the obligation incurred. Reinstatement costs are recognized in profit and loss through depreciation of the capitalized leasehold improvements over their estimated useful lives.

Software
Software development costs are capitalized when they meet certain criteria relating to identifiability, it is probable that future economic benefits will flow to the enterprise, and the cost can be measured reliably. Internally developed software meeting these criteria and purchased software are classified within IT, software and communication.



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Notes to the consolidated financial statements

Property held for sale

Non-current property formerly own-used or leased to third parties under an operating lease and equipment the Group has decided to sell and for which sale within 12 months is highly probable are classified as non-current assets held for sale and recorded inOther assets.assets. Upon classification as held for sale, they are no longer depreciated and are carried at the lower of book value or net realizable value.fair value less cost to sell. Foreclosed properties and other properties classified as current assets are included inProperties held for saleand recorded inOther assets.assets (see Note 17). They are also carried at the lower of book value and net realizable value.

Investment property
Investment property is carried ator fair value with changes in fair value recognized inless cost to sell.

Software

Software development costs are capitalized when they meet certain criteria relating to identifiability, it is probable that future economic benefits will flow to the income statement inenterprise and the period of change. UBS employs internal real estate experts to determine the fair value of investment property by applying recognized valuation techniques. In cases where prices of recent market transactions of comparable propertiescost can be measured reliably. Internally developed software that meets these criteria and purchased software are available, fair value is determined by reference to these transactions.classified within IT, software and communication.

Estimated useful life of property and equipment

Property and equipment is depreciated on a straight-line basis over its estimated useful life as follows:
   
 
Properties, excluding land Not exceeding 50 years
 
Leasehold improvements Residual lease term,
  but not exceeding 10 years
 
Other machines and equipment Not exceeding 10 years
 
IT, software and communication Not exceeding 5 years
 

20) Goodwill and intangible assets

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of net identifiable assets of the acquired entity at the date of acquisition. Goodwill is not amortized; it is tested yearly for impairment and, additionally, when a reasonable indication of impairment exists. The impairment test is conducted at the segment level as reported in Note 2a. The segment has been determined as the cash-generating unit for impairment testing purposes, assince this is the level at which the performance of investments is reviewed and assessed by management. Refer to Note 16 for details.
Intangible assets comprise separately identifiable intangible items arising from business combinations and certain purchased trademarks and similar items. Intangible assets are recognized at cost. The cost of an intangible asset acquired in a business combination is its fair value at the date of acquisition. Intangible assets with a definite useful life are amortized using the straight-line method over their estimated useful economic life, generally not exceeding 20 years. Intangible assets with an indefinite useful life are not amortized. Gener-

ally,Generally, all identified intangible assets of UBS have a definite useful life. At each balance sheet date, intangible assets are reviewed for indications of impairment or changes in estimated future benefits. If such indications exist, the intangible assets are analyzed to assess whether their carrying amount is fully recoverable. An impairment loss is recognized if the carrying amount exceeds the recoverable amount.

Intangible assets are classified into two categories: a) infrastructure, and b) customer relationships, contractual rights and other. Infrastructure consists of an intangible asset recognized in connection with the acquisition of PaineWebber Group, Inc. Customer relationships, contractual rights and other includes mainly intangible assets for client relationships, non-compete agreements, favorable contracts, proprietary software, trademarks and trade names acquired in business combinations.

21) Income taxes

Income tax payable on profits is recognized as an expense based on the applicable tax laws in each jurisdiction in the period in which profits arise. The tax effects of income tax losses available for carry forward are recognized as a deferred tax asset if it is probable that future taxable profit (based on profit forecast assumptions) will be available against which those losses can be utilized.



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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 balance sheet and their amounts as measured for tax purposes, which will result in taxable amounts in future periods. Deferred tax assets are recognized for temporary differences that will result in deductible amounts in future periods, but only to the extent it is probable that sufficient taxable profits will be available against which these differences can be utilized.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the asset will be realized or the liability will be settled based on enacted rates.
Tax assets and liabilities of the same type (current or deferred) are offset when they arise from the same tax reporting group, they relate to the same tax authority, the legal right to offset exists, and they are intended to be settled net or realized simultaneously.
Current and deferred taxes are recognized as income tax benefit or expense except for current and deferred taxes recognized (i) upon the acquisition of a subsidiary, (ii) for unrealized gains or losses on financial investments available-for-sale, for changes in fair value of derivative instruments designated as cash flow hedges, and for certain foreign currency translations of foreign operations, (iii) for certain tax benefits on deferred compensation awards, and (iv) for gains and losses on the sale of treasury shares. Deferred taxes recognized in a business combination (item (i)) are considered when determining goodwill. Items (ii), (iii) and (iv) are recorded inNet incomerecognized directly in equity.equity.



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22) Debt issued

Money Market paper
Money market paper issued is initially measured at fair value, which is the consideration received, net of transaction costs incurred. Subsequent measurement is at amortized cost, using the effective interest rate method to amortize cost at inception to the redemption value over the life of the debt.

Debt without embedded derivativederivatives

Issued debt instruments without embedded derivatives that are not designated at fair value through profit or loss are accounted for at amortized cost. However, it is the Group’s policy to apply fair value hedge accounting to its fixed-rate debt instruments when the interest rate risk is managed on a mark-to-market basis. Whenin cases where fair value hedge accounting is applied to fixed-rate debt instruments as part of the Group’s asset and liability management activity, the carrying values of debt issued are adjusted for changes in fair value related to the hedged exposure rather than carried at amortized cost - -– refer to partitem 15) for further discussion.

Debt with embedded derivatives (related to UBS AG shares)

Debt instruments issued with embedded derivatives that are related to UBS AG shares (e.g. mandatory convertible notes) are separated into a liability and an equity component at issue date if the derivative is settled by UBS receiving or delivering a fixed number of its own shares in exchange for a fixed amount of cash or another financial asset. When a hybrid debt instrument is issued, aA portion of the net proceeds of the instrument is allocated to the debt component on the date of issue based on its fair value. The determination of fair value is generally based on quoted market prices for UBS debt instruments with comparable terms.terms but without a conversion feature. The debt component is subsequently measured at amortized cost or at fair value through profit or loss, if the fair value option is applied. The remaining

amount of the net proceeds is allocated to the equity component and reported inShare premium.premiumSubsequent changes in fair value of the separated. The equity component areis not recognized.subsequently re-measured. However, if the hybridentire debt instrument or the embedded derivative related to UBS AG shares is to be cash settled or if it contains a cash or net share settlement alternative, then the separated derivative is accounted for as a freestanding derivative, with changes in fair value recorded inNet trading incomeunless the entire hybrid debt instrument is designated at fair value through profit or loss (“Fair Value Option”) -– refer to partitem 8).

Debt with embedded derivatives
(not (not related to UBS AG shares)

Debt instruments issued with embedded derivatives that are related to non-UBS AG equity instruments, foreign exchange, interest rate, credit instruments or indices are considered structured debt instruments. UBS has designated most of its structured debt instruments at fair value through profit or loss (“Fair Value Option”) – see partitem 8). If such instruments have not been designated at fair value through profit or loss, the embedded derivative is separated from the

host contract and accounted for as a standalone derivative if the criteria for separation are met. The host contract is subsequently measured at amortized cost. The fair value option is not applied to certain hybrid instruments which contain bifurcatable embedded derivatives with references to foreign exchange rates and precious metal prices and which are not hedged by derivative instruments. Those hybrids are still subject to bifurcation of the embedded derivative.

Bonds issued by UBS held as a result of market making activities or deliberate purchases in the market are treated as redemption of debt. A gain or loss on redemption is recorded depending on whether the repurchase price of the bond is lower or higher than its carrying value. A subsequent sale of own bonds in the market is treated as a reissuance of debt.
Interest expense on debt instruments is included inInterest on debt issued.issued. Refer to Note 19 for further details on debt issued.

23) Post-employment benefitsPension 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 plans, and other post-retirement benefits such as medical and life insurance benefits.

Defined benefit plans

Typically defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.
The defined benefit liability recognized in the balance sheet is the present value of the defined obligation at the balance sheet date less the fair value of the plan assets at the balance sheet date, together with adjustments for any unrecognized actuarial gains and losses and unrecognized past service cost. If the defined benefit liability is negative (i.e. a defined benefit asset), measurement of the asset is limited to the lower of a) the defined benefit asset and b) the total of any cumulative unrecognized net actuarial losses plus unrecognized past service cost plus the present



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Note 1 Summary of significant accounting policies (continued)

value of economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan. UBS applies the projected unit credit method to determine the present value of its defined benefit obligation and the related current service cost and, where applicable, past service cost. These amounts are calculated annually by independent actuaries. The principal actuarial assumptions used are set out in Note 30.

UBS recognizes a portion of its actuarial gains and losses as income or expense if the net cumulative unrecognized actuarial gains and losses at the endbeginning of the previous reporting period are outside the corridor defined as the greater of:
   
 
a) 10% of the present value of the defined benefit obligation at that date (before deducting the fair value of plan assets); and  
 
b) 10% of the fair value of any plan assets at that date.  
 



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Notes to the consolidated financial statements

The unrecognized actuarial gains and losses exceeding the greater of these two values are recognized in the income statement over the expected average remaining working lives of the employees participating in the plans.

UBS recognizes curtailments on its defined benefit plans when the reductions in expected future service and in the defined benefit obligation are 10% or more. Reductions in expected future service and in the defined benefit obligation of between 5% and 10% are recognized if deemed material, and reductions of less than 5% are generally not recognized.

Defined contribution plans
A defined contribution plan is a pension plan under which UBS pays fixed contributions into a separate entity. UBS has no legal or constructive obligation to pay further 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 rendered services in exchange for such contributions; this is generally in the year of contribution. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in the future payments is available.

Other post-retirement benefits
UBS 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 employment using the same accounting methodology used for the defined benefit plans.

24) Equity participation and other compensation plans

Equity participation plans
UBS has established several equity participation plans in the form of share plans, option plans and share-settled stock appreciation right (SAR) plans. UBS’s equity participation plans are mandatory, discretionary, or voluntary plans. UBS recognizes the fair value of share, option and SAR awards, determined at the date of grant,

as compensation expense over the period that the employee is required to provide active services in order to earn the award.

Plans containing voluntary termination non-compete provisions (i.e. good leaver clauses) and no vesting conditions are considered vested at the grant date because no future service is required. Compensation expense is fully recognized on the grant date or is recognized in a period prior to the grant date if the bank can substantiate that the award is attributable to past service and the amount of the award can be reasonably and reliably estimated. The awards remain forfeitable until the legal vesting date if certain conditions are not met. Forfeiture events occurring after the grant date do not result in a reversal of compensation expense because the related services have

been received. Forfeiture events occurring before the grant date result in the reversal of compensation expense.

Plans containing vesting conditions have either a tiered vesting structure, which vest in increments over that period or a cliff vesting structure, which vest at the end of the period. Such plans may contain provisions that shorten the required service period due to retirement eligibility. In such instances, UBS recognizes compensation expense over the shorter of the legal vesting period and the period from grant to the retirement eligibility date of the employee. Forfeiture of these awards during the service period results in a reversal of compensation expense.
The fair value of a share is determined as the average of the high and low UBS share price at the date of grant adjusted, where applicable, for an employee’s non-entitlement to dividends during the vesting period, any post-vesting sale and hedge restrictions, and non-vesting conditions. The fair value of an option and a SAR is determined by means of a Monte Carlo simulation which takes into account the specific terms and conditions under which the options and SARs are granted.
Equity settled awards are classified as equity instruments. The fair value of an equity-settled award is not remeasured subsequent to the grant date, unless an award isits terms are modified such that itsthe fair value immediately after modification exceeds itsthe fair value immediately prior to modification. Any increase in fair value resulting from a modification is recognized as compensation expense, either over the remaining service period or immediately for vested awards.
Cash settled awards are classified as liabilities and remeasured to fair value at each balance sheet date as long as the award is outstanding. Decreases in fair value reduce compensation expense, and no compensation expense, on a cumulative basis, is recognized for awards that expire worthless or remain unexercised.
Details of the determination of fair value of equity participation plans are disclosed in Note 31d).

Other compensation plans
UBS has established other fixed and variable deferred cash compensation plans, the value of which is not linked to UBS’s own equity. UBS’s deferred cash compensation plans are either mandatory or discretionary plans.

The grant date fair value of fixed deferred cash awards is recognized as compensation expense over the service period, which is the period the employee is obligated to work in order to become entitled to the award.
Variable deferred cash compensation is generally awarded in the form of alternative investment vehicles (AIVs). The grant date fair value for AIVs is based on the fair value of the underlying assets (i.e. money market funds, UBS and non-UBS mutual funds and other UBS sponsored funds) on the grant date and is subsequently marked-to-market at each reporting date until the award



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is distributed. Forfeiture of these awards results in the reversal of expense. Refer to Note 31 for further details on equity participation and other compensation plans.



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25) Amounts due under unit-linked investment contracts
UBS’s financial liabilities from unit-linked contracts are presented asOther liabilities(refer to Note 20) on the balance sheet. These contracts allow investors to invest in a pool of assets through investment units issued by a UBS subsidiary. The unit holders receive all rewards and bear all risks associated with the reference asset pool. The financial liability represents the amount due to unit holders and is equal to the fair value of the reference asset pool.

Assets held under unit-linked investment contractcontracts are presented as tradingTrading portfolio assets. Refer to Note 11.

26) Provisions
Provisions are recognized when 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 to settle the obligation and the amount can be reliably estimated. Provisions are reflected underOther liabilitieson the balance sheet. Refer to Note 21.

The majority of UBS’s provisions relate to operational risks, including litigation and restructuring costs. When a provision is recognized, its amount needs to be estimated as the exact amount of the obligation is generally unknown. The estimate is based on all available information and reflects the amount that hasin management’s opinion represents the highest probabilitybest estimate of being paid.the expenditure required to settle the obligation. UBS revises existing provisions up or down as soon as it is able to quantify the amounts more accurately. If the effect of the time value of money is material, provisions are discounted and measured at the present value of the expenditure expected to settle the obligation, using a rate that reflects the current market assessments of the time value of money and the risks specific to the obligation.
The majority of UBS’s provisions relate to operational risks, including litigation and restructuring costs. Provisions are reflected underOther liabilitieson the balance sheet. Refer to Note 21.
If the amount of an obligation cannot be measured with sufficient reliability, a present obligation is not recognized but disclosed as contingent liabilities in Note 21.

27) Equity, treasury shares and contracts on UBS shares

Transaction costs related to share issuances
Incremental costs directly attributable to the issue of new shares or contracts with physical settlement (classified as equity instruments) are recognized inEquityas “transaction costs related to share issuances, net of tax” and are a deduction fromEquity.

Non-controlling interests
Net profitandEquityare presented including non-controlling interests.Net profitis split intoNet profit attributable to UBS shareholdersandNet profit attributable to non-controlling interests. Equity is split intoEquity attributable to UBS shareholdersandEquity attributable to non-controlling interests.

UBS AG shares held (“treasury shares”)
UBS AG shares held by the Group are classified inEquityas Treasury sharesand accounted for at cost. Treasury shares are deducted from total shareholders’ equity until they are cancelled or reissued. The difference between the proceeds from sales ofTreasury sharesand their weighted average cost (net of tax, if any) is reported asShare premium.premium.

Contracts with gross physical settlement
(except physically settled written put options and
forward share purchase contracts)


Contracts that require gross physical settlement in UBS AG shares are classified inEquityasShare premium(provided a fixed amount of shares areis exchanged against a fixed amount of cash) and accounted for at cost. They are added to or deducted from equity until settlement of such contracts. Upon settlement of such contracts, the difference between the proceeds received and their cost (net of tax, if any) are reported asShare premium.premium.

Transaction cost related to share issuance of equity instruments
Incremental costs directly attributable to the issue of new shares or contracts with physical settlement (classified as eq-

uity instruments) are shown in equity as “transaction cost related to share issuance” and are a deduction of equity, net of tax, from the proceeds.

Contracts with net cash settlement or net cash settlement option
Contracts on UBS AG shares that require net cash settlement, or provide the counterparty or UBS with a settlement option which includes a choice of settling net in cash, are classified as trading instruments, with changes in fair value reported in the income statement as “netNet trading income”income, except for written put options and forward share purchase contracts.

Physically settled written put options and forward share
purchase contracts
Physically settled written put options and forward share purchase contracts, including contracts where physical settlement is a settlement alternative, result in the recognition of a financial liability. At the inception of the contract, the present value of the obligation to purchase own shares in exchange for cash is transferred out ofEquityand recognized as a liability. The liability is subsequently accreted, using the effective interest rateEIR method, over the life of the contract to the nominal purchase obligation by recognizing interest expense. Upon settlement of the contract, the liability is derecognized, and the amount of equity originally recognized as a liability is reclassified withinEquitytoTreasury shares.shares. The premium received for writing put options is recognized directly inShare premium.premium.

Minority interests
Net profit and Equity arepresented including minority interests.Net profitis split intoNet profitattributable to UBS shareholders andNet profit attributable to minority interests. Equity is split intoEquityattributable to UBS shareholders andEquityattributable to minority interests.

Trust preferred securities issued
UBS has issued trust preferred securities through consolidated preferred funding trusts which hold debt issued by UBS. UBS AG has fully and unconditionally guaranteed all of these securities. UBS’s obligations under these guarantees are subordinated to the fully prior payment in full of the deposit liabilities of UBS and all other liabilities of UBS. The trust preferred securities represent equity instruments which are held by third parties and treated as minoritynon-controlling interests in UBS’s consolidated financial statements. The full dividend payment obligation on these trust preferred securities issued is reclassified fromEquityto a corresponding liability onceOnce a coupon payment becomes mandatory, i.e. when it is triggered by a contractually determined event. In the income statement the full dividend payment is reclassified fromNet profitattributable to UBS shareholders toNet profitattributable to minor-trig-



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Notes to the consolidated financial statements

Note 1 Summary of significant accounting policies (continued)

itygered by a contractually defined event, the full dividend payment obligation on these trust preferred securities issued is reclassified fromEquity to a corresponding liability. In the income statement the full dividend payment is reclassified fromNet profit attributable to UBS shareholderstoNet profit attributable to non-controlling interestsat that time. UBS bonds held by preferred funding trusts are eliminated in consolidation.

28) Discontinued operations and non-current assets held for sale
UBS classifies individual non-current non-financial assets and disposal groups as held for sale if such assets or disposal groups are available for immediate sale in their present 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 ismust be committed to a plan to sell such assets and is actively looking for a buyer,buyer. Furthermore, the assets are beingmust be actively marketed at a reasonable sales price in relation to their fair value and the sale is expected to be completed within one year, and their sale is considered highly probable.year. These assets (and liabilities in the case of disposal groups) are measured at the lower of their carrying amount and fair value less costs to sell and presented inOther assetsandOther liabilities(see Notes 17 and 20). Netting of assets and liabilities is not permitted.

UBS presents discontinued operations in a separate line in the income statement if an entity or a component of an entity has been disposed of or is classified as held for sale and a) represents a separate major line of business or geographical area of operations, b) is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations, or c) is a subsidiary acquired exclusively with a view to resale (e.g. certain private equity investments).Net profitfrom discontinued operations includes the net total of operating profit and loss before tax from discontinued operations including(including net gain or loss on sale before tax or measurement to fair value less costs to sellsell) and discontinued operations tax expense. A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of UBS’s operations and cash flows. If an entity or a component of an entity is classified as a discontinued operation, UBS restates prior periods in the income statement. Refer to Note 37 for further details.

29) Leasing
UBS enters into lease contracts, predominantly of premises and equipment, as a lessor and a lessee. The terms and conditions of these contracts are assessed and the leases are classified as operating leases or finance leases according to their economic substance. When making such an assessment, the Group focuses on the following aspects: a) transfer of ownership of the asset to the lessee at the end of the lease term; b) existence of a bargain purchase option held by the lessee; c) whether the lease term is for the major part of the economic life of the asset; d) whether the present value of the minimum lease payments is substantially equal to the fair value of the leased asset at inception of the lease

term; and e) whether the asset is of a specialized nature that only the lessee can use without major modifications being made. If one or more of the conditions are met, the lease is generally classified as a

finance lease, while the non-existence of such conditions normally leads to a classification as an operating lease.

Lease contracts classified as operating leases where UBS is the lessee are disclosed in Note 25. These contracts include non-cancellable long-term leases of office buildings in most UBS locations. Lease contracts classified as operating leases where UBS is the lessor, and finance lease contracts where UBS is the lessor or the lessee, are not material. Contractual arrangements which are not considered leases in their entirety but which include lease elements are not material to UBS.
UBS recognizes a provision for a lease contract of office space if the unavoidable costs of a contract exceed the benefits to be received under it, which requires that a lease contract is considered onerous in its entirety. A provision for onerous lease contracts often includes significant vacant rental space.

30) Fee income
UBS earns fee income from a diverse range of services it provides to its customers.clients. Fee income can be divided into two broad categories: income earned from services that are provided over a certain period of time for which customers are generally billed on an annual or semi-annual basis, and income earned from providing transaction-type services. Fees earned from services that are provided over a certain period of time are recognized ratably over the service period.period with the exception of performance-linked fees or fee components which are recognized when the performance criteria are fulfilled. Fees earned from providing transaction-type services are recognized when the service has been completed. Performance-linked fees or fee components are recognized when the recognition criteria are fulfilled. Loan commitment fees on lending arrangements where the initial expectation is that the loan will be drawn down at some point are deferred until the loan is drawn down and then recognized as an adjustment to the effective yield over the life of the loan. If the commitment expires and the loan is not drawn down, the fees are recognized as revenue on expiry.

The following fee income is predominantly earned from services that are provided over a period of time: investment fund fees, fiduciary fees, custodian fees, portfolio and other management and advisory fees, insurance-related fees and credit-related fees and commissions received up-front.fees. Fees predominantly earned from providing transaction-type services include underwriting fees, corporate finance fees and brokerage fees.

31) Foreign currency translation
Transactions denominated in foreign currency are translated into the functional currency of the reporting unit at the spot exchange rate on the date of the transaction. At the balance sheet date, all assets and liabilities denominated in foreign currency, except for non-monetary items, are translated using the closing exchange rate. Non-monetary items measured in terms ofat historical cost are translated at the exchange rate aton the date of the transaction. Resulting foreign exchange differences are recognized inNet trading income, except for non-monetary financial investments available-for-sale. Foreign exchange differences from non-monetary finan-



286

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Note 1 Summary of significant accounting policies (continued)

cial investments available-for-sale which are recorded directly inEquityuntil the asset is sold or becomes impaired.



276

impaired, unless the non-monetary financial investment is subject to a fair value hedge of foreign exchange risk, in which case changes in fair value attributable to the hedged risk are reported inNet trading income.

Financial information

Upon consolidation, assets and liabilities of foreign operations are translated into Swiss francs (CHF) – UBS’s presentation currency – at the closing exchange rate aton the balance sheet date, and income and expense items are translated at the average rate for the period. Differences resulting from the use of different exchange rates are recognized directly inForeign currency translation withinEquity. Upon disposal

When a foreign operation is disposed of such that control, significant influence or joint control is lost, the cumulative amount inForeign currency translation within Equityrelated to that foreign operationsoperation attributable to UBS is reclassified to profit or loss as part of the gain or loss on disposal. When UBS disposes of a portion of its interest in a subsidiary that includes a foreign operation without losing control, the related foreignportion of the cumulative currency translation impact previously deferredbalance is reattributed to non-controlling interests. When UBS disposes of a portion of its investment in equityan associate or joint venture that includes a foreign operation while retaining significant influence or joint control, the related portion of the cumulative currency translation balance is reclassified toOther income. profit or loss.

32) Earnings per share (EPS)

Basic earnings per share are calculated by dividing the net profit or loss for the period attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period.
Diluted earnings per share are calculated using the same method as for basic EPS 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 exercised into ordinary shares.

33) Segment reporting
In 2009,

UBS’s businesses i.e. wealth management and Swiss banking business, asset management and investment banking wereare organized on a worldwide basis into four business divisions and the Corporate Center, taken into consideration the economic characteristics of the businesses. The four business divisions, also known as the operating segments or reportable segments, weredivisions: Wealth Management & Swiss Bank, Wealth Management Americas, Global Asset Management and Investment Bank.Bank, fully supported by the Corporate Center. In 2009, these four business divisions were presented as four operating segments or reportable segments in Note 2a “Segment reporting”, in addition to the Corporate Center column.
In 2010, for the purpose of segment reporting, the business division Wealth Management & Swiss Bank was split into two separate reportable segments, namely Wealth Management and Retail & Corporate. As a result of the split, UBS now presents five reportable segments. This change was made in order to better reflect the management structure and responsibilities. In the internal management report to the Group Executive Board (GEB) or the

chief operating decision maker, the financial information about the fourfive reportable segments and the Corporate Center was separately presented. This internal management view was the basis for the external segment reporting.

In addition, the Corporate Center predominantly includes certaincolumn for Note 2a “Segment Reporting” was renamed to “Treasury activities and other corporate items” to reflect the changes in presentation of the Corporate Center information during the year as described in Note 1b “Allocation of additional Corporate Center costs relatingand to Group functions and elimination items and itreportable segments”. The Corporate Center is not considered an operating segment under IFRS 8. The8Operating segments.It predominantly includes the results of treasury activities, e.g. from the management of structural foreign exchange risks and interest rate risks, residual operating expenses such as those associated with the functioning of the Group Executive Board and the Board of Directors, other costs related to organizational management, as well as a limited number of specifically defined items. These items include the valuation of UBS’s option to acquire the SNB StabFund’s equity and expenses such as capital taxes, as well as the difference between actually incurred Corporate Center costs and periodically agreed flat fees charged to the business divisions. All other costs incurred by the Corporate Center related to shared serviceservices and control functions like risk management and control, finance, legal and compliance, marketing and communications, human resources, information technology infrastructure and service centrescenters are charged out to the business divisionsreportable segments based on internal accounting policies.

UBS’s internal accounting policies, which include the management accounting policies and service level agreements, determine the revenues and expenses directly attributable to each business division.reportable segment. Internal charges and transfer pricing adjustments are reflected in the business divisionreportable segment performances.
Revenue-sharing agreements are used to allocate external customerclient revenues to business divisionsreportable segments on a reasonable basis. Due to the present arrangement of revenue-sharing agreements, the total intersegmentinter-segment revenues for UBS are immaterial.not considered material.
The costs of shared services and control functions managed by the Corporate Center are allocated to the direct cost lines of personnel expenses, general and administrative expenses and depreciation in the respective business divisionreportable segment income statements, based on internally determined allocation keys.
Net interest incomeis allocated to the business divisionsreportable segments based on their balance sheet positions. Assets and liabilities of the business divisionsreportable segments are funded through and invested with the central treasury department,departments located in each business division. The treasury departments are supported by the Group Treasury in the Corporate Center, with the net margin reflected in the results of each business division. To complete the allocation,reportable segment. The Corporate Center transfers interest income earned from managing UBS’s consolidated equity back to the reportable segments based on the average attributed equity.
Commissions are credited to the business divisionreportable segments based on the corresponding customerclient relationship. Revenue-sharing agreementsagree-



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Financial information
Notes to the consolidated financial statements

Note 1 Summary of significant accounting policies (continued)

ments are used for the allocation of customer revenues where several business divisionsreportable segments are involved in the value-creation chain.

In line with the internal management reporting, segment assets are reported without intercompany balances or on a third-party view basis. Refer to Note 2a “Segment reporting”. for further details. For the purpose of segment reporting under IFRS 8, the non-current assets consist of investment in associates and joint ventures, goodwill, other intangible assets as well as plant, property and equipment.

34) Netting

UBS nets assets and liabilities in its balance sheet if it has a legallycurrently enforceable legal right to set off the recognized amounts and intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously. Netted positions include positive and negative replacement values of OTC interest rate swaps transacted with London Clearing House. The positions are netted by currency and across maturities. Furthermore, amounts included inLoans and Dueto customers related to UBS’s Prime Brokerage Business have been netted, where possible.



277b) Changes in accounting policies, comparability and other adjustments

Wealth Management & Swiss Bank reorganization

From 2010 onwards, the internal reporting of Wealth Management & Swiss Bank to the Group Executive Board was revised in order to better reflect the management structure and responsibilities. Segregated financial information is now reported for:
–“Wealth Management”, encompassing all wealth management business conducted out of Switzerland and in the Asian and European booking centers;
–“Retail & Corporate”, including services provided to Swiss retail private clients, small and medium enterprises and corporate and institutional clients.
In line with this revised internal reporting structure and IFRS 8Operating segments, Wealth Management and Retail & Corporate are now presented in the external financial reports as separate business units and reportable segments. Prior periods presented have been restated to conform to the new presentation format.

Allocation of additional Corporate Center costs to reportable segments

From 2010 onwards, almost all costs incurred by the Corporate Center related to shared services and control functions are allocated to the reportable segments, which directly and indirectly receive the value of the services, either based on a full cost recovery or on a periodically agreed flat fee. The allocated costs are shown in the respective expense lines of the reportable segments in Note 2a “Segment reporting”, and in the “UBS business divisions and Corporate Center” section of this report.
Up to and including 2009, certain costs incurred by the Corporate Center were presented as Corporate Center expenses and not charged to the business divisions. This change in allocation

policy has been applied prospectively and prior year numbers have not been restated.

The incremental charges to the business divisions made in 2010 mainly relate to control functions. If figures for each quarter of 2009 had been presented on the basis of the allocation methodology applied for 2010, the estimated impact on operating expenses and performance before tax would have been as shown in the table below.
The “Corporate Center” column of the table in Note 2a “Segment reporting” has been renamed “Treasury activities and other corporate items”. Refer to Note 1a) 33) “Segment reporting” for more details.

Cash collateral from derivative transactions and Prime brokerage receivables and payables

From 2010 onwards, UBS has changed the presentation of cash collateral from derivative transactions and prime brokerage receivables and payables to improve transparency.
Cash collateral receivables and payables on derivatives are presented in the new balance sheet linesCash collateral receivables on derivative instrumentsandCash collateral payables on derivative instrumentsby transferring the amounts out ofDue from banksandLoans, andDue to banksandDue to customers, respectively. Prime brokerage receivables and prime brokerage payables have been transferred out ofDue from banksandLoanstoOther assets, and out ofDue to banksandDue to customerstoOther liabilities, respectively. These changes in presentation impacted neither UBS’s income statement nor total assets and liabilities. The respective tables, notes and other information in this financial information section were adjusted accordingly.



                             
Corporate Center cost allocation impact on 2009 figures 
          Wealth          Total    
  Wealth Management &  Management  Global Asset  Investment  business  Corporate 
  Swiss Bank Americas  Management  Bank  divisions  Center 
  Wealth  Retail &                     
CHF million Management  Corporate                     
 
Estimated increase in 2009 operating expenses and decrease in performance before tax  128   96   84   44   288   640   (640)
 

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Note 1 Summary of significant accounting policies (continued)

For 2009 and 2008, the following reclassifications were made:

                         
Cash collateral from derivative transactions and Prime brokerage receivables and payables 
  31.12.09 – before      31.12.09 – after  31.12.08 – before      31.12.08 – after 
CHF million reclassification  Reclassification  reclassification  reclassification  Reclassification  reclassification 
 
Due from banks  46,574   (29,770)  16,804   64,451   (46,757)  17,694 
 
Cash collateral receivables on derivatives  0   53,774   53,774   0   85,703   85,703 
instruments                        
 
Loans  306,828   (40,351)  266,477   340,308   (48,852)  291,456 
 
Other assets  7,336   16,347   23,682   9,931   9,906   19,837 
 
Due to banks  65,166   (33,244)  31,922   125,628   (48,806)  76,822 
 
Cash collateral payables on derivatives instruments  0   66,097   66,097   0   92,937   92,937 
 
Due to customers  410,475   (71,212)  339,263   465,741   (103,102)  362,639 
 
Other liabilities  33,986   38,359   72,344   42,998   58,971   101,969 
 

Equity and Other comprehensive income
In 2010, UBS reviewed certain components of its equity and made adjustments to correct immaterial misstatements that relate to periods several years back. The following paragraphs describe the impacts of the changes on UBS’s financial statements as of 31 December 2010.

UBS’sForeign currency translationbalance was adjusted by a credit of CHF 592 million. The adjustment increased totalOther comprehensive income by CHF 592 million and totalComprehensive incomeby CHF 429 million because a loss of CHF 163 million was transferred to the income statement.
In addition, UBS reclassified an amount of CHF 213 million fromEquity attributable to non-controlling intereststoOther liabilitiesas this amount has been identified as redeemable and therefore not satisfying the criteria for an equity instrument under IFRS. Also, an amount of CHF 134 million relating to an equity participation plan was reclassified fromShare premiumtoOther liabilitiesas it was identified that the amount is not related to equity settled awards. The impact on the income statement for both items was insignificant.
Furthermore, UBS merged the balance of the balance sheet lineRevaluation reserve from step acquisitions, net of taxintoShare premium, resulting in an increase ofShare premiumby CHF 38 million. The balance sheet as of 31 December 2009 and 2008 and the statement of changes in equity for 2009 and 2008, were adjusted accordingly.

Personnel expenses
In 2010, UBS reclassified certain elements ofOther personnel expensestoVariable compensation – other in order to align the presentation with the new FINMA definition of variable compensation.

In addition, amounts previously reported underSalaries and variable compensationare presented for the first time on the following separate lines:Salaries, Variable compensation – discretionary bonus, Variable compensation – otherandWealth Management Americas: Financial advisor compensation.

     Furthermore, UBS reclassified the pension costs related to bonus toPension and other post-employment benefit plans.Previously, those amounts were reported underSocial security.Prior period amounts have been adjusted accordingly. The change in the presentation did not impact UBS’s personnel expenses. The related amounts are disclosed in the footnotes to Note 6.

Fair value hierarchy of financial instruments
From 2010 onwards, UBS considers input data observable and classifies the respective financial instrument as level 2 in the fair value hierarchy when there is an equally offsetting transaction. An offsetting transaction constitutes evidence of an observable market transaction, when it can be demonstrated that the offsetting transactions nullifies substantially all the price risk of the proportion of the offset instrument and the proportion is significant. In cases such as derivatives, where the counterparty’s credit risk is also based on observable inputs, then it can be concluded that all input data are observable. Refer to Note 27b) for more details.

Effective 2010

Improvements to IFRSs 2009
The IASB issued amendments to twelve IFRS standards as part of its annual improvements project in April 2009. UBS adopted the Improvements to IFRSs 2009 on 1 January 2010. The adoption of the amendments did not have a significant impact on UBS’s financial statements.

Amendments to IAS 39 Financial Instruments:

Recognition and Measurement – Eligible Hedged Items
The amendments to IAS 39 were issued in July 2008. The amendments provide additional guidance on the designation of a hedged item. The amendments clarify how the existing principles underlying hedge accounting should be applied in two particular situations: a) a one-sided risk in a hedged item and b) inflation in a financial hedged item. UBS adopted the amendments to IAS 39 on 1 January 2010. The adoption of the amend-



289

Financial information
Notes to the consolidated financial statements

b) Changes inNote 1 Summary of significant accounting policies comparability and other adjustments(continued)

Restatements madements to the financial statements 2008

UBS has restated its 2008 financial statements to correct identified accounting errors related to the 2008 financial statements. These errors were not material to the annual or quarterly 2008 financial statements, but related corrections would have been material to first quarter 2009 financial statements. On 21 May 2009, UBS re-filed its US Form 20-F for the year 2008, which included the restated 2008 financial statements. The restatement comprises three items in excess of CHF 100 million as follows:

The fair value of auction rate securities purchase commitments at 31 December 2008, which are recognized as negative replacement values on UBS’s balance sheet, was increased by CHF 112 million, resulting in a corresponding charge to net trading income.
For certain assets reclassified from“Held-for-trading”to“Loans and receivables”in fourth quarter 2008, recognition of interest income based on the effective interest rate method was reduced by CHF 180 million. Other assets were reduced accordingly as of 31 December 2008.
The partial disposals of an investment in a consolidated investment fund in 2008 gave rise to the realization of the related foreign currency translation loss deferred in shareholders’ equity. This adjustment reduced other income for the year 2008 by CHF 192 million butIAS 39 did not have a netsignificant impact on UBS’s equity. financial statements.

IFRS 3 Business Combinations, IAS 27 Consolidated and Separate Financial Statements, and IAS 21 The Effects of Changes in Foreign Exchange Rates

In additionJanuary 2008, the IASB issued the revised IFRS 3Business Combinationsand amendments to IAS 27Consolidated and Separate Financial Statements, and IAS 21The effects of Changes in Foreign Exchange Rates.
The most significant changes under revised IFRS 3 are as follows:
–Contingent consideration should be recognized at fair value as part of the consideration transferred at the acquisition date. Previously, contingent consideration was recognized if, and only if, UBS had a present obligation, the economic outflow was more likely than not and a reliable estimate was determinable.
–Non-controlling interests in an acquiree that are present ownership interests and provide entitlement to a proportionate share of the net assets in the event of liquidation should either be measured at fair value or as the non-controlling interest’s proportionate share of the fair value of net identifiable assets of the entity acquired. All other components of the non-controlling interests are measured at their acquisition-date fair values. The option is available on a transaction-by-transaction basis.
–Transaction costs incurred by the acquirer should be expensed as incurred.

The amendments to IAS 27 and the abovementioned items, a number of misstatements individually below CHF 65 million were adjusted. The aggregate net effect of these items on net profit attributableconsequential amendments to UBS shareholders was an increase of net profit attributable to shareholders of CHF 79 million.

The total net impactIAS 21 require the effects (including foreign exchange translation) of all restated items ontransactions with non-controlling interests to be recorded in equity if there is no change in control. The standards also specify the 2008 results was a reduction of net profit and net profit attributableaccounting when control is lost: any remaining interest in the entity should be re-measured to UBS shareholders of CHF 405 million, a reduction of equity and equity attributable to UBS shareholders of CHF 269 million,fair value, and a reductiongain or loss (including foreign exchange translation) should be recognized in profit or loss. The amendments to IAS 21 further clarify that no deferred foreign currency translation gains and losses are to be released upon a partial repayment of basicshare capital of a subsidiary without a loss of control.
UBS adopted the amendments to IFRS 3, IAS 27 and diluted earnings per share by CHF 0.15 and CHF 0.14 respectively. There was noIAS 21 with prospective effect on income tax expense.1 January 2010. The adoption of the revised guidance did not materially impact UBS’s financial statements.

Effective in 2009 and earlier

IAS 1 (revised) Presentation of Financial Statements
Effective 1 January 2009, the revised International Accounting Standard (IAS) 1 affected the presentation of owner changes in equity and of comprehensive income. UBS continued to present owner changes in equity in the “statement of changes in equity”, but detailed information relating to non-owner changes in equity, such as foreign exchange translation, cash flow hedges and financial investments available-for-sale, were presented in the “Statement“statement of comprehensive income”.

When implementing these amendments effectiveas of 1 January 2009, UBS also adjusted the format of its “statement of changes in equity” and replaced the “statement of recognized income and expense” in the financial statements of previous years with a “statement of comprehensive income”. Preferred securities issued by consolidated trusts are reported as “equity attributable to minority interests”, as they are equity instruments held by third parties. As these securities make up the largest part of UBS’s equity attributable to minority interests, UBS discloses movement information in a separate table.
UBS also re-assessed its accounting treatment of dividends from trust preferred securities. In line with the classification of trust preferred securities as equity instruments, UBS recognizes liabilities for the full dividend payment obligation once a coupon payment becomes mandatory, i.e., when it is triggered by a contractually determined event. In the income statement, the same amount is reclassified from net profit attributable to UBS shareholders to net profit attributable to minoritynon-controlling interests.

IAS 1 (revised) Presentation of Financial Statements, and
IAS 32 (revised) Financial Instruments: Presentation
The IASB issued a further amendment to IAS 1 and an amendment to IAS 32 regarding puttable financial instruments and obligations arising on liquidation. The IAS 32 amendment clarifies under which circumstances puttable financial instruments and obligations arising on liquidation have to be treated as equity instruments.

The amendment is limited in scope and is restricted to the accounting for such instruments under IAS 1, IAS 32, IAS 39 and IFRS 7. The amendment to IAS 1 requires additional information about puttable financial instruments and obligations arising on liquidations which have to be treated as equity instruments. UBS adopted the amendments on 1 January 2009. The adoption of the amendments did not have a significant impact on UBS’s Financial Statements.

IFRS 8 Operating Segments
Effective as of 1 January 2009, UBS adopted IFRS 8Operating Segmentswhich replaced IAS 14Segment Reporting.Reporting. Under the requirements of the new standard, UBS’s external segmental reporting is now based on the internal management reporting to the Group Executive Board (or the “chief operating decision maker”), which makes decisions on the allocation of resources and assesses the performance of the reportable segments.

In accordance with the new UBS structure announced in February 2009, UBS disclosed four reportable segments. These segments are the business divisions – Wealth Management & Swiss Bank, Wealth Management Americas, Global



Refer to item 33) and Note 2 for further details.

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Financial information

Asset Management and Investment Bank. While the Corporate Center does not meet the requirements of an operating segment, it is also shown separately. Segment information from prior periods in Note 2a has been restated to conform to the requirements of this new standard. In addition, goodwill and intangible assets presented in Note 16 have also been reallocated in order to reflect the revised segment reporting structure.

As UBS’s reportable segment operations are mainly financial, the total interest income and expense for all reportable segments are presented on a net basis. Based on the present arrangement of revenue-sharing agreements, the total intersegment revenues for UBS are immaterial. Apart from that, the segment assets are disclosed without the intercompany balances and this basis is in line with the internal management reporting. For more details on the basis on which the segment information is prepared and reconciled to the amounts presented in UBS’s income statement and balance sheet, refer to Note 2a.

IFRS 7 (revised) Financial Instruments: Disclosures
This standard was revised in March 2009 when the International Accounting Standards Board (IASB) published the amendment “Improving Disclosures about Financial Instruments”. Effective 1 January 2009, the amendment requires enhanced disclosures about fair value measurements and liquidity risk.

The enhanced fair value measurement disclosure requirements include: a fair value hierarchy (i.e. categorization of all financial instruments into levels 1, 2 and 3 based on the relevant definitions); significant transfers between level 1 and level 2; reconciliation of level 3 instruments at the beginning of the period to the ending balance (level 3 movement table); level 3 profit or loss for positions still held at balance sheet date; and sensitivity information for the total position of level 3 instruments and the basis for the calculation of such information.
The amended liquidity risk disclosure requirements largely confirm the previous rules for providing maturity information for non-derivative financial liabilities, but amend the rules for providing maturity information for derivative financial liabilities.

Reassessment of Embedded Derivatives
The International Financial Reporting Interpretations Committee (IFRIC) issued in March 2009 the supplement Embedded Derivatives: Amendments to IFRIC 9 and IAS 39. This guidance amends IFRIC 9 Reassessment of Embedded Derivatives, and IAS 39 Financial Instruments: Recognition and Measurement. The amendments clarify that on reclassification of a financial asset out of the“Held for trading”category, all embedded derivatives have to be assessed and, if necessary, separately accounted for in the financial statements. The application of this guidance did not materially impact UBS’s financial statements.

IFRIC 15 Agreements for the Construction of Real Estate
IFRIC 15 was issued on 3 July 2008 and is effective for annual periods beginning on or after 1 January 2009. IFRIC 15 provides guidance on the accounting for agreements for the construction of real estate where entities enter into agreements with buyers before construction has been completed and the timing of revenue recognition. The application of this guidance did not materially impact UBS’s financial statements.

IFRIC 16 Hedges of a Net Investment in a Foreign Operation
IFRIC 16 was issued on 1 October 2008 and became effective on 1 January 2009. IFRIC 16 provides guidance in identifying the foreign currency risks that qualify as a hedged risk in the hedge of a net investment in a foreign operation; where, within a group, hedging instruments that are hedges of a net investment in a foreign operation can be held to qualify for hedge accounting, and how an entity should determine the amounts to be reclassifiedreclassi-



290

Financial information

Note 1 Summary of significant accounting policies (continued)

fied from equity to profit or loss for both the hedging instrument and the hedged item. The impact of this interpretation on UBS’s financial statements was immaterial.

IAS 24 Related Party Disclosures
In November 2009, the IASB amended IAS 24Related Party Disclosureswith latest possible effective date 1 January 2011. UBS has early adopted the revised requirements in its annual financial statements 2009. The revised standard amends the definition of related parties, in particular, the relationship between UBS and associated companies of UBS’s key management personnel or their close family members. Transactions between UBS and associated companies of UBS key management personnel over which UBS key management personnel does not have control or joint control are no longer considered related partyrelated-party transactions. Due to the application of the revised guidance, related party transactions disclosed in Note 32e of the annual financial statements 2008 have been significantly reduced. Balances and movements of loans to related parties have been reduced by CHF 668 million atas of 31 December 2008 and CHF 530 million at 31 December 2007; and fees received for services provided by UBS have been reduced by CHF 11 million in 2008 and CHF 10 million in 2007.

Allocation of Shared Services Costs in Segment Disclosures
From 2009 onwards, ITI and Group Off-shoring costs managed by the Corporate Center are allocated to the direct cost lines personnel expenses, general and administrative expenses, and depreciation, in the respective business division income statements, based on appropriate internally determined allocation keys. In the Corporate Center income statement, costs allocated to the business divisions are deducted from the respective cost lines. In previous reports, these costs were presented as an expense on the line“Services (to)/from other business divisions”within each



279

Financial information
Notes to the consolidated financial statements2008.

Impact on income statement lines

For the comparative 12-month period in 2008, the following allocations were made:

                     
  Wealth  Wealth          
  Management &  Management  Global Asset  Investment  Corporate 
CHF million Swiss Bank  Americas  Management  Bank  Center 
 
Personnel expenses  228   85   20   300   (633)
 
General and administrative expenses  328   121   28   431   (909)
 
Depreciation of property and equipment  163   60   15   216   (455)
 
Services (to)/from other business divisions  (719)  (267)  (62)  (949)  1,997 
 

business division and an offsetting corresponding amount on that line in the Corporate Center. The new presentation format provides greater transparency by allocating shared service costs to direct cost lines in divisional income statements. Comparative periods have been adjusted.

Group results and business division performance before tax in previous periods were not impacted by this policy change.

Unit-linked Investment Contracts
In fourth quarter 2009, UBS decided to present Wealth Management & Swiss Banking’s obligations under unit-linked investment contracts underOther liabilitiesin order to align the treatment with similar contracts issued by Global Asset Management. In the past, the respective obligations of Wealth Management & Swiss Banking have been reported underDue to customers.UBS has retrospectively applied this change in presentation. The change in presentation resulted in the following effects on the balance sheet for 1 January 2008 and 31 December 2008: a decrease ofDue to customersand a corresponding increase in amounts due underOther liabilitieson the balance sheet (unit-linked investment contracts) of CHF 11,787 million and CHF 9,033 million, respectively. The change in presentation did not impact UBS’s total liabilities, income statements or earnings per share for these periods.

Effective in 2008 and earlier

IFRS 2 Share-based Payment:
Vesting Conditions and Cancellations
On 1 January 2008, UBS adopted an amendment to IFRS 2Share-based Payment: Vesting Conditions and Cancellationsand fully restated the two comparative prior years. The amended standard clarifies the definition of vesting conditions and the accounting treatment of cancellations. Under the amended standard, UBS is required to distinguish between vesting conditions (such as service and performance conditions) and non-vesting conditions.

The amended standard no longer considers vesting conditions to include certain non-compete provisions.
The impact of this change is that UBS compensation awards are expensed over the period that the employee is required to provide active services in order to earn the award.

Post-vesting sale and hedge restrictions and non-vesting conditions are considered when determining grant date fair value. The effect of the restatement on the opening balance sheet at 1 January 2006 was as follows: reduction of retained earnings by approximately CHF 2.3 billion, increase of share premium by approximately CHF 2.3 billion, increase

of liabilities (including deferred tax liabilities) by approximately CHF 0.5 billion, and increase of deferred tax assets by approximately CHF 0.5 billion.Net profitattributable to UBS shareholders declined by CHF 863 million in 2007 and by CHF 730 million in 2006. Additional compensation expenses of CHF 797 million and CHF 516 million waswere recognized in 2007 and 2006, respectively. These additional compensation expenses include awards granted in 2008 for the performance year 2007. The impact of the restatement on total equity as of 31 December 2007 was a decrease of CHF 366 million. Retained earnings atas of 31 December 2007 decreased by approximately CHF 3.9 billion, share premium increased by approximately CHF 3.5 billion, liabilities (including deferred tax liabilities) increased by approximately CHF 0.6 billion and deferred tax assets increased by approximately CHF 0.2 billion. The restatement decreased basic and diluted earnings per share for the year ended 31 December 2007 by CHF 0.40 each and for the year ended 31 December 2006 by CHF 0.33 and CHF 0.31, respectively. In order to provide comparative information, these amounts also reflect the retrospective adjustments to shares outstanding in 2007 due to the capital increase and the share dividend paid in 2008.

The additional compensation expense is attributable to the acceleration of expenses related to share-based awards as well as for certain alternative investment vehicle awards and deferred cash compensation awards which contain non-compete provisions and sale and hedge restrictions that no longer qualify as vesting conditions under the amended standard.

Reclassifications of Financial Assets
The International Accounting Standards Board published an amendment to International Accounting Standard 39 (IAS 39Financial Instruments: Recognition and Measurement)Measurement) on 13 October 2008, under which eligible financial assets, subject to certain conditions being met, may be reclassified out of the“Held for trading”tradingcategory if the firm had the intent and ability to hold them for the foreseeable future or until maturity.



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Financial information

Although the amendment could have been applied retrospectively from 1 July 2008, UBS decided at the end of October 2008 to apply the amendment with effect from 1 October 2008 following an assessment of the implications on its financial statements. Refer to Note 29b for further details on reclassification of financial assets.

Changes to segment reporting
UBS has continuously reduced its private equity business in Industrial Holdings over the last three years. The business no longer includes consolidated industrial private equity investments. Starting first quarter 2008, UBS presented the remaining activities from this business, mainly financial investments available-for-sale, under Corporate Center.



c) International Financial Reporting Standards and Interpretations to be adopted in 2010 and later

Effective in 2010

Improvements to IFRS 2009
The International Accounting Standards Board issued amendments to twelve IFRS standards as part of its annual improvements project in April 2009. The adoption of the amendments could result in accounting changes for presentation, recognition or measurement purposes. The improvements to IFRS 2009 will be adopted by UBS as of 1 January 2010. UBS does not expect these amendments to have a significant impact on UBS’s financial statements.

Amendments to IAS 39 Financial Instruments: Recognition
and Measurement – Eligible Hedged Items
The amendment to IAS 39 was issued in July 2008. The amendments provide additional guidance on the designation of a hedged item. The amendment clarifies how the existing principles underlying hedge accounting should be applied in two particular situations: a) a one-sided risk in a hedged item and b) inflation in a financial hedged item. The amendments to IAS 39 will be adopted by UBS as of 1 January 2010. UBS does not expect the amendments to have a significant impact on UBS’s financial statements.

IFRS 3 Business Combinations and IAS 27 Consolidated and
Separate Financial Statements
In January 2008, the IASB issued a revised Standard of IFRS 3Business Combinationsand amendments to IAS 27Consolidated and Separate Financial Statements.The most significant changes under revised IFRS 3 are as follows:
–Contingent consideration will be recognized at fair value as part of the consideration transferred at the acquisition date. Currently contingent consideration is only recognized once it meets the probability and reliably measurable criteria.
–Non-controlling interests in an acquiree will either be measured at fair value or as the non-controlling interest’s proportionate share of the fair value of net identifiable assets of the entity acquired. The option is available on a transaction-by-transaction basis.

–Transaction costs incurred by the acquirer will no longer be part of the acquisition cost but will have to be expensed as incurred.
The revised IFRS 3 and IAS 27 are effective for annual periods beginning on 1 January 2010 and have to be applied prospectively from the date of adoption. Business combinations consummated prior to that date will not be impacted.
The amendments to IAS 27 (including the consequential amendments to IAS 21) require the effects (including foreign exchange translation) of all transactions with non-controlling interests to be recorded in equity if there is no change in control. The standards also specify the accounting when control is lost: any remaining interest in the entity is remeasured to fair value, and a gain or loss (including foreign exchange translation) is recognized in profit or loss. The amendments to IAS 21 further clarify that no deferred foreign currency translation gains and losses are to be released upon a partial repayment of share capital of a subsidiary without a loss of control. The IAS 21 amendments are effective on 1 January 2010 and have to be applied prospectively from the date of adoption.

Effective in 2011 and later, if not adopted early

IFRS 9 Financial Instruments
In November 2009, the IASB issued IFRS 9Financial instruments,which includes revised guidance on the classification and measurement of financial assets. The publication of IFRS 9 represents the completion of the first part of a multi-stage project to replace IAS 39Financial instruments: recognition and measurement.Under the revised guidance, a financial asset is to be accounted for at amortized cost only if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Non-traded equity instruments may be accounted for at fair value through equity, but the subsequent release of amounts booked directly to equity into the income state-



281291

Financial information
Notes to the consolidated financial statements

Note 1 Summary of significant accounting policies (continued)

c) International Financial Reporting Standards and Interpretations to be adopted in 2011 and later

ment is no longer permitted. All other financial assets are measured at fair value through profit or loss.Effective in 2011

Improvements to IFRSs 2010
In May 2010, the IASB issued amendments to seven standards as part of its annual improvements project. UBS is currently assessingwill adopt the improvements to IFRSs 2010 as of 1 January 2011. The amendments will not have a material impact of the new standard on itsUBS’s financial statements. It is likely that a number of financial assets currently accounted for at amortized cost will be accounted for at fair value through profit or loss under the new standard because a) their contractual cash flows do not comprise solely payments of principal and interest on the principal, and/or b) UBS does not hold the assets with the intention to collect contractual cash flows they generate. Certain debt securities currently classified as available-for-sale may satisfy the criteria for “amortized cost” accounting; debt securities available-for-sale failing these criteria will be accounted for at fair value. The effective date for mandatory adoption is 1 January 2013, with early

adoption permitted. UBS did not adopt IFRS 9 for the year ended 31 December 2009.

IFRIC 14 Prepayments of a Minimum Funding Requirement
In November 2009, the IASB issued the amended IFRIC 14The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction, which itself is an interpretation of IAS 19Employee Benefits.Benefits. The amendment applies in the limited circumstances when an entity is subject to minimum funding requirements and makes an early payment of contributions to cover those requirements. The amendment permits an entity to treat the benefit of such an early payment as an asset. The amendment is effective onfrom 1 January 2011. Early application is permitted. UBS doesis not expectaffected by this amendment.

Effective in 2012 and later, if not adopted early

IFRS 9 Financial Instruments
In November 2009, the IASB issued IFRS 9Financial instruments, which includes revised guidance on the classification and measurement of financial assets. In October 2010, the IASB updated IFRS 9 to include guidance on financial liabilities and derecognition of financial instruments and amended IFRS 7 to include disclosures about transferred financial assets. The publication of IFRS 9 represents the completion of the first part of a multi-stage project to replace IAS 39Financial instruments: recognition and measurement.

The standard requires all financial assets to be classified on the basis of the entity’s business model for managing the financial assets, and the contractual cash flow characteristics of the financial asset. A financial asset is accounted for at amortized cost only if the following criteria are met: (a) the objective of the business model is to hold the financial asset for the collection of the contractual cash flows, and (b) the contractual cash flows under the instrument solely represent payments of principal and interest. If a financial asset meets the criteria to be measured at amortized cost, 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. Non-traded equity instruments may be accounted for at fair value through other comprehensive income (OCI). Such designation is available on initial recognition on an instrument-by-instrument basis and is irrevocable.

There is no subsequent recycling of realized gains or losses from OCI to profit or loss. All other financial assets are measured at fair value through profit or loss.

The accounting and presentation for financial liabilities and for derecognition of financial instruments has been transferred from IAS 39Financial instruments: Recognition and measurementto IFRS 9. The guidance is unchanged with one exception: the accounting for financial liabilities designated at fair value through profit or loss. The requirements in IAS 39 regarding the classification and measurement of financial liabilities have been retained, including the related application and implementation guidance. The two existing measurement categories for financial liabilities remain unchanged. The criteria for designating a financial liability at fair value through profit or loss also remain unchanged. For financial liabilities designated at fair value through profit or loss, changes in fair value due to changes in an entity’s own credit risk are directly recognized in OCI instead of in profit and loss. There is no subsequent recycling of realized gains or losses from OCI to profit or loss. For financial liabilities that are required to be measured at fair value through profit or loss, i.e., all derivatives and trading portfolio liabilities, all fair value movements will continue to be recognized in profit and loss.
UBS is currently assessing the impact from this interpretationof the new standard on its financial statements. The effective date for mandatory adoption is 1 January 2013, with early adoption permitted. The IFRS 7 amendments are applicable for annual accounting periods beginning on or after 1 July 2011. UBS did not early adopt IFRS 9 for the year ended 31 December 2010.

Amendments to IAS 12 Income Taxes
In December 2010, the IASB issued amendments to IAS 12Income Taxesto clarify guidance related to the measurement of deferred taxes. IAS 12 requires an entity to measure the deferred tax related to an asset based on whether the entity expects to recover the carrying amount of the asset principally through use or sale. The guidance establishes a rebuttable presumption that recovery of the carrying amount will normally be through sale. As a result of the amendments, SIC-21,Income Taxes – Recovery of Revalued Non-Depreciable Assets, would no longer apply to investment properties carried at fair value. The amendments provide a practical approach for measuring deferred tax liabilities and deferred tax assets when investment property is measured using the fair value model. The amendments also incorporate the guidance contained in SIC-21, which is now withdrawn. The amendments are effective for annual periods beginning on or after 1 January 2012, with early adoption permitted. UBS is currently assessing the impact of the revised standard on its financial statements.



282292

Financial information

Note 2a Segment reporting

In 2009, UBS’s businesses were reorganized on a worldwide basis intoUBS AG is the parent company of the UBS Group (Group). The operational structure of the Group comprises the Corporate Center and four business divisions and the Corporate Center. The business divisionsdivisions: Wealth Management & Swiss Bank, Wealth Management Americas, Global Asset Management and the Investment Bank. In 2010, for the purpose of segment reporting, the business division Wealth Management & Swiss Bank constitute one segment each. In total,was split into two separate reportable segments, namely Wealth Management and Retail & Corporate. As a result of the split, UBS reportsnow presents five reportable segments compared with only four businessreportable segments and the Corporate Center in 2009. The Corporate Center includes all corporate functions, elimination items as well as the remaining industrial holdings activities and is not considered a business segment. The “Corporate Center” column of the table in Note 2a “Segment reporting” has been renamed “Treasury activities and other corporate items”. Refer to Note 1a) 33) “Segment reporting” for more details.

Wealth Management & Swiss Bank

Wealth Management & Swiss Bank focuses on delivering comprehensive financial services to high net worth and ultra high net worth individuals around the world – except to those served by Wealth Management Americas – as well as private and corporate clients in Switzerland. UBSOur Wealth Management business unit provides clients in over 40 countries, including Switzerland, with financial advice, products and tools to fit their individual needs. UBS hasOur Retail & Corporate business unit provides individual and business clients with an array of banking services, such as deposits and lending, and maintains a leading position across allits client segments in Switzerland.

Wealth Management Americas

Wealth Management Americas provides advice-based relationshipssolutions through financial advisors who deliver a fully integrated set of products and services specifically designed to address the needs

of ultra high net worth, high net worth and core affluent individuals and families. It includes the former Wealthdomestic United States business (Wealth Management US business unit, as well asUS), the domestic Canadian business and the international business booked in the United States.

Global Asset Management

Global Asset Management is a large-scale asset manager with wellbusinesses diversified businesses across regions, capabilities and distribution channels. It offers investment capabilities and investment styles across all major traditional and alternative asset classes. These includeclasses including equities, fixed income, currency, hedge fund, real estate infrastructure and private equity investment capabilitiesinfrastructure that can also be combined ininto multi-asset strategies. The fund services unit provides legal fund set-up and accounting and reporting for retail and institutional funds.

Investment Bank

The Investment Bank provides securities and other financial products and research in equities, fixed income, rates, foreign exchange and precious metals.commodities. It also provides advisory services and access to the world’s capital markets for corporate and institutional intermediaryclients, sovereign and governmental bodies, financial intermediaries, alternative asset management clients.managers and private investors.

Corporate Center

The Corporate Center seeks to ensure that the business divisions operate as a coherentprovides and effective whole by providing and managingmanages support and control functions for the business divisions and the Group in areas such areas as risk control, finance, legal and compliance, funding, capital and balance sheet management, management of foreign currencies,non-trading risk, communication and branding, human resources, information technology, real estate, procurement, corporate development and service centres. Most costs and personnel of the Corporate Center are allocated to the business divisions.





283

293

Financial information
Notes to the consolidated financial statements

Note 2a Segment reporting (continued)

Internal chargesTransactions between the reportable segments are carried out at internally agreed rates or at arm’s length and transfer pricing adjustments are reflected in the performance of each business.segment. Revenue-sharing agreements are used to allocate external customerclient revenues to a segment and cost-allocation agreements are used to allocate shared costs between the segments.

                             
                      Treasury    
          Wealth          activities and    
  Wealth Management &  Management  Global Asset  Investment  other corporate    
  Swiss Bank Americas  Management  Bank  items  UBS 
  Wealth  Retail &                     
CHF million Management  Corporate                     
 
                             
For the year ended 31 December 2010
                            
 
Net interest income  1,737   2,422   695   (17)  2,235   (858)  6,215 
 
Non-interest income  5,608   1,524   4,870   2,075   9,775   1,993   25,845 
 
Income1
  7,345   3,946   5,565   2,058   12,010   1,135   32,060 
 
Credit loss (expense) / recovery  11   (76)  (1)  0   0   0   (66)
 
Total operating income2
  7,356   3,870   5,564   2,058   12,010   1,135   31,994 
 
Personnel expenses  3,153   1,625   4,225   1,096   6,743   78   16,920 
 
General and administrative expenses  1,264   836   1,223   400   2,693   168   6,585 
 
Services to / from other business divisions  449   (509)  (6)  (5)  64   8   0 
 
Depreciation of property and equipment  163   146   198   43   278   89   918 
 
Amortization of intangible assets3
  19   0   55   8   34   0   117 
 
Total operating expenses4
  5,049   2,098   5,694   1,542   9,813   343   24,539 
 
Performance from continuing operations before tax
  2,308   1,772   (130)  516   2,197   793   7,455 
 
Performance from discontinued operations before tax
  0   0   0   0   0   2   2 
 
Performance before tax
  2,308   1,772   (130)  516   2,197   795   7,457 
 
Tax expense / (benefit) on continuing operations                          (381)
 
Tax expense / (benefit) on discontinued operations                          0 
 
Net profit
                          7,838 
 
Additional information5
                            
 
Total assets  94,056   153,101   50,071   15,894   966,945   37,180   1,317,247 
 
Additions to non-current assets  25   12   48   8   32   467   593 
 
1 Impairments of financial investments available-for-sale for the year ended 31 December 2010 were as follows: Wealth Management & Swiss Bank CHF 45 million; Global Asset Management CHF 2 million; Investment Bank CHF 41 million; Treasury activities and other corporate items CHF (16) million. The total inter-segment revenues for the Group are immaterial as the majority of the revenues are allocated across the business divisiondivisions by means of revenue-sharing agreements.  2 Refer to “Note 38 Reorganizations and disposals” for further information on the impact on performance before tax of restructuring charges, and to “Note 27 Fair value of financial instruments” for further information on the allocation of own credit charges to the Investment Bank.  3 Refer to “Note 16 Goodwill and intangible assets” for further information regarding goodwill and other intangible assets by business division.  4 Refer to “Note 1 Summary of significant accounting policies” for more information on the allocation of additional Corporate Center costs to business divisions from 2010 onwards.  5 The segment assets are based on a reasonable basis. third-party view, i.e. the amounts do not include inter-company balances.

294

Financial information

Note 2a Segment reporting (continued)

Transactions between business divisionsthe reportable segments are conductedcarried out at internally agreed transfer pricesrates or at arm’s length.length and are reflected in the performance of each segment. Revenue-sharing agreements are used to allocate external client revenues to a segment and cost-allocation agreements are used to allocate shared costs between the segments.

                         
  Wealth  Wealth             
  Management &  Management  Global Asset  Investment  Corporate    
CHF million Swiss Bank  Americas  Management  Bank  Center  UBS 
 

For the year ended 31 December 2009
                        
 
Net interest income1
  4,533   800   2   2,339   (1,229)  6,446 
 
Non-interest income  6,989   4,746   2,134   2,494   1,623   17,987 
 
Income2
  11,523   5,546   2,137   4,833   394   24,433 
 
Credit loss (expense)/recovery  (133)  3   0   (1,698)  (5)  (1,832)
 
Total operating income  11,390   5,550   2,137   3,135   389   22,601 
 
Personnel expenses  5,197   4,231   996   5,568   551   16,543 
 
General and administrative expenses  2,017   1,017   387   2,628   199   6,248 
 
Services to/from other business divisions  (90)  4   (74)  (147)  306   0 
 
Depreciation of property and equipment  289   170   36   360   193   1,048 
 
Impairment of goodwill3
  0   34   340   749   0   1,123 
 
Amortization of intangible assets3
  67   62   13   59   0   200 
 
Total operating expenses  7,480   5,518   1,698   9,216   1,250   25,162 
 
Performance from continuing operations before tax
  3,910   32   438   (6,081)  (860)  (2,561)
 
Performance from discontinued operations before tax
  0   0   0   0   (7)  (7)
 
Performance before tax4
  3,910   32   438   (6,081)  (867)  (2,569)
 
Tax expense on continuing operations                      (443)
 
Tax expense on discontinued operations                      0 
 
Net profit
                      (2,125)
 
Additional information5
                        
 
Total assets  248,140   53,197   20,238   991,964   26,999   1,340,538 
 
Additions to non-current assets  43   59   11   81   745   939 
 
                             
          Wealth          Treasury activities    
  Wealth Management &  Management  Global Asset      and other    
  Swiss Bank Americas  Management  Investment Bank  corporate items  UBS 
  Wealth  Retail &                     
CHF million Management  Corporate                     
 
                             
For the year ended 31 December 2009
                            
 
Net interest income  1,853   2,681   800   2   2,339   (1,229)  6,446 
 
Non-interest income  5,574   1,415   4,746   2,134   2,494   1,623   17,987 
 
Income1
  7,427   4,096   5,546   2,137   4,833   394   24,433 
 
Credit loss (expense) / recovery  45   (178)  3   0   (1,698)  (5)  (1,832)
 
Total operating income  7,471   3,918   5,550   2,137   3,135   389   22,601 
 
Personnel expenses  3,360   1,836   4,231   996   5,568   551   16,543 
 
General and administrative expenses  1,182   835   1,017   387   2,628   199   6,248 
 
Services to / from other business divisions  428   (518)  4   (74)  (147)  306   0 
 
Depreciation of property and equipment  154   136   170   36   360   193   1,048 
 
Impairment of goodwill2
  0   0   34   340   749   0   1,123 
 
Amortization of intangible assets2
  67   0   62   13   59   0   200 
 
Total operating expenses3
  5,191   2,289   5,518   1,698   9,216   1,250   25,162 
 
Performance from continuing
operations before tax
  2,280   1,629   32   438   (6,081)  (860)  (2,561)
 
Performance from discontinued
operations before tax
  0   0   0   0   0   (7)  (7)
 
Performance before tax
  2,280   1,629   32   438   (6,081)  (867)  (2,569)
 
Tax expense / (benefit) on continuing operations                      (443)
 
Tax expense / (benefit) on discontinued operations                      0 
 
Net profit
                          (2,125)
 
Additional information4
                            
 
Total assets  109,627   138,513   53,197   20,238   991,964   26,999   1,340,538 
 
Additions to non-current assets  13   30   59   11   81   745   939 
 
1 Net interest income is disclosed to comply with the IFRS requirements. Refer to “Note 3 Net interest and trading income” for the information which corresponds to the view of management.  2 Impairments of financial investments available-for-sale for the year ended 31 December 2009 were as follows: Wealth Management & Swiss Bank CHF 158 million; Global Asset Management CHF 20 million; Investment Bank CHF 142 million; Corporate CenterTreasury activities and other corporate items CHF 29 million. The total inter-segment revenues for the Group are immaterial as the majority of the revenues are allocated across the business divisions by means of revenue-sharing agreements.  32 Refer to “Note 16 Goodwill and intangible assets” of this report for further information regarding goodwill and other intangible assets by business division.  43 Refer to “Note 38 Reorganizations and disposals”1 Summary of significant accounting policies” for further information on the impact on performance before tax of the disposal of UBS Pactual and restructuring charges, and to “Note 27 Fair value of financial instruments” for furthermore information on the allocation on own credit charges.  of additional Corporate Center costs to business divisions from 2010 onwards.  54 The segment assets are based on a third-party view, and this is in line with the reporting to the management, i.e. the amounts do not include inter-company balances.

284295

Financial information


Notes to the consolidated financial statements

Note 2a Segment reporting (continued)

Internal chargesTransactions between the reportable segments are carried out at internally agreed rates or at arm’s length and transfer pricing adjustments are reflected in the performance of each business.segment. Revenue-sharing agreements are used to allocate external customerclient revenues to a business division on a reasonable basis. Transactionssegment and cost-allocation agreements are used to allocate shared costs between business divisions are conducted at internally agreed transfer prices or at arm’s length.the segments.

                            
 Wealth Treasury activities   
                         Wealth Management & Management Global Asset and other   
 Wealth Wealth          Swiss Bank Americas  Management  Investment Bank  corporate items  UBS 
 Management & Management Global Asset Investment Corporate    Wealth Retail &           
CHF million Swiss Bank Americas Management Bank Center UBS  Management Corporate           
For the year ended 31 December 2008
  
Net interest income 5,424 938  (2) 2,007  (2,375) 5,992  2,217 3,207 938  (2) 2,007  (2,375) 5,992 
Non-interest income 9,989 5,340 2,906  (23,808) 3,373  (2,200) 8,285 1,704 5,340 2,906  (23,808) 3,373  (2,200)
Income1
 15,413 6,278 2,905  (21,800) 998 3,792  10,502 4,911 6,278 2,905  (21,800) 998 3,792 
Credit loss (expense)/recovery  (392)  (29) 0  (2,575) 0  (2,996)
Credit loss (expense) / recovery  (388)  (4)  (29) 0  (2,575) 0  (2,996)
Total operating income 15,021 6,249 2,904  (24,375) 998 796  10,114 4,907 6,249 2,904  (24,375) 998 796 
Personnel expenses 5,430 4,271 946 5,182 433 16,262  3,503 1,927 4,271 946 5,182 433 16,262 
General and administrative expenses 3,295 2,558 462 3,830 353 10,498  2,357 938 2,558 462 3,830 353 10,498 
Services to/from other business divisions  (73) 16 88 41  (73) 0 
Services to / from other business divisions 409  (482) 16 88 41  (73) 0 
Depreciation of property and equipment 323 162 44 447 265 1,241  181 142 162 44 447 265 1,241 
Impairment of goodwill2
 0 0 0 341 0 341 
Impairment of goodwill 0 0 0 0 341 0 341 
Amortization of intangible assets2
 33 65 33 83 0 213 
Amortization of intangible assets 33 0 65 33 83 0 213 
Total operating expenses 9,008 7,072 1,572 9,925 979 28,555 
Total operating expenses2
 6,483 2,524 7,072 1,572 9,925 979 28,555 
Performance from continuing operations before tax
 6,013  (823) 1,333  (34,300) 19  (27,758) 3,631 2,382  (823) 1,333  (34,300) 19  (27,758)
Performance from discontinued operations before tax
 0 0 0 0 198 198  0 0 0 0 0 198 198 
Performance before tax
 6,013  (823) 1,333  (34,300) 217  (27,560) 3,631 2,382  (823) 1,333  (34,300) 217  (27,560)
Tax expense on continuing operations  (6,837)
Tax expense / (benefit) on continuing operations  (6,837)
Tax expense on discontinued operations 1 
Tax expense / (benefit) on discontinued operations 1 
Net profit
  (20,724)  (20,724)
Additional information3
  
Total assets 251,487 39,039 24,640 1,680,257 19,392 2,014,815  96,777 154,710 39,039 24,640 1,680,257 19,392 2,014,815 
Additions to non-current assets 275 135 430 809 961 2,609  241 34 135 430 809 961 2,609 
1 Impairments of financial investments available-for-sale for the year ended 31 December 2008 were as follows: Wealth Management & Swiss Bank CHF 19 million; Wealth Management Americas CHF 1 million; Global Asset Management CHF 22 million; Investment Bank CHF 121 million; Corporate CenterTreasury activities and other corporate items CHF 40 million. The total inter-segment revenues for the Group are immaterial as the majority of the revenues are allocated across the business divisions by means of revenue-sharing agreements.  2 Refer to “Note 16 Goodwill and intangible assets”1 Summary of this reportsignificant accounting policies” for furthermore information regarding goodwill and other intangible assets byon the allocation of additional Corporate Center costs to business division.  divisions from 2010 onwards.  3 The segment assets are based on a third-party view, and this is in line with the reporting to the management, i.e. the amounts do not include inter-company balances.

285

Financial information
Notes to the consolidated financial statements

Note 2a Segment reporting (continued)

Internal charges and transfer pricing adjustments are reflected in the performance of each business. Revenue-sharing agreements are used to allocate external customer revenues to a business division on a reasonable basis. Transactions between business divisions are conducted at internally agreed transfer prices or at arm’s length.

                         
  Wealth  Wealth             
  Management &  Management  Global Asset  Investment  Corporate    
CHF million Swiss Bank  Americas  Management  Bank  Center1  UBS 
 
For the year ended 31 December 2007
                        
 
Net interest income  5,600   824   (76)  209   (1,220)  5,337 
 
Non-interest income  12,089   6,329   4,170   (747)  4,782   26,622 
 
Income2
  17,689   7,153   4,094   (538)  3,562   31,959 
 
Credit loss (expense)/recovery  30   (2)  0   (266)  (0)  (238)
 
Total operating income  17,718   7,151   4,094   (804)  3,562   31,721 
 
Personnel expenses  6,356   5,060   1,883   11,633   583   25,515 
 
General and administrative expenses  2,514   1,209   593   3,800   312   8,429 
 
Services to/from other business divisions  (43)  28   73   (171)  114   0 
 
Depreciation of property and equipment  334   163   72   4313   243   1,243 
 
Amortization of intangible assets4
  15   70   19   172   0   276 
 
Total operating expenses  9,176   6,530   2,640   15,865   1,252   35,463 
 
Performance from continuing operations before tax
  8,543   621   1,454   (16,669)  2,310   (3,742)
 
Performance from discontinued operations before tax
  0   0   0   0   145   145 
 
Performance before tax
  8,543   621   1,454   (16,669)  2,455   (3,597)
 
Tax expense on continuing operations                      1,369 
 
Tax expense on discontinued operations                      (258)
 
Net profit
                      (4,708)
 
Additional information5
                        
 
Total assets  256,738   34,730   43,500   1,922,815   17,109   2,274,891 
 
Additions to non-current assets  223   416   553   1,111   1,927   4,230 
 
1 Includes data from Industrial Holdings which was considered a reportable segment in 2007. Results of Industrial Holdings: Total operating income CHF 689 million, total operating expenses CHF 163 million, performance from continuing operations before tax CHF 526 million, profit from discontinued operations before tax CHF 138 million.  2 Impairments of financial investments available-for-sale for the year ended 31 December 2007 were as follows: Wealth Management & Swiss Bank CHF 11 million; Global Asset Management CHF 39 million; Investment Bank CHF 22 million; Corporate Center CHF 2 million.  3 Includes CHF 34 million for impairments of leasehold improvements and other machines and equipment.  4 Refer to “Note 16 Goodwill and intangible assets” of this report for further information regarding goodwill and other intangible assets by business division.  5 The segment assets are based on a third-party view and this is in line with the reporting to the management, i.e. the amounts do not include inter-company balances.

286296

Financial information

Note 2b Segment reporting by geographic location

The geographic analysis of operating income and non-current assets is based on the location of the entity in which the transactions and assets are recorded. The divisions of the Group are managed on an autonomous basis worldwide with a focus on cross-divisional collaboration and the interest of UBS’sour clients to yield the maximum possible profitability by product line for the Group. The geographical analysis of operating income and non-current assets is provided in order to comply with IFRS.

                 
For the year ended 31 December 2010 
  Total operating income Total non-current assets 
  CHF million  Share %  CHF million  Share % 
 
Switzerland  12,670   40   4,922   31 
 
United Kingdom  2,791   9   594   4 
 
Rest of Europe  1,514   5   1,078   7 
 
United States  10,752   34   8,673   54 
 
Asia Pacific  3,796   12   394   2 
 
Rest of the world  470   1   418   3 
 
Total
  31,994   100   16,080   100 
 
                 
For the year ended 31 December 2009 
  Total operating income Total non-current assets 
  CHF million  Share %  CHF million  Share % 
 
Switzerland  11,939   53   5,137   28 
 
United Kingdom  (3,999)  (18)  743   4 
 
Rest of Europe  1,264   6   1,266   7 
 
United States  9,333   41   9,928   55 
 
Asia Pacific  3,770   17   451   3 
 
Rest of the world  294   1   565   3 
 
Total
  22,601   100   18,090   100 
 
                 
For the year ended 31 December 2008 
  Total operating income Total non-current assets 
  CHF million  Share %  CHF million  Share % 
 
Switzerland  11,564   1,453   5,207   25 
 
United Kingdom  (9,219)  (1,158)  805   4 
 
Rest of Europe  6,132   770   1,337   7 
 
United States  (10,519)  (1,321)  10,505   51 
 
Asia Pacific  3,122   392   495   2 
 
Rest of the world  (284)  (36)  2,184   11 
 
Total
  796   100   20,533   100 
 
                 
For the year ended 31 December 2007 
  Total operating income  Total non-current assets 
  CHF million  Share %  CHF million  Share % 
 
Switzerland  18,787   59   5,355   22 
 
United Kingdom  (1,671)  (5)  2,336   10 
 
Rest of Europe  2,541   8   1,006   4 
 
United States  880   3   11,686   49 
 
Asia Pacific  6,393   20   388   2 
 
Rest of the world  4,791   15   2,980   13 
 
Total
  31,721   100   23,751   100 
 

287297

Financial information
Notes to the consolidated financial statements

Income statement notes

Note 3 Net interest and trading income

Accounting standards require separate disclosure of“Net interest income”incomeand“Net trading income”income (see(see the tables on this and the next page). This required disclosure, however, does not take into account that net interest and trading income are generated by a range of different businesses. In many cases, a particular business can generate both net interest and trading income. Fixed income trading activity, for example, generates both trading profits and coupon income. UBS considers it to be more meaningful to analyze net interest and trading income according to the businesses that drive

it. The second table below (“Breakdown(Breakdown by busi-

nesses”)businesses) provides information that corresponds to this view: “NetNet income from trading businesses”businesses includes both interest and trading income generated by the Investment Bank, including its lending activities, and trading income generated by the other business divisions; “NetNet income from interest margin businesses”businesses comprises interest income from the loan portfolios of Wealth Management & Swiss Bank and Wealth Management Americas; “NetNet income from treasury activities and other”other reflects all income from the Group’s centralized treasury function.



                             
 For the year ended % change from  For the year ended % change from 
CHF million 31.12.09 31.12.08 31.12.07 31.12.08  31.12.10 31.12.09 31.12.08 31.12.09 
  
Net interest and trading income
  
Net interest income 6,446 5,992 5,337 8  6,215 6,446 5,992  (4)
Net trading income  (324)  (25,820)  (8,353) 99  7,471  (324)  (25,820) 
Total net interest and trading income
 6,122  (19,828)  (3,016)  13,686 6,122  (19,828) 124 
  
Breakdown by businesses
  
Net income from trading businesses1
 382 (27,203)  (10,658)     7,508 382  (27,203) 
Net income from interest margin businesses 5,053 6,160 6,230  (18) 4,624 5,053 6,160  (8)
Net income from treasury activities and other 687 1,214  1,412 (43) 1,554 687 1,214 126 
Total net interest and trading income
 6,122  (19,828)  (3,016)  13,686 6,122  (19,828) 124 
  
Net interest income2
  
Interest income
  
Interest earned on loans and advances3
 13,202 20,213 21,263  (35)
Interest earned on loans and advances3, 4
 10,603 13,202 20,213  (20)
Interest earned on securities borrowed and reverse repurchase agreements 2,629 22,521 48,274  (88) 1,436 2,629 22,521  (45)
Interest and dividend income from trading portfolio 7,150 22,397 39,101  (68) 6,015 7,150 22,397  (16)
Interest income on financial assets designated at fair value 316 404 298   (22) 262 316 404  (17)
Interest and dividend income from financial investments available-for-sale 164 145 176 13  557 164 145 240 
Total
 23,461 65,679 109,112  (64) 18,872 23,461 65,679  (20)
Interest expense
  
Interest on amounts due to banks and customers 3,873 18,150 29,318  (79)
Interest on amounts due to banks and customers5
 1,984 3,873 18,150  (49)
Interest on securities lent and repurchase agreements 2,179 16,123 40,581  (86) 1,282 2,179 16,123  (41)
Interest and dividend expense from trading portfolio 3,878 9,162 15,812  (58) 3,794 3,878 9,162  (2)
Interest on financial liabilities designated at fair value 2,855 7,298 7,659  (61) 2,392 2,855 7,298  (16)
Interest on debt issued 4,231 8,954 10,405  (53) 3,206 4,231 8,954  (24)
Total
 17,016 59,687 103,775  (71) 12,657 17,016 59,687  (26)
Net interest income
 6,446 5,992 5,337 8  6,215 6,446 5,992  (4)
1 Includes lending activities of the Investment Bank.  2 Interest includes forward points on foreign exchange swaps used to manage short-term interest rate risk on foreign currency loans and deposits.3 Includes interest income on impaired loans and advances of CHF 9537 million for 2010, CHF 66 million for 2009 and CHF 9942 million for 20082008.  4 Includes interest income on cash collateral receivables on derivative instruments and CHF 110 million for 2007.net interest income on swaps.  5 Includes interest expense on cash collateral payables on derivative instruments.

288298

Financial information

Financial information

                         
Note 3 Net interest and trading income (continued) 
       
Net trading income1 
  For the year ended  % change from 
CHF million 31.12.09  31.12.08  31.12.07  31.12.08 
 
Investment Bank equities  2,462   4,694   9,048   (48)
 
Investment Bank fixed income, currencies and commodities  (5,455)  (35,040)  (21,424)  84 
 
Other business divisions  2,668   4,525   4,023   (41)
 
Net trading income
  (324)  (25,820)  (8,353)  99 
 
of which: net gains/(losses) from financial assets designated at fair value
  678   (974)  (30)    
 
of which: net gains/(losses) from financial liabilities designated at fair value2
  (6,741)  44,284   (3,779)    
 
1 Refer to the tableNote 3 Net interest and trading income (continued)
                 
  
  For the year ended % change from 
CHF million 31.12.10  31.12.09  31.12.08  31.12.09 
 
                 
Net trading income1
                
 
Investment Bank equities  2,356   2,462   4,694   (4)
 
Investment Bank fixed income, currencies and commodities  2,000   (5,455)  (35,040)    
 
Other business divisions2
  3,115   2,668   4,525   17 
 
Net trading income
  7,471   (324)  (25,820)    
 
of which: net gains / (losses) from financial assets designated at fair value
  465   678   (974)  (31)
 
of which: net gains / (losses) from financial liabilities designated at fair value3
  (1,001)  (6,741)  44,284   85 
 
1 Refer to the table “Net interest and trading income” on the previous page for the Net income from trading businesses (for an explanation, readrefer to the corresponding introductory comment).  2 Mainly consists of gains and losses from foreign exchange and net trading income from treasury activities.  23 Financial liabilities designated at fair value are to a large extent economically hedged with derivatives and other instruments whose change in fair value is also reported inNet trading income.Refer For more information on own credit refer to Note“Note 27 for further information.Fair value of financial instruments”.

Significant impacts on net trading income

Net trading incomein 2009 includes2010 included a lossgain of CHF 0.80.7 billion from credit valuation adjustments for monoline credit protection (CHF 8.20.8 billion loss in 2008); refer to the “Risk management and control” section of this report for more information on exposure to monolines. Additional losses2009). 2010Net trading income also included a gain of CHF 23.7 billion related to positions previously considered risk concentrations were included in 2008.

The SNB transaction resulted in gains of CHF 0.10.7 billion from the valuation of UBS’s

option to acquire the SNB StabFund’s equity and losses of CHF 0.2 billion due to price adjustments for positions transferred to the fund (losses of CHF 5.2 billion in 2008).

A gain of CHF 0.3 billion (CHF 4.60.1 billion gain in 2008) was recorded on the valuation of the embedded derivative of the MCNs issued in 2008.2009).
èRefer to the “Risk management and control” section of this report for more information on exposure to monolines and the option to acquire equity of the SNB StabFund



Note 4 Net fee and commission income

                
               
 For the year ended % change from  For the year ended % change from 
CHF million 31.12.09 31.12.08 31.12.07 31.12.08  31.12.10 31.12.09 31.12.08 31.12.09 
Equity underwriting fees 1,590 1,138 2,564 40  1,157 1,590 1,138  (27)
Debt underwriting fees 796 818 1,178  (3) 755 796 818  (5)
Total underwriting fees
 2,386 1,957 3,742 22  1,912 2,386 1,957  (20)
M&A and corporate finance fees 881 1,662 2,768  (47) 857 881 1,662  (3)
Brokerage fees1
 6,217 8,209 10,211  (24) 4,930 5,400 7,150  (9)
Investment fund fees 4,000 5,583 7,422  (28) 3,898 4,000 5,583  (3)
Portfolio management and advisory fees2
 5,863 7,667 9,454  (24)
Portfolio management and advisory fees 5,959 5,863 7,667 2 
Insurance-related and other fees 264 317 423  (17) 361 264 317 37 
Total securities trading and investment activity fees
 19,611 25,394 34,020  (23) 17,918 18,794 24,335  (5)
Credit-related fees and commissions 339 273 279 24  448 339 273 32 
Commission income from other services 878 1,010 1,017  (13) 850 878 1,010  (3)
Total fee and commission income
 20,827 26,677 35,316  (22) 19,216 20,010 25,618  (4)
Brokerage fees paid1
 1,748 1,763 2,540  (1) 1,093 1,231 1,164  (11)
Other 1,368 1,984 2,142  (31)
Other1
 964 1,068 1,524  (10)
Total fee and commission expense
 3,116 3,748 4,682  (17) 2,057 2,299 2,689  (11)
Net fee and commission income
 17,712 22,929 30,634  (23) 17,160 17,712 22,929  (3)
of which: net brokerage fees
  4,469 6,445 7,671  (31)
of which: net brokerage fees1
 3,837 4,169 5,985  (8)
1 In 2009,2010, UBS restatedcorrected the amounts presented in previous periods on the linesBrokerage feesandBrokerage fees, paid.Brokerage fees paid, Other and Net brokerage fees. Amounts previously disclosed for both lines have been decreased as follows: Brokerage fees by CHF 146817 million and CHF 1,059 million for the yearyears ended 31 December 2009 and 31 December 2008 andrespectively; Brokerage fees paid by CHF 70517 million and CHF 599 million for the yearyears ended 31 December 2007.2009 and 31 December 2008 respectively; Other and Net brokerage fees by CHF 300 million and CHF 460 million for the years ended 31 December 2009 and 31 December 2008 respectively. The totals of Net fee and commission incomeis and consequently Net profit attributable to UBS shareholders are not affected.  2 Includes fiduciary and custodian fees, which were presented as separate lines in previous reports.affected by this correction.

289299

Financial information
Notes to the consolidated financial statements

Note 5 Other income

                
                     
 For the year ended % change from  For the year ended % change from 
CHF million 31.12.09 31.12.08 31.12.07 31.12.08  31.12.10 31.12.09 31.12.08 31.12.09 
Associates and subsidiaries
  
Net gains from disposals of consolidated subsidiaries1
 96  (184)  (70)   (7) 96  (184) 
Net gains from disposals of investments in associates  (1) 199 28 
Net gains from disposals of investments in associates2
 256  (1) 199 
Share of net profits of associates 37  (6) 145  81 37  (6) 119 
Total
 133 9 103  331 133 9 149 
Financial investments available-for-sale
  
Net gains from disposals 110  6152  3,3383  (82) 204 110  6153 85 
Impairment charges  (349)4  (202)  (71)  (73)  (72)  (349)4  (202) 79 
Total
  (239) 413 3,267  132  (239) 413 
Net income from investments in property5
 72 88 108  (18)
Net income from properties5
 53 72 88  (26)
Net gains from investment properties6
  (39) 0 31  8 ��(39) 0 
Other income from Industrial Holdings 0 0 689 
Other  6727 183 143 267 
Other7
 690 672 183 3 
Total other income
 599 692 4,341  (13) 1,214 599 692 103 
1 Includes foreign exchange amounts reclassified from equity upon disposal or deconsolidation of subsidiaries. 2009 includesincluded a loss of CHF 498 million on the sale of UBS Pactual.  2 Included in 2010 is a gain of CHF 180 million from the sale of investments in associates owning office space in New York.  23 Includes a gain of approximately CHF 360 million for the disposal of UBS’s equity stake in Bank of China.  34 Includes a pre-tax gain of CHF 1,950 million from UBS’s sale of its 20.7% stake in Julius Baer.  4 Includes impairments for a global real estate fund of CHF 155 million, Asian debt instruments of CHF 86 million and private equity investments of CHF 55 million.  5 Includes net rent received from third parties and net operating expenses.  6 Includes unrealized and realized gains from investment properties at fair value and foreclosed assets.  7 Includes net gains from disposals of loans and receivables of CHF 324 million in 2010 and of CHF 205 million in 2009. 2010 includes a gain of CHF 158 million from the sale of a property in Zurich. 2009 included a gain of CHF 304 million from the public tender offer for four subordinated bonds of UBS.

Note 6 Personnel expenses

                 
  For the year ended  % change from 
CHF million 31.12.09  31.12.08  31.12.07  31.12.08 
 
Salaries and variable compensation  12,801   12,207   20,715   5 
 
Contractors  275   423   630   (35)
 
Insurance and social security contributions  851   706   1,290   21 
 
Contribution to retirement plans  941   926   922   2 
 
Other personnel expenses  1,675   2,000   1,958   (16)
 
Total personnel expenses
  16,543   16,262   25,515   2 
 
of which: share-based personnel expense
  913   (94)  3,173     
 
                     
  
     For the year ended % change from 
CHF million Note  31.12.10  31.12.09  31.12.08  31.12.09 
 
Salaries      7,033   7,383   7,775   (5)
 
Variable compensation – discretionary bonus  31   4,082   2,809   1,674   45 
 
Variable compensation – other1
  31   310   830   1,025   (63)
 
Contractors      232   275   423   (16)
 
Social security2
      826   804   660   3 
 
Pension and other post-employment benefit plans2
  30   724   988   972   (27)
 
Wealth Management Americas: financial advisor compensation3
  31   2,667   2,426   2,435   10 
 
Other personnel expenses1
      1,047   1,027   1,298   2 
 
Total personnel expenses
      16,920   16,543   16,262   2 
 
1 In 2010, UBS adjusted the amounts presented in previous periods on the line Other personnel expenses to align the presentation with the new definition by FINMA of variable compensation. Amounts previously disclosed under Other personnel expenses have been decreased by CHF 648 million for the year ended 31 December 2009 and CHF 702 million for the year ended 31 December 2008, with a corresponding increase in Variable compensation – other.  2 Starting 2010, UBS presents the pension costs related to cash bonus in Pension and other post-employment benefit plans. Previously those amounts were reported under Social security. Prior periods amounts have been adjusted accordingly as follows: by CHF 47 million for the year ended 31 December 2009 and by CHF 46 million for the year ended 31 December 2008.  3 Financial advisor compensation consists of grid-based compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated based on financial advisor productivity, firm tenure and other variables. It also includes costs related to compensation commitments and advances granted to financial advisors at the time of recruitment, which are subject to vesting requirements.

Note 7 General and administrative expenses

                
               
 For the year ended % change from  For the year ended % change from 
CHF million 31.12.09 31.12.08 31.12.07 31.12.08  31.12.10 31.12.09 31.12.08 31.12.09 
Occupancy 1,420 1,516 1,569  (6) 1,252 1,420 1,516  (12)
Rent and maintenance of IT and other equipment 623 669 701  (7) 555 623 669  (11)
Telecommunications and postage 697 888 948  (22) 664 697 888  (5)
Administration 695 926 991  (25) 669 695 926  (4)
Marketing and public relations 225 408 585  (45) 339 225 408 51 
Travel and entertainment 412 728 1,029  (43) 466 412 728 13 
Professional fees 830 1,085 1,106  (24) 754 830 1,085  (9)
Outsourcing of IT and other services 836 1,029 1,233  (19) 1,078 836 1,029 29 
Other 512  3,2491 267  (84)
Other1
 807 512  3,2492 58 
Total general and administrative expenses
 6,248 10,498 8,429  (40) 6,585 6,248 10,498 5 
1 Includes litigation provisions. Refer to “Note 21 Provisions and contingent liabilities”.  12 Includes an amount of CHF 1,464 million for the expected costs associated with the repurchase of auction rate securities from clients and CHF 917 million in connection with UBS’s US cross-border case.

290300

Financial information

Note 8 Earnings per share (EPS) and shares outstanding

                 
  
  As of or for the year ended % change from 
  31.12.10  31.12.09  31.12.08  31.12.09 
 
                 
Basic earnings (CHF million)
                
 
Net profit attributable to UBS shareholders  7,534   (2,736)  (21,292)    
 
from continuing operations  7,533   (2,719)  (21,442)    
 
from discontinued operations  1   (17)  150     
 
                 
Diluted earnings (CHF million)
                
 
Net profit attributable to UBS shareholders  7,534   (2,736)  (21,292)    
 
Less: (profit) / loss on equity derivative contracts  (2)  (5)  (28)  60 
 
Net profit attributable to UBS shareholders for diluted EPS  7,532   (2,741)  (21,320)    
 
from continuing operations  7,531   (2,724)  (21,470)    
 
from discontinued operations  1   (17)  150     
 
                 
Weighted average shares outstanding
                
 
Weighted average shares outstanding for basic EPS  3,789,732,938   3,661,086,266   2,792,023,098   4 
 
Potentially dilutive ordinary shares resulting from unvested exchangeable shares, in-the-money options and warrants outstanding1
  48,599,111   754,948   1,151,556     
 
Weighted average shares outstanding for diluted EPS  3,838,332,049   3,661,841,214   2,793,174,654   5 
 
Potential ordinary shares from unexercised employee shares and in-the-money options not considered due to the anti-dilutive effect  0   20,166,373   27,909,964   (100)
 
                 
Earnings per share (CHF)
                
 
Basic  1.99   (0.75)  (7.63)    
 
from continuing operations  1.99   (0.74)  (7.68)    
 
from discontinued operations  0.00   0.00   0.05     
 
Diluted  1.96   (0.75)  (7.63)    
 
from continuing operations  1.96   (0.74)  (7.69)    
 
from discontinued operations  0.00   0.00   0.05     
 
                 
Shares outstanding
                
 
Ordinary shares issued  3,830,840,513   3,558,112,753   2,932,580,549   8 
 
Treasury shares  38,892,031   37,553,872   61,903,121   4 
 
Shares outstanding  3,791,948,482   3,520,558,881   2,870,677,428   8 
 
Retrospective adjustment for capital increase2
          23,252,487     
 
Mandatory convertible notes and exchangeable shares3
  580,261   273,264,461   605,547,748   (100)
 
Shares outstanding for EPS  3,792,528,743   3,793,823,342   3,499,477,663   0 
 
                 
  As of or for the year ended  % change from 
  31.12.09  31.12.08  31.12.07  31.12.08 
 
                 
Basic earnings (CHF million)
                
 
Net profit attributable to UBS shareholders  (2,736)  (21,292)  (5,247)  87 
 
from continuing operations  (2,719)  (21,442)  (5,650)  87 
 
from discontinued operations  (17)  150   403     
 
                 
Diluted earnings (CHF million)
                
 
Net profit attributable to UBS shareholders  (2,736)  (21,292)  (5,247)  87 
 
Less: (profit)/loss on equity derivative contracts  (5)  (28)  (16)  82 
 
Net profit attributable to UBS shareholders for diluted EPS  (2,741)  (21,320)  (5,263)  87 
 
from continuing operations  (2,724)  (21,470)  (5,666)  87 
 
from discontinued operations  (17)  150   403     
 
                 
Weighted average shares outstanding
                
 
Weighted average shares outstanding for basic EPS  3,661,086,266   2,792,023,098   2,182,836,078   31 
 
Potentially dilutive ordinary shares resulting from unvested exchangeable shares, in-the-money options and warrants outstanding1
  754,948   1,151,556   1,467,3262  (34)
 
Weighted average shares outstanding for diluted EPS  3,661,841,214   2,793,174,654   2,184,303,404   31 
 
Potential ordinary shares from unexercised employee shares and in-the-money options not considered due to the anti-dilutive effect  20,166,373   27,909,964   53,668,047   (28)
 
                 
Earnings per share (CHF)
                
 
Basic  (0.75)  (7.63)  (2.40)  90 
 
from continuing operations  (0.74)  (7.68)  (2.59)  90 
 
from discontinued operations  0.00   0.05   0.18   (100)
 
Diluted  (0.75)  (7.63)  (2.41)  90 
 
from continuing operations  (0.74)  (7.69)  (2.59)  90 
 
from discontinued operations  0.00   0.05   0.18   (100)
 
                 
Shares outstanding
                
 
Ordinary shares issued  3,558,112,753   2,932,580,549   2,073,547,344   21 
 
Treasury shares  37,553,872   61,903,121   158,105,524   (39)
 
Shares outstanding  3,520,558,881   2,870,677,428   1,915,441,820   23 
 
Retrospective adjustments for stock dividend3
          95,772,091     
 
Retrospective adjustments for rights issue2
          141,850,917     
 
Retrospective adjustment for capital increase4
      23,252,487   17,439,825     
 
Mandatory convertible notes and exchangeable shares5
  273,264,461   605,547,748   518,711   (55)
 
Shares outstanding for EPS  3,793,823,342   3,499,477,663   2,171,023,364   8 
 
1 Total equivalent shares outstanding on out-of-the-money options that were not dilutive for the respective periods but could potentially dilute earnings per share in the future were 288,915,585;241,320,185; 288,915,585 and 283,263,330 and 119,309,645 for the years ended 31 December 2009,2010, 31 December 20082009 and 31 December 20072008 respectively. An additional 100 million ordinary shares (“contingent share issue”) related to the SNB transaction were not dilutive for the years ended 31 December 2009 and 31 December 2008all periods, but could potentially dilute earnings per share in the future.  2 Shares outstanding and potentially dilutive ordinary shares are increased by 7.053% due to the rights issue carried out in 2008.  3 Shares outstanding are increased by 5% to reflect the 1:20 ratio of the stock dividend distributed in 2008 for the financial year 2007.  4 Shares outstanding increased by 0.81% due to the capital increase in 2009.  53 31 December 2009 and 31 December 2008 include 272,651,005 shares for the mandatory convertible notes issued to two investors in March 2008. 31 December 2008 includes 332,225,913 shares for the mandatory convertible notes issued to the Swiss Confederation in December 2008. Remaining amountsAll other numbers related to exchangeable shares. All adjusted for the dilution effect of the stock dividend, the rights issue and the capital increase where applicable.

291301

Financial information
Notes to the consolidated financial statements

Balance sheet notes: assets

         
Note 9a Due from banks and loans (held at amortized cost) 
CHF million 31.12.09  31.12.08 
 
         
By type of exposure
        
 
Banks, gross  46,606   64,473 
 
Allowance for credit losses  (32)  (22)
 
Net due from banks  46,574   64,451 
 
Loans, gross        
 
Residential mortgages  121,031   121,811 
 
Commercial mortgages  19,970   21,270 
 
Other loans1
  141,237   173,812 
 
Securities2
  27,237   26,320 
 
Subtotal  309,475   343,213 
 
Allowance for credit losses  (2,648)  (2,905)
 
of which: related to securities
  (179)  (126)
 
Net loans  306,828   340,308 
 
Net due from banks and loans (held at amortized cost)
  353,402   404,759 
 
         
By geographical region (based on the location of the borrower)
        
 
Switzerland  163,397   166,798 
 
United Kingdom  24,038   30,540 
 
Rest of Europe  35,482   47,724 
 
United States  85,411   105,907 
 
Asia Pacific  19,531   23,279 
 
Rest of the world  32,231   38,590 
 
Subtotal  360,090   412,838 
 
Allowance for credit losses  (2,680)  (2,927)
 
Net due from banks, loans (held at amortized cost) and loans designated at fair value3
  357,410   409,911 
 
         
By type of collateral
        
 
Secured by real estate  142,617   145,491 
 
Collateralized by securities  56,783   56,312 
 
Guarantees and other collateral  75,589   113,032 
 
Unsecured  85,101   98,003 
 
Subtotal  360,090   412,838 
 
Allowance for credit losses  (2,680)  (2,927)
 
Net due from banks, loans (held at amortized cost) and loans designated at fair value3
  357,410   409,911 
 
1 Includes current accounts,Note 9a Due from banks and loans and cash collateral for derivatives.  (held at amortized cost)
         
CHF million 31.12.10  31.12.09 
 
         
By type of exposure
        
 
Banks, gross  17,158   16,836 
 
Allowance for credit losses  (24)  (32)
 
Net due from banks  17,133   16,804 
 
Loans, gross        
 
Residential mortgages  122,499   121,031 
 
Commercial mortgages  20,362   19,970 
 
Current accounts and loans  99,710   100,887 
 
Securities1
  21,392   27,237 
 
Subtotal  263,964   269,124 
 
Allowance for credit losses  (1,087)  (2,648)
 
of which: related to securities1
  (273)  (179)
 
Net loans  262,877   266,477 
 
Net due from banks and loans (held at amortized cost)
  280,010   283,281 
 
         
By geographical region (based on the location of the borrower)
        
 
Switzerland  161,109   159,990 
 
United Kingdom  7,376   9,681 
 
Rest of Europe  22,142   25,360 
 
United States  52,097   60,520 
 
Asia Pacific  16,984   13,659 
 
Rest of the world  24,672   20,759 
 
Subtotal  284,381   289,969 
 
Allowance for credit losses  (1,111)  (2,680)
 
Net due from banks, loans (held at amortized cost) and loans designated at fair value2
  283,270   287,289 
 
         
By type of collateral
        
 
Secured by real estate  144,403   142,617 
 
Collateralized by securities  46,565   39,463 
 
Guarantees and other collateral  30,890   39,439 
 
Unsecured  62,523   68,450 
 
Subtotal  284,381   289,969 
 
Allowance for credit losses  (1,111)  (2,680)
 
Net due from banks, loans (held at amortized cost) and loans designated at fair value2
  283,270   287,289 
 
21 On 31 December 2009,2010, includes reclassified US student loan auction rate securities (ARS) of CHF 7.84.3 billion (CHF 8.47.8 billion on 31 December 2008)2009), other reclassified securities of CHF 11.57.4 billion (CHF 13.411.5 billion on 31 December 2008)2009) and CHF 8.09.7 billion ARS acquired from clients (CHF 4.58.0 billion on 31 December 2008)2009). The related allowances for reclassified ARS amount to CHF 157 million (CHF 66 million on 31 December 2009) and other reclassified securities to CHF 63 million (CHF 96 million on 31 December 2009), respectively.  32 Includes loans designated at fair value of CHF 3.3 billion on 31 December 2010 and CHF 4.0 billion on 31 December 2009 and CHF 5.2 billion on 31 December 2008.2009. For further details refer to “Note 12 Financial assets designated at fair value”.

292

302

Financial information

Note 9b Allowances and provisions for credit losses

                
Note 9b Allowances and provisions for credit losses 
                 
 Specific Collective loan      Specific       
 allowances and loss allowances      allowances and Collective loan     
CHF million provisions and provisions Total 31.12.09 Total 31.12.08  provisions loss allowances Total 31.12.10 Total 31.12.09 
Balance at the beginning of the year 3,047 23 3,070 1,164  2,771 49 2,820 3,070 
Write-offs (2,046) 0 (2,046)  (868)  (1,505) 0  (1,505)  (2,046)
Recoveries 52 0 52 44  79 0 79 52 
Increase/(decrease) in credit loss allowances and
provisions recognized in the income statement		 1,806 26 1,832 2,996 
Increase / (decrease) in credit loss allowances and provisions recognized in the income statement 67  (2) 66 1,832 
Disposals (51) 0 (51)  (223) 0 0 0  (51)
Foreign currency translation and other adjustments (37) 0 (37)  (43)  (173) 0  (173)  (37)
Balance at the end of the year
 2,7711 49 2,820 3,070   1,2391 47 1,287 2,820 
 Specific Collective loan     
 allowances and loss allowances     
CHF million provisions and provisions Total 31.12.09 Total 31.12.08 
As a reduction of due from banks 32 0 32 22 
As a reduction of loans1
 2,598 49 2,648 2,905 
As a reduction of securities borrowed 51 0 51 112 
Subtotal 2,681 49 2,730 3,039 
Included in other liabilities related to provisions for contingent claims 90 0 90 31 
Total allowances and provisions for credit losses
 2,771 49 2,820 3,070 
                 
  Specific          
  allowances and  Collective loan       
CHF million provisions  loss allowances  Total 31.12.10  Total 31.12.09 
 
As a reduction of due from banks  24   0   24   32 
 
As a reduction of loans1
  1,039   47   1,087   2,648 
 
As a reduction of securities borrowed  46   0   46   51 
 
Subtotal  1,109   47   1,157   2,730 
 
Included in other liabilities related to provisions for contingent claims  130   0   130   90 
 
Total allowances and provisions for credit losses
  1,239   47   1,287   2,820 
 
1 CHF 1,192254 million areis related to reclassified assets (securities and other assets) on 31 December 20092010 and CHF 1,3311,192 million on 31 December 2008.2009.

Note 10 Cash collateral on securities borrowed and lent, reverse repurchase and reverse repurchase agreements, and derivative instruments

 

The Group enters into collateralized reverse repurchase and repurchase agreements, and securities borrowing and securities lending transactions and derivative transactions that may result in credit exposure in the event that the counterparty to the transaction is unable to fulfill its contractual obligations. The Group controls credit

credit risk associated with these activities by monitoring counterparty credit exposure and collateral values on a daily basis and requiring additional collateral to be deposited with or returned to the Group when deemed necessary.



                                             
Balance sheet assetsBalance sheet assetsBalance sheet assets 
 Cash collateral on Reverse repurchase Cash collateral on Reverse repurchase Cash collateral Cash collateral 
 securities borrowed agreements securities borrowed agreements
CHF million 31.12.09 31.12.09 31.12.08 31.12.08
By counterparty
            
Banks 17,143 71,051  17,523  110,254
Customers 46,364 45,638  105,374  114,393
Total
 63,507 116,689  122,897  224,648
Balance sheet liabilities
 Cash collateral Reverse receivables Reverse receivables 
 Cash collateral on Repurchase Cash collateral on Repurchase on securities repurchase on derivative Cash collateral on repurchase on derivative 
 securities lent agreements securities lent agreements borrowed agreements instruments securities borrowed agreements instruments 
CHF million 31.12.09 31.12.09 31.12.08 31.12.08 31.12.10 31.12.10 31.12.10 31.12.09 31.12.09 31.12.09 
By counterparty
             
Banks 7,268 26,167  12,181  36,088 20,302 91,788 20,230 17,143 71,051 29,705 
Customers 727 38,008  1,881  66,473 42,153 51,002 17,841 46,364 45,638 24,069 
Total
 7,995 64,175  14,063  102,561 62,454 142,790 38,071 63,507 116,689 53,774 
                         
Balance sheet liabilities 
          Cash collateral          Cash collateral 
          payables          payables 
  Cash collateral on  Repurchase  on derivative  Cash collateral on  Repurchase  on derivative 
  securities lent  agreements  instruments  securities lent  agreements  instruments 
CHF million 31.12.10  31.12.10  31.12.10  31.12.09  31.12.09  31.12.09 
 
By counterparty
                        
 
Banks  5,820   28,201   34,930   7,268   26,167   32,932 
 
Customers  831   46,595   23,994   727   38,008   33,165 
 
Total
  6,651   74,796   58,924   7,995   64,175   66,097 
 

293303

Financial information
Notes to the consolidated financial statements

Note 11 Trading portfolio

The Group trades in debt instruments (including money market paperspaper and tradeabletradable loans), equity instruments, precious metals, other commodities and derivatives to meet the financial needs of its clientscustomers and to generate revenue. Non-derivative traded instruments are included in the table

below. For derivative instruments, referRefer to “Note 23 DerivativeDeriva-

tive instruments and hedge accounting”. The table below represents an IFRSa pure accounting view. It does not reflect hedges and other risk mitigating factors and the amounts must therefore may not be reflective forconsidered risk exposures.



                 
 31.12.09 31.12.08        
CHF million Level 1 Level 2 Level 3 Total  31.12.10 31.12.09 
Trading portfolio assets
 
 
Trading portfolio assets by counterparty
 
Debt instruments
  
Government and government agencies 59,731 21,656 742 82,129 115,696 
Government and government agencies1
 83,952 85,483 
of which: Switzerland
 155 121  13,292 3,778 
of which: United States
 22,498 31,366  19,843 22,498 
of which: Japan
 25,795 46,049  25,996 25,795 
Banks 578 13,768 678 15,024 23,175 
Banks1
 14,711 10,850 
Corporates and other 3,293 28,123 10,462 41,878 85,991  35,647 39,902 
Total debt instruments
 63,601 63,546 11,882 139,030 224,862  134,310 136,234 
of which: pledged as collateral
 46,348 62,153 
of which: pledged as collateral and can be repledged or resold
by counterparty
 30,622 30,903 
Equity instruments
 61,788 14,317 258 76,364 77,258  57,506 57,541 
of which: pledged as collateral
 18,400 15,849 
Financial assets for unit-linked investment contracts 18,056 21,619 
of which: pledged as collateral and can be repledged or resold
by counterparty
 13,599 9,312 
Financial assets held for trading
 209,873 215,393 
Subtotal
 125,389 77,864 12,141 215,393 302,120 
Precious metals and other commodities 16,864 9,934 
Precious metals and other physical commodities 18,942 16,864 
Total trading portfolio assets
 232,258 312,054  228,815 232,258 
  
Trading portfolio liabilities
 
Trading portfolio liabilities by counterparty
 
Debt instruments
  
Government and government agencies 20,389 5,917 0 26,306 34,043 
Government and government agencies1
 29,628 26,317 
of which: Switzerland
 85 129  237 85 
of which: United States
 10,351 18,914  11,729 10,351 
of which: Japan
 3,384 2,344  7,699 3,384 
Banks 753 2,617 102 3,472 4,354 
Banks1
 3,107 3,462 
Corporates and other 298 4,989 161 5,447 10,945  4,640 5,447 
Total debt instruments
 21,441 13,523 262 35,226 49,342  37,376 35,226 
Equity instruments
 12,014 70 160 12,243 13,089  17,599 12,243 
Total trading portfolio liabilities
 33,454 13,593 422 47,469 62,431  54,975 47,469 
1 From 2010 onwards bills issued by the Swiss National Bank are reported under Government and government agencies. In previous years, these bills were presented under Banks. The comparative period has been adjusted accordingly.

294304

Financial information

Note 11 Trading portfolio (continued)

                     
  31.12.10 31.12.09 
CHF million Level 1  Level 2  Level 3  Total    
 
                     
Trading portfolio assets by product type
                    
 
Debt instruments
                    
 
Government bills / bonds  43,583   22,543   310   66,435   67,528 
 
Corporate bonds, including bonds issued by financial institutions  1,097   42,275   3,864   47,237   49,460 
 
Loans  0   3,117   2,425   5,543   5,559 
 
Asset-backed securities  7,070   4,287   3,741   15,098   13,688 
 
of which: mortgage-backed securities
  7,070   2,360   925   10,355   9,202 
 
Total debt instruments
  51,751   72,222   10,337   134,310   136,234 
 
Equity instruments
                    
 
Shares  40,861   2,041   273   43,175   43,074 
 
Investment fund units and other  5,432   8,726   174   14,331   14,467 
 
Total equity instruments
  46,292   10,767   446   57,506   57,541 
 
Financial assets for unit-linked investment contracts  18,056   0   0   18,056   21,619 
 
Financial assets held for trading
  116,100   82,989   10,783   209,873   215,393 
 
Precious metals and other physical commodities              18,942   16,864 
 
Total trading portfolio assets
              228,815   232,258 
 
                     
Trading portfolio liabilities by product type
                    
 
Debt instruments
                    
 
Government bills / bonds  25,079   1,561   10   26,650   22,259 
 
Corporate bonds, including bonds issued by financial institutions  864   9,544   117   10,525   12,033 
 
Loans  0   0   0   0   160 
 
Asset-backed securities  77   97   27   200   774 
 
of which: mortgage-backed securities
  76   47   0   123   515 
 
Total debt instruments
  26,020   11,201   154   37,376   35,226 
 
Equity instruments
                    
 
Shares  15,947   419   128   16,494   11,615 
 
Investment fund units and other  959   146   0   1,106   629 
 
Total equity instruments
  16,906   565   128   17,599   12,243 
 
Total trading portfolio liabilities
  42,926   11,766   282   54,975   47,469 
 

305

Financial information
Notes to the consolidated financial statements

Note 12 Financial assets designated at fair value

                
Note 12 Financial assets designated at fair value 
CHF million 31.12.09 31.12.08  31.12.10 31.12.09 
Loans 3,052 4,500  2,331 3,052 
Structured loans  957 653  929 957 
Reverse repurchase and securities borrowing agreements  
Banks 3,712 4,321  2,784 3,712 
Customers 1,662 2,329  1,345 1,662 
Other financial assets 840 1,079  1,115 840 
Total financial assets designated at fair value
 10,223 12,882  8,504 10,223 

The maximum exposure to credit loss of all items in the above table except for Other financial assets is equal to the fair value (CHF 9,383except CHF 856 million atas of 31 December 2010 and CHF 840 million as of 31 December 2009 and CHF 11,803 million at 31 December 2008). reported inOther financial assetswhich are generally comprised of equity investments andthat are not directly exposed to credit risk. The maximum exposure to

credit loss at as of 31 December 2010 and

31 December 2009 and 31 December 2008 is mitigated by collateral of CHF 4,8453,929 million and CHF 6,3354,845 million, respectively.

The amount by which credit derivatives or similar instruments mitigate the maximum exposure to credit loss of loans and structured loans designated at fair value is as follows:



                
CHF million 31.12.09 31.12.08  31.12.10 31.12.09 
Notional amount of loans and structured loans 4,224 6,186  4,075 4,224 
Credit derivatives related to loans and structured loans – notional amounts1
 2,699 4,314 
Credit derivatives related to loans and structured loans – notional amount1
 1,730 2,699 
Credit derivatives related to loans and structured loans – fair value1
  90 547   (5) 90 
                             
Additional InformationAdditional Information Additional Information 
 Cumulative from inception  Cumulative from inception 
 For the year ended until the year ended  For the year ended until the year ended 
CHF million 31.12.09 31.12.08 31.12.09 31.12.08  31.12.10 31.12.09 31.12.10 31.12.09 
Change in fair value of loans and structured loans designated at fair value, attributable to changes in credit risk2
 530  (668)  (128)  (659) 100 530  (27)  (128)
Change in fair value of credit derivatives and similar instruments which mitigate the maximum exposure to credit loss of loans and structured loans designated at fair value2
  (435) 486  90 547   (94)  (435)  (5) 90 
1 Credit derivatives contracts include credit default swaps, total return swaps, and similar instruments. These are generally used to manage credit risk when UBS has a direct credit exposure to the counterparty, which has not otherwise been collateralized.  2 Current and cumulative changes in the fair value of loans attributable to changes in their credit risk are only calculated for those loans outstanding aton the balance sheet date. Current and cumulative changes in the fair value of credit derivatives hedging such loans include all the derivatives which have been used to mitigate the 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.

295306

Financial information

Note 13 Financial investments available-for-sale

         
CHF million 31.12.10  31.12.09 
 
         
Financial investments available-for-sale by counterparty
        
 
Debt instruments
        
 
Government and government agencies1
  67,552   76,938 
 
of which: Switzerland
  3,206   646 
 
of which: United States
  38,070   47,282 
 
of which: United Kingdom
  8,303   4,741 
 
of which: Japan
  6,541   3,950 
 
Banks1
  5,091   2,937 
 
Corporates and other  765   531 
 
Total debt instruments
  73,409   80,406 
 
Equity instruments
  1,359   1,351 
 
Total financial investments available-for-sale
  74,768   81,757 
 
unrealized gains – before tax  514   577 
 
unrealized (losses) – before tax  (662)2  (93)
 
Net unrealized gains / (losses) – before tax
  (148)  484 
 
Net unrealized gains / (losses) – after tax
  (243)  375 
 
                     
  31.12.10 31.12.09 
CHF million Level 1  Level 2  Level 3  Total    
 
                     
Financial investments available-for-sale by product
                    
 
Debt instruments
                    
 
Government bills / bonds  52,285   5,324   32   57,642   64,908 
 
Corporate bonds, including bonds issued by financial institutions  561   11,045   64   11,670   14,688 
 
Asset-backed securities  6   4,078   13   4,097   810 
 
of which: mortgage-backed securities
  2   4,078   13   4,093   807 
 
Total debt instruments
  52,852   20,447   110   73,409   80,406 
 
Equity instruments
                    
 
Shares  80   445   496   1,021   862 
 
Investment fund units      87   23   110   119 
 
Private equity investments  2   1   224   227   370 
 
Total equity instruments
  82   533   743   1,359   1,351 
 
Total financial investments available-for-sale
  52,935   20,980   853   74,768   81,757 
 
1 From 2010 onwards, bills issued by the Swiss National Bank are reported within Government and government agencies. In previous years, these bills were presented within Banks. The comparative period has been adjusted accordingly.  2 Includes losses of CHF 31 million with a duration of more than 12 months.

307

Financial information
Notes to the consolidated financial statements

                     
Note 13 Financial investments available-for-sale 
  31.12.09  31.12.08 
CHF million Level 1  Level 2  Level 3  Total     
 
Debt instruments
                    
 
Government and government agencies  72,510   3,591   41   76,142   2,349 
 
of which: Switzerland
              232   3 
 
of which: United States
              46,906   281 
 
of which: Germany
              7,958   0 
 
of which: France
              7,936   0 
 
of which: United Kingdom
              4,774   2,014 
 
of which: Japan
              3,950   0 
 
Banks  1,748   1,981   4   3,732   180 
 
Corporates and other  14   95   422   531   1,038 
 
Total debt instruments1
  74,271   5,667   467   80,406   3,567 
 
Equity instruments
  35   405   910   1,351   1,681 
 
Total financial investments available-for-sale
  74,307   6,073   1,378   81,757   5,248 
 
Net unrealized gains (losses) – before tax              500   403 
 
Net unrealized gains (losses) – after tax              391   349 
 
1 The increase

Note 14 Investments in 2009 is mainly related to UBS’s strategic decision to rebalance its liquidity reserve which led to a shift from reverse repurchase agreements and trading portfolio assets into debt instruments available-for-sale. These instruments include high quality liquid short-term securities issued by governments and government-controlled institutions in various currencies, mainly US dollar and euro.  

associates
                
Note 14 Investments in associates 
 
CHF million 31.12.09 31.12.08  31.12.10 31.12.09 
Carrying amount at the beginning of the year 892 1,979  870 892 
Additions 14 807  19 14 
Disposals  (38)  (1,307)  (94)  (38)
Transfers  (1)  (422) 0  (1)
Income 42 12  86 42 
Impairments  (4)  (18)  (6)  (4)
Dividends paid  (30)  (34)  (29)  (30)
Foreign currency translation  (5)  (125)  (55)  (5)
Carrying amount at the end of the year
 870 892  790 870 

Significant associated companies of the Group had the following balance sheet and income statement totals on an aggregated basis, not adjusted for the Group’s proportionate interest. Refer to “Note 34 Significant subsidiaries and associates”.

         
CHF million 31.12.09  31.12.08 
 
Assets  5,155   4,272 
 
Liabilities  3,248   3,448 
 
Revenues  1,468   1,211 
 
Net profit  319   198 
 

296

Financial information
         
  
CHF million 31.12.10  31.12.09 
 
Assets  6,391   5,155 
 
Liabilities  4,391   3,248 
 
Revenues  1,371   1,468 
 
Net profit  239   319 
 

Note 15 Property and equipment

                            
 
                            
At historical cost less accumulated depreciationAt historical cost less accumulated depreciation At historical cost less accumulated depreciation 
 Leasehold IT, software Other        IT, software         
 Own-used improve- and com- machines and Projects in      Own-used Leasehold and com- Other machines Projects     
CHF million properties ments munication equipment progress 31.12.09 31.12.08  properties improvements munication and equipment in progress 31.12.10 31.12.09 
Historical cost
  
Balance at the beginning of the year 9,289 3,393 4,086 867 317 17,952 18,723  9,468 3,227 4,150 784 217 17,846 17,952 
Additions 259 77 265 24 229 854 1,181  33 96 170 41 198 538 854 
Additions from acquired companies 0 0 0 0 0 0 7  0 0 0 0 0 0 0 
Disposals/write-offs1
  (15)  (309)  (346)  (65) 0  (736)  (792)
Disposals write-offs1
  (36)  (304)  (185)  (77)  (0)  (602)  (736)
Reclassifications  (78) 76 132  (34)  (323)  (227)  (222)  (90) 31 104 9  (186)  (132)  (227)
Foreign currency translation 13  (10) 12  (7)  (6) 2  (945)  (55)  (218)  (237)  (58)  (15)  (583) 2 
Balance at the end of the year 9,468 3,227 4,150 784 217 17,846 17,952  9,321 2,832 4,002 700 213 17,068 17,846 
Accumulated depreciation
  
Balance at the beginning of the year 5,272 2,031 3,612 546 0 11,461 11,679  5,417 2,109 3,669 555 0 11,750 11,461 
Depreciation2
 247 358 371 72 0 1,048 1,241  209 286 359 63 0 918 1,048 
Disposals/write-offs1
  (13)  (263)  (325)  (42) 0  (644)  (697)  (20)  (280)  (182)  (66) 0  (548)  (644)
Reclassifications  (94) 3 2  (14) 0  (104)  (164)  (34) 38  (0) 8 0 12  (104)
Foreign currency translation 6  (20) 9  (7) 0  (12)  (598)  (25)  (148)  (220)  (43) 0  (437)  (12)
Balance at the end of the year 5,417 2,109 3,669 555 0 11,750 11,461  5,548 2,005 3,625 518 0 11,695 11,750 
Net book value at the end of the year3
 4,051 1,118 481 229 217 6,096 6,491  3,773 827 377 182 213 5,373 6,096 
1 Includes write-offs of fully depreciated assets.  2 In 2009,2010, amounts include CHF 261 million impairments of own-used property, CHF 3040 million impairments of leasehold improvements and CHF 21 million impairments of IT, software and communication.  3 Fire insurance value of property and equipment is CHF 13,80013,481 million (2008:(2009: CHF 14,16613,800 million).
                
Investment properties at fair valueInvestment properties at fair value Investment properties at fair value 
CHF million 31.12.09 31.12.08  31.12.10 31.12.09 
Balance at the beginning of the year 215 189  116 215 
Additions 0 37  3 0 
Sales  (60) 0   (23)  (60)
Revaluations  (37)  (6) 2  (37)
Reclassifications 6 0 
Foreign currency translation  (2)  (5)  (10)  (2)
Balance at the end of the year
 116 215  94 116 

297308

Financial information
Notes to the consolidated financial statements

Financial information

Note 16  Goodwill and intangible assets

Introduction

At

As of 31 December 2009,2010, the following four segments carried goodwill: Wealth Management & Swiss Bank (CHF 1.51.4 billion), Wealth Management Americas (CHF 3.73.3 billion), Global Asset Management (CHF 1.61.4 billion), and Investment Bank (CHF 3.33.0 billion). For the purpose of testing goodwill for impairment, UBS considers each of thesethe segments as reported in Note 2a as separate cash-generating units, and determines the recoverable amount of a segment on the basis of value in use.

AtAs of 31 December 2009,2010, equity attributable to UBS shareholders stood at CHF 4147 billion, up from CHF 3341 billion atas of 31 December 2008.2009. UBS’s market capitalization excluding the shares to be issued upon conversionwas approximately CHF 59 billion as of the MCNs, amounted to31 December 2010 compared with CHF 57 billion atas of 31 December 2009 compared with CHF 44 billion at 31 December 2008.2009. On the basis of the impairment testing methodology described below, UBS concluded that the year-end 20092010 balances of goodwill allocated to its segments remain recoverable.

Methodology for goodwill impairment testing

The recoverable amount is determined using a proprietary model based on discounted cash flows,flow model, which has been adapted to give effect to the specialuses inputs that consider features of the banking business and its regulatory environment. The recoverable amount is determinedcalculated by estimating streams of earnings available to shareholders inover the next five years, discounted to their present values. The terminal value reflecting all periods beyond the fifth year is calculated on the basis of the forecast of fifth-year profit, the cost of equity and the long-term growth rate. DuringFor the year 2009,2010 test, the discount rates and long-term growth rates used to calculate the present values were reduced to reflect the

improved capital basis and the realized de-risking of the balance sheet, and the long-term growth rate was also marginally reduced.cash-generating units remained unchanged. The recoverable amount of a segment is the sum of discounted earnings available to shareholders from the first five individually forecast years and the terminal value.

The carrying amount for each segment is determined by reference to the Equity Attribution framework. Within this framework, which is described in the Treasury management section of this report, management attributes equity to the businesses after considering their risk exposure, asset size, goodwill and intangible assets. Until the end of 2009, the carrying amount for each segment was determined by a roll-forward of the historic carrying amounts based onamount. The change in methodology for determining the equity attributed to UBS shareholders, as full balance sheets are not available for the segments. For each segment the beginning-of-the-period balance of equity is rolled forward by accounting for the items that affect a segment’s carrying amount e.g. allocation of transactionsthe cash-generating units from the roll-forward approach to the Equity Attribution framework was made in 2010 as the principles underlying the Equity Attribution framework were approved by the Board of Directors during the year. Moreover, the framework became embedded in the Bank for purposes of measuring the performance of each of its businesses. This new methodology is aligned with shareholders at Group level, to arrive at the end-of-the-period balance.2010 business planning process, the inputs from which are used in calculating the recoverable amounts of the respective cash-generating units.

Assumptions

The model used to determine the recoverable amount is most sensitive to changes in the forecast earnings available to shareholders in years one to five, the cost of equity and to changes in the long-term growth rate. The applied long-term growth rate is based on real growth rates and expected inflation. Earnings available to shareholders are estimated based on the basis of forecast results, which take into account business initiatives and planned capital investments, and returns to shareholders, which take into account amounts of capital that could be distributed or used for share buy-backs.investments. Valuation parameters used inwithin the Group’s impairment test model are linked to external market information, where applicable. Management believes that reasonable changes in key assumptions used to determine the recoverable amounts of all segments will not result in an impairment situation.



Discount and growth rates

                      
Discount and growth rates 
 Discount rates Growth rates  Discount rates Growth rates
ln % 31.12.09 31.12.08 31.12.09 31.12.08 
In %
 31.12.10  31.12.09  31.12.10  31.12.09 
Wealth Management & Swiss Bank 9.0 9.5 1.2 1.3 
Wealth Management 9.0  9.0  1.2  1.2 
Wealth Management Americas 9.0 11.5 2.4 2.6  9.0  9.0  2.4  2.4 
Global Asset Management 9.0 11.0 2.4 2.6  9.0  9.0  2.4  2.4 
Investment Bank 11.0 13.0 2.4 2.6  11.0  11.0  2.4  2.4 

309

298

Financial information


Notes to the consolidated financial statements

Note 16 Goodwill and intangible assets (continued)

Investment Bank/Bank / Wealth Management Americas
On 31 December 2009,

As in prior years, the assessment of the goodwill of the Investment Bank and Wealth Management Americas continued to be a key focus. Goodwill allocated to the Investment Bank amounted to CHF 3.3 billion at 31 December 2009 (CHF 4.3 billion at 31 December 2008). The reduction is due to the derecognition of CHF 0.9 billion goodwill related to UBS Pactual, of which CHF 749 million was subject to an impairment (refer to Note 38 for details). Goodwill allocated to Wealth Management Americas amounted to CHF 3.7 billion at 31 December 2009 (CHF 3.8 billion at 31 December 2008). In 2009, CHF 40 million goodwill related to UBS Pactual was derecognized, of which CHF 34 million was subject to an impairment (refer to Note 38 for details).

In its review of the year-end 20092010 goodwill balance, UBS considered the performance outlook of its Investment Bank and Wealth Management Americas business divisions and the underlying business operations to resolve whether the recoverable amounts for these units coverscover their carrying amounts, based on the methodology described above. On this basis, UBS concluded that goodwill allocated to the Investment Bank and Wealth Management Americas remained

remains recoverable aton 31 December 2009.2010. The conclusion was reached based on the basis of the current forecast results and the underlying assumption that the economic environmenteconomy will gradually improve over the next three years and reach an average growth level thereafter. The fair value obtained from the model calculation was subject tolevel.

In addition, a stress test by decreasing forecastwas performed employing the same

discounted cash flows by one-third and atflow model. The earnings used were based on an economic stress scenario. Under this economic stress scenario, the same time increasingkey macro economic drivers are severely reduced in the discount rate by 3.5 percentage points.near term, with a gradual recovery thereafter. The stressstressed values so obtained coveredexceeded the bookcarrying values of all business divisions, including the Investment Bank and Wealth Management Americas. However, if the regulatory pressure on the banking industry further intensifies and conditions in the financial markets turn out to be worse than anticipated in UBS’sour performance forecasts, the goodwill carried in the Investment Bank and Wealth Management Americasthese business divisions mightmay need to be impaired in future quarters.

periods.

Recognition of any impairment of goodwill would reduce IFRS Equity attributable to UBS shareholders and net profit, but it would not impact cash flows, as well as the BIS tierTier 1 capital, BIS total capital, and capital ratios of the UBS Group, as goodwill is required to be deducted from capital under the Basel II capital framework.



                                           
 Goodwill Intangible assets    Goodwill  Intangible assets   
 Customer        Customer       
 relationships,        relationships,       
 contractual        contractual       
CHF million Total Infrastructure rights and other Total 31.12.09 31.12.08  Total Infrastructure rights and other Total 31.12.10 31.12.09 
Historical cost
  
Balance at the beginning of the year 11,585 824 1,308 2,131 13,716 15,324  10,115 787 894 1,680 11,795 13,716 
Additions and reallocations 32 0 38 38 70 585  20 0 14 14 34 70 
Disposals  (1,631)  (13)  (546)  (559)  (2,190)  (33)  (3) 0 0 0  (3)  (2,190)
Write-offs1
 0 0 0 0 0  (472) 0 0  (1)  (1)  (1) 0 
Foreign currency translation 128  (24) 95 71 199  (1,688)  (1,016)  (77)  (97)  (174)  (1,190) 199 
Balance at the end of the year 10,115 787 894 1,680 11,795 13,716  9,115 710 809 1,519 10,634 11,795 
Accumulated amortization and impairment
  
Balance at the beginning of the year 0 337 444 781 781 786  0 361 426 787 787 781 
Amortization 0 42 102 144 144 193  0 40 65 105 105 144 
Impairment of goodwill and intangible assets 1,1232 0 57 57 1,180 361 
Impairment 0 0 12 12 12 1,180 
Disposals  (1,199)  (6) (211)  (217)  (1,416)  (7) 0 0 0 0 0  (1,416)
Write-offs1
 0 0 0 0 0  (472) 0 0  (1)  (1)  (1) 0 
Foreign currency translation 76  (12) 34 23 99  (80) 0  (39)  (52)  (91)  (91) 99 
Balance at the end of the year 0 361 426 787 787 781  0 362 450 812 812 787 
Net book value at the end of the year
 10,115 425 468 893 11,008 12,935  9,115 348 359 707 9,822 11,008 
1 Represents write-offs of fully amortized intangible assets.

310

Financial information

2Note 16 Goodwill and intangible assets (continued) Represents

The following table presents the disclosure of goodwill impairment related to UBS Pactual.and intangible assets by business unit for the year ended 31 December 2010.

                             
  Balance at                  Foreign  Balance at 
  the beginning  Additions and              currency  the end of 
CHF million of the year  reallocations  Disposals  Amortization  Impairment  translation  the year 
 
Goodwill
                            
 
Wealth Management  1,510   20               (178)  1,351 
 
Wealth Management Americas  3,655                   (352)  3,303 
 
Global Asset Management  1,610                   (161)  1,448 
 
Investment Bank  3,341       (3)          (325)  3,013 
 
UBS
  10,115   20   (3)          (1,016)  9,115 
 
Intangible assets
                            
 
Wealth Management  137           (8)  (12)  (18)  100 
 
Wealth Management Americas  526           (55)      (46)  425 
 
Global Asset Management  49   3       (8)      (5)  40 
 
Investment Bank  182   10       (34)      (15)  143 
 
UBS
  893   14       (105)  (12)  (83)  707 
 

299The estimated, aggregated amortization expenses for intangible assets are as follows:

     
CHF million Intangible assets 
 
Estimated, aggregated amortization expenses for:
    
 
2011  93 
 
2012  88 
 
2013  81 
 
2014  74 
 
2015  73 
 
2016 and thereafter  298 
 
Total
  707 
 

Note 17 Other assets

         
  
CHF million 31.12.10  31.12.09 
 
Settlement and clearing accounts  708   915 
 
VAT and other tax receivables  275   209 
 
Prepaid pension costs  3,174   3,053 
 
Properties held for sale  302   568 
 
Prime brokerage receivables  16,395   16,347 
 
Other receivables  1,827   2,590 
 
Total other assets
  22,681   23,682 
 

311

Financial information
Notes to the consolidated financial statements

Note 16 Goodwill and intangible assets (continued)

The following table presents goodwill and intangible assets by business unit for the year ended 31 December 2009.

                             
  Balance at  Additions              Foreign  Balance at 
  the beginning  and              currency  the end of 
CHF million of the year  reallocations  Disposals  Amortization  Impairment  translation  the year 
 
Goodwill
                            
 
Wealth Management & Swiss Bank  1,5231  (2)  0       0   (11)  1,510 
 
Wealth Management Americas  3,8031  (1)  (14)      (34)  (100)  3,655 
 
Global Asset Management  1,982   4   (130)      (340)  94   1,610 
 
Investment Bank  4,277   31   (287)      (749)  68   3,341 
 
UBS
  11,585   32   (432)      (1,123)  52   10,115 
 
Intangible assets
                            
 
Wealth Management & Swiss Bank  2031  0   0   (11)  (56)  1   137 
 
Wealth Management Americas  6741  0   (83)  (61)  (1)  (4)  526 
 
Global Asset Management  186   0   (160)  (13)  0   36   49 
 
Investment Bank  286   38   (99)  (59)  0   15   182 
 
UBS
  1,350   38   (342)  (144)  (57)  48   893 
 
1  Goodwill of CHF 125 million and intangible assets of CHF 48 million have been reallocated from Wealth Management & Swiss Bank to Wealth Management Americas due to the restructuring announced in February 2009.

The estimated, aggregated amortization expenses for intangible assets are as follows:

     
CHF million Intangible assets 
 
Estimated, aggregated amortization expenses for:
    
 
2010  105 
 
2011  103 
 
2012  97 
 
2013  89 
 
2014  82 
 
2015 and thereafter  417 
 
Total
  893 
 

Note 17 Other assets

         
CHF million 31.12.09  31.12.08 
 
Settlement and clearing accounts  915   1,203 
 
VAT and other tax receivables  209   330 
 
Prepaid pension costs  3,053   2,922 
 
Properties held for sale  568   981 
 
Other receivables  2,590   4,495 
 
Total other assets
  7,336   9,931 
 

300

Financial information

Balance sheet notes: liabilities

Note 18 Due to banks and customers

        
          
CHF million 31.12.09 31.12.08  31.12.10 31.12.09 
Due to banks 65,166 125,628  41,490 31,922 
Due to customers in savings and investment accounts 101,573 91,614  104,607 101,573 
Other amounts due to customers 308,903 374,127  227,694 237,691 
Total due to customers 410,475 465,741  332,301 339,263 
Total due to banks and customers
 475,641 591,369  373,791 371,185 

Note 19 Financial liabilities designated at fair value and debt issued

        
 
         
Financial liabilities designated at fair valueFinancial liabilities designated at fair value Financial liabilities designated at fair value 
CHF million 31.12.09 31.12.08  31.12.10 31.12.09 
Bonds and compound debt instruments issued
  
Equity linked 54,856  46,894 54,856 
Credit linked 25,663  19,761 25,663 
Rates linked 16,367  20,439 16,367 
Other 2,286  949 2,286 
Total
 99,173  92,4461 88,043 99,173 
����
Compound debt instruments – OTC 13,306 7,468  12,475 13,306 
Loan commitments2
 174 1,632 
Repurchase agreements 93 0 
Loan commitments1
 145 174 
Total
 112,653 101,546  100,756 112,653 
1 Breakdown by product type has been implemented with the 2009 disclosure.  2 Loan commitments recognized asFinancial liabilities designated at fair value, until drawn down by counterparty and recognized as loans. See Note 1a) 8) for additional information.

AtAs of 31 December 2010, the contractual redemption amount at maturity ofFinancial liabilities designated at fair valuethrough profit or loss was CHF 11.1 billion higher than the carrying value. As of 31 December 2009, the contractual redemption amount at maturity of Financial liabilities designated at fair value through profit or loss was CHF 7.6 billion higher than the carrying value. At 31 December 2008, the contractual re-

demption amount at maturity of such liabilities was CHF 12.27.6 billion higher than the carrying value. Refer to Note 1a) 8) for details.



                
Debt issued (held at amortized cost)Debt issued (held at amortized cost) Debt issued (held at amortized cost) 
CHF million 31.12.09 31.12.08  31.12.10 31.12.09 
Money market papers 51,579 111,619  56,039 51,579 
Debt:  
Senior bonds 57,653 67,298  54,627 57,653 
Subordinated bonds 11,244 12,769  8,547 11,244 
Bonds issued by the central bond institutions of the Swiss regional or cantonal banks 7,909 2,418  8,455 7,909 
Medium-term notes 2,967 3,150  2,605 2,967 
Total
 131,352 197,254  130,271 131,352 

301312

Financial information

Financial information
Notes to the consolidated financial statements

Note 19 Financial liabilities designated at fair value and debt issued (continued)

The Group uses interest rate and foreign exchange derivatives to manage the risks inherent in certain debt issues (held at amortized cost). In certain cases, the Group applies hedge accounting for interest rate risk as discussed in Note 1 a)1a) 15) and “Note 23 Derivative Instruments and Hedge Accounting”. As a result of applying hedge accounting, atas of 31 December 20092010 and 31 December 2008,2009, the carrying value of debt issued was CHF 600913 million higher and CHF 904600 million higher, respectively, reflecting changes in fair value due to interest rate movements.

The Group issues both CHF and non-CHF denominated fixed-rate and floating-rate debt.
Subordinated debt securities are unsecured obligations of the Group that are subordinated in right of payment to all present and future senior indebtedness and certain other obligations of the Group. AtAs of 31 December 2010 and 31 December 2009, and 31 December 2008, the

Group had CHF 11,2448,547 million and CHF

12,769 11,244 million, respectively, in subordinated debt. Subordinated debt usually pays fixed interest annually or floating ratefloating-rate interest based on three-month or six-month London Interbank Offered Rate (LIBOR) and provides for single principal payments upon maturity.

AtAs of 31 December 20092010 and 31 December 2008,2009, the Group had CHF 167,702153,730 million and CHF 165,312167,702 million, respectively, in unsubordinated debt (excluding money market paper, compound debt instruments – OTC and loan commitments designated at fair value).
The following table shows the split between fixed-rate and floating-rate debt issues based on the contractual terms. However, it should be noted that the Group uses interest rate swaps to hedge many of the fixed-rate debt issues, which changes their repricingre-pricing characteristics into those of floating-rate debt.



                                                                        
Contractual maturity datesContractual maturity dates Contractual maturity dates 
 Total Total  Total Total 
CHF million, except where indicated 2010 2011 2012 2013 2014 2015-2019 Thereafter 31.12.09 31.12.08  2011 2012 2013 2014 2015 2016–2020 Thereafter 31.12.10 31.12.09 
UBS AG (Parent Bank)
  
Senior debt  
Fixed rate 66,450 13,600 7,839 10,609 8,132 17,517 6,209 130,356 103,579  66,270 9,108 18,435 8,010 9,061 18,044 9,839 138,767 130,356 
Interest rates (range in %)1
 0 – 10.46 0 – 10.00 0 – 7.0 0 – 9.44 0 – 8.84 0 – 9.5 0 – 8.0  0-10.0 0-10.0 0-10.0 0-10.0 0-8.4 0-9.5 0-8.0 
Floating rate 16,341 11,154 10,463 5,653 4,368 8,631 11,765 68,375 81,000  14,378 11,349 6,507 5,045 6,436 5,811 9,847 59,372 68,375 
Subordinated debt  
Fixed rate 0 0 0 0 397 5,488 1,282 7,167 8,875  0 0 0 397 1,049 3,914 1,052 6,412 7,167 
Interest rates (range in %) 3.34 2.38 – 7.38 6.38 – 8.75  3.34 2.38-7.38 3-7.38 6.38-8.75 
Floating rate 0 0 0 0 0 3,578 499 4,077 3,820  0 0 0 0 0 1,703 431 2,134 4,077 
Subtotal 82,792 24,754 18,303 16,262 12,897 35,214 19,754 209,975 197,274  80,648 20,457 24,942 13,452 16,546 29,471 21,170 206,685 209,975 
Subsidiaries
  
Senior debt  
Fixed rate 8,335 1,012 308 340 180 944 8,375 19,494 83,003  8,742 266 315 155 39 869 4,009 14,396 19,494 
Interest rates (range in %)1
 0 – 9.0 0 – 9.49 0 – 7.74 0 – 9.0 0 – 7.63 0 – 5.54 0 – 12.0  0-8.38 0-9.62 0-2.82 0-7.63 0-7.4 0-8.25 0-10.0 
Floating rate 1,160 1,451 1,354 1,108 713 4,650 4,102 14,537 18,449  816 1,058 881 818 1,423 1,587 3,363 9,947 14,537 
Subordinated debt 
Fixed rate 0 0 0 0 0 0 0 0 74 
Interest rates (range in %) 
Floating rate 0 0 0 0 0 0 0 0 0 
Subtotal 9,495 2,463 1,661 1,448 893 5,594 12,476 34,030 101,526  9,558 1,324 1,197 973 1,462 2,456 7,372 24,342 34,030 
Total
 92,287 27,217 19,964 17,710 13,789 40,808 32,230 244,005 298,800  90,206 21,781 26,139 14,424 18,008 31,928 28,542 231,027 244,005 
1 The contractual interest rates on some minor positions of structured products were not considered in the interest rate ranges. The interest raterates of these products isare up to 69.5%35.76%.

The table above indicates fixed interest rate coupons on the Group’s bonds. The high or low coupons generally relate to structured debt issues prior to the separation of embedded derivatives. As a result, the stated interest rate on such debt issues generally

issues generally does not reflect the effective interest rate the Group is paying to service its debt after the embedded derivative has been separated and, where applicable, the application of hedge accounting.



302313

Financial information


Notes to the consolidated financial statements

Note 20 Other liabilities

            
              
CHF million Note 31.12.09 31.12.08  Note 31.12.10 31.12.09 
Provisions  21 2,311 2,727  21 1,574 2,311 
Provisions for contingent claims  9b 90 31  9b 130 90 
Current tax liabilities 1,082 1,192  750 1,082 
Deferred tax liabilities  22 142 1,470  22 97 142 
VAT and other tax payables 612 1,022  579 612 
Settlement and clearing accounts 1,430 3,089  961 1,430 
Amounts due under unit-linked investment contracts 21,740 22,084  18,125 21,740 
Prime brokerage payables 36,383 38,359 
Other payables1
 6,579 11,384  5,121 6,579 
Total other liabilities
 33,986 42,998  63,719 72,344 
1 Includes third-party interest of consolidated limited partnerships of CHF 1.60.9 billion (2008(2009: CHF 3.11.6 billion) and liabilities from cash settledcash-settled employee compensation plans of CHF 2.2 billion (2009: CHF 2.5 billion (2008 CHF 3.6 billion). Contingent payments (net present value as of 31 December 2008 CHF 1.4 billion) for the acquisition of Pactual in 2006 were finally derecognized in 2009 due to the sale of UBS Pactual in September 2009.

Note 21 Provisions and litigationcontingent liabilities

                                                
 
 
a) Provisionsa) Provisions 
 Total Total  Total Total 
CHF million Operational1 Litigation2 Restructuring Other4 31.12.09 31.12.083  Operational risks1 Litigation2 Restructuring Other3 31.12.10 31.12.09 
Balance at the beginning of the year 270 1,418 183 856 2,727 1,716  82 1,028 488 713 2,311 2,727 
Additions from acquired companies 0 0 0 0 0 1 
Increase in provisions recognized in the income statement 293 265 649 139 1,346 4,002  86 721 144 106 1,056 1,346 
Release of provisions recognized in the income statement  (94)  (22)  (6)  (187)  (309)  (528)  (22)  (88)  (93)  (58)  (260)  (309)
Provisions used in conformity with designated purpose  (352)  (516)  (415)  (92)  (1,375)  (1,381)  (79)  (960)4  (199)  (103)  (1,341)  (1,375)
Capitalized reinstatement costs 0 0 0 3 3  (21) 0 0 0  (24)  (24) 3 
Disposal of subsidiaries  (32)  (3) 0 0  (35) 0  0 0 0 0 0  (35)
Reclassifications 0 0 92  (1) 90  (979) 0  (20) 1 23 4 90 
Foreign currency translation  (3)  (113)  (14)  (5)  (135)  (83)  (11)  (63)  (60)  (39)  (173)  (135)
Balance at the end of the year
 82 1,028 488 713 2,311 2,727  56 618 281 619 1,574 2,311 
1 Includes provisions for litigation resulting from security risks and transaction processing risks.  2 Includes litigation resulting from legal, liability and compliance risks. 3 In 2008 Global Wealth Management & Business Banking madeAdditionally, includes a provision of CHF 1,464 million (USD 1,363 million) for the expected costs of the repurchase of auction rate securities (ARS), including fines. In fourth quarter 2008, after the provision was partially applied for repurchases of ARS, an amount of CHF 968 million (USD 908 million), excluding fines, was reclassified to Negative replacement values. In addition, a provision of CHF 917 million (USD 780 million) was madeestablished in connection with UBS’sdemands for repurchase of US cross-border case.  mortgage loans sold or securitized by UBS, as described in section “c) Other contingent liabilities” of this note.  43 Includes reinstatement costs for leasehold improvement which amounted to CHF 122 million on 31 December 2010 (CHF 161 million on 31 December 2009 (CHF 167 million on 31 December 2008)2009), provisions for onerous lease contracts, provisions for employee benefits (service anniversaries and sabbatical leave) and other items.4 Includes an amount of CHF 651 million relating to the settlement of the US cross-border case. The respective provision was recognized in 2008.

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Note 21 Provisions and contingent liabilities (continued)

b) Litigation and regulatory matters

Litigation

The UBS Group operates in a legal and regulatory environment that exposes it to significant litigation risks. As a result, UBS (which for purposes of this Note may refer to UBS AG and / or one or more of its subsidiaries, as applicable) is involved in various disputes and legal proceedings, including litigation, arbitration, and regulatory and criminal investigations. Such cases are subject to many uncertainties, and their outcome is often difficult to predict, including the impact on operations or on the financial statements, particularly in the earlier stages of a case. In certain circumstances, to avoid the expense and distraction of legal proceedings, UBS may, based on a cost-benefit analysis, enter into a settlement even though UBS denies any wrongdoing. The Group makes provisions for cases brought against it when, in the opinion of management after seeking legal advice, it is probable that a liability exists, and the amount can be reasonablyreliably estimated.
Certain potentially significant legal proceedings or threatened proceedings as of 31 December 20092010 are described below:below. In some cases we provide the amount of damages claimed, the size of a transaction or other information in order to assist investors in considering the magnitude of any potential exposure. We are unable to provide an estimate of the possible financial effect of particular claims or proceedings (where the possibility of an outflow is more than remote) beyond the level of current reserves established. Doing so can be expected to prejudice seriously our position in these matters and would require us to provide speculative legal assessments as to claims and proceedings which involve unique fact patterns or novel legal theories, have not yet been initiated or are at early stages of adjudication, or as to which alleged damages have not been quantified by the claimant. In many cases a combination of these factors impedes our ability to estimate the financial effect of contingent liabilities.
a)Municipal Bonds: In November 2006, UBS and others received subpoenas from the US Department of Justice, An-

1) Municipal Bonds

In November 2006, UBS and others received subpoenas from the Antitrust Division of the US Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC) seeking information relating to the investment of proceeds of municipal bond issuances and associated derivative transactions. In addition, various state Attorneys General have issued subpoenas seeking similar information. The investigations are ongoing, and UBS is cooperating. Several putative class actions also have been filed in Federal District Courts against UBS and numerous other firms. In the SEC investigation, on 4 February 2008, UBS received a “Wells notice” advising that the SEC staff is considering recommending that the SEC bring a civil action against UBS in connection with the bidding of various financial instruments associated with municipal securities. In December 2010, three former UBS employees were indicted in connection with the Federal criminal antitrust

titrust Division, and the US Securities and Exchange Commission (SEC) seeking information relating to the investment of proceeds of municipal bond issuances and associated derivative transactions. Both investigations are ongoing, and UBS is cooperating. In addition, various state Attorneys General have issued subpoenas seeking similar information. In the SEC investigation, on 4 February 2008, UBS received a “Wells notice” advising that the SEC staff is considering recommending that the SEC bring a civil action against UBS AG in connection with the bidding of various financial instruments associated with municipal securities. The discussions with the SEC are ongoing.
b)Auction Rate Securities: UBS was the subject of an SEC investigation and state regulatory actions relating to the marketing and sale of auction rate securities (ARSs) to clients, and to UBS’s role and participation in ARS auctions and underwriting of ARSs. UBS was also named in several putative class actions and individual civil suits and

investigation. Discussions with the SEC, DOJ and a number of state Attorneys General are ongoing.

2) Auction Rate Securities

UBS was the subject of an SEC investigation and state regulatory actions relating to the marketing and sale of auction rate securities (ARS) to clients, and to UBS’s role and participation in ARS auctions and underwriting of ARS. UBS was also named in several putative class actions and individual civil suits and arbitrations. The regulatory actions and investigations and the civil proceedings followed the disruption in the markets for these securities and related auction failures since mid-February 2008. At the end of 2008 UBS entered into settlements with the SEC, the New York Attorney General (NYAG) and the Massachusetts Securities Division whereby UBS agreed to offer to buy back ARS from eligible customers within certain time periods, the last of which began on 30 June 2010, and to pay penalties of USD 150 million (USD 75 million to the NYAG, USD 75 million to the other states). UBS’s settlement is largely in line with similar industry regulatory settlements. UBS has settled with the majority of states and is continuing to finalize settlements with the rest. The fines being paid in these state settlements are being charged against the USD 150 million provision that was established in 2008. The SEC continues to investigate individuals affiliated with UBS regarding the trading in ARS and disclosures. During the third quarter of 2010, a claimant alleging consequential damages from the illiquidity of ARS was awarded approximately USD 80 million by an arbitration panel and UBS has booked a provision of CHF 78 million relating to the case. UBS moved in state court to vacate the award and oral argument was heard on that motion in December 2010. UBS is the subject of other pending arbitration and litigation claims by clients and issuers relating to ARS.

3) Inquiries Regarding Cross-Border Wealth Management
Businesses

Following the disclosure and the settlement of the US cross-border matter, tax and regulatory authorities in a number of countries have made inquiries and served requests for information located in their respective jurisdictions relating to the cross-border wealth management services provided by UBS and other financial institutions. UBS is cooperating with these requests within the limits of financial privacy obligations under Swiss and other applicable laws.

4) Matters Related to the Credit Crisis

UBS is responding to a number of governmental inquiries and investigations and is involved in a number of litigations, arbitrations and disputes related to the credit crisis and in particular



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Notes to the consolidated financial statements

Note 21 Provisions and litigationcontingent liabilities (continued)

 

arbitrations. The regulatory actions and investigations and the civil proceedings followed the disruption

mortgage-related securities and other structured transactions and derivatives. In particular, the SEC is investigating UBS’s valuation of super senior tranches of collateralized debt obligations (CDOs) during the third quarter of 2007 and UBS’s reclassification of financial assets pursuant to amendments to IAS 39 during the fourth quarter of 2008. UBS has provided documents and testimony to the SEC and is continuing to cooperate with the SEC in its investigation. UBS has also communicated with and has responded to other inquiries by various governmental and regulatory authorities, including the Swiss Financial Market Supervisory Authority (FINMA), the UK Financial Services Authority (FSA), the SEC, the US Financial Industry Regulatory Authority (FINRA), the Financial Crisis Inquiry Commission (FCIC), the New York Attorney General, and the US Department of Justice, concerning various matters related to the credit crisis. These matters concern, among other things, UBS’s (i) disclosures and write-downs, (ii) interactions with rating agencies, (iii) risk control, valuation, structuring and marketing of mortgage-related instruments, and (iv) role as underwriter in securities offerings for other issuers.

5) Lehman Principal Protection Notes

From March 2007 through September 2008, UBS sold approximately USD 1 billion face amount of structured notes issued by Lehman Brothers Holdings Inc. (“Lehman”), a majority of which were referred to as “principal protection notes,” reflecting the fact that while the notes’ return was in some manner linked to market indices or other measures, some or all of the investor’s principal was an unconditional obligation of Lehman as issuer of the notes. UBS has been named along with other defendants in a putative class action alleging materially misleading statements and omissions in the prospectuses relating to these notes and asserting claims under US securities laws. UBS has also been named in numerous individual civil suits and customer arbitrations (some of which have resulted in settlements or adverse judgments), was named in a proceeding brought by the New Hampshire Bureau of Securities, and is responding to investigations by other state regulators and FINRA relating to the sale of these notes to UBS customers. The customer litigations and regulatory investigations relate primarily to whether UBS adequately disclosed the risks of these notes to its customers.

6) Claims Related to Sales of RMBS and Mortgages

From 2002 through about 2007, UBS was a substantial underwriter and issuer of US residential mortgage-backed securities (RMBS). UBS has been named as a defendant relating to its role as underwriter and issuer of RMBS in more than 20 lawsuits relating to at least USD 39 billion in original face amount of RMBS underwritten or issued by UBS. Most of the lawsuits are in their early stages. Many have not advanced beyond the motion to dismiss phase; some are

in the early stages of discovery. Of the original face amount of RMBS at issue in these cases, approximately USD 4.5 billion was issued in offerings in which a UBS subsidiary transferred underlying loans (the majority of which were purchased from third party originators) into a securitization trust and made representations and warranties about those loans. The remaining USD 34.5 billion of RMBS to which these cases relate was issued in third-party securitizations where UBS acted as underwriter. In connection with most of the claims included in this latter category, UBS currently expects to be indemnified by the issuers against any loss or liability. These RMBS-related claims include cases in which UBS is named as a defendant in litigation by insurers of RMBS seeking recovery of insurance paid to RMBS investors. These insurers allege that UBS and other RMBS underwriters aided and abetted misrepresentations and fraud by RMBS issuers, and claim equitable and contractual subrogation rights. UBS has also been contacted by certain government-sponsored enterprises requesting that UBS repurchase USD 2 billion of securities issued in UBS-sponsored RMBS offerings.

As described below under “c) Other contingent liabilities”, UBS also has contractual obligations to repurchase US residential mortgage loans as to which its representations made at the time of transfer prove to have been materially inaccurate. Contested loan repurchase demands relating to loans with an initial principal balance of USD 30 million are the subject of litigation.

7) Claims Related to UBS Disclosure

A putative consolidated class action has been filed in the markets for these securities and related auction failures since mid-February 2008. At the end of 2008 UBS entered into settlements with the SEC, the New York Attorney General (NYAG) and the Massachusetts Securities Division whereby UBS agreed to offer to buy back ARSs from eligible customers within certain time periods, the last of which begins on 30 June 2010, and to pay penalties of USD 150 million (USD 75 million to the NYAG, USD 75 million to the other states). UBS’s settlement is largely in line with similar industry regulatory settlements. UBS is continuing to finalize agreements with other state regulators. The SEC continues to investigate individuals affiliated with UBS who traded in ARSs or who had responsibility for disclosures.

c)US Cross-Border: UBS AG has been the subject of a number of governmental inquiries and investigations relating to its cross-border private banking services to US private clients during the years 2000-2007. On 18 February 2009, UBS AG announced that it had entered into a Deferred Prosecution Agreement (DPA) with the US Department of Justice Tax Division (DOJ) and the United States Attorney’s Office for the Southern District of Florida, and a Consent Order with the SEC relating to these investigations. As part of the settlement agreements UBS agreed to, among other things, (i) pay a total of USD 780 million to the United States, (ii) complete the exit of the US cross-border business out of non-SEC registered entities, and (iii) implement and maintain an effective program of internal controls with respect to compliance with its obligations under the Qualified Intermediary (Ql) Agreement with the US Internal Revenue Service (IRS), as well as a revised legal and compliance governance structure in order to strengthen independent legal and compliance controls. Pursuant to the DPA, the DOJ agreed that any further prosecution of UBS will be deferred for a period of at least 18 months, subject to extension under certain circumstances such as UBS needing more time to complete the implementation of the exit of its US cross-border business. If UBS satisfies all of its obligations under the DPA, the DOJ will refrain permanently from pursuing charges against UBS relating to the investigation of its US cross-border business. As part of the resolution of an SEC claim that UBS acted as an unregulated broker dealer and investment advisor in connection with its US cross-border business, UBS consented to a settlement that provides, among other things, that: (i) UBS will pay USD 200 million to the SEC (included in the USD 780 million payment described above); and (ii) UBS will complete its exit of the US cross-border business and will be permanently enjoined from violating certain SEC registration requirements.

The agreements with the DOJ and SEC did not resolve the “John Doe” summons which the IRS served on UBS in July 2008. In this regard, on 19 February 2009, the Civil Tax Division of the DOJ filed a civil petition for enforcement of this summons in the US Federal District Court for the Southern District of Florida, through which it sought an order directingNew York against UBS, to produce information locateda number of current and former directors and senior officers and certain banks that underwrote UBS’s May 2008 Rights Offering (including UBS Securities LLC) alleging violation of the US securities laws in Switzerland regarding US clients who have maintained accounts with UBS in Switzerland without providing a Form W-9.

On 19 August 2009, UBS executed a settlement agreementconnection with the IRSfirm’s disclosures relating to its positions and losses in mortgage-related securities, its positions and losses in auction rate securities, and its US cross-border business. Defendants have moved to dismiss the complaint for failure to state a claim. UBS, a number of senior officers and employees and various UBS committees have also been sued in a putative consolidated class action for breach of fiduciary duties brought on behalf of current and former participants in two UBS Employee Retirement Income Security Act (ERISA) retirement plans in which there were purchases of UBS stock. Defendants have moved to dismiss the ERISA complaint for failure to state a claim.

8) Madoff

In relation to the Bernard L. Madoff Investment Securities LLC (BMIS) investment fraud, UBS AG, UBS (Luxembourg) SA and certain other UBS subsidiaries have been subject to inquiries by a number of regulators, including FINMA and the DOJ, to resolve the “John Doe” summons litigation (UBS-US Settlement Agreement)Luxembourg Commission de Surveillance du Secteur Financier (CSSF). At the same time, the United States and Switzerland entered into a separate but related agreement (Swiss-US Agreement). Among other things, these agreements provide that: (i) UBS and the IRS would promptly file a stipulation dismissing the “John Doe” summons enforcement action then pending in federal court in Miami, which occurred the same day; (ii) the IRS would submit a request for information regarding accounts of US clients maintained at UBS in Switzerland, on the basis that such clients appear to have committed tax fraud or the like within the meaning of the existing 1996 Swiss-US Double Taxation Treaty, to the Swiss Federal Tax Administration (SFTA), which it did on 31 August 2009; (iii) UBS would send a notice to US accountholders that appear to be within the scope of the treaty request and produce to the SFTA information on the corresponding accounts both in accordance with a specified schedule, which UBS has done in compliance with an order issued by the SFTA on 1 September 2009; and (iv) UBS and the IRS would agree to amend UBS’s Ql Agreement, whereupon the IRS would withdraw the previously disclosed Ql Notice of Default dated 15 May 2008. The UBS-US Settlement Agreement does not call for any monetary payment by UBS.

Because UBS has complied with all of its obligations set forth in the UBS-US Settlement Agreement required to be completed by 31 December 2009, the IRS has withdrawn the summons with prejudice as to all accounts not covered by the treaty request.

Subject to UBS’s compliance with its further notification and information processing obligations set forth in the UBS-US Settlement Agreement, the IRS will withdraw the “John Doe” summons with prejudice as to the remaining accounts – i.e. those subject to the treaty request – no later than 24 August 2010 upon the actual or anticipated delivery to the IRS of information relating to accounts covered by the treaty request that does not differ significantly from the expected results. Alternatively, the summons will be withdrawn with prejudice as to the remaining accounts if at any time on or after 1 January 2010 theThose inquiries concerned two third-party funds established under Lux-



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Note 21 Provisions and litigationcontingent liabilities (continued)

 

IRS has received information from any source relating to at least 10,000 accounts of US persons maintained at UBS in Switzerland.
On 21 January 2010, the Swiss Federal Administrative Court ruled that the SFTA did not have a proper legal basis to grant the IRS request for information with respect to accounts of US persons who had failed to report substantial amounts of income over an extended period, but had not engaged in fraudulent activity within the meaning of Swiss law. The decision does not invalidate the UBS-US Settlement Agreement or the Swiss-US Agreement and it does not affect the treaty request to the extent it is directed at accounts in relation to which such fraudulent activity occurred. Following consultations with the US Government about measures to ensure the further implementation of the Swiss-US Settlement Agreement, the Swiss Government decided on 24 February 2010 that it will seek to amend the Swiss-US Agreement and submit it to Parliament for approval.
UBS continues, as in the past, to fulfill all of its obligations under the settlements, including, among other things, the exit of the US cross-border business out of non-SEC registered entities and the provision of relevant account information to the SFTA under the treaty process.
d)Inquiries Regarding Non-US Cross-Border Businesses: Following the disclosure of the US cross-border matter and the settlements with the DOJ and the SEC, tax and regulatory authorities in a number of countries have requested information relating to the cross-border wealth management services provided by UBS and other financial institutions. In particular, the revenue services of Canada, the UK and Australia have served requests upon, or made inquiries of, UBS and other Swiss and non-Swiss financial institutions providing cross-border wealth management services for information relating to such services that is located in their respective jurisdictions. UBS is cooperating with these requests strictly within the limits of financial privacy obligations under Swiss and other applicable laws. It is premature to speculate on the outcome of any such inquiries.
e)Matters Related to the Credit Crisis: UBS is responding to a number of governmental inquiries and investigations, and is involved in a number of litigations, arbitrations and disputes, related to the credit crisis and in particular mortgage-related securities and other structured transactions and derivatives. These matters concern, among other things, UBS’s valuations, accounting classifications, disclosures, writedowns, and contractual obligations, as well as its role as underwriter in securities offerings for other issuers. In particular, UBS has communicated with and has responded to inquiries by FINMA, its home country consolidated regulator, as well as the SEC, the Financial Industry Regulatory Authority and the United States Attor-
ney’s Office for the Eastern District of New York, regarding some of these issues and others, including the role of internal control units, governance and processes around risk control and valuation of mortgage-related instruments, compliance with public disclosure rules, and the business rationales for the launching and the reintegration of Dillon Read Capital Management. FINMA concluded its investigation in October 2008.
f)Claims Related to UBS Disclosure: A putative consolidated class action has been filed against UBS and a number of current and former directors and senior officers in the Southern District of New York alleging securities fraud in connection with the firm’s disclosures relating to its losses in the subprime mortgage markets, its losses and positions in auction rate securities, and its US cross-border business. Defendants have moved to dismiss the complaint for lack of jurisdiction and for failure to state a claim. UBS and a number of senior officers and directors have also been sued in a putative consolidated class action brought on behalf of holders of UBS Employee Retirement Income Security Act (ERISA) retirement plans in which there were purchases of UBS stock. UBS has moved to dismiss the ERISA complaint for failure to state a claim.
g)Madoff: In relation to the Madoff investment fraud, UBS, UBS (Luxembourg) SA and certain other UBS subsidiaries have been subject to inquiries by a number of regulators, including FINMA and the Luxembourg Commission de Surveillance du Secteur Financier (CSSF). Those inquiries concerned two third-party funds established under Luxembourg law substantially all assets of which were with Bernard L. Madoff Investment Securities LLC (BMIS), as well as certain funds established under offshore jurisdictions with either direct or indirect exposure to BMIS. These funds now face severe losses. The last reported net asset value of the two Luxembourg funds before the revelation of the Madoff scheme was approximately USD 1.7 billion in the aggregate. The documentation establishing both funds identifies UBS entities in various roles including custodian, administrator, manager, distributor and promoter, and indicates that UBS employees serve as board members. On 25 February 2009, the CSSF issued a communique with respect to the larger of the two funds, stating that UBS (Luxembourg) SA had failed to comply with its due diligence responsibilities as custodian bank. The CSSF ordered UBS (Luxembourg) SA to review its infrastructure and procedures relating to its supervisory obligations as custodian bank, but did not order it to compensate investors. On 25 May 2009, UBS (Luxembourg) SA submitted a comprehensive final report to the CSSF, which resulted in the CSSF publishing a new communique saying that UBS (Luxembourg) SA has provided evidence demonstrating that it has the infrastructure and


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Notesembourg law, substantially all assets of which were with BMIS, as well as certain funds established under 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, administrator, manager, distributor and promoter, and indicates that UBS employees serve as board members. Between February and May 2009 UBS (Luxembourg) SA responded to criticisms made by the CSSF in relation to its responsibilities as custodian bank and demonstrated to the consolidated financial statementssatisfaction of the CSSF that it has the infrastructure and internal organization in place in accordance with professional standards applicable to custodian banks in Luxembourg. In December 2009 and March 2010 the liquidators of the two Luxembourg funds filed claims on behalf of the funds against UBS entities, non-UBS entities and certain individuals including current and former UBS employees. The amounts claimed are approximately EUR 890 million and EUR 305 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 have been filed against the March 2010 decisions of the court in which the claims in a number of test cases were held to be inadmissible. In the US, the BMIS Trustee has filed claims against UBS entities, amongst others, in relation to the two Luxembourg funds and one of the offshore funds. A claim was filed in November 2010 against 23 defendants including UBS entities, the Luxembourg and offshore funds concerned and various individuals, including current and former UBS employees. The total amount claimed against all defendants is no less than USD 2 billion. A second claim was filed in December 2010 against 16 defendants including UBS entities and the Luxembourg fund concerned. The total amount claimed against all defendants is not less than USD 555 million. 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 number of claims have been filed with respect to such funds.

Note 21 Provisions9) Transactions with City of Milan and litigation (continued)Other Italian Public
Sector Entities

internal organization in place in accordance with professional standards applicable to custodian banks in Luxembourg. In addition, on 17 December 2009, a claim in the amount of EUR 890 million was filed on behalf of the larger of the two Luxembourg funds by the liquidators of that fund against 15 defendants, including UBS entities, Access Management Luxembourg SA, Ernst & Young, the CSSF and various individuals. A large number of alleged beneficiaries have filed claims against UBS entities (and non-UBS entities) for purported losses relating to the Madoff scheme. Further, certain clients of UBS in Germany are exposed to Madoff-managed positions through third-party funds and funds administered by UBS entities in Germany.
h)City of Milan Transactions: In January 2009, the City of Milan filed civil proceedings against UBS Limited, UBS Italia SIM Spa and three other international banks in relation to a 2005 bond issue and associated derivatives transactions entered into with the City of Milan between 2005 and 2007. The claim is to recover alleged damages in an amount which will compensate for terms of the related derivatives which the City claims to
In January 2009, the City of Milan filed civil proceedings against UBS Limited, UBS Italia SIM Spa and three other international banks in relation to a 2005 bond issue and associated derivatives transactions entered into with the City of Milan between 2005 and 2007. The claim is to recover alleged damages in an amount which will compensate for terms of the related derivatives which

the City claims to be objectionable. In the alternative, the City seeks to recover alleged hidden profits allegedasserted to have been made by the banks in thean amount of approximately EUR 88 million (of which UBS Limited is alleged to have received approximately EUR 16 million) together with further damages of not less than EUR 150 million. The claims are made against all of the banks on a joint and several basis. UBS is vigorously defending the claim. In addition, a criminal investigation by a Prosecutor in Milan has been ongoing in relation to the same transactions. In November 2009, the Prosecutor filed a request for committal for trial of two current UBS employees and one former UBS employee, together with employees from other banking institutions. The request alleges thatbanks, a former City officer and a former adviser to the banks’ employees engagedCity, are facing a criminal trial for alleged “aggravated fraud” in criminal conduct in orderrelation to allow the banks to earn allegedly concealed profits on the JuneCity’s 2005 bond issue and the execution, and subsequent restructuring, of certain related derivative transactions. The Prosecutor also requested committal for trial ofprimary allegation is that UBS Limited and the other international banks in relation tofraudulently obtained hidden and / or illegal profits by entering into the derivative contracts with the City of Milan. The banks also face an administrative charge of failing to have in place a business organizationorganizational model to prevent crime. Preliminaryavoid the alleged misconduct by employees, the sanctions for which could include a limitation on activities in Italy. The City has separately asserted claims for damages against UBS Limited and UBS individuals in relation to this alleged failure. A number of transactions with other public entity counterparties in Italy have also been called into question or become the subject of legal proceedings and claims for damages and other awards. These include derivative transactions with the Regions of Calabria, Tuscany, Lombardy and Lazio and the City of Florence. UBS has itself issued proceedings before English courts in connection with a number of derivative transactions with Italian public entities, including some of those mentioned above, aimed at obtaining declaratory judgments as to the legitimacy of UBS’s behavior.

10) HSH Nordbank AG (HSH)

HSH has filed an action against UBS in New York State court hearingsrelating to USD 500 million of notes acquired by HSH in a synthetic CDO transaction known as North Street Referenced Linked Notes, 2002-4 Limited (NS4). The notes were linked through a credit default swap between the NS4 issuer and UBS to a reference pool of corporate bonds and asset-backed securities. HSH alleges that UBS knowingly misrepresented the risk in the transaction, sold HSH notes with “embedded losses”, and improperly profited at HSH’s expense by misusing its right to substitute assets in the reference pool within specified parameters. HSH is seeking USD 500 million in compensatory damages plus pre-judgment interest. The case was initially filed in 2008. Following orders issued in 2008 and 2009, in which the court dismissed most of HSH’s claims and its punitive damages demand and later partially denied a motion to dismiss certain repleaded claims, the claims remaining in the case are taking place through March 2010.for fraud, breach of contract and breach of the implied covenant of good faith and fair dealing. Both sides have appealed the court’s most recent partial dismissal order, and a decision on the appeal is pending.



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Note 21 Provisions and contingent liabilities (continued)

11) Kommunale Wasserwerke Leipzig GmbH (KWL)

In 2006 and 2007, KWL entered into a series of managed Credit Default Swap transactions with bank swap counterparties, including UBS. Under the CDS contracts between KWL and UBS, the last of which were terminated by UBS on 18 October 2010, a net sum of approximately USD 138 million has fallen due from KWL but not been paid. In January 2010, UBS issued proceedings in the English High Court against KWL seeking various declarations from the English court, in order to establish that the swap transaction between KWL and UBS is valid, binding and enforceable as against KWL. On 15 October 2010, the English court dismissed an application by KWL contesting its jurisdiction, and ruled that it has jurisdiction and will hear the proceedings. On 18 October 2010, UBS issued a further claim against KWL in the English court seeking declarations concerning the validity of UBS’s early termination on that date of the remaining CDS with KWL. On 11 November 2010, the English Supreme Court ruled in a case concerning similar jurisdictional issues, but not involving UBS, that certain questions should be referred to the European Court of Justice. Thereafter, KWL was granted permission to appeal certain jurisdictional aspects of its claim, and the court ordered a temporary stay of the proceedings related to UBS’s claim for a declaration as to validity. In March 2010, KWL issued proceedings in Leipzig, Germany, against UBS and other banks involved in these contracts, claiming that the swap transactions are void and not binding on the basis of KWL’s allegation that KWL did not have the capacity or the necessary internal authorization to enter into the transactions and that the banks knew this. UBS is contesting the claims and has also contested the jurisdiction of the Leipzig court. The Leipzig court indicated in August 2010 that it did not have jurisdiction over KWL’s claim. Subsequently, KWL made a further submission in October 2010 making additional allegations including fraudulent collusion by UBS employees. On 15 February 2011, the Leipzig court proposed that the proceedings in Leipzig be stayed against UBS and the other banks pending the outcome of the appeal on the jurisdiction aspects in England.

The other two banks that entered into CDS transactions with KWL entered into back-to-back CDS transactions with UBS. In

April 2010, UBS issued separate proceedings in the English High Court against those bank swap counterparties seeking declarations as to the parties’ obligations under those transactions. The aggregate amount that UBS contends is outstanding under those transactions is approximately USD 189 million. These English proceedings are also currently stayed.

It is reported that in January 2011, the former managing director of KWL and two financial advisers were convicted on criminal charges related to certain KWL transactions, including swap transactions with UBS and other banks.

12) Puerto Rico

The SEC has been investigating UBS’s secondary market trading and associated disclosures involving shares of closed-end funds managed by UBS Asset Managers of Puerto Rico, principally in 2008 and 2009. In November 2010, the SEC issued a “Wells notice” to two UBS subsidiaries, advising them that the SEC staff is considering whether to recommend that the SEC bring a civil action against them relating to these matters. We believe that the negative financial results, if any, to shareholders of the funds who traded their shares through UBS during the relevant periods were less than USD 5 million in the aggregate. There is, however, no assurance that the SEC’s staff will agree with UBS’s analysis.

13) LIBOR

UBS has received subpoenas from the SEC, the US Commodity Futures Trading Commission and the US Department of Justice in connection with investigations regarding submissions to the British Bankers’ Association, which sets LIBOR rates. UBS understands that the investigations focus on whether there were improper attempts by UBS, either acting on its own or together with others, to manipulate LIBOR rates at certain times. In addition, UBS has received an order to provide information to the Japan Financial Supervisory Agency concerning similar matters. UBS is conducting an internal review and is cooperating with the investigations.



c) Other contingent liabilities

Demands Related to Sales of Mortgages and RMBS

For several years prior to the crisis in the US residential mortgage loan market, UBS sponsored securitizations of US residential mortgage-backed securities (RMBS) and was a purchaser and seller of US residential mortgages. A subsidiary of UBS, UBS Real Estate Securities Inc. (“UBS RESI”), acquired pools of residential 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. The overall market for privately issued US RMBS during this period was approximately USD 3.9 trillion.

UBS RESI also sold pools of loans acquired from originators to third-party purchasers. These whole loan sales during the period 2004 through 2007 totaled approximately USD 19 billion in original principal balance.
UBS was 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.



318

Financial information

Note 21 Provisions and contingent liabilities (continued)

When UBS acted as an RMBS sponsor or mortgage seller, it generally made certain representations relating to the characteristics of the underlying loans. In the event of a material breach of these representations, UBS was in most cases contractually obligated to repurchase the loans to which they related or to indemnify certain parties against losses. UBS has been notified by certain institutional purchasers and insurers of mortgage loans and RMBS that possible breaches of representations may entitle the purchasers to require that UBS repurchase the loans or to other relief. UBS has received relatively few repurchase demands and has repurchased only a small fraction of the underlying loans.

In the period from 2006 through 2009, UBS received demands to repurchase loans having an original principal balance of approximately USD 356 million in the aggregate. Of that principal balance of USD 356 million, UBS has repurchased or agreed to repurchase loans accounting for about 5%. Repurchase demands accounting for about 45% were rescinded after rebuttal by UBS. Demands accounting for a further 41% either were rebutted by UBS but not rescinded (and are the subject of ongoing discussions) or were not pursued by the party making the demand. Repurchase demands accounting for about 9% are the subject of ongoing litigation.
In 2010, UBS received demands to repurchase additional loans having an original principal balance of approximately USD 350 million. Of that principal balance of USD 350 million, UBS has agreed to repurchase loans accounting for about 12%, repurchase demands accounting for about 67% have been rebutted by UBS but not rescinded, UBS continues to review repurchase demands accounting for about 15%, and demands accounting for about 6% are being resolved between the repurchase requestor and the originators of the loans. UBS expects that the majority of the underlying loans subject to these 2010 repurchase demands will ultimately not be required to be repurchased. Since 1 January 2011 UBS has received demands to repurchase additional loans having an original principal balance of approximately USD 5 million. Those loans are under review.
UBS established by the end of the fourth quarter 2010 a USD 97 million provision based on its best estimate of the loss arising from loan repurchase demands received from 2006 through 2010 to which UBS has agreed, or which UBS has rebutted but which are unresolved, and for certain anticipated loan repurchase demands of which UBS has been informed. It is not yet clear when or to what extent this provision will be utilized in connection with

actual repurchases or indemnity payments, because both the submission of anticipated demands and the timing of resolution of such demands are uncertain. We nevertheless expect that most of the repurchases and payments related to the demands received in 2010, excluding any that become the subject of litigation, will occur in 2011.

UBS has made indemnity payments in amounts equivalent to 62% of the original principal balance of already-liquidated loans that were the subject of 2010 demands to which UBS agreed. With respect to unliquidated loans that UBS agreed to repurchase in response to demands made in 2010, UBS does not yet have sufficient information to estimate the charge it will recognize upon repurchase. Losses upon repurchase will reflect the estimated value of the loans in question at the time of repurchase as well as, in some cases, partial repayment by the borrowers prior to repurchase. It is not possible to predict future indemnity rates or percentage losses upon repurchase for reasons including timing and market uncertainties as well as possible differences in the characteristics of loans that may be the subject of future demands compared to those that have been the subject of past demands.
In most instances in which UBS would be required to repurchase loans or indemnify against losses due to misrepresentations, UBS would be able to assert demands against third-party loan originators who provided representations when selling the related loans to UBS. However, many of these third parties are insolvent or no longer exist. UBS estimates that, of the total original principal balance of loans sold or securitized by UBS from 2004 through 2007, less than 50% was purchased from third-party originators that remain solvent. In respect of loans that UBS has agreed to repurchase pursuant to demands received in 2010, UBS has in turn asserted indemnity or repurchase demands against third parties for loans with an aggregate original principal balance of USD 29 million. Only a small number of UBS’s demands have been resolved, and UBS has not recognized any asset in respect of the unresolved demands.
We cannot reliably estimate the level of future repurchase demands, and do not know whether UBS’s past success rate in rebutting such demands will be a good predictor of future success. We also cannot reliably estimate the timing of any such demands.
As described above under “b) Litigation and regulatory matters”, UBS is also subject to claims and threatened claims in connection with its role as underwriter and issuer of RMBS, and certain loan repurchase demands are also the subject of litigation.



319

Financial information


Notes to the consolidated financial statements

Note 22 Income taxes

                       
Note 22 Income taxes 
 
 For the year ended  For the year ended 
CHF million 31.12.09 31.12.08 31.12.07  31.12.10 31.12.09 31.12.08 
 
Tax expense from continuing operations
  
Domestic
  
Current 55  (336) 409   (75) 55  (336)
Deferred 23  (7,282)  (25) 668 23  (7,282)
Foreign
  
Current 462 519 1,061  300 462 519 
Deferred  (983) 262  (76)  (1,273)  (983) 262 
Total income tax expense from continuing operations
  (443)  (6,837) 1,369 
Total income tax expense/(benefit) from continuing operations
  (381)  (443)  (6,837)
 
Tax expense from discontinued operations
  
Domestic
 0 1  (258) 0 0 1 
Total income tax expense from discontinued operations
 0 1  (258) 0 0 1 
Total income tax expense
  (443)  (6,836) 1,111 
Total income tax expense/(benefit)
  (381)  (443)  (6,836)

The deferred tax benefit reflects the recognition of additional deferred tax assets in respect of tax losses and temporary differences in a number of foreign locations including the US (CHF 3731,161 million) and Japan (CHF 12798 million), taking into account updated forecast taxable profit assumptions over the five-year horizon used for recognition purposes. In addition, it reflects the release ofThis was partly offset by a Swiss net deferred tax liabilityexpense as Swiss tax losses for which deferred tax assets have previously been recognized were used against profits for the year (tax expense of CHF 243 million relating to UBS Pactual prior to its sale during the year. 1,409 million), which was itself partly offset by an upwards revaluation of Swiss deferred tax assets taking into account revised forecast profit assumptions (tax benefit of CHF 741 million).

The current tax charge mainlyexpense relates to tax expenses in respect of entities with taxable profits.
     The currentprofits in the Group partly offset by tax expense for 2009 includes tax costs related to prior yearsbenefits of CHF 50 million.261 million arising from the agreement of prior year positions with tax authorities in various locations. In addition, there was

is a deferred tax benefitexpense of CHF 1163 million relating to prior years in respect of the release of a net deferred tax liability.years. The net tax benefits relating to prior years were therefore CHF 65258 million.

The Group made net corporate income tax payments, including domestic and foreign taxes, of CHF 498 million, CHF 505 million and CHF 887 million in 2010, 2009 and CHF 3,663 million in 2009, 2008 and 2007 respectively.
The components of operating profit before tax, and the differences between income tax expense reflected in the financial statements and the amounts calculated at the Swiss statutory rate, are as follows:



                       
 For the year ended  For the year ended 
CHF million 31.12.09 31.12.08 31.12.07  31.12.10 31.12.09 31.12.08 
Operating profit from continuing operations before tax  (2,561)  (27,758)  (3,742) 7,455  (2,561)  (27,758)
Domestic 4,871 3,269 10,337  5,999 4,871 3,269 
Foreign  (7,433)  (31,027)  (14,079) 1,456  (7,433)  (31,027)
Income taxes at Swiss statutory rate of 21.5% for 2009, 22% for 2008 and 2007  (551)  (6,107)  (823)
Income taxes at Swiss statutory rate of 21.5% for 2010 and 2009, 22% for 2008 1,603  (551)  (6,107)
 
Increase/(decrease) resulting from:  
Applicable tax rates differing from Swiss statutory rate  (1,636)  (7,056)  (3,054)  (49)  (1,636)  (7,056)
Tax effects of losses not recognized 1,188 7,412 6,327  275 1,188 7,412 
Previously unrecorded tax losses now utilized  (79)  (10)  (257)  (1,225)  (79)  (10)
Non-taxable and lower taxed income  (932)  (773)  (1,587)  (889)  (932)  (773)
Non-deductible goodwill and intangible asset amortization 7 160 15 
Non-deductible expenses 1,005 737 227 
Non-deductible expenses and additional taxable income 1,985 1,012 897 
Adjustments related to prior years  (65)  (490)  (72)  (258)  (65)  (490)
Change in deferred tax valuation allowance 552  (692) 279 
Change in deferred tax valuation allowances  (1,820) 552  (692)
Other items 69  (17) 314   (3) 69  (17)
Income tax expense from continuing operations
  (443)  (6,837) 1,369 
Income tax expense/(benefit) from continuing operations
  (381)  (443)  (6,837)

307320

Financial information
Notes to the consolidated financial statements

Note 22 Income taxes (continued)
Financial information

Note 22 Income taxes (continued)

Significant components of the Group’s deferred income tax assets and liabilities are as follows:

                                                
CHF million31.12.0931.12.08  31.12.10 31.12.09 
 Valuation Valuation    Valuation Valuation   
Deferred tax assets Gross allowance Recognized Gross allowance Recognized  Gross allowance Recognized Gross allowance Recognized 
Compensation and benefits 1,782  (1,561) 221 1,534  (1,213) 321 
Compensation and benefits1
 1,993  (1,791) 201 2,204  (1,983) 221 
Tax loss carry-forwards 32,505  (24,259) 8,246 32,834  (24,708) 8,126 
Tax loss carry-forwards1
 28,474  (19,546) 8,929 31,945  (23,699) 8,246 
Trading assets 561  (403) 158 608  (365) 243 
Trading assets1
 1,164  (999) 165 923  (765) 158 
Other 2,458  (2,215) 243 258  (69) 190  2,002  (1,776) 226 2,458  (2,215) 243 
Total deferred tax assets
 37,305  (28,437) 8,868 35,234  (26,354) 8,880  33,634  (24,112) 9,522 37,529  (28,661) 8,868 
 
Deferred tax liabilities
  
Compensation and benefits 5 111  0 5 
Property and equipment 1 29  0 1 
Financial investments and associates 60 206  25 60 
Trading assets 0 244  1 0 
Goodwill and intangible assets 61 289  40 61 
Other 15 591  31 15 
Total deferred tax liabilities
 142 1,470  97 142 

The change1 As compared to the figures stated in the net oftax note to the 2009 consolidated financial statements, the gross deferred tax assets and liabilitiesvaluation allowance in the comparatives for 31 December 2009 and 2008 does not equalhave each been increased by a net amount of CHF 224 million, resulting in no change in the deferred tax benefit in those years. Thisassets recognized. The net increase is because certainmade up of i) an increase for compensation and benefits of CHF 422 million, ii) an increase for trading assets of CHF 362 million and iii) a decrease for tax loss carry-forwards of CHF 560 million.

Certain deferred tax asset and liability movements are recognized directly in the statement of changes in equity and also becausein the statement of comprehensive income, including the effects of exchange rate changes on tax assets and liabilities denominated in currencies other than Swiss francs.

     During the year, deferred tax liabilities of CHF 0.7 billion were offset against In particular, in 2010, deferred tax assets of CHF 318 million were recognized directly inEquityfor the increased recognition of those Swiss tax losses incurred in accordance with IAS 12.

previous years that are of an equity nature for IFRS accounting purposes (2009: CHF 203 million).

In the table above, the valuation allowance represents amounts that are not expected to provide future benefits due to insufficiency of future taxable income (and at 31 December 2008, also amounts offset against potential tax adjustments).

income.

UBS AG Switzerland and certain overseas branches and subsidiaries of the Group have deferred tax assets related to tax loss carry-forwards and other items.items as shown in the table above. For entities that incurred tax losses in either the current or preceding year, an amount of CHF 8,7739,147 million is recognized as deferred tax

assets atas of 31 December 20092010 (CHF 8,4638,773 million atas of 31 December 2008)2009). These deferred tax assets mainly relate to Swiss tax losses (primarily due to the write-down of investments in US subsidiaries in 2007 and 2008) and US tax losses. Swiss tax losses can be carried forward for seven years and US federal tax losses for 20 years.

The deferred tax assets recognized atas of 31 December 20092010 in respect of tax losses have been based on profitability assumptions over athe five-year horizon. The expected future profitability is based on business plan assumptions, as adjusted to take into account the recognition criteria of IAS 12. If the business plan earnings and assumptions in following quartersfuture periods substantially deviate from the current assumptions, the amount of deferred tax assets may need to be adjusted in the future.

     At

As of 31 December 2009,2010, tax losses totaling CHF 72,31351,355 million which are not recognized as deferred tax assets are available to be offset against potential tax adjustments or future taxable income.

As of 31 December 2009, there were tax losses of CHF 72,313 million, which were not recognized as deferred tax assets and were available to be offset against future taxable income and potential tax adjustments. The tax losses not recognized reduced during 2010 because of their utilization against profits for the year, the increased recognition of deferred tax assets for losses brought forward, foreign exchange rate effects on the Swiss franc value of overseas losses and a change as of 31 December 2010 as compared to the prior year in terms of presenting the unrecognized tax losses net of any potential tax adjustments.

The tax losses not recognized as deferred tax assets as of 31 December 2010 expire as follows:



     
CHF million 31.12.0931.12.10
 
Within 1 year  10 
 
From 2 to 45 years  43,184 
 
After 4From 6 to 10 years  72,30854
From 11 to 20 years36,943
No expiry11,174 
 
Total
  72,31351,355 
 

321

Financial information
Notes to the consolidated financial statements

Note 22 Income taxes (continued)

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 provides for deferred income taxes on undistributed earnings of subsidiaries except to the extent that those earnings are indefinitely invested. AtAs of 31 December 2009,2010, no such earnings were treated as indefinitely invested.

308

Financial informationFor the reasons set out in Note 33, as compared to UBS’s fourth quarter 2010 report issued on 8 February 2011, the tax benefit for the year in the income statement is CHF 320 million higher, the deferred tax benefit recognized in equity is CHF 315 million lower and deferred tax assets recognized at 31 December 2010 are CHF 5 million higher.



Note 23 Derivative instruments and hedge accounting

 

Derivatives: overview

A derivative is a financial instrument, the value of which is derived from the value of anothersome other variable (“underlying”) financial instrument, an index or some other variable. Typically, the underlying is a share, commodity or bond price, an index value or an. These underlyings may be indices, exchange or interest rate.

rates, or the value of shares, commodities, bonds, or other financial instruments. The majority of derivative contracts are negotiated with respect to notional amounts, as to amount (“notional”),well as tenor, price and how the tradesettlement mechanisms, as is to be settled in the future between UBS and its counterparties, which may becustomary with other professionals or customers (over-the-counter (OTC) contracts).

     OTC contracts are usually traded under an International Swaps and Derivatives Association (ISDA) master trading agreement (MTA) between UBS and its counterparties. Other derivative contracts are standardized in terms of their amounts and settlement dates and are bought and sold on organized exchanges (exchange-traded contracts (ETD)). With ETDs, the exchange also acts as a central counterparty. financial instruments.

The notional amount of a derivative is generally the quantity of the underlying instrument on which the derivative contract is based, and is the basis uponreference against which changes in the value of the contractderivative are measured. It providesNotional 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 underlying volume of business transactedtypes of derivatives entered into by the Group but does not provide necessarily any measureGroup.
Over-the-counter (OTC) contracts are usually traded under an International Swaps and Derivatives Association (ISDA) master trading agreement (MTA) between UBS and its counterparties. Such contracts are negotiated directly with counterparties, at terms agreed between those parties, and will have industry-standard settlement mechanisms prescribed by ISDA. Other derivative contracts are standardized in terms of their amounts and settlement dates, and are bought and sold on organized exchanges; the latter are referred to as exchange-traded derivatives (ETD) contracts. Exchanges offer the benefits of pricing transparency, daily settlement of changes in value at the exchange, and consequently reduced credit risk.

In 2010, industry norms have resulted in increased use of exchanges in favor of OTC trading and settlement mechanisms, a trend which is expected to continue.

Derivative instruments which are transacted in the OTC market are carried at fair value (refer to Note 27 for fair value measurementon the face of derivative instruments), shown in the balance sheet and classified asSeparate totals of Positive replacement values(assets) andNegative replacement values (liabilities),except both on the balance sheet, and in the notes to the accounts. Derivative instruments which trade at an exchange are classified as either Due from or Due to banks and customers. The treatment of exchange-traded derivatives in this manner is an indication the Group has a receivable from, or payable to, an exchange for the change in fair value from the previous day.

Products which receive this treatment are futures contracts, 100% daily-daily margined exchange tradedexchange-traded options, and interest rate swaps transacted with the London Clearing house (LCH) with daily margining, whichHouse, and certain credit derivative contracts.

Principles and techniques applied in the measurement of fair value derivative instruments are presenteddiscussed in Note 27a).Positive replacement values represent the amount the Group would receive if the derivative contract were settled in full on the balance sheet asdate.Due from banks, Loans and Due to banks and customers.

     Positive replacement values represent the cost to the Group of replacing all transactions with a fair value in the Group’s favor, assuming transactions could be replaced instantaneously. Negative replacement values represent the cost to the Group’s counterparties of replacing all their transactions with the Group with a fair value in their favor.Positive and Negative replacement valueson different transactions are only netted if the transactions are with the same counterparty with a legally enforceable right to set off.Positive and Negative replacement values are denominatedindicate the value at which the Group would extinguish its obligations in respect of the same currency,underlying contract, were it able and the cash flows are intendedrequired to do so. It is not industry standard for derivative contracts to be settled or extinguished before their maturity, as stated in, and governed by, ISDA or the applicable exchange.

All contracts at an exchange are settled net, with the net receivable or payable, as reported by the applicable exchange, recorded on athe balance sheet. The Group may avail itself of netting provisions for OTC contracts, which do not settle via exchange, if all necessary conditions exist. Those conditions are: contracts with the same legal counterparty; legally enforceable rights to set off amounts due; common maturity dates; and an intention to settle net, basis.which is evidenced by current practice. Changes in the replacement values of derivativederivatives transacted in trading businesses are recorded in net trading income, unless the derivatives are designated and effective as hedging instruments are recognized in the income statement unless they meet the criteria for certain types of hedge accounting relationships as explaineddescribed in Note“Note 1a) 15)Derivative instruments and hedge accounting.accounting”.

Types of derivative instruments

The Group uses the following derivative financial instruments for both trading and hedging purposes.

Forwards and futuresare contractual obligations to buy or sell financial instruments or commodities on a future date at a specified price. Forward contracts are tailor-made agreements that are transacted between counterparties on Through the OTC market, whereas futures are standardized contracts transacted on regulated exchanges.

Swapsare transactions in which two parties exchange cash flows on a specified notional amount for a predetermined period. Most swaps are traded OTC. The major typesuse of swap transactions undertaken bythe products listed below the Group is engaged in extensive high volume market making and client facilitation trading referred to as the flow business. Measurement techniques applied to determine the fair value of each product type are as follows:described in Note 27c).

– Interest rate swap contracts generally entailThe main types of derivative instruments used by the contractual exchange of fixed-rate and floating-rate interest pay ments in a single currency, based on a notional amount and a reference interest rate, e.g. LIBOR.Group are:
– Options and warrants: options and warrants are contractual agreements under which, typically, the seller (writer) grants the purchaser the right, but not the obligation, either to buy (call option) or to sell (put option) by or at a set date, a specified



322

Financial information

Note 23 Derivative instruments and hedge accounting (continued)

quantity of a financial instrument or commodity at a predetermined price. The purchaser pays a premium to the seller for this right. Options involving more complex payment structures are also transacted. Options may be traded in the OTC market or on a regulated exchange and may be traded in the form of a security (warrant).
–Swaps: Swaps are transactions in which two parties exchange cash flows on a specified notional amount for a predetermined period.
–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 counterparties in the OTC market, whereas futures are standardized contracts transacted on regulated exchanges.
–Cross-currency:Cross-currency swaps involve the exchange of interest payments based on two different currency principal balances and reference interest rates and generally also entail exchange of principal amounts at the start and/and / or end of the contract. Most cross-currency swaps are traded in the OTC market.
The main underlying products used by the Group are:
– Interest rate contracts: Interest rate products include interest rate swaps, swaptions and caps and floors.
–Credit derivatives:Credit default swaps (CDSs) are the most common form of a credit derivative, under which the party buying protection makes one or more payments to the party selling protection in exchange for an undertaking by the seller to make a payment to the buyer following a credit event (as defined in the contract) with respect to a third-party credit entity (as defined in the contract). Settlement following a credit event may be a net cash amount or cash in return for physical delivery of one or more obligations of the credit entity and is made regardless of whether the protection buyer has actually suffered a loss. After a credit event and settlement, the contract is terminated. An elaboration of credit derivatives is included in a separate section below.
– Total rate of return swaps give(TRSs): TRSs are employed in both the totalInvestment Bank’s fixed income and equity trading businesses with underlyings which are generally equity or fixed income indices, loans or bonds. TRSs are structured with one party making payments based on a set rate, either fixed or variable, and the other party making payments based on the return receiver exposure to all of the cash flows and economic benefits and risks of an underlying asset, without having to ownwhich includes both the asset,profit or loss it generates and any changes in exchange for a series of payments, often based on a reference interest rate, e.g. LIBOR. The total return payer has an equal and opposite position.its value.
– Metal swaps (precious metalForeign exchange contracts: Foreign exchange contracts will include spot, forward and cross-currency swaps and base metal swaps) involve theoptions and warrants. Forward purchase and sale currency contracts are typically executed to meet customer needs and for trading and hedging purposes.
–Equity / Index contracts: The Group uses equity derivatives linked to single names, indices and baskets of specific metals. A precious metal swap involves the purchase and sale of a specified metal with fixed notional amount and fixed price but different settlement dates. A base metal swap is the simultaneous purchase and sale of a specified metal with same settlement dates but different pricing terms.single names

     Options and warrantsare contractual agreements under which, typically, the seller (writer) grants the purchaser the right, but not the obligation, either to buy (call option) or to sell (put option) by or at a set date, a specified quantity of a financial instrument or commodity at a predetermined price.



309

Financial information
Notes to the consolidated financial statements

Note 23 Derivative instruments and hedge accounting (continued)

The purchaser pays a premium to the seller for this right. Options involving more complex payment structures are also transacted. Options may be traded OTC or on a regulated exchange and may be traded in the form of a security (warrant).

Credit derivatives

UBS’s credit derivative portfolio consists of credit default swaps, total return swaps and options and warrants. As of 31 December 2009, the total notional value of protection bought was CHF 1,288 billion (CHF 56 billion and CHF 23 billionPositive replacement valuesandNegative replacement values,respectively) and the total notional value of protection sold was CHF 1,187 billion (CHF 23 billion and CHF 47 billionPositive replacement valuesandNegative replacement values, respectively), in 2009. UBS’s credit derivatives are usually traded as OTC contracts. During 2009 a number of initiatives were launched in both the US and Europe to establish centralized clearing solutions for OTC CDS contracts (exchange cleared derivatives), with the aim of reducing counterparty risk. UBS, along with other dealer members, has been an active participant in these initiatives.

     A significant portion of UBS’s credit derivatives are traded under an ISDA MTA between UBS and its counterparty. UBS’s CDS trades are also documented using industry standard forms of documentation published by ISDA or equivalent terms documented in a bespoke (i.e. tailored) agreement. Those forms and agreements use standardized terms that form the basis for market conventions related to the types of credit events that would trigger performance (i.e. payment) under a CDS.

     The types of credit events that would require UBS to perform under a CDS contract are subject to agreement between the parties at the time of the transaction. However, nearly all transactions are traded using credit events that are applicable under certain market conventions based on the type of reference entity to which the transaction relates. Applicable credit events by market conventions include “bankruptcy”, “failure to pay”, “restructuring”, “obligation acceleration” and “repudiation/moratorium”.

Recourse provisions

UBS uses standardized agreements and forms as the basis for its credit derivative contracts. Those agreements and forms do not contain recourse provisions that would enable UBS to recover from third parties any amounts paid out by UBS (i.e. this is the case where a credit event occurs and UBS is required to make payment under a CDS).

Economic hedges and strategy

UBS actively utilizes CDS to economically hedge specific counterparty credit risks in its banking book loans portfolio (includ-

and indices. The indices used may be based on a standard market 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 commodity derivatives trading business, which includes the commodity index and the recently added flow business. The index business is a client facilitation business trading exchange traded funds, OTC swaps and options on commodity indices. The underlying indices cover third party and UBS defined indices such as the UBS Bloomberg Constant Maturity Commodity Index and the Dow Jones UBS Commodity indices. The flow business is investor led and incorporates both ETD and vanilla OTC products, for which the underlying covers the agriculture, base metals and energy sectors. All of the flow trading is cash settled with no physical delivery of the underlying.
–Precious metals: The Group has a well established precious metals ability 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 OTCs and certain non-vanilla OTCs. The vanilla OTCs are in forwards, swaps and options. The non-vanilla OTC business relates to cash settled forwards similar in nature to non deliverable forwards, meaning there is no physical delivery of the underlying.

ing loan commitments) 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.

     UBS is an active dealer in fixed income instruments and CDS and related products with respect to a large number of securities issuers. The primary purpose of these activities is for the benefit of UBS’s clients (market making) and to a lesser extent creating new credit exposures taken for UBS’s own trading purposes (proprietary trading).

     Market making activity consists of buying and selling single-name CDS, index CDS, loan CDS and related referenced cash instruments to facilitate client trading activity. Proprietary trading consists of trading in single-name CDS, index CDS and loan CDS to capitalize on pricing discrepancies between various credit instruments (bonds, loans and equities) across investment grade, high-yield and emerging markets.

     As a general matter, risk to the relevant issuers arising from fixed income instruments, CDS and related products are reviewed and risk-managed on a net exposure basis (i.e. taking into account all exposures to a particular issuer arising from fixed income instruments, CDS and related products) across market making and proprietary trading activities.

     UBS’s strategy with respect to CDS trading was the reduction in scope and scale of the firm’s structured credit, proprietary credit and asset securitization (including synthetic securitization) activities during 2009 and 2008.

Contingent featuresUsage of derivative liabilitiesinstruments at UBS

Based on UBS’s credit ratings as of 31 December 2009, additional collateral or termination payments pursuant to bilateral agreements with certain counterparties of approximately CHF 1.2 billion and CHF 2.8 billion would have been required in the event of a one-notch and two-notch reduction, respectively, in UBS’s long-term credit ratings. In evaluating UBS’s liquidity requirements, UBS considers additional collateral or termination payments that would be required in the event of a reduction in UBS’s long-term credit ratings.

Derivatives transacted for trading purposes

Most of the Group’s derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of derivative products to customers to enable them to take, transfer, modify or reduce current or expected risks. Trading activities include market making, positioning and arbitrage activities. Market making involves quoting bid and offer prices to other market participants with the intention of generating revenues based on spread and volume. Positioning means managing market risk positions with the expectation of profiting from favorable move-



310

Financial information

Note 23 Derivative instruments and hedge accounting (continued)

mentsmovements in prices, rates or indices. Arbitrage activities involve identifying and profiting from price differentials between the same product in different markets or the same economic factor in different products.

Detailed example: Credit derivatives

UBS is an active dealer in the fixed income market, including CDSs and related products, with respect to a large number of issuer’s securities. The primary purpose of these activities is for the benefit of UBS’s clients (market making) and to a lesser extent creating new credit exposures taken for UBS’s own trading purposes (proprietary trading).
Market making activity consists of buying and selling single-name CDSs, index CDSs, loan CDSs and related referenced cash instruments to facilitate client trading activity. Proprietary trading



323

Financial information
Notes to the consolidated financial statements

Note 23 Derivative instruments and hedge accounting (continued)

consists of trading in single-name CDSs, index CDSs and loan CDSs to capitalize on pricing discrepancies between various credit instruments (bonds, loans and equities) across investment grade, high-yield and emerging markets.

UBS actively utilizes CDSs to economically hedge specific counterparty credit risks in its accrual loan portfolio and off balance sheet loan portfolio (including loan commitments) with the aim of reducing concentrations in individual names, sectors or specific portfolios. In addition, UBS actively utilizes CDSs 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.
In 2009, UBS’s strategy with respect to CDS trading was the reduction in scope and scale of the firm’s structured credit risk transfer products, proprietary credit trading, and synthetic assets securitizations activities, a continuation of strategic decisions made in 2008. In 2010, market innovation and client demand for exposure to related products resulted in an expansion of structured activities and continuation of the Bank’s CDS flow trading. These activities include market making on behalf of clients in index, multi-name index, swap index option, and first-to-default CDS products. Where applicable, these products may form part of structured arrangements with clients seeking exposure to specific risks.
The value of protection bought and sold is not in isolation a measure of UBS’s credit risk. Counterparty relationships are viewed in terms of the total outstanding credit risk, which relates to other instruments in addition to CDSs, and in connection with collateral arrangements in place.
As of 31 December 2010, the total notional value of protection bought was CHF 1,195 billion (CHF 39 billion and CHF 17 billionPositive replacement valuesandNegative replacement values,respectively) and the total notional value of protection sold was CHF 1,118 billion (CHF 17 billion and CHF 34 billion Positive replacement values and Negative replacement values, respectively).
UBS’s credit derivatives are usually traded as OTC contracts. During 2009 a number of initiatives were launched in both the US and Europe to establish centralized clearing solutions for OTC CDS contracts (exchange cleared derivatives), with the aim of reducing counterparty risk. UBS, along with other dealer members, continued to participate in these initiatives throughout 2010.
A significant portion of UBS’s credit derivatives are traded under an ISDA MTA between UBS and its counterparty. UBS’s CDS trades are also documented using industry standard forms of documentation published by ISDA or equivalent terms documented in a bespoke (i.e. tailored) agreement. Those forms and agreements use standardized terms that form the basis for market conventions related to the types of credit events that would trigger performance (i.e. payment) under a CDS.
The types of credit events that would require UBS to perform under a CDS contract are subject to agreement between the parties at the time of the transaction. However, nearly all transactions are traded using credit events that are applicable under certain

market conventions based on the type of reference entity to which the transaction relates. Applicable credit events by market conventions include “bankruptcy”, “failure to pay”, “restructuring”, “obligation acceleration” and “repudiation / moratorium”.

Credit Derivatives: Recourse provisions

UBS uses standardized agreements and forms as the basis for its credit derivative contracts. Those agreements and forms do not contain recourse provisions that would enable UBS to recover from third parties any amounts paid out by UBS (i.e. this is the case where a credit event occurs and UBS is required to make payment under a CDS).

Contingent features of derivative liabilities

Based on UBS’s credit ratings as of 31 December 2010, additional collateral or termination payments pursuant to bilateral agreements with certain counterparties of approximately CHF 0.7 billion and CHF 1.9 billion would have been required in the event of a one-notch and two-notch reduction, respectively, in UBS’s long-term credit ratings. In evaluating UBS’s liquidity requirements, UBS considers additional collateral or termination payments that would be required in the event of a reduction in UBS’s long-term credit ratings.

Derivatives transactedused for structural hedging purposes

The Group enters into derivative transactions for the purposes of hedging assets, liabilities, forecast transactions, cash flows and credit exposures. The accounting treatment of hedge transactions varies according to the nature of the instrument hedged and whether the hedge qualifies as such for accounting purposes.

Derivative transactions may qualify as hedges for accounting purposes. These are described under the corresponding headings in this note.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“Note 1a) 15)Derivative instruments and hedge accounting,accounting”, where terms used in the following sections are explained.

The Group has also entered into interest rate swaps and other interest rate derivatives (e.g. futures) for day-to-day economic interest rate risk management purposes, but without applying hedge accounting.

     The In addition, the Group has also used equity futures, options and, to a lesser extent, swaps for economically hedging in a variety of equitiesequity trading strategies to offset underlying equity and equity volatility exposure.

The Group has also entered into CDS’sCDSs that provide economic hedges for credit risk exposures (refer to the credit derivatives section).

Fair value changes of derivatives that are part of economic relationships, but do not qualify for hedge accounting treatment, are booked toNet trading income.income.

Fair value hedges

The Group’s fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair value of



324

Financial information

Note 23 Derivative instruments and hedge accounting (continued)

fixed-rate instruments (e.g. long-term-fixed ratelong-term fixed-rate debt issues) due to movements in market interest rates. The fair values of outstanding interest rate derivatives designated as fair value hedges

were assets of CHF 1,171 million and liabilities of CHF 46 million as of 31 December 2010 and assets of CHF 526 million and liabilities of CHF 71 millionPositive replacement values andNegative replacement values,respectively, at as of 31 December 2009 and a CHF 883 million net Positive replacement values at2009.



             
Fair value hedges of interest rate risk 
  For the year ended 
CHF million 31.12.10  31.12.09  31.12.08 
 
Gains / (losses) on hedging instruments  402   (171)  778 
 
Gains / (losses) on hedged items attributable to the hedged risk  (383)  182   (796)
 
Net gains / (losses) representing ineffective portions of fair value hedges
  19   11   (18)
 

The Group also hedges foreign exchange exposures arising from certain foreign currency denominated non-monetary financial investments available-for-sale using either the spot component of the forward foreign exchange contracts or debt issued denominated in the same currencies. As of 31 December 2008.
2010 the aggregate notional amount of hedging instruments designated as fair value hedges of foreign currency risk was CHF 393 million (CHF 386 million as of 31 December 2009). The ineffectiveness of these hedges was not material for the financial statements of the Group in the disclosed reporting periods.



             
Fair value hedges of interest rate risk 
  For the year ended 
CHF million 31.12.09  31.12.08  31.12.07 
 
Gains/(losses) on hedging instruments  (171)  778   15 
 
Gains/(losses) on hedged items attributable to the hedged risk  182   (796)  (11)
 
Net gains/(losses) representing ineffective portions of fair value hedges
  11   (18)  4 
 

Fair value hedges offor portfolio interest rate risk

The Group also applies fair value hedge accounting ofto portfolio interest rate risk. The change in fair value of the hedged items is recorded separately from the hedged item and is included inOther assetson the balance sheet. The fair value of derivatives designated for this hedge method atas of 31 December 2010 was a CHF 972 million liability; as of 31 December 2009 it was a CHF 956 millionNegative replacement

liability.

value,31 December 2008 was a CHF 765 million netNegative replacement value.

     During 2008, UBS expanded the use of Fair Value hedge accounting for portfolio interest rate risk to include other Swiss mortgage loan portfolios. In 2009 no further scope expansion was made.



             
Fair value hedge of portfolio of interest rate risk1 
  For the year ended 
CHF million 31.12.09  31.12.08  31.12.07 
 
Gains/(losses) on hedging instruments  (48)  (644)  (37)
 
Gains/(losses) on hedged items attributable to the hedged risk  11   688   30 
 
Net gains/(losses) representing ineffective portions of fair value hedges
  (37)  44   (7)
 
             
Fair value hedge of portfolio of interest rate risk1 
  For the year ended 
CHF million 31.12.10  31.12.09  31.12.08 
 
Gains / (losses) on hedging instruments  35   (48)  (644)
 
Gains / (losses) on hedged items attributable to the hedged risk  (60)  11   688 
 
Net gains / (losses) representing ineffective portions of fair value hedges
  (25)  (37)  44 
 
11Hedge effectiveness is calculated on a cumulative basis.

311

Financial information
Notes to the consolidated financial statements

Note 23 Derivative instruments and hedge accounting (continued)

Cash flow hedges of forecasted transactions

The Group is exposed to variability in future interest cash flows on non-trading assets and liabilities that bear interest at variable rates or are expected to be refunded or reinvested in the future. The amounts and timing of future cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities, based on contractual terms and other relevant factors including esti-

matesestimates of prepayments and

defaults. The aggregate principal balances and interest cash flows across all portfolios over time form the basis for identifying the non-trading interest rate risk of the Group, which is hedged with interest rate swaps, the maximum maturity of which is 1918 years.

The schedule of forecasted principal balances on which the expected interest cash flows arise as of 31 December 20092010 is shown below.



                                        
Forecasted cash flowsForecasted cash flows Forecasted cash flows 
CHF billion < 1 year 1–3 years 3–5 years 5–10 years over 10 years  < 1 year 1-3 years 3-5 years 5-10 years over 10 years 
Cash inflows (assets) 205 352 202 141 20 
Cash inflows 215 368 233 180 15 
Cash outflows (liabilities) 69 136 96 78 4 
Cash outflows 52 87 60 44 1 
Net cash flows
  136  216  106  63  16  163 281 173 136 14 

GainsTo the extent the cash flow hedging relationship meets the qualifying criteria, the effective portion of the fair value changes of the designated derivative hedging instruments is recognized in Equity. These gains and losses on the effective portions of derivatives designated as cash flow hedges of forecasted transactions are initially recorded inEquityasNet incomerecognized directly in equity and are transferred from Equity to current period earnings whenin the forecastedsame period in which the hedged cash flows affect

net profit or loss. The gains and losses on ineffective portionsportion of such derivatives arethe fair value changes of the derivative hedging instruments is recognized immediately in the income statement. A CHF 22 million loss, a CHF 183 million loss and a CHF 108 million loss and a CHF 443 million gain waswere recognized in 2010, 2009 and 2008, and 2007, respectively, in Net trading income due to hedge ineffectiveness.



325

Financial information
Notes to the consolidated financial statements

Note 23 Derivative instruments and hedge accounting (continued)

As of 31 December 2009,2010, the fair values of outstanding derivatives designated as cash flow hedges of forecasted transactions were CHF 5,1805,397 million assets and CHF 2,7363,392 millionPositive replacement valuesandNegative replacement values,respectively, liabilities and as of 31 December 20082009 the amount wasamounts were CHF 2,5395,180 million netPositive replacement values.

assets and CHF 2,736 million liabilities.

At the end of 20092010 and 2008,2009, gains of CHF 4618 million and CHF 8646 million associated with de-designated interest rate swaps were deferred inEquity.Equity. They will be removed fromfrom Equitywhen the previously hedged forecasted cash flows have an impact on net profit or loss, or when the forecasted cash flows are no longer expected to occur. Amounts reclassified fromEquitytoNet interest incomeof de-designated swaps were CHF 28 million net gain in 2010, CHF 40 million net gain in 2009 and CHF 49 million net gain in 2008 and CHF 79 million net gain in 2007.

2008.

In 2008, due to reductions in the volume of short-term financial instruments, some of the forecasted cash flows previously included in the hedge relationships were determined to no longer be expected to occur.

Hedges of net investments in foreign operations

The Group applies hedge accounting for certain consolidated net investments in USD-denominated operations. At 31 December 20092010 the fair values of the financial liabilities (predominantly structured products issued by UBS) designated as hedging instruments in net investment hedges was CHF 1.9 billion as compared to CHF 2.5 billion.billion at 31 December 2009. Gains or losses on the translation of these hedging instruments are transferred directly to Equity to offset any gains or losses on translation of the net investments in the subsidiaries, which are also recognized in Equity. No material ineffectiveness fromof hedges of net investments in foreign operations was recognized in the income statements during 2010 and 2009.

Contractual maturities of derivatives designated as hedging instruments in hedge accounting relationships

The contractual maturities of derivatives designated as hedging instruments in hedge accounting relationships are considered “essential” for anthe understanding of the timing of their cash flows.



                                                        
Derivatives designated in hedge accounting relationships (undiscounted cash flows)Derivatives designated in hedge accounting relationships (undiscounted cash flows) Derivatives designated in hedge accounting relationships (undiscounted cash flows) 
 Due within Due between Due between Due between Due after    Due within Due between Due between Due between Due after   
CHF billion On demand 1 month 1 and 3 months 3 and 12 months 1 and 5 years 5 years Total  On demand 1 month 1 and 3 months 3 and 12 months 1 and 5 years 5 years Total 
Interest rate swaps1
  
Cash inflows 0 0 0 1 3 17 21 
Cash outflows 0 0  (0)  (1)  (3)  (15)  (19) 0 0 0 1 4 14 19 
Cash inflows 0 0 0 0 2 18 20 
Net cash flows
 0 0 0 0  (1) 3 2 
Total 31.12.09
  0  0  (0)  (1)  (1)  3  1 
11Interest rate swaps are generally gross settled. The table includes all cash inflows and outflows of interest rate swaps withPositive and Negative replacement values.

312

Financial information

Note 23 Derivative instruments and cash outflows of all interest rate swaps designated in hedge accounting (continued)relationships, which are either assets or liabilities of UBS as of 31 December 2010.

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 managed and controlled as an integral part of the market risk of these portfolios. The Group’s approach to market risk is described in the audited “Market risk” section of this report.
Derivative instruments are transacted with many different counterparties, most of whom are also counterparties for other types of business. The credit risk of derivatives is managed and controlled in the context of the Group’s overall credit exposure to each counterparty. The Group’s approach to credit risk is described in the audited “Credit risk” section of this report. It should be noted that, although the Positive replacement values shown on the balance sheet can be an important component of the Group’s credit exposure, thePositive replacement valuesfor a counterparty are rarely an adequate reflection of the Group’s credit exposure on its derivatives business with that counterparty. This is, for ex-

ample,example, because on the one hand, replacement values can increase over time (“potential future exposure”), while on the other hand, exposure may be mitigated by

entering into master netting agreements and bilateral collateral arrangements with counterparties. Both the exposure measures used by the Group internally to control credit risk and the capital requirements imposed by regulators reflect these additional factors.

The replacement values presented on UBS’s balance sheet and in the tables on the next two pagespage include netting in accordance with IFRS requirements (refer to Note 1a) 34)), which is more restrictive than netting in accordance with Swiss Federal Banking law. The main difference of Swiss Federal Banking law to IFRS is that Swiss Federal Banking law netting is generally based on close-out netting arrangements which are enforceable in case of insolvency. ThePositive and Negative replacement valuesbased on netting in accordance with Swiss Federal Banking law (factoring in cash collateral) are presented on the bottom of the tables on the next two pages.page.
The notional amounts presented in the tables indicate a nominal value of transactions outstanding at the reporting date but do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and, therefore, do not indicate the Group’s exposure to credit or market risks.



313326

Financial information
Notes to the consolidated financial statements

                                                     
Note 23 Derivative instruments and hedge accounting1 (continued) 
                                      Notional      Notional    
As of 31 December 2009 Term to maturity      values      values  Other 
  Within 3 months  3–12 months  1–5 years  over 5 years  Total  related to  Total  related to  notional 
CHF billion PRV2  NRV3  PRV  NRV  PRV  NRV  PRV  NRV  PRV  PRVs  NRV  NRVs  values4 
 
Interest rate contracts
                                                    
 
Over-the-counter (OTC) contracts                                                    
 
Forward contracts  1.8   1.6   0.7   0.8   0.1   0.1   0.0   0.0   2.5   1,343.7   2.5   1,286.5   0.0 
 
Swaps  8.2   6.8   18.7   16.9   89.7   82.6   69.5   65.0   186.2   7,110.7   171.4   6,802.7   15,949.2 
 
Options  1.0   1.1   3.5   3.0   10.1   11.9   11.3   13.5   25.9   543.2   29.4   611.8   0.0 
 
Exchange-traded contracts5
                                                    
 
Futures                                                  271.9 
 
Options  0.1   0.1   0.2   0.2   0.2   0.2   0.0   0.0   0.5   3.9   0.4   3.5   0.0 
 
Total
  11.1   9.6   23.1   20.8   100.0   94.8   80.8   78.6   215.1   9,001.5   203.7   8,704.5   16,221.2 
 
Credit derivative contracts
                                                    
 
Over-the-counter (OTC) contracts                                                    
 
Credit default swaps  0.1   0.3   0.9   0.9   33.1   32.1   42.9   36.4   77.1   1,254.7   69.7   1,208.9   0.0 
 
Total rate of return swaps  0.1   0.1   0.0   0.0   1.0   0.3   0.4   0.4   1.5   5.7   0.9   5.4   0.0 
 
Options and warrants  0.0   0.0   0.0   0.0   0.0   0.0   0.0   0.0   0.0   9.3   0.0   6.6   0.0 
 
Total
  0.2   0.4   1.0   0.9   34.1   32.4   43.3   36.9   78.6   1,269.6   70.6   1,220.9   0.0 
 
Foreign exchange contracts
                                                    
 
Over-the-counter (OTC) contracts                                                    
 
Forward contracts  7.5   6.3   2.4   2.6   0.8   0.6   0.0   0.0   10.6   453.2   9.5   403.7   0.0 
 
Interest and currency swaps  31.2   30.3   13.1   15.3   18.9   23.5   17.3   16.8   80.5   2,279.8   85.8   2,209.6   0.0 
 
Options  1.8   1.7   2.1   2.0   1.2   1.2   0.9   0.8   5.9   609.7   5.7   560.2   0.0 
 
Exchange-traded contracts5
                                                    
 
Futures                                                  1.5 
 
Options  0.0   0.0   0.0   0.0   0.0   0.0   0.0   0.0   0.1   1.5   0.1   0.1   0.0 
 
Total
  40.4   38.3   17.6   20.0   20.9   25.2   18.2   17.6   97.1   3,344.2   101.1   3,173.5   1.5 
 
Equity/index contracts
                                                    
 
Over-the-counter (OTC) contracts                                                    
 
Forward contracts  0.9   0.8   1.1   1.2   0.5   0.8   0.4   0.9   2.9   56.6   3.7   46.9   0.0 
 
Options  0.4   0.9   2.1   2.7   2.4   4.1   2.1   1.7   7.0   60.9   9.5   73.7   0.0 
 
Exchange-traded contracts5
                                                    
 
Futures                                                  6.8 
 
Options  4.9   4.6   4.7   4.9   5.2   5.8   0.2   0.1   15.1   30.5   15.5   36.2   0.0 
 
Total
  6.2   6.3   8.0   8.8   8.1   10.7   2.7   2.8   25.1   148.0   28.7   156.8   6.8 
 
Commodities contracts
                                                    
 
Over-the-counter (OTC) contracts                                                    
 
Forward contracts  0.6   0.6   0.7   0.6   0.7   0.7   0.1   0.1   2.0   20.6   2.0   15.0   0.0 
 
Options  0.3   0.2   0.7   0.6   0.9   0.9   0.1   0.2   1.9   21.7   1.9   23.6   0.0 
 
Exchange-traded contracts5
                                                    
 
Futures                                                  2.7 
 
Options  0.4   0.4   0.7   0.7   0.8   0.8   0.0   0.0   1.9   0.6   1.9   2.0   0.0 
 
Total
  1.3   1.2   2.0   1.9   2.4   2.4   0.2   0.4   5.9   42.9   5.8   40.7   2.7 
 
Total derivative instruments, based on IFRS netting
  59.3   55.9   51.7   52.4   165.5   165.5   145.2   136.2   421.7   13,806.2   409.9   13,296.5   16,232.2 
 
Replacement value netting, based on capital adequacy rules                                  (313.2)      (313.2)        
 
Cash collateral netting                                  (37.2)      (32.7)        
 
Total derivative instruments, based on capital adequacy netting6
                                  71.3       64.1         
 
Financial information
                                         
Note 23 Derivative instruments and hedge accounting (continued)1 
As of 31.12.10 31.12.098 
      Notional      Notional          Notional      Notional    
      values      values  Other      values      values  Other 
  Total  related  Total  related  notional  Total  related  Total  related  notional 
CHF billion PRV2  to PRVs  NRV3  to NRVs  values4  PRV2  to PRVs  NRV3  to NRVs  values4 
 
Interest rate contracts
                                        
 
Over-the-counter (OTC) contracts                                        
 
Forward contracts  1.9   1,320.7   2.3   1,233.6   0.0   2.1   1,308.0   2.1   1,265.6   0.0 
 
Swaps  170.4   7,527.0   154.3   7,423.7   13,076.0   186.2   7,110.7   171.4   6,802.7   15,949.2 
 
Options  31.2   785.3   32.5   822.8   0.0   25.9   543.2   29.4   611.8   0.0 
 
Exchange-traded contracts                                        
 
Futures                  785.4                   1,221.5 
 
Options  0.0   61.7   0.0   69.7   0.0   0.0   1.3   0.0   1.3   0.0 
 
Agency transactions7
  0.2       0.2           0.5       0.4         
 
Total
  203.7   9,694.7   189.3   9,549.8   13,861.4   214.7   8,963.2   203.3   8,681.4   17,170.7 
 
Credit derivative contracts
                                        
 
Over-the-counter (OTC) contracts                                        
 
Credit default swaps  52.2   1,189.8   49.8   1,091.2   0.0   77.1   1,254.7   69.7   1,208.9   0.0 
 
Total rate of return swaps  3.5   6.1   1.3   4.2   0.0   1.5   5.7   0.9   5.4   0.0 
 
Options and warrants  0.1   11.9   0.1   9.5   0.0   0.0   9.3   0.0   6.6   0.0 
 
Total
  55.8   1,207.8   51.2   1,104.9   0.0   78.6   1,269.6   70.6   1,220.9   0.0 
 
Foreign exchange contracts
                                        
 
Over-the-counter (OTC) contracts                                        
 
Forward contracts  16.3   531.1   17.1   554.1   0.0   10.6   453.2   9.5   403.7   0.0 
 
Interest and currency swaps  88.5   2,279.9   97.0   2,190.5   0.0   80.5   2,279.8   85.8   2,209.6   0.0 
 
Options  8.7   515.1   8.8   483.4   0.0   5.9   347.7   5.7   350.7   0.0 
 
Exchange-traded contracts                                        
 
Futures  0.0               9.0                   1.5 
 
Options  0.0   0.0   0.0   0.1   0.0       1.5       0.1   0.0 
 
Agency transactions7
  0.0       0.0           0.1       0.1         
 
Total
  113.5   3,326.1   123.0   3,228.1   9.0   97.1   3,082.2   101.1   2,964.1   1.5 
 
Equity / index contracts
                                        
 
Over-the-counter (OTC) contracts                                        
 
Forward contracts  2.6   32.2   4.0   46.3   0.0   2.7   26.0   3.4   28.1   0.0 
 
Options  8.1   67.1   8.7   81.6   0.0   7.0   80.8   9.5   73.7   0.0 
 
Exchange-traded contracts                                        
 
Futures                  28.8                   26.5 
 
Options  3.8   106.7   3.7   111.0   0.0   4.6   108.5   4.7   120.5   0.0 
 
Agency transactions7
  7.5       7.6           10,5       10.8         
 
Total
  22.0   206.0   24.0   238.9   28.8   24.8   215.3   28.4   222.3   26.5 
 
Commodities contracts
                                        
 
Over-the-counter (OTC) contracts                                        
 
Forward contracts  2.7   18.8   2.7   15.9   0.0   2.0   20.6   2.0   15.0   0.0 
 
Options  1.5   19.2   1.7   15.4   0.0   1.9   21.7   1.9   22.7   0.0 
 
Exchange-traded contracts                                        
 
Futures                  41.0                   26.1 
 
Options  0.0   0.7   0.0   1.2   0.0   0.0   1.9       1.9   0.0 
 
Agency transactions7
  1.7       1.7           1.9       1.9         
 
Total
  5.9   38.7   6.0   32.5   41.0   5.9   44.2   5.8   39.6   26.1 
 
Unsettled purchases of financial assets5
  0.2   36.5   0.1   18.8   0.0   0.4   35.9   0.2   25.4     
 
Unsettled sales of financial assets5
  0.1   34.9   0.1   13.0   0.0   0.2   30.4   0.5   14.3     
 
Total derivative instruments, based on IFRS netting
  401.1   14,544.6   393.8   14,186.0   13,940.2   421.7   13,640.8   409.9   13,168.1   17,224.9 
 
Replacement value netting, based on capital adequacy rules  (301.5)      (301.5)          (313.2)      (313.2)        
 
Cash collateral netting  (36.5)      (23.9)          (37.2)      (32.7)        
 
Total derivative instruments, based on capital adequacy netting6
  63.1       68.3           71.3       64.1         
 
1 Bifurcated embedded derivatives are presented in the same balance sheet line as the host contract and are excluded from the table. Payablestable; these derivatives amount to a PRV of CHF 2.7 billion (related notional values of CHF 8.6 billion) and receivables resulting from the valuationa NRV of regular way purchases and salesCHF 1.3 billion (related notional values of financial assets between trade and settlement date are recognized as replacement values and therefore included in the table. PRVs and NRVs are categorized in different time bands on the basis of the maximal duration of the derivative contract.  CHF 10.4 billion).  2 PRV: Positive replacement value.  3 NRV: Negative replacement value.  4 Receivables resulting from derivatives are recognized on UBS’s balance sheet under Due from banks and Loans: CHF 0.7 billion (2009: CHF 1.6 billion.billion). Payables resulting from these derivatives are recognized on UBS’s balance sheet under Due to banks and Due to customers: CHF 2.7 billion (2009: CHF 1.6 billion.  billion).  5 Notional values Changes in the fair value of exchange-traded products include own account trades only.  purchased and sold financial assets between trade date and settlement date are recognized as replacement values.  6 Includes the impact of netting agreements (including cash collateral) in accordance with Swiss Federal Banking Law,law, based on the IFRS scope of consolidation.

314

Financial information
                                                     
Note 23 Derivative instruments and hedge accounting1 (continued) 
                                      Notional      Notional    
As of 31 December 2008 Term to maturity      values      values  Other 
  Within 3 months  3–12 months  1–5 years  Over 5 years  Total  related to  Total  related to  notional 
CHF billion PRV2  NRV3  PRV  NRV  PRV  NRV  PRV  NRV  PRV  PRVs  NRV  NRVs  values4 
 
Interest rate contracts
                                                    
 
Over-the-counter (OTC) contracts                                                    
 
Forward contracts  2.1   2.2   3.8   4.1   0.3   0.4   0.0   0.0   6.2   1,544.9   6.7   1,584.5   0.0 
 
Swaps  9.5   9.9   23.6   24.3   152.1   140.5   144.8   142.9   330.0   8,543.3   317.6   8,260.0   15,002.0 
 
Options  4.0   3.7   6.6   7.0   14.3   15.7   12.6   16.5   37.4   498.4   43.0   595.5   0.0 
 
Exchange-traded contracts5
                                                    
 
Futures                                                  527.5 
 
Options  0.8   0.8   0.5   0.5   0.1   0.1   0.0   0.0   1.4   6.4   1.4   8.7   0.0 
 
Total
  16.4   16.6   34.5   36.0   166.8   156.7   157.4   159.5   375.1   10,593.1   368.7   10,448.7   15,529.6 
 
Credit derivative contracts
                                                    
 
Over-the-counter (OTC) contracts                                                    
 
Credit default swaps  0.5   0.3   3.4   3.5   95.4   91.2   89.8   88.2   189.1   1,856.1   183.3   1,754.0   0.0 
 
Total rate of return swaps  3.4   0.4   0.2   0.1   3.1   0.5   1.6   0.5   8.3   31.2   1.5   12.6   0.0 
 
Options and warrants                                                    
 
Total
  3.9   0.7   3.6   3.6   98.4   91.7   91.4   88.8   197.4   1,887.2   184.8   1,766.7   0.0 
 
Foreign exchange contracts
                                                    
 
Over-the-counter (OTC) contracts                                                    
 
Forward contracts  21.0   22.8   8.4   10.6   1.6   1.1   0.1   0.1   31.2   468.1   34.5   485.6   0.0 
 
Interest and currency swaps  72.1   74.5   36.2   33.8   34.9   39.2   27.1   26.5   170.3   2,047.4   173.9   1,868.4   0.0 
 
Options  7.5   7.6   10.0   9.1   2.1   1.8   0.0   0.0   19.7   610.1   18.6   524.8   0.0 
 
Exchange-traded contracts5
                                                    
 
Futures                                                  1.7 
 
Options  0.2   0.3   0.0   0.0   0.0   0.0   0.0   0.0   0.2   12.8   0.3   6.1   0.0 
 
Total
  101.0   105.2   54.6   53.5   38.7   42.1   27.2   26.6   221.5   3,138.3   227.3   2,884.8   1.7 
 
Equity/index contracts
                                                    
 
Over-the-counter (OTC) contracts                                                    
 
Forward contracts  1.9   1.6   2.0   1.8   2.2   2.0   0.2   0.3   6.4   68.5   5.7   40.1   0.0 
 
Options  1.7   3.2   4.8   7.4   4.7   8.5   1.7   4.0   12.9   108.9   23.0   106.1   0.0 
 
Exchange-traded contracts5
                                                    
 
Futures                                           ��      33.5 
 
Options  5.0   5.2   5.3   6.7   4.8   5.6   0.9   1.2   16.1   97.9   18.7   110.5   0.0 
 
Total
  8.6   10.0   12.1   16.0   11.7   16.1   2.9   5.5   35.3   275.2   47.4   256.7   33.5 
 
Commodities contracts
                                                    
 
Over-the-counter (OTC) contracts                                                    
 
Forward contracts  3.0   2.4   4.3   3.7   1.9   1.6   0.9   1.1   10.0   39.1   8.7   33.1   0.0 
 
Options  0.8   1.0   2.6   2.5   2.6   2.3   0.3   0.2   6.3   36.3   6.1   42.4   0.0 
 
Exchange-traded contracts5
                                                    
 
Futures                                                  14.1 
 
Options  2.1   2.2   3.8   3.9   2.7   2.7   0.0   0.0   8.6   74.7   8.7   95.6   0.0 
 
Total
  5.8   5.6   10.7   10.1   7.1   6.6   1.2   1.4   24.9   150.1   23.6   171.1   14.1 
 
Total derivative instruments,
based on IFRS netting
  135.7   138.1   115.5   119.2   322.8   313.1   280.0   281.6   854.1   16,043.9   851.9   15,528.0   15,578.9 
 
Replacement value netting,
based on capital adequacy rules		                                  (651.7)      (651.7)        
 
Cash collateral netting                                  (41.3)      (52.8)        
 
Total derivative instruments,
based on capital adequacy
netting6
                                  161.1       147.4         
 
17 Bifurcated embedded derivatives are presented in the same balance sheet line as the host contract and are excluded from the table. Payables and receivables resulting from the valuation of regular way purchases and sales of financial assets between trade and settlement date are recognized as replacement values and therefore included in the table. PRVs and NRVs are categorized in different time bands on the basis of the maximal duration of the derivative contract.  2 PRV: Positive replacement value.  3 NRV: Negative replacement value.  4 Receivables resulting from derivatives are recognized on UBS’s balance sheet under Due from banks and Loans: CHF 0.2 billion. Payables resulting from these derivatives are recognized on UBS’s balance sheet under Due to banks and Due to customers: CHF 0.1 billion.  5 Notional values of exchange-traded products include own account trades only.  agency transactions are not disclosed due to their significantly different risk profile.  68 Includes the impact Notional values as of netting agreements (including cash collateral) in accordance with Swiss Federal Banking Law, based on the IFRS scope of consolidation.31 December 2009 for Interest rate, Foreign exchange, Equity/index and Commodities contracts have been corrected.

315327

Financial information
Notes to the consolidated financial statements

Note 23 Derivative instruments and hedge accounting (continued)

      On a notional value basis, credit protection bought and sold held as of 31 December 2010 matures in a range of approximately 10% within one year, approximately 70% within 1 to 5 years and approximately 20% after 5 years. The maturity profile of OTC interest rate contracts held as of 31 December 2010, based on notional values, is as follows: approximately 45% mature within

one year, 33% within 1 to 5 years and 22% over 5 years. Notional values of interest rate contracts cleared with The London Clearing House are presented under “other notional values” and are categorized into maturity buckets on the basis of contractual maturities of the cleared underlying derivative contracts.



328

Financial information

Off-balance-sheet information

Note 24 Pledgeable off-balance-sheet securities

The Group obtains securities which are not recorded on the balance sheet with the right to sell or repledge them as shown in the table below.

                
CHF million 31.12.09 31.12.08  31.12.10 31.12.09 
Fair value of securities received which can be sold or repledged  528,856 651,380  573,852 528,856 
under reverse repurchase, securities borrowing and lending arrangements, derivative transactions and other transactions
  515,314 621,981 
as collateral under reverse repurchase, securities borrowing and lending arrangements, derivative transactions and other transactions
 571,970 515,314 
in unsecured borrowings
  13,542 29,399  1,882 13,542 
thereof sold or repledged  398,883 430,670  428,347 398,883 
in connection with financing activities
  335,371 343,252  352,668 335,371 
to satisfy commitments under short sale transactions
  47,469 62,431  54,975 47,469 
in connection with derivative and other transactions
  16,043 24,987  20,705 16,043 

Note 25 Operating lease commitments

AtAs of 31 December 2009,2010, 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 agreementsagree-

ments do not contain contingent

rent payment clauses and purchase 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.

The minimum commitments for non-cancellable leases of premises and equipment are presented as follows:



      
CHF million 31.12.09  31.12.10 
Operating leases due
  
2010  989 
2011  870  862 
2012  786  741 
2013  658  646 
2014  555  554 
2015 and thereafter  2,113 
2015 464 
2016 and thereafter 1,818 
Subtotal commitments for minimum payments under operating leases  5,971  5,085 
Less: Sublease rentals under non-cancellable leases  690  500 
Net commitments for minimum payments under operating leases
  5,281  4,585 
             
CHF million 31.12.10  31.12.09  31.12.08 
 
Gross operating lease expense
  1,057   1,191   1,215 
 
Sublease rental income  97   57   50 
 
Net operating lease expense
  960   1,134   1,165 
 

316

Financial information

Note 25 Operating lease commitments (continued)

             
CHF million 31.12.09  31.12.08  31.12.07 
 
Gross operating lease expense
  1,191   1,215   1,251 
 
from continuing operations  1,191   1,215   1,233 
 
from discontinued operations  0   0   18 
 
Sublease rental income from continuing operations  57   50   54 
 
Net operating lease expense
  1,134   1,165   1,197 
 
from continuing operations  1,134   1,165   1,179 
 
from discontinued operations  0   0   18 
 

Operating lease contracts include non-cancellable long-term leases of office buildings in most UBS locations. AtAs of 31 December 2009,2010, the minimum lease commitments for each of

11 12 office locations exceeded CHF 100 million and non-cancellable minimum lease commitments for the office location in New York exceeded CHF 500 million.



317329

Financial information
Notes to the consolidated financial statements

Additional information

Note 26 Capital increasesincrease and mandatory convertible notes

June 2009 share capital increase

On 25 June 2009, UBS increased its share capital by issuing 293,258,050 new registered shares with a par value of CHF 0.10 each. The shares were placed with a small number of large institutional investors at a price of CHF 13.00 per share. Net proceeds from the capital increase were CHF 3.8 billion. The shares were issued upon decision by the Board of Directors out of authorized capital which had been approved at the annual general meeting of shareholders on 15 April 2009.

Conversion of the mandatory convertible notes
issued in March 2008

On 5 March 2010, the mandatory convertible notes (MCNs) with a notional value of CHF 13 billion issued in March 2008 to the Swiss Confederation

On 19 August 2009,Government of Singapore Investment Corporation Pte. Ltd. and an investor from the Swiss Confederation announced the conversion of itsMiddle East were converted into UBS CHF 6 billion mandatory convert-

ibleshares. The notes (MCNs). Upon conversion on 25 August 2009,were converted at a price of CHF 47.68 per share. As a result, UBS issued 332,225,913272,651,005 new shares with a nominal value of CHF 0.10 each from existing conditional capital. The liability and theNegative replacement valuerecorded on the balance sheet for the principal amount and the embedded derivative component of the MCNs were reclassified to equity.treated as equity instruments and recognized inShare premium. The conversion of the MCNs resulted in an overall increase in equitya reclassification of CHF 6,71827 million for 2009, reflecting an increase in share capital of CHF 33 million and an increase in sharefromShare premium of CHF 6,685 million. Prior to the conversion of the MCNs, the embedded derivative component was re-measured to fair value resulting in a gain of CHF 341 million for 2009. In addition, the Swiss Confederation waived its right to receive future coupon payments on the converted MCNs for a cash amount of approximately CHF 1.8 billion. The impact on UBS’s income statement resulting from this waiver was not material.Share capital.



Note 27 Fair value of financial instruments

a) Valuation principles

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Financial instruments classified as held for trading or designated as at fair value through profit or loss, and financial assets classified as available for sale are recognized in the financial statements at fair value. All derivatives are measured at fair value.

Fair values are determined from quoted prices in active markets for identical financial assets or financial liabilities where these are available. Fair value of a financial asset or financial liability in an active market is the current bid or offer price times the number of units of the instrument held. Where a trading portfolio contains both financial assets and financial liabilities with offsetting market risks, fair value is determined by valuing the gross long and short positions at current mid-marketmid market prices, with an adjustment at portfolio level to the net open long or short position to amend the valuation to bid or offer as appropriate.
Where the market for a financial instrument is not active, fair value is established using a valuation technique or pricing model. These valuation techniques and models involve a degree of estimation, the extent of which depends on the

instrument’s complexity and the availability of market-based data. Valuation adjustments may be made to allow for additional factors including model risks, liquidity risk as reflected in the bid / offer and credit risk. Based on the established fair value and model governance policies and related controls and procedures applied, the management believes that these valuation adjustments are necessary and appropriate to fairly state the values of financial instruments carried at fair value on the balance sheet.

When entering into a transaction where model inputs are not market observable, the financial instrument is initially recognized at the transaction price, which is generally the best indicator of fair

value. This may differ from the value obtained from the valuation model (“Deferred day 1 profit or loss”). The timing of the recognition in profit and loss of this initial difference in fair value depends on the individual facts and circumstances of each transaction but is never later than when the market data become observable.

Pricing models and valuation techniques


The most frequently applied pricing models and valuation techniques include discounted cash flow models, relative



318

Financial information

Note 27 Fair value of financial instruments (continued)

a) Valuation principles (continued)

value models and option pricing models. Discounted cash flows determine the value by estimating the expected future cash flows from assets or liabilities discounted to their present value. Relative value models determine the value based on the market prices of similar assets or liabilities. Option pricing models are complex present value models,include such probability-based techniques as binomial options pricing models.and Monte Carlo pricing.

UBS uses widely recognized valuation models for determining fair values of financial instruments of lower complexity such aslike interest rate and currency swaps. For more complex instruments, UBS uses internally developed models, which are usually based on valuation methods and techniques generally recognized as standard within the industry. Such valuation models are used primarily to value derivatives transacted in the over-the-counter (OTC) market, unlisted equity and debt securities (including those with embedded derivatives), and other fair valued debt instruments for which markets were illiquid in 2009.2010. Market-observable assumptions and inputs are used where available, and derived from similar assets in similar and active markets, from recent transaction prices for comparable items or from other observable market data. Little, if any, weight is placed on transaction prices when calculating the fair value if there is no active market and the transactions are not orderly (i.e., distressed or forced). For positions where observable reference data are not available for



330

Financial information

Note 27 Fair value of financial instruments (continued)

some or all parameters, UBS calibrates the non-market-observable inputs used in its valuation models based on a combination of judgment, historical experience and knowledge of current market conditions. Assumptions and inputs used in valuation techniques and models include benchmark interest rates, credit spreads and other premiapremiums used in estimating discount rates, bond and equity prices, equity index prices, foreign exchange rates and volatilitieslevels of market volatility and correlations.

correlation.
The output of a model is always an estimate or approximation of a value that cannot be determined with certainty, and valuation techniques employed may not fully reflect all factors relevant to the positions UBS holds. Valuations are therefore adjusted, where appropriate, to bring the fair value derived from the model towards the appropriate bid/offer price and coverreflect close out costs, credit exposure, model uncertainty and model uncertainty. The values derived from applying these techniques are significantly affected by the choice of valuation model and the underlying assumptions made concerning factors such as the amounts and timing of future cash flows, discount rates, volatility and credit risk. Accrued interest is recognized as part of the fair value of financial instruments accounted for at fair value. Lockup periods for equity investments are considered when determining fair value.trading restrictions.

Interest rate curves


UBS uses various interest rate curves for valuing its financial instruments. Financial liabilities designated at fair value are measured using UBS’s senior debtfunds transfer price curve. Financial assets designated at fair value are valued consistent with the curve used for the particular business. Uncollateralized credit exposure is reserved through normal credit rating and reserving methods. For the valuation of uncollateralized derivative instruments, UBS generally employs a LIBOR flat curve. If the derivatives are only partially collateralized, or uncollateralized, the credit exposure is adjusted through a credit valuation adjustment (CVA) or a debit valuation adjustment (DVA). For the valuation of overnight interest-rate swaps,collateralized derivatives, UBS generally employs the overnight interest-rateindexed swap (OIS) curve.

Valuation curve is applied.changes
For collateralized derivatives, the valuation approach was amended at the beginning of the year to use the OIS curve rather than the LIBOR flat curve. This followed a change in the market convention for pricing collateralized derivatives, to reflect that the interest rate typically paid on cash collateral references the OIS curve. The transitional effect of this change in estimate was recognized prospectively and resulted in an immaterial pre-tax gain.

Counterparty credit risk in the valuation of OTC derivative instruments, derivatives embedded in funded assets designated at fair value and derivatives embedded in traded debt instruments
In order to arrive at fair value, credit valuation adjustments (CVA) are necessary to reflect the credit risk of the counterparty inherent in over-the-counter (OTC) derivatives transactions, derivatives embedded in funded assets designated at fair value and derivatives embedded in traded debt instruments. This amount represents the estimated market value of protection required to hedge against credit risk from counterparties in theseUBS’s OTC derivatives portfolio, derivatives embedded in funded assets designated at fair value and in traded debt instruments. CVA depends on expected future exposures, default probability and recovery rate. The calculation takes into account whether collateral or netting arrangements or break clauses are in place. The most significant component of the overall CVA is the portion related to monoline credit protection, discussed further below.

UBS’s own credit risk in the valuations of derivative financial liabilities (Negative replacement values)

In 2009, theThe Group revised its methodology for estimatingestimates debit valuation adjustments (DVA) to incorporate own credit in the valuation of derivatives, predominantlypredominately, to align it with the CVA methodology as described above. Under the previous approach, the Libor flat valuation of uncollateralized derivative liabilities after consideration of any netting agreement was revalued using UBS’s senior debt curve. The difference between the valuation at Libor flat and the valuation at the senior debt curve provided the life-to-date DVA, and the change in the life-to-date DVA between periods provided the own credit gain or loss in each period. Under the new approach, the Group applies a methodology consistent with that used to calculate CVA. The calculation takes into account negative expected exposure profiles for the derivativederivatives portfolio, collaterals,collateral, netting agreements, expected future



319

Financial information
Notes to the consolidated financial statements

Note 27 Fair value of financial instruments (continued)

a) Valuation principles (continued)

mark-to-market movements, and UBS’s credit default spreads to determine the UBS counterparty exposure from the perspective of holders of UBS debt.

The debit valuation adjustments (DVA) so calculated represent the theoretical costs to counterparties of hedging their UBS credit risk exposure or the credit risk reserve that a counterparty could reasonably be expected to hold against their credit risk exposure to

UBS, if they applied the same methodology as used to calculate UBS’s CVA. The impact of this methodology change is included in the financial impact of the valuation changes for derivative liabilities and financial liabilities designated at fair value described below.

As of 31 December 2009,2010, the CVA and DVA for derivative financial instruments (replacement values) were as follows:



         
  31.12.09 
CHF billion CVA1  DVA 
 
Life-to-date
  (4.3)  0.4 
 
of which: CVA on monoline credit protection – negative basis trades
  (2.9)  N/A 
 
of which: CVA on monoline credit protection – other
  (0.2)  N/A 
 
of which: CVA on other instruments
  (1.2)  N/A 
 
Year-to-date2
  0.6   (1.9)
 
of which: CVA on monoline credit protection – negative basis trades
  (0.8)  N/A 
 
of which: CVA on monoline credit protection – other
  0.4   N/A 
 
of which: CVA on other instruments
  1.1   N/A 
 

         
  31.12.10 
CHF billion CVA1  DVA 
 
Life-to-date gain / (loss)
  (2.2)  0.5 
 
of which: CVA on monoline credit protection – negative basis trades
  (1.1)  N/A 
 
of which: CVA on monoline credit protection – other
  (0.1)  N/A 
 
of which: CVA on other instruments
  (1.0)  N/A 
 
Gain / (loss) for the year ended2
  1.0   0.2 
 
of which: CVA on monoline credit protection – negative basis trades
  0.7   N/A 
 
of which: CVA on monoline credit protection – other
  0.1   N/A 
 
of which: CVA on other instruments
  0.2   N/A 
 
1 Amounts do not include reserves against defaulted counterparties.  2 CVA amounts do not include commutations.

331

Financial information
Notes to the consolidated financial statements

Note 27 Fair value of financial instruments (continued)

UBS’s own credit risk in the valuations of financial liabilities designated at fair value


The Group’s own credit changes are reflected in valuations for those financial liabilities designated at fair value, where the Group’s own credit risk would be considered by market participants. TheyOwn credit effects are discounted fornot reflected in the valuations of fully collateralized transactions and other instruments for which it is established market practice not to include an entity-specific adjustment for own credit. them.
Own credit changes wereare calculated based on a senior debtfunds transfer price (FTP) curve, generated from observed external pricing

which provides a single level of discounting for uncollateralized funded instruments within UBS. The FTP curve is used by UBS to value uncollateralized and partially collateralized funding associated with new senior debttransactions designated at fair value, and for relevant tenors is set by reference to the level at which newly issued by the Group, or relevant secondary market transactions in senior long-term UBS debt.medium-term notes (MTNs) are priced. The senior debtFTP curve spread is considered to be representative of the credit risk which reflects the premium (or discount) that

market participants require to acquire UBS debt. InMTNs. The FTP curve was implemented at the absenceend of an observablethe year and has replaced the asset and liability management revaluation curve (ALMRC). The impact on the income statement at implementation was not material.

The ALMRC was implemented at the beginning of the year and replaced the senior debt curve credit default swap spreads would be considered as well.(SDC). The ALMRC incorporated additional market information from recently issued UBS debt instruments and aligned the pricing and risk management of different liability instruments under a single curve. UBS also improved the estimation methodologies for the construction of interest rate curves in non-USD currencies and for long-term maturities (i.e. tenors over ten years). The transitional impact of this prospectively applied change in estimate was a pre-tax net loss of CHF 133 million.
TheAs of 31 December 2010 and 2009, respectively, the own credit results forFinancial liabilities designated at fair value(predominantly issued structured products) were as follows:



                       
Own credit on financial liabilities designated at fair valueOwn credit on financial liabilities designated at fair value Own credit on financial liabilities designated at fair value 
 As of or for the year ended  As of or for the year ended 
CHF million 31.12.091 31.12.08 31.12.07  31.12.10 31.12.09 31.12.08 
Total gain/(loss) for the year ended  (2,023) 2,032 659 
Total gain / (loss) for the year ended  (548)  (2,023) 2,032 
of which: credit spread related only
  (1,958) 3,993 659   (470)  (1,958) 3,993 
Life-to-date gain  890 2,953 663  237 890 2,953 

1 Includes

Year-to-date amounts represent the following impacts from valuation changes as of 1 January 2009: increasechange during the year and life-to-date amounts reflect the cumulative change since initial recognition. The change in own credit of CHF 823 million on a year-to-date and life-to-date basis; increase of CHF 441 millionfor the period can be analyzed in own credit related to credit spread only.

320

Financial information

Note 27 Fair value of financial instruments (continued)

a) Valuation principles (continued)

The year-to-date amounts represent the portion of the change in fair value of the financial liabilities designated at fair value that is related to own credit. The life-to-date amount reflects the gain related to own credit by which the fair value of financial liabilities designated at fair value has changed since inception. Included in these amounts is the quantification oftwo components: (1) changes in fair value that are attributable to changesthe change in UBS’s credit spreadspreads during the periods. In addition,period, and (2) the total own credit changes include the credit effect of “volume changes”, i.e.volume changes, which is the credit effect of period changeschange in fair values attributable to factors other than credit spreads, such as redemptions, effects from time decay, changes in interest rates and changes in the value of referenced instruments issued by third parties, or,parties. The disclosed own credit amounts are also impacted by foreign currency movements.

A 1 basis point increase in the case of the life-to-date amount, changesUBS credit spread over LIBOR is expected to result in the foreign exchange rates.

Changes to the valuation of derivative financial instruments and financial instruments designated at fair value

In 2009, UBS reviewed its approach to calculating and bookingan own credit gain of derivative liabilities and financial liabilities designated at fair value. The following paragraph describes the impacts of the changes on UBS’s 2009 results and balance sheet as of the transition date 1 January 2009.
UBS’s 2009 net profit and net trading income increased by CHF 143approximately USD 19.6 million made up of a charge of CHF 222 million to the Corporate Center and a CHF 365 million credit to the Investment Bank. The net impact on the Investment Bank comprises a credit of CHF 823 million related to own credit and a debit of CHF 458 million to the fixed income, currencies and commodities business.Financial liabilities designated at fair valuedecreased by CHF 1,080 million,Financial assets designated at fair valueincreased by CHF 198 million,Negative replacement valuesincreased by CHF 1,119 million, andPositive replacement valuesdecreased by CHF 16 million.(CHF 18.3 million).

Reflection of market liquidity risk in fair value determinations


Fair value estimates incorporate the effects of market liquidity risk in the relevant markets. Market liquidity risk is the risk that a loss is incurred in neutralizing the exposures within a position or portfolio by either liquidating the position or establishing an offsetting position. A liquidity adjustment is therefore maderaised to provide against the expected cost of covering open market risk positions within a portfolio or position. Bid/OfferLiquidity adjustments are bid / offer adjustments taken where a net open risk position is retained and the model on which it is valued is calibrated to mid market. Valuations based on models incorporate liquidity or risk premiums either implicitly (e.g., by

calibrating to market prices that incorporate such premiums) or explicitly.

Reflection of model uncertainty in fair value determinations


Uncertainties associated with the use of model-based valuations are predominantly addressed through the use of model reserves. These reserves reflect the amounts that UBS estimates are appropriate to deduct from the valuations produced directly by the models to reflect uncertainties in the relevant modeling assumptions and inputs used. In arriving at these estimates, UBS considers thea range of market practice and how it believes other market participants would assess these uncertainties. Model reserves are periodically reassessed in light of information from market transactions, pricing utilities, and other relevant sources.

Valuation processes


UBS’s fair value and model governance structure includes numerous controls and procedural safeguards that are intended to maximize the quality of fair value measurements reported in the financial statements. New products need to be reviewed and approved by all stakeholders relevant to risk and financial control. Responsibility for the ongoing measurement of financial instruments at fair value resides with the business but is independently validated by risk and financial control functions. In carrying out their valuation responsibilities, the businesses are required to consider the availability and quality of available external market information and to provide justification and rationale for their fair value estimates. Independent price verification of financial instruments measured at fair value is undertaken by the product control function, which is independent from the risk taking businesses. The objective of the independent price verification process is to independently corroborate the business’busi-



332

Financial information

Note 27 Fair value of financial instruments (continued)

ness’ estimates of fair value against available market information. By benchmarking the business’ fair value estimates with observable market prices or other independent sources, the degree of valuation uncertainty embedded in these measurements can be assessed and managed as required in the governance framework. A critical aspect of the independent price verification process is the evaluation of the appropriateness of modeling approaches and input assumptions which yield fair value estimates derived from valuation models. The output of modelling approaches is also compared to observed prices and market levels for the specific instrument being
priced. This calibration analysis is performed to assess the ability of the model and its inputs (which are frequently based upon a combination of price levels of observable hedge instruments and difficult to observe parameters) to price a specific product in its own specific market. An independent model review group reviews UBS’s valuation models on a regular basis or if specific triggers occur and approves them for valuing specific products. As a result of the valuation controls employed, valuation adjustments may be made to the business’ estimate of fair value to either align with independent market information or financial accounting standards.



321

Financial information
Notes to the consolidated financial statements

Note 27 Fair value of financial instruments (continued)

b) Fair value hierarchy

All financial instruments at fair value are categorized into one of three fair value hierarchy levels at year-end, based upon the lowest level input that is significant to the product’s fair value measurement in its entirety:
– Level 1 – quoted prices (unadjusted) in active markets for identical assets and liabilities

– Level 2 – valuation techniques for which all significant inputs are market observable, either directly or indirectly; and
– Level 3 – valuation techniques which include significant inputs that are not based on observable market data.


                                                              
Determination of fair values from quoted market prices or valuation techniques 
Determination of fair values from quoted market prices or valuation techniques1Determination of fair values from quoted market prices or valuation techniques1 
 31.12.09  31.12.08  31.12.10 31.12.09 
CHF billion Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total  Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total 
Trading portfolio assets  110.9  65.5  11.6  188.0 128.1 128.4 15.3 271.8 
Financial assets held for trading2
 77.8 60.8 10.0 148.5 94.1 65.5 11.6 171.2 
Trading portfolio assets 
pledged as collateral  31.3  12.3  0.6  44.2 25.4 13.2 1.6 40.2 
Financial assets held for trading pledged as collateral 38.3 22.2 0.8 61.4 31.3 12.3 0.6 44.2 
Positive replacement values  4.0  393.8  23.8  421.7 5.1 811.2 37.8 854.1  3.6 385.1 12.4 401.1 4.0 393.8 23.8 421.7 
of which:
  
Interest rate contracts
  0.8  213.7  0.6  215.1 0.1 372.0 3.0 375.1  0.9 201.5 1.3 203.8 0.8 213.7 0.6 215.1 
Credit derivative contracts
  0.0  58.0  20.5  78.6 0.0 166.7 30.7 197.4  48.1 7.7 55.8 58.0 20.5 78.6 
Foreign exchange contracts
  0.3  95.9  0.9  97.1 0.4 221.0 0.0 221.5  0.3 112.2 1.0 113.5 0.3 95.9 0.9 97.1 
Equity/index contracts
  2.9  20.5  1.7  25.1 4.6 26.7 4.1 35.3 
Equity / index contracts
 2.3 17.5 2.4 22.2 2.9 20.5 1.7 25.1 
Commodities contracts
  0.0  5.8  0.1  5.9 0.0 24.8 0.0 24.8  0.0 5.8 0.0 5.9 0.0 5.8 0.1 5.9 
Financial assets designated 
at fair value  0.8  9.2  0.3  10.2 1.1 11.2 0.6 12.9 
Financial assets designated at fair value 0.8 7.3 0.5 8.5 0.8 9.2 0.3 10.2 
Financial investments 
available-for-sale  74.3  6.1  1.4  81.8 2.4 1.2 1.6 5.2 
Financial investments available-for-sale 52.9 21.0 0.9 74.8 74.3 6.1 1.4 81.8 
Total assets
  221.4  487.0  37.6  745.9 162.1 965.2 57.0 1,184.3  173.4 496.4 24.5 694.3 204.5 487.0 37.6 729.1 
Trading portfolio liabilities  33.5  13.6  0.4  47.5 33.9 27.5 1.0 62.4  42.9 11.8 0.3 55.0 33.5 13.6 0.4 47.5 
Negative replacement values  3.7  389.2  17.0  409.9 4.9 812.0 35.0 851.9  3.5 379.9 10.4 393.8 3.7 389.2 17.0 409.9 
of which:
  
Interest rate contracts
  0.7  203.1  0.0  203.7 0.0 366.9 1.8 368.7  1.0 187.8 0.7 189.4 0.7 203.1 0.0 203.7 
Credit derivative contracts
  0.0  55.8  14.7  70.6 0.0 153.7 31.0 184.8  44.9 6.2 51.1 55.8 14.7 70.6 
Foreign exchange contracts
  0.3  99.4  1.4  101.1 0.3 227.0 0.0 227.3  0.3 120.9 1.8 123.0 0.3 99.4 1.4 101.1 
Equity/index contracts
  2.8  25.0  1.0  28.7 4.5 40.7 2.1 47.4 
Equity / index contracts
 2.2 20.5 1.5 24.2 2.8 25.0 1.0 28.7 
Commodities contracts
  0.0  5.8  0.0  5.8 0.0 23.6 0.0 23.6  0.0 5.8 0.1 6.0 0.0 5.8 0.0 5.8 
Financial liabilities 
designated at fair value  0.0  102.4  10.3  112.7 0.0 91.2 10.3 101.5 
Financial liabilities designated at fair value 0.0 86.7 14.0 100.8 0.0 102.4 10.3 112.7 
Other liabilities – amounts due under unit-linked investment contracts3
 18.1 18.1 21.6 21.6 
Total liabilities
  37.2  505.2  27.7  570.1 38.8 930.7 46.3 1,015.8  46.4 496.5 24.7 567.6 37.2 526.8 27.7 591.7 
1 Bifurcated embedded derivatives, which are presented on the same balance sheet lines as host contracts, are excluded from this table. As of 31 December 2010, the fair value of the embedded derivative on Debt issued line were negative net CHF 1.7 billion classified as level 3 instruments and positive net CHF 0.3 billion classified as level 2 instruments respectively.  2 Financial assets held for trading do not include precious metal and commodities.  3 From December 2010 onwards, the amounts due under unit-linked investment contracts are reported in Other liabilities in this table. The comparative period has been adjusted.

Detailed breakdowns of UBS’s trading portfolio and financial investments available-for-sale by fair value hierarchy levels are shown in Notethe Notes 11 and 13, respectively.

322333

Financial information


Notes to the consolidated financial statements

Note 27 Fair value of financial instruments (continued)

b) Fair value hierarchy (continued)

Transfers between level 1 and level 2 of the fair value hierarchy

Trading assets of approximately CHF 90.8 billion, of which CHF 50.6 billion are debtequity instruments, and trading liabilities of approximately CHF 40.2 billion, of which almost all are debtshort sold equity instruments, were transferred from level 2 to level 1 due to increased trading activities and volumes, respectively.
Trading assets and liabilities with amounts of approximately CHF 81.5 billion and approximately CHF 30.6 billion were transferred from level 1 to level 2.2 respectively. The assets are largely related to equity instruments of CHF 0.8 billion and government bonds (CHF 3 billion) and equity instruments (CHF 3 billion).of CHF 0.2
billion. The trading liabilities transferred from level 1

to level 2 consisted equallylargely consist of short sold debt and equity instruments.instruments of CHF 0.5 billion. These assets and liabilities transferred from level 1 to level 2 no longer met the average market activity UBS considers necessary when determining whether an instrument is traded in an active market.

Movements of level 3 instruments

The table below includes a roll-forward of the balance sheet amounts of the significant classes of financial instruments classified within level 3.



                     
Movements of level 3 instruments and gains/losses for level 3 instruments held at the end of the reporting period 
Movements of level 3 instruments and gains / losses for level 3 instruments held at the end of the reporting periodMovements of level 3 instruments and gains / losses for level 3 instruments held at the end of the reporting period 
 Trading portfolio assets Derivative instruments Financial liabilities  Financial assets held for Derivative instruments1   
 (including those pledged (net replacement designated at  trading (including those Positive Negative Financial liabilities 
CHF billion as collateral)1 values)1 fair value1  pledged as collateral)1 replacement values replacement values designated at fair value1 
Balance at 31 December 2008
 16.9 2.8 10.3  16.9 37.8 35.0 10.3 
  
Total gains/losses included in the income statement
  (3.9)  2.4  (1.7)
Total gains / (losses) included in the income statement
  (3.9)  (13.0)  (15.4)  (1.7)
Net trading income  (3.7) 2.2  (1.1)  (3.7)  (12.8)  (15.0)  (1.1)
Other  (0.2) 0.2  (0.6)  (0.2)  (0.2)  (0.4)  (0.6)
  
Purchases, sales, issuances and settlements
  (6.3)  (1.0)  (4.6)  (6.3)  (9.6)  (8.6)  (4.6)
Purchases 5.6 0.0 0.0  5.6 0.0 0.0 0.0 
Sales  (11.9) 0.0 0.0   (11.9) 0.0 0.0 0.0 
Issuances 0.0 2.0 2.7  0.0 7.3 5.3 2.7 
Settlements 0.0  (3.0)  (7.3) 0.0  (16.9)  (13.9)  (7.3)
  
Transfers into and/or out of level 3
  5.4  2.8  5.3 
Transfers into or out of level 3
 5.4 6.3 3.5 5.3 
Transfers into level 3 12.5 3.3 8.0  12.5 26.0 22.7 8.0 
Transfers out of level 3  (7.1)  (0.5)  (2.7)  (7.1)  (19.7)  (19.2)  (2.7)
  
Foreign currency translation
 0.1  (0.2) 1.0  0.1 2.2 2.5 1.0 
Balance at 31 December 2009
  12.2  6.8  10.3  12.2 23.8 17.0 10.3 
  
Total gains/losses for the period included in the income statement for level 3 instruments held at the end of the reporting period
  (0.5)  (0.6)  (0.7)
Total gains / (losses) for the period included in the income statement for level 3 instruments held at the end of the reporting period 2009
  (0.5)  (9.3) 8.7  (0.7)
Net trading income  (1.0)  (0.6)  (0.7)  (1.0)  (9.4) 8.8  (0.7)
Other 0.5 0.0 0.0  0.5 0.1  (0.1) 0.0 
 
Balance at 31 December 2009
 12.2 23.8 17.0 10.3 
 
Total gains / (losses) included in the income statement
 0.2 1.2 1.8 0.3 
Net trading income  (0.2) 1.1 1.8 0.1 
Other 0.4 0.1 0.0 0.2 
 
Purchases, sales, issuances and settlements
 0.0  (7.0)  (5.4)  (1.4)
Purchases 3.7 0.0 0.0 0.0 
Sales  (3.7) 0.0 0.0 0.0 
Issuances 0.0 1.6 1.4 3.3 
Settlements 0.0  (8.6)  (6.8)  (4.7)
 
Transfers into or out of level 3
  (0.4)  (2.7)  (1.1) 4.7 
Transfers into level 3 2.4 1.6 1.8 5.8 
Transfers out of level 3  (2.8)  (4.3)  (2.9)  (1.1)
 
Foreign currency translation
  (1.0)  (3.0)  (1.9) 0.1 
Balance at 31 December 2010
 10.8 12.4 10.4 14.0 
 
Total gains / (losses) for the period included in the income statement for level 3 instruments held at the end of the reporting period 2010
 0.2 1.2  (1.8)  (0.3)
Net trading income  (0.2) 1.1  (1.8)  (0.1)
Other 0.4 0.1 0.0  (0.2)
1 Where financial instruments moved into or out of level 3 level during 2009,the periods, this change is reflected as if the financial instrument had been in the new level as of the beginning of the quarteryear in which the movement took place.

323334

Financial information

Note 27 Fair value of financial instruments (continued)

Material changes in level 3 instruments
As of 31 December 2010, financial instruments measured with valuation techniques using significant non-market observable inputs (level 3) mainly included the following:
–structured rates and credit trades, including bespoke collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs)
–reference-linked notes
–financial instruments linked to the US sub-prime residential and US commercial real estate markets
–corporate bonds and corporate credit default swaps (CDS)
–equity linked notes issued by UBS
–traded loans

Financial assets held for trading

Trading portfolio assets transferred into and out of level 3 amounted to CHF 2.4 billion and CHF 2.8 billion, respectively. Transfers into level 3 of approximately CHF 1.1 billion were related to certain corporate bonds where no independent price verification was possible given the observability of the market. In addition, traded loans of CHF 0.6 billion were transferred into level 3 as trading activity diminished and independent sources became unavailable, sovereign bonds of CHF 0.4 billion were moved to level 3 as no independent price sources were available to verify fair values. Transfers out of level 3 were comprised of CHF 1.5 billion corporate bonds, of which CHF 1.3 billion were puttable bonds. Additionally, transfers out of level 3 included CLOs of CHF 0.7 billion and financial instruments linked to the Asian real estate market of CHF 0.2 billion as independent price sources became available and were used to verify fair values.
Level 3 trading assets purchased within the year amounted to CHF 3.7 billion. These purchases include traded loans of CHF 0.9 billion, corporate bonds of CHF 0.9 billion, financial instruments linked to the commercial real estate market of CHF 0.6 billion, equity instruments of CHF 0.4 billion, asset backed bonds of CHF 0.3 billion, and financial instruments linked to the European real estate market of CHF 0.2 billion.
Sales and settlements of level 3 trading assets amounted to CHF 3.7 billion, which included corporate bonds of CHF 1.1 billion, traded loans of CHF 0.8 billion, asset backed bonds of CHF 0.4 billion, financial instruments linked to the US real estate market of CHF 0.4 billion, financial instruments linked to the Asian real estate market of CHF 0.2 billion and those linked to commodities of approximately CHF 0.2 billion.

Derivative instruments

Derivative instruments transferred into level 3 include positive replacement values of CHF 1.6 billion and negative replacement values of CHF 1.8 billion. Transfers out of level 3 instruments included positive replacement values of CHF 4.3 billion and negative replacement values of CHF 2.9 billion.

Transfers into level 3 positive replacement values were comprised primarily of structured rates exotic trades of CHF 0.6 billion where skew and volatility could no longer be verified, structured credit bespoke CDO positions of CHF 0.5 billion, due to a sub-set of our portfolio being less comparable with available independent market data for correlation, and CDS positions of CHF 0.3 billion as credit curves and recovery rates could no longer be independently verified. Transfers into level 3 negative replacement values were comprised primarily of structured rates exotic trades of CHF 0.6 billion, structured credit bespoke CDO positions of CHF 0.3 billion, collateralized loan obligation CDS of CHF 0.3 billion, equity options of CHF 0.2 billion as volatility became unobservable for long-dated positions, and commercial mortgage-backed securities (CMBS) CDS of CHF 0.1 billion as reliability of independent market data for underlyings decreased.
Commencing 2010, UBS considers input data for a position observable when there is an equally offsetting transaction that nullifies substantially the price risk relating to that input of the instrument. As a consequence, positive replacement values of CHF 2.2 billion in total were transferred out of level 3. The following financial instruments were impacted: super senior subprime CDO positions of CHF 1.2 billion, subprime residential mortgage-backed securities (RMBS) CDS of CHF 0.6 billion, CDO positions of CHF 0.2 billion and CMBS CDS positions of CHF 0.1 billion. In addition, the following instruments were transferred out of level 3: subprime RMBS CDS positions of CHF 0.8 billion as reliability of independent market data on underlying positions increased, structured credit bespoke CDO positions of CHF 0.7 billion, due to a sub-set of our portfolio being more comparable with available independent market data for correlation, and corporate bonds CDS positions of CHF 0.3 billion where credit spreads and recovery rates could be independently verified. Transfers of negative replacement values out of level 3 include the effect of UBS’s new view that offsetting transactions may give rise to a level 2 classification. The effect amounted to CHF 2.2 billion in total. The following financial instruments were impacted: super senior sub-prime CDO positions of CHF 1.2 billion, subprime RMBS CDS of CHF 0.6 billion, CDO positions of CHF 0.2 billion and CMBS CDS positions of CHF 0.1 billion. In addition, corporate bond CDS of CHF 0.3 billion were transferred out of level 3.
Net issuances and purchases of level 3 positive replacement values were 1.6 billion, which included equity options of CHF 0.8 billion, structured credit bespoke CDO positions of CHF 0.4 billion and structured rates positions of CHF 0.1 billion. Net issuances and purchases of level 3 negative replacement values were CHF 1.4 billion, which included structured credit bespoke CDO positions of CHF 0.9 billion, equity options of CHF 0.2 billion and structured rates of CHF 0.1 billion.
Net settlements of level 3 positive replacement values were CHF 8.6 billion, which consisted primarily of structured credit positions of CHF 3.0 billion, subprime super senior CDO positions of CHF 1.5 billion, asset-backed CDS positions of CHF 0.7 billion, subprime


335

Financial information
Notes to the consolidated financial statements

Note 27 Fair value of financial instruments (continued)

b) Fair value hierarchy (continued)

Material changes in level 3 instruments

AsRMBS CDS positions of 31 December 2009, financial instruments measured with valuation techniques using significant non-market observable inputs (level 3) mainly included the following instruments:
–structured rates and credit trades, including bespoke collateralized debt obligations (CDOs),
–instruments linked to the US residential and US commercial real estate markets,
–non-US reference-linked notes, and
–equity-linked notes issued by UBS.

Trading portfolio assets

Trading portfolio assets transferred into and outCHF 0.6 billion, equity options of level 3 amounted to CHF 12.50.6 billion and CHF 7.1 billion, respectively. On a net basis, approximately CHF 3 billion of transfers into level 3 were related to certain non-US reference-linked notes held in Asia as price determining factors for these instruments, such as prices of the underlying asset-backed securities, including residential and commercial real-estate securities, became unobservable. Other credit positions (largely puttable bonds) of approximately CHF 2 billion were transferred into level 3 since the embedded options could not be price tested. In addition, leverage finance instruments, asset-backed securities and other instruments of approximately CHF 1 billion in total, were transferred into level 3 due to prices becoming unobservable. Transfers out of level 3, on a net basis, largely comprised structured rates and credit trades of approximately CHF 1 billion, since liquidity had returned to the underlying markets, as well as corporate bonds of approximately CHF 1 billion, for which independent pricing sources became observable.
Level 3 trading assets purchased in 2009 largely include leverage finance products of approximately CHF 2 billion and other credit instruments of approximately CHF 1 billion.
Due to sales and settlements, level 3 instruments decreased by approximately CHF 12 billion. The following instruments were affected: structured rates and credit trades by approximately CHF 1 billion, bespoke CDOs by approximately CHF 2 billion, instruments linked to the US sub-prime residential and US commercial real estate markets byCMBS positions of approximately CHF 3 billion, instruments linked to the non-US real estate market by approximately CHF 2 billion,0.5 billion. Net sales and leverage finance instruments, reference-linked notes, non-real estate asset-backed securities, and other credit instruments by approximately CHF 1 billion for each of these categories.

Derivative instruments

Net replacement values transferred into and outsettlements of level 3 amounted to approximately CHF 3 billion and approximately CHF 1 billion, respectively. Transfers into level 3 instruments includedPositive replacement valuesof CHF 26 billion and negative replacement values were CHF 6.8 billion, consist of structured credit bespoke CDO positions of CHF 23 billion. Transfers out of level 3 instruments includedPositive replacement values2.7 billion, auction rate security forward purchase agreements of CHF 200.8 billion, corporate bond CDS positions of CHF 0.6 billion, structured rate trades of CHF 0.6 billion, subprime RMBS CDS positions of CHF 0.6 billion and negative replacement valuessubprime super senior CDO positions of CHF 190.5 billion.
Transfers into level 3 of replacement values mainly included bespoke CDOs, whose correlation was not observable through models or through reference data, single-name corporate credit default swaps (CDS), for which credit curves were not available from pricing sources, and home equity loans CDSs and other instruments linked to the US residential real estate market, whose recovery values became unobservable due to the illiquidity of the underlying positions. In addition, certain structured rates and credit trades whose loan and credit curves were unobservable have been transferred to level 3.
Transfers of replacement values out of level 3 consisted mainly of structured rates and credit trades, for which independent pricing sources (e.g. reliable quotes from pricing services) became available, and other credit instruments for which recovery rates and credit spreads could be observed in the market.

Financial liabilities designated at fair value

LevelTransfers of financial liabilities designated at fair value into level 3 were CHF 5.8 billion, consist primarily of secured funding notes of CHF 2.1 billion due to the lack of directly comparable transactional data, structured rate-linked notes of CHF 1.9 billion as the volatility of the embedded derivative could not be independently tested, equity linked notes of CHF 1.3 billion as the volatility of the embedded equity option could no longer be independently verified.
Transfers of financial liabilities designated at fair value out of level 3 were CHF 1.1 billion, which consisted of equity linked notes of CHF 0.5 billion and structured rate-linked notes of CHF 0.5 billion where the volatility of the embedded option was independently verified.
Net issuances of level 3 financial liabilities designated at fair value reclassified intowere CHF 3.3 billion, consisting primarily of equity linked notes of CHF 1.6 billion, structured rate-linked notes of CHF 1.2 billion and credit linked notes of CHF 0.4 billion. Net settlements of level 3 in 2009financial liabilities designated at fair value were CHF 4.7 billion, which consisted primarily of equity linked notes of CHF 82.4 billion, predominantly related to hybridstructured rate-linked notes of approximately CHF 1.4 billion and credit linked notes of CHF 0.4 billion.

Sensitivity information

Sensitivity of level 3 financial liabilities, including equity-linked notes issued by UBS,assets and funded credit derivatives. The main driver forliabilities

Included in the reclassification was the lackfair value estimates of market data for underlying credit default swap curves.

Level 3 sensitivity information

Financialfinancial instruments carried at fair value on UBS’sthe balance sheet include a subset of instruments for which fair value is measuredare those estimated in

full or in part using valuation techniques based on assumptions that are not supported by market observable prices, rates, or rates.
Thereother inputs. In addition, there may be uncertainty about a valuation resultingwhich results from the choice of the valuation technique or model used, the assumptions embedded in those models, the extent to which inputs are not market observable, or as a resultconsequence of other elements affecting the valuation technique or model.
At 31 December 2009,To show the effect when changing the unobservable inputs to a reasonably possible alternative assumption, UBS performed a sensitivity analysis of its financial instruments classified as level 3, which are valued using a model-based technique, and for which significant model inputs are unobservable in the markets in which the underlying products are transacted. For securities and loans which are not ascribed a value from a model-based technique, fair values as of 31 December were adjusted by two to assess20 percent, as deemed adequate for the rangeapplicable product in the professional judgment of reasonably possiblecontrol functions, which perform procedures to establish the reasonableness of the Bank’s valuation assertions at the balance sheet date. For all other level 3 financial instruments, the respective significant unobservable parameters were identified, and fair value estimates adjusted to alternative val-assumptions deemed reasonable in the markets in which the instruments may transact.

Cash instruments referred to in the below table relate to long and short inventory, if applicable, of the respective product type. For purposes of the below presentation, derivative instruments will include positive and negative replacement values, as well as issued notes with embedded equity or interest rate derivative features, which are presented on the UBS balance sheet as financial assets or liabilities designated at fair value. For all instruments, favorable changes are increases to asset values and decreases to liability values, as a consequence of applying the relevant sensitivity percentage. Unfavorable changes are decreases in asset values, and increases in liability values, as a consequence of applying the relevant sensitivity percentage for the respective financial instruments.


         
As of 31.12.10 
  Favorable  Unfavorable 
CHF billion changes  changes 
 
Cash instruments
        
 
Mortgage securities  0.3   (0.3)
 
Debt securities  0.2   (0.2)
 
Traded loans  0.1   (0.1)
 
Total cash instruments
  0.6   (0.6)
 
Derivatives instruments
        
 
Equity derivatives  0.4   (0.4)
 
Interest rate derivatives  0.7   (0.7)
 
Credit derivatives  0.1   (0.1)
 
Total derivatives instruments
  1.2   (1.2)
 

324336

Financial information

Note 27 Fair value of financial instruments (continued)

b) Fair value hierarchy (continued)

uations for level 3 instruments. In undertaking this analysis, UBS evaluated these instruments by classifying them into low, medium and high categories of valuation uncertainty based on the assessment of instrument level characteristics and available market information. Instrument level characteristics include the model from which the valuation was derived, the degree of impact on fair value by unobservable parameters, reserves and valuation adjustments. Market information includes any data that supports the classification such as reference to similar instruments and observable pa-

rameter information. Based on the valuation uncertainty assigned to an instrument, the market value was adjusted upward and downward and summed across the level 3 financial assets and liabilities to arrive at the estimated range of reasonably possible alternative valuations, as shown in the table below: Favorable valuation changes for assets would be offset to a significant degree by unfavorable changes in liabilities and vice versa as a consistent use of different assumptions and estimates would prevent a simultaneous favorable or unfavorable valuation change of assets and liabilities.



         
As of 31 December 2009, CHF billion Favorable changes  Unfavorable changes 
 
Financial assets1
�� 4.1   (4.1)
 
of which: trading portfolio assets (including those pledged as collateral)
  1.0   (10)
 
of which: positive replacement values
  3.1   (3.1)
 
Financial liabilities
  (3.3)  3.3 
 
of which: financial liabilities designated at fair value
  (1.6)  1.6 
 
of which: negative replacement values
  (1.7)  1.7 
 
1 Includes level 3 sensitivity for financial instruments accounted for at fair value through profit or loss.

c) Valuation techniques by product and market risk sensitivity

This section includes a description of the valuation of certain significantmain product categories, and related valuation techniques employed by the Bank.

Government and models.corporate bonds, bills and loans

Government bonds and bills are generally actively traded with quoted prices in liquid markets. Should market prices not be available, the securities are valued against yield curves implied from similar issuances.
Corporate bonds are priced at market levels, which are based on recent trades or broker and dealer quotes. In addition, sensitivity informationcases where no directly comparable price is available, the bonds are tested against yields derived from other securities by the same issuer or benchmarked against similar securities adjusting for certain significant instrument categories thatseniority, maturity and liquidity. For illiquid securities credit modeling may be used, which considers the features of the security and discounts cash-flows using observable or implied credit spreads and prevailing interest rates.
Loans held at fair value are excludedpriced at market levels reflecting recent transactions or quoted dealer prices. For illiquid loans where no market price is available, alternative valuation techniques are used which may include relative value benchmarking using pricing derived from Management Value-at-Risk as discloseddebt instruments in the Risk and treasury management section of this reportcomparable entities.
The corporate lending portfolio is provided.

Credit valuation adjustments on monoline credit protection
UBS previously entered into negative basis trades with monolines, whereby they providedvalued using either directly observed market prices typically from consensus providers or using a credit default swap protection against UBS-held underlyings,pricing model, which requires credit spreads, recovery and interest rate inputs.

Equity securities, hedge fund and investment fund units, convertible bonds, and options
The majority of equity securities are traded on public stock exchanges where quoted prices are readily and regularly available.

Hedge funds are measured at fair value based on their published Net Asset Values (NAVs). The Bank will consider the availability of NAVs from the funds or restrictions imposed upon the redemption of these funds when determining the final fair value.
Convertible bonds are mostly valued using observable pricing sources, which are generally available given frequency of trading in the market.
Investment fund units are predominantly exchange traded, with quoted prices in liquid markets. Should market prices not be available these instruments may be valued based on their Net Asset Value (NAV).
UBS has positions in both Exchange Traded Options (ETO) and Over-the-Counter (OTC) options. ETOs generally have observable prices, and the Bank considers market prices for their fair value assessment. OTC options are measured using either industry standard models or internally developed proprietary models.

Residential Mortgage-Backed Securities (RMBS), Commercial Mortgage-Backed Securities (CMBS), Asset-Backed Securities (ABS) and Collateralized Debt Obligations (CDO)
Values of RMBS, CMBS, ABS and CDOs are determined by traded prices and independently verified market data when available. In the absence of direct market data, values will be derived from traded and quoted prices on the securities with similar characteristics or indices through benchmarking and the triangulation approaches.

Securities with plain vanilla structure but limited observable market data are valued through industry standard valuation models, while those with complex structures are valued through proprietary models. Key inputs to such models include management’s quantitative and qualitative assessment on current and future economic conditions, of securities’ projected performance under such conditions, as well as liquidity in the market, among other factors. When applicable, reserves including, residential mortgage-backedbut not limited to, model risk and liquidity risk as reflected in the bid / offer may also be taken into account to determine the final value.

Credit derivatives related to RMBS, CMBS, ABS and CDO

Credit derivatives are in the form of credit default swaps, total return swaps and balance guaranteed swaps either referencing an index, single name securities collateralized debt obligations (RMBS CDO),or a basket of references. Single name contracts are primarily priced using reliable market data or traded prices on identical or similar exposures to determine their value. More illiquid and bespoke credit derivatives are valued through proprietary models and inputs to such models are derived via market data and calibration to similar transactions, with collateralized loan obligation (CLO)reference indices, and asset-backed securities collateralized debt obligations (ABS CDO). Since the start of the financial crisis, thesecurities.

Credit derivatives

Single name and index credit valuation adjustments (CVA) relatingdefault swaps, and any derivation or combination which can be classified as complex structured credit products, are valued by using market available credit spreads and recovery rates from either consensus pricing services or other market participants. This data is fed into industry standard models in order to derive fair value.
Complex structured credit products are valued using proprietary models, which are calibrated to data derived from consensus pricing services. Inputs to these mono-line exposures have been a source of valuation uncertainty, given market illiquiditymodels include single name credit spreads, recovery rates, implied correlations, credit volatilities, cash / synthetic basis spreads and the termsquanto basis spreads.

Rates swaps and forwards

OTC swap products include interest rate swaps, basis swaps, cross currency swaps, inflation swaps and interest rate forwards, often referred to as forward rate agreements (FRAs). All of these exposures relative to other monoline-related instruments.
CVA amounts related to monoline credit protectionproducts are based on a methodology that uses credit default swap (CDS) spreads on the monolines as a key input in determining an implied level of expected loss. Where a monoline has no observable CDS spread, a judgment is made on the most comparable monoline or combination of monolines and the corresponding spreads are used instead. For RMBS CDO, CMBS

CDO, and CLO asset categories, cash flow projections are used in conjunction with current fair values of the underlying assets to provide estimates of expectedvalued by estimating future exposure levels. For other asset categories, future exposure is based on current exposure.

To assess the sensitivity of the monoline CVA calculation to alternative assumptions, the impact of a 10% increase in monoline credit default swap spreads (e.g. from 2,000 basis points to 2,200 basis points for a specific monoline) was considered. At 31 December 2009, such an increase would have resulted in an increase in the monoline credit valuation adjustment of approximately USD 77 million (CHF 80 million; 31 December 2008: USD 206 million or CHF 220 million). The sensitivity of the monoline credit valuation adjustment to a decrease of one percentage point in the monoline recovery rate assumptions (e.g. from 20% to 19% for a specific monoline, conditional on default occurring) is estimated to result in an increase of approximately USD 26 million (CHF 27 million) in the CVA (31 December 2008: USD 58 million or CHF 62 million). The sensitivity to recovery rates is substantially linear.

Instruments linked to US residential real estate market

As of 31 December 2009, instruments linked to the US residential real estate market (e.g., US RMBS CDO) are presented asPositive or Negative replacement values,or trading portfolio assets. The Group applies a fundamental model,interest cash-flows (both



325337

Financial information
Notes to the consolidated financial statements

Note 27 Fair value of financial instruments (continued)

c) Valuation techniques by product and market risk sensitivity (continued)

based on contractual cashfixed and future index levels) and then discounting these flows using an interest rate that reflects the appropriate funding rate for that portion of the underlying bonds dueportfolio. Interest rates and future index levels used in the above calculations are generated from observing current market interest rates associated with typical OTC interest rate derivatives (swap rates, basis swap spreads, futures prices, FRA rates) and converting these into rates specific to the absence of liquidity,portfolio using market standard yield curve models.

Rates options

Interest rate caps and therefore pricing information.floors, swaptions, and other interest rate options are valued using market standard option models. These models use inputs that include (but are not limited to) interest rate yield curves, inflation curves, interest rates volatilities, FX rate volatilities, inflation volatilities, correlations (between different interest rates or between rates and FX or inflation). The contractual cash flows are adjusted for the expected rate of underlying defaults. Losses in the underlying mortgage pools are derived from the development of default and prepayment curves to which loss severity and interest curves are applied. The projected lifetime losses are additionally calibrated to ABX market indices. The default adjusted mortgage bond cash flows are then aggregated across all bond positions in the CDO, to arrive at the overall expected cash flows from the mortgage pool, used for the discounting process. The principles of this model are applied to both cash and synthetic instruments.

Commitments to acquire auction rate securities (ARSs)

Following the settlement agreements reached regarding ARS, UBS has fair valued its commitment to repurchase eligible ARS from customers at par. The commitment is treated as a derivative and fair valued through profit or loss. The value of the derivative has three main variables: (1) forward fair market value of the ARS underlying the remaining outstanding commitments, (2) client put behavior, and (3) forecasted issuer redemptions at par. The model to value the commitment considers the cash flows of the trusts themselves, and where the predicted cash flows are expected to create a surplus, the trust is assumed to redeem at par, because its choices of alternative actions, primarily to issue new loans or redeem, are severely restricted. UBS assumes that all clients will put their eligible ARS back to UBS at par on the first eligible day pursuant to the agreement with the US authorities. The discount rates in this model embed risk premiums thatmodels are calibrated so that they are able to recover market observed prices for standard option instruments trading within the market transactions. UBS estimates that a 50% increase or decrease inand the risk premiums would result in a loss of approximately USD 287 million (CHF 297 million) or gain of approximately USD 303 million (CHF 314 million). As of 31 December 2008 a similarcalibrated model was applied, however, atis then used to revalue the beginning of 2009 revisions were made to better reflect assumptions about when the clients are expected to exercise their put options.

US reference-linked notes (US RLNs)

The US reference-linked notes (US RLNs) consist of a series of transactions whereby UBS purchased credit protection, predominantly in note form, on a notional portfolio of fixed income assets. The referenced assets are comprised of USDAsset-Backed Securities (ABSs)(primarily commercial mortgage-backed securities and sub-prime residential mortgage-backed securities) and/or corporate bonds and loans across all rating categories. The credit protection embodied in theportfolio.

RLNs is fairFX spot and forward

Open spot and settled FX positions are valued using a market standard approach to the valuation of portfolio credit protection (Gaussian copula). This approach effectively is intended to simulate correlated defaults within the portfolio, where the expected losses and defaults of the individual assets are closely linked to the observed market FX spot rate. Forward FX positions are valued using the spot rate adjusted for forward pricing points observed from standard market sources.

FX options

OTC options on FX rates are valued using market standard option models. These models include inputs that include (but are not limited to) FX spot rates, FX forward points, FX volatilities, interest rate yield curves, correlations between FX rates and interest rates. The models are calibrated so that they are able to recover market observed prices (spread levels) of those assets. Key assumptions offor standard option instruments trading within the model include correlations and recovery rates. UBS applies fair value adjustments related to potential uncertainty in each of these parameters, which are only partly observable. In addition, UBS applies fair value adjustments for uncertainties associated with the use of observed spread levels as the primary inputs. These fair value adjustments are calculated by applying shocks to the relevant parameters and revaluing the credit protection. These shocks for correlation, recovery and spreads are set to various levels depending on the asset type and / or region and may vary over time depending on the best judgment of the relevant trading and control personnel. Correlation and recovery shocks are generally in the reasonably possible range of 5 to 15 percentage points. Spread shocks vary more widely and depend on whether the underlying protection is funded or unfunded to reflect cash or synthetic basis effects. As of 31 December 2009, the fair value of the US RLN credit protection (pre-reserve) is approximately USD 1,502 million (CHF 1,555 million; 31 December 2008: USD 3,284 million or CHF 3,502 million). The fair value adjustments calculated by applying the shocks described above are approximately USD 71 million (CHF 74 million; 31 December 2008: USD 299 million or CHF 319 million) as of 31 December 2009. This adjustment may also be considered a measurement of sensitivity.

Non-US reference-linked notes (Non-US RLNs)

The same valuation modelmarket and the same approachcalibrated model is then used to calculation of fair value adjustments are applied torevalue the non-US reference-linked note (non-US RLN) credit protection as to the US RLN credit protection described above, except that the spread is shocked by 10% for European corporate names. As of 31 December 2009, the fair value of the non-US RLN credit protection is approximately USD 1,155 million (CHF 1,196 million; 31 December 2008: USD 1,971 million or CHF 2,102 million). The fair value adjustments (up and down) calculated by applying the shocks described above are approximately USD 105 million (CHF 109 million; 31 December 2008: USD 155 million or CHF 165 million). This adjustment may also be considered a measurement of sensitivity.portfolio.

Option to acquire equity of the SNB StabFund

Under IFRS, UBS’s option to purchase the SNB StabFund’s equity is recognized on the balance sheet as a derivative at
èRefer to the “Risk and treasury management” section for more information on certain financial instruments with significant valuation uncertainty (CVA monolines, US and non-US reference-linked notes, option to acquire equity of the SNB StabFund)



326

Financial information

Note 27 Fair value of financial instruments (continued)

c) Valuation techniques by product and market risk sensitivity (continued)

fair value(Positive replacement values)with changes to fair value recognized in profit and loss. As of 31 December 2009, the fair value (after adjustments) of UBS’s call option was approximately USD 1,174 million (CHF 1,216 million; 31 December 2008: CHF 1,100 million).

The model adopted in 2009 incorporates cash flow projections for all assets within the fund across various scenarios and is calibrated to market levels by setting the spread above one-month Libor rates used to discount future cash flows such that the model-generated price of the underlying asset pool equals UBS’s assessed fair value of the asset pool. The model incorporates a model reserve (fair value adjustment) to address potential uncertainty in this calibration. For 31 December 2009, this adjustment was USD 262 million (CHF 271 million; 30 September 2009: USD 229 million or CHF 237 million). As of 31 December 2009, a 100 basis points increase in the discount rate would have decreased the option value by approximately USD 126 million (CHF 130 million) and a 100 basis points decrease would have increased the option value by approximately USD 143 million (CHF 148 million).

Bespoke collateralized debt obligations (CDOs)

Significant positions of bespoke CDOs are classified as level 3 instruments (31 December 2009: Positive replacement value of CHF 6,067 million and Negative replacement value of CHF 6,208 million; 31 December 2008: Positive replacement value of CHF 15,118 million and Negative replacement value of CHF 16,137 million). The instruments represent customized collateralized debt obligations. These products are sold in ‘tranches’ whereby the tranche’s seniority and attachment points reflect the size of the risk being taken. One of the main

risks that the investor is exposed to is the correlation behavior of the names in the tranche.

The primary market inputs to the valuation approach are observed in the vanilla credit markets, being the vanilla credit indices and single name credit curves. A widely-used modeling approach is applied, which first constructs the correlation from the index information and then values the transaction by comparing it to the index.

Equity-linked notes issued by UBS

As of 31 December 2009, equity-linked notes issued by UBS of CHF 3,398 million (31 December 2008: CHF 3,316 million) accounted for as financial liabilities designated at fair value were classified as level 3.
The valuation models used for these types of notes are a market standard Black-Scholes model for the more standard vanilla type returns and a “Local Volatility Monte Carlo” based approach for more complex instruments.
While some of the parameter inputs to these models will be observable, for example equity and FX spot prices and interest rates, others will be based on valuation techniques or will require the extrapolation of observable data, which may result in an instrument being required to be classified in level 3.
The main parameters which may not be directly observable are equity volatilities and dividend assumptions for longer-dated trades which will normally be extrapolated from observable shorter-term market information. Correlation inputs, required for instruments where the value is based upon multiple underlyings, will be calculated by a modeling technique which uses historic data to estimate future correlation levels, the model output being bench-marked against available information.



327

Financial information
Notes to the consolidated financial statements

Note 27 Fair value of financial instruments (continued)

d) Deferred day 1 profit or loss

The table reflects financial instruments for which fair value is determined using valuation models where not all significant inputs are market observable. Such financial instruments are initially recognized at their transaction price, although the values obtained from the relevant valuation

model on day 1 may differ. Day 1 reserves are released and P&L is recorded in trading profit or loss as

either the underlying parameters become observable or the transaction is closed out.

The table shows the aggregate difference yet to be recognized in profit or loss at the beginning and end of the period and a reconciliation of changes in the balance of this difference (movement of deferred day 1 profit or loss).



Deferred day 1 profit or loss

               
Deferred day 1 profit or lossDeferred day 1 profit or loss 
 For the year ended  For the year ended 
CHF million 31.12.09 31.12.08  31.12.10 31.12.09 
Balance at the beginning of the year
 627 550  599 627 
Deferred profit/(loss) on new transactions 231 588 
Deferred profit / (loss) on new transactions 282 231 
Recognized (profit)/loss in the income statement  (240)  (459)
Recognized (profit) / loss in the income statement  (260)  (240)
Foreign currency translation  (19)  (52)  (56)  (19)
Balance at the end of the year
 599 627  565 599 

On 31 December 2009,2010, deferred day 1 profit or loss of approximately CHF 0.3 billion (31 December 2008:2009: approximately CHF 0.40.3 billion) pertains largely to multi-name credit default swaps (largely structured rates and credit trades, including bespoke CDOs and multi-name credit default swaps,

bespoke CDOs), and of approximately CHF 0.3 billion (31 December 2008:2009: approximately CHF 0.20.3 billion) to over-the-counter (OTC) equity options. Both instruments are presented as replacement values on UBS’s balance sheet.



338

Financial information

Note 27 Fair value of financial instruments (continued)

e) Financial instruments accounted for at amortized cost

The following table reflects the estimated fair values for UBS’s instruments accounted for at amortized cost. Refer to Note 29 for an overview of financial assets classified as

“loans “loans and receivables” and financial liabilities accounted for at amortized cost.



                             
 31.12.09 31.12.08  31.12.10 31.12.09 
CHF billion Carrying value Fair value Carrying value Fair value  Carrying value Fair value Carrying value Fair value 
Assets
  
Due from banks 46.6 46.6 64.5 64.5  17.1 17.1 16.8 16.8 
Loans 305.1 306.0 338.5 338.1  261.3 263.4 264.7 265.6 
Cash collateral on securities borrowed 63.5 63.5 122.9 122.9  62.5 62.5 63.5 63.5 
Reverse repurchase agreements 116.7 116.7 224.6 224.8  142.8 142.8 116.7 116.7 
Cash collateral receivables on derivative instruments 38.1 38.1 53.8 53.8 
Accrued income and prepaid expenses, other assets 5.1 5.1 9.1 9.1  20.6 20.6 21.4 21.4 
Liabilities
  
Due to banks 65.2 65.1 125.6 125.6  41.5 41.5 31.9 31.8 
Due to customers 410.5 410.5 465.7 465.7  332.3 332.5 339.3 339.3 
Cash collateral on securities lent 8.0 8.0 14.1 14.1  6.7 6.7 8.0 8.0 
Repurchase agreements 64.2 64.2 102.5 102.5  74.8 74.7 64.2 64.2 
Cash collateral payables on derivative instruments 58.9 58.9 66.1 66.1 
Debt issued 134.5 133.6 201.2 199.7  131.6 131.4 134.5 133.6 
Accrued expenses and deferred income, other liabilities 15.9 15.9 22.8 22.8  49.2 49.2 54.3 54.3 
Off-balance-sheet financial instruments
 
Commitments
 
Loan commitments1
 0.3 0.4  0.4 1.9 0.3 1.2 
Guarantees and similar instruments2
 0.1  (0.1)  0.1 0.3 0.1 0.4 
1 Loan commitments include derivative loan commitments, loan commitments accounted for as financial liabilities designated at fair value and other loan commitments not recognized on balance sheet, unless a provision is required.  2 The fair value of financial guarantees is positive as the present value of the expected fees exceeds the present value of the expected outflows.

328

Financial information

Note 27 Fair value of financial instruments (continued)

e) Financial instruments accounted for at amortized cost (continued)Loans include Wealth Management assets, mainly mortgage loans, where fair values exceed related carrying values by CHF 3.4 billion, and Investment Bank assets where fair values fall below related carrying values by CHF 1.2 billion.

The fair values included in the table above were calculated for disclosure purposes only. The valuation techniques and assumptions described below provide a measurement of fair value of UBS’s financial instruments accounted for at amortized cost. However, because other institutions may use different methods and assumptions for their fair value estimation, such fair value disclosures cannot necessarily be compared from one financial institution to another. UBS applies significant judgments and assumptions to arrive at these fair values, which are more holistic and less sophisticated than UBS’s established fair value and model governance policies and processes applied forto financial instruments accounted for at fair value, whose fair values impact UBS’s balance sheet and net profit. The following principles were applied when determining fair value estimates for financial instruments accounted for at amortized cost:
– For financial instruments with remaining maturities greater than three months, the fair value was determined from quoted market prices, where available.
– Where quoted market prices were not available, the fair values were estimated by discounting contractual cash flows using

current market interest rates or appropriate yield curves for instruments with similar credit risk and maturity. These estimates generally include adjustments for counterparty credit or UBS’s own credit.
– 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 estimate of fair value. The following financial instruments accounted for at amortized cost

have remaining maturities of three months or less: 99%94% of loansamounts due from banks; 55% of loans due from customers; 100% of cash collateral on securities borrowed; 100%95% of reverse repurchase agreements; 96%100% of cash collateral receivables on derivatives; 42% of loans; 94% of amounts due to banks; 100% of amount due to customers; 100% of cash collateral on securities lent; 100%93% of repurchase agreements; 100% of cash collateral payable on derivatives; 97% of amount due to customers; and 49%30% of debt issued.
– The fair value of variable-interest bearingvariable interest-bearing financial instruments accounted for at amortized cost is assumed to be approximated by their carrying amounts, which are net of credit loss allowances,al-


339

Financial information
Notes to the consolidated financial statements

Note 27 Fair value of financial instruments (continued)

lowances, and does not reflect fair value changes in the credit quality of counterparties or UBS’s own credit movements.
– The fair value estimates for repurchase and reverse repurchase agreements with variable and fixed interest rates, for all maturities, 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-termshort term nature of these instruments.
–Loans include Wealth Management assets, mainly mortgage loans, where fair values exceed related carrying values by CHF 3.3 billion, and Investment Bank assets where fair values fall below related carrying values by CHF 2.4 billion, of which CHF 0.9 billion relate to reclassified financial assets.
– The estimated fair values of off-balanceoff balance sheet financial instruments are based on market prices for similar facilities and guarantees. Where this information is not available, fair value is estimated using discounted cash flow analysis.


329

Financial information
Notes to the consolidated financial statements

Note 28 Pledged assets and transferred financial assets which do not qualify for derecognition

Financial assets are mainly pledged in securities borrowing and lending transactions, in repurchase and reverse repurchase transactions, under collateralized credit lines with central banks, against loans from mortgage institutions, in con-connection

nection with derivative transactions, as security deposits for stock exchanges and clearinghouse memberships, or transferred for security purposepurposes in connection with the issuance of covered bonds.



       
Assets pledged
  Carrying amount
CHF million 31.12.09 31.12.08
 
Financial assets held for trading pledged to third parties for liabilities with and without the right of rehypothecation 64,748  78,002 
 
of which: pledged to third parties with right of rehypothecation
 44,221  40,216 
 
Mortgage loans1
 21,741  3,699 
 
Other2
 65,775  21,040 
 
Total
 152,264  102,741 
 
1 Book value includes mortgage loans transferred for security purpose in preparation of upcoming covered bond issuances.  2 Includes financial investments available-for-sale of CHF 53 billion (2008: CHF 0 billion) and reclassified financial assets of CHF 10 billion (2008: CHF 16 billion).

The following table presents details of financial assets which have been sold or otherwise transferred, but which do not

qualify for derecognition. Criteria for derecognition are discussed in Note 1a) 5).



        
Assets pledgedAssets pledged 
 Carrying amount 
CHF million 31.12.10 31.12.09 
Financial assets held for trading portfolio assets pledged to third parties 79,742 64,748 
of which: pledged to third parties with right of rehypothecation
 61,352 44,221 
Financial investments available-for-sale pledged to third parties 38,106 53,222 
Mortgage loans 27,119 21,741 
Other loans and receivables 10,235 12,553 
of which: pledged to third parties with right of rehypothecation
 559 192 
Total financial assets pledged
 155,202 152,264 
 
The following table presents details of financial assets which have been sold or otherwise transferred, but which do not qualify for derecognition. Criteria for derecognition are discussed in Note 1a) 5).
The following table presents details of financial assets which have been sold or otherwise transferred, but which do not qualify for derecognition. Criteria for derecognition are discussed in Note 1a) 5).
                
Transfer of financial assets which do not qualify for derecognitionTransfer of financial assets which do not qualify for derecognition Transfer of financial assets which do not qualify for derecognition 
 Continued asset recognition in full – Total assets  Continued asset recognition in full – Total assets 
CHF billion 31.12.09 31.12.08  31.12.10 31.12.09 
Nature of transaction
  
Securities lending agreements 17.1 22.0  30.9 17.1 
Repurchase agreements 24.6 13.1  28.6 24.6 
Other financial asset transfers 110.9 46.6  96.6 110.9 
Total
 152.6 81.7  156.1 152.6 

The transactions are mostly conducted under standard agreements employed by financial market participants and are undertaken with counterparties subject to UBS’s normal credit risk control processes. The resulting credit risk exposures are controlled by daily monitoring and collateralization of the positions. The financial assets which continue to be recognized are typically transferred in exchange for cash or other financial assets. The associated liabilities can therefore be assumed to be approximately the carrying amount of the transferred financial assets except for certain positions pledged with central banks.

UBS retains substantially all risks and rewards of the transferred assets in each situation of continued recognition in

full.recognition. These include credit risk, settlement risk, country risk and market risk.

Repurchase agreements and securities lending agreements are discussed in Notes 1a) 13) and 1a) 14). Other financial asset transfers include sales of financial assets while concurrently entering into a total rate of return swap with the same counterparty and sales of financial assets involving guarantees.

Transferred financial assets which are subject to partial continued recognitioncontinuing involvement were immaterial in 20092010 and 2008. The carrying amounts of the partially recognized transferred financial assets are included in the table.

2009.


330340

Financial information

Note 29 Measurement categories of financial assets and financial liabilities

a) Measurement categories of financial assets and financial liabilities

The following table provides information about the carrying amounts of individual classes of financial instruments within the measurement categories of financial assets and financial liabilities as defined in IAS 39. Only those assets and liabilities which are deemed to be financial instruments are included

in the table below,be-

low, which causes certain balances to differ from those presented on the balance sheet.

    Refer to “Note 27 Fair value of financial instruments” for more information on how fair value of financial instruments is determined.

èRefer to “Note 27 Fair value of financial instruments” for more information on how fair value of financial instruments is determined



        
         31.12.10 31.12.09 
 31.12.09 31.12.08 
 
Financial assets1
  
Held for trading
  
Trading portfolio assets 171,173 261,904  148,521 171,173 
Trading portfolio assets pledged as collateral 44,221 40,216  61,352 44,221 
Debt issued2
 3,109 4,152  2,665 3,109 
Positive replacement values 421,694 854,100  401,146 421,694 
Total
 640,197 1,160,372  613,684 640,197 
Fair value through profit or loss
  
Financial assets designated at fair value 10,223 12,882  8,504 10,223 
Cash, loans and receivables
 
Financial assets at amortized cost
 
Cash and balances with central banks 20,899 32,744  26,939 20,899 
Due from banks 46,574 64,451  17,133 16,804 
Cash collateral on securities borrowed 63,507 122,897  62,454 63,507 
Reverse repurchase agreements 116,689 224,648  142,790 116,689 
Cash collateral receivables on derivative instruments 38,071 53,774 
Loans 305,061 338,520  261,263 264,710 
Accrued income and prepaid expenses 1,465 3,238  1,404 1,465 
Other assets 3,594 5,901  19,175 19,941 
Total
 557,789 792,399  569,229 557,789 
Available-for-sale
  
Financial investments available-for-sale 81,757 5,248  74,768 81,757 
Total financial assets
 1,289,966 1,970,901  1,266,185 1,289,966 
 
Financial liabilities
  
Held for trading
  
Trading portfolio liabilities 47,469 62,431  54,975 47,469 
Debt issued2
 8 185  1,308 8 
Negative replacement values 409,943 851,864  393,762 409,943 
Total
 457,420 914,480  450,045 457,420 
Fair value through profit or loss, other
  
Financial liabilities designated at fair value 112,653 101,546  100,756 112,653 
Amounts due under unit-linked contracts 21,740 22,084  18,125 21,740 
Total
 134,393 123,630  118,881 134,393 
Financial liabilities at amortized cost
  
Due to banks 65,166 125,628  41,490 31,922 
Cash collateral on securities lent 7,995 14,063  6,651 7,995 
Repurchase agreements 64,175 102,561  74,796 64,175 
Cash collateral payables on derivative instruments 58,924 66,097 
Due to customers 410,475 465,741  332,301 339,263 
Accrued expenses and deferred income 8,522 10,012  7,581 8,522 
Debt issued 134,453 201,221  131,628 134,453 
Other liabilities 7,415 12,765  41,622 45,774 
Total
 698,201 931,991  694,993 698,201 
Total financial liabilities
 1,290,014 1,970,101  1,263,918 1,290,014 
1 CHF 138127 billionof Loans,CHF 026 billion ofDue from banks,CHF 8 billion ofFinancial investments available-for-saleand CHF 7 billion ofFinancial assets designated at fair valueare expected to be recovered or settled after twelve months.  2 Embedded derivatives presented on the balance sheet lineDebt issued.

331341

Financial information
Notes to the consolidated financial statements

Note 29 Measurement categories of financial assets and financial liabilities (continued)

b) Reclassification of financial assets

The reclassification of financial assets reflected UBS’s change in intent and ability to hold these financial assets for the foreseeable future rather than for trading in the near term. The foreseeable future is interpreted to mean a period of approximately 12 months following the date of reclassification. The financial assets were reclassified using their fair value on the date of the reclassification, which became their new cost basis at that date.

In fourth quarter 2008 and first quarter 2009, financial assets with fair values on their reclassification dates of CHF 26 billion and CHF 0.6 billion, respectively, were reclassified out ofTrading portfolio assetstoLoans.

The table below shows the carrying values and fair values of these financial assets.



         
Trading portfolio assets reclassified to loans 
CHF billion
  31.12.09   31.12.08 
 
Carrying value of trading portfolio assets reclassified  19.9   24.2 
 
Fair value of trading portfolio assets reclassified  19.0   20.8 
 
Pro-forma fair value gain/(loss)  (0.9)  (3.4)
 
         
Trading portfolio assets reclassified to loans 
CHF billion 31.12.10  31.12.09 
 
Carrying value  11.9   19.9 
 
Fair value  12.1   19.0 
 
Pro-forma fair value gain / (loss)  0.2   (0.9)
 

In 2009,2010, carrying values decreased by approximately CHF 4.38.0 billion mainly due to sales of approximately CHF 2.66.3 billion. Redemptions credit loss expenses of CHF 10.7 billion and the appreciation of the Swiss franc against the US dollar of CHF 1.4 billion resulted in a decrease of approximately CHF 3.3 billion.further decreases. The decrease was partially offset by financial assets of CHF 0.6 billion reclassified in 2009, and the accretion of interest of approximately CHF 0.90.4 billion from the amortization of the discount between carrying values and the expected recoverable amounts.

Fair values of reclassified financial assets decreased as well by approximatelyCHF 6.9 billion in 2010. The decreases included sales of CHF 6.3

billion, redemptions of CHF 0.7 billion, fair value changes of CHF 0.4 billion and the appreciation of the Swiss franc against the US dollar of CHF 1.4 billion, partially offset by fair value gains of CHF 1.8 billion in 2009, which includes a fair value gain of approximately CHF 4.7 billion and financial assets reclassified in 2009 of CHF 0.6 billion, offset by decreases of approximately CHF 2.6 billion related to sales and decreases of approximately CHF 4.5 billion related to redemptions and the decline of the CHF/USD exchange rate.

billion.

The table below provides notional values, fair values, and carrying values by product category, as well as the ratio of carrying value to notional value.



                 
Reclassified assets 
              Ratio of carrying 
31.12.09, CHF billion Notional value  Fair value  Carrying value  to notional value 
 
US student loan and municipal auction rate securities  9.3   8.0   8.2   88%
 
Monoline-protected assets1
  7.5   6.1   6.5   86%
 
Leveraged finance  2.6   0.9   0.8   30%
 
CMBS/CRE (excluding interest-only strips)  2.0   1.5   1.6   82%
 
US reference-linked notes  1.1   0.9   1.0   86%
 
Other assets  1.1   0.9   1.0   90%
 
Total (excluding CMBS interest-only strips)
  23.6   18.2   19.0   80%
 
CMBS interest-only strips      0.8   0.9     
 
Total reclassified assets
  23.6   19.0   19.9     
 
1 Includes CDOs (notional value of approximately CHF 0.45 billion; carrying value and fair value of approximately CHF 0.3 billion) which are no longer hedged by CDS with monoline insurers following the commutation of these CDS trades in prior periods.

Reclassified financial assets impacted UBS’s income statement as presented in the table below.



                
Reclassified assetsReclassified assets 
 Ratio of carrying 
CHF billion Notional value Fair value Carrying value to notional value 
US student loan and municipal auction rate securities 5.1 4.4 4.5  88%
Monoline-protected assets 6.1 5.4 5.3  86%
Leveraged finance 0.5 0.4 0.4  75%
CMBS / CRE (excluding interest-only strips) 0.2 0.1 0.1  81%
US reference-linked notes 0.6 0.6 0.5  83%
Other assets 0.9 0.8 0.7  82%
Total (excluding CMBS interest-only strips)
 13.5 11.7 11.6  86%
CMBS interest-only strips 0.4 0.3 
Total reclassified assets
 13.5 12.1 11.9 
        
Contribution of the reclassified assets to the income statementContribution of the reclassified assets to the income statement Contribution of the reclassified assets to the income statement
 For the year ended
 For the year ended    
CHF billion��31.12.09 31.12.08  31.12.10 31.12.09 
Net interest income 1.5 0.1  0.5 1.5 
Credit loss (expense)/recovery  (1.0)  (1.3)
Credit loss (expense) / recovery  (0.1)  (1.0)
Other income 0.1 0.0 
Other income1
 0.1 0.1 
Impact on operating profit before tax
 0.6  (1.2) 0.5 0.6 
1 Includes net gains on the disposal of reclassified assets.

332342

Financial information

Note 29 Measurement categories of financial assets and financial liabilities (continued)

c) Maximum exposure to credit risk and credit quality information

The table below presents the Group’s maximum exposure to credit risk without taking account of any collateral held or other credit enhancements. The amounts included in the table represent the carrying amounts of financial instruments subject to credit risk, which were determined under the guidance

of IFRS. Financial instrumentsin-

struments have been netted only if and to the extent a) legally enforceable rights to offset exist, and b) UBS has the intention to settle the underlying transactions on a net basis. As such, the amounts disclosed in the table below should not necessarily be considered a “risk measure”.



                                            
Maximum exposure to credit risk1 
Maximum exposure to credit riskMaximum exposure to credit risk 
 31.12.09 31.12.08  31.12.10 31.12.09 
CHF million WM&SB WMA IB Other2 UBS WM&SB WMA IB Other2 UBS  WM&SB WMA IB Other1 UBS WM&SB WMA IB Other1 UBS 
Balances with central banks 8,589 0 9,525 0 18,114 17,628 0 11,528 0 29,156  10,727 0 13,732 0 24,459 8,589 0 9,525 18,114 
Due from banks 2,651 1,074 42,568 282 46,574 5,499 1,096 57,475 381 64,451  2,654 2,157 12,007 315 17,133 2,647 1,074 12,802 282 16,804 
Loans 194,410 21,492 89,057 101 305,061 203,758 23,956 110,056 750 338,520  199,591 22,470 39,044 158 261,263 194,410 21,492 48,722 86 264,710 
Cash collateral on securities borrowed 0 0 63,507 0 63,507 0 0 122,897 0 122,897  62,454 62,454 63,507 63,507 
Reverse repurchase agreements 1,107 4,302 109,896 1,384 116,689 0 4,223 219,580 844 224,648  3,615 123,574 15,601 142,790 1,107 4,302 109,896 1,384 116,689 
Cash collateral receivables on derivative instruments 4 38,052 15 38,071 4 53,755 15 53,774 
Accrued income, other assets and debt underwriting commitments subject to credit risk 1,319 147 2,436 1,185 5,087 1,955 183 4,526 2,479 9,144  1,187 163 18,437 804 20,591 1,319 147 18,783 1,185 21,434 
Financial instruments measured at
amortized cost on balance sheet
 208,076 27,015 316,989 2,952 555,032 228,840 29,458 526,062 4,454 788,816 
Financial instruments recognized at amortized cost on balance sheet
 214,163 28,405 307,300 16,893 566,762 208,076 27,015 316,989 2,952 555,032 
Positive replacement values 2,534 520 416,862 1,778 421,694 5,610 491 847,158 841 854,100  2,688 600 396,018 1,840 401,146 2,534 520 416,862 1,778 421,694 
Trading portfolio assets (including pledged positions) – debt instruments 16,341 1,107 117,047 4,535 139,030 85 1,343 219,739 3,695 224,862  10,707 613 122,986 5 134,310 16,341 1,107 117,047 1,739 136,234 
Financial assets designated at fair value – debt instruments 65 0 9,317 0 9,383 0 0 11,803 0 11,803  30 7,359 7,389 65 9,317 9,383 
Financial investments available-for-sale – debt instruments 5,393 16,515 52,183 6,315 80,406 615 278 2,451 223 3,567  27 11,585 3,426 58,371 73,409 5,393 16,515 52,183 6,315 80,406 
Financial instruments measured at
fair value on balance sheet
 24,333 18,142 595,409 12,628 650,513 6,310 2,112 1,081,151 4,759 1,094,332 
Financial instruments recognized at fair value on balance sheet
 13,453 12,798 529,789 60,215 616,255 24,333 18,142 595,409 9,832 647,717 
Credit guarantees, performance guarantees, documentary credits and similar instruments3
 11,888 385 4,569 137 16,979 14,258 405 4,856 149 19,668 
Credit guarantees, performance guarantees, documentary credits and similar instruments2
 10,449 370 5,467 119 16,405 11,888 385 4,569 137 16,979 
Undrawn irrevocable credit facilities 7,236 498 51,593 0 59,328 2,775 13 57,528 0 60,316 
Loan commitments 7,276 1,066 48,509 56,851 7,236 498 51,593 59,328 
Irrevocable commitments to acquire ARS 0 0 8,700 0 8,700 0 0 16,571 0 16,571  140 140 8,700 8,700 
Irrevocable forward starting reverse repos agreements 39,036 39,036 43,020 43,020 
Irrevocable forward starting securities borrowing agreements 454 454 904 904 
Commitments
 19,124 883 64,862 137 85,007 17,033 418 78,955 149 96,555  17,724 1,436 93,607 119 112,887 19,124 883 108,786 137 128,931 
Total at the year-end
 251,533 46,040 977,260 15,717 1,290,552 252,183 31,988 1,686,168 9,362 1,979,703  245,340 42,640 930,695 77,228 1,295,903 251,533 46,040 1,021,184 12,921 1,331,680 
1 The exposures are considered the best representation of “maximum exposure to credit risk” as defined by IFRS, without taking into account additional netting potentials, collaterals and other credit risk mitigation measures.  2 Other includes Global Asset Management and the Corporate Center.treasury activities and other corporate items.  32 The related provision of CHF 130 million (CHF 90 million (CHF 31 million for 2008)2009) has been deducted.

The table above does not include written credit protection, which is generally recognized on UBS’s balance sheet underNegative replacement values.values. It also excludes UBS’s potential obligations under the Swiss Deposit Insurance.Insurance (2010: CHF 961 million, 2009: 1,030 million).

The maximum exposure to credit risk determined under IFRS guidance and disclosed in the table above is actively managed and subject to credit risk management, such as collater-

alizationcollateralization and hedging. Collateral held and credit risk mitigation is described in the section “Risk management and control”.



333343

Financial information
Notes to the consolidated financial statements

Note 29 Measurement categories of financial assets and financial liabilities (continued)

                                 
Financial assets subject to credit risk by rating category 
CHF million 31.12.10 
Rating category1 0-1  2-3  4-5  6-8  9-13  defaulted  not rated4  Total 
 
Balances with central banks  14,636   9,800   23                   24,459 
 
Due from banks  326   11,728   2,555   2,349   174   2       17,133 
 
Loans  11,845   75,638   76,200   79,785   16,216   1,580       261,263 
 
Cash collateral on securities borrowed and reverse repurchase agreements  59,372   112,871   23,093   8,229   1,675   4       205,244 
 
Positive replacement values  15,220   331,725   38,372   12,567   2,187   1,074       401,146 
 
Cash collateral receivables on derivative instruments  6,207   22,591   4,470   4,475   320   8       38,071 
 
Trading portfolio assets (including pledged) – debt instruments  52,541   59,353   10,162   5,544   6,415   296       134,310 
 
Financial investments available-for-sale – debt instruments  66,804   6,559       40   6           73,409 
 
Other financial instruments  104   5,853   3,734   16,349   1,646   294       27,980 
 
Commitments2
                                
 
Guarantees and similar instruments3
  131   7,183   4,528   3,149   1,386   159       16,535 
 
Undrawn irrevocable credit facilities  671   32,793   10,310   4,821   8,109   147       56,851 
 
Irrevocable forward starting reverse repos                          39,036   39,036 
 
Irrevocable forward starting securities borrowing                          454   454 
 
Total
  227,856   676,094   173,446   137,308   38,134   3,564   39,490   1,295,893 
 
                                 
CHF million 31.12.09 
Rating category1 0-1  2-3  4-5  6-8  9-13  defaulted  not rated4  Total 
 
Balances with central banks  14,491   3,615   9                   18,114 
 
Due from banks  312   14,092   1,517   596   176   111       16,804 
 
Loans  15,738   68,854   76,986   84,120   16,295   2,716       264,710 
 
Cash collateral on securities borrowed and reverse repurchase agreements  47,928   100,127   24,108   7,444   537   52       180,196 
 
Positive replacement values  18,138   357,590   31,511   10,316   2,682   1,456       421,694 
 
Cash collateral receivables on derivative instruments  7,956   37,621   3,563   3,835   606   194       53,774 
 
Trading portfolio assets (including pledged) – debt instruments  60,216   56,032   9,871   4,429   4,985   701       136,234 
 
Financial investments available-for-sale – debt instruments  75,363   5,007   3   25   8           80,406 
 
Other financial instruments  177   7,407   5,001   15,528   2,380   323       30,816 
 
Commitments2
                                
 
Guarantees and similar instruments3
  87   8,391   4,129   2,931   1,475   56       17,070 
 
Undrawn irrevocable credit facilities  962   40,682   8,441   3,357   5,463   422       59,328 
 
Irrevocable forward starting reverse repos                          43,020   43,020 
 
Irrevocable forward starting securities borrowing                          904   904 
 
Total
  241,368   699,417   165,140   132,582   34,608   6,032   43,924   1,323,070 
 
c) Maximum exposure to credit risk1 Details on rating categories are available in table “UBS internal rating scale and credit quality information (continued)mapping of external ratings” within section “Risk and treasury management”.  2
                             
Financial assets subject to credit risk by rating category 
CHF million                         31.12.09
 
Rating category  0–1   2–3   4–5   6–8   9–13  defaulted  Total 
 
Balances with central banks  14,491   3,615   9               18,114 
 
Due from banks  3,392   39,256   2,526   1,108   186   106   46,574 
 
Loans  21,000   82,204   81,791   98,611   18,544   2,910   305,061 
 
Cash collateral on securities borrowed and reverse repurchase agreements  47,928   100,127   24,108   7,444   537   52   180,196 
 
Positive replacement values  18,138   357,590   31,511   10,316   2,682   1,456   421,694 
 
Trading portfolio assets (including pledged) – debt instruments  61,492   57,128   10,081   4,523   5,090   716   139,030 
 
Financial investments available-for-sale – debt instruments  75,363   5,007   3   25   8       80,406 
 
Other financial instruments  696   9,211   2,435   945   559   624   14,470 
 
Commitments1
                            
 
Guarantees and similar instruments2
  87   8,391   4,129   2,931   1,475   56   17,070 
 
Undrawn irrevocable credit facilities  962   40,682   8,441   3,357   5,463   422   59,328 
 
Total
  243,550   703,210   165,033   129,262   34,546   6,341   1,281,942 
 
                             
CHF million                         31.12.08
 
Rating category  0-1   2-3   4-5   6-8   9-13  defaulted  Total 
 
Balances with central banks  23,619   5,534   3               29,156 
 
Due from banks  5,697   43,075   13,847   1,418   327   87   64,451 
 
Loans  26,210   97,300   82,431   108,076   20,204   4,298   338,520 
 
Cash collateral on securities borrowed and reverse repurchase agreements  95,379   218,644   19,841   12,528   711   441   347,544 
 
Positive replacement values  46,805   602,505   172,865   24,333   5,081   2,511   854,100 
 
Trading portfolio assets (including pledged) – debt instruments  98,836   89,508   20,780   7,103   8,031   604   224,862 
 
Financial investments available-for-sale – debt instruments  3,271   131   110   35   16   3   3,567 
 
Other financial instruments  1,253   13,085   2,846   2,048   890   824   20,947 
 
Commitments1
                            
 
Guarantees and similar instruments2
  36   9,496   4,944   3,654   1,497   72   19,699 
 
Undrawn irrevocable credit facilities  238   33,820   15,285   2,840   7,719   415   60,316 
 
Total
  301,344   1,113,099   332,952   162,035   44,477   9,254   1,963,161 
 
1 Excludes commitments to acquire ARS of CHF 140 million for 2010 (CHF 8,700 million for 2009 (CHF 16,571 million 2008)2009).  23 The provisions of CHF 130 million for 2010 (CHF 90 million for 2009 (CHF 31 million 2008)2009) are not deducted from the notional value of “guaranteesGuarantees and similar instruments”.instruments.  4 These ratings are not available for 2010 and 2009 respectively.

334344

Financial information

Note 30 Pension and other post-employment benefit plans

 
             
CHF million 31.12.10  31.12.09  31.12.08 
 
Net periodic pension cost for defined benefit plans  477   742   660 
 
of which: related to major plans (Note 30a)
  430   694   672 
 
of which: related to post-retirement medical and life insurance plans (Note 30b)
  22   9   9 
 
of which: related to remaining plans
  25   39   (21)
 
Pension cost for defined contribution plans (Note 30c)  246   246   312 
 
Total pension and other post-employment benefit plans (Note 6)
  724   988   972 
 

a) Defined benefit plans

 

UBS has established various pension plans inside and outside of Switzerland. The major plans are located in Switzerland, the UK, the US and Germany. Independent actuarial valuations are performed for the plans in these locations.countries. The measurement date of these plans is 31 December for each year presented.
The overall investment policy and strategy for UBS’s defined benefit pension plans isare guided by the objective of achieving an investment return which, together with the contributions paid, is sufficient to maintain reasonable control over the various funding risks of the plans. The investment advisors appointed by plan fiduciariesDepending on the country the pension fund trustees and/or UBS are responsible for determiningthe determination of the mix of asset types and target allocations which are reviewed by the plan fiduciaries on a regular basis.allocations. Actual asset allocation is determined by a variety of current economic and market conditions and in consideration of specific asset class risk.
The expected long-term rates of return on plan assets are based on long-term expected inflation, interest rates, risk premiums and targeted asset class allocations. These estimates take into consideration historical asset class returns and are determined together with the plans’ investment and actuarial advisors.

Swiss pension plan

The Swiss pension plan covers all UBS employees in Switzerland and exceeds the minimum benefit requirements under Swiss law. The Swiss plan allows employees a choice in the level of annual contributions paid by the employee. The pension plan provides benefits which are based on annual contributions as a percentage of salary and accrue at an interest rate that is defined annually by the Pension Foundation Board.

Contributions to the pension plan are paid by employees and the employer. The employee contributions are calculated as a percentage of covered salary and are deducted monthly. The percentages deducted from salary for the full standard level of benefit coverage depend on age and vary between 1% and 9% of covered base salary and 3% and 8% of covered variable compensation. The employer pays a contribution that ranges between 100% and 375% of employees’ contributions for the standard level of benefit coverage. The benefits covered include retirement benefits; disability, death and survivor pensions; and employment termination benefits.
The employer contributions expected to be made in 20102011 to the Swiss pension plan are CHF 560530 million.

ForeignInternational pension plans

The foreigninternational locations of UBS operate various pension plans in accordance with local regulations and practices. The locations with defined benefit plans of a materialsignificant nature are in the UK, the US and Germany. The UK and the US defined benefit plans are closed to new entrants who are covered by defined contribution plans. The amounts shown for foreigninternational plans reflect the net funded positions of the material foreignsignificant international plans.
The pension plans provide benefits in the event of retirement, death or disability. The level of benefits provided depends on the defined rate of benefit accrual and level of compensation. The plans are funded entirely by UBS. The employer contributions expected to be made in 20102011 to these pension plans are CHF 10796 million. The funding policy for these plans is consistent with local government and tax requirements.
The assumptions used in foreigninternational plans take into accountare based on local economic conditions.
èRefer also to Note 1a) 23).



335345

Financial information
Notes to the consolidated financial statements

Note 30 Pension and other post-employment benefit plans (continued)

 
                                             
a) Defined benefit plans (continued) 
Defined benefit plansDefined benefit plans 
CHF million Swiss Foreign  Swiss International 
For the year ended 31.12.09 31.12.08 31.12.07 31.12.09 31.12.08 31.12.07  31.12.10 31.12.09 31.12.08 31.12.10 31.12.09 31.12.08 
Defined benefit obligation at the beginning of the year  (21,311)  (20,877)  (21,506)  (3,642)  (4,928)  (5,207)  (21,119)  (21,311)  (20,877)  (4,353)  (3,642)  (4,928)
Service cost  (432)  (336)  (367)  (41)  (63)  (88)  (384)  (432)  (336)  (41)  (41)  (63)
Interest cost  (672)  (710)  (633)  (230)  (251)  (264)  (657)  (672)  (710)  (237)  (230)  (251)
Plan participant contributions  (195)  (233)  (236)   (197)  (195)  (233) 
Amendments 0 0  (414) 
Actuarial gain/(loss) 231  (288) 1,508  (471) 318 236   (149) 231  (288)  (119)  (471) 318 
Benefits paid 1,314 1,158 792 153 148 151  1,252 1,314 1,158 148 153 148 
Termination benefits  (54)  (25)  (21)   (45)  (54)  (25) 
Acquisitions 0 0  (54)
Foreign currency translation  (122) 1,134 298  549  (122) 1,134 
Defined benefit obligation at the end of the year
  (21,119)  (21,311)  (20,877)  (4,353)  (3,642)  (4,928)  (21,299)  (21,119)  (21,311)  (4,053)  (4,353)  (3,642)
Fair value of plan assets at the beginning of the year 19,029 22,181 21,336 2,866 4,579 4,602  20,286 19,029 22,181 3,517 2,866 4,579 
Expected return on plan assets 846 990 1,067 202 282 313  850 846 990 237 202 282 
Actuarial gain/(loss) 963  (3,820)  (250) 266  (1,027)  (97) 54 963  (3,820) 163 266  (1,027)
Employer contributions 567 603 584 232 194 200  510 513 578 86 232 194 
Employer contributions – termination benefits 45 54 25 0 
Plan participant contributions 195 233 236  197 195 233 
Benefits paid  (1,314)  (1,158)  (792)  (153)  (148)  (151)  (1,252)  (1,314)  (1,158)  (148)  (153)  (148)
Foreign currency translation 104  (1,014)  (288)  (449) 104  (1,014)
Fair value of plan assets at the end of the year
 20,286 19,029 22,181 3,517 2,866 4,579  20,690 20,286 19,029 3,406 3,517 2,866 
Funded status
  (833)  (2,282) 1,304  (836)  (776)  (349)  (609)  (833)  (2,282)  (647)  (836)  (776)
Unrecognized net actuarial (gains)/losses 2,996 4,405 2,123 1,475 1,324 975  3,028 2,996 4,405 1,183 1,475 1,324 
Unrecognized assets 0 0  (1,304) 
(Accrued)/prepaid pension cost
 2,163 2,123 2,123 639 548 626  2,418 2,163 2,123 536 639 548 
 
Movement in the net (liability) or asset
  
(Accrued)/prepaid pension cost at the beginning of the year 2,123 2,123 1,953 548 626 633  2,163 2,123 2,123 639 548 626 
Net periodic pension cost  (527)  (603)  (414)  (167)  (69)  (97)  (300)  (527)  (603)  (130)  (167)  (69)
Employer contributions 567 603 584 232 194 200  510 513 578 86 232 194 
Acquisitions 0 0  (54)
Employer contributions – termination benefits 45 54 25 0 
Foreign currency translation 26  (203)  (56)  (59) 26  (203)
(Accrued)/prepaid pension cost
 2,163 2,123 2,123 639 548 626  2,418 2,163 2,123 536 639 548 
 
Amounts recognized in the balance sheet
  
Prepaid pension cost 2,163 2,123 2,123 890 798 887  2,418 2,163 2,123 756 890 798 
Accrued pension liability  (251)  (250)  (261)  (220)  (251)  (250)
(Accrued)/prepaid pension cost
 2,163 2,123 2,123 639 548 626  2,418 2,163 2,123 536 639 548 
Components of net periodic pension cost
 
Service cost 384 432 336 41 41 63 
Interest cost 657 672 710 237 230 251 
Expected return on plan assets  (850)  (846)  (990)  (237)  (202)  (282)
Amortization of unrecognized net (gains)/losses 64 215 0 89 98 37 
Immediate recognition of net actuarial (gains)/losses in current period  1,826 
Termination benefits 45 54 25 
Limit of defined benefit asset  (1,304) 
Net periodic pension cost
 300 527 603 130 167 69 

336346

Financial information

Note 30 Pension and other post-employment benefit plans (continued)

 

a) Defined benefit plans (continued)

 
                         
CHF million Swiss  Foreign 
For the year ended 31.12.09  31.12.08  31.12.07  31.12.09  31.12.08  31.12.07 
 
Components of net periodic pension cost
                        
 
Service cost  432   336   367   41   63   88 
 
Interest cost  672   710   633   230   251   264 
 
Expected return on plan assets  (846)  (990)  (1,067)  (202)  (282)  (313)
 
Amortization of unrecognized net (gains)/losses  215   0   0   98   37   58 
 
Immediate recognition of net actuarial (gains)/losses in current period  0   1,826   (1,258)            
 
Immediate recognition of past service cost in current period  0   0   414             
 
Special termination benefits  54   25   21             
 
Limit of defined benefit asset  0   (1,304)  1,304             
 
Net periodic pension cost
  527   603   414   167   69   97 
 
                         
Funded and unfunded plans 
  Swiss 
CHF million 31.12.09  31.12.08  31.12.07  31.12.06  31.12.05    
 
Defined benefit obligation from funded plans  (21,119)  (21,311)  (20,877)  (21,506)  (20,972)    
 
Plan assets  20,286   19,029   22,181   21,336   20,229     
 
Surplus/(deficit)
  (833)  (2,282)  1,304   (170)  (743)    
 
                         
Experience gains/(losses) on plan liabilities  214   0   0             
 
Experience gains/(losses) on plan assets  963   (3,820)  (250)            
 
                         
  Foreign 
CHF million 31.12.09  31.12.08  31.12.07  31.12.06  31.12.05    
 
Defined benefit obligation from funded plans  (4,078)  (3,402)  (4,654)  (5,002)  (4,635)    
 
Defined benefit obligation from unfunded plans  (275)  (240)  (274)  (205)  (385)    
 
Plan assets  3,517   2,866   4,579   4,602   4,288     
 
Surplus/(deficit)
  (836)  (776)  (349)  (605)  (732)    
 
                         
Experience gains/(losses) on plan liabilities  (12)  62   (32)            
 
Experience gains/(losses) on plan assets  266   (1,027)  (97)            
 
                         
Funded and unfunded plans 
  Swiss 
CHF million 31.12.10  31.12.09  31.12.08  31.12.07  31.12.06     
 
Defined benefit obligation from funded plans  (21,299)  (21,119)  (21,311)  (20,877)  (21,506)    
 
Plan assets  20,690   20,286   19,029   22,181   21,336     
 
Surplus / (deficit)
  (609)  (833)  (2,282)  1,304   (170)    
 
                         
Experience gains / (losses) on plan liabilities  253   214   0             
 
Experience gains / (losses) on plan assets  54   963   (3,820)            
 
                         
  International 
CHF million 31.12.10  31.12.09  31.12.08  31.12.07  31.12.06     
 
Defined benefit obligation from funded plans  (3,813)  (4,078)  (3,402)  (4,654)  (5,002)    
 
Defined benefit obligation from unfunded plans  (240)  (275)  (240)  (274)  (205)    
 
Plan assets  3,406   3,517   2,866   4,579   4,602     
 
Surplus / (deficit)
  (647)  (836)  (776)  (349)  (605)    
 
                         
Experience gains / (losses) on plan liabilities  (17)  (12)  62             
 
Experience gains / (losses) on plan assets  163   266   (1,027)            
 
                         
  Swiss International 
  31.12.10  31.12.09  31.12.08  31.12.10  31.12.09  31.12.08 
 
Principal weighted average actuarial assumptions used (%)
                        
 
Assumptions used to determine defined benefit obligations at the end of the year
                        
 
Discount rate  2.8   3.3   3.3   5.4   5.7   6.0 
 
Expected rate of salary increase  2.5   2.5   2.5   4.9   5.0   4.5 
 
Rate of pension increase  0.3   0.5   0.5   2.3   2.5   1.9 
 
                         
Assumptions used to determine net periodic pension cost for the year ended
                        
 
Discount rate  3.3   3.3   3.5   5.7   6.0   5.8 
 
Expected rate of return on plan assets  4.3   4.5   4.5   6.9   6.6   7.1 
 
Expected rate of salary increase  2.5   2.5   2.5   5.0   4.5   4.8 
 
Rate of pension increase  0.5   0.5   0.8   2.5   1.9   2.4 
 
                         
Plan assets (weighted average)
                        
 
                         
Actual plan asset allocation (%)
                        
 
Equity instruments  32   35   26   45   46   46 
 
Debt instruments  54   51   55   38   35   35 
 
Real estate  13   13   13   3   3   3 
 
Other  1   1   6   14   16   16 
 
Total
  100   100   100   100   100   100 
 
                         
Long-term target plan asset allocation (%)
                        
 
Equity instruments  15-39   18-44   20-48   40-42   42-45   45-48 
 
Debt instruments  44-68   41-65   37-63   38-44   37-44   37-38 
 
Real estate  10-18   9-17   10-20   3-6   3-7   3-7 
 
Other  0--5   0-5   0-5   11-15   11-12   10-12 
 
Actual return on plan assets (%)
  4.6   9.7   (12.8)  11.7   15.5   (18.2)
 
                         
Additional details to fair value of plan assets
                        
 
UBS financial instruments and UBS bank accounts  258   205   782             
 
UBS AG shares1
  25   66   55             
 
Derivative financial instruments, counterparty UBS  298   25   41             
 
Other assets used by UBS  188   193   107             
 
1 The number of UBS AG shares was 1,638,000, 4,095,850 and 3,734,000 as of 31 December 2010, 31 December 2009 and 31 December 2008, respectively.

337347

Financial information
Notes to the consolidated financial statements

Note 30 Pension and other post-employment benefit plans (continued)

 

a) Defined benefit plans (continued)

                             
Mortality tables and life expectancies for major plans 
      Life expectancy at age 65 for a male member currently 
      aged 65 aged 45 
Country Mortality table  31.12.10  31.12.09  31.12.08  31.12.10  31.12.09  31.12.08 
 
Switzerland BVG 2005
  17.9   17.9   17.8   17.9   17.9   17.8 
 
UK PA 2000 G, medium cohort with adjustment
  23.0   22.8   22.7   25.9   25.7   25.6 
 
Germany Dr. K. Heubeck 2005 G
  19.3   19.1   19.0   22.0   21.9   21.8 
 
US PPA mandated mortality table per IRC 1.430(h)(3)   19.0   18.4   18.4   19.0   18.4   18.4 
 
                         
  Swiss  Foreign 
  31.12.09  31.12.08  31.12.07  31.12.09  31.12.08  31.12.07 
 
Principal weighted average actuarial assumptions used (%)
 
Assumptions used to determine defined benefit obligations at the end of the year
 
Discount rate  3.3   3.3   3.5   5.7   6.0   5.8 
 
Expected rate of salary increase  2.5   2.5   2.5   5.0   4.5   4.8 
 
Rate of pension increase  0.5   0.5   0.8   2.5   1.9   2.4 
 
                         
Assumptions used to determine net periodic pension cost for the year ended
 
Discount rate  3.3   3.5   3.0   6.0   5.8   5.2 
 
Expected rate of return on plan assets  4.5   4.5   5.0   6.6   7.1   7.0 
 
Expected rate of salary increase  2.5   2.5   2.5   4.5   4.8   4.6 
 
Rate of pension increase  0.5   0.8   0.8   1.9   2.4   2.1 
 
                         
Plan assets (weighted average)
                        
 
                         
Actual plan asset allocation (%)
                        
 
Equity instruments  35   26   38   46   46   50 
 
Debt instruments  51   55   47   35   35   38 
 
Real estate  13   13   11   3   3   4 
 
Other  1   6   4   16   16   8 
 
Total
  100   100   100   100   100   100 
 
                         
Long-term target plan asset allocation (%)
                        
 
Equity instruments  18–44   20–48   33–51   42–45   45–48   49–52 
 
Debt instruments  41–65   37–63   31–50   37–44   37–38   38–44 
 
Real estate  9–17   10–20   10–19   3–7   3–7   4–6 
 
Other  0–5   0–5   0   11–12   10–12   1–3 
 
Actual return on plan assets (%)
  9.7   (12.8)  3.9   15.5   (18.2)  4.8 
 
                         
Additional details to fair value of plan assets
                        
 
UBS financial instruments and UBS bank accounts  205   782   336             
 
UBS AG shares1
  66   55   128             
 
Securities lent to UBS included in plan assets  0   0   9,379             
 
Other assets used by UBS included in plan assets  218   148   111             
 
1 The number of UBS AG shares was 4,095,850, 3,734,000 and 2,436,257 as of 31 December 2009, 31 December 2008 and 31 December 2007, respectively.
                           
Mortality tables and life expectancies for major plans 
    Life expectancy at age 65 for a male member currently 
    aged 65  aged 45 
Country Mortality table 31.12.09  31.12.08  31.12.07  31.12.09  31.12.08  31.12.07 
 
Switzerland BVG 2005  17.9   17.8   17.8   17.9   17.8   17.8 
 
  PA 2000 G, medium cohort with                        
UK adjustment  22.8   22.7   21.9   25.7   25.6   23.0 
 
Germany Dr. K. Heubeck 2005 G  19.1   19.0   18.9   21.9   21.8   21.6 
 
US RP 2000 with projections  18.4   18.4   18.3   18.4   18.4   18.3 
 
                                                   
 Life expectancy at age 65 for a female member currently  Life expectancy at age 65 for a female member currently 
 aged 65 aged 45  aged 65 aged 45 
Country Mortality table 31.12.09 31.12.08 31.12.07 31.12.09 31.12.08 31.12.07  Mortality table 31.12.10 31.12.09 31.12.08 31.12.10 31.12.09 31.12.08 
Switzerland BVG 2005 21.0 21.1 21.1 21.0 21.1 21.1  BVG 2005
 21.0 21.0 21.1 21.0 21.0 21.1 
 PA 2000 G, medium cohort with 
UK adjustment 24.6 24.5 24.8 26.5 26.4 25.8  PA 2000 G, medium cohort with adjustment
 24.7 24.6 24.5 26.6 26.5 26.4 
Germany Dr. K. Heubeck 2005 G 23.3 23.1 23.0 25.8 25.7 25.6  Dr. K. Heubeck 2005 G
 23.4 23.3 23.1 26.0 25.8 25.7 
US RP 2000 with projections 20.6 20.6 20.5 20.6 20.6 20.5  PPA mandated mortality table per IRC 1.430(h)(3) 20.9 20.6 20.6 20.9 20.6 20.6 

338348

Financial information

Note 30 Pension and other post-employment benefit plans (continued)

 

b) Post-retirement medical and life insurance plans

 

In the US and the UK, UBS offers retiree medical benefits that contribute to the health care coverage of certain employees and beneficiaries after retirement. The UK plan is closed to new entrants. In addition to retiree medical benefits, UBS in the US also provides retiree life insurance benefits.benefits to certain employees. The benefit obligation in excess of the fair value of plan assets for these plans amounts to CHF 186209 million as of 31 December 2009 (2008:2010 (2009: CHF 159186 million; 2007:2008: CHF 190159 million) and the total accrued post-retirement cost amounts to CHF 163158 million as of 31

31 December 2009 (2008:2010 (2009: CHF 163 million; 2008: CHF 164 million; 2007: CHF 181 million). The net periodic post-retirement costs for the years ended 31 December 2010, 31 December 2009, and 31 December 2008 and 31 December 2007 were CHF 22 million (net of a curtailment gain of CHF 0 million), CHF 9 million (including(net of a curtailment gain of CHF 8 million), and CHF 9 million (including(net of a curtailment gain of CHF 11 million), and CHF 26 million, respectively.

The employer contributions expected to be made in 20102011 to the post-retirement medical and life insurance plans are CHF 7 million.



                                        
Post-retirement medical and life insurance plansPost-retirement medical and life insurance plans 
CHF million 31.12.09 31.12.08 31.12.07  31.12.10 31.12.09 31.12.08 
Post-retirement benefit obligation at the beginning of the year  (159)  (190)  (219)       (186)  (159)  (190) 
Service cost  (7)  (8)  (12)   (9)  (7)  (8) 
Interest cost  (10)  (11)  (11)   (11)  (10)  (11) 
Plan participant contributions  (2)  (0)  (1)   (2)  (2) 0 
Actuarial gain/(loss)  (31) 14 39 
Amendments 0 0  (8) 
Actuarial gain / (loss)  (35)  (31) 14 
Benefits paid 10 7 8  10 10 7 
Curtailments 9 9 0  9 9 
Foreign currency translation 4 20 14  24 4 20 
Post-retirement benefit obligation at the end of the year
  (186)  (159)  (190)   (209)  (186)  (159) 
  
Fair value of plan assets at the beginning of the year 0 0 0  0 0 0 
Employer contributions 8 6 7  8 8 6 
Plan participant contributions 2 1 1  2 2 1 
Benefits paid  (10)  (7)  (8)   (10)  (10)  (7) 
Fair value of plan assets at the end of the year
 0 0 0  0 0 0 
                     
CHF million 31.12.09 31.12.08 31.12.07 31.12.06 31.12.05  31.12.10 31.12.09 31.12.08 31.12.07 31.12.06 
Defined benefit obligation  (186)  (159)  (190)  (219)  (216)  (209)  (186)  (159)  (190)  (219)
Plan asset 0 0 0 0 0  0 0 0 0 0 
Surplus/(deficit)
  (186)  (159)  (190)  (219)  (216)
Surplus / (deficit)
  (209)  (186)  (159)  (190)  (219)
Experience gains/(losses) on plan liabilities 8 3 8 1  (3)
Experience gains / (losses) on plan liabilities 6 8 3 

The post-retirement benefit expense is determined by using the assumed average health care cost trend rate. The rate used in determining post-retirement benefit expensefor 2011 is assumed to be 9% for 20098% and is assumed to decrease gradually to an ultimate trend rate of 5% in 2015.by 2018. On a country-by-country basis, the same discount rate is used for the calculation of the post-retirement benefit obligation from medical and life plans as for the defined benefit obligations arising from pension plans.

Assumed average health care cost trend rates have a significant effect on the amounts reported for health care plans. A one percentage point change in the assumed health care cost trend rates would change the US post-retirement benefit obligation and the service and interest cost components of the net periodic post-retirement benefit costs as follows:



                
CHF million 1% increase 1% decrease  1% increase 1% decrease 
Effect on total service and interest cost 4  (3) 5  (4)
Effect on the post-retirement benefit obligation 26  (21) 35  (27)

339349

Financial information
Notes to the consolidated financial statements

Note 30 Pension and other post-employment benefit plans (continued)

 

c) Defined contribution plans

 

UBS also sponsors a number of defined contribution plans in its foreigninternational locations. The locations with defined contribution plans of a materialsignificant nature are in the UK and the US. Certain plans permit employees to make contributions and earn matching

or other contributions from UBS. The em-

ployeremployer contributions to these plans recognized as expense for the years ended 31 December 2009,2010, 31 December 2008,2009, and 31 December 20072008 were CHF 246 million, CHF 312246 million, and CHF 285312 million, respectively.



d) Related party disclosure

 

UBS is the principal bank for the pension fund of UBS in Switzerland. In this function, UBS is engaged to execute most of the pension fund’s banking activities. These activities can include, but are not limited to, trading and securities lending and borrowing. All transactions have been executed at arm’s length conditions.

The foreigninternational UBS pension funds do not have a similar banking relationship with UBS, but they may hold and trade UBS shares and/or securities.
In 2008, UBS sold to its Swiss pension fund certain bank-occupied properties for proceeds of approximately CHF 186 million and recognized a gain of approximately CHF 97 million.to the Swiss pension fund. UBS and itsthe Swiss pension fund entered simultaneouslysi-

multaneously into lease-back arrangements for some of the properties with 25-year lease terms and two renewal options for ten years each. At 31 December 2008 the minimum commitment towards the Swiss pension fund under the related leases was approximately CHF 41 million.

During 2009, UBS renegotiated one of the lease contracts which reduced UBS’s remaining lease commitment. At
As of 31 December 20092010, the minimum commitment towards the Swiss pension fund under the related leases is approximately CHF 21 million (2009: CHF 27 million.million). The total rent paid by UBS under these leases(including the lease-back arrangements) amounted to CHF 511 million in 2009.2010, CHF 12 million in 2009, and CHF 7 million in 2008.
The following fees and interestamounts have been received or paid by UBS:



                       
Related party disclosureRelated party disclosureRelated party disclosure 
 For the year ended  For the year ended 
CHF million 31.12.09 31.12.08 31.12.07  31.12.10 31.12.09 31.12.08 
Received by UBS
  
Fees 34 44 58  21 34 44 
Paid by UBS
  
Rent 11 12 7 
Interest 2 1 2  3 2 1 
Dividends and capital repayments 0 4 38  0 0 4 

The transaction volumes in UBS shares and other UBS securities are as follows:

                       
Transaction volumes – related partiesTransaction volumes – related partiesTransaction volumes – related parties 
 For the year ended  For the year ended 
 31.12.09 31.12.08 31.12.07  31.12.10 31.12.09 31.12.08 
Financial instruments bought by pension funds
  
UBS AG shares (in thousands of shares) 3,869 6,925 1,728  2,684 3,869 6,925 
UBS financial instruments (nominal values in CHF million) 35 78 950  40 35 78 
Financial instruments sold by pension funds or matured
  
UBS AG shares (in thousands of shares) 4,116 1,881 1,930  4,735 4,116 1,881 
UBS financial instruments (nominal values in CHF million) 14 10 976  10 14 10 

UBS has also leased buildings from its pension funds. The rent paiddid not hold financial instruments issued by UBS under these leases amounted to CHF 12 million in 2009, CHF 7 million in 2008, and CHF 6 million in 2007.

There were no financial instruments due from UBS pension plans outstanding as of 31 December 2010, 31 December 2009 (2008: CHF 0 million; 2007: CHF 0 million). The amounts due to UBS

and 31 December 2008, respectively.

defined benefit pension plans are included in the additional detailsDetails to the fair value of plan assets.assets of the defined pension plans are disclosed in Note 30a. Furthermore, UBS defined

contribution planspension funds hold 17,259,20317,665,621 UBS shares with a market value of CHF 278272 million as of 31 December 2009 (2008:2010 (2009: 17,259,203 shares with a market value of CHF 278 million; 2008: 17,866,949 shares with a market value of CHF 272 million; 2007: 14,121,239 shares with a market value of CHF 736 million).



340350

Financial information

Note 31 Equity participation and other compensation plans

a) Plans offered

UBS has established several equity participation and other compensation plans to further align the interests of executives, managers and staff with the interests of shareholders. The plans are offered to eligible employees in approximately 50 countries and are designed to meet the complex legal, tax and regulatory requirements of each country in which they are offered. UBS’s compensation plans are mandatory, discretionary or voluntary. The explanations below provide a general description of the terms of the most significant plans offered, however specific plan rules may vary by country. Refer to Note 1a) 24) for a description of the accounting policy related to equity participation and other compensation plans.

Mandatory share-based compensation plans

Equity Ownership Plan (EOP): CertainSelected employees receive a portion of their annual performance-related compensation, which exceedsabove a certain threshold, in the form of an EOP award of UBS shares, notional UBS shares, UBS performance shares, or of alternative investment vehiclesAlternative Investment Vehicles (AIVs)1 instead of cash,, on a mandatory basis. The awards granted in UBS shares or notional UBS shares are settled by delivering UBS shares, except in countries where this is not permitted for legal reasons. Awards granted in the form of AIVs are settled in cash. The majority of EOP awards continue to be granted in UBS shares and notional UBS shares. EOP awards generally vest in one-third increments over a three-year vesting period. TheseThe awards are generally forfeitable upon voluntary termination of employment with UBS. Compensation expense for these awards is generally recognized over the shorter of the legal vesting period and the period from grant to the date the employee satisfies certain retirement eligibility requirements. Compensation expense is recognized in the performance year if the employee meets thesethe retirement eligibility requirements at the date of grant.
Otherwise, compensation expense is recognized from the grant date to the earliest of the vesting date or the retirement eligibility date of the employee, on a tiered basis for share-settled awards and on a straight-line basis for cash-settled awards. During 2009, UBS only granted EOP awards to certain employees for which it had a contractual commitment.
     During 2008, The awards granted in UBS grantedperformance shares are settled by delivering UBS shares but the vesting of these awards is subject to certain employees EOP awards withthe fulfillment of specific performance conditions. Deferred performance shares will only vest in full if the participant’s division is profitable (for Corporate Center participants, the Group as a nine-month vesting period.whole needs to be profitable). Compensation expense for these awards was fullyis recognized in 2007.in-line with the other EOP awards.
Senior Executive Equity Ownership Plan (SEEOP): Senior executivesGroup Executive Board (GEB) members receive a portion of their performance-related compensationmandatory deferral in UBS shares or notional UBS shares instead of cash, on a mandatory basis.shares. The awards granted in UBS shares or notional UBS shares are settled by delivering UBS shares. SEEOP awards generally vest in one-fifth increments over a five-year vesting period. These awardsperiod and are forfeitable if certain conditions are not met. Compensation expense for

1 Selected employees are granted a contingent right to receive a cash payment, the value of which is based on the value of underlying investment funds, rather than the value of UBS’s equity.

all SEEOP awards is recognized during the performance year, which is generally the period prior to the grant date.

During 2010 and 2009, UBS only granted SEEOP awards to certain employees for whichsenior executives to whom it had a contractual commitment. Since 2010, awards granted under SEEOP are settled by delivering UBS shares, but the

     During 2008, UBS granted

vesting of these awards is subject to certain employees SEEOP awards with a nine-month vesting period.the fulfillment of specific performance conditions. Compensation expense is recognized on the same basis as for theseother share-settled EOP awards.

Incentive Performance Plan (IPP): In 2010 GEB members and certain other senior employees received as part of their annual incentive in the form of restricted performance shares granted under the IPP. Each performance share is a contingent right to receive between one and three UBS shares at vesting for each performance share granted, depending on the achievement of share price targets. IPP awards cliff-vest after approximately five years and are subject to continued employment with UBS. Compensation expense is recognized on a tiered basis from the grant date to the earliest of the vesting date or the retirement eligibility date of the employee. IPP was fullya forward looking one-time plan granted in 2010 only.
Performance Equity Plan (PEP): In 2010 GEB members received as part of their annual incentive in the form of restricted performance shares. Each performance share is a contingent right to receive between zero and two UBS shares at vesting for each performance share granted, depending on the achievement of Economic Profit (EP) and Total Shareholder Return (TSR) targets. PEP awards cliff-vest after approximately three years. EP is a risk-adjusted profit measure that explicitly takes into account the cost of risk capital. TSR measures the total return to UBS shareholders (in form of share price appreciation and dividends) as compared to the constituents of a banking index. Vesting is subject to continued employment with UBS. Compensation expense is recognized in 2007.on a tiered basis from the grant date to the earliest of the vesting date or the retirement eligibility date of the employee.

Mandatory deferred cash compensation plans

Conditional Variable Compensation Plan (CVCP): CVCP was a one-time forward looking compensation plan under which awards were granted toIn 2009 certain employees onreceived as part of their mandatory deferral a mandatory basis in the second quartercash award that is subject to a performance condition. The award consists of 2009. Under this plan, UBS awarded a contingent right to receive cash payments at vesting subject to forfeiture provisions. TheseThe awards are generally forfeitable upon termination of employment with UBS and additionally require profitability and recapitalization performance hurdles to be met in order for the awards not to forfeit.met. The awards vest in one-third increments over a three-year vesting period. Compensation expense is recognized overon a straight-line basis from the shortergrant date to the earliest of the vesting period and the period from the service inception date toor the retirement eligibility date of the employee. No further grants will be made under this plan.CVCP was a one-time plan granted in 2009 only.
WMUS Partner Plus Plan: Wealth Management Americas sponsorsoperates a compulsorymandatory deferred cash compensation plan for selected eligible employees based in the US. Under this plan, UBS awards amountsAmounts are based on a predefined formula during the performance year. Participants are also allowed to voluntarily contribute additional amounts earned during the year into the plan up to a percentage of UBS’s contributions. The amounts awarded earn an above-market rate of interest during the initial four-year period and a market rate of interest thereafter. Partner Plus awards vest in 20% increments 6 to 10 years after the grant date. The UBS contributions and all interest earned are forfeitable in certain circumstances. Compensation expense is recognized over the shorter of the vesting period and the period from the performance year to the date that the employee is eligible to leave UBS and retain their award.
     Cash Balance Plan (CBP): This plan applies to members of the Group Executive Board and allows for a maximum payout of 60% of an executive’s variable cash incentive at the beginning of the following year (subject to an additional cash-cap). A minimum of 40% of an executive’s cash incentive awarded for 2009 is deferred and paid out during the two subsequent years subject to forfeiture, i.e. the entire cash incentive is paid out over a three-year period. The forfeiture provisions allow for unvested awards to be reduced (including to nil) in certain events including termination for



1 Selected employees are granted a contingent right to receive a cash payment, the value of which is based on the value of underlying investment funds or cash, rather than the value of UBS’s equity.

341351

Financial information
Notes to the consolidated financial statements

Note 31 Equity participation and other compensation plans (continued)

a) Plans offered (continued)

the initial four-year period and a market rate of interest thereafter. The awards vest in 20% increments six to ten years following grant date. Interest earned on UBS contributions is forfeitable under certain circumstances. Compensation expense is recognized on a straight-line basis from the grant date to the earliest of the vesting date or the retirement eligibility date of the employee.

WMUS advances related to recruited financial advisors: The Company has entered into various agreements with certain of its financial advisors whereby these financial advisors receive a compensatory advance in the form of an employee loan. These employee loans have been capitalized and are being expensed on a straight-line basis over the terms specified in each agreement.
Cash Balance Plan (CBP): In 2010 Group Executive Board (GEB) members received as part of their mandatory deferral a cash award that allows for a maximum payout of 60% of a GEB member’s variable cash incentive at the beginning of the following year, subject to a total cash awards limitation. A minimum of 40% of the GEB member’s cash incentive awarded is deferred and paid out during the two following years subject to “malus”, i.e. the entire cash incentive is paid out over a three-year period. The “malus” allows for unvested awards to be reduced (including to nil) in the event of termination for cause, certain financial losses behavior that contributes substantially to ain subsequent years, material restatement of the financial results or tostatements, harm to UBS’s reputation, breaches of legal or regulatory requirements or of risk/compliance policies, and a number of other events. Compensation expense is recognized in the performance year, which is generally the yearperiod prior to the grant date.

Discretionary share-based compensation plans

Key Employee Stock Appreciation Rights Plan (KESAP) and Key Employee Stock Option Plan (KESOP): KeyUntil 2009 key and high potential employees may bewere 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 is granted. In certain cases, an option or SAR may be granted at a higher strike price. A SAR gives employees the right to receive such number of UBS shares equal to the value of any appreciation in the market price of a UBS share between the grant date and the exercise date. One option gives the right to acquire one registered UBS share at the option’s strike price.
     KESAP and KESOP These awards are settled by delivering UBS shares, except in countries where this is not permitted for legal reasons. Options granted prior to 2008 generally vestvested in one-third increments over a three-year vesting period and generally expireexpired ten years from the grant date. SARs21 and options granted from 2008 onwards vestvested in full following a three-year vesting period and generally expireexpired ten years from the grant date. These awards are generally forfeitable upon termination of employment with UBS. Compensation expense is recognized overon a tiered basis from the shortergrant date to the earliest of the legal vesting period and the period from grant todate or the retirement

eligibility date of the employee.

No KESAP or KESOP awards were granted in 2010.
Senior Executive Stock Appreciation Rights Plan (SESAP) and Senior Executive Stock Option Plan (SESOP): Until 2008 senior executives may bewere granted discretionary SARs or UBS options with a strike price set at 110% of the fair market value of a UBS share on the date the SAR or option is granted. A SAR gives employeesan employee the right to receive such number of UBS shares equal to the value of any appreciation over 110% of the market price of a UBS share between grant date and the exercise date. One option gives the right to acquire one registered UBS share at the option’s strike price. SESAP and SESOP awards are settled by delivering UBS shares. These awards vest in full following a three-year vesting period and generally expire ten years from the grant date. These awards are forfeitable if certain conditions are not met. Compensation expense for all SESAP and SESOP awards is recognized dur-

2 The first grants made under KESAP were in 2009.

ingduring the performance year, which is generally the period prior to the grant date. During 2009, UBS only granted SESOP awards only to certain employees for which it had a contractual commitment. No SESOP awards were granted in 2010.

Voluntary share-based compensation plans

Equity Plus Plan (Equity Plus): This is a voluntary plan that gives eligible employees the opportunity to purchase UBS shares at fair market value and generally receive at no additional cost twoone free notional UBS optionsshare for each shareevery three shares purchased, up to a maximum annual limit. Share purchases can be made annually from bonus compensation and / or quarterly based on regular deductions from salary. Shares purchased under Equity Plus are restricted from sale for twoa maximum of three years from the time of purchase. Prior to 2010, each participant generally received at no additional cost two UBS options for each share purchased under this plan. The options havehad a strike price equal to the fair market value of a UBS share on the grant date, the option is granted,had a two-year vesting period and generally expireexpired ten years from the date of grant.grant date. The options are forfeitable in certain circumstances and are settled by delivering UBS shares, except in countries where this is not permitted for legal reasons. Compensation expense relatedfor the Equity Plus plans is recognized on a tiered basis from the grant date to the UBS options is recognized over the shorterearliest of the legal vesting period and the period from grant todate or the retirement eligibility date of the employee.
UBS satisfies share delivery obligations under its option-basedshare, option and SAR-based participationSAR plans either by purchasing UBS shares in the market or through the issuance of new shares. For UBS’s option-based plans, shares held in treasury or newly issued shares are delivered to the employee against receipt of the strike price at exercise. Under its SAR-based plans, UBS does not receive payment of a strike price at exercise but rather delivers to the employee shares held in treasury or newly issued shares equal to the difference between the market value of a UBS share at exercise and the strike price. As of 31 December 2009,2010, UBS was holding approximately 27.726 million shares in treasury and an additionalapproximately 150 million unissued shares in conditional share capital, which are available and can be used to satisfy awards of notional shares and performance shares and for future employee option and SAR exercises. The shares available cover all vested (i.e. exercisable) employee options, SARs and SARs.

Other plans

Executive Capital Accumulation Plan (ECAP): UBS sponsors a voluntary deferred compensation plan for selected eligible employees. Under this plan, participants are allowed to notionally invest a portion of their cash bonus in money market funds, UBS and non-UBS mutual funds and other UBS sponsored funds. No additional company match is granted, the awards are generally not forfeitable and are settled in cash. This plan does not result in compensation expense for UBS.notional shares.



1 The first grants made under KESAP were in 2009.

342352

Financial information

Note 31 Equity participation and other compensation plans (continued)

b) Effect on income statement

Mandatory, discretionaryEffect on income statement for the financial year and voluntary share-based
future periods

The following table summarizes the compensation plans
The total share-based compensation expense, including amounts for AIVs granted under EOP,expenses recognized for the years ended 31 December 2009, 31 December 20082010 and 31 December 2007 was CHF 913 million, negative CHF 94 million and CHF 3,173 million, respectively. For the years ended 31 December 2009, 31 December 2008 and 31 December 2007, the compensation expense recognized for share-based payments was primarily related to equity-settled plans. At 31 December 2009, total compensation expense related to non-vested mandatory, discretionary and voluntary share-based awards, including amounts for AIVs issued under EOP, granted in 2009 and previous yearsexpenses, which will be recognized as an expense in the income statement from 2010 and later is CHF 832 million. This amount is expected to be recognized in Personnel expenses over a weighted average period of 3.6 years.

     Paymentsincome statements 2011 and later. The deferred compensation expenses in the table also include non-vested awards granted in February and March 2011, which relate to participants of cash-settledthe compensation core cycle 2010.


                         
Personnel expenses – recognized and deferred1 
  Personnel expenses for the year ended 2010 Personnel expenses deferred to 2011 and later 
  Expenses  Expenses              
  relating to  relating to      Relating to  Relating to    
  awards for  awards for      awards  awards for    
CHF million 2010  prior years  Total  for 2010  prior years  Total 
 
Variable bonus awards
                        
 
Cash discretionary bonus  2,079   5   2,084   0   0   0 
 
Conditional Variable Compensation Plan (CVCP)  0   179   179   0   292   292 
 
Cash Balance and other cash plans  64   71   135   236   19   255 
 
Total deferred cash plans  64   250   314   236   311   547 
 
Equity Ownership Plan (EOP/SEEOP/Performance) – UBS shares  434   852   1,286   1,249   515   1,764 
 
Performance Equity Plan (PEP)  6   5   11   16   2   18 
 
Incentive Performance Plan (IPP)  0   131   131   6   221   227 
 
Total UBS share plans  440   988   1,428   1,271   738   2,009 
 
UBS share option plans (KESAP/KESOP)      145   145       114   114 
 
Equity Ownership Plan (EOP) – AIVs  28   83   111   67   57   124 
 
Total discretionary bonus
  2,611   1,471   4,082   1,574   1,220   2,794 
 
Variable compensation
                        
 
Variable compensation – other2
  399   (89)  310   337   20   357 
 
Financial advisor compensation – cash payments  1,813   0   1,813   0   0   0 
 
Compensation commitments and advances related to recruited financial advisors  29   570   599   388   2,186   2,574 
 
Partner Plus and other deferred cash plans  127   35   162   221   302   523 
 
UBS share plans  11   82   93   89   266   355 
 
Wealth Management Americas financial advisor compensation3
  1,980   687   2,667   698   2,754   3,452 
 
Total
  4,990   2,069   7,059   2,609   3,994   6,603 
 
1 Total share-based plans, including amounts for AIVs granted under EOP, for the years ended 31 December 2009, 31 December 2008 and 31 December 2007 were CHF 83 million, CHF 80 million and CHF 42 million, respectively. The total carrying amount of the liability related to these cash-settled plans amounted to CHF 206 million as of 31 December 2009.

Mandatory deferred cash compensation plans
The total deferred cash compensation expense, related to CBP and CVCP (as described in previous section),personnel expenses recognized for the year ended 31 December 2009 was2010 of CHF 631,843 million is comprised of UBS share plans of CHF 1,428 million, UBS share option plans of CHF 145 million, Equity Ownership Plan – AIVs of CHF 111 million, related social security costs of CHF 90 million and other variable compensation of CHF 69 million.   At 31 December 2009, total2 Includes replacement awards of CHF 107 million, forfeiture credits of CHF (167) million, guaranteed bonuses of CHF 135 million, severance payments of CHF 69 million and UBS’s Equity Plus Plan of CHF 80 million.   3 Financial advisor compensation expenseconsists 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 costs related to CVCP awardscompensation commitments and advances granted in 2009to financial advisors at the time of recruitment, which will be recognized as an expense in the income statement from 2010 and later is CHF 570 million. This amount is expected to be recognized in Personnel expenses over a weighted average period of 1.8 years.



c) UBS share awards

Movements in shares granted under the equity participation plans described in Note 31a) are as follows:

                         
  
      Weighted      Weighted      Weighted 
  Number of  average  Number of  average  Number of  average 
  shares  grant date  shares  grant date  shares  grant date 
  31.12.09  fair value CHF  31.12.08  fair value CHF  31.12.07  fair value CHF 
 
Forfeitable, at the beginning of the year  84,736,935   53   59,102,580   66   56,141,102   58 
 
Shares awarded during the year  39,067,130   12   90,895,594   32   30,271,820   70 
 
Distributions during the year  (31,293,824)  66   (60,105,109)  61   (25,031,819)  55 
 
Forfeited during the year  (5,621,615)  38   (5,156,131)  54   (2,278,523)  66 
 
Forfeitable, at the end of the year  86,888,626   31   84,736,935   53   59,102,580   66 
 
of which: shares vested for accounting purposes
  40,148,461       65,767,017       47,700,903     
 

UBS measures compensation expense based on the average market price of the UBS share on the grant date as quoted on the SIX Swiss Exchange less a discount for post-vesting sale and hedge restrictions and non-vesting conditions, in accordance with IFRS 2Share-based Payment: Vesting Conditions and Cancellations.The grant date fair value of notional UBS shares without dividend entitlements also includes a deduction for the present value of future expected dividends to be paid between grant date and distribution.

     The fair value of the share awards subject to post-vesting sale and hedge restrictions is discounted based upon the duration of the post-vesting restriction and is referenced to the cost of purchasing an at-the-money plain vanilla European put option for the term of the transfer restriction. Thevesting requirements.

weighted average discount for share awards granted in 2009 is approximately 31.7% of the market price of the UBS share. Discounts for non-vesting conditions are based on the probability that the non-vesting conditions will be achieved and the award will become exercisable. The fair value of share-based awards granted prior to 2008 was not discounted for post-vesting sale and hedge restrictions, as there was no distinction between vesting and non-vesting conditions until the IASB amended IFRS 2Share-based Payment: Vesting Conditions and Cancellations.The market value of shares legally vested was CHF 346 million, CHF 1,385 million, and CHF 1,737 million for the years ended 31 December 2009, 31 December 2008, and 31 December 2007, respectively.



343353

Financial information
Notes to the consolidated Financial informationfinancial statements

Note 31 Equity participation and other compensation plans (continued)

                         
Personnel expenses – recognized and deferred1 
  Personnel expenses for the year ended 2009 Personnel expenses deferred to 2010 and later 
  Expenses  Expenses              
  relating to  relating to      Relating to  Relating to    
  awards for  awards for      awards for  awards for    
CHF million 2009  prior years  Total  2009  prior years  Total 
 
Variable bonus awards
                        
 
Cash discretionary bonus  2,245   (169)  2,076   0   0   0 
 
Conditional Variable Compensation Plan (CVCP)  0   19   19   0   558   558 
 
Cash Balance and other cash plans  44   0   44   45   12   57 
 
Total deferred cash plans  44   19   63   45   570   615 
 
Equity Ownership Plan (EOP/SEEOP) – UBS shares  276   283   559   1,352   97   1,449 
 
Performance Equity Plan (PEP)  0   0   0   8   0   8 
 
Incentive Performance Plan (IPP)  0   0   0   467   0   467 
 
Total UBS share plans  276   283   559   1,827   97   1,924 
 
UBS share option plans (KESAP/KESOP)  33   23   56   34   286   320 
 
Equity Ownership Plan (EOP) – AIVs  34   21   55   134   13   147 
 
Total discretionary bonus
  2,632   177   2,809   2,040   966   3,006 
 
Variable compensation
                        
 
Variable compensation – other2
  816   14   830   61   27   88 
 
Financial advisor compensation – cash payments  1,712   0   1,712   0   0   0 
 
Compensation commitments and advances related to recruited financial advisors  127   471   598   1,198   1,744   2,942 
 
Partner Plus and other deferred cash plans  28   (7)  21   124   241   365 
 
UBS share plans  0   95   95   110   236   346 
 
Wealth Management Americas financial advisor compensation3
  1,867   559   2,426   1,432   2,221   3,653 
 
Total
  5,315   750   6,065   3,533   3,214   6,747 
 
1 Total share-based personnel expenses recognized for the year ended 31 December 2009 of CHF 913 million is comprised of UBS share plans of CHF 559 million, UBS share option plans of CHF 56 million, Equity Ownership Plan – AIVs of CHF 55 million, related social security costs of CHF 16 million and other variable compensation of CHF 227 million.   2 Includes replacement awards of CHF 41 million, forfeiture credits of CHF (81) million, guaranteed bonuses of CHF 56 million, severance payments of CHF 433 million and UBS’s Equity Plus Plan of CHF 132 million.   3 Financial advisor compensation consists of grid-based compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated based on financial advisor productivity, firm tenure and other variables. It also includes costs related to compensation commitments and advances granted to financial advisors at the time of recruitment, which are subject to vesting requirements.

Additional disclosures on mandatory, discretionary and voluntary share-based compensation plans (including AIVs granted under EOP)

The total share-based personnel expenses recognized for the years ended 31 December 2010, 2009 and 2008 were CHF 1,843 million, CHF 913 million and negative CHF 94 million, respectively. These expenses include social security costs, and current performance year awards for core cycle awards granted in the period following the performance year where the employee meets the retirement eligibility requirements at the date of grant.
The total compensation expenses for non-vested awards granted up to 31 December 2010 to be recognized in future

periods is CHF 1,382 million and will be recognized inPersonnel expensesover a weighted average period of 2.5 years. Deferred compensation amounts included in the table above differ from this amount as they include non-vested awards granted in February and March 2011 related to the compensation core cycle 2010.

Actual payments to participants of cash-settled share-based plans, including amounts granted as AIVs issued under EOP, for the years ended 31 December 2010, 2009 and 2008 were CHF 79 million, CHF 83 million and CHF 80 million, respectively. The total carrying amount of the liability related to unvested cash-settled share-based compensation plans was CHF 54 million at 31 December 2010.



354

Financial information

Note 31 Equity participation and other compensation plans (continued)

d) 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 
      Weighted      Weighted      Weighted 
  Number of  average grant  Number of  average grant  Number of  average grant 
  shares  date fair  shares  date fair  shares  date fair 
  2010  value CHF  2009  value CHF  2008  value CHF 
 
Outstanding, at the beginning of the year  86,888,626   31   84,736,935   53   59,102,580   66 
 
Shares awarded during the year  125,133,310   15   39,067,130   12   90,895,594   32 
 
Distributions during the year  (29,669,688)  42   (31,293,824)  66   (60,105,109)  61 
 
Forfeited during the year  (11,267,108)  21   (5,621,615)  38   (5,156,131)  54 
 
Outstanding, at the end of the year  171,085,140   18   86,888,626   31   84,736,935   53 
 
of which: shares vested for accounting purposes
  47,366,286       40,148,461       65,767,017     
 

The market value of shares that became legally vested during the years ended 31 December 2010, 2009, and 2008 was CHF 421 million, CHF 346 million, and CHF 1,385 million, respectively.

Movements in IPP units are as follows:

             
Incentive Performance Plan 
      Weighted average    
  Number of  fair value of IPP  Representative of 
  performance shares  performance shares  UBS shares 
  2010  at grant date CHF1  20102 
 
Forfeitable, at the beginning of the year  0   0   0 
 
Awarded during the year  19,629,916   22   19,629,916 
 
Distributions during the year  0   0   0 
 
Forfeited / cancelled during the year  (1,472,674)  22   (1,472,674)
 
Increase / decrease of UBS shares to be delivered upon vesting, based on conditions at the end of the year  N/A   N/A   0 
 
Forfeitable, at the end of the year  18,157,242   22   18,157,242 
 
of which: performance shares vested for accounting purposes
  4,073,546       4,073,546 
 
1 Valuations were carried out and take into account the relevant performance conditions, targets set, and the range of possible outcomes for these.   2 Based on conditions existing at the representative balance sheet date.

Movements in PEP units are as follows:

             
Performance Equity Plan 
      Weighted average    
  Number of  fair value of PEP  Representative of 
  performance shares  performance shares  UBS shares 
  2010  at grant date CHF1  20102 
 
Forfeitable, at the beginning of the year  0   0   0 
 
Awarded during the year  545,642   16   545,642 
 
Distributions during the year  0   0   0 
 
Forfeited during the year  (26,805)  16   (26,805)
 
Increase / decrease of UBS shares to be delivered upon vesting, based on conditions at the end of the year  N/A   N/A   (251,636)
 
Forfeitable, at the end of the year  518,837   16   267,201 
 
of which: performance shares vested for accounting purposes
  221,638       114,143 
 
1 Valuations were carried out and take into account the relevant performance conditions, targets set, and the range of possible outcomes for these.   2 Based on conditions existing at the representative balance sheet date.

355

Financial information
Notes to the consolidated financial statements

Note 31 Equity participation and other compensation plans (continued)

UBS option awards


Movements in options granted under the equity participation plans described in Note 31a) areoption awards were as follows:

                                                
 
UBS option awardsUBS option awards 
 Weighted          Weighted     
 Number of average Number of Weighted Number of Weighted  average Weighted Weighted 
 options exercise price options average exercise options average exercise  Number of exercise price Number of average exercise Number of average exercise 
 31.12.09 CHF2 31.12.081 price CHF1,2 31.12.071 price CHF1,2  options 2010 CHF2 options 2009 price CHF2 options 20081 price CHF1,2 
Outstanding, at the beginning of the year 236,055,545 47 198,213,092 52 188,393,473 47  228,623,886 43 236,055,545 47 198,213,092 52 
Granted during the year 22,525,624 13 62,973,879 30 48,094,483 67  0 0 22,525,624 13 62,973,879 30 
Exercised during the year  (48,241) 16  (3,673,657) 26  (34,331,511) 36   (40,894) 14  (48,241) 16  (3,673,657) 26 
Forfeited during the year  (7,245,512) 37  (6,732,080) 52  (3,650,942) 62   (5,814,986) 33  (7,245,512) 37  (6,732,080) 52 
Expired unexercised  (22,663,530) 48  (14,725,689) 46  (292,411) 58   (17,222,431) 54  (22,663,530) 48  (14,725,689) 46 
Outstanding, at the end of the year 228,623,886 43 236,055,545 47 198,213,092 52  205,545,575 42 228,623,886 43 236,055,545 47 
Exercisable, at the end of the year 137,797,186 51 124,054,442 46 96,396,428 39  155,302,104 48 137,797,186 51 124,054,442 46 
1 As a result of the rights offering in June 2008, UBS adjusted the number of options and exercise price for vested and unvested employee options, which were unexercised at the date of the rights offering. This was done to prevent any dilution impact to holders of these options. No additional compensation expense was recognized. This resulted in an increase to the number of options awarded in 2008 of 3,881,320 and an increase to the prior year outstanding balance of 2,400,143.   2 Some of the options in this table have exercise prices denominated in USD, which have been converted into CHF at the year-end spot exchange rate for the purposes of this table.

The weighted average share price at the time when the options were exercised during the year was CHF 18, CHF 34, and CHF 72 for the years ended 31 December 2009, 31 De-

cember 2008, and 31 December 2007, respectively. The following table provides additional information about option awards:



exercises, grants and intrinsic values:
                        
 31.12.09 31.12.08 31.12.07  31.12.10 31.12.09 31.12.08 
Weighted average share price of options exercised (CHF) 16 18 34 
Intrinsic value of options exercised during the year (CHF million) 0.2 29 1,046  0.06 0.20 29 
Weighted average grant date fair value of options granted (CHF) 6.00 7.53 10.43  N/A 6.00 7.53 

The following table summarizesprovides additional information about options outstanding and options exercisable atas of 31 December 2009:2010:

                                                            
 Options outstanding Options exercisable  Options outstanding Options exercisable 
 Weighted Weighted  Weighted Weighted 
 Weighted Aggregate average Weighted Aggregate average  Weighted Aggregate average Weighted Aggregate average 
 Number of average intrinsic value remaining Number of average intrinsic value remaining  Number of average intrinsic value remaining Number of average intrinsic value remaining 
 options exercise price (CHF/USD contractual options exercise price (CHF/USD contractual  options exercise price (CHF / USD contractual options exercise price (CHF / USD contractual 
Range of exercise price per share outstanding (CHF/USD) million) term (years) exercisable (CHF/USD) million) term (years) 
Range of exercise prices outstanding (CHF / USD) million) term (years) exercisable (CHF / USD) million) term (years) 
  
CHF awards
  
10.21–15.00 18,599,225 11.33 87.8 9.1 2,001 14.47 0.0 8.9  17,491,529 11.31 70.6 8.1 3,739,473 14.47 3.3 7.9 
15.01–25.00 11,560,852 18.70 1.8 9.3 93,767 20.07 0.0 8.7  10,805,461 18.72 0.0 8.3 3,480,569 22.45 0.0 7.7 
25.01–35.00 45,514,537 31.10 0.0 7.3 8,319,508 28.31 0.0 3.4  43,010,690 31.12 0.0 6.4 22,141,540 29.88 0.0 5.6 
35.01–15.00 25,831,524 39.04 0.0 5.0 16,931,901 40.58 0.0 3.3 
35.01–45.00 22,801,529 38.91 0.0 4.1 14,768,284 40.65 0.0 2.4 
45.01–55.00 21,961,024 49.34 0.0 5.4 21,539,533 49.26 0.0 5.3  19,987,650 49.37 0.0 4.4 19,801,910 49.33 0.0 4.4 
55.01–65.00 4,945,136 60.26 0.0 7.0 4,509,038 59.96 0.0 6.9  4,867,956 60.23 0.0 6.0 4,867,956 60.23 0.0 6.0 
65.01–75.00 67,395,232 67.89 0.0 6.7 53,616,749 67.27 0.0 6.6  57,874,089 67.71 0.0 5.7 57,872,067 67.71 0.0 5.7 
10.21–75.00
 195,807,530 44.98 89.6 6.9 105,012,497 55.83 0.0 5.6  176,838,904 44.25 70.6 5.9 126,671,799 51.97 3.3 5.2 
  
USD awards
  
4.61–15.00 15,632 13.53 0.0 0.3 15,632 13.53 0.0 0.3 
15.01–25.00 10,288,746 21.11 0.0 2.7 10,268,746 21.11 0.0 2.7 
15.51–25.00 10,429,351 20.19 0.0 1.8 10,409,351 20.19 0.0 1.8 
25.01–35.00 3,037,460 27.95 0.0 3.7 3,037,355 27.95 0.0 3.7  7,011,857 31.68 0.0 3.3 7,011,557 31.68 0.0 3.3 
35.01–45.00 16,052,302 38.12 0.0 4.8 16,040,740 38.12 0.0 4.8  11,256,014 38.61 0.0 4.1 11,200,872 38.62 0.0 4.2 
45.01–51.99 3,422,216 44.89 0.0 5.4 3,422,216 44.89 0.0 5.4 
45.01–46.91 9,449 46.81 0.0 4.6 8,525 46.91 0.0 5.1 
4.61–51.99
 32,816,356 32.54 0.0 4.1 32,784,689 32.54 0.0 4.1 
15.51–46.91
 28,706,671 30.23 0.0 3.1 28,630,305 30.22 0.0 3.1 

344356

Financial information

Note 31 Equity participation and other compensation plans (continued)

e) UBS SARSARs awards


Movements in SARs granted under the equity participation plans described in Note 31a) are as follows:

                
UBS SAR awardsUBS SAR awards 
         Weighted     
  Number average Number Weighted 
 Number of rights Weighted average  of SARs exercise of SARs average exercise 
 31.12.09 exercise price (CHF)  2010 price CHF 2009 price CHF 
Outstanding, at the beginning of the year 0 0  60,907,175 12 0 0 
Granted during the year 66,126,830 12  0 0 66,126,830 12 
Exercised during the year 0 0   (160,334) 12 0 0 
Forfeited during the year  (5,219,655) 11   (2,721,700) 11  (5,219,655) 11 
Expired unexercised 0 0   (10,100) 11 0 0 
Outstanding, at the end of the year 60,907,175 12  58,015,041 12 60,907,175 12 
Exercisable, at the end of the year 4,000,000 10  4,005,317 10 4,000,000 10 

The following table summarizesprovides additional information about SARs exercises, grants and intrinsic values:

         
  31.12.10  31.12.09 
 
Weighted average share price of SARs exercised (CHF)  15.8   N/A 
 
Intrinsic value of SARs exercised during the year (CHF million)  0.6   N/A 
 
Weighted average grant date fair value of SARs granted (CHF)  N/A   5.0 
 

The following table provides additional information about SARs outstanding atas of 31 December 2009.2010:

                                               
 SARs outstanding  SARs outstanding SARs exercisable 
 Weighted average  Weighted Weighted 
 Number of SARs Weighted average Aggregate remaining contractual  Weighted average Weighted average 
Range of exercise price per SAR outstanding exercise price (CHF) intrinsic value (CHF) term (years) 
 Number of average Aggregate remaining Number of average Aggregate remaining 
  SARs exercise intrinsic value contractual SARs exercise intrinsic value contractual 
CHF awards
 
Range of exercise prices outstanding price (CHF) (CHF million) term (years) exercisable price (CHF) (CHF million) term (years) 
 
CHF
 
9.35–12.50 59,273,505 11.26 283.9 8.8  56,450,205 11.26 231.2 7.8 4,000,000 10.10 21.0 3.2 
12.51–15.00 53,410 14.57 0.1 9.5  51,410 14.56 0.0 8.5 0 0.00 0.0 0.0 
15.01–17.50 268,330 16.47 0.0 9.5  217,496 16.52 0.0 8.4 5,317 16.80 0.0 8.4 
17.51–20.00 406,930 19.25 0.0 9.7  390,930 19.25 0.0 8.7 0 0.00 0.0 0.0 
37.51–40.00 905,000 40.00 0.0 9.2 
35.01–40.00 905,000 40.00 0.0 8.2 0 0.00 0.0 0.0 
9.35–40.00
 60,907,175 11.77 284.0 8.8  58,015,041 11.78 231.2 7.8 4,005,317 10.11 21.0 3.2 

345357

Financial information
Notes to the consolidated financial statements

Note 31 Equity participation and other compensation plans (continued)

f)d) Valuation

UBS share awards

UBS measures compensation expense based on the average market price of the UBS share on the grant date as quoted on the SIX Swiss Exchange less a discount for post-vesting sale and hedge restriction, in accordance with IFRS 2Share-based Payment: Vesting Conditions and Cancellations.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 plain vanilla European put option for the term of the transfer restriction. The weighted average discount for share and performance share awards granted during 2010 is approximately 20.6% 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 grant date and distribution.

UBS options and SARs (instruments) isawards

Since 2010, the fair values of options and SARs have been determined by means ofusing a Monte Carlo simulation. The simulation technique uses a mix of implied and historic volatility and specific employee exercise behavior patterns based on statistical data, taking into account the specific terms and conditions under which the instruments are granted, such as the vesting period, forced exercises during the lifetime, and gain- and time-dependent exercise behavior.standard closed-formula option valuation model. The expected term of each instrument is calculated asbased on historical employee exercise behavior patterns, taking into account the probability-share price, strike

weighted average

price, vesting period and the contractual life of the time between grantinstrument. Similar to 2009 and exercise. The2008, the term structure of volatility is derived from the implied volatilities of traded UBS options in combination with the observed long-term historichistorical share price volatility. Expected future dividends are derived from traded UBS options or from the historical dividend pattern. No options or SARs were granted in 2010.
     TheIn 2009 and 2008, the fair value of options and SARs was determined by means of a Monte Carlo simulation. The simulation technique used a mix of implied and historical volatility and specific employee exercise behaviour patterns based on statistical data, taking into account the specific terms and conditions under which the instrument was granted, such as the vesting period, forced exercises during the lifetime, and gain- and time-dependent exercise behaviour. The expected term of each instrument was calculated as the probability-weighted average period of the time between grant and exercise. The term structure of volatility was derived from the implied volatilities of traded UBS options in combination with the observed long-term historical share price volatility. Expected future dividends were derived from traded UBS options or from the historical dividend pattern. The fair values of options and SARs granted during 2009 and 2008 were determined using the following assumptions:


             
  31.12.09 
  CHF awards  range low  range high 
 
Expected volatility (%)  48.22   40.91   53.47 
 
Risk-free interest rate (%)  2.16   1.50   2.57 
 
Expected dividend (CHF)  0.27   0.00   0.29 
 
Strike price (CHF)  11.88   9.35   40.00 
 
Share price (CHF)  11.64   9.35   19.27 
 
             
  31.12.08 
  CHF awards  range low  range high 
 
Expected volatility (%)  33.86   30.00   49.32 
 
Risk-free interest rate (%)  2.83   1.74   3.27 
 
Expected dividend (CHF)  1.85   1.10   2.57 
 
Strike price (CHF)  30.11   14.47   46.02 
 
Share price (CHF)  28.05   14.47   43.61 
 

UBS performance share awards (IPP, PEP)

For performance share awards granted in 20092010, UBS obtained independent third party valuations based on the market conditions at the date of grant. The valuation methodology applied was a Monte Carlo simulation. The approach to determining in-

put parameters and valuing the post-vesting transfer restriction is in line with that used for options. The fair value of optionsIPP and PEP units granted in 2008 and 2007during 2010 was determined using the following assumptions:



             
  31.12.09 
  CHF awards  range low  range high 
 
Expected volatility (%)  48.22   40.91   53.47 
 
Risk-free interest rate (%)  2.16   1.50   2.57 
 
Expected dividend (CHF)  0.27   0.00   0.29 
 
Strike price (CHF)  11.88   9.35   40.00 
 
Share price (CHF)  11.64   9.35   19.27 
 
             
  31.12.08 
  CHF awards  range low  range high 
 
Expected volatility (%)  33.86   30.00   49.32 
 
Risk-free interest rate (%)  2.83   1.74   3.27 
 
Expected dividend (CHF)  1.85   1.10   2.57 
 
Strike price (CHF)  30.11   14.47   46.02 
 
Share price (CHF)  28.05   14.47   43.61 
 
             
  31.12.07 
  CHF awards  range low  range high 
 
Expected volatility (%)  23.86   22.51   29.23 
 
Risk-free interest rate (%)  2.58   2.46   3.27 
 
Expected dividend (CHF)  3.13   2.20   4.56 
 
Strike price (CHF)1
  71.31   55.48   78.80 
 
Share price (CHF)1
  70.25   55.48   78.80 
 
1 Not adjusted for stock dividend and rights offering in 2008.
         
  31.12.10 
  IPP CHF awards  PEP CHF awards 
 
Expected TSR volatility (%)  38.07   63.00 
 
Expected EP volatility (%)  N/A   57.00 
 
Risk-free interest rate (%)  1.06   0.60 
 
Expected dividend (CHF)  0.12   0.10 
 
Share price (CHF)  14.80   14.80 
 

346358

Financial information

Note 32 Related parties

The Group defines related parties as associated companies (entities which are controlled or significantly 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

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). This definition is based on the revised requirements of IAS 24Related Party Disclosuresissued in November 2009.



a) Remuneration of key management personnel

The non-independent members of the BoD have top management employment contracts and receive pension benefits upon retirement. Total remuneration of the non-inde-

pendentnon-independent members of the BoD and GEB including those who stepped down during 200920101is as follows:

             
Remuneration of key management personnel

 
CHF million 31.12.10  31.12.09  31.12.08 
 
Base salaries and other cash payments  16   16   12 
 
Incentive awards – cash 303  64   0 
 
Employer’s contributions to retirement benefit plans  1   2   2 
 
Benefits in kind, fringe benefits (at market value)  1   1   1 
 
Equity compensation benefits2
 484  29   0 
 
Total
  96   112   15 
 


             
CHF million 31.12.09  31.12.08  31.12.07 
 
Base salaries and other cash payments  16   12   14 
 
Incentive awards – cash  64   0   38 
 
Employer’s contributions to retirement benefit plans  2   2   2 
 
Benefits in kind, fringe benefits (at market value)  1   1   2 
 
Equity compensation benefits2
  29   0   22 
 
Total
  112   15   78 
 
1 During 2009, Marcel Rohner, Jerker Johansson, Raoul Weil, Walter H. Stürzinger, Rory Tapner, and Marten Hoekstra2010, Francesco Morra stepped down from the GEB.   The total rewards of approximately CHF 39 million are heavily influenced by contractual obligations.  2 Expense for shares and options granted is measured at grant date and allocated over the vesting period, generally 3 years for options and 5 years for shares.

Peter Kurer, former Chairman of the BoD, did not stand for reelection at the AGM on 15 April 2009,3 In 2010, incentive awards include immediate and retired from UBS as of April 2009. He received his base salary until the termination date of 30 April 2009. For ongoing advisory requirementsdeferred cash.   4 In 2010, equity compensation benefits include PEP, SEEOP and assistance in the handover to his successor, Peter Kurer received a flat salary of CHF 1,000,000. For 2009, as was the case for 2007 and 2008, he did not receive any discretionary incentive or fixed share awards. After assessing his tenure as Chairman and the specific organizational transition requirements, the Human Resources and Compensation Committee (HRCC) deemed it appropriate to approve a one-time contribution of CHF 3,332,000 into the UBS pension fund on his behalf to cover the deficit in his pension fund.

blocked shares.

     Marcel Rohner stepped down as Group CEO on 26 February 2009. In honoring the twelve-month notice period of his contract, he received his annual salary of CHF 1,500,000. For 2009, as also for 2008, he did not receive any discretionary incentive awards. After assessing his tenure as Group CEO and the specific organizational transition requirements, the HRCC deemed it appropriate to approve a one-time contribution of CHF 1,200,000 into the UBS pension fund on his behalf to cover the deficit in his pension fund.
The independent members of the BoD do not have 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 2010, CHF 6.4 million in 2009 and CHF 6.4 million in 2008 and CHF 5.7 million in 2007.

2008.



347

Financial information
Notes to the consolidated financial statements

Note 32 Related parties (continued)

b) Equity holdings

                   
b) Equity holdingsb) Equity holdings 
 31.12.09 31.12.08 31.12.07  31.12.10 31.12.09 31.12.08 
Number of stock options from equity participation plans held by non-independent members of the BoD
and the GEB1
 9,410,280 8,458,037 6,828,152  9,085,194 9,410,280 8,458,037 
Number of shares held by members of the BoD, GEB and parties closely linked to them 4,180,154 5,869,952 6,693,012  4,850,196 4,180,154 5,869,952 
1 Further information about UBS’s equityRefer to “Note 31 Equity participation plans can be foundand other compensation plans” in Note 31.this section for more information.

Of the share totals above, atas of 31 December 2010, 31 December 2009 and 31 December 2008, and 31 December 2007,5,597 shares, 0 shares 15,878 shares and 4,85215,878 shares respectively were held by close family members of key management personnel and 0 shares, 103,8410 shares and 2,200,000103,841 shares respectively were held by entities which are directly or indirectly controlled orcon-

trolled or jointly controlled by key management personnel or their close family members. Further information about UBS’s equityRefer to “Note 31 Equity participation plans can be foundand other compensation plans” in Note 31.this section for more information. No member of the BoD or GEB is the beneficial owner of more than 1% of the Group’s shares at 31 December 2009.2010.



359

Financial information
Notes to the consolidated financial statements

Note 32 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, based on terms and conditions granted to third parties adjusted for reducedre-

duced credit risk. Independent BoD

members are granted loans and mortgages at general market conditions.

Movements in the loan, advances and mortgage balances are as follows:



                
Loans, advances and mortgages to key management personnelLoans, advances and mortgages to key management personnel 
CHF million 31.12.09 31.12.08  31.12.10 31.12.09 
Balance at the beginning of the year 11 15  18 11 
Additions 12 8  8 12 
Reductions  (5)  (12)  (4)  (5)
Balance at the end of the year 18 11  22 18 

No unsecured loans were granted to key management personnel as of 31 December 20092010 and 31 December 2008.2009.

d) Associated companies

         
CHF million 31.12.09  31.12.08 
 
Balance at the beginning of the year  301   220 
 
Additions  295   171 
 
Reductions  (222)  (77)
 
Credit loss (expense)/recovery  (1)  0 
 
Foreign currency translation  0   (13)
 
Balance at the end of the year  373   301 
 
of which: unsecured loans
  42   82 
 
of which: allowances for credit losses
  1   3 
 

All loans to associated companies are transacted at arm’s length.

348

length:
         
CHF million 31.12.10  31.12.09 
 
Balance at the beginning of the year  373   301 
 
Additions  2   295 
 
Reductions  (118)  (222)
 
Credit loss (expense) / recovery  0   (1)
 
Foreign currency translation  2   0 
 
Balance at the end of the year  259   373 
 
of which: unsecured loans
  39   42 
 
of which: allowances for credit losses
  1   1 
 

Financial information

Note 32 Related parties (continued)

d) Associated companies (continued)

Other transactions with associated companies transacted at arm’s length are as follows:length:

                       
 As of or for the year ended  As of or for the year ended 
CHF million 31.12.09 31.12.08 31.12.07  31.12.10 31.12.09 31.12.08 
Payments to associates for goods and services received 130 90 87  139 130 90 
Fees received for services provided to associates 2 6 20  1 2 6 
Commitments and contingent liabilities to associates 156 40 33  68 156 40 

Note 34 provides a list of significant associates.

360

Financial information

Note 32 Related parties (continued)

e) Other related party transactions

During 20082010 and 2007,2008, UBS entered into transactions at arm’s length with entities which are directly or indirectly controlled or jointly controlled by UBS’s key management personnel or their close family members. In 2010, UBS provided services for H21 Macro Fund Ltd (Cayman Islands). In 2009, UBS did not enter into any such transactions. The 2008transactions and 2007 numbers included into the table below have been restated to reflect the revised guidance in IAS 24Related Party Disclosures.Refer to Note 1b for details.

     In 2008, these entities included: Aebi +

Co. AG (Switzerland), Kedge Capital Selected Funds Ltd. (Jersey), Löwenfeld AG (Switzerland), Martown Trading Ltd. (Isle of Man), Omega Fund I Ltd (Jersey), Omega Fund IV Ltd (Jersey), Stadler Rail Group (Switzerland), Team Alinghi (Switzerland) and Team Alinghi (Spain).



Movements in loans to other related parties are as follows:


                        
Other related party transactionsOther related party transactions 
CHF million 31.12.09 31.12.08 31.12.07  31.12.10 31.12.09 31.12.08 
Balance at the beginning of the year 6 158 539  0 6 158 
Additions 0 0 77  0 0 0 
Reductions  (6)  (152)  (458) 0  (6)  (152)
Balance at the end of the year1
 0 6 158  0 0 6 
1 In 2009 includes loans, guarantees and contingent liabilities of CHF 0 million and unused committed facilities of CHF 0 million but excludes unused uncommitted working capital facilities and unused guarantees of CHF 0 million. In 2008 includes loans, guarantees and contingent liabilities of CHF 6 million and unused committed facilities of CHF 0 million but excludes unused uncommitted working capital facilities and unused guarantees of CHF 320 million. In 2007 includes loans, guarantees and contingent liabilities of CHF 158 million and unused committed facilities of CHF 0 million but excludes unused uncommitted working capital facilities and unused guarantees of CHF 57 million.

Other transactions with these related parties include:

                        
CHF million 31.12.09 31.12.08 31.12.07  31.12.10 31.12.09 31.12.08 
Goods sold and services provided to UBS 0 1 8  0 0 1 
Fees received for services provided by UBS 0 11 6  1 0 11 

As part of its sponsorship of Team Alinghi, UBS paid CHF 828,090 (EUR 538,000) in basic sponsoring fees for 2008.

Team Alinghi’s controlling shareholder is UBS former Board member Ernesto Bertarelli.



f) Additional information

UBS also engages in trading and risk management activities (e.g. swaps, options and forwards) with various related parties mentioned in previous sections. These transactions may give rise to credit risk either for UBS or for a related party towards

UBS. As

part of its normal course of business, UBS is also a market maker in equity and debt instruments and at times may hold positions in instruments of related parties.



349361

Financial information
Notes to the consolidated financial statements

Note 33 Events after the reporting period

In January 2010, UBS closedSubsequent to the sale of its investments in several associated entities owning office space in New York. A significant portionpublication of the office space is leasedunaudited fourth quarter 2010 financial report on 8 February 2011, management decided to adjust the annual financial statements 2010. The net impact of these adjustments on net profit attributable to UBS shareholders was a gain of CHF 373 million, which increased basic and diluted earnings per share by CHF 0.10.

The principal change relates to an adjustment of the investment carrying amount of a subsidiary held by UBS Group until 2018.AG for purposes of the Parent Bank’s 2010 statutory financial statements prepared pursuant to Swiss Federal banking law. The sales price is USD 180adjustment, a reduction in the subsidiary carrying amount of CHF 1,609 million, with a resulting gain on saledecreases the level of approximately USD 173 million, which will be recognizedSwiss taxable profit reported for the year 2010. The adjustment resulted in 2010.
There have been no further material events afteran increase in the re-deferred tax benefit for the year reflected in the Income statement of CHF 298 million.

porting period which would require disclosure or adjustment

In addition, other adjustments made to the 31 December 2009 Financial Statements.Income statement that forms part of the audited annual financial statements 2010 include a refinement in the 2010 variable compensation accrual at year-end of CHF 74 million (credit to the Income statement) across the business divisions, a litigation matter resulting in a CHF 40 million charge affecting Wealth Management, a credit valuation adjustment gain of CHF 19 million affecting the Investment Bank, and a tax benefit of CHF 22 million to the Income statement in relation to these other items.
On 43 March 2010,2011, the Board of Directors reviewed the financial statements and authorized them for issue. These financial statements will be submitted to the Annual General Meeting of Shareholdersshareholders on 1428 April 20102011 for approval.



Note 34 Significant subsidiaries and associates

The legal entity group structure of UBS is designed to support the Group’s businesses within an efficient legal, tax, regulatory and funding framework. Neither the business divisions of UBS (namely Investment Bank, Wealth Management Americas, Wealth Management & Swiss Bank and Global Asset Management) nor the Corporate Center are replicated in their own individual legal entities, but rather they generally operate out of UBS AG (Parent Bank) through its Swiss and foreign branches.

The Parent Bankparent bank structure allows UBS to capitalize on the advantages offered by the use of one legal platform forby all the businessbusi-

ness divisions. It provides for the most cost efficient and flexible structure and facilitates efficient allocation and use of capital, comprehensive risk management and control and straightforward funding processes.
Where, usually due to local legal, tax or regulatory rules or due to additional legal entities joining the UBS Group via acquisition, it is either not possible or not efficient to operate out of the Parent Bank,parent bank, then local subsidiary companies host the businesses. The significant operating subsidiary companies in the Group are listed below:


                     
Significant subsidiaries 
              Share capital in  Equity interest 
Company Jurisdiction of incorporation  Business division1      millions  accumulated in % 
 
Caisse Centrale de Réescompte Paris, France  Global AM  EUR   5.0   100.0 
 
CCR Asset Management S.A. Paris, France  Global AM  EUR   4.8   100.0 
 
FondcenterAG Zurich, Switzerland  Global AM  CHF   0.1   100.0 
 
OOO UBS Bank Moscow, Russia  IB  RUB   1,250.0   100.0 
 
PT UBS Securities Indonesia Jakarta, Indonesia  IB  IDR   118,000.0   98.6 
 
Topcard Service AG Glattbrugg, Switzerland  WM&SB  CHF   0.2   100.0 
 
UBS (Bahamas) Ltd. Nassau, Bahamas  WM&SB  USD   4.0   100.0 
 
UBS (France) S.A. Paris, France  WM&SB  EUR   125.7   100.0 
 
UBS (Grand Cayman) Limited George Town, Cayman Islands  IB  USD   25.0   100.0 
 
UBS (Italia) S.p.A. Milan, Italy  WM&SB  EUR   60.0   100.0 
 
UBS (Luxembourg) S.A. Luxembourg, Luxembourg  WM&SB  CHF   150.0   100.0 
 
UBS (Luxembourg) SA Austria Branch Vienna, Austria  WM&SB  CHF   0.0   100.0 
 
UBS (Monaco) S.A. Monte Carlo, Monaco  WM&SB  EUR   9.2   100.0 
 
UBS Alternative and Quantitative Investments Limited London, Great Britain  Global AM  GBP   0.3   100.0 
 
UBS Alternative and Quantitative Investments LLC Delaware, USA  Global AM  USD   0.1   100.0 
 
UBS Americas Inc Delaware, USA  IB  USD   0.0   100.0 
 
UBS Asesores SA Panama, Panama  WM&SB  USD   0.0   100.0 
 
UBS Bank (Canada) Toronto, Canada  WMA  CAD   8.5   100.0 
 
UBS Bank Mexico, S.A. Institucion de Banca Multiple,
UBS Grupo Financiero		 Mexico City, Mexico  IB  MXN   706.4   100.0 
 
UBS Bank USA Utah, USA  WMA  USD   1,880.02  100.0 
 
UBS Bank, S.A. Madrid, Spain  WM&SB  EUR   82.2   100.0 
 
UBS Belgium SA/NV Brussels, Belgium  WM&SB  EUR   23.0   100.0 
 
UBS Capital Securities (Jersey) Limited St. Helier, Jersey  CC  EUR   0.0   100.0 
 
Significant subsidiaries
               
        Share capital  Equity interest 
Company Jurisdiction of incorporation Business division1   in millions  accumulated in % 
 
CCR Asset Management S.A. Paris, France Global AM EUR  5.3   100.0 
 
Ellington Co., Ltd. Tokyo, Japan IB JPY  10.0   100.0 
 
Fondcenter AG Zurich, Switzerland Global AM CHF  0.1   100.0 
 
OOO UBS Bank Moscow, Russia IB RUB  1,250.0   100.0 
 
PT UBS Securities Indonesia Jakarta, Indonesia IB IDR  118,000.0   98.6 
 
Topcard Service AG Glattbrugg, Switzerland WM&SB CHF  0.2   100.0 
 
UBS (Bahamas) Ltd. Nassau, Bahamas WM&SB USD  4.0   100.0 
 
UBS (France) S.A. Paris, France WM&SB EUR  125.7   100.0 
 
UBS (Grand Cayman) Limited George Town, Cayman Islands IB USD  25.0   100.0 
 
UBS (Italia) S.p.A. Milan, Italy WM&SB EUR  60.0   100.0 
 
UBS (Luxembourg) S.A. Luxembourg, Luxembourg WM&SB CHF  150.0   100.0 
 
UBS (Luxembourg) SA Austria Branch Vienna, Austria WM&SB CHF  0.0   100.0 
 
UBS (Monaco) S.A. Monte Carlo, Monaco WM&SB EUR  9.2   100.0 
 
UBS Alternative and Quantitative Investments Limited London, Great Britain Global AM GBP  0.3   100.0 
 
UBS Alternative and Quantitative Investments LLC Delaware, USA Global AM USD  0.1   100.0 
 
UBS Americas Inc Delaware, USA IB USD  0.0   100.0 
 
1 WMA: Wealth Management Americas,Americas; WM&SB: Wealth Management & Swiss Bank,Bank; Global AM: Global Asset Management,Management; IB: Investment Bank,Bank; CC: Corporate Center.2 Share capital and share premium.

350362

Financial information

Note 34 Significant subsidiaries and associates (continued)

                               
Significant subsidiaries (continued)Significant subsidiaries (continued) Significant subsidiaries (continued) 
 Share capital in Equity interest  Share capital Equity interest 
Company Jurisdiction of incorporation Business division1 millions accumulated in %  Jurisdiction of incorporation Business division1 in millions accumulated in % 
UBS Asesores SA Panama, Panama WM&SB USD 0.0 100.0 
UBS Bank (Canada) Toronto, Canada WMA CAD 8.5 100.0 
UBS Bank (Netherlands) B.V. Amsterdam, the Netherlands WM&SB EUR 0.2 100.0 
UBS Bank Mexico, S.A. Institucion de Banca Multiple, UBS Grupo Financiero Mexico City, Mexico IB MXN 706.4 100.0 
UBS Bank USA Utah, USA WMA USD  1,880.02 100.0 
UBS Bank, S.A. Madrid, Spain WM&SB EUR 82.2 100.0 
UBS Belgium SA/NV Brussels, Belgium WM&SB EUR 28.0 100.0 
UBS Brasil Administradora de Valores Mobiliarios Ltda São Paulo, Brazil WM&SB BRL 0.0 100.0 
UBS Capital Securities (Jersey) Limited St. Helier, Jersey CC EUR 0.0 100.0 
UBS Card Center AG Glattbrugg, Switzerland WM&SB CHF 0.1 100.0  Glattbrugg, Switzerland WM&SB CHF 0.1 100.0 
UBS Casa de Bolsa, S.A. de C.V. Mexico City, Mexico IB MXN 114.9 100.0  Mexico City, Mexico IB MXN 114.9 100.0 
UBS Convertible Securities (Jersey) Limited St. Helier, Jersey CC CHF 50.0 100.0 
UBS Custody Services Singapore Pte. Ltd. Singapore, Singapore WM&SB SGD 5.5 100.0  Singapore, Singapore WM&SB SGD 5.5 100.0 
UBS Derivatives Hong Kong Limited Hong Kong, China IB HKD 880.0 100.0  Hong Kong, China IB HKD 880.0 100.0 
UBS Deutschland AG Frankfurt am Main, Germany WM&SB EUR 176.0 100.0  Frankfurt am Main, Germany WM&SB EUR 176.0 100.0 
UBS Fiduciaria S.p.A. Milan, Italy WM&SB EUR 0.2 100.0  Milan, Italy WM&SB EUR 0.2 100.0 
UBS Finance (Curação) N.V. Willemstad, Netherlands Antilles CC USD 0.1 100.0  Willemstad, Netherlands Antilles CC USD 0.1 100.0 
UBS Finance (Delaware) LLC Delaware, USA IB USD  37.32 100.0  Delaware, USA IB USD  37.32 100.0 
UBS Financial Services Inc. Delaware, USA WMA USD  3,505.82 100.0  Delaware, USA WMA USD  3,875.02 100.0 
UBS Financial Services Incorporated of Puerto Rico Hato Rey, Puerto Rico WMA USD  31.02 100.0  Hato Rey, Puerto Rico WMA USD  31.02 100.0 
UBS Fund Advisor, L.L.C. Delaware, USA WMA USD  0.02 100.0  Delaware, USA WMA USD  0.02 100.0 
UBS Fund Holding (Luxembourg) S.A. Luxembourg, Luxembourg Global AM CHF 42.0 100.0 
UBS Fund Holding (Switzerland) AG Basel, Switzerland Global AM CHF 18.0 100.0 
UBS Fund Management (Luxembourg) SA Luxembourg, Luxembourg Global AM EUR 10.0 100.0 
UBS Fund Management (Switzerland) AG Basel, Switzerland Global AM CHF 1.0 100.0  Basel, Switzerland Global AM CHF 1.0 100.0 
UBS Fund Services (Cayman) Ltd George Town, Cayman Islands Global AM USD 5.6 100.0  George Town, Cayman Islands Global AM USD 5.6 100.0 
UBS Fund Services (Ireland) Limited Dublin, Ireland Global AM EUR 1.3 100.0  Dublin, Ireland Global AM EUR 1.3 100.0 
UBS Fund Services (Luxembourg) S.A. Luxembourg, Luxembourg Global AM CHF 2.5 100.0  Luxembourg, Luxembourg Global AM CHF 2.5 100.0 
UBS Fund Services (Luxembourg) S.A. Poland Branch Zabierzow, Poland CC PLN 0.1 100.0  Zabierzow, Poland CC PLN 0.1 100.0 
UBS Futures Singapore Ltd. Singapore, Singapore IB USD  39.82 100.0  Singapore, Singapore IB USD  39.82 100.0 
UBS Global Asset Management (Americas) Inc Delaware, USA Global AM USD 0.0 100.0  Delaware, USA Global AM USD 0.0 100.0 
UBS Global Asset Management (Australia) Ltd Sydney, Australia Global AM AUD 8.0 100.0  Sydney, Australia Global AM AUD 8.0 100.0 
UBS Global Asset Management (Canada) Co Toronto, Canada Global AM CAD  117.02 100.0  Toronto, Canada Global AM CAD  117.02 100.0 
UBS Global Asset Management (Deutschland) GmbH Frankfurt am Main, Germany Global AM EUR 7.7 100.0  Frankfurt am Main, Germany Global AM EUR 7.7 100.0 
UBS Global Asset Management (Hong Kong) Limited Hong Kong, China Global AM HKD 25.0 100.0  Hong Kong, China Global AM HKD 25.0 100.0 
UBS Global Asset Management (Italia) SGR SpA Milan, Italy Global AM EUR 5.1 100.0  Milan, Italy Global AM EUR 5.1 100.0 
UBS Global Asset Management (Japan) Ltd Tokyo, Japan Global AM JPY 2,200.0 100.0  Tokyo, Japan Global AM JPY 2,200.0 100.0 
UBS Global Asset Management (Singapore) Ltd Singapore, Singapore Global AM SGD 4.0 100.0  Singapore, Singapore Global AM SGD 4.0 100.0 
UBS Global Asset Management (Taiwan) Ltd Taipei, Taiwan Global AM TWD 340.0 100.0  Taipei, Taiwan Global AM TWD 340.0 100.0 
UBS Global Asset Management (UK) Ltd London, Great Britain Global AM GBP 93.0 100.0  London, Great Britain Global AM GBP 125.0 100.0 
UBS Global Asset Management (US) Inc Delaware, USA Global AM USD  17.22 100.0  Delaware, USA Global AM USD  17.22 100.0 
UBS Global Asset Management Funds Ltd London, Great Britain Global AM GBP 26.0 100.0  London, Great Britain Global AM GBP 26.0 100.0 
UBS Global Asset Management Holding Ltd London, Great Britain Global AM GBP 109.4 100.0  London, Great Britain Global AM GBP 151.4 100.0 
UBS Global Asset Management Life Ltd London, Great Britain Global AM GBP 5.0 100.0  London, Great Britain Global AM GBP 15.0 100.0 
UBS Global Life AG Vaduz, Liechtenstein WM&SB CHF 5.0 100.0  Vaduz, Liechtenstein WM&SB CHF 5.0 100.0 
UBS Global Trust Corporation St. John, Canada WM&SB CAD 0.1 100.0  St. John, Canada WM&SB CAD 0.1 100.0 
UBS Hana Asset Management Company Ltd Seoul, South Korea Global AM KRW 45,000.0 51.0  Seoul, South Korea Global AM KRW 45,000.0 51.0 
UBS Hypotheken AG Zurich, Switzerland WM&SB CHF 0.1 98.0  Zurich, Switzerland WM&SB CHF 0.1 98.0 
UBS International Holdings B.V. Amsterdam, the Netherlands CC EUR 6.8 100.0  Amsterdam, the Netherlands CC EUR 6.8 100.0 
UBS International Hong Kong Limited Hong Kong, China WMA USD 1.7 100.0 
UBS International Life Limited Dublin, Ireland WM&SB EUR 1.0 100.0  Dublin, Ireland WM&SB EUR 1.0 100.0 
UBS Investment Management Canada Inc. Toronto, Canada WMA CAD 0.0 100.0 
UBS Investments Philippines, Inc. Makati City, Philippines IB PHP 360.0 99.4 
UBS Italia SIM SpA Milan, Italy IB EUR 15.1 100.0 
UBS Leasing AG Zurich, Switzerland WM&SB CHF 10.0 100.0 
UBS Life AG Zurich, Switzerland WM&SB CHF 25.0 100.0 
UBS Life Insurance Company USA California, USA WMA USD  39.32 100.0 
UBS Limited London, Great Britain IB GBP 63.3 100.0 
UBS Loan Finance LLC Delaware, USA IB USD  16.72 100.0 
UBS Menkul Degerler AS Istanbul, Turkey IB TRY 30.0 100.0 
1 WMA: Wealth Management Americas,Americas; WM&SB: Wealth Management & Swiss Bank,Bank; Global AM: Global Asset Management,Management; IB: Investment Bank,Bank; CC: Corporate Center.  2 Share capital and share premium.

351363

Financial information
Notes to the consolidated financial statements

Note 34 Significant subsidiaries and associates (continued)

                                    
Significant subsidiaries (continued)Significant subsidiaries (continued) Significant subsidiaries (continued) 
 Share capital in Equity interest  Share capital Equity interest 
Company Jurisdiction of incorporation Business division1 millions accumulated in %  Jurisdiction of incorporation Business division1 in millions accumulated in % 
UBS Investment Management Canada Inc. Toronto, Canada WMA CAD 0.0 100.0 
UBS Investments Philippines, Inc. Makati City, Philippines IB PHP 360.0 99.4 
UBS Italia SIM SpA Milan, Italy IB EUR 15.1 100.0 
UBS Leasing AG Zurich, Switzerland WM&SB CHF 10.0 100.0 
UBS Life AG Zurich, Switzerland WM&SB CHF 25.0 100.0 
UBS Life Insurance Company USA California, USA WMA USD  39.32 100.0 
UBS Limited London, Great Britain IB GBP 153.7 100.0 
UBS Loan Finance LLC Delaware, USA IB USD  16.72 100.0 
UBS Menkul Degerler AS Istanbul, Turkey IB TRY 30.0 100.0 
UBS New Zealand Limited Auckland, New Zealand IB NZD 7.5 100.0  Auckland, New Zealand IB NZD 7.5 100.0 
UBS O’Connor Limited London, Great Britain Global AM GBP 8.8 100.0  London, Great Britain Global AM GBP 8.8 100.0 
UBS O’Connor LLC Delaware, USA Global AM USD 1.0 100.0  Delaware, USA Global AM USD 1.0 100.0 
UBS Preferred Funding (Jersey) Limited St. Helier, Jersey CC EUR 0.0 100.0  St. Helier, Jersey CC EUR 0.0 100.0 
UBS Preferred Funding Company LLC I Delaware, USA CC USD 0.0 100.0 
UBS Preferred Funding Company LLC II Delaware, USA CC USD 0.0 100.0  Delaware, USA CC USD 0.0 100.0 
UBS Preferred Funding Company LLC IV Delaware, USA CC USD 0.0 100.0  Delaware, USA CC USD 0.0 100.0 
UBS Preferred Funding Company LLC V Delaware, USA CC USD 0.0 100.0  Delaware, USA CC USD 0.0 100.0 
UBS Real Estate Kapitalanlagegesellschaft mbH Munich, Germany Global AM EUR 7.5 51.0  Munich, Germany Global AM EUR 7.5 94.9 
UBS Real Estate Securities Inc Delaware, USA IB USD 1,300.4 100.0  Delaware, USA IB USD  1,300.42 100.0 
UBS Realty Investors LLC Massachusetts, USA Global AM USD 9.3 100.0  Massachusetts, USA Global AM USD 9.3 100.0 
UBS Saudi Arabia Riyadh, Saudi Arabia IB SAR 110.0 73.0 
UBS Sauerborn Private Equity Komplementär GmbH Bad Homburg, Germany WM&SB EUR 0.0 100.0  Bad Homburg, Germany WM&SB EUR 0.0 100.0 
UBS Securities (Thailand) Ltd Bangkok, Thailand IB THB 400.0 100.0  Bangkok, Thailand IB THB 400.0 100.0 
UBS Securities Asia Limited Hong Kong, China IB HKD 20.0 100.0  Hong Kong, China IB HKD 20.0 100.0 
UBS Securities Australia Ltd Sydney, Australia IB AUD  209.82 100.0  Sydney, Australia IB AUD  209.82 100.0 
UBS Securities Canada Inc Toronto, Canada IB CAD 10.0 100.0  Toronto, Canada IB CAD 10.0 100.0 
UBS Securities España Sociedad de Valores SA Madrid, Spain IB EUR 15.0 100.0  Madrid, Spain IB EUR 15.0 100.0 
UBS Securities France S.A. Paris, France IB EUR 22.9 100.0  Paris, France IB EUR 22.9 100.0 
UBS Securities Hong Kong Limited Hong Kong, China IB HKD 430.0 100.0  Hong Kong, China IB HKD 430.0 100.0 
UBS Securities India Private Limited Mumbai, India IB INR 140.0 100.0  Mumbai, India IB INR 140.0 100.0 
UBS Securities International Limited London, Great Britain IB GBP 18.0 100.0  London, Great Britain IB GBP 18.0 100.0 
UBS Securities Israel Limited Herzliya Pituach, Israel IB ILS 0.0 100.0 
UBS Securities Japan Ltd George Town, Cayman Islands IB JPY 60,000.0 100.0  George Town, Cayman Islands IB JPY 60,000.0 100.0 
UBS Securities LLC Delaware, USA IB USD  22.205.62 100.0  Delaware, USA IB USD  22,205.62 100.0 
UBS Securities Malaysia Sdn. Bhd. Kuala Lumpur, Malaysia IB MYR 80.0 100.0  Kuala Lumpur, Malaysia IB MYR 80.0 100.0 
UBS Securities Philippines Inc Makati City, Philippines IB PHP 190.0 100.0  Makati City, Philippines IB PHP 190.0 100.0 
UBS Securities Pte. Ltd. Singapore, Singapore IB SGD 311.5 100.0  Singapore, Singapore IB SGD 311.5 100.0 
UBS Securities Pte. Ltd. Seoul Branch Seoul, South Korea IB KRW 150,000.0 100.0  Seoul, South Korea IB KRW 150,000.0 100.0 
UBS Service Centre (Poland) Sp. z o.o. Krakow, Poland CC PLN 0.1 100.0  Krakow, Poland CC PLN 1.4 100.0 
UBS South Africa (Proprietary) Limited Sandton, South Africa IB ZAR 0.0 100.0  Sandton, South Africa IB ZAR 0.0 100.0 
UBS Swiss Financial Advisers AG Zurich, Switzerland WM&SB CHF 1.5 100.0  Zurich, Switzerland WM&SB CHF 1.5 100.0 
UBS Trust Company National Association New York, USA WMA USD  105.02 100.0  New York, USA WMA USD  55.02 100.0 
UBS Trustees (Bahamas) Ltd Nassau, Bahamas WM&SB USD 2.0 100.0  Nassau, Bahamas WM&SB USD 2.0 100.0 
UBS Trustees (Cayman) Ltd George Town, Cayman Islands WM&SB USD 2.0 100.0  George Town, Cayman Islands WM&SB USD 2.0 100.0 
UBS Trustees (Jersey) Ltd. St. Helier, Jersey WM&SB GBP 0.0 100.0  St. Helier, Jersey WM&SB GBP 0.0 100.0 
UBS Trustees (Singapore) Ltd Singapore, Singapore WM&SB SGD 3.3 100.0  Singapore, Singapore WM&SB SGD 3.3 100.0 
UBS UK Properties Limited London, Great Britain IB GBP 132.0 100.0  London, Great Britain IB GBP 132.0 100.0 
UBS Wealth Management (UK) Ltd London, Great Britain WM&SB GBP 2.5 100.0  London, Great Britain WM&SB GBP 2.5 100.0 
UBS Wealth Management Australia Ltd Melbourne, Australia WM&SB AUD 53.9 100.0  Sydney, Australia WM&SB AUD 53.9 100.0 
Vermogens Advies Holding B.V. Amsterdam, the Netherlands WM&SB EUR 0.3 100.0 
UBS Wealth Management Israel Ltd Herzliya Pituach, Israel WM&SB ILS 3.5 100.0 
1 WMA: Wealth Management Americas,Americas; WM&SB: Wealth Management & Swiss Bank,Bank; Global AM: Global Asset Management,Management; IB: Investment Bank,Bank; CC: Corporate Center.  2 Share capital and share premium.

352364

Financial information

Note 34 Significant subsidiaries and associates (continued)

     
Changes in the consolidation scope 20092010
 
Newly significant, fully consolidated companies    
 
Topcard Service AGEllington Co., Ltd. – Glattbrugg, SwitzerlandTokyo, Japan    
 
UBS (Luxembourg) SA Austria BranchBrasil Administradora de Valores Mobiliarios Ltda – Vienna, AustriaSao Paulo, Brazil    
 
UBS Capital Securities (Jersey) LimitedFund Management (Luxembourg) SA – St. Helier, JerseyLuxembourg, Luxembourg    
 
UBS Casa de Bolsa, S.A. de C.V.International Hong Kong Limited – Mexico City, MexicoHong Kong, China    
 
UBS Custody Services Singapore Pte. Ltd.Saudi Arabia – Singapore, SingaporeRiyadh, Saudi Arabia    
 
UBS Hypotheken AGSecurities Israel Limited – Zurich, SwitzerlandHerzliya Pituach, Israel    
 
UBS Preferred Funding (Jersey) LimitedWealth Management Israel Ltd – St. Helier, JerseyHerzliya Pituach, Israel    
 
     
  
Significant deconsolidated companies Reason for deconsolidation 
 
Banco UBS Pactual S.A. – RioCaisse Centrale de Janeiro, BrazilSold
CCR Actions S.A.Réescompte – Paris, France Merged 
 
CCR Gestion S.A. – Paris, France Merged 
 
UBS FactoringConvertible Securities (Jersey) Limited – St. Helier, JerseyLiquidated
UBS Fund Holding (Luxembourg) S.A. – Luxembourg, LuxembourgLiquidated
UBS Fund Holding (Switzerland) AG – Zurich,Basel, Switzerland Merged 
 
UBS Finance (Cayman Islands) Ltd.Preferred Funding Company LLC I – George Town, Cayman IslandsDelaware, USA Liquidated 
 
UBS International Inc. – Delaware, USAMerged
UBS Pactual Asset Management S.A. DTVM – Rio de Janeiro, BrazilSold
UBS Service Centre (India) Private Limited – Mumbai, IndiaSold
UBS Services USA LLC – Delaware, USAMerged
         
Significant associates 
Company Industry  Equity interest in % 
 
SIX Group AG – Zurich, Switzerland1
 Financial   17.3 
 
UBS Securities Co. Limited – Beijing, China Financial   20.0 
 
1 UBS is represented in the Board of Directors.

353

Financial information
Notes to the consolidated financial statements

Note 35 Invested assets and net new money

Invested assets include all client assets managed by or deposited with UBS for investment purposes. Invested assets include managed fund assets, managed institutional assets, discretionary and advisory wealth management portfolios, fiduciary deposits, time deposits, savings accounts and wealth management securities or brokerage accounts. All assets held for purely transactional purposes and custody-only assets, including corporate client assets held for cash management and transactional purposes, are excluded from invested assets as the Group only administers the assets and does not offer advice on how the assets should be invested. Also excluded are non-bankable assets (e.g.(e. g. art collections) and deposits from third-party banks for funding or trading purposes.

Discretionary assets are defined as client assets which UBS decides how to invest. Other invested assets are those where the client ultimately decides how the assets are invested. When a single product is created in one business division and sold in another, it is counted in both the business division that manages the investment and the one that distrib-

utesdistributes it. This results in double counting within UBS total invested assets, as both business divisions are providing a service independently to their respective clients, and both add value and generate revenue.

Net new money in a period is the net amount of invested assets that are entrusted to UBS by new and existing clients less those withdrawn by existing clients and clients who terminated their relationship with UBS.

Net new money is calculated using the direct method, by which inflows and outflows to / from/from invested assets are determined at the client level based on transactions. Interest and dividend income from invested assets is not counted as net new money inflow. Market and currency movements as well as fees, commissions and interest on loans charged are excluded from net new money, as are the effects resulting from any acquisition or divestment of a UBS subsidiary or business. Reclassifications between invested assets and clientcustody-only assets as a result of a change in the service level delivered are treated as net new money flows.
The Investment Bank does not track invested assets and net new money. However, when a client is transferred from the Investment Bank to another business division, this produces net new money even though client assets were already with UBS.
Net new money for 2010 includes inflows of CHF 3.7 billion resulting from transfers of Investment Bank clients to Wealth Management, as part of the Global Family Office initiative.



          
         As of or for the year ended 
CHF billion  31.12.09  31.12.08 
 
Fund assets managed by UBS   319   339 
 
Discretionary assets   590   528 
 
Other invested assets   1,325   1,307 
 
Total invested assets (double counts included)
   2,233   2,174 
 
of which: double count
   254   273 
 
of which: acquisitions (divestments)
   (48.2)  19.1 
 
Net new money (double counts included)
   (147.3)  (226.0)
 

354365

Financial information
Notes to the consolidated financial statements

Note 35 Invested assets and net new money (continued)

         
  As of or for the year ended 
CHF billion 31.12.10  31.12.09 
 
Fund assets managed by UBS  282   319 
 
Discretionary assets  596   590 
 
Other invested assets  1,274   1,325 
 
Total invested assets (double counts included)
  2,152   2,233 
 
of which: double count
  225   254 
 
of which: acquisitions (divestments)
  0.0   (48.2)
 
Net new money (double counts included)
  (14.3)  (147.3)
 

Note 36 Business combinations

Business combinations completed in 2010

In 2010 no significant business combinations were completed.

Business combinations completed in 2009

Acquisition of the commodity index business of
AIG Financial Products Corp.

In May 2009, UBS completed the acquisition of the commodity index business of AIG Financial Products Corp., including AIG’s rights to the DJ-AIG Commodity index. This commodity index businessbusi-

ness comprises a product platform of commodity index swaps and funded notes based on the benchmark Dow Jones-AIG Commodity Index (DJ-AIGCI). The cost of the business combination, including directly at-

tributableattributable transaction costs, amounted to CHF 74 million (USD 65 million) of which CHF 17 million (USD 15 million) was paid in cash upon closing. The remaining payments, based upon future earnings of the purchased business, are expected to bewere made by Septemberin 2010. The cost of the business combination was allocated toIntangible assetsof CHF 40 million (USD 35 million) andGoodwill of CHF 34 million (USD 30 million). The business of AIG was integrated into UBS’s Investment Bank.



                        
AIG Commodity Index 2009AIG Commodity Index 2009 AIG Commodity Index 2009 
CHF million Book value Step-up to fair value Fair value  Book value Step-up to fair value Fair value 
  
Assets
  
Intangible assets 0 40 40  0 40 40 
Goodwill 0 34 34  0 34 34 
All other assets 598 0 598  598 0 598 
Total assets
 598 74 672  598 74 672 
  
Liabilities and equity
  
Liabilities 598 0 598  598 598 
Equity 0 74 74  74 74 
Total liabilities and equity
 598 74 672  598 74 672 

355

Financial information
Notes to the consolidated financial statements

Note 36 Business combinations (continued)

Business combinations completed in 2008

Caisse Centrale de Réescompte Group

In February 2008, UBS completed the acquisition in France of 100% of Caisse Centrale de Réescompte Group (CCR) from Commerzbank. The cost of the business combination, including directly attributable transaction costs, amounted to approximately CHF 613 million (EUR 387 million) and was paid in cash. The cost of the business combination included approximately EUR 133 million for the excess capital in CCR at closing. The cost of the business combination has been

allocated toIntangible assetsreflecting customer relationships of CHF 36 million (EUR 23 million), net assets of CHF 209 million (EUR 131 million) andGoodwill ofCHF 368 million (EUR 233 million). The business of CCR, which included EUR 13.3 billion of invested assets as of 31 December 2007 and approximately 190 employees, was integrated into UBS’s asset management and wealth management businesses in France.



             
Caisse Centrale de Réescompte Group (CCR) 2008 
CHF million Book value  Step-up to fair value  Fair value 
 
             
Assets
            
 
Intangible assets  0   36   36 
 
Property and equipment  5   0   5 
 
Goodwill  0   368   368 
 
All other assets  513   1   514 
 
Total assets
  518   405   923 
 
             
Liabilities and equity
            
 
Liabilities  297   13   310 
 
Equity  221   392   613 
 
Total liabilities and equity
  518   405   923 
 

In 2009, the allocations were finalized and the intangible assets and goodwill were allocated to the divisions as follows:

             
Caisse Centrale de Réescompte Group (CCR) 2008 
  Wealth Management &  Global Asset    
CHF million Swiss Bank  Management  Total 
 
             
Assets
            
 
Intangible assets  10   26   36 
 
Goodwill  33   335  ��368 
 

356

Financial information

Note 36 Business combinations (continued)

VermogensGroep

In August 2008, UBS completed the acquisition of 100% of VermogensGroep, an independent Dutch wealth manager. The cost of the business combination, including directly attributable transaction costs, amounted to approximately CHF 173 million (EUR 107 million) out of which approximately CHF 81 million (EUR 50 million) was paid in cash upon closing. The remaining cost of the business combination is expected to be paid in installments over 3 years. The

cost of the business combination was allocated toIntangible assetsof CHF 49 million (EUR 30 million),Net liabilitiesof CHF 2.1 million (EUR 1.3 million) andGoodwillof CHF 126 million (EUR 78 million). VermogensGroep serve wealthy private clients, foundations and institutions in the Dutch market and managed client assets of approximately EUR 4 billion at the time of the transaction. VermogensGroep was integrated into UBS’s wealth management business.



             
VermogensGroep 2008 
CHF million Book value  Step-up to fair value  Fair value 
 
             
Assets
            
 
Intangible assets  0   49   49 
 
Property and equipment  2   0   2 
 
Goodwill  0   126   126 
 
All other assets  10   0   10 
 
Total assets
  12   175   187 
 
             
Liabilities and equity
            
 
Liabilities  2   12   14 
 
Equity  10   163   173 
 
Total liabilities and equity
  12   175   187 
 

Pro-forma information (unaudited)

The following pro-forma information shows UBS’s total operating income, net profit attributable to UBS shareholders and basic earnings per share as if all of the acquisitions completed

in 2009 had been made as of 1 January 2008 and all acquisitions completed in 2008 had been made as of 1 Janu-

ary 2007.2008. Adjustments have been made to reflect additional amortization and depreciation of assets and liabilities, which have been assigned fair values different from their carryover basesbasis in purchase accounting.



                   
Pro-forma information (unaudited)Pro-forma information (unaudited) Pro-forma information (unaudited) 
 For the year ended  For the year ended 
CHF million, except where indicated 31.12.09 31.12.08 31.12.07  31.12.09 31.12.08 
Total operating income 22,606 910 31,932  22,606 910 
Net profit  (2,737)  (21,251)  (5,233)  (2,737)  (21,251)
Basic earnings per share (CHF)  (0.75)  (7.61)  (2.40)  (0.75)  (7.61)

357366

Financial information
Notes to the consolidated financial statements

Financial information

Note 37 Discontinued operations

2010

In 2010, private equity investments sold in prior years contributed a subsequent gain of CHF 2 million to UBS’s net profit from discontinued operations.

2009

In 2009, private equity investments sold in prior years contributed a subsequent loss of CHF 7 million to UBS’s net profit from discontinued operations.

2008

Industrial holdings

In 2008, private equity investments, including the sale of one equity investment and subsequent gains on private equity investments sold in prior years, contributed CHF 155 million to UBS’s net profit from discontinued operations, which included after-tax gains on sale of CHF 120 million and an after-tax operating profit of CHF 34 million. The cash consideration received for the equity investment sold in 2008 amounted to CHF 141 million. These private equity investments were held within the Industrial Holdings segment, integrated within the Corporate Center since the beginning of 2008, and were sold in line with UBS’s strategy to exit the private equity business.

2007

Industrial holdings

In 2007, private equity investments, including the sale of two private equity investments, as well as subsequent gains on private equity investments sold in prior years, contributed CHF 138 million to UBS’s net profit from discontinued operations, which included after-tax gains on sale of CHF 102 million and an after-tax operating profit of CHF 36 million. The cash consideration received for the two investments sold in 2007 amounted to CHF 14 million. These private equity investments were all held within the Industrial Holdings segment and were sold in line with UBS’s strategy to exit the private equity business.

Private Banks & GAM

The tax benefit on gain from sales of CHF 258 million includes the release of a deferred tax liability of approximately CHF 275 million to the profit and loss account, which was recognized upon the sale of UBS’s 20.7% stake in Julius Baer in 2007. This deferred tax liability had been recognized in connection with the receipt of Julius Baer shares on the sale of Private Banks & GAM in December 2005, but was not ultimately incurred due to the manner of realization of the Julius Baer investment. The tax expense from the recognition of the deferred tax liability was booked in discontinued operations in 2005, and therefore the release has also been reflected in discontinued operations.



358

Financial information

Note 37 Discontinued operations (continued)

        
 For the year ended 31.12.08  For the year ended 31.12.08 
CHF million Private Banks & GAM1,2 Industrial Holdings2  Private Banks & GAM1, 2 Industrial Holdings2 
Operating income 0 19  0 19 
Operating expenses 0  (15) 0  (15)
Operating profit from discontinued operations before tax 0 34  0 34 
Pre-tax gain on sale 44 120  44 120 
Profit from discontinued operations before tax
 44 155  44 155 
Tax expense on operating profit from discontinued operations before tax 0 0  0 0 
Tax expense on gain from sale 1 0  1 0 
Tax expense from discontinued operations
 1 0  1 0 
Net profit from discontinued operations
 43 155  43 155 
Net cash flows from
  
operating activities 0  (1) 0  (1)
investing activities 0 3  0 3 
financing activities 0 0  0 0 
1 Gain resulting from a purchase price adjustment related to the sale of Private Banks & GAM in 2005.  2 Included in Corporate CenterTreasury activities and other corporate items in Note 2a.
         
  For the year ended 31.12.07 
CHF million Private Banks & GAM1  Industrial Holdings1 
 
Operating income  0   394 
 
Operating expenses  0   358 
 
Operating profit from discontinued operations before tax  0   36 
 
Pre-tax gain on sale  7   102 
 
Profit from discontinued operations before tax
  7   138 
 
Tax expense on operating profit from discontinued operations before tax  0   0 
 
Tax expense on gain from sale  (258)  0 
 
Tax expense from discontinued operations
  (258)  0 
 
Net profit from discontinued operations
  265   138 
 
Net cash flows from
        
 
operating activities  0   32 
 
investing activities  0   (1)
 
financing activities  0   (42)
 
1 Included in Corporate Center in Note 2a.

359Note 38 Reorganizations and disposals

Sale of investment in New York office building

In January 2010, UBS closed the sale of its investments in several associated entities owning office space in New York. A significant portion of the office space is leased by UBS Group until 2018. The sales price was CHF 187 million with a resulting gain on sale of CHF 180 million.

Restructuring 2010

During 2010, UBS incurred net restructuring charges of CHF 113 million. Wealth Management Americas recognized CHF 90 million for real-estate related costs inGeneral and administrative expensesand CHF 37 million for impairment inDepreciation of property and equipment. In addition, the business division incurred personnel related restructuring charges of CHF 35 million. The Investment Bank released personnel related restructuring provisions of CHF 25 million.



367

Financial information
Notes to the consolidated financial statements

Note 38 Reorganizations and disposals

Sale of UBS Pactual

On 18 September 2009, UBS completed the sale of its Brazilian financial services business, UBS Pactual, to BTG Investments, LP. The sale consideration consisted of a combination of cash and transfer of liabilities by BTG Investments. The total cash consideration amounted to USD 620 million, of which USD 420 million was paid at closing of the transaction and the remaining USD 200 million, plus accrued interest, will be payable 12 months after the closing. The liabilities transferred to BTG Investments consisted primarily of the present value of the residual payment obligation of USD 1.6 billion owed to former Pactual partners, which was incurred by UBS upon acquisition of Pactual in 2006 and was due in 2011.

Overall, the impact of the transaction on UBS’s profit before tax was a net charge of CHF 1,403 million, including a goodwill impairment charge of CHF 1,123 million and a pre-tax loss on sale of CHF 498 million reported in the Corporate Center, partly offset by UBS Pactual’s pre-tax operational profits for 2009 of CHF 218 million. In addition, deferred tax benefits of CHF 243 million have been recognized.
The goodwill impairment charge of CHF 1,123 million was allocated to the business divisions as follows: Investment Bank, CHF 749 million; Global Asset Management, CHF 340 million; and Wealth Management Americas CHF 34 million. It includes an impairment of CHF 492 million primarily relating to the effects from foreign exchange losses that were previously deferred in equity and from the translation of the US dollar denominated sales price into Swiss francs. For management and segment reporting purposes, consistent with UBS’s internal policy that foreign exchange exposures related to investments in subsidiaries are managed by Group Treasury, related gains and losses are recognized in the Corporate Center. This impairment was charged through the“Services (to) / from other business divisions”line item to the Corporate Center with respective credits to the Investment Bank of CHF 328 million, Global Asset Management of CHF 149 million and Wealth Management Americas of CHF 15 million.
The operational results of UBS Pactual of CHF 218 million were included in the business divisions Investment Bank, Global Asset Management and Wealth Management Americas and the Corporate Center.

Sale of 56 branches in Wealth Management Americas

Following an agreement announced in March 2009, UBS sold 56 branches in Wealth Management Americas to Stifel, Nicolaus & Company, Incorporated for an upfront cash payment of approximately USD 29 million. In addition, UBS received aggregate payments of USD 18 million for net fixed

assets and employee forgivable loans, and net USD 154 million for customer loans that were transferred. Under the terms of the agreement, UBS may also receive additional consideration contingent on the performance of the business sold during the two years following the closing of the transaction. The transaction was closed in four separate closings during the second half of 2009. Overall, for 2009 the impact of the transaction on UBS’s profit before tax was a net charge of approximately USD 12 million.

Sale of UBS’s India Service Centre (ISC)

On 30 December 2009, UBS completed the sale of its India Service Centre (ISC) to Cognizant Technology Solutions for a sale consideration of USD 82 million, which was paid in cash at closing.

The net impact of the transaction on UBS’s profit before tax was a gain of CHF 36 million recognized in the fourth quarter inOther income.In addition, the ISC contributed a pre-tax profit of CHF 11 million for 2009.

Sale of assets to a third-party fund controlled by the Swiss National Bank (SNB)

As announced on 16 October 2008, UBS entered into an agreement with the Swiss National Bank (SNB) to transfer certain illiquid securities and other positions to the SNB StabFund limited partnership for collective investments (the “fund”), which is fully owned and controlled by the SNB.

For each transfer of assets, the SNB financed 90% of the purchase price by providing a loan to the fund and the remaining 10% by making an equity contribution to the fund. Upon each asset transfer, UBS purchased, for an amount equal to the SNB’s equity contribution to the fund on that date, an option to repurchase the fund’s equity (all such options referred to collectively as the “call option”). The exercise price of the call option was set at USD 1 billion plus 50% of the fund’s equity value exceeding USD 1 billion at the time of exercise. The call option will be exercisable upon repayment in full of the loan provided by the SNB. The loan is secured by the assets of the fund and bears interest at a rate of one month USD-LIBOR plus 250 basis points. Service of the loan is made from the cash flows generated by the fund’s assets.
In the event of a change of control of UBS, the SNB has the right but not the obligation to request that UBS purchase the loan it provided to the fund at its outstanding principal amount plus accrued interest and the fund’s equity for 50% of its value at the time (the “put option”).
If, upon termination of the fund, the SNB incurs a loss on its loan, it will be entitled to receive 100 million UBS ordinary shares, subject to anti-dilution adjustments, in exchange for



360

Financial information

Note 38 Reorganizations and disposals (continued)

payment of the par value of these shares (the “contingent share issue”).

The positions were transferred to the fund at fair value determined at 30 September 2008. UBS’s estimated fair values as of 30 September 2008 were subject to review by independent third-party valuation agents and the positions transferred to the SNB were priced at the lower of UBS’s estimated fair value and the value determined by the SNB based on the valuation estimated by the valuation agents.
The total market value (net exposure) transferred to the SNB StabFund’s portfolio amounted to USD 38.7 billion (net of pricing adjustments). USD 16.4 billion of positions were transferred to the fund in December 2008, followed by the remaining USD 22.2 billion of positions, of which USD 6.6 billion were transferred in March and USD 15.7 billion in early April 2009.
The purchase price for the overall portfolio was, in the aggregate, USD 1 billion lower than the market value UBS assigned to these positions on 30 September 2008. Of this USD 1 billion, USD 0.7 billion was accounted for in UBS’s results for 2008. The remaining USD 0.3 billion price difference was recognized in the income statement in 2009.
Under IFRS, UBS’s call option to acquire equity of the SNB StabFund is recognized on the balance sheet as a derivative (Positive replacement values) at fair value (CHF 1.2 billion at 31 December 2009), with changes in fair value recognized in profit or loss. The put option was valued as a contingent li-

ability that has been deemed remote at 31 December 2009 and 2008. The contingent share issue was treated as an equity instrument and was recognized at fair value in equity as an increase to share premium and an expense in net trading income in 2008. The fair value of the contingent share issue was estimated at approximately CHF 607 million and not thereafter re-measured to fair value.

Overall, the impact of the SNB transaction on the income statement in 2009 was a loss of CHF 115 million, which includes a CHF 232 million loss due to the price difference recognized in first quarter 2009 and a CHF 117 million net gain on UBS’s option to acquire the fund’s equity.

Restructuring

In 2009, UBS incurred restructuring charges of CHF 791 million, including CHF 491 million inPersonnel expenses,mainly for severance payments, CHF 256 million inGeneral and administrative expenses,primarily for real-estate related costs, and CHF 45 million of depreciation and impairment losses on property and equipment. These restructuring charges were allocated to the business divisions as follows: Wealth Management & Swiss Bank, CHF 322 million; Wealth Management Americas, CHF 152 million; Global Asset Management, CHF 48 million; Investment Bank, CHF 226 million; and the Corporate Center, CHF 45 million.



Note 39 Currency translation rates

The following table shows the principalmain rates used to translate the financial information of UBS’s foreign entitiesoperations into Swiss francs:

                                         
 Spot rate Average rate  Spot rate Average rate 
  As of   Year ended  As of Year ended 
 31.12.09 31.12.08 31.12.09 31.12.08 31.12.07  31.12.10 31.12.09 31.12.10 31.12.09 31.12.08 
1 USD 1.04 1.07 1.08 1.06 1.22  0.93 1.04 1.04 1.08 1.06 
1 EUR 1.48 1.49 1.51 1.58 1.65  1.25 1.48 1.37 1.51 1.58 
1 GBP 1.67 1.56 1.70 1.96 2.31  1.46 1.67 1.62 1.70 1.96 
100 JPY 1.11 1.17 1.16 0.98 1.02  1.15 1.11 1.18 1.16 0.98 

361

Financial information
Notes to the consolidated financial statements

Note 40 Swiss banking law requirements

The consolidated Financial Statements of UBS are prepared in accordance with International Financial Reporting Standards (IFRS). The Guidelines of the Swiss Financial Market Supervisory Authority (FINMA) require banks which present their financial statements under IFRS to provide a narrative explanation of the main differences between IFRS and Swiss GAAP (FINMA circular 08/2) and the Banking Ordinance. Included in this note are the significant differences in regard to recognition and measurement between IFRS and the provisions of the Banking Ordinance and the Guidelines of the FINMA governing financial statement reporting pursuant to Article 23 through Article 27 of the Banking Ordinance. The differences outlined in points two through nine also apply to the Parent Bank statutory accounts.

1. Consolidation

Under IFRS, all entities which are controlled by the Group are consolidated.

Under Swiss law, only entities that are active in the field of banking and finance and real estate entities are subject to consolidation. Entities which are held temporarily are generally recorded as financial investments.

2. Financial investments available-for-sale

Under IFRS, financialFinancial investments available-for-sale are carried at fair value. Changes in fair value are recorded directly in equity until an investment is sold, collected or otherwise disposed of, or until an investment is determined to be impaired. At the time an available-for-sale investment is determined to be impaired, the cumulative unrealized loss previously recognized in equity is included in net profit or loss for the period. On disposal of a financial investment available-for-sale, the cumulative unrecognized gain or loss previously recognized in equity is recognized in the income statement.

Under Swiss law, financial investments are carried either at the lower of cost or market or at amortized cost less impairment with changes in measurement recorded in the income statement. ReductionsRe-

ductions to market value below cost and reversals of such reductions up to original cost as well as gains and losses on disposal are included inOther income. Equity Permanent equity investments that are considered permanent are carriedclassified on the balance sheet asInvestments in associated companies and are measured at cost less impairment with impairment losses recorded in the income statement. Permanent investments are classified on the balance sheet as investments in associated companies.

3. Cash flow hedges

The Group uses derivative instruments to hedge the exposure from varying cash flows. Under IFRS, when hedge ac-

countingaccounting 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 unrecognized gain or loss is realized and released to income.

Under Swiss law, the effective portion of the fair value change of the derivative instrument used to hedge cash flow exposures is deferred on the balance sheet as other assets or other liabilities. The deferred amounts are released to income when the hedged cash flows materialize.

4. Investment property

Under IFRS, investment property is carried at fair value, with changes in fair value recognized in the income statement.

Under Swiss law, investment property is carried at amortized cost less any accumulated depreciation less impairment losses unless the investment property is classified as held for sale. Investment property classified as held for sale is carried at the lower of cost or market.

5. Fair value option

Under IFRS, the Group applies the fair value option to certain financial assets and financial liabilities, mainly to hybrid debt instruments. As a result, the entire hybrid instrument isHybrid instruments are accounted for at fair value with changes in fair value reflected in netNet trading income.Furthermore, UBS designated certain loans, loan commitments and fund



368

Financial information

Note 40 Swiss banking law requirements (continued)

investments as financial assets designated at fair value through profit and loss.

Under Swiss accounting rules, the fair value option is not available.available except for issued structured products that consist of a debt host contract and a bifurcatable embedded derivative(s). However, changes in fair value attributable to changes in own credit are not recognized in the income statement.

6. Goodwill and intangible assets

Under IFRS, goodwill acquired in a business combination is not amortized but tested annually for impairment. Intangible assets acquired in a business combination with an indefinite useful life are also not amortized but tested annually for impairment.

Under Swiss law, goodwill and intangible assets with indefinite useful lives are amortized over a period not exceeding five years, unless a longer useful life, which may not exceed twenty years, can be justified.

7. Discontinued operations

Under certain conditions, IFRS requires that non-current assets or disposal groups be classified as held for sale. Disposal groups that meet the criteria of discontinued operations are presented in the income statement in a single line asNet net income from discontinued operations.

Under Swiss law, no such reclassification takes place.



362

Financial information

Note 40 Swiss banking law requirements (continued)

8. Extraordinary income and expense

Certain items of income and expense are classified as extraordinary items under Swiss law, whereas in the Group Income Statement the amounts are classified as operating income or expense or are included in net profit from discontinued operations, if required.

9. Netting of replacement values

Under IFRS, replacement values are reported on a gross basis, unless certain restrictive requirements are met. Under Swiss law, replacement values and the related cash collateral are reported on a net basis, provided the master netting and the related collateral agreements are legally enforceable.



369

Financial information
Notes to the consolidated financial statements

Note 41 Supplemental guarantor information required under SEC rules

Guarantee of PaineWebber securities

Following the acquisition of Paine Webber Group Inc., UBS made a full and unconditional guarantee of the senior and subordinated notes and trust preferred securities (“Debt Securities”) of PaineWebber. Prior to the acquisition, PaineWebber was ana SEC Registrant.registrant. Upon the acquisition, PaineWebber was merged into UBS Americas Inc., a wholly ownedwholly-owned subsidiary of UBS.

Under the guarantee, if UBS Americas Inc. fails to make any timely payment under the Debt Securities agreements,

the holders of the Debt Securities or the Debt Securities trustee may demand payment from UBS without first proceeding against UBS Americas Inc. UBS’s obligations under the subordinated note guarantee are subordinated to the prior payment in full of the deposit liabilities of UBS and all other liabilities of UBS.

The information presented in this note is prepared in accordance with IFRS and should be read in conjunction with the Consolidated Financial Statements of UBS of which this information is a part.



                     
Supplemental guarantor consolidated income statement 
CHF million UBS AG  UBS      Consolidating    
For the year ended 31 December 2009 Parent Bank1  Americas Inc.  Subsidiaries  entries  UBS Group 
 
Operating income
                    
 
Interest income  18,798   4,432   6,715   (6,484)  23,461 
 
Interest expense  (16,860)  (1,982)  (4,657)  6,484   (17,016)
 
Net interest income  1,939   2,450   2,058   0   6,446 
 
Credit loss (expense)/recovery  (937)  (897)  2   0   (1,832)
 
Net interest income after credit loss expense  1,002   1,553   2,060   0   4,614 
 
Net fee and commission income  7,912   6,025   3,774   0   17,712 
 
Net trading income  (1,487)  (423)  1,586   0   (324)
 
Income from subsidiaries  1,114   0   0   (1,114)  0 
 
Other income  550   (872)  921   0   599 
 
Total operating income
  9,092   6,282   8,341   (1,114)  22,601 
 
Operating expenses
                    
 
Personnel expenses  8,577   5,566   2,400   0   16,543 
 
General and administrative expenses  2,351   2,512   1,385   0   6,248 
 
Depreciation of property and equipment  686   171   191   0   1,048 
 
Impairment of goodwill  0   0   1,123   0   1,123 
 
Amortization of intangible assets  3   96   101   0   200 
 
Total operating expenses
  11,617   8,345   5,200   0   25,162 
 
Operating profit from continuing operations before tax
  (2,526)  (2,063)  3,141   (1,114)  (2,561)
 
Tax expense  210   (549)  (104)  0   (443)
 
Net profit from continuing operations
  (2,736)  (1,514)  3,245   (1,114)  (2,118)
 
Net profit from discontinued operations  0   0   (7)  0   (7)
 
Net profit  (2,736)  (1,514)  3,238   (1,114)  (2,125)
 
Net profit attributable to minority interests  0   (3)  613   0   610 
 
Net profit attributable to UBS shareholders
  (2,736)  (1,511)  2,625   (1,114)  (2,736)
 
1 UBS AG Parent Bank prepares its financial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS.

363

Financial information
Notes to the consolidated financial statements

Note 41 Supplemental guarantor information required under SEC rules (continued)

                     
Supplemental guarantor consolidated balance sheet 
CHF million UBS AG  UBS      Consolidating    
As of 31 December 2009 Parent Bank1  Americas Inc.  Subsidiaries  entries  UBS Group 
 
Assets
                    
 
Cash and balances with central banks  15,177   75   5,647   0   20,899 
 
Due from banks  67,640   8,597   100,909   (130,572)  46,574 
 
Cash collateral on securities borrowed  39,807   56,402   10,700   (43,402)  63,507 
 
Reverse repurchase agreements  113,891   37,914   82,474   (117,590)  116,689 
 
Trading portfolio assets  122,801   18,224   48,739   (1,727)  188,037 
 
Trading portfolio assets pledged as collateral  47,954   11,422   859   (16,014)  44,221 
 
Positive replacement values  413,822   8,260   145,265   (145,654)  421,694 
 
Financial assets designated at fair value  5,831   5,876   11,283   (12,768)  10,223 
 
Loans  296,497   45,774   22,749   (58,193)  306,828 
 
Financial investments available-for-sale  63,459   15,441   2,857   0   81,757 
 
Accrued income and prepaid expenses  1,664   3,880   1,100   (828)  5,816 
 
Investments in associates  61,551   24   49   (60,754)  870 
 
Property and equipment  4,920   791   501   0   6,212 
 
Goodwill and intangible assets  494   9,101   1,413   0   11,008 
 
Deferred tax assets  6,352   2,037   479   0   8,868 
 
Other assets  7,131   2,115   2,169   (4,078)  7,336 
 
Total assets
  1,268,991   225,933   437,194   (591,580)  1,340,538 
 
Liabilities
                    
 
Due to banks  110,418   53,751   31,569   (130,572)  65,166 
 
Cash collateral on securities lent  17,662   22,993   10,742   (43,402)  7,995 
 
Repurchase agreements  38,563   66,545   76,657   (117,590)  64,175 
 
Trading portfolio liabilities  41,884   10,792   610   (5,817)  47,469 
 
Negative replacement values  400,432   8,173   146,992   (145,654)  409,943 
 
Financial liabilities designated at fair value  100,768   276   27,953   (16,344)  112,653 
 
Due to customers  341,200   54,470   72,999   (58,193)  410,475 
 
Accrued expenses and deferred income  5,155   2,269   2,093   (828)  8,689 
 
Debt issued  126,965   493   12,242   (8,348)  131,352 
 
Other liabilities  8,229   3,380   26,455   (4,078)  33,986 
 
Total liabilities
  1,191,276   223,142   408,312   (530,826)  1,291,905 
 
Equity attributable to UBS shareholders
  77,715   (234)  24,287   (60,754)  41,013 
 
Equity attributable to minority interests  0   3,025   4,595   0   7,620 
 
Total equity
  77,715   2,791   28,882   (60,754)  48,633 
 
Total liabilities and equity
  1,268,991   225,933   437,194   (591,580)  1,340,538 
 
                     
Supplemental guarantor consolidated income statement 
CHF million UBS AG  UBS      Consolidating    
For the year ended 31 December 2010 Parent Bank1  Americas Inc.  Subsidiaries  entries  UBS Group 
 
Operating income
                    
 
Interest income  15,732   3,388   2,723   (2,971)  18,872 
 
Interest expense  (12,153)  (1,409)  (2,067)  2,971   (12,657)
 
Net interest income  3,579   1,980   656   0   6,215 
 
Credit loss (expense) / recovery  (2)  (16)  (48)  0   (66)
 
Net interest income after credit loss expense  3,577   1,964   608   0   6,149 
 
Net fee and commission income  7,293   6,465   3,401   0   17,160 
 
Net trading income  6,979   (117)  609   0   7,471 
 
Income from subsidiaries  1,384   0   0   (1,384)  0 
 
Other income  1,515   1,296   (1,597)  0   1,214 
 
Total operating income
  20,749   9,608   3,022   (1,384)  31,994 
 
Operating expenses
                    
 
Personnel expenses  9,220   5,850   1,850   0   16,920 
 
General and administrative expenses  2,729   2,691   1,164   0   6,585 
 
Depreciation of property and equipment  628   172   117   0   918 
 
Impairment of goodwill  0   0   0   0   0 
 
Amortization of intangible assets  3   90   24   0   117 
 
Total operating expenses
  12,581   8,804   3,154   0   24,539 
 
Operating profit from continuing operations before tax
  8,168   804   (132)  (1,384)  7,455 
 
Tax expense / (benefit)  633   (1,150)  136   0   (381)
 
Net profit from continuing operations
  7,534   1,954   (268)  (1,384)  7,836 
 
Net profit from discontinued operations  0   0   2   (1,384)  2 
 
Net profit  7,534   1,954   (266)  (1,384)  7,838 
 
Net profit attributable to non-controlling interests  0   0   304   0   304 
 
Net profit attributable to UBS shareholders
  7,534   1,954   (570)  (1,384)  7,534 
 
1 UBS AG Parent Bank prepares its financial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS.

364370

Financial information

Note 41 Supplemental guarantor information required under SEC rules (continued)

                 
Supplemental guarantor consolidated statement of cash flows 
CHF million UBS AG  UBS       
For the year ended 31 December 2009 Parent Bank1  Americas Inc.  Subsidiaries  UBS Group 
 
Net cash flow from/(used in) operating activities
  4,841   (6,469)  56,126   54,497 
 
Cash flow from/(used in) investing activities                
 
Purchase of subsidiaries and associates  (42)  0   0   (42)
 
Disposal of subsidiaries and associates  296   0   0   296 
 
Purchase of property and equipment  (656)  (124)  (75)  (854)
 
Disposal of property and equipment  104   53   6   163 
 
Net (investment in)/divestment of financial investments available-for-sale  (22,319)  (12,484)  14,677   (20,127)
 
Net cash flow from/(used in) investing activities
  (22,616)  (12,555)  14,608   (20,563)
 
Cash flow from /(used in) financing activities                
 
Net money market papers issued/(repaid)  (7,020)  (1,596)  (51,424)  (60,040)
 
Net movements in treasury shares and own equity derivative activity  673   0   0   673 
 
Capital issuance  3,726   0   0   3,726 
 
Issuance of long-term debt, including financial liabilities designated at fair value  64,956   0   2,106   67,062 
 
Repayment of long-term debt, including financial liabilities designated at fair value  (55,616)  (1,548)  (7,861)  (65,024)
 
Increase in minority interests  0   0   3   3 
 
Dividends paid to/decrease in minority interests  0   (8)  (576)  (583)
 
Net activity in investments in subsidiaries  (4,032)  2,419   1,614   0 
 
Net cash flow from/(used in) financing activities
  2,686   (733)  (56,136)  (54,183)
 
Effects of exchange rate differences  5,886   574   (933)  5,529 
 
Net increase/(decrease) in cash and cash equivalents
  (9,202)  (19,183)  13,664   (14,721)
 
Cash and cash equivalents at the beginning of the year  132,782   24,421   22,490   179,693 
 
Cash and cash equivalents at the end of the year
  123,580   5,238   36,154   164,973 
 
Cash and cash equivalents comprise:
                
 
Cash and balances with central banks  15,177   75   5,647   20,899 
 
Money market papers2
  78,025   3,714   16,694   98,432 
 
Due from banks with original maturity of less than three months  30,378   1,450   13,814   45,642 
 
Total
  123,580   5,238   36,154   164,973 
 
                     
Supplemental guarantor consolidated balance sheet 
CHF million UBS AG  UBS      Consolidating    
As of 31 December 2010 Parent Bank1  Americas Inc.  Subsidiaries  entries  UBS Group 
 
Assets
                    
 
Cash and balances with central banks  26,372   69   498   0   26,939 
 
Due from banks  30,941   5,038   68,198   (87,044)  17,133 
 
Cash collateral on securities borrowed  39,315   61,314   9,572   (47,746)  62,454 
 
Reverse repurchase agreements  130,977   53,203   85,331   (126,721)  142,790 
 
Trading portfolio assets  108,678   22,853   37,652   (1,719)  167,463 
 
Trading portfolio assets pledged as collateral  61,428   9,412   2,162   (11,649)  61,352 
 
Positive replacement values  393,565   8,624   115,618   (116,661)  401,146 
 
Cash collateral receivables on derivative instruments  42,940   5,010   23,861   (33,740)  38,071 
 
Financial assets designated at fair value  4,778   4,788   8,850   (9,911)  8,504 
 
Loans  258,378   37,828   12,778   (46,107)  262,877 
 
Financial investments available-for-sale  59,269   11,647   3,853   0   74,768 
 
Accrued income and prepaid expenses  1,450   3,612   942   (538)  5,466 
 
Investments in associates  62,095   6   0   (61,311)  790 
 
Property and equipment  4,493   614   360   0   5,467 
 
Goodwill and intangible assets  448   8,150   1,224   0   9,822 
 
Deferred tax assets  6,054   2,897   571   0   9,522 
 
Other assets  18,504   5,938   1,914   (3,675)  22,681 
 
Total assets
  1,249,683   241,001   373,384   (546,822)  1,317,247 
 
Liabilities
                    
 
Due to banks  79,842   47,430   1,261   (87,044)  41,490 
 
Cash collateral on securities lent  20,374   23,613   10,410   (47,746)  6,651 
 
Repurchase agreements  40,713   79,920   80,883   (126,721)  74,796 
 
Trading portfolio liabilities  45,191   13,433   1,215   (4,865)  54,975 
 
Negative replacement values  383,892   8,667   117,863   (116,661)  393,762 
 
Cash collateral payables on derivative instruments  45,024   10,543   37,097   (33,740)  58,924 
 
Financial liabilities designated at fair value  94,864   295   18,457   (12,859)  100,756 
 
Due to customers  301,976   29,266   47,166   (46,107)  332,301 
 
Accrued expenses and deferred income  5,071   2,433   773   (538)  7,738 
 
Debt issued  125,113   398   10,315   (5,555)  130,271 
 
Other liabilities  23,286   20,580   23,529   (3,675)  63,719 
 
Total liabilities
  1,165,349   236,578   348,968   (485,511)  1,265,384 
 
Equity attributable to UBS shareholders
  84,334   4,408   19,388   (61,311)  46,820 
 
Equity attributable to non-controlling interests  0   15   5,028   0   5,043 
 
Total equity
  84,334   4,423   24,416   (61,311)  51,863 
 
Total liabilities and equity
  1,249,683   241,001   373,384   (546,822)  1,317,247 
 
1 UBS AG Parent Bank prepares its financial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS.

371

Financial information
Notes to the consolidated financial statements

Note 41 Supplemental guarantor information required under SEC rules (continued)

                 
Supplemental guarantor consolidated statement of cash flows 
CHF million UBS AG  UBS       
For the year ended 31 December 2010 Parent Bank1  Americas Inc.  Subsidiaries  UBS Group 
 
Net cash flow from / (used in) operating activities
  7,233   4,036   695   11,963 
 
Cash flow from / (used in) investing activities               ��
 
Purchase of subsidiaries and associates  (75)  0   0   (75)
 
Disposal of subsidiaries and associates  307   0   0   307 
 
Purchase of property and equipment  (367)  (88)  (86)  (541)
 
Disposal of property and equipment  196   22   24   242 
 
Net (investment in) / divestment of financial investments available-for-sale  (17,374)  1,150   (9,407)  (25,631)
 
Net cash flow from / (used in) investing activities
  (17,312)  1,084   (9,471)  (25,698)
 
Cash flow from / (used in) financing activities                
 
Net money market papers issued / (repaid)  3,241   0   1,218   4,459 
 
Net movements in treasury shares and own equity derivative activity  (1,456)  0   0   (1,456)
 
Capital issuance  (113)  0   0   (113)
 
Issuance of long-term debt, including financial liabilities designated at fair value  75,842   8   2,568   78,418 
 
Repayment of long-term debt, including financial liabilities designated at fair value  (65,968)  (82)  (11,447)  (77,497)
 
Increase in non-controlling interests  0   0   6   6 
 
Dividends paid to / decrease in non-controlling interests  0   (6)  (2,047)  (2,053)
 
Net activity in investments in subsidiaries  (122)  235   (113)  0 
 
Net cash flow from / (used in) financing activities
  11,424   154   (9,815)  1,764 
 
Effects of exchange rate differences  (10,218)  1,482   (3,444)  (12,181)
 
Net increase / (decrease) in cash and cash equivalents
  (8,873)  6,756   (22,034)  (24,151)
 
Cash and cash equivalents at the beginning of the year  123,580   5,238   36,154   164,973 
 
Cash and cash equivalents at the end of the year
  114,707   11,994   14,120   140,822 
 
Cash and cash equivalents comprise:
                
 
Cash and balances with central banks  26,372   69   498   26,939 
 
Money market papers2
  65,688   3,737   8,573   77,998 
 
Due from banks with original maturity of less than three months3
  22,647   8,188   5,050   35,885 
 
Total
  114,707   11,994   14,120   140,822 
 
1 UBS AG Parent Bank prepares its financial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS.   2 Money market papers are included in the balance sheet under “TradingTrading portfolio assets”, “Tradingassets, Trading portfolio assets pledged as collateral”collateral and “FinancialFinancial investments available-for-sale”.available-for-sale. CHF 57,11639,768 million were pledged as of 31 December 2009.2010.   3 Includes positions recognized in the balance sheet under Due from banks and Cash collateral receivables on derivative instruments.

365372

Financial information
Notes to the consolidated financial statements

Financial information

Note 41 Supplemental guarantor information required under SEC rules (continued)

                                        
Supplemental guarantor consolidated income statementSupplemental guarantor consolidated income statement Supplemental guarantor consolidated income statement 
CHF million UBS AG UBS Consolidating    UBS AG UBS Consolidating   
For the year ended 31 December 2008 Parent Bank1 Americas Inc. Subsidiaries entries UBS Group 
For the year ended 31 December 2009 Parent Bank1 Americas Inc. Subsidiaries entries UBS Group 
Operating income
  
Interest income 49,699 21,343 27,354  (32,717) 65,679  18,798 4,432 6,715  (6,484) 23,461 
Interest expense  (48,686)  (17,436)  (26,282) 32,717  (59,687)  (16,860)  (1,982)  (4,657) 6,484  (17,016)
Net interest income 1,013 3,907 1,072 0 5,992  1,939 2,450 2,058 0 6,446 
Credit loss (expense)/recovery  (861)  (2,050)  (85) 0  (2,996)
Credit loss (expense) / recovery  (937)  (897) 2 0  (1,832)
Net interest income after credit loss expense 152 1,857 987 0 2,996  1,002 1,553 2,060 0 4,614 
Net fee and commission income 9,709 7,910 5,310 0 22,929  7,912 6,025 3,774 0 17,712 
Net trading income  (8,129)  (19,847) 2,156 0  (25,820)  (1,487)  (423) 1,586 0  (324)
Income from subsidiaries  (19,882) 0 0 19,882 0  1,114 0 0  (1,114) 0 
Other income 2,836 1,058  (3,202) 0 692  550  (872) 921 0 599 
Total operating income
  (15,314)  (9,022) 5,251 19,882 796  9,092 6,282 8,341  (1,114) 22,601 
Operating expenses
  
Personnel expenses 8,738 5,169 2,355 0 16,262  8,577 5,566 2,400 0 16,543 
General and administrative expenses 3,918 4,604 1,976 0 10,498  2,351 2,512 1,385 0 6,248 
Depreciation of property and equipment 770 205 266 0 1,241  686 171 191 0 1,048 
Impairment of goodwill 0 341 0 0 341  0 0 1,123 0 1,123 
Amortization of intangible assets 1 93 119 0 213  3 96 101 0 200 
Total operating expenses
 13,427 10,412 4,716 0 28,555  11,617 8,345 5,200 0 25,162 
Operating profit from continuing operations before tax
  (28,741)  (19,434) 535 19,882  (27,758)  (2,526)  (2,063) 3,141  (1,114)  (2,561)
Tax expense  (7,407)  (4) 574 0  (6,837)
Tax expense / (benefit) 210  (549)  (104) 0  (443)
Net profit from continuing operations
  (21,335)  (19,430)  (39) 19,882  (20,922)  (2,736)  (1,514) 3,245  (1,114)  (2,118)
Net profit from discontinued operations 43 0 155 0 198  0 0  (7) 0  (7)
Net profit  (21,292)  (19,430) 116 19,882  (20,724)  (2,736)  (1,514) 3,238  (1,114)  (2,125)
Net profit attributable to minority interests 0  (9) 577 0 568 
Net profit attributable to non-controlling interests 0  (3) 613 0 610 
Net profit attributable to UBS shareholders
  (21,292)  (19,421)  (461) 19,882  (21,292)  (2,736)  (1,511) 2,625  (1,114)  (2,736)
1 UBS AG Parent Bank prepares its financial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS.

366373

Financial information


Notes to the consolidated financial statements

Note 41 Supplemental guarantor information required under SEC rules (continued)

                                        
Supplemental guarantor consolidated balance sheetSupplemental guarantor consolidated balance sheet Supplemental guarantor consolidated balance sheet 
CHF million UBS AG UBS Consolidating    UBS AG UBS Consolidating   
As of 31 December 2008 Parent Bank1 Americas Inc. Subsidiaries entries UBS Group 
As of 31 December 2009 Parent Bank1 Americas Inc. Subsidiaries entries UBS Group 
Assets
  
Cash and balances with central banks 27,030 332 5,382 0 32,744  15,177 75 5,647 0 20,899 
Due from banks 111,563 11,490 192,206  (250,808) 64,451  27,861 4,476 84,363  (99,896) 16,804 
Cash collateral on securities borrowed 48,874 109,783 16,914  (52,674) 122,897  39,807 56,402 10,700  (43,402) 63,507 
Reverse repurchase agreements 206,087 79,178 145,851  (206,468) 224,648  113,891 37,914 82,474  (117,590) 116,689 
Trading portfolio assets 145,012 47,558 57,230 22,038 271,838  122,801 18,224 48,739  (1,727) 188,037 
Trading portfolio assets pledged as collateral 71,736 12,655 1,531  (45,706) 40,216  47,954 11,422 859  (16,014) 44,221 
Positive replacement values 862,459 18,215 293,896  (320,470) 854,100  413,822 8,260 145,265  (145,654) 421,694 
Cash collateral receivables on derivative instruments 56,477 5,787 23,340  (31,830) 53,774 
Financial assets designated at fair value 5,120 7,755 12,741  (12,734) 12,882  5,831 5,876 11,283  (12,768) 10,223 
Loans 326,548 53,774 35,193  (75,207) 340,308  265,689 41,871 15,955  (57,039) 266,477 
Financial investments available-for-sale 1,237 638 3,373 0 5,248  63,459 15,441 2,857 0 81,757 
Accrued income and prepaid expenses 3,684 2,700 2,666  (2,909) 6,141  1,664 3,880 1,100  (828) 5,816 
Investments in associates 66,255 58 50  (65,473) 892  61,551 24 49  (60,754) 870 
Property and equipment 5,093 971 642 0 6,706  4,920 791 501 0 6,212 
Goodwill and intangible assets 250 9,393 3,292 0 12,935  494 9,101 1,413 0 11,008 
Deferred tax assets 6,607 1,757 516 0 8,880  6,352 2,037 479 0 8,868 
Other assets 8,934 2,148 6,333  (7,484) 9,931  21,241 4,352 2,169  (4,078) 23,682 
Total assets
 1,896,489 358,405 777,816  (1,017,895) 2,014,815  1,268,991 225,933 437,194  (591,580) 1,340,538 
Liabilities
  
Due to banks 196,723 68,213 111,500  (250,808) 125,628  79,245 51,091 1,482  (99,896) 31,922 
Cash collateral on securities lent 25,248 32,884 8,605  (52,674) 14,063  17,662 22,993 10,742  (43,402) 7,995 
Repurchase agreements 30,988 140,197 137,844  (206,468) 102,561  38,563 66,545 76,657  (117,590) 64,175 
Trading portfolio liabilities 51,034 17,086 903  (6,592) 62,431  41,884 10,792 610  (5,817) 47,469 
Negative replacement values 855,005 16,792 300,537  (320,470) 851,864  400,432 8,173 146,992  (145,654) 409,943 
Cash collateral payables on derivative instruments 49,328 9,847 38,752  (31,830) 66,097 
Financial liabilities designated at fair value 88,505 1,716 35,973  (24,648) 101,546  100,768 276 27,953  (16,344) 112,653 
Due to customers 422,688 70,242 48,018  (75,207) 465,741  300,123 31,840 64,340  (57,039) 339,263 
Accrued expenses and deferred income 7,417 2,584 3,104  (2,909) 10,196  5,155 2,269 2,093  (828) 8,689 
Debt issued 127,408 2,439 72,569  (5,162) 197,254  126,965 493 12,242  (8,348) 131,352 
Other liabilities 12,598 4,313 33,571  (7,484) 42,998  31,151 18,823 26,449  (4,078) 72,344 
Total liabilities
 1,817,614 356,466 752,624  (952,422) 1,974,282  1,191,276 223,142 408,312  (530,826) 1,291,905 
Equity attributable to UBS shareholders
 78,875  (1,097) 20,226  (65,473) 32,531  77,715 2,770 21,283  (60,754) 41,013 
Equity attributable to minority interests 0 3,036 4,966 0 8,002 
Equity attributable to non-controlling interests 0 21 7,599 0 7,620 
Total equity
 78,875 1,939 25,192  (65,473) 40,533  77,715 2,791 28,882  (60,754) 48,633 
Total liabilities and equity
 1,896,489 358,405 777,816  (1,017,895) 2,014,815  1,268,991 225,933 437,194  (591,580) 1,340,538 
1 UBS AG Parent Bank prepares its financial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS.

367374

Financial information
Notes to the consolidated financial statements

Financial information

Note 41 Supplemental guarantor information required under SEC rules (continued)

                                
Supplemental guarantor consolidated statement of cash flowsSupplemental guarantor consolidated statement of cash flows Supplemental guarantor consolidated statement of cash flows 
CHF million UBS AG UBS      UBS AG UBS     
For the year ended 31 December 2008 Parent Bank1 Americas Inc. Subsidiaries UBS Group 
For the year ended 31 December 2009 Parent Bank1 Americas Inc. Subsidiaries UBS Group 
Net cash flow from / (used in) operating activities
 69,799  (438) 7,646 77,007  4,841  (6,469) 56,126 54,497 
Cash flow from / (used in) investing activities  
Purchase of subsidiaries and associates  (1,502) 0 0  (1,502)  (42) 0 0  (42)
Disposal of subsidiaries and associates 1,686 0 0 1,686  296 0 0 296 
Purchase of property and equipment  (819)  (258)  (140)  (1,217)  (656)  (124)  (75)  (854)
Disposal of property and equipment 37 27 5 69  104 53 6 163 
Net (investment in) / divestment of financial investments available-for-sale 330 156  (1,198)  (712)  (22,319)  (12,484) 14,677  (20,127)
Net cash flow from / (used in) investing activities
  (268)  (75)  (1,333)  (1,676)  (22,616)  (12,555) 14,608  (20,563)
Cash flow from / (used in) financing activities  
Net money market papers issued / (repaid)  (52,815) 914 11,264  (40,637)  (7,020)  (1,596)  (51,424)  (60,040)
Net movements in treasury shares and own equity derivative activity 623 0 0 623  673 0 0 673 
Capital issuance 23,135 0 0 23,135  3,726 0 0 3,726 
Issuance of long-term debt, including financial liabilities designated at fair value 91,961 0 11,126 103,087  64,956 0 2,106 67,062 
Repayment of long-term debt, including financial liabilities designated at fair value  (62,822)  (14,500)  (15,572)  (92,894)  (55,616)  (1,548)  (7,861)  (65,024)
Increase in minority interests 0 842 819 1,661 
Increase in non-controlling interests 0 0 3 3 
Dividends paid to / decrease in minority interests 0  (112)  (420)  (532)
Dividends paid to / decrease in non-controlling interests 0  (8)  (576)  (583)
Net activity in investments in subsidiaries  (11,978) 21,816  (9,838) 0   (4,032) 2,419 1,614 0 
Net cash flow from / (used in) financing activities
  (11,896) 8,960  (2,621)  (5,557) 2,686  (733)  (56,136)  (54,183)
Effects of exchange rate differences  (33,963) 442  (5,665)  (39,186) 5,886 574  (933) 5,529 
Net increase / (decrease) in cash and cash equivalents
 23,672 8,889  (1,973) 30,588   (9,202)  (19,183) 13,664  (14,721)
Cash and cash equivalents at the beginning of the year 109,110 15,532 24,463 149,105  132,782 24,421 22,490 179,693 
Cash and cash equivalents at the end of the year
 132,782 24,421 22,490 179,693  123,580 5,238 36,154 164,973 
Cash and cash equivalents comprise:
  
Cash and balances with central banks 27,030 332 5,382 32,744  15,177 75 5,647 20,899 
Money market papers2
 62,777 19,875 4,080 86,732  78,025 3,714 16,694 98,432 
Due from banks with original maturity of less than three months 42,975 4,214 13,028 60,217 
Due from banks with original maturity of less than three months3
 30,378 1,450 13,814 45,642 
Total
 132,782 24,421 22,490 179,693  123,580 5,238 36,154 164,973 
1 UBS AG Parent Bank prepares its financial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS.  2 Money market papers are included in the balance sheet under “TradingTrading portfolio assets”, “Tradingassets, Trading portfolio assets pledged as collateral”collateral and “FinancialFinancial investments available-for-sale”.available-for-sale. CHF 19,91257,116 million were pledged as of 31 December 2008. The previously disclosed amount of pledged money market papers has been adjusted to include2009.  3 Includes positions recognized in the balance sheet under “Trading portfolio assets pledged as collateral”.Due from banks and Cash collateral receivables on derivative instruments.

368375

Financial information


Notes to the consolidated financial statements

Note 41 Supplemental guarantor information required under SEC rules (continued)

                                        
Supplemental guarantor consolidated income statementSupplemental guarantor consolidated income statement Supplemental guarantor consolidated income statement 
CHF million UBS AG UBS Consolidating    UBS AG UBS Consolidating   
For the year ended 31 December 2007 Parent Bank1 Americas Inc. Subsidiaries entries UBS Group 
For the year ended 31 December 2008 Parent Bank1 Americas Inc. Subsidiaries entries UBS Group 
Operating income
  
Interest income 77,306 47,747 51,985  (67,926) 109,112  49,699 21,343 27,354  (32,717) 65,679 
Interest expense  (74,689)  (46,420)  (50,592) 67,926  (103,775)  (48,686)  (17,436)  (26,282) 32,717  (59,687)
Net interest income 2,617 1,327 1,393 0 5,337  1,013 3,907 1,072 0 5,992 
Credit loss (expense) / recovery 11  (234)  (15) 0  (238)  (861)  (2,050)  (85) 0  (2,996)
Net interest income after credit loss expense 2,628 1,093 1,378 0 5,099  152 1,857 987 0 2,996 
Net fee and commission income 12,852 10,119 7,663 0 30,634  9,709 7,910 5,310 0 22,929 
Net trading income 3,467  (9,932)  (1,888) 0  (8,353)  (8,129)  (19,847) 2,156 0  (25,820)
Income from subsidiaries 464 0 0  (464) 0   (19,882) 0 0 19,882 0 
Other income  (4,273) 8,369 245 0 4,341  2,836 1,058  (3,202) 0 692 
Total operating income
 15,138 9,649 7,398  (464) 31,721   (15,314)  (9,022) 5,251 19,882 796 
Operating expenses
  
Personnel expenses 13,239 8,329 3,947 0 25,515  8,738 5,169 2,355 0 16,262 
General and administrative expenses 5,684 3,446  (701) 0 8,429  3,918 4,604 1,976 0 10,498 
Depreciation of property and equipment 930 138 175 0 1,243  770 205 266 0 1,241 
Impairment of goodwill 0 341 0 0 341 
Amortization of intangible assets 3 101 172 0 276  1 93 119 0 213 
Total operating expenses
 19,856 12,014 3,593 0 35,463  13,427 10,412 4,716 0 28,555 
Operating profit from continuing operations before tax
  (4,718)  (2,365) 3,805  (464)  (3,742)  (28,741)  (19,434) 535 19,882  (27,758)
Tax expense 794  (486) 1,061 0 1,369 
Tax expense / (benefit)  (7,407)  (4) 574 0  (6,837)
Net profit from continuing operations
  (5,512)  (1,879) 2,744  (464)  (5,111)  (21,335)  (19,430)  (39) 19,882  (20,922)
Net profit from discontinued operations 265 0 138 0 403  43 0 155 0 198 
Net profit  (5,247)  (1,879) 2,882  (464)  (4,708)  (21,292)  (19,430) 116 19,882  (20,724)
Net profit attributable to minority interests 0 18 521 0 539 
Net profit attributable to non-controlling interests 0  (9) 577 0 568 
Net profit attributable to UBS shareholders
  (5,247)  (1,897) 2,361  (464)  (5,247)  (21,292)  (19,421)  (461) 19,882  (21,292)
1 UBS AG Parent Bank prepares its financial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS.

369376

Financial information
Notes to the consolidated financial statements

Financial information

Note 41 Supplemental guarantor information required under SEC rules (continued)

                                
Supplemental guarantor consolidated statement of cash flowsSupplemental guarantor consolidated statement of cash flows Supplemental guarantor consolidated statement of cash flows 
CHF million UBS AG UBS      UBS AG UBS     
For the year ended 31 December 2007 Parent Bank1 Americas Inc. Subsidiaries UBS Group 
For the year ended 31 December 2008 Parent Bank1 Americas Inc. Subsidiaries UBS Group 
Net cash flow from / (used in) operating activities
  (65,749) 19,670  (5,999)  (52,078) 69,799  (438) 7,646 77,007 
Cash flow from / (used in) investing activities  
Purchase of subsidiaries and associates  (2,337) 0 0  (2,337)  (1,502) 0 0  (1,502)
Disposal of subsidiaries and associates 885 0 0 885  1,686 0 0 1,686 
Purchase of property and equipment  (1,022)  (581)  (307)  (1,910)  (819)  (258)  (140)  (1,217)
Disposal of property and equipment 40 28 66 134  37 27 5 69 
Net (investment in) / divestment of financial investments available-for-sale 4,027 34 1,920 5,981  330 156  (1,198)  (712)
Net cash flow from / (used in) investing activities
 1,593  (519) 1,679 2,753   (268)  (75)  (1,333)  (1,676)
Cash flow from / (used in) financing activities  
Net money market papers issued / (repaid) 35,017  (1,426)  (919) 32,672   (52,815) 914 11,264  (40,637)
Net movements in treasury shares and own equity derivative activity  (2,771) 0 0  (2,771) 623 0 0 623 
Dividends paid  (4,275) 0 0  (4,275)
Capital issuance 23,135 0 0 23,135 
Issuance of long-term debt, including financial liabilities designated at fair value 105,197 1,022 4,655 110,874  91,961 0 11,126 103,087 
Repayment of long-term debt, including financial liabilities designated at fair value  (54,251)  (7,022)  (1,134)  (62,407)  (62,822)  (14,500)  (15,572)  (92,894)
Increase in minority interests 0 32 1,062 1,094 
Increase in non-controlling interests 0 842 819 1,661 
Dividends paid to / decrease in minority interests 0  (665) 46  (619)
Dividends paid to / decrease in non-controlling interests 0  (112)  (420)  (532)
Net activity in investments in subsidiaries 871  (6,627) 5,756 0   (11,978) 21,816  (9,838) 0 
Net cash flow from / (used in) financing activities
 79,788  (14,686) 9,466 74,568   (11,896) 8,960  (2,621)  (5,557)
Effects of exchange rate differences  (9,070)  (3,062)  (96)  (12,228)  (33,963) 442  (5,665)  (39,186)
Net increase / (decrease) in cash and cash equivalents
 6,562 1,403 5,050 13,015  23,672 8,889  (1,973) 30,588 
Cash and cash equivalents at the beginning of the year 102,548 14,129 19,413 136,090  109,110 15,532 24,463 149,105 
Cash and cash equivalents at the end of the year
 109,110 15,532 24,463 149,105  132,782 24,421 22,490 179,693 
Cash and cash equivalents comprise:
  
Cash and balances with central banks 8,530 109 10,154 18,793  27,030 332 5,382 32,744 
Money market papers2
 60,266 13,202 3,747 77,215  62,777 19,875 4,080 86,732 
Due from banks with original maturity of less than three months 40,314 2,221 10,562 53,097 
Due from banks with original maturity of less than three months3
 42,975 4,214 13,028 60,217 
Total
 109,110 15,532 24,463 149,105  132,782 24,421 22,490 179,693 
1 UBS AG Parent Bank prepares its financial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS.  2 Money market papers are included in the balance sheet under “TradingTrading portfolio assets”, “Tradingassets, Trading portfolio assets pledged as collateral”collateral and “FinancialFinancial investments available-for-sale”.available-for-sale. CHF 7,88119,912 million were pledged as of 31 December 2007. The previously disclosed amount of pledged money market papers has been adjusted to include2008.  3 Includes positions recognized in the balance sheet under “Trading portfolio assets pledged as collateral”.Due from banks and Cash collateral receivables on derivative instruments.

377

Financial information
Notes to the consolidated financial statements

Note 41 Supplemental guarantor information required under SEC rules (continued)

Guarantee of other securities

UBS AG, acting through wholly-owned US-domiciled finance subsidiaries, issued the following trust preferred securities:

         
USD billion, unless otherwise indicated   Outstanding as of 31.12.10
Issuing entity Type of security Date issued Interest (%) Amount
 
UBS Preferred Funding Trust II Trust preferred securities1 June 2001 7.247 0.5
 
UBS Preferred Funding Trust IV Floating rate non-cumulative trust preferred securities May 2003 one-month LIBOR+ 0.7% 0.3
 
UBS Preferred Funding Trust V Trust preferred securities May 2006 6.243 1.0
 
                 
USD billion, unless otherwise indicated    Outstanding as of 31.12.09 
Issuing entity Type of security  Date issued  Interest (%)  Amount 
 
UBS Preferred Funding Trust I Trust preferred securities  October 2000   8.622   1.5 
 
UBS Preferred Funding Trust II Trust preferred securities1  June 2001   7.247   0.5 
 
UBS Preferred Funding Trust IV Floating rate non-cumulative trust      one-month LIBOR     
  preferred securities  May 2003   + 0.7   0.3 
 
UBS Preferred Funding Trust V Trust preferred securities  May 2006   6.243   1.0 
 
1 In June 2006, USD 300 million (at 7.25%) of Trust preferred securities also issued in June 2001 were redeemed.

UBS AG has fully and unconditionally guaranteed these securities. UBS’s obligations under the trust preferred securities guarantee are subordinated to the prior payment in full of the deposit liabilities of UBS and all other liabilities of

UBS. At 31 December 2009,2010, the amount of senior liabilities of UBS to which the holders of the subordinated debt securities would be subordinated is approximately CHF 1,2801,256 billion.

Guarantee to UBS Ltd.

UBS AG issued a guarantee to each counterparty of UBS Ltd. Under the guarantee UBS AG irrevocably and unconditionally guarantees, for the benefit of each counterparty, each and every obligation that UBS Ltd. entered into. UBS AG promises to pay to that counterpart on demand any unpaid balance of such liabilities under the terms of the guarantee.



370378

Financial information

Financial information
UBS AG (Parent Bank)

UBS AG (Parent Bank)

Parent Bank review

Income statement

TheNet profit for the Parent Bank UBS AG net loss decreased bywas CHF 31,4486,123 million, from a lossan increase of CHF 36,48911,164 million, tocompared with a loss of CHF 5,041 million.million in 2009.

Net trading incomeimproved by CHF 8,9906,977 million from negative CHF 9,466476 million to negativepositive CHF 476 million. 2008 reflects6,501 million, mainly lossesdue to an improvement in the fixed income business and chargesgains associated with the SNB transaction.
Income from investments in associated companies decreased increased to CHF 1,703 million from CHF 1,154 million from CHF 3,763 million in 20082009, mainly due to lowerhigher dividend distributions received.
Personnel expenseswere upincreased to CHF 10,300 million from CHF 9,101 million from CHF 6,707 million in 20082009 mainly due to recognition of a defined pension assetan increase in 2008.variable compensation.
Depreciation decreased to CHF 2,4052,051 million from CHF 26,9002,405 million in 2008 which included2009, mainly due to lower write-downs of investments in associated US companies.
Allowances, provisions and lossesdecreased to CHF 1,432181 million from CHF 3,0711,432 million in 2008,2009, which included costs related to the US cross-border case and costs associated with the repurchasecredit loss expenses of auction rate securities.CHF 912 million.
The decreaseincrease inExtraordinary incomeand inExtraordinary expensesareis explained in additionalthe section “Additional income statement information.information”.

Balance sheet

In 2009, UBS’s overall balance sheet reduction initiatives led also to lower Parent Bank assets stood at CHF 863 billion on 31 December 2010, up slightly from CHF 848 billion on 31 December 2009. The total assets. In particularasset increased by CHF 15 billion due to UBS subsidiaries and third partythird-party banks in the Americas, European region,Asia and to lesser extent in Asia, reducedEurope increasing their assets and therefore their funding needs from the Parent Bank. The Parent Bank total assets stood at CHF 848 billion at 31 December 2009, a drop of CHF 342 billion from CHF 1,189 billion at 31 December 2008.

The reductionsincreases occurred in inter-bank lending (loans and collateral trading)financial investments, which rose by CHF 20 billion (due to a shift from money market papers), which declined by 165 billion, pos-inter-

itive replacement valuesbank lending (up CHF 15 billion), liquid assets (up CHF 11 billion) due to larger holdings of cash and balances at central banks, and investments in associated companies (up CHF 2 billion) in the Americas and European region. These increases were partially offset by lower money market papers (down CHF 13319 billion), related to the aforementioned shift to financial investments, customer loans and collateral trading (down CHF 37 billion), trading balances (down CHF 2111 billion), and liquid assetspositive replacement values (down CHF 12 billion). These declines however were partially offset by higher positions in money market papers (up CHF 29 billion) and financial investments (up CHF 4 billion). Mortgage loans remained stable in 20092010 at CHF 141142 billion.

Interbank lending

During 2009,2010, interbank collateral trading increased by CHF 14 billion, due to higher trading volumes with UBS subsidiaries, in particular in Asia and Europe. Due from banks on time increased by CHF 4 billion, predominantly due to the higher funding needs of UBS bank subsidiaries in the Americas region. These increases were partially offset by due from banks on timedemand, which declined slightly by CHF 532 billion predominately due to lower funding needs of third party banks in the Americas and European region as well as UBS subsidiaries in the European region. Due from banks on demand declined by CHF 12 billion due to lower funding to bank subsidiaries in the European region. In addition, interbank collateral trading declined by CHF 100 billion, attributable to lower trading volumes and a shift into money market paper within UBS subsidiaries in the Americas, European region and Asia.

Customer lending

The customer loan drop ofCustomer loans decreased by CHF 3711 billion was theas a result of lower funding needs by clientsof UBS subsidiaries (non-banks) in the Americas region, as well as lower cash collateral requirements on derivative instruments in the Americas and in the European region, as well as UBS subsidiaries (non-banks), predominately in the Americas region.Europe.

Money market papers

The increasedecrease in money market papers iswas due to UBS’s strategic decision toa rebalance itsin our investment portfolio, which led to a shift from reverse repurchase agreements into money market papers available-for-sale.to financial investments. These instruments include highly liquid short-term securities issued by governments and government-controlled institutions in various currencies, mainly US dollar, euro and euro.British pound.



371379

Financial information
UBS AG (Parent Bank)

Parent Bankbank financial statements

Income statement

                     
Income statement 
 
 For the year ended % change from  For the year ended % change from 
CHF million 31.12.09 31.12.08 31.12.08  31.12.10 31.12.09 31.12.09 
Interest and discount income 13,764 37,825  (64) 10,853 13,764  (21)
Interest and dividend income from trading portfolio 4,911 12,014  (59) 4,441 4,911  (10)
Interest and dividend income from financial investments 92 76 21  312 92 239 
Interest expense  (16,901)  (49,022)  (66)  (12,181)  (16,901)  (28)
Net interest income 1,866 893 109  3,426 1,866 84 
Credit-related fees and commissions 255 208 23  295 255 16 
Fee and commission income from securities and investment business 9,294 11,668  (20) 8,433 9,294  (9)
Other fee and commission income 624 610 2  645 624 3 
Fee and commission expense  (2,264)  (2,849)  (21)  (2,070)  (2,264)  (9)
Net fee and commission income 7,909 9,637  (18) 7,304 7,909  (8)
Net trading income  (476)  (9,466) 95  6,501  (476) 
Net income from disposal of financial investments 123 176  (30) 228 123 85 
Income from investments in associated companies 1,154 3,763  (69) 1,703 1,154 48 
Income from real estate holdings 26 29  (10) 31 26 19 
Sundry income from ordinary activities 4,761 3,384 41  3,632 4,761  (24)
Sundry ordinary expenses  (3,604)  (2,767) 30   (3,422)  (3,604)  (5)
Other income from ordinary activities 2,460 4,584  (46) 2,172 2,460  (12)
Operating income
 11,759 5,648 108  19,402 11,759 65 
Personnel expenses 9,101 6,707 36  10,300 9,101 13 
General and administrative expenses 4,421 5,822  (24) 4,502 4,421 2 
Operating expenses
 13,522 12,528 8  14,802 13,522 9 
Operating profit
  (1,763)  (6,880) 74  4,601  (1,763) 
Depreciation and write-offs on investments in associated companies and fixed assets 2,405 26,900  (91) 2,051 2,405  (15)
Allowances, provisions and losses 1,432 3,071  (53) 181 1,432  (87)
Profit before extraordinary items and taxes
  (5,600)  (36,852) 85  2,369  (5,600) 
Extraordinary income 688 1,002  (31) 3,957 688 475 
Extraordinary expenses  (49)  (482)  (90)  (178)  (49)  (263)
Tax expense  (80)  (157)  (49)  (25)  (80) 69 
Profit/(loss) for the period
  (5,041)  (36,489) 86 
Profit / (loss) for the period
 6,123  (5,041) 

372380

Financial information
Balance sheet
             
Balance sheet 
          % change from 
CHF million 31.12.09  31.12.08  31.12.08 
 
             
Assets
            
 
Liquid assets  15,177   27,030   (44)
 
Money market papers  91,988   62,777   47 
 
Due from banks  191,002   355,679   (46)
 
Due from customers  153,893   191,308   (20)
 
Mortgage loans  140,671   141,328   0 
 
Trading balances in securities and precious metals  138,160   158,741   (13)
 
Financial investments  15,206   11,085   37 
 
Investments in associated companies  19,225   22,001   (13)
 
Fixed assets  4,986   5,032   (1)
 
Accrued income and prepaid expenses  1,754   3,877   (55)
 
Positive replacement values  68,977   201,801   (66)
 
Other assets  6,504   8,697   (25)
 
Total assets
  847,543   1,189,356   (29)
 
Total subordinated assets
  2,617   3,924   (33)
 
Total amounts receivable from Group companies
  242,617   435,721   (44)
 
             
Liabilities and equity
            
 
Money market papers issued  45,043   52,063   (13)
 
Due to banks  184,010   292,730   (37)
 
Due to customers on savings and deposit accounts  72,985   61,872   18 
 
Other amounts due to customers  287,156   388,338   (26)
 
Medium-term bonds  2,967   3,150   (6)
 
Bonds issued and loans from central mortgage institutions  155,907   143,589   9 
 
Accruals and deferred income  7,520   7,895   (5)
 
Negative replacement values  54,468   193,108   (72)
 
Other liabilities  6,641   14,181   (53)
 
Allowances and provisions  2,277   2,724   (16)
 
Share capital  356   293   22 
 
General statutory reserve  30,377   40,910   (26)
 
Reserve for own shares  835  2,877   (71)
 
Other reserves  2,042   22,115   (91)
 
Profit/(loss) for the period  (5,041)  (36,489)  86 
 
Total liabilities and equity
  847,543   1,189,356   (29)
 
Total subordinated liabilities
  19,410   21,228   (9)
 
Total amounts payable to Group companies
  145,268   271,434   (46)
 
Financial information

Balance sheet

                 
  
              % change from 
CHF million 31.12.101  31.12.102  31.12.09  31.12.09 
 
                 
Assets
                
 
Liquid assets  26,372   26,372   15,177   74 
 
Money market papers  73,049   73,049   91,988   (21)
 
Due from banks  206,162   206,162   191,002   8 
 
Due from customers  142,634   142,634   153,893   (7)
 
Mortgage loans  141,708   141,708   140,671   0 
 
Trading balances in securities and precious metals  139,685   139,685   138,160   1 
 
Financial investments  34,788   34,788   15,206   129 
 
Investments in associated companies  21,075   21,075   19,225   10 
 
Fixed assets  4,557   4,557   4,986   (9)
 
Accrued income and prepaid expenses  1,643   1,643   1,754   (6)
 
Positive replacement values  65,449   65,449   68,977   (5)
 
Other assets  6,373   6,373   6,504   (2)
 
Total assets
  863,495   863,495   847,543   2 
 
Total subordinated assets
  2,287   2,287   2,617   (13)
 
Total amounts receivable from Group companies
  254,762   254,762   242,617   5 
 
                 
Liabilities and equity
                
 
Money market papers issued  50,729   50,729   45,043   13 
 
Due to banks  192,511   192,511   184,010   5 
 
Due to customers on savings and deposit accounts  78,322   78,322   72,985   7 
 
Other amounts due to customers  260,404   260,404   287,156   (9)
 
Medium-term bonds  2,605   2,605��  2,967   (12)
 
Bonds issued and loans from central mortgage institutions  89,860   89,860   155,907   (42)
 
Financial liabilities designated at fair value  79,847   79,847         
 
Accruals and deferred income  7,634   7,634   7,520   2 
 
Negative replacement values  60,723   60,723   54,468   11 
 
Other liabilities  4,717   4,717   6,641   (29)
 
Allowances and provisions  1,424   1,424   2,277   (37)
 
Share capital  383   383   356   8 
 
General statutory reserve  31,904   27,379   30,377   (10)
 
thereof capital contribution reserves3
  42,091   42,091   41,689   1 
 
thereof retained earnings
  (10,187)  (14,712)  (11,312)  (30)
 
Reserve for own shares  432   432   835   (48)
 
thereof capital contribution reserves3
  432   432   835   (48)
 
Other reserves  2,000   402   2,042   (80)
 
thereof retained earnings
  2,000   402   2,042   (80)
 
Profit / (loss) for the period      6,123   (5,041)    
 
Total liabilities and equity
  863,495   863,495   847,543   2 
 
Total subordinated liabilities
  14,689   14,689   19,410   (24)
 
Total amounts payable to Group companies
  129,243   129,243   145,268   (11)
 
1 After appropriation of retained earnings, which is subject to approval by the Annual General Meeting (AGM) on 28 April 2011.  2 Before appropriation of retained earnings.  3 Under Swiss tax law, effective 1 January 2011, repayments of capital contribution reserves are no longer subject to withholding tax deduction. For further information refer to Notes to the Parent Bank financial statements, Changes in accounting policies, comparability and other adjustments, Capital contribution reserves.

381

Financial information
UBS AG (Parent Bank)

Statement of appropriation of retained earnings

The Board of Directors proposes that the Annual General Meeting (AGM) on 1428 April 20102011 approves the following appropriation:

     
CHF million 
 
Profit/Other reserves402
Profit / (loss) for the financial year 20092010 as per the Parent Bank’s Income Statement  (5,0416,123
Total for appropriation
)6,525
 
Appropriation to other reserves  (2,0422,000)
 
Appropriation to general statutory reserves: Share premiumreserves (retained earnings)  (2,9994,525
Total appropriation
)6,525
 

373382

Financial information
UBS AG (Parent Bank)

Financial information

Notes to the Parent Bank financial statements

Accounting policies

The Parent Bank Financial Statements are prepared in accordance with Swiss Federal banking law. The accounting policies are principally the same as for the Group Financial Statements outlined in Note“Note 1, Summary of Significant Accounting Policies.” Major differences between the Swiss Federal banking law requirements and International Financial Reporting Standards are described in Note 40 to the consolidated financial statements. The accounting policies applied for the statutory accounts of the Parent Bank are discussed below. The risk management of UBS AG is described in the context of the risk management for UBS Group. ReferFor the statutory required risk assessment refer to the “Risk and treasury management” section.section of this report. For a description of the business activities refer to the “UBS business divisions and Corporate Center” section of this report.

Treasury shares

Treasury shares are own equity instruments held by an entity. Under Swiss law, treasury shares are recognized in the balance sheet as trading balances.balances or asFinancial investments. Short positions in treasury shares are recognized in “DueDue to banks”. banks.Treasury shares recognized as trading balances and short positions in treasury shares are measured at fair value with unrealized gains or losses from remeasurement to fair value included in the income statement. Treasury shares recognized asFinancial investmentsare valued according to the principles of lower of cost or market value. Realized gains and losses on the sale or acquisition of treasury shares are recognized in the income statement.

AReserve reserve for own shares held for other than trading purposes must be created withinin equity equal to the cost value of the treasury shares held through reclassification fromOther reserves.RepurchaseTherefore the repurchases of treasury shares held for other than trading purposes is only allowed if sufficientOther reservesare available. TheReserve for own sharesis not available for distribution to shareholders.

Foreign currency translation

Assets and liabilities of foreign branches are translated into CHF at the spot exchange rate at the balance sheet date. Income and expense items are translated at weighted average exchange rates for the period. Gains resulting fromAny exchange differences arising on the translation of each of these foreign branches are credited to a provision account (other liabilities). Losses resulting from exchange differences are debited firstlyrecognized in the income statement.1

The main currency translation rates used by the Parent Bank can be found in Note 39 to the aforementioned provision account until such provision is fully utilized, and secondly to profit and loss.consolidated financial statements.

Investments in associated companies

Investments in associated companies are equity interests which are held for the purpose of the Parent Bank’s business activities or for strategic reasons. They include all directly held subsidiaries andthrough which UBS AG conducts its banking business on a global basis. The investments are carried at cost less impairment. The carrying value is tested for impairment when indications for a decrease in value exist, which include incurrence of significant operating losses or a severe depreciation of the currency in which the investment is denominated. If an investment in associate is impaired, its value is generally 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 to a value above the net asset value if applicable.in the opinion of management forecasts of future profitability provide sufficient evidence that a carrying value above net asset value is supported. Management may exercise its discretion as to what extent and in which period a recovery in value is recognized.

Deferred taxes

Deferred tax assets are not recognized in the Parent Bank Financial Statements. DeferredStatements under Swiss Federal banking law. However, deferred tax liabilities aremay be recognized for all taxable temporary differences. The change in the deferred tax liability balance is recognized in profit or loss.

Equity participation and other compensation plans

Equity participation plans

Under Swiss law, employee share awards are recognized as compensation expenseexpenses and accrued over the performance year, which is generally the period prior to the grant date. Employee option awards which do not contain voluntary termination non-compete provisions are recognized as compensation expenseexpenses on the grant date. If the award is performance based and contains substantive future service/vesting period conditions, compensation expense isexpenses are recognized overduring the performance period. Employee option awards which contain voluntary termination non-compete provisions (i.e. good leaver clause) are recognized as compensation expenseexpenses over the performance year. Equity- and cash-settled



1 The description in the notes of our “foreign currency translation” accounting policy was changed to align it with our applied accounting practice. This foreign currency translation policy has been consistently applied for the two periods presented, and therefore, the change in description in the notes does not affect the financial statements of UBS AG (Parent Bank) for the years ended 31 December 2010 and 2009.

383

Financial information
UBS AG (Parent Bank)

awards are classified as liabilities. The employee share option awards are remeasured to fair value at each balance sheet date. However, for employee share options that UBS intends to settle in shares from conditional capital, there is no impact on the income statement and no liability is recognized. Upon exercise of employee options, cash received for payment of the strike price is credited against share capital and general statutory reserve.

Other compensation plans

Fixed and variable deferred cash compensation is recognized as compensation expenseexpenses over the performance year. If the award is performance based and contains substantive future service/service / vesting period conditions, compensation expense isexpenses are recognized overduring the performance period.

Changes in accounting policies, comparability and
other adjustments

Equity participation and other compensation plans

Employee share option awards, which UBS intends to settle using treasury shares, are classified as liabilities and are re-measured to fair value at each balance sheet date. As of 1 January 2010, UBS simplified its approach to determine the fair value of such employee share option awards (see details in Note 31 to the consolidated financial statements). UBS compared the values generated by the new model to those of the original model and concluded that fair values obtained from the new valuation model are not materially different from the fair values obtained from the original model. A valuation difference of CHF 12 million was recognized as an expense in trading income. Employee share option awards that are settled by issuing new shares out of conditional capital are not affected by this model change as no compensation expense and no liability is recognized.

Own bonds held for trading and market making activities

In 2010, UBS changed its accounting policy for owns bonds held. Own bonds held for trading and market making purposes are no longer treated as extinguishment of debt, but are rather classified

as trading assets. Gains and losses from trading and market making activities are reported in trading income.

Financial liabilities designated at fair value

In December 2010, FINMA issued a “Frequently Asked Questions” document that amends FINMA circular 08/2 to allow designation of issued structured products that meet certain conditions as at fair value through profit or loss. Changes in fair value attributable to a change in own credit are not recognized. Issued structured products are hybrid instruments that consist of a debt host contract and a bifurcatable embedded derivative(s). UBS adopted this amendment to FINMA circular 08/2 for year-end 2010. Issued structured products designated at fair value are presented on the face of the balance sheet in the lineFinancial liabilitiesdesignated at fair value. The difference between fair value and amortized cost upon transition is recorded in trading income and resulted in a trading loss of approximately CHF 988 million.

Capital contribution reserves

Under Swiss tax law, effective 1 January 2011, repayments of capital contribution reserves established since 1997 are no longer subject to withholding tax deduction. The presentation of the balance sheet has been changed to present the components of theGeneral statutory reserve, Reserve for own sharesandOther reservesaccounts within shareholders’ equity. Amounts in these reserve accounts originate either from share premiums paid in connection with the issue of new shares or profits or losses transferred to any of these reserve accounts (retained earnings). This more detailed presentation has been made to establish the amount of capital contribution reserves that UBS may be able to repay to shareholders without being subject to the withholding tax deduction that applies to dividends paid out of retained earnings. Such amount is subject to approval from the Swiss Tax Authorities. The comparative prior year period conforms to the current year presentation.
In an additional column, the balance sheet as of 31 December 2010 is presented taking into account the proposed appropriation of the available profit to reserves.



374384

Financial information

Additional income statement information

Financial informationNet trading income

             
  
  For the year ended % change from 
CHF million 31.12.10  31.12.09  31.12.09 
 
Investment Bank equities  1,890   3,005   (37)
 
Investment Bank fixed income, currencies and commodities  2,326   (4,496)    
 
Other business divisions  2,285   1,014   125 
 
Total  6,501   (476)    
 

Extraordinary income and expenses

ChangesExtraordinary income2010 was mainly comprised of the following items: merger gains and gains from sale of subsidiaries and associated companies of CHF 601 million; reversal of write-downs of investments in accounting policies, comparability and other adjustments

Nettingassociated companies of cash collateral against replacement values

In 2009, UBS concluded that the cash collateral provided or received can be offset against the negative or positive replacement values if the cash collateral is provided or received under the same legally enforceable master netting and related collateral agreement. The change in accounting policy resultedCHF 2,337 million (2009: CHF 265 million), mainly in the following effects on the balance sheetUnited States; a number of prior period related valuation corrections aggregating CHF 741 million related to (i) share-based compensation plans, (ii) financial instruments which, unlike under IFRS, cannot be accounted for 31 December 2009: a decrease of approximately
at

CHF 28.3 billion inPositive replacement values,a decreasefair value through profit or loss according to FINMA circular 08/2, (iii) financial investments carried at lower of approximately CHF 29.4 billion inNegative replacement valuescost or market value, and (iv) miscellaneous other valuation adjustments; and a corresponding decrease release of other liabilities of CHF 227 million.

Extraordinary expensesinDue 2010 included losses from banks/Due from customersandDue to banks/Due to customers.There was no impact to the income statement for the period.

Subordinated liabilities

In the balance sheet 2009, total subordinated liabilities presented for 31 December 2008 have been adjusted fromsale of subsidiaries and associated companies of CHF 24,42718 million to(2009: CHF 21,22848 million) and prior year related valuation corrections of CHF 160 million.



375385

Financial information
UBS AG (Parent Bank)

Additional income statement information

Net trading income
             
Net trading income 
  For the year ended % change from 
CHF million 31.12.09  31.12.08  31.12.08 
Investment Bank equities  3,005   3,930   (24)
 
Investment Bank fixed income, currencies and commodities1
  (4,496)  (12,678)  65 
 
Other business divisions1
  1,014   (718)    
 
Total  (476)  (9,466)  95 
 
1 The prior year amounts have been adjusted to conform to the current year’s presentation.

Extraordinary income and expenses

Extraordinary income includes gains from sale of subsidiaries and associated companies of CHF 393 million in 2009, whereas 2008 included a gain on sale of Bank of China investment of approximately CHF 360 million. Further, 2009 includes write-up of investments in associated companies of CHF 265 million (2008: CHF 30 million). Amounts in 2008 included a

release on reserves on investments in subsidiaries of CHF 490 million and a release of provisions of CHF 72 million.

Extraordinary expenses in 2009 include losses from sale of subsidiaries and associated companies of CHF 48 million. 2008 included CHF 478 million related to an overstatement of trading income in 2007.



376

Financial information

Additional balance sheet information

Allowances and provisions
                         
Allowances and provisions1 
      Provisions applied  Recoveries,          
      in accordance  doubtful interest,          
  Balance at  with their  currency translation  Provisions released  New provisions  Balance at 
CHF million 31.12.08  specified purpose  differences  to income  charged to income  31.12.09 
 
Default risks (credit and country risk)  1,556   (1,408)  196   (493)  1,405   1,256 
 
Litigation risks  1,078   (280)  (100)  (22)  134   810 
 
Operational risks  157   (203)  0   (57)  145   42 
 
Retirement benefit plans  94   (29)  (1)  0   32   96 
 
Restructuring provisions  74   (205)  45   (3)  303   214 
 
Deferred taxes  36   0   (15)  (12)  0   9 
 
Other  1,259   (522)  2   (173)  458   1,024 
 
Total allowances and provisions
  4,254   (2,647)  127   (760)  2,477   3,451 
 
Allowances deducted from assets  1,530                   1,174 
 
Total provisions as per balance sheet
  2,724                   2,277 
 
1 In previous years, the table included “Trading portfolio risks” (CHF 14,858 million at 31 December 2008). “Trading portfolio risks” includes credit, liquidity and model adjustments to financial instruments accounted for at fair value through profit or loss. As these adjustments are components of fair value rather than allowances and provisions, and respective profit or loss impacts are presented as net trading income rather than credit loss expense/(recovery), “Trading portfolio risks” are no longer included.
Statement of shareholder’s equity
                         
Statement of shareholders' equity 
                      Total 
                      shareholders' 
      General statutory  General statutory          equity (before 
      reserves:  reserves:  Reserves for own      distribution 
CHF million Share capital  Share premium  Retained earnings  shares  Other reserves  of profit 
 
As of 31.12.07 and 1.1.08
  207   6,303   2,472   9,441   15,567   33,990 
 
Capital increase1
  86   15,911           (15)  15,982 
 
Capital increase related to MCNs      16,223               16,223 
 
Increase in reserves                      0 
 
Prior year dividend                      0 
 
Profit/(loss) for the period                  (36,489)  (36,489)
 
Changes in reserves for own shares              (6,564)  6,564   0 
 
Transfers      (11,901)  (2,472)      14,373   0 
 
As of 31.12.08 and 1.1.09
  293   26,536   0   2,877   0   29,706 
 
Capital increase  30   3,783               3,813 
 
Capital increase related to MCNs  33   58               91 
 
Increase in reserves                      0 
 
Prior year dividend                      0 
 
Profit/(loss) for the period                  (5,041)  (5,041)
 
Changes in reserves for own shares              (2,042)  2,042   0 
 
Transfers2
      (2,999)          2,999   0 
 
As of 31.12.09
  356   27,378   0   835   0   28,569 
 
1 Includes stock dividend.   2 Subject to approval by the Annual General Meeting on 14 April 2010.

377

Financial information
UBS AG (Parent Bank)

Share capital
                 
Share capital 
  Par value  Ranking for dividends 
  No. of shares  Capital in CHF  No. of shares  Capital in CHF 
 
As of 31.12.09
                
 
Issued and paid up  3,558,112,753   355,811,275   3,558,112,753   355,811,275 
 
Conditional share capital  527,773,646   52,777,365         
 
As of 31.12.08
                
 
Issued and paid up  2,932,580,549   293,258,055   2,932,580,549   293,258,055 
 
Conditional share capital  792,844,711   79,284,471         
 

Shares issued

On 25 June 2009, UBS increased its share capital by issuing 293,258,050 new registered shares. The shares were placed with a small number of large institutional investors. The shares were issued out of authorized capital which had been approved at the Annual General Meeting of shareholders (AGM) on 15 April 2009.

On 19 August 2009, the Swiss Confederation announced the conversion of its UBS mandatory convertible notes (MCNs). Upon conversion on 25 August 2009, UBS issued 332,225,913 new shares from existing conditional capital.
On 27 February 2008 the extraordinary general meeting of shareholders approved the creation of a maximum of CHF 10,370,000 in authorized capital allowing the distribution of a stock dividend. That resulted in the issuance of 98,698,754 shares.
On 23 April 2008, the AGM of shareholders approved a capital increase that resulted in the issuance of 760,295,181 fully paid registered shares. All issued shares are fully paid.

For further information on the capital increase and the conversion of the MCNs in 2009, refer to “Note 26 Capital increases and mandatory convertible notes” in the financial statements.

Conditional share capital

On 31 December 2009, a maximum of 29,350 shares could have been issued against the future exercise of options from former PaineWebber employee option plans and 149,994,296 shares could have been issued to fund UBS’s employee share option programs. In addition, conditional capital of up to 277,750,000 shares was available for the UBS share delivery obligation due to the issuance of the March 2008 mandatory convertible notes (MCNs) and conditional capital of up to 100,000,000 shares is available in connection with the transaction with the Swiss National Bank (SNB).



378

Financial information

Off-balance-sheet and other information

Assets pledged or assigned as security for own obligations and assets subject to reservation of title
                         
Assets pledged or assigned as security for own obligations and assets subject to reservation of title 
  31.12.09  31.12.08  Change in % 
CHF million Book value  Effective liability  Book value  Effective liability  Book value  Effective liability 
 
Money market papers  42,898   1,368   7,429   1,300   477   5 
 
Mortgage loans1
  21,741   12,321   3,699   2,418   488   410 
 
Securities  47,289   31,862   50,223   37,083   (6)  (14)
 
Other  8,578   0   8,149   0   5     
 
Total
  120,506   45,551   69,500   40,801   73   12 
 
                         
  31.12.10 31.12.09 Change in % 
CHF million Book value  Effective liability  Book value  Effective liability  Book value  Effective liability 
 
Money market papers1
  31,575   7,876   42,898   1,368   (26)  476 
 
Mortgage loans2
  27,119   15,706   21,741   12,321   25   27 
 
Securities1
  60,989   26,308   47,289   31,862   29   (17)
 
Other  5,790   0   8,578   0   (33)    
 
Total
  125,473   49,890   120,506   45,551   4   10 
 
1 Includes positions pledged to central banks for credit facilities which are committed but undrawn.  12 Book value includes Includes mortgage loans transferred for security purposepurposes in preparation of existing and upcoming covered bond issuances.

Financial assets are mainly pledged in securities borrowing and lending transactions, in repurchase and reverse repurchase transactions, under collateralized credit lines with central banks, against loans from mortgage institutions, in con-

nectionconnection with derivative transactions, as security deposits for stock exchanges and clearinghouse memberships or transferred for security purposepurposes in connection with the issuance of covered bonds.

Allowances and provisions

                         
  
      Provisions applied  Recoveries,          
      in accordance  doubtful interest,          
  Balance at  with their  currency translation  Provisions released  New provisions  Balance at 
CHF million 31.12.09  specified purpose  differences  to income  charged to income  31.12.10 
 
Default risks (credit and country risk)  1,256   (383)  90   (378)  380   964 
 
Litigation risks  810   (764)  (29)  (37)  170   151 
 
Operational risks  42   (20)  (6)  (7)  16   25 
 
Retirement benefit plans  96   (30)  (13)      37   90 
 
Restructuring provisions  214   (112)  (13)  (32)  21   80 
 
Deferred taxes  9       59   (64)      4 
 
Other  1,024   (75)  (28)  (74)  137   982 
 
Total allowances and provisions
  3,451   (1,384)  60   (592)  761   2,296 
 
Allowances deducted from assets  1,174                   872 
 
Total provisions as per balance sheet
  2,277                   1,424 
 

386

Financial information

Statement of shareholders’ equity

                         
  
                      Total shareholders' 
  Share  General statutory  Reserves for  Other  Profit / (loss)  equity (before 
CHF million capital  reserves  own shares  reserves  for the period  distribution of profit) 
   
As of 31.12.08 and 1.1.09
  293   40,910   2,877   22,115   (36,489)  29,706 
 
Capital increase  30   3,783               3,813 
 
Capital increase related to mandatory convertible notes (MCNs)  33   58               91 
 
Profit / (loss) allocation      (14,374)      (22,115)  36,489   0 
 
Prior year dividend                      0 
 
Profit / (loss) for the period                  (5,041)  (5,041)
 
Changes in reserves for own shares          (2,042)  2,042       0 
 
As of 31.12.09 and 1.1.10
  356   30,377   835   2,042   (5,041)  28,569 
 
Capital increase      1               1 
 
Capital increase related to mandatory convertible notes (MCNs)  27                  ��27 
 
Profit / (loss) allocation      (2,999)      (2,042)  5,041   0 
 
Prior year dividend                      0 
 
Profit / (loss) for the period                  6,123   6,123 
 
Changes in reserves for own shares          (402)  402       0 
 
As of 31.12.10
  383   27,379   432   402   6,123   34,719 
 

Share capital and significant shareholders

                 
  
  Par value Ranking for dividends 
  No. of shares  Capital in CHF  No. of shares  Capital in CHF 
 
As of 31.12.10
                
 
Issued and paid up  3,830,840,513   383,084,051   3,830,840,513   383,084,051 
 
Conditional share capital  629,920,712   62,992,071         
 
As of 31.12.09
                
 
Issued and paid up  3,558,112,753   355,811,275   3,558,112,753   355,811,275 
 
Conditional share capital  527,773,646   52,777,365         
 

Shares issued

On 5 March 2010, the mandatory convertible notes (MCNs) with a notional value of CHF 13 billion issued in March 2008 to the Government of Singapore Investment Corporation Pte. Ltd. and an investor from the Middle East were converted into UBS shares. The notes were converted at a price of CHF 47.68 per share. As a result, UBS issued 272,651,005 new shares with a nominal value of CHF 0.10 each from existing conditional capital. The MCNs were treated as equity instruments and recognized inShare premium.

Conditional share capital

On 31 December 2010, 149,920,712 shares were available for issue to fund UBS’s employee share option programs. In addition, conditional capital of up to 100,000,000 shares was available in connection with the Swiss National Bank (SNB) transaction. Furthermore, on 14 April 2010 the annual general meeting of UBS AG approved the creation of conditional capital up to a maximum amount of 380,000,000 shares for conversion rights / warrants

granted in connection with the issuance of bonds or similar financial instruments.

Significant shareholders

According to disclosure notifications filed with UBS AG and the SIX Swiss Exchange, on 8 June 2010, The Capital Group Companies, Inc., Los Angeles, disclosed a holding of 4.90% of the total share capital of UBS AG. On 12 March 2010, the Government of Singapore, Singapore, as beneficial owner, disclosed under the Swiss Stock Exchange Act, a holding by the Government of Singapore Investment Corp. of 6.45% of the total share capital of UBS AG. On 17 December 2009, BlackRock Inc., New York, disclosed according to the Swiss Stock Exchange Act, a holding of 3.45% of the total share capital of UBS AG (3.21% of the total share capital as of 11 March 2010).

According to UBS’s share register, the shareholders (acting in their own name or in their capacity as nominees for other investors or beneficial owners) listed in the table below, were registered with 3% or more of the total share capital as of 31 December 2010.



387

Financial information
UBS AG (Parent Bank)

Shareholders registered in the UBS shares register with 3% or more of shares issued

                         
  
  31.12.10 31.12.09 
      Total          Total    
      nominal          nominal    
      value CHF          value CHF    
  Quantity  million  Share %  Quantity  million  Share % 
 
Chase Nominees Ltd, London  409,822,353   41   10.70   413,857,854   41   11.63 
 
DTC (Cede & Co.), New York1
  280,355,684   28   7.32   299,489,003   30   8.42 
 
Government of Singapore Investment Corp., Singapore  245,481,682   25   6.41         less than 3 
 
Nortrust Nominees Ltd, London  145,038,407   15   3.79   109,365,321   11   3.07 
 
1 DTC (Cede & Co.), New York, “The Depository Trust Company”, is a US securities clearing organization.

èRefer to the “Corporate governance and compensation” section of this report for more information on significant shareholders’ and shareholders participation rights


Other assets

         
  
CHF million 31.12.10  31.12.09 
 
Settlement and clearing accounts  499   592 
 
VAT and other tax receivables  203   128 
 
Prepaid pension costs  2,839   2,664 
 
Other receivables  2,832   3,120 
 
Total other assets
  6,373   6,504 
 

Other liabilities

         
  
CHF million 31.12.10  31.12.09 
 
VAT and other tax payables  444   484 
 
Settlement and clearing accounts  581   883 
 
Deferral position for hedging instruments  1,443   782 
 
Other payables  2,250   4,493 
 
Total other liabilities
  4,717   6,641 
 

388

Financial information

Off-balance-sheet and other information

Commitments and contingent liabilities

                        
Commitments and contingent liabilities 
 
 % change from % change from 
CHF million 31.12.09 31.12.08 31.12.08  31.12.10 31.12.09 31.12.09 
Contingent liabilities 139,319 286,451  (51) 102,820 119,030  (14)
Irrevocable commitments 73,270 68,660 7  106,304 113,027  (6)
Irrevocable securities delivery obligations related to forward starting repos and securities lending transactions 27,215 18,623 46 
Liabilities for calls on shares and other equities 151 145 4  168 151 11 
Confirmed credits 2,083 2,079 0 
Documentary credits 4,278 2,083 105 

Contingent liabilitiesinclude indemnities and guarantees issued by UBS AG for the benefit of subsidiaries and creditors of subsidiaries. In instances where the indemnity amount issued by the Parent Bank is not defined, the indemnity relates to the solvency or minimum capitalization of a subsidiary, and therefore no amount is included in the table above. This policy has been applied since 2010. The prior year amounts have been adjusted to conform to the current year’s presentation.

Irrevocable commitments and securities delivery obligations:

From 2010 onwards, collateralized forward starting transactions are presented in this table; the comparative period has been adjusted accordingly. Irrevocable commitments include cash payment obligations from forward starting reverse repos and securities borrowing transactions. Irrevocable securities delivery obligations related to forward starting repos and securities lending transactions are presented on a separate line.

UBS AG is jointly and severally liable for the value added tax (VAT) liability of Swiss subsidiaries that belong to its VAT group.



Derivative instruments1

                         
  
  31.12.10 31.12.09 
          Notional          Notional 
          amount          amount 
CHF million PRV2  NRV3  CHF billion  PRV2  NRV3  CHF billion4 
 
Interest rate contracts  176,918   166,919   32,963   187,506   174,632   34,726 
 
Credit derivative contracts  57,812   50,578   2,345   80,008   70,586   2,525 
 
Foreign exchange contracts  113,514   122,843   6,561   97,925   101,800   6,051 
 
Precious metal contracts  3,784   3,755   71   3,442   3,378   78 
 
Equity / Index contracts  16,281   19,455   483   17,314   21,353   451 
 
Commodities contracts, excluding precious metals contracts  894   927   41   761   697   31 
 
Total derivative instruments  369,203   364,477   42,463   386,956   372,447   43,862 
 
Replacement value netting  303,754   303,754       317,979   317,979     
 
Replacement values after netting  65,449   60,723       68,977   54,468     
 
                         
Derivative instruments 
  31.12.09  31.12.08 
          Notional          Notional 
          amount          amount 
CHF million, except where indicated PRV1  NRV2  CHF billion  PRV1  NRV2  CHF billion 
 
Interest rate contracts  187,506   174,632   33,787   377,307   370,346   36,476 
 
Credit derivative contracts  80,008  70,586   2,525  202,357   187,216   3,712 
 
Foreign exchange contracts  97,925   101,800   6,523   222,178   229,656   6,005 
 
Precious metal contracts  3,442   3,378   79   5,804   5,697   108 
 
Equity/index contracts  17,314   21,353   251   28,502   36,208   473 
 
Commodities contracts, excluding precious metals contracts  761   697   6   27,055   25,387   160 
 
Total derivative instruments  386,956   372,447   43,171   863,203   854,510   46,934 
 
Replacement value netting  317,979   317,979       661,402   661,402     
 
Replacement values after netting  68,977   54,468       201,801   193,108     
 
1 Bifurcated embedded derivatives are presented in the same balance sheet line as the host contract and are excluded from this table.  12 PRV: Positive replacement value.  23 NRV: Negative replacement value.4 Notional values as of 31 December 2009 for Interest rate, Foreign exchange, Equity/index and Commodities contracts have been corrected.

379Fiduciary transactions

             
  
          % change from 
CHF million 31.12.10  31.12.09  31.12.09 
 
Deposits:
            
 
with third-party banks  11,529   17,088   (33)
 
with subsidiaries  1,740   1,810   (4)
 
Total
  13,269   18,898   (30)
 

389

Financial information
UBS AG (Parent Bank)

Fiduciary transactions
             
Fiduciary transactions 
          % change from 
CHF million 31.12.09  31.12.08  31.12.08 
 
Deposits:            
 
with third-party banks  17,088   36,452   (53)
 
with subsidiaries  1,810   2,738   (34)
 
Total
  18,898   39,190   (52)
 

Due to UBS pension plans

             
  
  For the year ended % change from 
CHF million 31.12.10  31.12.09  31.12.09 
 
Obligations due to UBS pension plans1
  682   543   26 
 
             
Due to UBS pension plans 
  For the year ended  % change from 
CHF million 31.12.09  31.12.08  31.12.08 
 
Due to UBS pension plans and UBS debt instruments held by pension plans  397   876   (55)
 
1 From 2010 onwards, derivative financial instruments are included; the comparative period has been adjusted.

Transactions with related parties

Transactions with related parties (such as securities transactions, payment transfer services, borrowing and compensation for deposits) are conducted at internally agreed transfer prices or at arm’s length.

Outsourcing

Outsourcing of IT and other services through agreements with external service providers is in compliance with FINMA circular 08/7 “Outsourcing banks”.

Dispensations in statutory financial statements

As UBS Group prepares consolidated financial statements in accordance with IFRS, UBS AG (Parent Bank) is exempted from various disclosures in the statutory financial statements. Refer to the IFRS “Consolidated financial statements” in the “Financial Information” section of this report for more information.

Personnel

The Parent Bank employed 36,381 personnel on 31 December 2010 compared with 36,182 personnel on 31 December 2009 and 40,998 personnel on 31 December 2008.

Significant shareholders
             
Significant shareholders 
In % of shares issued 31.12.09  31.12.08  31.12.07 
 
Chase Nominees Ltd, London  11.63   7.19   7.99 
 
DTC (Cede & Co.), New York1
  8.42   9.89   14.15 
 
Mellon Bank N.A., Everett  3.21  less than 3  less than 3 
 
Nortrust Nominees Ltd, London  3.07  less than 3  less than 3 
 
1 DTC (Cede & Co.), New York, “The Depository Trust Company” is a US securities clearing organization.
2009.

380390

Financial information

Corporate governance and compensation report

Total compensation for all GEB members

Compensation details
                                       
  
        Variable cash    
CHF, except where indicateda  compensation under CBP   
                                Contribu-    
                                tions to    
                Annual  Annual  Annual      retirement    
  For the year     Immediate  Deferred  bonus  bonus under  bonus  Benefits in  benefits    
Name, function ended Base salary  cashb  cashb, 3  under PEPc  SEEOPd  under IPPc  kinde  plansf  Total 
 
Oswald J. Grübel, Group CEO 2010  3,000,000   0   0   0   0   –   25,600   0   3,025,600 
 
Carsten Kengeter, CEO Investment Bank (highest-paid) 2010  874,626   1,002,496   2,339,158   1,670,827   3,341,654   –   92,547   0   9,321,308 
 
Carsten Kengeter, CEO Investment Bank (highest-paid) 2009  669,092   3,002,082   2,001,388   6,155,869   –   1,349,336   0   12,545   13,190,312 
 
Aggregate of all GEB members who were in office on 31 December 20101
 2010  14,705,894   15,588,145   14,451,756   15,019,951   30,039,901   –   381,851   843,402   91,030,900 
 
Aggregate of all GEB members who were in office on 31 December 20091
 2009  12,000,055   15,440,827   10,293,884   13,453,4244  –   15,696,333   270,971   1,551,068   68,706,566 
 
Aggregate of all GEB members who stepped down during 20102
 2010  755,950   1,380,000   920,000   0   0   –   78,817   118,334   3,253,101 
 
Aggregate of all GEB members who stepped down during 20092
 2009  2,447,544   23,065,858   15,377,239   0   –   0   215,151   171,122   41,276,914 
 
1 Number and additional information for executivedistribution of GEB members: 13 GEB members of the BoD
                                 
Compensation details and additional information for executive members of the BoD 
CHF, except where indicateda 
              Annual incentive  Discretionary      Contributions to    
  For the      Annual incentive  award (shares  award (options  Benefits  retirement    
Name, function1 year ended  Base salary  award (cash)  – fair value)c  – fair value)d  in kinde  benefits plansf  Total 
 
Kaspar Villiger, Chairman  2009   602,083   0   0   0   74,488   0   676,571 
   
   2008                             
 
Peter Kurer, former Chairman  2009   666,667   0   0   0   37,561   89,780   794,008 
   
   2008   1,333,333   0   0   0   58,267   174,047   1,565,647 
 
Marcel Ospel, former Chairman  2009                             
   
   2008   666,667   0   0   0   80,755   87,023   834,445 
 
Stephan Haeringer,  2009                             
   
former Executive Vice Chairman  2008   1,125,000   0   0   0   108,846   195,802   1,429,648 
 
1 2009: Kaspar Villiger was the only non-independent member in office on 31 December 2009; Peter Kurer did not stand for reelection at the AGM on 15 April 2009. 2008: Peter Kurer was the only executive member in office2010 and on 31 December 2008;2009 respectively.  2 Number and distribution of former GEB members for 2010 includes Francesco Morra (three months in office, including a notice period of six months); and 2009 includes Marcel Ospel did not standRohner (two months in office), Walter H. Stürzinger and Raoul Weil (three months in office), Jerker Johansson (four months in office), Rory Tapner (six months in office) and Marten Hoekstra (10 months in office).  3 In 2010, for reelectionJohn Cryan, Carsten Kengeter and Alexander Wilmot-Sitwell, deferred cash includes blocked shares.  4 Included in the share awards are SEEOP awards at the AGM on 23 April 2008a fair value of GBP 4,655,950 and Stephan Haeringer stepped down during the year asEOP awards at a memberfair value of the BoD, and both of these payments are pro-rata for the four and nine months, respectively, in their functions.GBP 1,594,250.

Explanation of the tables outlining compensation details of executivefor GEB members of
theand non-independent BoD and members of the GEB:

a. Local currencies are converted into CHF using the exchange rates as detailed in “NoteNote 39 Currency“Currency translation rates” in the “Financial information” section of this report.
b. The entireOf the cash incentiveaward, 60% is only paid out immediately (representing 24% of a GEB member’s total annual bonus). The balance is paid out in equal installments of 20%, each over a three-year periodthe subsequent two years, and is subject to forfeiture.
c. Values perValue of each performance share at grant: CHF 18.70 for PEP awards granted in 2011 relating to the performance year 2010; CHF 16.30 for PEP awards granted in 2010 relating to the performance year 2009; and CHF 22.20 for IPP awards granted in 2010 relatedrelating to the performance year 2009. These values are based on the performance share valuation which will be usedvaluations for accounting purposes under lFRS2. The valuation was carried out by PricewaterhouseCoopers and takeswhich take into account the relevant performance conditions targets set, and the range of possible outcomes for these.these conditions.
d. No options wereSEEOP is a pre-existing compensation plan that has been updated and re-introduced. SEEOP awards vest in equal installments over five years and are subject to forfeiture. The grant date accounting value per share granted under SEEOP in 2010 for2011 relating to the performance year 2009.2010 at grant is CHF 18.43 or USD 19.94 (actual shares) and CHF 18.30 or USD 19.80 (notional shares).
e. Benefits in kind – car leasing, company car allowance, staff discount on banking products and services,are all valued at market price, for example, health and welfare benefits and general expense allowances – are all valued at market price.allowances.
f. Swiss executives participate in the same pension plan as all other employees. Under this plan, employees receive a company contributionUBS makes contributions to the plan, which covers compensation of up to CHF 820,800. The retirement benefits consist of a pension, a bridging pension and a one-off payout of accumulated capital. Employees must also contribute to the plan. This figure excludes the mandatory employer’s social security contributions (AHV, ALV), but includes the portion attributed to the employer’s portion of the legal BVG requirement. The employee contribution is included in the base salary and annual incentive award components.
 
  In both the US and the UK, executives participatesenior management participates in the same pension plans as all other employees. In the US, there are separate pension plans for Wealth Management Americas compared with the plans differ between the twoother business divisions. For each business division thereThere are generally two different types of pension plans. The grandfathered plans, which are no longer open to new hires, operate depending(depending on the abovementioned distinction by business division,division) either on a cash balance basis or a career average salary basis and participantsbasis. Participants accrue a pension based on their annual compensation limited to USD 250,000 (or USD 150,000 for Wealth Management Americas employees). The principal plans for new hires are defined contribution plans. In the defined contribution plan, participants receive companyplans, UBS makes contributions to the plan based on compensation and limited to USD 245,000. US management may also participate in a 401(k) defined contribution plan (open to all employees), which provides a limited company matching contribution for employee contributions. In the UK, management participates in either the principal pension plan, which operates on a defined contribution basis and is limited to an earnings cap of GBP 100,000, or a grandfathered defined benefit plan which provides a pension onupon retirement based on career average base salary (uncapped)(individual caps introduced as of 1 July 2010).

381391

Financial information
UBS AG (Parent Bank)

Share and option ownership of GEB members on 31 December 2009 / 2010

                           
 
    Number of          Potentially      Potentially 
  For the unvested  Number of  Total number of  conferred voting  Number of  conferred voting 
Name, function1 year ended shares / at risk2  vested shares  shares  rights in %  options held3  rights in %4 
 
Oswald J. Grübel, Group Chief Executive Officer 2010  0   0   0   0.000   4,000,000   0.181 
  
 2009  –   –   0   0.000   4,000,000   0.217 
 
John Cryan, Group Chief Financial Officer 2010  221,879   185,975   407,854   0.018   382,673   0.017 
  
 2009  –   –   235,929   0.013   382,673   0.021 
 
Markus U. Diethelm, Group General Counsel 2010  178,619   75,700   254,319   0.012   0   0.000 
  
 2009  –   –   112,245   0.006   0   0.000 
 
John A. Fraser, 2010  326,702   316,541   643,243   0.029   1,088,795   0.049 
   
Chairman and CEO Global Asset Management 2009  –   –   480,464   0.026   1,088,795   0.059 
 
Lukas Gähwiler, CEO UBS Switzerland and 2010  110,000   850   110,850   0.005   0   0.000 
   
co-CEO Wealth Management & Swiss Bank 2009  –   –   –       –     
 
Carsten Kengeter, CEO Investment Bank 2010  916,201   363,047   1,279,248   0.058   905,000   0.041 
   
  2009  –   –   516,909   0.028   905,000   0.049 
 
Ulrich Körner, Group Chief Operating Officer 2010  177,592   95,597   273,189   0.012   0   0.000 
   
and CEO Corporate Center 2009  –   –   0   0.000   0   0.000 
 
Philip J. Lofts, Group Chief Risk Officer 2010  200,009   144,603   344,612   0.016   577,723   0.026 
   
  2009  –   –   179,234   0.010   577,723   0.031 
 
Robert J. McCann, CEO Wealth Management 2010  138,598   540,866   679,464   0.031   0   0.000 
   
Americas 2009  –   –   602,481   0.033   0   0.000 
 
Francesco Morra, former CEO 2010  –   –   –       –     
   
UBS Switzerland5
 2009  –   –   153,860   0.008   325,086   0.018 
 
Alexander Wilmot-Sitwell, co-Chairman and 2010  274,739   213,613   488,352   0.022   353,807   0.016 
   
co-CEO Group Asia Pacific 2009  –   –   286,767   0.016   353,807   0.019 
 
Robert Wolf, Chairman and CEO, UBS Group 2010  242,805   635,382   878,187   0.040   948,473   0.043 
   
Americas/President Investment Bank 2009  –   –   785,631   0.043   948,473   0.051 
 
Chi-Won Yoon, co-Chairman and 2010  184,858   318,332   503,190   0.023   623,253   0.028 
   
co-CEO Group Asia Pacific 2009  –   –   367,573   0.020   623,253   0.034 
 
Jürg Zeltner, CEO UBS Wealth Management 2010  113,609   9,405   123,014   0.006   205,470   0.009 
   
and co-CEO Wealth Management & Swiss Bank 2009  –   –   16,502   0.001   205,470   0.011 
 
1 This table includes vested and unvested shares and options held by GEB members, including related parties.  2 Includes shares granted under PEP and IPP. The actual number of shares vesting in the future will be calculated under the terms of the plans. Refer to “Deferred variable compensation plans” in the “Corporate governance and compensation” section of this report for more information on both plans.  3 Refer to “Note 31 Equity participation and other compensation plans” in the “Financial information” section of this report for more information.  4 No conversion rights are outstanding.  5 GEB member who stepped down during 2010.

392

Financial information

Compensation details and additional information for non-independent BoD members

                           
  
CHF, except where indicateda 
                    Contributions    
  For the     Annual bonus  Annual      to retirement    
Name, function1 year ended Base salary  (cash)  share award  Benefits in kinde  benefits plansf  Total 
 
Kaspar Villiger, Chairman 2010  850,000   0   500,0002  141,308   0   1,491,308 
   
  2009  602,083   0   0   74,488   0   676,571 
 
Peter Kurer, former Chairman 2010  –   –   –   –   –   – 
   
  2009  666,667   0   0   37,561   89,780   794,008 
 
1 2010: Kaspar Villiger was the only non-independent member in office on 31 December 2010 and 31 December 2009, respectively. Peter Kurer did not stand for reelection at the AGM on 15 April 2009.  2 These shares are blocked for four years.

Remuneration details and additional information for independent BoD members of the BoD

                                           
  
CHF, except where indicateda 
    Human       For the                           
    Resources Governance & Corporate   period                      Share    
  Audit & Compensation Nominating Responsibility Risk AGM to      Committee  Benefits  Additional      percen-  Number of 
Name, function1 Committee Committee Committee Committee Committee AGM  Base fee  retainer(s)  in kind  payments  Total  tage2  shares3,4 
            
Michel Demaré, M   M      2010/2011   325,000   300,000       250,0005  875,000   100   52,631 
            
Vice Chairman M          2009/2010   325,000   200,000   0   0   525,000   50   21,203 
            
David Sidwell,         C  2010/2011   325,000   400,000       250,0005  975,000   50   30,893 
            
Senior Independent Director         C  2009/2010   325,000   400,000   0   0   725,000   50   29,281 
            
Sally Bott,   C M M    2010/2011   325,000   450,000           775,000   50   24,556 
            
member   C   M    2009/2010   325,000   350,000   0   0   675,000   50   27,261 
            
Rainer-Marc Frey, M       M  2010/2011   325,000   400,000           725,000   100   43,583 
            
member         M  2009/2010   325,000   200,000   0   0   525,000   100   40,301 
            
Bruno Gehrig,   M M      2010/2011   325,000   200,000           525,000   50   16,634 
            
member   M M      2009/2010   325,000   200,000   0   0   525,000   50   21,203 
            
Ann F. Godbehere, M     M    2010/2011   325,000   250,000           575,000   50   18,219 
            
member M     M    2009/2010   325,000   250,000           575,000   50   23,222 
            
Axel P. Lehmann,         M  2010/2011   325,000   200,000           525,000   100   31,519 
            
member         M  2009/2010   325,000   200,000   0  ��0   525,000   100   40,301 
            
Sergio Marchionne,            2010/2011                   –         
            
former Senior Independent Director,                                          
former Vice Chairman     M      2009/2010   325,000   100,000   0   250,0005  675,000   100   51,845 
            
Wolfgang Mayrhuber,   M   M    2010/2011   325,000   150,000           475,000   50   15,050 
            
member            2009/2010                   –         
            
Helmut Panke,   M     M  2010/2011   325,000   300,000           625,000   50   19,803 
            
member   M     M  2009/2010   325,000   300,000   0   0   625,000   50   25,242 
            
William G. Parrett, C          2010/2011   325,000   300,000           625,000   50   19,803 
            
member C          2009/2010   325,000   300,000   0   0   625,000   50   25,242 
            
Peter R. Voser,            2010/2011                   –         
            
former member     M      2009/2010   325,000   100,000   0   0   425,000   50   17,164 
            
Total 2010
                                6,700,000         
            
Total 2009
                                6,425,000         
            
                                           
Remuneration details and additional information for independent members of the BoD 
CHF, except where indicated3 
              For the                          
    HR & Governance & Corporate     period                     Share    
  Audit Compensation Nominating Responsibility Risk Strategy AGM to     Committee  Benefits  Additional      percent-  Number of 
Name, function1 Committee Committee Committee Committee Committee Committee AGM Base fee  retainer(s)  in kind  payments  Total  age3  shares4,5 
        
Sergio Marchionne,     M       2009/2010  325,000   100,000   0   250.0006  675,000   100   51,845 
        
Senior Independent
Director, Vice Chairman		     M     M 2008/2009  325,000   200,000   0   250.0006  775,000   100   75,228 
        
Ernesto Bertarelli,             2009/2010                            
        
former member   M M       2008/2009  325,000   200,000   0   0   525,000   100   51,596 
        
Sally Bott,   C   M     2009/2010  325,000   350,000   0   0   675,000   50   27,261 
        
member2
   M   M     2008/2009  162,500   75,000   0   0   237,500   50   12,280 
        
Michel Demaré, M           2009/2010  325,000   200,000   0   0   525,000   50   21,203 
        
member             2008/2009                            
        
Rainer-Marc Frey,         M   2009/2010  325,000   200,000   0   0   525,000   100   40,301 
        
member2
         M M 2008/2009  162,500   150,000   0   0   312,500   50   16,158 
        
Bruno Gehrig,   M M       2009/2010  325,000   200,000   0   0   525,000   50   21,203 
        
member2
 M           2008/2009  162,500   100,000   0   0   262,500   50   13,572 
        
Ann F. Godbehere, M     M     2009/2010  325,000   250,000   0   0   575,000   50   23,222 
        
member             2008/2009                            
        
Gabrielle Kaufmann-             2009/2010                            
        
Kohler, former member     C M     2008/2009  325,000   250,000   0   0   575,000   50   29,731 
        
Axel P. Lehmann,         M   2009/2010  325,000   200,000   0   0   525,000   100   40,301 
        
member             2008/2009                            
        
Rolf A. Meyer,             2009/2010                            
        
former member2
 M M         2008/2009  162,500   150,000   0   0   312,500   50   16,158 
        
Helmut Panke,   M     M   2009/2010  325,000   300,000   0   0   625,000   50   25,242 
        
member   M     M   2008/2009  325,000   300,000   0   0   625,000   50   32,316 
        
William G. Parrett, C           2009/2010  325,000   300,000   0   0   625,000   50   25,242 
        
member2
 M           2008/2009  162,500   100,000   0   0   262,500   50   13,572 
        
David Sidwell,         C   2009/2010  325,000   400,000   0   0   725,000   50   29,281 
        
member       M C   2008/2009  325,000   450,000   0   0   775,000   50   40,072 
        
Peter Spuhler,             2009/2010                            
        
former member2
             2008/2009  162,500   0   0   0   162,500   100   15,945 
        
Peter R.Voser,     M       2009/2010  325,000   100,000   0   0   425,000   50   17,164 
        
member C         M 2008/2009  325,000   400,000   0   0   725,000   50   37,487 
        
Lawrence A. Weinbach,             2009/2010                            
        
former member2
 M           2008/2009  162,500   100,000   0   0   262,500   50   13,572 
        
Joerg Wolle,             2009/2010                            
        
former member   C M       2008/2009  325,000   300,000   0   0   625,000   50   32,316 
 
Total 2009                                6,425,000         
 
Total 2008                                6,437,500         
 
Legend:C = Chairperson of the respective committee;Committee; M = Member of the respective committeeCommittee
1 There were 10 independent BoD members in office on 31 December 2010. Wolfgang Mayrhuber was appointed at the AGM on 14 April 2010 and Sergio Marchionne and Peter Voser stepped down from the BoD at the AGM on 14 April 2010. There were 11 independent BoD members in office on 31 December 2009. Michel Demaré, Ann F. Godbehere and Axel P. Lehmann were appointed at the AGM on 15 April 2009 and Ernesto Bertarelli, Gabrielle Kaufmann-Kohler and Joerg Wolle stepped down from the BoD at the AGM on 15 April 2009.  There were 11 independent BoD members in office on 31 December 2008. David Sidwell was appointed at the AGM on 23 April 2008, and Rolf A. Meyer, Peter Spuhler and Lawrence A. Weinbach stepped down from the BoD at the EGM on 2 October 2008. Sally Bott, Rainer-Marc Frey, Bruno Gehrig and William G. Parrett were appointed at the EGM on 2 October 2008.   2 Remuneration for 2008/2009 is for six months only, as such members either stepped down or were appointed on 2 October 2008.   3 Fees are paid 50% in cash and 50% in restrictedblocked UBS shares. However, independent BoD members can elect to have 100% of their remuneration paid in restrictedblocked UBS shares.  43 For 2010, shares valued at CHF 18.56 (average price of UBS shares at SIX Swiss Exchange over the last 10 trading days of February 2011), included a price discount of 15%, for a new value of discount price CHF 15.78. These shares are blocked for four years. For 2009, shares valued at CHF 14.57 (average price of UBS shares at SIX Swiss Exchange over the last 10 trading days of February 2010), included a price discount of 15%, for a new value of discount price CHF 12.38. These shares are blocked for four years.  For 2008, shares valued at CHF 11.38 (average price of UBS shares at virt-x, now SIX Swiss Exchange, over the last 10 trading days of February 2009) included a price discount of 15%, discount price for a new value of CHF 9.67. These shares are blocked for four years.   54 Number of shares is reduced in case of the 100% election to deduct social security contribution. All remuneration payments are submitted to social security contribution/withholding tax.  65 This payment is associated with the Senior Independent Director function.
In addition, for 2008/2009 only, one-off cash payments were made toVice Chairman or the Chairmen of the RC (CHF 500,000), the GNC (CHF 300,000) and the HRCC (CHF 200,000). These payments reflect the substantial workload of setting up the new RC, and expanding the mandate of the GNC and the HRCC.SID function, respectively.

382

Financial information
Total payments to all members of the BoD
       
Total payments to all members of the BoD 
  For the   
CHF, except where indicateda year ended Total 
 
Aggregate of all members of the BoD 2009  7,895,579 
 
Aggregate of all members of the BoD 2008  10,267,240 
 
Total compensation for all members of the GEB
                               
Total compensation for all members of the GEB 
CHF, except where indicateda 
        Annual              Contributions    
        incentive  Annual  Annual      to retirement    
  For the     award CBP  incentive  incentive  Benefits  benefits    
Name, function year ended Base salary  and cashb  award PEPc  award IPPc  in kinde  plansf  Total 
 
Carsten Kengeter, co-CEO Investment Bank (highest-paid) 2009  669,092   5,003,470   6,155,869   1,349,336   0   12,545   13,190,312 
 
Marcel Rohner, Group Chief Executive Officer (highest-paid) 2008  1,500,000   0   0   0   161,768   152,934   1,814,702 
 
Aggregate of all members of the GEB who were in office on 31 December 20091
 2009  12,000,055   25,734,711   13,453,4243  15,696,333   270,971   1,551,068   68,706,562 
 
Aggregate of all members of the GEB who were in office on 31 December 20081
 2008  7,815,943   0   0   0   457,652   817,315   9,090,911 
 
Aggregate of all members of the GEB who stepped down during 20092
 2009  2,447,544   38,443,097   0   0   215,151   171,122   41,276,914 
 
Aggregate of all members of the GEB who stepped down during 20082
 2008  1,614,871   0   0   0   234,838   258,423   2,108,132 
 
1 Numbers and distribution of GEB members in 2009: 13 GEB members in office on 31 December. 2008: 12 GEB members in office on 31 December.  2 Number and distribution of GEB members in 2009: includes two months in office as a GEB member for Marcel Rohner, three months in office for Walter H. Stürzinger and Raoul Weil, four months in office for Jerker Johansson, six months in office for Rory Tapner and ten for Marten Hoekstra. 2008: includes four months in office as a GEB member for Peter Kurer, eight months in office for Marco Suter and ten months for Joe Scoby.  3 Included in the share awards are SEEOP awards at a fair value of GBP 4,655,950 and EOP awards at a fair value of GBP 1,594,250.

383393

Financial information
UBS AG (Parent Bank)

Total payments to all BoD members

         
CHF, except where indicateda For the year ended  Total 
 
Aggregate of all BoD members 2010    8,191,310 
   
  2009    7,895,579 
 

Share and option ownershipholdings of BoD members of the BoD on 31 December 2008/2009 / 2010

                    
Share and option ownership of members of the BoD on 31 December 2008/2009 
 For the Number of Voting rights Number of Potentially conferred Type and quantity           
Name, function1 year ended shares held in % options held voting rights in %2 of options3  For the year ended Number of shares held Voting rights in % 
Kaspar Villiger, Chairman 2009 22,500 0.001 0 0.000    2010 22,500 0.001 
    
 2008 – –    2009 22,500 0.001 
Sergio Marchionne, 2009 164,154 0.009 0 0.000   
Michel Demaré, Vice Chairman 2010 23,703 0.001 
    
Senior Independent Director, Vice Chairman 2008 87,926 0.005 0 0.000   
 2009 2,500 0.000 
Ernesto Bertarelli, former member4
 2009 – –   
David Sidwell, Senior Independent Director 2010 69,354 0.003 
    
 2008 89,434 0.005 0 0.000    2009 40,073 0.002 
Sally Bott, member 2009 12,281 0.001 0 0.000    2010 39,542 0.002 
  
 2008 1 0.000 0 0.000   
Michel Demaré, member 2009 2,500 0.000 0 0.000   
    
 2008 – –    2009 12,281 0.001 
Rainer-Marc Frey, member 2009 16,158 0.001 0 0.000    2010 56,459 0.003 
    
 2008 0 0.000 0 0.000    2009 16,158 0.001 
Bruno Gehrig, member 2009 16,572 0.001 0 0.000    2010 37,775 0.002 
    
 2008 3,000 0.000 0 0.000    2009 16,572 0.001 
Ann F. Godbehere, member 2009 0 0.000 0 0.000    2010 23,222 0.001 
    
 2008 – –    2009 0 0.000 
Gabrielle Kaufmann-Kohler, former member4
 2009 – –   
Axel P. Lehmann, member 2010 58,452 0.003 
    
 2008 18,713 0.001 0 0.000    2009 18,151 0.001 
Peter Kurer, former Chairman4
 2009 – –   
Sergio Marchionne, 2010 – 
    
former Senior Independent Director, former Vice Chairman2
 2009 164,154 0,009 
 2008 416,088 0.025 372,995 0.022 xli: 85,256
   xlvii: 95,913
   lvi: 95,913
   lxiv: 95,913
Axel P. Lehmann, member 2009 18,151 0.001 0 0.000   
Wolfgang Mayrhuber, member 2010 0 0.000 
    
 2008 – –    2009 – 
Helmut Panke, member 2009 64,287 0.003 0 0.000    2010 89,529 0.004 
    
 2008 31,971 0.002 0 0.000    2009 64,287 0.003 
William G. Parrett, member 2009 17,573 0.001 0 0.000    2010 42,815 0.002 
    
 2008 4,000 0.000 0 0.000    2009 17,573 0.001 
David Sidwell, member 2009 40,073 0.002 0 0.000   
Peter R. Voser, former member2
 2010 – 
    
 2008 1 0.000 0 0.000    2009 68,310 0.004 
Peter R. Voser, member 2009 68,310 0.004 0 0.000   
  
 2008 30,823 0.002 0 0.000   
Joerg Wolle, former member4
 2009 – –   
  
 2008 41,509 0.002 0 0.000   
1 This table includes vested, unvested, blocked and unblocked shares held by BoD members, including related parties. No options were granted in 2009 and 2010.  2 BoD members who stepped down at the 2010 AGM.

394

Financial information

Compensation paid to former BoD and GEB members1

               
CHF, except where indicateda 
  For the         
Name, function year ended Compensation  Benefits in kind  Total 
 
Georges Blum, former BoD member 2010  0   0   0 
   
(Swiss Bank Corporation) 2009  0   92,399   92,399 
 
Franz Galliker, former BoD member 2010  0   0   0 
   
(Swiss Bank Corporation) 2009  0   10,659   10,659 
 
Walter G. Frehner, former BoD member 2010  0   0   0 
   
(Swiss Bank Corporation) 2009  0   25,371   25,371 
 
Hans (Liliane) Strasser, former BoD member 2010  0   0   0 
   
(Swiss Bank Corporation) 2009  0   9,758   9,758 
 
Robert Studer, former BoD member 2010  0   0   0 
   
(Union Bank of Switzerland) 2009  0   18,751   18,751 
 
Alberto Togni, former BoD member 2010  0   20,493   20,493 
   
(UBS) 2009  320,136   355,983   676,119 
 
Philippe (Alix) de Weck, former BoD member 2010  0   0   0 
   
(Union Bank of Switzerland) 2009  0   93,135   93,135 
 
Aggregate of all former GEB members2
 2010  0   57,229   57,229 
   
  2009  0   18,293   18,293 
 
Aggregate of all former BoD and GEB members 2010  0   77,722   77,722 
   
  2009  320,136   624,349   944,485 
 
1 Compensation or remuneration that is connected with the former member’s activity on the BoD or GEB, that is not at market conditions.  2 Includes one former GEB member in 2010 and one former GEB member in 2009.

395

Financial information
UBS AG (Parent Bank)

Vested and unvested options held by GEB members of the BoDon 31 December 2009 / 20101

                         
  Total                
For the number of  Number of  Year of  Vesting  Expiry  Strike 
year ended options held2  options3  grant  date  date  price 
 
                         
Oswald J. Grübel, Group Chief Executive Officer
 
2010  4,000,000   4,000,000   2009   26/02/2009   25/02/2014  CHF 10.10 
 
2009  4,000,000   4,000,000   2009   26/02/2009   25/02/2014  CHF 10.10 
 
                         
John Cryan, Group Chief Financial Officer
 
2010  382,673   21,362   2002   31/01/2003   31/01/2012  CHF 36.49 
       
       20,731   2002   31/01/2004   31/01/2012  CHF 36.49 
       
       20,725   2002   31/01/2005   31/01/2012  CHF 36.49 
       
       5,454   2002   28/02/2003   28/02/2012  CHF 36.65 
       
       5,294   2002   28/02/2004   28/02/2012  CHF 36.65 
       
       5,292   2002   28/02/2005   28/02/2012  CHF 36.65 
       
       23,626   2003   01/03/2004   31/01/2013  CHF 27.81 
       
       23,620   2003   01/03/2005   31/01/2013  CHF 27.81 
       
       23,612   2003   01/03/2006   31/01/2013  CHF 27.81 
       
       5,526   2003   01/03/2004   28/02/2013  CHF 26.39 
       
       5,524   2003   01/03/2005   28/02/2013  CHF 26.39 
       
       5,524   2003   01/03/2006   28/02/2013  CHF 26.39 
       
       17,072   2004   01/03/2005   27/02/2014  CHF 44.32 
       17,068   2004   01/03/2006   27/02/2014  CHF 44.32 
       
       17,063   2004   01/03/2007   27/02/2014  CHF 44.32 
       
       14,210   2005   01/03/2006   28/02/2015  CHF 47.58 
       
       14,210   2005   01/03/2007   28/02/2015  CHF 47.58 
       
       14,207   2005   01/03/2008   28/02/2015  CHF 47.58 
       
       5,330   2006   01/03/2007   28/02/2016  CHF 65.97 
       
       5,328   2006   01/03/2008   28/02/2016  CHF 65.97 
       
       5,326   2006   01/03/2009   28/02/2016  CHF 65.97 
       
       17,762   2007   01/03/2008   28/02/2017  CHF 67.00 
       
       17,762   2007   01/03/2009   28/02/2017  CHF 67.00 
       
       17,760   2007   01/03/2010   28/02/2017  CHF 67.00 
       
       53 285   2008   01/03/2011   28/02/2018  CHF 32.45 
 
2009  382,673   21,362   2002   31/01/2003   31/01/2012  CHF 36.49 
       
       20,731   2002   31/01/2004   31/01/2012  CHF 36.49 
       
       20,725   2002   31/01/2005   31/01/2012  CHF 36.49 
       
       5,454   2002   28/02/2003   28/02/2012  CHF 36.65 
       
       5,294   2002   28/02/2004   28/02/2012  CHF 36.65 
       
       5,292   2002   28/02/2005   28/02/2012  CHF 36.65 
       
       23,626   2003   01/03/2004   31/01/2013  CHF 27.81 
       
       23,620   2003   01/03/2005   31/01/2013  CHF 27.81 
       
       23,612   2003   01/03/2006   31/01/2013  CHF 27.81 
       
       5,526   2003   01/03/2004   28/02/2013  CHF 26.39 
       
       5,524   2003   01/03/2005   28/02/2013  CHF 26.39 
       
       5,524   2003   01/03/2006   28/02/2013  CHF 26.39 
       
       17,072   2004   01/03/2005   27/02/2014  CHF 44.32 
       
       17,068   2004   01/03/2006   27/02/2014  CHF 44.32 
       
       17,063   2004   01/03/2007   27/02/2014  CHF 44.32 
       
       14,210   2005   01/03/2006   28/02/2015  CHF 47.58 
       
       14,210   2005   01/03/2007   28/02/2015  CHF 47.58 
       
       14,207   2005   01/03/2008   28/02/2015  CHF 47.58 
                         
  Total                
For the number of  Number of  Year of  Vesting  Expiry  Strike 
year ended options held2  options3  grant  date  date  price 
 
                         
John Cryan, Group Chief Financial Officer (continued)
 
2009  382,673   5,330   2006   01/03/2007   28/02/2016  CHF 65.97 
       
       5,328   2006   01/03/2008   28/02/2016  CHF 65.97 
       
       5,326   2006   01/03/2009   28/02/2016  CHF 65.97 
       
       17,762   2007   01/03/2008   28/02/2017  CHF 67.00 
       
       17,762   2007   01/03/2009   28/02/2017  CHF 67.00 
       
       17,760   2007   01/03/2010   28/02/2017  CHF 67.00 
       
       53,285   2008   01/03/2011   28/02/2018  CHF 32.45 
 
                         
Markus U. Diethelm, Group General Counsel
 
2010  0                     
 
2009  0                     
 
                         
John A. Fraser, Chairman and CEO Global Asset Management
 
2010  1,088,795   76,380   2002   31/01/2005   31/01/2012  USD 21.24 
       
       127,884   2002   28/06/2005   28/06/2012  CHF 37.90 
       
       127,884   2003   31/01/2006   31/01/2013  USD 22.53 
       
       170,512   2004   01/03/2007   27/02/2014  USD 38.13 
       
       202,483   2005   01/03/2008   28/02/2015  USD 44.81 
       
       213,140   2006   01/03/2009   28/02/2016  CHF 72.57 
       
       170,512   2007   01/03/2010   28/02/2017  CHF 73.67 
 
2009  1,088,795   76,380   2002   31/01/2005   31/01/2012  USD 21.24 
       
       127,884   2002   28/06/2005   28/06/2012  CHF 37.90 
       
       127,884   2003   31/01/2006   31/01/2013  USD 22.53 
       
       170,512   2004   01/03/2007   27/02/2014  USD 38.13 
       
       202,483   2005   01/03/2008   28/02/2015  USD 44.81 
       
       213,140   2006   01/03/2009   28/02/2016  CHF 72.57 
       
       170,512   2007   01/03/2010   28/02/2017  CHF 73.67 
 
                         
Lukas Gähwiler, CEO UBS Switzerland and
co-CEO Wealth Management & Swiss Bank
 
2010  0                     
 
2009  –                     
 
                         
Carsten Kengeter, CEO Investment Bank
 
2010  905,000   905,000   2009   01/03/2012   27/12/2019  CHF 40.00 
 
2009  905,000   905,000   2009   01/03/2012   27/12/2019  CHF 40.00 
 
                         
Ulrich Körner, Group Chief Operating Officer and CEO Corporate Center
 
2010  0                     
 
2009  0                     
 
                         
Philip J. Lofts, Group Chief Risk Officer
 
2010  577,723   11,445   2002   31/01/2003   31/01/2012  CHF 36.49 
       
       11,104   2002   31/01/2004   31/01/2012  CHF 36.49 
       
       11,098   2002   31/01/2005   31/01/2012  CHF 36.49 
       
       1,240   2002   28/02/2003   28/02/2012  CHF 36.65 
       
       5,464   2002   28/02/2004   28/02/2012  CHF 36.65 
       
       1,199   2002   28/02/2005   28/02/2012  CHF 36.65 

1 This table includes options held by GEB members, including related parties.  2 No conversion rights are outstanding.  3 Refer to “Note 31 Equity participation and other compensation plans” in the “Financial information” section of this report for more information on stock option plans.  4 Members of the BoD who stepped down at the AGM 2009.information.

384396

Financial information

Financial information

Compensation paid to former members of the BoDVested and GEB
               
Compensation paid to former members of the BoD and GEB1 
CHF, except where indicateda 
  For the     Benefits    
Name, function year ended Compensation  in kind  Total 
 
Georges Blum, former member of the BoD 2009      92,399   92,399 
   
(Swiss Bank Corporation) 2008      101,579   101,579 
 
Franz Galliker, former member of the BoD 2009      10,659   10,659 
   
(Swiss Bank Corporation)  2008      69,596   69,596 
 
Walter G. Frehner, former member of the BoD 2009      25,371   25,371 
   
(Swiss Bank Corporation) 2008      74,663   74,663 
 
Hans (Liliane) Strasser, former member of the BoD 2009      9,758   9,758 
   
(Swiss Bank Corporation) 2008      32,673   32,673 
 
Robert Studer, former member of the BoD 2009      18,751   18,751 
   
(Union Bank of Switzerland) 2008      126,208   126,208 
 
Alberto Togni, former member of the BoD 2009  320,136   355,983   676,119 
   
(UBS) 2008  318,461   427,949   746,410 
 
Philippe (Alix) de Weck, former member of the BoD 2009      93,135   93,135 
   
(Union Bank of Switzerland) 2008      109,703   109,703 
 
Aggregate of all former members of the GEB2
 2009  0   18,293   18,293 
   
  2008  0   171,180   171,180 
 
Aggregate of all former members of the BoD and GEB 2009  320,136   624,349   944,485 
   
  2008  318,461   1,113,551   1,432,012 
 
1 Compensation or remuneration that is connected with the former members’ activity on the BoD orunvested options held by GEB or that is not at market conditions.  2 Includes two former GEB members.

385

Financial information
UBS AG (Parent Bank)

Share and option ownership of members of the GEB on 31 December 2008/2009
                         
Share and option ownership of members of the GEB on 31 December 2008/2009 
                    Type and 
  For the Number of  Voting rights  Number of  Potentially conferred  quantity of 
Name, function1 year ended shares held  in %  options held  voting rights in %2  options3 
 
Oswald J. Grübel, 2009  0   0.000   4,000,000   0.217  lxx:  4,000,000 
   
Group Chief Executive Officer 2008  –       –           
 
Marcel Rohner, 2009  –       –           
   
former Group Chief Executive Officer4
 2008  711,366   0.042   1,055,043   0.063  xxxii:  31,971 
                    xli:  213,140 
                    xlvii:  277,082 
                    lvi:  319,710 
                    lxiv:  213,140 
 
John Cryan, 2009  235,929   0.013   382,673   0.021  iii:  21,362 
Group Chief Financial Officer                   iv:  20,731 
                    vii:  20,725 
                    xii:  5,454 
                    xiii:  5,294 
                    xvi:  5,292 
                    xxi:  23,626 
                    xxiii:  23,620 
                    xxvi:  23,612 
                    xxviii:  5,526 
                    xxix:  5,524 
                    xxx:  5,524 
                    xxxviii:  17,072 
                    xl:  17,068 
                    xlii:  17,063 
                    xliv:  14,210 
                    xlv:  14,210 
                    xlvi:  14,207 
                    liii:  5,330 
                    liv:  5,328 
                    lv:  5,326 
                    lxi:  17,762 
                    lxii:  17,762 
                    lxiii:  17,760 
                    lxvi:  53,285 
   
  2008  235,929   0.014   382,673   0.023  iii:  21,362 
                    iv:  20,731 
                    vii:  20,725 
                    xii:  5,454 
                    xiii:  5,294 
                    xvi:  5,292 
                    xxi:  23,626 
                    xxiii:  23,620 
                    xxvi:  23,612 
                    xxviii:  5,526 
                    xxix:  5,524 
                    xxx:  5,524 
                    xxxviii:  17,072 
                    xl:  17,068 
                    xlii:  17,063 
                    xliv:  14,210 
                    xlv:  14,210 
                    xlvi:  14,207 
                    liii:  5,330 
                    liv:  5,328 
                    lv:  5,326 
                    lxi:  17,762 
                    lxii:  17,762 
                    lxiii:  17,760 
                    lxvi:  53,285 
 
Markus U. Diethelm, 2009  112,245   0.006   0   0.000       
   
Group General Counsel 2008  112,245   0.007   0   0.000       
 
John A. Fraser, 2009  480,464   0.027   1,088,795   0.059  viii:  76,380 
Chairman and CEO Global Asset Management                   xix:  127,884 
                    xxv:  127,884 
                    xliii:  170,512 
                    xlviii:  202,483 
                    lvi:  213,140 
                    lxiv:  170,512 
 

386

 / 20101 (continued)

Financial information
                         
Share and option ownership of members of the GEB on 31 December 2008/2009 (continued) 
                    Type and 
  For the Number of  Voting rights  Number of  Potentially conferred  quantity of 
Name, function1 year ended shares held  in %  options held  voting rights in %2  options3 
 
John A. Fraser, 2008  561,216   0.035   1,144,808   0.068  i:  56,013 
Chairman and CEO Global Asset Management                   viii:  76,380 
                    xix:  127,884 
                    xxv:  127,884 
                    xliii:  170,512 
                    xlviii:  202,483 
                    lvi:  213,140 
                    lxiv:  170,512 
 
Marten Hoekstra, 2009  –       –            
   
former CEO Wealth Management US4
 2008  245,397   0.015   684,168   0.041  ii:  8,679 
                    vi:  8,421 
                    ix:  8,421 
                    xi:  8,823 
                    xiv:  4,262 
                    xv:  8,563 
                    xviii:  8,561 
                    xxxiii:  42,628 
                    xliii:  53,285 
                    xlviii:  53,285 
                    lvi:  85,256 
                    lxiv:  154,931 
                    lxvii:  239,053 
 
Jerker Johansson, 2009  –       –          
   
former Chairman and CEO Investment Bank4
 2008  521,544   0.031   753,410   0.045  lxviii:  745,990 
                    lxix:  7,420 
 
Carsten Kengeter, 2009  516,909   0.028   905,000   0.049  lxxi:  905,000 
   
co-CEO Investment Bank 2008  –       –           
 
Ulrich Körner, 2009  0   0.000   0   0.000       
   
Group Chief Operating Officer 2008  –       –           
 
Philip J. Lofts, 2009  179,234   0.010   577,723   0.031  iii:  11,445 
Group Chief Risk Officer                   iv:  11,104 
                    vii:  11,098 
                    xii:  1,240 
                    xiii:  5,464 
                    xvi:  1,199 
                    xxi:  9,985 
                    xxiii:  9,980 
                    xxvi:  9,974 
                    xxviii:  1,833 
                    xxix:  1,830 
                    xxx:  1,830 
                    xxxviii:  35,524 
                    xl:  35,524 
                    xlii:  35,521 
                    xlvii:  117,090 
                    lvi:  117,227 
                    lxiv:  85,256 
                    lxvii:  74,599 
   
  2008  186,434   0.011   577,723   0.034  iii:  11,445 
                    iv:  11,104 
                    vii:  11,098 
                    xii:  1,240 
                    xiii:  5,464 
                    xvi:  1,199 
                    xxi:  9,985 
                    xxiii:  9,980 
                    xxvi:  9,974 
                    xxviii:  1,833 
                    xxix:  1,830 
                    xxx:  1,830 
                    xxxviii:  35,524 
                    xl:  35,524 
                    xlii:  35,521 
                    xlvii:  117,090 
                    lvi:  117,227 
                    lxiv:  85,256 
                    lxvii:  74,599 
 

387

Financial information
UBS AG (Parent Bank)

                         
Share and option ownership of members of the GEB on 31 December 2008/2009 (continued) 
                    Type and 
  For the Number of  Voting rights  Number of  Potentially conferred  quantity of 
Name, function1 year ended shares held  in %  options held  voting rights in %2  options3 
 
Robert J. McCann, 2009  602,481   0.033   0   0.000       
   
CEO Wealth Management Americas 2008  –       –           
 
Franco Morra, 2009  153,860   0.008   325,086   0.018  lvi:  43,911 
CEO UBS Switzerland                   lxiv:  66,866 
                    lxvii:  114,309 
                    lxxii:  100,000 
   
  2008  –       –           
 
Walter H. Stürzinger, 2009  –       –           
   
former Chief Operating Officer, Corporate Center4
 2008  296,886   0.018   372,995   0.022  xx:  31,971 
                    xli:  63,942 
                    xlvii:  85,256 
                    lvi:  95,913 
                    lxiv:  95,913 
 
Rory Tapner, 2009  –       –           
   
former Chairman and CEO Asia Pacific4
 2008  827,809   0.049   1,379,533   0.082  vii:  281,862 
                    xix:  213,140 
                    xxxi:  213,140 
                    xli:  170,512 
                    xlvii:  159,855 
                    lvi:  170,512 
                    lxiv:  170,512 
 
Raoul Weil, 2009  –       –           
   
former Chairman and CEO Global Wealth 2008  315,698   0.019   432,409   0.026  xix:  53,285 
Management & Business Banking4
                   xlvii:  102,281 
                    lvi:  127,884 
                    lxiv:  148,959 
 
Alexander Wilmot-Sitwell, 2009  286,767   0.016   353,807   0.019  xlvi:  53,282 
co-CEO Investment Bank                   xlix:  2,130 
                    liii:  35,524 
                    liv:  35,524 
                    lv:  35,521 
                    lxiv:  106,570 
                    lxvii:  85,256 
   
  2008  304,655   0.018   353,807   0.021  xlvi:  53,282 
                    xlix:  2,130 
                    liii:  35,524 
                    liv:  35,524 
                    lv:  35,521 
                    lxiv:  106,570 
                    lxvii:  85,256 
 
Robert Wolf, 2009  785,631   0.043   948,473   0.051  xxv:  287,739 
Chairman and CEO, UBS Group Americas/                   xliii:  213,140 
President Investment Bank                   xlviii:  127,884 
                    lvi:  106,570 
                    lxiv:  106,570 
                    lxvii:  106,570 
   
  2008  827,307   0.049   948,473   0.056  xxv:  287,739 
                    xliii:  213,140 
                    xlviii:  127,884 
                    lvi:  106,570 
                    lxiv:  106,570 
                    lxvii:  106,570 
 

388

Financial information
                         
Share and option ownership of members of the GEB on 31 December 2008/2009 (continued) 
                    Type and 
  For the Number of  Voting rights  Number  Potentially conferred  quantity of 
Name, function1 year ended shares held  in %  options held  voting rights in %2  options3 
 
Chi-Won Yoon, 2009  367,573   0.020   623,253   0.034  i:  11,577 
Chairman and CEO Asia Pacific                   v:  11,229 
                    viii:  11,227 
                    x:  2,252 
                    xiv:  6,446 
                    xvii:  2,184 
                    xxii:  8,648 
                    xxiv:  8,642 
                    xxvii:  8,635 
                    xxxiv:  4,262 
                    xxxv:  3,374 
                    xxxvi:  3,371 
                    xxxvii:  3,371 
                    xxxviii:  6,200 
                    xxxix:  4,262 
                    xl:  6,198 
                    xlii:  6,195 
                    xliv:  10,659 
                    xlv:  10,657 
                    xlvi:  10,654 
                    liii:  21,316 
                    liv:  21,314 
                    lv:  21,311 
                    lxi:  8,881 
                    lxii:  8,880 
                    lxiii:  8,880 
                    lxvi:  42,628 
                    lxxii:  350,000 
   
  2008  –       –           
 
Jürg Zeltner, 2009  16,502   0.001   205,470   0.011  iii:  809 
CEO Wealth Management                   iv:  784 
                    vii:  784 
                    xlii:  4,972 
                    xliv:  7,106 
                    xlv:  7,103 
                    xlvi:  7,103 
                    xlix:  93 
                    l:  161 
                    li:  149 
                    lii:  127 
                    liii:  7,106 
                    liv:  7,103 
                    lv:  7,103 
                    lvii:  110 
                    lviii:  242 
                    lix:  230 
                    lx:  221 
                    lxi:  7,105 
                    lxii:  7,105 
                    lxiii:  7,103 
                    lxv:  223 
                    lxvii:  42,628 
                    lxxii:  90,000 
   
  2008  –       –           
 
                         
  Total                
For the number of  Number of  Year of  Vesting  Expiry  Strike 
year ended options held2  options3  grant  date  date  price 
 
                         
Philip J. Lofts, Group Chief Risk Officer (continued)
 
2010  577,723   9,985   2003   01/03/2004   31/01/2013  CHF 27.81 
       
       9,980   2003   01/03/2005   31/01/2013  CHF 27.81 
       
       9,974   2003   01/03/2006   31/01/2013  CHF 27.81 
       
       1,833   2003   01/03/2004   28/02/2013  CHF 26.39 
       
       1,830   2003   01/03/2005   28/02/2013  CHF 26.39 
       
       1,830   2003   01/03/2006   28/02/2013  CHF 26.39 
       
       35,524   2004   01/03/2005   27/02/2014  CHF 44.32 
       
       35,524   2004   01/03/2006   27/02/2014  CHF 44.32 
       
       35,521   2004   01/03/2007   27/02/2014  CHF 44.32 
       
       117,090   2005   01/03/2008   28/02/2015  CHF 52.32 
       
       117,227   2006   01/03/2009   28/02/2016  CHF 72.57 
       
       85,256   2007   01/03/2010   28/02/2017  CHF 73.67 
       
       74,599   2008   01/03/2011   28/02/2018  CHF 35.66 
 
2009  577,723   11,445   2002   31/01/2003   31/01/2012  CHF 36.49 
       
       11,104   2002   31/01/2004   31/01/2012  CHF 36.49 
       
       11,098   2002   31/01/2005   31/01/2012  CHF 36.49 
       
       1,240   2002   28/02/2003   28/02/2012  CHF 36.65 
       
       5,464   2002   28/02/2004   28/02/2012  CHF 36.65 
       
       1,199   2002   28/02/2005   28/02/2012  CHF 36.65 
       
       9,985   2003   01/03/2004   31/01/2013  CHF 27.81 
       
       9,980   2003   01/03/2005   31/01/2013  CHF 27.81 
       
       9,974   2003   01/03/2006   31/01/2013  CHF 27.81 
       
       1,833   2003   01/03/2004   28/02/2013  CHF 26.39 
       
       1,830   2003   01/03/2005   28/02/2013  CHF 26.39 
       
       1,830   2003   01/03/2006   28/02/2013  CHF 26.39 
       
       35,524   2004   01/03/2005   27/02/2014  CHF 44.32 
       
       35,524   2004   01/03/2006   27/02/2014  CHF 44.32 
       
       35,521   2004   01/03/2007   27/02/2014  CHF 44.32 
       
       117,090   2005   01/03/2008   28/02/2015  CHF 52.32 
       
       117,227   2006   01/03/2009   28/02/2016  CHF 72.57 
       
       85,256   2007   01/03/2010   28/02/2017  CHF 73.67 
       
       74,599   2008   01/03/2011   28/02/2018  CHF 35.66 
 
                         
Robert J. McCann, CEO Wealth Management Americas
 
2010  0                     
 
2009  0                     
 
                         
Francesco Morra, former CEO UBS Switzerland4
 
2010  –                     
 
2009  325,086   43,911   2006   01/03/2009   28/02/2016  CHF 72.57 
       
       66,866   2007   01/03/2010   28/02/2017  CHF 73.67 
       
       114,309   2008   01/03/2011   28/02/2018  CHF 35.66 
       
       100,000   2009   01/03/2012   27/02/2019  CHF 11.35 
 
                         
Alexander Wilmot-Sitwell, co-Chairman and co-CEO Group Asia Pacific
 
2010  353,807   53,282   2005   01/03/2008   28/02/2015  CHF 47.58 
       
       2,130   2005   04/03/2007   04/03/2015  CHF 47.89 
                         
  Total                
For the number of  Number of  Year of  Vesting  Expiry  Strike 
year ended options held2  options3  grant  date  date  price 
 
                         
Alexander Wilmot-Sitwell, co-Chairman und co-CEO Group Asia Pacific (cont.)
 
2010  353,807   35,524   2006   01/03/2007   28/02/2016  CHF 65.97 
       
       35,524   2006   01/03/2008   28/02/2016  CHF 65.97 
       
       35,521   2006   01/03/2009   28/02/2016  CHF 65.97 
       
       106,570   2007   01/03/2010   28/02/2017  CHF 73.67 
       
       85,256   2008   01/03/2011   28/02/2018  CHF 35.66 
 
2009  353,807   53,282   2005   01/03/2008   28/02/2015  CHF 47.58 
       
       2,130   2005   04/03/2007   04/03/2015  CHF 47.89 
       
       35,524   2006   01/03/2007   28/02/2016  CHF 65.97 
       
       35,524   2006   01/03/2008   28/02/2016  CHF 65.97 
       
       35,521   2006   01/03/2009   28/02/2016  CHF 65.97 
       
       106,570   2007   01/03/2010   28/02/2017  CHF 73.67 
       
       85,256   2008   01/03/2011   28/02/2018  CHF 35.66 
 
                         
Robert Wolf, Chairman and CEO, UBS Group Americas /
President Investment Bank
 
2010  948,473   287,739   2003   31/01/2006   31/01/2013  USD 22.53 
       
       213,140   2004   01/03/2007   27/02/2014  USD 38.13 
       
       127,884   2005   01/03/2008   28/02/2015  USD 44.81 
       
       106,570   2006   01/03/2009   28/02/2016  CHF 72.57 
       
       106,570   2007   01/03/2010   28/02/2017  CHF 73.67 
       
       106,570   2008   01/03/2011   28/02/2018  CHF 35.66 
 
2009  948,473   287,739   2003   31/01/2006   31/01/2013  USD 22.53 
       
       213,140   2004   01/03/2007   27/02/2014  USD 38.13 
       
       127,884   2005   01/03/2008   28/02/2015  USD 44.81 
       
       106,570   2006   01/03/2009   28/02/2016  CHF 72.57 
       
       106,570   2007   01/03/2010   28/02/2017  CHF 73.67 
       
       106,570   2008   01/03/2011   28/02/2018  CHF 35.66 
 
                         
Chi-Won Yoon, co-Chairman and co-CEO Group Asia Pacific
 
2010  623,253   11,577   2002   31/01/2002   31/01/2012  USD 21.24 
       
       11,229   2002   31/01/2004   31/01/2012  USD 21.24 
       
       11,227   2002   31/01/2005   31/01/2012  USD 21.24 
       
       2,252   2002   28/02/2002   28/02/2012  USD 21.70 
       
       6,446   2002   29/02/2004   28/02/2012  USD 21.70 
       
       2,184   2002   28/02/2005   28/02/2012  USD 21.70 
       
       8,648   2003   01/03/2004   31/01/2013  USD 20.49 
       
       8,642   2003   01/03/2005   31/01/2013  USD 20.49 
       
       8,635   2003   01/03/2006   31/01/2013  USD 20.49 
       
       4,262   2003   28/02/2005   28/02/2013  USD 19.53 
       
       3,374   2003   01/03/2004   28/02/2013  USD 19.53 
       
       3,371   2003   01/03/2005   28/02/2013  USD 19.53 
       
       3,371   2003   01/03/2006   28/02/2013  USD 19.53 
       
       6,200   2004   01/03/2005   27/02/2014  CHF 44.32 
       
       4,262   2004   27/02/2006   27/02/2014  CHF 44.32 
       
       6,198   2004   01/03/2006   27/02/2014  CHF 44.32 
       
       6,195   2004   01/03/2007   27/02/2014  CHF 44.32 
       
       10,659   2005   01/03/2006   28/02/2015  CHF 47.58 

1 This table includes vested and unvested shares and options held by GEB members, of the GEB, including related parties.  2 No conversion rights are outstanding.  3 Refer to “Note 31 Equity participation and other compensation plans” in the “Financial information” section of this report for more information.  4 GEB member who stepped down during 2010.

397

Financial information
UBS AG (Parent Bank)

Vested and unvested options held by GEB members on 31 December 2009 / 20101 (continued)

                         
  Total                
For the number of  Number of  Year of  Vesting  Expiry  Strike 
year ended options held2  options3  grant  date  date  price 
 
                         
Chi-Won Yoon, co-Chairman und co-CEO Group Asia Pacific (continued)
 
2010  623,253   10,657   2005   01/03/2007   28/02/2015  CHF 47.58 
       
       10,654   2005   01/03/2008   28/02/2015  CHF 47.58 
       
       21,316   2006   01/03/2007   28/02/2016  CHF 65.97 
       
       21,314   2006   01/03/2008   28/02/2016  CHF 65.97 
       
       21,311   2006   01/03/2009   28/02/2016  CHF 65.97 
       
       8,881   2007   01/03/2008   28/02/2017  CHF 67.00 
       
       8,880   2007   01/03/2009   28/02/2017  CHF 67.00 
       
       8,880   2007   01/03/2010   28/02/2017  CHF 67.00 
       
       42,628   2008   01/03/2011   28/02/2018  CHF 32.45 
       
       350,000   2009   01/03/2012   27/02/2019  CHF 11.35 
 
2009  623,253   11,577   2002   31/01/2002   31/01/2012  USD 21.24 
       
       11,229   2002   31/01/2004   31/01/2012  USD 21.24 
       
       11,227   2002   31/01/2005   31/01/2012  USD 21.24 
       
       2,252   2002   28/02/2002   28/02/2012  USD 21.70 
       
       6,446   2002   29/02/2004   28/02/2012  USD 21.70 
       
       2,184   2002   28/02/2005   28/02/2012  USD 21.70 
       
       8,648   2003   01/03/2004   31/01/2013  USD 20.49 
       
       8,642   2003   01/03/2005   31/01/2013  USD 20.49 
       
       8,635   2003   01/03/2006   31/01/2013  USD 20.49 
       
       4,262   2003   28/02/2005   28/02/2013  USD 19.53 
       
       3,374   2003   01/03/2004   28/02/2013  USD 19.53 
       
       3,371   2003   01/03/2005   28/02/2013  USD 19.53 
       
       3,371   2003   01/03/2006   28/02/2013  USD 19.53 
       
       6,200   2004   01/03/2005   27/02/2014  CHF 44.32 
       
       4,262   2004   27/02/2006   27/02/2014  CHF 44.32 
       
       6,198   2004   01/03/2006   27/02/2014  CHF 44.32 
       
       6,195   2004   01/03/2007   27/02/2014  CHF 44.32 
       
       10,659   2005   01/03/2006   28/02/2015  CHF 47.58 
       
       10,657   2005   01/03/2007   28/02/2015  CHF 47.58 
       
       10,654   2005   01/03/2008   28/02/2015  CHF 47.58 
       
       21,316   2006   01/03/2007   28/02/2016  CHF 65.97 
       
       21,314   2006   01/03/2008   28/02/2016  CHF 65.97 
       
       21,311   2006   01/03/2009   28/02/2016  CHF 65.97 
       
       8,881   2007   01/03/2008   28/02/2017  CHF 67.00 
       
       8,880   2007   01/03/2009   28/02/2017  CHF 67.00 
       
       8,880   2007   01/03/2010   28/02/2017  CHF 67.00 
       
       42,628   2008   01/03/2011   28/02/2018  CHF 32.45 
       
       350,000   2009   01/03/2012   27/02/2019  CHF 11.35 
 
                         
Jürg Zeltner, CEO UBS Wealth Management and
co-CEO Wealth Management & Swiss Bank
 
2010  205,470   809   2002   31/01/2003   31/01/2012  CHF 36.49 
       
       784   2002   31/01/2004   31/01/2012  CHF 36.49 
       
       784   2002   31/01/2005   31/01/2012  CHF 36.49 
       
       4,972   2004   01/03/2007   27/02/2014  CHF 44.32 
                         
  Total                
For the number of  Number of  Year of  Vesting  Expiry  Strike 
year ended options held2  options3  grant  date  date  price 
 
                         
Jürg Zeltner, CEO UBS Wealth Management and
co-CEO Wealth Management & Swiss Bank (continued)
 
2010  205,470   7,106   2005   01/03/2006   28/02/2015  CHF 47.58 
       
       7,103   2005   01/03/2007   28/02/2015  CHF 47.58 
       
       7,103   2005   01/03/2008   28/02/2015  CHF 47.58 
       
       93   2005   04/03/2007   04/03/2015  CHF 47.89 
       
       161   2005   06/06/2007   06/06/2015  CHF 45.97 
       
       149   2005   09/09/2007   09/09/2015  CHF 50.47 
       
       127   2005   05/12/2007   05/12/2015  CHF 59.03 
       
       7,106   2006   01/03/2007   28/02/2016  CHF 65.97 
       
       7,103   2006   01/03/2008   28/02/2016  CHF 65.97 
       
       7,103   2006   01/03/2009   28/02/2016  CHF 65.97 
       
       110   2006   03/03/2008   03/03/2016  CHF 65.91 
       
       242   2006   09/06/2008   09/06/2016  CHF 61.84 
       
       230   2006   08/09/2008   08/09/2016  CHF 65.76 
       
       221   2006   08/12/2008   08/12/2016  CHF 67.63 
       
       7,105   2007   01/03/2008   28/02/2017  CHF 67.00 
       
       7,105   2007   01/03/2009   28/02/2017  CHF 67.00 
       
       7,103   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 
       
       90,000   2009   01/03/2012   27/02/2019  CHF 11.35 
 
2009  205,470   809   2002   31/01/2003   31/01/2012  CHF 36.49 
       
       784   2002   31/01/2004   31/01/2012  CHF 36.49 
       
       784   2002   31/01/2005   31/01/2012  CHF 36.49 
       
       4,972   2004   01/03/2007   27/02/2014  CHF 44.32 
       
       7,106   2005   01/03/2006   28/02/2015  CHF 47.58 
       
       7,103   2005   01/03/2007   28/02/2015  CHF 47.58 
       
       7,103   2005   01/03/2008   28/02/2015  CHF 47.58 
       
       93   2005   04/03/2007   04/03/2015  CHF 47.89 
       
       161   2005   06/06/2007   06/06/2015  CHF 45.97 
       
       149   2005   09/09/2007   09/09/2015  CHF 50.47 
       
       127   2005   05/12/2007   05/12/2015  CHF 59.03 
       
       7,106   2006   01/03/2007   28/02/2016  CHF 65.97 
       
       7,103   2006   01/03/2008   28/02/2016  CHF 65.97 
       
       7,103   2006   01/03/2009   28/02/2016  CHF 65.97 
       
       110   2006   03/03/2008   03/03/2016  CHF 65.91 
       
       242   2006   09/06/2008   09/06/2016  CHF 61.84 
       
       230   2006   08/09/2008   08/09/2016  CHF 65.76 
       
       221   2006   08/12/2008   08/12/2016  CHF 67.63 
       
       7,105   2007   01/03/2008   28/02/2017  CHF 67.00 
       
       7,105   2007   01/03/2009   28/02/2017  CHF 67.00 
       
       7,103   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 
       
       90,000   2009   01/03/2012   27/02/2019  CHF 11.35 

41 This table includes options held by GEB members, including related parties.  2 No conversion rights are outstanding.  3 Refer to “Note 31 Equity participation and other compensation plans” in the “Financial information” section of this report for more information.

398

Financial information

Loans granted to GEB members on 31 December 2009 / 2010

         
CHF, except where indicateda 
Name, function1 For the year ended  Loans2 
 
Jürg Zeltner, CEO UBS Wealth Management, co-CEO Wealth Management & Swiss Bank3
  2010   5,739,862 
 
Jürg Zeltner, CEO UBS Wealth Management, co-CEO Wealth Management & Swiss Bank3
  2009   5,800,202 
 
Aggregate of all GEB members  2010   20,696,569 
   
   2009   15,356,483 
 
1 No loans have been granted to related parties of the GEB members at conditions not customary in the market.  2 All loans granted are secured loans.  3 GEB member with the highest loan granted.

Loans granted to BoD members on 31 December 2009 / 2010 GEB

         
CHF, except where indicateda 
Name, function1 For the year ended  Loans2 
 
Kaspar Villiger, Chairman  2010   0 
   
   2009   0 
 
Michel Demaré, Vice Chairman  2010   850,000 
   
   2009   850,000 
 
David Sidwell, Senior Independent Director  2010   0 
   
   2009   0 
 
Sergio Marchionne, former Senior Independent Director, former Vice Chairman3
  2010   – 
   
   2009   0 
 
Sally Bott, member  2010   0 
   
   2009   0 
 
Rainer-Marc Frey, member  2010   0 
   
   2009   0 
 
Bruno Gehrig, member4
  2010   798,000 
   
   2009   798,000 
 
Ann F. Godbehere, member  2010   0 
   
   2009   0 
 
Axel P. Lehmann, member  2010   0 
   
   2009   0 
 
Wolfgang Mayrhuber, member  2010   0 
   
   2009   0 
 
Helmut Panke, member  2010   0 
   
   2009   0 
 
William G. Parrett, member4
  2010   0 
   
   2009   1,260,731 
 
Peter R. Voser, member3
  2010   – 
   
   2009   0 
 
Aggregate of all BoD members  2010   1,648,000 
   
   2009   2,908,731 
 
1 No loans have been granted to related parties of BoD members at conditions not customary in the market.  2 All loans granted are secured loans.  3 BoD members who stepped down during 2009.at the 2010 AGM.  4 Secured loans granted prior to their election to the BoD.

389399

Financial information
UBS AG (Parent Bank)

(LETTERHEAD)Ernst & Young Ltd
Aeschengraben 9
CH-4002 Basel
Phone+41 58 286 86 86
Fax+41 58 286 86 00
www.ey.com/ch

To the General Meeting of

UBS AG, Zurich and Basel

Basel, 3 March 2011

Vested and unvested options held by independent members

Report of the BoDstatutory auditor on the financial statements

As statutory auditor, we have audited the financial statements which comprise the balance sheet, income statement and
by members notes on pages 380 to 399 of UBS AG for the year ended 31 December 2010.

Board of Directors’ responsibility

The Board of Directors is responsible for the preparation of the GEBfinancial statements in accordance with the requirements of Swiss law and the Company’s articles of association. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances.

Auditor’s responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Swiss law and Swiss Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity’s preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control system. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements for the year ended 31 December 2008/20092010 comply with Swiss law and the Company’s articles of association.

(LETTERHEAD)

                                                                   
Vested and unvested options held by independent members of the BoD and
by members of the GEB on 31 December 2008/2009		 
Type Number of options  Year of grant  Vesting date  Expiry date  Subscription ratio  Strike price 
 
i  11,577   2002   31.01.2002   31.01.2012   1:1  USD 21.24 
 
ii  8,679   2002   31.01.2002   31.07.2012   1:1  USD 21.24 
 
iii  33,616   2002   31.01.2003   31.01.2012   1:1  CHF 36.49 
 
iv  32,619   2002   31.01.2004   31.01.2012   1:1  CHF 36.49 
 
v  11,229   2002   31.01.2004   31.01.2012   1:1  USD 21.24 
 
vi  8,421   2002   31.01.2004   31.07.2012   1:1  USD 21.24 
 
vii  314,469   2002   31.01.2005   31.01.2012   1:1  CHF 36.49 
 
viii  87,607   2002   31.01.2005   31.01.2012   1:1  USD 21.24 
 
ix  8,421   2002   31.01.2005   31.07.2012   1:1  USD 21.24 
 
x  2,252   2002   28.02.2002   28.02.2012   1:1  USD 21.70 
 
xi  8,823   2002   28.02.2002   28.08.2012   1:1  USD 21.70 
 
xii  6,694   2002   28.02.2003   28.02.2012   1:1  CHF 36.65 
 
xiii  10,758   2002   28.02.2004   28.02.2012   1:1  CHF 36.65 
 
xiv  10,708   2002   29.02.2004   28.02.2012   1:1  USD 21.70 
 
xv  8,563   2002   29.02.2004   28.08.2012   1:1  USD 21.70 
 
xvi  6,491   2002   28.02.2005   28.02.2012   1:1  CHF 36.65 
 
xvii  2,184   2002   28.02.2005   28.02.2012   1:1  USD 21.70 
 
xviii  8,561   2002   28.02.2005   28.08.2012   1:1  USD 21.70 
 
xix  394,309   2002   28.06.2005   28.06.2012   1:1  CHF 37.90 
 
xx  31,971   2002   28.06.2005   28.12.2012   1:1  CHF 37.90 
 
xxi  33,611   2003   01.03.2004   31.01.2013   1:1  CHF 27.81 
 
xxii  8,648   2003   01.03.2004   31.01.2013   1:1  USD 20.49 
 
xxiii  33,600   2003   01.03.2005   31.01.2013   1:1  CHF 27.81 
 
xxiv  8,642   2003   01.03.2005   31.01.2013   1:1  USD 20.49 
 
xxv  415,623   2003   31.01.2006   31.01.2013   1:1  USD 22.53 
 
xxvi  33,586   2003   01.03.2006   31.01.2013   1:1  CHF 27.81 
 
xxvii  8,635   2003   01.03.2006   31.01.2013   1:1  USD 20.49 
 
xxviii  7,359   2003   01.03.2004   28.02.2013   1:1  CHF 26.39 
 
xxix  7,354   2003   01.03.2005   28.02.2013   1:1  CHF 26.39 
 
xxx  7,354   2003   01.03.2006   28.02.2013   1:1  CHF 26.39 
 
xxxi  213,140   2003   31.01.2006   31.01.2013   1:1  CHF 30.50 
 
xxxii  31,971   2003   31.01.2006   31.07.2013   1:1  CHF 30.50 
 
xxxiii  42,628   2003   31.01.2006   31.07.2013   1:1  USD 22.53 
 
xxxiv  4,262   2003   28.02.2005   28.02.2013   1:1  USD 19.53 
 
xxxv  3,374   2003   01.03.2004   28.02.2013   1:1  USD 19.53 
 
xxxvi  3,371   2003   01.03.2005   28.02.2013   1:1  USD 19.53 
 
xxxvii  3,371   2003   01.03.2006   28.02.2013   1:1  USD 19.53 
 
xxxviii  58,796   2004   01.03.2005   27.02.2014   1:1  CHF 44.32 
 
xxxix  4,262   2004   27.02.2006   27.02.2014   1:1  CHF 44.32 
 
xl  58,790   2004   01.03.2006   27.02.2014   1:1  CHF 44.32 
 
xli  532,850   2004   28.02.2007   27.02.2014   1:1  CHF 48.69 
 
xlii  63,751   2004   01.03.2007   27.02.2014   1:1  CHF 44.32 
 
xliii  436,937   2004   01.03.2007   27.02.2014   1:1  USD 38.13 
 
xliv  31,975   2005   01.03.2006   28.02.2015   1:1  CHF 47.58 
 
xlv  31,970   2005   01.03.2007   28.02.2015   1:1  CHF 47.58 
 
xlvi  85,246   2005   01.03.2008   28.02.2015   1:1  CHF 47.58 
 
xlvii  837,477   2005   01.03.2008   28.02.2015   1:1  CHF 52.32 
 
xlviii  383,652   2005   01.03.2008   28.02.2015   1:1  USD 44.81 
 
xlix  2,223   2005   04.03.2007   04.03.2015   1:1  CHF 47.89 
 
l  161   2005   06.06.2007   06.06.2015   1:1  CHF 45.97 
 
li  149   2005   09.09.2007   09.09.2015   1:1  CHF 50.47 
 

390400

Financial information
                                                                   
Vested and unvested options held by independent members of the BoD and
by members of the GEB on 31 December 2008/2009 (continued)		 
Type Number of options  Year of grant  Vesting date  Expiry date  Subscription ratio  Strike price 
 
lii  127   2005   05.12.2007   05.12.2015   1:1  CHF 59.03 
 
liii  69,276   2006   01.03.2007   28.02.2016   1:1  CHF 65.97 
 
liv  69,269   2006   01.03.2008   28.02.2016   1:1  CHF 65.97 
 
lv  69,261   2006   01.03.2009   28.02.2016   1:1  CHF 65.97 
 
lvi  1,376,036   2006   01.03.2009   28.02.2016   1:1  CHF 72.57 
 
lvii  110   2006   03.03.2008   03.03.2016   1:1  CHF 65.91 
 
lviii  242   2006   09.06.2008   09.06.2016   1:1  CHF 61.84 
 
lix  230   2006   08.09.2008   08.09.2016   1:1  CHF 65.76 
 
lx  221   2006   08.12.2008   08.12.2016   1:1  CHF 67.63 
 
lxi  33,748   2007   01.03.2008   28.02.2017   1:1  CHF 67.00 
 
lxii  33,747   2007   01.03.2009   28.02.2017   1:1  CHF 67.00 
 
lxiii  33,743   2007   01.03.2010   28.02.2017   1:1  CHF 67.00 
 
lxiv  1,415,142   2007   01.03.2010   28.02.2017   1:1  CHF 73.67 
 
lxv  223   2007   02.03.2009   02.03.2017   1:1  CHF 67.08 
 
lxvi  95,913   2008   01.03.2011   28.02.2018   1:1  CHF 32.45 
 
lxvii  662,415   2008   01.03.2011   28.02.2018   1:1  CHF 35.66 
 
lxviii  745,990   2008   01.03.2011   07.04.2018   1:1  CHF 36.46 
 
lxix  7,420   2008   01.03.2011   06.06.2018   1:1  CHF 28.10 
 
lxx  4,000,000   2009   26.02.2009   25.02.2014   1:1  CHF 10.10 
 
lxxi  905,000   2009   01.03.2012   27.12.2019   1:1  CHF 40.00 
 
lxxii  540,000   2009   01.03.2012   27.02.2019   1:1  CHF 11.35 
 

(LETTERHEAD)2

391Report on other legal requirements

We confirm that we meet the Swiss legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence (Art. 728 Code of Obligations (CO) and Art. 11 AOA) and that there are no circumstances incompatible with our independence.

In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists, which has been designed for the preparation of financial statements in accordance with the instructions of the Board of Directors.

We further confirm that the proposed appropriation of available earnings complies with Swiss law and the Company’s articles of association. We recommend that the financial statements submitted to you be approved.

Ernst & Young Ltd
-s- Jonathan Bourne
-s- Dr. Andreas Blumer
Jonathan BourneDr. Andreas Blumer
Licensed audit expertLicensed audit expert
(Auditor in charge)

401

Financial information
UBS AG (Parent Bank)

(BDO LOGO)
Phone 044 444 36 44BDO Ltd
Fax      044 444 37 84Fabrikstrasse 50
www.bdo.ch8031 Zurich
Loans granted to members

Confirmation of the BoD on 31 December 2008 / 2009auditors concerning conditional capital increase

to the Board of Directors of
UBS AG, Zurich and Basel
               
Loans granted to members of the BoD on 31 December 2008 / 2009 
CHF, except where indicateda 
  For the     Other loans    
Name, function1 year ended Secured loans  granted  Total 
 
Kaspar Villiger, Chairman 2009  0   0   0 
   
  2008  0   0   0 
 
Sergio Marchionne, Senior Independent Director, Vice Chairman 2009  0   0   0 
   
  2008  0   0   0 
 
Ernesto Bertarelli, former member3
 2009  –   –   – 
   
  2008  0   0   0 
 
Sally Bott, member 2009  0   0   0 
   
  2008  0   0   0 
 
Michel Demaré, member 2009  850,000   0   850,000 
   
  2008  0   0   0 
 
Rainer-Marc Frey, member 2009  0   0   0 
   
  2008  0   0   0 
 
Bruno Gehrig, member2
 2009  798,000   0   798,000 
   
  2008  798,000   0   798,000 
 
Ann F. Godbehere, member 2009  0   0   0 
   
  2008  0   0   0 
 
Gabrielle Kaufmann-Kohler, former member3
 2009  –   –   – 
   
  2008  0   0   0 
 
Peter Kurer, former Chairman2,3
 2009  –   –   – 
   
  2008  1,261,000   0   1,261,000 
 
Axel P. Lehmann, member 2009  0   0   0 
   
  2008  0   0   0 
 
Helmut Panke, member 2009  0   0   0 
   
  2008  0   0   0 
 
William G. Parrett, member2
 2009  1,260,731   0   1,260,731 
   
  2008  1,167,659   0   1,167,659 
 
David Sidwell, member 2009  0   0   0 
   
  2008  0   0   0 
 
Peter R. Voser, member 2009  0   0   0 
   
  2008  0   0   0 
 
Joerg Wolle, former member3
 2009  –   –   – 
   
  2008  0   0   0 
 
Aggregate of all members of the BoD 2009  2,908,731   0   2,908,731 
 
Aggregate of all members of the BoD 2008  3,226,659   0   3,226,659 
 
1 No loans

As special auditors of UBS AG, we have been granted to related partiesaudited the issue of new shares and the preconditions for the adjustment of the membersprovisions regarding the conditional capital increase according to article 4a of the BoD at conditions not customaryarticles of association in the market.  2 Secured loans granted priorperiod from 1 January 2010 to their election5 March 2010 in accordance with the provisions of article 653f paragraph 1 of the Swiss code of obligations.

According to article 4a of the articles of association, the following possibilities for the issue of conditional capital exist:
•Paragraph 1; employee stock option plans of Paine Webber Group Inc., New York, based on the resolution of the annual general meeting of 7 September 2000.
•Paragraph 2; employee stock option plans of UBS AG, based on the resolution of the annual general meeting of 19 April 2006.
•Paragraph 3; 9% mandatory convertible notes due 2010, based on the resolution of the general meeting of shareholders of 27 February 2008.
•Paragraph 4; options granted to the Swiss National Bank in connection with its loan granted to the 5NB StabFund Limited Partnership for Collective Investment, based on the resolution of the general meeting of shareholders of 27 November 2008.

In addition we have audited the expiration of options relating to the BoD.  3 Including those membersemployee stock option plans of Paine Webber Group Inc., New York, in accordance with the provisions of article 653i paragraph 1 of the BoD who stepped down atSwiss code of obligations.

The issue of new shares in accordance with the AGM 2009.

Loans granted to membersprovisions of the GEB on 31 December 2008/2009
               
Loans granted to members of the GEB on 31 December 2008 / 2009 
CHF, except where indicateda 
  For the     Other loans    
Name, function1 year ended Secured loans  granted2  Total 
 
Jürg Zeltner, CEO Wealth Management 2009  5,800,202   0   5,800,202 
 
Markus U. Diethelm, Group General Counsel 2008  3,900,000   0   3,900,000 
 
Aggregate of all members of the GEB3
 2009  15,356,483   0   15,356,483 
 
Aggregate of all members of the GEB4
 2008  7,740,562   0   7,740,562 
 
1 No loans have been granted to related partiescompany’s articles of association is the responsibility of the membersboard of directors. Our responsibility is to express an opinion on whether the issue of new shares is in accordance with the provisions of Swiss law and the company’s articles of association. In addition, the provision of evidence that the option rights have expired is also the responsibility of the GEB at conditions not customaryboard of directors. Our responsibility is to express an opinion on the accuracy of this statement, based on our audit. We confirm that we meet the legal requirements on licensing and independence.

Our audit was conducted in accordance with the Swiss auditing standards, which require that an audit be planned and performed to obtain reasonable assurance as to whether the issue of new shares, and whether the conclusion as to the expired option rights, were both free of material error. We have performed the audit procedures considered appropriate in the market.  2 Guarantees.  3 Including those members of the GEB who stepped down during 2009.  4 Including those members of the GEB who stepped down during 2008.  circumstances. We believe that our audit provides a reasonable basis for our opinion.

In our opinion
•the issue of 3’171 new registered shares of a nominal value of CHF 0.10 per share relating to the employee stock option plans of Paine Webber Group Inc., New York, according to article 4a paragraph 1 of the articles of association, was in accordance with the provisions of Swiss law and the company’s articles of association. Furthermore, no option rights relating to registered shares of a nominal value of CHF 0.10 per share have expired during the reporting period;
•the issue of 24’561 new registered shares of a nominal value of CHF 0.10 per share relating to the employee stock option plans of UBS AG, according to article 4a paragraph 2 of the articles of association, was in accordance with the provisions of Swiss taw and the company’s articles of association;
•the issue of 272’651’005 registered shares of a nominal value of CHF 0.10 per share in conjunction with the total conversion of the 9%mandatory convertible notes due in 2010, according to article 4a paragraph 3 of the articles of association, was in accordance with the provisions of Swiss law and the company’s articles of association as well as the defined conditions of the conversion rights;
•no new registered shares relating to the options granted to the Swiss National Bank, according to article 4a paragraph 4 of the articles of association, were issued in the reporting period.

Zurich, 8 March 2010
BDO Ltd
-s- Werner Schiesser
-s- Markus Egli
Werner SchiesserMarkus Egli
Licensed Audit ExpertLicensed Audit Expert

392402

Financial information

(BDO LOGO)
Phone 044 444 36 44BDO Ltd
Fax      044 444 37 84Fabrikstrasse 50
www.bdo.ch8031 Zurich
Report

Confirmation of the statutory auditorauditors concerning conditional capital increase
to the Board of Directors of
UBS AG, Zurich and Basel

As special auditors of UBS AG, we have audited the issue of new shares and the preconditions for the adjustment of the provisions regarding the conditional capital increase according to article 4a of the articles of association in the period from 6 March 2010 to 31 August 2010 in accordance with the provisions of article 653f paragraph 1 of the Swiss code of obligations.

According to article 4a of the articles of association, the following possibilities for the issue of conditional capital exist:
•Paragraph 1; employee stock option plans of Paine Webber Group Inc., New York, based on the resolution of the annual general meeting of 7 September 2000.
•Paragraph 2; employee stock option plans of UBS AG, based on the resolution of the annual general meeting of 19 April 2006.
•Paragraph 3; options granted to the Swiss National Bank in connection with its loan granted to the SNB StabFund Limited Partnership for Collective Investment, based on the resolution of the general meeting of shareholders of 27 November 2008.
•Paragraph 4; conversion rights and/or warrants granted in connection with the issuance of bonds or similar financial instruments, based on the resolution of the annual general meeting of 14 April 2010.

In addition we have audited the expiration of options relating to the employee stock option plans of Paine Webber Group Inc., New York, in accordance with the provisions of article 653i paragraph 1 of the Swiss code of obligations.

The issue of new shares in accordance with the provisions of the company’s articles of association is the responsibility of the board of directors. Our responsibility is to express an opinion on whether the issue of new shares is in accordance with the provisions of Swiss law and the company’s articles of association. In addition, the provision of evidence that the option rights have expired is also the responsibility of the board of directors. Our responsibility is to express an opinion on the financial statementsaccuracy of this statement, based on our audit. We confirm that we meet the legal requirements on licensing and independence.

Our audit was conducted in accordance with the Swiss auditing standards, which require that an audit be planned and performed to obtain reasonable assurance as to whether the issue of new shares, and whether the conclusion as to the expired option rights, were both free of material error. We have performed the audit procedures considered appropriate in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

In our opinion
•the cancellation of 26’179 option rights relating to registered shares of a nominal value of CHF 0.10 per share in connection with the employee stock option plans of Paine Webber Group Inc., New York, according to article 4a paragraph 1 of the articles of association, and the repeal of the related clause of the articles of association, are in accordance with the provisions of Swiss law;
•the issue of 13’778 new registered shares of a nominal value of CHF 0.10 per share relating to the employee stock option plans of UBS AG, according to article 4a paragraph 2 of the articles of association, was in accordance with the provisions of Swiss law and the company’s articles of association;
•no new registered shares relating to the options granted to the Swiss National Bank, according to article 4a paragraph 3 of the articles of association, were issued in the reporting period;
•no new registered shares relating to the conversion rights and/or warrants granted in connection with the issuance of bonds or similar financial instruments, according to article 4a paragraph 4 of the articles of association, were issued in the reporting period.

Zurich, 7 September 2010
BDO Ltd
-s- Werner Schiesser
-s- Markus Egli
Werner SchiesserMarkus Egli
Licensed Audit ExpertLicensed Audit Expert

(AUDITOR'S REPORT)

393403

Financial information
UBS AG (Parent Bank)

(BDO LOGO)
Phone 044 444 36 44BDO Ltd
Fax      044 444 37 84Fabrikstrasse 50
www.bdo.ch8031 Zurich

Confirmation of the auditors concerning conditional capital increase

to the Board of Directors of

UBS AG, Zurich and Basel

(AUDITOR'S REPORT)As special auditors of UBS AG, we have audited the issue of new shares and the preconditions for the adjustment of the provisions regarding the conditional capital increase according to article 4a of the articles of association in the period from 1 September 2010 to 31 December 2010 in accordance with the provisions of article 653f paragraph 1 of the Swiss code of obligations.

394According to article 4a of the articles of association, the following possibilities for the issue of conditional capital exist:
•Paragraph 1; employee stock option plans of UBS AG, based on the resolution of the annual general meeting of 19 April 2006.
•Paragraph 2; options granted to the Swiss National Bank in connection with its loan granted to the SNB StabFund Limited Partnership for Collective Investment, based on the resolution of the general meeting of shareholders of 27 November 2008.
•Paragraph 3; conversion rights and/or warrants granted in connection with the issuance of bonds or similar financial instruments, based on the resolution of the annual general meeting of 14 April 2010.

The issue of new shares in accordance with the provisions of the company’s articles of association is the responsibility of the board of directors. Our responsibility is to express an opinion on whether the issue of new shares is in accordance with the provisions of Swiss law and the company’s articles of association. We confirm that we meet the legal requirements on licensing and independence.

Our audit was conducted in accordance with the Swiss auditing standards, which require that an audit be planned and performed to obtain reasonable assurance as to whether the issue of new shares was free of material error. We have performed the audit procedures considered appropriate in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

In our opinion
•the issue of 35’245 new registered shares of a nominal value of CHF 0.10 per share relating to the employee stock option plans of UBS AG, according to article 4a paragraph 1 of the articles of association, was in accordance with the provisions of Swiss law and the company’s articles of association;
•no new registered shares relating to the options granted to the Swiss National Bank, according to article 4a paragraph 2 of the articles of association, were issued in the reporting period;
•no new registered shares relating to the conversion rights and/or warrants granted in connection with the issuance of bonds or similar financial instruments, according to article 4a paragraph 3 of the articles of association, were issued in the reporting period.

Zurich, 24 January 2011
BDO Ltd
-s- Werner Schiesser
-s- Markus Egli
Werner SchiesserMarkus Egli
Licensed Audit ExpertLicensed Audit Expert

BDO Ltd, with its statutory seat in Zurich, is the legally independent Swiss member firm of the international BDO network.

404

Financial information

Financial information


Additional disclosure required under SEC regulations
Confirmations of the auditors concerning conditional capital increase

(AUDITOR'S REPORT)

395

  Financial information
  UBS AG (Parent Bank)

(AUDITOR'S REPORT)

396

Financial information

(AUDITOR'S REPORT)

397

Financial information

Additional disclosure required
under SEC regulations

A – Introduction

The following pages contain additional disclosures about UBS Group which are required under SEC regulations.

UBS’s consolidated Financial StatementsConsolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and are denominated in Swiss francs (CHF), the reporting currency of the Group.

 



399405

Financial information
Additional disclosure required under SEC regulations

B – Selected financial data

The tables below set forth, for the periods and dates indicated,provide information concerning the noon buyingpurchase rate for the Swiss franc, expressed in United States dollars or USD, per one Swiss franc. The noon buyingpurchase rate is the rate in New York

City for cable transfers in foreign currencies as certifiedcer-

tified for customs purposes by the Federal Reserve Bank of New York.

On 2625 February 20102011, the noon buyingpurchase rate was 0.93361.0774 USD per 1 CHF.



                 
          Average rate1    
Year ended 31 December High  Low  (USD per 1 CHF)  At period end 
 
2005  0.8721   0.7544   0.8010   0.7606 
 
2006  0.8396   0.7575   0.8034   0.8200 
 
2007  0.9087   0.7978   0.8381   0.8827 
 
2008  1.0142   0.8171   0.9298   0.9369 
 
2009  1.0016   0.8408   0.9260   0.9654 
 
                 
Month High Low         
 
September 2009  0.9768   0.9387         
 
October 2009  0.9936   0.9593         
 
November 2009  0.9996   0.9703         
 
December 2009  1.0016   0.9532         
 
January 2010  0.9848   0.9472         
 
February 2010  0.9472   0.9210         
 
                 
          Average rate1    
Year ended 31 December High  Low  (USD per 1 CHF)  At period end 
 
2006  0.8396   0.7575   0.8034   0.8200 
 
2007  0.9087   0.7978   0.8381   0.8827 
 
2008  1.0142   0.8171   0.9298   0.9369 
 
2009  1.0016   0.8408   0.9260   0.9654 
 
2010  1.0673   0.8610   0.9670   1.0673 
 
                 
Month High  Low         
 
September 2010  1.0254   0.9828         
 
October 2010  1.0493   1.0108         
 
November 2010  1.0438   0.9984         
 
December 2010  1.0673   1.0003         
 
January 2011  1.0719   1.0251         
 
February 20112
  1.0808   1.0251         
 
1 The average of the noon buyingpurchase rates on the last business day of each full month during the relevant period.  2 High / Low-rates between 1 February and 25 February 2011.

400406

Financial information
                                       
Key figuresKey figures Key figures 
 As of or for the year ended  As of or for the year ended 
CHF million, except where indicated 31.12.09 31.12.08 31.12.07 31.12.06 31.12.05  31.12.10 31.12.09 31.12.08 31.12.07 31.12.06 
Balance sheet data
  
Total assets 1,340,538 2,014,815 2,274,891 2,348,733 2,001,099  1,317,247 1,340,538 2,014,815 2,274,891 2,348,733 
Equity attributable to UBS shareholders 41,013 32,531 36,875 51,037 45,633  46,820 41,013 32,531 36,875 51,037 
Average equity to average assets (%) 1.9 1.5 1.8 2.0 1.9  3.0 1.9 1.5 1.8 2.0 
Market capitalization
 57,108 43,519 108,654 154,222 131,949  58,803 57,108 43,519 108,654 154,222 
Shares
  
Registered ordinary shares 3,558,112,753 2,932,580,549 2,073,547,344 2,105,273,286 2,177,265,044  3,830,840,513 3,558,112,753 2,932,580,549 2,073,547,344 2,105,273,286 
Treasury shares 37,553,872 61,903,121 158,105,524 164,475,699 208,519,748  38,892,031 37,553,872 61,903,121 158,105,524 164,475,699 
BIS capital ratios
  
Tier 1 (%) 15.4 11.0  9.11  12.21  13.31
Tier 1 (%)1
 17.8 15.4 11.0 9.1 12.2 
Total BIS (%) 19.8 15.0  12.21  15.01  14.51
Total BIS (%)1
 20.4 19.8 15.0 12.2 15.0 
Risk-weighted assets 206,525 302,273 374,4211  344,0151  312,5321
Risk-weighted assets1
 198,875 206,525 302,273 374,421 344,015 
Invested assets (CHF billion)
 2,233 2,174 3,189 2,989 2,652  2,152 2,233 2,174 3,189 2,989 
Personnel (full-time equivalents)
  
Switzerland 24,050 26,406 27,884 27,022 26,029  23,284 24,050 26,406 27,884 27,022 
United Kingdom 6,204 7,071 8,813 8,243 7,135  6,634 6,204 7,071 8,813 8,243 
Rest of Europe 4,145 4,817 4,776 4,338 3,759  4,122 4,145 4,817 4,776 4,338 
Middle East/Africa 134 145 139 102 112 
Middle East / Africa 137 134 145 139 102 
United States 22,702 27,362 29,921 29,076 25,999  22,031 22,702 27,362 29,921 29,076 
Rest of Americas 1,132 1,984 2,054 1,743 1,137  1,147 1,132 1,984 2,054 1,743 
Asia Pacific 6,865 9,998 9,973 7,616 5,398  7,263 6,865 9,998 9,973 7,616 
Total 65,233 77,783 83,560 78,140 69,569  64,617 65,233 77,783 83,560 78,140 
Long-term ratings2
 
Fitch, London A+ A+ AA AA+ AA+ 
Moody’s, New York Aa3 Aa2 Aaa Aa2 Aa2 
Standard & Poor’s, New York A+ A+ AA AA+ AA+ 
1 The calculation prior to 2008 is based on the Basel I approach.2 Refer to the “Credit risk” section of this report for information about the nature of these ratings.

401407

Financial information
Additional disclosure required under SEC regulations

                     
Income statement data 
  For the year ended 
CHF million, except where indicated 31.12.09  31.12.08  31.12.07  31.12.06  31.12.05 
 
Interest income  23,461   65,679   109,112   87,401   59,286 
 
Interest expense  (17,016)  (59,687)  (103,775)  (80,880)  (49,758)
 
Net interest income  6,446   5,992   5,337   6,521   9,528 
 
Credit loss (expense)/recovery  (1,832)  (2,996)  (238)  156   375 
 
Net interest income after credit loss (expense)/recovery  4,614   2,996   5,099   6,677   9,903 
 
Net fee and commission income  17,712   22,929   30,634   25,456   21,184 
 
Net trading income  (324)  (25,820)  (8,353)  13,743   8,248 
 
Other income  599   692   4,341   1,608   1,135 
 
Total operating income  22,601   796   31,721   47,484   40,470 
 
Total operating expenses  25,162   28,555   35,463   33,365   28,533 
 
Operating profit from continuing operations before tax
  (2,561)  (27,758)  (3,742)  14,119   11,937 
 
Tax expense  (443)  (6,837)  1,369   2,998   2,270 
 
Net profit from continuing operations
  (2,118)  (20,922)  (5,111)  11,121   9,667 
 
Net profit from discontinued operations  (7)  198   403   899   4,526 
 
Net profit  (2,125)  (20,724)  (4,708)  12,020   14,193 
 
Net profit attributable to minority interests  610   568   539   493   661 
 
Net profit attributable to UBS shareholders
  (2,736)  (21,292)  (5,247)  11,527   13,532 
 
Cost/income ratio (%)1
  103.0   753.0   111.0   70.5   71.2 
 
Per share data (CHF)
                    
 
Basic earnings per share2
  (0.75)  (7.63)  (2.40)  5.15   5.93 
 
Diluted earnings per share2
  (0.75)  (7.63)  (2.41)  4.95   5.70 
 
Operating profit before tax per share  (0.70)  (9.94)  (1.71)  6.30   5.23 
 
Cash dividends declared per share (CHF)3,4
  N/A   N/A   N/A   2.20   1.60 
 
Cash dividend declared per share (USD)3,4
  N/A   N/A   N/A   1.83   1.26 
 
Dividend payout ratio (%)3,4
  N/A   N/A   N/A   42.7   27.0 
 
Rates of return (%)
                    
 
Return on equity attributable to UBS shareholders5
  (7.8)  (58.7)  (10.5)  23.8   34.0 
 
Return on average equity  (7.9)  (60.6)  (10.6)  24.0   34.4 
 
Return on average assets  (0.1)  (0.9)  (0.2)  0.5   0.7 
 
                     
Income statement data 
  For the year ended 
CHF million, except where indicated 31.12.10  31.12.09  31.12.08  31.12.07  31.12.06 
 
Interest income  18,872   23,461   65,679   109,112   87,401 
 
Interest expense  (12,657)  (17,016)  (59,687)  (103,775)  (80,880)
 
Net interest income  6,215   6,446   5,992   5,337   6,521 
 
Credit loss (expense) / recovery  (66)  (1,832)  (2,996)  (238)  156 
 
Net interest income after credit loss (expense) / recovery  6,149   4,614   2,996   5,099   6,677 
 
Net fee and commission income  17,160   17,712   22,929   30,634   25,456 
 
Net trading income  7,471   (324)  (25,820)  (8,353)  13,743 
 
Other income  1,214   599   692   4,341   1,608 
 
Total operating income  31,994   22,601   796   31,721   47,484 
 
Total operating expenses  24,539   25,162   28,555   35,463   33,365 
 
Operating profit from continuing operations before tax
  7,455   (2,561)  (27,758)  (3,742)  14,119 
 
Tax expense / (benefit)  (381)  (443)  (6,837)  1,369   2,998 
 
Net profit from continuing operations
  7,836   (2,118)  (20,922)  (5,111)  11,121 
 
Net profit from discontinued operations  2   (7)  198   403   899 
 
Net profit  7,838   (2,125)  (20,724)  (4,708)  12,020 
 
Net profit attributable to non-controlling interests  304   610   568   539   493 
 
Net profit attributable to UBS shareholders
  7,534   (2,736)  (21,292)  (5,247)  11,527 
 
Cost / income ratio (%)1
  76.5   103.0   753.0   111.0   70.5 
 
Per share data (CHF)
                    
 
Basic earnings per share2
  1.99   (0.75)  (7.63)  (2.40)  5.15 
 
Diluted earnings per share2
  1.96   (0.75)  (7.63)  (2.41)  4.95 
 
Operating profit before tax per share  1.97   (0.70)  (9.94)  (1.71)  6.30 
 
Cash dividends declared per share (CHF)3,4
  N/A   N/A   N/A   N/A   2.20 
 
Cash dividend declared per share (USD)3,4
  N/A   N/A   N/A   N/A   1.83 
 
Dividend payout ratio (%)3,4
  N/A   N/A   N/A   N/A   42.7 
 
Rates of return (%)
                    
 
Return on equity attributable to UBS shareholders5
  16.7   (7.8)  (58.7)  (10.5)  23.8 
 
Return on average equity  16.6   (7.9)  (60.6)  (10.6)  24.0 
 
Return on average assets  0.5   (0.1)  (0.9)  (0.2)  0.5 
 
1 Operating expenses/expenses / operating income before credit loss expense.  2 For EPS calculation, refer to Note 8 in the Financial Statements.  3 Additionally, in July 2006, a par value reduction of CHF 0.30 (USD 0.24) per share was distributed. Dividends are normally declared and paid in the year subsequent to the reporting period.  4 For the business year 2007 a stock dividend was distributed for which 98,698,754 new shares were issued on 19 May 2008 to UBS shareholders with an exchange ratio of 20:1.  5 Net profit attributable to UBS shareholders/shareholders / average equity attributable to UBS shareholders. Calculation excludes expected deductions for dividend distributions.

402408

Financial information
                     
Balance sheet data 
  For the year ended 
CHF million 31.12.09  31.12.08  31.12.07  31.12.06  31.12.05 
 
Assets
                    
 
Total assets  1,340,538   2,014,815   2,274,891   2,348,733   2,001,099 
 
Due from banks  46,574   64,451   60,907   50,426   33,644 
 
Cash collateral on securities borrowed  63,507   122,897   207,063   351,590   288,435 
 
Reverse repurchase agreements  116,689   224,648   376,928   405,834   404,432 
 
Trading portfolio assets  188,037   271,838   660,182   648,346   499,297 
 
Trading portfolio assets pledged as collateral  44,221   40,216   114,190   230,168   154,759 
 
Positive replacement values  421,694   854,100   428,217   292,975   273,889 
 
Loans  306,828   340,308   335,864   297,842   279,910 
 
Liabilities
                    
 
Due to banks  65,166   125,628   145,762   203,689   124,328 
 
Cash collateral on securities lent  7,995   14,063   31,621   63,088   59,938 
 
Repurchase agreements  64,175   102,561   305,887   545,480   478,508 
 
Trading portfolio liabilities  47,469   62,431   164,788   204,773   188,631 
 
Negative replacement values  409,943   851,864   443,539   297,063   277,770 
 
Financial liabilities designated at fair value  112,653   101,546   191,853   145,687   117,401 
 
Due to customers  410,475   465,741   630,105   546,154   461,425 
 
Debt issued  131,352   197,254   222,077   190,143   160,710 
 
Equity attributable to UBS shareholders  41,013   32,531   36,875   51,037   45,633 
 
Financial information
                     
Balance sheet data 
  For the year ended 
CHF million 31.12.10  31.12.09  31.12.08  31.12.07  31.12.06 
 
Assets
                    
 
Total assets  1,317,247   1,340,538   2,014,815   2,274,891   2,348,733 
 
Due from banks  17,133   16,804   17,694   25,976   32,156 
 
Cash collateral on securities borrowed  62,454   63,507   122,897   207,063   351,590 
 
Reverse repurchase agreements  142,790   116,689   224,648   376,928   405,834 
 
Trading portfolio assets  167,463   188,037   271,838   660,182   648,346 
 
Trading portfolio assets pledged as collateral  61,352   44,221   40,216   114,190   230,168 
 
Positive replacement values  401,146   421,694   854,100   428,217   292,975 
 
Cash collateral receivables on derivative instruments  38,071   53,774   85,703   64,978   24,433 
 
Loans  262,877   266,477   291,456   271,492   258,350 
 
Financial investments available-for-sale  74,768   81,757   5,248   4,966   8,937 
 
Other assets  22,681   23,682   19,837   51,417   52,949 
 
Liabilities
                    
 
Due to banks  41,490   31,922   76,822   121,983   182,316 
 
Cash collateral on securities lent  6,651   7,995   14,063   31,621   63,088 
 
Repurchase agreements  74,796   64,175   102,561   305,887   545,480 
 
Trading portfolio liabilities  54,975   47,469   62,431   164,788   204,773 
 
Negative replacement values  393,762   409,943   851,864   443,539   297,063 
 
Cash collateral payables on derivative instruments  58,924   66,097   92,937   77,781   52,251 
 
Financial liabilities designated at fair value  100,756   112,653   101,546   191,853   145,687 
 
Due to customers  332,301   339,263   362,639   496,279   451,020 
 
Debt issued  130,271   131,352   197,254   222,077   190,143 
 
Other liabilities  63,719   72,344   101,969   153,107   137,935 
 
Equity attributable to UBS shareholders  46,820   41,013   32,531   36,875   51,037 
 

Ratio of earnings to fixed charges

                     
The following table sets forth UBS’s ratio of earnings to fixed charges on an IFRS basis for the periods indicated. The ratios are calculated based on earnings from continuing operations. Ratios of earnings to combined fixed charges and preferred stock dividend requirements are not presented as there were no preferred share dividends in any of the periods indicated.
                     
  For the year ended
  
   31.12.09   31.12.08   31.12.07   31.12.06   31.12.05 
  
   0.82   0.53   0.96   1.17   1.23 
  
The following table sets forth UBS’s ratio of earnings to fixed charges on an IFRS basis for the periods indicated. The ratios are calculated based on earnings from continuing operations. Ratios of earnings to combined fixed charges and preferred stock dividend requirements are not presented as there were no preferred share dividends in any of the periods indicated.

403

                 
For the year ended 
 
31.12.10
  31.12.09   31.12.08   31.12.07   31.12.06 
 
1.53
  0.82   0.53   0.96   1.17 
 


409

Financial information
Additional disclosure required under SEC regulations

C – Information on the company

Property, plant and equipment

At 31 December 2009,2010, UBS operated about 973907 business and banking locations worldwide, of which about 42%43% were in Switzerland, 41% in the Americas, 12%11% in the rest of Europe, Middle East and Africa and 5% in Asia-Pacific. Of the business and banking locations in Switzerland, 37%36% were owned directly by UBS,

with the remainder, along

with most of UBS’s offices outside Switzerland, being held under commercial leases.

These premises are subject to continuous maintenance and upgrading and are considered suitable and adequate for current and anticipated operations.



404410

Financial information

D – Information required by industry guide 3

Selected statistical information

The tables below set forth selected statistical information regarding the Group’s banking operations extracted from the Financial Statements. Unless otherwise indicated, average balances for the years ended 31 December 2009,2010, 31 December 20082009 and 31 December 2007De-
cember 2008 are calculated from

monthly data. The distinction between domestic and foreign is generally based on the booking location. For loans, this method is not significantly different from an analysis based on the domicile of the borrower.



Average balances and interest rates

The following table sets forth average interest-earning assets and average interest-bearing liabilities, along with the average rates, for the years ended 31 December 2010, 2009 2008 and 2007.2008.

                                                                   
 31.12.09 31.12.08 31.12.07  31.12.10 31.12.09 31.12.08 
 Average Average Average Average Average Average  Average Average Average Average Average Average 
CHF million, except where indicated balance Interest rate (%) balance Interest rate (%) balance Interest rate (%)  balance Interest rate (%) balance Interest rate (%) balance Interest rate (%) 
Assets
  
Due from banks  
Domestic 3,420 200 5.8 7,243 421 5.8 11,784 664 5.6  3,037 13 0.4 3,420 56 1.6 7,243 342 4.7 
Foreign 52,668 321 0.6 58,287 1,559 2.7 46,049 2,344 5.1  14,280 60 0.4 16,194 260 1.6 15,946 789 4.9 
Cash collateral on securities borrowed and
reverse repurchase agreements		  
Domestic 10,029 244 2.4 31,642 1,208 3.8 31,473 1,693 5.4  11,277 196 1.7 10,029 244 2.4 31,642 1,208 3.8 
Foreign 381,049 2,385 0.6 669,010 21,313 3.2 977,302 46,581 4.8  296,252 1,240 0.4 381,049 2,385 0.6 669,010 21,313 3.2 
Trading portfolio assets  
Domestic 10,976 228 2.1 15,104 520 3.4 11,866 696 5.9  14,150 231 1.6 10,976 228 2.1 15,104 520 3.4 
Foreign taxable 270,674 6,915 2.6 522,804 21,494 4.1 861,923 38,206 4.4  212,430 5,769 2.7 270,674 6,915 2.6 522,804 21,494 4.1 
Foreign non-taxable 2,160 7 0.3 8,070 383 4.7 5,754 199 3.5  2,033 15 0.7 2,160 7 0.3 8,070 383 4.7 
Foreign total 272,834 6,922 2.5 530,874 21,877 4.1 867,677 38,405 4.4  214,463 5,784 2.7 272,834 6,922 2.5 530,874 21,877 4.1 
Cash collateral receivables on derivative instruments 
Domestic 
Foreign 49,095 306 0.6 68,482 282 0.4 70,867 2,196 3.1 
Financial assets designated at fair value  
Domestic 548 0 945 0 588 0  568 0 548 0 945 0 
Foreign 11,674 316 2.7 11,024 404 3.7 9,114 298 3.3  9,128 262 2.9 11,674 316 2.7 11,024 404 3.7 
Loans  
Domestic 179,680 5,532 3.1 188,950 6,840 3.6 187,073 6,565 3.5  179,164 4,921 2.7 179,680 5,676 3.2 188,950 6,919 3.7 
Foreign 151,584 4,946 3.3 147,034 8,304 5.6 146,040 9,359 6.4  90,032 2,584 2.9 105,791 4,208 4.0 91,281 5,603 6.1 
Financial investments available-for-sale  
Domestic 991 21 2.1 1,599 72 4.5 3,930 66 1.7  1,712 18 1.1 991 21 2.1 1,599 72 4.5 
Foreign taxable 28,295 143 0.5 3,370 73 2.2 2,934 110 3.7  74,821 539 0.7 28,295 143 0.5 3,370 73 2.2 
Foreign non-taxable 0 0 0  0 
Foreign total 28,295 143 0.5 3,370 73 2.2 2,934 110 3.7  74,821 539 0.7 28,295 143 0.5 3,370 73 2.2 
Other interest-earning assets 
Domestic 0 0 0 0 0 0 
Foreign 15,227 484 3.2 13,785 517 3.8 27,227 1,275 4.7 
Total interest-earning assets
 1,103,748 21,258 1.9 1,665,082 62,591 3.8 2,295,830 106,781 4.7  973,206 16,638 1.7 1,103,748 21,258 1.9 1,665,082 62,591 3.8 
Net interest on swaps 2,203 3,088 2,331  2,234 2,203 3,088 
Interest income and average
interest-earning assets
 1,103,748 23,461 2.1 1,665,082 65,679 3.9 2,295,830 109,112 4.8  973,206 18,872 1.9 1,103,748 23,461 2.1 1,665,082 65,679 3.9 
Non-interest-earning assets  
Positive replacement values 654,651 600,073 373,229  471,046 654,651 600,073 
Fixed assets 6,609 7,091 7,090  5,884 6,609 7,091 
Other 86,133 82,357 82,739  81,876 86,133 82,357 
Total average assets
 1,851,141 2,354,603 2,758,888  1,532,012 1,851,141 2,354,603 

405411

Financial information
Additional disclosure required under SEC regulations

                                                                   
Average balances and interest rates (continued)Average balances and interest rates (continued) Average balances and interest rates (continued) 
 31.12.09 31.12.08 31.12.07  31.12.10 31.12.09 31.12.08 
 Average Average Average Average Average Average  Average Average Average Average Average Average 
CHF million, except where indicated balance Interest rate (%) balance Interest rate (%) balance Interest rate (%)  balance Interest rate (%) balance Interest rate (%) balance Interest rate (%) 
Liabilities and equity
  
Due to banks  
Domestic  36,278  219  0.6 51,027 1,503 2.9 60,858 2,477 4.1  29,400 253 0.9 36,248 219 0.6 51,027 1,503 2.9 
Foreign  76,305  457  0.6 88,798 3,423 3.9 146,286 8,008 5.5  10,318 99 1.0 34,205 245 0.7 55,731 1,930 3.5 
Cash collateral on securities lent and repurchase agreements  
Domestic  11,321  200  1.8 31,269 1,026 3.3 47,041 1,902 4.0  12,089 147 1.2 11,321 200 1.8 31,269 1,026 3.3 
Foreign  195,991  1,979  1.0 397,453 15,097 3.8 752,616 38,680 5.1  176,098 1,135 0.6 195,991 1,979 1.0 397,453 15,097 3.8 
Trading portfolio liabilities  
Domestic  1,411  55  3.9 5,525 256 4.6 5,561 328 5.9  1,068 37 3.5 1,411 55 3.9 5,525 256 4.6 
Foreign  58,091  3,823  6.6 132,901 8,906 6.7 214,326 15,484 7.2  59,672 3,757 6.3 58,091 3,823 6.6 132,901 8,906 6.7 
Cash collateral payables on derivative instruments 
Domestic 361 0 30 0 0 0 
Foreign 69,223 242 0.3 84,747 278 0.3 82,969 2,343 2.8 
Financial liabilities designated at fair valueFinancial liabilities designated at fair value 
Domestic  934  17  1.8 1,444 69 4.8 1,503 79 5.3  878 3 0.3 934 17 1.8 1,444 69 4.8 
Foreign  106,690  2,838  2.7 151,324 7,229 4.8 173,162 7,580 4.4  108,405 2,389 2.2 106,690 2,838 2.7 151,324 7,229 4.8 
Due to customers  
Domestic demand deposits  64,877  98  0.2 56,730 495 0.9 64,568 736 1.1  85,838 106 0.1 64,872 98 0.2 56,730 495 0.9 
Domestic savings deposits  68,042  521  0.8 65,073 604 0.9 75,587 502 0.7  75,802 409 0.5 68,042 521 0.8 65,073 604 0.9 
Domestic time deposits  13,075  451  3.4 35,575 1,081 3.0 41,056 1,206 2.9  7,977 49 0.6 13,075 451 3.4 35,575 1,081 3.0 
Domestic total  145,994  1,070  0.7 157,378 2,180 1.4 181,211 2,444 1.3  169,617 564 0.3 145,989 1,070 0.7 157,378 2,180 1.4 
Foreign  304,641  2,127  0.7 394,151 11,044 2.8 418,558 16,388 3.9 
Foreign1
 168,099 756 0.4 220,860 1,971 0.9 271,487 8,998 3.3 
Short-term debt  
Domestic  689  27  3.9 1,735 63 3.6 2,228 98 4.4  1,140 9 0.8 971 27 2.8 1,735 63 3.6 
Foreign  86,186  2,234  2.6 134,920 6,216 4.6 144,546 8,643 6.0  53,454 394 0.7 85,904 1,280 1.5 134,920 6,216 4.6 
Long-term debt  
Domestic 13,462 142 1.1 11,152 153 1.4 5,766 148 2.6 
Foreign 68,267 2,661 3.9 76,961 2,771 3.6 74,531 2,527 3.4 
Other interest-bearing liabilities 
Domestic  11,152  153  1.4 5,766 148 2.6 4,235 115 2.7  0 0 0 0 0 0 
Foreign  76,961  1,817  2.4 74,531 2,527 3.4 70,079 1,549 2.2  37,996 69 0.2 41,139 90 0.2 72,762 1,196 1.6 
Total interest-bearing liabilities
  1,112,644  17,016  1.5 1,628,222 59,687 3.7 2,222,210 103,775 4.7  979,547 12,657 1.3 1,112,644 17,016 1.5 1,628,222 59,687 3.7 
Non-interest-bearing liabilities  
Negative replacement values  641,028 605,990 382,115  459,987 641,028 605,990 
Other  54,720 77,476 98,951  40,418 54,720 77,476 
Total liabilities  1,808,392 2,311,688 2,703,276  1,479,952 1,808,392 2,311,688 
Total equity  42,749 42,915 55,612  52,060 42,749 42,915 
Total average liabilities and equity  1,851,141 2,354,603 2,758,888  1,532,012 1,851,141 2,354,603 
Net interest income
  6,446 5,992 5,337  6,215 6,446 5,992 
Net yield on interest-earning assets
Net yield on interest-earning assets
  0.6 0.4 0.2  0.6 0.6 0.4 
1 Due to customers in foreign offices consists mainly of time deposits.

The percentage of total average interest-earning assets attributable to foreign activities was 81%78% for 2010 (81% for 2009 (85%and 85% for 2008 and 89% for 2007)2008). The percentage of total average interest-bearing liabilities attributable to foreign activities was 81%77% for 2010 (81% for 2009 (84%and 84% for 2008 and 86% for 2007)2008). All assets and liabilities are translated into CHF at uniform month-end rates. Interest income and interest expense are translated at monthly average rates.

Average rates earned and paid on assets and liabilities can change from period to period based on the changes in 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.


406412

Financial information

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 2010 compared with the year ended 31 December 2009, and for the year ended 31 December 2009 compared with the year ended 31 December 2008,2008. Volume and for the year ended 31 December 2008 compared with the year end-

ed 31 December 2007. Volume and rate variances have been calculated on movements in average balances and changes in interest rates. Changes due to a combination of volume and rates have been allocated proportionally. Refer to the appropriate section of Industry Guide 3 for a discussion of the treatment of impaired and non-performing loans.



                                             
 2009 compared with 2008 2008 compared with 2007  2010 compared with 2009 2009 compared with 2008 
 Increase/(decrease) Increase/(decrease)    Increase / (decrease) Increase / (decrease)   
 due to changes in due to changes in    due to changes in due to changes in   
 Average Average Net Average Average Net  Average Average Net Average Average Net 
CHF million volume rate change volume rate change  volume rate change volume rate change 
Interest income from interest-earning assets
  
Due from banks  
Domestic  (222) 1  (221)  (254) 11  (243)  (6)  (37)  (43)  (180)  (106)  (286)
Foreign  (152)  (1,086)  (1,238) 624  (1,409)  (785)  (31)  (169)  (200) 12  (541)  (529)
Cash collateral on securities borrowed and reverse repurchase agreementsCash collateral on securities borrowed and reverse repurchase agreements 
Domestic  (821)  (143)  (964) 9  (494)  (485) 30  (78)  (48)  (821)  (143)  (964)
Foreign  (9,215)  (9,713)  (18,928)  (14,798)  (10,470)  (25,268)  (509)  (636)  (1,145)  (9,215)  (9,713)  (18,928)
Trading portfolio assets  
Domestic  (140)  (152)  (292) 191  (367)  (176) 67  (64) 3  (140)  (152)  (292)
Foreign taxable  (10,337)  (4,242)  (14,579)  (14,921)  (1,791)  (16,712)  (1,514) 368  (1,146)  (10,337)  (4,242)  (14,579)
Foreign non-taxable  (278)  (98)  (376) 81 103 184  8 8  (278)  (98)  (376)
Foreign total  (10,615)  (4,340)  (14,955)  (14,840)  (1,688)  (16,528)  (1,514) 376  (1,138)  (10,615)  (4,340)  (14,955)
Cash collateral receivables on derivative instruments 
Domestic 
Foreign  (78) 102 24  (74)  (1,840)  (1,914)
Financial assets designated at fair value  
Domestic 0 0 0 0 0 0  0 0 0 0 
Foreign 24  (112)  (88) 63 43 106   (69) 15  (54) 24  (112)  (88)
Loans  
Domestic  (334)  (974)  (1,308) 66 209 275   (17)  (738)  (755)  (343)  (900)  (1,243)
Foreign 255  (3,613)  (3,358) 64  (1,119)  (1,055)  (630)  (994)  (1,624) 885  (2,280)  (1,395)
Financial investments available-for-sale  
Domestic  (27)  (24)  (51)  (40) 46 6  15  (18)  (3)  (27)  (24)  (51)
Foreign taxable 548  (478) 70  16  (53)  (37) 233 163 396 548  (478) 70 
Foreign non-taxable 0 0 0 0 0 0  
Foreign total 548  (478) 70  16  (53)  (37) 233 163 396 548  (478) 70 
Other interest-bearing assets 
Domestic 
Foreign 55  (88)  (33)  (632)  (126)  (758)
Interest income  
Domestic  (1,544)  (1,292)  (2,836)  (28)  (595)  (623) 89  (935)  (846)  (1,511)  (1,325)  (2,836)
Foreign  (19,155)  (19,342)  (38,497)  (28,871)  (14,696)  (43,567)  (2,543)  (1,231)  (3,774)  (19,067)  (19,430)  (38,497)
Total interest income from interest-earning assets  (20,699)  (20,634)  (41,333)  (28,899)  (15,291)  (44,190)  (2,454)  (2,166)  (4,620)  (20,578)  (20,755)  (41,333)
Net interest on swaps  (885) 757  31  (885)
Total interest income
  (42,218)  (43,433)  (4,589)  (42,218)

407413

Financial information
Additional disclosure required under SEC regulations

                                             
Analysis of changes in interest income and expense (continued)Analysis of changes in interest income and expense (continued) Analysis of changes in interest income and expense (continued) 
 2009 compared with 2008 2008 compared with 2007  2010 compared with 2009 2009 compared with 2008 
 Increase/(decrease) Increase/(decrease)    Increase / (decrease) Increase / (decrease)   
 due to changes in due to changes in    due to changes in due to changes in   
 Average Average Net Average Average Net  Average Average Net Average Average Net 
CHF million volume rate change volume rate change  volume rate change volume rate change 
Interest expense on interest-bearing liabilities
  
Due to banks  
Domestic  (428)  (856)  (1,284)  (403)  (571)  (974)  (41) 75 34  (429)  (855)  (1,284)
Foreign  (487)  (2,479)  (2,966)  (3,162)  (1,423)  (4,585)  (167) 21  (146)  (753)  (932)  (1,685)
Cash collateral on securities lent and repurchase agreements  
Domestic  (658)  (168)  (826)  (631)  (245)  (876) 14  (67)  (53)  (658)  (168)  (826)
Foreign  (7,656)  (5,462)  (13,118)  (18,113)  (5,470)  (23,583)  (199)  (645)  (844)  (7,656)  (5,462)  (13,118)
Trading portfolio liabilities  
Domestic  (13)  (5)  (18)  (189)  (12)  (201)
Foreign 104  (170)  (66)  (5,012)  (71)  (5,083)
Cash collateral payables on derivative instruments 
Domestic  (189)  (12)  (201)  (2)  (70)  (72) 
Foreign  (5,012)  (71)  (5,083)  (5,863)  (715)  (6,578)  (47) 11  (36) 50  (2,115)  (2,065)
Financial liabilities designated at fair value  
Domestic  (24)  (28)  (52)  (3)  (7)  (10)  (1)  (13)  (14)  (24)  (28)  (52)
Foreign  (2,142)  (2,249)  (4,391)  (961) 610  (351) 46  (495)  (449)  (2,142)  (2,249)  (4,391)
Due to customers  
Domestic demand deposits 73  (470)  (397)  (86)  (155)  (241) 42  (34) 8 73  (470)  (397)
Domestic savings deposits 27  (110)  (83)  (74) 176 102  62  (174)  (112) 27  (110)  (83)
Domestic time deposits  (675) 45  (630)  (159) 34  (125)  (173)  (229)  (402)  (675) 45  (630)
Domestic total  (575)  (535)  (1,110)  (319) 55  (264)  (69)  (437)  (506)  (575)  (535)  (1,110)
Foreign  (2,506)  (6,411)  (8,917)  (952)  (4,392)  (5,344)  (475)  (740)  (1,215)  (1,671)  (5,356)  (7,027)
Short-term debt  
Domestic  (38) 2  (36)  (22)  (13)  (35) 5  (23)  (18)  (28)  (8)  (36)
Foreign  (2,242)  (1,740)  (3,982)  (578)  (1,849)  (2,427)  (487)  (399)  (886)  (2,255)  (2,681)  (4,936)
Long-term debt  
Domestic 140  (135) 5 41  (8) 33  32  (43)  (11) 140  (135) 5 
Foreign 83  (793)  (710) 98 880 978   (313) 203  (110) 83 161 244 
Other interest-bearing liabilities 
Domestic 
Foreign  (6)  (15)  (21)  (506)  (600)  (1,106)
Interest expense  
Domestic  (1,772)  (1,732)  (3,504)  (1,339)  (859)  (2,198)  (73)  (513)  (586)  (1,763)  (1,741)  (3,504)
Foreign  (19,962)  (19,205)  (39,167)  (29,531)  (12,359)  (41,890)  (1,544)  (2,229)  (3,773)  (19,862)  (19,305)  (39,167)
Total interest expense
  (21,734)  (20,937)  (42,671)  (30,870)  (13,218)  (44,088)  (1,617)  (2,742)  (4,359)  (21,625)  (21,046)  (42,671)

408414

Financial information

Deposits

The following table analyzes average deposits and the average rates on each deposit category listed below for the years ended 31 December 2010, 2009 2008 and 2007.2008. The geographic allocation is based on the location of the office or branch

where the deposit is

made. Deposits by foreign depositors in domestic offices were CHF 55,17163,953 million, CHF 54,957 million and CHF 45,082 million and CHF 72,849 million atas of 31 December 2010, 31 December 2009 and 31 December 2008, and 31 December 2007, respectively.



                                           
 31.12.09 31.12.08 31.12.07  31.12.10 31.12.09 31.12.08 
 Average Average Average Average Average Average  Average Average Average Average Average Average 
CHF million, except where indicated deposit rate (%) deposit rate (%) deposit rate (%)  deposit rate (%) deposit rate (%) deposit rate (%) 
Banks
  
Domestic offices
  
Demand deposits 1,154 0.1 2,341 0.5 2,474 0.6  1,315 0.0 1,154 0.1 2,341 0.5 
Time deposits 2,266 0.9 4,902 3.8 9,310 5.1  1,722 2.1 2,266 0.9 4,902 3.8 
Total domestic offices 3,420 0.6 7,243 2.7 11,784 4.2  3,037 1.2 3,420 0.6 7,243 2.7 
Foreign offices
  
Interest-bearing deposits1
 52,668 0.6 58,287 3.9 46,049 5.5  14,280 1.0 16,194 0.7 15,946 3.5 
Total due to banks
 56,088 0.6 65,530 3.7 57,833 5.2  17,317 1.0 19,614 0.7 23,189 3.2 
  
Customer accounts
  
Domestic offices
  
Demand deposits 64,877 0.2 56,730 0.9 64,568 1.1  85,838 0.1 64,872 0.2 56,730 0.9 
Savings deposits 68,042 0.8 65,073 0.9 75,587 0.7  75,802 0.5 68,042 0.8 65,073 0.9 
Time deposits 13,075 3.4 35,575 3.0 41,056 2.9  7,977 0.6 13,075 3.4 35,575 3.0 
Total domestic offices 145,994 0.7 157,378 1.4 181,211 1.3  169,617 0.3 145,989 0.7 157,378 1.4 
Foreign offices
  
Demand deposits 93,520 0.4 111,168 2.4 110,839 1.1  35,588 0.2 29,725 0.8 38,761 1.7 
Time and savings deposits1
 211,121 0.8 282,983 2.9 307,719 4.9  132,511 0.5 191,135 0.9 232,726 3.6 
Total foreign offices 304,641 0.7 394,151 2.8 418,558 3.9  168,099 0.4 220,860 0.9 271,487 3.3 
Total due to customers
 450,635 0.7 551,529 2.4 599,769 3.1  337,716 0.4 366,849 0.8 428,865 2.6 
1 Mainly time deposits.

AtAs of 31 December 2009,2010, the maturity of time deposits exceeding CHF 150,000, or an equivalent amount in other currencies, was as follows:

                
CHF million Domestic Foreign  Domestic Foreign 
Within 3 months 27,398 82,800  35,520 63,087 
Over 3 up to 6 months 773 9,315 
3 to 6 months 2,077 4,182 
Over 6 up to 12 months 655 3,242 
6 to 12 months 1,718 2,386 
Over 1 up to 5 years 358 827 
1 to 5 years 336 411 
Over 5 years 160 80  102 108 
Total time deposits
 29,344 96,264  39,753 70,174 

409415

Financial information
Additional disclosure required under SEC regulations

Short-term borrowings

The following table presents the period-end, average and maximum month-end outstanding amounts for short-term borrowings, along with the average rates and period-end rates at and for the years ended 31 December 2010, 2009 2008 and 2007.2008.

                                                                   
 Money market papers issued Due to banks Repurchase agreements1  Money market papers issued Due to banks Repurchase agreements1 
CHF million, except where indicated 31.12.09 31.12.08 31.12.07 31.12.09 31.12.08 31.12.07 31.12.09 31.12.08 31.12.07  31.12.10 31.12.09 31.12.08 31.12.10 31.12.09 31.12.08 31.12.10 31.12.09 31.12.08 
Period-end balance 51,579 111,619 152,256 18,560 61,155 84,826 136,811 140,039 487,455  56,039 51,579 111,619 24,332 15,086 59,106 150,024 136,811 140,039 
Average balance 86,875 136,655 146,774 56,495 74,295 149,311 195,613 404,512 739,138  54,594 86,875 136,655 22,401 50,838 83,569 178,458 195,613 404,512 
Maximum month-end balance 125,812 170,503 167,637 74,044 87,233 175,233 272,443 591,005 848,401  64,941 125,812 170,503 37,886 70,985 95,979 207,828 272,443 591,005 
Average interest rate during the period (%) 2.6 4.6 6.0 0.6 3.5 5.1 0.7 3.5 5.0  0.7 1.5 4.6 0.9 0.7 3.2 0.4 0.7 3.5 
Average interest rate at period-end (%) 0.9 2.9 6.1 0.6 2.3 4.5 0.3 1.4 4.9  0.7 0.9 2.9 1.0 0.6 2.3 0.4 0.3 1.4 
1 For the purpose of this disclosure, balances are presented on a gross basis.

                                 
Contractual maturities of debt investments available-for-sale1,2 
  Within 1 year  Over 1 up to 5 years  Over 5 up to 10 years  Over 10 years 
CHF million, except percentages Amount  Yield (%)  Amount  Yield (%)  Amount  Yield (%)  Amount  Yield (%) 
 
31 December 2009
                                
 
Swiss national government and agencies  209   0.47   16   2.27   6   1.11   1   4.00 
 
Swiss local governments  0   0.00   0   0.00   0   0.00   0   0.00 
 
US Treasury and agencies  3,475   0.05   1,831   0.02   0   0.00   0   0.00 
 
Foreign governments and official institutions  2,861   0.98   96   2.75   25   1.88   18   3.66 
 
Corporate debt securities3
  5,227   0.11   5,021   0.10   0   21.80   3   21.80 
 
Mortgage-backed securities  27   0.00   3   4.87   25   3.75   752   0.43 
 
Other debt instruments  98   2.80   3   1.21   0   0.00   0   0.00 
 
Total fair value
  11,898       6,970       56       774     
 
                                 
  Within 1 year  Over 1 up to 5 years  Over 5 up to 10 years  Over 10 years 
CHF million, except percentages Amount  Yield (%)  Amount  Yield (%)  Amount  Yield (%)  Amount  Yield (%) 
 
31 December 2008
                                
 
Swiss national government and agencies  0   0.00   2   3.46   0   0.00   1   4.00 
 
Swiss local governments  0   0.00   0   0.00   0   0.00   0   0.00 
 
US Treasury and agencies  0   0.00   0   0.00   0   0.00   0   0.00 
 
Foreign governments and official institutions  33   1.31   0   0.00   33   2.81   34   5.22 
 
Corporate debt securities  3   23.35   88   3.38   38   3.12   12   1.74 
 
Mortgage-backed securities  0   0.00   0   0.00   42   4.00   455   5.28 
 
Other debt instruments  188   9.06   3   13.47   0   0.00   37   7.42 
 
Total fair value
  224       93       113       539     
 
                                
Contractual maturities of investments in debt instruments available-for-sale1,2Contractual maturities of investments in debt instruments available-for-sale1,2 
 Within 1 year Over 1 up to 5 years Over 5 up to 10 years Over 10 years 
CHF million, except percentages Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%) 
31 December 2010
 
Swiss national government and agencies 3,048 0.54 95 1.34 1 4.00 
US Treasury and agencies 18,500 0.41 6,687 1.11 8,792 1.62 
Foreign governments and official institutions 20,916 0.55 843 0.78 4,552 3.28 28 5.20 
Corporate debt securities3
 5,119 1.02 652 0.81 1 5.38 4 15.84 
Mortgage-backed securities 3 4.83 1 13.09 4,089 3.04 
Other debt instruments 51 14.52 3 14.52 
Total fair value
 47,633 8,284 13,345 4,123 
                          
 Within 1 year Over 1 up to 5 years Over 5 up to 10 years Over 10 years  Within 1 year Over 1 up to 5 years Over 5 up to 10 years Over 10 years 
CHF million, except percentages Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%)  Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%) 
31 December 2007
 
31 December 2009
 
Swiss national government and agencies 0 0.00 2 2.02 0 0.00 1 4.00  623 0.47 16 2.27 6 1.11 1 4.00 
Swiss local governments 0 0.00 0 0.00 0 0.00 0 0.00 
US Treasury and agencies 41,451 0.16 5,044 0.02 
US Treasury and agencies 0 0.00 0 0.00 0 0.00 0 0.00 
Foreign governments and official institutions 28,861 0.30 96 2.75 25 1.88 18 3.66 
Corporate debt securities3
 1,139 0.11 1,808 0.10 0 21.80 3 21.80 
Mortgage-backed securities 27 0.00 3 4.87 25 3.75 752 0.43 
Other debt instruments 98 2.80 3 1.21 
Total fair value
 72,199 6,970 56 774 
 
 Within 1 year Over 1 up to 5 years Over 5 up to 10 years Over 10 years 
CHF million, except percentages Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%) 
31 December 2008
 
Swiss national government and agencies 2 3.46 1 4.00 
Foreign governments and official institutions 50 1.87 2 2.54 75 4.48 0 0.00  39 1.14 0 0.00 33 2.81 34 5.22 
Corporate debt securities 50 5.66 44 4.11 0 0.00 0 0.00  2,122 1.05 88 3.38 38 3.12 12 1.74 
Mortgage-backed securities 0 0.00 0 0.00 3 4.48 561 5.28  42 4.00 455 5.28 
Other debt instruments 14 4.20 216 12.41 0 0.00 0 0.00  188 9.06 3 13.47 37 7.42 
Total fair value
 114 264 78 562  2,349 93 113 539 
1 Money market papers of CHF 60,317 million (2008: CHF 2,165 million) and debtDebt instruments without fixed maturities are not disclosed in this table. Refer to Note 13.  2 Average yields are calculated on an amortized cost basis.  3 Absolute Return Bonds (ARBs) had been purchased below par and therefore generated a yield of 21.8%15.8% (21.8% in maturities above 5 years.2009).

410416

Financial information

Due from banks and loans (gross)

 

The Group’s lending portfolio is widely diversified across industry sectors with no significant concentrations of credit risk. CHF 152.8151.2 billion (42.4%(53.1% 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 Banksbanks and Financialfinancial institutions amounted to CHF 132.663.8 billion (36.8%(22.4% of the total). This includes cash posted as collateral by UBS against negative replacement values on derivatives or other positions,

which, from a risk perspective, is not considered lending but is a key component of the measurement of counterparty risk taken in connection with the underlying products. Exposure to Banksbanks includes money market deposits with highly rated institutions. Excluding Banksbanks and Financialfinancial institutions, the largest industry sector exposure as

of December 20092010 is CHF 16.315.3 billion (4.5%(5.4% of the total) to Public authorities.services. For further discussion of the loan portfolio, refer to credit risk in the “Risk“Credit risk” section of this report.

The following table illustrates the diversification of the loan portfolio among industry sectors at 31 December 2010, 2009, 2008, 2007 and treasury management” section.2006. The industry categories presented are consistent with the classification of loans for reporting to the Swiss Financial Market Supervisory Authority (FINMA) and Swiss National Bank.



                    
                     
CHF million 31.12.09 31.12.08 31.12.07 31.12.06 31.12.05  31.12.10 31.12.09 31.12.08 31.12.07 31.12.06 
Domestic
  
Banks1
 819 1,734 1,237 561 1,407  1,130 609 1,056 735 458 
Construction 1,381 1,377 1,393 1,535 1,816  1,356 1,381 1,554 1,594 1,742 
Financial institutions 7,458 8,113 5,525 5,542 4,213  3,737 4,370 5,984 5,322 5,382 
Hotels and restaurants 1,882 1,811 1,824 1,957 2,044  1,803 1,882 1,811 1,824 1,957 
Manufacturing 3,374 4,020 3,887 3,643 4,134  3,192 3,373 3,795 3,766 3,578 
Private households 119,432 119,285 121,536 117,852 111,549  119,796 119,432 119,285 121,536 117,852 
Public authorities 3,785 4,042 4,734 4,972 5,494  4,908 3,785 4,042 4,734 4,972 
Real estate and rentals 11,745 12,097 11,691 11,356 11,792  12,252 11,745 11,921 11,489 11,148 
Retail and wholesale 4,299 4,818 5,138 4,569 4,808  4,101 4,288 4,781 4,647 4,507 
Services2
 5,702 6,172 6,170 6,758 8,088 
Services 5,728 5,712 5,935 5,875 6,450 
Other3
 3,520 3,329 3,300 4,345 3,119 
Other2
 3,107 3,413 3,539 3,712 4,710 
Total domestic
 163,397 166,798 166,435 163,090 158,464  161,109 159,990 163,705 165,233 162,757 
Foreign
  
Banks1
 46,452 63,708 60,333 50,124 32,287  16,474 16,891 17,629 25,905 32,374 
Chemicals 2,403 2,816 635 1,321 2,716  394 2,403 2,816 646 1,333 
Construction 741 448 624 522 295  1,008 741 619 867 862 
Electricity, gas and water supply 1,024 2,995 1,888 951 1,637  686 759 1,655 880 717 
Financial institutions 77,838 100,779 96,370 67,676 62,344  42,470 44,143 60,775 37,074 39,361 
Manufacturing 3,606 5,026 4,678 3,006 3,784  2,456 3,313 4,709 4,370 2,324 
Mining 3,177 4,394 4,509 3,177 3,431  2,776 2,799 3,787 4,272 3,171 
Private households 33,392 33,242 42,828 35,031 38,283  31,361 33,166 33,216 42,219 34,861 
Public authorities 12,472 11,094 4,172 2,175 1,686  9,880 10,808 8,104 2,825 1,318 
Real estate and rentals 1,305 4,240 5,056 4,360 2,707  1,578 1,240 4,069 4,813 4,021 
Retail and wholesale 1,772 2,515 2,239 1,815 1,257  1,765 1,558 2,045 1,954 1,648 
Services 8,629 9,816 9,294 16,436 5,593  9,621 8,363 9,913 8,720 7,074 
Transport, storage and communication 3,085 3,894 1,752 1,528 1,419  1,959 3,059 3,603 1,860 1,648 
Other4
 797 1,073 1,105 564 272 
Other3
 843 735 584 977 546 
Total foreign
 196,693 246,040 235,483 188,686 157,711  123,271 129,978 153,524 137,381 131,257 
Total gross
 360,090 412,838 401,918 351,776 316,175  284,381 289,969 317,228 302,614 294,014 
1 IncludesDue from banks and Loansfrom Industrial Holdings of CHF 27 million at 31 December 2007, CHF 93 million at 31 December 2006, CHF 728 million at 31 December 2005.  2006.  2 Includes communication, health and social work, education and other social and personal service activities.  3 Includes chemicals, food and beverages, transportation, storage, mining, electricity, gas and water supply.  43 Includes food and beverages, hotels and restaurants.

The table above also includes loans designated at fair value.

411417

Financial information
Additional disclosure required under SEC regulations

Due from banks and loans (gross) (continued)

The following table analyzes the Group’s mortgage portfolio by geographic origin of the client and type of mortgage at 31 December 2010, 2009, 2008, 2007 2006 and 2005. Mortgag-

es2006. Mortgages are included in the industry categories mentioned on the previous page.

                     
CHF million 31.12.10  31.12.09  31.12.08  31.12.07  31.12.06 
 
Mortgages
                    
 
Domestic  136,687   136,029   134,700   135,341   134,468 
 
Foreign  6,174   4,972   8,381   8,152   10,069 
 
Total gross mortgages
  142,861   141,001   143,081   143,493   144,537 
 
                     
Mortgages
                    
 
Residential  122,499   121,031   121,811   122,435   124,548 
 
Commercial  20,362   19,970   21,270   21,058   19,989 
 
Total gross mortgages
  142,861   141,001   143,081   143,493   144,537 
 


                     
CHF million 31.12.09  31.12.08  31.12.07  31.12.06  31.12.05 
 
Mortgages
                    
 
Domestic  136,029   134,700   135,341   134,468   130,880 
 
Foreign  4,972   8,381   8,152   10,069   15,619 
 
Total gross mortgages
  141,001   143,081   143,493   144,537   146,499 
 
                     
Mortgages
                    
 
Residential  121,031   121,811   122,435   124,548   127,990 
 
Commercial  19,970   21,270   21,058   19,989   18,509 
 
Total gross mortgages
  141,001   143,081   143,493   144,537   146,499 
 
                     
                     
                     
Due from banks and loan maturities (gross)1
CHF million    Within 1 year  Over 1 up
to 5 years		 Over 5 years  Total 
 
Domestic
                    
 
Banks      728   90   0   818 
 
Mortgages      53,436   58,961   23,632   136,029 
 
Other loans      20,405   4,832   1,314   26,551 
 
Total domestic
      74,569   63,883   24,946   163,398 
 
Foreign
                    
 
Banks      45,444   212   132   45,788 
 
Mortgages      2,845   1,611   516   4,972 
 
Other loans      93,955   12,491   35,467   141,9232
 
Total foreign
      142,254   14,314   36,115   192,683 
 
Total gross
      216,823   78,197   61,061   356,081 
 
                 
Due from banks and loan maturities (gross)1 
      Over 1 up       
CHF million Within 1 year  to 5 years  Over 5 years  Total 
 
Domestic
                
 
Banks  1,082   48       1,130 
 
Mortgages  52,673   58,778   25,236   136,687 
 
Other loans  17,577   4,384   1,331   23,292 
 
Total domestic
  71,332   63,210   26,567   161,109 
 
Foreign
                
 
Banks  15,767   183   77   16,027 
 
Mortgages  4,038   1,583   553   6,174 
 
Other loans  61,041   8,300   28,470   97,8112
 
Total foreign
  80,846   10,066   29,100   120,012 
 
Total gross
  152,178   73,276   55,667   281,121 
 
1 Loans designated at fair value are not included.  2 On 31 December 2009,2010, includes reclassified US student loan auction rate securities (ARS) of CHF 7.84.3 billion (CHF 8.47.8 billion on 31 December 2008)2009), other reclassified securities of CHF 11.57.4 billion (CHF 13.411.5 billion on 31 December 2008)2009) and CHF 8.09.7 billion ARS acquired from clients (CHF 4.58.0 billion on 31 December 2008)2009).

At 31 December 2009,2010, the total amount ofDue from banks and Loansloans due after one year granted affixedat fixed and floating rates isare as follows:

                        
CHF million 1 to 5 years Over 5 years Total  1 to 5 years Over 5 years Total 
Fixed-rate loans 75,064 27,623 102,687  72,595 27,857 100,452 
Adjustable or floating-rate loans 3,132 33,439 36,571  681 27,810 28,491 
Total
 78,196 61,062 139,258  73,276 55,667 128,943 

412418

Financial information

Impaired and non-performing loans

A loan (included inDue from banksor Loans)Loans) is classified as non-performing: 1) when the payment of interest, principal or fees is overdue by more than 90 days and there is no firm evidence that

it will be made good by later payments or the

liquidation of collateral; 2) when insolvency proceedings have commenced; or 3) when obligations have been restructured on concessionary terms.



                     
CHF million 31.12.09  31.12.08  31.12.07  31.12.05  31.12.05 
 
Gross interest income that would have been recorded on non-performing loans:                    
 
Domestic  13   16   39   50   81 
 
Foreign  9   3   4   10   8 
 
Interest income included in net profit for non-performing loans:                    
 
Domestic  41   32   40   56   72 
 
Foreign  9   4   2   8   9 
 

The table below provides an analysis of the Group’s non-performing loans. For further information see credit risk in the “Risk and treasury management” section.

                    
CHF million 31.12.10 31.12.09 31.12.08 31.12.07 31.12.06 
Gross interest income that would have been recorded under non-performing loans:
 
Domestic 11 13 16 39 50 
Foreign 35 89 7 6 10 
Interest income included in net profit of non-performing loans:
 
Domestic 35 41 32 40 56 
Foreign 19 30 6 2 8 
 
The table below provides an analysis of the Group’s non-performing loans. For further information see credit risk in the “Risk and treasury management” section.
The table below provides an analysis of the Group’s non-performing loans. For further information see credit risk in the “Risk and treasury management” section.
                     
CHF million 31.12.09 31.12.08 31.12.07 31.12.05 31.12.05  31.12.10 31.12.09 31.12.08 31.12.07 31.12.06 
Non-performing loans:  
Domestic 1,462 1,431 1,349 1,744 2,106  1,164 1,462 1,431 1,349 1,744 
Foreign 3,940 3,272 132 174 257  563 3,940 3,272 132 174 
Total non-performing loans
 5,402 4,703 1,481 1,918 2,363  1,727 5,402 4,703 1,481 1,918 

UBS does not, as a matter of policy, typically restructure loans to accrue interest at rates different from the original contractual terms or reduce the principal amount of loans. For more information seerefer to the “Credit risk” section of this report. Instead, specific loan allowances are established as necessary. Unrecognized interest related to restructured loans was not material to the results of operations in 2010, 2009, 2008, 2007 2006 or 2005.2006.

In addition to the non-performing loans shown above, the Group has CHF 2,466 million, CHF 1,463 million, CHF 4,442 million, CHF 911 million CHF 710 million and CHF 1,071710 million in “other impaired loans” for the years ended 31 December 2010, 2009, 2008, 2007 and 2006, respectively.

2008, 2007, 2006 and 2005, respectively.
Other impaired loans are loans where the Group’s credit officers have expressed doubts as to the ability of the borrowers to repay the loans. For the years ended 31 December 2010, 2009, 2008, 2007 and 2006, and 2005, theythese loans are loans not considered “non-performing” in accordance with Swiss regulatory guidelines. As of 31 December 2010, 31 December 2009, 31 December 2008, 31 December 2007 and 31 December 2006, and 31 December 2005, specific allowances of CHF 536 million, CHF 410 million, CHF 941 million, CHF 124 million, CHF 106 million, CHF 200 million, respectively, had been established against these loans.


413419

Financial information
Additional disclosure required under SEC regulations

Cross-border outstandings

Cross-border outstandings consist of exposures in relation to (i) general banking products with third parties, such as loans and deposits with third parties, credit equivalents ofadvances, (ii) over-the-counter (OTC) derivatives, exchange-traded (ETD) derivatives and securities financing transactions, which are represented as a credit equivalent based on UBS’s internal risk measures, and (iii) the market value of the inventory of debt securities. Outstandings are monitored and reported on an ongoing basis by the credit risk control organization with a dedicated country risk information system. With the exception of the 32largest most developed economies, to which UBS assigns a high rating, and a small number of financial centers, where the credit quality of UBS’s exposures is not correlated with the state of their internal economy, these exposures are rigorously limited. The following analysis excludesDue from banks and Loansfrom Industrial Holdings.

Claims that are secured by third-party guarantees are recorded against the guarantor’s country of domicile. Outstandings that are

secured by collateral are recorded against

the country where the asset could be liquidated. This follows the “Guidelines for the Management of Country Risk”, which are applicable to all banks that are supervised by the Swiss Financial Market Supervisory Authority (FINMA).

The following tables list those countries for which cross-border outstandings exceeded 0.75% of total assets at 31 December 2010, 2009 2008 and 2007.2008. At 31 December 2009,2010, there were no outstandings that exceeded 0.75% of total assets in any country currently facing liquidity problems that the Group expects would materially affect the country’s ability to service its obligations.
For more information on country exposure, see credit risk inrefer to the “Risk and treasury management” section.“Credit risk” section of this report.



                     
  31.12.09 
CHF million Banks  Private sector  Public sector  Total  % of total assets 
 
United States  14,915   52,305   62,224   129,444   9.7 
 
Germany  14,612   9,114   12,648   36,374   2.7 
 
Japan  625   4,280   22,888   27,793   2.1 
 
France  9,672   5,672   10,848   26,192   2.0 
 
United Kingdom  4,700   9,293   7,310   21,303   1.6 
 
Netherlands  4,425   7,023   2,940   14,388   1.1 
 
Italy  1,694   2,296   8,729   12,719   0.9 
 
Luxembourg  3,950   8,509   20   12,479   0.9 
 
                     
  31.12.08 
CHF million Banks  Private sector  Public sector  Total  % of total assets 
 
United States  13,869   71,584   14,234   99,687   4.9 
 
Japan  2,093   13,159   38,922   54,174   2.7 
 
Germany  19,098   10,418   6,010   35,526   1.8 
 
France  11,469   7,048   6,807   25,324   1.3 
 
United Kingdom  9,599   8,608   2,625   20,832   1.0 
 
Luxembourg  2,883   17,586   0   20,469   1.0 
 
                                       
 31.12.07  31.12.10 
CHF million Banks Private sector Public sector Total % of total assets  Banks Private sector Public sector Total % of total assets 
United States 13,110 192,049 16,545 221,704 9.8  8,039 48,145 46,332 102,516 7.8 
Japan 1,761 12,883 36,717 51,361 2.3  725 3,155 39,551 43,431 3.3 
Germany 21,384 12,354 2,249 35,988 1.6  12,842 6,455 6,044 25,341 1.9 
United Kingdom 6,624 14,647 8,552 29,823 1.3  4,157 8,715 7,864 20,736 1.6 
Cayman Islands 173 27,715 74 27,963 1.2 
France 7,521 5,665 4,715 17,901 1.4 
Netherlands 3,814 5,276 3,315 12,405 0.9 
 
 31.12.09 
CHF million Banks Private sector Public sector Total % of total assets 
United States 14,915 52,305 62,224 129,444 9.7 
Germany 14,612 9,114 12,648 36,374 2.7 
Japan 625 4,280 22,888 27,793 2.1 
France 10,620 7,075 4,605 22,300 1.0  9,672 5,672 10,848 26,192 2.0 
United Kingdom 4,700 9,293 7,310 21,303 1.6 
Netherlands 4,425 7,023 2,940 14,388 1.1 
Italy 1,694 2,296 8,729 12,719 0.9 
Luxembourg 3,950 8,509 20 12,479 0.9 
 
 31.12.08 
CHF million Banks Private sector Public sector Total % of total assets 
United States 13,869 71,584 14,234 99,687 4.9 
Japan 2,093 13,159 38,922 54,174 2.7 
Germany 19,098 10,418 6,010 35,526 1.8 
France 11,469 7,048 6,807 25,324 1.3 
United Kingdom 9,599 8,608 2,625 20,832 1.0 
Luxembourg 2,883 17,586 0 20,469 1.0 

414420

Financial information

Summary of movements in allowances and provisions for credit losses

The following table provides an analysis of movements in allowances and provisions for credit losses.

UBS writes off loans against allowances only on final settlement of bankruptcy proceedings, the sale of the underly-underlying assets

ing assets and/and / or in case of debt forgiveness. Under Swiss law, a creditor can continue to collect from a debtor who has emerged from bankruptcy, unless the debt has been forgiven through a formal agreement.



                                        
CHF million 31.12.09 31.12.08 31.12.07 31.12.06 31.12.05  31.12.10 31.12.09 31.12.08 31.12.07 31.12.06 
Balance at beginning of year
 3,070 1,164 1,332 1,776 2,802  2,820 3,070 1,164 1,332 1,776 
Domestic
  
Write-offs
  
Banks 0 0 0 0 0 
Construction  (16)  (6)  (9)  (14)  (16)  (8)  (15)  (6)  (9)  (14)
Financial institutions  (2)  (37)  (8)  (11)  (14)  (47)  (2)  (37)  (9)  (11)
Hotels and restaurants  (2)  (3)  (7)  (16)  (26)  (1)  (2)  (3)  (8)  (16)
Manufacturing1
  (21)  (31)  (45)  (40)  (39)
Manufacturing  (28)  (21)  (24)  (14)  (37)
Private households  (61)  (112)  (68)  (89)  (131)  (66)  (61)  (112)  (69)  (89)
Public authorities 0 0  (1) 0 0  0 0 0  (1) 0 
Real estate and rentals  (19)  (10)  (27)  (44)  (56)  (2)  (19)  (10)  (26)  (44)
Retail and wholesale  (41)  (4)  (62)  (20)  (25)  (117)  (41)  (4)  (62)  (20)
Services2
  (3)  (7)  (20)  (47)  (35)
Services  (49)  (3)  (7)  (17)  (43)
Other3
  (12) 0  (21)  (2)  (4)
Other1
  (16)  (12)  (8)  (54)  (7)
Total domestic write-offs
  (177)  (210)  (268)  (283)  (346)  (332)  (177)  (210)  (268)  (281)
Foreign
  
Write-offs
  
Banks  (8)  (13)  (1)  (3)  (164)  (2)  (8)  (134)  (1)  (3)
Chemicals  (111)  (1) 0 0 0   (846)  (111)  (1) 0 0 
Construction  (10) 0 0 0 0  0  (10) 0 0 0 
Electricity, gas and water supply 0 0 0 0 0 
Financial institutions  (685)  (623)  (15) 0  (50)  (267)  (685)  (501)  (15) 0 
Manufacturing4
  (138)  (6)  (21)  (11)  (8)
Manufacturing  (22)  (138)  (6)  (21)  (6)
Mining  (5) 0 0  (1)  (23) 0  (5) 0 0  (1)
Private households  (40)  (5)  (14)  (7)  (21)  (21)  (40)  (4)  (14)  (7)
Public authorities  (25)  (2)  (2)  (58)  (22)  (1)  (20)  (2)  (2)  (58)
Real estate and rentals  (196) 0 0 0  (3)  (1)  (196)  (1) 0 0 
Retail and wholesale  (121) 0 0 0  (9)  (1)  (122) 0 0 0 
Services  (413) 0 0 0 0   (9)  (413) 0 0 0 
Transport, storage and communication  (37)  (7) 0 0 0   (3)  (37)  (6) 0 0 
Other5
  (80)  (1) 0 0  (5)
Other2
 0  (80)  (1) 0  (5)
Total foreign write-offs
  (1,869)  (658)  (53)  (80)  (305)  (1,173)  (1,865)  (658)  (53)  (80)
Total specific provisions for off-balance sheet
 0  (5) 0 0  (1)
Total write-offs
  (2,046)  (868)  (321)  (363)  (651)  (1,505)  (2,046)  (868)  (321)  (363)
Recoveries
  
Domestic 44 43 52 51 53  38 44 43 52 51 
Foreign 8 1 3 11 10  41 8 1 3 11 
Total recoveries
 52 44 55 62 63  79 52 44 55 62 
Net write-offs
  (1,994)  (824)  (266)  (301)  (588)  (1,427)  (1,994)  (824)  (266)  (301)
Increase/(decrease) in credit loss allowance and provision 1,806 3,007 242  (108)  (298)
Increase / (decrease) in credit loss allowance and provision 67 1,806 3,007 242  (108)
Collective loan loss provisions 26  (11)  (4)  (48)  (76)  (2) 26  (11)  (4)  (48)
Other adjustments  (88)  (266)  (140) 13  (64)  (173)  (88)  (266)  (140) 13 
Balance at end of year
 2,820 3,070 1,164 1,332 1,776  1,287 2,820 3,070 1,164 1,332 
Net foreign exchange  (37)  (43)  (9) 10 50   (173)  (37)  (43)  (9) 10 
Other adjustments  (51)6  (223)6  (131) 3  (114) 0  (51)3  (223)3  (131) 3 
Total adjustments
  (88)  (266)  (140) 13  (64)  (173)  (88)  (266)  (140) 13 
1 Until 2008 this position includesIncludes chemicals, food and beverages.  2 Includes communication, health and social work, education and other social and personal service activities and until 2008 transportation.  3 Includesbeverages, transportation, storage, mining, and electricity, gas and water supply and in 2009 additionally chemicals,supply.  2 Includes food and beverages, transportation.  4 Until 2008 this position includes food and beverages.  5 Includes hotels and restaurants and in 2009 additionally food and beverages.restaurants.  63 In 2009 the other adjustmentsOther adjustment was due to the sale of UBS Pactual. In 2008 a loan was forgiven in exchange for the collateral.

415421

Financial information
Additional disclosure required under SEC regulations

Allocation of the allowances and provisions for credit losses

The following table provides an analysis of the allocation of the allowances and provisions for credit loss by industry sector and geographic location at 31 December 2010, 2009, 2008, 2007

2007, 2006 and 2005.2006. For a description of procedures with respect to allowances and provisions for credit losses, see credit risk inrefer to the “Risk and treasury management” section.
“Credit risk” section of this report.



                                        
CHF million 31.12.09 31.12.08 31.12.07 31.12.06 31.12.05  31.12.10 31.12.09 31.12.08 31.12.07 31.12.06 
Domestic
  
Banks 1 16 10 10 10  1 1 16 10 10 
Construction 27 39 43 72 91  23 27 39 43 73 
Financial institutions 126 18 52 61 75  28 126 18 52 61 
Hotels and restaurants 6 8 10 27 49  5 6 8 10 27 
Manufacturing1
 104 71 113 155 174 
Manufacturing 93 104 84 98 104 
Private households 119 121 190 187 262  91 119 125 190 188 
Public authorities 20 1 1 3 8  0 1 1 1 4 
Real estate and rentals 21 50 57 99 168  19 21 50 57 98 
Retail and wholesale 221 262 247 311 330  165 221 262 247 312 
Services2
 99 78 112 113 196 
Services 45 99 79 87 94 
Other3
 43 92 76 107 61 
Other1
 27 43 47 53 106 
Total domestic
 787 756 911 1,145 1,424  497 768 729 848 1,076 
Foreign
  
Banks4
 31 6 18 20 35 
Banks2
 23 31 6 35 20 
Chemicals 1,037 960 1 4 5  8 1,037 960 1 4 
Construction 1 8 1 2 2  2 1 8 1 1 
Electricity, gas and water supply 0 2 3 8 16  0 0 2 3 8 
Financial institutions 414 542 112 9 8  190 414 530 96 9 
Manufacturing5
 83 25 20 37 57 
Manufacturing 15 83 25 13 35 
Mining 0 4 0 0 1  0 0 4 0 0 
Private households 171 233 15 26 30  139 171 226 13 26 
Public authorities 87 19 20 21 72  171 18 19 20 21 
Real estate and rentals 36 208 8 4 3  15 36 208 8 3 
Retail and wholesale 17 80 4 4 1  8 17 81 4 4 
Services 100 19 4 7 27  12 100 205 7 7 
Transport, storage and communication 7 185 1 1 0  29 7 1 1 1 
Other6
 0 0 12 6 8 
Other3
 0 0 12 17 1 
Total foreign
 1,984 2,291 219 149 265  613 1,913 2,287 219 143 
Collective loan loss provisions7
 49 23 34 38 86 
Collective loan loss provisions 47 49 23 34 38 
Total allowances and provisions for credit losses8
 2,820 3,070 1,164 1,332 1,775 
Included in other liabilities related to provisions for contingent claims 130 90 31 63 76 
Total allowances and provisions for credit losses
 1,287 2,820 3,070 1,164 1,332 
1 Until 2008 this position includesIncludes chemicals, food and beverages.  2 Includes communication, health and social work, education and other social and personal service activities and until 2008 transportation.  3 Includesbeverages, transportation, storage, mining, electricity, gas and water supply and in 2009 additionally chemicals, food and beverages, transportation.supply.  42 Counterparty allowances and provisions only.  53 Until 2008 this position includesIncludes food and beverages.  6 Includesbeverages, hotels and restaurants and in 2009 additionally food and beverages.  7 The 2009, 2008, 2007, 2006 and 2005 amounts include CHF 0 million, CHF 0 million, CHF 0 million, CHF 0 million and CHF 48 million, respectively, of country provisions.  8 The 2009, 2008, 2007, 2006 and 2005 amounts include CHF 90 million, CHF 31 million, CHF 63 million, CHF 76 million, CHF 109 million, respectively, of provisions for unused commitments and contingent liabilities.  restaurants.

416422

Financial information

Due from banks and loans by industry sector (gross)

The following table presents the percentage of loans in each industry sector and geographic location to total loans. This table can be read in conjunction with the preceding table showing the

showing the breakdown of the allowances and provisions for credit losses by industry sectors to evaluate the credit risks in each of the categories.



                                        
ln % 31.12.09 31.12.08 31.12.07 31.12.06 31.12.05 
In % 31.12.10 31.12.09 31.12.08 31.12.07 31.12.06 
Domestic
  
Banks1
 0.2 0.4 0.3 0.2 0.4  0.4 0.2 0.3 0.2 0.2 
Construction 0.4 0.3 0.3 0.4 0.6  0.5 0.5 0.5 0.5 0.6 
Financial institutions 2.1 2.0 1.4 1.6 1.3  1.3 1.5 1.9 1.8 1.8 
Hotels and restaurants 0.5 0.4 0.5 0.6 0.6  0.6 0.6 0.6 0.6 0.7 
Manufacturing 0.9 1.0 1.0 1.0 1.3  1.1 1.2 1.2 1.2 1.2 
Private households 33.2 28.9 30.2 33.5 35.3  42.1 41.2 37.6 40.2 40.1 
Public authorities 1.0 1.0 1.2 1.4 1.7  1.7 1.3 1.3 1.6 1.7 
Real estate and rentals 3.3 2.9 2.9 3.2 3.7  4.3 4.1 3.8 3.8 3.8 
Retail and wholesale 1.2 1.2 1.3 1.3 1.5  1.4 1.5 1.5 1.5 1.5 
Services2
 1.6 1.5 1.5 1.9 2.6 
Services 2.0 2.0 1.9 1.9 2.2 
Other3
 1.0 0.8 0.8 1.3 1.1 
Other2
 1.1 1.2 1.1 1.2 1.6 
Total domestic
 45.4 40.4 41.4 46.4 50.1  56.7 55.2 51.6 54.6 55.4 
Foreign
  
Banks1
 12.9 15.4 15.0 14.2 10.2  5.8 5.8 5.6 8.6 11.0 
Chemicals 0.7 0.7 0.2 0.4 0.9  0.1 0.8 0.9 0.2 0.5 
Construction 0.2 0.1 0.2 0.1 0.1  0.4 0.3 0.2 0.3 0.3 
Electricity, gas and water supply 0.3 0.7 0.5 0.3 0.5  0.2 0.3 0.5 0.3 0.2 
Financial institutions 21.6 24.4 24.0 19.2 19.7  14.9 15.2 19.2 12.3 13.4 
Manufacturing 1.0 1.2 1.2 0.9 1.2  0.9 1.1 1.5 1.4 0.8 
Mining 0.9 1.1 1.1 0.9 1.1  1.0 1.0 1.2 1.4 1.1 
Private households 9.3 8.1 10.7 10.0 12.1  11.0 11.4 10.5 14.0 11.9 
Public authorities 3.4 2.7 1.0 0.6 0.5  3.5 3.7 2.6 0.9 0.4 
Real estate and rentals 0.4 1.0 1.3 1.2 0.9  0.6 0.4 1.3 1.6 1.4 
Retail and wholesale 0.5 0.6 0.6 0.5 0.4  0.6 0.5 0.6 0.6 0.6 
Services 2.4 2.4 2.3 4.7 1.8  3.4 2.9 3.1 2.9 2.4 
Transport, storage and communication 0.8 0.9 0.4 0.4 0.4  0.7 1.1 1.1 0.6 0.6 
Other4
 0.2 0.3 0.1 0.2 0.1 
Other3
 0.3 0.3 0.2 0.3 0.2 
Total foreign
 54.6 59.6 58.6 53.6 49.9  43.3 44.8 48.4 45.4 44.6 
Total gross
 100.0 100.0 100.0 100.0 100.0  100.0 100.0 100.0 100.0 100.0 
1 IncludesDue from banks and Loansfrom Industrial Holdings of CHF 27 million at 31 December 2007, CHF 93 million at 31 December 2006, and CHF 728 million at 31 December 2005.  2006.  2 Includes communication, health and social work, education and other social and personal service activities.  3 Includes chemicals, food and beverages, transportation, storage, mining, electricity, gas and water supply.  43 Includes food and beverages, hotels and restaurants.

417423

Financial information
Additional disclosure required under SEC regulations

Loss history statistics

The following is a summary of the Group’s loan loss history (relating to Due from banks and Loans). The table below does not include loans designated at fair value.

                                        
CHF million, except where indicated 31.12.09 31.12.08 31.12.07 31.12.06 31.12.05  31.12.10 31.12.09 31.12.08 31.12.07 31.12.06 
Gross loans1
 356,081 407,685 397,802 349,524 315,210  281,121 285,960 312,076 298,498 308,332 
Impaired loans 6,865 9,145 2,392 2,628 3,434  4,193 6,865 9,145 2,392 2,628 
Non-performing loans 5,402 4,703 1,481 1,918 2,363  1,727 5,402 4,703 1,481 1,918 
Allowances and provisions for credit losses2
 2,820 3,070 1,164 1,332 1,776  1,287 2,820 3,070 1,164 1,332 
Net write-offs 1,994 824 266 301 588  1,427 1,994 824 266 301 
Credit loss (expense)/recovery  (1,832)  (2,996)  (238) 156 375 
Credit loss (expense) / recovery  (66)  (1,832)  (2,996)  (238) 156 
Ratios
  
Impaired loans as a percentage of gross loans 1.9 2.2 0.6 0.8 1.1  1.5 2.4 2.9 0.8 0.9 
Non-performing loans as a percentage of gross loans 1.5 1.2 0.4 0.5 0.7  0.6 1.9 1.5 0.5 0.6 
Allowances and provisions for credit losses as a percentage of:  
Gross loans 0.8 0.8 0.3 0.4 0.6  0.5 1.0 1.0 0.4 0.4 
Impaired loans 41.1 33.6 48.7 50.7 51.7  30.7 41.1 33.6 48.7 50.7 
Non-performing loans 52.2 65.3 78.6 69.4 75.2  74.5 52.2 65.3 78.6 69.4 
Allocated allowances as a percentage of impaired loans3
 38.3 31.8 41.7 46.3 46.4  25.4 38.3 31.8 41.7 46.3 
Allocated allowances as a percentage of non-performing loans4
 41.6 41.8 58.9 58.0 59.0  30.6 41.6 41.8 58.9 58.0 
Net write-offs as a percentage of:  
Gross loans 0.6 0.2 0.1 0.1 0.2  0.5 0.7 0.3 0.1 0.1 
Average loans outstanding during the period 0.5 0.2 0.0 0.1 0.1  0.5 0.7 0.3 0.1 0.1 
Allowances and provisions for credit losses 70.7 26.8 22.9 22.6 33.1  110.9 70.7 26.8 22.9 22.6 
Allowance and provisions for credit losses as a multiple of net write-offs 1.41 3.73 4.38 4.43 3.02  0.90 1.41 3.73 4.38 4.43 
1 IncludesDue from banks and Loansfrom Industrial Holdings in the amount of CHF 27 million for 2007 and CHF 93 million for 2006 and CHF 728 million for 2005.  2006.  2 Includes collective loan loss provisions.  3 Allowances relating to impaired loans only.  4 Allowances relating to non-performing loans only.

418424

Financial information

425

Annual Report 2010

Cautionary statement regarding forward-looking statementsStatement Regarding Forward-Looking Statements || This report contains statements that constitute “forward-looking statements”, including but not limited to management’s outlook for UBS’s financial performance and statements relating to the anticipated effect of transactions and strategic initiatives on UBS’s business and future development. While these forward-looking statements represent UBS’s judgments and expectations concerning the matters described, a number of risks, uncertainties and other important factors could cause actual developments and results to differ materially from UBS’s expectations. These factors include, but are not limited to: (1) future developments in the markets in which UBS operates or to which it is exposed, including movements in securities markets,prices or liquidity, credit spreads, currency exchange rates and interest rates; (2)rates and the effect of the current economic environment or otherconditions and market developments on the financial position or creditworthiness of UBS’s customersclients and counterparties; (3)(2) changes in the availability of capital and funding, including any changes in UBS’s credit spreads and ratings; (3) the ability of UBS to retain earnings and reduce its risk-weighted assets in order to comply with recommended Swiss capital requirements without adversely affecting its business; (4) the consequences of the recent Swiss court decision relating to the provision of certain UBS client data tochanges in financial regulation in Switzerland, the US, Internal Revenue Service,the UK and other major financial centers which may impose constraints on or necessitate changes in the scope and location of UBS’s business activities and in its legal and booking structures, including possible effectsthe imposition of more stringent capital and liquidity requirements, incremental tax requirements and constraints on UBS’s 2009 settlements with US authoritiesremuneration, some of which may affect UBS in a different manner or degree than they affect competing institutions; (5) the liability to which UBS may be exposed due to legal claims and on its businesses; (5)regulatory investigations, including those stemming from market dislocation and losses incurred by clients and counterparties during the financial crisis; (6) the outcome and possible consequences of pending or future actionsinquiries or inquiriesactions concerning UBS’s cross-border banking business by tax or regulatory authorities in various other jurisdictions; (6)(7) the degree to which UBS is successful in effecting organizational changes and implementing strategic plans, and whether those changes and plans will have the effects intended; (7)(8) UBS’s ability to retain and attract the employees that are necessary to generate revenues and to manage, support and control its businesses; (8) possible political, legal and regulatory developments, including the effect of more stringent capital and liquidity requirements, constraints on remuneration and the imposition of additional legal or regulatory constraints on UBS’s activities; (9) changes in accounting standards or policies, and accounting determinations affecting the recognition of gain or loss, the valuation of goodwill and other matters; (10) limitations on the effectiveness of UBS’s internal processes for risk management, risk control, measurement and modeling, and of financial models generally; (11) changes in the size, capabilities and effectiveness of UBS’s competitors;competitors, including whether UBS will be successful in keeping pace with competitors in updating its technology, particularly in trading businesses; and (12) the occurrence of operational failures, such as fraud, unauthorized trading and systems failures, either within UBS or within a counterparty; and (13) technological developments. In addition, actual results could depend on other factors that we have previously indicated could adversely affect ourcounterparty. Our business and financial performance which are containedcould 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 2009.2010. UBS is not under any obligation to (and expressly disclaims any obligation to) update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise.

Rounding || Numbers presented throughout this report may not add up precisely to the totals provided in the tables and text. Percentages and percent changes are calculated based on rounded figures displayed in the tables and text and may not precisely reflect the percentages and percent changes that would be derived based on figures that are not rounded.

Imprint| Publisher: UBS AG, P.O. Box, CH-8098 Zurich, Switzerland; P.O. Box, CH-4002 Basel, Switzerland; www.ubs.com | Language: English/German | SAP-No. 80531E-1001426

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