Financial Businesses

Market risk is incurred primarily through UBS’s trading activities, which are centered in the Investment Bank, but also arise, to a much lesser extent, in the Wealth Management businesses. Additionally, our Treasury department assumes market risk as a result of its balance sheet and capital management responsibilities.

Credit and equity markets were challenging at the beginning of the quarter. Credit spreads continued to widen on the back of the negative news from the automobile sector. Both investment grade and high yield paper regained strength in the latter half of the period and credit spreads tightened back to levels seen at the end of first quarter. Poor corporate earnings and weak economic data drove most equity indices down in April, but markets recovered, reaching quarterly highs by the end of the period. In the foreign exchange markets, the US dollar strengthened whereas the euro weakened. Oil prices remained in the headlines and reached new highs towards the end of June.

Market risk for the Investment Bank, as measured by the average 10-day 99% VaR, was CHF 362 million, slightly down from the CHF 371 million seen in the previous quarter. Interest rate VaR, which is the largest contributor, increased in the quarter. The changes were driven by US dollar interest rate exposure, but credit spread exposure remained the dominant element. Equities VaR remained stable for most of the period, rising at the end of the quarter as a result of the pick-up in market activity. Higher average foreign exchange VaR was a result of increased market-making activity. Despite these individual increases, greater diversification among the risk types led to the reduction in total Investment Bank VaR.

Average Corporate Center VaR for the quarter increased by CHF 28 million, driven by interest rate exposure in the Treasury book. While Corporate Center remains a relatively small contributor to total VaR, this increase resulted in a small rise in average total VaR to CHF 384 million from CHF 377 million in first quarter.

’Backtesting’ compares actual revenues arising from closing positions (i. e., excluding intraday revenues, fees and commissions) with the 1-day VaR calculated on these positions, and is used to monitor the quality of the VaR model. The graph on the next page shows these daily backtesting revenues and the corresponding 1-day VaR over the last 12 months. The 10-day VaR, which is the basis of the limits and exposures in the tables below, is also shown in this graph for information. Revenue volatility over the period was within the range predicted by the VaR model.

We also routinely assess and actively manage and control tail risks against a standard set of forward-looking stress scenarios, supplemented by specific scenarios targeting individual sectors or reflecting current concerns, such as widening credit spreads or increased energy market volatility. Stress events modeled in our standard scenarios include crises in equity, corporate bond and emerging markets, and severe movements in currency, interest rate and energy markets. These scenarios are reviewed regularly and fine-tuned as necessary. Both period-end and average stress loss exposure were lower than in first quarter and exposures remained well within the approved limits.

VaR and stress measures control our overall portfolio exposure but we also apply concentration controls on exposure to individual market risk variables, such as individual equity markets, currency interest rates and foreign exchange rates, and single name issuers. The diversification of risks and avoidance of undue concentrations remain key pillars of our risk control process.