At a Glance

Dillon Read Capital Management starts operating

Dillon Read Capital Management (DRCM), UBS’s new alternative investment management business, started operating in early June.

The principal finance and credit arbitrage and commercial real estate businesses, previously part of the fixed income, rates and currencies area of the Investment Bank, now form the core of DRCM. The business, with 156 employees, was transferred from the Investment Bank to Global Asset Management on 5 June 2006. The DRCM business manages alternative investment vehicles, initially only on behalf of the Investment Bank. The Investment Bank will continue to record the trading revenues generated by the assets managed by DRCM on its fixed income, rates and currencies revenues line. DRCM personnel and general and administrative expenses will be booked in Global Asset Management. DRCM will charge the Investment Bank for providing investment management services. Those charges and expenses will be reported in the “Services to / from other business units” line. This arrangement, also shown in the diagram below, has no impact on UBS’s consolidated financial results.

This quarterly report reflects the results in the manner described above for the period since DRCM started operating at the beginning of June. The third quarter of 2006 will be the first full quarter that reflects the new structure.

Outside investor funds will be launched later this year.

Recent acquisitions

Banco Pactual

In early May, we announced the acquisition of Brazilian financial services firm, Banco Pactual, for an upfront payment of USD 1 billion and a further payment of up to USD 1.6 billion in five years, subject to certain performance conditions. In addition, we will establish a retention pool of up to USD 500 million in UBS shares for Pactual employees payable beginning on the fifth anniversary of closing.

Pactual is the leading independent investment bank and asset management firm in Brazil and has a fast-growing wealth management business. Pactual offers a full range of investment banking services mainly focused on the local Brazilian market. The bank is also a leading participant in Brazilian fixed income and equities markets, serving an extensive base of institutional clients in both local and international markets.

The present value of the purchase price, excluding the retention pool, is approximately USD 2.2 billion. The transaction is expected to close, subject to regulatory approval, in the second half of the year. The businesses of Pactual will be integrated into the investment banking, wealth management, and asset management businesses.

The acquisition demonstrates the strength of our commitment to developing our business in Brazil, and indeed the whole of Latin America.

ABN AMRO’s global futures and options business

At the end of May, we announced the acquisition of ABN AMRO’s global futures and options business for a cash consideration of USD 386 million plus the value of the business’s net tangible assets.

This acquisition will establish UBS as a market leader in the futures and options execution and dealing industry and a global provider of execution and clearing services across multiple asset classes including equities, interest rates, commodities, equity indices, and currencies.

The investment reflects UBS’s continued commitment to the futures and options business, increasing our already significant market share while creating platform scale and synergies. In early July, we received antitrust clearance for the acquisition from the US Federal Trade Commission. The transaction is subject to further regulatory approvals and is expected to close around the end of third quarter 2006.

Impact on capital and risk

Both acquisitions will expand our investment banking presence and open up new sources of revenue. This will naturally lead to an increase in the amount of risk we manage. Our overall approach to balancing risk and return, however, will not change. We will continue to avoid concentrations of risk and to limit the scope for adverse variations in our earnings from major individual “stress” events.

For capital adequacy purposes, investments in Pactual and in ABN AMRO’s global futures and options business already affect our second quarter 2006 Tier 1 capital, depressing the Tier 1 ratio by 1.0 percentage point. The risk-weighted assets the businesses assume will be included once the transactions are closed.

Risk consumption, as measured by Value at Risk (VaR), is expected to increase following the integration of these businesses, in particular Pactual. Exposure will continue to be well within our risk capacity, defined as the level of risk we are capable of absorbing based on our earnings power without affecting our ability to pay dividends, adhere to our strategic objectives and manage our daily business. Shortly before the acquisitions are closed, we will assess whether we need to raise our VaR limits. This will take into account all diversification effects in the overall trading portfolio along with increased present and future business activity.

UBS receives Russian banking licence

We received a banking license from the Central Bank of Russia in June, enabling us to expand our businesses in Russia. We plan to offer wealth management, asset management, ruble fixed income and foreign exchange services alongside our existing Russian operations in equities and investment banking.