Off-balance sheet

In the normal course of business, UBS enters into arrangements that, under International Financial Reporting Standards (IFRS), are not initially recognized on the balance sheet and do not affect the income statement. These types of arrangements are kept off-balance sheet, unless (i) they become onerous, (ii) they are considered derivative instruments, or (iii) UBS incurs an obligation from them or becomes entitled to a specific asset. As soon as such an obligation is incurred, it is recognized on the balance sheet, with the resulting loss recorded in the income statement. However, it should be noted that in many instances, the amount recognized on the balance sheet does not represent the full potential for loss inherent in such arrangements. For the most part, the arrangements either meet the financial needs of customers or offer investment opportunities through entities that are not controlled by UBS. The following paragraphs discuss several distinct areas of off-balance sheet arrangements and any potential obligations that may arise from them as of 31 March 2008.

Off-balance sheet arrangements include purchased and retained interests, derivatives and other involvements in non-consolidated entities and structures. UBS has originated such structures and has acquired interests in structures set up by third-parties.

Liquidity facilities and similar obligations

UBS has no significant exposure through liquidity facilities, guarantees and similar obligations to structured investment vehicles (SIVs), conduits and other types of special purpose entities (SPEs). Losses resulting from such obligations were not significant in 2007 and first quarter 2008.

Non-consolidated securitization vehicles and collateralized debt obligations

UBS sponsors the creation of SPEs that facilitate the securitization of acquired residential and commercial mortgage loans, other financial assets and related securities. UBS also securitizes customers' debt obligations in transactions that involve SPEs which issue collateralized debt obligations. A typical securitization transaction of this kind would involve the transfer of assets into a trust or corporation in return for beneficial interests in the form of securities. Generally, UBS intends a sale of the beneficial interests to third parties shortly after securitization. Due to illiquid markets for certain instruments linked to the US mortgage market in the second half of 2007 and first quarter 2008, retained interests could not be sold in the short term.

Consolidation of securitization vehicles and CDOs

UBS continually evaluates its involvements with consolidated and non-consolidated SPEs as required under IFRS. Certain events - such as restructurings, the vesting of potential rights and the acquisition, disposition or expiration of interests, etc. - may prompt reconsideration of the initial consolidation conclusions made by UBS at the inception of its involvement with such entities. In these instances, SPEs may be consolidated or de-consolidated as the conditions have changed. In December 2007, due to market conditions, various non-consolidated CDOs in which UBS held a majority stake in super senior securities were declared to have breached default provisions pursuant to the entities' governing documents. In these instances, various contingent decision-making rights became immediately vested in the super senior class holders. UBS determined that, in certain instances, the rights arising from such events caused it to be in control of these entities. The affected SPEs are consolidated in UBS's statement of financial position as of 31 March 2008 and 31  December 2007. The impact of consolidation was not material to UBS's balance sheet at 31 March 2008 and 31 December 2007. The full extent of UBS's losses in respect of super senior positions held was already included in the income statement such that the consolidation of the CDO vehicles had no incremental impact on UBS's income statement.

Risks resulting from non-consolidated securitization vehicles and CDOs

UBS's main concentrations of risk are disclosed in detail in the "Risk concentrations" section of this report. The information provided on risk concentrations discloses risks associated with UBS's involvement in consolidated and non-consolidated US mortgage securitization vehicles and CDOs. In the event that consolidation of additional vehicles will be required in the future, UBS does not expect a significant impact on its risk exposure, capital, financial position or results of operations and any gross-up of the assets and liabilities in the balance sheet is expected to be modest.

Positions with significant impact on the income statement are disclosed in Note 3 in the Financial Statements of this report.

Investment funds

If UBS decided to support a Global Asset Management fund or another investment sponsored by UBS it might, depending on the facts and circumstances, present risks that could increase to material levels. UBS does not currently foresee the likelihood of material losses on such positions but the possibility cannot be definitively ruled out.

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