Risk management and control

UBS took decisive action to materially reduce its exposures to significant risk concentrations, specifically through sustained and ongoing sales during the quarter, the largest of which was the sale of US residential mortgage-backed securities to a fund managed by BlackRock. In addition to sales, further writedowns reduced exposures to US residential mortgage-related positions and student loan auction rate certificates (ARCs), and additional credit valuation adjustments were taken against credit default protection purchased from monoline insurers. Positions in leveraged finance were reduced, although UBS continues to participate in new transactions.

Group average value at risk (VaR 10-day 99% confidence based on five years of historical data) for second quarter 2008 was CHF 316 million, which was stable relative to the prior quarter. However, enhancements to the VaR model introduced at the end of June - designed to increase the granularity of credit spread risk representation between derivative, index and cash positions - resulted in a higher period-end VaR of CHF 382 million. As previously reported in first quarter 2008, positions in US sub- prime and Alt-A residential mortgage-backed securities (RMBSs), super senior RMBS CDOs, the US reference-linked note program, and related hedges, were excluded from VaR reporting and limits due to illiquidity. These positions are controlled primarily by volume-based limits that reduce as positions are worked down, supplemented by targeted stress scenarios.

UBS clarified the roles and responsibilities regarding risk management and control for its Board of Directors (BoD) and executive management. Under the revised set of Organization Regulations and Risk Authorities, effective 1 July 2008, the BoD is responsible for the highest-level portfolio and concentration measures and limits and the Group Chief Executive Officer (Group CEO) is authorized to deploy the allocated risk capacity in transactions, positions and exposures. A Group Executive Board (GEB) Risk Council replaces the GEB Risk Sub-Committee and will support the Group CEO. Additionally, a new BoD Risk Committee has been established to take on some responsibilities of the former Chairman's Office.

On 14 May 2008, UBS announced that, effective 1 July 2008, the market and credit risk functions of the Investment Bank would be merged into a single unit to provide a more integrated approach to risk control. Thomas Daula, the former Chief Risk Officer (CRO) of Morgan Stanley, was appointed CRO of the Investment Bank with responsibilities for this new unit as well as operational risk. Also effective 1 July 2008, the former Group Chief Credit Officer of UBS was appointed Group Chief Operating Officer for Risk Control, with responsibility for key strategic projects and the development of risk control architecture and processes. Additionally, a combined Group Risk Methodology function has been established with responsibility for developing and improving risk measurement methodologies across the primary market and credit risk categories.