Changes in 2008

Sale of assets to a fund to be controlled by the Swiss National Bank

As announced on 16 October 2008, the Swiss National Bank (SNB) and UBS have reached an agreement to transfer in one or more sales up to USD 60 billion of currently illiquid securities and other assets from UBS's balance sheet to a separate fund entity to be controlled and owned by the SNB. With this transaction, UBS caps future potential losses from these assets, reduces its risk-weighted assets, materially de-risks and reduces its balance sheet and is no longer exposed to the funding risk of the assets to be transferred.

UBS will capitalize the fund with equity of up to USD 6 billion, which will absorb any potential losses realized by the fund up to this amount. The SNB will finance the fund with a loan of up to USD 54 billion, secured by the assets of the fund.

At the time of each sale of assets to the fund, the SNB will fund 90% of the purchase price by making a loan and UBS will fund 10% through an equity contribution. Should assets worth less than USD 60 billion be sold to the fund 1, the proportion of loan funding to equity contribution would remain in the ratio nine to one. The SNB will immediately purchase the equity from UBS for a nominal price of USD 1 and grant to UBS an option to repurchase the equity upon repayment in full of the loan. The loan will be non-recourse to UBS and will be priced at LIBOR plus 250 basis points. The fund and the loan facility will terminate in eight years, but the termination date may be extended to 10 or 12 years. The cash flow from the assets, including interest, rental income, principal repayments and proceeds from asset sales (net of expenses and working capital requirements), will be applied to service the loan until full repayment.

In the event of a change of control of UBS, the SNB will have the right but not the obligation to require UBS to purchase the outstanding loans at par plus accrued interest and to purchase the fund equity at 50% of its value at the time.

Once the SNB loan is fully repaid by the fund, UBS may exercise its option to repurchase the fund equity by paying the SNB USD 1 billion plus 50% of the amount by which the equity value at the time of exercise exceeds USD 1 billion. This option will be carried on UBS's balance sheet at its fair value.

If, upon the fund's termination, the SNB incurs a loss on the loan it has made to the fund, the SNB will be entitled to receive up to 100 million UBS ordinary shares depending in some manner upon the magnitude of the loss. The precise terms of the arrangement will be agreed upon by the SNB and UBS in the near future.

Implications for UBS's income statement in fourth quarter 2008

Upon completion of the transaction, UBS will incur a loss of up to USD 6 billion triggered by the sale of its equity interest in the fund to the SNB for a sales price of USD 1. This loss will be partly offset by the fair value of the option for UBS to buy back the equity of the entity once the loan made by the SNB has been fully repaid. The fair value of the option is dependent on the assets effectively transferred to the fund, their fair value and certain other factors and is currently subject to final determination.

On a preliminary basis, UBS estimates that the transaction will result in an aggregate net charge against earnings in fourth quarter 2008 of approximately CHF 4 billion.

The fair value of this option will be measured and reflected in UBS's income statement. This may lead to some UBS revenue volatility in future quarters.

Implications for risk positions

The assets to be transferred to the fund include approximately USD 31 billion (as per valuation on 30 September 2008) of primarily cash securities, already disclosed as concentrated risk positions relating to US real estate-related securities, US student loan auction rate securities and other US student loan securities, and assets from the US reference-linked note program (RLN).

Upon the completion of the transaction, UBS's net exposure to these risk categories will be reduced to nearly zero (compared with USD 44 billion on 30 June 2008 and USD 32 billion at 30 September 2008), with residual long positions held by UBS in these asset classes hedged through existing short positions, including credit protection embedded in the RLN programs. UBS will continue to manage down these residual positions.

UBS will also transfer additional assets with a total net value of around USD 18 billion (as per valuation at 30 September 2008) to the fund. These additional assets are mainly non-US residential and commercial mortgage related securities and other US and non-US debt securities backed by a variety of asset classes. The inclusion of these positions follows UBS's decision to downsize its securitization business and provides a better diversification of the fund's portfolio.

The transfer of the assets referred to above will take place during fourth quarter 2008 and first quarter 2009, but will be priced at market valuations as at 30 September 2008. These prices will be verified by independent third parties, and any lower third party valuations will be reflected in the purchase price to be paid by the fund and therefore recorded in UBS's income statement.

UBS will have the right to transfer up to USD 8.5 billion of additional assets to the fund over a longer period ending on 30 September 2010. These assets consist of up to USD 5 billion of US student loan auction rate securities UBS may buy back from clients as contemplated by the recent settlements and up to USD 3.5 billion of positions which may become unhedged in the event of commutation of the credit protection contracts with one or more monoline insurers.

UBS will act as the investment manager of the fund, overseen by a board controlled by the SNB. The oversight board will approve specified matters including certain major transactions and changes in investment guidelines. It will also be empowered to change the investment manager.

The table below shows on a pro forma basis the impact of the announced transaction with the SNB on remaining positions as at 30 September 2008.

Reporting in future quarters

The impact of the transaction and related capital measures will be shown in the fourth quarter 2008 results, separately identified within operating performance. The initial valuation date of the SNB transaction was 30 September 2008 and the relevant positions to be transferred to the fund as described above will therefore be excluded from UBS's future reporting of risk positions. UBS will remove assets from its balance sheet upon the closing of sales to the fund and will report on completed transfers and the fair value of UBS's option to buy back the equity of the fund as part of its quarterly reporting.

Implications for capital, balance sheet and funding

The transaction will allow UBS to reduce its balance sheet as the assets are transferred to the fund. Furthermore, UBS will no longer need to finance these assets, resulting in a reduction in its overall funding needs. Similarly, the transaction will reduce UBS's risk-weighted assets by an estimated CHF 21 billion when applied to the 30 September 2008 balance sheet on a pro forma basis.

As described above, UBS estimates that the transaction will result in an approximately CHF 4 billion net charge against earnings in fourth quarter 2008. Additionally, UBS will be required to deduct from tier 1 eligible capital 50% of the value of the equity repurchase option (the value of which is estimated at approximately CHF 2 billion). These effects on capital will be offset by the capital increase of CHF 6 billion arising from the sale of mandatory convertible notes (MCNs) to the Swiss Confederation (refer to sidebar below). Combined with the reduction in risk-weighted assets, it is estimated that the impact of these measures would result in a 30 September 2008 pro forma tier 1 capital ratio of 11.9%.

¹ Due to asset sales and writedowns that occurred between mid-September 2008 and the 30 September valuation date, the total amount of assets identified for sale by UBS to the fund has been reduced to approximately USD 57 billion. UBS and the SNB are discussing the possibility that additional assets might be identified for sale to the fund in order to utilize the facility more fully. This may increase the amounts of assets in certain categories that would be eligible for transfer to the fund as referred to in this sidebar.

UBS will raise CHF 6 billion of new capital in the form of mandatory convertible notes (MCNs), convertible into UBS registered shares, which the Swiss Confederation has agreed to purchase. The MCNs issue is subject to approval by UBS shareholders, who will vote on the creation of the required conditional capital underlying the MCNs at an extraordinary general meeting (EGM) to be held on 27 November 2008. The MCNs will count as tier 1 capital for BIS capital adequacy purposes following EGM approval.

The MCNs will pay an annual coupon of 12.5% until maturity, which is 30 months after issuance. Upon conversion of the MCNs, the Swiss Confederation will hold approximately 9.3% of UBS's share capital, on the basis of currently outstanding shares and assuming conversion of the mandatory convertible notes issued in March 2008. Further dilution could occur if equity is issued to the SNB as a result of a decline in value of the fund equity, as described above.

In connection with the transaction, UBS has undertaken to comply with best practices for compensation schemes and policies as determined in consultation with the Swiss Federal Banking Commission and in line with standards to be established by certain international forums.

The Swiss Confederation reserves the right to reduce part or all of its investment by transferring the MCNs to third party investors.

Additional information on the terms and conditions of the MCNs can be found at www.ubs.com/investors. UBS shareholders will be provided with more details on the MCNs issuance together with the invitation to the EGM.