Risk management and control

The Swiss Federal Banking Commission (SFBC) concluded its investigation into the causes of the significant writedowns incurred by UBS; it confirms UBS's own conclusions on the causes in all material aspects. UBS has developed a comprehensive and detailed remediation plan to eliminate the weaknesses it identified, including those related to risk management and control. The remedial actions of this plan have been or are currently being implemented, and are supported by the SFBC.

Exposures to US residential real estate-related positions were reduced by almost 50%. This was achieved largely through sustained sales and to a lesser extent further writedowns. Leveraged finance and commercial real estate positions were reduced through a combination of sales and writedowns, and further credit valuation adjustments were taken against credit default protection purchased from monoline insurers.

UBS increased the scope of its internal management Value at Risk (VaR) to more accurately represent risk exposures and related hedges. Before these changes, credit hedges were included in VaR but the underlying credit exposures were not, resulting in an inconsistent treatment for risk monitoring and control. With the continued deterioration in credit markets, UBS has increased hedging activity against credit exposures in its over-the-counter (OTC) derivatives portfolio and therefore incorporated into its internal management VaR the impact of changes in credit spread sensitivities relating to these counterparty exposures. However, when computing the regulatory capital that is required to underpin market risks, these credit spread sensitivities currently need to be excluded. This has resulted in a material difference between UBS's internal management VaR and the VaR used for regulatory capital purposes. UBS has therefore changed its VaR disclosure to reflect the regulatory measure, but continues to provide details of its internal management VaR. Further information about this change can be found in the sidebar "Value at Risk developments - treatment of CVA".

On 16 October 2008, UBS announced a transaction with the Swiss National Bank (SNB) to materially reduce the risk of UBS's balance sheet. Up to USD 60 billion of currently illiquid securities and other assets will be transferred into a separate fund entity. This includes the majority of UBS's concentrated risk positions, excluding exposures to monoline insurers and leveraged finance. Further information about this transaction can be found in the sidebar "Transaction with the Swiss National Bank".