Off-balance sheet

In the normal course of business, UBS enters into arrangements that, under International Financial Reporting Standards, lead to either de-recognition of financial assets and liabilities for which UBS has transferred substantially all risks and rewards or the non-recognition of financial assets (and liabilities) received for which UBS has not assumed the related risks and rewards. UBS recognizes these types of arrangements on the balance sheet to the extent of its involvement, which, for example, may be in the form of derivatives, guarantees, financing commitments or servicing rights. When UBS, through these arrangements, incurs an obligation or becomes entitled to an asset, it recognizes them on the balance sheet, with the resulting loss or gain recorded in the income statement. It should be noted that in many instances, the amount recognized on the balance sheet does not represent the full gain or loss potential inherent in such arrangements. Generally, these arrangements either meet the financial needs of customers or offer investment opportunities through entities that are not controlled by UBS. 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.

The following paragraphs discuss several distinct areas of off-balance sheet arrangements. Note 11 to the financial statements of this report discusses committed amounts of undrawn irrevocable credit facilities, credit guarantees, performance guarantees, documentary credits and similar instruments, as well as commitments to acquire auction rate securities from clients.

Potential support to non-consolidated investment funds is discussed in the "Risk management and control" section of this report.

Liquidity facilities and guarantees

At the end of third quarter 2008, UBS had no significant exposure through liquidity facilities and guarantees to structured investment vehicles, conduits and other types of special purpose entities (SPEs). Losses resulting from such obligations were not significant in the first nine months of 2008.

Non-consolidated securitization vehicles and collateralized debt obligations

UBS sponsored the creation of SPEs that facilitate the securitization of acquired residential and commercial mortgage loans, other financial assets and related securities. UBS also securitized customers' debt obligations in transactions that involve SPEs which issue collateralized debt obligations. A typical securitization transaction of this kind involves the transfer of assets into a trust or corporation in return for beneficial interests in the form of securities. Generally, UBS intended to sell the beneficial interests to third parties shortly after securitization but beginning in the second half of 2007, certain retained interests could not be sold due to illiquid markets for certain instruments linked to the US mortgage market. The volume and size of new securitization structures originated by UBS significantly declined in 2008.

In October 2008, UBS announced the repositioning of its fixed income, currencies and commodities (FICC) business around client servicing and facilitation. The repositioning includes a substantial downsizing of the real estate, securitization, and proprietary trading activities. Please also refer to the "Transaction with the Swiss National Bank" sidebar of this report which describes the expected sale of financial assets to a fund controlled by the Swiss National Bank. Both measures will significantly reduce UBS's relationships to non-consolidated securitization vehicles and CDOs in the future.

Consolidation of securitization vehicles and CDOs

UBS continually evaluates whether triggering events require the reconsideration of the consolidation conclusions made at the inception of its involvement with securitization vehicles and CDOs. Triggering events generally include items such as major restructurings, the vesting of potential rights and the acquisition, disposition or expiration of interests. In these instances, SPEs may be consolidated or de-consolidated as the conditions have changed. Starting in December 2007, due to adverse 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 and therefore consolidated the affected entities. The consolidation had no material incremental impact on UBS's income statement and balance sheet.

On 20 May 2008, UBS sold a portfolio of USD 15 billion of US residential mortgage-backed securities (RMBSs) to the RMBS Opportunities Master Fund, LP, a fund managed by BlackRock, Inc. The fund was financed with approximately USD 3.75 billion of equity from third party investors and an amortizing USD 11.25 billion loan collateralized by the fund's assets provided by UBS. Since inception, the fund has amortized the loan through monthly payments in line with original expectations. UBS does not consolidate the fund because it concluded that the equity investors continue to receive the majority of the fund's risks and rewards. UBS would reassess the fund's consolidation status if loan amortization would significantly fall behind schedule or the performance of the underlying portfolio deteriorated to such an extent that UBS would not fully recover the loan made to the fund.

Risks resulting from non-consolidated securitization vehicles and CDOs

The "Risk management and control" section of this report provides a detailed disclosure of UBS's main risk concentrations, including risks associated with UBS's involvement in consolidated and non-consolidated US mortgage securitization vehicles and CDOs. If future consolidation of additional securitization vehicles is required by accounting standards, UBS does not expect this to have a significant impact on its risk exposure, capital, financial position or results of operations. Positions with significant impact on the income statement are disclosed in Note 3 to the financial statements of this report.