UBS sponsors the formation of Special Purpose Entities (SPEs)
primarily to allow clients to hold investments in separate
legal
entities, to allow clients to jointly invest in alternative
assets, for asset securitization transactions and for buying or
selling credit protection. In accordance with IFRS, we do not
consolidate SPEs that we do not control. In order to determine
whether we control an SPE or not, we have to make
judgments about risks and rewards and assess our ability to
make operational decisions for the SPE in question. In many
instances, elements are present that, considered in isolation,
indicate control or lack of control over an SPE, but when
considered together make it difficult to reach a clear conclusion.
When assessing whether we have to consolidate an
SPE we evaluate a range of factors, including whether (a) the
activities of the SPE are being conducted on our behalf according
to our specific business needs so that we obtain the
benefits from the SPE’s operations, or (b) we have decisionmaking
powers to obtain the majority of the benefits of the
activities of the SPE, or UBS has delegated these decisionmaking
powers by setting up an autopilot mechanism, or
(c) we have the rights to obtain the majority of the benefits
of the activities of an SPE and therefore may be exposed to
risks arising from the activities of the SPE, or (d) we retain the
majority of the residual or ownership risks related to the SPE
or its assets in order to obtain the benefits from its activities.
We consolidate an SPE if our assessment of the relevant factors
indicates that we control the SPE.
SPEs used to allow clients to hold investments are structures
that allow one or more clients to invest in an asset or
set of assets, which are generally purchased by the SPE in the
open market and not transferred from UBS. The risks and rewards of the assets held by the SPE reside with the clients.
Typically, we will receive service and commission fees for creation
of the SPE, or because we act as investment manager,
custodian or in some other function. Many of these SPEs are
single-investor or family trusts while others allow a broad
number of investors to invest in a diversified asset base
through a single share or certificate. These latter SPEs range
from mutual funds to trusts investing in real estate. The majority
of our SPEs is created for client investment purposes
and is not consolidated. However, we consolidate investment
funds in cases where we provide or have a moral obligation
to provide financial support to a fund. In these instances
we generally assume the majority or a significant
portion of the risks of the fund, which, combined with our
role as investment manager, makes us the party that can
exercise
control over the entity.
SPEs used to allow clients to jointly invest in alternative
assets, e. g. feeder funds, for which generally no active
markets
exist, are often in the form of limited partnerships.
Investors are the limited partners and contribute all or the
majority of the capital, whereas UBS serves as the general
partner. In that capacity, we are the investment manager and
have sole discretion about investment and other administrative
decisions, but have no or only a nominal amount of capital
invested. We typically receive service and commission
fees for our services as general partner but do not, or only to
a minor extent, participate in the risks and rewards of the
vehicle, which reside with the limited partners. In most
instances,
limited partnerships are not consolidated under
IFRS because our legal and contractual rights and obligations
indicate that we do not have the power to govern the financial
and operating policies of these entities and concurrently
do not have the objective of obtaining benefits from its activities
through such power.
SPEs used for securitization. SPEs for securitization are
created when we have assets (for example, a portfolio of
loans) which we sell to an SPE, and the SPE in turn sells interests
in the assets as securities to investors. Consolidation of
these SPEs depends mainly on whether we retain the majority
of the benefits or risks of the assets in the SPE.
We do not consolidate SPEs for securitization if we have no
control over the assets and no longer retain any significant
exposure (for gain or loss) to the income or investment returns
on the assets sold to the SPE or the proceeds of their liquidation.
This type of SPE is a bankruptcy remote entity – if UBS
were to go bankrupt the holders of the securities would clearly
be owners of the asset, while if the SPE were to go bankrupt
the securities holders would have no recourse to UBS.
SPEs for credit protection are set up to allow us to sell the
credit risk on portfolios, which may or may not be held by us,
to investors. They exist primarily to allow us to have a single
counterparty (the SPE), which sells credit protection to us.
The SPE in turn has investors who provide it with capital and
participate in the risks and rewards of the credit events that it insures. We generally consolidate SPEs used for credit protection.
