Investment Bank

UBS is a leading investment banking and securities firm, delivering comprehensive advice and execution to clients across the world’s capital markets.

Business

The Investment Bank provides a broad range of products and services to corporate and institutional clients, governments, financial intermediaries and alternative asset managers. The needs of private investors are met indirectly through working with UBS's wealth management businesses and other private banks.

Strategy

The current crisis in the financial markets and the resulting dramatic changes in industry dynamics, and the losses incurred in 2007 and 2008, require the Investment Bank to recalibrate its business in order to generate profitable and sustainable growth. A number of senior leadership changes took place within the Investment Bank in 2008: Jerker Johansson joined UBS as Chairman and Chief Executive of the Investment Bank in March 2008, Carsten Kengeter and Jeffrey Mayer were appointed co-heads of the fixed income, currencies and commodities (FICC) business area and Tom Daula was appointed Chief Risk Officer to oversee credit risk and market risk on a combined basis as well as operational risk.

The Chairman and CEO of the Investment Bank, members of the Group Executive Board and the UBS Board of Directors have concluded a detailed strategic review. Based on this, the Investment Bank is implementing a comprehensive repositioning plan focused on client-driven growth, a simplified organizational structure and a de-levered and de-risked balance sheet. The FICC business area has significantly restructured to concentrate on client service, simplify its operating model, strengthen risk management and focus on competitive strengths, including foreign exchange and flow businesses in credit and rates. The municipal securities business and fixed income proprietary trading businesses have been closed and certain commodities businesses have been sold. Real estate and securitization businesses and complex structured products have been substantially or downsized or exited.

Equities will continue to leverage its global distribution platform and product expertise, while seeking further efficiency gains. The investment banking department will continue to provide corporate and institutional clients with advisory services while leveraging its capital markets knowledge to both deepen long-term client relationships and gain market share.

These steps will require more efficient utilization of resources and a continued emphasis on cost containment and workforce productivity, and will bring costs down to a more sustainable level. They are occurring in conjunction with an aggressive effort to reduce the size of the balance sheet. In addition, a new market-based funding model and robust risk framework have been implemented. However, implementation of this strategy is inextricably linked to the talent and expertise within the firm. The Investment Bank will therefore continue to attract, develop and retain the best people and foster a collaborative and meritocratic culture. Announced headcount reductions have and will come predominantly from the businesses being exited or downsized.

Organizational structure

The Investment Bank is headquartered in London and employs approximately 17,000 people across 38 countries. It has three distinct business areas which are run functionally on a global basis: equities, FICC and the investment banking department. The investment banking department is an industry leader and provides advice on cross-border mergers and acquisitions in addition to raising capital for companies and governments. Traditionally one of the leaders in European corporate finance, the Investment Bank has built strong franchises in the US and Asia Pacific in recent years. An important partner for institutional clients, the Investment Bank's market-leading equities business is complemented by its top-tier foreign exchange business and broad product capabilities across fixed income markets.

Although the Investment Bank pursues a strategy of organic development, its presence has been enhanced through acquisitions. Key acquisitions over the past three years include:

- the September 2006 acquisition of the global futures and options business of ABN AMRO, which positioned UBS as a market leader in futures and options as well as a global provider of execution and clearing services.

- the December 2006 acquisition of the Brazilian financial services firm Banco Pactual, which placed the Investment Bank as a leader in its field in the Brazilian market.

- the April 2007 acquisition of a 20% stake in UBS Securities, China.

Legal structure

The Investment Bank operates through branches and subsidiaries of UBS AG. Securities activities in the US are conducted through UBS Securities LLC, a registered broker-dealer.

Competitors

The competitive landscape changed significantly in 2008. Market dislocation led UBS and its competitors to take significant steps to strengthen their balance sheets, reduce costs and maintain client confidence. Some governments and investors also took significant stakes in select financial institutions in 2008. The Investment Bank competes against other major international players such as Bank of America / Merrill Lynch, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan Chase and Morgan Stanley.

Products and services

Equities

A leading participant in the global primary and secondary markets for equity, equity-linked and equity derivative products, the equities business area distributes, trades, finances and clears cash equity and equity-linked products. It also structures, originates and distributes new equity and equity-linked issues and provides research on companies, industry sectors, geographical markets and macroeconomic trends. A focus on technology has led to significant improvements in business processes and client services. Investments have been made in direct market access, prime brokerage and client relationship platforms, earning UBS recognition as a market leader in the provision of a number of electronic services to clients. The business area also has a global footprint with a strong presence in many local markets.

Business lines of the equities business and their functions are listed below:

- Cash equities provides clients with expert advisory and execution offerings with top-tier research, corporate access and tailored investment ideas. With market-leading trading execution for single stock and portfolio trading, UBS provides capital commitment, full service and block trading, advanced electronic trading strategies and tools, state-of-the-art analytics and value-enhancing commission management services.

- Derivatives provides standardized products and customized investment solutions to clients. In addition to products with returns linked to equities or equity indices, it also offers derivative products linked to hedge funds, mutual funds, real estate and commodity indices in a variety of formats such as over-the-counter, securitized, fund-wrapped and exchange-traded.

- Prime services provides integrated global services, including securities borrowing and lending, equity swaps execution, multi-asset-class prime brokerage and multi-asset-class exchange-traded derivatives execution and clearing. These services are provided to an expanding list of hedge funds, banks, asset management and commodity trading clients.

- Equity research provides independent assessments of the prospects for over 3,400 companies across most industry sectors and geographical regions (corresponding to 82% of world market capitalization), as well as economic, strategic and quantitative research.

Fixed income, currencies and commodities

The FICC business area delivers products and solutions to corporate, institutional and public sector clients in all major markets. In response to changes in global markets and client demand, FICC significantly restructured at the start of 2009 to improve client service, simplify its operating model, strengthen risk management and focus on competitive strengths. The real estate and securitization business will be exited (with the exception of pass-through trading, which is now part of macro, described below); certain commodities businesses (excluding precious metals) have been sold, and the structured products business significantly downsized. In December 2008, a significant proportion of FICC risk positions were transferred to a fund owned and controlled by the Swiss National Bank (SNB), and further positions are planned to be transfered in March 2009. Refer to the "Transaction with the Swiss National Bank" sidebar in the "Strategy and structure" section of this report for more information on this transaction. In first quarter 2009 additional risk positions will be isolated in a specialist group whose mandate is to maximize value while conducting an orderly exit of positions.

The business lines of the FICC business and their functions are listed below:

- Macro consists of foreign exchange, money market and interest rate risk management activities. It provides a range of foreign exchange, treasury and liquidity management solutions to institutional and private clients. Interest rate activities include standardized rate-driven products and services such as interest rate derivatives trading, underwriting and trading of government and agency securities.

- Credit is active in the origination, underwriting, and distribution of primary cash and synthetic credit transactions. It is also active in secondary trading and market-making in high yield and investment grade bonds and loans in both cash and derivative products.

- Emerging markets has local market presence in Latin America through UBS Pactual, as well as in Asia and Central and Eastern Europe, enabling it to offer local investors access to international markets and international investors an opportunity for local exposure.

- Client services is the global sales effort, unifying product specialist sales groups, including foreign exchange, money market, rates and emerging markets products.

- Quantitative analysis provides tailored solutions for clients as well as more broadly scalable solutions for the FICC flow platforms.

- Research provides investors with analysis across a selected range of issuers, products, markets and industries.

Investment banking

The investment banking department provides advice and a range of execution services to corporate clients, financial institutions, financial sponsors, sovereign wealth funds and hedge funds. Its advisory group assists on complex transactions and advises on strategic reviews and corporate restructuring solutions, while UBS's capital markets and leveraged finance teams arrange the execution of primary and secondary equity, as well as investment grade and non-investment grade debt issues worldwide. With a presence in all major financial markets, coverage is based on a comprehensive matrix of country, sector and product banking professionals.

With the goal of creating a fully integrated primary business to drive revenue growth and realize productivity gains, the global groups for equity capital markets and debt capital markets have been combined. The initial focus is on product knowledge sharing, to enable teams to provide holistic advice and innovative solutions across the entire capital structure.