Treasury shares

Under IFRS accounting rules, UBS's holdings of its own shares for trading or non-trading purposes are recorded as treasury shares and deducted from shareholders' equity. Our holding of treasury shares decreased to 164,475,699 or 7.8% of shares issued on 31 December 2006, from 208,519,748 or 9.6% on the same date a year ago. Of the treasury shares held, 22,600,000 are earmarked for cancellation whereas the other 141,875,699 cover employee share and option programs and, to a limited extent, market-making activities at the Investment Bank.

Treasury shares earmarked for cancellation (share buyback program 2006/2007)

At the Annual General Meeting (AGM) on 19 April 2006, shareholders gave the Board of Directors a mandate to set up a repurchase program in 2006 / 2007 for a maximum amount of CHF 5 billion. At the AGM on 18 April 2007, shareholders will be asked to approve the cancellation of 33,020,000 shares representing a total value of CHF 2.4 billion under the program that ended on 7 March 2007. The shares will be cancelled in summer 2007.

The table below shows the impact on basic earnings per share of the purchase of treasury shares through the second line buyback program.

Treasury share holdings for employee participation plans

UBS shares are also purchased and held to satisfy share delivery obligations under UBS's share and option-based participation plans that align the long-term interests of executives, managers, staff and shareholders. For share-based participation plans, UBS shares are purchased in the market and set aside for future distribution to employees once the holding period criteria have been met.

Share delivery obligations under its option-based participation plans are satisfied either by purchasing UBS shares in the market on grant date or shortly thereafter or through the issuance of new shares from conditional capital. At exercise, shares held in treasury or newly issued shares are delivered to the employee against receipt of the strike price. In 2006, a total of 47.2 million employee options were exercised and an additional 45.5 million new options were granted. As of 31 December 2006, UBS was holding approximately 115 million shares in treasury and an additional 150 million unissued shares in conditional share capital that can be used for future employee option exercises. The shares available cover all exercisable employee options.

Treasury shares held by the Investment Bank

The Investment Bank, acting as liquidity provider to the equity futures market and as a market maker in UBS shares and derivatives, has issued derivatives linked to UBS stock. Most of these instruments are classified as cash-settled derivatives and are held for trading purposes only. To hedge the economic exposure, a limited number of UBS shares are held by the Investment Bank.

The presentation in the table below does not include movements in UBS share positions held by the Investment Bank.

Treasury shares – statutory limit

Under the Swiss Stock Exchange Act, treasury shares held by the company must be reported once they rise above a certain threshold. UBS's holding in its own shares remained between 5% and 10% throughout 2006.