Item 1

A. Motion of the Board of Directors

The Board of Directors proposes the creation of conditional capital in a maximum amount of CHF 36,500,000 by means of the following addition to the Articles of Association:

Article 4a para. 4 (new)
Mandatory Convertible Notes
The share capital will be increased by a maximum of CHF 36,500,000 through the issuance of a maximum of 365,000,000 fully paid registered shares with a par value of CHF 0.10 each upon voluntary or mandatory conversion of the 12.5% mandatory convertible notes due 2011 ("MCN") to be issued by the Corporation or one of its subsidiaries to the Swiss Confederation or other investors. The conditions of the conversion rights under the MCN shall be determined by the Board of Directors.

The advance subscription right and the pre-emptive right of the shareholders shall be excluded in connection with the issuance of the MCN and upon voluntary or mandatory conversion of the MCN in favor of the MCN holders. The issue price of the registered shares to be issued upon voluntary or mandatory conversion of the MCN will be determined by reference to the respective market price of the registered shares at the time of (i) the public announcement of the MCN, (ii) the shareholders' approval of this Article 4a para. 4 and (iii) the conversion of the MCN. The voluntary or mandatory conversion of the MCN is to occur within a period of 30 months after the issuance of the MCN.

The acquisition of shares upon voluntary or mandatory conversion of the MCN as well as any subsequent transfer of the shares are subject to the registration requirements set out in Article 5 of these Articles of Association.

B. Explanations

Transaction with the Swiss National Bank
As announced on 16 October 2008, the Swiss National Bank ("SNB") and UBS reached an agreement under which UBS will sell up to USD 60 billion of currently illiquid securities and other assets to a newly formed fund to be controlled by the SNB.

With this transaction, UBS caps its future potential losses from these assets, reduces its risk-weighted assets, materially de-risks and reduces its balance sheet and is no longer exposed to the funding risk of the assets transferred. In particular, US real estate-related net risk positions will be reduced to nearly zero. As a consequence, UBS will incur no further writedowns or losses on the transferred assets, thus significantly reducing uncertainty for UBS shareholders and clients. At the same time, the transaction provides reasonable protections and commercial benefits to the SNB and contributes to the stability of the financial system by ensuring an orderly sale of these assets over the long term.

The purchase of securities and other assets from UBS by the fund will be financed through up to USD 6 billion of equity to be contributed by UBS into the fund and a loan in a maximum amount of USD 54 billion to be provided to the fund by the SNB. Should assets worth less than USD 60 billion be sold to the fund1, the proportion of equity and loan to be contributed would remain in the ratio one to nine respectively. The loan will be non-recourse to UBS (assuming no change in control of UBS), and will be secured by, and repaid exclusively from cash flows from, the fund's assets. It will mature in eight years (extendable to 10 or 12 years) and will accrue interest at the 1-month USD-London Interbank Offered Rate (LIBOR) plus 2.5% per annum. Immediately after contributing the equity to the fund, UBS will sell its equity interest to the SNB for USD 1, and will receive from the SNB an option to repurchase the equity upon full repayment of the loan. The SNB will have full control and ownership of the fund.

Only the net cash flow from the fund's assets - including interest, rental income, principal repayments and proceeds from asset sales - will be used to service the loan provided by the SNB. Once the fund has fully repaid the loan, UBS will have the option to repurchase the fund's equity from the SNB for a price equal to the sum of USD 1 billion and half of the then equity value of the remaining fund that exceeds USD 1 billion. If, upon the fund's termination, the SNB incurs a loss on the loan it has made to the fund, the SNB will be entitled to receive up to 100 million UBS ordinary shares depending in some manner upon the magnitude of the loss. The precise terms of the arrangement will be agreed upon by the SNB and UBS in the near future.

The assets to be transferred into the fund include approximately USD 31 billion (as per valuation at 30 September 2008) of primarily cash securities, already disclosed as concentrated risk positions relating to US real estate-related securities, US student loan auction rate securities and other US student loan securities, and assets from the US reference-linked note program (RLN). Upon completion of the transaction, UBS's net exposure to these risk categories will be reduced to nearly zero, with residual long positions held by UBS in these asset classes hedged through existing short positions, including credit protection embedded in the RLN programs. UBS will continue to manage down these residual positions.

The table below shows on a pro forma basis the impact of the transaction on UBS's remaining risk concentrations as at 30 September 2008.

UBS will also transfer to the fund additional, mainly non-US debt instruments with a total net value of around USD 18 billion (as per valuation at 30 September 2008) - a wide range of securities backed by a variety of asset classes. The inclusion of these positions follows UBS's decision to downsize its securitization business and provides a better diversification of the fund's portfolio.

Risk positions: UBS net exposures

As of

After transfer into fund

USD billion



US subprime




US Alt-A




US prime




US RLN program1




Commercial real estate




Student loans




Positions affected by transfer into fund








Leveraged finance








The transfer of the assets referred to above will take place during fourth quarter 2008 and first quarter 2009, but will be priced at market valuations as at 30 September 2008. These prices will be verified by independent third parties, and any lower third party valuations will be reflected in the purchase price to be paid by the fund and therefore recorded in UBS's income statement.

UBS will have the right to transfer up to USD 8.5 billion of additional assets into the fund at a later stage. These consist of up to USD 5 billion of student loan auction rate securities the bank may buy back from clients as contemplated by the recent settlements and up to USD 3.5 billion of positions which may become unhedged in the event of commutation of the credit protection contracts with one or more monoline insurers.

UBS will act as the investment manager of the fund, overseen by a board controlled by the SNB. The oversight board will also be empowered to change the investment manager.

The impact of the transaction and related capital measures on UBS will be shown in the fourth quarter 2008 results, separately identified within operating performance. On a preliminary basis, UBS estimates that the transaction will result in an aggregate net charge to fourth quarter 2008 earnings of approximately CHF 4 billion.

Issuance of Mandatory Convertible Notes to the Swiss Confederation
In order to enable UBS to retain a strong Tier 1 capital ratio after giving effect to the transaction with the SNB, the Board of Directors proposes that UBS issue mandatory convertible notes ("MCNs") in a principal amount of CHF 6 billion to the Swiss Confederation.

The MCNs are a special type of equity-linked security, which will never be redeemed in cash but will automatically convert into UBS shares at maturity (or earlier if UBS or the holder should effect early conversion). Therefore, MCNs are treated as Tier 1 capital by bank regulators and further strengthen UBS's capital position.

The Swiss Confederation has agreed to subscribe the full amount of the MCNs of CHF 6 billion. The Swiss Confederation has publicly stated that it does not intend to be a long-term holder of the MCNs or the shares into which they convert, but reserves the right to reduce all or part of its investment by selling MCNs to third party investors.

The terms and conditions of the MCNs agreed with the Swiss Confederation reflect current market conditions and are commercially reasonable for both sides. The MCNs have a maturity date 30 months after the issue date (which is expected to be 4 December 2008). Until maturity of the MCNs, the holder receives an annual coupon of 12.5% of their nominal value (i.e. CHF 750 million). The minimum and maximum number of UBS shares to be issued upon conversion of the MCNs will, inter alia, depend on UBS's share price during the three trading days immediately before the EGM on 27 November 2008. However, the minimum number of shares to be issued upon conversion will not be less than 253.4 million, while the maximum number of shares will not exceed 329.5 million, subject to no dilutive events occurring between issuance and conversion of the MCNs. Dilutive events (such as any dividend payments) would result in downward adjustments of the conversion price of the MCNs, which in turn would increase the number of shares to be issued. Therefore, the Board of Directors proposes that shareholders approve the creation of conditional capital of an amount of 365 million shares.

The MCNs provide UBS with a firm and immediate commitment of capital from announcement on pre-defined and commercially acceptable terms. This allows UBS to retain a strong Tier 1 capital ratio following the transaction with the SNB, which will significantly contribute to rebuild the shareholders' and clients' confidence in UBS. To achieve this end, the Board of Directors concluded that the exclusion of the advance subscription right and of the pre-emptive right of existing shareholders was in the best interest of the company.

For further information concerning the transaction with the SNB and a more detailed overview of the terms and conditions of the MCNs, please refer to UBS's report for the third quarter 2008 and the attached summary term sheet.

Impact of the transactions
Taken together, the reduction in risk weighted assets and expected charges resulting from the SNB transactions and the capital increase resulting from the MCN issuance would result in a pro forma Tier 1 capital ratio of 11.9% as of 30 September 2008.

The illustration summarizes the major components of these transactions.

Impact of the transactions

Summary Term Sheet of the Mandatory Convertible Notes ("MCN")


UBS AG or a subsidiary

Issue size

CHF 6,000,000,000

Issue price



30 months


12.50% p.a., payable annually

Convertible into

Registered shares of UBS AG

Payment date

5 business days after the Extraordinary General Meeting ("EGM") of UBS


CHF 100,000,000

Condition of offering

Registration of the conditional capital to be created at the EGM on 27 November 2008

Reference Price

The lower of (i) the volume weighted average price ("VWAP") of the UBS share on SWX Europe on the trading day before announcement (CHF 20.2359 on 15 October 2008) and (ii) the arithmetic average of the daily VWAP on each of the three trading days ending on the trading day before the EGM. However, in no case will the Reference Price be less than CHF 18.21, i.e. 90% of the VWAP of the UBS share on SWX Europe on the trading day before announcement (CHF 20.2359)

Minimum Conversion Price

100% of the Reference Price

Maximum Conversion Price

117% of the Reference Price

Mandatory Conversion at Maturity (Redemption)

The MCN will be redeemed via conversion into UBS shares at the Maturity Conversion Ratio, which will be determined according to the following schedule:
- if VWAP at maturity <= Min. Conversion Price: denomination of MCN divided by Min. Conversion Price (Maximum Conversion Ratio);
- if VWAP at maturity >= Max. Conversion Price: denomination of MCN divided by Max. Conversion Price (Minimum Conversion Ratio). In addition, issuer will deliver shares to MCN holder based on the following formula: [(VWAP - Max. Conversion Price) x Incremental Share Factor] divided by VWAP, where Incremental Share Factor is [1 - (Min. Conversion Price divided by Max. Conversion Price)] x [denomination of MCN divided by Min. Conversion Price];
- if VWAP at maturity is between Min. Conversion Price and Max. Conversion Price: denomination of MCN divided by the VWAP

Capital distribution

Full adjustment of conversion price for dividends or distributions in cash paid on UBS shares

Early conversion by MCN holder

Upon early conversion by the MCN holder, the MCN holder will receive a number of shares based on the Maturity Conversion Ratio, and will retain the right to receive all accrued and unpaid interest and all interest due to be paid until the original maturity date, payable on the original coupon dates

Early conversion by issuer

Upon early conversion by the issuer, the MCN holder will receive a number of shares based on the Maximum Conversion Ratio, and will retain the right to receive all accrued and unpaid interest and all interest due to be paid until the original maturity date, payable on the original coupon dates


6 months after the Payment Date

Anti-dilution provisions

Standard provisions

Reset adjustment

If UBS AG issues in excess of CHF 5 billion shares, other equity securities or equity-linked securities at a sale price below the Reference Price, or additional mandatory convertible notes or equivalent instruments with a payment rate higher than the Coupon on the MCN or a maximum conversion price below the Maximum Conversion Price of the MCN, during the one year period following the announcement of the issuance of the MCN, the Maximum Conversion Price may be reduced, but to no less than the Minimum Conversion Price

1 Due to asset sales and writedowns that occurred between mid-September 2008 and the 30 September 2008 valuation date, the total amount of assets identified for sale by UBS to the fund has been reduced to approximately USD 57 billion. UBS and the SNB are discussing the possibility that additional assets might be identified for sale to the fund in order to utilize the facility more fully. This may increase the amounts of assets in certain categories that would be eligible for transfer to the fund.