Risk disclosure – UBS AG, Nassau Branch

The purpose of this document is to disclose the levels of protection associated with the different levels of segregation in respect of securities held directly for clients with Central Securities Depositories (CSDs) within the European Union (EU), including a description of the main legal implications of the respective levels of segregation offered and information on the insolvency law applicable.

This disclosure is required under Art. 38(6) of the Central Securities Depositories Regulation (CSDR) in relation to CSDs domiciled in the EU.

This document is not intended to constitute legal or other advice and should not be relied upon as such. You should seek your own legal advice if you require any guidance on the matters stated herein.

In our own books and records, we record each client's individual entitlement to securities that we hold for that client in a separate client account. We also open accounts with a CSD in our own name (or in our nominee's name) in which we hold clients' securities. As a general rule, we currently make two types of accounts with CSDs available to clients: Individual Client Segregated Accounts (ISAs) and Omnibus Client Segregated Accounts (OSAs).

An ISA is used to hold the securities of a single client and therefore the client's securities are held separately from the securities of other clients and our own proprietary securities.

An OSA is used to hold the securities of a number of clients on a collective basis. However, we do not hold our own proprietary securities in OSAs.

If a Swiss bank were to become insolvent, the insolvency proceedings would take place in Switzerland and be governed by Swiss insolvency law. Nevertheless, non-Swiss branches of a Swiss bank may also be subject to insolvency proceedings in the foreign location in question governed by local insolvency law. Were we to become insolvent, insolvency proceedings relating to our Nassau, Bahamas branch may also take place in The Bahamas and be governed by Bahamian insolvency law.

Clients' legal entitlement to the securities that a Swiss bank holds for them directly with a CSD would generally (except in specific circumstances, some of which are discussed below) not be affected by the bank's insolvency (bankruptcy), regardless of whether those securities were held in ISAs or OSAs.This applies generally in the case of our Nassau, Bahamas branch as well (see the discussion below specifically in relation to The Bahamas).

In practice, the exclusion of securities from a Swiss bank's bankruptcy estate would further depend on a number of additional factors, the most relevant of which are discussed below.

Swiss law

Under Swiss insolvency laws, intermediated securities and certain other safe custody assets within the meaning of the Banking Act booked on safekeeping accounts held by clients with a Swiss bank, as well as certain readily available claims of the bank to receive delivery of securities from third parties, do not form part of the bankruptcy estate. Instead, in an insolvency (bankruptcy) of a bank, they are designated to be excluded in favour of the relevant client, subject to any claims the bank has against the client.

According to Art. 11 FISA, a Swiss bank must hold with itself or with a sub-custodian or a CSD intermediated securities (available securities) in a quantity and of a kind at least equal to, the total of intermediated securities credited to the securities accounts maintained by the bank for its clients^[1].
A bank is also subject to strict requirements as to maintenance of accurate books and records and as to reconciliation of its records against those of the CSDs and sub-custodians with which the intermediated securities are held. Accordingly, as long as a bank maintains sufficient holdings of intermediated securities in accordance with its statutory obligations, clients should receive the same level of protection in the bank's insolvency, regardless of whether the intermediated securities are held in an ISA or an OSA. However, ISA could contribute to swifter identification of client assets in a default scenario.

Bahamian law

Under Bahamian law, securities that are being held for the benefit of clients must be segregated from our assets. Depending on the circumstances, such client securities may be held in an OSA or an ISA. Further, Bahamian law also requires that securities held for the benefit of clients must be identified as such in our records, in the client's ledger, and the client's statement of account.

On the basis of the foregoing, where securities are held as discussed above and our records reflect a particular client's entitlement to the securities we hold, under Bahamian insolvency law the securities that we hold on behalf of clients would not form a part of our estate on insolvency and would consequently not be available for distribution to our creditors.

Clients whose securities are held in this way should be protected in the event of our insolvency and should not be required to submit proof of their claim to such assets in the administration of our insolvent estate. This applies whether the securities are held in an OSA or an ISA.

Although client’s securities are held in our name at CSDs, we hold them on behalf of our clients.

For securities that are held in a CSD, the nature of the entitlement embodied in a security also depends on the law, regulations and contractual framework applicable to such other CSDs and further parties involved in the custody chain. In such a case, entitlements that are available for exclusion may be limited to contractual claims against a CSD involved. Moreover, the ability of the client to exclude securities in the case of insolvency may depend on whether a CSD or any custodian in the custody chain could assert any right to set-off, retention right, security interest or similar right with respect to the securities (see also “Security interests” below).

As described above, the statutory requirements are designed to ensure that a Swiss bank holds intermediated securities in a quantity and a kind at least equal to the intermediated securities credited to client accounts. If notwithstanding these requirements there were a shortfall between the number of intermediated securities that a bank is obliged to deliver to clients and the number of intermediated securities that the bank holds on their behalf in either an ISA or an OSA, this could result in fewer intermediated securities than clients are entitled to being returned to them on the bank's insolvency. The way in which a shortfall could arise and would be treated may be different as between ISAs and OSAs.

A shortfall could arise for a number of reasons including as a result of administrative error, intraday movements or counterparty default. In most cases a shortfall occurs as a result of a mismatch between the time when a bank receives intermediated securities and the earlier time when the delivery is booked to the account of the receiving account holder. In Switzerland, typically for exchange traded transaction, banks credit the client accounts immediately on trade date while the effective delivery may not occur intraday but later (most markets have settlement cycles of 2 or 3 days). As a result, a recipient client could dispose of its intermediated securities as soon as they are credited to its securities account, irrespective of whether the bank has actually already received the intermediated securities. This process is referred to as contractual settlement. Contractual settlement may therefore cause a difference between the bank's number of intermediated securities at the CSD and the clients' higher number of aggregated securities credited to their securities accounts. In the normal course of the settlement this process-immanent difference disappears at the end of the settlement cycle. Contractual settlement increases market liquidity, accelerates deliveries and settlement, and is based on the fact that a failed settlement of an exchange traded transaction (and the risk that, as a result, a bank does not hold sufficient available securities) is rare. The risk involved with shortfalls is further mitigated by the fact that, if a shortfall arises, a bank is obliged to acquire without delay securities if and to the extent the total number of available securities is less than the total number of securities credited to clients' accounts (see below).

In the case of an ISA, the securities held in the ISA can only be delivered out for the settlement of transactions made by the ISA client. As a matter of principle, this may reduce the risk
of a shortfall in that account, but also increases the risk of settlement failure which, in turn, may incur additional costs (e.g. buy-in costs) and/or delay in settlements.

In the case of an ISA, although arguments could be made that the relevant client should not be exposed to a shortfall that is clearly attributable to an account held for another client or clients, it cannot be excluded that a shortfall on any other (ISA or OSA) account would be shared rateably among clients, including clients who do not have an interest in the relevant account^[2]. Accordingly, a client holding whose securities are held in an ISA may still be exposed to a shortfall on an account held for another client or clients.

In the case of an OSA, a shortfall attributable to the OSA would be shared rateably among the clients with an interest in the OSA (and potentially other clients). Therefore, a client may be exposed to a shortfall even where securities have been lost in circumstances which are completely unrelated to that client.

If a shortfall arises, the bank has the obligation under Swiss law to acquire without delay securities if and to the extent the total number of available securities is less than the total number of securities credited to clients' accounts. If a shortfall arose and was not so covered, clients may have a claim for compensation against a Swiss bank. Furthermore, if the securities that may be excluded from the bank's bankruptcy estate (see above) are not sufficient to satisfy the claims relating to client accounts in full, securities of the same kind held by the bank for its own account will also be excluded for the benefit of the relevant clients.

If a Swiss bank were to become insolvent prior to covering a shortfall, clients would rank as general unsecured creditors for any amounts owing to them in connection with such a claim. Clients would therefore be exposed to the risks of a Swiss bank's insolvency, including the risk that they may not be able to recover all or part of any compensation claimed.

In order to calculate clients' shares of any shortfall in respect of an OSA, each client's entitlement to securities held within that account would need to be established as a matter of law and fact based on the bank's books and records. The shortfall would then be allocated among the clients as described above. It may therefore be a time-consuming process to confirm each client's entitlement and establish the securities available for exclusion. This could give rise to delays in returning securities and initial uncertainty for a client as to its actual entitlement on an insolvency.

Where a CSD benefits from a security interest (either it benefits from a statutory right or a contractual right based on its terms and conditions) over securities held by the bank with it (including securities held for clients), there could be a delay in the return of securities to a client (and a possible shortfall) in the event that the bank failed to satisfy its obligations to a CSD and the security interest was enforced. This applies regardless of whether the securities are held in an ISA or an OSA. However, in practice, we would expect that a CSD would first seek recourse to any securities held in the our proprietary accounts to satisfy the bank’s obligations and only then make use of securities in client accounts. We would also expect a CSD to enforce its security rateably across client accounts held with it. Furthermore, Swiss law requires the liquidator to satisfy claims of the CSD arising out of the custody of intermediated securities or the financing of their acquisition.^[3]

Under Bahamian law, the consent of clients must be obtained before a security interest may be created over securities held for the benefit of the client's account.

Where a client purported to grant a security interest over its interest in securities held in an OSA and the security interest was asserted against the CSD with which the account was held, there could be a delay in the return of securities to all clients holding securities in the relevant account (and a possible shortfall in the account). However, in practice, we would expect that the beneficiary of a security interest (pledgee) over a client’s securities would perfect its security by notifying us rather than a CSD and would seek to enforce the security against us rather than against the CSD, with which it had no relationship.

Set out below are links to the disclosures made by CSDs in the EU in which we are a Participant:

If you click on those links, you leave this information/website. These disclosures have been provided by relevant CSD. Bank has not investigated or performed due diligence on the disclosures and websites and clients rely on the CSD disclosures and websites at their own risk.