UBS Index Governance and Control Framework

UBS Indices
UBS has established a governance and control framework (the “UBS Control Framework”) for the creation, determination and distribution of UBS's Indices in order to protect and maintain the integrity of the Indices and to address any conflicts of interest.

The responsibility for Index Administration in relation to UBS's Indices that are developed and maintained by UBS Investment Bank is undertaken by the UBS Index Group, which is part of Compliance & Operational Risk Control within UBS Group Risk Control.

Each UBS Index has been established and designed only for the purpose of seeking to achieve the objective stated the Index Manual in respect of the UBS Index. It has not been designed to operate as a general benchmark for the wider equities, commodities, foreign exchange and/or fixed income market. The level of the UBS Index will be a function of the price, level or value of the components of the UBS Index. In the absence of an index market disruption event, force majeure event or other adjustment event (howsoever described), the level of the UBS Index will be calculated in accordance with the formulae in the methodology of the UBS Index (including in circumstances where the market for a component of the UBS Index is illiquid or fragmented).

UBS Index Oversight Committee
An Index Oversight Committee has been established to review and provide challenge on all aspects of UBS's Indices development, determination and dissemination process and provide effective oversight of Index Administration carried out by the UBS Index Group, in accordance with, and subject to, the applicable procedures set out in the UBS Control Framework. The Index Oversight Committee meets on a quarterly basis and is chaired by the Compliance Programme Manager. The criteria for the selection of members of the Index Oversight Committee and the membership of the Index Oversight Committee are documented in the Index Oversight Committee Terms of Reference, as stated in the UBS Control Framework. The main features of the Index Oversight Committee Terms of Reference, including the main features of the UBS Index Group’s oversight function to be performed by the Index Oversight Committee, are set out in Schedule 1 hereto.
The Index Oversight Committee is comprised of representatives from Research, Equity Structuring and Commodities departments of the Investment Bank, Asset Management, Wealth Management and control functions such as Legal and Compliance & Operational Risk Control.

UBS Control Framework
UBS's Index Administration process is documented by the UBS Index Group in a UBS Control Framework Document. The UBS Control Framework Document describes the operating model and control framework to control and govern the development, determination and dissemination process of an Index.

The UBS Control Framework Document is reviewed at least on an annual basis by the UBS Index Group and updated as appropriate.

Main features of the UBS Control Framework Document (insofar as it applies to Indices that are subject to the IOSCO Principles) are summarised below:

  • Index development - New Indices development must comply with internal policies and procedures to ensure the appropriate guidelines and requirements are met, subject to review and approval by the UBS Index Group, and any relevant control and infrastructure functions. These guidelines and requirements include aspects relating to, but are not limited to, the identification and management of conflicts of interests, the design of the Index, data sufficiency and hierarchy of data inputs requirements, Index Manual content requirements, and back-testing and verification of the Index calculation.
  • Controls over data collection - UBS endeavours for data inputs to feed automatically into UBS's Index calculation IT systems. Where a data source is not automated, the data is independently verified by the UBS Index Group to ensure its validity. Where data is received from UBS's front office trading desks, the UBS Index Group will seek to corroborate data from other sources.
  • Index calculation and verification - Primary calculation of Indices is conducted within IT calculation systems which are operated within relevant IT standards. Secondary (or verification) calculations of Indices are conducted by a separate team in the UBS Index Group to verify against primary calculations in order to minimise the risk of calculation errors.

    Where possible, verification of the primary calculations will be performed prior to the publication of the Index, to reduce the risk of publishing an incorrect Index, and if Index Verification occurs on a post-publication basis, the process will aim to rectify any errors in a timely fashion.

    Index lifecycle events, such as rebalances or corporate actions, are tracked in event calendars. Such calendars are verified on a weekly basis to minimize risks of an event being missed.
  • Expert Judgment - If the UBS Index Group is required or entitled to make a determination in relation to an Index pursuant to the Methodology and that determination involves the exercise of Expert Judgment, then the UBS Index Group will exercise that Expert Judgment (i) in good faith and in a commercially reasonable manner and (ii) in such manner as to ensure, as far as commercially reasonable, consistency in the approach it adopts with regard to the exercise of such Expert Judgment between Index determinations, including having regard to previous occasions on which the UBS Index Group has exercised that Expert Judgment in relation to the relevant Index.
  • If the UBS Index Group requires a Submission from a Submitter to determine the level of an Index and the Submitter has discretion as to the data to be provided, then the UBS Index Group will provide the Submitter with prescribed criteria to be followed by such Submitter in exercising such discretion in order to ensure, as far as commercially reasonable, consistency in the approach the Submitter adopts with regard to the exercise of discretion. Hierarchy of data inputs - The data inputs to be used to determine the level in respect of any Index, are as specified in the Methodology for the Index. The UBS approval process in respect of any Index takes into account compliance with a Hierarchy of Data Statement issued by UBS, as set out in Schedule 3 hereto.
  • Publication - Indices are published to data vendors (e.g. Bloomberg, Reuters) from the IT calculation systems. For Indices that are subject to pre-publication verification, publication occurs once Indices have been verified, and for Indices subject to post-publication verification, the prior-day publication is verified to ensure that the published level matches the verified Index level.
  • Index changes, transition and termination - Changes to an Index, e.g. due to changes in Methodology, will be made upon receiving advice and approval by the UBS Index Group. The change process may also require a Stakeholder consultation that is determined on a case by case basis by the UBS Index Group, depending on whether the change is deemed to be material. Once feedback from Stakeholders is complete, the final process will be reviewed and approved by the Index Oversight Committee, and thereafter a notification published on the UBS Index Website.

    For an Index transition, due its cessation, owing to market structure change, product definition change, or any other condition which makes the Index no longer representative of its intended underlying Interest, the transition process may be subject to a Stakeholder consultation process, where the nature of each process is determined on a case by case basis, depending on use of the Index. Once feedback from Stakeholders is complete, the final process will be reviewed and approved by the Index Oversight Committee, and thereafter a notification published on the UBS Index Website.

    Termination of an Index will require escalation and approval by the Index Oversight Committee. The UBS Index Group will provide Stakeholders with adequate notice of the termination of the Index.

    UBS’s Index Transition Policy is set out in Schedule 2 hereto.
  • Periodic review - On an annual basis, Indices that have been designed to measure a particular underlying Interest will be reviewed by the UBS Index Group to ensure that the Index continues to reflect the underlying Interest, and that the Interest has not diminished or is non-functioning such that it can no longer be used as the basis of a credible Index. Where an Index is to be revised as a result of this review, the revision, including the rationale for the revision, will be published on the UBS Index Website. The result of this periodic review should also be presented to the Index Oversight Committee.
  • Oversight of third parties - Where an activity relating to the Index determination process is undertaken by a third party, the UBS Index Group maintains oversight of the third party by monitoring the activities undertaken by the third party on a periodic basis.

    As of 30th of September 2016, UBS has no Third Parties involved in activities relating to the determination of Indices, e.g. collection of inputs, publication or acting as calculation agent.
  • Training and competency - Staff involved in the Administration process must possess the relevant levels of expertise and knowledge, and must attend relevant trainings as prescribed by UBS's policies and procedures.
  • Whistleblowing and complaints - UBS has an established whistleblowing policy and procedures to deal with genuine concerns that staff may have about suspected breaches within UBS, which may include any potential misconduct or irregularities that may arise from UBS's Administration of Indices. All complaints relating to UBS's Indices are handled in accordance with the complaints handling procedure at www.ubs.com/global/en/index-group/contact-us.html
  • Audits - The audit of UBS's Administration of Indices is considered and undertaken by UBS's Group Internal Audit.
  • Records management - Written records in relation to UBS's Index Administration is kept in accordance with UBS's established policy and procedures on records management.

Definitions and Glossary

Administration - includes all stages and processes involved in the production and dissemination of an Index, including: (a) collecting, analysing and/or processing information or expressions of opinion for the purposes of the determination of an Index; (b) determining an Index through the application of a formula or another method of calculating the information or expressions of opinions provided for that purpose; and (c) dissemination to users, including any review, adjustment and modification to this process.

Administrator - an organization or legal person that controls the creation and operation of the Index Administration process, whether or not it owns intellectual property relating to the Index. In particular, it has responsibility for all stages of the Index Administration process, including (a) the calculation of the Index; (b) determining and applying the Index Methodology; and (c) disseminating the Index.

Expert Judgment - refers to the exercise of discretion by an Index Administrator or Submitter with respect to use of data in determining an Index. Expert Judgment includes extrapolating values from prior or related transactions, adjusting values for factors that might influence the quality of data such as market events or impairment of a buyer or seller’s credit quality, or weighting firm bids or offers greater than a particular concluded transaction.

Index -is defined, in line with the definition of 'Benchmark' used in the IOSCO Principles, as a rate, price or valuation used either as a measure of the performance of a set of financial instruments or as an economical, statistical indicator tracked since a chosen start date, and which is:

  • Specifically referred to as an 'index' (for example, the "UBS ABC Index") or an Indicator that has been developed or is to be developed (either in whole or in part) by UBS;
  • Made available to users, whether free of charge or for payment;
  • Calculated periodically, entirely or partially by the application of a formula or another method of calculation to, or an assessment of, the value of one or more underlying interest; and
  • Used for reference for purposes that include one or more of the following:
    • Determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments;
    • Determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument; and / or
    • Measuring the performance of a financial instrument.

Index Manual - A document describing the key features and methodology of the Index.

Interest - refers to any physical commodity, currency or other tangible goods, intangibles (such as an equity security, bond, futures contract, swap or option, interest rates, another index, including indices that track the performance of a rule-based trading strategy or the volatility of a financial instrument or another index), any financial instrument on an Interest, which is intended to be measured by an Index. Depending on the context, it is assumed that the word “Interest” also includes the market for such Interest.

IOSCO -International Organization of Securities Commissions.

IOSCO Principles - Principles as described in IOSCO's "Principles for Benchmark Administration" published on 17 July 2013.

Methodology - the written rules and procedures according to which information is collected and the Index is determined.

Regulated Market or Exchange - a market or exchange that is regulated and / or supervised by a Regulatory Authority.

Regulatory Authority - a governmental or statutory body (not being a Self-Regulatory Organization) with responsibility for securities and/or commodities and futures regulation.

Self-Regulatory Organisation” or “SRO” - an organisation that has been given the power or responsibility to regulate itself, whose rules are subject to meaningful sanctions regarding any part of the securities market or industry. This authority may be derived from a statutory delegation of power to a non-governmental entity or through a contract between an SRO and its members as is authorised or recognised by the governmental regulator.

Stakeholder - refers to Subscribers and other persons and entities who own contracts and financial instruments that reference an Index.

Submission(s) - means prices, estimates, values, rates or other information that is provided by a Submitter to the UBS Index Group for the purposes of determining an Index, excluding data sourced from Regulated Markets or Exchanges with mandatory post-trade transparency requirements.

Submitter - a legal person providing information to an Administrator or any calculation agent required in connection with the determination of an Index.

Subscriber - a person or entity that purchases Index determination services from an Administrator.

UBS Index Website - www.ubs.com/indexgroup

SCHEDULE 1

Main features of the Index Oversight Committee Terms of Reference

1. Preamble

The UBS Index Group is part of the Compliance & Operational Risk Control department within UBS Group Risk and acts as the Index Administrator, where such role is to be performed by UBS for an Index (referred to as "UBS Index" or "UBS Indices" hereafter, and the terms "Index" and "Administrator" are defined in the Index Policy). The UBS Index Group has primary responsibility for all aspects of the determination, distribution and dissemination processes for UBS Indices.

The UBS Index Oversight Committee ('the Index Oversight Committee') is an oversight function established to review and provide challenge on UBS Indices’ development, determination and dissemination processes that are performed by the UBS Index Group.

The Index Oversight Committee Terms of Reference enter into force on 17 July 2014 and should be reviewed by the Index Oversight Committee at least annually thereafter.

2. Goals and responsibilities

  • Oversight of UBS Indices design:
    • Review and challenge the results of the UBS Index Group's periodic review of UBS Indices;
    • Review management information prepared by the UBS Index Group to allow the Index Oversight Committee to be informed about issues and risks relating to UBS Indices;
    • Oversee changes to UBS Indices Methodology that have been approved by the UBS Index Group. Approve changes to UBS Indices Methodology which are deemed "material" by the UBS Index Group. For "material" changes the Index Oversight Committee shall authorise or may request the UBS Index Group to undertake a consultation with Stakeholders;
    • Review and approve termination of UBS Indices, including guidelines that set out how the UBS Index Group should consult with Stakeholders about such termination; and
    • Approve, or reject, the UBS Index Group's proposal to launch a new UBS Index where a material conflict of interest is identified during the UBS Index development process.
  • Oversight of the integrity of UBS Indices determination processes and the UBS Indices Control Framework as implemented by the UBS Index Group:
    • Oversee the management and operation of UBS Indices by the UBS Index Group, including activities related to Index determination undertaken by a third party;
    • Consider the results of audits undertaken by Group Internal Audit or external auditors, and follow-up on the implementation of remedial actions highlighted in the results of these audits;
    • Oversee any exercise of Expert Judgment by the UBS Index Group to ensure published Methodologies have been followed (the term "Expert Judgment" is defined in the Index Policy); and
    • Oversee changes made by the UBS Index Group to the UBS Indices Control Framework and to approve any proposed exceptions to the Index Policy.
  • Review and assess adequacy of the UBS Index Group, considering whether the team is adequately and appropriately staffed, whether the team is adequately trained and have the relevant expertise, and its adherence to segregation of duties in the design and operating of controls within the UBS Index Group.

It is the responsibility of the Index Oversight Committee to govern the Index development process, in accordance with internal policies.

3. Criteria to select members of the Index Oversight Committee

The following criteria should guide the selection of a Permanent Member (as described below) of the Index Oversight Committee, including the selection of the Permanent Members' delegate ('the Delegate Member'):

  • A UBS employee of Executive Director level or above (for Delegate Member, Director or above);
  • Collectively amongst the members, possess sufficient level of knowledge and / or experience and expertise in relation to Indices, in order to understand and opine on the matters presented to the Index Oversight Committee; and
  • Where any existing or potential conflicts of interest arise, relevant Members of the Index Oversight Committee may provide information solely on an advisory basis to the Index Oversight Committee.
    The Permanent Members and Delegate Members, together, may be referred to as 'Members of the Committee'.

4. Chairperson and Membership

The Chair of the Index Oversight Committee is Inderpal Gujral.

The Chair, amongst other things, determines the membership of the Index Oversight Committee, guided by the criteria in Section 3 above, sets meeting dates and the Index Oversight Committee agenda, leads the meetings, and provides high quality and timely decision making.

The Index Oversight Committee is comprised of representatives from Research, Equity Structuring and Commodities departments of the Investment Bank, Asset Management, Wealth Management and control functions such as Legal and Compliance & Operational Risk Control.

The information about Permanent Members of the Index Oversight Committee is available upon request from the UBS Index Group subject to such request complying with the internal policies and external regulations.

Appointment, replacement or terminations of Members of the Index Oversight Committee shall be approved by the Index Oversight Committee guided by the criteria in Section 3 above.

5. Meeting Schedule, Minutes Reporting and Escalation

The Index Oversight Committee will hold Ordinary Meetings on a quarterly basis, at which it discusses and considers potential changes to the methodology and maintenance of UBS Indices, which should at least include the matters described in Section 2 above.

In addition to Ordinary Meetings, the Index Oversight Committee may convene Extraordinary Meetings at the request of any Member of the Index Oversight Committee to discuss certain extraordinary circumstances that may occur with respect to an Index (any such circumstances a "Material Event").

Where a Material Event has occurred and an Extraordinary Meeting is convened, the Index Oversight Committee can decide to take any appropriate action in respect of an Index, as is provided for in the relevant Index Manual. To the extent that a Material Event occurs with respect to an Index and the relevant Index Manual is inconclusive or not (sufficiently) prescriptive about the possible consequence of a Material Event occurring, the Index Oversight Committee may take action that it deems reasonable and appropriate to address the occurrence of such Material Event.

6. Quorum

The quorum for Ordinary Meetings and Extraordinary Meetings of the Index Oversight Committee is four Permanent or Delegate Members, including the Chair or its delegate, and in addition, should include representatives from Legal, C&ORC and the UBS Index Group.

7. Implementation of the Index Committee action points

Any agreed action points arising from the Index Oversight Committee meeting should be completed in a timely fashion, prior to the agreed deadline. An audit trail of such closure shall be submitted to and stored by the UBS Index Group.

8. Delegate Members

The information about Delegate Members of the Index Oversight Committee is available upon request from the UBS Index Group subject to such request complying with the internal policies and external regulations.

9. Index sponsored by a third party

Where an Index is sponsored by a third party, a delegated committee may be created by the Index Oversight Committee to fulfil either part of, or all of the responsibilities described in Section 2. The delegated committee will report to this Index Oversight Committee on a bi-annual basis.

SCHEDULE 2

UBS Transition Policy

For an Index transition, due its cessation, owing to market structure change, product definition change, or any other condition which makes the Index no longer representative of its intended underlying Interest, the transition process will be subject to a consultation with Stakeholders. The nature of each process is determined on a case by case basis, depending on use of the Index, where the list of possible actions to be documented may be based on examples from Principle 13 of the IOSCO Principles. Once feedback from Stakeholders is complete, the final process shall be reviewed and approved by the Index Oversight Committee, and thereafter a notification published on the UBS Index Website.

Termination of an Index must be reported and approved by the Index Oversight Committee.

The UBS Index Group will provide all relevant internal and external parties (including the Index Oversight Committee) with notice of the termination of the Index.

SCHEDULE 3

Hierarchy of Data Statement

For each new Index, the Index Owner shall provide information in the Index Development Template to explain the following Index features and to satisfy audit trail requirements:

a)     Does the Index result in an accurate and reliable representation of the economic realities of the Interest it seeks to measure?

b)     Have any factors that might result in a distortion of the Index level been eliminated?

c)     Does the investment universe adequately represent the Interest?

d)     Is there sufficient size and liquidity in the underlying market to provide observable and transparent pricing?

e)     Is the relative size of the underlying market sufficient for the intended use of the Index?

f)      Is the distribution of trading in the underlying instruments diverse, i.e. absence of market concentration?

g)     Is the Index designed to continue to reflect changes in the underlying market?

h)     Detail each data input used to construct the Enhanced Index and its precise source?

i)      Is the data used to construct the Index based on prices/values determined by competitive forces of supply and demand?

j)      Is the data anchored by observable market transactions entered into at arm's length between buyers and sellers in the market?

k)     Is any data input based on Expert Judgement or perceptions-based, and why was such source chosen?

l)      Is any data input dependent on UBS internal pricing sources?

m)   What alternative data sources exist and why was the selected data source chosen?

n)   If a data source is not available, what fall back should be used? This fall back may include not publishing the Index level. Where possible, for example in respect of data from Regulated Exchanges, data inputs into the Index calculation process.