UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934
Date: November 30, 2015
UBS Group AG
Commission File Number: 1-36764
UBS AG
Commission File Number: 1-15060
(Registrants' Names)
Bahnhofstrasse 45, Zurich, Switzerland, and
Aeschenvorstadt 1, Basel, Switzerland
(Address of principal executive office)
Indicate by check mark whether the registrant files or
will file annual reports under cover of Form 20‑F or Form 40-F.
Form 20-F x
Form 40-F o
This Form 6-K consists of updated risk
factor disclosure of UBS Group AG and UBS AG, which appears immediately
following this page.
Risk Factors
Certain risks, including
those described below, may impact our ability to execute our strategy and
affect our business activities, financial condition, results of operations and
prospects. Because the business of a broad-based international financial
services firm such as UBS is inherently exposed to risks that become apparent
only with the benefit of hindsight, risks of which we are not presently aware
or which we currently do not consider to be material could also impact our
ability to execute our strategy and affect our business activities, financial
condition, results of operations and prospects. The order of presentation of
the risk factors below does not indicate the likelihood of their occurrence or
the potential magnitude of their consequences.
Fluctuation in foreign
exchange rates and continuing low or negative interest rates may have a
detrimental effect on our capital strength, our liquidity and funding position,
and our profitability
On 15 January 2015, the Swiss National Bank
("SNB") discontinued the minimum targeted exchange rate for
the Swiss franc versus the euro, which had been in place since September 2011.
At the same time, the SNB lowered the interest rate on deposit account balances
at the SNB that exceed a given exemption threshold by 50 basis points to
negative 0.75 % It also moved the target range for three-month LIBOR to
between negative 1.25% and negative 0.25%, (previously negative 0.75% to
positive 0.25%). These decisions resulted in an immediate, considerable
strengthening of the Swiss franc against the euro, US dollar, British pound,
Japanese yen and several other currencies, as well as a reduction in Swiss
franc interest rates. The longer-term rate of the Swiss franc against these
other currencies is not certain, nor is the future direction of Swiss franc
interest rates. Several other central banks have likewise adopted a
negative-interest-rate policy.
A significant portion of the equity of our
foreign operations is denominated in US dollars, euro, British pounds and other
foreign currencies.
Similarly, a significant portion of our RWA
are denominated in US dollars, euros, British pounds and other foreign
currencies. Group Asset and Liability Management is mandated with the task of
minimizing adverse effects from changes in currency rates on our capital
ratios. The Group Asset and Liability Management Committee, a committee of our
Group Executive Board, can adjust the currency mix in capital, within limits
set by the Board of Directors, to balance the effect of foreign exchange
movements on the fully applied CET1 capital and total capital ratio. As a
result, the proportion of RWA denominated in foreign currencies outweighs the
capital in these currencies, and any further significant appreciation of the
Swiss franc against these currencies would be expected to benefit our Basel III
capital ratios, while a depreciation of the Swiss franc would be expected to
have a detrimental effect.
The portion of our operating income
denominated in non-Swiss franc currencies is greater than the portion of
operating expenses denominated in non-Swiss franc currencies. Therefore,
appreciation of the Swiss franc against other currencies generally has an
adverse effect on our earnings in the absence of any mitigating actions.
In addition to the estimated effects from
changes in foreign currency exchange rates, our equity and capital are affected
by changes in interest rates. In particular, the calculation of our net
defined benefit assets and liabilities is sensitive to the discount rate
applied. Any further reduction in interest rates would lower the discount
rates and result in an increase in pension plan deficits due to the long
duration of corresponding liabilities. This would lead to a corresponding
reduction in our equity and fully applied CET1 capital. Also, a continuing low
or negative interest rate environment would have an adverse effect on the
re-pricing of UBS's assets and liabilities, and would significantly impact the
net interest income generated from our wealth management and retail and
corporate businesses. The low or negative interest rate environment may affect
customer behavior and hence the overall balance sheet structure. Mitigating
actions that we have taken, or may take in the future, to counteract these
effects, such as the introduction of selective deposit fees or minimum lending
rates, could result in the loss of customer deposits, a key source of our
funding, and / or a declining market share in our domestic lending portfolio.
We are closely monitoring developments in
the Swiss economy. We expect the stronger Swiss franc may have a negative
effect on the Swiss economy and on exporters in particular, which could
adversely affect some of the counterparties within our domestic lending
portfolio and lead to an increase in the level of credit loss expenses in
future periods from the low levels recently observed.
Regulatory and legal changes may adversely
affect our business and our ability to execute our strategic plans
Fundamental
changes in the laws and regulations affecting financial institutions can have a
material and adverse effect on our business. In the wake of the 2007–2009
financial crisis and the following instability in global financial markets,
regulators and legislators have proposed, have adopted, or are actively
considering, a wide range of changes to these laws and regulations. These
measures are generally designed to address the perceived causes of the crisis
and to limit the systemic risks posed by major financial institutions. They
include the following:
·
significantly higher
regulatory capital requirements;
·
changes in the
definition and calculation of regulatory capital;
·
changes in the
calculation of RWA, including potential requirements to calculate or disclose
RWA using less risk-sensitive standardized approaches rather than the internal
models approach UBS currently uses as required by FINMA under the Basel III
framework;
·
changes in the
calculation of the leverage ratio or the introduction of a more demanding
leverage ratio;
·
new or significantly
enhanced liquidity or funding requirements;
·
requirements to
maintain liquidity and capital in jurisdictions in which activities are
conducted and booked;
·
limitations on
principal trading and other activities;
·
new licensing,
registration and compliance regimes;
·
limitations on risk
concentrations and maximum levels of risk;
·
taxes and government
levies that would effectively limit balance sheet growth or reduce the
profitability of trading and other activities;
·
cross-border market
access restrictions;
·
a variety of measures
constraining, taxing or imposing additional requirements relating to
compensation;
·
adoption of new
liquidation regimes intended to prioritize the preservation of systemically
significant functions;
·
requirements to
maintain loss-absorbing capital or debt instruments subject to write down as
part of recovery measures or a resolution of the Group or a Group company,
including requirements for subsidiaries to maintain such instruments;
·
requirements to adopt
structural and other changes designed to reduce systemic risk and to make major
financial institutions easier to manage, restructure, disassemble or liquidate,
including ring-fencing certain activities and operations within separate legal
entities; and
·
requirements to adopt
risk and other governance structures at a local jurisdiction level.
Many of these measures have been adopted
and their implementation has had a material effect on our business. Others
will be implemented over the next several years; some are subject to
legislative action or to further rulemaking by regulatory authorities before
final implementation. As a result, there remains a high level of uncertainty
regarding a number of the measures referred to above, including whether (or the
form in which) they will be adopted, the timing and content of implementing
regulations and interpretations and / or the dates of their effectiveness. The
implementation of such measures and further, more restrictive changes may
materially affect our business and ability to execute our strategic plans.
Notwithstanding attempts by regulators to
coordinate their efforts, the measures adopted or proposed differ significantly
across the major jurisdictions, making it increasingly difficult to manage a
global institution. The absence of a coordinated approach, moreover,
disadvantages institutions headquartered in jurisdictions that impose
relatively more stringent standards. Switzerland has adopted capital and
liquidity requirements for its major international banks that are among the
strictest of the major financial centers. This could disadvantage Swiss banks,
such as UBS, when they compete with peer financial institutions subject to more
lenient regulation or with unregulated non-bank competitors.
Regulatory and legislative
changes in Switzerland
Swiss regulatory changes have generally
proceeded more quickly in capital, liquidity and other areas than those in
other major jurisdictions, FINMA, the SNB and the Swiss Federal Council are
implementing requirements that are significantly more onerous and restrictive
for major Swiss banks, such as UBS, than those adopted or proposed by
regulatory authorities in other major global financial centres. In December
2014, a group of senior experts representing the private sector, authorities
and academia (the Brunetti group) appointed by the Swiss Federal Council
published recommendations on, among other things, safeguarding systemic
stability and too big to fail ("TBTF"), including with respect
to the calculation of RWA, higher leverage ratio and withdrawing regulatory
waivers at the level of the entity holding systemically relevant functions.
Based on the Brunetti group report, the Swiss Federal Council conducted a
review of the Swiss TBTF law, resulting in the Swiss TBTF Proposal. The Swiss
TBTF Proposal would make the Swiss capital regime by far the most demanding in
the world and in several areas anticipates adoption of
international
standards.
Capital regulation: A revised banking ordinance and capital
adequacy ordinance implementing the Basel III capital standards and the Swiss
TBTF law became effective on 1 January 2013. As a systemically relevant Swiss
bank, we are subject to base capital requirements, as well as a progressive
buffer that scales with our total exposure (a metric that is based on our
balance sheet size) and market share in Switzerland. In addition, Swiss
governmental authorities have the authority to impose an additional
countercyclical buffer capital requirement of up to 2.5% of RWA. This
authority has been exercised to impose an additional capital charge of 2% in
respect of RWA arising from Swiss residential mortgage loans. FINMA has
further required banks using the internal ratings-based ("IRB")
approach to use a bank-specific multiplier when calculating RWA for
owner-occupied Swiss residential mortgages, which is being phased in through
2019. Moreover, FINMA has extended the multiplier approach to Swiss
income-producing residential and commercial real estate ("IPRE"),
as well as to credit exposure in the Basel II asset class "corporate"
for the Investment Bank. The multiplier for IPRE applies from the first
quarter of 2015, and the multiplier for Investment Bank corporates from the
second quarter of 2015, and they will increase over time and reach full
implementation by December 2018. Assuming no change in portfolio size or other
characteristics, we expect these multipliers to result in an aggregate increase
in RWA of CHF 5 to 6 billion each year from 2015 through 2018 and CHF 2 billion
in 2019. We understand that the new requirements have been introduced against
the background of the Basel Committee on Banking Supervision ("BCBS")
considering substantive changes to the standardized approach and a capital
requirement floor based on the standardized approach.
In October 2015, the Swiss Federal Council
published the cornerstones of the proposed revised Swiss TBTF regime, including
further strengthened capital requirements for Swiss SRB. The proposal
represents the intended implementation of the recommendation of the Brunetti
commission. For Swiss SRB which operate internationally, the proposal would
revise existing Swiss SRB capital requirements as a new going concern
requirement and would establish an additional gone concern capital requirement,
which, together with the going concern requirement, represents the TLAC
required for Swiss SRB. The proposed going concern capital requirements
consist of a basic requirement for all Swiss SRB which is set at 4.5% of LRD
and 12.9% of RWA. On top of that, a progressive buffer would be added
reflecting the degree of systemic importance. Our progressive buffer is
expected to be 0.5% of LRD and 1.4% of RWA resulting in a total going concern
capital requirement of 5% of LRD and 14.3% of RWA. The going concern leverage
ratio proposal would require a minimum CET1 capital requirement of 3.5% of LRD
and up to 1.5% in high-trigger additional Tier 1 ("AT1")
capital instruments. The minimum CET1 capital requirement will remain
unchanged at 10% of RWA, and the balance of the RWA-based capital requirement,
i.e. 4.3%, may be met with high-trigger AT1 instruments. The gone concern
capital would be 5.0% of LRD and 14.3% of RWA for internationally active Swiss
SRB and may be met with senior debt that is TLAC eligible. Banks would be
eligible for a reduction of the gone concern capital requirement if they
demonstrate improved resolvability. The proposal envisages transitional
arrangements for outstanding low-trigger AT1 and tier 2 instruments to qualify
as going concern capital until maturity or first call date and at least until
the end of 2019. Any high and low-trigger tier 2 capital remaining after 2019
will qualify as gone concern capital while low-trigger tier 1 capital
instruments will continue to qualify as going concern capital.
The BCBS has issued far-reaching proposals
(i) on revising the standardized approach to credit risk, e.g., by relying less
on external credit ratings, reducing the scope of national discretion and
strengthening the link between the standardized and the IRB approach, (ii) on
mandatory disclosure of RWA based on the standardized approach and (iii) on the
design of a capital floor framework. If adopted by the BCBS and implemented
into Swiss regulation, implementation of disclosure or capital calculations
based on the standardized approach would result in significant implementation
costs to us. In addition, a capital standard or floor based on the
standardized approach would likely be less risk sensitive and would likely
result in higher capital requirements.
In addition, we have mutually agreed with
FINMA to an incremental operational risk capital requirement to be held against
litigation, regulatory and similar matters and other contingent liabilities,
which added CHF 13.3 billion to our RWA as of 30 September 2015. There can be
no assurance that we will not be subject to increases in capital requirements
in the future either from the imposition of additional requirements or changes
in the calculation of RWA or other components of the existing minimum capital
requirement.
Liquidity and funding: As a Swiss SRB, we are required to
maintain a Liquidity Coverage Ratio ("LCR") of high-quality
liquid assets to estimated stressed short-term funding outflows, and will be
required to maintain a Net Stable Funding Ratio ("NSFR"), both
of which are intended to ensure that we are not overly reliant on short-term
funding and that we have sufficient long-term funding for illiquid assets.
These requirements, together with liquidity
requirements imposed by other jurisdictions in which we operate, require us to
maintain
substantially higher levels of overall
liquidity than was previously the case. Increased capital requirements and
higher liquidity requirements make certain lines of business less attractive
and may reduce our overall ability to generate profits. The LCR and NSFR
calculations make assumptions about the relative likelihood and amount of
outflows of funding and available sources of additional funding in a market or
firm-specific stress situation. There can be no assurance that in an actual
stress situation our funding outflows would not exceed the assumed amounts.
Resolution planning and resolvability: The revised Swiss banking act and capital
adequacy ordinances provide FINMA with additional powers to intervene to
prevent a failure or resolve a failing financial institution. These measures
may be triggered when certain thresholds are breached and permit the exercise
of considerable discretion by FINMA in determining whether, when or in what
manner to exercise such powers. In case of a threatened insolvency, FINMA may
impose more onerous requirements on us, including restrictions on the payment
of dividends and interest. Although the actions that FINMA may take in such circumstances
are not yet defined, we could be required directly or indirectly, for example,
to alter our legal structure (e.g., to separate lines of business into
dedicated entities, with limitations on intra-group funding and certain
guarantees), or to further reduce business risk levels in some manner. The
Swiss banking act also provides FINMA with the ability to extinguish or convert
to common equity the liabilities of a bank in connection with its resolution.
Swiss TBTF requirements require Swiss SRB,
including UBS, to put in place viable emergency plans to preserve the operation
of systemically important functions despite a failure of the institution, to
the extent that such activities are not sufficiently separated in advance. The
current Swiss TBTF law provides for the possibility of a limited reduction of
capital requirements for Swiss SRB that adopt measures to reduce resolvability
risk beyond what is legally required. Such actions include changes the legal
structure of a bank group in a manner that would insulate parts of the group to
exposure from risks arising from other parts of the group thereby making it
easier to dispose of certain parts of the group in a recovery scenario, to
liquidate or dispose of certain parts of the group in a resolution scenario or
to execute a debt bail-in. The proposed revisions to the Swiss TBTF
requirements also contemplate a limited reduction of the proposed TLAC
requirement based on improvements to resolvability. However, there is no
certainty with respect to timing or size of a potential capital rebate.
We have undertaken or
announced a series of measures to improve our resolvability:
·
UBS Group AG completed
an exchange offer for the shares of UBS AG and a procedure under the Swiss
Stock Exchange and Securities Trading Act to squeeze out minority shareholders
of UBS AG and as of 1 September 2015, owns all of the outstanding shares of UBS
AG and is the holding company for the UBS Group.
·
In June 2015, UBS AG
transferred its Retail & Corporate and Wealth Management business booked in
Switzerland to UBS Switzerland AG, a banking subsidiary of UBS AG in
Switzerland.
·
In the UK, we completed
the implementation of a more self-sufficient business and operating model for
UBS Limited, under which UBS Limited bears and retains a larger proportion of
the risk and reward in its business activities.
·
In the third quarter,
we established UBS Business Solutions AG as a direct subsidiary of UBS Group
AG, to act as the Group service company. We expect to transfer the ownership
of the majority of our existing service subsidiaries to this entity. We expect
that the transfer of shared service and support functions into the service
company structure will be implemented in a staged approach through 2018. The
purpose of the service company structure is to improve the resolvability of the
Group by enabling us to maintain operational continuity of critical services
should a recovery or resolution event occur.
·
UBS AG has established
a new subsidiary, UBS Americas Holding LLC, which we intend to designate as our
intermediate holding company for our US subsidiaries prior to the 1 July 2016
deadline under new rules for foreign banks in the US pursuant to the
Dodd-Frank. During the third quarter of 2015, UBS AG contributed its equity
participation in the principal US operating subsidiaries to UBS Americas
Holding LLC to meet the requirement under Dodd-Frank that the intermediate
holding company own all of UBS's US operations, except branches of UBS AG.
·
We have established a
new subsidiary of UBS AG, UBS Asset Management AG, into which we expect to
transfer the majority of the operating subsidiaries of Asset Management during
2016. We continue to consider further changes to the legal entities used by
Asset Management, including the transfer of operations conducted by UBS AG in
Switzerland into a subsidiary of UBS Asset Management AG.
We continue to consider further changes to
the Group's legal structure in response to capital and other regulatory
requirements and in order to obtain any reduction in capital requirements for
which the Group may be eligible. Such changes may include the transfer of
operating subsidiaries of UBS AG to become direct subsidiaries of UBS Group AG,
consolidation of operating subsidiaries in the
European
Union, and adjustments to the booking entity or location of products and
services. These structural changes are being discussed on an ongoing basis
with FINMA and other regulatory authorities and remain subject to a number of
uncertainties that may affect their feasibility, scope or timing.
Movement of businesses to a new subsidiary
("subsidiarization") will require significant time and
resources to implement. Subsidiarization in Switzerland and elsewhere may
create operational, capital, liquidity, funding and tax inefficiencies and
increase our and counterparties' credit risk. Refer to "Regulatory and
legislative changes outside Switzerland" for a description of other regulatory
and legislative developments that may affect these decisions and further
discussion of these risks. There can be no assurance that the execution of the
changes we have undertaken, planned or may implement in the future will result
in a material reduction in the progressive capital buffer as permitted under
the Swiss TBTF law or that these changes will satisfy existing or future
requirements for resolvability or mandatory structural change in banking
organizations.
Market regulation: The Swiss Parliament adopted in June 2015
new regulation of the financial market infrastructure in Switzerland which is
expected to become effective in 2016 and mandates the clearing of OTC
derivatives with a central counterparty, among other things. These laws may
have a material impact on the market infrastructure that we use, available
platforms, collateral management and the way we interact with clients. In
addition, these initiatives may cause us to incur material implementation
costs.
Regulatory and legislative
changes outside Switzerland
Regulatory and legislative changes in other
locations in which it operates may subject us to a wide range of new
restrictions both in individual jurisdictions and, in some cases, globally.
Banking structure and activity limitations: Some of these regulatory and legislative
changes may subject us to requirements to move activities from UBS AG branches
into subsidiaries. Such "subsidiarization" can create operational,
capital and tax inefficiencies, increase our aggregate credit exposure to
counterparties as they transact with multiple entities within our Group, expose
our businesses to higher local capital requirements, to local liquidity and
funding requirements, and potentially give rise to client and counterparty
concerns about the credit quality of individual subsidiaries. Such changes
could also negatively affect our funding model and severely limit our booking
flexibility.
For example, we have significant operations
in the UK and currently use UBS AG's London branch as a global booking center
for many types of products. We have been required by the Prudential Regulatory
Authority ("PRA") and by FINMA to increase very substantially
the capitalization of our UK bank subsidiary, UBS Limited, and may be required
to change our booking practices to reduce or even eliminate its utilization of
UBS AG's London branch as a global booking centre for the ongoing business of
the Investment Bank. In addition, the UK Independent Commission on Banking has
recommended structural and non-structural reforms of the banking sector, most
of which have been endorsed by the UK government and implemented in the
Financial Services (Banking Reform) Act. Key proposed measures include the
ring-fencing of retail banking activities in the UK (which we do not expect to
affect us directly), additional common equity tier 1 capital requirements of up
to 3% of RWA for retail banks, and the issuance by UK banks of debt subject to
bail-in provisions. Furthermore, the European Commission published its proposal
for a "Regulation on bank structural reform" in January 2014. The
objectives of the Regulation center on the reduction of the systemic impact of
banks and addressing the too big to fail problem. Proposals include the
separation of retail banking activities from wholesale banking activities
together with a ban on proprietary trading and lending to hedge funds and
private equity funds. Significant divergence in views on the scope and
application of these proposals persists at the EU level with full potential
political agreement not likely before early 2016. Issues that remain the
subject of debate include how prescriptive to be as to separation requirements
and which trading activities entities can and cannot be engaged in. The
applicability and implications of such changes to branches and subsidiaries of
foreign banks are also not yet entirely clear, but they could have a material
adverse effect on our businesses located or booked in the UK and other EU
locations.
In February 2014, the Federal Reserve Board
issued final rules for foreign banking organizations ("FBO")
operating in the US (under Section 165 of Dodd-Frank) that include the
following: (i) a requirement for FBO with more than USD 50 billion of US
non-branch assets to establish an intermediate holding company ("IHC")
to hold all US subsidiary operations, (ii) risk-based capital and leverage
requirements for the IHC, (iii) liquidity requirements, including a 30-day
onshore liquidity requirement for the IHC, (iv) risk management requirements
including the establishment of a risk committee and the appointment of a US
chief risk office, (v) stress test and capital planning requirements and (vi) a
debt-to-equity limit for institutions that pose "a grave threat" to
US financial stability. Requirements differ based on the overall size of the
foreign banking organization and the amount of its US-based assets. We expect
that we will be subject to the most stringent requirements based on our current
operations. We will have to establish an
IHC by 1 July
2016 and meet many of the new requirements. The IHC will not need to comply
with the US leverage ratio until 1 January 2018.
In October 2015, the Federal Reserve Board
proposed long-term debt and TLAC requirements for US globally systemically
important bank holding companies and US IHC that are controlled by non-US
globally systemically important banks. Under the proposed regulation, covered
IHC, including our IHC, would be required to have TLAC held by a non-US parent
entity (internal TLAC) equal to the greatest of: (i) 16% or 18% of RWA, (ii) if
the IHC is subject to the US supplementary leverage ratio, 6% or 6.75% of total
leverage exposure and (iii) 8% or 9% of average total consolidated assets. The
lower percentages would apply to an IHC if the home country resolution
authority for the IHC's parent banking organization certifies to the Federal
Reserve Board that its resolution strategy for the parent banking organization
does not involve the IHC entering a resolution proceeding in the US. FINMA has
adopted a single point of entry resolution strategy and we anticipate that we
will qualify for the lower internal TLAC requirement. The TLAC requirement must
be met with tier 1 capital and eligible long-term debt, including tier 2
capital instruments that meet requirements for eligible long-term debt, that is
issued directly by the covered IHC to a foreign entity that controls the
covered IHC. An IHC also would be required to maintain outstanding eligible
long-term debt held by a non-US parent entity equal to the greatest of: (i) 7%
of RWA, (ii) if the IHC is subject to the US supplementary leverage ratio, 3%
of total leverage exposure and (iii) 4% of average total consolidated assets.
In addition, IHC would be required to maintain an internal TLAC buffer of 2.5%
of RWA plus any countercyclical buffer. Failure to maintain the buffer would
trigger restrictions on distribution of dividends and discretionary variable
compensation payments. If adopted as proposed, these requirements would apply
as of 1 January 2019, with the RWA-based component of the TLAC requirement
phased in until 1 January 2022.
In the US, regulations implementing the
"Volcker Rule" became effective in July 2015. In general, the
Volcker Rule prohibits any banking entity from engaging in proprietary trading
and from owning interests in hedge funds and other private fund vehicles. The
Volcker Rule also broadly limits investments and other transactional activities
between a bank and funds that the bank has sponsored or with which the bank has
certain other relationships. The Volcker Rule permits us and other non-US
banking entities to engage in certain activities that would otherwise be
prohibited to the extent that they are conducted outside the US and certain
other conditions are met. We have established a global compliance and
reporting framework to ensure compliance with the Volcker Rule and the
available exemptions. The Volcker Rule could also have a substantial impact on
market liquidity and the economics of market-making activities.
OTC derivatives regulation: In 2009, the G20 countries committed to
require all standardized over-the-counter ("OTC") derivative
contracts to be traded on exchanges or trading facilities and cleared through
central counterparties by the end of 2012. This commitment is being
implemented through Dodd-Frank in the US and corresponding legislation in the
EU, Switzerland – where the new regulation of the financial market
infrastructure in Switzerland, which is expected to become effective in 2016
and mandates, among other things, the clearing of OTC derivatives via a central
counterparty – and other jurisdictions, and has and will continue to have a
significant effect on UBS's OTC derivatives business, which is conducted
primarily in the Investment Bank. For example, we expect that, as a rule, the
shift of OTC derivatives trading to a central clearing model will tend to
reduce profit margins in these products, although some market participants may
be able to offset this effect with higher trading volumes in commoditized
products. Although we are preparing for these thematic market changes, the
changes are likely to reduce the revenue potential of certain lines of business
for market participants generally, and we may be adversely affected.
These mandatory clearing requirements will
be supplemented by mandatory requirements to trade such clearable instruments
on regulated venues under the forthcoming Markets in Financial Instruments
Directive ("MiFID II") and the Markets in Financial
Instruments Regulation ("MiFIR"). These two pieces of
legislation, together with the more detailed implementing measures, due to take
effect in early 2017, have the potential to bring about a major change to many
aspects of the way financial services are provided in and into the European
Economic Area. All areas of the provision of financial services are impacted
across all client types. Some notable areas covered include increased pre and
post-trade transparency, particularly into the area of fixed income products;
further restrictions on the provision of inducements; the introduction of a new
discretionary trading venue with the aim of regulating broker crossing
networks; trading controls for algorithmic trading activities; increased
conduct of business requirements and strengthened supervisory powers which
include powers for authorities to ban products or services in particular
situations. We will not know the full effect of this legislation until the
details of the implementing legislation and national implementation (where applicable)
are completed. We expect that this legislation will necessitate changes in
business models and procedures in a number of areas. This will likely entail
the expenditure of significant time and resources on an ongoing basis and, in
common with some other legislative proposals in this area, may also reduce the
revenue potential of our businesses.
UBS AG
registered as a swap dealer with the Commodity Futures Trading Commission
("CFTC") in the US at the end of 2012, enabling the
continuation of its swaps business with US persons. We expect to register UBS
AG as a security-based swap dealer with the SEC, when its registration is
required. Regulations issued by the CFTC and those proposed by the SEC impose
substantial new requirements on registered swap dealers for clearing, trade
execution, transaction reporting, recordkeeping, risk management and business
conduct. Certain of the CFTC's regulations, including those relating to swap
data reporting, recordkeeping, compliance and supervision, apply to UBS AG
globally. Application of the CFTC's regulations and the SEC's regulations,
when they become effective to UBS AG's or possibly to other Group entities'
swaps business with non-US persons continues to present a substantial
implementation burden, will likely duplicate or conflict with legal
requirements applicable to us outside the US, including in Switzerland, and may
place us at a competitive disadvantage to firms that are not required to
register as swap dealers with the SEC or CFTC.
Regulation of cross-border provision of
financial services: In
many instances, we provide services on a cross-border basis. We are therefore
sensitive to barriers restricting market access for third-country firms. In
particular, efforts in the European Union ("EU") to harmonize
the regime for third-country firms to access the European market may have the
effect of creating new barriers that adversely affect our ability to conduct
business in these jurisdictions from Switzerland. In addition, a number of
jurisdictions are increasingly regulating cross-border activities on the basis
of some notion of comity (e.g., substituted compliance and equivalence
determination). While the issuance of such determinations in particular
jurisdictions may ensure us access to markets in those jurisdictions, a
negative determination in other jurisdictions may negatively influence our
ability to act as a global firm. In addition, as jurisdictions tend to apply
such determinations on a jurisdictional level rather than on an entity level, we
will generally need to rely on jurisdictions' willingness to collaborate.
Resolution and recovery;
bail-in
We are currently required to produce
recovery and resolution plans in the US, the UK, Switzerland and Germany and
are likely to face similar requirements for our operations in other
jurisdictions, including our operations in the EU as a whole as part of the
proposed EU Bank Recovery and Resolution Directive. If a recovery or
resolution plan is determined by the relevant authority to be inadequate or not
credible, relevant regulation may authorize the authority to place limitations
on the scope or size of our business in that jurisdiction, hold higher amounts
of capital or liquidity or change our legal structure or business to remove the
relevant impediments to resolution. Resolution plans may increase the pressure
on us to make structural changes, such as the creation of separate legal
entities, if the resolution plan in any jurisdiction identifies impediments
that are not acceptable to the relevant regulators. Such structural changes
may negatively impact our ability to benefit from synergies between business
units, and if they include the creation of separate legal entities, may have
the other negative consequences mentioned above with respect to
subsidiarization more generally.
See "– Regulatory and legal changes
may adversely affect our business and our ability to execute our strategic
plans – Regulatory and legislative changes in Switzerland"
above in connection with the Swiss TBTF Proposal and the FSB Proposal. The FSB
proposes that a minimum Pillar 1 TLAC requirement be set within the range of
16% to 20% of RWA and at least twice the Basel III tier 1 leverage ratio
requirement. In addition, a number of jurisdictions, including Switzerland, the
US, the UK and the EU, have implemented or are considering implementing changes
that would allow resolution authorities to write down or convert into equity
unsecured debt to execute a bail-in. The scope of bail-in authority and the
legal mechanisms that would be utilized for the purpose are subject to a great
deal of development and interpretation. Regulatory requirements to maintain
minimum TLAC, including potential requirements to maintain TLAC at
subsidiaries, as well as the power of resolution authorities to bail in TLAC
and other debt obligations and uncertainty as to how such powers will be
exercised, may increase the total amount and cost of funding for us.
Possible consequences of
regulatory and legislative developments
Planned and potential regulatory and
legislative developments in Switzerland and in other jurisdictions in which we
have operations may have a material adverse effect on our ability to execute
our strategic plans, on the profitability or viability of certain business
lines globally or in particular locations, and in some cases on our ability to
compete with other financial institutions. The developments have been, and are
likely to continue to be, costly to implement and could also have a negative
impact on our legal structure or business model, potentially generating capital
inefficiencies and affecting our profitability. Finally, the uncertainty
related to, or the implementation of, legislative and regulatory changes may
have a negative impact on our relationships with clients and our success in
attracting client business.
Our
capital strength is important in supporting our strategy, client franchise and
competitive position
Our capital position, as measured by the
fully applied common equity tier 1 and total capital ratios under Swiss SRB
Basel III requirements, is determined by: (i) RWA (credit, non-counterparty
related, market and operational risk positions, measured and risk-weighted
according to regulatory criteria) and (ii) eligible capital. Both RWA and
eligible capital may fluctuate based on a number of factors. RWA are driven by
our business activities and by changes in the risk profile of our exposures, as
well as regulatory requirements. For instance, substantial market volatility,
a widening of credit spreads (a major driver of our value-at-risk), adverse
currency movements, increased counterparty risk, deterioration in the economic
environment, or increased operational risk could result in a rise in RWA. Our
eligible capital would be reduced if we experienced net losses or losses
through other comprehensive income, as determined for the purpose of the
regulatory capital calculation, which may also render it more difficult or more
costly for us to raise new capital. In addition, eligible capital can be
reduced for a number of other reasons, including certain reductions in the
ratings of securitization exposures, acquisitions and divestments changing the
level of goodwill, adverse currency movements affecting the value of equity,
prudential adjustments that may be required due to the valuation uncertainty
associated with certain types of positions, and changes in the value of certain
pension fund assets and liabilities or in the interest rate and other
assumptions used to calculate the changes in our net defined benefit obligation
recognized in other comprehensive income. See "Fluctuation in foreign
exchange rates and continuing low or negative interest rates may have a
detrimental effect on our capital strength, our liquidity and funding position,
and our profitability". Any such increase in RWA or reduction in
eligible capital could materially reduce our capital ratios.
Risks captured in the operational risk
component of RWA have become increasingly significant as a component of our
overall RWA as a result of significant reductions in market and credit risk
RWA, as we executes our strategy, and increased operational risk charges
arising from operational risk events (including charges arising from
litigation, regulatory and similar matters). We have agreed with FINMA on a
supplemental analysis that is used to calculate an incremental operational risk
capital charge to be held for litigation, regulatory and similar matters and
other contingent liabilities. The incremental RWA calculated based on this
supplemental analysis as of 30 September 2015 was CHF 13.3 billion. Future
developments in and the ultimate elimination of the incremental RWA
attributable to the supplemental analysis will depend on provisions charged to
earnings for litigation, regulatory and similar matters and other contingent
liabilities and on developments in these matters. The methods used for
calculation of operational risk RWA and the calibration of the models used are
under review internationally and in Switzerland. Any changes in the methods and
the calibration may result in an increase in RWA arising from operational risk.
There can be no assurance that we will be successful in addressing these
matters and reducing or eliminating the incremental operational risk component
of RWA or that any reduction in the incremental operational risk RWA will not
be offset by changes in the methodology for calculation or calibration of
operational risk RWA.
The required levels and calculation of our
regulatory capital and the calculation of our RWA are also subject to changes
in regulatory requirements or their interpretation, as well as the exercise of
regulatory discretion. Changes in the calculation of RWA under Basel III and
Swiss requirements (such as the revised treatment of certain securitization exposures
under the Basel III framework) have significantly increased the level of our
RWA and, therefore, have adversely affected our capital ratios. We have
achieved substantial reductions in RWA, in part to mitigate the effects of
increased capital requirements. Further changes in the calculation of RWA, the
imposition of additional supplemental RWA charges or multipliers applied to
certain exposures, or the imposition of an RWA floor based on the standardized
approach or other methodology could substantially increase our RWA. See "Regulatory
and legal changes may adversely affect our business and our ability to execute
our strategic plans – Regulatory and legislative changes in Switzerland –
Capital regulations" for more information on the recent FINMA IRB
multiplier. In addition, we may not be successful in our plans to further
reduce RWA, either because we are unable to carry out fully the actions we have
planned or because other business or regulatory developments or actions to some
degree counteract the benefit of our actions.
In addition to the risk-based capital
requirements, we are subject to a minimum leverage ratio requirement for Swiss
SRB. The minimum leverage ratio requirement would be substantially increased
under the Swiss TBTF Proposal. The leverage ratio operates separately from the
risk-based capital requirements. It is a simple balance sheet measure and
therefore limits balance sheet intensive activities, such as lending, more than
activities that are less balance sheet intensive and, accordingly, under
certain circumstances could constrain our business activities even if we
satisfy other risk-based capital requirements. We have achieved substantial
reductions in our balance sheet and expect to make further reductions as we
wind down our Non-core and Legacy Portfolio positions. These reductions have
improved our leverage ratio and contributed to our ability to comply with the
more stringent leverage ratio requirements. However, further increases in the
leverage ratio requirement, including those contemplated in the Swiss TBTF
Proposal, may make it difficult for us to satisfy the requirements without
adversely affecting certain of our businesses,
particularly
balance sheet intensive businesses, such as lending.
Changes in international or Swiss
requirements for risk-based capital, leverage ratios, LCR or NSFR, including
changes in minimum levels, method of calculation or supervisory add-ons could
have a material adverse effect on our capital position and our business. Any
such changes that are implemented only, or more quickly, in Switzerland may
have an adverse effect on our competitive position compared with institutions
regulated under different regimes.
We may not be successful
in completing our announced strategic plans or in implementing changes in our
businesses to meet changing market, regulatory and other conditions
In October 2012, we announced a significant
acceleration in the implementation of our strategy. The strategy included
transforming our Investment Bank to focus it on its traditional strengths, very
significantly reducing Basel III RWA and further strengthening our capital
position, and significantly reducing costs and improving efficiency. We have
substantially completed the transformation of our business, but elements remain
that are not complete. There continues to be a risk that we will not be
successful in completing the execution of our plans, that our plans may be
delayed, that market events may adversely affect the implementation of our plan
or that the effects of our plans may differ from those intended.
We have substantially reduced the RWA and
balance sheet usage of our Non-core and Legacy Portfolio positions, but there
can be no assurance that we will continue to be able to exit the remaining
positions in the Non-core and Legacy Portfolio as quickly as our plans suggest
or that we will not incur significant losses in doing so. The continued
illiquidity and complexity of many of our legacy risk positions in particular
could make it difficult to sell or otherwise exit these positions and reduce
the RWA and the balance sheet usage associated with these exposures. As the
size of the Non-core and Legacy Portfolio decreases, achieving a complete exit
of particular classes of transactions will be necessary to achieve the
reductions of RWA, balance sheet and costs associated with the positions. At
the same time, our ability to meet our future capital targets and requirements
depends in part on our ability to reduce RWA and balance sheet usage without
incurring unacceptable losses.
As part of our strategy, we have a program
underway to achieve significant incremental cost reductions. The success of
our strategy and our ability to reach certain of the targets we have announced
depends on the success of the effectiveness and efficiency measures we are able
to carry out. As is often the case with major effectiveness and efficiency
programs, our plans involve significant risks. Included among these are the
risks that restructuring costs may be higher and may be recognized sooner than
we have projected, that we may not be able to identify feasible cost reduction
opportunities that are also consistent with our business goals and that cost
reductions may be realized later or may be less than we anticipate. Changes in
workforce location or reductions in workforce can lead to charges to the income
statement well in advance of the cost savings intended to be achieved through
such workforce strategy. For example, under IFRS we are required to recognize
provisions for real estate lease contracts when the unavoidable costs of
meeting the obligations under the contracts are considered to exceed the future
economic benefits expected to be received under them and closure or disposal of
operations may result in foreign currency translation losses (or gains)
previously recorded in other comprehensive income being recognized in income.
In addition, as we implement our effectiveness and efficiency programs we may
experience unintended consequences such as the loss or degradation of
capabilities that we need in order to maintain our competitive position and
achieve our targeted returns.
We are exposed to possible outflows of
client assets in our asset-gathering businesses and to changes affecting the
profitability of our Wealth Management business division and we may not be
successful in implementing the business changes needed to address them. We
experienced substantial net outflows of client assets in our wealth management
and asset management businesses in 2008 and 2009. The net outflows resulted
from a number of different factors, including our substantial losses, damage to
our reputation, the loss of client advisors, difficulty in recruiting qualified
client advisors and tax, legal and regulatory developments concerning our
cross-border private banking business.
Many of these factors have been
successfully addressed. Our Wealth Management and Wealth Management Americas
business divisions recorded substantial net new money inflows in 2013 and
2014. Long-term changes affecting the cross-border private banking business
model will, however, continue to affect client flows in the Wealth Management
business division for an extended period of time. One of the important drivers
behind the longer-term reduction in the amount of cross-border private banking
assets, particularly in Europe but increasingly also in other regions, is the
heightened focus of fiscal authorities on cross-border investments. Changes in
local tax laws or regulations and their enforcement and the implementation of
cross-border tax information exchange regimes may affect the ability or the
willingness of our clients to do business with us or the viability of our
strategies and business model. For the last three years, we have experienced
net withdrawals in our Swiss booking center from clients domiciled elsewhere
in Europe, in many cases related to the negotiation of
tax treaties between Switzerland and other countries.
The net new money inflows in recent years
in our Wealth Management business division have come predominantly from clients
in Asia Pacific and in the ultra high net worth segment globally. Over time,
inflows from these lower-margin segments and markets have been replacing
outflows from higher-margin segments and markets, in particular cross-border
European clients. This dynamic, combined with changes in client product
preferences as a result of which low-margin products account for a larger share
of our revenues than in the past, put downward pressure on our return on
invested assets and adversely affect the profitability of our Wealth Management
business division.
Reduced and in some cases negative interest
rates impact Wealth Management's performance, particularly given the associated
cost of maintaining the high-quality liquid assets required to cover regulatory
outflow assumptions embedded in the LCR. In order to adapt its business to the
new regulatory and interest rate environments, in the first half of 2015,
Wealth Management launched a global program intended to optimize its leverage ratio
denominator and LCR and changed pricing for a number of clients with a high
proportion of short-term deposits relative to invested assets. Although the
majority of these clients have chosen to retain their relationship with us and,
in the aggregate, the program has reduced the LRD and high-quality liquid asset
requirements for the Wealth Management business, net new money outflows and
reductions in customer deposits have been recorded in the second and third
quarters of 2015 related to this program.
We will continue our efforts to adjust to
client trends, regulatory and market dynamics as necessary, in an effort to
overcome the effects of changes in the business environment on our
profitability, balance sheet and capital positions, but there can be no assurance
that we will be able to counteract those effects. In addition, we have made
changes to our business offerings and pricing practices in line with the Swiss
Supreme Court case concerning "retrocessions" (fees paid to a bank
for distributing third-party and intra-group investment funds and structured
products) and other industry developments. These changes may adversely affect
our margins on these products and the current offering may be less attractive
to clients than the products it replaces. There can be no assurance that we
will be successful in our efforts to offset the adverse impact of these or
similar trends and developments.
Asset Management experienced net outflows
of client assets in 2012 and 2013, although it had net inflows for the first
three quarters of 2014 and for full year 2014. Further net outflows of client
assets could also adversely affect the results of this business division.
Material legal and
regulatory risks arise in the conduct of our business
The nature of our business subjects us to
significant regulatory oversight and liability risk. As a global financial
services firm operating in more than 50 countries, we are subject to many
different legal, tax and regulatory regimes. We are involved in a variety of
claims, disputes, legal proceedings and government investigations. These
proceedings expose us to substantial monetary damages and legal defence costs,
injunctive relief and criminal and civil penalties, in addition to potential
regulatory restrictions on our businesses. The outcome of most of these
matters, and their potential effect on our future business or financial
results, is extremely difficult to predict.
In December 2012, we announced settlements
totalling approximately CHF 1.4 billion in fines by and disgorgements to US, UK
and Swiss authorities to resolve investigations by those authorities relating
to LIBOR and other benchmark interest rates. We entered into a non-prosecution
agreement ("NPA") with the US Department of Justice ("DOJ")
and UBS Securities Japan Co. Ltd. also pled guilty to one count of wire fraud
relating to the manipulation of certain benchmark interest rates. In May 2015,
the NPA was terminated by the DOJ based on its determination in its discretion
that we had committed a US crime in relation to foreign exchange matters. As a
consequence, UBS AG pleaded guilty to one count of wire fraud for conduct in
the LIBOR matter, and has agreed to pay a USD 203 million fine and accept a
three-year term of probation. The settlements do not resolve investigations by
other authorities or civil claims that have been or may in the future be
asserted by private and governmental claimants with respect to submissions
regarding LIBOR or other benchmark interest rates. The extent of our financial
exposure to these remaining matters is extremely difficult to estimate and
could be material.
Our settlements with governmental
authorities in connection with foreign exchange and LIBOR and benchmark
interest rates starkly illustrate the much-increased level of financial and
reputational risk now associated with regulatory matters in major
jurisdictions. Very large fines and disgorgement amounts were assessed against
us, and the guilty pleas by us and a subsidiary, despite our full cooperation
with the authorities in the investigations relating to LIBOR and other
benchmark interest rates, and despite our receipt of conditional leniency or
conditional immunity from antitrust authorities in a number of jurisdictions,
including the US and Switzerland. We undersrtand that, in determining the
consequences to us, the authorities considered the fact that it has in the
recent
past been determined that we have engaged in
serious misconduct in several other matters. The heightened risk level was
further illustrated by the European Commission ("EC")
announcement in December 2013 of fines against other financial institutions
related to its Yen Interest Rate Derivatives ("YIRD")
investigation. The EC stated that we would have been subject to fines of
approximately EUR 2.5 billion had we not received full immunity for disclosing
to the EC the existence of infringements relating to YIRD. Recent resolution
of enforcement matters involving other financial institutions further
illustrates the continued increase in the financial and other penalties,
reputational risk and other consequences of regulatory matters in major
jurisdictions, particularly the US, and the resulting difficulty in predicting
in this environment the financial and other terms of resolutions of pending
government investigations and similar proceedings. In 2014, Credit Suisse AG
("CS") and BNP Paribas ("BNPP") each pleaded
guilty to criminal charges in the United States and simultaneously entered into
settlements with other US agencies, including the Federal Reserve and the New
York Department of Financial Services ("DFS"). These
resolutions involved the payment of substantial penalties (USD 1.8 billion in
the case of CS and USD 8.8 billion in the case of BNPP), agreements with
respect to future operation of their businesses and actions with respect to
relevant personnel. In the case of BNPP, the DFS suspended for a one-year
period BNPP's ability to conduct through its New York branch business activity
related to the business line that gave rise to the illegal conduct, namely US
dollar clearing for specified BNPP business units. In addition, the DOJ has
announced a series of resolutions related to the conduct of major financial
institutions in packaging, marketing, issuing and selling residential
mortgage-backed securities. In these resolutions, financial institutions have
been required to pay penalties ranging from USD 7 to USD 16.7 billion and, in
many cases, were also required to provide relief to consumers who were harmed
by the relevant conduct.
We continue to be subject to a large number
of claims, disputes, legal proceedings and government investigations, including
the matters described in the notes to the financial statements included in our
Third Quarter 2015 Financial Report and we expect that our ongoing business
activities will continue to give rise to such matters in the future. The
extent of our financial exposure to these and other matters is material and
could substantially exceed the level of provisions that we have established for
litigation, regulatory and similar matters. We are not able to predict the
financial and other terms on which some of these matters may be resolved.
Litigation, regulatory and similar matters may also result in non-monetary
penalties and consequences. Among other things, a guilty plea to, or
conviction of, a crime (including as a result of termination of the NPA) could
have material consequences for us. Resolution of regulatory proceedings may
require us to obtain waivers of regulatory disqualifications to maintain certain
operations, may entitle regulatory authorities to limit, suspend or terminate
licenses and regulatory authorizations and may permit financial market
utilities to limit, suspend or terminate our participation in such utilities.
Failure to obtain such waivers, or any limitation, suspension or termination of
licenses, authorizations or participations, could have material consequences
for us.
At this point in time, we believe that the
industry continues to operate in an environment where charges associated with
litigation, regulatory and similar matters will remain elevated for the
foreseeable future and we continue to be exposed to a number of significant
claims and regulatory matters.
Ever since our losses in 2007 and 2008, we
have been subject to a very high level of regulatory scrutiny and to certain
regulatory measures that constrain our strategic flexibility. While we believe
that we have remediated the deficiencies that led to the material losses during
the 2007–2009 financial crisis, the unauthorized trading incident announced in
September 2011, the LIBOR-related settlements of 2012 and settlements with some
regulators of matters related to our foreign exchange and precious metals
business, the resulting effects of these matters on our reputation and
relationships with regulatory authorities have proven to be more difficult to
overcome. For example, following the unauthorized trading incident, FINMA
placed restrictions (since removed) on acquisitions or business expansions in
our Investment Bank unit. We are determined to address the issues that have
arisen in the above and other matters in a thorough and constructive manner.
We are in active dialogue with our regulators concerning the actions that we
are taking to improve our operational risk management and control framework,
but there can be no assurance that our efforts will have the desired effects.
As a result of this history, our level of risk with respect to regulatory
enforcement may be greater than that of some of our peer institutions.
Operational risks affect
our business
Our businesses are dependent on our ability
to process a large number of complex transactions across multiple and diverse
markets in different currencies, to comply with requirements of many different
legal and regulatory regimes to which we are subject and to prevent, or
promptly detect and stop, unauthorized, fictitious or fraudulent transactions.
Our operational risk management and control systems and processes are designed
to help ensure that the risks associated with our activities, including those
arising from process error, failed execution, misconduct, unauthorized trading,
fraud, system failures, financial crime, cyber-attacks, breaches of information
security and failure of security and physical protection, are appropriately
controlled.
Cyber-crime is
a fast growing threat to large organizations that rely on technology to support
their business. It can range from internet-based attacks that interfere with
the organizations' internet websites, to more sophisticated crimes that target
the organizations, as well as their clients, and seek to gain unauthorized
access to technology systems in efforts to disrupt business, steal money or
obtain sensitive information. Cyber-threats to the financial industry have been
increasing and cyber-attacks have become increasingly sophisticated as criminal
organizations deploy resources and technical capabilities to target specific
institutions.
A major focus of US governmental policy
relating to financial institutions in recent years has been fighting money
laundering and terrorist financing. Regulations applicable to us impose
obligations to maintain effective policies, procedures and controls to detect,
prevent and report money laundering and terrorist financing, and to verify the
identity of our clients. We are also subject to laws and regulations related
to corrupt and illegal payments to government officials by others, such as the
US Foreign Corrupt Practices Act and the UK Bribery Act. We have implemented
policies, procedures and internal controls that are designed to comply with
such laws and regulations. Failure to maintain and implement adequate programs
to combat money laundering and terrorist financing or laws against corruption,
or any failure of our programs in these areas, could have serious consequences
both from legal enforcement action and from damage to our reputation.
Although we seek to continuously adapt our
capability to detect and respond to the risks described above, if our internal
controls fail or prove ineffective in identifying and remedying these risks, we
could suffer operational failures that might result in material losses, such as
the loss from the unauthorized trading incident announced in September 2011.
Participation in high-volume and high-frequency
trading activities, even in the execution of client-driven business, can also
expose us to operational risks. Our loss in 2012 relating to the Facebook
initial public offering illustrates the exposure participants in these
activities have to unexpected results arising not only from their own systems
and processes but also from the behavior of exchanges, clearing systems and
other third parties and from the performance of third-party systems.
Our wealth and asset management businesses
operate in an environment of increasing regulatory scrutiny and changing
standards. Legislation and regulators have changed and are likely to continue
to change fiduciary and other standards of care for asset managers and advisers
and have increased focus on mitigating or eliminating conflicts of interest
between a manager or adviser and the client. These changes have and likely
will continue to present regulatory and operational risks if not implemented
effectively across the global systems and processes of investment managers and
other industry participants. If we fail to effectively implement controls to
ensure full compliance with new, rising standards in the wealth and asset
management industry, we could be subject to additional fines and sanctions as a
result. These could have an impact on our ability to operate or grow our
wealth and asset management businesses in line with our strategy.
Certain types of operational control
weaknesses and failures could also adversely affect our ability to prepare and
publish accurate and timely financial reports. Following the unauthorized
trading incident announced in September 2011, management determined that we had
a material weakness in our internal control over financial reporting as of the
end of 2010 and 2011, although this did not affect the reliability of our
financial statements for either year.
In addition, despite the contingency plans
we have in place, our ability to conduct business may be adversely affected by
a disruption in the infrastructure that supports our businesses and the
communities in which we are located. This may include a disruption due to
natural disasters, pandemics, civil unrest, war or terrorism and involve
electrical, communications, transportation or other services used by us or
third parties with whom we conduct business.
Our reputation is
critical to the success of our business
Our reputation is critical to the success
of our strategic plans. Damage to our reputation can have fundamental negative
effects on our business and prospects. Reputational damage is difficult to
reverse, and improvements tend to be slow and difficult to measure. This was
demonstrated in recent years, as our very large losses during the financial
crisis, the US cross-border matter (relating to the governmental inquiries and
investigations relating to our cross-border private banking services to US
private clients during the years 2000–2007 and the settlements entered into
with US authorities with respect to this matter) and other events seriously
damaged our reputation. Reputational damage was an important factor in our
loss of clients and client assets across our asset-gathering businesses, and
contributed to our loss of and difficulty in attracting staff in 2008 and
2009. These developments had short-term and also more lasting adverse effects
on our financial performance, and we recognized that restoring our reputation
would be essential to maintaining our relationships with clients, investors,
regulators and the general public, as well as with our employees. More
recently, the unauthorized trading incident announced in September 2011 and our
involvement in the LIBOR matter and
investigations
relating to our foreign exchange and precious metals business have also
adversely affected our reputation. Any further reputational damage could have
a material adverse effect on our operational results and financial condition
and on our ability to achieve our strategic goals and financial targets.
Performance in the
financial services industry is affected by market conditions and the
macroeconomic climate
The financial services industry prospers in
conditions of economic growth, stable geopolitical conditions, transparent,
liquid and buoyant capital markets and positive investor sentiment. An
economic downturn, continued low interest rates or weak or stagnant economic
growth in our core markets, or a severe financial crisis can negatively affect
our revenues and ultimately our capital base.
A market downturn and weak macroeconomic
conditions can be precipitated by a number of factors, including geopolitical
events, changes in monetary or fiscal policy, trade imbalances, natural
disasters, pandemics, civil unrest, war or terrorism. Because financial
markets are global and highly interconnected, even local and regional events
can have widespread impact well beyond the countries in which they occur. A
crisis could develop, regionally or globally, as a result of disruptions in
emerging markets as well as developed markets that are susceptible to
macroeconomic and political developments, or as a result of the failure of a
major market participant. We have material exposures to a number of these
markets, both as a wealth manager and as an investment bank. Moreover, our
strategic plans depend more heavily upon our ability to generate growth and
revenue in emerging markets, causing us to be more exposed to the risks associated
with them. The continued absence of sustained and credible improvements to
unresolved issues in Europe, continued US fiscal and monetary policy issues,
emerging markets fragility and the mixed outlook for global growth demonstrate
that macroeconomic and political developments can have unpredictable and
destabilizing effects. Adverse developments of these kinds have affected our
businesses in a number of ways, and may continue to have further adverse
effects on our businesses as follows:
·
a general reduction in
business activity and market volumes, as we have recently experienced, affects
fees, commissions and margins; local or regional economic factors, such as the
ongoing European sovereign debt concerns and negative interest rates, could
also have an effect on us;
·
a market downturn is
likely to reduce the volume and valuations of assets we manage on behalf of
clients, reducing our asset and performance-based fees;
·
the ongoing low
interest rate environment will further erode interest margins in several of our
businesses and adversely affect our net defined benefit obligations in relation
to our pension plans;
·
negative interest rates
announced by central banks in Switzerland or elsewhere may also affect client
behaviour and changes to our deposit and lending pricing and structure that we
may make to respond to negative interest rates and client behaviour may cause
deposit outflows, reduced business volumes or otherwise adversely affect our
businesses;
·
reduced market
liquidity or volatility limits trading and arbitrage opportunities and impedes
our ability to manage risks, impacting both trading income and
performance-based fees;
·
deteriorating market
conditions could cause a decline in the value of assets that we own and account
for as investments or trading positions;
·
worsening economic
conditions and adverse market developments could lead to impairments and
defaults on credit exposures and on our trading and investment positions, and
losses may be exacerbated by declines in the value of collateral we hold; and
·
if individual countries
impose restrictions on cross-border payments or other exchange or capital
controls, or change their currency (for example, if one or more countries
should leave the euro), we could suffer losses from enforced default by
counterparties, be unable to access our own assets, or be impeded in, or
prevented from, managing our risks.
Because we have very substantial exposures
to other major financial institutions, the failure of one or more such
institutions could have a material effect on us.
The developments mentioned above have in
the past affected and could materially affect the performance of the business
units and of us as a whole, and ultimately our financial condition. There are
related risks that, as a result of the factors listed above, carrying value of
goodwill of a business unit might suffer impairments, deferred tax asset levels
may need to be adjusted or our capital position or regulatory capital ratios
could be adversely affected.
We hold legacy and other risk positions
that may be adversely affected by conditions in the financial markets; legacy
risk positions may be difficult to liquidate
We, like other
financial market participants, were severely affected by the financial crisis
that began in 2007. The deterioration of financial markets since the beginning
of the crisis was extremely severe by historical standards, and we recorded
substantial losses on fixed income trading positions, particularly in 2008 and
2009. Although we have significantly reduced our risk exposures starting in
2008, and more recently as we progress our strategy and focus on complying with
Basel III capital standards, we continue to hold substantial legacy risk
positions, primarily in our Non-core and Legacy Portfolio unit. In many cases
these risk positions remain illiquid, and we continue to be exposed to the risk
that the remaining positions may again deteriorate in value. In the fourth
quarter of 2008 and the first quarter of 2009, certain of these positions were
reclassified for accounting purposes from fair value to amortized cost; these
assets are subject to possible impairment due to changes in market interest
rates and other factors.
Moreover, we hold positions related to real
estate in various countries, and could suffer losses on these positions. These
positions include a substantial Swiss mortgage portfolio. Although management
believes that this portfolio has been very prudently managed, we could
nevertheless be exposed to losses if the concerns expressed by the Swiss National
Bank and others about unsustainable price escalation in the Swiss real estate
market come to fruition. Other macroeconomic developments, such as the
implications on export markets of the appreciation of the Swiss franc following
recent announcements by the Swiss National Bank, the adoption of negative
interest rates by the Swiss National Bank or other central banks or any return
of crisis conditions within the eurozone and the potential implications of the
recent decision in Switzerland to reinstate immigration quotas for EU / EEA
countries, could also adversely affect the Swiss economy, our business in
Switzerland in general and, in particular, our Swiss mortgage and corporate
loan portfolios.
In addition, we are exposed to risk in our
prime brokerage, reverse repo and Lombard lending activities, as the value or
liquidity of the assets against which we provide financing may decline rapidly.
Our global presence
subjects us to risk from currency fluctuations
We prepare our consolidated financial statements
in Swiss francs. However, a substantial portion of our assets, liabilities,
invested assets, revenues and expenses are denominated in other currencies,
particularly the US dollar, the euro and the British pound. Accordingly,
changes in foreign exchange rates, particularly between the Swiss franc and the
US dollar (US dollar revenues account for the largest portion of our non-Swiss
franc revenues) have an effect on our reported income and expenses, and on
other reported figures such as other comprehensive income, invested assets,
balance sheet assets, RWA and Basel III CET1 capital. These effects may
adversely affect our income, balance sheet, capital and liquidity ratios. The
effects described in the sidebar "Impact of Swiss National Bank actions"
in the "Current market climate and industry drivers" section
of the Annual Report 2014 clearly illustrate the potential effect of
significant currency movements, particularly of the Swiss franc.
We are dependent upon
our risk management and control processes to avoid or limit potential losses in
our counterparty credit and trading businesses
Controlled risk-taking is a major part of
the business of a financial services firm. Credit risk is an integral part of
many of our retail, corporate, wealth management and Investment Bank
activities, and our non-core activities that were transferred to Corporate
Center – Non-core and Legacy Portfolio, including lending, underwriting and
derivatives activities. Changes in interest rates, credit spreads, securities'
prices, market volatility and liquidity, foreign exchange levels and other
market fluctuations can adversely affect our earnings. Some losses from
risk-taking activities are inevitable, but to be successful over time, we must
balance the risks we take against the returns we generate. We must, therefore,
diligently identify, assess, manage and control our risks, not only in normal
market conditions but also as they might develop under more extreme (stressed)
conditions, when concentrations of exposures can lead to severe losses.
As seen during the financial crisis of
2007–2009, we are not always able to prevent serious losses arising from
extreme or sudden market events that are not anticipated by our risk measures
and systems. Value-at-risk, a statistical measure for market risk, is derived
from historical market data, and thus by definition could not have anticipated
the losses suffered in the stressed conditions of the financial crisis.
Moreover, stress loss and concentration controls and the dimensions in which we
aggregated risk to identify potentially highly correlated exposures proved to
be inadequate. Notwithstanding the steps we have taken to strengthen our risk
management and control framework, we could suffer further losses in the future
if, for example:
·
we do not fully
identify the risks in our portfolio, in particular risk concentrations and
correlated risks;
·
our assessment of the
risks identified or our response to negative trends proves to be untimely,
inadequate, insufficient or incorrect;
·
markets move in ways
that we do not expect – in terms of their speed, direction, severity or
correlation – and our ability to manage risks in the resulting environment is,
therefore, affected;
·
third parties to whom
we have credit exposure or whose securities we holds for our own account are
severely affected by events not anticipated by our models, and accordingly we
suffer defaults and impairments beyond the level implied by our risk
assessment; or
·
collateral or other
security provided by our counterparties proves inadequate to cover their
obligations at the time of their default.
We also manage risk on behalf of our
clients in our asset and wealth management businesses. The performance of
assets we hold for our clients in these activities could be adversely affected
by the same factors. If clients suffer losses or the performance of their
assets held with us is not in line with relevant benchmarks against which
clients assess investment performance, we may suffer reduced fee income and a
decline in assets under management, or withdrawal of mandates.
If we decide to support a fund or another
investment that we sponsor in our asset or wealth management businesses, we
might, depending on the facts and circumstances, incur charges that could
increase to material levels.
Investment positions, such as equity
investments made as part of strategic initiatives and seed investments made at
the inception of funds that we manage, may also be affected by market risk
factors. These investments are often not liquid and generally are intended or
required to be held beyond a normal trading horizon. They are subject to a
distinct control framework. Deteriorations in the fair value of these
positions would have a negative impact on our earnings.
Valuations of certain
positions rely on models; models have inherent limitations and may use inputs
which have no observable source
If available, the fair value of a financial
instrument or non-financial asset or liability is determined using quoted
prices in active markets for identical assets or liabilities. Where the market
is not active, fair value is established using a valuation technique, including
pricing models. Where available, valuation techniques use market observable
assumptions and inputs. If such information is not available, inputs may be
derived by reference to similar instruments in active markets, from recent
prices for comparable transactions or from other observable market data. If
market observable data is not available, we select non-market observable inputs
to be used in our valuation techniques. We also use internally developed
models. Such models have inherent limitations; different assumptions and
inputs would generate different results, and these differences could have a
significant impact on our financial results. We regularly review and update
our valuation models to incorporate all factors that market participants would
consider in setting a price, including factoring in current market conditions.
Judgment is an important component of this process, and failure to make the
changes necessary to reflect evolving market conditions could have a material
adverse effect on our financial results. Moreover, evolving market practice
may result in changes to valuation techniques that could have a material impact
on our financial results. Changes in model inputs or calibration, changes in
the valuation methodology incorporated in models, or failure to make the
changes necessary to reflect evolving market conditions could have a material
adverse effect on our financial results.
Liquidity and funding
management are critical to our ongoing performance
The viability of our business depends on
the availability of funding sources, and our success depends on our ability to
obtain funding at times, in amounts, for tenors and at rates that enable us to
efficiently support our asset base in all market conditions. A substantial
part of our liquidity and funding requirements is met using short-term
unsecured funding sources, including retail and wholesale deposits and the
regular issuance of money market securities. The volume of our funding sources
has generally been stable, but could change in the future due to, among other
things, general market disruptions or widening credit spreads, which could also
influence the cost of funding. A change in the availability of short-term
funding could occur quickly.
Reductions in our credit ratings can
increase our funding costs, in particular with regard to funding from wholesale
unsecured sources, and can affect the availability of certain kinds of
funding. In addition, as we experienced in connection with Moody's downgrade
of our long-term rating in June 2012, rating downgrades can require us to post
additional collateral or make additional cash payments under master trading agreements
relating to our derivatives businesses. Our credit ratings, together with our
capital strength and reputation, also contribute to maintaining client and
counterparty confidence and it is possible that ratings changes could influence
the performance of some of our businesses.
More stringent capital and liquidity and
funding requirements will likely lead to increased competition for both secured
funding and
deposits as a stable source of funding,
and to higher funding costs. The addition of loss-absorbing debt as a
component of capital requirements and potential future requirements to maintain
senior unsecured debt that could be written down in the event of our insolvency
or other resolution, may increase our funding costs or limit the availability of
funding of the types required.
We may be unable to
identify or capture revenue or competitive opportunities, or retain and attract
qualified employees
The financial services industry is
characterized by intense competition, continuous innovation, detailed (and
sometimes fragmented) regulation and ongoing consolidation. We face
competition at the level of local markets and individual business lines, and
from global financial institutions that are comparable to us in their size and
breadth. Barriers to entry in individual markets and pricing levels are being
eroded by new technology. We expect these trends to continue and competition
to increase. Our competitive strength and market position could be eroded if
we are unable to identify market trends and developments, do not respond to
them by devising and implementing adequate business strategies, adequately
developing or updating our technology, particularly in trading businesses, or
are unable to attract or retain the qualified people needed to carry them out.
The amount and structure of our employee
compensation is affected not only by our business results but also by
competitive factors and regulatory considerations. Constraints on the amount
or structure of employee compensation, higher levels of deferral, performance
conditions and other circumstances triggering the forfeiture of unvested awards
may adversely affect our ability to retain and attract key employees, and may
in turn negatively affect our business performance. We have made changes to the
terms of compensation awards to reflect the demands of various stakeholders,
including regulatory authorities and shareholders. These terms include the
introduction of a deferred contingent capital plan with many of the features of
the loss-absorbing capital that we have issued in the market but with a higher
capital ratio write-down trigger, increased average deferral periods for stock
awards, and expanded forfeiture provisions for certain awards linked to
business performance. These changes, while intended to better align the
interests of our staff with those of other stakeholders, increase the risk that
key employees will be attracted by competitors and decide to leave us, and that
we may be less successful than our competitors in attracting qualified employees.
The loss of key staff and the inability to attract qualified replacements,
depending upon which and how many roles are affected, could seriously
compromise our ability to execute our strategy and to successfully improve our
operating and control environment.
In a referendum in March 2013, the Swiss
cantons and voters approved an initiative to give shareholders of Swiss listed
companies more influence over board and management compensation. The ordinance
requires public companies to specify in their articles of association a
mechanism to require annual binding votes by shareholders on the aggregate
compensation of each of the board of directors and the executive board. We
held our first such binding votes at our 2015 annual general meeting.
The EU has adopted legislation that caps
the amount of variable compensation in proportion to the amount of fixed
compensation for employees of a bank active within the EU. This legislation
will apply to our employees in the EU. These and other similar initiatives may
require us to make further changes to our compensation structure and may
increase the risks described above.
Our financial results
may be negatively affected by changes to accounting standards
We report our results and financial
position in accordance with IFRS as issued by the IASB. Changes to IFRS or
interpretations thereof may cause our future reported results and financial
position to differ from current expectations, or historical results to differ
from those previously reported due to the adoption of accounting standards on a
retrospective basis. Such changes may also affect our regulatory capital and
ratios. We monitor potential accounting changes and when these are finalized
by the IASB, and determine the potential impact and disclose significant future
changes in our financial statements. Currently, there are a number of issued
but not yet effective IFRS changes, as well as potential IFRS changes, some of
which could be expected to impact our reported results, financial position and
regulatory capital in the future.
Our financial results
may be negatively affected by changes to assumptions supporting the value of
our goodwill
The goodwill that we have recognized on the
respective balance sheets of our operating segments is tested for impairment at
least annually. Our impairment test in respect of the assets recognized as of
31 December 2014 indicated that the value of our goodwill is not impaired. The
impairment test is based on assumptions regarding estimated earnings, discount
rates and long-term growth rates impacting the recoverable amount of each
segment and on estimates of the carrying amounts of the segments to which the
goodwill relates. If the estimated earnings and other assumptions in future
periods deviate from the current outlook, the value of our goodwill may become
impaired in the future, giving rise to losses in the income statement. For
example, in the third quarter of 2012, the carrying amount of goodwill and
certain other non-financial assets of the Investment Bank were written down,
resulting in a pre-tax
impairment loss of almost CHF
3.1 billion.
The effect of taxes on
our financial results is significantly influenced by reassessments of our
deferred tax assets
The deferred tax assets ("DTA")
that we have recognized on our balance sheet as of 31 December 2014 in respect
of prior years' tax losses reflect the probable recoverable level based on
future taxable profit as informed by our business plans. If the business plan
earnings and assumptions in future periods substantially deviate from current
forecasts, the amount of recognized deferred tax assets may need to be adjusted
in the future. These adjustments may include write-downs of deferred tax
assets through the income statement.
Our effective tax rate is highly sensitive
both to our performance as well as our expectation of future profitability as
reflected in our business plans. Our results in recent periods have
demonstrated that changes in the recognition of deferred tax assets can have a
very significant effect on our reported results. If our performance is
expected to improve, particularly in the US, the UK or Switzerland, we could
potentially recognize additional deferred tax assets as a result of that
assessment. The effect of doing so would be to significantly reduce our
effective tax rate in years in which additional deferred tax assets are
recognized. Conversely, if our performance in those countries is expected to
produce diminished taxable profit in future years, we may be required to write
down all or a portion of the currently recognized deferred tax assets through
the income statement. This would have the effect of increasing our effective
tax rate in the year in which any write-downs are taken.
In 2015, excluding the effects of any potential
reassessment of the level of deferred tax assets, we expect our effective tax
rate to be approximately 25%. We expect to revalue our overall level of
deferred tax assets ("DTAs") during the second half of each
year based on a reassessment of future profitability taking into account
updated business plan forecasts as part of our annual business planning
process. In each of the past three years, we have recognized substantial DTAs
as a result of extension of the forecast period over which income is taken into
account for recognition of DTAs based on both future forecasts and assessment
criteria of the reliability of those forecasts. As the internal assessment
threshold for further extensions of the forecast period are higher, we
currently do not expect to make further extensions of the forecast period in
the near future, which will reduce the amount of DTAs recognized in future
years. Should we realize less profits in future years than anticipated in our
forecasts or reduce our forecasts of future profitability, particularly in the
US, we could be required to write down currently recognized DTAs. Given the
amount of DTAs currently recognized, any such write-down could be substantial.
Our full year tax rate could change significantly based on reassessments of
DTAs. It could also change if aggregate tax expenses for locations other than
Switzerland, the US and the UK differ from what is expected. Our effective tax
rate is also sensitive to any future reductions in statutory tax rates,
particularly in the US and Switzerland. Reductions in the statutory tax rate
would cause the expected future tax benefit from items such as tax loss
carry-forwards in the affected locations to diminish in value. This in turn
would cause a write-down of the associated deferred tax assets.
In addition, statutory and regulatory
changes, as well as changes to the way in which courts and tax authorities
interpret tax laws could cause the amount of taxes ultimately paid by us to
materially differ from the amount accrued.
We have undertaken, or are considering,
changes to our legal structure in the US, the UK, Switzerland and other
countries in response to regulatory changes. Tax laws or the tax authorities
in these countries may prevent the transfer of tax losses incurred in one legal
entity to newly organized or reorganized subsidiaries or affiliates or may
impose limitations on the utilization of tax losses that are expected to carry
on businesses formerly conducted by the transferor. Were this to occur in
situations where there were also limited planning opportunities to utilize the
tax losses in the originating entity, the deferred tax assets associated with
such tax losses could be written down through the income statement.
A net charge of CHF 123 million was
recognized in operating expenses (within operating profit before tax) in 2014
in relation to the UK bank levy. This is a balance sheet levy, payable by
banks operating in the UK. Our bank levy expense for future years will depend
on both the rate of the levy and our taxable UK liabilities at each year-end;
changes to either factor could increase the cost. This expense could increase
if organizational changes involving UBS Limited and/or UBS AG alter the level
or profile of our bank levy tax base. We expect that the annual bank levy
charge will continue to be recognized for IFRS purposes as an expense arising
in the final quarter of each financial year, rather than being accrued
throughout the year, as it is charged by reference to the year-end balance
sheet position.
As UBS Group AG is a
holding company, its operating results, financial condition and ability to pay
dividends and other distributions and/or to pay its obligations in the future
are dependent on funding, dividends and other distributions received
from UBS AG or any other current or future direct
subsidiary, which may be subject to restrictions
UBS Group AG's ability to pay dividends and
other distributions and to pay its obligations in the future will depend on the
level of funding, dividends and other distributions, if any, received from UBS
AG and any new subsidiaries established by UBS Group in the future. The
ability of such subsidiaries to make loans or distributions (directly or
indirectly) to UBS Group AG may be restricted as a result of several factors,
including restrictions in financing agreements and the requirements of
applicable law and regulatory and fiscal or other restrictions. UBS Group AG's
subsidiaries, including UBS AG, UBS Switzerland AG, UBS Limited and the US IHC
(when designated) are subject to laws that restrict dividend payments,
authorize regulatory bodies to block or reduce the flow of funds from those
subsidiaries to UBS Group AG, or limit or prohibit transactions with
affiliates. Restrictions and regulatory action of this kind could impede
access to funds that UBS Group AG may need to make payments.
In addition, UBS Group AG's right to
participate in a distribution of assets upon a subsidiary's liquidation or
reorganization is subject to all prior claims of the subsidiary's creditors.
UBS Group AG's credit rating could be lower
than the rating of UBS AG, which may adversely affect the market value of the
securities and other obligations of UBS Group AG on a standalone basis.
Furthermore, we expect that UBS Group AG
may guarantee some of the payment obligations of certain of our subsidiaries
from time to time. These guarantees may require UBS Group AG to provide
substantial funds or assets to subsidiaries or their creditors or
counterparties at a time when UBS Group AG is in need of liquidity to fund its
own obligations.
Our stated capital
returns objective is based, in part, on capital ratios that are subject to
regulatory change and may fluctuate significantly
We have committed to return at least 50% of
our net profit to shareholders as capital returns, provided our fully applied
CET1 capital ratio is at least 13% and our post-stress fully applied CET1
capital ratio is at least 10%. As of 30 June 2015, our post-stress CET1
capital ratio exceeded this 10% objective. However, our ability to maintain a
fully applied CET1 capital ratio of at least 13% is subject to numerous risks,
including the results of our business, changes to capital standards,
methodologies and interpretation that may adversely affect our calculated fully
applied CET1 capital ratio, imposition of risk add-ons or additional capital
requirements such as additional capital buffers.
Changes in the methodology, assumptions,
stress scenario and other factors may result in material changes in our
post-stress fully applied CET1 capital ratio. Our objective to maintain a
post-stress fully applied CET1 capital ratio of at least 10% is a condition to
our capital returns commitment. To calculate our post-stress CET1 capital
ratio, We forecast capital one year ahead based on internal projections of
earnings, expenses, distributions to shareholders and other factors affecting
CET1 capital, including our net defined benefit assets and liabilities. We
also forecast one-year developments in RWA. We adjust these forecasts based on
assumptions as to how they may change as a result of a severe stress event. We
then further deduct from capital the stress loss estimated using our combined
stress test ("CST") framework to arrive at the post-stress
CET1 capital ratio. Changes to our results, business plans and forecasts, in
the assumptions used to reflect the effect of a stress event on our business
forecasts or in the results of our CST, could have a material effect on our
stress scenario results and on our calculated fully applied post-stress CET1
capital ratio. Our CST framework relies on various risk exposure measurement
methodologies which are predominantly proprietary, on our selection and
definition of potential stress scenarios and on our assumptions regarding
estimates of changes in a wide range of macroeconomic variables and certain
idiosyncratic events for each of those scenarios. We periodically review these
methodologies, and assumptions are subject to periodic review and change on a
regular basis. Our risk exposure measurement methodologies may change in
response to developing market practice and enhancements to our own risk control
environment, and input parameters for models may change due to changes in
positions, market parameters and other factors. Our stress scenarios, the
events comprising a scenario and the assumed shocks and market and economic
consequences applied in each scenario are subject to periodic review and
change. A change in the CST scenario used to calculate the fully applied
post-stress CET1 capital ratio, or in the assumptions used in a particular
scenario, may cause the post-stress CET1 capital ratio to fluctuate materially
from period to period. Our business plans and forecasts are subject to
inherent uncertainty, our choice of stress test scenarios and the market and
macroeconomic assumptions used in each scenario are based on judgments and
assumptions about possible future events. Our risk exposure methodologies are
subject to inherent limitations, rely on numerous assumptions as well as on
data which may have inherent limitations. In particular, certain data is not
available on a monthly basis and we may therefore rely on prior month/quarter
data as an estimate. All of these factors may result in our post-stress CET1
capital ratio, as calculated using our methodology for any period, being
materially higher or lower than the actual effect of a stress scenario.
This Form 6-K is hereby incorporated by reference into each of
(1) the registration statement of UBS AG on Form F-3
(Registration Number 333-204908) and (2) the registration statements of UBS
Group AG on Form S-8 (Registration Numbers 333-200634; 333-200635; 333-200641;
and 333-200665), and into each prospectus outstanding under any of the
foregoing registration statements; and also into (3) any outstanding
offering circular or similar document issued or authorized by UBS AG that
incorporates by reference any Form 6-K’s of UBS AG that are
incorporated into its registration statements filed with the SEC, and (4) the
base prospectus of Corporate Asset Backed Corporation (“CABCO”) dated
June 23, 2004 (Registration Number 333-111572), the Form 8-K of
CABCO filed and dated June 23, 2004 (SEC File Number 001-13444),
and the Prospectus Supplements relating to the CABCO Series 2004-101 Trust
dated May 10, 2004 and May 17, 2004 (Registration
Number 033-91744 and 033-91744-05).
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
UBS Group AG
By: _/s/ David Kelly______________
Name: David Kelly
Title: Managing Director
By: _/s/ Sarah M. Starkweather______
Name: Sarah M. Starkweather
Title: Executive Director
UBS AG
By: _/s/ David Kelly______________
Name: David Kelly
Title: Managing Director
By: _/s/ Sarah M. Starkweather______
Name: Sarah M. Starkweather
Title: Executive Director
Date: November
30, 2015
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