USV E TRACS UBS Bloomberg CMCI Silver

Introduction and basis for preparation

Terms used in this report, unless the context requires otherwise

Scope of Basel III Pillar 3 disclosures

The Basel Committee on Banking Supervision (BCBS) Basel III capital adequacy framework consists of three complementary pillars. Pillar 1 provides a framework for measuring minimum capital requirements for the credit, market, operational and non-counterparty-related risks faced by banks. Pillar 2 addresses the principles of the supervisory review process, emphasizing the need for a qualitative approach to supervising banks. Pillar 3 requires banks to publish a range of disclosures, mainly covering risk, capital, leverage, liquidity and remuneration.

This report provides Pillar 3 disclosures for UBS Group and prudential key figures and regulatory information for UBS AG standalone, UBS Switzerland AG standalone, UBS Europe SE consolidated and UBS Americas Holding LLC consolidated in the respective sections under “Significant regulated subsidiaries and sub-groups.”

As UBS is considered a systemically relevant bank (an SRB) under Swiss banking law, UBS Group AG and UBS AG are required to comply with regulations based on the Basel III framework as applicable to Swiss SRBs on a consolidated basis. Capital and other regulatory information as of 31 March 2020 for UBS Group AG consolidated is provided in the “Capital management” section of our first quarter report and for UBS AG consolidated in the “Capital management” section of the UBS AG first quarter 2020 report, available under “Quarterly reporting” at www.ubs.com/investors.  

Local regulators may also require the publication of Pillar 3 information at a subsidiary or sub-group level. Where applicable, these local disclosures are provided under “Holding company and significant regulated subsidiaries and sub-groups” at www.ubs.com/investors. 

Significant BCBS and FINMA capital adequacy, liquidity and funding, and related disclosure requirements

This Pillar 3 report has been prepared in accordance with Swiss Financial Market Supervisory Authority (FINMA) Pillar 3 disclosure requirements (FINMA Circular 2016/1, “Disclosure – banks”) as revised on 31 October 2019, the underlying BCBS guidance “Revised Pillar 3 disclosure requirements” issued in January 2015, the “Frequently asked questions on the revised Pillar 3 disclosure requirements” issued in August 2016, the “Pillar 3 disclosure requirements – consolidated and enhanced framework” issued in March 2017 and the subsequent “Technical Amendment – Pillar 3 disclosure requirements – regulatory treatment of accounting provisions” issued in August 2018.

COVID-19 temporary regulatory measures

The Swiss Federal Council has established a loan guarantee scheme of up to CHF 40 billion, increased from the initially announced amount of up to CHF 20 billion, to support small and medium-sized Swiss companies suffering from substantial reductions in revenue due to the current COVID-19 pandemic. Affected companies can apply through their banks for emergency loans amounting to a maximum of 10% of their annual turnover, with a ceiling of CHF 20 million. Loans up to CHF 0.5 million are 100% guaranteed by the Swiss government and carry a 0% interest rate. Loans of between CHF 0.5 million and CHF 20 million are 85% government-guaranteed; for these loans the portion that is guaranteed by the government carries a 0.5% interest rate and banks are free to determine the interest rate for the remaining portion.

To support the lending capacity of banks, the Swiss Federal Council has deactivated the countercyclical buffer on residential real estate loans at the request of the Swiss National Bank (the SNB) and several other countries similarly reduced their countercyclical buffers. This led to a reduction of 29 basis points of UBS’s common equity tier 1 (CET1) capital requirement, with no impact on UBS’s capital ratios.

Banks that have model-based market risk RWA calculations, such as UBS, are experiencing an increased number of backtesting exceptions driven by the higher volatility in the markets. These exceptions could ultimately result in higher bank-specific minimum capital requirements. FINMA has introduced a temporary exemption, freezing the number of backtesting exceptions from 1 February 2020 until 1 July 2020. As of 31 March 2020, we did not benefit from this measure, as the number of backtesting exceptions we experienced would not have led to an increase in market risk RWA.

In addition, FINMA has permitted banks to temporarily exclude central bank sight deposits from the leverage ratio denominator (LRD) for the purpose of calculating going concern ratios. This exemption applies until 1 July 2020 and may be extended. Applicable dividends or similar distributions approved by shareholders after 25 March 2020 reduce the relief by the LRD equivalent of the capital distribution.

As of 31 March 2020, these exclusions resulted in a temporary reduction of our LRD for going concern requirement purposes of USD 78 billion. Given our existing buffers to capital requirements and the temporary nature of this measure, this had no impact on our capacity to provide funding to our clients or the Swiss economy.

Regulators in key jurisdictions outside of Switzerland have taken measures intended to encourage banks to take an accommodative stance when dealing with customers facing financial stress, and also to support liquidity in markets. These measures include temporary relaxation of capital buffer and Pillar 2 capital requirements, temporary modifications to the LRD and the establishment of special lending or financing facilities.

Furthermore, the Basel Committee on Banking Supervision (the BCBS) has delayed the implementation deadline of Basel III rules by one year, to 1 January 2023. The accompanying transitional arrangement for the output floor has also been extended by one year, to 1 January 2028. These measures had no impact on UBS's capital position.

®   Refer to the “UBS Group AG consolidated” section of this report for more information about the effects of the temporary exemption granted by FINMA in connection with COVID-19

®   Refer to the “UBS AG standalone” section of this report for more information about the effects of the temporary exemption granted by FINMA in connection with COVID-19

®   Refer to the “UBS Switzerland AG standalone” section of this report for more information about the effects of the temporary exemption granted by FINMA in connection with COVID-19

Revised FINMA circular on credit risk

Effective 1 January 2020, we have adopted the standardized approach for counterparty credit risk (SA-CCR). SA-CCR is a comprehensive, non-modeled approach for measuring counterparty credit risk associated with over-the-counter derivatives, exchange-traded derivatives and long settlement transactions that replaces the current exposure method (CEM).

In addition, we have implemented the FINMA revisions to the capital treatment concerning UBS’s exposures to central counterparties, which mainly include a single approach for calculating capital requirements for exposures arising from UBS’s contributions to the mutualized default fund resources of a qualifying central counterparty (a QCCP), and the specific guidance regarding multi-level client structures where UBS clears its trades through intermediaries linked to a central counterparty.

We also adopted the capital requirements for investments in funds in the banking book detailed in FINMA Circular 2017/7 “Credit risk – banks” whereby investments in funds that are held in the banking book are consistently treated with one of the following three approaches, which vary in their degree of risk sensitivity and conservatism: the “look-through approach,” the “mandate-based approach” or the “fallback approach.”

Gone concern capital requirements for UBS AG standalone and UBS Switzerland AG

Effective 1 January 2020, UBS AG standalone is subject to the gone concern capital requirements for Switzerland-based intermediate parent banks of global systemically important banks (G-SIBs) on a standalone basis, as stipulated in the revised Capital Adequacy Ordinance issued in November 2019. We have implemented the necessary disclosure in this report, as agreed with FINMA.

UBS Switzerland AG is subject to a lower gone concern requirement effective 1 January 2020, corresponding to 62% of the Group’s gone concern requirement (before applicable reductions) as outlined in the revised Capital Adequacy Ordinance.

Frequency and comparability of Pillar 3 disclosures

FINMA has specified the reporting frequency for each disclosure, as outlined in the table on pages 7 and 8 of our 31 December 2019 Pillar 3 report, available under “Pillar 3 disclosures” at www.ubs.com/investors.  

In line with the FINMA-specified disclosure frequency and requirements for disclosure with regard to comparative periods, we provide quantitative comparative information as of 31 December 2019 for disclosures required on a quarterly basis. Where specifically required by FINMA and/or the BCBS, we disclose comparative information for additional reporting dates.

UBS Group

Key metrics of the first quarter of 2020

The KM1 and KM2 tables on the next page are based on Basel Committee on Banking Supervision (BCBS) Basel III rules; however, they do not reflect the effects of the temporary exemption of central bank sight deposits for leverage ratio calculation granted by the Swiss Financial Market Supervisory Authority (FINMA) in connection with COVID-19. The KM2 table includes a reference to the total loss-absorbing capacity (TLAC) term sheet, published by the Financial Stability Board (the FSB). The FSB provides this term sheet at www.fsb.org/2015/11/total-loss-absorbing-capacity-tlac-principles-and-term-sheet. 

During the first quarter of 2020, our common equity tier 1 (CET1) capital increased by USD 1.1 billion to USD 36.7 billion, mainly as a result of operating profit before tax and compensation- and own shares-related capital components, partly offset by share repurchases under our share repurchase program, accruals for capital returns to shareholders, defined benefit plans, current tax expense and foreign currency translation effects.

®   Refer to “UBS shares” in the “Capital management” section of our first quarter 2020 report for more information about the share repurchase program

®   Refer to the “Introduction and basis for preparation” section of this report for more information about the COVID-19-related temporary regulatory measures, and to “Effects of the application of the temporary COVID-19-related FINMA exemption of central bank sight deposits” in the “Going and gone concern requirements and eligible capital“ section of this report for additional information

Tier 1 capital remained stable at USD 51.9 billion as the aforementioned CET1 increase was mostly offset by a net decrease of USD 1.1 billion in additional tier 1 (AT1) instruments, which was primarily due to the call of a USD 1.25 billion loss-absorbing AT1 instrument denominated in US dollars. The TLAC
available as of 31 March 2020 included CET1 capital, additional tier 1 and tier 2 capital instruments eligible under the TLAC framework, and non-regulatory capital elements of TLAC. Under the Swiss systemically relevant bank (SRB) framework, including transitional arrangements, TLAC excludes 45% of the gross unrealized gains on debt instruments measured at fair value through other comprehensive income for accounting purposes, which for regulatory capital purposes is measured at the lower of cost or market value. This amount was negligible as of 31 March 2020, but is included as available TLAC in the KM2 table in this section.

Our available TLAC increased by USD 4.1 billion to USD 93.7 billion, mainly reflecting new issuances of two external TLAC instruments amounting to USD 1.8 billion, an increase in the eligibility of two external TLAC instruments of USD 1.5 billion due to the removal of the 50% haircut in their last year of eligibility under the Swiss SRB framework (as a national discretion item), as well as interest rate risk hedge, foreign currency translation and other effects.

Risk-weighted assets (RWA) increased by USD 27.0 billion to USD 286.3 billion, mainly due to increases in credit risk and market risk RWA from client-driven increases and higher market volatility. The leverage ratio exposure increased by USD 45 billion to USD 956 billion, reflecting increases in on-balance sheet exposures, derivative exposures and securities financing transactions (SFTs).

The liquidity coverage ratio (LCR) increase was primarily driven by higher average high-quality liquid asset (HQLA) balances due to lower funding consumption by the business divisions and higher customer deposit balances in Global Wealth Management. In addition, average net cash outflows decreased, due to a reduction in secured financing transactions and increased average inflows from customer lending, which have been partially offset by increased average outflows from customer deposits.

Our approach to measuring risk exposure and risk-weighted assets

Depending on the intended purpose, the measurement of risk exposure that we apply may differ. Exposures may be measured for financial accounting purposes under International Financial Reporting Standards (IFRS), for deriving our regulatory capital requirements or for internal risk management and control purposes. Our Pillar 3 disclosures are generally based on measures of risk exposure used to derive the regulatory capital required under Pillar 1. Our risk-weighted assets (RWA) are calculated according to the Basel Committee on Banking Supervision (BCBS) Basel III framework, as implemented by the Swiss Capital Adequacy Ordinance issued by the Swiss Federal Council and by the associated circulars issued by the Swiss Financial Market Supervisory Authority (FINMA).

For information about the measurement of risk exposures and RWA, refer to pages 12–14 of our 31 December 2019 Pillar 3 report, available under “Pillar 3 disclosures” at www.ubs.com/investors. 

RWA development in the first quarter of 2020

The OV1 table on the next page provides an overview of our RWA and the related minimum capital requirements by risk type. The FINMA template includes rows that are currently not applicable to UBS and therefore have been left empty.

During the first quarter of 2020, RWA increased by USD 27.0 billion to USD 286.3 billion, mainly reflecting increases in credit
risk RWA of USD 9.0 billion, market risk RWA of USD 8.5 billion, counterparty credit risk (CCR) RWA of USD 5.2 billion and credit valuation adjustment RWA of USD 2 billion. Fund investment related RWA for the first quarter of 2020 are newly calculated based on revised capital requirements, reflecting an implementation impact of USD 0.6 billion.

Credit risk RWA under the standardized approach increased by USD 1.8 billion, mainly due to higher exposures in the Investment Bank. Standardized RWAs for counterparty credit risk increased by USD 2.6 billion, mainly in the Investment Bank and in Global Wealth Management, primarily driven by the revised methodology for the calculation of exposure at default on derivatives (SA-CCR) and due to increased trading volumes and market volatility during the period. Other CCR RWA increased by USD 1.2 billion, mainly driven by higher exposures in our agency lending business and margin loans. The increase in credit valuation adjustment RWA of USD 2 billion was primarily due to increased trading volumes and market volatility during the period, as well as the revised methodology for the calculation of exposure at default on derivatives (SA-CCR).

The flow tables for credit risk, counterparty credit risk and market risk RWA in the respective sections of this report provide further details regarding the movements in RWA in the first quarter of 2020. More information about capital management and RWA, including details regarding movements in RWA during the first quarter of 2020, is provided on pages 50–51  in the “Capital management” section of our first quarter 2020 report, available under “Quarterly reporting” at www.ubs.com/investors. 

Credit risk RWA development in the first quarter of 2020

Credit risk RWA under the advanced internal ratings-based
(A-IRB) approach increased by USD 7.2 billion to USD 100.1 billion as of 31 March 2020.

The RWA increase from asset size movements of USD 7.5 billion was predominantly due to client-driven increases in loans and unutilized credit facilities, primarily in our Investment Bank.

The CR8 table below provides a breakdown of the credit risk RWA movements in the first quarter of 2020 across movement categories defined by BCBS. These categories are described on page 50 of our 31 December 2019 Pillar 3 report, available under “Pillar 3 disclosures” at www.ubs.com/investors. 

Counterparty credit risk RWA development in the first quarter of 2020

Counterparty credit risk RWA under the internal model method (IMM) increased by USD 0.3 billion to USD 20.6 billion during the first quarter of 2020, primarily due to increased business activity in equity swaps and foreign currency trades in the Investment Bank’s Global Markets business partially offset by a
decrease in RWA of USD 0.4 billion as a result of improved credit quality of counterparties.

Counterparty credit risk RWA under value-at-risk (VaR) increased by USD 1.2 billion to USD 6.7 billion, mainly driven by higher prime brokerage receivables and increased volume of securities financing transactions in the Investment Bank and Group Functions.

Market risk RWA development in the first quarter of 2020

The three main components that contribute to market risk RWA are value-at-risk (VaR), stressed value-at-risk (SVaR) and incremental risk charge (IRC). VaR and SVaR components include the RWA charge for risks-not-in-VaR.

The MR2 table below provides a breakdown of the market risk RWA under an internal models approach movement in the first quarter of 2020 across these components, according to the movement categories defined by the BCBS. These categories are described on page 81 of our 31 December 2019 Pillar 3 report, available under “Pillar 3 disclosures” at www.ubs.com/investors. 

Market risk RWA under an internal models approach increased by USD 8.5 billion to USD 14.6 billion in the first quarter of 2020, driven by higher average regulatory VaR and SVaR levels, mainly driven by the Investment Bank’s Global Markets business due to unprecedented and sharp market moves across asset classes. This was partially offset by a decrease related to the ongoing parameter update of the VaR model.

The VaR multiplier remained unchanged, at 3, compared with the fourth quarter of 2019.

As of 1 January 2020, we have fully phased in the going and gone concern requirements according to the Swiss Capital Adequacy Ordinance (CAO) that includes the too-big-to-fail provisions applicable to Swiss SRBs, which became effective on 1 July 2016 and were subject to phasing in until 1 January 2020. The table below provides details of the Swiss systemically relevant bank (SRB) going and gone concern capital requirements as required by the Swiss Financial Market Supervisory Authority (FINMA); however, it does not reflect the effects of the temporary exemption of central bank sight deposits for going concern leverage ratio calculation granted by FINMA on 25 March 2020 in connection with COVID-19. The respective effect is presented on the next page. More information about capital management is provided on pages 43–53 in the “Capital management” section of our first quarter 2020 report, available under “Quarterly reporting” at www.ubs.com/investors. 

Application of the temporary COVID-19-related FINMA exemption of central bank sight deposits

In line with the FINMA exemption rules that apply until 1 July 2020 and may be extended, the eligible leverage ratio denominator (LRD) relief applicable to UBS is reduced by the going concern LRD equivalent of the capital distribution that UBS plans to make after 25 March 2020. The table below summarizes the effects on our Swiss SRB going concern capital requirements and information. The FINMA exemption rules have no effect on our Swiss SRB gone concern capital requirements and ratios.

Outside of this section of this report, for simplicity and due to the short-term nature of the FINMA exemption, we have chosen to present LRD excluding the temporary FINMA exemption.

The LRD after the aforementioned temporary FINMA exemption under BCBS rules is identical to the Swiss SRB number presented in the table below. The BCBS Basel III leverage ratio was 5.92% after considering the temporary FINMA exemption.

Basel III leverage ratio

The Basel Committee on Banking Supervision (BCBS) leverage ratio is calculated by dividing the period-end tier 1 capital by the period-end leverage ratio denominator (LRD), as summarized in the table below. The LRD presented below does not reflect the effects of the temporary exemption related to the central bank sight deposit exclusion for leverage ratio calculation granted by
the Swiss Financial Market Supervisory Authority (FINMA) on 25 March 2020 in connection with COVID-19. The effects of the

temporary exemption granted by FINMA in connection with COVID-19 are presented in the “Going and gone concern requirements and eligible capital“ section of this report.

®   Refer to the “Introduction and basis for preparation” section of this report for more information about the COVID-19-related temporary regulatory measures

The LRD consists of IFRS on-balance sheet assets and off-balance sheet items. Derivative exposures are adjusted for a number of items, including replacement value and eligible cash variation margin netting, the current exposure method add-on and net notional amounts for written credit derivatives. The LRD also includes an additional charge for counterparty credit risk related to securities financing transactions (SFTs).

The table on the next page shows the difference between total IFRS assets per IFRS consolidation scope and the BCBS total on-balance sheet exposures. Those exposures are the starting point for calculating the BCBS LRD, as shown in the LR2 table in this section. The difference is due to the application of the regulatory scope of consolidation for the purpose of the BCBS calculation. In addition, carrying amounts for derivative financial instruments and SFTs are deducted from IFRS total assets. They are measured
differently under BCBS leverage ratio rules and are therefore added back in separate exposure line items in the LR2 table.

Difference between the Swiss SRB and BCBS leverage ratio

The LRD is the same under Swiss systemically relevant bank (SRB) and BCBS rules. However, there is a difference in the capital numerator between the two frameworks. Under BCBS rules only common equity tier 1 and additional tier 1 capital are included in the numerator. Under Swiss SRB rules we are required to meet going as well as gone concern leverage ratio requirements. Therefore, depending on the requirement, the numerator includes tier 1 capital instruments, tier 2 capital instruments and/or total loss-absorbing capacity (TLAC)-eligible senior unsecured debt.

The tables presented below and on the next page do not reflect the effects of the temporary exemption related to the central bank sight deposit exclusion for the leverage ratio calculation granted by FINMA on 25 March 2020 in connection with COVID-19. The effects of the temporary exemption granted by FINMA in connection with COVID-19 are presented in the “Going and gone concern requirements and eligible capital“ section of this report.

®   Refer to the “Introduction and basis for preparation” section of this report for more information about the COVID-19-related temporary regulatory measures

During the first quarter of 2020, LRD increased by USD 45 billion to USD 956 billion. On-balance sheet exposures (excluding derivatives and SFTs) increased by USD 14 billion, mainly driven by higher cash and balances with central banks and an increase in lending, partly offset by reductions in trading assets. Derivative exposures increased by USD 18 billion, reflecting market-driven movements on equity and foreign exchange contracts as well as higher collateral placed with counterparties and exchanges. SFTs increased by USD 10 billion as a result of an increase in borrowing activities, collateral sourcing and cash reinvestment.

®   Refer to the “Introduction and basis for preparation” section of this report for more information about the COVID-19-related temporary regulatory measures, and to “Application of the temporary COVID-19-related FINMA exemption of central bank sight deposits” in the “Going and gone concern requirements and eligible capital“ section of this report for additional information

High-quality liquid assets

HQLA must be easily and immediately convertible into cash at little or no loss of value, especially during a period of stress. HQLA are assets that are of low risk and are unencumbered. Other characteristics of HQLA are ease and certainty of valuation, low correlation with risky assets, listing of the assets on a developed and recognized exchange, existence of an active and sizeable market for the assets, and low volatility. Our HQLA predominantly consist of assets that qualify as Level 1 in the liquidity coverage ratio (LCR) framework, including cash, central bank reserves and government bonds.

Liquidity coverage ratio

In the first quarter of 2020, the UBS Group LCR increased 5 percentage points to 139%, remaining above the 110% Group LCR requirement communicated by the Swiss Financial Market Supervisory Authority (FINMA). The LCR increase was primarily driven by higher average HQLA balances due to lower funding consumption by the business divisions and higher customer deposit balances in Global Wealth Management. In addition, average net cash outflows decreased due to reduced secured financing transactions and higher average inflows from customer lending, which were partially offset by higher average outflows from customer deposits.