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Fair value measurement
 12 Months Ended
Dec. 31, 2021
Entity [Table]  
Disclosure Of Fair Value Measurement Explanatory
Note 21
 
Fair value measurement
a) Valuation principles
All
 
financial
 
and non-financial
 
assets
 
and liabilities
 
measured
 
or
disclosed at fair value are categorized into one of three
 
fair value
hierarchy levels
 
in accordance
 
with IFRS.
 
The fair
 
value hierarchy
is based on the
 
transparency of inputs to
 
the valuation of an
 
asset
or liability as
 
of the measurement
 
date. In certain
 
cases, the inputs
used to
 
measure fair
 
value may fall
 
within different
 
levels of
 
the
fair
 
value
 
hierarchy.
 
For
 
disclosure
 
purposes,
 
the
 
level
 
in
 
the
hierarchy within which an
 
instrument is classified in its entirety
 
is
based on the lowest level input
 
that is significant to the position’s
fair value measurement:
–
 
Level 1
 
–
 
quoted
 
prices
 
(unadjusted)
 
in
 
active
 
markets
 
for
identical assets and liabilities;
–
 
Level 2 –
 
valuation techniques
 
for which
 
all significant
 
inputs
are, or are based on, observable market data; or
–
 
Level 3 – valuation techniques
 
for which significant inputs are
not based on observable market data.
Fair
 
values
 
are
 
determined
 
using
 
quoted
 
prices
 
in
 
active
markets for
 
identical assets
 
or liabilities,
 
where available.
 
Where
the
 
market
 
for
 
a
 
financial
 
instrument
 
or
 
non-financial
 
asset
 
or
liability
 
is
 
not
 
active,
 
fair
 
value
 
is
 
established
 
using
 
a
 
valuation
technique, including
 
pricing models.
 
Valuation adjustments
 
may
be made to
 
allow for additional
 
factors, including model,
 
liquidity,
credit and funding
 
risks, which are
 
not explicitly captured
 
within
the
 
valuation
 
technique,
 
but
 
which
 
would
 
nevertheless
 
be
considered by market participants when establishing
 
a price. The
limitations
 
inherent
 
in
 
a
 
particular
 
valuation
 
technique
 
are
considered in the determination
 
of the classification of
 
an asset or
liability
 
within
 
the
 
fair
 
value
 
hierarchy.
 
Generally,
 
the
 
unit
 
of
account
 
for
 
a
 
financial
 
instrument
 
is
 
the
 
individual
 
instrument,
and UBS applies
 
valuation adjustments at
 
an individual instrument
level,
 
consistent
 
with
 
that
 
unit
 
of
 
account.
 
However,
 
if
 
certain
conditions are met, UBS may estimate the fair value
 
of a portfolio
of
 
financial
 
assets
 
and
 
liabilities
 
with
 
substantially
 
similar
 
and
offsetting risk exposures on the basis of the net open risks.
›
 
Refer to Note 21d for more information
b) Valuation governance
UBS’s fair value measurement and model governance framework
includes numerous controls and other procedural safeguards that
are intended to
 
maximize the quality of
 
fair value measurements
reported in the financial statements. New products and valuation
techniques must
 
be reviewed
 
and approved
 
by key
 
stakeholders
from the risk and finance control functions. Responsibility for the
ongoing measurement of financial and non-financial instruments
at fair value is with the business divisions.
Fair
 
value
 
estimates
 
are
 
validated
 
by
 
the
 
risk
 
and
 
finance
control
 
functions,
 
which
 
are
 
independent
 
of
 
the
 
business
divisions. Independent
 
price verification
 
is performed
 
by Finance
through benchmarking the business divisions’
 
fair value estimates
with observable market prices
 
and other independent sources.
 
A
governance
 
framework
 
and
 
associated
 
controls
 
are
 
in
 
place
 
in
order to monitor
 
the quality of third
 
-party pricing sources
 
where
used.
 
For
 
instruments
 
where
 
valuation
 
models
 
are
 
used
 
to
determine
 
fair
 
value,
 
independent
 
valuation
 
and
 
model
 
control
groups within Finance and Risk
 
Control evaluate UBS’s models on
a regular basis,
 
including valuation and
 
model input parameters,
as well as pricing. As a result of the
 
valuation controls employed,
valuation
 
adjustments
 
may
 
be
 
made
 
to
 
the
 
business
 
divisions’
estimates of fair value to
 
align with independent market
 
data and
the relevant accounting standard.
›
 
Refer to Note 21d for more information
c) Fair value hierarchy
The table below provides
 
the fair value hierarchy
 
classification of
financial and
 
non-financial assets
 
and liabilities
 
measured at
 
fair
value.
 
The
 
narrative
 
that
 
follows describes
 
valuation
 
techniques
used
 
in
 
measuring
 
their
 
fair
 
value
 
of
 
different
 
product
 
types
(including significant valuation
 
inputs and assumptions
 
used), and
the
 
factors
 
considered
 
in
 
determining
 
their
 
classification
 
within
the fair value hierarchy.
Determination of fair values from quoted market
 
prices or valuation techniques
1
31.12.21
31.12.20
USD million
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Financial assets measured at fair value on a recurring basis
Financial assets at fair value held for trading
113,697
14,825
2,299
130,821
107,507
15,553
2,337
125,397
of which:
Equity instruments
97,958
1,090
149
99,197
90,307
1,101
171
91,579
Government bills / bonds
7,135
1,351
10
8,496
9,028
2,207
10
11,245
Investment fund units
7,843
1,364
21
9,229
7,374
1,794
23
9,192
Corporate and municipal bonds
708
7,604
556
8,868
789
8,356
817
9,961
Loans
0
3,099
1,443
4,542
0
1,860
1,134
2,995
Asset-backed securities
53
317
120
489
8
236
181
425
Derivative financial instruments
522
116,479
1,140
118,142
795
157,068
1,754
159,617
of which:
Foreign exchange contracts
255
53,043
7
53,305
319
68,424
5
68,749
Interest rate contracts
0
32,747
494
33,241
0
50,353
537
50,890
Equity / index contracts
0
27,861
384
28,245
0
33,990
853
34,842
Credit derivative contracts
0
1,179
236
1,414
0
2,008
350
2,358
Commodity contracts
0
1,590
16
1,606
0
2,211
6
2,217
Brokerage receivables
0
21,839
0
21,839
0
24,659
0
24,659
Financial assets at fair value not held for trading
2
27,278
28,622
4,180
60,080
40,986
35,435
3,942
80,364
of which:
Financial assets for unit-linked investment contracts
21,110
187
6
21,303
20,628
101
2
20,731
Corporate and municipal bonds
123
13,937
306
14,366
290
16,957
372
17,619
Government bills / bonds
5,624
3,236
0
8,860
19,704
3,593
0
23,297
Loans
0
4,982
892
5,874
0
7,699
862
8,561
Securities financing transactions
0
5,704
100
5,804
0
6,629
122
6,751
Auction rate securities
0
0
1,585
1,585
0
0
1,527
1,527
Investment fund units
338
574
117
1,028
278
447
105
831
Equity instruments
83
2
681
765
86
0
544
631
Other
0
0
495
495
0
10
408
418
Financial assets measured at fair value through other comprehensive income on
 
a recurring basis
Financial assets measured at fair value through other comprehensive
 
income
2
2,704
6,140
0
8,844
1,144
7,114
0
8,258
of which:
Asset-backed securities
0
4,849
0
4,849
0
6,624
0
6,624
Government bills / bonds
2,658
27
0
2,686
1,103
47
0
1,150
Corporate and municipal bonds
45
1,265
0
1,310
40
444
0
485
Non-financial assets measured at fair value on a recurring basis
Precious metals and other physical commodities
5,258
0
0
5,258
6,264
0
0
6,264
Non-financial assets measured at fair value on a non-recurring basis
Other non-financial assets
3
0
0
26
26
0
1
245
246
Total assets measured at fair value
149,459
187,905
7,645
345,010
156,696
239,831
8,278
404,805
Determination of fair values from quoted market
 
prices or valuation techniques (continued)
1
31.12.21
31.12.20
USD million
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Financial liabilities measured at fair value on a recurring basis
Financial liabilities at fair value held for trading
25,413
6,170
105
31,688
26,888
6,652
55
33,595
of which:
Equity instruments
18,328
513
83
18,924
22,519
425
40
22,985
Corporate and municipal bonds
30
4,219
17
4,266
31
4,048
9
4,089
Government bills / bonds
5,883
826
0
6,709
3,642
1,036
0
4,678
Investment fund units
1,172
555
6
1,733
696
1,127
5
1,828
Derivative financial instruments
509
118,558
2,242
121,309
746
156,884
3,471
161,102
of which:
Foreign exchange contracts
258
53,800
21
54,078
316
70,149
61
70,527
Interest rate contracts
0
28,398
278
28,675
0
43,389
527
43,916
Equity / index contracts
0
33,438
1,511
34,949
0
38,870
2,306
41,176
Credit derivative contracts
0
1,412
341
1,753
0
2,403
528
2,931
Commodity contracts
0
1,503
63
1,566
0
2,003
24
2,027
Financial liabilities designated at fair value on a recurring basis
Brokerage payables designated at fair value
0
44,045
0
44,045
0
38,742
0
38,742
Debt issued designated at fair value
2
0
59,606
14,194
73,799
0
50,273
10,970
61,243
Other financial liabilities designated at fair value
2
0
29,258
816
30,074
0
29,671
716
30,387
of which:
Financial liabilities related to unit-linked investment contracts
0
21,466
0
21,466
0
20,975
0
20,975
Securities financing transactions
0
6,375
2
6,377
0
7,317
0
7,317
Over-the-counter debt instruments
0
1,334
794
2,128
0
1,363
697
2,060
Total liabilities measured at fair value
25,922
257,637
17,357
300,916
27,635
282,222
15,212
325,069
1 Bifurcated embedded derivatives are presented on the same balance sheet lines
 
as their host contracts and are not included in this table. The fair value of these derivatives was not
 
material for the periods presented.
 
2 As of 31 December 2021, USD
17
 
billion (31 December 2020: USD
21
 
billion) of Financial assets at fair value not
 
held for trading, USD
8
 
billion (31 December 2020: USD
8
 
billion) of Financial assets measured at
fair value through other
 
comprehensive income, USD
36
 
billion (31 December 2020:
 
USD
16
 
billion) of Debt issued
 
designated at fair value
 
and USD
1
 
billion (31 December 2020:
 
USD
1
 
billion) of Other financial
liabilities designated at fair value are expected to be recovered or settled after 12 months.
 
3 Other non-financial assets primarily consist of properties and other non-current assets held for sale, which are
 
measured
at the lower of their net carrying amount or fair value less costs to sell.
Valuation techniques
 
UBS uses widely recognized valuation techniques for determining
the fair
 
value of
 
financial and
 
non-financial instruments
 
that are
not
 
actively
 
traded
 
and
 
quoted.
 
The
 
most
 
frequently
 
applied
valuation
 
techniques include
 
discounted value
 
of expected
 
cash
flows, relative value and option pricing methodologies.
Discounted
 
value
 
of
 
expected
 
cash
 
flows
 
is
 
a
 
valuation
technique
 
that
 
measures
 
fair
 
value
 
using
 
estimated
 
expected
future
 
cash
 
flows
 
from
 
assets
 
or
 
liabilities
 
and
 
then
 
discounts
these
 
cash
 
flows
 
using a
 
discount
 
rate
 
or
 
discount
 
margin that
reflects the credit and
 
/ or funding spreads
 
required by the market
for instruments with similar risk
 
and liquidity profiles to produce
 
a
present
 
value. When
 
using such
 
valuation
 
techniques, expected
future
 
cash
 
flows
 
are
 
estimated
 
using
 
an
 
observed
 
or
 
implied
market
 
price
 
for
 
the
 
future
 
cash
 
flows
 
or
 
by
 
using
 
industry-
standard cash flow projection
 
models. The discount factors
 
within
the calculation are
 
generated using industry-standard yield
 
curve
modeling techniques and models.
Relative value models measure fair
 
value based on the market
prices
 
of
 
equivalent
 
or
 
comparable
 
assets
 
or
 
liabilities,
 
making
adjustments
 
for
 
differences
 
between
 
the
 
characteristics
 
of
 
the
observed instrument and the instrument being valued.
Option pricing models
 
incorporate assumptions regarding
 
the
behavior of future
 
price movements of
 
an underlying referenced
asset or assets
 
to generate a
 
probability-weighted future expected
payoff for
 
the option.
 
The resulting
 
probability-weighted expected
payoff is
 
then discounted using
 
discount factors generated
 
from
industry-standard
 
yield
 
curve
 
modeling
 
techniques
 
and
 
models.
The
 
option
 
pricing
 
model
 
may be
 
implemented
 
using a
 
closed-
form analytical
 
formula or
 
other mathematical
 
techniques (e.g.,
binomial tree or Monte Carlo simulation).
Where available,
 
valuation techniques
 
use market-observable
assumptions and inputs.
 
If such data
 
is not available,
 
inputs may
be derived
 
by reference
 
to similar
 
assets in
 
active markets,
 
from
recent
 
prices
 
for
 
comparable
 
transactions
 
or
 
from
 
other
observable
 
market
 
data.
 
In
 
such
 
cases,
 
the
 
inputs
 
selected
 
are
based
 
on
 
historical
 
experience
 
and
 
practice
 
for
 
similar
 
or
analogous instruments, derivation of input levels based on
 
similar
products with
 
observable price
 
levels,
 
and knowledge
 
of current
market conditions and valuation approaches.
For
 
more
 
complex instruments,
 
fair
 
values may
 
be
 
estimated
using
 
a
 
combination
 
of
 
observed
 
transaction
 
prices,
 
consensus
pricing services and relevant quotes. Consideration
 
is given to the
nature of
 
the quotes
 
(e.g.,
 
indicative
 
or firm)
 
and the
 
relationship
 
of
recently
 
evidenced
 
market
 
activity
 
to
 
the
 
prices
 
provided
 
by
consensus
 
pricing
 
services.
 
UBS
 
also
 
uses
 
internally
 
developed
models,
 
which
 
are
 
typically
 
based
 
on
 
valuation
 
methods
 
and
techniques
 
recognized
 
as standard
 
within
 
the industry.
 
Assumptions
and inputs
 
used in
 
valuation
 
techniques
 
include
 
benchmark
 
interest
rate curves,
 
credit and
 
funding spreads
 
used in estimating
 
discount
rates, bond
 
and equity
 
prices,
 
equity index
 
prices,
 
foreign exchange
rates, levels of market volatility and correlation. Refer to Note 21f
for
 
more
 
information.
 
The
 
discount
 
curves
 
used
 
by
 
the
 
Group
incorporate
 
the
 
funding
 
and
 
credit
 
characteristics
 
of
 
the
instruments
 
to which they
 
are applied.
Derivative instruments: valuation and classification in the
fair value hierarchy
The
 
curves
 
used
 
for
 
discounting
 
expected
 
cash
 
flows
 
in
 
the
valuation
 
of
 
collateralized
 
derivatives
 
reflect
 
the
 
funding
 
terms
associated
 
with
 
the
 
relevant
 
collateral
 
arrangement
 
for
 
the
instrument
 
being
 
valued.
 
These
 
collateral
 
arrangements
 
differ
across
 
counterparties
 
with
 
respect
 
to
 
the
 
eligible
 
currency
 
and
interest
 
terms
 
of
 
the
 
collateral.
 
The
 
majority
 
of
 
collateralized
derivatives are measured using
 
a discount curve based
 
on funding
rates
 
derived
 
from
 
overnight
 
interest
 
in
 
the
 
cheapest
 
eligible
currency for the respective counterparty collateral agreement.
Product
Valuation and classification in the fair value hierarchy
Government bills
and bonds
Valuation
–
 
Generally valued using prices obtained directly
 
from the market.
–
 
Instruments not priced directly using active-market data
 
are valued using discounted cash
 
flow valuation
techniques that incorporate market data
 
for similar government instruments.
 
Fair value hierarchy
–
 
Generally traded in active markets with prices that can be obtained directly from these markets, resulting
in classification as Level 1,
 
while the remaining positions are classified
 
as Level 2 and Level 3.
Corporate and
municipal bonds
Valuation
–
 
Generally
 
valued
 
using
 
prices
 
obtained
 
directly
 
from
 
the
 
market
 
for
 
the
 
security,
 
or
 
similar
 
securities,
adjusted for seniority, maturity and liquidity.
–
 
When prices
 
are not
 
available, instruments are
 
valued using
 
discounted cash
 
flow valuation
 
techniques
incorporating the credit spread of the
 
issuer or similar issuers.
–
 
For convertible bonds
 
without directly
 
comparable prices,
 
issuances may
 
be priced using
 
a convertible
 
bond
model.
Fair value hierarchy
–
 
Generally classified as Level 1 or Level 2, depending
 
on the depth of trading activity behind price
 
sources.
–
 
Level 3 instruments have no suitable pricing information
 
available.
Traded loans and
loans measured at
fair value
Valuation
–
 
Valued directly
 
using market prices
 
that reflect recent
 
transactions or quoted
 
dealer prices, where
 
available.
–
 
Where no
 
market price
 
data is
 
available, loans
 
are valued
 
by relative
 
value benchmarking
 
using pricing
derived from debt instruments in comparable entities or different products in the same entity, or by using
a credit default
 
swap valuation technique,
 
which requires inputs
 
for credit spreads,
 
credit recovery rates
and interest
 
rates. Recently
 
originated commercial real
 
estate loans
 
are measured
 
using a
 
securitization
approach based on rating agency guidelines.
Fair value hierarchy
–
 
Instruments with suitably deep and liquid pricing
 
information are classified as Level 2.
–
 
Positions requiring the use of
 
valuation techniques, or for
 
which the price sources have
 
insufficient trading
depth, are classified as Level 3.
Uncollateralized
 
and
 
partially
 
collateralized
 
derivatives
 
are
discounted
 
using
 
the
 
alternative
 
reference
 
rate
 
(the
 
ARR)
 
(or
equivalent) curve for the currency
 
of the instrument. As described
in
 
Note
2
1
d
,
the
 
fair
 
value
 
of
 
uncollateralized
 
and
 
partially
collateralized
 
derivatives
 
is
 
then
 
adjusted
 
by
 
credit
 
valuation
adjustments
 
(
CVA
s)
,
debit
 
valuation
 
adjustments
 
(
DVA
s)
 
and
funding valuation adjustments (FVAs), as
 
applicable, to reflect an
estimation
 
of
 
the
 
effect
 
of
 
counterparty
 
credit
 
risk,
 
UBS’s
 
own
credit risk, and funding costs and benefits.
›
 
Refer to Note 10 for more information about
 
derivative
instruments
Derivative product
Valuation and classification in the fair value hierarchy
Interest rate
contracts
Valuation
–
 
Interest rate swap contracts
 
are valued by estimating
 
future interest cash flows
 
and discounting those
 
cash
flows using
 
a rate
 
that reflects the
 
appropriate funding rate
 
for the
 
position being
 
measured. The yield
curves used to estimate future index
 
levels and discount rates are generated using
 
market-standard yield
curve models using interest rates associated with
 
current market activity. The key inputs to the
 
models are
interest rate swap rates, forward rate agreement rates, short-term interest rate futures prices,
 
basis swap
spreads and inflation swap rates.
–
 
Interest rate option contracts
 
are valued using various
 
market-standard option models, using inputs that
include interest rate yield curves, inflation curves,
 
volatilities and correlations.
–
 
When the maturity
 
of an interest
 
rate swap or
 
option contract exceeds
 
the term for
 
which standard market
quotes are observable for
 
a significant input parameter,
 
the contracts are valued
 
by extrapolation from the
last observable point using standard assumptions
 
or by reference to another observable comparable
 
input
parameter to represent a suitable proxy for that
 
portion of the term.
Fair value hierarchy
–
 
The majority of interest
 
rate swaps are classified
 
as Level 2,
 
as the standard market
 
contracts that form the
inputs for yield curve models are generally traded
 
in active and observable markets.
–
 
Options are
 
generally treated
 
as Level 2,
 
as the calibration
 
process enables
 
the model
 
output to
 
be validated
to active-market
 
levels. Models
 
calibrated in
 
this way
 
are then
 
used to
 
revalue the
 
portfolio of
 
both standard
options and more exotic products.
–
 
Interest rate swap
 
or option contracts
 
are classified as
 
Level 3 when the
 
terms
 
exceed standard market-
observable quotes.
–
 
Exotic options for
 
which appropriate volatility
 
or correlation input
 
levels cannot be implied
 
from observable
market data are classified as Level 3.
Credit derivative
contracts
Valuation
–
 
Credit derivative
 
contracts are
 
valued using
 
industry-standard models
 
based primarily
 
on
 
market credit
spreads, upfront pricing points and implied recovery rates. Where a derivative credit spread is not directly
available, it may be derived from the price of
 
the reference cash bond.
 
–
 
Asset-backed credit
 
derivatives are
 
valued using
 
a valuation
 
technique similar
 
to that
 
of the
 
underlying
security with an adjustment to reflect
 
the funding differences between cash
 
and synthetic form.
Fair value hierarchy
–
 
Single-entity and
 
portfolio
 
credit derivative
 
contracts are
 
classified as
 
Level 2
 
when credit
 
spreads and
recovery rates
 
are determined
 
from actively
 
traded observable
 
market data.
 
Where the
 
underlying reference
name(s) are not actively traded
 
and the correlation cannot be
 
directly mapped to actively traded tranche
instruments, these contracts are classified
 
as Level 3.
 
–
 
Asset-backed
 
credit
 
derivatives
 
follow
 
the
 
characteristics
 
of
 
the
 
underlying
 
security
 
and
 
are
 
therefore
distributed across Level 2 and Level 3.
Derivative product
Valuation and classification in the fair value hierarchy
Foreign exchange
contracts
Valuation
–
 
Open spot foreign exchange (FX)
 
contracts are valued using the FX spot rate
 
observed in the market.
–
 
Forward FX contracts are valued using the FX spot rate adjusted for forward pricing points observed from
standard market-based sources.
–
 
Over-the-counter (OTC) FX
 
option contracts are
 
valued using
 
market-standard option valuation
 
models.
The models used for shorter-dated options (i.e., maturities of
 
five years or less) tend
 
to be different than
those used for
 
longer-dated
 
options because
 
the models needed
 
for longer-dated
 
OTC FX contracts
 
require
additional consideration of interest rate and FX
 
rate interdependency.
–
 
The valuation for
 
multi-dimensional FX
 
options uses a
 
multi-local volatility model,
 
which is calibrated
 
to the
observed FX volatilities for all relevant FX pairs.
Fair value hierarchy
–
 
The
 
markets
 
for
 
FX
 
spot
 
and
 
FX
 
forward
 
pricing
 
points
 
are
 
both
 
actively
 
traded
 
and
 
observable
 
and
therefore such FX contracts are generally classified
 
as Level 2.
 
–
 
A significant proportion of
 
OTC FX option contracts are
 
classified as Level 2 as
 
inputs are derived mostly
from standard market contracts traded in
 
active and observable markets.
–
 
OTC FX
 
option contracts
 
classified as
 
Level 3 include
 
multi-dimensional FX
 
options and
 
long-dated FX
 
exotic
option contracts where there is no active market
 
from which to derive volatility or correlation
 
inputs.
Equity / index
contracts
Valuation
–
 
Equity forward
 
contracts have a
 
single stock
 
or index
 
underlying and are
 
valued using
 
market-standard
models. The key inputs to the models are
 
stock prices, estimated dividend rates and equity funding rates
(which are implied
 
from prices of
 
forward contracts observed
 
in the market).
 
Estimated cash flows
 
are then
discounted using market-standard discounted cash flow models using a rate that reflects the appropriate
funding rate for
 
that portion
 
of the portfolio.
 
When no market
 
data is available
 
for the instrument
 
maturity,
they are
 
valued by
 
extrapolation of
 
available data,
 
use of
 
historical dividend
 
data, or
 
use of
 
data for
 
a
related equity.
 
–
 
Equity option contracts are valued
 
using market-standard models that
 
estimate the equity forward level
 
as
described
 
for
 
equity
 
forward
 
contracts
 
and
 
incorporate
 
inputs
 
for
 
stock
 
volatility
 
and
 
for
 
correlation
between
 
stocks
 
within
 
a
 
basket.
 
The
 
probability-weighted
 
expected
 
option
 
payoff
 
generated
 
is
 
then
discounted
 
using
 
market-standard
 
discounted
 
cash
 
flow
 
models
 
applying
 
a
 
rate
 
that
 
reflects
 
the
appropriate funding rate
 
for that portion of
 
the portfolio. When
 
volatility, forward or
 
correlation inputs are
not
 
available,
 
they
 
are
 
valued
 
using
 
extrapolation
 
of
 
available
 
data,
 
historical
 
dividend,
 
correlation
 
or
volatility data, or the equivalent data for
 
a related equity.
Fair value hierarchy
–
 
As inputs are
 
derived mostly from standard
 
market contracts traded in
 
active and observable markets,
 
a
significant proportion of equity forward contracts
 
are classified as Level 2.
 
–
 
Equity option positions for which inputs are derived
 
from standard market contracts traded in active and
observable markets are also classified
 
as Level 2. Level 3 positions are those
 
for which volatility, forward or
correlation inputs are not observable.
Commodity
contracts
Valuation
–
 
Commodity forward
 
and swap
 
contracts are
 
measured using
 
market-standard models
 
that use
 
market
forward levels on standard instruments.
 
–
 
Commodity
 
option
 
contracts
 
are
 
measured
 
using
 
market-standard
 
option
 
models
 
that
 
estimate
 
the
commodity forward level
 
as described for
 
commodity forward and
 
swap contracts, incorporating
 
inputs
for the volatility of the underlying
 
index or commodity. For commodity
 
options on baskets of commodities
or
 
bespoke
 
commodity
 
indices,
 
the
 
valuation
 
technique
 
also
 
incorporates
 
inputs
 
for
 
the
 
correlation
between different commodities or commodity
 
indices.
Fair value hierarchy
–
 
Individual
 
commodity contracts
 
are
 
typically classified
 
as
 
Level 2,
 
because
 
active
 
forward and
 
volatility
market data is available.
Product
Valuation and classification in the fair value hierarchy
Investment fund
units
Valuation
–
 
Predominantly exchange-traded, with
 
readily available quoted prices in liquid markets.
–
 
Where market prices are not available, fair
 
value may be measured using net asset
 
values (NAVs).
Fair value hierarchy
–
 
Listed units
 
are classified
 
as
 
Level 1, provided
 
there is
 
sufficient trading
 
activity to
 
justify active-market
classification, while other positions are classified
 
as Level 2.
–
 
Positions for which NAVs are not available
 
are classified as Level 3.
Asset-backed
securities (ABS)
Valuation
–
 
For liquid securities, the valuation
 
process will use trade
 
and price data, updated for movements
 
in market
levels between the time of trading and the
 
time of valuation. Less liquid instruments are measured using
discounted expected
 
cash flows
 
incorporating price
 
data for instruments
 
or indices with
 
similar risk profiles.
Fair value hierarchy
–
 
Residential
 
mortgage
-
backed
 
securities
,
c
ommercial
 
mortgage
-
backed
 
securities
 
and
 
other
 
ABS
 
are
generally classified as Level 2. However,
 
if significant inputs are unobservable,
 
or if market or fundamental
data is not available, they are classified as Level
 
3.
Auction rate
securities (ARS)
Valuation
–
 
ARS
 
are
 
valued
 
utilizing
 
a
 
discounted
 
cash
 
flow
 
methodology.
 
The
 
model
 
captures
 
interest
 
rate
 
risk
emanating from the note coupon, credit risk attributable to the
 
underlying closed-end fund investments,
liquidity risk as a function of the level of trading volume in these positions, and extension risk, as ARS
 
are
perpetual instruments that require an assumption
 
regarding their maturity or issuer redemption
 
date.
 
Fair value hierarchy
–
 
Granular and liquid pricing information is generally not available for
 
ARS. As a result, these securities are
classified as Level 3.
Equity instruments
Valuation
–
 
Listed equity instruments are generally valued
 
using prices obtained directly from the market.
–
 
Unlisted equity holdings,
 
including private equity
 
positions, are initially
 
marked at their
 
transaction price
and are
 
revalued when
 
reliable evidence of
 
price movement
 
becomes available
 
or when
 
the position
 
is
deemed to be impaired.
 
Fair value hierarchy
–
 
The majority
 
of equity
 
securities are actively
 
traded on
 
public stock
 
exchanges where quoted
 
prices are
readily and regularly available, resulting in Level
 
1 classification.
Financial assets for
unit-linked
investment
contracts
Valuation
–
 
The majority of assets are listed on exchanges
 
and fair values are determined using quoted
 
prices.
Fair value hierarchy
–
 
Most assets are classified as Level 1 if actively traded,
 
or Level 2 if trading is not active.
–
 
Instruments for which prices are not readily available
 
are classified as Level 3.
Securities financing
transactions
Valuation
–
 
These instruments are valued using discounted expected cash flow techniques. The discount rate applied
is based on funding curves that are relevant
 
to the collateral eligibility terms.
Fair value hierarchy
–
 
Collateral funding curves for
 
these instruments are generally
 
observable and, as a
 
result, these positions
are classified as Level 2.
–
 
Where the collateral
 
terms are non-standard,
 
the funding curve
 
may be considered
 
unobservable and
 
these
positions are classified as Level 3.
Brokerage
receivables and
payables
Valuation
–
 
Fair value is determined based on the value of
 
the underlying balances.
Fair value hierarchy
–
 
Due to their on-demand nature, these receivables
 
and payables are deemed as Level 2.
Amounts due under
unit-linked
investment
contracts
Valuation
–
 
The
 
fair
 
values
 
of
 
investment
 
contract
 
liabilities
 
are
 
determined
 
by
 
reference
 
to
 
the
 
fair
 
value
 
of
 
the
corresponding assets.
Fair value hierarchy
–
 
The liabilities themselves are not actively traded,
 
but are mainly referenced to instruments
 
that are actively
traded and are therefore classified as Level 2.
d) Valuation adjustments and other items
The output of a
 
valuation technique is
 
always an estimate of
 
a fair
value
 
that
 
cannot
 
be
 
measured
 
with
 
complete
 
certainty.
 
As
 
a
result, valuations are adjusted, where appropriate and when such
factors would be considered by market participants
 
in estimating
fair value, to
 
reflect close-out costs,
 
credit exposure, model-driven
valuation
 
uncertainty,
 
funding
 
costs
 
and
 
benefits,
 
trading
restrictions and other factors.
 
The table below summarizes the
 
valuation adjustment reserves
recognized on the balance sheet. Details about each category are
provided further below.
Valuation adjustment reserves on the balance sheet
As of
Life-to-date gain / (loss), USD million
31.12.21
31.12.20
31.12.19
Deferred day-1 profit or loss reserves
418
269
146
Own credit adjustments on financial liabilities designated at fair value
(315)
(381)
(88)
CVAs, FVAs,
 
DVAs and other valuation adjustments
(1,004)
(959)
(706)
Deferred day-1 profit or loss reserves
For
 
new
 
transactions
 
where
 
the
 
valuation
 
technique
 
used
 
to
measure fair
 
value requires
 
significant inputs
 
that are
 
not based
on
 
observable
 
market
 
data,
 
the
 
financial
 
instrument
 
is
 
initially
recognized
 
at
 
the
 
transaction
 
price.
 
The
 
transaction
 
price
 
may
differ
 
from
 
the fair
 
value obtained
 
using a
 
valuation technique,
where any such difference is deferred and not initially recognized
in the income statement.
Deferred
 
day-1
 
profit
 
or
 
loss
 
is generally
 
released
 
into
Other
net
 
income
 
from
 
financial
 
instruments
 
measured
 
at
 
fair
 
value
through profit or loss
 
when pricing of equivalent products or the
underlying
 
parameters
 
become
s
 
observable
 
or
 
when
 
the
transaction is closed out.
The
 
table
 
below
 
summarizes
 
the
 
changes
 
in
 
deferred
 
day-1
profit or loss reserves during the respective period.
Deferred day-1 profit or loss reserves
USD million
2021
2020
2019
Reserve balance at the beginning of the year
269
146
255
Profit / (loss) deferred on new transactions
459
362
171
(Profit) / loss recognized in the income statement
(308)
(238)
(278)
Foreign currency translation
(2)
0
(2)
Reserve balance at the end of the year
418
269
146
Own credit
 
Own
 
credit
 
risk
 
is
 
reflected
 
in
 
the
 
valuation
 
of
 
UBS’s
 
fair
 
value
option liabilities where
 
this component is considered relevant
 
for
valuation
 
purposes
 
by
 
UBS’s
 
counterparties
 
and
 
other
 
market
participants.
Changes in
 
the fair
 
value of
 
financial liabilities
 
designated at
fair
 
value
 
through
 
profit
 
or
 
loss
 
related
 
to
 
own
 
credit
 
are
recognized
 
in
Other
 
comprehensive
 
income
 
directly
 
within
Retained
 
earnings,
with
 
no
 
reclassification
 
to
 
the
 
income
statement in future periods.
 
This presentation does not
 
create or
increase an accounting mismatch in the
 
income statement, as the
Group does not hedge changes in own credit.
Own
 
credit
 
is
 
estimated
 
using
 
own
 
credit
 
adjustment
 
(OCA)
curves,
 
which
 
incorporate
 
observable
 
market
 
data,
 
including
market-observed
 
secondary
 
prices
 
for
 
UBS’s
 
debt,
 
UBS’s
 
credit
default swap spreads
 
and debt curves
 
of peers. In
 
the table below,
the
 
change
 
in
 
unrealized
 
own credit
 
consists of
 
changes
 
in
 
fair
value that are attributable
 
to the change in
 
UBS’s credit spreads,
as well
 
as the
 
effect of
 
changes in
 
fair values
 
attributable to
 
factors
other than credit spreads, such as redemptions, effects from time
decay
 
and changes
 
in
 
interest and
 
other
 
market rates.
 
Realized
own credit is recognized
 
when an instrument with
 
an associated
unrealized OCA
 
is repurchased
 
prior to
 
the contractual
 
maturity
date.
 
Life-to-date
 
amounts
 
reflect
 
the
 
cumulative
 
unrealized
change since initial recognition.
›
 
Refer to Note 16 for more information about
 
debt issued
designated at fair value
Own credit adjustments on financial liabilities
 
designated at fair value
Included in Other comprehensive income
For the year ended
USD million
31.12.21
31.12.20
31.12.19
Recognized during the period:
Realized gain / (loss)
 
(14)
2
8
Unrealized gain / (loss)
 
60
(295)
(408)
Total gain / (loss), before tax
46
(293)
(400)
As of
 
USD million
31.12.21
31.12.20
31.12.19
Recognized on the balance sheet as of the end of the period:
Unrealized life-to-date gain / (loss)
 
(315)
(381)
(88)
Credit valuation adjustments
In order to measure
 
the fair value of
 
OTC derivative instruments,
including
 
funded
 
derivative
 
instruments
 
that
 
are
 
classified
 
as
Financial assets at
 
fair value
 
not held for
 
trading,
 
CVAs are needed
to
 
reflect
 
the
 
credit
 
risk
 
of
 
the
 
counterparty
 
inherent
 
in
 
these
instruments. This
 
amount represents
 
the estimated
 
fair value
 
of
protection required
 
to hedge the counterparty credit
 
risk of such
instruments.
 
A
 
CVA
 
is
 
determined
 
for
 
each
 
counterparty,
considering
 
all
 
exposures
 
with
 
that
 
counterparty,
 
and
 
is
dependent
 
on
 
the
 
expected
 
future
 
value
 
of
 
exposures,
 
default
probabilities
 
and
 
recovery
 
rates,
 
applicable
 
collateral
 
or
 
netting
arrangements,
 
break
 
clauses,
 
funding
 
spreads
,
 
and
 
other
contractual factors.
 
Funding valuation adjustments
FVAs
 
reflect
 
the
 
costs
 
and
 
benefits
 
of
 
funding
 
associated
 
with
uncollateralized and
 
partially collateralized
 
derivative receivables
and
 
payables
 
and
 
are
 
calculated
 
as
 
the
 
valuation
 
effect
 
from
moving
 
the
 
discounting
 
of
 
the
 
uncollateralized
 
derivative
 
cash
flows from the ARR to OCA using the CVA framework, including
the probability of counterparty default.
 
An FVA is
 
also applied to
collateralized derivative
 
assets in
 
cases where the
 
collateral cannot
be sold or repledged.
Debit valuation adjustments
A DVA
 
is estimated to incorporate own
 
credit in the valuation of
derivatives
 
where
 
an
 
FVA
 
is
 
not
 
already
 
recognized.
 
The
 
DVA
calculation
 
is
 
effectively
 
consistent
 
with
 
the
 
CVA
 
framework,
being
 
determined
 
for
 
each
 
counterparty,
 
considering
 
all
exposures
 
with
 
that
 
counterparty
 
and
 
taking
 
into
 
account
collateral
 
netting
 
agreements,
 
expected
 
future
 
mark-to-market
movements and UBS’s credit default spreads.
Other valuation adjustments
Instruments that are measured as part of a portfolio of combined
long and short
 
positions are valued at
 
mid-market levels to
 
ensure
consistent
 
valuation
 
of
 
the
 
long-
 
and
 
short-component
 
risks.
 
A
liquidity valuation adjustment is
 
then made to the
 
overall net long
or
 
short
 
exposure
 
to
 
move
 
the
 
fair
 
value
 
to
 
bid
 
or
 
offer
 
as
appropriate, reflecting current levels of market liquidity.
 
The bid–
offer spreads used in
 
the calculation of this valuation adjustment
are obtained from market transactions
 
and other relevant sources
and are updated periodically.
Uncertainties
 
associated
 
with
 
the
 
use
of
 
model
-
based
valuations
 
are
 
incorporated
 
into
 
the
 
measurement
 
of
 
fair
 
value
through
 
the
 
use
 
of
 
model
 
reserves.
 
These
 
reserves
 
reflect
 
the
amounts
 
that
 
the
 
Group
 
estimates
 
should
 
be
 
deducted
 
from
valuations
 
produced
 
directly
 
by
 
models
 
to
 
incorporate
uncertainties in the relevant modeling assumptions, in the
 
model
and market inputs used, or in the calibration
 
of the model output
to
 
adjust
 
for
 
known
 
model
 
deficiencies.
 
In
 
arriving
 
at
 
these
estimates,
 
the
 
Group
 
considers
 
a
 
range
 
of
 
market
 
practices,
including how it
 
believes market participants
 
would assess these
uncertainties. Model reserves
 
are reassessed periodically
 
in light
 
of
data
 
from
 
market
 
transactions,
 
consensus
 
pricing
 
services
 
and
other relevant sources.
Other items
In the first half of 2021,
 
UBS incurred a loss of
 
USD
861
 
million as
a
 
result
 
of
 
closing
 
out
 
a
 
significant
 
portfolio
 
of
 
swaps
 
with
 
a
US-based
 
client
 
of
 
its
 
prime
 
brokerage
 
business
 
and
 
the
unwinding of
 
related hedges,
 
following the
 
client’s default.
 
This
loss
 
is
 
presented
 
within
Other
 
net
 
income
 
from
 
financial
instruments measured at fair value through profit or loss
.
Valuation adjustments on financial instruments
As of
Life-to-date gain / (loss), USD million
31.12.21
31.12.20
Credit valuation adjustments
1
(44)
(66)
Funding valuation adjustments
(49)
(73)
Debit valuation adjustments
2
0
Other valuation adjustments
(913)
(820)
of which: liquidity
(341)
(340)
of which: model uncertainty
(571)
(479)
1 Amounts do not include reserves against defaulted counterparties.
e) Transfers between Level 1 and Level 2
Assets and liabilities transferred
 
from Level 2 to
 
Level 1 during 2021 were
 
not material. Assets and
 
liabilities transferred from Level 1
to Level 2 during 2021 were also not material.
f) Level 3 instruments: valuation techniques and inputs
The
 
table
 
below
 
presents
 
material
 
Level 3
 
assets
 
and
 
liabilities,
together
 
with
 
the
 
valuation
 
techniques
 
used
 
to
 
measure
 
fair
value,
 
the
 
inputs
 
used
 
in
 
a
 
given
 
valuation
 
technique
 
that
 
are
considered significant as
 
of 31 December
 
2021 and
 
unobservable,
and a range of values for those unobservable inputs.
 
The
 
range
 
of
 
values represents
 
the
 
highest-
 
and lowest-level
inputs
 
used in
 
the valuation
 
techniques. Therefore,
 
the range
 
does
not reflect the level of
 
uncertainty regarding a particular input or
an assessment
 
of the
 
reasonableness of
 
the Group’s
 
estimates and
assumptions, but rather the different underlying
 
characteristics of
the relevant
 
assets and
 
liabilities held
 
by the
 
Group. The
 
ranges
will
 
therefore
 
vary
 
from
 
period
 
to
 
period
 
and
 
parameter
 
to
parameter
 
based
 
on
 
characteristics
 
of
 
the
 
instruments
 
held
 
at
each balance
 
sheet date.
 
Furthermore, the
 
ranges of
 
unobservable
inputs may differ across other financial institutions, reflecting the
diversity of the products in each firm’s inventory.
Valuation techniques and inputs used in the fair value measurement
 
of Level 3 assets and liabilities
Fair value
Significant
unobservable
input(s)
1
Range of inputs
Assets
Liabilities
Valuation
technique(s)
31.12.21
31.12.20
USD billion
31.12.21
31.12.20
31.12.21
31.12.20
low
high
weighted
average
2
low
high
weighted
average
2
unit
1
Financial assets and liabilities at fair value held for trading and Financial assets at fair
 
value not held for trading
Corporate and municipal
bonds
0.9
1.2
0.0
0.0
Relative value to
market comparable
Bond price equivalent
16
143
98
1
143
100
points
Discounted expected
cash flows
Discount margin
434
434
268
268
basis
points
Traded loans, loans
measured at fair value,
loan commitments and
guarantees
2.8
2.4
0.0
0.0
Relative value to
market comparable
Loan price equivalent
0
101
99
0
101
99
points
Discounted expected
cash flows
Credit spread
175
800
436
190
800
398
basis
points
Market comparable
and securitization
model
Credit spread
28
1,544
241
40
1,858
333
basis
points
Auction rate securities
1.6
1.5
Discounted expected
cash flows
Credit spread
115
197
153
100
188
140
basis
points
Investment fund units
3
0.1
0.1
0.0
0.0
Relative value to
market comparable
Net asset value
Equity instruments
3
0.8
0.7
0.1
0.0
Relative value to
market comparable
Price
Debt issued designated at
fair value
4
14.2
11.0
Other financial liabilities
designated at fair value
0.8
0.7
Discounted expected
cash flows
Funding spread
24
175
42
175
basis
points
Derivative financial instruments
Interest rate contracts
0.5
0.5
0.3
0.5
Option model
Volatility of interest
rates
65
81
29
69
basis
points
Credit derivative contracts
0.2
0.3
0.3
0.5
Discounted expected
cash flows
Credit spreads
 
1
583
1
489
basis
points
Bond price equivalent
2
136
0
100
points
Equity / index contracts
0.4
0.9
1.5
2.3
Option model
Equity dividend yields
0
11
0
13
%
Volatility of equity
stocks, equity and
other indices
4
98
4
100
%
Equity-to-FX
correlation
(29)
76
(34)
65
%
Equity-to-equity
correlation
(25)
100
(16)
100
%
1 The ranges of significant
 
unobservable inputs are represented in
 
points, percentages and basis
 
points. Points are a
 
percentage of par (e.g., 100
 
points would be 100% of par).
 
2 Weighted averages are
 
provided
for most non-derivative financial
 
instruments and were calculated
 
by weighting inputs based on
 
the fair values of the
 
respective instruments. Weighted
 
averages are not provided
 
for inputs related to Other
 
financial
liabilities designated at
 
fair value
 
and Derivative
 
financial instruments,
 
as this would
 
not be meaningful.
 
3 The
 
range of
 
inputs is not
 
disclosed, as there
 
is a dispersion
 
of values
 
given the diverse
 
nature of the
investments.
 
4 Debt issued designated at fair value primarily consists of UBS structured notes, which include variable maturity notes with various equity and foreign exchange underlying risks,
 
rates-linked and credit-
linked notes, all of which have embedded derivative parameters that are considered to be unobservable.
 
The equivalent derivative instrument parameters are presented in the respective derivative financial instruments
lines in this table.
Significant unobservable inputs in Level 3 positions
This section discusses the significant unobservable inputs
 
used in the valuation of Level
 
3 instruments and assesses the potential
 
effect
that a change in each
 
unobservable input in isolation
 
may have on a
 
fair value measurement. Relationships
 
between observable and
unobservable inputs have not been included
 
in the summary below.
 
Input
Description
Bond price equivalent
–
 
Where market
 
prices are
 
not available
 
for a
 
bond, fair
 
value is
 
measured by comparison
 
with observable
 
pricing data
 
from
similar instruments. Factors considered when
 
selecting comparable instruments include credit
 
quality, maturity and industry of
the issuer. Fair value may be measured either by a direct price comparison or by conversion of
 
an instrument price into a yield
(either as an outright yield or as a spread to
 
the relevant benchmark rate).
 
–
 
For corporate and municipal bonds,
 
the range represents the range
 
of prices from reference issuances
 
used in determining fair
value. Bonds priced at 0 are distressed to the point that no recovery
 
is expected, while prices significantly in excess of 100 or
par
 
relate
 
to
 
inflation-linked
 
or
 
structured
 
issuances
 
that
 
pay
 
a
 
coupon
 
in
 
excess
 
of
 
the
 
market
 
benchmark
 
as
 
of
 
the
measurement date.
–
 
For credit derivatives, the bond price range
 
represents the range of prices used for
 
reference instruments, which are typically
converted to an equivalent yield or credit
 
spread as part of the valuation process.
Loan price equivalent
–
 
Where market prices are not available
 
for a traded loan, fair value is measured
 
by comparison with observable
 
pricing data for
similar instruments.
 
Factors considered
 
when selecting
 
comparable instruments include
 
industry segment, collateral
 
quality,
maturity and issuer-specific covenants. Fair value may be measured either by a direct price comparison
 
or by conversion of an
instrument price
 
into a yield.
 
The range represents
 
the range
 
of prices
 
derived from
 
reference issuances
 
of a similar
 
credit quality
used to
 
measure fair
 
value for
 
loans classified
 
as Level 3.
 
Loans priced
 
at 0
 
are distressed
 
to the
 
point that
 
no recovery
 
is
expected, while a current price of 100 represents
 
a loan that is expected to be repaid in full.
Credit spread
–
 
Valuation models for many credit derivatives
 
require an input for the credit
 
spread, which is a reflection of the
 
credit quality of
the associated referenced
 
underlying. The credit
 
spread of a
 
particular security is
 
quoted in relation
 
to the yield
 
on a benchmark
security or reference rate, typically either US Treasury or ARR,
 
and is generally expressed in terms of basis points. An increase
 
/
(decrease) in credit
 
spread will increase
 
/ (decrease) the
 
value of credit
 
protection offered by
 
credit default swaps
 
and other
credit derivative
 
products. The
 
income statement
 
effect from
 
such changes
 
depends on
 
the nature
 
and direction
 
of the
 
positions
held. Credit spreads may
 
be negative where the asset
 
is more creditworthy than the
 
benchmark against which the spread
 
is
calculated. A
 
wider credit spread
 
represents decreasing creditworthiness. The
 
range represents a
 
diverse set
 
of underlyings,
with the lower
 
end of the
 
range representing
 
credits of the
 
highest quality
 
and the upper
 
end of the
 
range representing
 
greater
levels of credit risk.
Discount margin
–
 
The discount margin (DM) spread represents the
 
discount rates applied to present value
 
cash flows of an asset
 
to reflect the
market return required for uncertainty in the
 
estimated cash flows. DM spreads are
 
a rate or rates applied on top of a floating
index (e.g., Secured Overnight Financing
 
Rate (SOFR)) to discount expected
 
cash flows. Generally, a decrease
 
/ (increase) in the
DM in isolation would result in a higher / (lower)
 
fair value.
–
 
The high end
 
of the
 
range relates
 
to securities
 
that are priced
 
low within
 
the market
 
relative to the
 
expected cash
 
flow schedule.
This indicates
 
that the
 
market is
 
pricing an
 
increased risk
 
of credit
 
loss into
 
the security
 
that is
 
greater than
 
what is
 
being
captured by the
 
expected cash
 
flow generation process.
 
The low e
 
nds of
 
the ranges are
 
typical of funding
 
rates on
 
better-
quality instruments.
Funding spread
–
 
Structured financing transactions are valued using synthetic funding curves that best represent the assets that are pledged as
collateral for the transactions. They are not representative
 
of where UBS can fund itself on an unsecured basis, but
 
provide an
estimate of where UBS can source and deploy secured funding with counterparties for a given type of collateral. The funding
spreads are expressed in terms of basis points,
 
and if funding spreads widen, this increases the
 
effect of discounting.
 
–
 
A small proportion of structured
 
debt instruments and non-structured
 
fixed-rate bonds within financial
 
liabilities designated at
fair value had an exposure to funding spreads that
 
was longer in duration than the actively traded
 
market.
Volatility
–
 
Volatility measures the variability of future prices
 
for a particular instrument and is generally
 
expressed as a percentage, where
a higher number reflects a more volatile instrument, for which future price movements are
 
more likely to occur. Volatility is a
key input
 
into option
 
models, where it
 
is used
 
to derive
 
a probability-based
 
distribution of
 
future prices
 
for the
 
underlying
instrument. The effect
 
of volatility on
 
individual positions within
 
the portfolio is
 
driven primarily by
 
whether the option
 
contract
is a
 
long or
 
short position.
 
In most
 
cases, the
 
fair value
 
of an
 
option increases
 
as a
 
result of
 
an increase
 
in volatility
 
and is
reduced by
 
a decrease
 
in volatility.
 
Generally,
 
volatility used
 
in the
 
measurement of fair
 
value is
 
derived from
 
active-market
option prices
 
(referred to
 
as implied
 
volatility). A
 
key feature
 
of implied
 
volatility is
 
the volatility
 
“smile” or
 
“skew,” which
represents the effect of pricing options of
 
different option strikes at different implied volatility
 
levels.
–
 
Volatilities of low interest rates tend to be much higher than volatilities of high interest rates. In addition, different currencies
may have significantly different implied volatilities.
Input
Description
Correlation
–
 
Correlation measures the interrelationship between the movements of two variables. It is expressed as a percentage between
 
–100% and
 
+100%, where
 
+100% represents
 
perfectly correlated
 
variables (meaning
 
a movement
 
of one
 
variable is
 
associated
with a
 
movement of the
 
other variable in
 
the same direction)
 
and –100% implies
 
that the variables
 
are inversely correlated
(meaning a movement
 
of one variable
 
is associated with
 
a movement of
 
the other variable
 
in the opposite
 
direction). The
 
effect
of correlation on the measurement of fair value depends on the specific terms of the instruments being valued, reflecting the
range of different payoff features within
 
such instruments.
–
 
Equity-to-FX correlation is important for equity options based on
 
a currency other than the
 
currency of the underlying stock.
Equity-to-equity correlation is particularly important for complex options that incorporate, in some
 
manner, different equities
in the projected payoff.
Equity dividend yields
–
 
The derivation of
 
a forward price
 
for an individual
 
stock or index
 
is important for
 
measuring fair value
 
for forward or
 
swap
contracts and for measuring fair value using option pricing models. The relationship between the current stock price and
 
the
forward price is based on a combination of expected future dividend levels and
 
payment timings, and, to a lesser extent, the
relevant funding rates applicable
 
to the stock in question.
 
Dividend yields are generally expressed
 
as an annualized percentage
of the share price,
 
with the lowest limit
 
of 0% representing
 
a stock that is
 
not expected to pay
 
any dividend. The
 
dividend yield
and timing represent the
 
most significant parameter in determining
 
fair value for instruments
 
that are sensitive to
 
an equity
forward price.
The table
 
below summarizes
 
those financial
 
assets and
 
liabilities
classified
 
as
 
Level 3
 
for
 
which
 
a
 
change
 
in
 
one
 
or
 
more
 
of
 
the
unobservable inputs
 
to reflect
 
reasonably possible
 
favorable and
unfavorable
 
alternative
 
assumptions
 
would
 
change
 
fair
 
value
significantly,
 
and
 
the estimated
 
effect
 
thereof.
 
The
 
table
 
below
does
 
not
 
represent
 
the
 
estimated
 
effect
 
of
 
stress
 
scenarios.
Interdependencies between Level 1, 2 and 3
 
parameters have not
been
 
incorporated
 
in
 
the
 
table.
 
Furthermore,
 
direct
 
inter-
relationships between the
 
Level 3 parameters discussed
 
below are
not a significant element of the valuation uncertainty.
Sensitivity
 
data
 
is
 
estimated
 
using
 
a
 
number
 
of
 
techniques,
including
 
the
 
estimation
 
of
 
price
 
dispersion
 
among
 
different
market
 
participants,
 
variation
 
in
 
modeling
 
approaches
 
and
reasonably possible
 
changes to assumptions
 
used within
 
the fair
value measurement process. The sensitivity ranges are not always
symmetrical
 
around
 
the
 
fair
 
values,
 
as
 
the
 
inputs
 
used
 
in
valuations are not always precisely in
 
the middle of the favorable
and unfavorable range.
Sensitivity data
 
is determined
 
at a
 
product or
 
parameter level
and
 
then
 
aggregated
 
assuming
 
no
 
diversification
 
benefit.
Diversification
 
would
 
incorporate
 
estimated
 
correlations
 
across
different sensitivity results and, as such, would result in an overall
sensitivity
 
that
 
would
 
be
 
less
 
than
 
the
 
sum
 
of
 
the
 
individual
component
 
sensitivities.
 
However,
 
the
 
Group
 
believes
 
that
 
the
diversification benefit is not significant to this analysis.
Sensitivity of fair value measurements to changes
 
in unobservable input assumptions
1
31.12.21
31.12.20
USD million
Favorable
 
changes
Unfavorable
 
changes
Favorable
 
changes
Unfavorable
 
changes
Traded loans, loans designated at fair value, loan commitments and guarantees
19
(13)
29
(28)
Securities financing transactions
41
(53)
40
(52)
Auction rate securities
66
2
(66)
2
105
(105)
Asset-backed securities
20
(20)
41
(41)
Equity instruments
173
(146)
129
(96)
Interest rate derivative contracts, net
29
(19)
11
(16)
Credit derivative contracts, net
5
(8)
10
(14)
Foreign exchange derivative contracts, net
19
(11)
20
(15)
Equity / index derivative contracts, net
368
(335)
318
(294)
Other
50
(73)
91
(107)
Total
790
(744)
794
(768)
1 Sensitivity of issued and
 
over-the-counter debt instruments
 
is reported with the equivalent
 
derivative or securities financing
 
instrument.
 
2 Includes refinements applied in estimating
 
valuation uncertainty across
various parameters and a change in assumptions regarding the underlying statistical distribution.
h) Level 3 instruments: movements during the period
The
 
table below
 
presents
 
additional
 
information about
 
material
movements in Level 3 assets and
 
liabilities measured at fair
 
value
on a recurring basis, excluding any related hedging activity.
Assets
 
and
 
liabilities
 
transferred
 
into
 
or
 
out
 
of
 
Level 3
 
are
presented as
 
if those
 
assets or
 
liabilities had
 
been transferred
 
at
the beginning of the year.
Movements of Level 3 instruments
Total gains / losses
included in
comprehensive income
USD billion
Balance
 
as of
31 December
2019
Net gains /
losses
included in
income
1
of which:
related to
Level 3
instruments
held at the
end of the
reporting
period
Purchases
Sales
Issuances
Settlements
Transfers
 
into
 
Level 3
Transfers
 
out of
 
Level 3
Foreign
currency
translation
Balance
 
as of
 
31 December
2020
Financial assets at fair value held for
trading
1.8
(0.1)
(0.1)
0.8
(1.4)
1.0
0.0
0.3
0.0
0.0
2.3
of which:
Investment fund units
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Corporate and municipal bonds
0.5
0.0
0.0
0.7
(0.5)
0.0
0.0
0.1
0.0
0.0
0.8
Loans
0.8
0.0
(0.1)
0.0
(0.7)
1.0
0.0
0.1
0.0
0.0
1.1
Other
0.4
0.0
0.0
0.1
(0.3)
0.0
0.0
0.2
0.0
0.0
0.4
Derivative financial instruments –
assets
1.3
0.3
0.4
0.0
0.0
0.7
(0.5)
0.1
(0.2)
0.1
1.8
of which:
Interest rate contracts
0.3
0.2
0.2
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.5
Equity / index contracts
0.6
0.1
0.1
0.0
0.0
0.6
(0.3)
0.0
(0.1)
0.0
0.9
Credit derivative contracts
0.4
0.0
0.0
0.0
0.0
0.1
(0.2)
0.1
0.0
0.0
0.3
Other
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Financial assets at fair value not held
for trading
4.0
0.0
0.1
0.8
(0.9)
0.0
0.0
0.1
0.0
0.0
3.9
of which:
Loans
1.2
0.0
0.0
0.3
(0.7)
0.0
0.0
0.0
0.0
0.0
0.9
Auction rate securities
1.5
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
1.5
Equity instruments
0.5
0.0
0.0
0.1
(0.1)
0.0
0.0
0.0
0.0
0.0
0.5
Other
0.7
0.0
0.0
0.4
(0.2)
0.0
0.0
0.0
0.0
0.0
1.0
Derivative financial instruments –
liabilities
2.0
1.3
1.2
0.0
0.0
1.2
(0.9)
0.4
(0.6)
0.1
3.5
of which:
Interest rate contracts
0.1
0.3
0.3
0.0
0.0
0.3
(0.2)
0.2
(0.2)
0.0
0.5
Equity / index contracts
1.3
1.0
0.8
0.0
0.0
0.8
(0.6)
0.1
(0.2)
0.0
2.3
Credit derivative contracts
0.5
0.0
0.0
0.0
0.0
0.1
(0.1)
0.1
(0.2)
0.0
0.5
Other
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.1
Debt issued designated at fair value
9.9
0.2
0.0
0.0
0.0
7.6
(5.7)
0.5
(1.7)
0.2
11.0
Other financial liabilities designated
at fair value
0.8
0.1
0.1
0.0
0.0
0.3
(0.5)
0.0
0.0
0.0
0.7
1 Net gains / losses
 
included in comprehensive income
 
are composed of Net interest
 
income, Other net
 
income from financial instruments
 
measured at fair value
 
through profit or loss
 
and Other income.
 
2 Total
Level 3 assets as of 31 December 2021 were USD
7.6
 
billion (31 December 2020: USD
8.3
 
billion). Total Level 3 liabilities as of 31 December 2021 were USD
17.4
 
billion (31 December 2020: USD
15.2
 
billion).
Total gains / losses
included in
comprehensive income
Balance
 
as of
31 December
2020
2
Net gains /
losses
included in
income
1
of which:
related to
Level 3
instruments
held at the
end of the
reporting
period
Purchases
Sales
Issuances
Settlements
Transfers
 
into
 
Level 3
Transfers
 
out of
 
Level 3
Foreign
 
currency
 
translation
Balance
 
as of
 
31 December
2021
2
2.3
0.0
(0.1)
0.3
(1.6)
1.2
0.0
0.3
(0.3)
0.0
2.3
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.8
0.0
0.0
0.2
(0.4)
0.0
0.0
0.0
(0.1)
0.0
0.6
1.1
0.0
0.0
0.0
(0.8)
1.2
0.0
0.0
(0.2)
0.0
1.4
0.4
0.0
0.0
0.1
(0.4)
0.0
0.0
0.3
0.0
0.0
0.3
1.8
(0.2)
(0.1)
0.0
0.0
0.5
(0.7)
0.1
(0.3)
0.0
1.1
0.5
0.1
0.1
0.0
0.0
0.1
(0.2)
0.0
(0.1)
0.0
0.5
0.9
(0.1)
(0.1)
0.0
0.0
0.3
(0.4)
0.0
(0.2)
0.0
0.4
0.3
(0.1)
(0.1)
0.0
0.0
0.0
(0.1)
0.0
0.0
0.0
0.2
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
3.9
0.1
0.1
1.0
(0.6)
0.0
0.0
0.1
(0.3)
0.0
4.2
0.9
0.0
0.0
0.6
(0.3)
0.0
0.0
0.0
(0.3)
0.0
0.9
1.5
0.1
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
1.6
0.5
0.1
0.1
0.1
(0.1)
0.0
0.0
0.0
0.0
0.0
0.7
1.0
0.0
(0.1)
0.3
(0.2)
0.0
0.0
0.0
0.0
0.0
1.0
3.5
0.2
0.0
0.0
0.0
0.9
(1.8)
0.0
(0.5)
0.0
2.2
0.5
(0.1)
(0.1)
0.0
0.0
0.0
(0.1)
0.0
0.0
0.0
0.3
2.3
0.3
0.1
0.0
0.0
0.8
(1.5)
0.0
(0.4)
0.0
1.5
0.5
(0.1)
(0.1)
0.0
0.0
0.0
0.0
0.0
(0.1)
0.0
0.3
0.1
0.1
0.0
0.0
0.0
0.0
(0.1)
0.0
0.0
0.0
0.1
11.0
0.7
0.6
0.0
0.0
8.0
(4.2)
0.2
(1.2)
(0.2)
14.2
0.7
0.0
0.0
0.0
0.0
0.4
(0.2)
0.0
0.0
0.0
0.8
i) Maximum exposure to credit risk for financial instruments measured at fair value
The
 
tables
 
below
 
provide
 
the
 
Group’s
 
maximum
 
exposure
 
to
credit risk for financial instruments
 
measured at fair value and
 
the
respective
 
collateral
 
and
 
other
 
credit
 
enhancements
 
mitigating
credit risk for these classes of financial instruments.
 
The
 
maximum
 
exposure
 
to
 
credit
 
risk
 
includes
 
the
 
carrying
amounts of financial
 
instruments recognized on
 
the balance sheet
subject
 
to
 
credit
 
risk
 
and
 
the
 
notional
 
amounts
 
for
 
off-balance
sheet arrangements.
 
Where information
 
is available,
 
collateral is
presented at fair value.
 
For other collateral, such as
 
real estate, a
reasonable alternative
 
value is
 
used. Credit
 
enhancements, such
as credit derivative contracts
 
and guarantees, are included
 
at their
notional amounts. Both are capped at the maximum
 
exposure to
credit risk for which
 
they serve as
 
security. The “Risk management
and control” section of this
 
report describes management’s view
of credit risk and
 
the related exposures,
 
which can differ
 
in certain
respects from the requirements of IFRS.
Maximum exposure to credit risk
 
31.12.21
Maximum
exposure to
credit risk
Collateral
Credit enhancements
Exposure to
credit risk
after collateral
and credit
enhancements
USD billion
Cash
collateral
received
Collateral-
ized by
securities
Secured by
real estate
Other
 
collateral
Netting
Credit
derivative
contracts
Guarantees
 
Financial assets measured at
 
fair value on the balance sheet
1
Financial assets at fair value
 
held for trading – debt instruments
2,3
22.4
 
22.4
Derivative financial instruments
4,5
118.1
4.2
103.2
10.7
Brokerage receivables
21.8
21.6
0.2
Financial assets at fair value not
 
held for trading – debt instruments
6
37.0
11.2
25.7
Total financial assets measured at fair value
199.4
0.0
37.1
0.0
0.0
103.2
0.0
0.0
59.1
Guarantees
7
0.2
 
 
 
 
0.2
0.0
31.12.20
Maximum
exposure to
credit risk
Collateral
Credit enhancements
Exposure to
credit risk
after collateral
and credit
enhancements
USD billion
Cash
collateral
received
Collateral-
ized by
securities
Secured by
real estate
Other
 
collateral
Netting
Credit
derivative
contracts
Guarantees
 
Financial assets measured at
 
fair value on the balance sheet
1
Financial assets at fair value
 
held for trading – debt instruments
2,3
24.6
24.6
Derivative financial instruments
4,5
159.6
6.0
138.4
15.2
Brokerage receivables
24.7
24.4
0.3
Financial assets at fair value not
 
held for trading – debt instruments
6
58.2
13.2
 
45.0
Total financial assets measured at fair value
267.1
0.0
43.6
0.0
0.0
138.4
0.0
0.0
85.1
Guarantees
7
0.5
0.1
0.3
0.0
1 The maximum exposure to loss is generally equal to the carrying amount and subject
 
to change over time with market movements.
 
2 These positions are generally managed under the market
 
risk framework. For
the purpose of this disclosure, collateral
 
and credit enhancements were not considered.
 
3 Does not include investment fund units.
 
4 Includes USD
0
 
million (31 December 2020: USD
0
 
million) fair values of loan
commitments and forward starting reverse repurchase agreements classified as derivatives.
 
The full contractual committed amount of forward starting reverse repurchase agreements (generally highly collateralized) of
USD
27.8
 
billion (31 December 2020:
 
USD
21.9
 
billion) and derivative
 
loan commitments (generally
 
unsecured) of USD
8.2
 
billion, of which
 
USD
0.8
 
billion has been sub-participated
 
(31 December 2020: USD
9.4
billion, of which USD
0.8
 
billion had been sub-participated), is
 
presented in Note 10 under notional
 
amounts.
 
5 The amount shown in
 
the “Netting” column represents the netting
 
potential not recognized on the
balance sheet. Refer to
 
Note 22 for more information.
 
6 Financial assets at fair
 
value not held for
 
trading collateralized by
 
securities consisted of structured
 
loans and reverse repurchase
 
and securities borrowing
agreements.
 
7 The amount shown in the “Guarantees” column largely relates to sub-participations.
j) Financial instruments not measured at fair value
The table below provides the estimated fair values of financial instruments not measured at fair value.
Financial instruments not measured at fair value
31.12.21
31.12.20
Carrying
amount
Fair value
Carrying
amount
Fair value
USD billion
Total
Carrying
amount
approximates
fair value
1
Level 1
Level 2
Level 3
Total
Total
Carrying
amount
approximates
fair value
1
Level 1
Level 2
Level 3
Total
Assets
2
Cash and balances at central banks
192.8
192.7
0.1
0.0
0.0
192.8
158.2
158.1
0.1
0.0
0.0
158.2
Loans and advances to banks
15.5
14.8
0.0
0.7
0.0
15.5
15.4
14.7
0.0
0.6
0.1
15.4
Receivables from securities financing
transactions
75.0
71.6
0.0
1.3
2.1
75.0
74.2
64.9
0.0
7.6
1.7
74.2
Cash collateral receivables on derivative
instruments
30.5
30.5
0.0
0.0
0.0
30.5
32.7
32.7
0.0
0.0
0.0
32.7
Loans and advances to customers
397.8
163.1
0.0
43.8
190.1
396.9
379.5
172.0
0.0
34.2
174.6
380.8
Other financial assets measured at amortized
cost
26.2
4.1
9.3
10.7
2.4
26.5
27.2
5.3
9.4
10.9
2.3
28.0
Liabilities
2
Amounts due to banks
13.1
9.1
0.0
4.0
0.0
13.1
11.0
8.5
0.0
2.6
0.0
11.0
Payables from securities financing
transactions
5.5
4.1
0.0
1.5
0.0
5.5
6.3
6.0
0.0
0.3
0.0
6.3
Cash collateral payables on derivative
instruments
31.8
31.8
0.0
0.0
0.0
31.8
37.3
37.3
0.0
0.0
0.0
37.3
Customer deposits
542.0
535.4
0.0
6.6
0.0
542.0
524.6
519.4
0.0
5.3
0.0
524.7
Debt issued measured at amortized cost
139.2
15.8
0.0
125.3
0.0
141.1
139.2
16.4
0.0
125.5
0.0
141.9
Other financial liabilities measured at
amortized cost
3
5.4
5.4
0.0
0.0
0.0
5.4
5.8
5.7
0.0
0.0
0.1
5.8
1 Includes certain financial instruments where the carrying amount is a reasonable
 
approximation of the fair value due to the instruments’
 
short-term nature (instruments that are receivable or payable
 
on demand, or
with a remaining maturity (excluding
 
the effects of callable
 
features) of three months or
 
less).
 
2 As of 31 December 2021,
 
USD
0
 
billion (31 December 2020: USD
0
 
billion) of Cash and balances
 
at central banks,
USD
0
 
billion (31 December 2020: USD
0
 
billion) of Loans and advances to banks, USD
1
 
billion (31 December 2020: USD
1
 
billion) of Receivables from securities financing transactions, USD
175
 
billion (31 December
2020: USD
163
 
billion) of Loans and advances to customers, USD
19
 
billion (31 December 2020: USD
20
 
billion) of Other financial assets measured at amortized cost, USD
1
 
billion (31 December 2020: USD
0
 
billion)
of Amounts due to
 
banks, USD
3
 
billion (31 December 2020:
 
USD
2
 
billion) of Customer
 
deposits, USD
84
 
billion (31 December 2020:
 
USD
82
 
billion) of Debt issued
 
measured at amortized
 
cost and USD
3
 
billion
(31 December 2020: USD
3
 
billion) of Other financial liabilities measured at amortized cost were expected to be recovered or settled after 12 months.
 
3 Excludes lease liabilities.
The fair
 
values included in
 
the table
 
above have been
 
calculated
for
disclosure
 
purposes
 
only.
 
The
 
valuation
 
techniques
 
and
assumptions described below relate only
 
to the fair value
 
of UBS’s
financial instruments
 
not measured at
 
fair value.
 
Other institutions
may
 
use different
 
methods and
 
assumptions for
 
their
 
fair value
estimations,
 
and
 
therefore
 
such
 
fair
 
value
 
disclosures
 
cannot
necessarily be compared from
 
one financial institution
 
to another.
The following principles
 
were applied when
 
determining fair
 
value
estimates for financial instruments not measured at fair value:
–
 
For
 
financial
 
instruments
 
with
 
remaining
 
maturities
 
greater
than three months, the
 
fair value was
 
determined from quoted
market prices, if available.
Where quoted market prices were
 
not available, the fair values
were
 
estimated
 
by
 
discounting
 
contractual
 
cash
 
flows
 
using
current
 
market
 
interest
 
rates
 
or
 
appropriate
 
yield
 
curves
 
for
instruments
 
with
 
similar
 
credit
 
risk
 
and
 
maturity.
 
These
estimates generally include
 
adjustments for counterparty
 
credit
risk or UBS’s own credit.
–
 
For short-term financial instruments with remaining maturities
of three
 
months or less,
 
the carrying amount,
 
which is net
 
of
credit
 
loss
 
allowances,
 
is
 
generally
 
considered
 
a
 
reasonable
estimate of fair value.
UBS AG  
Entity [Table]  
Disclosure Of Fair Value Measurement Explanatory
Note 21
 
Fair value measurement
a) Valuation principles
All
 
financial
 
and non-financial
 
assets
 
and liabilities
 
measured
 
or
disclosed at fair value are categorized into one of three
 
fair value
hierarchy levels
 
in accordance
 
with IFRS.
 
The fair
 
value hierarchy
is based on the
 
transparency of inputs to
 
the valuation of an
 
asset
or liability as
 
of the measurement
 
date. In certain
 
cases, the inputs
used to
 
measure fair
 
value may fall
 
within different
 
levels of
 
the
fair
 
value
 
hierarchy.
 
For
 
disclosure
 
purposes,
 
the
 
level
 
in
 
the
hierarchy within which an
 
instrument is classified in its entirety
 
is
based on the lowest level input
 
that is significant to the position’s
fair value measurement:
–
 
Level 1
 
–
 
quoted
 
prices
 
(unadjusted)
 
in
 
active
 
markets
 
for
identical assets and liabilities;
–
 
Level 2 –
 
valuation techniques
 
for which
 
all significant
 
inputs
are, or are based on, observable market data; or
–
 
Level 3 – valuation techniques
 
for which significant inputs are
not based on observable market data.
Fair
 
values
 
are
 
determined
 
using
 
quoted
 
prices
 
in
 
active
markets for
 
identical assets
 
or liabilities,
 
where available.
 
Where
the
 
market
 
for
 
a
 
financial
 
instrument
 
or
 
non-financial
 
asset
 
or
liability
 
is
 
not
 
active,
 
fair
 
value
 
is
 
established
 
using
 
a
 
valuation
technique, including
 
pricing models.
 
Valuation adjustments
 
may
be made to
 
allow for additional
 
factors, including model,
 
liquidity,
credit and funding
 
risks, which are
 
not explicitly captured
 
within
the
 
valuation
 
technique,
 
but
 
which
 
would
 
nevertheless
 
be
considered by market participants when establishing
 
a price. The
limitations
 
inherent
 
in
 
a
 
particular
 
valuation
 
technique
 
are
considered in the determination
 
of the classification of
 
an asset or
liability
 
within
 
the
 
fair
 
value
 
hierarchy.
 
Generally,
 
the
 
unit
 
of
account
 
for
 
a
 
financial
 
instrument
 
is
 
the
 
individual
 
instrument,
and UBS applies
 
valuation adjustments at
 
an individual instrument
level,
 
consistent
 
with
 
that
 
unit
 
of
 
account.
 
However,
 
if
 
certain
conditions are met, UBS may estimate the fair value
 
of a portfolio
of
 
financial
 
assets
 
and
 
liabilities
 
with
 
substantially
 
similar
 
and
offsetting risk exposures on the basis of the net open risks.
›
 
Refer to Note 21d for more information
b) Valuation governance
UBS’s fair value measurement and model governance framework
includes numerous controls and other procedural safeguards that
are intended to
 
maximize the quality of
 
fair value measurements
reported in the financial statements. New products and valuation
techniques must
 
be reviewed
 
and approved
 
by key
 
stakeholders
from the risk and finance control functions. Responsibility for the
ongoing measurement of financial and non-financial instruments
at fair value is with the business divisions.
Fair
 
value
 
estimates
 
are
 
validated
 
by
 
the
 
risk
 
and
 
finance
control
 
functions,
 
which
 
are
 
independent
 
of
 
the
 
business
divisions. Independent
 
price verification
 
is performed
 
by Finance
through benchmarking the business divisions’
 
fair value estimates
with observable market prices
 
and other independent sources.
 
A
governance
 
framework
 
and
 
associated
 
controls
 
are
 
in
 
place
 
in
order to monitor
 
the quality of third
 
-party pricing sources
 
where
used.
 
For
 
instruments
 
where
 
valuation
 
models
 
are
 
used
 
to
determine
 
fair
 
value,
 
independent
 
valuation
 
and
 
model
 
control
groups within Finance and Risk
 
Control evaluate UBS’s models on
a regular basis,
 
including valuation and
 
model input parameters,
as well as pricing. As a result of the
 
valuation controls employed,
valuation
 
adjustments
 
may
 
be
 
made
 
to
 
the
 
business
 
divisions’
estimates of fair value to
 
align with independent market
 
data and
the relevant accounting standard.
›
 
Refer to Note 21d for more information
c) Fair value hierarchy
The table below provides
 
the fair value hierarchy
 
classification of
financial and
 
non-financial assets
 
and liabilities
 
measured at
 
fair
value.
 
The
 
narrative
 
that
 
follows describes
 
valuation
 
techniques
used
 
in
 
measuring
 
their
 
fair
 
value
 
of
 
different
 
product
 
types
(including significant valuation
 
inputs and assumptions
 
used), and
the
 
factors
 
considered
 
in
 
determining
 
their
 
classification
 
within
the fair value hierarchy.
Determination of fair values from quoted market
 
prices or valuation techniques
1
31.12.21
31.12.20
USD million
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Financial assets measured at fair value on a recurring basis
Financial assets at fair value held for trading
113,722
15,012
2,299
131,033
107,526
15,630
2,337
125,492
of which:
Equity instruments
97,983
1,090
149
99,222
90,327
1,101
171
91,599
Government bills / bonds
7,135
1,351
10
8,496
9,028
2,207
10
11,245
Investment fund units
7,843
1,364
21
9,229
7,374
1,794
23
9,192
Corporate and municipal bonds
708
7,791
556
9,055
789
8,432
817
10,038
Loans
0
3,099
1,443
4,542
0
1,860
1,134
2,995
Asset-backed securities
53
317
120
489
8
236
181
425
Derivative financial instruments
522
116,482
1,140
118,145
795
157,069
1,754
159,618
of which:
Foreign exchange contracts
255
53,046
7
53,307
319
68,425
5
68,750
Interest rate contracts
0
32,747
494
33,241
0
50,353
537
50,890
Equity / index contracts
0
27,861
384
28,245
0
33,990
853
34,842
Credit derivative contracts
0
1,179
236
1,414
0
2,008
350
2,358
Commodity contracts
0
1,590
16
1,606
0
2,211
6
2,217
Brokerage receivables
0
21,839
0
21,839
0
24,659
0
24,659
Financial assets at fair value not held for trading
2
27,278
28,185
4,180
59,642
40,986
35,110
3,942
80,038
of which:
Financial assets for unit-linked investment contracts
21,110
187
6
21,303
20,628
101
2
20,731
Corporate and municipal bonds
123
13,937
306
14,366
290
16,957
372
17,619
Government bills / bonds
5,624
3,236
0
8,860
19,704
3,593
0
23,297
Loans
0
4,982
892
5,874
0
7,699
862
8,561
Securities financing transactions
0
5,704
100
5,804
0
6,629
122
6,751
Auction rate securities
0
0
1,585
1,585
0
0
1,527
1,527
Investment fund units
338
137
117
591
278
121
105
505
Equity instruments
83
2
681
765
86
0
544
631
Other
0
0
495
495
0
10
408
418
Financial assets measured at fair value through other comprehensive income on
 
a recurring basis
Financial assets measured at fair value through other comprehensive
 
income
2
2,704
6,140
0
8,844
1,144
7,114
0
8,258
of which:
Asset-backed securities
0
4,849
0
4,849
0
6,624
0
6,624
Government bills / bonds
2,658
27
0
2,686
1,103
47
0
1,150
Corporate and municipal bonds
45
1,265
0
1,310
40
444
0
485
Non-financial assets measured at fair value on a recurring basis
Precious metals and other physical commodities
5,258
0
0
5,258
6,264
0
0
6,264
Non-financial assets measured at fair value on a non-recurring basis
Other non-financial assets
3
0
0
26
26
0
1
245
246
Total assets measured at fair value
149,484
187,658
7,645
344,787
156,716
239,583
8,278
404,576
Determination of fair values from quoted market
 
prices or valuation techniques (continued)
1
31.12.21
31.12.20
USD million
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Financial liabilities measured at fair value on a recurring basis
Financial liabilities at fair value held for trading
25,413
6,170
105
31,688
26,889
6,652
55
33,595
of which:
Equity instruments
18,328
513
83
18,924
22,519
425
40
22,985
Corporate and municipal bonds
30
4,219
17
4,266
31
4,048
9
4,089
Government bills / bonds
5,883
826
0
6,709
3,642
1,036
0
4,678
Investment fund units
1,172
555
6
1,733
696
1,127
5
1,828
Derivative financial instruments
509
118,558
2,242
121,309
746
156,884
3,471
161,102
of which:
Foreign exchange contracts
258
53,800
21
54,078
316
70,149
61
70,527
Interest rate contracts
0
28,398
278
28,675
0
43,389
527
43,916
Equity / index contracts
0
33,438
1,511
34,949
0
38,870
2,306
41,176
Credit derivative contracts
0
1,412
341
1,753
0
2,403
528
2,931
Commodity contracts
0
1,503
63
1,566
0
2,003
24
2,027
Financial liabilities designated at fair value on a recurring basis
Brokerage payables designated at fair value
0
44,045
0
44,045
0
38,742
0
38,742
Debt issued designated at fair value
2
0
59,606
11,854
71,460
0
50,273
9,595
59,868
Other financial liabilities designated at fair value
2
0
29,258
3,156
32,414
0
29,682
2,091
31,773
of which:
Financial liabilities related to unit-linked investment contracts
0
21,466
0
21,466
0
20,975
0
20,975
Securities financing transactions
0
6,375
2
6,377
0
7,317
0
7,317
Over-the-counter debt instruments
0
1,334
794
2,128
0
1,363
697
2,060
Total liabilities measured at fair value
25,922
257,637
17,357
300,916
27,635
282,233
15,212
325,080
1 Bifurcated embedded derivatives are presented on the same balance sheet lines
 
as their host contracts and are not included in this table. The fair value of these derivatives was not
 
material for the periods presented.
 
2 As of 31 December 2021, USD
16
 
billion (31 December 2020: USD
20
 
billion) of Financial assets at fair value not
 
held for trading, USD
8
 
billion (31 December 2020: USD
8
 
billion) of Financial assets measured at
fair value through other
 
comprehensive income, USD
33
 
billion (31 December 2020:
 
USD
15
 
billion) of Debt issued
 
designated at fair value
 
and USD
3
 
billion (31 December 2020:
 
USD
3
 
billion) of Other financial
liabilities designated at fair value are expected to be recovered or settled after 12 months.
 
3 Other non-financial assets primarily consist of properties and other non-current assets held for sale, which are
 
measured
at the lower of their net carrying amount or fair value less costs to sell.
Valuation techniques
 
UBS uses widely recognized valuation techniques for determining
the fair
 
value of
 
financial and
 
non-financial instruments
 
that are
not
 
actively
 
traded
 
and
 
quoted.
 
The
 
most
 
frequently
 
applied
valuation
 
techniques include
 
discounted value
 
of expected
 
cash
flows, relative value and option pricing methodologies.
Discounted
 
value
 
of
 
expected
 
cash
 
flows
 
is
 
a
 
valuation
technique
 
that
 
measures
 
fair
 
value
 
using
 
estimated
 
expected
future
 
cash
 
flows
 
from
 
assets
 
or
 
liabilities
 
and
 
then
 
discounts
these
 
cash
 
flows
 
using a
 
discount
 
rate
 
or
 
discount
 
margin that
reflects the credit and
 
/ or funding spreads
 
required by the market
for instruments with similar risk
 
and liquidity profiles to produce
 
a
present
 
value. When
 
using such
 
valuation
 
techniques, expected
future
 
cash
 
flows
 
are
 
estimated
 
using
 
an
 
observed
 
or
 
implied
market
 
price
 
for
 
the
 
future
 
cash
 
flows
 
or
 
by
 
using
 
industry-
standard cash flow projection
 
models. The discount factors
 
within
the calculation are
 
generated using industry-standard yield
 
curve
modeling techniques and models.
Relative value models measure fair
 
value based on the market
prices
 
of
 
equivalent
 
or
 
comparable
 
assets
 
or
 
liabilities,
 
making
adjustments
 
for
 
differences
 
between
 
the
 
characteristics
 
of
 
the
observed instrument and the instrument being valued.
Option pricing models
 
incorporate assumptions regarding
 
the
behavior of future
 
price movements of
 
an underlying referenced
asset or assets
 
to generate a
 
probability-weighted future expected
payoff for
 
the option.
 
The resulting
 
probability-weighted expected
payoff is
 
then discounted using
 
discount factors generated
 
from
industry-standard
 
yield
 
curve
 
modeling
 
techniques
 
and
 
models.
The
 
option
 
pricing
 
model
 
may be
 
implemented
 
using a
 
closed-
form analytical
 
formula or
 
other mathematical
 
techniques (e.g.,
binomial tree or Monte Carlo simulation).
Where available,
 
valuation techniques
 
use market-observable
assumptions and inputs.
 
If such data
 
is not available,
 
inputs may
be derived
 
by reference
 
to similar
 
assets in
 
active markets,
 
from
recent
 
prices
 
for
 
comparable
 
transactions
 
or
 
from
 
other
observable
 
market
 
data.
 
In
 
such
 
cases,
 
the
 
inputs
 
selected
 
are
based
 
on
 
historical
 
experience
 
and
 
practice
 
for
 
similar
 
or
analogous instruments, derivation of input levels based on
 
similar
products with
 
observable price
 
levels,
 
and knowledge
 
of current
market conditions and valuation approaches.
For
 
more
 
complex instruments,
 
fair
 
values may
 
be
 
estimated
using
 
a
 
combination
 
of
 
observed
 
transaction
 
prices,
 
consensus
pricing services and relevant quotes. Consideration
 
is given to the
nature of
 
the quotes
 
(e.g.,
 
indicative
 
or firm)
 
and the
 
relationship
 
of
recently
 
evidenced
 
market
 
activity
 
to
 
the
 
prices
 
provided
 
by
consensus
 
pricing
 
services.
 
UBS
 
also
 
uses
 
internally
 
developed
models,
 
which
 
are
 
typically
 
based
 
on
 
valuation
 
methods
 
and
techniques
 
recognized
 
as standard
 
within
 
the industry.
 
Assumptions
and inputs
 
used in
 
valuation
 
techniques
 
include
 
benchmark
 
interest
rate curves,
 
credit and funding
 
spreads used
 
in estimating
 
discount
rates, bond
 
and equity
 
prices,
 
equity index
 
prices,
 
foreign exchange
rates, levels of market volatility and correlation. Refer to Note 21f
for more
 
information.
 
The discount
 
curves
 
used by
 
UBS incorporate
the funding and credit characteristics
 
of the instruments to which
they are applied.
Financial instruments excluding derivatives: valuation and classification in the fair value hierarchy
 
Product
Valuation and classification in the fair value hierarchy
Government bills
and bonds
Valuation
–
 
Generally valued using prices obtained directly
 
from the market.
–
 
Instruments not priced directly using active-market data
 
are valued using discounted cash
 
flow valuation
techniques that incorporate market data
 
for similar government instruments.
 
Fair value hierarchy
–
 
Generally traded in active markets with prices that can be obtained directly from these markets, resulting
in classification as Level 1,
 
while the remaining positions are classified
 
as Level 2 and Level 3.
Corporate and
municipal bonds
Valuation
–
 
Generally
 
valued
 
using
 
prices
 
obtained
 
directly
 
from
 
the
 
market
 
for
 
the
 
security,
 
or
 
similar
 
securities,
adjusted for seniority, maturity and liquidity.
–
 
When prices
 
are not
 
available, instruments are
 
valued using
 
discounted cash
 
flow valuation
 
techniques
incorporating the credit spread of the
 
issuer or similar issuers.
–
 
For convertible bonds
 
without directly
 
comparable prices,
 
issuances may
 
be priced using
 
a convertible
 
bond
model.
Fair value hierarchy
–
 
Generally classified as Level 1 or Level 2, depending
 
on the depth of trading activity behind price
 
sources.
–
 
Level 3 instruments have no suitable pricing information
 
available.
Traded loans and
loans measured at
fair value
Valuation
–
 
Valued directly
 
using market prices
 
that reflect recent
 
transactions or quoted
 
dealer prices, where
 
available.
–
 
Where no
 
market price
 
data is
 
available, loans
 
are valued
 
by relative
 
value benchmarking
 
using pricing
derived from debt instruments in comparable entities or different products in the same entity, or by using
a credit default
 
swap valuation technique,
 
which requires inputs
 
for credit spreads,
 
credit recovery rates
and interest
 
rates. Recently
 
originated commercial real
 
estate loans
 
are measured
 
using a
 
securitization
approach based on rating agency guidelines.
Fair value hierarchy
–
 
Instruments with suitably deep and liquid pricing
 
information are classified as Level 2.
–
 
Positions requiring the use of
 
valuation techniques, or for
 
which the price sources have
 
insufficient trading
depth, are classified as Level 3.
Product
Valuation and classification in the fair value hierarchy
Investment fund
units
Valuation
–
 
Predominantly exchange-traded, with
 
readily available quoted prices in liquid markets.
–
 
Where market prices are not available, fair
 
value may be measured using net asset values
 
(NAVs).
Fair value hierarchy
–
 
Listed units
 
are classified
 
as
 
Level 1, provided
 
there is
 
sufficient trading
 
activity to
 
justify active-market
classification, while other positions are classified
 
as Level 2.
–
 
Positions for which NAVs are not available
 
are classified as Level 3.
Asset-backed
securities (ABS)
Valuation
–
 
For liquid securities, the valuation
 
process will use trade
 
and price data, updated for movements
 
in market
levels between the time of trading and the
 
time of valuation. Less liquid instruments are measured using
discounted expected
 
cash flows
 
incorporating price
 
data for instruments
 
or indices with
 
similar risk profiles.
Fair value hierarchy
–
 
Residential
 
mortgage
-
backed
 
securities
,
commercial
mortgage
-
backed
 
securities
 
and
 
other
 
ABS
 
are
generally classified as Level 2. However,
 
if significant inputs are unobservable,
 
or if market or fundamental
data is not available, they are classified as Level
 
3.
Auction rate
securities (ARS)
Valuation
–
 
ARS
 
are
 
valued
 
utilizing
 
a
 
discounted
 
cash
 
flow
 
methodology.
 
The
 
model
 
captures
 
interest
 
rate
 
risk
emanating from the note coupon, credit risk attributable to the
 
underlying closed-end fund investments,
liquidity risk as a function of the level of trading volume in these positions, and extension risk, as ARS are
perpetual instruments that require an assumption
 
regarding their maturity or issuer redemption
 
date.
Fair value hierarchy
–
 
Granular and liquid pricing information is generally not available for
 
ARS. As a result, these securities are
classified as Level 3.
Equity instruments
Valuation
–
 
Listed equity instruments are generally valued
 
using prices obtained directly from the market.
–
 
Unlisted equity holdings,
 
including private equity
 
positions, are initially
 
marked at their
 
transaction price
and are
 
revalued when
 
reliable evidence of
 
price movement
 
becomes available
 
or when
 
the position
 
is
deemed to be impaired.
 
Fair value hierarchy
–
 
The majority
 
of equity
 
securities are actively
 
traded on
 
public stock
 
exchanges where quoted
 
prices are
readily and regularly available, resulting in Level
 
1 classification.
Financial assets for
unit-linked
investment
contracts
Valuation
–
 
The majority of assets are listed on exchanges
 
and fair values are determined using quoted
 
prices.
Fair value hierarchy
–
 
Most assets are classified as Level 1 if actively traded,
 
or Level 2 if trading is not active.
–
 
Instruments for which prices are not readily available
 
are classified as Level 3.
Securities financing
transactions
Valuation
–
 
These instruments are valued using discounted expected cash flow techniques. The discount rate applied
is based on funding curves that are relevant
 
to the collateral eligibility terms.
Fair value hierarchy
–
 
Collateral funding curves for
 
these instruments are generally
 
observable and, as a
 
result, these positions
are classified as Level 2.
–
 
Where the collateral
 
terms are non-standard,
 
the funding curve
 
may be considered
 
unobservable and
 
these
positions are classified as Level 3.
Brokerage
receivables and
payables
Valuation
–
 
Fair value is determined based on the value of
 
the underlying balances.
Fair value hierarchy
–
 
Due to their on-demand nature, these receivables
 
and payables are deemed as Level 2.
Amounts due under
unit-linked
investment
contracts
Valuation
–
 
The
 
fair
 
values
 
of
 
investment
 
contract
 
liabilities
 
are
 
determined
 
by
 
reference
 
to
 
the
 
fair
 
value
 
of
 
the
corresponding assets.
Fair value hierarchy
–
 
The liabilities themselves are not actively traded,
 
but are mainly referenced to instruments
 
that are actively
traded and are therefore classified as Level 2.
Derivative instruments: valuation and classification in the
fair value hierarchy
The
 
curves
 
used
 
for
 
discounting
 
expected
 
cash
 
flows
 
in
 
the
valuation
 
of
 
collateralized
 
derivatives
 
reflect
 
the
 
funding
 
terms
associated
 
with
 
the
 
relevant
 
collateral
 
arrangement
 
for
 
the
instrument
 
being
 
valued.
 
These
 
collateral
 
arrangements
 
differ
across
 
counterparties
 
with
 
respect
 
to
 
the
 
eligible
 
currency
 
and
interest
 
terms
 
of
 
the
 
collateral.
 
The
 
majority
 
of
 
collateralized
derivatives are measured using
 
a discount curve based
 
on funding
rates
 
derived
 
from
 
overnight
 
interest
 
in
 
the
 
cheapest
 
eligible
currency for the respective counterparty collateral agreement.
Uncollateralized
 
and
 
partially
 
collateralized
 
derivatives
 
are
discounted
 
using
 
the
 
alternative
 
reference
 
rate
 
(the
 
ARR)
 
(or
equivalent) curve for the currency
 
of the instrument. As described
in
 
Note
2
1
d
,
the
 
fair
 
value
 
of
 
uncollateralized
 
and
 
partially
collateralized
 
derivatives
 
is
 
then
 
adjusted
 
by
 
credit
 
valuation
adjustments
 
(
CVA
s)
,
debit
 
valuation
 
adjustments
 
(
DVA
s)
 
and
funding valuation adjustments (FVAs), as
 
applicable, to reflect an
estimation
 
of
 
the
 
effect
 
of
 
counterparty
 
credit
 
risk,
 
UBS’s
 
own
credit risk, and funding costs and benefits.
›
 
Refer to Note 10 for more information about
 
derivative
instruments
Derivative product
Valuation and classification in the fair value hierarchy
Interest rate
contracts
Valuation
–
 
Interest rate swap contracts
 
are valued by estimating
 
future interest cash flows
 
and discounting those
 
cash
flows using
 
a rate
 
that reflects the
 
appropriate funding rate
 
for the
 
position being
 
measured. The yield
curves used to estimate future index
 
levels and discount rates are generated using
 
market-standard yield
curve models using interest rates associated with
 
current market activity. The key inputs to the
 
models are
interest rate swap rates, forward rate agreement rates, short-term interest rate futures prices,
 
basis swap
spreads and inflation swap rates.
–
 
Interest rate option contracts
 
are valued using various
 
market-standard option models, using inputs that
include interest rate yield curves, inflation curves,
 
volatilities and correlations.
–
 
When the maturity
 
of an interest
 
rate swap or
 
option contract exceeds
 
the term for
 
which standard market
quotes are observable for
 
a significant input parameter,
 
the contracts are valued
 
by extrapolation from the
last observable point using standard assumptions
 
or by reference to another observable comparable
 
input
parameter to represent a suitable proxy for that
 
portion of the term.
Fair value hierarchy
–
 
The majority of interest rate swaps are classified
 
as Level 2 as the standard market contracts
 
that form the
inputs for yield curve models are generally traded
 
in active and observable markets.
–
 
Options are generally
 
treated as Level
 
2 as the calibration
 
process enables
 
the model output
 
to be validated
to active-market
 
levels. Models
 
calibrated in
 
this way
 
are then
 
used to
 
revalue the
 
portfolio of
 
both standard
options and more exotic products.
–
 
Interest rate swap
 
or option contracts
 
are classified as
 
Level 3 when the
 
terms
 
exceed standard market-
observable quotes.
–
 
Exotic options for
 
which appropriate volatility
 
or correlation input
 
levels cannot be implied
 
from observable
market data are classified as Level 3.
Credit derivative
contracts
Valuation
–
 
Credit derivative
 
contracts are
 
valued using
 
industry-standard models
 
based primarily
 
on
 
market credit
spreads, upfront pricing points and implied recovery rates. Where a derivative credit spread is not directly
available, it may be derived from the price of
 
the reference cash bond.
 
–
 
Asset-backed credit
 
derivatives are
 
valued using
 
a valuation
 
technique similar
 
to that
 
of the
 
underlying
security with an adjustment to reflect
 
the funding differences between cash
 
and synthetic form.
Fair value hierarchy
–
 
Single-entity and
 
portfolio
 
credit derivative
 
contracts are
 
classified as
 
Level 2
 
when credit
 
spreads and
recovery rates
 
are determined
 
from actively
 
traded observable
 
market data.
 
Where the
 
underlying reference
name(s) are not actively traded
 
and the correlation cannot be
 
directly mapped to actively traded tranche
instruments, these contracts are classified
 
as Level 3.
 
–
 
Asset-backed
 
credit
 
derivatives
 
follow
 
the
 
characteristics
 
of
 
the
 
underlying
 
security
 
and
 
are
 
therefore
distributed across Level 2 and Level 3.
Derivative product
Valuation and classification in the fair value hierarchy
Foreign exchange
contracts
Valuation
–
 
Open spot foreign exchange (FX)
 
contracts are valued using the FX spot rate
 
observed in the market.
–
 
Forward FX contracts are valued using the FX spot rate adjusted for forward pricing points observed from
standard market-based sources.
–
 
Over-the-counter (OTC)
 
FX option
 
contracts are
 
valued using
 
market-standard option valuation
 
models.
The models used for shorter-dated options (i.e., maturities of
 
five years or less) tend
 
to be different than
those used for
 
longer-dated
 
options because
 
the models needed
 
for longer-dated
 
OTC FX contracts
 
require
additional consideration of interest rate and FX
 
rate interdependency.
–
 
The valuation for
 
multi-dimensional FX
 
options uses a
 
multi-local volatility model,
 
which is calibrated
 
to the
observed FX volatilities for all relevant FX pairs.
Fair value hierarchy
–
 
The
 
markets
 
for
 
FX
 
spot
 
and
 
FX
 
forward
 
pricing
 
points
 
are
 
both
 
actively
 
traded
 
and
 
observable
 
and
therefore such FX contracts are generally classified
 
as Level 2.
 
–
 
A significant proportion of
 
OTC FX option contracts are
 
classified as Level 2 as
 
inputs are derived mostly
from standard market contracts traded in
 
active and observable markets.
–
 
OTC FX
 
option contracts
 
classified as
 
Level 3 include
 
multi-dimensional FX
 
options and
 
long-dated FX
 
exotic
option contracts where there is no active market
 
from which to derive volatility or correlation
 
inputs.
Equity / index
contracts
Valuation
–
 
Equity forward
 
contracts have a
 
single stock
 
or index
 
underlying and are
 
valued using
 
market-standard
models. The key inputs to the models are
 
stock prices, estimated dividend rates and equity funding rates
(which are implied
 
from prices of
 
forward contracts
 
observed in the
 
market). Estimated cash
 
flows are then
discounted using market-standard discounted cash flow models using a rate that reflects the appropriate
funding rate for
 
that portion
 
of the portfolio.
 
When no market
 
data is available
 
for the instrument
 
maturity,
they are
 
valued by
 
extrapolation of
 
available data,
 
use of
 
historical dividend
 
data, or
 
use of
 
data for
 
a
related equity.
 
–
 
Equity option contracts are valued
 
using market-standard models that
 
estimate the equity forward level
 
as
described
 
for
 
equity
 
forward
 
contracts
 
and
 
incorporate
 
inputs
 
for
 
stock
 
volatility
 
and
 
for
 
correlation
between
 
stocks
 
within
 
a
 
basket.
 
The
 
probability-weighted
 
expected
 
option
 
payoff
 
generated
 
is
 
then
discounted
 
using
 
market-standard
 
discounted
 
cash
 
flow
 
models
 
applying
 
a
 
rate
 
that
 
reflects
 
the
appropriate funding rate
 
for that portion of
 
the portfolio. When
 
volatility, forward or
 
correlation inputs are
not
 
available,
 
they
 
are
 
valued
 
using
 
extrapolation
 
of
 
available
 
data,
 
historical
 
dividend,
 
correlation
 
or
volatility data, or the equivalent data for
 
a related equity.
Fair value hierarchy
–
 
As inputs are
 
derived mostly from standard
 
market contracts traded in
 
active and observable markets,
 
a
significant proportion of equity forward contracts
 
are classified as Level 2.
 
–
 
Equity option positions for which inputs are derived
 
from standard market contracts traded in active and
observable markets are also classified
 
as Level 2. Level 3 positions are those
 
for which volatility, forward or
correlation inputs are not observable.
Commodity
contracts
Valuation
–
 
Commodity forward
 
and swap
 
contracts are
 
measured using
 
market-standard models
 
that use
 
market
forward levels on standard instruments.
 
–
 
Commodity
 
option
 
contracts
 
are
 
measured
 
using
 
market-standard
 
option
 
models
 
that
 
estimate
 
the
commodity forward level
 
as described for
 
commodity forward and
 
swap contracts, incorporating
 
inputs
for the volatility of the underlying
 
index or commodity. For commodity
 
options on baskets of commodities
or
 
bespoke
 
commodity
 
indices,
 
the
 
valuation
 
technique
 
also
 
incorporates
 
inputs
 
for
 
the
 
correlation
between different commodities or commodity
 
indices.
Fair value hierarchy
–
 
Individual
 
commodity contracts
 
are
 
typically classified
 
as
 
Level 2,
 
because
 
active
 
forward and
 
volatility
market data is available.
d) Valuation adjustments and other items
The output of a valuation technique is always an estimate of a
fair value that cannot be
 
measured with complete certainty. As a
result, valuations are adjusted, where appropriate and when such
factors would be considered by market participants in estimating
fair value, to reflect
 
close-out costs, credit exposure,
 
model-driven
valuation
 
uncertainty,
 
funding
 
costs
 
and
 
benefits,
 
trading
restrictions and other factors.
 
The table below summarizes the
 
valuation adjustment reserves
recognized on the balance sheet. Details about each category are
provided further below.
Valuation adjustment reserves on the balance sheet
As of
Life-to-date gain / (loss), USD million
31.12.21
31.12.20
31.12.19
Deferred day-1 profit or loss reserves
418
269
146
Own credit adjustments on financial liabilities designated at fair value
(315)
(381)
(88)
CVAs, FVAs,
 
DVAs and other valuation adjustments
(1,004)
(959)
(706)
Deferred day-1 profit or loss reserves
For
 
new
 
transactions
 
where
 
the
 
valuation
 
technique
 
used
 
to
measure fair
 
value requires
 
significant inputs
 
that are
 
not based
on
 
observable
 
market
 
data,
 
the
 
financial
 
instrument
 
is
 
initially
recognized
 
at
 
the
 
transaction
 
price.
 
The
 
transaction
 
price
 
may
differ
 
from
 
the fair
 
value obtained
 
using a
 
valuation technique,
where any such difference is deferred and not initially recognized
in the income statement.
Deferred
 
day-1
 
profit
 
or
 
loss
 
is generally
 
released
 
into
Other
net
 
income
 
from
 
financial
 
instruments
 
measured
 
at
 
fair
 
value
through profit or loss
 
when pricing of equivalent products or the
underlying
 
parameters
 
become
s
 
observable
 
or
 
when
 
the
transaction is closed out.
The
 
table
 
below
 
summarizes
 
the
 
changes
 
in
 
deferred
 
day-1
profit or loss reserves during the respective period.
Deferred day-1 profit or loss reserves
USD million
2021
2020
2019
Reserve balance at the beginning of the year
269
146
255
Profit / (loss) deferred on new transactions
459
362
171
(Profit) / loss recognized in the income statement
(308)
(238)
(278)
Foreign currency translation
(2)
0
(2)
Reserve balance at the end of the year
418
269
146
Own credit
 
Own
 
credit
 
risk
 
is
 
reflected
 
in
 
the
 
valuation
 
of
 
UBS’s
 
fair
 
value
option liabilities where
 
this component is considered relevant
 
for
valuation
 
purposes
 
by
 
UBS’s
 
counterparties
 
and
 
other
 
market
participants.
Changes in
 
the fair
 
value of
 
financial liabilities
 
designated at
fair
 
value
 
through
 
profit
 
or
 
loss
 
related
 
to
 
own
 
credit
 
are
recognized
 
in
Other
 
comprehensive
 
income
 
directly
 
within
Retained
 
earnings,
with
 
no
 
reclassification
 
to
 
the
 
income
statement in future periods.
 
This presentation does not
 
create or
increase an
 
accounting mismatch
 
in the income
 
statement, as
 
UBS
does not hedge changes in own credit
Own
 
credit
 
is
 
estimated
 
using
 
own
 
credit
 
adjustment
 
(OCA)
curves,
 
which
 
incorporate
 
observable
 
market
 
data,
 
including
market-observed
 
secondary
 
prices
 
for
 
UBS’s
 
debt,
 
UBS’s
 
credit
default swap spreads
 
and debt curves
 
of peers. In
 
the table below,
the
 
change
 
in
 
unrealized
 
own credit
 
consists of
 
changes
 
in
 
fair
value that are attributable
 
to the change in
 
UBS’s credit spreads,
as well
 
as the
 
effect of
 
changes in
 
fair values
 
attributable to
 
factors
other than credit spreads, such as redemptions, effects from time
decay
 
and changes
 
in
 
interest and
 
other market
 
rates.
 
Realized
own credit is recognized
 
when an instrument with
 
an associated
unrealized OCA
 
is repurchased
 
prior to
 
the contractual
 
maturity
date.
 
Life-to-date
 
amounts
 
reflect
 
the
 
cumulative
 
unrealized
change since initial recognition.
›
 
Refer to Note 16 for more information about
 
debt issued
designated at fair value
Own credit adjustments on financial liabilities
 
designated at fair value
Included in Other comprehensive income
For the year ended
USD million
31.12.21
31.12.20
31.12.19
Recognized during the period:
Realized gain / (loss)
 
(14)
2
8
Unrealized gain / (loss)
 
60
(295)
(408)
Total gain / (loss), before tax
46
(293)
(400)
As of
 
USD million
31.12.21
31.12.20
31.12.19
Recognized on the balance sheet as of the end of the period:
Unrealized life-to-date gain / (loss)
 
(315)
(381)
(88)
Credit valuation adjustments
In order to measure
 
the fair value of
 
OTC derivative instruments,
including
 
funded
 
derivative
 
instruments
 
that
 
are
 
classified
 
as
Financial assets at
 
fair value
 
not held for
 
trading,
 
CVAs are needed
to
 
reflect
 
the
 
credit
 
risk
 
of
 
the
 
counterparty
 
inherent
 
in
 
these
instruments. This
 
amount represents
 
the estimated
 
fair value
 
of
protection required
 
to hedge the counterparty credit
 
risk of such
instruments.
 
A
 
CVA
 
is
 
determined
 
for
 
each
 
counterparty,
considering
 
all
 
exposures
 
with
 
that
 
counterparty,
 
and
 
is
dependent
 
on
 
the
 
expected
 
future
 
value
 
of
 
exposures,
 
default
probabilities
 
and
 
recovery
 
rates,
 
applicable
 
collateral
 
or
 
netting
arrangements,
 
break
 
clauses,
 
funding
 
spreads
 
and
 
other
contractual factors.
 
Funding valuation adjustments
FVAs
 
reflect
 
the
 
costs
 
and
 
benefits
 
of
 
funding
 
associated
 
with
uncollateralized and
 
partially collateralized
 
derivative receivables
and
 
payables
 
and
 
are
 
calculated
 
as
 
the
 
valuation
 
effect
 
from
moving
 
the
 
discounting
 
of
 
the
 
uncollateralized
 
derivative
 
cash
flows from the ARR to OCA using the CVA framework, including
the probability of counterparty default.
 
An FVA is
 
also applied to
collateralized derivative
 
assets in
 
cases where the
 
collateral cannot
be sold or repledged.
Debit valuation adjustments
A DVA
 
is estimated to incorporate own
 
credit in the valuation of
derivatives
 
where
 
an
 
FVA
 
is
 
not
 
already
 
recognized.
 
The
 
DVA
calculation
 
is
 
effectively
 
consistent
 
with
 
the
 
CVA
 
framework,
being
 
determined
 
for
 
each
 
counterparty,
 
considering
 
all
exposures
 
with
 
that
 
counterparty
 
and
 
taking
 
into
 
account
collateral
 
netting
 
agreements,
 
expected
 
future
 
mark-to-market
movements and UBS’s credit default spreads.
Other valuation adjustments
Instruments that are measured as part of a portfolio of combined
long and short
 
positions are valued at
 
mid-market levels to
 
ensure
consistent
 
valuation
 
of
 
the
 
long-
 
and
 
short-component
 
risks.
 
A
liquidity valuation adjustment is
 
then made to the
 
overall net long
or
 
short
 
exposure
 
to
 
move
 
the
 
fair
 
value
 
to
 
bid
 
or
 
offer
 
as
appropriate, reflecting current levels of market liquidity.
 
The bid–
offer spreads used in
 
the calculation of this valuation adjustment
are obtained from market transactions
 
and other relevant sources
and are updated periodically.
Uncertainties
 
associated
 
with
 
the
 
use
 
of
 
model-based
valuations
 
are
 
incorporated
 
into
 
the
 
measurement
 
of
 
fair
 
value
through
 
the
 
use
 
of
 
model
 
reserves.
 
These
 
reserves
 
reflect
 
the
amounts that UBS estimates should be deducted from
 
valuations
produced
 
directly
 
by
 
models
 
to
 
incorporate
 
uncertainties
 
in
 
the
relevant modeling
 
assumptions, in
 
the model
 
and market
 
inputs
used,
 
or
 
in
 
the
 
calibration
 
of
 
the
 
model
 
output
 
to
 
adjust
 
for
known
 
model
 
deficiencies.
 
In
 
arriving
 
at
 
these
 
estimates,
 
UBS
considers a
 
range of
 
market practices,
 
including how
 
it believes
market
 
participants
 
would
 
assess
 
these
 
uncertainties.
 
Model
reserves are
 
reassessed periodically
 
in light
 
of data
 
from market
transactions,
 
consensus
 
pricing
 
services
 
and
 
other
 
relevant
sources.
Other items
In the first
 
half of
 
2021, UBS
 
AG incurred
 
a loss
 
of USD
861
 
million
as a
 
result of
 
closing out
 
a significant
 
portfolio of
 
swaps with
 
a
US-based
 
client
 
of
 
its
 
prime
 
brokerage
 
business
 
and
 
the
unwinding of
 
related hedges,
 
following the
 
client’s default.
 
This
loss
 
is
 
presented
 
within
Other
 
net
 
income
 
from
 
financial
instruments measured at fair value through profit or loss
.
Valuation adjustments on financial instruments
As of
Life-to-date gain / (loss), USD million
31.12.21
31.12.20
Credit valuation adjustments
1
(44)
(66)
Funding valuation adjustments
(49)
(73)
Debit valuation adjustments
2
0
Other valuation adjustments
(913)
(820)
of which: liquidity
(341)
(340)
of which: model uncertainty
(571)
(479)
1 Amounts do not include reserves against defaulted counterparties.
e) Transfers between Level 1 and Level 2
Assets and liabilities transferred
 
from Level 2 to
 
Level 1 during 2021
 
were not material. Assets and
 
liabilities transferred from Level 1
to Level 2 during 2021 were also not material.
f) Level 3 instruments: valuation techniques and inputs
The
 
table
 
below
 
presents
 
material
 
Level 3
 
assets
 
and
 
liabilities,
together
 
with
 
the
 
valuation
 
techniques
 
used
 
to
 
measure
 
fair
value,
 
the
 
inputs
 
used
 
in
 
a
 
given
 
valuation
 
technique
 
that
 
are
considered significant as
 
of 31 December
 
2021 and
 
unobservable,
and a range of values for those unobservable inputs.
 
The
 
range
 
of
 
values
 
represents
 
the
 
highest-
 
and lowest-level
inputs
 
used in
 
the valuation
 
techniques. Therefore,
 
the range
 
does
not reflect the level of
 
uncertainty regarding a particular input or
an
 
assessment
 
of
 
the
 
reasonableness
 
of
 
UBS’s
 
estimates
 
and
assumptions, but rather the different underlying
 
characteristics of
the
 
relevant
 
assets
 
and
 
liabilities
 
held
 
by
 
UBS.
 
The
 
ranges
 
will
therefore vary from period to period and parameter to parameter
based on characteristics
 
of the instruments
 
held at each
 
balance
sheet date. Furthermore,
 
the ranges of unobservable
 
inputs may
differ across other financial institutions,
 
reflecting the diversity of
the products in each firm’s inventory.
Valuation techniques and inputs used in the fair value measurement
 
of Level 3 assets and liabilities
Fair value
Significant
unobservable
input(s)
1
Range of inputs
Assets
Liabilities
Valuation
technique(s)
31.12.21
31.12.20
USD billion
31.12.21
31.12.20
31.12.21
31.12.20
low
high
weighted
average
2
low
high
weighted
average
2
unit
1
Financial assets and liabilities at fair value held for trading and Financial assets at fair
 
value not held for trading
Corporate and municipal
bonds
0.9
1.2
0.0
0.0
Relative value to
market comparable
Bond price equivalent
16
143
98
1
143
100
points
Discounted expected
cash flows
Discount margin
434
434
268
268
basis
points
Traded loans, loans
measured at fair value,
loan commitments and
guarantees
2.8
2.4
0.0
0.0
Relative value to
market comparable
Loan price equivalent
0
101
99
0
101
99
points
Discounted expected
cash flows
Credit spread
175
800
436
190
800
398
basis
points
Market comparable
and securitization
model
Credit spread
28
1,544
241
40
1,858
333
basis
points
Auction rate securities
1.6
1.5
Discounted expected
cash flows
Credit spread
115
197
153
100
188
140
basis
points
Investment fund units
3
0.1
0.1
0.0
0.0
Relative value to
market comparable
Net asset value
Equity instruments
3
0.8
0.7
0.1
0.0
Relative value to
market comparable
Price
Debt issued designated at
fair value
4
11.9
9.6
Other financial liabilities
designated at fair value
3.2
2.1
Discounted expected
cash flows
Funding spread
24
175
42
175
basis
points
Derivative financial instruments
Interest rate contracts
0.5
0.5
0.3
0.5
Option model
Volatility of interest
rates
65
81
29
69
basis
points
Credit derivative contracts
0.2
0.3
0.3
0.5
Discounted expected
cash flows
Credit spreads
 
1
583
1
489
basis
points
Bond price equivalent
2
136
0
100
points
Equity / index contracts
0.4
0.9
1.5
2.3
Option model
Equity dividend yields
0
11
0
13
%
Volatility of equity
stocks, equity and
other indices
4
98
4
100
%
Equity-to-FX
correlation
(29)
76
(34)
65
%
Equity-to-equity
correlation
(25)
100
(16)
100
%
1 The ranges of significant
 
unobservable inputs are represented in
 
points, percentages and basis
 
points. Points are a
 
percentage of par (e.g., 100
 
points would be 100% of par).
 
2 Weighted averages are
 
provided
for most non-derivative financial
 
instruments and were calculated
 
by weighting inputs based on
 
the fair values of the
 
respective instruments. Weighted
 
averages are not provided
 
for inputs related to Other
 
financial
liabilities designated at
 
fair value
 
and Derivative
 
financial instruments,
 
as this would
 
not be meaningful.
 
3 The
 
range of
 
inputs is not
 
disclosed, as there
 
is a dispersion
 
of values
 
given the diverse
 
nature of the
investments.
 
4 Debt issued designated at fair value primarily consists of UBS structured notes, which include variable maturity notes with various equity and foreign exchange underlying risks,
 
rates-linked and credit-
linked notes, all of which have embedded derivative parameters that are considered to be unobservable.
 
The equivalent derivative instrument parameters are presented in the respective derivative financial instruments
lines in this table.
Significant unobservable inputs in Level 3 positions
This section discusses the significant unobservable inputs
 
used in the valuation of Level 3
 
instruments and assesses the potential effect
that a change in each
 
unobservable input in isolation
 
may have on a
 
fair value measurement. Relationships
 
between observable and
unobservable inputs have not been included in the summary below.
 
Input
Description
Bond price equivalent
–
 
Where market
 
prices are
 
not available
 
for a
 
bond, fair
 
value is
 
measured by comparison
 
with observable
 
pricing data
 
from
similar instruments. Factors considered when
 
selecting comparable instruments include credit
 
quality, maturity and industry of
the issuer. Fair value may be measured either by a direct price comparison or by conversion of
 
an instrument price into a yield
(either as an outright yield or as a spread to
 
the relevant benchmark rate).
 
–
 
For corporate and municipal bonds,
 
the range represents the range
 
of prices from reference issuances
 
used in determining fair
value. Bonds priced at 0 are distressed to the point that no
 
recovery is expected, while prices significantly in excess of 100 or
par
 
relate
 
to
 
inflation-linked
 
or
 
structured
 
issuances
 
that
 
pay
 
a
 
coupon
 
in
 
excess
 
of
 
the
 
market
 
benchmark
 
as
 
of
 
the
measurement date.
–
 
For credit derivatives, the bond price range
 
represents the range of prices used for
 
reference instruments, which are typically
converted to an equivalent yield or credit
 
spread as part of the valuation process.
Loan price equivalent
–
 
Where market prices are not available
 
for a traded loan, fair value is measured
 
by comparison with observable
 
pricing data for
similar instruments.
 
Factors considered
 
when selecting
 
comparable instruments include
 
industry segment, collateral
 
quality,
maturity and issuer-specific covenants. Fair value may be measured either by a direct price comparison
 
or by conversion of an
instrument price
 
into a yield.
 
The range represents
 
the range
 
of prices
 
derived from
 
reference issuances
 
of a similar
 
credit quality
used to
 
measure fair
 
value for
 
loans classified
 
as Level 3.
 
Loans priced
 
at 0
 
are distressed
 
to the
 
point that
 
no recovery
 
is
expected, while a current price of 100 represents
 
a loan that is expected to be repaid in full.
Credit spread
–
 
Valuation models for many credit derivatives
 
require an input for the credit
 
spread, which is a reflection of the
 
credit quality of
the associated referenced
 
underlying. The credit
 
spread of a
 
particular security is
 
quoted in relation
 
to the yield
 
on a benchmark
security or reference rate, typically either US Treasury or ARR,
 
and is generally expressed in terms of basis points. An increase
 
/
(decrease) in credit
 
spread will increase
 
/ (decrease) the
 
value of credit
 
protection offered by
 
credit default swaps
 
and other
credit derivative
 
products. The
 
income statement
 
effect from
 
such changes
 
depends on
 
the nature
 
and direction
 
of the
 
positions
held. Credit spreads may
 
be negative where the asset
 
is more creditworthy than the
 
benchmark against which the spread
 
is
calculated. A
 
wider credit spread
 
represents decreasing creditworthiness. The
 
range represents a
 
diverse set
 
of underlyings,
with the lower
 
end of the
 
range representing
 
credits of the
 
highest quality
 
and the upper
 
end of the
 
range representing
 
greater
levels of credit risk.
Discount margin
–
 
The discount margin (DM) spread represents the
 
discount rates applied to present value
 
cash flows of an asset
 
to reflect the
market return required for uncertainty in the
 
estimated cash flows. DM spreads are
 
a rate or rates applied on top of a floating
index (e.g., Secured Overnight Financing
 
Rate (SOFR)) to discount expected
 
cash flows. Generally, a decrease
 
/ (increase) in the
DM in isolation would result in a higher / (lower)
 
fair value.
–
 
The high end
 
of the
 
range relates
 
to securities
 
that are priced
 
low within
 
the market
 
relative to the
 
expected cash
 
flow schedule.
This indicates
 
that the
 
market is
 
pricing an
 
increased risk
 
of credit
 
loss into
 
the security
 
that is
 
greater than
 
what is
 
being
captured by the
 
expected cash
 
flow generation process.
 
The low e
 
nds of
 
the ranges are
 
typical of funding
 
rates on
 
better-
quality instruments.
Funding spread
–
 
Structured financing transactions are valued using synthetic funding curves that best represent the assets that are pledged as
collateral for the transactions. They are not representative
 
of where UBS can fund itself on an unsecured basis, but
 
provide an
estimate of where UBS can source and deploy secured funding with counterparties for a given type of collateral. The funding
spreads are expressed in terms of basis points,
 
and if funding spreads widen, this increases the
 
effect of discounting.
 
–
 
A small proportion of structured
 
debt instruments and non-structured
 
fixed-rate bonds within financial
 
liabilities designated at
fair value had an exposure to funding spreads that
 
was longer in duration than the actively traded
 
market.
Volatility
–
 
Volatility measures the variability of future prices
 
for a particular instrument and is generally
 
expressed as a percentage, where
a higher number reflects a more volatile instrument, for which future price movements are
 
more likely to occur. Volatility is a
key input
 
into option
 
models, where it
 
is used
 
to derive
 
a probability-based
 
distribution of
 
future prices
 
for the
 
underlying
instrument. The effect
 
of volatility on
 
individual positions within
 
the portfolio is
 
driven primarily by
 
whether the option
 
contract
is a
 
long or
 
short position.
 
In most
 
cases, the
 
fair value
 
of an
 
option increases
 
as a
 
result of
 
an increase
 
in volatility
 
and is
reduced by
 
a decrease
 
in volatility.
 
Generally,
 
volatility used
 
in the
 
measurement of fair
 
value is
 
derived from
 
active-market
option prices
 
(referred to
 
as implied
 
volatility). A
 
key feature
 
of implied
 
volatility is
 
the volatility
 
“smile” or
 
“skew,” which
represents the effect of pricing options of
 
different option strikes at different implied volatility
 
levels.
–
 
Volatilities of low interest rates tend to be much higher than volatilities of high interest rates. In addition, different currencies
may have significantly different implied volatilities.
Input
Description
Correlation
–
 
Correlation measures the interrelationship between the movements of two variables. It is expressed as a percentage between
 
–100% and
 
+100%, where
 
+100% represents
 
perfectly correlated
 
variables (meaning
 
a movement
 
of one
 
variable is
 
associated
with a
 
movement of the
 
other variable in
 
the same direction)
 
and –100% implies
 
that the variables
 
are inversely correlated
(meaning a movement
 
of one variable
 
is associated with
 
a movement of
 
the other variable
 
in the opposite
 
direction). The
 
effect
of correlation on the measurement of fair value depends on the specific terms of the instruments being valued, reflecting the
range of different payoff features within
 
such instruments.
–
 
Equity-to-FX correlation is important for equity options based on
 
a currency other than the
 
currency of the underlying stock.
Equity-to-equity correlation is particularly important for complex options that incorporate, in some
 
manner, different equities
in the projected payoff.
Equity dividend yields
–
 
The derivation of
 
a forward price
 
for an individual
 
stock or index
 
is important for
 
measuring fair value
 
for forward or
 
swap
contracts and for measuring fair value using option pricing models. The relationship between the current stock price and
 
the
forward price is based on a combination of expected future dividend levels and
 
payment timings, and, to a lesser extent, the
relevant funding rates applicable
 
to the stock in question.
 
Dividend yields are generally expressed
 
as an annualized percentage
of the share price,
 
with the lowest limit
 
of 0% representing
 
a stock that is
 
not expected to pay
 
any dividend. The
 
dividend yield
and timing represent the
 
most significant parameter in determining
 
fair value for instruments
 
that are sensitive to
 
an equity
forward price.
g) Level 3 instruments: sensitivity to changes in unobservable input assumptions
The table
 
below summarizes
 
those financial
 
assets and
 
liabilities
classified
 
as
 
Level 3
 
for
 
which
 
a
 
change
 
in
 
one
 
or
 
more
 
of
 
the
unobservable inputs
 
to reflect
 
reasonably possible
 
favorable and
unfavorable
 
alternative
 
assumptions
 
would
 
change
 
fair
 
value
significantly,
 
and
 
the estimated
 
effect
 
thereof.
 
The
 
table
 
below
does
 
not
 
represent
 
the
 
estimated
 
effect
 
of
 
stress
 
scenarios.
Interdependencies between Level 1, 2 and 3
 
parameters have not
been
 
incorporated
 
in
 
the
 
table.
 
Furthermore,
 
direct
 
inter-
relationships between the
 
Level 3 parameters discussed
 
below are
not a significant element of the valuation uncertainty.
Sensitivity
 
data
 
is
 
estimated
 
using
 
a
 
number
 
of
 
techniques,
including
 
the
 
estimation
 
of
 
price
 
dispersion
 
among
 
different
market
 
participants,
 
variation
 
in
 
modeling
 
approaches
 
and
reasonably possible
 
changes to assumptions
 
used within the
 
fair
value measurement process. The sensitivity ranges are not always
symmetrical
 
around
 
the
 
fair
 
values,
 
as
 
the
 
inputs
 
used
 
in
valuations are not always precisely in
 
the middle of the favorable
and unfavorable range.
Sensitivity data
 
is determined
 
at a
 
product or
 
parameter level
and
 
then
 
aggregated
 
assuming
 
no
 
diversification
 
benefit.
Diversification
 
would
 
incorporate
 
estimated
 
correlations
 
across
different sensitivity results and, as such, would result in an overall
sensitivity
 
that
 
would
 
be
 
less
 
than
 
the
 
sum
 
of
 
the
 
individual
component
 
sensitivities.
 
However,
 
UBS
 
believes
 
that
 
the
diversification benefit is not significant to this analysis.
Sensitivity of fair value measurements to changes
 
in unobservable input assumptions
1
31.12.21
31.12.20
USD million
Favorable
 
changes
Unfavorable
 
changes
Favorable
 
changes
Unfavorable
 
changes
Traded loans, loans designated at fair value, loan commitments and guarantees
19
(13)
29
(28)
Securities financing transactions
41
(53)
40
(52)
Auction rate securities
66
2
(66)
2
105
(105)
Asset-backed securities
20
(20)
41
(41)
Equity instruments
173
(146)
129
(96)
Interest rate derivative contracts, net
29
(19)
11
(16)
Credit derivative contracts, net
5
(8)
10
(14)
Foreign exchange derivative contracts, net
19
(11)
20
(15)
Equity / index derivative contracts, net
368
(335)
318
(294)
Other
50
(73)
91
(107)
Total
790
(744)
794
(768)
1 Sensitivity of issued and
 
over-the-counter debt instruments
 
is reported with the equivalent
 
derivative or securities financing
 
instrument.
 
2 Includes refinements applied in estimating
 
valuation uncertainty across
various parameters and a change in assumptions regarding the underlying statistical distribution.
h) Level 3 instruments: movements during the period
The
 
table below
 
presents
 
additional
 
information about
 
material
movements in Level 3 assets and
 
liabilities measured at fair
 
value
on a recurring basis, excluding any related hedging activity.
Assets
 
and
 
liabilities
 
transferred
 
into
 
or
 
out
 
of
 
Level 3
 
are
presented as
 
if those
 
assets or
 
liabilities had
 
been transferred
 
at
the beginning of the year.
Movements of Level 3 instruments
Total gains / losses
included in
comprehensive income
USD billion
Balance
 
as of
31 December
2019
Net gains /
losses
included in
income
1
of which:
related to
Level 3
instruments
held at the
end of the
reporting
period
Purchases
Sales
Issuances
Settlements
Transfers
 
into
 
Level 3
Transfers
 
out of
 
Level 3
Foreign
currency
translation
Balance
 
as of
 
31 December
2020
Financial assets at fair value held for
trading
1.8
(0.1)
(0.1)
0.8
(1.4)
1.0
0.0
0.3
0.0
0.0
2.3
of which:
Investment fund units
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Corporate and municipal bonds
0.5
0.0
0.0
0.7
(0.5)
0.0
0.0
0.1
0.0
0.0
0.8
Loans
0.8
0.0
(0.1)
0.0
(0.7)
1.0
0.0
0.1
0.0
0.0
1.1
Other
0.4
0.0
0.0
0.1
(0.3)
0.0
0.0
0.2
0.0
0.0
0.4
Derivative financial instruments –
assets
1.3
0.3
0.4
0.0
0.0
0.7
(0.5)
0.1
(0.2)
0.1
1.8
of which:
Interest rate contracts
0.3
0.2
0.2
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.5
Equity / index contracts
0.6
0.1
0.1
0.0
0.0
0.6
(0.3)
0.0
(0.1)
0.0
0.9
Credit derivative contracts
0.4
0.0
0.0
0.0
0.0
0.1
(0.2)
0.1
0.0
0.0
0.3
Other
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Financial assets at fair value not held
for trading
4.0
0.0
0.1
0.8
(0.9)
0.0
0.0
0.1
0.0
0.0
3.9
of which:
Loans
1.2
0.0
0.0
0.3
(0.7)
0.0
0.0
0.0
0.0
0.0
0.9
Auction rate securities
1.5
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
1.5
Equity instruments
0.5
0.0
0.0
0.1
(0.1)
0.0
0.0
0.0
0.0
0.0
0.5
Other
0.7
0.0
0.0
0.4
(0.2)
0.0
0.0
0.0
0.0
0.0
1.0
Derivative financial instruments –
liabilities
2.0
1.3
1.2
0.0
0.0
1.2
(0.9)
0.4
(0.6)
0.1
3.5
of which:
Interest rate contracts
0.1
0.3
0.3
0.0
0.0
0.3
(0.2)
0.2
(0.2)
0.0
0.5
Equity / index contracts
1.3
1.0
0.8
0.0
0.0
0.8
(0.6)
0.1
(0.2)
0.0
2.3
Credit derivative contracts
0.5
0.0
0.0
0.0
0.0
0.1
(0.1)
0.1
(0.2)
0.0
0.5
Other
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.1
Debt issued designated at fair value
9.6
0.0
(0.2)
0.0
0.0
6.6
(5.6)
0.5
(1.7)
0.2
9.6
Other financial liabilities designated
at fair value
1.0
0.2
0.2
0.0
0.0
1.4
(0.6)
0.0
0.0
0.0
2.1
1 Net gains / losses
 
included in comprehensive income
 
are composed of Net interest
 
income, Other net
 
income from financial instruments
 
measured at fair value
 
through profit or loss
 
and Other income.
 
2 Total
Level 3 assets as of 31 December 2021 were USD
7.6
 
billion (31 December 2020: USD
8.3
 
billion). Total Level 3 liabilities as of 31 December 2021 were USD
17.4
 
billion (31 December 2020: USD
15.2
 
billion).
i) Maximum exposure to credit risk for financial instruments measured at fair value
The tables below provide
 
UBS AG’s maximum exposure
 
to credit
risk
 
for
 
financial
 
instruments
 
measured
 
at
 
fair
 
value
 
and
 
the
respective
 
collateral
 
and
 
other
 
credit
 
enhancements
 
mitigating
credit risk for these classes of financial instruments.
 
The
 
maximum
 
exposure
 
to
 
credit
 
risk
 
includes
 
the
 
carrying
amounts of financial
 
instruments recognized on
 
the balance sheet
subject
 
to
 
credit
 
risk
 
and
 
the
 
notional
 
amounts
 
for
 
off-balance
sheet arrangements.
 
Where information
 
is available,
 
collateral is
presented at fair value.
 
For other collateral, such as
 
real estate, a
reasonable alternative
 
value is
 
used. Credit
 
enhancements, such
as credit derivative contracts
 
and guarantees, are included
 
at their
notional amounts. Both are capped at the maximum
 
exposure to
credit risk for which
 
they serve as
 
security. The “Risk management
and control” section of this
 
report describes management’s view
of credit risk and
 
the related exposures,
 
which can differ
 
in certain
respects from the requirements of IFRS.
Maximum exposure to credit risk
 
31.12.21
Maximum
exposure to
credit risk
Collateral
Credit enhancements
Exposure to
credit risk
after collateral
and credit
enhancements
USD billion
Cash
collateral
received
Collateral-
ized by
securities
Secured by
real estate
Other
 
collateral
Netting
Credit
derivative
contracts
Guarantees
 
Financial assets measured at
 
fair value on the balance sheet
1
Financial assets at fair value
 
held for trading – debt instruments
2,3
22.6
 
22.6
Derivative financial instruments
4,5
118.1
4.2
103.2
 
10.7
Brokerage receivables
21.8
0.0
21.6
 
 
 
 
0.2
Financial assets at fair value not
 
held for trading – debt instruments
6
37.0
0.0
11.2
 
 
 
25.7
Total financial assets measured at fair value
199.5
0.0
37.1
0.0
0.0
103.2
0.0
0.0
59.2
Guarantees
7
0.2
 
 
 
0.0
 
0.2
0.0
31.12.20
Maximum
exposure to
credit risk
Collateral
Credit enhancements
Exposure to
credit risk
after collateral
and credit
enhancements
USD billion
Cash
collateral
received
Collateral-
ized by
securities
Secured by
real estate
Other
 
collateral
Netting
Credit
derivative
contracts
Guarantees
 
Financial assets measured at
 
fair value on the balance sheet
1
Financial assets at fair value
 
held for trading – debt instruments
2,3
24.7
 
 
24.7
Derivative financial instruments
4,5
159.6
6.0
138.4
 
 
15.2
Brokerage receivables
24.7
24.4
 
 
 
 
0.3
Financial assets at fair value not
 
held for trading – debt instruments
6
58.2
0.0
13.2
 
 
 
 
45.0
Total financial assets measured at fair value
267.2
0.0
43.6
0.0
0.0
138.4
0.0
0.0
85.2
Guarantees
7
0.5
 
 
 
0.1
 
0.3
0.0
1 The maximum exposure to loss is generally equal to the carrying amount and subject to change over time with market movements.
 
2 These positions are generally managed under the market risk framework. For
the purpose of this disclosure, collateral and credit enhancements were
 
not considered.
 
3 Does not include investment fund units.
 
4 Includes USD
0
 
million (31 December 2020: USD
0
 
million) fair values of loan
commitments and forward starting reverse repurchase
 
agreements classified as derivatives. The
 
full contractual committed amount of forward
 
starting reverse repurchase agreements (generally highly
 
collateralized)
of USD
27.8
 
billion (31 December 2020: USD
21.9
 
billion) and derivative loan commitments (generally unsecured) of USD
8.2
 
billion, of which USD
0.8
 
billion has been sub-participated (31 December 2020: USD
9.4
billion, of which USD
0.8
 
billion had been sub-participated), is presented in Note 10
 
under notional amounts.
 
5 The amount shown in the “Netting” column represents
 
the netting potential not recognized on the
balance sheet. Refer to Note 22
 
for more information.
 
6 Financial assets at fair value
 
not held for trading collateralized
 
by securities consisted of structured loans
 
and reverse repurchase and securities borrowing
agreements.
 
7 The amount shown in the “Guarantees” column largely relates to sub-participations.
j) Financial instruments not measured at fair value
The table below provides the estimated fair values of financial instruments not measured at fair value.
Financial instruments not measured at fair value
31.12.21
31.12.20
Carrying
amount
Fair value
Carrying
amount
Fair value
USD billion
Total
Carrying
amount
approximates
fair value
1
Level 1
Level 2
Level 3
Total
Total
Carrying
amount
approximates
fair value
1
Level 1
Level 2
Level 3
Total
Assets
2
Cash and balances at central banks
192.8
192.7
0.1
0.0
0.0
192.8
158.2
158.1
0.1
0.0
0.0
158.2
Loans and advances to banks
15.4
14.6
0.0
0.7
0.0
15.3
15.3
14.6
0.0
0.6
0.1
15.3
Receivables from securities financing
transactions
75.0
71.6
0.0
1.3
2.1
75.0
74.2
64.9
0.0
7.6
1.7
74.2
Cash collateral receivables on derivative
instruments
30.5
30.5
0.0
0.0
0.0
30.5
32.7
32.7
0.0
0.0
0.0
32.7
Loans and advances to customers
398.7
163.7
0.0
43.8
190.4
397.9
381.0
173.1
0.0
34.2
174.9
382.3
Other financial assets measured at amortized
cost
26.2
4.1
9.3
10.7
2.4
26.5
27.2
5.4
9.4
10.9
2.3
28.0
Liabilities
2
Amounts due to banks
13.1
9.1
0.0
4.0
0.0
13.1
11.0
8.5
0.0
2.6
0.0
11.1
Payables from securities financing
transactions
5.5
4.1
0.0
1.5
0.0
5.5
6.3
6.0
0.0
0.2
0.0
6.3
Cash collateral payables on derivative
instruments
31.8
31.8
0.0
0.0
0.0
31.8
37.3
37.3
0.0
0.0
0.0
37.3
Customer deposits
544.8
537.6
0.0
7.3
0.0
544.8
527.9
521.8
0.0
6.2
0.0
528.0
Funding from UBS Group AG
57.3
2.8
0.0
56.0
0.0
58.8
54.0
0.0
0.0
55.6
0.0
55.6
Debt issued measured at amortized cost
82.4
13.0
0.0
69.8
0.0
82.8
85.4
16.4
0.0
70.0
0.0
86.3
Other financial liabilities measured at
amortized cost
3
6.3
6.3
0.0
0.0
0.0
6.3
6.6
6.6
0.0
0.0
0.1
6.7
1 Includes certain financial instruments where the carrying amount is a reasonable
 
approximation of the fair value due to the instruments’
 
short-term nature (instruments that are receivable or payable
 
on demand, or
with a remaining maturity (excluding
 
the effects of callable
 
features) of three months or
 
less).
 
2 As of 31 December 2021,
 
USD
0
 
billion (31 December 2020: USD
0
 
billion) of Cash and balances
 
at central banks,
USD
0
 
billion (31 December 2020: USD
0
 
billion) of Loans and advances to banks, USD
1
 
billion (31 December 2020: USD
1
 
billion) of Receivables from securities financing transactions, USD
175
 
billion (31 December
2020: USD
163
 
billion) of Loans and advances to customers, USD
19
 
billion (31 December 2020: USD
20
 
billion) of Other financial assets measured at amortized cost, USD
1
 
billion (31 December 2020: USD
0
 
billion)
of Amounts due to banks,
 
USD
4
 
billion (31 December 2020:
 
USD
3
 
billion) of Customer deposits,
 
USD
53
 
billion (31 December 2020: USD
49
 
billion) of Funding from
 
UBS Group AG,
 
USD
31
 
billion (31 December
2020: USD
31
 
billion) of Debt issued measured at amortized cost and USD
3
 
billion (31 December 2020: USD
3
 
billion) of Other financial liabilities measured at amortized cost were expected to be recovered or settled
after 12 months.
 
3 Excludes lease liabilities.
The fair
 
values included in
 
the table
 
above have been
 
calculated
for
 
disclosure
 
purposes
 
only.
 
The
 
valuation
 
techniques
 
and
assumptions described below relate only
 
to the fair value
 
of UBS’s
financial instruments
 
not measured at
 
fair value.
 
Other institutions
may
 
use different
 
methods and
 
assumptions for
 
their
 
fair value
estimations,
 
and
 
therefore
 
such
 
fair
 
value
 
disclosures
 
cannot
necessarily be compared from
 
one financial institution
 
to another.
The following principles
 
were applied when
 
determining fair
 
value
estimates for financial instruments not measured at fair value:
–
 
For
 
financial
 
instruments
 
with
 
remaining
 
maturities
 
greater
than three months, the
 
fair value was
 
determined from quoted
market prices, if available.
Where quoted market prices were
 
not available, the fair values
were
 
estimated
 
by
 
discounting
 
contractual
 
cash
 
flows
 
using
current
 
market
 
interest
 
rates
 
or
 
appropriate
 
yield
 
curves
 
for
instruments
 
with
 
similar
 
credit
 
risk
 
and
 
maturity.
 
These
estimates generally include
 
adjustments for counterparty
 
credit
risk or UBS’s own credit.
–
 
For short-term financial instruments with remaining maturities
of three
 
months or less,
 
the carrying amount,
 
which is net
 
of
credit
 
loss
 
allowances,
 
is
 
generally
 
considered
 
a
 
reasonable
estimate of fair value.