Interest rate benchmark reform

12 Months Ended

Dec. 31, 2021

Schedule Interest Rate Benchmark Reform [Table]

Disclosure of how entity is managing transition to alternative benchmark rates, its progress at reporting date and risks to which it is exposed arising from financial instruments because of transition [text block]

Note 25 Interest rate benchmark reform

Background

A market-wide reform of major interest rate benchmarks is being

undertaken globally, with the Financial Conduct Authority (the

FCA) announcing in March 2021 that the publication of London

Interbank Offered Rates (LIBORs) would cease after 31 December

2021 for all non-US dollar LIBORs, as well as for one-week and

two-month USD LIBOR. Publication of the remaining USD LIBOR

tenors will cease immediately after 30 June 2023.

The majority of UBS’s IBOR exposure was linked to CHF LIBOR

and USD LIBOR. The alternative reference rate (the ARR) for CHF

LIBOR is the Swiss Average Rate Overnight (SARON). The ARR for

USD LIBOR is the Secured Overnight Financing Rate (SOFR); in

addition, there are recommended ARRs for GBP LIBOR, JPY LIBOR

and EUR LIBOR. 

The Euro Interbank Offered Rate (EURIBOR) was reformed in

2019, with the reform consisting of a change in the underlying

calculation method. Consequently, contracts linked to EURIBOR

are not considered throughout the rest of this Note.

On 25 January 2021, the IBOR Fallbacks Supplement and IBOR

Fallbacks Protocol, which amend the International Swaps and

Derivatives Association (ISDA) standard definitions for interest rate

derivatives to incorporate fallbacks for derivatives linked to certain

IBORs, came into effect. From that date, all newly cleared and

non-cleared derivatives between adhering parties that reference

ISDA standard

definitions now include these fallbacks. UBS

adhered to the protocol in November 2020.

UBS’s focus throughout 2021 was on transitioning existing

contracts via bi-lateral and multi-lateral agreements, by leveraging

industry solutions

(e.

g.,

the use of fallback provisions)

and

through third-party actions (those by clearing houses, agents,

etc.). UBS has established a framework to address the transition

of contracts that do not contain adequate fallback provisions.

Furthermore, in line with regulatory guidance

,

UBS has

implemented a framework to limit new contracts referencing

IBORs. 

Governance over the transition to alternative benchmark rates

UBS established a global cross-divisional, cross-functional

governance structure and change program to address the scale

and complexity of the transition. This global program is sponsored

by the Group CFO and led by senior representatives from the

business divisions and UBS’s control and support functions. The

program includes governance and execution structures within

each business division, together with cross-divisional teams from

each control and support function. During 2021, progress was

overseen centrally via a monthly operating committee and a

monthly steering committee, as well as quarterly updates to the

joint Audit and Risk Committees. A dedicated Group-wide forum,

with an increased US regional focus, will oversee progress of the

remaining USD LIBOR transition.

Risks

A

core part of UBS’s change program is the identification,

management and monitoring of the risks associated with IBOR

reform and transition. These risks include, but are not limited to,

the following:

–

economic risks to UBS and its clients, through the repricing of

existing contracts, reduced transparency and / or liquidity of

pricing information, market uncertainty or disruption;

–

accounting risks, where the transition affects the accounting

treatment, including hedge accounting and consequential

income statement volatility;

–

valuation risks arising from the variation between benchmarks

that will cease and ARRs, affecting the risk profile of financial

instruments;

–

operational risks arising from changes to UBS’s front-to-back

processes and systems to accommodate the transition, e.g.,

data sourcing and processing and bulk migration of contracts;

and

–

legal and conduct risks relating to UBS’s engagement with

clients and market counterparties around new benchmark

products and amendments required for existing contracts

referencing benchmarks that will cease.

Overall, the effort required to transition is affected by multiple

factors, including whether negotiations need to take place with

multiple stakeholders (as is the case for syndicated loans or certain

listed securities), market readiness

–

such as liquidity in ARR

-

equivalent products – and a client’s technical readiness to handle

ARR market conventions. UBS remains confident that it has the

transparency, oversight and operational preparedness to progress

with the IBOR transition consistent with market timelines, given the

significant progress made as of 31 December 2021. UBS did not

have and does not expect changes to its risk management approach

and strategy as a result of interest rate benchmark reform.

Transition progress 

Non-derivative instruments

UBS’s significant non-derivative exposures subject to IBOR reform

primarily related to brokerage receivable and payable balances,

corporate and private loans, and mortgages, linked to CHF and

USD LIBORs. During 2020, UBS transitioned most of its CHF

LIBOR-linked deposits to SARON. In that same year, UBS launched

SARON-based mortgages and corporate loans based on all major

ARRs in the Swiss market, as well as SOFR-based mortgages in the

US market. 

Throughout 2021, UBS transitioned substantially all of its

private and corporate loans linked to non-USD IBORs, with the

remaining CHF LIBOR-linked contracts planned to transition on

their first roll date in 2022. 

In addition, as of 31 December 2021 UBS had completed the

transition

of IBOR

-

linked

non

-

derivative financial assets and

liabilities related to brokerage accounts, except for balances

originated in the US, which transitioned to SOFR in January 2022.

In March 2021, following the FCA announcement regarding

the cessation timelines for IBORs,

UBS initiated a centralized

communication initiative for private mortgages linked to CHF

LIBOR, with the objective of transitioning these exposures, either

through the activation of existing fallbacks or the amendment of

contractual terms where such fallbacks do not exist. During 2021,

mortgages that were linked to CHF LIBOR

were

reduced

to

USD 

21

 billion as of 31 December 2021, with these remaining

mortgages automatically transitioning to SARON from their next

coupon roll date. 

The transition of

US sec

urities

-

based lending

to SOFR

,

amounting to USD

37

 billion as of 31 December 2021, was for

the most part completed in January 2022, with US mortgages

linked to USD LIBOR planned to transition to SOFR in 2022–2023.

As of 31 December 2021, UBS had approximately USD

3

 billion

equivalent of Japanese yen- and US dollar-denominated publicly

issued benchmark bonds that, per current contractual terms, if

not called on their respective call dates, would reset based directly

on JPY LIBOR and USD LIBOR. These bonds have robust IBOR

fallback language and the confirmation of interest rate calculation

mechanics will be communicated as market standards formalize

and in advance of any rate resets. In addition, several US dollar-

and Swiss franc-denominated benchmark bonds publicly issued

by UBS reference rates indirectly derived from IBORs, if they are

not called on their respective call dates. UBS aims to transition

those bonds in advance of their reset dates, with the transition of

Swiss franc-denominated benchmark bonds completed in January

2022. These debt instruments have not been included in the table

on the following page, given their current fixed-rate coupon. 

As of 31 December 2021, UBS had approximately USD

5

 billion

of irrevocable commitments that may be drawn down in different

currencies with IBOR-linked interest rates and that expire after the

relevant benchmark cessation dates; approximately USD

3

 billion

of these contracts had transitioned for all IBORs, except USD

LIBOR

,

and

USD

2

 billion

of these

commitments

retained

a

non

-

USD IBOR interest rate

as

of

31

December 2021

with

transition dependent upon the actions of other parties. To the

extent non-USD IBOR-linked amounts are requested under these

contracts, UBS will seek to renegotiate current terms or rely on

legislative solutions.

Derivative instruments 

UBS holds derivatives for trading and hedging purposes, including

those designated in hedge accounting relationships. A significant

number of interest rate and cross -currency swaps have floating

legs that reference various benchmarks that are subject to IBOR

reform.

The majority of derivatives are transacted with clearing houses,

in particular LCH, with the transition of these non-USD IBOR-

linked derivatives substantially completed in December 2021. UBS

had also completed the transition of all non-USD IBOR-linked

exchange

-

traded derivatives (ETDs)

through participation in

activities organized by respective exchanges

by 31

December

2021. 

For derivatives not

transacted with clearing houses or

exchanges, UBS and a significant proportion of UBS’s

counterparties have adhered to the ISDA IBOR Fallbacks Protocol,

which builds in agreed fallbacks. The majority of these contracts

had transitioned as of 31 December 2021, with a small number

of contracts transitioned in January 2022, to ensure an orderly

transition when converting high volumes of transactions at the

time of cessation.

Financial instruments yet to transition to alternative benchmarks

The amounts included in the table below relate to financial

instrument contracts across UBS’s business divisions where UBS

has material exposures subject to IBOR reform that have not yet

transitioned to ARRs, and that:

–

contractually reference an interest rate benchmark that will

transition to an alternative benchmark; and

–

have a contractual maturity date (including open-ended

contracts) after the agreed cessation dates. 

Contracts

where

penalty terms reference IBORs, or where

exposure to an IBOR is not the primary purpose of the contract,

have not been included, as these contracts do not have a material

impact on the transition process. 

In line with information provided to management and external

parties monitoring UBS’s transition progress, the table below

includes the following financial metrics for instruments external

to the Group that are subject to interest rate benchmark reform:

–

gross carrying value / exposure for non-derivative financial

instruments; and 

–

total trade count for derivative financial instruments.

The exposure

s

included

in the table below represent the

maximum IBOR exposure, without regard for early termination

rights, with the actual exposure being dependent upon client

preferences and investment decisions. 

As of 31 December 2021, UBS had made significant progress

in transitioning LIBOR exposures to ARRs. The remaining non-USD

LIBOR-linked exposures included in the table below primarily

relate to derivatives that successfully transitioned in January 2022

and CHF LIBOR mortgages that will automatically transition to

SARON on their first roll date in 2022.

31.12.21

LIBOR benchmark rates

Measure

CHF

USD

GBP

EUR

1

JPY

Carrying value of non-derivative financial instruments

Total non-derivative financial assets 

USD million

21,616

2

65,234

3

45

4

1

0

Total non-derivative financial liabilities 

USD million

27

4

1,985

4

3

4

5

0

Trade count of derivative financial instruments

Total derivative financial instruments

Trade count

829

6

40,500

7

183

6

3,744

6

184

6

Off-balance sheet exposures

Total irrevocable loan commitments

USD million

0

11,863

8

0

0

0

1 Relates primarily to EUR LIBOR positions. 2 Relates primarily to CHF LIBOR mortgages, which will automatically transition to SARON on their first roll date in 2022. 3 Includes USD LIBOR securities-based lending

and brokerage accounts, amounting to USD

37

 billion, and USD

5

 billion respectively, which for the most part transitioned to SOFR in January 2022, as well as USD

1

 billion of loans related to revolving multi-currency

credit lines, where IBOR transition efforts are complete, except for USD LIBOR. The remainder primarily relates to US mortgages and corporate lending. 4 Relates to floating-rate notes that per their contractual terms

can reset to rates linked to LIBOR, with transition dependent upon the actions of respective issuers. 5 Relates to contracts that transitioned in January 2022. 6 Includes predominantly bilateral derivatives, which

transitioned in January 2022, and an insignificant amount of cleared derivatives, where the respective clearing houses’ organized transition happened in January 2022. 7 Includes approximately

5,000

 cross-currency

derivatives, of which approximately

500

 have both a non-USD LIBOR leg and a USD LIBOR leg, where the non-USD leg transitioned in January 2022 before the next fixing date. The remainder represents cross-currency

swaps with an ARR leg and a USD IBOR leg. 8 Includes loan commitments that can be drawn in different currencies at the client‘s discretion, of which approximately USD

3

 billion have only USD LIBOR exposure

remaining and approximately USD

2

 billion retain a non-USD LIBOR interest rate as of 31 December 2021, with transition dependent upon the actions of other parties. The remainder represents loan commitments

that can be drawn in US dollars only and will transition in 2022–2023.

UBS AG

Schedule Interest Rate Benchmark Reform [Table]

Disclosure of how entity is managing transition to alternative benchmark rates, its progress at reporting date and risks to which it is exposed arising from financial instruments because of transition [text block]

Note 25 Interest rate benchmark reform

Background

A market-wide reform of major interest rate benchmarks is being

undertaken globally, with the Financial Conduct Authority (the

FCA) announcing in March 2021 that the publication of London

Interbank Offered Rates (LIBORs) would cease after 31 December

2021 for all non-US dollar LIBORs, as well as for one-week and

two-month USD LIBOR. Publication of the remaining USD LIBOR

tenors will cease immediately after 30 June 2023.

The majority of UBS AG’s IBOR exposure was linked to CHF

LIBOR and USD LIBOR. The alternative reference rate (the ARR) for

CHF LIBOR is the Swiss Average Rate Overnight (SARON). The ARR

for USD LIBOR is the Secured Overnight Financing Rate (SOFR); in

addition, there are recommended ARRs for GBP LIBOR, JPY LIBOR

and EUR LIBOR. 

The Euro Interbank Offered Rate (EURIBOR) was reformed in

2019, with the reform consisting of a change in the underlying

calculation method. Consequently, contracts linked to EURIBOR

are not considered throughout the rest of this Note.

On 25 January 2021, the IBOR Fallbacks Supplement and IBOR

Fallbacks Protocol, which amend the International Swaps and

Derivatives Association (ISDA) standard definitions for interest rate

derivatives to incorporate fallbacks for derivatives linked to certain

IBORs, came into effect. From that date, all newly cleared and

non-cleared derivatives between adhering parties that reference

ISDA standard definitions now include these fallbacks. UBS AG

adhered to the protocol in November 2020.

UBS AG’s focus throughout 2021 was on transitioning existing

contracts via bi-lateral and multi-lateral agreements, by leveraging

industry solutions

(e.

g.,

the use of fallback provisions)

and

through third-party actions (those by clearing houses, agents,

etc

.

).

UBS

AG

h

as established a framework to address the

transition of contracts that do not contain adequate fallback

provisions. Furthermore, in line with regulatory guidance, UBS AG

has implemented a framework to limit new contracts referencing

IBORs. 

Governance over the transition to alternative benchmark rates

UBS

AG

established a global cross

-

divisional, cross

-

functional

governance structure and change program to address the scale

and complexity of the transition. This global program is sponsored

by the Group CFO and led by senior representatives from the

business divisions and UBS AG’s control and support functions.

The program includes governance and execution structures within

each business division, together with cross-divisional teams from

each control and support function. During 2021, progress was

overseen centrally via a monthly operating committee and a

monthly steering committee, as well as quarterly updates to the

joint Audit and Risk Committees. A dedicated Group-wide forum,

with an increased US regional focus, will oversee progress of the

remaining USD LIBOR transition.

Risks

A core part of UBS AG’s change program is the identification,

management and monitoring of the risks associated with IBOR

reform and transition. These risks include, but are not limited to,

the following:

–

economic risks to UBS AG and its clients, through the repricing

of existing contracts, reduced transparency and / or liquidity of

pricing information, market uncertainty or disruption;

–

accounting risks, where the transition affects the accounting

treatment, including hedge accounting and consequential

income statement volatility;

–

valuation risks arising from the variation between benchmarks

that will cease and ARRs, affecting the risk profile of financial

instruments;

–

operational risks arising from changes to UBS AG’s front-to-

back processes and systems to accommodate the transition,

e.g.

,

data sourcing and processing and bulk migration of

contracts; and

–

legal and conduct risks relating to UBS AG’s engagement with

clients and market counterparties around new benchmark

products and amendments required for existing contracts

referencing benchmarks that will cease.

Overall, the effort required to transition is affected by multiple

factors, including whether negotiations need to take place with

multiple stakeholders (as is the case for syndicated loans or certain

listed securities), market readiness

–

such as liquidity in ARR

-

equivalent products – and a client’s technical readiness to handle

ARR market conventions. UBS AG remains confident that it has the

transparency, oversight and operational preparedness to progress

with the IBOR transition consistent with market timelines, given the

significant progress made as of 31 December 2021. UBS AG did not

have and does not expect changes to its risk management approach

and strategy as a result of interest rate benchmark reform.

Transition progress 

Non-derivative instruments

UBS AG’s significant non-derivative exposures subject to IBOR

reform

primarily relate

d

to brokerage receivable and payable

balances, corporate and private loans, and mortgages, linked to

CHF and USD LIBORs. During 2020, UBS AG transitioned most of

its CHF LIBOR-linked deposits to SARON. In that same year, UBS

AG launched SARON-based mortgages and corporate loans based

on all major ARRs in the Swiss market, as well as SOFR-based

mortgages in the US market. 

Throughout 2021, UBS AG transitioned substantially all of its

private and corporate loans linked to non-USD IBORs, with the

remaining CHF LIBOR-linked contracts planned to transition on

their first roll date in 2022. 

In addition, as of 31 December 2021 UBS AG had completed

the transition of IBOR-linked non-derivative financial assets and

liabilities related to brokerage accounts, except for balances

originated in the US, which transitioned to SOFR in January 2022.

In March 2021, following the FCA announcement regarding

the cessation timelines for IBORs, UBS AG initiated a centralized

communication initiative for private mortgages linked to CHF

LIBOR, with the objective of transitioning these exposures, either

through the activation of existing fallbacks or the amendment of

contractual terms where such fallbacks do not exist. During 2021,

mortgages that were linked to CHF LIBOR

were

reduced

to

USD 

21

 billion as of 31 December 2021, with these remaining

mortgages automatically transitioning to SARON from their next

coupon roll date. 

The transition of

US securities

-

based lending

to SOFR

,

amounting to USD

37

 billion as of 31 December 2021, was for

the most part completed in January 2022, with US mortgages

linked to USD LIBOR planned to transition to SOFR in 2022–2023.

As of 31 December 2021, UBS AG had approximately USD

3

billion equivalent of Japanese yen- and US dollar-denominated

funding from UBS Group AG that, per current contractual terms,

if not called on their respective call dates, would reset based

directly on JPY LIBOR and USD LIBOR. These bonds have robust

IBOR fallback language and the confirmation of interest rate

calculation mechanics will be communicated as market standards

formalize and in advance of any rate resets. In addition, several

US

dollar

-

and

Swiss franc

-

denominated

contracts providing

funding from UBS Group AG reference rates indirectly derived

from IBORs, if they are not called on their respective call dates.

UBS AG aims to transition these contracts in advance of their reset

dates, with the transition of Swiss franc-denominated funding

completed in January 2022. These debt instruments have not

been included in the table on the following page, given their

current fixed-rate coupon.

As of 31 December 2021, UBS AG had approximately USD

5

billion of irrevocable commitments that may be drawn down in

different currencies with IBOR-linked interest rates and that expire

after the relevant benchmark cessation dates

;

approximately

USD

3

 billion of these contracts had transitioned for all IBORs,

except

USD LIBOR

,

and

USD

2

 billion of these

commitments

retained a non-USD IBOR interest rate as of 31 December 2021

with transition dependent upon the actions of other parties. To

the extent non-USD IBOR-linked amounts are requested under

these contracts, UBS AG will seek to renegotiate current terms or

rely on legislative solutions.

Derivative instruments 

UBS AG holds derivatives for trading and hedging purposes,

including those designated in hedge accounting relationships. A

significant number of interest rate and cross-currency swaps have

floating legs that reference various benchmarks that are subject

to IBOR reform.

The majority of derivatives are transacted with clearing houses,

in particular LCH, with the transition of these non-USD IBOR-

linked derivatives substantially completed in December 2021. UBS

AG had also completed the transition of all non-USD IBOR-linked

exchange

-

traded derivatives (ETDs)

through participation in

activities

organized by respective exchanges

by 31

December

2021. 

For derivatives not transacted with clearing houses or

exchanges, UBS AG and a significant proportion of UBS AG’s

counterparties have adhered to the ISDA IBOR Fallbacks Protocol,

which builds in agreed fallbacks. The majority of these contracts

had transitioned as of 31 December 2021, with a small number

of contracts transitioned in January 2022, to ensure an orderly

transition when converting high volumes of transactions at the

time of cessation.

Financial instruments yet to transition to alternative benchmarks

The amounts included in the table below relate to financial

instrument contracts across UBS AG’s business divisions where

UBS AG has material exposures subject to IBOR reform that have

not yet transitioned to ARRs, and that:

–

contractually reference an interest rate benchmark that will

transition to an alternative benchmark; and

–

have a contractual maturity date (including open-ended

contracts) after the agreed cessation dates. 

Contracts

where

penalty terms reference IBOR

s, or where

exposure to an IBOR is not the primary purpose of the contract,

have not been included, as these contracts do not have a material

impact on the transition process. 

In line with information provided to management and external

parties monitoring UBS AG’s transition progress, the table below

includes the following financial metrics for instruments external

to UBS AG that are subject to interest rate benchmark reform:

–

gross carrying value / exposure for non-derivative financial

instruments; and 

–

total trade count for derivative financial instruments.

The exposure

s

included

in the table below represent the

maximum IBOR exposure, without regard for early termination

rights, with the actual exposure being dependent upon client

preferences and investment decisions. 

As of 31 December 2021, UBS

AG

ha

d

made significant

progress in transitioning LIBOR exposures to ARRs. The remaining

non-USD LIBOR-linked exposures included in the table below

primarily relate t

o derivatives

that

successfully transitioned in

January 2022 and CHF LIBOR mortgages that will automatically

transition to SARON on their first roll date in 2022.

31.12.21

LIBOR benchmark rates

Measure

CHF

USD

GBP

EUR

1

JPY

Carrying value of non-derivative financial instruments

Total non-derivative financial assets 

USD million

21,616

2

65,234

3

45

4

1

0

Total non-derivative financial liabilities 

USD million

27

4

1,985

4

3

4

5

0

Trade count of derivative financial instruments

Total derivative financial instruments

Trade count

829

6

40,500

7

183

6

3,744

6

184

6

Off-balance sheet exposures

Total irrevocable loan commitments

USD million

0

11,863

8

0

0

0

1 Relates primarily to EUR LIBOR positions. 2 Relates primarily to CHF LIBOR mortgages, which will automatically transition to SARON on their first roll date in 2022. 3 Includes USD LIBOR securities-based lending

and brokerage accounts, amounting to USD

37

 billion, and USD

5

 billion respectively, which for the most part transitioned to SOFR in January 2022, as well as USD

1

 billion of loans related to revolving multi-currency

credit lines, where IBOR transition efforts are complete, except for USD LIBOR. The remainder primarily relates to US mortgages and corporate lending. 4 Relates to floating-rate notes that per their contractual terms

can reset to rates linked to LIBOR, with transition dependent upon the actions of respective issuers. 5 Relates to contracts that transitioned in January 2022. 6 Includes predominantly bilateral derivatives, which

transitioned in January 2022, and an insignificant amount of cleared derivatives, where the respective clearing houses’ organized transition happened in January 2022. 7 Includes approximately

5,000

 cross-currency

derivatives, of which approximately

500

 have both a non-USD LIBOR leg and a USD LIBOR leg, where the non-USD leg transitioned in January 2022 before the next fixing date. The remainder represents cross-currency

swaps with an ARR leg and a USD IBOR leg. 8 Includes loan commitments that can be drawn in different currencies at the client‘s discretion, of which approximately USD

3

 billion have only USD LIBOR exposure

remaining and approximately USD

2

 billion retain a non-USD LIBOR interest rate as of 31 December 2021, with transition dependent upon the actions of other parties. The remainder represents loan commitments

that can be drawn in US dollars only and will transition in 2022–2023.