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Fair value measurement
 12 Months Ended
Dec. 31, 2022
Entity [Table]  
Disclosure Of Fair Value Measurement Explanatory
Note 20
 
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
 
International F
 
inancial Reporting
 
Standards (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 a
 
re 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 20d
 
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 20d
 
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.
During 2022, assets and liabilities that were transferred from Level 2 to Level 1, or from Level 1 to Level 2, and were held
for the entire reporting period were
 
not material.
Determination of fair values
 
from quoted market prices or valuation techniques
1
31.12.22
31.12.21
USD m
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
96,241
10,138
1,488
107,866
113,697
14,825
2,299
130,821
of which: Equity instruments
83,074
789
126
83,988
97,958
1,090
149
99,197
of which: Government bills / bonds
5,496
950
18
6,464
7,135
1,351
10
8,496
of which: Investment fund units
6,673
596
61
7,330
7,843
1,364
21
9,229
of which: Corporate and municipal bonds
976
6,363
541
7,880
708
7,604
556
8,868
of which: Loans
0
1,179
628
1,807
0
3,099
1,443
4,542
of which: Asset-backed securities
22
261
114
397
53
317
120
489
Derivative financial instruments
769
147,875
1,464
150,108
522
116,479
1,140
118,142
of which: Foreign exchange
575
84,881
2
85,458
255
53,043
7
53,305
of which: Interest rate
0
39,345
460
39,805
0
32,747
494
33,241
of which: Equity / index
1
21,542
653
22,195
0
27,861
384
28,245
of which: Credit
0
719
318
1,038
0
1,179
236
1,414
of which: Commodities
0
1,334
30
1,365
0
1,590
16
1,606
Brokerage receivables
0
17,576
0
17,576
0
21,839
0
21,839
Financial assets at fair value not held for trading
26,572
29,498
3,725
59,796
27,278
28,622
4,180
60,080
of which: Financial assets for unit-linked investment
 
contracts
13,071
1
0
13,072
21,110
187
6
21,303
of which: Corporate and municipal bonds
35
14,101
230
14,366
123
13,937
306
14,366
of which: Government bills / bonds
13,103
3,638
0
16,741
5,624
3,236
0
8,860
of which: Loans
0
3,602
736
4,337
0
4,982
892
5,874
of which: Securities financing transactions
0
7,590
114
7,704
0
5,704
100
5,804
of which: Auction rate securities
0
0
1,326
1,326
0
0
1,585
1,585
of which: Investment fund units
307
566
190
1,063
338
574
117
1,028
of which: Equity instruments
57
0
792
849
83
2
681
765
Financial assets measured at
 
fair value through other comprehensive
 
income on a recurring basis
Financial assets measured at fair value through
 
other comprehensive income
57
2,182
0
2,239
2,704
6,140
0
8,844
of which: Asset-backed securities
2
0
0
0
0
0
4,849
0
4,849
of which: Government bills / bonds
2
0
26
0
26
2,658
27
0
2,686
of which: Corporate and municipal bonds
57
2,156
0
2,213
45
1,265
0
1,310
Non-financial assets measured at
 
fair value on a recurring basis
Precious metals and other physical commodities
4,471
0
0
4,471
5,258
0
0
5,258
Non-financial assets measured at
 
fair value on a non-recurring
 
basis
Other non-financial assets
3
0
0
110
110
0
0
26
26
Total assets measured
 
at fair value
128,110
207,269
6,788
342,166
149,459
187,905
7,645
345,010
Determination of fair values
 
from quoted market prices or valuation techniques
 
(continued)
1
31.12.22
31.12.21
USD m
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
23,578
5,823
114
29,515
25,413
6,170
105
31,688
of which: Equity instruments
16,521
352
78
16,951
18,328
513
83
18,924
of which: Corporate and municipal bonds
36
4,643
27
4,707
30
4,219
17
4,266
of which: Government bills / bonds
5,880
706
1
6,587
5,883
826
0
6,709
of which: Investment fund units
1,141
84
3
1,229
1,172
555
6
1,733
Derivative financial instruments
640
152,582
1,684
154,906
509
118,558
2,242
121,309
of which: Foreign exchange
 
587
87,897
24
88,508
258
53,800
21
54,078
of which: Interest rate
 
0
37,429
116
37,545
0
28,398
278
28,675
of which: Equity / index
 
0
24,963
1,184
26,148
0
33,438
1,511
34,949
of which: Credit
0
920
279
1,199
0
1,412
341
1,753
of which: Commodities
0
1,309
52
1,361
0
1,503
63
1,566
Financial liabilities designated at
 
fair value on a recurring basis
Brokerage payables designated at
 
fair value
0
45,085
0
45,085
0
44,045
0
44,045
Debt issued designated at fair value
0
63,111
10,527
73,638
0
59,606
14,194
73,799
Other financial liabilities designated at fair value
0
29,547
691
30,237
0
29,258
816
30,074
of which: Financial liabilities related to unit-linked
 
investment contracts
0
13,221
0
13,221
0
21,466
0
21,466
of which: Securities financing transactions
0
15,333
0
15,333
0
6,375
2
6,377
of which: Over-the-counter
 
debt instruments and other
0
993
691
1,684
0
1,417
814
2,231
Total liabilities measured
 
at fair value
24,219
296,148
13,015
333,381
25,922
257,637
17,357
300,916
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 Effective 1 April 2022, a portfolio of
 
assets previously classified as Financial
 
assets measured at fair value
 
through other
 
comprehensive income was
 
reclassified to Other financial
 
assets measured at amortized cost.
Refer to Note 1 for more information.
 
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 20e for more information. The discount curves used by the
Group 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 age
 
ncy 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.
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.
–
 
Equity securities less actively traded
 
will be classified as Level 2 and illiquid
 
positions as Level 3.
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.
Product
Valuation and
 
classification in the fair value hierarchy
Financial liabilities
related to 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.
Precious metals and
other physical
commodities
Valuation
–
 
Physical assets are valued using the
 
spot rate observed in the relevant market
 
.
Fair value
hierarchy
–
 
Generally traded in active markets
 
with prices that can
 
be obtained directly from
 
these markets, resulting
in classification as Level 1.
Debt issued
designated at fair
value
Valuation
–
 
The risk management
 
and the valuation
 
approaches for
 
these instruments are
 
closely aligned with
 
the
equivalent
 
derivatives
 
business
 
and
 
the
 
underlying
 
risk,
 
and
 
the
 
valuation
 
techniques
 
used
 
for
 
this
component are the same a
 
s
 
the relevant valuation techniques described below.
Fair value
hierarchy
–
 
The observability is closely aligned with
 
the equivalent derivatives business and the underlying
 
risk.
 
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
 
20d,
 
the fair
 
value
 
of
 
uncollateralized
 
and
partially
 
collateralized derivatives
 
is
 
then adjusted
 
by
 
credit
 
valuation
 
adjustments
 
(CVAs),
 
debit valuation
 
adjustments
(DVAs)
 
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 ob
 
servable.
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.
 
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 becomes
 
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 m
2022
2021
2020
Reserve balance at the beginning of the
 
year
418
269
146
Profit / (loss) deferred on new transactions
299
459
362
(Profit) / loss recognized in the income statement
(295)
(308)
(238)
Foreign currency translation
0
(2)
0
Reserve balance at the end of the year
422
418
269
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 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 15
 
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 m
31.12.22
31.12.21
31.12.20
Recognized during the period:
Realized gain / (loss)
 
1
(14)
2
Unrealized gain / (loss)
 
866
60
(295)
Total gain / (loss), before
 
tax
867
46
(293)
USD m
31.12.22
31.12.21
31.12.20
Recognized on the balance sheet
 
as of the end of the period:
Unrealized life-to-date gain / (loss)
 
556
(315)
(381)
of which: debt issued designated at fair value
453
(347)
(418)
of which: other financial liabilities designated at
 
fair value
103
32
36
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.
Balance sheet valuation adjustments
 
on financial instruments
As of
USD m
31.12.22
31.12.21
Credit valuation adjustments
1
(33)
(44)
Funding valuation adjustments
(50)
(49)
Debit valuation adjustments
4
2
Other valuation adjustments
(839)
(913)
of which: liquidity
(311)
(341)
of which: model uncertainty
(529)
(571)
1 Amounts do not include reserves
 
against defaulted counterparties.
Other items
In the first half of 2021,
 
UBS incurred a loss of
 
USD
861
m 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
.
e)
 
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 2022
 
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)
31.12.22
31.12.21
USD bn
31.12.22
31.12.21
31.12.22
31.12.21
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
0.8
0.9
0.0
0.0
Relative value to
market comparable
Bond price equivalent
14
112
85
16
143
98
points
Discounted expected
cash flows
Discount margin
412
412
434
434
basis
points
Traded loans, loans
measured at fair value,
loan commitments and
guarantees
1.7
2.8
0.0
0.0
Relative value to
market comparable
Loan price equivalent
30
100
97
0
101
99
points
Discounted expected
cash flows
Credit spread
200
200
200
175
800
436
basis
points
Market comparable
and securitization
model
Credit spread
145
1,350
322
28
1,544
241
basis
points
Auction rate securities
1.3
1.6
Discounted expected
cash flows
Credit spread
115
196
144
115
197
153
basis
points
Investment fund units
3
0.3
0.1
0.0
0.0
Relative value to
market comparable
Net asset value
Equity instruments
3
0.9
0.8
0.1
0.1
Relative value to
market comparable
Price
Debt issued designated at
fair value
4
10.5
14.2
Other financial liabilities
designated at fair value
0.7
0.8
Discounted expected
cash flows
Funding spread
23
175
24
175
basis
points
Derivative financial instruments
Interest rate
0.5
0.5
0.1
0.3
Option model
Volatility of interest
rates
75
143
65
81
basis
points
Credit
0.3
0.2
0.3
0.3
Discounted expected
cash flows
Credit spreads
 
9
565
1
583
basis
points
Bond price equivalent
3
277
2
136
points
Equity / index
0.7
0.4
1.2
1.5
Option model
Equity dividend yields
0
20
0
11
%
Volatility of equity
stocks, equity and
other indices
4
120
4
98
%
Equity-to-FX
correlation
(29)
84
(29)
76
%
Equity-to-equity
correlation
(25)
100
(25)
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 ends 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.
 
f) 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
 
interrelationships
 
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
31.12.22
31.12.21
USD m
Favorable
 
changes
Unfavorable
 
changes
Favorable
 
changes
Unfavorable
 
changes
Traded loans, loans
 
measured at fair value, loan
 
commitments and guarantees
19
(12)
19
(13)
Securities financing transactions
33
(37)
41
(53)
Auction rate securities
46
2
(46)
2
66
(66)
Asset-backed securities
27
(27)
20
(20)
Equity instruments
183
(161)
173
(146)
Interest rate derivatives, net
18
2
(12)
2
29
(19)
Credit derivatives, net
3
(4)
5
(8)
Foreign exchange derivatives,
 
net
10
(5)
19
(11)
Equity / index derivatives, net
361
(330)
368
(335)
Other
39
2
(62)
2
50
(73)
Total
738
(696)
790
(744)
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.
g) 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
USD bn
Balance at
the beginning
of the period
Net gains /
losses
included in
compre-
hensive
income
1
of which:
related to
instruments
held at the
end of the
period
Purchases
Sales
Issuances
Settlements
Transfers
 
into
 
Level 3
Transfers
 
out of
 
Level 3
Foreign
 
currency
 
translation
Balance at
the end
of the period
For the twelve months ended
 
31 December 2022
2
Financial assets at fair value held
 
for
trading
2.3
(0.3)
(0.3)
0.3
(1.8)
0.5
0.0
0.7
(0.3)
(0.0)
1.5
of which: Investment fund units
0.0
(0.0)
(0.0)
0.0
(0.0)
0.0
0.0
0.1
(0.0)
(0.0)
0.1
of which: Corporate and municipal
bonds
0.6
(0.0)
(0.0)
0.3
(0.6)
0.0
0.0
0.4
(0.0)
(0.0)
0.5
of which: Loans
1.4
(0.1)
(0.1)
0.0
(1.1)
0.5
0.0
0.0
(0.2)
0.0
0.6
Derivative financial instruments –
assets
1.1
0.6
0.3
0.0
0.0
0.4
(0.7)
0.1
(0.0)
(0.0)
1.5
of which: Interest rate
0.5
0.3
0.3
0.0
0.0
0.0
(0.2)
0.0
(0.1)
(0.0)
0.5
of which: Equity / index
0.4
0.2
0.1
0.0
0.0
0.4
(0.3)
0.1
(0.0)
(0.0)
0.7
of which: Credit
0.2
0.1
(0.1)
0.0
0.0
0.0
(0.2)
0.0
0.1
0.0
0.3
Financial assets at fair value not
 
held
for trading
4.2
0.1
0.1
0.7
(1.2)
0.1
(0.0)
0.2
(0.3)
(0.0)
3.7
of which: Loans
0.9
(0.0)
(0.0)
0.4
(0.4)
0.1
0.0
0.1
(0.3)
(0.0)
0.7
of which: Auction rate securities
1.6
0.1
0.0
0.0
(0.3)
0.0
0.0
0.0
0.0
0.0
1.3
of which: Equity instruments
0.7
0.0
0.0
0.1
(0.1)
0.0
0.0
0.1
0.0
(0.0)
0.8
Derivative financial instruments –
liabilities
2.2
(0.8)
(0.4)
0.0
0.0
1.1
(0.9)
0.3
(0.2)
(0.1)
1.7
of which: Interest rate
0.3
(0.3)
(0.0)
0.0
0.0
0.1
(0.0)
0.0
(0.0)
(0.0)
0.1
of which: Equity / index
1.5
(0.4)
(0.3)
0.0
0.0
0.8
(0.7)
0.1
(0.2)
(0.0)
1.2
of which: Credit
0.3
(0.1)
(0.0)
0.0
0.0
0.1
(0.1)
0.1
(0.0)
(0.0)
0.3
Debt issued designated at fair value
3
14.2
(2.2)
(1.8)
0.0
0.0
4.7
(3.1)
0.7
(3.4)
(0.3)
10.5
Other financial liabilities designated at
fair value
0.8
(0.1)
(0.1)
0.0
0.0
0.0
(0.1)
0.0
(0.0)
(0.0)
0.7
For the twelve months ended
 
31 December 2021
Financial assets at fair value held
 
for
trading
2.3
(0.0)
(0.1)
0.3
(1.6)
1.2
0.0
0.3
(0.3)
(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
of which: Corporate and municipal
bonds
0.8
0.0
(0.0)
0.2
(0.4)
0.0
0.0
0.0
(0.1)
(0.0)
0.6
of which: Loans
1.1
0.0
(0.0)
0.0
(0.8)
1.2
0.0
0.0
(0.2)
0.0
1.4
Derivative financial instruments –
assets
1.8
(0.2)
(0.1)
0.0
0.0
0.5
(0.7)
0.1
(0.3)
(0.0)
1.1
of which: Interest rate
0.5
0.1
0.1
0.0
0.0
0.1
(0.2)
0.0
(0.1)
(0.0)
0.5
of which: Equity / index
0.9
(0.1)
(0.1)
0.0
0.0
0.3
(0.4)
0.0
(0.2)
(0.0)
0.4
of which: Credit
0.3
(0.1)
(0.1)
0.0
0.0
0.0
(0.1)
0.0
(0.0)
0.0
0.2
Financial assets at fair value not
 
held
for trading
3.9
0.1
0.1
1.0
(0.6)
0.0
0.0
0.1
(0.3)
(0.0)
4.2
of which: Loans
0.9
(0.0)
0.0
0.6
(0.3)
0.0
0.0
0.0
(0.3)
(0.0)
0.9
of which: Auction rate securities
1.5
0.1
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
1.6
of which: Equity instruments
0.5
0.1
0.1
0.1
(0.1)
0.0
0.0
0.0
(0.0)
(0.0)
0.7
Derivative financial instruments –
liabilities
3.5
0.2
(0.0)
0.0
0.0
0.9
(1.8)
0.0
(0.5)
(0.0)
2.2
of which: Interest rate
0.5
(0.1)
(0.1)
0.0
0.0
0.0
(0.1)
0.0
(0.0)
(0.0)
0.3
of which: Equity / index
2.3
0.3
0.1
0.0
0.0
0.8
(1.5)
0.0
(0.4)
(0.0)
1.5
of which: Credit
0.5
(0.1)
(0.1)
0.0
0.0
0.0
(0.0)
0.0
(0.1)
(0.0)
0.3
Debt issued designated at fair value
11.0
0.7
0.6
0.0
0.0
8.0
(4.2)
0.2
(1.2)
(0.2)
14.2
Other financial liabilities designated at
fair value
0.7
0.0
0.0
0.0
0.0
0.4
(0.2)
0.0
(0.0)
(0.0)
0.8
1 Net gains / losses included in comprehensive
 
income are recognized in Net interest
 
income and Other net income
 
from financial instruments
 
measured at fair value through profit
 
or loss in the Income statement,
 
and
also in
 
Gains /
 
(losses) from
 
own credit
 
on financial
 
liabilities
 
designated at
 
fair value,
 
before tax
 
in the
 
Statement
 
of comprehensive
 
income.
 
2 Total
 
Level 3
 
assets as
 
of 31 December
 
2022
 
were USD
6.8
bn
(31 December 2021:
 
USD
7.6
bn). Total Level
 
3 liabilities
 
as of 31 December
 
2022 were
 
USD
13.0
bn (31 December
 
2021: USD
17.4
bn).
 
3 Of the
 
USD
2.2
bn in net gains
 
/ losses
 
that is included
 
in comprehensive
income, USD
1.7
bn is recognized
 
in the Income
 
statement and
 
USD
0.5
bn is recognized
 
in the Statement
 
of comprehensive
 
income in
 
Gains / (losses)
 
from own credit
 
on financial liabilities
 
designated at fair
 
value,
before tax.
h) 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
 
31.12.22
Maximum
exposure to
credit risk
Collateral
Credit enhancements
Exposure to
credit risk
after collateral
and credit
enhancements
USD bn
Cash
collateral
received
Collateralized
by equity and
debt
instruments
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
16.5
 
16.5
Derivative financial instruments
4
150.1
5.9
133.5
10.7
Brokerage receivables
17.6
17.3
0.3
Financial assets at fair value not
 
held for trading – debt instruments
5
44.8
11.4
33.4
Total financial assets
 
measured at fair value
229.0
0.0
34.6
0.0
0.0
133.5
0.0
0.0
61.0
Guarantees
6
0.2
0.2
0.0
31.12.21
Maximum
exposure to
credit risk
Collateral
Credit enhancements
Exposure to
credit risk
after collateral
and credit
enhancements
USD bn
Cash
collateral
received
Collateralized
by equity and
debt
instruments
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
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
5
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
6
0.2
0.2
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 The
 
amount shown in the
 
“Netting” column
 
represents the
 
netting potential
not recognized on the balance
 
sheet. Refer to Note
 
21 for more information.
 
5 Financial assets
 
at fair value not
 
held for trading collateralized
 
by securities consisted
 
of structured loans and reverse
 
repurchase and
securities borrowing agreements.
 
6 The amount
 
shown in the “Guarantees”
 
column largely relates to
 
sub-participations.
i) 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
31.12.22
31.12.21
Carrying
amount
Fair value
Carrying
amount
Fair value
USD bn
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
Cash and balances at central banks
169.4
169.4
0.1
0.0
0.0
169.4
192.8
192.7
0.1
0.0
0.0
192.8
Loans and advances to banks
14.8
14.0
0.0
0.7
0.0
14.8
15.5
14.8
0.0
0.7
0.0
15.5
Receivables from securities financing
transactions measured at amortized cost
67.8
64.3
0.0
1.8
1.7
67.8
75.0
71.6
0.0
1.3
2.1
75.0
Cash collateral receivables on derivative
instruments
35.0
35.0
0.0
0.0
0.0
35.0
30.5
30.5
0.0
0.0
0.0
30.5
Loans and advances to customers
387.2
134.3
0.0
45.9
194.7
374.9
397.8
163.1
0.0
43.8
190.1
396.9
Other financial assets measured at amortized
cost
2
53.3
12.9
10.3
25.1
2.5
50.8
26.2
4.1
9.3
10.7
2.4
26.5
Liabilities
Amounts due to banks
11.6
8.9
0.0
2.7
0.0
11.6
13.1
9.1
0.0
4.0
0.0
13.1
Payables from securities financing
transactions measured at amortized cost
4.2
3.5
0.0
0.7
0.0
4.2
5.5
4.1
0.0
1.5
0.0
5.5
Cash collateral payables on derivative
instruments
36.4
36.4
0.0
0.0
0.0
36.4
31.8
31.8
0.0
0.0
0.0
31.8
Customer deposits
525.1
491.3
0.0
33.6
0.0
524.8
542.0
535.4
0.0
6.6
0.0
542.0
Debt issued measured at amortized cost
114.6
15.4
0.0
98.1
0.0
113.5
139.2
15.8
0.0
125.3
0.0
141.1
Other financial liabilities measured at
amortized cost
3
6.2
6.2
0.0
0.0
0.0
6.2
5.4
5.4
0.0
0.0
0.0
5.4
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 Effective 1 April 2022, a portfolio of assets
 
previously classified as Financial assets measured at
 
fair value through other
comprehensive income was
 
reclassified to Other financial
 
assets measured at amortized
 
cost. Refer to Note 1 for information.
 
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 20
 
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
 
International F
 
inancial Reporting
 
Standards (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 20d
 
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 f
 
inancial 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 20d
 
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.
During 2022, assets and liabilities that were transferred from Level 2 to Level 1, or from Level 1 to Level 2, and were held
for the entire reporting period were
 
not material.
Determination of fair values
 
from quoted market prices or valuation techniques
1
31.12.22
31.12.21
USD m
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
96,263
10,284
1,488
108,034
113,722
15,012
2,299
131,033
of which: Equity instruments
83,095
789
126
84,010
97,983
1,090
149
99,222
of which: Government bills / bonds
5,496
950
18
6,464
7,135
1,351
10
8,496
of which: Investment fund units
6,673
596
61
7,330
7,843
1,364
21
9,229
of which: Corporate and municipal bonds
976
6,509
541
8,026
708
7,791
556
9,055
of which: Loans
0
1,179
628
1,807
0
3,099
1,443
4,542
of which: Asset-backed securities
22
261
114
397
53
317
120
489
Derivative financial instruments
769
147,876
1,464
150,109
522
116,482
1,140
118,145
of which: Foreign exchange
575
84,882
2
85,459
255
53,046
7
53,307
of which: Interest rate
0
39,345
460
39,805
0
32,747
494
33,241
of which: Equity / index
1
21,542
653
22,195
0
27,861
384
28,245
of which: Credit
0
719
318
1,038
0
1,179
236
1,414
of which: Commodities
0
1,334
30
1,365
0
1,590
16
1,606
Brokerage receivables
0
17,576
0
17,576
0
21,839
0
21,839
Financial assets at fair value not held for trading
26,572
29,110
3,725
59,408
27,278
28,185
4,180
59,642
of which: Financial assets for unit-linked investment
 
contracts
13,071
1
0
13,072
21,110
187
6
21,303
of which: Corporate and municipal bonds
35
14,101
230
14,366
123
13,937
306
14,366
of which: Government bills / bonds
13,103
3,638
0
16,741
5,624
3,236
0
8,860
of which: Loans
0
3,602
736
4,337
0
4,982
892
5,874
of which: Securities financing transactions
0
7,590
114
7,704
0
5,704
100
5,804
of which: Auction rate securities
0
0
1,326
1,326
0
0
1,585
1,585
of which: Investment fund units
307
178
190
675
338
137
117
591
of which: Equity instruments
57
0
792
849
83
2
681
765
Financial assets measured at
 
fair value through other comprehensive
 
income on a recurring basis
Financial assets measured at fair value through
 
other comprehensive income
57
2,182
0
2,239
2,704
6,140
0
8,844
of which: Asset-backed securities
2
0
0
0
0
0
4,849
0
4,849
of which: Government bills / bonds
2
0
26
0
26
2,658
27
0
2,686
of which: Corporate and municipal bonds
57
2,156
0
2,213
45
1,265
0
1,310
Non-financial assets measured at
 
fair value on a recurring basis
Precious metals and other physical commodities
4,471
0
0
4,471
5,258
0
0
5,258
Non-financial assets measured at
 
fair value on a non-recurring
 
basis
Other non-financial assets
3
0
0
21
21
0
0
26
26
Total assets measured
 
at fair value
128,132
207,028
6,698
341,858
149,484
187,658
7,645
344,787
Determination of fair values
 
from quoted market prices or valuation techniques
 
(continued)
1
31.12.22
31.12.21
USD m
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
23,578
5,823
114
29,515
25,413
6,170
105
31,688
of which: Equity instruments
16,521
352
78
16,951
18,328
513
83
18,924
of which: Corporate and municipal bonds
36
4,643
27
4,707
30
4,219
17
4,266
of which: Government bills / bonds
5,880
706
1
6,587
5,883
826
0
6,709
of which: Investment fund units
1,141
84
3
1,229
1,172
555
6
1,733
Derivative financial instruments
640
152,582
1,684
154,906
509
118,558
2,242
121,309
of which: Foreign exchange
 
587
87,897
24
88,508
258
53,800
21
54,078
of which: Interest rate
 
0
37,429
116
37,545
0
28,398
278
28,675
of which: Equity / index
 
0
24,963
1,184
26,148
0
33,438
1,511
34,949
of which: Credit
0
920
279
1,199
0
1,412
341
1,753
of which: Commodities
0
1,309
52
1,361
0
1,503
63
1,566
Financial liabilities designated at
 
fair value on a recurring basis
Brokerage payables designated at
 
fair value
0
45,085
0
45,085
0
44,045
0
44,045
Debt issued designated at fair value
0
62,603
9,240
71,842
0
59,606
11,854
71,460
Other financial liabilities designated at fair value
0
30,055
1,978
32,033
0
29,258
3,156
32,414
of which: Financial liabilities related to unit-linked
 
investment contracts
0
13,221
0
13,221
0
21,466
0
21,466
of which: Securities financing transactions
0
15,333
0
15,333
0
6,375
2
6,377
of which: Over-the-counter
 
debt instruments and other
0
993
691
1,684
0
1,417
814
2,231
Total liabilities measured
 
at fair value
24,219
296,148
13,015
333,382
25,922
257,637
17,357
300,916
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 Effective 1 April 2022, a portfolio of
 
assets previously classified as Financial
 
assets measured at fair value
 
through other
 
comprehensive income was
 
reclassified to Other financial
 
assets measured at amortized cost.
Refer to Note 1 for more information.
 
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
 
20e
 
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.
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.
–
 
Equity securities less actively traded
 
will be classified as Level 2 and illiquid
 
positions as Level 3.
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.
Product
Valuation and
 
classification in the fair value hierarchy
Financial liabilities
related to 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.
Precious metals and
other physical
commodities
Valuation
–
 
Physical assets are valued using the
 
spot rate observed in the relevant market
 
.
Fair value
hierarchy
–
 
Generally traded in active markets
 
with prices that can
 
be obtained directly from
 
these markets, resulting
in classification as Level 1.
Debt issued
designated at fair
value
Valuation
–
 
The risk management
 
and the valuation
 
approaches for
 
these instruments are
 
closely aligned with
 
the
equivalent
 
derivatives
 
business
 
and
 
the
 
underlying
 
risk,
 
and
 
the
 
valuation
 
techniques
 
used
 
for
 
this
component are the same a
 
s
 
the relevant valuation techniques described below.
Fair value
hierarchy
–
 
The observability is closely aligned with
 
the equivalent derivatives business and the underlying
 
risk.
 
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
 
20d,
 
the fair
 
value
 
of
 
uncollateralized
 
and
partially
 
collateralized derivatives
 
is
 
then adjusted
 
by
 
credit
 
valuation
 
adjustments
 
(CVAs),
 
debit valuation
 
adjustments
(DVAs)
 
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 ob
 
servable.
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.
 
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 becomes
 
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 m
2022
2021
2020
Reserve balance at the beginning of the
 
year
418
269
146
Profit / (loss) deferred on new transactions
299
459
362
(Profit) / loss recognized in the income statement
(295)
(308)
(238)
Foreign currency translation
0
(2)
0
Reserve balance at the end of the year
422
418
269
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 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 15
 
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 m
31.12.22
31.12.21
31.12.20
Recognized during the period:
Realized gain / (loss)
 
1
(14)
2
Unrealized gain / (loss)
 
866
60
(295)
Total gain / (loss), before
 
tax
867
46
(293)
USD m
31.12.22
31.12.21
31.12.20
Recognized on the balance sheet
 
as of the end of the period:
Unrealized life-to-date gain / (loss)
 
556
(315)
(381)
of which: debt issued designated at fair value
289
(144)
(233)
of which: other financial liabilities designated at fair value
266
(172)
(148)
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 sou
 
rces 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.
Balance sheet valuation adjustments
 
on financial instruments
As of
USD m
31.12.22
31.12.21
Credit valuation adjustments
1
(33)
(44)
Funding valuation adjustments
(50)
(49)
Debit valuation adjustments
4
2
Other valuation adjustments
(839)
(913)
of which: liquidity
(311)
(341)
of which: model uncertainty
(529)
(571)
1 Amounts do not include reserves
 
against defaulted counterparties.
Other items
In the first
 
half of 2021,
 
UBS AG incurred
 
a loss of
 
USD
861
m 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
.
e)
 
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 2022
 
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)
31.12.22
31.12.21
USD bn
31.12.22
31.12.21
31.12.22
31.12.21
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
0.8
0.9
0.0
0.0
Relative value to
market comparable
Bond price equivalent
14
112
85
16
143
98
points
Discounted expected
cash flows
Discount margin
412
412
434
434
basis
points
Traded loans, loans
measured at fair value,
loan commitments and
guarantees
1.7
2.8
0.0
0.0
Relative value to
market comparable
Loan price equivalent
30
100
97
0
101
99
points
Discounted expected
cash flows
Credit spread
200
200
200
175
800
436
basis
points
Market comparable
and securitization
model
Credit spread
145
1,350
322
28
1,544
241
basis
points
Auction rate securities
1.3
1.6
Discounted expected
cash flows
Credit spread
115
196
144
115
197
153
basis
points
Investment fund units
3
0.3
0.1
0.0
0.0
Relative value to
market comparable
Net asset value
Equity instruments
3
0.9
0.8
0.1
0.1
Relative value to
market comparable
Price
Debt issued designated at
fair value
4
9.2
11.9
Other financial liabilities
designated at fair value
2.0
3.2
Discounted expected
cash flows
Funding spread
23
175
24
175
basis
points
Derivative financial instruments
Interest rate
0.5
0.5
0.1
0.3
Option model
Volatility of interest
rates
75
143
65
81
basis
points
Credit
0.3
0.2
0.3
0.3
Discounted expected
cash flows
Credit spreads
 
9
565
1
583
basis
points
Bond price equivalent
3
277
2
136
points
Equity / index
0.7
0.4
1.2
1.5
Option model
Equity dividend yields
0
20
0
11
%
Volatility of equity
stocks, equity and
other indices
4
120
4
98
%
Equity-to-FX
correlation
(29)
84
(29)
76
%
Equity-to-equity
correlation
(25)
100
(25)
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 ends
 
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.
 
f) 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
 
interrelationships
 
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
31.12.22
31.12.21
USD m
Favorable
 
changes
Unfavorable
 
changes
Favorable
 
changes
Unfavorable
 
changes
Traded loans, loans
 
measured at fair value, loan
 
commitments and guarantees
19
(12)
19
(13)
Securities financing transactions
33
(37)
41
(53)
Auction rate securities
46
2
(46)
2
66
(66)
Asset-backed securities
27
(27)
20
(20)
Equity instruments
183
(161)
173
(146)
Interest rate derivatives, net
18
2
(12)
2
29
(19)
Credit derivatives, net
3
(4)
5
(8)
Foreign exchange derivatives,
 
net
10
(5)
19
(11)
Equity / index derivatives, net
361
(330)
368
(335)
Other
39
2
(62)
2
50
(73)
Total
738
(696)
790
(744)
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.
g) 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
USD bn
Balance at
the beginning
of the period
Net gains /
losses
included in
compre-
hensive
income
1
of which:
related to
instruments
held at the
end of the
period
Purchases
Sales
Issuances
Settlements
Transfers
 
into
 
Level 3
Transfers
 
out of
 
Level 3
Foreign
 
currency
 
translation
Balance at
the end
of the period
For the twelve months ended
 
31 December 2022
2
Financial assets at fair value held
 
for
trading
2.3
(0.3)
(0.3)
0.3
(1.8)
0.5
0.0
0.7
(0.3)
(0.0)
1.5
of which: Investment fund units
0.0
(0.0)
(0.0)
0.0
(0.0)
0.0
0.0
0.1
(0.0)
(0.0)
0.1
of which: Corporate and municipal
bonds
0.6
(0.0)
(0.0)
0.3
(0.6)
0.0
0.0
0.4
(0.0)
(0.0)
0.5
of which: Loans
1.4
(0.1)
(0.1)
0.0
(1.1)
0.5
0.0
0.0
(0.2)
0.0
0.6
Derivative financial instruments –
assets
1.1
0.6
0.3
0.0
0.0
0.4
(0.7)
0.1
(0.0)
(0.0)
1.5
of which: Interest rate
0.5
0.3
0.3
0.0
0.0
0.0
(0.2)
0.0
(0.1)
(0.0)
0.5
of which: Equity / index
0.4
0.2
0.1
0.0
0.0
0.4
(0.3)
0.1
(0.0)
(0.0)
0.7
of which: Credit
0.2
0.1
(0.1)
0.0
0.0
0.0
(0.2)
0.0
0.1
0.0
0.3
Financial assets at fair value not
 
held
for trading
4.2
0.1
0.1
0.7
(1.2)
0.1
(0.0)
0.2
(0.3)
(0.0)
3.7
of which: Loans
0.9
(0.0)
(0.0)
0.4
(0.4)
0.1
0.0
0.1
(0.3)
(0.0)
0.7
of which: Auction rate securities
1.6
0.1
0.0
0.0
(0.3)
0.0
0.0
0.0
0.0
0.0
1.3
of which: Equity instruments
0.7
0.0
0.0
0.1
(0.1)
0.0
0.0
0.1
0.0
(0.0)
0.8
Derivative financial instruments –
liabilities
2.2
(0.8)
(0.4)
0.0
0.0
1.1
(0.9)
0.3
(0.2)
(0.1)
1.7
of which: Interest rate
0.3
(0.3)
(0.0)
0.0
0.0
0.1
(0.0)
0.0
(0.0)
(0.0)
0.1
of which: Equity / index
1.5
(0.4)
(0.3)
0.0
0.0
0.8
(0.7)
0.1
(0.2)
(0.0)
1.2
of which: Credit
0.3
(0.1)
(0.0)
0.0
0.0
0.1
(0.1)
0.1
(0.0)
(0.0)
0.3
Debt issued designated at fair value
11.9
(1.3)
(0.9)
0.0
0.0
4.7
(3.1)
0.7
(3.3)
(0.3)
9.2
Other financial liabilities designated at
fair value
3
3.2
(1.0)
(1.0)
0.0
0.0
0.0
(0.1)
0.1
(0.2)
(0.0)
2.0
For the twelve months ended
 
31 December 2021
Financial assets at fair value held
 
for
trading
2.3
(0.0)
(0.1)
0.3
(1.6)
1.2
0.0
0.3
(0.3)
(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
of which: Corporate and municipal
bonds
0.8
0.0
(0.0)
0.2
(0.4)
0.0
0.0
0.0
(0.1)
(0.0)
0.6
of which: Loans
1.1
0.0
(0.0)
0.0
(0.8)
1.2
0.0
0.0
(0.2)
0.0
1.4
Derivative financial instruments –
assets
1.8
(0.2)
(0.1)
0.0
0.0
0.5
(0.7)
0.1
(0.3)
(0.0)
1.1
of which: Interest rate
0.5
0.1
0.1
0.0
0.0
0.1
(0.2)
0.0
(0.1)
(0.0)
0.5
of which: Equity / index
0.9
(0.1)
(0.1)
0.0
0.0
0.3
(0.4)
0.0
(0.2)
(0.0)
0.4
of which: Credit
0.3
(0.1)
(0.1)
0.0
0.0
0.0
(0.1)
0.0
(0.0)
0.0
0.2
Financial assets at fair value not
 
held
for trading
3.9
0.1
0.1
1.0
(0.6)
0.0
0.0
0.1
(0.3)
(0.0)
4.2
of which: Loans
0.9
(0.0)
0.0
0.6
(0.3)
0.0
0.0
0.0
(0.3)
(0.0)
0.9
of which: Auction rate securities
1.5
0.1
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
1.6
of which: Equity instruments
0.5
0.1
0.1
0.1
(0.1)
0.0
0.0
0.0
(0.0)
(0.0)
0.7
Derivative financial instruments –
liabilities
3.5
0.2
(0.0)
0.0
0.0
0.9
(1.8)
0.0
(0.5)
(0.0)
2.2
of which: Interest rate
0.5
(0.1)
(0.1)
0.0
0.0
0.0
(0.1)
0.0
(0.0)
(0.0)
0.3
of which: Equity / index
2.3
0.3
0.1
0.0
0.0
0.8
(1.5)
0.0
(0.4)
(0.0)
1.5
of which: Credit
0.5
(0.1)
(0.1)
0.0
0.0
0.0
(0.0)
0.0
(0.1)
(0.0)
0.3
Debt issued designated at fair value
9.6
0.7
0.6
0.0
0.0
7.1
(4.2)
0.1
(1.2)
(0.2)
11.9
Other financial liabilities designated at
fair value
2.1
0.0
0.0
0.0
0.0
1.3
(0.2)
0.0
(0.0)
(0.0)
3.2
1 Net gains / losses included in comprehensive
 
income are recognized in Net interest
 
income and Other net income
 
from financial instruments
 
measured at fair value through
 
profit or loss in the Income statement, and
also in
 
Gains /
 
(losses) from
 
own credit
 
on financial
 
liabilities
 
designated at
 
fair value,
 
before tax
 
in the
 
Statement
 
of comprehensive
 
income.
 
2 Total
 
Level 3
 
assets as
 
of 31 December
 
2022
 
were USD
6.7
bn
(31 December 2021:
 
USD
7.6
bn). Total Level
 
3 liabilities
 
as of 31 December
 
2022 were
 
USD
13.0
bn (31 December 2021:
 
USD
17.4
bn).
 
3 Of the
 
USD
1.0
bn in net gains
 
/ losses that
 
is included in
 
comprehensive
income, USD
0.6
bn is recognized
 
in the Income
 
statement and
 
USD
0.4
bn is recognized
 
in the Statement
 
of comprehensive
 
income in
 
Gains / (losses)
 
from own credit
 
on financial liabilities
 
designated at fair
 
value,
before tax.
h) 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
 
31.12.22
Maximum
exposure to
credit risk
Collateral
Credit enhancements
Exposure to
credit risk
after collateral
and credit
enhancements
USD bn
Cash
collateral
received
Collateralized
by equity and
debt
instruments
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
16.7
 
16.7
Derivative financial instruments
4
150.1
5.9
133.5
10.7
Brokerage receivables
17.6
17.3
0.3
Financial assets at fair value not
 
held for trading – debt instruments
5
44.8
11.4
33.4
Total financial assets
 
measured at fair value
229.2
0.0
34.6
0.0
0.0
133.5
0.0
0.0
61.2
Guarantees
6
0.2
0.2
0.0
31.12.21
Maximum
exposure to
credit risk
Collateral
Credit enhancements
Exposure to
credit risk
after collateral
and credit
enhancements
USD bn
Cash
collateral
received
Collateralized
by equity and
debt
instruments
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
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
5
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
6
0.2
0.0
0.2
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 The
 
amount shown in the
 
“Netting” column
 
represents the
 
netting potential
not recognized on the balance
 
sheet. Refer to Note
 
21 for more information.
 
5 Financial assets
 
at fair value not
 
held for trading collateralized
 
by securities consisted
 
of structured loans and reverse
 
repurchase and
securities borrowing agreements.
 
6 The amount
 
shown in the “Guarantees”
 
column largely relates to
 
sub-participations.
i) 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
31.12.22
31.12.21
Carrying
amount
Fair value
Carrying
amount
Fair value
USD bn
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
Cash and balances at central banks
169.4
169.4
0.1
0.0
0.0
169.4
192.8
192.7
0.1
0.0
0.0
192.8
Loans and advances to banks
14.7
13.9
0.0
0.7
0.0
14.6
15.4
14.6
0.0
0.7
0.0
15.3
Receivables from securities financing
transactions measured at amortized cost
67.8
64.3
0.0
1.8
1.7
67.8
75.0
71.6
0.0
1.3
2.1
75.0
Cash collateral receivables on derivative
instruments
35.0
35.0
0.0
0.0
0.0
35.0
30.5
30.5
0.0
0.0
0.0
30.5
Loans and advances to customers
390.0
136.9
0.0
45.9
195.0
377.7
398.7
163.7
0.0
43.8
190.4
397.9
Other financial assets measured at amortized
cost
2
53.4
13.0
10.3
25.1
2.5
51.0
26.2
4.1
9.3
10.7
2.4
26.5
Liabilities
Amounts due to banks
11.6
8.9
0.0
2.7
0.0
11.6
13.1
9.1
0.0
4.0
0.0
13.1
Payables from securities financing
transactions measured at amortized cost
4.2
3.5
0.0
0.7
0.0
4.2
5.5
4.1
0.0
1.5
0.0
5.5
Cash collateral payables on derivative
instruments
36.4
36.4
0.0
0.0
0.0
36.4
31.8
31.8
0.0
0.0
0.0
31.8
Customer deposits
527.2
493.0
0.0
33.9
0.0
526.9
544.8
537.6
0.0
7.3
0.0
544.8
Funding from UBS Group AG measured at
amortized cost
56.1
2.0
0.0
53.7
0.0
55.7
57.3
2.8
0.0
56.0
0.0
58.8
Debt issued measured at amortized cost
59.5
13.4
0.0
45.5
0.0
58.9
82.4
13.0
0.0
69.8
0.0
82.8
Other financial liabilities measured at
amortized cost
3
7.2
7.2
0.0
0.0
0.0
7.2
6.3
6.3
0.0
0.0
0.0
6.3
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 Effective 1 April 2022, a portfolio of assets
 
previously classified as Financial assets measured at
 
fair value through other
comprehensive income was
 
reclassified to Other financial
 
assets measured at amortized
 
cost. Refer to Note 1 for information.
 
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.