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Interest rate benchmark reform | 6 Months Ended
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Jun. 30, 2021
Disclosure Of Interest Rate Benchmark Reform [Line Items] |
Disclosure of how entity is managing transition to alternative benchmark rates, its progress at reporting date and risks to which it is exposed arising from financial instruments because of transition [text block] | Note 13 Interest rate benchmark reform Background A market-wide reform of major interest rate benchmarks is being undertaken globally, with the Financial Conduct Authority (the FCA) announcing in March 2021 that the publication of London Interbank Offered Rates (LIBORs) will cease for all non- US dollar LIBORs, as well as for one-week and two-month USD LIBOR, after 31 December 2021. Publication of the remaining USD LIBOR tenors will cease immediately after 30 June 2023. The majority of UBS’s Interbank Offered Rate (IBOR) exposure is to CHF LIBOR and USD LIBOR. The alternative reference rate ( ARR ) for CHF LIBOR is the Swiss Average Rate Overnight (SARON). Th e ARR for USD LIBOR is the Secured Overnight Financing Rate (SOFR); in addition, there are recommended ARRs for GBP LIBOR, JPY LIBOR and EUR LIBOR. For certain products in the US, UBS is considering the use of credit-sensitive rates as an alternative to SOFR. As of 30 June 2021, transition uncertainty with respect to significant interest rate benchmarks remains, with the exception of the Euro Interbank O ffered Rate ( Euribor ). The reform of Euribor is now complete and consisted of a change in the underlying calculation method. The transition to ARRs includes a number of active steps that will also benefit from the support of associated regulatory activities. There may be some contracts, known as “tough legacy contracts,” that cannot be practically transitioned or amended from IBORs to ARRs . The FCA continues to consult market participants about requiring the ICE Benchmark Administration to continue publishing certain LIBOR settings (i.e., one-, three- and six-month settings for the GBP, JPY and USD LIBORs) on a “synthetic” basis, which are not representative of the underlying financial markets, for a certain duration after 3 1 December 2021. However, these synthetic LIBORs will not be available for use in new contracts, given that they are non-representative, and are instead intended to help reduce disruption where resolution has not been agreed for certain tough legacy contracts. Furthermore, in February 2021, the EU Benchmarks Regulation was amended to enable the European Commission to designate a statutory replacement rate for tough legacy LIBOR contracts that are governed by the laws of EU Member States and remain outstanding after LIBOR cessation. On 6 April 2021, New York State LIBOR legislation was enacted with the intention of minimizing legal uncertainty and adverse economic effects associated with USD LIBOR transition for tough legacy contracts governed by New York law. For USD LIBOR contracts not governed by New York law, a bill has been introduced in Congress with similar objectives. In October 2020, the International Swaps and Derivatives Association (ISDA) released the IBOR Fallbacks Supplement and IBOR Fallbacks Protocol, amending ISDA standard definitions for interest-rate derivatives to incorporate fallbacks for derivatives linked to certain IBORs. The changes came into effect on 25 January 2021 and, from that date, all newly cleared and non- cleared derivatives between adhering parties that reference ISDA standard definitions now include these fallbacks. UBS adhered to the protocol in November 2020. UBS is focused on transitioning existing contracts via bi-lateral and multi-lateral agreements, leveraging industry solutions (e.g., the use of fallback provisions) and through third-party actions (clearing houses, agents , etc . ). Furthermore, in line with regulatory guidance UBS has implemented a framework to limit entry into new contracts referencing IBORs. Governance over the transition to alternative benchmark rates UBS has established a global cross-divisional, cross-functional governance structure and change program to address the scale and complexity of the transition. This global program is sponsored by the Group CFO and led by senior representatives from the business divisions and UBS’s control and support functions. The program includes governance and execution structures within each business division, together with cross- divisional teams from each control and support function. Progress is overseen centrally via a monthly operating committee and a monthly steering committee, as well as quarterly updates to the joint Audit and Risk committees. Risks A core part of UBS’s change program is the identification, management and monitoring of the risks associated with IBOR reform and transition. These risks include, but are not limited to, the following: – economic risks to UBS and its clients, through the repricing of existing contracts, reduced transparency and / or liquidity of pricing information, market uncertainty or disruption; – accounting risks, where the transition affects the accounting treatment, including hedge accounting and consequential income statement volatility; – valuation risks arising from the variation between benchmarks that will cease and ARRs, affecting the risk profile of financial instruments; – operational risks arising from changes to UBS’s front-to-back processes and systems to accommodate the transition, as well as the revision of operational controls related to the reform; and – legal and conduct risks relating to UBS’s engagement with clients and market counterparties around new benchmark products and amendments required for existing contracts referencing benchmarks that will cease. In some cases, contracts may contain provisions intended to provide a fallback interest rate in the event of a brief unavailability of the relevant IBOR. These provisions may not be effective or may produce arbitrary results in the event of a permanent cessation of the relevant IBOR. While efforts to transition outstanding transactions from IBORs to ARRs have made substantial progress, including through industry-wide protocols, such as the ISDA IBOR Fallbacks Supplement and IBOR Fallbacks Protocol, there are still substantial volumes of transactions that require modification to effectively transition to ARRs. UBS remains confident that it has the transparency, oversight and operational preparedness to progress with the IBOR transition consistent with market timelines. UBS does not expect changes to its risk management approach and strategy as a result of interest rate benchmark reform. Progress made during 2020 and the first half of 2021 Approaches to transition vary by product type. During 2020, UBS transitioned most of its CHF LIBOR-linked deposits to SARON and launched SARON - based mortgages and corporate loans based on all major ARRs in the Swiss market, as well as SOFR- based mortgages in the US market. By the end of the second quarter of 2021, UBS ha d successfully transitioned its GBP LIBOR- and EUR LIBOR-based private and commercial real estate mortgages in the UK and Monaco to the Sterling Overnight Index Average ( SONIA ) and Euribor , respectively. UBS has detailed plans in place to deliver the required changes for all other IBOR exposures, predominantly during 2021. Financial instruments yet to transition to alternative benchmarks The amounts included in the table below relate to financial instrument contracts across UBS’s business divisions where UBS has material exposures subject to IBOR reform that have not yet transitioned to ARRs, and that: contractually reference an interest rate benchmark that will transition to an alternative benchmark; and – have a contractual maturity date (including open-ended contracts) after the agreed cessation dates. Contracts where penalty terms reference IBORs , or where exposure to an IBOR is not the primary purpose of the contract, have not been included, as these contracts do not have a material impact on the transition process. In addition, contracts that have been changed to incorporate ARR-based interest rates before the relevant cessation date have been excluded from the table below, because UBS expects no further transition work to implement the reform. In line with information provided to management and external parties monitoring UBS’s transition progress, the table below includes the following financial metrics for instruments subject to interest rate benchmark reform: – gross carrying value / exposure for non-derivative financial instruments; and – total trade count for derivative financial instruments. The exposure s included in the table below represent the maximum IBOR exposure, with the actual IBOR exposure being dependent upon client preferences and investment decisions. Overall, the effort required to transition is affected by multiple factors, including whether negotiations need to take place with multiple stakeholders (as is the case for syndicated loans or certain listed securities), market readiness – such as liquidity in ARR equivalent products – and a client’s technical readiness to handle ARR market conventions. As significant IBOR exposures transition to ARRs during 2021, the values and trade count disclosed are expected to decrease. 30.6.21 LIBOR benchmark rates 1 Measure CHF USD GBP EUR 2 JPY XCCY Carrying value of non-derivative financial instruments Total non-derivative financial assets USD million 31,423 77,502 1,829 6,587 3,070 3,796 3 Total non-derivative financial liabilities USD million 2,029 9,834 566 1,919 1,060 0 Trade count of derivative financial instruments Total derivative financial instruments Trade count 9,519 42,566 12,513 9,626 4,247 5,948 4 Off-balance sheet exposures Total irrevocable loan commitments USD million 1 4,433 0 0 0 15,767 5 31.3.21 LIBOR benchmark rates 1 Measure CHF USD GBP EUR 2 JPY XCCY Carrying value of non-derivative financial instruments Total non-derivative financial assets USD million 36,046 72,185 5,399 8,253 3,060 4,469 3 Total non-derivative financial liabilities USD million 2,612 13,142 1,429 2,252 1,460 0 Trade count of derivative financial instruments Total derivative financial instruments Trade count 9,749 40,080 13,006 9,613 3,961 5,206 4 Off-balance sheet exposures Total irrevocable loan commitments USD million 106 4,656 167 0 0 15,188 5 1 Contracts have been disclosed without regard to early termination rights. Instead, it is assumed that such contracts will transition away from IBORs without such rights being exercised. 2 Includes primarily EUR LIBOR positions. 3 Includes loans related to revolving multi-currency credit lines. 4 Includes cross-currency swaps where either leg or both legs are indexed to an IBOR. 5 Includes loan commitments that can be drawn in different currencies at the client‘s discretion. Non-derivative instruments UBS’s significant non-derivative IBOR exposures primarily relate to brokerage receivable and payable balances, corporate and private loans, and mortgages, linked to CHF and USD LIBORs. In March 2021, following the FCA announcement regarding the cessation timelines for IBORs, UBS started a centralized communication initiative for private mortgages linked to CHF LIBOR, with the objective of transitioning these exposures either through the activation of existing fallbacks or the amendment of contractual terms, where such fallbacks do not exist. During the second quarter of 2021, mortgages that were linked to CHF LIBOR have been reduced by approximately USD 2 billion and the remaining USD 3 billion of mortgages linked to GBP LIBOR as of 31 March 2021 have successfully transitioned . US mortgages linked to USD LIBOR are planned to transition to SOFR from 2022–2023. US securities-based lending increased by approximately USD 4 billion in the second quarter of 2021, with agreements expected to switch to an alternative benchmark from the fourth quarter of 2021. UBS is also proactively discussing transition mechanisms with many of its brokerage and corporate clients in order to transition their exposures throughout 2021 from CHF LIBOR, EUR LIBOR and GBP LIBOR. During the second quarter of 2021, the gross carrying amount of IBOR-indexed non-derivative financial assets and liabilities r elated to brokerage accounts , predominantly linked to GBP and USD LIBOR, was reduced by approximately USD 8 billion in aggregate as a result of successful transitions. For certain non-derivative financial assets and financial liabilities, in particular bonds issued by third parties, UBS is dependent on the participation and engagement of others in effecting the transition from IBORs. UBS is actively monitoring such exposures and is in discussions with clients. As presented in the table on the previous page, UBS had approximately USD 16 billion (31 March 2021, USD 15 billion) of irrevocable commitments as of 30 June 2021 that can be drawn down in different currencies with IBOR-based interest rates, primarily USD LIBOR and Euribor, and that expire after the relevant benchmark cessation dates . Related drawn - down amounts under these commitments were USD 4 billion (31 March 2021, USD 4 billion). In addition, UBS had approximately USD 10 billion (31 March 2021 , USD 16 billion ) of committed revocable credit lines outstanding that allow clients to draw down a number of IBOR- linked products. UBS is in discussions with impacted clients, with plans in place to have all contracts amended by the relevant cessation dates. Derivative instruments UBS holds derivatives for trading and hedging purposes, including those designated in hedge accounting relationships. A significant number of interest rate and cross-currency swaps have floating legs that reference various benchmarks that will cease. The majority of derivatives are transacted with clearing houses where UBS is dependent upon industry - wide compression activities to reduce exposure and clearing house actions to convert any remaining derivatives nearer the cessation dates. London Clearing House (LCH), which is the clearing house for a significant number of UBS’s IRS derivatives, has confirmed that a standardized transition will be undertaken in December 2021 to transition IBOR-based derivatives to respective ARRs. UBS expects derivative volumes to fluctuate in line with business activity until such clearing house actions are taken. For derivatives not transacted with clearing houses, as previously noted, UBS adhered to the ISDA IBOR Fallback Protocol in November 2020, although its preferred approach, in line with regulatory expectations, is to actively switch to ARRs before the relevant cessation dates or to bilaterally compress where feasible. UBS has begun a series of outreach activities to understand counterparties’ intentions regarding whether they seek to adhere to the protocol or will actively switch. In order to minimize the operational risk of converting high volumes of transactions at the time of cessation, UBS is making progress with its preparations to convert derivative instruments in bulk to ARR equivalents.

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- Definition The disclosure of how the entity is managing the transition to alternative benchmark rates, its progress at the reporting date and the risks to which it is exposed arising from financial instruments because of the transition. + References No definition available. + Details
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