Note 24 Commitments and Contingent Liabilities The Group utilizes various lending-related financial instru- ments in order to meet the financial needs of its customers. The Group issues commitments to extend credit, standby and other letters of credit, guarantees, commitments to enter into repurchase agreements, note issuance facilities and revolving underwriting facilities. Guarantees represent irrevocable as- surances, subject to the satisfaction of certain conditions, that the Group will make payment in the event that the customer fails to fulfill its obligation to third parties. The Group also en- ters into commitments to extend credit in the form of credit lines that are available to secure the liquidity needs of cus- tomers but have not yet been drawn on by them, the major- ity of which range in maturity from one month to five years. The contractual amount of these instruments is the maxi- mum amount at risk for the Group if the customer fails to meet its obligations. The risk is similar to the risk involved
in extending loan facilities and is subject to the same risk management and control framework. For the years ended 31 December 2005, 2004 and 2003 the Group recognized credit loss recoveries of CHF 39 million, CHF 31 million and CHF 23 million respectively, related to obligations incurred for contingencies and commitments.
The Group generally enters into sub-participations to mit- igate the risks from commitments and contingencies. A sub- participation is an agreement by another party to take a share of the loss in the event that the borrower fails to fulfill its ob- ligations and, where applicable, to fund a part of the credit facility. The Group retains the contractual relationship with the borrower, and the sub-participant has only an indirect re- lationship with the borrower. The Group will only enter into sub-participation agreements with banks whose rating is equal to or better than that of the borrower.
The Group also acts in its own name as trustee or in fiduciary capacities for the account of third parties. The assets man- aged in such capacities are not reported on the balance sheet unless they are invested with UBS. UBS earns commission and fee income from such transactions and assets. These activi-
ties potentially expose UBS to liability risks in cases of gross negligence with regard to non-compliance with its fiduciary and contractual duties. UBS has policies and processes in place to control these risks.
Note 24 Commitments and Contingent Liabilities (continued)
CHF million 31.12.05 31.12.04
Contingent liabilities
Credit guarantees and similar instruments1 11,526 10,252
Sub-participations (719) (621 )
Total 10,807 9,631
Performance guarantees and similar instruments2 2,805 2,536
Sub-participations (335) (415 )
Total 2,470 2,121
Documentary credits 2,235 2,106
Sub-participations (207) (272 )
Total 2,028 1,834
Gross contingent liabilities 16,566 14,894
Sub-participations (1,261) (1,308 )
Net contingent liabilities 15,305 13,586
Irrevocable commitments
Undrawn irrevocable credit facilities 72,905 53,168
Sub-participations (2) (7 )
Total 72,903 53,161
Liabilities for calls on shares and other equities 20 19
Gross irrevocable commitments 72,925 53,187
Sub-participations (2) (7 )
Net irrevocable commitments 72,923 53,180
Gross commitments and contingent liabilities 89,491 68,081
Sub-participations (1,263) (1,315 )
Net commitments and contingent liabilities 88,228 66,766
Market value guarantees in form of written put options 317,973 352,509
1Credit guarantees in the form of bills of exchange and other guarantees, including guarantees in the form of irrevocable letters of credit, endorsement liabilities from bills rediscounted, advance payment guarantees and similar facilities. 2Bid bonds, performance bonds, builders’ guarantees, letters of indemnity, other performance guarantees in the form of irrevocable letters of credit and similar facilities.
As part of its trading and market making activities, UBS writes put options on a broad range of underlyings. For writing put options, UBS receives a premium, which is recognized as neg- ative replacement value on the balance sheet. The contract volume of a written put option, which is the number of units of the underlying multiplied by the exercise price per unit, is considered a market price guarantee issued, because the op- tion holder is entitled to make UBS purchase the underlying at the stated exercise price. The fair value of all written put
options is recognized on the balance sheet as negative re- placement value, which is significantly lower than the under- lying total contract volume that represents the maximum potential payment UBS could be required to make upon exercise of the puts. The exposure from writing put options is subject to UBS’s risk management and control framework. Accordingly, neither the underlying total contract volume nor the negative replacement value are indicative of the actual risk exposure arising from written put options.
Financial Statements
Notes to the Financial Statements
Note 25 Operating Lease Commitments
CHF million 31.12.05
Operating leases due
2006 963 2007 908 2008 844 2009 783 2010 672 2011 and thereafter 3,973
Subtotal commitments for minimum payments under operating leases 8,143
Less: Sublease rentals under non-cancellable leases 821
Net commitments for minimum payments under operating leases 7,322
CHF million 31.12.05 31.12.04 31.12.03
Gross operating lease expense 1,232 1,309 1,354
from continuing operations 1,157 1,236 1,263
from discontinued operations 75 73 91
Sublease rental income from continuing operations 51 43 43
Net operating lease expense 1,181 1,266 1,311
from continuing operations 1,106 1,193 1,220
from discontinued operations 75 73 91
Note 24 Commitments and Contingent Liabilities (continued)
CHF million Mortgage collateral Other collateral Unsecured Total
Overview of collateral
Gross contingent liabilities 355 9,558 6,653 16,566
Gross irrevocable commitments 3,333 33,722 35,850 72,905
Liabilities for calls on shares and other equities 20 20
Total 31.12.05 3,688 43,280 42,523 89,491
Total 31.12.04 3,599 30,045 34,437 68,081
Other commitments
The Group enters into commitments to fund external private equity funds and investments, which typically expire within five years. The commitments themselves do not involve credit or market risk as the funds purchase investments at market
value at the time the commitments are drawn. The maximum amount available to fund these investments at 31 December 2005 and 31 December 2004 was CHF 933 million and CHF 1,019 million respectively.
At 31 December 2005, UBS was obligated under a number of non-cancellable operating leases for premises and equipment used primarily for banking purposes. The significant premises leases usually include renewal options and escalation clauses in line with general office rental market conditions as well as rent adjustments based on price indices. However, the lease
agreements do not contain contingent rent payment clauses and purchase options. The leases also do not impose any re- strictions on UBS’s ability to pay dividends, engage in debt fi- nancing transactions or enter into further lease agreements. The minimum commitments for non-cancellable leases of premises and equipment are presented as follows:
Note 26 Pledged Assets and Pledgeable Off-Balance Sheet Securities
Assets are pledged from the Group’s balance sheet as collateral or for other purposes. Additionally, the Group receives pledge- able securities in various types of transactions. These securities are not recognized on the balance sheet.
Pledged Assets
Assets are pledged as collateral for collateralized credit lines with central banks, loans from central mortgage institutions, de- posit guarantees for savings banks, security deposits relating to stock exchange membership and mortgages on the Group’s property. No financial assets are pledged for contingent liabilities. The following table shows additional information about as- sets pledged or assigned as security for liabilities and assets subject to reservation of title for the years ended 31 December 2005 and 31 December 2004.
Carrying amount Related liability Carrying amount Related liability
CHF million 31.12.05 31.12.05 31.12.04 31.12.04
Mortgage loans 64 38 175 60
Securities 115,580 88,596 92,440 87,113
Property and equipment 520 683 320 0
Other 474 0 0 0
Total pledged assets 116,638 89,317 92,935 87,173
Pledgeable Off-Balance Sheet Securities
The Group also obtains off-balance sheet securities with the right to sell or repledge them as shown in the table below.
CHF million 31.12.05 31.12.04
Fair value of securities received which can be sold or repledged 1,255,176 968,737
as collateral under reverse repurchase, securities borrowing and lending arrangements,
derivative transactions and other transactions 1,183,238 921,067
in unsecured borrowings which can be sold or repledged 71,938 47,670
thereof sold or repledged 1,002,423 818,151
in connection with financing activities 918,802 737,805
to satisfy commitments under short sale transactions 70,174 57,903
in connection with derivative transactions 9,205 6,714
in connection with other transactions 4,242 15,729
Note 27 Litigation
Due to the nature of their business, the bank and other com- panies within the UBS Group are involved in various claims, dis- putes and legal proceedings, arising in the ordinary course of business. The Group makes provisions for such matters when, in the opinion of management and its professional advisors, it is probable that a payment will be made by the Group, and the amount can be reasonably estimated (see Note 20).
In respect of the further claims asserted against the Group of which management is aware (and which, according to the principles outlined above, have not been provided for), it is the opinion of management that such claims are either with- out merit, can be successfully defended or will not have a ma- terial adverse effect on the Group’s financial condition, results of operations or liquidity.