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UBSs response to evolving regulatory requirements addressing “too big to fail” UBS supports international efforts to increase financial stability and avoid the risk of banks that are systemically “too big to fail” (TBTF), requiring taxpayer bailouts in a future crisis. Background In the aftermath of the 2007/09 financial crisis, UBS adopted too big to fail (TBTF) requirements in Switzerland and other countries in which the Group operates. UBS has responded with decisive action, improving its capital strength, and investing heavily in and taken significant steps to improve the resolvability of the Group by changing its legal structure, business model and risk profile. Capital position Since 2009 UBS has almost halved its risk-weighted assets (RWA) and significantly reduced its balance sheet. Today, UBS is among the best-capitalized large global banks, with a fully applied Basel III CET1 capital ratio of 14.2% as of 30 June 2016, above our target of at least 13%. It operates a strong, successful cash generating business. UBS values superior capital strength as it offers flexibility to address expected and unexpected events, and offers a competitive advantage that clients value. New capital provisions in Switzerland Switzerland has capital requirements for systemically relevant banks (SRBs) that are among the most stringent in the world. These were strengthened further in May 2016 when the Swiss Federal Council adopted a revised capital adequacy ordinance, amending the already existing capital requirements and establishing additional gone concern requirements. The revised rules became effective on 1 July 2016 and are fully applicable beginning 2020. Going concern: Going concern requirements under the revised Swiss SRB framework consist of a minimum requirement for all Swiss SRBs of a leverage ratio of 4.5% and a capital ratio of 12.86%. In addition to the minimum requirement, an add-on reflecting the degree of a bank's systemic importance is applied based on market share and the leverage ratio denominator (LRD). The add-on for UBS is expected to be 0.5% of our LRD and 1.44% of RWA. This results in total going concern capital requirements of 5.0% of LRD and 14.3% of RWA, applicable from 1 January 2020. This excludes countercyclical buffer requirements and any potential rebate. Any high- and low-trigger tier 2 capital remaining after 2019 will qualify as gone concern capital (see below). Existing low-trigger AT1 capital instruments will remain available to meet the going concern capital requirements until their first call date. 1 Glossary: Going concern capital requirements refer to the capital required to absorb losses from its current operating activities Gone concern requirements refer to the additional loss-absorbing capacity required for restructuring or orderly wind down. TLAC: The total loss-absorbing capacity (TLAC) concept aims to facilitate the resolution of globally active banking groups without impairing financial stability or exposing taxpayers. Gone concern: The provision includes an additional gone concern requirement of 14.3% of RWA and of 5% of the bank's LRD to be met with bail-in instruments, which will continue to change the overall funding mix of the firm. In total, UBS will be subject to a TLAC (total loss absorbing capacity) requirement – defined as the sum of going and gone concern requirements – of up to 28.6% of RWA and 10% of the Group's LRD. Recovery and resolvability UBS has developed comprehensive recovery and resolution planning globally and locally that provides the tools to manage a severe loss event (i.e. a recovery). If the firm cannot be stabilized, it also provides responsible authorities with resolution plans for restructuring or winding down certain businesses. Alongside these measures, the bank has invested significantly in structural, financial and operational ring-fencing measures to improve the Group's resolvability. • In 2014, UBS established UBS Group AG as the Group holding company. This step substantially enhances resolvability in response to evolving global regulatory requirements and facilitates the application of UBS's and key regulators' preferred single-point-of-entry bail-in strategy. • In Switzerland, UBS established UBS Switzerland AG in 2015 as a subsidiary of UBS AG, for its Personal & Corporate Banking division and Swiss-based wealth management business. With UBS Switzerland AG we implemented an ex-ante separation of the systemically important functions and critical operations. The vast majority of our clients in Switzerland have been transferred to UBS Switzerland AG. • In the UK, UBS implemented a revised business model for UBS Limited. Today this legal entity carries a larger share of the risks and rewards deriving from its own business. • In the US, UBS established UBS Americas Holding LLC as a subsidiary of UBS AG and designated it as our intermediate holding company for our US subsidiaries in line with US rules for foreign banks under the Dodd-Frank Wall Street Reform and Consumer Protection Act, or “Dodd-Frank”. Along with other measures this will help us provide US regulators with viable resolution plans. During the third quarter of 2015, UBS established UBS Asset Management AG, a subsidiary of UBS AG, to which the firm plans to transfer the majority of operating subsidiaries of Asset Management during 2016. • In 2015, UBS also established UBS Business Solutions AG a fully owned subsidiary of UBS Group AG and the parent of its global service companies. We expect that the transfer of shared service and support functions into the service company structure will be implemented in a staged approach through 2018. The purpose of the service company structure is to improve the resolvability of the group by enabling us to maintain operational continuity of critical services should a recovery or resolution event occur. 2 .GICNUVTWEVWTGQH7$5)TQWRCUQH&GEGODGT 7$5)TQWR#)EQPUQNKFCVGF 7$5)TQWR#) 7$5#)EQPUQNKFCVGF 7$5#) 7$5$WUKPGUU5QNWVKQPU#) 7$5 5YKV\GTNCPF #) 7$5 #OGTKECU *QNFKPI..% 7$5.KOKVGF 7$5#UUGV /CPCIGOGPV #) 1VJGT UWDUKFKCTKGU 7$5 #OGTKECU +PE 7$5$CPM 75# 7$5 (KPCPEKCN 5GTXKEGU +PE 141.553 mm 7$5 5GEWTKVKGU ..% &KTGEVCPFKPFKTGEVJQNFKPIU7$5#)CPFVJGUKIPKƂECPVUWDUKFKCTKGUUJQYPKPVJKUEJCTVJQNFKPCIITGICVGQHVJGUGQVJGTUWDUKFKCTKGUYKVJXGT[HGYGZEGRVKQPU UBS: stronger, safer and simpler • UBS's substantial progress has been positively recognized by equity and debt investors, as well as credit rating agencies, whose credit ratings for UBS assume neither implicit nor explicit state support for UBS Group AG in the event of a recovery or resolution. • The Swiss financial regulator FINMA has determined that the measures completed by UBS warrant a rebate under its gone concern requirement. • BS's strategy, business and the way UBS serves the vast majority of its clients are not affected by these changes. • These plans do not require UBS to raise additional common equity capital and are not expected to materially affect the firm's capital generating capability. • Finally, UBS continues to consider additional changes to the Group's legal structure to improve the Group's resolvability further. 3