News for Banks

7/29/2019 News for Banks

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There will be much to discuss at SIBOS

2008. Last year, the banking industry was

gaining momentum. This year, it is rebuild-

ing trust. There is no more important task.

As no bank is an island, the first step to-

wards bolstering our industrys credibility

is to restore trust between financial insti-

tutions. This is more than a matter of re-

furbishing balance sheets. It is about build-

ing confidence in the financial system by

strengthening its operational infrastruc-

ture. And it involves overhauling the com-

plex web of institutional relationships thatmake that infrastructure function.

Network management has a vital part

to play in that agenda. In this SIBOS edi-

tion of News for Banks, we show (on pag-

es 5 6) how we have fine-tuned our own

approach to relationship management to

get a more integrated picture of our coun-

terparties. We believe that our efforts will

result in additional opportunities for both

ourselves and the institutions we do busi-

ness with. Meanwhile, we continue to in-

vest in our platform. Offshoring is often

sold simply as a response to cost pressuresbut we prefer to see our service centres in

India and Poland as sources of fresh talent

(pages 10 11). For us, the ultimate meas-

ure of success in offshoring lies in how

far we can hone our effectiveness and, of

course, pass on the benefits to our busi-

ness partners.

Adroit use of technology can also help

to build confidence. In the back office,

better reporting systems (see pages 7 8)

could reduce the scope for errors and mis-

trust. In the front office, an innovative

approach to delivering equity structured

products lets advisors create the exact

solution that their client is looking for

(pages 1617). Certain solutions, though,

continue to build on tradition. Our annual

seminar for partner banks (pages 1213)

is now in its thirty-first year. In a time of

upheaval, I like to think that such events

help to forge the trust that will underpin

our industrys recovery.

Rebuilding trust

2 Network management

The future of custody; the network

reloaded; and real-time reporting

9 Analysts in action

Research feeds into products

10Talent-spotter

How UBS went offshoring

12Cloudy outlook

The view from Wolfsberg

14Reserves seminarWhere central bankers convene

15Blue sea thought

Indexing the worlds sea freight

16Made to measure

Bespoke structured products

18In brief

News from around the world

Stephan ZimmermannChief Operations OfficerUBS Global Wealth Management &Business Banking

News for BanksUBS Newsletter for Banks and Financial Institutions Autumn 2008


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2 UBS News for Banks / Autumn 2008

Network management

The custodial challengeConsolidation and proliferating business lines are reshaping the custody sector,say industry experts from Thomas Murray, a ratings and information consultancy

The words paradigm shift should be

applied only to a science or an industrythat is undergoing radical change. That

could now be the case in the custody sec-

tor. Institutional investors are adopting

new techniques and products, prompting

custodians to embrace completely new

business lines. The implications for net-

work managers at custodial banks are pro-

found. New skills and organizational struc-

tures are required. New channels need to

be opened and new relationships forged

if banks are to succeed in this new era of

competition. There are certainly risks for

custodians in this new world but, by thesame token, there are considerable oppor-

tunities for institutions that can get their

service offering right.

Casting the network wider: custodians are well placed to expand their service offering

Banks operate via a network when they

do not perform the operation themselves.Effectively, this is a form of outsourcing.

Banks offering a global service almost al-

ways outsource some functions; nobody

can do everything, everywhere. The

traditional functions that are outsourced

include cash clearing (also called corre-

spondent banking) and custody. In coun-

tries where a global bank has too small a

footprint to justify a self-clearing operation

via a branch or subsidiary, it opts to use

the services of a local provider. There are

therefore buyers (for instance the global

custodians) and sellers (the domestic agentbanks). Naturally, the buyer seeks the best

quality at the cheapest price, while the

seller seeks to maximize revenue and

mitigate risk. This can give rise to tensions

between the global custodians, as buyers

of services, and the local agent banks,as providers. Owing to the global nature

of banking, banks are both sellers and

buyers a Swiss bank could be a buyer of

services in Uruguay and a seller of services

in Switzerland. Banks often negotiate

services reciprocally I will buy your service

if you will buy mine but this may not

always make for the best solution.

Managing the network

The business of network management

grew out of these diverse relationships.

To provide services, global banks aredependent on third-party providers. Tradi-

tionally, network management consisted in

conducting due diligence surveys of third-

party providers and negotiating fee scales.


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3UBS News for Banks / Autumn 2008

Network managers spent their time

flying round the world carrying out due

diligence. Network management in thisguise is essentially a cost centre. The real

benefits only arrived when global banks

started to leverage their network by

booking business from multiple locations.

The same network could then support

business originating from all the major

financial centres in the US, Europe and

Asia Pacific.

Growing cash, securities and FX flows

increase the value of the global network.

The institutions that carry these flows have

significant placing power in the money

markets or in stock lending, for example.This value attaches to the network, so

it is no longer a cost centre but a major

enabler and, if properly utilized, a signifi-

cant revenue generator. Global networks

are now valuable components of the bank

that complement existing business lines

or create new ones.

Trends and drivers

Europes single currency started a period

of consolidation in network relationships.

Banks could appoint a single counterparty

for their euro cash clearing, instead ofone for each national currency. For a time,

banks still had to worry about which cen-

tral bank held their counterpartys funds

but the advent of Target 2 for Cash has

made this issue less relevant. Monetary

union in other parts of the world lies fur-

ther ahead and will probably not play a

part in custody sector consolidation over

the medium term.

In tandem, infrastructure consolidation

will continue to move ahead at a steady

pace. One of the roles of the custodian,

either as a domestic agent bank or as a

global provider, is to mitigate the risk that

resides at the central securities depository

(CSD) level. One of the major risks is deal-

ing with the wide variety of CSDs in

Europe.If procedures, tax and legal arrange-

ments were harmonized across all the

CSDs, then a major component of this risk

would fall away. This provides a considera-

ble incentive to consolidate Europes CSDs.

However, no roadmap yet exists. As one

pointer to the future, Euroclear has re-

cently announced the acquisition of Nor-

dic Central Securities Depository (NCSD).

In another move, seven CSDs outside the

Euroclear group have also recently an-

nounced the Link-Up Markets, a central

facility to allow interoperability betweenthem. All CSDs in the Eurozone were

obliged to decide by July 4, 2008 whether

to remain independent or support the

European Central Banks Target 2 for

Securities (T2S) initiative which envisages

a consolidation of all settlement across

the Eurozone.

Euroclear has positioned itself as a new

competitor in this business. It is offering an

alternative to the traditional agent banks,leveraging the CSDs in its group to provide

settlement and asset servicing from its

single CSD platform. Euroclear is attempt-

ing to disintermediate the agent banks in

Europe. Some are fighting back; others

are beginning to accept the inevitable. The

recent sale of NCSD to Euroclear by the

Swedish banks will have a dramatic impact

on their domestic custody business. As

Euroclear will probably seek to disinterme-

diate the local agent banks in Sweden and

Finland, the sale of NCSD is a better way

of extracting value from the business thanif the European Central Bank were to na-

tionalize it away via T2S. Since custodians

provide access to infrastructure, custodians

will have to reshape themselves as the in-

frastructure itself consolidates.

The pursuit of alpha is a further chal-

lenge for the custody business. To sup-

plement long-only products, investors are

moving into an ever-wider range of prod-

ucts and asset classes. As a result, cash

custodians now have to deal with ex-

change traded derivatives, OTC derivatives,

private equity, property, and commodities.At the same time, new strategies such as

130/30 require custodians to account for

and value short positions, sometimes us-

ing systems that were explicitly designed

to prevent short positions even arising.

Worse still, the large institutions that used

to buy hedge fund units are now starting

Custodians will have toreshape themselves as theinfrastructure consolidates

Network management evolves from cost centre to enabler


4/20


to replicate hedge fund strategies, so that

they can control the associated risks them-

selves. In this way, asset managers are

behaving increasingly like investment

banks. As they do so, they demand from

their counterparties the kind of support

that was previously provided to traders.

The new paradigm

To plug the gaps in custodian service pro-

visions, institutions have signed up with

prime brokers. But this solution carries its

own risks, given that the institution is now

doing business with an investment bank

rather than a custodial institution. The cus-

todians need to win back the business lost

to the prime brokers but they can only do

this by offering a full range of services

including middle office trade processing

and risk management, pricing and valua-tion of complex derivatives including inte-

grated collateral management and full

administrative support for short positions.

All these new requirements take custodi-

ans into new territory. As with the tradi-

tional cash and custody services, where

they have no in-house capability, the cus-

todians will need to outsource the solu-

tion. However, outsourcing the solution for

exchange traded derivatives, or OTC deriv-atives or other complex products, requires

a new type of network management. New

channels need to be opened to allow the

custodians to win the business back from

the prime brokers.

One such business is that of hedge

funds. These are major drivers of trading

volumes and there are significant revenues

to be made from meeting their service re-

quirements. However, there can also be

significant risks when dealing with hedge

funds. The custodian community has tradi-

tionally steered clear of such risks but theprime brokers have been cunning in struc-

turing their product offering to provide

low-risk solutions (see chart).

Notice that the up and down arrows

in the chart cancel each other out across

the product offerings thereby eliminating

market risk. This is how the prime brokers

have been able to service the hedge funds

without incurring excessive risk for them-

selves. However, this structure is only pos-

sible if the prime broker operates in all the

product lines custody, derivatives and

collateral management. If the service pro-vider operates in only one of these prod-

uct lines or if it processes equity products

in a separate silo to fixed income products,

then it will not be able to structure these

flow trades. As more and more institu-

tional investors (pension funds, insurance

companies and so on) begin to emulate

the strategies of hedge funds in pursuit of

alpha, then those that cannot offer the full

range will lose business to those that can.Clearly custodians can provide securi-

ties lending through their traditional net-

works. What they are lacking is the asset

swap capability supported by the deriva-

tives stream and quite often the repo

capability provided by the collateral man-

agement stream. These streams re-

quire new channels to be opened by

the network management teams of the

custodian.

Fortunately, this challenge may not be

as difficult as it seems. Custodians are very

adept at operating through the traditionalinfrastructures, be they central counter-

party clearing houses (CCPs) or CSDs. This

is a familiar world. The new OTC deriv-

ative products are beginning to mature

and adopt infrastructure models similar to

those found in the traditional cash mar-

kets. As nobody would contemplate set-

tling the high volume of securities traded

at an exchange on a bilateral basis, every-

body settles on a multilateral basis via a

CSD. The same is becoming commonplace

in the world of OTC derivatives. There are

a number of third-party solutions for theOTC derivatives world that provide services

essentially similar to those of a CSD. How-

ever, these solutions have been designed

by investment banks for investment banks.

If the custodians are to join the party,

therefore, their network managers need to

lead the charge by opening up these new

channels for their banks.

The new channels mean that the tradi-

tional arrangement of cash and securities

networks combined as transaction bank-

ing will be replaced by the new paradigm

of separate networks for each of the prod-uct lines and asset classes. If the custodian

bank can then provide an integrated solu-

tion across all these products, it becomes

impossible to lift individual solutions out

and sell them off as Deutsche Bank or

Nordea have done. Custody and its net-

work management cease to be a monoline

business and truly embrace the complexity

that their customers demand.

Thomas MurraySimon Thomas CEO & Chief Rating Officer

[email protected]

Tim Reucroft Director of [email protected]

New channels need to beopened to allow the custodi-ans to win the business backfrom the prime brokers

Chart: Controlling the risks

Source: Thomas Murrray

Typical transaction ows between hedge fund and prime broker

Securities Lender

Custody

Cash

Equity

Repo Trader

Collateral Management

Cash

Bond

Asset Swap

Derivatives

Bond

Equity


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Network management

The network reloadedEveryone benefits when network managers take an all-in view ofcounterparty banks, argues Martin Steinbach, UBSs head of global servicesfor financial institutions

In your view, what are the main issues

facing network managers today?

Steinbach: The biggest challenge hasntchanged. It consists in striking the right

balance between managing relationships

and getting the best service for your bank.

On one hand, you may want to give a cer-

tain bank a contract because they might

be in a position to reward you with other

business. On the other, your own opera-

tions and product units just want to sign

up the best-in-class providers. A second

challenge is quite simply to find the best-

in-class provider.

Why is that?Detailed due diligence is labour-intensive

both for ourselves and our service provid-

ers. Making the process as efficient and

cost-effective as possible is a major head-

Martin Steinbach: we strive to take a holistic view of each relationship

ache for all network managers. As can be

the diplomatic issues arising from service

reviews.

How important are cost considerations

in counterparty reviews?

Clearly cost pressures are bearing down

heavily on the whole sector. Banks have

responded by concentrating their business

with fewer service providers. In return for

funnelling more business through those

providers, they negotiate keener pricing.

This process is quite similar to what the

auto industry did some decades ago. Fol-

lowing Japanese practice, car makers cut

the number of their component suppliersbut deepened their interdependency on

the chosen few that remained. The proc-

ess started later in banking, but the trend

is clear. This consolidation is most dramatic

on the cash clearing side. In the past,

banks tended to open cash accounts fairly

indiscriminately, just to please a counter-party. But those days are over. At UBS,

cash clearing in most major currencies is

already centralized, as is much of our cash

management. And wed like to get an

even better overview of our cash accounts

and balances round the world.

What about custody?

Custody has always been a more concen-

trated sector than cash, owing to its com-

plexity and capital intensity. In addition,

UBS started to consolidate its custody

activities quite early, when we startedworking with the infrastructure-type enti-

ties such as SIS (now Swiss Financial Mar-

ket Services) and Euroclear, the European

settlement system for securities transac-


6/20


tions. And were consolidating further,

now that we take a group-wide approach

to network management.

Speaking of a group-wide approach,

how has network management

changed at UBS to deal with the

trends you mention?

I would say that network management

has become a discipline in its own right.

A key step forward was the start-up of a

commercial services group within our in-

vestment bank. This unit has the man-date to negotiate the best possible prices

and terms for cash and custody services.

Effectively, this is a purchasing depart-

ment. Manufacturing companies have al-

ways seen purchasing as a key function,

but bankers have taken longer to adopt

that mind-set. More recently, we set up a

central committee to coordinate cash and

custody relationships across all our busi-

ness activities wealth management and

business banking, investment banking,

and asset management. Before we go into

a particular market, we try to harmonizeour requirements across all our business

groups so that we can present a common

negotiating stance on terms and pricing.

The economic benefits can be considera-

ble, amounting to several million dollars in

just one recent instance.

Thats good, but whats in it for your

counterparties?

I think everyone benefits when a business

relationship goes forward on a more ob-

jective, professional footing. On our side,

we seek to provide the right informa-tion for reviews and to base all decisions

on the appropriate indicators. Yes, were

tough negotiators and, as a service pro-

vider ourselves, we experience exactly the

same from our counterparties. But, once

a relationship is established, we can of-

fer transaction volumes that are more than

worthwhile.

If the benefits are so clear, why did

it take so long to set up a group-wide

approach to network management?

There was informal collaboration and con-

sultation across our business groups long

before we established the group-wide net-

work management committee. But the

decision to move to a more formal struc-ture could not be taken lightly. One rea-

son is that a centralized approach to net-

work management involves certain costs.

If a business unit negotiates a mandate in-

dependently, it can move faster and might

even get a service package that is more

closely tailored to its particular needs. So

coordination involves compromise. Human

factors are also significant. Centrally coor-

dinated network management is not wide-

spread in our industry. So people have to

be educated to accept it.

Id imagine that centralized decision-

making leans heavily on information

management

Exactly so. On the sell side, we get a lot

of information from our customer relation-

ship management system. Capturing

transactions on the buy side and tracking

what we pay in fees is more difficult. Thats

because the data sources are more dispa-

rate and depend more on manual proc-

esses. The exception is cash clearing, at

least in our main currencies, where we

have an electronic data feed and know ex-actly what our outgoings are. The upshot

is that, where we previously had a buy

view and a sell view of a particular

counterparty, we can now get a more inte-

grated picture. And this helps us improve

the overall relationship.

A final question how does centralized

network management fit into UBSs

The Bank for Banks concept?

Network management focuses on cash

and custody relationships, while The

Bank for Banks covers the entirety of ourrelationships with other institutions, in-

cluding everything from corporate finance

to fund management (see box). The com-

mon element is that we strive to take a

holistic view of each relationship. We see

this as the best way to find synergies be-

tween ourselves and partner banks, result-

ing in more intensive discussions and op-

portunities for growth.

Martin Hood News for [email protected]

About the Bank for Banks

UBS. The Bank for Banks provides

financial institutions with a wide range

of modular services that draw on the

expertise of all UBSs business groups.

At present, these services are grouped

into six streams comprising cash/

currency, securities, asset management,

private banking, corporate finance, and

trade and export finance. The serviceoffering is delivered through market-

ing hubs in Switzerland, New York, and

Hong Kong.


7/20


Network management

The real-time advantageHow improved reporting standards could allay liquidity fears andcut systemic risk

Trust is in short supply in todays finan-

cial markets. The trouble in this hypothe-

tical case started when a bank sent a

multi-billion payment order to its cashclearing provider. The payment was due

to a central bank as part of a repurchase

agreement. Unfortunately, the banks

account had insufficient funds, leading

the clearer to queue the payment order

in its risk system. A series of inbound

payments funding the account were re-

ceived during the day, but not enough to

release the payment.

Client bank and clearer were in frequent

contact throughout the day and, a few

minutes before market close, they agreed

that a partial payment would be releasedto the central bank taking the banks

overdraft with the clearer to its limit. Late

in the business day, the central bank, ob-

viously nervous about the well-publicized

When the clock is ticking, it helps to have an instant overview of your positions

subprime exposures of the originating

bank, raised questions about the partial

payment and threatened to exclude the

originating bank from the next days repoauction a move that might awkwardly

crimp its funding activities. Unless, that is,

the clearer could confirm that the problem

was operational and not caused by liquid-

ity constraints. Finally, the central bank

extended the payment deadline for the

remaining amount to early next morning

which, again, put the onus on the clearer.

Decision time

Later that evening, the clearers manage-

ment bit the bullet. They decided to make

the required payment, even though thisresulted in a very significant additional

credit exposure. Not to do so, they judged,

might endanger their client and create

knock-on effects throughout the market.

Later the next day, however, the issue

resolved itself quietly when the client bank

reconciled its accounts and discovered

two funding payments that had failed toarrive on the value date.

This story shows how fall-out from the

credit crisis can ripple through to the op-

erations areas of commercial banks. We

now ask what mitigating actions could

have been taken in the above case. Lastly,

we take a look at how such risks might be

contained in future through technical im-

provements. The incident described above

shows that, when banks have little trust in

each other, a relatively trivial break-down

in the funding process could cause a po-

tentially fatal chain reaction. Further, thatoperational processes are typically not

robust enough to withstand a temporary

lack of liquidity in a nervous market envi-

ronment. Two observations stand out:


8/20


Process fragmentation along the

liquidity/settlement chain deprives

management of an end-to-end view

(eg funding activities are not reconciled

in time with actual settlement of fund-

ing transactions).

Information is lacking on the actual

status of a transaction at every point in

the value chain.

What is causing these two issues and why

have they not been better addressed?When seeking answers, its useful to take

a holistic view of the settlement value

chain. The first problem is silo thinking.

Organizations tend to be fragmented

along the value chain for the more effi-

cient division of labour. For example, the

cash management team reports positions

to the trading floor where funding trans-

actions are executed. These are in turn

settled by a settlements team. In return

for economies of scale, the organiza-

tion gives up a big-picture overview of the

front-to-back process, smooth informa-tion flow between different parts of the

organization and optimal use of available

information.

A second challenge is infrastructure

complexity. Most banks operate complex

legacy infrastructures. Yet systems need to

be able to exchange information interac-

tively along the entire value chain.

The problem is compounded by an his-

torical lack of universal interbank reporting

standards. Until recently, at least, banks

had no interbank reporting standard that

could fulfil all their needs regarding infor-mation content, timing and delivery chan-

nel. Existing reporting standards either

lacked specific information or allowed too

much variation in the interpretation of the

standards or were not fully interactive.

Then there are the vested interests.

Clearers can and do benefit when less-

than-transparent reporting of cash posi-

tions prevents their clients from manag-

ing their balances effectively. The resulting

free balances generate interest revenues

for the clearing institution. Such incen-

tives may somewhat mute the clamour formore transparent and comprehensive

reporting solutions.

Nevertheless, a number of measures are

available that could help to resolve the is-

sues of process fragmentation and insuffi-

cient information. Reporting solutions are

prominent among them. In the case dis-

cussed above, the client bank could not

see whether funding payments had actu-

ally been received on his nostro account

and only learned the true position one

day later, when reconciling the end-of-

previous-day account statement. Intradayaccount reporting that included transac-

tion details would have filled in this infor-

mation gap.

The chart (below) provides an overview

of the most commonly available reporting

solutions. Within the banking world,

SWIFT is the standard for most settlement-

related reporting. Proprietary e-banking

type solutions may provide more integra-

tion along the value chain but not neces-

sarily the depth of integration required to

interoperate effectively with the systems of

client banks. Depending on the numberof nostro relationships, a proprietary

reporting solution may not be effective un-

less it is capable of integrating information

from various providers.

In some areas, industry utilities have

carved out a space as providers of business

process outsourcing services that include

related reporting such as trade confirma-

tion matching. The drawback to most of

these solutions is that they focus narrowly

on a specific element in the settlement

value chain and therefore may not meet

client needs in all three reporting dimen-sions, namely information content, timing,

and channel.

Solutions

In our opinion, one solution to watch is

SWIFTNet Cash Reporting. This is the first

format to provide an interbank reporting

standard that spans the entire settlement

value chain, is interactive and capable of

carrying all the required information. On

both the supply and demand side, the

take-up of SWIFTNet Cash Reporting has

been relatively slow so far. This reflects thesignificant infrastructure investment and

system integration that are required to

fully exploit its benefits.

On the supply side, the challenge is two-

fold. First, there is the considerable techni-

cal challenge of collecting all transaction-

related information across various business

lines and making it available through a sin-

gle channel. Then there is the commercial

headache involved in giving up the bene-

fits of todays less-than-fully transparent

reporting in exchange for potential future

market differentiation and client gratitude.On the demand side, the challenge con-

sists mainly in the required infrastructure

investment. That said, systemic stresses,

as seen in our case study above, suggest

that real-time cash reporting is soon likely

to win a growing volume of support across

the industry. As always, the market will

decide.

Ties TiessenUBS Global Wealth Management &Business Banking, Cash Custody Solutions

[email protected]

Systems need to be ableto exchange informationinteractively alongthe entire value chain

Chart: The road to real time

Source: UBS

Overview of reporting solutions

TradeExecution &Capture

TransactionProcessing &Enrichment

CashManagement

Funding &CollateralManagement

Settlement& PaymentExecution

NostroReconciliation

Investigations& ClaimsManagement

Channel

SWIFTNet Accord

Timing

Content/Format

SWIFTMT941/942

Misys Treasury

Traiana

GTSS

FXALL Settle-ment Center

SWIFTNet E&I

SWIFTMT900/910/942

SWIFTMT940/942/950

SWIFTNet E&I

SWIFTNet Cash Reporting

Integrated proprietary e-banking solutions


9/20


Research

Less carbon, similar return

Launched in March, the UBS Europe

Carbon Optimized Index contains the

same 600 companies as its benchmark,the DJ Stoxx 600 Index. It matches the

benchmarks sector weightings, but

overweights carbon-efficient companies

and underweights the carbon-ineffi-

cient ones, based on data from Trucost,

an environmental research organiza-

tion. The carbon footprint of the index

is therefore 3040% lower than the

benchmarks but offers similar returns.

The index thus offers an alternative to

existing green investments that ei-

ther use a negative screening process

(excluding high-carbon sectors suchas oil and gas altogether) or focus on

solution providers such as alternative

energy companies.

New directionsResearch is more than ever a source of competitive advantage and new products

Sometimes traditions can mask radical

upheavals. Market observers might have

concluded that nothing had changed

when the 2008 Thomson Extel Survey

named UBS as the top Pan-European Bro-kerage Firm for Equity and Equity-Linked

Research for an eighth consecutive year.

But they would be mistaken. Over the past

decade, the securities research business

has been through wrenching overhauls to

its regulatory and compliance regime, as

well as its economic model.

The way sell-side research is done may

have changed, but its importance is grow-

ing as clients demand increasingly custom-

ized investment solutions. Indeed, fund

managers continue to rely on broker re-

search to a greater extent than commonlyacknowledged. Getting the answers to

their questions still depends on deep

industry knowledge, backed by access

to corporate management, sector exper-

tise and contacts. The research business

is polarizing. On one hand, the number

of specialized boutiques is growing fast.

On the other, the large research depart-

ments maintained by the major investment

banks are gaining increasing prominence

as idea factories.

With 600 analysts, associates, strategists

and economists covering companies thatrepresent more than 90% of total global

market capitalization, UBS views research

as a key source of competitive advantage

for its clients. Coverage is global and cross-

Research contributed to UBSs new European carbon-optimized stock index

asset, serving the needs of a wide range

of client institutions including traditional

money managers, hedge funds, pension

funds, insurance companies, and sover-

eign wealth funds. The banks teams haveproduced many high-impact studies within

the past year, including George Magnuss

widely publicized work on the Minsky

moment (see News for Banks, Summer

2008 edition) and several studies on food

prices and inflation.

In keeping with the industry trend to-

wards differentiated thinking, UBS re-

searchers have launched a Global Bearreport, which is a fortnightly selection of

sell-rated ideas from analysts around the

world.

Complex issues

Meanwhile, the Q-Series covers complex

issues that affect investment decisions. A

recent study looked at the marginal cost of

oil production, helping investors to identify

where the floor for oil prices might lie.

Research does not stop with research.

UBS analysts have also collaborated with

the banks derivatives experts to launcha number of research-driven structured

products that include the Constant Matu-

rity Commodities Index (CMCI), an innova-

tive index product that addresses irritants

such as volatility and roll yield. (See News

for Banks, Autumn 2007 edition.) Another

research-backed product, the Europe Car-

bon Optimized Index (see box), caters to

increasing investor concerns about climate

change. The research business has come a

long way in eight years, but UBSs inten-

sive focus on clients and ideas remains a

constant.

Mark Steinert UBS Investment BankGlobal Head of Equity [email protected]


10/20


Offshoring

The talents of two citiesHow UBS went to Hyderabad and Krakow and found what it was looking for

Offshoring is about tapping into new

sources of skill and talent. When UBSopened its India Service Centre (ISC) at

Hyderabad in 2006, a single newspaper

advertisement attracted some 15,000 job

applications in just the first week. In the

early stages, the recruitment and selection

team dealt with this challenge by inter-

viewing first-round candidates en masse

over selected weekends. One surprise

was that parents sometimes accompanied

their grown-up offspring to the interview.

In India, the familys opinion of a future

employer counts. Up to 100 people per

month were hired, with the result thatthe ISC is now up to almost 1,900 full-

time UBS employees who are active in a

number of roles, from IT infrastructure

through securities research.

UBS in Poland: offshoring is more about tapping into new sources of skill than cutting costs

Several general trends are highlighted

by UBSs first centrally coordinated ventureinto offshoring which can be defined as

the transfer of business processes to a pro-

vider located outside a firms home coun-

try, typically in a location with surplus

talent. This is an important point. Lower

costs are still a motivating factor for off-

shoring ventures, but, these days, criteria

such as access to skills and talent, as well

as higher efficiency, have moved to the

forefront when companies decide to move

activities offshore.

Knowledge processingA second trend is that offshoring is no

longer just about IT. The range of activi-

ties now regularly offshored encompasses

both business and knowledge processes,

from complex processing to analytics and

research. The former category, known asbusiness process offshoring (BPO), com-

prises specific business tasks that often

involve executing either complex or stand-

ardized processes. Sample BPO functions

include back-office work, billing, purchas-

ing, payments processing, trade finance

operations, and payroll administration.

BPOs more advanced sister, knowledge

process offshoring (KPO), consists of

processes that demand research, judg-

ment, analysis and decision-making skills.

Sample KPO work includes management

information system (MIS) reporting, busi-ness research, financial modelling, and

product design. As the banking industry

is heavily impacted by knowledge-based

economies and their workers, offshoring


11/20


becomes an increasingly important re-

source for the sector.

Would-be offshorers have an increas-ingly wide range of destinations to con-

sider. While India and offshoring were

once almost synonymous, other countries

have made headway in marketing their

attractions. China, the Philippines, Roma-

nia, Malaysia, and others now vie for the

jobs and investments that offshoring con-

tracts bring.

The UBS offshoring story started in

2005, when the companys group exec-

utive board decided on a multi-hub ap-

proach. It created a Group Offshoring unit

in its Corporate Center to coordinate thebuilding of wholly owned offshoring sub-

sidiaries known as captives. The team

would also work with the banks three

business groups to select and move func-

tions to these centres. After an extensive

economic and risk-based selection process,

the core project team selected India as the

first location. The UBS India Service Cen-

tre (ISC) at Hyderabad, a city with a pop-

ulation of 7 million on the Deccan Plain,

was completed in a bare nine months and

opened its doors in March 2006.

Client benefits

The Hyderabad centre supports UBS busi-

ness units worldwide by providing both

knowledge and business processes that

range from research on single securities to

the processing of over-the-counter deriv-

atives for institutional clients. It also hosts

a cohort of IT infrastructure specialists as

part of a global hub arrangement. Bene-

fiting from the experience of other west-

ern firms in India such as McKinsey, UBSs

Group Offshoring unit has developed ge-

neric services such as presentation prep-aration, creative design, and web page

development that can be used on a pay-

as-you-go basis by business units world-

wide. This saves time, as well as money

that might otherwise go to external agen-

cies and consultancies.

Building on its successful experiencein Hyderabad, the UBS offshoring team

next identified a need for a captive in cen-

tral Europe. The location was mandated

here by the need for staff fluent in Ger-

man and French among other European

languages.

With the asset management units

fund services business as launch user, the

group executive board approved the cre-

ation of a Poland Service Centre (PSC) in

Krakow on February 7, 2007. The project

team selected Poland because it possesses

the largest working population in CentralEurope, as well as one of the youngest.

With half the population under the age

of 34, and 2 million students enrolled

at university, Poland produces almost

400,000 graduates per year from 126

institutes of higher education, including

35 universities. Already operational and

opening officially in the course of 2008,

the PSC will support some 250 job roles.

Like its Indian sister, it supports a number

of business and knowledge-based func-

tions and will carry out typical back-office

activities.UBS has brought home a number of

lessons from its offshoring journey. First,

the human resources function has to

be robust in all areas if it is to weather

the frenetic dynamics of some offshore

labour markets. Recruitment, on-boarding,

and retention all need to be thoroughly

proven. Secondly, culture counts. Inevi-table frictions are greatly mitigated by

better cultural understanding and integra-

tion. Culture implies not only adjusting to

different national cultures, but also the in-

tegration of new service centre employees

into the firms own culture. At UBS, the

challenge has been to integrate across cul-

tures Indian, Polish, American, British,

Swiss while also accommodating the

very different business cultures of the in-

vestment bank, wealth management, and

asset management arms. Thirdly, firm-wide

metrics need to be developed that gobeyond mere headcount numbers and

savings and take account of the qualita-

tive and long-term benefits of offshoring.

Ultimately, the primary measure of suc-

cess in offshoring is how far the company

can hone its efficiency and effectiveness

and, of course, pass on these benefits to

its clientele.

Kevin D. StringerUBS Corporate Center, Group [email protected]

The primary measureof success is how far thecompany can hone itseffectiveness and pass onthe benefit to its clients

Building on success in Krakow


12/20


Conferences

Outlook cloudyRecovery from the banking and credit crisis willtake years, warned George Magnus at this yearsInternational Banking Seminar

Continuity: Wolfsberg has been home to IBASEM for thirty-one years

Low stratus obscured the sun on the

first day of IBASEM 2008 (see box). The

sombre skies provided a suitable backdrop

for George Magnuss economic outlook,

which headed up the days programme.

If the current crisis were just about

liquidity, we would have sorted it by now,

said UBSs senior economic advisor. But

doubts about solvency as well as liquidityare now stalking the financial sector, as

they did during Americas savings and

loan imbroglio and Japans more recent

banking crisis.

The bad news is that the path to recov-

ery will be protracted. This is no short,

sharp shock, like the 1998 Asia crisis or

the post-2001 slump. As markets shrink

from providing the credit needed to allevi-

ate the downturn and keep troubled lend-

ers in business, governments and central

banks are stepping in to prevent a vicious

circle of deleveraging and damage to thereal economy. By effectively nationalizing

the securities repo market, the Fed is doing

a great job of preventing such a melt-

down, Magnus said.


13/20


Despite these efforts, growth rates

are set to suffer. During the last years of

the boom, some 40% of Americas GDP

growth came from FIRE, an acronym en-

compassing finance, insurance, and real

estate sectors that are now out for the

count. In Britain, FIRE may have burnedan even bigger hole, having accounted for

more than half of the UKs GDP growth

in recent years.

Mind the gap

If the developed economies sneeze,

who will catch a cold? Skeptical that de-

coupling will save the global economy,

Magnus expects growth to slow also in

emerging economies. With output gaps

widening in most of those countries, in-

flation is also shaping up as a global af-

fliction. Supply shortages are not the onlyreason for price rises; monetary expansion

is also a significant factor, in both the de-

veloped and developing world. That is not

to say, however, that the policy response

should be the same everywhere. Ideally,

the developing world should tighten to

keep already rampant inflation within

check. By contrast, the developed countries

should keep the monetary spigot open, to

ease the strain on their shell-shocked

financial systems. The good news for the

US and the UK is that accelerating inflation

rarely, if ever, follows a banking crisis.All this raises the question of how the

banking crisis itself will play out. The Scan-

dinavian experience of the early 1990s

provides a few hints, Magnus believes.

Benchmark eventIBASEM is the International Banking Seminar, an annual event for clients of

UBS. The Bank for Banks. The 2008 iteration took place from May 19 22 at

Wolfsberg, Switzerland. Some thirty delegates converged on the rural canton of

Thurgau from banks as far afield as the US, China, Vietnam, and almost everywhere

in between. This year, participants heard presentations on a wide range of topics

in banking and economics. Like many of their predecessors, they also took time out

to visit the nearby Rhine Falls. Much water has flowed over those celebrated

cascades since the first IBASEM convened thirty-one years ago. Meanwhile, the price

of a barrel of oil has risen from less than $15 to more than $120. But some things

remain the same. IBASEM is still a pre-eminent venue for exchanging ideas and

views and simply getting to know people better.

George Magnus issues FIRE warning

House prices declined by one-quarter in

Sweden and almost one half in Finland,

peak to trough. Equity markets lost evenmore, while GDP contracted by almost 8%

in Finland and by roughly 2% in Sweden

and Norway, peak to trough. It then took

about four years to rebuild personal sav-

ings. Restoring the banking sector to rude

good health required a few more years.

The upshot, concludes Magnus, is that

a Japan-style lost decade can probably be

averted. That said, the effects of the crisis

itself and the associated regulatory back-

lash could be long-lasting. And the US and

European financial systems will achieve a

Scandinavian-style resolution of their prob-lems only if regulators and market partici-

pants continue to play their cards right.

For more detail, see George Magnuss

UBS Economic Insights Deleveraging:

a different kind of downturn,June 2008.

The upshot is thata Japan-style lost decadecan probably be averted.That said, the effects of thecrisis itself and the asso-ciated regulatory backlashcould be long-lasting


14/20


Mobilizing the reservesCentral bankers convene to discuss how best to invest their trillions

Put yourself in the well-polished brogues

of a central banker. Sovereign institutionssuch as your own preside over a staggering

$13 trillion worldwide that is one out of

every 12 investible dollars on the planet.

Burgeoning reserves may seem enviable,

but they also bring outsize headaches.

How do you keep up the value of your

holdings when the dollar, long the worlds

favourite reserve currency, is fraying at the

edges? And how do you respond to politi-

cians who would like you to pay more into

the public purse?

All these questions help to explain why,

every June, central bankers from all overthe world converge on the UBS Reserve

Management Seminar (see box). In keep-

ing with the collaborative spirit of the

event, a central feature is the survey of

central bank investment practices. Com-

piled by UBSs relationship managers for

sovereign institutions over the past decade,

these statistics provide a valuable picture

of whats changing and whats not in the

otherwise understated world of central

banking.

Introducing this years survey, confer-

ence organizer Terry Keeley noted thatonly 3% of respondents still invest exclu-

sively in US treasuries or deposits, down

from almost one-third just five years ago.

But its too soon to sound the dollars

death-knell. As Keeley noted, the green-

Central bank investment strategies may be less conservative than the architecture suggests

back remains overwhelmingly the largest

reserve holding. At the same time, only alimited number of European and Middle

Eastern central banks have made a signif-

icant move towards the euro. This year,

only 12% of respondents said they would

increase their euro holdings, sharply down

from 45% in 2006 07. More than one-

third said they would not change their cur-

rency allocation.

Other forms of diversification are pop-

ular, though. Many sovereign institutions

have parlayed some of their dollar hold-

ings into higher yielding US agencies a

category that includes paper issued by thefederal mortgage institutions and even

corporate debt. Almost one-fifth of re-

spondents, including the Swiss National

Bank, now invest in equities, up from 2%

only five years ago.

Futures and forwards

A growing familiarity with derivatives is

also evident. Some 70% of respondents

use them in managing their portfolios, up

from just over one-half in 2002. The most

common instruments are bond contracts,

eurocurrency futures, foreign exchangeforwards, interest rate and currency swaps,

and OTC options for foreign exchange and

gold, in that order.

Speaking of gold, the first signs of a re-

think may be evident. Back in the 1990s,

it became fashionable to sell down hold-

ings of bullion. So far, the rally in goldprices has prompted only a handful of cen-

tral banks to make significant purchases

although China has picked up roughly

as much as Austria sold. But 7% of this

years respondents said they planned to

increase their gold holdings. Thats more

than twice the number who favoured a

higher weighting of equities. In a world of

change, some central bank traditions are

remarkably durable.

Martin Hood News for Banks

[email protected]

Conferences


About the ReserveManagement Seminar

First held in 1995, the Reserve Manage-

ment Seminar brings together partici-

pants from central banks and sovereign

institutions worldwide. Taking place

this year at Thun, Switzerland from

June 1 6, the seminar attracted repre-sentatives from more than 70 sovereign

institutions, which collectively manage

three-quarters of the worlds total

reserves.


15/20


Blue Sea thinkingA new index on sea-freight derivatives helps investors tap into the China story

In the same week that UBS launched

its Blue Sea index on freight derivatives,the 203,512-tonne bulk carrier China

Steel Team was booked to carry iron ore

from Brazil to China. At a record-break-

ing $303,000 per day, the freight rate

was more than three times higher than

the ships last fixture, just one month pre-

viously. China Steel Team is one of fewer

than 600 Capesize bulk carriers in the

world. And as the name of this particu-

lar one suggests, Chinas prodigious appe-

tite for raw materials is keeping all of them

busy. Thats not surprising, when you con-

sider that Baosteel, Chinas leading steelproducer, needs 150 ship-loads of ore

every year to feed its blast furnaces.

Statistics like these explain why sea

freight rates are rocketing, particularly for

dry bulk cargoes such as iron ore or coal.

According to Simpson Spence & Young, a

consultancy, average dry bulk freight rates

reached almost $220,000 per day in May,

up from $80,000 or below in January

and a previous long-term average of

$15,000 $20,000. Capacity shortage is

responsible for part of this squeeze but

a lack of tonnage is not the whole story.Even if the 185 or so Capesizers on order

could be delivered tomorrow, ports and

cargo terminals are too choked with ship-

ping to allow them to load and unload

The sea may be calm but the freight rates are volatile

Solutions

on time. The upshot is a rising trend in

freight rates, coupled with spectacular vol-atility; the benchmark Baltic Exchange sea

freight index for dry commodities sagged

by more than a third between November

last year and mid-January 2008 on fears

of a US recession, although it has since

bounced back.

That volatility, of course, has already

attracted banks, hedge funds, and other

financial institutions. So far, would-be

investors have looked to the existing mar-

kets for sea-freight derivatives, which are

based mainly on futures and forwards on

the principal reference indices. What waslacking, however, was a packaged instru-

ment that offered a balanced exposure to

a representative spectrum of the dry-bulk

freight market. It was this gap that UBS

sought to fill when it launched its Blue Sea

Index on May 22.

Congestion factor

UBS Blue Sea is the first fully integrated in-

dex to be benchmarked on the most ac-

tively traded dry-bulk forward freight

agreements. FFAs are non-standardized

over-the-counter forward contracts basedon one of several underlying freight indi-

ces. They are agreed between two parties

for a specific route, for a specific delivery

rate and a specific vessel type. The index

also incorporates a Port Congestion Fac-

tor that takes into account the effect onfreight derivative prices of loading or un-

loading delays in more than 60 iron ore

and coal ports worldwide.

The index is aimed primarily at investors

who are interested in freight as a generic

asset class. In addition, shipowners and

charterers could use the index to hedge

their total exposure to freight rates. For

this purpose, sub-indices are also available.

These are based on the three categories of

bulk carriers that comprise the main index,

namely the Capesize giants and the hand-

ier-sized Panamax and Supramax types.Its too early to say which types of

investor will make the most intensive use

of the new index. But Blue Sea has cer-

tainly captured the attention of industry

experts. Lloyds List, the longest-standing

daily newspaper for the maritime industry,

commented as follows: This new UBS

initiative deserves to be watched as it may

introduce a new level of sophistication to

the freight derivatives market by opening

it up to investors who are not necessarily

freight professionals. The Blue Sea Index is

indeed blue sky thinking.

Ilija MurisicUBS Investment Bank, Hybrid Derivatives [email protected]


16/20


Solutions

Engine of empowermentHow an online tool adds wow to the art of designing and distributingequity structured products

Equity Investor puts bespoke structured products at your fingertips

Like many investors in troubled times,

Rob Muster is in two minds. Although he

retired two years ago from an executive-

level job at an insurance firm, he keeps in

touch with the markets and runs his own

portfolio. Some of the bombed-out

finance stocks harbour quite a bit of value,

he suspects. But the current volatility

makes him nervous and he didnt build his

career at a blue-chip life company by

taking uncontrolled bets.The situation, he judges, calls for a prod-

uct with some measure of downside pro-

tection but, in the past, few such gizmos

appealed to him. Either the minimum in-

vestment would be too high or the tenor

would be too long. He doesnt want to

invest 2 million and hed prefer not to be

locked in for a year. Still, he might as well

arrange a meeting with his helpful client

advisor, Pia Esempio, to see what she has.

Muster is pleasantly surprised. Over a

cup of coffee, Esempio shows him a variety

of investment possibilities some with

higher upside, such as the PERLES Plus\Bo-

nus Certificates, and others that lean moretowards yield enhancement, such as Kick-

in GOALs\Reverse Convertibles. Right there

on her laptop, she explains, she can build

a matrix of potential real-time yields across

over 200 underlying securities and six dif-

ferent structured product categories. And,

no, he doesnt have to invest 2 million.

Indeed, the minimum can be just 50,000.

Tenors can be short too: anything down to

one month for selected products.

Wow, Muster thinks, this is a different

experience. Esempio could echo that senti-

ment. Since her bank adopted UBSs

Equity Investor tool (see box), her clients

have shown markedly more interest instructured products. Thats not surpris-

ing, as shes now able to offer products

that exactly match their market views and

risk appetites. In short, she feels empow-


17/20


UBS Equity Investor at a glance

UBS Equity Investor is an online interface that enables advisors to create equity-based

instruments that exactly match client needs. Products available through Equity Inves-

tor include GOALs (reverse convertibles), BLOCS (discount certificates with or without

a barrier) and PERLES Plus (bonus certificates). Used by UBS client advisors across

Europe and Asia for a number of years, the Equity Investor application is now also

available to UBSs partner institutions. The tool integrates several key components:automated real-time pricing for products that UBS makes markets in; access to re-

search and tutorials on product structures; and straight-through transaction process-

ing and the after-sales service required for equity products.

ered. It certainly wasnt like this just a few

years ago. Creating a new structured prod-

uct used to involve a lot of manual screen-checking and phoning as often it still

does. If only, people like Esempio used to

sigh, structured products could be sum-

moned up on demand, like a genie out of

a lamp.

That very wish, in fact, motivated the

development of UBS Equity Investor. Its

predecessor, FX Investor, was deployed as

early as 2002. This online tool went far

towards establishing foreign exchange as

an asset class in its own right among pri-

vate clients. A particular attraction of FX

Investor is that it allows client advisorsto structure their own double-currency

deposits (DOCUs) effectively deposits

matched to a currency call option. As

investors built up huge cash positions dur-

ing the post-2001 market meltdown, the

DOCU became the right product at the

right time. (See The discreet charm of the

DOCU in News for Banks 1/2006).

Technical challenges

The question now was whether UBS could

apply the technology of FX Investor to eq-

uity structured products. That was no sim-ple task. While foreign exchange is one of

the most highly standardized commodi-

ties on the planet, equities are less homo-

geneous than the cheeses of France. Thus

structured products on equities must take

account of the underlying securitys physi-

cal settlement requirements, corporate

actions, dividends, varying exchange open-

ing hours and regulatory environments.

The technical challenges also included

automated real-time pricing for the instru-

ments on offer, straight-through transac-

tion processing, and full integration withthe banks risk-management systems.

Equity Investor also had to mesh with

KeyInvest, a suite of databases that serves

as the shop window for all UBSs invest-

ment products. Advisors refer to KeyInvestto check if a structured product already ex-

ists that will fit their clients needs. If not,

they can then use Equity Investor to create

one.

Client advisors were quick to take ad-

vantage of the tool when UBS rolled out

Equity Investor within the firm in 2003. A

special version was also deployed in the

banks Asia Pacific region, where it soon

established itself. Accumulators a struc-

tured product designed to let investors buy

shares efficiently over a period of time in a

moderately buoyant market proved a hitduring last years bull run in Hong Kong.

The next step was to offer the tool to

its partner institutions. The first third-party

users signed up late last year. Which is why

the wholly fictional Rob Muster is nowmeeting with the gracious and efficient

(but no less imaginary) Pia Esempio.

Muster still hasnt finished his coffee but

hes already fairly certain what kind of

structure would suit him. Hed like a return

of around 10%, and so Esempio suggests

that they invest in a banking sector index

via a three-month reverse convertible with

a 25% risk buffer.

If the index trades sideways during the

next three months, Muster will receive an

above-market rate of return. After three

months, the parameters can be re-alignedto generate 10% for the next three

months, depending on market conditions

at the time. The instrument will perform

less well than the index only if, against

expectations, the index should rise dramat-

ically over the period. And, even if the

index should fall below the specified strike

price, he will lose less than if he held the

underlying stocks. Muster agrees, and the

deal is done in seconds. Yes, this was a

really different experience, he thinks. And

the coffee wasnt bad either.

Gavin StanleyUBS Investment Bank, Derivatives [email protected]

Specially created products make for a superior client experience


18/20


FX fanfare

UBS was named as Best Banks Platform

(for e-tools and service) and Best Bank forPost-Trade Services in Profit & Loss maga-

zines Digital FX Awards 2008. Regarding

the Best Banks Platform award, the mag-

azine said: Years of experience clearly

count for UBS. Since we started awarding

client segment service trophies in 2004,

UBS has won this prize every year and

2008 is no different. True, this is partially

because the bank has an excellent service

model for its banking brethren which

relies upon offline and online services, but

as we have repeatedly stated UBS does

the simple things really well.

In brief

Seminar for sovereigns

The inaugural UBS Sovereign Wealth

Fund conference took place in Abu

Dhabi in April. Attended by represent-

atives from 25 sovereign institutions

around the world, the event covered

topics such as best practices for sov-

ereign wealth funds, asset allocation

and the implications of strategic equity

holdings. Keynote speeches addressed

topics including public relations, private

equity, and cross-border capital flows.

According to financial services consul-

tancy Cerulli, sovereign wealth fundshave allocated an estimated $1.3 trillion

to external managers for investment in

global capital markets. This amounts

to about 44% of the funds total esti-

mated assets. The event was one of the

first to focus expressly on the needs of

sovereign wealth funds.

Works outing

Some 60,000 artists, collectors, gallery owners and curators converged on Switzerland

this June for the 39 th Art Basel. Sponsored by UBS for the past 15 years, the event is

widely recognized as a leading forum in the international art world. The 300 exhibiting

galleries were selected from 1,000 or more applications. The galleries showed works

by more than 2,000 artists. Art Basel Miami Beach, a sister event, is scheduled for

December 4 7, 2008.

Face to face with 300 exhibitors at Art Basel

Bridge to the Netherlands

UBS has signed an agreement to acquire the VermogensGroep, an independent

Amsterdam-based wealth manager. This transaction will create one of the foremost

wealth management firms in the Netherlands. VermogensGroep serves wealthy

private clients, foundations and institutions in the Dutch market with 38 staff work-

ing in Amsterdam. The firm manages client assets of approximately 4 billion and

an additional 10 bil lion assets under administration. The core business of Ver-

mogensGroep is the provision of its wealth intelligence and control solution (consist-

ing of investment management, monitoring and reporting services) to ultra-high net

worth clients. VermogensGroep will be fully integrated into UBSs operations over

time. Closing of the transaction remains subject to regulatory approval.

Cash call

Cash being a global business, UBS gath-

ered participants from a dozen or so

countries at its second International

Cash Seminar, which took place at Thun,

Switzerland, in July. The first day opened

with a presentation and intensive work-

shop on liquidity management, including

a session on collateralized funding and

liquidity strategies. A guest speaker fromthe Swiss National Bank contributed a

central bank perspective on the topic. The

second days sessions focused on global

cash infrastructure and settlement risk.


19/20


Inflation investigated

Rising prices will have a mixed effect on emerging markets corporates, conclude

UBS Investment Bank analysts in a new study entitled What will inflation mean for

Global Emerging Markets? Food and energy costs, the main culprits behind rising

inflation, tend to have a stronger effect in emerging markets than they do in devel-

oped countries, say the researchers. Rising inflation has a negative impact on equity

markets as it raises the equity risk premium and reduces the quality of earnings.

Companies that outperform in this environment are ones with pricing power, where

fixed costs benefit from long-term pricing contracts, or ones with some leverage but

limited refinancing needs. The upshot: materials, energy and financials are likely to

do relatively better than IT and healthcare in these markets.

Administrative accolade

UBSs Fund Services unit was recentlynamed Americas Fund Administrator of

the Year (Offshore) by ICFA Magazine, an

industry journal. Part of the banks asset

management arm, Fund Services is a dedi-

cated fund administrator that provides

tailored and flexible services for retail and

institutional funds, as well as for hedge

funds and alternative investment vehicles.

Its administration centres are located in

Canada, the Cayman Islands, Ireland,

Luxembourg, Poland, Switzerland and the

UK, with additional offices in Hong Kong

and New York.

News for Banks is a quarterly newsletter for banks and financial institutions worldwide

Published by: UBS AG, P.O. Box, 8098 Zurich, Switzerland. E-mail: [email protected]: Sylvia Goepfert, Kathrin Wolff Schmandt, Markus StraessleEditorial board: Sylvia Goepfert, Manfred Kroeller, Markus Straessle, Reto Gadient, Kathrin Wolff SchmandtEditor: Martin HoodPhoto credits: Getty 1, 2, 7, 9, 14, 15, 17, 19; Kursiv 3, 18; Erwin Zueger Photography 5, 6, 12, 13; UBS 10, 11, 16; Art Basel 18Layout: UBS AG, Procurement/Publishing, Basel

Copyright: UBS 2008 Printed in Switzer land. Reproduction or quotation is permitted on request provided the source is stated.

While the facts in this publication have been carefully researched, UBS cannot be held responsible for their accuracy.The opinions expressed may differ from official UBS views. This publication is for information only and is not intended as an offer, or a solicitationof an offer, to buy or sell any investment or other specific product or service from any person in any jurisdiction. Certain products and services aresubject to legal restrictions and cannot be offered worldwide on an unrestricted basis.

Bankers are forever

James Bond fans will remember 2008 for

two reasons. May marked the centennial

of Ian Fleming, the secret agents crea-

tor, while the latest 007 film debuts in No-

vember. This could be the moment, then,

to highlight two connections albeit tenu-

ous between UBS and the prolific author

of spy novels. In 1935, at the age of 27,

Ian Fleming joined the City of London firmRowe & Pitman, an antecedent firm of

todays UBS. As history relates, however,

Fleming was to find his mtier in a differ-

ent field. He left the firm to join naval

intelligence in 1939. For its part, Rowe &

Pitman made do without his services

until it was bought by SG Warburg in

1986. Swiss Bank Corporation then

absorbed Warburg shortly before its own

merger with Union Bank of Switzerland.

The Bond franchise and the bank have

crossed paths on just one other occasion:

a UBS gold vault featured briefly in Gold-finger, the Bond film first screened in 1964.

As Auric Goldfinger might have said, once

is happenstance but twice is coincidence.

Show in Shanghai

A selection of works from the UBS Art Collection was exhibited at the Shanghai Art

Museum from June 6 to July 20, 2008, marking a new milestone for the collection.

Entitled Memories for Tomorrow, the exhibition featured memorials of past events

and visions for the future. Works from the collection have already been shown at the

Museum of Modern Art (MoMA) in New York, at the Tate Modern in London, at muse-

ums in Sydney and Melbourne as well as at the Mori Art Museum in Tokyo. Further

exhibitions are planned for later this year and 2009.


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