Market Risk Control. Andrew Threadgold, Group Head of Market Risk

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1 Market Risk Control Andrew Threadgold, Group Head of Market Risk June 4, 2007

2 Key messages Strong risk management and control culture Comprehensive framework of market risk controls Highly qualified risk control staff Not easy to compare risk measures across firms 1

3 Philosophy of Market Risk Control A sound foundation: Risk Identification Risk Measurement Risk / Return Asymmetries Concentrations Tails 2

4 Market Risk measurement and limits Comprehensive framework of market risk controls Portfolio measures Concentration measures Risk factor Operational limits Stress Issuer risk 3

5 Portfolio risk measures and Stress Portfolio measures Stress Note: these are both net risk measures 4

6 Value at Risk: Internal & regulatory measure What is? Statistical estimate of the worst expected loss over a given horizon at a given confidence level Frequency 1% P&L Internal External Regulatory 5

7 Value at Risk at UBS Historical simulation Positions full risk slides Historical simulation 5-yr historical price series -over 9000 series of prices and volatilities - 5 yrs historical daily data - 10 day horizon - 99% confidence level 6

8 Value at Risk at UBS Idiosyncratic components Equity idiosyncratic risk Deal break Potential Stress rating migration Historical simulation + Idiosyncratic components = 7

9 UBS disclosure 8

10 Value at Risk - A long term view Jul-98 1-Oct-98 1-Jan-99 3-Apr-99 4-Jul-99 4-Oct-99 4-Jan-00 5-Apr-00 6-Jul-00 6-Oct-00 6-Jan-01 8-Apr-01 9-Jul-01 9-Oct-01 9-Jan Apr Jul Oct-02 (CHF m) 12-Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan day 99% confidence

11 Value at Risk Comparability of numbers 10

12 Value at Risk Investment Bank: revenue distribution 2006 Frequency in number of days < to to to to to 0 0 to to to to to to to to to 180 >180 Revenues in CHF million Backtesting revenues 1 Full revenues 2 Source: management accounts 1 Backtesting revenues exclude non-trading revenues, such as commissions and fees, and revenue from intra-day trading 2 Full revenues include all revenues from business areas which have trading activities 11

13 Value at Risk UBS history This graph shows the 1-day 99%, and the comparable backtesting revenues over 1 year to 30 th March

14 summary Robust process based on 5 years of history Add-ons make it conservative in a statistical sense Difficult to compare even with alternative calculations Backtesting revenues are disclosed 13

15 Stress Multiple scenarios; evaluated daily Stress calculation A Stress Positions B Potential loss A Potential loss B C Potential loss C Maximum potential loss Stress exposure

16 Stress testing framework Types of stress test Stress For LIMITS For INFORMATION Stress CORPORATE level Standard scenarios Additional standard scenarios BUSINESS level Specialised scenarios Ad-hoc scenarios 15

17 Concentration measures Risk factor limits and issuer risk controls Concentration measures Risk factor Issuer risk 16

18 Risk factor limits Focus on managing and controlling concentration Risk factor Risk factor limits Limits applied at the level of the individual market variable or group of correlated variables, e.g. US equity market level Oil price Exchange rates UK interest rates Credit spreads 17

19 Issuer risk Focus on managing and controlling concentration Issuer risk Issuer risk controls Controls applied to the potential loss from an event affecting a single issuing entity Entities Families Industries Countries 18

20 Market Risk measurement and limits Operational limits - many targeted limits Operational limits -based Stress-based Fundamental units Examples: volumes, market values, notionals, greeks, sensitivities, Risk factor Issuer risk 19

21 Summary Portfolio measures Concentration measures Risk factor Statistical measure: 99% confidence 10 day holding period 5 years historical data Scenario based measure Standard Ad hoc Operational limits Many targeted limits Providing the glue Individual interest rates, exchange rates, equity markets, commodity prices Credit spreads Individual issuers of debt and equity securities Stress Issuer risk 20

22 Questions 21

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