# UBS FINANCIAL SERVICES INC. X-17A-5 (2023-03-01) — Broker-dealer annual report - Company: UBS FINANCIAL SERVICES INC. - Form: X-17A-5 - Filed: 2023-03-01 - Period: 2022-12-31 - Accession: 0000200565-23-000002 - CIK: 200565 - File #: 8-16257 - Type: Broker-dealer - Material weakness: Yes - Auditor: Ernst & Young LP - Auditor location: New York, NY - Contact: Kathleen Horan - Phone: 201-352-8620 - Email: ralph.mattone@ubs.com - Website: ubs.com - Signed by: Ralph Mattone (Chief Financial Officer) Original filing: https://www.sec.gov/Archives/edgar/data/200565/000020056523000002/Balsheet3.pdf --- {0}------------------------------------------------ ![](_page_0_Picture_0.jpeg) CONSOLIDATED STATEMENT OF FINANCIAL CONDITION UBS Financial Services Inc. (a Subsidiary of UBS Americas Inc.) December 31, 2022 With Report of Independent Registered Public Accounting Firm {1}------------------------------------------------ **UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D,C. 20549 ANNUAL REPORTS FORM X-17A-S PART** Ill **FACING PAGE** 0MB APPROVAl **OMe** Number: 3235-0123 EKpires: Oct. 31, 2023 Estimated average burden hours per response: 12 SEC FILE NUMBER 8·226S1 **Information Required Pursuant to Rules 17a-s, 17a-12, and 18a-7 under the Securities Exchange Act of 1934** FILING FOR THE PERIOD BEGINNIN-G--~0=1/~0=l/~2~2 \_ \_\_,AND ENDING \_\_\_ 1\_2\_/3\_1\_/2\_2 \_\_ MM/DD/VY MM/DD/'N **A, REGISTRANT IDENTJFICATJON NAME** OF FIRM : \_ \_\_\_\_\_aU::..:B=-=S:;..;S=-=e::..;:c ... u;..:ri .... ti,.esa;...:aLL..,.C...,( ..... "t=h=-=e:....;C=a:.:..m=p=a:.:.n=--y\_").\_\_ \_\_\_\_\_\_\_\_\_\_\_\_\_\_ \_ **TYPE OF REGISTRANT (check all applicable boxes):** 0 Broker-dealer □ SeCtJrity-based **swap** dealer D Check here if respondent is also an OTC derivatives dealer □ Major security-based swap participant ADDRESS OF PRINCIPAL PLACE OF **BUSINESS:** (Do not use a P.O. box no.) 1285 Avenue of the Americas (No. and Street} New York **NY** (City) (State) PERSON TO CONTACT WITH REGARD TO THIS FILING 10019 (Zip Code) Mr. Ralph Mattone (212) 713-9711 Ralph.Mattone@ubs.com (Name) {Area Code-Telephone Number) (Email Address} **B. ACCOUNTANT IDENTIFICATION** INDEPENDENT PUBLIC ACCOUNTANT whose reports are contained In this filing• Ernst & Young U.C (Name - If individual, state last,, first, and middle name) One Manhattan West New York NY (Address) (City) (State) 10/20/2003 42 10001 (Zip Code) Ir• of Reglstratio, wm, PCAO B)Of applkable) FOR OFFICIAL USE **ONLY** {PCAOB "'''''"""" Nomber, If a"""~., I "' Claims for e>16,388 | |-------------------------------------|--------------| | Provision for credit losses | 1,895 | | Charge-offs | {8,220) | | Recoveries | | | Ending balance December 31, 2022 | \$
10,063 | #### **Depreciation and Amortization** The Company depreciates office equipment and software using the straight-line method over estimated useful lives of three to ten years. Leasehold improvements are amortized over the lesser of the estimated useful life of the asset or the remaining term of the lease. At December 31, 2022, property, equipment and software include \$409,499 related to internally generated computer software which are under development and not ready to use. #### **Income Taxes** The Company is included in the consolidated federal income tax return and certain combined state and local tax returns of UBS Americas. In addition, the Company files stand-alone returns in other state, local and foreign jurisdictions. Federal, state, local and foreign taxes are provided for on a separate return basis. In accordance with the provisions of FASB ASC 740 - "Income Taxes" ("ASC 740"), deferred tax assets and liabilities are recognized for the future tax effect of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Def erred tax assets and liabilities are measured using enacted tax rates expected to be in effect during the year in which the basis differences reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in earnings in the period that includes the enactment date. In the event it is more likely than not that a deferred tax asset will not be realized, a valuation allowance is recorded. ASC 7 40 also sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. This interpretation uses a two-step approach wherein a tax benefit is recognized if a position is more likely than not to be sustained. The amount of the benefit is then measured to be the highest tax benefit that is greater than 50% likely to be realized. #### **Goodwill and Intangible Assets** Goodwill represents the excess of the cost of an acquisition over the fair value of the Company's share of net identifiable assets of the acquired entity at the date of acquisition. Goodwill is not amortized but is tested, at least annually, for impairment in accordance with F ASB ASC 350, "Intangibles - Goodwill {14}------------------------------------------------ # Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* ### **2. Summary of Significant Accounting Policies (continued)** and Other". The Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If after the qualitative assessment the Company determines it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then performing the two-step impairment test is not required. However, if the Company concludes otherwise, then it is required to perform the first step of the two-step impairment test. The Company has an unconditional option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the twostep goodwill impairment test. The Company may resume performing the qualitative assessment in any subsequent period. The first step, used to identify potential impairment, involves comparing each reporting unit's fair value to its carrying value including goodwill and intangible assets. If the fair value of a reporting unit exceeds its carrying value, applicable goodwill and intangible assets is considered not to be impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to measure the amount of impairment. At December 31, 2022, the Company's goodwill primarily relates to the acquisitions of Piper Jaffrey Companies and McDonald Investments in September 2006 and February 2007, respectively. There was no goodwill impairment recognized for the year ended December 31, 2022. Intangible assets are recorded at cost, which represents the fair value of the acquired intangible assets at the date of acquisition and are amortized over ten years. At December 31, 2022, the Company held \$1,036 of intangible assets, net of accumulated amortization of \$1,682. The Company tests intangible assets, at least annually, for impairment by assessing whether the carrying value of the finite life intangible asset exceeds its fair value, based upon its future expected cash flows. There was no impairment recorded for intangible assets for the year ended December 31, 2022. ### **Share-based and Other Deferred Compensation Plans** UBS has established several share-based compensation plans that are settled in UBS's equity instruments or an amount that is based on the value of such instruments. These awards are generally subject to conditions that require employees to complete a specified period of service and, for performance shares, to satisfy specified performance conditions. For equity-settled instruments, fair value is determined at the date of grant and is not re-measured {15}------------------------------------------------ # Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* ### **2. Summary of Significant Accounting Policies (continued)** unless its terms are modified such that the fair value immediately after modification exceeds the fair value immediately prior to modification. For cash-settled awards, fair value is re-measured at each reporting date such that the cumulative expense recognized equals the cash distributed. UBS has established deferred compensation plans that are settled in cash or financial instruments other than UBS equity instruments, the amount of which may be fixed or may vary based on the achievement of specified performance conditions or the value of specified underlying assets. ### **Receivables from Customers and Allowance for Loan Losses** Receivables from customers consist of non-purpose loans (the "Loans") (see Note 7). The Company reports loans due from customers at the outstanding principal amount adjusted for any charge offs or allowances for credit losses. Loans are generally placed on non-accrual status at the point when a maintenance call is not satisfied by the borrower. Any accrued interest receivable related to a Loan that is placed on nonaccrual status is added to the principal amount due. Payments received while a Loan is on nonaccrual status are recorded as a reduction of principal. Income on non-accrual Loans is recognized only to the extent that cash payments are in excess of the carrying value of the Loan. If the borrower has demonstrated over a period of time, the ability to make periodic interest and principal payments as scheduled, the loan will be returned to accrual status. Interest income on loans is calculated by applying the contractual interest rate to the daily balances of the outstanding principal amount. See Credit Losses section above, for details on measurement of allowance for loan losses. #### **Accounting Developments** #### **Adopted in 2022** In June 2022, the F ASE issued ASU No. 2022-03, "Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions." The ASU clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU also introduces new disclosure {16}------------------------------------------------ # Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* ## **2. Summary of Significant Accounting Policies (continued)** requirements which provide information about the restriction including the nature and remaining duration of the restriction. The Company early adopted ASU 2022-03 as of January 1, 2022. The adoption of ASU 2022-03 did not have a material impact on the Company's consolidated statement of financial condition. In December 2022 the FASB has issued ASU No. 2022-06, "Deferral of the Sunset Date of Topic 848", which defers the sunset date in ASU 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, from December 31, 2022 to December 31, 2024. ASU 2022-06 was effective upon issuance. The Company adopted the amendments for contract modifications **within** ASU 2020-04 as of January **1,** 2021 with no material impact to its consolidated statement of financial condition and will continue to apply the relief in Topic 848 through the extended sunset date. ## **Pending Adoptions** In October 2021, the F ASB released ASU 2021-08 "Accounting for Contract Assets and Contract Liabilities from Contracts with Customers" which provides guidance on recognizing and measuring contract assets and contract liabilities from contracts with customers acquired in a business combination. The ASU amends ASC 805 to add contract assets and contract liabilities to the list of exceptions to the recognition and measurement principles that apply to business combinations and requires that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The Company adopted ASU 2021-08 on its effective date of January 1, 2023 on a prospective basis. The adoption of ASU 2021-08 did not have a material impact on the Company's consolidated statement of financial condition. In March 2022, the FASB released ASU 2022-01 "Fair Value Hedging- Portfolio Layer Method" which makes targeted improvements to the accounting for hedging activities. The ASU expands the current single-layer method to allow multiple hedge layers of a single closed portfolio of qualifying assets, which include both prepayable and non-prepayable assets. The ASU also provides additional guidance on the accounting for and disclosure of hedge basis adjustments under the portfolio layer method. and clarifies the types of derivatives that can be used as hedges. {17}------------------------------------------------ # Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* ### **2. Summary of Significant Accounting Policies (continued)** The Company adopted ASU 2022-01 on its effective date of January 1, 2023. The adoption of ASU 2022-01 did not have a material impact on the Company's consolidated statement of financial condition. In March 2022, the FASB issued ASU No. 2022-02, "Troubled Debt Restructurings and Vintage Disclosures". The ASU eliminates the troubled debt restructurings recognition and measurement guidance by creditors, enhances disclosure requirements for certain loan refinancings and restructurings by creditors and requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20. The guidance is effective beginning January **1,** 2023 and early adoption is permitted. The Company adopted ASU 2022-02 on its effective date of January 1, 2023. The adoption of ASU 2022-01 did not have a material impact on the Company's consolidated statement of financial condition. #### **3. Fair Value Measurement** At December 31, 2022, the fair value hierarchy classification of financial assets and liabilities measured at fair value is summarized below: | | Level 1 | | Level2 | Level3 | | Total | | | |---------------------------------------------------|-------------------|------------|--------|-----------|-------|---------|----|--------------| | Financial instruments owned, at fair value | | | | | | | | | | U.S. Government securities and agency obligations | \$ | 25 | \$ | 522 | \$ | | \$ | 547 | | Equities | | 707 | | 8,000 | | 153,714 | | 162,421 | | Mutual funds | | 261,199 | | | | 4,042 | | 265,241 | | Corporate debt obligations | | | | 1,591 | | | | 1,591 | | State and municipal obligations | | | | 260,060 | | | | 260,060 | | Certificates of deposit and money market funds | | | | 219 | | | | 219 | | Mortgage-backed obligations | | | | 15,562 | | | | 15,562 | | Total | | \$ 261,931 | \$ | 285,954 | \$ | 157,756 | \$ | 705,641 | | | | | | | | | | | | | Level2
Level 1 | | Level3 | | Total | | | | | Financial assets designated at fair value | | | | | | | | | | Brokerage receivables | \$ | | \$ | 5,704,758 | \$ | | | \$ 5,704,758 | {18}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* ### **3. Fair Value Measurement (continued)** | | Level 1 | Level 2 | Level 3 | Total | |--------------------------------------------------------------|--------------|-----------------|---------|--------------| | Financial instruments sold, not yet purchased, at fair value | | | | | | U.S. Government securities and agency obligations | \$
48,857 | \$
200 \$ | | \$
49,057 | | Equities | 268 | 812 | | \$
1,080 | | Corporate debt obligations | | 683 | | \$
683 | | State and municipal obligations | | 2,371 | | \$
2,371 | | Certificates of deposit and money market funds | | 94 | | \$
94 | | Mortgage-backed obligations | | 48 | | \$
48 | | Total | \$
49,125 | \$
4,208 \$ | | \$
53,333 | | | Level 1 | Level 2 | Level 3 | Total | | Financial liabilities designated at fair value | | | | | | Brokerage payables | \$ | \$
5,266,726 | \$ | \$ 5,266,726 | Fair value of the brokerage receivables and brokerage payables (Note 5) approximate amortized cost which generally represents the balance due or balance owed. Due to the on-demand nature of its underlying, these receivables and payables are designated as Level 2. Financial instruments sold, not yet purchased, at fair value represents obligations of the Company to deliver the specified securities at contracted prices and, thereby, requires the Company to purchase the securities in the market at prevailing prices. The Company's ultimate obligation to satisfy the sale of securities sold, not yet purchased may exceed the amount reflected in the consolidated statement of financial condition. Transfers of financial instruments owned and financial instruments sold, not yet purchased between the fair value levels are recognized as of June 30 and December 31 each year. During the year ended December 31, 2022, the Company did not transfer any financial assets or liabilities between Level 1 and Level 2. The Company is the primary liquidity provider in the market for a number of closed-end mutual funds (the "Funds") invested in Puerto Rico municipal securities. Since 2013, the Puerto Rico market has experienced a downturn and liquidity issues became prevalent with the Funds. The Company also holds equity investments in privately held companies to facilitate its business activities. The fair value of these Funds and equity investments is based on valuation techniques for which significant inputs are not based on observable market data. The following table provides a reconciliation of the beginning and ending balances for the various classes of assets measured at fair value using unobservable inputs - Level 3. {19}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* #### **3. Fair Value Measurement (continued)** | | Financial Instruments Owned | | | | | | | | | | |----------------------------|-----------------------------|--------------|----|----------|-------|---------|--|--|--|--| | | | Mutual Funds | | Equities | Total | | | | | | | Beginning balance | \$ | 8,436 | \$ | 132,086 | \$ | 140,522 | | | | | | Purchases | | 32 | \$ | 2,169 | \$ | 2,201 | | | | | | Sales | | (32) | | | \$ | (32) | | | | | | Net unrealized (loss) gain | | (4,394) | \$ | 19,459 | \$ | 15,065 | | | | | | Ending balance | \$ | 4,042 | \$ | 153,714 | \$ | 157,756 | | | | | The following table provides information on the valuation techniques, significant unobservable inputs and the range of values for those inputs for financial instruments owned, at fair value, categorized as Level 3 in the fair value hierarchy at December 31, 2022. The range of values presented in the below table is representative of the lowest level of input that is significant to the financial instruments' fair value. The disclosure below also includes qualitative information on the sensitivity of the fair value measurements to changes in the significant unobservable inputs. Weighted averages are provided for non-derivative financial instruments and were calculated by weighting inputs based on the fair values of the respective instruments. For Equities, the range of inputs is not disclosed, as there is a dispersion of values given the diverse nature of the investments. | | Financial
Valuation
Instruments
Teclmique
Owned | | Significant
Unobseivable
Inputs | Range of Input
Values (Weighted
Average) | | | | | |--------------|-------------------------------------------------------------|-------------------------------------------|---------------------------------------|------------------------------------------------|--|--|--|--| | Mutual funds | \$4,042 | Internally
developed model | Discount rates | 34% - 72% | | | | | | Equities | \$153,714 | Relative value to
market
comparable | Price | | | | | | {20}------------------------------------------------ # Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* #### **3. Fair Value Measurement (continued)** #### **Financial assets and liabilities not measured at fair value** Other financial assets and liabilities are recorded by the Company at their contract values and include cash and cash equivalents, cash and securities segregated and on deposit for federal and other regulations, resale agreements, securities borrowed and securities loaned, receivables from and payables to (i) customers, (ii) brokers, dealers and clearing organizations, (iii) affiliated companies, (iv) dividend and interest, (v) fees and other receivables, and (vi) subordinated debt. All financial assets and liabilities carried at contract amounts either have short-term maturities (one year or less) or are carried at amounts that approximate fair value. The carrying value of loans included in receivable from customers approximate fair value as these loans re-price daily and there is no stated maturity date nor any historical losses. The following table represents the carrying value, fair value, and fair value hierarchy category of certain financial assets and liabilities that are not recorded at fair value in the Company's consolidated statement of financial condition. The following table excludes all non-financial assets and liabilities. | | Carrying Value | Fair Value | (Level 1) | (Level 2) | (Level 3) | |---------------------------------------------------------------------|------------------|------------|---------------|------------|-----------| | Financial Assets: | | | | | | | Cash and cash equivalents | \$
750,999 | 750,999 | \$
750,999 | \$ | \$ | | Cash and securities segregated and on deposit for federal and other | | | | | | | regulations | 1,724,300 | 1,724,300 | 482,700 | 1,24 1,600 | | | Securities purchased under agreements to resell | 56, 116 | 56, 116 | | 56,116 | | | Securities borrowed | 894,522 | 894,522 | | 894,522 | | | Receivables from customers | 388,528 | 388,528 | | 388,528 | | | Receivables - Brokers, dealers and clearing organizations | 2,500,662 | 2,500,662 | | 2,500,662 | | | Receivables - Dividends and interest | 10,119 | 10,119 | | 10,119 | | | Receivables - Fees and other | 210,943 | 210,943 | | 210,943 | | | Receivables from affiliated companies | 675,862 | 675,862 | | 675,862 | | | Financial Liabilities: | Ca!!,Y!!!g Value | Fair Value | (Level 1) | (Level 2) | (Level3) | | Securities 1 oaned | 181,623 | 181,623 | | 181,623 | | | Payables to customers | 965,700 | 965,700 | | 965,700 | | | Payables - Brokers, dealers and clearing organizations | 103,444 | 103,444 | | 103,444 | | | Payables- Dividends and interest | 6, 122 | 6, 122 | | 6,122 | | | Payables to affiliated companies | 2,259,836 | 2,259,836 | | 2,259,836 | | | Subordinated liabilities | 650,000 | 650,000 | | 650,000 | | ## **4. Collateralized Agreements** The Company enters into securities purchased under agreements to resell, securities borrowed and securities loaned transactions to, among other things, facilitate the Company's financing transactions and acquire securities to cover short positions and settle other securities obligations. {21}------------------------------------------------ # Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* ### **4. Collateralized Agreements (continued)** ### **Secured Financing Transactions-Maturities and Collateral Pledged** The following tables present gross obligations, prior to any netting as shown below, for securities loaned transactions by remaining contractual maturity and class of collateral pledged as of December 31, 2022. | | | | Remaining Contractual Maturity | | | | | | | | | |-------------------|-----------------------|----------|--------------------------------|--|----------|----|-------------------------|--|----|---------|--| | | Overnight
and Open | | Less than 30
days | | 30_
y | | 90 da s Over 90
days | | | Total | | | Securities loaned | \$ | 181 ,623 | \$ | | | \$ | \$ | | \$ | 181,623 | | | Total | \$ | 181 ,623 | \$ | | | \$ | \$ | | \$ | 181,623 | | #### **Secured Financing by the Class of Collateral Pledged** | Securities loaned | | |-------------------|---------------| | Equities | \$
181,623 | | Total | \$
181,623 | The Company does not have any transactions accounted for as a sale that results in the Company retaining substantially all of the exposure to the economic returns of the transferred asset. #### **Offsetting of Collateral Agreements** The Company manages credit risk by entering into netting agreements with counterparties. These netting agreements generally enable the counterparties to offset liabilities against assets received in the event that the counterparty to the transaction is unable to fulfill its contractual obligation. The Company offsets these financial assets and financial liabilities on the consolidated statement of financial condition only when it has an enforceable legal right to offset the respective recognized amounts and intends to settle on a net basis. {22}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* ### **4. Collateralized Agreements (continued)** The following table presents information regarding the offsetting of financial assets and liabilities. | | | Gross
Amounts | | Amounts
Statement of
Financial
Condition | | Net Amounts
Statement of
Financial
Condition | | Cash or Financial
Offset in the Presented in the Instruments Amounts
not offset in the
Statement of Fmancial
Condition<2
H3
l | | Net
Amount | | |---------------------------------------------------------------------------------------------------|----|-------------------|----|---------------------------------------------------|----|-------------------------------------------------------|----|-------------------------------------------------------------------------------------------------------------------------------------------------|--|---------------|--| | Financial assets
Securities borrowed | \$ | 894,522 | \$ | | \$ | 894,522 | \$ | (889,501) \$ | | 5,021 | | | Securities purchased under agreements to resell (I)
Financial liabilities
Securities loaned | | 56,116
181,623 | | | | 56,116
181,623 | | (56,116)
(180,831) | | 792 | | - (1) Balance excludes \$1,241,600 in securities purchased under agreements to resell that are segregated pursuant to the Customer Protection Rule and are included in cash and securities segregated and on deposit for federal and other regulations on the consolidated statement of financial condition. - (2) Amounts relate to master netting agreements and collateral agreements which have been determined by the Company to be legally enforceable in the event of default and where certain other criteria are not met in accordance with applicable offsetting account guidance ASC 210-20-45-11. - (3) The total amount reported is limited to the related amount presented on the statement of financial condition to not include any over-collateralization of these positions. In the normal course of business, the Company receives margin securities and obtains securities under agreements to resell and securities borrowed on terms which permit it to pledge or resell the securities to others. At December 31, 2022, the Company obtained and had available securities with a fair value of approximately \$8,417,968, of which approximately \$2,201,938 have been either pledged or otherwise transferred to others in connection with the Company's financing activities, such as securities loaned as well as to cover short sales and to satisfy customer margin requirements at the Options Clearing Corporation. #### **5. Financial Assets and Financial Liabilities Designated at Fair value** Financial assets and financial liabilities designated at fair value consist of brokerage receivables and payables. These assets and liabilities represent customer activities recorded on a settlement date basis including callable, on-demand margin loans ("Margin Loans"), free cash credits and secured credits (sale of securities not yet purchased). The balances are an aggregation of cash receivables and payables that form a single unit of account at the customer level. The business model for these accounts is similar to any current or on-demand accounts, with customers using {23}------------------------------------------------ # Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* ### **5. Financial Assets and Financial Liabilities Designated at Fair value (continued)** the account to house subscriptions, redemptions and billed amounts. See Note 3 for fair value measurement on brokerage receivables and payables. The Company's customer activities involve the execution, settlement and financing of various securities transactions. These activities are transacted on either a cash or margin basis. In issuing Margin loans, the Company extends credit to customers, which is collateralized by cash and/or securities in the customer's account. The Company seeks to control risks associated with its customer activities by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. The Company monitors required margin level daily and pursuant to such guidelines, requires the customer to deposit additional collateral or reduce positions, when necessary. Such transactions may expose the Company to credit risk in the event that margin requirements are not sufficient to fully cover losses that customers may incur. If the customer fails to satisfy its obligations, the Company may be required to purchase or sell the collateral at prevailing market prices in order to fulfill the customer's obligations. Securities owned by customers, including those that collateralize margin loans or similar transactions, are not reflected on the consolidated statement of financial condition. ### **6. Cash and Securities Segregated and on Deposit for Federal and Other Regulations** The Company is required to segregate cash in a special reserve bank account for the exclusive benefit of customers under SEC Rule 15c3-3 (the "Customer Protection Rule"). The Company also performs a separate computation for assets in the proprietary accounts of broker-dealers ("PAE") in accordance with the Customer Protection Rule. At December 31, 2022, the Company included \$482,700 in cash and \$1,241,600 of qualified securities in cash and securities segregated and on deposit for federal and other regulations. Included in receivable from brokers, dealers and clearing organizations on the consolidated statement of financial condition is \$11,553 in net liquidating equity segregated pursuant to Section 4d(a)(2) of the Commodity Exchange Act and CFTC Regulation 1.20 and 30.7. #### **7. Receivables from and Payables to Customers** The Company provides securities-based lending that allows customers to borrow against the value of qualifying securities for any suitable purpose other than purchasing, trading, or carrying securities ("Loans"). As of December 31, 2022, the Company recognized Loans in the amount of \$388,528. Loans are subject to the same collateral requirements as Margin Loans (refer to Note 5). Payables to customers in the amount of \$965,700 consist of deposits in foreign currency. {24}------------------------------------------------ # Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* ### **8. Receivables from and Payables to Brokers, Dealers and Clearing Organizations** Receivables from and payables to brokers, dealers and clearing organizations at December 31, 2022, consist of the following: | Receivables from brokers, dealers and clearing organizations: | | |---------------------------------------------------------------|-----------------| | Securities failed to deliver | \$
46,576 | | Receivables related to cash clearing activity | 2,217,528 | | Receivables related to commodities clearing activity | 28,677 | | Deposits with clearing organizations | 158,872 | | Others | 49,009 | | Total | \$
2,500,662 | | Payables to brokers, dealers and clearing organizations: | | | Securities failed to receive | \$
100,789 | | Pending trades and other | 2,655 | | Total | \$
103,444 | #### **9. Related-Party Transactions** In the normal course of business, the Company enters into transactions with affiliated companies. At December 31, 2022, the consolidated statement of financial condition included the following balances with affiliates: **Assets** | Cash and cash equivalents | \$
195,517 | |---------------------------------------------------------------------------------|---------------| | Cash and securities segregated and on deposit for federal and other regulations | 1,243,068 | | Securities purchased under agreements to resell | 56,116 | | Securities borrowed | 894,522 | | Receivables from brokers, dealers and clearing organizations | 7,233 | | Receivables from affiliated companies | 675,862 | | Liabilities | | | Securities loaned | \$
181,623 | | Payables to brokers, dealers and clearing organizations | 36,018 | | Accrued compensation and benefits | 156,478 | | Payables to affiliated companies | 2,259,836 | | Other liabilities and accrued expense | 19,124 | | Dividend and interest payable | 797 | | Subordinated liabilities (Note 10) | \$
650,000 | {25}------------------------------------------------ # Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* ### **9. Related-Party Transactions (continued)** Cash and securities segregated and on deposit for federal and other regulations includes a resale agreement with an affiliated counterparty in the amount of \$1,241,600 which the Company has deposited with a third party. The Company exchanges cash balances in a foreign currency, originating from customer deposits, to UBS Americas Inc. in exchange for US dollars, creating a receivable and a payable, respectively. The US dollars the Company receives in this transaction is used to meet its customer requirement, pursuant to SEA 15c3-3, that arise from the foreign currency deposits made by the Company's customers. The balances related to these transactions with UBS Americas Inc., at December 31, 2022, were \$647,572 included in receivables from affiliated companies and \$655,000 in payables to affiliated companies in consolidated statement of financial condition. Payables to affiliated companies include a short-term funding facility with UBSAHL. The balance at December 31, 2022 was \$1,303,000, of which \$1,000,000 was drawn against a committed credit line. ### **Service Level Agreements** Pursuant to service level arrangements, the Company receives services from and provides services to affiliates (i.e., operational, administrative, securities research, premises). The significant arrangements where the Company receives or provides such support services include arrangements with UBS Bank USA ("BUSA"), UBS Business Solutions LLC ("UBS BS"), UBS Business Solutions AG ("UBS BS AG"), UBS Securities LLC ("UBSS LLC"), UBS Business Solutions UK ("UBS UK"), UBS AG Stamford branch ("Stamford branch") and UBS Asset Management Inc. ("UBS AM"). In addition, the Company receives services from Group related to the administration of certain compensation plans. In the normal course of business, the Company enters into resale agreements and securities lending transactions with UBSS LLC in order to facilitate customer transactions and to meet its short-term financing needs. Additionally, the Company enters into stock borrow and stock loan transactions with UBSS LLC. Certain employees of the Company have been issued loans of \$2,499,582 (net of an allowance for credit losses of \$42,151) by an affiliate as part of the Company's compensation programs related to employee recruiting and retention (see Note 16). {26}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* ### **10. Subordinated Liabilities** At December 31, 2022, subordinated borrowings and total credit facilities with UBS Americas Holding LLC consisted of the following: | | Maturity | Amount Outstanding | |------------------------|-----------|--------------------| | Subordinated term loan | 5/31/2024 | 325,000 | | | 6/30/2025 | 325,000 | | | | \$
650,000 | These loans are subordinated to claims of general creditors, are covered by agreements approved by FINRA and other regulatory authorities, and are included by the Company for purposes of computing net capital under the SEC Uniform Net Capital Rule. To the extent that such borrowings are required for the Company's continued compliance with minimum net capital requirements, these loans may not be repaid unless first approved by FINRA. These loans bear interest based on SOFR plus a spread which ranges from 194 bps to 240 bps. ### **11. Risk Management** The Company's risk management policies and related procedures are aligned with those of UBS. The Company's risk governance framework operates along three lines of defense. The first line of defense, business management, owns its risk exposures and is accountable for maintaining effective processes and systems to manage its risks in compliance with laws, rules and regulations as well as internal standards, including identifying control weaknesses and inadequate processes. Business management has appropriate supervisory controls and review processes in place designed to identify control weaknesses and inadequate processes. The second line of defense, the control functions, provides independent oversight of risks, including assisting in setting risk limits and protecting against non-compliance with applicable laws and regulations. Internal audit forms the third line of defense. This function assesses the design and operating effectiveness and sustainability of processes to define risk appetite, governance, risk management, internal controls, remediation activities and processes to comply with legal and regulatory requirements and internal governance standards. {27}------------------------------------------------ # Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* ## **11. Risk Management (continued)** The Company's risk management and control principles are as follows: - Protection of financial strength. Protecting the financial strength of the Company by controlling risk exposures and avoiding potential risk concentrations at individual exposure levels, at specific portfolio levels and at an aggregate Company level across all risk types. - Protection of reputation. Protecting the Company's reputation through a sound risk culture characterized by a holistic and integrated view of risk, performance and reward, and through full compliance with the Company's standards and principles, particularly the Company's Code of Business Conduct and Ethics. - Business management accountability. Maintaining management accountability, whereby business management, as opposed to Risk Control, owns all risks assumed throughout the Company and is responsible for the continuous and active management of all risk exposures to ensure that risk and return are balanced. - Independent controls. Independent control functions which monitor the effectiveness of the business's risk management and oversee risk-taking activities. - Risk disclosure. Disclosure of risks to senior management, the Board of Directors, investors, regulators, credit rating agencies and other stakeholders with an appropriate level of comprehensiveness and transparency. ## **Market Risk** Market risk is the risk of loss from changes in market variables. There are two broad categories of changes: general market risk factors driven by macroeconomic, geopolitical and other marketwide considerations and market risk factors that are specific to individual companies or entities. General market risk factors include interest rates, level of equity market indices, foreign currency exchange rates and other factors. Market risk factors that are specific to individual companies or entities cannot be explained by general market moves. In the normal course of business the Company is exposed to general and specific market risks related to its trading activities and some non-trading businesses are also subject to market risk. The Company has two major portfolio measures to monitor market risk: Value at Risk and Stress Loss. The two major portfolio measures are complemented by concentration and other supplementary limits on portfolios, sub-portfolios or asset classes. The senior management of each relevant business area is responsible for reviewing trading and non-trading positions, exposures, profits and losses, and trading strategies. The Company has a risk control group which reviews the Company's risk profile and independently monitors development in trading and non-trading portfolios according to established limits. The risk control group also reviews trading positions and economic hedging strategies, performs market risk modeling and aids in setting risk policies of the Company. {28}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* #### **11. Risk Management (continued)** #### **Operational Risk** Operational risk is the risk resulting from inadequate or failed internal processes, people and systems, or from external causes (e.g., deliberate, accidental or natural). Events may be direct financial losses or indirect in the form of revenue forgone resulting from business suspension. They may also result in damage to the Company's reputation and franchise, which have longer term financial consequences. Operational risk is an inevitable consequence of being in business, and managing operational risk is a core element of the Company's business activities. It is not possible to eliminate every source of operational risk, but the Company's aim is to provide a framework that supports the identification, assessment and management of all material operational risks to achieve an appropriate balance between risk and return. A comprehensive non-financial risk taxonomy is established that defines the universe of inherent material operational risks which arise from business activities. This provides a standard risk language for identifying, assessing and managing operational risk across all business divisions. The aggregated impact of control deficiencies and the adequacy of remediation efforts are assessed by Operational Risk Control for all relevant operational risk taxonomy categories. This front-toback process, supported by internal subject matter expertise, provides a transparent assessment of the current operational risk exposure against articulated risk appetite statements and measures. Significant control deficiencies that surface during the internal control and operational risk assessment processes must be reported in the system of control and sustainable remediation must be initiated. ### **Credit Risk** Credit risk is the risk of financial loss resulting from failure by a client or counterparty to meet its contractual obligations to the Company. This can be caused by factors directly related to the counterparty or from failures in the settlement process. It can also be triggered by economic or political factors in the country in which the counterparty is based or where it has substantial assets. Counterparties to the Company's financing activities are primarily affiliates, other financial institutions, including banks, brokers and dealers, investment funds and insurance companies, individuals and non-financial operating entities. Credit losses could arise should counterparties fail to perform and the value of any collateral held prove inadequate due to market conditions. {29}------------------------------------------------ # Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* ### **11. Risk Management (continued)** The Company manages credit risk by monitoring net exposure to individual counterparties on a daily basis, monitoring credit limits and requiring additional collateral where appropriate. Client transactions are entered on either a cash or margin basis. In a margin transaction, the Company extends credit to a client, using the securities purchased and/or other securities held on behalf of the client, as collateral for amounts loaned. Amounts loaned are limited by margin regulations of the Federal Reserve Board and other regulatory authorities and are subject to the Company's credit review and daily monitoring procedures. Market declines could, however, reduce the value of any collateral below the principal amount loaned, plus accrued interest, before the collateral can be sold. Client transactions include positions in written options, financial instruments sold, not yet purchased and commodities and financial futures. The risk to the Company's customers in these transactions can be substantial, principally due to price volatility which can reduce the customers' ability to meet their obligations. To the extent customers are unable to meet their commitments to the Company and margin deposits are insufficient to cover outstanding liabilities, the Company may take action as appropriate. Client trades are recorded on a settlement date basis. Should either the client or broker fail to perform, the Company may be required to complete the transaction at prevailing market prices. Trades pending at December 31, 2022 were settled without material adverse effect on the consolidated statement of financial condition, taken as a whole. Receivables and payables with brokers and dealers, agreements to resell and securities borrowed and loaned are generally collateralized by cash, U.S. Government and agency securities. Additional collateral is requested when considered necessary. The Company may pledge customers' margin securities as collateral in support of securities loaned and bank loans, as well as to satisfy margin requirements at clearing organizations. For margin loans, the amounts loaned or pledged are limited to the extent permitted by applicable margin regulations. Should the counterparty fail to return the customers' securities, the Company may be required to replace them at prevailing market prices. At December 31, 2022, the market value of securities loaned to other brokers approximated the amounts due or collateral obtained. ### **12. Leases** The Company is a lessee in a number of leases, primarily of real estate, including offices and sales offices. All of these leases are classified as operating leases. {30}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* ### **12. Leases (continued)** ### **Consolidated Statement of Financial Condition Accounts related to Leases as of December 31,2022** | Right of use assets, net of accumulated depreciation of \$356,896 | \$
607,071 | |-------------------------------------------------------------------|---------------| | Lease liabilities | (748,150) | | Weighted Average: | | | Remaining lease term, in years | 8 years | | Discount rates | 3.40% | #### **Lease Liabilities as of December 31, 2022** The aggregate minimum future payments required by operating leases with initial or remaining lease terms exceeding one year, were as follows: | | Total Rent Payments | | | |-----------------------------------------------------------|---------------------|---------|--| | 2023 | \$ | 132,973 | | | 2024 | | 126,713 | | | 2025 | | 116,657 | | | 2026 | | 104,941 | | | 2027 | | 89,319 | | | 2028 and thereafter | | 284,832 | | | Total undiscounted cash flows | \$ | 855,435 | | | Difference between undiscounted and discounted cash flows | | 107,326 | | | Amount on consolidated statement of financial condition | \$ | 748,109 | | #### **13. Commitments and Contingencies** #### **Legal Proceedings** The Company operates in a legal and regulatory environment that exposes it to significant litigation risks and similar risks arising from disputes and regulatory proceedings. As a result, the Company is involved in various disputes and legal proceedings, including litigation, arbitration, and regulatory and criminal investigations. Such matters are subject to many uncertainties, and the outcome and timing of resolution are often difficult to predict, particularly in the earlier stages of a case. There are also situations where the Company may enter into a settlement agreement. This may occur in order to avoid the expense, {31}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* #### **13. Commitments and Contingencies (continued)** management distraction or reputational implications of continuing to contest liability, even for those matters for which the Company believes it should be exonerated. The uncertainties inherent in all such matters affect the amount and timing of any potential outflows for both matters with respect to which provisions have been established and other contingent liabilities. The Company makes provisions for matters brought against it when, in the opinion of management after seeking legal advice, it is more likely than not that the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required, and the amount can be reliably estimated. Where these factors are otherwise satisfied, a provision may be established for claims that have not yet been asserted against the Company, but are nevertheless expected to be, based on the Company's experience with similar asserted claims. Such provisions would be included in the other liabilities and accrued expenses on the consolidated statement of financial condition. If any of those conditions are not met, such matters result in contingent liabilities. If the amount of an obligation cannot be reliably estimated, a liability exists that is not recognized even if an outflow of resources is probable. Accordingly, no provision is established even if the potential outflow of resources with respect to such matters could be significant. It is not practicable to provide an aggregate estimate of liability for our litigation, regulatory and similar matters as a class of contingent liabilities. Doing so would require the Company to provide speculative legal assessments as to claims and proceedings that involve unique fact patterns or novel legal theories, which have not yet been initiated or are at early stages of adjudication, or as to which alleged damages have not been quantified by the claimants. Although we therefore cannot provide a numerical estimate of the future losses that could arise from the class of litigation, regulatory and similar matters, the Company believes that the aggregate amount of possible future losses from this class that are more than remote substantially exceeds the level of current provisions. In the matters disclosed below, the Company does not state whether a provision has been established. Either a) the Company has not established a provision and the matter is treated as a contingent liability under the applicable accounting standard orb) the Company has established a provision but expects disclosure of that fact would prejudice seriously the Company's position with other parties in that matter because it would reveal the fact that the Company believes an outflow of resources to be probable and reliably estimable. In addition to the matters mentioned below, the Company is involved in litigation as well as regulatory matters arising in the normal course of business. {32}------------------------------------------------ # Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* ### **13. Commitments and Contingencies (continued)** #### **Puerto Rico Matters** Declines since 2013 in the market prices of Puerto Rico municipal bonds and of closed-end funds (Funds) that are sole-managed and co-managed by UBS Trust Company of Puerto Rico ("UBS Trust of PR") and distributed by UBSFSI led to multiple regulatory inquiries, which in 2014 and 2015, led to settlements with the Office of the Commissioner of Financial Institutions for the Commonwealth of Puerto Rico, the US Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority. Since then, UBS customers in Puerto Rico who own the funds or Puerto Rico municipal bonds and/or who used their UBS account assets as collateral for UBS non-purpose loans filed customer complaints and arbitration demands seeking aggregate damages of \$3,430,000, of which \$3,370,000 have been resolved through settlements, arbitration or withdrawal of claims. Allegations include fraud, misrepresentation and unsuitability of the funds and of the loans. A shareholder derivative action was filed in 2014 against various UBS entities and current and certain former directors of the funds, alleging hundreds of millions of US dollars in losses in the funds. In 2021, the parties reached an agreement to settle this matter for \$15,000, subject to court approval. In 2011, a purported derivative action was filed on behalf of the Employee Retirement System of the Commonwealth of Puerto Rico (System) against over 40 defendants, including UBSFSI, which was named in connection with its underwriting and consulting services. Plaintiffs alleged that defendants violated their purported fiduciary duties and contractual obligations in connection with the issuance and underwriting of \$3,000,000 of bonds by the System in 2008 and sought damages of over \$800,000. In 2016, the court granted the System's request to join the action as a plaintiff. In 2022, a federal district court enjoined the plaintiffs from proceeding with the action on the grounds it impermissibly conflicted with Puerto Rico's approved Plan of Adjustment. Beginning in 2015, certain agencies and public corporations of the Commonwealth of Puerto Rico (Commonwealth) defaulted on certain interest payments on Puerto Rico bonds. In 2016, US federal legislation created an oversight board with power to oversee Puerto Rico's finances and to restructure its debt. The oversight board has imposed a stay on the exercise of certain creditors' rights. In 201 7, the oversight board placed certain of the bonds into a bankruptcy-like proceeding under the supervision of a Federal District Judge. In May 2019, the oversight board filed complaints in Puerto Rico federal district court bringing claims against financial, legal and accounting firms that had participated in Puerto Rico municipal bond offerings, including UBS, seeking a return of underwriting and swap fees paid in connection {33}------------------------------------------------ # Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* #### **13. Commitments and Contingencies (continued)** with those offerings. UBS estimates that it received approximately \$125,000 in fees in the relevant offerings. In August 2019, and February and November 2020, four US insurance companies that insured issues of Puerto Rico municipal bonds sued UBS and several other underwriters of Puerto Rico municipal bonds in three separate cases. The actions collectively seek recovery of an aggregate of \$955,000 in damages from the defendants. The plaintiffs in these cases claim that defendants failed to reasonably investigate financial statements in the offering materials for the insured Puerto Rico bonds issued between 2002 and 2007, which plaintiffs argue they relied upon in agreeing to insure the bonds notwithstanding that they had no contractual relationship with the underwriters. Defendants' motions to dismiss have been granted in all three cases; those decisions are being appealed by the plaintiffs. The Company's consolidated statement of financial condition as of December 31, 2022 reflects provisions with respect to these matters in amounts that the Company believes to be appropriate under the applicable accounting standards. As in the case of other matters for which the Company has established provisions, the future outflow of resources in respect of such matters cannot be determined with certainty based on currently available information, and accordingly may ultimately prove to be substantially greater (or may be less) than the provisions that have been recognized. #### **Yield Enhancement Strategy Matters** Customers of the Company have commenced arbitration proceedings seeking to recover losses incurred in the Yield Enhancement Strategy ("YES"), a managed options investment strategy. As of December 31, 2022, pending arbitrations seeking claimed damages in these proceeding was approximately \$75,000. In addition, the Company has received regulatory inquiries from the SEC and FINRA, as well as certain state securities regulators, concerning YES. In June 2022, the SEC entered an order finding that the Company violated provisions of the Investment Advisers Act of 1940. As a result, the Company was ordered to pay disgorgement, prejudgment interest, and a civil monetary penalty totaling \$24,600. This amount was partially set off by \$7,200 that was previously paid to investors by UBS. The Company's consolidated statement of financial condition as of December 31, 2022 reflects provisions with respect to these matters in amounts that the Company believes to be appropriate under the applicable accounting standards. As in the case of other matters for which the Company has established provisions, the future outflow of resources in respect of such matters cannot be determined with certainty based on currently available information, and accordingly may ultimately prove to be substantially greater (or may be less) than the provisions that have been recognized. {34}------------------------------------------------ # Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* ### **13. Commitments and Contingencies (continued)** #### **Communications Recordkeeping Matter** The SEC and CFTC conducted investigations of UBS and other financial institutions regarding compliance with records preservation requirements relating to business communications sent over unapproved electronic messaging channels. UBS cooperated with the investigations, and in September 2022, the Company and an affiliate agreed to pay civil monetary penalties of \$125,000 to the SEC and \$75,000 to the CFTC to resolve these matters. #### **Foreign Currency Wires Matter** In the fall of 2021, the Company received inquiries from the Financial Industry Regulatory Authority (FINRA), and in early 2022, additional inquiries from the U.S. Securities and Exchange Commission (SEC) and the Financial Crimes Enforcement Network (FinCEN), all regarding the Company's transaction monitoring of foreign currency wires in connection with retail customer accounts under its updated AML Program. The review is ongoing, and the Company is cooperating fully with the regulators. The Company's consolidated statement of financial condition as of December 31, 2022 reflects provisions with respect to these matters in amounts that the Company believes to be appropriate under the applicable accounting standards. As in the case of other matters for which the Company has established provisions, the future outflow of resources in respect of such matters cannot be determined with certainty based on currently available information, and accordingly may ultimately prove to be substantially greater (or may be less) than the provisions that have been recognized. #### **Guarantees** The Company is a member of various exchanges and clearinghouses that trade and clear securities and/or derivative contracts. Associated with its membership, the Company may be required to pay a proportionate share of the financial obligations of another member who may default on its obligations to the exchange or the clearinghouse. While the rules governing different exchange or clearinghouse members vary, in general, the Company's guarantee obligations would arise only if the exchange or clearinghouse had previously exhausted its resources. In addition, any such guarantee obligation would be apportioned among the other non-defaulting members of the exchange. Any potential contingent liability under these membership agreements cannot be estimated. The Company has not recorded any contingent liability in its consolidated statement of financial condition for the agreements and believes that any potential requirement to make payments under these agreements is remote. {35}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* #### **13. Commitments and Contingencies (continued)** #### **Other Commitments and Contingencies** In meeting the financing needs of certain customers, the Company issues standby letters of credit, which are fully collateralized by customer margin securities. At December 31, 2022, the Company had outstanding \$124,899 of such standby letters of credit. In the normal course of business, the Company enters into underwriting commitments. Settlement of these transactions after December 31, 2022 did not have a material impact on the consolidated statement of financial condition, taken as a whole. #### **14. Consolidated Subsidiaries** The following is a summary of certain financial information of the Company's consolidated subsidiaries at December 31, 2022: | | | UBSFSI per FOCUS
(unaudited) | | Other
Subsidiaries | | Eliminations/
Other | | UBSFSI
Consolidated | | |-----------------|---------------|---------------------------------|----|-----------------------|----|------------------------|----|------------------------|--| | Total assets | | \$
18,384,396 | \$ | 6,219 | \$ | (1 ,687} | \$ | 18,388,928 | | | Total
equity | stockholder's | \$
5,140,113 | \$ | 1,687 | \$ | (1 ,687} | \$ | 5,140,113 | | The Company prepares Part II of Form X-17 A-5 using the flow-through method allowed pursuant to Appendix C of 17 CFR 240.15c3-l ("the Net Capital Rule"). See Note 15 Net Capital Requirements. #### **15. Net Capital Requirements** As a registered broker-dealer with the SEC, the Company is subject to the SEC's Net Capital Rule (SEA Rule 15c3-l). The Company computes its net capital requirement under the alternative method provided for in SEA Rule 15c3-l which requires the Company maintain net capital no less than the excess margin collected on resale agreements plus the greater of 2% of combined aggregate debit items arising from its customer reserve computation, as per SEA Rule 15c3-3, or the risk-based capital requirement under Regulation 1.17 of the Commodity Exchange Act. At December 31, 2022, the Company had net capital of \$1,182,347 which was \$1,040,178 in excess of the required net capital of \$142,169. The Company's ratio of net capital to aggregate debit items was 16.76%. {36}------------------------------------------------ # Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* ### **16. Equity Participation and Other Compensation Plans** UBS has several equity participation and other compensation plans to align the interests of executives, managers and staff with the interests of shareholders while continuously meeting regulatory requirements. ### **Equity Ownership Plan ("EOP")** EOP is a mandatory share-based compensation plan for all employees with total compensation above a defined threshold. These employees receive a portion of their annual performance-related compensation above the threshold in the form of notional shares. Furthermore, notional shares granted to (i) Group Managing Directors, (ii) employees who by the nature of their role have been determined to materially set, commit or control significant amounts of the firm's resources or exert significant influence over its risk profile and (iii) employees whose incentive exceeds a certain threshold are subject to performance conditions. The performance conditions are based on the UBS return on tangible equity and the divisional return on attributed equity. Certain awards, such as replacement awards issued outside the normal performance year cycle, such as replacement awards or sign-on awards, may take the form of deferred cash under the EOP plan rules. Notional shares represent a promise to receive UBS shares at vesting and do not carry voting rights during the vesting period. A wards granted carry a dividend equivalent which may be paid in notional shares or cash and which vests on the same terms and conditions as the awards. A wards are settled by delivering UBS shares at vesting. EOP awards generally vest in equal increments after two and three years following grant. The awards are generally forfeitable upon, among other circumstances, voluntary termination of employment with the Company. ### **Deferred Contingent Capital Plan ("DCCP")** DCCP is a mandatory deferred cash compensation plan for all employees with total compensation above a defined threshold. For awards granted, DCCP takes the form of notional additional tier 1 ("A Tl") capital instruments, which may be settled at the discretion of UBS in the form of a cash payment or a marketable ATl capital instrument. Awards vest in full after five years unless there is a trigger or viability event. Awards granted under the DCCP are written down if UBS's common equity tier 1 capital ratio falls below defined thresholds. DCCP awards are also forfeited if a viability event occurs, that is if the Swiss Financial Market Supervisory Authority provides a written notice to UBS that the DCCP awards must be written down to prevent an insolvency, bankruptcy or failure of UBS, or if UBS receives a commitment of extraordinary support from the public sector that is necessary to prevent such an event. {37}------------------------------------------------ # Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* ### **16. Equity Participation and Other Compensation Plans (continued)** For awards granted, interest payments are discretionary. The awards are generally forfeitable upon, among other circumstances, voluntary termination of employment with the Company. ### Equity **Plus Plan** Equity Plus is a voluntary share-based compensation plan that provides eligible employees with the opportunity to purchase shares of UBS at market value (not subject to vesting) and receive one notional UBS share for every three shares purchased, up to a maximum annual limit. Share purchases may be made annually from the performance award and/or monthly through regular deductions from salary. If the shares purchased are held for three years and, in general, if the employee remains **in** employment, the notional shares vest. For notional shares granted, employees are entitled to receive a dividend equivalent which may be paid in notional shares and/or cash. ### **Voluntary Investment Plan** The Voluntary Investment Plan offers a select group of senior management employees an opportunity to defer their income, the length of the deferral is generally at the discretion of the employee. Each year the employees eligible to participate in the Plan, may elect to defer the desired percentage of compensation into the Plan, tax free where allowable. Deferrals are fully vested and not subject to forfeiture. There are no Company contributions. #### **Financial Advisor Compensation** The compensation for financial advisors is based on production payout and deferred compensation awards. Production payout, paid monthly in the form of non-deferred cash payments, is primarily based on compensable revenue generated by financial advisors. Financial advisors may also qualify for supplemental compensation in the form of deferred compensation awards, which vest over various time periods of up to ten years depending on the type of award. Production payout rates and deferred compensation awards may be reduced for, among other things, negligence or carelessness, or a failure to comply with the firm's rules, standards, practices and policies or applicable laws and regulations. Year End Awards are deferred compensation awards based on strategic performance measures. These awards are granted in the form of both deferred share-based and deferred cash-based awards with a vesting period of up to 6 years. Through performance year 2016, strategic objective awards were partly granted to eligible financial advisors under the PartnerPlus deferred cash plan. In addition to such granted awards (Company contributions), participants were also allowed to voluntarily contribute additional {38}------------------------------------------------ # Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* ### **16. Equity Participation and Other Compensation Plans (continued)** amounts otherwise payable as production payout up to a certain percentage, which vest upon contribution. Company contributions and voluntary contributions are credited with interest in accordance with the terms of the plan. Rather than being credited with interest, a participant may elect to have voluntary contributions, along with vested Company contributions, credited with notional earnings based on the performance of various mutual funds. Company contributions and interest on both Company and voluntary contributions ratably vest in installments six to ten years following the grant date. Company contributions and interest on notional earnings are forfeitable under certain circumstances. The Company enters into compensatory arrangements to incentivize certain eligible active financial advisors to achieve specified revenue production and other performance thresholds. Growth Plus is an incentive program for selected financial advisors whose revenue production and length of service exceed defined thresholds from 2010 through 2017. Compensation arrangements were granted in 2010, 2011, 2015, and 2018. The awards vest ratably over seven years from grant with the exception of the 2018 arrangement which vests over five years. The Company also offers the Aspiring Legacy Financial Advisors program (ALF A) to eligible Financial Advisors, when they transition their relationships to other Financial Advisors (receiving F As) as they leave the Financial Services industry. This program provides an opportunity to Financial Advisors to earn up to 300% of their production over the course of the program. The program allows Financial Advisors to receive monthly payments for a period of 5 years. The Company also enters into compensatory arrangements with certain new financial advisors primarily as a recruitment incentive. The compensation may be earned and paid to the financial advisor during a period of continued employment and may be forfeited under certain circumstances. In addition to these compensation arrangements, the Company may issue loans to certain new and active financial advisors. As of December 31, 2022, the Company issued loans to financial advisors of \$117,719 (net of an allowance for credit losses of \$10,059), which are included in other assets in the consolidated statement of financial condition. ### **17. Pension and Other Post-Employment Benefit Plans** Eligible employees of the Company were included in the UBS FSI Pension Plan (the "Plan"), i.e., a defined benefit pension plan which was closed to new entrants in 1998. {39}------------------------------------------------ # Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* ## **17. Pension and Other Post-Employment Benefit Plans** ( **continued)** The following table shows the changes in the projected benefit obligation and fair value of Plan assets during 2022, as well as the overfunded status of the Plan which was included in other assets on the Company's consolidated statement of financial condition at December 31, 2022: ## **Consolidated Statement of Financial Condition** | Prqjected benefit obligation at December 31, 2022 | \$
617,243 | |---------------------------------------------------|----------------| | Fair value of plan assets at December 31, 2022 | 644,330 | | December 31, 2022 status: overfunded | \$
{27,087) | The measurement date was December 31, 2022. The accumulated benefit obligation for the year ended December 31, 2022 was \$617,243. Fair value of plan assets and funded status surplus, at December 31, 2022 were \$644,330 and \$27,087, respectively. For December 2022, the benefit obligation and benefit cost for the Plan were determined using the following rates: | | Benefit | Benefit | | |---------------------------------------|------------|---------|--| | | Obligation | Cost | | | Discount rate | 4.92% | 2.49% | | | Average rate of compensation increase | NIA | NIA | | | Interest crediting rates | NIA | NIA | | The weighted average of the expected returns for each asset class used in determining the expected long-term rate of return on Plan asset was 3.39% for 2022. The compensation increase assumption is no longer applicable as all of the grandfathered active participants are at or above age 70 and are assumed to retire immediately. As per plan rules the plan does not credit any interest. *Investment Policies and Strategies* The Plan's long-term asset allocation target consists of 15% equity securities and 85% debt securities. The debt securities are invested in a blend of short and long duration US corporate bonds and long {40}------------------------------------------------ # Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* ## **17. Pension and Other Post-Employment Benefit Plans** ( **continued)** term US government bonds. The equity securities are invested **in** a diversified portfolio of global investments with allocations to US, international and emerging market investments. *Basis Used to Determine the Expected Long-Term Return on Plan Assets Assumption* A weighted average of the expected returns for each asset class was used in determining the expected long-term rate of return on Plan assets. The expected returns are based on a capital markets model developed by the Plan's investment consultant. ### *Contributions* No contributions were made to the Plan for the year ended December 31, 2022. The future contributions to the Plan will be evaluated at least annually by the Company. #### *Estimated Future Benefit Payments* The following benefit payments are expected to be paid: | | Defined
Benefit
Payments | |----------------------|--------------------------------| | Year | | | 2023 | \$
63,817 | | 2024 | 62,251 | | 2025 | 61,557 | | 2026 | 58,502 | | 2027 | 57,789 | | Years 2028 -
2032 | 241,850 | ## *Fair Value Measurement of Plan Assets* At December 31, 2022, the fair value of investments held by the Plan are as follows: {41}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* ### **17. Pension and Other Post-Employment Benefit Plans** ( **continued)** | | Quoted
Active
Assets | Pri~es in
Markets for Observable bl In
Identical | Other
Inputs | | e | Significant Si nificant
Ug bs no erva
puts | | Weighted
Average Total
Asset
Allocation | |-----------------------------------------|----------------------------|--------------------------------------------------------|-----------------|------------|----|--------------------------------------------------|-------|--------------------------------------------------| | | | Level I | | Level 2 | | Level 3 | Total | | | Common stock | \$ | 79,773 | \$ | | | | | 79,773
12.74% | | Short-term investments | | | | 24,459 | | | | 24,459
3.91% | | Government securities | | 23,962 | | 88,445 | | | | 112,407
17.95% | | Corporate debt securities | | | | 409,449 | | | | 409,449
65.40% | | | | \$ 103,735 | | \$ 522,353 | \$ | | | 626,088
100.00% | | Investments measured at NAV | | | | | | | | | | Mutual/collective funds on common stock | | | | | | | | 15,127 | | Accrued income expense | | | | | | | | 5,027 | | Pending purchases and sales | | | | | | | | 1,913 | | Total net investments, at fair value | | | | | | | | 644,329 | In the year ended December 31, 2022 there were no direct investments in UBS stock or debt included in the assets held by the Plan. The following are the major categories of Plan assets and a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2022. *Common stock:* Actively traded securities are valued at the closing price reported on the active exchange market on which the individual securities are traded. *Mutual/collective funds and short-term investments:* Funds that are actively traded on an exchange are priced based on the last exchange price, which represents the net asset value ("NA V") of shares held by the Plan at year end. Funds that are not actively traded on an exchange are priced at the NA V of shares held by the Plan at year end using inputs that corroborate the NA V with observable (i.e., on-going redemption and/or subscription activity) market-based data. *Government securities and corporate debt securities:* U.S. Government securities are generally actively traded and are valued using quoted market prices. Where market prices are not available Government securities and corporate debt securities are valued primarily using institutional bid evaluations. Bid evaluations are an estimated price at which a dealer would pay for a security. Corroborated indicative market observable data such as reported sales of similar securities, broker and dealer quotes, market information, including live trading levels are used when available to estimate the institutional bid evaluation. Government securities use the consensus and matrix pricing method. The inputs (quotes, spread and data points for yield curves) to these methods can be considered to be observable market-based data. Corporate debt securities use the discounted {42}------------------------------------------------ # Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* ### **17. Pension and Other Post-Employment Benefit Plans** ( **continued)** cash flow method. The inputs (e.g., the issue's margin, the forward curve from the appropriate benchmark, and data points for yield scale) to these methods can be considered to be observable market-based data. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. #### **Post-Retirement Medical and Life Plan** As of December 31, 2022, a net liability of \$20 was recognized for post-employment medical plan. ### **Defined Contribution Plan** Employees of the Company are eligible to participate in the UBS 401 (k) Plan (plan sponsor UBS AG) or UBS Financial Services Inc. Puerto Rico Savings Plus Plan (plan Sponsor UBSFSI), which include an employee savings investment plan and a defined retirement contribution plan. ### **Other Benefits** The Company also provides certain life insurance and health care benefits to employees of the Company. No assets have been segregated and restricted to provide for plan benefits. #### **18. Income Taxes** Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to be in effect during the year in which the basis differences reverse. The Company recognizes deferred tax assets to the extent it is more likely than not to be realized. In making such a determination, Management considers all available positive and negative evidence, including history of earnings, possible tax planning strategies and future taxable income, supported through detailed projections. After consideration of all relevant evidence, UBSFSI believes that it is more likely than not that a benefit will be realized for federal, state, and local deferred tax assets and accordingly, no valuation allowance was recorded against these assets. {43}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* #### **18. Income Taxes (continued)** After consideration of all relevant evidence, UBSFSI believes that it is more likely than not that a benefit will not be realized for its foreign deferred tax assets and accordingly, a valuation allowance of \$512,302 has been recorded. Since December 31, 2021, the valuation allowance related to foreign deferred tax assets decreased by \$1,204. The components of the Company's deferred tax assets and liabilities as of December 31, 2022 were as follows: | Deferred tax assets: | | | |---------------------------------------------------|----|-----------| | Capitalized expenditure | \$ | 1,466,568 | | Employee benefits | | 690,128 | | Net operating loss carryforwards | | 496,841 | | Accelerated income and deferred deductions | | 38,072 | | Book over tax depreciation | | 39,051 | | Lease liability | | 206,499 | | Partnership investments | | 4,907 | | | | 2,942,066 | | Valuation allowance | | (512,302) | | Total deferred tax assets | | 2,429,764 | | Deferred tax liabilities: | | | | Accelerated deductions and deferred income | | 233,764 | | Right-of-use asset | | 162,826 | | Unrealized gains on available for sale securities | | 26,028 | | Total deferred tax liabilities | | 422,618 | | Net deferred tax assets | \$ | 2,007,146 | At December 31, 2022, the Company has foreign net operating loss carryforwards of \$1,324,908 with expiration dates starting in 2023. {44}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* #### **18. Income Taxes (continued)** The effective tax rate for the Company differs from the statutory federal rate primarily due to the change in the valuation allowance for the Company's foreign deferred tax assets, foreign, state and local taxes, non-deductible expenses, tax-exempt interest income and adjustments to existing deferred tax balances. On August 16, 2022, the Inflation Reduction Act (the "IRA") was signed into law. In general, the provisions of the IRA will be effective beginning with the fiscal year 2023, with certain exceptions. The IRA includes a new 15% corporate minimum tax as well as a 1 % excise tax on corporate stock repurchases completed after December 31, 2022. As required under the authoritative guidance of ASC Topic 7 40, Income Taxes, the Company reviewed the impact on income taxes due to the change in legislation and concluded there was no impact to the financial statement as of December 31, 2022. The Company is in the process of evaluating the potential future impacts of the IRA and will continue to review and monitor the issuance of additional guidance from the US Treasury Department. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: {45}------------------------------------------------ # Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* ### **18. Income Taxes (continued)** | Total amounts of unrecognized tax benefits as of January 1, 2022 | \$
4,167 | |-------------------------------------------------------------------------|-------------| | Gross amounts of the increases in unrecognized tax benefits as a result | 2,549 | | of tax positions taken during a prior period | | | Gross amounts of the decreases in unrecognized tax benefits as a | | | result of tax positions taken during a prior period | | | Gross amounts of the increases in unrecognized tax benefits as a result | | | of tax positions taken during the current period | | | Gross amounts of the decreases in unrecognized tax benefits as a | | | result of tax positions taken during the current period | | | The amounts of decreases in the unrecognized tax benefits relating to | | | settlements with taxing authorities | | | Reductions to the unrecognized tax benefits as a result of a lapse of | | | the applicable statute of limitations | | | Total amounts of unrecognized tax benefits as of December 31, 2022 | \$
6,716 | | | | | The total amount of unrecognized tax benefits that, if recognized, | | | would affect the effective tax rate | \$
5,618 | | The total amount of interest and penalties recognized in the | | | consolidated statement of financial condition | \$
2,699 | The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income taxes. UBSFSI is included in the consolidated federal income tax return and certain combined state and local income tax returns of UBS Americas. UBSFSI also files stand-alone returns in various state and local jurisdictions. As of December 31, 2022, the consolidated group is under examination by the Internal Revenue Service ("IRS") for tax years 2015 through 2018. The 2019, 2020 and 2021 tax years are open for examination. There are various state and local jurisdictions currently under audit for tax years 2009 through 2020 and the 2021 tax year is open for examination. UBSFSI files income tax returns with the commonwealth of Puerto Rico, for which tax years 2018 through 2021 are subject to examination. In the next twelve months the Company believes that unrecognized tax benefits will decrease by \$5,230. {46}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31, 2022 *(Amounts in Thousands of Dollars)* ### **19. Subsequent Events** The Company has evaluated its subsequent event disclosure through February 28, 2023, the date that the Company's consolidated statement of financial condition were issued, and has determined that there are no events, that would have a material of impact on the consolidated statement of financial condition. Source: SEC EDGAR via Adviser Search (https://search.stillhousedata.com). Agents: see https://search.stillhousedata.com/llms.txt.