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PROSPECTUS SUPPLEMENT dated July 13, 2016(To Prospectus dated April 29, 2016)
Issued by UBS AG$100,000,0001 VelocitySharesTM VIX Variable Long/Short ETN linked to
the S&P 500 VIX Futures Variable Long/Short Index TR – Short Term due July 18, 2046(the “Variable Long/Short Securities”)
$100,000,0001 VelocitySharesTM VIX Tail Risk ETN linked tothe S&P 500 VIX Futures Tail Risk Index TR – Short Term due July 18, 2046
(the “Tail Risk Securities”)$100,000,0001 VelocitySharesTM VIX Short Volatility Hedged ETN linked to
the S&P 500 VIX Futures Short Volatility Hedged Index TR – Short Term due July 18, 2046(the “Short Volatility Hedged Securities”)
UBS AG is offering and selling three separate series of exchange traded notes (each, a “series of Securities” and collectively, the“Securities”). The Securities do not pay any interest during their term. Each series of Securities tracks the performance of a differentunderlying index (each, an “Index” and collectively, the “Indices”). Each Index is designed to provide exposure to a differentdynamic short-term volatility strategy by pairing both leveraged long and unleveraged short positions in first and second monthVIX futures contracts. Each Index has a target allocation between long and short exposures to VIX futures contracts as describedherein. Each Index measures the performance of 13 separate sub-portfolios that are rebalanced quarterly on a rolling basis, and theleveraged long and unleveraged short positions within each sub-portfolio are rebalanced daily.Investing in the Securities requires an understanding of futures contracts, volatility strategies and path dependence of investmentreturns and the Securities are intended for sophisticated investors to use as part of an overall diversified portfolio. They are designedto achieve their stated investment objectives over the short-term, and their performance over longer periods of time can differsignificantly from their stated objectives. Investing in the Securities involves significant risks and the Securities may not be suitableas a long-term investment or a “buy and hold” strategy. The Securities should be purchased only by sophisticated investors whounderstand the potential consequences of investing in volatility indices and of seeking inverse and leveraged investment returns, whounderstand the path dependence of investment returns, and who are prepared to actively and frequently monitor their investmentsin the Securities, even intraday. Although the Securities have been approved for listing on NYSE Arca, subject to official notice ofissuance, there is no guarantee that a liquid market will develop or be maintained. See “Risk Factors” on page S-27 for risksinvolved in investing in the Securities.Securities OfferedVariable Long/Short Securities➤ The Variable Long/Short Securities are linked to the total return version of the S&P 500 VIX Futures Variable Long/Short
Index TR – Short Term (the “Variable Long/Short Index”). Each of the 13 sub-portfolios of the Variable Long/Short Index hasa target exposure of a 33.33% two times leveraged long position and a 66.67% unleveraged short position in the S&P 500 VIXShort-Term Futures Index (the “Short-Term Futures Index”).
➤ The Variable Long/Short Securities are intended to provide a net long or net short exposure to VIX futures, depending onconditions in the market, with the goal of having a net long exposure during periods of high volatility and a net short exposureduring periods of low volatility. As described herein, however, the actual exposure of the Variable Long/Short Securities to VIXfutures contracts may differ from what is intended and there is no guarantee that the Securities will have a net VIX futuresexposure that benefits investors. The actual exposure of the Securities may result in a loss of some or all of your investment.
Tail Risk Securities➤ The Tail Risk Securities are linked to the total return version of the S&P 500 VIX Futures Tail Risk Index TR – Short Term
(the “Tail Risk Index”). Each of the 13 sub-portfolios has a target exposure of a 45% two times leveraged long position and a55% unleveraged short position in the Short-Term Futures Index, which is intended to result in a net long position in VIXfutures.
➤ The Tail Risk Securities are intended to provide net long exposure to VIX futures, which exposure is more likely to increase invalue when volatility increases and more likely to decrease in value when volatility declines, partially mitigated through theshort exposure to VIX futures. As described herein, however, the actual exposure of the Tail Risk Securities may deviatesignificantly from the intended target exposure, resulting in a net short exposure to VIX futures, and there is no guarantee thatthe Securities will have a net VIX futures exposure that benefits investors. The actual exposure of the Securities may result in aloss of some or all of your investment.
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities orpassed upon the accuracy or adequacy of this prospectus supplement or the accompanying prospectus. Any representation to thecontrary is a criminal offense.The Securities are not deposit liabilities of UBS AG and are not insured by the Federal Deposit Insurance Corporation or anyother governmental agency in the United States, Switzerland or any other jurisdiction.
UBS Investment Bank (cover continued on next page)Prospectus Supplement dated July 13, 2016
1 For each series of Securities, $100,000,000 aggregate Stated Principal Amount is equal to 4,000,000 Securities.
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Short Volatility Hedged Securities
➤ The Short Volatility Hedged Securities are linked to the total return version of the S&P 500 VIX Futures Short VolatilityHedged Index TR – Short Term (the “Short Volatility Hedged Index”). Each of the 13 sub-portfolios of the Short VolatilityHedged Index has a target exposure of a 10% two times leveraged long position and a 90% unleveraged short position in theShort-Term Futures Index, which is intended to result in a net short position in VIX futures.
➤ The Short Volatility Hedged Securities are intended to provide net short exposure to VIX futures, which exposure is more likelyto decrease in value when volatility increases and more likely to increase in value when volatility declines. The leveraged longposition provides a hedge as compared to an outright short position in VIX futures. As described herein, however, the actualexposure of the Short Volatility Hedged Securities may deviate significantly from the intended target exposure, resulting in a netlong exposure to VIX futures, and there is no guarantee that the Securities will have a net VIX futures exposure that benefitsinvestors. The actual exposure of the Securities may result in a loss of some or all of your investment.
General Considerations for the Securities
➤ The Securities do not pay any interest during their term.
➤ The Closing Indicative Value for each series of Securities is recalculated each day to reflect the performance of the applicableunderlying Index.
➤ For each series of Securities, a Daily Investor Fee calculated at the rate of 1.30% per annum of its Closing Indicative Value onthe previous calendar day is deducted each calendar day from its Closing Indicative Value on such calendar day.
➤ For each series of Securities, a Futures Spread Fee is also deducted on each Index Business Day from its Closing Indicative Valueand is intended to approximate the hypothetical cost of buying or selling the number of first and second month VIX futuresthat would be necessary to replicate the performance of the applicable underlying Index. The Futures Spread Fee is uncapped,may vary significantly from day-to-day based upon, among other factors, market conditions, the performance of the applicableunderlying Index, the size of the trade at settlement (“TAS”) bid and offer spreads and the number of first and second monthVIX futures hypothetically required to be bought or sold each day, all of which are beyond UBS’s control and cannot bepredicted. See “Prospectus Supplement Summary — Payments on the Securities” and “Specific Terms of the Securities —Futures Spread Fee” for more information regarding the calculation of the Futures Spread Fee.
➤ You will receive a cash payment at maturity or upon exercise by UBS of its call right with respect to any series of Securitiesbased on its Closing Indicative Value on the applicable Valuation Date, as described herein.
➤ You may exercise your right to early redemption with a minimum redemption amount of 50,000 Securities of any series if youcomply with the required procedures described herein. You will receive a cash payment upon early redemption based on theClosing Indicative Value of such series on the applicable Valuation Date, less the Redemption Fee Amount, as described herein.
➤ You will receive a cash payment following the acceleration upon occurrence of a Stop Loss Termination Event (as definedherein) with respect to any series of Securities based on its indicative value when such event occurs, as determined by UBSSecurities LLC, as Security Calculation Agent, in its sole discretion, acting in good faith and in a commercially reasonablemanner, as described herein.
➤ Each series of Securities has been approved for listing, subject to official notice of issuance, on NYSE Arca. The Variable Long/Short Securities, Tail Risk Securities and Short Volatility Hedged Securities have been approved for listing under the symbols“LSVX”, “BSWN” and “XIVH”, respectively. There can be no assurance that an active secondary market will develop.
➤ The intraday indicative value of each series of Securities will be published on each Trading Day under the ticker symbols below:
Securities Bloomberg Yahoo! Finance
Variable Long/Short Securities LSVXIV <INDEX> ^LSVX-IVTail Risk Securities BSWNIV <INDEX> ^BSWN-IV
Short Volatility Hedged Securities XIVHIV <INDEX> ^XIVH-IV
➤ The Securities are Series B senior unsecured debt securities issued by UBS AG (“UBS”). Any payment at maturity, uponacceleration, early redemption or call is subject to the creditworthiness of UBS and is not guaranteed by any third party. Inaddition, the actual or perceived creditworthiness of UBS will affect the market value, if any, of the Securities.
Investing in the Securities involves significant risks. The Securities do not guarantee any return of your initial investment. You maylose all or a substantial portion of your principal if you invest in the Securities. You will lose all or a substantial portion of yourprincipal at maturity, or upon acceleration, early redemption or exercise by UBS of its call right if the applicable underlying Indexdeclines or does not increase by an amount sufficient to offset the cumulative effect of the Daily Investor Fee, the Futures Spread Feeand the Redemption Fee Amount, if applicable. There is a significant possibility that you will lose all or a substantial portion ofyour investment if you hold your Securities for a long period of time. We do not expect that any investor will hold the Securitiesfrom inception to maturity.
See “Risk Factors” beginning on page S-27 for additional risks related to an investment in the Securities.
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The principal terms of each series of the Securities are as follows:
Issuer: UBS AG (London Branch)
Series: Medium-Term Notes, Series B. Unlike UBS AG’s exchange-traded notes issued prior to June 14,2015, which are part of a series of debt securities entitled “Medium-Term Notes, Series A,”having UBS Switzerland AG as a co-obligor, the Securities are part of a series of debt securitiesentitled “Medium Term Notes, Series B,” which do not benefit from the co-obligation of UBSSwitzerland AG.
Initial Trade Date: July 13, 2016
Initial Settlement Date: July 18, 2016
Term: 30 years, subject to your right to require UBS to redeem your Securities on any Redemption Dateand subject to the UBS Call Right and potential acceleration upon occurrence of a Stop LossTermination Event, each as described below.
Maturity Date: July 18, 2046, subject to adjustment
No Interest Payments: We will not pay you interest during the term of the Securities.
Stated Principal Amount: $25.00 per Security
Underlying Indices: The return on each series of the Securities is linked to the performance of the total return versionof a different underlying Index that is designed to provide exposure to a different dynamic short-term volatility strategy by pairing both leveraged long and unleveraged short positions in firstand second month VIX futures contracts.
The CBOE Volatility Index® (the “VIX Index”) is a benchmark index designed to measure themarket price of volatility in large cap U.S. stocks over 30 days in the future, and is calculatedbased on the prices of certain put and call options on the S&P 500® Index. Assuming all otherrelevant factors remain constant or have negligible changes, as the prices of options on the S&P500® Index generally increase, the VIX Index, which indirectly measures implied volatility bymeasuring changes in these option prices, typically increases. The VIX Index has historically hada negative correlation to the S&P 500® Index.
Futures on the VIX Index (“VIX futures contracts” or “VIX futures”) were first launched fortrading by the CBOE Futures Exchange (“CFE”) in 2004. VIX Index futures have expirationsranging from the first month consecutively out to the ninth month and use a contract multiplierof 1000. Futures on the VIX Index give investors the ability to invest in forward market volatilitybased on their view of the future direction or movement of the VIX Index. Investors that believethe implied volatility of the S&P 500® Index (and thus the VIX Index) will increase may buy VIXfutures. Conversely, investors that believe that the implied volatility of the S&P 500® Index (andthus the VIX Index) will decline may sell VIX futures. Futures, unlike securities or indices, havean expiration date. Accordingly, to maintain exposure to a futures position an investor must rollit from one month to the next by liquidating expiring futures contracts and entering into a newfutures contracts expiring in later months. These transactions create the potential for positive ornegative returns that are separate from outright price movements in the underlying index. As aresult, the return on a position in VIX futures may vary significantly from the percentage changesof the VIX Index itself. Typically, though not in all market conditions, this “roll cost”significantly decreases the return for investors who are long VIX futures while investors who areshort VIX futures benefit from a “roll yield.” Since each Index is based on the performance of 13sub-portfolios of VIX futures, its performance may also be reduced by a roll cost or benefit froma roll yield.
Index Target Ratio/Rebalancings:
The Index underlying each series of Securities has a different target ratio of leveraged long andunleveraged short exposures to VIX futures.
SecuritiesUnderlying
Index
TargetNet
VolatilityAllocation
TargetAllocation of
2XLeveragedLeg (LongPosition)
TargetAllocation ofInverse Leg
(ShortPosition)
UnderlyingIndexTicker
SecuritiesTicker
VariableLong/ShortSecurities
VariableLong/ShortIndex
0% 33.33% 66.67% SPVXVST LSVX
Tail RiskSecurities
Tail RiskIndex
35% 45% 55% SPVXTRST BSWN
ShortVolatilityHedgedSecurities
ShortVolatilityHedged Index
-70% 10% 90% SPVXVHST XIVH
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The performance of the long and short positions of the applicable underlying Index (which arerebalanced daily as described under “The Indices — The Underlying Indices” beginning on pageS-52) is based on the return from the excess return version of the Short-Term Futures Index,which measures the return from a daily rolling long position in the first and second monthfutures contracts on the VIX Index.
In order to reduce the path-dependent nature of such an exposure, each Index tracks 13 sub-portfolios, each of which has the same target allocation between a leveraged long and inverseexposure to VIX futures contracts. Each sub-portfolio is rebalanced back to the applicableunderlying Index’s target weights (as described under “The Indices — Index Construction”) onceper quarter on a rolling basis, with one of the 13 sub-portfolios tracked by each Index beingrebalanced each Wednesday during the quarter. In addition, on the last business day of everyquarter each Index is itself rebalanced so that all 13 sub-portfolios are equally weighted. For adetailed description of the Indices, see “The Indices” beginning on page S-45.
Daily Investor Fee: Each series of Securities is subject to a “Daily Investor Fee.” On the Initial Trade Date, the DailyInvestor Fee is equal to zero. On each subsequent calendar day, the Daily Investor Fee for eachseries of Securities equals the product of (i) 1.30% divided by 365 times (ii) the ClosingIndicative Value for such series of Securities on the previous calendar day. For the purpose ofcalculating the Daily Investor Fee, if such previous calendar day was not an Index Business Day,the Closing Indicative Value will be calculated based on the Closing Indicative Value on theimmediately preceding Index Business Day.
Futures Spread Fee: Each series of Securities is also subject to a fee (the “Futures Spread Fee”), which is intended toapproximate the hypothetical cost of buying and selling the number of first and second monthVIX futures that would be necessary to replicate the performance of the applicable underlyingIndex. The Futures Spread Fee, which is uncapped, is based on market inputs that are beyondUBS’s control and it may vary significantly from day to day. Because the Futures Spread Fee mayvary significantly even over short periods of time and will generally reduce the return on theSecurities, an investor should monitor its investment frequently, even intraday.
The costs to buy or sell first and second month VIX futures are assumed for purposes ofcalculating the Futures Spread Fee to be equal to the bid or offer spread, as applicable, on a TAStransaction. A “TAS” transaction is a transaction on a futures contract at a price (a “TASprice”) equal to the daily settlement price, plus a specified differential above or below the dailysettlement price, for the futures contract on a specified trading day. The TAS bid spread reflectsthe differential when an investor is selling VIX futures, while the TAS offer spread reflects thedifferential when an investor is buying VIX futures.
TAS transactions are utilized with respect to futures contracts because, unlike with equitysecurities, there is no option to buy or sell futures contracts at the daily closing price. Accordingto Bloomberg data, the closing TAS spread per VIX future has ranged historically from $-0.06 to$0.05 for the first and second month VIX futures contracts. Historical data regarding the TASspreads is severely limited and therefore not a good predictor of future spreads. Investors arecautioned regarding the use of or reliance on such historical data and are urged to makeindependent evaluations of TAS spreads.
The Futures Spread Fee for each series of Securities on any Index Business Day will be calculatedusing the formula set forth under “Specific Terms of the Securities — Futures Spread Fee” onpage S-67. On each calendar day that is not an Index Business Day, the Futures Spread Fee foreach series of Securities will equal zero.
Cash Settlement Amount atMaturity:
On the Maturity Date, you will receive a cash payment per Security of each series that you hold(the “Cash Settlement Amount at Maturity”) equal to its Closing Indicative Value as of the FinalValuation Date.
Closing Indicative Value: For each series of Securities, on the Initial Trade Date, the Closing Indicative Value is equal to$25.00 per Security. For each subsequent calendar day, the Closing Indicative Value per Securitywill equal:
(its Closing Indicative Value on the previous calendar day × Daily Index Performance for theapplicable underlying Index) – Daily Investor Fee for such series of Securities for such calendarday – Futures Spread Fee for such series of Securities for such calendar day.
You will lose some or all of your investment if the applicable underlying Index level declines ordoes not increase by an amount sufficient to offset the cumulative effect of the Daily InvestorFee and the Futures Spread Fee.
Daily Index Performance: For each Index, the Daily Index Performance on any Index Business Day will equal (i) the IndexClosing Level for the applicable underlying Index on such Index Business Day divided by (ii) theIndex Closing Level for the applicable underlying Index on the immediately preceding IndexBusiness Day. The Daily Index Performance will equal one on any calendar day that is not anIndex Business Day.
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Index Closing Level: The closing level of the applicable underlying Index as reported on Bloomberg L.P.
Early Redemption: Subject to your compliance with the procedures described under “Specific Terms of the Securities— Early Redemption at the Option of the Holders” and “Specific Terms of the Securities —Redemption Procedures” beginning on pages S-73 and S-74, respectively, you may elect torequire UBS to redeem your Securities of any series, in whole or in part, prior to the MaturityDate on any Index Business Day commencing on July 19, 2016 through and including the finalRedemption Date, subject to a minimum redemption amount of at least 50,000 Securities of suchseries. UBS reserves the right from time to time to waive this minimum redemption amount in itssole discretion on a case-by-case basis. You should not assume you will be entitled to the benefitof any such waiver. If you redeem your Securities, you will receive a cash payment equal to theRedemption Amount, which will be determined on the applicable Redemption Valuation Dateand paid on the applicable Redemption Date. The first Redemption Date will be July 19, 2016and the final Redemption Date will be July 11, 2046.
Redemption Amount Upon early redemption of the Securities of any series, you will receive per Security a cashpayment on the relevant Redemption Date equal to its Closing Indicative Value as of theapplicable Valuation Date, minus the Redemption Fee Amount. If the amount so calculated isless than or equal to zero, the payment upon your exercise of redemption will be zero. We referto this cash payment as the “Redemption Amount.”
Redemption Fee Amount: As of any Valuation Date, an amount per Security of any series equal to the product of (i)0.125% and (ii) its Closing Indicative Value as of such Valuation Date. UBS reserves the rightfrom time to time to waive the Redemption Fee Amount in its sole discretion on a case-by-casebasis. You should not assume you will be entitled to the benefit of any such waiver.
Redemption Procedures To redeem your Securities prior to the Maturity Date, you must instruct your broker to deliver anotice of redemption to Janus Distributors LLC (“Janus Distributors”) by email no later than4:00 p.m. (New York City time) on the Index Business Day on which you elect to exercise yourredemption right and you and your broker must follow the procedures described herein. If youfail to comply with these procedures, your notice will be deemed ineffective. UBS reserves theright from time to time to waive, in its sole discretion, any of the requirements contained in theredemption procedures described under “Specific Terms of the Securities — Early Redemption atthe Option of the Holders” and “Specific Terms of the Securities — Redemption Procedures”beginning on pages S-73 and S-74, respectively. UBS also reserves the right from time to time toaccelerate, in its sole discretion on a case-by-case basis, the Redemption Valuation Date to thedate on which the notice of redemption is received by Janus Distributors rather than thefollowing Index Business Day. You should not assume you will be entitled to the benefit of anysuch waiver or acceleration.
UBS Call Right: On any Trading Day on or after July 19, 2017 through and including the Maturity Date (anysuch date, the “Call Settlement Date”), UBS may at its option redeem all, but not less than all,issued and outstanding Securities of any series. To exercise this option (the “Call Right”), UBSmust provide notice to the holders of such series of the Securities not less than ten calendar daysprior to the Call Settlement Date. Upon early redemption in the event UBS exercises this right,you will receive on the Call Settlement Date a cash payment (the “Call Settlement Amount”)equal to the Closing Indicative Value for each applicable Security as of the applicable ValuationDate. If the amount so calculated is less than or equal to zero, the payment upon exercise of theCall Right will be zero.
Acceleration Upon Occurrenceof a Stop Loss TerminationEvent; Stop Loss RedemptionValue:
The “Stop Loss Termination Event” provisions of the Securities provide for the early, automatictermination of a series of Securities in certain circumstances by way of a mandatory redemptionby UBS. If the stop loss termination provision is triggered with respect to any series of Securities,those Securities will be mandatorily redeemed and the holders will receive the Stop LossRedemption Value as described herein, which payment may be equal to zero. Holders ofSecurities of such series will not benefit from any future exposure to the applicable Index after aStop Loss Termination Event.
If, at any time, the intraday indicative value of any series of Securities on any Index Business Day,calculated as described in “Valuation of the Indices and the Securities — Intraday SecurityValues,” is equal to or less than 20.0% of the Closing Indicative Value of such Securities at theend of the prior Index Business Day (such event with respect to any series of Securities, a “StopLoss Termination Event” and the day on which such event occurs, a “Stop Loss TerminationDate”), all issued and outstanding Securities of such series will be automatically accelerated andmandatorily redeemed by UBS for a cash payment equal to the Stop Loss Redemption Value.
The “Stop Loss Redemption Value” will be determined by UBS Securities LLC as SecurityCalculation Agent in its sole discretion, acting in good faith and in a commercially reasonablemanner, using the latest publicly available quotations for the intraday indicative value of theapplicable underlying Index that are available as soon as reasonably practicable after the time
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that an investor could reasonably be expected to unwind an investment in the first and secondmonth VIX futures hypothetically required to replicate the performance of the applicableunderlying Index following the occurrence of a Stop Loss Termination Event, based on suchfactors as liquidity, market availability and practical time constraints. UBS Securities LLC, asSecurity Calculation Agent, will calculate, in its sole discretion, the Stop Loss Redemption Valueof such series of Securities as:
(Closing Indicative Value on the previous calendar day × Daily Intraday Index Performance forthe applicable underlying Index as soon as reasonably practicable following the Stop LossTermination Event) – Daily Investor Fee for such series of Securities on the Stop LossTermination Date.
The Stop Loss Redemption Value (a) is not expected to be greater than 20.0% of the ClosingIndicative Value of such series of Securities at the end of the prior Index Business Day and (b)shall not be less than $0 per Security.
If a Stop Loss Termination Event occurs for any series of Securities, you will receive on the StopLoss Redemption Date only the Stop Loss Redemption Value in respect of your investment insuch Securities. If the Stop Loss Redemption Value so calculated is equal to or less than zero, thepayment upon acceleration will be zero. The “Stop Loss Redemption Date” will be the fifthBusiness Day following the Stop Loss Termination Date; provided that if the calculation of theStop Loss Redemption Value is postponed as a result of a market disruption event, the Stop LossRedemption Date will be the fifth business day after the Stop Loss Redemption Value iscalculated. For a discussion of the risks related to the occurrence of a Stop Loss TerminationEvent, see “Risk Factors — The Securities may be automatically accelerated and mandatorilyredeemed, resulting in a loss of all or a substantial portion of your investment.”
Valuation Dates: The applicable “Valuation Date” means (i) with respect to an early redemption, the third IndexBusiness Day prior to the related Redemption Date, which day is also the first Index BusinessDay following the date that a Redemption Notice and Redemption Confirmation are delivered incompliance with the redemption procedures (or, in the sole discretion of UBS, the same date thatthe Redemption Notice and Redemption Confirmation are delivered in compliance with theredemption procedures) (a “Redemption Valuation Date”), (ii) with respect to UBS’s exercise ofits Call Right, the third Trading Day prior to the Call Settlement Date, (iii) with respect to theMaturity Date, the Final Valuation Date and (iv) with respect to the occurrence of a Stop LossTermination Event, the Stop Loss Termination Date. The “Final Valuation Date” will be theTrading Day that falls on July 13, 2046. If any of the applicable Valuation Dates, including theFinal Valuation Date, is not a Trading Day, then such Valuation Date or Final Valuation Datewill be the next succeeding Trading Day, but in no event more than three Trading Days after theoriginally scheduled Valuation Date. See “Specific Terms of the Securities — Market DisruptionEvent” on page S-78.
Index Calculation Agent: SPDJI
Security Calculation Agents: UBS Securities LLC and Janus Index and Calculation Services LLC (“Janus Index”). See “SpecificTerms of the Securities — Security Calculation Agents” on page S-76 for more information.
Listing: Each series of Securities has been approved for listing, subject to official notice of issuance, onNYSE Arca. The Variable Long/Short Securities, Tail Risk Securities and Short Volatility HedgedSecurities have been approved for listing under the symbols “LSVX”, “BSWN” and “XIVH”,respectively. There can be no assurance that an active secondary market will develop; if it does,we expect that investors will purchase and sell the Securities primarily in this secondary market.
Indicative Value: The “indicative value” of each series of Securities is calculated at any time on any Index BusinessDay in accordance with the following equation:
(its Closing Indicative Value on the previous calendar day × Daily Intraday Index Performancefor the applicable underlying Index) – Daily Investor Fee for such series of Securities for suchcalendar day
The “Daily Intraday Index Performance” at any time is equal to (i) the level of the applicableunderlying Index at such time divided by (ii) the Index Closing Level for the applicableunderlying Index on the immediately preceding Index Business Day.
On any given Index Business Day, the indicative value prior to market close will not reflect theFutures Spread Fee for such Index Business Day because the Futures Spread Fee can only becalculated after the market close using the TAS spreads for the first and second month VIXfutures contracts. Only the Closing Indicative Value calculated on such Index Business Day willreflect the Futures Spread Fee.
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Split or Reverse Split of theSecurities:
Janus Index may, at any time in in its sole discretion, instruct us to initiate a split or reverse splitof any series of Securities. If Janus Index instructs us to initiate a split or reverse split, asapplicable, such date shall be deemed to be the “announcement date,” and we will issue a noticeto holders of such series of Securities and press release announcing the split or reverse split,specifying the effective date of the split or reverse split. The record date for any split or reversesplit will be the tenth calendar day after the announcement date, provided that if such calendarday is not a Business Day, the record date for such split or reverse split will be the first BusinessDay following such calendar day. The effective date of any split or reverse split will be the nextBusiness Day after the record date. The Securities of any series shall not be split or reverse splitmore than four times per calendar year in the aggregate per series of Securities. In the event of asplit or reverse split, the Closing Indicative Value of such series of Securities will be adjustedaccordingly. See “Valuation of the Indices and the Securities — Split or Reverse Split of theSecurities” beginning on page S-64.
Intraday Indicative ValueSymbols of the Securities:
The intraday indicative value of the Securities will be published on each Trading Day under theticker symbols:
Securities Bloomberg Yahoo! Finance
Variable Long/Short Securities LSVXIV <INDEX> ^LSVX-IVTail Risk Securities BSWNIV <INDEX> ^BSWN-IV
Short Volatility Hedged Securities XIVHIV <INDEX> ^XIVH-IV
CUSIP and ISIN Numbers: Securities CUSIP ISIN
Variable Long/Short Securities 90274D 176 US90274D1761Tail Risk Securities 90274D 168 US90274D1688
Short Volatility Hedged Securities 90274D 150 US90274D1506
On the Initial Trade Date, we sold $25,000,000 aggregate Stated Principal Amount of each series of the Securities to UBS SecuritiesLLC at 100% of their stated Principal Amount. After the Initial Trade Date, from time to time we may sell a portion of each seriesof the Securities, and issue and sell additional Securities of each series at market prices prevailing at the time of sale, at prices relatedto market prices or at negotiated prices. We expect to receive proceeds equal to 100% of the price at which the Securities of eachseries are sold to the public, less any commissions paid to UBS Securities LLC. The Securities of each series may be sold at a pricethat is higher or lower than the Stated Principal Amount. UBS Securities LLC may charge normal commissions in connection withany purchase or sale of the Securities of each series and may receive a portion of the Daily Investor Fee and Futures Spread Fee. Inaddition, Janus Distributors will receive a fee in consideration for its role in marketing and placing each series of Securities underthe “VelocitySharesTM” brand. Please see “Supplemental Plan of Distribution” on page S-91 for more information.
We may issue and sell additional Securities of any series at any time, but we are under no obligation to do so, and we may limit orrestrict such sales, and we may stop and subsequently resume selling additional Securities of any series, at any time for any reason.In addition, we may condition our acceptance of a market maker’s, other market participant’s or investor’s offer to purchaseSecurities of any series on its agreeing to purchase certain exchange traded notes issued by UBS or enter into certain transactionsconsistent with our hedging strategy, including but not limited to swaps, OTC derivatives, listed options, or securities. Any of theseactions could materially affect the trading price and liquidity of such series of Securities in the secondary market. Alternatively, asuspension of sales of any series of the Securities could lead to insufficient supply, causing the market price of such series ofSecurities to increase. Such an increase could represent a premium over the intraday indicative value of such series of Securities.Before trading in the secondary market, you should compare the intraday indicative value of such series of Securities with the then-prevailing trading price of such series. Furthermore, if we were to resume sales of such series of Securities, it could result in thereduction or elimination of any premium in the market price over the intraday indicative value. Thus, paying a premium purchaseprice over the intraday indicative value of such series of Securities could lead to significant losses in the event you sell your Securitiesat a time when such premium is no longer present in the market or such series of Securities is called or accelerated.
We may use this prospectus supplement and the accompanying prospectus in the initial sale of the Securities of each series. Inaddition, UBS Securities LLC or another of our affiliates may use this prospectus supplement and the accompanying prospectus inmarket-making transactions in any Securities of any series after their initial sale. Unless we or our agent informs you otherwise inthe confirmation of sale or in a notice delivered at the same time as the confirmation of sale, this prospectus supplement and theaccompanying prospectus are being used in a market-making transaction.
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The Securities being offered as described in this prospectus supplement and the accompanying prospectusconstitute one offering in a series of offerings of exchange-traded notes. We are offering and maycontinue to offer from time to time exchange-traded notes linked to different underlying indices and withthe same or different terms and conditions, relative to those set forth in this prospectus supplement. Youshould be sure to refer to the prospectus supplement for the particular offering of exchange-traded notesin which you are considering an investment.
This prospectus supplement contains the specific financial and other terms that apply to the securities beingoffered herein. Terms that apply generally to all our Medium-Term Notes, Series B, are described under“Description of Debt Securities We May Offer” in the accompanying prospectus. The terms described here(i.e., in this prospectus supplement) modify or supplement those described in the accompanying prospectusand, if the terms described here are inconsistent with those described there, the terms described here arecontrolling. The contents of any website referred to in this prospectus supplement are not incorporated byreference in this prospectus supplement or the accompanying prospectus.
You may access the accompanying prospectus dated April 29, 2016 at:http://www.sec.gov/Archives/edgar/data/1114446/000119312516569341/d161008d424b3.htm
We are responsible for the information incorporated by reference or provided in this prospectussupplement or the accompanying prospectus. We have not authorized anyone to provide you withdifferent information. We are not making an offer of these Securities in any state where the offer is notpermitted. You should not assume that the information in this prospectus supplement is accurate as ofany date other than the date on the front of the document.
TABLE OF CONTENTS
Prospectus SupplementProspectus Supplement Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1Historical Performance and Hypothetical Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-18Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-27The Indices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-45Valuation of the Indices and the Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-63Specific Terms of the Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-66Use of Proceeds and Hedging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-84Material U.S. Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-85Benefit Plan Investor Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-89Supplemental Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-91
Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-92Notice of Early Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1Broker’s Confirmation of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1Hypothetical Calculations of the Futures Spread Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1ProspectusIntroduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Cautionary Note Regarding Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Incorporation of Information About UBS AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Where You Can Find More Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Presentation of Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Limitations on Enforcement of U.S. Laws Against UBS AG, Its Management and Others . . . . . . . . . . . . . . . . . . 7UBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Swiss Regulatory Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Description of Debt Securities We May Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Description of Warrants We May Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33Legal Ownership and Book-Entry Issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48Considerations Relating to Indexed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53Considerations Relating to Securities Denominated or Payable in or Linked to a Non-U.S. Dollar Currency . . 56U.S. Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59Tax Considerations Under the Laws of Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70Benefit Plan Investor Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75Validity of the Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
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Prospectus Supplement SummaryThe following is a summary of terms of the Securities, as well as a discussion of factors you shouldconsider before purchasing any of the Securities. The information in this section is qualified in its entiretyby the more detailed explanations set forth elsewhere in this prospectus supplement and in theaccompanying prospectus. Please note that references to “UBS,” “we,” “our” and “us” refer only toUBS AG and not to its consolidated subsidiaries.
We may, without your consent, create and issue additional securities having the same terms andconditions as the any series of Securities. We may consolidate the additional securities to form a singleclass with the outstanding Securities of such series. In addition, we may suspend sales of any or all seriesof the Securities for any reason, or we may condition our acceptance of a market maker’s, other marketparticipant’s or investor’s offer to purchase Securities of any series on its agreeing to purchase certainexchange traded notes issued by UBS or enter into certain transactions consistent with our hedgingstrategy, including but not limited to swaps, OTC derivatives, listed options, or securities, any of whichcould affect the liquidity of the market for one or more series of the Securities.
This section summarizes the following aspects of the Securities:
- What are the Securities and how do they work?
- How do you redeem your Securities?
- What are some of the risks of the Securities?
- Is this the right investment for you?
- Who calculates and publishes the Indices?
- What are the tax consequences of owning the Securities?
The Securities are intended only for sophisticated investors who understand futures markets, volatilitytrading strategies and path dependence of investment returns.
Investing in the Securities requires an understanding of futures contracts, volatility strategies and pathdependence of investment returns and the Securities are intended for sophisticated investors to use as partof an overall diversified portfolio. Each series of Securities is designed to achieve its stated investmentobjectives (described below under “What are the Securities and how do they work? — The UnderlyingIndices”) over the short-term, and its performance over longer periods of time can differ from its statedobjectives. Investing in the Securities involves significant risks and the Securities may not be suitable as along-term investment or as part of a “buy and hold” strategy. Even an investment in the Securities over ashorter holding period may not perform as intended. The Securities should be purchased only bysophisticated investors who understand the potential consequences of investing in volatility indices andof seeking inverse and leveraged investment returns, who understand the path dependence of investmentreturns, and who are prepared to actively and frequently monitor their investments in the Securities, evenintraday. Although the Securities have been approved for listing on the NYSE Arca, subject to officialnotice of issuance, there is no guarantee that a liquid market will develop or be maintained. In addition,each series of Securities may be automatically accelerated and mandatorily redeemed prior to theMaturity Date in the event of a Stop Loss Termination Event or upon exercise of UBS’s Call Right.
Unlike ordinary debt securities, the Securities do not pay interest during their term and do not guaranteeany return of principal at maturity or upon call, early redemption or acceleration. You may lose all or asubstantial portion of your initial investment.
See “Risk Factors” beginning on page S-27.
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What are the Securities and how do they work?
The Securities are senior unsecured medium-term notes issued by UBS with a return linked to changes inthe level of the Long/Short Index, the Tail Risk Index or the Short Volatility Hedged Index, as applicable.The Daily Investor Fee and the Futures Spread Fee (and Redemption Fee Amount, if applicable)associated with the Securities will reduce the amount payable at maturity or upon early redemption,acceleration or exercise of our call right. Each Index is designed to provide exposure to a differentdynamic short-term volatility strategy by pairing both leveraged long and unleveraged short positions infirst and second month VIX futures contracts. Each Index has a target allocation between leveraged longand unleveraged short exposures to VIX futures contracts as described herein. Each Index measures theperformance of 13 separate sub-portfolios that are rebalanced quarterly on a rolling basis, and theleveraged long and unleveraged short positions within each sub-portfolio are rebalanced daily. Forillustration, the principal components of each of the Indices are as follows:
Total Return Version of Underlying Index1
Linked to:
13 Sub-Portfolios2
3-Month T-Bill Rate+
Tail Risk SecuritiesShort Volatility Hedged
Securities
Comprised of:
Variable Long/ShortSecurities
Excess Return Version of the Index
The excess return version of each Index comprises 13 sub-portfolios, each of which is split between a two times leveraged (“long”)leg and an unleveraged inverse (“short”) leg. The two times leveraged leg is linked to two times the daily return of the Short-TermFutures Index, and the inverse leg is linked to the inverse daily return of the Short-Term Futures Index. Each sub-portfolio has thesame target allocation between leveraged and inverse exposures to VIX futures contracts through the Short-Term Futures Index.
Each sub-portfolio is rebalanced to its target weights on a rolling quarterly basis.
Leveraged Leg Inverse Leg+
2x Daily Return of the Short-Term Futures Index(Long Position)
-1x Daily Return of the Short-Term Futures Index(Short Position)
The target exposure for each sub-portfolio is shown below for each underlying Index. The actual exposure of each leg will vary overtime between rebalancing dates based on the performance of the Short-Term Futures Index.
1 Each total return Index comprises the applicable excess return index and exposure to the rate of interest that could be earned oncash collateral invested in three month U.S. Treasury Bills.
2 Each Index tracks 13 sub-portfolios in order to simulate the return of owning 13 separate positions in VIX futures on an equallyweighted basis, with one position being rebalanced to target weights each week during a quarter.
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The target exposure for each sub-portfolio is shown below for each underlying Index, along with thetarget net volatility allocation of each Index. The actual exposure of each leg will vary over time betweenrebalancing dates based on the performance of the S&P 500 VIX Short-Term FuturesTM Index (the“Short-Term Futures Index”). At the time you purchase the Securities, the actual exposure of each leg isunlikely to be at its target exposure.
Index NameWeight of 2x
Leveraged LegWeight of Inverse
Leg
Target NetVolatilityAllocation
Variable Long/Short Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33.33% 66.67% 0%Tail Risk Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45% 55% 35%Short Volatility Hedged Index . . . . . . . . . . . . . . . . . . . . . . . . . . . 10% 90% -70%
For a detailed description of the composition of each Index, see “— The Underlying Indices — TheVariable Long/Short Index,” “— The Underlying Indices — The Tail Risk Index,” and “— TheUnderlying Indices — The Short Volatility Hedged Index” below.
As shown in the above graphic, the sub-portfolios in each Index are composed of a two-times leveragedlong exposure to the Short-Term Futures Index and an unleveraged, inverse exposure to the Short-TermFutures Index. The Short-Term Futures Index measures the return from a daily rolling long position inthe first and second month futures contracts on the VIX Index, taking into account roll cost or roll yield.An investor maintaining a desired long exposure in a futures position by replacing contracts expiring inone month with contracts expiring in the next month will incur a roll cost when purchasing thereplacement contracts at a higher cost and will benefit from a roll yield when purchasing the replacementcontracts at a lower cost. Conversely, an investor maintaining a desired short exposure in a futuresposition will benefit from a roll yield when selling replacement contracts at a higher price and incur a rollcost when selling replacement contracts at a lower price. Since the prices of VIX futures contracts aremore commonly higher in distant delivery months than in nearer delivery months (i.e., when the marketis in “contango”), an investor maintaining a long position in VIX futures contracts will typically incur“roll costs” when rolling into contracts with a later delivery date (because such contracts have a higherprice than the contracts currently held), and therefore the long position is likely to decline in value unlessvolatility increases sharply. On the other hand, an investor maintaining a short position in VIX futurescontracts will typically benefit from a roll yield, and therefore the short position is likely to increase invalue unless volatility increases sharply. These relationships may be reversed when prices of VIX futurescontracts in distant delivery months are lower than in nearer delivery months (i.e., when the market is in“backwardation”). For a discussion of the Short-Term Futures Index, see “The Indices — The S&P 500VIX Short-Term Futures Index,” and for a discussion of the futures markets, see “The Indices — FuturesMarkets.”
A Daily Investor Fee for each series of Securities calculated at the rate of 1.30% per annum of its ClosingIndicative Value on the previous calendar day is deducted each calendar day. The Futures Spread Fee,deducted each Index Business Day, is a variable, uncapped fee which is intended to approximate thehypothetical cost of buying and selling the number of first and second month VIX futures that would benecessary to replicate the performance of the applicable underlying Index. In order to hedge its exposure,UBS may buy or sell an appropriate number of first and second month VIX futures on each IndexBusiness Day so that its position in VIX futures matches the notional position held by the applicableunderlying Index. Each series of Securities may provide a cash payment at maturity or upon call, earlyredemption or acceleration if the applicable underlying Index level at maturity or upon call, accelerationor early redemption, as applicable, has appreciated sufficiently to offset the negative effect of the DailyInvestor Fee and the Futures Spread Fee.
As explained in “Risk Factors — The Securities are not suitable for all investors. In particular, theSecurities should be purchased only by sophisticated investors who understand the consequences of
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investing in volatility indices and of seeking inverse or leveraged investment results, who understand thepath dependence of the Indices and the Securities, who do not intend to hold the Securities as a buy andhold investment and who are willing to actively and frequently monitor their investment, even intraday”beginning on page S-27, given the effects of the roll costs or roll yields, as applicable, associated with theVIX futures contracts underlying the Indices and the effect of the Daily Investor Fee and Futures SpreadFee, there is a significant possibility that the amount payable on the Securities at maturity or upon call,early redemption or acceleration will be less than the amount of your initial investment in the Securities,and that you will lose part or all of your initial investment if you hold the Securities for a long period oftime. We do not expect that any investor will hold the Securities from inception to maturity.
The Underlying Indices
The return on each series of the Securities is linked to the performance of the total return version of adifferent underlying Index that is designed to provide exposure to a different dynamic short-termvolatility strategy by pairing both leveraged long and unleveraged short positions in first and secondmonth VIX futures contracts. The long position is a two times leveraged long exposure to the Short-Term Futures Index, and the short position is an unleveraged, inverse exposure to the Short-TermFutures Index. Each Index has a target allocation between long and short exposures to VIX futurescontracts as described herein. Each Index measures the performance of 13 separate sub-portfolios thatare rebalanced quarterly on a rolling basis, and the leveraged long and unleveraged short positions withineach sub-portfolio are rebalanced daily.
The Variable Long/Short Index
The Variable Long/Short tracks 13 sub-portfolios, each of which has a target net volatility allocation of0% consisting of target exposures of a 33.33% two times leveraged long position and a 66.67%unleveraged short position in the Short-Term Futures Index.
The Variable Long/Short Index will be either net long or net short VIX futures depending on volatility.As volatility increases, the leveraged long leg of each sub-portfolio will increase in value while the inverseleg of each sub-portfolio will decrease in value, resulting in a corresponding increase in the weight of theleveraged long leg and a decrease in the weight of the inverse leg. The opposite is also true. As a result,the Variable Long/Short Index will move toward a net long VIX futures exposure as volatility increases,and move towards a net short VIX futures exposure as volatility decreases. This is intended to give theholder the opportunity to achieve a positive expected return from either the roll yield (in a contangomarket) through the inverse leg or a large increase in volatility through the leveraged long leg.
While the strategy is intended to be dynamic, the path dependence of the Variable Long/Short Index maycause its actual performance to deviate significantly from its intended target exposure, preventing theVariable Long/Short Securities from achieving their goal. To the extent that the Variable Long/ShortIndex does not transition from net long to net short (or vice-versa) in a manner advantageous to holdersof the Variable Long/Short Securities, investors in the Variable Long/Short Securities may be net short asvolatility increases or net long as volatility decreases, especially if there are sudden increases or decreasesin the volatility of the S&P 500® Index. As a result, the Variable Long/Short Securities should only bepurchased by sophisticated investors who understand the risks of investing in volatility and the impact ofrebalancing of the sub-portfolios and the Variable Long/Short Index and who will actively monitor theirinvestment, including intraday.
The Tail Risk Index
The Tail Risk Index tracks 13 sub-portfolios, each of which has a target net volatility allocation of 35%consisting of target exposures of a 45% two times leveraged long position and a 55% unleveraged shortposition in the Short-Term Futures Index intended to result in a net long position in VIX futures.
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The Tail Risk Index is more likely to increase in value when volatility increases and to decrease in valuewhen volatility decreases, but any such increase or decrease should be mitigated by the inverse leg’s shortexposure. In a contango market, the inverse leg is also intended to mitigate the roll cost associated withthe leveraged long position by providing a roll yield.
While the strategy is intended to result in a net long position in VIX futures, the path dependence of theTail Risk Index may cause its actual performance to deviate significantly from its intended targetexposure, resulting in a net short exposure to VIX futures, preventing the Tail Risk Securities fromachieving their goal. As a result, the Tail Risk Securities should only be purchased by sophisticatedinvestors who understand the risks of investing in volatility and the construction of the Tail Risk Indexand who will actively monitor their investment, including intraday.
The Short Volatility Hedged Index
The Short Volatility Hedged Index tracks 13 sub-portfolios, each of which has a target net volatilityallocation of -70% consisting of target exposures of a 10% two times leveraged long position and a 90%unleveraged short position in the Short-Term Futures Index intended to result in a net short position asto VIX futures.
The Short Volatility Hedged Index is more likely to increase in value when volatility decreases and todecrease in value when volatility increases, but any such increase or decrease should be mitigated by theleveraged leg’s long exposure. The Short Volatility Hedged Index is also intended to provide anopportunity to achieve a positive expected return from the roll yield in VIX futures in a contango marketon the inverse leg.
While the strategy is intended to result in a net short position in VIX futures, the path dependence of theShort Volatility Hedged Index may cause its actual performance to deviate significantly from its intendedtarget exposure, resulting in a net long exposure to VIX futures, preventing the Short Volatility HedgedSecurities from achieving their goal. As a result, the Short Volatility Hedged Securities should only bepurchased by sophisticated investors who understand the risks of investing in volatility and theconstruction of the Short Volatility Hedged Index and who will actively monitor their investment,including intraday.
Path-Dependent Nature of the Indices
Because the leveraged and inverse exposures in each sub-portfolio in each of the Indices are reset daily,and the target weights for each sub-portfolio are not maintained on a daily basis, the performance of theIndices is path-dependent. As volatility increases, the leveraged long leg of each sub-portfolio in theapplicable underlying Index will increase in value, resulting in an increase in its relative weight, while theinverse leg of each sub-portfolio will decrease in value, resulting in a decrease in its relative weight. Theopposite is also true. As a result, each Index has a variable net long or net short volatility position whichwill change on a daily basis, moving toward a net long VIX futures exposure as volatility increases, andmoving toward a net short VIX futures exposure as volatility decreases. This means that the performanceof the applicable underlying Index, and therefore the value of your series of Securities, will depend notonly upon the level of the Short-Term Futures Index at maturity or upon call, early redemption oracceleration, but also on the performance of the Short-Term Futures Index over each day that you holdyour Securities. In other words, the performance of the applicable underlying Index and the value of yourseries of Securities will be affected by not only the increase in the level of the Short-Term Futures Indexover a given time period but also the volatility of the level of the Short-Term Futures Index over suchtime period. For example, a sharp spike in the level of the Short-Term Futures Index at the end of aparticular time period will not result in the same return as a gradual uptick in the Short-Term FuturesIndex over the same time period, even if the level of the Short-Term Futures Index at the end of theapplicable time period is the same in each scenario. As a general matter, it is expected that your Securities
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will have better returns if the Short-Term Futures Index trends from one level to another (in a beneficialdirection) over multiple trading days, rather than moving abruptly between those levels in a single day orexperiencing significant changes in opposite directions over multiple trading days.
In addition, the performance of each Index is path dependent insofar as its level at any time depends notonly on the level of the Short-Term Futures Index at such time but also on such Index’s level at any priortime that any of its component sub-portfolios was rebalanced. Accordingly, periods of volatility in theVIX Index may have a particularly unpredictable and significant impact on the level of each Index bycausing the prices of VIX futures contracts that are used to rebalance the component sub-portfoliosunrepresentative of longer term trends and by causing the actual weighting of leveraged long andunleveraged short positions to diverge significantly from their targets. As a result, the value of yourinvestment in any series of Securities may diverge significantly from the value you might expect on thebasis of the strategy of the applicable underlying Index and changes in the level of the Short-TermFutures Index over the period that you hold them. At particularly high levels of volatility in the VIXIndex you may lose all or a substantial portion of your investment even though the VIX Index hasincreased (if you hold Tail Risk Securities), decreased (if you hold Short Volatility Hedged Securities) orreturned to its approximate level at the time of you investment (if you hold Variable Long/ShortSecurities). The construction of each Index out of 13 separate sub-portfolios, one of which is rebalancedeach Wednesday during any given quarter, as well as the quarterly rebalancing of the entire Index, maymitigate some of these effects but is unlikely to eliminate them entirely.
The daily deduction of the applicable Daily Investor Fee and Futures Spread Fee introduces a furtherelement of path dependency with respect to the Closing Indicative Value of each series of Securities. Theamounts deducted over the period you hold your Securities depend not on the level of the applicableIndex at the time your Securities mature or are redeemed, called or accelerated or the time you sell yourSecurities but rather upon the Closing Indicative Value of such Securities each day during the term ofyour investment (in the case of the Daily Investor Fee) and the TAS bid and offer spreads and the numberof VIX futures hypothetically required to be bought or sold each Index Business Day during the term ofyour investment (in the case of the Futures Spread Fee).
Payments on the Securities
We will not pay you any interest on the Securities. None of the Securities guarantees any return ofprincipal at or prior to maturity, or upon early redemption, call or acceleration.
Payments at maturity or upon early redemption, acceleration or exercise of our call right for theSecurities of any series will be based on the Closing Indicative Value of the Securities of such series,determined as described below. You will lose some or all of your investment if the applicable underlyingIndex level declines or does not increase by an amount sufficient to offset the cumulative effect of theDaily Investor Fee and the Futures Spread Fee over the period that you hold your investment.
On the Initial Trade Date, the “Closing Indicative Value” for each series of Securities is equal to $25.00per Security. For each subsequent calendar day, the “Closing Indicative Value” for the Securities of anyseries will equal:
(Closing Indicative Value on the previous calendar day × Daily Index Performance for the applicableunderlying Index) – Daily Investor Fee for such series of Securities for such calendar day – Futures
Spread Fee for such series of Securities for such calendar day
For each Index, the “Daily Index Performance” on any Index Business Day will equal (i) the closing levelof such Index (the “Index Closing Level”) as reported on NYSE and Bloomberg L.P. (“Bloomberg”) onsuch Index Business Day (provided, however, that if the closing level of the applicable underlying Indexas reported on the NYSE (or any successor) differs from the closing level of the applicable underlying
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Index as reported on Bloomberg (or any successor), then the Index Closing Level will be the closing levelof the applicable underlying Index as calculated by the Index Calculation Agent) divided by (ii) the IndexClosing Level of such Index on the immediately preceding Index Business Day. The Daily IndexPerformance will equal one on any calendar day that is not an Index Business Day.
Each series of Securities is subject to a “Daily Investor Fee” that will be subtracted from the ClosingIndicative Value of each series of Securities on each calendar day. On the Initial Trade Date, the DailyInvestor Fee is equal to zero. On each subsequent calendar day, the Daily Investor Fee for the each seriesof Securities equals the product of (i) 1.30% divided by 365 times (ii) the Closing Indicative Value forsuch series of Securities on the previous calendar day. For the purpose of calculating the Daily InvestorFee, if such previous calendar day was not an Index Business Day, the Closing Indicative Value will becalculated based on the Closing Indicative Value on the immediately preceding Index Business Day.
Each series of Securities is subject to a “Futures Spread Fee,” which is intended to approximate thehypothetical cost of buying and selling the number of first and second month VIX futures that would benecessary to replicate the performance of the applicable underlying Index. The Futures Spread Fee, whichis uncapped, may vary significantly from day-to-day and may be much higher than would be expectedbased upon the historical and estimated historical performance of the Indices and the historical range ofthe TAS bid and offer spreads (though it may, under certain circumstances that we do not expect tooccur, increase the Current Indicative Value of the applicable series of Securities rather than decreasingit). The amount of the Futures Spread Fee will vary based upon, among other factors, market conditions,the performance of the applicable underlying Index, the size of the TAS bid and offer spreads and thenumber of first and second month VIX futures to be hypothetically bought or sold each day in order toreplicate the VIX futures position represented by the applicable underlying Index, all of which arebeyond UBS’s control and cannot be predicted. In particular, the number of VIX futures hypotheticallyrequired to be bought and sold each day in order to replicate the VIX futures position represented by theapplicable underlying Index may vary significantly. Because the Futures Spread Fee for any series ofSecurities may vary significantly even over short periods of time and will very likely reduce the return onsuch series of Securities, an investor should monitor its investment frequently, even intraday.
The costs to buy or sell first and second month VIX futures are assumed for purposes of calculating theFutures Spread Fee to equal the bid or offer spread, as applicable, on a TAS transaction. A “TAS”transaction is a transaction on a futures contract at a price (a “TAS price”) equal to the daily settlementprice, plus a specified differential above or below the daily settlement price (referred to as a “TAS bidspread” or “TAS offer spread,” as applicable), for the futures contract on a specified trading day. TheTAS bid spread reflects the differential when an investor is selling VIX futures, while the TAS offerspread reflects the differential when an investor is buying VIX futures.
TAS transactions are utilized with respect to futures contracts because, unlike with equity securities,there is no option to buy or sell futures contracts at the daily closing price. According to Bloomberg data,the closing TAS spread per VIX future has ranged historically from $-0.06 to $0.05 for the first andsecond month VIX futures contracts. Historical data regarding TAS spreads is severely limited istherefore not a good predictor of future TAS spreads. Investors are cautioned regarding the use of orreliance on such historical data and are urged to make independent evaluations of such data.
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For each series of Securities, the Futures Spread Fee on any Index Business Day will be calculated usingthe following formula.
Futures Spread Fee = (Cost1 + Cost2) × Closing Indicative Valuet-1
IndexERt-1
where:
Cost1 = the cost to buy or sell, as applicable, the necessary first month VIX futures onsuch Index Business Day;
Cost2 = the cost to buy or sell, as applicable, the necessary second month VIX futures onsuch Index Business Day;
IndexERt-1 = the level of the excess return version of the applicable underlying Index on theprevious Index Business Day; and
ClosingIndicativeValuet-1 = the Closing Indicative Value of such series of Securities on the previous Index
Business Day.
On each calendar day that is not an Index Business Day, the Futures Spread Fee for each series ofSecurities will equal zero.
The number of first and second month VIX futures hypothetically required to be bought or sold for eachapplicable underlying Index on any given Index Business Day t will be published once per Index BusinessDay under the following ticker symbols (the “Tickers”) at approximately 5:15 p.m. (New York Citytime):
VariableLong/ShortSecurities Tail Risk Securities
Short VolatilityHedged Securities
Ticker1 (number of firstmonth VIX futureshypothetically required tobe held) . . . . . . . . . . . . . . . . SPVXLVT1 SPVXTVT1 SPVXSVT1
Ticker2 (number of secondmonth VIX futureshypothetically required tobe held) . . . . . . . . . . . . . . . . SPVXLVT2 SPVXTVT2 SPVXSVT2
For the avoidance of doubt, the Ticker values on a particular Index Business Day that will be used in anycalculation relating to the Securities will be the updated value disseminated on such Index Business Day,regardless of whether such update takes place at approximately 5:15 p.m. (New York City time) or atany other time after the market closes on such Index Business Day.
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The cost to buy or sell first or second month VIX futures, as applicable, will be determined on any IndexBusiness Day t that is not a settlement date for first and second month VIX futures contracts accordingto the following equations:
If Ticker1,t > Ticker1,t–1 then Cost1 = (Ticker1,t – Ticker1,t–1) × TAS1t,offer
If Ticker1,t < Ticker1,t–1 then Cost1 = (Ticker1,t – Ticker1,t–1) × TAS1t,bid
If Ticker2,t > Ticker2,t–1 then Cost2 = (Ticker2,t – Ticker2,t–1) × TAS2t,offer
If Ticker2,t < Ticker2,t–1 then Cost2 = (Ticker2,t – Ticker2,t–1) × TAS2t,bid
If Ticker2,t = Ticker2,t–1 then Cost2 = 0
If Ticker1,t = Ticker1,t–1then Cost1 = 0
where:
Ticker1,t = the number of first month VIX futures hypothetically required to be held onIndex Business Day t, as disseminated under the Ticker1 tickers above afterbeing updated on such Index Business Day, which is expected to occur atapproximately 5:15 p.m. (New York City time) on such Index Business Day;
Ticker1,t-1 = the number of first month VIX futures hypothetically required to be held onIndex Business Day t-1, as disseminated on the prior Index Business Day underthe Ticker1 tickers above after being updated on such Index Business Day,which is expected to occur at approximately 5:15 p.m. (New York City time)on such Index Business Day;
Ticker2,t = the number of second month VIX futures hypothetically required to be held onIndex Business Day t, as disseminated under the Ticker2 tickers above afterbeing updated on such Index Business Day, which is expected to occur atapproximately 5:15 p.m. (New York City time) on such Index Business Day;
Ticker2,t-1 = the number of second month VIX futures hypothetically required to be held onIndex Business Day t-1, as disseminated on the prior Index Business Day underthe Ticker2 tickers above after being updated on such Index Business Day,which is expected to occur at approximately 5:15 p.m. (New York City time)on such Index Business Day;
TAS1t,offer = the last TAS offer spread for first month VIX futures on day t prior to 4:13 p.m.
(New York City time) as recorded by the CFE;TAS1
t,bid = the last TAS bid spread for first month VIX futures on day t prior to 4:13 p.m.(New York City time) as recorded by the CFE;
TAS2t,offer = the last TAS offer spread for second month VIX futures on day t prior to
4:13 p.m. (New York City time) as recorded by the CFE; andTAS2
t,bid = the last TAS bid spread for second month VIX futures on day t prior to4:13 p.m. (New York City time) as recorded by the CFE.
If the TAS bid or offer spread for either the first or second month VIX futures is unavailable on a givenIndex Business Day, then the offer spread will be assumed to be 2.5 cents and the bid spread will beassumed to be -2.5 cents on such Index Business Day, except that if the CFE discontinues the ability to
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conduct trades at a TAS price, or stops recording the TAS bid or offer spreads and there is no successorwhich, in the good faith judgment of UBS Securities LLC as Security Calculation Agent, wouldapproximate the TAS bid and offer spreads, UBS Securities LLC will make a good faith estimate in itssole discretion of the cost per future to effect the trades necessary to replicate the VIX futures positionrepresented by the applicable Index on any applicable Index Business Day had the TAS not beendiscontinued.
On settlement days for the first and second month VIX futures contracts, the first month VIX futurescontract expires and is replaced by what was formerly the second month VIX futures contract, and thesecond month VIX futures contract is replaced by what was formerly the third month VIX futurescontract. To account for this roll, the Futures Spread Fee will be calculated using the modified equationsbelow on any settlement day for the first and second month VIX futures contracts:
If Ticker1,t > Ticker2,t–1
If Ticker1,t < Ticker2,t–1
If Ticker2,t > 0
If Ticker2,t < 0
then Cost1 = (Ticker1,t – Ticker2,t−1) × TAS1t,offer
then Cost1 = (Ticker1,t – Ticker2,t−1) × TAS1t,bid
then Cost2 = Ticker2,t × TAS2t,offer
then Cost2 = Ticker2,t × TAS2t,bid
In the event that the TAS procedures for VIX futures contracts change, including without limitation theending time for effecting TAS transactions on a given Trading Day, or if one or both of the Tickers cease tobe published, fail to accurately represent the number of first and second month VIX futures hypotheticallyrequired to be bought or sold for each applicable underlying Index or are otherwise disrupted, the SecurityCalculation Agents will make such adjustments to the procedures and equations used to calculate theFutures Spread Fee as they may determine, acting in good faith in their sole discretion, will most closelyapproximate the Futures Spread Fee that would have prevailed in the absence of such changes.
For more information regarding the Futures Spread Fee and how the Tickers are calculated, see “SpecificTerms of the Securities — Futures Spread Fee” on page S-67. For hypothetical calculations of the FuturesSpread Fee, see Annex C.
Each series of Securities is fully exposed to any decline in the level of the applicable underlying Index. Youmay lose all or a substantial portion of your investment if the Index level on the applicable Valuation Date isnot sufficient to offset the negative effect of the Daily Investor Fee, the Futures Spread Fee and theRedemption Fee Amount, if applicable. In addition, the Daily Investor Fee will be calculated based on a dailyClosing Indicative Value and therefore will depend on the daily fluctuations of the applicable underlyingIndex, and the Futures Spread Fee will depend on the TAS bid and offer spreads and numbers of VIX futurescontracts hypothetically required to be bought or sold and the other factors described above.
The Daily Investor Fee will be calculated and applied daily and therefore will depend on the dailyfluctuations of the applicable Index level. In addition, the Futures Spread Fee will be calculated andapplied based on the applicable Closing Indicative Value , the applicable TAS bid or offer spreads andthe number of first and second month VIX futures hypothetically required to be bought or sold each dayin order to replicate the VIX futures position represented by the applicable underlying Index, and willtherefore depend on a number of market factors, all of which are beyond UBS’s control. See “SpecificTerms of the Securities — Cash Settlement Amount at Maturity,” “— Daily Investor Fee” and “—Futures Spread Fee,” beginning on pages S-66, S-67 and S-67, respectively.
Any series of Securities may be called by UBS prior to the Maturity Date pursuant to UBS’s Call Right.See “Specific Terms of the Securities — UBS’s Call Right” beginning on page S-75.
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Maturity
At maturity, you will receive a cash payment (the “Cash Settlement Amount”) for each series ofSecurities you hold equal to its Closing Indicative Value as of the Final Valuation Date. If the ClosingIndicative Value for any series of Securities as of the Final Valuation Date is equal to or less than zero,the Cash Settlement Amount for such series of Securities will be zero.
UBS’s Call Right
On any Trading Day on or after July 19, 2017 through and including the Maturity Date, UBS may at itsoption redeem all, but not less than all, issued and outstanding Securities of any series. To exercise its CallRight, UBS must provide notice to the holders of such series of Securities not less than ten calendar daysprior to the Call Settlement Date specified by UBS. In the event UBS exercises this right, you will receive acash payment per Security equal to its Closing Indicative Value as of the Valuation Date. We refer to thiscash payment as the “Call Settlement Amount.” In the event UBS exercises its Call Right, the applicable“Valuation Date” means the third Trading Day prior to the Call Settlement Date. See also “Description ofthe Debt Securities We May Offer — Redemption and Payment” in the attached prospectus.
Acceleration Upon Occurrence of Stop Loss Termination Event
If, at any time on any Index Business Day, the intraday indicative value of any series of Securities,calculated as described under “Valuation of the Indices and the Securities — Intraday Security Values,” isequal to or less than 20.0% of its Closing Indicative Value at the end of the prior Index Business Day(such event with respect to any series of Securities, a “Stop Loss Termination Event” and the day onwhich such event occurs, a “Stop Loss Termination Date”), all issued and outstanding Securities of suchseries will be automatically accelerated and mandatorily redeemed by UBS for a cash payment equal tothe Stop Loss Redemption Value; provided that if the Stop Loss Redemption Value so calculated is lessthan or equal to zero, the payment upon acceleration will be zero.
If a Stop Loss Termination Event occurs for any series of Securities, you will receive on the Stop LossRedemption Date only the Stop Loss Redemption Value in respect of your investment in such Securities.If the Stop Loss Redemption Value so calculated is equal to or less than zero, the payment uponacceleration will be zero. The “Stop Loss Redemption Date” will be the fifth Business Day following theStop Loss Termination Date; provided that if the calculation of the Stop Loss Redemption Value ispostponed as a result of a Market Disruption Event, the Stop Loss Redemption Date will be the fifthbusiness day after the Stop Loss Redemption Value is calculated, subject to adjustment. For a discussionof the risks related to the occurrence of a Stop Loss Termination Event, see “Risk Factors—TheSecurities may be automatically accelerated and mandatorily redeemed, resulting in a loss of all or asubstantial portion of your investment.”
UBS must provide notice (which may be provided via press release) to the holders of such series of Securitiesnot later than the second Index Business Day after the occurrence of a Stop Loss Termination Event thatsuch Stop Loss Termination Event has occurred. See “Specific Terms of the Securities — Acceleration UponOccurrence of Stop Loss Termination Event” beginning on page S-75.
How do you redeem your Securities?
Early Redemption
You may elect to require UBS to redeem your Securities of any series, in whole or in part, prior to theMaturity Date on any Index Business Day commencing on July 19, 2016 through and including the finalRedemption Date, subject to a minimum redemption amount of at least 50,000 Securities of such series,your compliance with the procedures described below and the potential postponements and adjustmentsas described under “Specific Terms of the Securities — Market Disruption Event.” To satisfy the
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minimum redemption amount, your broker or other financial intermediary may bundle your Securities ofsuch series for redemption with those of other holders of Securities of such series to reach this minimumamount of 50,000 Securities; however, there can be no assurance that they can or will do so. UBSreserves the right from time to time to waive this minimum redemption amount in its sole discretion on acase-by-case basis. You should not assume you will be entitled to the benefit of any such waiver. The firstRedemption Date will be July 19, 2016 and the final Redemption Date will be July 11, 2046.
Upon early redemption, you will receive per Security a cash payment on the relevant Redemption Dateequal to its Closing Indicative Value as of the applicable Valuation Date, minus the Redemption FeeAmount. We refer to this cash payment as the “Redemption Amount.” If the amount so calculated is lessthan or equal to zero, the payment upon early redemption will be zero. We reserve the right from time totime to waive the Redemption Fee Amount in our sole discretion on a case-by-case basis. You should notassume you will be entitled to the benefit of any such waiver.
For any early redemption, the applicable “Valuation Date” means the third Index Business Day prior tothe related Redemption Date, which day is also the first Index Business Day following the date on whichyou deliver a redemption notice to Janus Distributors in compliance with the redemption procedures (or,in the sole discretion of UBS, the same date that the redemption notice is delivered in compliance withthe redemption procedures). The applicable “Redemption Date” means the third Index Business Dayfollowing the corresponding Valuation Date or, if such day is not a Business Day, the next followingIndex Business Day that is also a Business Day.
You may lose all or a substantial portion of your investment upon early redemption if the level of theapplicable underlying Index declines or does not increase by an amount sufficient to offset the combinednegative effect of the Daily Investor Fee, the Futures Spread Fee and the Redemption Fee Amount.
The Securities may be called by UBS prior to the Maturity Date pursuant to UBS’s Call Right and will beautomatically accelerated and mandatorily redeemed upon the occurrence of a Stop Loss TerminationEvent. See “Specific Terms of the Securities — UBS’s Call Right” beginning on page S-75 and “SpecificTerms of the Securities — Acceleration Upon Occurrence of Stop Loss Termination Event” beginning onpage S-75.
Redemption Procedures
To redeem your Securities prior to the Maturity Date, you must instruct your broker to deliver aredemption notice to Janus Distributors by email no later than 4:00 p.m. (New York City time) on theIndex Business Day on which you elect to exercise your redemption right and you and your broker mustfollow the procedures described herein. If you fail to comply with these procedures, your notice will bedeemed ineffective. See “Specific Terms of the Securities — Redemption Procedures” beginning on pageS-74 and “Description of the Debt Securities We May Offer — Redemption and Payment” in theaccompanying prospectus.
What are some of the risks of the Securities?
An investment in the Securities involves risks. Selected risks are summarized here, but we urge you toread the more detailed explanation of risks described under “Risk Factors” beginning on page S-27.
➤ You may lose all or a substantial portion of your investment — Each series of Securities is designedfor investors who seek exposure to the applicable underlying Index and are exposed to any decline inthe level of the applicable underlying Index. You will lose some or all of your investment if theapplicable underlying Index level does not increase enough to offset the negative effect of theapplicable Daily Investor Fee, the Futures Spread Fee and the Redemption Fee Amount of theapplicable series, if applicable. Each Index is volatile and subject to a variety of market forces, some
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of which are described below. Because of the way the Indices are constructed and the unpredictabilityof volatility markets, the net volatility exposure of each underlying Index may change unpredictablyand in ways that are not intended.
➤ Market and volatility risk — The return on the Securities, which may be positive or negative, isdirectly linked to the level of the applicable underlying Index, which, in turn, is designed to provideexposure to a specific dynamic short-term volatility strategy by pairing both leveraged long andunleveraged short positions in first and second month futures contracts on the VIX Index. The VIXIndex measures the 30-day forward volatility of the S&P 500® Index as calculated based on theprices of certain put and call options on the S&P 500® Index. The level of the S&P 500® Index, theprices of options on the S&P 500® Index, and the level of the VIX Index are each affected by avariety of factors and may change unpredictably, affecting the value of your Securities inunforeseeable ways.
➤ Credit of issuer — The Securities are senior unsecured debt obligations of the issuer, UBS, and arenot, either directly or indirectly, an obligation of or guaranteed by any third party. Any payment tobe made on any series of Securities, including any payment at maturity, upon acceleration, earlyredemption or call, depends on the ability of UBS to satisfy its obligations as they come due. As aresult, the actual and perceived creditworthiness of UBS will affect the market value, if any, of eachseries of Securities prior to maturity, acceleration, call or early redemption. In addition, in the eventUBS were to default on its obligations, you may not receive any amounts owed to you under theterms of the Securities. The Securities do not benefit from any co-obligation of UBS Switzerland AG.
➤ No interest payments from the Securities — You will not receive any interest payments on any seriesof the Securities.
➤ Long holding period risk —The Securities require an understanding of futures contracts, volatilitystrategies and path dependence of investment returns and are intended for sophisticated investors touse as part of an overall diversified portfolio, and should not be used as a buy and hold investment.The Securities involve significant risks and may not be suitable as a long-term investment. Each seriesof Securities is designed to achieve its stated investment objectives (described above under “What arethe Securities and how do they work? — The Underlying Indices”) over the short term, and itsperformance over longer periods of time can differ from its stated objectives. In addition, investors inVIX futures contracts must roll their VIX futures positions from one month to the next in order tomaintain their exposure because futures positions, unlike positions in securities, cannot be heldindefinitely and require frequent transactions in order to be maintained. The need to maintain aconstant exposure to VIX futures creates the potential for positive or negative returns based on theshape of the VIX futures curve (i.e. whether the market for VIX futures is in contango or inbackwardation). These changes are separate from outright movements in VIX futures. As a result, thereturn on a position in VIX futures may vary significantly from the percentage changes of the VIXIndex over the same period. Typically, though not in all market conditions, this “roll cost”significantly decreases the return for investors who are long VIX futures. As a result of this “rollcost” and other factors that may cause the value of your Securities to decrease, including the effects ofdaily and quarterly rebalancing and the combined negative effect of the Daily Investor Fee and theFutures Spread Fee, there is a significant possibility that the amount payable on the Securities atmaturity or upon call, early redemption or acceleration will be less than the amount of your initialinvestment in the Securities, and that you will lose part or all of your initial investment if you holdthe Securities for a long period of time. We do not expect that any investor will hold the Securitiesfrom inception to maturity. Accordingly, the Securities should be purchased only by sophisticatedinvestors who understand the consequences of investing in volatility indices and of seeking inverse orleveraged investment results, who understand the path dependence of investment returns, and whowill actively and frequently monitor their investment in the Securities, even intraday.
S-13
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➤ Potential automatic acceleration upon the occurrence of a Stop Loss Termination Event — If a StopLoss Termination Event occurs with respect to any series of Securities, all issued and outstandingSecurities of such series will be automatically accelerated and mandatorily redeemed by UBS for acash payment equal to the Stop Loss Redemption Value; provided that if the Stop Loss RedemptionValue so calculated is less than or equal to zero, the payment upon acceleration will be zero. The StopLoss Redemption Value you receive on the Stop Loss Redemption Date may be significantly less thanyour investment and may be zero. In addition, if the Securities are automatically accelerated andmandatorily redeemed by UBS, you will not benefit from any subsequent increase in the IndexClosing Level after the occurrence of the Stop Loss Termination Event, even if such increase occursprior to the Stop Loss Redemption Date.
➤ A trading market for the Securities may not develop — Although each series of Securities has beenapproved for listing on NYSE Arca, subject to official notice of issuance, a trading market for the oneor more series of the Securities may not develop. Certain affiliates of UBS may engage in limitedpurchase and resale transactions in the Securities, although they are not required to and may stop atany time. We are not required to maintain any listing of the Securities on NYSE Arca or any otherexchange. In addition, we are not obliged to, and may not, sell the full aggregate principal amount ofthe Securities shown on the cover of this prospectus supplement. We may suspend or cease sales ofthe Securities at any time, at our discretion. Therefore, the liquidity of the Securities may be limited.
➤ Requirements upon early redemption — You must satisfy the requirements described herein for yourredemption request to be considered, including the minimum redemption amount of at least 50,000Securities of the applicable series, unless we determine otherwise or your broker or other financialintermediary bundles your Securities for redemption with those of other investors of the applicableseries to reach this minimum requirement and there can be no assurance that they can or will do so.Therefore, the liquidity of each series Securities may be limited. In addition, the payment you receiveupon early redemption will be reduced by the applicable Daily Investor Fee and the Redemption FeeAmount. While UBS reserves the right to waive the minimum redemption amount or the RedemptionFee Amount from time to time in its sole discretion, there can be no assurance that UBS will choose towaive any redemption requirements or fees or that any holder of the Securities will benefit fromUBS’s election to do so.
➤ Your redemption election is irrevocable — You will not know the Redemption Amount at the timeyou elect to request us to redeem your Securities of a series and you will not be able to rescind yourelection to redeem your Securities of a series after your redemption notice is received by UBS.Accordingly, you will be exposed to market risk in the event market conditions change after UBSreceives your offer and the Redemption Amount is determined on the applicable Valuation Date.
➤ Uncertain tax treatment — Significant aspects of the tax treatment of the Securities are uncertain.You should consult your own tax advisor about your own tax situation. See “Material U.S. FederalIncome Tax Consequences” beginning on page S-85.
➤ UBS’s Call Right — UBS may elect to redeem all outstanding Securities of any series on any TradingDay on or after July 19, 2017, as described under “Specific Terms of the Securities — UBS’s CallRight” beginning on page S-75. If UBS exercises its Call Right, the Call Settlement Amount may beless than your initial investment in the Securities.
Is this the right investment for you?
The Securities may be a suitable investment for you if:
➤ You are a sophisticated investor and understand the consequences of investing in volatility indices,futures contracts, path dependence of investment returns and of seeking inverse or leveragedinvestment results.
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➤ You are willing to accept the risk that you may lose all or a substantial portion of your investment.
➤ You seek an investment with a return linked to the performance of the applicable underlying Index,which will provide exposure to a specific volatility strategy, which is accomplished by pairing bothleveraged long and unleveraged short positions in VIX futures.
➤ You are willing to accept and understand the risk of fluctuations in volatility in general andfluctuations in the performance of the applicable underlying Index in particular.
➤ You believe the level of the applicable Index will increase by an amount sufficient to offset thenegative effect of the Daily Investor Fee, the Futures Spread Fee and any Redemption Fee Amountover your intended holding period of the Securities and to provide you with a satisfactory return onyour investment during the time you hold the Securities.
➤ You are willing to accept the risk that the price at which you are able to sell each series of Securitiesmay be significantly less than the amount you invested.
➤ You are willing to hold securities that have a long-term maturity (30 years) even though the Securitiesare not suitable for a “buy and hold” strategy of long-term investment.
➤ You are willing to hold securities that are subject to the UBS Call Right on any Trading Day on orafter July 19, 2017.
➤ You do not seek current income from your investment.
➤ You are not seeking an investment for which there will be an active secondary market.
➤ You seek an investment which does not make regular interest payments.
➤ You are comfortable with the creditworthiness of UBS, as issuer of the Securities.
The Securities may NOT be a suitable investment for you if:
➤ You are not a sophisticated investor and/or do not understand the consequences of investing involatility indices, futures contracts, path dependence of investment returns and of seeking inverse orleveraged investment results.
➤ You are not willing to accept the risk that you may lose all or a substantial portion of yourinvestment.
➤ You do not seek an investment with a return linked to the performance of the applicable Index,which will provide exposure to a specific volatility strategy, which is accomplished by pairing bothleveraged long and unleveraged short positions in VIX futures.
➤ You are not willing or able to monitor an investment frequently, even intraday.
➤ You are not willing to accept the risk of fluctuations in volatility in general and fluctuations in theperformance of the applicable underlying Index in particular.
➤ You seek a long-term investment objective.
➤ You believe that the level of the applicable Index will decline during your holding period of theSecurities of any series or any increase in the level of the applicable underlying Index over the term ofsuch Securities will not be sufficient to offset the negative effect of the Daily Investor Fee, the FuturesSpread Fee and any Redemption Fee Amount over your intended holding period and to provide youwith a satisfactory return on your investment during the time you hold them.
➤ You are not willing to accept the risk that the price at which you are able to sell each series ofSecurities may be significantly less than the amount you invested.
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➤ You are not willing to hold securities that have a long-term maturity (30 years) even though theSecurities are not suitable for a “buy and hold” strategy of long-term investment.
➤ You are not willing to hold securities that are subject to the UBS Call Right on any Trading Day onor after July 19, 2017.
➤ You prefer the lower risk and therefore accept the potentially lower returns of fixed-incomeinvestments with comparable maturities and credit ratings.
➤ You seek current income from your investment.
➤ You seek an investment for which there will be an active secondary market.
➤ You are not comfortable with the creditworthiness of UBS, as issuer of the Securities.
Who calculates and publishes the Indices?
The level of the Indices is calculated and disseminated by the Index Calculation Agent in real-time oneach Index Business Day. Index information, including the level of the applicable underlying Index, isavailable from NYSE and Bloomberg for each of the Indices under the symbols set forth in the tablebelow.
Securities Underlying IndexUnderlyingIndex Ticker
Variable Long/Short Securities Variable Long/Short Index SPVXVSTTail Risk Securities Tail Risk Index SPVXTRSTShort Volatility Hedged Securities Volatility Hedged Index SPVXVHST
The historical performance of the Indices is not indicative of the future performance of the Indices or theSecurities, or the level of the Indices or the Closing Indicative Value of the Securities on the applicableValuation Date.
What are the tax consequences of owning the Securities?
The United States federal income tax consequences of your investment in the Securities of a series areuncertain. Some of these tax consequences are summarized below, but we urge you to read the moredetailed discussion in “Material U.S. Federal Income Tax Consequences” on page S-85.
Pursuant to the terms of each series of Securities, you and we agree, in the absence of a statutory,regulatory, administrative or judicial ruling to the contrary, to characterize the Securities of a series aspre-paid derivative contracts with respect to the applicable Index. If your Securities of a series are sotreated, you should generally recognize capital gain or loss upon the sale, exchange, redemption ormaturity of your Securities of a series in an amount equal to the difference between the amount realizedand the amount you paid for your Securities of a series. Such gain or loss should generally be long-termcapital gain or loss if you held your Securities of a series for more than one year. The deductibility ofcapital losses is subject to limitations.
In the opinion of our counsel, Sullivan & Cromwell LLP, it would be reasonable to treat the Securities inthe manner described above. However, because there is no authority that specifically addresses the taxtreatment of the Securities, it is possible that the Securities could be treated for tax purposes in analternative manner as described under “Material U.S. Federal Income Tax Consequences — AlternativeTreatments” on page S-86.
The Internal Revenue Service (the “IRS”) released a notice in 2007 that may affect the taxation ofholders of the Securities. According to the notice, the IRS and the Treasury Department are actively
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considering, among other things, whether holders of instruments such as the Securities should berequired to accrue ordinary income on a current basis, whether gain or loss upon the sale, exchange,redemption or maturity of such instruments should be treated as ordinary or capital, whether foreignholders of such instruments should be subject to withholding tax, and whether the special “constructiveownership rules” of Section 1260 of the Internal Revenue Code of 1986, as amended (the “Code”),should be applied to such instruments. Similarly, the IRS and the Treasury Department have currentprojects open with regard to the tax treatment of pre-paid forward contracts and contingent notionalprincipal contracts. While it is impossible to anticipate how any ultimate guidance would affect the taxtreatment of instruments such as the Securities (and while any such guidance may be issued on aprospective basis only), such guidance could be applied retroactively and could in any case increase thelikelihood that you will be required to accrue income over the term of an instrument such as theSecurities. The outcome of this process is uncertain.
Furthermore, in 2007, legislation was introduced in Congress that, if enacted, would have requiredholders of a series of Securities purchased after the bill was enacted to accrue interest income over theterm of the series of Securities despite the fact that there will be no interest payments over the term of theseries of Securities. It is not possible to predict whether a similar or identical bill will be enacted in thefuture and whether any such bill would affect the tax treatment of your Securities of a series.
Holders are urged to consult their tax advisors concerning the significance and the potential impact ofthe above considerations. Except to the extent otherwise required by law, we intend to treat yourSecurities for United States federal income tax purposes in accordance with the treatment describedabove and under “Material U.S. Federal Income Tax Consequences” on page S-85 unless and until suchtime as there is a change in law or the Treasury Department or IRS determines that some other treatmentis more appropriate.
Conflicts of Interest
UBS Securities LLC is an affiliate of UBS and, as such, has a “conflict of interest” in this offering withinthe meaning of FINRA Rule 5121. In addition, UBS will receive the net proceeds from the initial publicoffering of the Securities, thus creating an additional conflict of interest within the meaning of Rule5121. Consequently, the offering is being conducted in compliance with the provisions of Rule 5121.UBS Securities LLC is not permitted to sell Securities in this offering to an account over which it exercisesdiscretionary authority without the prior specific written approval of the account holder.
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Historical Performance and Hypothetical ExamplesHistorical Performance of the Indices
The prices of the first and second month VIX futures contracts underlying each of the Indices have beenhighly volatile in the past and the performance of the Indices cannot be predicted for any future period.Since their inception, the Indices have experienced significant fluctuations. Any historical upward ordownward trend in the applicable Index Closing Level is not an indication that the Indices are more orless likely to increase or decrease at any time during the term of your Securities. The Index Closing Levelfor each Index is deemed to have been 100 on December 20, 2005. SPDJI began independentlycalculating the Indices on November 3, 2011. Therefore, the historical information for the period fromDecember 20, 2005 until November 3, 2011 is hypothetical and is provided as an illustration of how theIndices would have performed during the period had the Index Sponsor begun calculating the Indices onDecember 20, 2005 using the methodology described in “The Indices” beginning on page S-45 since thatdate. This data does not reflect actual performance, nor was a contemporaneous investment model run ofthe Indices, and this estimated historical information may reflect a bias toward strategies that haveperformed well in the past. Historical information for the period from and after November 3, 2011 isbased on the actual performance of the Indices.
Any historical upward or downward trend in value of the Indices during any period shown below is notan indication that the value of the Indices is more or less likely to increase or decrease at any time duringthe term of the Securities. The historical or estimated historical total returns of the Indices do not give anindication of future performance of the Indices. UBS cannot make any assurance that the futureperformance of the Indices will result in holders of the Securities receiving a positive return on theirinvestment.
Historical information presented is as of July 11, 2016, and is furnished as a matter of information only.Estimated historical and historical performance of each Index is not an indication of future performance.Future performance of the Indices may differ significantly from estimated historical and historicalperformance, either positively or negatively.
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Historical Performance and Hypothetical Examples
The graphs below illustrate the estimated historical and historical performance of the Indices fromDecember 20, 2005 (the “base date”) to July 11, 2016 and from November 3, 2011 (the day on whichthe Index Sponsor began calculating the Indices) to July 11, 2016. The graphs below are based on thetotal returns of each of the Indices.
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Variable Long / Short Index Tail Risk Index Short Volatility Hedged Index
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Variable Long / Short Index Tail Risk Index Short Volatility Hedged Index
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Historical Performance and Hypothetical Examples
Hypothetical Payment at Maturity or Upon Call or Early Redemption
The hypothetical examples set forth below illustrate how the Securities would perform at maturity orupon call or early redemption, in hypothetical circumstances. They are purely hypothetical and areprovided for illustrative purposes only. They should not be taken as an indication or prediction of futureinvestment results. If you sell your Securities in the secondary market prior to the Maturity Date, yourreturn will depend on the market value of your Securities at the time of sale, which may be affected by anumber of other factors not reflected in the tables below. See “Risk Factors” on page S-27 for furtherinformation. The hypothetical examples below do not take into account the effects of any applicabletaxes.
As described in this prospectus supplement, each Index is designed to provide exposure to a differentdynamic short-term volatility strategy by pairing both leveraged long and unleveraged short positions infirst and second month VIX futures contracts. The Variable Long/Short Index is intended to transitionbetween being net long VIX futures and net short VIX futures, depending on conditions in the market,with the goal of having a net long exposure to VIX futures during periods in which the Variable Long/Short Securities can capture volatility spikes and a net short exposure to VIX futures during periods inwhich the Variable Long/Short Securities can capture roll yield or drops in volatility. As described herein,however, the actual exposure of the Variable Long/Short Securities may differ from what is intended andthere is no guarantee that the Variable Long/Short Securities will have a net VIX futures exposure thatbenefits investors.
The Tail Risk Index is intended to provide net long exposure to VIX futures, which exposure is morelikely to increase in value when volatility increases and to decrease in value when volatility decreases, butany such increase or decrease should be mitigated by the inverse leg’s short exposure. In a contangomarket, the inverse leg is also intended to mitigate the roll cost associated with the leveraged longposition by providing a roll yield. As described herein, however, the actual exposure of the Tail RiskSecurities may differ from what is intended and there is no guarantee that the Tail Risk Securities willhave a net VIX futures exposure that benefits investors.
The Short Volatility Hedged Index is intended to provide net short exposure to VIX futures, whichexposure is more likely to increase in value when volatility decreases and to decrease in value whenvolatility increases, but any such increase or decrease should be mitigated by the leveraged leg’s longexposure. The Short Volatility Hedged Index is also intended to provide an opportunity to achieve apositive expected return from the roll yield in VIX futures in a contango market on the inverse leg. Asdescribed herein, however, the actual exposure of the Short Volatility Hedged Securities may differ fromwhat is intended and there is no guarantee that the Short Volatility Hedged Securities will have a net VIXfutures exposure that benefits investors.
While each Index is intended to pursue a particular volatility strategy, the path dependence of each Indexmay cause its actual performance to deviate significantly from its intended target exposure, preventingthe applicable series of Securities from achieving their goal. For example, the factors that cause such pathdependence may cause the Variable Long/Short Securities to have a net short exposure to VIX futureswhen volatility is rising or net long exposure when volatility is falling, or it may cause the Tail RiskSecurities to have net short exposure to VIX futures or the Short Volatility Hedged Securities to have netlong exposure to VIX futures, which in the case of each of the foregoing series of Securities is theopposite of the intended (target) exposure. See “The Indices—The Underlying Indices—Path-DependentNature of the Indices” for more information on the path dependence of the Indices and the Securities. Inaddition, the return from each series of Securities will be reduced by the applicable Daily Investor Feeand the Futures Spread Fee. As a result, the Securities should only be purchased by sophisticated
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Historical Performance and Hypothetical Examples
investors who understand the risks of investing in volatility and the impact of rebalancing of the sub-portfolios and the applicable underlying Index and who will actively monitor their investment, includingintraday.
The hypothetical examples below are not intended to demonstrate the expected return of the volatilitystrategies to which the Indices provide exposure or of any series of Securities, but merely to illustratehow the return on your Securities will be impacted by the performance of the applicable underlyingIndex and the effect of the Daily Investor Fee and the Futures Spread Fee.
In Example 1, the level of the applicable underlying Index increases at a constant rate of 5% per year forthe 30-year term of the Securities. In Example 2, the level of the applicable underlying Index decreases ata constant rate of 5% per year for the 30-year term of the Securities. In Example 3, the level of theapplicable underlying Index decreases 3% in odd-numbered years and increases 2% in even-numberedyears (i.e. it decreases 3% for the first year, increases 2% in the second year, decreases 3% in the thirdyear, increases 2% in the fourth year, and so on) until the end of the 30-year term of the Securities. InExample 4, the level of the applicable underlying Index generally decreases at a constant rate of 20% peryear for the 30-year term of the Securities, except for increases of 30% in years 8 and 16 and an increaseof 40% in year 25. These examples highlight the impact of changes in the level of the applicableunderlying Index, as well as of the applicable Daily Investor Fee and Futures Spread Fee, on the paymentat maturity or upon call, upon early redemption or acceleration, under different circumstances. Thefigures in these examples have been rounded for convenience.
The following assumptions are used in each of the four examples:
➤ The Daily Index Performance is calculated on an annual basis. (As described in “Specific Terms of theSecurities—Daily Index Performance,” the Daily Index Performance will actually be calculated foreach series of Securities on a daily basis.)
➤ The Daily Investor Fee is applied on an annual basis, assuming the Closing Indicative Value of theSecurities at the end of the previous year is the Closing Indicative Value for purposes of calculatingsuch Daily Investor Fee. (As described in “Specific Terms of the Securities—Daily Investor Fee,” theDaily Investor Fee will actually be applied to the Closing Indicative Value of the such Securities on adaily basis and will depend on the daily performance of the applicable underlying Index.)
➤ The Futures Spread Fee is assumed to be 1.00% per annum, applied on an annual basis. (As describedin “Specific Terms of the Securities—Futures Spread Fee,” the Futures Spread Fee is an uncapped feeapplied to the Closing Indicative Value of each series of Securities on every Trading Day, may varysignificantly from day to day and may be considerably higher than this assumed fee. You should notexpect that this assumed fee is indicative of what the actual Futures Spread Fee will be over the periodthat you hold your Securities.)
➤ The Closing Indicative Value on the first day is $25.00.
➤ The initial level of the applicable underlying Index is 100.00.
➤ The Securities were purchased at inception and will be held until maturity. (As described in thisprospectus supplement, we do not expect that any investor will hold the Securities from inception tomaturity, and the Securities are not intended as a buy and hold investment. Instead, they should bepurchased only by sophisticated investors who understand the consequences of investing in volatilityindices and of seeking inverse or leveraged investment results, who understand the path dependenceof investment returns, and who will actively and frequently monitor their investment in the Securities,even intraday.)
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Historical Performance and Hypothetical Examples
Example 1 —The level of the applicable underlying Index increases at a constant rate of5% per year.
Year Index Level
Daily IndexPerformance(calculatedannually)
Daily InvestorFee (calculated
annually)
Futures SpreadFee (calculated
annually)Closing
Indicative ValueRedemption
Amount
0 . . . . . . . . . . . . . . . . . 100.00 25.001 . . . . . . . . . . . . . . . . . 105.00 1.05 0.325000000 0.250000000 25.68 25.642 . . . . . . . . . . . . . . . . . 110.25 1.05 0.333775000 0.256750000 26.37 26.343 . . . . . . . . . . . . . . . . . 115.76 1.05 0.342786925 0.263682250 27.08 27.054 . . . . . . . . . . . . . . . . . 121.55 1.05 0.352042172 0.270801671 27.81 27.785 . . . . . . . . . . . . . . . . . 127.63 1.05 0.361547311 0.278113316 28.56 28.536 . . . . . . . . . . . . . . . . . 134.01 1.05 0.371309088 0.285622375 29.33 29.307 . . . . . . . . . . . . . . . . . 140.71 1.05 0.381334433 0.293334180 30.13 30.098 . . . . . . . . . . . . . . . . . 147.75 1.05 0.391630463 0.301254202 30.94 30.909 . . . . . . . . . . . . . . . . . 155.13 1.05 0.402204486 0.309388066 31.77 31.7310 . . . . . . . . . . . . . . . . 162.89 1.05 0.413064007 0.317741544 32.63 32.5911 . . . . . . . . . . . . . . . . 171.03 1.05 0.424216735 0.326320565 33.51 33.4712 . . . . . . . . . . . . . . . . 179.59 1.05 0.435670587 0.335131221 34.42 34.3713 . . . . . . . . . . . . . . . . 188.56 1.05 0.447433693 0.344179764 35.35 35.3014 . . . . . . . . . . . . . . . . 197.99 1.05 0.459514402 0.353472617 36.30 36.2615 . . . . . . . . . . . . . . . . 207.89 1.05 0.471921291 0.363016378 37.28 37.2416 . . . . . . . . . . . . . . . . 218.29 1.05 0.484663166 0.372817820 38.29 38.2417 . . . . . . . . . . . . . . . . 229.20 1.05 0.497749071 0.382883901 39.32 39.2718 . . . . . . . . . . . . . . . . 240.66 1.05 0.511188296 0.393221766 40.38 40.3319 . . . . . . . . . . . . . . . . 252.70 1.05 0.524990380 0.403838754 41.47 41.4220 . . . . . . . . . . . . . . . . 265.33 1.05 0.539165121 0.414742401 42.59 42.5421 . . . . . . . . . . . . . . . . 278.60 1.05 0.553722579 0.425940445 43.74 43.6922 . . . . . . . . . . . . . . . . 292.53 1.05 0.568673089 0.437440837 44.93 44.8723 . . . . . . . . . . . . . . . . 307.15 1.05 0.584027262 0.449251740 46.14 46.0824 . . . . . . . . . . . . . . . . 322.51 1.05 0.599795998 0.461381537 47.38 47.3225 . . . . . . . . . . . . . . . . 338.64 1.05 0.615990490 0.473838838 48.66 48.6026 . . . . . . . . . . . . . . . . 355.57 1.05 0.632622233 0.486632487 49.98 49.9127 . . . . . . . . . . . . . . . . 373.35 1.05 0.649703033 0.499771564 51.33 51.2628 . . . . . . . . . . . . . . . . 392.01 1.05 0.667245015 0.513265396 52.71 52.6529 . . . . . . . . . . . . . . . . 411.61 1.05 0.685260631 0.527123562 54.14 54.0730 . . . . . . . . . . . . . . . . 432.19 1.05 0.703762668 0.541355898 55.60 55.53
Cumulative Index Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 332.19%Annualized Index Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.00%Cumulative Return on Securities (assuming redemption) . . . . . . . . . 122.11%Annualized Return on Securities (assuming redemption) . . . . . . . . . 2.70%
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Historical Performance and Hypothetical Examples
Example 2 —The level of the applicable underlying Index decreases at a constant rateof 5% per year.
Year Index Level
Daily IndexPerformance(calculatedannually)
Daily InvestorFee (calculated
annually)
Futures SpreadFee (calculated
annually)Closing
Indicative ValueRedemption
Amount
0 . . . . . . . . . . . . . . . . . 100.00 25.001 . . . . . . . . . . . . . . . . . 95.00 0.95 0.325000000 0.250000000 23.18 23.152 . . . . . . . . . . . . . . . . . 90.25 0.95 0.301275000 0.231750000 21.48 21.463 . . . . . . . . . . . . . . . . . 85.74 0.95 0.279281925 0.214832250 19.91 19.894 . . . . . . . . . . . . . . . . . 81.45 0.95 0.258894344 0.199149496 18.46 18.445 . . . . . . . . . . . . . . . . . 77.38 0.95 0.239995057 0.184611583 17.11 17.096 . . . . . . . . . . . . . . . . . 73.51 0.95 0.222475418 0.171134937 15.86 15.847 . . . . . . . . . . . . . . . . . 69.83 0.95 0.206234713 0.158642087 14.71 14.698 . . . . . . . . . . . . . . . . . 66.34 0.95 0.191179579 0.147061214 13.63 13.629 . . . . . . . . . . . . . . . . . 63.02 0.95 0.177223469 0.136325746 12.64 12.6210 . . . . . . . . . . . . . . . . 59.87 0.95 0.164286156 0.126373966 11.71 11.7011 . . . . . . . . . . . . . . . . 56.88 0.95 0.152293267 0.117148667 10.86 10.8512 . . . . . . . . . . . . . . . . 54.04 0.95 0.141175858 0.108596814 10.07 10.0513 . . . . . . . . . . . . . . . . 51.33 0.95 0.130870021 0.100669247 9.33 9.3214 . . . . . . . . . . . . . . . . 48.77 0.95 0.121316509 0.093320392 8.65 8.6415 . . . . . . . . . . . . . . . . 46.33 0.95 0.112460404 0.086508003 8.02 8.0116 . . . . . . . . . . . . . . . . 44.01 0.95 0.104250794 0.080192919 7.43 7.4217 . . . . . . . . . . . . . . . . 41.81 0.95 0.096640486 0.074338836 6.89 6.8818 . . . . . . . . . . . . . . . . 39.72 0.95 0.089585731 0.068912101 6.39 6.3819 . . . . . . . . . . . . . . . . 37.74 0.95 0.083045973 0.063881517 5.92 5.9120 . . . . . . . . . . . . . . . . 35.85 0.95 0.076983617 0.059218167 5.49 5.4821 . . . . . . . . . . . . . . . . 34.06 0.95 0.071363813 0.054895240 5.09 5.0822 . . . . . . . . . . . . . . . . 32.35 0.95 0.066154254 0.050887888 4.72 4.7123 . . . . . . . . . . . . . . . . 30.74 0.95 0.061324994 0.047173072 4.37 4.3724 . . . . . . . . . . . . . . . . 29.20 0.95 0.056848269 0.043729438 4.05 4.0525 . . . . . . . . . . . . . . . . 27.74 0.95 0.052698345 0.040537189 3.76 3.7526 . . . . . . . . . . . . . . . . 26.35 0.95 0.048851366 0.037577974 3.48 3.4827 . . . . . . . . . . . . . . . . 25.03 0.95 0.045285217 0.034834782 3.23 3.2328 . . . . . . . . . . . . . . . . 23.78 0.95 0.041979396 0.032291843 2.99 2.9929 . . . . . . . . . . . . . . . . 22.59 0.95 0.038914900 0.029934538 2.77 2.7730 . . . . . . . . . . . . . . . . 21.46 0.95 0.036074112 0.027749317 2.57 2.57
Cumulative Index Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -78.54%Annualized Index Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -5.00%Cumulative Return on Securities (assuming redemption) . . . . . . . . . -89.72%Annualized Return on Securities (assuming redemption) . . . . . . . . . -7.30%
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Historical Performance and Hypothetical Examples
Example 3 — The level of the applicable underlying Index decreases 3% in odd-numbered years and increases 2% in even-numbered years (i.e. it decreases 3% for thefirst year, increases 2% in the second year, decreases 3% in the third year, increases 2%in the fourth year, and so on).
Year Index Level
Daily IndexPerformance(calculatedannually)
Daily InvestorFee (calculated
annually)
Futures SpreadFee (calculated
annually)Closing
Indicative ValueRedemption
Amount
0 . . . . . . . . . . . . . . . . . 100.00 25.001 . . . . . . . . . . . . . . . . . 97.00 0.97 0.325000000 0.250000000 23.68 23.652 . . . . . . . . . . . . . . . . . 98.94 1.02 0.307775000 0.236750000 23.60 23.573 . . . . . . . . . . . . . . . . . 95.97 0.97 0.306851675 0.236039750 22.35 22.334 . . . . . . . . . . . . . . . . . 97.89 1.02 0.290588536 0.223529643 22.29 22.265 . . . . . . . . . . . . . . . . . 94.95 0.97 0.289716771 0.222859054 21.10 21.086 . . . . . . . . . . . . . . . . . 96.85 1.02 0.274361782 0.211047524 21.04 21.027 . . . . . . . . . . . . . . . . . 93.95 0.97 0.273538696 0.210414382 19.93 19.908 . . . . . . . . . . . . . . . . . 95.83 1.02 0.259041146 0.199262420 19.87 19.849 . . . . . . . . . . . . . . . . . 92.95 0.97 0.258264022 0.198664632 18.81 18.7910 . . . . . . . . . . . . . . . . 94.81 1.02 0.244576029 0.188135407 18.76 18.7311 . . . . . . . . . . . . . . . . 91.97 0.97 0.243842301 0.187571001 17.76 17.7412 . . . . . . . . . . . . . . . . 93.81 1.02 0.230918659 0.177629738 17.71 17.6913 . . . . . . . . . . . . . . . . 90.99 0.97 0.230225903 0.177096848 16.77 16.7514 . . . . . . . . . . . . . . . . 92.81 1.02 0.218023930 0.167710715 16.72 16.7015 . . . . . . . . . . . . . . . . 90.03 0.97 0.217369858 0.167207583 15.83 15.8116 . . . . . . . . . . . . . . . . 91.83 1.02 0.205849256 0.158345581 15.79 15.7717 . . . . . . . . . . . . . . . . 89.07 0.97 0.205231708 0.157870545 14.95 14.9318 . . . . . . . . . . . . . . . . 90.85 1.02 0.194354427 0.149503406 14.91 14.8919 . . . . . . . . . . . . . . . . 88.13 0.97 0.193771364 0.149054896 14.12 14.1020 . . . . . . . . . . . . . . . . 89.89 1.02 0.183501482 0.141154986 14.07 14.0621 . . . . . . . . . . . . . . . . 87.19 0.97 0.182950977 0.140731521 13.33 13.3122 . . . . . . . . . . . . . . . . 88.94 1.02 0.173254576 0.133272750 13.29 13.2723 . . . . . . . . . . . . . . . . 86.27 0.97 0.172734812 0.132872932 12.58 12.5724 . . . . . . . . . . . . . . . . 88.00 1.02 0.163579867 0.125830667 12.55 12.5325 . . . . . . . . . . . . . . . . 85.36 0.97 0.163089127 0.125453175 11.88 11.8726 . . . . . . . . . . . . . . . . 87.06 1.02 0.154445404 0.118804157 11.84 11.8327 . . . . . . . . . . . . . . . . 84.45 0.97 0.153982067 0.118447744 11.22 11.2028 . . . . . . . . . . . . . . . . 86.14 1.02 0.145821018 0.112170014 11.18 11.1729 . . . . . . . . . . . . . . . . 83.56 0.97 0.145383555 0.111833504 10.59 10.5830 . . . . . . . . . . . . . . . . 85.23 1.02 0.137678226 0.105906328 10.56 10.55
Cumulative Index Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -14.77%Annualized Index Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0.53%Cumulative Return on Securities (assuming redemption) . . . . . . . . . -57.82%Annualized Return on Securities (assuming redemption) . . . . . . . . . -2.84%
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Historical Performance and Hypothetical Examples
Example 4 — The level of the applicable underlying Index decreases at a constant rateof 20% per year, except for increases of 30% in years 8 and 16 and an increase of 40%in year 25.
Year Index Level
Daily IndexPerformance(calculatedannually)
Daily InvestorFee (calculated
annually)
Futures SpreadFee (calculated
annually)Closing
Indicative ValueRedemption
Amount
0 . . . . . . . . . . . . . . . . . 100.00 25.001 . . . . . . . . . . . . . . . . . 80.00 0.80 0.325000000 0.250000000 19.43 19.402 . . . . . . . . . . . . . . . . . 64.00 0.80 0.252525000 0.194250000 15.09 15.073 . . . . . . . . . . . . . . . . . 51.20 0.80 0.196211925 0.150932250 11.73 11.714 . . . . . . . . . . . . . . . . . 40.96 0.80 0.152456666 0.117274358 9.11 9.105 . . . . . . . . . . . . . . . . . 32.77 0.80 0.118458829 0.091122176 7.08 7.076 . . . . . . . . . . . . . . . . . 26.21 0.80 0.092042510 0.070801931 5.50 5.497 . . . . . . . . . . . . . . . . . 20.97 0.80 0.071517031 0.055013100 4.27 4.278 . . . . . . . . . . . . . . . . . 27.26 1.30 0.055568733 0.042745179 5.46 5.459 . . . . . . . . . . . . . . . . . 21.81 0.80 0.070961272 0.054585594 4.24 4.2410 . . . . . . . . . . . . . . . . 17.45 0.80 0.055136908 0.042413006 3.30 3.2911 . . . . . . . . . . . . . . . . 13.96 0.80 0.042841378 0.032954906 2.56 2.5612 . . . . . . . . . . . . . . . . 11.17 0.80 0.033287750 0.025605962 1.99 1.9913 . . . . . . . . . . . . . . . . 8.93 0.80 0.025864582 0.019895832 1.55 1.5414 . . . . . . . . . . . . . . . . 7.15 0.80 0.020096780 0.015459062 1.20 1.2015 . . . . . . . . . . . . . . . . 5.72 0.80 0.015615198 0.012011691 0.93 0.9316 . . . . . . . . . . . . . . . . 7.43 1.30 0.012133009 0.009333084 1.19 1.1917 . . . . . . . . . . . . . . . . 5.95 0.80 0.015493853 0.011918348 0.93 0.9218 . . . . . . . . . . . . . . . . 4.76 0.80 0.012038723 0.009260556 0.72 0.7219 . . . . . . . . . . . . . . . . 3.81 0.80 0.009354088 0.007195452 0.56 0.5620 . . . . . . . . . . . . . . . . 3.04 0.80 0.007268126 0.005590867 0.43 0.4321 . . . . . . . . . . . . . . . . 2.44 0.80 0.005647334 0.004344103 0.34 0.3422 . . . . . . . . . . . . . . . . 1.95 0.80 0.004387979 0.003375368 0.26 0.2623 . . . . . . . . . . . . . . . . 1.56 0.80 0.003409459 0.002622661 0.20 0.2024 . . . . . . . . . . . . . . . . 1.25 0.80 0.002649150 0.002037808 0.16 0.1625 . . . . . . . . . . . . . . . . 1.75 1.40 0.002058390 0.001583377 0.22 0.2226 . . . . . . . . . . . . . . . . 1.40 0.80 0.002834402 0.002180310 0.17 0.1727 . . . . . . . . . . . . . . . . 1.12 0.80 0.002202331 0.001694101 0.13 0.1328 . . . . . . . . . . . . . . . . 0.89 0.80 0.001711211 0.001316316 0.10 0.1029 . . . . . . . . . . . . . . . . 0.72 0.80 0.001329611 0.001022778 0.08 0.0830 . . . . . . . . . . . . . . . . 0.57 0.80 0.001033108 0.000794698 0.06 0.06
Cumulative Index Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -99.43%Annualized Index Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -15.81%Cumulative Return on Securities (assuming redemption) . . . . . . . . . -99.75%Annualized Return on Securities (assuming redemption) . . . . . . . . . -18.14%
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Historical Performance and Hypothetical Examples
We cannot predict the actual applicable Index Closing Level of any series of Securities on any IndexBusiness Day or the market value of your Securities, nor can we predict the relationship between theapplicable Index and the market value of your series of Securities at the Maturity Date or any time priorthereto, including on any Valuation Date. The actual amount that a holder of the applicable Securitieswill receive at maturity or upon call, acceleration or early redemption, as the case may be, and the rate ofreturn on each of the Securities of any series will depend on the actual applicable Index Closing Level,the Daily Investor Fee and the Futures Spread Fee on each day such holder holds its investment, and onthe Redemption Fee Amount, if applicable. Moreover, the assumptions on which the hypothetical returnsare based are purely for illustrative purposes. Consequently, the amount, in cash, to be paid in respect ofyour Securities, if any, on the Maturity Date, Call Settlement Date, Stop Loss Redemption Date or therelevant Redemption Date, as applicable, may be very different from the information reflected in thetables above.
The hypothetical examples above are provided for purposes of information only. The hypotheticalexamples are not indicative of the future performance of the applicable Index on any Index Business Dayor what the value of your Securities of the applicable series may be. Fluctuations in the hypotheticalexamples may be greater or less than fluctuations experienced by the holders of the Securities of theapplicable series. The performance data shown above is for illustrative purposes only and does notrepresent the actual future performance of any series of Securities.
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Risk FactorsYour investment in the Securities will involve significant risks. The Securities are not secured debt andare riskier than ordinary unsecured debt securities. Unlike ordinary debt securities, the Securities do notpay interest during their term and the return on the Securities is linked to the performance of an Index.As described in more detail below, the trading price of the Securities may vary considerably due to eventsthat are difficult to predict and beyond our control. Investing in the Securities of any series is notequivalent to investing directly in the applicable underlying Index or in the VIX futures contracts used toconstruct the applicable underlying Index. This section describes the most significant risks relating to aninvestment in the Securities. We urge you to read the following information about these risks as well asthe risks described under “Considerations Relating to Indexed Securities” in the accompanyingprospectus, together with the other information in this prospectus supplement and the accompanyingprospectus, before investing in the Securities.
The Securities do not pay interest and do not guarantee any payment at maturity orupon call, acceleration or early redemption. The Securities are fully exposed to adecline in the level of the applicable underlying Index and you may lose all or asignificant portion of your investment in the Securities.
The Securities do not guarantee a minimum payment or payment of the Stated Principal Amount atmaturity or upon call, acceleration or early redemption, and you may receive less, and possiblysignificantly less, than the amount you originally invested. The cash payment (if any) that you receive onyour Securities at maturity or upon call, acceleration or early redemption, will be based primarily on anyincrease or decrease in the applicable underlying Index (as measured by the Daily Index Performance)and will be reduced by the Daily Investor Fee and the Futures Spread Fee and, in the case of an earlyredemption, the Redemption Fee Amount. The Daily Investor Fee will be calculated and applied based onthe applicable Daily Index Performance and will therefore depend on daily fluctuations of the applicableunderlying Index level. In addition, the Futures Spread Fee will be calculated and applied based on theapplicable Daily Index Performance, the applicable TAS bid or offer spreads and the number of first andsecond month VIX futures hypothetically required to be bought or sold each day in order to replicate theVIX futures position represented by the applicable underlying Index, and will therefore depend on anumber of market factors, all of which are beyond UBS’s control. Each Index is volatile and subject to avariety of market forces, some of which are described below. The Index Closing Level on any ValuationDate is therefore unpredictable. You may lose all or a substantial portion of your principal if the level ofthe applicable underlying Index decreases or does not increase by an amount sufficient to offset the DailyInvestor Fee and the Futures Spread Fee and, if applicable, the Redemption Fee Amount. This will be trueeven if the value of the applicable underlying Index as of some date or dates prior to the applicableValuation Date would have been sufficiently high to offset the Daily Investor Fee and the Futures SpreadFee and, if applicable, the Redemption Fee Amount.
The Securities are not suitable for all investors. In particular, the Securities should bepurchased only by sophisticated investors who understand the consequences ofinvesting in volatility indices and of seeking inverse or leveraged investment results,who understand the path dependence of the Indices and the Securities, who do notintend to hold the Securities as a buy and hold investment and who are willing toactively and frequently monitor their investment, even intraday.
The Securities require an understanding of futures contracts, volatility strategies and path dependence ofinvestment results and are intended for sophisticated investors to use as part of an overall diversifiedportfolio, and should not be used as a buy and hold investment. The Securities are risky and may not besuitable for investors who plan to hold them for longer periods of time. Each series of Securities isdesigned to achieve its stated investment objectives (described under “The Indices — Index
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Risk Factors
Construction” beginning on page S-54) over the short-term, and the effect of non-continuous rebalancingand the resulting path-dependent nature of the exposure of each series of Securities means that theSecurities may deviate significantly from their target exposure (and may even have exposure that isinverse to their respective intended target exposures) and may therefore fail to achieve their goal,particularly over longer periods of time. Therefore, it is likely that you will suffer significant losses evenif the level of the VIX Index or the Short-Term Futures Index increases over the long term. In addition,because investors in VIX futures contracts must roll their VIX futures positions from one month to thenext, futures positions, unlike positions in securities, cannot be held indefinitely and require frequenttransactions in order to maintain the position in VIX futures. The need to maintain a constant exposureto VIX futures creates the potential for positive or negative returns based on the shape of the VIX futurescurve (i.e. whether the market for VIX futures is in contango or in backwardation). These changes areseparate from outright movements in VIX futures. As a result, the return on a position in VIX futuresmay vary significantly from the percentage changes of the VIX Index itself. Typically, though not in allmarket conditions, this “roll cost” significantly decreases the return for investors who are long VIXfutures. As a result of this “roll cost” and other factors that may cause the value of your Securities todecrease, including the effects of daily and quarterly rebalancing and the combined negative effect of theDaily Investor Fee and the Futures Spread Fee, there is a significant possibility that the amount payableon the Securities at maturity or upon call, early redemption or acceleration will be less than the amountof your initial investment in the Securities, and that you will lose part or all of your initial investment ifyou hold the Securities for a long period of time. We do not expect that any investor will hold theSecurities from inception to maturity. The Securities should be purchased only by sophisticated investorswho understand the consequences of investing in volatility indices and of seeking inverse or leveragedinvestment results, who understand the path dependence of investment returns, and who will actively andfrequently monitor their investment in the Securities, even intraday.
Credit of UBS.
The Securities are senior unsecured debt obligations of the issuer, UBS, and are not, either directly orindirectly, an obligation of or guaranteed by any other party. Any payment to be made on the Securities,including any payment at maturity or upon call, acceleration or early redemption, depends on the abilityof UBS to satisfy its obligations as they come due. As a result, the actual and perceived creditworthinessof UBS will affect the market value, if any, of the Securities prior to maturity, call, acceleration or earlyredemption. In addition, in the event UBS were to default on its obligations, you may not receive anyamounts owed to you under the terms of the Securities.
Changes in our credit ratings may affect the market value of the Securities.
Our credit ratings are an assessment of our ability to pay our obligations, including those on theSecurities. Consequently, actual or anticipated changes in our credit ratings may affect the market valueof the Securities, either positively or negatively. However, because the return on the Securities isdependent upon certain factors in addition to our ability to pay our obligations on the Securities, animprovement in our credit ratings will not reduce the other investment risks related to the Securities.Therefore, a deterioration in our credit ratings may have a negative effect on the market value of theSecurities but an improvement in our credit ratings may or may not result in an increase in the marketvalue of the Securities.
The Securities may be automatically accelerated and mandatorily redeemed, resultingin a loss of all or a substantial portion of your investment.
As described in more detail under “Specific Terms of the Securities — Acceleration Upon Occurrence ofStop Loss Termination Event” beginning on page S-75, in the event the intraday indicative value of anyseries of Securities is equal to or less than 20.0% of its Closing Indicative Value at the end of the prior
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Risk Factors
Index Business Day, all issued and outstanding Securities of such series will be automatically acceleratedand mandatorily redeemed and holders will receive only the Stop Loss Redemption Value; provided thatif the Stop Loss Redemption Value so calculated is less than or equal to zero, the payment uponacceleration will be zero. Holders of Securities that are accelerated will not benefit from any subsequentincrease in the indicative value of the applicable underlying Index, even if such increase occurs prior tothe Stop Loss Redemption Date and even if such increase causes the indicative value of the Securities toexceed the intraday indicative value that triggered the Stop Loss Termination Event. The Stop LossRedemption Value may be significantly less than the amount of your investment in the applicable seriesof Securities and may be zero.
In addition, because the intraday indicative value of any series of Securities must decrease by 80% ormore from the prior Index Business Day’s Closing Indicative Value on a single Index Business Day inorder to trigger a Stop Loss Redemption Event, it is highly likely that any such Stop Loss TerminationEvent will occur during a period of extreme market conditions, including disruptions to trading markets.For example, during any such period the liquidity of VIX futures may be adversely affected, which mayhinder or delay the determination of the applicable Stop Loss Redemption Value. Market conditions onany Stop Loss Termination Date are beyond our control and are impossible to predict, and mayadversely affect the value of your Securities in unforeseen ways.
The Futures Spread Fee is an uncapped fee that may vary significantly over time, evenfrom day to day, will be impacted by market factors beyond UBS’s control and cannotbe predicted.
The Futures Spread Fee for each series of Securities is an uncapped fee intended to approximate thehypothetical cost of buying and selling the number of first and second month VIX futures that would benecessary to replicate the performance of the applicable underlying Index. The Futures Spread Fee isbased in part on the TAS bid and offer spreads of the VIX futures underlying the applicable underlyingIndex and in part on the number of first and second month VIX futures hypothetically required to bebought or sold each day in order to replicate the VIX futures position represented by the applicableunderlying Index. While the TAS spreads per VIX future have historically ranged from -$0.06 to $0.05,historical data regarding TAS spreads is severely limited and should not be taken as an indication ofwhat the TAS spreads will be during the term of the Securities. In addition, the number of VIX futureshypothetically required to be bought and sold each day in order to replicate the VIX futures positionrepresented by the applicable underlying Index may vary significantly.
As a result, the Futures Spread Fee may vary significantly from day to day and may be much higher thanwould be expected based upon the historical and estimated historical performance of the Indices and thehistorical range of the TAS bid and offer spreads. The amount of the Futures Spread Fee will vary basedupon, among other factors, market conditions, the performance of the applicable underlying Index, thesize of the TAS bid and offer spreads and the number of first and second month VIX futures required tobe bought or sold each day in order to replicate the VIX futures position represented by the applicableunderlying Index, all of which are beyond UBS’s control and cannot be predicted. Therefore, investorsshould be extremely cautious when considering an investment in the Securities and should frequentlymonitor their investment and the very likely negative effect of the Futures Spread Fee on the return of theSecurities. See “Specific Terms of the Securities — Futures Spread Fee” beginning on page S-67 for moreinformation regarding the calculation of the Futures Spread Fee.
Each series of Securities may trade at a substantial premium to or discount from itsintraday indicative value which could, in certain circumstances, result in a loss of someor all of your investment such series of Securities.
The market value of each series of Securities is influenced by many unpredictable factors, some of whichmay cause the price at which such series can be sold in the secondary market to vary substantially from
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Risk Factors
the intraday indicative value that is calculated and disseminated throughout trading hours. For example,if UBS were to suspend sales of one or more series of Securities for any reason, the liquidity of the marketfor such series of Securities could be affected, potentially leading to insufficient supply, causing themarket price of such series of Securities to increase. Such an increase could represent a premium over theintraday indicative value of such series of Securities. Before trading in the secondary market, you shouldcompare the intraday indicative value of such series of Securities with the then-prevailing trading price ofsuch series. Furthermore, unless UBS indicates otherwise, if UBS were to suspend selling additionalSecurities of any series, it would reserve the right to resume selling additional Securities of such series atany time, which might result in the reduction or elimination of any premium in the market price over theintraday indicative value. Therefore, paying a premium purchase price over the intraday indicative valueof any series of Securities could lead to significant losses in the event you sell such Securities at a timewhen such premium is no longer present in the market or if such series of Securities is called, acceleratedor matures.
Conversely, suspension of additional issuances of a series of Securities can also result in a significantreduction in the number of outstanding Securities of such series if investors subsequently exercise theirearly redemption right. If the total number of outstanding Securities of a series has fallen to a level that isclose to or below the minimum redemption amount, you may not be able to purchase enough Securitiesof such series to meet the minimum size requirement in order to exercise your early redemption right.The unavailability of the redemption right could result in the Securities of such series trading in thesecondary market at discounted prices below the intraday indicative value. Having to sell your Securitiesat a discounted market price below the intraday indicative value of the Securities could lead to significantlosses. Prior to making an investment in any series of Securities, you should take into account whether ornot the market price is tracking its intraday indicative value and consider the prospects of it continuingto do so.
The Securities may be purchased in the secondary market at prices other than theClosing Indicative Value, which means that the effective leverage amount of theleveraged and inverse legs of the applicable underlying Index may be greater or lesserthan their target leverage amounts.
The Securities may be purchased in the secondary market at prices other than the Closing IndicativeValue, which will have an effect on the effective leverage amount of the leveraged and inverse legs of theapplicable underlying Index. Because the leverage amounts are fixed only after the close of trading oneach Index Business Day and do not change intraday as the level of the Short-Term Futures Index movesin favor of either the leveraged leg or inverse leg of the applicable underlying Index (i.e., the level of theShort-Term Futures Index decreases for the inverse leg of each Index, or the level of the Short-TermFutures Index increases for the leveraged leg of each Index), the actual leverage amounts at the time youpurchase any Securities may differ from the leverage amounts established at the most recent rebalancing.Thus, if the level of the Short-Term Futures Index increases during the Index Business Day, the effectiveexposure for the inverse leg of each Index increases above one times inverse and the effective exposurefor the leveraged leg of each Index decreases below two times leveraged. The reverse is also true.
If the Closing Indicative Value of any series of Securities increases above its StatedPrincipal Amount, at any time, any subsequent adverse daily performance of theapplicable underlying Index will result in a larger decrease in the level of such ClosingIndicative Value than if the current Closing Indicative Value of such series hadremained constant at its Stated Principal Amount.
If the current Closing Indicative Value of any series of Securities increases above its Stated PrincipalAmount, the amount of decrease of such Closing Indicative Value resulting from an adverse dailyperformance of the applicable underlying Index will increase accordingly. This is because the applicable
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Risk Factors
Daily Index Performance will be applied to a Closing Indicative Value larger than its Stated PrincipalAmount. As such, the amount of decrease from any adverse daily performance of the applicableunderlying Index will be more than if such Closing Indicative Value were maintained constant at itsStated Principal Amount. This means that if the Closing Indicative Value of such series of Securitiesincreases above its Stated Principal Amount, it will take smaller adverse daily performances to decreasesuch Closing Indicative Value (and subsequently the value of your investment) back to its initial valuethan would have been the case if such Closing Indicative Value were maintained at its Stated PrincipalAmount. Further, because of the leveraged and inverse legs of each Index, you could lose more than 1%of your initial investment for each 1% of adverse daily performance of the Short-Term Futures Index.
If the Closing Indicative Value for any series of Securities decreases below its StatedPrincipal Amount, at any time, any subsequent beneficial daily performance of theapplicable underlying Index will result in a smaller increase in the level of such ClosingIndicative Value than if the current respective Closing Indicative Value of such serieshad remained constant at its Stated Principal Amount.
If the current Closing Indicative Value for any series of Securities decreases below its Stated PrincipalAmount, the amount of increase of such Closing Indicative Value resulting from a beneficial dailyperformance of the applicable underlying Index will decrease correspondingly. This is because theapplicable Daily Index Performance will be applied to a smaller Closing Indicative Value than its StatedPrincipal Amount. As such, the amount of increase from any beneficial daily performance of theapplicable underlying Index will be less than if such Closing Indicative Value were maintained constantat its Stated Principal Amount. This means that if the Closing Indicative Value of such series of Securitiesdecreases below its Stated Principal Amount, it will take larger beneficial daily performances to restoresuch Closing Indicative Value (and subsequently the value of your investment) back to its initial valuethan would have been the case if such Closing Indicative Value were maintained at its Stated PrincipalAmount. Further, because of the leveraged and inverse legs of each Index, you could gain less than 1% ofyour initial investment for each 1% of beneficial daily performance of the Short-Term Futures Index.
The Securities are not linked to the VIX Index.
Each series of Securities is linked to the daily performance of one of the applicable underlying Indices,which in turn is linked to prices of futures contracts on the VIX Index. Each applicable underlying Indextracks a combination of leveraged and inverse exposure to an index of futures on the VIX Index, withdifferent target weights for each type of exposure depending on the applicable underlying Index. Theperformance of these futures contracts will not necessarily track the performance of the VIX Index andnone of the Indices is designed to track the performance of the VIX Index. Your Securities may notbenefit from increases (or in the case of the inverse leg of the applicable underlying Index, decreases) inthe level of the VIX Index because such increases (or in the case of the inverse leg of the applicableunderlying Index, decreases) will not necessarily cause the level of the relevant futures contracts on theVIX Index to increase (or in the case of the inverse leg of the applicable underlying Index, decrease).Additionally, the rolling of the futures contracts that are used to construct the applicable underlyingIndex may decrease your returns. A hypothetical investment that was linked directly to the performanceof the VIX Index could generate a higher return than your series of Securities.
The Securities are not linked to options used to calculate the VIX Index, the actualvolatility of the S&P 500® Index or the equity securities included in the S&P 500® Index,nor will the return on your Securities be a participation in the actual volatility of theS&P 500® Index.
The VIX Index measures the 30-day forward volatility of the S&P 500® Index as calculated based on theprices of certain put and call options on the S&P 500® Index. The actual volatility of the S&P 500®
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Risk Factors
Index may differ significantly from the level predicted by the VIX Index or derived from the prices of theput and call options used in the calculation of the VIX Index. The Closing Indicative Value and theintraday indicative value of each series of Securities are based on the value of the applicable underlyingIndex, which is based on the relevant futures on the VIX Index. Your Securities are not linked to therealized volatility of the S&P 500® Index and will not reflect the return you would realize if you owned,or held a short position in, the equity securities underlying the S&P 500® Index or if you traded the putand call options on the S&P 500® Index used to calculate the level of the VIX Index.
The VIX Index is a theoretical calculation and is not a tradable index.
The VIX Index is a theoretical calculation and cannot be traded on a spot price basis. The settlementprice at maturity of the VIX futures contracts contained in the Short-Term Futures Index is based on thistheoretically derived calculation. As a result, the behavior of the futures contracts that comprise theShort-Term Futures Index may be different from futures contracts whose settlement price is based on atradable asset.
The rolling of futures contracts included in the Short-Term Futures Index, whichunderlies the leveraged and inverse legs of the sub-portfolios comprising each Index,may result in a reduced amount payable at maturity or upon early redemption, call oracceleration of the Securities.
The Short-Term Futures Index, which underlies the leveraged and inverse legs of the sub-portfolioscomprising each Index, is composed of futures contracts on the VIX Index. Unlike equities, whichtypically entitle the holder to a continuing stake in a corporation, futures contracts specify a certain datefor delivery of the underlying asset or for settlement in cash based on the level of the underlying asset. Asthe futures contracts that comprise the Short-Term Futures Index approach expiration, they are replacedby similar contracts that have a later expiration. Thus, for example, a futures contract purchased andheld in August may specify an October expiration. As time passes, the contract expiring in October maybe replaced by a contract expiring in November. This process is referred to as “rolling.” If the market forthese contracts is (putting aside other considerations) in “backwardation,” which means that the pricesare lower in the distant delivery months than in the nearer delivery months, the sale of the Octobercontract would take place at a price that is higher than the purchase price of the November contract,thereby creating a positive “roll yield.” The contracts included in the Short-Term Futures Index have nothistorically exhibited consistent periods of backwardation, and backwardation will most likely not existat many, if not most, times. Moreover, many of the contracts included in the Short-Term Futures Indexhave historically traded in “contango” markets. Contango markets are those in which the prices ofcontracts are higher in the distant delivery months than in the nearer delivery months. VIX futures havefrequently exhibited very high contango in the past, resulting in a significant cost to “roll” the futures.
The existence of contango in the future markets could result in negative “roll yields,” also referred to as“roll costs,” which could adversely affect the value of the leveraged long leg of each of the sub-portfoliosbut could increase the value of the inverse leg of each of the sub-portfolios. Conversely, the existence ofbackwardation in the future markets could result in positive “roll yields,” which could favorably affectthe value of the leveraged long leg of each of the sub-portfolios but could decrease the value of theinverse leg of each of the sub-portfolios.
The Short-Term Futures Index may in the future be based on other pricing references orcontracts that are not traded on regulated futures exchanges, and may cease to exist ifno acceptable substitute to futures contracts is available.
The Short-Term Futures Index, which underlies both the leveraged and inverse legs of each of the Indices,is currently based solely on futures contracts traded on regulated futures exchanges (referred to in the
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Risk Factors
United States as “designated contract markets”). If these exchange-traded futures cease to exist, theShort-Term Futures Index may be calculated based on other reference prices of the VIX Index itself(rather than futures or other derivatives on the VIX Index) or on over-the-counter contracts (such asswaps and forward contracts), or instruments traded on trading facilities, based on the VIX Index.Alternatively, a successor index may be chosen by the Security Calculation Agents, as described under“Specific Terms of the Securities — Discontinuance or Modification of the Indices or Termination of ourLicense Agreement with the Index Sponsor,” which successor index may be based on contracts or otherpricing references that are not traded on regulated futures exchanges. Other contracts or trading facilitieson which such contracts or instruments are traded may be subject to lesser degrees of regulation thanfutures exchanges or, in some cases, no substantive regulation. As a result, trading in such contracts, andthe manner in which prices and volumes are reported by the relevant trading facilities, may not be subjectto the provisions of, and the protections afforded by, the Commodity Exchange Act, or other applicablestatutes and related regulations, that govern trading on regulated U.S. futures exchanges, or similarstatutes and regulations that govern trading on regulated non-U.S. futures exchanges. In addition, manyelectronic trading facilities have only recently initiated trading and do not have significant tradinghistories. As a result, the trading of contracts on such facilities, and the inclusion of such contracts in theShort-Term Futures Index, may be subject to certain risks not presented by U.S. or U.K. exchange-tradedfutures contracts, including risks related to the liquidity and price histories of the relevant contracts. Inaddition, if no futures contracts on the VIX Index are available, and no acceptable substitute pricingreferences can be identified, the Index Sponsor may be unable to calculate the Short-Term Futures Index,and therefore, the Indices, which would result in a Market Disruption Event. For more information, see“Specific Terms of the Securities — Market Disruption Event.”
The Securities are part of a series of UBS AG debt securities entitled “Medium-TermNotes, Series B” and do not benefit from a co-obligation of UBS Switzerland AG.
Unlike UBS AG’s exchange-traded notes issued prior to June 14, 2015, which are part of a series of debtsecurities entitled “Medium-Term Notes, Series A” having UBS Switzerland AG as a co-obligor of suchdebt securities, the Securities are part of a separate series of debt securities entitled “Medium-Term Notes,Series B,” and were issued after June 14, 2015. As a result, UBS Switzerland AG is not a co-obligor of theSecurities and has no liability with respect to the Securities. If UBS AG fails to perform and observe everycovenant of the indenture to be performed or observed by UBS AG with respect to the Securities, holders ofthe Securities will have recourse only against UBS AG, and not against UBS Switzerland AG.
There are restrictions on the minimum number of Securities you may redeem and onthe procedures and timing for early redemption.
You must redeem at least 50,000 Securities of an applicable series at one time in order to exercise yourright to redeem your Securities on any Redemption Date, unless we elect to waive the minimumredemption amount in our sole discretion, on a case-by-case basis, or your broker or other financialintermediary bundles your Securities for redemption with those of other holders of the applicable seriesto reach this minimum requirement. You should not assume you will be entitled to the benefit of anysuch waiver. You may only redeem your Securities on a Redemption Date if Janus Distributors receives anotice of redemption from your broker by no later than 4:00 p.m. (New York City time) and aconfirmation of redemption by no later than 4:00 p.m. (New York City time) on the Index Business Dayprior to the applicable Valuation Date. If Janus Distributors does not receive your notice of redemptionby 4:00 p.m. (New York City time), or the confirmation of redemption by 4:00 p.m. (New York Citytime) on the Index Business Day prior to the applicable Valuation Date, your notice will not be effectiveand we will not redeem your Securities on the applicable Redemption Date. Your notice of redemptionwill not be effective until Janus Distributors confirms receipt. In addition, Janus Distributors may requesta medallion signature guarantee or such assurances of delivery as Janus Distributors may deem necessary
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Risk Factors
in its sole discretion. See “Specific Terms of the Securities — Early Redemption at the Option of theHolders” beginning on page S-73. We also reserve the right from time to time to accelerate, in our solediscretion on a case-by-case basis, the Redemption Valuation Date to the date on which the notice ofredemption is received by Janus Distributors rather than the following Index Business Day. You shouldnot assume you will be entitled to the benefit of any such acceleration.
You will not know the Redemption Amount at the time you elect to request that weredeem your Securities.
You will not know the Redemption Amount you will receive at the time you elect to request that weredeem your Securities. Your notice to Janus Distributors to redeem your Securities is irrevocable andmust be received by Janus Distributors no later than 4:00 p.m. (New York City time) on the IndexBusiness Day immediately preceding the Redemption Valuation Date and a completed and signedconfirmation of such redemption must be received by Janus Distributors no later than 4:00 p.m. (NewYork City time) on the same date. The Redemption Valuation Date is the third Index Business Day priorto the related Redemption Date and also the first Index Business Day following the date on which suchnotice and confirmation are received by Janus Distributors, except that we reserve the right from time totime to accelerate, in our sole discretion on a case-by-case basis, the Redemption Valuation Date to thedate on which the notice of redemption is received by Janus Distributors rather than the following IndexBusiness Day. You will not know the Redemption Amount until after the Redemption Valuation Date,and we will pay you the Redemption Amount, if any, on the Redemption Date, which is the third IndexBusiness Day following the corresponding Redemption Valuation Date. As a result, you will be exposedto market risk in the event the market fluctuates after we confirm the validity of your notice of electionto exercise your right to have us redeem your Securities, and prior to the relevant Redemption Date.
The liquidity of the market for the Securities may vary materially over time, and youmay be unable to redeem the Securities if you do not hold at least 50,000 Securities ofa series.
As stated on the cover of this prospectus supplement, we intend to sell a portion of the Securities on theInitial Trade Date, and the remainder of the Securities may be offered and sold from time to time,through UBS Securities LLC, our affiliate, as agent, to investors and dealers acting as principals. Also, thenumber of Securities outstanding or held by persons other than our affiliates could be reduced at anytime due to early redemptions. We may suspend or cease sales of the Securities at any time, at ourdiscretion. Accordingly, the liquidity of the market for the Securities could vary materially over theirterm. While you may elect to redeem your Securities of any series prior to maturity, early redemption issubject to the conditions and procedures described elsewhere in this prospectus supplement, including thecondition that you must redeem at least 50,000 Securities of the applicable series at one time in order toexercise your right to redeem your Securities on any Redemption Date.
You will not receive interest payments on the Securities or have rights in respect ofany of the futures contracts underlying the Indices or the Short-Term Futures Index.
You will not receive any periodic interest payments on the Securities. However, because it is possible thatthe Securities may be classified as contingent payment debt instruments rather than a pre-paid derivativecontract, you may be required to accrue interest income over the term of your Securities. See “MaterialU.S. Federal Income Tax Consequences — Alternative Treatments.”
As an owner of the Securities, you will not have rights that investors in the futures contracts underlyingthe Indices or the Short-Term Futures Index (the “Index Contracts”) may have. Your Securities will bepaid in cash, and you will have no right to receive any dividends or distributions relating to suchcontracts.
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Risk Factors
The market value of the Securities may be influenced by many unpredictable factors.
The market value of your Securities may fluctuate between the date you purchase them and theapplicable Valuation Date . Therefore, you may sustain a significant loss if you sell your Securities in thesecondary market. We expect that generally the value of the Index Contracts and the applicableunderlying Index will affect the market value of the Securities more than any other factor, althoughseveral other factors, many of which are beyond our control, will also influence the market value of theSecurities. Factors that may influence the market value of the Securities include:
➤ Prevailing market prices and forward volatility index levels of the U.S. stock markets andprevailing market prices of options on the S&P 500® Index, the VIX Index, and relevant futurescontracts on the VIX Index;
➤ supply and demand for the Securities, including inventory positions with UBS Securities LLC orany market maker or additional issues of the Securities and any suspensions or limits on suchactivity;
➤ the time remaining to the maturity of the Securities;
➤ interest rates;
➤ economic, financial, political, regulatory, geographical, judicial or force majeure events that affectthe level of the applicable underlying Index, the market price of the U.S. and global stock marketsor the Index Contracts, or that affect markets generally;
➤ the size of the TAS bid and offer spreads for first and second month VIX futures contracts;
➤ the actual and perceived creditworthiness of UBS; or
➤ supply and demand as well as hedging activities in the equity-linked structured product markets.
These factors interrelate in complex ways, and the effect of one factor on the market value of yourSecurities may offset or enhance the effect of another factor in an unpredictable manner, which couldnegatively affect the market value of the Securities.
We may issue and sell additional Securities at any time but we are under no obligationto do so, and we may limit or restrict such sales, and we may stop and subsequentlyresume selling additional Securities at any time. Any of these actions could materiallyand adversely affect the trading price and liquidity of the Securities in the secondarymarket.
In our sole discretion, we may decide to issue and sell additional Securities from time to time at a pricethat is higher or lower than the Stated Principal Amount, based on the indicative value of the Securitiesat that time. The price of the Securities in any subsequent sale may differ substantially (higher or lower)from the price paid in connection with any other issuance of such Securities. Sales of the Securities will bemade at market prices prevailing at the time of sale, at prices related to market prices or at negotiatedprices. Additionally, any Securities held by us or an affiliate in inventory may be resold at prevailingmarket prices or lent to market participants who may have made short sales of the Securities. However,we are under no obligation to issue or sell additional Securities at any time, and if we do sell additionalSecurities, we may limit or restrict such sales, and we may stop and subsequently resume sellingadditional Securities at any time. Any of these actions could materially and adversely affect the tradingprice and liquidity of such Securities in the secondary market. Furthermore, unless we indicate otherwise,if we suspend selling additional Securities, we reserve the right to resume selling additional Securities atany time, which might result in the reduction or elimination of any premium in the trading price.
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Risk Factors
There may not be an active trading market in the applicable Securities; sales in thesecondary market may result in significant losses.
Each series of the Securities has been approved for listing, subject to official notice of issuance, on NYSEArca. However, we are not required to maintain any listing of the Securities on NYSE Arca or any otherexchange. Certain affiliates of UBS may engage in limited purchase and resale transactions in theSecurities, although they are not required to do so and may stop at any time. As a result, if an activesecondary market develops, we expect that investors will purchase and sell the Securities primarily in thissecondary market. Even if an active secondary market for the Securities develops, it may not providesignificant liquidity or trade at prices advantageous to you. As a result, if you sell your Securities in thesecondary market, you may have to do so at a discount from the issue price or the intraday indicativevalue of the Securities and you may suffer significant losses.
The Index Sponsor may, in its sole discretion, discontinue the public disclosure of theintraday indicative value of the Indices and the end-of-day closing value of the Indices,which could result in the Securities being delisted from NYSE Arca.
Each series of Securities has been approved for listing, subject to official notice of issuance, on NYSEArca. The Variable Long/Short Securities are listed under the symbol “LSVX”. The Tail Risk Securitiesare listed under the symbol “BSWN”. The Short Volatility Hedged Securities are listed under the symbol“XIVH”. The Index Sponsor is not under any obligation to continue to calculate the intraday indicativevalue of any Index and end-of-day official closing value of any Index or required to calculate similarvalues for any successor indices. If the Index Sponsor discontinues such public disclosure, we may not beable to provide the intraday indicative values related to the applicable Index required to maintain anylisting of the Securities on the NYSE Arca. If the Securities become delisted, the liquidity of the marketfor the Securities may be materially and adversely affected and you may sustain significant losses if yousell your Securities in the secondary market. We are not required to maintain any listing of the Securitieson NYSE Arca or any other exchange.
The Index Sponsor may adjust each Index in a way that affects the applicable IndexClosing Level, and the Index Sponsor has no obligation to consider your interests as aholder of the Securities.
The Index Sponsor is responsible for calculating and publishing the Indices, and can edit, add, delete orsubstitute the Index Contracts or make other methodological changes that could change the applicableIndex Closing Level. You should realize that the changing of underlying futures contracts included in theapplicable Index may affect the applicable Index, as a newly added contract may perform significantlybetter or worse than the existing contract. Additionally, the Index Sponsor may alter, discontinue orsuspend calculation or dissemination of any Index. Any of these actions could adversely affect the valueof the Securities. The Index Sponsor has no obligation to consider your interests as a holder of theSecurities in calculating or revising the Indices. See “The Indices.”
Estimated historical and historical levels of the Indices should not be taken as anindication of future performance during the term of the Securities.
The historical information in this prospectus supplement is presented for information only and the actualperformance of the Indices over the term of the Securities, as well as the amount payable at maturity orupon call, early redemption or acceleration, may bear little relation to the historical performance of theIndices, which is limited as of the date of this prospectus supplement, or to the past estimated historicalperformance of the Indices. The performance of the futures contracts on the VIX Index underlying theShort-Term Futures Index and the net long or short exposure of the applicable underlying Index willdetermine the applicable Index Closing Level on any given Valuation Date or at other times during theterm of the Securities. As a result, it is impossible to predict whether the level of each of the Indices willrise or fall.
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Risk Factors
The Indices, the Short-Term Futures Index and VIX Index futures have limited historicalinformation.
The Indices were created on November 3, 2011 and the Short-Term Futures Index underlying theleveraged long and inverse legs of the Indices was created on May 10, 2010 and therefore each has alimited history. Furthermore, the Index Sponsor has published limited information about how the Indicesand the Short-Term Futures Index would have performed had they been calculated in the past. Inaddition, futures on the VIX Index have only traded freely since March 26, 2004, and not all futures ofall relevant maturities have traded at all times since that date.
Because the Indices, the Short-Term Futures Index and the VIX futures contracts that underlie them areof recent origin and limited or no historical performance data exists with respect to them, yourinvestment in the Securities may involve a greater risk than investing in alternate securities linked to oneor more indices with an established record of performance. A longer history of actual performance mayhave been helpful in providing more reliable information on which to assess the validity of theproprietary methodology that each Index makes use of as the basis for an investment decision.
Changes in the three-month Treasury rate may affect the level of the applicableunderlying Index and the value of your Securities.
Because the value of the each of the Indices is linked, in part, to the three-month Treasury rate , changesin the three-month Treasury rate may affect the amount payable on each series of Securities at maturity,or upon call, early redemption or acceleration and the market value of each series of Securities. Assumingthe trading prices of the futures contracts underlying the Short-Term Futures Index remain constant, anincrease in the three-month Treasury rate will increase the value of each Index and, therefore, the valueof the Securities. A decrease in the three-month Treasury rate will adversely impact the level of eachIndex and, therefore, the value of the Securities.
The policies of the Index Sponsor, the Chicago Board Options Exchange and the CFE,and changes that affect the composition and valuation of the applicable underlyingIndex, the S&P 500® Index, the VIX Index, the Short-Term Futures Index or the futurescontracts underlying the Short-Term Futures Index, could affect the amount payable onyour Securities and their market value.
The policies of the Index Sponsor, the Chicago Board Options Exchange (“CBOE”) and the CFEconcerning the calculation of each Index, the S&P 500® Index, the VIX Index and the Short-TermFutures Index, as applicable, and any additions, deletions or substitutions of equity securities, optionscontracts or futures contracts and the manner in which changes affecting the equity securities, optionscontracts or futures contracts are reflected in the S&P 500® Index, the VIX Index or the Short-TermFutures Index, could affect the value of any Index, the VIX Index or the Short-Term Futures Index, and,therefore, the amount payable on your Securities at maturity, or upon call, early redemption oracceleration and the market value of your Securities prior to maturity.
SPDJI can add, delete or substitute the equity securities underlying the S&P 500® Index or make othermethodological changes to the S&P 500® Index. SPDJI can also add, delete or substitute the futurescontracts underlying the Short-Term Futures Index or make other methodological changes that couldchange the level of the Short-Term Futures Index. The changing of equity securities included in the S&P500® Index may affect the value of the put and call options used to calculate the level of the VIX Index.The changing of the futures contracts underlying the Short-Term Futures Index may affect theperformance of the Short-Term Futures Index in similar ways. Additionally, SPDJI may alter, discontinueor suspend calculation or dissemination of the S&P 500® Index or the Short-Term Futures Index. Any of
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Risk Factors
these actions could adversely affect the value of your Securities. S&P has no obligation to consider yourinterests in calculating or revising the S&P 500® Index or the Short-Term Futures Index. See “TheIndices.”
The CBOE can make methodological changes to the calculation of the VIX Index that could affect thevalue of futures contracts on the VIX Index and, consequently, the value of your Securities. There can beno assurance that the CBOE will not change the VIX Index calculation methodology in a way which mayaffect the value of your Securities. Additionally, the CBOE may alter, discontinue or suspend calculationor dissemination of the VIX Index and/or the exercise settlement value. Any of these actions couldadversely affect the value of your Securities. The CBOE has no obligation to consider your interests incalculating or revising the VIX Index or in calculating the exercise settlement value. See “The Indices —The VIX Index” below.
In addition, the policies of the CFE, with respect to the futures contracts underlying the Short-TermFutures Index, and any changes in such policies, could affect the value of such futures contracts, theShort-Term Futures Index and the Indices and, therefore, the market value of your Securities.
If events such as these occur, or if the value of the applicable underlying Index, the S&P 500® Index orthe Short-Term Futures Index is not available or cannot be calculated because of a market disruptionevent or for any other reason, the Security Calculation Agents may be required to make a good faithestimate in their sole discretion of the value of the applicable underlying Index. The circumstances inwhich the Security Calculation Agents will be required to make such a determination are described morefully under “Specific Terms of the Securities — Market Disruption Event.”
Changes in law or regulation relating to commodities futures contracts may adverselyaffect the market value of the Securities and the amounts payable on your Securities.
Commodity futures contracts, such as the Index Contracts, are subject to legal and regulatory regimesthat are in the process of changing in the United States and, in some cases, in other countries. The Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known as the “Dodd-Frank Act,”provides for substantial changes in the regulation of the futures and over-the-counter derivatives markets.Among other things, the legislation requires that most over-the-counter transactions be executed onorganized exchanges or facilities and be cleared through regulated clearing houses. This requirement hasbecome effective for certain categories of interest rate and credit default swaps. It is anticipated thatother products will become subject to the mandatory centralized execution and clearing requirement inthe future. In addition, the legislation requires registration of, and imposes regulations on, swap dealersand major swap participants. The enactment of the Dodd-Frank Act could make participation in themarkets more burdensome and expensive. This could adversely affect the prices of futures contracts and,in turn, the market value of the Securities and the amounts payable on the Securities at maturity or uponcall, early redemption or acceleration. In addition, other parts of the legislation, by increasing regulationof, and imposing additional costs on, swap transactions, could reduce trading in the swap and futuresmarkets, which would further restrict liquidity, increase volatility and adversely affect prices, whichcould in turn adversely affect the value of the applicable underlying Index.
If UBS were to be subject to restructuring proceedings, the market value of theSecurities may be adversely affected.
Under certain circumstances, the Swiss Financial Market Supervisory Authority (FINMA) has the powerto open restructuring or liquidation proceedings in respect of, and/or impose protective measures inrelation to, UBS, which proceedings or measures may have a material adverse effect on the terms andmarket value of the Securities and/or the ability of UBS to make payments thereunder. Pursuant to article
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Risk Factors
25 et seq. of the Swiss Banking Act, FINMA has broad statutory powers to take measures and actions inrelation to UBS if it (i) is overindebted, (ii) has serious liquidity problems or (iii) fails to fulfill theapplicable capital adequacy provisions after expiration of a deadline set by FINMA. If one of theseprerequisites is met, FINMA is authorized to open restructuring proceedings (Sanierungsverfahren) orliquidation (bankruptcy) proceedings (Bankenkonkurs) in respect of, and/or impose protective measures(Schutzmassnahmen) in relation to, UBS. The Swiss Banking Act, as last amended as of January 1, 2013,grants significant discretion to FINMA in connection with the aforementioned proceedings andmeasures. In particular, a broad variety of protective measures may be imposed by FINMA, including abank moratorium (Stundung) or a maturity postponement (Fälligkeitsaufschub), which measures may beordered by FINMA either on a stand-alone basis or in connection with restructuring or liquidationproceedings. In a restructuring proceeding, the resolution plan may, among other things, (a) provide forthe transfer of UBS’s assets or a portion thereof, together with debts and other liabilities, and contracts ofUBS, to another entity, (b) provide for the conversion of UBS’s debt and/or other obligations, includingits obligations under the notes, into equity, and/or (c) potentially provide for haircuts on obligations ofUBS, including its obligations under the Securities. As of the date of this product supplement, there areno precedents as to what impact the revised regime would have on the rights of holders of the Securitiesor the ability of UBS to make payments thereunder if one or several of the measures under the revisedinsolvency regime were imposed in connection with a resolution of UBS.
Trading and other transactions by UBS or its affiliates in equity securities underlyingthe S&P 500® Index or instruments linked to the S&P 500® Index, the applicableunderlying Index, the VIX Index, the Short-Term Futures Index or the equity securitiesunderlying the S&P 500® Index may impair the market value of the Securities.
As described below under “Use of Proceeds and Hedging” in this prospectus supplement, we or one ormore of our affiliates may hedge our obligations under the Securities by purchasing or selling equitysecurities underlying the S&P 500® Index or listed or over-the-counter options, futures, swaps or otherderivative financial instruments linked to the S&P 500® Index (including the put and call options used tocalculate the level of the VIX Index), the applicable underlying Index, the VIX Index (including the VIXfutures which are used to calculate the Short-Term Futures Index), the Short-Term Futures Index and theequity securities underlying the S&P 500® Index, and we may adjust these hedges by, among otherthings, purchasing or selling any of the foregoing at any time.35 Although they are not expected to, anyof these hedging activities may affect the market price and/or the volatility of those items and, therefore,could adversely affect the market value of the Securities. It is possible that we or one or more of ouraffiliates could receive substantial returns from these hedging activities while the market value of theSecurities declines.
We or one or more of our affiliates may also engage in trading in equity securities underlying the S&P 500®
Index or listed or over-the-counter options, futures, swaps or other derivative financial instruments linkedto the S&P 500® Index (including the put and call options used to calculate the level of the VIX Index), theapplicable underlying Index, the VIX Index (including the VIX futures which are used to calculate theShort-Term Futures Index), the Short-Term Futures Index and the equity securities underlying the S&P500® Index on a regular basis as part of our general broker-dealer and other businesses, for proprietaryaccounts, for other accounts under management or to facilitate transactions for customers. Any of theseactivities could affect the market price and/or volatility of those items and, therefore, could adversely affectthe market value of the Securities. We or one or more of our affiliates may also issue or underwrite othersecurities or financial or derivative instruments with returns linked or related to changes in the performanceof any of the foregoing. By introducing competing products into the marketplace in this manner, we or oneor more of our affiliates could adversely affect the market value of the Securities. With respect to any of theactivities described above, neither UBS nor its affiliates has any obligation to take the needs of any buyer,seller or holder of the Securities into consideration at any time.
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Risk Factors
The business activities of UBS or its affiliates may create conflicts of interest.
We and our affiliates expect to play a variety of roles in connection with the issuance of the Securities.
As noted above, we and our affiliates expect to engage in trading activities related the Indices and theIndex Contracts that are not for the account of holders of the Securities or on their behalf. These tradingactivities may present a conflict between the holders’ interest in the Securities and the interests that weand our affiliates will have in our and our affiliates’ proprietary accounts, in facilitating transactions,including options and other derivatives transactions, for our and our affiliates’ customers and in accountsunder our and our affiliates’ management. These trading activities, if they influence the level of theIndices, could be adverse to the interests of the holders of the Securities.
Moreover, we and our affiliates may have published and in the future may publish research reports withrespect to the futures contracts underlying the Indices or listed or over-the-counter options, futures,swaps or other derivative financial instruments linked to the Indices and the commodity futures contractsunderlying the Indices. This research is modified from time to time without notice and may expressopinions or provide recommendations that are inconsistent with purchasing or holding the Securities.The research should not be viewed as a recommendation or endorsement of the Securities in any way andinvestors must make their own independent investigation of the merits of this investment.
Any of these activities could adversely affect the level of the Indices and, therefore, the indicative value ofthe Securities. Furthermore, any of these activities, if occurring on any Redemption Valuation Date,could adversely affect the payment at maturity, call, acceleration or redemption of any series of theSecurities.
There are potential conflicts of interest between you and the Security CalculationAgents.
Our affiliate, UBS Securities LLC, and Janus Index , will serve as the Security Calculation Agents. UBSSecurities LLC will, among other things, decide the amount of the return paid out to you on theSecurities at maturity, or upon call, early redemption or acceleration. For a fuller description of theSecurity Calculation Agents’ roles, see “Specific Terms of the Securities — Security Calculation Agents”on page S-76. The Security Calculation Agents will exercise their judgment when performing theirfunctions. For example, the Security Calculation Agents may have to determine whether a marketdisruption event affecting the Index Contracts or any applicable Index has occurred or is continuing on aday when the Security Calculation Agents will determine the applicable Index Closing Level. Thisdetermination may, in turn, depend on the Security Calculation Agents’ judgments as to whether theevent has materially interfered with our ability to unwind our hedge positions. Since these determinationsby the Security Calculation Agents may affect the market value of the Securities, the Security CalculationAgents may have a conflict of interest with you if they need to make any such decision.
The Securities are not regulated by the Commodity Futures Trading Commission.
Unlike an investment in the Securities, an investment in a collective investment vehicle that invests infutures contracts on behalf of its participants may be regulated as a commodity pool and its operatormay be required to be registered with and regulated by the Commodity Futures Trading Commission(“CFTC”) as a “commodity pool operator.” Because the Securities are not interests in a commoditypool, the Securities will not be regulated by the CFTC as interests in a commodity pool, UBS will not beregistered with the CFTC as a “commodity pool operator” and you will not benefit from the CFTC’s orany non-United States regulatory authority’s regulatory protections afforded to persons who trade infutures contracts or who invest in regulated commodity pools. The Securities do not constituteinvestments by you or UBS on your behalf in futures contracts traded on regulated futures exchanges,
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Risk Factors
which may only be transacted through a person registered with the CFTC as a “futures commissionmerchant.” UBS is not registered with the CFTC as a “futures commission merchant” and you will notbenefit from the CFTC’s or any other non-United States regulatory authority’s regulatory protectionsafforded to persons who trade in futures contracts on a regulated futures exchange through a registeredfutures commission merchant.
UBS and its affiliates have no affiliation with the Index Sponsor and are notresponsible for its public disclosure of information.
We and our affiliates are not affiliated with the Index Sponsor (except for licensing arrangementsdiscussed under “The Indices — License Agreement”) and have no ability to control or predict itsactions, including any errors in or discontinuation of public disclosure regarding methods or policiesrelating to the calculation of the Indices. In addition, if our license agreement with the Index Sponsorwere to terminate, we would no longer have the right to use the Indices or the related trademarks. If theIndex Sponsor discontinues or suspends the calculation of one or more of the Indices, or if our licenseagreement with the Index Sponsor terminates, it may become difficult to determine the market value ofone or more series of the Securities and the payment at maturity, call, acceleration or redemption. TheSecurity Calculation Agents may designate a successor index in their sole discretion. If the SecurityCalculation Agents determine in their sole discretion that no successor index comparable to theapplicable underlying Index exists, the payment you receive at maturity or upon call, early redemption oracceleration will be determined by UBS Securities LLC, as Security Calculation Agent. See “SpecificTerms of the Securities — Security Calculation Agents” on page S-76 and “Specific Terms of theSecurities — Market Disruption Event” on page S-78. The Index Sponsor is not involved in the offer ofthe Securities in any way, and has no obligation to consider your interest as an owner of the Securities intaking any actions that might affect the market value of your Securities.
We have derived the information about the Index Sponsor and the Indices from publicly availableinformation, without independent verification. Neither we nor any of our affiliates have performed anindependent review or due diligence of publicly available information with respect to Index Sponsor orthe Indices contained in this prospectus supplement. You, as an investor in the Securities, should makeyour own independent investigation into the Index Sponsor and the Indices.
Suspension or disruptions of market trading in VIX futures may adversely affect thevalue of your Securities.
U.S. futures exchanges and some foreign exchanges have regulations that limit the amount of fluctuationin futures contract prices that may occur during a single Trading Day. These limits are generally referredto as “daily price fluctuation limits” and the maximum or minimum price of a contract on any given dayas a result of these limits is referred to as a “limit price.” Once the limit price has been reached in aparticular contract, no trades may be made at a different price. Limit prices have the effect of precludingtrading in a particular contract or forcing the liquidation of contracts at disadvantageous times or prices.These circumstances could adversely affect the level of the Short-Term Futures Index and, therefore, theapplicable underlying Index and the value of your Securities. Although VIX futures are not currentlysubject to such daily price fluctuation limits, the CFE may impose such limits in the future.
Index calculation disruption events may require an adjustment to the calculation ofthe applicable underlying Index.
At any time during the term of the Securities, the intraday and daily calculations of the level of theapplicable underlying Index may be adjusted in the event that the Security Calculation Agents determinethat any of the following Index calculation disruption events exists: the Index Sponsor does not publishthe level of the applicable underlying Index; disruptions in trading of the equity securities included in theS&P 500® Index; disruptions in the price and trade reporting systems of any Relevant Exchange (as
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Risk Factors
defined in “Specific Terms of the Securities — Market Disruption Event”) for the S&P 500® Index;disruptions or a breakdown in the price and reporting systems for any Relevant Exchange for the VIXIndex; disruptions or a breakdown in the price and reporting systems for any Relevant Exchange for theShort-Term Futures Index; a decision to permanently discontinue trading in SPX Options (as definedbelow) or futures on the VIX Index; the occurrence or existence, or a lack of, or a material decline in, theliquidity in the market for trading in any futures contract in the Short-Term Futures Index; any event orcondition, the occurrence of which results in an illiquid market for trading in any futures contract on theShort-Term Futures Index; the CFE discontinues the ability to conduct trades at a TAS price, or stopsrecording the TAS bid and offer spreads; the declaration or continuance of a general moratorium inrespect of banking activities in any relevant city; or any force majeure event, the occurrence of which, asdetermined by the Security Calculation Agents, would materially affect the applicable underlying Index,the S&P 500® Index, the Short-Term Futures Index, any futures contract underlying any the Short-TermFutures Index or the calculation of the VIX Index. Any such Index calculation disruption event may havean adverse impact on the level of the applicable underlying Index or the manner in which it is calculatedand, therefore, may have an adverse effect on the market value of the Securities. See “Specific Terms ofthe Securities — Market Disruption Event.”
Changes that affect the composition, methodology, policies and calculation of theIndices will affect the amount payable on and the market value of the Securities.
The amount payable on the Securities and their market value could be affected if the Index Sponsor, inits sole discretion, discontinues or suspends calculation of any Index in which case it may becomedifficult to determine the market value of the applicable Securities. If events such as these occur, or if theapplicable Index Closing Level is not available because of a market disruption event or for any otherreason, the Security Calculation Agents will make a good-faith estimate in their sole discretion of theapplicable Index Closing Level that would have prevailed in the absence of the market disruption event.If the Security Calculation Agents determine that the publication of the applicable Index is discontinuedand that there is no successor index on the date when the Index Closing Level is required to bedetermined, the Security Calculation Agents will instead make a good-faith estimate in their solediscretion of the applicable Index Closing Level.
In addition, changes by the Index Sponsor of its policies relating to any of the Indices, the calculation ofthe Indices or to the underlying future contracts could affect the level of the Indices and, therefore, thevalue of your Securities. The Index Sponsor could also change its methodology concerning constituentsthat qualify for inclusion in each applicable Index and how it calculates the applicable Index, whichcould adversely affect the value of such series of Securities. The Index Sponsor has no obligation toconsider your interests in calculating or revising the Indices.
Additional commodity futures contracts may satisfy the eligibility criteria for inclusion in an Index, andthe commodity futures contract or contracts currently included in an Index may fail to satisfy suchcriteria. The weighting factors applied to each futures contract included in the Short-Term Futures Indexand/or the applicable Indices may change annually, based on various factors. In addition, the IndexSponsor may modify the methodology for determining the composition and weighting of each Index, forcalculating its value in order to assure that each Index represents an adequate measure of marketperformance or for other reasons, or for calculating the value of each Index. A number of modificationsto the methodology for determining the contracts to be included in the Short-Term Futures Index and forvaluing the Short-Term Futures Index, of which the Indices are a derivative-index, have been made in thepast several years and further modifications may be made in the future. The Index Sponsor may alsodiscontinue or suspend calculation or publication of an Index, in which case it may become difficult todetermine the market value of the applicable Index. Any such changes could adversely affect the value ofthe series of Securities.
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Risk Factors
The Security Calculation Agents can postpone the determination of the Index ClosingLevel and thus the applicable Redemption Date, the Stop Loss Redemption Date, theCall Settlement Date or the Maturity Date if a market disruption event occurs on theapplicable Valuation Date.
The determination of the applicable Index Closing Level may be postponed if the Security CalculationAgents determine that a market disruption event has occurred or is continuing on the applicableValuation Date, including the Final Valuation Date. If such a postponement occurs, then the SecurityCalculation Agents will instead use the applicable Index Closing Level on the next following TradingDay on which no market disruption event occurs or is continuing. In no event, however, will theapplicable Valuation Date for the Securities be postponed by more than three Trading Days. As a result,the applicable Redemption Date, the Stop Loss Redemption Date, the Call Settlement Date or theMaturity Date for the Securities could also be postponed, although not by more than three Trading Days.If the applicable Valuation Date or Final Valuation Date is postponed to the last possible day, but amarket disruption event occurs or is continuing on such last possible day, that day will nevertheless bethe applicable Valuation Date. If a market disruption event is occurring on the applicable ValuationDate, then the Security Calculation Agents will make a good-faith estimate in their sole discretion of theIndex Closing Level that would have prevailed in the absence of the market disruption event. See“Specific Terms of the Securities — Market Disruption Event” on page S-78. As a result of such marketdisruption, the Security Calculation Agents’ good-faith estimate could result in a valuation that differs,and potentially differs materially, from the valuation that would have been obtained had no marketdisruption occurred.
Because your payment at maturity, or upon call, early redemption or acceleration is a function of, amongother things, the Daily Index Performance on the relevant Valuation Date, the postponement of theapplicable Valuation Date may result in the application of a different applicable Index Closing Level and,therefore, a different Daily Index Performance, which could decrease the Closing Indicative Value ascompared to the Closing Indicative Value that you would have received based on the Index Closing Levelon the originally scheduled Valuation Date.
UBS Securities LLC, as Security Calculation Agent is responsible for determining whetherthe ability to conduct trades at a TAS price has been discontinued or whether the CFEhas stopped recoding the TAS bid and offer spreads and, if it makes such determination,may select a successor or, in the absence of a successor, make a good-faith estimate intheir sole discretion of the cost per futures contract to effect the trades necessary toreplicate the VIX futures position represented by the applicable Index.
UBS Securities LLC, as Security Calculation Agent will determine whether the CFE has discontinued theability to conduct trades at a TAS price or stopped recording the TAS bid or offer spreads. If UBSSecurities LLC makes such determination, they will select a successor to the TAS price or the TAS bidand/or offer spreads which, in the good-faith judgment of UBS Securities LLC, would approximate theTAS bid and offer spreads. If no such successor exists, the UBS Securities LLC will make a good-faithestimate, in its sole discretion, of the cost per futures contract to effect the trades necessary to replicatethe VIX futures position represented by the applicable Index on any applicable Index Business Day hadthe ability to conduct trades at a TAS price not been discontinued or the CFE not stopped recording theTAS bid or offer spreads, and such TAS bid and offer spreads will be used for all purposes relating to theSecurities, including the calculation of the Futures Spread Fee. While UBS Securities LLC will make allsuch determinations in good faith, there can be no assurance that the TAS bid and offer spreadsestimated will be correct, and the Futures Spread Fee in such circumstances may be higher than if theability to conduct trades at a TAS price had not been discontinued or if the CFE had not stoppedrecording the TAS bid and offer spreads.
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Risk Factors
UBS may call the Securities prior to the Maturity Date.
On any Trading Day on or after July 19, 2017, UBS may elect to call all, but not less than all, theoutstanding Securities of any series upon not less than ten calendar days’ prior notice.
If UBS elects to redeem your Securities pursuant to its Call Right, you may not be able to reinvest atcomparable terms or returns. If the Securities have increased in value, you may have to invest yourproceeds in a lower-return investment.
Significant aspects of the tax treatment of the Securities are uncertain.
Significant aspects of the tax treatment of the Securities are uncertain. We do not plan to request a rulingfrom the IRS regarding the tax treatment of the Securities, and the IRS or a court may not agree with thetax treatment described in this prospectus supplement. Please read carefully the section entitled “Whatare the tax consequences of owning the Securities?” in the summary section on page S-16, the section“Material U.S. Federal Income Tax Consequences” on page S-85, and the section “U.S. TaxConsiderations” in the accompanying prospectus. You should consult your tax advisor about your owntax situation.
The IRS released a notice in 2007 that may affect the taxation of holders of the Securities. According tothe notice, the IRS and the Treasury Department are actively considering, among other things, whetherholders of instruments such as the Securities should be required to accrue ordinary income on a currentbasis, whether gain or loss upon the sale, exchange, redemption or maturity of such instruments shouldbe treated as ordinary or capital, whether foreign holders of such instruments should be subject towithholding tax, and whether the special “constructive ownership rules” of Section 1260 of the Codeshould be applied to such instruments. Similarly, the IRS and the Treasury Department have currentprojects open with regard to the tax treatment of pre-paid forward contracts and contingent notionalprincipal contracts. While it is impossible to anticipate how any ultimate guidance would affect the taxtreatment of instruments such as the Securities (and while any such guidance may be issued on aprospective basis only), such guidance could be applied retroactively and could in any case increase thelikelihood that you will be required to accrue income over the term of an instrument such as theSecurities. The outcome of this process is uncertain.
Furthermore, in 2007, legislation was introduced in Congress that, if enacted, would have requiredholders of the Securities purchased after the bill was enacted to accrue interest income over the term ofthe Securities despite the fact that there will be no interest payments over the term of the Securities. It isnot possible to predict whether a similar or identical bill will be enacted in the future and whether anysuch bill would affect the tax treatment of your Securities.
In addition, as discussed in more detail below under “Material U.S. Federal Income Tax Consequences —Alternative Treatments,” the IRS could possibly assert that a holder of Securities should be required toinclude amounts in income prior to the sale, redemption or maturity of the Securities.
Holders are urged to consult their tax advisors concerning the significance and the potential impact ofthe above considerations. We intend to treat your Securities for United States federal income taxpurposes in accordance with the treatment described above and under “Material U.S. Federal IncomeTax Consequences” on page S-85 unless and until such time as there is a change in law or the TreasuryDepartment or IRS determines that some other treatment is more appropriate.
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The IndicesWe have derived the following description of the Indices, the S&P 500® Index, the VIX Index, and theShort-Term Futures Index from the S&P 500 VIX Futures Long/Short Strategy Index SeriesMethodology, which governs the management and calculation of the Indices and from the S&P VIXFutures Indices Methodology which governs the Short-Term Futures Index, and its related family ofindices, including the VIX Index, which is published by the Index Sponsor. We have also derived certaininformation about the Indices, the S&P 500® Index, the VIX Index and the Short-Term Futures Indexfrom public sources without independent verification. Such information reflects the policies of and issubject to change by the Index Sponsor. Neither we nor any of our affiliates have performed anindependent review or due diligence of publicly available information with respect to the Indices or theIndex Sponsor. You, as an investor in the Securities, should make your own independent investigationinto the Index Sponsor and the applicable underlying Index.
The Indices, the S&P 500®, the VIX Index, and the Short-Term Futures Index are calculated, maintainedand published by S&P Dow Jones Indices (“SPDJI” or the “Index Sponsor”). The Index Sponsor has noobligation to continue to publish, and may discontinue the publication of, any or all of the Indices. Theinformation contained herein with respect to the Short-Term Futures Index and the Indices reflects thepolicies of the Index Sponsor at the date of this prospectus supplement. The Short-Term Futures Index,the Indices and the policies of the Index Sponsor are subject to change by the Index Sponsor at any time.
Each series of the Securities follows a different volatility strategy that corresponds to the Index to whichit is linked, as indicated by the weightings assigned to the leveraged leg and the inverse leg of each Indexin the graphic below. At the time you purchase the Securities, the actual exposure of each leg is unlikelyto be at its target exposure.
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The Indices
For illustration, the principal components of each of the Indices are as follows:
Total Return Version of Underlying Index1
Linked to:
13 Sub-Portfolios2
3-Month T-Bill Rate+
Tail Risk SecuritiesShort Volatility Hedged
Securities
Comprised of:
Variable Long/ShortSecurities
Excess Return Version of the Index
The excess return version of each Index comprises 13 sub-portfolios, each of which is split between a two times leveraged (“long”)leg and an unleveraged inverse (“short”) leg. The two times leveraged leg is linked to two times the daily return of the Short-TermFutures Index, and the inverse leg is linked to the inverse daily return of the Short-Term Futures Index. Each sub-portfolio has thesame target allocation between leveraged and inverse exposures to VIX futures contracts through the Short-Term Futures Index.
Each sub-portfolio is rebalanced to its target weights on a rolling quarterly basis.
Leveraged Leg Inverse Leg+
2x Daily Return of the Short-Term Futures Index(Long Position)
-1x Daily Return of the Short-Term Futures Index(Short Position)
The target exposure for each sub-portfolio is shown below for each underlying Index. The actual exposure of each leg will vary overtime between rebalancing dates based on the performance of the Short-Term Futures Index.
1 Each total return Index comprises the applicable excess return index and exposure to the rate of interest that could be earned oncash collateral invested in three month U.S. Treasury Bills.
2 Each Index tracks 13 sub-portfolios in order to simulate the return of owning 13 separate positions in VIX futures on an equallyweighted basis, with one position being rebalanced to target weights each week during a quarter.
The target exposure for each sub-portfolio is shown below for each underlying Index, along with thetarget net volatility allocation of each Index. The actual exposure of each leg will vary over time betweenrebalancing dates based on the performance of the Short-Term Futures Index.
Index NameWeight of 2x
Leveraged LegWeight of
Inverse Leg
Target NetVolatilityAllocation
Variable Long/Short Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33.33% 66.67% 0%Tail Risk Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45% 55% 35%Short Volatility Hedged Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10% 90% -70%
For a detailed description of the composition of each Index, see “— The Underlying Indices—TheVariable Long/Short Index,” “—The Underlying Indices—The Tail Risk Index,” and “—The UnderlyingIndices—The Short Volatility Hedged Index” below.
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The Indices
As shown in the above graphic, the sub-portfolios in each Index are composed of a two-times leveragedlong exposure to the Short-Term Futures Index and an unleveraged, inverse exposure to the Short-TermFutures Index. The Short-Term Futures Index measures the return from a daily rolling long position inthe first and second month futures contracts on the VIX Index, taking into account roll cost or roll yield.An investor maintaining a desired long exposure in a futures position by replacing contracts expiring inone month with contracts expiring in the next month will incur a roll cost when purchasing thereplacement contracts at a higher cost and will benefit from a roll yield when purchasing the replacementcontracts at a lower cost. Conversely, an investor maintaining a desired short exposure in a futuresposition will benefit from a roll yield when selling replacement contracts at a higher price and incur a rollcost when selling replacement contracts at a lower price. Since the prices of VIX futures contracts aremore commonly higher in distant delivery months than in nearer delivery months (i.e., when the marketis in “contango”), an investor maintaining a long position in VIX futures contracts will typically incur“roll costs” when rolling into contracts with a later delivery date (because such contracts have a higherprice than the contracts currently held), and therefore the long position is likely to decline in value unlessvolatility increases sharply. On the other hand, an investor maintaining a short position in VIX futurescontracts will typically benefit from a roll yield, and therefore the short position is likely to increase invalue unless volatility increases sharply. These relationships may be reversed when prices of VIX futurescontracts in distant delivery months are lower than in nearer delivery months (i.e., when the market is in“backwardation”). For a discussion of the futures markets, see “— Futures Markets” below.
Historically, the VIX Index has a negative correlation to the S&P 500® Index. While the spot VIX isdifficult or impossible to replicate as a practical matter, there is a market in VIX futures and options, andinvestors trade them to express their view on the S&P 500® Index’s implied volatility.
The return on each series of Securities will be determined by the performance of the applicableunderlying Index to which such Securities are linked, as reduced by the Daily Investor Fee and theFutures Spread Fee and, if applicable, the Redemption Fee Amount.
As described above, the Indices are total return indices designed to provide exposure to a specificvolatility strategy, each of which consists of both a 2x leveraged long exposure to the Short-Term FuturesIndex and an unleveraged, inverse (or “short”) exposure to the Short-Term Futures Index. The individuallong and short positions are rebalanced daily, while the target ratio of long and short exposure isdifferent for each Index and is rebalanced to target weights on a rolling quarterly basis. In order toreduce the path-dependent nature of such an exposure, each Index tracks 13 sub-portfolios, each ofwhich allocates between the leveraged and inverse exposure to the Short-Term VIX Futures Index. Eachsub-portfolio is rebalanced back to its target weights (as set forth in the table above) once per quarter ona rolling basis, with one sub-portfolio being rebalanced each Wednesday during the quarter. In addition,on the last business day of every quarter each Index is itself rebalanced so that all 13 sub-portfolios areequally weighted. Each strategy therefore simulates the return of owning 13 separate positions in firstand second month VIX futures on an equally weighted basis. Despite these periodic rebalancings, theactual long and short positions of any series of the Securities may significantly deviate from the targetexposure and the net VIX futures exposure of any series of the Securities may even be inverse to theintended target VIX futures exposure of such series, and as a result, investors should actively monitorand manage their investment in any series of the Securities, even intraday.
The VIX Index
We have derived all information contained in this prospectus supplement regarding the VIX Index,including, without limitation, its make-up, method of calculation and changes in its components, frompublicly available information. Such information reflects the policies of, and is subject to change by, theCBOE. We make no representation or warranty as to the accuracy or completeness of such information.
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The Indices
The VIX Index was developed by the CBOE and is calculated, maintained and published by the CBOE.The CBOE has no obligation to continue to publish, and may discontinue the publication of, the VIXIndex. The VIX Index is reported by Bloomberg under the ticker symbol “VIX”.
The VIX Index is a benchmark index designed to measure the market price of volatility in large cap U.S.stocks over 30 days in the future, and is calculated based on the prices of certain put and call options onthe S&P 500® Index. The VIX Index measures the premium paid by investors for certain options linkedto the level of the S&P 500® Index. Assuming all other relevant factors remain constant or havenegligible changes, as the prices of options on the S&P 500® Index generally increase, the VIX Index,which indirectly measures implied volatility by measuring changes in these option prices, typicallyincreases. The VIX Index has historically had a negative correlation to the S&P 500® Index.
The calculation of the VIX Index involves a formula that uses the prices of a weighted series of out-of-themoney put and call options on the level of the S&P 500® Index (“SPX Options”) with two adjacentexpiry terms to derive a constant 30-day forward measure of market volatility. The VIX Index iscalculated independent of any particular option pricing model and in doing so seeks to eliminate anybiases which may otherwise be included in using options pricing methodology based on certainassumptions.
The VIX Index measures the 30-day forward volatility of the S&P 500® Index as implied by the SPXOptions. To arrive at the VIX Index level, a broad range of out-of-the money 30-day and weekly SPXOptions with more than 23 days and less than 37 days to expiration are selected in order to bracket a30-day calendar period. The components used are (i) SPX Options with 30 calendar days or less toexpiration (“near-term options”) and (ii) SPX Options with 31 calendar days or more to expiration(“next-term options”). Once each week, the SPX Options used to calculate the VIX Index “roll” to newmaturities. For example, on the second Tuesday in October, the VIX Index would be calculated usingSPX Options expiring 24 days later (near-term options) and 31 days later (next-term options). On thefollowing day, the SPX Options that expire in 30 calendar days would become the near-term options andSPX Options expiring in 37 calendar days would become the next-term options.
The implied volatility using prices of the near-term options and next-term options are then calculated ona strike price weighted average basis in order to arrive at a single average implied volatility value for eachof the near-term options and next-term options. These two results are then interpolated to arrive at asingle value with a constant maturity of 30 days to expiration.
Futures on the VIX Index were first launched for trading by the CFE in 2004. VIX Index futures haveexpirations ranging from the first month consecutively out to the ninth month. Futures on the VIX Indexallow investors the ability to invest in forward market volatility based on their view of the futuredirection or movement of the VIX Index. Investors that believe the implied volatility of the S&P 500®
Index will increase may buy VIX futures, expecting that the level of the VIX Index will increase.Conversely, investors that believe that the implied volatility of the S&P 500® Index will decline may sellVIX futures, expecting that the level of the VIX Index will fall. Prior to April 2008, not all consecutivefirst to seventh month VIX futures were listed.
VIX Index futures are reported by Bloomberg under the ticker symbol “UX”.
Futures Markets
Futures contracts based on the VIX Index are traded on the CFE, which is a regulated futures exchange,and other types of derivatives on the VIX Index may be traded in the over-the-counter market and onvarious types of electronic trading facilities and markets. At present, all VIX futures contracts used in the
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The Indices
calculation of the Indices are exchange-traded futures contracts. An exchange-traded futures contractprovides for the purchase and sale of a specified type and quantity of a commodity or financialinstrument during a stated delivery month for a fixed price, or for payment of a cash settlement amountbased on a reference price or index. The VIX Index is not a tangible item that can be purchased and solddirectly, and as a result, futures contracts on the VIX Index provide for payment and receipt of cashbased on the level of the VIX Index at settlement or liquidation of the contract.
As described above, the VIX Index measures the 30-day forward volatility of the S&P 500® Index asimplied by the SPX Options; thus, on any given Trading Day, the level of the VIX Index measures thespot 30-day implied volatility, or the volatility expected for the 30 days beginning on such Trading Day.VIX futures, on the other hand, are standard futures contracts that cash settle to a “Special OpeningQuotation” of the VIX Index, which is calculated from the sequence of opening prices of the SPX Optionseries that underlies the VIX Index on the settlement date. As a result, VIX futures are contracts onforward 30-day implied volatilities. For example, in March, the level of the VIX Index measures the 30-day implied volatility for the 30 days beginning on such date, while a May VIX futures contract is aforward contract on what the 30-day implied volatility will be for the period beginning on the Mayexpiration date.
There is no purchase price paid or received on the purchase or sale of a futures contract. Instead, anamount of cash or cash equivalents must be deposited with the broker as “initial margin.” This amountvaries based on the requirements imposed by the exchange clearing houses, but may be lower than 5% ofthe notional value of the contract. This margin deposit provides collateral for the obligations of theparties to the futures contract.
By depositing margin, which may vary in form depending on the exchange, with the clearing house orbroker involved, a market participant may be able to earn interest on its margin funds, thereby increasingthe total return that it may realize from an investment in futures contracts. The market participantnormally makes to, and receives from, the broker subsequent daily payments as the price of the futurescontract fluctuates. These payments are called “variation margin” and are made as the existing positionsin the futures contract become more or less valuable, a process known as “marking to the market.”
Futures contracts are traded on organized exchanges, known as “designated contract markets” in theUnited States. At any time prior to the expiration of a futures contract, subject to the availability of aliquid secondary market, a trader may elect to close out its position by taking an opposite position on theexchange on which the trader obtained the position. This operates to terminate the position and fix thetrader’s profit or loss. Futures contracts are cleared through the facilities of a centralized clearing houseand a brokerage firm, referred to as a “futures commission merchant,” which is a member of the clearinghouse. The clearing house guarantees the performance of each clearing member that is a party to afutures contract by, in effect, taking the opposite side of the transaction. Clearing houses do notguarantee the performance by clearing members of their obligations to their customers.
Unlike equity securities, futures contracts, by their terms, have stated expirations and, at a specified pointin time prior to expiration, trading in a futures contract for the current delivery month will cease. As aresult, a market participant wishing to maintain its exposure to a futures contract on a particularcommodity with the nearest expiration must close out its position in the expiring contract and establish anew position in the contract for the next delivery month, a process referred to as “rolling.” For example,a market participant with a long position in November VIX Index futures that wishes to maintain aposition in the nearest delivery month will, as the November contract nears expiration, sell Novemberfutures, which serves to close out the existing long position, and buy December futures. This will “roll”the November position into a December position, and, when the November contract expires, the marketparticipant will still have a long position in the nearest delivery month.
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The Indices
The need to roll futures contracts in order to maintain exposure leads to the incurrence of “roll costs” or“roll yields,” depending on the state of the market. Over the long-term, volatility is usually stable, and asa result, the market for VIX futures contracts is typically in “contango,” which means the prices ofcontracts are higher in the distant delivery months than in the nearer delivery months. In a contangomarket, a long position in VIX futures contracts will incur “roll costs” when rolling into contracts with alater delivery date (because such contracts have a higher price than the contracts currently held), andtherefore is likely to decline in value unless volatility increases sharply. On the other hand, a shortposition in VIX futures contracts will instead benefit from such price differential when rolling intocontracts with a later delivery date, which is referred to as “roll yield,” and therefore is likely to increasein value.
Futures exchanges and clearing houses in the United States are subject to regulation by the CFTC.Exchanges may adopt rules and take other actions that affect trading, including imposing speculativeposition limits, maximum price fluctuations and trading halts and suspensions and requiring liquidationof contracts in certain circumstances. Futures markets outside the United States are generally subject toregulation by comparable regulatory authorities. The structure and nature of trading on non-U.S.exchanges, however, may differ from this description.
The S&P 500 VIX Short-Term FuturesTM Index
The Short-Term Futures Index is composed of one or more futures contracts based on the VIX Index, allof which are exchange-traded futures contracts. The Index Sponsor publishes the Short-Term FuturesIndex. The Short-Term Futures Index measures the return from a daily rolling long position in the firstand second month futures contracts on the VIX Index, taking into account roll cost or roll yield. TheShort-Term Futures Index rolls continuously throughout each month from the first month contract intothe second month contract. The value of the Short-Term Futures Index in real time and at the close oftrading on each day on which the Short-Term Futures Index is calculated (a “VIX Futures BusinessDay”) is published by Bloomberg or a successor under the ticker symbols “SPVXSPID” and “SPVXSP”,respectively.
The base date for the Short-Term Futures Index is December 20, 2005 and the base level for the Short-Term Futures Index is 100,000.
Calculation of the Short-Term Futures Index
On each VIX Futures Business Day, t, the index excess return, or IndexERt is calculated as follows:
IndexERt = IndexERt-1 * (1 + CDRt)
where:
IndexERt-1 = The Short-Term Futures Index excess return on the immediately preceding VIXFutures Business Day, t-1.
CDRt = contract daily return on t, as determined by the following formula:
CDRt =TDWOt – 1TDWIt-1
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The Indices
where:
TDWOt = total dollar weight obtained on t, as determined by the following formula:
TDWOt = CRWi,t–1 × DCRPi,t
2
i=1
TDWIt-1 = total dollar weight invested on t-1, as determined by the following formula:
TDWIt–1 = CRWi,t–1 × DCRPi,t–1
n2
i=1
where:
CRWi,t = contract roll weight of the ith VIX futures contract on t.
DRCPi,t = daily contract reference price of the ith VIX futures contract on t.
m = The term of the futures contract that is rolled out on date t as seen on the below table.
n = The term of the futures contract that is rolled in on date t as seen on the below table.Index Name Underlying Contracts Roll Out (m) Roll In (n)
S&P 500 VIX Short-TermFutures Index . . . . . . . . 1st, 2nd 1st 2nd
Contract Rebalancing for the VIX Short-Term Futures Index
Each “Roll Period” for the Short-Term Futures Index starts on the Tuesday prior to the monthly CBOEVIX Futures Settlement Date (the Wednesday falling 30 calendar days before the S&P 500 optionexpiration for the following month), and runs through the Tuesday prior to the subsequent month’sCBOE VIX Futures Settlement Date. Thus, the Short-Term Futures Index is rolling on a continual basis.On the VIX Futures Business Day after the current Roll Period ends, the following Roll Period begins.
In calculating the index excess return of the Short-Term Futures Index, the contract roll weights(CRWi,t) of each of the contracts in the Short-Term Futures Index are determined as follows:
CRWm,t = 100 �dr
dt
CRWn,t = 100 �dt – dr
dt
where:
dt = The total number of VIX Futures Business Days in the current Roll Period beginning with,and including, the starting CBOE VIX Futures Settlement Date and ending with, butexcluding, the following CBOE VIX Futures Settlement Date. The number of VIX FuturesBusiness Days is deemed constant in cases of a new holiday introduced intra-month or anunscheduled market closure.
dr = The total number of VIX Futures Business Days within a Roll Period beginning with, andincluding, the following VIX Futures Business Days and ending with, but excluding, thefollowing CBOE VIX Futures Settlement Date. The number of VIX Futures Business Daysincludes a new holiday introduced intra-month up to the VIX Futures Business Dayspreceding such a holiday.
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The Indices
At the close on the Tuesday, corresponding to the start of the Roll Period, all of the weight is allocated tothe shorter-term (i.e., first month) contract. Then on each subsequent VIX Futures Business Day afraction of the first month VIX futures holding is sold and an equal notional amount of the longer-term(second month) VIX futures is bought. The fraction, or quantity, is proportional to the number of firstmonth VIX futures contracts as of the previous VIX Futures Business Day, and inversely proportional tothe length of the current Roll Period. In this way the initial position in the first month contract isprogressively moved to the second month contract over the course of the month, until the following RollPeriod starts when the old second month VIX futures contract becomes the new first month VIX futurescontract and a fraction of the new first month VIX futures contract gets sold every day afterward as theprocess begins again.
In addition to the transactions described above, the weight of each index component is also adjustedevery day to ensure that the change in total dollar exposure for the Short-Term Futures Index is only dueto the price change of each contract and not due to using a different weight for a contract trading at ahigher price.
The Underlying Indices
The return on each series of the Securities is linked to the performance of the total return version of adifferent underlying Index that is designed to provide exposure to a different dynamic short-termvolatility strategy by pairing both leveraged long and unleveraged short positions in first and secondmonth VIX futures contracts. The long position is a two times leveraged long exposure to the Short-Term Futures Index, and the short position is an unleveraged, inverse exposure to the Short-TermFutures Index. Each Index has a target allocation between long and short exposures to VIX futurescontracts as described herein. Each Index measures the performance of 13 separate sub-portfolios thatare rebalanced quarterly on a rolling basis, and the leveraged long and unleveraged short positions withineach sub-portfolio are rebalanced daily.
The Variable Long/Short Index
The Variable Long/Short tracks 13 sub-portfolios, each of which has a target net volatility allocation of0% consisting of target exposures of a 33.33% two times leveraged long position and a 66.67%unleveraged short position in the Short-Term Futures Index.
The Variable Long/Short Index will be either net long or net short VIX futures depending on volatility.As volatility increases, the leveraged long leg of each sub-portfolio in the Variable Long/Short Index willincrease in value while the inverse leg of each sub-portfolio will decrease in value, resulting in acorresponding increase in the weight of the leveraged long leg and a decrease in the weight of the inverseleg. The opposite is also true. As a result, the Variable Long/Short Index will move toward a net longVIX futures exposure as volatility increases, and move towards a net short VIX futures exposure asvolatility decreases. This is intended to give the holder the opportunity to achieve a positive expectedreturn from either the roll yield (in a contango market) through the inverse leg or a large increase involatility through the leveraged leg.
While the strategy is intended to be dynamic, the path dependence of the Variable Long/Short Index maycause its actual performance to deviate significantly from the intended target exposure preventing theVariable Long/Short Securities from achieving their goal. To the extent that the Variable Long/ShortIndex does not transition from net long to net short (or vice-versa) in a manner advantageous to holdersof the Variable Long/Short Securities, investors in the Variable Long/Short Securities may be net short asvolatility increases or net long as volatility decreases, especially if there are sudden increases or decreasesin the volatility of the S&P 500® Index. As a result, the Variable Long/Short Securities should only be
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The Indices
purchased by sophisticated investors who understand the risks of investing in volatility and the impact ofrebalancing of the sub-portfolios and the Variable Long/Short Index and who will actively monitor theirinvestment, including intraday.
The Tail Risk Index
The Tail Risk Index tracks 13 sub-portfolios, each of which has a target net volatility allocation of 35%consisting of target exposures of a 45% two times leveraged long position and a 55% unleveraged shortposition in the Short-Term Futures Index intended to result in a net long position in VIX futures.
The Tail Risk Index is more likely to increase in value when volatility increases and to decrease in valuewhen volatility decreases, but any such increase or decrease should be mitigated by the inverse leg’s shortexposure. In a contango market, the inverse leg is also intended to mitigate the roll cost associated withthe leveraged long position by providing a roll yield.
While the strategy is intended to result in a net long position in VIX futures, the path dependence of theTail Risk Index may cause its actual performance to deviate significantly from the intended targetexposure, resulting in a net short exposure to VIX futures, preventing the Tail Risk Securities fromachieving their goal. As a result, the Tail Risk Securities should only be purchased by sophisticatedinvestors who understand the risks of investing in volatility and the construction of the Tail Risk Indexand who will actively monitor their investment, including intraday.
The Short Volatility Hedged Index
The Short Volatility Hedged Index tracks 13 sub-portfolios, each of which has a target net volatilityallocation of -70% consisting of target exposures of a 10% two times leveraged long position and a 90%unleveraged short position in the Short-Term Futures Index intended to result in a net short position asto VIX futures.
The Short Volatility Hedged Index is more likely to increase in value when volatility decreases and todecrease in value when volatility increases, but any such increase or decrease should be mitigated by theleveraged leg’s long exposure. The Short Volatility Hedged Index is also intended to provide anopportunity to achieve a positive expected return from the roll yield in VIX futures in a contango marketon the inverse leg.
While the strategy is intended to result in a net short position in VIX futures, the path dependence of theShort Volatility Hedged Index may cause its actual performance to deviate significantly from theintended target exposure, resulting in a net long exposure to VIX futures, preventing the Short VolatilityHedged Securities from achieving their goal. As a result, the Short Volatility Hedged Securities shouldonly be purchased by sophisticated investors who understand the risks of investing in volatility and theconstruction of the Short Volatility Hedged Index and who will actively monitor their investment,including intraday.
Path-Dependent Nature of the Indices
Because the leveraged and inverse exposures in each sub-portfolio in each of the Indices are reset daily,and the target weights for each sub-portfolio are not maintained on a daily basis, the performance of theIndices is path-dependent. As volatility increases, the leveraged long leg of each sub-portfolio in theapplicable underlying Index will increase in value, resulting in an increase in its relative weight, while theinverse leg of each sub-portfolio will decrease in value, resulting in a decrease in its relative weight. Theopposite is also true. As a result, each Index has a variable net long or net short volatility position whichwill change on a daily basis, moving toward a net long VIX futures exposure as volatility increases, and
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The Indices
moving toward a net short VIX futures exposure as volatility decreases. This means that the performanceof the applicable underlying Index, and therefore the value of your series of Securities, will depend notonly upon the level of the Short-Term Futures Index at maturity or upon call, early redemption oracceleration, but also on the performance of the Short-Term Futures Index over each day that you holdyour Securities. In other words, the performance of the applicable underlying Index and the value of yourseries of Securities will be affected by not only the increase in the level of the Short-Term Futures Indexover a given time period but also the volatility of the level of the Short-Term Futures Index over suchtime period. For example, a sharp spike in the level of the Short-Term Futures Index at the end of aparticular time period will not result in the same return as a gradual uptick in the Short-Term FuturesIndex over the same time period, even if the level of the Short-Term Futures Index at the end of theapplicable time period is the same in each scenario. As a general matter, it is expected that your Securitieswill have better returns if the Short-Term Futures Index trends from one level to another (in a beneficialdirection) over multiple trading days, rather than moving abruptly between those levels in a single day orexperiencing significant changes in opposite directions over multiple trading days.
In addition, the performance of each Index is path dependent insofar as its level at any time depends notonly on the level of the Short-Term Futures Index at such time but also on such Index’s level at any priortime that any of its component sub-portfolios was rebalanced. Accordingly, periods of volatility in theVIX Index may have a particularly unpredictable and significant impact on the level of each Index bycausing the prices of VIX futures contracts that are used to rebalance the component sub-portfoliosunrepresentative of longer term trends and by causing the actual weighting of leveraged long andunleveraged short positions to diverge significantly from their targets. As a result, the value of yourinvestment in any series of Securities may diverge significantly from the value you might expect on thebasis of the strategy of the applicable underlying Index and changes in the level of the Short-TermFutures Index over the period that you hold them. At particularly high levels of volatility in the VIXIndex you may lose all or a substantial portion of your investment even though the VIX Index hasincreased (if you hold Tail Risk Securities), decreased (if you hold Short Volatility Hedged Securities) orreturned to its approximate level at the time of you investment (if you hold Variable Long/ShortSecurities). The construction of each Index out of 13 separate sub-portfolios, one of which is rebalancedeach Wednesday during any given quarter, as well as the quarterly rebalancing of the entire Index, maymitigate some of these effects but is unlikely to eliminate them entirely.
The daily deduction of the applicable Daily Investor Fee and Futures Spread Fee introduces a furtherelement of path dependency with respect to the Closing Indicative Value of each series of Securities. Theamounts deducted over the period you hold your Securities depend not on the level of the applicableIndex at the time your Securities mature or are redeemed, called or accelerated or the time you sell yourSecurities but rather upon the Closing Indicative Value of such Securities each day during the term ofyour investment (in the case of the Daily Investor Fee) and the TAS bid and offer spreads and the numberof VIX futures hypothetically required to be bought or sold each day during the term of your investment(in the case of the Futures Spread Fee).
Index Construction
Each applicable underlying Index is constructed so that each sub-portfolio has a daily rebalanced 2xleveraged position in the Short-Term Futures Index and a daily rebalanced inverse position in the Short-Term Futures Index. Due to the nature of the daily rebalancing, if the underlying VIX futures trend up,the exposure in the leveraged position increases more than linearly and the exposure in the inverseposition decreases more than linearly, resulting in a net increase in long exposure. If the underlyingfutures trend down, the opposite is true and the result is a net increase in short exposure.
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The Indices
In order to reduce the path-dependent nature of such an exposure, each Index tracks 13 sub-portfolios,each of which allocates between a leveraged and inverse exposure to VIX futures. Each sub-portfolio isrebalanced back to its target weights once per quarter on a rolling basis, with one sub-portfolio beingrebalanced each Wednesday during the quarter (or on the following Index Business Day if suchWednesday is not an Index Business Day). In addition, on the last Index Business Day of every quarter,each Index is itself rebalanced so that all 13 sub-portfolios are equally weighted. Each strategy thereforesimulates the return of owning 13 separate positions in VIX futures on an equally weighted basis.
The value of each Index has been normalized such that its hypothetical level on December 20, 2005 was100.
The calculation of each Index on each Index Business Day proceeds in four steps:
➤ first, the daily excess return for the leveraged leg and the inverse leg of the Index is calculated;
➤ second, for each sub-portfolio included in the Index, the daily excess return and value is calculatedusing the respective daily excess returns and target weights of its leveraged leg and inverse leg;
➤ third, the excess return of the Index is calculated based on the value of each sub-portfolio; and
➤ fourth, the total return value of the Index is calculated based on the excess return and the currentthree-month U.S. Treasury rate.
Index Calculation
Step 1: Calculating the Leveraged and Inverse Underlying Indices
On each Index Business Day t, the excess return of the Short-Term Futures Index is used to calculate the dailyexcess return of the leveraged leg and the inverse leg of each Index, and these daily excess returns are thenused to calculate the daily leveraged and inverse excess return index values using the following formulas:
LERt=2×LVFt
LVFt–1
– 1
IERt=-1×IVFt
IVFt–1
– 1
Lt = (1 + LERt) � Lt-1
It = (1 + IERt) � It-1
Where:
LERt = Daily excess return of the leveraged leg on t.
IERt = Daily excess return of the inverse leg on t.
LVFt = Excess return of the Short-Term Futures Index on t.
IVFt = Excess return of the Short-Term Futures Index on t.
Lt = Daily leveraged excess return index value on t.
It = Daily inverse excess return index value on t.
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The Indices
Step 2: Calculating the Sub-Portfolio Values
The value of each sub-portfolio in the Index is calculated based on the return of such sub-portfolio’s leveragedand inverse legs since the last rebalancing day for such sub-portfolio (lr) using the following formulas:
PERi,t = wL × + wI ×Lt
Li,lr
– 1It
Li,lr
– 1
Pi,t = (1 + PERi,t) � Pi,t
where:
PERi.t = Daily excess return of portfolio i since the last rebalancing day on t.
wL = Target weight of the leveraged leg.
Lt = Leveraged excess return index value on t.
Li,lr = Leveraged excess return index value on the last rebalancing day of portfolio i.
wl = 1 – wL, which is the target weight of the inverse leg.
It = Inverse excess return index value on t.
Ii,lr = Inverse excess return index value on the last rebalancing day of portfolio i.
Pi,t = Value of portfolio i on t.
Pi,lr = Value of portfolio i on its last rebalancing day.
Step 3: Calculating the Excess Return Version of Each Index
The excess return index value for each Index is calculated based on the return of each sub-portfolio sincethe last quarterly rebalancing day, lR, as follows:
ERt =Pi,t
Pi,lR
– 1×113
13
i=1
IndexERt = (1 + ERt) � IndexERlR
where:
ERt = Index excess return since last rebalancing day (lR) on t.
Pi,t = Value of sub-portfolio i on t.
Pi,lR = Value of sub-portfolio i on the last rebalancing day of the excess return version ofthe Index (lR).
IndexERt = The Excess Return Index value on t.
IndexERlR = The Excess Return Index value on its last quarterly rebalancing day (lR).
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The Indices
Step 4: Calculating the Total Return Indices
The total return index value includes an interest component based on the three-month U.S. Treasury rate:
IndexTRt = (1 + DERt + TBRt) � IndexTRt-1
DERt =IndexERt – 1
IndexERt-1
191360 × TBARt–1
– 11 –
TBRt =
Deltat91
where:
IndexTRt = The Total Return Index value on t.
DERt = Index daily excess return on t.
TBRt = Treasury bill return on t.
Deltat = The number of calendar days between the current and previous Index BusinessDays.
TBARt-1 = The most recent weekly high discount rate for 91-day US Treasury bills effectiveon the preceding Index Business Day. Generally the rates are announced by the USTreasury on each Monday. On any Monday that is a bank holiday, the previousFriday’s rates will apply.
Publication of Index Value
The level of each Index is calculated in accordance with the method described above. The value of eachIndex in real time and at the close of trading on each Trading Day will be published by Bloomberg or asuccessor under the ticker symbols shown below:
IndexUnderlying
Index Ticker
Variable Long/Short Index . . . . . . . . . . . . . . . . . . . . . SPVXVSTTail Risk Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SPVXTRSTShort Volatility Hedged Index . . . . . . . . . . . . . . . . . . SPVXVHST
Index Governance
The Commodities Index Committee (the “Index Committee”) maintains the Indices. All members of theIndex Committee are full-time professionals at SPDJI. The Index Committee meets quarterly. At eachmeeting, the Index Committee may revise index policy for timing of rebalancing or other matters. SPDJIconsiders information about changes to its indices and related matters to be potentially market movingand material. Therefore, all Index Committee discussions are confidential.
Announcements
Announcements of the daily Index values are made after the equity and futures market close each day.
Holiday Schedule
The Indices are calculated daily when the U.S. futures exchanges are open for official trading, excludingholidays and weekends. A complete holiday schedule for the year is available at www.spdji.com.
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The Indices
Unscheduled Market Closures
In situations where an exchange is forced to close early due to unforeseen events, such as computer orelectric power failures, weather conditions or other events, SPDJI will calculate the value of the Indicesbased on most recent prices published by the exchanges. If an exchange fails to open due to unforeseencircumstances, SPDJI may determine not to publish the Indices for that day. If a market disruption occurson any day, the roll/rebalancing is performed on the next business day that the NYSE and CBOE areopen. Prices of VIX futures on the actual roll/rebalancing day are used.
Historical and Estimated Historical Performance
Since their inception, the Indices have experienced significant fluctuations. Any historical upward ordownward trend in the applicable Index Closing Level is not an indication that the Indices are more orless likely to increase or decrease at any time during the term of your Securities. The Index Closing Levelfor each Index is deemed to have been 100 on December 20, 2005. SPDJI began independentlycalculating the Indices on November 3, 2011. Therefore, the historical information for the period fromDecember 20, 2005 until November 3, 2011 is hypothetical and is provided as an illustration of how theIndices would have performed during the period had the Index Sponsor begun calculating the Indices onDecember 20, 2005 using the methodology described above since that date. This data does not reflectactual performance, nor was a contemporaneous investment model run of the Indices, and this estimatedhistorical information may reflect a bias toward strategies that have performed well in the past.Historical information for the period from and after November 3, 2011 is based on the actualperformance of the Indices.
Any historical upward or downward trend in value of the Indices during any period shown below is notan indication that the value of the Indices is more or less likely to increase or decrease at any time duringthe term of the Securities. The historical or estimated historical total returns of the Indices do not give anindication of future performance of the Indices. UBS cannot make any assurance that the futureperformance of the Indices will result in holders of the Securities receiving a positive return on theirinvestment.
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The Indices
The table below shows the estimated historical and historical performance of each of the Indices fromDecember 20, 2005 through July 11, 2016.
Historical Results for the period December 20, 2005 through July 11, 2016
Variable Long/ShortIndex Tail Risk Index
Short Volatility HedgedIndex
YearEndingLevel
AnnualReturn
EndingLevel
AnnualReturn
EndingLevel
AnnualReturn
2006 . . . . . . . . . . . . . . . . . . . . . . . . 121.03 20.93% 97.07 -2.05% 173.23 69.75%2007 . . . . . . . . . . . . . . . . . . . . . . . . 109.06 -9.89% 98.75 1.73% 110.11 -36.44%2008 . . . . . . . . . . . . . . . . . . . . . . . . 249.76 129.01% 270.89 174.32% 110.68 0.52%2009 . . . . . . . . . . . . . . . . . . . . . . . . 266.81 6.83% 213.95 -21.02% 197.81 78.72%2010 . . . . . . . . . . . . . . . . . . . . . . . . 352.51 32.12% 207.58 -2.98% 416.59 110.60%2011 . . . . . . . . . . . . . . . . . . . . . . . . 383.25 8.72% 228.48 10.07% 333.48 -19.95%2012 . . . . . . . . . . . . . . . . . . . . . . . . 399.00 4.11% 159.92 -30.01% 680.78 104.14%2013 . . . . . . . . . . . . . . . . . . . . . . . . 382.56 -4.12% 111.78 -30.10% 1,141.33 67.65%2014 . . . . . . . . . . . . . . . . . . . . . . . . 310.69 -18.79% 84.17 -24.70% 1,026.37 -10.07%2015 . . . . . . . . . . . . . . . . . . . . . . . . 227.39 -26.81% 55.32 -34.28% 849.24 -17.26%2016 (through 7/11/16) . . . . . . . . . 201.78 -11.26% 43.48 -21.40% 893.24 5.18%
PAST HISTORICAL PERFORMANCEIS NOT INDICATIVE OF FUTURE RESULTS.
The table below shows the historical performance of each Index from December 20, 2005 throughJuly 11, 2016.
Variable Long/Short Index Tail Risk IndexShort Volatility Hedged
Index
Total Return . . . . . . . . . . 101.78% -56.52% 793.24%Annualized Return . . . . . . 6.87% -7.59% 23.05%
Historical information presented is as of July 11, 2016, and is furnished as a matter of information only.Estimated historical and historical performance of each Index is not an indication of future performance.Future performance of the Indices may differ significantly from estimated historical and historicalperformance, either positively or negatively.
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The Indices
The graphs below illustrate the estimated historical and historical performance of the Indices fromDecember 20, 2005 (the “base date”) to July 11, 2016 and from November 3, 2011 (the day on whichthe Index Sponsor began calculating the Indices) to July 11, 2016. The graphs below are based on thetotal returns of each of the Indices.
0
200
400
600
800
1000
1200
1400
1600
Variable Long / Short Index Tail Risk Index Short Volatility Hedged Index
12/2
0/20
05
12/2
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06
12/2
0/20
07
12/2
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12/2
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11/3
/201
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/201
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/201
5
Variable Long / Short Index Tail Risk Index Short Volatility Hedged Index
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The Indices
License Agreement
We have entered into an agreement with the Index Sponsor that provides us and our affiliates with anon-transferable, limited license for a fee, with the right to use the Index in connection with securities,including the Securities. The Indices are owned and published by SPDJI.
Modifications to the Indices
The Index Sponsor may revise Index policy for timing of rebalancings or other matters as describedabove under “— Index Governance.” The Index Sponsor or the calculation agents may also makedeterminations relating to market disruption and force majeure events as described below.
Disclaimers
The Indices are products of SPDJI and have been licensed for use by UBS. S&P® and S&P 500® areregistered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); and are trademarks ofSPDJI and/or its affiliates; VIX® is a registered trademark of CBOE. These trademarks have been licensedfor use by SPDJI and sublicensed for certain purposes by UBS.
The Securities are not sponsored, endorsed, sold or promoted by SPDJI, S&P, CBOE, or any of theirrespective affiliates or their third party licensors (collectively, “S&P Dow Jones Indices”). S&P DowJones Indices does not make any representation or warranty, express or implied, to the owners of theSecurities or any member of the public regarding the advisability of investing in securities generally or inthe Securities particularly or the ability of the Indices to track general market performance. S&P DowJones Indices’ only relationship to UBS with respect to the Indices is the licensing of the Indices andcertain trademarks, service marks and/or trade names of S&P Dow Jones Indices. The Indices aredetermined, composed and calculated by S&P Dow Jones Indices without regard to UBS or theSecurities. S&P Dow Jones Indices has no obligation to take the needs of UBS or the owners of theSecurities into consideration in determining, composing or calculating the Indices. S&P Dow JonesIndices is not responsible for and has not participated in the determination of the prices, and amount ofthe Securities or the timing of the issuance or sale of the Securities, or in the determination or calculationof the equations by which the Securities may be converted into cash, surrendered, or redeemed, as thecase may be. S&P Dow Jones Indices has no obligation or liability in connection with the administration,marketing or trading of the Securities. There is no assurance that investment products based on theIndices will accurately track index performance or provide positive investment returns. S&P Dow JonesIndices LLC is not an investment advisor. Inclusion of a futures contract within the Indices is not arecommendation by S&P Dow Jones Indices to buy, sell, or hold such contract, nor is it considered to beinvestment advice. Notwithstanding the foregoing, CME Group Inc. and its affiliates may independentlyissue and/or sponsor financial products unrelated to the Securities, but which may be similar to andcompetitive with the Securities. In addition, CME Group Inc. and its affiliates may trade financialproducts which are linked to the performance of one or more of the Indices. It is possible that thistrading activity will affect the value of the Indices and the Securities.
S&P DOW JONES INDICES DOES NOT GUARANTEE THE ADEQUACY, ACCURACY,TIMELINESS AND/OR THE COMPLETENESS OF THE INDICES OR ANY DATA RELATEDTHERETO OR ANY COMMUNICATION WITH RESPECT THERETO, INCLUDING BUT NOTLIMITED TO, ORAL, WRITTEN, OR ELECTRONIC COMMUNICATIONS. S&P DOW JONESINDICES SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS,OMISSIONS, OR DELAYS THEREIN. S&P DOW JONES INDICES MAKES NO EXPRESS ORIMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OFMERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE OR AS TO RESULTSTO BE OBTAINED BY UBS, OWNERS OF THE SECURITIES, OR ANY OTHER PERSON ORENTITY FROM THE USE OF THE INDICES OR WITH RESPECT TO ANY DATA RELATED
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The Indices
THERETO. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT WHATSOEVERSHALL S&P DOW JONES INDICES BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL,PUNITIVE, OR CONSEQUENTIAL DAMAGES INCLUDING BUT NOT LIMITED TO, LOSS OFPROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEENADVISED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT,STRICT LIABILITY, OR OTHERWISE. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANYAGREEMENTS OR ARRANGEMENTS BETWEEN S&P DOW JONES INDICES AND UBS, OTHERTHAN THE LICENSORS OF S&P DOW JONES INDICES.
ALTHOUGH JANUS INDEX & CALCULATION SERVICES LLC SHALL OBTAIN INFORMATIONFOR INCLUSION IN OR FOR USE IN CALCULATIONS RELATED TO THE SECURITIES AND/ORINDICES FROM SOURCES WHICH JANUS INDEX & CALCULATION SERVICES LLCCONSIDERS RELIABLE, NEITHER JANUS INDEX & CALCULATION SERVICES LLC NOR ANYOTHER PARTY GUARANTEES THE ACCURACY AND/OR THE COMPLETENESS OF THEINDICES OR ANY DATA INCLUDED THEREIN OR ANY CALCULATIONS MADE WITHRESPECT TO THE SECURITIES. NEITHER JANUS INDEX & CALCULATION SERVICES LLCNOR ANY OTHER PARTY MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTSTO BE OBTAINED BY UBS, UBS’S CUSTOMERS AND COUNTERPARTIES, HOLDERS OF THESECURITIES, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDICES OR ANYDATA INCLUDED THEREIN OR ANY CALCULATIONS MADE WITH RESPECT TO THESECURITIES IN CONNECTION WITH THE RIGHTS LICENSED HEREUNDER OR FOR ANYOTHER USE. NEITHER JANUS INDEX & CALCULATION SERVICES LLC NOR ANY OTHERPARTY MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND JANUS INDEX &CALCULATION SERVICES LLC HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OFMERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THEINDICES OR ANY DATA INCLUDED THEREIN OR ANY CALCULATIONS MADE WITHRESPECT TO THE SECURITIES. WITHOUT LIMITING ANY OF THE FOREGOING, IN NOEVENT SHALL JANUS INDEX & CALCULATION SERVICES LLC OR ANY OTHER PARTY HAVEANY LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL ORANY OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITYOF SUCH DAMAGES.
NEITHER JANUS INDEX & CALCULATION SERVICES LLC AND ITS AFFILIATES (TOGETHER,“JANUS”) NOR ANY OTHER PARTY MAKES ANY REPRESENTATION OR WARRANTY, EXPRESSOR IMPLIED, TO THE OWNERS OF THE SECURITIES OR ANY MEMBER OF THE PUBLICREGARDING THE ADVISABILITY OF INVESTING IN THE SECURITIES GENERALLY OR THESIMILARITIES OR VARIATIONS BETWEEN THE PERFORMANCE OF THE SECURITIES OR THEINDICES AND THE PERFORMANCE OF THE UNDERLYING SECURITIES OR FINANCIALINSTRUMENTS. JANUS IS THE LICENSOR OF CERTAIN TRADEMARKS, SERVICE MARKS ANDTRADE NAMES OF VELOCITY SHARES. NEITHER JANUS NOR ANY OTHER PARTYGUARANTEES THE ACCURACY AND/OR THE COMPLETENESS OF THE INDICES OR ANY DATAINCLUDED THEREIN OR ANY CALCULATIONS MADE WITH RESPECT TO THE SECURITIES.JANUS DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANYPARTICULAR PURPOSE WITH RESPECT TO THE INDICES OR ANY DATA INCLUDED THEREIN.
THE SECURITIES ARE NOT SPONSORED, ENDORSED OR SOLD BY JANUS INDEX ANDCALCULATION SERVICES LLC OR ITS AFFILIATES NOR DOES JANUS INDEX ANDCALCULATION SERVICES LLC MAKE ANY REPRESENTATION REGARDING THEADVISABILITY OF INVESTING IN ANY OF THE SECURITIES.
“VelocityShares”, the “V logo” and the “V VelocityShares logo” are service marks of Janus Index andCalculation Services LLC and are used herein under license.
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Valuation of the Indices and the SecuritiesIntraday Index Values
On each Index Business Day, SPDJI, or a successor Index Calculation Agent, will calculate and publishthe intraday indicative value of each applicable Index every 15 seconds during normal trading hours onBloomberg under the ticker symbols “SPVXVST”, “SPVXTRST” and “SPVXVHST”. The actualapplicable Index Closing Level for each series of the Securities may vary, and on a cumulative basis overthe term of the applicable Securities may vary significantly, from the intraday indicative value of theapplicable Index.
The intraday indicative calculation of the level of the Indices will be provided for reference purposesonly. Published calculations of the level of the Indices from the Index Calculation Agent mayoccasionally be subject to delay or postponement. Any such delays or postponements will affect thecurrent level of each applicable Index and therefore the value of the applicable Securities in the secondarymarket. The intraday indicative value of the Indices published every 15 seconds will be based on theintraday levels of the Index Contracts.
Intraday Security Values
Janus Index will be responsible for calculating an intraday “indicative value” for each series of theSecurities meant to approximate the expected trading value of the Securities in a liquid market andpublishing it to Bloomberg (based in part on information provided by the NYSE) or a successor via thefacilities on the Consolidated Tape Association. The Variable Long/Short Securities are listed under thesymbol “LSVXIV”. The Tail Risk Securities are listed under the symbol “BSWNIV”. The Short VolatilityHedged Securities are listed under the symbol “XIVHIV”.
In connection with your Securities of any series, the term “indicative value” is calculated in accordancewith the following equation:
(Closing Indicative Value of such series of Securities on the previous calendar day × DailyIntraday Index Performance for the applicable underlying Index) – Daily Investor Fee for such
series of Securities for such calendar day
The “Daily Intraday Index Performance” at any time is equal to (i) the level of the applicable underlyingIndex at such time divided by (ii) the Index Closing Level for the applicable underlying Index on theimmediately preceding Index Business Day.
On any given Index Business Day, the indicative value prior to market close will not reflect the effect ofthe Futures Spread Fee for such Index Business Day because the Futures Spread Fee can only becalculated after the market close using the TAS spread for the first and second month VIX futurescontracts. Only the Closing Indicative Value calculated on such Index Business Day will reflect the effectof the Futures Spread Fee.
The “Index Closing Level” is the closing level of the applicable underlying Index as reported on theNYSE and Bloomberg; provided, however, that if the closing level of the applicable underlying Index asreported on the NYSE (or any successor) differs from the closing level of the applicable underlying Indexas reported on Bloomberg (or any successor), then the Index Closing Level will be the closing level of theapplicable underlying Index as calculated by the Index Calculation Agent.
The intraday indicative value calculation will be used to determine whether the Securities will beaccelerated, as discussed under “Specific Terms of the Securities — Acceleration Upon Occurrence ofStop Loss Termination Event”. The intraday indicative value calculation is not intended as a price or
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Valuation of the Indices and the Securities
quotation, or as an offer or solicitation for the purpose or sale of your Securities, nor will it reflecthedging or other transactional costs, credit considerations, market liquidity or bid-offer spreads. For thisreason and others, the actual trading price of the Securities may be different from their indicative value.
The calculation of the intraday indicative value shall not constitute a recommendation or solicitation toconclude a transaction at the level stated, and should not be treated as giving investment advice.
The publishing of the intraday indicative value of each series of the Securities by Bloomberg mayoccasionally be subject to delay or postponement. The actual trading price of each series of the Securitiesmay be different from their intraday indicative value. The intraday indicative value of each series of theSecurities is published at least every 15 seconds during the NYSE Arca’s Core Trading Session, which iscurrently from 9:30 a.m. to 4:00 p.m., New York City time, and may not be equal to the payment atmaturity or upon call, early redemption or acceleration.
These intraday indicative value calculations will be prepared as of a particular time and date and willtherefore not reflect subsequent changes in market values or prices or in any other factors relevant totheir determination.
Split or Reverse Split of the Securities
Subject to the limitation described below, Janus Index may instruct us, at any time in its sole discretion,to initiate a split or reverse split of one or more series of Securities. The record date for any split orreverse split will be the tenth calendar day after the day on which we announce, by means of a pressrelease specifying the date of the split or reverse split, as applicable, that Janus Index is exercising itsright to initiate a split or reverse split, as applicable, provided that if such calendar day is not a BusinessDay, the record date for such split or reverse split will be the first Business Day following such calendarday. The effective date will be the next Business Day after the record date. The Securities of any seriesshall not be split or reverse split more than four times per calendar year in the aggregate per series ofSecurities.
If the Securities of any series undergo a split, Janus Index, as Security Calculation Agent, will adjust theClosing Indicative Value of such series of Securities accordingly. For example, if the Securities of a seriesundergo a 4:1 split, every investor who holds a Security of such series via The Depository TrustCompany (“DTC”) on the relevant record date will, after the split, hold four Securities of such series,and adjustments will be made as described below. The Closing Indicative Value on such record datewould be divided by four to reflect the 4:1 split of the Securities of such series. Any adjustment of theClosing Indicative Value will be rounded to eight decimal places. The split will become effective at theopening of trading of such series of Securities on the Business Day immediately following the record date.If, prior to the effectiveness of the split, the Stop Loss Termination Trigger threshold is breached, thesplit will not occur. The effects of any split will not trigger a Stop Loss Termination Event.
In the case of a reverse split, the Closing Indicative Value of any series of Securities will be adjustedaccordingly, and we reserve the right to address odd numbers of Securities (commonly referred to as“partials”) in a manner determined by us in our sole discretion. For example, if the Securities of a seriesundergo a 1:4 reverse split, every investor who holds four Securities of such series via DTC on therelevant record date will, after the reverse split, hold only one Security of such series and the ClosingIndicative Value of the Securities of such series on such record date would be multiplied by four to reflectthe 1:4 reverse split of the Securities of such series. Any adjustment of the Closing Indicative Value willbe rounded to eight decimal places. The reverse split will become effective at the opening of trading ofsuch series of Securities on the Business Day immediately following the record date. If, prior to theeffectiveness of the reverse split, the Stop Loss Termination Trigger threshold is breached, the reversesplit will not occur.
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Valuation of the Indices and the Securities
Holders who own a number of Securities of such series on the record date that is not evenly divisible bythe reverse split divisor (which in the case of a 1:4 reverse split, for example, will be 4) will receive thesame treatment as all other holders of such series of Securities for the maximum number of Securities ofsuch series they hold which is evenly divisible by the reverse split divisor, and we will have the right tocompensate holders of such series of Securities for their remaining or “partial” Securities of such series ina manner determined by us in our sole discretion. Our current intention is to provide holders with a cashpayment for their partials on the sixth Business Day following the effective date in an amount equal tothe appropriate percentage of the Closing Indicative Value of the reverse split-adjusted Securities of suchseries on the third Business Day following the effective date. For example, in the case of a 1:4 reversesplit, a holder who held 23 Securities of a series via DTC on the record date would receive five post-reverse split Securities of such series on the effective date (which will be the immediately followingBusiness Day), and a cash payment on the sixth Business Day following the effective date that is equal to3⁄4 of the Closing Indicative Value of the reverse split-adjusted Securities of such series on the thirdBusiness Day following the effective date.
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Specific Terms of the SecuritiesIn this section, references to “holders” mean those who own the Securities registered in their own names,on the books that we or the trustee maintain for this purpose, and not those who own beneficial interestsin the Securities registered in street name or in the Securities issued in book-entry form through DTC oranother depositary. Owners of beneficial interests in the Securities should read the section entitled “LegalOwnership and Book-Entry Issuance” in the accompanying prospectus.
The Securities are part of a series of debt securities entitled “Medium-Term Notes, Series B” that we mayissue, from time to time, under the indenture more particularly described in the accompanyingprospectus. This prospectus supplement summarizes specific financial and other terms that apply to theSecurities. Terms that apply generally to all Medium-Term Notes, Series B are described in “Descriptionof Debt Securities We May Offer” in the accompanying prospectus. The terms described here (i.e., in thisprospectus supplement) supplement those described in the accompanying prospectus and, if the termsdescribed here are inconsistent with those described there, the terms described here are controlling.
The Securities are issued under our indenture dated as of June 12, 2015 between us and U.S. Bank TrustNational Association, as trustee.
Please note that the information about the price to the public and the net proceeds to UBS on the frontcover of this prospectus supplement relates only to the initial sale of the Securities. If you have purchasedthe Securities in a secondary market transaction after the initial sale, information about the price anddate of sale to you will be provided in a separate confirmation of sale.
We describe the terms of each series of the Securities in more detail below.
Coupon
We will not pay you interest during the term of the Securities.
Denomination
The Stated Principal Amount of the Securities is $25 per Security.
Cash Settlement Amount at Maturity
Each Security does not guarantee any return of principal at or prior to, maturity or upon call, earlyredemption or acceleration. Instead, on the Maturity Date, you will receive a cash payment (the “CashSettlement Amount”) per Security equal to the Closing Indicative Value for the applicable Security as ofthe Final Valuation Date.
Closing Indicative Value
On the Initial Trade Date, the “Closing Indicative Value” for each series of Securities is equal to $25.00per Security. For each subsequent calendar day, such Closing Indicative Value will equal:
(Closing Indicative Value on the previous calendar day × Daily Index Performancefor the applicable underlying Index) – Daily Investor Fee for such series of Securities for such calendar
day – the Futures Spread Fee for such series of Securities for such calendar day
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Specific Terms of the Securities
Daily Index Performance
For each Index, the “Daily Index Performance” on any Index Business Day will equal (i) the IndexClosing Level on such Index Business Day divided by (ii) the Index Closing Level on the immediatelypreceding Index Business Day, in each case for the applicable underlying Index. The Daily IndexPerformance will equal one on any calendar day that is not an Index Business Day.
For purposes of calculating the Closing Indicative Value of each Index at maturity or upon call, earlyredemption or acceleration, the Daily Index Performance will be determined as of the Final ValuationDate or corresponding Valuation Date, as the case may be. If the amount calculated above is equal to orless than zero, the payment at maturity will be zero.
“Index Business Day” means any day on which the Primary Exchange and each Related Exchange arescheduled to be open for trading.
“Primary Exchange” means, with respect to each of the Index Contracts, the exchange where the IndexContracts are listed.
“Related Exchange” means, with respect to each of the Index Contracts, each exchange or quotationsystem where trading has a material effect (as determined by the Security Calculation Agents) on theoverall market for futures or options contracts relating to such Index Contract.
“record date” means with respect to any split or reverse split, the tenth calendar day after theannouncement date, provided that if such calendar day is not a Business Day, the record date for suchsplit or reverse split will be the first Business Day following such calendar day.
A “Trading Day” means any day on which (i) the value of the applicable underlying Index is publishedby Bloomberg or Thomson Reuters, (ii) trading is generally conducted on NYSE Arca and (iii) trading isgenerally conducted on the Primary Exchanges on which the Index Contracts are traded, in each case asdetermined by the Security Calculation Agents in their sole discretion.
Daily Investor Fee
Each series of Securities is subject to a “Daily Investor Fee” per Security that will be subtracted from theClosing Indicative Value of each series of Securities on each calendar day. On the Initial Trade Date, theDaily Investor Fee is equal to zero. On each subsequent calendar day, the Daily Investor Fee for eachseries of Securities equals the product of (i) 1.30% divided by 365 times (ii) the Closing Indicative Valuefor such series of Securities on the previous calendar day. For the purpose of calculating the DailyInvestor Fee, if such previous calendar day was not an Index Business Day, the Closing Indicative Valuewill be calculated based on the Closing Indicative Value on the immediately preceding Index BusinessDay.
Futures Spread Fee
Each series of Securities is subject to a “Futures Spread Fee,” which is intended to approximate thehypothetical cost of buying and selling the number of first and second month VIX futures that would benecessary to replicate the performance of the applicable underlying Index. The Futures Spread Fee, whichis uncapped, may vary significantly from day-to-day and may be much higher than would be expectedbased upon the historical and estimated historical performance of the Indices and the historical range ofthe TAS bid and offer spreads (though it may, under certain circumstances, increase the CurrentIndicative Value of the applicable series of Securities rather than decreasing it). The amount of the
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Specific Terms of the Securities
Futures Spread Fee will vary based upon, among other factors, market conditions, the performance of theapplicable underlying Index, the size of the TAS bid and offer spreads and the number of first and secondmonth VIX futures to be hypothetically bought or sold each day in order to replicate the VIX futuresposition represented by the applicable underlying Index, all of which are beyond UBS’s control andcannot be predicted. In particular, the number of VIX futures hypothetically required to be bought andsold each day in order to replicate the VIX futures position represented by the applicable underlyingIndex may vary significantly. Because the Futures Spread Fee for each series of Securities may varysignificantly even over short periods of time and will very likely reduce the return on each series ofSecurities, an investor should monitor its investment frequently, even intraday.
The costs to buy or sell first and second month VIX futures are assumed for purposes of calculating theFutures Spread Fee to equal the bid or offer spread, as applicable, on a TAS transaction. A TAStransaction is a transaction on a futures contract at a price (a “TAS price”) equal to the daily settlementprice, plus a specified differential above or below the daily settlement price (referred to as the “TAS bidspread” or “TAS offer spread”, as applicable), for the futures contract on a specified trading day. TheTAS bid spread reflects the differential when an investor is selling VIX futures, while the TAS offerspread reflects the differential when an investor is buying VIX futures.
TAS transactions are utilized with respect to futures contracts because, unlike with equity securities,there is no option to buy or sell futures contracts at the daily closing price. According to Bloomberg data,the closing TAS spread per VIX future has ranged historically from $-0.06 to $0.05 for the first andsecond month VIX futures contracts. Historical data regarding the TAS spreads is severely limited istherefore not a good predictor of future TAS spreads, Investors are cautioned regarding the use of orreliance on such historical data and are urged to make independent evaluations of such data.
The Futures Spread Fee on any Index Business Day for each series of Securities will be calculated usingthe following formula.
Futures Spread Fee =(Cost1 + Cost2) � Closing Indicative Valuet-1IndexERt-1
where:
Cost1 = the cost to buy or sell, as applicable, the necessary first month VIX futures on suchIndex Business Day;
Cost2 = the cost to buy or sell, as applicable, the necessary second month VIX futures on suchIndex Business Day;
IndexERt-1 = the level of the excess return version of the applicable underlying Index on theprevious Index Business Day; and
ClosingIndicativeValuet-1 = the Closing Indicative Value of such series of Securities on the previous Index
Business Day
On each calendar day that is not an Index Business Day, the Futures Spread Fee for each series ofSecurities will equal zero.
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Specific Terms of the Securities
The number of first and second month VIX futures hypothetically required to be bought or sold for eachapplicable underlying Index on any given Index Business Day t will be published once per Index BusinessDay under the following ticker symbols at approximately 5:15 p.m. (New York City time):
VariableLong/ShortSecurities
Tail RiskSecurities
Short VolatilityHedged
Securities
Ticker1 (number of first month VIX futures hypotheticallyrequired to be held) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SPVXLVT1 SPVXTVT1 SPVXSVT1
Ticker2 (number of second month VIX futures hypotheticallyrequired to be held) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SPVXLVT2 SPVXTVT2 SPVXSVT2
For the avoidance of doubt, the Ticker values on a particular Index Business Day that will be used in anycalculation relating to the Securities will be the updated value disseminated on such Index Business Day,regardless of whether such update takes place at approximately 5:15 p.m. (New York City time) or atany other time after the market closes on such Index Business Day.
The cost to buy or sell first or second month VIX futures, as applicable, will be determined on any IndexBusiness Day t that is not a settlement date for first and second month VIX futures contracts accordingto the following equations:
If Ticker1,t > Ticker1,t–1 then Cost1 = (Ticker1,t – Ticker1,t–1) × TAS1t,offer
If Ticker1,t < Ticker1,t–1 then Cost1 = (Ticker1,t – Ticker1,t–1) × TAS1t,bid
If Ticker2,t > Ticker2,t–1 then Cost2 = (Ticker2,t – Ticker2,t–1) × TAS2t,offer
If Ticker2,t < Ticker2,t–1 then Cost2 = (Ticker2,t – Ticker2,t–1) × TAS2t,bid
If Ticker2,t = Ticker2,t–1 then Cost2 = 0
If Ticker1,t = Ticker1,t–1then Cost1 = 0
where:
Ticker1,t = the number of first month VIX futures hypothetically required to be held on IndexBusiness Day t, as disseminated under the Ticker1 tickers above after being updatedon such Index Business Day, which is expected to occur at approximately 5:15 p.m.(New York City time) on such Index Business Day;
Ticker1,t-1 = the number of first month VIX futures hypothetically required to be held on IndexBusiness Day t-1, as disseminated on the prior Index Business Day under the Ticker1tickers above after being updated on such Index Business Day, which is expected tooccur at approximately 5:15 p.m. (New York City time) on such Index Business Day;
Ticker2,t = the number of second month VIX futures hypothetically required to be held on IndexBusiness Day t, as disseminated under the Ticker2 tickers above after being updatedon such Index Business Day, which is expected to occur at approximately 5:15 p.m.(New York City time) on such Index Business Day;
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Specific Terms of the Securities
Ticker2,t-1 = the number of second month VIX futures hypothetically required to be held on IndexBusiness Day t-1, as disseminated on the prior Index Business Day under the Ticker2tickers above after being updated on such Index Business Day, which is expected tooccur at approximately 5:15 p.m. (New York City time) on such Index Business Day;
TAS1t,offer
= the last TAS offer spread for first month VIX futures on day t prior to 4:13 p.m.(New York City time) as recorded by the CFE;
TAS1t,bid
= the last TAS bid spread for first month VIX futures on day t prior to 4:13 p.m.(New York City time) as recorded by the CFE;
TAS2t,offer
=the last TAS offer spread for second month VIX futures on day t prior to 4:13 p.m.(New York City time) as recorded by the CFE; and
TAS2t,bid
=the last TAS bid spread for second month VIX futures on day t prior to 4:13 p.m.(New York City time) as recorded by the CFE.
If the TAS bid or offer spread for either the first or second month VIX futures is unavailable on a givenIndex Business Day, then the TAS offer spread will be assumed to be 2.5 cents and the TAS bid spread tobe -2.5 cents on such Index Business Day, except that if the CFE discontinues the ability to conducttrades at a TAS price, or stops recording the TAS bid or offer spreads and there is no successor which, inthe good-faith judgment of UBS Securities LLC as Security Calculation Agent, would approximate theTAS bid and offer spreads, UBS Securities LLC will make a good faith estimate in its sole discretion ofthe cost per future to effect the trades necessary to replicate the VIX futures position represented by theapplicable Index on any applicable Index Business Day had the TAS not been discontinued.
On settlement days for the first and second month VIX futures contracts, the first month VIX futurescontract expires and is replaced by what was formerly the second month VIX futures contract, and thesecond month VIX futures contract is replaced by what was formerly the third month VIX futurescontract. To account for this roll, the Futures Spread Fee will be calculated using the modified equationsbelow on any settlement day for the first and second month VIX futures contracts:
If Ticker1,t > Ticker2,t–1 then Cost1 = (Ticker1,t – Ticker2,t–1) × TAS1t,offer
If Ticker1,t < Ticker2,t–1 then Cost1 = (Ticker1,t – Ticker2,t–1) × TAS1t,bid
If Ticker2,t > 0 then Cost2 = Ticker2,t × TAS2t,offer
If Ticker2,t < 0 then Cost2 = Ticker2,t × TAS2t,bid
In the event that the TAS procedures for VIX futures contracts change, including without limitation theending time for effecting TAS transactions on a given Trading Day, or if one or both of the Tickers ceaseto be published, fail to accurately represent the number of first and second month VIX futureshypothetically required to be bought or sold for each applicable underlying Index or are otherwisedisrupted, the Security Calculation Agents will make such adjustments to the procedures and equationsused to calculate the Futures Spread Fee as they may determine, acting in good faith in their solediscretion, will most closely approximate the Futures Spread Fee that would have prevailed in theabsence of such changes.
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Specific Terms of the Securities
Steps to Calculate Futures Spread Fee:
Step 1: Use Ticker1 and Ticker2, to determine whether it is necessary to buy or sell futures to replicate theapplicable underlying Index.
➤ If Ticker1,t is greater than Ticker1,t-1 then that signals a need to buy futures, if Ticker1,t is less thanTicker1,t-1 then that signals a need to sell futures. Repeat Step 1 for the second month VIX futuresas represented by Ticker2,t and Ticker2,t-1.
Step 2: Determine if you are using TAS bid or TAS offer spread.
➤ If Step 1 signaled a requirement to buy futures, then use the TAS offer spread. If Step 1 signaled arequirement to sell futures, use the TAS bid spread.
➤ Repeat Steps 1 and 2 for both the first month VIX futures and second month VIX futures asrepresented by Ticker1 and Ticker2.
Step 3: Multiply the TAS bid or TAS offer, as applicable, by the number of futures hypotheticallyrequired to be bought or sold as relevant to solve for Cost1 and Cost2.
Step 4: Add together Cost1 and Cost2.
Step 5: Divide the sum of Cost1 and Cost2 by the Excess Return of the applicable underlying Index on theprevious day.
Step 6: Multiply the percentage calculated in step 5 by the Closing Indicative Value of the applicableseries of Securities on the previous day.
For hypothetical calculations of the Futures Spread Fee, see Annex C.
Calculation of the Number of First and Second Month VIX Futures
The Tickers, which are reported on Bloomberg under the ticker symbols set forth above, represent thenumber of first and second month VIX futures hypothetically required to be held on Index Business Dayt for each of the Indices. The Tickers are calculated in accordance with the following formulas:
Ticker1,t = IndexERlR × –× × ×13i=1
Pi,lr
Pi,lR
2wL×Lt
Li,lr
wi×It
Ii,lr
drt
drt×UX1,t+(dTt–drt)×UX2,t
1
13
Ticker2,t = IndexERlR × –× × ×13i=1
Pi,lr
Pi,lR
2wL×Lt
Li,lr
wi×It
Ii,lr
dTt–drt
drt×UX1,t+(dTt–drt)×UX2,t
1
13
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Specific Terms of the Securities
where:
IndexERlR = The excess return value of the applicable underlying Index on its last rebalancingday.
Pi,lr = Value of portfolio i on its last sub-portfolio rebalancing day.
Pi, lR = Value of portfolio i on the last index rebalancing day (ie when the 13 sub-portfoliosrebalance).
wL = Target weight of the leveraged leg of the applicable underlying Index.
Lt = Leveraged excess return value of the applicable underlying Index on business day t.
Li, lr = Leveraged excess return value of the applicable underlying Index on the lastrebalancing day of portfolio i.
wi = (1- wL), which is equal to the target weight of the inverse leg of the applicableunderlying Index.
It = Inverse excess return value of the applicable underlying Index on business day t.
Ii,lr = Inverse excess return value of the applicable underlying Index on the lastrebalancing day of portfolio i.
UX1,t = Daily Contract Reference Price (i.e. the settlement price) of the first month VIXFutures Contract on date t.
UX2,t = Daily Contract Reference Price (i.e. the settlement price) of the second month VIXFutures Contract on date t.
dT,t = The total number of business days in the current Roll Period (as defined under “TheIndices—The S&P 500 VIX Short-Term Futures Index” above) beginning with, andincluding, the most recent CBOE VIX Futures Settlement Date and ending with, butexcluding, the following CBOE VIX Futures Settlement Date as of day t. Thenumber of business days stays constant in cases of a new holiday introduced intra-month or an unscheduled market closure.
drt = The total number of business days within a Roll Period beginning with, andincluding, the following business day and ending with, but excluding, the followingCBOE VIX Futures Settlement Date as of day t. The number of business daysincludes a new holiday introduced intra-month up to the business day proceedingsuch a holiday.
Maturity Date
The “Maturity Date” for each series of Securities will be July 18, 2046, unless that day is not a BusinessDay, in which case the Maturity Date for each series of Securities will be the next following Business Day.If the third Trading Day before July 18, 2046 does not qualify as the Final Valuation Date as determined inaccordance with “— Valuation Dates” below, then the Maturity Date will be the third Trading Dayfollowing the Final Valuation Date. The Security Calculation Agents may postpone the Final ValuationDate — and therefore the Maturity Date — if a Market Disruption Event or Force Majeure Event occurs oris continuing on a day that would otherwise be the Final Valuation Date. We describe Market DisruptionEvents and Force Majeure Events under “— Market Disruption Event” below.
Unlike ordinary debt securities, the Securities do not pay interest and do not guarantee any return ofprincipal at maturity or upon call, early redemption or acceleration.
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Specific Terms of the Securities
Each series of Securities is fully exposed to any decline in the level of the applicable underlying Index.You may lose all or a substantial portion of your investment if the Index level on the applicableValuation Date is not sufficient to offset the negative effect of the Daily Investor Fee and the FuturesSpread Fee. In addition, the Daily Investor Fee will be calculated based on a daily Closing IndicativeValue and therefore will depend on the daily fluctuations of the applicable underlying Index, and theFutures Spread Fee will depend on the TAS bid and offer spreads and numbers of VIX futureshypothetically required to be bought or sold and the other factors described above. If the ClosingIndicative Value as of the Final Valuation Date is equal to or less than zero, the payment at maturity willbe zero.
The Securities may be called by UBS prior to the Maturity Date pursuant to UBS’s Call Right and, uponthe occurrence of a Stop Loss Termination Event, the Securities will be automatically accelerated andmandatorily redeemed. See “— UBS’s Call Right” beginning on page S-75 and “— Acceleration UponOccurrence of Stop Loss Termination Event” beginning on page S-75.
Valuation Dates
The applicable Valuation Date means (i) with respect to an early redemption, the third Index BusinessDay prior to the related Redemption Date, which day is also the first Index Business Day following thedate that a Redemption Notice and Redemption Confirmation are delivered in compliance with theredemption procedures, (ii) with respect to UBS’s exercise of its Call Right, the third Trading Day priorto the Call Settlement Date, (iii) with respect to the Maturity Date, the Final Valuation Date, and(iv) with respect to the occurrence of a Stop Loss Termination Event, the Stop Loss Termination Date.The “Final Valuation Date” will be the Trading Day that falls on July 13, 2046.
If the Security Calculation Agents determine that a market disruption event or force majeure event occursor is continuing on a Valuation Date, the applicable Valuation Date will be the first following TradingDay on which the Security Calculation Agents determine that a market disruption event or force majeureevent does not occur and is not continuing. In no event, however, will the applicable Valuation Date forthe Securities be postponed by more than three Trading Days.
If the Security Calculation Agents determine that a market disruption event or force majeure event occursor is continuing on July 13, 2046, then the Final Valuation Date will be the first following Trading Dayon which the Security Calculation Agents determine that a market disruption event or force majeureevent does not occur and is not continuing. In no event, however, will the Final Valuation Date bepostponed by more than three Trading Days.
Early Redemption at the Option of the Holders
Subject to your compliance with the procedures described below and the potential postponements andadjustments as described under “— Market Disruption Event,” you may submit a request to have usredeem your Securities of any series on any Index Business Day no later than 4:00 p.m. (New York Citytime) and a confirmation of redemption by no later than 4:00 p.m. (New York City time) on any IndexBusiness Day, provided that you request that we redeem a minimum of 50,000 Securities of the applicableseries. We reserve the right from time to time to waive this minimum redemption amount in our solediscretion on a case-by-case basis. You should not assume you will be entitled to the benefit of any suchwaiver. For any applicable redemption request, the “Redemption Valuation Date” will be the first IndexBusiness Day following the date that the applicable redemption notice and redemption confirmation aredelivered, except that we reserve the right from time to time to accelerate, in our sole discretion on a case-by-case basis, the Redemption Valuation Date to the date on which the notice of redemption is received byUBS rather than the following Index Business Day. You should not assume you will be entitled to the
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Specific Terms of the Securities
benefit of any such acceleration. To satisfy the minimum redemption amount, your broker or otherfinancial intermediary may bundle your Securities for redemption with those of other holders of theapplicable series to reach this minimum amount of 50,000 Securities of the applicable series. The firstRedemption Date will be July 19, 2016 and the final Redemption Date will be July 11, 2046.
Upon early redemption, you will receive per Security a cash payment on the relevant Redemption Dateequal to the Closing Indicative Value for the applicable Security as of the applicable Valuation Date,minus the Redemption Fee Amount as of the applicable Valuation Date. We refer to this cash payment asthe “Redemption Amount.” If the amount calculated above is less than or equal to zero, the paymentupon early redemption will be zero. We reserve the right from time to time to waive the Redemption FeeAmount in our sole discretion on a case-by-case basis. You should not assume you will be entitled to thebenefit of any such waiver.
As of any Valuation Date, the “Redemption Fee Amount” means an amount per Security equal to theproduct of (i) 0.125% and (ii) the Closing Indicative Value for the applicable Security as of suchValuation Date.
You may lose all or a substantial portion of your investment upon early redemption if the level of theapplicable underlying Index declines or does not increase by an amount sufficient to offset the combinednegative effect of the Daily Investor Fee, the Futures Spread Fee and the Redemption Fee Amount.
We discuss these matters in the accompanying prospectus under “Description of Debt Securities We MayOffer — Redemption and Payment.”
The redemption feature is intended to induce arbitrageurs to counteract any trading of the Securities at adiscount to their indicative value, though there can be no assurance that arbitrageurs will employ theredemption feature in this manner or that they will be successful in counteracting any divergence in themarket price of the Securities and their indicative value.
The Securities may be called by UBS prior to the Maturity Date pursuant to UBS’s Call Right. See“—UBS’s Call Right” beginning on page S-75.
Redemption Dates
The applicable “Redemption Date” means the third Index Business Day following the correspondingValuation Date (other than the Final Valuation Date) or, if such day is not an Index Business Day, thenext following Business Day. The final Redemption Date will be July 11, 2046.
Redemption Procedures
To redeem your Securities, you must instruct your broker or other person through whom you hold yourSecurities to take the following steps through normal clearing system channels:
➤ deliver a notice of redemption, which is attached to this prospectus supplement as Annex A, to JanusDistributors via email no later than 4:00 p.m. (New York City time) on the Index Business Dayimmediately preceding the applicable Valuation Date. If Janus Distributors receives your notice by thetime specified in the preceding sentence, Janus Distributors will respond by sending you a form ofconfirmation of redemption which is attached to this prospectus supplement as Annex B;
➤ deliver the signed confirmation of redemption to Janus Distributors via e-mail in the specified formby 4:00 p.m. (New York City time) on the same day. Janus Distributors must acknowledge receipt inorder for your confirmation to be effective;
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Specific Terms of the Securities
➤ instruct your DTC custodian to book a delivery vs. payment trade with respect to your Securities onthe applicable Valuation Date at a price equal to the Redemption Amount; and
➤ cause your DTC custodian to deliver the trade as booked for settlement via DTC at or prior to 10:00a.m. (New York City time) on the applicable Redemption Date.
Different brokerage firms may have different deadlines for accepting instructions from their customers.Accordingly, as a beneficial owner of the Securities, you should consult the brokerage firm throughwhich you own your interest for the relevant deadline. If your broker delivers your notice of redemptionafter 4:00 p.m. (New York City time), or your confirmation of redemption after 4:00 p.m. (New YorkCity time), on the Index Business Day prior to the applicable Valuation Date, your notice will not beeffective, you will not be able to redeem your Securities on the applicable Redemption Date and yourbroker will need to complete all the required steps if you should wish to redeem your Securities on anysubsequent Redemption Date. In addition, Janus Distributors may request a medallion signatureguarantee or such assurances of delivery as it may deem necessary in its sole discretion. All instructionsgiven to participants from beneficial owners of Securities relating to the right to redeem their Securitieswill be irrevocable.
We reserve the right from time to time to waive the minimum redemption amount or the Redemption FeeAmount in our sole discretion on a case-by-case basis. In addition, we reserve the right from time to timeto accelerate, in our sole discretion on a case-by-case basis, the Redemption Valuation Date to the dateon which the notice of redemption is received by Janus Distributors rather than the following IndexBusiness Day. You should not assume you will be entitled to the benefit of any such waiver or election toaccelerate the Redemption Valuation Date.
UBS’s Call Right
On any Trading Day on or after July 19, 2017 through and including the Maturity Date, UBS may at itsoption redeem all, but not less than all, issued and outstanding Securities of any series. To exercise itsCall Right, UBS must provide notice to the holders of the such Securities not less than ten calendar daysprior to the Call Settlement Date specified by UBS. In the event UBS exercises this right, you will receivea cash payment per Security equal to its Closing Indicative Value as of the Valuation Date. We refer tothis cash payment as the “Call Settlement Amount.” See also “Description of the Debt Securities WeMay Offer — Redemption and Payment” in the attached prospectus.
You may lose all or a substantial portion of your investment upon UBS’s exercise of its Call Right if thelevel of the applicable underlying Index declines or does not increase by an amount sufficient to offset thenegative effect of the Daily Investor Fee and the Futures Spread Fee.
Acceleration Upon Occurrence of Stop Loss Termination Event
If, at any time on any Index Business Day, the intraday indicative value of any series of Securities,calculated as described above in “Valuation of the Indices and the Securities — Intraday SecurityValues,” is equal to or less than 20.0% of the Closing Indicative Value of such series of Securities at theend of the prior Index Business Day (each such event, a “Stop Loss Termination Event,” and each suchday, a “Stop Loss Termination Date”), all issued and outstanding Securities of such series will beautomatically accelerated and mandatorily redeemed by UBS for a cash payment equal to the Stop LossRedemption Value; provided that if the Stop Loss Redemption Value so calculated is less than or equal tozero, the payment upon acceleration will be zero.
The “Stop Loss Redemption Value” will be determined by UBS Securities LLC, as Security CalculationAgent in its sole discretion, acting in good faith and in a commercially reasonable manner, using the
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Specific Terms of the Securities
latest publicly available quotations for the intraday indicative value of the applicable underlying Indexthat are available as soon as reasonably practicable after the time that an investor could reasonably beexpected to unwind an investment in the first and second month VIX futures hypothetically required toreplicate the performance of the applicable underlying Index following the occurrence of such Stop LossTermination Event, based on such factors as liquidity, market availability and practical time constraints.UBS Securities LLC, as Security Calculation Agent, will calculate, in its sole discretion, the Stop LossRedemption Value of such series of Securities as:
(its Closing Indicative Value on the previous calendar day × Daily Intraday Index Performance for theapplicable underlying Index as soon as reasonably practicable following the Stop Loss Termination
Event) – Daily Investor Fee for such series of Securities on the Stop Loss Termination Date
The Stop Loss Redemption Value for any series of Securities (a) is not expected to be greater than 20.0%of its Closing Indicative Value at the end of the prior Index Business Day and (b) shall not be less than $0per Security.
If a Stop Loss Termination Event occurs for any series of Securities, you will receive on the Stop LossRedemption Date only the Stop Loss Redemption Value in respect of your investment in such Securities.If the Stop Loss Redemption Value so calculated is equal to or less than zero, the payment uponacceleration will be zero. The “Stop Loss Redemption Date” will be the fifth Business Day following theStop Loss Termination Date; provided that if the calculation of the Stop Loss Redemption Value ispostponed as a result of a Market Disruption Event, the Stop Loss Redemption Date will be the fifthbusiness day after the Stop Loss Redemption Value is calculated, subject to adjustment. For a discussionof the risks related to the occurrence of a Stop Loss Termination Event, see “Risk Factors — TheSecurities may be automatically accelerated and mandatorily redeemed, resulting in a loss of all or asubstantial portion of your investment.”
Subject to the prior verification by UBS Securities LLC, as Security Calculation Agent, that the intradayindicative value of such series of Securities was accurately calculated by the NYSE to be less than orequal to 20.0% of its Closing Indicative Value at the end of the prior Index Business Day, UBS mustprovide notice (which may be provided via press release) to the holders of such series of Securities notlater than the second Index Business Day after the occurrence of a Stop Loss Termination Event that suchStop Loss Termination Event has occurred.
You may lose some or all of your investment upon acceleration. The negative effect of the Daily InvestorFee and the Futures Spread Fee will reduce your final payment. If the return of the applicable underlyingIndex is insufficient to offset the negative effect of the Daily Investor Fee and Futures Spread Fee or if thereturn of the applicable underlying Index is negative over the period you hold your Securities, you willlose some or all of your investment upon acceleration.
Security Calculation Agents
UBS Securities LLC and Janus Index will act as the Security Calculation Agents. UBS Securities LLC will,in its sole discretion, make all determinations with respect to any reduction of the minimum redemptionamount of 50,000 Securities or with respect to whether a Stop Loss Termination Event has occurred andwill calculate for each series of Securities (i) the intraday indicative value for purposes of calculating anyStop Loss Redemption Value, (ii) the Stop Loss Redemption Value, if any, that we will pay you upon theoccurrence of a Stop Loss Termination Event, (iii) whether any day is a Trading Day (iv) any amountsdue upon default, (v) the Closing Indicative Value for purposes of calculating the Redemption Amount,Call Settlement Amount, Stop Loss Redemption Value, or any such other amounts payable at maturity orupon call, acceleration or early redemption, (vi) the Redemption Amount, Call Settlement Amount, Stop
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Specific Terms of the Securities
Loss Redemption Value or Cash Settlement Amount or any such other amounts payable at maturity orupon call, acceleration or early redemption, or (vii) whether the CFE has discontinued the ability toconduct trades at a TAS price or stopped recording the TAS bid or offer spreads, determining whetherthere is a successor to the TAS price or the TAS bid and/or offer spreads that, in its good faith judgment,would approximate the TAS price of the TAS bid and offer spreads, and, if no such successor exists,making a good faith estimate in its sole discretion of the cost per futures contract to effect the tradesnecessary to replicate the VIX futures position represented by the applicable Index on any applicableIndex Business Day had the ability to conduct trades at a TAS price not been discontinued or the CFEnot stopped recording the TAS bid or offer spreads.
Janus Index will determine, in its sole discretion, (i) the Closing Indicative Value for each series of theSecurities (other than as described above), (ii) the intraday indicative value for each series of theSecurities (other than in the case of a Market Disruption Event), (iii) whether any day is a Business Dayor Index Business Day and (iv) whether the Securities of any series shall be split or reverse-split and anyadjustments to be made as a result of any such split or reverse split.
The Security Calculation Agents will jointly be responsible for (i) determining whether a MarketDisruption Event has occurred and, if so, the applicable Closing Indicative Value, (ii) determiningwhether any Index has been discontinued or whether there has been a material change in any Index and,if so, whether to replace such Index, and (iii) all other matters or calculations to be made by the SecurityCalculation Agents not specifically described above.
In addition, in the event that the TAS procedures for VIX futures contracts change, including withoutlimitation the ending time for effecting TAS transactions on a given Trading Day, or if one or both of theTickers cease to be published, fail to accurately represent the number of first and second month VIXfutures hypothetically required to be bought or sold for each applicable underlying Index or areotherwise disrupted, the UBS Securities LLC, as Security Calculation Agent will make such adjustmentsto the procedures and equations used to calculate the Futures Spread Fee as they may determine, actingin good faith in their sole discretion, will most closely approximate the Futures Spread Fee that wouldhave prevailed in the absence of such changes.
All determinations made by the Security Calculation Agents will be at the sole discretion of the SecurityCalculation Agents and will, in the absence of manifest error, be conclusive for all purposes and bindingon you and on us. We may appoint one or more different Security Calculation Agents from time to timeafter the date of this prospectus supplement without your consent and without notifying you.
The Security Calculation Agents will provide written notice to the trustee at its New York office, onwhich notice the trustee may conclusively rely, of the amount to be paid at maturity or upon call, earlyredemption or acceleration on or prior to 4:00 p.m., New York City time, on the Business Dayimmediately preceding the Maturity Date or any Redemption Date, Stop Loss Redemption Date or CallSettlement Date, as applicable.
All dollar amounts related to determination of the Closing Indicative Value, the Daily Investor Fee, theFutures Spread Fee, the Redemption Amount and Redemption Fee Amount per Security, and the CallSettlement Amount or Stop Loss Redemption Amount, if any, per Security will be rounded to the nearestten-thousandth, with five one hundred-thousandths rounded upward (e.g., .76545 would be rounded upto .7655); and all dollar amounts paid on the aggregate principal amount of Securities per holder will berounded to the nearest cent, with one-half cent rounded upward.
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Specific Terms of the Securities
Market Disruption Event
If an applicable underlying Index is not published on an Index Business Day, or if a Market DisruptionEvent or a Force Majeure Event (each as defined below) has occurred or is occurring, and such eventaffects such Index and/or the ability to hedge such Index, the Security Calculation Agents may (but arenot required to) make determinations and/or adjustments to such Index or method of calculating suchIndex. The determination of the value of a Security on a Valuation Date, including the Final ValuationDate, may be postponed if the Security Calculation Agents determine that a Market Disruption Event orForce Majeure Event has occurred or is continuing on such Valuation Date. In that event, the applicableValuation Date will be the next following Trading Day on which a no Market Disruption Event or ForceMajeure Event has occurred or is not continuing. In no event, however, will a Valuation Date bepostponed by more than three Trading Days. If a Valuation Date is postponed until the third TradingDay following the scheduled Valuation Date but a Market Disruption Event or Force Majeure Eventoccurs or is continuing on such day, that day will nevertheless be the Valuation Date and the SecurityCalculation Agents will make a good faith estimate in their sole discretion of the value of the IndexClosing Level for applicable underlying Index for such day. All determinations and adjustments to bemade by the Security Calculation Agents may be made in the Security Calculation Agents’ sole discretion.See “Risk Factors” in this prospectus supplement for a discussion of certain conflicts of interest whichmay arise with respect to the Security Calculation Agents.
The occurrence or existence of any of the following, as determined by the Security Calculation Agents intheir sole discretion, will constitute a “Market Disruption Event” with respect to any Index:
➤ the Index Sponsor does not publish the level of each applicable underlying Index on any IndexBusiness Day;
➤ a suspension, absence or material limitation of trading of equity securities then constituting 20% ormore of the level of the S&P 500® Index on the Relevant Exchanges (as defined below) for suchsecurities for more than two hours of trading (one hour on any day that is an “index roll date” forpurposes of calculating the VIX Index or the relevant successor index) during, or during the one hourperiod preceding the close of, the principal trading session on such Relevant Exchange;
➤ a breakdown or failure in the price and trade reporting systems of any Relevant Exchange for theS&P 500® Index as a result of which the reported trading prices for equity securities then constituting20% or more of the level of the S&P 500® Index are materially inaccurate (i) during the one hourpreceding the close of the principal trading session on such Relevant Exchange or (ii) during any onehour period of trading on such Relevant Exchange on any day that is an “index roll date” forpurpose of calculating the VIX Index or the relevant successor index;
➤ a suspension, absence or material limitation of trading on any Relevant Exchange for futurescontracts, options or other products on the VIX Index (or any relevant successor index) traded onsuch Relevant Exchange for more than two hours of trading (one hour on any day that is an “indexroll date” for purposes of calculating the VIX Index or the relevant successor index) during, or duringthe one hour period preceding the close of, the principal trading session on such Relevant Exchange;
➤ a breakdown or failure in the price and trade reporting systems of any Relevant Exchange for futurescontracts on the VIX Index (or the relevant successor index) as a result of which the reported tradingprices for futures on the VIX Index (or futures on the relevant successor index) during the one hourperiod preceding, and including, the scheduled time at which the value of the VIX Index or the Short-Term Futures Index is calculated for purposes of the Indices (or the relevant successor index) arematerially inaccurate;
➤ a suspension, absence or material limitation of trading on any Relevant Exchange for the Short-TermFutures Index (or any relevant successor index) for more than two hours of trading (one hour on any
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Specific Terms of the Securities
day that is an “index roll date” for purposes of calculating the Indices or the relevant successor index)during, or during the one hour period preceding the close of, the principal trading session on suchRelevant Exchange;
➤ a breakdown or failure in the price and trade reporting systems of any Relevant Exchange for theShort-Term Futures Index (or the relevant successor index) as a result of which the reported tradingprices for the relevant futures contracts on the VIX Index (or futures on the relevant successorindices) during the one hour period preceding, and including, the scheduled time at which the value ofthe futures contracts on the VIX Index is calculated for purposes of the Short-Term Futures Index (orthe relevant successor index) are materially inaccurate;
➤ a decision to permanently discontinue trading in futures on the VIX Index (or futures on the relevantsuccessor index);
➤ on any Index Business Day, the occurrence or existence of a lack of, or a material decline in, theliquidity in the market for trading in any futures contract included in the Short-Term Futures Indexor any Index;
➤ any event or any condition (including without limitation any event or condition that occurs as a resultof the enactment, promulgation, execution, ratification, interpretation or application of, or anychange in or amendment to, any law, rule or regulation by an applicable governmental authority) thatresults in an illiquid market for trading in any futures contract underlying the Short-Term FuturesIndex or any Index; and
➤ the declaration or continuance of a general moratorium in respect of banking activities in anyrelevant city.
A “Force Majeure Event” includes any event or circumstance (including, without limitation, a systemsfailure, natural or man-made disaster, act of God, armed conflict, act of terrorism, riot or labordisruption or any similar intervening circumstance) that the Security Calculation Agents determine to bebeyond their reasonable control and materially affect the any Index, the S&P 500® Index, the VIX Indexor the Short-Term Futures Index (or the relevant successor index) or any futures contract underlying anyIndex (or the relevant successor index).
For purposes of determining whether a Market Disruption Event has occurred:
➤ a limitation on the hours or number of days of trading will not constitute a Market Disruption Eventif it results from an announced change in the regular business hours of any Relevant Exchange for theS&P 500® Index, the VIX Index or the Short-Term Futures Index (or the relevant successor index);
➤ limitations pursuant to the rules of any Relevant Exchange similar to NYSE Rule 80B (or anyapplicable rule or regulation enacted or promulgated by any other self-regulatory organization or anygovernment agency of scope similar to NYSE Rule 80B as determined by the Index Sponsor) ontrading during significant market fluctuations will constitute a suspension, absence or materiallimitation of trading;
➤ a suspension of trading in an SPX Option or a futures contract on the VIX Index (or futures contracton the relevant successor index) by the Relevant Exchange for the VIX Index (or the relevantsuccessor index) by reason of:
➤ a price change exceeding limits set by such Relevant Exchange,
➤ an imbalance of orders relating to such SPX Option or futures contract, as applicable, or
➤ a disparity in bid and ask quotes relating to such SPX Option or futures contract, as applicable,will, in each such case, constitute a suspension, absence or material limitation of trading on suchRelevant Exchange; and
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➤ a “suspension, absence or material limitation of trading” on any Relevant Exchange will not includeany time when such Relevant Exchange is itself closed for trading under ordinary circumstances.
“Relevant Exchange” means, with respect to the S&P 500® Index, the primary exchange or market oftrading for any equity security (or any combination thereof) then included in the S&P 500® Index or,with respect to the VIX Index or any relevant successor index, the primary exchange or market for SPXOptions or futures on the VIX Index (or futures on the relevant successor index), as applicable, or, withrespect to the Short-Term Futures Index or any relevant successor index, the primary exchange or marketfor the relevant futures contracts on the VIX Index (or futures on the relevant successor index to the VIXIndex).
Redemption Price Upon Optional Tax Redemption
We have the right to redeem the Securities in the circumstances described under “Description of DebtSecurities We May Offer — Optional Tax Redemption” in the accompanying prospectus. If we exercisethis right, the redemption price of the Securities will be determined by UBS Securities LLC, as SecurityCalculation Agent in a manner reasonably calculated to preserve your and our relative economicposition.
Default Amount on Acceleration
If an event of default occurs and the maturity of the Securities is accelerated, the default amount inrespect of the principal of the Securities shall become due and payable. We describe the default amountbelow under “— Default Amount.”
For the purpose of determining whether the holders of our Medium-Term Notes, Series B, of which theSecurities are a part, are entitled to take any action under the indenture, we will treat Stated PrincipalAmount of the Securities as their outstanding principal amount. Although the terms of the Securities maydiffer from those of the other Medium-Term Notes, Series B, holders of specified percentages in principalamount of all Medium-Term Notes, Series B, together in some cases with other series of our debtsecurities, will be able to take action affecting all the Medium-Term Notes, Series B, including theSecurities. This action may involve changing some of the terms that apply to the Medium-Term Notes,Series B, accelerating the maturity of the Medium-Term Notes, Series B, including the Securities, after adefault or waiving some of our obligations under the indenture. We discuss these matters in the attachedprospectus under “Description of Debt Securities We May Offer — Default, Remedies and Waiver ofDefault” and “Description of Debt Securities We May Offer — Modification and Waiver of Covenants.”
Default Amount
The default amount for the Securities of any series on any day will be an amount, in U.S. dollars, asdetermined by UBS Securities LLC, as Security Calculation Agent, in its sole discretion, equal to the costof having a qualified financial institution, of the kind and selected as described below, expressly assumeall our payment and other obligations with respect to the Securities of such series as of that day and as ifno default or acceleration had occurred, or to undertake other obligations providing substantiallyequivalent economic value to you with respect to the Securities of such series. That cost will equal:
➤ the lowest amount that a qualified financial institution would charge to effect this assumption orundertaking, plus
➤ the reasonable expenses, including reasonable attorneys’ fees, incurred by the holders of the Securitiesin preparing any documentation necessary for this assumption or undertaking.
During the default quotation period for the Securities, which we describe below, the holders of theSecurities and/or we may request a qualified financial institution to provide a quotation of the amount itwould charge to effect this assumption or undertaking. If either party obtains a quotation, it must notify
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Specific Terms of the Securities
the other party in writing of the quotation. The amount referred to in the first bullet point above willequal the lowest — or, if there is only one, the only — quotation obtained, and as to which notice is sogiven, during the default quotation period. With respect to any quotation, however, the party notobtaining the quotation may object, on reasonable and significant grounds, to the assumption orundertaking by the qualified financial institution providing the quotation and notify the other party inwriting of those grounds within two Business Days after the last day of the default quotation period, inwhich case that quotation will be disregarded in determining the default amount.
Default Quotation Period
The default quotation period is the period beginning on the day the default amount first becomes dueand ending on the third Business Day after that day, unless:
➤ no quotation of the kind referred to above is obtained; or
➤ every quotation of that kind obtained is objected to within five Business Days after the due date asdescribed above.
If either of these two events occurs, the default quotation period will continue until the third BusinessDay after the first Business Day on which prompt notice of a quotation is given as described above. Ifthat quotation is objected to as described above within five Business Days after that first Business Day,however, the default quotation period will continue as described in the prior sentence and this sentence.
In any event, if the default quotation period and the subsequent two Business Day objection period havenot ended before the Final Valuation Date, then the default amount will equal the Stated PrincipalAmount of the Securities.
Qualified Financial Institutions
For the purpose of determining the default amount at any time, a qualified financial institution must be afinancial institution organized under the laws of any jurisdiction in the United States of America, Europeor Japan, which at that time has outstanding debt obligations with a stated maturity of one year or lessfrom the date of issue and rated either:
➤ A-1 or higher by Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-HillCompanies, Inc., or any successor, or any other comparable rating then used by that rating agency; or
➤ P-1 or higher by Moody’s Investors Service or any successor, or any other comparable rating thenused by that rating agency.
Discontinuance or Modification of an Index or Termination of Our License Agreementwith the Index Sponsor
If the Index Sponsor discontinues publication of any Index, or if our license agreement with the IndexSponsor terminates, and any other person or entity publishes an index that the Security CalculationAgents determine is comparable to such Index and the Security Calculation Agents approve such index asa successor index, then the Security Calculation Agents will determine the value of the applicableunderlying Index on the applicable Valuation Date and the amount payable at maturity or upon call,early redemption or acceleration by reference to such successor index.
If our license agreement with the Index Sponsor terminates, or the Security Calculation Agents determinethat the publication of any Index is discontinued and there is no successor index, or that a marketdisruption event or force majeure event has occurred and is continuing on the date on which the value ofthe applicable underlying Index is required to be determined, the Security Calculation Agents willdetermine the amount payable by a computation methodology that the Security Calculation Agentsdetermine will as closely as reasonably possible replicate such Index.
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Specific Terms of the Securities
If the Security Calculation Agents determine that any Index or the method of calculating any Index hasbeen changed at any time in any respect, including whether the change is made by the Index Sponsorunder its existing policies or following a modification of those policies, is due to the publication of asuccessor index, or is due to any other reason, then the Security Calculation Agents will be permitted(but not required) to make such adjustments to such Index or method of calculating such Index as itbelieves are appropriate to ensure that the value of such Index used to determine the amount payable atmaturity or upon call, early redemption or acceleration is equitable.
All determinations and adjustments to be made by the Security Calculation Agents may be made in theSecurity Calculation Agents’ sole discretion. See “Risk Factors” in this prospectus supplement for adiscussion of certain conflicts of interest which may arise with respect to the calculation agents.
Termination of Janus Agreements
UBS and its affiliates have entered into various agreements with Janus Distributors and Janus Index withrespect to the Securities, including a Services Agreement, a Co-Calculation Agents Agreement and aTrademark License Agreement (collectively, the “Agreements”). Each of UBS, Janus Distributors andJanus Index has the right to terminate the Agreements under certain circumstances. In the event that theAgreements are terminated, UBS may be required to suspend further issuances of the Securities and toexercise its Call Right, which could result in the loss of some or all of your investment in the Securities.
Manner of Payment and Delivery
Any payment on or delivery of the Securities at maturity or upon call, acceleration or early redemptionwill be made to accounts designated by you and approved by us, or at the corporate trust office of thetrustee in New York City, but only when the Securities are surrendered to the trustee at that office. Wealso may make any payment or delivery in accordance with the applicable procedures of the depositary.
Business Day
When we refer to a Business Day with respect to the Securities, we mean a day that is a Business Day ofthe kind described in “Description of Debt Securities We May Offer — Payment Mechanics for DebtSecurities” in the accompanying prospectus.
Modified Business Day
As described in “Description of Debt Securities We May Offer — Payment Mechanics for DebtSecurities” in the attached prospectus, any payment on the Securities that would otherwise be due on aday that is not a Business Day may instead be paid on the next day that is a Business Day, with the sameeffect as if paid on the original due date, except as described under “— Cash Settlement Amount atMaturity,” “— UBS’s Call Right,” “Acceleration Upon Occurrence of Stop Loss Termination Event” and“— Early Redemption at the Option of the Holders” above.
Defeasance
Neither full defeasance nor covenant defeasance, as described in the accompanying prospectus under“Description of Debt Securities We May Offer — Defeasance and Covenant Defeasance,” will apply tothe Securities.
Reissuances or Reopened Issues
We may, at our sole discretion, “reopen” or reissue any series of Securities. We intend to issue each seriesof Securities initially in amounts having the aggregate stated principal amount specified on the cover ofthis prospectus supplement. We may issue additional Securities of any series in amounts that exceed such
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Specific Terms of the Securities
amount at any time, without your consent and without notifying you. The Securities do not limit ourability to incur other indebtedness or to issue other securities. Also, we are not subject to financial orsimilar restrictions by the terms of the Securities. For more information, please refer to “Description ofDebt Securities We May Offer — Amounts That We May Issue” in the accompanying prospectus.
These further issuances, if any, will be consolidated to form a single class with such series of originallyissued Securities and will have the same CUSIP number and will trade interchangeably with such series ofSecurities immediately upon settlement. Any additional issuances will increase the aggregate statedprincipal amount of the outstanding of Securities of such series, plus the aggregate stated principalamount of any Securities bearing the same CUSIP number that are issued pursuant to any futureissuances of Securities bearing the same CUSIP number. The price of any additional offering will bedetermined at the time of pricing of that offering.
Booking Branch
The Securities will be booked through UBS AG, London Branch.
Clearance and Settlement
The DTC participants that hold the Securities through DTC on behalf of investors will follow thesettlement practices applicable to equity securities in DTC’s settlement system with respect to the primarydistribution of the Securities and secondary market trading between DTC participants.
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Use of Proceeds and HedgingWe will use the net proceeds we receive from the sale of the Securities for the purposes we describe in theattached prospectus under “Use of Proceeds.” We or our affiliates may also use those proceeds intransactions intended to hedge our obligations under the Securities as described below.
In anticipation of the sale of the Securities, we or our affiliates expect to enter into hedging transactionsinvolving purchases or sales of securities and/or futures contracts underlying any of the Indices or listedor over-the-counter options, futures, swaps or other derivative financial instruments linked to any of theIndices and/or any of the futures contracts underlying any of the Indices prior to and/or on the InitialTrade Date. In addition, after the Initial Trade Date, we expect to regularly enter into additional hedgingtransactions, and from time to time we may unwind those we have previously entered into. In thisregard, we or our affiliates may:
➤ acquire or dispose of long or short positions in listed or over-the-counter options, futures, exchange-traded funds or other instruments linked to the Indices and/or any of the futures contracts underlyingthe Indices;
➤ acquire or dispose of long or short positions in listed or over-the-counter options, futures, orexchange-traded funds or other instruments based on the level of other similar market indices orfutures contracts; or
➤ any combination of the above.
We or our affiliates may acquire a long or short position in securities similar to the Securities from timeto time and may, in our or their sole discretion, hold or resell those securities.
We or our affiliates may close out our or their hedge on or before the relevant Valuation Date or theFinal Valuation Date. That step may involve sales or purchases of futures contracts underlying any of theIndices or listed or over-the-counter options, futures, swaps or other derivative financial instrumentslinked to any of the Indices and/or any of the futures contracts underlying any of the Indices, or otherinstruments based on indices designed to track the performance of any of the Indices.
The hedging activity discussed above may adversely affect the market value of the Securities from time totime. See “Risk Factors” on page S-27 for a discussion of these adverse effects.
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Material U.S. Federal Income Tax ConsequencesThe following is a general description of the material United States federal tax considerations relating tothe Securities. It does not purport to be a complete analysis of all tax considerations relating to theSecurities. Prospective purchasers of the Securities should consult their tax advisors as to theconsequences under the tax laws of the country of which they are resident for tax purposes and the taxlaws of the United States of acquiring, holding and disposing of the Securities and receiving paymentsunder the Securities. This summary is based upon the law as in effect on the date of this prospectussupplement and is subject to any change in law that may take effect after such date.
The discussion below supplements, and to the extent inconsistent replaces, the discussion under “U.S.Tax Considerations” in the attached prospectus. This discussion applies to you only if you hold yourSecurities as capital assets for tax purposes. This section does not apply to you if you are a member of aclass of holders subject to special rules, such as:
➤ a dealer in securities,
➤ a trader in securities that elects to use a mark-to-market method of tax accounting for your securitiesholdings,
➤ a bank,
➤ a life insurance company,
➤ a tax-exempt organization,
➤ a person subject to alternative minimum tax,
➤ a person that purchases or sells the Securities as part of a wash sale for tax purposes,
➤ a person that owns Securities as part of a straddle or a hedging or conversion transaction for taxpurposes, or
➤ a United States holder (as defined below) whose functional currency for tax purposes is not the U.S.dollar.
This discussion is based on the Code, its legislative history, existing and proposed regulations under theCode, published rulings and court decisions, all as currently in effect. These laws are subject to change,possibly on a retroactive basis.
If a partnership holds the Securities, the United States federal income tax treatment of a partner willgenerally depend on the status of the partner and the tax treatment of the partnership. A partner in apartnership holding the Securities should consult its tax advisor with regard to the United States federalincome tax treatment of an investment in the Securities.
Except as otherwise noted under “Non-United States Holders” below, this discussion is only applicableto you if you are a United States holder. You are a United States holder if you are a beneficial owner of aSecurity and you are: (i) a citizen or resident of the United States; (ii) a domestic corporation; (iii) anestate whose income is subject to United States federal income tax regardless of its source; or (iv) a trustif a United States court can exercise primary supervision over the trust’s administration and one or moreUnited States persons are authorized to control all substantial decisions of the trust.
NO STATUTORY, REGULATORY, JUDICIAL OR ADMINISTRATIVE AUTHORITY DIRECTLYDISCUSSES HOW THE SECURITIES SHOULD BE TREATED FOR UNITED STATES FEDERALINCOME TAX PURPOSES. AS A RESULT, THE UNITED STATES FEDERAL INCOME TAXCONSEQUENCES OF YOUR INVESTMENT IN THE SECURITIES ARE UNCERTAIN.
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Material U.S. Federal Income Tax Consequences
ACCORDINGLY, WE URGE YOU TO CONSULT YOUR TAX ADVISOR AS TO THE TAXCONSEQUENCES OF HAVING AGREED TO THE REQUIRED TAX TREATMENT OF YOURSECURITIES DESCRIBED BELOW AND AS TO THE APPLICATION OF STATE, LOCAL, OROTHER TAX LAWS TO YOUR INVESTMENT IN YOUR SECURITIES.
In the opinion of our counsel, Sullivan & Cromwell LLP, it would be reasonable to treat the Securities asa pre-paid derivative contract with respect to the applicable Index and the terms of the Securities requireyou and us (in the absence of a statutory, regulatory, administrative or judicial ruling to the contrary) totreat the Securities for all tax purposes in accordance with such characterization. If the Securities are sotreated, you should generally recognize capital gain or loss upon the sale, exchange, redemption ormaturity of your Securities in an amount equal to the difference between the amount you receive at suchtime and your tax basis in the Securities. Such gain or loss should generally be long-term capital gain orloss if you held your Securities for more than one year. In general, your tax basis in your Securities willbe equal to the price you paid for them. Capital gain of a non-corporate United States holder is generallytaxed at preferential rates where the property is held for more than one year. The deductibility of capitallosses is subject to limitations. If you are an initial purchaser of the Securities, your holding period foryour Securities will generally begin on the date after the issue date (i.e., the settlement date) for yourSecurities, and, if you are a secondary purchaser of the Securities, your holding period for your Securitieswill generally begin on the date you acquire your Securities. In both cases, if you hold your Securitiesuntil maturity, your holding period will generally include the maturity date.
Alternative Treatments. The IRS released a notice in 2007 that may affect the taxation of holders of theSecurities. According to the notice, the IRS and the Treasury Department are actively considering, amongother things, whether holders of instruments such as the Securities should be required to accrue ordinaryincome on a current basis, whether additional gain or loss upon the sale, exchange, redemption ormaturity of such instruments should be treated as ordinary or capital, whether foreign holders of suchinstruments should be subject to withholding tax, and whether the special “constructive ownershiprules” of Section 1260 of the Code should be applied to such instruments. Similarly, the IRS and theTreasury Department have current projects open with regard to the tax treatment of pre-paid forwardcontracts and contingent notional principal contracts. While it is impossible to anticipate how anyultimate guidance would affect the tax treatment of instruments such as the Securities (and while anysuch guidance may be issued on a prospective basis only), such guidance could be applied retroactivelyand could in any case increase the likelihood that you will be required to accrue income over the term ofan instrument such as the Securities. The outcome of this process is uncertain. Holders are urged toconsult their tax advisors concerning the significance and the potential impact of the aboveconsiderations. UBS intends to treat your Securities for United States federal income tax purposes inaccordance with the treatment described above unless and until such time as the Treasury Department orIRS determines that some other treatment is more appropriate.
Furthermore, in 2007, legislation was introduced in Congress that, if enacted, would have requiredholders of the Securities purchased after the bill was enacted to accrue interest income over the term ofthe Securities despite the fact that there will be no interest payments over the term of the Securities. It isnot possible to predict whether a similar or identical bill will be enacted in the future and whether anysuch bill would affect the tax treatment of your Securities.
In addition, it is possible that the Securities could be treated as a debt instrument subject to the specialtax rules governing contingent debt instruments. If the Securities are so treated, you would be required toaccrue interest income over the term of your Securities based upon the yield at which we would issue anon-contingent fixed-rate debt instrument with other terms and conditions similar to your Securities.You would recognize gain or loss upon the sale, exchange, redemption or maturity of your Securities inan amount equal to the difference, if any, between the amount you receive at such time and your
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Material U.S. Federal Income Tax Consequences
adjusted basis in your Securities. In general, your adjusted basis in your Securities would be equal to theamount you paid for your Securities, increased by the amount of interest you previously accrued withrespect to your Securities. Any gain you recognize upon the sale, exchange, redemption or maturity ofyour Securities would be ordinary income and any loss recognized by you at such time would be ordinaryloss to the extent of interest you included in income in the current or previous taxable years in respect ofyour Securities, and thereafter, would be capital loss.
If the Securities are treated as a contingent debt instrument and you purchase your Securities in thesecondary market at a price that is at a discount from, or in excess of, the adjusted issue price of theSecurities, such excess or discount would not be subject to the generally applicable market discount oramortizable bond premium rules described under “U.S. Tax Considerations — Taxation of DebtSecurities — Market Discount” and “U.S. Tax Considerations — Taxation of Debt Securities — DebtSecurities Purchased at a Premium” in the accompanying prospectus but rather would be subject tospecial rules set forth in Treasury Regulations governing contingent debt instruments. Accordingly, if youpurchase your Securities in the secondary market, you should consult your tax advisor as to the possibleapplication of such rules to you.
It is also possible that the IRS could assert that you should be treated as if you owned the underlyingfutures contracts in the Short-Term Futures Index that are referenced by the long positions in theapplicable Index that are in turn referenced by your Securities. Under such characterization, it is possiblethat Section 1256 of the Code could apply to your Securities (or a portion of your Securities). IfSection 1256 were to apply to your Securities, gain or loss recognized with respect to your Securities (ora portion of your Securities) would be treated as 60% long-term capital gain or loss and 40% short-termcapital gain or loss, without regard to your holding period in the Securities. You would also be requiredto mark your Securities (or a portion of your Securities) to market at the end of your taxable year (i.e.,recognize income as if the Securities or relevant portion of the Securities had been sold for fair marketvalue).
In addition, it is possible that you could be required to recognize gain or loss in respect of all or a portionof Securities, upon (i) a rebalancing of the positions or subportfolios in the applicable Index, (ii) therolling of a futures contract in the Short-Term Futures Index, and/or (iii) the rebalancing or adjustmentof the components of the Short-Term Futures Index. The amount of loss recognized in this case could bedeferred on account of the “wash sale” rules of Section 1091 of the Code.
In addition, the IRS could potentially assert that you should be required to treat amounts attributable tothe Daily Investor Fee, the Futures Spread Fee and the Redemption Fee Amount, as expenses that you aredeemed to pay in respect of the Securities. The deduction of any such deemed expenses would generallybe subject to the 2% floor on miscellaneous itemized deductions. Such amounts would correspondinglyincrease the amount of gain or decrease the amount of loss that you recognize with respect to yourSecurities.
The IRS could also assert that all or a portion of the Securities should be treated as comprising offsettingpositions with respect to long and short positions that are used to construct the applicable Index, inwhich case all or a portion of the Securities could be treated as a straddle for U.S. federal income taxpurposes. This treatment could have the effect of (i) causing the character of all or a portion of any gainthat you recognize in respect of your Securities to be short-term capital gain and (ii) requiring paymentsof interest allocable to all or a portion of your Securities to be capitalized, rather than deducted.
Because of the absence of authority regarding the appropriate tax characterization of your Securities, it ispossible that the IRS could seek to characterize your Securities in a manner that results in taxconsequences to you that are different from those described above. For example, the IRS could possibly
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Material U.S. Federal Income Tax Consequences
assert that (i) you should recognize ordinary income in respect of the interest component that is includedin the applicable Index, (ii) any gain or loss that you recognize upon the exchange, redemption ormaturity of your Securities that is attributable to the short positions in an applicable Index should beshort-term capital gain or loss, (iii) some or all of the gain or loss that you recognize upon the sale,exchange, redemption or maturity of your Securities should be treated as ordinary gain or loss, (iv) youshould be required to accrue interest income over the term of the Securities, or (v) your Securities shouldbe treated as a notional principal contract for tax purposes. You should consult your tax advisor as tothe tax consequences of such characterizations and any possible alternative characterizations of yourSecurities for U.S. federal income tax purposes.
Medicare Tax. If you are an individual or estate, or a trust that does not fall into a special class of truststhat is exempt from such tax, you are subject to a 3.8% tax (the “Medicare Tax”) on the lesser of(1) your “net investment income” (or “undistributed net investment income” in the case of an estate ortrust) for the relevant taxable year and (2) the excess of your modified adjusted gross income for thetaxable year over a certain threshold (which in the case of individuals is between $125,000 and$250,000, depending on the individual’s circumstances). Your net investment income includes any netgain recognized upon the sale, exchange, redemption or maturity of your Securities, unless such net gainis derived in the ordinary course of the conduct of a trade or business (other than a trade or business thatconsists of certain passive or trading activities). If you are a United States holder that is an individual,estate or trust, you are urged to consult your tax advisors regarding the applicability of the Medicare taxto your net investment income in respect of your investment in the Securities.
Information with Respect to Foreign Financial Assets. Owners of “specified foreign financial assets” withan aggregate value in excess of $50,000 (and in some circumstances, a higher threshold), may be requiredto file an information report with respect to such assets with their tax returns. “Specified foreignfinancial assets” include any financial accounts maintained by foreign financial institutions as well as anyof the following (which may include your Securities), but only if they are held for investment and notheld in accounts maintained by financial institutions: (i) stocks and securities issued by non-U.S. persons,(ii) financial instruments and contracts that have non-U.S. issuers or counterparties, and (iii) interests inforeign entities. Holders are urged to consult their tax advisors regarding the application of this reportingrequirement to their ownership of the Securities.
Treasury Regulations Requiring Disclosure of Reportable Transactions. Treasury regulations requireUnited States taxpayers to report certain transactions (“Reportable Transactions”) on IRS Form 8886.An investment in the Securities or the sale, exchange, maturity, call, acceleration or redemption of theSecurities should generally not be treated as a Reportable Transaction under current law, but it ispossible that future legislation, regulations or administrative rulings could cause your investment in theSecurities or the sale, exchange, redemption or maturity of the Securities to be treated as a ReportableTransaction. You should consult your tax advisor regarding any tax filing and reporting obligations thatmay apply in connection with acquiring, owning and disposing of the Securities.
Backup Withholding and Information Reporting. Notwithstanding that we do not intend to treat theSecurities as debt for tax purposes, we intend to apply the information reporting and backup withholdingrules that are described under “U.S. Tax Considerations — Taxation of Debt Securities — BackupWithholding and Information Reporting” in the accompanying prospectus to any payments made onyour Securities.
Non-United States Holders. If you are not a United States holder, you should not be subject to UnitedStates withholding tax with respect to payments on your Securities but you will be subject to generallyapplicable information reporting and backup withholding requirements with respect to payments madeon your Securities unless you comply with certain certification and identification requirements as to yourforeign status.
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Benefit Plan Investor ConsiderationsA fiduciary of a pension, profit-sharing or other employee benefit plan subject to the U.S. EmployeeRetirement Income Security Act of 1974, as amended (“ERISA”) (each, a “Plan”), should consider thefiduciary standards of ERISA in the context of the Plan’s particular circumstances before authorizing aninvestment in the Securities. Among other factors, the fiduciary should consider whether the investmentwould satisfy the prudence and diversification requirements of ERISA and would be consistent with thedocuments and instruments governing the Plan, and whether the investment would involve a prohibitedtransaction under ERISA or the Code.
Section 406 of ERISA and Section 4975 of the Code prohibit Plans, as well as individual retirementaccounts, Keogh plans and any other plans that are subject to Section 4975 of the Code (also “Plans”),from engaging in certain transactions involving “plan assets” with persons who are “parties in interest”under ERISA or “disqualified persons” under the Code with respect to the Plan. A violation of theseprohibited transaction rules may result in excise tax or other liabilities under ERISA or the Code forthose persons, unless exemptive relief is available under an applicable statutory, regulatory oradministrative exemption. Employee benefit plans that are governmental plans (as defined inSection 3(32) of ERISA), certain church plans (as defined in Section 3(33) of ERISA) and non-U.S. plans(as described in Section 4(b)(4) of ERISA) (“Non-ERISA Arrangements”) are not subject to therequirements of Section 406 of ERISA or Section 4975 of the Code but may be subject to similarprovisions under applicable federal, state, local, non-U.S. or other laws (“Similar Laws”).
The acquisition of the Securities by a Plan or any entity whose underlying assets include “plan assets” byreason of any Plan’s investment in the entity (a “Plan Asset Entity”) with respect to which we, UBSSecurities LLC, and other of our affiliates is or becomes a party in interest or disqualified person mayresult in a prohibited transaction under ERISA or Section 4975 of the Code, unless the Securities areacquired pursuant to an applicable exemption. The U.S. Department of Labor has issued five prohibitedtransaction class exemptions, or “PTCEs,” that may provide exemptive relief if required for direct orindirect prohibited transactions that may arise from the purchase or holding of the Securities. Theseexemptions are PTCE 84-14 (for certain transactions determined by independent qualified professionalasset managers), PTCE 90-1 (for certain transactions involving insurance company pooled separateaccounts), PTCE 91-38 (for certain transactions involving bank collective investment funds), PTCE 95-60 (for transactions involving certain insurance company general accounts), and PTCE 96-23 (fortransactions managed by in-house asset managers). In addition, ERISA Section 408(b)(17) andSection 4975(d)(20) of the Code may provide an exemption (the “service provider exemption”) for thepurchase and sale of the Securities, provided that neither the issuer of the Securities nor any of itsaffiliates has or exercises any discretionary authority or control or render any investment advice withrespect to the assets of any Plan involved in the transaction, and provided further that the Plan pays nomore and receives no less than “adequate consideration” in connection with the transaction. There canbe no assurance that all of the conditions of any such exemptions will be satisfied.
Any purchaser or holder of the Securities or any interest therein will be deemed to have represented by itspurchase and holding of the Securities that it either (1) is not a Plan, a Plan Asset Entity or a Non-ERISAArrangement and is not purchasing the Securities on behalf of or with the assets of any Plan, a Plan AssetEntity or Non-ERISA Arrangement or (2) the purchase or holding of the Securities will not result in anon-exempt prohibited transaction or a similar violation under any applicable Similar Laws.
Due to the complexity of these rules and the penalties that may be imposed upon persons involved innon-exempt prohibited transactions, it is important that fiduciaries or other persons consideringpurchasing the Securities on behalf of or with the assets of any Plan, a Plan Asset Entity or Non-ERISA
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Benefit Plan Investor Considerations
Arrangement consult with their counsel regarding the availability of exemptive relief under any of thePTCEs listed above, the service provider exemption or the potential consequences of any purchase orholding under Similar Laws, as applicable. Purchasers of the Securities have exclusive responsibility forensuring that their purchase and holding of the Securities do not violate the fiduciary or prohibitedtransaction rules of ERISA or the Code or any similar provisions of Similar Laws. The sale of any of theSecurities to a Plan, Plan Asset Entity or Non-ERISA Arrangement is in no respect a representation by usor any of our affiliates or representatives that such an investment meets all relevant legal requirementswith respect to investments by any such Plans, Plan Asset Entities or Non-ERISA Arrangements generallyor any particular Plan, Plan Asset Entity or Non-ERISA Arrangement or that such investment isappropriate for such Plans, Plan Asset Entities or Non-ERISA Arrangements generally or any particularPlan, Plan Asset Entity or Non-ERISA Arrangement.
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Supplemental Plan of DistributionOn the Initial Trade Date, we sold $25,000,000 aggregate stated principal amount of each series ofSecurities to UBS Securities LLC. After the Initial Trade Date, from time to time we may registeradditional Securities of each series and sell them at market prices prevailing at the time of sale, at pricesrelated to market prices or at negotiated prices. We expect to receive proceeds equal to 100% of the priceat which the Securities are sold to the public, less any commissions paid to UBS Securities LLC. TheSecurities may be sold at a price that is higher or lower than the Stated Principal Amount of such series.UBS Securities LLC may charge normal commissions for the sale of the Securities and may also receive aportion of the Daily Investor Fee and Futures Spread Fee in connection with future distributions.
Additional Securities of any series may be offered and sold from time to time through UBS SecuritiesLLC, as agent, to investors and to dealers acting as principals for resale to investors. We are not,however, obliged to, and may not, sell additional Securities of any series or the full aggregate statedprincipal amount of the Securities of any series set forth on the cover of this prospectus supplement. Wemay suspend or cease sales of the Securities of any series at any time, at our discretion, or resume sales ofsuch Securities, or we may condition our acceptance of a market maker’s, other market participant’s orinvestor’s offer to purchase Securities of any series on its agreeing to purchase certain exchange tradednotes issued by UBS or enter into certain transactions consistent with our hedging strategy, including butnot limited to swaps, OTC derivatives, listed options, or securities, any of which could materially andadversely affect the trading price and liquidity of such Securities in the secondary market. For moreinformation about the plan of distribution and possible market-making activities, see “Plan ofDistribution” in the accompanying prospectus.
Broker-dealers may make a market in the Securities, although none of them are obligated to do so andany of them may stop doing so at any time without notice. This prospectus (including this prospectussupplement and the accompanying prospectus) may be used by such dealers in connection with market-making transactions. In these transactions, dealers may resell a Security covered by this prospectus thatthey acquire from other holders after the original offering and sale of the Securities, or they may sell aSecurity covered by this prospectus in short sale transactions.
As described in more detail under “Use of Proceeds and Hedging” on page S-84, we or one of ouraffiliates may enter into swap agreements or related hedge transactions with one of our other affiliates orunaffiliated counterparties in connection with the sale of the Securities. UBS and/or its affiliates may earnadditional income as a result of payments pursuant to these swap or related hedge transactions.
Broker-dealers and other persons are cautioned that some of their activities may result in their beingdeemed participants in the distribution of the Securities in a manner that would render them statutoryunderwriters and subject them to the prospectus delivery and liability provisions of the U.S. SecuritiesAct of 1933. Among other activities, broker-dealers and other persons may make short sales of theSecurities and may cover such short positions by borrowing Securities from UBS or its affiliates or bypurchasing Securities from UBS or its affiliates subject to its obligation to repurchase such Securities at alater date. As a result of these activities, these market participants may be deemed statutory underwriters.A determination of whether a particular market participant is an underwriter must take into account allthe facts and circumstances pertaining to the activities of the participant in the particular case, and theexample mentioned above should not be considered a complete description of all the activities that wouldlead to designation as an underwriter and subject a market participant to the prospectus-delivery andliability provisions of the U.S. Securities Act of 1933. This prospectus will be deemed to cover any shortsales of Securities by market participants who cover their short positions with Securities borrowed oracquired from us or our affiliates in the manner described above.
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Supplemental Plan of Distribution
We have retained Janus Distributors, a member of the Financial Industry Regulatory Authority, Inc., toprovide certain services relating to the placement and marketing of the Securities of any series. JanusDistributors will receive a fee in consideration for its role in marketing and placing the Securities. Theactual amount received by Janus Distributors in a given year will depend on the number of Securities ofany series then outstanding and the number of other then outstanding Securities of any series issued by usand marketed and/or placed by Janus Distributors. From time to time, Janus Distributors and itsaffiliates may engage in transactions with and perform services for us for which they may be paidcustomary fees. The terms of our agreements with Janus Distributors give them the right to cause anearly acceleration should such agreements be terminated. Janus Index, an affiliate of Janus Distributors,is responsible for computing and disseminating the closing indicative value and intraday indicative valueof the Securities, as described above under “Specific Terms of the Securities — Security CalculationAgents.”
UBS reserves the right to pay a portion of the Daily Investor Fee and the Futures Spread Fee to UBSSecurities LLC and certain broker-dealers in consideration for services relating to the Securities including,but not limited to, promotion and distribution.
Conflicts of Interest
UBS Securities LLC is an affiliate of UBS and, as such, has a “conflict of interest” in this offering withinthe meaning of FINRA Rule 5121. In addition, UBS will receive the net proceeds (excluding anyunderwriting discount) from the public offering of the Securities, thus creating an additional conflict ofinterest within the meaning of Rule 5121. Consequently, the offering is being conducted in compliancewith the provisions of Rule 5121. UBS Securities LLC is not permitted to sell Securities in this offering toan account over which it exercises discretionary authority without the prior specific written approval ofthe account holder.
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ANNEX A
NOTICE OF EARLY REDEMPTION
Subject: VelocityShares Notice of Early Redemption, CUSIP No. [90274D 176/90274D 168/90274D 150]
[BODY OF EMAIL]
Name of broker: [ ]
Name of beneficial holder: [ ]
Number of Securities to be redeemed: [ ]
Applicable Redemption Valuation Date: [ ], 20[ ]*
Broker Contact Name: [ ]
Broker Telephone #: [ ]
Broker DTC # (and any relevant sub-account): [ ]
The undersigned acknowledges that in addition to any other requirements specified in the prospectussupplement relating to the Securities being satisfied, the Securities will not be redeemed unless (i) thisnotice of redemption is delivered to Janus Distributors by 4:00 p.m. (New York City time) on the IndexBusiness Day prior to the applicable Redemption Valuation Date; (ii) the confirmation, as completed andsigned by the undersigned is delivered to Janus Distributors by 4:00 p.m. (New York City time) on thesame day the notice of redemption is delivered; (iii) the undersigned has booked a delivery vs. payment(“DVP”) trade on the applicable Valuation Date, facing UBS Securities LLC DTC 442 and (iv) theundersigned instructs DTC to deliver the DVP trade to UBS Securities LLC as booked for settlement viaDTC at or prior to 10:00 a.m. (New York City time) on the applicable Redemption Date.
The undersigned further acknowledges that the undersigned has read the section “Risk Factors — Youwill not know the Redemption Amount at the time you elect to request that we redeem your Securities”in the prospectus supplement relating to the Securities and the undersigned understands that it will beexposed to market risk on the Redemption Valuation Date. Terms used but not defined in this noticeshall have the meanings ascribed to them in the prospectus supplement relating to the Securities.
* Subject to adjustment as described in the prospectus supplement relating to the Securities.
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ANNEX B
BROKER’S CONFIRMATION OF REDEMPTION
[TO BE COMPLETED BY BROKER]
Dated:
Janus Distributors LLC.
Janus Distributors, as Calculation Agent
Email: [email protected]
To Whom It May Concern:
The holder of VelocitySharesTM ETN due July 18, 2046, CUSIP No. 90274D 176/90274D168/90274D 150 (the “Securities”) hereby irrevocably elects to exercise, on the Redemption Date of[holder to specify]*, with respect to the number of Securities indicated below, as of the date hereof, theredemption right as described in the prospectus supplement relating to the Securities (the “Prospectus”).Terms not defined herein have the meanings given to such terms in the Prospectus.
The undersigned certifies to you that it will (i) book a DVP trade on the applicable Valuation Date withrespect to the number of Securities specified below at a price per Security equal to the RedemptionAmount, facing UBS Securities LLC DTC 642 and (ii) deliver the trade as booked for settlement via DTCat or prior to 10:00 a.m. (New York City time) on the applicable Redemption Date.
The undersigned acknowledges that in addition to any other requirements specified in the Prospectusbeing satisfied, the Securities will not be redeemed unless (i) this confirmation is delivered to JanusDistributors LLC by 4:00 p.m. (New York City time) on a Business Day which is the same day the noticeof redemption is delivered; (ii) the Redemption Agent has responded by sending an acknowledgment ofthe Confirmation of Redemption accepting the redemption request; (iii) the undersigned has booked aDVP trade on the applicable Valuation Date, facing UBS Securities LLC DTC 642; and (iv) theundersigned will deliver the DVP trade to UBS Securities LLC as booked for settlement via DTC at orprior to 10:00 a.m. (New York City time) on the applicable Redemption Date.
The undersigned acknowledges that the redemption obligation is solely an obligation of UBS AG andJanus Distributors LLC is acting only to facilitate the redemption for UBS.
Very truly yours,[NAME OF DTC PARTICIPANT HOLDER]
Name:Title:Telephone:E-mail:
Number of Securities surrendered for redemption:DTC # (and any relevant sub-account):Contact Name:Telephone:E-mail:
(At least 50,000 Securities must be redeemed at one time to exercise the right to early redemption on anyredemption date.)
* Subject to adjustment as described in the prospectus supplement relating to the Securities.
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ANNEX C
HYPOTHETICAL CALCULATIONS OF THE FUTURES SPREAD FEE
Three hypothetical examples of calculating the Futures Spread Fee are shown in the table below:
TAS1t,bid
TAS1t,offer
TAS2t,bid
TAS2t,offer
Futures Spread Fee $0.00150 $0.00175$0.00150
Variable Scenario 1 Scenario 2 Scenario 3
Ticker1,t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 7 10Ticker1,t-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 8 8Ticker2,t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4 4Ticker2,t-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 6 5
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ticker1,t - Ticker1,t-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 -1 2Ticker2,t - Ticker2,t-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 -2 -1
-0.02 -0.02 -0.010.02 0.02 0.02
-0.02 -0.02 -0.030.02 0.02 0.03
IndexERt-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1000 1000 1000Current Indicative Valuet-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 25 25Cost1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.04 0.02 0.04Cost2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.02 0.04 0.03Fee as % of IndexERt-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.006% 0.006% 0.007%
In Scenario 1, in order to replicate the VIX futures position represented by the applicable underlyingIndex, it is necessary to buy two first month VIX futures contracts and buy one second month VIXfutures contract. Since it is necessary to buy both first and second month VIX futures contracts, bothCost1 and Cost2 are calculated using the TAS offer spread.
In Scenario 2, in order to replicate the VIX futures position represented by the applicable underlyingIndex, it is necessary to sell one first month VIX futures contract and sell two second month VIX futurescontracts. Since it is necessary to sell both first and second month VIX futures contracts, both Cost1 andCost2 are calculated using the TAS bid spread.
In Scenario 3, in order to replicate the VIX futures position represented by the applicable underlyingIndex, it is necessary to buy two first month VIX futures contracts and sell one second month VIXfutures contract. Since it is necessary to buy first month VIX futures contracts, Cost1 is calculated usingthe TAS offer spread. Since it is necessary to sell second month VIX futures contracts, Cost2 is calculatedusing the TAS bid spread.
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PROSPECTUS
$17,558,384,984UBS AG
DEBT SECURITIES ANDWARRANTS
UBS AG from time to time may offer to sell debt securities and warrants.
UBS AG may offer and sell these securities to or through one or more underwriters, dealers and agents, includingthe firms named below, or directly to purchasers, on a delayed or continuous basis.
This prospectus describes some of the general terms that may apply to these securities and the general manner inwhich they may be offered. The specific terms of any securities to be offered, and the specific manner in whichthey may be offered, will be described in the applicable prospectus supplement.
Neither the Securities and Exchange Commission nor any other regulatory body has approved ordisapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Anyrepresentation to the contrary is a criminal offense.
The securities are not deposit liabilities of UBS AG and are not insured by the United States Federal DepositInsurance Corporation or any other governmental agency of the United States, Switzerland or any otherjurisdiction.
UBS AG may use this prospectus in the initial sale of the securities. In addition, UBS AG, UBS Securities LLC,UBS Financial Services Inc. or any other affiliate of UBS AG may use this prospectus in market-makingtransactions involving the securities or similar securities after their initial sale. Unless UBS AG or its agentinforms the purchaser otherwise in the confirmation of sale, this prospectus is being used in a market-makingtransaction.
UBS Investment Bank UBS Financial Services Inc.
The date of this Prospectus is April 29, 2016
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TABLE OF CONTENTS
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Cautionary Note Regarding Forward-Looking
Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Incorporation of Information About UBS AG . . . . . 5Where You Can Find More Information . . . . . . . . . 6Presentation of Financial Information . . . . . . . . . . . 7Limitations on Enforcement of U.S. Laws Against
UBS, Its Management and Others . . . . . . . . . . . . 7UBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Swiss Regulatory Powers . . . . . . . . . . . . . . . . . . . . . 11Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Description of Debt Securities We May Offer . . . . 13Description of Warrants We May Offer . . . . . . . . . 33
Legal Ownership and Book-Entry Issuance . . . . . . . 48Considerations Relating to Indexed Securities . . . . 53Considerations Relating to Securities Denominated
or Payable in or Linked to a Non-U.S. DollarCurrency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
U.S. Tax Considerations . . . . . . . . . . . . . . . . . . . . . 59Tax Considerations Under the Laws of
Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70Benefit Plan Investor Considerations . . . . . . . . . . . . 72Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . 74Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . . 75Validity of the Securities . . . . . . . . . . . . . . . . . . . . . 76Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
CERTAIN TERMS
In this prospectus:
• when we refer to “UBS AG” or “us,” we mean UBS AG on a parent only basis.
• when we refer to “UBS,” we mean UBS AG and its consolidated subsidiaries.
• when we refer to “Group,” we mean UBS Group AG and its consolidated subsidiaries.
• when we refer to “USD,” we mean United States dollars.
• when we refer to “CHF,” we mean Swiss francs.
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Introduction
The Securities We Are Offering
We may offer debt securities and warrants from time to time. When we use the term “securities” in this prospectus,we mean any of the securities we may offer with this prospectus, unless we say otherwise. This prospectus,including the following summary, describes the general terms that may apply to the securities; the specific terms ofany particular securities that we may offer will be described in a separate supplement to this prospectus. If there aredifferences between this prospectus and your prospectus supplement, your prospectus supplement will control.
Debt Securities
For any particular debt securities we offer, the applicable prospectus supplement will describe the specificdesignation, the aggregate principal or face amount and the purchase price; the stated maturity; the redemptionterms, if any; the rate or manner of calculating the rate and payment dates for interest, if any; the amount, or mannerof calculating the amount, payable at maturity and whether that amount may be paid by delivering cash, securities orother property; the terms on which the debt securities may be convertible into or exercisable or exchangeable forcommon stock or other securities of issuers other than UBS AG, if any; whether the obligations of UBS AG underthe debt securities are secured by any form of collateral or credit support and, if so, its nature and terms; and anyother specific terms.
The debt securities are not deposit liabilities of UBS AG and are not insured by the United States Federal DepositInsurance Corporation or any other governmental agency of the United States, Switzerland or any other jurisdiction.We will issue the debt securities under a debt indenture between us and U.S. Bank Trust National Association, astrustee.
Warrants
We may offer two types of warrants:
• warrants to purchase our debt securities; and
• warrants to purchase or sell, or whose cash value is determined by reference to the performance, level orvalue of, one or more of the following:
• securities of one or more issuers other than UBS AG;
• one or more currencies;
• one or more commodities;
• any other financial, economic or other measure or instrument, including the occurrence or non-occurrence of any event or circumstance; and
• one or more indices or baskets of the items described above.
For any particular warrants we offer, the applicable prospectus supplement will describe the underlying property;the expiration date; the exercise price or the manner of determining the exercise price; the amount and kind, or themanner of determining the amount and kind, of property to be delivered by you or us upon exercise; and any otherspecific terms. We may issue the warrants under a warrant indenture between us and U.S. Bank Trust NationalAssociation, or under warrant agreements between us and one or more other warrant agents that will be named inthe applicable prospectus supplement.
Form of Securities
We will issue the securities in book-entry form through one or more depositaries, such as The Depository TrustCompany, Euroclear or Clearstream, named in the applicable prospectus supplement. Each sale of a security in
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book-entry form will settle in immediately available funds through the depositary, unless otherwise stated. In mostcases, we will issue the securities only in registered form, without coupons, although we may issue the securities inbearer form if so specified in the applicable prospectus supplement.
Payment Currencies
Amounts payable in respect of the securities, including the purchase price, will be payable in U.S. dollars, unless theapplicable prospectus supplement says otherwise.
If any securities are to be listed or quoted on a securities exchange or quotation system, the applicable prospectussupplement will say so.
Use of Proceeds
We intend to use the net proceeds from the sales of securities to provide additional funds for our operations and forother general corporate purposes outside of Switzerland.
Plan of Distribution
The securities will be offered in connection with their initial issuance or in market-making transactions by us or ouraffiliates after initial issuance. Those offered in market-making transactions may be securities that we will not issueuntil after the date of this prospectus as well as securities that we have previously issued.
When we issue new securities, we may offer them for sale to or through underwriters, dealers and agents, includingour affiliates, or directly to purchasers. The applicable prospectus supplement will include any required informationabout the firms we use and the discounts or commissions we may pay them for their services.
Our affiliates that we refer to above may include, among others, UBS Securities LLC and UBS Financial ServicesInc.
Branches
We expect the securities will be booked through our Jersey branch, our London branch, or such other branch as isspecified in the applicable prospectus supplement.
Conflicts of Interest
Each of UBS Securities LLC and UBS Financial Services Inc. is an affiliate of UBS and, as such, has a “conflict ofinterest” in any offering of the securities within the meaning of Rule 5121 of the Financial Industry RegulatoryAuthority, Inc. (“FINRA”). Consequently, any offering of the securities will be conducted in compliance with theprovisions of Rule 5121. Neither UBS Securities LLC nor UBS Financial Services Inc. will be permitted to sellsecurities in any offering to an account over which it exercises discretionary authority without the prior specificwritten approval of the account holder.
Risk Factors Relating to UBS and Other Considerations Relating to the Securities
For a discussion of important business and financial risks relating to UBS, please see “Risk Factors” in Part I,Item 3D of our Annual Report on Form 20-F for the fiscal year ended December 31, 2015, which is incorporated inthis prospectus by reference (and in any of our annual or quarterly reports for a subsequent fiscal period that are soincorporated).
There are a number of considerations that you should take into account prior to investing in the securities. Pleaseread “Considerations Relating to Indexed Securities” and “Considerations Relating to Securities Denominated orPayable in or Linked to a Non-U.S. Dollar Currency” for more information.
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Cautionary Note Regarding Forward-Looking StatementsThis prospectus and the documents incorporated by reference herein contain statements that constitute “forward-looking statements,” including but not limited to management’s outlook for UBS’s financial performance andstatements relating to the anticipated effect of transactions and strategic initiatives on UBS’s business and futuredevelopment. While these forward-looking statements represent UBS’s judgments and expectations concerning thematters described, a number of risks, uncertainties and other important factors could cause actual developments andresults to differ materially from UBS’s expectations. These factors include, but are not limited to: (1) the degree towhich we are successful in executing our announced strategic plans, including its cost reduction and our efficiencyinitiatives and the planned further reduction in Basel III risk-weighted assets (RWA) and leverage ratio denominator(LRD), and the degree to which UBS is successful in implementing changes to its wealth management businesses tomeet changing market, regulatory and other conditions; (2) the continuing low or negative interest rate environment,developments in the macroeconomic climate and in the markets in which UBS operates or to which it is exposed,including movements in securities prices or liquidity, credit spreads, and currency exchange rates and the effect ofeconomic conditions and market developments on the financial position or creditworthiness of UBS’s clients andcounterparties; (3) changes in the availability of capital and funding, including any changes in UBS’s credit spreadsand ratings, as well as availability and cost of funding to meet requirements for debt that will be eligible for total loss-absorbing capacity (TLAC) requirements, or loss-absorbing capital; (4) changes in or the implementation of financiallegislation and regulation in Switzerland, the U.S., the UK and other financial centers that may impose, or result in,more stringent capital (including leverage ratio), liquidity and funding requirements, incremental tax requirements,additional levies, limitations on permitted activities, constraints on remuneration or other measures; (5) uncertainty asto when and to what degree the Swiss Financial Market Supervisory Authority (FINMA) will approve reductions to theincremental RWA resulting from the supplemental operational risk capital analysis mutually agreed to by UBS andFINMA, or will approve a limited reduction of capital or gone concern requirements due to measures to reduceresolvability risk; (6) the degree to which UBS is successful in implementing changes to its legal structure to improveits resolvability and meet related regulatory requirements, including changes in legal structure and reporting required toimplement US enhanced prudential standards, implementing a service company model, the transfer of the AssetManagement business to a holding company and the potential need to make further changes to the legal structure orbooking model of UBS Group in response to legal and regulatory requirements relating to capital requirements,resolvability requirements and proposals in Switzerland and other countries for mandatory structural reform of banks;(7) changes in UBS’s competitive position, including whether differences in regulatory capital and other requirementsamong the major financial centers will adversely affect UBS’s ability to compete in certain lines of business;(8) changes in the standards of conduct applicable to UBS’s business that may result from new regulation or newenforcement of existing standards, including measures to impose new or enhanced duties when interacting withcustomers or in the execution and handling of customer transactions; (9) the liability to which UBS may be exposed, orpossible constraints or sanctions that regulatory authorities might impose on UBS, due to litigation, contractual claimsand regulatory investigations, including the potential for disqualification from certain businesses or loss of licenses orprivileges as a result of regulatory or other governmental sanctions; (10) the effects on our cross-border bankingbusiness of tax or regulatory developments and of possible changes in our policies and practices relating to thisbusiness; (11) UBS’s ability to retain and attract the employees necessary to generate revenues and to manage, supportand control its businesses, which may be affected by competitive factors including differences in compensationpractices; (12) changes in accounting or tax standards or policies, and determinations or interpretations affecting therecognition of gain or loss, the valuation of goodwill, the recognition of deferred tax assets and other matters;(13) limitations on the effectiveness of internal processes for risk management, risk control, measurement andmodeling, and of financial models generally; (14) whether UBS will be successful in keeping pace with competitors inupdating its technology, particularly in trading businesses; (15) the occurrence of operational failures, such as fraud,misconduct, unauthorized trading, financial crime, cyber-attacks, and systems failures; (16) restrictions to the ability ofUBS Group AG to make payments or distributions, including due to restrictions on the ability of its subsidiaries tomake loans or distributions, directly or indirectly, or, in the case of financial difficulties, due to the exercise by FINMAof its broad statutory powers in relation to protective measures, restructuring and liquidation proceedings; (17) the
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Cautionary Note Regarding Forward-Looking Statements
degree to which changes in regulation, capital or legal structure, financial results or other factors, includingmethodology, assumptions and stress scenarios, may affect UBS’s ability to maintain its stated capital return objective;and (18) the effect that these or other factors or unanticipated events may have on our reputation and the additionalconsequences that this may have on our business and performance. The sequence in which the factors above arepresented is not indicative of their likelihood of occurrence or the potential magnitude of their consequences. Ourbusiness and financial performance could be affected by other factors identified in our past and future filings andreports, including those filed with the SEC. More detailed information about those factors is set forth in documentsfurnished by UBS and filings made by UBS with the SEC, including UBS’s Annual Report on Form 20-F for the yearended December 31, 2015. UBS is not under any obligation to (and expressly disclaims any obligation to) update oralter its forward-looking statements, whether as a result of new information, future events, or otherwise.
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Incorporation of Information About UBS AGThe SEC allows us to “incorporate by reference” into this prospectus the information that we file with them, whichmeans that:
• The incorporated documents are considered part of this prospectus.
• We can disclose important information to you by referring you to those documents.
• Information that we file with the SEC from time to time will automatically be considered to update andsupersede the information in this prospectus.
We incorporate by reference in this prospectus:
• UBS AG’s Annual Report on Form 20-F for the year ended December 31, 2015, which UBS AG filed withthe SEC on March 18, 2016; and
• UBS AG’s Reports of Foreign Issuer on Form 6-K, which UBS AG filed with the SEC on February 2, 2016(three Reports) and March 18, 2016.
All subsequent reports that we file on Form 20-F under the Securities Exchange Act of 1934 prior to the termination ofthis offering will also be deemed to be incorporated by reference into this prospectus. We may also incorporate anyother Form 6-K that we submit to the SEC on or after the date of this prospectus and prior to the termination of thisoffering if the Form 6-K filing specifically states that it is incorporated by reference into the registration statement ofwhich this prospectus forms a part.
Any statement in this prospectus contained in a document incorporated or deemed to be incorporated by reference intothis prospectus will be deemed to be modified or superseded for purposes of this prospectus to the extent that astatement in this prospectus or in any later filed document modifies or supersedes that statement. Any statement that ismodified or superseded in this manner will no longer be a part of this prospectus, except as modified or superseded.
You (including any beneficial owner) may request a copy, at no cost, of any or all of the documents that areincorporated by reference into this prospectus, excluding exhibits (other than those that we specifically incorporate byreference into the documents that you request) by contacting us, orally or in writing, at the following address:
UBS AGInvestor RelationsBahnhofstrasse 45P.O. BoxCH-8098 ZurichSwitzerlandPhone: +41-44-234 41 00Fax: +41-44-234 34 15E-mail: [email protected]: www.ubs.com/investor-relations
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Where You Can Find More InformationUBS AG files periodic reports and other information with the SEC. You may read and copy any document that UBSAG files with the SEC at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549.Please call the SEC at 1-800-SEC-0330 for further information on the operation of its public reference room. The SECalso maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements, and otherinformation about issuers like UBS AG that file electronically with the SEC.
We have filed a registration statement under the Securities Act of 1933 on Form F-3 with the SEC covering thesecurities. For further information about the securities and UBS, you should review our registration statement, itsexhibits and the documents incorporated by reference into this prospectus. This prospectus summarizes materialprovisions of the contracts and other documents that we refer you to. Since this prospectus may not contain all theinformation that you may find important, you should review the full text of these documents. We have included copiesof these documents as exhibits to our registration statement.
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Presentation of Financial InformationUBS’s financial statements, which are incorporated by reference into this prospectus, have been prepared in accordancewith International Financial Reporting Standards and are denominated in Swiss francs, or “CHF,” the legal tender ofSwitzerland.
The tables below set forth, for the periods and dates indicated, information concerning the noon buying rate for theSwiss franc, expressed in United States dollars or “USD,” per one Swiss franc. The “noon buying rate” is the rate inNew York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bankof New York. On February 29, 2016, the noon buying rate was 1.0040 per 1 CHF.
(USD per 1 CHF)Year ended December 31, High Low Average rate(1) At period end
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3706 1.0251 1.1398 1.06682012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1174 1.0043 1.0724 1.09232013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1292 1.0190 1.0826 1.12312014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1478 1.0066 1.0893 1.00662015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1781 0.9704 1.0398 0.9983
Month High Low
September 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0401 1.0225October 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0539 1.0086November 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0149 0.9704December 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0180 0.9713January 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0028 0.9779February 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0303 0.9779
(1) The average of the noon buying rates on the last business day of each full month during the relevant period.
Limitations on Enforcement of U.S. Laws Against UBS, ItsManagement and OthersUBS AG is a Swiss bank. Many of its directors and executive officers, including the majority of the persons whosigned the registration statement of which this prospectus is a part, and certain experts named in this prospectus, areresident outside the United States, and all or a substantial portion of our assets and the assets of those persons arelocated outside the United States. As a result, it may be difficult for you to serve legal process on UBS AG or itsmanagement or have any of them appear in a U.S. court. We have been advised by UBS AG internal counsel that thereis doubt as to the enforceability in Switzerland, in original actions or in actions for enforcement of judgments of U.S.courts, of liabilities based solely on the federal securities laws of the United States.
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UBS
OVERVIEW
UBS AG is a wholly owned subsidiary of UBS Group AG, which, with its subsidiaries, draws on its over 150-yearheritage to serve private, institutional and corporate clients worldwide, as well as retail clients in Switzerland. UBS’sbusiness strategy is centered on its (in UBS’s own opinion) pre-eminent global wealth management businesses and its(in UBS’s own opinion) leading universal bank in Switzerland, complemented by its Asset Management business andits Investment Bank, with a focus on capital efficiency and businesses that offer a superior structural growth andprofitability outlook. Headquartered in Zurich and Basel, Switzerland, UBS has offices in more than 50 countries,including all major financial centers.
On December 31, 2015, UBS’s common equity tier 1 capital ratio1 was 15.4% on a fully applied basis and 19.5% on aphase-in basis, invested assets stood at CHF 2,689 billion and equity attributable to UBS shareholders was CHF55,248 million. On the same date, UBS employed 58,131 people2.
For further information about UBS, including more detailed descriptions of the Business Groups and Corporate Center,see “Where You Can Find More Information.”
BUSINESS OVERVIEW
UBS operates as a group with five business divisions (Wealth Management, Wealth Management Americas, Personal& Corporate Banking, Asset Management and the Investment Bank) and a Corporate Center. Each of the businessdivisions and the Corporate Center are described below. A description of the Group’s strategy can be found in theannual report of UBS AG as of December 31, 2015 (the “Annual Report 2015”) on pages 33-38 (inclusive); adescription of the businesses, strategies, clients, organizational structures, products and services of the businessdivisions and the Corporate Center can be found in the Annual Report 2015, on pages 41-58 (inclusive).
Wealth Management
Wealth Management provides comprehensive financial services to wealthy private clients around the world, with theexception of those served by Wealth Management Americas. UBS is a global firm with global capabilities, and itsclients benefit from the full spectrum of resources, including wealth planning, investment management solutions andcorporate finance advice, banking and lending solutions (e.g., securities–based lending), as well as a wide range ofspecific offerings. Wealth Management’s guided architecture model gives clients access to a wide range of productsfrom the world’s leading third-party institutions that complement its own products.
Wealth Management Americas
Wealth Management Americas is one of the leading wealth managers in the Americas in terms of financial advisorproductivity and invested assets. Its business includes UBS’s domestic US and Canadian wealth managementbusinesses, as well as international business booked in the US. It provides a fully integrated set of wealth managementsolutions designed to address the needs of ultra high net worth and high net worth clients.
1 Based on the Basel III framework, as applicable to Swiss systemically relevant banks. The common equity tier 1capital ratio is the ratio of common equity tier 1 capital to risk-weighted assets. The information provided on a fullyapplied basis entirely reflects the effects of the new capital deductions and the phase-out of ineligible capitalinstruments. The information provided on a phase-in basis gradually reflects those effects during the transitionperiod. For information as to how common equity tier 1 capital is calculated, refer to the “Capital management”section of the Annual Report 2015.
2 Full-time equivalents.
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UBS
Personal & Corporate Banking
Effective January 2016, the business division Retail & Corporate was renamed Personal and Corporate Banking.Personal & Corporate Banking provides comprehensive financial products and services to UBS’s private, corporate andinstitutional clients in Switzerland, maintaining a leading position in these segments and embedding its offering in amulti-channel approach. The business is a central element of UBS’s universal bank delivery model in Switzerland,supporting other business divisions by referring clients and growing the wealth of the firm’s private clients so they canbe transferred to Wealth Management. Personal & Corporate Banking leverages the cross-selling potential of UBS’sasset-gathering and investment bank businesses, and manages a substantial part of UBS’s Swiss infrastructure andbanking products platform.
Asset Management
Effective October 2015, the business division Global Asset Management was renamed Asset Management. AssetManagement is a large-scale asset manager, with a presence in 22 countries. It offers investment capabilities andinvestment styles across all major traditional and alternative asset classes to institutions, wholesale intermediaries andwealth management clients around the world. It is a leading fund house in Europe, the third-largest international assetmanager in Asia, the largest mutual fund manager in Switzerland and one of the largest fund of hedge funds and realestate investment managers in the world.
Investment Bank
The Investment Bank provides corporate, institutional and wealth management clients with expert advice, innovativesolutions, execution and comprehensive access to international capital markets. It offers advisory services and providesin-depth cross-asset research, along with access to equities, foreign exchange, precious metals and selected rates andcredit markets, through its business units, Corporate Client Solutions and Investor Client Services. The InvestmentBank is an active participant in capital markets flow activities, including sales, trading and market-making across arange of securities.
Corporate Center
Corporate Center is comprised of Services, Group Asset and Liability Management (“Group ALM”) and Non-core andLegacy Portfolio. Services includes the Group’s control functions such as finance, risk control (including compliance)and legal. In addition, it provides all logistics and support services, including operations, information technology,human resources, regulatory relations and strategic initiatives, communications and branding, corporate services,physical security, information security as well as outsourcing, nearshoring and offshoring. Group ALM is responsiblefor centrally managing the Group’s liquidity and funding position, as well as providing other balance sheet and capitalmanagement services to the Group. Non-core and Legacy Portfolio is comprised of the non-core businesses and legacypositions that were part of the Investment Bank prior to its restructuring.
CORPORATE INFORMATION
The legal and commercial name of the company is UBS AG. The company was incorporated under the name SBC AGon February 28, 1978, for an unlimited duration and entered in the Commercial Register of Canton Basel-City on thatday. On December 8, 1997, the company changed its name to UBS AG. The company in its present form was createdon June 29, 1998, by the merger of Union Bank of Switzerland (founded 1862) and Swiss Bank Corporation (founded1872). UBS AG is entered in the Commercial Registers of Canton Zurich and Canton Basel-City. The registrationnumber is CHE-101.329.561.
UBS AG is incorporated and domiciled in Switzerland and operates under the Swiss Code of Obligations and the SwissFederal Banking Law as an Aktiengesellschaft, a corporation that has issued shares of common stock to investors.
According to Article 2 of the Articles of Association of UBS AG (“Articles of Association”), the purpose of UBS AGis the operation of a bank. Its scope of operations extends to all types of banking, financial, advisory, trading andservice activities in Switzerland and abroad.
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UBS
Following the successful completion of the SESTA procedure (as described below), all UBS AG shares that remainedpublicly held were canceled and UBS Group AG shares were delivered as compensation.
The addresses and telephone numbers of UBS AG’s two registered offices and principal places of business are:Bahnhofstrasse 45, CH-8001 Zurich, Switzerland, telephone +41 44 234 1111; and Aeschenvorstadt 1, CH-4051 Basel,Switzerland, telephone +41 61 288 5050.
MEASURES TO MODIFY LEGAL STRUCTURE
Described below are certain measures taken by UBS which were intended to substantially improve the resolvability ofUBS in response to Swiss “too big to fail” requirements and applicable requirements in other countries in which UBSoperates.
In December 2014, UBS Group AG completed an exchange offer for the shares of UBS AG and established UBSGroup AG as the holding company for UBS Group. During 2015, UBS Group AG filed and completed a courtprocedure under article 33 of the Swiss Stock Exchange Act (the “SESTA procedure”) resulting in the cancellation ofthe shares of the remaining minority shareholders of UBS AG. As a result, UBS Group AG now owns 100% of theoutstanding shares of UBS AG.
In June 2015, the Personal & Corporate Banking and Wealth Management businesses booked in Switzerland weretransferred from UBS AG to UBS Switzerland AG through an asset transfer in accordance with the Swiss Merger Act.Under the Swiss Merger Act, UBS AG assumed joint liability for obligations existing on the asset transfer date, June14, 2015, which were transferred to UBS Switzerland AG. UBS AG has no liability for new obligations incurred byUBS Switzerland AG after the asset transfer date. As of the asset transfer date, UBS AG assumed joint liability forapproximately CHF 260 billion of obligations of UBS Switzerland AG, excluding the collateralized portion of securedcontractual obligations. The joint liability amount declines as obligations mature, terminate or are novated followingthe asset transfer date. As of December 31, 2015, the joint liability amounted to approximately CHF 55 billion. As ofDecember 31, 2015, the probability of an outflow under this joint and several liability was assessed to be remote.
In the second quarter of 2015, UBS AG also completed the implementation of a more self-sufficient business andoperating model for UBS Limited, its investment banking subsidiary in the UK, under which UBS Limited bears andretains a larger proportion of the risk and reward in its business activities. Also during 2015, UBS AG established anew subsidiary, UBS Americas Holding LLC, which UBS AG intends to designate as its intermediate holdingcompany for its US subsidiaries prior to the July 1, 2016 deadline under new rules for foreign banks in the US pursuantto the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). During the third quarter of 2015,UBS AG contributed its equity participation in the principal US operating subsidiaries to UBS Americas Holding LLCto meet the requirement under Dodd-Frank that the intermediate holding company own all of our US operations, exceptbranches of UBS AG. Lastly, UBS AG also established UBS Asset Management AG, a new subsidiary, in 2015.
These structural changes are being discussed on an ongoing basis with FINMA and other regulatory authorities, andremain subject to a number of uncertainties that may affect their feasibility, scope or timing.
For more information, refer to the “The legal structure of UBS Group” and “Significant accounting and financialreporting changes” sections of the Annual Report 2015, which is incorporated by reference into this prospectus, and todiscussions of further updates contained in any subsequent report UBS files with or submits to the SEC on or after thedate of this prospectus and prior to the termination of this offering that are incorporated by reference into thisprospectus or the registration statement of which this prospectus forms a part, as described above under “Incorporationof Information About UBS AG”.
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Swiss Regulatory PowersIf UBS AG experiences financial difficulties, FINMA has the power to open resolution or liquidation proceedings inrespect of, and/or impose protective measures in relation to, UBS, which proceedings or measures may have a materialadverse effect on the terms and market value of the debt securities and the warrants and/or the ability of UBS to makepayments thereunder.
Pursuant to article 25 et seq. of the Swiss Banking Act, FINMA has broad statutory powers to take measures andactions in relation to UBS if it: (i) is over-indebted; (ii) has serious liquidity problems; or (iii) fails to fulfil theapplicable capital adequacy provisions after expiry of a deadline set by FINMA. If one of these pre-requisites is met,FINMA is authorized: (a) to open restructuring proceedings (Sanierungsverfahren); (b) to open liquidation(bankruptcy) proceedings (Bankenkonkurs) in respect of UBS; and/or (c) to impose protective measures(Schutzmassnahmen) in relation to UBS. The Swiss Banking Act, as last amended as of January 1, 2016, grantssignificant discretion to FINMA in connection with the aforementioned proceedings and measures. In particular, abroad variety of protective measures may be imposed by FINMA, including a bank moratorium (Stundung) or amaturity postponement (Falligkeitsaufschub), which measures may be ordered by FINMA either on a stand-alone basisor in connection with reorganisation or liquidation proceedings.
The resolution regime of the Swiss Banking Act is further detailed in the FINMA Banking Insolvency Ordinance (BIO-FINMA) that entered into force as of 1 November 2012. In a restructuring proceeding, FINMA, as resolution authority,is competent to approve the resolution plan (Sanierungsplan). The resolution plan may, among other things, providefor: (i) the transfer of UBS’s assets or portions thereof, together with debts, other liabilities and contracts (which mayor may not include the contractual relationship between UBS and the holders) of UBS, or portions thereof, to anotherentity; (ii) the conversion of UBS’s debt and/or other obligations, including its obligations under the debt securities andthe warrants, into equity (a “debt-to-equity swap”); and/or (iii) the partial or full write-off of obligations owed by UBS(a “haircut”), including its obligations under the debt securities and the warrants. Pursuant to article 48 lit. a-c BIO-FINMA, a debt-to-equity swap and/or a partial or full haircut on its debt and other obligations including the debtsecurities and the warrants may only take place after: (i) all debt instruments issued by UBS AG qualifying asadditional tier 1 capital or tier 2 capital (such as contingent write-down bonds) have been converted into equity; and (ii)the existing equity of UBS AG has been fully cancelled. Further, pursuant to article 48 lit. d BIO-FINMA, debt-to-equity swaps (but arguably not haircuts) must occur in the following order: (i) all subordinated claims not qualifying asregulatory capital; (ii) all other claims not excluded by law from a debt-to-equity swap; and (iii) deposits (in excess ofthe amount privileged by law). With respect to a haircut, the BIO-FINMA does not contain any guidance as to theorder in which different categories of claims shall be partially or fully written off. Therefore, it cannot be excluded thatany resolution plan in respect of UBS AG could provide that the claims under or in connection with the debt securitiesand the warrants will be partially or fully converted or written-off, while, in case of a write-off, preserving claimsranking junior to or pari passu with the claims under the debt securities and the warrants. In such case, holders of thedebt securities and the warrants may lose all or some of their investment in such debt securities and warrants. In case ofa restructuring of a systemically important bank (such as UBS AG), the creditors whose claims are affected by theresolution plan will not have a right to vote on, opt out of, or dismiss the resolution plan. In addition, if a resolutionplan has been approved by the FINMA, the rights of a creditor to seek judicial review of the resolution plan (e.g., onthe grounds that the plan would unduly prejudice the rights of the holders of the debt securities and the warrants orotherwise be in violation of the Swiss Banking Act) are very limited in that the competent court may not grantsuspensory effect (aufschiebende Wirkung) to the approval of the resolution plan and, even if the objection of acreditor against the resolution plan is approved, the court can only award a compensation payment but not invalidate oroverride the resolution plan.
As of the date of this prospectus, there is no clear guidance on what impact it would have on the rights of holders of thedebt securities or warrants or the ability of UBS to make payments under the debt securities or warrants if one orseveral of the measures under the aforementioned insolvency regime were imposed in connection with a restructuringof UBS.
For a description of the regulation and supervision of UBS AG more generally, please see the Annual Report 2015 andthe other documents incorporated by reference into this prospectus.
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Use of ProceedsWe intend to use the proceeds from the sale of the securities to provide additional funds for our operations and forgeneral corporate purposes outside of Switzerland. We will receive the net proceeds from sales of the securities madein connection with their original issuance and in connection with any market-making resales that UBS AG itselfundertakes. We do not expect to receive any proceeds from resales of the securities, including the debt securities ofUBS Americas Inc., by UBS Securities LLC, UBS Financial Services Inc. or any of our other affiliates in market-making transactions. We expect our affiliates to retain the proceeds of their market-making resales and not to pay theproceeds to us.
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Description of Debt Securities We May OfferPlease note that in this section entitled “Description of Debt Securities We May Offer,” references to UBS, we, ourand us refer only to UBS AG and not to its consolidated subsidiaries. In particular, the debt securities are obligationssolely of UBS AG, and not of any of its subsidiaries, including, without limitation, UBS Switzerland AG. Also, in thissection, references to “holders” and “you” mean those who own debt securities registered in their own names on thebooks that we or the trustee maintain for this purpose, and not those who own beneficial interests in debt securitiesregistered in street name or in debt securities issued in book-entry form through one or more depositaries. Owners ofbeneficial interests in the debt securities should read the section below entitled “Legal Ownership and Book-EntryIssuance.”
The Debt Indenture
As required by U.S. federal law for publicly offered bonds and notes, the debt securities are governed by a documentcalled an indenture. The debt indenture is a contract between us and U.S. Bank Trust National Association, which actsas trustee. The debt securities offered by this prospectus will be issued under one or more indentures to be entered intoon or after the date of this prospectus.
The trustee has two main roles:
• First, the trustee can enforce your rights against us if we default. There are limitations on the extent to which thetrustee acts on your behalf, which we describe below under “—Default, Remedies and Waiver of Default.”
• Second, the trustee performs administrative duties for us, such as sending you interest payments and notices.
See “—Our Relationship with the Trustee” below for more information about the trustee.
We May Issue Many Series of Debt Securities Under the Debt Indenture
We may issue as many distinct series of debt securities under the debt indenture as we wish. This section summarizesterms of the debt securities that apply generally to all series. The provisions of the debt indenture allow us not only toissue debt securities with terms different from those of debt securities previously issued under the debt indenture, butalso to “reopen” a previous issue of a series of debt securities and issue additional debt securities of that series. Most ofthe financial and other specific terms of your series, will be described in the prospectus supplement accompanying thisprospectus. Those terms may vary from the terms described here.
We may issue debt securities separately or together with other debt securities or with our warrants.
As you read this section, please remember that the specific terms of your debt security as described in your prospectussupplement will supplement and, if applicable, may modify or replace the general terms described in this section. Ifthere are any differences between your prospectus supplement and this prospectus, your prospectus supplement willcontrol. Thus, the statements we make in this section may not apply to your debt security.
When we refer to a series of debt securities, we mean a series issued under the debt indenture. When we refer to yourprospectus supplement, we mean the prospectus supplement describing the specific terms of the debt security youpurchase. The terms used in your prospectus supplement will have the meanings described in this prospectus, unlessotherwise specified.
Unless we indicate otherwise in your prospectus supplement, the debt securities we issue to you will be part of theseries of debt securities referred to as our “medium-term notes, Series B.” The Series B notes are a single distinct seriesunder the debt indenture, and we may issue Series B notes in such amounts, at such times and on such terms as wewish. The Series B notes will differ from one another, and from any other series, in their terms, but all of the Series Bnotes together will constitute a single series for all purposes under the debt indenture pursuant to which they will beissued.
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Description of Debt Securities We May Offer
Amounts That We May Issue
The debt indenture does not limit the aggregate amount of debt securities that we may issue or the number of series orthe aggregate amount of any particular series. We may have already issued Series B notes, many of which maycurrently be outstanding. We intend to issue additional Series B notes, and may issue additional Series B notes at anytime, without your consent and without notifying you. We may also issue debt securities and other securities at anytime without your consent and without notifying you.
The debt indenture and the debt securities do not limit our ability to incur other indebtedness or to issue othersecurities. Also, we are not subject to financial or similar restrictions by the terms of the debt securities.
Principal Amount, Stated Maturity and Maturity
The principal amount of a debt security means the principal amount payable at its stated maturity, unless that amount isnot determinable, in which case the principal amount of a debt security is its face amount.
The term “stated maturity” with respect to any debt security means the day on which the principal amount of your debtsecurity is scheduled to become due. The principal may become due sooner, by reason of redemption or accelerationafter a default or otherwise in accordance with the terms of the debt security. The day on which the principal actuallybecomes due, whether at the stated maturity or earlier, is called the “maturity” of the principal.
We also use the terms “stated maturity” and “maturity” to refer to the days when other payments become due. Forexample, we may refer to a regular interest payment date when an installment of interest is scheduled to become due asthe “stated maturity” of that installment.
When we refer to the “stated maturity” or the “maturity” of a debt security without specifying a particular payment, wemean the stated maturity or maturity, as the case may be, of the principal.
This Section Is Only a Summary
The debt indenture and its associated documents, including your debt security, contain the full legal text governing thematters described in this section and your prospectus supplement. We have filed a copy of the debt indenture with theSEC as an exhibit to our registration statement. See “Where You Can Find More Information” above for informationon how to obtain a copy.
This section and your prospectus supplement summarize all the material terms of the debt indenture and your debtsecurity. They do not, however, describe every aspect of the debt indenture and your debt security. For example, in thissection and your prospectus supplement, we use terms that have been given special meaning in the debt indenture, butwe describe the meaning of only the more important of those terms.
Governing Law
The debt indenture is, and the debt securities will be, governed by New York law.
Currency of Debt Securities
Amounts that become due and payable on your debt security in cash will be payable in a currency, composite currency,basket of currencies or currency unit or units specified in your prospectus supplement. We refer to this currency,composite currency, basket of currencies or currency unit or units as a “specified currency.” The specified currency foryour debt security will be U.S. dollars, unless your prospectus supplement states otherwise. Some debt securities mayhave different specified currencies for principal and interest. You will have to pay for your debt securities by deliveringthe requisite amount of the specified currency to UBS Securities LLC, UBS Financial Services Inc. or another firm thatwe name in your prospectus supplement, unless other arrangements have been made between you and us or you andthat firm. We will make payments on your debt securities in the specified currency, except as described below in“—Payment Mechanics for Debt Securities.” See “Considerations Relating to Securities Denominated or Payable in orLinked to a Non-U.S. Dollar Currency” below for more information about risks of investing in this kind of debtsecurities.
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Description of Debt Securities We May Offer
Types of Debt Securities
We may issue any of the three types of debt securities described below. A debt security may have elements of each ofthe three types of debt securities described below. For example, a debt security may bear interest at a fixed rate forsome periods and at a floating rate in others. Similarly, a debt security may provide for a payment of principal atmaturity linked to an index and also bear interest at a fixed or floating rate.
Fixed Rated Debt Securities
A debt security of this type will bear interest at a fixed rate described in the applicable prospectus supplement. Thistype includes zero coupon debt securities, which bear no interest and are instead issued at a price lower than theprincipal amount. See “—Original Issue Discount Debt Securities” below for more information about zero coupon andother original issue discount debt securities.
Each fixed rate debt security, except any zero coupon debt security, will bear interest from its original issue date orfrom the most recent date to which interest on the debt security has been paid or made available for payment. Interestwill accrue on the principal of a fixed rate debt security at the fixed yearly rate stated in the applicable prospectussupplement, until the principal is paid or made available for payment or the security has been converted or exchanged.Each payment of interest due on an interest payment date or the date of maturity will include interest accrued from andincluding the last date to which interest has been paid, or made available for payment, or from the issue date if nonehas been paid or made available for payment, to but excluding the interest payment date or the date of maturity. Wewill compute interest on fixed rate debt securities on the basis of a 360-day year of twelve 30-day months. We will payinterest on each interest payment date and at maturity as described below under “—Payment Mechanics for DebtSecurities.”
Floating Rate Debt Securities
Interest Rate Formulas. A debt security of this type will bear interest at rates that are determined by reference to aninterest rate formula. In some cases, the rates may also be adjusted by adding or subtracting a spread or multiplying bya spread multiplier and may be subject to a minimum rate or a maximum rate. If your debt security is a floating ratedebt security, the formula and any adjustments that apply to the interest rate will be specified in your prospectussupplement.
Each floating rate debt security will bear interest from its original issue date or from the most recent date to whichinterest on the debt security has been paid or made available for payment. Interest will accrue on the principal of afloating rate debt security at the yearly rate determined according to the interest rate formula stated in the applicableprospectus supplement, until the principal is paid or made available for payment. We will pay interest on each interestpayment date and at maturity as described below under “—Payment Mechanics for Debt Securities.”
Calculation of Interest. Calculations relating to floating rate debt securities will be made by the calculation agent,an institution that we appoint as our agent for this purpose. That institution may include any affiliate of ours, such asUBS Securities LLC. The prospectus supplement for a particular floating rate debt security will name the institutionthat we have appointed to act as the calculation agent for that debt security as of its original issue date. We may appointa different institution to serve as calculation agent from time to time after the original issue date of the debt securitywithout your consent and without notifying you of the change. Absent manifest error, all determinations of thecalculation will be final and binding on you and us, without any liability on the part of the calculation agent.
For each floating rate debt security, the calculation agent will determine, on the corresponding interest calculation ordetermination date, as described in the applicable prospectus supplement, the interest rate that takes effect on eachinterest reset date. In addition, the calculation agent will calculate the amount of interest that has accrued during eachinterest period—i.e., the period from and including the original issue date, or the last date to which interest has beenpaid or made available for payment, to but excluding the payment date. For each interest period, the calculation agentwill calculate the amount of accrued interest by multiplying the face or other specified amount of the floating rate debtsecurity by an accrued interest factor for the interest period. This factor will equal the sum of the interest factors
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Description of Debt Securities We May Offer
calculated for each day during the interest period. The interest factor for each day will be expressed as a decimal andwill be calculated by dividing the interest rate, also expressed as a decimal, applicable to that day by 360 or by theactual number of days in the year, as specified in the applicable prospectus supplement.
Upon the request of the holder of any floating rate debt security, the calculation agent will provide the interest rate thenin effect for that debt security—and, if determined, the interest rate that will become effective on the next interest resetdate. The calculation agent’s determination of any interest rate, and its calculation of the amount of interest for anyinterest period, will be final and binding in the absence of manifest error.
All percentages resulting from any calculation relating to a debt security will be rounded upward or downward, asappropriate, to the next higher or lower one hundred-thousandth of a percentage point, e.g., 9.876541% (or .09876541)being rounded down to 9.87654% (or .0987654) and 9.876545% (or .09876545) being rounded up to 9.87655% (or.0987655). All amounts used in or resulting from any calculation relating to a floating rate debt security will berounded upward or downward, as appropriate, to the nearest cent, in the case of U.S. dollars, or to the nearestcorresponding hundredth of a unit, in the case of a currency other than U.S. dollars, with one-half cent or one-half of acorresponding hundredth of a unit or more being rounded upward.
In determining the base rate that applies to a floating rate debt security during a particular interest period, thecalculation agent may obtain rate quotes from various banks or dealers active in the relevant market, as described in theapplicable prospectus supplement. Those reference banks and dealers may include the calculation agent itself and itsaffiliates, as well as any underwriter, dealer or agent participating in the distribution of the relevant floating rate debtsecurities and its affiliates, and they may include UBS AG or its affiliates.
Indexed Debt Securities
A debt security of this type provides that the principal amount payable at its maturity, and/or the amount of interestpayable on an interest payment date, will be determined by reference to:
• securities of one or more issuers;
• one or more currencies;
• one or more commodities;
• any other financial, economic or other measure or instrument, including the occurrence or non-occurrence ofany event or circumstance; and/or
• one or more indices or baskets of the items described above.
If you are a holder of an indexed debt security, you may receive an amount at maturity (including upon accelerationfollowing an event of default) that is greater than or less than the face amount of your debt security depending upon theformula used to determine the amount payable and the value of the applicable index at maturity. The value of theapplicable index will fluctuate over time.
An indexed debt security may provide either for cash settlement or for physical settlement by delivery of theunderlying property or another property of the type listed above. An indexed debt security may also provide that theform of settlement may be determined at our option or at the holder’s option. Some indexed debt securities may beconvertible, exercisable or exchangeable, at our option or the holder’s option, into or for securities of an issuer otherthan UBS AG.
If you purchase an indexed debt security, your prospectus supplement will include information about the relevantindex, about how amounts that are to become payable will be determined by reference to the price or value of thatindex and about the terms on which the security may be settled physically or in cash. The prospectus supplement willalso identify the calculation agent that will calculate the amounts payable with respect to the indexed debt security andmay exercise significant discretion in doing so. The calculation agent may be UBS Securities LLC or another of ouraffiliates. See “Considerations Relating to Indexed Securities” for more information about risks of investing in debtsecurities of this type.
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Description of Debt Securities We May Offer
Original Issue Discount Debt Securities
A fixed rate debt security, a floating rate debt security or an indexed debt security may be an original issue discountdebt security. A debt security of this type is issued at a price lower than its principal amount and provides that, uponredemption or acceleration of its maturity, an amount less than its principal amount will be payable. An original issuediscount debt security may be a zero coupon debt security. A debt security issued at a discount to its principal may, forU.S. federal income tax purposes, be considered an original issue discount debt security, regardless of the amountpayable upon redemption or acceleration of maturity. See “U.S. Tax Considerations—Taxation of Debt Securities—Original Issue Discount” below for a brief description of the U.S. federal income tax consequences of owning anoriginal issue discount debt security.
Information In Your Prospectus Supplement
Your prospectus supplement will describe the specific terms of your debt security, which will include some or all of thefollowing:
• any limit on the total principal amount of the debt securities of the same series;
• the stated maturity;
• the specified currency or currencies for principal and interest, if not U.S. dollars;
• the price at which we originally issue your debt security, expressed as a percentage of the principal amount,and the original issue date;
• whether your debt security is a fixed rate debt security, a floating rate debt security or an indexed debtsecurity;
• if your debt security is a fixed rate debt security, the yearly rate at which your debt security will bear interest,if any, and the interest payment dates;
• if your debt security is a floating rate debt security, the interest rate basis; any applicable index currency ormaturity, spread or spread multiplier or initial base rate, maximum rate or minimum rate; the interest reset,determination, calculation and payment dates; the day count used to calculate interest payments for anyperiod; the business day convention; and the calculation agent;
• if your debt security is an indexed debt security, the principal amount, if any, we will pay you at maturity, theamount of interest, if any, we will pay you on an interest payment date or the formula we will use to calculatethese amounts, if any, and the terms on which your debt security will be exchangeable for or payable in cash,securities or other property;
• if your debt security may be converted into or exercised or exchanged for debt or equity securities of one ormore third parties, the terms on which conversion, exercise or exchange may occur, including whetherconversion, exercise or exchange is mandatory, at the option of the holder or at our option, the period duringwhich conversion, exercise or exchange may occur, the initial conversion, exercise or exchange price or rateand the circumstances or manner in which the amount of securities issuable upon conversion, exercise orexchange may be adjusted;
• if your debt security is also an original issue discount debt security, the yield to maturity;
• if applicable, the circumstances under which your debt security may be redeemed at our option or repaid atthe holder’s option before the stated maturity, including any redemption commencement date, repaymentdate(s), redemption price(s) and redemption period(s);
• the authorized denominations, if other than $1,000 and integral multiples of $1,000;
• the depositary for your debt security, if other than DTC, and any circumstances under which the holder mayrequest securities in non-global form, if we choose not to issue your debt security in book-entry form only;
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Description of Debt Securities We May Offer
• if your debt security will be issued in bearer form, any special provisions relating to bearer securities;
• if applicable, the circumstances under which we will pay additional amounts on any debt securities held by aperson who is not a United States person for tax purposes and under which we can redeem the debt securitiesif we have to pay additional amounts;
• the names and duties of any co-trustees, depositaries, authenticating agents, paying agents, transfer agents orregistrars for your debt security, as applicable; and
• any other terms of your debt security, which could be different from those described in this prospectus.
If you purchase your debt security—or any of our other securities we describe in this prospectus—in a market-makingtransaction, you will receive information about the price you pay and your trade and settlement dates in a separateconfirmation of sale. A market-making transaction is one in which we, UBS Securities LLC, UBS Financial ServicesInc. or another of our affiliates resells a security that it has previously acquired from another holder. A market-makingtransaction in a particular security occurs after the original issuance and sale of the security.
Extension of Maturity
If specified in the applicable prospectus supplement, we will have the option to extend the stated maturity of your debtsecurity for one or more periods of whole years up to but not beyond the final maturity date specified in the prospectussupplement. We call a debt security whose maturity we may extend an extendible debt security. We call the period oftime as to which we may extend the maturity the extension period. The following procedures will apply to extendibledebt securities, unless otherwise indicated in the applicable prospectus supplement.
We may extend the maturity of an extendible debt security by notifying the paying agent between 45 and 60 daysbefore the stated maturity then in effect. The stated maturity may be the original stated maturity, as described in theprospectus supplement, or a maturity that we previously extended by following these procedures. If we notify thepaying agent that we will extend the maturity, the paying agent will send a notice to each holder by first class mail,postage prepaid, or by other means agreed upon between us and the paying agent, at least 30 days before the statedmaturity then in effect. The notice sent by the paying agent will provide the following information:
• our election to extend the maturity of the extendible debt security;
• the extended maturity date or, if the maturity date had previously been extended, the new extended maturitydate;
• the interest rate that will apply during the extension period or, in the case of a floating rate debt security, thespread and/or spread multiplier, if any, applicable during the extension period; and
• the provisions, if any, for redemption and repayment during the extension period.
Once the paying agent has mailed the notice to each holder, the extension of the maturity date will take placeautomatically. All of the terms of the debt security will be the same as the terms of the debt security as originallyissued, except those terms that are described in the notice sent by the paying agent to each holder and except asdescribed in the following paragraph.
Not later than 10:00 a.m., New York City time, on the twentieth calendar day before the maturity date then in effect foran extendible debt security or, if that day is not a business day, on the next succeeding business day, we may revoke theinterest rate set forth in the extension notice sent by the paying agent to each holder and establish a higher interest ratefor the extension period. If we elect to establish a higher interest rate, the paying agent will send a notice to each holderby first class mail, postage prepaid, or by other means agreed between us and the paying agent, of the higher interestrate in the case of a floating rate debt security, the higher spread and/or spread multiplier, if any. The notice of thehigher rate cannot be revoked. All extendible debt securities as to which the maturity date has been extended will bearthe higher rate for the extension period, whether or not tendered for repayment.
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Description of Debt Securities We May Offer
If we elect to extend the maturity date of an extendible debt security, each holder may elect repayment of all or part ofits debt security on the maturity date then in effect at a price equal to the principal amount plus any accrued and unpaidinterest to that date. To elect repayment, a holder must give notice to the paying agent between 25 and 35 days beforethe maturity date in effect. The notice must consist of either:
• the debt security along with the completed form entitled “Option to Elect Repayment,” which will be attachedto your debt security.
• a telegram, facsimile transmission or letter from a member of a national securities exchange, the FinancialIndustry Regulatory Authority, Inc. or a commercial bank or trust company in the United States setting forththe name of the holder, the principal amount of the debt security, the principal amount of the debt security tobe repaid, the certificate number or a description of the tenor and terms of the debt security, a statement thatthe option to elect repayment is being elected and a guarantee that the debt security, together with thecompleted form entitled “Option to Elect Repayment” will be received by the paying agent no later than thefifth business day after the date of the telegram, facsimile transmission or letter. The telegram, facsimiletransmission or letter will become effective upon receipt, by that fifth business day, of the debt security andcomplete form.
The holder may revoke the election of repayment by sending to the paying agent written notice by 3:00 p.m., NewYork City time, on the twentieth day before the maturity date then in effect or, if that day is not a business day, on thenext succeeding business day.
If an extendible debt security is represented by a global debt security, the depositary or its nominee, as the holder, willbe the only person that can exercise the right to elect repayment or revoke such an election. Any indirect owners whoown beneficial interests in the global debt security and wish to make such an election must give proper and timelyinstructions to the banks or brokers through which they hold their interests, requesting that they notify the depositary tomake a repayment election or revoke such an election on their behalf. Different firms have different deadlines foraccepting instructions from their customers, and you should take care to act promptly enough to ensure that yourrequest is given effect by the depositary before the applicable deadline for exercise.
Redemption and Repayment
Unless otherwise indicated in your prospectus supplement, your debt security will not be entitled to the benefit of anysinking fund—that is, we will not deposit money on a regular basis into any separate custodial account to repay yourdebt securities. In addition, we will not be entitled to redeem your debt security before its stated maturity (except forcertain tax reasons, as described below) unless your prospectus supplement specifies a redemption date or redemptioncommencement date. You will not be entitled to require us to buy your debt security from you, before its statedmaturity, unless your prospectus supplement specifies one or more repayment dates.
If your prospectus supplement specifies one or more redemption dates, a redemption commencement date or arepayment date, it will also specify one or more redemption prices or repayment prices, which may be expressed as apercentage of the principal amount of your debt security. It may also specify one or more redemption periods duringwhich the redemption prices relating to a redemption of debt securities during those periods will apply.
If your prospectus supplement specifies one or more redemption dates, your debt security will be redeemable at ouroption on any of those dates. If your prospectus supplement specifies a redemption commencement date, your debtsecurity will be redeemable at our option at any time on or after that date. If we redeem your debt security, we will doso at the specified redemption price. If different prices are specified for different redemption periods, the price we paywill be the price that applies to the redemption period during which your debt security is redeemed.
If your prospectus supplement specifies a repayment date, your debt security will be repayable at your option on thespecified repayment date at the specified repayment price, together with interest accrued to the repayment date.
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Description of Debt Securities We May Offer
If we exercise an option to redeem any debt security, we will give the trustee and the holders written notice of theprincipal amount of the debt security to be redeemed, not less than 5 business days nor more than 60 days before theapplicable redemption date unless otherwise specified in your prospectus supplement. We will give the notice in themanner described below in “—Notices.”
If a debt security represented by a global debt security is subject to repayment at the holder’s option, the depositary orits nominee, as the holder, will be the only person that can exercise the right to repayment. Any indirect holders whoown beneficial interests in the global debt security and wish to exercise a repayment right must give proper and timelyinstructions to the banks or brokers through which they hold their interests, requesting that they notify the depositary toexercise the repayment right on their behalf. Different firms have different deadlines for accepting instructions fromtheir customers, and you should take care to act promptly enough to ensure that your request is given effect by thedepositary before the applicable deadline for exercise.
Street name and other indirect holders should contact their banks or brokers for information about how to exercise arepayment right in a timely manner.
We or our affiliates may purchase debt securities from investors who are willing to sell from time to time, either in theopen market at prevailing prices or in private transactions at negotiated prices. Debt securities that we or they purchasemay, at our discretion, be held, resold or cancelled.
Optional Tax Redemption
In addition to the situations described above under “—Redemption and Repayment,” we also have the option to redeemthe debt securities in two situations described below, unless otherwise indicated in your prospectus supplement. Theredemption price for the debt securities, other than original issue discount debt securities, will be equal to the principalamount of the debt securities being redeemed plus accrued interest and any additional amounts due on the date fixedfor redemption. The redemption price for original issue discount debt securities will be specified in the prospectussupplement for such debt securities. Furthermore, we must give you between 10 and 60 days’ notice before redeemingthe debt securities unless otherwise specified in your prospectus supplement.
• The first situation is where, as a result of a change in, execution of or amendment to any laws or treaties orthe official application or interpretation of any laws or treaties, we would be required to pay additionalamounts as described below under “—Payment of Additional Amounts.”
This applies only in the case of changes, executions, amendments, applications or interpretations that occuron or after the date specified in the prospectus supplement for the applicable debt securities and in a relevantjurisdiction, as defined in “—Payment of Additional Amounts” below. If UBS is succeeded by anotherentity, the applicable jurisdiction will be the jurisdiction in which the successor entity is organized, and theapplicable date will be the date the entity became a successor.
We would not have the option to redeem in this case if we could have avoided the payment of additionalamounts or the deduction or withholding by using reasonable measures available to us.
• The second situation is where a person located outside of a relevant jurisdiction into which UBS is merged orto whom it has conveyed, transferred or leased its property is required to pay an additional amount. We wouldhave the option to redeem the debt securities even if we are required to pay additional amounts immediatelyafter the merger, conveyance, transfer or lease. We are not required to use reasonable measures to avoid theobligation to pay additional amounts in this situation.
Payment of Additional Amounts
A relevant jurisdiction may require UBS to withhold amounts from payments on the principal or interest on a debtsecurity for taxes or any other governmental charges. If the relevant jurisdiction requires a withholding of this type,UBS may be required to pay you an additional amount so that the net amount you receive will be the amount specifiedin the debt security to which you are entitled.
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Description of Debt Securities We May Offer
By relevant jurisdiction, we mean Switzerland or a jurisdiction in which the UBS branch through which debt securitiesare issued is located. UBS will not have to pay additional amounts in respect of taxes or other governmental chargesthat are required to be deducted or withheld by any paying agent from a payment on a debt security, if such paymentcan be made without such deduction or withholding by any other paying agent, or in respect of taxes or othergovernmental charges that would not have been imposed but for
• the existence of any present or former connection between you and the relevant jurisdiction, other than themere holding of the debt security and the receipt of payments on it;
• your status as an individual resident of a member state of the European Union;
• a failure to comply with any reasonable certification, documentation, information or other reportingrequirement concerning your nationality, residence, identity or connection with the relevant jurisdiction, ifsuch compliance is required as a precondition to relief or exemption from such taxes or other governmentalcharges (including, without limitation, a certification that you are not resident in the relevant jurisdiction orare not an individual resident of a member state of the European Union); or
• a change in law that becomes effective more than 30 days after a payment on the debt security becomes dueand payable or on which the payment is duly provided for, whichever occurs later.
In addition, no additional amounts will be required to be paid on account of any deduction or withholding imposed orrequired pursuant to Sections 1471 through 1474 of the Internal Revenue Code (as defined below under “U.S. TaxConsiderations”), any current or future regulations or official interpretations thereof, any agreement entered intopursuant to Section 1471(b) of the Internal Revenue Code, or any fiscal or regulatory legislation, rules or practicesadopted pursuant to any intergovernmental agreement entered into in connection with the implementation of suchSections of the Internal Revenue Code.
These provisions will also apply to any taxes or governmental charges imposed by any jurisdiction in which asuccessor to UBS is organized. The prospectus supplement relating to the debt security may describe additionalcircumstances in which UBS would not be required to pay additional amounts.
Mergers and Similar Transactions
We are generally permitted to merge or consolidate with another firm. We are also permitted to sell our assetssubstantially as an entirety to another firm. With regard to any series of debt securities, we may not take any of theseactions, however, unless all the following conditions are met:
• If the successor firm in the transaction is not UBS, the successor firm must be organized as a corporation,partnership or trust and must expressly assume our obligations under the debt securities of that series and thedebt indenture. The successor firm must be organized under the laws of Switzerland.
• Immediately after the transaction, no default under the debt securities of that series has occurred and iscontinuing. For this purpose, “default under the debt securities of that series” means an event of default withrespect to that series or any event that would be an event of default with respect to that series if therequirements for giving us default notice and for our default having to continue for a specific period of timewere disregarded. We describe these matters below under “—Default, Remedies and Waiver of Default.”
If the conditions described above are satisfied with respect to the debt securities of any series, we will not need to obtainthe approval of the holders of those debt securities in order to merge or consolidate or to sell our assets. Also, theseconditions will apply only if we wish to merge or consolidate with another firm or sell our assets substantially as anentirety to another firm. We will not need to satisfy these conditions if we enter into other types of transactions, includingany transaction in which we acquire the stock or assets of another firm, any transaction that involves a change of controlof UBS but in which we do not merge or consolidate and any transaction in which we sell less than substantially all ourassets. We will also not need to satisfy these conditions if UBS AG merges into or consolidates with, or conveys, transfersor leases its properties and assets substantially as an entirety to any affiliate of UBS AG that is the parent or a wholly-owned subsidiary of the parent, provided that the parent shall expressly and irrevocably guarantee, by a supplemental
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Description of Debt Securities We May Offer
indenture, the due and punctual payment of the principal of and any premium and interest on all the securities and theperformance and observance of every covenant of the indenture to be performed and observed by UBS AG.
Also, if we merge, consolidate or sell our assets substantially as an entirety and the successor firm is a non-Swissentity, neither we nor any successor would have any obligation to compensate you for any resulting adverse taxconsequences to the debt securities.
Defeasance and Covenant Defeasance
If indicated in the applicable prospectus supplement for a debt security, the provisions for full defeasance and covenantdefeasance described below will apply to that debt security. In general, we expect these provisions to apply to eachdebt security that has a specified currency of U.S. dollars and is not a floating rate or indexed debt security.
Full Defeasance
If there is a change in U.S. federal tax law, as described below, we can legally release ourselves from all payment andother obligations on your debt security. This is called full defeasance. To do so, each of the following must occur:
• We must deposit in trust for the benefit of all holders of those debt securities, money, U.S. government orU.S. government agency notes or bonds or a combination of money and U.S. government or U.S. governmentagency notes or bonds that will, in each case, in the opinion of a nationally recognized firm of independentpublic accountants, generate enough cash to make interest, principal and any other payments on those debtsecurities on their various due dates.
• There must be a change in current U.S. federal tax law or an Internal Revenue Service ruling that lets us makethe above deposit without causing the holders to be taxed on those debt securities any differently than if wedid not make the deposit and just repaid the debt securities ourselves. Under current federal tax law, thedeposit and our legal release from your debt securities would be treated as though we took back your debtsecurity and gave you your share of the cash and notes or bonds deposited in trust. In that event, you couldrecognize gain or loss on your debt security.
• We must deliver to the trustee a legal opinion of our counsel confirming the tax law change described above.
If we ever fully defease your debt security, you would have to rely solely on the trust deposit for payments on yourdebt security. You would not be able to look to us for payment in the event of any shortfall.
Covenant Defeasance
Under current U.S. federal tax law, we can make the same type of deposit described above and be released from anyrestrictive covenants relating to your debt security that may be described in your prospectus supplement. This is calledcovenant defeasance. In that event, you would lose the protection of those restrictive covenants. In order to achievecovenant defeasance for any debt securities, we must do both of the following:
• We must deposit in trust for the benefit of all holders of those debt securities, money, U.S. government orU.S. government agency notes or bonds or a combination of money and U.S. government or U.S. governmentagency notes or bonds that will, in each case, in the opinion of a nationally recognized firm of independentpublic accountants, generate enough cash to make interest, principal and any other payments on those debtsecurities on their various due dates.
• We must deliver to the trustee a legal opinion of our counsel confirming that under U.S. federal income taxlaw as then in effect we may make the above deposit without causing you to be taxed on those debt securitiesany differently than if we did not make the deposit and just repaid those debt securities ourselves.
If we accomplish covenant defeasance with regard to your debt security, the following provisions of the debt indentureand your debt security would no longer apply:
• Any covenants that your prospectus supplement may state are applicable to your debt security; and
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Description of Debt Securities We May Offer
• The events of default resulting from a breach of covenants, described below in the fourth bullet point under“—Default, Remedies and Waiver of Default—Events of Default.”
Any right we have to redeem will survive covenant defeasance with regard to those debt securities.
If we accomplish covenant defeasance on your debt security, you can still look to us for repayment of your debtsecurity in the event of any shortfall in the trust deposit. You should note, however, that if one of the remaining eventsof default occurred, such as our bankruptcy, and your debt security became immediately due and payable, there may bea shortfall. Depending on the event causing the default you may not be able to obtain payment of the shortfall.
Default, Remedies and Waiver of Default
You will have special rights if an event of default with respect to your series of debt securities occurs and is not cured,as described in this subsection.
Events of Default
Unless your prospectus supplement says otherwise, when we refer to an event of default with respect to any series ofdebt securities, we mean any of the following:
• We do not pay the principal or any premium (including delivering any security or other property deliverable)on any debt security of that series at its maturity;
• We do not pay interest on any debt securities of that series within 30 days after it becomes due and payable;
• We do not deposit a sinking fund payment with regard to any debt securities of that series on its due date, butonly if the payment is required in the applicable prospectus supplement;
• We remain in breach of any other covenant we make in the debt indenture for the benefit of the debt securitiesof that series, for 60 days after we receive a notice of default stating that we are in breach and requiring us toremedy the breach. The notice must be sent by the trustee or the holders of not less than 10% in principalamount of the relevant series of debt securities then outstanding;
• We file for bankruptcy or certain other bankruptcy, insolvency or reorganization events relating to UBSoccur; or
• If the applicable prospectus supplement states that any additional event of default applies to your series, thatevent of default occurs.
Remedies If an Event of Default Occurs
If an event of default has occurred with respect to any series of debt securities and has not been cured or waived, thetrustee or the holders of not less than 25% in principal amount of all debt securities of that series then outstanding maydeclare the entire principal amount of the debt securities of that series to be due immediately. If an event of defaultoccurs because of bankruptcy, insolvency or reorganization events relating to UBS, the entire principal amount of thedebt securities of that series will be automatically accelerated, without any action by the trustee or any holder.
Each of the situations described above is called an acceleration of the maturity of the affected series of debt securities.If the maturity of any series is accelerated and a judgment for payment has not yet been obtained, the holders of amajority in principal amount of the debt securities of that series may cancel the acceleration for the entire series.
If an event of default occurs, the trustee will have special duties. The trustee will be obligated to use those of its rightsand powers under the debt indenture, and to use the same degree of care and skill in doing so, that a prudent personwould use in that situation in conducting his or her own affairs.
Except as described in the prior paragraph, the trustee is not required to take any action under the debt indenture at therequest of any holders unless the holders offer the trustee reasonable protection from expenses and liability. This iscalled an indemnity. If the trustee is provided with an indemnity reasonably satisfactory to it, the holders of a majorityin principal amount of all debt securities of the relevant series may direct the time, method and place of conducting any
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Description of Debt Securities We May Offer
lawsuit or other formal legal action seeking any remedy available to the trustee with respect to that series. Thesemajority holders may also direct the trustee in performing any other action under the debt indenture with respect to thedebt securities of that series.
Before you bypass the trustee and bring your own lawsuit or other formal legal action or take other steps to enforceyour rights or protect your interests relating to any debt security, all of the following must occur:
• The holder of your debt security must give the trustee written notice that an event of default has occurred, andthe event of default must not have been cured or waived.
• The holders of not less than 25% in principal amount of all debt securities of your series must make a writtenrequest that the trustee take action because of the default, and they or other holders must offer to the trusteeindemnity reasonably satisfactory to the trustee against the cost and other liabilities of taking that action.
• The trustee must not have taken action for 60 days after the above steps have been taken.
• During those 60 days, the holders of a majority in principal amount of the debt securities of your series mustnot have given the trustee directions that are inconsistent with the written request of the holders of not lessthan 25% in principal amount of all debt securities of your series.
You are, however, entitled at any time to bring a lawsuit for the payment of money due on your debt security on orafter its due date.
Waiver of Default
The holders of not less than a majority in principal amount of the debt securities of any series may waive a default forall debt securities of that series. If this happens, the default will be treated as if it has not occurred. No one can waive apayment default on your debt security, however, without the approval of the particular holder of that debt security.
We Will Give the Trustee Information About Defaults Annually
We will furnish to the trustee every year a written statement of two of our officers certifying that to their knowledge weare in compliance with the debt indenture and the debt securities, or else specifying any default under the debtindenture.
Book-entry and other indirect holders should consult their banks or brokers for information on how to give notice ordirection to or make a request of the trustee and how to declare or cancel an acceleration of the maturity of the debtsecurities. Book-entry and other indirect owners are described below under “Legal Ownership and Book-EntryIssuance.”
Modification and Waiver of Covenants
There are three types of changes we can make to the debt indenture and the debt securities of any series.
Changes Requiring Each Holder’s Approval
First, there are changes that cannot be made without the approval of each holder of a debt security affected by thechange. Here is a list of those types of changes:
• change the stated maturity for any principal or interest payment on a debt security;
• reduce the principal amount, the amount payable on acceleration of the maturity after a default, the interestrate or the redemption price for a debt security;
• permit redemption of a debt security if not previously permitted;
• impair any right a holder may have to require repayment of his or her debt security;
• impair any right that a holder of an indexed or any other debt security may have to exchange or convert thedebt security for or into securities or other property;
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Description of Debt Securities We May Offer
• change the currency of any payment on a debt security other than as permitted by the debt security;
• change the place of payment on a debt security, if it is in non-global form;
• impair a holder’s right to sue for payment of any amount due on his or her debt security;
• reduce the percentage in principal amount of the debt securities of any one or more affected series, takenseparately or together, as applicable, the approval of whose holders is needed to change the debt indenture orthose debt securities;
• reduce the percentage in principal amount of the debt securities of any one or more affected series, takenseparately or together, as applicable, the consent of whose holders is needed to waive our compliance with thedebt indenture or to waive defaults; and
• change the provisions of the debt indenture dealing with modification and waiver in any other respect, exceptto increase any required percentage referred to above or to add to the provisions that cannot be changed orwaived without approval of the holder of each affected debt security.
Changes Not Requiring Approval of Holders
The second type of change does not require any approval by holders of the debt securities of an affected series. Thistype of change is limited to clarifications and changes that would not adversely affect the debt securities of that seriesin any material respect. We also do not need any approval to make changes that affect only debt securities to be issuedunder the debt indenture after the changes take effect.
We may also make changes or obtain waivers that do not adversely affect a particular debt security, even if they affectother debt securities. In those cases, we do not need to obtain the approval of the holder of the unaffected debt security;we need only obtain any required approvals from the holders of the affected debt securities.
Changes Requiring Majority Approval
Any other change to the debt indenture and the debt securities would require the following approval:
• If the change affects only the debt securities of a particular series, it must be approved by the holders of662⁄3% in principal amount of the debt securities of that series.
• If the change affects the debt securities of more than one series of debt securities issued under the debtindenture, it must be approved by the holders of 662⁄3% in principal amount of all series affected by thechange, with the debt securities of all the affected series voting together as one class for this purpose (and ofany affected series that by its terms is entitled to vote separately as a series, as described below).
In each case, the required approval must be given by written consent.
Majority approval would be required for us to obtain a waiver of any of our covenants in the debt indenture. Ourcovenants include the promises we make about merging, which we describe above under “—Mergers and SimilarTransactions.” If the holders approve a waiver of a covenant, we will not have to comply with that covenant. Theholders, however, cannot approve a waiver of any provision in a particular debt security, or in the debt indenture as itaffects that debt security, that we cannot change without the approval of the holder of that debt security as describedabove under “—Changes Requiring Each Holder’s Approval,” unless that holder approves the waiver.
Book-entry and other indirect holders should consult their banks or brokers for information on how approval may begranted or denied if we seek to change the debt indenture or the debt securities or request a waiver.
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Description of Debt Securities We May Offer
Special Rules for Action by Holders
When holders take any action under the debt indenture, such as giving a notice of default, declaring an acceleration,approving any change or waiver or giving the trustee an instruction, we will apply the following rules.
Only Outstanding Debt Securities Are Eligible
Only holders of outstanding debt securities of the applicable series will be eligible to participate in any action byholders of debt securities of that series. Also, we will count only outstanding debt securities in determining whether thevarious percentage requirements for taking action have been met. For these purposes, a debt security will not be“outstanding”:
• if it has been surrendered for cancellation;
• if we have deposited or set aside, in trust for its holder, money for its payment or redemption;
• if we have fully defeased it as described above under “—Defeasance and Covenant Defeasance—FullDefeasance”; or
• if we or one of our affiliates, such as UBS Securities LLC or UBS Financial Services Inc., is the beneficialowner.
Special Series Voting Rights
We may issue series of debt securities that are entitled, by their terms, to vote separately on matters (for example,modification or waiver of provisions in the debt indenture) that would otherwise require a vote of all affected series,voting together as a single class. Any such series would be entitled to vote together with all other affected series, votingtogether as one class, and would also be entitled to vote separately, as a series only. These special voting rights will bedescribed in the applicable prospectus supplement. For a series that does not have these special rights, voting will occuras described in the preceding section, but subject to any separate voting rights of any series having special rights. Wemay issue a series having these or other special voting rights without obtaining the consent of or giving notice toholders of outstanding series.
Eligible Principal Amount of Some Debt Securities
In some situations, we may follow special rules in calculating the principal amount of a debt security that is to betreated as outstanding for the purposes described above. This may happen, for example, if the principal amount ispayable in a non-U.S. dollar currency, increases over time or is not to be fixed until maturity. For any debt security ofthe kind described below, we will decide how much principal amount to attribute to the debt security as follows:
• For an original issue discount debt security, we will use the principal amount that would be due and payableon the action date if the maturity of the debt security were accelerated to that date because of a default.
• For a debt security whose principal amount is not known, we will use any amount that we indicate in theprospectus supplement for that debt security. The principal amount of a debt security may not be known, forexample, because it is based on an index that changes from time to time and the principal amount is not to bedetermined until a later date.
• For debt securities with a principal amount denominated in one or more non-U.S. dollar currencies orcurrency units, we will use the U.S. dollar equivalent, which we will determine.
Determining Record Dates for Action by Holders
We will generally be entitled to set any day as a record date for the purpose of determining the holders that are entitledto take action under the debt indenture. In certain limited circumstances, only the trustee will be entitled to set a recorddate for action by holders. If we or the trustee set a record date for an approval or other action to be taken by holders,that vote or action may be taken only by persons or entities who are holders on the record date and must be taken
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Description of Debt Securities We May Offer
during the period that we specify for this purpose, or that the trustee specifies if it sets the record date. We or thetrustee, as applicable, may shorten or lengthen this period from time to time. This period, however, may not extendbeyond the 180th day after the record date for the action. In addition, record dates for any global debt security may beset in accordance with procedures established by the depositary from time to time. Accordingly, record dates for globaldebt securities may differ from those for other debt securities.
Form, Exchange and Transfer of Debt Securities
We will issue each debt security in global—i.e., book-entry—form only, unless we specify otherwise in the applicableprospectus supplement. Debt securities in book-entry form will be represented by a global security registered in thename of a depositary, which will be the holder of all the debt securities represented by the global security. Those whoown beneficial interests in a global debt security will do so through participants in the depositary’s securities clearancesystem, and the rights of these indirect owners will be governed solely by the applicable procedures of the depositaryand its participants. We describe book-entry securities below under “Legal Ownership and Book-Entry Issuance.”Unless we specify otherwise in the applicable prospectus supplement, The Depository Trust Company, New York,New York, known as DTC, will be the depositary for all debt securities in global form.
In addition, we will generally issue each debt security in registered form, without coupons, unless we specify otherwisein the applicable prospectus supplement. If we issue a debt security in bearer form, the applicable prospectussupplement will describe the provisions that would apply to that security.
If a debt security is issued as a global debt security, only the depositary—e.g., DTC, Euroclear and Clearstream—willbe entitled to transfer and exchange the debt security or exercise any other rights of a holder as described in thissubsection, since the depositary will be the sole holder of the debt security.
If any debt securities cease to be issued in global form, then unless we indicate otherwise in your prospectussupplement, they will be issued:
• only in fully registered form;
• without interest coupons; and
• unless we indicate otherwise in your prospectus supplement, in denominations of $1,000 and integralmultiples of $1,000.
Holders may exchange their debt securities for debt securities of smaller denominations (subject to the limit above) orcombined into fewer debt securities of larger denominations, as long as the total principal amount is not changed. Youmay not exchange your debt securities for securities of a different series or having different terms, unless yourprospectus supplement says you may.
Holders may exchange or transfer their debt securities at the office of the trustee. They may also replace lost, stolen,destroyed or mutilated debt securities at that office. We have appointed the trustee to act as our agent for registeringdebt securities in the names of holders and transferring and replacing debt securities. We may appoint another entity toperform these functions or perform them ourselves.
Holders will not be required to pay a service charge to transfer or exchange their debt securities, but they may berequired to pay for any tax or other governmental charge associated with the exchange or transfer. The transfer orexchange, and any replacement, will be made only if our transfer agent is satisfied with the holder’s proof of legalownership. The transfer agent may require an indemnity before replacing any debt securities.
If we have designated additional transfer agents for your debt security, they will be named in your prospectussupplement. We may appoint additional transfer agents or cancel the appointment of any particular transfer agent. Wemay also approve a change in the office through which any transfer agent acts.
If the debt securities of any series are redeemable and we redeem less than all those debt securities, we may block thetransfer or exchange of those debt securities during the period beginning 15 days before the day we mail the notice ofredemption and ending on the day of that mailing or during any other period specified in the applicable prospectus
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Description of Debt Securities We May Offer
supplement, in order to freeze the list of holders who will receive the mailing. We may also refuse to register transfersof or exchange any debt security selected for redemption, except that we will continue to permit transfers andexchanges of the unredeemed portion of any debt security being partially redeemed.
The rules for exchange described above apply to exchanges of debt securities for other debt securities of the sameseries and kind. If a debt security is convertible, exercisable or exchangeable into or for a different kind of security,such as one that we have not issued, or for other property, the rules governing that type of conversion, exercise orexchange will be described in the applicable prospectus supplement.
Payment Mechanics for Debt Securities
Who Receives Payments?
If interest is due on a debt security on an interest payment date, we will pay the interest to the person in whose namethe debt security is registered at the close of business on the regular record date described below relating to the interestpayment date. If interest is due at maturity but on a day that is not an interest payment date, we will pay the interest tothe person entitled to receive the principal of the debt security. If principal or another amount besides interest is due ona debt security at maturity, we will pay the amount to the holder of the debt security against surrender of the debtsecurity at a proper place of payment (or, in the case of a global debt security, in accordance with the applicablepolicies of the depositary).
Payment Dates and Regular Record Dates for Interest
Unless we specify otherwise in the applicable prospectus supplement, interest on any fixed rate debt security will bepayable semiannually each May 15 and November 15 and at maturity, and the regular record date relating to an interestpayment date for any fixed rate debt security will be the May 1 or November 1 next preceding that interest paymentdate. The regular record date relating to an interest payment date for any floating rate debt security will be the 15thcalendar day before that interest payment date. These record dates will apply whether or not a particular record date is abusiness day. For the purpose of determining the holder at the close of business on a regular record date when businessis not being conducted, the close of business will mean 5:00 P.M., New York City time, on that day.
The term “business day” means, for any debt security, a day that meets all the following applicable requirements:
• for all debt securities, is a Monday, Tuesday, Wednesday, Thursday or Friday that is not a day on whichbanking institutions in New York City generally are authorized or obligated by law, regulation or executiveorder to close and that satisfies any other criteria specified in your prospectus supplement;
• if the debt security is a floating rate debt security whose interest rate is based on LIBOR, is also a day onwhich dealings in the relevant index currency specified in the applicable prospectus supplement are transactedin the London interbank market;
• if the debt security has a specified currency other than U.S. dollars or euros, is also a day on which bankinginstitutions are not authorized or obligated by law, regulation or executive order to close in the principalfinancial center of the country issuing the specified currency;
➣ if the debt security either is a floating rate debt security whose interest rate is based on EURIBOR or has aspecified currency of euros, is also a day on which the Trans-European Automated Real-time Gross settlementExpress Transfer (TARGET) System, or any successor system, is open for business;
➣ if the debt security is held through Euroclear, is also not a day on which banking institutions in Brussels, Belgiumare generally authorized or obligated by law, regulation or executive order to close; and
➣ if the debt security is held through Clearstream, is also not a day on which banking institutions in Luxembourg aregenerally authorized or obligated by law, regulation or executive order to close.
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Description of Debt Securities We May Offer
How We Will Make Payments Due in U.S. Dollars
We will follow the practices described in this subsection when paying amounts due in U.S. dollars. Payments ofamounts due in other currencies will be made as described in the next subsection.
Payments on Global Debt Securities. We will make payments on a global debt security in accordance with theapplicable policies of the depositary as in effect from time to time. Under those policies, we will pay directly to thedepositary, or its nominee, and not to any indirect owners who own beneficial interests in the global debt security. Anindirect owner’s right to receive those payments will be governed by the rules and practices of the depositary and itsparticipants, as described under “Legal Ownership and Book-Entry Issuance—What Is a Global Security?”
Payments on Non-Global Debt Securities. We will make payments on a debt security in non-global, registeredform as follows. We will pay interest that is due on an interest payment date by check mailed on the interest paymentdate to the holder at his or her address shown on the trustee’s records as of the close of business on the regular recorddate. We will make all other payments by check at the paying agent described below, against surrender of the debtsecurity. All payments by check will be made in next-day funds—that is, in funds that become available on the dayafter the check is cashed.
Alternatively, if a non-global debt security has a face amount of at least $1,000,000 and the holder asks us to do so, wewill pay any amount that becomes due on the debt security by wire transfer of immediately available funds to anaccount at a bank in New York City, on the due date. To request wire payment, the holder must give the paying agentappropriate wire transfer instructions at least five business days before the requested wire payment is due. In the caseof any interest payment due on an interest payment date, the instructions must be given by the person who is the holderon the relevant regular record date. In the case of any other payment, payment will be made only after the debt securityis surrendered to the paying agent. Any wire instructions, once properly given, will remain in effect unless and untilnew instructions are given in the manner described above.
Book-entry and other indirect owners should consult their banks or brokers for information on how they will receivepayments on their debt securities.
How We Will Make Payments Due in Other Currencies
We will follow the practices described in this subsection when paying amounts that are due in a specified currencyother than U.S. dollars.
Payments on Global Debt Securities. We will make payments on a global debt security in accordance with theapplicable policies of the depositary as in effect from time to time. We understand that these policies, as currently ineffect at DTC, are as follows:
Unless otherwise indicated in your prospectus supplement, if you are an indirect owner of global debt securitiesdenominated in a specified currency other than U.S. dollars and if you have the right to elect to receive payments inthat other currency and you do make that election, you must notify the participant through which your interest in theglobal debt security is held of your election:
• on or before the applicable regular record date, in the case of a payment of interest, or
• on or before the 16th day prior to stated maturity, or any redemption or repayment date, in the case ofpayment of principal or any premium.
You may elect to receive all or only a portion of any interest, principal or premium payment in a specified currencyother than U.S. dollars.
Your participant must, in turn, notify DTC of your election on or before the third DTC business day after that regularrecord date, in the case of a payment of interest, and on or before the 12th DTC business day prior to stated maturity, oron the redemption or repayment date if your debt security is redeemed or repaid earlier, in the case of a payment ofprincipal or any premium.
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Description of Debt Securities We May Offer
DTC, in turn, will notify the paying agent of your election in accordance with DTC’s procedures.
If complete instructions are received by the participant and forwarded by the participant to DTC, and by DTC to thepaying agent, on or before the dates noted above, the paying agent, in accordance with DTC’s instructions, will makethe payments to you or your participant by wire transfer of immediately available funds to an account maintained byyou or your participant with a bank located in the country issuing the specified currency or in another jurisdictionacceptable to us and the paying agent.
If the foregoing steps are not properly completed, we expect DTC to inform the paying agent that payment is to bemade in U.S. dollars. In that case, we or our agent will convert the payment to U.S. dollars in the manner describedbelow under “—Conversion to U.S. Dollars.” We expect that we or our agent will then make the payment in U.S.dollars to DTC, and that DTC in turn will pass it along to its participants.
Book-entry and other indirect holders of a global debt security denominated in a currency other than U.S. dollarsshould consult their banks or brokers for information on how to request payment in the specified currency.
Payments on Non-Global Debt Securities. Except as described in the second to last paragraph under this heading,we will make payments on debt securities in non-global form in the applicable specified currency. We will make thesepayments by wire transfer of immediately available funds to any account that is maintained in the applicable specifiedcurrency at a bank designated by the holder and is acceptable to us and the trustee. To designate an account for wirepayment, the holder must give the paying agent appropriate wire instructions at least five business days before therequested wire payment is due. In the case of any interest payment due on an interest payment date, the instructionsmust be given by the person who is the holder on the regular record date. In the case of any other payment, the paymentwill be made only after the debt security is surrendered to the paying agent. Any instructions, once properly given, willremain in effect unless and until new instructions are properly given in the manner described above.
If a holder fails to give instructions as described above, we will notify the holder at the address in the trustee’s recordsand will make the payment within five business days after the holder provides appropriate instructions. Any latepayment made in these circumstances will be treated under the debt indenture as if made on the due date, and nointerest will accrue on the late payment from the due date to the date paid.
Although a payment on a debt security in non-global form may be due in a specified currency other than U.S. dollars,we will make the payment in U.S. dollars if the holder asks us to do so. To request U.S. dollar payment, the holdermust provide appropriate written notice to the trustee at least five business days before the next due date for whichpayment in U.S. dollars is requested. In the case of any interest payment due on an interest payment date, the requestmust be made by the person who is the holder on the regular record date. Any request, once properly made, will remainin effect unless and until revoked by notice properly given in the manner described above.
Indirect owners of a non-global debt security with a specified currency other than U.S. dollars should contact theirbanks or brokers for information about how to receive payments in the specified currency or in U.S. dollars.
Conversion to U.S. Dollars. When we are asked by a holder to make payments in U.S. dollars of an amount due inanother currency, either on a global debt security or a non-global debt security as described above, we will determinethe U.S. dollar amount the holder receives as follows. The exchange rate agent described below will request currencybid quotations expressed in U.S. dollars from three or, if three are not available, then two, recognized foreign exchangedealers in New York City, any of which may be the exchange rate agent, which may be UBS Securities LLC, anaffiliate of UBS, as of 11:00 A.M., New York City time, on the second business day before the payment date. Currencybid quotations will be requested on an aggregate basis, for all holders of debt securities requesting U.S. dollar paymentsof amounts due on the same date in the same specified currency. The U.S. dollar amount the holder receives will bebased on the highest acceptable currency bid quotation received by the exchange rate agent. If the exchange rate agentdetermines that at least two acceptable currency bid quotations are not available on that second business day, thepayment will be made in the specified currency.
To be acceptable, a quotation must be given as of 11:00 A.M., New York City time, on the second business day beforethe due date and the quoting dealer must commit to execute a contract at the quotation in the total amount due in that
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Description of Debt Securities We May Offer
currency on all series of debt securities. If some but not all of the relevant debt securities are LIBOR debt securities orEURIBOR debt securities, the second preceding business day will be determined for this purpose as if none of thosedebt securities were LIBOR debt securities or EURIBOR debt securities.
A holder that requests payment in U.S. dollars will bear all associated currency exchange costs, which will be deductedfrom the payment.
When the Specified Currency Is Not Available. If we are obligated to make any payment in a specified currencyother than U.S. dollars, and the specified currency or any successor currency is not available to us or cannot be paid toyou due to circumstances beyond our control—such as the imposition of exchange controls or a disruption in thecurrency markets—we will be entitled to satisfy our obligation to make the payment in that specified currency bymaking the payment in U.S. dollars, on the basis specified in the applicable prospectus supplement.
For a specified currency other than U.S. dollars, the exchange rate will be the noon buying rate for cable transfers ofthe specified currency in New York City as quoted by the Federal Reserve Bank of New York on the then-most recentday on which that bank has quoted that rate.
The foregoing will apply to any debt security, whether in global or non-global form, and to any payment, including apayment at maturity. Any payment made under the circumstances and in a manner described above will not result in adefault under any debt security or the debt indenture.
Exchange Rate Agent. If we issue a debt security in a specified currency other than U.S. dollars, we will appoint afinancial institution to act as the exchange rate agent and will name the institution initially appointed when the debtsecurity is originally issued in the applicable prospectus supplement. We may select UBS Securities LLC or another ofour affiliates to perform this role. We may change the exchange rate agent from time to time after the original issuedate of the debt security without your consent and without notifying you of the change.
All determinations made by the exchange rate agent will be at its sole discretion unless we state in your prospectussupplement that any determination is subject to our approval. In the absence of manifest error, those determinationswill be conclusive for all purposes and binding on you and us, without any liability on the part of the exchange rateagent.
Payment When Offices Are Closed
If any payment is due on a debt security on a day that is not a business day, we will make the payment on the next daythat is a business day. Unless specified otherwise in the applicable prospectus supplement, payments postponed to thenext business day in this situation will be treated under the debt indenture as if they were made on the original due date.Postponement of this kind will not result in a default under any debt security or the debt indenture, and no interest willaccrue on the postponed amount from the original due date to the next day that is a business day. The term business dayhas a special meaning, which we describe above under “—Payment Dates and Regular Record Dates for Interest.”
Paying Agent
We may appoint one or more financial institutions to act as our paying agents, at whose designated offices debtsecurities in non-global entry form may be surrendered for payment at their maturity. We call each of those offices apaying agent. We may add, replace or terminate paying agents from time to time. We may also choose to act as ourown paying agent. Initially, we have appointed the trustee, at its corporate trust office in New York City, as the payingagent. We must notify the trustee of changes in the paying agents.
Settlement Mechanics
The settlement mechanics applicable to debt securities calling for physical settlement will be described in theapplicable prospectus supplement.
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Description of Debt Securities We May Offer
Unclaimed Payments
Regardless of who acts as paying agent, all money paid by us to a paying agent that remains unclaimed at the end oftwo years after the amount is due to a holder will be repaid to us. After that two-year period, the holder may look onlyto us for payment and not to the trustee, any other paying agent or anyone else.
Notices
Notices to be given to holders of a global debt security will be given only to the depositary, in accordance with itsapplicable policies as in effect from time to time. Notices to be given to holders of debt securities not in global formwill be sent by mail to the respective addresses of the holders as they appear in the trustee’s records, and will bedeemed given when mailed. Neither the failure to give any notice to a particular holder, nor any defect in a notice givento a particular holder, will affect the sufficiency of any notice given to another holder.
Book-entry and other indirect holders should consult their banks or brokers for information on how they will receivenotices.
Our Relationship with the Trustee
U.S. Bank Trust National Association has provided commercial banking and other services for us and our affiliates inthe past and may do so in the future. Among other things, U.S. Bank Trust National Association holds debt securitiesissued by us and serves as trustee or agent with regard to other obligations of UBS or its subsidiaries.
U.S. Bank Trust National Association is serving as the trustee for the debt securities and the warrants issued under ourwarrant indenture. Consequently, if an actual or potential event of default occurs with respect to any of these securities,the trustee may be considered to have a conflicting interest for purposes of the Trust Indenture Act of 1939. In thatcase, the trustee may be required to resign under one or more of the indentures, and we would be required to appoint asuccessor trustee. For this purpose, a “potential” event of default means an event that would be an event of default ifthe requirements for giving us default notice or for the default having to exist for a specific period of time weredisregarded.
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Description of Warrants We May OfferPlease note that in this section entitled “Description of Warrants We May Offer,” references to UBS AG, we, our andus refer only to UBS AG and not to its consolidated subsidiaries. In particular, the debt securities are obligationssolely of UBS AG, and not of any of its subsidiaries, including, without limitation, UBS Switzerland AG. Also, in thissection, references to “holders” mean those who own warrants registered in their own names, on the books that we orthe trustee or warrant agent, as applicable, maintain for this purpose, and not those who own beneficial interests inwarrants registered in street name or in warrants issued in book-entry form through one or more depositaries. Ownersof beneficial interests in the warrants should read the section below entitled “Legal Ownership and Book-EntryIssuance.”
We May Issue Many Series of Warrants
We may issue warrants that are debt warrants or universal warrants. We may offer warrants separately or together withother warrants or with our debt securities.
We may issue warrants in such amounts or in as many distinct series as we wish. We will issue each series of warrantsunder either a warrant indenture between UBS and U.S. Bank Trust National Association, or a warrant agreement, to beentered into before the first issuance of warrants under such warrant agreement, between UBS and a warrant agent tobe named in the prospectus supplement applicable to the first series of warrants to be issued pursuant to such a warrantagreement. This section summarizes terms of the warrant indenture and warrant agreements and terms of the warrantsthat apply generally to all series of warrants. Most of the financial and other specific terms of your warrant will bedescribed in the prospectus supplement accompanying this prospectus. Those terms may vary from the terms describedhere.
As you read this section, please remember that the specific terms of your warrant as described in your prospectussupplement will supplement and, if applicable, may modify or replace the general terms described in this section. Ifthere are differences between your prospectus supplement and this prospectus, your prospectus supplement willcontrol. Thus, the statements we make in this section may not apply to your warrant.
When we refer to a series of warrants, we mean all warrants issued as part of the same series under the warrantindenture or warrant agreement. When we refer to your prospectus supplement, we mean the prospectus supplementdescribing the specific terms of the warrant you purchase. The terms used in your prospectus supplement will have themeanings described in this prospectus, unless otherwise specified.
Types of Warrants
We may issue any of the following types of warrants:
Debt Warrants
We may issue warrants for the purchase of our debt securities on terms to be determined at the time of sale. We refer tothis type of warrant as a “debt warrant.”
Universal Warrants
We may also issue warrants, on terms to be determined at the time of sale, for the purchase or sale of, or whose cashvalue is determined by reference to the performance, level or value of, one or more of the following:
• securities of one or more issuers other than UBS AG;
• one or more currencies;
• one or more commodities;
• any other financial, economic or other measure or instrument, including the occurrence or non-occurrence ofany event or circumstance; and
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Description of Warrants We May Offer
• one or more indices or baskets of the items described above.
We refer to this type of warrant as a “universal warrant.” We refer to each property described above as a “warrantproperty.”
We may satisfy our obligations, if any, and the holder of a universal warrant may satisfy its obligations, if any, withrespect to any universal warrants by delivering:
• the warrant property;
• the cash value of the warrant property; or
• the cash value of the warrants determined by reference to the performance, level or value of the warrantproperty.
The applicable prospectus supplement will describe what we may deliver to satisfy our obligations, if any, and what theholder of a universal warrant may deliver to satisfy its obligations, if any, with respect to any universal warrants.
Information In Your Prospectus Supplement
All Warrants
Your prospectus supplement will describe the specific terms of your warrant, which will include some or all of thefollowing:
• the specific designation and aggregate number of, and the price at which we will issue, the warrants;
• the currency with which the warrants may be purchased;
• the warrant indenture or warrant agreement under which we will issue the warrants;
• the date on which the right to exercise the warrants will begin and the date on which that right will expire or,if you may not continuously exercise the warrants throughout that period, the specific date or dates on whichyou may exercise the warrants;
• whether the warrants will be issued in fully registered form or bearer form, in global or non-global form or inany combination of these forms;
• the identities of the warrant agent, any depositaries and any paying, transfer, calculation or other agents forthe warrants;
• any securities exchange or quotation system on which the warrants or any securities deliverable upon exerciseof the warrants may be listed;
• whether the warrants are to be sold separately or with other securities; and
• any other terms of the warrants.
If we issue warrants together with any other warrants or any debt securities, the applicable prospectus supplement willspecify whether the warrants will be separable from the other securities before the warrants’ expiration date.
No holder of a warrant will have any rights of a holder of the warrant property purchasable under the warrant.
An investment in a warrant may involve special risks, including risks associated with indexed securities and currency-related risks if the warrant or the warrant property is linked to an index or is payable in or otherwise linked to a non-U.S. dollar currency. We describe some of these risks below under “Considerations Relating to Indexed Securities” and“Considerations Relating to Securities Denominated or Payable in or Linked to a Non-U.S. Dollar Currency.”
We and our affiliates may resell warrants in market-making transactions after their initial issuance. We discuss thesetransactions above under “Description of Debt Securities We May Offer—Information in Your ProspectusSupplement.”
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Description of Warrants We May Offer
Debt Warrants
If you purchase debt warrants, your prospectus supplement may contain, where applicable, the following additionalinformation about your warrants:
• the designation, aggregate principal amount, currency and terms of the debt securities that may be purchasedupon exercise of the debt warrants;
• the exercise price and whether the exercise price may be paid in cash, by the exchange of any debt warrants orother securities or both and the method of exercising the debt warrants; and
• the designation, terms and amount of debt securities, if any, to be issued together with each of the debtwarrants and the date, if any, after which the debt warrants and debt securities will be separately transferable.
Universal Warrants
If you purchase universal warrants, your prospectus supplement may contain, where applicable, the followingadditional information about your warrants:
• whether the universal warrants are put warrants or call warrants, including in either case warrants that may besettled by means of net cash settlement or cashless exercise, or any other type of warrants;
• the money or warrant property, and the amount or method for determining the amount of money or warrantproperty, payable or deliverable upon exercise of each universal warrant;
• the price at which and the currency with which the warrant property may be purchased or sold upon theexercise of each universal warrant, or the method of determining that price;
• whether the exercise price may be paid in cash, by the exchange of any universal warrants or other securitiesor both, and the method of exercising the universal warrants; and
• whether the exercise of the universal warrants is to be settled in cash or by delivery of the warrant property orboth and whether settlement will occur on a net basis or a gross basis.
This Section Is Only a Summary
The warrant indenture or warrant agreement and its associated documents, including your warrant, contain the fulllegal text of the matters described in this section and your prospectus supplement. We have filed a copy of the warrantindenture with the SEC as an exhibit to our registration statement. See “Where You Can Find More Information” abovefor information on how to obtain a copy of it. We will describe the warrant agreement under which we issue anywarrants in the applicable prospectus supplement, and we will file that agreement with the SEC as an exhibit to anamendment to the registration statement of which this prospectus is a part or as an exhibit to a Form 6-K andincorporated herein by reference. See “Where You Can Find More Information” above for information on how toobtain a copy of a warrant agreement when it is filed.
This section and your prospectus supplement summarize all the material terms of the warrant indenture or warrantagreement and your warrant. They do not, however, describe every aspect of the warrant indenture or warrantagreement and your warrant. For example, in this section and in your prospectus supplement, we use terms that havebeen given special meaning in the warrant indenture or warrant agreement, but we describe the meaning for only themore important of those terms.
The Warrant Indenture
We may issue universal warrants under the warrant indenture. Warrants of this kind will not be secured by anyproperty or assets of UBS or its subsidiaries. Thus, by owning a warrant issued under the warrant indenture, you holdone of our unsecured obligations.
The warrants issued under the warrant indenture will be contractual obligations of UBS and will rank equally with allof our other unsecured contractual obligations and unsecured and unsubordinated debt. The warrant indenture does notlimit our ability to incur additional contractual obligations or debt.
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Description of Warrants We May Offer
The warrant indenture is a contract between us and U.S. Bank Trust National Association, which acts as trustee. Thetrustee has two main roles:
• First, the trustee can enforce your rights against us if we default. There are limitations on the extent to whichthe trustee acts on your behalf, which we describe later under “—Default, Remedies and Waiver of Default.”
• Second, the trustee performs administrative duties for us, such as sending you payments and notices.
We May Issue Many Series of Warrants Under the Warrant Indenture
We may issue as many distinct series of warrants under the warrant indenture as we wish. This section summarizesterms of the warrants that apply generally to all series issued under the warrant indenture. The provisions of the warrantindenture allow us not only to issue warrants with terms different from those of warrants previously issued under thewarrant indenture, but also to “reopen” a previous issue of a series of warrants and issue additional warrants of thatseries.
Amounts That We May Issue
The warrant indenture does not limit the aggregate number of warrants that we may issue or the number of series or theaggregate amount of any particular series. We may issue warrants and other securities at any time without your consentand without notifying you.
The warrant indenture and the warrants do not limit our ability to incur other contractual obligations or indebtedness orto issue other securities. Also, the terms of the warrants do not impose financial or similar restrictions on us.
Expiration Date and Payment or Settlement Date
The term “expiration date” with respect to any warrant means the date on which the right to exercise the warrantexpires. The term “payment or settlement date” with respect to any warrant means the date when any money or warrantproperty with respect to that warrant becomes payable or deliverable upon exercise or redemption of that warrant inaccordance with its terms.
Governing Law
The warrant indenture is, and the warrants issued under it will be, governed by New York law.
Currency of Warrants
Amounts that become due and payable on your warrant will be payable in a currency, composite currency, basket ofcurrencies or currency unit or units specified in your prospectus supplement. We refer to this currency, compositecurrency, basket of currencies or currency unit or units as a “specified currency.” The specified currency for yourwarrant will be U.S. dollars, unless your prospectus supplement states otherwise. You will have to pay for your warrantby delivering the requisite amount of the specified currency to UBS Securities LLC, UBS Financial Services Inc. oranother firm that we name in your prospectus supplement, unless other arrangements have been made between you andus or you and that firm. We will make payments on your warrants in the specified currency, except as described belowin “—Payment Mechanics for Warrants.” See “Considerations Relating to Securities Denominated or Payable in orLinked to a Non-U.S. Dollar Currency” below for more information about risks of investing in warrants of this kind.
Redemption
We will not be entitled to redeem your warrant before its expiration date unless your prospectus supplement specifies aredemption commencement date.
If your prospectus supplement specifies a redemption commencement date, it will also specify one or more redemptionprices. It may also specify one or more redemption periods during which the redemption prices relating to a redemptionof warrants during those periods will apply.
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Description of Warrants We May Offer
If your prospectus supplement specifies a redemption commencement date, your warrant will be redeemable at ouroption at any time on or after that date or at a specified time or times. If we redeem your warrant, we will do so at thespecified redemption price. If different prices are specified for different redemption periods, the price we pay will bethe price that applies to the redemption period during which your warrant is redeemed.
If we exercise an option to redeem any warrant, we will give to the trustee and holders written notice of the redemptionprice of the warrant to be redeemed, not less than 10 days nor more than 60 days before the applicable redemption dateor within any other period before the applicable redemption date specified in the applicable prospectus supplement. Wewill give the notice in the manner described below in “—Notices.”
We or our affiliates may purchase warrants from investors who are willing to sell from time to time, either in the openmarket at prevailing prices or in private transactions at negotiated prices. Warrants that we or they purchase may, at ourdiscretion, be held, resold or cancelled.
Mergers and Similar Transactions
We are generally permitted to merge or consolidate with another corporation or other entity. We are also permitted tosell our assets substantially as an entirety to another corporation or other entity. With regard to any series of warrants,however, we may not take any of these actions unless all the following conditions are met:
• If the successor entity in the transaction is not UBS, the successor entity must be organized as a corporation,partnership or trust and must expressly assume our obligations under the warrants of that series and thewarrant indenture. The successor entity may be organized under the laws of any jurisdiction, whether inSwitzerland or elsewhere.
• Immediately after the transaction, no default under the warrants of that series has occurred and is continuing.For this purpose, “default under the warrants of that series” means an event of default with respect to thatseries or any event that would be an event of default with respect to that series if the requirements for givingus default notice and for our default having to continue for a specific period of time were disregarded. Wedescribe these matters below under “—Default, Remedies and Waiver of Default.”
If the conditions described above are satisfied with respect to the warrants of any series, we will not need to obtain theapproval of the holder of those warrants in order to merge or consolidate or to sell our assets. Also, these conditionswill apply only if we wish to merge or consolidate with another entity or sell our assets substantially as an entirety toanother entity. We will not need to satisfy these conditions if we enter into other types of transactions, including anytransaction in which we acquire the stock or assets of another entity, any transaction that involves a change of controlof UBS but in which we do not merge or consolidate and any transaction in which we sell less than substantially all ourassets. We will also not need to satisfy these conditions if UBS AG merges into or consolidates with, or conveys,transfers or leases its properties and assets substantially as an entirety to any affiliate of UBS AG that is the parent or awholly-owned subsidiary of the parent, provided that the parent shall expressly and irrevocably guarantee, by asupplemental indenture, the due and punctual payment of the principal of and any premium and interest on all thesecurities and the performance and observance of every covenant of the indenture to be performed and observed byUBS AG.
Also, if we merge, consolidate or sell our assets substantially as an entirety and the successor is a non-Swiss entity,neither we nor any successor would have any obligation to compensate you for any resulting adverse tax consequencesrelating to your warrants.
Default, Remedies and Waiver of Default
You will have special rights if an event of default with respect to your warrant occurs and is continuing, as described inthis subsection.
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Description of Warrants We May Offer
Events of Default. Unless your prospectus supplement says otherwise, when we refer to an event of default withrespect to any series of warrants issued under the warrant indenture, we mean that, upon satisfaction by the holder ofthe warrant of all conditions precedent to our relevant obligation or covenant to be satisfied by the holder, any of thefollowing occurs:
• We do not pay any money or deliver any warrant property with respect to that warrant on the payment orsettlement date in accordance with the terms of that warrant;
• We remain in breach of any covenant we make in the warrant indenture for the benefit of the holder of thatwarrant for 60 days after we receive a notice of default stating that we are in breach and requiring us toremedy the breach. The notice must be sent by the trustee or the holders of at least 10% in number of therelevant series of warrants;
• We file for bankruptcy or certain other bankruptcy, insolvency or reorganization events relating to UBSoccur; or
• If the applicable prospectus supplement states that any additional event of default applies to the series, thatevent of default occurs.
If we do not pay any money or deliver any warrant property when due with respect to a particular warrant of a series,as described in the first bullet point above, that failure to make a payment or delivery will not constitute an event ofdefault with respect to any other warrant of the same series or any other series.
Remedies If an Event of Default Occurs. If an event of default occurs with respect to any series of warrants issuedunder the warrant indenture, the trustee will have special duties. In that situation, the trustee will be obligated to usethose of its rights and powers under the warrant indenture, and to use the same degree of care and skill in doing so, thata prudent person would use in that situation in conducting his or her own affairs.
Except as described in the prior paragraph, the trustee is not required to take any action under the warrant indenture atthe request of any holders unless the holders offer the trustee reasonable protection from expenses and liability. This iscalled an indemnity. If the trustee is provided with an indemnity reasonably satisfactory to it, the holders of a majorityin number of all warrants of the relevant series may direct the time, method and place of conducting any lawsuit orother formal legal action seeking any remedy available to the trustee. These majority holders may also direct the trusteein performing any other action under the warrant indenture with respect to the warrants of that series.
Before you bypass the trustee and bring your own lawsuit or other formal legal action or take other steps to enforceyour rights or protect your interests relating to any warrant issued under the warrant indenture, all of the followingmust occur:
• The holder of your warrant must give the trustee written notice that an event of default has occurred, and theevent of default must not have been cured or waived.
• The holders of not less than 25% in number of all warrants of your series must make a written request that thetrustee take action because of the default, and they or other holders must offer to the trustee indemnityreasonably satisfactory to the trustee against the cost and other liabilities of taking that action.
• The trustee must not have taken action for 60 days after the above steps have been taken.
• During those 60 days, the holders of a majority in number of the warrants of your series must not have giventhe trustee directions that are inconsistent with the written request of the holders of not less than 25% innumber of the warrants of your series.
You are, however, entitled at any time to bring a lawsuit for the payment of any money or delivery of any warrantproperty due on your warrant on or after its payment or settlement date.
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Description of Warrants We May Offer
Waiver of Default. The holders of not less than a majority in number of the warrants of any series may waive adefault for all warrants of that series. If this happens, the default will be treated as if it has not occurred. No one canwaive a default in payment of any money or delivery of any warrant property due on any warrant, however, without theapproval of the particular holder of that warrant.
We Will Give the Trustee Information About Defaults Annually. We will furnish to the trustee every year awritten statement of two of our officers certifying that to their knowledge we are in compliance with the warrantindenture and the warrants issued under it, or else specifying any default under the indenture.
Book-entry and other indirect owners should consult their banks or brokers for information on how to give notice ordirection to or make a request of the trustee. Book-entry and other indirect owners are described below under “LegalOwnership and Book-Entry Issuance.”
Modification and Waiver of Covenants
There are three types of changes we can make to the warrant indenture and the warrants of any series issued under thewarrant indenture.
Changes Requiring Each Holder’s Approval. First, there are changes that cannot be made without the approval ofeach holder of a warrant affected by the change. Here is a list of those types of changes:
• change the exercise price of the warrant;
• change the terms of any warrant with respect to the payment or settlement date of the warrant;
• reduce the amount of money payable or reduce the amount or change the kind of warrant property deliverableupon the exercise of the warrant or any premium payable upon redemption of the warrant;
• change the currency of any payment on a warrant;
• change the place of payment on a warrant;
• permit redemption of a warrant if not previously permitted;
• impair a holder’s right to exercise its warrant, or sue for payment of any money payable or delivery of anywarrant property deliverable with respect to its warrant on or after the payment or settlement date or, in thecase of redemption, the redemption date;
• if any warrant provides that the holder may require us to repurchase the warrant, impair the holder’s right torequire repurchase of the warrant;
• reduce the percentage in number of the warrants of any one or more affected series, taken separately ortogether, as applicable, the approval of whose holders is needed to change the indenture or those warrants;
• reduce the percentage in number of the warrants of any one or more affected series, taken separately ortogether, as applicable, the consent of whose holders is needed to waive our compliance with the indenture orto waive defaults; and
• change the provisions of the indenture dealing with modification and waiver in any other respect, except toincrease any required percentage referred to above or to add to the provisions that cannot be changed orwaived without approval of the holder of each affected warrant.
Changes Not Requiring Approval of Holders. The second type of change does not require any approval by holdersof the warrants of an affected series. These changes are limited to clarifications and changes that would not adverselyaffect the warrants of that series in any material respect. Nor do we need any approval to make changes that affect onlywarrants to be issued under the warrant indenture after the changes take effect.
We may also make changes or obtain waivers that do not adversely affect a particular warrant, even if they affect otherwarrants. In those cases, we do not need to obtain the approval of the holder of that warrant; we need only obtain anyrequired approvals from the holders of the affected warrants.
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Description of Warrants We May Offer
Changes Requiring Majority Approval. Any other change to the warrant indenture and the warrants issued underthe warrant indenture would require the following approval:
• If the change affects only the warrants of a particular series, it must be approved by the holders of a majorityin number of the warrants of that series.
• If the change affects the warrants of more than one series issued under the warrant indenture, it must beapproved by the holders of a majority in number of all series affected by the change, with the warrants of allthe affected series voting together as one class for this purpose.
In each case, the required approval must be given by written consent.
The same majority approval would be required for us to obtain a waiver of any of our covenants in the warrantindenture. If the holders approve a waiver of a covenant, we will not have to comply with that covenant. The holders,however, cannot approve a waiver of any provision in a particular warrant, or in the warrant indenture as it affects thatwarrant, that we cannot change without the approval of the holder of that warrant as described above in “—ChangesRequiring Each Holder’s Approval,” unless that holder approves the waiver.
Book-entry and other indirect owners should consult their banks or brokers for information on how approval may begranted or denied if we seek to change the warrant indenture or any warrants or request a waiver.
Special Rules for Action by Holders
When holders take any action under the warrant indenture, such as giving a notice of default, approving any change orwaiver or giving the trustee an instruction, we will apply the following rules.
Only Outstanding Warrants Are Eligible. Only holders of outstanding warrants of the applicable series will beeligible to participate in any action by holders of warrants of that series. Also, we will count only outstanding warrantsin determining whether the various percentage requirements for taking action have been met. For these purposes, awarrant will not be “outstanding”:
• if it has been surrendered for cancellation;
• if it has been called for redemption;
• if we have deposited or set aside, in trust for its holder, money or warrant property for its payment orsettlement; or
• if we or one of our affiliates, such as UBS Securities LLC or UBS Financial Services Inc., is the beneficialowner.
Determining Record Dates for Action by Holders. We will generally be entitled to set any day as a record date forthe purpose of determining the holders that are entitled to take action under the warrant indenture. In certain limitedcircumstances, only the trustee will be entitled to set a record date for action by holders. If we or the trustee set a recorddate for an approval or other action to be taken by holders, that vote or action may be taken only by persons or entitieswho are holders on the record date and must be taken during the period that we specify for this purpose, or that thetrustee specifies if it sets the record date. We or the trustee, as applicable, may shorten or lengthen this period fromtime to time. This period, however, may not extend beyond the 180th day after the record date for the action. Inaddition, record dates for any global warrant may be set in accordance with procedures established by the depositaryfrom time to time. Accordingly, record dates for global warrants may differ from those for other warrants.
Notices
Notices to be given to holders of a global warrant will be given only to the depositary, in accordance with its applicablepolicies as in effect from time to time. Notices to be given to holders of warrants not in global form will be sent bymail to the respective addresses of the holders as they appear in the trustee’s records, and will be deemed given whenmailed. Neither the failure to give any notice to a particular holder, nor any defect in a notice given to a particularholder, will affect the sufficiency of any notice given to another holder.
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Description of Warrants We May Offer
Book-entry and other indirect owners should consult their banks or brokers for information on how they will receivenotices.
The Warrant Agreements
We may issue debt warrants and some universal warrants in one or more series and under one or more warrantagreements, each to be entered into between us and a bank, trust company or other financial institution as warrantagent. We may add, replace or terminate warrant agents from time to time. We may also choose to act as our ownwarrant agent. We will describe the warrant agreement under which we issue any warrants in the applicable prospectussupplement, and we will file that agreement with the SEC as an exhibit to an amendment to the registration statementof which this prospectus is a part or as an exhibit to a Form 6-K and incorporated herein by reference. See “Where YouCan Find More Information” above for information on how to obtain a copy of a warrant agreement when it is filed.
We may also issue universal warrants under the warrant indenture. For these warrants, the applicable provisions of thewarrant indenture described above would apply instead of the provisions described in this section.
Enforcement of Rights
The warrant agent under a warrant agreement will act solely as our agent in connection with the warrants issued underthat agreement. The warrant agent will not assume any obligation or relationship of agency or trust for or with anyholders of those warrants. Any holder of warrants may, without the consent of any other person, enforce by appropriatelegal action, on its own behalf, its right to exercise those warrants in accordance with their terms. No holder of anywarrant will be entitled to any rights of a holder of the debt securities or any other warrant property purchasable uponexercise of the warrant, including any right to receive payments on those debt securities or other warrant property or toenforce any covenants or rights in the relevant indenture or any other agreement.
Warrant Agreement Will Not Be Qualified Under Trust Indenture Act
No warrant agreement will be qualified as an indenture, and no warrant agent will be required to qualify as a trustee,under the Trust Indenture Act. Therefore, holders of warrants issued under a warrant agreement will not have theprotection of the Trust Indenture Act with respect to their warrants.
Modification and Waiver of Covenants
There are three types of changes we can make to the warrants of any series and the related warrant agreement.
Changes Requiring Each Holder’s Approval. We may not amend any particular warrant or a warrant agreement withrespect to any particular warrant unless we obtain the consent of the holder of that warrant, if the amendment would:
• change the exercise price of the warrant;
• change the kind or reduce the amount of the warrant property or other consideration receivable upon exercise,cancellation or expiration of the warrant, except as permitted by the antidilution or other adjustmentprovisions of the warrant;
• shorten, advance or defer the period of time during which the holder may exercise the warrant or otherwiseimpair the holder’s right to exercise the warrant; or
• reduce the percentage of outstanding, unexpired warrants of any series or class the consent of whose holders isrequired to amend the series or class, or the applicable warrant agreement with regard to that series or class, asdescribed below.
Changes Not Requiring Approval of Holders. We and the applicable warrant agent may amend any warrant orwarrant agreement without the consent of any holder:
• to cure any ambiguity;
• to cure, correct or supplement any defective or inconsistent provision; or
• to make any other change that we believe is necessary or desirable and will not adversely affect the interestsof the affected holders in any material respect.
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Description of Warrants We May Offer
We do not need any approval to make changes that affect only warrants to be issued after the changes take effect. Wemay also make changes that do not adversely affect a particular warrant in any material respect, even if they adverselyaffect other warrants in a material respect. In those cases, we do not need to obtain the approval of the holder of theunaffected warrant; we need only obtain any required approvals from the holders of the affected warrants.
Changes Requiring Majority Approval. Any other change to a particular warrant agreement and the warrantsissued under that agreement would require the following approval:
• If the change affects only the warrants of a particular series issued under that agreement, the change must beapproved by the holders of a majority of the outstanding, unexpired warrants of that series.
• If the change affects the warrants of more than one series issued under that agreement, the change must beapproved by the holders of a majority of all outstanding, unexpired warrants of all series affected by thechange, with the warrants of all the affected series voting together as one class for this purpose.
In each case, the required approval must be given in writing.
Mergers and Similar Transactions Are Permitted; No Restrictive Covenants or Events of Default
The warrant agreements and any warrants issued under the warrant agreements will not restrict our ability to merge orconsolidate with, or sell our assets to, another corporation or other entity or to engage in any other transactions. If atany time we merge or consolidate with, or sell our assets substantially as an entirety to, another corporation or otherentity, the successor entity will succeed to and assume our obligations under the warrants and warrant agreements. Wewill then be relieved of any further obligation under the warrants and warrant agreements.
The warrant agreements and any warrants issued under the warrant agreements will not include any restrictions on ourability to put liens on our assets, including our interests in our subsidiaries, nor will they restrict our ability to sell ourassets. The warrant agreements and any warrants issued under the warrant agreements also will not provide for anyevents of default or remedies upon the occurrence of any events of default.
Governing Law
Each warrant agreement and any warrants issued under the warrant agreement will be governed by New York law.
Form, Exchange and Transfer of Warrants
We will issue each warrant in global—i.e., book-entry—form only, unless we say otherwise in the applicableprospectus supplement. Warrants in book-entry form will be represented by a global security registered in the name ofa depositary, which will be the holder of all the warrants represented by the global security. Those who own beneficialinterests in a global warrant will do so through participants in the depositary’s system, and the rights of these indirectowners will be governed solely by the applicable procedures of the depositary and its participants. We describe book-entry securities below under “Legal Ownership and Book-Entry Issuance.” Unless we specify otherwise in theapplicable prospectus supplement, The Depository Trust Company, New York, New York, known as DTC, will be thedepositary for all warrants in global form.
If a warrant is issued as a registered global warrant, only the depositary—e.g., DTC, Euroclear and Clearstream—willbe entitled to transfer and exchange the warrant as described in this subsection, since the depositary will be the soleholder of the warrant.
In addition, we will issue each warrant in registered form, unless we say otherwise in the applicable prospectussupplement. If we issue a warrant in bearer form, the applicable prospectus supplement will describe the provisionsthat would apply to that security.
If any warrants cease to be issued in registered global form, then unless we indicate otherwise in your prospectussupplement, they will be issued:
• only in fully registered form; and
• in denominations of 100 warrants and any multiple of 100 warrants.
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Description of Warrants We May Offer
Holders may exchange their warrants for warrants of smaller denominations or combined into fewer warrants of largerdenominations, as long as the total number of warrants is not changed.
Holders of non-global warrants may exchange or transfer their warrants at the office of the trustee or warrant agent, asapplicable. They may also replace lost, stolen, destroyed or mutilated warrants at that office. We have appointed thetrustee or warrant agent, as applicable, to act as our agent for registering warrants in the names of holders andtransferring and replacing warrants. We may appoint another entity to perform these functions or perform themourselves.
Holders will not be required to pay a service charge to transfer or exchange their warrants, but they may be required topay for any tax or other governmental charge associated with the transfer or exchange. The transfer or exchange, andany replacement, will be made only if our transfer agent is satisfied with the holder’s proof of legal ownership. Thetransfer agent may require an indemnity before replacing any warrants.
If we have the right to redeem, accelerate or settle any warrants before their expiration, and we exercise our right as toless than all those warrants, we may block the transfer or exchange of those warrants during the period beginning 15days before the day we mail the notice of exercise and ending on the day of that mailing or during any other periodspecified in the applicable prospectus supplement, in order to freeze the list of holders who will receive the mailing.We may also refuse to register transfers of or exchange any warrant selected for early settlement, except that we willcontinue to permit transfers and exchanges of the unsettled portion of any warrant being partially settled.
If we have designated additional transfer agents for your warrant, they will be named in your prospectus supplement.We may appoint additional transfer agents or cancel the appointment of any particular transfer agent. We may alsoapprove a change in the office through which any transfer agent acts.
The rules for exchange described above apply to exchange of warrants for other warrants of the same series and kind. Ifa warrant is exercisable for a different kind of security, such as one that we have not issued, or for other property, therules governing that type of exercise will be described in the applicable prospectus supplement.
Payment Mechanics for Warrants
Who Receives Payment?
If money is due on a warrant at its payment or settlement date, we will pay the amount to the holder of the warrantagainst surrender of the warrant at a proper place of payment or, in the case of a global warrant, in accordance with theapplicable policies of the depositary.
How We Will Make Payments Due in U.S. Dollars
We will follow the practices described in this subsection when paying amounts due in U.S. dollars. Payments ofamounts due in other currencies will be made as described in the next subsection.
Payments on Global Warrants. We will make payments on a global warrant in accordance with the applicablepolicies of the depositary as in effect from time to time. Under those policies, we will pay directly to the depositary, orits nominee, and not to any indirect owners who own beneficial interests in the global warrant. An indirect owner’sright to receive those payments will be governed by the rules and practices of the depositary and its participants, asdescribed in the section entitled “Legal Ownership and Book-Entry Issuance—What Is a Global Security?”.
Payments on Non-Global Warrants. We will make payments on a warrant in non-global, registered form asfollows. We will make all payments by check at the paying agent described below, against surrender of the warrant. Allpayments by check will be made in next-day funds—that is, in funds that become available on the day after the checkis cashed.
Alternatively, if a non-global warrant has an original issue price of at least $1,000,000 and the holder asks us to do so,we will pay any amount that becomes due on the warrant by wire transfer of immediately available funds to an account
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Description of Warrants We May Offer
at a bank in New York City, on the payment or settlement date. To request wire payment, the holder must give thepaying agent appropriate wire transfer instructions at least five business days before the requested wire payment is due.Payment will be made only after the warrant is surrendered to the paying agent.
Book-entry and other indirect owners should consult their banks or brokers for information on how they will receivepayments on their warrants.
How We Will Make Payments Due in Other Currencies
We will follow the practices described in this subsection when paying amounts that are due in a specified currencyother than U.S. dollars.
Payments on Global Warrants. We will make payments on a global warrant in accordance with the applicablepolicies of the depositary as in effect from time to time. We understand that these policies, as currently in effect atDTC, are as follows:
Unless otherwise indicated in your prospectus supplement, if you are an indirect owner of global warrants denominatedin a specified currency other than U.S. dollars and if you have the right to elect to receive payments in that othercurrency and do make that election, you must notify the participant through which your interest in the global warrant isheld of your election on or before the 16th day before the payment or settlement date. Your participant must, in turn,notify DTC of your election on or before the 12th DTC business day before the payment or settlement date.
DTC, in turn, will notify the paying agent of your election in accordance with DTC’s procedures.
If complete instructions are received by the participant and forwarded by the participant to DTC, and by DTC to thepaying agent, on or before the dates noted above, the paying agent, in accordance with DTC’s instructions, will makethe payment to you or your participant by wire transfer of immediately available funds to an account maintained by youor your participant with a bank located in the country issuing the specified currency or in another jurisdictionacceptable to us and the paying agent.
If the foregoing steps are not properly completed, we expect DTC to inform the paying agent that payment is to bemade in U.S. dollars. In that case, we or our agent will convert the payment to U.S. dollars in the manner describedbelow under “—Conversion to U.S. Dollars.” We expect that we or our agent will then make the payment in U.S.dollars to DTC, and that DTC in turn will pass it along to its participants.
Book-entry and other indirect owners of a global warrant denominated in a currency other than U.S. dollars shouldconsult their banks or brokers for information on how to request payment in the specified currency.
Payments on Non-Global Warrants. Except as described in the second to last paragraph under this heading, wewill make payments on warrants in non-global form in the applicable specified currency. We will make these paymentsby wire transfer of immediately available funds to any account that is maintained in the applicable specified currency ata bank designated by the holder and is acceptable to us and the trustee or warrant agent, as applicable. To designate anaccount for wire payment, the holder must give the paying agent appropriate wire instructions at least five businessdays before the requested wire payment is due. The payment will be made only after the warrant is surrendered to thepaying agent.
If a holder fails to give instructions as described above, we will notify the holder at the address in the records of thetrustee or warrant agent, as applicable, and will make the payment within five business days after the holder providesappropriate instructions. Any late payment made in these circumstances will be treated under the warrant indenture orwarrant agreement, as applicable, as if made on the payment or settlement date, and no interest will accrue on the latepayment from the payment or settlement date to the date paid.
Although a payment on a warrant in non-global form may be due in a specified currency other than U.S. dollars, wewill make the payment in U.S. dollars if the holder asks us to do so. To request U.S. dollar payment, the holder mustprovide appropriate written notice to the trustee or warrant agent, as applicable, at least five business days before thepayment or settlement date for which payment in U.S. dollars is requested.
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Description of Warrants We May Offer
Indirect owners of a non-global warrant with a specified currency other than U.S. dollars should contact their banks orbrokers for information about how to receive payments in the specified currency or in U.S. dollars.
Conversion to U.S. Dollars. When we are asked by a holder to make payments in U.S. dollars of an amount due inanother currency, either on a global warrant or a non-global warrant as described above, we will determine the U.S.dollar amount the holder receives as follows. The exchange rate agent described below will request currency bidquotations expressed in U.S. dollars from three or, if three are not available, then two, recognized foreign exchangedealers in New York City, any of which may be the exchange rate agent, an affiliate of UBS, as of 11:00 A.M., NewYork City time, on the second business day before the payment date. Currency bid quotations will be requested on anaggregate basis, for all holders of warrants requesting U.S. dollar payments of amounts due on the same date in thesame specified currency. The U.S. dollar amount the holder receives will be based on the highest acceptable currencybid quotation received by the exchange rate agent. If the exchange rate agent determines that at least two acceptablecurrency bid quotations are not available on that second business day, the payment will be made in the specifiedcurrency.
To be acceptable, a quotation must be given as of 11:00 A.M., New York City time, on the second business day beforethe due date and the quoting dealer must commit to execute a contract at the quotation in the total amount due in thatcurrency on all series of warrants. If some but not all of the relevant warrants are LIBOR warrants or EURIBORwarrants, the second preceding business day will be determined for this purpose as if none of those warrants wereLIBOR warrants or EURIBOR warrants.
A holder that requests payment in U.S. dollars will bear all associated currency exchange costs, which will be deductedfrom the payment.
When the Specified Currency Is Not Available. If we are obligated to make any payment in a specified currencyother than U.S. dollars, and the specified currency or any successor currency is not available to us due to circumstancesbeyond our control—such as the imposition of exchange controls or a disruption in the currency markets—we will beentitled to satisfy our obligation to make the payment in that specified currency by making the payment in U.S. dollars,on the basis specified in the applicable prospectus supplement.
For a specified currency other than U.S. dollars, the exchange rate will be the noon buying rate for cable transfers ofthe specified currency in New York City as quoted by the Federal Reserve Bank of New York on the then-most recentday on which that bank has quoted that rate.
The foregoing will apply to any warrant, whether in global or non-global form, and to any payment, including apayment at the payment or settlement date. Any payment made under the circumstances and in a manner describedabove will not result in a default under any warrant or the indenture.
Exchange Rate Agent. If we issue a warrant in a specified currency other than U.S. dollars, we will appoint afinancial institution to act as the exchange rate agent and will name the institution initially appointed when the warrantis originally issued in the applicable prospectus supplement. We may select UBS Securities LLC or another of ouraffiliates to perform this role. We may change the exchange rate agent from time to time after the original issue date ofthe warrant without your consent and without notifying you of the change.
All determinations made by the exchange rate agent will be in its sole discretion unless we state in the applicableprospectus supplement that any determination requires our approval. In the absence of manifest error, thosedeterminations will be conclusive for all purposes and binding on you and us, without any liability on the part of theexchange rate agent.
Payment When Offices Are Closed
If any payment or delivery of warrant property is due on a warrant on a day that is not a business day, we will make thepayment or delivery on the next day that is a business day. Unless otherwise specified in the applicable prospectussupplement, payments or deliveries postponed to the next business day in this situation will be treated under the
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Description of Warrants We May Offer
indenture as if they were made on the original payment or settlement date. Postponement of this kind will not result ina default under any warrant or the indenture, and no interest will accrue on the postponed amount from the originalpayment or settlement date to the next day that is a business day.
The term “business day” means, for any warrant, a day that meets all the following applicable requirements:
• for all warrants, is a Monday, Tuesday, Wednesday, Thursday or Friday that is not a day on which bankinginstitutions in New York City generally are authorized or obligated by law, regulation or executive order toclose and that satisfies any other criteria specified in your prospectus supplement;
• if the warrant has a specified currency other than U.S. dollars or euros, is also a day on which bankinginstitutions are not authorized or obligated by law, regulation or executive order to close in the principalfinancial center of the country issuing the specified currency;
• if the warrant is held through Euroclear, is also not a day on which banking institutions in Brussels, Belgiumare generally authorized or obligated by law, regulation or executive order to close; and
• if the warrant is held through Clearstream, is also not a day on which banking institutions in Luxembourg aregenerally authorized or obligated by law, regulation or executive order to close.
Paying Agent
We may appoint one or more financial institutions to act as our paying agents, at whose designated offices warrants innon-global form may be surrendered for payment at their payment or settlement date. We call each of those offices apaying agent. We may add, replace or terminate paying agents from time to time. We may also choose to act as ourown paying agent. Initially, we have appointed the trustee, at its corporate trust office in New York City, as the payingagent for warrants issued under the warrant indenture. We must notify the trustee of changes in the paying agents forwarrants issued under the warrant indenture.
Unclaimed Payments
Regardless of who acts as paying agent, all money paid or warrant property delivered by us to a paying agent thatremains unclaimed at the end of two years after the amount is due to a holder will be repaid or redelivered to us. Afterthat two-year period, the holder may look only to us for payment of any money or delivery of any warrant property,and not to the trustee or warrant agent, as applicable, any other paying agent or anyone else.
Payment of Additional Amounts
A relevant jurisdiction may require UBS to withhold amounts from payments on a warrant for taxes or any othergovernmental charges. If the relevant jurisdiction requires a withholding of this type, UBS may be required to pay youan additional amount so that the net amount you receive will be the amount specified in the warrant to which you areentitled.
By relevant jurisdiction, we mean Switzerland or a jurisdiction in which the UBS branch through which warrants areissued is located. UBS will not have to pay additional amounts in respect of taxes or other governmental charges thatare required to be deducted or withheld by any paying agent from a payment on a warrant, if such payment can bemade without such deduction or withholding by any other paying agent, or in respect of taxes or other governmentalcharges that would not have been imposed but for
• the existence of any present or former connection between you and the relevant jurisdiction, other than themere holding of the warrant and the receipt of payments on it;
• your status as an individual resident of a member state of the European Union;
• a failure to comply with any reasonable certification, documentation, information or other reportingrequirement concerning your nationality, residence, identity or connection with the relevant jurisdiction, if
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Description of Warrants We May Offer
such compliance is required as a precondition to relief or exemption from such taxes or other governmentalcharges (including, without limitation, a certification that you are not resident in the relevant jurisdiction orare not an individual resident of a member state of the European Union); or
• a change in law that becomes effective more than 30 days after a payment on the warrant becomes due andpayable or on which the payment is duly provided for, whichever occurs later.
In addition, no additional amounts will be required to be paid on account of any deduction or withholding imposed orrequired pursuant to Sections 1471 through 1474 of the Internal Revenue Code, any current or future regulations orofficial interpretations thereof, any agreement entered into pursuant to Section 1471(b) of the Internal Revenue Code,or any fiscal or regulatory legislation, rules or practices adopted pursuant to any intergovernmental agreement enteredinto in connection with the implementation of such Sections of the Internal Revenue Code.
These provisions will also apply to any taxes or governmental charges imposed by any jurisdiction in which asuccessor to UBS is organized. The prospectus supplement relating to the warrant may describe additionalcircumstances in which UBS would not be required to pay additional amounts.
Calculation Agent
Calculations relating to warrants will be made by the calculation agent, an institution that we appoint as our agent forthis purpose. That institution may include any affiliate of ours, such as UBS Securities LLC. The prospectussupplement for a particular warrant will name the institution that we have appointed to act as the calculation agent forthat warrant as of its original issue date. We may appoint a different institution to serve as calculation agent from timeto time after the original issue date of the warrant without your consent and without notifying you of the change.
The calculation agent’s determination of any amount of money payable or warrant property deliverable with respect toa warrant will be final and binding in the absence of manifest error.
All percentages resulting from any calculation relating to a warrant will be rounded upward or downward, asappropriate, to the next higher or lower one hundred-thousandth of a percentage point, e.g., 9.876541% (or .09876541)being rounded down to 9.87654% (or .0987654) and 9.876545% (or .09876545) being rounded up to 9.87655% (or.0987655). All amounts used in or resulting from any calculation relating to a warrant will be rounded upward ordownward, as appropriate, to the nearest cent, in the case of U.S. dollars, or to the nearest corresponding hundredth of aunit, in the case of a currency other than U.S. dollars, with one-half cent or one-half of a corresponding hundredth of aunit or more being rounded upward.
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Legal Ownership and Book-Entry IssuanceIn this section, we describe special considerations that will apply to registered securities issued in global—i.e., book-entry—form. First we describe the difference between legal ownership and indirect ownership of registered securities.Then we describe special provisions that apply to global securities.
Who is The Legal Owner of a Registered Security?
Each debt security or warrant in registered form will be represented either by a certificate issued in definitive form to aparticular investor or by one or more global securities representing the entire issuance of securities. We refer to thosewho have securities registered in their own names, on the books that we or the trustee, warrant agent or other agentmaintain for this purpose, as the “holders” of those securities. These persons are the legal holders of the securities. Werefer to those who, indirectly through others, own beneficial interests in securities that are not registered in their ownnames as indirect owners of those securities. As we discuss below, indirect owners are not legal holders, and investorsin securities issued in book-entry form or in street name will be indirect owners.
Book-Entry Owners
We will issue each security in book-entry form only. This means securities will be represented by one or more globalsecurities registered in the name of a financial institution that holds them as depositary on behalf of other financialinstitutions that participate in the depositary’s book-entry system. These participating institutions, in turn, holdbeneficial interests in the securities on behalf of themselves or their customers.
Under each indenture or warrant agreement, only the person in whose name a security is registered is recognized as theholder of that security. Consequently, for securities issued in global form, we will recognize only the depositary as theholder of the securities and we will make all payments on the securities, including deliveries of any property other thancash, to the depositary. The depositary passes along the payments it receives to its participants, which in turn pass thepayments along to their customers who are the beneficial owners. The depositary and its participants do so underagreements they have made with one another or with their customers; they are not obligated to do so under the terms ofthe securities.
As a result, investors will not own securities directly. Instead, they will own beneficial interests in a global security,through a bank, broker or other financial institution that participates in the depositary’s book-entry system or holds aninterest through a participant. As long as the securities are issued in global form, investors will be indirect owners, andnot holders, of the securities.
Street Name Owners
In the future we may terminate a global security or issue securities initially in non-global form. In these cases, investorsmay choose to hold their securities in their own names or in street name. Securities held by an investor in street namewould be registered in the name of a bank, broker or other financial institution that the investor chooses, and theinvestor would hold only a beneficial interest in those securities through an account he or she maintains at thatinstitution.
For securities held in street name, we will recognize only the intermediary banks, brokers and other financialinstitutions in whose names the securities are registered as the holders of those securities and we will make allpayments on those securities, including deliveries of any property other than cash, to them. These institutions passalong the payments they receive to their customers who are the beneficial owners, but only because they agree to do soin their customer agreements or because they are legally required to do so. Investors who hold securities in street namewill be indirect owners, not holders, of those securities.
Legal Holders
Our obligations, as well as the obligations of the trustee and the obligations, if any, of any warrant agents and any otherthird parties employed by us, the trustee or any of those agents, run only to the holders of the securities. We do not
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Legal Ownership and Book-Entry Issuance
have obligations to investors who hold indirect interests in global securities, in street name or by any other indirectmeans. This will be the case whether an investor chooses to be an indirect owner of a security or has no choice becausewe are issuing the securities only in global form.
For example, once we make a payment or give a notice to the holder, we have no further responsibility for thatpayment or notice even if that holder is required, under agreements with depositary participants or customers or by law,to pass it along to the indirect owners but does not do so. Similarly, if we want to obtain the approval of the holders forany purpose—for example, to amend the indenture for a series of debt securities or warrants or the warrant agreementfor a series of warrants or to relieve us of the consequences of a default or of our obligation to comply with a particularprovision of the indenture—we would seek the approval only from the holders, and not the indirect owners, of therelevant securities. Whether and how the holders contact the indirect owners is up to the holders.
When we refer to “you” in this prospectus, we mean those who invest in the securities being offered by this prospectus,whether they are the holders or only indirect owners of those securities. When we refer to “your securities” in thisprospectus, we mean the securities in which you will hold a direct or indirect interest.
Special Considerations for Indirect Owners
If you hold securities through a bank, broker or other financial institution, either in book-entry form or in street name,you should check with your own institution to find out:
• how it handles securities payments and notices;
• whether it imposes fees or charges;
• whether and how you can instruct it to exercise any rights to purchase or sell warrant property under awarrant or to exchange or convert a security for or into other property;
• how it would handle a request for the holders’ consent, if ever required;
• whether and how you can instruct it to send you securities registered in your own name so you can be aholder, if that is permitted in the future;
• how it would exercise rights under the securities if there were a default or other event triggering the need forholders to act to protect their interests; and
• if the securities are in book-entry form, how the depositary’s rules and procedures will affect these matters.
What Is a Global Security?
We will issue each security in book-entry form only. Each security issued in book-entry form will be represented by aglobal security that we deposit with and register in the name of one or more financial institutions or clearing systems,or their nominees, which we select. A financial institution or clearing system that we select for any security for thispurpose is called the “depositary” for that security. A security will usually have only one depositary but it may havemore.
Each series of securities will have one or more of the following as the depositaries:
• The Depository Trust Company, New York, New York, which is known as “DTC”;
• a financial institution holding the securities on behalf of Morgan Guaranty Trust Company of New York,acting out of its Brussels, Belgium, office, as operator of the Euroclear system, which is known as“Euroclear”;
• a financial institution holding the securities on behalf of Clearstream Banking, société anonyme, which isknown as “Clearstream”; and
• any other clearing system or financial institution named in the applicable prospectus supplement. Thedepositaries named above may also be participants in one another’s systems. Thus, for example, if DTC is thedepositary for a global security, investors may hold beneficial interests in that security through Euroclear orClearstream, as DTC participants.
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Legal Ownership and Book-Entry Issuance
The depositary or depositaries for your securities will be named in your prospectus supplement; if none is named, thedepositary will be DTC.
A global security may represent one or any other number of individual securities. Generally, all securities representedby the same global security will have the same terms. We may, however, issue a global security that representsmultiple securities of the same kind, such as debt securities, that have different terms and are issued at different times.We call this kind of global security a master global security. Your prospectus supplement will not indicate whetheryour securities are represented by a master global security.
A global security may not be transferred to or registered in the name of anyone other than the depositary or itsnominee, unless special termination situations arise. We describe those situations below under “—Holder’s Option toObtain a Non-Global Security; Special Situations When a Global Security Will Be Terminated.” As a result of thesearrangements, the depositary, or its nominee, will be the sole registered owner and holder of all securities representedby a global security, and investors will be permitted to own only indirect interests in a global security. Indirect interestsmust be held by means of an account with a broker, bank or other financial institution that in turn has an account withthe depositary or with another institution that does. Thus, an investor whose security is represented by a global securitywill not be a holder of the security, but only an indirect owner of an interest in the global security.
If the prospectus supplement for a particular security indicates that the security will be issued in global form only, thenthe security will be represented by a global security at all times unless and until the global security is terminated. Wedescribe the situations in which this can occur below under “—Holder’s Option to Obtain a Non-Global Security;Special Situations When a Global Security Will Be Terminated.” If termination occurs, we may issue the securitiesthrough another book-entry clearing system or decide that the securities may no longer be held through any book-entryclearing system.
Special Considerations for Global Securities
As an indirect owner, an investor’s rights relating to a global security will be governed by the account rules of thedepositary and those of the investor’s financial institution or other intermediary through which it holds its interest (suchas Euroclear or Clearstream, if DTC is the depositary), as well as general laws relating to securities transfers. We donot recognize this type of investor or any intermediary as a holder of securities and instead deal only with thedepositary that holds the global security.
If securities are issued only in the form of a global security, an investor should be aware of the following:
• An investor cannot require the securities to be registered in his or her own name, and cannot obtain non-global certificates for his or her interest in the securities, except in the special situations we describe below.
• An investor will be an indirect holder and must look to his or her own bank or broker for payments on thesecurities and protection of his or her legal rights relating to the securities, as we describe above under“—Who Is the Legal Owner of a Registered Security?”
• An investor may not be able to sell interests in the securities to some insurance companies and otherinstitutions that are required by law to own their securities in non-book-entry form.
• An investor may not be able to pledge his or her interest in a global security in circumstances wherecertificates representing the securities must be delivered to the lender or other beneficiary of the pledge inorder for the pledge to be effective.
• The depositary’s policies will govern payments, deliveries, transfers, exchanges, notices and other mattersrelating to an investor’s interest in a global security, and those policies may change from time to time. We,the trustee and any warrant agents will have no responsibility for any aspect of the depositary’s policies,actions or records of ownership interests in a global security. We, the trustee and any warrant agents also donot supervise the depositary in any way.
• The depositary will require that those who purchase and sell interests in a global security within its book-entry system use immediately available funds and your broker or bank may require you to do so as well.
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Legal Ownership and Book-Entry Issuance
• Financial institutions that participate in the depositary’s book-entry system and through which an investorholds its interest in the global securities, directly or indirectly, may also have their own policies affectingpayments, deliveries, transfers, exchanges, notices and other matters relating to the securities, and thosepolicies may change from time to time. For example, if you hold an interest in a global security throughEuroclear or Clearstream, when DTC is the depositary, Euroclear or Clearstream, as applicable, will requirethose who purchase and sell interests in that security through them to use immediately available funds andcomply with other policies and procedures, including deadlines for giving instructions as to transactions thatare to be effected on a particular day. There may be more than one financial intermediary in the chain ofownership for an investor. We do not monitor and are not responsible for the policies or actions or records ofownership interests of any of those intermediaries.
Holder’s Option to Obtain a Non-Global Security; Special Situations When a Global Security Will Be
Terminated
If we issue any series of securities in book-entry form but we choose to give the beneficial owners of that series theright to obtain non-global securities, any beneficial owner entitled to obtain non-global securities may do so byfollowing the applicable procedures of the depositary, any transfer agent or registrar for that series and that owner’sbank, broker or other financial institution through which that owner holds its beneficial interest in the securities. If youare entitled to request a non-global certificate and wish to do so, you will need to allow sufficient lead time to enable usor our agent to prepare the requested certificate.
In addition, in a few special situations described below, a global security will be terminated and interests in it will beexchanged for certificates in non-global form representing the securities it represented. After that exchange, the choiceof whether to hold the securities directly or in street name will be up to the investor. Investors must consult their ownbanks or brokers to find out how to have their interests in a global security transferred on termination to their ownnames, so that they will be holders. We have described the rights of holders and street name investors above under“—Who Is the Legal Owner of a Registered Security?”
The special situations for termination of a global security are as follows:
• if the depositary notifies us that it is unwilling, unable or no longer qualified to continue as depositary for thatglobal security and we do not appoint another institution to act as depositary within 60 days; or
• in the case of a global security representing debt securities or warrants issued under an indenture, if an eventof default has occurred with regard to these debt securities or warrants and has not been cured or waived.
If a global security is terminated, only the depositary, and not we, the trustee for any debt securities or warrants or thewarrant agent for any warrants, is responsible for deciding the names of the institutions in whose names the securitiesrepresented by the global security will be registered and, therefore, who will be the holders of those securities.
Considerations Relating to Euroclear and Clearstream
Euroclear and Clearstream are securities clearance systems in Europe. Both systems clear and settle securitiestransactions between their participants through electronic, book-entry delivery of securities against payment.
Euroclear and Clearstream may be depositaries for a global security. In addition, if DTC is the depositary for a globalsecurity, Euroclear and Clearstream may hold interests in the global security as participants in DTC.
As long as any global security is held by Euroclear or Clearstream as depositary, you may hold an interest in the globalsecurity only through an organization that participates, directly or indirectly, in Euroclear or Clearstream. If Euroclearor Clearstream is the depositary for a global security and there is no depositary in the United States, you will not beable to hold interests in that global security through any securities clearance system in the United States.
Payments, deliveries, transfers, exchanges, notices and other matters relating to the securities made through Euroclearor Clearstream must comply with the rules and procedures of those systems. Those systems could change their rules
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Legal Ownership and Book-Entry Issuance
and procedures at any time. We have no control over those systems or their participants and we take no responsibilityfor their activities. Transactions between participants in Euroclear or Clearstream, on one hand, and participants inDTC, on the other hand, when DTC is the depositary, would also be subject to DTC’s rules and procedures.
Special Timing Considerations for Transactions in Euroclear and Clearstream
Investors will be able to make and receive through Euroclear and Clearstream payments, deliveries, transfers,exchanges, notices and other transactions involving any securities held through those systems only on days when thosesystems are open for business. Those systems may not be open for business on days when banks, brokers and otherinstitutions are open for business in the United States.
In addition, because of time-zone differences, U.S. investors who hold their interests in the securities through thesesystems and wish to transfer their interests, or to receive or make a payment or delivery or exercise any other right withrespect to their interests, on a particular day may find that the transaction will not be effected until the next businessday in Luxembourg or Brussels, as applicable. Thus, investors who wish to exercise rights that expire on a particularday may need to act before the expiration date. In addition, investors who hold their interests through both DTC andEuroclear or Clearstream may need to make special arrangements to finance any purchases or sales of their interestsbetween the U.S. and European clearing systems, and those transactions may settle later than would be the case fortransactions within one clearing system.
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Considerations Relating to Indexed SecuritiesWe use the term “indexed securities” to mean debt securities and warrants whose value is linked to an underlyingproperty or index, including equity, commodity and credit indexed securities and equity, commodity, currency andcredit linked securities. Indexed securities may present a high level of risk, and those who invest in some indexedsecurities may lose their entire investment. In addition, the treatment of indexed securities for U.S. federal income taxpurposes is often unclear due to the absence of any authority specifically addressing the issues presented by anyparticular indexed security. Thus, if you propose to invest in indexed securities, you should independently evaluate thefederal income tax consequences of purchasing an indexed security that apply in your particular circumstances. Youshould also read “U.S. Tax Considerations” for a discussion of U.S. tax matters.
Investors in Indexed Securities Could Lose Their Investment
The amount of principal and/or interest payable on an indexed debt security and the cash value or physical settlementvalue of a physically settled debt security and the cash value or physical settlement value of an indexed warrant will bedetermined by reference to the price, value or level of one or more securities, currencies, commodities or otherproperties, any other financial, economic or other measure or instrument, including the occurrence or non-occurrenceof any event or circumstance, and/or one or more indices or baskets of any of these items. We refer to each of these asan “index.” The direction and magnitude of the change in the price, value or level of the relevant index will determinethe amount of principal and/or interest payable on an indexed debt security and the cash value or physical settlementvalue of a physically settled debt security and the cash value or physical settlement value of an indexed warrant. Theterms of a particular indexed debt security may or may not include a promised return of a percentage of the faceamount at maturity or a minimum interest rate. An indexed warrant generally will not provide for any guaranteedminimum settlement value. Thus, if you purchase an indexed security, you may lose all or a portion of the principal orother amount you invest and may receive no interest on your investment.
The Issuer of a Security or Currency That Serves as an Index Could Take Actions That May
Adversely Affect an Indexed Security
The issuer of a security that serves as an index or part of an index for an indexed security will have no involvement inthe offer and sale of the indexed security and no obligations to the holder of the indexed security. The issuer may takeactions, such as a merger or sale of assets, without regard to the interests of the holder. Any of these actions couldadversely affect the value of a security indexed to that security or to an index of which that security is a component.
If the index for an indexed security includes a non-U.S. dollar currency or other asset denominated in a non-U.S. dollarcurrency, the government that issues that currency will also have no involvement in the offer and sale of the indexedsecurity and no obligations to the holder of the indexed security. That government may take actions that couldadversely affect the value of the security. See “Considerations Relating to Securities Denominated or Payable in orLinked to a Non-U.S. Dollar Currency—Government Policy Can Adversely Affect Currency Exchange Rates and anInvestment in a Non-U.S. Dollar Security” below for more information about these kinds of government actions.
An Indexed Security May Be Linked to a Volatile Index, Which Could Hurt Your Investment
Some indices are highly volatile, which means that their value may change significantly, up or down, over a shortperiod of time. The amount of principal or interest that can be expected to become payable on an indexed debt securityor the expected settlement value of an indexed warrant may vary substantially from time to time. Because the amountspayable with respect to an indexed security are generally calculated based on the value or level of the relevant index ona specified date or over a limited period of time, volatility in the index increases the risk that the return on the indexedsecurity may be adversely affected by a fluctuation in the level of the relevant index.
The volatility of an index may be affected by political or economic events, including governmental actions, or by theactivities of participants in the relevant markets. Any of these events or activities could adversely affect the value of anindexed security.
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Considerations Relating to Indexed Securities
An Index to Which a Security is Linked Could Be Changed or Become Unavailable
Some indices compiled by us or our affiliates or third parties may consist of or refer to several or many differentsecurities, commodities or currencies or other instruments or measures. The compiler of such an index typicallyreserves the right to alter the composition of the index and the manner in which the value or level of the index iscalculated. An alteration may result in a decrease in the value of or return on an indexed security that is linked to theindex. The indices for our indexed securities may include published indices of this kind or customized indicesdeveloped by us or our affiliates in connection with particular issues of indexed securities.
A published index may become unavailable, or a customized index may become impossible to calculate in the normalmanner, due to events such as war, natural disasters, cessation of publication of the index or a suspension or disruptionof trading in one or more securities, commodities or currencies or other instruments or measures on which the index isbased. If an index becomes unavailable or impossible to calculate in the normal manner, the terms of a particularindexed security may allow us to delay determining the amount payable as principal or interest on a debt security or thesettlement value of an indexed warrant, or we may use an alternative method to determine the value of the unavailableindex. Alternative methods of valuation are generally intended to produce a value similar to the value resulting fromreference to the relevant index. It is unlikely, however, that any alternative method of valuation we use will produce avalue identical to the value that the actual index would produce. If we use an alternative method of valuation for asecurity linked to an index of this kind, the value of the security, or the rate of return on it, may be lower than itotherwise would be.
Some indexed securities are linked to indices that are not commonly used or that have been developed only recently.The lack of a trading history may make it difficult to anticipate the volatility or other risks associated with an indexedsecurity of this kind. In addition, trading in these indices or their underlying stocks, commodities or currencies or otherinstruments or measures, or options or futures contracts on these stocks, commodities or currencies or otherinstruments or measures, may be limited, which could increase their volatility and decrease the value of the relatedindexed securities or their rates of return.
We May Engage in Hedging Activities That Could Adversely Affect an Indexed Security
In order to hedge an exposure on a particular indexed security, we may, directly or through our affiliates, enter intotransactions involving the securities, commodities or currencies or other instruments or measures that underlie theindex for that security, or involving derivative instruments, such as swaps, options or futures, on the index or any of itscomponent items. By engaging in transactions of this kind, we could adversely affect the value of an indexed security.It is possible that we could achieve substantial returns from our hedging transactions while the value of the indexedsecurity may decline.
Information About Indices May Not Be Indicative of Future Performance
If we issue an indexed security, we may include historical information about the relevant index in the applicableprospectus supplement. Any information about indices that we may provide will be furnished as a matter ofinformation only, and you should not regard the information as indicative of the range of, or trends in, fluctuations inthe relevant index that may occur in the future.
We May Have Conflicts of Interest Regarding an Indexed Security
UBS Securities LLC, UBS Financial Services Inc. and our other affiliates may have conflicts of interest with respect tosome indexed securities. UBS Securities LLC, UBS Financial Services Inc. and our other affiliates may engage intrading, including trading for hedging purposes, for their own accounts or for other accounts under their management,in indexed securities and in the securities, commodities or currencies or other instruments or measures on which theindex is based or in other derivative instruments related to the index or its component items. These trading activitiescould adversely affect the value of indexed securities. We and our affiliates may also issue or underwrite securities orderivative instruments that are linked to the same index as one or more indexed securities. By introducing competingproducts into the marketplace in this manner, we could adversely affect the value of an indexed security.
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Considerations Relating to Indexed Securities
UBS Securities LLC, UBS Financial Services Inc. or another of our affiliates may serve as calculation agent for theindexed securities and may have considerable discretion in calculating the amounts payable in respect of the securities.To the extent that UBS Securities LLC, UBS Financial Services Inc. or another of our affiliates calculates or compilesa particular index, it may also have considerable discretion in performing the calculation or compilation of the index.Exercising discretion in this manner could adversely affect the value of an indexed security based on the index or therate of return on the security.
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Considerations Relating to Securities Denominated or Payable in orLinked to a Non-U.S. Dollar CurrencyIf you intend to invest in a non-U.S. dollar security—e.g., a security whose principal and/or interest is payable in acurrency other than U.S. dollars or that may be settled by delivery of or reference to a non-U.S. dollar currency orproperty denominated in or otherwise linked to a non-U.S. dollar currency—you should consult your own financial andlegal advisors as to the currency risks entailed by your investment. Securities of this kind may not be an appropriateinvestment for investors who are unsophisticated with respect to non-U.S. dollar currency transactions.
The information in this prospectus is directed primarily to investors who are U.S. residents or whose base currency isthe U.S. dollar. Investors who are not U.S. residents or whose base currency is not the U.S. dollar should consult theirown financial and legal advisors about currency-related risks particular to their investment.
An Investment in a Non-U.S. Dollar Security Involves Currency-Related Risks
An investment in a non-U.S. dollar security entails significant risks that are not associated with a similar investment ina security that is payable solely in U.S. dollars and where settlement value is not otherwise based on a non-U.S. dollarcurrency. These risks include the possibility of significant changes in rates of exchange between the U.S. dollar and thevarious non-U.S. dollar currencies or composite currencies and the possibility of the imposition or modification offoreign exchange controls or other conditions by either the United States or non-U.S. governments. When payments aremade in the non-U.S. dollar currency, the total principal plus interest in that currency may be less than the initialprincipal invested on a U.S. dollar basis, if converted back into U.S. dollars at the then-current spot price, despite anyinterest or enhanced yield that may have been earned. These risks generally depend on factors over which we have nocontrol, such as economic and political events and the supply of and demand for the relevant currencies in the globalmarkets.
There Are Limited Facilities for Non-U.S. Dollar Currencies in the United States
At the present time, there are limited facilities in the United States for the conversion of U.S. dollars into foreigncurrencies, currency units or composite currencies and vice versa, and commercial banks generally do not offer non-U.S. dollar checking or savings account facilities in the United States. The agents are prepared to arrange for theconversion of U.S. dollars into the non-U.S. dollar specified currency in which a security may be denominated in orderto enable the purchaser to pay for the security, provided that a request is made to the applicable agent on or prior to thethird business day preceding the date of delivery of the security, or by such other day as determined by such agent.Each such conversion will be made by the applicable agent on such terms and subject to such conditions, limitationsand charges as the agent may from time to time establish in accordance with its regular foreign exchange practices. Allcosts of conversion will be borne by the purchaser of such security denominated in a non-U.S. dollar specifiedcurrency.
Changes in Currency Exchange Rates Can Be Volatile and Unpredictable
Rates of exchange between the U.S. dollar and many other currencies have been highly volatile, and this volatility maycontinue and perhaps spread to other currencies in the future. Fluctuations in currency exchange rates could adverselyaffect an investment in a security denominated in, or where value is otherwise linked to, a specified currency other thanU.S. dollars. Depreciation of the specified currency against the U.S. dollar could result in a decrease in the U.S. dollar-equivalent value of payments on the security, including the principal payable at maturity or settlement value payableupon exercise. That in turn could cause the market value of the security to fall. Depreciation of the specified currencyagainst the U.S. dollar could result in a loss to the investor on a U.S. dollar basis.
Government Policy Can Adversely Affect Currency Exchange Rates and an Investment in a Non-
U.S. Dollar Security
Currency exchange rates can either float or be fixed by sovereign governments. From time to time, governments use avariety of techniques, such as intervention by a country’s central bank or imposition of regulatory controls or taxes, to
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Considerations Relating to Securities Denominated or Payable in or Linked to a Non-U.S. Dollar Currency
affect the exchange rate of their currencies. Governments may also issue a new currency to replace an existing currencyor alter the exchange rate or exchange characteristics by devaluation or revaluation of a currency. Thus, a special riskin purchasing non-U.S. dollar securities is that their yields or payouts could be significantly and unpredictably affectedby governmental actions. Even in the absence of governmental action directly affecting currency exchange rates,political or economic developments in the country issuing the specified currency for a non-U.S. dollar security orelsewhere could lead to significant and sudden changes in the exchange rate between the U.S. dollar and the specifiedcurrency. These changes could affect the value of the security as participants in the global currency markets move tobuy or sell the specified currency or U.S. dollars in reaction to these developments.
Governments have imposed from time to time and may in the future impose exchange controls or other conditions,including taxes, with respect to the exchange or transfer of a specified currency that could affect exchange rates as wellas the availability of a specified currency for a security at its maturity or on any other payment date. In addition, theability of a holder to move currency freely out of the country in which payment in the currency is received or toconvert the currency at a freely determined market rate could be limited by governmental actions.
Non-U.S. Dollar Securities May Permit Us to Make Payments in U.S. Dollars or Delay Payment If We
Are Unable to Obtain the Specified Currency
Securities payable in a currency other than U.S. dollars may provide that, if the other currency is subject toconvertibility, transferability, market disruption or other conditions affecting its availability at or about the time when apayment on the securities comes due because of circumstances beyond our control, we will be entitled to make thepayment in U.S. dollars or delay making the payment. These circumstances could include the imposition of exchangecontrols or our inability to obtain the other currency because of a disruption in the currency markets. If we madepayment in U.S. dollars, the exchange rate we would use would be determined in the manner described above under“Description of Debt Securities We May Offer—Payment Mechanics for Debt Securities—How We Will MakePayments Due in Other Currencies—When the Specified Currency Is Not Available” and “Description of Warrants WeMay Offer—Payment Mechanics for Warrants—How We Will Make Payments Due in Other Currencies—When theSpecified Currency Is Not Available.” A determination of this kind may be based on limited information and wouldinvolve significant discretion on the part of our foreign exchange agent. As a result, the value of the payment in U.S.dollars an investor would receive on the payment date may be less than the value of the payment the investor wouldhave received in the other currency if it had been available, or may be zero. In addition, a government may imposeextraordinary taxes on transfers of a currency. If that happens, we will be entitled to deduct these taxes from anypayment on notes payable in that currency.
We Will Not Adjust Non-U.S. Dollar Securities to Compensate for Changes in Currency Exchange
Rates
Except as described above, we will not make any adjustment or change in the terms of a non-U.S. dollar security in theevent of any change in exchange rates for the relevant currency, whether in the event of any devaluation, revaluation orimposition of exchange or other regulatory controls or taxes or in the event of other developments affecting thatcurrency, the U.S. dollar or any other currency. Consequently, investors in non-U.S. dollar securities will bear the riskthat their investment may be adversely affected by these types of events.
In a Lawsuit for Payment on a Non-U.S. Dollar Security, an Investor May Bear Currency Exchange
Risk
Our securities will be governed by New York law. Under Section 27 of the New York Judiciary Law, a state court inthe State of New York rendering a judgment on a security denominated in a currency other than U.S. dollars would berequired to render the judgment in the specified currency; however, the judgment would be converted into U.S. dollarsat the exchange rate prevailing on the date of entry of the judgment. Consequently, in a lawsuit for payment on asecurity denominated in a currency other than U.S. dollars, investors would bear currency exchange risk until judgmentis entered, which could be a long time.
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Considerations Relating to Securities Denominated or Payable in or Linked to a Non-U.S. Dollar Currency
In courts outside of New York, investors may not be able to obtain judgment in a specified currency other than U.S.dollars. For example, a judgment for money in an action based on a non-U.S. dollar security in many other U.S. federalor state courts ordinarily would be enforced in the United States only in U.S. dollars. The date used to determine therate of conversion of the currency in which any particular security is denominated into U.S. dollars will depend uponvarious factors, including which court renders the judgment.
Information About Exchange Rates May Not Be Indicative of Future Performance
If we issue a non-U.S. dollar security, we may include in the applicable prospectus supplement currency disclosure thatprovides information about historical exchange rates for the relevant non-U.S. dollar currency or currencies. Anyinformation about exchange rates that we may provide will be furnished as a matter of information only, and youshould not regard the information as indicative of the range of, or trends in, fluctuations in currency exchange rates thatmay occur in the future. That rate will likely differ from the exchange rate used under the terms that apply to aparticular security.
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U.S. Tax ConsiderationsUnless as otherwise stated in the applicable prospectus supplement, this section describes the material United Statesfederal income tax consequences to United States holders, as defined below, of owning the debt securities. It is theopinion of Sullivan & Cromwell LLP, United States tax counsel to UBS. It applies to you only if you hold yoursecurities as capital assets for tax purposes. This section does not apply to you if you are a member of a class of holderssubject to special rules, such as:
• a dealer in securities or currencies;
• a trader in securities that elects to use a mark-to-market method of tax accounting for your securitiesholdings;
• a bank;
• a life insurance company;
• a tax-exempt organization;
• a person subject to alternative minimum tax;
• a person that owns debt securities that are a hedge or that are hedged against interest rate or currency risks;
• a person that owns debt securities as part of a straddle or conversion transaction for tax purposes;
• a person that purchases or sells debt securities as part of a wash sale for tax purposes;
• a person whose functional currency for tax purposes is not the U.S. dollar; or
• a person that is not a United States holder, as defined below.
This section deals only with debt securities that are booked through a non-U.S. branch of UBS AG, that are inregistered form and that are due to mature 30 years or less from the date on which they are issued. The United Statesfederal income tax consequences of owning debt securities that are booked through a U.S. branch of UBS AG, that aredue to mature more than 30 years from their date of issue or that are in bearer form, as well as the restrictions onownership for debt securities that are in bearer form, and the tax consequences of owning warrants will be discussed inan applicable prospectus supplement. This section is based on the U.S. Internal Revenue Code of 1986, as amended(the “Internal Revenue Code”), its legislative history, existing and proposed regulations under the Internal RevenueCode, and published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly ona retroactive basis.
If a partnership holds the debt securities, the United States federal income tax treatment of a partner will generallydepend on the status of the partner and the tax treatment of the partnership. A partner in a partnership holding the debtsecurities should consult its tax advisor with regard to the United States federal income tax treatment of an investmentin the debt securities.
Please consult your own tax advisor concerning the consequences of owning these debt securities in your particularcircumstances under the Internal Revenue Code and the laws of any other taxing jurisdiction.
You are a United States holder if you are a beneficial owner of a debt security and you are:
• a citizen or resident of the United States;
• a domestic corporation;
• an estate whose income is subject to United States federal income tax regardless of its source; or
• a trust if a United States court can exercise primary supervision over the trust’s administration and one ormore United States persons are authorized to control all substantial decisions of the trust.
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U.S. Tax Considerations
Taxation of Debt Securities
This subsection describes the material United States federal income tax consequences of owning, selling and disposingof the debt securities UBS AG is offering.
Payments of Interest
Except as described below in the case of interest on a discount debt security that is not qualified stated interest, each asdefined below under “Original Issue Discount—General,” you will be taxed on any interest on your debt security,whether payable in U.S. dollars or a foreign currency, including a composite currency or basket of currencies otherthan U.S. dollars, as ordinary income at the time you receive the interest or it accrues, depending on your method ofaccounting for tax purposes.
Interest we pay on the debt securities and original issue discount, if any, accrued with respect to the debt securities (asdescribed below under “—Original Issue Discount”) and any additional amounts paid with respect to withholding taxon the debt securities, including withholding tax on payments of such additional amounts, constitutes income fromsources outside the United States, and will, depending on your circumstances be either “passive” or “general” incomefor purposes of the rules regarding the foreign tax credit allowable to a United States holder.
Cash Basis Taxpayers. If you are a taxpayer that uses the cash receipts and disbursements method of accounting fortax purposes and you receive an interest payment that is denominated in, or determined by reference to, a foreigncurrency, you must recognize income equal to the U.S. dollar value of the interest payment, based on the exchange ratein effect on the date of receipt, regardless of whether you actually convert the payment into U.S. dollars.
Accrual Basis Taxpayers. If you are a taxpayer that uses an accrual method of accounting for tax purposes, you maydetermine the amount of income that you recognize with respect to an interest payment denominated in, or determinedby reference to, a foreign currency by using one of two methods. Under the first method, you will determine theamount of income accrued based on the average exchange rate in effect during the interest accrual period or, withrespect to an accrual period that spans two taxable years, that part of the period within the taxable year.
If you elect the second method, you would determine the amount of income accrued on the basis of the exchange ratein effect on the last day of the accrual period or, in the case of an accrual period that spans two taxable years, theexchange rate in effect on the last day of the part of the period within the taxable year. Additionally, under this secondmethod, if you receive a payment of interest within five business days of the last day of your accrual period or taxableyear, you may instead translate the interest accrued into U.S. dollars at the exchange rate in effect on the day that youactually receive the interest payment. If you elect the second method, it will apply to all debt instruments that you holdat the beginning of the first taxable year to which the election applies and to all debt instruments that you subsequentlyacquire. You may not revoke this election without the consent of the Internal Revenue Service.
When you actually receive an interest payment, including a payment attributable to accrued but unpaid interest uponthe sale or retirement of your debt security, denominated in, or determined by reference to, a foreign currency forwhich you accrued an amount of income, you will recognize ordinary income or loss measured by the difference, ifany, between the exchange rate that you used to accrue interest income and the exchange rate in effect on the date ofreceipt, regardless of whether you actually convert the payment into U.S. dollars.
Original Issue Discount
General. If you own a debt security, other than a short-term debt security with a term of one year or less, it will betreated as a discount debt security issued at an original issue discount if the amount by which the debt security’s statedredemption price at maturity exceeds its issue price is more than a de minimis amount. Generally, a debt security’sissue price will be the first price at which a substantial amount of debt securities included in the issue of which the debtsecurity is a part is sold to persons other than bond houses, brokers, or similar persons or organizations acting in thecapacity of underwriters, placement agents, or wholesalers. A debt security’s stated redemption price at maturity is thetotal of all payments provided by the debt security that are not payments of qualified stated interest. Generally, an
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U.S. Tax Considerations
interest payment on a debt security is qualified stated interest if it is one of a series of stated interest payments on adebt security that are unconditionally payable at least annually at a single fixed rate, with certain exceptions for lowerrates paid during some periods, applied to the outstanding principal amount of the debt security. There are special rulesfor variable rate debt securities that are discussed under “—Variable Rate Debt Securities.”
In general, your debt security is not a discount debt security if the amount by which its stated redemption price atmaturity exceeds its issue price is less than the de minimis amount of 1/4 of 1% of its stated redemption price atmaturity multiplied by the number of complete years to its maturity. Your debt security will have de minimis originalissue discount if the amount of the excess is less than the de minimis amount. If your debt security has de minimisoriginal issue discount, you must include the de minimis amount in income as stated principal payments are made onthe debt security, unless you make the election described below under “—Election to Treat All Interest as OriginalIssue Discount.” You can determine the includible amount with respect to each such payment by multiplying the totalamount of your debt security’s de minimis original issue discount by a fraction equal to:
• the amount of the principal payment made
divided by
• the stated principal amount of the debt security.
Generally, if your discount debt security matures more than one year from its date of issue, you must include originalissue discount, or OID, in income before you receive cash attributable to that income. The amount of OID that youmust include in income is calculated using a constant-yield method, and generally you will include increasingly greateramounts of OID in income over the life of your debt security. More specifically, you can calculate the amount ofaccrued OID that you must include in income by adding the daily portions of OID with respect to your discount debtsecurity for each day during the taxable year or portion of the taxable year that you hold your discount debt security.You can determine the daily portion by allocating to each day in any accrual period a pro rata portion of the OIDallocable to that accrual period. You may select an accrual period of any length with respect to your debt security andyou may vary the length of each accrual period over the term of your debt security. However, no accrual period may belonger than one year and each scheduled payment of interest or principal on the debt security must occur on either thefirst or final day of an accrual period.
You can determine the amount of OID allocable to an accrual period by:
• multiplying your discount debt security’s adjusted issue price at the beginning of the accrual period by yourdebt security’s yield to maturity; and then
• subtracting from this figure the sum of the payments of qualified stated interest on your debt securityallocable to the accrual period.
You must determine the debt security’s yield to maturity on the basis of compounding at the close of each accrualperiod and adjusting for the length of each accrual period. Further, you can determine your discount debt security’sadjusted issue price at the beginning of any accrual period by:
• adding your debt security’s issue price and any accrued OID for each prior accrual period; and then
• subtracting any payments previously made on your debt security that were not qualified stated interestpayments.
If an interval between payments of qualified stated interest on your debt security contains more than one accrualperiod, then, when you determine the amount of OID allocable to an accrual period, you must allocate the amount ofqualified stated interest payable at the end of the interval, including any qualified stated interest that is payable on thefirst day of the accrual period immediately following the interval, pro rata to each accrual period in the interval basedon their relative lengths. In addition, you must increase the adjusted issue price at the beginning of each accrual periodin the interval by the amount of any qualified stated interest that has accrued prior to the first day of the accrual periodbut that is not payable until the end of the interval. You may compute the amount of OID allocable to an initial shortaccrual period by using any reasonable method if all other accrual periods, other than a final short accrual period, are ofequal length.
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U.S. Tax Considerations
The amount of OID allocable to the final accrual period is equal to the difference between:
• the amount payable at the maturity of your debt security, other than any payment of qualified stated interest;and
• your debt security’s adjusted issue price as of the beginning of the final accrual period.
Acquisition Premium. If you purchase your debt security for an amount that is less than or equal to the sum of allamounts, other than qualified stated interest, payable on your debt security after the purchase date but is greater thanthe amount of your debt security’s adjusted issue price, as determined above under “General,” the excess is acquisitionpremium. If you do not make the election described below under “Election to Treat All Interest as Original IssueDiscount,” then you must reduce the daily portions of OID by a fraction equal to:
• the excess of your adjusted basis in the debt security immediately after purchase over the adjusted issue priceof the debt security
divided by
• the excess of the sum of all amounts payable (other than qualified stated interest) on the debt security after thepurchase date over the debt security’s adjusted issue price.
Pre-Issuance Accrued Interest. An election may be made to decrease the issue price of your debt security by theamount of pre-issuance accrued interest if:
• a portion of the initial purchase price of your debt security is attributable to pre-issuance accrued interest;
• the first stated interest payment on your debt security is to be made within one year of your debt security’sissue date; and
• the payment will equal or exceed the amount of pre-issuance accrued interest.
If this election is made, a portion of the first stated interest payment will be treated as a return of the excluded pre-issuance accrued interest and not as an amount payable on your debt security.
Debt Securities Subject to Contingencies Including Optional Redemption. Your debt security is subject to acontingency if it provides for an alternative payment schedule or schedules applicable upon the occurrence of acontingency or contingencies, other than a remote or incidental contingency, whether such contingency relates topayments of interest or of principal. In such a case, you must determine the yield and maturity of your debt security byassuming that the payments will be made according to the payment schedule most likely to occur if:
• the timing and amounts of the payments that comprise each payment schedule are known as of the issue date;and
• one of such schedules is significantly more likely than not to occur.
If there is no single payment schedule that is significantly more likely than not to occur, other than because of amandatory sinking fund, you must include income on your debt security in accordance with the general rules thatgovern contingent payment obligations. These rules will be discussed in the applicable prospectus supplement.
Notwithstanding the general rules for determining yield and maturity, if your debt security is subject to contingencies,and either you or we have an unconditional option or options that, if exercised, would require payments to be made onthe debt security under an alternative payment schedule or schedules, then:
• in the case of an option or options that we may exercise, we will be deemed to exercise or not exercise anoption or combination of options in the manner that minimizes the yield on your debt security and,
• in the case of an option or options that you may exercise, you will be deemed to exercise or not exercise anoption or combination of options in the manner that maximizes the yield on your debt security.
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U.S. Tax Considerations
If both you and we hold options described in the preceding sentence, those rules will apply to each option in the orderin which they may be exercised. You may determine the yield on your debt security for the purposes of thosecalculations by using any date on which your debt security may be redeemed or repurchased as the maturity date andthe amount payable on the date that you chose in accordance with the terms of your debt security as the principalamount payable at maturity.
If a contingency, including the exercise of an option, actually occurs or does not occur contrary to an assumption madeaccording to the above rules then, except to the extent that a portion of your debt security is repaid as a result of thischange in circumstances and solely to determine the amount and accrual of OID, you must redetermine the yield andmaturity of your debt security by treating your debt security as having been retired and reissued on the date of thechange in circumstances for an amount equal to your debt security’s adjusted issue price on that date.
Election to Treat All Interest as Original Issue Discount. You may elect to include in gross income all interest thataccrues on your debt security using the constant-yield method described above under “General,” with the modificationsdescribed below. For purposes of this election, interest will include stated interest, OID, de minimis original issuediscount, market discount, de minimis market discount and unstated interest, as adjusted by any amortizable bondpremium, described below under “Debt Securities Purchased at a Premium,” or acquisition premium.
If you make this election for your debt security, then, when you apply the constant-yield method:
• the issue price of your debt security will equal your cost;
• the issue date of your debt security will be the date you acquired it; and
• no payments on your debt security will be treated as payments of qualified stated interest.
Generally, this election will apply only to the debt security for which you make it; however, if the debt security forwhich this election is made has amortizable bond premium, you will be deemed to have made an election to applyamortizable bond premium against interest for all debt instruments with amortizable bond premium, other than debtinstruments the interest on which is excludible from gross income, that you hold as of the beginning of the taxable yearto which the election applies or any taxable year thereafter. Additionally, if you make this election for a marketdiscount debt security, you will be treated as having made the election discussed below under “Market Discount” toinclude market discount in income currently over the life of all debt instruments having market discount that youacquire on or after the first day of the first taxable year to which the election applies. You may not revoke any electionto apply the constant-yield method to all interest on a debt security or the deemed elections with respect to amortizablebond premium or market discount debt securities without the consent of the Internal Revenue Service.
Variable Rate Debt Securities. Your debt security will be a variable rate debt security if:
• your debt security’s issue price does not exceed the total noncontingent principal payments by more than thelesser of:
1. .015 multiplied by the product of the total noncontingent principal payments and the number ofcomplete years to maturity from the issue date, or
2. 15 percent of the total noncontingent principal payments; and
• your debt security provides for stated interest, compounded or paid at least annually, only at:
1. one or more qualified floating rates,
2. a single fixed rate and one or more qualified floating rates,
3. a single objective rate, or
4. a single fixed rate and a single objective rate that is a qualified inverse floating rate; and
• the value of any floating rate on any date during the term of your debt security is set no earlier than threemonths prior to the first day on which that value is in effect and no later than one year following that first day.
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U.S. Tax Considerations
Your debt security will have a variable rate that is a qualified floating rate if:
• variations in the value of the rate can reasonably be expected to measure contemporaneous variations in thecost of newly borrowed funds in the currency in which your debt security is denominated; or
• the rate is equal to such a rate either:
1. multiplied by a fixed multiple that is greater than 0.65 but not more than 1.35, or
2. multiplied by a fixed multiple that is greater than 0.65 but not more than 1.35, increased or decreased bya fixed rate.
If your debt security provides for two or more qualified floating rates that are within 0.25 percentage points of eachother on the issue date or can reasonably be expected to have approximately the same values throughout the term of thedebt security, the qualified floating rates together constitute a single qualified floating rate.
Your debt security will not have a qualified floating rate, however, if the rate is subject to certain restrictions (includingcaps, floors, governors, or other similar restrictions) unless such restrictions are fixed throughout the term of the debtsecurity or are not reasonably expected to significantly affect the yield on the debt security.
Your debt security will have a variable rate that is a single objective rate if:
• the rate is not a qualified floating rate; and
• the rate is determined using a single, fixed formula that is based on objective financial or economicinformation that is not within the control of or unique to the circumstances of the issuer or a related party.
Your debt security will not have a variable rate that is an objective rate, however, if it is reasonably expected that theaverage value of the rate during the first half of your debt security’s term will be either significantly less than orsignificantly greater than the average value of the rate during the final half of your debt security’s term.
An objective rate as described above is a qualified inverse floating rate if:
• the rate is equal to a fixed rate minus a qualified floating rate; and
• the variations in the rate can reasonably be expected to inversely reflect contemporaneous variations in thecost of newly borrowed funds.
Your debt security will also have a single qualified floating rate or an objective rate if interest on your debt security isstated at a fixed rate for an initial period of one year or less followed by either a qualified floating rate or an objectiverate for a subsequent period, and either:
• the fixed rate and the qualified floating rate or objective rate have values on the issue date of the debt securitythat do not differ by more than 0.25 percentage points; or
• the value of the qualified floating rate or objective rate is intended to approximate the fixed rate.
In general, if your variable rate debt security provides for stated interest at a single qualified floating rate or objectiverate (or one of those rates after a single fixed rate for an initial period), all stated interest on your debt security isqualified stated interest. In this case, the amount of OID, if any, is determined by using, for a qualified floating rate orqualified inverse floating rate, the value as of the issue date of the qualified floating rate or qualified inverse floatingrate, or, for any other objective rate, a fixed rate that reflects the yield reasonably expected for your debt security.
If your variable rate debt security does not provide for stated interest at a single qualified floating rate or a singleobjective rate, and also does not provide for interest payable at a fixed rate other than a single fixed rate for an initialperiod, you generally must determine the interest and OID accruals on your debt security by:
• determining a fixed rate substitute for each variable rate provided under your variable rate debt security;
• constructing the equivalent fixed rate debt instrument (using the fixed rate substitute described above);
• determining the amount of qualified stated interest and OID with respect to the equivalent fixed rate debtinstrument; and
• adjusting for actual variable rates during the applicable accrual period.
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U.S. Tax Considerations
When you determine the fixed rate substitute for each variable rate provided under the variable rate note, you generallywill use the value of each variable rate as of the issue date or, for an objective rate that is not a qualified inversefloating rate, a rate that reflects the reasonably expected yield on your debt security.
If your variable rate debt security provides for stated interest either at one or more qualified floating rates or at aqualified inverse floating rate, and also provides for stated interest at a single fixed rate other than a single fixed ratefor an initial period, you generally must determine interest and OID accruals by using the method described in theprevious paragraph. However, your variable rate debt security will be treated, for purposes of the first three steps of thedetermination, as if your debt security had provided for a qualified floating rate, or a qualified inverse floating rate,rather than the fixed rate. The qualified floating rate, or qualified inverse floating rate, that replaces the fixed rate mustbe such that the fair market value of your variable rate debt security as of the issue date approximates the fair marketvalue of an otherwise identical debt instrument that provides for the qualified floating rate, or qualified inverse floatingrate, rather than the fixed rate.
Short-Term Debt Securities. In general, if you are an individual or other cash basis United States holder of a short-term debt security, you are not required to accrue OID, as specially defined below for the purposes of this paragraph,for United States federal income tax purposes unless you elect to do so. However, you may be required to include anystated interest in income as you receive it. If you are an accrual basis taxpayer, a taxpayer in a special class, including,but not limited to, a regulated investment company, common trust fund, or a certain type of pass-through entity, or acash basis taxpayer who so elects, you will be required to accrue OID on short-term debt securities on either a straight-line basis or under the constant-yield method, based on daily compounding. If you are not required and do not elect toinclude OID in income currently, any gain you realize on the sale or retirement of your short-term debt security will beordinary income to the extent of the accrued OID, which will be determined on a straight-line basis unless you make anelection to accrue the OID under the constant-yield method, through the date of sale or retirement. However, if you arenot required and do not elect to accrue OID on your short-term debt securities, you will be required to defer deductionsfor interest on borrowings allocable to your short-term debt securities in an amount not exceeding the deferred incomeuntil the deferred income is realized.
When you determine the amount of OID subject to these rules, you must include all interest payments on your short-term debt security, including stated interest, in your short-term debt security’s stated redemption price at maturity.
Foreign Currency Discount Debt Securities. If your discount debt security is denominated in, or determined byreference to, a foreign currency, you must determine OID for any accrual period on your discount debt security in theforeign currency and then translate the amount of OID into U.S. dollars in the same manner as stated interest accruedby an accrual basis United States holder, as described under “—Payments of Interest.” You may recognize ordinaryincome or loss when you receive an amount attributable to OID in connection with a payment of interest or the sale orretirement of your debt security.
Market Discount
You will be treated as if you purchased your debt security, other than a short-term debt security, at a market discount,and your debt security will be a market discount note if:
• in the case of an initial purchaser, you purchase your debt security for less than its issue price as determinedabove under “—Original Issue Discount—General”; and
• in the case of all purchasers, the difference between the debt security’s stated redemption price at maturity or,in the case of a discount debt security, the debt security’s revised issue price, and the price you paid for yourdebt security is equal to or greater than 1/4 of 1 percent of your debt security’s stated redemption price atmaturity or revised issue price, respectively, multiplied by the number of complete years to the debt security’smaturity. To determine the revised issue price of your debt security for these purposes, you generally add anyOID that has accrued on your debt security to its issue price.
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U.S. Tax Considerations
If your debt security’s stated redemption price at maturity or, in the case of a discount debt security, its revised issueprice, exceeds the price you paid for the debt security by less than 1/4 of 1% multiplied by the number of completeyears to the debt security’s maturity, the excess constitutes de minimis market discount, and the rules discussed beloware not applicable to you.
You must treat any gain you recognize on the maturity or disposition of your market discount debt security as ordinaryincome to the extent of the accrued market discount on your debt security. Alternatively, you may elect to includemarket discount in income currently over the life of your debt security. If you make this election, it will apply to alldebt instruments with market discount that you acquire on or after the first day of the first taxable year to which theelection applies. You may not revoke this election without the consent of the Internal Revenue Service. If you own amarket discount debt security and do not make this election, you will generally be required to defer deductions forinterest on borrowings allocable to your debt security in an amount not exceeding the accrued market discount on yourdebt security until the maturity or disposition of your debt security.
If you own a market discount debt security, the market discount would accrue on a straight-line basis unless an electionis made to accrue market discount using a constant-yield method. If you make this election, it will apply only to thedebt security with respect to which it is made and you may not revoke it. You would, however, not include accruedmarket discount in income unless you elect to do so as described above.
Debt Securities Purchased at a Premium
If you purchase your debt security for an amount in excess of its principal amount (or, in the case of a discount debtsecurity, in excess of its stated redemption price at maturity), you may elect to treat the excess as amortizable bondpremium. If you make this election, you will reduce the amount required to be included in your income each year withrespect to interest on your debt security by the amount of amortizable bond premium allocable to that year, based onyour debt security’s yield to maturity. If your debt security is denominated in, or determined by reference to, a foreigncurrency, you will compute your amortizable bond premium in units of the foreign currency and your amortizable bondpremium will reduce your interest income in units of the foreign currency. Gain or loss recognized that is attributableto changes in exchange rates between the time your amortized bond premium offsets interest income and the time ofthe acquisition of your debt security is generally taxable as ordinary income or loss. If you make an election toamortize bond premium, it will apply to all debt instruments, other than debt instruments the interest on which isexcludible from gross income, that you hold at the beginning of the first taxable year to which the election applies orthat you thereafter acquire, and you may not revoke it without the consent of the Internal Revenue Service. See also“—Original Issue Discount—Election to Treat All Interest as Original Issue Discount.”
Purchase, Sale and Retirement of the Debt Securities
Your tax basis in your debt security will generally be the U.S. dollar cost, as defined below, of your debt security,adjusted by:
• adding any OID or market discount previously included in income with respect to your debt security; andthen
• subtracting any payments on your debt security that are not qualified stated interest payments and anyamortizable bond premium applied to reduce the interest on your debt security.
If you purchase your debt security with foreign currency, the U.S. dollar cost of your debt security will generally be theU.S. dollar value of the purchase price on the date of purchase. However, if you are a cash basis taxpayer, or an accrualbasis taxpayer if you so elect, and your debt security is traded on an established securities market, as defined in theapplicable Treasury regulations, the U.S. dollar cost of your debt security will be the U.S. dollar value of the purchaseprice on the settlement date of your purchase.
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U.S. Tax Considerations
You will generally recognize gain or loss on the sale or retirement of your debt security equal to the difference betweenthe amount you realize on the sale or retirement, excluding any amounts attributable to accrued but unpaid interest(which will be treated as interest payments), and your tax basis in your debt security. If your debt security is sold orretired for an amount in foreign currency, the amount you realize will be the U.S. dollar value of such amount on thedate the debt security is disposed of or retired, except that in the case of a debt security that is traded on an establishedsecurities market, as defined in the applicable Treasury regulations, a cash basis taxpayer, or an accrual basis taxpayerthat so elects, will determine the amount realized based on the U.S. dollar value of the foreign currency on thesettlement date of the sale.
You will recognize capital gain or loss when you sell or retire your debt security, except to the extent:
• described above under “—Original Issue Discount—Short-Term Debt Securities” or “—Market Discount,” or
• attributable to changes in exchange rates as described below.
Capital gain of a noncorporate United States holder is generally taxed at preferential rates where the property is heldfor more than one year.
You must treat any portion of the gain or loss that you recognize on the sale or retirement of a debt security as ordinaryincome or loss to the extent attributable to changes in exchange rates. However, you only take exchange gain or lossinto account to the extent of the total gain or loss you realize on the transaction.
Exchange of Amounts in Other Than U.S. Dollars
If you receive foreign currency as interest on your debt security or on the sale or retirement of your debt security, yourtax basis in the foreign currency will equal its U.S. dollar value when the interest is received or at the time of the saleor retirement. If you purchase foreign currency, you generally will have a tax basis equal to the U.S. dollar value of theforeign currency on the date of your purchase. If you sell or dispose of a foreign currency, including if you use it topurchase debt securities or exchange it for U.S. dollars, any gain or loss recognized generally will be ordinary incomeor loss.
Medicare Tax
A United States holder that is an individual or estate, or a trust that does not fall into a special class of trusts that isexempt from such tax, is subject to a 3.8% tax on the lesser of (1) the United States holder’s “net investment income”(or “undistributed net investment income” in the case of an estate or trust) for the relevant taxable year and (2) theexcess of the United States holder’s modified adjusted gross income for the taxable year over a certain threshold(which in the case of individuals is between $125,000 and $250,000, depending on the individual’s circumstances). AUnited States holder’s net investment income generally includes its interest income and its net gains from thedisposition of debt securities, unless such interest income or net gains are derived in the ordinary course of the conductof a trade or business (other than a trade or business that consists of certain passive or trading activities). If you are aUnited States holder that is an individual, estate or trust, you are urged to consult your tax advisors regarding theapplicability of the Medicare tax to your income and gains in respect of your investment in the debt securities.
Extendible, Indexed and Other Debt Securities
The applicable prospectus supplement will discuss any special United States federal income tax rules with respect toextendible debt securities, contingent foreign currency debt securities, debt securities the payments on which aredetermined by reference to the value of any index or stock and debt securities that are subject to the rules governingcontingent payment obligations.
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U.S. Tax Considerations
Treasury Regulations Requiring Disclosure of Reportable Transactions
Treasury regulations require United States taxpayers to report certain transactions that give rise to a loss in excess ofcertain thresholds (a “Reportable Transaction”). Under these regulations, if the debt securities are denominated in, orlinked to, a foreign currency, a United States holder that recognizes a loss with respect to the debt securities that ischaracterized as an ordinary loss due to changes in currency exchange rates (under any of the rules discussed above)would be required to report the loss on Internal Revenue Service Form 8886 (Reportable Transaction Statement) if theloss exceeds the thresholds set forth in the regulations. For individuals and trusts, this loss threshold is $50,000 in anysingle taxable year. For other types of taxpayers and other types of losses, the thresholds are higher. You shouldconsult with your tax advisor regarding any tax filing and reporting obligations that may apply in connection withacquiring, owning and disposing of debt securities.
Foreign Account Tax Compliance Withholding
Certain non-U.S. financial institutions must comply with information reporting requirements or certificationrequirements in respect of their direct and indirect United States shareholders and/or United States accountholders toavoid becoming subject to withholding on certain payments. UBS and other non-U.S. financial institutions mayaccordingly be required to report information to the IRS regarding the holders of debt securities and to withhold on aportion of payments under the debt securities to certain holders that fail to comply with the relevant informationreporting requirements (or hold debt securities directly or indirectly through certain non-compliant intermediaries).However, such withholding would generally not apply to payments made before January 1, 2019. Moreover, suchwithholding would only apply to debt securities issued at least six months after the date on which final regulationsimplementing such rule are enacted. Holders are urged to consult their own tax advisors and any banks or brokersthrough which they will hold debt securities as to the consequences (if any) of these rules to them.
Information with Respect to Foreign Financial Assets
Owners of “specified foreign financial assets” with an aggregate value in excess of $50,000 (and in somecircumstances, a higher threshold) may be required to file an information report with respect to such assets with theirtax returns. “Specified foreign financial assets” may include financial accounts maintained by foreign financialinstitutions (which would include debt of a foreign financial institution that is not regularly traded on an establishedsecurities market, and thus may include your debt securities), as well as any of the following but only if they are heldfor investment and not held in accounts maintained by financial institutions: (i) stocks and securities issued by non-United States persons, (ii) financial instruments and contracts that have non-United States issuers or counterparties, and(iii) interests in foreign entities. Holders are urged to consult their tax advisors regarding the application of thisreporting requirement to their ownership of the debt securities.
Backup Withholding and Information Reporting
If you are a noncorporate United States holder, information reporting requirements, on Internal Revenue Service Form1099, generally will apply to payments of principal and interest on a debt security within the United States, and thepayment of proceeds to you from the sale of a debt security effected at a United States office of a broker.
Additionally, backup withholding may apply to such payments if you fail to comply with applicable certificationrequirements or are notified by the Internal Revenue Service that you have failed to report all interest and dividendsrequired to be shown on your federal income tax returns.
Payment of the proceeds from the sale of a debt security effected at a foreign office of a broker generally will not besubject to information reporting or backup withholding. However, a sale effected at a foreign office of a broker couldbe subject to information reporting in the same manner as a sale within the United States (and in certain cases may besubject to backup withholding as well) if (i) the broker has certain connections to the United States, (ii) the proceeds orconfirmation are sent to the United States or (iii) the sale has certain other specified connections with the United States.
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U.S. Tax Considerations
You generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed yourincome tax liability by filing a refund claim with the Internal Revenue Service.
Taxation of Warrants
U.S. tax considerations with respect to warrants will be discussed in an applicable prospectus supplement.
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Tax Considerations Under the Laws of SwitzerlandGeneral
Unless as otherwise stated in the applicable prospectus supplement, this section describes the principal taxconsequences under the laws of Switzerland for non-Swiss investors (i.e., for investors who are not residents ofSwitzerland and have no permanent establishment or fixed place of business situated in Switzerland for Swiss taxpurposes) of acquiring, owning or disposing of debt securities and warrants issued and booked by a non-Swiss branchof UBS AG, which has the status of a bank and the proceeds from which are used outside Switzerland. This summarydoes not address the tax treatment of Swiss investors (i.e., for investors who are residents of Switzerland or have apermanent establishment or fixed place of business situated in Switzerland for Swiss tax purposes). The taxinformation set forth below is based on the opinion of Homburger AG, Zürich, Switzerland, dated March 17, 2016, andhas been approved by them for its accuracy.
The following is a summary based on legislation as of the date of this prospectus and does not aim to be acomprehensive description of all the Swiss tax considerations that may be relevant to a decision to invest in debtsecurities and warrants. The tax treatment for each debt-holder and warrant-holder depends on the particular situation.All holders and prospective holders are advised to consult their own professional tax advisors in light of their particularcircumstances as to the Swiss tax legislation that could be relevant for them in connection with the purchase, ownershipand disposition of debt securities and warrants and the consequences of such actions under the tax legislation ofSwitzerland.
Swiss Income and Wealth Tax
Holders of debt securities and warrants who are not residents of Switzerland and have not engaged in a trade orbusiness through a permanent establishment or fixed place of business situated in Switzerland to which the debtsecurities and warrants are attributable or to which the debt securities and warrants belong will not be subject to anySwiss federal, cantonal or communal corporate or individual income and capital or wealth tax or capital gains tax onthe holding and disposition of the debt securities and warrants or the exercise of warrants.
Issuance Stamp Tax
Under the condition that UBS AG will book the debt securities and warrants in its Jersey branch, London branch or anyother branch not situated in Switzerland and under the conditions that the respective branch has the status of a bank andUBS AG does not use the proceeds of the sale of the debt securities and the warrants in Switzerland, the issuance of thedebt securities and warrants will not be a taxable event for Swiss issuance stamp tax purposes.
Withholding Tax
Under the condition that UBS AG will book the debt securities or warrants in its Jersey branch, London branch or anyother branch not situated in Switzerland and under the conditions that the respective branch has the status of a bank andUBS AG does not use the proceeds of the sale of the debt securities and warrants in Switzerland, the payment ofinterest on and the redemption of debt securities or warrants and the exercise of warrants is not subject to Swisswithholding tax.
On 4 November 2015 the Swiss Federal Council announced that it had mandated the Swiss Federal FinanceDepartment to appoint a group of experts to prepare a proposal for a reform of the Swiss withholding tax system. Theproposal is expected to, among other things, replace the current debtor-based regime applicable to interest paymentswith a paying agent-based regime for Swiss withholding tax. This paying agent-based regime is expected to be similarto the one contained in the draft legislation published by the Swiss Federal Council on 17 December 2014, which wassubsequently withdrawn on 24 June 2015. If such a new paying-agent based regime were to be enacted, and were toresult in the deduction or withholding of Swiss withholding tax on any interest payments in respect of debt securities orwarrants by any person other than the Issuer, the holder of such debt security or warrant would not be entitled toreceive any additional amounts as a result of such deduction or withholding under the terms of the debt securities orwarrants, as the case may be.
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Tax Considerations Under the Laws of Switzerland
Securities Turnover Tax
Dealings in debt securities or warrants where a bank or another securities dealer in Switzerland (as defined in the SwissFederal Stamp Tax Act) acts as an intermediary, or is a party, to the transaction, may be subject to Swiss federal stamptax on the turnover in securities at an aggregated rate of up to 0.3 percent of the purchase price of the debt securities orwarrants. A branch of UBS AG situated, or a subsidiary of UBS AG resident, outside Switzerland will not be a Swisssecurities dealer under the Swiss Federal Stamp Tax Act.
European Directive on the Taxation of Savings Income
On October 26, 2004, the European Community and Switzerland entered into an agreement on the taxation of savingsincome pursuant to which Switzerland will adopt measures equivalent to those of the European Directive 2003/48/ECof June 3, 2003 on the taxation of savings income in the form of interest payments. The agreement came into force asof July 1, 2005.
In accordance with this agreement, Swiss paying agents have to withhold tax at a rate of 35 percent on interestpayments made under the debt securities and warrants to a beneficial owner who is an individual and resident of an EUmember state, with the option of the individual to have the paying agent and Switzerland provide to the tax authoritiesof the EU member state the details of the interest payments in lieu of the withholding.
Foreign Final Withholding Tax
The Swiss Federal Council signed treaties with the United Kingdom and Austria providing, inter alia, for a finalwithholding tax. The treaties entered into force on 1 January 2013 and might be followed by similar treaties with otherEuropean countries.
According to the treaties, a Swiss paying agent may levy a final withholding tax on capital gains and on certain incomeitems deriving, inter alia, from debt securities and warrants. The final withholding tax will substitute the ordinaryincome tax due by an individual resident of a contracting state on such gains and income items. In lieu of the finalwithholding, individuals may opt for a voluntary disclosure of the relevant capital gains and income items to the taxauthorities of their state of residency.
Holders of debt securities and warrants who might be in the scope of the abovementioned treaties should consult theirown tax adviser as to the tax consequences relating to their particular circumstances.
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Benefit Plan Investor ConsiderationsA fiduciary of a pension, profit-sharing or other employee benefit plan subject to the U.S. Employee RetirementIncome Security Act of 1974, as amended (“ERISA”) (each, a “Plan”), should consider the fiduciary standards ofERISA in the context of the Plan’s particular circumstances before authorizing an investment in the debt securities andwarrants. Among other factors, the fiduciary should consider whether the investment would satisfy the prudence anddiversification requirements of ERISA and would be consistent with the documents and instruments governing thePlan, and whether the investment would involve a prohibited transaction under ERISA or the U.S. Internal RevenueCode (the “Code”).
Section 406 of ERISA and Section 4975 of the Code prohibit Plans, as well as individual retirement accounts, Keoghplans and any other plans that are subject to Section 4975 of the Code (also “Plans”), from engaging in certaintransactions involving “plan assets” with persons who are “parties in interest” under ERISA or “disqualified persons”under the Code with respect to the Plan. A violation of these prohibited transaction rules may result in excise tax orother liabilities under ERISA or the Code for those persons, unless exemptive relief is available under an applicablestatutory, regulatory or administrative exemption. Employee benefit plans that are governmental plans (as defined inSection 3(32) of ERISA), certain church plans (as defined in Section 3(33) of ERISA) and non-U.S. plans (as describedin Section 4(b)(4) of ERISA) (“Non-ERISA Arrangements”) are not subject to the requirements of Section 406 ofERISA or Section 4975 of the Code but may be subject to similar provisions under applicable federal, state, local, non-U.S. or other laws (“Similar Laws”).
The acquisition of debt securities and warrants by a Plan or any entity whose underlying assets include “plan assets” byreason of any Plan’s investment in the entity (a “Plan Asset Entity”) with respect to which we, UBS Securities LLC,UBS Financial Services Inc. and other of our affiliates is or becomes a party in interest or disqualified person mayresult in a prohibited transaction under ERISA or Section 4975 of the Code, unless the debt securities and warrants areacquired pursuant to an applicable exemption. The U.S. Department of Labor has issued five prohibited transactionclass exemptions, or “PTCEs”, that may provide exemptive relief if required for direct or indirect prohibitedtransactions that may arise from the purchase or holding of debt securities and warrants. These exemptions are PTCE84-14 (for certain transactions determined by independent qualified professional asset managers), PTCE 90-1 (forcertain transactions involving insurance company pooled separate accounts), PTCE 91-38 (for certain transactionsinvolving bank collective investment funds), PTCE 95-60 (for transactions involving certain insurance companygeneral accounts), and PTCE 96-23 (for transactions managed by in-house asset managers). In addition, ERISASection 408(b)(17) and Section 4975(d)(20) of the Code may provide an exemption for the purchase and sale of debtsecurities and warrants offered hereby, provided that neither the issuer of securities offered hereby nor any of itsaffiliates have or exercise any discretionary authority or control or render any investment advice with respect to theassets of any Plan involved in the transaction, and provided further that the Plan pays no more and receives no less than“adequate consideration” in connection with the transaction (the “service provider exemption”). There can be noassurance that all of the conditions of any such exemptions will be satisfied.
Any purchaser or holder of debt securities and warrants or any interest therein will be deemed to have represented byits purchase and holding or conversion of debt securities and warrants offered hereby that it either (1) is not a Plan, aPlan Asset Entity or a Non-ERISA Arrangement and is not purchasing the debt securities and warrants on behalf of orwith the assets of any Plan, a Plan Asset Entity or Non-ERISA Arrangement or (2) the purchase or holding of the debtsecurities and warrants will not result in a non-exempt prohibited transaction or a similar violation under anyapplicable Similar Laws.
Due to the complexity of these rules and the penalties that may be imposed upon persons involved in non-exemptprohibited transactions, it is important that fiduciaries or other persons considering purchasing debt securities andwarrants on behalf of or with the assets of any Plan, a Plan Asset Entity or Non-ERISA Arrangement consult with theircounsel regarding the availability of exemptive relief under any of the PTCEs listed above, the service providerexemption or the potential consequences of any purchase or holding under Similar Laws, as applicable. Purchasers ofdebt securities and warrants have exclusive responsibility for ensuring that their purchase and holding of debt securities
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Benefit Plan Investor Considerations
and warrants do not violate the fiduciary or prohibited transaction rules of ERISA or the Code or any similar provisionsof Similar Laws. The sale of any debt securities and warrants to a Plan, Plan Asset Entity or Non-ERISA Arrangementis in no respect a representation by us or any of our affiliates or representatives that such an investment meets allrelevant legal requirements with respect to investments by any such Plans, Plan Asset Entities or Non-ERISAArrangements generally or any particular Plan, Plan Asset Entity or Non-ERISA Arrangement or that such investmentis appropriate for such Plans, Plan Asset Entities or Non-ERISA Arrangements generally or any particular Plan, PlanAsset Entity or Non-ERISA Arrangement.
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Plan of DistributionPlan of Distribution for the Initial Offer and Sale of Securities
We plan to issue the securities under a distribution agreement with UBS Securities LLC and UBS Financial ServicesInc., as the agents. We have filed a copy of the form of distribution agreement with the SEC as an exhibit to ourregistration statement. See “Where You Can Find More Information” above for information on how to obtain a copy ofit. Subject to certain conditions, the agents would agree to use their reasonable efforts to solicit purchases of thesecurities. We would have the right to accept offers to purchase securities and may reject any proposed purchase of thesecurities. The agents may also reject any offer to purchase securities. We would pay the agents a commission on anysecurities sold through the agents. In accordance with Rule 5110 of the Financial Industry Regulatory Authority, Inc.(“FINRA”), in no situation will underwriting compensation exceed 8% of the principal amount of the securities.
UBS Securities LLC and UBS Financial Services Inc. are affiliates of UBS. Rule 5121 of FINRA imposes certainrequirements when a FINRA member such as UBS Securities LLC or UBS Financial Services Inc. distributes anaffiliated company’s securities. UBS Securities LLC and UBS Financial Services Inc. have advised UBS that thisoffering will comply with the applicable requirements of Rule 5121.
We may also sell securities to the agents who will purchase the securities as principal for their own accounts. In that case, theagents will purchase the securities at a price equal to the issue price specified in the applicable prospectus supplement, less adiscount. The discount will equal the applicable commission on an agency sale of securities with the same stated maturity.
The agents may resell any securities they purchase as principal to other brokers or dealers at a discount, which mayinclude all or part of the discount the agents received from us. If all the securities are not sold at the initial offeringprice, the agents may change the offering price and the other selling terms.
We may also sell securities directly to investors. We will not pay commissions on securities we sell directly.
The agents, whether acting as agent or principal, may be deemed to be “underwriters” within the meaning of theSecurities Act of 1933. We have agreed to indemnify the agents against certain liabilities, including liabilities under theSecurities Act.
If the agents sell securities to dealers who resell to investors and the agents pay the dealers all or part of the discount orcommission they receive from us, those dealers may also be deemed to be “underwriters” within the meaning of theSecurities Act.
In connection with an offering, the agents may purchase and sell securities in the open market. These transactions mayinclude short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involvethe sale by an agent of a greater number of securities than they are required to purchase in an offering. Stabilizingtransactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the marketprice of the securities while an offering is in progress.
The agents may also impose a penalty bid. This occurs when a particular agent repays to the agents a portion of thediscount received by it because the agents have repurchased securities sold by or for the account of that agent instabilizing or short-covering transactions.
These activities by the agents may stabilize, maintain or otherwise affect the market price of the securities. As a result,the price of the securities may be higher than the price that otherwise might exist in the open market. If these activitiesare commenced, they may be discontinued by the agents at any time. These transactions may be effected on anexchange or automated quotation system, if the securities are listed on that exchange or admitted for trading on thatautomated quotation system, or in the over-the-counter market or otherwise.
The purchase price of the securities will be required to be paid in immediately available funds in New York City,unless otherwise indicated in your prospectus supplement.
We may appoint agents other than or in addition to UBS Securities LLC and UBS Financial Services Inc. with respectto the securities. Any other agents will be named in the applicable prospectus supplements and those agents will enter
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Plan of Distribution
into the distribution agreement referred to above. The other agents may be affiliates or customers of UBS and mayengage in transactions with and perform services for UBS in the ordinary course of business. UBS Securities LLC andUBS Financial Services Inc. may resell securities to or through another of our affiliates, as selling agents.
The securities are a new issue of securities, and there will be no established trading market for any security before itsoriginal issue date. We may or may not list the securities on a securities exchange or quotation system. We have beenadvised by UBS Securities LLC and UBS Financial Services Inc. that they intend to make a market in the securities.However, neither UBS Securities LLC, UBS Financial Services Inc. nor any of our other affiliates nor any other agentnamed in your prospectus supplement that makes a market is obligated to do so and any of them may stop doing so atany time without notice. No assurance can be given as to the liquidity or trading market for the securities.
Under Rule 15c6-1 of the Securities Exchange Act of 1934, trades in the secondary market generally are required tosettle in three business days, unless the parties to any such trade expressly agree otherwise. Your prospectussupplement may provide that the original issue date for your securities may be more than three scheduled business daysafter the trade date for your securities. Accordingly, in such a case, if you wish to trade securities on any date prior tothe third business day before the original issue date for your securities, you will be required, by virtue of the fact thatyour securities initially are expected to settle in more than three scheduled business days after the trade date for yoursecurities, to make alternative settlement arrangements to prevent a failed settlement.
Market-Making Resales by Affiliates
This prospectus may be used by UBS, UBS Securities LLC, UBS Financial Services Inc. or any other affiliate of UBSin connection with offers and sales of the securities in market-making transactions. In a market-making transaction,each of UBS, UBS Securities LLC, UBS Financial Services Inc. or any other affiliate of UBS may resell a security itacquires from other holders, after the original offering and sale of the security. Resales of this kind may occur in theopen market or may be privately negotiated at prevailing market prices at the time of resale or at related or negotiatedprices. In these transactions, UBS, UBS Securities LLC, UBS Financial Services Inc. or any other affiliate of UBS mayact as principal or agent, including as agent for the counterparty in a transaction in which it acts as principal, or asagent for both counterparties in a transaction in which it does not act as principal. UBS, UBS Securities LLC, UBSFinancial Services Inc. or any other affiliate of UBS may receive compensation in the form of discounts andcommissions, including from both counterparties in some cases.
The securities to be sold in market-making transactions include securities to be issued after the date of this prospectusas well as securities previously issued.
UBS does not expect to receive any proceeds from market-making transactions other than those it undertakes on itsown. UBS does not expect that UBS Securities LLC, UBS Financial Services Inc. or any other affiliate that engages inthese transactions will pay any proceeds from its market-making resales to UBS.
Information about the trade and settlement dates, as well as the purchase price, for a market-making transaction will beprovided to the purchaser in a separate confirmation of sale.
Unless UBS or an agent informs you in your confirmation of sale that your security is being purchased in its originaloffering and sale, you may assume that you are purchasing your security in a market-making transaction.
Matters Relating to Initial Offering and Market-Making Resales
In this prospectus, the term “this offering” means the initial offering of the securities made in connection with theiroriginal issuance. This term does not refer to any subsequent resales of securities in market-making transactions.
Conflicts of Interest
Each of UBS Securities LLC and UBS Financial Services Inc. is an affiliate of UBS and, as such, has a “conflict ofinterest” in any offering of the securities within the meaning of Rule 5121. Consequently, any offering of the securitieswill be conducted in compliance with the provisions of Rule 5121. Neither UBS Securities LLC nor UBS FinancialServices Inc. will be permitted to sell securities in any offering to an account over which it exercises discretionaryauthority without the prior specific written approval of the account holder.
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Validity of the SecuritiesIn connection with particular offerings of the securities in the future, and if stated in the applicable prospectussupplement, the validity of those securities may be passed upon for UBS AG by Sullivan & Cromwell LLP as tomatters of New York law and by Homburger AG as to matters of Swiss law, and for any underwriters or agents bySullivan & Cromwell LLP or other counsel named in the applicable prospectus supplement.
ExpertsErnst & Young Ltd, independent registered public accounting firm, has audited UBS’s consolidated financialstatements included in UBS’s Annual Report on Form 20-F for the year ended December 31, 2015, and theeffectiveness of UBS’s internal control over financial reporting as of December 31, 2015, as set forth in their reports,which are incorporated by reference in the prospectuses and elsewhere in the registration statement. UBS’s financialstatements are incorporated by reference in reliance on Ernst & Young Ltd’s reports, given on their authority as expertsin accounting and auditing.
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You should rely only on the informationincorporated by reference or provided in thisprospectus supplement or the accompanyingprospectus. We have not authorized anyone toprovide you with different information. We are notmaking an offer of these securities in any statewhere the offer is not permitted. You should notassume that the information in this prospectussupplement is accurate as of any date other thanthe date on the front of the document.
TABLE OF CONTENTS
Prospectus Supplement
Prospectus Supplement Summary . . . . . . . . S-1Hypothetical Examples . . . . . . . . . . . . . . . . . . . . . S-18Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-27The Indices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-45Valuation of the Indices and the Securities . . . . . S-63Specific Terms of the Securities . . . . . . . . . . . . . . S-66Use of Proceeds and Hedging . . . . . . . . . . . . . . . . S-84Material U.S. Federal Income Tax
Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . S-85Benefit Plan Investor Considerations . . . . . . . . . . S-89Supplemental Plan of Distribution . . . . . . . . . . . . S-91
Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . S-92Notice of Early Redemption . . . . . . . . . . . . . . . . . A-1Broker’s Confirmation of Redemption . . . . . . . . B-1Hypothetical Calculation of the Futures Spread
Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1
Prospectus
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Cautionary Note Regarding Forward-Looking
Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Incorporation of Information About UBS AG . . . 5Where You Can Find More Information . . . . . . . 6Presentation of Financial Information . . . . . . . . . 7Limitations on Enforcement of U.S. Laws
Against UBS AG, Its Management andOthers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
UBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Swiss Regulatory Powers . . . . . . . . . . . . . . . . . . . 11Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Description of Debt Securities We May Offer . . . 13Description of Warrants We May Offer . . . . . . . 33Legal Ownership and Book-Entry Issuance . . . . . 48Considerations Relating to Indexed Securities . . 53Considerations Relating to Securities
Denominated or Payable in or Linked to aNon-U.S. Dollar Currency. . . . . . . . . . . . . . . . . 56
U.S. Tax Considerations . . . . . . . . . . . . . . . . . . . . 59Tax Considerations Under the Laws of
Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70Benefit Plan Investor Considerations . . . . . . . . . . 72Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . 74Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . 75Validity of the Securities . . . . . . . . . . . . . . . . . . . . 76Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
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Prospectus Supplement dated July 13, 2016(To Prospectus dated April 29, 2016)
UBS Investment Bank