Statement of Financial Condition
UBS Securities LLC
Notes to the Statement of Financial Condition (continued)
(In Thousands)
12. Risk Management (continued)
Credit Risk
Credit risk is the risk of financial loss resulting from failure by a client or counterparty to meet its
contractual obligations to the Company. This can be caused by factors directly related to the
counterparty or from failures in the settlement process. It can also be triggered by economic or
political factors in the country in which the counterparty is based or where it has substantial assets.
The Company is engaged in various finance, trading, and brokerage activities in which
counterparties primarily include affiliates, other financial institutions, including banks, brokers
and dealers, investment funds, and non-financial operating entities. In the event counterparties do
not fulfill their obligations and the value of any collateral prove inadequate due to market
conditions, the Company may be exposed to risk. The risk of default depends on the
creditworthiness of the counterparty or issuer of the instrument. It is the Company's policy to
review, as necessary, the credit standing of each counterparty.
The Company manages credit risk by monitoring net exposure to individual counterparties on a
daily basis, monitoring credit limits and requiring additional collateral where appropriate.
Client transactions are entered on either a cash or margin basis. In a margin transaction, the
Company extends credit to a client, using the securities purchased and/or other securities held on
behalf of the client, as collateral for amounts loaned. Amounts loaned are limited by margin
regulations of the Federal Reserve Board and other regulatory authorities and are subject to the
Company's credit review and daily monitoring procedures. Market declines could, however,
reduce the value of any collateral below the principal amount loaned, plus accrued interest, before
the collateral can be sold.
Client transactions include positions in written options, financial instruments sold, not yet
purchased and commodities and financial futures. The risk to the Company's clients in these
transactions can be substantial, principally due to price volatility which can reduce the clients'
ability to meet their obligations. To the extent clients are unable to meet their commitments to the
Company and margin deposits are insufficient to cover outstanding liabilities, the Company may
take action as appropriate.
Client trades are recorded on a settlement date basis. Should either the client or broker fail to
perform, the Company may be required to complete the transaction at prevailing market prices.
Trades pending at year end were settled without material adverse effect on the statement of
financial condition.
Receivables and payables with brokers and dealers, agreements to resell and repurchase securities,
and securities borrowed and loaned are generally collateralized by cash, U.S. Government and
agency securities. Additional collateral is requested when considered necessary.
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