UBS Newsletter for Banks and Financial Institutions Autumn 2008 The banking industry is rebuilding trust after a challenging year and restoring confidence in the financial system requires strengthening operational infrastructure and institutional relationships. Network management plays a vital role by fine-tuning relationship management and investing in technology to reduce errors and provide real-time reporting. Offshoring operations to locations with lower costs and fresh talent can help banks pass benefits to business partners while honing effectiveness. A new sea freight derivatives index launched by UBS provides balanced exposure to dry bulk freight markets and could attract new investors to freight as an asset class.

1. UBS Newsletter for Banks and Financial Institutions Autumn 2008
News for Banks
Rebuilding trust
There will be much to discuss at SIBOS approach to delivering equity structured
2008. Last year, the banking industry was products lets advisors create the exact
gaining momentum. This year, it is rebuild- solution that their client is looking for
ing trust. There is no more important task. (pages 16 –17). Certain solutions, though,
As no bank is an island, the first step to- continue to build on tradition. Our annual
wards bolstering our industry’s credibility seminar for partner banks (pages 12–13)
is to restore trust between financial insti- is now in its thirty-first year. In a time of
tutions. This is more than a matter of re- upheaval, I like to think that such events
furbishing balance sheets. It is about build- help to forge the trust that will underpin
ing confidence in the financial system by our industry’s recovery.
strengthening its operational infrastruc-
ture. And it involves overhauling the com-
plex web of institutional relationships that
make that infrastructure function.
Network management has a vital part
to play in that agenda. In this SIBOS edi- Stephan Zimmermann
2 Network management tion of News for Banks, we show (on pag- Chief Operations Officer
The future of custody; the network es 5 – 6) how we have fine-tuned our own UBS Global Wealth Management &
Business Banking
reloaded; and real-time reporting approach to relationship management to
9 Analysts in action get a more integrated picture of our coun-
Research feeds into products terparties. We believe that our efforts will
10 Talent-spotter result in additional opportunities for both
How UBS went offshoring ourselves and the institutions we do busi-
12 Cloudy outlook ness with. Meanwhile, we continue to in-
The view from Wolfsberg vest in our platform. Offshoring is often
14 Reserves seminar sold simply as a response to cost pressures
Where central bankers convene but we prefer to see our service centres in
15 Blue sea thought India and Poland as sources of fresh talent
Indexing the world’s sea freight (pages 10 –11). For us, the ultimate meas-
16 Made to measure ure of success in offshoring lies in how
Bespoke structured products far we can hone our effectiveness and, of
18 In brief course, pass on the benefits to our busi-
News from around the world ness partners.
Adroit use of technology can also help
to build confidence. In the back office,
better reporting systems (see pages 7– 8)
could reduce the scope for errors and mis-
trust. In the front office, an innovative

2. Solutions
The sea may be calm but the freight rates are volatile
Blue Sea thinking
A new index on sea-freight derivatives helps investors tap into the China story
In the same week that UBS launched on time. The upshot is a rising trend in also incorporates a “Port Congestion Fac-
its Blue Sea index on freight derivatives, freight rates, coupled with spectacular vol- tor” that takes into account the effect on
the 203,512-tonne bulk carrier China atility; the benchmark Baltic Exchange sea freight derivative prices of loading or un-
Steel Team was booked to carry iron ore freight index for dry commodities sagged loading delays in more than 60 iron ore
from Brazil to China. At a record-break- by more than a third between November and coal ports worldwide.
ing $303,000 per day, the freight rate last year and mid-January 2008 on fears The index is aimed primarily at investors
was more than three times higher than of a US recession, although it has since who are interested in freight as a generic
the ship’s last fixture, just one month pre- bounced back. asset class. In addition, shipowners and
viously. China Steel Team is one of fewer That volatility, of course, has already charterers could use the index to hedge
than 600 Capesize bulk carriers in the attracted banks, hedge funds, and other their total exposure to freight rates. For
world. And as the name of this particu- financial institutions. So far, would-be this purpose, sub-indices are also available.
lar one suggests, China’s prodigious appe- investors have looked to the existing mar- These are based on the three categories of
tite for raw materials is keeping all of them kets for sea-freight derivatives, which are bulk carriers that comprise the main index,
busy. That’s not surprising, when you con- based mainly on futures and forwards on namely the Capesize giants and the hand-
sider that Baosteel, China’s leading steel the principal reference indices. What was ier-sized Panamax and Supramax types.
producer, needs 150 ship-loads of ore lacking, however, was a packaged instru- It’s too early to say which types of
every year to feed its blast furnaces. ment that offered a balanced exposure to investor will make the most intensive use
Statistics like these explain why sea a representative spectrum of the dry-bulk of the new index. But Blue Sea has cer-
freight rates are rocketing, particularly for freight market. It was this gap that UBS tainly captured the attention of industry
dry bulk cargoes such as iron ore or coal. sought to fill when it launched its Blue Sea experts. Lloyds List, the longest-standing
According to Simpson Spence & Young, a Index on May 22. daily newspaper for the maritime industry,
consultancy, average dry bulk freight rates commented as follows: “This new UBS
reached almost $220,000 per day in May, Congestion factor initiative deserves to be watched as it may
up from $80,000 or below in January UBS Blue Sea is the first fully integrated in- introduce a new level of sophistication to
and a previous long-term average of dex to be benchmarked on the most ac- the freight derivatives market by opening
$15,000 – $20,000. Capacity shortage is tively traded dry-bulk forward freight it up to investors who are not necessarily
responsible for part of this squeeze but agreements. FFAs are non-standardized freight professionals. The Blue Sea Index is
a lack of tonnage is not the whole story. over-the-counter forward contracts based indeed blue sky thinking.”
Even if the 185 or so Capesizers on order on one of several underlying freight indi-
could be delivered tomorrow, ports and ces. They are agreed between two parties
Ilija Murisic
cargo terminals are too choked with ship- for a specific route, for a specific delivery UBS Investment Bank, Hybrid Derivatives Trading
ping to allow them to load and unload rate and a specific vessel type. The index ilija.murisic@ubs.com
UBS News for Banks / Autumn 2008 15

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