The UBS (UBS) recent quarterly report highlights the risks the Swiss bank took in getting into the U.S. mortgage finance market. On paper, its Blackrock-run RMBS Opportunities Master Fund special purpose vehicle does not seem very appealing by today’s standards. The portfolio was comprised primarily of Alt-A (53%) and subprime (33%) products. The aggregate notional balance of the residential mortgage-backed securities fund’s assets collateralizing the loan on June 30 was $12.4 billion. For the record, at this time, the portfolio is not impaired. “We closely monitor the RMBS fund and its performance, particularly to determine if deterioration of the underlying RMBS mortgage pools indicates that the equity investors in the fund no longer receive the majority of the risks and rewards, and also to assess whether the loan to the RMBS fund has been impaired,” the report states. On the other hand, UBS continues to use its covered bond investments as a major source of funding liabilities, according to the earnings report. Covered bonds are securities backed by municipal and corporate loans, as well as mortgages. In the case of UBS, pristine-quality Swiss residential mortgages are proving to be its bread and butter. In Switzerland, as well as Germany, a central bank-led covered bond program is called Pfandbrief. “Along with a large deposit base, we also generate funding by pledging a portion of our portfolio of Swiss residential mortgages as collateral for the Swiss Pfandbriefe and our own covered bond program,” the report states. “Collectively, these broad product offerings, and the global scope of our business activities, underpin our funding stability.” Write to Jacob Gaffney. Follow him on Twitter @jacobgaffney.