PRODUCT SUPPLEMENT

This product supplement describes some of the general terms that may apply to the Securities and the general manner in which they may be offered. The applicable prospectus supplement and applicable final terms supplement (together, the “applicable supplements”) to this product supplement will describe the specific terms of any Securities that we offer, including (i) the particular product being offered, (ii) the underlying asset or underlying basket and (iii) the specific manner in which such Securities may be offered.

If there is any inconsistency between the terms of the Securities described in the accompanying prospectus, this product supplement, the index supplement and the applicable supplements, the following hierarchy will govern: first, the applicable final terms supplement; second, the applicable prospectus supplement; third, this product supplement; fourth, the index supplement; and last, the accompanying prospectus.

Unless otherwise specified in the applicable supplements, the general terms of the Securities are described in this product supplement and include the following:

See “Risk Factors” beginning on page PS-17 of this product supplement for risks related to an investment in the Securities.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these Securities or passed upon the adequacy or accuracy of this product supplement, the index supplement or the accompanying prospectus. Any representation to the contrary is a criminal offense.

The Securities are not bank deposits and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.

You should read this product supplement together with the prospectus dated April 29, 2016, titled “Debt Securities and Warrants”, relating to our Medium-Term Notes, Series B, of which the Securities are a part, the index supplement dated April 29, 2016, which contains information about certain indices to which particular categories of debt securities and warrants that we may offer, including the Securities, may be linked and any applicable supplements related to the Securities that we may file with the Securities and Exchange Commission (the “SEC”) from time to time. You may access these documents on the SEC website at www.sec.gov as follows (or if such address has changed, by reviewing our filings for the relevant date on the SEC website):

You should rely only on the information incorporated by reference or provided in this product supplement or the accompanying prospectus or index supplement. We have not authorized anyone to provide you with different information. We are not making an offer of these Securities in any state where the offer is not permitted. You should not assume that the information in this product supplement is accurate as of any date other than the date on the front of the document.

Product Supplement Summary

This product supplement describes terms that will apply generally to the Securities. On the trade date, UBS AG will prepare a final terms supplement. The final terms supplement together with any applicable prospectus supplement (collectively, the “applicable supplements”) will specify the underlying asset or underlying basket and the specific pricing terms for that issuance and will indicate any changes to the general terms specified below. In some instances, UBS AG may prepare a pricing supplement on the trade date, in lieu of a final terms supplement and related prospectus supplement. References in this product supplement to the “applicable supplements” or the “applicable final terms supplement” will also refer to the applicable pricing supplement as the context may require. You should read the applicable supplements in conjunction with this product supplement and the accompanying prospectus.

References to “UBS”, “we”, “our” and “us” refer only to UBS AG and not to its consolidated subsidiaries. In this product supplement, when we refer to the “Securities”, we mean the Step Strategies Products. Also, references to the “accompanying prospectus” mean the accompanying prospectus, titled “Debt Securities and Warrants”, dated April 29, 2016, of UBS. References to the “index supplement” mean the UBS index supplement dated April 29, 2016.

What are the Step Strategies Products?

The “Step Strategies Products” consist of two separate product offerings: the Step Securities and the Trigger Step Securities. We refer to the Step Strategies Products as the “Securities”.

What are the Securities?

The Securities are medium-term unsubordinated and unsecured debt securities issued by UBS AG linked to:

a common stock, including an American depositary receipt (an “ADR”), of a specific company,

a share of an exchange traded fund (an “ETF”, and together with common stock, an “underlying equity”),

an index (an “underlying index”, and together with an underlying equity, an “underlying asset”), or

a weighted basket (an “underlying basket”) comprised of underlying equities and/or underlying indices (each, a “basket asset”).

As used in this product supplement, the term “common stock” includes non-U.S. equity securities issued through depositary arrangements such as ADRs. We refer to the common stock represented by an ADR as “non-U.S. stock”. If an underlying equity is an ADR, the term “non-U.S. stock issuer” refers to the issuer of the non-U.S. stock underlying the ADR. The underlying asset or underlying basket will be specified in the applicable supplement to this product supplement.

Payment at Maturity for the Securities

Any payment on the Securities, including any repayment of principal, is subject to the creditworthiness of UBS. If UBS were to default on its payment obligations, you may not receive any amounts owed to you under the Securities and you could lose all of your initial investment.

Investing in the Securities involves significant risks. The Securities differ from ordinary debt securities in that UBS is not necessarily obligated to repay the full amount of your initial investment. Depending on the particular terms of your Securities, if the underlying return is negative, you could lose a significant portion or all of your initial investment.

All defined terms relating to payment at maturity are set forth below under “Defined Terms Relating to Payments at Maturity for the Securities”.

The Step Strategies Products:

The Step Strategies Products provide the opportunity to receive a return equal to the step return or to participate in any positive underlying return in excess of the step return with full or contingent downside market exposure at maturity.

Payment at Maturity for Step Securities

For any offering of Step Securities, the amount you will receive at maturity will be based on (i) the underlying return and (ii) whether the final level is less than the initial level. At maturity UBS will pay a cash payment for each Step Security that you hold, calculated as follows:

If the underlying return is zero or positive:

$10 × (1 + the greater of (a) Step Return and (b) Underlying Return).

If the underlying return is negative:

$10 × (1 + Underlying Return).

Investors in Step Securities are fully exposed to any decline in the level of the underlying asset or underlying basket from the trade date to the final valuation date. Specifically, if the underlying return is negative, you will lose a percentage of your principal amount equal to the underlying return and, in extreme situations, you could lose all of your initial investment.

Payment at Maturity for Trigger Step Securities

For any offering of Trigger Step Securities, the amount you will receive at maturity will be based on (i) the underlying return and (ii) whether the final level is less than the downside threshold. At maturity UBS will pay a cash payment for each Trigger Step Security that you hold, calculated as follows:

If the underlying return is zero or positive:

$10 × (1 + the greater of (a) Step Return and (b) Underlying Return).

If the underlying return is negative and the final level is equal to or greater than the downside threshold:

Principal Amount of $10.

If the underlying return is negative and the final level is less than the downside threshold:

$10 × (1 + Underlying Return).

Investors in Trigger Step Securities may be fully exposed to any decline in the level of the underlying asset or underlying basket from the trade date to the final valuation date. Specifically, if the final level is less than the downside threshold, you will lose a percentage of your principal amount equal to the underlying return and, in extreme situations, you could lose all of your initial investment.

Defined Terms Relating to Payments at Maturity for the Securities:

The “underlying return” is the quotient, expressed as a percentage, of (i) the final level of the underlying asset or underlying basket minus the initial level of the underlying asset or underlying basket, divided by (ii) the initial level of the underlying asset or underlying basket. Expressed as a formula:

Final Level – Initial Level

Initial Level

Unless otherwise provided in the applicable supplement, the “initial level” will be, with respect to:

an underlying equity, the closing level of such underlying equity on the trade date,

an underlying index, the closing level of such underlying index on the trade date, or

an underlying basket, 100.

The initial level will be determined by the calculation agent and may be postponed in the case of a market disruption event as described under “General Terms of the Securities — Market Disruption Events” or adjusted in the case of antidilution and reorganization events as described under “— Antidilution Adjustments for Securities Linked to an Underlying Equity or Equity Basket Asset” and “— Reorganization Events for Securities Linked to an Underlying Equity or Equity Basket Asset”.

Unless otherwise provided in the applicable supplement, the “final level” will be, with respect to:

an underlying equity, the closing level of such underlying equity on the final valuation date,

an underlying index, the closing level of such underlying index on the final valuation date, or

an underlying basket, a level of the underlying basket equal to the product of (a) the initial level of such underlying basket multiplied by (b) the sum of one and the weighted performance of the basket assets measured from the trade date to the final valuation date.

The final level will be determined by the calculation agent and may be postponed in the case of a market disruption event as described under “General Terms of the Securities — Market Disruption Events” or adjusted in the case of antidilution and reorganization events as described under “— Antidilution Adjustments for Securities Linked to an Underlying Equity or Equity Basket Asset” and “— Reorganization Events for Securities Linked to an Underlying Equity or Equity Basket Asset”.

The “step return” will be a positive percentage specified in the applicable supplement.

The “downside threshold” will be a specified level of the underlying asset or underlying basket that will be less than the initial level specified in the applicable supplement. The downside threshold will be based on a percentage of the initial level and may be adjusted in the case of antidilution and reorganization events as described under “General Terms of the Securities — Antidilution Adjustments for Securities Linked to an Underlying Equity or Equity Basket Asset” and “— Reorganization Events for Securities Linked to an Underlying Equity or Equity Basket Asset”.

The calculation agent may adjust the terms of the Securities for an underlying asset or underlying basket in the case of antidilution and reorganization events described below under “General Terms of the Securities — Antidilution Adjustments for Securities Linked to an Underlying Equity or Equity Basket Asset” and “— Reorganization Events for Securities Linked to an Underlying Equity or Equity Basket Asset”.

The Securities are Part of a Series

The Securities are part of a series of debt securities entitled “Medium-Term Notes, Series B” that we may issue from time to time under our indenture, which is described in the accompanying prospectus. This product supplement summarizes general financial and other terms that apply to the Securities. Terms that apply generally to all Medium-Term Notes, Series B are described in “Description of Debt Securities We May Offer” in the accompanying prospectus.

We may issue separate offerings of the Securities that may be identical in all respects, except that each offering may be linked to the performance of a different underlying asset or underlying basket and will be subject to the particular terms of the respective Securities set forth in the applicable supplements. Each offering of the Securities is a separate and distinct security and you may invest in one or more offerings of the Securities as set forth in the applicable supplements. The performance of each offering of the Securities will depend solely upon the performance of the underlying asset or underlying basket to which such offering is linked and will not depend on the performance of any other offering of the Securities.

Specific Terms of Each Security Will Be Described in the Applicable Supplements

The applicable supplements accompanying this product supplement describe the specific terms of your Securities. The terms described therein modify or supplement those described herein and in the accompanying prospectus.

You should read any applicable supplements in conjunction with this product supplement, the index supplement and the accompanying prospectus.

Selected Purchase Considerations

Subject to the specific terms of your Securities as described in the applicable supplements, an investment in the Securities may offer the following features:

Risk of loss at maturity — Depending on the particular terms of your Security, you may suffer losses at maturity depending on whether the final level of the underlying asset or underlying basket is less than the initial level or downside threshold, as applicable.

For Step Securities, if the underlying return is negative, you will lose a percentage of your principal amount equal to the underlying return and, in extreme situations, you could lose all of your initial investment.

For Trigger Step Securities, if the underlying return is negative and the final level is less than the downside threshold, you will lose a percentage of your principal amount equal to the underlying return and, in extreme situations, you could lose all of your initial investment.

The contingent repayment of principal applies only at maturity — If you are able to sell your Securities prior to maturity in the secondary market, you may have to sell them at a loss relative to your initial investment even if the level of the underlying asset or the level of the underlying basket is equal to or greater than the initial level or downside threshold, as applicable. All payments on the Securities are subject to the creditworthiness of UBS.

Participation in the positive performance of the underlying asset or underlying basket with a step return feature — At maturity, if the underlying return is zero or positive, UBS will repay you at least your principal amount plus a return on the Securities equal to the step return. The Securities also provide an opportunity for participation in any positive underlying return that exceeds the step return. You can receive the full benefit of the step return or the participation in the underlying return from UBS only if you hold your Securities to maturity.

Minimum investment — Unless otherwise specified in the applicable supplement, the Securities have a $10 principal amount per Security and a minimum investment of 100 Securities (for a total minimum purchase price of $1,000). Purchases in excess of these minimum amounts may be made in integrals of one Security. Purchases and sales of Securities made in the secondary market, if any exists, are not subject to the minimum investment of 100 Securities.

What are Some of the Risks of the Securities?

An investment in the Securities involves significant risks. Some of the risks that apply generally to the Securities are summarized here, but we urge you to read the more detailed explanation of risks relating to the Securities in the “Risk Factors” section of this product supplement and in the applicable supplements.

Risk of loss at maturity — The Securities differ from ordinary debt securities in that UBS will not necessarily repay the principal amount of the Securities at maturity. UBS will repay you the principal amount of your Securities in cash only if the final level of the underlying asset or underlying basket is equal to or greater than the initial level (meaning the underlying return is zero or positive) or, if the underlying return is negative, if the final level is equal to or greater than the downside threshold, as applicable, and will only make such payment at maturity. If the underlying return is negative and the final level is less than the initial level or downside threshold, as applicable, you will lose a percentage of your principal amount equal to the underlying return and, in extreme situations, you could lose all of your initial investment.

The contingent repayment of principal applies only at maturity — You should be willing to hold your Securities to maturity. If you are able to sell your Securities prior to maturity in the secondary market, you may have to sell them at a loss relative to your initial investment even if the level of the underlying asset or underlying basket at such time is equal to or greater than the initial level or downside threshold, as applicable.

The step return and any participation in the positive performance of the underlying asset or underlying basket in excess of the step return applies only at maturity — At maturity, the Securities provide the opportunity to receive a return equal to the step return or to participate in any positive underlying return in excess of the step return. You can receive the full benefit of the step return or the participation in the underlying return from UBS only if you hold your Securities to maturity.

No interest payments — UBS will not pay any interest with respect to the Securities.

Credit risk of UBS — The Securities are unsubordinated, unsecured debt obligations of UBS and are not, either directly or indirectly, an obligation of any third party. Any payment to be made on the Securities, including any repayment of principal at maturity, depends on the ability of UBS to satisfy its obligations as they come due. As a result, UBS’s actual and perceived creditworthiness may affect the market value of the Securities. If UBS were to default on its obligations, you may not receive any amounts owed to you under the terms of the Securities and you could lose all of your initial investment.

Greater expected volatility generally indicates an increased risk of loss at maturity — “Volatility” refers to the frequency and magnitude of changes in the level of an underlying asset or underlying basket. The greater the expected volatility of an underlying asset or underlying basket as of the trade date, the greater the expectation is as of that date that the final level of such underlying asset or underlying basket could be less than its initial level or downside threshold, as applicable, and as a consequence, indicates an increased risk of loss. However, an underlying asset or underlying basket’s volatility can change significantly over the term of the Securities and, in the case of Trigger Step Securities, a relatively lower downside threshold may not necessarily indicate a greater likelihood of a return of principal at maturity. You should be willing to accept the downside market risk of an underlying asset or underlying basket and the potential to lose a significant portion or all of your initial investment.

Market risk — The return on the Securities, which may be negative, is directly linked to the performance of the underlying asset or underlying basket and, if an underlying asset is an index or an ETF, indirectly linked to the value of the stocks (“underlying equity constituents”), futures contracts on physical commodities (“constituent commodities”) and other assets constituting the index or ETF (collectively, “underlying constituents”). The level of the underlying asset or basket asset, as applicable, can rise or fall sharply due to factors specific to such underlying asset or its underlying constituents, such as stock or commodity price volatility, earnings, financial conditions, corporate, industry and regulatory developments, management changes and decisions and other events, as well as general market factors, such as general stock market or commodity market levels, interest rates and economic and political conditions.

Owning the Securities is not the same as owning any underlying equity or underlying constituents — The return on your Securities may not reflect the return you would realize if you actually owned the underlying equity, basket assets or underlying constituents comprising the underlying asset or basket assets, as applicable. For instance, for underlying equities and underlying equity constituents, you will not receive or be entitled to receive any dividend payments or other distributions during the term of the Securities, and any such dividends or distributions will not be factored into the calculation of the payment at maturity on your Securities. In addition, as an owner of the Securities, you will not have voting rights or any other rights that a holder of any underlying equity or underlying constituents may have.

There can be no assurance that the investment view implicit in the Securities will be successful — It is impossible to predict whether and the extent to which the level of the underlying asset or underlying basket will rise or fall and there can be no assurance that the final level of the underlying asset or underlying basket will be equal to or greater than the initial level or downside threshold, as applicable. The final level of the underlying asset or underlying basket will be influenced by complex and interrelated political, economic, financial and other factors that affect the issuer of the underlying equity (the “underlying equity issuer”) or, if any underlying asset or basket asset is an index or ETF, the issuer(s) of the underlying equity constituents (each, an “underlying constituent issuer”) or the constituent commodities of such index or ETF. If an underlying asset or basket asset, as applicable, is an equity, you should be willing to accept the risks of owning equities in general and each such underlying equity in particular, and the risk of losing a significant portion or all of your initial investment. If an underlying asset or basket asset, as applicable, is an index or ETF, you should be willing to accept the risks associated with the relevant markets tracked by each such index or ETF in general and its underlying constituents in particular, and the risk of losing a significant portion or all of your initial investment.

The calculation agent can make antidilution and reorganization adjustments that affect the payment to you at maturity — For antidilution and reorganization events affecting an underlying equity, the calculation agent may make adjustments to the initial level, downside threshold and/or final level, as applicable, of the affected underlying equity, and any other term of the Securities. However, the calculation agent will not make an adjustment in response to every corporate event that could affect an underlying equity. If an event occurs that does not require the calculation agent to make an adjustment, the market value of the Securities and the payment at maturity may be materially and adversely affected. In addition, all determinations and calculations concerning any such adjustments will be made by the calculation agent. You should be aware that the calculation agent may make any such adjustment, determination or calculation in a manner that differs from that discussed in this product supplement or the applicable supplement as necessary to achieve an equitable result.

Common Stocks: Following certain reorganization events relating to an underlying equity issuer where such issuer is not the surviving entity, the amount you receive at maturity may be based on the equity security of a successor to such underlying equity issuer in combination with any cash or any other assets distributed to holders of an underlying equity in such reorganization

event. If an underlying equity issuer becomes subject to (i) a reorganization event whereby an underlying equity is exchanged solely for cash, (ii) a merger or consolidation with UBS or any of its affiliates, or (iii) an underlying equity is delisted or otherwise suspended from trading, the amount you receive at maturity may be based on a substitute security as defined below under “General Terms of the Securities — Reorganization Events for Securities Linked to an Underlying Equity or Equity Basket Asset”.

ETFs: If an underlying equity is an ETF, following a delisting or suspension from trading or discontinuance of the ETF, the amount you receive at maturity may be based on a share of another ETF or a basket of securities, futures contracts, commodities or other assets, as described below under “General Terms of the Securities — Delisting, Discontinuance or Modification of an ETF”.

ADRs: If an underlying equity is an ADR, following a delisting (including for this purpose the OTC Bulletin Board) or termination of the ADR facility, the amount you receive at maturity may be based on the non-U.S. stock represented by the ADR as described below under “General Terms of the Securities — Delisting of ADRs or Termination of ADR Facility”. The occurrence of any antidilution or reorganization event and the consequent adjustments may materially and adversely affect the value of the Securities and your payment at maturity, if any. For more information, see the sections “General Terms of the Securities — Antidilution Adjustments for Securities Linked to an Underlying Equity or Equity Basket Asset” and “— Reorganization Events for Securities Linked to an Underlying Equity or Equity Basket Asset” of this product supplement, as well as the above-referenced sections.

There may be little or no secondary market for the Securities — Unless otherwise specified in the applicable supplement, the Securities will not be listed or displayed on any securities exchange or any electronic communications network. UBS Securities LLC and other affiliates of UBS intend, but are not required, to make a market for the Securities and may stop making a market at any time. Furthermore, there can be no assurance that a secondary market for the Securities will develop. The price, if any, at which you may be able to sell your Securities prior to maturity could be at a substantial discount from the issue price and to their intrinsic value and you may suffer substantial losses as a result.

Economic and market factors affecting the terms and market price of Securities prior to maturity — Because structured notes, including the Securities, can be thought of as having a debt component and a derivative component, factors that influence the values of debt instruments and options and other derivatives will also affect the terms and features of the Securities at issuance and the market price of the Securities prior to maturity. These factors include the price or level of the underlying asset or any underlying constituent; the volatility of the underlying asset or any underlying constituent; the dividend rate paid on each underlying equity or underlying constituent; the time remaining to the maturity of the Securities; interest rates in the markets; geopolitical conditions and economic, financial, political, force majeure and regulatory or judicial events; the composition of the underlying asset if an underlying asset is an index or ETF; the availability of comparable instruments; the creditworthiness of UBS; the then current bid-ask spread for the Securities and the factors discussed under “— Potential conflict of interest” below. These and other factors are unpredictable and interrelated and may offset or magnify each other.

Impact of fees on the secondary market price of the Securities — Generally, the price of the Securities in the secondary market is likely to be lower than the issue price to public because the issue price to public included, and the secondary market prices are likely to exclude, commissions, hedging costs or other compensation paid with respect to the Securities.

Potential UBS impact on the market price of the underlying asset or any underlying constituent — Trading or transactions by UBS or its affiliates in an underlying asset or any underlying constituent, as applicable, listed and/or over-the-counter options, futures, exchange-traded funds or other instruments with returns linked to the performance of an underlying asset or any underlying constituent, may adversely affect the market price(s) or level(s) of the underlying asset or basket asset(s) and, therefore, the market value of the Securities.

Potential conflict of interest — UBS and its affiliates may engage in business with an underlying equity issuer or any underlying constituent issuer, which may present a conflict between the obligations of UBS and you, as a holder of the Securities. There are also potential conflicts of interest between you and the calculation agent, which will be an affiliate of UBS and which will make potentially subjective judgments. The calculation agent will determine the payment at maturity of the Securities, if any, based on observed levels of the underlying asset or basket assets. The calculation agent can postpone the determination of the initial level and the final level of the underlying asset, underlying basket or basket asset, as applicable, on the trade date or final valuation date, respectively.

Potentially inconsistent research, opinions or recommendations by UBS — UBS and its affiliates publish research from time to time on financial markets and other matters that may influence the value of the Securities, or express opinions or provide recommendations that are inconsistent with purchasing or holding the Securities. Any research, opinions or recommendations expressed by UBS or its affiliates may not be consistent with each other and may be modified from time to time without notice. Investors should make their own independent investigation of the merits of investing in the Securities and the underlying asset or underlying basket to which the Securities are linked.

Dealer incentives — UBS and its affiliates act in various capacities with respect to the Securities. We and our affiliates may act as a principal, agent or dealer in connection with the sale of the Securities. Such affiliates, including the sales representatives, will derive compensation from the distribution of the Securities and such compensation may serve as an incentive to sell these Securities instead of other investments. We may pay dealer compensation to any of our affiliates acting as agents or dealers in connection with the distribution of the Securities.

Uncertain tax treatment — Significant aspects of the tax treatment of the Securities are uncertain. You should consult your tax advisor about your own tax situation.

Subject to the specific terms of your Securities, as specified in the applicable supplement, the Securities generally may be a suitable investment for you if:

You fully understand the risks inherent in an investment in the Securities, including the risk of loss of all of your initial investment.

You can tolerate a loss of a significant portion or all of your initial investment and are willing to make an investment that may have the same downside market risk as a hypothetical investment in the underlying asset, underlying basket or underlying constituents.

You believe the level of the underlying asset or underlying basket will appreciate over the term of the Securities.

You can tolerate fluctuations in the price of the Securities prior to maturity that may be similar to or exceed the downside fluctuations in the level of the underlying asset or underlying basket.

You do not seek current income from your investment and are willing to forgo dividends paid on any underlying equity or underlying constituent.

You are willing to hold the Securities to maturity and accept that there may be little or no secondary market for the Securities.

You are willing to assume the credit risk of UBS for all payments under the Securities, and understand that if UBS defaults on its obligations you may not receive any amounts due to you including any repayment of principal.

Subject to the specific terms of your Securities, as specified in the applicable supplement, the Securities generally may not be a suitable investment for you if:

You do not fully understand the risks inherent in an investment in the Securities, including the risk of loss of all of your initial investment.

You require an investment designed to provide a full return of principal at maturity.

You are not willing to make an investment that may have the same downside market risk as a hypothetical investment in the underlying asset, underlying basket or underlying constituents.

You believe that the level of the underlying asset or underlying basket will decline during the term of the Securities and is likely to be less than the initial level or downside threshold, as applicable, on the final valuation date.

You cannot tolerate fluctuations in the price of the Securities prior to maturity that may be similar to or exceed the downside fluctuations in the level of the underlying asset or underlying basket.

You seek current income from this investment or prefer to receive the dividends paid on any underlying equity or underlying constituent.

You are unable or unwilling to hold the Securities to maturity or you seek an investment for which there will be an active secondary market.

You are not willing to assume the credit risk of UBS for all payments under the Securities, including any repayment of principal.

The suitability considerations identified above are not exhaustive. Whether or not the Securities are a suitable investment for you will depend on your individual circumstances, and you should reach an investment decision only after you and your investment, legal, tax, accounting, and other advisors have carefully considered the suitability of an investment in the Securities in light of your particular circumstances. You should also review carefully the “Risk Factors” section of this product supplement.

What are the Tax Consequences of the Securities?

The U.S. federal income tax consequences of your investment in the Securities are uncertain. Some of these tax consequences are summarized below, but we urge you to read the more detailed discussion in “Supplemental U.S. Tax Considerations” and discuss the tax consequences of your particular situation with your tax advisor.

Pursuant to the terms of the Securities, UBS and you agree, in the absence of a statutory, regulatory, administrative or judicial ruling to the contrary, to characterize your Securities as a pre-paid derivative contract with respect to the underlying asset or underlying basket. If your Securities are so treated, you should generally not accrue any income with respect to the underlying asset or underlying basket and you should generally recognize gain or loss upon the sale or maturity of your Securities in an amount equal to the difference between the amount you receive at such time and the amount you paid for your Securities. Subject to the discussion below with respect to “constructive ownership”, such recognized gain or loss should generally be long-term capital gain or loss if you have held your Securities for more than one year (otherwise such gain or loss will be short-term capital gain or loss if you have held your Securities for one year or less).

Constructive Ownership. A “constructive ownership transaction” includes a contract under which an investor will receive payment equal to or credit for the future value of any equity interest in a regulated

investment company or trust (such as shares of certain underlying equities that are ETFs), a passive foreign investment company (“PFIC”), a real estate investment trust (“REIT”) or certain other “pass-thru entities”. If the Securities were treated as a “constructive ownership transaction”, the tax consequences of sale, exchange or maturity of the Securities could be affected materially and adversely. Under the “constructive ownership transaction” rules, if an investment in Securities is treated as a “constructive ownership transaction”, any long-term capital gain recognized by a U.S. holder (as defined under “Supplemental U.S. Tax Considerations”) in respect of a Security would be recharacterized as ordinary income to the extent such gain exceeds the amount of “net underlying long-term capital gain” (as defined in Section 1260 of the Internal Revenue Code of 1986, as amended (the “Code”)) of the U.S. holder (the “Excess Gain”). It is not clear how the “net underlying long-term capital gain” is determined with respect to the Securities. Unless otherwise established by clear and convincing evidence, the “net underlying long-term capital gain” is treated as zero. In addition, an interest charge would also apply to any deemed underpayment of tax in respect of any “Excess Gain” to the extent such gain would have resulted in gross income inclusion for the U.S. holder in taxable years prior to the taxable year of the sale, exchange or maturity of the security (assuming such income accrued such that the amount in each successor year is equal to the income of the prior year increased at a constant rate equal to the applicable federal rate as of the date of sale, exchange or maturity of the Security). In the case of Securities referencing a gold or silver ETF, if Section 1260 were to apply to your Securities any long-term capital gain that you recognize with respect to your Securities that is not recharacterized as ordinary income would be subject to tax at a special 28% maximum rate that is applicable to “collectibles”.

There exists a risk that an investment in Securities that are linked to shares of an ETF, PFIC, REIT or other “pass-thru entity” or an underlying basket that contains shares in an ETF, PFIC, REIT or other “pass-thru entity” could be treated as a “constructive ownership transaction”. If such treatment applies, it is not entirely clear to what extent any long-term capital gain recognized by a U.S. holder in respect of a Security would be recharacterized as ordinary income. Furthermore, depending on the precise terms of a particular offering of Securities that reference an ETF or other “pass-thru entity”, the risk may be substantial that such Securities would be treated as a “constructive ownership transaction”, and that all or a portion of any long-term capital gain recognized with respect to such Securities could be recharacterized as ordinary income and subject to an interest charge (or, in the case of a gold or silver ETF, subject to a special 28% maximum rate that is applicable to “collectibles”). Because the application of the constructive ownership rules to the Securities is unclear, U.S. holders are urged to consult their tax advisors regarding the potential application of the “constructive ownership” rules.

We believe that it would be reasonable to treat your Securities in the manner described above. However, because there is no authority that specifically addresses the tax treatment of the Securities, it is possible that your Securities could alternatively be treated for tax purposes as a single contingent payment debt instrument, or pursuant to some other characterization, including possible treatment as a “constructive ownership transaction” subject to the constructive ownership rules of Section 1260 and that the timing and character of your income from the Securities could differ materially from the treatment described above, as described further under “Supplemental U.S. Tax Considerations — Alternative Treatments”. In the case of Trigger Step Securities, the risk that the Securities may be recharacterized for U.S. federal income tax purposes as instruments giving rise to current ordinary income (even before receipt of any cash) and short-term capital gain or loss (even if held for more than one year), is higher than with other equity-linked securities that do not guarantee full repayment of principal.

The Internal Revenue Service (the “IRS”) released a notice that may affect the taxation of holders of the Securities. According to Notice 2008-2, the IRS and the Treasury Department are actively considering whether the holder of an instrument such as the Securities should be required to accrue ordinary income on a current basis. It is not possible to determine what guidance they will ultimately issue, if any. It is possible, however, that under such guidance, holders of the Securities will ultimately be required to accrue income currently and this could be applied on a retroactive basis. The IRS and the Treasury

Department are also considering other relevant issues, including whether additional gain or loss from such instruments should be treated as ordinary or capital, whether non-U.S. holders of such instruments should be subject to withholding tax on any deemed income accruals, and whether the special “constructive ownership rules” described above should be applied to such instruments. You are urged to consult your tax advisor concerning the significance, and the potential impact, of the above considerations. Except to the extent otherwise required by law, UBS intends to treat your Securities for U.S. federal income tax purposes in accordance with the treatment described above and under “Supplemental U.S. Tax Considerations” unless and until such time as the Treasury Department and IRS determine that some other treatment is more appropriate.

Furthermore, in 2007, legislation was introduced in Congress that, if enacted, would have required holders of Securities purchased after the bill was enacted to accrue interest income over the term of the Securities despite the fact that there will be no interest payments over the term of the Securities. It is not possible to predict whether a similar or identical bill will be enacted in the future, or whether any such bill would affect the tax treatment of your Securities.

Additionally, in 2013, the House Ways and Means Committee has released in draft form certain proposed legislation relating to financial instruments. If enacted, the effect of this legislation generally would be to require instruments such as the Securities to be marked to market on an annual basis with all gains and losses to be treated as ordinary, subject to certain exceptions. It is not possible to predict whether a similar or identical bill will be enacted in the future, or whether any such bill would affect the tax treatment of your Securities. You are urged to consult your tax advisor regarding the draft legislation and its possible impact on you.

Non-U.S. Holders. Gain from the sale, exchange, redemption or maturity of a Security or settlement at maturity generally will not be subject to U.S. tax to a non-U.S. holder that provides us (and/or the applicable withholding agent) with a fully completed and validly executed applicable IRS Form W-8 unless such gain is effectively connected with a trade or business conducted by the non-U.S. holder in the U.S. or unless the non-U.S. holder is a non-resident alien individual and is present in the U.S. for 183 days or more during the taxable year of such sale, exchange, redemption or maturity and certain other conditions are satisfied, or has certain other present or former connections with the U.S.

Both U.S. and non-U.S. holders should consult their tax advisors regarding the U.S. federal income tax consequences of an investment in the Securities (including possible application of Section 1260 and alternative treatments and the issues presented by Notice 2008-2), as well as any tax consequences arising under the laws of any state, local or non-U.S. taxing jurisdiction (including that of the underlying equity issuers and/or the jurisdictions of the underlying constituent issuers, as applicable).

Hypothetical Examples of How the Securities Perform

This section provides examples of how the Securities perform under various scenarios and are provided for illustrative purposes only and are purely hypothetical. They do not purport to be representative of every possible scenario concerning increases or decreases in the final level of the underlying asset or underlying basket relative to the initial level or downside threshold, as applicable. We cannot predict the final level of the underlying asset or underlying basket. You should not take these examples as an indication or assurance of the expected performance of the underlying asset or underlying basket. The examples are based on the assumptions therein.

Calculate the Underlying Return for an Underlying Asset

Where the payment at maturity is based on the performance of a single underlying asset, the underlying return is the difference between the final level and initial level of the underlying asset and is expressed as a percentage of the initial level. The underlying return may be positive or negative and is calculated as follows:

Underlying Return =

Final Level – Initial Level

Initial Level

Unless otherwise provided in the applicable supplement, the “initial level” will be, with respect to (i) an underlying equity, the closing level of the underlying equity on the trade date and (ii) an underlying index, the closing level of the underlying index on the trade date, in each case as determined by the calculation agent.

Unless otherwise provided in the applicable supplement, the “final level” will be, with respect to (i) an underlying equity, the closing level of the underlying equity on the final valuation date and (ii) an underlying index, the closing level of the underlying index on the final valuation date, in each case as determined by the calculation agent.

Calculate the Underlying Return for an Underlying Basket

Where the payment at maturity is based on the performance of an underlying basket, the underlying return is the difference between the final level and initial level of the underlying basket and is expressed as a percentage of the initial level. The underlying return may be positive or negative and is calculated as follows:

Underlying Return =

Final Level – Initial Level

Initial Level

Unless otherwise provided in the applicable supplement, the “initial level” will be, with respect to an underlying basket, 100.

Unless otherwise provided in the applicable supplement, the “final level” will be, with respect to an underlying basket, calculated by the calculation agent on the final valuation date as follows:

100 × (1 + (W_BA1 × BAR₁) + (W_BA2 × BAR₂) + (W_BA3 × BAR₃))

where

“W” is the respective weighting of each basket asset (i.e., BA₁, BA₂ and BA₃) in the underlying basket, expressed as a percentage, and

“BAR” is the respective asset return for each basket asset (i.e., BA₁, BA₂ and BA₃) calculated in the same manner described above under “Calculate the Underlying Return for an Underlying Asset”.

Hypothetical Performance Scenarios

Based on the computation of the underlying return above, the following charts show hypothetical performance scenarios for each of the Step Strategies Products based on a range of underlying returns given the stated assumptions. These examples of how the Securities perform under various scenarios are provided for illustrative purposes only and are purely hypothetical.

Payment at Maturity for the Step Strategies Products

The below table illustrates the payment at maturity for a hypothetical offering of Step Securities and Trigger Step Securities, each with a $10 principal amount and a minimum investment of 100 Securities (for a total minimum purchase price of $1,000), each with the assumptions below. For ease of reference, the highlighted hypothetical scenarios in the following table illustrate examples in which an investor would (i) realize a return equal to the underlying return, (ii) realize a return equal to the step return and (iii) realize a loss on the initial investment.

Assumptions:


Step Securities		Trigger Step Securities
Initial Level: 100		Initial Level: 100
Step Return: 22%		Step Return: 20%
		Downside Threshold: 80


Underlying Return of Underlying Asset		Step Securities		Trigger Step Securities
Final Level	Underlying Return	Payment at Maturity	Total Return at Maturity	Payment at Maturity	Total Return at Maturity
130	30.00%	$1,300	30.00%	$1,300	30.00%
125	25.00%	$1,250	25.00%	$1,250	25.00%
122	22.00%	$1,220	22.00%	$1,220	22.00%
121	21.00%	$1,220	22.00%	$1,210	21.00%
120	20.00%	$1,220	22.00%	$1,200	20.00%
115	15.00%	$1,220	22.00%	$1,200	20.00%
110	10.00%	$1,220	22.00%	$1,200	20.00%
108	8.00%	$1,220	22.00%	$1,200	20.00%
105	5.00%	$1,220	22.00%	$1,200	20.00%
100	0.00%	$1,220	22.00%	$1,200	20.00%
90	-10.00%	$900	-10.00%	$1,000	0.00%
80	-20.00%	$800	-20.00%	$1,000	0.00%
70	-30.00%	$700	-30.00%	$700	-30.00%
60	-40.00%	$600	-40.00%	$600	-40.00%
50	-50.00%	$500	-50.00%	$500	-50.00%
40	-60.00%	$400	-60.00%	$400	-60.00%
30	-70.00%	$300	-70.00%	$300	-70.00%
20	-80.00%	$200	-80.00%	$200	-80.00%
10	-90.00%	$100	-90.00%	$100	-90.00%
0	-100.00%	$0	-100.00%	$0	-100.00%


		The underlying return is greater than the step return; investor’s payment at maturity is equal to the initial investment plus a return equal to the underlying return.
		The underlying return is zero; investor’s payment at maturity is equal to the initial investment plus a return equal to the step return.
		The underlying return is negative, and in the case of Trigger Step Securities, the final level is less than the downside threshold; investor’s payment at maturity is less than the initial investment, resulting in a percentage loss equal to the underlying return.

Example 1 — The Final Level of the Underlying Asset is 125 (resulting in an Underlying Return of 25%).

Step Securities and Trigger Step Securities:

Because the underlying return at maturity of 25% is greater than the respective step returns of 22% for Step Securities and 20% for Trigger Step Securities, the payment at maturity would be calculated as follows: