A dispute between UBS and a hedge fund that sold it protection on a complicated mortgage security highlights why banks are still having a hard time figuring out the total amount they will have to write down such debt.

UBS asked Paramax Capital International to sell it protection on $1.3bn of the most highly rated slices of a collateralised debt obligation made up of subprime residential mortgages that the UBS investment bank underwrote. In general, by hedging the risk fully through the credit derivatives market, banks can remove such exposures from their balance sheets and do not have to set aside capital.