Morgan Stanley 1999 Annual Report Download - page 31

global financial markets due to investors’ concerns about the
impact of a prolonged economic downturn on high-yield issuers.
Revenues from securitized fixed income securities also declined, as
the relatively low interest rate environment in the U.S. increased
prepayment concerns and resulted in increased spreads.
Foreign exchange revenues declined 32% in fiscal 1999
from the record level of revenues achieved in fiscal 1998. The
decrease primarily reflects reduced customer trading volumes and
lower levels of volatility in the global foreign exchange markets as
compared with the prior year. During much of fiscal 1999, the U.S.
dollar strengthened against the euro, reflecting the strong economic
performance of the U.S., coupled with a slower growth rate across
much of Europe. The U.S. dollar also appreciated against the
Japanese yen in the beginning of fiscal 1999, although the yen
strengthened later in the year due to the prospects of improved eco-
nomic growth in the Far East and increased investor demand for
yen-denominated assets. Revenues from foreign exchange trading
increased 17% to record levels in fiscal 1998. The increase was
primarily attributable to high levels of customer trading volume and
volatility in the foreign exchange markets. During fiscal 1998, the
U.S. dollar fluctuated against major currencies due to concerns
about the U.S. economy’s exposure to the financial crises in the Far
East and emerging markets, as well as from the Fed’s decision to
lower the overnight lending rate on three occasions during the fourth
quarter. Certain European currencies also experienced periods of
volatility, resulting from expectations of interest rate fluctuations in
anticipation of EMU and the collapse of the Russian ruble. Difficult
political and economic conditions in certain Asian nations, coupled
with the continued recession in Japan, also contributed to periods
of high volatility in the currency markets.
Commodities trading revenues rose 123% to record levels
in fiscal 1999, primarily driven by higher revenues from energy-
related products, including crude oil, refined energy products and
natural gas. Revenues from trading energy-related products bene-
fited from the sharp rise in energy prices that occurred during the
latter half of fiscal 1999. The upward trend of energy prices was
primarily attributable to strong demand for energy products, rela-
tively low inventory levels and reduced production volumes.
Revenues from natural gas trading benefited from periods of price
volatility during the year, which was primarily attributable to chang-
ing weather conditions and varying levels of demand. Higher
revenues from electricity and metals trading also contributed to the
increase. In fiscal 1998, commodities trading revenues were com-
parable to those recorded in fiscal 1997, as higher revenues from
energy-related products and electricity were partially offset by lower
revenues from natural gas trading. Revenues from trading energy-
related products were impacted by energy prices that fell during
much of fiscal 1998. Diminished demand for these products, par-
tially due to the economic crisis in the Far East, coupled with high
inventory levels, contributed to the decline in prices. Electricity
trading revenues benefited from higher electricity prices, primarily
during the summer months when the demand for electric power
increased. Revenues from natural gas trading decreased as unsea-
sonably warm weather in certain regions of the U.S. during the win-
ter months reduced the demand for home heating oil, leading to a
decline in prices. In both fiscal 1999 and fiscal 1998, commodi-
ties trading revenues benefited from the expansion of the customer
base for commodity-related products, including derivatives, and the
use of such products for risk management purposes.
Principal transaction investment revenues aggregating
$712 million were recognized in fiscal 1999 as compared with
$390 million in fiscal 1998. Fiscal 1999’s revenues reflected the
highest level of revenues recorded by the Company’s private equity
business and included realized and unrealized gains from the
Company’s positions in Equant N.V., a Netherlands-based data
communications company, and Knight/Trimark Group Inc., a
U.S.-based broker-dealer. Net gains from increases in the value of
certain other private equity and venture capital investments also
contributed to fiscal 1999’s results. Fiscal 1998’s principal trans-
action investment revenues primarily resulted from gains on certain
positions that were sold during the year and increases in the value
of certain of the Company’s private equity investments. Such
increases included gains from the initial public offering of Equant
N.V. and from the sale of positions in Fort James Corporation and
Jefferson Smurfit Corporation.
Commissions
Commission revenues primarily arise from agency transactions in
listed and over-the-counter equity securities and sales of mutual
funds, futures, insurance products and options. Commissions also
include revenues from customer securities transactions associated
with MSDW Online. Commission revenues increased 27% in fiscal
1999, primarily reflecting higher revenues from equity cash
products in markets located in the U.S., Europe and the Far East.
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