Morgan Stanley 1999 Annual Report Download - page 49

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bility management, reduce borrowing costs and hedge interest rate
risk (see Note 6 to the consolidated financial statements).
The Company believes that derivatives are valuable tools
that can provide cost-effective solutions to complex financial prob-
lems and remains committed to providing its clients with innovative
financial products. The Company established Morgan Stanley
Derivative Products Inc. to offer derivative products to clients who
will enter into derivative transactions only with triple-A rated coun-
terparties. In addition, the Company, through its continuing
involvement with regulatory, self-regulatory and industry activities,
provides leadership in the development of policies and practices in
order to maintain confidence in the markets for derivative products,
which is critical to the Company’s ability to assist clients in meet-
ing their overall financial needs.
YEAR 2000
The Year 2000 issue arose since many of the world’s computer sys-
tems (including those in non-information technology systems) tra-
ditionally recorded years in a two-digit format. If not addressed,
such computer systems may have been unable to properly interpret
dates beyond the year 1999, which may have led to business dis-
ruptions in the U.S. and internationally. Accordingly, the Company
established a firmwide initiative to address issues associated with
the Year 2000. As part of this initiative, the Company reviewed its
global software and hardware infrastructure for mainframe, server
and desktop computing environments and engaged in extensive
remediation and testing. The Year 2000 initiative also encom-
passed the review of agencies, vendors and facilities for Year 2000
compliance.
Since 1995, the Company prepared actively for the Year
2000 issue to ensure that it would have the ability to respond to
any critical business process failure, to prevent the loss of work-
space and technology, and to mitigate any potential financial loss
or damage to its global franchise. Where necessary, contingency
plans were expanded or developed to address specific Year 2000 risk
scenarios, supplementing existing business policies and practices.
During fiscal 1999, in its preparation for the millennial
changeover, the Company established a global Command, Control
and Communication Network (the “C3 Network”). The purpose of
the C3 Network was to enable the Company’s management, on both
a global and regional basis, to monitor and manage any Year 2000-
related issues and their potential impact on the Company’s busi-
ness activities. Using a variety of tools developed for this purpose,
the C3 Network monitored business verification points as well as
internal issues and external events. The Company also maintained
communications with clients and regulators and coordinated global
communications between senior management and all of the
Company’s business areas.
The Company considers the transition into the Year 2000
successful from the perspective of both its internal systems and
global external interactions. Over the millennial changeover period,
no material issues were encountered, and the Company conducted
business as usual.
Based upon current information, the Company estimates
that the total cost associated with implementing its Year 2000 ini-
tiative, including the review, remediation and testing of all internal
systems, review of vendors, and event management will be approx-
imately $240 million. Substantially all of such costs were incurred
by the end of fiscal 1999, although approximately $15 million in
costs are expected to be incurred during fiscal 2000. These costs
are funded through operating cash flow and expensed in the period
in which they are incurred.
RISK MANAGEMENT
RISK MANAGEMENT POLICY AND CONTROL STRUCTURE
Risk is an inherent part of the Company’s business and activities.
The extent to which the Company properly and effectively identi-
fies, assesses, monitors and manages each of the various types of
risk involved in its activities is critical to its soundness and prof-
itability. The Company’s broad-based portfolio of business activities
helps reduce the impact that volatility in any particular area or
related areas may have on its net revenues as a whole. The
Company seeks to identify, assess, monitor and manage, in accor-
dance with defined policies and procedures, the following principal
risks involved in the Company’s business activities: market risk,
credit risk, operational risk, legal risk and funding risk. Funding risk
is discussed in the “Liquidity and Capital Resources” section of
“Management’s Discussion and Analysis of Financial Condition and
Results of Operations” beginning on page 22.