Morgan Stanley 1999 Annual Report Download - page 50

99 AR |page 48 Risk management at the Company is a multi-faceted
process with independent oversight that requires constant commu-
nication, judgment and knowledge of specialized products and
markets. The Company’s senior management takes an active role in
the risk management process and has developed policies and pro-
cedures that require specific administrative and business functions
to assist in the identification, assessment and control of various
risks. In recognition of the increasingly varied and complex nature
of the global financial services business, the Company’s risk man-
agement policies, procedures and methodologies are evolutionary
in nature and are subject to ongoing review and modification.
The Management Committee, composed of the Company’s
most senior officers, establishes the overall risk management poli-
cies for the Company and reviews the Company’s performance rel-
ative to these policies. The Management Committee has created
several Risk Committees to assist it in monitoring and reviewing the
Company’s risk management practices. These Risk Committees, as
well as other committees established to manage and monitor spe-
cific risks, review the risk monitoring and risk management policies
and procedures relating to the Company’s market and credit risk
profile, sales practices, pricing of consumer loans and reserve ade-
quacy, legal enforceability, and operational and systems risks.
The Firm Risk Management, Controllers, Treasury and Law,
Compliance and Governmental Affairs Departments, which are all
independent of the Company’s business units, also assist senior
management and the Risk Committees in monitoring and control-
ling the Company’s risk profile. The Firm Risk Management
Department is responsible for risk policy development, risk analysis
and risk reporting to senior management and the Risk Committees
and has operational responsibility for measuring and monitoring
aggregate market and credit risk with respect to institutional trad-
ing activities. In addition, the Internal Audit Department, which
also reports to senior management, periodically examines and eval-
uates the Company’s operations and control environment. The
Company continues to be committed to employing qualified per-
sonnel with appropriate expertise in each of its various administra-
tive and business areas to implement effectively the Company’s risk
management and monitoring systems and processes.
The following is a discussion of the Company’s risk man-
agement policies and procedures for its principal risks (other than
funding risk). The discussion focuses on the Company’s securities
trading (primarily its institutional trading activities) and consumer
lending and related activities. The Company believes that these
activities generate a substantial portion of its principal risks. This
discussion and the estimated amounts of the Company’s market
risk exposure generated by the Company’s statistical analyses are
forward-looking statements. However, the analyses used to assess
such risks are not predictions of future events, and actual results
may vary significantly from such analyses due to events in the mar-
kets in which the Company operates and certain other factors
described below.
MARKET RISK
Market risk refers to the risk that a change in the level of one or
more market prices, rates, indices, volatilities, correlations or other
market factors, such as liquidity, will result in losses for a specified
position or portfolio. For a discussion of the Company’s currency
exposure relating to its net monetary investments in non-U.S. dol-
lar functional currency subsidiaries, see Note 11 to the consoli-
dated financial statements.
TRADING AND RELATED ACTIVITIES
Primary Market Risk Exposures and Market Risk Management
During fiscal 1999, the Company had exposures to a wide range of
interest rates, equity prices, foreign exchange rates and commodity
prices — and associated volatilities and spreads — related to a
broad spectrum of global markets in which it conducts its trading
activities. The Company is exposed to interest rate risk as a result
of maintaining market-making activities and proprietary trading in
interest rate sensitive financial instruments (e.g., risk arising from
changes in the level or volatility of interest rates, the timing of
mortgage prepayments, the shape of the yield curve and credit
spreads for corporate bonds and emerging market debt). The
Company is exposed to equity price risk as a result of making mar-
kets in equity securities and equity derivatives and maintaining pro-
prietary positions. The Company is exposed to foreign exchange rate
risk in connection with making markets in foreign currencies and
foreign currency options and with maintaining foreign exchange
positions. The Company’s currency trading covers many foreign cur-
rencies, including the yen, euro and pound sterling. The Company
is exposed to commodity price risk as a result of trading in com-
modity-related derivatives and physical commodities.
The Company manages its trading positions by employing a
variety of strategies, which include diversification of risk exposures