Morgan Stanley 1999 Annual Report Download - page 66

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99 AR |page 64 evidenced by listed market prices or transactions which directly
affect the value of such equity securities. Downward adjustments
relating to such equity securities are made in the event that the
Company determines that the eventual realizable value is less than
the carrying value. The carrying value of investments made in
connection with principal real estate activities which do not involve
equity securities are adjusted periodically based on independent
appraisals, estimates prepared by the Company of discounted
future cash flows of the underlying real estate assets or other indi-
cators of fair value.
Loans made in connection with private equity and invest-
ment banking activities are carried at cost plus accrued interest
less reserves, if deemed necessary, for estimated losses.
FINANCIAL INSTRUMENTS USED FOR
ASSET AND LIABILITY MANAGEMENT
The Company has entered into various contracts as hedges against
specific assets, liabilities or anticipated transactions. These con-
tracts include interest rate swaps, foreign exchange forwards and
foreign currency swaps. The Company uses interest rate and cur-
rency swaps to manage the interest rate and currency exposure aris-
ing from certain borrowings and to match the repricing characteris-
tics of consumer loans with those of the borrowings that fund these
loans. For contracts that are designated as hedges of the
Company’s assets and liabilities, gains and losses are deferred and
recognized as adjustments to interest revenue or expense over the
remaining life of the underlying assets or liabilities. For contracts
that are hedges of asset securitizations, gains and losses are rec-
ognized as adjustments to servicing fees. Gains and losses result-
ing from the termination of hedge contracts prior to their stated
maturity are recognized ratably over the remaining life of the instru-
ment being hedged. The Company also uses foreign exchange for-
ward contracts to manage the currency exposure relating to its net
monetary investment in non-U.S. dollar functional currency opera-
tions. The gain or loss from revaluing these contracts is deferred
and reported within cumulative translation adjustments in share-
holders’ equity, net of tax effects, with the related unrealized
amounts due from or to counterparties included in receivables from
or payables to brokers, dealers and clearing organizations.
SECURITIES TRANSACTIONS
Clients’ securities transactions are recorded on a settlement date
basis with related commission revenues and expenses recorded on
the trade date. Securities purchased under agreements to resell
(“reverse repurchase agreements”) and securities sold under
agreements to repurchase (“repurchase agreements”), principally
government and agency securities, are treated as financing transac-
tions and are carried at the amounts at which the securities sub-
sequently will be resold or reacquired as specified in the respective
agreements; such amounts include accrued interest. Reverse repur-
chase and repurchase agreements are presented on a net-by-coun-
terparty basis, when appropriate. It is the Company’s policy to take
possession of securities purchased under agreements to resell. The
Company monitors the fair value of the underlying securities as
compared with the related receivable or payable, including accrued
interest, and, as necessary, requests additional collateral. Where
deemed appropriate, the Company’s agreements with third parties
specify its rights to request additional collateral.
Securities borrowed and securities loaned are carried at
the amounts of cash collateral advanced and received in connec-
tion with the transactions. The Company measures the fair value of
the securities borrowed and loaned against the collateral on a daily
basis. Additional collateral is obtained as necessary to ensure such
transactions are adequately collateralized.
Collateral received under securities financing transactions,
such as reverse repurchase agreements, is recognized, together
with a corresponding obligation to return the collateral, if the col-
lateral provider does not have the contractual right to substitute
collateral or redeem collateral on short notice. Collateral transferred
under securities financing transactions, such as repurchase agree-
ments, is reclassified from financial instruments owned to receiv-
able for securities provided as collateral if the Company does not
have the contractual right to substitute collateral or redeem collat-
eral on short notice. At November 30, 1999 and 1998, the
Company recorded obligations to return securities received as col-
lateral of $14,729 million and $6,636 million, respectively. The
related assets received as collateral were recorded among several
captions included in the Company’s consolidated statements of
financial condition. At November 30, 1999 and 1998, after giving