Morgan Stanley 1999 Annual Report Download - page 79

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page 77 |99 AR
The Credit Department administers and monitors the cred-
it limits among trading divisions on a worldwide basis. In addition
to monitoring credit limits, the Company manages the credit expo-
sure relating to the Company’s trading activities by reviewing coun-
terparty financial soundness periodically, by entering into master
netting agreements and collateral arrangements with counterparties
in appropriate circumstances and by limiting the duration of expo-
sure. In certain cases, the Company also may close out transactions
or assign them to other counterparties to mitigate credit risk.
CONCENTRATION RISK
The Company is subject to concentration risk by holding large posi-
tions in certain types of securities or commitments to purchase
securities of a single issuer, including sovereign governments and
other entities, issuers located in a particular country or geographic
area, public and private issuers involving developing countries or
issuers engaged in a particular industry. Financial instruments
owned by the Company include U.S. government and agency secu-
rities and securities issued by other sovereign governments (princi-
pally Japan, Italy, Canada and Germany), which, in the aggregate,
represented approximately 12% of the Company’s total assets at
November 30, 1999. In addition, substantially all of the collateral
held by the Company for resale agreements or bonds borrowed,
which together represented approximately 29% of the Company’s
total assets at November 30, 1999, consists of securities issued by
the U.S. government, federal agencies or other sovereign govern-
ment obligations. Positions taken and commitments made by the
Company, including positions taken and underwriting and financing
commitments made in connection with its private equity and prin-
cipal investment activities, often involve substantial amounts and
significant exposure to individual issuers and businesses, including
non-investment grade issuers. The Company seeks to limit concen-
tration risk through the use of the systems and procedures
described in the preceding discussions of market and credit risk.
CUSTOMER ACTIVITIES
The Company’s customer activities involve the execution, settle-
ment and financing of various securities and commodities transac-
tions on behalf of customers. Customer securities activities are
transacted on either a cash or margin basis. Customer commodities
activities, which include the execution of customer transactions in
commodity futures transactions (including options on futures), are
transacted on a margin basis.
The Company’s customer activities may expose it to off-
balance sheet credit risk. The Company may have to purchase or
sell financial instruments at prevailing market prices in the event
of the failure of a customer to settle a trade on its original terms or
in the event cash and securities in customer margin accounts are
not sufficient to fully cover customer losses. The Company seeks to
control the risks associated with customer activities by requiring
customers to maintain margin collateral in compliance with various
regulations and Company policies.
NOTIONAL/CONTRACT AMOUNTS AND
FAIR MARKET VALUES OF DERIVATIVES
The gross notional or contract amounts of derivative instruments
and fair value (carrying amount) of the related assets and liabilities
at November 30, 1999 and 1998, as well as the average fair value
of those assets and liabilities for fiscal 1999 and 1998, are pre-
sented in the table which follows. Fair value represents the cost of
replacing these instruments and is further described in Note 2.
Future changes in interest rates, foreign currency exchange rates or
the fair values of the financial instruments, commodities or indices
underlying these contracts ultimately may result in cash settle-
ments exceeding fair value amounts recognized in the consolidated
statements of financial condition. Assets represent unrealized gains
on purchased exchange traded and OTC options and other contracts
(including interest rate, foreign exchange, and other forward con-
tracts and swaps), net of any unrealized losses owed to the