Morgan Stanley 2009 Annual Report Download - page 104

Institutional Securities Activities.
Corporate Lending.In connection with certain of its Institutional Securities business activities, the Company
provides loans or lending commitments (including bridge financing) to selected clients. Such loans and lending
commitments can generally be classified as either “relationship-driven” or “event-driven.”
“Relationship-driven” loans and lending commitments are generally made to expand business relationships with
select clients. The commitments associated with “relationship-driven” activities may not be indicative of the
Company’s actual funding requirements, as the commitment may expire unused or the borrower may not fully
utilize the commitment. The borrowers of “relationship-driven” lending transactions may be investment grade or
non-investment grade. The Company may hedge its exposures in connection with “relationship-driven”
transactions.
“Event-driven” loans and lending commitments refer to activities associated with a particular event or
transaction, such as to support client merger, acquisition or recapitalization transactions. The commitments
associated with these “event-driven” activities may not be indicative of the Company’s actual funding
requirements since funding is contingent upon a proposed transaction being completed. In addition, the borrower
may not fully utilize the commitment or the Company’s portion of the commitment may be reduced through the
syndication process. The borrower’s ability to draw on the commitment is also subject to certain terms and
conditions, among other factors. The borrowers of “event-driven” lending transactions may be investment grade
or non-investment grade. The Company risk manages its exposures in connection with “event-driven”
transactions through various means, including syndication, distribution and/or hedging.
Securitized Products. While new activity has been reduced from historical levels, the Company may extend
short or long-term funding to clients through loans and lending commitments that are secured by assets of the
borrower and generally provide for over-collateralization, including commercial real estate, loans secured by
loan pools, corporate and operating company loans, and secured lines of revolving credit. Credit risk with respect
to these loans and lending commitments arises from the failure of a borrower to perform according to the terms
of the loan agreement or a decline in actual or underlying collateral value.
Derivative Contracts. In the normal course of business, the Company enters into a variety of derivative
contracts related to financial instruments and commodities. The Company uses these instruments for trading and
hedging purposes, as well as for asset and liability management. These instruments generally represent future
commitments to swap interest payment streams, exchange currencies, or purchase or sell commodities and other
financial instruments on specific terms at specified future dates. Many of these products have maturities that do
not extend beyond one year, although swaps, options and equity warrants typically have longer maturities.
The Company incurs credit risk as a dealer in OTC derivatives. Credit risk with respect to derivative instruments
arises from the failure of a counterparty to perform according to the terms of the contract. The Company’s
exposure to credit risk at any point in time is represented by the fair value of the derivative contracts reported as
assets. The fair value of derivatives represents the amount at which the derivative could be exchanged in an
orderly transaction between market participants and is further described in Note 2 to the consolidated financial
statements. 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 settlements
exceeding fair value amounts recognized in the consolidated statements of financial condition.
Other. In addition to the activities noted above, there are other credit risks managed by Credit Risk
Management and various business areas within Institutional Securities. The Company incurs credit risk through
margin and collateral transactions with clearing houses, clearing agencies, exchanges, banks, securities firms and
other financial counterparties. Certain risk management activities as they pertain to establishing appropriate
collateral amounts for the Company’s prime brokerage and securitized product businesses are primarily
monitored within those respective areas in that they determine the appropriate collateral level for each strategy or
position. In addition, a collateral management group monitors collateral levels against requirements and oversees
the administration of the collateral function. In addition, certain businesses with heightened settlement risk
monitor compliance with established settlement risk limits.
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