Morgan Stanley 2009 Annual Report Download - page 140

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
4. Fair Value Disclosures.
Fair Value Measurements.
A description of the valuation techniques applied to the Company’s major categories of assets and liabilities
measured at fair value on a recurring basis follows.
Financial Instruments Owned and Financial Instruments Sold, Not Yet Purchased
U.S. Government and Agency Securities
• U.S. Treasury Securities. U.S. treasury securities are valued using quoted market prices. Valuation
adjustments are not applied. Accordingly, U.S. treasury securities are generally categorized in Level 1 of
the fair value hierarchy.
• U.S. Agency Securities. U.S. agency securities are comprised of two main categories consisting of
agency issued debt and mortgage pass-throughs. Non-callable agency issued debt securities are generally
valued using quoted market prices. Callable agency issued debt securities are valued by benchmarking
model-derived prices to quoted market prices and trade data for identical or comparable securities.
Mortgage pass-throughs include mortgage pass-throughs and forward settling mortgage pools. Fair value
of mortgage pass-throughs are model driven with respect to spreads of the comparable To-be-announced
(“TBA”) security. Actively traded non-callable agency issued debt securities are categorized in Level 1 of
the fair value hierarchy. Callable agency issued debt securities and mortgage pass-throughs are generally
categorized in Level 2 of the fair value hierarchy.
Other Sovereign Government Obligations
• Foreign sovereign government obligations are valued using quoted prices in active markets when
available. To the extent quoted prices are not available, fair value is determined based on a valuation
model that has as inputs interest rate yield curves, cross-currency basis index spreads, and country credit
spreads for structures similar to the bond in terms of issuer, maturity and seniority. These bonds are
generally categorized in Levels 1 or 2 of the fair value hierarchy.
Corporate and Other Debt
• State and Municipal Securities. The fair value of state and municipal securities is estimated using
recently executed transactions, market price quotations and pricing models that factor in, where
applicable, interest rates, bond or credit default swap spreads and volatility. These bonds are generally
categorized in Level 2 of the fair value hierarchy.
• Residential Mortgage-Backed Securities (“RMBS”), Commercial Mortgage-Backed Securities
(“CMBS”), and other Asset-Backed Securities (“ABS”). RMBS, CMBS and other ABS may be valued
based on external price or spread data. When position-specific external price data are not observable, the
valuation is based on prices of comparable bonds. Valuation levels of RMBS and CMBS indices are used
as an additional data point for benchmarking purposes or to price outright index positions.
Fair value for retained interests in securitized financial assets (in the form of one or more tranches of the
securitization) is determined using observable prices or, in cases where observable prices are
not available for certain retained interests, the Company estimates fair value based on the present value of
expected future cash flows using its best estimates of the key assumptions, including forecasted credit
losses, prepayment rates, forward yield curves and discount rates commensurate with the risks involved.
RMBS, CMBS and other ABS, including retained interests in these securitized financial assets, are
categorized in Level 3 if external prices or spread inputs are unobservable or if the comparability
assessment involves significant subjectivity related to property type differences, cash flows, performance
and other inputs; otherwise, they are categorized in Level 2 of the fair value hierarchy.
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