Morgan Stanley 2009 Annual Report Download - page 159

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
agreements and transactions, the Company either receives or provides collateral, including U.S. government and
agency securities, other sovereign government obligations, corporate and other debt, and corporate equities. The
Company receives collateral in the form of securities in connection with reverse repurchase agreements,
securities borrowed and derivative transactions, and customer margin loans. In many cases, the Company is
permitted to sell or repledge these securities held as collateral and use the securities to secure repurchase
agreements, to enter into securities lending and derivative transactions or for delivery to counterparties to cover
short positions. As of December 31, 2009 and December 31, 2008, the fair value of financial instruments
received as collateral where the Company is permitted to sell or repledge the securities was $429 billion and
$290 billion, respectively, and the fair value of the portion that had been sold or repledged was $311 billion and
$214 billion, respectively.
The Company additionally receives securities as collateral in connection with certain securities for securities
transactions in which the Company is the lender. In instances where the Company is permitted to sell or repledge
these securities, the Company reports the fair value of the collateral received and the related obligation to return
the collateral in the consolidated statements of financial condition. As of December 31, 2009 and December 31,
2008, $14 billion and $5 billion, respectively, were reported as Securities received as collateral and an Obligation
to return securities received as collateral in the consolidated statements of financial condition. Collateral received
in connection with these transactions that was subsequently repledged was approximately $13 billion and $4
billion as of December 31, 2009 and December 31, 2008, respectively.
The Company manages credit exposure arising from reverse repurchase agreements, repurchase agreements,
securities borrowed and securities loaned transactions by, in appropriate circumstances, entering into master
netting agreements and collateral arrangements with counterparties that provide the Company, in the event of a
customer default, the right to liquidate collateral and the right to offset a counterparty’s rights and obligations.
The Company also 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 to ensure such transactions
are adequately collateralized. Where deemed appropriate, the Company’s agreements with third parties specify
its rights to request additional collateral. Customer receivables generated from margin lending activity are
collateralized by customer-owned securities held by the Company. For these transactions, adherence to the
Company’s collateral policies significantly limits the Company’s credit exposure in the event of customer
default. The Company may request additional margin collateral from customers, if appropriate, and, if necessary,
may sell securities that have not been paid for or purchase securities sold but not delivered from customers.
The Company is subject to concentration risk by holding large positions in certain types of securities, loans 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 securities and securities issued by other sovereign governments (principally the U.K., Japan, South
Korea and Brazil), which, in the aggregate, represented approximately 11% of the Company’s total assets as of
December 31, 2009. In addition, substantially all of the collateral held by the Company for resale agreements or
bonds borrowed, which together represented approximately 30% of the Company’s total assets as of
December 31, 2009, consist of securities issued by the U.S. government, federal agencies or other sovereign
government obligations. Positions taken and commitments made by the Company, including positions taken and
underwriting and financing commitments made in connection with its private equity, principal investment and
lending activities, often involve substantial amounts and significant exposure to individual issuers and
businesses, including non-investment grade issuers. In addition, the Company may originate or purchase certain
residential and commercial mortgage loans that could contain certain terms and features that may result in
additional credit risk as compared with more traditional types of mortgages. Such terms and features may include
loans made to borrowers subject to payment increases or loans with high loan-to-value ratios.
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