Morgan Stanley 2009 Annual Report Download - page 176

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FDIC’s Temporary Liquidity Guarantee Program.
At December 31, 2009, the Company had long-term debt outstanding of $23.8 billion under the TLGP. At
December 31, 2008, the Company had commercial paper and long-term debt outstanding of $6.4 billion and $9.8
billion, respectively, under the TLGP. These borrowings are senior unsecured debt obligations of the Company
and guaranteed by the FDIC under the TLGP. The FDIC has concluded that the guarantee is backed by the full
faith and credit of the U.S. government.
10. Derivative Instruments and Hedging Activities.
The Company trades, makes markets and takes proprietary positions globally in listed futures, OTC swaps,
forwards, options and other derivatives referencing, among other things, interest rates, currencies, investment
grade and non-investment grade corporate credits, loans, bonds, U.S. and other sovereign securities, emerging
market bonds and loans, credit indices, asset-backed security indices, property indices, mortgage-related and
other asset-backed securities and real estate loan products. The Company uses these instruments for trading,
foreign currency exposure management, and asset and liability management.
The Company manages its trading positions by employing a variety of risk mitigation strategies. These strategies
include diversification of risk exposures and hedging. Hedging activities consist of the purchase or sale of
positions in related securities and financial instruments, including a variety of derivative products (e.g., futures,
forwards, swaps and options). The Company manages the market risk associated with its trading activities on a
Company-wide basis, on a worldwide trading division level and on an individual product basis.
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 a derivative represents the amount at which the derivative could be exchanged in an
orderly transaction between market participants, and is further described in Notes 2 and 4.
In connection with its derivative activities, the Company generally enters into master netting agreements and
collateral arrangements with counterparties. These agreements provide the Company with the ability to offset a
counterparty’s rights and obligations, request additional collateral when necessary or liquidate the collateral in
the event of counterparty default.
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