Morgan Stanley 2009 Annual Report Download - page 189

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The table below summarizes certain information regarding the Company’s obligations under guarantee
arrangements as of December 31, 2008:
Maximum Potential Payout/Notional Carrying
Amount
(Asset)/
Liability
Collateral/
Recourse
Years to Maturity
Type of Guarantee Less than 1 1-3 3-5 Over 5 Total
(dollars in millions)
Credit derivative contracts(1) .... $225,742 $778,266 $1,593,218 $989,207 $3,586,433 $427,338 $—
Other credit contracts ........... 53 43 188 3,014 3,298 3,379 —
Credit-linked notes ............. 207 486 326 640 1,659 (242) —
Non-credit derivative
contracts(1) ................ 684,432 385,734 195,419 274,652 1,540,237 145,609 —
Standby letters of credit and other
financial guarantees issued .... 779 1,964 1,817 4,418 8,978 78 4,787
Market value guarantees ........ — — — 645 645 36 134
Liquidity facilities ............. 3,152 698 188 376 4,414 25 3,741
Whole loan sales guarantees ..... — — — 42,045 42,045 — —
General partner guarantees ...... 54 198 33 150 435 29 —
Auction rate security guarantees . . 1,747 — — — 1,747 40 —
(1) Carrying amount of derivative contracts are shown on a gross basis prior to cash collateral or counterparty netting. For further
information on derivative contracts, see Note 10.
The Company has obligations under certain guarantee arrangements, including contracts and indemnification
agreements that contingently require a guarantor to make payments to the guaranteed party based on changes in
an underlying measure (such as an interest or foreign exchange rate, security or commodity price, an index or the
occurrence or non-occurrence of a specified event) related to an asset, liability or equity security of a guaranteed
party. Also included as guarantees are contracts that contingently require the guarantor to make payments to the
guaranteed party based on another entity’s failure to perform under an agreement, as well as indirect guarantees
of the indebtedness of others. The Company’s use of guarantees is described below by type of guarantee:
Derivative Contracts. Certain derivative contracts meet the accounting definition of a guarantee, including
certain written options, contingent forward contracts and credit default swaps (see Note 10 regarding credit
derivatives in which the Company has sold credit protection to the counterparty). Although the Company’s
derivative arrangements do not specifically identify whether the derivative counterparty retains the underlying
asset, liability or equity security, the Company has disclosed information regarding all derivative contracts that
could meet the accounting definition of a guarantee. The maximum potential payout for certain derivative
contracts, such as written interest rate caps and written foreign currency options, cannot be estimated, as
increases in interest or foreign exchange rates in the future could possibly be unlimited. Therefore, in order to
provide information regarding the maximum potential amount of future payments that the Company could be
required to make under certain derivative contracts, the notional amount of the contracts has been disclosed. In
certain situations, collateral may be held by the Company for those contracts that meet the definition of a
guarantee. Generally, the Company sets collateral requirements by counterparty so that the collateral covers
various transactions and products and is not allocated specifically to individual contracts. Also, the Company
may recover amounts related to the underlying asset delivered to the Company under the derivative contract.
The Company records all derivative contracts at fair value. Aggregate market risk limits have been established,
and market risk measures are routinely monitored against these limits. The Company also manages its exposure
to these derivative contracts through a variety of risk mitigation strategies, including, but not limited to, entering
into offsetting economic hedge positions. The Company believes that the notional amounts of the derivative
contracts generally overstate its exposure.
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