Morgan Stanley 2009 Annual Report Download - page 214

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
cash flows of the plan’s liabilities in order to help reduce plan exposure to interest rate variation and to better
align assets with obligations. The longer duration fixed income allocation is expected to help protect the plan’s
funded status and maintain the stability of plan contributions over the long run.
The allocation by investment manager of the Company’s U.S. Qualified Plan is reviewed by the Morgan Stanley
Retirement Plan Investment Committee on a regular basis. When the exposure to a given investment manager
reaches a minimum or maximum allocation level, an asset allocation review process is initiated, and the portfolio
will be automatically rebalanced back closer toward the target allocation unless the Investment Committee
determines otherwise.
Derivative instruments are permitted in the U.S. Qualified Plan’s portfolio only to the extent that they comply
with all of the plan’s policy guidelines and are consistent with the plan’s risk and return objectives. In addition,
any investment in derivatives must meet the following conditions:
• Derivatives may be used only if they are deemed by the investment manager to be more attractive than a
similar direct investment in the underlying cash market or if the vehicle is being used to manage risk of
the portfolio.
• Derivatives may not be used in a speculative manner or to leverage the portfolio under any circumstances.
• Derivatives may not be used as short-term trading vehicles. The investment philosophy of the U.S.
Qualified Plan is that investment activity is undertaken for long-term investment rather than short-term
trading.
• Derivatives may only be used in the management of the U.S. Qualified Plan’s portfolio when their
possible effects can be quantified, shown to enhance the risk-return profile of the portfolio, and reported
in a meaningful and understandable manner.
As a fundamental operating principle, any restrictions on the underlying assets apply to a respective derivative
product. This includes percentage allocations and credit quality. Derivatives will be used solely for the purpose
of enhancing investment in the underlying assets and not to circumvent portfolio restrictions.
The plan assets are measured at fair value using valuation techniques that are consistent with the valuation
techniques applied to the Company’s major categories of assets and liabilities as described in Note 4. Quoted
market prices in active markets are the best evidence of fair value and are used as the basis for the measurement,
if available. If a quoted market price is available, the fair value is the product of the number of trading units
multiplied by the market price. If a quoted market price is not available, the estimate of fair value is based on the
valuation approaches that maximize use of observable inputs and minimize use of unobservable inputs.
The fair value of OTC derivative contracts is derived primarily using pricing models, which may require multiple
market input parameters. Derivative contracts are presented on a gross basis prior to cash collateral or
counterparty netting. Derivative contracts consist of investments in options and futures contracts, forward
contracts and swaps.
Commingled trust funds are privately offered funds available to institutional clients that are regulated,
supervised, and subject to periodic examination by a state or federal agency. The trust must be maintained for the
collective investment or reinvestment of assets contributed to it from employee benefit plans maintained by more
than one employer or a controlled group of corporations. The sponsor of the commingled trust funds values the
funds’ NAV based on the fair value of the underlying securities. The underlying securities of the commingled
trust funds consist of mainly long duration fixed income instruments. Commingled trust funds are categorized in
Level 2 of the fair value hierarchy to the extent that they are readily redeemable at their NAV or else they are
categorized in Level 3 of the fair value hierarchy.
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