Morgan Stanley 2009 Annual Report Download - page 24

The global economic downturn continues to impact our “single name” credit risk exposure. While we believe
current valuations and reserves adequately address our perceived levels of risk, there is a possibility that
continued difficult economic conditions may further negatively impact our clients and our current credit
exposures. In addition, as a clearing member firm, we finance our customer positions and we could be held
responsible for the defaults or misconduct of our customers. Although we regularly review our credit exposures,
default risk may arise from events or circumstances that are difficult to detect or foresee.
Defaults by another large financial institution could adversely affect financial markets generally.
The commercial soundness of many financial institutions may be closely interrelated as a result of credit, trading,
clearing or other relationships between the institutions. As a result, concerns about, or a default or threatened
default by, one institution could lead to significant market-wide liquidity and credit problems, losses or defaults
by other institutions. This is sometimes referred to as “systemic risk” and may adversely affect financial
intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges, with which we
interact on a daily basis, and therefore could adversely affect Morgan Stanley.
Operational Risk.
Operational risk refers to the risk of financial or other loss, or damage to a firm’s reputation, resulting from
inadequate or failed internal processes, people, resources, systems or from other internal or external events (e.g.,
internal or external fraud, legal and compliance risks, damage to physical assets, etc.). Morgan Stanley may incur
operational risk across its full scope of business activities, including revenue-generating activities (e.g., sales and
trading) and support functions (e.g., information technology and trade processing). Legal and compliance risk is
included in the scope of operational risk and is discussed below under “Legal Risk.” For more information on
how we monitor and manage operational risk, see “Operational Risk” in Part II, Item 7A herein.
We are subject to operational risk that could adversely affect our businesses.
Our businesses are highly dependent on our ability to process, on a daily basis, a large number of transactions
across numerous and diverse markets in many currencies. In general, the transactions we process are increasingly
complex. We perform the functions required to operate our different businesses either by ourselves or through
agreements with third parties. We rely on the ability of our employees, our internal systems and systems at
technology centers operated by third parties to process a high volume of transactions.
We also face the risk of operational failure or termination of any of the clearing agents, exchanges, clearing
houses or other financial intermediaries we use to facilitate our securities transactions. In the event of a
breakdown or improper operation of our or a third party’s systems or improper action by third parties or
employees, we could suffer financial loss, an impairment to our liquidity, a disruption of our businesses,
regulatory sanctions or damage to our reputation.
Despite the business contingency plans we have in place, our ability to conduct business may be adversely
affected by a disruption in the infrastructure that supports our business and the communities where we are
located. This may include a disruption involving physical site access, terrorist activities, disease pandemics,
electrical, communications or other services used by Morgan Stanley, its employees or third parties with whom
we conduct business.
Legal Risk.
Legal and compliance risk includes the risk of exposure to fines, penalties, judgments, damages and/or
settlements in connection with regulatory or legal actions as a result of non-compliance with applicable legal or
regulatory requirements or litigation. Legal risk also includes contractual and commercial risk such as the risk
that a counterparty’s performance obligations will be unenforceable. In today’s environment of rapid and
possibly transformational regulatory change, we also view regulatory change as a component of legal risk. For
more information on how we monitor and manage legal risk, see “Risk Management—Legal Risk” in Part II,
Item 7A herein.
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