Morgan Stanley 2009 Annual Report Download - page 82

The Company’s liquidity and funding risk management policies are designed to mitigate the potential risk that
the Company may be unable to access adequate financing to service its financial obligations without material
franchise or business impact. The key objectives of the liquidity and funding risk management framework are to
support the successful execution of the Company’s business strategies while ensuring sufficient liquidity through
the business cycle and during periods of stressed market conditions.
Liquidity Management Policies.
The principal elements of the Company’s liquidity management framework are the Contingency Funding Plan
(“CFP”) and liquidity reserves. Comprehensive financing guidelines (secured funding, long-term funding strategy,
surplus capacity, diversification and staggered maturities) support the Company’s target liquidity profile.
Contingency Funding Plan. The CFP is the Company’s primary liquidity risk management tool. The CFP
models a potential, prolonged liquidity contraction over a one-year time period and sets forth a course of action
to effectively manage a liquidity event. The CFP and liquidity risk exposures are evaluated on an ongoing basis
and reported to the FRC, ALCO and other appropriate risk committees.
The Company’s CFP model incorporates scenarios with a wide range of potential cash outflows during a range of
liquidity stress events, including, but not limited to, the following: (i) repayment of all unsecured debt maturing
within one year and no incremental unsecured debt issuance; (ii) maturity roll-off of outstanding letters of credit
with no further issuance and replacement with cash collateral; (iii) return of unsecured securities borrowed and
any cash raised against these securities; (iv) additional collateral that would be required by counterparties in the
event of a multi-notch long-term credit ratings downgrade; (v) higher haircuts on or lower availability of secured
funding; (vi) client cash withdrawals; (vii) drawdowns on unfunded commitments provided to third parties; and
(viii) discretionary unsecured debt buybacks.
The CFP is produced on a parent and major subsidiary level to capture specific cash requirements and cash
availability at various legal entities. The CFP assumes that the parent company does not have access to cash that
may be held at certain subsidiaries due to regulatory, legal or tax constraints.
Liquidity Reserves. The Company seeks to maintain target liquidity reserves that are sized to cover daily
funding needs and meet strategic liquidity targets as outlined in the CFP. These liquidity reserves are held in the
form of cash deposits and pools of central bank eligible unencumbered securities. The parent company liquidity
reserve is managed globally and consists of overnight cash deposits and unencumbered U.S. and European
government bonds, agencies and agency pass-throughs. The Company believes that diversifying the form in
which its liquidity reserves (cash and securities) are maintained enhances its ability to quickly and efficiently
source funding in a stressed environment. The Company’s funding requirements and target liquidity reserves
may vary based on changes to the level and composition of its balance sheet, timing of specific transactions,
client financing activity, market conditions and seasonal factors.
On December 31, 2009, the parent liquidity reserve was $64 billion, and the total Company liquidity reserve was
$163 billion. The average parent liquidity reserve was $61 billion, and the average total Company liquidity
reserve was $154 billion for 2009.
Capital Covenants.
In October 2006 and April 2007, the Company executed replacement capital covenants in connection with
offerings by Morgan Stanley Capital Trust VII and Morgan Stanley Capital Trust VIII (the “Capital Securities”).
Under the terms of the replacement capital covenants, the Company has agreed, for the benefit of certain
specified holders of debt, to limitations on its ability to redeem or repurchase any of the Capital Securities for
specified periods of time. For a complete description of the Capital Securities and the terms of the replacement
capital covenants, see the Company’s Current Reports on Form 8-K dated October 12, 2006 and April 26, 2007.
78