Morgan Stanley 2010 Annual Report Download - page 112

See Note 8 to the consolidated financial statements for additional information on the credit quality of the
Company’s financing receivables.
Institutional Securities Activities.
Corporate Lending. In connection with certain of its Institutional Securities business segment activities, the
Company provides loans or lending commitments (including bridge financing) to selected corporate clients. Such
loans and lending commitments can generally be classified as either “relationship-driven” or “event-driven.”
“Relationship-driven” loans and lending commitments are generally made to expand business relationships with
select clients. Commitments associated with “relationship-driven” activities may not be indicative of the
Company’s actual funding requirements, as the commitment may expire unused or the borrower may not fully
utilize the commitment. The Company may hedge its exposures in connection with “relationship-driven”
transactions, and commitments may be subject to conditions, including financial covenants.
“Event-driven” loans and lending commitments refer to activities associated with a particular event or
transaction, such as to support client merger, acquisition or recapitalization activities. Commitments associated
with these “event-driven” activities may not be indicative of the Company’s actual funding requirements since
funding is contingent upon a proposed transaction being completed. In addition, the borrower may not fully
utilize the commitment or the Company’s portion of the commitment may be reduced through the syndication
process. The borrower’s ability to draw on the commitment is also subject to certain terms and conditions, among
other factors. The Company risk manages its exposures in connection with “event-driven” transactions through
various means, including syndication, distribution and/or hedging.
Securitizations. The Company may extend short- or long-term funding to clients through loans and lending
commitments that are secured by assets of the borrower and generally provide for over-collateralization,
including commercial real estate, loans secured by loan pools, commercial and industrial company loans, and
secured lines of revolving credit. Credit risk with respect to these loans and lending commitments arises from the
failure of a borrower to perform according to the terms of the loan agreement or a decline in the underlying
collateral value.
Derivative Contracts. In the normal course of business, the Company enters into a variety of derivative
contracts related to financial instruments and commodities. The Company uses these instruments for trading and
hedging purposes, as well as for asset and liability management. These instruments generally represent future
commitments to swap interest payment streams, exchange currencies, or purchase or sell commodities and other
financial instruments on specific terms at specified future dates. Many of these products have maturities that do
not extend beyond one year, although swaps, options and equity warrants typically have longer maturities.
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, net of cash collateral received. The fair value of derivatives represents the amount at which the derivative
could be exchanged in an orderly transaction between market participants and is further described in Note 2 to
the consolidated financial statements. Future changes in interest rates, foreign currency exchange rates, or the fair
values of the financial instruments, commodities or indices underlying these contracts ultimately may result in
cash settlements exceeding fair value amounts recognized in the consolidated statements of financial condition.
In addition to measuring and managing credit exposures referenced to the current fair value of derivative
instruments, the Company also measures and manages credit exposures referenced to potential exposure.
Potential exposure is an estimate of exposure, within a specified confidence level, that could be outstanding over
time based on market movements.
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