Morgan Stanley 2010 Annual Report Download - page 151

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
4. Fair Value Disclosures.
Fair Value Measurements.
A description of the valuation techniques applied to the Company’s major categories of assets and liabilities
measured at fair value on a recurring basis follows.
Financial Instruments Owned and Financial Instruments Sold, Not Yet Purchased.
U.S. Government and Agency Securities.
•U.S. Treasury Securities. U.S. treasury securities are valued using quoted market prices. Valuation
adjustments are not applied. Accordingly, U.S. treasury securities are generally categorized in Level 1 of
the fair value hierarchy.
• U.S. Agency Securities. U.S. agency securities are composed of three main categories consisting of
agency-issued debt, agency mortgage pass-through pool securities and collateralized mortgage
obligations. Non-callable agency-issued debt securities are generally valued using quoted market prices.
Callable agency-issued debt securities are valued by benchmarking model-derived prices to quoted
market prices and trade data for identical or comparable securities. The fair value of agency mortgage
pass-through pool securities is model-driven based on spreads of the comparable To-be-announced
(“TBA”) security. Collateralized mortgage obligations are valued using indices, quoted market prices and
trade data for identical or comparable securities. Actively traded non-callable agency-issued debt
securities are generally categorized in Level 1 of the fair value hierarchy. Callable agency-issued debt
securities, agency mortgage pass-through pool securities and collateralized mortgage obligations are
generally categorized in Level 2 of the fair value hierarchy.
Other Sovereign Government Obligations.
• Foreign sovereign government obligations are valued using quoted prices in active markets when
available. To the extent quoted prices are not available, fair value is determined based on a valuation
model that has as inputs interest rate yield curves, cross-currency basis index spreads, and country credit
spreads for structures similar to the bond in terms of issuer, maturity and seniority. These bonds are
generally categorized in Level 1 or Level 2 of the fair value hierarchy.
Corporate and Other Debt.
• State and Municipal Securities. The fair value of state and municipal securities is determined using
recently executed transactions, market price quotations and pricing models that factor in, where
applicable, interest rates, bond or credit default swap spreads and volatility. These bonds are generally
categorized in Level 2 of the fair value hierarchy.
• Residential Mortgage-Backed Securities (“RMBS”), Commercial Mortgage-Backed Securities (“CMBS”)
and other Asset-Backed Securities (“ABS”). RMBS, CMBS and other ABS may be valued based on
price or spread data obtained from observed transactions or independent external parties such as vendors
or brokers. When position-specific external price data are not observable, the fair value determination
may require benchmarking to similar instruments and/or analyzing expected credit losses, default and
recovery rates. In evaluating the fair value of each security, the Company considers security collateral-
specific attributes, including payment priority, credit enhancement levels, type of collateral, delinquency
rates and loss severity. In addition, for RMBS borrowers, Fair Isaac Corporation (“FICO”) scores and the
level of documentation for the loan are also considered. Market standard models, such as Intex, Trepp or
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