Morgan Stanley 2010 Annual Report Download - page 155

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
of fair value. For non-exchange-traded investments either held directly or held within internally managed
funds, fair value after initial recognition is based on an assessment of each underlying investment,
considering rounds of financing and third-party transactions, discounted cash flow analyses and market-
based information, including comparable company transactions, trading multiples and changes in market
outlook, among other factors. Exchange-traded direct equity investments are generally valued based on
quoted prices from the exchange.
Exchange-traded direct equity investments that are actively traded are categorized in Level 1 of the fair
value hierarchy. Non-exchange-traded direct equity investments and investments in private equity and
real estate funds are generally categorized in Level 3 of the fair value hierarchy. Investments in hedge
funds that are redeemable at the measurement date or in the near future are categorized in Level 2 of the
fair value hierarchy; otherwise, they are categorized in Level 3 of the fair value hierarchy.
Physical Commodities.
• The Company trades various physical commodities, including crude oil and refined products, natural gas,
base and precious metals and agricultural products. Fair value for physical commodities is determined
using observable inputs, including broker quotations and published indices. Physical commodities are
categorized in Level 2 of the fair value hierarchy.
Securities Available for Sale.
• Securities available for sale are composed of U.S. government and agency securities, including U.S.
Treasury securities, agency-issued debt, agency mortgage pass-through securities and collateralized
mortgage obligations. Actively traded U.S. Treasury securities and 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 securities and collateralized mortgage obligations are generally
categorized in Level 2 of the fair value hierarchy. For further information on securities available for sale,
see Note 5.
Commercial Paper and Other Short-term Borrowings/Long-term Borrowings.
• Structured Notes. The Company issues structured notes that have coupon or repayment terms linked to
the performance of debt or equity securities, indices, currencies or commodities. Fair value of structured
notes is determined using valuation models for the derivative and debt portions of the notes. These
models incorporate observable inputs referencing identical or comparable securities, including prices that
the notes are linked to, interest rate yield curves, option volatility and currency, commodity or equity
rates. Independent, external and traded prices for the notes are also considered. The impact of the
Company’s own credit spreads is also included based on the Company’s observed secondary bond market
spreads. Most structured notes are categorized in Level 2 of the fair value hierarchy.
Deposits.
•Time Deposits. The fair value of certificates of deposit is determined using third-party quotations.
These deposits are generally categorized in Level 2 of the fair value hierarchy.
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