Morgan Stanley 2010 Annual Report Download - page 165

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(1) Total realized and unrealized gains (losses) are primarily included in Principal transactions—Trading in the consolidated statements of
income except for $(1,418) million related to Financial instruments owned—Investments, which is included in Principal transactions—
Investments.
(2) Amounts represent unrealized gains (losses) for 2009 related to assets and liabilities still outstanding at December 31, 2009.
(3) Net derivative and other contracts represent Financial instruments owned—Derivative and other contracts net of Financial instruments
sold, not yet purchased—Derivative and other contracts. For further information on derivative instruments and hedging activities, see
Note 12.
Financial instruments owned—Corporate and other debt. The net losses in Level 3 Corporate and other debt
were primarily driven by certain corporate loans and certain commercial mortgage-backed securities, partially
offset by gains in certain other debt and collateralized debt obligations.
During 2009, the Company reclassified approximately $6.8 billion of certain Corporate and other debt from
Level 3 to Level 2. The reclassifications were primarily related to certain corporate loans and bonds, state and
municipal securities, CMBS and other debt. For certain corporate loans, more liquidity re-entered the market and
external prices and/or spread inputs for these instruments became observable. For corporate bonds and CMBS,
the reclassifications were primarily due to an increase in market price quotations for these or comparable
instruments, or available broker quotes, such that observable inputs were utilized for the fair value measurement
of these instruments. For certain other debt, as the unobservable inputs became insignificant in the overall
valuation, the fair value of these instruments became highly correlated with similar instruments in an observable
market. For state and municipal securities, certain SLARS were reclassified as there was increased activity in the
SLARS market and restructuring activity of the underlying trusts.
During 2009, the Company also reclassified approximately $3.3 billion of certain Corporate and other debt from
Level 2 to Level 3. The reclassifications were primarily related to certain corporate loans and were generally due
to a reduction in market price quotations for these or comparable instruments, or a lack of available broker
quotes, such that unobservable inputs had to be utilized for the fair value measurement of these instruments. The
key unobservable inputs are assumptions to establish comparability to other instruments with observable spread
levels.
Financial instruments owned—Net derivative and other contracts. The net losses in Net derivative and other
contracts were primarily driven by tightening of credit spreads on underlying reference entities of single name
and basket credit default swaps.
During 2009, the Company reclassified approximately $10.2 billion of certain Derivative and other contracts
from Level 3 to Level 2, primarily related to single name subprime and CMBS credit default swaps as well as
tranched-indexed corporate credit default swaps. Certain single name subprime and CMBS credit default swaps
were reclassified primarily because the values associated with the unobservable inputs, such as correlation, were
no longer deemed significant to the fair value measurement of these derivative contracts due to market
deterioration. Increased availability of transaction data, broker quotes and/or consensus pricing resulted in the
reclassifications of certain tranche-indexed corporate credit default swaps. The Company reclassified
approximately $0.4 billion of certain Derivative and other contracts from Level 2 to Level 3 as certain inputs
became unobservable.
Financial instruments owned—Investments. The net losses from investments were primarily related to
investments associated with the Company’s real estate products.
The Company reclassified investments in certain hedge funds from Level 3 to Level 2 because they were
redeemable at the measurement date or in the near future.
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