Morgan Stanley 2010 Annual Report Download - page 176

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company did not have any AFS securities at December 31, 2009.
6. Collateralized Transactions.
The Company enters into reverse repurchase agreements, repurchase agreements, securities borrowed and
securities loaned transactions to, among other things, acquire securities to cover short positions and settle other
securities obligations, to accommodate customers’ needs and to finance the Company’s inventory positions. The
Company’s policy is generally to take possession of Securities received as collateral, Securities purchased under
agreements to resell and Securities borrowed. The Company manages credit exposure arising from reverse
repurchase agreements, repurchase agreements, securities borrowed and securities loaned transactions by, in
appropriate circumstances, entering into master netting agreements and collateral arrangements with
counterparties that provide the Company, in the event of a customer default, the right to liquidate collateral and
the right to offset a counterparty’s rights and obligations. The Company also monitors the fair value of the
underlying securities as compared with the related receivable or payable, including accrued interest, and, as
necessary, requests additional collateral to ensure such transactions are adequately collateralized. Where deemed
appropriate, the Company’s agreements with third parties specify its rights to request additional collateral.
The Company also engages in securities financing transactions for customers through margin lending. Under
these agreements and transactions, the Company either receives or provides collateral, including U.S.
government and agency securities, other sovereign government obligations, corporate and other debt, and
corporate equities. Customer receivables generated from margin lending activity are collateralized by customer-
owned securities held by the Company. The Company monitors required margin levels and established credit
limits daily and, pursuant to such guidelines, requires customers to deposit additional collateral, or reduce
positions, when necessary. Margin loans are extended on a demand basis and are not committed facilities.
Factors considered in the review of margin loans are the amount of the loan, the intended purpose, the degree of
leverage being employed in the account, and overall evaluation of the portfolio to ensure proper diversification
or, in the case of concentrated positions, appropriate liquidity of the underlying collateral or potential hedging
strategies to reduce risk. Additionally, transactions relating to concentrated or restricted positions require a
review of any legal impediments to liquidation of the underlying collateral. Underlying collateral for margin
loans is reviewed with respect to the liquidity of the proposed collateral positions, valuation of securities, historic
trading range, volatility analysis and an evaluation of industry concentrations. For these transactions, adherence
to the Company’s collateral policies significantly limits the Company’s credit exposure in the event of customer
default. The Company may request additional margin collateral from customers, if appropriate, and, if necessary,
may sell securities that have not been paid for or purchase securities sold but not delivered from customers. At
December 31, 2010 and December 31, 2009, there were approximately $18.0 billion and $12.4 billion,
respectively, of customer margin loans outstanding.
170