Morgan Stanley 2010 Annual Report Download - page 183

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Securitization Activities. In a securitization transaction, the Company transfers assets (generally commercial or
residential mortgage loans or U.S. agency securities) to an SPE, sells to investors most of the beneficial interests,
such as notes or certificates, issued by the SPE, and in many cases, retains other beneficial interests. In many
securitization transactions involving commercial mortgage loans, the Company transfers a portion of the assets to
the SPE with unrelated parties transferring the remaining assets.
The purchase of the transferred assets by the SPE is financed through the sale of these interests. In some of these
transactions, primarily involving residential mortgage loans in the U.S. and Europe and commercial mortgage
loans in Europe, the Company serves as servicer for some or all of the transferred loans. In many securitizations,
particularly involving residential mortgage loans, the Company also enters into derivative transactions, primarily
interest rate swaps or interest rate caps, with the SPE.
In most of these transactions, the SPE met the criteria to be classified as a QSPE under the accounting guidance
effective prior to January 1, 2010 for the transfer and servicing of financial assets. The Company did not
consolidate QSPEs if they met certain criteria regarding the types of assets and derivatives they held, the
activities in which they engaged and the range of discretion they may have exercised in connection with the
assets they held. SPEs that formerly met the criteria to be a QSPE are now subject to the same consolidation
requirements as other VIEs.
The primary risk retained by the Company in connection with these transactions generally is limited to the
beneficial interests issued by the SPE that are owned by the Company, with the risk highest on the most
subordinate class of beneficial interests. These beneficial interests generally are included in Financial instruments
owned—Corporate and other debt and are measured at fair value. The Company does not provide additional
support in these transactions through contractual facilities, such as liquidity facilities, guarantees or similar
derivatives.
Although not obligated, the Company generally makes a market in the securities issued by SPEs in these
transactions. As a market maker, the Company offers to buy these securities from, and sell these securities to,
investors. Securities purchased through these market-making activities are not considered to be retained interests,
although these beneficial interests generally are included in Financial instruments owned—Corporate and other
debt and are measured at fair value.
The Company enters into derivatives, generally interest rate swaps and interest rate caps with a senior payment
priority in many securitization transactions. The risks associated with these and similar derivatives with SPEs are
essentially the same as similar derivatives with non-SPE counterparties and are managed as part of the
Company’s overall exposure.
See Note 12 for further information on derivative instruments and hedging activities.
Municipal Tender Option Bond Trusts. In a municipal tender option bond transaction, the Company, on behalf
of a client, transfers a municipal bond to a trust. The trust issues short-term securities that the Company, as the
remarketing agent, sells to investors. The client retains a residual interest. The short-term securities are supported
by a liquidity facility pursuant to which the investors may put their short-term interests. In some programs, the
Company provides this liquidity facility; in most programs, a third-party provider will provide such liquidity
facility. The Company may purchase short-term securities in its role either as remarketing agent or liquidity
provider. The client can generally terminate the transaction at any time. The liquidity provider can generally
terminate the transaction upon the occurrence of certain events. When the transaction is terminated, the
municipal bond is generally sold or returned to the client. Any losses suffered by the liquidity provider upon the
sale of the bond are the responsibility of the client. This obligation generally is collateralized. Liquidity facilities
provided to municipal tender option bond trusts are classified as derivatives.
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