Morgan Stanley 2010 Annual Report Download - page 198

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
positions in related securities and financial instruments, including a variety of derivative products (e.g., futures,
forwards, swaps and options). The Company manages the market risk associated with its trading activities on a
Company-wide basis, on a worldwide trading division level and on an individual product basis.
The Company’s derivative products consist of the following:
At December 31, 2010 At December 31, 2009
Assets Liabilities Assets Liabilities
(dollars in millions)
Exchange traded derivative products ........................... $ 6,099 $ 8,553 $ 1,866 $ 5,649
OTC derivative products .................................... 45,193 39,249 47,215 32,560
Total ................................................ $51,292 $47,802 $49,081 $38,209
The Company incurs credit risk as a dealer in OTC derivatives. Credit risk with respect to derivative instruments
arises from the failure of a counterparty to perform according to the terms of the contract. The Company’s
exposure to credit risk at any point in time is represented by the fair value of the derivative contracts reported as
assets. The fair value of a derivative represents the amount at which the derivative could be exchanged in an
orderly transaction between market participants and is further described in Notes 2 and 4.
In connection with its derivative activities, the Company generally enters into master netting agreements and
collateral arrangements with counterparties. These agreements provide the Company with the ability to offset a
counterparty’s rights and obligations, request additional collateral when necessary or liquidate the collateral in
the event of counterparty default.
The tables below present a summary by counterparty credit rating and remaining contract maturity of the fair
value of OTC derivatives in a gain position at December 31, 2010 and December 31, 2009, respectively. Fair
value is presented in the final column, net of collateral received (principally cash and U.S. government and
agency securities):
OTC Derivative Products—Financial Instruments Owned at December 31, 2010(1)
Cross-
Maturity
and Cash
Collateral
Netting(3)
Net
Exposure
Post-Cash
Collateral
Net
Exposure
Post-
Collateral
Years to Maturity
Credit Rating(2) Less than 1 1-3 3-5 Over 5
(dollars in millions)
AAA ...................... $ 802 $ 2,005 $ 1,242 $ 8,823 $ (5,906) $ 6,966 $ 6,683
AA........................ 6,601 6,760 5,589 17,844 (27,801) 8,993 7,877
A ......................... 8,655 8,710 6,507 26,492 (36,397) 13,967 12,383
BBB....................... 2,982 4,109 2,124 7,347 (9,034) 7,528 6,001
Non-investment grade ......... 2,628 3,231 1,779 4,456 (4,355) 7,739 5,348
Total .................. $21,668 $24,815 $17,241 $64,962 $(83,493) $45,193 $38,292
(1) Fair values shown represent the Company’s net exposure to counterparties related to the Company’s OTC derivative products. The table
does not include listed derivatives and the effect of any related hedges utilized by the Company. The table also excludes fair values
corresponding to other credit exposures, such as those arising from the Company’s lending activities.
(2) Obligor credit ratings are determined by the Company’s Credit Risk Management Department.
(3) Amounts represent the netting of receivable balances with payable balances for the same counterparty across maturity categories.
Receivable and payable balances with the same counterparty in the same maturity category are netted within such maturity category,
where appropriate. Cash collateral received is netted on a counterparty basis, provided legal right of offset exists.
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