Morgan Stanley 2010 Annual Report Download - page 203

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Credit-Risk-Related Contingencies.
In connection with certain OTC trading agreements, the Company may be required to provide additional
collateral or immediately settle any outstanding liability balances with certain counterparties in the event of a
credit ratings downgrade. At December 31, 2010 and December 31, 2009, the aggregate fair value of derivative
contracts that contain credit-risk-related contingent features that are in a net liability position totaled $32,567
million and $23,052 million, respectively, for which the Company has posted collateral of $26,904 million and
$20,607 million, respectively, in the normal course of business. At December 31, 2010 and December 31, 2009,
the amount of additional collateral or termination payments that could be called by counterparties under the terms
of such agreements in the event of a one-notch downgrade of the Company’s long-term credit rating was
approximately $873 million and $717 million, respectively. Additional collateral or termination payments of
approximately $1,537 million and $975 million could be called by counterparties in the event of a two-notch
downgrade at December 31, 2010 and December 31, 2009, respectively. Of these amounts, $1,766 million and
$1,203 million at December 31, 2010 and December 31, 2009, respectively, related to bilateral arrangements
between the Company and other parties where upon the downgrade of one party, the downgraded party must
deliver incremental collateral to the other party. These bilateral downgrade arrangements are a risk management
tool used extensively by the Company as credit exposures are reduced if counterparties are downgraded.
Credit Derivatives and Other Credit Contracts.
The Company enters into credit derivatives, principally through credit default swaps, under which it provides
counterparties protection against the risk of default on a set of debt obligations issued by a specified reference
entity or entities. A majority of the Company’s counterparties are banks, broker-dealers, insurance and other
financial institutions, and monoline insurers. The table below summarizes certain information regarding
protection sold through credit default swaps and CLNs at December 31, 2010:
Protection Sold
Maximum Potential Payout/Notional
Fair Value
(Asset)/
Liability(1)(2)
Years to Maturity
Credit Ratings of the Reference Obligation Less than 1 1-3 3-5 Over 5 Total
(dollars in millions)
Single name credit default swaps:
AAA .......................... $ 2,747 $ 7,232 $ 13,927 $ 22,648 $ 46,554 $ 3,193
AA ............................ 13,364 44,700 35,030 33,538 126,632 4,260
A ............................. 47,756 131,464 79,900 50,227 309,347 (940)
BBB........................... 74,961 191,046 115,460 76,544 458,011 (2,816)
Non-investment grade ............. 70,691 173,778 84,605 59,532 388,606 6,984
Total .............................. 209,519 548,220 328,922 242,489 1,329,150 10,681
Index and basket credit default swaps:
AAA .......................... 17,437 67,165 26,172 26,966 137,740 (1,569)
AA ............................ 974 3,012 695 18,236 22,917 305
A ............................. 447 9,432 44,104 4,902 58,885 2,291
BBB........................... 24,311 80,314 176,252 69,218 350,095 (278)
Non-investment grade ............. 53,771 139,875 95,796 106,022 395,464 13,802
Total .............................. 96,940 299,798 343,019 225,344 965,101 14,551
Total credit default swaps sold .......... $306,459 $848,018 $671,941 $467,833 $2,294,251 $25,232
Other credit contracts(3)(4) ............. $ 61 $ 1,416 $ 822 $ 3,856 $ 6,155 $ (1,198)
Total credit derivatives and other credit
contracts ......................... $306,520 $849,434 $672,763 $471,689 $2,300,406 $24,034
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