Morgan Stanley 2010 Annual Report Download - page 204

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(1) Fair value amounts are shown on a gross basis prior to cash collateral or counterparty netting.
(2) Fair value amounts of certain credit default swaps where the Company sold protection have an asset carrying value because credit
spreads of the underlying reference entity or entities tightened during the terms of the contracts.
(3) Other credit contracts include CLNs, CDOs and credit default swaps that are considered hybrid instruments.
(4) Fair value amount shown represents the fair value of the hybrid instruments.
The table below summarizes certain information regarding protection sold through credit default swaps and
CLNs at December 31, 2009:
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 ............................. $ 926 $ 2,733 $ 10,969 $ 30,542 $ 45,170 $ 846
AA .............................. 13,355 31,475 38,360 39,424 122,614 1,355
A................................ 35,164 101,909 100,489 50,432 287,994 (3,115)
BBB ............................. 57,979 161,309 151,143 80,216 450,647 (6,753)
Non-investment grade ............... 58,408 180,311 123,972 63,871 426,562 25,870
Total ................................. 165,832 477,737 424,933 264,485 1,332,987 18,203
Index and basket credit default swaps:
AAA ............................. 41,517 59,925 51,750 53,917 207,109 (1,563)
AA .............................. — 1,113 4,082 17,120 22,315 1,794
A................................ 198 3,604 25,425 5,666 34,893 (377)
BBB ............................. 12,866 65,484 183,799 93,906 356,055 (2,101)
Non-investment grade ............... 40,941 160,331 160,127 132,267 493,666 27,665
Total ................................. 95,522 290,457 425,183 302,876 1,114,038 25,418
Total credit default swaps sold ............. $261,354 $768,194 $850,116 $567,361 $2,447,025 $43,621
Other credit contracts(3)(4) ............... $ 160 $ 125 $ 361 $ 1,757 $ 2,403 $ 783
Total credit derivatives and other credit
contracts ............................ $261,514 $768,319 $850,477 $569,118 $2,449,428 $44,404
(1) Fair value amounts are shown on a gross basis prior to cash collateral or counterparty netting.
(2) Fair value amounts of certain credit default swaps where the Company sold protection have an asset carrying value because credit
spreads of the underlying reference entity or entities tightened during the terms of the contracts.
(3) Other credit contracts include CLNs and credit default swaps that are considered hybrid instruments.
(4) Fair value amount shown represents the fair value of the hybrid instruments.
Single Name Credit Default Swaps. A credit default swap protects the buyer against the loss of principal on a
bond or loan in case of a default by the issuer. The protection buyer pays a periodic premium (generally
quarterly) over the life of the contract and is protected for the period. The Company in turn will have to perform
under a credit default swap if a credit event as defined under the contract occurs. Typical credit events include
bankruptcy, dissolution or insolvency of the referenced entity, failure to pay and restructuring of the obligations
of the referenced entity. In order to provide an indication of the current payment status or performance risk of the
credit default swaps, the external credit ratings, primarily Moody’s credit ratings, of the underlying reference
entity of the credit default swaps are disclosed.
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