Morgan Stanley 2010 Annual Report Download - page 216

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
of Tier 1 capital to RWAs of 6%, and a ratio of Tier 1 capital to average book assets (leverage ratio) of
5%. Each U.S. depository institution subsidiary of the Company must be well-capitalized in order for the
Company to continue to qualify as a financial holding company and to continue to engage in the broadest range
of financial activities permitted to financial holding companies. At December 31, 2010 and December 31, 2009,
the Company’s three U.S. depository institutions maintained capital at levels in excess of the universally
mandated well-capitalized levels. These subsidiary depository institutions maintain capital at levels sufficiently
in excess of the “well-capitalized” requirements to address any additional capital needs and requirements
identified by the federal banking regulators.
In July 2010, Morgan Stanley Trust, a Federal Savings Bank regulated by the Office of Thrift Supervision (the
“OTS”), converted to Morgan Stanley Private Bank, National Association (the “Private Bank”), a national bank
regulated by the Office of the Comptroller of the Currency. Upon conversion, the Private Bank became subject to
the Market Risk Amendment to the Risk-Based Capital rules under Basel I, and the Private Bank’s trading
portfolio risk-weighted assets calculation changed from the ratings-based approach to the market-risk
approach. The change in the risk-weighting of the portfolio resulted in the capital ratio changes, which had no
impact on the operations of the Company or the Private Bank.
MS&Co. and Other Broker-Dealers. MS&Co. is a registered broker-dealer and registered futures commission
merchant and, accordingly, is subject to the minimum net capital requirements of the U.S. Securities and
Exchange Commission (“SEC”), the Financial Industry Regulatory Authority and the U.S. Commodity Futures
Trading Commission. MS&Co. has consistently operated with capital in excess of its regulatory capital
requirements. MS&Co.’s net capital totaled $7,463 million and $7,854 million at December 31, 2010 and
December 31, 2009, respectively, which exceeded the amount required by $6,355 million and $6,758 million,
respectively. MS&Co. is required to hold tentative net capital in excess of $1 billion and net capital in excess of
$500 million in accordance with the market and credit risk standards of Appendix E of SEC Rule 15c3-1.
MS&Co. is also required to notify the SEC in the event that its tentative net capital is less than $5 billion. At
December 31, 2010, MS&Co. had tentative net capital in excess of the minimum and the notification
requirements.
Morgan Stanley Smith Barney LLC is a registered broker-dealer and registered futures commission merchant
and, accordingly, is subject to the minimum net capital requirements of the SEC, the Financial Industry
Regulatory Authority, Inc. and the U.S. Commodity Futures Trading Commission. Morgan Stanley Smith Barney
LLC has operated with capital in excess of its regulatory capital requirements. Morgan Stanley Smith Barney
LLC clears certain customer activity directly and introduces other business to MS&Co. and Citi. MSIP, a
London-based broker-dealer subsidiary, is subject to the capital requirements of the Financial Services Authority,
and MSMS, a Tokyo-based broker-dealer subsidiary, is subject to the capital requirements of the Financial
Services Agency. MSIP and MSMS have consistently operated in excess of their respective regulatory capital
requirements.
Other Regulated Subsidiaries. Certain other U.S. and non-U.S. subsidiaries are subject to various securities,
commodities and banking regulations, and capital adequacy requirements promulgated by the regulatory and
exchange authorities of the countries in which they operate. These subsidiaries have consistently operated in
excess of their local capital adequacy requirements.
Morgan Stanley Derivative Products Inc. (“MSDP”), a derivative products subsidiary rated Aa3 by Moody’s and
AAA by Standard & Poor’s Ratings Services, a Division of the McGraw-Hill Companies Inc. (“S&P”),
maintains certain operating restrictions that have been reviewed by Moody’s and S&P. On December 17, 2010,
MSDP was downgraded from an Aa2 rating to an Aa3 rating by Moody’s but maintained its AAA rating by S&P.
While MSDP has made substantial effort to address Moody’s comments, MSDP’s counterparty rating remains on
review for possible downgrade while Moody’s continues to evaluate MSDP’s capital adequacy. The
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