Morgan Stanley 2010 Annual Report Download - page 23

fees, minimum capital requirements, reporting and proficiency testing. MS&Co. and MSSB LLC have affiliates
that are registered as commodity trading advisers and/or commodity pool operators, or are operating under
certain exemptions from such registration pursuant to CFTC rules and other guidance. Under CFTC and NFA
rules, commodity trading advisers who manage accounts must distribute disclosure documents and maintain
specified records relating to their activities, and clients and commodity pool operators have certain
responsibilities with respect to each pool they operate. For each pool, a commodity pool operator must prepare
and distribute a disclosure document; distribute periodic account statements; prepare and distribute audited
annual financial reports; and keep specified records concerning the participants, transactions and operations of
each pool, as well as records regarding transactions of the commodity pool operator and its principals. Violations
of the rules of the CFTC, the NFA or the commodity exchanges could result in remedial actions, including fines,
registration restrictions or terminations, trading prohibitions or revocations of commodity exchange
memberships.
Derivatives Regulation. Through the Dodd-Frank Act, the Company will face a comprehensive U.S. regulatory
regime for its activities in certain over-the-counter derivatives. The regulation of “swaps” and “security-based
swaps” (collectively, “Swaps”) in the U.S. will be effected and implemented through CFTC, SEC and other
agency regulations, which are required to be adopted by July 2011.
The Dodd-Frank Act requires, with limited exceptions, central clearing of certain types of Swaps and also
mandates that trading of such Swaps, with limited exceptions, be done on regulated exchanges or execution
facilities. As a result, market participants, including the Company’s entities engaging in Swaps, will have to
centrally clear and trade on an exchange or execution facility certain Swap transactions that are currently
uncleared and executed bilaterally. Also, the Dodd-Frank Act requires the registration of “swap dealers” and
“major swap participants” with the CFTC and “security-based swap dealers” and “major security-based swap
participants” with the SEC (collectively, “Swaps Entities”). Certain subsidiaries of the Company will likely be
required to register as a swap dealer and security-based swap dealer and it is possible some may register as a
major swap participant and major security-based swap participant.
Swap Entities will be subject to a comprehensive regulatory regime with respect to the Swap activities for which
they are registered. For example, Swaps Entities will be subject to a capital regime, a margin regime for
uncleared Swaps and a segregation regime for collateral of counterparties to uncleared Swaps. Swaps Entities
also will be subject to business conduct and documentation standards with respect to their Swaps counterparties.
Furthermore, Swaps Entities will be subject to significant operational and governance requirements, including
reporting and recordkeeping, maintenance of daily trading records, creation of audit trails, monitoring
procedures, risk management, conflicts of interest and the requirement to have a chief compliance officer, among
others. It is currently unclear to what extent regulation of Swaps Entities might also bring certain activities of the
affiliates of such a Swaps Entity under the oversight of the Swaps Entity’s regulator.
The specific parameters of these Swaps Entities requirements are being developed through CFTC, SEC and bank
regulator rulemakings. Until such time as final rules are adopted, the extent of the regulation Morgan Stanley
entities required to register will face remains unclear. It is likely, however, that, regardless of the final rules
adopted, the Company will face increased costs due to the registration and regulatory requirements listed above.
Complying with the proposed regulation of Swaps Entities could require the Company to restructure its Swaps
businesses, require extensive systems changes, require personnel changes, and raise additional potential liabilities
and regulatory oversight. Compliance with Swap-related regulatory capital requirements may require the
Company to devote more capital to its Swaps business. The Dodd-Frank Act requires reporting of Swap
transactions, both to regulators and publicly, under rules and regulations currently being proposed by the CFTC
and the SEC, and the extent of these reporting requirements will not be clear until final rules are adopted.
The Dodd-Frank Act also requires certain entities receiving customer collateral for cleared Swaps to register with
the CFTC as a futures commission merchant or with the SEC as a broker, dealer or security-based swap dealer, as
appropriate to the type of activity, and to follow certain segregation requirements for customer collateral. Futures
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