Morgan Stanley 2010 Annual Report Download - page 35

available, and the proceeds, if any, from insurance recovery may not be adequate to cover liabilities with respect
to particular incidents. As a result, our financial condition, results of operations and cash flows may be adversely
affected by these events.
Under the BHC Act, there is a grandfather exemption for “activities related to the trading, sale or investment in
commodities and underlying physical properties,” provided that we were engaged in “any of such activities as of
September 30, 1997 in the United States” and provided that certain other conditions are satisfied. If the Federal
Reserve were to determine that any of our commodities activities did not qualify for the BHC Act grandfather
exemption, then we would likely be required to divest any such activities that did not otherwise conform to the
BHC Act by the end of any extensions of the BHC Act grace period, which would terminate in all events on the
fifth anniversary of our becoming a bank holding company.
We also expect the other laws and regulations affecting our commodities business to increase in both scope and
complexity. During the past several years, intensified scrutiny of certain energy markets by federal, state and
local authorities in the U.S. and abroad and the public has resulted in increased regulatory and legal enforcement,
litigation and remedial proceedings involving companies engaged in the activities in which we are engaged. For
example, the U.S. and the EU have increased their focus on the energy markets which has resulted in increased
regulation of companies participating in the energy markets, including those engaged in power generation and
liquid hydrocarbons trading. In addition, new regulation of OTC derivatives markets in the U.S. and similar
legislation proposed or adopted abroad will impose significant new costs and impose new requirements on our
commodities derivatives activities. We may incur substantial costs or loss of revenue in complying with current
or future laws and regulations and our overall businesses and reputation may be adversely affected by the current
legal environment. In addition, failure to comply with these laws and regulations may result in substantial civil
and criminal fines and penalties.
A failure to address conflicts of interest appropriately could adversely affect our businesses.
As a global financial services firm that provides products and services to a large and diversified group of clients,
including corporations, governments, financial institutions and individuals, we face potential conflicts of interest
in the normal course of business. For example, potential conflicts can occur when there is a divergence of
interests between us and a client, among clients, or between an employee on the one hand and us or a client on
the other. We have policies, procedures and controls that are designed to address potential conflicts of interest.
However, identifying and mitigating potential conflicts of interest can be complex and challenging, and can
become the focus of media and regulatory scrutiny. Indeed, actions that merely appear to create a conflict can put
our reputation at risk even if the likelihood of an actual conflict has been mitigated. It is possible that potential
conflicts could give rise to litigation or enforcement actions, which may lead to our clients being less willing to
enter into transactions in which a conflict may occur and could adversely affect our businesses.
Our regulators have the ability to scrutinize our activities for potential conflicts of interest, including through
detailed examinations of specific transactions. In addition, our status as a bank holding company supervised by
the Federal Reserve subjects us to direct Federal Reserve scrutiny with respect to transactions between our
domestic subsidiary banks and their affiliates.
Risk Management.
Our hedging strategies and other risk management techniques may not be fully effective in mitigating our risk
exposure in all market environments or against all types of risk.
We have devoted significant resources to develop our risk management policies and procedures and expect to
continue to do so in the future. Nonetheless, our hedging strategies and other risk management techniques may
not be fully effective in mitigating our risk exposure in all market environments or against all types of risk,
including risks that are unidentified or unanticipated. Some of our methods of managing risk are based upon our
use of observed historical market behavior. As a result, these methods may not predict future risk exposures,
which could be significantly greater than the historical measures indicate. Management of market, credit,
liquidity, operational, legal and regulatory risks requires, among other things, policies and procedures to record
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