Morgan Stanley 2010 Annual Report Download - page 65

In 2010, equity sales and trading revenues also reflected unrealized gains of approximately $20 million related to
changes in the fair value of net derivative contracts attributable to the tightening of counterparties’ credit default
swap spreads compared with unrealized gains of approximately $198 million in 2009. The Company also recorded
unrealized gains of $31 million in 2010 related to changes in the fair value of net derivative contracts attributable to
the widening of the Company’s credit default swap spreads compared with unrealized losses of approximately $154
million in 2009 from the tightening of the Company’s credit default swap spreads. The unrealized gains and losses
on credit default swap spreads do not reflect any gains or losses on related hedging instruments.
Fixed Income. Fixed income sales and trading revenues increased 21% to $5,867 million in 2010 from $4,854
million in 2009. Results in 2010 included negative revenues of approximately $703 million due to the tightening
of the Company’s credit spreads resulting from the increase in the fair value of certain of the Company’s long-
term and short-term borrowings, primarily structured notes, for which the fair value option was elected compared
with negative revenues of approximately $3,321 million in 2009. Interest rate, credit and currency product
revenues decreased 38% in 2010, reflecting lower trading results across most businesses. Results for 2010
primarily reflected solid customer flows in interest rate, credit and currency products, which were partly offset by
a challenging trading environment. Interest rate, credit and currency product net revenues in 2010 were also
negatively impacted by losses of $865 million from Monolines compared with losses of $232 million in 2009.
Results in interest rate, credit and currency products also included a gain of approximately $123 million related
to a change in the fair value measurement methodology to use the OIS curve as an input to value substantially all
collateralized interest rate derivative contracts (see “Overview of 2010 Financial Results—Significant Items—
OIS Fair Value Measurement” herein and Note 4 to the consolidated financial statements). Commodity net
revenues decreased 27% in 2010, primarily due to low levels of client activity and market volatility. Results in
2009 included a gain of approximately $319 million related to the sale of undivided participating interests in a
portion of the Company’s claims against a derivative counterparty that filed for bankruptcy protection (see Note
18 to the consolidated financial statements).
In 2010, fixed income sales and trading revenues reflected net unrealized gains of $603 million related to
changes in the fair value of net derivative contracts attributable to the tightening of counterparties’ credit default
swap spreads compared with unrealized gains of approximately $3,462 million in 2009. The Company also
recorded unrealized gains of $287 million in 2010 related to changes in the fair value of net derivative contracts
attributable to the widening of the Company’s credit default swap spreads compared with unrealized losses of
approximately $1,938 million in 2009 from the tightening of the Company’s credit default swap spreads. The
unrealized gains and losses on credit default swap spreads do not reflect any gains or losses on related hedging
instruments.
Other. In addition to the equity and fixed income sales and trading revenues discussed above, sales and trading
revenues included other trading revenues, consisting primarily of certain activities associated with the
Company’s corporate activities. In connection with its corporate lending activities, the Company provides to
select clients loans or lending commitments (including bridge financing) that are generally classified as either
“event-driven” or “relationship-driven.” “Event-driven” loans and lending commitments refer to activities
associated with a particular event or transaction, such as to support client merger, acquisition or recapitalization
transactions. “Relationship-driven” loans and lending commitments are generally made to expand business
relationships with select clients. For further information about the Company’s corporate lending activities, see
Item 7A, “Quantitative and Qualitative Disclosures about Market Risk—Credit Risk” herein. The fair value
measurement of loans and lending commitments takes into account fee income that is considered an attribute of
the contract. The valuation of these commitments could change in future periods depending on, among other
things, the extent that they are renegotiated or repriced or if the associated acquisition transaction does not occur.
Other sales and trading also includes costs related to negative carry.
In 2010, other sales and trading net revenues reflected a net loss of $441 million compared with net gains of $173
million in 2009. Results in 2010 primarily included net losses of approximately $342 million (mark-to-market
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