Morgan Stanley 2010 Annual Report Download - page 87

Liquidity and Capital Resources.
The Company’s senior management establishes the liquidity and capital policies of the Company. Through
various risk and control committees, the Company’s senior management reviews business performance relative
to these policies, monitors the availability of alternative sources of financing, and oversees the liquidity and
interest rate and currency sensitivity of the Company’s asset and liability position. The Company’s Treasury
Department, Firm Risk Committee (“FRC”), Asset and Liability Management Committee (“ALCO”) and other
control groups assist in evaluating, monitoring and controlling the impact that the Company’s business activities
have on its consolidated statements of financial condition, liquidity and capital structure. Liquidity and capital
matters are reported regularly to the Board’s Risk Committee.
The Balance Sheet.
The Company actively monitors and evaluates the composition and size of its balance sheet. A substantial
portion of the Company’s total assets consists of liquid marketable securities and short-term receivables arising
principally from sales and trading activities in the Institutional Securities business segment. The liquid nature of
these assets provides the Company with flexibility in managing the size of its balance sheet. The Company’s total
assets increased to $807,698 million at December 31, 2010 from $771,462 million at December 31, 2009. The
increase in total assets was primarily due to higher interest bearing deposits with banks and financial instruments
owned, partially offset by lower securities borrowed.
The Company’s assets and liabilities are primarily related to transactions attributable to sales and trading and
securities financing activities. At December 31, 2010, securities financing assets and liabilities were $358 billion
and $321 billion, respectively. At December 31, 2009, securities financing assets and liabilities were $376 billion
and $316 billion, respectively. Securities financing transactions include repurchase and resale agreements,
securities borrowed and loaned transactions, securities received as collateral and obligation to return securities
received. Securities borrowed or purchased under agreements to resell and securities loaned or sold under
agreements to repurchase are treated as collateralized financings (see Note 2 to the consolidated financial
statements). Securities sold under agreements to repurchase and Securities loaned were $177 billion at
December 31, 2010 and averaged $211 billion during 2010, respectively. The period-end balance was lower than
the annual average, primarily due to the seasonal maturity of client financing activity on December 31, 2010.
Securities purchased under agreements to resell and Securities borrowed were $287 billion at December 31, 2010
and averaged $306 billion during 2010, respectively.
Securities financing assets and liabilities also include matched book transactions with minimal market, credit
and/or liquidity risk. Matched book transactions accommodate customers, as well as obtain securities for the
settlement and financing of inventory positions. The customer receivable portion of the securities financing
transactions includes customer margin loans, collateralized by customer owned securities, and customer cash,
which is segregated according to regulatory requirements. The customer payable portion of the securities
financing transactions primarily includes customer payables to the Company’s prime brokerage clients. The
Company’s risk exposure on these transactions is mitigated by collateral maintenance policies that limit the
Company’s credit exposure to customers. Included within securities financing assets were $17 billion and $14
billion at December 31, 2010 and December 31, 2009, respectively, recorded in accordance with accounting
guidance for the transfer of financial assets that represented equal and offsetting assets and liabilities for fully
collateralized non-cash loan transactions.
The Company uses the Tier 1 leverage ratio, risk-based capital ratios (see “Regulatory Requirements” herein),
Tier 1 common ratio and the balance sheet leverage ratio as indicators of capital adequacy when viewed in the
context of the Company’s overall liquidity and capital policies. These ratios are commonly used measures to
assess capital adequacy and frequently referred to by investors.
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