Morgan Stanley 2010 Annual Report Download - page 91

Company’s business strategies. The principal elements of the Company’s liquidity and funding risk management
framework are the Contingency Funding Plan and the Global Liquidity Reserve that support the target liquidity
profile (see “Contingency Funding Plan” and “Global Liquidity Reserve” herein).
Contingency Funding Plan.
The Contingency Funding Plan (“CFP”) is the Company’s primary liquidity and funding risk management tool.
The CFP outlines the Company’s response to liquidity stress in the markets and incorporates stress testing to
identify potential liquidity risk. Liquidity stress tests model multiple scenarios related to idiosyncratic, systemic
or a combination of both types of events across various time horizons. Based on the results of stress testing, the
CFP sets forth a course of action to effectively manage through a stressed liquidity event.
The Company’s CFP incorporates a number of assumptions, including, but not limited to, the following:
• No government support;
• No access to unsecured debt markets;
• Repayment of all unsecured debt maturing within one year;
• Higher haircuts and significantly lower availability of secured funding;
• Additional collateral that would be required by trading counterparties and certain exchanges and clearing
organizations related to multi-notch credit rating downgrades;
• Discretionary unsecured debt buybacks;
• Drawdowns on unfunded commitments provided to third parties;
• Client cash withdrawals;
• Limited access to the foreign exchange swap markets;
• Return of securities borrowed on an uncollateralized basis; and
• Maturity roll-off of outstanding letters of credit with no further issuance.
The CFP is produced at the Parent and major operating subsidiary levels, as well as at major currency levels, to
capture specific cash requirements and cash availability across the Company. The CFP assumes the subsidiaries
will use their own liquidity first to fund their obligations before drawing liquidity from the Parent company. The
CFP also assumes that the Parent will support its subsidiaries and will not have access to their liquidity reserves
due to regulatory, legal or tax constraints.
At December 31, 2010, the Company maintained sufficient liquidity to meet funding and contingent obligations
as modeled in its liquidity stress tests.
Global Liquidity Reserve.
The Company maintains sufficient liquidity reserves (“Global Liquidity Reserve”) to cover daily funding needs
and meet strategic liquidity targets sized by the CFP. The Global Liquidity Reserve is held within the Parent
company and major operating subsidiaries. It is comprised of cash and cash equivalents, securities that have been
reversed or borrowed by the Company primarily on an overnight basis (predominantly consisting of U.S. and
European government bonds and U.S. agency and agency mortgage-backed securities) and pools of Federal
Reserve-eligible (eligible to be pledged to the Federal Reserve’s Discount Window) securities (see table below).
The assets that make up the Global Liquidity Reserve are all unencumbered and are not pledged as collateral on
either a mandatory or a voluntary basis. They do not include other unencumbered assets that are available to the
Company for additional monetization.
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