Morgan Stanley 2014 Annual Report Download - page 105

Net Stable Funding Ratio. The objective of the NSFR is to reduce funding risk over a one-year horizon by
requiring banking organizations to fund their activities with sufficiently stable sources of funding in order to
mitigate the risk of future funding stress. In October 2014, the Basel Committee finalized revisions to the original
December 2010 version of the NSFR. The U.S. banking regulators are expected to issue a proposal to implement
the NSFR in the U.S. The Company continues to evaluate the NSFR and its potential impact on the Company’s
current liquidity and funding requirements.
Funding Management.
The Company manages its funding in a manner that reduces the risk of disruption to the Company’s operations.
The Company pursues a strategy of diversification of secured and unsecured funding sources (by product, by
investor and by region) and attempts to ensure that the tenor of the Company’s liabilities equals or exceeds the
expected holding period of the assets being financed.
The Company funds its balance sheet on a global basis through diverse sources. These sources may include the
Company’s equity capital, long-term debt, repurchase agreements, securities lending, deposits, commercial
paper, letters of credit and lines of credit. The Company has active financing programs for both standard and
structured products targeting global investors and currencies.
Secured Financing.
A substantial portion of the Company’s total assets consists of liquid marketable securities and arises principally
from its Institutional Securities business segment’s sales and trading activities. The liquid nature of these assets
provides the Company with flexibility in funding these assets with secured financing. The Company’s goal is to
achieve an optimal mix of durable secured and unsecured financing. Secured financing investors principally
focus on the quality of the eligible collateral posted. Accordingly, the Company actively manages its secured
financing book based on the quality of the assets being funded.
The Company utilizes shorter-term secured financing only for highly liquid assets and has established longer
tenor limits for less liquid asset classes, for which funding may be at risk in the event of a market disruption. The
Company defines highly liquid assets as government-issued or government-guaranteed securities with a high
degree of fundability and less liquid assets as those that do not meet this criteria. At December 31, 2014 and
December 31, 2013, the weighted average maturity of the Company’s secured financing against less liquid assets
was greater than 120 days. To further minimize the refinancing risk of secured financing for less liquid assets, the
Company has established concentration limits to diversify its investor base and reduce the amount of monthly
maturities for secured financing of less liquid assets. Furthermore, the Company obtains term secured funding
liabilities in excess of less liquid inventory, or “spare capacity”, as an additional risk mitigant to replace maturing
trades in the event that secured financing markets or the Company’s ability to access them become limited.
Finally, in addition to the above risk management framework, the Company holds a portion of its Global
Liquidity Reserve against the potential disruption to its secured financing capabilities.
The Company also maintains a pool of liquid and easily fundable securities, which provide a valuable future
source of liquidity. With the implementation of U.S. Basel III liquidity standards, the Company has also
incorporated high quality liquid asset classifications that are consistent with the U.S. LCR definitions into its
encumbrance reporting, which further substantiates the demonstrated liquidity characteristics of the
unencumbered asset pool and the Company’s ability to readily identify new funding sources for such assets.
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