Morgan Stanley 2014 Annual Report Download - page 130

functions assist senior management and the FRC in monitoring and controlling the Company’s risk through a
number of control processes. Each function maintains its own risk governance structure with specified
individuals and committees responsible for aspects of managing risk. Further discussion about the responsibilities
of the risk management functions may be found below under “Market Risk,” “Credit Risk,” and “Operational
Risk.”
Support and Control Groups. The Company’s support and control groups include the Legal Department, the
Compliance Department, the Finance Division, the Operations Division, the Technology and Data Division, and
the Human Resources Department. The Company’s support and control groups coordinate with the business
segment control groups to review the risk monitoring and risk management policies and procedures relating to,
among other things, controls over financial reporting and disclosure; the business segment’s market, credit and
operational risk profile; liquidity risks; sales practices; reputational, legal enforceability, compliance and
regulatory risk; and operational and technological risks. Participation by the senior officers of the Company and
business segment control groups helps ensure that risk policies and procedures, exceptions to risk limits, new
products and business ventures, and transactions with risk elements undergo thorough review.
Culture, Values and Conduct of Employees. All of the Company’s employees have accountability for risk
management. The Company strives to establish a culture of effective risk management through its defined core
values, governance framework, management oversight, training and development programs, policies, procedures,
and defined roles and responsibilities within the Company. The actions and conduct of each employee are
essential to risk management. The Company’s Code of Conduct (the “Code”) has been established to provide a
framework and standards for employee conduct that further reinforces the Company’s commitment to integrity
and high ethical standards. Every new hire and every employee annually must certify to their understanding of
and adherence to the Code. The employee annual review process includes evaluation of adherence to the Code.
The Global Incentive Compensation Discretion Policy sets forth standards that specifically provide that managers
must consider whether the employee effectively managed and supervised the risk control practices of his/her
employee reports during the performance year. The Company has several mutually reinforcing processes to
identify incidents of employee conduct that may have an impact on the employment status, current year
compensation or prior-year compensation. The Company’s clawback and cancellation provisions permit recovery
of deferred incentive compensation where, for example, an employee’s act or omission (including with respect to
direct supervisory responsibilities) causes a restatement of the Company’s consolidated financial results,
constitutes a violation of the Company’s global risk management principles, policies and standards, or causes a
loss of revenue associated with a position on which the employee was paid and the employee operated outside of
internal control policies.
Stress Value-at-Risk.
The Company frequently enhances its market and credit risk management framework to address severe stresses
that are observed in global markets during economic downturns. During 2014, the Company expanded and
improved its risk measurement processes, including stress tests and scenario analysis, and further refined its
market and credit risk limit framework. Stress Value-at-Risk (“S-VaR”), a proprietary methodology that
comprehensively measures the Company’s market and credit risks, was further refined and continues to be an
important metric used in establishing the Company’s risk appetite and its capital allocation framework. S-VaR
simulates many stress scenarios based on more than 25 years of historical data and attempts to capture the
different liquidities of various types of general and specific risks. Additionally, S-VaR captures event and default
risks that are particularly relevant for credit portfolios.
Risk Management Process.
The following is a discussion of the Company’s risk management policies and procedures for its principal risks
(capital and liquidity risk is discussed in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Liquidity and Capital Resources” in Item 7). The discussion focuses on the Company’s
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