Morgan Stanley 2014 Annual Report Download - page 131

securities activities (primarily its institutional trading activities) and corporate lending and related activities. The
Company believes that these activities generate a substantial portion of its principal risks. This discussion and the
estimated amounts of the Company’s risk exposure generated by the Company’s statistical analyses are forward-
looking statements. However, the analyses used to assess such risks are not predictions of future events, and
actual results may vary significantly from such analyses due to events in the markets in which the Company
operates and certain other factors described below.
Market Risk.
Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, implied
volatilities (the price volatility of the underlying instrument imputed from option prices), correlations or other
market factors, such as market liquidity, will result in losses for a position or portfolio. Generally, the Company
incurs market risk as a result of trading, investing and client facilitation activities, principally within the
Company’s Institutional Securities business segment where the substantial majority of the Company’s Value-at-
Risk (“VaR”) for market risk exposures is generated. In addition, the Company incurs trading-related market risk
within its Wealth Management business segment. The Company’s Investment Management business segment
incurs principally Non-trading market risk primarily from capital investments in real estate funds and
investments in private equity vehicles.
Sound market risk management is an integral part of the Company’s culture. The various business units and
trading desks are responsible for ensuring that market risk exposures are well-managed and prudent. The control
groups help ensure that these risks are measured and closely monitored and are made transparent to senior
management. The Company’s Market Risk Department is responsible for ensuring transparency of material
market risks, monitoring compliance with established limits and escalating risk concentrations to appropriate
senior management. To execute these responsibilities, the Company’s Market Risk Department monitors the
Company’s risk against limits on aggregate risk exposures, performs a variety of risk analyses, routinely reports
risk summaries, and maintains the Company’s VaR and scenario analysis systems. These limits are designed to
control price and market liquidity risk. Market risk is also monitored through various measures: by use of
statistics (including VaR, S-VaR and related analytical measures); by measures of position sensitivity; and
through routine stress testing, which measures the impact on the value of existing portfolios of specified changes
in market factors, and scenario analyses conducted by the Company’s Market Risk Department in collaboration
with the business units. The material risks identified by these processes are summarized in reports produced by
the Company’s Market Risk Department that are circulated to and discussed with senior management, the FRC,
the BRC and the Board.
The Chief Risk Officer, among other things, monitors market risk through the Company’s Market Risk
Department, which reports to the Chief Risk Officer and is independent of the business units, and has close
interactions with senior management and the risk management control groups in the business units. The Chief
Risk Officer is a member of the FRC, chaired by the Chief Executive Officer, which includes the most senior
officers of the Company, and regularly reports on market risk matters to this committee, as well as to the BRC
and the Board.
Sales and Trading and Related Activities.
Primary Market Risk Exposures and Market Risk Management. During 2014, the Company had exposures to
a wide range of interest rates, equity prices, foreign exchange rates and commodity prices—and the associated
implied volatilities and spreads—related to the global markets in which it conducts its trading activities.
The Company is exposed to interest rate and credit spread risk as a result of its market-making activities and
other trading in interest rate-sensitive financial instruments (e.g., risk arising from changes in the level or implied
volatility of interest rates, the timing of mortgage prepayments, the shape of the yield curve and credit spreads).
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