Morgan Stanley 2014 Annual Report Download - page 147

to borrow money against the value of qualifying securities for any purpose other than purchasing securities. The
Company establishes approved credit lines against qualifying securities and monitors limits daily and, pursuant
to such guidelines, requires customers to deposit additional collateral, or reduce debt positions, when necessary.
These credit lines are primarily uncommitted loan facilities, as the Company reserves the right to not make any
advances, or may terminate these credit lines at any time. Factors considered in the review of these loans include
but are not limited to the loan amount, the degree of leverage and the quality of diversification, price volatility
and liquidity of the collateral.
Residential real estate loans consist of first and second lien mortgages, including HELOC loans. For these loans,
a loan evaluation process is adopted within a framework of credit underwriting policies and collateral
valuation. The Company’s underwriting policy is designed to ensure that all borrowers pass an assessment of
capacity and willingness to pay, which includes an analysis of applicable industry standard credit scoring models
(e.g., Fair Isaac Corporation (“FICO”) scores), debt ratios and assets of the borrower. Loan-to-value ratios are
determined based on independent third-party property appraisal/valuations, and security lien position is
established through title/ownership reports. The vast majority of mortgage and HELOC loans are held for
investment in the Company’s Wealth Management business segment’s loan portfolio.
In 2014, loans and lending commitments associated with the Company’s Wealth Management business segment
lending activities increased by approximately 45%, mainly due to growth in PLA and residential real estate loans.
At December 31, 2014 and December 31, 2013, approximately 99.9% of the Company’s Wealth Management
business segment lending activities held for investment were current; while approximately 0.1% were on non-
accrual status because the loans were past due for a period of 90 days or more or payment of principal or interest
was in doubt.
The Company’s Wealth Management business segment also provides margin lending to retail clients and had an
outstanding balance of $13.7 billion and $14.0 billion at December 31, 2014 and December 31, 2013,
respectively, which were classified within Customer and other receivables in the Company’s consolidated
statements of financial condition.
In addition, the Company’s Wealth Management business segment has employee loans that are granted primarily
in conjunction with a program established by the Company to recruit and retain certain employees. These loans,
recorded in Customer and other receivables in the Company’s consolidated statements of financial condition, are
full recourse, require periodic payments and have repayment terms ranging from two to 12 years. The Company
establishes an allowance for loan amounts it does not consider recoverable from terminated employees, which is
recorded in Compensation and benefits expense.
Credit Exposure—Derivatives.
The Company incurs credit risk as a dealer in over-the-counter (“OTC”) derivatives. Credit risk with respect to
derivative instruments arises from the failure of a counterparty to perform according to the terms of the contract.
In connection with its OTC derivative activities, the Company generally enters into master netting agreements
and collateral arrangements with counterparties. These agreements provide the Company with the ability to
demand collateral as well as to liquidate collateral and offset receivables and payables covered under the same
master netting agreement in the event of counterparty default. The Company manages its trading positions by
employing a variety of risk mitigation strategies. These strategies include diversification of risk exposures and
hedging. Hedging activities consist of the purchase or sale of positions in related securities and financial
instruments, including a variety of derivative products (e.g., futures, forwards, swaps and options). For credit
exposure information on the Company’s OTC derivative products, see Note 12 to the Company’s consolidated
financial statements in Item 8.
Credit Derivatives. A credit derivative is a contract between a seller (guarantor) and buyer (beneficiary) of
protection against the risk of a credit event occurring on one or more debt obligations issued by a specified
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