Morgan Stanley 2014 Annual Report Download - page 221

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
in the Company’s AFS securities within its Investment securities portfolio (see Note 5). In 2014, securities issued
by securitization SPEs consisted of $1.0 billion of securities backed primarily by residential mortgage loans,
$8.5 billion of securities backed by U.S. agency collateralized mortgage obligations, $1.2 billion of securities
backed by commercial mortgage loans, $0.5 billion of securities backed by CDOs or CLOs and $2.7 billion
backed by other consumer loans, such as credit card receivables, automobile loans and student loans. In 2013,
securities issued by securitization SPEs consisted of $1.1 billion of securities backed primarily by residential
mortgage loans, $8.4 billion of securities backed by U.S. agency collateralized mortgage obligations, $1.3 billion
of securities backed by commercial mortgage loans, $0.7 billion of securities backed by CDOs or CLOs and $1.0
billion backed by other consumer loans, such as credit card receivables, automobile loans and student loans. The
Company’s primary risk exposure is to the securities issued by the SPE owned by the Company, with the risk
highest on the most subordinate class of beneficial interests. These securities generally are included in Trading
assets—Corporate and other debt or AFS securities within the Company’s Investment securities portfolio and are
measured at fair value (see Note 4). The Company does not provide additional support in these transactions
through contractual facilities, such as liquidity facilities, guarantees or similar derivatives. The Company’s
maximum exposure to loss generally equals the fair value of the securities owned.
The Company’s transactions with VIEs primarily include securitizations, municipal tender option bond trusts,
credit protection purchased through CLNs, other structured financings, collateralized loan and debt obligations,
equity-linked notes, managed real estate partnerships and asset management investment funds. The Company’s
continuing involvement in VIEs that it does not consolidate can include ownership of retained interests in
Company-sponsored transactions, interests purchased in the secondary market (both for Company-sponsored
transactions and transactions sponsored by third parties), derivatives with securitization SPEs (primarily interest
rate derivatives in commercial mortgage and residential mortgage securitizations and credit derivatives in which
the Company has purchased protection in synthetic CDOs). Such activities are further described below.
Securitization Activities. In a securitization transaction, the Company transfers assets (generally commercial or
residential mortgage loans or U.S. agency securities) to an SPE, sells to investors most of the beneficial interests,
such as notes or certificates, issued by the SPE, and in many cases, retains other beneficial interests. In many
securitization transactions involving commercial mortgage loans, the Company transfers a portion of the assets to
the SPE with unrelated parties transferring the remaining assets.
The purchase of the transferred assets by the SPE is financed through the sale of these interests. In some of these
transactions, primarily involving residential mortgage loans in the U.S., the Company serves as servicer for some
or all of the transferred loans. In many securitizations, particularly involving residential mortgage loans, the
Company also enters into derivative transactions, primarily interest rate swaps or interest rate caps, with the SPE.
Although not obligated, the Company generally makes a market in the securities issued by SPEs in these
transactions. As a market maker, the Company offers to buy these securities from, and sell these securities to,
investors. Securities purchased through these market-making activities are not considered to be retained interests,
although these beneficial interests generally are included in Trading assets—Corporate and other debt and are
measured at fair value.
The Company enters into derivatives, generally interest rate swaps and interest rate caps with a senior payment
priority in many securitization transactions. The risks associated with these and similar derivatives with SPEs are
essentially the same as similar derivatives with non-SPE counterparties and are managed as part of the
Company’s overall exposure. See Note 12 for further information on derivative instruments and hedging
activities.
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