Morgan Stanley 2014 Annual Report Download - page 222

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Available for Sale Securities. In its AFS securities within its Investment securities portfolio, the Company
holds securities issued by VIEs not sponsored by the Company. These securities include government guaranteed
securities issued in transactions sponsored by the federal mortgage agencies and the most senior securities issued
by VIEs in which the securities are backed by student loans, automobile loans, commercial mortgage loans or
CLOs (see Note 5).
Municipal Tender Option Bond Trusts. In a municipal tender option bond transaction, the Company, generally
on behalf of a client, transfers a municipal bond to a trust. The trust issues short-term securities that the
Company, as the remarketing agent, sells to investors. The client retains a residual interest. The short-term
securities are supported by a liquidity facility pursuant to which the investors may put their short-term interests.
In some programs, the Company provides this liquidity facility; in most programs, a third-party provider will
provide such liquidity facility. The Company may purchase short-term securities in its role either as remarketing
agent or liquidity provider. The client can generally terminate the transaction at any time. The liquidity provider
can generally terminate the transaction upon the occurrence of certain events. When the transaction is terminated,
the municipal bond is generally sold or returned to the client. Any losses suffered by the liquidity provider upon
the sale of the bond are the responsibility of the client. This obligation generally is collateralized. Liquidity
facilities provided to municipal tender option bond trusts are classified as derivatives. The Company consolidates
any municipal tender option bond trusts in which it holds the residual interest.
Credit Protection Purchased through CLNs. In a CLN transaction, the Company transfers assets (generally
high-quality securities or money market investments) to an SPE, enters into a derivative transaction in which the
SPE writes protection on an unrelated reference asset or group of assets, through a credit default swap, a total
return swap or similar instrument, and sells to investors the securities issued by the SPE. In some transactions,
the Company may also enter into interest rate or currency swaps with the SPE. Upon the occurrence of a credit
event related to the reference asset, the SPE will deliver collateral securities as the payment to the Company. The
Company is generally exposed to price changes on the collateral securities in the event of a credit event and
subsequent sale. These transactions are designed to provide investors with exposure to certain credit risk on the
reference asset. In some transactions, the assets and liabilities of the SPE are recognized in the Company’s
consolidated statement of financial condition. In other transactions, the transfer of the collateral securities is
accounted for as a sale of assets, and the SPE is not consolidated. The structure of the transaction determines the
accounting treatment. CLNs are included in Other in the above VIE tables.
The derivatives in CLN transactions consist of total return swaps, credit default swaps or similar contracts in
which the Company has purchased protection on a reference asset or group of assets. Payments by the SPE are
collateralized. 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.
Other Structured Financings. The Company primarily invests in equity interests issued by entities that develop
and own low-income communities (including low-income housing projects) and entities that construct and own
facilities that will generate energy from renewable resources. The equity interests entitle the Company to its
share of tax credits and tax losses generated by these projects. In addition, the Company has issued guarantees to
investors in certain low-income housing funds. The guarantees are designed to return an investor’s contribution
to a fund and the investor’s share of tax losses and tax credits expected to be generated by the fund. The
Company is also involved with entities designed to provide tax-efficient yields to the Company or its clients.
Collateralized Loan and Debt Obligations. A CLO or a CDO is an SPE that purchases a pool of assets,
consisting of corporate loans, corporate bonds, asset-backed securities or synthetic exposures on similar assets
through derivatives, and issues multiple tranches of debt and equity securities to investors. The Company
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