Morgan Stanley 2014 Annual Report Download - page 248

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The table below summarizes gains (losses) on derivative instruments not designated as accounting hedges for
2014, 2013 and 2012:
Gains (Losses)
Recognized in Income(1)(2)
Product Type 2014 2013 2012
(dollars in millions)
Interest rate contracts ................................................. $(1,549) $ (608) $ 2,930
Credit contracts ..................................................... (142) 74 (722)
Foreign exchange contracts ............................................ 1,597 4,546 (340)
Equity contracts ..................................................... (3,027) (9,193) (1,794)
Commodity contracts ................................................. 1,816 772 387
Other contracts ...................................................... 123 (90) 1
Total derivative instruments ........................................ $(1,182) $(4,499) $ 462
(1) Gains (losses) on derivative contracts not designated as hedges are primarily included in Trading revenues in the Company’s
consolidated statements of income.
(2) Gains (losses) associated with certain derivative contracts that have physically settled are excluded from the table above. Gains (losses)
on these contracts are reflected with the associated cash instruments, which are also included in Trading revenues in the Company’s
consolidated statements of income.
The Company also has certain embedded derivatives that have been bifurcated from the related structured
borrowings. Such derivatives are classified in Long-term borrowings and had a net fair value of $10 million and
$32 million at December 31, 2014 and December 31, 2013, respectively, and a notional value of $2,069 million
and $2,140 million at December 31, 2014 and December 31, 2013, respectively. The Company recognized losses
of $22 million, losses of $27 million and gains of $12 million related to changes in the fair value of its bifurcated
embedded derivatives for 2014, 2013 and 2012, respectively.
At December 31, 2014 and December 31, 2013, the amount of payables associated with cash collateral received
that was netted against derivative assets was $63.2 billion and $52.0 billion, respectively, and the amount of
receivables in respect of cash collateral paid that was netted against derivative liabilities was $37.3 billion and
$33.6 billion, respectively. Cash collateral receivables and payables of $21 million and $30 million, respectively,
at December 31, 2014 and $10 million and $13 million, respectively, at December 31, 2013, were not offset
against certain contracts that did not meet the definition of a derivative.
Credit Risk-Related Contingencies.
In connection with certain OTC trading agreements, the Company may be required to provide additional
collateral or immediately settle any outstanding liability balances with certain counterparties in the event of a
credit rating downgrade. At December 31, 2014, the aggregate fair value of OTC derivative contracts that contain
credit risk-related contingent features that are in a net liability position totaled $29,543 million, for which the
Company has posted collateral of $24,802 million, in the normal course of business. The additional collateral or
termination payments which may be called in the event of a future credit rating downgrade vary by contract and
can be based on ratings by either or both of Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s
Ratings Services (“S&P”). At December 31, 2014, for such OTC trading agreements, the future potential
collateral amounts and termination payments that could be called or required by counterparties or exchange and
clearing organizations in the event of one-notch or two-notch downgrade scenarios based on the relevant
contractual downgrade triggers were $1,708 million and an incremental $2,758 million, respectively. Of these
amounts, $3,195 million at December 31, 2014 related to bilateral arrangements between the Company and other
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