Morgan Stanley 2014 Annual Report Download - page 251

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
At December 31, 2013
Maximum Potential Payout/Notional
Fair Value
(Asset)/
Liability(1)(2)
Years to Maturity
Credit Ratings of the Reference Obligation Less than 1 1-3 3-5 Over 5 Total
(dollars in millions)
Single name credit default swaps:
AAA............................. $ 1,546 $ 8,661 $ 12,128 $ 1,282 $ 23,617 $ (145)
AA .............................. 9,443 24,158 25,310 4,317 63,228 (845)
A ............................... 45,663 53,755 44,428 4,666 148,512 (2,704)
BBB ............................. 103,143 122,382 112,950 20,491 358,966 (4,294)
Non-investment grade ............... 60,254 77,393 61,088 6,780 205,515 (1,361)
Total ................................. 220,049 286,349 255,904 37,536 799,838 (9,349)
Index and basket credit default swaps(3):
AAA............................. 14,890 40,522 30,613 2,184 88,209 (1,679)
AA .............................. 3,751 4,127 4,593 6,006 18,477 (275)
A ............................... 2,064 2,263 11,633 36 15,996 (418)
BBB ............................. 5,974 29,709 74,982 3,847 114,512 (2,220)
Non-investment grade ............... 67,108 157,149 122,516 16,985 363,758 (3,053)
Total ................................. 93,787 233,770 244,337 29,058 600,952 (7,645)
Total credit default swaps sold ............ $313,836 $520,119 $500,241 $66,594 $1,400,790 $(16,994)
Other credit contracts(4)(5) ............... $ 75 $ 441 $ 529 $ 816 $ 1,861 $ (457)
Total credit derivatives and other credit
contracts ............................ $313,911 $520,560 $500,770 $67,410 $1,402,651 $(17,451)
(1) Fair value amounts are shown on a gross basis prior to cash collateral or counterparty netting.
(2) Fair value amounts of certain credit default swaps where the Company sold protection have an asset carrying value because credit
spreads of the underlying reference entity or entities tightened during the term of the contracts.
(3) Credit ratings are calculated internally.
(4) Other credit contracts include CLNs, CDOs and credit default swaps that are considered hybrid instruments.
(5) Fair value amounts shown represent the fair value of the hybrid instruments.
Single Name Credit Default Swaps. A credit default swap protects the buyer against the loss of principal on a
bond or loan in case of a default by the issuer. The protection buyer pays a periodic premium (generally
quarterly) over the life of the contract and is protected for the period. The Company in turn will have to perform
under a credit default swap if a credit event as defined under the contract occurs. Typical credit events include
bankruptcy, dissolution or insolvency of the referenced entity, failure to pay and restructuring of the obligations
of the referenced entity. In order to provide an indication of the current payment status or performance risk of the
credit default swaps, the external credit ratings of the underlying reference entity of the credit default swaps are
disclosed.
Index and Basket Credit Default Swaps. Index and basket credit default swaps are credit default swaps that
reference multiple names through underlying baskets or portfolios of single name credit default swaps.
Generally, in the event of a default on one of the underlying names, the Company will have to pay a pro rata
portion of the total notional amount of the credit default index or basket contract. In order to provide an
indication of the current payment status or performance risk of these credit default swaps, the weighted average
external credit ratings of the underlying reference entities comprising the basket or index were calculated and
disclosed.
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