Morgan Stanley 2014 Annual Report Download - page 284

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As a fundamental operating principle, any restrictions on the underlying assets apply to a respective derivative
product. This includes percentage allocations and credit quality. Derivatives are used solely for the purpose of
enhancing investment in the underlying assets and not to circumvent portfolio restrictions.
Plan assets are measured at fair value using valuation techniques that are consistent with the valuation techniques
applied to the Company’s major categories of assets and liabilities as described in Note 4. Quoted market prices
in active markets are the best evidence of fair value and are used as the basis for the measurement, if available. If
a quoted market price is available, the fair value is the product of the number of trading units multiplied by the
market price. If a quoted market price is not available, the estimate of fair value is based on the valuation
approaches that maximize use of observable inputs and minimize use of unobservable inputs.
The fair value of OTC derivative contracts is derived primarily using pricing models, which may require multiple
market input parameters. Derivative contracts are presented on a gross basis prior to cash collateral or
counterparty netting. Derivatives consist of investments in interest rate swap contracts and are categorized as
Level 2 of the fair value hierarchy.
Commingled trust funds are privately offered funds available to institutional clients that are regulated, supervised
and subject to periodic examination by a U.S. federal or state agency. The trust must be maintained for the
collective investment or reinvestment of assets contributed to it from U.S. tax-qualified employee benefit plans
maintained by more than one employer or controlled group of corporations. The sponsor of the commingled trust
funds values the funds’ NAV based on the fair value of the underlying securities. The underlying securities of the
commingled trust funds consist of mainly long-duration fixed income instruments. Commingled trust funds that
are redeemable at the measurement date or in the near future are categorized in Level 2 of the fair value
hierarchy, otherwise they are categorized in Level 3 of the fair value hierarchy.
Some non-U.S.-based plans hold foreign funds that consist of investments in foreign corporate equity funds,
foreign fixed income funds, foreign target cash flow funds and foreign liquidity funds. Foreign corporate equity
funds and foreign fixed income funds invest in individual securities quoted on a recognized stock exchange or
traded in a regulated market. Certain fixed income funds aim to produce returns consistent with certain Financial
Times Stock Exchange indexes. Foreign target cash flow funds are designed to provide a series of fixed annual
cash flows over five or 10 years achieved by investing in government bonds and derivatives. Foreign liquidity
funds place a high priority on capital preservation, stable value and a high liquidity of assets. Foreign funds are
generally categorized in Level 2 of the fair value hierarchy as they are readily redeemable at their NAV.
Corporate equity funds traded on a recognized exchange are categorized in Level 1 of the fair value hierarchy.
Other investments held by non-U.S. based plans consist of real estate funds, hedge funds and insurance annuity
contracts. These real estate and hedge funds are categorized in Level 2 of the fair value hierarchy to the extent
that they are readily redeemable at their NAV, otherwise they are categorized in Level 3 of the fair value
hierarchy. The insurance annuity contracts are valued based on the premium reserve of the insurer for a guarantee
that the insurer has given to the employee benefit plan that approximates fair value. The insurance annuity
contracts are categorized in Level 3 of the fair value hierarchy.
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