Morgan Stanley 2014 Annual Report Download - page 30

through particular clearing houses, central agents or exchanges as required by provisions of the Dodd-Frank Act
may increase our concentration of risk with respect to these entities. As a result, concerns about, or a default or
threatened default by, one institution could lead to significant market-wide liquidity and credit problems, losses
or defaults by other institutions. This is sometimes referred to as “systemic risk” and may adversely affect
financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges, with
which we interact with on a daily basis, and therefore could adversely affect us. See also “Systemic Risk
Regime” under “Business—Supervision and Regulation—Financial Holding Company” in Part I, Item 1.
Operational Risk.
Operational risk refers to the risk of loss, or of damage to our reputation, resulting from inadequate or failed
processes, people and systems or from external events (e.g., fraud, theft, legal and compliance risks or damage to
physical assets). We may incur operational risk across the full scope of our business activities, including revenue-
generating activities (e.g., sales and trading) and control groups (e.g., information technology and trade
processing). Legal, regulatory and compliance risk is included in the scope of operational risk and is discussed
below under “Legal, Regulatory and Compliance Risk.” For more information on how we monitor and manage
operational risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—
Operational Risk” in Part II, Item 7A.
We are subject to operational risks, including a failure, breach or other disruption of our operational or
security systems, that could adversely affect our businesses or reputation.
Our businesses are highly dependent on our ability to process, on a daily basis, a large number of transactions
across numerous and diverse markets in many currencies. In some of our businesses, the transactions we process
are complex. In addition, we may introduce new products or services or change processes, resulting in new
operational risk that we may not fully appreciate or identify. The technology used is increasingly complex and
relies on the continued effectiveness of the programming code and integrity of the data to process the trades. We
perform the functions required to operate our different businesses either by ourselves or through agreements with
third parties. We rely on the ability of our employees, our internal systems and systems at technology centers
operated by unaffiliated third parties to process a high volume of transactions.
As a major participant in the global capital markets, we maintain extensive controls to reduce the risk of incorrect
valuation or risk management of our trading positions due to flaws in data, models, systems or processes or due
to fraud. Nevertheless, such risk cannot be completely eliminated.
We also face the risk of operational failure or termination of any of the clearing agents, exchanges, clearing
houses or other financial intermediaries we use to facilitate our securities transactions. In the event of a
breakdown or improper operation of our or a third party’s systems or improper or unauthorized action by third
parties or our employees, we could suffer financial loss, an impairment to our liquidity, a disruption of our
businesses, regulatory sanctions or damage to our reputation. In addition, the interconnectivity of multiple
financial institutions with central agents, exchanges and clearing houses, and the increased importance of these
entities, increases the risk that an operational failure at one institution or entity may cause an industry-wide
operational failure that could materially impact our ability to conduct business.
Despite the business contingency plans we have in place, there can be no assurance that such plans will fully
mitigate all potential business continuity risks to us. Our ability to conduct business may be adversely affected by
a disruption in the infrastructure that supports our business and the communities where we are located, which are
concentrated in the New York metropolitan area, London, Hong Kong and Tokyo as well as Mumbai, Budapest,
Glasgow and Baltimore. This may include a disruption involving physical site access, cyber incidents, terrorist
activities, disease pandemics, catastrophic events, natural disasters, extreme weather events, electrical,
environmental, computer servers, communications or other services we use, our employees or third parties with
whom we conduct business.
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