Morgan Stanley 2014 Annual Report Download - page 36

example, the U.S. and the E.U. have increased their focus on the energy markets which has resulted in increased
regulation of companies participating in the energy markets, including those engaged in power generation and
liquid hydrocarbons trading. In addition, new regulation of OTC derivatives markets in the U.S. and similar
legislation proposed or adopted abroad will impose significant new costs and impose new requirements on our
commodities derivatives activities. We may incur substantial costs or loss of revenue in complying with current
or future laws and regulations and our overall businesses and reputation may be adversely affected by the current
legal environment. In addition, failure to comply with these laws and regulations may result in substantial civil
and criminal fines and penalties.
A failure to address conflicts of interest appropriately could adversely affect our businesses and reputation.
As a global financial services firm that provides products and services to a large and diversified group of clients,
including corporations, governments, financial institutions and individuals, we face potential conflicts of interest
in the normal course of business. For example, potential conflicts can occur when there is a divergence of
interests between us and a client, among clients, or between an employee on the one hand and us or a client on
the other. We have policies, procedures and controls that are designed to address potential conflicts of interest.
However, identifying and mitigating potential conflicts of interest can be complex and challenging, and can
become the focus of media and regulatory scrutiny. Indeed, actions that merely appear to create a conflict can put
our reputation at risk even if the likelihood of an actual conflict has been mitigated. It is possible that potential
conflicts could give rise to litigation or enforcement actions, which may lead to our clients being less willing to
enter into transactions in which a conflict may occur and could adversely affect our businesses and reputation.
Our regulators have the ability to scrutinize our activities for potential conflicts of interest, including through
detailed examinations of specific transactions. Our status as a bank holding company supervised by the Federal
Reserve subjects us to direct Federal Reserve scrutiny with respect to transactions between our U.S. Subsidiary
Banks and their affiliates.
Risk Management.
Our risk management strategies may not be fully effective in mitigating our risk exposures in all market
environments or against all types of risk.
We have devoted significant resources to develop our risk management policies and procedures and expect to
continue to do so in the future. Nonetheless, our risk management strategies, including our hedging strategies,
may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk,
including risks that are unidentified or unanticipated. As our businesses change and grow, and the markets in
which we operate evolve, our risk management strategies may not always adapt with those changes. Some of our
methods of managing risk are based upon our use of observed historical market behavior and management’s
judgment. As a result, these methods may not predict future risk exposures, which could be significantly greater
than the historical measures indicate. For example, market conditions during the financial crisis involved
unprecedented dislocations and highlight the limitations inherent in using historical information to manage risk.
Management of market, credit, liquidity, operational, legal, regulatory and compliance risks requires, among
other things, policies and procedures to record properly and verify a large number of transactions and events, and
these policies and procedures may not be fully effective. Our trading risk management strategies and techniques
also seek to balance our ability to profit from trading positions with our exposure to potential losses. While we
employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the
judgments that accompany their application cannot anticipate every economic and financial outcome or the
timing of such outcomes. For example, to the extent that our trading or investing activities involve less liquid
trading markets or are otherwise subject to restrictions on sale or hedging, we may not be able to reduce our
positions and therefore reduce our risk associated with such positions. We may, therefore, incur losses in the
course of our trading or investing activities. For more information on how we monitor and manage market and
certain other risks, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—
Market Risk” in Part II, Item 7A.
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