Morgan Stanley 2015 Annual Report Download - page 110

The Company’s VaR model evolves over time in response to changes in the composition of trading portfolios and to
improvements in modeling techniques and systems capabilities. The Company is committed to continuous review and
enhancement of VaR methodologies and assumptions in order to capture evolving risks associated with changes in market
structure and dynamics. As part of the Company’s regular process improvements, additional systematic and name-specific
risk factors may be added to improve the VaR model’s ability to more accurately estimate risks to specific asset classes or
industry sectors.
Since the reported VaR statistics are estimates based on historical data, VaR should not be viewed as predictive of the
Company’s future revenues or financial performance or of its ability to monitor and manage risk. There can be no assurance
that the Company’s actual losses on a particular day will not exceed the VaR amounts indicated below or that such losses
will not occur more than five times in 100 trading days for a 95%/one-day VaR. VaR does not predict the magnitude of
losses that, should they occur, may be significantly greater than the VaR amount.
VaR statistics are not readily comparable across firms because of differences in the firms’ portfolios, modeling assumptions
and methodologies. These differences can result in materially different VaR estimates across firms for similar portfolios. The
impact of such differences varies depending on the factor history assumptions, the frequency with which the factor history is
updated and the confidence level. As a result, VaR statistics are more useful when interpreted as indicators of trends in a
firm’s risk profile rather than as an absolute measure of risk to be compared across firms.
The Company utilizes the same VaR model for risk management purposes, as well as for regulatory capital calculations. The
Company’s VaR model has been approved by the Company’s regulators for use in regulatory capital calculations.
The portfolio of positions used for Management VaR differs from that used for regulatory capital requirements (“Regulatory
VaR”), as Management VaR contains certain positions that are excluded from Regulatory VaR. Examples include
counterparty Credit Valuation Adjustments (“CVA”) and related hedges, as well as loans that are carried at fair value and
associated hedges.
The following table presents the Management VaR for the Trading portfolio, on a period-end, annual average and annual
high and low basis. To further enhance the transparency of the traded market risk, the Credit Portfolio VaR has been
disclosed as a separate category from the Primary Risk Categories. The Credit Portfolio includes counterparty CVA and
related hedges, as well as loans that are carried at fair value and associated hedges.
Trading Risks.
95%/One-Day Management VaR.
95%/One-Day VaR for 2015 95%/One-Day VaR for 2014
Market Risk Category
Period
End Average High Low
Period
End Average High Low
(dollars in millions)
Interest rate and credit spread ................ $ 28 $ 34 $ 42 $ 27 $ 31 $ 31 $ 44 $ 25
Equity price .............................. 17 19 40 14 18 18 26 15
Foreign exchange rate ...................... 6 11 20 6 10 11 17 6
Commodity price .......................... 10 16 21 10 15 17 24 12
Less: Diversification benefit(1)(2) ............ (23) (33) N/A N/A (30) (34) N/A N/A
Primary Risk Categories .................... $ 38 $ 47 $ 57 $ 38 $ 44 $ 43 $ 53 $ 34
Credit Portfolio ........................... 12 13 20 10 15 11 15 9
Less: Diversification benefit(1)(2) ............ (9) (10) N/A N/A (14) (7) N/A N/A
Total Management VaR .................... $ 41 $ 50 $ 61 $ 41 $ 45 $ 47 $ 58 $ 38
N/A—Not Applicable.
(1) Diversification benefit equals the difference between the total Management VaR and the sum of the component VaRs. This benefit arises because the simulated
one-day losses for each of the components occur on different days; similar diversification benefits also are taken into account within each component.
(2) The high and low VaR values for the total Management VaR and each of the component VaRs might have occurred on different days during the year, and
therefore, the diversification benefit is not an applicable measure.
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