Morgan Stanley 2015 Annual Report Download - page 153

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Asset/Liability Valuation Technique Valuation Hierarchy Classification
Investment Securities
AFS Securities AFS securities are composed of U.S. government and agency
securities (e.g., U.S. Treasury securities, agency-issued debt,
agency mortgage pass-through securities and collateralized
mortgage obligations), CMBS, Federal Family Education Loan
Program (“FFELP”) student loan ABS, auto loan ABS,
corporate bonds, CLOs and actively traded equity securities.
For further information on the determination of fair value,
refer to the corresponding asset/liability valuation technique
described herein.
For further information on AFS securities, see Note 5.
• Generally Level 1 - actively traded U.S.
Treasury securities, non-callable agency-
issued debt securities and equity securities
• Generally Level 2 - callable agency-
issued debt securities, agency mortgage
pass-through securities, collateralized
mortgage obligations, CMBS, FFELP
student loan ABS, auto loan ABS,
corporate bonds and CLOs
Deposits Certificates of Deposit
• Generally Level 2
The Company issues Federal Deposit Insurance Corporation
(“FDIC”) insured certificates of deposit that pay either fixed
coupons or that have repayment terms linked to the
performance of debt or equity securities, indices or currencies.
The fair value of these certificates of deposit is determined
using valuation models that incorporate observable inputs
referencing identical or comparable securities, including:
- prices to which the deposits are linked
- interest rate yield curves
- option volatility and currency rates
- equity prices
- the impact of the Company’s own credit spreads, adjusted
for the impact of the FDIC insurance, which is based on
vanilla deposit issuance rates
Short-Term Borrowings/Long-Term
Borrowings Structured Notes
• Generally Level 2
The Company issues structured notes that have coupon or
repayment terms linked to the performance of debt or equity
securities, indices, currencies or commodities.
Fair value of structured notes is determined using valuation
models for the derivative and debt portions of the notes. These
models incorporate observable inputs referencing identical or
comparable securities, including:
- prices to which the notes are linked
- interest rate yield curves
- option volatility and currency
- commodity or equity prices
Independent, external and traded prices for the notes are
considered as well. The impact of the Company’s own credit
spreads is also included based on observed secondary bond
market spreads.
Securities Purchased under Agreements
to Resell and Securities Sold under
Agreements to Repurchase
Fair value is computed using a standard cash flow discounting
methodology.
The inputs to the valuation include contractual cash flows and
collateral funding spreads, which are estimated using various
benchmarks, interest rate yield curves and option volatilities.
• Generally Level 2
• Level 3 - in instances where the
unobservable inputs are deemed significant
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