Morgan Stanley 2015 Annual Report Download - page 201

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Senior debt securities often are denominated in various non-U.S. dollar currencies and may be structured to provide a return
that is equity-linked, credit-linked, commodity-linked or linked to some other index (e.g., the consumer price index). Senior
debt also may be structured to be callable by the Company or extendible at the option of holders of the senior debt securities.
Debt containing provisions that effectively allow the holders to put or extend the notes aggregated $2,902 million at
December 31, 2015 and $2,175 million at December 31, 2014. In addition, in certain circumstances, certain purchasers may
be entitled to cause the repurchase of the notes. The aggregated value of notes subject to these arrangements was $650
million at December 31, 2015 and $551 million at December 31, 2014. Subordinated debt and junior subordinated debentures
generally are issued to meet the capital requirements of the Company or its regulated subsidiaries and primarily are U.S.
dollar denominated.
During 2015, Morgan Stanley Capital Trusts VI and VII redeemed all of their issued and outstanding 6.60% Capital
Securities, respectively, and the Company concurrently redeemed the related underlying junior subordinated debentures.
Senior Debt—Structured Borrowings.
The Company’s index-linked, equity-linked or credit-linked borrowings include various structured instruments whose
payments and redemption values are linked to the performance of a specific index (e.g., Standard & Poor’s 500), a basket of
stocks, a specific equity security, a credit exposure or basket of credit exposures. To minimize the exposure resulting from
movements in the underlying index, equity, credit or other position, the Company has entered into various swap contracts and
purchased options that effectively convert the borrowing costs into floating rates based upon LIBOR. The Company
generally carries the entire structured borrowings at fair value. The swaps and purchased options used to economically hedge
the embedded features are derivatives and also are carried at fair value. Changes in fair value related to the notes and
economic hedges are reported in Trading revenues. See Note 3 for further information on structured borrowings.
Subordinated Debt and Junior Subordinated Debentures.
Included in the long-term borrowings are subordinated notes of $10,404 million having a contractual weighted average
coupon of 4.45% at December 31, 2015 and $8,339 million having a contractual weighted average coupon of 4.57% at
December 31, 2014. Junior subordinated debentures outstanding by the Company were $2,870 million at December 31, 2015
having a contractual weighted average coupon of 6.22% at December 31, 2015 and $4,868 million at December 31, 2014
having a contractual weighted average coupon of 6.37% at December 31, 2014. Maturities of the subordinated and junior
subordinated notes range from 2022 to 2067, while maturities of certain junior subordinated debentures can be extended to
2052 at the Company’s option.
Asset and Liability Management.
In general, securities inventories that are not financed by secured funding sources and the majority of the Company’s assets
are financed with a combination of deposits, short-term funding, floating rate long-term debt or fixed rate long-term debt
swapped to a floating rate. Fixed assets are generally financed with fixed rate long-term debt. The Company uses interest rate
swaps to more closely match these borrowings to the duration, holding period and interest rate characteristics of the assets
being funded and to manage interest rate risk. These swaps effectively convert certain of the Company’s fixed rate
borrowings into floating rate obligations. In addition, for non-U.S. dollar currency borrowings that are not used to fund assets
in the same currency, the Company has entered into currency swaps that effectively convert the borrowings into U.S. dollar
obligations.
The Company’s use of swaps for asset and liability management affected its effective average borrowing rate.
Effective Average Borrowing Rate.
2015 2014 2013
Weighted average coupon of long-term borrowings at period-end(1) ................... 4.0% 4.2% 4.4%
Effective average borrowing rate for long-term borrowings after swaps at period-end(1) . . . 2.1% 2.3% 2.2%
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