Morgan Stanley 2015 Annual Report Download - page 205

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Guarantees.
Obligations Under Guarantee Arrangements at December 31, 2015.
Maximum Potential Payout/Notional
Years to Maturity
Less than 1 1-3 3-5 Over 5 Total
Carrying
Amount
(Asset)/
Liability
Collateral/
Recourse
(dollars in millions)
Credit derivative contracts(1) ......$ 208,694 $ 298,030 $ 149,171 $ 33,624 $ 689,519 $ 785 $ —
Other credit contracts ............ 19 107 2 332 460 (24) —
Non-credit derivative contracts(1) . . . 1,103,014 760,769 321,557 567,755 2,753,095 61,401 —
Standby letters of credit and other
financial guarantees issued(2) .... 822 1,361 1,174 5,870 9,227 (175) 7,633
Market value guarantees .......... 11 166 224 29 430 (3) 6
Liquidity facilities ............... 3,079———3,079 (5) 4,875
Whole loan sales guarantees ....... — — 1 23,451 23,452 9 —
Securitization representations and
warranties ................... — — — 65,000 65,000 98 —
General partner guarantees ........ 25 41 87 467 620 29 —
(1) Carrying amounts of derivative contracts are shown on a gross basis prior to cash collateral or counterparty netting. For further information on derivative
contracts, see Note 4.
(2) These amounts include certain issued standby letters of credit participated to third parties totaling $0.7 billion due to the nature of the Company’s obligations
under these arrangements.
The Company has obligations under certain guarantee arrangements, including contracts and indemnification agreements,
that contingently require a guarantor to make payments to the guaranteed party based on changes in an underlying measure
(such as an interest or foreign exchange rate, security or commodity price, an index, or the occurrence or non-occurrence of a
specified event) related to an asset, liability or equity security of a guaranteed party. Also included as guarantees are
contracts that contingently require the guarantor to make payments to the guaranteed party based on another entity’s failure
to perform under an agreement, as well as indirect guarantees of the indebtedness of others.
Types of Guarantees.
Derivative Contracts. Certain derivative contracts meet the accounting definition of a guarantee, including certain written
options, contingent forward contracts and credit default swaps (see Note 4 regarding credit derivatives in which the Company
has sold credit protection to the counterparty). Although the Company’s derivative arrangements do not specifically identify
whether the derivative counterparty retains the underlying asset, liability or equity security, the Company has disclosed
information regarding all derivative contracts that could meet the accounting definition of a guarantee. The maximum
potential payout for certain derivative contracts, such as written interest rate caps and written foreign currency options,
cannot be estimated, as increases in interest or foreign exchange rates in the future could possibly be unlimited. Therefore, in
order to provide information regarding the maximum potential amount of future payments that the Company could be
required to make under certain derivative contracts, the notional amount of the contracts has been disclosed. In certain
situations, collateral may be held by the Company for those contracts that meet the definition of a guarantee. Generally, the
Company sets collateral requirements by counterparty so that the collateral covers various transactions and products and is
not allocated specifically to individual contracts. Also, the Company may recover amounts related to the underlying asset
delivered to the Company under the derivative contract.
The Company records all derivative contracts at fair value. Aggregate market risk limits have been established, and market
risk measures are routinely monitored against these limits. The Company also manages its exposure to these derivative
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