Morgan Stanley 2015 Annual Report Download - page 216

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
automobile loans and student loans, and CDOs or CLOs. The Company’s primary risk exposure is to the securities issued by
the SPE owned by the Company, with the risk highest on the most subordinate class of beneficial interests. These securities
generally are included in Trading assets—Corporate and other debt or AFS securities within its Investment securities
portfolio and are measured at fair value (see Note 3). The Company does not provide additional support in these transactions
through contractual facilities, such as liquidity facilities, guarantees or similar derivatives. The Company’s maximum
exposure to loss generally equals the fair value of the securities owned.
The Company’s transactions with VIEs primarily include securitizations, municipal tender option bond trusts, credit
protection purchased through CLNs, other structured financings, collateralized loan and debt obligations, equity-linked notes,
managed real estate partnerships and asset management investment funds. The Company’s continuing involvement in VIEs
that it does not consolidate can include ownership of retained interests in Company-sponsored transactions, interests
purchased in the secondary market (both for Company-sponsored transactions and transactions sponsored by third parties),
derivatives with securitization SPEs (primarily interest rate derivatives in commercial mortgage and residential mortgage
securitizations and credit derivatives in which the Company has purchased protection in synthetic CDOs). Such activities are
further described below.
Securitization Activities.
In a securitization transaction, the Company transfers assets (generally commercial or residential mortgage loans or U.S.
agency securities) to an SPE, sells to investors most of the beneficial interests, such as notes or certificates, issued by the
SPE, and, in many cases, retains other beneficial interests. In many securitization transactions involving commercial
mortgage loans, the Company transfers a portion of the assets to the SPE with unrelated parties transferring the remaining
assets.
The purchase of the transferred assets by the SPE is financed through the sale of these interests. In some of these
transactions, primarily involving residential mortgage loans in the U.S., the Company serves as servicer for some or all of the
transferred loans. In many securitizations, particularly involving residential mortgage loans, the Company also enters into
derivative transactions, primarily interest rate swaps or interest rate caps, with the SPE.
Although not obligated, the Company generally makes a market in the securities issued by SPEs in these transactions. As a
market maker, the Company offers to buy these securities from, and sell these securities to, investors. Securities purchased
through these market-making activities are not considered to be retained interests, although these beneficial interests
generally are included in Trading assets—Corporate and other debt and are measured at fair value.
The Company enters into derivatives, generally interest rate swaps and interest rate caps, with a senior payment priority in
many securitization transactions. The risks associated with these and similar derivatives with SPEs are essentially the same
as similar derivatives with non-SPE counterparties and are managed as part of the Company’s overall exposure. See Note 4
for further information on derivative instruments and hedging activities.
Available for Sale Securities.
In the AFS securities within the Investment securities portfolio, the Company holds securities issued by VIEs not sponsored
by the Company. These securities include government guaranteed securities issued in transactions sponsored by the federal
mortgage agencies and the most senior securities issued by VIEs in which the securities are backed by student loans,
automobile loans, commercial mortgage loans or CLOs (see Note 5).
Municipal Tender Option Bond Trusts.
In a municipal tender option bond transaction, the Company, generally on behalf of a client, transfers a municipal bond to a
trust. The trust issues short-term securities that the Company, as the remarketing agent, sells to investors. The client retains a
residual interest. The short-term securities are supported by a liquidity facility pursuant to which the investors may put their
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