Morgan Stanley 1998 Annual Report Download - page 26

quarter. Certain European currencies also experienced periods of
volatility, resulting from expectations of interest rate fluctuations in
anticipation of EMU and the collapse of the Russian ruble. Difficult
political and economic conditions in certain Asian nations, coupled
with the continued recession in Japan, also contributed to periods of
high volatility in the currency markets. Foreign exchange trading rev-
enues increased 196% in fiscal 1997, primarily resulting from the
Company’s increased client market share and from high levels of
volatility in the foreign exchange markets. During fiscal 1997, the U.S.
dollar appreciated against many currencies throughout the year due
to the strong growth of the U.S. economy and continued low levels
of inflation. In addition, many European currencies experienced
periods of increased volatility due to uncertainty regarding the tim-
ing of EMU and the strength of the euro, while the performance of
the yen was affected by sluggish economic growth in Japan. Other
Asian currencies were particularly volatile during the latter half of fis-
cal 1997, primarily due to the depreciation of certain currencies,
including Thailand’s baht. Higher trading volumes and an increasing
customer base also contributed to the increase in revenues.
Commodities trading revenues were comparable to
prior-year levels, as higher revenues from crude oil, refined energy
products and electricity were partially offset by lower revenues from
natural gas trading. Revenues from trading crude oil and refined
energy products were impacted by energy prices that fell during much
of fiscal 1998. Diminished demand for these products, partially due
to the ongoing economic crisis in the Far East, coupled with high
inventory levels, contributed to the decline in prices. Electricity
trading revenues benefited from higher electricity prices, primarily
during the summer months when the demand for electric power
increased. The Company’s continued presence in the electricity
market and the ongoing deregulation of the industry also had a favor-
able impact on electricity trading revenues. Revenues from natural
gas trading decreased as unseasonably warm weather in certain
regions of the U.S. during the winter months reduced the demand
for home heating oil, leading to a decline in prices. Commodities trad-
ing revenues increased 42% and reached record levels in fiscal 1997,
benefiting from higher revenues from trading in energy products,
including the Company’s increased presence in the electricity mar-
kets, precious metals and natural gas. Volatility in these products
was high during most of the year due to fluctuating levels of customer
demand and inventory. In both fiscal 1998 and fiscal 1997, com-
modities trading revenues benefited from the expansion of the cus-
tomer base for commodity-related products, including derivatives,
and the use of such products for risk management purposes.
Principal transaction investment revenues aggregating
$89 million were recognized in fiscal 1998 as compared with $463
million in fiscal 1997. Fiscal 1998 revenues reflected the second
highest level of revenues from the Company’s private equity business,
which primarily resulted from gains on certain positions that were
sold during the year and increases in the carrying value of certain
of the Company’s private equity investments. Such increases included
gains from the initial public offering of Equant and gains from the
sale of positions in Fort James Corporation and Jefferson Smurfit
Corporation. These gains were substantially offset by losses from an
institutional leveraged emerging markets debt portfolio that occurred
during the third quarter. Fiscal 1997 revenues primarily reflect
increases in the carrying value of certain of the Company’s private
equity investments, including an increase related to the Company’s
holdings of Fort James Corporation, as well as realized gains on cer-
tain positions that were sold during the year. Higher revenues from
certain real estate and venture capital investment gains also con-
tributed to fiscal 1997’s revenues.
Commissions
Commission revenues primarily arise from agency transactions in
listed and over-the-counter equity securities and sales of mutual
funds, futures, insurance products and options. Commission revenues
increased 13% in fiscal 1998, reflecting higher revenues from
equity cash products, primarily from markets in the U.S. and Europe,
as well as higher revenues from derivative products. Revenues from
U.S. markets benefited from high levels of market volatility, which
contributed to increased customer trading volumes. Revenues from
European markets also benefited from strong customer trading
volumes, which were positively impacted by the generally favorable
performances of certain European equity markets and from the
Company’s increased sales and research activities in the region.
Commissions on derivative products increased as the high levels of
market volatility contributed to increased customer hedging activi-
ties and trading volumes. Higher commissions from the sale of
mutual funds and the Company’s addition of more than 1,000
financial advisors during fiscal 1998 also contributed to the increase.
Commission revenues increased 16% in fiscal 1997, primarily
reflecting high customer trading volumes, particularly in the third
and fourth fiscal quarters when the New York Stock Exchange expe-
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MORGAN STANLEY DEAN WITTER *1998 ANNUAL REPORT