Morgan Stanley 2014 Annual Report Download - page 140

Equity Market Sensitivity.
In the Company’s Wealth Management and Investment Management business segments, certain fee-based
revenue streams are driven by the value of clients’ equity holdings. The overall level of revenues for these
streams also depends on multiple additional factors that include, but are not limited to, the level and duration of
the equity market decline, price volatility, the geographic and industry mix of client assets, the rate and
magnitude of client investments and redemptions, and the impact of such market decline and price volatility on
client behavior. Therefore, overall revenues do not correlate completely with changes in the equity markets.
Credit Risk.
Credit risk refers to the risk of loss arising when a borrower, counterparty or issuer does not meet its financial
obligations to the Company. Credit risk includes the risk that economic, social and political conditions and events
in a foreign country will adversely affect an obligor’s ability and willingness to fulfill their obligations. The
Company primarily incurs credit risk exposure to institutions and individuals mainly through its Institutional
Securities and Wealth Management business segments.
The Company may incur credit risk in its Institutional Securities business segment through a variety of activities,
including, but not limited to, the following:
• entering into swap or other derivative contracts under which counterparties have obligations to make
payments to the Company;
• extending credit to clients through various lending commitments;
• providing short- or long-term funding that is secured by physical or financial collateral whose value may
at times be insufficient to fully cover the loan repayment amount;
• posting margin and/or collateral to clearinghouses, clearing agencies, exchanges, banks, securities firms
and other financial counterparties;
• placing funds on deposit at other financial institutions to support the Company’s clearing and settlement
obligations; and
• investing or trading in securities and loan pools, whereby the value of these assets may fluctuate based on
realized or expected defaults on the underlying obligations or loans.
The Company incurs credit risk in its Wealth Management business segment, primarily through lending to
individuals and entities, including, but not limited to, the following:
• margin loans collateralized by securities;
• securities-based and other forms of secured loans; and
• single-family residential mortgage loans in conforming, non-conforming or home equity lines of credit
(“HELOC”) form, primarily to existing Wealth Management clients.
Monitoring and Control.
In order to help protect the Company from losses, the Company’s Credit Risk Management Department
establishes company-wide practices to evaluate, monitor and control credit risk exposure at the transaction,
obligor and portfolio levels. The Company’s Credit Risk Management Department approves extensions of credit,
evaluates the creditworthiness of the Company’s counterparties and borrowers on a regular basis, and ensures
that credit exposure is actively monitored and managed. The evaluation of counterparties and borrowers includes
an assessment of the probability that an obligor will default on its financial obligations and any losses that may
occur when an obligor defaults. In addition, credit risk exposure is actively managed by credit professionals and
committees within the Company’s Credit Risk Management Department and through various risk committees,
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