Morgan Stanley 2014 Annual Report Download - page 217

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
the primary beneficiary of a VIE is the party that both (1) has the power to direct the activities of a VIE that most
significantly affect the VIE’s economic performance and (2) has an obligation to absorb losses or the right to
receive benefits that in either case could potentially be significant to the VIE. The Company consolidates entities
of which it is the primary beneficiary.
The Company’s variable interests in VIEs include debt and equity interests, commitments, guarantees, derivative
instruments and certain fees. The Company’s involvement with VIEs arises primarily from:
• Interests purchased in connection with market-making activities, securities held in its AFS securities
portfolio and retained interests held as a result of securitization activities, including re-securitization
transactions.
• Guarantees issued and residual interests retained in connection with municipal bond securitizations.
• Servicing of residential and commercial mortgage loans held by VIEs.
• Loans made to and investments in VIEs that hold debt, equity, real estate or other assets.
• Derivatives entered into with VIEs.
• Structuring of credit-linked notes (“CLN”) or other asset-repackaged notes designed to meet the
investment objectives of clients.
• Other structured transactions designed to provide tax-efficient yields to the Company or its clients.
The Company determines whether it is the primary beneficiary of a VIE upon its initial involvement with the
VIE and reassesses whether it is the primary beneficiary on an ongoing basis as long as it has any continuing
involvement with the VIE. This determination is based upon an analysis of the design of the VIE, including the
VIE’s structure and activities, the power to make significant economic decisions held by the Company and by
other parties, and the variable interests owned by the Company and other parties.
The power to make the most significant economic decisions may take a number of different forms in different
types of VIEs. The Company considers servicing or collateral management decisions as representing the power
to make the most significant economic decisions in transactions such as securitizations or CDOs. As a result, the
Company does not consolidate securitizations or CDOs for which it does not act as the servicer or collateral
manager unless it holds certain other rights to replace the servicer or collateral manager or to require the
liquidation of the entity. If the Company serves as servicer or collateral manager, or has certain other rights
described in the previous sentence, the Company analyzes the interests in the VIE that it holds and consolidates
only those VIEs for which it holds a potentially significant interest of the VIE.
The structure of securitization vehicles and CDOs is driven by several parties, including loan seller(s) in
securitization transactions, the collateral manager in a CDO, one or more rating agencies, a financial guarantor in
some transactions and the underwriter(s) of the transactions, who serve to reflect specific investor demand. In
addition, subordinate investors, such as the “B-piece” buyer (i.e., investors in most subordinated bond classes) in
commercial mortgage-backed securitizations or equity investors in CDOs, can influence whether specific loans
are excluded from a CMBS transaction or investment criteria in a CDO.
For many transactions, such as re-securitization transactions, CLNs and other asset-repackaged notes, there are
no significant economic decisions made on an ongoing basis. In these cases, the Company focuses its analysis on
decisions made prior to the initial closing of the transaction and at the termination of the transaction. Based upon
factors, which include an analysis of the nature of the assets, including whether the assets were issued in a
transaction sponsored by the Company and the extent of the information available to the Company and to
investors, the number, nature and involvement of investors, other rights held by the Company and investors, the
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