Morgan Stanley 2015 Annual Report Download - page 107

control processes. Each function maintains its own risk governance structure with specified individuals and committees
responsible for aspects of managing risk. Further discussion about the responsibilities of the risk management functions may
be found below under “Market Risk,” “Credit Risk,” “Operational Risk” and “Liquidity and Funding Risk.”
Support and Control Groups. The Company’s support and control groups include the Legal Department, the Compliance
Department, the Finance Division, the Operations Division, the Technology and Data Division, and the Human Resources
Department. The Company’s support and control groups coordinate with the business segment control groups to review the
risk monitoring and risk management policies and procedures relating to, among other things, controls over financial
reporting and disclosure; the business segment’s market, credit and operational risk profile; liquidity risks; sales practices;
reputational, legal enforceability, compliance and regulatory risk; and technological risks. Participation by the senior officers
of the Company and business segment control groups helps ensure that risk policies and procedures, exceptions to risk limits,
new products and business ventures, and transactions with risk elements undergo thorough review.
Culture, Values and Conduct of Employees. Employees of the Company are accountable for conducting themselves in
accordance with the Company’s core values: Putting Clients First, Doing the Right Thing, Leading with Exceptional Ideas
and Giving Back. The Company is committed to establishing a strong culture anchored in these core values, its governance
framework, management oversight, effective risk management and controls, training and development programs, policies,
procedures, and defined roles and responsibilities, including the role of the Culture, Values and Conduct Committee. The
Company’s Code of Conduct (the “Code”) establishes standards for employee conduct that further reinforce the Company’s
commitment to integrity and ethical conduct. Every new hire and every employee annually must certify to their
understanding of and adherence to the Code. The employee annual review process includes evaluation of adherence to the
Code and the Company’s core values. The Global Incentive Compensation Discretion Policy sets forth standards that
specifically provide that managers must consider whether their employees effectively managed and/or supervised risk control
practices during the performance year. The Company also has several mutually reinforcing processes to identify employee
conduct that may have an impact on employment status, current-year compensation and/or prior-year compensation. The
Company’s clawback and cancellation provisions permit recovery of deferred incentive compensation where an employee’s
act or omission (including with respect to direct supervisory responsibilities) causes a restatement of the Company’s
consolidated financial results, constitutes a violation of the Company’s global risk management principles, policies and
standards or causes a loss of revenues associated with a position on which the employee was paid and the employee operated
outside of internal control policies.
Stress Value-at-Risk.
The Company frequently enhances its market and credit risk management framework to address severe stresses that are
observed in global markets during economic downturns. During 2015, the Company expanded and improved its risk
measurement processes, including stress tests and scenario analysis, and further refined its market and credit risk limit
framework. Stress Value-at-Risk (“S-VaR”), a proprietary methodology that comprehensively measures the Company’s
market and credit risks, was further refined and continues to be an important metric used in establishing its risk appetite and
capital allocation framework. S-VaR simulates many stress scenarios based on more than 25 years of historical data and
attempts to capture the different liquidities of various types of general and specific risks. Additionally, S-VaR captures event
and default risks that are particularly relevant for credit portfolios.
Risk Management Process.
The following is a discussion of the Company’s risk management policies and procedures for its principal risks (capital and
liquidity risk is discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Liquidity and Capital Resources” in Item 7). The discussion focuses on the Company’s securities activities (primarily its
institutional trading activities) and corporate lending and related activities. The Company believes that these activities
generate a substantial portion of its principal risks. This discussion and the estimated amounts of the Company’s risk
exposure generated by its statistical analyses are forward-looking statements. However, the analyses used to assess such risks
are not predictions of future events, and actual results may vary significantly from such analyses due to events in the markets
in which the Company operates and certain other factors described below.
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