Morgan Stanley 2015 Annual Report Download - page 108

Market Risk.
Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, implied volatilities (the
price volatility of the underlying instrument imputed from option prices), correlations or other market factors, such as market
liquidity, will result in losses for a position or portfolio. Generally, the Company incurs market risk as a result of trading,
investing and client facilitation activities, principally within the Institutional Securities business segment where the
substantial majority of the Company’s Value-at-Risk (“VaR”) for market risk exposures is generated. In addition, the
Company incurs trading-related market risk within the Wealth Management business segment. The Investment Management
business segment incurs principally Non-trading market risk, primarily from capital investments in real estate funds and
investments in private equity vehicles.
Sound market risk management is an integral part of the Company’s culture. The various business units and trading desks are
responsible for ensuring that market risk exposures are well-managed and prudent. The control groups help ensure that these
risks are measured and closely monitored and are made transparent to senior management. The Market Risk Department is
responsible for ensuring transparency of material market risks, monitoring compliance with established limits and escalating
risk concentrations to appropriate senior management. To execute these responsibilities, the Market Risk Department
monitors the Company’s risk against limits on aggregate risk exposures, performs a variety of risk analyses, routinely reports
risk summaries, and maintains its VaR and scenario analysis systems. These limits are designed to control price and market
liquidity risk. Market risk is also monitored through various measures: by use of statistics (including VaR, S-VaR and related
analytical measures); by measures of position sensitivity; and through routine stress testing, which measures the impact on
the value of existing portfolios of specified changes in market factors, and scenario analyses conducted by the Market Risk
Department in collaboration with the business units. The material risks identified by these processes are summarized in
reports produced by the Market Risk Department that are circulated to and discussed with senior management, the FRC, the
BRC and the Board.
The Chief Risk Officer, among other things, monitors market risk through the Market Risk Department, which reports to the
Chief Risk Officer and is independent of the business units, and has close interactions with senior management and the risk
management control groups in the business units. The Chief Risk Officer is a member of the FRC, chaired by the Chief
Executive Officer, which includes the most senior officers of the Company, and regularly reports on market risk matters to
this committee, as well as to the BRC and the Board.
Sales and Trading and Related Activities.
Primary Market Risk Exposures and Market Risk Management. During 2015, the Company had exposures to a wide range
of interest rates, equity prices, foreign exchange rates and commodity prices—and the associated implied volatilities and
spreads—related to the global markets in which it conducts its trading activities.
The Company is exposed to interest rate and credit spread risk as a result of its market-making activities and other trading in
interest rate-sensitive financial instruments (e.g., risk arising from changes in the level or implied volatility of interest rates,
the timing of mortgage prepayments, the shape of the yield curve and credit spreads). The activities from which those
exposures arise and the markets in which the Company is active include, but are not limited to, the following: corporate and
government debt across both developed and emerging markets and asset-backed debt (including mortgage-related securities).
The Company is exposed to equity price and implied volatility risk as a result of making markets in equity securities and
derivatives and maintaining other positions (including positions in non-public entities). Positions in non-public entities may
include, but are not limited to, exposures to private equity, venture capital, private partnerships, real estate funds and other
funds. Such positions are less liquid, have longer investment horizons and are more difficult to hedge than listed equities.
The Company is exposed to foreign exchange rate and implied volatility risk as a result of making markets in foreign
currencies and foreign currency derivatives, from maintaining foreign exchange positions and from holding non-U.S. dollar-
denominated financial instruments.
The Company is exposed to commodity price and implied volatility risk as a result of market-making activities in crude and
refined oil products, natural gas, electricity, and precious and base metals. Commodity exposures are subject to periods of
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