Morgan Stanley 2015 Annual Report Download - page 148

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Asset/Liability Valuation Technique Valuation Hierarchy Classification
Corporate and Other Debt
State and Municipal Securities Fair value is determined using:
- recently executed transactions
- market price quotations
- pricing models that factor in, where applicable, interest
rates, bond or CDS spreads and volatility
• Generally Level 2
Residential Mortgage-Backed
Securities (“RMBS”),
Commercial Mortgage-Backed
Securities (“CMBS”) and other
Asset-Backed Securities
(“ABS”)
RMBS, CMBS and other ABS may be valued based on price
or spread data obtained from observed transactions or
independent external parties such as vendors or brokers.
When position-specific external price data are not observable,
the fair value determination may require benchmarking to
similar instruments, and/or analyzing expected credit losses,
default and recovery rates, and/or applying discounted cash
flow techniques. In evaluating the fair value of each security,
the Company considers security collateral-specific attributes,
including payment priority, credit enhancement levels, type of
collateral, delinquency rates and loss severity. In addition, for
RMBS borrowers, Fair Isaac Corporation (“FICO”) scores and
the level of documentation for the loan are considered.
Market standard models, such as Intex, Trepp or others, may
be deployed to model the specific collateral composition and
cash flow structure of each transaction. Key inputs to these
models are market spreads, forecasted credit losses, and
default and prepayment rates for each asset category.
Valuation levels of RMBS and CMBS indices are used as an
additional data point for benchmarking purposes or to price
outright index positions.
Auction Rate Securities (“ARS”)
The Company primarily holds investments in Student Loan
Auction Rate Securities (“SLARS”) and Municipal Auction
Rate Securities (“MARS”), which are floating rate instruments
for which the rates reset through periodic auctions. SLARS are
ABS backed by pools of student loans. MARS are municipal
bonds often wrapped by municipal bond insurance.
The fair value of ARS is primarily determined using recently
executed transactions and market price quotations obtained
from independent external parties such as vendors and brokers,
where available. The Company uses an internally developed
methodology to discount for the lack of liquidity and non-
performance risk where independent external market data are
not available.
Inputs that impact the valuation of SLARS are:
- independent external market data
- recently executed transactions of comparable ARS
- underlying collateral types
- level of seniority in the capital structure
- amount of leverage in each structure
- credit rating and liquidity considerations
• Generally Level 2
• Level 3 - if external prices or significant
spread inputs are unobservable or if the
comparability assessment involves
significant subjectivity related to property
type differences, cash flows, performance
and other inputs
• Generally Level 2 - as the valuation
technique relies on observable external
data
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