Morgan Stanley 2015 Annual Report Download - page 149

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Asset/Liability Valuation Technique Valuation Hierarchy Classification
Inputs that impact the valuation of MARS are:
- recently executed transactions
- the maximum rate
- quality of underlying issuers/insurers
- evidence of issuer calls/prepayment
SLARS and MARS are presented within ABS and State and
municipal securities, respectively, in the fair value hierarchy table.
Corporate Bonds Fair value is determined using:
- recently executed transactions
- market price quotations (where observable)
- bond spreads
- CDS spreads
- at the money volatility and/or volatility skew obtained
from independent external parties such as vendors and
brokers adjusted for any basis difference between cash
and derivative instruments
The spread data used are for the same maturity as the bond. If
the spread data do not reference the issuer, then data that
reference a comparable issuer are used. When position-specific
external price data are not observable, fair value is determined
based on either benchmarking to similar instruments or cash
flow models with yield curves, bond or single name CDS
spreads and recovery rates as significant inputs.
• Generally Level 2
• Level 3 - if prices, spreads or any of the
other aforementioned key inputs are
unobservable
Collateralized Debt Obligations
(“CDO”) and Collateralized
Loan Obligations (“CLO”)
The Company holds cash CDOs/CLOs that typically reference
a tranche of an underlying synthetic portfolio of single name
CDS spreads collateralized by corporate bonds (“credit-linked
notes”) or cash portfolio of asset-backed securities/loans
(“asset-backed CDOs/CLOs”).
Credit correlation, a primary input used to determine the fair
value of credit-linked notes, is usually unobservable and
derived using a benchmarking technique. The other credit-
linked note model inputs such as credit spreads, including
collateral spreads, and interest rates are typically observable.
Asset-backed CDOs/CLOs are valued based on an evaluation
of the market and model input parameters sourced from similar
positions as indicated by primary and secondary market
activity. Each asset-backed CDO/CLO position is evaluated
independently taking into consideration available comparable
market levels, underlying collateral performance and pricing,
deal structures and liquidity.
• Level 2 - when either the credit
correlation input is insignificant or
comparable market transactions are
observable
• Level 3 - when either the credit
correlation input is deemed to be
significant or comparable market
transactions are unobservable
Loans and Lending
Commitments Corporate Loans and Lending Commitments
Fair value of corporate loans is determined using:
- recently executed transactions
- market price quotations (where observable)
- implied yields from comparable debt
- market observable CDS spread levels obtained from
independent external parties such as vendors and brokers
adjusted for any basis difference between cash and
derivative instruments, along with proprietary valuation
models and default recovery analysis where such
transactions and quotations are unobservable
• Level 2 - if value based on observable
market data for identical or comparable
instruments
• Level 3 - in instances where prices or
significant spread inputs are unobservable
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