Morgan Stanley 2015 Annual Report Download - page 150

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Asset/Liability Valuation Technique Valuation Hierarchy Classification
The fair value of contingent corporate lending commitments is
determined by using executed transactions on comparable
loans and the anticipated market price based on pricing
indications from syndicate banks and customers. The valuation
of loans and lending commitments also takes into account fee
income that is considered an attribute of the contract.
Mortgage Loans
Fair value is determined using observable prices based on
transactional data or third-party pricing for identical or
comparable instruments, when available.
Where position-specific external prices are not observable, fair
value is estimated based on benchmarking to prices and rates
observed in the primary market for similar loan or borrower
types or based on the present value of expected future cash
flows using its best estimates of the key assumptions,
including forecasted credit losses, prepayment rates, forward
yield curves and discount rates commensurate with the risks
involved or a methodology that utilizes the capital structure
and credit spreads of recent comparable securitization
transactions.
• Level 2 - if value is based on observable
market data for identical or comparable
instruments
• Level 3 - if observable prices are not
available due to the subjectivity involved
in the comparability assessment related to
mortgage loan vintage, geographical
concentration, prepayment speed and
projected loss assumptions
Corporate Equities Exchange-Traded Equity Securities
Fair value is generally determined based on quoted prices from
the exchange. To the extent these securities are actively traded,
valuation adjustments are not applied.
Unlisted Equity Securities
Fair value is determined based on an assessment of each
underlying security, considering rounds of financing and third-
party transactions, discounted cash flow analyses and market-
based information, including comparable company
transactions, trading multiples and changes in market outlook,
among other factors.
• Level 1 - if actively traded
• Level 2 or Level 3 - if not actively traded
• Generally Level 3
Fund Units
Listed fund units are generally marked to the exchange-traded
price.
Listed fund units if not actively traded and unlisted fund units
are generally marked to NAV.
• Level 1 - listed fund units if actively
traded on an exchange
• Certain fund units that are measured at
fair value using the NAV per share are not
classified in the fair value hierarchy.
Derivative and Other Contracts Listed Derivative Contracts
Listed derivatives that are actively traded are valued based on
quoted prices from the exchange.
Listed derivatives that are not actively traded are valued using
the same approaches as those applied to OTC derivatives.
• Level 1 - listed derivatives that are
actively traded
• Level 2 - listed derivatives that are not
actively traded
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