Morgan Stanley 2015 Annual Report Download - page 152

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Asset/Liability Valuation Technique Valuation Hierarchy Classification
the model inputs generally include interest rate yield curves,
commodity underlier price curves, implied volatility of the
underlying commodities and, in some cases, the implied
correlation between these inputs. The fair value of these
products is determined using executed trades and broker and
consensus data to provide values for the aforementioned
inputs. Where these inputs are unobservable, relationships to
observable commodities and data points, based on historic and/
or implied observations, are employed as a technique to
estimate the model input values.
For further information on the valuation techniques for OTC
derivative products, see Note 2.
For further information on derivative instruments and hedging
activities, see Note 4.
Investments Investments include direct investments in equity securities as
well as investments in private equity funds, real estate funds
and hedge funds, which include investments made in
connection with certain employee deferred compensation
plans.
Direct investments are presented in the fair value hierarchy
table as Principal investments and Other. Initially, the
transaction price is generally considered by the Company as
the exit price and is its best estimate of fair value.
After initial recognition, in determining the fair value of non-
exchange-traded internally and externally managed funds, the
Company generally considers the NAV of the fund provided
by the fund manager to be the best estimate of fair value. For
non-exchange-traded investments either held directly or held
within internally managed funds, fair value after initial
recognition is based on an assessment of each underlying
investment, 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. Exchange-traded direct equity investments are
generally valued based on quoted prices from the exchange.
• Level 1 - exchange-traded direct equity
investments in an active market
• Level 2 - non-exchange-traded direct
equity investments and investments in
private equity and real estate funds if
valued based on rounds of financing or
third-party transactions; exchange-traded
direct equity investments if not actively
traded
• Level 3 - non-exchange-traded direct
equity investments and investments in
private equity and real estate funds where
rounds of financing or third-party
transactions are not available
Certain investments that are measured at
fair value using the NAV per share are not
classified in the fair value hierarchy. For
additional disclosure about such
investments, see “Fair Value of
Investments Measured at Net Asset Value”
herein.
Physical Commodities The Company trades various physical commodities, including
crude oil and refined products, natural gas, base and precious
metals, and agricultural products.
Fair value is determined using observable inputs, including
broker quotations and published indices.
• Generally Level 2
• Level 3 - in instances where significant
inputs are unobservable
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