Morgan Stanley 2015 Annual Report Download - page 160

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Long-term borrowings.
During 2013, the Company reclassified approximately $1.3 billion of certain long-term borrowings, primarily structured
notes, from Level 3 to Level 2. The Company reclassified the structured notes as the unobservable embedded derivative
component became insignificant to the overall valuation.
Significant Unobservable Inputs Used in Recurring Level 3 Fair Value Measurements.
The disclosures below provide information on the valuation techniques, significant unobservable inputs, and their ranges and
averages for each major category of assets and liabilities measured at fair value on a recurring basis with a significant Level
3 balance. The level of aggregation and breadth of products cause the range of inputs to be wide and not evenly distributed
across the inventory. Further, the range of unobservable inputs may differ across firms in the financial services industry
because of diversity in the types of products included in each firm’s inventory. The following disclosures also include
qualitative information on the sensitivity of the fair value measurements to changes in the significant unobservable inputs.
Recurring Level 3 Fair Value Measurements Valuation Techniques and Sensitivity of Unobservable Inputs.
Balance at
December 31, 2015
Valuation Technique(s) /
Significant Unobservable Input(s) /
Sensitivity of the Fair Value to Changes
in the Unobservable Inputs Range(1) Averages(2)
(dollars in millions)
Assets at Fair Value
Trading assets:
Corporate and other debt:
Residential mortgage-backed securities $ 341 Comparable pricing:
Comparable bond price / (A) 0 to 75 points 32 points
Commercial mortgage-backed securities 72 Comparable pricing:
Comparable bond price / (A) 0 to 9 points 2 points
Corporate bonds 267 Comparable pricing(3):
Comparable bond price / (A) 3 to 119 points 90 points
Comparable pricing:
EBITDA multiple / (A) 7 to 9 times 8 times
Structured bond model:
Discount rate / (C) 15% 15%
Collateralized debt and loan obligations 430 Comparable pricing(3):
Comparable bond price / (A) 47 to 103 points 67 points
Correlation model:
Credit correlation / (B) 39% to 60% 49%
Loans and lending commitments 5,936 Corporate loan model:
Credit spread / (C) 250 to 866 bps 531 bps
Margin loan model(3):
Credit spread / (C)(D) 62 to 499 bps 145 bps
Volatility skew / (C)(D) 14% to 70% 33%
Discount rate / (C)(D) 1% to 4% 2%
Option model:
Volatility skew / (C) -1% -1%
Comparable pricing:
Comparable loan price / (A) 35 to 100 points 88 points
Discounted cash flow:
Implied weighted average cost of capital / (C)(D) 6% to 8% 7%
Capitalization rate / (C)(D) 4% to 10% 4%
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