Morgan Stanley 2015 Annual Report Download - page 217

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
short-term interests. In some programs, the Company provides this liquidity facility; in most programs, a third-party provider
will provide such liquidity facility. The Company may purchase short-term securities in its role either as remarketing agent
or as liquidity provider. The client can generally terminate the transaction at any time. The liquidity provider can generally
terminate the transaction upon the occurrence of certain events. When the transaction is terminated, the municipal bond is
generally sold or returned to the client. Any losses suffered by the liquidity provider upon the sale of the bond are the
responsibility of the client. This obligation generally is collateralized. Liquidity facilities provided to municipal tender option
bond trusts are classified as derivatives. The Company consolidates any municipal tender option bond trusts in which it holds
the residual interest.
Credit Protection Purchased through CLNs.
In a CLN transaction, the Company transfers assets (generally high-quality securities or money market investments) to an
SPE, enters into a derivative transaction in which the SPE writes protection on an unrelated reference asset or group of
assets, through a credit default swap, a total return swap or similar instrument, and sells to investors the securities issued by
the SPE. In some transactions, the Company may also enter into interest rate or currency swaps with the SPE. Upon the
occurrence of a credit event related to the reference asset, the SPE will deliver collateral securities as payment to the
Company. The Company is generally exposed to price changes on the collateral securities in the event of a credit event and
subsequent sale. These transactions are designed to provide investors with exposure to certain credit risk on the reference
asset. In some transactions, the assets and liabilities of the SPE are recognized in the Company’s consolidated statements of
financial condition. In other transactions, the transfer of the collateral securities is accounted for as a sale of assets, and the
SPE is not consolidated. The structure of the transaction determines the accounting treatment.
The derivatives in CLN transactions consist of total return swaps, credit default swaps or similar contracts in which the
Company has purchased protection on a reference asset or group of assets. Payments by the SPE are collateralized. The risks
associated with these and similar derivatives with SPEs are essentially the same as similar derivatives with non-SPE
counterparties and are managed as part of the Company’s overall exposure.
Other Structured Financings.
The Company primarily invests in equity interests issued by entities that develop and own low-income communities
(including low-income housing projects) and entities that construct and own facilities that will generate energy from
renewable resources. The equity interests entitle the Company to its share of tax credits and tax losses generated by these
projects. In addition, the Company has issued guarantees to investors in certain low-income housing funds. The guarantees
are designed to return an investor’s contribution to a fund and the investor’s share of tax losses and tax credits expected to be
generated by the fund. The Company is also involved with entities designed to provide tax-efficient yields to the Company or
its clients.
Collateralized Loan and Debt Obligations.
A CLO or a CDO is an SPE that purchases a pool of assets, consisting of corporate loans, corporate bonds, asset-backed
securities or synthetic exposures on similar assets through derivatives, and issues multiple tranches of debt and equity
securities to investors. The Company underwrites the securities issued in CLO transactions on behalf of unaffiliated sponsors
and provides advisory services to these unaffiliated sponsors. The Company sells corporate loans to many of these SPEs, in
some cases representing a significant portion of the total assets purchased. If necessary, the Company may retain unsold
securities issued in these transactions. Although not obligated, the Company generally makes a market in the securities issued
by SPEs in these transactions. These beneficial interests are included in Trading assets and are measured at fair value.
Equity-Linked Notes.
In an equity-linked note (“ELN”) transaction, the Company typically transfers to an SPE either (1) a note issued by the
Company, the payments on which are linked to the performance of a specific equity security, equity index, or other index or
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