Morgan Stanley 2015 Annual Report Download - page 26

insurance recovery may not be adequate to cover liabilities with respect to particular incidents. As a result, our financial
condition, results of operations and cash flows may be adversely affected by these events.
The BHC Act provides a grandfather exemption for “activities related to the trading, sale or investment in commodities and
underlying physical properties,” provided that we were engaged in “any of such activities as of September 30, 1997 in the
United States” and provided that certain other conditions that are within our reasonable control are satisfied. If the Federal
Reserve were to determine that any of our commodities activities did not qualify for the BHC Act grandfather exemption,
then we would likely be required to divest any such activities that did not otherwise conform to the BHC Act. See also
“Scope of Permitted Activities” under “Business—Supervision and Regulation” in Part I, Item 1.
We also expect the other laws and regulations affecting our commodities business to increase in both scope and complexity.
During the past several years, intensified scrutiny of certain energy markets by federal, state and local authorities in the U.S.
and abroad and the public has resulted in increased regulatory and legal enforcement, litigation and remedial proceedings
involving companies conducting the activities in which we are engaged. In addition, new regulation of OTC derivatives
markets in the U.S. and similar legislation proposed or adopted abroad will impose significant new costs and impose new
requirements on our commodities derivatives activities. We may incur substantial costs or loss of revenue in complying with
current or future laws and regulations and our overall businesses and reputation may be adversely affected by the current
legal environment. In addition, failure to comply with these laws and regulations may result in substantial civil and criminal
fines and penalties.
A failure to address conflicts of interest appropriately could adversely affect our businesses and reputation.
As a global financial services firm that provides products and services to a large and diversified group of clients, including
corporations, governments, financial institutions and individuals, we face potential conflicts of interest in the normal course
of business. For example, potential conflicts can occur when there is a divergence of interests between us and a client, among
clients, or between an employee on the one hand and us or a client on the other. We have policies, procedures and controls
that are designed to identify and address potential conflicts of interest. However, identifying and mitigating potential
conflicts of interest can be complex and challenging, and can become the focus of media and regulatory scrutiny. Indeed,
actions that merely appear to create a conflict can put our reputation at risk even if the likelihood of an actual conflict has
been mitigated. It is possible that potential conflicts could give rise to litigation or enforcement actions, which may lead to
our clients being less willing to enter into transactions in which a conflict may occur and could adversely affect our
businesses and reputation.
Our regulators have the ability to scrutinize our activities for potential conflicts of interest, including through detailed
examinations of specific transactions. Our status as a bank holding company supervised by the Federal Reserve subjects us to
direct Federal Reserve scrutiny with respect to transactions between our U.S. Bank Subsidiaries and their affiliates.
Risk Management.
Our risk management strategies, models and processes may not be fully effective in mitigating our risk exposures in all
market environments or against all types of risk.
We have devoted significant resources to develop our risk management policies and procedures and expect to continue to do
so in the future. Nonetheless, our risk management strategies, models and processes, including our use of various risk models
for assessing market exposures and hedging strategies, stress testing and other analysis, may not be fully effective in
mitigating our risk exposure in all market environments or against all types of risk, including risks that are unidentified or
unanticipated. As our businesses change and grow, and the markets in which we operate evolve, our risk management
strategies, models and processes may not always adapt with those changes. Some of our methods of managing risk are based
upon our use of observed historical market behavior and management’s judgment. As a result, these methods may not predict
future risk exposures, which could be significantly greater than the historical measures indicate. In addition, many models we
use are based on assumptions or inputs regarding correlations among prices of various asset classes or other market
indicators and therefore cannot anticipate sudden, unanticipated or unidentified market or economic movements, which could
cause us to incur losses.
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