Morgan Stanley 2015 Annual Report Download - page 52

in energy prices and the slowdown of China’s economic growth. Global real gross domestic product growth decelerated in
2015 from 2014. Growth in emerging market economies slowed for a fourth straight year, while growth in developed market
economies was steady but sluggish. Notable trends during the year included falling oil and other commodity prices, an
appreciating U.S. dollar weighing on global trade flows and increasing policy challenges in a number of major emerging
market economies, most notably China. The U.S. Board of Governors of the Federal Reserve System (the “Federal Reserve”)
announced a rate increase in December 2015 based on cumulative labor market progress and rising confidence in achieving
its inflation target. However, with Europe and Japan still struggling and China decelerating, the European Central Bank, the
Bank of Japan and the People’s Bank of China acted to continue their targeted monetary policy easing measures. Subsequent
to December 31, 2015, the Bank of Japan announced a program of Quantitative and Qualitative Monetary Easing with a
Negative Interest Rate that introduced a three tier policy rate system for bank reserves with a low rate of (0.1)%.
Business Segments.
Substantially all of the Company’s operating revenues and operating expenses are directly attributable to its business
segments. Certain revenues and expenses have been allocated to each business segment, generally in proportion to its
respective net revenues, non-interest expenses or other relevant measures.
As a result of treating certain intersegment transactions as transactions with external parties, the Company includes an
Intersegment Eliminations category to reconcile the business segment results to its consolidated results.
Net Revenues.
Trading. Trading revenues include revenues from customers’ purchases and sales of financial instruments in which the
Company acts as a market maker as well as gains and losses on the Company’s related positions and other positions carried
at fair value. Trading revenues include the realized gains and losses from sales of cash instruments and derivative
settlements, unrealized gains and losses from ongoing fair value changes of the Company’s positions related to market-
making activities, and gains and losses related to investments associated with certain employee deferred compensation plans
and other positions carried at fair value. In many markets, the realized and unrealized gains and losses from the purchase and
sale transactions will include any spreads between bids and offers. Certain fees received on loans carried at fair value and
dividends from equity securities are also recorded in this line item since they relate to positions carried at fair value.
Commissions received for purchasing and selling listed equity securities and options are recorded separately in Commissions
and fees. Other cash and derivative instruments typically do not have fees associated with them, and fees for related services
are recorded in Commissions and fees.
The Company often invests in investments or other financial instruments to economically hedge its obligations under its
deferred compensation plans. Changes in the value of such investments are recorded in Trading revenues and Investments
revenues. Expenses associated with the related deferred compensation plans are recorded in Compensation and benefits.
Compensation expense is calculated based on the notional value of the award granted, adjusted for upward and downward
changes in fair value of the referenced investment, and is recognized ratably over the prescribed vesting period for the award.
Generally, changes in compensation expense resulting from changes in fair value of the referenced investment will be offset
by changes in fair value of the investments made by the Company. However, there may be a timing difference between the
immediate revenue recognition of gains and losses on the Company’s investments and the deferred recognition of the related
compensation expense over the vesting period.
As a market maker, the Company stands ready to buy, sell or otherwise transact with customers under a variety of market
conditions and to provide firm or indicative prices in response to customer requests. The Company’s liquidity obligations can
be explicit and obligatory in some cases, and in others, customers expect the Company to be willing to transact with them. In
order to most effectively fulfill its market-making function, the Company engages in activities across all of its trading
businesses that include, but are not limited to: (i) taking positions in anticipation of, and in response to, customer demand to
buy or sell and—depending on the liquidity of the relevant market and the size of the position—to hold those positions for a
period of time; (ii) managing and assuming basis risk (risk associated with imperfect hedging) between customized customer
risks and the standardized products available in the market to hedge those risks; (iii) building, maintaining and rebalancing
inventory, through trades with other market participants, and engaging in accumulation activities to accommodate anticipated
customer demand; (iv) trading in the market to remain current on pricing and trends; and (v) engaging in other activities to
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