MORGAN STANLEY
Rocky Shun Ho
Zhengyu Lu
Nantaka Vongpiyabovorn
Jingxin Wu
Zhe Wu
Morgan Stanley
• Formed on September 16, 1935
• Formed by J.P Morgan & Co. employees
• Henry S. Morgan
• Harold Stanley
• 1942: Join the New York Stock Exchange
• US $779 billion as assets
Overview
Risk Management
Hedging
Compensation
Expansion
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Risk Management
Hedging
Compensation
Achievement
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Risk Management
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Compensation
Community
Overview
Risk Management
Hedging
Compensation
Global Office
Operates in 36 countries, over 600 offices and a workforce of over 60,000
Operates in 36 countries around the world, with over 600 offices and a
workforce of over 60,000
Headquartered in New
York City, US
Overview
Risk Management
Hedging
Compensation
Balance Sheet
Overview
Risk Management
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Compensation
Balance Sheet
Overview
Risk Management
Hedging
Compensation
Asset Level Evaluation
Decompose Assets to Different Levels
Income Statement
Overview
Risk Management
Hedging
Compensation
Income Statement
Cash Flow Statement
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Compensation
Cash Flow Statement
Overview
Risk Management
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Compensation
Three Core Businesses
Institutional Securities
Global Wealth
Management Group
Asset Management
Capital raising
Brokerage and investment
advisory services
•Investment alternatives
Global asset management
products and services
•Equity
•Fixed income
•Alternative investments
•Hedge funds
•Funds of funds
•Merchant banking
•Real estate
•Private equity
•Infrastructure
Financial advisory services
•Mergers and acquisitions
•Restructurings
•Real estate
•Project finance
Financial and wealth planning
services
Corporate lending
Sales, trading, financing and
market-making activities
•In equity and fixed income
securities
•Related products
•Foreign exchange
•commodities
Benchmark indices and Risk
management analytics
Annuity and other insurance
products
Credit and other lending products
Cash management services
Retirement services
Investment activities
Trust and fiduciary services
Investment activities
Overview
Risk Management
Hedging
Compensation
5-Year Net Annual Revenue
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Compensation
Business Mix 2008 & 2009
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Compensation
Business Segment in 10-K
Industries
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Large-Market Investment Banking
Financial Services
Asset Management
Institutional Asset Management
Retail Asset Management
Investment Banking
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Risk Management
Hedging
Compensation
2008: MS and Financial Crisis
Overview
Risk Management
Hedging
Compensation
2008: MS and Financial Crisis
Overview
Risk Management
Hedging
Compensation
2008: MS and Financial Crisis
Overview
Risk Management
Hedging
Compensation
2008: MS and Financial Crisis
Overview
Risk Management
Hedging
Compensation
2008: MS and Financial Crisis
Overview
Risk Management
Hedging
Compensation
Risk Management Philosophy
Based on the following principles
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Comprehensiveness
Independence
Accountability
Defined risk
Tolerance
Transparency
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Compensation
Risk Governance Structure
Board of Directors
Audit Committee and the Risk Committee of the Board
Senior management oversight (including the Chief Executive
Officer, the Chief Risk Officer, the Chief Financial Officer,
the Chief Legal Officer and the Chief Compliance
Officer)
Internal Audit Department
Independent risk management functions (including the Market
Risk Department, Credit Risk Management, the Corporate
Treasury Department and the Operational Risk
Department)
Company control groups (including the Human Resources
Department, the Legal and Compliance Division, the Tax
Department and the Financial Control Group)
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Risk Management
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Compensation
Risk Committee
Oversees
• Risk governance structure
• Risk management and risk assessment guidelines and
policies regarding market, credit and liquidity and
funding risk
• Risk tolerance
• Performance of the Chief Risk Officer
Overview
Risk Management
Hedging
Compensation
Types of Risks
Operational risk
• Risk of losses arising from insufficient controls on
people, resources, and processes and external factors
such as compliance risk
Legal/Regulatory risk
• Risk of losses in fines, penalties, damages resulting
from noncompliance and legal actions
Credit risk
• Risk of default from borrowers
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Risk Management
Hedging
Compensation
Types of Risks
Liquidity and funding risk
• Risk of difficulty in accessing capital markets, inability
to liquidate assets in a timely manner, and threats to
going concern in satisfying financial obligations
Market risk
• Risk of losses arising from changes in market prices,
rates, volatility, and correlations
Overview
Risk Management
Hedging
Compensation
Types of Risks
Competitive environment risk
• Risks from competition
International risk
• Risks of losses from global operation
Acquisition risk
• Risk of losses from acquisitions, minority stakes,
forming joint ventures, and strategic alliances
Overview
Risk Management
Hedging
Compensation
Operating Risk
Sources of risk
• Increasingly complex and large volume of transactions
processed in various markets and currencies
• Internal risks from employees and control systems, and
external risks from financial intermediaries and other
third parties
• Terrorist activities, diseases, and natural disasters 
contingency planning
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Risk Management
Hedging
Compensation
Operating Risk Management
Operational risk Oversight Committee
• Chaired by CRO, provides oversight of operational
risk
Operational risk manager
• Monitors, measures, analyzes and reports on
operational risk
• Independent of business segments
Business Manager
• Maintain processes and controls designed to
manage operational risk
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Risk Management
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Compensation
Operating Risk Management
Business Continuity Management
• Contingency planning to ensure continuity of
operations in case of disaster
External vendors
• Risk managed through service level, contractual
agreements, service and quality reviews
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Risk Management
Hedging
Compensation
Legal Risk
Extensive supervision from the Fed and regulatory
agencies
• Possibly stricter capital requirements and leverage
limits coming as soon 2010
Risk related to commodities activities
• Engages in production, storage, and transportation of
several commodities including metals, agricultural and
energy products
• Contamination may create liability even if MS is not at
fault
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Risk Management
Hedging
Compensation
Legal Risk
Fiscal and monetary policy
• Various policies from central banks have effect on
cost of funds for lending, capital raising and
investment activities
Conflict of interests
• Can result in enforcement by governing agencies
• Can result in public scrutiny or loss of business
Estimation errors
• For legal proceedings which involve substantial
stake and are in early stages, costs are hard to
estimate
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Risk Management
Hedging
Compensation
Legal Risk Management
Legal and Compliance Division
• “Develops various procedures addressing issues such
as regulatory capital requirements, sales and trading
practices, new products, potential conflicts of interest,
structured transactions, use and safekeeping of
customer funds and securities, credit granting, money
laundering, privacy and recordkeeping”
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Risk Management
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Compensation
Credit Risk
Institutional Securities Activities
Corporate lending
• Relationship-driven – expand business relationships
• Event driven – lending commitments for events such
as acquisition and mergers by clients
Securitized products
• Structuring, underwriting, and trading collateralized
securities
• Risk borrower not performing according to agreement
and devaluation of collateral
Overview
Risk Management
Hedging
Compensation
Credit Risk
Institutional Securities Activities
Derivate contracts
• Dealer in OTC derivatives
• “Generally represent future commitments to swap
interest payment streams, exchange currencies, or
purchase or sell commodities and other financial
instruments on specific terms at specified future dates”
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Risk Management
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Compensation
Credit Risk
Global Wealth Management Group Activities
Commercial Lending
• Working capital lines of credit, revolving lines of credit,
standby letters of credit, term loans and commercial
real estate mortgages
• Involves the use of independent credit agencies
Margin Lending
• Reviews amount of the loan, the intended purpose, the
degree of leverage being employed in the account
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Risk Management
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Compensation
Credit Risk
Global Wealth Management Group Activities
Consumer Lending
• Mortgages, HELOC
• Evaluation of capacity and willingness to pay
• FICO scores, debt ratios, borrower’s reserves
Overview
Risk Management
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Compensation
Credit Risk Management
Credit Risk Management is responsible for
• Evaluating, monitoring and controlling credit risk for
each business segment
• Ensuring transparency of material credit risks,
compliance with established limits, approving material
extensions of credit, and communicating with senior
management regarding risk concerns
Overview
Risk Management
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Compensation
Analyzing Credit Risk
Transactions and creditworthiness of borrowers
reviewed regularly
At three levels: transaction, counterparty and
portfolio
Produces credit ratings similar to external
services
• BB+ below considered non-investment
grade
Overview
Risk Management
Hedging
Compensation
Analyzing Credit Risk
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Risk Management
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Compensation
Risk Mitigation
Through management of key risk elements such as
size, seniority and collateral
Sell or assign lending commitments to other financial
institutions
Netting agreements to offset obligations in derivate
trading
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Risk Management
Hedging
Compensation
Exposure by Country
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Risk Management
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Compensation
Exposure by Industry
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Compensation
Regulation: Basel II Accord
• The First Pillar: Minimum Capital Requirements
• Maintain three major risks: Credit Risk, Operational
Risk, Market Risk
• Minimum Capital Requirement: (risk weighted) 8%
• The Second Pillar: Supervisory Review
• Assist the first pillar with regulatory responses
• Deals with liquidity risk and other risks
• The Third Pillar: Market Discipline
• Market disclosure
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Risk Management
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Compensation
Basel & Morgan Stanley
• Transferred to Financial Holding Company since
2008
• Capital Standard:
• Maintain a total capital ratio of 10%, minimum Tier 1
capital ratio is 6%
• Currently comply to Basel I, will adjust to Basel II
Overview
Risk Management
Hedging
Compensation
Morgan Stanley-Capital Ratio
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Compensation
Economic Capital-Function
• Estimate the amount of equity capital required to
support the business over a wide range of market
environments while simultaneously satisfying regulatory,
rating agency and investor requirements
• Continue to evolve over time in response to changes
in in business and regulatory environment and to
enhance modeling technique
• Assign to each business segment and sub-allocate to
product lines
• Align equity capital with risks in business segments
to evaluate return on a risk-adjusted basis
Overview
Risk Management
Hedging
Compensation
Economic Capital-Calculation
• Regulatory Capital + Additional Capital for Stress
Losses
• Stress losses include market, credit, business, and
operational risks
• Economic Capital = Tier 1 Capital + Unallocated
Capital
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Risk Management
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Compensation
Regulatory Capital vs. Economic Capital
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Compensation
Economic Capital-Components
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Compensation
Economic Capital vs. Risks
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Compensation
Stress Losses
• Stress losses are defined at the 90% to 95%
confidence interval in order to capture the worst
potential losses in 10 to 20 years
• Types of stress losses:
• Market: systematic, idiosyncratic (unsystematic) or
random risk
• Credit: counterparty defaults
• Business: earnings volatility
• Operational: legal risk
Overview
Risk Management
Hedging
Compensation
Risk Factors
• Liquidity Risk: risk that is unable to finance its
operations due to a loss of access to the capital
markets or difficulty in liquidating its assets
• Inability to raise fund in the L.T. or S.T. debt capital market /
equity capital market
• Inability to access the secured lending markets
• Inability to control the disruption of the financial market or
negative view to the industry
• Depends on credit rating
• Depends on payment from subsidiaries
• Depends on U.S. and international market and economic
conditions
Overview
Risk Management
Hedging
Compensation
Liquidity
Overview
Risk Management
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Compensation
Liquidity
Note explanation
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Compensation
Equity Capital Management
Policy
• Theory: Based on business opportunities, capital
availability, and rates of return, internal capital
policies, regulatory requirements, rating agency
guidelines, changing in business needs
• Actions: Repurchase $4.4 billion out of $6 billion
Overview
Risk Management
Hedging
Compensation
Economic Capital
Overview
Risk Management
Hedging
Compensation
Liquidity Risk Management
Policy
• Objects: Support the successful execution of the
Company’s business strategies while ensuring
sufficient liquidity through the business cycle and
during periods of stressed market condition
• Approaches
• Contingency Funding Plan
• Liquidity Reserves
Overview
Risk Management
Hedging
Compensation
Funding Management Policy
• Designed to provide for financings that are
executed in a manner that reduces the risk
disruption to the company’s operations
• Types of holdings
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Secured Financing / Unsecured Financing
Short-Term Borrowings
Deposits
Long-Term Borrowings
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Risk Management
Hedging
Compensation
Credit Ratings
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Risk Management
Hedging
Compensation
Off-Balance Sheet Arrangements with
Unconsolidated Entities
• Institutional Securities Activities: Commercial and
residential mortgage loans, CMOs, corporate
bonds and loans, municipal bonds
• Guarantees:
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Risk Management
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Compensation
Commitment and Contractual
Obligations
Risk Factors
• Market Risk: risk that a change in the level of one
or more market prices or other market factors,
which result in losses for a position or portfolio
• Affected by market fluctuations and by economic and
other (political, availability and cost of capital, liquidity
of global markets, level of volatility of prices…)
• Affected by the volatile and illiquid market conditions
• Affected by holding large and concentrated position
• Affected by the real estate sector
Overview
Risk Management
Hedging
Compensation
Market Risk
• Actions
• Monitor the Company’s risk against limits on aggregate
risk exposures
• Perform a variety of risk analyses
• Routinely report risk summaries
• Maintain the Company’s VaR system
• Approaches
• Diversification of risk exposures
• Hedging
• VaR and Sensitivity Analysis
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Risk Management
Hedging
Compensation
VaR: Benefits and Shortcomings
• Benefits:
• Takes into account linear and nonlinear risk exposures
• Capture correlation risks and basis risks / capture
name specific risk (Monte Carlo Simulation)
• Response to the change in the composition of trading
portfolios
• Estimate aggregate risk exposures
• Reflect risk reduction due to diversification & hedging
Overview
Risk Management
Hedging
Compensation
VaR: Benefits and Shortcomings
• Limitations:
• Past changes in market may not yield accurate
prediction
• Changes in portfolio regarding market movement may
differ from the model
• Time horizon not capture market risk position
• Historical data may only provide limited insight
• Future risk depends on future position
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Risk Management
Hedging
Compensation
VaR 2009
The VaR increases for 2009 were primarily driven by increased exposure to interest
rate and credit sensitive products across the trading and non-trading portfolios. The
trading portfolio also experienced increases due to increased equity and foreign
currency exposure. Additionally, the Company’s VaR for 2009 was affected by
higher market volatilities over the period.
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Risk Management
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Compensation
VaR Statistics
The company
experienced daily
trading losses on 38
days
Competitive Environment Risk
• strong competition from other financial services
firms
• Competition for qualified employee
• Automated trading markets may adversely affect
business and may increase competition
Overview
Risk Management
Hedging
Compensation
International Risk
• Subject to numerous political, economic, legal,
operational, franchise and other risks
• In many countries, the laws and regulations
applicable to the securities and financial services are
uncertain, it is difficult to determine the exact
requirements of local laws in every market.
• Various emerging market countries have
experienced severe political, economic and
financial disruptions, including significant
devaluations of currencies, capital and currency
exchange controls and high rates of inflation
Overview
Risk Management
Hedging
Compensation
Acquisition Risk
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unable to fully capture the expected value from
acquisitions, joint ventures, minority stakes and
strategic alliances
• need to combine accounting and data processing
systems and management controls and to integrate
relationships with clients and business partners
• conflicts or disagreements between MS and its joint
venture partners may negatively impact the benefits
Overview
Risk Management
Hedging
Compensation
Morgan Stanley’s Position in the
Derivatives Market
• Morgan Stanley is a trader, sale and user in the
derivatives market
• Trading revenue takes big part in the total noninterest revenue
Overview
Risk Management
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Compensation
Trading and Selling Position
• Morgan Stanley conducts sales, trading, financing
and market-making activities on securities and
futures exchanges and in over-the-counter (“OTC”)
markets around the world
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Risk Management
Hedging
Compensation
Trading and Selling Position
• Equity Trading: including equity swaps, options,
warrants and futures
• Interest Rates, Credit and Currencies: in listed
futures and OTC swaps, forwards, options and other
derivatives referencing, among other things, interest
rates, currencies
• Commodities: including metals (base and precious),
agricultural products, crude oil, oil products, natural gas,
electric power, emission credits, coal, freight, liquefied
natural gas and related products and indices
Overview
Risk Management
Hedging
Compensation
OTC Derivative Products
Financial Instruments Owned
Overview
Risk Management
Hedging
Compensation
OTC Derivative Products
Financial Instruments Sold, Not Yet
Overview
Risk Management
Hedging
Compensation
Using of Derivatives
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Morgan Stanley purchase or sale of positions in
related securities and financial instruments,
including a variety of derivative products (e.g.,
futures, forwards, swaps and options) to maintain a
portfolio that the Company believes is welldiversified in the aggregate with respect to market
risk factors
Overview
Risk Management
Hedging
Compensation
Using of Derivatives
• the Company enters into a variety of derivative
contracts related to financial instruments and
commodities for hedging purpose
• use of currency forward contracts or the spot market
in various hedging transactions related to net assets,
revenues, expenses or cash flows to reduce the risk
from inflation and changes in FX rate
• the Company uses credit derivatives to manage its
exposure to residential and commercial mortgage
loans and corporate lending exposures during the
periods presented
Overview
Risk Management
Hedging
Compensation
Using of Derivatives
• A credit derivative is a contract between a seller
(guarantor) and buyer (beneficiary) of protection
against the risk of a credit event occurring on a set of
debt obligations issued by a specified reference entity.
If a credit event occurs, the guarantor is required to
make payment to the beneficiary based on the terms
of the credit derivative contract.
Overview
Risk Management
Hedging
Compensation
Using of Derivatives
Overview
Risk Management
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Compensation
Hedge Accounting
• The Company applies hedge accounting using various
derivative financial instruments and non-U.S. dollar
denominated debt used to hedge interest rate and
foreign exchange risk arising from assets and liabilities
not held at fair value as part of asset and liability
management and foreign currency exposure management.
• The Company’s hedges are designated and qualify for
accounting purposes as one of the following types : fair
value hedges and net investment hedges
Overview
Risk Management
Hedging
Compensation
Hedge Accounting
• Fair Value Hedges—Interest Rate Risk. The
Company’s designated fair value hedges consisted
primarily of interest rate swaps designated as fair
value hedges of changes in the benchmark interest
rate of fixed rate senior long-term borrowings.
• Net Investment Hedges. The Company may utilize
forward foreign exchange contracts and non-U.S.
dollar denominated debt to manage the currency
exposure relating to its net investments in non-U.S.
dollar functional currency operations.
Overview
Risk Management
Hedging
Compensation
Overview
Risk Management
Hedging
Compensation
Hedge Accounting
• The following tables summarize the gains or losses
reported on derivative instruments designated and
qualifying as accounting hedges
Overview
Risk Management
Hedging
Compensation
Hedge Accounting
• The following tables summarize the gains or losses
reported on derivative instruments designated and
qualifying as net investment hedges
Overview
Risk Management
Hedging
Compensation
Hedge Accounting
• The following tables summarize the gains or losses
reported on derivative instruments NOT designated
as accounting hedges
Overview
Risk Management
Hedging
Compensation
Hedge funds
• Investments in hedge funds may be subject to initial
period lock-up restrictions or gates. A hedge fund
lock-up provision is a provision which provides that,
during a certain initial period, an investor may not
make a withdrawal from the fund. The purpose of a
gate is to restrict the level of redemptions that an
investor in a particular hedge fund can demand on
any redemption date.
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Risk Management
Hedging
Compensation
Hedge funds
Overview
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Compensation
Compensation Philosophy
• 2008: the most challenging years ever
experienced by the financial industry
• Reduction of Compensation:
-Three most senior officers—Chairman and CEO and CoPresidents forgo a bonus for fiscal 2008
-Compensation for the 14 members of the Company’s
Operating Committee was reduced by an average of 75%
from 2007, and 2008 compensation for the 35 members of
the Management Committee was reduced by an average
of 65% from 2007
-Bonus compensation for other employees reduced by
approximately 50% from 2007
Overview
Risk Management
Hedging
Compensation
Executives Compensation
• Compensation Objectives and Strategy
Variable incentive compensation that is clearly and
appropriately linked to Company and individual
performance
A greater percentage of incentive compensation is
delivered as long-term awards rather than cash bonus
based on annual results.
The Company competes for talent globally with
commercial banks, brokerage firms, hedge funds and
other companies offering financial services. The CMDS
making sure executive compensation programs are
competitive across the industry.
Overview
Risk Management
Hedging
Compensation
Executives Compensation
Overview
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Compensation
Employee Stock-Based Compensation
• The accounting guidance for stock-based compensation
requires measurement of compensation cost for equity based
awards at fair value and recognition of compensation cost over
the service period, net of estimated forfeitures
Overview
Risk Management
Hedging
Compensation
Deferred Stock Awards
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Compensation
Compensation Awards
Overview
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Hedging
Compensation
Thank You