Patton Cheung Gurjeet Sandhu Kezheng Li Justin “Bieber” Ling
Agenda Company Overview Risk Management Activities Compensation Practices
Overview Morgan Stanley is a global financial services firm headquartered in New York City serving a diversified group of corporations, governments, financial institutions, and individuals. Morgan Stanley also operates in 36 countries around the world, with over 600 offices and a workforce of over 60,000.
Global Offices Headquartered in New York City, US
Financial Crisis Morgan Stanley Trading Price from 2001-2011
Financial Crisis • Converted to bank holding company • Regulated by the Federal Reserve • No longer a securities firm • Morgan Stanley borrowed $107.3 billion from the Fed during the 2008 crisis • $ 9 billion invested by Mitsubishi UFJ Financial Group • Bought Smith Barney from Citigroup • Joint venture with Citigroup • No.1 in customer service among full-service brokerage firms
Industry • The company operates in three business segments • Institutional Securities • Global Wealth Management Group • Asset Management.
KeishiHotsuki CRO Bachelor’s degree in Economics from Hitotsubashi University Masters of Science in Industrial Administration from Carnegie Mellon University
Risk Management Philosophy “Management believes effective risk management is vital to the success of the Company’s business activities” “The cornerstone of the Company’s risk management philosophy is the execution of risk-adjusted returns through prudent risk-taking that protects the Company’s capital base and franchise.” • Five Key Principles • Comprehensiveness • Independence • Accountability • Defined risk tolerance • Transparency.
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)
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
Fair Value Evaluation Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 Level 2—Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
Type 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
Type 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
Type 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
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
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
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
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
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
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”
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
Credit Risk Institutional Securities Activities Derivative 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”