MORGAN STANLEY B.V. Report and financial statements 31 December 2013

CONTENTS PAGE
ANNUAL REPORT
Directors' report 1
Directors' responsibility statement 7
ANNUAL ACCOUNTS
Statement of comprehensive income 8
Statement of changes in equity 9
Statement of financial position 10
Statement of cash flows 11
Notes to the financial statements 12
OTHER INFORMATION
Additional information 54
Independent auditor's report 55
MORGAN STANLEY B.V.
DIRECTORS’ REPORT
1
The Directors present their report and financial statements (which comprise the
statement of comprehensive
income, statement of changes in equity, statement of financial position,
statement of cash flows and the
related notes, 1 to 20) for Morgan Stanley B.V. (the “Company”) for the year
ended 31 December 2013.
RESULTS AND DIVIDENDS
The profit for the year, after tax, was €4,576,000 (2012: €3,679,000).
During the year, no dividends were paid or proposed (2012: €nil).
PRINCIPAL ACTIVITY
The principal activity of the Company is the issuance of financial instruments
including notes, certificates
and warrants (“Structured Notes”) and the hedging of the obligations arising
pursuant to such issuances.
The Company’s ultimate parent undertaking and controlling entity is Morgan
Stanley, which, together with
the Company and Morgan Stanley’s other subsidiary undertakings, form the “Morgan
Stanley Group”.
FUTURE OUTLOOK
There have not been any significant changes in the Company’s principal activity
in the year under review
and no significant change in the Company’s principal activity is expected.
BUSINESS REVIEW
During 2013, global market and economic conditions showed improvement from 2012,
though significant
uncertainty remained. Investor sentiment was boosted by encouraging signs of
improvement in the global
economy during the second half of 2013. The United States (“US”) economy
continued its moderate
growth pace, but while as a whole the recession in the euro-area came to an end,
significant pockets of slow
or negative growth remained in Europe. Global market and economic conditions
were also challenged by
investor concerns about the US longer-term budget outlook and the scaling back
of monetary stimulus, the
remaining European sovereign debt issues and slowing economic growth in emerging
markets. Shorter term
concerns over the US budget standoff were resolved in late 2013 as Congress came
to a tentative agreement
on federal government funding for the next two fiscal years. Elsewhere,
especially in parts of Europe,
growth remains hindered by fiscal and longer term structural issues in the
economy.
In Europe, major equity market indices finished higher at 31 December 2013
compared to 31 December
2012. Euro-area gross domestic product started to grow in the second quarter of
2013, and the European
Central Bank (“ECB”) views this as a gradual recovery in economic conditions,
albeit with significant
downside risks. The euro-area unemployment rate increased to 12% at 31 December
2013 from 11.9% at
31 December 2012. At 31 December 2013, the Bank of England’s benchmark interest
rate was 0.5%, which
was unchanged from 31 December 2012. To stimulate economic activity in Europe,
during 2013 the ECB
lowered the benchmark interest rate from 0.75% to 0.25% and indicated that it
will keep open its special
liquidity facilities until at least the middle of 2014.
The statement of comprehensive income for the year is set out on page 8. The
Company made a profit
before income tax of €6,094,000 in the current year, an increase of €1,219,000
from the prior year due to
the higher level of Structured Notes in issuance during the current year on
which management charges are
received. Management charges are reflected in ‘Other income’ in the statement of
comprehensive income.
MORGAN STANLEY B.V.
DIRECTORS’ REPORT
2
BUSINESS REVIEW (CONTINUED)
Net gains on financial instruments classified as held for trading and net losses
on financial instruments
designated at fair value through profit or loss offset to €nil, which is
consistent with the Company’s
function and the prior year. The Company hedges its Structured Notes with
derivatives classified as held
for trading along with loans designated at fair value and prepaid equity
securities contracts. Net losses on
financial instruments designated at fair value through profit or loss of
€509,271,000 represents fair value
movements for the year on the issued Structured Notes, prepaid equity securities
contracts and loans
designated at fair value (2012: €81,202,000 gain). This loss has arisen as a
result of unfavourable fair value
movements on the assets underlying certain Structured Notes issued that are
hedged by derivatives
classified as held for trading, on which a corresponding gain of €509,271,000
has been recognised (2012:
€81,202,000 loss).
Interest expense and interest income primarily relate to the yield payable on
Convertible Preferred Equity
Certificates (“CPECs”), and interest receivable on the loan of the cash
consideration from the CPECs
issuance to another Morgan Stanley Group undertaking. The current year includes
twelve months of the
yield payable and interest receivable, compared to nine months in the prior
year.
The statement of financial position for the Company is set out on page 10. The
Company’s total assets at 31
December 2013 are €8,170,610,000, an increase of €1,650,925,000 or 25% when
compared to 31
December 2012. Total liabilities of €8,145,533,000 represent an increase of
€1,646,349,000 or 25%, when
compared to total liabilities at 31 December 2012. These movements are primarily
attributed to the value of
issued Structured Notes held at 31 December 2013, which has increased by
€1,571,410,000 since 31
December 2012. This increase represents new issuances and fair value movements,
offset by maturities in
the year. The increase in the value of issued Structured Notes has resulted in
an increase in the valuation of
the related hedging instruments, whereby financial assets designated at fair
value through profit or loss and
net financial instruments classified as held for trading have increased by
€1,201,488,000 and €400,079,000
respectively.
The performance of the Company is included in the results of the Morgan Stanley
Group which are
disclosed in the Morgan Stanley Group’s Annual Report on Form 10-K to the US
Securities and Exchange
Commission. The Morgan Stanley Group manages its key performance indicators on a
global basis but in
consideration of individual legal entities. For this reason, the Company’s
Directors believe that providing
further performance indicators for the Company itself would not enhance an
understanding of the
development, performance or position of the business of the Company.
The Risk Management section below sets out the Company's and the Morgan Stanley
Group's policies for
the management of liquidity and cash flow risk and other significant business
risks.
Risk management
Risk is an inherent part of both Morgan Stanley’s and the Company’s business
activity and is managed
within the context of the broader Morgan Stanley Group’s business activities.
The Morgan Stanley Group
seeks to identify, assess, monitor and manage each of the various types of risk
involved in its activities on a
global basis, in accordance with defined policies and procedures and in
consideration of the individual legal
entities. The Company’s own risk management policies and procedures are
consistent with those of the
Morgan Stanley Group.
Note 15 to the financial statements provides more detailed qualitative and
quantitative disclosures about the
Company’s management of and exposure to financial risks.
MORGAN STANLEY B.V.
DIRECTORS’ REPORT
3
BUSINESS REVIEW (CONTINUED)
Risk management (continued)
Set out below is an overview of the Company’s policies for the management of
financial risk and other
significant business risks.
Market risk
Market risk refers to the risk that a change in the level of one or more market
prices, rates, indices, implied
volatilities (the price volatility of the underlying instrument imputed from
option prices), correlations or
other market factors, such as liquidity, will result in losses for a position or
portfolio.
The Morgan Stanley Group manages the market risk associated with its trading
activities on a global basis,
at both a trading division and an individual product level, which includes
consideration of market risk for
each individual legal entity.
It is the policy and objective of the Company not to be exposed to market risk.
Credit risk
Credit risk refers to the risk of loss arising when a borrower, counterparty or
issuer does not meet its
obligations to the Company.
Credit risk management policies and procedures for the Company are consistent
with those of the Morgan
Stanley Group and include escalation to appropriate key management personnel of
the Company.
The Morgan Stanley Group manages credit risk exposure on a global consolidated
basis and in
consideration of individual legal entities. Its credit risk management policies
and procedures establish the
framework for identifying, measuring, monitoring and controlling credit risk
whilst ensuring transparency
of material credit risks, ensuring compliance with established limits and
escalating risk concentrations to
appropriate senior management.
Liquidity and funding risk
Liquidity and funding risk refers to the risk that the Company will be unable to
finance its operations due to
a loss of access to the capital markets or difficulty in liquidating its assets.
Liquidity and funding risk also
encompasses the Company’s ability to meet its financial obligations without
experiencing significant
business disruption or reputational damage that may threaten its viability as a
going concern.
The primary goal of the Morgan Stanley Group’s liquidity risk management
framework is to ensure that the
Morgan Stanley Group, including the Company, have access to adequate funding
across a wide range of
market conditions. The framework is designed to enable the Morgan Stanley Group
to fulfil its financial
obligations and support the execution of the Company’s business strategies. The
Company’s capital
management framework is further described in note 19.
Morgan Stanley continues to actively manage its capital and liquidity position
to ensure adequate resources
are available to support the activities of the Morgan Stanley Group, including
the Company, to enable the
Morgan Stanley Group to withstand market stresses, and to meet regulatory stress
testing requirements
proposed by regulators globally.
Operational risk
Operational risk refers to the risk of loss, or of damage to the Company’s or
the Morgan Stanley Group’s
reputation, resulting from inadequate or failed processes, people and systems or
from external events (e.g.
fraud, legal and compliance risks or damage to physical assets). Legal and
regulatory risk is included in the
scope of operational risk and is discussed below under “Legal and regulatory
risk”.
MORGAN STANLEY B.V.
DIRECTORS’ REPORT
4
BUSINESS REVIEW (CONTINUED)
Risk management (continued)
Operational risk (continued)
The Company’s business is highly dependent on its ability to process, on a daily
basis, a large number of
transactions across numerous and diverse markets in many currencies. In
addition, new products or
services may be introduced or change processes, resulting in new operational
risk that may not be fully
appreciated or identified. In general, the transactions processed are
increasingly complex. The Company
relies on the ability of the Morgan Stanley Group’s employees, its internal
systems, and systems at
technology centres operated by unaffiliated third parties to process a high
volume of transactions.
The Company also faces the risk of operational failure or termination of any of
the clearing agents,
exchanges, clearing houses or other financial intermediaries it uses to
facilitate securities transactions. In
the event of a breakdown or improper operation of the Company’s or a third
party’s systems or improper or
unauthorised action by third parties or the Morgan Stanley Group’s employees,
the Company could suffer
financial loss, an impairment to its liquidity, a disruption of its businesses,
regulatory sanctions or damage
to its reputation. In addition, the interconnectivity of multiple financial
institutions with central agencies,
exchanges and clearing houses, and the increased importance of these entities,
increases the risk that an
operational failure at one institution or entity may cause an industry-wide
operational failure that could
materially impact the Company’s ability to conduct business.
The Company’s operations rely on the secure processing, storage and transmission
of confidential and other
information in its computer systems and the systems of third parties with which
the Company does business
with or that facilitate its business activities, such as vendors. Like other
financial services firms, the
Company and its third party providers have been and continue to be subject to
unauthorised access,
mishandling or misuse, computer viruses or malware cyber attacks, denial of
service attacks and other
events. Events such as these could have a security impact on the Company’s
systems and jeopardise the
Company’s or the Company’s clients’ or counterparties’ personal, confidential,
proprietary or other
information processed and stored in, and transmitted through, the Company’s and
our third party providers’
computer systems. Furthermore, such events could cause interruptions or
malfunctions in the Company’s,
the Company’s clients’, the Company’s counterparties’ or third parties’
operations, which could result in
reputational damage, client dissatisfaction, litigation or regulatory fines or
penalties not covered by
insurance maintained by the Company, and adversely affect the business,
financial condition or results of
operations.
The Morgan Stanley Group has established an operational risk management process
that operates on a
global and regional basis to identify, measure, monitor and control risk.
Effective operational risk
management is essential to reducing the impact of operational risk incidents and
mitigating legal,
regulatory, and reputational risks.
Legal and regulatory risk
Legal and regulatory risk includes the risk of exposure to fines, penalties,
judgements, damages and/ or
settlements in connection with regulatory or legal actions as a result of non
-compliance with applicable
legal or regulatory requirements and standards or litigation. Legal risk also
includes contractual and
commercial risk such as the risk that a counterparty’s performance obligations
will be unenforceable. The
Morgan Stanley Group is generally subject to extensive regulation in the
different jurisdictions in which it
conducts its business. In the current environment of rapid and possibly
transformational regulatory change,
the Morgan Stanley Group also views regulatory change as a component of legal
risk.
MORGAN STANLEY B.V.
DIRECTORS’ REPORT
5
BUSINESS REVIEW (CONTINUED)
Risk management (continued)
Legal and regulatory risk (continued)
The Morgan Stanley Group has established procedures based on legal and
regulatory requirements on a
worldwide basis that are designed to foster compliance with applicable statutory
and regulatory
requirements. The Morgan Stanley Group, principally through the Legal and
Compliance Division, also
has established procedures that are designed to require that the Morgan Stanley
Group’s policies relating to
business conduct, ethics and practices are complied with. In connection with its
businesses, the Morgan
Stanley Group has and continuously develops various procedures addressing issues
such as regulatory
capital requirements, sales and trading practices, new products, information
barriers, potential conflicts of
interest, structured transactions, use and safekeeping of customer funds and
securities, lending and credit
granting, anti-money laundering, privacy and recordkeeping. In addition, the
Morgan Stanley Group has
established procedures to mitigate the risk that a counterparty’s performance
obligations will be
unenforceable, including consideration of counterparty legal authority and
capacity, adequacy of legal
documentation, the permissibility of a transaction under applicable law and
whether applicable bankruptcy
or insolvency laws limit or alter contractual remedies. The legal and regulatory
focus on the financial
services industry presents a continuing business challenge for the Morgan
Stanley Group.
Significant changes in the way that major financial services institutions are
regulated are occurring in the
United Kingdom (“UK”), Europe, the US and worldwide. The reforms being discussed
and, in some cases,
already implemented, include several that contemplate comprehensive
restructuring of the regulation of the
financial services industry. Such measures will likely lead to stricter
regulation of financial institutions
generally, and heightened prudential requirements for systemically important
firms in particular. Such
measures could include reforms of the over-the-counter (“OTC”) derivatives
markets, such as mandated
exchange trading and clearing, position limits, margin, capital and registration
requirements. Changes in
tax legislation in the UK and worldwide, such as increased taxation of financial
transactions, liabilities and
employees compensation, are also possible.
Going concern
Business risks associated with the uncertain market and economic conditions are
being monitored and
managed by the Morgan Stanley Group and the Company. Retaining sufficient
liquidity and capital to
withstand these market pressures remains central to the Morgan Stanley Group’s
and the Company’s
strategy. In particular, the Morgan Stanley Group’s capital is deemed sufficient
to exceed the minimum
capital ratio under the most negative stressed scenario reviewed by the US
Federal Reserve. The Morgan
Stanley Group regularly performs stress testing to ensure it has sufficient
resources at its disposal to absorb
losses associated with certain stressed scenarios.
Taking all of these factors into consideration, the Directors believe it is
reasonable to assume that the
Company will have access to adequate resources to continue in operational
existence for the foreseeable
future. Accordingly they continue to adopt the going concern basis in preparing
the annual report and
financial statements.
MORGAN STANLEY B.V.
DIRECTORS’ REPORT
6
DIRECTORS
The following Directors held office throughout the year and to the date of
approval of this report:
R H L de Groot
H Herrmann
P J G de Reus
Z Wu
TMF Management B.V.
The Company has taken notice of Dutch legislation effective as of 1 January
2013, as a consequence of
which the Company should take into account as much as possible a balanced
composition of the Board of
Directors in terms of gender, when nominating or appointing Directors to the
Board of Directors, to the
effect that at least 30 percent of the positions should be held by women and at
least 30 percent by men.
Currently the composition of the Board of Directors deviates from the gender
diversity objectives. When
appointing a Director, the Board of Directors considers the gender diversity
objectives, as appropriate.
EVENTS AFTER THE REPORTING DATE
There have been no significant events since the reporting date.
AUDIT COMMITTEE
The Company qualifies as an organisation of public interest pursuant to Dutch
and European Union (“EU”)
law. Morgan Stanley International Limited, a shareholder in the Company, has an
audit committee that
complies with the applicable corporate governance rules and also functions as
the audit committee of the
Company; accordingly, the Company has therefore taken the exemption for groups
and has not established
its own audit committee.
AUDITOR
Deloitte Accountants B.V. have expressed their willingness to continue in office
as auditor of the Company
and a resolution to re-appoint them will be proposed at the forthcoming annual
general meeting.
Approved by the Board and signed on its behalf by
24 April 2014
R H L de Groot H Herrmann P J G de Reus
Z Wu TMF Management B.V.
MORGAN STANLEY B.V.
DIRECTORS’ RESPONSIBILITY STATEMENT
7
The Directors, the names of whom are set out below, confirm to the best of their
knowledge:
- the financial statements, which have been prepared in accordance with
International Financial
Reporting Standards (“IFRSs”) as issued by the International Accounting
Standards Board (“IASB”)
and as endorsed by the EU, have been prepared in accordance with the applicable
set of accounting
standards and give a true and fair view of the assets, liabilities, financial
position and profit or loss of
the Company; and
- the management report represented by the Directors’ report includes a fair
review of the development
and performance of the business and the position of the Company together with a
description of the
principal risks and uncertainties that the Company faces.
Approved by the Board and signed on its behalf by
24 April 2014
R H L de Groot H Herrmann P J G de Reus
Z Wu TMF Management B.V.
MORGAN STANLEY B.V.
STATEMENT OF COMPREHENSIVE INCOME
Year ended 31 December 2013
8
Note 2013 2012
€'000 €'000
Net gains/(losses) on financial instruments classified as held
for trading 509,271 (81,202)
Net (losses)/gains on financial instruments designated at fair
value through profit or loss (509,271) 81,202
Interest income 4 25,554 20,033
Interest expense 4 (25,459) (19,936)
Other income 5 6,094 4,875
Other expense 6 (95) (97)
PROFIT BEFORE INCOME TAX 6,094 4,875
Income tax expense 7 (1,518) (1,196)
PROFIT AND TOTAL COMPREHENSIVE INCOME FOR
THE YEAR 4,576 3,679
All operations were continuing in the current and prior year.
The notes on pages 12 to 53 form an integral part of the financial statements.
MORGAN STANLEY B.V.
STATEMENT OF CHANGES IN EQUITY
Year ended 31 December 2013
9
Share
capital
Retained
earnings
Total
equity
€'000 €'000 €'000
Balance at 1 January 2012 15,018 1,804 16,822
Profit and total comprehensive income for the year - 3,679 3,679
Balance at 31 December 2012 15,018 5,483 20,501
Profit and total comprehensive income for the year - 4,576 4,576
Balance at 31 December 2013 15,018 10,059 25,077
The notes on pages 12 to 53 form an integral part of the financial statements.
MORGAN STANLEY B.V.
Registered number: 34161590
STATEMENT OF FINANCIAL POSITION
As at 31 December 2013
(Including Proposed Appropriation of Results)
10
Note 2013 2012
€'000 €'000
ASSETS
Loans and receivables:
Cash and short-term deposits 12a 1,585 1,255
Trade receivables 2,947 1,364
Other receivables 20 1,195,027 1,166,206
1,199,559 1,168,825
Financial assets classified as held for trading 9 979,451 561,398
Financial assets designated at fair value through profit or loss 10 5,990,950
4,789,462
Current tax assets 650 -
TOTAL ASSETS 8,170,610 6,519,685
LIABILITIES AND EQUITY
Financial liabilities at amortised cost:
Convertible preferred equity certificates 8 1,170,579 1,145,195
Trade payables 54,607 22,537
Other payables 20 21 21
1,225,207 1,167,753
Financial liabilities classified as held for trading 9 283,324 265,350
Financial liabilities designated at fair value through profit or loss 10
6,637,002 5,065,592
Current tax liabilities - 489
TOTAL LIABILITIES 8,145,533 6,499,184
EQUITY
Share capital 11 15,018 15,018
Retained earnings 10,059 5,483
Equity attributable to owners of the Company 25,077 20,501
TOTAL EQUITY 25,077 20,501
TOTAL LIABILITIES AND EQUITY 8,170,610 6,519,685
These financial statements were approved by the Board and authorised for issue
on
Signed on behalf of the Board
24 April 2014
R H L de Groot H Herrmann P J G de Reus
Z Wu TMF Management B.V.
The notes on pages 12 to 53 form an integral part of the financial statements.
MORGAN STANLEY B.V.
STATEMENT OF CASH FLOWS
Year ended 31 December 2013
11
Note 2013 2012
€'000 €'000
NET CASH FLOWS FROM OPERATING ACTIVITIES 12b 330 158
NET CASH FLOWS USED IN INVESTING ACTIVITIES - (1,125,281)
FINANCING ACTIVITIES
Issue of convertible preferred equity certificates 8 - 1,125,281
NET CASH FLOWS FROM FINANCING ACTIVITIES - 1,125,281
NET INCREASE IN CASH AND CASH EQUIVALENTS 330 158
CASH AND CASH EQUIVALENTS AT THE BEGINNING
OF THE YEAR 12a 1,255 1,097
CASH AND CASH EQUIVALENTS AT THE END OF THE
YEAR 12a 1,585 1,255
The notes on pages 12 to 53 form an integral part of the financial statements.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
12
1. CORPORATE INFORMATION
The Company is incorporated and domiciled in The Netherlands, at the following
address:
Luna Arena, Herikerbergweg 238, 1101 CM, Amsterdam Zuidoost, The Netherlands.
The Company is engaged in the issuance of Structured Notes and the hedging of
the obligations arising
pursuant to such issuances with prepaid equity securities contracts, loans
designated at fair value and
derivatives from other Morgan Stanley Group undertakings.
The issued Structured Notes expose the Company to the risk of changes in market
prices of the underlying
securities, interest rate risk and, where denominated in currencies other than
Euros, the risk of changes in
rates of exchange between the Euro and the other relevant currencies. The
Company uses the contracts that
it purchases from other Morgan Stanley Group undertakings to hedge the market
price, interest rate and
foreign currency risks associated with the issuance of the Structured Notes. The
changes in fair value of the
Structured Notes issuances are fully hedged by the changes in fair value of
these contracts.
The Company’s immediate parent undertaking is Archimedes Investments
Coöperatieve U.A., which is
registered in The Netherlands. Copies of its financial statements can be
obtained from Luna Arena,
Herikerbergweg 238, 1101 CM, Amsterdam Zuidoost, The Netherlands.
The Company’s ultimate parent undertaking and controlling entity is Morgan
Stanley which, together with
the Company and Morgan Stanley’s other subsidiary undertakings, form the Morgan
Stanley Group.
Morgan Stanley is incorporated in the state of Delaware, the United States of
America.
2. BASIS OF PREPARATION
Statement of compliance
The Company has prepared its annual financial statements in accordance with
IFRSs issued by the IASB as
adopted by the EU, Interpretations issued by the IFRS Interpretations Committee
and Dutch law.
New standards and interpretations adopted during the year
The following standards and amendments to standards relevant to the Company’s
operations were adopted
during the year. Except where otherwise stated, these standards and amendments
to standards did not have
a material impact on the Company’s financial statements.
An amendment to International Accounting Standard (“IAS”) 1 ‘Presentation of
financial statements’
(“IAS 1”) was issued by the IASB in June 2011 for application in annual periods
beginning on or after 1
July 2012. The revised standard was endorsed by the EU in June 2012.
An amendment to IFRS 7 ‘Financial instruments: Disclosures – offsetting
financial assets and financial
liabilities’ (“IFRS 7”) was issued by the IASB in December 2011 for
retrospective application in annual
periods beginning on or after 1 January 2013 and interim periods within those
annual periods. The
amendment was endorsed by the EU in December 2012. The amendments require
disclosures regarding the
Company’s financial instruments that are either offset in the statement of
financial position or subject to an
enforceable master netting arrangement or similar agreement, which are included
in note 16.
IFRS 13 ‘Fair value measurement’ (“IFRS 13”) was issued by the IASB in May 2011
for prospective
application in annual periods beginning on or after 1 January 2013 and was
endorsed by the EU in
December 2012. There was no material impact to the Company as a result of
adopting the measurement
requirements of IFRS 13. Additional disclosures required by IFRS 13 are included
in note 17.
As part of the May 2012 Improvements to IFRSs, the IASB made amendments to the
following standards
that are relevant to the Company’s operations: IAS 1 and IAS 34 ‘Interim
financial reporting’ (for
application in accounting periods beginning on or after 1 January 2013). The
improvements were endorsed
by the EU in March 2013.
There were no other standards or interpretations relevant to the Company’s
operations which were adopted
during the year.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
13
2. BASIS OF PREPARATION (CONTINUED)
New standards and interpretations not yet adopted
At the date of authorisation of these financial statements, the following
standards and amendments to
standards relevant to the Company’s operations were issued by the IASB but not
yet mandatory. Except
where otherwise stated, the Company does not expect that the adoption of the
following standards and
amendments to standards will have a material impact on the Company’s financial
statements.
An amendment to IAS 32 ‘Financial instruments: Presentation – offsetting
financial instruments’ was
issued by the IASB in December 2011, for retrospective application in annual
periods beginning on or after
1 January 2014. The amendment was endorsed by the EU in December 2012.
IFRS 9 ‘Financial instruments’ (“IFRS 9”) was issued by the IASB in November
2009. Amendments to
IFRS 9 were issued by the IASB in November 2013. Although there are expected to
be significant changes
to the presentation of financial instruments by the Company, there is not
expected to be a significant impact
on net assets. Retrospective application is required and IFRS 9 is anticipated
to be effective for annual
periods beginning on or after 1 January 2018, however the early adoption of
amendments relating to own
credit is permitted.
As part of the December 2013 Improvements to IFRSs, the IASB made amendments to
the following
standards that are relevant to the Company's operations: IFRS 13 and IAS 24
‘Related party disclosures’
(for application in accounting periods beginning on or after 1 July 2014).
Basis of measurement
The financial statements of the Company are prepared under the historical cost
basis except for certain
financial instruments that have been measured at fair value as explained in the
accounting policies below.
Use of estimates and sources of uncertainty
The preparation of the Company’s financial statements requires management to
make judgements,
estimates and assumptions regarding the valuation of certain financial
instruments, impairment of assets
and other matters that affect the financial statements and related disclosures.
The Company believes that the
estimates utilised in preparing the financial statements are reasonable,
relevant and reliable. Actual results
could differ from these estimates.
For further details on the judgements used in determining fair value of certain
assets and liabilities, see note
17.
The going concern assumption
The Company’s business activities, together with the factors likely to affect
its future development,
performance and position, are reflected in the Business Review section of the
Directors’ report on pages 1
to 5. In addition, the notes to the financial statements include the Company’s
objectives, policies and
processes for managing its capital; its financial risk management objectives;
details of its financial
instruments; and its exposures to credit risk and liquidity risk.
As set out in the Directors’ report, retaining sufficient liquidity and capital
to withstand market pressures
remains central to the Morgan Stanley Group’s and the Company’s strategy.
Taking all of these factors into consideration, the Directors believe it is
reasonable to assume that the
Company will have access to adequate resources to continue in operational
existence for the foreseeable
future. Accordingly, they continue to adopt the going concern basis in preparing
the annual report and
financial statements.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
14
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Functional currency
Items included in the financial statements are measured and presented in Euros,
the currency of the primary
economic environment in which the Company operates.
All currency amounts in the financial statements and Directors’ report are
rounded to the nearest thousand
Euros.
b. Foreign currencies
All monetary assets and liabilities denominated in currencies other than Euros
are translated into Euros at
the rates ruling at the reporting date. Transactions in currencies other than
Euros are recorded at the rates
prevailing at the dates of the transactions. All translation differences are
taken through the statement of
comprehensive income. Exchange differences recognised in the statement of
comprehensive income are
presented in ‘Other income’ or ‘Other expense’, except where noted in 3(c)
below.
c. Financial instruments
The Company classifies its financial assets into the following categories on
initial recognition: financial
assets classified as held for trading, financial assets designated at fair value
through profit or loss, and loans
and receivables.
The Company classifies its financial liabilities into the following categories
on initial recognition: financial
liabilities classified as held for trading, financial liabilities designated at
fair value through profit or loss
and financial liabilities at amortised cost.
More information regarding these classifications is included below:
i) Financial instruments classified as held for trading
Financial instruments classified as held for trading, including all derivatives,
are initially recorded on
trade date at fair value (see note 3(d) below). All subsequent changes in fair
value, foreign exchange
differences, interest and dividends are reflected in the statement of
comprehensive income in ‘Net gains/
(losses) on financial instruments classified as held for trading’. Transaction
costs are excluded from the
initial fair value measurement of the financial instrument. These costs are
recognised in the statement of
comprehensive income in ‘Other expense’.
ii) Financial instruments designated at fair value through profit or loss
The Company has designated certain financial assets and financial liabilities at
fair value through profit or
loss when the financial assets or financial liabilities are managed, evaluated
and reported internally on a
fair value basis.
From the date the transaction in a financial instrument designated at fair value
through profit or loss is
entered into (trade date) until settlement date, the Company recognises any
unrealised fair value changes
in the contract as financial instruments designated at fair value through profit
or loss. On settlement date,
the fair value of consideration given or received is recognised as a financial
instrument designated at fair
value through profit or loss (see note 3(d) below). All subsequent changes in
fair value, foreign exchange
differences, interest and dividends are reflected in the statement of
comprehensive income in ‘Net
(losses)/ gains on financial instruments designated at fair value through profit
or loss’.
Transaction costs are excluded from the initial fair value measurement of the
financial instrument. These
costs are recognised in the statement of comprehensive income in ‘Other
expense’.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
15
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
c. Financial instruments (continued)
iii) Loans and receivables and financial liabilities at amortised cost
Financial assets classified as loans and receivables are initially recognised on
settlement date at fair value
(see note 3(d) below) and subsequently measured at amortised cost less allowance
for impairment.
Interest is recognised in the statement of comprehensive income in ‘Interest
income’, using the effective
interest rate method as described below. Transaction costs that are directly
attributable to the acquisition
of the financial asset are added to or deducted from the fair value on initial
recognition. Impairment losses
and reversals of impairment losses on financial assets classified as loans and
receivables are recognised in
the statement of comprehensive income in ‘Other expense’.
Financial liabilities at amortised cost are initially recognised on settlement
date at fair value (see note 3(d)
below) and subsequently measured at amortised cost. Interest is recognised in
the statement of
comprehensive income in ‘Interest expense’ using the effective interest rate
method as described below.
Transaction costs that are directly attributable to the issue of the financial
liability are added to or
deducted from the fair value on initial recognition.
The CPECs issued by the Company are classified as financial liabilities at
amortised cost in accordance
with the substance of the contractual arrangement. The yield on the CPECs is
recognised in the statement
of comprehensive income in ‘Interest expense’ using the effective interest rate
method as described
below.
The effective interest rate method is a method of calculating the amortised cost
of a financial instrument
(or a group of financial instruments) and of allocating the interest income or
interest expense over the
expected life of the financial instrument. The effective interest rate is the
rate that exactly discounts the
estimated future cash payments and receipts through the expected life of the
financial instrument (or,
where appropriate a shorter period) to the carrying amount of the financial
instrument. The effective
interest rate is established on initial recognition of the financial instrument.
The calculation of the
effective interest rate includes all fees and commissions paid or received,
transaction costs, and discounts
or premiums that are an integral part of the effective interest rate.
Transaction costs are incremental costs
that are directly attributable to the acquisition, issue or disposal of a
financial instrument.
d. Fair value
Fair value measurement
Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability (i.e. the
“exit price”) in an orderly transaction between market participants at the
measurement date.
Where the Company manages a group of financial assets and financial liabilities
on the basis of its net
exposure to either market or credit risk, the Company measures the fair value of
that group of financial
instruments consistently with how market participants would price the net risk
exposure at the measurement
date.
In determining fair value, the Company uses various valuation approaches and
establishes a hierarchy for
inputs used in measuring fair value that maximises the use of relevant
observable inputs and minimises the
use of unobservable inputs by requiring that the most observable inputs be used
when available.
Observable inputs are inputs that market participants would use in pricing the
asset or liability developed
based on market data obtained from sources independent of the Company.
Unobservable inputs are inputs
that reflect the Company’s assumptions about the assumptions other market
participants would use in
pricing the asset or liability, developed based on the best information
available in the circumstances.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
16
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
d. Fair value (continued)
The hierarchy is broken down into three levels based on the observability of
inputs as follows:
 Level 1 – Quoted prices (unadjusted) in an active market for identical assets
or liabilities
Valuations based on quoted prices in active markets for identical assets or
liabilities that the
Morgan Stanley Group has the ability to access. Valuation adjustments and block
discounts are not
applied to Level 1 instruments. Since valuations are based on quoted prices that
are readily and
regularly available in an active market, valuation of these products does not
entail a significant
degree of judgement.
 Level 2 – Valuation techniques using observable inputs
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 – Valuation techniques with significant unobservable inputs
Valuations based on inputs that are unobservable and significant to the overall
fair value
measurement.
The availability of observable inputs can vary from product to product and is
affected by a wide variety of
factors, including, for example, the type of product, whether the product is new
and not yet established in
the marketplace, the liquidity of markets and other characteristics particular
to the product. To the extent
that valuation is based on models or inputs that are less observable or
unobservable in the market, the
determination of fair value requires more judgement. Accordingly, the degree of
judgement exercised by
the Company in determining fair value is greatest for instruments categorised in
Level 3 of the fair value
hierarchy.
The Company considers prices and inputs that are current as of the measurement
date, including during
periods of market dislocation. In periods of market dislocation, the
observability of prices and inputs may
be reduced for many instruments. This condition could cause an instrument to be
reclassified from Level 1
to Level 2 or Level 2 to Level 3 of the fair value hierarchy. In addition, a
downturn in market conditions
could lead to declines in the valuation of many instruments.
In certain cases, the inputs used to measure fair value may fall into different
levels of the fair value
hierarchy. In such cases, for disclosure purposes, the level in the fair value
hierarchy within which the fair
value measurement falls in its entirety is determined based on the lowest level
input that is significant to the
fair value measurement in its entirety.
Valuation techniques
Many cash instruments and OTC derivative contracts have bid and ask prices that
can be observed in the
marketplace. Bid prices reflect the highest price that a party is willing to pay
for an asset. Ask prices
represent the lowest price that a party is willing to accept for an asset. For
financial instruments whose
inputs are based on bid-ask prices, the Company does not require that the fair
value estimate always be a
predetermined point in the bid-ask range. The Company’s policy is to allow for
mid-market pricing and to
adjust to the point within the bid-ask range that meets the Company’s best
estimate of fair value. For
offsetting positions in the same financial instrument, the same price within the
bid-ask spread is used to
measure both the long and short positions.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
17
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
d. Fair value (continued)
Fair value for many cash and OTC contracts is derived using pricing models.
Pricing models take into
account the contract terms (including maturity), as well as multiple inputs
including, where applicable,
commodity prices, equity prices, interest rate yield curves, credit curves,
correlation, creditworthiness of
the counterparty, option volatility and currency rates. Where appropriate,
valuation adjustments are made
to account for various factors such as liquidity risk (bid-ask adjustments),
credit quality, model uncertainty
and concentration risk.
Adjustments for liquidity risk adjust model-derived valuations of financial
instruments for the bid-mid or
mid-ask spread required to properly reflect the exit price of a risk position.
Bid-mid and mid-ask spreads
are marked to levels observed in trader activity, broker quotes or other
external third-party data. Where
these spreads are unobservable for the particular position in question, spreads
are derived from observable
levels of similar positions.
Credit valuation adjustments are applied to both cash instruments and OTC
derivatives. For cash
instruments, the impact of changes in its own credit spreads is considered when
measuring the fair value of
liabilities and the impact of changes in the counterparty’s credit spreads is
considered when measuring the
fair value of assets. For OTC derivatives, the impact of changes in both the
Company’s and the
counterparty’s credit standing is considered when measuring fair value. In
determining the expected
exposure the Company simulates the distribution of the future exposure to a
counterparty, then applies
market-based default probabilities to the future exposure, leveraging external
third-party credit default
swap (“CDS”) spread data. Where CDS spread data are unavailable for a specific
counterparty, bond
market spreads, CDS spread data based on the counterparty’s credit rating or CDS
spread data that
reference a comparable counterparty may be utilised. The Company also considers
collateral held and
legally enforceable master netting agreements that mitigate the Company’s
exposure to each counterparty.
Adjustments for model uncertainty are taken for positions where underlying
models are reliant on
significant inputs that are neither directly nor indirectly observable, hence
requiring reliance on established
theoretical concepts in their derivation. These adjustments are derived by
making assessments of the
possible degree of variability using statistical approaches and market-based
information where possible.
The Company generally subjects all valuations and models to a review process
initially and on a periodic
basis thereafter.
The Company may apply a concentration adjustment to certain of its OTC
derivatives portfolios to reflect
the additional cost of closing out a particularly large risk exposure. Where
possible, these adjustments are
based on observable market information but in many instances significant
judgement is required to estimate
the costs of closing out concentrated risk exposures due to the lack of
liquidity in the marketplace.
Fair value is a market-based measure considered from the perspective of a market
participant rather than an
entity-specific measure. Therefore, even when market assumptions are not readily
available, the
Company’s own assumptions are set to reflect those that the Company believes
market participants would
use in pricing the asset or liability at the measurement date.
Valuation process
The Valuation Review Group (“VRG”) within the Financial Control Group (“FCG”) is
responsible for the
Company’s fair value valuation policies, processes and procedures. VRG is
independent of the business
units and reports to the Chief Financial Officer of the Morgan Stanley Group
(“CFO”), who has final
authority over the valuation of the Company’s financial instruments. VRG
implements valuation control
processes to validate the fair value of the Company’s financial instruments
measured at fair value including
those derived from pricing models. These control processes are designed to
ensure that the values used for
financial reporting are based on observable inputs wherever possible. In the
event that observable inputs are
not available, the control processes are designed to ensure that the valuation
approach utilised is appropriate
and consistently applied and that the assumptions are reasonable.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
18
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
d. Fair value (continued)
The Company’s control processes apply to all financial instruments, unless
otherwise noted. These control
processes include:
Model Review. VRG, in conjunction with the Market Risk Department and, where
appropriate, the
Credit Risk Management Department, both of which report to the Chief Risk
Officer of the Morgan
Stanley Group (“CRO”), independently review valuation models’ theoretical
soundness, the
appropriateness of the valuation methodology and calibration techniques
developed by the business
units using observable inputs. Where inputs are not observable, VRG reviews the
appropriateness of
the proposed valuation methodology to ensure it is consistent with how a market
participant would
arrive at the unobservable input. The valuation methodologies utilised in the
absence of observable
inputs may include extrapolation techniques and the use of comparable observable
inputs. As part of
the review, VRG develops a methodology to independently verify the fair value
generated by the
business unit’s valuation model. Before trades are executed using new valuation
models, those
models are required to be independently reviewed. All of the Company’s valuation
models are
subject to an independent annual VRG review.
Independent Price Verification. The business units are responsible for
determining the fair value of
financial instruments using approved valuation models and valuation
methodologies. Generally on a
monthly basis, VRG independently validates the fair values of financial
instruments determined
using valuation models by determining the appropriateness of the inputs used by
the business units
and by testing compliance with the documented valuation methodologies approved
in the model
review process described above.
VRG uses recently executed transactions, other observable market data such as
exchange data,
broker/ dealer quotes, third-party pricing vendors and aggregation services for
validating the fair
values of financial instruments generated using valuation models. VRG assesses
the external sources
and their valuation methodologies to determine if the external providers meet
the minimum
standards expected of a third-party pricing source. Pricing data provided by
approved external
sources are evaluated using a number of approaches; for example, by
corroborating the external
sources’ prices to executed trades, by analysing the methodology and assumptions
used by the
external source to generate a price and/ or by evaluating how active the third
-party pricing source (or
originating sources used by the third-party pricing source) is in the market.
Based on this analysis,
VRG generates a ranking of the observable market data to ensure that the highest
-ranked market data
source is used to validate the business unit’s fair value of financial
instruments.
For financial instruments where the fair value is based on unobservable inputs,
VRG reviews the
business unit’s valuation techniques to ensure these are consistent with market
participant
assumptions.
The results of this independent price verification and any adjustments made by
VRG to the fair value
generated by the business units are presented to management of the Morgan
Stanley Group’s three
business segments (i.e. Institutional Securities, Wealth Management and
Investment Management),
the CFO and the CRO on a regular basis.
Review of Transactions where the valuation is based on unobservable inputs. VRG
reviews the
models and valuation methodology used to price all new material Level 3
transactions and both the
FCG and Market Risk Department management must approve the fair value of the
trade that is
initially recognised.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
19
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
d. Fair value (continued)
Gains and losses on inception
In the normal course of business, the fair value of a financial instrument on
initial recognition is the
transaction price (i.e. the fair value of the consideration given or received).
In certain circumstances,
however, the fair value will be based on other observable current market
transactions in the same
instrument, without modification or repackaging, or on a valuation technique
whose variables include only
data from observable markets. When such evidence exists, the Company recognises
a gain or loss on
inception of the transaction.
When the use of unobservable market data has a significant impact on determining
fair value at the
inception of the transaction, the entire initial gain or loss indicated by the
valuation technique as at the
transaction date is not recognised immediately in the statement of comprehensive
income and is recognised
instead when the market data becomes observable.
e. Derecognition of financial assets and liabilities
The Company derecognises a financial asset only when the contractual rights to
the cash flows from the
asset expire, or when it transfers the financial asset and substantially all the
risk and rewards of ownership
of the asset.
The Company derecognises financial liabilities when the Company’s obligations
are discharged, cancelled
or they expire.
f. Impairment of financial assets
At each reporting date, an assessment is made as to whether there is any
objective evidence of impairment
in the value of a financial asset classified as loans and receivables.
Impairment losses are recognised if an
event has occurred which will have an adverse impact on the expected future cash
flows of an asset and the
expected impact can be reliably estimated.
Impairment losses on loans and receivables are measured as the difference
between the carrying amount of
the loans and receivables and the present value of estimated cash flows
discounted at the asset’s original
effective interest rate. Such impairment losses are recognised in the statement
of comprehensive income
within ‘Other expense’ and are recognised against the carrying amount of the
impaired asset on the
statement of financial position. Interest on the impaired asset continues to be
accrued on the reduced
carrying amount based on the original effective interest rate of the asset.
If in a subsequent period, the amount of the estimated impairment loss decreases
because of an event
occurring after the impairment was recognised, the previously recognised
impairment loss is reversed as
detailed by financial asset in note 3(c)(iii). Any reversal is limited to the
extent that the value of the asset
may not exceed the original amortised cost of the asset had no impairment
occurred.
g. Cash and cash equivalents
For the purposes of the statement of cash flows, cash and cash equivalents
comprise cash and demand
deposits with banks, along with highly liquid investments, with original
maturities of three months or less,
that are readily convertible to known amounts of cash and subject to
insignificant risk of change in value.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
20
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
h. Income tax
The tax expense represents the sum of the tax currently payable.
The tax currently payable is calculated based on taxable profit for the year.
Taxable profit may differ from
profit before income tax as reported in the statement of comprehensive income
because it excludes items of
income or expense that are taxable or deductible in other years and it further
excludes items that are never
taxable or deductible. The Company’s liability for current tax is calculated
using tax rates that have been
enacted or substantively enacted by the reporting date. Current tax is charged
or credited in the statement of
comprehensive income.
Current tax assets are offset against current tax liabilities when there is a
legally enforceable right to set off
current tax assets against current tax liabilities and the Company intends to
settle its current tax assets and
current tax liabilities on a net basis or to realise the asset and settle the
liability simultaneously.
i. Offsetting of financial assets and financial liabilities
Where there is a currently legally enforceable right to set off the recognised
amounts and an intention to
either settle on a net basis or to realise the asset and the liability
simultaneously, financial assets and
financial liabilities are offset and the net amount is presented on the
statement of financial position. In the
absence of such conditions, financial assets and financial liabilities are
presented on a gross basis.
4. INTEREST INCOME AND INTEREST EXPENSE
‘Interest income’ and ‘Interest expense’ represent total interest income and
total interest expense for
financial assets and financial liabilities that are not carried at fair value.
No other gains or losses have been recognised in respect of loans and
receivables other than as disclosed as
‘Interest income’ within the statement of comprehensive income.
No other gains or losses have been recognised in respect of financial
liabilities at amortised cost other than
as disclosed as ‘Interest expense’ within the statement of comprehensive income.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
21
5. OTHER INCOME
2013 2012
€'000 €'000
Management charges to other Morgan Stanley Group undertakings 6,094 4,875
6. OTHER EXPENSE
2013 2012
€'000 €'000
Auditors remuneration:
Audit of the Company's financial statements 95 97
Of the auditors remuneration, €35,000 (2012: €35,000) was paid to Deloitte
Accountants B.V. for audit
services.
The Company employed no staff during the year (2012: none).
7. INCOME TAX EXPENSE
2013 2012
€'000 €'000
Current tax expense
Current year 1,524 1,219
Adjustments in respect of prior years (6) (23)
Income tax expense 1,518 1,196
Reconciliation of effective tax rate
The current year income tax expense is lower (2012: lower) than that resulting
from applying the average
standard rate of corporation tax in The Netherlands for the year of 25.0% (2012:
25.0%). The main
differences are explained below:
2013 2012
€'000 €'000
Profit before income tax 6,094 4,875
Income tax using the average standard rate of corporation tax
in The Netherlands of 25.0% (2012: 25.0%) 1,524 1,219
Impact on tax of:
Tax over provided in prior years (6) (23)
Total income tax expense in the statement of comprehensive
income 1,518 1,196
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
22
8. CONVERTIBLE PREFERRED EQUITY CERTIFICATES
€'000
At 1 January 2012 -
Issued during the year 1,125,281
Yield payable 19,914
At 31 December 2012 1,145,195
Yield payable 25,384
At 31 December 2013 1,170,579
On 30 March 2012, the Company issued 11,252,813 of CPECs of €100 each,
classified as financial
liabilities at amortised cost. The CPECs were issued to one of the Company's
shareholders, Archimedes
Investments Coöperatieve U.A. (a Morgan Stanley Group undertaking), in exchange
for cash consideration
of €1,125,281,000. The cash consideration was subsequently loaned to another
Morgan Stanley Group
undertaking.
The holder of the CPECs is entitled to receive an annual yield on a date agreed
by the Company and the
holder. The yield for each CPEC is calculated as income deriving from the
Company's activities less the
necessary amounts to cover the costs of the Company divided by the number of
CPECs then in issue. Other
income relating to management charges received from other Morgan Stanley Group
undertakings and gains
or losses from financial instruments classified as held for trading or
designated at fair value through profit
or loss are excluded from the calculation.
The CPECs carry no voting rights. The Company and the holder has the right to
convert each issued CPEC
into one ordinary share with a nominal value of €100.
The maturity date of the CPECs is 150 years from the date of issuance, however,
the CPECs may be
redeemed earlier at the option of the Company or on liquidation of the Company.
The CPECs rank ahead of the ordinary shares in the event of liquidation.
9. FINANCIAL ASSETS AND FINANCIAL LIABILITIES CLASSIFIED AS HELD FOR
TRADING
Financial assets and financial liabilities classified as held for trading are
summarised as follows:
2013 2012
Assets Liabilities Assets Liabilities
€'000 €'000 €'000 €'000
Derivatives 979,451 283,324 561,398 265,350
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
23
10. FINANCIAL ASSETS AND FINANCIAL LIABILITIES DESIGNATED AT FAIR VALUE
THROUGH PROFIT OR LOSS
Financial instruments designated at fair value through profit or loss consist
primarily of the following
financial liabilities and financial assets:
Issued Structured Notes: These relate to financial liabilities which arise from
selling structured products
generally in the form of notes, certificates and warrants. These instruments
contain an embedded derivative
which significantly modifies the cash flows of the issuance. The return on the
instrument is linked to an
underlying that is not clearly and closely related to the debt host including,
but not limited to equity-linked
notes. The Structured Notes are designated at fair value through profit or loss
as the risks to which the
Company is a contractual party are risk managed on a fair value basis as part of
the Company’s trading
portfolio and the risk is reported to key management personnel on this basis.
Prepaid equity securities contracts: These contracts involve derivatives for
which an initial payment is
paid at inception. The contracts, along with the loans designated at fair value
through profit or loss and the
derivative contracts classified as held for trading, are part of the hedging
strategy for the obligations arising
pursuant to the issuance of the Structured Notes. The prepaid equity securities
contracts are designated at
fair value through profit or loss as the risks to which the Company is a
contractual party are managed on a
fair value basis as part of the Company’s trading portfolio and the risk is
reported to key management
personnel on this basis.
Loans: These are loans to other Morgan Stanley Group undertakings that, along
with the prepaid equity
securities contracts and the derivatives contracts classified as held for
trading, are part of the hedging
strategy for the obligations arising pursuant to the issuance of the Structured
Notes. These loans are
designated at fair value through profit or loss as the risks to which the
Company is a contractual party are
managed on a fair value basis as part of the Company’s trading portfolio and the
risk is reported to key
management personnel on this basis.
2013 2012
Assets Liabilities Assets Liabilities
€'000 €'000 €'000 €'000
Issued Structured Notes - 6,637,002 - 5,065,592
Prepaid equity securities contracts 1,805,691 - 1,905,196 -
Loans 4,185,259 - 2,884,266 -
5,990,950 6,637,002 4,789,462 5,065,592
The change in fair value of issued Structured Notes recognised through the
statement of comprehensive
income attributable to own credit risk is a loss of €53,205,000 (2012: loss of
€98,248,000) and
cumulatively is a gain of €88,934,000 (2012: cumulative gain of €142,139,000).
This change is determined
as the amount of change in fair value that is not attributable to changes in
market conditions that give rise to
market risk.
The change in fair value of prepaid equity securities contracts and loans
recognised through the statement
of comprehensive income attributable to own credit risk is a gain of €66,011,000
(2012: gain of
€123,694,000) and cumulatively is a loss of €74,929,000 (2012: cumulative loss
of €140,940,000).
The change in fair value of financial instruments designated at fair value
through profit or loss attributable
to own credit risk for the year is offset by a net loss of €12,806,000 (2012:
loss of €25,446,000) and
cumulatively is a net loss of €14,005,000 (2012: cumulative loss of €1,199,000),
in changes in the fair
value of financial instruments classified as held for trading attributable to
own credit risk.
The carrying amount of financial liabilities designated at fair value was
€258,660,000 higher than the
contractual amount due at maturity (2012: €451,000,000 lower).
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
24
10. FINANCIAL ASSETS AND FINANCIAL LIABILITIES DESIGNATED AT FAIR VALUE
THROUGH PROFIT OR LOSS (CONTINUED)
The following table presents the carrying value of the Company’s financial
liabilities designated at fair
value through the profit or loss account, classified according to underlying
security type, including, single
name equities, equity indices and equity portfolio.
31 December 2013
Single
name
equities
Equity
indices
Equity
portfolio Other Total
€'000 €'000 €'000 €'000 €'000
Certificates and warrants 1,949,054 125,508 461,638 - 2,536,200
Notes 401,068 2,339,586 959,780 400,368 4,100,802
Total financial liabilities designated at
fair value through profit or loss 2,350,122 2,465,094 1,421,418 400,368
6,637,002
31 December 2012
Single
name
equities
Equity
indices
Equity
portfolio Other Total
€'000 €'000 €'000 €'000 €'000
Certificates and warrants 1,243,407 75,908 371,045 - 1,690,360
Notes 346,672 1,696,448 919,283 412,829 3,375,232
Total financial liabilities designated at
fair value through profit or loss 1,590,079 1,772,356 1,290,328 412,829
5,065,592
The majority of the Company’s financial liabilities designated at fair value
through the profit or loss
provide exposure to an underlying single name equity, an equity index or
portfolio of equities. The prepaid
equity securities contracts, derivative contracts classified as held for trading
and loans that the Company
enters into to hedge the Structured Notes are valued as detailed in note 3(d)
and note 17(a), and have
similar valuation inputs to the liabilities they hedge.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
25
11. EQUITY
Ordinary share capital
Ordinary shares
of €100 each
Number
Authorised
At 1 January 2012 and 31 December 2012 400,000
Ordinary shares
of €100 each
€'000
Issued and fully paid
At 1 January 2012, 31 December 2012 and 31 December 2013 15,018
On 9 December 2013 the Articles of Association of the Company were amended
whereby the concept of
authorised share capital was abolished and whereby the voting rights attached to
the Company’s shares
were amended. Following the amendment of the Articles of Association each share
confers the right to cast
one vote, provided that subject to mandatory law, all resolutions of the General
Meeting shall be adopted
by unanimous vote in a meeting in which the entire share capital is present or
represented.
The holders of ordinary shares are entitled to receive dividends as declared
from time to time.
Reserves
The Company uses the contracts that it purchases from other Morgan Stanley Group
undertakings to hedge
the market price, interest rate, foreign currency and other market risks
associated with the issuance of the
Structured Notes, consistent with the Company’s risk management strategy. Both
the contracts and the
Structured Note issuances are valued at fair value through profit or loss. As
such the Company is not
exposed to any market risk on these financial instruments. The changes in fair
value of the Structured Note
issuances are fully hedged by the changes in fair value of these contracts.
Therefore, a legal revaluation
reserve under Part 9, Book 2 of the Dutch Civil Code (BW2, article 390(1)) is
not necessary.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
26
12. ADDITIONAL CASH FLOW INFORMATION
a. Cash and cash equivalents
For the purposes of the statement of cash flows, cash and cash equivalents
comprise the following balances,
which have less than three months maturity from the date of acquisition:
2013 2012
€'000 €'000
Cash and short-term deposits 1,585 1,255
b. Reconciliation of cash flows from operating activities
2013 2012
€'000 €'000
Profit for the year 4,576 3,679
Adjustments for:
Interest income (25,554) (20,033)
Interest expense 25,459 19,936
Income tax expense 1,518 1,196
Operating cash flows before changes in operating assets and
liabilities 5,999 4,778
Changes in operating assets
(Increase)/ decrease in loans and receivables, excluding
cash and short-term deposits (4,850) 8,171
Increase in financial assets classified as held for
trading (418,053) (350,211)
Increase in financial assets designated at fair value
through profit or loss (1,201,488) (844,808)
(1,624,391) (1,186,848)
Changes in operating liabilities
Increase/ (decrease) in financial liabilities at amortised cost,
excluding bank loans and overdrafts 32,070 (129)
Increase/ (decrease) in financial liabilities classified as held for
trading 17,974 (291,596)
Increase in financial liabilities designated at fair value
through profit or loss 1,571,410 1,475,326
1,621,454 1,183,601
Interest paid (75) (17)
Income taxes paid (2,657) (1,356)
(2,732) (1,373)
Net cash flows from operating activities 330 158
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
27
13. EXPECTED MATURITY OF ASSETS AND LIABILITIES
The table below shows an analysis of assets and liabilities analysed according
to when they are expected to
be recovered, realised or settled.
At 31 December 2013 Less than
or equal to More than
twelve twelve
months months Total
€'000 €'000 €'000
ASSETS
Loans and receivables:
Cash and short-term deposits 1,585 - 1,585
Trade receivables 2,947 - 2,947
Other receivables 26,212 1,168,815 1,195,027
30,744 1,168,815 1,199,559
Financial assets classified as held for trading 403,975 575,476 979,451
Financial assets designated at fair value through profit or loss 1,722,487
4,268,463 5,990,950
Current tax assets 650 - 650
2,157,856 6,012,754 8,170,610
LIABILITIES
Financial liabilities at amortised cost:
Convertible preferred equity certificates - 1,170,579 1,170,579
Trade payables 54,607 - 54,607
Other payables 21 - 21
54,628 1,170,579 1,225,207
Financial liabilities classified as held for trading 86,332 196,992 283,324
Financial liabilities designated at fair value through profit or loss 1,991,819
4,645,183 6,637,002
2,132,779 6,012,754 8,145,533
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
28
13. EXPECTED MATURITY OF ASSETS AND LIABILITIES (CONTINUED)
At 31 December 2012 Less than
or equal to More than
twelve twelve
months months Total
€'000 €'000 €'000
ASSETS
Loans and receivables:
Cash and short-term deposits 1,255 - 1,255
Trade receivables 1,364 - 1,364
Other receivables 22,179 1,144,027 1,166,206
24,798 1,144,027 1,168,825
Financial assets classified as held for trading 145,047 416,351 561,398
Financial assets designated at fair value through profit or loss 1,189,153
3,600,309 4,789,462
1,358,998 5,160,687 6,519,685
LIABILITIES
Financial liabilities at amortised cost:
Convertible preferred equity certificates - 1,145,195 1,145,195
Trade payables 22,537 - 22,537
Other payables 21 - 21
22,558 1,145,195 1,167,753
Financial liabilities classified as held for trading 47,381 217,969 265,350
Financial liabilities designated at fair value through profit or loss 1,266,901
3,798,691 5,065,592
Current tax liabilities 489 - 489
1,337,329 5,161,855 6,499,184
14. SEGMENTAL REPORTING
Segment information is presented in respect of the Company’s business and
geographical segments. The
business segments and geographical segments are based on the Company’s
management and internal
reporting structure.
Business segments
Morgan Stanley structures its business segments primarily based upon the nature
of the financial products
and services provided to customers and Morgan Stanley’s internal management
structure. The Company’s
own business segments are consistent with those of Morgan Stanley.
The Company has one reportable business segment, Institutional Securities, which
provides financial
services to financial institutions. Its business includes the issuance of
financial instruments and the hedging
of the obligations arising pursuant to such issuances.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
29
14. SEGMENTAL REPORTING (CONTINUED)
Geographical segments
The Company operates in three geographic regions as listed below:
 Europe, Middle East and Africa (“EMEA”)
 Americas
 Asia
The following table presents selected statement of comprehensive income and
statement of financial
position information of the Company’s operations by geographic area. The
external revenues (net of
interest expense) and total assets disclosed in the following table reflect the
regional view of the
Company’s operations, on a managed basis. The basis for attributing external
revenues (net of interest
expense) and total assets is determined by a combination of client and trading
desk location.
EMEA Americas Asia Total
2013 2012 2013 2012 2013 2012 2013 2012
€'000 €'000 €'000 €'000 €'000 €'000 €'000 €'000
External revenues
net of interest 5,007 4,094 605 440 577 438 6,189 4,972
Profit before
income tax 4,930 4,014 596 432 568 429 6,094 4,875
Total assets 5,585,109 4,448,769 1,913,726 1,608,583 671,775 462,333 8,170,610
6,519,685
Of the Company’s external revenue, 100% (2012: 100%) arises from transactions
with other Morgan
Stanley Group undertakings. Further details of such transactions are disclosed
in the related party
disclosures note 20.
15. FINANCIAL RISK MANAGEMENT
Risk management procedures
Risk is an inherent part of both Morgan Stanley’s and the Company’s business
activity and is managed by
the Company within the context of the broader Morgan Stanley Group. The Morgan
Stanley Group seeks to
identify, assess, monitor and manage each of the various types of risk involved
in its business activities in
accordance with defined policies and procedures. The Company’s own risk
management policies and
procedures are consistent with those of the Morgan Stanley Group.
The principal activity of the Company is the issuance of financial instruments
and the hedging of the
obligations arising pursuant to such issuances. It is the policy and objective
of the Company not to be
exposed to market risk. On issuance of each financial instrument, the Company
enters into hedges of its
obligations by purchasing financial instruments from other Morgan Stanley Group
undertakings.
Significant risks faced by the Company resulting from its trading activities are
set out below.
Credit risk
Credit risk refers to the risk of loss arising when a borrower, counterparty or
issuer does not meet its
financial obligations to the Company.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
30
15. FINANCIAL RISK MANAGEMENT (CONTINUED)
Credit risk (continued)
The Morgan Stanley Group manages credit risk exposure on a global consolidated
basis and in
consideration of individual legal entities. The credit risk management policies
and procedures of the
Morgan Stanley Group establish the framework for identifying, measuring,
monitoring and controlling
credit risk while ensuring transparency of material credit risks, ensuring
compliance with established limits
and escalating risk concentrations to appropriate senior management. Credit risk
management policies and
procedures for the Company are consistent with those of the Morgan Stanley Group
and include escalation
to appropriate key management personnel of the Company.
The Company enters into the majority of its financial asset transactions with
other Morgan Stanley Group
undertakings, and both the Company and the other Morgan Stanley Group
undertakings are wholly-owned
subsidiaries of the same ultimate parent entity, Morgan Stanley. As a result of
the implicit support that
would be provided by Morgan Stanley, the Company is considered exposed to the
credit risk of Morgan
Stanley, except where the Company transacts with other Morgan Stanley Group
undertakings that have a
higher credit rating to that of Morgan Stanley.
The maximum exposure to credit risk of the Company at the reporting date is the
carrying amount of the
financial assets held in the statement of financial position. The Company has
not entered into any credit
enhancements to manage its exposure to credit risk.
The Company does not have any significant exposure arising from items not
recognised on its statement of
financial position.
The impact of master netting arrangements and similar agreements on the
Company’s ability to offset
financial assets and financial liabilities is disclosed in note 16.
Maximum exposure to credit risk by credit rating(1)
Gross credit exposure
Credit rating 2013 2012
€'000 €'000
AA 1,471 1,040
A 8,168,489 6,518,645
Total 8,169,960 6,519,685
(1) Internal credit rating derived using methodologies generally consistent with
those used by external
rating agencies.
At 31 December 2013 there were no financial assets past due but not impaired or
individually impaired
(2012: €nil).
Liquidity and funding risk
Liquidity and funding risk refers to the risk that the Company will be unable to
finance its operations due to
a loss of access to the capital markets or difficulty in liquidating its assets.
Liquidity and funding risk also
encompasses the Company’s ability to meet its financial obligations without
experiencing significant
business disruption or reputational damage that may threaten its viability as a
going concern.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
31
15. FINANCIAL RISK MANAGEMENT (CONTINUED)
Liquidity and funding risk (continued)
The Morgan Stanley Group’s senior management establishes the overall liquidity
and funding policies of
the Morgan Stanley Group and the liquidity risk management policies and
procedures conducted within the
Company are consistent with those of the Morgan Stanley Group. The primary goal
of the Morgan Stanley
Group’s liquidity risk management framework is to ensure the Morgan Stanley
Group, including the
Company, have access to adequate funding across a wide range of market
conditions. The framework is
designed to enable the Company to fulfil its financing obligations and support
the execution of the
Company’s business strategies.
The Company hedges all of its issued Structured Notes with financial instruments
entered into with other
Morgan Stanley Group undertakings, where both the Company and the other Morgan
Stanley Group
undertakings are wholly-owned subsidiaries of the same group parent company,
Morgan Stanley. Further,
the maturity profile of the financial assets matches the maturity profile of the
financial liabilities.
Liquidity management policies
The core components of the Morgan Stanley Group’s liquidity management
framework, which includes
consideration of the liquidity risk for each individual legal entity, are the
Contingency Funding Plan
(“CFP”), Liquidity Stress Tests and the Global Liquidity Reserve, which support
the Morgan Stanley
Group’s target liquidity profile.
Contingency Funding Plan. The CFP describes the data and information flows,
limits, targets, operating
environment indicators, escalation procedures, roles and responsibilities, and
available mitigating actions in
the event of a liquidity stress. The CFP also sets forth the principal elements
of the Morgan Stanley
Group’s liquidity stress testing which identifies stress events of different
severity and duration, assesses
current funding sources and uses and establishes a plan for monitoring and
managing a potential liquidity
stress event.
Liquidity Stress Tests. The Morgan Stanley Group uses Liquidity Stress Tests to
model liquidity outflows
across multiple scenarios over a range of time horizons.
The assumptions underpinning the Liquidity Stress Tests include, but are not
limited to, the following: (i)
no government support; (ii) no access to unsecured debt markets; (iii) repayment
of all unsecured debt
maturing within the stress horizon; (iv) higher haircuts and significantly lower
availability of secured
funding; (v) additional collateral that would be required by trading
counterparties and certain exchanges
and clearing organisations related to credit rating downgrades; (vi) additional
collateral that would be
required due to collateral substitutions, collateral disputes and uncalled
collateral; (vii) discretionary
unsecured debt buybacks; (viii) drawdowns on unfunded commitments provided to
third parties; (ix) client
cash withdrawals and reduction in customer short positions that fund long
positions; (x) limited access to
the foreign exchange swap markets; (xi) return of securities borrowed on an
uncollateralised basis; and (xii)
maturity roll-off of outstanding letters of credit with no further issuance.
The Liquidity Stress Tests are produced for Morgan Stanley and the major
operating subsidiaries, as well as
at major currency levels, to capture specific cash requirements and cash
availability at various legal entities.
The Liquidity Stress Tests assume that subsidiaries will use their own liquidity
first to fund their
obligations before drawing liquidity from Morgan Stanley. It is also assumed
that Morgan Stanley will
support its subsidiaries and will not have access to cash that may be held at
certain subsidiaries that are
subject to regulatory, legal or tax constraints.
Since the Company hedges the liquidity risk of its financial liabilities with
financial assets that match the
maturity profile of the financial liabilities, the Company is not considered a
major operating subsidiary for
the purposes of liquidity risk. However, the Company would have access to the
cash or liquidity reserves
held by Morgan Stanley in the unlikely event that it was unable to access
adequate financing to service its
financial liabilities when they become payable.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
32
15. FINANCIAL RISK MANAGEMENT (CONTINUED)
Liquidity and funding risk (continued)
The CFP and Liquidity Stress Tests are evaluated on an ongoing basis and
reported to the Firm Risk
Committee, Asset/ Liability Management Committee, and other appropriate risk
committees.
Global Liquidity Reserve. The Morgan Stanley Group maintains sufficient
liquidity reserves (“the Global
Liquidity Reserve”) to cover daily funding needs and meet strategic liquidity
targets sized by the CFP and
Liquidity Stress Tests. The size of the Global Liquidity Reserve is actively
managed by the Morgan
Stanley Group. The following components are considered in sizing the Global
Liquidity Reserve:
unsecured debt maturity profile, statement of financial position size and
composition, funding needs in a
stressed environment inclusive of contingent cash outflows and collateral
requirements. Additionally, the
Global Liquidity Reserve includes an additional reserve, which is primarily a
discretionary surplus based
on the Morgan Stanley Group’s risk tolerance and is subject to change dependent
on market and firmspecific
events.
The Global Liquidity Reserve, to which the Company has access, is held within
Morgan Stanley and the
Morgan Stanley Group’s major operating subsidiaries and is composed of
diversified cash and cash
equivalents and highly liquid unencumbered securities.
Eligible unencumbered securities include US government securities, US agency
securities, US agency
mortgage-backed securities, non-US government securities and other highly liquid
investment grade
securities.
The ability to monetise assets during a liquidity crisis is critical. The Morgan
Stanley Group believes that
the assets held in the Global Liquidity Reserve can be monetised within five
business days in a stressed
environment given the highly liquid and diversified nature of the reserves.
Funding management policies
The Morgan Stanley Group manages its funding in a manner that reduces the risk
of disruption to the
Morgan Stanley Group’s and the Company’s operations. The Morgan Stanley Group
pursues a strategy of
diversification of secured and unsecured funding sources (by product, by
investor and by region) and
attempts to ensure that the tenor of the Morgan Stanley Group’s, and the
Company’s, liabilities equals or
exceeds the expected holding period of the assets being financed.
The Morgan Stanley Group funds its statement of financial position on a global
basis through diverse
sources, which includes consideration of the funding risk of each legal entity.
These sources may include
the Morgan Stanley Group’s equity capital, long-term debt, securities sold under
agreements to repurchase,
securities lending, deposits, commercial paper, letters of credit and lines of
credit. The Morgan Stanley
Group has active financing programmes for both standard and structured products
targeting global investors
and currencies.
Balance sheet management
In managing both the Morgan Stanley Group’s and the Company’s funding risk the
composition and size of
the entire statement of financial position, not just financial liabilities, is
monitored and evaluated. A
substantial portion of the Morgan Stanley Group’s total assets consists of
liquid marketable securities and
short-term receivables arising from its Institutional Securities business
segment’s sales and trading
activities. The liquid nature of these assets provides the Morgan Stanley Group
and the Company with
flexibility in managing the size of its statement of financial position.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
33
15. FINANCIAL RISK MANAGEMENT (CONTINUED)
Liquidity and funding risk (continued)
Maturity analysis
In the following maturity analysis of financial assets and financial
liabilities, derivative contracts, financial
assets designated at fair value through profit or loss and financial liabilities
designated at fair value through
profit or loss are disclosed according to their earliest contractual maturity;
all such amounts are presented
at their fair value, consistent with how these financial instruments are
managed. All other amounts
represent the undiscounted cash flows receivable and payable by the Company
arising from its financial
assets and financial liabilities to earliest contractual maturities as at 31
December 2013 and 31 December
2012. Receipt of financial assets and repayments of financial liabilities that
are subject to immediate notice
are treated as if notice were given immediately and are classified as on demand.
This presentation is
considered by the Company to appropriately reflect the liquidity risk arising
from these financial assets and
financial liabilities, presented in a way that is consistent with how the
liquidity risk on these financial
assets and financial liabilities is managed by the Company.
Equal to Equal to
or more or more
than 1 than 2
year years Equal to
but less but less or more
On Less than than 2 than 5 than 5
demand 1 year years years years Total
31 December 2013 €'000 €'000 €'000 €'000 €'000 €'000
Financial assets
Loans and receivables:
Cash and short-term deposits 1,585 - - - - 1,585
Trade receivables 2,947 - - - - 2,947
Other receivables 1,195,027 - - - - 1,195,027
Financial assets classified as held for
trading:
Derivatives 481,555 54,372 41,334 189,957 212,233 979,451
Financial assets designated at fair
value through profit or loss:
Prepaid equity securities contracts 1,209,242 341,145 101,652 136,789 16,863
1,805,691
Loans 491,753 392,839 408,396 2,300,082 592,189 4,185,259
Total financial assets 3,382,109 788,356 551,382 2,626,828 821,285 8,169,960
Financial liabilities
Financial liabilities at amortised cost:
Convertible preferred equity certificates 1,170,579 - - - - 1,170,579
Trade payables 54,607 - - - - 54,607
Other payables 21 - - - - 21
Financial liabilities classified as held
for trading:
Derivatives 97,852 24,989 33,236 90,064 37,183 283,324
Financial liabilities designated at fair
value through profit or loss:
Issued Structured Notes 2,034,623 763,367 518,146 2,536,764 784,102 6,637,002
Total financial liabilities 3,357,682 788,356 551,382 2,626,828 821,285
8,145,533
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
34
15. FINANCIAL RISK MANAGEMENT (CONTINUED)
Liquidity and funding risk (continued)
Equal to Equal to
or more or more
than 1 than 2
year years Equal to
but less but less or more
On Less than than 2 than 5 than 5
demand 1 year years years years Total
31 December 2012 €'000 €'000 €'000 €'000 €'000 €'000
Financial assets
Loans and receivables:
Cash and short-term deposits 1,255 - - - - 1,255
Trade receivables 1,364 - - - - 1,364
Other receivables 1,166,206 - - - - 1,166,206
Financial assets classified as held for
trading:
Derivatives 26,758 118,919 30,876 200,523 184,322 561,398
Financial assets designated at fair
value through profit or loss
Prepaid equity securities contracts 1,380,558 160,272 135,526 201,151 27,689
1,905,196
Loans 67,401 157,161 188,662 2,008,861 462,181 2,884,266
Total financial assets 2,643,542 436,352 355,064 2,410,535 674,192 6,519,685
Financial liabilities
Financial liabilities at amortised cost:
Convertible preferred equity certificates 1,145,195 - - - - 1,145,195
Trade payables 22,537 - - - - 22,537
Other payables 21 - - - - 21
Financial liabilities classified as held
for trading:
Derivatives 22,071 30,618 24,616 127,812 60,233 265,350
Financial liabilities designated at fair
value through profit or loss
Issued Structured Notes 1,432,728 405,734 330,448 2,282,723 613,959 5,065,592
Total financial liabilities 2,622,552 436,352 355,064 2,410,535 674,192
6,498,695
Market risk
Market risk is defined by IFRS 7 as the risk that the fair value or future cash
flows of a financial instrument
will fluctuate because of changes in market prices.
Sound market risk management is an integral part of the Company’s and the Morgan
Stanley Group’s
culture. The Company is responsible for ensuring that market risk exposures are
well-managed and prudent
and more broadly for ensuring transparency of material market risks, monitoring
compliance with
established limits, and escalating risk concentrations to appropriate senior
management.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
35
15. FINANCIAL RISK MANAGEMENT (CONTINUED)
Market risk (continued)
To execute these responsibilities, the Morgan Stanley Group monitors the market
risk of the firm against
limits on aggregate risk exposures, performs a variety of risk analyses,
routinely reports risk summaries and
maintains the Value at Risk (“VaR”) and scenario systems. The Company is managed
within the Morgan
Stanley Group’s global framework. The market risk management policies and
procedures of the Company
include performing risk analyses and reporting any material risks identified to
appropriate key management
personnel of the Company.
The Company enters into the majority of its financial asset transactions with
other Morgan Stanley Group
undertakings, where both the Company and the other Morgan Stanley Group
undertakings are whollyowned
subsidiaries of the same group parent entity, Morgan Stanley.
The issued Structured Notes expose the Company to the risk of changes in market
prices of the underlying
securities, interest rate risk and, where denominated in currencies other than
Euros, the risk of changes in
rates of exchange between the Euro and the other relevant currencies. The
Company uses the contracts that
it purchases from other Morgan Stanley Group undertakings to hedge the market
price, interest rate and
foreign currency risks associated with the issuance of the Structured Notes,
consistent with the Company’s
risk management strategy. As such, the Company is not exposed to any market risk
on these financial
instruments.
16. FINANCIAL ASSETS AND FINANCIAL LIABILITIES SUBJECT TO OFFSETTING
In order to manage credit exposure arising from its business activities, the
Company applies various credit
risk management policies and procedures, see note 15 for further details.
Primarily in connection with
derivative contracts, prepaid equity securities contracts and issued Structured
Notes, the Company enters
into master netting arrangements with its counterparties. These agreements
provide the Company with the
right, in the ordinary course of business and/ or in the event of a counterparty
default (such as bankruptcy
or a counterparty’s failure to pay or perform), to net a counterparty’s rights
and obligations under such
agreement. However, in certain circumstances, the Company may not have such an
agreement in place; the
relevant insolvency regime (which is based on type of counterparty entity and
the jurisdiction of
organisation of the counterparty) may not support the enforceability of the
agreement; or the Company
may not have sought legal advice to support the enforceability of the agreement.
In cases where the
Company has not determined an agreement to be enforceable, the related amounts
are not offset in the
tabular disclosures. The enforceability of the master netting agreement is taken
into account in the
Company’s risk management practices and application of counterparty credit
limits.
In the statement of financial position, financial assets and financial
liabilities are only offset and presented
on a net basis where there is a current legally enforceable right to set off the
recognised amounts and an
intention to either settle on a net basis or to realise the asset and the
liability simultaneously. In the absence
of such conditions, financial assets and financial liabilities are presented on
a gross basis.
The following tables present information about the offsetting of financial
instruments.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
36
16. FINANCIAL ASSETS AND FINANCIAL LIABILITIES SUBJECT TO OFFSETTING
(CONTINUED)
Gross
Amounts (1)
Amounts
offset in the
statement of
financial
position (2)
Net
amounts
presented in
the
statement of
financial
position
Amounts not
offset in the
statement of
financial
position
(3)(4)(5)
Net
exposure (6)
Financial
instruments
€'000 €'000 €'000 €'000 €'000
31 December 2013
Assets
Financial assets classified as held
for trading:
Derivatives 979,451 - 979,451 (283,324) 696,127
Financial assets designated at fair
value through profit or loss:
Prepaid equity securities
contracts 1,837,348 (31,657) 1,805,691 (1,313,717) 491,974
TOTAL 2,816,799 (31,657) 2,785,142 (1,597,041) 1,188,101
Liabilities
Financial liabilities classified as
held for trading:
Derivatives 283,324 - 283,324 (283,324) -
Financial liabilities designated at
fair value through profit or
loss:
Issued Structured Notes 6,668,659 (31,657) 6,637,002 (1,313,717) 5,323,285
TOTAL 6,951,983 (31,657) 6,920,326 (1,597,041) 5,323,285
(1) Amounts include €55,781,000 of financial assets classified as held for
trading – derivatives, €491,974,000 of financial assets
designated at fair value through profit or loss - prepaid equity securities
contracts and €5,008,237,000 of financial liabilities
designated at fair value through profit or loss - issued Structured Notes which
are either not subject to master netting agreements or
are subject to such agreements but the Company has not determined the agreements
to be legally enforceable.
(2) Amounts are reported on a net basis in the statement of financial position
when there is a legally enforceable master netting
arrangement that provides for the current right of offset and there is an
intention to either settle on a net basis or to realise the asset
and liability simultaneously.
(3) Amounts relate to master netting arrangements which have been determined by
the Company to be legally enforceable, but do not
meet all criteria required for net presentation within the statement of
financial position.
(4) Certain trade receivables and payables that are not presented net within the
statement of financial position have legally enforceable
master netting agreements or similar arrangements in place which would allow for
an additional €2,260,000 to be offset in the event
of default.
(5) Amounts relate to intercompany cross-product master netting arrangements,
which include those amounts where the Morgan Stanley
Group undertaking from which the Company purchased the prepaid equity securities
contracts is also the holder of the issued
Structured Notes. These arrangements have been determined by the Company to be
legally enforceable but do not meet all the criteria
required for net presentation within the statement of financial position.
(6) Of the residual net exposure, intercompany cross-product legally enforceable
netting arrangements are in place which would allow for
an additional €74,643,000 to be offset in the ordinary course of business and/
or in the event of default.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
37
16. FINANCIAL ASSETS AND FINANCIAL LIABILITIES SUBJECT TO OFFSETTING
(CONTINUED)
Gross
Amounts (1)
Amounts
offset in the
statement of
financial
position (2)
Net
amounts
presented in
the
statement of
financial
position
Amounts not
offset in the
statement of
financial
position
(3)(4)(5)
Net
exposure (6)
Financial
instruments
€'000 €'000 €'000 €'000 €'000
31 December 2012
Assets
Financial assets classified as held
for trading:
Derivatives 561,398 - 561,398 (265,350) 296,048
Financial assets designated at fair
value through profit or loss:
Prepaid equity securities
contracts 1,951,430 (46,234) 1,905,196 (869,705) 1,035,491
TOTAL 2,512,828 (46,234) 2,466,594 (1,135,055) 1,331,539
Liabilities
Financial liabilities classified as
held for trading:
Derivatives 265,350 - 265,350 (265,350) -
Financial liabilities designated at
fair value through profit or
loss:
Issued Structured Notes 5,111,826 (46,234) 5,065,592 (869,705) 4,195,887
TOTAL 5,377,176 (46,234) 5,330,942 (1,135,055) 4,195,887
(1) Amounts include €210,542,000 of financial assets classified as held for
trading – derivatives, €348,846,000 of financial assets
designated at fair value through profit or loss - prepaid equity securities
contracts and €4,195,887,000 of financial liabilities
designated at fair value through profit or loss - issued Structured Notes which
are either not subject to master netting agreements or
are subject to such agreements but the Company has not determined the agreements
to be legally enforceable.
(2) Amounts are reported on a net basis in the statement of financial position
when there is a legally enforceable master netting
arrangement that provides for the current right of offset and there is an
intention to either settle on a net basis or to realise the asset
and liability simultaneously.
(3) Amounts relate to master netting arrangements which have been determined by
the Company to be legally enforceable, but do not
meet all criteria required for net presentation within the statement of
financial position.
(4) Certain trade receivables and payables that are not presented net within the
statement of financial position have legally enforceable
master netting agreements or similar arrangements in place which would allow for
an additional €1,364,000 to be offset in the event
of default.
(5) Amounts relate to intercompany cross-product master netting arrangements,
which include those amounts where the Morgan Stanley
Group undertaking from which the Company purchased the prepaid equity securities
contracts is also the holder of the issued
Structured Notes. These arrangements have been determined by the Company to be
legally enforceable but do not meet all the criteria
required for net presentation within the statement of financial position.
(6) Of the residual net exposure, intercompany cross-product legally enforceable
netting arrangements are in place which would allow for
an additional €9,383,000 to be offset in the ordinary course of business and/ or
in the event of default.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
38
17. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE
a. Financial assets and liabilities recognised at fair value on a recurring
basis
The following tables present the carrying value of the Company’s financial
assets and financial liabilities
recognised at fair value on a recurring basis, classified according to the fair
value hierarchy.
2013 Valuation
Valuation techniques
Quoted techniques with
prices in using significant
active observable unobservable
market inputs inputs
(Level 1) (Level 2) (Level 3) Total
€'000 €'000 €'000 €'000
Financial assets classified as held for trading:
Derivatives - 879,030 100,421 979,451
Financial assets designated at fair value through
profit or loss:
Prepaid equity securities contracts - 1,778,994 26,697 1,805,691
Loans - 4,185,259 - 4,185,259
Total financial assets measured at fair value - 6,843,283 127,118 6,970,401
Financial liabilities classified as held for
trading:
Derivatives - 274,718 8,606 283,324
Financial liabilities designated at fair value
through profit or loss:
Certificates and warrants - 2,536,200 - 2,536,200
Notes - 3,679,098 421,704 4,100,802
Total financial liabilities measured at fair value - 6,490,016 430,310 6,920,326
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
39
17. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED)
a. Financial assets and liabilities recognised at fair value on a recurring
basis (continued)
2012 Valuation
Valuation techniques
Quoted techniques with
prices in using significant
active observable unobservable
market inputs inputs
(Level 1) (Level 2) (Level 3) Total
€'000 €'000 €'000 €'000
Financial assets classified as held for trading:
Derivatives - 421,236 140,162 561,398
Financial assets designated at fair value
through profit or loss:
Prepaid equity securities contracts - 1,861,756 43,440 1,905,196
Loans - 2,884,266 - 2,884,266
Total financial assets measured at fair value - 5,167,258 183,602 5,350,860
Financial liabilities classified as held for
trading:
Derivatives - 219,844 45,506 265,350
Financial liabilities designated at fair
value through profit or loss:
Certificates and warrants - 1,690,360 - 1,690,360
Notes - 2,533,701 841,531 3,375,232
Total financial liabilities measured at fair value - 4,443,905 887,037 5,330,942
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
40
17. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED)
a. Financial assets and liabilities recognised at fair value on a recurring
basis (continued)
The Company’s valuation approach and fair value hierarchy categorisation for
financial instruments
recognised at fair value on a recurring basis is as follows:
Financial assets and financial liabilities classified as held for trading
 Derivatives
OTC derivative contracts. OTC derivative contracts include forward, swap and
option contracts related
to interest rates, foreign currencies, equity prices or commodity prices.
Depending on the product and the terms of the transaction, the fair value of OTC
derivative products
can be either observed or modelled using a series of techniques, and model
inputs from comparable
benchmarks, including closed-form analytic formulas, such as the Black-Scholes
option-pricing model,
and simulation models or a combination thereof. Many pricing models do not
entail material
subjectivity because the methodologies employed do not necessitate significant
judgement, and the
pricing inputs are observed from actively quoted markets, as is the case for
generic interest rate swaps,
certain option contracts and certain CDSs. In the case of more established
derivative products, the
pricing models used by the Company are widely accepted by the financial services
industry. A
substantial majority of OTC derivative products valued using pricing models fall
into this category and
are categorised in Level 2 of the fair value hierarchy.
Other derivative products, including complex products that have become illiquid,
require more
judgement in the implementation of the valuation technique applied due to the
complexity of the
valuation assumptions and the reduced observability of inputs. In these
instances where significant
inputs are unobservable, they are categorised in Level 3 of the fair value
hierarchy.
Financial assets and financial liabilities designated at fair value through
profit or loss
 Prepaid equity securities contracts and issued Structured Notes
The Company issues Structured Notes and purchases prepaid equity securities
contracts that have
coupons or repayment terms linked to the performance of debt or equity
securities, indices, currencies
or commodities. The fair value of Structured Notes and prepaid equity securities
contracts is
determined using valuation models for the derivative and debt portions of the
notes. These models
incorporate observable inputs referencing identical or comparable securities,
including prices to which
the notes are linked, interest rate yield curves, option volatility and
currency, commodity or equity
prices. Independent, external and traded prices for the notes are also
considered. The impact of own
credit spreads is also included based on observed secondary bond market spreads.
Most prepaid equity
securities contracts are categorised in Level 2 of the fair value hierarchy. In
instances where significant
inputs are unobservable, they are categorised in Level 3 of the fair value
hierarchy. Further detail in
relation to the issued Structured Notes is included below.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
41
17. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED)
a. Financial assets and liabilities recognised at fair value on a recurring
basis (continued)
 Issued Structured Notes
Notes. Notes give a risk exposure tailored to market views and risk appetite and
mainly provide
exposure to the underlying single name equity, equity index or portfolio of
equities. Typically, the
redemption payment of the note is significantly dependent on the value of
embedded equity
derivatives. In general, call and put options, digital options, straddles and
callability features are
combined to create a bespoke coupon rate or redemption payoff for each note
issuance, with risk
exposure to one or more equity underlyings or indices. The Company values the
embedded derivatives
using market standard models, which are assessed for appropriateness at least
annually. Model inputs,
such as equity forward rates, equity implied volatility and equity correlations,
are marked such that the
fair value of the derivatives match prices observable in the inter-dealer
markets. In arriving at fair
value, the Company uses discount rates appropriate to the funding rates specific
to the instrument. In
general, this results in overnight rates being used to discount the Company
assets and liabilities. In
addition, since the notes bear Morgan Stanley’s credit risk, the Company
considers this when assessing
the fair value of the notes, by adjusting the discount rates to reflect the
prevailing credit spread at the
reporting date.
The Company has a small number of notes where the cash flows due on the notes is
dependent on
embedded derivatives linked to the interest rate, foreign exchange or commodity
markets. The
Company values these notes in the same way as for equity-linked notes, by using
market standard
models and marking the inputs to match prices observed in the inter-dealer OTC
markets. Similarly to
equity-linked notes, these issuances bear Morgan Stanley’s credit risk, and the
valuation is assessed
accordingly. Most notes are categorised in Level 2 of the fair value hierarchy.
In instances where
significant inputs are unobservable, they are categorised in Level 3 of the fair
value hierarchy.
Certificates and warrants. Certificates and warrants provide exposure to the
underlying single name
equity, equity index or portfolio of equities. They therefore provide risk
exposure to the value of the
underlying position and to the dividends paid or received. The Company values
the underlying
position using observable data where available (for instance, exchange closing
prices), or alternatively
using information from third parties (for example net asset values obtained from
fund administrators)
or using Morgan Stanley’s own valuation assumptions if required. The Company
estimates future
dividend payments using a variety of available data, including market prices for
forwards and futures,
analytical review and estimates of future tax rates, incorporating the Company’s
own assumptions
where required. The certificates and warrants can typically be redeemed at short
notice and so the
certificates and warrants provide minimal exposure to the credit risk of Morgan
Stanley. The
certificates and warrants are categorised in Level 2 of the fair value
hierarchy.
 Loans
The fair value of loans to other Morgan Stanley Group undertakings is estimated
based on the present
value of expected future cash flows using its best estimate of interest rate
yield curves. The loans are
categorised in Level 2 of the fair value hierarchy.
b. Transfers between Level 1 and Level 2 of the fair value hierarchy for
financial assets and
liabilities recognised at fair value on a recurring basis
There were no transfers between Level 1 and Level 2 of the fair value hierarchy
during the current and
prior year.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
42
17. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED)
c. Changes in Level 3 financial assets and liabilities recognised at fair value
on a recurring
basis
The following tables present the changes in the fair value of the Company’s
Level 3 financial assets and
financial liabilities for the years ended 31 December 2013 and 31 December 2012.
Level 3 instruments may
be hedged with instruments classified in Level 2. As a result, the realised and
unrealised gains/ (losses) for
assets and liabilities within the Level 3 category presented in the tables below
do not reflect the related
realised and unrealised gains/ (losses) on hedging instruments that have been
classified by the Company
within the Level 2 category.
Additionally, both observable and unobservable inputs may be used to determine
the fair value of positions
that the Company has classified within the Level 3 category. As a result, the
unrealised gains/ (losses)
during the year for assets and liabilities within the Level 3 category presented
in the tables below may
include changes in fair value during the year that were attributable to both
observable (e.g. changes in
market interest rates) and unobservable (e.g. changes in unobservable long-dated
volatilities) inputs.
The Morgan Stanley Group operates a number of intra-group policies to ensure
that, where possible,
revenues and related costs are matched. Where the trading positions included in
the below table are risk
managed using financial instruments held by other Morgan Stanley Group
undertakings, these policies
potentially result in the recognition of offsetting gains or losses in the
Company.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
43
17. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED)
c. Changes in Level 3 financial assets and liabilities recognised at fair value
on a recurring
basis (continued)
2013 Unrealised
gains or
(losses) for
level 3 assets
Total gains or
Purchases
Issuances
Settlements
Net /(liabilities)
(losses) transfers outstanding
Balance recognised in in and/ or Balance at as at 31
at 1 statement of out of 31 December
January comprehensive Level 3 December 2013
2013 income (1) (2) 2013 (3)
€'000 €'000 €'000 €'000 €'000 €'000 €'000 €'000
Financial assets classified
as held for trading:
Net derivative contracts: (4)
Equity 94,656 33,363 - - (40,850) 4,646 91,815 3,486
Financial assets designated
at fair value through
profit or loss:
Prepaid equity securities
contracts 43,440 3,811 8,052 - (30,021) 1,415 26,697 2,285
Total financial assets
measured at
fair value 138,096 37,174 8,052 - (70,871) 6,061 118,512 5,771
Financial liabilities
designated at fair value
through profit or loss:
Notes (841,531) (24,496) - (234,652) 146,163 532,812 (421,704) (18,264)
Total financial
liabilities measured
at fair value (841,531) (24,496) - (234,652) 146,163 532,812 (421,704) (18,264)
(1) The total gains or (losses) are recognised in the statement of comprehensive
income as detailed in the financial instruments accounting policy
(note 3c).
(2) For financial assets and financial liabilities that were transferred into
and out of Level 3 during the year, gains or (losses) are presented as if the
assets or liabilities had been transferred into or out of Level 3 as at the
beginning of the year.
(3) Amounts represent unrealised gains or (losses) for the year ended 31
December 2013 related to assets and liabilities still outstanding at 31
December 2013. The unrealised gains or (losses) are recognised in the statement
of comprehensive income as detailed in the financial instruments
accounting policy (note 3c).
(4) Net derivative contracts represent Financial assets classified as held for
trading – derivative contracts net of Financial liabilities classified as
held for trading – derivative contracts.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
44
17. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED)
c. Changes in Level 3 financial assets and liabilities recognised at fair value
on a recurring
basis (continued)
During the year, the Company reclassified approximately €736,000 of net
derivative contracts, €2,366,000
of prepaid equity securities contracts and €19,527,000 of issued Structured
Notes from Level 2 to Level 3.
The reclassifications were due to a reduction in the volume of recently executed
transactions or a lack of
available broker quotes for these instruments, such that certain significant
inputs became unobservable.
During the year, the Company reclassified approximately €5,382,000 of net
derivative contracts, €951,000
of prepaid equity securities contracts and €552,339,000 of issued Structured
Notes from Level 3 to Level 2.
The reclassifications were due to the availability of market quotations for
these or comparable instruments,
or available broker quotes, or consensus data such that certain significant
inputs became observable.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
45
17. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED)
c. Changes in Level 3 financial assets and liabilities recognised at fair value
on a recurring
basis (continued)
2012 Unrealised
gains or
(losses) for
level 3 assets
Total gains or
Purchases
Issuances
Settlements
Net /(liabilities)
(losses) transfers outstanding
Balance recognised in in and/ or Balance at as at 31
at 1 statement of out of 31 December
January comprehensive Level 3 December 2012
2012 income (1) (2) 2012 (3)
€'000 €'000 €'000 €'000 €'000 €'000 €'000 €'000
Financial assets designated
at fair value through
profit or loss:
Prepaid equity securities
contracts 57,123 3,783 2,769 - (8,599) (11,636) 43,440 1,572
Total financial assets
measured at
fair value 57,123 3,783 2,769 - (8,599) (11,636) 43,440 1,572
Financial liabilities
classified as held for
trading:
Net derivative contracts: (4)
Equity (48,185) (62,343) - - 198,270 6,914 94,656 (7,789)
Financial liabilities
designated at fair value
through profit or loss:
Notes (429,860) 100,245 - (555,883) 71,911 (27,944) (841,531) 82,704
Total financial
liabilities measured
at fair value (478,045) 37,902 - (555,883) 270,181 (21,030) (746,875) 74,915
(1) The total gains or (losses) are recognised in the statement of comprehensive
income as detailed in the financial instruments accounting policy
(note 3c).
(2) For financial assets and financial liabilities that were transferred into
and out of Level 3 during the year, gains or (losses) are presented as if the
assets or liabilities had been transferred into or out of Level 3 as at the
beginning of the year.
(3) Amounts represent unrealised gains or (losses) for the year ended 31
December 2012 related to assets and liabilities still outstanding at 31
December 2012. The unrealised gains or (losses) are recognised in the statement
of comprehensive income as detailed in the financial instruments
accounting policy (note 3c).
(4) Net derivative contracts represent Financial assets classified as held for
trading – derivative contracts net of Financial liabilities classified as
held for trading – derivative contracts.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
46
17. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED)
c. Changes in Level 3 financial assets and liabilities recognised at fair value
on a recurring
basis (continued)
During 2012, the Company reclassified approximately €3,019,000 of net derivative
contracts, €nil of
prepaid equity securities contracts and €96,677,000 of issued Structured Notes
from Level 2 to Level 3.
The reclassifications were due to a reduction in the volume of recently executed
transactions or a lack of
available broker quotes for these instruments, such that certain significant
inputs became unobservable.
During 2012, the Company reclassified approximately €9,933,000 of net derivative
contracts, €11,636,000
of prepaid equity securities contracts and €68,733,000 of issued Structured
Notes from Level 3 to Level 2.
The reclassifications were due to the availability of market quotations for
these or comparable instruments,
or available broker quotes, or consensus data such that certain significant
inputs became observable.
d. Valuation of Level 3 financial assets and liabilities recognised at fair
value on a recurring
basis
The disclosures below provide information on the sensitivity of fair value
measurements to key inputs and
assumptions.
1. Quantitative information about and qualitative sensitivity of significant
unobservable inputs
The table below provides information on the valuation techniques, significant
unobservable inputs
and their ranges and averages for each major category of assets and liabilities
measured at fair value
on a recurring basis with a significant Level 3 balance.
The level of aggregation and breadth of products cause the range of inputs to be
wide and not evenly
distributed across the inventory. Further, the range of unobservable inputs may
differ across firms in
the financial services industry because of diversity in the types of products
included in each firm’s
inventory. The following disclosures also include qualitative information on the
sensitivity of the
fair value measurements to changes in the significant unobservable inputs.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
47
17. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED)
d. Valuation of Level 3 financial assets and liabilities recognised at fair
value on a recurring
basis (continued)
2013 Significant unobservable
input(s)/ Sensitivity of the
Fair Valuation fair value to changes in the
value technique(s) unobservable inputs Range (2) Averages (3)
€'000
ASSETS
Financial assets classified
as held for trading:
Net derivative contracts: (1)
Equity (4) 91,815 Option model
Net asset value ("NAV")
At the money volatility / (B) (C)
Volatility skew / (B) (C)
Equity - Equity correlation / (A) (C)
Equity - Foreign exchange correlation / (B) (C)
NAV value / (A) (C)
19% to 31%
-1% to 0%
45% to 96%
-75% to 45%
€0 - €88
23%
-1%
73%
-31%
€46
Financial assets designated
at fair value through
profit or loss:
Prepaid equity securities
contracts
26,697 Option model
CDS model
At the money volatility / (A) (C)
Volatility skew / (A) (C)
Equity - Equity correlation / (B) (C)
Funding spread / (B) (C)
16% to 25%
-1% to 0%
24% to 95%
96bps to 147bps
20%
-1%
65%
129bps
LIABILITIES
Financial liabilities
designated at fair value
through profit or loss:
Notes (421,704) Option model
NAV
At the money volatility / (B) (C)
Volatility skew / (B) (C)
Equity - Equity correlation / (B) (C)
Equity - Foreign exchange correlation / (B) (C)
NAV value / (A) (C)
15% to 42%
-2% to 0%
46% to 96%
-70% to 30%
€0 - €88
21%
-1%
74%
-31%
€46
(1) Net derivative contracts represent financial assets classified as held for
trading – derivative contracts net of financial liabilities classified as held
for
trading – derivative contracts.
(2) The ranges of significant unobservable inputs are represented in percentages
or basis points ("bps"). A basis point equals 1/100th of 1%; for
example, 1,004 basis points would equal 10.04%.
(3) Amounts represent weighted averages which are calculated by weighting each
input by the fair value of the respective financial instruments except
for derivative contracts where inputs are weighted by risk.
(4) Includes derivative contracts with multiple risks (i.e. hybrid products)
Sensitivity of the fair value to changes in the unobservable inputs:
(A) Significant increase/ (decrease) in the unobservable input in isolation
would result in a significantly higher/ (lower) fair value measurement.
(B) Significant increase/ (decrease) in the unobservable input in isolation
would result in a significantly lower/ (higher) fair value measurement.
(C) There are no predictable relationships between the significant unobservable
inputs.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
48
17. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED)
d. Valuation of Level 3 financial assets and liabilities recognised at fair
value on a recurring
basis (continued)
The following provides a description of significant unobservable inputs included
in the table above for all
major categories of assets and liabilities:
 Correlation – a pricing input where the payoff is driven by more than one
underlying risk.
Correlation is a measure of the relationship between the movements of two
variables (i.e. how the
change in one variable influences a change in the other variable). The
correlation ranges may be
wide since any two underlying inputs may be highly correlated (either positively
or negatively) or
weakly correlated.
 Volatility – the measure of the variability in possible returns for an
instrument given how much
that instrument changes in value over time. Volatility is a pricing input for
options and, generally,
the lower the volatility, the less risky the option. The level of volatility
used in the valuation of a
particular option depends on a number of factors, including the nature of the
risk underlying that
option (e.g. the volatility of a particular underlying equity security may be
significantly different
from that of a particular underlying commodity index), the tenor and the strike
price of the option.
 Volatility skew – the measure of the difference in implied volatility for
options with identical
underliers and expiry dates but with different strikes. The implied volatility
for an option with a
strike price that is above or below the current price of an underlying asset
will typically deviate
from the implied volatility for an option with a strike price equal to the
current price of that same
underlying asset.
 Funding spread – the difference between the interbank funding rate and a
specific bank funding
rate. Embedded within this spread is the cost of the optionality for the client
to put back
certificates at any time to be repaid at par.
2. Sensitivity of fair values to changing significant assumptions to reasonably
possible alternatives
All financial instruments are valued in accordance with the techniques outlined
in the fair value
hierarchy. Some of these techniques, including those used to value instruments
categorised in
Level 3 of the fair value hierarchy, are dependent on unobservable parameters
and the fair value
for these financial instruments has been determined using parameters appropriate
for the valuation
methodology based on prevailing market evidence. It is recognised that the
unobservable
parameters could have a range of reasonably possible alternative values.
In estimating the change in fair value, to provide information about the
variability of the fair value
measurement, the unobservable parameters were varied to the extremes of the
ranges of
reasonably possible alternatives using statistical techniques, such as
dispersion in comparable
observable external inputs for similar asset classes, historic data or judgement
if a statistical
technique is not appropriate. Where a financial instrument has more than one
unobservable
parameter, the sensitivity analysis reflects the greatest reasonably possible
increase or decrease to
fair value by varying the assumptions individually. It is unlikely that all
unobservable parameters
would be concurrently at the extreme range of possible alternative assumptions
and therefore the
sensitivity shown below is likely to be greater than the actual uncertainty
relating to the financial
instruments.
The following tables present the sensitivity of the fair value of Level 3
financial assets and
financial liabilities to reasonably possible alternative assumptions, providing
quantitative
information on the potential variability of the fair value measurement.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
49
17. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED)
d. Valuation of Level 3 financial assets and liabilities recognised at fair
value on a recurring
basis (continued)
Effect of reasonably possible
alternative assumptions
2013
Fair value
Increase in fair
value
Decrease in fair
value
€'000 €'000 €'000
Financial assets classified as held for trading:
Net derivative contracts:(1)
Equity 91,815 1,548 (1,991)
Financial assets designated at fair value
through profit or loss:
Prepaid equity securities contracts 26,697 322 (368)
Financial liabilities designated at fair value
through profit or loss:
Notes (421,704) (1,870) 2,359
(1) Net derivative contracts represent financial assets classified as held for
trading – derivative contracts net of financial liabilities
classified as held for trading – derivative contracts.
Effect of reasonably possible
alternative assumptions
2012
Fair value
Increase in fair
value
Decrease in fair
value
€'000 €'000 €'000
Financial assets classified as held for trading:
Net derivative contracts:(1)
Equity 94,656 7,463 (4,378)
Financial assets designated at fair value
through profit or loss:
Prepaid equity securities contracts 43,440 1,191 (1,155)
Financial liabilities designated at fair value
through profit or loss:
Notes (841,531) (8,654) 5,533
(1) Net derivative contracts represent financial assets classified as held for
trading – derivative contracts net of financial liabilities
classified as held for trading – derivative contracts.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2013
50
17. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED)
e. Assets and liabilities measured at fair value on a non-recurring basis
Non-recurring fair value measurements of assets and liabilities are those which
are required or permitted in
the statement of financial position in particular circumstances. There were no
assets or liabilities measured
at fair value on a non-recurring basis during the year or prior year.
18. ASSETS AND LIABILITIES NOT MEASURED AT FAIR VALUE
For all financial instruments not measured at fair value, the carrying amount is
considered to be a
reasonable approximation of fair value due to the short term nature of these
assets and liabilities.
19. CAPITAL MANAGEMENT
The Morgan Stanley Group manages its capital on a global basis with
consideration for its legal entities.
The capital managed by the Morgan Stanley Group broadly includes ordinary share
capital, preference
share capital, subordinated loans and reserves.
The Morgan Stanley Group’s required capital estimation is based on the Required
Capital Framework, an
internal capital adequacy measure. The framework is a risk-based use of capital
measure, which is
compared with the Morgan Stanley Group’s regulatory capital to ensure the Morgan
Stanley Group
maintains an amount of going concern capital after absorbing potential losses
from extreme stress events
where applicable, at a point in time. The Morgan Stanley Group defines the
difference between its
regulatory capital and aggregate Required Capital as its Parent capital.
The Required Capital Framework will evolve over time in response to changes in
the business and
regulatory environment and to incorporate enhancements in modelling techniques.
The Morgan Stanley Group actively manages its consolidated capital position
based upon, among other
things, business opportunities, risks, capital availability and rates of return
together with internal capital
policies, regulatory requirements and rating agency guidelines and, therefore,
in the future may expand or
contract its capital base to address the changing needs of its businesses.
The Morgan Stanley Group also aims to adequately capitalise at a legal entity
level whilst safeguarding that
entity’s ability to continue as a going concern and ensuring that it meets all
regulatory capital requirements,
so that it can continue to provide returns for the Morgan Stanley Group.
In order to maintain or adjust the capital structure as described above, the
Company may adjust the amount
of dividends paid, return capital to shareholders, issue new shares, or sell
assets to reduce debt.
The Company manages the following items as capital:
2013 2012
€'000 €'000
Share capital 15,018 15,018
Reserves 10,059 5,483
25,077 20,501
MORGAN STANLEY B.V.
ADDITIONAL INFORMATION
Year ended 31 December 2013
51
20. RELATED PARTY DISCLOSURES
Parent and subsidiary relationships
Parent and ultimate controlling entity
The Company’s immediate parent undertaking is Archimedes Investments
Coöperatieve U.A., which is
registered in The Netherlands. Copies of its financial statements can be
obtained from Luna Arena,
Herikerbergweg 238, 1101 CM, Amsterdam Zuidoost, The Netherlands.
The ultimate parent undertaking and controlling entity and the largest group of
which the Company is a
member and for which group financial statements are prepared is Morgan Stanley.
Morgan Stanley is
incorporated in the state of Delaware, the United States of America and copies
of its financial statements
can be obtained from www.morganstanley.com/investorrelations.
Key management compensation
Key management personnel are defined as those persons having authority and
responsibility for planning,
directing and controlling the activities of the Company. Key management
personnel include the Board of
Directors of the Company, plus key business unit management.
Compensation paid to key management personnel in respect of their services
rendered to the Company is:
2013 2012
€'000 €'000
Short-term employee benefits 22 21
Post-employment benefits 1 1
Share-based payments 4 2
Other long-term employee benefits 2 4
TMF management fees 424 303
453 331
The share-based payment costs disclosed above reflect the amortisation of equity
-based awards granted to
key management personnel over the last three years and are therefore not
directly aligned with other staff
costs in the current year.
Key management personnel compensation is borne by other Morgan Stanley Group
undertakings in both
the current and prior year.
Transactions with related parties
The Morgan Stanley Group conducts business for clients globally through a
combination of both functional
and legal entity organisational structures. Accordingly, the Company is closely
integrated with the
operations of the Morgan Stanley Group and enters into transactions with other
Morgan Stanley Group
undertakings on an arm’s length basis for the purposes of utilising financing,
trading and risk management,
and infrastructure services. The nature of these relationships along with
information about the transactions
and outstanding balances is given below. The Company has not recognised any
expense and has made no
provision for impairment relating to the amount of outstanding balances from
related parties (2012: €nil).
In addition, the management and execution of business strategies on a global
basis results in many Morgan
Stanley transactions impacting a number of Morgan Stanley Group undertakings.
The Morgan Stanley
Group operates a number of intra-group policies to ensure that, where possible,
revenues and related costs
are matched. For the year ended 31 December 2013, a net gain of €14,607,000 was
recognised in the
statement of comprehensive income arising from such policies (2012: €7,035,000).
MORGAN STANLEY B.V.
ADDITIONAL INFORMATION
Year ended 31 December 2013
52
20. RELATED PARTY DISCLOSURES (CONTINUED)
Transactions with related parties (continued)
Funding
The Company receives general funding from and provides general funding to other
Morgan Stanley Group
undertakings.
General funding is undated, unsecured, floating rate lending. Funding may be
received or provided for
specific transaction related funding requirements, or for general operational
purposes. The interest rates are
established by the Morgan Stanley Group Treasury function for all entities
within the Morgan Stanley
Group and approximate the market rate of interest that the Morgan Stanley Group
incurs in funding its
business. Additionally, other funding includes CPECs due to the Company’s direct
parent undertaking,
Archimedes Investments Coöperatieve U.A.. The specific terms of the related
yield are detailed in note 8.
Details of the outstanding balances on these funding arrangements and the
related interest income or
expense recognised in the statement of comprehensive income during the year are
shown in the table
below:
2013 2012
Interest Balance Interest Balance
€'000 €'000 €'000 €'000
Amounts due from the Company’s indirect
parent undertaking 24,788 1,068,859 18,746 1,045,553
Amounts due from other Morgan Stanley
Group undertakings 766 126,168 1,287 120,653
25,554 1,195,027 20,033 1,166,206
Amounts due to the Company’s direct
parent undertaking 25,384 1,170,579 19,914 1,145,195
Amounts due to other Morgan Stanley
Group undertakings - 21 5 21
25,384 1,170,600 19,919 1,145,216
MORGAN STANLEY B.V.
ADDITIONAL INFORMATION
Year ended 31 December 2013
53
20. RELATED PARTY DISCLOSURES (CONTINUED)
Transactions with related parties (continued)
Trading and risk management
The Company issues Structured Notes and hedges the obligations arising from the
issuance by entering into
prepaid equity securities contracts, derivative contracts and loans designated
at fair value through profit or
loss with other Morgan Stanley Group undertakings. All such transactions are
entered into on an arm’s
length basis. The total amounts receivable and payable on issued Structured
Notes, prepaid equity securities
contracts, derivative contracts and loans designated at fair value through
profit or loss were as follows:
2013 2012
€'000 €'000
Amounts due from the Company’s indirect parent undertakings on
unsettled securities and derivative transactions 13,379 26,442
Amounts due from other Morgan Stanley Group undertakings 6,959,969 5,325,782
6,973,348 5,352,224
Amounts due to the Company’s indirect parent undertakings on
unsettled securities and derivative transactions 9,291 14,766
Amounts due to other Morgan Stanley Group undertakings 2,097,213 1,348,114
2,106,504 1,362,880
Infrastructure services
In the current and prior year, the Company uses infrastructure services
including the provision of office
facilities, operated by other Morgan Stanley Group undertakings at no charge.
MORGAN STANLEY B.V.
ADDITIONAL INFORMATION
Year ended 31 December 2013
54
Independent auditor’s report
The independent auditor’s report is recorded on the next page.
Statutory rules concerning appropriation of the net result
The Articles of Association of the Company provide that the net result for the
year is at the disposition of
the General Meeting of Shareholders.
Distribution can only be made to the extent that the Shareholder’s equity
exceeds the reserves provided for
by the Articles of Association. The Board of Directors must grant its approval
which it can only withhold in
the event that it knows or reasonably should have known that, following the
distribution, the Company will
not be able to continue with the payments of its debts becoming due and payable
in the foreseeable future.
Appropriation of the net result for the year
The statement of financial position is presented after the proposed
appropriation of net result for the year
ended 31 December 2013. The Directors propose to add profit to the statement of
comprehensive income as
part of the equity shareholders’ funds.
Subsequent events
There have been no significant events since the reporting date.