Investor Presentaiton

MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 24. FINANCIAL RISK MANAGEMENT Risk management procedures Risk is an inherent part of the Morgan Stanley Group's and the Company's business activities. The Company 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 has developed its own risk management policy framework, which is consistent with and leverages the risk management policies and procedures of the Morgan Stanley Group and which include escalation to appropriate senior management personnel of the Company as well as oversight through the Company's Board of Directors (the "Board") and through a dedicated Risk Committee that reports to the Board. Significant risks faced by the Company resulting from its private wealth management and financing 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. The Company is primarily exposed to credit risk from margin loans to clients of the Wealth Management business segment, and to a lesser extent from Treasury activities related to deposit placement, investment portfolio and interest rate and foreign exchange hedges. Credit risk management Credit risk exposure is managed on a global basis and in consideration of each significant legal entity within the Morgan Stanley Group. The credit risk management policies and procedures establish the framework for identifying, measuring, monitoring and controlling credit risk whilst ensuring transparency of material credit risks, compliance with established limits and escalating risk concentrations to appropriate senior management and the Board of Directors. The Company incurs credit risk primarily in the Wealth Management business through margin loans to its clients. Margin loans are asset-based in nature secured by mostly cash and marketable securities held with the Company as collateral. The Company also incurs credit risk through a variety of treasury activities, including, but not limited to, the following: entering into derivative contracts with other Morgan Stanley Group undertakings under which counterparties may have obligations to make payments to the Company; • posting margin and/or collateral to banks and other financial counterparties; • placing funds on deposit at other financial institutions; and • entering into securities transactions, whereby the value of these assets may fluctuate based on realised or expected defaults on the underlying obligations. Monitoring and Control In order to help protect the Company from losses, the Credit Risk Management Department establishes firm-wide practices to evaluate, monitor and control credit risk at the transaction, obligor and portfolio levels. The Credit Risk Management Department approves extensions of credit, evaluates the creditworthiness of the Company's counterparties and borrowers on a regular basis, and helps ensure that credit exposure is actively monitored and managed. The evaluation of counterparties and borrowers includes an assessment of the probability that an obligor will default on its financial obligations and any subsequent losses that may occur when an obligor defaults. In addition, credit risk exposure is actively managed by credit professionals and committees within the Credit Risk Management Department and through various risk committees, whose membership includes individuals from the Credit Risk Management Department. 36 36

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