Edgar Filing: Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.

Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-Q

QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS

OF REGISTERED MANAGEMENT INVESTMENT COMPANY

Investment Company Act file number: 811-22011

Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.

(Exact name of registrant as specified in charter)


522 Fifth Avenue, New York, New York		10036
(Address of principal executive offices)		(Zip code)

John Gernon

522 Fifth Avenue, New York, New York 10036

(Name and address of agent for service)

Registrant’s telephone number, including area code: 212-296-0289

Date of fiscal year end: October 31, 2013

Date of reporting period: July 31, 2013

Item 1. Schedule of Investments.

The Fund’s schedule of investments as of the close of the reporting period prepared pursuant to Rule 12-12 of Regulation S-X is as follows:

Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.

Portfolio of Investments

Third Quarter Report

July 31, 2013 (unaudited)

(Showing Percentage of Total Value of Investments)


	Face Amount (000)		Value (000)
Fixed Income Securities (97.9%)

Brazil (16.5%)
Sovereign (16.5%)
Brazil Notas do Tesouro Nacional, Series F,
10.00%, 1/1/14 - 1/1/23	BRL	574,616	$	251,959

Chile (0.6%)

Sovereign (0.6%)
Chile Government International Bond,
5.50%, 8/5/20	CLP	4,665,000		9,283

Colombia (3.7%)

Sovereign (3.7%)
Colombia Government International Bond,
7.75%, 4/14/21	COP	29,000,000		17,964
9.85%, 6/28/27		46,000,000		32,360
12.00%, 10/22/15		11,000,000		6,666

				56,990

Hungary (7.4%)

Sovereign (7.4%)
Hungary Government Bond,
6.75%, 2/24/17	HUF	8,500,000		39,716
7.50%, 11/12/20		15,180,000		73,615

				113,331

Indonesia (6.3%)

Sovereign (6.3%)
Barclays Bank PLC, Indonesia Government Bonds, Credit Linked Notes,
10.00%, 7/17/17 (a)(b)	IDR	360,000,000		38,495
Credit Suisse, Indonesia Government Bonds, Credit Linked Notes,
10.00%, 7/17/17		154,683,530		16,540
Deutsche Bank AG, Republic of Indonesia Government Bond, Credit Linked Notes,
11.00%, 12/15/20 (a)(b)		60,000,000		6,924
JPMorgan Chase Bank, London, Indonesia Government Bonds, Credit Linked Notes,
8.25%, 7/17/21		135,000,000		13,487
10.00%, 7/19/17 (b)		192,525,000		20,587

				96,033

Malaysia (3.1%)

Sovereign (3.1%)
Malaysia Government Bond,
3.84%, 8/12/15	MYR	110,000		34,227
5.09%, 4/30/14		42,152		13,202

				47,429

Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.

Portfolio of Investments

Third Quarter Report

July 31, 2013 (unaudited)(cont’d)

(Showing Percentage of Total Value of Investments)


	Face Amount (000)		Value (000)
Mexico (11.1%)

Sovereign (11.1%)
Mexican Bonos,
7.50%, 6/3/27	MXN	72,585	$	6,259
8.00%, 6/11/20		1,094,027		97,638
Petroleos Mexicanos (Units),
7.65%, 11/24/21 (a)(c)		791,300		66,103

				170,000

Peru (1.8%)

Sovereign (1.8%)
Peru Government Bond,
7.84%, 8/12/20	PEN	37,745		15,696
Peruvian Government International Bond (Units),
7.84%, 8/12/20 (c)		30,000		12,475

				28,171

Philippines (1.1%)

Sovereign (1.1%)
Philippine Government International Bond,
4.95%, 1/15/21	PHP	648,000		16,189

Poland (9.7%)

Sovereign (9.7%)
Poland Government Bond,
5.25%, 10/25/20	PLN	314,000		107,028
5.50%, 10/25/19		98,947		34,127
5.75%, 4/25/29		16,780		6,129

				147,284

Russia (11.9%)

Corporate Bond (0.8%)
VimpelCom Holdings BV,
9.00%, 2/13/18 (a)	RUB	378,100		11,586

Sovereign (11.1%)
Russian Federal Bond - OFZ,
7.05%, 1/19/28		875,000		24,887
8.15%, 2/3/27		3,150,000		99,627
Russian Foreign Bond - Eurobond,
7.85%, 3/10/18		290,000		9,275
7.85%, 3/10/18 (a)		1,095,000		35,023

				168,812

				180,398

Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.

Portfolio of Investments

Third Quarter Report

July 31, 2013 (unaudited)(cont’d)

(Showing Percentage of Total Value of Investments)


	Face Amount (000)		Value (000)
South Africa (11.2%)

Sovereign (11.2%)
Eskom Holdings SOC Ltd.,
5.75%, 1/26/21	$	47,400	$	46,689
South Africa Government Bond,
6.75%, 3/31/21	ZAR	774,700		74,975
7.25%, 1/15/20		481,524		48,471

				170,135

Turkey (13.5%)

Corporate Bond (3.4%)
Turkiye Garanti Bankasi AS,
7.38%, 3/7/18 (a)	TRY	111,480		51,958

Sovereign (10.1%)
Turkey Government Bond,
10.50%, 1/15/20		278,825		154,035

				205,993

Total Fixed Income Securities (Cost $1,683,821)				1,493,195

	Shares
Short-Term Investment (2.1%)

Investment Company (2.1%)
Morgan Stanley Institutional Liquidity Funds - Money Market Portfolio - Institutional Class (d) (Cost $32,294)		32,293,827		32,294

Total Investments (100.0%) (Cost $1,716,115) (e)+				1,525,489

Liabilities in Excess of Other Assets				(355,523	)

Net Assets			$	1,169,966

(a)	144A security - Certain conditions for public sale may exist. Unless otherwise noted, these securities are deemed to be liquid.

(b)	Variable/Floating Rate Security - Interest rate changes on these instruments are based on changes in a designated base rate. The rates shown are those in effect on July 31, 2013.

(c)	Consists of one or more classes of securities traded together as a unit.

(d)

The Fund invests in the Morgan Stanley Institutional Liquidity Funds - Money Market Portfolio - Institutional Class (the “Liquidity Funds”), an open-end management investment company managed by the Adviser. Advisory fees paid by the Fund are reduced by an amount equal to the advisory and administrative service fees paid by the Liquidity Funds with respect to assets invested by the Fund in the Liquidity Funds.

(e)	Securities are available for collateral in connection with open futures contract.

At July 31, 2013, the U.S. Federal income tax cost basis of investments was approximately $1,716,115,000 and, accordingly, net unrealized depreciation for U.S. Federal income tax purposes was approximately $190,626,000 of which approximately $23,933,000 related to appreciated securities and approximately $214,559,000 related to depreciated securities.


BRL	—	Brazilian Real
CLP	—	Chilean Peso
COP	—	Colombian Peso

Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.

Portfolio of Investments

Third Quarter Report

July 31, 2013 (unaudited)(cont’d)

(Showing Percentage of Total Value of Investments)


HUF	—	Hungarian Forint
IDR	—	Indonesian Rupiah
MXN	—	Mexican New Peso
MYR	—	Malaysian Ringgit
PEN	—	Peruvian Nuevo Sol
PHP	—	Philippine Peso
PLN	—	Polish Zloty
RUB	—	Russian Ruble
TRY	—	Turkish Lira
ZAR	—	South African Rand

Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.

Portfolio of Investments

Third Quarter Report

July 31, 2013 (unaudited)(cont’d)

(Showing Percentage of Total Value of Investments)

Futures

Contracts:

The Fund had the following futures contracts open at July 31, 2013:


	Number of Contracts		Value (000)			Expiration Date		Unrealized Appreciation (000)
Short:
U.S. Treasury 10 yr. Note		387	$	(48,931	)		Sep-13	$	243

Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.

Notes to the Portfolio of Investments n July 31, 2013 (unaudited)

Security Valuation: (1) Bonds and other fixed income securities may be valued according to the broadest and most representative market. In addition, bonds and other fixed income securities may be valued on the basis of prices provided by a pricing service. The prices provided by a pricing service take into account broker-dealer market price quotations for institutional size trading in similar groups of securities, security quality, maturity, coupon and other security characteristics as well as any developments related to the specific securities; (2) futures are valued at the latest price published by the commodities exchange on which they trade; (3) when market quotations are not readily available, including circumstances under which Morgan Stanley Investment Management Inc. (the “Adviser”) determines that the closing price, last sale price or the mean between the last reported bid and asked prices are not reflective of a security’s market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund’s Board of Directors (the “Directors”). Occasionally, developments affecting the closing prices of securities and other assets may occur between the times at which valuations of such securities are determined (that is, close of the foreign market on which the securities trade) and the close of business of the New York Stock Exchange (“NYSE”). If developments occur during such periods that are expected to materially affect the value of such securities, such valuations may be adjusted to reflect the estimated fair value of such securities as of the close of the NYSE, as determined in good faith by the Directors or by the Adviser using a pricing service and/or procedures approved by the Directors; (4) quotations of foreign portfolio securities, other assets and liabilities and forward contracts stated in foreign currency are translated into U.S. dollar equivalents at the prevailing market rates prior to the close of the NYSE; (5) investments in mutual funds, including the Morgan Stanley Institutional Liquidity Funds, are valued at the net asset value as of the close of each business day; and (6) short-term debt securities with remaining maturities of 60 days or less at the time of purchase may be valued at amortized cost, unless the Adviser determines such valuation does not reflect the securities’ market value, in which case these securities will be valued at their fair market value determined by the Adviser.

Under procedures approved by the Directors, the Fund’s Adviser has formed a Valuation Committee. The Valuation Committee provides administration and oversight of the Fund’s valuation policies and procedures, which are reviewed at least annually by the Directors. These procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.

The Fund has procedures to determine the fair value of securities and other financial instruments for which market prices are not readily available. Under these procedures, the Valuation Committee convenes on a regular and ad hoc basis to review such securities and considers a number of factors, including valuation methodologies and significant unobservable valuation inputs, when arriving at fair value. The Valuation Committee may employ a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The Valuation Committee employs various methods for calibrating these valuation approaches including a regular review of valuation methodologies, key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.

Fair Value Measurement: Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures” (“ASC 820”), defines fair value as

the value that the Funds would receive to sell an investment or pay to transfer a liability in a timely transaction with an independent buyer in the principal market, or in the absence of a principal market the most advantageous market for the investment or liability. ASC 820 establishes a three-tier hierarchy to distinguish between (1) inputs that reflect the assumptions market participants would use in valuing an asset or liability developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in valuing an asset or liability developed based on the best information available in the circumstances (unobservable inputs) and to establish classification of fair value measurements for disclosure purposes. Various inputs are used in determining the value of the Funds’ investments. The inputs are summarized in the three broad levels listed below.

•

Level 1 – unadjusted quoted prices in active markets for identical investments

•

Level 2 – other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)

•

Level 3 – significant unobservable inputs including the Fund’s own assumptions in determining the fair value of investments. Factors considered in making this determination may include, but are not limited to, information obtained by contacting the issuer, analysts, or the appropriate stock exchange (for exchange-traded securities), analysis of the issuer’s financial statements or other available documents and, if necessary, available information concerning other securities in similar circumstances

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities and the determination of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each security.

The following is a summary of the inputs used to value the Fund’s investments as of July 31, 2013.


Investment Type	Level 1 Unadjusted quoted prices (000)		Level 2 Other significant observable inputs (000)		Level 3 Significant unobservable inputs (000)		Total (000)
Assets:
Fixed Income Securities
Corporate Bonds	$	—	$	63,544	$	—	$	63,544
Sovereign		—		1,429,651		—		1,429,651

Total Fixed Income Securities		—		1,493,195		—		1,493,195

Short-Term Investment - Investment Company		32,294		—		—		32,294
Futures Contracts		243		—		—		243

Total Assets	$	32,537	$	1,493,195	$	—	$	1,525,732

Transfers between investment levels may occur as the markets fluctuate and/or the availability of data used in an investment’s valuation changes. The Fund recognizes transfers between the levels as of the end of the period. As of July 31, 2013, the Fund did not have any investments transfer between investment levels.

Item 2. Controls and Procedures.

(a) The Fund’s principal executive officer and principal financial officer have concluded that the Fund’s disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-Q was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, based upon such officers’ evaluation of these controls and procedures as of a date within 90 days of the filing date of the report.

(b) There were no changes in the Fund’s internal control over financial reporting that occurred during the registrant’s fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Fund’s internal control over financial reporting.

Item 3. Exhibits.

(a) A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.

/s/ John Gernon

John Gernon

Principal Executive Officer

September 17, 2013

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/ John Gernon

John Gernon

Principal Executive Officer

September 17, 2013

/s/ Francis Smith

Francis Smith

Principal Financial Officer

September 17, 2013