Form 10-Q
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

Commission File Number 1-11758

 

LOGO

 

(Exact Name of Registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of

incorporation or organization)

 

   1585 Broadway

New York, NY 10036

(Address of principal executive offices,
including zip code)

 

   36-3145972

(I.R.S. Employer Identification No.)

  

(212) 761-4000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer x

Non-Accelerated Filer ¨

(Do not check if a smaller reporting company)

 

Accelerated Filer ¨

Smaller reporting company ¨

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

As of April 29, 2016, there were 1,937,024,359 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.


Table of Contents

LOGO

 

QUARTERLY REPORT ON FORM 10-Q

For the quarter ended March 31, 2016

 

Table of Contents         Page  

Part I—Financial Information

  

Item 1.

  Financial Statements (Unaudited)      1   
 

Condensed Consolidated Statements of Income

     1   
 

Condensed Consolidated Statements of Comprehensive Income

     2   
 

Condensed Consolidated Balance Sheet

     3   
 

Condensed Consolidated Statements of Changes in Total Equity

     4   
 

Condensed Consolidated Statements of Cash Flows

     5   
  Notes to Condensed Consolidated Financial Statements (Unaudited)      6   
 

1. Introduction and Basis of Presentation

     6   
 

2. Significant Accounting Policies

     7   
 

3. Fair Values

     8   
 

4. Derivative Instruments and Hedging Activities

     24   
 

5. Investment Securities

     31   
 

6. Collateralized Transactions

     36   
 

7. Loans and Allowance for Credit Losses

     39   
 

8. Equity Method Investments

     44   
 

9. Deposits

     44   
 

10. Long-Term Borrowings and Other Secured Financings

     44   
 

11. Commitments, Guarantees and Contingencies

     45   
 

12. Variable Interest Entities and Securitization Activities

     51   
 

13. Regulatory Requirements

     57   
 

14. Total Equity

     60   
 

15. Earnings per Common Share

     62   
 

16. Interest Income and Interest Expense

     63   
 

17. Employee Benefit Plans

     63   
 

18. Income Taxes

     64   
 

19. Segment and Geographic Information

     64   
 

20. Subsequent Events

     66   
  Report of Independent Registered Public Accounting Firm      67   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      68   
 

Introduction

     68   
 

Executive Summary

     69   
 

Business Segments

     75   
 

Supplemental Financial Information and Disclosures

     87   
 

Accounting Development Updates

     88   
 

Critical Accounting Policies

     89   
 

Liquidity and Capital Resources

     90   

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      107   

Item 4.

  Controls and Procedures      122   

Financial Data Supplement (Unaudited)

     123   

Part II—Other Information

  

Item 1.

  Legal Proceedings      126   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      127   

Item 6.

  Exhibits      127   

 

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Table of Contents

Available Information.

 

The Company files annual, quarterly and current reports, proxy statements and other information with the U.S. Securities and Exchange Commission (the “SEC”). You may read and copy any document the Company files with the SEC at the SEC’s public reference room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements and other information that issuers (including the Company) file electronically with the SEC. The Company’s electronic SEC filings are available to the public at the SEC’s internet site, www.sec.gov.

 

The Company’s internet site is www.morganstanley.com. You can access the Company’s Investor Relations webpage at www.morganstanley.com/about-us-ir. The Company makes available free of charge, on or through its Investor Relations webpage, its proxy statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The Company also makes available, through its Investor Relations webpage, via a link to the SEC’s internet site, statements of beneficial ownership of the Company’s equity securities filed by its directors, officers, 10% or greater shareholders and others under Section 16 of the Exchange Act.

 

You can access information about the Company’s corporate governance at www.morganstanley.com/about-us-governance. The Company’s Corporate Governance webpage includes:

   

Amended and Restated Certificate of Incorporation;

   

Amended and Restated Bylaws;

   

Charters for its Audit Committee, Compensation, Management Development and Succession Committee, Nominating and Governance Committee, Operations and Technology Committee, and Risk Committee;

   

Corporate Governance Policies;

   

Policy Regarding Communication with the Board of Directors;

   

Policy Regarding Director Candidates Recommended by Shareholders;

   

Policy Regarding Corporate Political Activities;

   

Policy Regarding Shareholder Rights Plan;

   

Equity Ownership Commitment;

   

Code of Ethics and Business Conduct;

   

Code of Conduct; and

   

Integrity Hotline Information.

 

Morgan Stanley’s Code of Ethics and Business Conduct applies to all directors, officers and employees, including its Chief Executive Officer, Chief Financial Officer and Deputy Chief Financial Officer. The Company will post any amendments to the Code of Ethics and Business Conduct and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange LLC (“NYSE”) on its internet site. You can request a copy of these documents, excluding exhibits, at no cost, by contacting Investor Relations, 1585 Broadway, New York, NY 10036 (212-761-4000). The information on the Company’s internet site is not incorporated by reference into this report.

 

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Table of Contents

Part I—Financial Information.

 

Item 1.

Financial Statements.

 

MORGAN STANLEY

Condensed Consolidated Statements of Income

(dollars in millions, except share and per share data)

(unaudited)

 

     Three Months Ended
March 31,
 
     2016     2015  

Revenues:

    

Investment banking

   $ 1,107      $ 1,357   

Trading

     2,065        3,650   

Investments

     (34     266   

Commissions and fees

     1,055        1,186   

Asset management, distribution and administration fees

     2,620        2,681   

Other

     80        171   
  

 

 

   

 

 

 

Total non-interest revenues

     6,893        9,311   
  

 

 

   

 

 

 

Interest income

     1,747        1,484   

Interest expense

     848        888   
  

 

 

   

 

 

 

Net interest

     899        596   
  

 

 

   

 

 

 

Net revenues

     7,792        9,907   
  

 

 

   

 

 

 

Non-interest expenses:

    

Compensation and benefits

     3,683        4,524   

Occupancy and equipment

     329        342   

Brokerage, clearing and exchange fees

     465        463   

Information processing and communications

     442        415   

Marketing and business development

     134        150   

Professional services

     514        486   

Other

     487        672   
  

 

 

   

 

 

 

Total non-interest expenses

     6,054        7,052   
  

 

 

   

 

 

 

Income from continuing operations before income taxes

     1,738        2,855   

Provision for income taxes

     578        387   
  

 

 

   

 

 

 

Income from continuing operations

     1,160        2,468   
  

 

 

   

 

 

 

Discontinued operations:

    

Income (loss) from discontinued operations before income taxes

     (5     (8

Provision for (benefit from) income taxes

     (2     (3
  

 

 

   

 

 

 

Income (loss) from discontinued operations

     (3     (5
  

 

 

   

 

 

 

Net income

   $ 1,157      $ 2,463   

Net income applicable to noncontrolling interests

     23        69   
  

 

 

   

 

 

 

Net income applicable to Morgan Stanley

   $ 1,134      $ 2,394   

Preferred stock dividends and other

     79        80   
  

 

 

   

 

 

 

Earnings applicable to Morgan Stanley common shareholders

   $ 1,055      $ 2,314   
  

 

 

   

 

 

 

Earnings per basic common share:

    

Income from continuing operations

   $ 0.56      $ 1.21   

Income (loss) from discontinued operations

            (0.01
  

 

 

   

 

 

 

Earnings per basic common share

   $ 0.56      $ 1.20   
  

 

 

   

 

 

 

Earnings per diluted common share:

    

Income from continuing operations

   $ 0.55      $ 1.18   

Income (loss) from discontinued operations

              
  

 

 

   

 

 

 

Earnings per diluted common share

   $ 0.55      $ 1.18   
  

 

 

   

 

 

 

Dividends declared per common share

   $ 0.15      $ 0.10   

Average common shares outstanding:

    

Basic

       1,883,141,468          1,924,122,199   

Diluted

       1,914,840,943          1,962,996,441   

 

See Notes to Condensed Consolidated Financial Statements.

 

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MORGAN STANLEY

Condensed Consolidated Statements of Comprehensive Income

(dollars in millions)

(unaudited)

 

     Three Months Ended
March 31,
 
     2016      2015  

Net income

   $ 1,157       $ 2,463   

Other comprehensive income (loss), net of tax:

     

Foreign currency translation adjustments(1)

   $ 186       $ (222

Change in net unrealized gains on available for sale securities(2)

     395         200   

Pension, postretirement and other

     1         2   

Change in net debt valuation adjustments(3)

     203           
  

 

 

    

 

 

 

Total other comprehensive income (loss)

   $ 785       $ (20
  

 

 

    

 

 

 

Comprehensive income

   $ 1,942       $ 2,443   

Net income applicable to noncontrolling interests

     23         69   

Other comprehensive income (loss) applicable to noncontrolling interests

     55         (2
  

 

 

    

 

 

 

Comprehensive income applicable to Morgan Stanley

   $     1,864       $     2,376   
  

 

 

    

 

 

 

 

(1)

Amounts include Provision for (benefit from) income taxes of $(115) million and $174 million.

(2)

Amounts include Provision for (benefit from) income taxes of $230 million and $121 million.

(3)

Debt valuation adjustments (“DVA”) represent the change in the fair value resulting from fluctuations in the Company’s credit spreads and other credit factors related to liabilities carried at fair value, primarily certain Long-term and Short-term borrowings. Amounts include Provision for (benefit from) income taxes of $120 million. See Notes 2 and 14 for further information.

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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MORGAN STANLEY

Condensed Consolidated Balance Sheet

(dollars in millions, except share data)

(unaudited)

 

    At
March  31,
2016
    At
December  31,
2015
 

Assets

   

Cash and due from banks

  $ 22,797      $ 19,827   

Interest bearing deposits with banks

    30,841        34,256   

Trading assets, at fair value ($130,582 and $127,627 were pledged to various parties)

    234,150        228,280   

Investment securities (includes $68,167 and $66,759 at fair value)

    77,592        71,983   

Securities received as collateral, at fair value

    8,813        11,225   

Securities purchased under agreements to resell (includes $555 and $806 at fair value)

    98,774        87,657   

Securities borrowed

    140,413        142,416   

Customer and other receivables

    44,762        45,407   

Loans:

   

Held for investment (net of allowances of $330 and $225)

    75,566        72,559   

Held for sale

    13,236        13,200   

Goodwill

    6,586        6,584   

Intangible assets (net of accumulated amortization of $2,204 and $2,130) (includes $4 and $5 at fair value)

    2,909        2,984   

Other assets

    51,058        51,087   
 

 

 

   

 

 

 

Total assets

  $     807,497      $ 787,465   
 

 

 

   

 

 

 

Liabilities

   

Deposits (includes $647 and $125 at fair value)

  $ 157,591      $ 156,034   

Short-term borrowings (includes $697 and $1,648 at fair value)

    1,109        2,173   

Trading liabilities, at fair value

    115,766        109,139   

Obligation to return securities received as collateral, at fair value

    17,984        19,316   

Securities sold under agreements to repurchase (includes $693 and $683 at fair value)

    41,305        36,692   

Securities loaned

    17,140        19,358   

Other secured financings (includes $2,623 and $2,854 at fair value)

    9,316        9,464   

Customer and other payables

    194,003        186,626   

Other liabilities and accrued expenses

    13,304        18,711   

Long-term borrowings (includes $36,008 and $33,045 at fair value)

    162,804        153,768   
 

 

 

   

 

 

 

Total liabilities

    730,322        711,281   
 

 

 

   

 

 

 

Commitments and contingent liabilities (see Note 11)

   

Equity

   

Morgan Stanley shareholders’ equity:

   

Preferred stock (see Note 14)

    7,520        7,520   

Common stock, $0.01 par value:

   

Shares authorized: 3,500,000,000; Shares issued: 2,038,893,979; Shares outstanding: 1,938,294,368 and 1,920,024,027

    20        20   

Additional paid-in capital

    22,526        24,153   

Retained earnings

    50,272        49,204   

Employee stock trusts

    2,861        2,409   

Accumulated other comprehensive loss

    (1,238     (1,656

Common stock held in treasury, at cost, $0.01 par value (100,599,611 and 118,869,952 shares)

    (3,090     (4,059

Common stock issued to employee stock trusts

    (2,861     (2,409
 

 

 

   

 

 

 

Total Morgan Stanley shareholders’ equity

    76,010        75,182   

Noncontrolling interests

    1,165        1,002   
 

 

 

   

 

 

 

Total equity

    77,175        76,184   
 

 

 

   

 

 

 

Total liabilities and equity

  $ 807,497      $     787,465   
 

 

 

   

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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MORGAN STANLEY

Condensed Consolidated Statements of Changes in Total Equity

Three Months Ended March 31, 2016 and 2015

(dollars in millions)

(unaudited)

 

    Preferred
Stock
    Common
Stock
    Additional
Paid-in
Capital
    Retained
Earnings
    Employee
Stock
Trusts
    Accumulated
Other
Comprehensive
Income (Loss)
    Common
Stock
Held in
Treasury
at Cost
    Common
Stock
Issued to
Employee
Stock
Trusts
    Non-
controlling
Interests
    Total
Equity
 

BALANCE AT DECEMBER 31, 2015

  $ 7,520      $ 20      $ 24,153      $ 49,204      $ 2,409      $ (1,656   $ (4,059   $ (2,409   $ 1,002      $ 76,184   

Cumulative adjustment for accounting change related to DVA(1)

                         312               (312                            

Net adjustment for accounting change related to consolidation(2)

                                                            106        106   

Net income applicable to Morgan Stanley

                         1,134                                           1,134   

Net income applicable to non controlling interests

                                                            23        23   

Dividends

                         (378                                        (378

Shares issued under employee plans and related tax effects

                  (1,627            452               1,945        (452            318   

Repurchases of common stock and employee tax withholdings

                                              (976                   (976

Net change in Accumulated other comprehensive income (loss)

                                       730                      55        785   

Other net decreases

                                                            (21     (21
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT MARCH 31, 2016

  $ 7,520      $ 20      $ 22,526      $ 50,272      $ 2,861      $ (1,238   $ (3,090   $ (2,861   $ 1,165      $ 77,175   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT DECEMBER 31, 2014

  $ 6,020      $ 20      $ 24,249      $ 44,625      $ 2,127      $ (1,248   $ (2,766   $ (2,127   $ 1,204      $ 72,104   

Net income applicable to Morgan Stanley

                         2,394                                           2,394   

Net income applicable to non controlling interests

                                                            69        69   

Dividends

                         (279                                        (279

Shares issued under employee plans and related tax effects

                  (887            304               1,398        (304            511   

Repurchases of common stock and employee tax withholdings

                                              (839                   (839

Net change in Accumulated other comprehensive income (loss)

                                       (18                   (2     (20

Issuance of preferred stock

    1,500               (7                                               1,493   

Other net increases

                                                            33        33   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT MARCH 31, 2015

  $ 7,520      $ 20      $ 23,355      $ 46,740      $ 2,431      $ (1,266   $ (2,207   $ (2,431   $ 1,304      $ 75,466   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

In accordance with the early adoption of a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities, a cumulative catch up adjustment was recorded as of January 1, 2016 to move the cumulative DVA amount, net of noncontrolling interest and tax, related to outstanding liabilities under the fair value option election from Retained earnings into Accumulated other comprehensive income (loss) (“AOCI”). See Notes 2 and 14 for further information.

(2)

In accordance with the accounting update Amendments to the Consolidation Analysis, a net adjustment was recorded as of January 1, 2016 to consolidate or deconsolidate certain entities under the new guidance. See Note 2 for further information.

 

See Notes to Condensed Consolidated Financial Statements.

 

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MORGAN STANLEY

Condensed Consolidated Statements of Cash Flows

(dollars in millions)

(unaudited)

 

     Three Months Ended
March 31,
 
     2016     2015  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 1,157      $ 2,463   

Adjustments to reconcile net income to net cash provided by (used for) operating activities:

    

Income from equity method investments

     (15     (38

Compensation payable in common stock and options

     217        295   

Depreciation and amortization

     415        321   

Net gain on sale of available for sale securities

     (12     (25

Impairment charges

     8        21   

Provision for credit losses on lending activities

     128        63   

Other operating adjustments

     93        56   

Changes in assets and liabilities:

    

Trading assets, net of Trading liabilities

     5,814        11,414   

Securities borrowed

     2,003        (13,657

Securities loaned

     (2,218     308   

Customer and other receivables and other assets

     899        (5,990

Customer and other payables and other liabilities

     2,153        8,052   

Securities purchased under agreements to resell

     (11,117     (7,944

Securities sold under agreements to repurchase

     4,613        (8,394
  

 

 

   

 

 

 

Net cash provided by (used for) operating activities

     4,138        (13,055
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Proceeds from (payments for):

    

Other assets—Premises, equipment and software, net

     (315     (320

Changes in loans, net

     (3,505     (2,666

Investment securities:

    

Purchases

     (15,211     (15,067

Proceeds from sales

     8,515        13,810   

Proceeds from paydowns and maturities

     1,536        1,290   

Other investing activities

     (136     48   
  

 

 

   

 

 

 

Net cash used for investing activities

     (9,116     (2,905
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net proceeds from (payments for):

    

Short-term borrowings

     (1,064     618   

Noncontrolling interests

     (5     (2

Other secured financings

     (329     399   

Deposits

     1,557        2,271   

Proceeds from:

    

Excess tax benefits associated with stock-based awards

     39        173   

Derivatives financing activities

            226   

Issuance of preferred stock, net of issuance costs

            1,493   

Issuance of long-term borrowings

     13,183        11,339   

Payments for:

    

Long-term borrowings

     (7,961     (5,334

Derivatives financing activities

     (120     (83

Repurchases of common stock and employee tax withholdings

     (976     (839

Cash dividends

     (436     (310
  

 

 

   

 

 

 

Net cash provided by financing activities

     3,888        9,951   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     645        (682
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (445     (6,691

Cash and cash equivalents, at beginning of period

     54,083        46,984   
  

 

 

   

 

 

 

Cash and cash equivalents, at end of period

   $ 53,638      $ 40,293   
  

 

 

   

 

 

 

Cash and cash equivalents include:

    

Cash and due from banks

   $ 22,797      $ 19,683   

Interest bearing deposits with banks

     30,841        20,610   
  

 

 

   

 

 

 

Cash and cash equivalents, at end of period

   $     53,638      $     40,293   
  

 

 

   

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash payments for interest were $613 million and $580 million.

Cash payments for income taxes, net of refunds, were $122 million and $119 million.

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

1.

Introduction and Basis of Presentation.

 

The Company.

 

Morgan Stanley, a financial holding company, is a global financial services firm that maintains significant market positions in each of its business segments—Institutional Securities, Wealth Management and Investment Management. Morgan Stanley, through its subsidiaries and affiliates, provides a wide variety of products and services to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individuals. Unless the context otherwise requires, the terms “Morgan Stanley” or the “Company” mean Morgan Stanley (the “Parent”) together with its consolidated subsidiaries.

 

For a description of the clients and principal products and services of each of the Company’s business segments, see Note 1 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”).

 

Basis of Financial Information.

 

The condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which require the Company to make estimates and assumptions regarding the valuations of certain financial instruments, the valuation of goodwill and intangible assets, compensation, deferred tax assets, the outcome of legal and tax matters, allowance for credit losses and other matters that affect its condensed consolidated financial statements and related disclosures. The Company believes that the estimates utilized in the preparation of its condensed consolidated financial statements are prudent and reasonable. Actual results could differ materially from these estimates. Intercompany balances and transactions have been eliminated.

 

The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the 2015 Form 10-K. Certain footnote disclosures included in the 2015 Form 10-K have been condensed or omitted from the condensed consolidated financial statements as they are not required for interim reporting under U.S. GAAP. The condensed consolidated financial statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for the fair presentation of the results for the interim period. The results of operations for interim periods are not necessarily indicative of results for the entire year.

 

Consolidation.

 

The condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and other entities in which the Company has a controlling financial interest, including certain variable interest entities (“VIE”) (see Note 12). For consolidated subsidiaries that are less than wholly owned, the third-party holdings of equity interests are referred to as noncontrolling interests. The net income attributable to noncontrolling interests for such subsidiaries is presented as Net income (loss) applicable to noncontrolling interests in the condensed consolidated statements of income. The portion of shareholders’ equity of such subsidiaries that is attributable to noncontrolling interests for such subsidiaries is presented as noncontrolling interests, a component of total equity, in the condensed consolidated balance sheet.

 

For a discussion of the Company’s VIEs and its significant regulated U.S. and international subsidiaries, see Notes 1 and 2 to the consolidated financial statements in the 2015 Form 10-K. See also Note 2 herein.

 

Condensed Consolidated Statements of Income Presentation.

 

The Company, through its subsidiaries and affiliates, provides a wide variety of products and services to a large and diversified group of clients. In connection with the delivery of these various products and services, the Company manages its revenues and related expenses in the aggregate. As such, when assessing the performance of its businesses, primarily in the Institutional Securities business segment, the Company considers its trading, investment banking, commissions and fees, and interest income, along with the associated interest expense, as one integrated activity.

 

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Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

Condensed Consolidated Statements of Cash Flows Presentation.

 

The adoption of the accounting update, Amendments to the Consolidation Analysis (see Note 2), resulted in a net noncash increase in total assets of $126 million.

 

2.

Significant Accounting Policies.

 

For a detailed discussion about the Company’s significant accounting policies, see Note 2 to the consolidated financial statements in the 2015 Form 10-K.

 

During the quarter ended March 31, 2016, other than the following, there were no significant updates made to the Company’s significant accounting policies.

 

Accounting Standards Adopted.

 

The Company adopted the following accounting updates as of January 1, 2016.

 

   

Recognition and Measurement of Financial Assets and Financial Liabilities.    In January 2016, the Financial Accounting Standards Board (the “FASB”) issued an accounting update that changes the requirements for the recognition and measurement of financial assets and financial liabilities. The Company early adopted the provision in this guidance relating to liabilities measured at fair value pursuant to a fair value option election that requires presenting unrealized DVA in Other comprehensive income (loss) (“OCI”), a change from the previous requirement to present DVA in net income. Realized DVA amounts will be recycled from AOCI to Trading revenues. Prior period DVA amounts remain in Trading revenues as previously reported. A cumulative catch up adjustment, net of noncontrolling interests and tax, of $312 million was recorded as of January 1, 2016 to move the cumulative DVA loss amount from Retained earnings into AOCI.

 

Other provisions of this rule may not be early adopted and will be effective January 1, 2018, and are not expected to have a material impact on the condensed consolidated financial statements.

 

   

Amendments to the Consolidation Analysis.    In February 2015, the FASB issued an accounting update that provides a new consolidation model for certain entities, such as investment funds and limited partnerships. The adoption on January 1, 2016, increased total assets by $131 million, reflecting consolidations of $206 million net of deconsolidations of $75 million. The consolidations resulted primarily from certain merchant banking funds in Investment Management where the Company acts as a general partner.

 

   

Simplifying the Presentation of Debt Issuance Costs.    In April 2015, the FASB issued an accounting update that requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. This guidance became effective for the Company beginning January 1, 2016 and did not have a material impact in the condensed consolidated financial statements.

 

The Company adopted the following accounting updates as of January 1, 2016, which did not have an impact in the condensed consolidated financial statements.

 

   

Simplifying the Accounting for Measurement-Period Adjustments.

 

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Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

   

Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity.

 

   

Measuring the Financial Assets and Financial Liabilities of a Consolidated Collateralized Financing Entity.

 

   

Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.

 

3.

Fair Values.

 

Fair Value Measurements.

 

For a description of the valuation techniques applied to the Company’s major categories of assets and liabilities measured at fair value on a recurring basis, see Note 3 to the consolidated financial statements in the 2015 Form 10-K. During the quarter ended March 31, 2016, there were no significant updates made to the Company’s valuation techniques.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis.

 

     Level 1     Level 2     Level 3     Counterparty
and Cash
Collateral
Netting
    Balance at
March 31,
2016
 
     (dollars in millions)  

Assets at Fair Value

          

Trading assets:

          

U.S. government and agency securities:

          

U.S. Treasury securities

   $ 23,545      $      $      $      $ 23,545   

U.S. agency securities

     1,004        20,662        8               21,674   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. government and agency securities

     24,549        20,662        8               45,219   

Other sovereign government obligations

     15,835        8,232        8               24,075   

Corporate and other debt:

          

State and municipal securities

            1,832        5               1,837   

Residential mortgage-backed securities

            1,337        292               1,629   

Commercial mortgage-backed securities

            1,029        59               1,088   

Asset-backed securities

            335        4               339   

Corporate bonds

            9,955        224               10,179   

Collateralized debt and loan obligations

            295        348               643   

Loans and lending commitments(1)

            3,640        6,185               9,825   

Other debt

            1,358        527               1,885   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

            19,781        7,644               27,425   

Corporate equities(2)

     95,676        366        430               96,472   

Derivative and other contracts:

          

Interest rate contracts

     507        424,488        1,170               426,165   

Credit contracts

            19,563        738               20,301   

Foreign exchange contracts

     77        73,019        224               73,320   

Equity contracts

     768        43,027        735               44,530   

Commodity contracts

     2,925        10,648        4,045               17,618   

Other

            19                      19   

Netting(3)

     (3,517     (477,187     (3,606     (61,800     (546,110
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative and other contracts

     760        93,577        3,306        (61,800     35,843   

Investments(4):

          

Principal investments

     22        20        743               785   

Other

     166        324        179               669   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

     188        344        922               1,454   

Physical commodities

            274                      274   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total trading assets(4)

     137,008        143,236        12,318        (61,800     230,762   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AFS securities

     32,731        35,436                      68,167   

Securities received as collateral

     8,811        2                      8,813   

Securities purchased under agreements to resell

            555                      555   

Intangible assets

                   4               4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets measured at fair value

   $   178,550      $   179,229      $   12,322      $   (61,800   $   308,301   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

     Level 1     Level 2     Level 3     Counterparty
and Cash
Collateral
Netting
    Balance at
March 31,
2016
 
     (dollars in millions)  

Liabilities at Fair Value

          

Deposits

   $      $ 624      $ 23      $      $ 647   

Short-term borrowings

            697                      697   

Trading liabilities:

          

U.S. government and agency securities:

          

U.S. Treasury securities

     10,553                             10,553   

U.S. agency securities

     304        162                      466   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. government and agency securities

     10,857        162                      11,019   

Other sovereign government obligations

     12,961        3,554                      16,515   

Corporate and other debt:

          

Corporate bonds

            6,517        6               6,523   

Lending commitments

            2        1               3   

Other debt

            31        4               35   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

            6,550        11               6,561   

Corporate equities(2)

     48,183        60        31               48,274   

Derivative and other contracts:

          

Interest rate contracts

     655        397,394        1,001               399,050   

Credit contracts

            19,806        1,461               21,267   

Foreign exchange contracts

     49        76,895        98               77,042   

Equity contracts

     487        44,825        2,567               47,879   

Commodity contracts

     2,493        9,401        2,845               14,739   

Other

            116                      116   

Netting(3)

     (3,517     (477,187     (3,606     (42,386     (526,696
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative and other contracts

     167        71,250        4,366        (42,386     33,397   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total trading liabilities

     72,168        81,576        4,408        (42,386     115,766   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Obligation to return securities received as collateral

     17,980        3        1               17,984   

Securities sold under agreements to repurchase

            542        151               693   

Other secured financings

            2,169        454               2,623   

Long-term borrowings

            34,210        1,798               36,008   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities measured at fair value

   $   90,148      $ 119,821      $ 6,835      $ (42,386   $ 174,418   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

     Level 1     Level 2     Level 3     Counterparty
and Cash
Collateral
Netting
    Balance at
December 31,
2015
 
     (dollars in millions)  

Assets at Fair Value

          

Trading assets:

          

U.S. government and agency securities:

          

U.S. Treasury securities

   $ 17,658      $      $      $      $ 17,658   

U.S. agency securities

     797        17,886                      18,683   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. government and agency securities

     18,455        17,886                      36,341   

Other sovereign government obligations

     13,559        7,400        4               20,963   

Corporate and other debt:

          

State and municipal securities

            1,651        19               1,670   

Residential mortgage-backed securities

            1,456        341               1,797   

Commercial mortgage-backed securities

            1,520        72               1,592   

Asset-backed securities

            494        25               519   

Corporate bonds

            9,959        267               10,226   

Collateralized debt and loan obligations

            284        430               714   

Loans and lending commitments(1)

            4,682        5,936               10,618   

Other debt

            2,263        448               2,711   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

            22,309        7,538               29,847   

Corporate equities(2)

     106,296        379        433               107,108   

Derivative and other contracts:

          

Interest rate contracts

     406        323,586        2,052               326,044   

Credit contracts

            22,258        661               22,919   

Foreign exchange contracts

     55        64,608        292               64,955   

Equity contracts

     653        38,552        1,084               40,289   

Commodity contracts

     3,140        10,654        3,358               17,152   

Other

            219                      219   

Netting(3)

     (3,840     (380,443     (3,120     (55,562     (442,965
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative and other contracts

     414        79,434        4,327        (55,562     28,613   

Investments(4):

          

Principal investments

     20        44        486               550   

Other

     163        310        221               694   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

     183        354        707               1,244   

Physical commodities

            321                      321   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total trading assets(4)

     138,907        128,083        13,009        (55,562     224,437   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AFS securities

     34,351        32,408                      66,759   

Securities received as collateral

     11,221        3        1               11,225   

Securities purchased under agreements to resell

            806                      806   

Intangible assets

                   5               5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets measured at fair value

   $ 184,479      $ 161,300      $ 13,015      $ (55,562   $ 303,232   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities at Fair Value

          

Deposits

   $      $ 106      $ 19      $      $ 125   

Short-term borrowings

            1,647        1               1,648   

Trading liabilities:

          

U.S. government and agency securities:

          

U.S. Treasury securities

     12,932                             12,932   

U.S. agency securities

     854        127                      981   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. government and agency securities

     13,786        127                      13,913   

Other sovereign government obligations

     10,970        2,558                      13,528   

Corporate and other debt:

          

Commercial mortgage-backed securities

            2                      2   

Corporate bonds

            5,035                      5,035   

Lending commitments

            3                      3   

Other debt

            5        4               9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

            5,045        4               5,049   

Corporate equities(2)

     47,123        35        17               47,175   

Derivative and other contracts:

          

Interest rate contracts

     466        305,151        1,792               307,409   

Credit contracts

            22,160        1,505               23,665   

Foreign exchange contracts

     22        65,177        151               65,350   

Equity contracts

     570        42,447        3,115               46,132   

Commodity contracts

     3,012        9,431        2,308               14,751   

Other

            43                      43   

Netting(3)

     (3,840     (380,443     (3,120     (40,473     (427,876
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative and other contracts

     230        63,966        5,751        (40,473     29,474   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total trading liabilities

     72,109        71,731        5,772        (40,473     109,139   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Obligation to return securities received as collateral

     19,312        3        1               19,316   

Securities sold under agreements to repurchase

            532        151               683   

Other secured financings

            2,393        461               2,854   

Long-term borrowings

            31,058        1,987               33,045   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities measured at fair value

   $ 91,421      $ 107,470      $ 8,392      $ (40,473   $ 166,810   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

 

AFS—Available for sale

(1)

At March 31, 2016, Loans and lending commitments held at fair value consisted of $7,455 million of corporate loans, $1,727 million of residential real estate loans and $643 million of wholesale real estate loans. At December 31, 2015, Loans and lending commitments held at fair value consisted of $7,286 million of corporate loans, $1,885 million of residential real estate loans and $1,447 million of wholesale real estate loans.

(2)

For trading purposes, the Company holds or sells short equity securities issued by entities in diverse industries and of varying sizes.

(3)

For positions with the same counterparty that cross over the levels of the fair value hierarchy, both counterparty netting and cash collateral netting are included in the column titled “Counterparty and Cash Collateral Netting.” For contracts with the same counterparty, counterparty netting among positions classified within the same level is included within that shared level. For further information on derivative instruments and hedging activities, see Note 4.

(4)

Amounts exclude certain investments that are measured at fair value using the net asset value (“NAV”) per share, which are not classified in the fair value hierarchy. At March 31, 2016 and December 31, 2015, the fair value of these investments was $3,388 million and $3,843 million, respectively. For additional disclosure about such investments, see “Fair Value of Investments Measured at Net Asset Value” herein.

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis.

 

The following tables present additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the quarters ended March 31, 2016 and 2015, respectively. Level 3 instruments may be hedged with instruments classified in Level 1 and Level 2. As a result, the realized and unrealized gains (losses) for assets and liabilities within the Level 3 category presented in the tables below do not reflect the related realized and unrealized gains (losses) on hedging instruments that have been classified by the Company within the Level 1 and/or Level 2 categories.

 

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 unrealized gains (losses) during the period for assets and liabilities within the Level 3 category presented in the tables below may include changes in fair value during the period that were attributable to both observable and unobservable inputs.

 

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Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

Roll-forward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis.

 

    Beginning
Balance at
December 31,
2015
    Total
Realized
and
Unrealized
Gains
(Losses)
    Purchases
(1)
    Sales     Issuances     Settlements     Net
Transfers
    Ending
Balance
at
March 31,
2016
    Unrealized
Gains
(Losses) for
Level 3
Assets/
Liabilities
Outstanding
at
March 31,
2016
 
    (dollars in millions)  

Assets at Fair Value

                 

Trading assets:

                 

U.S. agency securities

  $      $ 5      $      $      $      $      $ 3      $ 8      $ 5   

Other sovereign government obligations

    4                      (2                   6        8          

Corporate and other debt:

                 

State and municipal securities

    19                      (15                   1        5          

Residential mortgage-backed securities

    341        (24     19        (67                   23        292        (17

Commercial mortgage-backed securities

    72        (9            (15                   11        59        (9

Asset-backed securities

    25        (1     1        (17                   (4     4          

Corporate bonds

    267        44        17        (98                   (6     224        28   

Collateralized debt and loan obligations

    430        (14     114        (113                   (69     348        (4

Loans and lending commitments

    5,936        (60     952        (319            (351     27        6,185        (64

Other debt

    448        5        75        (9                   8        527        5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

    7,538        (59     1,178        (653            (351     (9     7,644        (61

Corporate equities

    433        11        78        (44                   (48     430        6   

Net derivative and other contracts(2):

                 

Interest rate contracts

    260        470        5               (14     (30     (522     169        411   

Credit contracts

    (844     28                             67        26        (723     24   

Foreign exchange contracts

    141        (61                          (105     151        126        (38

Equity contracts(3)

    (2,031     (135     137               (128     294        31        (1,832     (12

Commodity contracts

    1,050        73        9               (61     (57     186        1,200        68   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net derivative and other contracts

    (1,424     375        151               (203     169        (128     (1,060     453   

Investments:

                 

Principal investments

    486        (43     365        (29            (41     5        743        (43

Other

    221        12               (25                   (29     179        12   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

    707        (31     365        (54            (41     (24     922        (31

Securities received as collateral

    1                      (1                                   

Intangible assets

    5                      (1                          4        (1

Liabilities at Fair Value

                 

Deposits

  $ 19      $ (2   $      $      $ 2      $      $      $ 23      $ (2

Short-term borrowings

    1                                    (1                     

Trading liabilities:

                 

Corporate and other debt:

                 

Corporate bonds

           (4     (2     9                      (5     6        (4

Lending commitments

           (1                                        1        (1

Other debt

    4        7               7                             4        7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

    4        2        (2     16                      (5     11        2   

Corporate equities

    17        (4     (15     13                      12        31        (4

Obligation to return securities received as collateral

    1                                                  1          

Securities sold under agreements to repurchase

    151                                                  151          

Other secured financings

    461        (18                   47        (22     (50     454        (18

Long-term borrowings

    1,987        (46                   72        (79     (228     1,798        (45

 

LOGO   12    


Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

    Beginning
Balance at
December 31,
2014
    Total
Realized
and
Unrealized
Gains
(Losses)
        Purchases
(1)
    Sales     Issuances     Settlements     Net
Transfers
    Ending
Balance
at
March 31,
2015
    Unrealized
Gains
(Losses) for
Level 3
Assets/
Liabilities
Outstanding
at
March 31,
2015
 
    (dollars in millions)  

Assets at Fair Value

                   

Trading assets:

                   

Other sovereign government obligations

  $ 41      $ 1        $ 2      $ (32   $      $      $ (1   $ 11      $ 1   

Corporate and other debt:

                   

Residential mortgage-backed securities

    175        17          58        (40                   86        296        12   

Commercial mortgage-backed securities

    96        (2       96        (10                          180        (2

Asset-backed securities

    76        (2       57        (29                   (35     67        3   

Corporate bonds

    386        38          129        (141                   12        424        38   

Collateralized debt and loan obligations

    1,152        79          241        (397            (253            822        2   

Loans and lending commitments

    5,874        41          914        (213            (1,807     (20     4,789        40   

Other debt

    285        (10       68        (1            (5     149        486        2   
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

    8,044        161          1,563        (831            (2,065     192        7,064        95   

Corporate equities

    272        19          30        (98                   7        230        12   

Net derivative and other contracts(2):

                   

Interest rate contracts

    (173     128          6               (11     65        (511     (496     119   

Credit contracts

    (743     (247       14               (30     7        15        (984     (252

Foreign exchange contracts

    151        62                               97        (13     297        62   

Equity contracts(3)

    (2,165     (273       33               (176     (54     163        (2,472     (324

Commodity contracts

    1,146        295                               (37     (59     1,345        262   
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net derivative and other contracts

    (1,784     (35       53               (217     78        (405     (2,310     (133

Investments:

                   

Principal investments

    835        17          11        (34                          829        9   

Other

    323        (12       2        (5                   83        391        (10
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

    1,158        5          13        (39                   83        1,220        (1

Securities received as collateral

                    33                                    33          

Intangible assets

    6                                      (1            5          

Liabilities at Fair Value

                   

Trading liabilities:

                   

Corporate and other debt:

                   

Corporate bonds

  $ 78      $ (4     $ (1   $ 8      $      $      $ (66   $ 23      $ (4

Lending commitments

    5        5                                                    5   

Other debt

    38        6          (11     5                      (3     23        6   
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

    121        7          (12     13                      (69     46        7   

Corporate equities

    45        1                 7                      (1     50        1   

Obligation to return securities received as collateral

                           33                             33          

Securities sold under agreements to repurchase

    153        (1                                          154        (1

Other secured financings

    149        (8                            (24            133        1   

Long-term borrowings

    1,934        17                        115        (142     (152     1,738        10   

 

(1)

Loan originations and consolidations of VIEs are included in purchases.

(2)

Net derivative and other contracts represent Trading assets—Derivative and other contracts, net of Trading liabilities—Derivative and other contracts. For further information on derivative instruments and hedging activities, see Note 4.

(3)

Net liability Level 3 derivative equity contracts increased by $785 million to correct the fair value level assigned to these contracts at December 31, 2014. The total amount of derivative equity contracts remained unchanged at December 31, 2014.

 

Significant Unobservable Inputs Used in Recurring Level 3 Fair Value Measurements.

 

The disclosures below provide 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.

 

    13   LOGO


Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

Recurring Level 3 Fair Value Measurements Valuation Techniques and Sensitivity of Unobservable Inputs.

 

     Balance at
March 31, 2016
    

Valuation Technique(s) /

Significant Unobservable Input(s) /

Sensitivity of the Fair Value to Changes

in the Unobservable Inputs

   Range(1)          Averages(2)      
     (dollars in millions)                     

Assets at Fair Value

           

Trading assets:

                               

Corporate and other debt:

           

Residential mortgage-backed securities

   $ 292      

Comparable pricing:

     
             

Comparable bond price / (A)

     0 to 79 points         27 points   

Commercial mortgage-backed securities

     59      

Comparable pricing:

     
             

Comparable bond price / (A)

     0 to 9 points         1 point   

Corporate bonds

     224      

Comparable pricing(3):

     
     

Comparable bond price / (A)

     3 to 118 points         63 points   
     

Comparable pricing:

     
             

EBITDA multiple / (A)

     5 to 10 times         7 times   

Collateralized debt and loan obligations

     348      

Comparable pricing(3):

     
     

Comparable bond price / (A)

     55 to 100 points         66 points   
     

Correlation model:

     
             

Credit correlation / (B)

     27% to 60%         37%   

Loans and lending commitments

     6,185      

Corporate loan model:

     
     

Credit spread / (C)

     323 to 989 bps         581 bps   
     

Margin loan model(3):

     
     

Credit spread / (C)(D)

     30 to 101 bps         74 bps   
     

Volatility skew / (C)(D)

     19% to 53%         29%   
     

Discount rate / (C)(D)

     1% to 9%         2%   
     

Option model:

     
     

Volatility skew / (C)

     -1%         -1%   
     

Comparable pricing:

     
     

Comparable loan price / (A)

     38 to 100 points         90 points   
     

Expected recovery:

     
     

Asset coverage / (A)

     48% to 100%         91%   
     

Discounted cash flow:

     
     

Implied weighted average cost of capital / (C)(D)

     6% to 7%         7%   
             

Capitalization rate / (C)(D)

     4% to 10%         4%   

Other debt

     527      

Comparable pricing:

     
     

Comparable loan price / (A)

     4 to 87 points         65 points   
     

Comparable pricing:

     
     

Comparable bond price / (A)

     7 points         7 points   
     

Option model:

     
     

At the money volatility / (C)

     16% to 53%         53%   
     

Margin loan model(3):

     
             

Discount rate / (C)

     1% to 2%         2%   

Corporate equities

     430      

Comparable pricing:

     
     

Comparable price / (A)

     46% to 59%         54%   
     

Comparable pricing(3):

     
             

Comparable equity price / (A)

     100%         100%   

Net derivative and other contracts(4):

           

Interest rate contracts

     169      

Option model:

     
     

Interest rate volatility concentration

     
     

liquidity multiple / (C)(D)

     2 times         2 times   
     

Interest rate—Foreign exchange

     
     

correlation / (C)(D)

     25% to 56%           42% /43%(5)   
     

Interest rate volatility skew / (A)(D)

     31% to 116%           66% / 66%(5)   
     

Interest rate quanto correlation / (A)(D)

     -9% to 35%             5% / -7%(5)   

 

LOGO   14    


Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

     Balance at
March 31, 2016
   

Valuation Technique(s) /

Significant Unobservable Input(s) /

Sensitivity of the Fair Value to Changes

in the Unobservable Inputs

   Range(1)          Averages(2)      
     (dollars in millions)                    
    

Interest rate curve correlation / (C)(D)

     27% to 96%           69% / 75%(5)   
    

Inflation volatility / (A)(D)

     58% to 60%           59% / 59%(5)   
            

Interest rate-Inflation correlation / (A)(D)

     -40% to 42%          -41% / -41%(5)   

Credit contracts

     (723  

Comparable pricing:

     
    

Cash synthetic basis / (C)(D)

     5 to 12 points         10 points   
    

Comparable bond price / (C)(D)

     0 to 75 points         24 points   
    

Correlation model(3):

     
            

Credit correlation / (B)

     29% to 90%         42%   

Foreign exchange contracts(6)

     126     

Option model:

     
    

Interest rate - Foreign exchange correlation / (C)(D)

     25% to 56%         42% / 43%(5)   
    

Foreign exchange volatility skew / (C)(D)

     -11% to 4%         0% /0%(5)   
    

Interest rate volatility skew / (A)(D)

     31% to 116%         66% / 66%(5)   
            

Interest rate curve / (A)(D)

     0%         0% / 0%(5)   

Equity contracts(6)

     (1,832  

Option model:

     
    

At the money volatility / (A)(D)

     7% to 86%         33%   
    

Volatility skew / (C)(D)

     -5% to 0%         -1%   
    

Equity-Equity correlation / (A)(D)

     40% to 97%         78%   
    

Equity-Foreign exchange correlation / (C)(D)

     -60% to -21%         -36%   
            

Equity-Interest rate correlation / (C)(D)

     -29% to 50%         17% / 8%(5)   

Commodity contracts

     1,200     

Option model:

     
    

Forward power price / (C)(D)

     $1 to $93 per         $31 per   
          megawatt hour         megawatt hour   
    

Commodity volatility / (A)(D)

     7% to 55%         17%   
            

Cross commodity correlation / (C)(D)

     43% to 99%         93%   
Investments:           

Principal investments

     743     

Discounted cash flow:

     
    

Implied weighted average cost of capital / (C)(D)

     12% to 17%         14%   
    

Exit multiple / (A)(D)

     8 to 14 times         8 times   
    

Market approach(3):

     
    

EBITDA multiple / (A)(D)

     6 to 26 times         11 times   
    

Forward capacity price / (A)(D)

     $5 to $9         $7   
    

Comparable pricing:

     
            

Comparable equity price / (A)

     43% to 100%         81%   

Other

     179     

Discounted cash flow:

     
    

Implied weighted average cost of capital / (C)(D)

     9%         9%   
    

Exit multiple / (A)(D)

     13 times         13 times   
    

Market approach:

     
    

EBITDA multiple / (A)(D)

     6 to 14 times         12 times   
    

Comparable pricing(3):

     
            

Comparable equity price / (A)

     100%         100%   
Liabilities at Fair Value           

Securities sold under agreements to repurchase

     151     

Discounted cash flow:

     
            

Funding spread / (A)

     104 to 130 bps         120 bps   
Other secured financings      454     

Option model:

     
    

Volatility skew / (C)

     -1%         -1%   
    

Discounted cash flow(3):

     
    

Discount rate / (C)

     4% to 14%         5%   
    

Discounted cash flow:

     
            

Funding spread / (A)

     94 to 130 bps         112 bps   

 

    15   LOGO


Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

     Balance at
March 31, 2016
    

Valuation Technique(s) /

Significant Unobservable Input(s) /

Sensitivity of the Fair Value to Changes

in the Unobservable Inputs

   Range(1)          Averages(2)      
     (dollars in millions)                     
Long-term borrowings      1,798      

Option model(3):

     
     

At the money volatility / (C)(D)

     6% to 55%         28%   
     

Volatility skew / (C)(D)

     -2% to 0%         -1%   
     

Equity-Equity correlation / (C)(D)

     40% to 97%         73%   
     

Equity-Foreign exchange correlation / (A)(D)

     -60% to -13%         -28%   
     

Option model:

     
     

Interest rate volatility skew / (A)(D)

     25% to 50%         38%   
     

Equity volatility discount / (C)(D)

     10% to 20%         15%   
     

Option model:

     
     

Interest rate-Foreign exchange correlation / (A)(D)

     25% to 56%         42% / 43%(5)   
     

Correlation model:

     
     

Credit correlation / (B)

     29% to 60%         42%   
     

Comparable pricing:

     
             

Comparable equity price / (A)

     100%         100%   

 

     Balance at
December 31, 2015
    

Valuation Technique(s) /
Significant Unobservable Input(s) /
Sensitivity of the Fair  Value to Changes in the
Unobservable Inputs

   Range(1)          Averages(2)      
     (dollars in millions)                     
Assets at Fair Value            
Trading assets:                                

Corporate and other debt:

           

Residential mortgage-backed securities

   $ 341      

Comparable pricing:

     
             

Comparable bond price / (A)

     0 to 75 points         32 points   

Commercial mortgage-backed securities

     72      

Comparable pricing:

     
             

Comparable bond price / (A)

     0 to 9 points         2 point   

Corporate bonds

     267      

Comparable pricing(3):

     
     

Comparable bond price / (A)

     3 to 119 points         90 points   
     

Comparable pricing:

     
     

EBITDA multiple / (A)

     7 to 9 times         8 times   
     

Structured bond model:

     
             

Discount rate / (C)

     15%         15%   

Collateralized debt and loan obligations

     430      

Comparable pricing(3):

     
     

Comparable bond price / (A)

     47 to 103 points         67 points   
     

Correlation model:

     
             

Credit correlation / (B)

     39% to 60%         49%   

Loans and lending commitments

     5,936      

Corporate loan model:

     
     

Credit spread / (C)

     250 to 866 bps         531 bps   
     

Margin loan model(3):

     
     

Credit spread / (C)(D)

     62 to 499 bps         145 bps   
     

Volatility skew / (C)(D)

     14% to 70%         33%   
     

Discount rate / (C)(D)

     1% to 4%         2%   
     

Option model:

     
     

Volatility skew / (C)

     -1%         -1%   
     

Comparable pricing:

     
     

Comparable loan price / (A)

     35 to 100 points         88 points   
     

Discounted cash flow:

     
     

Implied weighted average cost of capital / (C)(D)

     6% to 8%         7%   
             

Capitalization rate / (C)(D)

     4% to 10%         4%   

 

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Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

     Balance at
December 31, 2015
   

Valuation Technique(s) /
Significant Unobservable Input(s) /
Sensitivity of the Fair  Value to Changes in the
Unobservable Inputs

   Range(1)          Averages(2)      
     (dollars in millions)                    

Other debt

     448     

Comparable pricing:

     
    

Comparable loan price / (A)

     4 to 84 points         59 points   
    

Comparable pricing:

     
    

Comparable bond price / (A)

     8 points         8 points   
    

Option model:

     
    

At the money volatility / (C)

     16% to 53%         53%   
    

Margin loan model(3):

     
            

Discount rate / (C)

     1%         1%   

Corporate equities

     433     

Comparable pricing:

     
    

Comparable price / (A)

     50% to 80%         72%   
    

Comparable pricing(3):

     
    

Comparable equity price / (A)

     100%         100%   
    

Market approach:

     
            

EBITDA multiple / (A)

     9 times         9 times   

Net derivative and other contracts(4):

          

Interest rate contracts

     260     

Option model:

     
    

Interest rate volatility concentration

     
    

liquidity multiple / (C)(D)

     0 to 3 times         2 times   
    

Interest rate - Foreign exchange correlation / (C)(D)

     25% to 62%         43% / 43%(5)   
    

Interest rate volatility skew / (A)(D)

     29% to 82%           43% / 40%(5)   
    

Interest rate quanto correlation / (A)(D)

     -8% to 36%             5% / -6%(5)   
    

Interest rate curve correlation / (C)(D)

     24% to 95%           60% / 69%(5)   
    

Inflation volatility / (A)(D)

     58%           58% / 58%(5)   
            

Interest rate - Inflation correlation / (A)(D)

     -41% to -39%         -41% / -41%(5)   

Credit contracts

     (844  

Comparable pricing:

     
    

Cash synthetic basis / (C)(D)

     5 to 12 points         9 points   
    

Comparable bond price / (C)(D)

     0 to 75 points         24 points   
    

Correlation model(3):

     
            

Credit correlation / (B)

     39% to 97%         57%   

Foreign exchange contracts(6)

     141     

Option model:

     
    

Interest rate - Foreign exchange correlation / (C)(D)

     25% to 62%           43% / 43%(5)   
    

Interest rate volatility skew / (A)(D)

     29% to 82%           43% / 40%(5)   
            

Interest rate curve / (A)(D)

     0%                0% / 0%(5)   

Equity contracts(6)

     (2,031  

Option model:

     
    

At the money volatility / (A)(D)

     16% to 65%         32%   
    

Volatility skew / (A)(D)

     -3% to 0%         -1%   
    

Equity - Equity correlation / (C)(D)

     40% to 99%         71%   
    

Equity - Foreign exchange correlation / (A)(D)

     -60% to -11%         -39%   
            

Equity - Interest rate correlation / (C)(D)

     -29% to 50%           16% / 8%(5)   

Commodity contracts

     1,050     

Option model:

     
    

Forward power price / (C)(D)

     $3 to $91 per         $32 per   
          megawatt hour         megawatt hour   
    

Commodity volatility / (A)(D)

     10% to 92%         18%   
            

Cross commodity correlation / (C)(D)

     43% to 99%         93%   

 

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Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

     Balance at
December 31, 2015
    

Valuation Technique(s) /
Significant Unobservable Input(s) /
Sensitivity of the Fair  Value to Changes in the
Unobservable Inputs

   Range(1)          Averages(2)      
     (dollars in millions)                     

Investments:

           

Principal investments

     486      

Discounted cash flow:

     
     

Implied weighted average cost of capital / (C)(D)

     16%         16%   
     

Exit multiple / (A)(D)

     8 to 14 times         9 times   
     

Capitalization rate / (C)(D)

     5% to 9%         6%   
     

Equity discount rate / (C)(D)

     20% to 35%         26%   
     

Market approach(3):

     
     

EBITDA multiple / (A)(D)

     8 to 20 times         11 times   
     

Forward capacity price / (A)(D)

     $ 5 to $9         $ 7   
     

Comparable pricing:

     
             

Comparable equity price / (A)

     43% to 100%         81%   

Other

     221      

Discounted cash flow:

     
     

Implied weighted average cost of capital / (C)(D)

     10%         10%   
     

Exit multiple / (A)(D)

     13 times         13 times   
     

Market approach:

     
     

EBITDA multiple / (A)

     7 to 14 times         12 times   
     

Comparable pricing(3):

     
             

Comparable equity price / (A)

     100%         100%   
Liabilities at Fair Value            

Securities sold under agreements to repurchase

   $ 151      

Discounted cash flow:

     
             

Funding spread / (A)

     86 to 116 bps         105 bps   
Other secured financings      461      

Option model:

     
     

Volatility skew / (C)

     -1%         -1%   
     

Discounted cash flow(3):

     
     

Discount rate / (C)

     4% to 13%         4%   
     

Discounted cash flow:

     
             

Funding spread / (A)

     95 to 113 bps         104 bps   
Long-term borrowings      1,987      

Option model(3):

     
     

At the money volatility / (C)(D)

     20% to 50%         29%   
     

Volatility skew / (A)(D)

     -1% to 0%         -1%   
     

Equity - Equity correlation / (A)(D)

     40% to 97%         77%   
     

Equity - Foreign exchange correlation / (C)(D)

     -70% to -11%         -39%   
     

Option model:

     
     

Interest rate volatility skew / (A)(D)

     50%         50%   
     

Equity volatility discount / (A)(D)

     10%         10%   
     

Correlation model:

     
     

Credit correlation / (B)

     40% to 60%         52%   
     

Comparable pricing:

     
             

Comparable equity price / (A)

     100%         100%   

 

bps—Basis points.

EBITDA—Earnings before interest, taxes, depreciation and amortization.

(1)

The range of significant unobservable inputs is represented in points, percentages, basis points, times or megawatt hours. Points are a percentage of par; for example, 79 points would be 79% of par. A basis point equals 1/100th of 1%; for example, 989 bps would equal 9.89%.

(2)

Amounts represent weighted averages except where simple averages and the median of the inputs are provided (see footnote 5 below). Weighted averages are calculated by weighting each input by the fair value of the respective financial instruments except for collateralized debt and loan obligations, principal investments, other debt, corporate bonds, long-term borrowings and derivative instruments where some or all inputs are weighted by risk.

(3)

This is the predominant valuation technique for this major asset or liability class.

(4)

Credit valuation adjustments (“CVA”) and funding valuation adjustments (“FVA”) are included in the balance but excluded from the Valuation Technique(s) and Significant Unobservable Input(s) in the table above. CVA is a Level 3 input when the underlying counterparty credit curve is unobservable. FVA is a Level 3 input in its entirety given the lack of observability of funding spreads in the principal market.

(5)

The data structure of the significant unobservable inputs used in valuing interest rate contracts, foreign exchange contracts and certain equity contracts may be in a multi-dimensional form, such as a curve or surface, with risk distributed across the structure. Therefore, a simple average and median, together with the range of data inputs, may be more appropriate measurements than a single point weighted average.

(6)

Includes derivative contracts with multiple risks (i.e., hybrid products).

 

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Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

 

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 changes in credit correlation may result in a significantly higher or lower fair value measurement. Increasing (decreasing) correlation drives a redistribution of risk within the capital structure such that junior tranches become less (more) risky and senior tranches become more (less) risky.

(C)

Significant increase (decrease) in the unobservable input in isolation would result in a significantly lower (higher) fair value measurement.

(D)

There are no predictable relationships between the significant unobservable inputs.

 

For a description of the Company’s significant unobservable inputs included in the March 31, 2016 and December 31, 2015 tables above for all major categories of assets and liabilities, see Note 3 to the consolidated financial statements in the 2015 Form 10-K. The following provides a description of an update to significant unobservable inputs included in the 2015 Form 10-K.

 

   

Asset Coveragethe ratio of a borrower’s underlying pledged assets less applicable costs relative to their outstanding debt (while considering the loan’s principal and the seniority and security of the loan commitment).

 

During the quarter ended March 31, 2016, there were no other significant updates made to the Company’s significant unobservable inputs.

 

Fair Value of Investments Measured at Net Asset Value.

 

For a description of the Company’s investments in private equity funds, real estate funds and hedge funds measured at fair value based on NAV, see Note 3 to the consolidated financial statements in the 2015 Form 10-K.

 

Investments in Certain Funds Measured at NAV per Share.

 

     At March 31, 2016      At December 31, 2015  
     Fair Value      Commitment      Fair Value      Commitment  
     (dollars in millions)  

Private equity funds

   $ 1,768       $ 467       $ 1,917       $ 538   

Real estate funds

     1,274         113         1,337         128   

Hedge funds:

           

Long-short equity hedge funds

     193                 422           

Fixed income/credit-related hedge funds

     52                 71           

Event-driven hedge funds

     2                 2           

Multi-strategy hedge funds

     99         4         94         4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,388       $ 584       $ 3,843       $ 670   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Private Equity Funds and Real Estate Funds.

 

Investments in these funds generally are not redeemable due to the closed-ended nature of these funds. Instead, distributions from each fund will be received as the underlying investments of the funds are disposed and monetized.

 

Fair Value of Certain Funds by Projected Liquidation Timing.

 

     At March 31, 2016  

Fund Type

   Less than 5 years      5-10 years      Over 10 years      Total  
     (dollars in millions)  

Private equity funds

   $ 141       $ 926       $ 701       $ 1,768   

Real estate funds

     97         708         469         1,274   

 

Hedge Funds.

 

Investments in hedge funds may be subject to initial period lock-up restrictions or gates. A hedge fund lock-up provision is a provision that provides that, during a certain initial period, an investor may not make a withdrawal from the fund. The purpose of a gate is to restrict the level of redemptions that an investor in a particular hedge fund can demand on any redemption date.

 

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Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

Fixed income/credit-related hedge funds, event-driven hedge funds and multi-strategy hedge funds are redeemable at least on a three-month period basis, primarily with a notice period of 90 days or less. At March 31, 2016, approximately 34% of the fair value amount of long-short equity hedge funds was redeemable at least quarterly, 33% is redeemable every six months and 33% of these funds have a redemption frequency of greater than six months. At December 31, 2015, approximately 34% of the fair value amount of long-short equity hedge funds was redeemable at least quarterly, 51% is redeemable every six months and 15% of these funds have a redemption frequency of greater than six months. The notice period for long-short equity hedge funds at March 31, 2016 and December 31, 2015 was primarily greater than six months.

 

Lock-up Restrictions and Gates by Hedge Fund Type.

 

     At March 31, 2016  
     Fair Value      Gate Restrictions      Remaining Exit
Restriction Period
 
     (dollars in millions)                

Long-short equity

   $ 193         26%         Indefinite   

Fixed income/credit-related

     52         73%         Indefinite   

Event-driven

     2         N/A         N/A   

Multi-strategy(1)

     99         N/A         N/A   

 

(1)

Approximately 21% of the fair value of multi-strategy investments is subject to lock-up restrictions, which have remaining periods primarily over three years at March 31, 2016.

 

Fair Value Option.

 

The Company elected the fair value option for certain eligible instruments that are risk managed on a fair value basis to mitigate income statement volatility caused by measurement basis differences between the elected instruments and their associated risk management transactions or to eliminate complexities of applying certain accounting models.

 

Impact on Earnings of Transactions Under the Fair Value Option Election.

 

     Trading
Revenues
    Interest
Income
(Expense)
    Gains (Losses)
Included in
Net Revenues
 
     (dollars in millions)  

Three Months Ended March 31, 2016

      

Securities purchased under agreements to resell

   $      $ 2      $ 2   

Deposits(1)

     (2            (2

Short-term borrowings(1)

     45               45   

Securities sold under agreements to repurchase(1)

     (9     (2     (11

Long-term borrowings(1)

     (965     (139             (1,104

Three Months Ended March 31, 2015

      

Securities purchased under agreements to resell

   $ (1   $      $ (1

Short-term borrowings(2)

     (40            (40

Securities sold under agreements to repurchase(2)

     (2     (1     (3

Long-term borrowings(2)

              937                (132     805   

 

(1)

Gains (losses) are mainly attributable to changes in foreign currency rates or interest rates or movements in the reference price or index for short-term and long-term borrowings before the impact of related hedges. In accordance with the early adoption of a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities, unrealized DVA gains of $323 million are recorded within OCI in the condensed consolidated statements of comprehensive income and not included in the above table for the quarter ended March 31, 2016. See Notes 2 and 14 for further information.

(2)

Gains (losses) recorded in Trading revenues for the quarter ended March 31, 2015 are attributable to DVA and the respective remainder is attributable to changes in foreign currency rates or interest rates or movements in the reference price or index for structured notes before the impact of related hedges.

 

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Table of Contents

MORGAN STANLEY—(Continued)

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

In addition to the amounts in the above table, as discussed in Note 2 to the consolidated financial statements in the 2015 Form 10-K, instruments within Trading assets or Trading liabilities are measured at fair value. The amounts in the above table are included within Net revenues and do not reflect gains or losses on related hedging instruments, if any.

 

Short-Term and Long-Term Borrowings Measured at Fair Value on a Recurring Basis.

 

Business Unit Responsible for Risk Management

   At March 31, 2016      At December 31, 2015  
     (dollars in millions)  

Equity

   $ 19,006       $ 17,789   

Interest rates

     15,657         14,255   

Credit and foreign exchange

     1,704         2,266   

Commodities

     338         383   
  

 

 

    

 

 

 

Total

   $ 36,705       $ 34,693   
  

 

 

    

 

 

 

 

Gains (Losses) due to Changes in Instrument-Specific Credit Risk.

 

     Three Months Ended
March 31,
 
     2016      2015  
     Trading
  Revenues  
         OCI           Trading
  Revenues  
          OCI       
     (dollars in millions)  

Short-term and long-term borrowings(1)

   $ 41      $ 319       $ 125       $   

Securities sold under agreements to repurchase(1)

            4                   

Loans and other debt(2)

     (100             77           

Lending commitments(3)

     1                9           

 

(1)

In accordance with the early adoption of a provision of the accounting update, Recognition and Measurement of Financial Assets and Financial Liabilities, for the quarter ended March 31, 2016 DVA gains (losses) are recorded in OCI when unrealized and in Trading revenues when realized. In the quarter ended March 31, 2015, the realized and unrealized DVA gains (losses) are recorded in Trading revenues. The cumulative impact of changes in the Company’s DVA and the pre-tax amount recognized in AOCI is a loss of $138 million at March 31, 2016. See Notes 2 and 14 for further information.

(2)

Loans and other debt instrument-specific credit gains (losses) were determined by excluding the non-credit components of gains and losses, such as those due to changes in interest rates.

(3)

Gains (losses) on lending commitments were generally determined based on the differential between estimated expected client yields and contractual yields at each respective period-end.

 

Net Difference of Contractual Principal Amount Over Fair Value.

 

     At March 31, 2016      At December 31, 2015  
     (dollars in millions)  

Loans and other debt(1)

   $ 14,353       $ 14,095   

Loans 90 or more days past due and/or on nonaccrual status(1)(2)

     12,177         11,651   

Short-term and long-term borrowings(3)

     344         508   

 

(1)

The majority of the difference between principal and fair value amounts for loans and other debt emanates from the distressed debt trading business, which purchases distressed debt at amounts well below par.

(2)

The aggregate fair value of loans that were in nonaccrual status was $2,267 million and $1,853 million at March 31, 2016 and December 31, 2015, respectively, which includes all loans 90 or more days past due of $887 million and $885 million at March 31, 2016 and December 31, 2015, respectively.

(3)

Short-term and long-term borrowings do not include structured notes where the repayment of the initial principal amount fluctuates based on changes in the reference price or index.

 

The tables above exclude non-recourse debt from consolidated VIEs, liabilities related to failed sales of financial assets, pledged commodities and other liabilities that have specified assets attributable to them.

 

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis.

 

Certain assets and liabilities were measured at fair value on a non-recurring basis and are not included in the tables above.

 

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Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis.

 

    Carrying Value
at March 31,

2016
    Fair Value by Level     Total Gains
(Losses) for the
Three Months Ended
March 31,

2016(1)
 
        Level 1         Level 2         Level 3      
    (dollars in millions)  

Assets:

         

Loans(2)

  $ 6,515      $      $ 3,359      $ 3,156      $ (80

Other assets—Other investments(3)

    27                      27        (3

Other assets—Premises, equipment and software costs(4)

                                (5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 6,542      $      $ 3,359      $ 3,183      $ (88
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

         

Other liabilities and accrued expenses(2)

  $ 459      $      $ 379      $ 80      $ (20
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  $ 459      $      $ 379      $ 80      $ (20
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Carrying Value
at March 31,
2015
    Fair Value by Level     Total Gains
(Losses) for the

Three Months Ended
March 31,

2015(1)
 
        Level 1         Level 2         Level 3      
    (dollars in millions)  

Assets:

         

Loans(2)

  $ 3,346      $      $ 2,521      $ 825      $ (24

Other assets—Other investments(3)

    35                      35        (2

Other assets—Premises, equipment and software costs(4)

                                (19
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 3,381      $      $ 2,521      $ 860      $ (45
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

         

Other liabilities and accrued expenses(2)

  $ 245      $      $ 203      $ 42      $ (7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  $ 245      $      $ 203      $ 42      $ (7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Changes in the fair value of Loans and losses related to Other assets—Other investments are recorded within Other revenues in the condensed consolidated statements of income. Losses related to Other assets—Premises, equipment and software costs are recorded within Other expenses if not held for sale and within Other revenues if held for sale. Changes in the fair value of lending commitments reported in Other liabilities and accrued expenses that are designated as held for sale are recorded within Other revenues, whereas, changes in the fair value related to held for investment lending commitments are recorded within Other expenses.

(2)

Non-recurring changes in the fair value of loans and lending commitments held for investment were calculated using the value of the underlying collateral. Loans and lending commitments held for sale were calculated using recently executed transactions; market price quotations; valuation models that incorporate market observable inputs where possible, such as comparable loan or debt prices and credit default swap spread levels adjusted for any basis difference between cash and derivative instruments; or default recovery analysis where such transactions and quotations are unobservable.

(3)

Losses related to Other assets—Other investments were determined primarily using discounted cash flow models and methodologies that incorporate multiples of certain comparable companies.

(4)

Losses related to Other assets—Premises, equipment and software costs were determined primarily using a default recovery analysis.

 

Financial Instruments Not Measured at Fair Value.

 

For a further discussion of financial instruments not measured at fair value, see Note 3 to the consolidated financial statements in the 2015 Form 10-K.

 

The carrying values of the remaining assets and liabilities not measured at fair value in the tables below approximate fair value due to their short-term nature.

 

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Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

Financial Instruments Not Measured at Fair Value.

 

The tables below exclude certain financial instruments such as equity method investments and all non-financial assets and liabilities such as the value of the long-term relationships with our deposit customers.

 

    At March 31, 2016     Fair Value by Level  
    Carrying
Value
    Fair Value     Level 1     Level 2     Level 3  
    (dollars in millions)  

Financial Assets:

         

Cash and due from banks

  $ 22,797      $ 22,797      $         22,797      $      $   

Interest bearing deposits with banks

    30,841        30,841        30,841                 

Investment securities—HTM securities

    9,425        9,478        1,963        7,515          

Securities purchased under agreements to resell

    98,219        98,246               97,727        519   

Securities borrowed

            140,413        140,416               140,314        102   

Customer and other receivables(1)

    40,935        40,823               36,227        4,596   

Loans(2)

    88,802        89,831               21,858                67,973   

Other assets—Cash deposited with clearing organizations or segregated under federal and other regulations or requirements

    31,808        31,808        31,808                 

Financial Liabilities:

         

Deposits

  $ 156,944      $         158,238      $      $         158,238      $   

Short-term borrowings

    412        412               412          

Securities sold under agreements to repurchase

    40,612        40,684               38,701        1,983   

Securities loaned

    17,140        17,160               17,160          

Other secured financings

    6,693        6,704               5,355        1,349   

Customer and other payables(1)

    191,137        191,137               191,137          

Long-term borrowings

    126,796        128,520               128,520          

 

    At December 31, 2015     Fair Value by Level  
    Carrying
Value
    Fair Value     Level 1     Level 2     Level 3  
    (dollars in millions)  

Financial Assets:

         

Cash and due from banks

  $ 19,827      $ 19,827      $         19,827      $      $   

Interest bearing deposits with banks

    34,256        34,256        34,256                 

Investment securities—HTM securities

    5,244        5,188        998        4,190          

Securities purchased under agreements to resell

    86,851        86,837               86,186        651   

Securities borrowed

    142,416        142,414               142,266        148   

Customer and other receivables(1)

    41,676        41,576               36,752        4,824   

Loans(2)

    85,759        86,423               19,241                67,182   

Other assets—Cash deposited with clearing organizations orsegregated under federal and other regulations or requirements

    31,469        31,469        31,469                 

Financial Liabilities:

         

Deposits

  $ 155,909      $         156,163      $      $         156,163      $   

Short-term borrowings

    525        525               525          

Securities sold under agreements to repurchase

    36,009        36,060               34,150        1,910   

Securities loaned

    19,358        19,382               19,192        190   

Other secured financings

    6,610        6,610               5,333        1,277   

Customer and other payables(1)

    183,895        183,895               183,895          

Long-term borrowings

            120,723        123,219               123,219          

 

HTM—Held to maturity.

(1)

Accrued interest, fees, and dividend receivables and payables where carrying value approximates fair value have been excluded.

(2)

Amounts include all loans measured at fair value on a non-recurring basis.

 

At March 31, 2016 and December 31, 2015, notional amounts of approximately $98.1 billion and $99.5 billion, respectively, of the Company’s lending commitments were held for investment and held for sale, which are not included in the above table. The estimated fair value of such lending commitments was a liability of $2,062 million and $2,172 million, respectively, at March 31, 2016 and December 31, 2015. Had these commitments been accounted for at fair value, $1,660 million would have been categorized in Level 2 and $402 million in Level 3 at March 31, 2016, and $1,791 million would have been categorized in Level 2 and $381 million in Level 3 at December 31, 2015.

 

    23   LOGO


Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

4.

Derivative Instruments and Hedging Activities.

 

The Company trades and makes markets globally in listed futures, over-the-counter (“OTC”) swaps, forwards, options and other derivatives referencing, among other things, interest rates, currencies, investment grade and non-investment grade corporate credits, loans, bonds, U.S. and other sovereign securities, emerging market bonds and loans, credit indices, asset-backed security indices, property indices, mortgage-related and other asset-backed securities, and real estate loan products. For a further discussion of the Company’s derivative instruments and hedging activities, see Note 4 to the consolidated financial statements in the 2015 Form 10-K.

 

Fair Value, Notional and Offsetting of Derivative Instruments.

 

Fair Value, Notional and Offsetting of Derivative Assets and Liabilities.

 

    Derivative Assets
at March 31, 2016
 
    Fair Value     Notional  
    Bilateral
OTC
    Cleared
OTC
    Exchange
Traded
    Total     Bilateral
OTC
    Cleared
OTC
    Exchange
Traded
    Total  
    (dollars in millions)  

Derivatives designated as accounting hedges:

               

Interest rate contracts

  $ 3,209      $ 2,897      $      $ 6,106      $ 34,259      $ 57,400      $      $ 91,659   

Foreign exchange contracts

    27                      27        1,527                      1,527   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives designated as accounting hedges

    3,236        2,897               6,133        35,786        57,400               93,186   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Derivatives not designated as accounting hedges(1):

               

Interest rate contracts

    273,635        146,182        242        420,059        4,254,497        5,634,287        1,243,384        11,132,168   

Credit contracts

    16,774        3,527               20,301        535,066        157,290               692,356   

Foreign exchange contracts

    72,794        423        76        73,293        1,900,339        14,915        11,542        1,926,796   

Equity contracts

    21,174               23,356        44,530        288,517               259,466        547,983   

Commodity contracts

    13,786               3,832        17,618        67,085               82,933        150,018   

Other

    19                      19        2,111                      2,111   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives not designated as accounting hedges

    398,182        150,132        27,506        575,820        7,047,615        5,806,492        1,597,325        14,451,432   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross derivatives(2)

  $     401,418      $     153,029      $     27,506      $     581,953      $     7,083,401      $     5,863,892      $     1,597,325      $     14,544,618   
         

 

 

   

 

 

   

 

 

   

 

 

 

Amounts offset:

               

Counterparty netting

    (314,379     (149,342     (24,456     (488,177        

Cash collateral netting

    (55,371     (2,562            (57,933        
 

 

 

   

 

 

   

 

 

   

 

 

         

Total derivative assets at fair value included in Trading assets

  $ 31,668      $ 1,125      $ 3,050      $ 35,843           
 

 

 

   

 

 

   

 

 

   

 

 

         

Amounts not offset(3):

               

Financial instruments collateral

    (10,299                   (10,299        

Other cash collateral

    (13                   (13        
 

 

 

   

 

 

   

 

 

   

 

 

         

Net exposure

  $ 21,356      $ 1,125      $ 3,050      $ 25,531           
 

 

 

   

 

 

   

 

 

   

 

 

         

 

LOGO   24    


Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

    Derivative Liabilities
at March 31, 2016
 
    Fair Value     Notional  
    Bilateral
OTC
    Cleared
OTC
    Exchange
Traded
    Total     Bilateral
OTC
    Cleared
OTC
    Exchange
Traded
    Total  
    (dollars in millions)  

Derivatives designated as accounting hedges:

               

Foreign exchange contracts

  $ 364      $ 28      $      $ 392      $ 8,267      $ 783      $      $ 9,050   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives designated as accounting hedges

    364        28               392        8,267        783               9,050   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Derivatives not designated as accounting hedges(1):

               

Interest rate contracts

    251,687        147,016        347        399,050        3,943,566        5,517,043        903,713        10,364,322   

Credit contracts

    17,616        3,651               21,267        569,403        144,845               714,248   

Foreign exchange contracts

    76,098        503        49        76,650        1,960,735        15,602        6,107        1,982,444   

Equity contracts

    23,973               23,906        47,879        331,715               252,398        584,113   

Commodity contracts

    11,240               3,499        14,739        62,976               65,323        128,299   

Other

    116                      116        4,858                      4,858   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives not designated as accounting hedges

    380,730        151,170        27,801        559,701        6,873,253        5,677,490        1,227,541        13,778,284   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross derivatives(2)

  $     381,094      $     151,198      $     27,801      $     560,093      $     6,881,520      $     5,678,273      $     1,227,541      $     13,787,334   
         

 

 

   

 

 

   

 

 

   

 

 

 

Amounts offset:

               

Counter party netting

    (314,379     (149,342     (24,456     (488,177        

Cash collateral netting

    (36,868     (1,651            (38,519        
 

 

 

   

 

 

   

 

 

   

 

 

         

Total derivative liabilities at fair value included in Trading liabilities

  $ 29,847      $ 205      $ 3,345      $ 33,397           
 

 

 

   

 

 

   

 

 

   

 

 

         

Amounts not offset(3):

               

Financial instruments collateral

    (8,368            (308     (8,676        

Other cash collateral

    (4     (25            (29        
 

 

 

   

 

 

   

 

 

   

 

 

         

Net exposure

  $ 21,475      $ 180      $ 3,037      $ 24,692           
 

 

 

   

 

 

   

 

 

   

 

 

         

 

    Derivative Assets
at December 31, 2015
 
    Fair Value     Notional  
    Bilateral
OTC
    Cleared
OTC
    Exchange
Traded
    Total     Bilateral
OTC
    Cleared
OTC
    Exchange
Traded
    Total  
    (dollars in millions)  

Derivatives designated as accounting hedges:

               

Interest rate contracts

  $ 2,825      $ 1,442      $      $ 4,267      $ 36,999      $ 35,362      $      $ 72,361   

Foreign exchange contracts

    166        1               167        5,996        167               6,163   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives designated as accounting hedges

    2,991        1,443               4,434        42,995        35,529               78,524   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Derivatives not designated as accounting hedges(4):

               

Interest rate contracts

    220,289        101,276        212            321,777        4,348,002        5,748,525        1,218,645        11,315,172   

Credit contracts

    19,310        3,609               22,919        585,731        139,301               725,032   

Foreign exchange contracts

    64,438        295        55        64,788        1,907,290        13,402        7,715        1,928,407   

Equity contracts

    20,212               20,077        40,289        316,770               229,859        546,629   

Commodity contracts

    13,114               4,038        17,152        67,449               82,313        149,762   

Other

    219                      219        5,684                      5,684   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives not designated as accounting hedges

    337,582        105,180        24,382        467,144        7,230,926        5,901,228        1,538,532        14,670,686   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross derivatives(2)

  $     340,573      $     106,623      $     24,382      $ 471,578      $     7,273,921      $     5,936,757      $     1,538,532      $     14,749,210   
         

 

 

   

 

 

   

 

 

   

 

 

 

Amounts offset:

               

Counter party netting

    (265,707     (104,294     (21,592     (391,593        

Cash collateral netting

    (50,335     (1,037            (51,372        
 

 

 

   

 

 

   

 

 

   

 

 

         

Total derivative assets at fair value included in Trading assets

  $ 24,531      $ 1,292      $ 2,790      $ 28,613           
 

 

 

   

 

 

   

 

 

   

 

 

         

Amounts not offset(3):

               

Financial instruments collateral

    (9,190                   (9,190        

Other cash collateral

    (9                   (9        
 

 

 

   

 

 

   

 

 

   

 

 

         

Net exposure

  $ 15,332      $ 1,292      $ 2,790      $ 19,414           
 

 

 

   

 

 

   

 

 

   

 

 

         

 

    25   LOGO


Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

    Derivative Liabilities
at December 31, 2015
 
    Fair Value     Notional  
    Bilateral
OTC
    Cleared
OTC
    Exchange
Traded
    Total     Bilateral
OTC
    Cleared
OTC
    Exchange
Traded
    Total  
    (dollars in millions)  

Derivatives designated as accounting hedges:

               

Interest rate contracts

  $ 20      $ 250      $      $ 270      $ 3,560      $ 9,869      $      $ 13,429   

Foreign exchange contracts

    56        6               62        4,604        455               5,059   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives designated as accounting hedges

    76        256               332        8,164        10,324               18,488   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Derivatives not designated as accounting hedges(4):

               

Interest rate contracts

    203,004        103,852        283        307,139        4,030,039        5,682,322        1,077,710        10,790,071   

Credit contracts

    19,942        3,723               23,665        562,027        131,388               693,415   

Foreign exchange contracts

    65,034        232        22        65,288        1,868,015        13,322        2,655        1,883,992   

Equity contracts

    25,708               20,424        46,132        332,734               229,266        562,000   

Commodity contracts

    10,864               3,887        14,751        59,169               62,974        122,143   

Other

    43                      43        4,114                      4,114   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives not designated as accounting hedges

    324,595        107,807        24,616        457,018        6,856,098        5,827,032        1,372,605        14,055,735   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross derivatives(2)

  $     324,671      $     108,063      $     24,616      $     457,350      $     6,864,262      $     5,837,356      $     1,372,605      $     14,074,223   
         

 

 

   

 

 

   

 

 

   

 

 

 

Amounts offset:

               

Counterparty netting

    (265,707     (104,294     (21,592     (391,593        

Cash collateral netting

    (33,332     (2,951            (36,283        
 

 

 

   

 

 

   

 

 

   

 

 

         

Total derivative liabilities at fair value included in Trading liabilities

  $ 25,632      $ 818      $ 3,024      $ 29,474           
 

 

 

   

 

 

   

 

 

   

 

 

         

Amounts not offset(3):

               

Financial instruments collateral

    (5,384            (405     (5,789        

Other cash collateral

    (5                   (5        
 

 

 

   

 

 

   

 

 

   

 

 

         

Net exposure

  $ 20,243      $ 818      $ 2,619      $ 23,680           
 

 

 

   

 

 

   

 

 

   

 

 

         

 

(1)

Notional amounts include gross notionals related to open long and short futures contracts of $967.4 billion and $399.2 billion, respectively. The unsettled fair value on these futures contracts (excluded from the table above) of $895 million and $371 million is included in Customer and other receivables and Customer and other payables, respectively, in the condensed consolidated balance sheet.

(2)

Amounts include $5.3 billion of derivative assets and $5.8 billion of derivative liabilities at March 31, 2016 and $4.2 billion of derivative assets and $5.2 billion of derivative liabilities at December 31, 2015, which are either not subject to master netting agreements or collateral agreements or are subject to such agreements but the Company has not determined the agreements to be legally enforceable.

(3)

Amounts relate to master netting agreements and collateral agreements that have been determined by the Company to be legally enforceable in the event of default but where certain other criteria are not met in accordance with applicable offsetting accounting guidance.

(4)

Notional amounts include gross notionals related to open long and short futures contracts of $1,009.5 billion and $653.0 billion, respectively. The unsettled fair value on these futures contracts (excluded from the table above) of $1,145 million and $437 million is included in Customer and other receivables and Customer and other payables, respectively, in the condensed consolidated balance sheet.

 

For information related to offsetting of certain collateralized transactions, see Note 6.

 

Gains (Losses) on Fair Value Hedges.

 

     Gains (Losses)
Recognized in Interest Expense
 
     Three Months Ended March 31,  

Product Type

   2016     2015  
             (dollars in millions)          

Derivatives

   $ 2,150      $ 758   

Borrowings

     (2,289     (843
  

 

 

   

 

 

 

Total

   $ (139   $ (85
  

 

 

   

 

 

 

 

LOGO   26    


Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

Gains (Losses) on Derivatives Designated as Net Investment Hedges.

 

     Gains (Losses)
Recognized in OCI (effective portion)
 
     Three Months Ended March 31,  

Product Type

     2016         2015    
     (dollars in millions)  

Foreign exchange contracts(1)

   $ (224   $ 262   

 

(1)

Losses of $20 million and $44 million related to the forward points on the hedging instruments were excluded from hedge effectiveness testing and recognized in Interest income during the quarters ended March 31, 2016 and 2015, respectively.

 

Gains (Losses) on Trading Instruments.

 

The table below summarizes gains and losses included in Trading revenues in the condensed consolidated statements of income from trading activities. These activities include revenues related to derivative and non-derivative financial instruments. The Company generally utilizes financial instruments across a variety of product types in connection with their market-making and related risk management strategies. Accordingly, the trading revenues presented below are not representative of the manner in which the Company manages its business activities and are prepared in a manner similar to the presentation of trading revenues for regulatory reporting purposes.

 

     Gains (Losses)
Recognized in Trading Revenues
 
     Three Months Ended March 31,  

Product Type

   2016     2015  
     (dollars in millions)  

Interest rate contracts

   $ 306      $ 570   

Foreign exchange contracts

     237        345   

Equity security and index contracts(1)

     1,330        1,595   

Commodity and other contracts(2)

     (144     676   

Credit contracts

     336        339   
  

 

 

   

 

 

 

Subtotal

   $ 2,065      $ 3,525   

Debt valuation adjustments(3)

            125   
  

 

 

   

 

 

 

Total trading revenue

   $ 2,065      $ 3,650   
  

 

 

   

 

 

 

 

(1)

Dividend income is included within equity security and index contracts.

(2)

Other contracts represent contracts not reported as interest rate, foreign exchange, equity security and index or credit contracts.

(3)

In accordance with the early adoption of a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities, unrealized DVA gains (losses) in the quarter ended March 31, 2016 are recorded within OCI in the condensed consolidated statements of comprehensive income. In the quarter ended March 31, 2015, the DVA gains (losses) were recorded within Trading revenues in the condensed consolidated statements of income. See Notes 2 and 14 for further information.

 

    27   LOGO


Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

OTC Derivative Products—Trading Assets.

 

Counterparty Credit Rating and Remaining Maturity of OTC Derivative Assets.

 

     Fair Value at March 31, 2016(1)  
     Contractual Years to Maturity      Cross-Maturity
and Cash
Collateral
Netting(3)
    Net  Exposure
Post-cash
Collateral
     Net  Exposure
Post-
collateral(4)
 

Credit Rating(2)

   Less than 1      1-3      3-5      Over 5          
     (dollars in millions)  

AAA

   $ 182       $ 567       $ 1,344       $ 4,683       $ (5,272   $ 1,504       $ 1,425   

AA

     2,524         1,488         1,750         12,747         (13,148     5,361         3,045   

A

     10,143         7,440         4,984         26,567         (38,249     10,885         7,603   

BBB

     4,953         4,487         2,246         13,055         (16,119     8,622         6,426   

Non-investment grade

     5,065         2,804         1,277         5,024         (7,762     6,408         3,982   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $   22,867       $   16,786       $   11,601       $   62,076       $ (80,550   $ 32,780       $   22,481   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

     Fair Value at December 31, 2015(1)  
     Contractual Years to Maturity      Cross-Maturity
and Cash
Collateral
Netting(3)
    Net Exposure
Post-cash
Collateral
     Net Exposure
Post-
collateral(4)
 

Credit Rating(2)

   Less than 1      1-3      3-5      Over 5          
     (dollars in millions)  

AAA

   $ 203       $ 453       $ 827       $ 3,665       $ (4,319   $ 829       $ 715   

AA

     2,689         2,000         1,876         9,223         (10,981     4,807         2,361   

A

     9,748         8,191         4,774         20,918         (34,916     8,715         5,448   

BBB

     3,614         4,863         1,948         11,801         (15,086     7,140         4,934   

Non-investment grade

     3,982         2,333         1,157         3,567         (6,716     4,323         3,166   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $   20,236       $   17,840       $   10,582       $   49,174       $ (72,018   $ 25,814       $   16,624   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

Fair values shown represent the Company’s net exposure to counterparties related to its OTC derivative products.

(2)

Obligor credit ratings are determined by the Credit Risk Management Department.

(3)

Amounts represent the netting of receivable balances with payable balances for the same counterparty across maturity categories. Receivable and payable balances with the same counterparty in the same maturity category are netted within such maturity category, where appropriate. Cash collateral received is netted on a counterparty basis, provided legal right of offset exists.

(4)

Fair value is shown, net of collateral received (primarily cash and U.S. government and agency securities).

 

Credit Risk-Related Contingencies.

 

In connection with certain OTC trading agreements, the Company may be required to provide additional collateral or immediately settle any outstanding liability balances with certain counterparties in the event of a credit rating downgrade of the Company.

 

Net Derivative Liabilities and Collateral Posted.

 

The following table presents the aggregate fair value of certain derivative contracts that contain credit risk-related contingent features that are in a net liability position for which the Company has posted collateral in the normal course of business.

 

         At March 31, 2016      
     (dollars in millions)  

Net derivative liabilities

   $ 28,798   

Collateral posted

     24,146   

 

The additional collateral or termination payments that may be called in the event of a future credit rating downgrade vary by contract and can be based on ratings by either or both of Moody’s Investors Service, Inc. (“Moody’s”) and Standard &

 

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Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

Poor’s Ratings Services (“S&P”). The table below shows the future potential collateral amounts and termination payments that could be called or required by counterparties or exchange and clearing organizations in the event of one-notch or two-notch downgrade scenarios based on the relevant contractual downgrade triggers.

 

Incremental Collateral or Termination Payments upon Potential Future Ratings Downgrade.

 

         At March 31, 2016(1)      
     (dollars in millions)  

One-notch downgrade

   $ 1,148   

Two-notch downgrade

     1,496   

 

(1)

Amounts include $1,666 million related to bilateral arrangements between the Company and other parties where upon the downgrade of one party, the downgraded party must deliver collateral to the other party. These bilateral downgrade arrangements are used by the Company to manage the risk of counterparty downgrades.

 

Credit Derivatives and Other Credit Contracts.

 

The Company enters into credit derivatives, principally through credit default swaps, under which it receives or provides protection against the risk of default on a set of debt obligations issued by a specified reference entity or entities. A majority of the Company’s counterparties are banks, broker-dealers and insurance and other financial institutions.

 

Notional and Fair Value of Protection Sold and Protection Purchased through Credit Default Swaps.

 

     At March 31, 2016  
     Protection Sold     Protection Purchased  
     Notional      Fair Value
(Asset)/Liability
    Notional      Fair Value
(Asset)/Liability
 
     (dollars in millions)  

Single name credit default swaps

   $ 402,123       $ 1,055      $ 387,777       $ (1,100

Index and basket credit default swaps

     214,815         (39     181,184         (193

Tranched index and basket credit default swaps

     68,229         (1,143     152,476             2,386   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $     685,167       $ (127   $     721,437       $ 1,093   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     At December 31, 2015  
     Protection Sold     Protection Purchased  
     Notional      Fair Value
(Asset)/Liability
    Notional      Fair Value
(Asset)/Liability
 
     (dollars in millions)  

Single name credit default swaps

   $ 420,806       $ 1,980      $ 405,361       $ (2,079

Index and basket credit default swaps

     199,688         (102     173,936         (82

Tranched index and basket credit default swaps

     69,025         (1,093     149,631             2,122   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $     689,519       $         785      $     728,928       $ (39
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

Credit Ratings of Reference Obligation and Maturities of Credit Protection Sold.

 

     At March 31, 2016  
     Maximum Potential Payout/Notional      Fair Value
(Asset)/
Liability(1)
 
     Years to Maturity     
     Less than 1      1-3      3-5      Over 5      Total     
     (dollars in millions)  

Single name credit default swaps:

                 

Investment grade

   $ 87,072       $ 123,998       $ 57,920       $ 13,162       $ 282,152       $ (1,367

Non-investment grade

     41,992         52,389         22,907         2,683         119,971         2,422   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 129,064       $ 176,387       $ 80,827       $ 15,845       $ 402,123       $     1,055   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Index and basket credit default swaps:

                 

Investment grade

   $ 32,276       $ 59,013       $ 45,293       $ 19,020       $ 155,602       $ (1,802

Non-investment grade

     53,291         44,154         12,657         17,340         127,442         620   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 85,567       $ 103,167       $ 57,950       $ 36,360       $ 283,044       $ (1,182
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total credit default swaps sold

   $ 214,631       $ 279,554       $ 138,777       $ 52,205       $ 685,167       $ (127
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other credit contracts

     27         44         5         323         399         (2
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total credit derivatives and other credit contracts

   $   214,658       $   279,598       $   138,782       $   52,528       $   685,566       $ (129
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2015  
     Maximum Potential Payout/Notional      Fair Value
(Asset)/
Liability(1)
 
     Years to Maturity     
     Less than 1      1-3      3-5      Over 5      Total     
     (dollars in millions)  

Single name credit default swaps:

                 

Investment grade

   $ 84,543       $ 138,467       $ 63,754       $ 12,906       $ 299,670       $ (1,831

Non-investment grade

     38,054         56,261         24,432         2,389         121,136         3,811   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 122,597       $ 194,728       $ 88,186       $ 15,295       $ 420,806       $ 1,980   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Index and basket credit default swaps:

                 

Investment grade

   $ 33,507       $ 59,403       $ 45,505       $ 5,327       $ 143,742       $ (1,977

Non-investment grade

     52,590         43,899         15,480         13,002         124,971         782   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 86,097       $ 103,302       $ 60,985       $ 18,329       $ 268,713       $ (1,195
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total credit default swaps sold

   $ 208,694       $ 298,030       $ 149,171       $ 33,624       $ 689,519       $     785   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other credit contracts

     19         107         2         332         460         (24
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total credit derivatives and other credit contracts

   $   208,713       $   298,137       $   149,173       $   33,956       $   689,979       $ 761   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Fair value amounts are shown on a gross basis prior to cash collateral or counterparty netting.

 

Purchased Credit Protection with Identical Underlying Reference Obligations.

 

For single name and non-tranched index and basket credit default swaps, the Company has purchased protection with a notional amount of approximately $566.4 billion and $577.7 billion at March 31, 2016 and December 31, 2015, respectively, compared with a notional amount of approximately $614.9 billion and $619.5 billion (included in the tables above) at March 31, 2016 and December 31, 2015, respectively, of credit protection sold with identical underlying reference obligations.

 

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MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

For further information on credit derivatives and other credit contracts, see Note 4 to the consolidated financial statements in the 2015 Form 10-K.

 

5.

Investment Securities.

 

The following tables present information about the Company’s AFS securities, which are carried at fair value, and HTM securities, which are carried at amortized cost. The net unrealized gains or losses on AFS securities are reported on an after-tax basis as a component of AOCI.

 

AFS and HTM Securities.

 

     At March 31, 2016  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  
     (dollars in millions)  

AFS debt securities:

           

U.S. government and agency securities:

           

U.S. Treasury securities

   $ 31,808       $ 151       $ 1       $ 31,958   

U.S. agency securities(1)

     21,662         127         35         21,754   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. government and agency securities

     53,470         278         36         53,712   

Corporate and other debt:

           

Commercial mortgage-backed securities:

           

Agency

     2,154         4         38         2,120   

Non-agency

     2,164         23         14         2,173   

Auto loan asset-backed securities

     2,328         2         1         2,329   

Corporate bonds

     3,930         47         7         3,970   

Collateralized loan obligations

     502                 10         492   

FFELP student loan asset-backed securities(2)

     3,489                 127         3,362   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate and other debt

     14,567         76         197         14,446   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total AFS debt securities

     68,037         354         233         68,158   
  

 

 

    

 

 

    

 

 

    

 

 

 

AFS equity securities

     15                 6         9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total AFS securities

     68,052         354         239         68,167   

HTM securities:

           

U.S. government securities:

           

U.S. Treasury securities

     1,953         10                 1,963   

U.S. agency securities(1)

     7,472         44         1         7,515   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total HTM securities

     9,425         54         1         9,478   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investment securities

   $     77,477       $     408       $     240       $     77,645   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

     At December 31, 2015  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  
     (dollars in millions)  

AFS debt securities:

           

U.S. government and agency securities:

           

U.S. Treasury securities

   $ 31,555       $ 5       $ 143       $ 31,417   

U.S. agency securities(1)

     21,103         29         156         20,976   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. government and agency securities

     52,658         34         299         52,393   

Corporate and other debt:

           

Commercial mortgage-backed securities:

           

Agency

     1,906         1         60         1,847   

Non-agency

     2,220         3         25         2,198   

Auto loan asset-backed securities

     2,556                 9         2,547   

Corporate bonds

     3,780         5         30         3,755   

Collateralized loan obligations

     502                 7         495   

FFELP student loan asset-backed securities(2)

     3,632                 115         3,517   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate and other debt

     14,596         9         246         14,359   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total AFS debt securities

     67,254         43         545         66,752   
  

 

 

    

 

 

    

 

 

    

 

 

 

AFS equity securities

     15                 8         7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total AFS securities

     67,269         43         553         66,759   

HTM securities:

           

U.S. government securities:

           

U.S. Treasury securities

     1,001                 3         998   

U.S. agency securities(1)

     4,223         1         34         4,190   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total HTM securities

     5,224         1         37         5,188   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investment securities

   $ 72,493       $     44       $     590       $ 71,947   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

U.S. agency securities consist mainly of agency-issued debt, agency mortgage pass-through pool securities and collateralized mortgage obligations.

(2)

FFELP—Federal Family Education Loan Program. Amounts are backed by a guarantee from the U.S. Department of Education of at least 95% of the principal balance and interest on such loans.

 

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Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

Investment Securities in an Unrealized Loss Position.

 

     At March 31, 2016  
     Less than 12 Months      12 Months or Longer      Total  
     Fair
Value
     Gross
Unrealized
Losses
     Fair
Value
     Gross
Unrealized
Losses
     Fair
Value
     Gross
Unrealized
Losses
 
     (dollars in millions)  

AFS debt securities:

                 

U.S. government and agency securities:

                 

U.S. Treasury securities

   $ 1,812       $ 1       $       $       $ 1,812       $ 1   

U.S. agency securities

     5,385         12         2,518         23         7,903         35   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. government and agency securities

     7,197         13         2,518         23         9,715         36   

Corporate and other debt:

                 

Commercial mortgage-backed securities:

                 

Agency

     328         1         1,206         37         1,534         38   

Non-agency

     440         1         656         13         1,096         14   

Auto loan asset-backed securities

     1,003         1         227                 1,230         1   

Corporate bonds

     461         3         388         4         849         7   

Collateralized loan obligations

                     492         10         492         10   

FFELP student loan asset-backed securities

     1,678         51         1,661         76         3,339         127   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate and other debt

     3,910         57         4,630         140         8,540         197   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total AFS debt securities

     11,107         70         7,148         163         18,255         233   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

AFS equity securities

     10         6                         10         6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total AFS securities

     11,117         76         7,148         163         18,265         239   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

HTM securities:

                 

U.S. government and agency securities:

                 

U.S. agency securities

     777         1         393                 1,170         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total HTM securities

     777         1         393                 1,170         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Investment securities

   $ 11,894       $ 77       $ 7,541       $ 163       $ 19,435       $ 240   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

     At December 31, 2015  
     Less than 12 Months      12 Months or Longer      Total  
     Fair
Value
     Gross
Unrealized
Losses
     Fair Value      Gross
Unrealized
Losses
     Fair
Value
     Gross
Unrealized
Losses
 
     (dollars in millions)  

AFS debt securities:

                 

U.S. government and agency securities:

                 

U.S. Treasury securities

   $ 25,994       $ 126       $ 2,177       $ 17       $ 28,171       $ 143   

U.S. agency securities

     14,242         135         639         21         14,881         156   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. government and agency securities

     40,236         261         2,816         38         43,052         299   

Corporate and other debt:

                 

Commercial mortgage-backed securities:

                 

Agency

     1,185         44         422         16         1,607         60   

Non-agency

     1,479         21         305         4         1,784         25   

Auto loan asset-backed securities

     1,644         7         881         2         2,525         9   

Corporate bonds

     2,149         19         525         11         2,674         30   

Collateralized loan obligations

     352         5         143         2         495         7   

FFELP student loan asset-backed securities

     2,558         79         929         36         3,487         115   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate and other debt

     9,367         175         3,205         71         12,572         246   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total AFS debt securities

     49,603         436         6,021         109         55,624         545   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

AFS equity securities

     7         8                         7         8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total AFS securities

     49,610         444         6,021         109         55,631         553   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

HTM securities:

                 

U.S. government and agency securities:

                 

U.S. Treasury securities

     898         3                         898         3   

U.S. agency securities

     3,677         34                         3,677         34   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total HTM securities

     4,575         37                         4,575         37   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Investment securities

   $ 54,185       $ 481       $ 6,021       $ 109       $ 60,206       $ 590   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

As discussed in Note 2 to the consolidated financial statements in the 2015 Form 10-K, AFS and HTM securities with a current fair value less than their amortized cost are analyzed as part of the Company’s ongoing assessment of temporary versus other-than-temporarily impaired at the individual security level.

 

The Company believes there are no securities in an unrealized loss position that are other-than-temporarily-impaired at March 31, 2016 and December 31, 2015 for the reasons discussed below.

 

For AFS debt securities, the Company does not intend to sell the securities and is not likely to be required to sell the securities prior to recovery of amortized cost basis. For AFS and HTM debt securities, the securities have not experienced credit losses as the net unrealized losses reported in the table above are primarily due to higher interest rates since those securities were purchased. Additionally, the Company does not expect to experience a credit loss based on consideration of the relevant information (as discussed in Note 2 to the consolidated financial statements in the 2015 Form 10-K), including for U.S. government and agency securities, the existence of an explicit and implicit guarantee provided by the U.S. government. The risk of credit loss on securities in an unrealized loss position is considered minimal because all of the Company’s agency securities as well as asset-backed securities (“ABS”), commercial mortgage-backed securities (“CMBS”) and collateralized loan obligations (“CLOs”) are highly rated and because corporate bonds are all investment grade.

 

For AFS equity securities, the Company has the intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in market value.

 

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MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

Amortized Cost, Fair Value and Annualized Average Yield of Investment Securities by Contractual Maturity Dates.

 

     At March 31, 2016  
     Amortized Cost          Fair Value          Annualized
Average Yield
 
     (dollars in millions)  

AFS debt securities:

        

U.S. government and agency securities:

        

U.S. Treasury securities:

        

Due within 1 year

   $ 5,194       $ 5,198         0.7

After 1 year through 5 years

     25,757         25,885         1.0

After 5 years through 10 years

     857         875         1.8
  

 

 

    

 

 

    

Total

     31,808         31,958      
  

 

 

    

 

 

    

U.S. agency securities:

        

After 1 year through 5 years

     2,774         2,775         0.5

After 5 years through 10 years

     1,534         1,560         1.9

After 10 years

     17,354         17,419         1.7
  

 

 

    

 

 

    

Total

     21,662         21,754      
  

 

 

    

 

 

    

Total U.S. government and agency securities

     53,470         53,712         1.2
  

 

 

    

 

 

    

Corporate and other debt:

        

Commercial mortgage-backed securities:

        

Agency:

        

Due within 1 year

     102         102         0.8

After 1 year through 5 years

     461         461         0.9

After 5 years through 10 years

     545         546         1.3

After 10 years

     1,046         1,011         1.6
  

 

 

    

 

 

    

Total

     2,154         2,120      
  

 

 

    

 

 

    

Non-agency:

        

After 10 years

     2,164         2,173         1.9
  

 

 

    

 

 

    

Total

     2,164         2,173      
  

 

 

    

 

 

    

Auto loan asset-backed securities:

        

Due within 1 year

     24         24         0.8

After 1 year through 5 years

     2,146         2,146         1.2

After 5 years through 10 years

     158         159         1.5
  

 

 

    

 

 

    

Total

     2,328         2,329      
  

 

 

    

 

 

    

Corporate bonds:

        

Due within 1 year

     534         535         1.2

After 1 year through 5 years

     2,660         2,678         1.7

After 5 years through 10 years

     736         757         2.7
  

 

 

    

 

 

    

Total

     3,930         3,970      
  

 

 

    

 

 

    

Collateralized loan obligations:

        

After 5 years through 10 years

     502         492         1.5
  

 

 

    

 

 

    

Total

     502         492      
  

 

 

    

 

 

    

 

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MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

     At March 31, 2016  
     Amortized Cost          Fair Value          Annualized
Average Yield
 
     (dollars in millions)  

FFELP student loan asset-backed securities:

        

After 1 year through 5 years

     72         72         0.6

After 5 years through 10 years

     756         737         0.9

After 10 years

     2,661         2,553         0.9
  

 

 

    

 

 

    

Total

     3,489         3,362      
  

 

 

    

 

 

    

Total corporate and other debt

     14,567         14,446         1.4
  

 

 

    

 

 

    

Total AFS debt securities

     68,037         68,158         1.3
  

 

 

    

 

 

    

AFS equity securities

     15         9        
  

 

 

    

 

 

    

Total AFS securities

     68,052         68,167         1.3
  

 

 

    

 

 

    

HTM securities:

        

U.S. government securities:

        

U.S. Treasury securities:

        

Due within 1 year

     200         200         0.7

After 1 year through 5 years

     1,408         1,418         1.1

After 5 years through 10 years

     345         345         1.8
  

 

 

    

 

 

    

Total

     1,953         1,963      
  

 

 

    

 

 

    

U.S. agency securities:

        

After 10 years

     7,472         7,515         2.1
  

 

 

    

 

 

    

Total

     7,472         7,515      
  

 

 

    

 

 

    

Total HTM securities

     9,425         9,478         1.9
  

 

 

    

 

 

    

Total Investment securities

   $ 77,477       $ 77,645         1.3
  

 

 

    

 

 

    

 

See Note 12 for additional information on securities issued by VIEs, including U.S. agency mortgage-backed securities, non-agency CMBS, auto loan ABS, CLO and FFELP student loan ABS.

 

Gross Realized Gains and Gross Realized (Losses) on Sales of AFS Securities.

 

     Three Months Ended  
     March 31,  
       2016         2015   
     (dollars in millions)  

Gross realized gains

   $ 14      $ 29   

Gross realized (losses)

     (2     (4
  

 

 

   

 

 

 

Total

   $ 12      $ 25   
  

 

 

   

 

 

 

 

Gross realized gains and losses are recognized in Other revenues in the condensed consolidated statements of income.

 

6.

Collateralized Transactions.

 

The Company enters into reverse repurchase agreements, repurchase agreements, securities borrowed and securities loaned transactions to, among other things, acquire securities to cover short positions and settle other securities obligations, to accommodate customers’ needs and to finance its inventory positions. For further discussion of the Company’s collateralized transactions, see Note 6 to the consolidated financial statements in the 2015 Form 10-K.

 

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MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

Offsetting of Certain Collateralized Transactions.

 

     At March 31, 2016  
     Gross
Amounts(1)
     Amounts
Offset
    Net Amounts
Presented
     Amounts
Not
Offset(2)
    Net Exposure  
     (dollars in millions)  

Assets

            

Securities purchased under agreements to resell

   $ 159,780       $ (61,006   $ 98,774       $ (96,204   $ 2,570   

Securities borrowed

     146,262         (5,849     140,413         (131,872     8,541   

Liabilities

            

Securities sold under agreements to repurchase

   $ 102,311       $ (61,006   $ 41,305       $ (34,928   $ 6,377   

Securities loaned

     22,989         (5,849     17,140         (16,849     291   

 

     At December 31, 2015  
     Gross
Amounts(1)
     Amounts
Offset
    Net Amounts
Presented
     Amounts
Not
Offset(2)
    Net Exposure  
     (dollars in millions)  

Assets

            

Securities purchased under agreements to resell

   $ 135,714       $ (48,057   $ 87,657       $ (84,752   $ 2,905   

Securities borrowed

     147,445         (5,029     142,416         (134,250     8,166   

Liabilities

            

Securities sold under agreements to repurchase

   $ 84,749       $ (48,057   $ 36,692       $ (31,604   $ 5,088   

Securities loaned

     24,387         (5,029     19,358         (18,881     477   

 

(1)

Amounts include $2.5 billion of Securities purchased under agreements to resell, $4.4 billion of Securities borrowed, $6.2 billion of Securities sold under agreements to repurchase and $0.1 billion of Securities loaned at March 31, 2016 and $2.6 billion of Securities purchased under agreements to resell, $3.0 billion of Securities borrowed and $4.9 billion of Securities sold under agreements to repurchase at December 31, 2015, 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 relate to master netting agreements that have been determined by the Company to be legally enforceable in the event of default but where certain other criteria are not met in accordance with applicable offsetting accounting guidance.

 

For information related to offsetting of derivatives, see Note 4.

 

Secured Financing Transactions—Maturities and Collateral Pledged.

 

Gross Secured Financing Balances by Remaining Contractual Maturity.

 

     At March 31, 2016  
     Overnight
and Open
     Less than
30 Days
     30-90 Days      Over
90 Days
     Total  
     (dollars in millions)  

Securities sold under agreements to repurchase(1)

   $ 36,220       $ 18,088       $ 20,689       $ 27,314       $ 102,311   

Securities loaned(1)

     11,911         866         2,241         7,971         22,989   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross amount of secured financing included in the above offsetting disclosure

   $ 48,131       $ 18,954       $ 22,930       $ 35,285       $ 125,300   

Obligation to return securities received as collateral

     17,984                                 17,984   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 66,115       $ 18,954       $ 22,930       $ 35,285       $ 143,284   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

     At December 31, 2015  
     Overnight
and Open
     Less than
30 Days
     30-90 Days      Over
90 Days
     Total  
     (dollars in millions)  

Securities sold under agreements to repurchase(1)

   $ 20,410       $ 25,245       $ 13,221       $ 25,873       $ 84,749   

Securities loaned(1)

     12,247         478         2,156         9,506         24,387   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross amount of secured financing included in the above offsetting disclosure

   $ 32,657       $ 25,723       $ 15,377       $ 35,379       $ 109,136   

Obligation to return securities received as collateral

     19,316                                 19,316   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 51,973       $ 25,723       $ 15,377       $ 35,379       $ 128,452   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Amounts are presented on a gross basis, prior to netting in the condensed consolidated balance sheet.

 

Gross Secured Financing Balances by Class of Collateral Pledged.

 

     At
March 31,  2016
     At
December 31,  2015
 
     (dollars in millions)  

Securities sold under agreements to repurchase(1)

     

U.S. government and agency securities

   $ 42,323       $ 36,609   

State and municipal securities

     1,151         173   

Other sovereign government obligations

     31,765         24,820   

Asset-backed securities

     356         441   

Corporate and other debt

     6,283         4,020   

Corporate equities

     19,740         18,473   

Other

     693         213   
  

 

 

    

 

 

 

Total securities sold under agreements to repurchase

   $ 102,311       $ 84,749   
  

 

 

    

 

 

 

Securities loaned(1)

     

U.S. government and agency securities

   $ 34       $   

Other sovereign government obligations

     5,907         7,336   

Corporate and other debt

     91         71   

Corporate equities

     16,935         16,972   

Other

     22         8   
  

 

 

    

 

 

 

Total securities loaned

   $ 22,989       $ 24,387   
  

 

 

    

 

 

 

Gross amount of secured financing included in the above offsetting disclosure

   $ 125,300       $ 109,136   
  

 

 

    

 

 

 

Obligation to return securities received as collateral

     

Corporate and other debt

   $       $ 3   

Corporate equities

     17,981         19,313   

Other

     3           
  

 

 

    

 

 

 

Total obligation to return securities received as collateral

   $ 17,984       $ 19,316   
  

 

 

    

 

 

 

Total

   $ 143,284       $ 128,452   
  

 

 

    

 

 

 

 

(1)

Amounts are presented on a gross basis, prior to netting in the condensed consolidated balance sheet.

 

Trading Assets Pledged.

 

The Company pledges its trading assets to collateralize repurchase agreements and other secured financings. Pledged financial instruments that can be sold or repledged by the secured party are identified as Trading assets (pledged to various

 

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MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

parties) in the condensed consolidated balance sheet. At March 31, 2016 and December 31, 2015, the carrying value of Trading assets that have been loaned or pledged to counterparties, where those counterparties do not have the right to sell or repledge the collateral, were $41.9 billion and $35.0 billion, respectively.

 

Collateral Received.

 

The Company receives collateral in the form of securities in connection with reverse repurchase agreements, securities borrowed and derivative transactions, customer margin loans and securities-based lending. In many cases, the Company is permitted to sell or repledge these securities held as collateral and use the securities to secure repurchase agreements, to enter into securities lending and derivative transactions or for delivery to counterparties to cover short positions. The Company additionally receives securities as collateral in connection with certain securities-for-securities transactions in which it is the lender. In instances where the Company is permitted to sell or repledge these securities, it reports the fair value of the collateral received and the related obligation to return the collateral in its condensed consolidated balance sheet. At March 31, 2016 and December 31, 2015, the total fair value of financial instruments received as collateral where the Company is permitted to sell or repledge the securities was $537.7 billion and $522.6 billion, respectively, and the fair value of the portion that had been sold or repledged was $415.9 billion and $398.1 billion, respectively.

 

Other.

 

The Company also engages in margin lending to clients that allows the client to borrow against the value of qualifying securities and is included within Customer and other receivables in the condensed consolidated balance sheet. Under these agreements and transactions, the Company receives collateral, including U.S. government and agency securities, other sovereign government obligations, corporate and other debt, and corporate equities. Customer receivables generated from margin lending activities are collateralized by customer-owned securities held by the Company. The Company monitors required margin levels and established credit terms daily and, pursuant to such guidelines, requires customers to deposit additional collateral, or reduce positions, when necessary. At March 31, 2016 and December 31, 2015, the amounts related to margin lending were approximately $24.6 billion and $25.3 billion, respectively.

 

For a further discussion of the Company’s margin lending activities, see Note 6 to the consolidated financial statements in the 2015 Form 10-K.

 

The Company has additional secured liabilities. For further discussion of other secured financings, see Note 10.

 

Cash and Securities Deposited with Clearing Organizations or Segregated.

 

     At
March 31,  2016
     At
December 31,  2015
 
     (dollars in millions)  

Securities(1)

   $ 18,909       $ 14,390   

Other assets—Cash deposited with clearing organizations or segregated under federal and other regulations or requirements

     31,808         31,469   
  

 

 

    

 

 

 

Total

   $ 50,717       $ 45,859   
  

 

 

    

 

 

 

 

(1)

Securities deposited with clearing organizations or segregated under federal and other regulations or requirements are sourced from Securities purchased under agreements to resell and Trading assets in the condensed consolidated balance sheet.

 

7.

Loans and Allowance for Credit Losses.

 

Loans.

 

The Company’s loans held for investment are recorded at amortized cost, and its loans held for sale are recorded at the lower of cost or fair value in the condensed consolidated balance sheet. For a further description of these loans, refer to Note 7 to the consolidated financial statements in the 2015 Form 10-K.

 

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MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

Loans Held for Investment and Held for Sale.

 

     At March 31, 2016     At December 31, 2015  

Loans by Product Type

   Loans Held for
Investment
    Loans Held
for Sale
     Total
Loans(1)(2)
    Loans Held for
Investment
    Loans Held
for Sale
     Total
Loans(1)(2)
 
     (dollars in millions)  

Corporate loans

   $     25,126      $     12,000       $     37,126      $     23,554      $     11,924       $     35,478   

Consumer loans

     22,174                22,174        21,528                21,528   

Residential real estate loans

     21,780        99         21,879        20,863        104         20,967   

Wholesale real estate loans

     6,816        1,137         7,953        6,839        1,172         8,011   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total loans, gross of allowance for loan losses

     75,896        13,236         89,132        72,784        13,200         85,984   

Allowance for loan losses

     (330             (330     (225             (225
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total loans, net of allowance for loan losses

   $ 75,566      $ 13,236       $ 88,802      $ 72,559      $ 13,200       $ 85,759   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

(1)

Amounts include loans that are made to non-U.S. borrowers of $9,470 million and $9,789 million at March 31, 2016 and December 31, 2015, respectively.

(2)

Loans at fixed interest rates and floating or adjustable interest rates were $9,384 million and $79,418 million, respectively, at March 31, 2016 and $8,471 million and $77,288 million, respectively, at December 31, 2015.

 

See Note 3 for further information regarding Loans and lending commitments held at fair value.

 

Credit Quality.

 

For a further discussion about the Company’s evaluation of credit transactions and monitoring and credit quality indicators, see Note 7 to the consolidated financial statements in the 2015 Form 10-K.

 

Credit Quality Indicators for Loans Held for Investment, Gross of Allowance for Loan Losses, by Product Type.

 

     At March 31, 2016  
     Corporate      Consumer      Residential
Real Estate
     Wholesale
Real  Estate
     Total  
     (dollars in millions)  

Pass

   $ 23,129       $ 22,174       $ 21,745       $ 6,816       $ 73,864   

Special mention

     437                                 437   

Substandard

     1,454                 35                 1,489   

Doubtful

     106                                 106   

Loss

                                       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 25,126       $ 22,174       $ 21,780       $ 6,816       $ 75,896   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2015  
     Corporate      Consumer      Residential
Real  Estate
     Wholesale
Real  Estate
     Total  
     (dollars in millions)  

Pass

   $ 22,040       $ 21,528       $ 20,828       $ 6,839       $ 71,235   

Special mention

     300                                 300   

Substandard

     1,202                 35                 1,237   

Doubtful

     12                                 12   

Loss

                                       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 23,554       $ 21,528       $ 20,863       $ 6,839       $ 72,784   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

Allowance for Credit Losses and Impaired Loans.

 

For factors considered by the Company in determining the allowance for loan losses and impairments, see Notes 2 and 7 to the consolidated financial statements in the 2015 Form 10-K.

 

Impaired and Past Due Loans Held for Investment.

 

     At March 31, 2016      At December 31, 2015  

Loans by Product Type

   Corporate      Residential
Real  Estate
         Total          Corporate      Residential
Real  Estate
         Total      
     (dollars in millions)  

Impaired loans with allowance

   $ 245       $       $ 245       $ 39       $       $ 39   

Impaired loans without allowance(1)

     382         18         400         89         17         106   

Impaired loans unpaid principal balance

     636         20         656         130         19         149   

Past due 90 days loans and on nonaccrual

     1         18         19         1         21         22   

 

(1)

At March 31, 2016 and December 31, 2015, no allowance was outstanding for these loans as the present value of the expected future cash flows (or, alternatively, the observable market price of the loan or the fair value of the collateral held) equaled or exceeded the carrying value.

 

     At March 31, 2016      At December 31, 2015  

Loans by Region

   Americas      EMEA      Asia-
Pacific
         Total          Americas      EMEA      Asia-
Pacific
         Total      
     (dollars in millions)  

Impaired loans

   $ 572       $ 23       $ 50       $ 645       $ 108       $ 12       $ 25       $ 145   

Past due 90 days loans and on nonaccrual

     19                         19         22                         22   

Allowance for loan losses

     261         43         26         330         183         34         8         225   

 

EMEA—Europe,

Middle East and Africa.

 

Troubled Debt Restructurings.

 

At March 31, 2016 and December 31, 2015, the impaired loans and lending commitments within held for investment include TDRs of $54.8 million and $44.0 million related to loans and $22.3 million and $34.8 million related to lending commitments, respectively, within corporate loans. At March 31, 2016 and December 31, 2015, the Company recorded an allowance of $8.5 million and $5.1 million, respectively, against these TDRs. These restructurings typically include modifications of interest rates, collateral requirements, other loan covenants, and payment extensions.

 

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MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

Allowance for Credit Losses on Lending Activities.

 

     Corporate     Consumer     Residential
Real  Estate
     Wholesale
Real Estate
     Total  
     (dollars in millions)  

Allowance for Loan Losses.

            

Balance at December 31, 2015

   $ 166      $ 5      $ 17       $ 37       $ 225   

Gross charge-offs

                                     

Gross recoveries

                                     
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net recoveries/(charge-offs)

                                     
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Provision for (release of) loan losses(1)

     109        (1     2         2         112   

Other(2)

     (7                            (7
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Balance at March 31, 2016

   $ 268      $ 4      $ 19       $ 39       $ 330   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Allowance for Loan Losses by Impairment Methodology.

            

Inherent

   $ 160      $ 4      $ 19       $ 39       $ 222   

Specific

     108                               108   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total allowance for loan losses at March 31, 2016

   $ 268      $ 4      $ 19       $ 39       $ 330   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Loans Evaluated by Impairment Methodology(3).

            

Inherent

   $ 24,499      $ 22,174      $ 21,762       $ 6,816       $ 75,251   

Specific

     627               18                 645   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total loans evaluated at March 31, 2016

   $ 25,126      $ 22,174      $ 21,780       $ 6,816       $ 75,896   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Allowance for Lending Commitments.

            

Balance at December 31, 2015

   $ 180      $ 1      $       $ 4       $ 185   

Provision for lending commitments(4)

     15                       1         16   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Balance at March 31, 2016

   $ 195      $ 1      $       $ 5       $ 201   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Allowance for Lending Commitments by Impairment Methodology.

            

Inherent

   $ 184      $ 1      $       $ 5       $ 190   

Specific

     11                               11   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total allowance for lending commitments at March 31, 2016

   $ 195      $ 1      $       $ 5       $ 201   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Lending Commitments Evaluated by Impairment Methodology(3).

            

Inherent

   $ 65,682      $ 5,066      $ 327       $ 380       $ 71,455   

Specific

     136                               136   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total lending commitments evaluated at March 31, 2016

   $ 65,818      $ 5,066      $ 327       $ 380       $ 71,591   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

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Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

     Corporate     Consumer      Residential
Real  Estate
     Wholesale
Real Estate
     Total  
     (dollars in millions)  

Allowance for Loan Losses.

             

Balance at December 31, 2014

   $ 118      $ 2       $ 8       $ 21       $ 149   

Gross recoveries

     1                                1   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Net recoveries/(charge-offs)

     1                                1   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Provision for loan losses(1)

     25                        1         26   

Other(2)

     (11                             (11
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Balance at March 31, 2015

   $ 133      $ 2       $ 8       $ 22       $ 165   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for Loan Losses by Impairment Methodology.

             

Inherent

   $ 128      $ 2       $ 8       $ 22       $ 160   

Specific

     5                                5   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan losses at March 31, 2015

   $ 133      $ 2       $ 8       $ 22       $ 165   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Loans Evaluated by Impairment Methodology(3).

             

Inherent

   $ 21,096      $ 17,372       $ 16,833       $ 5,265       $ 60,566   

Specific

     25                20                 45   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total loan evaluated at March 31, 2015

   $ 21,121      $ 17,372       $ 16,853       $ 5,265       $ 60,611   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for Lending Commitments.

             

Balance at December 31, 2014

   $ 147      $       $       $ 2       $ 149   

Provision for lending commitments(4)

     36                        1         37   

Other

     (1                             (1
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Balance at March 31, 2015

   $ 182      $       $       $ 3       $ 185   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for Lending Commitments by Impairment Methodology.

             

Inherent

   $ 182      $       $       $ 3       $ 185   

Specific

                                      
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for lending commitments at March 31, 2015

   $ 182      $       $       $ 3       $ 185   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Lending Commitments Evaluated by Impairment Methodology(3).

             

Inherent

   $ 70,153      $ 3,875       $ 287       $ 376       $ 74,691   

Specific

     26                                26   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total lending commitments evaluated at March 31, 2015

   $ 70,179      $ 3,875       $ 287       $ 376       $ 74,717   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

The Company recorded provisions of $112 million and $26 million for loan losses for the quarters ended March 31, 2016 and 2015, respectively.

(2)

Amount includes the impact related to the transfer to loans held for sale and foreign currency translation adjustments.

(3)

Loan balances are gross of the allowance for loan losses, and lending commitments are gross of the allowance for lending commitments.

(4)

The Company recorded provisions of $16 million and $37 million for commitments for the quarters ended March 31, 2016 and 2015, respectively.

 

Employee Loans.

 

Employee loans are granted primarily in conjunction with a program established in the Wealth Management business segment to retain and recruit certain employees. These loans are recorded in Customer and other receivables in the condensed consolidated balance sheet. These loans are full recourse, generally require periodic payments and have repayment terms ranging from 2 to 12 years. The Company establishes an allowance for loan amounts it does not consider recoverable, which is recorded in Compensation and benefits expense. At March 31, 2016, the Company had $4,708 million of employee loans, net of an allowance of approximately $103 million. At December 31, 2015, the Company had $4,923 million of employee loans, net of an allowance of approximately $108 million.

 

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Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

8.

Equity Method Investments.

 

Overview.

 

The Company has investments accounted for under the equity method of accounting (see Note 1 to the consolidated financial statements in the 2015 Form 10-K) of $3,257 million and $3,144 million at March 31, 2016 and December 31, 2015, respectively, included in Other assets—Other investments in the condensed consolidated balance sheet. Income from equity method investments was $15 million and $38 million for the quarters ended March 31, 2016 and 2015, respectively, and is included in Other revenues in the condensed consolidated statements of income. Income from equity method investments for the quarters ended March 31, 2016 and 2015 was primarily related to the Company’s 40% stake in Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (“MUMSS”), as described below.

 

Japanese Securities Joint Venture.

 

The Company holds a 40% voting interest (“40% interest”) and Mitsubishi UFJ Financial Group, Inc. (“MUFG”) holds a 60% voting interest in MUMSS. The Company accounts for its equity method investment in MUMSS within the Institutional Securities business segment. During the quarters ended March 31, 2016 and 2015, the Company recorded income from its 40% interest in MUMSS of $34 million and $69 million, respectively, within Other revenues in the condensed consolidated statements of income.

 

9.

Deposits.

 

Deposits.

 

     At
March 31,  2016(1)
     At
December 31,  2015(1)
 
     (dollars in millions)  

Savings and demand deposits

   $ 154,049       $ 153,346   

Time deposits(2)

     3,542         2,688   
  

 

 

    

 

 

 

Total(3)

   $ 157,591       $ 156,034   
  

 

 

    

 

 

 

 

(1)

Total deposits subject to the FDIC insurance at March 31, 2016 and December 31, 2015 were $114 billion and $113 billion, respectively. Of the total time deposits subject to the FDIC insurance at March 31, 2016 and December 31, 2015, $15 million and $14 million, respectively, met or exceeded the FDIC insurance limit.

(2)

Certain time deposit accounts are carried at fair value under the fair value option (see Note 3).

(3)

The Company’s deposits were primarily held in the U.S.

 

Interest bearing deposits at March 31, 2016 included $154,032 million of savings deposits payable upon demand and $3,044 million of time deposits maturing in 2016, $456 million of time deposits maturing in 2017 and $10 million of time deposits maturing in 2018.

 

10.

Long-Term Borrowings and Other Secured Financings.

 

Long-Term Borrowings.

 

Components of Long-term Borrowings.

 

     At
March 31,  2016
     At
December 31,  2015
 
     (dollars in millions)  

Senior debt

   $ 149,060       $ 140,494   

Subordinated debt

     10,895         10,404   

Junior subordinated debentures

     2,849         2,870   
  

 

 

    

 

 

 

Total

   $ 162,804       $ 153,768   
  

 

 

    

 

 

 

 

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Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

During the quarter ended March 31, 2016 and 2015, the Company issued notes with a principal amount of approximately $13.2 billion and $11.3 billion, respectively, and approximately $8.0 billion and $5.3 billion, respectively, in aggregate long-term borrowings matured or were retired.

 

The weighted average maturity of long-term borrowings, based upon stated maturity dates, was approximately 6.2 years and 6.1 years at March 31, 2016 and December 31, 2015, respectively.

 

Other Secured Financings.

 

Other secured financings include the liabilities related to transfers of financial assets that are accounted for as financings rather than sales, consolidated VIEs where the Company is deemed to be the primary beneficiary, pledged commodities, certain equity-linked notes and other secured borrowings. These liabilities are generally payable from the cash flows of the related assets accounted for as Trading assets. See Note 12 for further information on Other secured financings related to VIEs and securitization activities.

 

Components of Other Secured Financings.

 

     At
March 31,  2016
     At
December 31,  2015
 
     (dollars in millions)  

Secured financings with original maturities greater than one year

   $ 7,551       $ 7,629   

Secured financings with original maturities one year or less

     1,373         1,435   

Failed sales(1)

     392         400   
  

 

 

    

 

 

 

Total

   $ 9,316       $ 9,464   
  

 

 

    

 

 

 

 

(1)

For more information on failed sales, see Note 12.

 

11.

Commitments, Guarantees and Contingencies.

 

Commitments.

 

The Company’s commitments are summarized below by years to maturity. Since commitments associated with these instruments may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.

 

Commitments.

 

     Years to Maturity at March 31, 2016         
     Less than 1      1-3      3-5      Over 5      Total  
     (dollars in millions)  

Letters of credit and other financial guarantees obtained to satisfy collateral requirements

   $ 114       $       $       $ 106       $ 220   

Investment activities

     550         107         16         302         975   

Corporate lending commitments(1)

     17,000         24,758         47,655         4,315         93,728   

Consumer lending commitments

     5,059         3                 4         5,066   

Residential real estate lending commitments

     35         71         83         241         430   

Wholesale real estate lending commitments

     86         271         20         29         406   

Forward-starting reverse repurchase agreements and securities borrowing agreements(2)(3)

     48,472                                 48,472   

Underwriting commitments

     148                                 148   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 71,464       $ 25,210       $ 47,774       $ 4,997       $ 149,445   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

 

(1)

Due to the nature of the Company’s obligations under the commitments, these amounts include certain commitments participated to third parties of $4.1 billion.

(2)

The Company enters into forward-starting reverse repurchase and securities borrowing agreements that primarily settle within three business days of the trade date, and of the total amount at March 31, 2016, $41.6 billion settled within three business days.

(3)

In addition, the Company has a contingent obligation to provide financing to a clearinghouse through which it clears certain transactions. The financing is required only upon the default of a clearinghouse member. The financing takes the form of a reverse repurchase facility, with a maximum amount of approximately $2.2 billion.

 

For a further description of these commitments, refer to Note 12 to the consolidated financial statements in the 2015 Form 10-K.

 

The Company sponsors several non-consolidated investment funds for third-party investors where it typically acts as general partner of, and investment advisor to, these funds and typically commits to invest a minority of the capital of such funds, with subscribing third-party investors contributing the majority. The Company’s employees, including its senior officers as well as the Company’s Board of Directors, may participate on the same terms and conditions as other investors in certain of these funds that the Company forms primarily for client investment, except that the Company may waive or lower applicable fees and charges for its employees. The Company has contractual capital commitments, guarantees, lending facilities and counterparty arrangements with respect to these investment funds.

 

Guarantees.

 

Obligations Under Guarantee Arrangements at March 31, 2016.

 

     Maximum Potential Payout/Notional      Carrying
Amount
(Asset)/
Liability
    Collateral/
Recourse
 
     Years to Maturity              
     Less than 1      1-3      3-5      Over 5      Total       
     (dollars in millions)  

Credit derivative contracts(1)

   $ 214,631       $   279,554       $   138,777       $ 52,205       $ 685,167       $ (127   $   

Other credit contracts

     27         44         5         323         399         (2       

Non-credit derivative contracts(1)

     1,186,070         699,114         298,000           533,692           2,716,876           74,940          

Standby letters of credit and other financial guarantees issued(2)

     872         1,262         1,139         5,884         9,157         (111     6,693   

Market value guarantees

     64         246         98         17         425         3        5   

Liquidity facilities

     3,154                                 3,154         (5     5,029   

Whole loan sales guarantees

                     2         23,426         23,428         9          

Securitization representations and warranties

                             63,896         63,896         103          

General partner guarantees

     31         36         48         311         426         74          

 

(1)

Carrying amounts of derivative contracts are shown on a gross basis prior to cash collateral or counterparty netting. For further information on derivative contracts, see Note 4.

(2)

These amounts include certain issued standby letters of credit participated to third parties totaling $0.7 billion due to the nature of the Company’s obligations under these arrangements.

 

The Company has obligations under certain guarantee arrangements, including contracts and indemnification agreements, that contingently require the Company to make payments to the guaranteed party based on changes in an underlying measure (such as an interest or foreign exchange rate, security or commodity price, an index, or the occurrence or non-occurrence of a specified event) related to an asset, liability or equity security of a guaranteed party. Also included as guarantees are contracts that contingently require the Company to make payments to the guaranteed party based on another entity’s failure to perform under an agreement, as well as indirect guarantees of the indebtedness of others.

 

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Table of Contents

MORGAN STANLEY—(Continued)

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

For more information on the nature of the obligation and related business activity for market value guarantees, liquidity facilities, whole loan sale guarantees, and general partner guarantees related to private equity and real estate funds, as well as the other products in the above table, please see Note 12 to the consolidated financial statements in the 2015 Form 10-K.

 

Other Guarantees and Indemnities.

 

In the normal course of business, the Company provides guarantees and indemnifications in a variety of transactions. These provisions generally are standard contractual terms. Certain of these guarantees and indemnifications related to trust preferred securities, indemnities and exchange/clearinghouse member guarantees are described in Note 12 to the consolidated financial statements in the 2015 Form 10-K.

 

In addition, in the ordinary course of business, the Company guarantees the debt and/or certain trading obligations (including obligations associated with derivatives, foreign exchange contracts and the settlement of physical commodities) of certain subsidiaries. These guarantees generally are entity or product specific and are required by investors or trading counterparties. The activities of the Company’s subsidiaries covered by these guarantees (including any related debt or trading obligations) are included in the condensed consolidated financial statements.

 

Trust Preferred Securities.

 

The Company has established Morgan Stanley Capital Trusts for the limited purpose of issuing trust preferred securities to third parties and lending such proceeds to the Company in exchange for junior subordinated debentures. The Morgan Stanley Capital Trusts are SPEs, and only the Parent provides a guarantee for the trust preferred securities. The Company has directly guaranteed the repayment of the trust preferred securities to the holders in accordance with the terms thereof. See Note 11 to the consolidated financial statements in the 2015 Form 10-K for details on the Company’s junior subordinated debentures.

 

Finance Subsidiary.

 

The Parent Company fully and unconditionally guarantees the securities issued by Morgan Stanley Finance LLC, a 100%-owned finance subsidiary.

 

Contingencies.

 

Legal.    In the normal course of business, the Company has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the entities that would otherwise be the primary defendants in such cases are bankrupt or are in financial distress. These actions have included, but are not limited to, residential mortgage and credit crisis related matters. Over the last several years, the level of litigation and investigatory activity (both formal and informal) by governmental and self-regulatory agencies has increased materially in the financial services industry. As a result, the Company expects that it may become the subject of increased claims for damages and other relief and, while the Company has identified below any individual proceedings where the Company believes a material loss to be reasonably possible and reasonably estimable, there can be no assurance that material losses will not be incurred from claims that have not yet been asserted or are not yet determined to be probable or possible and reasonably estimable losses.

 

The Company contests liability and/or the amount of damages as appropriate in each pending matter. Where available information indicates that it is probable a liability had been incurred at the date of the consolidated financial statements and the Company can reasonably estimate the amount of that loss, the Company accrues the estimated loss by a charge to income. The Company’s future legal expenses may fluctuate from period to period, given the current environment regarding government investigations and private litigation affecting global financial services firms, including the Company.

 

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MORGAN STANLEY—(Continued)

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

In many proceedings and investigations, however, it is inherently difficult to determine whether any loss is probable or even possible or to estimate the amount of any loss. In addition, even where a loss is possible or an exposure to loss exists in excess of the liability already accrued with respect to a previously recognized loss contingency, it is not always possible to reasonably estimate the size of the possible loss or range of loss.

 

For certain legal proceedings and investigations, the Company cannot reasonably estimate such losses, particularly for proceedings and investigations where the factual record is being developed or contested or where plaintiffs or governmental entities seek substantial or indeterminate damages, restitution, disgorgement or penalties. Numerous issues may need to be resolved, including through potentially lengthy discovery and determination of important factual matters, determination of issues related to class certification and the calculation of damages or other relief, and by addressing novel or unsettled legal questions relevant to the proceedings or investigations in question, before a loss or additional loss or range of loss or additional range of loss can be reasonably estimated for a proceeding or investigation.

 

For certain other legal proceedings and investigations, the Company can estimate reasonably possible losses, additional losses, ranges of loss or ranges of additional loss in excess of amounts accrued, but does not believe, based on current knowledge and after consultation with counsel, that such losses will have a material adverse effect on the Company’s consolidated financial statements as a whole, other than the matters referred to in the following paragraphs.

 

On July 15, 2010, China Development Industrial Bank (“CDIB”) filed a complaint against the Company, styled China Development Industrial Bank v. Morgan Stanley & Co. Incorporated et al., which is pending in the Supreme Court of the State of New York, New York County (“Supreme Court of NY”). The complaint relates to a $275 million credit default swap referencing the super senior portion of the STACK 2006-1 CDO. The complaint asserts claims for common law fraud, fraudulent inducement and fraudulent concealment and alleges that the Company misrepresented the risks of the STACK 2006-1 CDO to CDIB, and that the Company knew that the assets backing the CDO were of poor quality when it entered into the credit default swap with CDIB. The complaint seeks compensatory damages related to the approximately $228 million that CDIB alleges it has already lost under the credit default swap, rescission of CDIB’s obligation to pay an additional $12 million, punitive damages, equitable relief, fees and costs. On February 28, 2011, the court denied the Company’s motion to dismiss the complaint. Based on currently available information, the Company believes it could incur a loss in this action of up to approximately $240 million plus pre- and post-judgment interest, fees and costs.

 

On January 25, 2011, the Company was named as a defendant in The Bank of New York Mellon Trust, National Association v. Morgan Stanley Mortgage Capital, Inc., a litigation pending in the United States District Court for the Southern District of New York (“SDNY”). The suit, brought by the trustee of a series of commercial mortgage pass-through certificates, alleges that the Company breached certain representations and warranties with respect to an $81 million commercial mortgage loan that was originated and transferred to the trust by the Company. The complaint seeks, among other things, to have the Company repurchase the loan and pay additional monetary damages. On June 16, 2014, the court granted the Company’s supplemental motion for summary judgment, which was appealed by plaintiff. On April 27, 2016, the United States Court of Appeals for the Second Circuit vacated the judgment of the SDNY and remanded the case to the SDNY for further proceedings consistent with its opinion. Based on currently available information, the Company believes it could incur a loss in this action of up to approximately $81 million, plus pre-judgment interest, fees and costs.

 

On August 7, 2012, U.S. Bank, in its capacity as trustee, filed a complaint on behalf of Morgan Stanley Mortgage Loan Trust 2006-4SL and Mortgage Pass-Through Certificates, Series 2006-4SL against the Company. The matter is styled Morgan Stanley Mortgage Loan Trust 2006-4SL, et al. v. Morgan Stanley Mortgage Capital Inc. and is pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $303 million, breached various representations and warranties. The complaint seeks, among other relief, rescission of the mortgage loan purchase agreement underlying the transaction, specific performance and unspecified damages and interest. On August 8, 2014, the court granted in part and denied in part the Company’s motion to dismiss. Based on currently available information, the Company believes that it could incur a loss in this action of up to approximately $149 million, the total original unpaid balance of the mortgage loans for which the

 

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MORGAN STANLEY—(Continued)

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

Company received repurchase demands that it did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

 

On August 8, 2012, U.S. Bank, in its capacity as trustee, filed a complaint on behalf of Morgan Stanley Mortgage Loan Trust 2006-14SL, Mortgage Pass-Through Certificates, Series 2006-14SL, Morgan Stanley Mortgage Loan Trust 2007-4SL and Mortgage Pass-Through Certificates, Series 2007-4SL against the Company styled Morgan Stanley Mortgage Loan Trust 2006-14SL, et al. v. Morgan Stanley Mortgage Capital Holdings LLC, as successor in interest to Morgan Stanley Mortgage Capital Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trusts, which had original principal balances of approximately $354 million and $305 million respectively, breached various representations and warranties. The complaint seeks, among other relief, rescission of the mortgage loan purchase agreements underlying the transactions, specific performance and unspecified damages and interest. On August 16, 2013, the court granted in part and denied in part the Company’s motion to dismiss the complaint. Based on currently available information, the Company believes that it could incur a loss in this action of up to approximately $527 million, the total original unpaid balance of the mortgage loans for which the Company received repurchase demands that it did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

 

On September 28, 2012, U.S. Bank, in its capacity as trustee, filed a complaint on behalf of Morgan Stanley Mortgage Loan Trust 2006-13ARX against the Company styled Morgan Stanley Mortgage Loan Trust 2006-13ARX v. Morgan Stanley Mortgage Capital Holdings LLC, as successor in interest to Morgan Stanley Mortgage Capital Inc., pending in the Supreme Court of NY. The plaintiff filed an amended complaint on January 17, 2013, which asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $609 million, breached various representations and warranties. The amended complaint seeks, among other relief, declaratory judgment relief, specific performance and unspecified damages and interest. By order dated September 30, 2014, the court granted in part and denied in part the Company’s motion to dismiss the amended complaint. On July 13, 2015, the plaintiff perfected its appeal from the court’s September 30, 2014 decision. Based on currently available information, the Company believes that it could incur a loss in this action of up to approximately $170 million, the total original unpaid balance of the mortgage loans for which the Company received repurchase demands that it did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

 

On January 10, 2013, U.S. Bank, in its capacity as trustee, filed a complaint on behalf of Morgan Stanley Mortgage Loan Trust 2006-10SL and Mortgage Pass-Through Certificates, Series 2006-10SL against the Company styled Morgan Stanley Mortgage Loan Trust 2006-10SL, et al. v. Morgan Stanley Mortgage Capital Holdings LLC, as successor in interest to Morgan Stanley Mortgage Capital Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $300 million, breached various representations and warranties. The complaint seeks, among other relief, an order requiring the Company to comply with the loan breach remedy procedures in the transaction documents, unspecified damages, and interest. On August 8, 2014, the court granted in part and denied in part the Company’s motion to dismiss the complaint. Based on currently available information, the Company believes that it could incur a loss in this action of up to approximately $197 million, the total original unpaid balance of the mortgage loans for which the Company received repurchase demands that it did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

 

On May 3, 2013, plaintiffs in Deutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al. filed a complaint against the Company, certain affiliates, and other defendants in the Supreme Court of NY. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by the Company to plaintiff currently at issue in this action was approximately

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

$644 million. The complaint alleges causes of action against the Company for common law fraud, fraudulent concealment, aiding and abetting fraud, negligent misrepresentation, and rescission and seeks, among other things, compensatory and punitive damages. On June 10, 2014, the court granted in part and denied in part the Company’s motion to dismiss the complaint. The Company perfected its appeal from that decision on June 12, 2015. At March 25, 2016, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $262 million, and the certificates had incurred actual losses of approximately $84 million. Based on currently available information, the Company believes it could incur a loss in this action up to the difference between the $262 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, or upon sale, plus pre- and post-judgment interest, fees and costs. The Company may be entitled to be indemnified for some of these losses.

 

On July 8, 2013, U.S. Bank National Association, in its capacity as trustee, filed a complaint against the Company styled U.S. Bank National Association, solely in its capacity as Trustee of the Morgan Stanley Mortgage Loan Trust 2007-2AX (MSM 2007-2AX) v. Morgan Stanley Mortgage Capital Holdings LLC, as Successor-by-Merger to Morgan Stanley Mortgage Capital Inc. and Greenpoint Mortgage Funding, Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $650 million, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, unspecified damages and interest. On August 22, 2013, the Company filed a motion to dismiss the complaint, which was granted in part and denied in part on November 24, 2014. Based on currently available information, the Company believes that it could incur a loss in this action of up to approximately $240 million, the total original unpaid balance of the mortgage loans for which the Company received repurchase demands that it did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

 

On April 28, 2014, Deutsche Bank National Trust Company, in its capacity as trustee for Morgan Stanley Structured Trust I 2007-1, filed a complaint against the Company styled Deutsche Bank National Trust Company v. Morgan Stanley Mortgage Capital Holdings LLC, pending in the SDNY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $735 million, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, unspecified compensatory and/or rescissory damages, interest and costs. On April 3, 2015, the court granted in part and denied in part the Company’s motion to dismiss the complaint. Based on currently available information, the Company believes that it could incur a loss in this action of up to approximately $292 million, the total original unpaid balance of the mortgage loans for which the Company received repurchase demands that it did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

 

On January 23, 2015, Deutsche Bank National Trust Company, in its capacity as trustee, filed a complaint against the Company styled Deutsche Bank National Trust Company solely in its capacity as Trustee of the Morgan Stanley ABS Capital I Inc. Trust 2007-NC4 v. Morgan Stanley Mortgage Capital Holdings LLC as Successor-by-Merger to Morgan Stanley Mortgage Capital Inc., and Morgan Stanley ABS Capital I Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $1.05 billion, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, compensatory, consequential, rescissory, equitable and punitive damages, attorneys’ fees, costs and other related expenses, and interest. On October 20, 2015, the court granted in part and denied in part the Company’s motion to dismiss the complaint. Based on currently available information, the Company believes that it could incur a loss in this action of up to approximately $277 million, the total original unpaid balance of the mortgage loans for which the Company received repurchase demands from a certificate holder and a monoline insurer that the Company did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

 

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MORGAN STANLEY—(Continued)

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

12.

Variable Interest Entities and Securitization Activities.

 

Overview.

 

The Company is involved with various special purpose entities (“SPE”) in the normal course of business. In most cases, these entities are deemed to be VIEs. The Company’s transactions with VIEs primarily include securitizations, municipal tender option bond trusts, credit protection purchased through credit-linked notes, other structured financings, collateralized loan and debt obligations, equity-linked notes, partnership investments and asset management investment funds. The Company’s continuing involvement in VIEs that it does not consolidate can include ownership of retained interests in Company-sponsored transactions, interests purchased in the secondary market (both for Company-sponsored transactions and transactions sponsored by third parties), and derivatives with securitization SPEs (primarily interest rate derivatives in commercial mortgage and residential mortgage securitizations and credit derivatives in which the Company has purchased protection in synthetic CDOs).

 

For a further discussion on the Company’s VIEs, the determination and structure of VIEs and securitization activities, see Note 13 to the consolidated financial statements in the 2015 Form 10-K.

 

As a result of adopting the accounting update, Amendments to the Consolidation Analysis, in the quarter ended March 31, 2016, certain consolidated entities are now considered VIEs and are included in the balances at March 31, 2016. See Note 2 for further information.

 

Consolidated VIEs.

 

Assets and Liabilities by Type of Activity.

 

     At March 31, 2016      At December 31, 2015  
     VIE Assets      VIE Liabilities      VIE Assets      VIE Liabilities  
     (dollars in millions)  

Credit-linked notes

   $ 901       $       $ 900       $   

Other structured financings

     791         13         787         13   

Asset-backed securitizations(1)

     651         417         668         423   

Other(2)

     1,069         27         245           
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,412       $ 457       $ 2,600       $ 436   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

The value of assets is determined based on the fair value of the liabilities of and the interests owned by the Company in such VIEs, because the fair values for the liabilities and interests owned are more observable.

(2)

Other primarily includes certain operating entities, investment funds and structured transactions.

 

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MORGAN STANLEY—(Continued)

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

Assets and Liabilities by Balance Sheet Caption.

 

     At March 31,      At December 31,  
     2016      2015  
     (dollars in millions)  

Assets

     

Cash and due from banks

   $ 38       $ 14   

Trading assets, at fair value

     2,109         1,842   

Customer and other receivables

     13         3   

Goodwill

     18           

Intangible assets

     143           

Other assets

     1,091         741   
     

 

 

    

 

 

 

Total assets

   $ 3,412       $ 2,600   
  

 

 

    

 

 

 

Liabilities

     

Other secured financings, at fair value

   $ 426       $ 431   

Other liabilities and accrued expenses

     31         5   
     

 

 

    

 

 

 

Total liabilities

   $ 457       $ 436   
     

 

 

    

 

 

 

 

Consolidated VIE assets and liabilities are presented in the above tables after intercompany eliminations. The assets owned by many consolidated VIEs cannot be removed unilaterally by the Company and are not generally available to the Company. The related liabilities issued by many consolidated VIEs are non-recourse to the Company. In certain other consolidated VIEs, the Company either has the unilateral right to remove assets or provide additional recourse through derivatives such as total return swaps, guarantees or other forms of involvement.

 

As part of the Institutional Securities business segment’s securitization and related activities, the Company has provided, or otherwise agreed to be responsible for, representations and warranties regarding certain assets transferred in securitization transactions sponsored by the Company (see Note 11).

 

In general, the Company’s exposure to loss in consolidated VIEs is limited to losses that would be absorbed on the VIE’s net assets recognized in its financial statements, net of amounts absorbed by third-party variable interest holders. At March 31, 2016 and December 31, 2015, noncontrolling interests in the condensed consolidated financial statements related to consolidated VIEs were $159 million and $37 million, respectively. The Company also had additional maximum exposure to losses of approximately $74 million and $72 million at March 31, 2016 and December 31, 2015, respectively, primarily related to certain derivatives, commitments, guarantees and other forms of involvement.

 

Non-consolidated VIEs.

 

The tables below include all VIEs in which the Company has determined that its maximum exposure to loss is greater than specific thresholds or meets certain other criteria. Most of the VIEs included in the tables below are sponsored by unrelated parties; the Company’s involvement generally is the result of its secondary market-making activities, securities held in its Investment securities portfolio (see Note 5), and certain investments in funds.

 

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MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

Non-Consolidated VIE Assets and Liabilities, Maximum and Carrying Value of Exposure to Loss.

 

    At March 31, 2016  
    Mortgage-and
Asset-Backed
  Securitizations  
      Collateralized  
Debt
Obligations
    Municipal
Tender
Option Bonds
    Other
Structured
  Financings  
            Other          
    (dollars in millions)  

VIE assets that the Company does not consolidate (unpaid principal balance)

  $ 124,025      $ 10,058      $ 4,878      $ 5,023      $ 42,052   

Maximum exposure to loss:

         

Debt and equity interests

  $ 13,470      $ 1,319      $ 65      $ 1,756      $ 4,481   

Derivative and other contracts

                  2,908               132   

Commitments, guarantees and other

    646        588               365        319   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total maximum exposure to loss

  $ 14,116      $ 1,907      $ 2,973      $ 2,121      $ 4,932   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value of exposure to loss—Assets:

         

Debt and equity interests

  $ 13,470      $ 1,319      $ 65      $ 1,370      $ 4,481   

Derivative and other contracts

                  5               41   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total carrying value of exposure to loss—Assets

  $ 13,470      $ 1,319      $ 70      $ 1,370      $ 4,522   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value of exposure to loss—Liabilities:

         

Derivative and other contracts

  $      $      $      $      $ 49   

Commitments, guarantees and other

                         3        11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total carrying value of exposure to loss—Liabilities

  $      $      $      $ 3      $ 60   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    At December 31, 2015  
    Mortgage-and
Asset-Backed
Securitizations
    Collateralized
Debt
Obligations
    Municipal
Tender
Option Bonds
    Other
Structured
Financings
    Other  
    (dollars in millions)  

VIE assets that the Company does not consolidate (unpaid principal balance)

  $ 126,872      $ 8,805      $ 4,654      $ 2,201      $ 20,775   

Maximum exposure to loss:

         

Debt and equity interests

  $ 13,361      $ 1,259      $ 1      $ 1,129      $ 3,854   

Derivative and other contracts

                  2,834               67   

Commitments, guarantees and other

    494        231               361        222   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total maximum exposure to loss

  $ 13,855      $ 1,490      $ 2,835      $ 1,490      $ 4,143   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value of exposure to loss—Assets:

         

Debt and equity interests

  $ 13,361      $ 1,259      $ 1      $ 685      $ 3,854   

Derivative and other contracts

                  5               13   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total carrying value of exposure to loss—Assets

  $ 13,361      $ 1,259      $ 6      $ 685      $ 3,867   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value of exposure to loss—Liabilities:

         

Derivative and other contracts

  $      $      $      $      $ 15   

Commitments, guarantees and other

                         3          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total carrying value of exposure to loss—Liabilities

  $      $      $      $ 3      $ 15   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

Non-Consolidated VIE Mortgage- and Asset-Backed Securitization Assets.

 

     At March 31, 2016      At December 31, 2015  
     Unpaid
Principal
Balance
     Debt and
Equity
Interests
     Unpaid
Principal
Balance
     Debt and
Equity
Interests
 
     (dollars in millions)  

Residential mortgages

   $ 16,359       $ 1,006       $ 13,787       $ 1,012   

Commercial mortgages

     52,151         2,515         57,313         2,871   

U.S. agency collateralized mortgage obligations

     17,331         3,503         13,236         2,763   

Other consumer or commercial loans

     38,184         6,446         42,536         6,715   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage- and asset-backed securitization assets

   $ 124,025       $ 13,470       $ 126,872       $ 13,361   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

The Company’s maximum exposure to loss often differs from the carrying value of the variable interests held by the Company. The maximum exposure to loss is dependent on the nature of the Company’s variable interest in the VIEs and is limited to the notional amounts of certain liquidity facilities, other credit support, total return swaps, written put options, and the fair value of certain other derivatives and investments the Company has made in the VIEs. Liabilities issued by VIEs generally are non-recourse to the Company. Where notional amounts are utilized in quantifying maximum exposure related to derivatives, such amounts do not reflect fair value write-downs already recorded by the Company.

 

The Company’s maximum exposure to loss does not include the offsetting benefit of any financial instruments that the Company may utilize to hedge these risks associated with its variable interests. In addition, the Company’s maximum exposure to loss is not reduced by the amount of collateral held as part of a transaction with the VIE or any party to the VIE directly against a specific exposure to loss.

 

Securitization transactions generally involve VIEs. Primarily as a result of its secondary market-making activities, the Company owned additional VIE assets mainly issued by securitization SPEs for which the maximum exposure to loss is less than specific thresholds. These additional assets totaled $12.6 billion and $12.9 billion at March 31, 2016 and December 31, 2015, respectively. These assets were either retained in connection with transfers of assets by the Company, acquired in connection with secondary market-making activities or held as AFS securities in its Investment securities portfolio (see Note 5), or held as investments in funds. At March 31, 2016 and December 31, 2015, these assets consisted of securities backed by residential mortgage loans, commercial mortgage loans or other consumer loans, such as credit card receivables, automobile loans and student loans, CDOs or CLOs, and investment funds. The Company’s primary risk exposure is to the securities issued by the SPE owned by the Company, with the risk highest on the most subordinate class of beneficial interests. These assets generally are included in Trading assets—Corporate and other debt, Trading assets—Investments or AFS securities within its Investment securities portfolio and are measured at fair value (see Note 3). The Company does not provide additional support in these transactions through contractual facilities, such as liquidity facilities, guarantees or similar derivatives. The Company’s maximum exposure to loss generally equals the fair value of the assets owned.

 

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MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

Transfers of Assets with Continuing Involvement.

 

Transactions with SPEs in which the Company, acting as principal, transferred financial assets with continuing involvement and received sales treatment are shown below.

 

     At March 31, 2016  
     Residential
Mortgage
Loans
     Commercial
Mortgage

Loans
     U.S. Agency
Collateralized
Mortgage
Obligations
     Credit-
Linked
Notes

and Other(1)
 
     (dollars in millions)  

SPE assets (unpaid principal balance)(2)

   $ 21,705       $ 55,403       $ 14,631       $ 12,061   

Retained interests (fair value):

           

Investment grade

   $       $ 85       $ 539       $   

Non-investment grade

     82         96                 1,137   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total retained interests (fair value)

   $ 82       $ 181       $ 539       $ 1,137   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interests purchased in the secondary market (fair value):

           

Investment grade

   $       $ 34       $ 63       $   

Non-investment grade

     47         52                 5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interests purchased in the secondary market (fair value)

   $ 47       $ 86       $ 63       $ 5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative assets (fair value)

   $       $ 316       $       $ 231   

Derivative liabilities (fair value)

                             465   

 

     At December 31, 2015  
     Residential
Mortgage
Loans
     Commercial
Mortgage
Loans
     U.S. Agency
Collateralized
Mortgage
Obligations
     Credit-
Linked
Notes and

Other(1)
 
     (dollars in millions)  

SPE assets (unpaid principal balance)(2)

   $ 22,440       $ 72,760       $ 17,978       $ 12,235   

Retained interests (fair value):

           

Investment grade

   $       $ 238       $ 649       $   

Non-investment grade

     160         63                 1,136   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total retained interests (fair value)

   $ 160       $ 301       $ 649       $ 1,136   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interests purchased in the secondary market (fair value):

           

Investment grade

   $       $ 88       $ 99       $   

Non-investment grade

     60         63                 10   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interests purchased in the secondary market (fair value)

   $ 60       $ 151       $ 99       $ 10   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative assets (fair value)

   $       $ 343       $       $ 151   

Derivative liabilities (fair value)

                             449   

 

(1)

Amounts include CLO transactions managed by unrelated third parties.

(2)

Amounts include assets transferred by unrelated transferors.

 

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MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

     At March 31, 2016  
         Level 1              Level 2              Level 3              Total      
     (dollars in millions)  

Retained interests (fair value):

           

Investment grade

   $       $ 624       $       $ 624   

Non-investment grade

             16         1,299         1,315   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total retained interests (fair value)

   $       $ 640       $ 1,299       $ 1,939   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interests purchased in the secondary market (fair value):

           

Investment grade

   $       $ 97       $       $ 97   

Non-investment grade

             84         20         104   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interests purchased in the secondary market (fair value)

   $       $ 181       $ 20       $ 201   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative assets (fair value)

   $       $ 508       $ 39       $ 547   

Derivative liabilities (fair value)

             76         389         465   

 

     At December 31, 2015  
         Level 1              Level 2              Level 3              Total      
     (dollars in millions)  

Retained interests (fair value):

           

Investment grade

   $       $ 886       $ 1       $ 887   

Non-investment grade

             17         1,342         1,359   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total retained interests (fair value)

   $       $ 903       $ 1,343       $ 2,246   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interests purchased in the secondary market (fair value):

           

Investment grade

   $       $ 187       $       $ 187   

Non-investment grade

             112         21         133   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interests purchased in the secondary market (fair value)

   $       $ 299       $ 21       $ 320   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative assets (fair value)

   $       $ 466       $ 28       $ 494   

Derivative liabilities (fair value)

             110         339         449   

 

Transferred assets are carried at fair value prior to securitization, and any changes in fair value are recognized in the condensed consolidated statements of income. The Company may act as underwriter of the beneficial interests issued by these securitization vehicles. Investment banking underwriting net revenues are recognized in connection with these transactions. The Company may retain interests in the securitized financial assets as one or more tranches of the securitization. These retained interests are included in the condensed consolidated balance sheet at fair value. Any changes in the fair value of such retained interests are recognized in the condensed consolidated statements of income.

 

Proceeds from New Securitization Transactions and Retained Interests in Securitization Transactions.

 

     Three Months Ended  
     March 31,  
          2016                 2015        
     (dollars in millions)  

Proceeds received from new securitization transactions

   $     2,713       $     4,891   

Proceeds from retained interests in securitization transactions

     631         948   

 

Net gains on sale of assets in securitization transactions at the time of the sale were not material in the first quarter of 2016 and 2015.

 

The Company has provided, or otherwise agreed to be responsible for, representations and warranties regarding certain assets transferred in securitization transactions sponsored by the Company (see Note 11).

 

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MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

Proceeds from Sales to CLO Entities Sponsored by Non-Affiliates.

 

     Three Months Ended  
     March 31,  
           2016                  2015        
     (dollars in millions)  

Proceeds from sale of corporate loans sold to those SPEs

   $     31       $     345   

 

Net gains on sale of corporate loans to CLO transactions at the time of sale were not material in the first quarter of 2016 and 2015.

 

The Company also enters into transactions in which it sells equity securities and contemporaneously enters into bilateral OTC equity derivatives with the purchasers of the securities, through which it retains the exposure to the securities as shown in the following table.

 

     At March 31, 2016      At December 31, 2015  
     (dollars in millions)  

Carrying value of assets derecognized at the time of sale and gross cash proceeds

   $ 9,020       $ 7,878   

Fair value of assets sold

     9,248         7,935   

Fair value of derivative assets recognized in the condensed consolidated balance sheet

     235         97   

Fair value of derivative liabilities recognized in the condensed consolidated balance sheet

     8         40   

 

Failed Sales.

 

For transfers that fail to meet the accounting criteria for a sale, the Company continues to recognize the assets in Trading assets at fair value, and the Company recognizes the associated liabilities in Other secured financings at fair value in the condensed consolidated balance sheet (see Note 10).

 

The assets transferred to unconsolidated VIEs in transactions accounted for as failed sales cannot be removed unilaterally by the Company and are not generally available to the Company. The related liabilities are also non-recourse to the Company. In certain other failed sale transactions, the Company has the right to remove assets or provide additional recourse through derivatives such as total return swaps, guarantees or other forms of involvement.

 

Carrying Value of Assets and Liabilities Related to Failed Sales.

 

    At March 31, 2016      At December 31, 2015  
        Assets              Liabilities              Assets              Liabilities      
    (dollars in millions)  

Failed sales

  $             392       $             392       $             400       $             400   

 

13.

Regulatory Requirements.

 

Regulatory Capital Framework.

 

For a discussion of the Company’s regulatory capital framework, see Note 14 to the consolidated financial statements in the 2015 Form 10-K.

 

Risk-Based Capital Requirement.

 

The Company is required to maintain minimum risk-based and leverage capital ratios under the regulatory capital requirements. The Company’s binding risk-based capital ratios for regulatory purposes are the lower of the capital ratios

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

computed under the (i) standardized approaches for calculating credit risk-weighted assets (“RWAs”) and market risk RWAs (the “Standardized Approach”); and (ii) applicable advanced approaches for calculating credit risk, market risk and operational risk RWAs (the “Advanced Approach”).

 

In addition to the minimum risk-based capital ratio requirements, on a fully phased-in basis by 2019, the Company will be subject to:

 

   

A greater than 2.5% Common Equity Tier 1 capital conservation buffer;

 

   

The Common Equity Tier 1 global systemically important bank (“G-SIB”) capital surcharge, which the Federal Reserve calculated as 3% for the Company in July 2015; and

 

   

Up to a 2.5% Common Equity Tier 1 countercyclical capital buffer, currently set by banking regulators at zero (collectively, the “buffers”).

 

In 2016, the phase-in amount for each of the buffers is 25% of the fully phased-in buffer requirement. Failure to maintain the buffers will result in restrictions on the Company’s ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers.

 

The methods for calculating each of the Company’s risk-based capital ratios will change through January 1, 2022 as aspects of the capital rules are phased in. These changes may result in differences in the Company’s reported capital ratios from one reporting period to the next that are independent of changes to its capital base, asset composition, off-balance sheet exposures or risk profile.

 

For a further discussion of the Company’s calculation of risk-based capital ratios, see Note 14 to the consolidated financial statements in the 2015 Form 10-K.

 

The Company’s Regulatory Capital and Capital Ratios.

 

At March 31, 2016 and December 31, 2015, the Company’s binding ratios are based on the Advanced Approach transitional rules.

 

Regulatory Capital Measures and Minimum Regulatory Capital Ratios.

 

     At March 31, 2016      At December 31, 2015  
     Amount           Ratio           Minimum
    Ratio(1)    
     Amount           Ratio           Minimum
    Ratio(1)    
 
     (dollars in millions)  

Regulatory capital and capital ratios:

                 

Common Equity Tier 1 capital

   $ 58,514         15.6%         5.9%       $ 59,409         15.5%         4.5%   

Tier 1 capital

     65,198         17.4%         7.4%         66,722         17.4%         6.0%   

Total capital

     77,969         20.9%         9.4%         79,403         20.7%         8.0%   

Tier 1 leverage(2)

             8.2%         4.0%                 8.3%         4.0%   

Assets:

                 

Total RWAs

   $     373,925         N/A         N/A       $     384,162         N/A         N/A   

Adjusted average assets(3)

     792,268         N/A         N/A         803,574         N/A         N/A   

 

N/A—Not Applicable.

(1)

Percentages represent minimum regulatory capital ratios under the transitional rules. These ratios include the following assumptions: (i) G-SIB capital surcharge for the Company remains at 3.0% as calculated by the Federal Reserve in July 2015; and (ii) countercyclical capital buffer remains at zero.

(2)

Tier 1 leverage ratios are calculated under Standardized Approach transitional rules.

(3)

Adjusted average assets represent the denominator of the Tier 1 leverage ratio and are composed of the average daily balance of consolidated on-balance sheet assets under U.S. GAAP during the calendar quarter, adjusted for disallowed goodwill, transitional intangible assets, certain deferred tax assets, certain investments in the capital instruments of unconsolidated financial institutions and other adjustments.

 

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MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

U.S. Bank Subsidiaries’ Regulatory Capital and Capital Ratios.

 

Morgan Stanley Bank, N.A. (“MSBNA”) and Morgan Stanley Private Bank, National Association (“MSPBNA”) (collectively, “U.S. Bank Subsidiaries”) are subject to similar regulatory capital requirements as the Company. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s U.S. Bank Subsidiaries’ financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, each of the Company’s U.S. Bank Subsidiaries must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.

 

At March 31, 2016 and December 31, 2015, the Company’s U.S. Bank Subsidiaries’ binding ratios are based on the Standardized Approach transitional rules.

 

U.S. Bank Subsidiaries’ Regulatory Capital Measures and Required Capital Ratios.

 

     Morgan Stanley Bank, N.A.  
     At March 31, 2016     At December 31, 2015  
           Amount                 Ratio          Required
Capital
     Ratio(1)     
        Amount                Ratio           Required
Capital
     Ratio(1)     
 
     (dollars in millions)  

Common Equity Tier 1 capital

   $       13,862         15.5     6.5   $         13,333         15.1     6.5

Tier 1 capital

     13,862         15.5     8.0     13,333         15.1     8.0

Total capital

     15,670         17.5     10.0     15,097         17.1     10.0

Tier 1 leverage

     13,862         10.1     5.0     13,333         10.2     5.0

 

     Morgan Stanley Private Bank, National Association  
     At March 31, 2016     At December 31, 2015  
           Amount                 Ratio          Required
Capital
     Ratio(1)     
        Amount                Ratio           Required
Capital
     Ratio(1)     
 
     (dollars in millions)  

Common Equity Tier 1 capital

   $       4,660         27.0     6.5   $         4,197         26.5     6.5

Tier 1 capital

     4,660         27.0     8.0     4,197         26.5     8.0

Total capital

     4,692         27.2     10.0     4,225         26.7     10.0

Tier 1 leverage

     4,660         10.9     5.0     4,197         10.5     5.0

 

(1)

Capital ratios that are required in order to be considered well-capitalized for U.S. regulatory purposes.

 

Under regulatory capital requirements adopted by the U.S. federal banking agencies, U.S. depository institutions, in order to be considered well-capitalized, must maintain certain minimum capital ratios. Each U.S. depository institution subsidiary of the Company must be well-capitalized in order for the Company to continue to qualify as a financial holding company and to continue to engage in the broadest range of financial activities permitted for financial holding companies. At March 31, 2016 and December 31, 2015, the Company’s U.S. Bank Subsidiaries maintained capital at levels sufficiently in excess of the universally mandated well-capitalized requirements to address any additional capital needs and requirements identified by the U.S. federal banking regulators.

 

Broker-Dealer Regulatory Capital Requirements.

 

Morgan Stanley & Co. LLC (“MS&Co.”) is a registered broker-dealer and registered futures commission merchant and, accordingly, is subject to the minimum net capital requirements of the U.S. Securities and Exchange Commission (“SEC”) and the U.S. Commodity Futures Trading Commission (“CFTC”). MS&Co. has consistently operated with capital in excess of its regulatory capital requirements. MS&Co.’s net capital totaled $10,411 million and $10,254 million at March 31, 2016 and December 31, 2015, respectively, which exceeded the amount required by $8,483 million and $8,458 million, respectively. MS&Co. is required to hold tentative net capital in excess of $1 billion and net capital in excess of $500 million

 

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MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

in accordance with the market and credit risk standards of Appendix E of SEC Rule 15c3-1. In addition, MS&Co. is required to notify the SEC in the event that its tentative net capital is less than $5 billion. At March 31, 2016 and December 31, 2015, MS&Co. had tentative net capital in excess of the minimum and the notification requirements.

 

Morgan Stanley Smith Barney LLC (“MSSB LLC”) is a registered broker-dealer and introducing broker for the futures business and, accordingly, is subject to the minimum net capital requirements of the SEC and the CFTC. MSSB LLC has consistently operated with capital in excess of its regulatory capital requirements. MSSB LLC’s net capital totaled $3,645 million and $3,613 million at March 31, 2016 and December 31, 2015, respectively, which exceeded the amount required by $3,491 million and $3,459 million, respectively.

 

Morgan Stanley & Co. International plc (“MSIP”), a London-based broker-dealer subsidiary, is subject to the capital requirements of the Prudential Regulation Authority, and Morgan Stanley MUFG Securities Co., Ltd. (“MSMS”), a Tokyo-based broker-dealer subsidiary, is subject to the capital requirements of the Financial Services Agency. MSIP and MSMS have consistently operated with capital in excess of their respective regulatory capital requirements.

 

Other Regulated Subsidiaries.

 

Certain other U.S. and non-U.S. subsidiaries of the Company are subject to various securities, commodities and banking regulations, and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. These subsidiaries have consistently operated with capital in excess of their local capital adequacy requirements.

 

14.

Total Equity.

 

Dividends and Share Repurchases.

 

During the quarters ended March 31, 2016 and 2015, the Company repurchased approximately $625 million and $250 million, respectively, of the Company’s outstanding common stock as part of its share repurchase program.

 

For a description of the share repurchase program, see Note 15 to the consolidated financial statements in the 2015 Form 10-K.

 

Preferred Stock.

 

For a description of Series A through Series J preferred stock issuances, see Note 15 to the consolidated financial statements in the 2015 Form 10-K. During the quarters ended March 31, 2016 and 2015, dividends declared on the Company’s outstanding preferred stock were $78 million. The Company is authorized to issue 30 million shares of preferred stock. The preferred stock has a preference over the common stock upon liquidation.

 

Preferred Stock Outstanding.

 

     Shares Outstanding
At March 31,
2016
     Liquidation
Preference per
Share
     Carrying Value  

Series

         At
March 31,
2016
     At
December 31,
2015
 
     (shares in millions)             (dollars in millions)  

A

     44,000       $             25,000       $                 1,100       $                 1,100   

C(1)

                             519,882         1,000         408         408   

E

     34,500         25,000         862         862   

F

     34,000         25,000         850         850   

G

     20,000         25,000         500         500   

H

     52,000         25,000         1,300         1,300   

I

     40,000         25,000         1,000         1,000   

J

     60,000         25,000         1,500         1,500   
        

 

 

    

 

 

 

Total

         $ 7,520       $ 7,520   
        

 

 

    

 

 

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

 

(1)

Series C is comprised of the issuance of 1,160,791 shares of Series C Preferred Stock to MUFG for an aggregate purchase price of $911 million, less the redemption of 640,909 shares of Series C Preferred Stock of $503 million, which were converted to common shares of approximately $705 million.

 

The Company’s preferred stock qualifies as Tier 1 capital in accordance with regulatory capital requirements (see Note 13).

 

Accumulated Other Comprehensive Income (Loss).

 

Changes in AOCI by Component, Net of Tax and Noncontrolling Interests.

 

     Foreign
Currency
Translation
Adjustments
    Change in
Net Unrealized
Gains (Losses) on
AFS Securities
    Pensions,
Postretirement
and Other
    Debt Valuation
Adjustment
    Total  
     (dollars in millions)  

Balance at December 31, 2015

   $ (963   $ (319   $ (374   $      $ (1,656

Cumulative adjustment for accounting change related to DVA(1)

                          (312     (312

Change in OCI before reclassifications

     132        402        2        228        764   

Amounts reclassified from AOCI(2)

            (7     (1     (26     (34
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net OCI during the period

     132        395        1        202        730   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2016

   $ (831   $ 76      $ (373   $ (110   $ (1,238
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

   $ (663   $ (73   $ (512   $      $ (1,248
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in OCI before reclassifications

     (220     215                      (5

Amounts reclassified from AOCI

            (15     2               (13
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net OCI during the period

     (220     200        2               (18
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2015

   $ (883   $ 127      $ (510   $      $ (1,266
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

In accordance with the early adoption of a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities, a cumulative catch up adjustment was recorded as of January 1, 2016 to move the cumulative DVA amount, net of noncontrolling interest and tax, related to outstanding liabilities under the fair value option election from Retained earnings into AOCI. See Note 2 for further information.

(2)

Amounts reclassified from AOCI in the quarter ended March 31, 2016 are principally due to the realization of DVA upon early retirement of the associated instruments and are recognized within Trading revenues in the condensed consolidated statements of income. The associated tax impact in Provision for (benefit from) income taxes was $(15) million. See Note 2 for further information.

 

The Company had no significant reclassifications out of AOCI for the quarters ended March 31, 2016 and 2015.

 

Noncontrolling Interests.

 

Noncontrolling interests were $1,165 million and $1,002 million at March 31, 2016 and December 31, 2015, respectively. The increase in noncontrolling interests was primarily due to the consolidation of certain legal entities associated with merchant banking funds sponsored by the Company. See Note 2 for further information on the adoption of the accounting update Amendments to the Consolidation Analysis.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

15.    Earnings per Common Share.

 

Calculation of Basic and Diluted Earnings Per Share (“EPS”).

 

     Three Months Ended March 31,  
             2016                     2015          
     (in millions, except for per share data)  

Basic EPS:

    

Income from continuing operations

   $ 1,160      $ 2,468   

Income (loss) from discontinued operations

     (3     (5
  

 

 

   

 

 

 

Net income

     1,157        2,463   

Net income applicable to noncontrolling interests

     23        69   
  

 

 

   

 

 

 

Net income applicable to Morgan Stanley

     1,134        2,394   

Less: Preferred dividends

     (78     (78

Less: Allocation of (earnings) loss to participating RSUs(1)

     (1     (2
  

 

 

   

 

 

 

Earnings applicable to Morgan Stanley common shareholders

   $ 1,055      $ 2,314   
  

 

 

   

 

 

 

Weighted average common shares outstanding

     1,883        1,924   

Earnings per basic common share:

    

Income from continuing operations

   $ 0.56      $ 1.21   

Income (loss) from discontinued operations

            (0.01
  

 

 

   

 

 

 

Earnings per basic common share

   $ 0.56      $ 1.20   
  

 

 

   

 

 

 

Diluted EPS:

    

Earnings applicable to Morgan Stanley common shareholders

   $ 1,055      $ 2,314   

Weighted average common shares outstanding

     1,883        1,924   

Effect of dilutive securities:

    

Stock options and RSUs(1)

     32        39   
  

 

 

   

 

 

 

Weighted average common shares outstanding and common stock equivalents

     1,915        1,963   
  

 

 

   

 

 

 

Earnings per diluted common share:

    

Income from continuing operations

   $ 0.55      $ 1.18   

Income (loss) from discontinued operations

              
  

 

 

   

 

 

 

Earnings per diluted common share

   $ 0.55      $ 1.18   
  

 

 

   

 

 

 

 

(1)

Restricted stock units (“RSUs”) that are considered participating securities participate in all of the earnings of the Company in the computation of basic EPS, and, therefore, such RSUs are not included as incremental shares in the diluted calculation.

 

Antidilutive Securities.

 

Securities that were considered antidilutive were excluded from the computation of diluted EPS.

 

Outstanding Antidilutive Securities at Period-End.

 

     Three Months Ended  
     March 31,  
     2016      2015  
     (shares in millions)  

Stock options

     14         11   

RSUs and performance-based stock units

     1         1   
  

 

 

    

 

 

 

Total

     15         12   
  

 

 

    

 

 

 

 

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MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

16.    Interest Income and Interest Expense.

 

Interest Income and Interest Expense.

 

     Three Months Ended  
     March 31,  
     2016     2015  
     (dollars in millions)  

Interest income(1):

    

Trading assets(2)

   $ 582      $ 594   

Investment securities

     236        201   

Loans

     647        474   

Interest bearing deposits with banks

     50        22   

Securities purchased under agreements to resell and Securities borrowed(3)

     (78     (104

Customer receivables and Other(4)

     310        297   
  

 

 

   

 

 

 

Total interest income

   $   1,747      $   1,484   
  

 

 

   

 

 

 

Interest expense(1):

    

Deposits

   $ 22      $ 18   

Short-term borrowings

     6        4   

Long-term borrowings

     959        926   

Securities sold under agreements to repurchase and Securities loaned(5)

     264        308   

Customer payables and Other(6)

     (403     (368
  

 

 

   

 

 

 

Total interest expense

   $ 848      $ 888   
  

 

 

   

 

 

 

Net interest

   $ 899      $ 596   
  

 

 

   

 

 

 

 

(1)

Interest income and expense are recorded within the condensed consolidated statements of income depending on the nature of the instrument and related market conventions. When interest is included as a component of the instrument’s fair value, interest is included within Trading revenues or Investments revenues. Otherwise, it is included within Interest income or Interest expense.

(2)

Interest expense on Trading liabilities is reported as a reduction to Interest income on Trading assets.

(3)

Includes fees paid on Securities borrowed.

(4)

Includes interest from customer receivables and other interest earning assets.

(5)

Includes fees received on Securities loaned.

(6)

Includes fees received from prime brokerage customers for stock loan transactions incurred to cover customers’ short positions.

 

17.    Employee Benefit Plans.

 

The Company sponsors various retirement plans for the majority of its U.S. and non-U.S. employees. The Company provides certain other postretirement benefits, primarily health care and life insurance, to eligible U.S. employees.

 

Components of Net Periodic Benefit Expense (Income) for Pension and Other Postretirement Plans.

 

     Three Months Ended  
     March 31,  
     2016     2015  
     (dollars in millions)  

Service cost, benefits earned during the period

   $ 4      $ 5   

Interest cost on projected benefit obligation

     38        39   

Expected return on plan assets

     (30     (30

Net amortization of prior service credit

     (4     (5

Net amortization of actuarial loss

     3        6   
  

 

 

   

 

 

 

Net periodic benefit expense

   $ 11      $ 15   
  

 

 

   

 

 

 

 

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MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

18.    Income Taxes.

 

The Company is under continuous examination by the Internal Revenue Service (the “IRS”) and other tax authorities in certain countries, such as Japan and the United Kingdom (“U.K.”), and in states in which it has significant business operations, such as New York. The Company is currently at various levels of field examination with respect to audits by the IRS, as well as New York State and New York City, for tax years 2009-2012 and 2007-2009, respectively. The IRS has substantially completed the field examination for the audit of tax years 2006-2008. The Company believes that the resolution of these tax matters will not have a material effect in the condensed consolidated balance sheet, although a resolution could have a material impact in the condensed consolidated statements of income for a particular future period and on the effective tax rate for any period in which such resolution occurs.

 

In April 2016, the Company received a notification from the IRS that the Congressional Joint Committee on Taxation approved the final report of an Appeals Office review of matters from tax years 1999-2005. The Company has reserved the right to contest certain items, the resolution of which is not expected to have a material impact on the effective tax rate or the condensed consolidated financial statements.

 

During 2016, the Company expects to reach a conclusion with the U.K. tax authorities on substantially all issues through tax year 2010, the resolution of which is not expected to have a material impact on the effective tax rate or the condensed consolidated financial statements.

 

The Company has established a liability for unrecognized tax benefits that it believes is adequate in relation to the potential for additional assessments. Once established, the Company adjusts liabilities for unrecognized tax benefits only when more information is available or when an event occurs necessitating a change.

 

It is reasonably possible that significant changes in the balance of unrecognized tax benefits may occur within the next 12 months related to certain tax authority examinations referred to above. At this time, however, it is not possible to reasonably estimate the expected change to the total amount of unrecognized tax benefits and the impact on the Company’s effective tax rate over the next 12 months.

 

The Company’s effective tax rate from continuing operations for the quarter ended March 31, 2015 included a net discrete tax benefit of $564 million. This net discrete tax benefit was primarily associated with the repatriation of non-U.S. earnings at a cost lower than originally estimated due to an internal restructuring to simplify the Company’s legal entity organization in the U.K.

 

19.    Segment and Geographic Information.

 

Segment Information.

 

For a discussion about the Company’s business segments, see Note 21 to the consolidated financial statements in the 2015 Form 10-K.

 

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MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

Selected Financial Information.

 

     Three Months Ended March 31, 2016  
     Institutional
Securities(1)
    Wealth
Management
     Investment
Management
    Intersegment
Eliminations
    Total  
     (dollars in millions)  

Total non-interest revenues(2)(3)

   $ 3,645      $ 2,837       $ 478      $ (67   $   6,893   

Interest income

     1,053        914         1        (221     1,747   

Interest expense

     984        83         2        (221     848   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net interest

     69        831         (1            899   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net revenues

   $ 3,714      $ 3,668       $ 477      $ (67   $ 7,792   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

   $ 908      $ 786       $ 44      $      $ 1,738   

Provision for income taxes

     275        293         10               578   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income from continuing operations

     633        493         34               1,160   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Discontinued operations:

           

Income (loss) from discontinued operations before income taxes

     (5                           (5

Provision for (benefit from) income taxes

     (2                           (2
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations

     (3                           (3
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

     630        493         34               1,157   

Net income (loss) applicable to noncontrolling interests

     39                (16            23   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income applicable to Morgan Stanley

   $ 591      $ 493       $ 50      $      $ 1,134   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

     Three Months Ended March 31, 2015  
     Institutional
Securities
    Wealth
Management
     Investment
Management
    Intersegment
Eliminations
    Total  
     (dollars in millions)  

Total non-interest revenues(2)(3)

   $ 5,546      $ 3,145       $ 674      $ (54   $   9,311   

Interest income

     870        737         1        (124     1,484   

Interest expense

     958        48         6        (124     888   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net interest

     (88     689         (5            596   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net revenues

   $ 5,458      $ 3,834       $ 669      $ (54   $ 9,907   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

   $ 1,813      $ 855       $ 187      $      $ 2,855   

Provision for income taxes(4)

     6        320         61               387   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income from continuing operations

     1,807        535         126               2,468   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Discontinued operations:

           

Income (loss) from discontinued operations before income taxes

     (8                           (8

Provision for (benefit from) income taxes

     (3                           (3
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations

     (5                           (5
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

     1,802        535         126               2,463   

Net income applicable to noncontrolling interests

     52                17               69   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income applicable to Morgan Stanley

   $ 1,750      $ 535       $ 109      $      $ 2,394   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

(1)

In accordance with the early adoption of a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities, unrealized DVA gains (losses) in the quarter ended March 31, 2016 are recorded within OCI in the condensed consolidated statements of comprehensive income. See Notes 2 and 14 for further information.

 

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MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

 

(2)

In certain management fee arrangements, the Company is entitled to receive performance-based fees (also referred to as incentive fees and includes carried interest) when the return on assets under management exceeds certain benchmark returns or other performance targets. In such arrangements, performance fee revenues are accrued (or reversed) quarterly based on measuring account/fund performance to date versus the performance benchmark stated in the investment management agreement. The Company’s portion of unrealized cumulative amount of performance-based fee revenue (for which the Company is not obligated to pay compensation) at risk of reversing if fund performance falls below stated investment management agreement benchmarks was approximately $422 million at both March 31, 2016 and December 31, 2015. See Note 11 for information regarding general partner guarantees, which include potential obligations to return performance fee distributions previously received.

(3)

The Company waives a portion of its fees from certain registered money market funds that comply with the requirements of Rule 2a-7 of the Investment Company Act of 1940. These fee waivers resulted in a reduction of fees of approximately $23 million and $50 million, respectively, for the quarters ended March 31, 2016 and 2015.

(4)

The Company’s effective tax rate from continuing operations for the quarter ended March 31, 2015 included a net discrete tax benefit of $564 million within Institutional Securities (see Note 18).

 

Total Assets by Business Segment.

 

     Institutional
Securities
     Wealth
Management
     Investment
Management
     Total(1)  
     (dollars in millions)  

At March 31, 2016

   $     621,644       $     181,087       $ 4,766       $     807,497   

At December 31, 2015

   $ 602,714       $ 179,708       $ 5,043       $ 787,465   

 

(1)

Corporate assets have been fully allocated to the business segments.

 

Geographic Information.

 

For a discussion about the Company’s geographic net revenues, see Note 21 to the consolidated financial statements in the 2015 Form 10-K.

 

Net Revenues by Region.

 

     Three Months Ended  
     March 31,  
     2016      2015  
     (dollars in millions)  

Americas

   $ 5,752       $ 6,930   

EMEA

     1,129         1,762   

Asia-Pacific

     911         1,215   
  

 

 

    

 

 

 

Net revenues

   $     7,792       $     9,907   
  

 

 

    

 

 

 

 

20.    Subsequent Events.

 

The Company has evaluated subsequent events for adjustment to or disclosure in its condensed consolidated financial statements through the date of this report and has not identified any recordable or disclosable events, not otherwise reported in these condensed consolidated financial statements or the notes thereto, except for the following:

 

Common Stock Dividend.

 

On April 18, 2016, the Company announced that its Board of Directors declared a quarterly dividend per common share of $0.15. The dividend is payable on May 13, 2016 to common shareholders of record on April 29, 2016.

 

Long-Term Borrowings.

 

Subsequent to March 31, 2016 and through April 29, 2016, long-term borrowings decreased by approximately $1.2 billion, net of issuances. This amount includes the issuance of $3.5 billion of senior debt on April 21, 2016.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of Morgan Stanley:

 

We have reviewed the accompanying condensed consolidated balance sheet of Morgan Stanley and subsidiaries (the “Company”) as of March 31, 2016, and the related condensed consolidated statements of income and comprehensive income, the condensed consolidated statements of cash flows and changes in total equity for the three-month periods ended March 31, 2016 and 2015. These interim condensed consolidated financial statements are the responsibility of the management of the Company.

 

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial condition of the Company as of December 31, 2015, and the consolidated statements of income, comprehensive income, cash flows and changes in total equity for the year then ended (not presented herein) included in the Company’s Annual Report on Form 10-K; and in our report dated February 23, 2016, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2015 is fairly stated, in all material respects, in relation to the consolidated statement of financial condition from which it has been derived.

 

 

/s/ Deloitte & Touche LLP    

New York, New York

May 4, 2016

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Introduction.

 

Morgan Stanley, a financial holding company, is a global financial services firm that maintains significant market positions in each of its business segments—Institutional Securities, Wealth Management and Investment Management. Morgan Stanley, through its subsidiaries and affiliates, provides a wide variety of products and services to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individuals. Unless the context otherwise requires, the terms “Morgan Stanley” or the “Company” mean Morgan Stanley (the “Parent”) together with its consolidated subsidiaries.

 

A description of the clients and principal products and services of each of the Company’s business segments is as follows:

 

Institutional Securities provides investment banking, sales and trading and other services to corporations, governments, financial institutions, and high-to-ultra high net worth clients. Investment banking services comprise capital raising and financial advisory services, including services relating to the underwriting of debt, equity and other securities as well as advice on mergers and acquisitions, restructurings, real estate and project finance. Sales and trading services include sales, financing and market-making activities in equity securities and fixed income products, including foreign exchange and commodities, as well as prime brokerage services. Other services include corporate lending activities and credit products, investments and research.

 

Wealth Management provides a comprehensive array of financial services and solutions to individual investors and small-to-medium sized businesses and institutions covering brokerage and investment advisory services, market-making activities in fixed income securities, financial and wealth planning services, annuity and insurance products, credit and other lending products, banking and retirement plan services.

 

Investment Management provides a broad range of investment strategies and products that span geographies, asset classes, and public and private markets, to a diverse group of clients across institutional and intermediary channels. Institutional clients include defined benefit/defined contribution pensions, foundations, endowments, government entities, sovereign wealth funds, insurance companies, third-party fund sponsors and corporations. Individual clients are serviced through intermediaries, including affiliated and non-affiliated distributors. Strategies and products comprise traditional asset management, including equity, fixed income, liquidity, alternatives and managed futures products as well as merchant banking and real estate investing.

 

The results of operations in the past have been, and in the future may continue to be, materially affected by competition, risk factors, legislative, legal and regulatory developments, as well as other factors. These factors also may have an adverse impact on the Company’s ability to achieve its strategic objectives. Additionally, the discussion of the Company’s results of operations below may contain forward-looking statements. These statements, which reflect management’s beliefs and expectations, are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of the risks and uncertainties that may affect the Company’s future results, see “Forward-Looking Statements” immediately preceding Part I, Item 1, “Business—Competition” and “Business—Supervision and Regulation” in Part I, Item 1, “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”) and “Liquidity and Capital Resources—Regulatory Requirements” herein.

 

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Executive Summary.

 

Overview of Financial Results.

 

Consolidated Results.

 

   

The Company reported net revenues of $7,792 million in the quarter ended March 31, 2016 (“current quarter”), compared with $9,907 million in the quarter ended March 31, 2015 (“prior year quarter”). For the current quarter, net income applicable to Morgan Stanley was $1,134 million, or $0.55 per diluted common share, compared with income of $2,394 million, or $1.18 per diluted common share, in the prior year quarter.

 

   

The prior year quarter included a net discrete tax benefit of $564 million, or $0.29 per diluted common share primarily associated with the repatriation of non-U.S. earnings at a cost lower than originally estimated and debt valuation adjustments (“DVA”) of $125 million or $0.04 per diluted common share. For a further discussion of the net discrete tax benefit, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.

 

   

Effective January 1, 2016, the Company early adopted a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities that requires unrealized gains and losses from debt-related credit spreads and other credit factors to be presented in Other comprehensive income as opposed to net revenues and net income. Results for 2015 are not restated pursuant to that guidance.

 

   

Net revenues were $7,792 million in the current quarter compared with $9,782 million excluding DVA, in the prior year quarter, and net income applicable to Morgan Stanley was $1,134 million, or $0.55 per diluted common share, in the current quarter compared with $2,314 million excluding DVA, or $1.14 per diluted common share excluding DVA, in the prior year quarter. Excluding both DVA and the net discrete tax benefit, net income applicable to Morgan Stanley was $1,750 million, or $0.85 per diluted common share, in the prior year quarter (see “Selected Non-Generally Accepted Accounting Principles (“Non-GAAP”) Financial Information” herein).

 

Business Segments.

 

   

Institutional Securities net revenues of $3,714 million in the current quarter decreased 32% from the prior year quarter reflecting challenging market conditions in fixed income and commodities sales and trading and underwriting, with strength in equity sales and trading and merger, acquisition and restructuring transactions (“M&A”) advisory.

 

   

Wealth Management net revenues of $3,668 million in the current quarter decreased 4% from the prior year quarter, reflecting weakness in transactional revenues, partially offset by strong growth in net interest income.

 

   

Investment Management net revenues of $477 million in the current quarter decreased 29% from the prior year quarter reflecting losses in private equity and real estate funds and stable asset management fees.

 

Expenses.

 

   

Compensation and benefits expenses of $3,683 million in the current quarter decreased 19% from $4,524 million in the prior year quarter, primarily due to a decrease in discretionary incentive compensation driven mainly by lower revenues, a decrease in fair value of deferred compensation plan referenced investments and carried interest, and lower headcount.

 

   

Non-compensation expenses were $2,371 million in the current quarter compared with $2,528 million in the prior year quarter, representing a 6% decrease, primarily as a result of lower litigation costs.

 

Return on Average Common Equity.

 

   

The annualized return on average common equity was 6.2% in the current quarter. For the prior year quarter, the annualized return on average common equity was 14.1%, or 13.5% excluding DVA, and 10.1% excluding DVA and the net discrete tax benefit.

 

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Selected Financial Information.

 

Business Segment Financial Information and Other Statistical Data.

 

     Three Months Ended  
     March 31,  
         2016             2015      
    

(dollars in millions, except where noted and

per share amounts)

 

Net revenues:

    

Institutional Securities

   $ 3,714      $ 5,458   

Wealth Management

     3,668        3,834   

Investment Management

     477        669   

Intersegment Eliminations

     (67     (54
  

 

 

   

 

 

 

Consolidated net revenues

   $ 7,792      $ 9,907   
  

 

 

   

 

 

 

Income from continuing operations applicable to Morgan Stanley:

    

Institutional Securities

   $ 594      $ 1,755   

Wealth Management

     493        535   

Investment Management

     50        109   
  

 

 

   

 

 

 

Income from continuing operations applicable to Morgan Stanley

   $ 1,137      $ 2,399   

Income (loss) from discontinued operations applicable to Morgan Stanley

     (3     (5
  

 

 

   

 

 

 

Net income applicable to Morgan Stanley

   $ 1,134      $ 2,394   

Preferred stock dividend and other

     79        80   
  

 

 

   

 

 

 

Earnings applicable to Morgan Stanley common shareholders

   $ 1,055      $ 2,314   
  

 

 

   

 

 

 

Earnings per basic common share(1)

   $ 0.56      $ 1.20   

Earnings per diluted common share(1)

   $ 0.55      $ 1.18   

Pre-tax profit margin(2):

    

Institutional Securities

     24     33

Wealth Management

     21     22

Investment Management

     9     28

Consolidated

     22     29

Average common equity (dollars in billions)(3)(4):

    

Institutional Securities

   $ 43.2      $ 37.0   

Wealth Management

     15.3        10.3   

Investment Management

     2.8        2.3   

Parent(3)

     6.9        16.0   
  

 

 

   

 

 

 

Consolidated average common equity

   $ 68.2      $ 65.6   
  

 

 

   

 

 

 

Return on average common equity(3)(4):

    

Institutional Securities

     4.9     18.6

Wealth Management

     12.6     18.9

Investment Management

     6.9     19.4

Consolidated

     6.2     14.1

Regional net revenues(5):

    

Americas

   $ 5,752      $ 6,930   

EMEA

     1,129        1,762   

Asia-Pacific

     911        1,215   
  

 

 

   

 

 

 

Net revenues

   $ 7,792      $ 9,907   
  

 

 

   

 

 

 

Effective income tax rate from continuing operations

     33.3     13.6

 

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     At
March 31,  2016
    At
December 31,  2015
 
    

(dollars in millions, except where noted and

per share amounts)

 

Total loans(6)

   $ 88,802      $ 85,759   

Total assets

   $ 807,497      $ 787,465   

Global Liquidity Reserve managed by bank and non-bank legal entities(7):

    

Bank legal entities

   $ 95,262      $ 94,328   

Non-bank legal entities

     115,807        108,936   
  

 

 

   

 

 

 

Total

   $ 211,069      $ 203,264   
  

 

 

   

 

 

 

Total deposits

   $ 157,591      $ 156,034   

Long-term borrowings

   $ 162,804      $ 153,768   

Maturities of long-term borrowings outstanding (next 12 months)

   $ 26,071      $ 22,396   

Book value per common share(8)

   $ 35.34      $ 35.24   

Capital ratios (Transitional—Advanced)(9):

    

Common Equity Tier 1 capital ratio

     15.6     15.5

Tier 1 capital ratio

     17.4     17.4

Total capital ratio

     20.9     20.7

Capital ratios (Transitional—Standardized)(9):

    

Tier 1 leverage ratio(10)

     8.2     8.3

Assets under management or supervision (dollars in billions)(11):

    

Wealth Management

   $ 787      $ 784   

Investment Management

     405        406   
  

 

 

   

 

 

 

Total

   $ 1,192      $ 1,190   
  

 

 

   

 

 

 

Worldwide employees

     54,779        56,218   

 

Selected Non-Generally Accepted Accounting Principles (“Non-GAAP”) Financial Information.

 

From time to time, the Company may disclose certain “non-GAAP financial measures” in the course of its earnings releases, earnings and other conference calls, financial presentations and otherwise. A “non-GAAP financial measure” excludes, or includes, amounts from the most directly comparable measure calculated and presented in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Non-GAAP financial measures disclosed by the Company are provided as additional information to investors in order to provide them with further transparency about, or as an alternative method for assessing, the Company’s financial condition, operating results or prospective regulatory capital requirements. These measures are not in accordance with, or a substitute for, U.S. GAAP and may be different from or inconsistent with non-GAAP financial measures used by other companies. Whenever the Company refers to a non-GAAP financial measure, the Company will also generally define it or present the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, along with a reconciliation of the differences between the non-GAAP financial measure and the U.S. GAAP financial measure.

 

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Reconciliation of Financial Measures from a Non-GAAP to a U.S. GAAP Basis.

 

     Three Months Ended
March 31,
 
     2016     2015  
     (dollars in millions, except per
share amounts)
 

Net revenues

    

Net revenues—non-GAAP

   $ 7,792      $ 9,782   

Impact of DVA(12)

            125   
  

 

 

   

 

 

 

Net revenues—U.S. GAAP

   $ 7,792      $ 9,907   
  

 

 

   

 

 

 

Net income applicable to Morgan Stanley

    

Net income applicable to Morgan Stanley, excluding DVA and net discrete tax benefits—non-GAAP

   $ 1,134      $ 1,750   

Impact of net discrete tax benefits(13)

            564   
  

 

 

   

 

 

 

Net income applicable to Morgan Stanley, excluding DVA—non-GAAP

   $ 1,134      $ 2,314   

Impact of DVA(12)

            80   
  

 

 

   

 

 

 

Net income applicable to Morgan Stanley—U.S. GAAP

   $ 1,134      $ 2,394   
  

 

 

   

 

 

 

Earnings per diluted common share

    

Earnings per diluted common share, excluding DVA and net discrete tax benefits—non-GAAP

   $ 0.55      $ 0.85   

Impact of net discrete tax benefits(13)

            0.29   
  

 

 

   

 

 

 

Earnings per diluted common share, excluding DVA—non-GAAP

   $ 0.55      $ 1.14   

Impact of DVA(12)

            0.04   
  

 

 

   

 

 

 

Earnings per diluted common share—U.S. GAAP

   $ 0.55      $ 1.18   
  

 

 

   

 

 

 

Effective income tax rate

    

Effective income tax rate from continuing operations—non-GAAP

     33.3     33.3

Impact of net discrete tax benefits(13)

            (19.7)

Effective income tax rate from continuing operations—U.S. GAAP

     33.3     13.6

 

Average common equity, return on average common equity, average tangible common equity, return on average tangible common equity and tangible book value per common share are all non-GAAP financial measures the Company considers to be useful measures to the Company and investors to assess capital adequacy and to allow better comparability of period-to-period operating performance. For a discussion of tangible common equity, see “Liquidity and Capital Resources—Tangible Equity” herein.

 

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Non-GAAP Financial Measures.

 

     Three Months Ended
March 31,
 
     2016      2015  
     (dollars in millions)  

Average common equity(4)(14)

     

Average common equity, excluding DVA and net discrete tax benefits

   $ 68,331       $ 66,253   

Average common equity, excluding DVA

   $ 68,331       $ 66,394   

Average common equity

   $ 68,187       $ 65,590   

Return on average common equity(4)

     

Return on average common equity, excluding DVA and net discrete tax benefits

     6.2%         10.1%   

Return on average common equity, excluding DVA

     6.2%         13.5%   

Return on average common equity

     6.2%         14.1%   

Average tangible common equity(14)

     

Average tangible common equity, excluding DVA and net discrete tax benefits

   $ 58,807       $ 56,550   

Average tangible common equity, excluding DVA

   $ 58,807       $ 56,691   

Average tangible common equity

   $ 58,663       $ 55,888   

Return on average tangible common equity(15)

     

Return on average tangible common equity, excluding DVA and net discrete tax benefits

     7.2%         11.8%   

Return on average tangible common equity, excluding DVA

     7.2%         15.8%   

Return on average tangible common equity

     7.2%         16.6%   

 

     At
March 31,  2016
     At
December 31,  2015
 

Tangible book value per common share(16)

   $ 30.44       $ 30.26   

 

EMEA—Europe, Middle East and Africa.

DVA—Debt valuation adjustments represent the change in the fair value resulting from fluctuations in the Company’s credit spreads and other credit factors related to liabilities carried at fair value, primarily certain Long-term and Short-term borrowings.

(1)

For the calculation of basic and diluted earnings per common share, see Note 15 to the condensed consolidated financial statements in Item 1.

(2)

Pre-tax profit margin is a non-GAAP financial measure that the Company considers to be a useful measure to the Company and investors to assess operating performance and represents income from continuing operations before income taxes as a percentage of net revenues.

(3)

Average common equity for each business segment is determined using the Company’s Required Capital framework, an internal capital adequacy measure (see “Liquidity and Capital Resources—Regulatory Requirements—Attribution of Average Common Equity according to the Required Capital Framework” herein). Effective January 1, 2016, the common equity estimation and attribution to the business segments are based on the Company’s fully phased-in regulatory capital, including supplementary leverage and stress losses (which results in more capital being attributed to the business segments), whereas prior periods were attributed based on transitional regulatory capital provisions. Also, beginning in 2016, the amount of capital allocated to the business segments will be set at the beginning of each year, and will remain fixed throughout the year, until the next annual reset. Differences between available and Required Capital will be reflected in Parent equity during the year. Periods prior to 2016 have not been recast under the new methodology. Each business segment’s return on average common equity equals net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity for that segment. Effective tax rates used in the computation are determined on a separate legal entity basis. Average common equity and the return on average common equity for each business segment are non-GAAP financial measures that the Company considers useful for the Company and investors in assessing capital adequacy and to allow better comparability of period-to-period operating performance.

(4)

Return on average common equity equals consolidated net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity. Effective January 1, 2016, as a result of the adoption of a provision of the accounting update related to DVA, the Company has redefined the calculation of the return on average common equity

 

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excluding DVA to adjust for DVA only in the denominator. Prior to January 1, 2016, for the return on average common equity, excluding DVA, and excluding DVA and net discrete tax benefits, both the numerator and denominator were adjusted to exclude those items. Average common equity, the return on average common equity, and average common equity and the return on average common equity, both excluding DVA, and excluding DVA and net discrete tax benefits, are non-GAAP financial measures that the Company considers useful for the Company and investors in assessing capital adequacy and to allow better comparability of period-to-period operating performance.

(5)

For a discussion of how the geographic breakdown for net revenues is determined, see Note 21 to the consolidated financial statements in Item 8 of the 2015 Form 10-K.

(6)

Amounts include loans held for investment (net of allowance) and loans held for sale but exclude loans at fair value, which are included in Trading assets in the condensed consolidated balance sheet (see Note 7 to the condensed consolidated financial statements in Item 1).

(7)

For a discussion of Global Liquidity Reserve, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management Framework—Global Liquidity Reserve” in Part II, Item 7 of the 2015 Form 10-K.

(8)

Book value per common share equals common shareholders’ equity of $68,490 million at March 31, 2016 and $67,662 million at December 31, 2015 divided by common shares outstanding of 1,938 million at March 31, 2016 and 1,920 million at December 31, 2015.

(9)

For a discussion of the Company’s regulatory capital ratios, see “Liquidity and Capital Resources—Regulatory Requirements” herein.

(10)

See Note 13 to the condensed consolidated financial statements in Item 1 for information on the Tier 1 leverage ratio.

(11)

Amounts exclude the Investment Management business segment’s proportionate share of assets managed by entities in which it owns a minority stake and assets for which fees are not generated.

(12)

In accordance with the early adoption of a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities, unrealized DVA gains (losses) in the current quarter are recorded within Other Comprehensive income (loss) (“OCI”) in the condensed consolidated statements of comprehensive income. In the prior year quarter, the DVA gains (losses) were recorded within Trading revenues in the condensed consolidated statements of income. See Notes 2 and 14 to the condensed consolidated financial statements in Item 1 for further information.

(13)

For a discussion of the Company’s net discrete tax benefit, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.

(14)

The impact of DVA on average common equity and average tangible common equity was approximately $(144) million and $(803) million in the current quarter and prior year quarter, respectively. The impact of the net discrete tax benefit on average common equity and average tangible common equity was approximately $141 million in the prior year quarter.

(15)

Return on average tangible common equity equals net income applicable to Morgan Stanley less preferred dividends as a percentage of average tangible common equity. Effective January 1, 2016, as a result of the adoption of a provision of the accounting update related to DVA, the Company has redefined the calculation of return on average tangible common equity excluding DVA to adjust for DVA only in the denominator. Prior to January 1, 2016, for the return on average tangible common equity, excluding DVA, and excluding DVA and net discrete tax benefits, both the numerator and the denominator were adjusted to exclude the impact of DVA and the impact of net discrete tax benefits. The impact of DVA was 0.8% in the prior year quarter. The impact of the net discrete tax benefit was 4.0% in the prior year quarter.

(16)

Tangible book value per common share equals tangible common equity of $58,999 million at March 31, 2016 and $58,098 million at December 31, 2015 divided by common shares outstanding of 1,938 million at March 31, 2016 and 1,920 million at December 31, 2015.

 

Return on Equity Target.

 

The Company is aiming to improve its return to shareholders, and accordingly has established a target return on average common equity excluding DVA (“Return on Equity”) to be achieved by 2017, subject to the successful execution of its strategic objectives. For further information on the Company’s Return on Equity target and related assumptions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—Return on Equity Target” in Part II, Item 7 of the 2015 Form 10-K.

 

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Business Segments.

 

Substantially all of the Company’s operating revenues and operating expenses are directly attributable to its business segments. Certain revenues and expenses have been allocated to each business segment, generally in proportion to its respective net revenues, non-interest expenses or other relevant measures.

 

As a result of treating certain intersegment transactions as transactions with external parties, the Company includes an Intersegment Eliminations category to reconcile the business segment results to its consolidated results.

 

Net Revenues.

 

For discussions of the Company’s net revenues, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Net Revenues” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Net Revenues by Segments” in Part II, Item 7 of the 2015 Form 10-K.

 

Compensation Expense.

 

For a discussion of the Company’s compensation expense, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Compensation Expense” in Part II, Item 7 of the 2015 Form 10-K.

 

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INSTITUTIONAL SECURITIES

 

INCOME STATEMENT INFORMATION

 

     Three Months Ended
March 31,
    % Change
from Prior Year
 
         2016             2015        
     (dollars in millions)        

Revenues:

      

Investment banking

   $ 990      $ 1,173        (16)%   

Trading

     1,891        3,422        (45)%   

Investments

     32        112        (71)%   

Commissions and fees

     655        673        (3)%   

Asset management, distribution and administration fees

     73        76        (4)%   

Other

     4        90        (96)%   
  

 

 

   

 

 

   

Total non-interest revenues

     3,645        5,546        (34)%   
  

 

 

   

 

 

   

Interest income

     1,053        870        21%   

Interest expense

     984        958        3%   
  

 

 

   

 

 

   

Net interest

     69        (88     N/M   
  

 

 

   

 

 

   

Net revenues

     3,714        5,458        (32)%   
  

 

 

   

 

 

   

Compensation and benefits

     1,382        2,026        (32)%   

Non-compensation expenses

     1,424        1,619        (12)%   
  

 

 

   

 

 

   

Total non-interest expenses

     2,806        3,645        (23)%   
  

 

 

   

 

 

   

Income from continuing operations before income taxes

     908        1,813        (50)%   

Provision for income taxes

     275        6        N/M   
  

 

 

   

 

 

   

Income from continuing operations

     633        1,807        (65)%   
  

 

 

   

 

 

   

Discontinued operations:

      

Income (loss) from discontinued operations before income taxes

     (5     (8     38%   

Provision for (benefit from) income taxes

     (2     (3     33%   
  

 

 

   

 

 

   

Income (loss) from discontinued operations

     (3     (5     40%   
  

 

 

   

 

 

   

Net income

     630        1,802        (65)%   

Net income applicable to noncontrolling interests

     39        52        (25)%   
  

 

 

   

 

 

   

Net income applicable to Morgan Stanley

   $ 591      $ 1,750        (66)%   
  

 

 

   

 

 

   

Amounts applicable to Morgan Stanley:

      

Income from continuing operations

   $ 594      $ 1,755        (66)%   

Income (loss) from discontinued operations

     (3     (5     40%   
  

 

 

   

 

 

   

Net income applicable to Morgan Stanley

   $ 591      $ 1,750        (66)%   
  

 

 

   

 

 

   

 

N/M—Not Meaningful.

 

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Investment Banking.

 

Investment banking revenues are composed of fees from advisory services and revenues from the underwriting of securities offerings and syndication of loans, net of syndication expenses.

 

Investment Banking Revenues.

 

     Three Months Ended
March 31,
     % Change
from Prior Year
 
         2016              2015         
     (dollars in millions)         

Advisory revenues

   $ 591       $ 471         25%   

Underwriting revenues:

        

Equity underwriting revenues

     160         307         (48)%   

Fixed income underwriting revenues

     239         395         (39)%   
  

 

 

    

 

 

    

Total underwriting revenues

     399         702         (43)%   
  

 

 

    

 

 

    

Total investment banking revenues

   $ 990       $ 1,173         (16)%   
  

 

 

    

 

 

    

 

Investment Banking Volumes.

 

     Three Months Ended
March  31,
 
         2016(1)              2015(1)      
     (dollars in billions)  

Completed mergers and acquisitions(2)

   $ 290       $ 126   

Equity and equity-related offerings(3)

     7         19   

Fixed income offerings(4)

     51         74   

 

(1)

Source: Thomson Reuters, data at April 14, 2016. Completed mergers and acquisitions volumes are based on full credit to each of the advisors in a transaction. Equity and equity-related offerings and fixed income offerings are based on full credit for single book managers and equal credit for joint book managers. Transaction volumes may not be indicative of net revenues in a given period. In addition, transaction volumes for prior periods may vary from amounts previously reported due to the subsequent withdrawal or change in the value of a transaction.

(2)

Amounts include transactions of $100 million or more.

(3)

Amounts include Rule 144A issuances and registered public offerings of common stock and convertible securities and rights offerings.

(4)

Amounts include non-convertible preferred stock, mortgage-backed and asset-backed securities, and taxable municipal debt. Amounts include publicly registered and Rule 144A issues. Amounts exclude leveraged loans and self-led issuances.

 

Investment banking revenues of $990 million in the current quarter decreased 16% from the prior year quarter due to lower underwriting revenues, partially offset by higher advisory revenues.

 

   

Advisory revenues increased due to higher completed M&A activity. Completed M&A volume activity increased from the prior year quarter (see Investment Banking Volumes table above).

 

   

Equity underwriting revenues decreased reflecting significantly lower market volumes. Fixed income underwriting revenues decreased primarily reflecting lower bond fees.

 

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Sales and Trading Net Revenues.

 

Sales and Trading Net Revenues.

 

     Three Months Ended
March 31,
    % Change
from Prior Year
 
         2016              2015        
     (dollars in millions)        

Trading

   $ 1,891       $ 3,422        (45)%   

Commissions and fees

     655         673        (3)%   

Asset management, distribution and administration fees

     73         76        (4)%   

Net interest

     69         (88     N/M       
  

 

 

    

 

 

   

Total sales and trading net revenues

   $ 2,688       $ 4,083        (34)%   
  

 

 

    

 

 

   

 

N/M—Not

Meaningful.

 

Sales and Trading Net Revenues by Business.

 

     Three Months Ended
March 31,
    % Change
from Prior Year
 
         2016             2015        
     (dollars in millions)        

Equity

   $ 2,056      $ 2,293        (10)%   

Fixed income and commodities

     873        2,003        (56)%   

Other

     (241     (213     (13)%   
  

 

 

   

 

 

   

Total sales and trading net revenues

   $ 2,688      $ 4,083        (34)%   
  

 

 

   

 

 

   

 

Sales and Trading Net Revenues, Excluding DVA in 2015.

 

Sales and trading net revenues, including equity and fixed income and commodities sales and trading net revenues that exclude the impact of DVA in 2015, are non-GAAP financial measures that the Company considers useful for the Company and investors to allow further comparability of period-to-period operating performance.

 

     Three Months Ended
March 31,
     % Change
from Prior Year
 
         2016              2015         
     (dollars in millions)         

Total sales and trading net revenues—non-GAAP

   $ 2,688       $ 3,958         (32)%   

Impact of DVA(1)

             125         (100)%   
  

 

 

    

 

 

    

Total sales and trading net revenues

   $ 2,688       $ 4,083         (34)%   
  

 

 

    

 

 

    

Equity sales and trading net revenues—non-GAAP

   $ 2,056       $ 2,268         (9)%   

Impact of DVA(1)

             25         (100)%   
  

 

 

    

 

 

    

Equity sales and trading net revenues

   $ 2,056       $ 2,293         (10)%   
  

 

 

    

 

 

    

Fixed income and commodities sales and trading net revenues—non-GAAP

   $ 873       $ 1,903         (54)%   

Impact of DVA(1)

             100         (100)%   
  

 

 

    

 

 

    

Fixed income and commodities sales and trading net revenues

   $ 873       $ 2,003         (56)%   
  

 

 

    

 

 

    

 

(1)

In accordance with the early adoption of a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities, unrealized DVA gains (losses) in the current quarter are recorded within OCI in the condensed consolidated statements of comprehensive income. In the prior year quarter, the DVA gains (losses) were recorded within Trading revenues in the condensed consolidated statements of income. See Notes 2 and 14 to the condensed consolidated financial statements in Item 1 for further information.

 

Total sales and trading net revenues of $2,688 million in the current quarter decreased 34% from the prior year quarter due to lower equity, fixed income and commodities revenues.

 

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Equity.

 

   

Equity sales and trading net revenues of $2,056 million, a decrease from the prior year quarter primarily reflecting declines in cash equities in volatile global equity markets, partly offset by continued strength in prime brokerage as a result of increased client activity.

 

Fixed Income and Commodities.

 

   

Fixed income and commodities net revenues of $873 million decreased from the prior year quarter. Lower commodities results primarily reflect the absence of revenues from the global oil merchanting business, which was sold on November 1, 2015, and the depressed energy price environment. Lower fixed income results reflect lower levels of client activity in rates and foreign exchange and a challenging credit environment. In the prior year quarter, fixed income and commodities results included a DVA gain of $100 million. For more information on the sale of the global oil merchanting business, see “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Business Segments—Institutional Securities—Investments, Other Revenues, Non-interest Expenses, Income Tax Items, Dispositions and Other Items—2015 Compared with 2014—Dispositions” in Part II, Item 7 of the 2015 Form 10-K.

 

Investments, Other Revenues, Non-interest Expenses and Other Items.

 

Investments.

 

   

Net investment gains of $32 million in the current quarter decreased 71% from the prior year quarter primarily reflecting losses on investments associated with the Company’s compensation plans and lower gains on principal investments in real estate.

 

Other.

 

   

Other revenues of $4 million in the current quarter decreased 96% from the prior year quarter primarily due to an increase in the allowance for losses on loans held for investment, mark-to-market losses on loans and commitments held for sale and lower results related to the Company’s 40% stake in Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (“MUMSS”) (see Note 8 to the condensed consolidated financial statements in Item 1 for further information).

 

Non-interest Expenses.

 

Non-interest expenses of $2,806 million in the current quarter decreased 23% from the prior year quarter driven by a 32% reduction in Compensation and benefits expenses and a 12% reduction in Non-compensation expenses.

 

   

Compensation and benefits expenses decreased in the current quarter primarily due to a decrease in discretionary incentive compensation driven mainly by lower revenues, a decrease in fair value of deferred compensation plan referenced investments and lower headcount.

 

   

Non-compensation expenses decreased primarily due to lower litigation costs.

 

Noncontrolling Interests.

 

Noncontrolling interests primarily relate to Mitsubishi UFJ Financial Group, Inc.’s interest in Morgan Stanley MUFG Securities Co., Ltd. (“MSMS”).

 

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WEALTH MANAGEMENT

 

INCOME STATEMENT INFORMATION

 

     Three Months Ended
March 31,
     % Change
from Prior Year
 
         2016             2015         
     (dollars in millions)         

Revenues:

       

Investment banking

   $ 121      $ 192         (37)%   

Trading

     194        232         (16)%   

Investments

     (2     2         N/M   

Commissions and fees

     412        526         (22)%   

Asset management, distribution and administration fees

     2,054        2,115         (3)%   

Other

     58        78         (26)%   
  

 

 

   

 

 

    

Total non-interest revenues

     2,837        3,145         (10)%   
  

 

 

   

 

 

    

Interest income

     914        737         24%   

Interest expense

     83        48         73%   
  

 

 

   

 

 

    

Net interest

     831        689         21%   
  

 

 

   

 

 

    

Net revenues

     3,668        3,834         (4)%   
  

 

 

   

 

 

    

Compensation and benefits

     2,088        2,225         (6)%   

Non-compensation expenses

     794        754         5%   
  

 

 

   

 

 

    

Total non-interest expenses

     2,882        2,979         (3)%   
  

 

 

   

 

 

    

Income from continuing operations before income taxes

     786        855         (8)%   

Provision for income taxes

     293        320         (8)%   
  

 

 

   

 

 

    

Income from continuing operations

     493        535         (8)%   
  

 

 

   

 

 

    

Discontinued operations:

       

Income (loss) from discontinued operations before income taxes

                      

Provision for (benefit from) income taxes

                      
  

 

 

   

 

 

    

Income (loss) from discontinued operations

                      
  

 

 

   

 

 

    

Net income

     493        535         (8)%   

Net income applicable to noncontrolling interests

                      
  

 

 

   

 

 

    

Net income applicable to Morgan Stanley

   $ 493      $ 535         (8)%   
  

 

 

   

 

 

    

Amounts applicable to Morgan Stanley:

       

Income from continuing operations

   $ 493      $ 535         (8)%   

Income (loss) from discontinued operations

                      
  

 

 

   

 

 

    

Net income applicable to Morgan Stanley

   $ 493      $ 535         (8)%   
  

 

 

   

 

 

    

 

N/M—Not

Meaningful.

 

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Net Revenues.

 

Transactional Revenues.

 

     Three Months
Ended March 31,
     % Change
from Prior Year
 
         2016              2015             
     (dollars in millions)         

Investment banking

   $ 121       $ 192         (37)%   

Trading

     194         232         (16)%   

Commissions and fees

     412         526         (22)%   
  

 

 

    

 

 

    

Transactional revenues

   $ 727       $ 950         (23)%   
  

 

 

    

 

 

    

 

Transactional revenues of $727 million in the current quarter decreased 23% from the prior year quarter due to lower revenues in each of Investment banking, Trading and Commissions and fees.

 

   

Investment banking revenues decreased primarily due to reduced levels of underwriting activity.

 

   

Trading revenues decreased primarily due to losses related to investments associated with certain employee deferred compensation plans.

 

   

Commissions and fees decreased primarily due to lower client activity from equity and mutual fund products and alternatives asset classes.

 

Asset Management.

 

   

Asset management, distribution and administration fees of $2,054 million in the current quarter decreased 3% from the prior year quarter primarily due to lower fees from mutual funds reflecting the impact of lower average asset levels and lower average fee rates related to fee-based accounts. (see “Statistical Data” herein).

 

Net Interest.

 

   

Net interest of $831 million in the current quarter increased 21% from the prior year quarter primarily due to higher deposit and loan balances.

 

Other.

 

   

Other revenues of $58 million in the current quarter decreased 26% from the prior year quarter primarily due to lower realized gains from the available for sale (“AFS”) securities portfolio.

 

Non-interest Expenses.

 

Non-interest expenses of $2,882 million in the current quarter decreased 3% from the prior year quarter primarily due to lower Compensation and benefit expenses partially offset by higher Non-compensation expenses.

 

   

Compensation and benefits expenses decreased primarily due to a decrease in the fair value of deferred compensation plan referenced investments and the decrease in formulaic payout to Wealth Management representatives linked to lower net revenues.

 

   

Non-compensation expenses increased primarily due to higher litigation costs and professional services fees.

 

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Other Items.

 

U.S. Department of Labor Conflict of Interest Rule.

 

In April 2016, the U.S. Department of Labor adopted a conflict of interest rule under the Employee Retirement Income Security Act of 1974 that broadens the circumstances under which a firm is considered a fiduciary when transacting with retail investment accounts and sets forth requirements to ensure that advice given by broker-dealers acting as investment advice fiduciaries is impartial. The new fiduciary standard for investment advice will apply on April 10, 2017 and full compliance is required by January 1, 2018. While the Company is still in the process of reviewing the final rule, given the breadth and scale of the Company’s platform and continued investment in technology, the Company believes that it will be able to provide compliant solutions to meet its clients’ investment needs (see also “Business—Supervision and Regulation—Institutional Securities and Wealth Management—Broker-Dealer and Investment Adviser Regulation” in Part I, Item 1 of the 2015 Form 10-K).

 

Statistical Data.

 

Financial Information and Statistical Data (dollars in billions, except where noted).

 

     At
March 31,
2016
    At
December 31,
2015
 

Client assets

   $ 1,999      $ 1,985   

Fee-based client assets(1)

   $ 798      $ 795   

Fee-based client assets as a percentage of total client assets

     40     40

Client liabilities(2)

   $ 66      $ 64   

Bank deposit program

   $ 152      $ 149   

Investment securities portfolio

   $ 61.8      $ 57.9   

Loans and lending commitments

   $ 58.2      $ 55.3   

Wealth Management representatives

     15,888        15,889   

Retail locations

     604        608   
     Three Months Ended
March 31,
 
     2016     2015  

Annualized revenues per representative (dollars in thousands)(3)

   $ 923      $ 959   

Client assets per representative (dollars in millions)(4)

   $ 126      $ 129   

Fee-based asset flows(5)

   $ 5.9      $ 13.3   

 

(1)

Fee-based client assets represent the amount of assets in client accounts where the basis of payment for services is a fee calculated on those assets.

(2)

Client liabilities include securities-based and tailored lending, home loans and margin lending.

(3)

Annualized revenues per representative equal the Wealth Management business segment’s annualized revenues divided by the average representative headcount.

(4)

Client assets per representative equal total period-end client assets divided by period-end representative headcount.

(5)

Fee-based asset flows include net new fee-based assets, net account transfers, dividends, interest and client fees and exclude cash management-related activity.

 

Total client liability balances increased to $66 billion at March 31, 2016 from $64 billion at December 31, 2015, primarily due to growth in Liquidity Access Line (“LAL”) securities-based lending product and residential real estate loans. The loans and lending commitments in the Wealth Management business segment continued to grow in the current quarter, and the Company expects this trend to continue. See “Supplemental Financial Information and Disclosures—U.S. Bank Subsidiaries Lending Activities” herein and “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Lending Activities” in Item 3.

 

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Fee-Based Client Assets.

 

For a description of fee-based client assets, including descriptions for the fee-based client asset types and rollforward items in the following tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Wealth Management—Fee-Based Client Assets” in Part II, Item 7 of the 2015 Form 10-K.

 

Fee-Based Client Assets Activity and Average Fee Rate by Account Type.

 

     At
December  31,

2015
     Inflows      Outflows     Market
Impact
    At
March  31,

2016
     Average for the
Three Months Ended
March 31, 2016
                            Fee Rate             
     (dollars in billions)      (in bps)

Separately managed accounts(1)

   $ 283       $ 9       $ (10   $ (4   $ 278       32

Unified managed accounts

     105         10         (5     2        112       110

Mutual fund advisory

     25                 (1            24       121

Representative as advisor

     115         6         (7            114       88

Representative as portfolio manager

     252         15         (11     (1     255       102
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

Subtotal

   $ 780       $ 40       $ (34   $ (3   $ 783       75

Cash management

     15         2         (2            15       6
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

Total fee-based client assets

   $ 795       $     42       $     (36   $     (3   $ 798       73
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

     At
December  31,

2014
     Inflows      Outflows     Market
Impact
    At
March  31,

2015
     Average for the
Three Months Ended
March 31, 2015
                            Fee Rate             
     (dollars in billions)      (in bps)

Separately managed accounts(1)

   $ 285       $ 11       $ (7   $ (2   $ 287       35

Unified managed accounts

     93         8         (4     2        99       115

Mutual fund advisory

     31                 (2     1        30       121

Representative as advisor

     119         9         (8     1        121       89

Representative as portfolio manager

     241         16         (10     3        250       105
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

Subtotal

   $ 769       $ 44       $ (31   $ 5      $ 787       77

Cash management

     16         3         (3            16       6
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

Total fee-based client assets

   $ 785       $     47       $     (34   $     5      $     803       75
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

bps—Basis points.

(1)

Includes non-custody account values reflecting prior quarter-end balances due to a lag in the reporting of asset values by third-party custodians.

 

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INVESTMENT MANAGEMENT

 

INCOME STATEMENT INFORMATION

 

     Three Months Ended
March 31,
    % Change
from Prior Year
 
         2016             2015        
     (dollars in millions)        

Revenues:

      

Investment banking

   $ 1      $        N/M   

Trading

     (10     3        N/M   

Investments

     (64     152        (142)%   

Commissions and fees

     3               N/M   

Asset management, distribution and administration fees

     526        514        2%   

Other

     22        5        N/M   
  

 

 

   

 

 

   

Total non-interest revenues

     478        674        (29)%   
  

 

 

   

 

 

   

Interest income

     1        1          

Interest expense

     2        6        (67)%   
  

 

 

   

 

 

   

Net interest

     (1     (5     80%   
  

 

 

   

 

 

   

Net revenues

     477        669        (29)%   
  

 

 

   

 

 

   

Compensation and benefits

     213        273        (22)%   

Non-compensation expenses

     220        209        5%   
  

 

 

   

 

 

   

Total non-interest expenses

     433        482        (10)%   
  

 

 

   

 

 

   

Income from continuing operations before income taxes

     44        187        (76)%   

Provision for income taxes

     10        61        (84)%   
  

 

 

   

 

 

   

Income from continuing operations

     34        126        (73)%   
  

 

 

   

 

 

   

Discontinued operations:

      

Income from discontinued operations before income taxes

                     

Provision for (benefit from) income taxes

                     
  

 

 

   

 

 

   

Income from discontinued operations

                     
  

 

 

   

 

 

   

Net income

     34        126        (73)%   

Net income applicable to noncontrolling interests

     (16     17        (194)%   
  

 

 

   

 

 

   

Net income applicable to Morgan Stanley

   $ 50      $ 109        (54)%   
  

 

 

   

 

 

   

Amounts applicable to Morgan Stanley:

      

Income from continuing operations

   $ 50      $ 109        (54)%   

Income from discontinued operations

                     
  

 

 

   

 

 

   

Net income applicable to Morgan Stanley

   $ 50      $ 109        (54)%   
  

 

 

   

 

 

   

 

N/M—Not

Meaningful.

 

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Net Revenues.

 

Investments.

 

   

Investments losses were $64 million in the current quarter compared with gains of $152 million in the prior year quarter reflecting investment markdowns and the reversal of previously accrued carried interest in certain private equity and real estate funds.

 

Asset Management, Distribution and Administration Fees.

 

   

Asset management, distribution and administration fees of $526 million in the current quarter were relatively unchanged from the prior year quarter.

 

Other.

 

   

Other revenues were $22 million in the current quarter compared to $5 million from the prior year quarter due to higher net revenues associated with the Company’s minority interest investments in certain third-party investment managers.

 

Non-interest Expenses.

 

Non-interest expenses of $433 million in the current quarter decreased 10% from the prior year quarter primarily due to lower Compensation and benefit expenses partially offset by higher Non-compensation expenses.

 

   

Compensation and benefits expenses decreased primarily due to the decrease in deferred compensation associated with carried interest.

 

   

Non-compensation expenses increased primarily due to higher brokerage and clearing expenses related to liquidity products.

 

Other Items.

 

Noncontrolling Interests.

 

Noncontrolling interests in the current quarter of $(16) million are primarily related to the consolidation of certain merchant banking funds sponsored by the Company, whereas noncontrolling interests in the prior year quarter of $17 million were primarily related to the consolidation of certain real estate funds sponsored by the Company. See Note 2 to the condensed consolidated financial statements in Item 1 for further information on the adoption of the accounting update Amendments to the Consolidation Analysis.

 

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Statistical Data.

 

Assets Under Management or Supervision and Average Fee Rate by Asset Class.

 

    At
December  31,

2015
    Inflows     Outflows     Distributions     Market
Impact
    Foreign
Currency

Impact
    At March 31,
2016
    Average for the
Three Months Ended
March 31,
2016
 
                  AUM     Fee Rate  
    (dollars in billions)     (in bps)  

Traditional Asset Management:

                 

Equity

  $ 126      $ 7      $ (9   $      $      $ 1      $ 125      $ 122        69   

Fixed income

    60        5        (6            2        1        62        60        32   

Liquidity

    149        336        (338            (1            146        149        17   

Alternatives(1)

    36        1        (1            (1            35        36        57   

Managed Futures

    3                                           3        3        111   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total Traditional Asset Management

    374        349        (354                   2        371        370        41   

Merchant Banking and Real Estate Investing(1)

    32        2                                    34        33        121   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total assets under management or supervision

  $ 406      $ 351      $ (354   $      $      $ 2      $ 405      $     403        48   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Shares of minority stake assets

    8                  8        8     

 

    At
December  31,

2014
    Inflows     Outflows     Distributions     Market
Impact
    Foreign
Currency

Impact
    At March 31,
2015
    Average for the
Three Months Ended
March 31,
2015
 
                  AUM     Fee Rate  
    (dollars in billions)     (in bps)  

Traditional Asset Management:

                 

Equity

  $ 141      $ 8      $ (10   $      $ 4      $ (2   $ 141      $ 142        70   

Fixed income

    65        7        (6            1        (2     65        65        31   

Liquidity

    128        283        (280            1        (1     131        127        8   

Alternatives(1)

    36                                           36        36        64   

Managed Futures

    3                                           3        3        114   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total Traditional Asset Management

    373        298        (296            6        (5     376        373        42   

Merchant Banking and Real Estate Investing(1)

    30        1        (1     (1     1               30        31        102   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total assets under management or supervision

  $ 403      $ 299      $ (297   $ (1   $ 7      $ (5   $ 406      $     404        47   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Shares of minority stake assets

    7                  7        7     

 

AUM—Assets

under management.

bps—Basis

points.

(1)

Assets under management or supervision for Merchant Banking and Real Estate Investing and Alternatives reflect the basis on which management fees are earned. This calculation excludes AUM where no management fees are earned or where the fair value of these assets, including lending commitments, differs from the basis on which management fees are earned. Including these assets, AUM at March 31, 2016 and March 31, 2015 for Merchant Banking and Real Estate Investing were $45 billion and $40 billion, respectively, and for Alternatives were $38 billion and $39 billion, respectively.

 

For a description of the rollforward items in the above tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Investment Management—Statistical Data” in Part II, Item 7 of the 2015 Form 10-K.

 


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Supplemental Financial Information and Disclosures.

 

U.S. Bank Subsidiaries.

 

The Company provides loans to a variety of customers, from large corporate and institutional clients to high net worth individuals, primarily through its U.S. bank subsidiaries, Morgan Stanley Bank, N.A. (“MSBNA”) and Morgan Stanley Private Bank, National Association (“MSPBNA”) (collectively, “U.S. Bank Subsidiaries”). The lending activities in the Institutional Securities business segment primarily include loans or lending commitments to corporate clients. The lending activities in the Wealth Management business segment primarily include securities-based lending that allows clients to borrow money against the value of qualifying securities and also include residential real estate loans. The Company expects its lending activities to continue to grow through further penetration of the Institutional Securities and Wealth Management business segments’ client base. For a further discussion of the Company’s credit risks, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk” in Item 3. For further discussion about loans and lending commitments, see Notes 7 and 11 to the condensed consolidated financial statements in Item 1.

 

U.S. Bank Subsidiaries’ Supplemental Financial Information Excluding Transactions with Affiliated Entities.

 

     At March 31, 2016      At December 31, 2015  
     (dollars in billions)  

U.S. Bank Subsidiaries assets

   $ 177.0       $ 174.2   

U.S. Bank Subsidiaries investment securities portfolio(1)

     61.8         57.9   

Wealth Management U.S. Bank Subsidiaries data:

     

Securities-based lending and other loans(2)

   $ 30.0       $ 28.6   

Residential real estate loans

     21.8         20.9   
  

 

 

    

 

 

 

Total

   $ 51.8       $ 49.5   
  

 

 

    

 

 

 

Institutional Securities U.S. Bank Subsidiaries data:

     

Corporate loans

   $ 23.9       $ 22.9   

Wholesale real estate loans

     8.3         8.9   
  

 

 

    

 

 

 

Total

   $ 32.2       $ 31.8   
  

 

 

    

 

 

 

 

(1)

The U.S. Bank Subsidiaries investment securities portfolio includes AFS investment securities of $54.1 billion at March 31, 2016 and $53.0 billion at December 31, 2015. The remaining balance represents held to maturity investment securities of $7.7 billion at March 31, 2016 and $4.9 billion at December 31, 2015.

(2)

Other loans primarily include tailored lending.

(3)

Other lending includes activities related to commercial and residential mortgage lending, asset-backed lending, corporate loans purchased in the secondary market, financing extended to equities and commodities customers, and loans to municipalities.

 

Income Tax Matters.

 

The effective tax rate from continuing operations was 33.3% and 13.6% for the quarters ended March 31, 2016 and 2015, respectively. The results for prior year quarter included a net discrete tax benefit of $564 million, primarily associated with the repatriation of non-U.S. earnings at a cost lower than originally estimated due to an internal restructuring to simplify the Company’s legal entity organization in the U.K. Excluding this net discrete tax benefit, the effective tax rate from continuing operations for the prior year quarter would have been 33.3%, which reflects the geographic mix of earnings.

 

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Accounting Development Updates.

 

The Financial Accounting Standards Board (the “FASB”) issued the following accounting updates which apply to the Company.

 

These accounting updates are not expected to have a material impact in the condensed consolidated financial statements:

 

   

Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.

 

   

Improvements to Employee Share-Based Payment Accounting.

 

   

Contingent Put and Call Options in Debt Instruments.

 

   

Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance is effective for the Company beginning January 1, 2018. On January 1, 2016, the Company early adopted a specific provision of the accounting update (see Note 2 to the condensed consolidated financial statements in Item 1), with the remainder to be adopted on January 1, 2018.

 

This accounting update will not have an impact in the condensed consolidated financial statements:

 

   

Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.

 

This accounting update will not have a material impact in the condensed consolidated financial statements:

 

   

Simplifying the Transition to the Equity Method of Accounting.

 

The FASB issued the following accounting updates which are currently being evaluated to determine the potential impact of adoption:

 

   

Leases. This accounting update requires lessees to recognize all leases with terms exceeding one year on the balance sheet which results in the recognition of a right of use asset and corresponding lease liability, including for those leases currently classified as operating leases by the Company. The right of use asset and lease liability will initially be measured using the present value of the remaining rental payments. The accounting for leases where the Company is the lessor is largely unchanged. This standard is effective on January 1, 2019 with early adoption permitted.

 

   

Revenue from Contracts with Customers. The purpose of this update is to clarify the principles of revenue recognition, to develop a common revenue recognition standard across all industries for U.S. GAAP and International Financial Reporting Standards and to provide enhanced disclosures for users of the financial statements. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This standard is effective on January 1, 2018, with early adoption permitted, but not before January 1, 2017.

 

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Critical Accounting Policies

 

The Company’s condensed consolidated financial statements are prepared in accordance with U.S. GAAP, which require the Company to make estimates and assumptions (see Note 1 to the Company’s condensed consolidated financial statements in Item 1). The Company believes that of its significant accounting policies (see Note 2 to the Company’s consolidated financial statements in Item 8 of the 2015 Form 10-K and Note 2 to the Company’s condensed consolidated financial statements in Item 1), the fair value, goodwill and intangible assets, legal and regulatory contingencies and income taxes policies involve a higher degree of judgment and complexity. For a further discussion about the Company’s critical accounting policies, see “Management Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in Part II, Item 7, of the 2015 Form 10-K.

 

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Liquidity and Capital Resources.

 

The Company’s senior management establishes liquidity and capital policies. Through various risk and control committees, senior management reviews business performance relative to these policies, monitors the availability of alternative sources of financing, and oversees the liquidity, interest rate and currency sensitivity of the Company’s asset and liability position. The Treasury Department, Firm Risk Committee, Asset and Liability Management Committee, and other committees and control groups assist in evaluating, monitoring and controlling the impact that the Company’s business activities have on its condensed consolidated balance sheet, liquidity and capital structure. Liquidity and capital matters are reported regularly to the Board and the Board’s Risk Committee.

 

The Balance Sheet.

 

The Company monitors and evaluates the composition and size of its balance sheet on a regular basis. The Company’s balance sheet management process includes quarterly planning, business-specific limits, monitoring of business-specific usage versus limits, key metrics and new business impact assessments.

 

The Company establishes balance sheet limits at the consolidated, business segment and business unit levels. The Company monitors balance sheet usage versus limits and reviews variances resulting from business activity or market fluctuations. On a regular basis, the Company reviews current performance versus limits and assesses the need to re-allocate limits based on business unit needs. The Company also monitors key metrics, including asset and liability size, composition of the balance sheet, limit utilization and capital usage.

 

Total Assets for the Company’s Business Segments.

 

     At March 31, 2016  
     Institutional
Securities
     Wealth
Management
     Investment
Management
     Total  
     (dollars in millions)  

Assets

           

Cash and cash equivalents

   $ 24,440       $ 28,867       $ 331       $ 53,638   

Trading assets, at fair value

     230,468         1,179         2,503         234,150   

Investment securities

     15,809         61,783                 77,592   

Securities received as collateral, at fair value

     8,813                         8,813   

Securities purchased under agreements to resell

     96,062         2,712                 98,774   

Securities borrowed

     139,851         562                 140,413   

Customer and other receivables

     23,513         20,714         535         44,762   

Loans, net of allowance

     36,986         51,816                 88,802   

Other assets(1)

     45,702         13,454         1,397         60,553   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $     621,644       $     181,087       $         4,766       $     807,497   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2015  
     Institutional
Securities
     Wealth
Management
     Investment
Management
     Total  
     (dollars in millions)  

Assets

           

Cash and cash equivalents

   $ 22,356       $ 31,216       $ 511       $ 54,083   

Trading assets, at fair value

     224,949         883         2,448         228,280   

Investment securities

     14,124         57,858         1         71,983   

Securities received as collateral, at fair value

     11,225                         11,225   

Securities purchased under agreements to resell

     83,205         4,452                 87,657   

Securities borrowed

     141,971         445                 142,416   

Customer and other receivables

     23,390         21,406         611         45,407   

Loans, net of allowance

     36,237         49,522                 85,759   

Other assets(1)

     45,257         13,926         1,472         60,655   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $     602,714       $     179,708       $         5,043       $     787,465   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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(1)

Other assets primarily includes Cash deposited with clearing organizations or segregated under federal and other regulations or requirements; Other investments; Premises, equipment and software costs; Goodwill; Intangible assets and deferred tax assets.

 

A substantial portion of the Company’s total assets consists of liquid marketable securities and short-term receivables arising principally from sales and trading activities in the Institutional Securities business segment. The liquid nature of these assets provides the Company with flexibility in managing the size of its balance sheet. Total assets increased modestly to $807 billion at current period end from $787 billion at prior year end, primarily due to increases in Securities purchased under agreements to resell and Trading assets driven primarily by higher levels of high quality liquid assets in the Company’s Global Liquidity Reserve and increases in over-the-counter (“OTC”) derivative contracts.

 

Securities Repurchase Agreements and Securities Lending.

 

Securities borrowed or securities purchased under agreements to resell and securities loaned or securities sold under agreements to repurchase are treated as collateralized financings (see Notes 2 and 6 to the condensed consolidated financial statements in Item 1).

 

Collateralized Financing Transactions and Average Balances.

 

     At March 31, 2016      At December 31, 2015      Average Balance  
           Three Months Ended  
           March 31, 2016      December 31, 2015  
     (dollars in millions)  

Securities purchased under agreements to resell and Securities borrowed

   $ 239,187       $ 230,073       $         237,887       $         250,605   

Securities sold under agreements to repurchase and Securities loaned

   $ 58,445       $ 56,050       $ 56,417       $ 62,373   

 

Securities purchased under agreements to resell and Securities borrowed and Securities sold under agreements to repurchase and Securities loaned period-end balances at March 31, 2016 were in line with the average balances during 2016. Securities purchased under agreements to resell and Securities borrowed and Securities sold under agreements to repurchase and Securities loaned period-end balances at December 31, 2015 were lower than the average balances during 2015. The balances moved in line with client financing activity and with general movements in firm inventory. Securities financing assets and liabilities also include matched book transactions with minimal market, credit and/or liquidity risk. Matched book transactions accommodate customers, as well as obtain securities for the settlement and financing of inventory positions.

 

Other Securities Financing.

 

The customer receivable portion of the securities financing transactions primarily includes customer margin loans, collateralized by customer-owned securities, and customer cash, which is segregated in accordance with regulatory requirements. The customer payable portion of the securities financing transactions primarily includes payables to the Company’s prime brokerage customers. The Company’s risk exposure on these transactions is mitigated by collateral maintenance policies that limit the Company’s credit exposure to customers. Included within securities financing assets were $9 billion and $11 billion at March 31, 2016 and December 31, 2015, respectively, recorded in accordance with accounting guidance for the transfer of financial assets that represented offsetting assets and liabilities for fully collateralized non-cash loan transactions.

 

Liquidity Risk Management Framework.

 

The primary goal of the Company’s Liquidity Risk Management Framework is to ensure that the Company has access to adequate funding across a wide range of market conditions. The framework is designed to enable the Company to fulfill its financial obligations and support the execution of its business strategies.

 

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The following principles guide the Company’s Liquidity Risk Management Framework:

 

   

Sufficient liquid assets should be maintained to cover maturing liabilities and other planned and contingent outflows;

 

   

Maturity profile of assets and liabilities should be aligned, with limited reliance on short-term funding;

 

   

Source, counterparty, currency, region and term of funding should be diversified; and

 

   

Liquidity Stress Tests should anticipate, and account for, periods of limited access to funding.

 

The core components of the Company’s Liquidity Risk Management Framework are the Required Liquidity Framework, Liquidity Stress Tests and the Global Liquidity Reserve, which support its target liquidity profile. For a further discussion about the Company’s Required Liquidity Framework and Liquidity Stress Tests, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management Framework” in Part II, Item 7 of the 2015 Form 10-K.

 

At March 31, 2016 and December 31, 2015, the Company maintained sufficient liquidity to meet current and contingent funding obligations as modeled in its Liquidity Stress Tests.

 

Global Liquidity Reserve.

 

The Company maintains sufficient liquidity reserves to cover daily funding needs and to meet strategic liquidity targets sized by the Required Liquidity Framework and Liquidity Stress Tests. For a further discussion of the Company’s Global Liquidity Reserve, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management Framework—Global Liquidity Reserve” in Part II, Item 7 of the 2015 Form 10-K.

 

Global Liquidity Reserve by Type of Investment.

 

     At March 31, 2016      At December 31, 2015  
     (dollars in millions)  

Cash deposits with banks

   $ 13,420       $ 10,187   

Cash deposits with central banks

     34,572         39,774   

Unencumbered highly liquid securities:

     

U.S. government obligations

     75,985         72,265   

U.S. agency and agency mortgage-backed securities

     39,940         37,678   

Non-U.S. sovereign obligations(1)

     33,254         28,999   

Other investment grade securities

     13,898         14,361   
  

 

 

    

 

 

 

Global Liquidity Reserve

   $ 211,069       $ 203,264   
  

 

 

    

 

 

 

 

(1)

Non-U.S. sovereign obligations are composed of unencumbered German, French, Dutch, U.K., Brazilian and Japanese government obligations.

 

Global Liquidity Reserve Managed by Bank and Non-Bank Legal Entities.

 

            Daily Average Balance  
            Three Months Ended March 31,  
     At March 31, 2016      At December 31, 2015          2016              2015      
     (dollars in millions)  

Bank legal entities:

           

Domestic

   $ 89,127       $ 88,432       $ 89,842       $ 82,638   

Foreign

     6,135         5,896         5,812         4,961   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Bank legal entities

     95,262         94,328         95,654         87,599   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-Bank legal entities(1):

           

Domestic

     78,454         74,811         80,952         76,833   

Foreign

     37,353         34,125         34,282         31,829   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Bank legal entities

     115,807         108,936         115,234         108,662   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 211,069       $ 203,264       $         210,888       $         196,261   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

The Parent managed $61,134 million and $54,810 million at March 31, 2016 and December 31, 2015, respectively, and averaged $62,209 million and $57,920 million for the three months ended March 31, 2016 and 2015, respectively.

 

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Regulatory Liquidity Framework.

 

The Basel Committee on Banking Supervision (the “Basel Committee”) has developed two standards intended for use in liquidity risk supervision: the Liquidity Coverage Ratio (“LCR”) and the Net Stable Funding Ratio (“NSFR”).

 

Liquidity Coverage Ratio.

 

The LCR was developed to ensure banking organizations have sufficient high-quality liquid assets to cover net cash outflows arising from significant stress over 30 calendar days. This standard’s objective is to promote the short-term resilience of the liquidity risk profile of banking organizations.

 

The final rule to implement the LCR in the U.S. (“U.S. LCR”) applies to the Company and its U.S. Bank Subsidiaries and each is required to calculate its respective U.S. LCR on each business day. As of January 1, 2016, the Company and its U.S. Bank Subsidiaries are required to maintain a minimum U.S. LCR of 90%, and this minimum standard will reach the fully phased-in level of 100% beginning on January 1, 2017. In addition, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) has proposed rules that would require large banking organizations, including the Company, to publicly disclose certain qualitative and quantitative information about their U.S. LCR beginning in the third quarter of 2016. The Company is compliant with the minimum required U.S. LCR based on current interpretation and continues to evaluate its impact on the Company’s liquidity and funding requirements.

 

Net Stable Funding Ratio.

 

The objective of the NSFR is to reduce funding risk over a one-year horizon by requiring banking organizations to fund their activities with sufficiently stable sources of funding in order to mitigate the risk of future funding stress. The Basel Committee finalized the NSFR framework in 2014. In the second quarter of 2016, the U.S. banking regulators issued a proposal to implement the NSFR in the U.S. The proposal would require a covered company to maintain an amount of available stable funding, which is calculated by applying standardized weightings to its equity and liabilities based on their expected stability, that is no less than the amount of its required stable funding, which is calculated by applying standardized weightings to its assets, derivatives exposures, and certain other off-balance sheet exposures based on their liquidity characteristics. If adopted as proposed, the requirements would apply to the Company and its U.S. Bank Subsidiaries from January 1, 2018. The Company is evaluating the potential impact of the proposal, which is subject to public comment and further rulemaking procedures.

 

Funding Management.

 

The Company manages its funding in a manner that reduces the risk of disruption to the Company’s operations. The Company 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 its liabilities equals or exceeds the expected holding period of the assets being financed.

 

The Company funds its balance sheet on a global basis through diverse sources. These sources may include the Company’s equity capital, long-term debt, securities sold under agreements to repurchase (“repurchase agreements”), securities lending, deposits, commercial paper, letters of credit and lines of credit. The Company has active financing programs for both standard and structured products targeting global investors and currencies.

 

Secured Financing.

 

For a discussion of the Company’s secured financing activities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Funding Management—Secured Financing” in Part II, Item 7 of the 2015 Form 10-K.

 

At March 31, 2016 and December 31, 2015, the weighted average maturity of the Company’s secured financing against less liquid assets was greater than 120 days.

 

Unsecured Financing.

 

For a discussion of the Company’s unsecured financing activities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Funding Management—Unsecured Financing” in Part II, Item 7 of the 2015 Form 10-K. When appropriate, the Company may use derivative products to conduct asset and liability management and to make adjustments to its interest rate and structured borrowings risk profile (see Note 4 to the condensed consolidated financial statements in Item 1).

 

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Deposits.

 

Available funding sources to the Company’s bank subsidiaries include time deposits, money market deposit accounts, demand deposit accounts, repurchase agreements, federal funds purchased, commercial paper and Federal Home Loan Bank advances. The vast majority of deposits in the Company’s U.S. Bank Subsidiaries are sourced from its retail brokerage accounts and are considered to have stable, low-cost funding characteristics. At March 31, 2016 and December 31, 2015 deposits were $157,591 million and $156,034 million, respectively (see Note 9 to the condensed consolidated financial statements in Item 1).

 

Short-Term Borrowings.

 

The Company’s unsecured short-term borrowings may consist of bank loans, bank notes, commercial paper and structured notes with maturities of 12 months or less at issuance. At March 31, 2016 and December 31, 2015, the Company had approximately $1,109 million and $2,173 million, respectively, in Short-term borrowings.

 

Long-Term Borrowings.

 

The Company believes that accessing debt investors through multiple distribution channels helps provide consistent access to the unsecured markets. In addition, the issuance of long-term debt allows the Company to reduce reliance on short-term credit sensitive instruments. Long-term borrowings are generally managed to achieve staggered maturities, thereby mitigating refinancing risk, and to maximize investor diversification through sales to global institutional and retail clients across regions, currencies and product types. Availability and cost of financing to the Company can vary depending on market conditions, the volume of certain trading and lending activities, its credit ratings and the overall availability of credit.

 

The Company may engage in various transactions in the credit markets (including, for example, debt retirements) that it believes are in the best interests of the Company and its investors.

 

Long-term Borrowings by Maturity Profile.

 

     Parent      Subsidiaries      Total  
     (dollars in millions)  

Due in 2016

   $ 12,272       $ 4,032       $ 16,304   

Due in 2017

     21,840         1,199         23,039   

Due in 2018

     18,296         1,058         19,354   

Due in 2019

     20,658         741         21,399   

Due in 2020

     16,239         952         17,191   

Thereafter

     62,564         2,953         65,517   
  

 

 

    

 

 

    

 

 

 

Total

   $         151,869       $         10,935       $ 162,804   
  

 

 

    

 

 

    

 

 

 

 

During the quarter ended March 31, 2016, the Company issued notes with a principal amount of approximately $13.2 billion. In connection with these note issuances, the Company generally enters into certain transactions to obtain floating interest rates. The weighted average maturity of the Company’s long-term borrowings, based upon stated maturity dates, was approximately 6.2 years at March 31, 2016. During the quarter ended March 31, 2016, approximately $8.0 billion in aggregate long-term borrowings matured or were retired. Subsequent to March 31, 2016 and through April 29, 2016, long-term borrowings decreased by approximately $1.2 billion, net of issuances. This amount includes the issuance of $3.5 billion of senior debt on April 21, 2016. For a further discussion of the Company’s long-term borrowings, including the amount of senior debt outstanding at March 31, 2016, see Note 10 to the condensed consolidated financial statements in Item 1.

 

Capital Covenants.

 

In April 2007, the Company executed replacement capital covenants in connection with an offering by Morgan Stanley Capital Trust VIII Capital Securities, which become effective after the scheduled redemption date in 2046. Under the terms of the replacement capital covenants, the Company has agreed, for the benefit of certain specified holders of debt, to

 

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limitations on its ability to redeem or repurchase any of the Capital Securities for specified periods of time. For a complete description of the Capital Securities and the terms of the replacement capital covenants, see the Company’s Current Report on Form 8-K dated April 26, 2007.

 

Credit Ratings.

 

The Company relies on external sources to finance a significant portion of its day-to-day operations. The cost and availability of financing generally are impacted by, among other things, the Company’s credit ratings. In addition, the Company’s credit ratings can have an impact on certain trading revenues, particularly in those businesses where longer-term counterparty performance is a key consideration, such as OTC derivative transactions, including credit derivatives and interest rate swaps. Rating agencies consider company-specific factors; other industry factors such as regulatory or legislative changes; the macroeconomic environment; and perceived levels of government support, among other things.

 

As of December 2, 2015, the Company’s credit ratings no longer incorporate uplift from perceived government support from any rating agency given the significant progress of the U.S. financial reform legislation and regulations. Meanwhile, some rating agencies have stated that they currently incorporate various degrees of credit rating uplift from non-governmental third-party sources of potential support.

 

Parent and MSBNA’s Senior Unsecured Ratings at April 29, 2016.

 

    Parent   Morgan Stanley Bank, N.A.
    Short-Term
Debt
  Long-Term
Debt
   Rating
Outlook
  Short-Term
Debt
  Long-Term
Debt
  Rating
Outlook

DBRS, Inc.

  R-1 (middle)   A (high)    Stable      

Fitch Ratings, Inc.

  F1   A    Stable   F1   A+   Stable

Moody’s Investors Service, Inc.

  P-2   A3    Stable   P-1   A1   Stable

Rating and Investment Information, Inc.

  a-1   A-    Stable      

Standard & Poor’s Ratings Services

  A-2   BBB+    Stable   A-1   A   Positive Watch

 

In connection with certain OTC trading agreements and certain other agreements where the Company is a liquidity provider to certain financing vehicles associated with the Institutional Securities business segment, the Company may be required to provide additional collateral or immediately settle any outstanding liability balances with certain counterparties or pledge additional collateral to certain exchanges and clearing organizations in the event of a future credit rating downgrade irrespective of whether the Company is in a net asset or net liability position.

 

The additional collateral or termination payments that may be called in the event of a future credit rating downgrade vary by contract and can be based on ratings by either or both of Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Ratings Services (“S&P”). The table below shows the future potential collateral amounts and termination payments that could be called or required by counterparties or exchanges and clearing organizations in the event of one-notch or two-notch downgrade scenarios, from the lowest of Moody’s or S&P ratings, based on the relevant contractual downgrade triggers.

 

Incremental Collateral or Terminating Payments upon Potential Future Rating Downgrade.

 

     At March 31, 2016      At December 31, 2015  
     (dollars in millions)  

One-notch downgrade

   $ 1,193       $ 1,169   

Two-notch downgrade

     1,776         1,465   

 

While certain aspects of a credit rating downgrade are quantifiable pursuant to contractual provisions, the impact it would have on the Company’s business and results of operations in future periods is inherently uncertain and would depend on a number of interrelated factors, including, among others, the magnitude of the downgrade, the rating relative to peers, the rating assigned by the relevant agency pre-downgrade, individual client behavior and future mitigating actions the Company might take. The liquidity impact of additional collateral requirements is included in the Company’s Liquidity Stress Tests.

 

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Capital Management.

 

The Company’s senior management views capital as an important source of financial strength. The Company 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 Company attempts to maintain total capital, on a consolidated basis, at least equal to the sum of its operating subsidiaries’ required equity.

 

In March 2015, the Company received no objection from the Federal Reserve to its 2015 capital plan. The capital plan included a share repurchase of up to $3.1 billion of the Company’s outstanding common stock during the period that began April 1, 2015 through June 30, 2016. Additionally, the capital plan included an increase in the Company’s quarterly common stock dividend to $0.15 per share from $0.10 per share that began with the dividend declared on April 20, 2015 (see also “Capital Plans and Stress Tests” herein). During the quarters ended March 31, 2016 and 2015, the Company repurchased approximately $625 million and $250 million, respectively, of its outstanding common stock as part of its share repurchase program (see Note 14 to the condensed consolidated financial statements in Item 1 and “Capital Management” herein).

 

Pursuant to the share repurchase program, the Company considers, among other things, business segment capital needs, as well as stock-based compensation and benefit plan requirements. Share repurchases under the Company’s program will be exercised from time to time at prices the Company deems appropriate subject to various factors, including its capital position and market conditions. The share repurchases may be effected through open market purchases or privately negotiated transactions, including through Rule 10b5-1 plans, and may be suspended at any time. Share repurchases by the Company are subject to regulatory approval (see also “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in Part II, Item 5 of the 2015 Form 10-K).

 

The Board determines the declaration and payment of dividends on a quarterly basis. On April 18, 2016, the Company announced that the Board declared a quarterly dividend per common share of $0.15. The dividend is payable on May 13, 2016 to common shareholders of record on April 29, 2016 (see Note 20 to the condensed consolidated financial statements in Item 1).

 

On March 15, 2016, the Company announced that the Board declared a quarterly dividend for preferred stock shareholders of record on March 31, 2016 that was paid on April 15, 2016 (see Note 14 to the condensed consolidated financial statements in Item 1).

 

Tangible Equity.

 

Tangible Equity Measures—Period End and Average.

 

           Monthly Average Balance  
     Balance at     Three Months Ended March 31,  
     March 31, 2016     December 31, 2015     2016     2015  
     (dollars in millions)  

Common equity

   $ 68,490      $ 67,662      $ 68,187      $ 65,590   

Preferred equity

     7,520        7,520        7,520        6,395   
  

 

 

   

 

 

   

 

 

   

 

 

 

Morgan Stanley shareholders’ equity

     76,010        75,182        75,707        71,985   

Junior subordinated debentures issued to capital trusts

     2,849        2,870        2,843        4,871   

Less: Goodwill and net intangible assets

     (9,491     (9,564     (9,524     (9,702
  

 

 

   

 

 

   

 

 

   

 

 

 

Tangible Morgan Stanley shareholders’ equity(1)

   $ 69,368      $ 68,488      $ 69,026      $ 67,154   
  

 

 

   

 

 

   

 

 

   

 

 

 

Common equity

   $ 68,490      $ 67,662      $ 68,187      $ 65,590   

Less: Goodwill and net intangible assets

     (9,491     (9,564     (9,524     (9,702
  

 

 

   

 

 

   

 

 

   

 

 

 

Tangible common equity(1)

   $ 58,999      $ 58,098      $ 58,663      $ 55,888   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Tangible Morgan Stanley shareholders’ equity and tangible common equity are non-GAAP financial measures that the Company and investors consider to be a useful measure to assess capital adequacy.

 

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Regulatory Requirements.

 

Regulatory Capital Framework.

 

The Company is a financial holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and is subject to the regulation and oversight of the Federal Reserve. The Federal Reserve establishes capital requirements for the Company, including well-capitalized standards, and evaluates its compliance with such capital requirements. The Office of the Comptroller of the Currency (“OCC”) establishes similar capital requirements and standards for the Company’s U.S. Bank Subsidiaries. The regulatory capital requirements are largely based on the Basel III capital standards established by the Basel Committee and also implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).

 

The Basel Committee has finalized revisions to the Basel III framework that, if adopted by the U.S. banking agencies, could result in substantial changes to the Company’s capital requirements. In particular, the Basel Committee has finalized a new methodology for calculating counterparty credit risk exposures in derivatives transactions, the standardized approach for measuring counterparty credit risk exposures, and revised frameworks for market risk, interest rate risk in the banking book, and securitization capital requirements. In addition, the Basel Committee has proposed revisions to various regulatory capital standards, the impact of which is uncertain and depends on future rulemakings by the U.S. banking agencies.

 

Regulatory Capital Requirements.

 

The Company is required to maintain minimum risk-based and leverage capital ratios under the regulatory capital requirements. A summary of the calculations of regulatory capital, risk-weighted assets (“RWAs”) and transition provisions follows. For a further discussion of these calculations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Implementation of U.S. Basel III” in Part II, Item 7 of the 2015 Form 10-K.

 

Regulatory Capital.    Minimum risk-based capital ratio requirements apply to Common Equity Tier 1 capital, Tier 1 capital and Total capital. Certain adjustments to and deductions from capital are required for purposes of determining these ratios, such as deductions for goodwill, intangibles, certain deferred tax assets, other amounts in other comprehensive income and investments in the capital instruments of unconsolidated financial institutions. Certain of these adjustments and deductions are also subject to transitional provisions.

 

In addition to the minimum risk-based capital ratio requirements, on a fully phased-in basis by 2019, the Company will be subject to:

 

   

A greater than 2.5% Common Equity Tier 1 capital conservation buffer;

 

   

The Common Equity Tier 1 global systemically important bank (“G-SIB”) capital surcharge, which the Federal Reserve calculated as 3% for the Company in July 2015; and

 

   

Up to a 2.5% Common Equity Tier 1 countercyclical capital buffer, currently set by banking regulators at zero (collectively, the “buffers”).

 

In 2016, the phase-in amount for each of the buffers is 25% of the fully phased-in buffer requirement. Failure to maintain the buffers will result in restrictions on the Company’s ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers. For a further discussion of the G-SIB capital surcharge, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—G-SIB Capital Surcharge” in Part II, Item 7 of the 2015 Form 10-K.

 

Risk-Weighted Assets.    RWAs reflect both on- and off-balance sheet risk of the Company as well as capital charges attributable to the risk of loss arising from the following:

 

   

Credit risk: The failure of a borrower, counterparty or issuer to meet its financial obligation to the Company;

 

   

Market risk: Adverse changes in the level of one or more market prices, rate, indices, implied volatilities, correlations or other market factors, such as market liquidity; and

 

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Operational risk: Inadequate or failed processes, people and systems or external events (e.g., fraud, theft, legal and compliance risks, cyber attacks or damage to physical assets).

 

The Company’s binding risk-based capital ratios for regulatory purposes are the lower of the capital ratios computed under (i) the standardized approaches for calculating credit risk RWAs and market risk RWAs (the “Standardized Approach”); and (ii) the applicable advanced approaches for calculating credit risk, market risk and operational risk RWAs (the “Advanced Approach”). At March 31, 2016, the Company’s binding ratios are based on the Advanced Approach transitional rules.

 

The methods for calculating each of the Company’s risk-based capital ratios will change through January 1, 2022 as aspects of the capital rules are phased in. These changes may result in differences in the Company’s reported capital ratios from one reporting period to the next that are independent of changes to its capital base, asset composition, off-balance sheet exposures or risk profile.

 

Minimum Risk-Based Capital Ratios: Transitional Provisions.

 

LOGO

 

(1)

These ratios include the following assumptions: (i) G-SIB capital surcharge for the Company remains at 3.0% as calculated by the Federal Reserve in July 2015; and (ii) countercyclical capital buffer remains at zero.

 

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Transitional and Fully Phased-In Regulatory Capital Ratios.

 

     At March 31, 2016  
     Transitional     Fully Phased-In  
     Standardized     Advanced     Standardized     Advanced  
     (dollars in millions)  

Risk-based capital:

        

Common Equity Tier 1 capital

   $ 58,514      $ 58,514      $ 56,056      $ 56,056   

Tier 1 capital

     65,198        65,198        63,627        63,627   

Total capital

     78,345        77,969        75,122        74,746   

Total RWAs

     359,179        373,925        369,697        385,074   

Common Equity Tier 1 capital ratio

     16.3     15.6     15.2     14.6

Tier 1 capital ratio

     18.2     17.4     17.2     16.5

Total capital ratio

     21.8     20.9     20.3     19.4

Leverage-based capital:

        

Adjusted average assets(1)

     792,268        N/A        791,096        N/A   

Tier 1 leverage ratio(2)

     8.2     N/A        8.0     N/A   

 

     At December 31, 2015  
     Transitional     Fully Phased-In  
     Standardized     Advanced     Standardized     Advanced  
     (dollars in millions)  

Risk-based capital:

        

Common Equity Tier 1 capital

   $ 59,409      $ 59,409      $ 55,441      $ 55,441   

Tier 1 capital

     66,722        66,722        63,000        63,000   

Total capital

     79,663        79,403        73,858        73,598   

Total RWAs

     362,920        384,162        373,421        395,277   

Common Equity Tier 1 capital ratio

     16.4     15.5     14.8     14.0

Tier 1 capital ratio

     18.4     17.4     16.9     15.9

Total capital ratio

     22.0     20.7     19.8     18.6

Leverage-based capital:

        

Adjusted average assets(1)

     803,574        N/A        801,346        N/A   

Tier 1 leverage ratio(2)

     8.3     N/A        7.9     N/A   

 

N/A—Not Applicable.

(1)

Adjusted average assets represent the denominator of the Tier 1 leverage ratio and are composed of the average daily balance of consolidated on-balance sheet assets under U.S. GAAP during the calendar quarter, adjusted for disallowed goodwill, transitional intangible assets, certain deferred tax assets, certain investments in the capital instruments of unconsolidated financial institutions and other adjustments.

(2)

The minimum Tier 1 leverage ratio requirement is 4.0%.

 

The fully phased-in basis pro forma estimates in the above tables are based on the Company’s current understanding of the capital rules and other factors, which may be subject to change as the Company receives additional clarification and implementation guidance from the Federal Reserve and as the interpretation of the regulation evolves over time. These fully phased-in pro forma estimates are non-GAAP financial measures that the Company considers to be useful measures for evaluating compliance with new regulatory capital requirements that were not yet effective at March 31, 2016. These preliminary estimates are subject to risks and uncertainties that may cause actual results to differ materially and should not be taken as a projection of what the Company’s capital ratios, RWAs, earnings or other results will actually be at future dates. For a discussion of risks and uncertainties that may affect the future results of the Company, see “Risk Factors” in Part I, Item 1A of the 2015 Form 10-K.

 

Well-Capitalized Minimum Regulatory Capital Ratios for U.S. Bank Subsidiaries.

 

     At March 31, 2016  

Common Equity Tier 1 risk-based capital ratio

     6.5

Tier 1 risk-based capital ratio

     8.0

Total risk-based capital ratio

     10.0

Tier 1 leverage ratio

     5.0

 

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For the Company to remain a financial holding company, its U.S. Bank Subsidiaries must qualify as well-capitalized by maintaining the minimum ratio requirements set forth in the above table. The Federal Reserve has not yet revised the well-capitalized standard for financial holding companies to reflect the higher capital standards required for the Company under the capital rules. Assuming that the Federal Reserve would apply the same or very similar well-capitalized standards to financial holding companies, each of the Company’s risk-based capital ratios and Tier 1 leverage ratio at March 31, 2016 would have exceeded the revised well-capitalized standard. The Federal Reserve may require the Company and its peer financial holding companies to maintain risk- and leverage-based capital ratios substantially in excess of mandated minimum levels, depending upon general economic conditions and a financial holding company’s particular condition, risk profile and growth plans.

 

Regulatory Capital Calculated under Advanced Approach Transitional Rules.

 

     At March 31, 2016     At December 31, 2015  
     (dollars in millions)  

Common Equity Tier 1 capital:

    

Common stock and surplus

   $ 19,456      $ 20,114   

Retained earnings

     50,272        49,204   

Accumulated other comprehensive income (loss)

     (1,238     (1,656

Regulatory adjustments and deductions:

    

Net goodwill

     (6,585     (6,582

Net intangible assets (other than goodwill and mortgage servicing assets)

     (1,743     (1,192

Credit spread premium over risk-free rate for derivative liabilities

     (389     (202

Net deferred tax assets

     (1,187     (675

Net after-tax debt valuation adjustments(1)

     66        156   

Adjustments related to accumulated other comprehensive income

     116        411   

Other adjustments and deductions

     (254     (169
  

 

 

   

 

 

 

Total Common Equity Tier 1 capital

   $ 58,514      $ 59,409   
  

 

 

   

 

 

 

Additional Tier 1 capital:

    

Preferred stock

   $ 7,520      $ 7,520   

Trust preferred securities

            702   

Noncontrolling interests

     607        678   

Regulatory adjustments and deductions:

    

Net deferred tax assets

     (791     (1,012

Credit spread premium over risk-free rate for derivative liabilities

     (259     (303

Net after-tax debt valuation adjustments(1)

     44        233   

Other adjustments and deductions

     (171     (253
  

 

 

   

 

 

 

Additional Tier 1 capital

   $ 6,950      $ 7,565   

Deduction for investments in covered funds

     (266     (252
  

 

 

   

 

 

 

Total Tier 1 capital

   $ 65,198      $ 66,722   
  

 

 

   

 

 

 

Tier 2 capital:

    

Subordinated debt

   $ 10,895      $ 10,404   

Trust preferred securities

     1,672        2,106   

Other qualifying amounts

     56        35   

Regulatory adjustments and deductions

     148        136   
  

 

 

   

 

 

 

Total Tier 2 capital

   $ 12,771      $ 12,681   
  

 

 

   

 

 

 

Total capital

   $ 77,969      $ 79,403   
  

 

 

   

 

 

 

 

(1)

In connection with the early adoption of a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities, related to DVA, the aggregate balance of net after-tax valuation adjustments was reduced by $77 million as of January 1, 2016.

 

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Roll-forward of Regulatory Capital Calculated under Advanced Approach Transitional Rules.

 

     Three Months Ended  
     March 31, 2016  
     (dollars in millions)  

Common Equity Tier 1 capital:

  

Common Equity Tier 1 capital at December 31, 2015

   $ 59,409   

Change related to the following items:

  

Value of shareholders’ common equity

     828   

Net goodwill

     (3

Net intangible assets (other than goodwill and mortgage servicing assets)

     (551

Credit spread premium over risk-free rate for derivative liabilities

     (187

Net deferred tax assets

     (512

Net after-tax debt valuation adjustments(1)

     (90

Adjustments related to accumulated other comprehensive income

     (295

Other deductions and adjustments

     (85
  

 

 

 

Common Equity Tier 1 capital at March 31, 2016

   $ 58,514   
  

 

 

 

Additional Tier 1 capital:

  

Additional Tier 1 capital at December 31, 2015

   $ 7,565   

Change related to the following items:

  

Trust preferred securities

     (702

Noncontrolling interests

     (71

Net deferred tax assets

     221   

Credit spread premium over risk-free rate for derivative liabilities

     44   

Net after-tax debt valuation adjustments(1)

     (189

Other adjustments and deductions

     82   
  

 

 

 

Additional Tier 1 capital at March 31, 2016

     6,950   
  

 

 

 
  

Deduction for investments in covered funds at December 31, 2015

     (252

Deduction for investments in covered funds

     (14
  

 

 

 

Deduction for investments in covered funds at March 31, 2016

     (266
  

 

 

 

Tier 1 capital at March 31, 2016

   $ 65,198   
  

 

 

 

Tier 2 capital:

  

Tier 2 capital at December 31, 2015

   $ 12,681   

Change related to the following items:

  

Subordinated debt

     491   

Trust preferred securities

     (434

Noncontrolling interests

     21   

Other adjustments and deductions

     12   
  

 

 

 

Tier 2 capital at March 31, 2016

   $ 12,771   
  

 

 

 

Total capital at March 31, 2016

   $ 77,969   
  

 

 

 

 

(1)

In connection with the early adoption of a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities, related to DVA, the aggregate balance of net after-tax valuation adjustments was reduced by $77 million as of January 1, 2016.

 

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Roll-forward of RWAs Calculated under Advanced Approach Transitional Rules.

 

     Three Months Ended
March  31, 2016(1)
 
     (dollars in millions)  

Credit risk RWAs:

  

Balance at December 31, 2015

   $ 173,586  

Change related to the following items:

  

Derivatives

     2,069   

Securities financing transactions

     1,349   

Other counterparty credit risk

     (6

Securitizations

     989   

Credit valuation adjustment

     2,483   

Investment securities

     508   

Loans

     (2,041

Cash

     627   

Equity investments

     (832

Other credit risk(2)

     (1,576
  

 

 

 

Total change in credit risk RWAs

   $ 3,570   
  

 

 

 

Balance at March 31, 2016

   $ 177,156   
  

 

 

 

Market risk RWAs:

  

Balance at December 31, 2015

   $ 71,476   

Change related to the following items:

  

Regulatory VaR

     (304

Regulatory stressed VaR

     (1,829

Incremental risk charge

     495   

Comprehensive risk measure

     (836

Specific risk:

  

Non-securitizations

     (1,161

Securitizations

     (906
  

 

 

 

Total change in market risk RWAs

   $ (4,541
  

 

 

 

Balance at March 31, 2016

   $ 66,935   
  

 

 

 

Operational risk RWAs:

  

Balance at December 31, 2015

   $ 139,100   

Change in operational risk RWAs(3)

     (9,266
  

 

 

 

Balance at March 31, 2016

   $ 129,834   
  

 

 

 

 

VaR—Value-at-Risk.

(1)

The RWAs for each category in the table reflect both on- and off-balance sheet exposures, where appropriate.

(2)

Amount reflects assets not in a defined category, non-material portfolios of exposures and unsettled transactions.

(3)

Amount reflects a reduction in the internal loss data related to litigation utilized in the operational risk capital model.

 

Supplementary Leverage Ratio.

 

The Company and its U.S. Bank Subsidiaries are required to publicly disclose their supplementary leverage ratios, which will become effective as a capital standard on January 1, 2018. By January 1, 2018, the Company must also maintain a Tier 1 supplementary leverage capital buffer of at least 2% in addition to the 3% minimum supplementary leverage ratio (for a total of at least 5%), in order to avoid limitations on capital distributions, including dividends and stock repurchases, and discretionary bonus payments to executive officers. In addition, beginning in 2018, the Company’s U.S. Bank Subsidiaries must maintain a supplementary leverage ratio of 6% to be considered well-capitalized.

 

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The Company’s Pro Forma Supplementary Leverage Exposure and Ratio on a Transitional Basis.

 

     At March 31, 2016      At December 31, 2015  
     (dollars in millions)  

Total assets

   $ 807,497       $ 787,465   

Average total assets(1)

   $ 803,267       $ 813,715   

Adjustments(2)(3)

     263,871         284,090   
  

 

 

    

 

 

 

Pro forma supplementary leverage exposure

   $ 1,067,138       $ 1,097,805   
  

 

 

    

 

 

 

Pro forma supplementary leverage ratio

     6.1%         6.1%   

 

(1)

Computed as the average daily balance of consolidated total assets under U.S. GAAP during the calendar quarter.

(2)

Computed as the arithmetic mean of the month-end balances over the calendar quarter.

(3)

Adjustments are to: (i) incorporate derivative exposures, including adding the related potential future exposure (including for derivatives cleared for clients), grossing up cash collateral netting where qualifying criteria are not met, and adding the effective notional principal amount of sold credit protection offset by qualifying purchased credit protection; (ii) reflect the counterparty credit risk for repo-style transactions; (iii) add the credit equivalent amount for off-balance sheet exposures; and (iv) apply other adjustments to Tier 1 capital, including disallowed goodwill, transitional intangible assets, certain deferred tax assets and certain investments in the capital instruments of unconsolidated financial institutions.

 

Based on the Company’s current understanding of the rules and other factors, the Company estimates its pro forma fully phased-in supplementary leverage ratio to be approximately 6.0% and 5.8% at March 31, 2016 and December 31, 2015, respectively. This estimate utilizes a fully phased-in Tier 1 capital numerator and a fully phased-in denominator of approximately $1,066.0 billion and $1,095.6 billion at March 31, 2016 and December 31, 2015, respectively, which takes into consideration the Tier 1 capital deductions that would be applicable in 2018 after the phase-in period has ended.

 

U.S. Subsidiary Banks’ Pro Forma Supplementary Leverage Ratios on a Transitional Basis.

 

     At March 31, 2016      At December 31, 2015  

Morgan Stanley Bank, N.A.

       7.4%           7.3%   

Morgan Stanley Private Bank, National Association

     10.6%         10.3%   

 

The pro forma supplementary leverage exposures and pro forma supplementary leverage ratios, both on transitional and fully phased-in bases, are non-GAAP financial measures that the Company considers to be useful measures for evaluating compliance with new regulatory capital requirements that have not yet become effective. The Company’s estimates are subject to risks and uncertainties that may cause actual results to differ materially from estimates based on these regulations. Further, these expectations should not be taken as projections of what the Company’s supplementary leverage ratios, earnings, assets or exposures will actually be at future dates. For a discussion of risks and uncertainties that may affect the future results of the Company, see “Risk Factors” in Part I, Item 1A of the 2015 Form 10-K.

 

Total Loss-Absorbing Capacity and Long-Term Debt Requirements.

 

The Federal Reserve has proposed a rule for top-tier bank holding companies of U.S. G-SIBs (“covered BHCs”), including the Parent, that establishes external total loss-absorbing capacity (“TLAC”) and long-term debt (“LTD”) requirements. The proposal contains various definitions and restrictions, such as requiring eligible LTD to be unsecured, have a remaining maturity of at least one year, and not have derivative-linked features, such as structured notes. The proposal would also impose restrictions on certain liabilities that covered BHCs may incur or have outstanding, including structured notes, as well as require all U.S. banking organizations supervised by the Federal Reserve with assets of at least $1 billion to make certain deductions from capital for their investments in unsecured debt issued by covered BHCs. For a further discussion of TLAC and LTD requirements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Total Loss-Absorbing Capacity and Long-Term Debt Requirements” in Part II, Item 7 of the 2015 Form 10-K. For discussions about the implication of the single point of entry (“SPOE”) resolution strategy and the TLAC proposal, see “Business—Supervision and Regulation—Financial Holding Company—Resolution and Recovery Planning” in Part I, Item 1 and “Risk Factors—Legal, Regulatory and Compliance Risk” in Part I, Item 1A of the 2015 Form 10-K.

 

Capital Plans and Stress Tests.

 

Pursuant to the Dodd-Frank Act, the Federal Reserve has adopted capital planning and stress test requirements for large bank holding companies, including the Company, which form part of the Federal Reserve’s annual Comprehensive Capital Analysis and Review (“CCAR”) framework.

 

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The Company received a non-objection to its 2015 capital plan (see “Capital Management” herein). The Company submitted its 2016 capital plan and company-run stress test results to the Federal Reserve on April 5, 2016. The Company expects that the Federal Reserve will provide its response to the Company’s 2016 capital plan and publish summary results of the CCAR and Dodd-Frank Act supervisory stress tests of each large bank holding company, including the Company, by June 30, 2016. The Company is required to disclose a summary of the results of its company-run stress tests within 15 days of the date the Federal Reserve discloses the results of the supervisory stress tests. In addition, the Company must submit the results of its mid-cycle company-run stress test to the Federal Reserve by October 5, 2016 and disclose a summary of the results between October 5, 2016 and November 4, 2016.

 

The Dodd-Frank Act also requires each of the Company’s U.S. Bank Subsidiaries to conduct an annual stress test. MSBNA and MSPBNA submitted their 2016 annual company-run stress tests to the OCC on April 5, 2016 and will publish a summary of their stress test results between June 15, 2016 and July 15, 2016.

 

For a further discussion of the Company’s capital plans and stress tests, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Capital Plans and Stress Tests” in Part II, Item 7 of the 2015 Form 10-K.

 

Attribution of Average Common Equity according to the Required Capital Framework.

 

The Company’s required capital (“Required Capital”) estimation is based on the Required Capital framework, an internal capital adequacy measure. Common equity attribution to the business segments is based on capital usage calculated by the Required Capital framework, as well as each business segment’s relative contribution to the Company’s total Required Capital. Required Capital is assessed for each business segment and further attributed to product lines. This process is intended to align capital with the risks in each business segment in order to allow senior management to evaluate returns on a risk-adjusted basis.

 

The Required Capital framework is a risk-based and leverage use-of-capital measure, which is compared with the Company’s regulatory capital to ensure that the Company maintains an amount of going concern capital after absorbing potential losses from stress events, where applicable, at a point in time. The Company defines the difference between its total average common equity and the sum of the average common equity amounts allocated to its business segments as Parent equity. The Company generally holds Parent equity for prospective regulatory requirements, organic growth, acquisitions and other capital needs.

 

Effective January 1, 2016, the common equity estimation and attribution to the business segments are based on the Company’s fully phased-in regulatory capital, including supplementary leverage and stress losses (which results in more capital being attributed to the business segments), whereas prior periods were attributed based on transitional regulatory capital provisions. Also, beginning in 2016, the amount of capital allocated to the business segments will be set at the beginning of each year, and will remain fixed throughout the year, until the next annual reset. Differences between available and Required Capital will be reflected in Parent equity during the year. Periods prior to 2016 have not been recast under the new methodology.

 

The Required Capital framework will evolve over time in response to changes in the business and regulatory environment and to incorporate enhancements in modeling techniques. The Company will continue to evaluate the framework with respect to the impact of future regulatory requirements, as appropriate.

 

Average Common Equity by Business Segment and Parent Equity.

 

     Three Months Ended(1)  
     March 31, 2016      January 1, 2016      December 31, 2015      March 31, 2015  
     Current Methodology      Prior Methodology  
     (dollars in billions)  

Institutional Securities

   $ 43.2       $         43.2       $ 32.3       $         37.0   

Wealth Management

     15.3         15.3         12.0         10.3   

Investment Management

     2.8         2.8         2.0         2.3   

Parent

     6.9         6.4         21.4         16.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 68.2       $ 67.7       $ 67.7       $ 65.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Amounts are calculated on a monthly basis. Average common equity is a non-GAAP financial measure that the Company and investors consider to be useful to assess capital adequacy.

 

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Resolution and Recovery Planning.

 

Pursuant to the Dodd-Frank Act, the Company is required to submit to the Federal Reserve and the Federal Deposit Insurance Corporation (“FDIC”) an annual resolution plan that describes its strategy for a rapid and orderly resolution under the U.S. Bankruptcy Code in the event of material financial distress or failure of the Company. The Company’s preferred resolution strategy, which is set out in its 2015 resolution plan, is an SPOE strategy. On April 12, 2016, the Federal Reserve and the FDIC notified the Company of certain shortcomings in its 2015 resolution plan. The Federal Reserve, but not the FDIC, viewed one of the shortcomings as a deficiency, but because a joint determination was not made, this was not a notice of deficiency. The Company is required to respond with a status report on its actions to address the shortcomings and a public section that explains those actions by October 1, 2016. Its next full resolution plan submission will be on July 1, 2017. If the Federal Reserve and the FDIC were, at a later time, to jointly determine that the Company’s 2017 resolution plan is not credible or would not facilitate an orderly resolution, and if the Company were unable to address any deficiencies at that later time, the Company or any of its subsidiaries may be subjected to more stringent capital, leverage, or liquidity requirements or restrictions on its growth, activities, or operations, or, after a two-year period, the Company may be required to divest assets or operations.

 

In May 2016, the Federal Reserve proposed a rule that would impose contractual requirements on certain “qualified financial contracts” (“covered QFCs”) to which U.S. G-SIBs, including the Company, and their subsidiaries (“covered entities”) are parties. While national banks and savings associations are not “covered entities” under the proposed rule, the OCC is expected to propose a rule that would subject national banks, including the Company’s U.S. Bank Subsidiaries, to substantively identical requirements. Under the proposal, covered QFCs must expressly provide that transfer restrictions and default rights against a covered entity are limited to the same extent as provided under the Federal Deposit Insurance Act and Title II of the Dodd-Frank Act and their implementing regulations. In addition, covered QFCs may not permit the exercise of cross-default rights against a covered entity based on an affiliate’s entry into insolvency, resolution or similar proceedings. If adopted as proposed, the requirements would take effect at the start of the first calendar quarter that begins at least one year after the final rule is issued. The Company is evaluating the potential impact of the proposal, which is subject to public comment and further rulemaking procedures.

 

For more information about resolution and recovery planning requirements and the activities of the Company and its U.S. Bank Subsidiaries in these areas, see “Business—Supervision and Regulation—Financial Holding Company—Resolution and Recovery Planning” in Part I, Item 1 of the 2015 Form 10-K.

 

Single-Counterparty Credit Limits.

 

In March 2016, the Federal Reserve re-proposed rules that would establish single-counterparty credit limits for large banking organizations (“covered companies”), with more stringent limits for the largest covered companies. U.S. G-SIBs, including the Company, would be subject to a limit of 15% of Tier 1 capital for credit exposures to any “major counterparty” (defined as other U.S. G-SIBs, foreign G-SIBs and nonbank systemically important financial institutions supervised by the Federal Reserve) and to a limit of 25% of Tier 1 capital for credit exposures to any other unaffiliated counterparty. The Company is evaluating the potential impact of the proposed rules.

 

Compensation Practices.

 

In the second quarter of 2016, the majority of the federal regulatory agencies required under the Dodd-Frank Act to issue regulations relating to the compensation practices of covered financial institutions, including the Company, re-proposed rules that if implemented would require, among other things, the deferral of a percentage of certain incentive-based compensation for senior executives and certain other employees and, under certain circumstances, “clawback” of incentive-based compensation. The Company is evaluating the proposal, which is subject to public comment and further rulemaking procedures.

 

U.K. Referendum.

 

A referendum regarding the U.K.’s continued membership in the European Union (“EU”) will take place on June 23, 2016. A determination to exit the EU could impact the markets and financial institutions with significant operations in Europe, such as the Company.

 

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Off-Balance Sheet Arrangements.

 

The Company enters into various off-balance sheet arrangements, including through unconsolidated special purpose entities (“SPEs”) and lending-related financial instruments (e.g., guarantees and commitments), primarily in connection with the Institutional Securities and Investment Management business segments.

 

The Company utilizes SPEs primarily in connection with securitization activities. For information on the Company’s securitization activities, see Note 12 to the condensed consolidated financial statements in Item 1.

 

For information on the Company’s commitments, obligations under certain guarantee arrangements and indemnities, see Note 11 to the condensed consolidated financial statements in Item 1. For further information on the Company’s lending commitments, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Lending Activities” in Item 3.

 

Effects of Inflation and Changes in Interest and Foreign Exchange Rates.

 

For a discussion of the effects of inflation and changes in foreign exchange rates on the Company’s business and financial results and strategies to mitigate potential exposures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Effects of Inflation and Changes in Interest and Foreign Exchange Rates” in Part II, Item 7 of the 2015 Form 10-K.

 

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Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

 

Risk Management.

 

Management believes effective risk management is vital to the success of the Company’s business activities. For a discussion of the Company’s risk management functions, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management” in Part II, Item 7A of the 2015 Form 10-K.

 

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 market liquidity, will result in losses for a position or portfolio. Generally, the Company incurs market risk as a result of trading, investing and client facilitation activities, principally within the Institutional Securities business segment where the substantial majority of the Company’s Value-at-Risk (“VaR”) for market risk exposures is generated. In addition, the Company incurs trading-related market risk within the Wealth Management business segment. The Institutional Securities and Wealth Management business segments incur non-trading interest rate risk primarily from lending and deposit taking activities. The Investment Management business segment incurs principally non-trading market risk primarily from investments in private equity and real estate funds. For a further discussion of market risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Market Risk” in Part II, Item 7A of the 2015 Form 10-K.

 

VaR.

 

The Company uses the statistical technique known as VaR as one of the tools used to measure, monitor and review the market risk exposures of its trading portfolios. The Market Risk Department calculates and distributes daily VaR-based risk measures to various levels of management.

 

VaR Methodology, Assumptions and Limitations.    For information regarding the Company’s VaR methodology, assumptions and limitations, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Market Risk—Sales and Trading and Related Activities—VaR Methodology, Assumptions and Limitations” in Part II, Item 7A of the 2015 Form 10-K.

 

The Company utilizes the same VaR model for risk management purposes as well as for regulatory capital calculations as approved by the Company’s regulators.

 

The portfolio of positions used for the Company’s VaR for risk management purposes (“Management VaR”) differs from that used for regulatory capital requirements (“Regulatory VaR”), as Management VaR contains certain positions that are excluded from Regulatory VaR. Examples include counterparty Credit Valuation Adjustments (“CVA”) and related hedges, as well as loans that are carried at fair value and associated hedges.

 

The following table presents the Management VaR for the Trading portfolio, on a period-end, quarterly average and quarterly high and low basis. To further enhance the transparency of the traded market risk, the Credit Portfolio VaR has been disclosed as a separate category from the Primary Risk Categories. The Credit Portfolio includes counterparty CVA and related hedges, as well as loans that are carried at fair value and associated hedges.

 

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Trading Risks.

 

95%/One-Day Management VaR.

 

     95%/One-Day VaR for the Quarter
Ended March 31, 2016
     95%/One-Day VaR for the
Quarter Ended December 31, 2015
 

Market Risk Category

   Period
End
    Average     High      Low      Period
End
    Average     High      Low  
     (dollars in millions)  

Interest rate and credit spread

   $ 35      $ 33      $ 39       $ 28       $ 28      $ 31      $ 42       $ 27   

Equity price

     16        18        26         14         17        18        25         16   

Foreign exchange rate

     7        7        11         5         6        11        20         6   

Commodity price

     11        11        13         10         10        12        18         10   

Less: Diversification benefit(1)(2)

     (30     (27     N/A         N/A         (23     (29     N/A         N/A   
  

 

 

   

 

 

         

 

 

   

 

 

      

Primary Risk Categories

   $ 39      $ 42      $ 53       $ 34       $ 38      $ 43      $ 53       $ 38   
  

 

 

   

 

 

         

 

 

   

 

 

      

Credit Portfolio

     19        16        20         12         12        13        14         12   

Less: Diversification benefit(1)(2)

     (11     (12     N/A         N/A         (9     (10     N/A         N/A   
  

 

 

   

 

 

         

 

 

   

 

 

      

Total Management VaR

   $     47      $     46      $     55       $     39       $     41      $     46      $     53       $     41   
  

 

 

   

 

 

         

 

 

   

 

 

      

 

N/A—Not

Applicable.

(1)

Diversification benefit equals the difference between the total Management VaR and the sum of the component VaRs. This benefit arises because the simulated one-day losses for each of the components occur on different days; similar diversification benefits also are taken into account within each component.

(2)

The high and low VaR values for the total Management VaR and each of the component VaRs might have occurred on different days during the quarter, and therefore, the diversification benefit is not an applicable measure.

 

The average Management VaR for the Primary Risk Categories for the quarter ended March 31, 2016 was $42 million which was relatively consistent with $43 million for the quarter ended December 31, 2015.

 

The average Management VaR for the Credit Portfolio for the quarter ended March 31, 2016 was $16 million compared with $13 million for the quarter ended December 31, 2015. The increase was driven by higher market volatility.

 

Distribution of VaR Statistics and Net Revenues for the quarter ended March 31, 2016.    One method of evaluating the reasonableness of the Company’s VaR model as a measure of the Company’s potential volatility of net revenues is to compare VaR with actual trading revenues. Assuming no intraday trading, for a 95%/one-day VaR, the expected number of times that trading losses should exceed VaR during the year is 13, and, in general, if trading losses were to exceed VaR more than 21 times in a year, the adequacy of the VaR model would be questioned. The Company evaluates the reasonableness of its VaR model by comparing the potential declines in portfolio values generated by the model with actual trading results for the Company, as well as individual business units. For days where losses exceed the VaR statistic, the Company examines the drivers of trading losses to evaluate the VaR model’s accuracy relative to realized trading results.

 

The distribution of VaR Statistics and Net Revenues is presented in the histograms below for the Total Trading populations.

 

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Total Trading.    As shown in the 95%/One-Day Management VaR table, the average 95%/one-day Total Management VaR for the quarter ended March 31, 2016 was $46 million. The histogram below presents the distribution of the daily 95%/one-day Total Management VaR for the quarter ended March 31, 2016, which was in a range between $40 million and $55 million for approximately 97% of trading days during the quarter.

 

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The histogram below shows the distribution for the quarter ended March 31, 2016 of daily net trading revenues, including profits and losses from Interest rate and credit spread, Equity price, Foreign exchange rate, Commodity price and Credit Portfolio positions and intraday trading activities, for the Company’s Trading businesses. Daily net trading revenues also include intraday trading activities but exclude certain items not captured in the VaR model, such as fees, commissions and net interest income. Daily net trading revenues differ from the definition of revenues required for Regulatory VaR backtesting, which further excludes intraday trading. During the quarter ended March 31, 2016, the Company experienced net trading losses on 8 days, of which no day was in excess of the 95%/one-day Total Management VaR.

 

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Non-trading Risks.

 

The Company believes that sensitivity analysis is an appropriate representation of the Company’s non-trading risks. Reflected below is this analysis covering substantially all of the non-trading risk in the Company’s portfolio.

 

Counterparty Exposure Related to the Company’s Own Credit Spread.    The credit spread risk sensitivity of the counterparty exposure related to the Company’s own credit spread corresponded to an increase in value of approximately $7 million and $6 million for each 1 basis point widening in the Company’s credit spread level at March 31, 2016 and December 31, 2015, respectively.

 

Funding Liabilities.    The credit spread risk sensitivity of the Company’s mark-to-market funding liabilities corresponded to an increase in value of approximately $13 million and $11 million for each 1 basis point widening in the Company’s credit spread level at March 31, 2016 and December 31, 2015, respectively.

 

Interest Rate Risk Sensitivity.    The table below presents an analysis of selected instantaneous upward and downward parallel interest rate shocks on net interest income over the next 12 months for the Company’s U.S. Bank Subsidiaries. These shocks are applied to the Company’s 12-month forecast for its U.S. Bank Subsidiaries, which incorporates market expectations of interest rates and the Company’s forecasted business activity, including its deposit deployment strategy and asset-liability management hedges.

 

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U.S. Bank Subsidiaries’ Net Interest Income Sensitivity Analysis.

 

     At
  March 31,  2016  
    At
  December 31,  2015  
 
     (dollars in millions)  

+200 basis points

   $ (202   $ (149

+100 basis points

     (79     (84

–100 basis points

     (534     (512

 

At March 31, 2016 and December 31, 2015, large instantaneous interest rates shocks had a negative impact to the Company’s U.S. Bank Subsidiaries’ projected net interest income over the following 12 months due to composition of the banks’ assets as well as expected deposit pricing behavior at higher levels of interest rates. The Company does not manage to any single rate scenario but rather manages net interest income in its U.S. Bank Subsidiaries to optimize across a range of possible outcomes. The sensitivity analysis assumes that the Company takes no action in response to these scenarios and does not assume any change in other macroeconomic variables normally correlated with changes in interest rates.

 

Investments.    The Company makes investments in both public and private companies. These investments are predominantly equity positions with long investment horizons, the majority of which are for business facilitation purposes. The market risk related to these investments is measured by estimating the potential reduction in net income associated with a 10% decline in investment values and related impact on performance fees.

 

Investments Sensitivity, Including Related Performance Fees.

 

     10% Sensitivity  
     At
    March  31, 2016    
     At
    December  31, 2015    
 
     (dollars in millions)  

Investments related to Investment Management activities:

     

Real estate funds

   $ 137       $ 139   

Private equity and infrastructure funds

     125         131   

Traditional asset management and hedge fund investments

     100         101   

Other investments:

     

Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.

     159         142   

Other Company investments

     169         194   

 

Equity Market Sensitivity.    In the Wealth Management and Investment Management business segments, certain fee-based revenue streams are driven by the value of clients’ equity holdings. The overall level of revenues for these streams also depends on multiple additional factors that include, but are not limited to, the level and duration of the equity market decline, price volatility, the geographic and industry mix of client assets, the rate and magnitude of client investments and redemptions, and the impact of such market decline and price volatility on client behavior. Therefore, overall revenues do not correlate completely with changes in the equity markets.

 

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 primarily incurs credit risk exposure to institutions and individuals through its Institutional Securities and Wealth Management business segments. For a further discussion of the Company’s credit risks, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk” in Part II, Item 7A of the 2015 Form 10-K. Also, see Notes 7 and 11 to the condensed consolidated financial statements in Item 1 for additional information about the Company’s loans and lending commitments, respectively.

 

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Lending Activities.

 

The Company provides loans and lending commitments to a variety of customers, from large corporate and institutional clients to high net worth individuals. In addition, the Company purchases loans in the secondary market. In the condensed consolidated balance sheet, these loans and lending commitments are carried at either fair value with changes in fair value recorded in earnings; held for investment, which are recorded at amortized cost; or held for sale, which are recorded at lower of cost or fair value. Loans held for investment and loans held for sale are classified in Loans, and loans held at fair value are classified in Trading assets in the condensed consolidated balance sheet. See Notes 3, 7 and 11 to the condensed consolidated financial statements in Item 1 for further information.

 

Loan and Lending Commitment Portfolio by Business Segment.

 

     At March 31, 2016  
     Institutional
Securities
    Wealth
Management
    Total  
     (dollars in millions)  

Corporate loans

   $ 17,288      $ 7,838      $ 25,126   

Consumer loans

            22,174        22,174   

Residential real estate loans

            21,780        21,780   

Wholesale real estate loans

     6,816               6,816   
  

 

 

   

 

 

   

 

 

 

Loans held for investment, gross of allowance

     24,104        51,792        75,896   

Allowance for loan losses

     (297     (33     (330
  

 

 

   

 

 

   

 

 

 

Loans held for investment, net of allowance

     23,807        51,759        75,566   
  

 

 

   

 

 

   

 

 

 

Corporate loans

     12,000               12,000   

Residential real estate loans

     42        57        99   

Wholesale real estate loans

     1,137               1,137   
  

 

 

   

 

 

   

 

 

 

Loans held for sale

     13,179        57        13,236   
  

 

 

   

 

 

   

 

 

 

Corporate loans

     7,455               7,455   

Residential real estate loans

     1,727               1,727   

Wholesale real estate loans

     643               643   
  

 

 

   

 

 

   

 

 

 

Loans held at fair value

     9,825               9,825   
  

 

 

   

 

 

   

 

 

 

Total loans(1)

     46,811        51,816        98,627   

Lending commitments(2)(3)

     93,272        6,358        99,630   
  

 

 

   

 

 

   

 

 

 

Total loans and lending commitments(2)(3)

   $         140,083      $         58,174      $         198,257   
  

 

 

   

 

 

   

 

 

 

 

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     At December 31, 2015  
     Institutional
Securities
    Wealth
Management
    Total  
     (dollars in millions)  

Corporate loans

   $         16,452      $         7,102      $         23,554   

Consumer loans

            21,528        21,528   

Residential real estate loans

            20,863        20,863   

Wholesale real estate loans

     6,839               6,839   
  

 

 

   

 

 

   

 

 

 

Loans held for investment, gross of allowance

     23,291        49,493        72,784   

Allowance for loan losses

     (195     (30     (225
  

 

 

   

 

 

   

 

 

 

Loans held for investment, net of allowance

     23,096        49,463        72,559   
  

 

 

   

 

 

   

 

 

 

Corporate loans

     11,924               11,924   

Residential real estate loans

     45        59        104   

Wholesale real estate loans

     1,172               1,172   
  

 

 

   

 

 

   

 

 

 

Loans held for sale

     13,141        59        13,200   
  

 

 

   

 

 

   

 

 

 

Corporate loans

     7,286               7,286   

Residential real estate loans

     1,885               1,885   

Wholesale real estate loans

     1,447               1,447   
  

 

 

   

 

 

   

 

 

 

Loans held at fair value

     10,618               10,618   
  

 

 

   

 

 

   

 

 

 

Total loans(1)

     46,855        49,522        96,377   

Lending commitments(2)(3)

     95,572        5,821        101,393   
  

 

 

   

 

 

   

 

 

 

Total loans and lending commitments(2)(3)

   $ 142,427      $ 55,343      $ 197,770   
  

 

 

   

 

 

   

 

 

 

 

(1)

Amounts exclude $24.6 billion and $25.3 billion related to margin loans and $4.7 billion and $4.9 billion related to employee loans at March 31, 2016 and December 31, 2015, respectively. See Notes 6 and 7 to the condensed consolidated financial statements in Item 1 for further information.

(2)

Lending commitments represent the notional amount of legally binding obligations to provide funding to clients for all lending transactions. Since commitments associated with these business activities may expire unused or may not be utilized to full capacity, they do not necessarily reflect the actual future cash funding requirements.

(3)

For syndications led by the Company, the lending commitments accepted by the borrower but not yet closed are net of the amounts agreed to by counterparties that will participate in the syndication. For syndications that the Company participates in and does not lead, lending commitments accepted by the borrower but not yet closed include only the amount that the Company expects it will be allocated from the lead, syndicate bank. Due to the nature of the Company’s obligations under the commitments, these amounts include certain commitments participated to third parties.

 

The Company’s credit exposure from its loans and lending commitments is measured in accordance with the Company’s internal risk management standards. Risk factors considered in determining the aggregate allowance for loan and commitment losses include the borrower’s financial strength, seniority of the loan, collateral type, volatility of collateral value, debt cushion, loan-to-value ratio, debt service ratio, covenants and counterparty type. At March 31, 2016 and December 31, 2015, the allowance for loan losses related to loans that were accounted for as held for investment was $330 million and $225 million, respectively, and the allowance for commitment losses related to lending commitments that were accounted for as held for investment was $201 million and $185 million, respectively. The aggregate allowance for loan and commitment losses increased over the quarter ended March 31, 2016 primarily due to specific reserves on exposures to counterparties in the energy sector and other select downgrades. See “Institutional Securities Lending Exposure Related to the Energy Industry” herein and Note 7 to the condensed consolidated financial statements in Item 1 for further information.

 

Institutional Securities Lending Activities.    In connection with certain of its Institutional Securities business segment activities, the Company provides loans and lending commitments to a diverse group of corporate and other institutional clients. These activities include corporate lending, commercial and residential mortgage lending, asset-backed lending, corporate loans purchased in the secondary market, financing extended to equities and commodities customers, and loans to municipalities. These loans and lending commitments may have varying terms; may be senior or subordinated; may be secured or unsecured; are generally contingent upon representations, warranties and contractual conditions applicable to the borrower; and may be syndicated, traded or hedged by the Company.

 

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Institutional Securities loans and lending commitments are mainly related to relationship-based and event-driven lending to select corporate clients. Relationship-based loans and lending commitments are used for general corporate purposes, working capital and liquidity purposes by the Company’s Investment Banking clients and typically consist of revolving lines of credit, letter of credit facilities and term loans. In connection with the relationship-based lending activities, the Company had hedges (which included single name, sector and index hedges) with a notional amount of $10.2 billion and $12.0 billion at March 31, 2016 and December 31, 2015, respectively. Event-driven loans and lending commitments are associated with a particular event or transaction, such as to support client merger, acquisition, recapitalization and project finance activities. Event-driven loans and lending commitments typically consist of revolving lines of credit, term loans and bridge loans.

 

Institutional Securities Loans and Lending Commitments by Credit Rating(1).

 

     At March 31, 2016  
     Years to Maturity         
     Less than 1      1-3      3-5      Over 5      Total  
     (dollars in millions)  

AAA

   $ 287       $ 24       $ 50       $       $ 361   

AA

     4,999         1,794         4,096                 10,889   

A

     3,788         6,645         9,924         1,099         21,456   

BBB

     7,582         16,614         24,800         3,165         52,161   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Investment grade

     16,656         25,077         38,870         4,264         84,867   

Non-investment grade

     9,374         16,717         20,875         4,413         51,379   

Unrated(2)

     832         801         56         2,148         3,837   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $     26,862       $     42,595       $     59,801       $     10,825       $     140,083   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2015  
     Years to Maturity         
     Less than 1      1-3      3-5      Over 5      Total  
     (dollars in millions)  

AAA

   $ 287       $ 24       $ 50       $       $ 361   

AA

     5,022         2,553         3,735         63         11,373   

A

     3,996         5,726         11,993         1,222         22,937   

BBB

     5,089         16,720         23,248         4,086         49,143   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Investment grade

     14,394         25,023         39,026         5,371         83,814   

Non-investment grade

     7,768         15,863         22,818         7,779         54,228   

Unrated(2)

     930         1,091         246         2,118         4,385   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $     23,092       $     41,977       $     62,090       $     15,268       $     142,427   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Obligor credit ratings are determined by the Credit Risk Management Department.

(2)

Unrated loans and lending commitments are primarily trading positions that are measured at fair value and risk managed as a component of Market Risk. For a further discussion of the Company’s Market Risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Market Risk” in Part II, Item 7A of the 2015 Form 10-K.

 

At March 31, 2016 and December 31, 2015, the aggregate amount of investment grade loans was $15.4 billion and $15.8 billion, respectively, the aggregate amount of non-investment grade loans was $27.7 billion and $26.9 billion, respectively, and the aggregate amount of unrated loans was $3.7 billion and $4.2 billion, respectively.

 

Event-Driven Loans and Lending Commitments.

 

     At March 31, 2016      At December 31, 2015  
          (dollars in billions)  

Event-driven loans

   $ 5.9       $ 5.4   

Event-driven lending commitments

     16.0         17.8   
     

 

 

    

 

 

 

Total

   $ 21.9       $ 23.2   
     

 

 

    

 

 

 

Event-driven loans and lending commitments to non-investment grade borrowers

   $ 10.6       $ 13.5   

 

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Maturity Profile of Event-driven Loans and Lending Commitments.

 

     At March 31, 2016     At December 31, 2015  

Less than 1 year

     34     24

1-3 years

     21     21

3-5 years

     24     24

Over 5 years

     21     31

 

At March 31, 2016, approximately 98% of the Institutional Securities business segment loans held for investment were current, while approximately 2% were on nonaccrual status, and at December 31, 2015, approximately 99% of the Institutional Securities business segment loans held for investment were current, while approximately 1% were on nonaccrual status because the loans were past due for a period of 90 days or more or payment of principal or interest was in doubt.

 

Institutional Securities Credit Exposure from Loans and Lending Commitments by Industry.

 

Industry(1)

   At March 31, 2016      At December 31, 2015  
     (dollars in millions)  

Real estate

   $ 16,761       $ 17,847   

Energy

     14,828         15,921   

Healthcare

     14,143         12,677   

Consumer discretionary

     13,612         12,098   

Utilities

     12,967         12,631   

Funds, exchanges and other financial services(2)

     10,544         11,649   

Industrials

     10,128         10,018   

Information technology

     8,462         11,122   

Mortgage finance

     8,327         8,260   

Consumer staples

     7,770         8,597   

Materials

     6,424         6,440   

Telecommunications services

     5,005         4,403   

Insurance

     4,588         4,682   

Special purpose vehicles

     2,754         3,482   

Consumer finance

     2,168         977   

Other

     1,602         1,623   
  

 

 

    

 

 

 

Total

   $             140,083       $             142,427   
  

 

 

    

 

 

 

 

(1)

Industry categories are based on the Global Industry Classification Standard®.

(2)

Includes mutual funds, pension funds, private equity and real estate funds, exchanges and clearinghouses, and diversified financial services.

 

Institutional Securities Lending Exposures Related to the Energy Industry.    At March 31, 2016, Institutional Securities’ loans and lending commitments related to the energy industry were $14.8 billion, of which approximately 60% are accounted for as held for investment and 40% are accounted for as either held for sale or at fair value. Additionally, approximately 60% of the total energy industry loans and lending commitments were to investment grade counterparties. At March 31, 2016, the energy industry portfolio included $1.8 billion in loans and $2.3 billion in lending commitments to Oil and Gas Exploration and Production (“E&P”) companies. The E&P lending commitments were primarily to investment grade counterparties. The E&P loans were substantially all to non-investment grade counterparties, which are generally subject to periodic borrowing base reassessments based on the value of the underlying oil and gas reserves pledged as collateral. In limited situations, the Company may extend the period related to borrowing base reassessments typically in conjunction with taking certain risk mitigating actions with the borrower. During the quarter ended March 31, 2016, the Company increased the allowance for loan and commitment losses on held for investment energy exposures and incurred mark-to-market losses on fair value and held for sale energy loans. See “Credit Risk—Lending Activities” herein for further information. To the extent commodities prices, or oil prices, remain at quarter-end levels, or deteriorate further, the Company may incur additional lending losses.

 

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Margin Lending.    In addition, Institutional Securities lending activities include margin lending, which allows the client to borrow against the value of qualifying securities. At March 31, 2016 and December 31, 2015, the amounts related to margin lending were $10.2 billion and $10.6 billion, respectively, which were classified within Customer and other receivables in the condensed consolidated balance sheet.

 

Other.    In addition to the activities noted above, there are other credit risks managed by the Credit Risk Management Department and various business areas within the Institutional Securities business segment. The Company participates in securitization activities whereby it extends short-term or long-term funding to clients through loans and lending commitments that are secured by the assets of the borrower and generally provide for over-collateralization, including commercial real estate loans, loans secured by loan pools, commercial company loans, and secured lines of revolving credit. Credit risk with respect to these loans and lending commitments arises from the failure of a borrower to perform according to the terms of the loan agreement or a decline in the underlying collateral value. See Note 12 to the condensed consolidated financial statements in Item 1 for information about the Company’s securitization activities. In addition, a collateral management group monitors collateral levels against requirements and oversees the administration of the collateral function. See Note 6 to the condensed consolidated financial statements in Item 1 for additional information about the Company’s collateralized transactions.

 

Wealth Management Lending Activities.    The principal Wealth Management lending activities include securities-based lending and residential real estate loans.

 

Securities-based lending provided to the Company’s retail clients is primarily conducted through its Portfolio Loan Account (“PLA”) and Liquidity Access Line (“LAL”) platforms which had an outstanding loan balance of $25.7 billion and $24.9 billion at March 31, 2016 and December 31, 2015, respectively. These loans allow the client to borrow money against the value of qualifying securities for any purpose other than purchasing securities. The Company establishes approved credit lines against qualifying securities and monitors terms daily and, pursuant to such guidelines, requires customers to deposit additional collateral, or reduce debt positions, when necessary. These credit lines are primarily uncommitted loan facilities, as the Company reserves the right to not make any advances, or may terminate these credit lines at any time. Factors considered in the review of these loans include, but are not limited to, the loan amount, the client’s credit profile, the degree of leverage, collateral diversification, price volatility and liquidity of the collateral.

 

Residential real estate loans consist of first and second lien mortgages, including HELOC loans. The Company’s underwriting policy is designed to ensure that all borrowers pass an assessment of capacity and willingness to pay, which includes an analysis utilizing industry standard credit scoring models (e.g., Fair Isaac Corporation (“FICO”) scores), debt ratios and assets of the borrower. Loan-to-value ratios are determined based on independent third-party property appraisal/valuations, and security lien position is established through title/ownership reports. The vast majority of mortgage and HELOC loans are held for investment in the Wealth Management business segment’s loan portfolio.

 

For the quarter ended March 31, 2016, loans and lending commitments associated with the Wealth Management business segment lending activities increased by approximately 5.1%, mainly due to growth in LAL and residential real estate loans.

 

Wealth Management Lending Activities by Remaining Contractual Maturity.

 

     At March 31, 2016  
     Years to Maturity         
     Less than 1      1-3      3-5      Over 5      Total  
     (dollars in millions)  

Securities-based lending and other loans

   $ 26,865       $ 1,191       $ 1,106       $ 837       $ 29,999   

Residential real estate loans

                     50         21,767         21,817   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 26,865       $ 1,191       $ 1,156       $ 22,604       $ 51,816   

Lending commitments

     5,373         186         529         270         6,358   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans and lending commitments

   $     32,238       $     1,377       $     1,685       $     22,874       $     58,174   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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     At December 31, 2015  
     Years to Maturity         
     Less than 1      1-3      3-5      Over 5      Total  
     (dollars in millions)  

Securities-based lending and other loans

   $     25,975       $     1,004       $        889       $ 749       $     28,617   

Residential real estate loans

                     35             20,870         20,905   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 25,975       $ 1,004       $ 924       $ 21,619       $ 49,522   

Lending commitments

     5,143         286         115         277         5,821   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans and lending commitments

   $ 31,118       $ 1,290       $ 1,039       $ 21,896       $ 55,343   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

At March 31, 2016 and December 31, 2015, approximately 99.9% of the Wealth Management business segment loans held for investment were current, while approximately 0.1% were on nonaccrual status because the loans were past due for a period of 90 days or more or payment of principal or interest was in doubt.

 

The Wealth Management business segment also provides margin lending to clients and had an outstanding balance of $14.4 billion and $14.7 billion at March 31, 2016 and December 31, 2015, respectively, which were classified within Customer and other receivables within the condensed consolidated balance sheet.

 

In addition, the Wealth Management business segment has employee loans that are granted primarily in conjunction with programs established by the Company to retain and recruit certain employees. These loans are recorded in Customer and other receivables in the condensed consolidated balance sheet. These loans are full recourse, generally require periodic payments and have repayment terms ranging from 2 to 12 years. The Company establishes an allowance for loan amounts it does not consider recoverable, which is recorded in Compensation and benefits expense.

 

Credit Exposure—Derivatives.

 

The Company incurs credit risk as a dealer in OTC derivatives. Credit risk with respect to derivative instruments arises from the failure of a counterparty to perform according to the terms of the contract. In connection with its OTC derivative activities, the Company generally enters into master netting agreements and collateral arrangements with counterparties. These agreements provide the Company with the ability to demand collateral, as well as to liquidate collateral and offset receivables and payables covered under the same master netting agreement in the event of counterparty default. The Company manages its trading positions by employing a variety of risk mitigation strategies. These strategies include diversification of risk exposures and hedging. Hedging activities consist of the purchase or sale of positions in related securities and financial instruments, including a variety of derivative products (e.g., futures, forwards, swaps and options). For credit exposure information on the Company’s OTC derivative products, see Note 4 to the condensed consolidated financial statements in Item 1.

 

Credit Derivatives.    For a discussion of the Company’s credit exposure to derivative contracts, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Credit Exposure—Derivatives” in Part II, Item 7A of the 2015 Form 10-K.

 

Credit Derivative Portfolio by Counterparty Type.

 

     At March 31, 2016  
     Fair Values(1)     Notionals  
     Receivable      Payable      Net     Protection
Purchased
     Protection
Sold
 
     (dollars in millions)  

Banks and securities firms

   $ 14,791       $ 15,244       $ (453   $ 515,969       $ 475,416   

Insurance and other financial institutions

     5,423         5,909         (486     199,358         206,180   

Non-financial entities

     87         114         (27     6,110         3,571   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $     20,301       $     21,267       $     (966   $     721,437       $     685,167   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

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     At December 31, 2015  
     Fair Values(1)     Notionals  
     Receivable      Payable      Net     Protection
Purchased
     Protection
Sold
 
     (dollars in millions)  

Banks and securities firms

   $ 16,962       $ 17,295       $ (333   $ 533,557       $ 491,267   

Insurance and other financial institutions

     5,842         6,247         (405     189,439         194,723   

Non-financial entities

     115         123         (8     5,932         3,529   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $     22,919       $     23,665       $     (746   $     728,928       $     689,519   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

The Company’s CDS are classified in either Level 2 or Level 3 of the fair value hierarchy. Approximately 4% and 3% of receivable fair values and 7% and 6% of payable fair values represented Level 3 amounts at March 31, 2016 and December 31, 2015, respectively (see Note 3 to the condensed consolidated financial statements in Item 1).

 

The fair values shown above are before the application of contractual netting or collateral. For additional credit exposure information on the Company’s credit derivative portfolio, see Note 4 to the condensed consolidated financial statements in Item 1.

 

OTC Derivative Products at Fair Value, Net of Collateral, by Industry.

 

Industry(1)

   At March 31, 2016      At December 31, 2015  
     (dollars in millions)  

Banks and securities firms

   $ 4,239       $ 1,672   

Utilities

     4,040         3,428   

Funds, exchanges and other financial services(2)

     2,753         2,029   

Industrials

     2,337         2,304   

Regional governments

     1,562         1,163   

Healthcare

     1,215         1,041   

Sovereign governments

     1,003         524   

Not-for-profit organizations

     981         794   

Special purpose vehicles

     822         718   

Information technology

     624         294   

Consumer discretionary

     588         725   

Consumer staples

     561         506   

Materials

     552         473   

Insurance

     390         380   

Energy

     366         396   

Other

     448         177   
  

 

 

    

 

 

 

Total(3)

   $             22,481       $             16,624   
  

 

 

    

 

 

 

 

(1)

Industry categories are based on the Global Industry Classification Standard®.

(2)

Amounts include mutual funds, pension funds, private equity and real estate funds, exchanges and clearinghouses, and diversified financial services.

(3)

For further information on derivative instruments and hedging activities, see Note 4 to the condensed consolidated financial statements in Item 1.

 

Country Risk Exposure.

 

Country risk exposure is the risk that events in, or that affect, a foreign country (any country other than the U.S.) might adversely affect the Company. The Company actively manages country risk exposure through a comprehensive risk management framework that combines credit and market fundamentals and allows the Company to effectively identify, monitor and limit country risk. Country risk exposure before and after hedging is monitored and managed. For a further discussion of the Company’s country risk exposure see, “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Country Risk Exposure” in Part II, Item 7A of the 2015 Form 10-K.

 

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The Company’s sovereign exposures consist of financial instruments entered into with sovereign and local governments. Its non-sovereign exposures consist of exposures to primarily corporations and financial institutions. The following table shows the Company’s 10 largest non-U.S. country risk net exposures at March 31, 2016. Index credit derivatives are included in the country risk exposure table. Each reference entity within an index is allocated to that reference entity’s country of risk. Index exposures are allocated to the underlying reference entities in proportion to the notional weighting of each reference entity in the index, adjusted for any fair value receivable/payable for that reference entity. Where credit risk crosses multiple jurisdictions, for example, a CDS purchased from an issuer in a specific country that references bonds issued by an entity in a different country, the fair value of the CDS is reflected in the Net Counterparty Exposure column based on the country of the CDS issuer. Further, the notional amount of the CDS adjusted for the fair value of the receivable/payable is reflected in the Net Inventory column based on the country of the underlying reference entity.

 

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Top Ten Country Exposures at March 31, 2016.

 

Country

   Net Inventory(1)     Net
Counterparty
Exposure(2)(3)
     Loans      Lending
Commitments
     Exposure Before
Hedges
    Hedges(4)     Net Exposure(5)  
     (dollars in millions)  

United Kingdom:

                 

Sovereigns

   $ 351      $ 56       $       $       $ 407      $ (165   $ 242   

Non-sovereigns

     490        9,842         3,890         6,242         20,464        (1,960     18,504   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Subtotal

   $ 841      $ 9,898       $ 3,890       $ 6,242       $ 20,871      $ (2,125   $ 18,746   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Brazil:

                 

Sovereigns

   $ 4,127      $       $       $       $ 4,127      $      $ 4,127   

Non-sovereigns

     13        434         1,093         91         1,631        (698     933   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Subtotal

   $ 4,140      $ 434       $         1,093       $ 91       $ 5,758      $ (698   $ 5,060   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Germany

                 

Sovereigns

   $ 143      $ 755       $       $       $ 898      $ (1,628   $ (730

Non-sovereigns

     107        1,696         358         3,962         6,123        (1,759     4,364   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Subtotal

   $ 250      $ 2,451       $ 358       $ 3,962       $ 7,021      $ (3,387   $ 3,634   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

France:

                 

Sovereigns

   $ (363   $ 1       $       $       $ (362   $      $ (362

Non-sovereigns

     (178     2,293         16         2,443         4,574        (921     3,653   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Subtotal

   $ (541   $ 2,294       $ 16       $ 2,443       $ 4,212      $ (921   $ 3,291   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

China

                 

Sovereigns

   $ 341      $ 273       $       $       $ 614      $ (344   $ 270   

Non-sovereigns

     1,188        287         936         632         3,043        (73     2,970   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Subtotal

   $ 1,529      $ 560       $ 936       $ 632       $ 3,657      $ (417   $ 3,240   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Canada

                 

Sovereigns

   $ (27   $ 48       $       $       $ 21      $      $ 21   

Non-sovereigns

     (30     1,288         213         1,587         3,058        (201     2,857   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Subtotal

   $ (57   $ 1,336       $ 213       $ 1,587       $ 3,079      $ (201   $ 2,878   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Singapore

                 

Sovereigns

   $ 1,980      $ 256       $       $       $ 2,236      $      $ 2,236   

Non-sovereigns

     49        313         45         122         529        (29     500   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Subtotal

   $ 2,029      $ 569       $ 45       $ 122       $ 2,765      $ (29   $ 2,736   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Italy

                 

Sovereigns

   $ 1,014      $ 7       $       $       $ 1,021      $ 12      $ 1,033   

Non-sovereigns

     245        860         11         698         1,814        (205     1,609   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Subtotal

   $ 1,259      $ 867       $ 11       $ 698       $ 2,835      $ (193   $ 2,642   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

United Arab Emirates

                 

Sovereigns

   $ 7      $ 1,359       $       $       $ 1,366      $ (80   $ 1,286   

Non-sovereigns

     (18     400         370         55         807        (15     792   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Subtotal

   $ (11   $ 1,759       $ 370       $ 55       $ 2,173      $ (95   $ 2,078   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Netherlands

                 

Sovereigns

   $ 88      $       $       $       $ 88      $      $ 88   

Non-sovereigns

     231        694         359         1,053         2,337        (363     1,974   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Subtotal

   $         319      $         694       $     359       $         1,053       $         2,425      $     (363   $         2,062   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(1)

Net inventory represents exposure to both long and short single-name and index positions (i.e., bonds and equities at fair value and CDS based on a notional amount assuming zero recovery adjusted for any fair value receivable or payable). As a market maker, the Company transacts in these CDS positions to facilitate client trading. At March 31, 2016, gross purchased protection, gross written protection, and net exposures related to single-name and index credit derivatives for those countries were $(148.2) billion, $146.4 billion and $(1.8) billion, respectively. For a further description of the triggers for purchased credit protection and whether those triggers may limit the effectiveness of the Company’s hedges, see “Credit Exposure—Derivatives” herein.

(2)

Net counterparty exposure (i.e., repurchase transactions, securities lending and OTC derivatives) takes into consideration legally enforceable master netting agreements and collateral.

 

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(3)

At March 31, 2016, the benefit of collateral received against counterparty credit exposure was $12.6 billion in Germany, with 97% of collateral consisting of cash and government obligations of France and Germany, and $11.1 billion in the U.K. with 99% of collateral consisting of cash and government obligations of the U.K. and U.S. The benefit of collateral received against counterparty credit exposure in the other countries totaled approximately $14.0 billion, with collateral primarily consisting of cash and government obligations of Brazil, the U.S. and France. These amounts do not include collateral received on secured financing transactions.

(4)

Amounts represent CDS hedges (purchased and sold) on net counterparty exposure and lending executed by trading desks responsible for hedging counterparty and lending credit risk exposures for the Company. Amounts are based on the CDS notional amount assuming zero recovery adjusted for any fair value receivable or payable.

(5)

In addition, at March 31, 2016, the Company had exposure to these countries for overnight deposits with banks of approximately $6.3 billion.

 

Country Risk Exposure Related to Brazil.    At March 31, 2016, the Company’s country risk exposures in Brazil included net exposures of $5,060 million (shown in the above table). The Company’s sovereign net exposures in Brazil were principally in the form of local currency government bonds held onshore to support client activity. The $933 million (shown in the above table) of exposures to non-sovereigns were diversified across both names and sectors.

 

Country Risk Exposure Related to China.    At March 31, 2016, the Company’s country risk exposures in China included net exposures of $3,240 million (shown in the above table) and overnight deposits with international banks of $406 million. The $2,970 million (shown in the above table) of exposures to non-sovereigns were diversified across both names and sectors and were primarily concentrated in high-quality positions with negligible direct exposure to onshore equities.

 

Operational Risk.

 

Operational risk refers to the risk of loss, or of damage to the Company’s reputation, resulting from inadequate or failed processes, people and systems or from external events (e.g., fraud, theft, legal and compliance risks, cyber attacks or damage to physical assets). We may incur operational risk across the full scope of our business activities, including revenue-generating activities (e.g., sales and trading) and support and control groups (e.g., information technology and trade processing). On March 4, 2016, the Basel Committee on Banking Supervision updated its proposal for calculating operational risk regulatory capital. Under the proposal, which would eliminate the use of an internal model-based approach, required levels of operational risk regulatory capital would generally be determined under a standardized approach based primarily on a financial statement-based measure of operational risk exposure and adjustments based on the particular institution’s historic operational loss record. The Company is evaluating the potential impact of the proposal, which is subject to public comment and further rulemaking procedures. For a further discussion about the Company’s operational risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Operational Risk” in Part II, Item 7A, of the 2015 Form 10-K.

 

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 our ability to meet our financial obligations without experiencing significant business disruption or reputational damage that may threaten our viability as a going concern. For a further discussion about the Company’s operational risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Liquidity and Funding Risk” in Part II, Item 7A, of the 2015 Form 10-K.

 

Legal and Compliance Risk.

 

Legal and compliance risk includes the risk of legal or regulatory sanctions, material financial loss, including fines, penalties, judgments, damages and/or settlements, or loss to reputation that the Company may suffer as a result of failure to comply with laws, regulations, rules, related self-regulatory organization standards and codes of conduct applicable to its business activities. This risk also includes contractual and commercial risk, such as the risk that a counterparty’s performance obligations will be unenforceable. It also includes compliance with anti-money laundering and terrorist financing rules and regulations. For a further discussion about the Company’s operational risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Legal and Compliance Risk” in Part II, Item 7A, of the 2015 Form 10-K.

 

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Item 4.

Controls and Procedures.

 

Under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

No change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) occurred during the period covered by this report that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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FINANCIAL DATA SUPPLEMENT (Unaudited)

Average Balances and Interest Rates and Net Interest Income

 

     Three Months Ended March 31, 2016  
     Average
Daily
Balance
     Interest     Average
Rate
 
     (dollars in millions)  

Assets

       

Interest earning assets:

       

Trading assets(1):

       

U.S.

   $ 98,478       $ 498        2.1

Non-U.S.

     92,876         84        0.4   

Investment securities:

       

U.S.

     75,765         236        1.3   

Loans:

       

U.S.

     86,427         641        3.0   

Non-U.S.

     187         6        13.0   

Interest bearing deposits with banks:

       

U.S.

     30,762         41        0.5   

Non-U.S.

     1,080         9        3.4   

Securities purchased under agreements to resell and Securities borrowed(2):

       

U.S.

     151,763         (62     (0.2

Non-U.S.

     86,124         (16     (0.1

Customer receivables and Other(3):

       

U.S.

     47,806         236        2.0   

Non-U.S.

     23,382         74        1.3   
  

 

 

    

 

 

   

Total

   $ 694,650       $ 1,747        1.0
     

 

 

   

Non-interest earning assets

     108,617        
  

 

 

      

Total assets

   $ 803,267        
  

 

 

      

Liabilities and Equity

       

Interest bearing liabilities:

       

Deposits:

       

U.S.

   $ 156,179       $ 17       

Non-U.S.

     2,772         5        0.7   

Short-term borrowings(4):

       

U.S.

     889                  

Non-U.S.

     501         6        4.9   

Long-term borrowings(4):

       

U.S.

     151,441         950        2.5   

Non-U.S.

     7,226         9        0.5   

Trading liabilities(1):

       

U.S.

     31,851                  

Non-U.S.

     48,337                  

Securities sold under agreements to repurchase and Securities loaned(5):

       

U.S.

     31,431         140        1.8   

Non-U.S.

     24,986         124        2.0   

Customer payables and Other(6):

       

U.S.

     117,917         (376     (1.3

Non-U.S.

     65,349         (27     (0.2
  

 

 

    

 

 

   

Total

   $ 638,879       $ 848        0.5   
     

 

 

   

Non-interest bearing liabilities and equity

     164,388        
  

 

 

      

Total liabilities and equity

   $ 803,267        
  

 

 

      

Net interest income and net interest rate spread

      $ 899        0.5
     

 

 

   

 

 

 

 

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FINANCIAL DATA SUPPLEMENT (Unaudited)—(Continued)

Average Balances and Interest Rates and Net Interest Income

 

     Three Months Ended March 31, 2015  
     Average
Daily
Balance
     Interest     Average Rate  
     (dollars in millions)  

Assets

       

Interest earning assets:

       

Trading assets(1):

       

U.S.

   $ 89,652       $ 481        2.2

Non-U.S.

     118,355         113        0.4   

Investment securities:

       

U.S.

     69,824         201        1.2   

Loans:

       

U.S.

     66,686         469        2.9   

Non-U.S.

     282         5        7.2   

Interest bearing deposits with banks:

       

U.S.

     21,719         16        0.3   

Non-U.S.

     1,131         6        2.2   

Securities purchased under agreements to resell and Securities borrowed(2):

       

U.S.

     175,084         (153     (0.4

Non-U.S.

     75,596         49        0.3   

Customer receivables and Other(3):

       

U.S.

     65,288         171        1.1   

Non-U.S.

     23,211         126        2.2   
  

 

 

    

 

 

   

Total

   $ 706,828       $ 1,484        0.9
     

 

 

   

Non-interest earning assets

     131,899        
  

 

 

      

Total assets

   $ 838,727        
  

 

 

      

Liabilities and Equity

       

Interest bearing liabilities:

       

Deposits:

       

U.S.

   $ 132,882       $ 17        0.1

Non-U.S.

     1,397         1        0.3   

Short-term borrowings(4):

       

U.S.

     1,130                  

Non-U.S.

     933         4        1.7   

Long-term borrowings(4):

       

U.S.

     147,865         917        2.5   

Non-U.S.

     8,493         9        0.4   

Trading liabilities(1):

       

U.S.

     19,403                  

Non-U.S.

     59,604                  

Securities sold under agreements to repurchase and Securities loaned(5):

       

U.S.

     65,005         131        0.8   

Non-U.S.

     36,137         177        2.0   

Customer payables and Other(6):

       

U.S.

     120,351         (381     (1.3

Non-U.S.

     57,849         13        0.1   
  

 

 

    

 

 

   

Total

   $ 651,049       $ 888        0.6   
     

 

 

   

Non-interest bearing liabilities and equity

     187,678        
  

 

 

      

Total liabilities and equity

   $ 838,727        
  

 

 

      

Net interest income and net interest rate spread

      $ 596        0.3
     

 

 

   

 

 

 

 

(1)

Interest expense on Trading liabilities is reported as a reduction of Interest income on Trading assets.

(2)

Includes fees paid on securities borrowed.

(3)

Includes interest from customer receivables and other interest earning assets.

(4)

The Company also issues structured notes that have coupon or repayment terms linked to the performance of debt or equity securities, indices, currencies or commodities, which are recorded within Trading revenues (see Note 3).

(5)

Includes fees received on Securities loaned.

(6)

Includes fees received from prime brokerage customers for stock loan transactions incurred to cover customers’ short positions.

 

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FINANCIAL DATA SUPPLEMENT (Unaudited)—(Continued)

Rate/Volume Analysis

 

     Three Months Ended March 31, 2016 versus
Three Months Ended March 31, 2015
 
     Increase (decrease) due to change in:        
     Volume     Rate     Net Change  
     (dollars in millions)  

Interest earning assets

      

Trading assets:

      

U.S.

   $ 47      $ (30   $ 17   

Non-U.S.

     (24     (5     (29

Investment securities:

      

U.S.

     17        18        35   

Loans:

      

U.S.

     139        33        172   

Non-U.S.

     (2     3        1   

Interest bearing deposits with banks:

      

U.S.

     7        18        25   

Non-U.S.

            3        3   

Securities purchased under agreements to resell and Securities borrowed:

      

U.S.

     20        71        91   

Non-U.S.

     7        (72     (65

Customer receivables and Other:

      

U.S.

     (46     111        65   

Non-U.S.

     1        (53     (52
  

 

 

   

 

 

   

 

 

 

Change in interest income

   $ 166      $ 97      $ 263   
  

 

 

   

 

 

   

 

 

 

Interest bearing liabilities

      

Deposits:

      

U.S.

   $ 3      $ (3   $   

Non-U.S.

     1        3        4   

Short-term borrowings:

      

U.S.

                     

Non-U.S.

     (2     4        2   

Long-term borrowings:

      

U.S.

     22        11        33   

Non-U.S.

     (1     1          

Securities sold under agreements to repurchase and Securities loaned:

      

U.S.

     (68     77        9   

Non-U.S.

     (55     2        (53

Customer payables and Other:

      

U.S.

     8        (3     5   

Non-U.S.

     2        (42     (40
  

 

 

   

 

 

   

 

 

 

Change in interest expense

   $ (90   $ 50      $ (40
  

 

 

   

 

 

   

 

 

 

Change in net interest income

   $ 256      $ 47      $ 303   
  

 

 

   

 

 

   

 

 

 

 

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Part II—Other Information.

 

Item 1.

Legal Proceedings.

 

The following new matters and developments have occurred since previously reporting certain matters in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”). See also “Legal Proceedings” in Part I, Item 3 of the 2015 Form 10-K.

 

Residential Mortgage and Credit Crisis Related Matters.

 

Regulatory and Governmental Matters.

 

On April 1, 2016, the California Attorney General’s Office filed an action against the Company and certain affiliates in California state court styled California v. Morgan Stanley, et al., on behalf of California investors, including the California Public Employees’ Retirement System and the California Teachers’ Retirement System. The complaint alleges that the Company made misrepresentations and omissions regarding residential mortgage-backed securities and notes issued by the Cheyne SIV, and asserts violations of the California False Claims Act and other state laws and seeks treble damages, civil penalties, disgorgement, and injunctive relief.

 

Civil Litigation.

 

On April 21, 2016, the Company filed a motion for summary judgment in The Charles Schwab Corp. v. BNP Paribas Securities Corp., et al.

 

On April 12, 2016, the court in Deutsche Bank National Trust Company, as Trustee for the Morgan Stanley ABS Capital I Inc. Trust, Series 2007-NC1 v. Morgan Stanley ABS Capital I, Inc. granted in part and denied in part the Company’s motion to dismiss the amended complaint, dismissing all claims except a single claim, regarding which the motion was denied without prejudice.

 

On April 12, 2016, the court in Deutsche Bank National Trust Company, solely in its capacity as Trustee for Morgan Stanley ABS Capital I Inc. Trust, Series 2007-NC3 v. Morgan Stanley Mortgage Capital Holdings LLC, as Successor-by-Merger to Morgan Stanley Mortgage Capital Inc. granted the Company’s motion to dismiss the complaint, and granted the plaintiff the ability to seek to replead certain aspects of the complaint.

 

Commercial Mortgage Related Matter.

 

On April 27, 2016, in The Bank of New York Mellon Trust, National Association v. Morgan Stanley Mortgage Capital, Inc., the United States Court of Appeals for the Second Circuit vacated the judgment of the United States District Court for the Southern District of New York (“SDNY”) and remanded the case to the SDNY for further proceedings consistent with its opinion.

 

Other Litigation.

 

On October 20, 2014, a purported class action complaint was filed against the Company and other defendants styled Genesee County Employees’ Retirement System v. Bank of America Corporation et al. in the SDNY. The action was later consolidated with four similar actions in SDNY under the lead case styled Alaska Electrical Pension Fund v. Bank of America Corporation et al. A consolidated amended complaint was filed on February 2, 2015 asserting claims for alleged violations of the Sherman Act, breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, and tortious interference with contract. The consolidated amended complaint alleges, among other things, that the defendants engaged in antitrust violations with regards to the process of setting ISDAfix, a financial benchmark and seeks treble damages, injunctive relief, attorneys’ fees and other relief. On March 28, 2016, the court granted in part and denied in part the defendants’ motion to dismiss the consolidated amended complaint.

 

Wealth Management Related Matters.

 

On March 21, 2016, the arbitration panel in Lynnda L. Speer, as Personal Representative of the Estate of Roy M. Speer, et al. v. Morgan Stanley Smith Barney LLC, et al. issued an award in favor of plaintiffs in the amount of $32.8 million, plus attorneys’ fees and costs.

 

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Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

The table below sets forth the information with respect to purchases made by or on behalf of the Company of its common stock during the quarterly period ended March 31, 2016.

 

Issuer Purchases of Equity Securities

(dollars in millions, except per share amounts)

 

Period

  Total
    Number of
Shares
Purchased
        Average Price    
Paid Per
Share
    Total Number of
Shares Purchased
    as Part  of Publicly    
Announced Plans
of Programs(1)
        Approximate Dollar    
Value of Shares
that May Yet be
Purchased Under
the Plans or
Programs
 

Month #1 (January 1, 2016-January 31, 2016)

       

Share Repurchase Program(2)

    3,710,000      $ 25.33        3,710,000      $ 1,156   

Employee transactions(3)

    12,348,182      $ 26.26                 

Month #2 (February 1, 2016-February 29, 2016)

       

Share Repurchase Program(2)

    14,360,000      $ 24.09        14,360,000      $ 810   

Employee transactions(3)

    1,000,818      $ 23.91                 

Month #3 (March 1, 2016-March 31, 2016)

       

Share Repurchase Program(2)

    7,266,941      $ 25.46        7,266,941      $ 625   

Employee transactions(3)

    91,048      $ 24.87                 

Quarter ended at March 31, 2016

       

Share Repurchase Program(2)

    25,336,941      $ 24.67        25,336,941      $ 625   

Employee transactions(3)

    13,440,048      $ 26.08                 

 

(1)

Share purchases under publicly announced programs are made pursuant to open-market purchases, Rule 10b5-1 plans or privately negotiated transactions (including with employee benefit plans) as market conditions warrant and at prices the Company deems appropriate and may be suspended at any time.

(2)

The Company’s Board of Directors has authorized the repurchase of the Company’s outstanding stock under a share repurchase program (the “Share Repurchase Program”). The Share Repurchase Program is a program for capital management purposes that considers, among other things, business segment capital needs, as well as equity-based compensation and benefit plan requirements. The Share Repurchase Program has no set expiration or termination date. Share repurchases by the Company are subject to regulatory approval. In March 2015, the Company received no objection from the Federal Reserve to repurchase up to $3.1 billion of the Company’s outstanding common stock that began in the second quarter of 2015 through the end of the second quarter of 2016 under the Company’s 2015 capital plan. During the quarter ended March 31, 2016, the Company repurchased approximately $625 million of the Company’s outstanding common stock as part of its Share Repurchase Program. For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Management” in Part I, Item 2.

(3)

Includes shares acquired by the Company in satisfaction of the tax withholding obligations on stock-based awards and the exercise of stock options granted under the Company’s stock-based compensation plans.

 

Item 6.

Exhibits.

 

An exhibit index has been filed as part of this Report on Page E-1.

 

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Table of Contents

SIGNATURE

 

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

 

MORGAN STANLEY

(REGISTRANT)

By:

 

/S/     JONATHAN PRUZAN

 

Jonathan Pruzan

Executive Vice President and

Chief Financial Officer

By:

 

/S/     PAUL C. WIRTH

 

Paul C. Wirth

Deputy Chief Financial Officer

 

Date: May 4, 2016

 

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EXHIBIT INDEX

MORGAN STANLEY

Quarter Ended March 31, 2016

 

Exhibit
No.
  

Description

  10.1   

Fourth Amendment to Investor Agreement, dated as of April 6, 2016, by and between Morgan Stanley and Mitsubishi UFJ Financial Group, Inc.

  10.2   

Memorandum to Colm Kelleher Regarding Relocation to New York, dated February 25, 2016.

  12   

Statement Re: Computation of Ratio of Earnings to Fixed Charges and Computation of Earnings to Fixed Charges and Preferred Stock Dividends.

  15   

Letter of awareness from Deloitte & Touche LLP, dated May 4, 2016, concerning unaudited interim financial information.

  31.1   

Rule 13a-14(a) Certification of Chief Executive Officer.

  31.2   

Rule 13a-14(a) Certification of Chief Financial Officer.

  32.1   

Section 1350 Certification of Chief Executive Officer.

  32.2   

Section 1350 Certification of Chief Financial Officer.

101   

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheet—March 31, 2016 and December 31, 2015, (ii) the Condensed Consolidated Statements of Income—Three Months Ended March 31, 2016 and 2015, (iii) the Condensed Consolidated Statements of Comprehensive Income—Three Months Ended March 31, 2016 and 2015, (iv) the Condensed Consolidated Statements of Cash Flows—Three Months Ended March 31, 2016 and 2015, (v) the Condensed Consolidated Statements of Changes in Total Equity—Three Months Ended March 31, 2016 and 2015, and (vi) Notes to Condensed Consolidated Financial Statements (unaudited).

 

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