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 June 30, 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

  

Accelerated Filer  ¨

Non-Accelerated Filer  ¨

  

Smaller reporting company  ¨

(Do not check if a 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 July 29, 2016, there were 1,911,808,935 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 June 30, 2016

 

Table of Contents

 

        Page        

Part I—Financial Information

 

Item 1.

    

Financial Statements (Unaudited)

  1
    

Consolidated Statements of Income

  1
    

Consolidated Statements of Comprehensive Income

  2
    

Consolidated Balance Sheets

  3
    

Consolidated Statements of Changes in Total Equity

  4
    

Consolidated Statements of Cash Flows

  5
    

Notes to 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

  27
    

5. Investment Securities

  34
    

6. Collateralized Transactions

  40
    

7. Loans and Allowance for Credit Losses

  43
    

8. Equity Method Investments

  47
    

9. Deposits

  47
    

10. Long-Term Borrowings and Other Secured Financings

  47
    

11. Commitments, Guarantees and Contingencies

  48
    

12. Variable Interest Entities and Securitization Activities

  53
    

13. Regulatory Requirements

  59
    

14. Total Equity

  61
    

15. Earnings per Common Share

  64
    

16. Interest Income and Interest Expense

  65
    

17. Employee Benefit Plans

  65
    

18. Income Taxes

  66
    

19. Segment and Geographic Information

  67
    

20. Subsequent Events

  70
    

Report of Independent Registered Public Accounting Firm

  71

Item 2.

    

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

  72
    

Introduction

  72
    

Executive Summary

  73
    

Business Segments

  78
    

Supplemental Financial Information and Disclosures

  90
    

Accounting Development Updates

  91
    

Critical Accounting Policies

  91
    

Liquidity and Capital Resources

  92

Item 3.

    

Quantitative and Qualitative Disclosures about Market Risk

  108

Item 4.

    

Controls and Procedures

  121

Financial Data Supplement (Unaudited)

  122

Part II—Other Information

 

Item 1.

    

Legal Proceedings

  128

Item 2.

    

Unregistered Sales of Equity Securities and Use of Proceeds

  129

Item 6.

    

Exhibits

  129

 

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Table of Contents

Available Information.

We file 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 we file 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 us) file electronically with the SEC. Our electronic SEC filings are available to the public at the SEC’s internet site, www.sec.gov.

Our internet site is www.morganstanley.com. You can access our Investor Relations webpage at www.morganstanley.com/about-us-ir. We make available free of charge, on or through our Investor Relations webpage, our 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. We also make available, through our Investor Relations webpage, via a link to the SEC’s internet site, statements of beneficial ownership of our equity securities filed by our directors, officers, 10% or greater shareholders and others under Section 16 of the Exchange Act.

You can access information about our corporate governance at www.morganstanley.com/about-us-governance. Our 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 our Chief Executive Officer, Chief Financial Officer and Deputy Chief Financial Officer. We 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 our 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 our internet site is not incorporated by reference into this report.

 

LOGO   ii    


Table of Contents

Part I—Financial Information

Item 1.            Financial Statements

MORGAN STANLEY

Consolidated Statements of Income

(in millions, except per share data)

(unaudited)

 

    Three Months Ended
June 30,

 

    Six Months Ended
June 30,

 

 
   

 

2016

   

 

2015

   

 

2016

   

 

2015

 

Revenues:

       

Investment banking

  $             1,224       $             1,614       $             2,331       $             2,971    

Trading

    2,746         2,973         4,811         6,623    

Investments

    126         261         92         527    

Commissions and fees

    1,020         1,158         2,075         2,344    

Asset management, distribution and administration fees

    2,637         2,742         5,257         5,423    

Other

    243         297         323         468    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

Total non-interest revenues

 

 

 

 

7,996 

 

  

 

 

 

 

9,045 

 

  

 

 

 

 

14,889 

 

  

 

 

 

 

18,356 

 

  

 

 

 

   

 

 

   

 

 

   

 

 

 

 

Interest income

 

 

 

 

1,667 

 

  

 

 

 

 

1,386 

 

  

 

 

 

 

3,414 

 

  

 

 

 

 

2,870 

 

  

Interest expense

    754         688         1,602         1,576    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

Net interest

 

 

 

 

913 

 

  

 

 

 

 

698 

 

  

 

 

 

 

1,812 

 

  

 

 

 

 

1,294 

 

  

 

 

 

   

 

 

   

 

 

   

 

 

 

 

Net revenues

 

 

 

 

8,909 

 

  

 

 

 

 

9,743 

 

  

 

 

 

 

16,701 

 

  

 

 

 

 

19,650 

 

  

 

 

 

   

 

 

   

 

 

   

 

 

 

 

Non-interest expenses:

       

Compensation and benefits

    4,015         4,405         7,698         8,929    

Occupancy and equipment

    329         351         658         693    

Brokerage, clearing and exchange fees

    484         487         949         950    

Information processing and communications

    429         438         871         853    

Marketing and business development

    154         179         288         329    

Professional services

    547         598         1,061         1,084    

Other

    468         558         955         1,230    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

Total non-interest expenses

 

 

 

 

6,426 

 

  

 

 

 

 

7,016 

 

  

 

 

 

 

12,480 

 

  

 

 

 

 

14,068 

 

  

 

 

 

   

 

 

   

 

 

   

 

 

 

 

Income from continuing operations before income taxes

 

 

 

 

2,483 

 

  

 

 

 

 

2,727 

 

  

 

 

 

 

4,221 

 

  

 

 

 

 

5,582 

 

  

Provision for income taxes

    833         894         1,411         1,281    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

Income from continuing operations

 

 

 

 

1,650 

 

  

 

 

 

 

1,833 

 

  

 

 

 

 

2,810 

 

  

 

 

 

 

4,301 

 

  

Income (loss) from discontinued operations, net of income taxes

    (4)        (2)        (7)        (7)   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

Net income

 

 

$

 

1,646 

 

  

 

 

$

 

1,831 

 

  

 

 

$

 

2,803 

 

  

 

 

$

 

4,294 

 

  

Net income applicable to noncontrolling interests

    64         24         87         93    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

Net income applicable to Morgan Stanley

 

 

$

 

1,582 

 

  

 

 

$

 

1,807 

 

  

 

 

$

 

2,716 

 

  

 

 

$

 

4,201 

 

  

Preferred stock dividends and other

    157         142         235         222    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

Earnings applicable to Morgan Stanley common shareholders

 

 

$

 

1,425 

 

  

 

 

$

 

1,665 

 

  

 

 

$

 

2,481 

 

  

 

 

$

 

3,979 

 

  

 

 

 

   

 

 

   

 

 

   

 

 

 

 

Earnings per basic common share:

       

Income from continuing operations

  $ 0.77       $ 0.87       $ 1.33       $ 2.07    

Income (loss) from discontinued operations

    (0.01)        —         (0.01)        —    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

Earnings per basic common share

 

 

$

 

0.76 

 

  

 

 

$

 

0.87 

 

  

 

 

$

 

1.32 

 

  

 

 

$

 

2.07 

 

  

 

 

 

   

 

 

   

 

 

   

 

 

 

 

Earnings per diluted common share:

       

Income from continuing operations

  $ 0.75       $ 0.85       $ 1.30       $ 2.03    

Income (loss) from discontinued operations

    —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

Earnings per diluted common share

 

 

$

 

0.75 

 

  

 

 

$

 

0.85 

 

  

 

 

$

 

1.30 

 

  

 

 

$

 

2.03 

 

  

 

 

 

   

 

 

   

 

 

   

 

 

 

 

Dividends declared per common share

 

 

$

 

0.15 

 

  

 

 

$

 

0.15 

 

  

 

 

$

 

0.30 

 

  

 

 

$

 

0.25 

 

  

Average common shares outstanding:

       

Basic

    1,866         1,919         1,875         1,922    

Diluted

    1,899         1,960         1,907         1,962    

See Notes to Consolidated Financial Statements.

 

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Table of Contents

MORGAN STANLEY

Consolidated Statements of Comprehensive Income

(dollars in millions)

(unaudited)

 

    Three Months Ended
June 30,

 

    Six Months Ended
June 30,

 

 
   

 

2016

   

 

2015

   

 

2016

   

 

2015

 

Net income

  $ 1,646       $ 1,831       $ 2,803       $ 4,294    

Other comprehensive income (loss), net of tax:

       

Foreign currency translation adjustments(1)

  $ 131       $ 34       $ 317       $ (188)   

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

    143         (228)        538         (28)   

Pension, postretirement and other

    (5)        (3)        (4)        (1)   

Change in net debt valuation adjustments(3)

    145         —         348         —    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

Total other comprehensive income (loss)

 

 

$

 

414 

 

  

 

 

$

 

(197)

 

  

 

 

$

 

1,199 

 

  

 

 

$

 

(217)

 

  

 

 

 

   

 

 

   

 

 

   

 

 

 

 

Comprehensive income

 

 

$

 

2,060 

 

  

 

 

$

 

1,634 

 

  

 

 

$

 

4,002 

 

  

 

 

$

 

4,077 

 

  

Net income applicable to noncontrolling interests

    64         24         87         93    

Other comprehensive income (loss) applicable to noncontrolling interests

    81         (16)        136         (18)   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

Comprehensive income applicable to Morgan Stanley

 

 

$

 

        1,915 

 

  

 

 

$

 

        1,626 

 

  

 

 

$

 

        3,779 

 

  

 

 

$

 

        4,002 

 

  

 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Amounts include Provision for (benefit from) income taxes of $(59) million and $(54) million in the quarter ended June 30, 2016 (“current quarter”) and the quarter ended June 30, 2015 (“prior year quarter”), respectively, and $(174) million and $120 million in the six months ended June 30, 2016 (“current year period”) and the six months ended June 30, 2015 (“prior year period”), respectively.

(2)

Amounts include Provision for (benefit from) income taxes of $84 million and $(137) million in the current quarter and prior year quarter, respectively, and $314 million and $(16) million in the current year period and prior year period, respectively.

(3)

Debt valuation adjustments (“DVA”) represent the change in the fair value resulting from fluctuations in the Firm’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 $80 million and $200 million in the current quarter and current year period, respectively. See Notes 2 and 14 for further information.

See Notes to Consolidated Financial Statements.

 

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Table of Contents

MORGAN STANLEY

Consolidated Balance Sheets

(dollars in millions, except share data)

(unaudited)

 

                                                 
    At June 30,
2016

 

    At December 31,
2015

 

 

Assets

   

Cash and due from banks

  $ 27,597       $ 19,827    

Interest bearing deposits with banks

    28,536         34,256    

Trading assets, at fair value ($141,543 and $127,627 were pledged to various parties)

    256,794         239,505    

Investment securities (includes $67,726 and $66,759 at fair value)

    80,144         71,983    

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

    97,589         87,657    

Securities borrowed

    131,281         142,416    

Customer and other receivables

    52,827         45,407    

Loans:

   

Held for investment (net of allowances of $323 and $225)

    77,283         72,559    

Held for sale

    15,882         13,200    

Goodwill

    6,581         6,584    

Intangible assets (net of accumulated amortization of $2,279 and $2,130) (includes $3 and $5 at fair value)

    2,833         2,984    

Other assets

    51,526         51,087    
 

 

 

   

 

 

 

 

Total assets

 

 

$

 

828,873 

 

  

 

 

$

 

787,465 

 

  

 

 

 

   

 

 

 

 

Liabilities

   

Deposits (includes $95 and $125 at fair value)

  $ 152,693       $ 156,034    

Short-term borrowings (includes $511 and $1,648 at fair value)

    880         2,173    

Trading liabilities, at fair value

    140,662         128,455    

Securities sold under agreements to repurchase (includes $699 and $683 at fair value)

    50,328         36,692    

Securities loaned

    17,241         19,358    

Other secured financings (includes $2,921 and $2,854 at fair value)

    9,901         9,464    

Customer and other payables

    201,189         186,626    

Other liabilities and accrued expenses

    14,112         18,711    

Long-term borrowings (includes $37,804 and $33,045 at fair value)

    163,492         153,768    
 

 

 

   

 

 

 

 

Total liabilities

 

 

 

 

750,498 

 

  

 

 

 

 

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: 1,917,509,492 and 1,920,024,027

    20         20    

Additional paid-in capital

    22,697         24,153    

Retained earnings

    51,410         49,204    

Employee stock trusts

    2,873         2,409    

Accumulated other comprehensive income (loss)

    (905)        (1,656)   

Common stock held in treasury, at cost, $0.01 par value (121,384,487 and 118,869,952 shares)

    (3,626)        (4,059)   

Common stock issued to employee stock trusts

    (2,873)        (2,409)   
 

 

 

   

 

 

 

 

Total Morgan Stanley shareholders’ equity

 

 

 

 

77,116 

 

  

 

 

 

 

75,182 

 

  

Noncontrolling interests

    1,259         1,002    
 

 

 

   

 

 

 

 

Total equity

 

 

 

 

78,375 

 

  

 

 

 

 

76,184 

 

  

 

 

 

   

 

 

 

 

Total liabilities and equity

 

 

$

 

828,873 

 

  

 

 

$

 

787,465 

 

  

 

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

MORGAN STANLEY

Consolidated Statements of Changes in Total Equity

Six Months Ended June 30, 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

    —         —         —         2,716         —         —         —         —         —         2,716    

Net income applicable to noncontrolling interests

    —         —         —         —         —         —         —         —         87         87    

Dividends

    —         —         —         (822)        —         —         —         —         —         (822)   

Shares issued under employee plans and related tax effects

    —         —         (1,456)        —         464         —         2,062         (464)        —         606    

Repurchases of common stock and employee tax withholdings

    —         —         —         —         —         —         (1,629)        —         —         (1,629)   

Net change in Accumulated other comprehensive income (loss)

    —         —         —         —           —         1,063         —         —         136         1,199    

Other net decreases

    —         —         —         —         —         —         —         —         (72)        (72)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT JUNE 30, 2016

  $ 7,520       $ 20       $ 22,697       $ 51,410       $ 2,873       $ (905)      $ (3,626)      $ (2,873)      $ 1,259       $ 78,375    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    —         —         —         4,201         —         —         —         —         —         4,201    

Net income applicable to noncontrolling interests

    —         —         —         —         —         —         —         —         93         93    

Dividends

    —         —         —         (720)        —         —         —         —         —         (720)   

Shares issued under employee plans and related tax effects

    —         —         (577)        —         314         —         1,423         (314)        —         846    

Repurchases of common stock and employee tax withholdings

    —         —         —         —         —         —         (1,473)        —         —         (1,473)   

Net change in Accumulated other comprehensive income (loss)

    —         —         —         —         —         (199)        —         —         (18)        (217)   

Issuance of preferred stock

    1,500         —         (7)        —         —         —         —         —         —         1,493    

Deconsolidation of certain legal entities associated with a real estate fund

    —         —         —           —         —         —         —         —         (191)        (191)   

Other net decreases

    —         —         (10)        —         —         —         —         —         (59)        (69)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT JUNE 30, 2015

  $     7,520       $         20       $     23,655       $     48,106       $     2,441       $ (1,447)      $     (2,816)      $     (2,441)      $      1,029       $     76,067    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 Consolidated Financial Statements.

 

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MORGAN STANLEY

Consolidated Statements of Cash Flows

(dollars in millions)

(unaudited)

 

    Six Months Ended
June 30,

 

 
   

 

2016

   

 

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES

   

Net income

  $ 2,803       $ 4,294    

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

   

Income from equity method investments

    (1)        (83)   

Compensation payable in common stock and options

    492         611    

Depreciation and amortization

    879         654    

Net gain on sale of available for sale securities

    (82)        (55)   

Impairment charges

    67         83    

Provision for credit losses on lending activities

    131         38    

Other operating adjustments

    218         37    

Changes in assets and liabilities:

   

Trading assets, net of Trading liabilities

    (333)        25,115    

Securities borrowed

    11,135         (7,261)   

Securities loaned

    (2,117)        (2,068)   

Customer and other receivables and other assets

    (10,537)        (601)   

Customer and other payables and other liabilities

    9,907         (1,482)   

Securities purchased under agreements to resell

    (9,932)        (23,472)   

Securities sold under agreements to repurchase

    13,636         (4,263)   
 

 

 

   

 

 

 

 

Net cash provided by (used for) operating activities

 

 

 

 

16,266 

 

  

 

 

 

 

(8,453)

 

  

 

 

 

   

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

   

Proceeds from (payments for):

   

Other assets—Premises, equipment and software, net

    (645)        (620)   

Changes in loans, net

    (4,724)        (9,082)   

Investment securities:

   

Purchases

    (30,700)        (26,832)   

Proceeds from sales

    20,274         26,501    

Proceeds from paydowns and maturities

    3,507         2,796    

Other investing activities

    (126)        (97)   
 

 

 

   

 

 

 

 

Net cash used for investing activities

 

 

 

 

(12,414)

 

  

 

 

 

 

(7,334)

 

  

 

 

 

   

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

   

Net proceeds from (payments for):

   

Short-term borrowings

    (1,293)        861    

Noncontrolling interests

    (43)        (60)   

Other secured financings

    (69)        (280)   

Deposits

    (3,341)        5,659    

Proceeds from:

   

Excess tax benefits associated with stock-based awards

    42         176    

Derivatives financing activities

    —         312    

Issuance of preferred stock, net of issuance costs

    —         1,493    

Issuance of long-term borrowings

    20,628         22,909    

Payments for:

   

Long-term borrowings

    (15,900)        (12,963)   

Derivatives financing activities

    (120)        (257)   

Repurchases of common stock and employee tax withholdings

    (1,629)        (1,473)   

Cash dividends

    (791)        (673)   
 

 

 

   

 

 

 

 

Net cash provided by (used for) financing activities

 

 

 

 

(2,516)

 

  

 

 

 

 

15,704 

 

  

 

 

 

   

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

 

 

714 

 

  

 

 

 

 

(542)

 

  

 

 

 

   

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

 

 

2,050 

 

  

 

 

 

 

(625)

 

  

Cash and cash equivalents, at beginning of period

    54,083         46,984    
 

 

 

   

 

 

 

 

Cash and cash equivalents, at end of period

 

 

$

 

56,133 

 

  

 

 

$

 

46,359 

 

  

 

 

 

   

 

 

 

 

Cash and cash equivalents include:

   

Cash and due from banks

  $ 27,597       $ 19,145    

Interest bearing deposits with banks

    28,536         27,214    
 

 

 

   

 

 

 

 

Cash and cash equivalents, at end of period

 

 

$

 

        56,133 

 

  

 

 

$

 

        46,359 

 

  

 

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash payments for interest were $1,082 million and $1,027 million.

Cash payments for income taxes, net of refunds, were $340 million and $342 million.

See Notes to Consolidated Financial Statements.

 

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MORGAN STANLEY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

1.            Introduction

and Basis of Presentation

 

The Firm

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 “Firm” 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 Firm’s business segments, see Note 1 to the consolidated financial statements in the Firm’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”).

Basis of Financial Information

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which require the Firm 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 consolidated financial statements and related disclosures. The Firm believes that the estimates utilized in the preparation of its consolidated financial statements are prudent and reasonable. Actual results could differ materially from these estimates. Intercompany balances and transactions have been eliminated.

The accompanying consolidated financial statements should be read in conjunction with the Firm’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 consolidated financial statements as they are not required for interim reporting under U.S. GAAP. The 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 consolidated financial statements include the accounts of the Firm, its wholly owned subsidiaries and other entities in which the Firm 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 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 consolidated balance sheets.

For a discussion of the Firm’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.

Consolidated Statements of Cash Flows Presentation

The adoption of the accounting update, Amendments to the Consolidation Analysis (see Note 2) on January 1, 2016, resulted in a net noncash increase in total assets of $126 million. In the prior year quarter, the Firm deconsolidated approximately $191 million in net assets previously attributable to nonredeemable noncontrolling interests that were related to a real estate fund sponsored by the Firm. The deconsolidation resulted in a non-cash reduction of assets of $169 million.

Global Oil Merchanting Business

As a result of entering into a definitive agreement to sell the global oil merchanting unit of the commodities division to Castleton Commodities International LLC, on May 11, 2015, the Firm recognized an impairment charge of $59 million in Other revenues during the prior quarter and prior year period, to reduce the carrying amount of the unit to its estimated fair value less costs to sell. The Firm closed the

transaction on November 1, 2015. The transaction did not meet the criteria for discontinued operations and did not have a material impact on the Firm’s financial results.

 

 

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MORGAN STANLEY

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

 

2.        Significant

Accounting Policies

 

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

During the current year period, other than the following, there were no significant updates made to the Firm’s significant accounting policies.

Accounting Standards Adopted

The Firm 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 certain financial assets and financial liabilities. The Firm 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. DVA amounts from periods prior to adoption 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 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 funds in Investment Management where the Firm 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, instead of as an asset as was previously required. This guidance became effective for the Firm beginning January 1, 2016 and did not have a material impact in the consolidated financial statements.

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

 

 

Simplifying the Accounting for Measurement-Period Adjustments.

 

 

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.

 

 

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MORGAN STANLEY

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

 

3.        Fair

Values

Fair Value Measurements

For a description of the valuation techniques applied to the Firm’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 current quarter and current year period, there were no significant updates made to the Firm’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 June 30,
2016

 

 
   

 

(dollars in millions)

 

Assets at Fair Value

             

Trading assets:

             

U.S. government and agency securities:

             

U.S. Treasury securities

  $ 24,565         $ —         $ —         $ —         $ 24,565     

U.S. agency securities

    795           22,085           20           —           22,900     
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Total U.S. government and agency securities

 

 

 

 

25,360  

 

  

  

 

 

 

22,085  

 

  

  

 

 

 

20  

 

  

  

 

 

 

—  

 

  

  

 

 

 

47,465  

 

  

Other sovereign government obligations

    20,942           6,607           2           —           27,551     

Corporate and other debt:

             

State and municipal securities

    —           1,943           10           —           1,953     

Residential mortgage-backed securities

    —           586           216           —           802     

Commercial mortgage-backed securities

    —           961           51           —           1,012     

Asset-backed securities

    —           142           88           —           230     

Corporate bonds

    —           11,751           276           —           12,027     

Collateralized debt and loan obligations

    —           443           109           —           552     

Loans and lending commitments(1)

    —           3,879           5,418           —           9,297     

Other debt

    —           827           528           —           1,355     
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Total corporate and other debt

 

 

 

 

—  

 

  

  

 

 

 

20,532  

 

  

  

 

 

 

6,696  

 

  

  

 

 

 

—  

 

  

  

 

 

 

27,228  

 

  

Corporate equities(2)

    100,018           367           572           —           100,957     

Securities received as collateral

    10,121           7           —           —           10,128     

Derivative and other contracts:

             

Interest rate contracts

    791           462,243           540           —           463,574     

Credit contracts

    —           16,157           304           —           16,461     

Foreign exchange contracts

    140           76,264           101           —           76,505     

Equity contracts

    1,368           40,524           637           —           42,529     

Commodity contracts

    2,847           8,605           4,057           —           15,509     

Other

    —           16           —           —           16     

Netting(3)

    (4,184)          (505,871)          (2,537)          (63,844)          (576,436)    
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Total derivative and other contracts

 

 

 

 

962  

 

  

  

 

 

 

97,938  

 

  

  

 

 

 

3,102  

 

  

  

 

 

 

(63,844) 

 

  

  

 

 

 

38,158  

 

  

Investments(4):

             

Principal investments

    21           19           769           —           809     

Other

    295           559           205           —           1,059     
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Total investments

 

 

 

 

316  

 

  

  

 

 

 

578  

 

  

  

 

 

 

974  

 

  

  

 

 

 

—  

 

  

  

 

 

 

1,868  

 

  

Physical commodities

    —           193           —           —           193     
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Total trading assets(4)

 

 

 

 

157,719  

 

  

  

 

 

 

148,307  

 

  

  

 

 

 

11,366  

 

  

  

 

 

 

(63,844) 

 

  

  

 

 

 

253,548  

 

  

 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

AFS securities

 

 

 

 

31,062  

 

  

  

 

 

 

36,664  

 

  

  

 

 

 

—  

 

  

  

 

 

 

—  

 

  

  

 

 

 

67,726  

 

  

Securities purchased under agreements to resell

    —           555           —           —           555     

Intangible assets

    —           3           —           —           3     
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Total assets measured at fair value

 

 

$

 

            188,781  

 

  

  

 

$

 

        185,529  

 

  

  

 

$

 

            11,366  

 

  

  

 

$

 

            (63,844) 

 

  

  

 

$

 

            321,832  

 

  

 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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MORGAN STANLEY

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

 

    Level 1

 

     Level 2

 

     Level 3

 

     Counterparty and
Cash Collateral
Netting

 

     Balance at June 30,
2016

 

 
   

 

(dollars in millions)

 

Liabilities at Fair Value

             

Deposits

  $ —         $ 65         $ 30         $ —         $ 95     

Short-term borrowings

    —           511           —           —           511     

Trading liabilities:

             

U.S. government and agency securities:

             

U.S. Treasury securities

    12,983           —           —           —           12,983     

U.S. agency securities

    358           111           —           —           469     
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Total U.S. government and agency securities

 

 

 

 

13,341  

 

  

  

 

 

 

111  

 

  

  

 

 

 

—  

 

  

  

 

 

 

—  

 

  

  

 

 

 

13,452  

 

  

Other sovereign government obligations

    15,885           2,668           —           —           18,553     

Corporate and other debt:

             

State and municipal securities

    —           3           —           —           3     

Asset-backed securities

    —           449           —           —           449     

Corporate bonds

    —           5,578           6           —           5,584     

Other debt

    —           15           3           —           18     
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Total corporate and other debt

 

 

 

 

—  

 

  

  

 

 

 

6,045  

 

  

  

 

 

 

9  

 

  

  

 

 

 

—  

 

  

  

 

 

 

6,054  

 

  

Corporate equities(2)

    46,440           76           26           —           46,542     

Obligation to return securities received as collateral

    18,731           7           —           —           18,738     

Derivative and other contracts:

             

Interest rate contracts

    969           436,022           775           —           437,766     

Credit contracts

    —           16,403           1,418           —           17,821     

Foreign exchange contracts

    82           78,441           102           —           78,625     

Equity contracts

    1,262           43,177           2,110           —           46,549     

Commodity contracts

    2,368           7,652           2,759           —           12,779     

Other

    —           91           11           —           102     

Netting(3)

    (4,184)          (505,871)          (2,537)          (43,727)          (556,319)    
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Total derivative and other contracts

 

 

 

 

497  

 

  

  

 

 

 

75,915  

 

  

  

 

 

 

4,638  

 

  

  

 

 

 

(43,727) 

 

  

  

 

 

 

37,323  

 

  

 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Total trading liabilities

 

 

 

 

94,894  

 

  

  

 

 

 

84,822  

 

  

  

 

 

 

4,673  

 

  

  

 

 

 

(43,727) 

 

  

  

 

 

 

140,662  

 

  

 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Securities sold under agreements to repurchase

 

 

 

 

—  

 

  

  

 

 

 

549  

 

  

  

 

 

 

150  

 

  

  

 

 

 

—  

 

  

  

 

 

 

699  

 

  

Other secured financings

    —           2,480           441           —           2,921     

Long-term borrowings

    44           35,831           1,929           —           37,804     
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Total liabilities measured at fair value

 

 

$

 

                94,938  

 

  

  

 

$

 

            124,258  

 

  

  

 

$

 

                7,223  

 

  

  

 

$

 

                (43,727) 

 

  

  

 

$

 

                182,692  

 

  

 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

    9   LOGO


Table of Contents

MORGAN STANLEY

NOTES TO 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                —         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    

Securities received as collateral

    11,221                       —         11,225    

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)

    150,128         128,086         13,010         (55,562)        235,662    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AFS securities

    34,351         32,408         —         —         66,759    

Securities purchased under agreements to resell

    —         806         —         —         806    

Intangible assets

    —         —                —           
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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                —         1,648    

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

    —                —         —           

Corporate bonds

    —         5,035         —         —         5,035    

Lending commitments

    —                —         —           

Other debt

    —                       —           
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

    —         5,045                —         5,049    

Corporate equities(2)

    47,123         35         17         —         47,175    

Obligation to return securities received as collateral

    19,312                       —         19,316    

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

    91,421         71,734         5,773         (40,473)        128,455    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

LOGO   10    


Table of Contents

MORGAN STANLEY

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

 

 

AFS—Available for sale

(1)

At June 30, 2016, Loans and lending commitments held at fair value consisted of $7,114 million of corporate loans, $1,721 million of residential real estate loans and $462 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 Firm 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 June 30, 2016 and December 31, 2015, the fair value of these investments was $3,246 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 all periods presented. 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 following tables do not reflect the related realized and unrealized gains (losses) on hedging instruments that have been classified by the Firm 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 Firm 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 following tables herein may include changes in fair value during the period that were attributable to both observable and unobservable inputs.

 

    11   LOGO


Table of Contents

MORGAN STANLEY

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

 

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

 

    Beginning
Balance at
March 31,
2016
    Total
Realized
and
Unrealized
Gains
(Losses)
    Purchases
(1)
    Sales     Issuances     Settlements     Net
Transfers
    Ending
Balance at
June 30,
2016
    Unrealized
Gains (Losses)
for Level 3
Assets/
Liabilities
Outstanding at
June 30, 2016
 
   

 

(dollars in millions)

 

Assets at Fair Value

                 

Trading assets:

                 

U.S. agency securities

  $      $ —       $ —       $ (18)      $ —       $ —       $ 30       $ 20       $ —    

Other sovereign government obligations

           —         —         (3)        —         —         (3)               —    

Corporate and other debt:

                 

State and municipal securities

                         —         —         —         —         10           

Residential mortgage-backed securities

    292                —         (82)        —         —                216         (5)   

Commercial mortgage-backed securities

    59         (3)               (4)        —         —         (2)        51         (5)   

Asset-backed securities

           (4)               (1)        —         —         83         88         (4)   

Corporate bonds

    224         17         116         (35)        —         —         (46)        276         17    

Collateralized debt and loan obligations

    348         18                (178)        —         —         (82)        109         18    

Loans and lending commitments

    6,185         (46)        360         (484)        —         (596)        (1)        5,418         (55)   

Other debt

    527                13         (19)        —         —                528           
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

    7,644         (10)        503         (803)        —         (596)        (42)        6,696         (30)   

Corporate equities

    430         (63)        273         (82)        —         —         14         572         (63)   

Net derivative and other contracts(2):

                 

Interest rate contracts

    169         (159)               —         (7)        42         (282)        (235)        (157)   

Credit contracts

    (723)        65                —         —         93         (550)        (1,114)        53    

Foreign exchange contracts

    126         (58)        —         —         —         (94)        25         (1)        (47)   

Equity contracts

    (1,832)        168         50         —         (140)        263         18         (1,473)        (106)   

Commodity contracts

    1,200         211                —         (4)        (88)        (26)        1,298         130    

Other

    —         —         —         —         —         —         (11)        (11)        —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net derivative and other contracts

    (1,060)        227         58         —         (151)        216         (826)        (1,536)        (127)   

Investments:

                 

Principal investments

    743                33         (11)        —         —         —         769           

Other

    179                25         —         —         —         —         205           
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

    922                58         (11)        —         —         —         974           

Intangible assets

           —         —         —         —         —         (4)        —         —    

Liabilities at Fair Value

                 

Deposits

  $ 23       $ (1)      $ —       $         —       $      $ —       $ (2)      $ 30       $ (1)   

Trading liabilities:

                 

Corporate and other debt:

                 

Corporate bonds

           (1)        (5)        29         —         —         (25)               (1)   

Lending commitments

                  —         —         —         —         —         —         —    

Other debt

           —         (1)        —         —         —         —                —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

    11         —         (6)        29         —         —         (25)               (1)   

Corporate equities

    31         (28)        (33)               —         —         (5)        26         —    

Obligation to return securities received as collateral

           —         (1)        —         —         —         —         —         —    

Securities sold under agreements to repurchase

    151                —         —         —         —         —         150           

Other secured financings

    454         (14)        —         —         23         (22)        (28)        441         (14)   

Long-term borrowings

    1,798         21         —         —         164         (131)        119         1,929         26    

 

LOGO   12    


Table of Contents

MORGAN STANLEY

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

 

    Beginning
Balance at
December 31,
2015
    Total
Realized
and
Unrealized
Gains
(Losses)
    Purchases
(1)
    Sales     Issuances     Settlements     Net
Transfers
    Ending
Balance at
June 30, 2016
    Unrealized
Gains

(Losses) for
Level 3

Assets/
Liabilities
Outstand-

ing at
June 30,
2016
 
   

 

(dollars in millions)

 

Assets at Fair Value

                 

Trading assets:

                 

U.S. agency securities

  $ —       $      $ —       $ (19)      $ —       $ —       $ 38       $ 20       $   

Other sovereign government obligations

           —         —         (5)        —         —                         

Corporate and other debt:

                 

State and municipal securities

    19                       (15)        —         —                10           

Residential mortgage-backed securities

    341         (19)        19         (133)        —         —                216         (14)   

Commercial mortgage-backed securities

    72         (10)        —         (19)        —         —                51         (11)   

Asset-backed securities

    25         (7)               (18)        —         —         81         88         (8)   

Corporate bonds

    267         62         113         (128)        —         —         (38)        276         61    

Collateralized debt and loan obligations

    430                22         (224)        —         —         (124)        109         17    

Loans and lending commitments

    5,936         (111)        970         (720)        —         (672)        15        5,418        (121)   

Other debt

    448         (2)        133         (63)        —         —         12         528         (2)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

    7,538         (81)        1,268        (1,320)        —         (672)        (37)        6,696         (77)   

    Corporate equities

    433         (45)        296         (119)        —         —                572         (64)   

    Securities received as collateral

           —         —         (1)        —         —         —         —         —    

    Net derivative and other contracts(2):

                 

Interest rate contracts

    260         305                —         (21)        (60)        (722)        (235)        205    

Credit contracts

    (844)        (343)               —         —         153         (81)        (1,114)        (360)   

Foreign exchange contracts

    141         (109)        —         —         —         (201)        168         (1)        (82)   

Equity contracts

    (2,031)        (321)        71         —         (184)        1,121         (129)        (1,473)        (434)   

Commodity contracts

    1,050         297                —         (4)        (176)        124         1,298         210    

Other

    —         —         —         —         —         —         (11)        (11)        —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net derivative and other contracts

    (1,424)        (171)        82         —         (209)        837         (651)        (1,536)        (461)   

Investments:

                 

Principal investments

    486         (39)        403         (40)        —         (41)        —         769         (37)   

Other

    221         (17)               —         —         —         —         205         (16)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

    707         (56)        404         (40)        —         (41)        —         974         (53)   

Intangible assets

           —         —         —         —         —         (5)        —         —    

Liabilities at Fair Value

                 

Deposits

  $ 19       $ (2)      $ —       $         —       $ 13       $ —       $ (4)      $ 30       $ (2)   

Short-term borrowings

           —         —         —         —         (1)        —         —         —    
Trading liabilities:                  

Corporate and other debt:

                 

Corporate bonds

    —         (5)        (7)        10         —         —         (2)               (5)   

Other debt

                  (3)               —         —         —                  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

           (3)        (10)        14         —         —         (2)               (3)   

Corporate equities

    17         (3)        (22)        18         —         —         10         26         (3)   

Obligation to return securities received as collateral

           —         (1)        —         —         —         —         —         —    

Securities sold under agreements to repurchase

    151                —         —         —         —         —         150           

Other secured financings

    461         (32)        —         —         69         (43)        (78)        441         (32)   

Long-term borrowings

    1,987         (12)        —         —         276         (167)        (179)        1,929         (6)   

 

    13   LOGO


Table of Contents

MORGAN STANLEY

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

 

    Beginning
Balance at
March 31,
2015
    Total
Realized
and
Unrealized
Gains
(Losses)
    Purchases
(1)
    Sales     Issuances     Settlements     Net
Transfers
    Ending
Balance at
June 30, 2015
    Unrealized
Gains (Losses)
for Level 3
Assets/
Liabilities
Outstanding at
June 30, 2015
 
    (dollars in millions)  

Assets at Fair Value

                 

Trading assets:

                 

U.S. agency securities

  $ —       $ —       $ —       $ (3)      $         —       $ —       $      $      $ —    

Other sovereign government obligations

    11         —                (1)        —         —         (3)        12         —    

Corporate and other debt:

                 

State and municipal securities

    —                       (9)        —         —         11                  

Residential mortgage-backed securities

    296                138         (32)        —         —         (26)        378           

Commercial mortgage-backed securities

    180         (4)               (9)        —         —         (88)        84         (5)   

Asset-backed securities

    67                11         (64)        —         —         —         19           

Corporate bonds

    424         (4)        228         (150)        —         (2)        (17)        479         (16)   

Collateralized debt and loan obligations

    822         68         300         (439)        —         (78)        (13)        660         (10)   

Loans and lending commitments

    4,789         31         1,615         (351)        —         (491)        (81)        5,512         26    

Other debt

    486         (1)        130         (51)        —         —         —         564         (1)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

    7,064         98         2,431         (1,105)        —         (571)        (214)        7,703         (2)   

Corporate equities

    230         38         266         (92)        —         —         44         486         26    

Securities received as collateral

    33         —         —         (30)        —         —         —                —    

Net derivative and other contracts(2):

                 

Interest rate contracts

    (496)        95                —         (13)        14         160         (236)        135    

Credit contracts

    (984)        (24)               —         (24)        23         16         (989)        (29)   

Foreign exchange contracts

    297         57         —         —         (1)        43         50         446         82    

Equity contracts

    (2,472)        (23)        39         —         (54)        206         202         (2,102)        (161)   

Commodity contracts

    1,345                       —         (112)        (34)        —         1,205         (27)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net derivative and other contracts

    (2,310)        109         49         —         (204)        252         428         (1,676)        —    

Investments:

                 

Principal investments

    829         (21)               (12)        —         (205)        (15)        581         (21)   

Other

    391         (4)        —         —         —         —         (87)        300         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

    1,220         (25)               (12)        —         (205)        (102)        881         (21)   

Intangible assets

                  —         —         —         —         —                  

Liabilities at Fair Value

                 

Trading liabilities:

                 

Corporate and other debt:

                 

Corporate bonds

  $ 23       $ —       $ (21)      $ 15       $ —       $ —       $ (2)      $ 15       $ —    

Other debt

    23         —         —         10         —         (29)        —                —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

    46         —         (21)        25         —         (29)        (2)        19         —    

Corporate equities

    50         240         (49)               —         —         349         112         240    

Obligation to return securities received as collateral

    33         —         (30)        —         —         —         —                —    

Securities sold under agreements to repurchase

    154         —         —         —         —         —         —         154         —    

Other secured financings

    133                —         —         37         —         —         168           

Long-term borrowings

    1,738         51         —         —         549         (88)        73         2,221         51    

 

LOGO   14    


Table of Contents

MORGAN STANLEY

NOTES TO 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
June 30, 2015
    Unrealized
Gains (Losses)
for Level 3
Assets/
Liabilities
Outstanding at
June 30, 2015
 
   

 

(dollars in millions)

 

Assets at Fair Value

                 

Trading assets:

                 

U.S. agency securities

  $ —       $ —       $      $           —       $           —       $ —       $ —       $      $ —    

Other sovereign government obligations

    41                       (32)        —         —         (4)        12           

Corporate and other debt:

                 

State and municipal securities

    —                       —         —         —                         

Residential mortgage-backed securities

    175         21         163         (51)        —         —         70         378         12    

Commercial mortgage-backed securities

    96         (6)        16         (22)        —         —         —         84         (9)   

Asset-backed securities

    76         (4)        11         (29)        —         —         (35)        19           

Corporate bonds

    386         10         213         (126)        —         (1)        (3)        479           

Collateralized debt and loan obligations

    1,152         145         404         (682)        —         (331)        (28)        660         (6)   

Loans and lending commitments

    5,874         35         2,082         (209)        —         (2,078)        (192)        5,512         30    

Other debt

    285         (8)        12         —         —         (1)        276         564           
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

    8,044         194         2,905         (1,119)        —         (2,411)        90         7,703         45    

Corporate equities

    272         64         260         (147)        —         —         37         486         49    

Securities received as collateral

    —         —                —         —         —         —                —    

Net derivative and other contracts(2):

                 

Interest rate contracts

    (173)        188                —         (20)        124         (364)        (236)        197    

Credit contracts

    (743)        (276)        17         —         (54)        31         36         (989)        (284)   

Foreign exchange contracts

    151         121         —         —         (1)        144         31         446         120    

Equity contracts

    (2,165)        (73)        69         —         (225)        156         136         (2,102)        (160)   

Commodity contracts

    1,146         299                —         (112)        (72)        (59)        1,205         234    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net derivative and other contracts

    (1,784)        259         98         —         (412)        383         (220)        (1,676)        107    

Investments:

                 

Principal investments

    835         (4)        15         (46)        —         (205)        (14)        581         (26)   

Other

    323         (16)               (6)        —         —         (3)        300         (12)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

    1,158         (20)        17         (52)        —         (205)        (17)        881         (38)   

Intangible assets

                  —         —         —         (1)        —                  

Liabilities at Fair Value

                 

Trading liabilities:

                 

Corporate and other debt:

                 

Corporate bonds

  $ 78       $ (2)      $ (12)      $ 14       $ —       $ —       $ (67)      $ 15       $ (2)   

Lending commitments

                  —         —         —         —         —         —           

Other debt

    38         —         —                —         (39)        (1)               —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

    121                (12)        20         —         (39)        (68)        19           

Corporate equities

    45         19         (75)        25         —         —         136         112         20    

Obligation to return securities received as collateral

    —         —         —                —         —         —                —    

Securities sold under agreements to repurchase

    153         (1)        —         —         —         —         —         154         (1)   

Other secured financings

    149         (6)        —         —         37         (24)        —         168           

Long-term borrowings

    1,934         65         —         —         612         (300)        40         2,221         59    

 

  (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.

 

    15   LOGO


Table of Contents

MORGAN STANLEY

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

 

Significant Unobservable Inputs Used in Recurring Level 3 Fair Value Measurements

The following disclosures 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.

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

 

     Balance at
June 30, 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

       $            216           Comparable pricing:      
               

     Comparable bond price / (A)

 

  

0 to 79 points

 

  

20 points

 

 

Commercial mortgage-backed securities

    

 

 

 

51     

 

 

  

 

Comparable pricing:

     
                     Comparable bond price / (A)    0 to 7 points    1 point

 

Asset-backed securities

       88           Comparable pricing:      
               

     Comparable bond price / (A)

 

  

45 to 55 points

 

  

46 points

 

 

Corporate bonds

    

 

 

 

276     

 

 

  

 

Comparable pricing(3):

     
             Comparable bond price / (A)    3 to 135 points    91 points
        Comparable pricing:      
               

     EBITDA multiple / (A)

 

  

5 to 10 times

 

  

7 times

 

 

Collateralized debt and loan obligations

       109           Comparable pricing(3):      
             Comparable bond price / (A)    20 to 95 points    57 points
        Correlation model:      
               

     Credit correlation / (B)

 

  

29% to 61%

 

  

42%

 

 

Loans and lending commitments

    

 

 

 

5,418     

 

 

  

 

Corporate loan model:

     
             Credit spread / (C)    482 to 898 bps    596 bps
        Margin loan model(3):      
             Credit spread / (C)(D)    31 to 102 bps    86 bps
             Volatility skew / (C)(D)    20% to 46%    32%
             Discount rate / (C)(D)    1% to 8%    3%
        Expected recovery:      
             Asset coverage / (A)    47% to 99%    90%
        Option model:      
             Volatility skew / (C)    -1%    -1%
        Comparable pricing:      
             Comparable loan price / (A)    43 to 100 points    87 points
        Discounted cash flow:      
       

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

   5% to 6%    6%
               

     Capitalization rate / (C)(D)

 

  

4% to 10%

 

  

4%

 

 

LOGO   16    


Table of Contents

MORGAN STANLEY

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

 

     Balance at
June 30, 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)               

 

Other debt

       528          Comparable pricing:      
             Comparable loan price / (A)    3 to 84 points    66 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%
        Discounted cash flow:      
                     Discount rate / (C)    10% to 13%    12%

 

Corporate equities

    

 

 

 

572    

 

 

  

 

Comparable pricing:

     
                     Comparable equity price / (A)    100%    100%

 

Net derivative and other contracts(4):

             

Interest rate contracts

       (235)         Option model(3):      
       

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

   25% to 55%    42% / 42% (5)
             Interest rate volatility skew / (A)(D)    34% to 143%    78% / 77% (5)
             Interest rate quanto correlation / (A)(D)    -8% to 35%    2% / -7% (5)
             Interest rate curve correlation / (C)(D)    19% to 95%    71% / 76% (5)
             Inflation volatility / (A)(D)    0% to 1%    1% / 1% (5)
             Interest rate - Inflation correlation / (A)(D)    -24% to -44%    -34% / -33% (5)
             Interest rate curve / (C)(D)    0% to 1%    1% / 1% (5)
             Foreign exchange volatility skew / (C)(D)    0% to 11%    4% / 6% (5)
        Comparable pricing:      
                     Comparable bond price / (C)    95 to 100 points    96 points

 

Credit contracts

    

 

 

 

(1,114)   

 

 

  

 

Comparable pricing:

     
             Cash synthetic basis / (C)(D)    5 to 12 points    10 points
             Comparable bond price / (C)(D)    0 to 85 points    26 points
        Correlation model(3):      
                     Credit correlation / (B)    29% to 92%    49%

 

Foreign exchange contracts(6)

    

 

 

 

(1)   

 

 

  

 

Option model:

     
       

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

   25% to 55%    42% / 42% (5)
             Interest rate volatility skew / (A)(D)    34% to 143%    78% / 77% (5)
             Interest rate curve / (A)(D)    0%    0% / 0% (5)
                     Interest rate curve correlation / (C)(D)    19% to 94%    73% / 81% (5)

 

Equity contracts(6)

    

 

 

 

(1,473)   

 

 

  

 

Option model:

     
             At the money volatility / (A)(D)    6% to 81%    35%
             Volatility skew / (A)(D)    -4% to 0%    -1%
             Equity - Equity correlation / (A)(D)    40% to 98%    79%
             Equity - Foreign exchange correlation / (C)(D)    -70% to -31%    -42%
                     Equity - Interest rate correlation / (C)(D)    -7% to 50%    19% / 12% (5)

 

Commodity contracts

       1,298          Option model:      
             Forward power price / (C)(D)    $2 to $95 per megawatt hour   

$34 per

megawatt hour

             Commodity volatility / (C)(D)    6% to 90%    18%
                     Cross commodity correlation / (C)(D)    5% to 99%    93%

 

    17   LOGO


Table of Contents

MORGAN STANLEY

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

 

     Balance at
June 30, 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)               

Investments:

             

Principal investments

       769      Discounted cash flow:      
       

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

   13% to 16%    15%
             Exit multiple / (A)(D)    8 to 23 times    9 times
        Market approach(3):      
             EBITDA multiple / (A)(D)    6 to 25 times    12 times
             Forward capacity price / (A)(D)    $4 to $9    $7
        Comparable pricing:      
                     Comparable equity price / (A)    43% to 100%    82%

Other

       205      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 13 times    12 times
        Comparable pricing(3):      
                     Comparable equity price / (A)    100%    100%

Liabilities at Fair Value

             

Securities sold under agreements to repurchase

       150      Discounted cash flow:      
                     Funding spread / (A)    117 to 123 bps    120 bps

Other secured financings

       441      Option model:      
             Volatility skew / (C)    -1%    -1%
        Discounted cash flow(3):      
             Discount rate / (C)    4%    4%
        Discounted cash flow:      
                     Funding spread / (A)    101 to 126 bps    114 bps

Long-term borrowings

       1,929      Option model(3):      
             At the money volatility / (C)(D)    6% to 48%    29%
             Volatility skew / (C)(D)    -2% to 0%    -1%
             Equity - Equity correlation / (C)(D)    50% to 98%    75%
             Equity - Foreign exchange correlation / (C)(D)    -50% to 11%    -25%
       

Option model:

     
             Interest rate - credit spread correlation / (A)(D)    -52% to 3%    -24% / -23% (5)
             Interest rate - Foreign exchange correlation /      
                 (A)(D)    53%    53% / 53% (5)
             Interest rate - equity correlation / (A)(D)    7% to 44%    26% / 26% (5)
             Interest rate curve correlation / (C)(D)    40% to 87%    73% / 78% (5)
       

Correlation model:

     
             Credit correlation / (B)    33% to 61%    44%
       

Comparable pricing:

     
                     Comparable equity price / (A)    100%    100%

 

LOGO   18    


Table of Contents

MORGAN STANLEY

NOTES TO 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)            

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 points

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%

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

 

    19   LOGO


Table of Contents

MORGAN STANLEY

NOTES TO 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)            

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%

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)</