Companies: 10,660     total market cap: $140.341 T
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Morgan Stanley
MS
#52
Rank
$286.01 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$179.96
Share price
2.34%
Change (1 day)
30.49%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services๐Ÿ’ฐ Investment
Categories
  1. Morgan Stanley
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2020 Q1

Morgan Stanley - 10-Q quarterly report FY2020 Q1


Text size:
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
Commission File Number 1-11758
mslogoa02.jpg
(Exact name of Registrant as specified in its charter)
 
 
 
 
 
 
 
 
 
Delaware
1585 Broadway
36-3145972
(212)
761-4000
 
(State or other jurisdiction of
incorporation or organization)
New York,
NY
10036
(I.R.S. Employer Identification No.)
(Registrant’s telephone number, including area code)
(Address of principal executive offices, including zip code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of each class
Trading
Symbol(s)
Name of exchange on
which registered
Common Stock, $0.01 par value
MS
New York Stock Exchange
Depositary Shares, each representing 1/1,000th interest in a share of Floating Rate
MS/PA
New York Stock Exchange
Non-Cumulative Preferred Stock, Series A, $0.01 par value
Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate
MS/PE
New York Stock Exchange
Non-Cumulative Preferred Stock, Series E, $0.01 par value
Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate
MS/PF
New York Stock Exchange
Non-Cumulative Preferred Stock, Series F, $0.01 par value
Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate
MS/PI
New York Stock Exchange
Non-Cumulative Preferred Stock, Series I, $0.01 par value
Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate
MS/PK
New York Stock Exchange
Non-Cumulative Preferred Stock, Series K, $0.01 par value
Depository Shares, each representing 1/1000th interest in a share of 4.875%
MS/PL
New York Stock Exchange
Non-Cumulative Preferred Stock, Series L, $0.01 par value
Global Medium-Term Notes, Series A, Fixed Rate Step-Up Senior Notes Due 2026
MS/26C
New York Stock Exchange
of Morgan Stanley Finance LLC (and Registrant’s guarantee with respect thereto)
Morgan Stanley Cushing® MLP High Income Index ETNs due March 21, 2031
MLPY
NYSE Arca, Inc.
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  ☒     No  ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ☒    No  ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.          ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No ☒
As of April 30, 2020, there were 1,575,656,380 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.


QUARTERLY REPORT ON FORM 10-Q
For the quarter ended March 31, 2020
Table of Contents
Part
Item
Page
Risk Factors
II
1A

1
Financial Information
I
 
2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
I
2

2
Introduction
 
 
2
Executive Summary
 
 
3
Business Segments
 
 
7
Supplemental Financial Information
 
 
15
Other Matters
 
 
15
Accounting Development Updates
 
 
15
Critical Accounting Policies
 
 
16
Liquidity and Capital Resources
 
 
16
Balance Sheet
 
 
16
Regulatory Requirements
 
 
21
Quantitative and Qualitative Disclosures about Risk
I
3

28
Market Risk
 
 
28
Credit Risk
 
 
30
Country and Other Risks
 
 
35
Report of Independent Registered Public Accounting Firm
 
 
38
Consolidated Financial Statements and Notes
I
1

39
Consolidated Income Statements (Unaudited)
 
 
39
Consolidated Comprehensive Income Statements (Unaudited)
 
 
40
Consolidated Balance Sheets (Unaudited at March 31, 2020)
 
 
41
Consolidated Statements of Changes in Total Equity (Unaudited)
 
 
42
Consolidated Cash Flow Statements (Unaudited)
 
 
43
Notes to Consolidated Financial Statements (Unaudited)
 
 
44
1.
Introduction and Basis of Presentation
 
 
44
2.
Significant Accounting Policies
 
 
45
3.
Cash and Cash Equivalents
 
 
47
4.
Fair Values
 
 
47
5.
Fair Value Option
 
 
54
6.
Derivative Instruments and Hedging Activities
 
 
55
7.
Investment Securities
 
 
59
8.
Collateralized Transactions
 
 
62
9.
Loans, Lending Commitments and Related Allowance for Credit Losses
 
 
63
10.
Other Assets—Equity Method Investments
 
 
67
11.
Deposits
 
 
67
12.
Borrowings and Other Secured Financings
 
 
67
13.
Commitments, Guarantees and Contingencies
 
 
68
14.
Variable Interest Entities and Securitization Activities
 
 
71
15.
Regulatory Requirements
 
 
73
16.
Total Equity
 
 
76
17.
Interest Income and Interest Expense
 
 
78
18.
Income Taxes
 
 
78
19.
Segment, Geographic and Revenue Information
 
 
78
Financial Data Supplement (Unaudited)
 
 
81
Glossary of Common Terms and Acronyms
 
 
82
Other Information
II
 
84
Legal Proceedings
II
1

84
Unregistered Sales of Equity Securities and Use of Proceeds
II
2

84
Controls and Procedures
I
4

84
Exhibits
II
6

84
Signatures
 
 
S-1

i

Available Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. The SEC maintains a website, www.sec.gov, that contains annual, quarterly and current reports, proxy and information statements and other information that issuers file electronically with the SEC. Our electronic SEC filings are available to the public at the SEC’s website.
Our website 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 (“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 website, 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 and our sustainability initiatives at www.morganstanley.com/about-us/sustainability-at-morgan-stanley. Our webpages include:
 
•
Amended and Restated Certificate of Incorporation;
•
Amended and Restated Bylaws;
•
Charters for our Audit Committee, Compensation, Management Development and Succession Committee, Nominating and Governance Committee, Operations and Technology Committee, and Risk Committee;
•
Corporate Governance Policies;
•
Policy Regarding Corporate Political Activities;
•
Policy Regarding Shareholder Rights Plan;
•
Equity Ownership Commitment;
•
Code of Ethics and Business Conduct;
•
Code of Conduct;
•
Integrity Hotline Information;
•
Environmental and Social Policies; and
•
Sustainability Report.
Our 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 website. 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 website is not incorporated by reference into this report.

ii

Risk Factors
In addition to “Risk Factors” in Part I, Item 1A of the 2019 Form 10-K, please refer to the risk factor under Item 8.01. “Other Matters,” in the Current Report on Form 8-K filed with the SEC on April 16, 2020 and the additional risk factors under “Risk Factors” in the Registration Statement on Form S-4 filed with the SEC on April 17, 2020.


 
1
March 2020 Form 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Morgan Stanley 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,” “Firm,” “us,” “we” or “our” mean Morgan Stanley (the “Parent Company”) together with its consolidated subsidiaries. See the “Glossary of Common Terms and Acronyms” for the definition of certain terms and acronyms used throughout this Form 10-Q.
A description of the clients and principal products and services of each of our business segments is as follows:
Institutional Securities provides investment banking, sales and trading, lending and other services to corporations, governments, financial institutions and high to ultra-high net worth clients. Investment banking services consist of capital raising and financial advisory services, including services relating to the underwriting of debt, equity and other securities, as well as advice on mergers and acquisitions, restructurings, real estate and project finance. Sales and trading services include sales, financing, prime brokerage and market-making activities in equity and fixed income products, including foreign exchange and commodities. Lending activities include originating corporate loans and commercial real estate loans, providing secured lending facilities, and extending financing to sales and trading customers. Other activities include Asia wealth management services, investments and research.
Wealth Management provides a comprehensive array of financial services and solutions to individual investors and small to medium-sized businesses and institutions covering: brokerage and investment advisory services; financial and wealth planning services; stock plan administration services; annuity and insurance products; securities-based lending, residential real estate loans and other lending products; banking; and retirement plan services.
 
Investment Management provides a broad range of investment strategies and products that span geographies, asset classes, and public and private markets to a diverse group of clients across institutional and intermediary channels. Strategies and products, which are offered through a variety of investment vehicles, include equity, fixed income, liquidity and alternative/other products. Institutional clients include defined benefit/defined contribution plans, foundations, endowments, government entities, sovereign wealth funds, insurance companies, third-party fund sponsors and corporations. Individual clients are generally served through intermediaries, including affiliated and non-affiliated distributors.
Management’s Discussion and Analysis includes certain metrics which we believe to be useful to us, investors, analysts and other stakeholders by providing further transparency about, or an additional means of assessing, our financial condition and operating results. Such metrics, when used, are defined and may be different from or inconsistent with metrics used by other companies.
The results of operations in the past have been, and in the future may continue to be, materially affected by: competition; risk factors; legislative, legal and regulatory developments; and other factors. These factors also may have an adverse impact on our ability to achieve our strategic objectives. Additionally, the discussion of our results of operations herein may contain forward-looking statements. These statements, which reflect management’s beliefs and expectations, are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of the risks and uncertainties that may affect our future results, see “Forward-Looking Statements,” “Business—Competition,” “Business—Supervision and Regulation,” and “Risk Factors” in the 2019 Form 10-K, and “Liquidity and Capital Resources—Regulatory Requirements” herein. In addition, see “Executive Summary” herein and “Risk Factors” for information on the current and possible future effects of the COVID-19 pandemic on our results.


March 2020 Form 10-Q
2
 
Table of Contents
 
Management’s Discussion and Analysis
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Executive Summary
Overview of Financial Results
Consolidated Results
Net Revenues
($ in millions)
netrevenuesa05.jpg

Net Income Applicable to Morgan Stanley
($ in millions)
netincomea05.jpg

Earnings per Common Share1 
epsa06.jpg
1.
For further information on basic and diluted EPS, see Note 16 to the financial statements.
 

We reported net revenues of $9,487 million in the quarter ended March 31, 2020 (“current quarter,” or “1Q 2020”), compared with $10,286 million in the quarter ended March 31, 2019 (“prior year quarter,” or “1Q 2019”). For the current quarter, net income applicable to Morgan Stanley was $1,698 million, or $1.01 per diluted common share, compared with $2,429 million or $1.39 per diluted common share, in the prior year quarter.
See “Coronavirus Disease (COVID-19) Pandemic” herein for information on the current and possible future effects of the COVID-19 pandemic on our results.
Non-interest Expenses1 
($ in millions)
noninterestexpensesa02.jpg

1.
The percentages on the bars in the chart represent the contribution of compensation and benefits expenses and non-compensation expenses to the total.
•
Compensation and benefits expenses of $4,283 million in the current quarter decreased 8% from $4,651 million in the prior year quarter. The decrease was primarily due to decreases in the fair value of investments to which certain deferred compensation plans are referenced and compensation associated with carried interest, partially offset by increases in discretionary incentive compensation, and the formulaic payout to Wealth Management representatives driven by the mix of revenues.
•
Non-compensation expenses of $3,058 million in the current quarter increased 14% from $2,680 million in the prior year quarter. The increase was primarily due to higher volume-related expenses and an increase in the provision for credit losses for lending commitments.
Income Taxes
The prior year quarter included intermittent net discrete tax benefits of $101 million, primarily associated with remeasurement of reserves and related interest as a result of new information pertaining to the resolution of multi-jurisdiction tax examinations. For further information, see “Supplemental Financial Information—Income Tax Matters” herein.

 
3
March 2020 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
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Selected Financial Information and Other Statistical Data
 
Three Months Ended March 31,
$ in millions
2020
2019
Net income applicable to Morgan Stanley
$
1,698

$
2,429

Preferred stock dividends
108

93

Earnings applicable to Morgan Stanley common shareholders
$
1,590

$
2,336

 
 
 
Expense efficiency ratio1
77.4
%
71.3
%
ROE2
8.5
%
13.1
%
Adjusted ROE3
8.3
%
12.5
%
ROTCE2,3
9.7
%
14.9
%
Adjusted ROTCE3
9.5
%
14.2
%
Pretax margin4
22.6
%
28.7
%
Pre-tax margin by segment4
 
 
Institutional Securities
19
%
31
%
Wealth Management
26
%
27
%
Investment Management
21
%
22
%
in millions, except per share and employee data
At
March 31,
2020
At
December 31,
2019
Liquidity resources5
$
255,134

$
215,868

Loans6
$
148,697

$
130,637

Total assets
$
947,795

$
895,429

Deposits
$
235,239

$
190,356

Borrowings
$
194,856

$
192,627

Common shares outstanding
1,576

1,594

Common shareholders' equity
$
77,340

$
73,029

Tangible common shareholders’ equity3
$
68,194

$
63,780

Book value per common share7
$
49.09

$
45.82

Tangible book value per common share3,7
$
43.28

$
40.01

Worldwide employees
60,670

60,431

 
At
March 31,
2020
At
December 31,
2019
Capital ratios8
 
 
Common Equity Tier 1 capital
15.2
%
16.4
%
Tier 1 capital
17.3
%
18.6
%
Total capital
19.6
%
21.0
%
Tier 1 leverage
8.1
%
8.3
%
SLR
6.2
%
6.4
%
1.
The expense efficiency ratio represents total non-interest expenses as a percentage of net revenues.
2.
ROE and ROTCE represent annualized earnings applicable to Morgan Stanley common shareholders as a percentage of average common equity and average tangible common equity, respectively.
3.
Represents a non-GAAP measure. See “Selected Non-GAAP Financial Information” herein.
4.
Pre-tax margin represents income from continuing operations before income taxes as a percentage of net revenues.
5.
For a discussion of Liquidity resources, see “Liquidity and Capital Resources—Liquidity Risk Management Framework—Liquidity Resources” herein.
6.
Amounts include loans held for investment (net of allowance) and loans held for sale but exclude loans at fair value, which are included in Trading assets in the balance sheets (see Note 9 to the financial statements).
7.
Book value per common share and tangible book value per common share equal common shareholders’ equity and tangible common shareholders’ equity, respectively, divided by common shares outstanding.
8.
At March 31, 2020 and December 31, 2019, our risk-based capital ratios are based on the Advanced Approach and the Standardized Approach rules, respectively. For a discussion of our capital ratios, see “Liquidity and Capital Resources—Regulatory Requirements” herein.
 
Business Segment Results

Net Revenues by Segment1 
($ in millions)
netrevenuesbysegment.jpg
Net Income Applicable to Morgan Stanley by Segment1 
($ in millions)
netincomebysegmenta01.jpg
1.
The percentages on the bars in the charts represent the contribution of each business segment to the total of the applicable financial category and may not total to 100% due to intersegment eliminations. See Note 19 to the financial statements for details of intersegment eliminations.
•
Institutional Securities net revenues of $4,905 million in the current quarter decreased 6% from $5,196 million in the prior year quarter primarily reflecting losses on loans and lending commitments held for sale and an increase in the provision for credit losses on loans and lending commitments held for investment, as well as losses related to investments associated with certain employee deferred cash-based compensation plans, partially offset by increases in Fixed Income and Equity sales and trading revenues driven by increased volumes and volatility.
•
Wealth Management net revenues of $4,037 million in the current quarter decreased 8% from $4,389 million in the prior year quarter, primarily reflecting losses related to investments associated with certain employee deferred cash-based compensation plans, partially offset by higher Asset management revenues and higher commissions driven by market volatility.

March 2020 Form 10-Q
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Table of Contents
 
Management’s Discussion and Analysis
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•
Investment Management net revenues of $692 million in the current quarter decreased 14% from $804 million in the prior year quarter, primarily reflecting lower Investments revenues, partially offset by higher Asset management revenues.
Net Revenues by Region1, 2  
($ in millions)
netrevenuesbyregiona01.jpg
1.
The percentages on the bars in the charts represent the contribution of each region to the total.
2.
For a discussion of how the geographic breakdown of net revenues is determined, see Note 19 to the financial statements.
Both the 34% increase in revenues in Asia and the 33% decrease in revenues in EMEA were primarily attributable to Equity sales and trading within the Institutional Securities business segment. The Equity sales and trading revenues increase in Asia reflects higher client volumes, while in EMEA market volatility and reduced dividend expectations weighed on revenues in the derivatives and financing businesses. Additionally, EMEA results reflected markdowns of held-for-sale loans and lending commitments.
Coronavirus Disease (COVID-19) Pandemic
The coronavirus disease (“COVID-19”) pandemic and related government-imposed shelter-in-place restrictions have had, and will likely continue to have, a severe impact on global economic conditions and the environment in which we operate our businesses.
In responding to this unprecedented situation, we have taken measures to prioritize the health of our employees and their families, and to be prepared operationally to serve our clients, leveraging our business continuity planning and historical investments in technology. More than 90% of our employees are currently working from home, and to date, we have not experienced any significant loss of operational capability, as we have implemented our pandemic-related responses. We believe we are prepared to continue to operate with the vast majority of our workforce working remotely for as long as health guidelines and prudence require, with limited impact to our operational capabilities.
The coronavirus disease has impacted many people’s health around the world, including many of our employees. Our
 
Chairman and CEO was diagnosed with the coronavirus in March, but has fully recovered. The rest of the Firm’s Operating Committee remain healthy and are sheltering in place.
With the COVID-19 impacts on individuals, communities and organizations continuing to evolve, governments around the world have reacted to the health crisis caused by the pandemic, and central banks have taken steps to proactively address market disruptions by cutting interest rates and providing liquidity sources and other stimulus programs. See “Regulatory Developments in Response to COVID-19” herein for further details.
We also have taken several direct steps to provide assistance. Our balance sheet has increased as we: support market and client activity; take in increased deposits from our Wealth Management clients; extend credit to our institutional and retail clients to provide them with additional liquidity; and provide financing to support COVID-19 impacted clients across multiple sectors. Along with the seven other U.S. Banks comprising the Financial Services Forum, we voluntarily ceased our Share Repurchase Program to keep this capital available to help clients and took action on the Federal Reserve's encouragement to use its discount window by borrowing from it. We have also taken steps to participate in other Federal Reserve programs, notably the Primary Dealer Credit Facility (“PDCF”).
Our financial condition, balance sheet, capital and liquidity have remained strong. In March 2020, we saw deposit inflows of $38 billion as customers sought relative safety away from volatile markets, and we raised more than $5 billion in new long-term debt supplementing our liquidity position.
As further discussed in “Business Segments” herein, towards the end of the current quarter, we observed the impact of the pandemic on our business. The decline of asset prices, reduction in interest rates, widening of credit spreads, borrower and counterparty credit deterioration, market volatility and reduced investment banking activity had the most immediate negative impacts on our current quarter performance. Related to these effects, the Firm experienced mark-to-market losses, net of economic hedges of $610 million on loans and lending commitments held for sale, provisions of $407 million for credit losses on loans and lending commitments held for investment, and losses of $384 million on fund and business-related investments, net of hedges. At the same time, high levels of client trading activity, related to market volatility, significantly increased revenues for global macro products and Commodities in Institutional Securities, and the transactional businesses in Wealth Management.
Though we are unable to estimate the extent of the impact, the continuing pandemic and related global economic crisis will adversely impact our future operating results. Additionally, with the continuance of many of the same negative impacts, without the benefit of higher client trading activity experienced in the

 
5
March 2020 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
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current quarter, it is uncertain that our financial objectives will be attained within the originally stated two year time frame.
We continue to use the elements of our Enterprise Risk Management framework manage the significant uncertainty in the present economic and market conditions. See “Quantitative and Qualitative Disclosures about Risk” in the 2019 Form 10-K for further information about our Enterprise Risk Management Framework.
In addition, refer to “Risk Factors” herein and Forward Looking Statements in the 2019 Form 10-K.
Selected Non-GAAP Financial Information
We prepare our financial statements using U.S. GAAP. From time to time, we may disclose certain “non-GAAP financial measures” in this document or in the course of our earnings releases, earnings and other conference calls, financial presentations, definitive proxy statement and otherwise. A “non-GAAP financial measure” excludes, or includes, amounts from the most directly comparable measure calculated and presented in accordance with U.S. GAAP. We consider the non-GAAP financial measures we disclose to be useful to us, investors, analysts and other stakeholders by providing further transparency about, or an alternate means of assessing, our financial condition, operating results, prospective regulatory capital requirements or capital adequacy.
These measures are not in accordance with, or a substitute for, U.S. GAAP and may be different from or inconsistent with non-GAAP financial measures used by other companies. Whenever we refer to a non-GAAP financial measure, we will also generally define it or present the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, along with a reconciliation of the differences between the U.S. GAAP financial measure and the non-GAAP financial measure.
The principal non-GAAP financial measures presented in this document are set forth in the following tables.
 
Reconciliations from U.S. GAAP to Non-GAAP Consolidated Financial Measures
 
Three Months Ended
March 31,
$ in millions, except per share data
2020
2019
Net income applicable to Morgan Stanley
$
1,698

$
2,429

Impact of adjustments
(31
)
(101
)
Adjusted net income applicable to Morgan Stanley—non-GAAP1
$
1,667

$
2,328

Earnings per diluted common share
$
1.01

$
1.39

Impact of adjustments
(0.02
)
(0.06
)
Adjusted earnings per diluted common share—non-GAAP1
$
0.99

$
1.33

Effective income tax rate
17.1
%
16.5
%
Impact of adjustments
1.4
%
3.4
%
Adjusted effective income tax rate—
non-GAAP1
18.5
%
19.9
%
 
Average Monthly Balance
 
Three Months Ended March 31,
$ in millions
2020
2019
Tangible equity
 
 
Morgan Stanley shareholders' equity
$
83,244

$
80,115

Less: Goodwill and net intangible assets
(9,200
)
(8,806
)
Tangible Morgan Stanley shareholders' equity—Non-GAAP
$
74,044

$
71,309

Common shareholders' equity
$
74,724

$
71,595

Less: Goodwill and net intangible assets
(9,200
)
(8,806
)
Tangible common shareholders' equity—Non-GAAP
$
65,524

$
62,789

 
Three Months Ended
March 31,
$ in billions
2020
2019
Average common equity
 
 
Unadjusted—GAAP
$
74.7

$
71.6

Adjusted1—Non-GAAP
74.7

71.5

ROE2
 
 
Unadjusted—GAAP
8.5
%
13.1
%
Adjusted—Non-GAAP1, 3
8.3
%
12.5
%
Average tangible common equity—Non-GAAP
Unadjusted
$
65.5

$
62.8

Adjusted1
65.5

62.7

ROTCE2—Non-GAAP
 
 
Unadjusted
9.7
%
14.9
%
Adjusted1, 3
9.5
%
14.2
%

March 2020 Form 10-Q
6
 
Table of Contents
 
Management’s Discussion and Analysis
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Non-GAAP Financial Measures by Business Segment
 
Three Months Ended
March 31,
$ in billions
2020
2019
Average common equity4, 5
 
 
Institutional Securities
$
42.8

$
40.4

Wealth Management
18.2

18.2

Investment Management
2.6

2.5

Average tangible common equity4, 5
 
 
Institutional Securities
$
42.3

$
39.9

Wealth Management
10.4

10.2

Investment Management
1.7

1.5

ROE6
 
 
Institutional Securities
6.3
%
12.9
%
Wealth Management
18.5
%
19.8
%
Investment Management
11.7
%
21.9
%
ROTCE6
 
 
Institutional Securities
6.4
%
13.0
%
Wealth Management
32.3
%
35.6
%
Investment Management
18.1
%
35.3
%
 
1.
Adjusted amounts exclude net discrete tax provisions (benefits) that are intermittent and include those that are recurring. Provisions (benefits) related to conversion of employee share-based awards are expected to occur every year and, as such, are considered recurring discrete tax items. For further information on the net discrete tax provisions (benefits), see “Supplemental Financial Information—Income Tax Matters” herein.
2.
ROE and ROTCE represent annualized earnings applicable to Morgan Stanley common shareholders as a percentage of average common equity and average tangible common equity, respectively. When excluding intermittent net discrete tax provisions (benefits), both the numerator and average denominator are adjusted.
3.
The calculations used in determining our “ROE and ROTCE Targets” referred to in the following section are the Adjusted ROE and Adjusted ROTCE amounts shown in this table.
4.
Average common equity and average tangible common equity for each business segment is determined using our Required Capital framework (see "Liquidity and Capital Resources—Regulatory Requirements—Attribution of Average Common Equity According to the Required Capital Framework” herein).
5.
The sums of the segments' Average common equity and Average tangible common equity do not equal the Consolidated measures due to Parent equity.
6.
The calculation of ROE and ROTCE by segment uses annualized net income applicable to Morgan Stanley by segment less preferred dividends allocated to each segment as a percentage of average common equity and average tangible common equity, respectively, allocated to each segment.
 
Return on Tangible Common Equity Target
In January 2020, we established an ROTCE Target of 13% to 15% to be achieved over the next two years.
Our ROTCE Target is a forward-looking statement that was based on a normal market environment and may be materially affected by many factors, including, among other things: macroeconomic and market conditions; legislative and regulatory developments; industry trading and investment banking volumes; equity market levels; interest rate environment; outsized legal expenses or penalties; the ability to maintain a reduced level of expenses; and capital levels.
With the COVID–19 pandemic, and the current global economic crisis that includes negative impacts from many of the aforementioned factors, it is uncertain that the ROTCE Target will be met within the originally stated time frame. See “Coronavirus Disease (COVID–19) Pandemic” herein and “Risk Factors” for further information on market and economic conditions and their effects on our financial results.
For further information on non-GAAP measures (ROTCE excluding intermittent net discrete tax items), see “Selected Non-GAAP Financial Information” herein. For information on the impact of intermittent net discrete tax items, see “Supplemental Financial Information—Income Tax Matters” herein.
Business Segments
Substantially all of our operating revenues and operating expenses are directly attributable to our business segments. Certain revenues and expenses have been allocated to each business segment, generally in proportion to its respective net revenues, non-interest expenses or other relevant measures.
For an overview of the components of our business segments, net revenues, compensation expense and income taxes, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments” in the 2019 Form 10-K.


 
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March 2020 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
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Institutional Securities
Income Statement Information
 
 
 
 
 
Three Months Ended
March 31,
 
$ in millions
2020
2019
% Change
Revenues
 
 
 
Investment banking
$
1,144

$
1,151

(1
)%
Trading
3,416

3,130

9
 %
Investments
(25
)
81

(131
)%
Commissions and fees
874

621

41
 %
Asset management
113

107

6
 %
Other
(1,079
)
222

N/M

Total non-interest revenues
4,443

5,312

(16
)%
Interest income
2,423

3,056

(21
)%
Interest expense
1,961

3,172

(38
)%
Net interest
462

(116
)
N/M

Net revenues
4,905

5,196

(6
)%
Compensation and benefits
1,814

1,819

—
 %
Non-compensation expenses
2,141

1,782

20
 %
Total non-interest expenses
3,955

3,601

10
 %
Income before provision for income taxes
950

1,595

(40
)%
Provision for income taxes
151

190

(21
)%
Net income
799

1,405

(43
)%
Net income applicable to noncontrolling interests
42

34

24
 %
Net income applicable to Morgan Stanley
$
757

$
1,371

(45
)%
 
 
 
 
Results in the Institutional Securities business segment reflect constructive markets in January and February 2020 and the significant effects of COVID-19 on markets in March. In particular, in March:

•
Uncertainty, driven by market volatility and the overall environment, resulted in lower activity in Advisory and Equity underwriting.

•
Market volumes and volatility were significantly higher than in the prior year quarter resulting in increased client activity across the Sales and Trading businesses and widened bid-offer spreads. Valuations were negatively impacted, and client balances declined significantly in the Equity Financing business.

•
Credit deteriorated rapidly, the results of which are reflected in losses on held-for-sale loans and lending commitments recorded in Other revenues, partially offset by positive hedge results in Other Sales and Trading, aggregating to $610 million for the current quarter; provisions for loan losses recorded in Other revenues, and lending commitments shown in Non-compensation expenses, aggregating to $388 million for the current quarter; Trading losses in certain Credit
 
products within Fixed Income; and losses on certain counterparties’ failure to meet margin requirements in Equity sales and trading.
These effects, in the context of the full quarter’s results, are further discussed herein.

Investment Banking
Investment Banking Revenues
 
Three Months Ended
March 31,
 
$ in millions
2020
2019
% Change
Advisory
$
362

$
406

(11
)%
Underwriting:


 
Equity
336

339

(1
)%
Fixed income
446

406

10
 %
Total Underwriting
782

745

5
 %
Total Investment banking
$
1,144

$
1,151

(1
)%
Investment Banking Volumes
 
Three Months Ended
March 31,
$ in billions
2020
2019
Completed mergers and acquisitions1
$
109

$
195

Equity and equity-related offerings2, 3
13

14

Fixed income offerings2, 4
82

58

Source: Refinitiv data as of April 1, 2020. Transaction volumes may not be indicative of net revenues in a given period. In addition, transaction volumes for prior periods may vary from amounts previously reported due to the subsequent withdrawal, change in value or change in timing of certain transactions.
1.
Includes transactions of $100 million or more. Based on full credit to each of the advisors in a transaction.
2.
Based on full credit for single book managers and equal credit for joint book managers.
3.
Includes Rule 144A issuances and registered public offerings of common stock, convertible securities and rights offerings.
4.
Includes Rule 144A and publicly registered issuances, non-convertible preferred stock, mortgage-backed and asset-backed securities, and taxable municipal debt. Excludes leveraged loans and self-led issuances.
Investment banking revenues of $1,144 million in the current quarter were relatively unchanged from the prior year quarter, reflecting lower results in our advisory business offset by higher results in our fixed income underwriting business.
 
•
Advisory revenues decreased in the current quarter primarily as a result of lower volumes of completed M&A activity, particularly large transactions.

•
Equity underwriting revenues were relatively unchanged compared with subdued results in the prior year quarter as lower revenues in secondary block share trades were offset by higher revenues in initial public offerings and follow-on offerings.


March 2020 Form 10-Q
8
 
Table of Contents
 
Management’s Discussion and Analysis
mslogoa02.jpg

•
Fixed income underwriting revenues increased in the current quarter primarily due to higher overall volumes compared to the prior year quarter, with higher revenues in investment grade bond and non-investment grade loan issuances, partially offset by lower revenues from investment grade loan issuances.
See “Investment Banking Volumes” herein.
Sales and Trading Net Revenues
 
 
 
 
By Income Statement Line Item
 
Three Months Ended
March 31,
 
$ in millions
2020
2019
% Change
Trading
$
3,416

$
3,130

9
%
Commissions and fees
874

621

41
%
Asset management
113

107

6
%
Net interest
462

(116
)
N/M

Total
$
4,865

$
3,742

30
%
 
 
 
 
By Business
 
Three Months Ended
March 31,
 
 
 
$ in millions
2020
2019
% Change
Equity
$
2,422

$
2,015

20
%
Fixed Income
2,203

1,710

29
%
Other
240

17

N/M

Total
$
4,865

$
3,742

30
%
 
 
 
 
 
 
 
 
 
 
Sales and Trading Revenues—Equity and Fixed Income
 
Three Months Ended
March 31, 2020
 
 
 
Net
 
$ in millions
Trading
Fees1
Interest2
Total
Financing
$
1,034

$
101

$
(37
)
$
1,098

Execution services
579

783

(38
)
1,324

Total Equity
$
1,613

$
884

$
(75
)
$
2,422

Total Fixed Income
$
1,773

$
102

$
328

$
2,203

 
Three Months Ended
March 31, 2019
 
 
 
Net
 
$ in millions
Trading
Fees1
Interest2
Total
Financing
$
1,115

$
98

$
(258
)
$
955

Execution services
551

553

(44
)
1,060

Total Equity
$
1,666

$
651

$
(302
)
$
2,015

Total Fixed Income
$
1,727

$
78

$
(95
)
$
1,710

1.
Includes Commissions and fees and Asset management revenues.
2.
Includes funding costs, which are allocated to the businesses based on funding usage.
 
Equity
Equity sales and trading net revenues of $2,422 million in the current quarter increased 20% from the prior year quarter, reflecting higher results in both our financing and execution services businesses.
•
Financing increased from the prior year quarter, primarily due to higher average client balances, partially offset by the impact of reduced dividend expectations on the valuation of certain hedges. Net interest increased reflecting a reduction in funding costs.
•
Execution services increased from the prior year quarter, reflecting an increase in market volumes in cash equities resulting in higher Commissions and fees, and higher client trading activity in derivatives products, which was partially offset by the impact of losses on certain counterparties’ failure to meet margin requirements and the impact of reduced dividend expectations on derivative valuations.
Fixed Income
Fixed Income sales and trading net revenues of $2,203 million in the current quarter were 29% higher than the prior year quarter, primarily driven by higher results in global macro products, partially offset by lower results in credit products.
•
Global macro products Trading revenues increased primarily due to higher client activity in both foreign exchange and rates products, and the widening of bid-offer spreads from higher market volatility. Higher average balances and lower funding costs contributed to an increase in Net interest revenues.
•
Credit products Trading revenues decreased primarily due to the widening of credit spreads which resulted in losses in securitized products and municipal securities, partially offset by increased revenues from client activity in corporate credit products from higher volumes and widening bid-offer spreads. Net interest revenues increased, primarily driven by higher spreads on Agency products and higher average balances in secured lending facilities.
•
Trading revenues from Commodities products and Other decreased as a result of lower client structuring activity within derivatives counterparty credit risk management, partially offset by improved inventory management in commodities due to higher market volatility in energy and metals. Net interest revenues increased, reflecting lower funding costs.
Other
•
Other sales and trading revenues of $240 million in the current quarter increased from the prior year quarter reflecting gains on hedges associated with loans and lending commitments compared with losses in the prior year quarter, partially offset by losses related to investments associated with certain employee deferred cash-based compensation plans.

 
9
March 2020 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
mslogoa02.jpg

Investments, Other Revenues, Non-interest Expenses, and Income Tax Items
Investments
•
Net investment losses of $25 million in the current quarter compared to gains in the prior year quarter, were primarily driven by losses in the current quarter on an energy-related investment and lower revenues from fund-related distributions.
Other Revenues
•
Other net losses of $1,079 million in the current quarter were primarily as a result of mark-to-market losses on loans and lending commitments held for sale due to the widening of credit spreads, compared with gains in the prior year quarter, as well as an increase in the provision for credit losses on loans held for investment.
 
Non-interest Expenses
Non-interest expenses of $3,955 million in the current quarter increased from the prior year quarter, primarily reflecting a 20% increase in Non-compensation expenses.
•
Compensation and benefits expenses remained relatively unchanged in the current quarter as the benefit from a decrease in the fair value of investments to which certain deferred compensation plans are referenced was offset by an increase in discretionary incentive compensation reflecting baseline annual compensation estimates, exclusive of the benefit noted.

•
Non-compensation expenses increased in the current quarter primarily due to higher volume-related expenses as well as an increase in the provision for credit losses for lending commitments held for investment.
Income Tax Items
Intermittent net discrete tax benefits of $101 million were recognized in Provision for income taxes in the prior year quarter. For further information, see “Supplemental Financial Information—Income Tax Matters” herein.


March 2020 Form 10-Q
10
 
Table of Contents
 
Management’s Discussion and Analysis
mslogoa02.jpg

Wealth Management
 
 
 
 
Income Statement Information
 
Three Months Ended
March 31,
 
$ in millions
2020
2019
% Change
Revenues
 
 
 
Investment banking
$
158

$
109

45
 %
Trading
(347
)
302

N/M

Investments
—

1

(100
)%
Commissions and fees
588

406

45
 %
Asset management
2,680

2,361

14
 %
Other
62

80

(23
)%
Total non-interest revenues
3,141

3,259

(4
)%
Interest income
1,193

1,413

(16
)%
Interest expense
297

283

5
 %
Net interest
896

1,130

(21
)%
Net revenues
4,037

4,389

(8
)%
Compensation and benefits
2,212

2,462

(10
)%
Non-compensation expenses
770

739

4
 %
Total non-interest expenses
2,982

3,201

(7
)%
Income before provision for income taxes
$
1,055

$
1,188

(11
)%
Provision for income taxes
191

264

(28
)%
Net income applicable to Morgan Stanley
$
864

$
924

(6
)%

Results in the Wealth Management business segment reflect the significant effects of COVID-19 on the economy and markets in March 2020. In particular, in March:

•
The decline in global asset prices contributed to losses on investments associated with certain employee deferred cash-based compensation plans of $426 million in the current quarter.

•
Already elevated market volumes and volatility compared to the prior year quarter increased further, resulting in increased commissions from client activity.
These effects, in the context of the full quarter’s results, are further discussed herein.
 
 
Financial Information and Statistical Data
 
At
March 31,
2020
At
December 31,
2019
$ in billions, except employee data
Client assets
$
2,397

$
2,700

Fee-based client assets1
$
1,134

$
1,267

Fee-based client assets as a percentage of total client assets
47
%
47
%
Client liabilities2
$
92

$
90

Investment securities portfolio
$
75.5

$
67.2

Loans and lending commitments
$
95.9

$
93.2

Wealth Management representatives
15,432

15,468

 
 
 
 
Three Months Ended
March 31,
 
2020
2019
Per representative:
 
 
Annualized revenues ($ in thousands)3
$
1,045

$
1,118

Client assets ($ in millions)4
$
155

$
158

Fee-based asset flows ($ in billions)5
$
18.4

$
14.8

 
1.
Fee-based client assets represent the amount of assets in client accounts where the fee for services is calculated based on those assets.
2.
Client liabilities include securities-based and tailored lending, residential real estate loans and margin lending.
3.
Revenues per representative equal Wealth Management’s annualized net revenues divided by the average number of representatives.
4.
Client assets per representative equal total period-end client assets divided by period-end number of representatives.
5.
For a description of the Inflows and Outflows included within Fee-based asset flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Wealth Management—Fee-Based Client Assets” in the 2019 Form 10-K. Excludes institutional cash management-related activity.
 
 
 
 
Transactional Revenues
 
Three Months Ended
March 31,
 
$ in millions
2020
2019
% Change
Investment banking
$
158

$
109

45
 %
Trading
(347
)
302

N/M

Commissions and fees
588

406

45
 %
Total
$
399

$
817

(51
)%
Transactional revenues as a % of Net revenues
10
%
19
%
 

 
11
March 2020 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
mslogoa02.jpg

Net Revenues
Transactional Revenues
Transactional revenues of $399 million in the current quarter decreased 51% from the prior year quarter as negative Trading revenues were partially offset by higher Commissions and fees and Investment banking revenues.
•
Investment banking revenues increased in the current quarter primarily due to higher revenues from structured products and closed-end fund issuances.
•
Trading revenues decreased in the current quarter principally due to losses related to investments associated with certain employee deferred cash-based compensation plans, compared with gains in the prior year quarter.
•
Commissions and fees increased in the current quarter primarily due to increased client activity in equities.
Asset Management
Asset management revenues of $2,680 million in the current quarter increased 14% from the prior year quarter primarily due to higher fee-based assets levels at the beginning of the monthly billing cycles in 2020 due to market appreciation and positive net flows, partially offset by lower average fee rates.
See “Fee-Based Client Assets—Rollforwards” herein.
 
Other
Other revenues of $62 million in the current quarter decreased 23% from the prior year quarter primarily due to an increase in the provision for credit losses.

Net Interest
Net interest of $896 million in the current quarter decreased 21% from the prior year quarter primarily due to lower interest rates on Loans and the investment portfolio, changes in our funding mix, and higher prepayment amortization expense related to mortgage-backed securities. These decreases were partially offset by the impact of lower rates paid on brokerage sweep deposits and higher Loan balances.
Non-interest Expenses
Non-interest expenses of $2,982 million in the current quarter decreased 7% from the prior year quarter primarily as a result of lower Compensation and benefits expenses, partially offset by higher Non-compensation expenses.
•
Compensation and benefits expenses decreased in the current quarter, primarily due to decreases in the fair value of investments to which certain deferred compensation plans are referenced, partially offset by an increase in the formulaic
 
payout to Wealth Management representatives driven by the mix of revenues.

•
Non-compensation expenses increased in the current quarter primarily due to incremental expenses related to Solium Capital, Inc., which was acquired in the second quarter of 2019.
 
 
 
 
 
 
Fee-Based Client Assets
 
 
 
 
 
 
Rollforwards
$ in billions
At
December 31,
2019
Inflows
Outflows
Market
Impact
At
March 31,
2020
Separately managed1
$
322

$
12

$
(7
)
$
2

$
329

Unified managed
313

16

(13
)
(53
)
263

Advisor
155

10

(9
)
(25
)
131

Portfolio manager
435

27

(18
)
(65
)
379

Subtotal
$
1,225

$
65

$
(47
)
$
(141
)
$
1,102

Cash management
42

4

(14
)
—

32

Total fee-based client assets
$
1,267

$
69

$
(61
)
$
(141
)
$
1,134

$ in billions
At
December 31,
2018
Inflows
Outflows
Market
Impact
At
March 31,
2019
Separately managed1
$
279

$
14

$
(5
)
$
(12
)
$
276

Unified managed
257

13

(11
)
24

283

Advisor
137

8

(9
)
11

147

Portfolio manager
353

19

(14
)
33

391

Subtotal
$
1,026

$
54

$
(39
)
$
56

$
1,097

Cash management
20

4

(5
)
—

19

Total fee-based client assets
$
1,046

$
58

$
(44
)
$
56

$
1,116

Average Fee Rates
 
Three Months Ended
March 31,
Fee rate in bps
2020
2019
Separately managed
14

14

Unified managed
99

101

Advisor
85

88

Portfolio manager
94

96

Subtotal
72

74

Cash management
5

6

Total fee-based client assets
71

73


1.
Includes non-custody account values reflecting prior quarter-end balances due to a lag in the reporting of asset values by third-party custodians.
For a description of fee-based client assets and rollforward items in the previous tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Wealth Management—Fee-Based Client Assets” in the 2019 Form 10-K.

March 2020 Form 10-Q
12
 
Table of Contents
 
Management’s Discussion and Analysis
mslogoa02.jpg

Investment Management
Income Statement Information
 
 
 
 
 
Three Months Ended
March 31,
 
$ in millions
2020
2019
% Change
Revenues
 
 

Trading
$
(37
)
$
(3
)
N/M

Investments
63

191

(67
)%
Asset management
665

617

8
 %
Other
7

3

133
 %
Total non-interest revenues
698

808

(14
)%
Interest income
8

4

100
 %
Interest expense
14

8

75
 %
Net interest
(6
)
(4
)
(50
)%
Net revenues
692

804

(14
)%
Compensation and benefits
257

370

(31
)%
Non-compensation expenses
292

260

12
 %
Total non-interest expenses
549

630

(13
)%
Income before provision for income taxes
143

174

(18
)%
Provision for income taxes
25

33

(24
)%
Net income
118

141

(16
)%
Net income applicable to noncontrolling interests
40

5

N/M

Net income applicable to Morgan Stanley
$
78

$
136

(43
)%
Results in the Investment Management business segment reflect the significant effects of COVID-19 on the economy and markets in March 2020. In particular, in March:
•
The decline in global asset prices led to losses of $326 million in the current quarter related to the reversal of accrued carried interest, and losses on investments in certain of our funds, net of economic hedges, and net losses in Trading revenues.
These effects, in the context of the full quarter’s results, are further discussed herein.
 

Net Revenues

Investments
Investments revenues of $63 million in the current quarter decreased 67% from the prior year quarter primarily as a result of the reversal of accrued carried interest and investment losses in certain private equity, real estate, and infrastructure funds and losses on seed investments in certain funds. Partially offsetting these decreases were higher carried interest and investment gains in an Asia private equity fund, principally driven by gains from an underlying investment, which is subject to certain sales restrictions.
Asset Management
Asset management revenues of $665 million in the current quarter increased 8% from the prior year quarter primarily as a result of higher average AUM.
See “Assets Under Management or Supervision” herein.
Non-interest Expenses
Non-interest expenses of $549 million in the current quarter decreased 13% from the prior year quarter primarily as a result of lower compensation and benefits expenses, partially offset by higher non-compensation expenses.
 
•
Compensation and benefits expenses decreased in the current quarter primarily due to lower compensation associated with carried interest and a decrease in the fair value of investments to which certain deferred compensation plans are referenced.

•
Non-compensation expenses in the current quarter increased from the prior year quarter primarily as a result of higher fee sharing paid to intermediaries driven by higher average AUM.

 
13
March 2020 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
mslogoa02.jpg

Assets Under Management or Supervision
Rollforwards
$ in billions
At
December 31, 2019
Inflows
Outflows
Market
Impact
Other
At
March 31,
2020
Equity
$
138

$
14

$
(12
)
$
(18
)
$
(1
)
$
121

Fixed income
79

10

(9
)
(4
)
(1
)
75

Alternative/Other
139

8

(4
)
(7
)
5

141

Long-term AUM subtotal
356

32

(25
)
(29
)
3

337

Liquidity
196

446

(395
)
1

(1
)
247

Total AUM
$
552

$
478

$
(420
)
$
(28
)
$
2

$
584

Shares of minority stake assets
6

 
 
 
 
6

 
 
 
 
 
 
 
$ in billions
At
December 31, 2018
Inflows
Outflows
Market
Impact
Other
At
March 31,
2019
Equity
$
103

$
9

$
(8
)
$
16

$
—

$
120

Fixed income
68

6

(7
)
1

—

68

Alternative/Other
128

5

(4
)
5

(1
)
133

Long-term AUM subtotal
299

20

(19
)
22

(1
)
321

Liquidity
164

343

(348
)
1

(1
)
159

Total AUM
$
463

$
363

$
(367
)
$
23

$
(2
)
$
480

Shares of minority stake assets
7

 
 
 
 
6

 
 
 
 
 
 
 
 


Average AUM
 
Three Months Ended
March 31,
$ in billions
2020
2019
Equity
$
133

$
113

Fixed income
79

68

Alternative/Other
139

131

Long-term AUM subtotal
351

312

Liquidity
206

163

Total AUM
$
557

$
475

Shares of minority stake assets
6

6

Average Fee Rates
 
Three Months Ended
March 31,
Fee rate in bps
2020
2019
Equity
77

76
Fixed income
31

32
Alternative/Other
60

68
Long-term AUM
60

63
Liquidity
17

17
Total AUM
44

47
For a description of the asset classes and rollforward items in the previous tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Investment Management—Assets Under Management or Supervision” in the 2019 Form 10-K.
 

March 2020 Form 10-Q
14
 
Table of Contents
 
Management’s Discussion and Analysis
mslogoa02.jpg

Supplemental Financial Information
Income Tax Matters
Effective Tax Rate from Continuing Operations
 
Three Months Ended
March 31,
$ in millions
2020
2019
U.S. GAAP
17.1
%
16.5
%
Adjusted effective income tax rate—non-GAAP1
18.5
%
19.9
%
Net discrete tax provisions/(benefits)
 
 
Recurring2
$
(99
)
$
(107
)
Intermittent3
$
(31
)
$
(101
)
 
1.
The adjusted effective income tax rate is a non-GAAP measure that excludes net discrete tax provisions (benefits) that are intermittent and includes those that are recurring. For further information on non-GAAP measures, see “Selected Non-GAAP Financial Information” herein.
2.
Provisions (benefits) related to conversion of employee share-based awards are expected to occur every year and, as such, are considered recurring discrete tax items.
3.
Includes all tax provisions (benefits) that have been determined to be discrete, other than Recurring items as defined above.
The current quarter includes intermittent net discrete tax benefits associated with the remeasurement of prior years’ tax liabilities. The prior year quarter includes intermittent net discrete tax benefits primarily associated with remeasurement of reserves and related interest as a result of new information pertaining to the resolution of multi-jurisdiction tax examinations. See Note 18 to the financial statements for further information.
U.S. Bank Subsidiaries
Our U.S. bank subsidiaries, Morgan Stanley Bank N.A. (“MSBNA”) and Morgan Stanley Private Bank, National Association (“MSPBNA”) (collectively, “U.S. Bank Subsidiaries”) accept deposits; provide loans to a variety of customers, from large corporate and institutional clients to high net worth individuals; and invest in securities. Lending activity recorded in the U.S. Bank subsidiaries from the Institutional Securities business segment primarily includes loans and lending commitments to corporate clients. Lending activity recorded in the U.S. Bank subsidiaries from the Wealth Management business segment primarily includes securities-based lending, which allows clients to borrow money against the value of qualifying securities, and residential real estate loans.
For a further discussion of our credit risks, see “Quantitative and Qualitative Disclosures about Risk—Credit Risk.” For a further discussion about loans and lending commitments, see Notes 9 and 13 to the financial statements.
 
U.S. Bank Subsidiaries’ Supplemental Financial Information1 
$ in billions
At
March 31,
2020
At
December 31,
2019
Assets
$
265.4

$
219.6

Investment securities portfolio:
 
 
Investment securities—AFS
49.0

42.4

Investment securities—HTM
28.7

26.1

Total investment securities
$
77.7

$
68.5

Deposits2
$
234.1

$
189.3

Wealth Management Loans
Securities-based lending and other3
$
51.4

$
49.9

Residential real estate
31.1

30.2

Total
$
82.5

$
80.1

Institutional Securities Loans
Corporate4:
 
 
Corporate relationship and event-driven lending
$
15.4

$
5.6

Secured lending facilities
28.4

26.8

Securities-based lending and other
5.1

5.4

Commercial and residential real estate
10.3

12.0

Total
$
59.2

$
49.8


1.
Amounts exclude transactions between the bank subsidiaries, as well as deposits from the Parent Company and affiliates.
2.
For further information on deposits, see “Liquidity and Capital Resources—Funding Management—Unsecured Financing” herein.
3.
Other loans primarily include tailored lending.
4.
For a further discussion of corporate loans in the Institutional Securities business segment, see “Credit Risk—Institutional Securities Corporate Loans” herein.
Other Matters
Planned Acquisition of E*TRADE
On February 20, 2020, we entered into a definitive agreement under which we will acquire E*TRADE Financial Corporation (“E*TRADE”) in an all-stock transaction. In the current quarter, we filed our application with the Federal Reserve and in early April the Hart-Scott-Rodino Antitrust waiting period expired. The acquisition is subject to customary closing conditions, including regulatory approvals and approval by E*TRADE shareholders, and we continue to expect the acquisition to close in the fourth quarter of 2020.
Accounting Development Updates
The Financial Accounting Standards Board has issued certain accounting updates that apply to us. Accounting updates not listed below were assessed and either determined to be not applicable or are not expected to have a significant impact on our financial statements.

 
15
March 2020 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
mslogoa02.jpg

The following accounting update is currently being evaluated to determine the potential impact of adoption:
•
Reference Rate Reform. This accounting update provides optional accounting relief to entities with contracts, hedge accounting relationships or other transactions that reference LIBOR or other interest rate benchmarks for which the referenced rate is expected to be discontinued or replaced. This optional relief generally allows for contract modifications solely related to the replacement of the reference rate to be accounted for as a continuation of the existing contract instead of as an extinguishment of the contract, and would therefore not trigger certain accounting impacts that would otherwise be required. The relief also allows entities to change certain critical terms of existing hedge accounting relationships that are affected by reference rate reform, and these changes would not require de-designating the hedge accounting relationship. The optional relief can be applied beginning January 1, 2020, and ending December 31, 2022. We plan to apply the accounting relief as relevant contract and hedge accounting relationship modifications are made during the course of the reference rate reform transition period.
Critical Accounting Policies
Our financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions (see Note 1 to the financial statements). We believe that of our significant accounting policies (see Note 2 to the financial statements in the 2019 Form 10-K and Note 2 to the financial statements), the fair value, goodwill and intangible assets, legal and regulatory contingencies and income taxes policies involve a higher degree of judgment and complexity. For a further discussion about our critical accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the 2019 Form 10-K.
Liquidity and Capital Resources
Senior management, with oversight by the Asset/Liability Management Committee and the Board of Directors (“Board”), establishes and maintains our liquidity and capital policies. Through various risk and control committees, senior management reviews business performance relative to these policies, monitors the availability of alternative sources of financing, and oversees the liquidity, interest rate and currency sensitivity of our asset and liability position. Our Treasury department, Firm Risk Committee, Asset/Liability Management Committee, and other committees and control groups assist in evaluating, monitoring and controlling the impact that our business activities have on our balance sheet, liquidity and capital structure. Liquidity and capital matters are reported regularly to the Board and the Risk Committee of the Board.
 
Balance Sheet
We monitor and evaluate the composition and size of our balance sheet on a regular basis. Our balance sheet management process includes quarterly planning, business-specific thresholds, monitoring of business-specific usage versus key performance metrics and new business impact assessments.
We establish balance sheet thresholds at the consolidated and business segment levels. We monitor balance sheet utilization and review variances resulting from business activity and market fluctuations. On a regular basis, we review current performance versus established thresholds and assess the need to re-allocate our balance sheet based on business unit needs. We also monitor key metrics, including asset and liability size and capital usage.
Total Assets by Business Segment
 
At March 31, 2020
$ in millions
IS
WM
IM
Total
Assets




Cash and cash equivalents
$
101,615

$
29,803

$
91

$
131,509

Trading assets at fair value
266,781

389

3,746

270,916

Investment securities
40,662

75,495

—

116,157

Securities purchased under agreements to resell
88,008

16,792

—

104,800

Securities borrowed
71,826

474

—

72,300

Customer and other receivables
58,523

15,216

685

74,424

Loans1
66,171

82,516

10

148,697

Other assets2
13,903

13,139

1,950

28,992

Total assets
$
707,489

$
233,824

$
6,482

$
947,795

 
At December 31, 2019
$ in millions
IS
WM
IM
Total
Assets
 
 
 
 
Cash and cash equivalents
$
67,657

$
14,247

$
267

$
82,171

Trading assets at fair value
293,477

47

3,586

297,110

Investment securities
38,524

67,201

—

105,725

Securities purchased under agreements to resell
80,744

7,480

—

88,224

Securities borrowed
106,199

350

—

106,549

Customer and other receivables
39,743

15,190

713

55,646

Loans1
50,557

80,075

5

130,637

Other assets2
14,300

13,092

1,975

29,367

Total assets
$
691,201

$
197,682

$
6,546

$
895,429

IS—Institutional Securities
WM—Wealth Management
IM—Investment Management
1.
Amounts include loans held for investment, net of allowance, and loans held for sale but exclude loans at fair value, which are included in Trading assets in the balance sheets (see Note 9 to the financial statements).
2.
Other assets primarily includes Goodwill and Intangible assets, premises, equipment and software, ROU assets related to leases, other investments, and deferred tax assets.
A substantial portion of total assets consists of liquid marketable securities and short-term receivables arising principally from sales and trading activities in the Institutional Securities

March 2020 Form 10-Q
16
 
Table of Contents
 
Management’s Discussion and Analysis
mslogoa02.jpg

business segment. Total assets increased to $948 billion at March 31, 2020 from $895 billion at December 31, 2019.
Within Wealth Management, assets increased in the investment portfolio comprising Cash and cash equivalents, Investment securities and Securities purchased under agreements to resell, as a result of significantly higher deposits in this segment, and loans continued to grow.
Institutional Securities’ assets were also higher reflecting increases within Cash and cash equivalents, primarily due to higher initial margin related to derivatives; Customer and other receivables, resulting from higher volumes of unsettled transactions in line with market conditions; and loan growth in March in support of client needs. Additionally, within Institutional Securities, Trading assets and Securities borrowed decreased, predominantly driven by corporate equities as the markets declined. The decrease in Trading assets includes a partial offset related to increased derivative exposures related to market volatility.
Liquidity Risk Management Framework
The core components of our Liquidity Risk Management Framework are the Required Liquidity Framework, Liquidity Stress Tests and Liquidity Resources, which support our target liquidity profile. For a further discussion about the Firm’s Required Liquidity Framework and Liquidity Stress Tests, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management Framework” in the 2019 Form 10-K.
At March 31, 2020 and December 31, 2019, we maintained sufficient liquidity to meet current and contingent funding obligations as modeled in our Liquidity Stress Tests.
Liquidity Resources
We maintain sufficient liquidity resources, which are comprised of HQLA and cash deposits with banks (“Liquidity Resources”) to cover daily funding needs and to meet strategic liquidity targets sized by the Required Liquidity Framework and Liquidity Stress Tests. The total amount of Liquidity Resources is actively managed by us considering the following components: unsecured debt maturity profile; balance sheet size and composition; funding needs in a stressed environment, inclusive of contingent cash outflows; legal entity, regional and segment liquidity requirements; regulatory requirements; and collateral requirements.
The amount of Liquidity Resources we hold is based on our risk tolerance and is subject to change depending on market and Firm-specific events. The Liquidity Resources are primarily held within the Parent Company and its major operating subsidiaries. The Total HQLA values in the tables immediately following are different from Eligible HQLA which, in
 
accordance with the LCR rule, also takes into account certain regulatory weightings and other operational considerations.
Liquidity Resources by Type of Investment1 
$ in millions
At
March 31,
2020
At
December 31,
2019
Cash deposits with central banks
$
60,719

$
35,025

Unencumbered HQLA Securities2:
 
 
U.S. government obligations
95,619

88,754

U.S. agency and agency mortgage-backed securities
58,342

50,732

Non-U.S. sovereign obligations3
30,255

29,909

Other investment grade securities
700

1,591

Total HQLA2
$
245,635

$
206,011

Cash deposits with banks (non-HQLA)
9,499

9,857

Total Liquidity Resources
$
255,134

$
215,868

1.
In the first quarter of 2020, we changed our internal measure of liquidity from the Global Liquidity Reserve to Liquidity Resources, which is more closely aligned with the regulatory definition of HQLA. Prior periods have been recast to conform to the current presentation.
2.
HQLA is presented prior to applying weightings and includes all HQLA held in subsidiaries.
3.
Primarily composed of unencumbered U.K., French, Japanese, and German government obligations.
 
Liquidity Resources by Bank and Non-Bank Legal Entities1 
$ in millions
At
March 31,
2020
At
December 31,
2019
Average Daily Balance
Three Months Ended
March 31, 2020
Bank legal entities


Domestic
$
112,126

$
75,894

$
83,117

Foreign
5,265

4,049

4,419

Total Bank legal entities
117,391

79,943

87,536

Non-Bank legal entities


Domestic:



Parent Company
53,548

53,128

49,284

Non-Parent Company
33,665

28,905

36,295

Total Domestic
87,213

82,033

85,579

Foreign
50,530

53,892

54,333

Total Non-Bank legal entities
137,743

135,925

139,912

Total Liquidity Resources
$
255,134

$
215,868

$
227,448

 
1.
In the first quarter of 2020, we changed our internal measure of liquidity from the Global Liquidity Reserve to Liquidity Resources, which is more closely aligned with the regulatory definition of HQLA. Prior periods have been recast to conform to the current presentation.
Liquidity Resources may fluctuate from period to period based on the overall size and composition of our balance sheet, the maturity profile of our unsecured debt and estimates of funding needs in a stressed environment, among other factors. During the current quarter, cash deposits at central banks have increased, largely driven by an increase in deposits received from customers.

 
17
March 2020 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
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Regulatory Liquidity Framework
Liquidity Coverage Ratio
We and our U.S. Bank Subsidiaries are subject to LCR requirements, including a requirement to calculate each entity’s LCR on each business day. The requirements are designed to ensure that banking organizations have sufficient Eligible HQLA to cover net cash outflows arising from significant stress over 30 calendar days, thus promoting the short-term resilience of the liquidity risk profile of banking organizations. The LCR calculation applies weightings (or asset haircuts) to HQLA and excludes certain HQLA held in subsidiaries.
As of March 31, 2020, we and our U.S. Bank Subsidiaries are compliant with the minimum required LCR of 100%. For further information on regulatory developments that have impacted our LCR, see “Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments” herein.
Liquidity Coverage Ratio
 
Average Daily Balance
Three Months Ended
$ in millions
March 31,
2020
December 31,
2019
Eligible HQLA1
 
 
Cash deposits with central banks
$
32,778

$
29,597

Securities2
140,336

148,221

Total Eligible HQLA1
$
173,114

$
177,818

LCR
127
%
134
%
1.
Under the LCR rule, Eligible HQLA is calculated using weightings and excluding certain HQLA held in subsidiaries.
2.
Primarily includes U.S. Treasuries, U.S. agency mortgage-backed securities, sovereign bonds and investment grade corporate bonds.
The reduction in the LCR was driven by lower average Eligible HQLA amounts, which included the removal from Eligible HQLA of certain securities used to secure intraday credit, following a recent regulatory rule clarification.
Net Stable Funding Ratio
The NSFR requires banking organizations to maintain sufficiently stable sources of funding over a one-year horizon. In 2016, the U.S. banking agencies issued a proposal to implement the NSFR in the U.S.; however, a final rule has not yet been issued. For an additional discussion of the NSFR, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Liquidity Framework—Net Stable Funding Ratio” in the 2019 Form 10-K.
Funding Management
We manage our funding in a manner that reduces the risk of disruption to our operations. We pursue a strategy of diversification of secured and unsecured funding sources (by product, investor and region) and attempt to ensure that the tenor
 
of our liabilities equals or exceeds the expected holding period of the assets being financed.
We fund our balance sheet on a global basis through diverse sources. These sources include our equity capital, borrowings, securities sold under agreements to repurchase, securities lending, deposits, letters of credit and lines of credit. We have active financing programs for both standard and structured products targeting global investors and currencies.
Secured Financing
For a discussion of our secured financing activities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Funding Management—Secured Financing” in the 2019 Form 10-K.
Collateralized Financing Transactions
$ in millions
At
March 31,
2020
At
December 31,
2019
Securities purchased under agreements to resell and Securities borrowed
$
177,100

$
194,773

Securities sold under agreements to repurchase and Securities loaned
$
57,447

$
62,706

Securities received as collateral1
$
4,711

$
13,022

 
Average Daily Balance
Three Months Ended
$ in millions
March 31,
2020
December 31,
2019
Securities purchased under agreements to resell and Securities borrowed
$
177,971

$
210,257

Securities sold under agreements to repurchase and Securities loaned
$
61,143

$
64,870

1.
Included within Trading assets—Corporate equities in the balance sheets.
See “Total Assets by Business Segment” herein for more details on the assets shown in the previous table, Note 2 to the financial statements in the 2019 Form 10-K and Note 8 to the financial statements for more details on collateralized financing transactions.
In addition to the collateralized financing transactions shown in the previous table, we engage in financing transactions collateralized by customer-owned securities, which are segregated in accordance with regulatory requirements. Receivables under these financing transactions, primarily margin loans, are included in Customer and other receivables in the balance sheets, and payables under these financing transactions, primarily to prime brokerage customers, are included in Customer and other payables in the balance sheets. Our risk exposure on these transactions is mitigated by collateral maintenance policies. We also hold related liquidity reserves.
Unsecured Financing
For a discussion of our unsecured financing activities, see “Management’s Discussion and Analysis of Financial Condition

March 2020 Form 10-Q
18
 
Table of Contents
 
Management’s Discussion and Analysis
mslogoa02.jpg

and Results of Operations—Liquidity and Capital Resources—Funding Management—Unsecured Financing” in the 2019 Form 10-K.
Deposits
$ in millions
At
March 31,
2020
At
December 31,
2019
Savings and demand deposits:
 
 
Brokerage sweep deposits1
$
151,618

$
121,077

Savings and other
36,886

28,388

Total Savings and demand deposits
188,504

149,465

Time deposits
46,735

40,891

Total
$
235,239

$
190,356

1.
Amounts represent balances swept from client brokerage accounts.

Deposits are primarily sourced from our Wealth Management clients and are considered to have stable, low-cost funding characteristics. Total deposits at March 31, 2020 significantly increased compared with December 31, 2019, primarily driven by higher brokerage sweep and savings deposits as customers sought relative safety away from volatile markets in March. In addition, total deposits increased as a result of higher time deposits. See Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—Coronavirus Disease (COVID-19) Pandemic herein for further information on market and economic conditions.
Borrowings by Remaining Maturity at March 31, 20201 
$ in millions
Parent Company
Subsidiaries
Total
Original maturities of one year or less
$
8

$
2,203

$
2,211

Original maturities greater than one year
2020
$
8,264

$
2,692

$
10,956

2021
19,575

4,099

23,674

2022
16,116

3,045

19,161

2023
15,155

2,938

18,093

2024
15,678

4,809

20,487

Thereafter
79,688

20,586

100,274

Total
$
154,476

$
38,169

$
192,645

Total Borrowings
$
154,484

$
40,372

$
194,856

Maturities over next 12 months2
 
 
$
17,153

1.
Original maturity in the table is generally based on contractual final maturity. For borrowings with put options, remaining maturity represents the earliest put date.
2.
Includes only borrowings with original maturities greater than one year.
Borrowings of $195 billion as of March 31, 2020 were relatively unchanged when compared with $193 billion at December 31, 2019.
We believe that accessing debt investors through multiple distribution channels helps provide consistent access to the unsecured markets. In addition, the issuance of borrowings with original maturities greater than one year allows us to reduce reliance on short-term credit sensitive instruments. Borrowings
 
with original maturities greater than one year are generally managed to achieve staggered maturities, thereby mitigating refinancing risk, and to maximize investor diversification through sales to global institutional and retail clients across regions, currencies and product types.
The availability and cost of financing to us can vary depending on market conditions, the volume of certain trading and lending activities, our credit ratings and the overall availability of credit. We also engage in, and may continue to engage in, repurchases of our borrowings in the ordinary course of business.
For further information on Borrowings, see Note 12 to the financial statements.
Credit Ratings
We rely on external sources to finance a significant portion of our daily operations. The cost and availability of financing generally are impacted by our credit ratings, among other things. In addition, our credit ratings can have an impact on certain trading revenues, particularly in those businesses where longer-term counterparty performance is a key consideration, such as certain OTC derivative transactions. When determining credit ratings, rating agencies consider both company-specific and industry-wide factors. These include regulatory or legislative changes, the macroeconomic environment and perceived levels of support, among other things. See also “Risk Factors— Liquidity Risk” in the 2019 Form 10-K.
Parent Company and U.S. Bank Subsidiaries' Issuer Ratings at April 30, 2020
 
Parent Company
 
Short-Term
Debt
Long-Term
Debt
Rating
Outlook
DBRS, Inc.
R-1 (middle)
A (high)
Stable
Fitch Ratings, Inc.
F1
A
Negative
Moody’s Investors Service, Inc.
P-2
A3
Ratings Under Review
Rating and Investment Information, Inc.
a-1
A
Stable
S&P Global Ratings
A-2
BBB+
Stable
 
MSBNA
 
Short-Term
Debt
Long-Term
Debt
Rating
Outlook
Fitch Ratings, Inc.
F1
A+
Negative
Moody’s Investors Service, Inc.
P-1
A1
Ratings Under Review
S&P Global Ratings
A-1
A+
Stable
 
MSPBNA
 
Short-Term
Debt
Long-Term
Debt
Rating
Outlook
Moody’s Investors Service, Inc.
P-1
A1
Ratings Under Review
S&P Global Ratings
A-1
A+
Stable
On February 21, 2020, Moody’s Investors Service, Inc. placed the Parent Company and U.S. Bank Subsidiaries on review for

 
19
March 2020 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
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possible upgrade, changing their outlooks from Positive to Ratings Under Review.
On April 23, 2020, Fitch Ratings, Inc. placed the Parent Company and MSBNA ratings on Negative outlook, a change from Stable, related to their expectation of significant operating environment headwinds due to the disruption to economic activity and financial markets from the COVID-19 pandemic.
Incremental Collateral or Terminating Payments
In connection with certain OTC derivatives and certain other agreements where we are a liquidity provider to certain financing vehicles associated with the Institutional Securities business segment, we may be required to provide additional collateral, immediately settle any outstanding liability balances with certain counterparties or pledge additional collateral to certain clearing organizations in the event of a future credit rating downgrade irrespective of whether we are in a net asset or net liability position. See Note 6 to the financial statements for additional information on OTC derivatives that contain such contingent features.
While certain aspects of a credit rating downgrade are quantifiable pursuant to contractual provisions, the impact it would have on our business and results of operations in future periods is inherently uncertain and would depend on a number of interrelated factors, including, among other things, the magnitude of the downgrade, the rating relative to peers, the rating assigned by the relevant agency pre-downgrade, individual client behavior and future mitigating actions we might take. The liquidity impact of additional collateral requirements is included in our Liquidity Stress Tests.
Capital Management
We view capital as an important source of financial strength and actively manage our consolidated capital position based upon, among other things, business opportunities, risks, capital availability and rates of return together with internal capital policies, regulatory requirements and rating agency guidelines. In the future, we may expand or contract our capital base to address the changing needs of our businesses.
Common Stock Repurchases
 
Three Months Ended
March 31,
in millions, except for per share data
2020
2019
Number of shares
29

28

Average price per share
$
46.01

$
42.19

Total
$
1,347

$
1,180

On March 15, 2020, the Financial Services Forum announced that its eight U.S. Bank members, including us, had voluntarily suspended their share repurchase programs. See “Executive Summary—Coronavirus Disease (COVID-19) Pandemic”
 
herein for information on the current and possible future effects of the COVID-19 pandemic on our results.
For further information on our common stock repurchases, see Note 16 to the financial statements.
For a description of our capital plan, see “Liquidity and Capital Resources—Regulatory Requirements—Capital Plans and Stress Tests.”
Common Stock Dividend Announcement
Announcement date
April 16, 2020

Amount per share

$0.35

Date to be paid
May 15, 2020

Shareholders of record as of
April 30, 2020

  
Preferred Stock Dividend Announcement
Announcement date
March 16, 2020
Date paid
April 15, 2020
Shareholders of record as of
March 31, 2020
For additional information on common and preferred stock, see Note 16 to the financial statements.
Off-Balance Sheet Arrangements and Contractual Obligations
Off-Balance Sheet Arrangements
We enter into various off-balance sheet arrangements, including through unconsolidated SPEs and lending-related financial instruments (e.g., guarantees and commitments), primarily in connection with the Institutional Securities and Investment Management business segments.
We utilize SPEs primarily in connection with securitization activities. For information on our securitization activities, see Note 14 to the financial statements.
For information on our commitments, obligations under certain guarantee arrangements and indemnities, see Note 13 to the financial statements. For a further discussion of our lending commitments, see “Quantitative and Qualitative Disclosures about Risk—Credit Risk—Loans and Lending Commitments.”
Contractual Obligations
For a discussion about our contractual obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual Obligations” in the 2019 Form 10-K.

March 2020 Form 10-Q
20
 
Table of Contents
 
Management’s Discussion and Analysis
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Regulatory Requirements
Regulatory Capital Framework
We are an FHC under the Bank Holding Company Act of 1956, as amended (“BHC Act”), and are subject to the regulation and oversight of the Federal Reserve. The Federal Reserve establishes capital requirements for us, including “well-capitalized” standards, and evaluates our compliance with such capital requirements. Regulatory capital requirements established by the Federal Reserve are largely based on the Basel III capital standards established by the Basel Committee and also implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The OCC establishes similar capital requirements and standards for our U.S. Bank Subsidiaries. For us to remain an FHC, we must remain well-capitalized in accordance with standards established by the Federal Reserve and our U.S. Bank Subsidiaries must remain well-capitalized in accordance with standards established by the OCC. For additional information on regulatory capital requirements for our U.S. Bank Subsidiaries, see Note 15 to the financial statements.
Regulatory Capital Requirements
We are required to maintain minimum risk-based and leverage-based capital, and TLAC ratios. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Capital Requirements” in the 2019 Form 10-K. For additional information on TLAC, see “Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements” herein.
Risk-Based Regulatory Capital. Minimum risk-based capital ratio requirements apply to Common Equity Tier 1 capital, Tier 1 capital and Total capital (which includes Tier 2 capital). Capital standards require certain adjustments to, and deductions from, capital for purposes of determining these ratios.
In addition to the minimum risk-based capital ratio requirements, we are subject to the following Common Equity Tier 1 buffers:
 
•
A greater than 2.5% capital conservation buffer;

•
The G-SIB capital surcharge, currently at 3%; and

•
Up to a 2.5% CCyB, currently set by U.S. banking agencies at zero.
For a further discussion of the G-SIB capital surcharge, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—G-SIB Capital Surcharge” in the 2019 Form 10-K.
 
Our risk-based capital ratios for purposes of determining regulatory compliance are the lower of the capital ratios computed under (i) the standardized approaches for calculating credit risk and market risk RWA (“Standardized Approach”) or (ii) the applicable advanced approaches for calculating credit risk, market risk and operational risk RWA (“Advanced Approach”). The credit risk RWA calculations between the two approaches differ in that the Standardized Approach requires calculation of RWA using prescribed risk weights, whereas the Advanced Approach utilizes models to calculate exposure amounts and risk weights. At March 31, 2020 and December 31, 2019, our ratios for determining regulatory compliance are based on the Advanced Approach and the Standardized Approach rules, respectively.
Leverage-Based Regulatory Capital. Minimum leverage-based capital requirements include a Tier 1 leverage ratio and an SLR. We are required to maintain an SLR of 5%, inclusive of an enhanced SLR capital buffer of at least 2%.
As of March 31, 2020, our risk-based and leverage-based capital amounts and ratios, as well as RWA, adjusted average assets and supplementary leverage exposure are calculated excluding the effect of the adoption of CECL based on our election to defer this effect over a five-year transition period. For further information, see “Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments” herein.

 
21
March 2020 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
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Regulatory Capital Ratios 
 
At March 31, 2020
$ in millions
Required
Ratio1
Standardized
Advanced
Risk-based capital
 
 
 
Common Equity Tier 1 capital
 
$
65,195

$
65,195

Tier 1 capital
 
73,896

73,896

Total capital
 
84,121

83,847

Total RWA
 
415,002

427,782

Common Equity Tier 1 capital ratio
10.0
%
15.7
%
15.2
%
Tier 1 capital ratio
11.5
%
17.8
%
17.3
%
Total capital ratio
13.5
%
20.3
%
19.6
%
 
 
 
 
$ in millions
 
Required
Ratio1
At
March 31,
2020
Leverage-based capital
 
 
 
Adjusted average assets2
 
 
$
910,499

Tier 1 leverage ratio
 
4.0
%
8.1
%
Supplementary leverage exposure3
 
$
1,185,734

SLR
 
5.0
%
6.2
%
 
At December 31, 2019
$ in millions
Required
Ratio1
Standardized
Advanced
Risk-based capital
 
 
 
Common Equity Tier 1 capital
 
$
64,751

$
64,751

Tier 1 capital
 
73,443

73,443

Total capital
 
82,708

82,423

Total RWA
 
394,177

382,496

Common Equity Tier 1 capital ratio
10.0
%
16.4
%
16.9
%
Tier 1 capital ratio
11.5
%
18.6
%
19.2
%
Total capital ratio
13.5
%
21.0
%
21.5
%
 
 
 
 
$ in millions
 
Required
Ratio1
At
December 31,
2019
Leverage-based capital
 
 
 
Adjusted average assets2
 
 
$
889,195

Tier 1 leverage ratio
 
4.0
%
8.3
%
Supplementary leverage exposure3
 
$
1,155,177

SLR
 
5.0
%
6.4
%
 
1.
Required ratios are inclusive of any buffers applicable as of the date presented. Failure to maintain the buffers would result in restrictions on our ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers.
2.
Adjusted average assets represents the denominator of the Tier 1 leverage ratio and is composed of the average daily balance of consolidated on-balance sheet assets for the quarters ending on the respective balance sheet dates, reduced by disallowed goodwill, intangible assets, investments in covered funds, defined benefit pension plan assets, after-tax gain on sale from assets sold into securitizations, investments in our own capital instruments, certain deferred tax assets and other capital deductions.
3.
Supplementary leverage exposure is the sum of Adjusted average assets used in the Tier 1 leverage ratio and other adjustments, primarily: (i) for derivatives, potential future exposure and the effective notional principal amount of sold credit protection offset by qualifying purchased credit protection; (ii) the counterparty credit risk for repo-style transactions; and (iii) the credit equivalent amount for off-balance sheet exposures.



 
Regulatory Capital
$ in millions
At
March 31,
2020
At
December 31,
2019
Change
Common Equity Tier 1 capital
 
 
 
Common stock and surplus
$
3,727

$
5,228

$
(1,501
)
Retained earnings
71,718

70,589

1,129

AOCI
2,095

(2,788
)
4,883

Regulatory adjustments and deductions:
 
 
Net goodwill
(7,058
)
(7,081
)
23

Net intangible assets
(1,924
)
(2,012
)
88

Other adjustments and deductions1
(3,363
)
815

(4,178
)
Total Common Equity Tier 1 capital
$
65,195

$
64,751

$
444

Additional Tier 1 capital
 
 
 
Preferred stock
$
8,520

$
8,520

$
—

Noncontrolling interests
536

607

(71
)
Additional Tier 1 capital
$
9,056

$
9,127

$
(71
)
Deduction for investments in covered funds
(355
)
(435
)
80

Total Tier 1 capital
$
73,896

$
73,443

$
453

Standardized Tier 2 capital
 
 
 
Subordinated debt
$
9,090

$
8,538

$
552

Noncontrolling interests
126

143

(17
)
Eligible allowance for credit losses
1,013

590

423

Other adjustments and deductions
(4
)
(6
)
2

Total Standardized Tier 2 capital
$
10,225

$
9,265

$
960

Total Standardized capital
$
84,121

$
82,708

$
1,413

Advanced Tier 2 capital
 
 
 
Subordinated debt
$
9,090

$
8,538

$
552

Noncontrolling interests
126

143

(17
)
Eligible credit reserves
739

305

434

Other adjustments and deductions
(4
)
(6
)
2

Total Advanced Tier 2 capital
$
9,951

$
8,980

$
971

Total Advanced capital
$
83,847

$
82,423

$
1,424

 
1.
Other adjustments and deductions used in the calculation of Common Equity Tier 1 capital primarily includes net after-tax DVA, the credit spread premium over risk-free rate for derivative liabilities, defined benefit pension plan assets, after-tax gain on sale from assets sold into securitizations, investments in our own capital instruments and certain deferred tax assets.



March 2020 Form 10-Q
22
 
Table of Contents
 
Management’s Discussion and Analysis
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RWA Rollforward
 
Three Months Ended
March 31, 2020
$ in millions
Standardized
Advanced
Credit risk RWA
 
 
Balance at December 31, 2019
$
342,684

$
228,927

Change related to the following items:
 
 
Derivatives
12,902

31,104

Securities financing transactions
(13,755
)
837

Securitizations
(768
)
(600
)
Investment securities
1,626

2,559

Commitments, guarantees and loans
11,162

3,652

Cash
919

591

Equity investments
953

1,003

Other credit risk1
4,652

4,925

Total change in credit risk RWA
$
17,691

$
44,071

Balance at March 31, 2020
$
360,375

$
272,998

Market risk RWA
 
 
Balance at December 31, 2019
$
51,493

$
51,597

Change related to the following items:
 
 
Regulatory VaR
1,971

1,971

Regulatory stressed VaR
287

287

Incremental risk charge
1,737

1,737

Comprehensive risk measure
216

112

Specific risk:
 
 
Non-securitization
2,034

2,034

Securitization
(3,111
)
(3,111
)
Total change in market risk RWA
$
3,134

$
3,030

Balance at March 31, 2020
$
54,627

$
54,627

Operational risk RWA
 
 
Balance at December 31, 2019
N/A

$
101,972

Change in operational risk RWA
N/A

(1,815
)
Balance at March 31, 2020
N/A

$
100,157

Total RWA
$
415,002

$
427,782

 
Regulatory VaR—VaR for regulatory capital requirements

1.
Amounts reflect assets not in a defined category, non-material portfolios of exposures and unsettled transactions, as applicable.
Credit risk RWA increased in the current quarter under both the Standardized and Advanced Approaches primarily from an increase in: i) Derivatives exposure, driven by market volatility; ii) Commitments, guarantees and loans, driven by an increase in commitments funded during the current quarter in the Institutional Securities business segment; and iii) Other credit risk, driven by an increase in unsettled transactions. Under the Advanced Approach, the increased exposure in Derivatives and widening credit spreads led to an increase in RWA related to CVA. Partially offsetting the increase in Standardized RWA was a decrease in Securities financing transactions.
Market risk RWA increased in the current quarter under the Standardized Approach and Advanced Approach primarily due to increases in Non-securitization specific risk charges and the Incremental risk charge, both driven by increased exposures in credit products, and an increase in Regulatory VaR mainly as a result of a higher market volatility, partially offset by a decrease
 
in Securitization specific risk charges due to reduced exposures to mortgage-backed securities.
The decrease in operational risk RWA under the Advanced Approach in the current quarter reflects a decline in the severity of execution-related losses.
Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements
The Federal Reserve has established external TLAC, long-term debt (“LTD”) and clean holding company requirements for top-tier BHCs of U.S. G-SIBs (“covered BHCs”), including the Parent Company. These requirements are designed to ensure that covered BHCs will have enough loss-absorbing resources at the point of failure to be recapitalized through the conversion of eligible LTD to equity or otherwise by imposing losses on eligible LTD or other forms of TLAC where an SPOE resolution strategy is used. The External TLAC amount and ratios as of March 31, 2020 are calculated excluding the effect of the adoption of CECL based on our election to defer this effect over a five-year transition period. Our External TLAC ratios that were calculated including the full effect of the adoption of CECL also exceeded each respective required ratio as of March 31, 2020.
Required and Actual TLAC and Eligible LTD Ratios
 
 
 
Actual
Amount/Ratio
$ in millions
Regulatory Minimum
Required 
Ratio1
At
March 31,
2020
At
December 31,
2019
External TLAC2
 
 
$
201,486

$
196,888

External TLAC as a % of RWA
18.0
%
21.5
%
47.1
%
49.9
%
External TLAC as a % of leverage exposure
7.5
%
9.5
%
17.0
%
17.0
%
Eligible LTD3
 
 
$
118,778

$
113,624

Eligible LTD as a % of RWA
9.0
%
9.0
%
27.8
%
28.8
%
Eligible LTD as a % of leverage exposure
4.5
%
4.5
%
10.0
%
9.8
%
 
1.
Required ratios are inclusive of applicable buffers.The final rule imposes TLAC buffer requirements on top of both the risk-based and leverage exposure-based external TLAC minimum requirements. The risk-based TLAC buffer is equal to the sum of 2.5%, the covered BHC's Method 1 G-SIB surcharge and the CCyB, if any, as a percentage of total RWA. The leverage exposure-based TLAC buffer is equal to 2% of the covered BHC's total leverage exposure. Failure to maintain the buffers would result in restrictions on our ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers.
2.
External TLAC consists of Common Equity Tier 1 capital and Additional Tier 1 capital (each excluding any noncontrolling minority interests), as well as eligible LTD.
3.
Consists of TLAC-eligible LTD reduced by 50% for amounts of unpaid principal due to be paid in more than one year but less than two years from each respective balance sheet date.
We are in compliance with all relevant TLAC requirements as of March 31, 2020 and December 31, 2019. For a further discussion of TLAC and related requirements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Regulatory Capital Requirements

 
23
March 2020 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
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—Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements” in the 2019 Form 10-K.
Capital Plans and Stress Tests
Pursuant to the Dodd-Frank Act, the Federal Reserve has adopted capital planning and stress test requirements for large BHCs, including us, which form part of the Federal Reserve’s annual CCAR framework.
We submitted our 2020 Capital Plan (“Capital Plan”) and company-run stress test results to the Federal Reserve on April 6, 2020. We expect that the Federal Reserve will provide its response to our 2020 Capital Plan and publish summary results of the CCAR and Dodd-Frank Act supervisory stress tests of each large BHC, including us, no later than June 30, 2020. We are required to disclose a summary of the results of our company-run stress tests within 15 days of the date that the Federal Reserve discloses the results of the supervisory stress tests. We may be required to resubmit our Capital Plan under certain circumstances, including in the event of a material change in our risk profile, financial condition or corporate structure. See “Risk Factors” in the 2019 Form 10-K.
For a further discussion of our capital plans and stress tests, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Capital Plans and Stress Tests” in the 2019 Form 10-K.
Attribution of Average Common Equity According to the Required Capital Framework
Our required capital (“Required Capital”) estimation is based on the Required Capital framework, an internal capital adequacy measure. Common equity attribution to the business segments is based on capital usage calculated under the Required Capital framework, as well as each business segment’s relative contribution to our total Required Capital.
The Required Capital framework is a risk-based and leverage use-of-capital measure, which is compared with our regulatory capital to ensure that we maintain an amount of going concern capital after absorbing potential losses from stress events, where applicable, at a point in time. The amount of capital allocated to the business segments is generally set at the beginning of each year and remains fixed throughout the year until the next annual reset unless a significant business change occurs (e.g., acquisition or disposition). We define the difference between our total average common equity and the sum of the average common equity amounts allocated to our business segments as Parent common equity. We generally hold Parent common equity for prospective regulatory requirements, organic growth, acquisitions and other capital needs.
The Required Capital framework is expected to evolve over time in response to changes in the business and regulatory
 
environment, for example, to incorporate changes in stress testing or enhancements to modeling techniques. We will continue to evaluate the framework with respect to the impact of future regulatory requirements, as appropriate.
Average Common Equity Attribution1   
 
Three Months Ended
March 31,
$ in billions
2020
2019
Institutional Securities
$
42.8

$
40.4

Wealth Management
18.2

18.2

Investment Management
2.6

2.5

Parent
11.1

10.5

Total
$
74.7

$
71.6

 
1.
The attribution of average common equity to the business segments is a non-GAAP financial measure. See “Selected Non-GAAP Financial Information” herein.
Resolution and Recovery Planning
Pursuant to the Dodd-Frank Act, we are required to periodically submit to the Federal Reserve and the FDIC a resolution plan that describes our strategy for a rapid and orderly resolution under the U.S. Bankruptcy Code in the event of our material financial distress or failure. Our next resolution plan submission is expected to be a targeted resolution plan in July 2021.
As described in our 2019 resolution plan, which was submitted on June 28, 2019, our preferred resolution strategy is an SPOE strategy. In line with our SPOE strategy, the Parent Company has transferred, and has agreed to transfer on an ongoing basis, certain assets to its wholly owned, direct subsidiary Morgan Stanley Holdings LLC (the “Funding IHC”). In addition, the Parent Company has entered into an amended and restated support agreement with its material entities (including the Funding IHC) and certain other subsidiaries. In the event of a resolution scenario, the Parent Company would be obligated to contribute all of its Contributable Assets to our material entities and/or the Funding IHC. The Funding IHC would be obligated to provide capital and liquidity, as applicable, to our material entities. The combined implication of the SPOE resolution strategy and the requirement to maintain certain levels of TLAC is that losses in resolution would be imposed on the holders of eligible long-term debt and other forms of eligible TLAC issued by the Parent Company before any losses are imposed on the holders of the debt securities of our operating subsidiaries or before putting U.S. taxpayers at risk.
For more information about resolution and recovery planning requirements and our activities in these areas, including the implications of such activities in a resolution scenario, see “Business—Supervision and Regulation—Financial Holding Company—Resolution and Recovery Planning,” “Risk Factors—Legal, Regulatory and Compliance Risk” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Resolution and Recovery Planning” in the 2019 Form 10-K.

March 2020 Form 10-Q
24
 
Table of Contents
 
Management’s Discussion and Analysis
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Regulatory Developments
Stress Capital Buffer Final Rule
The Federal Reserve has adopted a final rule to integrate its annual capital planning and stress testing requirements with existing applicable regulatory capital requirements. The final rule, which applies to certain BHCs, including us, introduces a stress capital buffer (“SCB”) and related changes to the capital planning and stress testing processes.
The SCB applies only with respect to Standardized Approach risk-based capital requirements and replaces the existing Common Equity Tier 1 capital conservation buffer, which is 2.5%. The SCB is the greater of (i) the maximum decline in our Common Equity Tier 1 capital ratio under the severely adverse scenario over the supervisory stress test measurement period plus the sum of the four quarters of planned common stock dividends divided by the projected RWAs from the quarter in which the Firm’s projected Common Equity Tier 1 capital ratio reaches its minimum in the supervisory stress test and (ii) 2.5%. Risk-based regulatory capital requirements under the Standardized Approach will include the SCB, as summarized above, as well as our Common Equity Tier 1 GSIB capital surcharge and any applicable Common Equity Tier 1 CCyB.
The final rule makes related changes to capital planning and stress testing processes for BHCs subject to the SCB. In particular, the supervisory stress test will assume that BHCs generally maintain a constant level of assets and RWAs throughout the projection period. In addition, the supervisory stress test will no longer assume that BHCs make all planned capital distributions, although the SCB will incorporate the dollar amount of four quarters of planned common stock dividends, as summarized above.
The final rule does not change regulatory capital requirements under the Advanced Approach, the Tier 1 leverage ratio or the SLR.
The Firm’s initial SCB will be based on the results of the 2020 CCAR supervisory stress test which the Federal Reserve is expected to publish by June 30, 2020. The SCB will take effect on October 1, 2020 and will remain in effect until September 30, 2021, and will be updated annually thereafter based on the results of the annual CCAR supervisory stress test, with a revised SCB taking effect on October 1 each year.
Upon receipt of the SCB, we will evaluate whether to update our Required Capital framework to take into account any changes in our risk-based capital requirements that result from the SCB.
The SCB final rule also includes a transitional arrangement for the third quarter of 2020. Between July 1, 2020 and September 30, 2020, the Firm will be authorized to make capital distributions that do not exceed the four-quarter average of
 
capital distributions for which the Federal Reserve indicated its non-objection in the 2019 capital plan cycle, unless otherwise determined by the Federal Reserve.

Revisions to Definition of Eligible Retained Income
The U.S. banking agencies have adopted an interim final rule amending the definition of eligible retained income in their respective capital rules. As amended, eligible retained income is defined by the Federal Reserve as the greater of (i) net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, and (ii) the average of net income over the preceding four quarters. This definition applies with respect to any payout restrictions applicable in the event of a breach of any regulatory capital buffers, including any applicable CCyB, G-SIB capital surcharge, capital conservation buffer, the enhanced SLR and, once effective, SCB, which replaces the capital conservation buffer under the Standardized Approach. The interim final rule became effective March 20, 2020.
Separately, the Federal Reserve has adopted an interim final rule amending the definition of eligible retained income under its TLAC rule to be consistent with the revised definition of eligible retained income in the regulatory capital framework, as summarized above. The interim final rule became effective March 26, 2020.

Regulatory Capital and Stress Testing Developments Related to Implementation of CECL
The U.S. banking agencies have adopted an interim final rule altering, for purposes of the regulatory capital and TLAC requirements, the required adoption time period for CECL. Under the interim final rule, banking organizations that implement the new accounting standard before the end of 2020 may elect to follow the three-year transition available under a prior rule or a new five-year transition. This five-year transition involves a two-year delay in recognizing the effects on regulatory capital of the new accounting standard, followed by a three-year transition period during which the electing organization phases out the aggregate capital effects of the two-year delay. The interim final rule became effective March 27, 2020. We have elected to implement the five-year transition for recognizing the potentially adverse effects of the adoption of CECL.
In addition, pursuant to the The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), banking organizations are not required to comply with CECL, for purposes of U.S. GAAP accounting, until the earlier of the end of the COVID-19 national emergency declared by the President of the United States on March 15, 2020 under the National Emergencies Act or December 31, 2020. We have not elected to delay our compliance with CECL for purposes of U.S. GAAP accounting.

 
25
March 2020 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
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Regulatory Developments in Response to COVID-19
In the United States, the Federal Reserve, the other U.S. state and federal financial regulatory agencies and Congress have taken actions to mitigate disruptions to economic activity and financial stability resulting from COVID-19.
Federal Reserve Actions
The Federal Reserve has established, or has taken steps to establish, a range of facilities and programs to support the U.S. economy and U.S. marketplace participants in response to economic disruptions associated with COVID-19. Through these facilities and programs, the Federal Reserve has taken steps to directly or indirectly purchase assets or debt instruments from, or make loans to, U.S. companies, financial institutions, municipalities and other market participants.
In addition, the Federal Reserve has taken a range of other actions to support the flow of credit to households and businesses. For example, on March 15, 2020, the Federal Reserve reduced the target range for the federal funds rate to 0 to 0.25% and announced that it would increase its holdings of U.S. Treasury securities and agency mortgage-backed securities and begin purchasing agency commercial mortgage-backed securities. The Federal Reserve has also encouraged depository institutions to borrow from the discount window and has lowered the primary credit rate for such borrowings by 150 basis points to 0.25% while extending the term of such loans up to 90 days. In addition, effective March 26, 2020, reserve requirements have been reduced to zero.
Acting in concert with the other U.S. banking agencies, the Federal Reserve has also issued statements encouraging banking organizations to use their capital and liquidity buffers as they lend to households and businesses affected by COVID-19. To facilitate banking organizations' use of their capital buffers, the Federal Reserve has revised the definition of eligible retained income applicable in the capital and TLAC frameworks. Additionally, the Federal Reserve has adopted an interim final rule that temporarily excludes U.S. Treasury securities and deposits at Federal Reserve Banks from the calculation of our supplementary leverage exposure used in the SLR. For a further discussion about the revised definition of eligible retained income and changes to the SLR calculation, see “Revisions to Definition of Eligible Retained Income” and “Supplementary Leverage Ratio Interim Final Rule,” respectively, herein.
Further, the Federal Reserve along with the other U.S. banking agencies, issued guidance stating that granting certain concessions to borrowers that are current on existing loans, either individually or as part of a program for creditworthy borrowers who are experiencing short-term financial or operational problems as a result of the coronavirus pandemic, generally would not be considered TDRs under applicable U.S. GAAP. This guidance also clarifies that efforts to work with borrowers of one-to-four family residential mortgages impacted
 
by the COVID-19 pandemic and meeting certain criteria will not result in such loans being deemed restructured or modified for purposes of U.S. Basel III, and will therefore not be subject to higher regulatory capital requirements.
As of March 31, 2020, we have participated in the PDCF, which provides liquidity to primary dealers through a secured lending facility, and, following the Federal Reserve's statement encouraging banks to use its discount window, we have accessed the discount window. While we continue to assess, we may participate in other of these facilities and programs, including on behalf of clients.
Non-U.S. Central Bank Actions
In addition to actions taken by the Federal Reserve, many non-U.S. central banks have announced similar facilities and programs in response to the economic and market disruptions associated with COVID-19. Firm subsidiaries operating in non-U.S. markets may participate, or perform customer facilitation roles, in such non-U.S. facilities or programs.
The CARES Act
The CARES Act was signed into law on March 27, 2020. Pursuant to the CARES Act, the U.S. Treasury has the authority to provide loans, guarantees and other investments in support of eligible businesses, states and municipalities affected by the economic effects of COVID-19. Some of these funds may also be used to support the several Federal Reserve programs and facilities described in “Federal Reserve Actions” previously or additional programs or facilities that are established by the Federal Reserve under its Section 13(3) authority and meet certain criteria. Among other provisions, the CARES Act also includes funding for the Small Business Administration to expand lending, relief from certain U.S. GAAP requirements to allow COVID-19-related loan modifications to not be categorized as TDRs and a range of incentives to encourage deferment, forbearance or modification of consumer credit and mortgage contracts.
The CARES Act also includes several measures that will temporarily adjust existing laws or regulations. These include providing the FDIC with additional authority to guarantee the deposits of solvent insured depository institutions held in non-interest-bearing business transaction accounts to a maximum amount specified by the FDIC, reinstating the FDIC’s Temporary Liquidity Guarantee Authority to guarantee debt obligations of solvent insured depository institutions or depository institution holding companies, temporarily allowing the U.S. Treasury to fully guarantee money market mutual funds and granting additional authority to the OCC to provide certain exemptions to the lending limits imposed on national banks.

March 2020 Form 10-Q
26
 
Table of Contents
 
Management’s Discussion and Analysis
mslogoa02.jpg

Supplementary Leverage Ratio Interim Final Rule
In response to the COVID-19 pandemic, the Federal Reserve has adopted an interim final rule that excludes, on a temporary basis, U.S. Treasury securities and deposits at Federal Reserve Banks from our SLR exposure measure from April 1, 2020 to March 31, 2021. This interim final rule does not amend our U.S. Bank Subsidiaries’ SLR requirements.
Other Matters

U.K. Withdrawal from the E.U.
On January 31, 2020, the U.K. withdrew from the E.U. under the terms of a withdrawal agreement between the U.K. and the E.U. The withdrawal agreement provides for a transition period to the end of December 2020, during which time the U.K. will continue to apply E.U. law as if it were a member state, and U.K. firms’ rights to provide financial services in E.U. member states will continue. Access to the E.U. market after the transition period remains subject to negotiation.
We have prepared the structure of our European operations for a range of potential outcomes, including for the possibility that U.K. financial firms’ access to E.U. markets after the transition period is limited, and we expect to be able to continue to serve our clients and customers under each of these potential outcomes.
For more information on the U.K.’s withdrawal from the E.U., our related preparations and the potential impact on our operations, see “Risk Factors— International Risk” in the 2019 Form 10-K. For further information regarding our exposure to the U.K., see also “Quantitative and Qualitative Disclosures about Risk—Country and Other Risks."

Planned Replacement of London Interbank Offered Rate and Replacement or Reform of Other Interest Rates
Central banks around the world, including the Federal Reserve, have commissioned committees and working groups of market participants and official sector representatives to replace LIBOR and replace or reform other interest rate benchmarks (collectively, the “IBORs”). Accordingly, we have established and are undertaking a Firmwide IBOR transition plan to promote the transition to alternative reference rates, which takes into account the considerable uncertainty regarding the availability of LIBOR beyond 2021.
For a further discussion of the expected replacement of the IBORs and/or reform of interest rate benchmarks, and the related risks and our transition plan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Other Matters” and “Risk Factors—Risk Management,” respectively, in the 2019 Form 10-K.
 

 
27
March 2020 Form 10-Q

Quantitative and Qualitative Disclosures about Risk
Management believes effective risk management is vital to the success of our business activities. For a discussion of our Enterprise Risk Management framework and risk management functions, see “Quantitative and Qualitative Disclosures about Risk—Risk Management” in the 2019 Form 10-K.
Market Risk
Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, volatilities, correlations or other market factors, such as market liquidity, will result in losses for a position or portfolio. Generally, we incur market risk as a result of trading, investing and client facilitation activities, principally within the Institutional Securities business segment where the substantial majority of our VaR for market risk exposures is generated. In addition, we incur non-trading market risk, principally within the Wealth Management and Investment Management business segments. The Wealth Management business segment primarily incurs non-trading market risk from lending and deposit-taking activities. The Investment Management business segment primarily incurs non-trading market risk from capital investments in alternative and other funds. For a further discussion of market risk, see “Quantitative and Qualitative Disclosures about Risk—Market Risk” in the 2019 Form 10-K.
Trading Risks
We are exposed to a wide range of risks related to interest rates, equity prices, foreign exchange rates and commodity prices, and the associated implied volatilities and spreads, related to the global markets in which we conduct our trading activities.
The statistical technique known as VaR is one of the tools we use to measure, monitor and review the market risk exposures of our trading portfolios.
For information regarding our primary risk exposures and market risk management, VaR methodology, assumptions and limitations, see “Quantitative and Qualitative Disclosures about Risk—Market Risk—Trading Risks” in the 2019 Form 10-K.


 
95%/One-Day Management VaR for the Trading Portfolio
 
Three Months Ended
 
March 31, 2020
$ in millions
Period
End
Average
High2
Low2
Interest rate and credit spread
$
62

$
32

$
62

$
24

Equity price
22

15

23

12

Foreign exchange rate
11

8

14

5

Commodity price
12

13

19

10

Less: Diversification benefit1
(65
)
(33
)
N/A

N/A

Primary Risk Categories
$
42

$
35

$
52

$
28

Credit Portfolio
25

15

25

12

Less: Diversification benefit1
(12
)
(10
)
N/A

N/A

Total Management VaR
$
55

$
40

$
58

$
32

 
Three Months Ended
 
December 31, 2019
$ in millions
Period
End
Average
High2
Low2
Interest rate and credit spread
$
26

$
28

$
31

$
24

Equity price
11

14

18

11

Foreign exchange rate
10

9

13

6

Commodity price
10

17

22

10

Less: Diversification benefit1
(27
)
(33
)
N/A

N/A

Primary Risk Categories
$
30

$
35

$
40

$
30

Credit Portfolio
15

15

17

13

Less: Diversification benefit1
(10
)
(11
)
N/A

N/A

Total Management VaR
$
35

$
39

$
43

$
33

1.
Diversification benefit equals the difference between the total Management VaR and the sum of the component VaRs. This benefit arises because the simulated one-day losses for each of the components occur on different days; similar diversification benefits also are taken into account within each component.
2.
The high and low VaR values for the total Management VaR and each of the component VaRs might have occurred on different days during the quarter, and therefore, the diversification benefit is not an applicable measure.
While Average total Management VaR and average Management VaR for the Primary Risk Categories were relatively unchanged from the three months ended December 31, 2019, the period-end balance increased. The increase in period-end VaR resulted primarily from the interest rate and credit spread and equity price risk categories, which were predominantly driven by increased market volatility related to COVID-19, and reflected increased exposures in the Fixed Income and Equity businesses related to client facilitation activity and market movements in March 2020. These increases were partially offset by an increased diversification benefit. For information on the impact of COVID-19 on market and economic conditions and their effect on our financial results, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—Coronavirus Disease (COVID-19) Pandemic” herein.

March 2020 Form 10-Q
28
 
Table of Contents
 
Risk Disclosures
mslogoa02.jpg

Distribution of VaR Statistics and Net Revenues
We evaluate the reasonableness of our VaR model by comparing the potential declines in portfolio values generated by the model with corresponding actual trading results for the Firm, as well as individual business units. For days where losses exceed the VaR statistic, we examine the drivers of trading losses to evaluate the VaR model’s accuracy relative to realized trading results. There were two days with trading losses in the current quarter, one of which exceeded the 95%/one-day Total Management VaR.
Daily 95%/One-Day Total Management VaR for the Current Quarter
($ in millions)
a1q2020dailyvar.jpg
Daily Net Trading Revenues for the Current Quarter
($ in millions)
a1q2020dailytradingrevenues5.jpg
The previous histogram shows the distribution of daily net trading revenues for the current quarter. Daily net trading revenues include profits and losses from Interest rate and credit spread, Equity price, Foreign exchange rate, Commodity price, and Credit Portfolio positions and intraday trading activities for our trading businesses. Certain items such as fees, commissions
 
and net interest income are excluded from daily net trading revenues and the VaR model. Revenues required for Regulatory VaR backtesting further exclude intraday trading.
Non-Trading Risks
We believe that sensitivity analysis is an appropriate representation of our non-trading risks. The following sensitivity analyses cover substantially all of the non-trading risk in our portfolio.
Credit Spread Risk Sensitivity1 
$ in millions
At
March 31,
2020
At
December 31,
2019
Derivatives
$
6

$
6

Funding liabilities2
39

42

 
1.
Amounts represent the potential gain for each 1 bps widening of our credit spread.
2.
Relates to Borrowings carried at fair value.
U.S. Bank Subsidiaries’ Net Interest Income Sensitivity Analysis
$ in millions
At
March 31,
2020
At
December 31,
2019
Basis point change
 
 
+100
$
850

$
151

 -100
(495
)
(642
)
The previous table presents an analysis of selected instantaneous upward and downward parallel interest rate shocks (subject to a floor of zero percent in the downward scenario) on net interest income over the next 12 months for our U.S. Bank Subsidiaries. These shocks are applied to our 12-month forecast for our U.S. Bank Subsidiaries, which incorporates market expectations of interest rates and our forecasted business activity.
We do not manage to any single rate scenario but rather manage net interest income in our U.S. Bank Subsidiaries to optimize across a range of possible outcomes, including non-parallel rate change scenarios. The sensitivity analysis assumes that we take no action in response to these scenarios, assumes there are no changes in other macroeconomic variables normally correlated with changes in interest rates, and includes subjective assumptions regarding customer and market re-pricing behavior and other factors. The change in sensitivity to interest rates between March 31, 2020 and December 31, 2019 is primarily driven by lower market rates. Given the current rate environment, the correlation between market rate increases and deposit cost increases is low, and therefore provides an incremental benefit in the +100bps scenario.

 
29
March 2020 Form 10-Q
Table of Contents
 
Risk Disclosures
mslogoa02.jpg

Investments Sensitivity, Including Related Carried Interest
 
Loss from 10% Decline
$ in millions
At
March 31,
2020
At
December 31,
2019
Investments related to Investment Management activities
$
327

$
367

Other investments:
 
 
MUMSS
173

169

Other Firm investments
197

195

MUMSS—Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.
We have exposure to public and private companies through direct investments, as well as through funds that invest in these assets. These investments are predominantly equity positions with long investment horizons, a portion of which is for business facilitation purposes. The market risk related to these investments is measured by estimating the potential reduction in net income associated with a 10% decline in investment values and related impact on performance-based fees, as applicable. The change in investments sensitivity related to Investment Management activities between March 31, 2020 and December 31, 2019 is primarily driven by lower valuations in private equity funds, related to the decline of global asset prices due to the effect of COVID-19 on economies and markets around the world. For information on the impact of COVID-19 on market and economic conditions and their effect on our financial results, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—Coronavirus Disease (COVID-19) Pandemic” herein.
Equity Market Sensitivity
In the Wealth Management and Investment Management business segments, certain fee-based revenue streams are driven by the value of clients’ equity holdings. The overall level of revenues for these streams also depends on multiple additional factors that include, but are not limited to, the level and duration of the equity market increase or decline, price volatility, the geographic and industry mix of client assets, the rate and magnitude of client investments and redemptions, and the impact of such market increase or decline and price volatility on client behavior. Therefore, overall revenues do not correlate completely with changes in the equity markets. For information on the impact of COVID-19 on market and economic conditions and their effect on our financial results, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—Coronavirus Disease (COVID-19) Pandemic” herein.
Credit Risk
Credit risk refers to the risk of loss arising when a borrower, counterparty or issuer does not meet its financial obligations to us. We are primarily exposed to credit risk from institutions and
 
individuals through our Institutional Securities and Wealth Management business segments. For a further discussion of our credit risks, see “Quantitative and Qualitative Disclosures about Risk—Credit Risk” in the 2019 Form 10-K.

The credit environment deteriorated rapidly towards the end of the current quarter, driven by the effect of COVID-19 on economic and market conditions. Within Institutional Securities the effects were notable, with mark-to-market losses on held-for-sale loans and lending commitments and increased allowances for credit losses related to held-for-investment loans and lending commitments, as discussed in Management’s Discussion and Analysis. The uncertain environment also caused an increase in client requests to draw down on lending commitments and market volatility led to increased counterparty credit exposures, both of which are further discussed herein.

In addition, we have begun to have discussions with and receive requests from certain clients for forbearance, or deferral of their loan payments to us, driven or exacerbated by the economic environment and following in part from the U.S. government’s enactment of the CARES Act. These requests and discussions primarily relate to commercial and residential real estate loans. Certain clients have also requested modifications of covenant terms.

The forbearance process is different based on loan and borrower type, among other factors.  In general, qualifying requests for forbearance related to single family residential real estate loans are immediately granted, whereas commercial real estate loan forbearance requires negotiation and approval. Receiving or granting forbearance or modification requests does not necessarily mean that we will incur credit losses. As of April 30, 2020, the principal amount of loans for which forbearance requests are currently active related to near-term payments on commercial real estate loans and residential real estate loans approximated $2 billion and $800 million, respectively.

These trends could continue in future periods given the present uncertain global economic and market conditions. See “Executive Summary—Coronavirus Disease (COVID-19) Pandemic,” and “Risk Factors” herein for further information. See also "Forward Looking Statements" in the 2019 10-K.

March 2020 Form 10-Q
30
 
Table of Contents
 
Risk Disclosures
mslogoa02.jpg

Loans and Lending Commitments
 
At March 31, 2020
$ in millions
IS
WM
IM1
Total
Loans held for investment, before allowance
$
49,358

$
82,589

$
5

$
131,952

Allowance for credit losses
(530
)
(87
)
—

(617
)
Loans held for investment, net of allowance
$
48,828

$
82,502

$
5

$
131,335

Loans held for sale
17,343

14

5

17,362

Loans held at fair value
9,573

—

489

10,062

Total loans
$
75,744

$
82,516

$
499

$
158,759

Lending commitments2
92,911

13,366

—

106,277

Total loans and lending commitments2
$
168,655

$
95,882

$
499

$
265,036

Total loans, before allowance
$
76,274

$
82,603

$
499

$
159,376

 
 
At December 31, 2019
$ in millions
IS
WM
IM1
Total
Loans held for investment, before allowance
$
38,290

$
80,114

$
5

$
118,409

Allowance for credit losses
(297
)
(52
)
—

(349
)
Loans held for investment, net of allowance
$
37,993

$
80,062

$
5

$
118,060

Loans held for sale
12,564

13

—

12,577

Loans held at fair value
11,075

—

251

11,326

Total loans
$
61,632

$
80,075

$
256

$
141,963

Lending commitments2
106,886

13,161

21

120,068

Total loans and lending commitments2
$
168,518

$
93,236

$
277

$
262,031

Total loans, before allowance
$
61,929

$
80,127

$
256

$
142,312


1.
Investment Management business segment loans are related to certain of our activities as an investment advisor and manager. At March 31, 2020 and December 31, 2019, loans held at fair value are predominantly the result of the consolidation of CLO vehicles, managed by Investment Management, composed primarily of senior secured corporate loans.
2.
Lending commitments represent the notional amount of legally binding obligations to provide funding to clients for lending transactions. Since commitments associated with these business activities may expire unused or may not be utilized to full capacity, they do not necessarily reflect the actual future cash funding requirements.

We provide loans and lending commitments to a variety of customers, from large corporate and institutional clients to high net worth individuals. In addition, we purchase loans in the secondary market. Loans and lending commitments are either held for investment, held for sale or carried at fair value. For more information on these loan classifications, see Note 2 to the financial statements in the 2019 Form 10-K.

Total loans and lending commitments increased by approximately $3 billion since December 31, 2019, primarily due to growth in tailored lending and Residential real estate loans within the Wealth Management business segment.  In addition, within the Institutional Securities business segment, there was an increase in Corporate relationship and event-driven lending commitments funded during the current quarter.
See Notes 4, 9 and 13 to the financial statements for further information.

 
Allowance for Credit Losses Rollforward—Loans and Lending Commitments
$ in millions
 
December 31, 20191
$
590

Effect of CECL adoption
(41
)
Gross charge-offs
(32
)
Provision
407

Other
(3
)
March 31, 2020
$
921

Allowance for credit losses—Loans
$
617

Allowance for credit losses—Lending commitments
304

1.
At December 31, 2019, the total allowance for credit losses for Loans and Lending commitments was $349 million and $241 million, respectively.
Credit exposure arising from our loans and lending commitments is measured in accordance with our internal risk management standards. Risk factors considered in determining the aggregate allowance for loan and commitment losses include the borrower’s financial strength, industry, facility structure, loan-to-value ratio, debt service ratio, collateral and covenants. Qualitative and environmental factors such as economic and business conditions, nature and volume of the portfolio and lending terms, and volume and severity of past due loans may also be considered.
The aggregate allowance for loans and lending commitments increased in the current quarter, principally reflecting a provision for credit losses within the Institutional Securities business segment resulting from the economic impact of COVID-19. This provision was primarily the result of higher actual and expected future downgrades, an increase in funded balances, principally in Corporate relationship and event-driven loans, as well as revisions to our forecasts in light of current and expected future market and macroeconomic conditions. See Note 2 to the financial statements for a discussion of the Firm’s allowance for credit loss methodology under CECL.
Status of Loans Held for Investment
 
At March 31, 2020
At December 31, 2019
 
IS
WM
IS
WM
Current
99.5
%
99.9
%
99.0
%
99.9
%
Nonaccrual1
0.5
%
0.1
%
1.0
%
0.1
%
 
1.
These loans are on nonaccrual status because the loans were past due for a period of 90 days or more or payment of principal or interest was in doubt.

 
31
March 2020 Form 10-Q
Table of Contents
 
Risk Disclosures
mslogoa02.jpg

Institutional Securities Loans and Lending Commitments1 
 
At March 31, 2020
 
Contractual Years to Maturity
 
$ in millions
Less than 1
1-3
3-5
Over 5
Total
Loans
 
 
 
 
 
AA
$
59

$
47

$
14

$
5

$
125

A
931

1,456

554

589

3,530

BBB
3,619

5,872

6,867

574

16,932

BB
12,401

11,430

10,186

1,251

35,268

Other NIG
5,865

5,503

4,313

2,242

17,923

Unrated2
101

92

286

1,487

1,966

Total loans
22,976

24,400

22,220

6,148

75,744

Lending commitments
 
 
 
 
AAA
—

50

—

—

50

AA
2,831

818

2,562

30

6,241

A
3,994

7,477

9,150

279

20,900

BBB
8,407

12,732

15,460

731

37,330

BB
3,635

3,986

7,219

1,067

15,907

Other NIG
2,064

2,754

6,604

1,056

12,478

Unrated2
3

—

—

2

5

Total lending commitments
20,934

27,817

40,995

3,165

92,911

Total exposure
$
43,910

$
52,217

$
63,215

$
9,313

$
168,655

 
At December 31, 2019
 
Contractual Years to Maturity
 
$ in millions
Less than 1
1-3
3-5
Over 5
Total
Loans
 
 
 
 
 
AA
$
7

$
50

$
—

$
5

$
62

A
955

923

516

277

2,671

BBB
2,297

5,589

3,592

949

12,427

BB
9,031

11,189

9,452

1,449

31,121

Other NIG
4,020

5,635

2,595

1,143

13,393

Unrated2
117

82

131

1,628

1,958

Total loans
16,427

23,468

16,286

5,451

61,632

Lending commitments
 
 
 
 
AAA
—

50

—

—

50

AA
2,838

908

2,509

—

6,255

A
6,461

7,287

9,371

298

23,417

BBB
7,548

13,780

20,560

753

42,641

BB
2,464

5,610

8,333

1,526

17,933

Other NIG
2,193

4,741

7,062

2,471

16,467

Unrated2
—

9

107

7

123

Total lending commitments
21,504

32,385

47,942

5,055

106,886

Total exposure
$
37,931

$
55,853

$
64,228

$
10,506

$
168,518

 
NIG–Non-investment grade
1.
Counterparty credit ratings are internally determined by CRM.
2.
Unrated loans and lending commitments are primarily trading positions that are measured at fair value and risk-managed as a component of market risk. For a further discussion of our market risk, see “Market Risk” herein.

As a result of the economic impacts of COVID-19, there was an increase in lending commitments funded during the current quarter in the Institutional Securities business segment. The increase was primarily driven by clients with non-investment grade and BBB internal credit ratings, who sought liquidity in
 
a period where, given the economic backdrop, capital markets alternatives to drawing on lines of credit were less available.
Institutional Securities Loans and Lending Commitments by Industry
$ in millions
At
March 31,
2020
At
December 31,
2019
Industry
 
 
Financials
$
40,142

$
40,992

Real estate
27,190

28,348

Industrials
16,100

13,136

Healthcare
13,582

14,113

Communications services
10,839

12,165

Utilities
10,231

9,905

Information technology
10,019

9,201

Consumer discretionary
9,993

9,589

Energy
9,856

9,461

Consumer staples
9,415

9,724

Materials
5,469

5,577

Insurance
3,961

3,755

Other
1,858

2,552

Total
$
168,655

$
168,518

The decline in economic activity, driven by the effects of COVID-19, and recent decline in oil prices, have currently impacted borrowers in many industries. The future developments of COVID-19 and its related effect on the economic environment are uncertain and may continue to impact certain sectors and industries, in which we have, or may in the future have, exposure in the form of loans or lending commitments. In addition, refer to “Risk Factors” herein.
The Institutional Securities business segment lending activities include Corporate relationship and event-driven lending, Secured lending facilities, Commercial real estate lending and Securities-based lending and other.
Corporate relationship and event-driven loans and lending commitments typically consist of revolving lines of credit, term loans and bridge loans; may have varying terms; may be senior or subordinated; may be secured or unsecured; are generally contingent upon representations, warranties and contractual conditions applicable to the borrower; and may be syndicated, traded or hedged. For additional information on event-driven loans, see “Institutional Securities Event-Driven Loans and Lending Commitments” herein.
Secured lending facilities include loans provided to clients, which are primarily secured by loans on underlying real estate or other assets. The underlying loans are associated with various types of collateral, including residential real estate, commercial real estate, corporate and financial assets. These facilities generally provide for overcollateralization. Credit risk with respect to these loans and lending commitments arises from the failure of a borrower to perform according to the terms of the loan agreement and/or a decline in the underlying collateral

March 2020 Form 10-Q
32
 
Table of Contents
 
Risk Disclosures
mslogoa02.jpg

value. The Firm monitors collateral levels against the requirements of lending agreements.
Commercial real estate loans are primarily senior, secured by underlying real estate and typically in term loan form.
Securities-based lending and other includes financing extended to sales and trading customers and corporate loans purchased in the secondary market.

Institutional Securities Loans1 
$ in millions
At
March 31,
2020
At
December 31,
2019
Corporate relationship and
event-driven lending
$
27,058

$
11,638

Secured lending facilities
30,493

29,654

Commercial & residential real estate
11,604

13,198

Securities-based lending and other
7,119

7,439

Total Institutional Securities loans
$
76,274

$
61,929

1.
Amounts include loans held for investment, before the allowance for credit losses, loans held for sale and loans at fair value.
Institutional Securities Event-Driven Loans and Lending Commitments1 
 
At March 31, 2020
 
Contractual Years to Maturity
 
$ in millions
Less than 1
1-3
3-5
Over 5
Total
Loans
$
3,284

$
1,205

$
1,527

$
1,132

$
7,148

Lending commitments
7,312

2,317

1,921

1,507

13,057

Total loans and lending commitments
$
10,596

$
3,522

$
3,448

$
2,639

$
20,205

 
At December 31, 2019
 
Contractual Years to Maturity
 
$ in millions
Less than 1
1-3
3-5
Over 5
Total
Loans
$
1,194

$
1,024

$
839

$
390

$
3,447

Lending commitments
7,921

5,012

2,285

3,090

18,308

Total loans and lending commitments
$
9,115

$
6,036

$
3,124

$
3,480

$
21,755


1.
Amounts include loans and lending commitments held for investment, before the allowance for credit losses, and held for sale.
Event-driven loans and lending commitments are associated with a particular event or transaction, such as to support client merger, acquisition, recapitalization or project finance activities. Balances may fluctuate as such lending is related to transactions that vary in timing and size from period to period. In the current quarter, credit spreads in the market for these loans and commitments widened significantly, resulting in a substantial slowdown in the volume of sales and syndications, which is a trend that could continue in the future given the current uncertain economic and market conditions. See “Executive Summary—Coronavirus Disease (COVID-19) Pandemic” and “Risk Factors” herein, and Forward Looking Statements in the 2019 Form 10-K.
 
Institutional Securities Loans and Lending Commitments Held for Investment
 
At March 31, 2020
At December 31, 2019
$ in millions
Loans
Lending Commitments
Loans
Lending Commitments
Corporate relationship and event-driven lending
$
15,457

$
55,365

$
5,426

$
61,716

Secured lending facilities
25,805

5,987

24,502

6,105

Commercial & residential real estate1
7,430

730

7,859

425

Securities-based lending and other2
666

461

503

832

Total, before allowance for credit losses
$
49,358

$
62,543

$
38,290

$
69,078

Allowance for credit losses
(530
)
(298
)
(297
)
(236
)
1.
Amounts principally comprise Commercial real estate loans and lending commitments.
2.
Amounts principally comprise Other loans and lending commitments.
Institutional Securities Allowance for Credit Losses Rollforward—Loans
$ in millions
Corporate relationship and event-driven lending
Secured lending facilities
Commercial & residential real estate
Securities-based lending and other
Total
December 31, 2019
$
115

$
101

$
75

$
6

$
297

Effect of CECL adoption
(2
)
(42
)
34

3

(7
)
Gross charge-offs
(32
)
—

—

—

(32
)
Provision
177

29

66

1

273

Other
—

—

(1
)
—

(1
)
March 31, 2020
$
258

$
88

$
174

$
10

$
530


Institutional Securities Allowance for Credit Losses Rollforward—Lending Commitments
$ in millions
Corporate relationship and event-driven lending
Secured lending facilities
Commercial & residential real estate
Securities-based lending and other
Total
December 31, 2019
$
201

$
27

$
7

$
1

$
236

Effect of CECL adoption
(41
)
(11
)
1

—

(51
)
Provision
91

16

5

3

115

Other
(2
)
—

—

—

(2
)
March 31, 2020
$
249

$
32

$
13

$
4

$
298


 
33
March 2020 Form 10-Q
Table of Contents
 
Risk Disclosures
mslogoa02.jpg

Institutional Securities HFI Loans—Ratios of Allowance for Credit Losses to Balance Before Allowance
 
At
March 31,
2020
At
December 31,
2019
Corporate relationship and event-driven lending
1.7
%
2.1
%
Secured lending facilities
0.3
%
0.4
%
Commercial & residential real estate
2.3
%
1.0
%
Securities-based lending and other
1.5
%
1.2
%
Total Institutional Securities loans
1.1
%
0.8
%
Wealth Management Loans and Lending Commitments
 
At March 31, 2020
 
Contractual Years to Maturity
 
$ in millions
Less than 1
1-3
3-5
Over 5
Total
Securities-based lending and other loans
$
43,158

$
4,709

$
2,141

$
1,441

$
51,449

Residential real estate loans
14

7

—

31,046

31,067

Total loans
$
43,172

$
4,716

$
2,141

$
32,487

$
82,516

Lending commitments
10,397

2,382

326

261

13,366

Total loans and lending commitments
$
53,569

$
7,098

$
2,467

$
32,748

$
95,882

 
At December 31, 2019
 
Contractual Years to Maturity
 
$ in millions
Less than 1
1-3
3-5
Over 5
Total
Securities-based lending and other loans
$
41,863

$
3,972

$
2,783

$
1,284

$
49,902

Residential real estate loans
13

11

—

30,149

30,173

Total loans
$
41,876

$
3,983

$
2,783

$
31,433

$
80,075

Lending commitments
10,219

2,564

71

307

13,161

Total loans and lending commitments
$
52,095

$
6,547

$
2,854

$
31,740

$
93,236

The principal Wealth Management business segment lending activities include securities-based lending and residential real estate loans.
Securities-based lending allows clients to borrow money against the value of qualifying securities, generally for any purpose other than purchasing, trading or carrying securities, or refinancing margin debt. For more information about our securities-based lending and residential real estate loans, see “Quantitative and Qualitative Disclosures about Risk—Credit Risk” in the 2019 Form 10-K.
For the current quarter, Loans and Lending commitments associated with the Wealth Management business segment increased primarily due to growth in tailored lending and Residential real estate loans.
 
Wealth Management Allowance for Credit Losses Rollforward—Loans and Lending Commitments
$ in millions
 
December 31, 20191
$
57

Effect of CECL adoption
17

Provision
19

March 31, 2020
$
93

Allowance for credit losses—Loans
$
87

Allowance for credit losses—Lending commitments
6

1.
At December 31, 2019, the total Allowance for credit losses for Loans and Lending commitments was $52 million and $5 million, respectively.

At March 31, 2020, approximately 75% of Wealth Management residential real estate loans were to borrowers with "Exceptional" or "Very Good" FICO scores (i.e., exceeding 740). Additionally, Wealth Management's securities-based lending portfolio remains well-collateralized and subject to daily client margining, which includes requiring customers to deposit additional collateral, or reduce debt positions, when necessary.
Customer and Other Receivables
Margin Loans
 
At March 31, 2020
$ in millions
IS
WM
Total
Customer receivables representing margin loans
$
16,635

$
9,546

$
26,181

 
At December 31, 2019
$ in millions
IS
WM
Total
Customer receivables representing margin loans
$
22,216

$
9,700

$
31,916

The Institutional Securities and Wealth Management business segments provide margin lending arrangements, which allow customers to borrow against the value of qualifying securities, primarily for the purpose of purchasing additional securities, as well as to collateralize short positions. Margin lending activities generally have lower credit risk due to the value of collateral held and their short-term nature. Amounts may fluctuate from period to period as overall client balances change as a result of market levels, client positioning and leverage.
Employee Loans
$ in millions
At
March 31,
2020
At
December 31,
2019
Currently employed by the Firm
$
2,867

N/A

No longer employed by the Firm
150

N/A

Balance
$
3,017

$
2,980

Allowance for credit losses1
(180
)
(61
)
Balance, net
$
2,837

$
2,919

Remaining repayment term, weighted average in years
5.0

4.8

1.
The change in Allowance for credit losses includes a $124 million increase due to the adoption of CECL on January 1, 2020.

March 2020 Form 10-Q
34
 
Table of Contents
 
Risk Disclosures
mslogoa02.jpg

Employee loans are granted in conjunction with a program established primarily to recruit certain Wealth Management representatives and are full recourse and generally require periodic repayments. The allowance for credit losses as of March 31, 2020 was calculated under CECL, while the allowance for credit losses at December 31, 2019 was calculated under the prior incurred loss model. The related provision is recorded in Compensation and benefits expense in the income statements. See Note 2 for a description of the CECL allowance methodology, including credit quality indicators, for employee loans. For additional information on employee loans, see Note 9.

Derivatives
Fair Value of OTC Derivative Assets
 
Counterparty Credit Rating1
 
$ in millions
AAA
AA
A
BBB
NIG
Total
At March 31, 2020
 
 
 
 
<1 year
$
2,046

$
26,829

$
55,668

$
38,756

$
19,369

$
142,668

1-3 years
536

6,458

22,788

18,243

13,104

61,129

3-5 years
521

5,952

14,442

10,521

4,718

36,154

Over 5 years
4,257

32,785

93,165

68,387

17,506

216,100

Total, gross
$
7,360

$
72,024

$
186,063

$
135,907

$
54,697

$
456,051

Counterparty netting
(3,472
)
(55,991
)
(150,333
)
(104,343
)
(30,638
)
(344,777
)
Cash and securities collateral
(3,336
)
(12,216
)
(29,345
)
(23,461
)
(16,979
)
(85,337
)
Total, net
$
552

$
3,817

$
6,385

$
8,103

$
7,080

$
25,937

 
Counterparty Credit Rating1
 
$ in millions
AAA
AA
A
BBB
NIG
Total
At December 31, 2019
 
 
 
 
<1 year
$
371

$
9,195

$
31,789

$
22,757

$
6,328

$
70,440

1-3 years
378

5,150

17,707

11,495

9,016

43,746

3-5 years
502

4,448

9,903

6,881

3,421

25,155

Over 5 years
3,689

24,675

70,765

40,542

14,587

154,258

Total, gross
$
4,940

$
43,468

$
130,164

$
81,675

$
33,352

$
293,599

Counterparty netting
(2,172
)
(33,521
)
(103,452
)
(62,345
)
(19,514
)
(221,004
)
Cash and securities collateral
(2,641
)
(8,134
)
(22,319
)
(14,570
)
(10,475
)
(58,139
)
Total, net
$
127

$
1,813

$
4,393

$
4,760

$
3,363

$
14,456

 
$ in millions
At
March 31,
2020
At
December 31,
2019
Industry
 
Financials
$
8,343

$
3,448

Utilities
5,226

4,275

Industrials
2,877

914

Healthcare
1,558

991

Regional governments
1,089

791

Not-for-profit organizations
936

657

Sovereign governments
900

403

Energy
891

524

Materials
826

325

Consumer staples
725

129

Information technology
686

659

Communications services
684

381

Consumer discretionary
463

370

Insurance
391

214

Real estate
215

315

Other
127

60

Total
$
25,937

$
14,456


1.
Counterparty credit ratings are determined internally by CRM.

We are exposed to credit risk as a dealer in OTC derivatives. Credit risk with respect to derivative instruments arises from the possibility that a counterparty may fail to perform according to the terms of the contract. In the current quarter, our exposure to credit risk arising from OTC derivatives has increased, primarily as a function of the effect of market factors and volatility on the valuation of our positions. For more information on derivatives, see “Quantitative and Qualitative Disclosures about Risk—Credit Risk—Derivatives” in the 2019 Form 10-K and Note 6 to the financial statements.
Country Risk
Country risk exposure is the risk that events in, or that affect, a foreign country (any country other than the U.S.) might adversely affect us. We actively manage country risk exposure through a comprehensive risk management framework that combines credit and market fundamentals and allows us to effectively identify, monitor and limit country risk. For a further discussion of our country risk exposure see, “Quantitative and Qualitative Disclosures about Risk—Country and Other Risks” in the 2019 Form 10-K.
Our sovereign exposures consist of financial contracts and obligations entered into with sovereign and local governments. Our non-sovereign exposures consist of financial contracts and obligations entered into primarily with corporations and financial institutions. Index credit derivatives are included in the following country risk exposure table. Each reference entity within an index is allocated to that reference entity’s country of risk. Index exposures are allocated to the underlying reference entities in proportion to the notional weighting of each reference entity in the index, adjusted for any fair value receivable or

 
35
March 2020 Form 10-Q
Table of Contents
 
Risk Disclosures
mslogoa02.jpg

payable for that reference entity. Where credit risk crosses multiple jurisdictions, for example, a CDS purchased from an issuer in a specific country that references bonds issued by an entity in a different country, the fair value of the CDS is reflected in the Net Counterparty Exposure row based on the country of the CDS issuer. Further, the notional amount of the CDS adjusted for the fair value of the receivable or payable is reflected in the Net Inventory row based on the country of the underlying reference entity.
Top 10 Non-U.S. Country Exposures at March 31, 2020
United Kingdom
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
(238
)
$
1,327

$
1,089

Net counterparty exposure2
88

13,314

13,402

Loans
—

2,822

2,822

Lending commitments
—

6,547

6,547

Exposure before hedges
(150
)
24,010

23,860

Hedges3
(311
)
(1,266
)
(1,577
)
Net exposure
$
(461
)
$
22,744

$
22,283

Germany
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
1,080

$
281

$
1,361

Net counterparty exposure2
127

5,539

5,666

Loans
—

1,649

1,649

Lending commitments
—

3,492

3,492

Exposure before hedges
1,207

10,961

12,168

Hedges3
(285
)
(874
)
(1,159
)
Net exposure
$
922

$
10,087

$
11,009

Japan
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
1,501

$
431

$
1,932

Net counterparty exposure2
78

4,559

4,637

Loans
—

714

714

Lending commitments
—

3

3

Exposure before hedges
1,579

5,707

7,286

Hedges3
(92
)
(130
)
(222
)
Net exposure
$
1,487

$
5,577

$
7,064

France
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
(427
)
$
(476
)
$
(903
)
Net counterparty exposure2
14

3,734

3,748

Loans
—

935

935

Lending commitments
—

2,919

2,919

Exposure before hedges
(413
)
7,112

6,699

Hedges3
(6
)
(712
)
(718
)
Net exposure
$
(419
)
$
6,400

$
5,981

 
Canada
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
587

$
369

$
956

Net counterparty exposure2
57

3,221

3,278

Loans
—

629

629

Lending commitments
—

985

985

Exposure before hedges
644

5,204

5,848

Hedges3
—

(97
)
(97
)
Net exposure
$
644

$
5,107

$
5,751

Spain
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
360

$
(139
)
$
221

Net counterparty exposure2
3

383

386

Loans
—

3,623

3,623

Lending commitments
—

713

713

Exposure before hedges
363

4,580

4,943

Hedges3
—

(132
)
(132
)
Net exposure
$
363

$
4,448

$
4,811

China
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
(432
)
$
1,487

$
1,055

Net counterparty exposure2
135

460

595

Loans
—

1,965

1,965

Lending commitments
—

770

770

Exposure before hedges
(297
)
4,682

4,385

Hedges3
(82
)
(82
)
(164
)
Net exposure
$
(379
)
$
4,600

$
4,221

Australia
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
1,464

$
359

$
1,823

Net counterparty exposure2
16

1,346

1,362

Loans
—

355

355

Lending commitments
—

647

647

Exposure before hedges
1,480

2,707

4,187

Hedges3
—

(107
)
(107
)
Net exposure
$
1,480

$
2,600

$
4,080

Brazil
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
2,384

$
79

$
2,463

Net counterparty exposure2
—

924

924

Loans
—

237

237

Lending commitments
—

64

64

Exposure before hedges
2,384

1,304

3,688

Hedges3
(12
)
(16
)
(28
)
Net exposure
$
2,372

$
1,288

$
3,660


March 2020 Form 10-Q
36
 
Table of Contents
 
Risk Disclosures
mslogoa02.jpg

India
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
1,571

$
680

$
2,251

Net counterparty exposure2
—

612

612

Loans
—

235

235

Exposure before hedges
1,571

1,527

3,098

Net exposure
$
1,571

$
1,527

$
3,098


1.
Net inventory represents exposure to both long and short single-name and index positions (i.e., bonds and equities at fair value and CDS based on a notional amount assuming zero recovery adjusted for the fair value of any receivable or payable).
2.
Net counterparty exposure (e.g., repurchase transactions, securities lending and OTC derivatives) is net of the benefit of collateral received and also is net by counterparty when legally enforceable master netting agreements are in place. For more information, see “Additional Information—Top 10 Non-U.S. Country Exposures” herein.
3.
Amounts represent net CDS hedges (purchased and sold) on net counterparty exposure and lending executed by trading desks responsible for hedging counterparty and lending credit risk exposures. Amounts are based on the CDS notional amount assuming zero recovery adjusted for any fair value receivable or payable. For further description of the contractual terms for purchased credit protection and whether they may limit the effectiveness of our hedges, see “Quantitative and Qualitative Disclosures about Risk—Credit Risk—Derivatives” in the 2019 Form 10-K.
 
Additional Information—Top 10 Non-U.S. Country Exposures

Collateral Held against Net Counterparty Exposure1 
$ in millions
 
At
March 31,
2020
Counterparty credit exposure
Collateral2
 
United Kingdom
U.K., U.S. and Spain
$
14,985

Germany
Italy and Germany
13,356

Other
Japan, U.S. and Canada
27,025

 
1.
The benefit of collateral received is reflected in the Top 10 Non-U.S. Country Exposures at March 31, 2020.
2.
Collateral primarily consists of cash and government obligations.
Country Risk Exposures Related to the U.K.
At March 31, 2020, our country risk exposures in the U.K. included net exposures of $22,283 million (as shown in the Top 10 Non-U.S. Country Exposures table) and overnight deposits of $5,163 million. The $22,744 million of exposures to non-sovereigns were diversified across both names and sectors and include $7,253 million to U.K.-focused counterparties that generate more than one-third of their revenues in the U.K., $5,845 million to geographically diversified counterparties, and $8,361 million to exchanges and clearinghouses.
Operational Risk
Operational risk refers to the risk of loss, or of damage to our reputation, resulting from inadequate or failed processes or systems, from human factors or from external events (e.g., fraud, theft, legal and compliance risks, cyber attacks or damage to physical assets). We may incur operational risk across the full scope of our business activities, including revenue-generating activities (e.g., sales and trading) and support and control groups (e.g., information technology and trade processing). For a further discussion about our operational risk, see “Quantitative
 
and Qualitative Disclosures about Risk—Operational Risk” in the 2019 Form 10-K. In addition, for further information on market and economic conditions and their effects on risk in general, see "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—Coronavirus Disease (COVID-19) Pandemic" and “Risk Factors” herein.
Model Risk
Model risk refers to the potential for adverse consequences from decisions based on incorrect or misused model outputs. Model risk can lead to financial loss, poor business and strategic decision making or damage to our reputation. The risk inherent in a model is a function of the materiality, complexity and uncertainty around inputs and assumptions. Model risk is generated from the use of models impacting financial statements, regulatory filings, capital adequacy assessments and the formulation of strategy. For a further discussion about our model risk, see “Quantitative and Qualitative Disclosures about Risk—Model Risk” in the 2019 Form 10-K.
Liquidity Risk
Liquidity risk refers to the risk that we will be unable to finance our operations due to a loss of access to the capital markets or difficulty in liquidating our assets. Liquidity risk also encompasses our ability (or perceived ability) to meet our financial obligations without experiencing significant business disruption or reputational damage that may threaten our viability as a going concern. For a further discussion about our liquidity risk, see “Quantitative and Qualitative Disclosures about Risk—Liquidity Risk” in the 2019 Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” herein. In addition, for further information on market and economic conditions and their effects on risk in general, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—Coronavirus Disease (COVID-19) Pandemic” and “Risk Factors” herein.
Legal and Compliance Risk
Legal and compliance risk includes the risk of legal or regulatory sanctions, material financial loss, including fines, penalties, judgments, damages and/or settlements, or loss to reputation that we may suffer as a result of failure to comply with laws, regulations, rules, related self-regulatory organization standards and codes of conduct applicable to our business activities. This risk also includes contractual and commercial risk, such as the risk that a counterparty’s performance obligations will be unenforceable. It also includes compliance with AML, terrorist financing, and anti-corruption rules and regulations. For a further discussion about our legal and compliance risk, see “Quantitative and Qualitative Disclosures about Risk—Legal and Compliance Risk” in the 2019 Form 10-K.
 

 
37
March 2020 Form 10-Q

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Morgan Stanley:
 
Results of Review of Interim Financial Information
We have reviewed the accompanying condensed consolidated balance sheet of Morgan Stanley and subsidiaries (the “Firm”) as of March 31, 2020, and the related condensed consolidated income statements, comprehensive income statements, cash flow statements and statements of changes in total equity for the three-month periods ended March 31, 2020 and 2019, and the related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Firm as of December 31, 2019, and the related consolidated income statement, comprehensive income statement, cash flow statement and statement of changes in total equity for the year then ended (not presented herein) included in the Firm’s Annual Report on Form 10-K; and in our report dated February 27, 2020, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2019 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

Basis for Review Results
This interim financial information is the responsibility of the Firm’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Firm in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 






/s/ Deloitte & Touche LLP
 
New York, New York
May 5, 2020



March 2020 Form 10-Q
38
 
Table of Contents
 
Consolidated Income Statements
(Unaudited)
mslogoa02.jpg


 
 
Three Months Ended
March 31,
in millions, except per share data
2020
2019
Revenues
 
 
Investment banking
$
1,271

$
1,242

Trading
3,056

3,441

Investments
38

273

Commissions and fees
1,360

966

Asset management
3,417

3,049

Other
(1,011
)
301

Total non-interest revenues
8,131

9,272

Interest income
3,503

4,290

Interest expense
2,147

3,276

Net interest
1,356

1,014

Net revenues
9,487

10,286

Non-interest expenses
 
 
Compensation and benefits
4,283

4,651

Brokerage, clearing and exchange fees
740

593

Information processing and communications
563

532

Professional services
449

514

Occupancy and equipment
365

347

Marketing and business development
132

141

Other
809

553

Total non-interest expenses
7,341

7,331

Income before provision for income taxes
2,146

2,955

Provision for income taxes
366

487

Net income
$
1,780

$
2,468

Net income applicable to noncontrolling interests
82

39

Net income applicable to Morgan Stanley
$
1,698

$
2,429

Preferred stock dividends
108

93

Earnings applicable to Morgan Stanley common shareholders
$
1,590

$
2,336

Earnings per common share
 
 
Basic
$
1.02

$
1.41

Diluted
$
1.01

$
1.39

Average common shares outstanding
 
 
Basic
1,555

1,658

Diluted
1,573

1,677


See Notes to Consolidated Financial Statements
39
March 2020 Form 10-Q

Table of Contents
 
Consolidated Comprehensive Income Statements
(Unaudited)
mslogoa02.jpg


 
 
Three Months Ended
March 31,
$ in millions
2020
2019
Net income
$
1,780

$
2,468

Other comprehensive income (loss), net of tax:
 
 
Foreign currency translation adjustments
(132
)
(22
)
Change in net unrealized gains (losses) on available-for-sale securities
1,325

429

Pension, postretirement and other
25

1

Change in net debt valuation adjustment
3,803

(620
)
Total other comprehensive income (loss)
$
5,021

$
(212
)
Comprehensive income
$
6,801

$
2,256

Net income applicable to noncontrolling interests
82

39

Other comprehensive income (loss) applicable to noncontrolling interests
138

(31
)
Comprehensive income applicable to Morgan Stanley
$
6,581

$
2,248


March 2020 Form 10-Q
40
See Notes to Consolidated Financial Statements

Table of Contents
 
Consolidated Balance Sheets

mslogoa02.jpg


$ in millions, except share data
(Unaudited) At
March 31, 2020
At
December 31, 2019
Assets
 
 
Cash and cash equivalents
$
131,509

$
82,171

Trading assets at fair value ($103,637 and $128,386 were pledged to various parties)
270,916

297,110

Investment securities (includes $68,871 and $62,223 at fair value)
116,157

105,725

Securities purchased under agreements to resell (includes $5 and $4 at fair value)
104,800

88,224

Securities borrowed
72,300

106,549

Customer and other receivables
74,424

55,646

Loans:
 
 
Held for investment (net of allowance of $617 and $349)
131,335

118,060

Held for sale
17,362

12,577

Goodwill
7,125

7,143

Intangible assets (net of accumulated amortization of $3,281 and $3,204)
2,021

2,107

Other assets
19,846

20,117

Total assets
$
947,795

$
895,429

Liabilities
 
 
Deposits (includes $4,052 and $2,099 at fair value)
$
235,239

$
190,356

Trading liabilities at fair value
142,076

133,356

Securities sold under agreements to repurchase (includes $775 and $733 at fair value)
45,816

54,200

Securities loaned
11,631

8,506

Other secured financings (includes $6,897 and $7,809 at fair value)
13,058

14,698

Customer and other payables
198,074

197,834

Other liabilities and accrued expenses
19,817

21,155

Borrowings (includes $57,162 and $64,461 at fair value)
194,856

192,627

Total liabilities
860,567

812,732

Commitments and contingent liabilities (see Note 13)


Equity
 
 
Morgan Stanley shareholders’ equity:
 
 
Preferred stock
8,520

8,520

Common stock, $0.01 par value:
 
 
Shares authorized: 3,500,000,000; Shares issued: 2,038,893,979; Shares outstanding: 1,575,500,507 and 1,593,973,680
20

20

Additional paid-in capital
23,428

23,935

Retained earnings
71,518

70,589

Employee stock trusts
3,088

2,918

Accumulated other comprehensive income (loss)
2,095

(2,788
)
Common stock held in treasury at cost, $0.01 par value (463,393,472 and 444,920,299 shares)
(19,721
)
(18,727
)
Common stock issued to employee stock trusts
(3,088
)
(2,918
)
Total Morgan Stanley shareholders’ equity
85,860

81,549

Noncontrolling interests
1,368

1,148

Total equity
87,228

82,697

Total liabilities and equity
$
947,795

$
895,429


See Notes to Consolidated Financial Statements
41
March 2020 Form 10-Q

Table of Contents
 
Consolidated Statements of Changes in Total Equity
(Unaudited)
mslogoa02.jpg


 
Three Months Ended
March 31,
 
$ in millions
2020
2019
Preferred Stock
 
 
Beginning and ending balance
$
8,520

$
8,520

Common Stock
 
 
Beginning and ending balance
20

20

Additional Paid-in Capital
 
 
Beginning balance
23,935

23,794

Share-based award activity
(507
)
(618
)
Other net increases
—

2

Ending balance
23,428

23,178

Retained Earnings
 
 
Beginning balance
70,589

64,175

Cumulative adjustments for accounting changes1
(100
)
63

Net income applicable to Morgan Stanley
1,698

2,429

Preferred stock dividends2
(108
)
(93
)
Common stock dividends2
(561
)
(513
)
Ending balance
71,518

66,061

Employee Stock Trusts
 
 
Beginning balance
2,918

2,836

Share-based award activity
170

164

Ending balance
3,088

3,000

Accumulated Other Comprehensive Income (Loss)
 
 
Beginning balance
(2,788
)
(2,292
)
Net change in Accumulated other comprehensive income (loss)
4,883

(181
)
Ending balance
2,095

(2,473
)
Common Stock Held In Treasury at Cost
 
 
Beginning balance
(18,727
)
(13,971
)
Share-based award activity
788

1,034

Repurchases of common stock and employee tax withholdings
(1,782
)
(1,645
)
Ending balance
(19,721
)
(14,582
)
Common Stock Issued to Employee Stock Trusts
 
 
Beginning balance
(2,918
)
(2,836
)
Share-based award activity
(170
)
(164
)
Ending balance
(3,088
)
(3,000
)
Non-Controlling Interests
 
 
Beginning balance
1,148

1,160

Net income applicable to non-controlling interests
82

39

Net change in Accumulated other comprehensive income (loss)
138

(31
)
Ending balance
1,368

1,168

Total Equity
$
87,228

$
81,892


1.
See Notes 2 and 16 for further information regarding cumulative adjustments for accounting changes.
2.
See Note 16 for information regarding dividends per share for each class of stock.



See Notes to Consolidated Financial Statements
42
March 2020 Form 10-Q

Table of Contents
 
Consolidated Cash Flow Statements
(Unaudited)
mslogoa02.jpg


 
Three Months Ended
March 31,
$ in millions
2020
2019
Cash flows from operating activities
 
 
Net income
$
1,780

$
2,468

Adjustments to reconcile net income to net cash provided by (used for) operating activities:
 
 
Stock-based compensation expense
154

293

Depreciation and amortization
824

658

Provision for (Release of) credit losses on lending activities
407

36

Other operating adjustments
1,044

(92
)
Changes in assets and liabilities:
 
 
Trading assets, net of Trading liabilities
35,079

23,977

Securities borrowed
34,249

(22,578
)
Securities loaned
3,125

600

Customer and other receivables and other assets
(23,619
)
1,567

Customer and other payables and other liabilities
(4,247
)
9,971

Securities purchased under agreements to resell
(16,576
)
1,952

Securities sold under agreements to repurchase
(8,384
)
(1,811
)
Net cash provided by (used for) operating activities
23,836

17,041

Cash flows from investing activities
 
 
Proceeds from (payments for):
 
 
Other assets—Premises, equipment and software, net
(354
)
(529
)
Changes in loans, net
(13,243
)
(1,329
)
Investment securities:
 
 
Purchases
(12,924
)
(15,895
)
Proceeds from sales
3,128

7,875

Proceeds from paydowns and maturities
2,378

2,663

Other investing activities
(93
)
(12
)
Net cash provided by (used for) investing activities
(21,108
)
(7,227
)
Cash flows from financing activities
 
 
Net proceeds from (payments for):
 
 
Other secured financings
259

(1,575
)
Deposits
44,694

(8,089
)
Proceeds from issuance of Borrowings
20,601

8,091

Payments for:
 
 
Borrowings
(14,967
)
(11,927
)
Repurchases of common stock and employee tax withholdings
(1,782
)
(1,645
)
Cash dividends
(688
)
(663
)
Other financing activities
(163
)
(56
)
Net cash provided by (used for) financing activities
47,954

(15,864
)
Effect of exchange rate changes on cash and cash equivalents
(1,344
)
(464
)
Net increase (decrease) in cash and cash equivalents
49,338

(6,514
)
Cash and cash equivalents, at beginning of period
82,171

87,196

Cash and cash equivalents, at end of period
$
131,509

$
80,682

Supplemental Disclosure of Cash Flow Information
 
 
Cash payments for:
 
 
Interest
$
2,123

$
2,896

Income taxes, net of refunds
342

245


See Notes to Consolidated Financial Statements
43
March 2020 Form 10-Q

Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

 
1. Introduction and Basis of Presentation
The Firm
Morgan Stanley 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 Company”) together with its consolidated subsidiaries. See the “Glossary of Common Terms and Acronyms” for the definition of certain terms and acronyms used throughout this Form 10-Q.
A description of the clients and principal products and services of each of the Firm’s business segments is as follows:
Institutional Securities provides investment banking, sales and trading, lending and other services to corporations, governments, financial institutions and high to ultra-high net worth clients. Investment banking services consist of capital raising and financial advisory services, including services relating to the underwriting of debt, equity and other securities, as well as advice on mergers and acquisitions, restructurings, real estate and project finance. Sales and trading services include sales, financing, prime brokerage and market-making activities in equity and fixed income products, including foreign exchange and commodities. Lending activities include originating corporate loans and commercial real estate loans, providing secured lending facilities, and extending financing to sales and trading customers. Other activities include Asia wealth management services, investments and research.
Wealth Management provides a comprehensive array of financial services and solutions to individual investors and small to medium-sized businesses and institutions covering: brokerage and investment advisory services; financial and wealth planning services; stock plan administration services; annuity and insurance products; securities-based lending, residential real estate loans and other lending products; banking; and retirement plan services.
Investment Management provides a broad range of investment strategies and products that span geographies, asset classes, and public and private markets to a diverse group of clients across institutional and intermediary channels. Strategies and products, which are offered through a variety of investment vehicles, include equity, fixed income, liquidity and alternative/other products. Institutional clients include defined benefit/defined contribution plans, foundations, endowments, government entities, sovereign wealth funds,
 
insurance companies, third-party fund sponsors and corporations. Individual clients are generally served through intermediaries, including affiliated and non-affiliated distributors.
Basis of Financial Information
The financial statements are prepared in accordance with U.S. GAAP, which requires the Firm to make estimates and assumptions regarding the valuations of certain financial instruments, the valuations of goodwill and intangible assets, the outcome of legal and tax matters, deferred tax assets, allowance for credit losses, and other matters that affect its financial statements and related disclosures. The Firm believes that the estimates utilized in the preparation of its financial statements are prudent and reasonable. Actual results could differ materially from these estimates.
Certain reclassifications have been made to prior periods to conform to the current presentation. The Notes are an integral part of the Firm's financial statements. The Firm has evaluated subsequent events for adjustment to or disclosure in these financial statements through the date of this report and has not identified any recordable or disclosable events not otherwise reported in these financial statements or the notes thereto.
The accompanying financial statements should be read in conjunction with the Firm’s financial statements and notes thereto included in the 2019 Form 10-K. Certain footnote disclosures included in the 2019 Form 10-K have been condensed or omitted from these financial statements as they are not required for interim reporting under U.S. GAAP. The 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 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 VIEs (see Note 14). Intercompany balances and transactions have been eliminated. For consolidated subsidiaries that are not 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 applicable to noncontrolling interests in the income statements. The portion of shareholders’ equity that is attributable to noncontrolling interests for such subsidiaries is presented as noncontrolling interests, a component of Total equity, in the balance sheets.
For a discussion of the Firm’s significant regulated U.S. and international subsidiaries and its involvement with VIEs, see Note 1 to the financial statements in the 2019 Form 10-K.

March 2020 Form 10-Q
44
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

2. Significant Accounting Policies
For a detailed discussion about the Firm’s significant accounting policies and for further information on accounting updates adopted in the prior year, see Note 2 to the financial statements in the 2019 Form 10-K.
During the three months ended March 31, 2020 (“current quarter”), there were no significant revisions to the Firm’s significant accounting policies, other than for the accounting updates adopted.
Accounting Updates Adopted in 2020
See Note 16 for a summary of the Retained earnings impact of this adoption.
Financial Instruments — Credit Losses
The Firm adopted the Financial Instruments - Credit Losses accounting update on January 1, 2020.
This accounting update impacted the impairment model for certain financial assets measured at amortized cost by requiring a CECL methodology to estimate expected credit losses over the entire life of the financial asset, recorded at inception or purchase. CECL replaced the loss model currently applicable to loans held for investment, HTM securities and other receivables carried at amortized cost, such as employee loans.

The update also eliminated the concept of other-than-temporary impairment for AFS securities and instead requires impairments on AFS securities to be recognized in earnings through an allowance when the fair value is less than amortized cost and a credit loss exists, and through a permanent reduction of the amortized cost basis when the securities are expected to be sold before recovery of amortized cost.

For certain portfolios, we determined that there are de minimus or zero expected credit losses; for example, for lending and financing transactions, such as Securities borrowed, Securities purchased under agreements to resell and certain other portfolios where collateral arrangements are being followed. Also, we have zero expected credit losses for certain financial assets based on the credit quality of the borrower or issuer, such as U.S. government and agency securities.

At transition on January 1, 2020, the adoption of this accounting standard resulted in an increase in the allowance for credit losses of $131 million with a corresponding reduction in Retained earnings of $100 million, net of tax. The adoption impact was primarily attributable to a $124 million increase in the allowance for credit losses on employee loans.

The following discussion highlights changes to the Firm’s accounting policies as a result of this adoption.
 
Instruments Measured at Amortized Cost and Certain Off-Balance Sheet Credit Exposures
Allowance for Credit Losses (“ACL”)
The ACL for financial instruments measured at amortized cost and certain off-balance sheet exposures (e.g., HFI loans and lending commitments, HTM securities, customer and other receivables and certain guarantees) represents an estimate of expected credit losses over the entire life of the financial instrument.
Factors considered by management when determining the ACL include payment status, fair value of collateral, expected payments of principal and interest, as well as internal or external information relating to past events, current conditions and reasonable and supportable forecasts. The Firm’s forecasts include assumptions about certain macroeconomic variables including, but not limited to, U.S. gross domestic product, equity market indices, unemployment rates, as well as commercial real estate and home price indices. At the conclusion of the Firm’s reasonable and supportable forecast period of three years, there is a gradual reversion back to historical averages.
The ACL is measured on a collective basis when similar risk characteristics exist for multiple instruments considering all available information relevant to assessing the collectability of cash flows. Generally, the Firm applies a probability of default (“PD”)/loss given default (“LGD”) model (“PD/LGD model”) for instruments that are collectively assessed, under which the ACL is calculated as the product of PD, LGD and exposure at default (“EAD”). These parameters are forecast for each collective group of loans using a scenario-based statistical model and at the conclusion of the Firm’s reasonable and supportable forecast period, the parameters gradually revert back to historical averages.

If the instrument does not share similar risk characteristics with other instruments, including when it is probable that the Firm will be unable to collect the full payment of principal and interest on the instrument when due, the ACL is measured on an individual basis. The Firm typically applies a discounted cash flow (“DCF”) method for instruments that are individually assessed.

The Firm may also elect to use an approach that considers the fair value of the collateral when measuring the ACL if the loan is collateral dependent (i.e.,repayment of the loan is expected to be provided substantially by the sale or operation of the underlying collateral and the borrower is experiencing financial difficulty).

Additionally, the Firm can elect to use an approach to measure the ACL using the fair value of collateral where the borrower is required to, and reasonably expected to, continually adjust and replenish the amount of collateral securing the instrument to reflect changes in the fair value of such collateral. The Firm has

 
45
March 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
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elected to use this approach for certain securities-based loans, customer receivables representing margin loans, Securities purchased under agreements to resell and Securities borrowed.
Credit quality indicators considered in developing the ACL include:
•
Corporate loans and Commercial real estate loans and securities: Internal risk ratings developed by CRM which are refreshed at least annually, and more frequently as necessary. These ratings generally correspond to external ratings published by S&P. The Firm also considers transaction structure, including type of collateral, collateral terms, and position of the obligation within the capital structure. In addition, for Commercial real estate, the Firm considers property type and location, net operating income, LTV ratios, among others, as well as commercial real estate price and credit spread indices and capitalization rates.
•
Residential real estate loans: Loan origination Fair Isaac Corporation (“FICO”) credit scores as determined by independent credit agencies in the United States and loan-to-value (“LTV”) ratios.
•
Employee loans: Employment status, which includes those currently employed by the Firm and for which the Firm can deduct any unpaid amounts due to it through certain compensation arrangements; and those no longer employed by the Firm where such compensation arrangements are no longer applicable.

Consumer loans primarily comprise securities-based loans and therefore the Firm generally measures the ACL on such loans based on the fair value of collateral.
Qualitative and environmental factors such as economic and business conditions, the nature and volume of the portfolio, and lending terms and the volume and severity of past due loans are also considered in the ACL calculations.
Recognition. The Firm recognizes its ACL and provision for credit losses in its balance sheets and income statements, respectively, for on– and off–balance sheet instruments as follows.
 
ACL
Provision for credit losses
Instruments measured at amortized cost (e.g., HFI loans, HTM securities and customer and other receivables)
Contra asset
Other revenue
Employee loans
Contra asset
Compensation and benefits expense
Off-balance sheet instruments (e.g., HFI lending commitments and certain guarantees)
Other liabilities and accrued expenses
Other expense
Troubled Debt Restructurings (“TDRs”)
The Firm may modify the terms of certain loans for economic or legal reasons related to a borrower’s financial difficulties by granting one or more concessions that the Firm would not
 
otherwise consider. Such modifications are accounted for and reported as a TDR, except for certain modifications related to the Coronavirus Disease (“COVID-19”) as noted in “Modifications and Nonaccrual Status for Borrowers Impacted by COVID-19” herein. A loan that has been modified in a TDR is generally considered to be impaired and is evaluated individually. TDRs are also generally classified as nonaccrual and may be returned to accrual status only after the Firm expects repayment of the remaining contractual principal and interest and there is sustained repayment performance for a reasonable period.
Nonaccrual
The Firm places financial instruments on nonaccrual status if principal or interest is past due for a period of 90 days or more or payment of principal or interest is in doubt unless the obligation is well-secured and in the process of collection, or in certain cases when related to the Coronavirus Disease (“COVID-19”) as noted in “Modifications and Nonaccrual Status for Borrowers Impacted by COVID-19” herein. For any instrument placed on nonaccrual status, the Firm reverses any unpaid interest accrued with an offsetting reduction to Interest income. Principal and interest payments received on nonaccrual instruments are applied to principal if there is doubt regarding the ultimate collectability of principal. If collection of the principal is not in doubt, interest income is realized on a cash basis. If neither principal nor interest collection is in doubt and the instruments are brought current, instruments are generally placed on accrual status and interest income is recognized using the effective interest method.
Modifications and Nonaccrual Status for Borrowers Impacted by COVID-19
In the first quarter of 2020, the Firm elected to apply the guidance issued by Congress in the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) as well as by the U.S. banking agencies stating that certain concessions granted to borrowers that are current on existing loans, either individually or as part of a program for creditworthy borrowers who are experiencing short-term financial or operational problems as a result of the coronavirus pandemic, generally would not be considered TDRs or nonaccrual.
ACL Write-offs
The Firm writes-off a financial instrument in the period that it is deemed uncollectible and records a reduction in the ACL and the balance of the financial instrument in the balance sheet. However, for accrued interest receivable balances that are separately recorded from the related financial instruments, the Firm's nonaccrual policy requires that accrued interest receivable be written off against Interest income when the related financial instrument is placed in nonaccrual status. Accordingly, the Firm elected not to measure an ACL for accrued interest receivables.

March 2020 Form 10-Q
46
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
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Available-for-Sale (“AFS”) Investment Securities

Unrealized Losses on AFS Securities

AFS securities are analyzed as part of the Firm's periodic assessment of credit losses at the individual security level. When considering if a credit loss exists, the Firm considers relevant information as discussed in Note 2 of the 2019 Form 10-K. Upon the adoption of Financial Instruments—Credit Losses, the Firm no longer considers the length of time the fair value has been less than the amortized cost basis in determining whether a credit loss exists.

Recognition. The Firm recognizes its ACL and provision for credit losses for AFS securities in its balance sheets and income statements, respectively, as follows.
 
ACL
Provision for credit losses
AFS securities
Contra asset
Other revenue
The Firm recognizes the non-credit loss component of the unrealized loss as an adjustment to the security’s asset balance with an offsetting entry to AOCI in the balance sheets.

For AFS securities in an unrealized loss position as of the balance sheet date that the Firm either has the intent to sell or that the Firm is likely to be required to sell before recovery of its amortized cost basis, any allowance for credit losses previously established is written off and the amortized cost basis is written down to the security’s fair value with any incremental unrealized losses reported in Other revenues.

Nonaccrual & ACL Write-Offs on AFS Securities
AFS securities follow the same nonaccrual and write-off guidance as discussed in “Instruments Measured at Amortized Cost and Certain Off-Balance Sheet Credit Exposures” herein.
3. Cash and Cash Equivalents
Cash and cash equivalents consist of Cash and due from banks and Interest bearing deposits with banks. Cash equivalents are highly liquid investments with remaining maturities of three months or less from the acquisition date that are readily convertible to cash and are not held for trading purposes.
$ in millions
At
March 31,
2020
At
December 31,
2019
Cash and due from banks
$
11,570

$
6,763

Interest bearing deposits with banks
119,939

75,408

Total Cash and cash equivalents
$
131,509

$
82,171

Restricted cash
$
56,064

$
32,512


Cash and cash equivalents also include Restricted cash such as cash in banks subject to withdrawal restrictions, restricted deposits held as compensating balances and cash segregated in
 
compliance with federal or other regulations, including the minimum reserve requirement set by the Federal Reserve Bank and other central banks.
4. Fair Values
Recurring Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
At March 31, 2020
$ in millions
Level 1
Level 2
Level 3
Netting1
Total
Assets at fair value
 
 
 
 
 
Trading assets:
 
 
 
 
 
U.S. Treasury and agency securities
$
42,231

$
29,105

$
99

$
—

$
71,435

Other sovereign government obligations
29,493

5,017

17

—

34,527

State and municipal securities
—

2,226

1

—

2,227

MABS
—

838

483

—

1,321

Loans and lending commitments2
—

4,082

5,980

—

10,062

Corporate and other debt
—

23,448

1,708

—

25,156

Corporate equities3
66,409

582

146

—

67,137

Derivative and other contracts:
 
 
 
 
Interest rate
14,025

253,646

1,367

—

269,038

Credit
—

12,605

753

—

13,358

Foreign exchange
26

112,711

76

—

112,813

Equity
1,041

93,175

1,560

—

95,776

Commodity and other
1,070

17,813

3,384

—

22,267

Netting1
(12,720
)
(376,568
)
(1,301
)
(69,653
)
(460,242
)
Total derivative and other contracts
3,442

113,382

5,839

(69,653
)
53,010

Investments4
562

204

725

—

1,491

Physical commodities
—

960

—

—

960

Total trading assets4
142,137

179,844

14,998

(69,653
)
267,326

Investment securities—AFS
35,899

32,972

—

—

68,871

Securities purchased under agreements to resell
—

5

—

—

5

Total assets at fair value
$
178,036

$
212,821

$
14,998

$
(69,653
)
$
336,202



 
47
March 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
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At March 31, 2020
$ in millions
Level 1
Level 2
Level 3
Netting1
Total
Liabilities at fair value
 
 
 
 
 
Deposits
$
—

$
3,935

$
117

$
—

$
4,052

Trading liabilities:
 
 
 
 
 
U.S. Treasury and agency securities
13,273

201

16

—

13,490

Other sovereign government obligations
20,273

836

2

—

21,111

Corporate and other debt
—

9,341

6

—

9,347

Corporate equities3
57,134

85

40

—

57,259

Derivative and other contracts:
 
 
 
 
Interest rate
14,655

242,840

494

—

257,989

Credit
—

12,631

555

—

13,186

Foreign exchange
20

112,552

226

—

112,798

Equity
1,090

89,344

2,936

—

93,370

Commodity and other
1,438

15,280

1,535

—

18,253

Netting1
(12,720
)
(376,568
)
(1,301
)
(64,138
)
(454,727
)
Total derivative and other contracts
4,483

96,079

4,445

(64,138
)
40,869

Total trading liabilities
95,163

106,542

4,509

(64,138
)
142,076

Securities sold under agreements to repurchase
—

775

—

—

775

Other secured financings
—

6,508

389

—

6,897

Borrowings
—

53,164

3,998

—

57,162

Total liabilities at fair value
$
95,163

$
170,924

$
9,013

$
(64,138
)
$
210,962

 
At December 31, 2019
$ in millions
Level 1
Level 2
Level 3
Netting1
Total
Assets at fair value
 
 
 
 
 
Trading assets:
 
 
 
 
 
U.S. Treasury and agency securities
$
36,866

$
28,992

$
22

$
—

$
65,880

Other sovereign government obligations
23,402

4,347

5

—

27,754

State and municipal securities
—

2,790

1

—

2,791

MABS
—

1,690

438

—

2,128

Loans and lending commitments2
—

6,253

5,073

—

11,326

Corporate and other debt
—

22,124

1,396

—

23,520

Corporate equities3
123,942

652

97

—

124,691

Derivative and other contracts:
 
 
 
Interest rate
1,265

182,977

1,239

—

185,481

Credit
—

6,658

654

—

7,312

Foreign exchange
15

64,260

145

—

64,420

Equity
1,219

48,927

922

—

51,068

Commodity and other
1,079

7,255

2,924

—

11,258

Netting1
(2,794
)
(235,947
)
(993
)
(47,804
)
(287,538
)
Total derivative and other contracts
784

74,130

4,891

(47,804
)
32,001

Investments4
481

252

858

—

1,591

Physical commodities
—

1,907

—

—

1,907

Total trading assets4
185,475

143,137

12,781

(47,804
)
293,589

Investment securities—AFS
32,902

29,321

—

—

62,223

Securities purchased under agreements to resell
—

4

—

—

4

Total assets at fair value
$
218,377

$
172,462

$
12,781

$
(47,804
)
$
355,816

 
 
At December 31, 2019
$ in millions
Level 1
Level 2
Level 3
Netting1
Total
Liabilities at fair value
 
 
 
 
 
Deposits
$
—

$
1,920

$
179

$
—

$
2,099

Trading liabilities:
 
 
 
 
 
U.S. Treasury and agency securities
11,191

34

—

—

11,225

Other sovereign government obligations
21,837

1,332

1

—

23,170

Corporate and other debt
—

7,410

—

—

7,410

Corporate equities3
63,002

79

36

—

63,117

Derivative and other contracts:
 
 
 
 
Interest rate
1,144

171,025

462

—

172,631

Credit
—

7,391

530

—

7,921

Foreign exchange
6

67,473

176

—

67,655

Equity
1,200

49,062

2,606

—

52,868

Commodity and other
1,194

7,118

1,312

—

9,624

Netting1
(2,794
)
(235,947
)
(993
)
(42,531
)
(282,265
)
Total derivative and other contracts
750

66,122

4,093

(42,531
)
28,434

Total trading liabilities
96,780

74,977

4,130

(42,531
)
133,356

Securities sold under agreements to repurchase
—

733

—

—

733

Other secured financings
—

7,700

109

—

7,809

Borrowings
—

60,373

4,088

—

64,461

Total liabilities at fair value
$
96,780

$
145,703

$
8,506

$
(42,531
)
$
208,458

MABS—Mortgage- and asset-backed securities
1.
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 “Netting.” Positions classified within the same level that are with the same counterparty are netted within that level. For further information on derivative instruments and hedging activities, see Note 6.
2.
For a further breakdown by type, see the following Detail of Loans and Lending Commitments at Fair Value table.
3.
For trading purposes, the Firm holds or sells short equity securities issued by entities in diverse industries and of varying sizes.
4.
Amounts exclude certain investments that are measured based on NAV per share, which are not classified in the fair value hierarchy. For additional disclosure about such investments, see “Net Asset Value Measurements” herein.
Detail of Loans and Lending Commitments at Fair Value
$ in millions
At
March 31,
2020
At
December 31, 2019
Corporate
$
7,711

$
8,036

Residential real estate
1,154

1,192

Commercial real estate
1,197

2,098

Total
$
10,062

$
11,326


Unsettled Fair Value of Futures Contracts1   
$ in millions
At
March 31,
2020
At
December 31, 2019
Customer and other receivables, net
$
935

$
365

1.
These contracts are primarily Level 1, actively traded, valued based on quoted prices from the exchange and are excluded from the previous recurring fair value tables.
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 financial statements in the 2019 Form 10-K. During the current quarter, there were no significant revisions made to the Firm’s valuation techniques.

March 2020 Form 10-Q
48
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

Rollforward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
Three Months Ended
March 31,
$ in millions
2020
2019
U.S. Treasury and agency securities
Beginning balance
$
22

$
54

Realized and unrealized gains (losses)
5

—

Purchases
85

—

Sales
(21
)
(50
)
Net transfers
8

3

Ending balance
$
99

$
7

Unrealized gains (losses)
$
5

$
—

Other sovereign government obligations
Beginning balance
$
5

$
17

Realized and unrealized gains (losses)
1

—

Purchases
10

2

Sales
—

(2
)
Net transfers
1

(12
)
Ending balance
$
17

$
5

Unrealized gains (losses)
$
1

$
—

State and municipal securities
Beginning balance
$
1

$
148

Realized and unrealized gains (losses)
—

1

Purchases
—

10

Sales
—

(44
)
Net transfers
—

(103
)
Ending balance
$
1

$
12

Unrealized gains (losses)
$
—

$
1

MABS
Beginning balance
$
438

$
354

Realized and unrealized gains (losses)
(89
)
(7
)
Purchases
158

19

Sales
(140
)
(83
)
Settlements
—

(3
)
Net transfers
116

21

Ending balance
$
483

$
301

Unrealized gains (losses)
$
(92
)
$
(14
)
Loans and lending commitments
Beginning balance
$
5,073

$
6,870

Realized and unrealized gains (losses)
(102
)
—

Purchases and originations
1,952

1,255

Sales
(529
)
(108
)
Settlements
(1,387
)
(820
)
Net transfers1
973

(854
)
Ending balance
$
5,980

$
6,343

Unrealized gains (losses)
$
(101
)
$
(7
)

 
 
Three Months Ended
March 31,
$ in millions
2020
2019
Corporate and other debt
Beginning balance
$
1,396

$
1,076

Realized and unrealized gains (losses)
(92
)
43

Purchases
585

204

Sales
(177
)
(127
)
Settlements
—

(3
)
Net transfers
(4
)
(132
)
Ending balance
$
1,708

$
1,061

Unrealized gains (losses)
$
(90
)
$
41

Corporate equities
Beginning balance
$
97

$
95

Realized and unrealized gains (losses)
(60
)
6

Purchases
22

51

Sales
(40
)
(9
)
Net transfers
127

9

Ending balance
$
146

$
152

Unrealized gains (losses)
$
(54
)
$
7

Investments
Beginning balance
$
858

$
757

Realized and unrealized gains (losses)
(63
)
10

Purchases
15

10

Sales
(8
)
(4
)
Net transfers
(77
)
201

Ending balance
$
725

$
974

Unrealized gains (losses)
$
(64
)
$
14

Net derivatives: Interest rate
Beginning balance
$
777

$
618

Realized and unrealized gains (losses)
156

(48
)
Purchases
61

24

Issuances
(7
)
(19
)
Settlements
(42
)
(12
)
Net transfers
(72
)
(12
)
Ending balance
$
873

$
551

Unrealized gains (losses)
$
111

$
(43
)
Net derivatives: Credit
Beginning balance
$
124

$
40

Realized and unrealized gains (losses)
131

162

Purchases
26

26

Issuances
(21
)
(442
)
Settlements
(24
)
(33
)
Net transfers
(38
)
(14
)
Ending balance
$
198

$
(261
)
Unrealized gains (losses)
$
123

$
167

 
 
 


 
49
March 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

 
Three Months Ended
March 31,
$ in millions
2020
2019
Net derivatives: Foreign exchange
Beginning balance
$
(31
)
$
75

Realized and unrealized gains (losses)
(62
)
(113
)
Purchases
3

1

Issuances
(8
)
—

Settlements
(8
)
8

Net transfers
(44
)
34

Ending balance
$
(150
)
$
5

Unrealized gains (losses)
$
(164
)
$
3

Net derivatives: Equity
Beginning balance
$
(1,684
)
$
(1,485
)
Realized and unrealized gains (losses)
635

(191
)
Purchases
97

34

Issuances
(144
)
(193
)
Settlements
(167
)
139

Net transfers
(113
)
(64
)
Ending balance
$
(1,376
)
$
(1,760
)
Unrealized gains (losses)
$
566

$
(203
)
Net derivatives: Commodity and other
Beginning balance
$
1,612

$
2,052

Realized and unrealized gains (losses)
75

43

Purchases
3

5

Issuances
(3
)
(1
)
Settlements
157

(81
)
Net transfers
5

88

Ending balance
$
1,849

$
2,106

Unrealized gains (losses)
$
22

$
(25
)
Deposits
Beginning balance
$
179

$
27

Realized and unrealized losses (gains)
(6
)
6

Issuances
12

24

Settlements
(5
)
(1
)
Net transfers
(63
)
43

Ending balance
$
117

$
99

Unrealized losses (gains)
$
(6
)
$
6

Nonderivative trading liabilities
Beginning balance
$
37

$
16

Realized and unrealized losses (gains)
(43
)
(1
)
Purchases
(82
)
(6
)
Sales
52

23

Net transfers
100

11

Ending balance
$
64

$
43

Unrealized losses (gains)
$
(43
)
$
(1
)
Other secured financings
 
 
Beginning balance
$
109

$
208

Realized and unrealized losses (gains)
(12
)
4

Issuances
2

—

Settlements
(115
)
(7
)
Net transfers
405

(52
)
Ending balance
$
389

$
153

Unrealized losses (gains)
$
(12
)
$
4


 
 
Three Months Ended
March 31,
$ in millions
2020
2019
Borrowings
Beginning balance
$
4,088

$
3,806

Realized and unrealized losses (gains)
(897
)
287

Issuances
701

264

Settlements
(234
)
(115
)
Net transfers
340

(467
)
Ending balance
$
3,998

$
3,775

Unrealized losses (gains)
$
(895
)
$
276

Portion of Unrealized losses (gains) recorded in OCI—Change in net DVA
(398
)
59


1.
Net transfers in the current quarter include the transfer of $857 million of equity margin loans from Level 2 to Level 3 as the unobservable input became significant.
Level 3 instruments may be hedged with instruments classified in Level 1 and Level 2. The realized and unrealized gains (losses) for assets and liabilities within the Level 3 category presented in the previous 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.
The unrealized gains (losses) during the period for assets and liabilities within the Level 3 category may include changes in fair value during the period that were attributable to both observable and unobservable inputs. Total realized and unrealized gains (losses) are primarily included in Trading revenues in the income statements.
Additionally, in the previous tables, consolidations of VIEs are included in Purchases and deconsolidations of VIEs are included in Settlements.

March 2020 Form 10-Q
50
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

Significant Unobservable Inputs Used in Recurring and Nonrecurring Level 3 Fair Value Measurements
Valuation Techniques and Unobservable Inputs
 
Balance / Range (Average)1
$ in millions, except inputs
At March 31, 2020
At December 31, 2019
Assets Measured at Fair Value on a Recurring Basis
U.S. Treasury and agency securities
$
99

$
22

Comparable pricing:
 
 
Bond price
18 to 117 points (86 points)

N/M

MABS
$
483

$
438

Comparable pricing:
 
Bond price
0 to 87 points (43 points)

0 to 96 points (47 points)

Loans and lending commitments
$
5,980

$
5,073

Margin loan model:
 
 
Discount rate
1% to 10% (2%)

1% to 9% (2%)

Volatility skew
13% to 89% (58%)

15% to 80% (28%)

Credit Spread
12 to 109 bps (41 bps)

9 to 39 bps (19 bps)

Comparable pricing:
 
Loan price
71 to 100 points (92 points)

69 to 100 points (93 points)

Corporate and other debt
$
1,708

$
1,396

Comparable pricing:
 
Bond price
10 to 108 points (85 points)

11 to 108 points (84 points)

Discounted cash flow:
 
Recovery rate
51% to 62% (54% / 51%)

35
%
Option model:
 
 
At the money volatility
21
%
21
%
Corporate equities
$
146

$
97

Comparable pricing:
 
Equity price
100
%
100
%
Investments
$
725

$
858

Discounted cash flow:
 
WACC
11% to 16% (14%)

8% to 17% (15%)

Exit multiple
7 to 17 times (12 times)

7 to 16 times (11 times)

Market approach:
 
 
EBITDA multiple
7 to 22 times (9 times)

7 to 24 times (11 times)

Comparable pricing:
 
Equity price
50% to 100% (99%)

75% to 100% (99%)

Net derivative and other contracts:
 
Interest rate
$
873

$
777

Option model:
 
 
IR volatility skew
2% to 183% (68% / 70%)

24% to 156% (63% / 59%)

IR curve correlation
46% to 88% (71% / 73%)

47% to 90% (72% / 72%)

Bond volatility
6% to 35% (25% / 25%)

4% to 15% (13% / 14%)

Inflation volatility
24% to 63% (44% / 41%)

24% to 63% (44% / 41%)

IR curve
0
%
1
%
 
 
 
 
Balance / Range (Average)1
$ in millions, except inputs
At March 31, 2020
At December 31, 2019
Credit
$
198

$
124

Credit default swap model:
 
Cash-synthetic basis
6 points

6 points

Bond price
0 to 98 points (52 points)

0 to 104 points (45 points)

Credit spread
20 to 488 bps (114 bps)

9 to 469 bps (81 bps)

Funding spread
204 to 278 bps (267 bps)

47 to 117 bps (84 bps)

Correlation model:
 
 
Credit correlation
40% to 78% (50%)

29% to 62% (36%)

Foreign exchange2
$
(150
)
$
(31
)
Option model:
 
 
IR - FX correlation
21% to 58% (38% / 38%)

32% to 56% (46% / 46%)

IR volatility skew
2% to 183% (68% / 70%)

24% to 156% (63% / 59%)

IR curve
10
%
10% to 11% (10% / 10%)

Contingency probability
95
%
85% to 95% (94% / 95%)

Equity2
$
(1,376
)
$
(1,684
)
Option model:
 
 
At the money volatility
17% to 78% (45%)

9% to 90% (36%)

Volatility skew
-4% to 0% (-1%)

-2% to 0% (-1%)

Equity correlation
5% to 96% (76%)

5% to 98% (70%)

FX correlation
-79% to 55% (-39%)

-79% to 60% (-37%)

IR correlation
-7% to 44% (19% / 18%)

-11% to 44% (18% / 16%)

Commodity and other
$
1,849

$
1,612

Option model:
 
 
Forward power price
$1 to $137 ($26) per MWh

$3 to $182 ($28) per MWh

Commodity volatility
8% to 145% (18%)

7% to 183% (18%)

Cross-commodity correlation
5% to 99% (93%)

43% to 99% (93%)

Liabilities Measured at Fair Value on a Recurring Basis
Deposits
$
117

$
179

Option Model:
 
 
At the money volatility
7% to 24% (7%)

16% to 37% (20%)

Other secured financings
$
389

$
109

Discounted cash flow:
 
Funding spread
106 to 161 bps (121 bps)

111 to 124 bps (117 bps)

Comparable pricing:
 
Loan price
30 to 101 points (86 points)

N/M

Borrowings
$
3,998

$
4,088

Option model:
 
 
At the money volatility
5% to 55% (31%)

5% to 44% (21%)

Volatility skew
-2% to 0% (0%)

-2% to 0% (0%)

Equity correlation
39% to 98% (81%)

38% to 94% (78%)

Equity - FX correlation
-75% to 17% (-32%)

-75% to 26% (-25%)

IR - FX Correlation
-27% to 7% (-5% / -5%)

-26% to 10% (-7% / -7%)

 
 
 

 
51
March 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

 
Balance / Range (Average)1
$ in millions, except inputs
At March 31, 2020
At December 31, 2019
Nonrecurring Fair Value Measurement
Loans
$
3,901

$
1,500

Corporate loan model:
 
Credit spread
44 to 600 bps (367 bps)

69 to 446 bps (225 bps)

Warehouse model:
 
 
Credit spread
159 to 743 bps (313 bps)

287 to 318 bps (297 bps)

Points—Percentage of par
IR—Interest rate
FX—Foreign exchange
1.
A single amount is disclosed for range and average when there is no significant difference between the minimum, maximum and average. Amounts represent weighted averages except where simple averages and the median of the inputs are more relevant.
2.
Includes derivative contracts with multiple risks (i.e., hybrid products).
The previous tables provide information on the valuation techniques, significant unobservable inputs, and the ranges and averages for each major category of assets and liabilities measured at fair value on a recurring and nonrecurring 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 of financial instruments. 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. There are no predictable relationships between multiple significant unobservable inputs attributable to a given valuation technique.
For a description of the Firm’s significant unobservable inputs and qualitative information about the effect of hypothetical changes in the values of those inputs, see Note 3 to the financial statements in the 2019 Form 10-K. During the current quarter, there were no significant revisions made to the descriptions of the Firm’s significant unobservable inputs.
Net Asset Value Measurements
Fund Interests
 
At March 31, 2020
At December 31, 2019
$ in millions
Carrying
Value
Commitment
Carrying
Value
Commitment
Private equity
$
2,219

$
557

$
2,078

$
450

Real estate
1,280

147

1,349

150

Hedge1
91

—

94

4

Total
$
3,590

$
704

$
3,521

$
604

1.
Investments in hedge funds may be subject to initial period lock-up or gate provisions, which restrict an investor from withdrawing from the fund during a certain initial period or restrict the redemption amount on any redemption date, respectively.
Amounts in the previous table represent the Firm’s carrying value of general and limited partnership interests in fund investments, as well as any related performance-based fees in the form of carried interest. The carrying amounts are measured based on the NAV of the fund taking into account the distribution terms applicable to the interest held. This same measurement applies whether the fund investments are accounted for under the equity method or fair value.
 
For a description of the Firm’s investments in private equity funds, real estate funds and hedge funds, which are measured based on NAV, see Note 3 to the financial statements in the 2019 Form 10-K.
See Note 13 for information regarding general partner guarantees, which include potential obligations to return performance fee distributions previously received. See Note 19 for information regarding unrealized carried interest at risk of reversal. 
Nonredeemable Funds by Contractual Maturity
 
Carrying Value at March 31, 2020
$ in millions
Private Equity
Real Estate
Less than 5 years
$
1,409

$
431

5-10 years
759

173

Over 10 years
51

676

Total
$
2,219

$
1,280


Nonrecurring Fair Value Measurements    
Carrying and Fair Values
 
At March 31, 2020
 
Fair Value
$ in millions
Level 2
Level 31
Total
Assets
 
 
 
Loans
$
5,823

$
3,901

$
9,724

Liabilities
 
 
 
Other liabilities and accrued expenses—Lending commitments
$
321

$
247

$
568

 
At December 31, 2019
 
Fair Value
$ in millions
Level 2
Level 31
Total
Assets
 
 
 
Loans
$
1,543

$
1,500

$
3,043

Other assets—Other investments
$
—

$
113

$
113

Total
$
1,543

$
1,613

$
3,156

Liabilities
 
 
 
Other liabilities and accrued expenses—Lending commitments
$
132

$
69

$
201

Total
$
132

$
69

$
201

 
1.
For significant Level 3 balances, refer to “Significant Unobservable Inputs Used in Recurring and Nonrecurring Level 3 Fair Value Measurements” section herein for details of the significant unobservable inputs used for nonrecurring fair value measurement.

March 2020 Form 10-Q
52
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

Gains (Losses) from Fair Value Remeasurements1   
 
Three Months Ended
March 31,
$ in millions
2020
2019
Assets
 
 
Loans2
$
(713
)
$
36

Other assets—Other investments3
—

(5
)
Other assets—Premises, equipment and software4
(3
)
(2
)
Total
$
(716
)
$
29

Liabilities


Other liabilities and accrued expenses—Lending commitments2
$
(316
)
$
67

Total
$
(316
)
$
67

1.
Gains and losses for Loans and Other assets—Other investments are classified in Other revenues. For other items, gains and losses are recorded in Other revenues if the item is held for sale; otherwise, they are recorded in Other expenses.
2.
Nonrecurring changes in the fair value of loans and lending commitments were calculated as follows: for the held-for-investment category, based on the value of the underlying collateral; and for the held-for-sale category, based on recently executed transactions, market price quotations, valuation models that incorporate market observable inputs where possible, such as comparable loan or debt prices and CDS spread levels adjusted for any basis difference between cash and derivative instruments, or default recovery analysis where such transactions and quotations are unobservable.
3.
Losses related to Other assets—Other investments were determined using techniques that included discounted cash flow models, methodologies that incorporate multiples of certain comparable companies and recently executed transactions.
4.
Losses related to Other assets—Premises, equipment and software generally include write-offs related to the disposal of certain assets.
Financial Instruments Not Measured at Fair Value
 
At March 31, 2020
 
Carrying
Value
Fair Value
$ in millions
Level 1
Level 2
Level 3
Total
Financial assets
 
 
 
 
Cash and cash equivalents
$
131,509

$
131,509

$
—

$
—

$
131,509

Investment securities—HTM
47,286

32,207

17,149

777

50,133

Securities purchased under agreements to resell
104,795

—

103,451

1,426

104,877

Securities borrowed
72,300

—

72,303

—

72,303

Customer and other receivables1
69,923

—

67,086

2,852

69,938

Loans2
148,697

—

32,529

114,841

147,370

Other assets
461

—

461

—

461

Financial liabilities
 
 
 
Deposits
$
231,187

$
—

$
231,555

$
—

$
231,555

Securities sold under agreements to repurchase
45,041

—

45,077

—

45,077

Securities loaned
11,631

—

11,633

—

11,633

Other secured financings
6,161

—

6,167

—

6,167

Customer and other payables1
195,211

—

195,211

—

195,211

Borrowings
137,694

—

135,148

10

135,158

 
Commitment
Amount
 
 
 
 
Lending commitments3
$
105,466

$
—

$
1,668

$
1,089

$
2,757




 
 
At December 31, 2019
 
Carrying
Value
Fair Value
$ in millions
Level 1
Level 2
Level 3
Total
Financial assets
 
 
 
 
Cash and cash equivalents
$
82,171

$
82,171

$
—

$
—

$
82,171

Investment securities—HTM
43,502

30,661

12,683

789

44,133

Securities purchased under agreements to resell
88,220

—

86,794

1,442

88,236

Securities borrowed
106,549

—

106,551

—

106,551

Customer and other receivables1
51,134

—

48,215

2,872

51,087

Loans2
130,637

—

22,293

108,059

130,352

Other assets
495

—

495

—

495

Financial liabilities
 
 
 
Deposits
$
188,257

$
—

$
188,639

$
—

$
188,639

Securities sold under agreements to repurchase
53,467

—

53,486

—

53,486

Securities loaned
8,506

—

8,506

—

8,506

Other secured financings
6,889

—

6,800

92

6,892

Customer and other payables1
195,035

—

195,035

—

195,035

Borrowings
128,166

—

133,563

10

133,573

 
Commitment
Amount
 
 
 
 
Lending commitments3
$
119,004

$
—

$
748

$
338

$
1,086

1.
Accrued interest and dividend receivables and payables have been excluded. Carrying value approximates fair value for these receivables and payables. As of March 31, 2020 and December 31, 2019, accrued interest receivable was $2.4 billion and $1.7 billion, respectively.
2.
Amounts include loans measured at fair value on a nonrecurring basis.
3.
Represents Lending commitments accounted for as Held for Investment and Held for Sale. For a further discussion on lending commitments, see Note 13.
The previous tables exclude certain financial instruments such as equity method investments and all non-financial assets and liabilities such as the value of the long-term relationships with the Firm’s deposit customers.

 
53
March 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

5. Fair Value Option
The Firm has elected the fair value option for certain eligible instruments that are risk managed on a fair value basis to mitigate income statement volatility caused by measurement basis differences between the elected instruments and their associated risk management transactions or to eliminate complexities of applying certain accounting models.
Borrowings Measured at Fair Value on a Recurring Basis
$ in millions
At
March 31,
2020
At
December 31,
2019
Business Unit Responsible for Risk Management
Equity
$
25,089

$
30,214

Interest rates
25,195

27,298

Commodities
4,681

4,501

Credit
1,179

1,246

Foreign exchange
1,018

1,202

Total
$
57,162

$
64,461


Net Revenues from Borrowings under the Fair Value Option
 
Three Months Ended
March 31,
$ in millions
2020
2019
Trading revenues
$
3,447

$
(2,903
)
Interest expense
83

93

Net revenues1
$
3,364

$
(2,996
)
1.
Amounts do not reflect any gains or losses from related economic hedges.
Gains (losses) from changes in fair value are recorded in Trading revenues and are mainly attributable to movements in the reference price or index, interest rates or foreign exchange rates.
Gains (Losses) Due to Changes in Instrument-Specific Credit Risk
 
 
 
 
 
 
Three Months Ended March 31,
 
2020
2019
$ in millions
Trading
Revenues
OCI
Trading
Revenues
OCI
Borrowings
$
(5
)
$
4,948

$
(4
)
$
(816
)
Loans and other debt1
(281
)
—

93

—

Lending commitments
2

—

(1
)
—

Deposits
—

72

—

(4
)
$ in millions
At
March 31,
2020
At
December 31,
2019
Cumulative pre-tax DVA gain (loss) recognized in AOCI
$
3,022

$
(1,998
)
1.
Loans and other debt instrument-specific credit gains (losses) were determined by excluding the non-credit components of gains and losses.
 
Difference Between Contractual Principal and Fair Value1   
$ in millions
At
March 31,
2020
At
December 31,
2019
Loans and other debt2
$
13,654

$
13,037

Nonaccrual loans2
11,014

10,849

Borrowings3
798

(1,665
)
1.
Amounts indicate contractual principal greater than or (less than) fair value.
2.
The majority of the difference between principal and fair value amounts for loans and other debt relates to distressed debt positions purchased at amounts well below par.
3.
Excludes borrowings where the repayment of the initial principal amount fluctuates based on changes in a reference price or index.
The previous tables exclude non-recourse debt from consolidated VIEs, liabilities related to transfers of financial assets treated as collateralized financings, pledged commodities and other liabilities that have specified assets attributable to them.
Fair Value Loans on Nonaccrual Status
$ in millions
At
March 31,
2020
At
December 31,
2019
Nonaccrual loans
$
1,150

$
1,100

Nonaccrual loans 90 or more days past due
$
262

$
330



March 2020 Form 10-Q
54
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

6. Derivative Instruments and Hedging Activities
Fair Values of Derivative Contracts
At March 31, 2020
 
Assets
$ in millions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges
 
 
 
Interest rate
$
1,295

$
7

$
—

$
1,302

Foreign exchange
152

83

—

235

Total
1,447

90

—

1,537

Not designated as accounting hedges
 
 
Interest rate
252,956

13,730

1,050

267,736

Credit
10,204

3,154

—

13,358

Foreign exchange
109,212

3,191

175

112,578

Equity
44,289

—

51,487

95,776

Commodity and other
17,778

—

4,489

22,267

Total
434,439

20,075

57,201

511,715

Total gross derivatives
$
435,886

$
20,165

$
57,201

$
513,252

Amounts offset
 
 
 
 
Counterparty netting
(328,104
)
(16,673
)
(54,079
)
(398,856
)
Cash collateral netting
(59,531
)
(1,855
)
—

(61,386
)
Total in Trading assets
$
48,251

$
1,637

$
3,122

$
53,010

Amounts not offset1
 
 
 
 
Financial instruments collateral
(23,868
)
—

—

(23,868
)
Other cash collateral
(83
)
—

—

(83
)
Net amounts
$
24,300

$
1,637

$
3,122

$
29,059

Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable
$
3,984


 
Liabilities
$ in millions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges
 
 
 
Interest rate
$
—

$
—

$
—

$
—

Foreign exchange
54

2

—

56

Total
54

2

—

56

Not designated as accounting hedges
 
 
Interest rate
245,978

10,698

1,313

257,989

Credit
9,556

3,630

—

13,186

Foreign exchange
109,225

3,336

181

112,742

Equity
39,606

—

53,764

93,370

Commodity and other
13,661

—

4,592

18,253

Total
418,026

17,664

59,850

495,540

Total gross derivatives
$
418,080

$
17,666

$
59,850

$
495,596

Amounts offset
 
 
 
 
Counterparty netting
(328,104
)
(16,673
)
(54,079
)
(398,856
)
Cash collateral netting
(55,307
)
(564
)
—

(55,871
)
Total in Trading liabilities
$
34,669

$
429

$
5,771

$
40,869

Amounts not offset1
 
 
 
 
Financial instruments collateral
(8,357
)
—

(3,825
)
(12,182
)
Other cash collateral
(34
)
(37
)
—

(71
)
Net amounts
$
26,278

$
392

$
1,946

$
28,616

Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable
5,601





 
At December 31, 2019
 
Assets
$ in millions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges
 
 
 
Interest rate
$
673

$
—

$
—

$
673

Foreign exchange
41

1

—

42

Total
714

1

—

715

Not designated as accounting hedges
 
 
Interest rate
179,450

4,839

519

184,808

Credit
4,895

2,417

—

7,312

Foreign exchange
62,957

1,399

22

64,378

Equity
27,621

—

23,447

51,068

Commodity and other
9,306

—

1,952

11,258

Total
284,229

8,655

25,940

318,824

Total gross derivatives
$
284,943

$
8,656

$
25,940

$
319,539

Amounts offset
 
 
 
 
Counterparty netting
(213,710
)
(7,294
)
(24,037
)
(245,041
)
Cash collateral netting
(41,222
)
(1,275
)
—

(42,497
)
Total in Trading assets
$
30,011

$
87

$
1,903

$
32,001

Amounts not offset1
 
 
 
 
Financial instruments collateral
(15,596
)
—

—

(15,596
)
Other cash collateral
(46
)
—

—

(46
)
Net amounts
$
14,369

$
87

$
1,903

$
16,359

Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable
$
1,900


 
Liabilities
$ in millions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges
 
 
 
Interest rate
$
1

$
—

$
—

$
1

Foreign exchange
121

38

—

159

Total
122

38

—

160

Not designated as accounting hedges
 
 
Interest rate
168,597

3,597

436

172,630

Credit
4,798

3,123

—

7,921

Foreign exchange
65,965

1,492

39

67,496

Equity
30,135

—

22,733

52,868

Commodity and other
7,713

—

1,911

9,624

Total
277,208

8,212

25,119

310,539

Total gross derivatives
$
277,330

$
8,250

$
25,119

$
310,699

Amounts offset
 
 
 
 
Counterparty netting
(213,710
)
(7,294
)
(24,037
)
(245,041
)
Cash collateral netting
(36,392
)
(832
)
—

(37,224
)
Total in Trading liabilities
$
27,228

$
124

$
1,082

$
28,434

Amounts not offset1
 
 
 
 
Financial instruments collateral
(7,747
)
—

(287
)
(8,034
)
Other cash collateral
(14
)
—

—

(14
)
Net amounts
$
19,467

$
124

$
795

$
20,386

Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable
$
3,680


1.
Amounts relate to master netting agreements and collateral agreements that have been determined by the Firm to be legally enforceable in the event of default but where certain other criteria are not met in accordance with applicable offsetting accounting guidance.

See Note 4 for information related to the unsettled fair value of futures contracts not designated as accounting hedges, which are excluded from the previous tables.

 
55
March 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

Notionals of Derivative Contracts
At March 31, 2020
 
Assets
$ in billions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges
Interest rate
$
10

$
144

$
—

$
154

Foreign exchange
5

2

—

7

Total
15

146

—

161

Not designated as accounting hedges
Interest rate
4,261

8,028

615

12,904

Credit
173

111

—

284

Foreign exchange
3,054

104

10

3,168

Equity
426

—

453

879

Commodity and other
111

—

72

183

Total
8,025

8,243

1,150

17,418

Total gross derivatives
$
8,040

$
8,389

$
1,150

$
17,579

 
Liabilities
$ in billions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges
Interest rate
$
—

$
43

$
—

$
43

Foreign exchange
6

—

—

6

Total
6

43

—

49

Not designated as accounting hedges
Interest rate
5,085

8,023

545

13,653

Credit
164

124

—

288

Foreign exchange
2,981

104

9

3,094

Equity
352

—

541

893

Commodity and other
89

—

69

158

Total
8,671

8,251

1,164

18,086

Total gross derivatives
$
8,677

$
8,294

$
1,164

$
18,135

















 
 
At December 31, 2019 
 
Assets
$ in billions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges
Interest rate
$
14

$
94

$
—

$
108

Foreign exchange
2

—

—

2

Total
16

94

—

110

Not designated as accounting hedges
Interest rate
4,230

7,398

732

12,360

Credit
136

79

—

215

Foreign exchange
2,667

91

10

2,768

Equity
429

—

419

848

Commodity and other
99

—

61

160

Total
7,561

7,568

1,222

16,351

Total gross derivatives
$
7,577

$
7,662

$
1,222

$
16,461

 
Liabilities
$ in billions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges
Interest rate
$
—

$
71

$
—

$
71

Foreign exchange
9

2

—

11

Total
9

73

—

82

Not designated as accounting hedges
Interest rate
4,185

6,866

666

11,717

Credit
153

84

—

237

Foreign exchange
2,841

91

14

2,946

Equity
455

—

515

970

Commodity and other
85

—

61

146

Total
7,719

7,041

1,256

16,016

Total gross derivatives
$
7,728

$
7,114

$
1,256

$
16,098


The Firm believes that the notional amounts of derivative contracts generally overstate its exposure. In most circumstances, notional amounts are used only as a reference point from which to calculate amounts owed between the parties to the contract. Furthermore, notional amounts do not reflect the benefit of legally enforceable netting arrangements or risk mitigating transactions.
For a discussion of the Firm's derivative instruments and hedging activities, see Note 5 to the financial statements in the 2019 Form 10-K.

March 2020 Form 10-Q
56
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

Gains (Losses) on Accounting Hedges
 
Three Months Ended
 
March 31,
$ in millions
2020
2019
Fair value hedges—Recognized in Interest income
 
Interest rate contracts
$
(64
)
$
(5
)
Investment Securities—AFS
65

5

Fair value hedges—Recognized in Interest expense
 
Interest rate contracts
$
6,667

$
1,577

Deposits1
(261
)
—

Borrowings
(6,432
)
(1,621
)
Net investment hedges—Foreign exchange contracts
 
Recognized in OCI
$
410

$
64

Forward points excluded from hedge effectiveness testing—Recognized in Interest income
33

35


Fair Value Hedges—Hedged Items 
$ in millions
At
March 31,
2020
At
December 31,
2019
Investment Securities—AFS
 
 
Carrying amount2 currently or previously hedged
$
1,969

$
917

Basis adjustments included in carrying amount3
$
77

$
14

Deposits1
 
 
Carrying amount currently or previously hedged
18,335

5,435

Basis adjustments included in carrying amount3
254

(7
)
Borrowings
 
 
Carrying amount currently or previously hedged
$
109,810

$
102,456

Basis adjustments included in carrying amount3
$
9,007

$
2,593


1.
The Firm began designating interest rate swaps as fair value hedges of certain Deposits in the fourth quarter of 2019.
2.
Carrying amount represents amortized cost basis for AFS securities.
3.
Hedge accounting basis adjustments are primarily related to outstanding hedges.
Net Derivative Liabilities and Collateral Posted
$ in millions
At
March 31,
2020
At
December 31,
2019
Net derivative liabilities with credit risk-related contingent features
$
33,064

$
21,620

Collateral posted
28,502

17,392


The previous table presents the aggregate fair value of certain derivative contracts that contain credit risk-related contingent features that are in a net liability position for which the Firm has posted collateral in the normal course of business.
 
Incremental Collateral and Termination Payments upon Potential Future Ratings Downgrade
$ in millions
At
March 31,
2020
One-notch downgrade
$
325

Two-notch downgrade
377

Bilateral downgrade agreements included in the amounts above1
$
614

 
1.
Amount represents arrangements between the Firm and other parties where upon the downgrade of one party, the downgraded party must deliver collateral to the other party. These bilateral downgrade arrangements are used by the Firm to manage the risk of counterparty downgrades.
The additional collateral or termination payments that may be called in the event of a future credit rating downgrade vary by contract and can be based on ratings by either or both of Moody’s Investors Service, Inc. (“Moody’s”) and S&P Global Ratings. The previous table shows the future potential collateral amounts and termination payments that could be called or required by counterparties or exchange and clearing organizations in the event of one-notch or two-notch downgrade scenarios based on the relevant contractual downgrade triggers.
Maximum Potential Payout/Notional of Credit Protection Sold1 
 
Years to Maturity at March 31, 2020
$ in billions
< 1
1-3
3-5
Over 5
Total
Single-name CDS
 
 
 
 
 
Investment grade
$
13

$
17

$
34

$
13

$
77

Non-investment grade
9

9

16

5

39

Total
$
22

$
26

$
50

$
18

$
116

Index and basket CDS
 
 
 
Investment grade
$
5

$
8

$
65

$
34

$
112

Non-investment grade
7

5

21

17

50

Total
$
12

$
13

$
86

$
51

$
162

Total CDS sold
$
34

$
39

$
136

$
69

$
278

Other credit contracts
—

—

—

—

—

Total credit protection sold
$
34

$
39

$
136

$
69

$
278

CDS protection sold with identical protection purchased
$
242

 
Years to Maturity at December 31, 2019
$ in billions
< 1
1-3
3-5
Over 5
Total
Single-name CDS
 
 
 
 
 
Investment grade
$
16

$
17

$
33

$
9

$
75

Non-investment grade
9

9

16

1

35

Total
$
25

$
26

$
49

$
10

$
110

Index and basket CDS
 
 
 
Investment grade
$
4

$
7

$
46

$
11

$
68

Non-investment grade
7

4

17

10

38

Total
$
11

$
11

$
63

$
21

$
106

Total CDS sold
$
36

$
37

$
112

$
31

$
216

Other credit contracts
—

—

—

—

—

Total credit protection sold
$
36

$
37

$
112

$
31

$
216

CDS protection sold with identical protection purchased
$
187


 
57
March 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

Fair Value Asset (Liability) of Credit Protection Sold1 
$ in millions
At
March 31,
2020
At
December 31,
2019
Single-name CDS
 
 
Investment grade
$
(963
)
$
1,057

Non-investment grade
(3,350
)
(540
)
Total
$
(4,313
)
$
517

Index and basket CDS
 
 
Investment grade
$
(693
)
$
1,052

Non-investment grade
(4,849
)
134

Total
$
(5,542
)
$
1,186

Total CDS sold
$
(9,855
)
$
1,703

Other credit contracts
(4
)
(17
)
Total credit protection sold
$
(9,859
)
$
1,686

 
1.
Investment grade/non-investment grade determination is based on the internal credit rating of the reference obligation. Internal credit ratings serve as the Credit Risk Management Department’s assessment of credit risk and the basis for a comprehensive credit limits framework used to control credit risk. The Firm uses quantitative models and judgment to estimate the various risk parameters related to each obligor.
Protection Purchased with CDS
 
Notional
$ in billions
At
March 31,
2020
At
December 31,
2019
Single name
$
123

$
118

Index and basket
153

103

Tranched index and basket
18

15

Total
$
294

$
236

 
Fair Value Asset (Liability)
$ in millions
At
March 31,
2020
At
December 31,
2019
Single name
$
4,152

$
(723
)
Index and basket
5,176

(1,139
)
Tranched index and basket
699

(450
)
Total
$
10,027

$
(2,312
)
 
The Firm enters into credit derivatives, principally CDS, under which it receives or provides protection against the risk of default on a set of debt obligations issued by a specified reference entity or entities. A majority of the Firm’s counterparties for these derivatives are banks, broker-dealers, and insurance and other financial institutions.

The fair value amounts as shown in the previous tables are prior to cash collateral or counterparty netting. For further information on credit derivatives and other contracts, see Note 5 to the financial statements in the 2019 Form 10-K.







 




















 

March 2020 Form 10-Q
58
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

7. Investment Securities
AFS and HTM Securities
 
At March 31, 2020
$ in millions
Amortized
Cost1
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair 
Value
AFS securities
 
 
 
 
U.S. government and agency securities:
 
 
U.S. Treasury securities
$
34,600

$
1,298

$
—

$
35,898

U.S. agency securities2
22,687

717

82

23,322

Total U.S. government and agency securities
57,287

2,015

82

59,220

Corporate and other debt:
 
 
 
 
Agency CMBS
4,765

244

8

5,001

Corporate bonds
1,828

16

35

1,809

State and municipal securities
1,453

48

48

1,453

FFELP student loan ABS3
1,535

—

147

1,388

Total corporate and other debt
9,581

308

238

9,651

Total AFS securities
66,868

2,323

320

68,871

HTM securities
 
 
 
 
U.S. government and agency securities:
 
 
U.S. Treasury securities
29,951

2,256

—

32,207

U.S. agency securities2
16,542

607

—

17,149

Total U.S. government and agency securities
46,493

2,863

—

49,356

Corporate and other debt:
 
 
 
 
Non-agency CMBS
793

4

20

777

Total HTM securities
47,286

2,867

20

50,133

Total investment securities
$
114,154

$
5,190

$
340

$
119,004


 
 

 
 
At December 31, 2019
$ in millions
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair 
Value
AFS securities
 
 
 
 
U.S. government and agency securities:
 
 
U.S. Treasury securities
$
32,465

$
224

$
111

$
32,578

U.S. agency securities2
20,725

249

100

20,874

Total U.S. government and agency securities
53,190

473

211

53,452

Corporate and other debt:
 
 
 
 
Agency CMBS
4,810

55

57

4,808

Corporate bonds
1,891

17

1

1,907

State and municipal securities
481

22

—

503

FFELP student loan ABS3
1,580

1

28

1,553

Total corporate and other debt
8,762

95

86

8,771

Total AFS securities
61,952

568

297

62,223

HTM securities
 
 
 
 
U.S. government and agency securities:
 
 
U.S. Treasury securities
30,145

568

52

30,661

U.S. agency securities2
12,589

151

57

12,683

Total U.S. government and agency securities
42,734

719

109

43,344

Corporate and other debt:
 
 
 
 
Non-agency CMBS
768

22

1

789

Total HTM securities
43,502

741

110

44,133

Total investment securities
$
105,454

$
1,309

$
407

$
106,356

 
1.
Amounts are net of any allowance for credit losses.
2.
U.S. agency securities consist mainly of agency-issued debt, agency mortgage pass-through pool securities and CMOs.
3.
Underlying loans are backed by a guarantee, ultimately from the U.S. Department of Education, of at least 95% of the principal balance and interest outstanding.

In the current quarter, the Firm transferred certain municipal securities from Trading assets into AFS securities as a result of a change in intent due to the severe deterioration in liquidity for these instruments. At March 31, 2020, these securities had a fair value of $441 million.




 
59
March 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

Investment Securities in an Unrealized Loss Position
 
At March 31, 2020
 
Less than 12 Months
12 Months or Longer
Total
$ in millions
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
AFS securities
 
 
 
 
 
 
U.S. agency securities
$
931

$
7

$
3,892

$
75

$
4,823

$
82

Corporate and other debt:
 
 
 
 
 
 
Agency CMBS
30

—

670

8

700

8

Corporate bonds
747

24

58

11

805

35

State and municipal securities
678

48

—

—

678

48

FFELP student loan ABS
349

29

1,038

118

1,387

147

Total corporate and other debt
1,804

101

1,766

137

3,570

238

Total AFS securities
$
2,735

$
108

$
5,658

$
212

$
8,393

$
320

 
At December 31, 2019
 
Less than 12 Months
12 Months or Longer
Total
$ in millions
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
AFS securities
 
 
 
 
 
 
U.S. government and agency securities:
 
 
 
 
 
 
U.S. Treasury securities
$
4,793

$
28

$
7,904

$
83

$
12,697

$
111

U.S. agency securities
2,641

20

7,697

80

10,338

100

Total U.S. government and agency securities
7,434

48

15,601

163

23,035

211

Corporate and other debt:
 
 
 
 
 
 
Agency CMBS
2,294

26

681

31

2,975

57

Corporate bonds
194

1

44

—

238

1

FFELP student loan ABS
91

—

1,165

28

1,256

28

Total corporate and other debt
2,579

27

1,890

59

4,469

86

Total AFS securities
10,013

75

17,491

222

27,504

297

HTM securities
 
 
 
 
 
 
U.S. government and agency securities:
 
 
 
 
 
 
U.S. Treasury securities
6,042

52

651

—

6,693

52

U.S. agency securities
2,524

18

2,420

39

4,944

57

Total U.S. government and agency securities
8,566

70

3,071

39

11,637

109

Corporate and other debt:
 
 
 
 
 
 
Non-agency CMBS
167

1

65

—

232

1

Total HTM securities
8,733

71

3,136

39

11,869

110

Total investment securities
$
18,746

$
146

$
20,627

$
261

$
39,373

$
407



For AFS securities, the Firm believes there are no securities in an unrealized loss position that have credit losses after performing the analysis described in Note 2. Additionally, the Firm does not intend to sell the securities and is not likely to be required to sell the securities prior to recovery of the amortized cost basis. Furthermore, the securities have not experienced credit losses as they are predominantly investment-grade and the Firm expects to recover the amortized cost basis.

 
As of March 31, 2020, the HTM securities net carrying amount reflects an amortized cost of $47,312 million less an allowance for credit losses of $26 million related to Non-agency CMBS. See Note 2 for a description of the ACL methodology used beginning in 2020 following the Firm's adoption of CECL and see Note 2 to the financial statements in the 2019 Form 10-K for prior period credit loss considerations. There were no securities in an unrealized loss position as of December 31, 2019 that had credit losses. As of March 31, 2020, and December 31, 2019, Non-Agency CMBS HTM securities were all on accrual status and were predominantly investment-grade.
See Note 14 for additional information on securities issued by VIEs, including U.S. agency mortgage-backed securities, non-agency CMBS and FFELP student loan ABS.

March 2020 Form 10-Q
60
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

Investment Securities by Contractual Maturity
 
At March 31, 2020
$ in millions
Amortized
Cost1
Fair
Value
Annualized
Average
Yield
AFS securities
 
 
 
U.S. government and agency securities:
U.S. Treasury securities:
 
 
 
Due within 1 year
$
3,728

$
3,770

2.0
%
After 1 year through 5 years
27,748

28,791

1.7
%
After 5 years through 10 years
3,124

3,337

1.6
%
Total
34,600

35,898

 
U.S. agency securities:
 
 
 
Due within 1 year
235

236

0.8
%
After 1 year through 5 years
78

78

1.4
%
After 5 years through 10 years
1,293

1,322

1.8
%
After 10 years
21,081

21,686

2.3
%
Total
22,687

23,322

 
Total U.S. government and agency securities
57,287

59,220

1.9
%
Corporate and other debt:
 
 
 
Agency CMBS:
 
 
 
After 1 year through 5 years
599

605

1.8
%
After 5 years through 10 years
3,273

3,488

2.5
%
After 10 years
893

908

2.0
%
Total
4,765

5,001

 
Corporate bonds:
 
 
 
Due within 1 year
44

44

2.3
%
After 1 year through 5 years
1,439

1,439

2.6
%
After 5 years through 10 years
345

326

2.9
%
Total
1,828

1,809

 
State and municipal securities:
 
 
 
After 1 year through 5 years
2

2

3.4
%
After 5 years through 10 years
139

142

3.1
%
After 10 Years
1,312

1,309

2.8
%
Total
1,453

1,453

 
FFELP student loan ABS:
 
 
 
After 1 year through 5 years
98

87

0.8
%
After 5 years through 10 years
307

270

0.9
%
After 10 years
1,130

1,031

1.2
%
Total
1,535

1,388

 
Total corporate and other debt
9,581

9,651

2.3
%
Total AFS securities
66,868

68,871

2.0
%
 
 
 
 
 
 
 
 
 
 
At March 31, 2020
$ in millions
Amortized
Cost1
Fair
Value
Annualized
Average
Yield
HTM securities
 
 
 
U.S. government and agency securities:
U.S. Treasury securities:
 
 
 
Due within 1 year
3,282

3,332

2.6
%
After 1 year through 5 years
17,769

18,733

2.0
%
After 5 years through 10 years
7,818

8,777

2.2
%
After 10 years
1,082

1,365

2.5
%
Total
29,951

32,207

 
U.S. agency securities:
 
 
 
After 5 years through 10 years
50

51

1.8
%
After 10 years
16,492

17,098

2.4
%
Total
16,542

17,149

 
Total U.S. government and agency securities
46,493

49,356

2.2
%
Corporate and other debt:
 
 
 
Non-agency CMBS:
 
 
 
Due within 1 year
100

99

4.8
%
After 1 year through 5 years
107

104

3.7
%
After 5 years through 10 years
549

536

3.9
%
After 10 years
37

38

4.4
%
Total corporate and other debt
793

777

4.0
%
Total HTM securities
47,286

50,133

2.3
%
Total investment securities
$
114,154

$
119,004

2.1
%
1.
Amounts are net of any allowance for credit losses.
Gross Realized Gains (Losses) on Sales of AFS Securities
 
Three Months Ended
March 31,
$ in millions
2020
2019
Gross realized gains
$
49

$
19

Gross realized (losses)
(8
)
(9
)
Total1
$
41

$
10

 
1.
Realized gains and losses are recognized in Other revenues in the income statements.

 

 
61
March 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

8. Collateralized Transactions
Offsetting of Certain Collateralized Transactions
 
At March 31, 2020
$ in millions
Gross
Amounts
Amounts
Offset
Net
Amounts
Presented
Amounts
Not Offset1
Net
Amounts
Assets
 
 
 
 
 
Securities purchased under agreements to resell
$
249,124

$
(144,324
)
$
104,800

$
(98,800
)
$
6,000

Securities borrowed
76,276

(3,976
)
72,300

(67,384
)
4,916

Liabilities
 
 
 
 
 
Securities sold under agreements to repurchase
$
189,937

$
(144,121
)
$
45,816

$
(39,114
)
$
6,702

Securities loaned
15,810

(4,179
)
11,631

(11,241
)
390

Net amounts for which master netting agreements are not in place or may not be legally enforceable
Securities purchased under agreements to resell
$
5,403

Securities borrowed
 
 
1,010

Securities sold under agreements to repurchase
 
5,325

Securities loaned
 
 
 
 
134

 
At December 31, 2019
$ in millions
Gross
Amounts
Amounts
Offset
Net
Amounts
Presented
Amounts
Not Offset1
Net
Amounts
Assets
 
 
 
 
 
Securities purchased under agreements to resell
$
247,545

$
(159,321
)
$
88,224

$
(85,200
)
$
3,024

Securities borrowed
109,528

(2,979
)
106,549

(101,850
)
4,699

Liabilities
 
 
 
 
 
Securities sold under agreements to repurchase
$
213,519

$
(159,319
)
$
54,200

$
(44,549
)
$
9,651

Securities loaned
11,487

(2,981
)
8,506

(8,324
)
182

Net amounts for which master netting agreements are not in place or may not be legally enforceable
Securities purchased under agreements to resell
$
2,255

Securities borrowed
 
 
1,181

Securities sold under agreements to repurchase
 
8,033

Securities loaned
 
 
 
 
101

1.
Amounts relate to master netting agreements that have been determined by the Firm to be legally enforceable in the event of default but where certain other criteria are not met in accordance with applicable offsetting accounting guidance.
For further discussion of the Firm’s collateralized transactions, see Note 7 to the financial statements in the 2019 Form 10-K. For information related to offsetting of derivatives, see Note 6.


 
Gross Secured Financing Balances by Remaining Contractual Maturity
 
At March 31, 2020
$ in millions
Overnight
and Open
Less than
30 Days
30-90
Days
Over
90 Days
Total
Securities sold under agreements to repurchase
$
65,591

$
60,940

$
25,746

$
37,660

$
189,937

Securities loaned
6,824

214

2,034

6,738

15,810

Total included in the offsetting disclosure
$
72,415

$
61,154

$
27,780

$
44,398

$
205,747

Trading liabilities—
Obligation to return securities received as collateral
15,270

—

—

—

15,270

Total
$
87,685

$
61,154

$
27,780

$
44,398

$
221,017

 
At December 31, 2019
$ in millions
Overnight
and Open
Less than
30 Days
30-90
Days
Over
90 Days
Total
Securities sold under agreements to repurchase
$
67,158

$
81,300

$
26,904

$
38,157

$
213,519

Securities loaned
2,378

3,286

516

5,307

11,487

Total included in the offsetting disclosure
$
69,536

$
84,586

$
27,420

$
43,464

$
225,006

Trading liabilities—
Obligation to return securities received as collateral
23,877

—

—

—

23,877

Total
$
93,413

$
84,586

$
27,420

$
43,464

$
248,883

Gross Secured Financing Balances by Class of Collateral Pledged
$ in millions
At
March 31,
2020
At
December 31,
2019
Securities sold under agreements to repurchase
U.S. Treasury and agency securities
$
77,557

$
68,895

State and municipal securities
689

905

Other sovereign government obligations
88,871

109,414

ABS
2,278

2,218

Corporate and other debt
7,369

6,066

Corporate equities
12,710

25,563

Other
463

458

Total
$
189,937

$
213,519

Securities loaned
 
 
Other sovereign government obligations
$
4,876

$
3,026

Corporate equities
10,277

8,422

Other
657

39

Total
$
15,810

$
11,487

Total included in the offsetting disclosure
$
205,747

$
225,006

Trading liabilities—Obligation to return securities received as collateral
Corporate equities
$
15,263

$
23,873

Other
7

4

Total
$
15,270

$
23,877

Total
$
221,017

$
248,883




March 2020 Form 10-Q
62
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

Carrying Value of Assets Loaned or Pledged without Counterparty Right to Sell or Repledge
$ in millions
At
March 31,
2020
At
December 31,
2019
Trading assets
$
40,345

$
41,201

Loans (before allowance for credit losses)
1,158

750

Total
$
41,503

$
41,951


The Firm pledges certain of its trading assets and loans to collateralize securities sold under agreements to repurchase, securities loaned, other secured financings and derivatives and to cover customer short sales. Counterparties may or may not have the right to sell or repledge the collateral.
Pledged financial instruments that can be sold or repledged by the secured party are identified as Trading assets (pledged to various parties) in the balance sheets.
Fair Value of Collateral Received with Right to Sell or Repledge 
$ in millions
At
March 31,
2020
At
December 31,
2019
Collateral received with right to sell
or repledge
$
604,450

$
679,280

Collateral that was sold or repledged1
483,708

539,412

1.
Does not include securities used to meet federal regulations for the Firm’s U.S. broker-dealers.
Segregated Securities 
$ in millions
At
March 31,
2020
At
December 31,
2019
Segregated securities1
35,491

25,061

1.
Securities segregated under federal regulations for the Firm’s U.S. broker-dealers are sourced from Securities purchased under agreements to resell and Trading assets in the balance sheets.
The Firm receives collateral in the form of securities in connection with securities purchased under agreements to resell, securities borrowed, securities-for-securities transactions, derivative transactions, customer margin loans and securities-based lending. In many cases, the Firm is permitted to sell or repledge this collateral to secure securities sold under agreements to repurchase, to enter into securities lending and derivative transactions or for delivery to counterparties to cover short positions.
Customer Margin Lending
$ in millions
At
March 31,
2020
At
December 31,
2019
Customer receivables representing margin loans
$
26,181

$
31,916


The Firm provides margin lending arrangements which allow customers to borrow against the value of qualifying securities. Receivables under margin lending arrangements are included
 
within Customer and other receivables in the balance sheets. Under these agreements and transactions, the Firm receives collateral, which includes U.S. government and agency securities, other sovereign government obligations, corporate and other debt, and corporate equities. Customer receivables generated from margin lending activities are collateralized by customer-owned securities held by the Firm. The Firm monitors required margin levels and established credit terms daily and, pursuant to such guidelines, requires customers to deposit additional collateral, or reduce positions, when necessary.
For a further discussion of the Firm’s margin lending activities, see Note 7 to the financial statements in the 2019 Form 10-K.
The Firm has additional secured liabilities. For a further discussion of other secured financings, see Note 12.
9. Loans, Lending Commitments and Related Allowance for Credit Losses
Loans by Type
 
At March 31, 2020
$ in millions
Loans Held
for Investment
Loans Held
for Sale
Total Loans
Corporate1
$
61,474

$
15,525

$
76,999

Consumer2
31,948

—

31,948

Residential real estate
31,100

14

31,114

Commercial real estate
7,430

1,823

9,253

Total loans, before allowance
131,952

17,362

149,314

Allowance for credit losses
(617
)
—

(617
)
Total loans, net
$
131,335

$
17,362

$
148,697

Fixed rate loans, net
 
 
$
25,155

Floating or adjustable rate loans, net
 
123,542

Loans to non-U.S. borrowers, net
 
24,633


 
63
March 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

 
At December 31, 2019
$ in millions
Loans Held
for Investment
Loans Held
for Sale
Total Loans
Corporate1
$
48,756

$
10,515

$
59,271

Consumer2
31,610

—

31,610

Residential real estate
30,184

13

30,197

Commercial real estate
7,859

2,049

9,908

Total loans, before allowance
118,409

12,577

130,986

Allowance for credit losses
(349
)
—

(349
)
Total loans, net
$
118,060

$
12,577

$
130,637

Fixed rate loans, net
 
 
$
22,716

Floating or adjustable rate loans, net
 
107,921

Loans to non-U.S. borrowers, net
 
21,617


1.
Institutional Securities business segment Corporate loans include relationship and event-driven loans, secured lending facilities and securities-based lending and other loans. Wealth Management business segment Corporate loans include securities-based and other loans, which are classified as Corporate based on the nature of the borrowing entity or the intended use of the loan proceeds.
2.
Wealth Management business segment Consumer loans include securities-based lending and other loans.

Loans Held for Investment before Allowance by Origination Year
 
At March 31, 2020
 
Corporate
$ in millions
AA-A
BBB
BB
Other NIG
Total
Revolving Loans
$
3,418

$
16,474

$
19,772

$
8,193

$
47,857

2020 YTD
122

671

456

23

1,272

2019
631

1,234

1,940

444

4,249

2018
37

2,083

1,096

493

3,709

2017
358

639

500

82

1,579

2016
74

547

505

60

1,186

Prior
641

311

595

75

1,622

Total
$
5,281

$
21,959

$
24,864

$
9,370

$
61,474

 
At March 31, 2020
$ in millions
Consumer1
Revolving Loans
$
31,362

2020 YTD
62

2019
382

2018
—

2017
16

2016
57

Prior
69

Total
$
31,948

1.
Consumer loans primarily comprise securities-based loans, which are subject to collateral maintenance provisions, and at March 31, 2020, these loans are predominantly over-collateralized. For more information on the ACL methodology related to Consumer loans, see Note 2.

 
 
At March 31, 2020
 
Residential Real Estate
 
by FICO Scores
 
by LTV Ratio
 
Total
$ in millions
≥ 740
680-739
≤ 679
 
≤ 80%
> 80%
 
Revolving Loans
$
103

$
40

$
6

 
$
149

$
—

 
$
149

2020 YTD
1,865

369

35

 
2,143

126

 
2,269

2019
6,239

1,397

179

 
7,290

525

 
7,815

2018
2,699

770

90

 
3,277

282

 
3,559

2017
3,248

817

116

 
3,882

299

 
4,181

2016
3,924

1,074

152

 
4,804

346

 
5,150

Prior
5,659

1,963

355

 
7,101

876

 
7,977

Total
$
23,737

$
6,430

$
933

 
$
28,646

$
2,454

 
$
31,100

 
At March 31, 2020
 
Commercial Real Estate
$ in millions
AA-A
BBB
BB
Other NIG
Total
Revolving Loans
$
5

$
—

$
—

$
—

$
5

2020 YTD
—

—

167

23

190

2019
—

539

2,056

360

2,955

2018
10

723

764

421

1,918

2017
—

217

577

344

1,138

2016
134

100

352

172

758

Prior
10

—

285

171

466

Total
$
159

$
1,579

$
4,201

$
1,491

$
7,430

YTD–Year to date


Past Due Status of Loans Held for Investment before Allowance
 
At March 31, 2020
$ in millions
Corporate
Consumer
Residential Real Estate
Commercial Real Estate
Current
$
61,466

$
31,948

$
30,883

$
7,430

Past due1
8

—

217

—

Total
$
61,474

$
31,948

$
31,100

$
7,430

1.
The majority of the amounts are less than 60 days past due as of March 31, 2020.

See Note 2 for a description of the ACL calculated under the CECL methodology, including credit quality indicators, used for HFI loans beginning in 2020.
Loans Held for Investment before Allowance1 
 
At December 31, 2019
$ in millions
Corporate
Consumer
Residential
Real Estate
Commercial
Real Estate
Total
Pass
$
47,681

$
31,605

$
30,060

$
7,664

$
117,010

Special mention
464

—

28

3

495

Substandard
605

5

96

192

898

Doubtful
6

—

—

—

6

Total
$
48,756

$
31,610

$
30,184

$
7,859

$
118,409

1.
There were no loans held for investment considered Loss as of December 31, 2019.

March 2020 Form 10-Q
64
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

Impaired Loans and Lending Commitments before Allowance
 
At December 31, 2019
$ in millions
Corporate
Consumer
Residential
Real Estate
Commercial Real Estate
Total
Loans
 
 
 
 
 
With allowance
$
268

$
—

$
—

$
85

$
353

Without allowance1
32

5

87

—

124

Total impaired loans
$
300

$
5

$
87

$
85

$
477

UPB
309

5

90

85

489

Lending commitments
 
 
 

With allowance
$
4

$
—

$
—

$
14

$
18

Without allowance1
32

—

—

—

32

Total impaired lending commitments
$
36

$
—

$
—

$
14

$
50


 
1.
No allowance was recorded for these loans and lending commitments as the present value of the expected future cash flows or value of the collateral equaled or exceeded the carrying value.
Loans and lending commitments in the previous table were evaluated for a specific allowance. All remaining loans and lending commitments were assessed under the inherent allowance methodology.
Impaired Loans before Allowance and Total Allowance by Region
 
At December 31, 2019
$ in millions
Americas

EMEA

Asia

Total

Impaired loans
$
392

$
85

$
—

$
477

Total Allowance for credit losses
270

76

3

349

Troubled Debt Restructurings
$ in millions
At
March 31,
2020
At
December 31,
2019
Loans, before allowance
$
132

$
92

Lending commitments
33

32

Allowance for credit losses on Loans and Lending commitments
26

16

Troubled debt restructurings typically include modifications of interest rates, collateral requirements, other loan covenants and payment extensions. As of December 31, 2019, impaired loans and lending commitments classified as held for investment within corporate loans include TDRs. See Note 2 for further information on TDR guidance issued by Congress in the CARES Act as well as by the U.S. banking agencies.
For a discussion of the Firm’s ACL methodology under the prior incurred loss model, including credit quality indicators, used for HFI loans as of December 31, 2019, and a further discussion of the Firm's loans, including loan types and categories, see Notes 2 and 8 in the 2019 Form 10-K.
 
Allowance for Credit Losses Rollforward—Loans
$ in millions
Corporate
Consumer
Residential
Real Estate
Commercial
Real Estate
Total
December 31, 2019
$
241

$
8

$
25

$
75

$
349

Effect of CECL adoption
(31
)
(6
)
21

25

9

Gross charge-offs
(32
)
—

—

—

(32
)
Provision (release)
215

1

1

75

292

Other
—

—

—

(1
)
(1
)
March 31, 2020
$
393

$
3

$
47

$
174

$
617

$ in millions
Corporate
Consumer
Residential
Real Estate
Commercial
Real Estate
Total
December 31, 2018
$
144

$
7

$
20

$
67

$
238

Provision (release)
26

(1
)
2

—

27

Other
(6
)
—

—

—

(6
)
March 31, 2019
$
164

$
6

$
22

$
67

$
259

Inherent
$
150

$
6

$
22

$
67

$
245

Specific
14

—

—

—

14


Allowance for Credit Losses Rollforward—Lending Commitments
$ in millions
Corporate
Consumer
Residential
Real Estate
Commercial
Real Estate
Total
December 31, 2019
$
232

$
2

$
—

$
7

$
241

Effect of CECL adoption
(53
)
(1
)
3

1

(50
)
Provision (release)
110

—

—

5

115

Other
(1
)
—

—

(1
)
(2
)
March 31, 2020
$
288

$
1

$
3

$
12

$
304

$ in millions
Corporate
Consumer
Residential
Real Estate
Commercial
Real Estate
Total
December 31, 2018
$
198

$
2

$
—

$
3

$
203

Provision (release)
8

—

—

1

9

Other
—

(1
)
—

—

(1
)
March 31, 2019
$
206

$
1

$
—

$
4

$
211

Inherent
$
202

$
1

$
—

$
4

$
207

Specific
4

—

—

—

4


The aggregate allowance for loans and lending commitments increased in the current quarter, principally reflecting a provision for credit losses within the Institutional Securities business segment resulting from the economic impact of COVID-19. This provision was primarily the result of higher actual and expected future downgrades, an increase in funded balances, principally in Corporate relationship and event-driven loans, as well as revisions to our forecasts in light of current and expected future market and macroeconomic conditions. For a further discussion of the Firm’s loans, including loan types and categories, as well as the Firm’s allowance methodology prior to the adoption of CECL, refer to Notes 2 and 8 to the financial statements in the 2019 Form 10-K. See Note 4 for further

 
65
March 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

information regarding Loans and lending commitments held at fair value. See Note 13 for details of current commitments to lend in the future.
Employee Loans
$ in millions
At
March 31,
2020
At
December 31,
2019
Currently employed by the Firm1
$
2,867

N/A

No longer employed by the Firm2
150

N/A

Balance
$
3,017

$
2,980

Allowance for credit losses3
(180
)
(61
)
Balance, net
$
2,837

$
2,919

Remaining repayment term, weighted average in years
5.0

4.8

1.
These loans are predominantly current.
2.
These loans are predominantly past due for a period of 90 days or more.
3.
The change in Allowance for credit losses includes a $124 million increase due to the adoption of CECL in the first quarter of 2020.
Employee loans are granted in conjunction with a program established primarily to recruit certain Wealth Management representatives, are full recourse and generally require periodic repayments, and are due in full upon termination of employment with the Firm. These loans are recorded in Customer and other receivables in the balance sheets. The allowance for credit losses as of March 31, 2020 was calculated under the CECL methodology, while the allowance for credit losses at December 31, 2019 was calculated under the prior incurred loss model. The related provision is recorded in Compensation and benefits expense in the income statements. See Note 2 for a description of the CECL allowance methodology, including credit quality indicators, for employee loans.



March 2020 Form 10-Q
66
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

10. Other Assets—Equity Method Investments
Equity Method Investments
$ in millions
At
March 31,
2020
At
December 31,
2019
Investments
$
2,413

$
2,363

 
Three Months Ended
March 31,
$ in millions
2020
2019
Income (loss)
$
29

$
(10
)

Equity method investments, other than investments in certain fund interests, are summarized above and are included in Other assets in the balance sheets with related income or loss included in Other revenues in the income statements. See “Net Asset Value Measurements—Fund Interests” in Note 4 for the carrying value of certain of the Firm’s fund interests, which are comprised of general and limited partnership interests, as well as any related carried interest.
Japanese Securities Joint Venture
 
Three Months Ended
March 31,
$ in millions
2020
2019
Income (loss) from investment in MUMSS
$
32

$
3


The Firm and Mitsubishi UFJ Financial Group, Inc. (“MUFG”) formed a joint venture in Japan comprising their respective investment banking and securities businesses by forming two joint venture companies, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (“MUMSS”) and Morgan Stanley MUFG Securities Co., Ltd. (“MSMS”) (the “Joint Venture”). The Firm owns a 40% economic interest in the Joint Venture and MUFG owns the other 60%.
The Firm’s 40% voting interest in MUMSS is accounted for under the equity method within the Institutional Securities business segment, and is included in the equity method investment balances above. The Firm consolidates MSMS into the Institutional Securities business segment, based on its 51% voting interest.
The Firm engages in transactions in the ordinary course of business with MUFG and its affiliates, for example investment banking, financial advisory, sales and trading, derivatives, investment management, lending, securitization and other financial services transactions. Such transactions are on substantially the same terms as those that would be available to unrelated third parties for comparable transactions.
 
11. Deposits
Deposits
$ in millions
At
March 31,
2020
At
December 31,
2019
Savings and demand deposits
$
188,504

$
149,465

Time deposits
46,735

40,891

Total
$
235,239

$
190,356

Deposits subject to FDIC insurance
$
176,034

$
149,966

Time deposits that equal or exceed the FDIC insurance limit
$
12

$
12


Time Deposit Maturities
$ in millions
At
March 31,
2020
2020
$
16,656

2021
16,836

2022
4,883

2023
4,070

2024
2,788

Thereafter
1,502

Total
$
46,735



   
12. Borrowings and Other Secured Financings
Borrowings
$ in millions
At
March 31,
2020
At
December 31,
2019
Original maturities of one year or less
$
2,211

$
2,567

Original maturities greater than one year
Senior
$
181,477

$
179,519

Subordinated
11,168

10,541

Total
$
192,645

$
190,060

Total borrowings
$
194,856

$
192,627

Weighted average stated maturity, in years1
7.6

6.9


1.
Only includes borrowings with original maturities greater than one year.
 

 
67
March 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

Other Secured Financings
$ in millions
At
March 31,
2020
At
December 31,
2019
Original maturities:
 
 
One year or less
$
7,304

$
7,103

Greater than one year
4,682

6,480

Transfers of assets accounted for as secured financings
1,072

1,115

Total
$
13,058

$
14,698



Other secured financings include the liabilities related to certain ELNs, transfers of financial assets that are accounted for as financings rather than sales, pledged commodities, consolidated VIEs where the Firm is deemed to be the primary beneficiary and other secured borrowings. These liabilities are generally payable from the cash flows of the related assets accounted for as Trading assets. See Note 14 for further information on other secured financings related to VIEs and securitization activities.
For transfers of assets that fail to meet accounting criteria for a sale, the Firm continues to record the assets and recognizes the associated liabilities in the balance sheets.
13. Commitments, Guarantees and Contingencies
Commitments
 
Years to Maturity at March 31, 2020
 
$ in millions
Less than 1
1-3
3-5
Over 5
Total
Lending:
 
 
 
 
Corporate
$
23,055

$
28,998

$
41,269

$
3,174

$
96,496

Consumer
8,112

23

3

—

8,138

Residential and commercial
real estate
163

1,179

49

252

1,643

Forward-starting secured financing receivables
80,666

219

—

—

80,885

Central counterparty1
300

—

—

12,344

12,644

Underwriting
206

—

—

—

206

Investment activities
992

226

58

265

1,541

Letters of credit and other financial guarantees
174

2

—

2

178

Total
$
113,668

$
30,647

$
41,379

$
16,037

$
201,731

Corporate lending commitments participated to third parties
$
7,226

Forward-starting secured financing receivables settled within three business days
$
71,096


1.
Beginning in the first quarter of 2020, commitments to central counterparties are presented separately; these commitments were previously included in Corporate Lending commitments and Forward-starting secured financing receivables depending on the type of agreement. These commitments relate to the Firm's membership in certain clearinghouses and are contingent upon the default of a clearinghouse member or other stress events.
 
Since commitments associated with these instruments may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.
For a further description of these commitments, refer to Note 13 to the financial statements in the 2019 Form 10-K.
Guarantees
Maximum Potential Payout/Notional of Obligations under Guarantee Arrangements
 
Years to Maturity at March 31, 2020
$ in millions
Less than 1
1-3
3-5
Over 5
Total
Credit derivatives
$
33,900

$
38,934

$
136,167

$
68,581

$
277,582

Other credit contracts
—

—

—

107

107

Non-credit derivatives
1,571,566

1,474,498

902,550

769,204

4,717,818

Standby letters of credit and other financial guarantees issued1
1,200

1,006

1,301

3,840

7,347

Market value guarantees
102

35

—

—

137

Liquidity facilities
4,047

—

—

—

4,047

Whole loan sales guarantees
—

—

2

23,193

23,195

Securitization representations and warranties
—

—

—

68,881

68,881

General partner guarantees
59

137

12

92

300

Client clearing guarantees
17

—

—

—

17

$ in millions
Carrying Amount Asset (Liability)
Credit derivatives2
$
(9,855
)
Other credit contracts
(4
)
Non-credit derivatives2
(146,854
)
Standby letters of credit and other financial guarantees issued1
111

Market value guarantees
—

Liquidity facilities
6

Whole loan sales guarantees
—

Securitization representations and warranties3
(42
)
General partner guarantees
(62
)
Client clearing guarantees
—


1.
These amounts include certain issued standby letters of credit participated to third parties, totaling $0.7 billion of notional and collateral/recourse, due to the nature of the Firm’s obligations under these arrangements. As of March 31, 2020, the carrying amount of standby letters of credit and other financial guarantees issued includes an allowance for credit losses of $57 million.
2.
The carrying amounts of derivative contracts that meet the accounting definition of a guarantee are shown on a gross basis. For further information on derivatives contracts, see Note 6.
3.
Primarily related to residential mortgage securitizations.

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

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contracts that contingently require the Firm to make payments to the guaranteed party based on another entity’s failure to perform under an agreement, as well as indirect guarantees of the indebtedness of others.
Client Clearing Guarantees. In the first quarter of 2020, FICC’s sponsored clearing model was updated such that the Firm could be responsible for liquidation of a sponsored member’s account and guarantees any resulting loss to the FICC in the event the sponsored member fails to fully pay any net liquidation amount due from the sponsored member to the FICC. Accordingly, the Firm’s maximum potential payout amount as of March 31, 2020 reflects the total of the estimated net liquidation amounts for sponsored member accounts.
For more information on the nature of the obligations and related business activities for our guarantees, see Note 13 to the financial statements in the 2019 Form 10-K.
Other Guarantees and Indemnities
In the normal course of business, the Firm provides guarantees and indemnifications in a variety of transactions. These provisions generally are standard contractual terms. Certain of these guarantees and indemnifications related to indemnities, exchange and clearinghouse member guarantees and merger and acquisition guarantees are described in Note 13 to the financial statements in the 2019 Form 10-K.
In addition, in the ordinary course of business, the Firm guarantees the debt and/or certain trading obligations (including obligations associated with derivatives, foreign exchange contracts and the settlement of physical commodities) of certain subsidiaries. These guarantees generally are entity or product specific and are required by investors or trading counterparties. The activities of the Firm’s subsidiaries covered by these guarantees (including any related debt or trading obligations) are included in the financial statements.
Finance Subsidiary
The Parent Company fully and unconditionally guarantees the securities issued by Morgan Stanley Finance LLC, a wholly owned finance subsidiary.

Contingencies

Legal
In addition to the matters described in the following paragraphs, in the normal course of business, the Firm has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of
 
damages. In some cases, the entities that would otherwise be the primary defendants in such cases are bankrupt or are in financial distress. These actions have included, but are not limited to, residential mortgage and credit crisis-related matters.
While the Firm has identified below any individual proceedings where the Firm believes a material loss to be reasonably possible and reasonably estimable, there can be no assurance that material losses will not be incurred from claims that have not yet been asserted or are not yet determined to be probable or possible and reasonably estimable losses.
The Firm contests liability and/or the amount of damages as appropriate in each pending matter. Where available information indicates that it is probable a liability had been incurred at the date of the financial statements and the Firm can reasonably estimate the amount of that loss, the Firm accrues the estimated loss by a charge to income.
In many proceedings and investigations, however, it is inherently difficult to determine whether any loss is probable or even possible or to estimate the amount of any loss. In addition, even where a loss is possible or an exposure to loss exists in excess of the liability already accrued with respect to a previously recognized loss contingency, it is not always possible to reasonably estimate the size of the possible loss or range of loss.
For certain legal proceedings and investigations, the Firm cannot reasonably estimate such losses, particularly for proceedings and investigations where the factual record is being developed or contested or where plaintiffs or government entities seek substantial or indeterminate damages, restitution, disgorgement or penalties. Numerous issues may need to be resolved, including through potentially lengthy discovery and determination of important factual matters, determination of issues related to class certification and the calculation of damages or other relief, and by addressing novel or unsettled legal questions relevant to the proceedings or investigations in question, before a loss or additional loss or range of loss or additional range of loss can be reasonably estimated for a proceeding or investigation.
For certain other legal proceedings and investigations, the Firm can estimate reasonably possible losses, additional losses, ranges of loss or ranges of additional loss in excess of amounts accrued but does not believe, based on current knowledge and after consultation with counsel, that such losses will have a material adverse effect on the Firm’s financial statements as a whole, other than the matters referred to in the following paragraphs.
On July 15, 2010, China Development Industrial Bank (“CDIB”) filed a complaint against the Firm, styled China Development Industrial Bank v. Morgan Stanley & Co. Incorporated et al., which is pending in the Supreme Court of the State of New York, New York County (“Supreme Court of

 
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NY”). The complaint relates to a $275 million CDS referencing the super senior portion of the STACK 2006-1 CDO. The complaint asserts claims for common law fraud, fraudulent inducement and fraudulent concealment and alleges that the Firm misrepresented the risks of the STACK 2006-1 CDO to CDIB, and that the Firm knew that the assets backing the CDO were of poor quality when it entered into the CDS with CDIB. The complaint seeks compensatory damages related to the approximately $228 million that CDIB alleges it has already lost under the CDS, rescission of CDIB’s obligation to pay an additional $12 million, punitive damages, equitable relief, fees and costs. On February 28, 2011, the court denied the Firm’s motion to dismiss the complaint. On December 21, 2018, the court denied the Firm’s motion for summary judgment and granted in part the Firm’s motion for sanctions relating to spoliation of evidence. On January 24, 2019, CDIB filed a notice of appeal from the court’s December 21, 2018 order, and on January 25, 2019, the Firm filed a notice of appeal from the same order. On March 7, 2019, the court denied the relief that CDIB sought in a motion to clarify and resettle the portion of the court’s December 21, 2018 order granting spoliation sanctions. On December 5, 2019, the Appellate Division, First Department (“First Department”) heard the parties’ cross appeals. Based on currently available information, the Firm believes it could incur a loss in this action of up to approximately $240 million plus pre- and post-judgment interest, fees and costs.
On July 8, 2013, U.S. Bank National Association, in its capacity as trustee, filed a complaint against the Firm styled U.S. Bank National Association, solely in its capacity as Trustee of the Morgan Stanley Mortgage Loan Trust 2007-2AX (MSM 2007-2AX) v. Morgan Stanley Mortgage Capital Holdings LLC, Successor-by-Merger to Morgan Stanley Mortgage Capital Inc. and GreenPoint Mortgage Funding, Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $650 million, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, unspecified damages and interest. On November 24, 2014, the court granted in part and denied in part the Firm’s motion to dismiss the complaint. On April 4, 2019, the court denied the Firm’s motion to renew its motion to dismiss. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $240 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.
On September 23, 2014, Financial Guaranty Insurance Company (“FGIC”) filed a complaint against the Firm in the Supreme Court of NY styled Financial Guaranty Insurance
 
Company v. Morgan Stanley ABS Capital I Inc. et al. relating to the Morgan Stanley ABS Capital I Inc. Trust 2007-NC4. The complaint asserts claims for breach of contract and fraudulent inducement and alleges, among other things, that the loans in the trust breached various representations and warranties and defendants made untrue statements and material omissions to induce FGIC to issue a financial guaranty policy on certain classes of certificates that had an original balance of approximately $876 million. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, compensatory, consequential and punitive damages, attorneys’ fees and interest. On January 23, 2017, the court denied the Firm’s motion to dismiss the complaint. On September 13, 2018, the First Department affirmed in part and reversed in part the lower court’s order denying the Firm’s motion to dismiss. On December 20, 2018, the First Department denied plaintiff’s motion for leave to appeal its decision to the New York Court of Appeals ("Court of Appeals") or, in the alternative, for re-argument. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $277 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands from a certificate holder and FGIC that the Firm did not repurchase, plus pre- and post- judgment interest, fees and costs, as well as claim payments that FGIC has made and will make in the future. In addition, plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.
On January 23, 2015, Deutsche Bank National Trust Company, in its capacity as trustee, filed a complaint against the Firm styled Deutsche Bank National Trust Company solely in its capacity as Trustee of the Morgan Stanley ABS Capital I Inc. Trust 2007-NC4 v. Morgan Stanley Mortgage Capital Holdings LLC as Successor-by-Merger to Morgan Stanley Mortgage Capital Inc., and Morgan Stanley ABS Capital I Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $1.05 billion, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, compensatory, consequential, rescissory, equitable and punitive damages, attorneys’ fees, costs and other related expenses, and interest. On December 11, 2015, the court granted in part and denied in part the Firm’s motion to dismiss the complaint. On October 19, 2018, the court granted the Firm’s motion for leave to amend its answer and to stay the case pending resolution of Deutsche Bank National Trust Company’s appeal to the Court of Appeals in another case, styled Deutsche Bank National Trust Company v. Barclays Bank PLC, regarding the applicable statute of limitations. On January 17, 2019, the First Department reversed the trial court’s order to the extent that it had granted in part the Firm’s motion to dismiss the complaint. On June 4, 2019, the First Department granted the Firm’s motion for leave

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to appeal to the Court of Appeals. On March 19, 2020, the Firm filed a motion for partial summary judgment. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $277 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands from a certificate holder and a monoline insurer that the Firm did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.
Tax
In matters styled Case number 15/3637 and Case number 15/4353, the Dutch Tax Authority (“Dutch Authority”) has challenged, in the District Court in Amsterdam, the prior set-off by the Firm of approximately €124 million (approximately $137 million) plus accrued interest of withholding tax credits against the Firm’s corporation tax liabilities for the tax years 2007 to 2013. The Dutch Authority alleges that the Firm was not entitled to receive the withholding tax credits on the basis, inter alia, that a Firm subsidiary did not hold legal title to certain securities subject to withholding tax on the relevant dates. The Dutch Authority has also alleged that the Firm failed to provide certain information to the Dutch Authority and keep adequate books and records. On April 26, 2018, the District Court in Amsterdam issued a decision dismissing the Dutch Authority’s claims. On June 4, 2018, the Dutch Authority filed an appeal before the Court of Appeal in Amsterdam in matters re-styled Case number 18/00318 and Case number 18/00319. On June 26 and July 2, 2019, a hearing of the Dutch Authority’s appeal was held. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately €124 million (approximately $137 million) plus accrued interest.
14. Variable Interest Entities and Securitization Activities
Consolidated VIE Assets and Liabilities by Type of Activity
 
At March 31, 2020
At December 31, 2019
$ in millions
VIE Assets
VIE Liabilities
VIE Assets
VIE Liabilities 
OSF
$
728

$
415

$
696

$
391

MABS1
368

108

265

4

Other2
934

44

987

66

Total
$
2,030

$
567

$
1,948

$
461

OSF—Other structured financings
1.
Amounts include transactions backed by residential mortgage loans, commercial mortgage loans and other types of assets, including consumer or commercial assets and may be in loan or security form. The value of assets is determined based on the fair value of the liabilities and the interests owned by the Firm in such VIEs as the fair values for the liabilities and interests owned are more observable.
2.
Other primarily includes operating entities, investment funds and structured transactions.
 
 
Consolidated VIE Assets and Liabilities by Balance Sheet Caption
$ in millions
At
March 31,
2020
At
December 31,
2019
Assets
 
 
Cash and cash equivalents
$
328

$
488

Trading assets at fair value
1,234

943

Customer and other receivables
16

18

Intangible assets
107

111

Other assets
345

388

Total
$
2,030

$
1,948

Liabilities
 
 
Other secured financings
$
519

$
422

Other liabilities and accrued expenses
48

39

Total
$
567

$
461

Noncontrolling interests
$
245

$
192


 
Consolidated VIE assets and liabilities are presented in the previous tables after intercompany eliminations. Generally, most assets owned by consolidated VIEs cannot be removed unilaterally by the Firm and are not available to the Firm while the related liabilities issued by consolidated VIEs are non-recourse to the Firm. However, in certain consolidated VIEs, the Firm either has the unilateral right to remove assets or provides additional recourse through derivatives such as total return swaps, guarantees or other forms of involvement.
In general, the Firm’s exposure to loss in consolidated VIEs is limited to losses that would be absorbed on the VIE net assets recognized in its financial statements, net of amounts absorbed by third-party variable interest holders.

 
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Non-consolidated VIEs
 
At March 31, 2020
$ in millions
MABS1
CDO
MTOB
OSF
Other2
VIE assets (UPB)
$
124,211

$
1,881

$
6,585

$
2,263

$
51,280

Maximum exposure to loss3
 
 
Debt and equity interests
$
15,173

$
254

$
277

$
1,086

$
10,468

Derivative and other contracts
—

—

4,047

—

3,659

Commitments, guarantees and other
572

—

—

—

334

Total
$
15,745

$
254

$
4,324

$
1,086

$
14,461

Carrying value of variable interests—Assets
 
 
Debt and equity interests
$
15,173

$
254

$
277

$
1,084

$
10,468

Derivative and other contracts
—

—

6

—

835

Total
$
15,173

$
254

$
283

$
1,084

$
11,303

Additional VIE assets owned4
 
 
 
$
11,024

Carrying value of variable interests—Liabilities
 
 
Derivative and other contracts
$
—

$
—

$
—

$
—

$
272

 
At December 31, 2019
$ in millions
MABS1
CDO
MTOB
OSF
Other2
VIE assets (UPB)
$
125,603

$
2,976

$
6,965

$
2,288

$
51,305

Maximum exposure to loss3
 
 
Debt and equity interests
$
16,314

$
240

$
—

$
1,009

$
11,977

Derivative and other contracts
—

—

4,599

—

2,995

Commitments, guarantees and other
631

—

—

—

266

Total
$
16,945

$
240

$
4,599

$
1,009

$
15,238

Carrying value of variable interests–Assets
 
 
Debt and equity interests
$
16,314

$
240

$
—

$
1,008

$
11,977

Derivative and other contracts
—

—

6

—

388

Total
$
16,314

$
240

$
6

$
1,008

$
12,365

Additional VIE assets owned4
 
 
 
$
11,453

Carrying value of variable interests—Liabilities
 
 
Derivative and other contracts
$
—

$
—

$
—

$
—

$
444


MTOB—Municipal tender option bonds
1.
Amounts include transactions backed by residential mortgage loans, commercial mortgage loans and other types of assets, including consumer or commercial assets. and may be in loan or security form.
2.
Other primarily includes exposures to commercial real estate property and investment funds.
3.
Where notional amounts are utilized in quantifying the maximum exposure related to derivatives, such amounts do not reflect changes in fair value recorded by the Firm.
4.
Additional VIE assets owned represents the carrying value of total exposure to non-consolidated VIEs for which the maximum exposure to loss is less than specific thresholds, primarily interests issued by securitization SPEs. The Firm’s primary risk exposure is to the most subordinate class of beneficial interest and maximum exposure to loss generally equals the fair value of the assets owned. These assets are primarily included in Trading assets and Investment securities and are measured at fair value (see Note 3). The Firm does not provide additional support in these transactions through contractual facilities, guarantees or similar derivatives.

 
The majority of the VIEs included in the previous tables are sponsored by unrelated parties; examples of the Firm’s involvement with these VIEs include its secondary market-making activities and the securities held in its Investment securities portfolio (see Note 7).
The Firm’s maximum exposure to loss is dependent on the nature of the Firm’s variable interest in the VIE and is limited to the notional amounts of certain liquidity facilities and other credit support, total return swaps and written put options, as well as the fair value of certain other derivatives and investments the Firm has made in the VIE.
The Firm’s maximum exposure to loss in the previous tables does not include the offsetting benefit of hedges or any reductions associated with the amount of collateral held as part of a transaction with the VIE or any party to the VIE directly against a specific exposure to loss.
Liabilities issued by VIEs generally are non-recourse to the Firm.
Detail of Mortgage- and Asset-Backed Securitization Assets
 
At March 31, 2020
At December 31, 2019
$ in millions
UPB
Debt and
Equity
Interests
UPB
Debt and
Equity
Interests
Residential mortgages
$
20,460

$
3,298

$
30,353

$
3,993

Commercial mortgages
52,672

3,677

53,892

3,881

U.S. agency collateralized mortgage obligations
45,958

6,257

36,366

6,365

Other consumer or commercial loans
5,121

1,941

4,992

2,075

Total
$
124,211

$
15,173

$
125,603

$
16,314


Transferred Assets with Continuing Involvement1 
 
At March 31, 2020
$ in millions
RML
CML
U.S. Agency
CMO
CLN and
Other3
SPE assets (UPB)4
$
9,501

$
79,516

$
15,480

$
11,109

Retained interests
Investment grade
$
26

$
780

$
763

$
—

Non-investment grade
13

238

—

87

Total
$
39

$
1,018

$
763

$
87

Interests purchased in the secondary market
Investment grade
$
—

$
65

$
78

$
—

Non-investment grade
29

68

—

—

Total
$
29

$
133

$
78

$
—

Derivative assets
$
—

$
—

$
—

$
830

Derivative liabilities
—

—

—

186


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At December 31, 20192
$ in millions
RML
CML
U.S. Agency
CMO
CLN and
Other3
SPE assets (UPB)4
$
9,850

$
86,203

$
19,132

$
8,410

Retained interests
Investment grade
$
29

$
720

$
2,376

$
1

Non-investment grade
17

254

—

92

Total
$
46

$
974

$
2,376

$
93

Interests purchased in the secondary market
Investment grade
$
6

$
197

$
77

$
—

Non-investment grade
75

51

—

—

Total
$
81

$
248

$
77

$
—

Derivative assets
$
—

$
—

$
—

$
339

Derivative liabilities
—

—

—

145

 
Fair Value At March 31, 2020
$ in millions
Level 2
Level 3
Total
Retained interests
 
 
 
Investment grade
$
790

$
—

$
790

Non-investment grade
7

83

90

Total
$
797

$
83

$
880

Interests purchased in the secondary market
Investment grade
$
141

$
2

$
143

Non-investment grade
85

12

97

Total
$
226

$
14

$
240

Derivative assets
$
820

$
10

$
830

Derivative liabilities
185

1

186

 
Fair Value at December 31, 2019
$ in millions
Level 2
Level 3
Total
Retained interests
 
 
 
Investment grade
$
2,401

$
4

$
2,405

Non-investment grade
6

97

103

Total
$
2,407

$
101

$
2,508

Interests purchased in the secondary market
Investment grade
$
278

$
2

$
280

Non-investment grade
68

58

126

Total
$
346

$
60

$
406

Derivative assets
$
337

$
2

$
339

Derivative liabilities
144

1

145



RML—Residential mortgage loans
CML—Commercial mortgage loans
1.
The Transferred Assets with Continuing Involvement tables include transactions with SPEs in which the Firm, acting as principal, transferred financial assets with continuing involvement and received sales treatment.
2.
As permitted by applicable guidance, certain transfers of assets where the Firm’s only continuing involvement is a derivative are only reported in the following Assets Sold with Retained Exposure table.
3.
Amounts include CLO transactions managed by unrelated third parties.
4.
Amounts include assets transferred by unrelated transferors.
Transferred assets are carried at fair value prior to securitization, and any changes in fair value are recognized in the income statements. The Firm may act as underwriter of the beneficial interests issued by these securitization vehicles, for which Investment banking revenues are recognized. The Firm may retain interests in the securitized financial assets as one or more tranches of the securitization. These retained interests are generally carried at fair value in the balance sheets with changes in fair value recognized in the income statements. Fair value for
 
these interests is measured using techniques that are consistent with the valuation techniques applied to the Firm’s major categories of assets and liabilities as described in Note 2 in the 2019 Form 10-K and Note 4 herein.
Proceeds from New Securitization Transactions and Sales of Loans
 
Three Months Ended
March 31,
$ in millions
2020
2019
New transactions1
$
8,471

$
4,733

Retained interests
4,088

2,887

Sales of corporate loans to CLO SPEs1, 2
66

—


1.
Net gains on new transactions and sales of corporate loans to CLO entities at the time of the sale were not material for all periods presented.
2.
Sponsored by non-affiliates.
The Firm has provided, or otherwise agreed to be responsible for, representations and warranties regarding certain assets transferred in securitization transactions sponsored by the Firm (see Note 13).
Assets Sold with Retained Exposure
$ in millions
At
March 31,
2020
At
December 31,
2019
Gross cash proceeds from sale of assets1
$
28,213

$
38,661

Fair value
 
 
Assets sold
$
28,068

$
39,137

Derivative assets recognized
in the balance sheets
862

647

Derivative liabilities recognized
in the balance sheets
1,004

152


1.
The carrying value of assets derecognized at the time of sale approximates gross cash proceeds.
The Firm enters into transactions in which it sells securities, primarily equities and contemporaneously enters into bilateral OTC derivatives with the purchasers of the securities, through which it retains exposure to the sold securities.
For a discussion of the Firm’s VIEs, the determination and structure of VIEs and securitization activities, see Note 14 to the financial statements in the 2019 Form 10-K.
15. Regulatory Requirements
Regulatory Capital Framework and Requirements
For a discussion of the Firm’s regulatory capital framework, see Note 15 to the financial statements in the 2019 Form 10-K.
The Firm is required to maintain minimum risk-based and leverage-based capital ratios under regulatory capital requirements. A summary of the calculations of regulatory capital and RWA follows.
Minimum risk-based capital ratio requirements apply to Common Equity Tier 1 capital, Tier 1 capital and Total capital

 
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mslogoa02.jpg

(which includes Tier 2 capital). Capital standards require certain adjustments to, and deductions from, capital for purposes of determining these ratios. At March 31, 2020 and December 31, 2019, the Firm's ratios for determining regulatory compliance are based on the Advanced Approach and the Standardized Approach rules, respectively.
In the current quarter, the U.S. banking agencies have adopted an interim final rule altering, for purposes of the regulatory capital rules, the required adoption time period for CECL. As of March 31, 2020, the risk-based and leverage-based capital amounts and ratios, as well as RWA, adjusted average assets and supplementary leverage exposure are calculated excluding the effect of the adoption of CECL based on our election to defer this effect over a five-year transition period in accordance with the interim final rule.
In addition to the minimum risk-based capital ratio requirements, the Firm is subject to the following Common Equity Tier 1 buffers:
 
•
A greater than 2.5% capital conservation buffer;

•
The G-SIB capital surcharge, currently at 3%; and

•
Up to a 2.5% CCyB, currently set by U.S. banking agencies at zero.
The Firm’s Regulatory Capital and Capital Ratios
 
At March 31, 2020
$ in millions
Required
Ratio1
Amount
Ratio
Risk-based capital
 
 
 
Common Equity Tier 1 capital
10.0
%
$
65,195

15.2
%
Tier 1 capital
11.5
%
73,896

17.3
%
Total capital
13.5
%
83,847

19.6
%
Total RWA
 
427,782

 
Leverage-based capital
 
 
 
Tier 1 leverage
4.0
%
$
73,896

8.1
%
Adjusted average assets2
 
910,499

 
SLR
5.0
%
73,896

6.2
%
Supplementary leverage exposure3
 
1,185,734

 
 
 
 
At December 31, 2019
$ in millions
Required
Ratio1
Amount
Ratio
Risk-based capital
 
 
 
Common Equity Tier 1 capital
10.0
%
$
64,751

16.4
%
Tier 1 capital
11.5
%
73,443

18.6
%
Total capital
13.5
%
82,708

21.0
%
Total RWA
 
394,177

 
Leverage-based capital
 
 
 
Tier 1 leverage
4.0
%
$
73,443

8.3
%
Adjusted average assets2
 
889,195

 
SLR
5.0
%
73,443

6.4
%
Supplementary leverage exposure3
 
1,155,177

 
 
1.
Required ratios are inclusive of any buffers applicable as of the date presented. Failure to maintain the buffers would result in restrictions on the Firm’s ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers.
2.
Adjusted average assets represents the denominator of the Tier 1 leverage ratio and is composed of the average daily balance of consolidated on-balance sheet assets for the quarters ending on the respective balance sheet dates, reduced by disallowed goodwill, intangible assets, investments in covered funds, defined benefit pension plan assets, after-tax gain on sale from assets sold into securitizations, investments in the Firm's own capital instruments, certain defined tax assets and other capital deductions.
3.
Supplementary leverage exposure is the sum of Adjusted average assets used in the Tier 1 leverage ratio and other adjustments, primarily: (i) for derivatives, potential future exposure and the effective notional principal amount of sold credit protection offset by qualifying purchased credit protection; (ii) the counterparty credit risk for repo-style transactions; and (iii) the credit equivalent amount for off-balance sheet exposures.
U.S. Bank Subsidiaries’ Regulatory Capital and Capital Ratios
The OCC establishes capital requirements for the Firm’s U.S. Bank Subsidiaries and evaluates their compliance with such capital requirements. Regulatory capital requirements for the U.S. Bank Subsidiaries are calculated in a similar manner to the Firm’s regulatory capital requirements, although G-SIB capital surcharge requirements do not apply to the U.S. Bank Subsidiaries.
The OCC’s regulatory capital framework includes Prompt Corrective Action (“PCA”) standards, including “well-capitalized” PCA standards that are based on specified regulatory capital ratio minimums. For the Firm to remain an FHC, the U.S. Bank Subsidiaries must remain well-capitalized in accordance with the OCC’s PCA standards. In addition, failure by the U.S. Bank Subsidiaries to meet minimum capital requirements may result in certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on the U.S. Bank Subsidiaries’ and the Firm’s financial statements.
At March 31, 2020 and December 31, 2019, the U.S. Bank Subsidiaries’ risk-based capital ratios are based on the Standardized Approach rules. At March 31, 2020, the risk-based

March 2020 Form 10-Q
74
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

and leverage-based capital amounts and ratios are calculated excluding the effect of the adoption of CECL based on our election to defer this effect over a five-year transition period.
MSBNA’s Regulatory Capital
 
At March 31, 2020
$ in millions
Well-Capitalized Requirement
Required
Ratio1
Amount
Ratio
Risk-based capital
 
 
 
 
Common Equity Tier 1 capital
6.5
%
7.0
%
$
16,839

18.2
%
Tier 1 capital
8.0
%
8.5
%
16,839

18.2
%
Total capital
10.0
%
10.5
%
17,349

18.7
%
Leverage-based capital
 
 
 
 
Tier 1 leverage
5.0
%
4.0
%
$
16,839

11.2
%
SLR
6.0
%
3.0
%
16,839

8.8
%
 
At December 31, 2019
$ in millions
Well-Capitalized Requirement
Required
Ratio1
Amount
Ratio
Risk-based capital
 
 
 
 
Common Equity Tier 1 capital
6.5
%
7.0
%
$
15,919

18.5
%
Tier 1 capital
8.0
%
8.5
%
15,919

18.5
%
Total capital
10.0
%
10.5
%
16,282

18.9
%
Leverage-based capital
 
 
 
 
Tier 1 leverage
5.0
%
4.0
%
$
15,919

11.3
%
SLR
6.0
%
3.0
%
15,919

8.7
%

MSPBNA’s Regulatory Capital
 
At March 31, 2020
$ in millions
Well-Capitalized Requirement
Required
Ratio1
Amount
Ratio
Risk-based capital
 
 
 
 
Common Equity Tier 1 capital
6.5
%
7.0
%
$
8,487

22.9
%
Tier 1 capital
8.0
%
8.5
%
8,487

22.9
%
Total capital
10.0
%
10.5
%
8,556

23.0
%
Leverage-based capital
 
 
 
 
Tier 1 leverage
5.0
%
4.0
%
$
8,487

9.7
%
SLR
6.0
%
3.0
%
8,487

9.3
%
 
 
At December 31, 2019
$ in millions
Well-Capitalized Requirement
Required
Ratio1
Amount
Ratio
Risk-based capital
 
 
 
 
Common Equity Tier 1 capital
6.5
%
7.0
%
$
7,962

24.8
%
Tier 1 capital
8.0
%
8.5
%
7,962

24.8
%
Total capital
10.0
%
10.5
%
8,016

25.0
%
Leverage-based capital
 
 
 
 
Tier 1 leverage
5.0
%
4.0
%
$
7,962

9.9
%
SLR
6.0
%
3.0
%
7,962

9.4
%

1.
Required ratios are inclusive of any buffers applicable as of the date presented. Failure to maintain the buffers would result in restrictions on the U.S. Bank Subsidiaries' ability to make capital distributions, including the payment of dividends.

 
 
U.S. Broker-Dealer Regulatory Capital Requirements
MS&Co. Regulatory Capital
$ in millions
At March 31, 2020
At December 31, 2019
Net capital
$
10,887

$
13,708

Excess net capital
6,620

10,686


MS&Co. is a registered U.S. broker-dealer and registered futures commission merchant and, accordingly, is subject to the minimum net capital requirements of the SEC and the CFTC. MS&Co. has consistently operated with capital in excess of its regulatory capital requirements.
As an Alternative Net Capital broker-dealer, and in accordance with Securities Exchange Act of 1934 (“Exchange Act”) Rule 15c3-1, Appendix E, MS&Co. is subject to minimum net capital and tentative net capital requirements. In addition, MS&Co. must notify the SEC if its tentative net capital falls below certain levels. At March 31, 2020 and December 31, 2019, MS&Co. has exceeded its net capital requirement and has tentative net capital in excess of the minimum and notification requirements.
MSSB Regulatory Capital
$ in millions
At March 31, 2020
At December 31, 2019
Net capital
$
2,924

$
3,387

Excess net capital
2,774

3,238


MSSB is a registered U.S. broker-dealer and introducing broker for the futures business and, accordingly, is subject to the minimum net capital requirements of the SEC. MSSB has consistently operated with capital in excess of its regulatory capital requirements.
Other Regulated Subsidiaries
MSIP, a London-based broker-dealer subsidiary, is subject to the capital requirements of the PRA, and MSMS, a Tokyo-based broker-dealer subsidiary, is subject to the capital requirements of the Financial Services Agency. MSIP and MSMS have consistently operated with capital in excess of their respective regulatory capital requirements.
Certain other U.S. and non-U.S. subsidiaries of the Firm are subject to various securities, commodities and banking regulations, and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. These subsidiaries have consistently operated with capital in excess of their local capital adequacy requirements.

 
75
March 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

16. Total Equity
Share Repurchases
 
Three Months Ended March 31,
$ in millions
2020
2019
Repurchases of common stock under the Firm's Share Repurchase Program
$
1,347

$
1,180


The Firm’s 2019 Capital Plan (“Capital Plan”) includes the share repurchase of up to $6.0 billion of outstanding common stock for the period beginning July 1, 2019 through June 30, 2020. Additionally, the Capital Plan includes quarterly common stock dividends of up to $0.35 per share, beginning with the common stock dividend announced on July 18, 2019. On March 15, 2020, the Financial Services Forum announced that each of its eight member banks, including the Firm, had voluntarily suspended their share repurchase programs. For information about the Firm's 2019 Capital Plan, see Note 16 to the financial statements in the 2019 Form 10-K.
A portion of common stock repurchases was conducted under a sales plan with MUFG, whereby MUFG sold shares of the Firm’s common stock to the Firm, as part of the Firm’s Share Repurchase Program. The sales plan is only intended to maintain MUFG’s ownership percentage below 24.9% in order to comply with MUFG’s passivity commitments to the Board of Governors of the Federal Reserve System and has no impact on the strategic alliance between MUFG and the Firm, including the joint ventures in Japan.
Common Stock Dividends per Share
 
Three Months Ended March 31,
 
2020
2019
Dividends declared per common share
$
0.35

$
0.30


Common Shares Outstanding for Basic and Diluted EPS
 
Three Months Ended
March 31,
in millions
2020
2019
Weighted average common shares outstanding, basic
1,555

1,658

Effect of dilutive Stock options, RSUs and PSUs
18

19

Weighted average common shares outstanding and common stock equivalents, diluted
1,573

1,677

Weighted average antidilutive common stock equivalents (excluded from the computation of diluted EPS)
12

6


 
Preferred Stock
 
Shares
Outstanding
 
Carrying Value
$ in millions, except per share data
At
March 31,
2020
Liquidation
Preference
per Share
At
March 31,
2020
At
December 31,
2019
Series
 
 
 
A
44,000

$
25,000

$
1,100

$
1,100

C1
519,882

1,000

408

408

E
34,500

25,000

862

862

F
34,000

25,000

850

850

H
52,000

25,000

1,300

1,300

I
40,000

25,000

1,000

1,000

J
60,000

25,000

1,500

1,500

K
40,000

25,000

1,000

1,000

L
20,000

25,000

500

500

Total
$
8,520

$
8,520

Shares authorized
30,000,000
 
 
1.
Series C is composed of the issuance of 1,160,791 shares of Series C Preferred Stock to MUFG for an aggregate purchase price of $911 million, less the redemption of 640,909 shares of Series C Preferred Stock of $503 million, which were converted to common shares of approximately $705 million in 2009.
For a description of Series A through Series L preferred stock issuances, see Note 16 to the financial statements in the 2019 Form 10-K. The preferred stock has a preference over the common stock upon liquidation. The Firm’s preferred stock qualifies as and is included in Tier 1 capital in accordance with regulatory capital requirements (see Note 15).
Preferred Stock Dividends
$ in millions, except per
share data
Three Months Ended
March 31, 2020
Three Months Ended
March 31, 2019
Per Share1
Total
Per Share1
Total
Series
 
 
 
 
A
$
253

$
11

$
250

$
11

C
25

13

25

13

E
445

15

445

15

F
430

14

430

15

G2
—

—

414

8

H3
344

18

—

—

I
398

16

398

16

J4
—

—

—

—

K
366

15

366

15

L
305

6

—

—

Total
 
$
108

 
$
93

  
 
1.
Dividends on all series are payable quarterly, unless otherwise noted.
2.
Series G preferred stock was redeemed during the first quarter of 2020. For further information, see Note 16 to the 2019 Form 10-K.
3.
Series H was payable semiannually until July 15, 2019, and is now payable quarterly.
4.
Series J is payable semiannually until July 15, 2020, and then quarterly thereafter.

March 2020 Form 10-Q
76
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

Accumulated Other Comprehensive Income (Loss)1   
$ in millions
CTA
AFS
Securities
Pension,
Postretirement
and Other
DVA
Total
December 31, 2019
$
(897
)
$
207

$
(644
)
$
(1,454
)
$
(2,788
)
OCI during the period
(141
)
1,325

25

3,674

4,883

March 31, 2020
$
(1,038
)
$
1,532

$
(619
)
$
2,220

$
2,095

December 31, 2018
$
(889
)
$
(930
)
$
(578
)
$
105

$
(2,292
)
OCI during the period
(12
)
429

1

(599
)
(181
)
March 31, 2019
$
(901
)
$
(501
)
$
(577
)
$
(494
)
$
(2,473
)
 
CTA—Cumulative foreign currency translation adjustments
1.
Amounts are net of tax and noncontrolling interests.
Components of Period Changes in OCI
 
Three Months Ended
March 31, 2020
$ in millions
Pre-tax
Gain
(Loss)
Income
Tax Benefit
(Provision)
After-tax
Gain
(Loss)
Non-
controlling
Interests
Net
CTA
OCI activity
$
(20
)
$
(112
)
$
(132
)
$
9

$
(141
)
Reclassified to earnings
—

—

—

—

—

Net OCI
$
(20
)
$
(112
)
$
(132
)
$
9

$
(141
)
Change in net unrealized gains (losses) on AFS securities
OCI activity
$
1,773

$
(416
)
$
1,357

$
—

$
1,357

Reclassified to earnings
(41
)
9

(32
)
—

(32
)
Net OCI
$
1,732

$
(407
)
$
1,325

$
—

$
1,325

Pension, postretirement and other
OCI activity
$
25

$
(4
)
$
21

$
—

$
21

Reclassified to earnings
5

(1
)
4

—

4

Net OCI
$
30

$
(5
)
$
25

$
—

$
25

Change in net DVA
OCI activity
$
5,015

$
(1,216
)
$
3,799

$
129

$
3,670

Reclassified to earnings
5

(1
)
4

—

4

Net OCI
$
5,020

$
(1,217
)
$
3,803

$
129

$
3,674

 
 
Three Months Ended
March 31, 2019
$ in millions
Pre-tax
Gain
(Loss)
Income
Tax Benefit
(Provision)
After-tax
Gain
(Loss)
Non-
controlling
Interests
Net
CTA
OCI activity
$
(4
)
$
(18
)
$
(22
)
$
(10
)
$
(12
)
Reclassified to earnings
—

—

—

—

—

Net OCI
$
(4
)
$
(18
)
$
(22
)
$
(10
)
$
(12
)
Change in net unrealized gains (losses) on AFS securities
OCI activity
$
570

$
(133
)
$
437

$
—

$
437

Reclassified to earnings
(10
)
2

(8
)
—

(8
)
Net OCI
$
560

$
(131
)
$
429

$
—

$
429

Pension, postretirement and other
OCI activity
$
—

$
(1
)
$
(1
)
$
—

$
(1
)
Reclassified to earnings
3

(1
)
2

—

2

Net OCI
$
3

$
(2
)
$
1

$
—

$
1

Change in net DVA
OCI activity
$
(824
)
$
201

$
(623
)
$
(21
)
$
(602
)
Reclassified to earnings
4

(1
)
3

—

3

Net OCI
$
(820
)
$
200

$
(620
)
$
(21
)
$
(599
)

Cumulative Adjustments to Beginning Retained Earnings Related to the Adoption of Accounting Updates
 
Three Months Ended
$ in millions
March 31, 2020
Financial Instruments—Credit Losses
$
(100
)
 
Three Months Ended
$ in millions
March 31, 2019
Leases
$
63



 
77
March 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

17. Interest Income and Interest Expense
 
Three Months Ended
March 31,
$ in millions
2020
2019
Interest income
 
 
Investment securities
$
445

$
475

Loans
1,154

1,195

Securities purchased under agreements to resell and Securities borrowed1
398

947

Trading assets, net of Trading liabilities
749

713

Customer receivables and Other2
757

960

Total interest income
$
3,503

$
4,290

 
 
 
Interest expense
 
 
Deposits
$
406

$
462

Borrowings
997

1,380

Securities sold under agreements to repurchase and Securities loaned3
509

600

Customer payables and Other4
235

834

Total interest expense
$
2,147

$
3,276

Net interest
$
1,356

$
1,014

 
1.
Includes fees paid on Securities borrowed.
2.
Includes interest from Cash and cash equivalents.
3.
Includes fees received on Securities loaned.
4.
Includes fees received from prime brokerage customers for stock loan transactions entered into to cover customers’ short positions.
Interest income and Interest expense are classified in the income statements based on the nature of the instrument and related market conventions. When included as a component of the instrument’s fair value, interest is included within Trading revenues or Investments revenues. Otherwise, it is included within Interest income or Interest expense. k
18. Income Taxes
The Firm is under continuous examination by the IRS and other tax authorities in certain countries, such as Japan and the U.K., and in states and localities in which it has significant business operations, such as New York.
The Firm believes that the resolution of these tax examinations will not have a material effect on the annual financial statements, although a resolution could have a material impact in the income statements and on the effective tax rate for any period in which such resolutions occur.
The Firm has established a liability for unrecognized tax benefits, and associated interest, if applicable (“tax liabilities”), that it believes is adequate in relation to the potential for additional assessments. Once established, the Firm adjusts such tax liabilities only when new information is available or when an event occurs necessitating a change.
It is reasonably possible that significant changes in the balance of unrecognized tax benefits may occur within the next 12 months. At this time, however, it is not possible to reasonably
 
estimate the expected change to the total amount of unrecognized tax benefits and the impact on the Firm’s effective tax rate over the next 12 months.
See Note 13 regarding the Dutch Tax Authority’s challenge, in the District Court in Amsterdam (matters styled Case number 15/3637 and Case number 15/4353), of the Firm’s entitlement to certain withholding tax credits, which may impact the balance of unrecognized tax benefits.
Net Discrete Tax Provisions/(Benefits)
 
Three Months Ended March 31,
$ in millions
2020
2019
Recurring1
$
(99
)
$
(107
)
Intermittent
(31
)
(101
)
 
1. Recurring discrete tax items are related to conversion of employee share-based awards.

The current quarter includes intermittent net discrete tax benefits associated with the remeasurement of prior years’ tax liabilities. The prior year quarter includes intermittent net discrete tax benefits primarily associated with remeasurement of reserves and related interest as a result of new information pertaining to the resolution of multi-jurisdiction tax examinations.
19. Segment, Geographic and Revenue Information
 
 
 
 
 
 
Selected Financial Information by Business Segment
 
 
 
 
 
 
 
Three Months Ended March 31, 2020
$ in millions
IS
WM
IM
I/E
Total
Investment banking
$
1,144

$
158

$
—

$
(31
)
$
1,271

Trading
3,416

(347
)
(37
)
24

3,056

Investments
(25
)
—

63

—

38

Commissions and fees1
874

588

—

(102
)
1,360

Asset management1
113

2,680

665

(41
)
3,417

Other
(1,079
)
62

7

(1
)
(1,011
)
Total non-interest revenues
4,443

3,141

698

(151
)
8,131

Interest income
2,423

1,193

8

(121
)
3,503

Interest expense
1,961

297

14

(125
)
2,147

Net interest
462

896

(6
)
4

1,356

Net revenues
$
4,905

$
4,037

$
692

$
(147
)
$
9,487

Income before provision for income taxes
$
950

$
1,055

$
143

$
(2
)
$
2,146

Provision for income taxes
151

191

25

(1
)
366

Net income
799

864

118

(1
)
1,780

Net income applicable to noncontrolling interests
42

—

40

—

82

Net income applicable to Morgan Stanley
$
757

$
864

$
78

$
(1
)
$
1,698


March 2020 Form 10-Q
78
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

 
Three Months Ended March 31, 2019
$ in millions
IS
WM
IM
I/E
Total
Investment banking
$
1,151

$
109

$
—

$
(18
)
$
1,242

Trading
3,130

302

(3
)
12

3,441

Investments
81

1

191

—

273

Commissions and fees1
621

406

—

(61
)
966

Asset management1
107

2,361

617

(36
)
3,049

Other
222

80

3

(4
)
301

Total non-interest revenues
5,312

3,259

808

(107
)
9,272

Interest income
3,056

1,413

4

(183
)
4,290

Interest expense
3,172

283

8

(187
)
3,276

Net interest
(116
)
1,130

(4
)
4

1,014

Net revenues
$
5,196

$
4,389

$
804

$
(103
)
$
10,286

Income before provision for income taxes
$
1,595

$
1,188

$
174

$
(2
)
$
2,955

Provision for income taxes
190

264

33

—

487

Net income
1,405

924

141

(2
)
2,468

Net income applicable to noncontrolling interests
34

—

5

—

39

Net income applicable to Morgan Stanley
$
1,371

$
924

$
136

$
(2
)
$
2,429


I/E–Intersegment Eliminations
1.
Substantially all revenues are from contracts with customers.

For a discussion about the Firm’s business segments, see Note 21 to the financial statements in the 2019 Form 10-K.
Detail of Investment Banking Revenues
 
Three Months Ended
March 31,
$ in millions
2020
2019
Institutional Securities Advisory
$
362

$
406

Institutional Securities Underwriting
782

745

Firm Investment banking revenues from contracts with customers
89
%
85
%

Trading Revenues by Product Type
 
Three Months Ended
March 31,
$ in millions
2020
2019
Interest rate
$
1,074

$
785

Foreign exchange
338

241

Equity security and index1
1,072

1,451

Commodity and other
266

422

Credit
306

542

Total
$
3,056

$
3,441

 
1.
Dividend income is included within equity security and index contracts.
The previous table summarizes realized and unrealized gains and losses, from derivative and non-derivative financial instruments, included in Trading revenues in the income statements. The Firm generally utilizes financial instruments across a variety of product types in connection with its market-making and related risk management strategies. The trading
 
revenues presented in the table are not representative of the manner in which the Firm manages its business activities and are prepared in a manner similar to the presentation of trading revenues for regulatory reporting purposes.
Investment Management Investments Revenues—Net Cumulative Unrealized Carried Interest
$ in millions
At
March 31,
2020
At
December 31,
2019
Net cumulative unrealized performance-based fees at risk of reversing
$
714

$
774


The Firm’s portion of net cumulative performance-based fees in the form of unrealized carried interest (for which the Firm is not obligated to pay compensation) are at risk of reversing when the return in certain funds fall below specified performance targets. See Note 13 for information regarding general partner guarantees, which include potential obligations to return performance fee distributions previously received.
Investment Management Asset Management Revenues—Reduction of Fees Due to Fee Waivers
 
Three Months Ended
March 31,
$ in millions
2020
2019
Fee waivers
$
11

$
11


The Firm waives a portion of its fees in the Investment Management business segment from certain registered money market funds that comply with the requirements of Rule 2a-7 of the Investment Company Act of 1940.

Certain Other Fee Waivers
Separately, the Firm’s employees, including its senior officers, may participate on the same terms and conditions as other investors in certain funds that the Firm sponsors primarily for client investment, and the Firm may waive or lower applicable fees and charges for its employees.
Net Revenues by Region
 
Three Months Ended
March 31,
$ in millions
2020
2019
Americas
$
6,646

$
7,321

EMEA
1,148

1,702

Asia
1,693

1,263

Total
$
9,487

$
10,286



For a discussion about the Firm’s geographic net revenues, see Note 21 to the financial statements in the 2019 Form 10-K.

 
79
March 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogoa02.jpg

Revenue Recognized from Prior Services
 
Three Months Ended
March 31,
$ in millions
2020
2019
Non-interest revenues
$
614

$
671

The previous table includes revenue from contracts with customers recognized where some or all services were performed in prior periods and is primarily composed of investment banking advisory fees and distribution fees.

Receivables from Contracts with Customers
$ in millions
At
March 31,
2020
At
December 31,
2019
Customer and other receivables
$
2,199

$
2,916


Receivables from contracts with customers, which are included within Customer and other receivables in the balance sheets, arise when the Firm has both recorded revenues and has the right per the contract to bill the customer.

Assets by Business Segment
$ in millions
At
March 31,
2020
At
December 31,
2019
Institutional Securities
$
707,489

$
691,201

Wealth Management
233,824

197,682

Investment Management
6,482

6,546

Total1
$
947,795

$
895,429

1. Parent assets have been fully allocated to the business segments.



March 2020 Form 10-Q
80
 
Table of Contents
 
Financial Data Supplement (Unaudited)

mslogoa02.jpg



 
 
 
 
 
 
 
Average Balances and Interest Rates and Net Interest Income
 
Three Months Ended March 31,
 
2020
2019
$ in millions
Average
Daily Balance
Interest
Annualized
Average
Rate
Average
Daily
Balance
Interest
Annualized
Average
Rate
Interest earning assets
Investment securities1
$
110,277

$
445

1.6
%
$
94,906

$
475

2.0
%
Loans1
134,441

1,154

3.5

116,698

1,195

4.2

Securities purchased under agreements to resell and Securities borrowed2:
U.S.
121,106

378

1.3

141,806

934

2.7

Non-U.S.
56,865

20

0.1

77,256

13

0.1

Trading assets, net of Trading liabilities3:
U.S.
78,771

626

3.2

74,152

631

3.5

Non-U.S.
22,903

123

2.2

11,861

82

2.8

Customer receivables and Other4:
U.S.
68,772

555

3.2

63,649

697

4.4

Non-U.S.
60,787

202

1.3

55,142

263

1.9

Total
$
653,922

$
3,503

2.2
%
$
635,470

$
4,290

2.7
%
Interest bearing liabilities
Deposits1
$
199,574

$
406

0.8
%
$
181,017

$
462

1.0
%
Borrowings1, 5
192,061

997

2.1

189,181

1,380

3.0

Securities sold under agreements to repurchase and Securities loaned6:
U.S.
31,461

328

4.2

26,615

450

6.9

Non-U.S.
29,682

181

2.5

32,350

150

1.9

Customer payables and Other7:
U.S.
128,744

109

0.3

117,932

554

1.9

Non-U.S.
63,914

126

0.8

65,498

280

1.7

Total
$
645,436

$
2,147

1.3
%
$
612,593

$
3,276

2.2
%
Net interest income and net interest rate spread
$
1,356

0.9
%
 
$
1,014

0.5
%

1.
Amounts include primarily U.S. balances.
2.
Includes fees paid on Securities borrowed.
3.
Excludes non-interest earning assets and non-interest bearing liabilities, such as equity securities.
4.
Includes Cash and cash equivalents.
5.
Includes borrowings carried at fair value, whose interest expense is considered part of fair value and therefore is recorded within Trading revenues.
6.
Includes fees received on Securities loaned. The annualized average rate was calculated using (a) interest expense incurred on all securities sold under agreements to repurchase and securities loaned transactions, whether or not such transactions were reported in the balance sheets and (b) net average on-balance sheet balances, which exclude certain securities-for-securities transactions.
7.
Includes fees received from prime brokerage customers for stock loan transactions entered into to cover customers’ short positions.


 
81
March 2020 Form 10-Q
Table of Contents
 
Glossary of Common Terms and Acronyms
mslogoa02.jpg


2019 Form 10-K
Annual report on Form 10-K for year ended December 31, 2019 filed with the SEC


ABS
Asset-backed securities


AFS
Available-for-sale


AML
Anti-money laundering


AOCI
Accumulated other comprehensive income (loss)


AUM
Assets under management or supervision


Balance sheets
Consolidated balance sheets


BEAT
Base erosion and anti-abuse tax


BHC
Bank holding company


bps
Basis points; one basis point equals 1/100th of 1%


Cash flow statements
Consolidated cash flow statements


CCAR
Comprehensive Capital Analysis and Review


CCyB
Countercyclical capital buffer


CDO
Collateralized debt obligation(s), including Collateralized loan obligation(s)


CDS
Credit default swaps


CECL
Current Expected Credit Losses, as calculated under the Financial Instruments—Credit Losses accounting update


CFTC
U.S. Commodity Futures Trading Commission


CLN
Credit-linked note(s)


CLO
Collateralized loan obligation(s)


CMBS
Commercial mortgage-backed securities


CMO
Collateralized mortgage obligation(s)


CVA
Credit valuation adjustment


DVA
Debt valuation adjustment


EBITDA
Earnings before interest, taxes, depreciation and amortization


ELN
Equity-linked note(s)
 


EMEA
Europe, Middle East and Africa


EPS
Earnings per common share


E.U.
European Union


FDIC
Federal Deposit Insurance Corporation


FFELP
Federal Family Education Loan Program


FFIEC
Federal Financial Institutions Examination Council


FHC
Financial Holding Company


FICC
Fixed Income Clearing Corporation


FICO
Fair Isaac Corporation


Financial statements
Consolidated financial statements


FVA
Funding valuation adjustment


GILTI
Global Intangible Low-Taxed Income


G-SIB
Global systemically important banks


HELOC
Home Equity Line of Credit


HQLA
High-quality liquid assets


HTM
Held-to-maturity


I/E
Intersegment eliminations


IHC
Intermediate holding company


IM
Investment Management


Income statements
Consolidated income statements


IRS
Internal Revenue Service


IS
Institutional Securities


LCR
Liquidity coverage ratio, as adopted by the U.S. banking agencies


LIBOR
London Interbank Offered Rate


M&A
Merger, acquisition and restructuring transaction


MSBNA
Morgan Stanley Bank, N.A.


MS&Co.
Morgan Stanley & Co. LLC


MSIP
Morgan Stanley & Co. International plc



March 2020 Form 10-Q
82
 
Table of Contents
 
Glossary of Common Terms and Acronyms
mslogoa02.jpg


MSMS
Morgan Stanley MUFG Securities Co., Ltd.


MSPBNA
Morgan Stanley Private Bank, National Association


MSSB
Morgan Stanley Smith Barney LLC


MUFG
Mitsubishi UFJ Financial Group, Inc.


MUMSS
Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.


MWh
Megawatt hour


N/A
Not Applicable


NAV
Net asset value


N/M
Not Meaningful


Non-GAAP
Non-generally accepted accounting principles


NSFR
Net stable funding ratio, as proposed by the U.S. banking agencies


OCC
Office of the Comptroller of the Currency


OCI
Other comprehensive income (loss)


OIS
Overnight index swap


OTC
Over-the-counter


OTTI
Other-than-temporary impairment


PRA
Prudential Regulation Authority


PSU
Performance-based stock unit


RMBS
Residential mortgage-backed securities


 
ROE
Return on average common equity


ROTCE
Return on average tangible common equity


ROU
Right-of-use


RSU
Restricted stock unit


RWA
Risk-weighted assets


SEC
U.S. Securities and Exchange Commission


SLR
Supplementary leverage ratio


SOFR
Secured Overnight Financing Rate


S&P
Standard & Poor’s


SPE
Special purpose entity


SPOE
Single point of entry


TDR
Troubled debt restructuring


TLAC
Total loss-absorbing capacity


U.K.
United Kingdom


UPB
Unpaid principal balance


U.S.
United States of America


U.S. GAAP
Accounting principles generally accepted in the United States of America


VaR
Value-at-Risk


VIE
Variable interest entity


WACC
Implied weighted average cost of capital


WM
Wealth Management

 
83
March 2020 Form 10-Q

Other Information
None.
Legal Proceedings
The following development has occurred since previously reporting certain matters in the Firm’s 2019 Form 10-K. See also the disclosures set forth under “Legal Proceedings” in the 2019 Form 10-K.

Residential Mortgage and Credit Crisis Related Matter

On March 19, 2020, the Firm filed a motion for partial summary judgment in Deutsche Bank National Trust Company solely in its capacity as Trustee of the Morgan Stanley ABS Capital I Inc. Trust 2007- NC4 v. Morgan Stanley Mortgage Capital Holdings LLC as Successor-by-Merger to Morgan Stanley Mortgage Capital Inc., and Morgan Stanley ABS Capital I Inc.
Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Three Months Ended March 31, 2020
$ in millions, except per share data
Total 
Number of Shares Purchased1
Average Price Paid Per Share
Total Shares 
Purchased as Part of Share Repurchase Program2,3
Dollar Value of Remaining Authorized Repurchase
January
11,966,543

$
55.82

4,860,960

$
2,733

February
7,624,176

$
52.63

7,135,908

$
2,354

March
17,552,911

$
40.65

17,278,471

$
1,653

Total
37,143,630

$
48.00

29,275,339

 

1.
Includes 7,868,291 shares acquired by the Firm in satisfaction of the tax withholding obligations on stock-based awards granted under the Firm’s stock-based compensation plans during the three months ended March 31, 2020.
2.
Share purchases under publicly announced programs are made pursuant to open-market purchases, Rule 10b5-1 plans or privately negotiated transactions (including with employee benefit plans) as market conditions warrant and at prices the Firm deems appropriate and may be suspended at any time. On April 18, 2018, the Firm entered into a sales plan with Mitsubishi UFJ Financial Group, Inc. (“MUFG”). See Note 16 to the financial statements for further information on the sales plan.
3.
The Firm’s Board of Directors has authorized the repurchase of the Firm’s outstanding stock under a share repurchase program (the “Share Repurchase Program”). The Share Repurchase Program is a program for capital management purposes that considers, among other things, business segment capital needs, as well as equity-based compensation and benefit plan requirements. The Share Repurchase Program has no set expiration or termination date.
 
Share repurchases by the Firm are subject to regulatory non-objection. On June 27, 2019, the Federal Reserve published summary results of CCAR and and the Firm received a non-objection to its 2019 Capital Plan. The Firm’s 2019 Capital Plan includes a share repurchase of up to $6.0 billion of its outstanding common stock during the period beginning July 1, 2019 through June 30, 2020. On March 15, 2020, the Financial Services Forum announced that each of its eight member banks, including the Firm, had voluntarily suspended their share repurchase programs. For further information, see “Liquidity and Capital Resources—Regulatory Requirements—Capital Plans and Stress Tests.”
 

Controls and Procedures
Under the supervision and with the participation of the Firm’s management, including the Chief Executive Officer and Chief Financial Officer, the Firm conducted an evaluation of the effectiveness of the Firm’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Firm's disclosure controls and procedures were effective as of the end of the period covered by this report.
No change in the Firm’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) occurred during the period covered by this report that materially affected, or is reasonably likely to materially affect, the Firm’s internal control over financial reporting.
Exhibits
Exhibit Index
Exhibit No.
Description
 
 
15
Letter of awareness from Deloitte  & Touche LLP, dated May 5, 2020, concerning unaudited interim financial information.
 
 
31.1
Rule 13a-14(a) Certification of Chief Executive Officer.
 
 
31.2
Rule 13a-14(a) Certification of Chief Financial Officer.
 
 
32.1
Section 1350 Certification of Chief Executive Officer.
 
 
32.2
Section 1350 Certification of Chief Financial Officer.
 
 
101
Interactive Data Files pursuant to Rule 405 of Regulation S-T formatted in Inline eXtensible Business Reporting Language (“Inline XBRL”).
 
 
104
Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).

March 2020 Form 10-Q
84
 

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
MORGAN STANLEY
(Registrant)
 
 
By:
/s/ JONATHAN PRUZAN
 
Jonathan Pruzan
Executive Vice President and
Chief Financial Officer
 
 
By:
/s/ PAUL C. WIRTH
 
Paul C. Wirth
Deputy Chief Financial Officer
Date: May 5, 2020


S-1

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