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)
29.48%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services๐Ÿ’ฐ Investment
Categories
  1. Morgan Stanley
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2020 Q2

Morgan Stanley - 10-Q quarterly report FY2020 Q2


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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 June 30, 2020
Commission File Number 1-11758
mslogo2q20.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 July 31, 2020, there were 1,576,760,960 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.


QUARTERLY REPORT ON FORM 10-Q
For the quarter ended June 30, 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
 
 
9
Supplemental Financial Information
 
 
19
Other Matters
 
 
19
Accounting Development Updates
 
 
19
Critical Accounting Policies
 
 
20
Liquidity and Capital Resources
 
 
20
Balance Sheet
 
 
20
Regulatory Requirements
 
 
25
Quantitative and Qualitative Disclosures about Risk
I
3

32
Market Risk
 
 
32
Credit Risk
 
 
34
Country and Other Risks
 
 
40
Report of Independent Registered Public Accounting Firm
 
 
43
Consolidated Financial Statements and Notes
I
1

44
Consolidated Income Statements (Unaudited)
 
 
44
Consolidated Comprehensive Income Statements (Unaudited)
 
 
45
Consolidated Balance Sheets (Unaudited at June 30, 2020)
 
 
46
Consolidated Statements of Changes in Total Equity (Unaudited)
 
 
47
Consolidated Cash Flow Statements (Unaudited)
 
 
48
Notes to Consolidated Financial Statements (Unaudited)
 
 
49
1.
Introduction and Basis of Presentation
 
 
49
2.
Significant Accounting Policies
 
 
50
3.
Cash and Cash Equivalents
 
 
52
4.
Fair Values
 
 
53
5.
Fair Value Option
 
 
60
6.
Derivative Instruments and Hedging Activities
 
 
61
7.
Investment Securities
 
 
65
8.
Collateralized Transactions
 
 
68
9.
Loans, Lending Commitments and Related Allowance for Credit Losses
 
 
69
10.
Other Assets—Equity Method Investments
 
 
72
11.
Deposits
 
 
73
12.
Borrowings and Other Secured Financings
 
 
73
13.
Commitments, Guarantees and Contingencies
 
 
73
14.
Variable Interest Entities and Securitization Activities
 
 
76
15.
Regulatory Requirements
 
 
79
16.
Total Equity
 
 
81
17.
Interest Income and Interest Expense
 
 
83
18.
Income Taxes
 
 
83
19.
Segment, Geographic and Revenue Information
 
 
84
Financial Data Supplement (Unaudited)
 
 
87
Glossary of Common Terms and Acronyms
 
 
88
Other Information
II
 
90
Legal Proceedings
II
1

90
Unregistered Sales of Equity Securities and Use of Proceeds
II
2

90
Controls and Procedures
I
4

91
Exhibits
II
6

91
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, as amended.


 
1
June 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.


June 2020 Form 10-Q
2
 
Table of Contents
 
Management’s Discussion and Analysis
mslogo2q20.jpg

Executive Summary
Overview of Financial Results
Consolidated Results—Three Months Ended June 30, 2020

•
The Firm delivered an annualized ROE of 15.7% and an annualized ROTCE of 17.8% (see “Non-GAAP measures” herein).
•
Each of our businesses contributed meaningfully to this result, in particular the Institutional Securities business segment, which showed an increase in net revenues of 56% on strong client engagement.
•
Wealth Management delivered pre-tax income of $1.1 billion with a pre-tax margin of 24% despite a challenging market and rate environment.
•
Investment Management reported long-term net flows of $15.4 billion and AUM of $665 billion driving revenue growth of 6%.
•
Given economic conditions, we continued to increase our ACL on loans and lending commitments with a provision of $239 million.
•
Our capital and liquidity ratios remain strong. At June 30, 2020, our Common Equity Tier 1 capital ratio was 16.1% and our Liquidity Coverage ratio was 147%.
Net Revenues
($ in millions)
netrevenues2q20.jpg
Net Income Applicable to Morgan Stanley
($ in millions)
netincome2q20.jpg
 
Earnings per Common Share
eps2q20.jpg
We reported net revenues of $13,414 million in the quarter ended June 30, 2020 (“current quarter,” or “2Q 2020”), compared with $10,244 million in the quarter ended June 30, 2019 (“prior year quarter,” or “2Q 2019”). For the current quarter, net income applicable to Morgan Stanley was $3,196 million, or $1.96 per diluted common share, compared with $2,201 million or $1.23 per diluted common share, in the prior year quarter.
We reported net revenues of $22,901 million in the six months ended June 30, 2020 (“current year period,” or “YTD 2020”), compared with $20,530 million in the period ended June 30, 2019 (“prior year period,” or “YTD 2019”). For the current year period, net income applicable to Morgan Stanley was $4,894 million, or $2.96 per diluted common share, compared with $4,630 million or $2.62 per diluted common share, in the prior year period.
See “Coronavirus Disease (COVID-19) Pandemic” herein for information on the current and possible future effects of the COVID-19 pandemic on our results.

 
3
June 2020 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
mslogo2q20.jpg

Non-interest Expenses1 
($ in millions)
expenses2q20.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 $6,035 million in the current quarter increased 33% from $4,531 million in the prior year quarter, primarily as a result of increases in discretionary incentive compensation driven by higher revenues and higher expenses related to certain deferred compensation plans linked to investment performance. Compensation and benefits expenses of $10,318 million in the current year period increased 12%, from $9,182 million in the prior year period, primarily as a result of increases in discretionary incentive compensation driven by higher revenues, partially offset by lower expenses related to certain deferred compensation plans linked to investment performance.
•
Non-compensation expenses of $3,024 million in the current quarter and $6,082 million in the current year period increased 8% and 11%, respectively, from $2,810 million in the prior year quarter and $5,490 million in the prior year period, primarily reflecting higher volume-related expenses and increased information processing and communications expenses, partially offset by a decrease in marketing and business development expenses. In addition, the current year period reflects an increase in the provision for credit losses for lending commitments and off-balance sheet instruments.
Income Taxes
The current quarter and current year period included intermittent net discrete tax costs of $134 million and $103 million, respectively, principally associated with the remeasurement of reserves and interest related to a foreign tax matter.
The prior year period 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.

June 2020 Form 10-Q
4
 
Table of Contents
 
Management’s Discussion and Analysis
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Selected Financial Information and Other Statistical Data
 
Three Months Ended June 30,
Six Months Ended June 30,
$ in millions
2020
2019
2020
2019
Net income applicable to Morgan Stanley
$
3,196

$
2,201

$
4,894

$
4,630

Preferred stock dividends
149

170

257

263

Earnings applicable to Morgan Stanley common shareholders
$
3,047

$
2,031

$
4,637

$
4,367

 
 
 
 
 
Expense efficiency ratio1
67.5
%
71.7
%
71.6
%
71.5
%
ROE2
15.7
%
11.2
%
12.2
%
12.1
%
Adjusted ROE3
16.4
%
11.2
%
12.5
%
11.8
%
ROTCE2,3
17.8
%
12.8
%
13.9
%
13.8
%
Adjusted ROTCE3
18.6
%
12.8
%
14.2
%
13.5
%
Pre-tax margin4
32.5
%
28.0
%
28.4
%
28.5
%
Pre-tax margin by segment4
 
 
 
 
Institutional Securities
38
%
29
%
31
%
30
%
Wealth Management
24
%
28
%
25
%
28
%
Investment Management
24
%
24
%
23
%
23
%
in millions, except per share and employee data
At
June 30,
2020
At
December 31,
2019
Liquidity resources5
$
301,407

$
215,868

Loans6
$
141,973

$
130,637

Total assets
$
975,363

$
895,429

Deposits
$
236,849

$
190,356

Borrowings
$
205,464

$
192,627

Common shares outstanding
1,576

1,594

Common shareholders' equity
$
78,125

$
73,029

Tangible common shareholders’ equity3
$
68,839

$
63,780

Book value per common share7
$
49.57

$
45.82

Tangible book value per common share3,7
$
43.68

$
40.01

Worldwide employees
61,596

60,431

Capital ratios8
 
 
Common Equity Tier 1 capital—Advanced
16.1
%
16.9
%
Common Equity Tier 1 capital—Standardized
16.5
%
16.4
%
Tier 1 capital—Advanced
18.1
%
19.2
%
Tier 1 capital—Standardized
18.6
%
18.6
%
Tier 1 leverage
8.1
%
8.3
%
SLR9
7.3
%
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 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 June 30, 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.
9.
At June 30, 2020, our SLR reflects the impact of a Federal Reserve interim final rule in effect until March 31, 2021. For further information, see “Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments” herein.
 
Business Segment Results

Net Revenues by Segment1 
($ in millions)
segmentrevenues2q20.jpg

 
5
June 2020 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
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Net Income Applicable to Morgan Stanley by Segment1 
($ in millions)
 

segmentincome2q20.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 sum to 100% due to intersegment eliminations. See Note 19 to the financial statements for details of intersegment eliminations.
•
Institutional Securities net revenues of $7,977 million in the current quarter increased 56% from $5,113 million in the prior year quarter. Net revenues of $12,882 million in the current year period increased 25% from $10,309 million in the prior year period. Increases in the current quarter and current year period are primarily due to higher sales and trading and underwriting revenues, driven by increased client engagement, partially offset by increases in the provision for credit losses on loans held for investment. In the current year period, the increase in revenues was also partially offset by losses on loans and lending commitments held for sale.
•
Wealth Management net revenues of $4,680 million in the current quarter increased 6% from $4,408 million in the prior year quarter, primarily due to higher gains from investments associated with certain employee deferred compensation plans, while Asset management revenues and net interest income were relatively unchanged. Net revenues of $8,717 million in the current year period were relatively unchanged from $8,797 million in the prior year period, as higher Asset management revenues were offset by the absence of gains
 
from investments associated with certain employee deferred compensation plans in the current year period and lower net interest income.
•
Investment Management net revenues of $886 million in the current quarter increased 6% from $839 million in the prior year quarter, primarily due to higher Asset management revenues as a result of higher average AUM. Net revenues of $1,578 million in the current year period decreased 4% from $1,643 million in the prior year period primarily due to lower Investments revenues, driven by the reversal of accrued carried interest.
Net Revenues by Region1, 2  
($ in millions)
revenuesbyregion2q20.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 in the 2019 Form 10-K.

Current quarter and current year period revenues in the Americas and Asia regions increased, primarily driven by the Institutional Securities business segment. With respect to the EMEA region, revenues increased primarily within Fixed Income sales and trading in the Institutional Securities business segment in the current quarter, while revenues were relatively unchanged in the current year period.

June 2020 Form 10-Q
6
 
Table of Contents
 
Management’s Discussion and Analysis
mslogo2q20.jpg

Coronavirus Disease (“COVID-19”) Pandemic
The 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. We have begun implementing a return-to-workplace program, which is phased based on role, location and employee willingness and ability to return, and focused on the health and safety of all returning staff. Recognizing that our offices around the world face different local conditions, time lines for return may vary significantly, though we are currently planning for the return of additional employees to offices by the end of 2020. The Firm continues to be fully operational, with approximately 90% of global employees and 95% of employees in the Americas working from home as of June 30, 2020.
Economic conditions have had mixed effects on our businesses. High levels of client trading activity, related to market volatility, have significantly increased revenues in the Sales and Trading businesses within the Institutional Securities business segment in both the current quarter and current year period. In addition, in the current quarter, certain of the negative impacts to our results in the first quarter have subsided given recoveries in public asset prices, tightening of credit spreads and an increase in underwriting activity.
We have recognized provisions for credit losses on loans and lending commitments of $239 million in the current quarter and $646 million in the current year period. In addition, the persistence of low interest rates will continue to negatively affect our net interest margin in the Wealth Management business segment.
Though we are unable to estimate the extent of the impact, the ongoing COVID-19 pandemic and related global economic crisis may have adverse impacts on our future operating results. In addition, levels of client trading activity may not remain elevated and investment banking advisory activity may be subdued. Refer to “Risk Factors” herein and Forward Looking Statements in the 2019 Form 10-K.
We continue to use the elements of our Enterprise Risk Management framework to 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.
 
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.

 
7
June 2020 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
mslogo2q20.jpg

Reconciliations from U.S. GAAP to Non-GAAP Consolidated Financial Measures
 
Three Months Ended
June 30,
Six Months Ended
June 30,
$ in millions, except per share data
2020
2019
2020
2019
Net income applicable to Morgan Stanley
$
3,196

$
2,201

$
4,894

$
4,630

Impact of adjustments
134

—

103

(101
)
Adjusted net income applicable to Morgan Stanley—non-GAAP1
$
3,330

$
2,201

$
4,997

$
4,529

Earnings per diluted common share
$
1.96

$
1.23

$
2.96

$
2.62

Impact of adjustments
0.08

—

0.07

(0.06
)
Adjusted earnings per diluted common share—non-GAAP1
$
2.04

$
1.23

$
3.03

$
2.56

Effective income tax rate
25.7
 %
22.6
%
22.8
 %
19.5
%
Impact of adjustments
(3.1
)%
—
%
(1.5
)%
1.8
%
Adjusted effective income tax rate—non-GAAP1
22.6
 %
22.6
%
21.3
 %
21.3
%
 
Average Monthly Balance
 
Three Months Ended June 30,
Six Months Ended June 30,
$ in millions
2020
2019
2020
2019
Tangible equity
 
 
 
 
Morgan Stanley shareholders' equity
$
86,118

$
81,155

$
84,512

$
80,622

Less: Goodwill and net intangible assets
(9,268
)
(9,098
)
(9,246
)
(8,978
)
Tangible Morgan Stanley shareholders' equity—Non-GAAP
$
76,850

$
72,057

$
75,266

$
71,644

Common shareholders' equity
$
77,598

$
72,635

$
75,992

$
72,102

Less: Goodwill and net intangible assets
(9,268
)
(9,098
)
(9,246
)
(8,978
)
Tangible common shareholders' equity—Non-GAAP
$
68,330

$
63,537

$
66,746

$
63,124

 
Three Months Ended
June 30,
Six Months Ended
June 30,
$ in billions
2020
2019
2020
2019
Average common equity
 
 
 
 
Unadjusted—GAAP
$
77.6

$
72.6

$
76.0

$
72.1

Adjusted1—Non-GAAP
77.6

72.6

76.0

72.0

ROE2
 
 
 
 
Unadjusted—GAAP
15.7
%
11.2
%
12.2
%
12.1
%
Adjusted—Non-GAAP1, 3
16.4
%
11.2
%
12.5
%
11.8
%
Average tangible common equity—Non-GAAP
Unadjusted
$
68.3

$
63.5

$
66.7

$
63.1

Adjusted1
68.4

63.5

66.7

63.1

ROTCE2—Non-GAAP
 
 
 
 
Unadjusted
17.8
%
12.8
%
13.9
%
13.8
%
Adjusted1, 3
18.6
%
12.8
%
14.2
%
13.5
%
 
Non-GAAP Financial Measures by Business Segment
 
Three Months Ended
June 30,
Six Months Ended
June 30,
$ in billions
2020
2019
2020
2019
Average common equity4, 5
 
 
 
Institutional Securities
$
42.8

$
40.4

$
42.8

$
40.4

Wealth Management
18.2

18.2

18.2

18.2

Investment Management
2.6

2.5

2.6

2.5

Average tangible common equity4, 5
 
 
 
Institutional Securities
$
42.3

$
39.9

$
42.3

$
39.9

Wealth Management
10.4

10.2

10.4

10.2

Investment Management
1.7

1.5

1.7

1.5

ROE6
 
 
 
 
Institutional Securities
19.3
%
9.8
%
12.8
%
11.3
%
Wealth Management
18.1
%
20.1
%
18.3
%
20.0
%
Investment Management
23.4
%
20.5
%
17.5
%
21.2
%
ROTCE6
 
 
 
 
Institutional Securities
19.6
%
9.9
%
13.0
%
11.5
%
Wealth Management
31.6
%
36.1
%
31.9
%
35.8
%
Investment Management
36.2
%
33.0
%
27.1
%
34.2
%
 
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.

June 2020 Form 10-Q
8
 
Table of Contents
 
Management’s Discussion and Analysis
mslogo2q20.jpg

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.


 
9
June 2020 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
mslogo2q20.jpg

Institutional Securities
Income Statement Information
 
Three Months Ended
June 30,
 
$ in millions
2020
2019
% Change
Revenues
 
 
 
Investment banking
$
2,051

$
1,472

39
 %
Trading
4,152

2,558

62
 %
Investments
36

194

(81
)%
Commissions and fees
717

625

15
 %
Asset management
115

103

12
 %
Other
337

143

136
 %
Total non-interest revenues
7,408

5,095

45
 %
Interest income
1,300

3,289

(60
)%
Interest expense
731

3,271

(78
)%
Net interest
569

18

N/M

Net revenues
7,977

5,113

56
 %
Compensation and benefits
2,952

1,789

65
 %
Non-compensation expenses
2,032

1,861

9
 %
Total non-interest expenses
4,984

3,650

37
 %
Income before provision for income taxes
2,993

1,463

105
 %
Provision for income taxes
790

324

144
 %
Net income
2,203

1,139

93
 %
Net income applicable to noncontrolling interests
17

18

(6
)%
Net income applicable to Morgan Stanley
$
2,186

$
1,121

95
 %

 
 
 
 
Six Months Ended
June 30,
 
$ in millions
2020
2019
% Change
Revenues
 
 
 
Investment banking
$
3,195

$
2,623

22
 %
Trading
7,568

5,688

33
 %
Investments
11

275

(96
)%
Commissions and fees
1,591

1,246

28
 %
Asset management
228

210

9
 %
Other
(742
)
365

N/M

Total non-interest revenues
11,851

10,407

14
 %
Interest income
3,723

6,345

(41
)%
Interest expense
2,692

6,443

(58
)%
Net interest
1,031

(98
)
N/M

Net revenues
12,882

10,309

25
 %
Compensation and benefits
4,766

3,608

32
 %
Non-compensation expenses
4,173

3,643

15
 %
Total non-interest expenses
8,939

7,251

23
 %
Income before provision for income taxes
3,943

3,058

29
 %
Provision for income taxes
941

514

83
 %
Net income
3,002

2,544

18
 %
Net income applicable to noncontrolling interests
59

52

13
 %
Net income applicable to Morgan Stanley
$
2,943

$
2,492

18
 %

Investment Banking
Investment Banking Revenues
 
Three Months Ended
June 30,
 
$ in millions
2020
2019
% Change
Advisory
$
462

$
506

(9
)%
Underwriting:


 
   Equity
882

546

62
 %
   Fixed income
707

420

68
 %
Total Underwriting
1,589

966

64
 %
Total Investment banking
$
2,051

$
1,472

39
 %
 
Six Months Ended
June 30,
 
$ in millions
2020
2019
% Change
Advisory
$
824

$
912

(10
)%
Underwriting:


 
Equity
1,218

885

38
 %
Fixed income
1,153

826

40
 %
Total Underwriting
2,371

1,711

39
 %
Total Investment banking
$
3,195

$
2,623

22
 %

June 2020 Form 10-Q
10
 
Table of Contents
 
Management’s Discussion and Analysis
mslogo2q20.jpg

Investment Banking Volumes
 
Three Months Ended
June 30,
Six Months Ended
June 30,
$ in billions
2020
2019
2020
2019
Completed mergers and acquisitions1
$
421

$
172

$
535

$
367

Equity and equity-related offerings2, 3
35

16

48

30

Fixed income offerings2, 4
113

63

204

121

Source: Refinitiv data as of July 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 $2,051 million in the current quarter and $3,195 million in the current year period increased 39% and 22% from the comparable prior year periods, reflecting an increase in revenues in our underwriting businesses, partially offset by a decrease in revenues in our advisory business.
•
Advisory revenues decreased in the current year periods despite increases in completed volumes as there were fewer transactions contributing to revenues.

•
Equity underwriting revenues increased on higher overall volumes in the current quarter and current year period, with higher revenues primarily in secondary block share trades, convertible issuances, and follow-on offerings, partially offset by lower revenues in initial public offerings driven by lower volumes.

•
Fixed income underwriting revenues increased in the current quarter and in the current year period primarily due to higher revenues in both investment grade and non-investment grade bond issuances on higher volumes in both periods.
See “Investment Banking Volumes” herein.
 
Sales and Trading Net Revenues

By Income Statement Line Item
 
Three Months Ended
June 30,
 
$ in millions
2020
2019
% Change
Trading
$
4,152

$
2,558

62
%
Commissions and fees
717

625

15
%
Asset management
115

103

12
%
Net interest
569

18

N/M

Total
$
5,553

$
3,304

68
%
 
Six Months Ended
June 30,
 
$ in millions
2020
2019
% Change
Trading
$
7,568

$
5,688

33
%
Commissions and fees
1,591

1,246

28
%
Asset management
228

210

9
%
Net interest
1,031

(98
)
N/M

Total
$
10,418

$
7,046

48
%
By Business
 
Three Months Ended
June 30,
 
 
 
$ in millions
2020
2019
% Change
Equity
$
2,619

$
2,130

23
%
Fixed Income
3,033

1,133

168
%
Other
(99
)
41

N/M

Total
$
5,553

$
3,304

68
%
 
Six Months Ended
June 30,
 
 
 
$ in millions
2020
2019
% Change
Equity
$
5,041

$
4,145

22
%
Fixed Income
5,236

2,843

84
%
Other
141

58

143
%
Total
$
10,418

$
7,046

48
%


 
11
June 2020 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
mslogo2q20.jpg

Sales and Trading Revenues—Equity and Fixed Income
 
Three Months Ended
June 30, 2020
 
 
 
Net
 
$ in millions
Trading
Fees1
Interest2
Total
Financing
$
884

$
115

$
94

$
1,093

Execution services
948

651

(73
)
1,526

Total Equity
$
1,832

$
766

$
21

$
2,619

Total Fixed Income
$
2,468

$
67

$
498

$
3,033

 
Three Months Ended
June 30, 2019
 
 
 
Net
 
$ in millions
Trading
Fees1
Interest2
Total
Financing
$
1,085

$
94

$
(152
)
$
1,027

Execution services
600

554

(51
)
1,103

Total Equity
$
1,685

$
648

$
(203
)
$
2,130

Total Fixed Income
$
1,144

$
81

$
(92
)
$
1,133


 
Six Months Ended
June 30, 2020
 
 
 
Net
 
$ in millions
Trading
Fees1
Interest2
Total
Financing
$
1,919

$
217

$
57

$
2,193

Execution services
1,527

1,434

(113
)
2,848

Total Equity
$
3,446

$
1,651

$
(56
)
$
5,041

Total Fixed Income
$
4,241

$
169

$
826

$
5,236

 
Six Months Ended
June 30, 2019
 
 
 
Net
 
$ in millions
Trading
Fees1
Interest2
Total
Financing
$
2,200

$
192

$
(410
)
$
1,982

Execution services
1,151

1,107

(95
)
2,163

Total Equity
$
3,351

$
1,299

$
(505
)
$
4,145

Total Fixed Income
$
2,871

$
159

$
(187
)
$
2,843

1.
Includes Commissions and fees and Asset management revenues.
2.
Includes funding costs, which are allocated to the businesses based on funding usage.
Sales and Trading Net Revenues in the Current Quarter
Equity
Equity sales and trading net revenues of $2,619 million in the current quarter increased 23% from the prior year quarter, reflecting increases in both our financing and execution services businesses.
•
Financing revenues increased from the prior year quarter, primarily due to the impact of higher realized spreads, partially offset by lower average client balances. Net interest revenues increased reflecting a reduction in funding costs.
•
Execution services revenues increased from the prior year quarter, reflecting improved inventory management results in derivatives products and cash equities as well as higher client
 
activity in cash equities, resulting in higher Commissions and fees.
Fixed Income
Fixed Income sales and trading net revenues of $3,033 million in the current quarter were 168% higher than the prior year quarter, reflecting increases across product lines.
•
Global macro products Trading revenues increased primarily due to higher client activity in both rates and foreign exchange products and wider bid-offer spreads from higher market volatility.
•
Credit products Trading revenues increased primarily due to higher client activity in corporate credit and securitized products and the effect of narrowing credit spreads.
•
Trading revenues from Commodities products and Other increased, primarily in power and gas, and oil products, as a result of increased client activity, driven by higher market volatility and structured transactions.
Net interest revenues increased reflecting lower funding costs.
Other
•
Other sales and trading losses of $99 million in the current quarter reflect losses on hedges associated with loans and lending commitments, lower yields on liquidity investments and losses on economic hedges related to certain Borrowings. Partially offsetting these decreases were gains from investments associated with certain employee deferred compensation plans.
Sales and Trading Net Revenues in the Current Year Period
Equity
Equity sales and trading net revenues of $5,041 million in the current year period increased 22% from the prior year period, reflecting increases in both our financing and execution services businesses.
•
Financing revenues increased from the prior year period, primarily due to higher average client balances. Net interest revenues increased, reflecting a reduction in funding costs.
•
Execution services revenues increased from the prior year period, reflecting improved inventory management results in cash equities and higher client activity in cash equities and derivatives, partially offset by the impact of counterparty exposure losses.

June 2020 Form 10-Q
12
 
Table of Contents
 
Management’s Discussion and Analysis
mslogo2q20.jpg

Fixed Income
Fixed Income sales and trading net revenues of $5,236 million in the current year period were 84% higher than the prior year period, primarily driven by global macro and credit products.
•
Global macro products Trading revenues increased primarily due to higher client activity in both rates and foreign exchange products and wider bid-offer spreads from continued high market volatility.
•
Credit products Trading revenues increased primarily due to higher client activity in corporate credit and securitized products from higher volumes and wider bid-offer spreads, partially offset by the effect of widening spreads on inventory in municipal, securitized and corporate credit products.
•
Trading revenues from Commodities products and Other increased as a result of improved inventory management and higher client activity in commodities due to higher market volatility, partially offset by lower client structuring activity within derivatives counterparty credit risk management.
Net interest revenues increased reflecting lower funding costs.
Other
•
Other sales and trading revenues of $141 million in the current year period increased from the prior year period reflecting gains on hedges associated with loans and lending commitments, partially offset by lower yields on liquidity investments and losses from investments associated with certain employee deferred compensation plans.

Investments, Other Revenues, Non-interest Expenses, and Income Tax Items
Investments
•
Net investments gains of $36 million in the current quarter and $11 million in the current year period decreased from the prior year periods. The prior year periods included gains associated with an investment's initial public offering and subsequent mark-to-market gains on remaining holdings.
Other Revenues
•
Other revenues of $337 million in the current quarter increased compared to the prior year quarter primarily as a result of higher mark-to-market gains on loans and lending commitments held for sale, partially offset by an increase in the provision for credit losses on loans held for investment. Other net losses of $742 million in the current year period were primarily a result of mark-to-market losses on loans and lending commitments held for sale and an increase in the provision for credit losses on loans held for investment.
 
Non-interest Expenses
Non-interest expenses of $4,984 million in the current quarter increased from the prior year quarter, primarily reflecting a 65% increase in Compensation and benefits expenses. Non-interest expenses of $8,939 million in the current year period increased from the prior year period, primarily reflecting a 32% increase in Compensation and benefits expenses and a 15% increase in Non-compensation expenses.
•
Compensation and benefits expenses increased in the current year periods primarily due to increases in discretionary incentive compensation, driven by higher revenues. Partially offsetting the increase in the current year period were lower expenses related to certain deferred compensation plans linked to investment performance.

•
Non-compensation expenses increased in the current year periods primarily due to higher volume-related expenses and information processing and communications expenses, and in the current year period, an increase in the provision for credit losses for lending commitments held for investment. Partially offsetting these increases were lower marketing and business development expenses in the current quarter and current year period.
Income Tax Items
The current quarter and current year period included intermittent net discrete tax costs of $125 million and $98 million, respectively. The prior year period included intermittent net discrete tax benefits of $101 million. For further information, see “Supplemental Financial Information—Income Tax Matters” herein.

 
13
June 2020 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
mslogo2q20.jpg

Wealth Management

Income Statement Information
 
Three Months Ended
June 30,
 
$ in millions
2020
2019
% Change
Revenues
 
 
 
Investment banking
$
110

$
138

(20
)%
Trading
492

162

N/M

Investments
8

—

N/M

Commissions and fees
473

428

11
 %
Asset management
2,507

2,544

(1
)%
Other
60

120

(50
)%
Total non-interest revenues
3,650

3,392

8
 %
Interest income
1,210

1,348

(10
)%
Interest expense
180

332

(46
)%
Net interest
1,030

1,016

1
 %
Net revenues
4,680

4,408

6
 %
Compensation and benefits
2,729

2,382

15
 %
Non-compensation expenses
809

783

3
 %
Total non-interest expenses
3,538

3,165

12
 %
Income before provision for income taxes
$
1,142

$
1,243

(8
)%
Provision for income taxes
289

290

—
 %
Net income applicable to Morgan Stanley
$
853

$
953

(10
)%

 
Six Months Ended
June 30,
 
$ in millions
2020
2019
% Change
Revenues
 
 
 
Investment banking
$
268

$
247

9
 %
Trading
145

464

(69
)%
Investments
8

1

N/M

Commissions and fees
1,061

834

27
 %
Asset management
5,187

4,905

6
 %
Other
122

200

(39
)%
Total non-interest revenues
6,791

6,651

2
 %
Interest income
2,403

2,761

(13
)%
Interest expense
477

615

(22
)%
Net interest
1,926

2,146

(10
)%
Net revenues
8,717

8,797

(1
)%
Compensation and benefits
4,941

4,844

2
 %
Non-compensation expenses
1,579

1,522

4
 %
Total non-interest expenses
6,520

6,366

2
 %
Income before provision for income taxes
$
2,197

$
2,431

(10
)%
Provision for income taxes
480

554

(13
)%
Net income applicable to Morgan Stanley
$
1,717

$
1,877

(9
)%


 

Financial Information and Statistical Data
 
At
June 30,
2020
At
December 31,
2019
$ in billions, except employee data
Client assets
$
2,661

$
2,700

Fee-based client assets1
$
1,236

$
1,267

Fee-based client assets as a percentage of total client assets
46
%
47
%
Client liabilities2
$
94

$
90

Investment securities
$
89.8

$
67.2

Loans and lending commitments
$
99.6

$
93.2

Wealth Management representatives
15,399

15,468

 
Three Months Ended
June 30,
 
2020
2019
Per representative:
 
 
Annualized revenues ($ in thousands)3
$
1,214

$
1,125

Client assets ($ in millions)4
$
173

$
164

Fee-based asset flows ($ in billions)5
$
11.1

$
9.8

 
Six Months Ended
June 30,
 
2020
2019
Per representative:
 
 
Annualized revenues ($ in thousands)3
$
1,130

$
1,122

Client assets ($ in millions)4
$
173

$
164

Fee-based asset flows ($ in billions)5
$
29.5

$
24.6

 
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 other loans (including tailored lending), residential real estate loans and margin lending.
3.
Revenues per representative equals Wealth Management’s annualized net revenues divided by the average number of representatives.
4.
Client assets per representative equals total period-end client assets divided by period-end number of representatives.
5.
Excludes institutional cash management-related activity. 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” in the 2019 Form 10-K.

June 2020 Form 10-Q
14
 
Table of Contents
 
Management’s Discussion and Analysis
mslogo2q20.jpg

Transactional Revenues
 
Three Months Ended
June 30,
 
$ in millions
2020
2019
% Change
Investment banking
$
110

$
138

(20
)%
Trading
492

162

N/M

Commissions and fees
473

428

11
 %
Total
$
1,075

$
728

48
 %
Transactional revenues as a % of Net revenues
23
%
17
%
 
 
Six Months Ended
June 30,
 
$ in millions
2020
2019
% Change
Investment banking
$
268

$
247

9
 %
Trading
145

464

(69
)%
Commissions and fees
1,061

834

27
 %
Total
$
1,474

$
1,545

(5
)%
Transactional revenues as a % of Net revenues
17
%
18
%
 
Net Revenues
Transactional Revenues
Transactional revenues of $1,075 million in the current quarter increased 48% from the prior year quarter primarily as a result of higher Trading revenues. Transactional revenues of $1,474 million in the current year period decreased 5% from the prior year period primarily as a result of lower Trading revenues, partially offset by higher Commissions and fees.
•
Investment banking revenues decreased in the current quarter primarily due to lower revenues from preferred equity and closed-end fund issuances. Investment banking revenues increased in the current year period primarily due to higher revenues from structured product issuances, partially offset by lower revenues from preferred equity issuances.
•
Trading revenues increased in the current quarter primarily due to higher gains from investments associated with certain employee deferred compensation plans, partially offset by lower fixed income revenue. Trading revenues decreased in the current year period primarily due to the absence of gains from investments associated with certain employee deferred compensation plans in the current year period, as well as lower fixed income revenue.
•
Commissions and fees increased in the current year periods primarily due to increased client activity in equities.
Asset Management
Asset management revenues of $2,507 million in the current quarter were relatively unchanged compared with the prior year quarter. Asset management revenues of $5,187 million in the
 
current year period increased 6% from the prior year period primarily due to higher fee-based asset levels in 2020 as a result of market appreciation and positive net flows, partially offset by lower average fee rates.
See “Fee-Based Client Assets—Rollforwards” herein.
 
Other
Other revenues of $60 million in the current quarter and $122 million in the current year period decreased 50% and 39%, respectively, from the prior year periods primarily due to lower realized gains from the AFS securities portfolio and an increase in the provision for credit losses.

Net Interest
Net interest of $1,030 million in the current quarter was relatively unchanged compared with the prior year quarter as growth in Loans, favorable prepayment amortization related to mortgage-backed securities and increases in investment portfolio balances driven by higher brokerage sweep deposits, were offset by the net effect of lower interest rates.
Net interest of $1,926 million in the current year period decreased 10% from the prior year period primarily due to the net effect of lower interest rates, partially offset by growth in Loans and increases in investment portfolio balances driven by higher brokerage sweep deposits.
Non-interest Expenses
Non-interest expenses of $3,538 million in the current quarter and $6,520 million in the current year period increased 12% and 2%, respectively, from the prior year periods, primarily as a result of higher Compensation and benefits expenses.
•
Compensation and benefits expenses increased in the current quarter, primarily due to higher expenses related to certain deferred compensation plans linked to investment performance. Compensation and benefits expenses increased in the current year period primarily due to an increase in the formulaic payout to Wealth Management representatives, driven by the mix of revenues and higher salaries, partially offset by lower expenses related to certain deferred compensation plans linked to investment performance.

•
Non-compensation expenses increased in the current year periods, reflecting E*TRADE acquisition-related expenses, and in the current year period incremental expenses related to Solium Capital, Inc. Partially offsetting these increases were lower marketing and business development expenses in the current quarter and current year period.

 
15
June 2020 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
mslogo2q20.jpg

Fee-Based Client Assets

Rollforwards
$ in billions
At
March 31,
2020
Inflows
Outflows
Market
Impact
At
June 30,
2020
Separately managed1
$
329

$
7

$
(4
)
$
(19
)
$
313

Unified managed
263

13

(10
)
39

305

Advisor
131

8

(8
)
18

149

Portfolio manager
379

20

(15
)
47

431

Subtotal
$
1,102

$
48

$
(37
)
$
85

$
1,198

Cash management
32

10

(4
)
—

38

Total fee-based client assets
$
1,134

$
58

$
(41
)
$
85

$
1,236

$ in billions
At
March 31,
2019
Inflows
Outflows
Market
Impact
At
June 30,
2019
Separately managed1
$
276

$
10

$
(5
)
$
15

$
296

Unified managed
283

12

(11
)
8

292

Advisor
147

7

(9
)
4

149

Portfolio manager
391

21

(15
)
3

400

Subtotal
$
1,097

$
50

$
(40
)
$
30

$
1,137

Cash management
19

3

(4
)
4

22

Total fee-based client assets
$
1,116

$
53

$
(44
)
$
34

$
1,159

$ in billions
At
December 31, 2019
Inflows
Outflows
Market
Impact
At
June 30,
2020
Separately managed1
$
322

$
19

$
(10
)
$
(18
)
$
313

Unified managed
313

29

(22
)
(15
)
305

Advisor
155

16

(15
)
(7
)
149

Portfolio manager
435

44

(31
)
(17
)
431

Subtotal
$
1,225

$
108

$
(78
)
$
(57
)
$
1,198

Cash management
42

9

(13
)
—

38

Total fee-based client assets
$
1,267

$
117

$
(91
)
$
(57
)
$
1,236

$ in billions
At
December 31, 2018
Inflows
Outflows
Market
Impact
At
June 30,
2019
Separately managed1
$
279

$
23

$
(9
)
$
3

$
296

Unified managed
257

23

(20
)
32

292

Advisor
137

14

(17
)
15

149

Portfolio manager
353

38

(27
)
36

400

Subtotal
$
1,026

$
98

$
(73
)
$
86

$
1,137

Cash management
20

7

(9
)
4

22

Total fee-based client assets
$
1,046

$
105

$
(82
)
$
90

$
1,159

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.

 

Average Fee Rates
 
Three Months Ended
June 30,
Six Months Ended
June 30,
Fee rate in bps
2020
2019
2020
2019
Separately managed
14

15

14

15

Unified managed
99

100

99

101

Advisor
86

87

85

87

Portfolio manager
94

94

94

95

Subtotal
72

75

72

74

Cash management
6

6

5

6

Total fee-based client assets
70

74

70

73

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.

June 2020 Form 10-Q
16
 
Table of Contents
 
Management’s Discussion and Analysis
mslogo2q20.jpg

Investment Management
Income Statement Information
 
Three Months Ended
June 30,
 
$ in millions
2020
2019
% Change
Revenues
 
 
 
Investment banking
$
—

$
(1
)
100
 %
Trading
22

(1
)
N/M

Investments
231

247

(6
)%
Asset management
684

612

12
 %
Other
(47
)
(9
)
N/M

Total non-interest revenues
890

848

5
 %
Interest income
7

6

17
 %
Interest expense
11

15

(27
)%
Net interest
(4
)
(9
)
56
 %
Net revenues
886

839

6
 %
Compensation and benefits
354

360

(2
)%
Non-compensation expenses
316

280

13
 %
Total non-interest expenses
670

640

5
 %
Income before provision for income taxes
216

199

9
 %
Provision for income taxes
39

44

(11
)%
Net income
177

155

14
 %
Net income applicable to noncontrolling interests
23

27

(15
)%
Net income applicable to Morgan Stanley
$
154

$
128

20
 %
 
Six Months Ended
June 30,
 
$ in millions
2020
2019
% Change
Revenues
 
 

Investment banking
$
—

$
(1
)
100
 %
Trading
(15
)
(4
)
N/M

Investments
294

438

(33
)%
Asset management
1,349

1,229

10
 %
Other
(40
)
(6
)
N/M

Total non-interest revenues
1,588

1,656

(4
)%
Interest income
15

10

50
 %
Interest expense
25

23

9
 %
Net interest
(10
)
(13
)
23
 %
Net revenues
1,578

1,643

(4
)%
Compensation and benefits
611

730

(16
)%
Non-compensation expenses
608

540

13
 %
Total non-interest expenses
1,219

1,270

(4
)%
Income before provision for income taxes
359

373

(4
)%
Provision for income taxes
64

77

(17
)%
Net income
295

296

—
 %
Net income applicable to noncontrolling interests
63

32

97
 %
Net income applicable to Morgan Stanley
$
232

$
264

(12
)%
 
Net Revenues
Investments
Investments revenues of $231 million in the current quarter decreased 6% from the prior year quarter, primarily in real estate and infrastructure funds, driven by lower carried interest.
Investments revenues of $294 million in the current year period decreased 33% from the prior year period primarily as a result of the reversal of accrued carried interest and investment losses in real estate, certain private equity and infrastructure funds, partially offset by 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 $684 million in the current quarter and $1,349 million in the current year period increased 12% and 10% from the prior year quarter and prior year period, respectively, primarily as a result of higher average AUM.
See “Assets Under Management or Supervision” herein.
Other
Other losses of $47 million in the current quarter and $40 million in the current year period increased from the prior year quarter and prior year period, reflecting an impairment of an investment in a third-party asset manager.
Non-interest Expenses
Non-interest expenses of $670 million in the current quarter increased 5% from the prior year quarter primarily as a result of higher Non-compensation expenses. Non-interest expenses of $1,219 million in the current year period decreased 4% from the prior year period primarily as a result of lower Compensation and benefits expenses.
•
Compensation and benefits expenses decreased in the current quarter and current year period, primarily due to lower compensation associated with carried interest, partially offset in the current quarter by higher expenses related to certain deferred compensation plans linked to investment performance.
•
Non-compensation expenses in the current quarter increased from the prior year quarter and prior year period primarily as a result of higher fee sharing paid to intermediaries on higher average AUM.

 
17
June 2020 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
mslogo2q20.jpg

Assets Under Management or Supervision
Rollforwards
$ in billions
At
March 31, 2020
Inflows
Outflows
Market
Impact
Other
At
June 30,
2020
Equity
$
121

$
18

$
(9
)
$
37

$
1

$
168

Fixed income
75

11

(6
)
4

—

84

Alternative/Other
141

7

(4
)
2

(1
)
145

Long-term AUM subtotal
337

36

(19
)
43

—

397

Liquidity
247

409

(388
)
—

—

268

Total AUM
$
584

$
445

$
(407
)
$
43

$
—

$
665

$ in billions
At
March 31,
2019
Inflows
Outflows
Market
Impact
Other
At
June 30,
2019
Equity
$
120

$
9

$
(7
)
$
6

$
—

$
128

Fixed income
68

5

(4
)
2

—

71

Alternative/Other
133

7

(6
)
1

—

135

Long-term AUM subtotal
321

21

(17
)
9

—

334

Liquidity
159

311

(307
)
1

(1
)
163

Total AUM
$
480

$
332

$
(324
)
$
10

$
(1
)
$
497

$ in billions
At
December 31,
2019
Inflows
Outflows
Market
Impact
Other
At
June 30,
2020
Equity
$
138

$
32

$
(21
)
$
19

$
—

$
168

Fixed income
79

21

(15
)
—

(1
)
84

Alternative/Other
139

15

(8
)
(5
)
4

145

Long-term AUM subtotal
356

68

(44
)
14

3

397

Liquidity
196

855

(783
)
1

(1
)
268

Total AUM
$
552

$
923

$
(827
)
$
15

$
2

$
665

$ in billions
At
December 31,
2018
Inflows
Outflows
Market
Impact
Other
At
June 30,
2019
Equity
$
103

$
18

$
(15
)
$
22

$
—

$
128

Fixed income
68

11

(11
)
3

—

71

Alternative/Other
128

12

(10
)
6

(1
)
135

Long-term AUM subtotal
299

41

(36
)
31

(1
)
334

Liquidity
164

654

(655
)
2

(2
)
163

Total AUM
$
463

$
695

$
(691
)
$
33

$
(3
)
$
497

 

Average AUM
 
Three Months Ended
June 30,
Six Months Ended
June 30,
$ in billions
2020
2019
2020
2019
Equity
$
146

$
123

$
142

$
117

Fixed income
80

69

80

69

Alternative/Other
143

134

141

132

Long-term AUM subtotal
369

326

363

318

Liquidity
266

163

235

164

Total AUM
$
635

489

$
598

$
482

Average Fee Rates
 
Three Months Ended
June 30,
Six Months Ended
June 30,
Fee rate in bps
2020
2019
2020
2019
Equity
76

75
75

76
Fixed income
29

33
30

32
Alternative/Other
58

64
59

66
Long-term AUM
59

62
59

62
Liquidity
16

17
16

17
Total AUM
41

47
42

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.

June 2020 Form 10-Q
18
 
Table of Contents
 
Management’s Discussion and Analysis
mslogo2q20.jpg

Supplemental Financial Information
Income Tax Matters
Effective Tax Rate
 
Three Months Ended
June 30,
Six Months Ended
June 30,
$ in millions
2020
2019
2020
2019
U.S. GAAP
25.7
%
22.6
%
22.8
%
19.5
%
Adjusted effective income tax rate—non-GAAP1
22.6
%
22.6
%
21.3
%
21.3
%
Net discrete tax provisions (benefits)
 
 
Recurring2
$
5

$
(20
)
$
(94
)
$
(127
)
Intermittent3
$
134

$
—

$
103

$
(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 and current year period included intermittent net discrete tax costs principally associated with the remeasurement of reserves and interest related to a foreign tax matter. The prior year period included 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 corporations, governments, financial institutions and high to ultra-high net worth clients; 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
June 30,
2020
At
December 31, 2019
Assets
$
263.9

$
219.6

Investment securities portfolio:
 
 
Investment securities—AFS
63.8

42.4

Investment securities—HTM
28.5

26.1

Total investment securities
$
92.3

$
68.5

Deposits2
$
236.0

$
189.3

Wealth Management Loans3
Residential real estate
$
32.1

$
30.2

Securities-based lending and Other4
53.1

49.9

Total
$
85.2

$
80.1

Institutional Securities Loans3
Corporate
$
10.6

$
5.6

Secured lending facilities
26.8

26.8

Commercial and Residential real estate
9.2

12.0

Securities-based lending and Other
4.8

5.4

Total
$
51.4

$
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.
For a further discussion of loans in the Wealth Management and Institutional Securities business segments, see “Quantitative and Qualitative Disclosures about Risk—Credit Risk” herein.
4.
Other loans primarily include tailored lending.
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 first quarter of 2020, we filed our application with the Federal Reserve and in early April the Hart-Scott-Rodino Antitrust waiting period expired. On July 17, 2020, E*TRADE shareholders approved the acquisition. While it remains subject to other customary closing conditions, including regulatory approvals, 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, which we have either determined are not applicable or are not expected to have a significant impact on our financial statements.

 
19
June 2020 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
mslogo2q20.jpg

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 June 30, 2020
$ in millions
IS
WM
IM
Total
Assets




Cash and cash equivalents
$
83,728

$
22,445

$
103

$
106,276

Trading assets at fair value
296,235

324

3,832

300,391

Investment securities
42,867

89,753

—

132,620

Securities purchased under agreements to resell
81,082

15,530

—

96,612

Securities borrowed
105,826

1,008

—

106,834

Customer and other receivables
47,260

14,285

745

62,290

Loans1
56,702

85,259

12

141,973

Other assets2
13,437

13,047

1,883

28,367

Total assets
$
727,137

$
241,651

$
6,575

$
975,363

 
 
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 business segment. Total assets increased to $975 billion at June 30, 2020 from $895 billion at December 31, 2019.
Wealth Management assets increased, primarily 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. Loans continued to grow.
Institutional Securities’ assets were also higher, reflecting increases within Cash and cash equivalents and Customer and other receivables, primarily due to higher margin related to derivatives and loan growth in support of client needs.
Liquidity Risk Management Framework
The core components of our Liquidity Risk Management Framework are the Required Liquidity Framework, Liquidity

June 2020 Form 10-Q
20
 
Table of Contents
 
Management’s Discussion and Analysis
mslogo2q20.jpg

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 June 30, 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 consist 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
June 30,
2020
At
December 31, 2019
Cash deposits with central banks
$
44,986

$
35,025

Unencumbered HQLA Securities2:
 
 
U.S. government obligations
154,591

88,754

U.S. agency and agency mortgage-backed securities
49,516

50,732

Non-U.S. sovereign obligations3
38,631

29,909

Other investment grade securities
1,233

1,591

Total HQLA2
$
288,957

$
206,011

Cash deposits with banks (non-HQLA)
12,450

9,857

Total Liquidity Resources
$
301,407

$
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 Japanese, UK, French, German and Dutch government obligations.
4.
 
Liquidity Resources by Bank and Non-Bank Legal Entities1 
$ in millions
At
June 30,
2020
At
December 31, 2019
Average Daily Balance
Three Months Ended
June 30, 2020
Bank legal entities


Domestic
$
117,476

$
75,894

$
113,537

Foreign
5,888

4,049

5,432

Total Bank legal entities
123,364

79,943

118,969

Non-Bank legal entities


Domestic:



Parent Company
87,338

53,128

75,430

Non-Parent Company
38,553

28,905

36,305

Total Domestic
125,891

82,033

111,735

Foreign
52,152

53,892

51,445

Total Non-Bank legal entities
178,043

135,925

163,180

Total Liquidity Resources
$
301,407

$
215,868

$
282,149

 
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. Liquidity Resources increased in the current year period primarily due to an increase in deposits.
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. In determining Eligible HQLA for LCR purposes, weightings (or asset haircuts) are applied to HQLA and certain HQLA held in subsidiaries are excluded.
As of June 30, 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.

 
21
June 2020 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
mslogo2q20.jpg

Liquidity Coverage Ratio
 
Average Daily Balance
Three Months Ended
$ in millions
June 30,
2020
March 31,
2020
Eligible HQLA1
 
 
Cash deposits with central banks
$
52,369

$
32,778

Securities2
155,251

140,336

Total Eligible HQLA1
$
207,620

$
173,114

LCR
147
%
127
%
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 increase in the LCR in the current quarter is due to increased Eligible HQLA consistent with higher liquidity levels.
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
June 30,
2020
At
December 31,
2019
Securities purchased under agreements to resell and Securities borrowed
$
203,446

$
194,773

Securities sold under agreements to repurchase and Securities loaned
$
61,341

$
62,706

Securities received as collateral1
$
7,986

$
13,022

 
Average Daily Balance
Three Months Ended
$ in millions
June 30,
2020
December 31,
2019
Securities purchased under agreements to resell and Securities borrowed
$
203,005

$
210,257

Securities sold under agreements to repurchase and Securities loaned
$
59,286

$
64,870

1.
Included within Trading assets in the balance sheets.
See 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 and Results of Operations—Liquidity and Capital Resources—Funding Management—Unsecured Financing” in the 2019 Form 10-K.

June 2020 Form 10-Q
22
 
Table of Contents
 
Management’s Discussion and Analysis
mslogo2q20.jpg

Deposits
$ in millions
At
June 30,
2020
At
December 31,
2019
Savings and demand deposits:
 
 
Brokerage sweep deposits1
$
156,903

$
121,077

Savings and other
38,683

28,388

Total Savings and demand deposits
195,586

149,465

Time deposits
41,263

40,891

Total
$
236,849

$
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 June 30, 2020 increased compared with December 31, 2019, primarily driven by higher brokerage sweep and savings deposits as the increases that occurred in the first quarter of 2020 were sustained.
Borrowings by Remaining Maturity at June 30, 20201 
$ in millions
Parent Company
Subsidiaries
Total
Original maturities of one year or less
$
28

$
3,198

$
3,226

Original maturities greater than one year
2020
$
4,699

$
2,086

$
6,785

2021
19,740

5,687

25,427

2022
16,238

3,784

20,022

2023
15,257

4,163

19,420

2024
15,839

5,341

21,180

Thereafter
84,430

24,974

109,404

Total
$
156,203

$
46,035

$
202,238

Total Borrowings
$
156,231

$
49,233

$
205,464

Maturities over next 12 months2
 
 
$
20,076

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 $205 billion as of June 30, 2020 increased modestly 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 July 31, 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 possible upgrade, changing their outlooks from Positive to Ratings Under Review.
On April 22, 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.

 
23
June 2020 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
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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
June 30,
Six Months Ended
June 30,
in millions, except for per share data
2020
2019
2020
2019
Number of shares
—

26

29

54

Average price per share
$
—

$
44.53

$
46.01

$
43.33

Total
$
—

$
1,180

$
1,347

$
2,360

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. On June 25, 2020, the Federal Reserve published summary results of CCAR and announced that large BHCs generally will be restricted in making share repurchases during the third quarter of 2020. For more information on our capital plan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Plans and Stress Tests.”
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
July 16, 2020

Amount per share

$0.35

Date to be paid
August 14, 2020

Shareholders of record as of
July 31, 2020

  


On June 25, 2020, the Federal Reserve announced that it would limit common stock dividend payments in the third quarter of 2020 for all large BHCs. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Plans and Stress Tests.”
Preferred Stock Dividend Announcement
Announcement date
June 15, 2020
Date paid
July 15, 2020
Shareholders of record as of
June 30, 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 in the 2019 Form 10-K.
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.

June 2020 Form 10-Q
24
 
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 June 30, 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 June 30, 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.

 
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June 2020 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
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Regulatory Capital Ratios 
 
At June 30, 2020
$ in millions
Required
Ratio1
Standardized
Advanced
Risk-based capital
 
 
 
Common Equity Tier 1 capital
 
$
68,712

$
68,712

Tier 1 capital
 
77,398

77,398

Total capital
 
87,377

87,048

Total RWA
 
415,545

427,034

Common Equity Tier 1 capital ratio
10.0
%
16.5
%
16.1
%
Tier 1 capital ratio
11.5
%
18.6
%
18.1
%
Total capital ratio
13.5
%
21.0
%
20.4
%
 
 
 
 
$ in millions
 
Required
Ratio1
At
June 30,
2020
Leverage-based capital
 
 
 
Adjusted average assets2
 
 
$
952,655

Tier 1 leverage ratio
 
4.0
%
8.1
%
Supplementary leverage exposure3,4
 
$
1,062,137

SLR4
 
5.0
%
7.3
%
 
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.
4.
Based on a Federal Reserve interim final rule in effect until March 31, 2021, our SLR and Supplementary leverage exposure as of June 30, 2020 reflect the exclusion of U.S. Treasury securities and deposits at Federal Reserve Banks. As of June 30, 2020, the impact of the interim final rule on our SLR was an improvement of 92 bps. For further information, see “Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments” herein.
 
Regulatory Capital
$ in millions
At
June 30,
2020
At
December 31,
2019
Change
Common Equity Tier 1 capital
 
 
 
Common stock and surplus
$
4,109

$
5,228

$
(1,119
)
Retained earnings
74,280

70,589

3,691

AOCI
1

(2,788
)
2,789

Regulatory adjustments and deductions:
 
 
Net goodwill
(7,224
)
(7,081
)
(143
)
Net intangible assets
(1,857
)
(2,012
)
155

Other adjustments and deductions1
(597
)
815

(1,412
)
Total Common Equity Tier 1 capital
$
68,712

$
64,751

$
3,961

Additional Tier 1 capital
 
 
 
Preferred stock
$
8,520

$
8,520

$
—

Noncontrolling interests
525

607

(82
)
Additional Tier 1 capital
$
9,045

$
9,127

$
(82
)
Deduction for investments in covered funds
(359
)
(435
)
76

Total Tier 1 capital
$
77,398

$
73,443

$
3,955

Standardized Tier 2 capital
 
 
 
Subordinated debt
$
8,691

$
8,538

$
153

Noncontrolling interests
124

143

(19
)
Eligible ACL
1,207

590

617

Other adjustments and deductions
(43
)
(6
)
(37
)
Total Standardized Tier 2 capital
$
9,979

$
9,265

$
714

Total Standardized capital
$
87,377

$
82,708

$
4,669

Advanced Tier 2 capital
 
 
 
Subordinated debt
$
8,691

$
8,538

$
153

Noncontrolling interests
124

143

(19
)
Eligible credit reserves
878

305

573

Other adjustments and deductions
(43
)
(6
)
(37
)
Total Advanced Tier 2 capital
$
9,650

$
8,980

$
670

Total Advanced capital
$
87,048

$
82,423

$
4,625

 
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.



June 2020 Form 10-Q
26
 
Table of Contents
 
Management’s Discussion and Analysis
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RWA Rollforward
 
Six Months Ended
June 30, 2020
$ in millions
Standardized
Advanced
Credit risk RWA
 
 
Balance at December 31, 2019
$
342,684

$
228,927

Change related to the following items:
 
 
Derivatives
2,645

29,723

Securities financing transactions
(8,441
)
569

Securitizations
(851
)
(588
)
Investment securities
2,279

4,279

Commitments, guarantees and loans
8,032

(2,693
)
Cash
2,066

2,031

Equity investments
2,286

2,419

Other credit risk1
(615
)
(1,003
)
Total change in credit risk RWA
$
7,401

$
34,737

Balance at June 30, 2020
$
350,085

$
263,664

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

$
51,597

Change related to the following items:
 
 
Regulatory VaR
11,622

11,622

Regulatory stressed VaR
4,690

4,690

Incremental risk charge
227

227

Comprehensive risk measure
114

10

Specific risk:
 
 
Non-securitization
(423
)
(423
)
Securitization
(2,263
)
(2,263
)
Total change in market risk RWA
$
13,967

$
13,863

Balance at June 30, 2020
$
65,460

$
65,460

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

$
101,972

Change in operational risk RWA
N/A

(4,062
)
Balance at June 30, 2020
N/A

$
97,910

Total RWA
$
415,545

$
427,034

 
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 year period under both the Standardized and Advanced Approaches primarily from an increase in Derivatives exposure driven by market volatility, and an increase in Investment Securities mainly due to increased exposures to U.S. government and agency securities. RWA under the Standardized Approach also increased due to Lending activities within the Institutional Securities and Wealth Management business segments, partially offset by a decrease in Securities financing transactions. Under the Advanced Approach, the increased exposure in Derivatives and widening credit spreads also led to an increase in RWA related to CVA.
Market risk RWA increased in the current year period under the Standardized and Advanced Approaches primarily due to an increase in Regulatory VaR mainly as a result of higher market volatility, and an increase in Stressed VaR driven by increased equity and interest rate risk.
 

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.
Required and Actual TLAC and Eligible LTD Ratios
 
 
 
Actual
Amount/Ratio
$ in millions
Regulatory Minimum
Required 
Ratio1
At
June 30,
2020
At
December 31,
2019
External TLAC2
 
 
$
203,608

$
196,888

External TLAC as a % of RWA
18.0
%
21.5
%
47.7
%
49.9
%
External TLAC as a % of leverage exposure
7.5
%
9.5
%
19.2
%
17.0
%
Eligible LTD3
 
 
$
117,808

$
113,624

Eligible LTD as a % of RWA
9.0
%
9.0
%
27.7
%
28.8
%
Eligible LTD as a % of leverage exposure
4.5
%
4.5
%
11.1
%
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 TLAC requirements as of June 30, 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—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, 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

 
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June 2020 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
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6, 2020. On June 25, 2020, the Federal Reserve published summary results of its supervisory stress tests of each large BHC. On June 29, 2020, we disclosed a summary of the results of our company-run stress tests on our Investor Relations website. Also on June 29, 2020, we announced that we will be subject to a stress capital buffer (“SCB”) of 5.9% beginning October 1, 2020. Together with other features of the regulatory capital framework, this SCB results in an aggregate Standardized Approach Common Equity Tier 1 required ratio of 13.4%. Generally, our SCB will be updated annually based on the results of the supervisory stress test. See “Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments—Stress Capital Buffer Final Rule” herein for additional information on the SCB.

On June 25, 2020, the Federal Reserve also announced that it will be providing updated scenarios, based on which each large BHC will be required to update and resubmit its capital plan within 45 days after the Federal Reserve makes the updated scenarios available. The Federal Reserve stated that it took this action based on its determination that changes in financial markets or the macro-economic outlook, since submission of each BHC’s original capital plan in April 2020, could have a material effect on each BHC’s risk profile and financial condition.

Additionally, on June 25, 2020, the Federal Reserve announced that, in the third quarter of 2020, all large BHCs would be subject to capital action restrictions. Except as noted below, these restrictions generally prohibit large BHCs from making any capital distribution (excluding any capital distribution arising from the issuance of a capital instrument eligible for inclusion in the numerator of a regulatory capital ratio), unless otherwise approved by the Federal Reserve. Large BHCs are, however, authorized to make share repurchases relating to issuances of common stock related to employee stock ownership plans; provided that a BHC does not increase the amount of its common stock dividends, to pay common stock dividends that do not exceed an amount equal to the average of the BHC’s net income for the four preceding calendar quarters, unless otherwise specified by the Federal Reserve; and to make scheduled payments on additional Tier 1 and Tier 2 capital instruments. The Federal Reserve stated that it may extend these provisions on a quarter-by-quarter basis after September 30, 2020. For a further discussion of our capital plans, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Balance Sheet—Capital Management” herein and 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.
We are currently evaluating potential updates to our Required Capital framework to take into account changes to our risk-based capital requirements resulting from the SCB and we will continue to evaluate the framework with respect to the impact of other future regulatory requirements, as appropriate.
Average Common Equity Attribution1   
 
Three Months Ended
June 30,
Six Months Ended
June 30,
$ in billions
2020
2019
2020
2019
Institutional Securities
$
42.8

$
40.4

$
42.8

$
40.4

Wealth Management
18.2

18.2

18.2

18.2

Investment Management
2.6

2.5

2.6

2.5

Parent
14.0

11.5

12.4

11.0

Total
$
77.6

$
72.6

$
76.0

$
72.1

 
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 will be a targeted resolution plan in July 2021.
As described in our most recent 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

June 2020 Form 10-Q
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Table of Contents
 
Management’s Discussion and Analysis
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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.
Regulatory Developments
CFTC Final Rule on Capital Requirements for Swap Dealers
The CFTC has finalized rules establishing capital requirements for CFTC-registered swap dealers not subject to regulation by a prudential regulator. Compliance with these rules, which will apply to a number of our subsidiaries that are CFTC-registered swap dealers, is required by October 6, 2021.
Final Rule to Amend the Covered Fund Provisions of the Volcker Rule

The Federal financial regulatory agencies responsible for the Volcker Rule’s implementing regulations have finalized a rule that revises the prohibition on certain investments by banking entities with defined covered funds. The final rule adds certain new exclusions from the definition of covered fund, while streamlining others. It also simplifies certain restrictions on inter-affiliate relationships with covered funds. The final rule is effective beginning October 1, 2020.

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, introduces an 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.

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 and other U.S. Banking Agency 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 the current year period, we have participated as principal, as well as on behalf of clients, in certain of these facilities and programs and we may participate in other of these facilities and programs in the future.
In addition, the Federal Reserve has taken a range of other actions to support the flow of credit to households and businesses. For example, the Federal Reserve has set the target range for the federal funds rate at 0 to 0.25% and announced that it would increase its holdings of U.S. Treasury securities and agency mortgage-backed securities, begin purchasing agency commercial mortgage-backed securities, and establish a facility to purchase corporate debt securities and shares of exchange-traded funds holding such 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

 
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June 2020 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
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extending the term of such loans up to 90 days. In addition, 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.
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 COVID-19 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 regulatory capital requirements.
The Federal Reserve and other U.S. banking agencies have also issued a series of rulemakings in response to the COVID-19 pandemic, including to facilitate banking organizations’ use of their capital buffers:
•
Supplementary Leverage Ratio Interim Final Rules. 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 supplementary leverage exposure from April 1, 2020 to March 31, 2021.
A similar interim final rule issued by the OCC along with the other U.S. banking agencies provides national banks, including MSBNA and MSPBNA, an optional election to apply similar relief. If elected, a national bank must receive prior approval from the OCC before making any capital distributions while the exclusion is in effect. As of June 30, 2020, neither MSBNA nor MSPBNA made this optional election.
•
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 U.S. banking agencies 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. We have elected to apply a transition method provided by the rule, under which the effects of CECL on our regulatory capital and TLAC requirements are deferred for two years, followed by a three-year phase-in of the aggregate capital effects of the two-year deferral.
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 Coronavirus Aid, Relief, and Economic Security Act (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 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

June 2020 Form 10-Q
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Table of Contents
 
Management’s Discussion and Analysis
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additional authority to the OCC to provide certain exemptions to the lending limits imposed on national banks.
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.
 

 
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June 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 and credit spreads, 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
 
June 30, 2020
$ in millions
Period
End
Average
High2
Low2
Interest rate and credit spread
$
42

$
47

$
59

$
36

Equity price
38

25

38

20

Foreign exchange rate
10

11

15

8

Commodity price
25

16

25

11

Less: Diversification benefit1
(68
)
(49
)
N/A

N/A

Primary Risk Categories
$
47

$
50

$
62

$
44

Credit Portfolio
26

25

30

23

Less: Diversification benefit1
(1
)
(15
)
N/A

N/A

Total Management VaR
$
72

$
60

$
78

$
47

 
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

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.
Average and period-end total Management VaR and Management VaR for the Primary Risk Categories increased from the three months ended March 31, 2020 primarily as a result of increased historical market volatility early in the current quarter amid the COVID-19 pandemic, with the period-end VaR increase being partially offset by risk reduction in the Fixed Income business.

June 2020 Form 10-Q
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Table of Contents
 
Risk Disclosures
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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 was one day with trading losses in the current quarter, which did not exceed the 95%/one-day Total Management VaR.
Daily 95%/One-Day Total Management VaR for the Current Quarter
($ in millions)
dailyvar2q20.jpg
 
Daily Net Trading Revenues for the Current Quarter
($ in millions)
 
dailytradingrevenues2q20.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
June 30,
2020
At
March 31, 2020
Derivatives
$
7

$
6

Funding liabilities2
45

39

 
1.
Amounts represent the potential gain for each 1 bps widening of our credit spread.
2.
Relates to Borrowings carried at fair value.

The change in sensitivity to funding liabilities between June 30, 2020 and March 31, 2020 was primarily driven by the effects of credit spread tightening and new issuances.
U.S. Bank Subsidiaries’ Net Interest Income Sensitivity Analysis
$ in millions
At
June 30,
2020
At
March 31, 2020
Basis point change
 
 
+100
$
599

$
850

 -100
(351
)
(495
)
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 June 30, 2020 and March 31, 2020 was primarily driven by the effect of changes in the mix of our assets and liabilities and lower market rates.

 
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Risk Disclosures
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Investments Sensitivity, Including Related Carried Interest
 
Loss from 10% Decline
$ in millions
At
June 30,
2020
At
March 31, 2020
Investments related to Investment Management activities
$
329

$
327

Other investments:
 
 
MUMSS
170

173

Other Firm investments
188

197

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.
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.
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.
 
Loans and Lending Commitments
 
At June 30, 2020
$ in millions
HFI
HFS
FVO
Total
Institutional Securities:
 
 
 
 
Corporate
$
9,974

$
9,360

$
18

$
19,352

Secured lending facilities
24,733

3,779

497

29,009

Commercial and Residential real estate
7,207

1,337

1,888

10,432

Securities-based lending and Other
1,012

56

5,837

6,905

Total Institutional Securities
42,926

14,532

8,240

65,698

Wealth Management:
 
 
 
 
Residential real estate
32,193

11

—

32,204

Securities-based lending and Other
53,165

—

—

53,165

Total Wealth Management
85,358

11

—

85,369

Total Investment Management1
4

8

510

522

Total loans, before ACL
128,288

14,551

8,750

151,589

ACL
(866
)
 
 
(866
)
Total loans, net of ACL
$
127,422

$
14,551

$
8,750

$
150,723

Lending commitments
 
 
 
$
112,841

Total loans, net of ACL, and lending commitments






$
263,564

 
At December 31, 2019
$ in millions
HFI
HFS
FVO
Total
Institutional Securities:
 
 
 
 
Corporate
$
5,426

$
6,192

$
20

$
11,638

Secured lending facilities
24,502

4,200

951

29,653

Commercial and Residential real estate
7,859

2,049

3,290

13,198

Securities-based lending and Other
503

123

6,814

7,440

Total Institutional Securities
38,290

12,564

11,075

61,929

Wealth Management:
 
 
 
 
Residential real estate
30,184

13

—

30,197

Securities-based lending and Other
49,930

—

—

49,930

Total Wealth Management
80,114

13

—

80,127

Total Investment Management1
5

—

251

256

Total loans, before ACL
118,409

12,577

11,326

142,312

ACL
(349
)
 
 
(349
)
Total loans, net of ACL
$
118,060

$
12,577

$
11,326

$
141,963

Lending commitments
 
 
 
$
120,068

Total loans, net of ACL, and lending commitments






$
262,031

HFI—Held for investment; HFS—Held for sale; FVO—Fair value option

1.
Investment Management business segment loans are related to certain of our activities as an investment advisor and manager. At June 30, 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 loans to corporations.
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 including large corporate and institutional clients as well as high to ultra-high net worth individuals. In addition, we

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Table of Contents
 
Risk Disclosures
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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 $2 billion since December 31, 2019, primarily due to growth in Corporate loans within the Institutional Securities business segment and across all the portfolios within the Wealth Management business segment, partially offset by a decrease in event-driven lending commitments and Commercial real estate loans within the Institutional Securities business segment.
See Notes 4, 9 and 13 to the financial statements for further information.
Beginning late in the first quarter of 2020 and following in part from the U.S. government’s enactment of the CARES Act, we have received requests from certain clients for modifications of their credit agreements with us, which in some cases include deferral of their loan payments. Requests for loan payment deferrals related to Residential real estate loans are immediately granted, while Commercial real estate loan deferrals require careful consideration prior to approval. As of June 30, 2020, we have approved requests for forbearance, or deferral of principal and interest payments, on loans with unpaid principal balances of approximately:
•
$1 billion in our Wealth Management business segment tailored lending portfolio, which is included within Securities-based lending and Other. These loans are commercial real estate-related and generally linked to personal guarantees from high to ultra-high net worth individuals;
•
$1 billion in Wealth Management business segment Residential real estate loans; and
•
Less than $1 billion within our Institutional Securities business segment, primarily within Commercial real estate.
In addition to the deferrals noted above, we are also working with clients regarding modifications of certain other terms under their original loan agreements that do not impact loan payments. As of June, 30 2020, we have granted such relief to certain borrowers, primarily within Secured lending facilities and Corporate loans. Such modifications include agreements to modify margin calls for Secured lending facilities, typically in return for additional payments which improve loan-to-value ratios. In some cases we have agreed to temporarily not enforce certain covenants, for example debt or interest coverage ratios, typically in return for other structural enhancements.
Granting loan deferrals or modification requests does not necessarily mean that we will incur credit losses and we do not believe modifications have had a material impact on the risk
 
profile of our loan portfolio. Modifications are considered in our evaluation of overall credit risk. Generally, loans with payment deferrals remain on accrual status and loans with other modifications remain on current status.
Requests for forbearance and other modifications could continue in future periods given the ongoing 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 Form 10-K. For additional information on regulatory guidance which permits certain loan modifications for borrowers impacted by COVID-19 to not be accounted for and reported as TDRs and the Firm’s accounting policies for such modifications, see “Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments” and Note 2 to the financial statements, respectively.
Allowance for Credit Losses—Loans and Lending Commitments
$ in millions
 
December 31, 20191
$
590

Effect of CECL adoption
(41
)
Gross charge-offs
(33
)
Recovery
2

Net (charge-offs) recoveries
(31
)
Provision2
646

Other
(1
)
June 30, 2020
$
1,163

ACL—Loans
$
866

ACL—Lending commitments
297

1.
At December 31, 2019, the ACL for Loans and Lending commitments was $349 million and $241 million, respectively.
2.
The provision for loan losses and provision (release) for losses on lending commitments were $246 million and $(7) million, respectively, in the current quarter and $538 million and $108 million, respectively, in the current year period.
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 year period, principally reflecting a provision for credit losses within the Institutional Securities business segment primarily resulting from the economic impact of COVID-19. This provision was the result of higher actual and expected future downgrades, revisions to our forecasts reflecting expected future market and macroeconomic conditions and an increase in funded balances. The base scenario

 
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June 2020 Form 10-Q
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Risk Disclosures
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used in our ACL models as of June 30, 2020 was generated using a combination of industry consensus economic forecasts, forward rates, and internally developed and validated models. Given the nature of our lending portfolio, the most sensitive model input is U.S. GDP. The base scenario, among other things, includes a continued sharp drop in U.S. GDP in the current quarter, a U.S. recession, and a recovery supported by fiscal stimulus and monetary policy measures in the U.S. and around the world beginning in the second half of 2020. See Note 2 to the financial statements for a discussion of the Firm’s ACL methodology under CECL.
Status of Loans Held for Investment
 
At June 30, 2020
At December 31, 2019
 
IS
WM
IS
WM
Accrual
99.0
%
99.9
%
99.0
%
99.9
%
Nonaccrual1
1.0
%
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.
Institutional Securities Loans and Lending Commitments1 
 
At June 30, 2020
 
Contractual Years to Maturity
 
$ in millions
Less than 1
1-3
3-5
Over 5
Total
Loans
 
 
 
 
 
AA
$
74

$
29

$
—

$
4

$
107

A
1,032

1,078

187

228

2,525

BBB
3,284

5,262

4,240

460

13,246

BB
12,221

8,157

7,808

461

28,647

Other NIG
5,527

6,943

4,568

1,870

18,908

Unrated2
72

67

121

1,249

1,509

Total loans
22,210

21,536

16,924

4,272

64,942

Lending commitments
 
 
 
 
AAA
—

50

—

—

50

AA
3,986

690

2,460

—

7,136

A
6,721

6,869

8,718

296

22,604

BBB
8,851

14,551

15,767

221

39,390

BB
3,020

5,342

7,303

745

16,410

Other NIG
1,151

5,091

6,244

331

12,817

Unrated2
3

47

2

1

53

Total lending commitments
23,732

32,640

40,494

1,594

98,460

Total exposure
$
45,942

$
54,176

$
57,418

$
5,866

$
163,402

 
 
 
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 the Credit Risk Management Department (“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 year period in the Institutional Securities business segment. In the first quarter of 2020, the increase was primarily driven by clients with non-investment grade credit ratings, who sought liquidity as capital markets alternatives to drawing on lines of credit were less available. In the current quarter, as capital markets became more active, many of these clients paid down on the lines which were drawn upon in the first quarter.

June 2020 Form 10-Q
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Table of Contents
 
Risk Disclosures
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Institutional Securities Loans and Lending Commitments by Industry
$ in millions
At
June 30,
2020
At
December 31,
2019
Industry
 
 
Financials
$
41,023

$
40,992

Real estate
25,195

28,348

Industrials
14,684

13,136

Healthcare
13,063

14,113

Communications services
10,298

12,165

Energy
10,118

9,461

Utilities
9,966

9,905

Consumer staples
9,855

9,724

Consumer discretionary
9,025

9,589

Information technology
8,378

9,201

Materials
5,178

5,577

Insurance
4,401

3,755

Other
2,218

2,552

Total
$
163,402

$
168,518

Sectors Currently in Focus due to COVID-19
The continuing effect on economic activity of COVID-19 and related governmental actions have impacted borrowers in many sectors and industries. While we are carefully monitoring all of our Institutional Securities business segment exposures, certain sectors are more sensitive to the current economic environment and are continuing to receive heightened focus. The sectors currently in focus are: air travel, retail, upstream energy, lodging and leisure, and healthcare services and systems. As of June 30, 2020, exposures to these sectors are included across the Industrials, Financials, Real estate, Consumer discretionary, Energy and Healthcare industries in the previous table, and in aggregate represent approximately 10% of total Institutional Securities business segment lending exposure. The substantial majority of these exposures are either investment grade or secured by collateral. The future developments of COVID-19 and related government actions and their effect on the economic environment remain uncertain; therefore, the sectors impacted and the extent of the impacts may change over time. Refer to “Risk Factors” herein.
Institutional Securities Lending Activities
The Institutional Securities business segment lending activities include Corporate, Secured lending facilities, Commercial real estate and Securities-based lending and Other.
Corporate comprises relationship and event-driven loans and lending commitments, which 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, which are, in turn, collateralized by various assets 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 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. In addition, as part of certain of its trading and securitization activities, Institutional Securities may also hold residential real estate loans.
Securities-based lending and Other includes financing extended to sales and trading customers and corporate loans purchased in the secondary market.
 
 
 
Institutional Securities Event-Driven Loans and Lending Commitments
 
At June 30, 2020
 
Contractual Years to Maturity
 
$ in millions
Less than 1
1-3
3-5
Over 5
Total
Loans
$
1,947

$
1,307

$
1,044

$
738

$
5,036

Lending commitments
5,504

2,846

2,055

455

10,860

Total loans and lending commitments
$
7,451

$
4,153

$
3,099

$
1,193

$
15,896

 
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

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. Late in first quarter of 2020, 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 impacted this market into the current quarter. By the end of the current quarter, this market had largely normalized; however, liquidity may decline and volatility may return in the future given the current uncertain economic and market conditions. See “Risk Factors” herein, and Forward Looking Statements in the 2019 Form 10-K.

 
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June 2020 Form 10-Q
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Risk Disclosures
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Institutional Securities Loans and Lending Commitments Held for Investment
 
At June 30, 2020
$ in millions
Loans
Lending Commitments
Total
Corporate
$
9,974

$
61,881

$
71,855

Secured lending facilities
24,733

8,379

33,112

Commercial real estate
7,207

306

7,513

Other
1,012

1,079

2,091

Total, before ACL
$
42,926

$
71,645

$
114,571

ACL
$
(756
)
$
(293
)
$
(1,049
)
 
At December 31, 2019
$ in millions
Loans
Lending Commitments
Total
Corporate
$
5,426

$
61,716

$
67,142

Secured lending facilities
24,502

6,105

30,607

Commercial real estate
7,859

425

8,284

Other
503

832

1,335

Total, before ACL
$
38,290

$
69,078

$
107,368

ACL
$
(297
)
$
(236
)
$
(533
)
Institutional Securities Allowance for Credit Losses—Loans and Lending Commitments
$ in millions
Corporate
Secured lending facilities
Commercial real estate
Other
Total
At December 31, 2019
 
 
 
 
 
ACL—Loans
$
115

$
101

$
75

$
6

$
297

ACL—Lending commitments
$
201

$
27

$
7

$
1

$
236

Total
$
316

$
128

$
82

$
7

$
533

Effect of CECL adoption
(43
)
(53
)
35

3

(58
)
Gross charge-offs
(33
)
—

—

—

(33
)
Recoveries
—

—

—

2

2

Net (charge-offs) recoveries
(33
)
—

—

2

(31
)
Provision1
371

89

162

(16
)
606

Other
(1
)
—

(42
)
42

(1
)
Total at June 30, 2020
$
610

$
164

$
237

$
38

$
1,049

ACL—Loans
$
379

$
122

$
226

$
29

$
756

ACL—Lending commitments
231

42

11

9

293

1.
The provision for loan losses and provision (release) for losses on lending commitments were $223 million and $(5) million, respectively, in the current quarter and $496 million and $110 million, respectively, in the current year period.
 
 
 
 
 
 
 
 
 
 
 
 
Institutional Securities HFI Loans—Ratios of Allowance for Credit Losses to Balance Before Allowance
 
At
June 30,
2020
At
December 31,
2019
Corporate
3.8
%
2.1
%
Secured lending facilities
0.5
%
0.4
%
Commercial real estate
3.1
%
1.0
%
Other
2.9
%
1.2
%
Total Institutional Securities loans
1.8
%
0.8
%
 
Wealth Management Loans and Lending Commitments
 
At June 30, 2020
 
Contractual Years to Maturity
 
$ in millions
Less than 1
1-3
3-5
Over 5
Total
Securities-based lending and Other
$
45,811

$
3,798

$
1,841

$
1,662

$
53,112

Residential real estate
12

5

—

32,130

32,147

Total loans
$
45,823

$
3,803

$
1,841

$
33,792

$
85,259

Lending commitments
11,440

2,276

396

269

14,381

Total loans and lending commitments
$
57,263

$
6,079

$
2,237

$
34,061

$
99,640

 
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
$
41,863

$
3,972

$
2,783

$
1,284

$
49,902

Residential real estate
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 year period, Loans and Lending commitments associated with the Wealth Management business segment increased due to growth across all portfolios.
Wealth Management Allowance for Credit Losses—Loans and Lending Commitments
$ in millions
 
December 31, 20191
$
57

Effect of CECL adoption
17

Provision2
40

June 30, 2020
$
114

ACL—Loans
$
110

ACL—Lending commitments
4

1.
At December 31, 2019, the total ACL for Loans and Lending commitments was $52 million and $5 million, respectively.
2.
The provision for loan losses and provision (release) for losses on lending commitments were $23 million and $(2) million, respectively, in the current quarter and $42 million and $(2) million, respectively, in the current year period.

At June 30, 2020, more than 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

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daily client margining, which includes requiring customers to deposit additional collateral, or reduce debt positions, when necessary.
Customer and Other Receivables
Margin Loans
 
At June 30, 2020
$ in millions
IS
WM
Total
Customer receivables representing margin loans
$
24,524

$
8,945

$
33,469

 
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
June 30,
2020
At
December 31,
2019
Currently employed by the Firm
$
2,850

N/A

No longer employed by the Firm
147

N/A

Balance
$
2,997

$
2,980

ACL1
(172
)
(61
)
Balance, net
$
2,825

$
2,919

Remaining repayment term, weighted average in years
5.0

4.8

1.
The change in ACL includes a $124 million increase due to the adoption of CECL on January 1, 2020.
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 ACL as of June 30, 2020 was calculated under CECL, while the ACL 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 June 30, 2020
 
 
 
 
<1 year
$
668

$
11,654

$
37,871

$
24,762

$
13,357

$
88,312

1-3 years
508

5,687

20,332

14,937

6,850

48,314

3-5 years
478

4,815

12,952

9,427

4,054

31,726

Over 5 years
4,482

32,927

93,134

66,713

17,852

215,108

Total, gross
$
6,136

$
55,083

$
164,289

$
115,839

$
42,113

$
383,460

Counterparty netting
(3,002
)
(42,172
)
(134,053
)
(90,233
)
(24,138
)
(293,598
)
Cash and securities collateral
(2,818
)
(10,580
)
(25,143
)
(19,460
)
(12,132
)
(70,133
)
Total, net
$
316

$
2,331

$
5,093

$
6,146

$
5,843

$
19,729

 
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
June 30,
2020
At
December 31,
2019
Industry
 
Utilities
$
4,887

$
4,275

Financials
4,251

3,448

Industrials
1,900

914

Healthcare
1,633

991

Regional governments
1,104

791

Energy
902

524

Information technology
886

659

Not-for-profit organizations
878

657

Materials
691

325

Sovereign governments
636

403

Communications services
479

381

Consumer staples
474

129

Consumer discretionary
435

370

Insurance
318

214

Real estate
207

315

Other
48

60

Total
$
19,729

$
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 year period, our exposure to credit risk arising from OTC derivatives has increased, primarily as a function of the effect of market factors and

 
39
June 2020 Form 10-Q
Table of Contents
 
Risk Disclosures
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volatility on the valuation of our positions, although exposure has declined since peaking in March. 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 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 June 30, 2020
United Kingdom
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
(205
)
$
782

$
577

Net counterparty exposure2
61

10,469

10,530

Loans
—

3,219

3,219

Lending commitments
—

6,247

6,247

Exposure before hedges
(144
)
20,717

20,573

Hedges3
(311
)
(1,253
)
(1,564
)
Net exposure
$
(455
)
$
19,464

$
19,009

 
Japan
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
8,782

$
526

$
9,308

Net counterparty exposure2
100

4,851

4,951

Loans
—

713

713

Lending commitments
—

2

2

Exposure before hedges
8,882

6,092

14,974

Hedges3
(96
)
(227
)
(323
)
Net exposure
$
8,786

$
5,865

$
14,651

Germany
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
1,745

$
12

$
1,757

Net counterparty exposure2
223

3,290

3,513

Loans
—

1,999

1,999

Lending commitments
—

3,272

3,272

Exposure before hedges
1,968

8,573

10,541

Hedges3
(285
)
(810
)
(1,095
)
Net exposure
$
1,683

$
7,763

$
9,446

France
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
67

$
(307
)
$
(240
)
Net counterparty exposure2
15

2,905

2,920

Loans
—

834

834

Lending commitments
—

3,213

3,213

Exposure before hedges
82

6,645

6,727

Hedges3
(6
)
(755
)
(761
)
Net exposure
$
76

$
5,890

$
5,966

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

$
(19
)
$
(19
)
Net counterparty exposure2
5

348

353

Loans
—

3,787

3,787

Lending commitments
—

1,780

1,780

Exposure before hedges
5

5,896

5,901

Hedges3
—

(119
)
(119
)
Net exposure
$
5

$
5,777

$
5,782

Canada
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
152

$
401

$
553

Net counterparty exposure2
130

1,964

2,094

Loans
—

285

285

Lending commitments
—

1,792

1,792

Exposure before hedges
282

4,442

4,724

Hedges3
—

(117
)
(117
)
Net exposure
$
282

$
4,325

$
4,607


June 2020 Form 10-Q
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Table of Contents
 
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China
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
(102
)
$
1,462

$
1,360

Net counterparty exposure2
85

375

460

Loans
—

1,432

1,432

Lending commitments
—

758

758

Exposure before hedges
(17
)
4,027

4,010

Hedges3
(82
)
(131
)
(213
)
Net exposure
$
(99
)
$
3,896

$
3,797

Australia
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
1,832

$
248

$
2,080

Net counterparty exposure2
17

662

679

Loans
—

319

319

Lending commitments
—

847

847

Exposure before hedges
1,849

2,076

3,925

Hedges3
—

(173
)
(173
)
Net exposure
$
1,849

$
1,903

$
3,752

India
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
1,763

$
716

$
2,479

Net counterparty exposure2
—

829

829

Loans
—

228

228

Exposure before hedges
1,763

1,773

3,536

Net exposure
$
1,763

$
1,773

$
3,536

Netherlands
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
98

$
218

$
316

Net counterparty exposure2
—

704

704

Loans
—

489

489

Lending commitments
—

1,648

1,648

Exposure before hedges
98

3,059

3,157

Hedges3
(32
)
(162
)
(194
)
Net exposure
$
66

$
2,897

$
2,963


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
June 30,
2020
Country of Risk
Collateral2
 
Germany
Spain and France
$
12,980

United Kingdom
U.K., U.S. and Spain
12,478

Other
Japan, France and U.S.
25,290

 
1.
The benefit of collateral received is reflected in the Top 10 Non-U.S. Country Exposures at June 30, 2020.
2.
Collateral primarily consists of cash and government obligations.
Country Risk Exposures Related to the U.K.
At June 30, 2020, our country risk exposures in the U.K. included net exposures of $19,009 million (as shown in the Top 10 Non-U.S. Country Exposures table) and overnight deposits of $6,225 million. The $19,464 million of exposures to non-sovereigns were diversified across both names and sectors and include $7,116 million to U.K.-focused counterparties that generate more than one-third of their revenues in the U.K., $5,618 million to geographically diversified counterparties, and $5,988 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

 
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June 2020 Form 10-Q
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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 “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.
 

June 2020 Form 10-Q
42
 

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 June 30, 2020, and the related condensed consolidated income statements, comprehensive income statements, and statements of changes in total equity for the three-month and six-month periods ended June 30, 2020 and 2019, and the cash flow statements for the six-month periods ended June 30, 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
August 4, 2020



 
43
June 2020 Form 10-Q
Table of Contents
 
Consolidated Income Statements
(Unaudited)
mslogo2q20.jpg


 
 
Three Months Ended
June 30,
Six Months Ended
June 30,
in millions, except per share data
2020
2019
2020
2019
Revenues
 
 
 
 
Investment banking
$
2,142

$
1,590

$
3,413

$
2,832

Trading
4,683

2,732

7,739

6,173

Investments
275

441

313

714

Commissions and fees
1,102

979

2,462

1,945

Asset management
3,265

3,220

6,682

6,269

Other
347

253

(664
)
554

Total non-interest revenues
11,814

9,215

19,945

18,487

Interest income
2,358

4,506

5,861

8,796

Interest expense
758

3,477

2,905

6,753

Net interest
1,600

1,029

2,956

2,043

Net revenues
13,414

10,244

22,901

20,530

Non-interest expenses
 
 
 
 
Compensation and benefits
6,035

4,531

10,318

9,182

Brokerage, clearing and exchange fees
716

630

1,456

1,223

Information processing and communications
589

538

1,152

1,070

Professional services
535

537

984

1,051

Occupancy and equipment
365

353

730

700

Marketing and business development
63

162

195

303

Other
756

590

1,565

1,143

Total non-interest expenses
9,059

7,341

16,400

14,672

Income before provision for income taxes
4,355

2,903

6,501

5,858

Provision for income taxes
1,119

657

1,485

1,144

Net income
$
3,236

$
2,246

$
5,016

$
4,714

Net income applicable to noncontrolling interests
40

45

122

84

Net income applicable to Morgan Stanley
$
3,196

$
2,201

$
4,894

$
4,630

Preferred stock dividends
149

170

257

263

Earnings applicable to Morgan Stanley common shareholders
$
3,047

$
2,031

$
4,637

$
4,367

Earnings per common share
 
 
 
 
Basic
$
1.98

$
1.24

$
3.00

$
2.65

Diluted
$
1.96

$
1.23

$
2.96

$
2.62

Average common shares outstanding
 
 
 
 
Basic
1,541

1,634

1,548

1,646

Diluted
1,557

1,655

1,565

1,666


June 2020 Form 10-Q
44
See Notes to Consolidated Financial Statements

Table of Contents
 
Consolidated Comprehensive Income Statements
(Unaudited)
mslogo2q20.jpg


 
 
Three Months Ended
June 30,
Six Months Ended
June 30,
$ in millions
2020
2019
2020
2019
Net income
$
3,236

$
2,246

$
5,016

$
4,714

Other comprehensive income (loss), net of tax:
 
 
 
 
Foreign currency translation adjustments
21

65

(111
)
43

Change in net unrealized gains (losses) on available-for-sale securities
295

609

1,620

1,038

Pension, postretirement and other
(1
)
3

24

4

Change in net debt valuation adjustment
(2,496
)
(246
)
1,307

(866
)
Total other comprehensive income (loss)
$
(2,181
)
$
431

$
2,840

$
219

Comprehensive income
$
1,055

$
2,677

$
7,856

$
4,933

Net income applicable to noncontrolling interests
40

45

122

84

Other comprehensive income (loss) applicable to noncontrolling interests
(87
)
9

51

(22
)
Comprehensive income applicable to Morgan Stanley
$
1,102

$
2,623

$
7,683

$
4,871


See Notes to Consolidated Financial Statements
45
June 2020 Form 10-Q

Table of Contents
 
Consolidated Balance Sheets

mslogo2q20.jpg


$ in millions, except share data
(Unaudited) At
June 30,
2020
At
December 31, 2019
Assets
 
 
Cash and cash equivalents
$
106,276

$
82,171

Trading assets at fair value ($127,153 and $128,386 were pledged to various parties)
300,391

297,110

Investment securities (includes $85,577 and $62,223 at fair value)
132,620

105,725

Securities purchased under agreements to resell (includes $19 and $4 at fair value)
96,612

88,224

Securities borrowed
106,834

106,549

Customer and other receivables
62,290

55,646

Loans:
 
 
Held for investment (net of allowance of $866 and $349)
127,422

118,060

Held for sale
14,551

12,577

Goodwill
7,329

7,143

Intangible assets (net of accumulated amortization of $3,361 and $3,204)
1,958

2,107

Other assets
19,080

20,117

Total assets
$
975,363

$
895,429

Liabilities
 
 
Deposits (includes $4,022 and $2,099 at fair value)
$
236,849

$
190,356

Trading liabilities at fair value
149,756

133,356

Securities sold under agreements to repurchase (includes $1,225 and $733 at fair value)
50,848

54,200

Securities loaned
10,493

8,506

Other secured financings (includes $9,914 and $7,809 at fair value)
13,662

14,698

Customer and other payables
198,971

197,834

Other liabilities and accrued expenses
21,311

21,155

Borrowings (includes $66,737 and $64,461 at fair value)
205,464

192,627

Total liabilities
887,354

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: 1,576,105,281 and 1,593,973,680
20

20

Additional paid-in capital
23,782

23,935

Retained earnings
74,015

70,589

Employee stock trusts
3,018

2,918

Accumulated other comprehensive income (loss)
1

(2,788
)
Common stock held in treasury at cost, $0.01 par value (462,788,698 and 444,920,299 shares)
(19,693
)
(18,727
)
Common stock issued to employee stock trusts
(3,018
)
(2,918
)
Total Morgan Stanley shareholders’ equity
86,645

81,549

Noncontrolling interests
1,364

1,148

Total equity
88,009

82,697

Total liabilities and equity
$
975,363

$
895,429


June 2020 Form 10-Q
46
See Notes to Consolidated Financial Statements

Table of Contents
 
Consolidated Statements of Changes in Total Equity
(Unaudited)
mslogo2q20.jpg


 
Three Months Ended
June 30,
Six Months Ended
June 30,
$ in millions
2020
2019
2020
2019
Preferred Stock
 
 
 
 
Beginning and ending balance
$
8,520

$
8,520

$
8,520

$
8,520

Common Stock
 
 
 
 
Beginning and ending balance
20

20

20

20

Additional Paid-in Capital
 
 
 
 
Beginning balance
23,428

23,178

23,935

23,794

Share-based award activity
354

268

(153
)
(350
)
Other net increases
—

—

—

2

Ending balance
23,782

23,446

23,782

23,446

Retained Earnings
 
 
 
 
Beginning balance
71,518

66,061

70,589

64,175

Cumulative adjustments for accounting changes1
—

—

(100
)
63

Net income applicable to Morgan Stanley
3,196

2,201

4,894

4,630

Preferred stock dividends2
(149
)
(170
)
(257
)
(263
)
Common stock dividends2
(550
)
(504
)
(1,111
)
(1,017
)
Ending balance
74,015

67,588

74,015

67,588

Employee Stock Trusts
 
 
 
 
Beginning balance
3,088

3,000

2,918

2,836

Share-based award activity
(70
)
(111
)
100

53

Ending balance
3,018

2,889

3,018

2,889

Accumulated Other Comprehensive Income (Loss)
 
 
 
 
Beginning balance
2,095

(2,473
)
(2,788
)
(2,292
)
Net change in Accumulated other comprehensive income (loss)
(2,094
)
422

2,789

241

Ending balance
1

(2,051
)
1

(2,051
)
Common Stock Held In Treasury at Cost
 
 
 
 
Beginning balance
(19,721
)
(14,582
)
(18,727
)
(13,971
)
Share-based award activity
56

47

844

1,081

Repurchases of common stock and employee tax withholdings
(28
)
(1,264
)
(1,810
)
(2,909
)
Ending balance
(19,693
)
(15,799
)
(19,693
)
(15,799
)
Common Stock Issued to Employee Stock Trusts
 
 
 
 
Beginning balance
(3,088
)
(3,000
)
(2,918
)
(2,836
)
Share-based award activity
70

111

(100
)
(53
)
Ending balance
(3,018
)
(2,889
)
(3,018
)
(2,889
)
Non-Controlling Interests
 
 
 
 
Beginning balance
1,368

1,168

1,148

1,160

Net income applicable to non-controlling interests
40

45

122

84

Net change in Accumulated other comprehensive income (loss)
(87
)
9

51

(22
)
Other net increases (decreases)
43

(101
)
43

(101
)
Ending balance
1,364

1,121

1,364

1,121

Total Equity
$
88,009

$
82,845

$
88,009

$
82,845


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
47
June 2020 Form 10-Q

Table of Contents
 
Consolidated Cash Flow Statements
(Unaudited)
mslogo2q20.jpg


 
Six Months Ended
June 30,
$ in millions
2020
2019
Cash flows from operating activities
 
 
Net income
$
5,016

$
4,714

Adjustments to reconcile net income to net cash provided by (used for) operating activities:
 
 
Stock-based compensation expense
548

592

Depreciation and amortization
1,510

1,333

Provision for (Release of) credit losses on lending activities
646

54

Other operating adjustments
599

(121
)
Changes in assets and liabilities:
 
 
Trading assets, net of Trading liabilities
17,539

2,621

Securities borrowed
(285
)
(17,267
)
Securities loaned
1,987

(1,583
)
Customer and other receivables and other assets
(7,789
)
48

Customer and other payables and other liabilities
(1,005
)
11,522

Securities purchased under agreements to resell
(8,388
)
13,124

Securities sold under agreements to repurchase
(3,352
)
12,535

Net cash provided by (used for) operating activities
7,026

27,572

Cash flows from investing activities
 
 
Proceeds from (payments for):
 
 
Other assets—Premises, equipment and software, net
(782
)
(1,008
)
Changes in loans, net
(8,700
)
(4,886
)
Investment securities:
 
 
Purchases
(33,195
)
(26,061
)
Proceeds from sales
3,581

9,869

Proceeds from paydowns and maturities
5,616

5,040

Other investing activities
(138
)
(776
)
Net cash provided by (used for) investing activities
(33,618
)
(17,822
)
Cash flows from financing activities
 
 
Net proceeds from (payments for):
 
 
Other secured financings
332

214

Deposits
46,287

(11,227
)
Proceeds from issuance of Borrowings
32,914

16,692

Payments for:
 
 
Borrowings
(24,632
)
(18,513
)
Repurchases of common stock and employee tax withholdings
(1,810
)
(2,909
)
Cash dividends
(1,328
)
(1,412
)
Other financing activities
(164
)
(106
)
Net cash provided by (used for) financing activities
51,599

(17,261
)
Effect of exchange rate changes on cash and cash equivalents
(902
)
(105
)
Net increase (decrease) in cash and cash equivalents
24,105

(7,616
)
Cash and cash equivalents, at beginning of period
82,171

87,196

Cash and cash equivalents, at end of period
$
106,276

$
79,580

Supplemental Disclosure of Cash Flow Information
 
 
Cash payments for:
 
 
Interest
$
2,742

$
6,311

Income taxes, net of refunds
679

1,115


June 2020 Form 10-Q
48
See Notes to Consolidated Financial Statements

Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.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, ACL, 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.

 
49
June 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.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 six months ended June 30, 2020 (“current year period”), there were no significant revisions to the Firm’s significant accounting policies, other than for the accounting updates adopted.
Accounting Updates Adopted in 2020
Reference Rate Reform
The Firm adopted the Reference Rate Reform accounting update in the current quarter. There was no impact to the Firm’s financial statements upon initial adoption.
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. The Firm is applying the accounting relief as relevant contract and hedge accounting relationship modifications are made during the course of the reference rate reform transition period. The 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. It 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 ends December 31, 2022.
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 previously 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
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 three 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 13 quarters, 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/loss given default model for instruments that are collectively assessed, under which the ACL is calculated as the product of probability of default, loss given default and exposure at default. These parameters are forecast for each collective group of assets 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.

June 2020 Form 10-Q
50
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg


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 generally applies a discounted cash flow 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 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, Secured lending facilities, Commercial real estate loans and securities, and Other loans: Internal risk ratings developed by the Credit Risk Management Department 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.

For Securities-based loans, the Firm generally measures the ACL 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 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.

 
51
June 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

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 COVID-19, generally would not be considered TDRs. Additionally, these loans generally would not be considered nonaccrual status unless collectability concerns exist despite the modification provided. For loans remaining on accrual status, the Firm elected to continue recognizing interest income during the modification periods.
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. However, in the case of loans which are modified as a result of COVID-19 and remain on accrual status due to the relief noted in “Modifications and Nonaccrual Status for Borrowers Impacted by COVID-19,” accrued interest receivable balances are assessed for any required ACL.
Available-for-Sale (“AFS”) Investment Securities

AFS securities are reported at fair value in the balance sheets. Interest income, including amortization of premiums and accretion of discounts, is included in Interest income in the Income statements. AFS securities in an unrealized gain position at the end of the reporting period are reflected in AOCI and AFS securities in an unrealized loss position are treated as follows.

Unrealized Losses on AFS Securities

AFS securities in an unrealized loss position 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 require a write-off of any previously established ACL as well as a write-down of amortized cost basis to the security's fair value, with any incremental unrealized losses reported in Other revenues.

For all other AFS securities in an unrealized loss position, the Firm assesses whether credit losses exist at the individual security level and reflects the credit losses in the ACL accordingly. 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. If a credit loss exists, 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 Investment securities
Other revenue
The Firm recognizes the non-credit loss component of the unrealized loss as an adjustment to the security’s value with an offsetting entry to AOCI in the balance sheets.

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, except as set forth in “Modifications and Nonaccrual Status for Borrowers Impacted by COVID-19.”
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
June 30,
2020
At
December 31,
2019
Cash and due from banks
$
12,411

$
6,763

Interest bearing deposits with banks
93,865

75,408

Total Cash and cash equivalents
$
106,276

$
82,171

Restricted cash
$
42,885

$
32,512


Cash and cash equivalents also include Restricted cash such as cash segregated in compliance with federal or other regulations, including minimum reserve requirements set by the Federal Reserve Bank and other central banks, and the Firm's initial margin deposited with clearing organizations.

June 2020 Form 10-Q
52
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

4. Fair Values
Recurring Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
At June 30, 2020
$ in millions
Level 1
Level 2
Level 3
Netting1
Total
Assets at fair value
 
 
 
 
 
Trading assets:
 
 
 
 
 
U.S. Treasury and agency securities
$
47,902

$
26,585

$
97

$
—

$
74,584

Other sovereign government obligations
39,287

6,249

11

—

45,547

State and municipal securities
—

1,408

—

—

1,408

MABS
—

1,104

379

—

1,483

Loans and lending commitments2
—

4,682

4,068

—

8,750

Corporate and other debt
—

24,126

2,686

—

26,812

Corporate equities3
94,672

940

83

—

95,695

Derivative and other contracts:
 
 
 
 
Interest rate
3,229

253,908

1,189

—

258,326

Credit
—

8,429

741

—

9,170

Foreign exchange
26

73,816

91

—

73,933

Equity
1,703

63,139

1,286

—

66,128

Commodity and other
2,337

13,049

3,362

—

18,748

Netting1
(6,355
)
(321,335
)
(1,065
)
(58,899
)
(387,654
)
Total derivative and other contracts
940

91,006

5,604

(58,899
)
38,651

Investments4
615

115

759

—

1,489

Physical commodities
—

2,396

—

—

2,396

Total trading assets4
183,416

158,611

13,687

(58,899
)
296,815

Investment securities—AFS
49,018

36,559

—

—

85,577

Securities purchased under agreements to resell
—

19

—

—

19

Total assets at fair value
$
232,434

$
195,189

$
13,687

$
(58,899
)
$
382,411


 
 
At June 30, 2020
$ in millions
Level 1
Level 2
Level 3
Netting1
Total
Liabilities at fair value
 
 
 
 
 
Deposits
$
—

$
3,932

$
90

$
—

$
4,022

Trading liabilities:
 
 
 
 
 
U.S. Treasury and agency securities
14,862

1,994

—

—

16,856

Other sovereign government obligations
24,147

1,460

1

—

25,608

Corporate and other debt
—

8,399

4

—

8,403

Corporate equities3
59,944

353

69

—

60,366

Derivative and other contracts:
 
 
 
 
Interest rate
3,317

240,593

429

—

244,339

Credit
—

8,739

610

—

9,349

Foreign exchange
19

77,030

74

—

77,123

Equity
1,967

70,055

3,170

—

75,192

Commodity and other
2,486

11,729

1,275

—

15,490

Netting1
(6,355
)
(321,335
)
(1,065
)
(54,215
)
(382,970
)
Total derivative and other contracts
1,434

86,811

4,493

(54,215
)
38,523

Total trading liabilities
100,387

99,017

4,567

(54,215
)
149,756

Securities sold under agreements to repurchase
—

785

440

—

1,225

Other secured financings
—

9,614

300

—

9,914

Borrowings
—

62,602

4,135

—

66,737

Total liabilities at fair value
$
100,387

$
175,950

$
9,532

$
(54,215
)
$
231,654

 
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


 
53
June 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

 
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 Value1 
$ in millions
At
June 30,
2020
At
December 31,
2019
Corporate
$
18

$
20

Secured lending facilities
497

951

Commercial Real Estate
942

2,098

Residential Real Estate
946

1,192

Securities-based lending and Other loans
6,347

7,065

Total
$
8,750

$
11,326


1.
Loans previously classified as corporate have been further disaggregated in the current period; prior period balances have been revised to conform with current period presentation.
Unsettled Fair Value of Futures Contracts1   
$ in millions
At
June 30,
2020
At
December 31,
2019
Customer and other receivables, net
$
556

$
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.
Rollforward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
Three Months Ended
June 30,
Six Months Ended
June 30,
$ in millions
2020
2019
2020
2019
U.S. Treasury and agency securities
Beginning balance
$
99

$
7

$
22

$
54

Realized and unrealized gains (losses)
(3
)
—

(20
)
—

Purchases
81

5

108

5

Sales
(38
)
(4
)
(23
)
(54
)
Net transfers
(42
)
(3
)
10

—

Ending balance
$
97

$
5

$
97

$
5

Unrealized gains (losses)
$
(1
)
$
—

$
(21
)
$
—

Other sovereign government obligations
Beginning balance
$
17

$
5

$
5

$
17

Realized and unrealized gains (losses)
(1
)


—

—

Purchases
—

8

9

8

Sales
(3
)
(3
)
(4
)
(4
)
Net transfers
(2
)


1

(11
)
Ending balance
$
11

$
10

$
11

$
10

Unrealized gains (losses)
$
(1
)
$
—

$
—

$
—

State and municipal securities
Beginning balance
$
1

$
12

$
1

$
148

Purchases
—

15

—

15

Sales
—

(11
)
—

(43
)
Net transfers
(1
)
—

(1
)
(104
)
Ending balance
$
—

$
16

$
—

$
16

Unrealized gains (losses)
$
—

$
—

$
—

$
—

MABS
Beginning balance
$
483

$
301

$
438

$
354

Realized and unrealized gains (losses)
11

(5
)
(62
)
3

Purchases
274

52

384

63

Sales
(401
)
(43
)
(418
)
(133
)
Settlements
—

(19
)
—

(22
)
Net transfers
12

194

37

215

Ending balance
$
379

$
480

$
379

$
480

Unrealized gains (losses)
$
8

$
(12
)
$
(60
)
$
(24
)
Loans and lending commitments
Beginning balance
$
5,980

$
6,343

$
5,073

$
6,870

Realized and unrealized gains (losses)
(2
)
73

(119
)
44

Purchases and originations
808

957

1,160

1,548

Sales
(672
)
(1,021
)
(755
)
(588
)
Settlements
(901
)
(733
)
(1,508
)
(1,487
)
Net transfers1
(1,145
)
(15
)
217

(783
)
Ending balance
$
4,068

$
5,604

$
4,068

$
5,604

Unrealized gains (losses)
$
5

$
66

$
(116
)
$
44



June 2020 Form 10-Q
54
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

 
Three Months Ended
June 30,
Six Months Ended
June 30,
$ in millions
2020
2019
2020
2019
Corporate and other debt
Beginning balance
$
1,708

$
1,061

$
1,396

$
1,076

Realized and unrealized gains (losses)
55

86

(87
)
161

Purchases
2,859

407

2,522

428

Sales
(1,726
)
(101
)
(861
)
(267
)
Settlements
(232
)
(3
)
(311
)
(5
)
Net transfers
22

(86
)
27

(29
)
Ending balance
$
2,686

$
1,364

$
2,686

$
1,364

Unrealized gains (losses)
$
46

$
85

$
(92
)
$
152

Corporate equities
Beginning balance
$
146

$
152

$
97

$
95

Realized and unrealized gains (losses)
(12
)
(12
)
(100
)
(10
)
Purchases
13

21

24

28

Sales
(25
)
(13
)
(127
)
(31
)
Net transfers
(39
)
(50
)
189

16

Ending balance
$
83

$
98

$
83

$
98

Unrealized gains (losses)
$
(9
)
$
(10
)
$
(91
)
$
(7
)
Investments
Beginning balance
$
725

$
974

$
858

$
757

Realized and unrealized gains (losses)
(23
)
26

(49
)
38

Purchases
14

9

17

14

Sales
(11
)
(32
)
(20
)
(36
)
Net transfers
54

(192
)
(47
)
12

Ending balance
$
759

$
785

$
759

$
785

Unrealized gains (losses)
$
(22
)
$
29

$
(50
)
$
38

Net derivatives: Interest rate
Beginning balance
$
873

$
551

$
777

$
618

Realized and unrealized gains (losses)
(126
)
238

70

183

Purchases
11

53

129

59

Issuances
(24
)
(19
)
(27
)
(30
)
Settlements
(12
)
(1
)
(26
)
(15
)
Net transfers
38

(6
)
(163
)
1

Ending balance
$
760

$
816

$
760

$
816

Unrealized gains (losses)
$
(160
)
$
230

$
27

$
234

Net derivatives: Credit
Beginning balance
$
198

$
(261
)
$
124

$
40

Realized and unrealized gains (losses)
(74
)
30

(60
)
217

Purchases
13

28

44

93

Issuances
(22
)
(19
)
(39
)
(470
)
Settlements
54

39

102

(8
)
Net transfers
(38
)
45

(40
)
(10
)
Ending balance
$
131

$
(138
)
$
131

$
(138
)
Unrealized gains (losses)
$
(143
)
$
30

$
(63
)
$
224

 
 
 
 
 

 
 
Three Months Ended
June 30,
Six Months Ended
June 30,
$ in millions
2020
2019
2020
2019
Net derivatives: Foreign exchange
Beginning balance
$
(150
)
$
5

$
(31
)
$
75

Realized and unrealized gains (losses)
122

(33
)
94

(154
)
Purchases
—

—

3

—

Issuances
—

—

(9
)
—

Settlements
2

(22
)
(11
)
(12
)
Net transfers
43

21

(29
)
62

Ending balance
$
17

$
(29
)
$
17

$
(29
)
Unrealized gains (losses)
$
44

$
(37
)
$
35

$
(45
)
Net derivatives: Equity
Beginning balance
$
(1,376
)
$
(1,760
)
$
(1,684
)
$
(1,485
)
Realized and unrealized gains (losses)
(135
)
86

181

(92
)
Purchases
149

60

237

96

Issuances
(391
)
(158
)
(595
)
(359
)
Settlements
10

43

(52
)
185

Net transfers
(141
)
14

29

(60
)
Ending balance
$
(1,884
)
$
(1,715
)
$
(1,884
)
$
(1,715
)
Unrealized gains (losses)
$
(156
)
$
70

$
(4
)
$
(106
)
Net derivatives: Commodity and other
Beginning balance
$
1,849

$
2,106

$
1,612

$
2,052

Realized and unrealized gains (losses)
338

(145
)
448

(113
)
Purchases
3

8

21

16

Issuances
(2
)
(2
)
(17
)
(17
)
Settlements
(119
)
(106
)
7

(183
)
Net transfers
18

—

16

106

Ending balance
$
2,087

$
1,861

$
2,087

$
1,861

Unrealized gains (losses)
$
182

$
(272
)
$
257

$
(306
)
Deposits
Beginning balance
$
117

$
99

$
179

$
27

Realized and unrealized losses (gains)
6

6

3

12

Issuances
—

24

—

51

Settlements
(4
)
(4
)
(9
)
(4
)
Net transfers
(29
)
13

(83
)
52

Ending balance
$
90

$
138

$
90

$
138

Unrealized losses (gains)
$
7

$
6

$
3

$
12

Nonderivative trading liabilities
Beginning balance
$
64

$
43

$
37

$
16

Realized and unrealized losses (gains)
5

(9
)
(10
)
(10
)
Purchases
(42
)
(24
)
(45
)
(30
)
Sales
24

11

22

28

Settlements
—

—

3

—

Net transfers
23

15

67

32

Ending balance
$
74

$
36

$
74

$
36

Unrealized losses (gains)
$
5

$
(9
)
$
(10
)
$
(10
)


 
55
June 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

 
Three Months Ended
June 30,
Six Months Ended
June 30,
$ in millions
2020
2019
2020
2019
Securities sold under agreements to repurchase
Beginning balance
$
—

$
—

$
—

$
—

Realized and unrealized losses (gains)
(31
)
—

(31
)
—

Issuances
471

—

471

—

Ending balance
$
440

$
—

$
440

$
—

Unrealized losses (gains)
$
(31
)
$
—

$
(31
)
$
—

Other secured financings
 
 
Beginning balance
$
389

$
153

$
109

$
208

Realized and unrealized losses (gains)
—

2

(12
)
6

Issuances
5

—

7

—

Settlements
(88
)
(1
)
(203
)
(8
)
Net transfers
(6
)
—

399

(52
)
Ending balance
$
300

$
154

$
300

$
154

Unrealized losses (gains)
$
—

$
2

$
(12
)
$
6

Borrowings
Beginning balance
$
3,998

$
3,775

$
4,088

$
3,806

Realized and unrealized losses (gains)
500

172

(202
)
444

Issuances
385

354

766

598

Settlements
(92
)
(99
)
(283
)
(243
)
Net transfers
(656
)
(263
)
(234
)
(666
)
Ending balance
$
4,135

$
3,939

$
4,135

$
3,939

Unrealized losses (gains)
$
496

$
173

$
(200
)
$
419

Portion of Unrealized losses (gains) recorded in OCI—Change in net DVA
281

35

(125
)
91


1.
Net transfers in the current year period reflect the largely offsetting impacts of transfers in of $857 million of equity margin loans in the first quarter and transfers out of $707 million of equity margin loans in the current quarter. The loans were transferred in in the first quarter as the significance of the margin loan rate input increased as a result of reduced liquidity, and transferred out in the second quarter as liquidity conditions improved reducing the significance of the input.
Level 3 instruments may be hedged with instruments classified in Level 1 and Level 2. The realized and unrealized gains or losses for assets and liabilities within the Level 3 category presented in the previous tables do not reflect the related realized and unrealized gains or 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.
 
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 June 30, 2020
At December 31, 2019
Assets Measured at Fair Value on a Recurring Basis
U.S. Treasury and agency securities
$
97

$
22

Comparable pricing:
 
 
Bond price
18 to 109 points (68 points)

N/M

MABS
$
379

$
438

Comparable pricing:
 
Bond price
0 to 80 points (44 points)

0 to 96 points (47 points)

Loans and lending commitments
$
4,068

$
5,073

Margin loan model:
 
 
Discount rate
N/A

1% to 9% (2%)

Volatility skew
N/A

15% to 80% (28%)

Credit Spread
N/A

9 to 39 bps (19 bps)

Margin loan rate
1% to 6% (3%)

N/A

Comparable pricing:
 
Loan price
68 to 110 points (92 points)

69 to 100 points (93 points)

Corporate and other debt
$
2,686

$
1,396

Comparable pricing:
 
Bond price
10 to 104 points (89 points)

11 to 108 points (84 points)

Discounted cash flow:
 
Recovery rate
51% to 62% (53% / 51%)

35
%
Option model:
 
 
At the money volatility
21
%
21
%
Corporate equities
$
83

$
97

Comparable pricing:
 
Equity price
100
%
100
%
Investments
$
759

$
858

Discounted cash flow:
 
WACC
10% to 20% (15%)

8% to 17% (15%)

Exit multiple
7 to 17 times (12 times)

7 to 16 times (11 times)

Market approach:
 
 
EBITDA multiple
6 to 23 times (10 times)

7 to 24 times (11 times)

Comparable pricing:
 
Equity price
50% to 100% (98%)

75% to 100% (99%)

 
 
 

June 2020 Form 10-Q
56
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

 
Balance / Range (Average)1
$ in millions, except inputs
At June 30, 2020
At December 31, 2019
Net derivative and other contracts:
 
Interest rate
$
760

$
777

Option model:
 
 
IR volatility skew
0% to 191% (66% / 80%)

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

IR curve correlation
59% to 97% (86% / 90%)

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

Bond volatility
4% to 37% (21% / 20%)

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

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

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

IR curve
1
%
1
%
Credit
$
131

$
124

Credit default swap model:
 
Cash-synthetic basis
6 points

6 points

Bond price
0 to 98 points (54 points)

0 to 104 points (45 points)

Credit spread
20 to 435 bps (82 bps)

9 to 469 bps (81 bps)

Funding spread
178 to 250 bps (215 bps)

47 to 117 bps (84 bps)

Correlation model:
 
 
Credit correlation
31% to 68% (39%)

29% to 62% (36%)

Foreign exchange2
$
17

$
(31
)
Option model:
 
 
IR - FX correlation
16% to 59% (38%)

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

IR volatility skew
0% to 191% (66% / 80%)

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

IR curve
10% to 11% (11%)

10% to 11% (10% / 10%)

Contingency probability
95% (95%)

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

Equity2
$
(1,884
)
$
(1,684
)
Option model:
 
 
At the money volatility
16% to 89% (43%)

9% to 90% (36%)

Volatility skew
-3% to 0% (-1%)

-2% to 0% (-1%)

Equity correlation
5% to 96% (73%)

5% to 98% (70%)

FX correlation
-60% to 55% (-35%)

-79% to 60% (-37%)

IR correlation
-7% to 45% (20% / 18%)

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

Commodity and other
$
2,087

$
1,612

Option model:
 
 
Forward power price
$0 to $148 ($27) per MWh

$3 to $182 ($28) per MWh

Commodity volatility
8% to 210% (19%)

7% to 183% (18%)

Cross-commodity correlation
43% to 99% (93%)

43% to 99% (93%)

Liabilities Measured at Fair Value on a Recurring Basis
Deposits
$
90

$
179

Option Model:
 
 
Equity at the money volatility
7% to 23% (7%)

16% to 37% (20%)

Corporate equities
$
69

$
36

Comparable pricing:


Equity price
100
%
N/A

Securities sold under agreements to repurchase
$
440

$
—

Discounted cash flow


Funding spread
121 to 154 bps (143 bps)

N/A

 
 
Balance / Range (Average)1
$ in millions, except inputs
At June 30, 2020
At December 31, 2019
Other secured financings
$
300

$
109

Discounted cash flow:
 
Funding spread
107 bps (107 bps)

111 to 124 bps (117 bps)

Comparable pricing:
 
Loan price
25 to 101 points (73 points)

N/M

Borrowings
$
4,135

$
4,088

Option model:
 
 
At the money volatility
6% to 73% (25%)

5% to 44% (21%)

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

-2% to 0% (0%)

Equity correlation
38% to 98% (78%)

38% to 94% (78%)

Equity - FX correlation
-72% to 13% (-30%)

-75% to 26% (-25%)

IR - FX Correlation
-27% to 6% (-6% / -6%)

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

Nonrecurring Fair Value Measurement
Loans
$
2,193

$
1,500

Corporate loan model:
 
Credit spread
42 to 591 bps (301 bps)

69 to 446 bps (225 bps)

Warehouse model:
 
 
Credit spread
193 to 714 bps (371 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.
Other than as follows, during the current quarter, there were no significant revisions made to the descriptions of the Firm’s significant unobservable inputs. For margin loans, the margin loan rate is the annualized rate that reflects the possibility of losses as a result of movements in the price of the underlying margin loan collateral. The rate is calibrated from the previously disclosed discount rate, credit spread and/or volatility measures. 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.

 
57
June 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

Net Asset Value Measurements
Fund Interests
 
At June 30, 2020
At December 31, 2019
$ in millions
Carrying
Value
Commitment
Carrying
Value
Commitment
Private equity
$
2,210

$
635

$
2,078

$
450

Real estate
1,284

147

1,349

150

Hedge1
82

—

94

4

Total
$
3,576

$
782

$
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 June 30, 2020
$ in millions
Private Equity
Real Estate
Less than 5 years
$
1,433

$
436

5-10 years
726

177

Over 10 years
51

671

Total
$
2,210

$
1,284


Nonrecurring Fair Value Measurements    
Carrying and Fair Values
 
At June 30, 2020
 
Fair Value
$ in millions
Level 2
Level 31
Total
Assets
 
 
 
Loans
$
4,748

$
2,193

$
6,941

Other assets—Other investments
—

50

50

Total
$
4,748

$
2,243

$
6,991

Liabilities
 
 
 
Other liabilities and accrued expenses—Lending commitments
$
194

$
82

$
276

Total
$
194

$
82

$
276

 
 
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.
Gains (Losses) from Fair Value Remeasurements1   
 
Three Months Ended
June 30,
Six Months Ended
June 30,
$ in millions
2020
2019
2020
2019
Assets
 
 
 
 
Loans2
$
(13
)
$
(10
)
$
(488
)
$
17

Other assets—Other investments3
(52
)
—

(52
)
(5
)
Other assets—Premises, equipment and software4
(3
)
(2
)
(6
)
(4
)
Total
$
(68
)
$
(12
)
$
(546
)
$
8

Liabilities
 
 


Other liabilities and accrued expenses—Lending commitments2
$
130

$
7

$
(88
)
$
74

Total
$
130

$
7

$
(88
)
$
74

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.

June 2020 Form 10-Q
58
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

Financial Instruments Not Measured at Fair Value
 
At June 30, 2020
 
Carrying
Value
Fair Value
$ in millions
Level 1
Level 2
Level 3
Total
Financial assets
 
 
 
 
Cash and cash equivalents
$
106,276

$
106,276

$
—

$
—

$
106,276

Investment securities—HTM
47,043

31,890

17,194

844

49,928

Securities purchased under agreements to resell
96,593

—

95,383

1,269

96,652

Securities borrowed
106,834

—

106,835

—

106,835

Customer and other receivables1
57,969

—

55,143

2,885

58,028

Loans2
141,973

—

28,054

114,691

142,745

Other assets
466

—

466

—

466

Financial liabilities
 
 
 
Deposits
$
232,827

$
—

$
233,592

$
—

$
233,592

Securities sold under agreements to repurchase
49,623

—

49,681

—

49,681

Securities loaned
10,493

—

10,489

—

10,489

Other secured financings
3,748

—

3,713

36

3,749

Customer and other payables1
195,877

—

195,877

—

195,877

Borrowings
138,727

—

142,234

5

142,239

 
Commitment
Amount
 
 
 
 
Lending commitments3
$
112,225

$
—

$
1,218

$
547

$
1,765

 

 
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.
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.

 
59
June 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.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
June 30,
2020
At
December 31,
2019
Business Unit Responsible for Risk Management
Equity
$
31,555

$
30,214

Interest rates
27,918

27,298

Commodities
5,020

4,501

Credit
1,267

1,246

Foreign exchange
977

1,202

Total
$
66,737

$
64,461


Net Revenues from Borrowings under the Fair Value Option
 
Three Months Ended
June 30,
Six Months Ended
June 30,
$ in millions
2020
2019
2020
2019
Trading revenues
$
(3,439
)
$
(2,190
)
$
8

$
(5,093
)
Interest expense
81

94

164

187

Net revenues1
$
(3,520
)
$
(2,284
)
$
(156
)
$
(5,280
)
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 June 30,
 
2020
2019
$ in millions
Trading
Revenues
OCI
Trading
Revenues
OCI
Borrowings
$
(1
)
$
(3,237
)
$
(3
)
$
(328
)
Loans and other debt1
(40
)
—

58

—

Lending commitments
(1
)
—

(1
)
—

Deposits
—

(63
)
—

1

 
Six Months Ended June 30,
 
2020
2019
$ in millions
Trading
Revenues
OCI
Trading
Revenues
OCI
Borrowings
$
(6
)
$
1,711

$
(7
)
$
(1,144
)
Loans and other debt1
(239
)
—

151

—

Lending commitments
1

—

(2
)
—

Deposits
—

9

—

(3
)
$ in millions
At
June 30,
2020
At
December 31,
2019
Cumulative pre-tax DVA gain (loss) recognized in AOCI
$
(278
)
$
(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
June 30,
2020
At
December 31,
2019
Loans and other debt2
$
13,245

$
13,037

Nonaccrual loans2
11,154

10,849

Borrowings3
(1,946
)
(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
June 30,
2020
At
December 31,
2019
Nonaccrual loans
$
1,214

$
1,100

Nonaccrual loans 90 or more days past due
$
231

$
330



June 2020 Form 10-Q
60
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

6. Derivative Instruments and Hedging Activities
Fair Values of Derivative Contracts
At June 30, 2020
 
Assets
$ in millions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges
 
 
 
Interest rate
$
1,311

$
—

$
—

$
1,311

Foreign exchange
28

30

—

58

Total
1,339

30

—

1,369

Not designated as accounting hedges
 
 
Interest rate
247,795

8,246

974

257,015

Credit
7,137

2,033

—

9,170

Foreign exchange
72,188

1,567

120

73,875

Equity
28,794

—

37,334

66,128

Commodity and other
14,331

—

4,417

18,748

Total
370,245

11,846

42,845

424,936

Total gross derivatives
$
371,584

$
11,876

$
42,845

$
426,305

Amounts offset
 
 
 
 
Counterparty netting
(284,053
)
(9,545
)
(41,233
)
(334,831
)
Cash collateral netting
(50,799
)
(2,024
)
—

(52,823
)
Total in Trading assets
$
36,732

$
307

$
1,612

$
38,651

Amounts not offset1
 
 
 
 
Financial instruments collateral
(17,219
)
—

—

(17,219
)
Other cash collateral
(90
)
(1
)
—

(91
)
Net amounts
$
19,423

$
306

$
1,612

$
21,341

Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable
$
3,099


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

$
1

$
—

$
1

Foreign exchange
142

19

—

161

Total
142

20

—

162

Not designated as accounting hedges
 
 
Interest rate
237,040

6,180

1,118

244,338

Credit
6,876

2,473

—

9,349

Foreign exchange
75,279

1,610

73

76,962

Equity
34,447

—

40,745

75,192

Commodity and other
10,965

—

4,525

15,490

Total
364,607

10,263

46,461

421,331

Total gross derivatives
$
364,749

$
10,283

$
46,461

$
421,493

Amounts offset
 
 
 
 
Counterparty netting
(284,053
)
(9,545
)
(41,233
)
(334,831
)
Cash collateral netting
(47,645
)
(494
)
—

(48,139
)
Total in Trading liabilities
$
33,051

$
244

$
5,228

$
38,523

Amounts not offset1
 
 
 
 
Financial instruments collateral
(9,813
)
—

(3,266
)
(13,079
)
Other cash collateral
(21
)
(15
)
—

(36
)
Net amounts
$
23,217

$
229

$
1,962

$
25,408

Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable
5,259





 
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.

 
61
June 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

Notionals of Derivative Contracts
At June 30, 2020
 
Assets
$ in billions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges
Interest rate
$
10

$
133

$
—

$
143

Foreign exchange
3

1

—

4

Total
13

134

—

147

Not designated as accounting hedges
Interest rate
4,088

6,742

543

11,373

Credit
133

95

—

228

Foreign exchange
2,814

87

11

2,912

Equity
440

—

404

844

Commodity and other
107

—

72

179

Total
7,582

6,924

1,030

15,536

Total gross derivatives
$
7,595

$
7,058

$
1,030

$
15,683

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

$
56

$
—

$
56

Foreign exchange
9

1

—

10

Total
9

57

—

66

Not designated as accounting hedges
Interest rate
4,150

6,571

540

11,261

Credit
141

100

—

241

Foreign exchange
2,893

87

14

2,994

Equity
441

—

525

966

Commodity and other
87

—

69

156

Total
7,712

6,758

1,148

15,618

Total gross derivatives
$
7,721

$
6,815

$
1,148

$
15,684

















 
 
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.

June 2020 Form 10-Q
62
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

Gains (Losses) on Accounting Hedges
 
Three Months Ended
Six Months Ended
 
June 30,
June 30,
$ in millions
2020
2019
2020
2019
Fair value hedges—Recognized in Interest income
 
Interest rate contracts
$
(16
)
$
(14
)
$
(80
)
$
(19
)
Investment Securities—AFS
23

14

89

19

Fair value hedges—Recognized in Interest expense
 
Interest rate contracts
$
245

$
2,470

$
6,912

$
4,047

Deposits1
46

—

(215
)
—

Borrowings
(327
)
(2,494
)
(6,759
)
(4,115
)
Net investment hedges—Foreign exchange contracts
 
Recognized in OCI
$
(96
)
$
(114
)
$
314

$
(50
)
Forward points excluded from hedge effectiveness testing—Recognized in Interest income
(8
)
42

25

77


Fair Value Hedges—Hedged Items 
$ in millions
At
June 30,
2020
At
December 31,
2019
Investment Securities—AFS
 
 
Amortized cost basis currently or previously hedged
$
2,131

$
917

Basis adjustments included in amortized cost2
$
91

$
14

Deposits1
 
 
Carrying amount currently or previously hedged
$
18,296

$
5,435

Basis adjustments included in carrying amount2
$
208

$
(7
)
Borrowings
 
 
Carrying amount currently or previously hedged
$
111,182

$
102,456

Basis adjustments included in carrying amount2
$
9,347

$
2,593


1.
The Firm began designating interest rate swaps as fair value hedges of certain Deposits in the fourth quarter of 2019.
2.
Hedge accounting basis adjustments are primarily related to outstanding hedges.
Net Derivative Liabilities and Collateral Posted
$ in millions
At
June 30,
2020
At
December 31,
2019
Net derivative liabilities with credit risk-related contingent features
$
28,973

$
21,620

Collateral posted
23,631

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
June 30,
2020
One-notch downgrade
$
370

Two-notch downgrade
350

Bilateral downgrade agreements included in the amounts above1
$
598

 
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 June 30, 2020
$ in billions
< 1
1-3
3-5
Over 5
Total
Single-name CDS
 
 
 
 
 
Investment grade
$
13

$
16

$
32

$
9

$
70

Non-investment grade
8

10

17

2

37

Total
$
21

$
26

$
49

$
11

$
107

Index and basket CDS
 
 
 
Investment grade
$
3

$
12

$
43

$
18

$
76

Non-investment grade
5

5

22

11

43

Total
$
8

$
17

$
65

$
29

$
119

Total CDS sold
$
29

$
43

$
114

$
40

$
226

Other credit contracts
—

—

—

—

—

Total credit protection sold
$
29

$
43

$
114

$
40

$
226

CDS protection sold with identical protection purchased
$
192

 
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


 
63
June 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

Fair Value Asset (Liability) of Credit Protection Sold1 
$ in millions
At
June 30,
2020
At
December 31,
2019
Single-name CDS
 
 
Investment grade
$
373

$
1,057

Non-investment grade
(1,348
)
(540
)
Total
$
(975
)
$
517

Index and basket CDS
 
 
Investment grade
$
691

$
1,052

Non-investment grade
(3,157
)
134

Total
$
(2,466
)
$
1,186

Total CDS sold
$
(3,441
)
$
1,703

Other credit contracts
(4
)
(17
)
Total credit protection sold
$
(3,445
)
$
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
June 30,
2020
At
December 31,
2019
Single name
$
114

$
118

Index and basket
112

103

Tranched index and basket
17

15

Total
$
243

$
236

 
Fair Value Asset (Liability)
$ in millions
At
June 30,
2020
At
December 31,
2019
Single name
$
791

$
(723
)
Index and basket
1,986

(1,139
)
Tranched index and basket
485

(450
)
Total
$
3,262

$
(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.








 



















 

June 2020 Form 10-Q
64
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

7. Investment Securities
AFS and HTM Securities
 
At June 30, 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
$
47,754

$
1,264

$
—

$
49,018

U.S. agency securities2
25,803

755

18

26,540

Total U.S. government and agency securities
73,557

2,019

18

75,558

Corporate and other debt:
 
 
 
 
Agency CMBS
4,712

359

1

5,070

Corporate bonds
1,777

46

2

1,821

State and municipal securities
1,650

75

22

1,703

FFELP student loan ABS3
1,493

—

68

1,425

Total corporate and other debt
9,632

480

93

10,019

Total AFS securities
83,189

2,499

111

85,577

HTM securities
 
 
 
 
U.S. government and agency securities:
 
 
U.S. Treasury securities
29,654

2,236

—

31,890

U.S. agency securities2
16,576

619

1

17,194

Total U.S. government and agency securities
46,230

2,855

1

49,084

Corporate and other debt:
 
 
 
 
Non-agency CMBS
813

33

2

844

Total HTM securities
47,043

2,888

3

49,928

Total investment securities
$
130,232

$
5,387

$
114

$
135,505


 
 
 
 
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 ACL.
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 first quarter of 2020, 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. These securities had a fair value of $441 million at the end of the first quarter of 2020.




 
65
June 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

Investment Securities in an Unrealized Loss Position
 
At June 30, 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. government and agency securities:
 
 
 
 
 
 
U.S. agency securities
$
653

$
2

$
3,524

$
16

$
4,177

$
18

Corporate and other debt:
 
 
 
 
 
 
Agency CMBS
27

—

207

1

234

1

Corporate bonds
246

1

40

1

286

2

State and municipal securities
569

22

—

—

569

22

FFELP student loan ABS
345

10

1,080

58

1,425

68

Total corporate and other debt
1,187

33

1,327

60

2,514

93

Total AFS securities
$
1,840

$
35

$
4,851

$
76

$
6,691

$
111

 
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



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 June 30, 2020, the HTM securities net carrying amount reflects an ACL of $28 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 HTM securities in an unrealized loss position as of December 31, 2019 that were other-than-temporarily impaired. As of June 30, 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.






June 2020 Form 10-Q
66
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

Investment Securities by Contractual Maturity
 
At June 30, 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
$
15,167

$
15,243

0.9
%
After 1 year through 5 years
29,674

30,645

1.4
%
After 5 years through 10 years
2,913

3,130

1.6
%
Total
47,754

49,018

 
U.S. agency securities:
 
 
 
Due within 1 year
225

225

0.8
%
After 1 year through 5 years
66

67

1.4
%
After 5 years through 10 years
1,204

1,239

1.8
%
After 10 years
24,308

25,009

2.1
%
Total
25,803

26,540

 
Total U.S. government and agency securities
73,557

75,558

1.6
%
Corporate and other debt:
 
 
 
Agency CMBS:
 
 
 
After 1 year through 5 years
589

602

1.8
%
After 5 years through 10 years
3,269

3,584

2.5
%
After 10 years
854

884

2.0
%
Total
4,712

5,070

 
Corporate bonds:
 
 
 
Due within 1 year
169

171

2.4
%
After 1 year through 5 years
1,322

1,359

2.6
%
After 5 years through 10 years
286

291

2.9
%
Total
1,777

1,821

 
State and municipal securities:
 
 
 
After 1 year through 5 years
3

3

3.6
%
After 5 years through 10 years
152

160

2.6
%
After 10 Years
1,495

1,540

2.7
%
Total
1,650

1,703

 
FFELP student loan ABS:
 
 
 
After 1 year through 5 years
95

88

0.8
%
After 5 years through 10 years
299

278

0.8
%
After 10 years
1,099

1,059

1.2
%
Total
1,493

1,425

 
Total corporate and other debt
9,632

10,019

2.3
%
Total AFS securities
83,189

85,577

1.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At June 30, 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
$
3,437

$
3,477

2.7
%
After 1 year through 5 years
17,414

18,370

2.0
%
After 5 years through 10 years
7,720

8,692

2.2
%
After 10 years
1,083

1,351

2.5
%
Total
29,654

31,890

 
U.S. agency securities:
 
 
 
After 5 years through 10 years
93

96

2.0
%
After 10 years
16,483

17,098

2.4
%
Total
16,576

17,194

 
Total U.S. government and agency securities
46,230

49,084

2.2
%
Corporate and other debt:
 
 
 
Non-agency CMBS:
 
 
 
Due within 1 year
114

114

4.7
%
After 1 year through 5 years
90

90

3.6
%
After 5 years through 10 years
572

600

3.8
%
After 10 years
37

40

4.4
%
Total corporate and other debt
813

844

3.9
%
Total HTM securities
47,043

49,928

2.3
%
Total investment securities
$
130,232

$
135,505

1.9
%
1.
Amounts are net of any ACL.
Gross Realized Gains (Losses) on Sales of AFS Securities
 
Three Months Ended
June 30,
Six Months Ended
June 30,
$ in millions
2020
2019
2020
2019
Gross realized gains
$
16

$
53

$
65

$
72

Gross realized (losses)
(6
)
—

(14
)
(9
)
Total1
$
10

$
53

$
51

$
63

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

 

 
67
June 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

8. Collateralized Transactions
Offsetting of Certain Collateralized Transactions
 
At June 30, 2020
$ in millions
Gross
Amounts
Amounts
Offset
Net
Amounts
Presented
Amounts
Not Offset1
Net
Amounts
Assets
 
 
 
 
 
Securities purchased under agreements to resell
$
243,285

$
(146,673
)
$
96,612

$
(94,255
)
$
2,357

Securities borrowed
115,709

(8,875
)
106,834

(102,237
)
4,597

Liabilities
 
 
 
 
 
Securities sold under agreements to repurchase
$
197,521

$
(146,673
)
$
50,848

$
(45,881
)
$
4,967

Securities loaned
19,368

(8,875
)
10,493

(10,040
)
453

Net amounts for which master netting agreements are not in place or may not be legally enforceable
Securities purchased under agreements to resell
$
1,653

Securities borrowed
 
 
1,520

Securities sold under agreements to repurchase
 
3,994

Securities loaned
 
 
 
 
238

 
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 June 30, 2020
$ in millions
Overnight
and Open
Less than
30 Days
30-90
Days
Over
90 Days
Total
Securities sold under agreements to repurchase
$
88,303

$
49,496

$
27,807

$
31,915

$
197,521

Securities loaned
11,254

335

2,438

5,341

19,368

Total included in the offsetting disclosure
$
99,557

$
49,831

$
30,245

$
37,256

$
216,889

Trading liabilities—
Obligation to return securities received as collateral
21,311

—

—

—

21,311

Total
$
120,868

$
49,831

$
30,245

$
37,256

$
238,200

 
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
June 30,
2020
At
December 31,
2019
Securities sold under agreements to repurchase
U.S. Treasury and agency securities
$
72,901

$
68,895

State and municipal securities
546

905

Other sovereign government obligations
91,141

109,414

ABS
2,548

2,218

Corporate and other debt
4,928

6,066

Corporate equities
24,368

25,563

Other
1,089

458

Total
$
197,521

$
213,519

Securities loaned
 
 
Other sovereign government obligations
$
9,440

$
3,026

Corporate equities
9,482

8,422

Other
446

39

Total
$
19,368

$
11,487

Total included in the offsetting disclosure
$
216,889

$
225,006

Trading liabilities—Obligation to return securities received as collateral
Corporate equities
$
21,251

$
23,873

Other
60

4

Total
$
21,311

$
23,877

Total
$
238,200

$
248,883




June 2020 Form 10-Q
68
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

Carrying Value of Assets Loaned or Pledged without Counterparty Right to Sell or Repledge
$ in millions
At
June 30,
2020
At
December 31,
2019
Trading assets
$
37,171

$
41,201

Loans, before ACL
—

750

Total
$
37,171

$
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
June 30,
2020
At
December 31,
2019
Collateral received with right to sell
or repledge
$
641,888

$
679,280

Collateral that was sold or repledged1
488,024

539,412

1.
Does not include securities used to meet federal regulations for the Firm’s U.S. broker-dealers.
Securities Segregated for Regulatory Purposes
$ in millions
At
June 30,
2020
At
December 31,
2019
Segregated securities1
30,017

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
June 30,
2020
At
December 31,
2019
Customer receivables representing margin loans
$
33,469

$
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
As of June 30, 2020, the Firm’s loan portfolio consists of the following types of loans:
•
Corporate.    Corporate includes revolving lines of credit, term loans and bridge loans made to corporate entities for a variety of purposes.
•
Secured lending facilities.    Secured lending facilities include loans provided to clients, which are primarily secured by loans which are, in turn, collateralized by various assets including residential real estate, commercial real estate, corporate and financial assets.
•
Residential Real Estate.    Residential real estate loans mainly include non-conforming loans and HELOC.
•
Commercial Real Estate.    Commercial real estate loans include owner-occupied loans and income-producing loans.
•
Securities-based lending and Other.    Securities-based lending includes loans which allow clients to borrow money against the value of qualifying securities for any suitable purpose other than purchasing, trading, or carrying securities or refinancing margin debt. The majority of these loans are structured as revolving lines of credit. Other primarily includes certain loans originated in the tailored lending business within the Wealth Management business segment.

 
69
June 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

Loans by Type1 
 
At June 30, 2020
$ in millions
Loans Held
for Investment
Loans Held
for Sale
Total Loans
Corporate
$
9,974

$
9,360

$
19,334

Secured lending facilities
24,733

3,779

28,512

Commercial real estate
7,207

1,337

8,544

Residential real estate
32,193

11

32,204

Securities-based lending and Other loans
54,181

64

54,245

Total loans, before ACL
128,288

14,551

142,839

ACL
(866
)


(866
)
Total loans, net
$
127,422

$
14,551

$
141,973

Fixed rate loans, net
 
 
$
28,944

Floating or adjustable rate loans, net
 
113,029

Loans to non-U.S. borrowers, net
 
23,165

 
At December 31, 2019
$ in millions
Loans Held
for Investment
Loans Held
for Sale
Total Loans
Corporate
$
5,426

$
6,192

$
11,618

Secured lending facilities
24,502

4,200

28,702

Commercial real estate
7,859

2,049

9,908

Residential real estate
30,184

13

30,197

Securities-based lending and Other loans
50,438

123

50,561

Total loans, before ACL
118,409

12,577

130,986

ACL
(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.
Loans previously classified as corporate have been further disaggregated in the current period; prior period balances have been revised to conform with current period presentation.

Loans Held for Investment before Allowance by Origination Year
 
At June 30, 2020
 
Corporate
$ in millions
Investment Grade
Non-Investment Grade
Total
Revolving Loans
$
2,253

$
5,695

$
7,948

2020
701

166

867

2019
304

159

463

2018
277

—

277

2017
—

67

67

2016
115

—

115

Prior
122

115

237

Total
$
3,772

$
6,202

$
9,974

 
 
 
At June 30, 2020
 
Secured lending facilities
$ in millions
Investment Grade
Non-Investment Grade
Total
Revolving Loans
$
3,692

$
14,423

$
18,115

2020
49

174

223

2019
278

1,868

2,146

2018
1,181

1,338

2,519

2017
245

515

760

2016
—

479

479

Prior
—

491

491

Total
$
5,445

$
19,288

$
24,733

 
At June 30, 2020
 
Commercial real estate
$ in millions
Investment Grade
Non-Investment Grade
Total
Revolving Loans
$
5

$
—

$
5

2020
17

573

590

2019
529

2,365

2,894

2018
432

1,237

1,669

2017
108

860

968

2016
235

443

678

Prior
10

393

403

Total
$
1,336

$
5,871

$
7,207

 
At June 30, 2020
 
Residential real estate
 
by FICO Scores
 
by LTV Ratio
 
Total
$ in millions
≥ 740
680-739
≤ 679
 
≤ 80%
> 80%
 
Revolving Loans
$
95

$
40

$
5

 
$
140

$
—

 
$
140

2020
3,973

799

66

 
4,602

236

 
4,838

2019
6,032

1,353

177

 
7,058

504

 
7,562

2018
2,579

723

86

 
3,119

269

 
3,388

2017
3,052

781

112

 
3,660

285

 
3,945

2016
3,725

1,011

149

 
4,561

324

 
4,885

Prior
5,241

1,862

332

 
6,621

814

 
7,435

Total
$
24,697

$
6,569

$
927

 
$
29,761

$
2,432

 
$
32,193

 
At June 30, 2020
 
Securities-based lending1
Other2
 
$ in millions
Investment Grade
Non-Investment Grade
Total
Revolving Loans
$
42,967

$
3,936

$
740

$
47,643

2020
—

472

424

896

2019
17

1,216

615

1,848

2018
232

232

547

1,011

2017
—

692

118

810

2016
—

551

146

697

Prior
16

1,069

191

1,276

Total
$
43,232

$
8,168

$
2,781

$
54,181

1. Securities-based loans are subject to collateral maintenance provisions, and at June 30, 2020, these loans are predominantly over-collateralized. For more information on the ACL methodology related to securities-based loans, see Note 2.
2. Other loans primarily include certain loans originated in the tailored lending business within the Wealth Management business segment.


June 2020 Form 10-Q
70
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

Past Due Status of Loans Held for Investment before Allowance
 
At June 30, 2020
$ in millions
Current
Past Due1
Total
Corporate
$
9,974

$
—

$
9,974

Secured lending facilities
24,733

—

24,733

Commercial real estate
7,207

—

7,207

Residential real estate
31,289

904

32,193

Securities-based lending and Other loans
54,181

—

54,181

Total
$
127,384

$
904

$
128,288

1.
The majority of the amounts are less than 90 days past due as of June 30, 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.
Troubled Debt Restructurings
$ in millions
At
June 30,
2020
At
December 31,
2019
Loans, before ACL
$
138

$
92

Lending commitments
24

32

ACL on Loans and Lending commitments
44

16


Troubled debt restructurings typically include modifications of interest rates, collateral requirements, other loan covenants and payment extensions. 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, see Notes 2 and 8 in the 2019 Form 10-K.
Allowance for Credit Losses Rollforward—Loans
$ in millions
Corporate
Secured lending facilities
CRE
Residential real estate
SBL and Other
Total
December 31, 2019
$
115

$
101

$
75

$
25

$
33

$
349

Effect of CECL adoption
(2
)
(42
)
34

21

(2
)
9

Gross charge-offs
(33
)
—

—

—

—

(33
)
Recovery
—

—

—

—

2

2

Net (charge-offs) recoveries
(33
)
—

—

—

2

(31
)
Provision (release)1
298

63

155

13

9

538

Other
1

—

(38
)
—

38

1

June 30, 2020
$
379

$
122

$
226

$
59

$
80

$
866

 
$ in millions
Corporate
Secured lending facilities
CRE
Residential real estate
SBL and Other
Total
December 31, 2018
$
62

$
60

$
67

$
20

$
29

$
238

Gross charge-offs
—

—

—

(1
)
—

(1
)
Provision (release)1
26

8

(3
)
4

(1
)
34

Other
(5
)
(1
)
—

—

—

(6
)
June 30, 2019
$
83

$
67

$
64

$
23

$
28

$
265


1.
The provision for loan losses was $246 million in the current quarter and $7 million in the prior year quarter.

Allowance for Credit Losses Rollforward—Lending Commitments
$ in millions
Corporate
Secured lending facilities
CRE
Residential real estate
SBL and Other
Total
December 31, 2019
$
201

$
27

$
7

$
—

$
6

$
241

Effect of CECL adoption
(41
)
(11
)
1

2

(1
)
(50
)
Provision (release)1
73

26

7

(1
)
3

108

Other
(2
)
—

(4
)
—

4

(2
)
June 30, 2020
$
231

$
42

$
11

$
1

$
12

$
297

$ in millions
Corporate
Secured lending facilities
CRE
Residential real estate
SBL and Other
Total
December 31, 2018
$
178

$
16

$
3

$
—

$
6

$
203

Provision (release)1
10

7

2

—

1

20

Other
(1
)
—

—

—

(1
)
(2
)
June 30, 2019
$
187

$
23

$
5

$
—

$
6

$
221

CRE—Commercial real estate
SBL—Securities-based lending
1.
The provision (release) for lending commitments was $(7) million in the current quarter and $11 million in the prior year quarter.
The aggregate allowance for loans and lending commitments increased in the current year period, principally reflecting a provision for credit losses within the Institutional Securities business segment primarily resulting from the economic impact of COVID-19. This provision was the result of higher actual and expected future downgrades, revisions to our forecasts reflecting expected future market and macroeconomic conditions and an increase in funded balances. The base scenario used in our ACL models as of June 30, 2020 was generated using a combination of industry consensus economic forecasts, forward rates, and internally developed and validated models. Given the nature of our lending portfolio, the most sensitive model input is U.S. GDP. The base scenario, among other things, includes a continued sharp drop in U.S. GDP in the current quarter, a U.S. recession, and a recovery supported by fiscal stimulus and monetary policy measures in the U.S. and around

 
71
June 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

the world beginning in the second half of 2020. For a further discussion of the Firm’s loans 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 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
June 30,
2020
At
December 31,
2019
Currently employed by the Firm1
$
2,850

N/A

No longer employed by the Firm2
147

N/A

Balance
$
2,997

$
2,980

ACL3
(172
)
(61
)
Balance, net
$
2,825

$
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 ACL 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 ACL as of June 30, 2020 was calculated under the CECL methodology, while the ACL 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.
10. Other Assets—Equity Method Investments
Equity Method Investments
$ in millions
At
June 30,
2020
At
December 31,
2019
Investments
$
2,254

$
2,363

 
Three Months Ended
June 30,
Six Months Ended
June 30,
$ in millions
2020
2019
2020
2019
Income (loss)1
$
(63
)
$
(16
)
$
(34
)
$
(26
)

1.
The current quarter and current year period include an impairment of the Investment Management business segment’s investment in a third-party asset manager.
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
June 30,
Six Months Ended
June 30,
$ in millions
2020
2019
2020
2019
Income (loss) from investment in MUMSS
$
(1
)
$
6

$
31

$
9


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.


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Notes to Consolidated Financial Statements
(Unaudited)
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11. Deposits
Deposits
$ in millions
At
June 30,
2020
At
December 31,
2019
Savings and demand deposits
$
195,586

$
149,465

Time deposits
41,263

40,891

Total
$
236,849

$
190,356

Deposits subject to FDIC insurance
$
174,085

$
149,966

Time deposits that equal or exceed the FDIC insurance limit
$
18

$
12


Time Deposit Maturities
$ in millions
At
June 30,
2020
2020
$
10,342

2021
17,361

2022
4,990

2023
4,164

2024
2,764

Thereafter
1,642

Total
$
41,263


   
12. Borrowings and Other Secured Financings
Borrowings
$ in millions
At
June 30,
2020
At
December 31,
2019
Original maturities of one year or less
$
3,226

$
2,567

Original maturities greater than one year
Senior
$
191,044

$
179,519

Subordinated
11,194

10,541

Total
$
202,238

$
190,060

Total borrowings
$
205,464

$
192,627

Weighted average stated maturity, in years1
7.5

6.9


1.
Only includes borrowings with original maturities greater than one year.
 
 
Other Secured Financings
$ in millions
At
June 30,
2020
At
December 31,
2019
Original maturities:
 
 
One year or less
$
7,256

$
7,103

Greater than one year
5,342

6,480

Transfers of assets accounted for as secured financings
1,064

1,115

Total
$
13,662

$
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 June 30, 2020
 
$ in millions
Less than 1
1-3
3-5
Over 5
Total
Lending:
 
 
 
 
Corporate
$
17,450

$
28,792

$
38,624

$
1,029

$
85,895

Secured lending facilities
5,645

2,956

1,697

194

10,492

Commercial and Residential real estate
132

267

43

260

702

Securities-based lending and Other
11,944

2,902

526

380

15,752

Forward-starting secured financing receivables
83,464

223

—

—

83,687

Central counterparty1
300

—

—

12,336

12,636

Investment activities
1,039

245

53

282

1,619

Letters of credit and other financial guarantees
177

2

—

2

181

Total
$
120,151

$
35,387

$
40,943

$
14,483

$
210,964

Lending commitments participated to third parties
$
8,126

Forward-starting secured financing receivables settled within three business days
$
68,742


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.

 
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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 June 30, 2020
$ in millions
Less than 1
1-3
3-5
Over 5
Total
Credit derivatives
$
29,339

$
42,620

$
113,770

$
39,648

$
225,377

Other credit contracts
—

—

—

102

102

Non-credit derivatives
1,460,683

1,210,765

403,879

782,142

3,857,469

Standby letters of credit and other financial guarantees issued1
1,155

2,243

847

4,131

8,376

Market value guarantees
97

31

—

—

128

Liquidity facilities
4,243

—

—

—

4,243

Whole loan sales guarantees
—

—

3

23,188

23,191

Securitization representations and warranties
—

—

—

67,773

67,773

General partner guarantees
59

154

12

114

339

Client clearing guarantees
4

—

—

—

4

$ in millions
Carrying Amount Asset (Liability)
Credit derivatives2
$
(3,441
)
Other credit contracts
(4
)
Non-credit derivatives2
(103,176
)
Standby letters of credit and other financial guarantees issued1
113

Market value guarantees
—

Liquidity facilities
5

Whole loan sales guarantees
—

Securitization representations and warranties3
(42
)
General partner guarantees
(66
)
Client clearing guarantees
—


1.
These amounts include certain issued standby letters of credit participated to third parties, totaling $0.6 billion of notional and collateral/recourse, due to the nature of the Firm’s obligations under these arrangements. As of June 30, 2020, the carrying amount of standby letters of credit and other financial guarantees issued includes an allowance for credit losses of $78 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
 
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 June 30, 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

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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 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 May 21, 2020, the Appellate Division, First Department (“First Department”), modified the Supreme Court of NY’s order to deny the Firm’s motion for sanctions relating to spoliation of evidence and otherwise affirmed the denial of the Firm’s motion for summary judgment. On June 19, 2020, the Firm moved for leave to appeal the First Department’s decision to the New York Court of Appeals (“Court of 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.

 
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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 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 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”) is challenging in the Dutch courts, the prior set-off by the Firm of approximately €124 million (approximately $139 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 with respect to certain of the tax years in dispute. On May 12, 2020, the Court of Appeal in Amsterdam granted the Dutch Authority’s appeal in matters re-styled Case number 18/00318 and Case number 18/00319. On June 22, 2020, the Firm filed an appeal against the decision of the Court of Appeal in Amsterdam before the Dutch High Court.
14. Variable Interest Entities and Securitization Activities
Consolidated VIE Assets and Liabilities by Type of Activity
 
At June 30, 2020
At December 31, 2019
$ in millions
VIE Assets
VIE Liabilities
VIE Assets
VIE Liabilities 
OSF
$
718

$
392

$
696

$
391

MABS1
411

107

265

4

Other2
884

41

987

66

Total
$
2,013

$
540

$
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.
 

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Consolidated VIE Assets and Liabilities by Balance Sheet Caption
$ in millions
At
June 30,
2020
At
December 31,
2019
Assets
 
 
Cash and cash equivalents
$
315

$
488

Trading assets at fair value
1,251

943

Customer and other receivables
13

18

Intangible assets
104

111

Other assets
330

388

Total
$
2,013

$
1,948

Liabilities
 
 
Other secured financings
$
493

$
422

Other liabilities and accrued expenses
47

39

Total
$
540

$
461

Noncontrolling interests
$
238

$
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.
Non-consolidated VIEs
 
At June 30, 2020
$ in millions
MABS1
CDO
MTOB
OSF
Other2
VIE assets (UPB)
$
136,083

$
2,661

$
6,391

$
2,198

$
45,504

Maximum exposure to loss3
 
 
Debt and equity interests
$
17,721

$
240

$
25

$
1,039

$
9,800

Derivative and other contracts
—

—

4,243

—

3,320

Commitments, guarantees and other
664

—

—

—

195

Total
$
18,385

$
240

$
4,268

$
1,039

$
13,315

Carrying value of variable interests—Assets
 
 
Debt and equity interests
$
17,721

$
240

$
25

$
1,038

$
9,800

Derivative and other contracts
—

—

5

—

589

Total
$
17,721

$
240

$
30

$
1,038

$
10,389

Additional VIE assets owned4
 
 
 
$
11,954

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

$
—

$
—

$
—

$
168

 
 
 
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 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 4). 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.

 
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Detail of Mortgage- and Asset-Backed Securitization Assets
 
At June 30, 2020
At December 31, 2019
$ in millions
UPB
Debt and
Equity
Interests
UPB
Debt and
Equity
Interests
Residential mortgages
$
20,347

$
3,227

$
30,353

$
3,993

Commercial mortgages
57,628

3,946

53,892

3,881

U.S. agency collateralized mortgage obligations
53,220

8,832

36,366

6,365

Other consumer or commercial loans
4,888

1,716

4,992

2,075

Total
$
136,083

$
17,721

$
125,603

$
16,314


Transferred Assets with Continuing Involvement1 
 
At June 30, 2020
$ in millions
RML
CML
U.S. Agency
CMO
CLN and
Other2
SPE assets (UPB)3
$
8,583

$
81,567

$
15,677

$
9,131

Retained interests
Investment grade
$
46

$
816

$
1,427

$
—

Non-investment grade
15

224

—

88

Total
$
61

$
1,040

$
1,427

$
88

Interests purchased in the secondary market
Investment grade
$
1

$
169

$
43

$
—

Non-investment grade
31

59

—

—

Total
$
32

$
228

$
43

$
—

Derivative assets
$
—

$
—

$
—

$
529

Derivative liabilities
—

—

—

150

 
At December 31, 2019
$ in millions
RML
CML
U.S. Agency
CMO
CLN and
Other2
SPE assets (UPB)3
$
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 June 30, 2020
$ in millions
Level 2
Level 3
Total
Retained interests
 
 
 
Investment grade
$
1,441

$
32

$
1,473

Non-investment grade
6

78

84

Total
$
1,447

$
110

$
1,557

Interests purchased in the secondary market
Investment grade
$
208

$
5

$
213

Non-investment grade
45

45

90

Total
$
253

$
50

$
303

Derivative assets
$
523

$
6

$
529

Derivative liabilities
150

—

150

 
 
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.
Amounts include CLO transactions managed by unrelated third parties.
3.
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. Further, 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.
Proceeds from New Securitization Transactions and Sales of Loans
 
Three Months Ended
June 30,
Six Months Ended
June 30,
$ in millions
2020
2019
2020
2019
New transactions1
$
9,189

$
7,513

$
17,660

$
12,246

Retained interests
1,136

635

5,224

3,522

Sales of corporate loans to CLO SPEs1, 2
73

—

139

—


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).

June 2020 Form 10-Q
78
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

Assets Sold with Retained Exposure
$ in millions
At
June 30,
2020
At
December 31,
2019
Gross cash proceeds from sale of assets1
$
30,190

$
38,661

Fair value
 
 
Assets sold
$
30,821

$
39,137

Derivative assets recognized
in the balance sheets
775

647

Derivative liabilities recognized
in the balance sheets
138

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 (which includes Tier 2 capital). Capital standards require certain adjustments to, and deductions from, capital for purposes of determining these ratios. At June 30, 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 year period, 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 June 30, 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 June 30, 2020
$ in millions
Required
Ratio1
Amount
Ratio
Risk-based capital
 
 
 
Common Equity Tier 1 capital
10.0
%
$
68,712

16.1
%
Tier 1 capital
11.5
%
77,398

18.1
%
Total capital
13.5
%
87,048

20.4
%
Total RWA
 
427,034

 
Leverage-based capital
 
 
 
Tier 1 leverage
4.0
%
$
77,398

8.1
%
Adjusted average assets2
 
952,655

 
SLR3
5.0
%
77,398

7.3
%
Supplementary leverage exposure3,4
 
1,062,137

 
 
 
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 exposure4
 
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.
Based on a Federal Reserve interim final rule in effect until March 31, 2021, the Firm’s SLR and Supplementary leverage exposure as of June 30, 2020 reflect the exclusion of U.S. Treasury securities and deposits at Federal Reserve Banks.
4.
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.
 

 
79
June 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

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 June 30, 2020 and December 31, 2019, the U.S. Bank Subsidiaries’ risk-based capital ratios are based on the Standardized Approach rules. At June 30, 2020, the risk-based 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 June 30, 2020
$ in millions
Well-Capitalized Requirement
Required
Ratio1
Amount
Ratio
Risk-based capital
 
 
 
 
Common Equity Tier 1 capital
6.5
%
7.0
%
$
17,228

18.9
%
Tier 1 capital
8.0
%
8.5
%
17,228

18.9
%
Total capital
10.0
%
10.5
%
17,844

19.6
%
Leverage-based capital
 
 
 
 
Tier 1 leverage
5.0
%
4.0
%
$
17,228

10.1
%
SLR
6.0
%
3.0
%
17,228

8.1
%
 
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 June 30, 2020
$ in millions
Well-Capitalized Requirement
Required
Ratio1
Amount
Ratio
Risk-based capital
 
 
 
 
Common Equity Tier 1 capital
6.5
%
7.0
%
$
8,232

21.9
%
Tier 1 capital
8.0
%
8.5
%
8,232

21.9
%
Total capital
10.0
%
10.5
%
8,317

22.2
%
Leverage-based capital
 
 
 
 
Tier 1 leverage
5.0
%
4.0
%
$
8,232

7.9
%
SLR
6.0
%
3.0
%
8,232

7.6
%
 
 
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 June 30, 2020
At December 31, 2019
Net capital
$
13,606

$
13,708

Excess net capital
9,411

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 June 30, 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.

June 2020 Form 10-Q
80
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

MSSB Regulatory Capital
$ in millions
At June 30, 2020
At December 31, 2019
Net capital
$
3,031

$
3,387

Excess net capital
2,860

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.
16. Total Equity
Preferred Stock
 
Shares
Outstanding
 
Carrying Value
$ in millions, except per share data
At
June 30,
2020
Liquidation
Preference
per Share
At
June 30,
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 preferred stock is held by MUFG.
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).
 
Common Shares Outstanding for Basic and Diluted EPS
 
Three Months Ended
June 30,
Six Months Ended
June 30,
in millions
2020
2019
2020
2019
Weighted average common shares outstanding, basic
1,541

1,634

1,548

1,646

Effect of dilutive Stock options, RSUs and PSUs
16

21

17

20

Weighted average common shares outstanding and common stock equivalents, diluted
1,557

1,655

1,565

1,666

Weighted average antidilutive common stock equivalents (excluded from the computation of diluted EPS)
8

—

10

3


 
Share Repurchases
 
Three Months Ended June 30,
Six Months Ended June 30,
$ in millions
2020
2019
2020
2019
Repurchases of common stock under the Firm's Share Repurchase Program
$
—

$
1,180

$
1,347

$
2,360


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. On June 25, 2020, the Federal Reserve published summary results of CCAR and announced that large BHCs, including the Firm, generally will be restricted in making share repurchases during the third quarter of 2020.
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.
Dividends
$ in millions, except per
share data
Three Months Ended
June 30, 2020
Three Months Ended
June 30, 2019
Per Share1
Total
Per Share1
Total
Preferred Stock Series
 
 
 
 
A
$
253

$
11

$
253

$
11

C
25

13

25

13

E
445

15

445

15

F
430

15

430

15

G2
—

—

414

8

H3
305

16

681

35

I
398

16

398

16

J4
694

42

694

42

K
366

15

366

15

L
305

6

—

—

Total Preferred stock
 
$
149

 
$
170

Common stock
0.35

$
550

$
0.30

$
504

 

 
81
June 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

$ in millions, except per
share data
Six Months Ended
June 30, 2020
Six Months Ended
June 30, 2019
Per Share1
Total
Per Share1
Total
Preferred Stock Series
 
 
 
 
A
$
506

$
22

$
503

$
22

C
50

26

50

26

E
891

30

891

30

F
859

29

859

30

G2
—

—

828

16

H3
649

34

681

35

I
797

32

797

32

J4
694

42

694

42

K
731

30

731

30

L
609

12

—

—

Total Preferred stock
 
$
257

 
$
263

Common stock
0.70

$
1,111

$
0.60

$
1,017


1.
Common and Preferred Stock dividends 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.
Cumulative Adjustments to Beginning Retained Earnings Related to the Adoption of Accounting Updates
 
Six Months Ended
$ in millions
June 30, 2020
Financial Instruments—Credit Losses
$
(100
)
 
Six Months Ended
$ in millions
June 30, 2019
Leases
$
63


 
Accumulated Other Comprehensive Income (Loss)1   
$ in millions
CTA
AFS
Securities
Pension,
Postretirement
and Other
DVA
Total
March 31, 2020
$
(1,038
)
$
1,532

$
(619
)
$
2,220

$
2,095

OCI during the period
21

295

(1
)
(2,409
)
(2,094
)
June 30, 2020
$
(1,017
)
$
1,827

$
(620
)
$
(189
)
$
1

March 31, 2019
$
(901
)
$
(501
)
$
(577
)
$
(494
)
$
(2,473
)
OCI during the period
36

609

3

(226
)
422

June 30, 2019
$
(865
)
$
108

$
(574
)
$
(720
)
$
(2,051
)
December 31, 2019
$
(897
)
$
207

$
(644
)
$
(1,454
)
$
(2,788
)
OCI during the period
(120
)
1,620

24

1,265

2,789

June 30, 2020
$
(1,017
)
$
1,827

$
(620
)
$
(189
)
$
1

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

$
(2,292
)
OCI during the period
24

1,038

4

(825
)
241

June 30, 2019
$
(865
)
$
108

$
(574
)
$
(720
)
$
(2,051
)
 
CTA—Cumulative foreign currency translation adjustments
1.
Amounts are net of tax and noncontrolling interests.
 
 
Components of Period Changes in OCI
 
Three Months Ended
June 30, 2020
$ in millions
Pre-tax
Gain
(Loss)
Income
Tax Benefit
(Provision)
After-tax
Gain
(Loss)
Non-
controlling
Interests
Net
CTA
OCI activity
$
5

$
19

$
24

$
—

$
24

Reclassified to earnings
(3
)
—

(3
)
—

(3
)
Net OCI
$
2

$
19

$
21

$
—

$
21

Change in net unrealized gains (losses) on AFS securities
OCI activity
$
395

$
(93
)
$
302

$
—

$
302

Reclassified to earnings
(10
)
3

(7
)
—

(7
)
Net OCI
$
385

$
(90
)
$
295

$
—

$
295

Pension, postretirement and other
OCI activity
$
(4
)
$
(1
)
$
(5
)
$
—

$
(5
)
Reclassified to earnings
5

(1
)
4

—

4

Net OCI
$
1

$
(2
)
$
(1
)
$
—

$
(1
)
Change in net DVA
OCI activity
$
(3,301
)
$
805

$
(2,496
)
$
(87
)
$
(2,409
)
Reclassified to earnings
1

(1
)
—

—

—

Net OCI
$
(3,300
)
$
804

$
(2,496
)
$
(87
)
$
(2,409
)
 
Three Months Ended
June 30, 2019
$ in millions
Pre-tax
Gain
(Loss)
Income
Tax Benefit
(Provision)
After-tax
Gain
(Loss)
Non-
controlling
Interests
Net
CTA
OCI activity
$
32

$
33

$
65

$
29

$
36

Reclassified to earnings
—

—

—

—

—

Net OCI
$
32

$
33

$
65

$
29

$
36

Change in net unrealized gains (losses) on AFS securities
OCI activity
$
849

$
(200
)
$
649

$
—

$
649

Reclassified to earnings
(53
)
13

(40
)
—

(40
)
Net OCI
$
796

$
(187
)
$
609

$
—

$
609

Pension, postretirement and other
OCI activity
$
—

$
—

$
—

$
—

$
—

Reclassified to earnings
3

—

3

—

3

Net OCI
$
3

$
—

$
3

$
—

$
3

Change in net DVA
OCI activity
$
(330
)
$
82

$
(248
)
$
(20
)
$
(228
)
Reclassified to earnings
3

(1
)
2

—

2

Net OCI
$
(327
)
$
81

$
(246
)
$
(20
)
$
(226
)

 

June 2020 Form 10-Q
82
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

 
Six Months Ended
June 30, 2020
$ in millions
Pre-tax
Gain
(Loss)
Income
Tax Benefit
(Provision)
After-tax
Gain
(Loss)
Non-
controlling
Interests
Net
CTA
OCI activity
$
(15
)
$
(93
)
$
(108
)
$
9

$
(117
)
Reclassified to earnings
(3
)
—

(3
)
—

(3
)
Net OCI
$
(18
)
$
(93
)
$
(111
)
$
9

$
(120
)
Change in net unrealized gains (losses) on AFS securities
OCI activity
$
2,168

$
(509
)
$
1,659

$
—

$
1,659

Reclassified to earnings
(51
)
12

(39
)
—

(39
)
Net OCI
$
2,117

$
(497
)
$
1,620

$
—

$
1,620

Pension, postretirement and other
OCI activity
$
21

$
(5
)
$
16

$
—

$
16

Reclassified to earnings
10

(2
)
8

—

8

Net OCI
$
31

$
(7
)
$
24

$
—

$
24

Change in net DVA
OCI activity
$
1,714

$
(411
)
$
1,303

$
42

$
1,261

Reclassified to earnings
6

(2
)
4

—

4

Net OCI
$
1,720

$
(413
)
$
1,307

$
42

$
1,265

 
Six Months Ended
June 30, 2019
$ in millions
Pre-tax
Gain
(Loss)
Income
Tax Benefit
(Provision)
After-tax
Gain
(Loss)
Non-
controlling
Interests
Net
CTA
OCI activity
$
28

$
15

$
43

$
19

$
24

Reclassified to earnings
—

—

—

—

—

Net OCI
$
28

$
15

$
43

$
19

$
24

Change in net unrealized gains (losses) on AFS securities
OCI activity
$
1,419

$
(333
)
$
1,086

$
—

$
1,086

Reclassified to earnings
(63
)
15

(48
)
—

(48
)
Net OCI
$
1,356

$
(318
)
$
1,038

$
—

$
1,038

Pension, postretirement and other
OCI activity
$
—

$
(1
)
$
(1
)
$
—

$
(1
)
Reclassified to earnings
6

(1
)
5

—

5

Net OCI
$
6

$
(2
)
$
4

$
—

$
4

Change in net DVA
OCI activity
$
(1,154
)
$
283

$
(871
)
$
(41
)
$
(830
)
Reclassified to earnings
7

(2
)
5

—

5

Net OCI
$
(1,147
)
$
281

$
(866
)
$
(41
)
$
(825
)


 
17. Interest Income and Interest Expense
 
Three Months Ended
June 30,
Six Months Ended
June 30,
$ in millions
2020
2019
2020
2019
Interest income
 
 
 
 
Investment securities
$
629

$
509

$
1,074

$
984

Loans
1,050

1,196

2,204

2,391

Securities purchased under agreements to resell and Securities borrowed1
(141
)
1,047

257

1,994

Trading assets, net of Trading liabilities
616

747

1,365

1,460

Customer receivables and Other2
204

1,007

961

1,967

Total interest income
$
2,358

$
4,506

$
5,861

$
8,796

 
 
 
 
 
Interest expense
 
 
 
 
Deposits
$
220

$
493

$
626

$
955

Borrowings
823

1,342

1,820

2,722

Securities sold under agreements to repurchase and Securities loaned3
209

735

718

1,335

Customer payables and Other4
(494
)
907

(259
)
1,741

Total interest expense
$
758

$
3,477

$
2,905

$
6,753

Net interest
$
1,600

$
1,029

$
2,956

$
2,043

 
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
Accrued Interest
$ in millions
At
June 30,
2020
At
December 31,
2019
Customer and other receivables
$
1,986

$
1,661

Customer and other payables
2,558

2,223


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.

 
83
June 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

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.
Net Discrete Tax Provisions (Benefits)
 
Three Months Ended
June 30,
Six Months Ended
June 30,
$ in millions
2020
2019
2020
2019
Recurring1
$
5

$
(20
)
$
(94
)
$
(127
)
Intermittent
134

—

103

(101
)
 
1. Recurring discrete tax items are related to conversion of employee share-based awards.

The current quarter and current year period included intermittent net discrete tax costs principally associated with the remeasurement of reserves and interest related to a foreign tax matter.

The prior year period included 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 June 30, 2020
$ in millions
IS
WM
IM
I/E
Total
Investment banking
$
2,051

$
110

$
—

$
(19
)
$
2,142

Trading
4,152

492

22

17

4,683

Investments
36

8

231

—

275

Commissions and fees1
717

473

—

(88
)
1,102

Asset management1
115

2,507

684

(41
)
3,265

Other
337

60

(47
)
(3
)
347

Total non-interest revenues
7,408

3,650

890

(134
)
11,814

Interest income
1,300

1,210

7

(159
)
2,358

Interest expense
731

180

11

(164
)
758

Net interest
569

1,030

(4
)
5

1,600

Net revenues
$
7,977

$
4,680

$
886

$
(129
)
$
13,414

Income before provision for income taxes
$
2,993

$
1,142

$
216

$
4

$
4,355

Provision for income taxes
790

289

39

1

1,119

Net income
2,203

853

177

3

3,236

Net income applicable to noncontrolling interests
17

—

23

—

40

Net income applicable to Morgan Stanley
$
2,186

$
853

$
154

$
3

$
3,196

 
Three Months Ended June 30, 2019
$ in millions
IS
WM
IM
I/E
Total
Investment banking
$
1,472

$
138

$
(1
)
$
(19
)
$
1,590

Trading
2,558

162

(1
)
13

2,732

Investments
194

—

247

—

441

Commissions and fees1
625

428

—

(74
)
979

Asset management1
103

2,544

612

(39
)
3,220

Other
143

120

(9
)
(1
)
253

Total non-interest revenues
5,095

3,392

848

(120
)
9,215

Interest income
3,289

1,348

6

(137
)
4,506

Interest expense
3,271

332

15

(141
)
3,477

Net interest
18

1,016

(9
)
4

1,029

Net revenues
$
5,113

$
4,408

$
839

$
(116
)
$
10,244

Income before provision for income taxes
$
1,463

$
1,243

$
199

$
(2
)
$
2,903

Provision for income taxes
324

290

44

(1
)
657

Net income
1,139

953

155

(1
)
2,246

Net income applicable to noncontrolling interests
18

—

27

—

45

Net income applicable to Morgan Stanley
$
1,121

$
953

$
128

$
(1
)
$
2,201


June 2020 Form 10-Q
84
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

 
Six Months Ended June 30, 2020
$ in millions
IS
WM
IM
I/E
Total
Investment banking
$
3,195

$
268

$
—

$
(50
)
$
3,413

Trading
7,568

145

(15
)
41

7,739

Investments
11

8

294

—

313

Commissions and fees1
1,591

1,061

—

(190
)
2,462

Asset management1
228

5,187

1,349

(82
)
6,682

Other
(742
)
122

(40
)
(4
)
(664
)
Total non-interest revenues
11,851

6,791

1,588

(285
)
19,945

Interest income
3,723

2,403

15

(280
)
5,861

Interest expense
2,692

477

25

(289
)
2,905

Net interest
1,031

1,926

(10
)
9

2,956

Net revenues
$
12,882

$
8,717

$
1,578

$
(276
)
$
22,901

Income before provision for income taxes
$
3,943

$
2,197

$
359

$
2

$
6,501

Provision for income taxes
941

480

64

—

1,485

Net income
3,002

1,717

295

2

5,016

Net income applicable to noncontrolling interests
59

—

63

—

122

Net income applicable to Morgan Stanley
$
2,943

$
1,717

$
232

$
2

$
4,894

 
Six Months Ended June 30, 2019
$ in millions
IS
WM
IM
I/E
Total
Investment banking
$
2,623

$
247

$
(1
)
$
(37
)
$
2,832

Trading
5,688

464

(4
)
25

6,173

Investments
275

1

438

—

714

Commissions and fees1
1,246

834

—

(135
)
1,945

Asset management1
210

4,905

1,229

(75
)
6,269

Other
365

200

(6
)
(5
)
554

Total non-interest revenues
10,407

6,651

1,656

(227
)
18,487

Interest income
6,345

2,761

10

(320
)
8,796

Interest expense
6,443

615

23

(328
)
6,753

Net interest
(98
)
2,146

(13
)
8

2,043

Net revenues
$
10,309

$
8,797

$
1,643

$
(219
)
$
20,530

Income before provision for income taxes
$
3,058

$
2,431

$
373

$
(4
)
$
5,858

Provision for income taxes
514

554

77

(1
)
1,144

Net income
2,544

1,877

296

(3
)
4,714

Net income applicable to noncontrolling interests
52

—

32

—

84

Net income applicable to Morgan Stanley
$
2,492

$
1,877

$
264

$
(3
)
$
4,630


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
June 30,
Six Months Ended
June 30,
$ in millions
2020
2019
2020
2019
Institutional Securities Advisory
$
462

$
506

$
824

$
912

Institutional Securities Underwriting
1,589

966

2,371

1,711

Firm Investment banking revenues from contracts with customers
92
%
90
%
91
%
90
%

Trading Revenues by Product Type
 
Three Months Ended
June 30,
Six Months Ended
June 30,
$ in millions
2020
2019
2020
2019
Interest rate
$
1,008

$
604

$
2,082

$
1,389

Foreign exchange
127

73

465

314

Equity security and index1
1,943

1,478

3,016

2,929

Commodity and other
603

264

868

686

Credit
1,002

313

1,308

855

Total
$
4,683

$
2,732

$
7,739

$
6,173

 
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
June 30,
2020
At
December 31,
2019
Net cumulative unrealized performance-based fees at risk of reversing
$
730

$
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.

 
85
June 2020 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo2q20.jpg

Investment Management Asset Management Revenues—Reduction of Fees Due to Fee Waivers
 
Three Months Ended
June 30,
Six Months Ended
June 30,
$ in millions
2020
2019
2020
2019
Fee waivers
$
22

$
10

$
33

$
21


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
June 30,
Six Months Ended
June 30,
$ in millions
2020
2019
2020
2019
Americas
$
9,765

$
7,526

$
16,411

$
14,847

EMEA
2,049

1,576

3,197

3,278

Asia
1,600

1,142

3,293

2,405

Total
$
13,414

$
10,244

$
22,901

$
20,530



For a discussion about the Firm’s geographic net revenues, see Note 21 to the financial statements in the 2019 Form 10-K.
Revenue Recognized from Prior Services
 
Three Months Ended
June 30,
Six Months Ended
June 30,
$ in millions
2020
2019
2020
2019
Non-interest revenues
$
680

$
725

$
1,242

$
1,344

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
June 30,
2020
At
December 31,
2019
Customer and other receivables
$
3,009

$
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
June 30,
2020
At
December 31,
2019
Institutional Securities
$
727,137

$
691,201

Wealth Management
241,651

197,682

Investment Management
6,575

6,546

Total1
$
975,363

$
895,429

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



June 2020 Form 10-Q
86
 
Table of Contents
 
Financial Data Supplement (Unaudited)

mslogo2q20.jpg



Average Balances and Interest Rates and Net Interest Income
 
Three Months Ended June 30,
 
2020
2019
$ in millions
Average
Daily Balance
Interest
Annualized
Average
Rate
Average
Daily
Balance
Interest
Annualized
Average
Rate
Interest earning assets
Investment securities1
$
123,713

$
629

2.0
 %
$
99,634

$
509

2.0
%
Loans1
147,326

1,050

2.9

118,091

1,196

4.1

Securities purchased under agreements to resell and Securities borrowed2:
U.S.
141,722

(85
)
(0.2
)
145,795

1,005

2.8

Non-U.S.
61,283

(56
)
(0.4
)
76,144

42

0.2

Trading assets, net of Trading liabilities3:
U.S.
70,641

489

2.8

81,129

661

3.3

Non-U.S.
24,757

127

2.1

12,749

86

2.7

Customer receivables and Other4:
U.S.
87,620

166

0.8

60,536

710

4.7

Non-U.S.
62,126

38

0.2

60,807

297

2.0

Total
$
719,188

$
2,358

1.3
 %
$
654,885

$
4,506

2.8
%
Interest bearing liabilities
Deposits1
$
235,370

$
220

0.4
 %
$
175,967

$
493

1.1
%
Borrowings1, 5
202,280

823

1.6

192,518

1,342

2.8

Securities sold under agreements to repurchase and Securities loaned6:
U.S.
28,840

92

1.3

35,268

534

6.1

Non-U.S.
30,446

117

1.5

31,342

201

2.6

Customer payables and Other7:
U.S.
121,977

(403
)
(1.3
)
124,119

585

1.9

Non-U.S.
63,778

(91
)
(0.6
)
64,693

322

2.0

Total
$
682,691

$
758

0.4
 %
$
623,907

$
3,477

2.2
%
Net interest income and net interest rate spread
$
1,600

0.9
 %
 
$
1,029

0.6
%










 

 
Six Months Ended June 30,
 
2020
2019
$ in millions
Average
Daily Balance
Interest
Annualized
Average
Rate
Average
Daily
Balance
Interest
Annualized
Average
Rate
Interest earning assets
Investment securities1
$
116,995

$
1,074

1.8
 %
$
97,283

$
984

2.0
%
Loans1
140,884

2,204

3.1

117,398

2,391

4.1

Securities purchased under agreements to resell and Securities borrowed2:
U.S.
131,357

293

0.4

143,119

1,939

2.7

Non-U.S.
59,131

(36
)
(0.1
)
77,389

55

0.1

Trading assets, net of Trading liabilities3:
U.S.
74,663

1,115

3.0

77,646

1,292

3.4

Non-U.S.
23,905

250

2.1

12,488

168

2.7

Customer receivables and Other4:
U.S.
77,694

721

1.9

61,756

1,407

4.6

Non-U.S.
61,078

240

0.8

58,824

560

1.9

Total
$
685,707

$
5,861

1.7
 %
$
645,903

$
8,796

2.7
%
Interest bearing liabilities
Deposits1
$
217,472

$
626

0.6
 %
$
178,478

$
955

1.1
%
Borrowings1, 5
197,171

1,820

1.9

190,859

2,722

2.9

Securities sold under agreements to repurchase and Securities loaned6:
U.S.
29,954

420

2.8

31,192

984

6.4

Non-U.S.
30,261

298

2.0

31,617

351

2.2

Customer payables and Other7:
U.S.
125,797

(294
)
(0.5
)
121,002

1,139

1.9

Non-U.S.
63,375

35

0.1

65,076

602

1.9

Total
$
664,030

$
2,905

0.9
 %
$
618,224

$
6,753

2.2
%
Net interest income and net interest rate spread
$
2,956

0.8
 %
 
$
2,043

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.


 
87
June 2020 Form 10-Q
Table of Contents
 
Glossary of Common Terms and Acronyms
mslogo2q20.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


ACL
Allowance for credit losses
 
 
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



June 2020 Form 10-Q
88
 
Table of Contents
 
Glossary of Common Terms and Acronyms
mslogo2q20.jpg


MSIP
Morgan Stanley & Co. International plc


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


N/M
Not Meaningful


NAV
Net asset value


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

 
89
June 2020 Form 10-Q

Other Information
None.
Legal Proceedings
The following developments have occurred since previously reporting certain matters in the Firm’s 2019 Form 10-K and the Firm’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 (the “First Quarter Form 10-Q”). See also the disclosures set forth under “Legal Proceedings” in the 2019 Form 10-K and the First Quarter Form 10-Q.

Residential Mortgage and Credit Crisis Related Matter
On May 21, 2020, the First Department, modified the order of the Supreme Court of NY in China Development Industrial Bank v. Morgan Stanley & Co. Incorporated, et al., to deny the Firm’s motion for sanctions relating to spoliation of evidence and otherwise affirmed the denial of the Firm’s motion for summary judgment. On June 19, 2020, the Firm moved for leave to appeal the First Department’s decision to the Court of Appeals.
European Matters
Tax
On May 12, 2020, the Court of Appeal in Amsterdam granted the Dutch Authority’s appeal in matters re-styled Case number 18/00318 and Case number 18/00319. On June 22, 2020, the Firm filed an appeal against the decision of the Court of Appeal in Amsterdam before the Dutch High Court.
Other
On July 14, 2020, the Italian Supreme Court in the matter styled Case number 2012/00406/MNV scheduled a hearing to take place on November 17, 2020.
 
Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Three Months Ended June 30, 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
April
763,709

$
33.98

—

$
1,653

May
19,727

$
39.41

—

$
1,653

June
20,993

$
43.89

—

$
—

Total
804,429

$
34.37

—

 

1.
Refers to 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 June 30, 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”) from time to time as conditions warrant and subject to regulatory non-objection. 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 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. As a result, $1.7 billion of share repurchase authorization expired unused on June 30, 2020. On June 25, 2020, the Federal Reserve published summary results of CCAR and announced that large BHCs, including the Firm, generally will be restricted in making share repurchases during the third quarter of 2020. For further information, see “Liquidity and Capital Resources—Regulatory Requirements—Capital Plans and Stress Tests.”


June 2020 Form 10-Q
90
 

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 August 4, 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).

 
91
June 2020 Form 10-Q

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/ RAJA J. AKRAM
 
Raja J. Akram
Deputy Chief Financial Officer,
Chief Accounting Officer and Controller
Date: August 4, 2020


S-1

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