Morgan Stanley - 10-Q quarterly report FY2016 Q2

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

OR

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

EXCHANGE ACT OF 1934

Commission File Number 1-11758

 

 

(Exact Name of Registrant as specified in its charter)

 

 

 

Delaware (State or other jurisdiction of incorporation or organization)		1585 Broadway New York, NY 10036 (Address of principal executive offices, including zip code)		36-3145972 (I.R.S. Employer Identification No.)		(212) 761-4000 (Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large Accelerated Filer  x		Accelerated Filer  ¨
Non-Accelerated Filer  ¨		Smaller reporting company  ¨
(Do not check if a smaller reporting company)

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

As of July 29, 2016, there were 1,911,808,935 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.

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QUARTERLY REPORT ON FORM 10-Q

For the quarter ended June 30, 2016

 

Table of Contents				Page
Part I—Financial Information
Item 1.		Financial Statements (Unaudited)		1
		Consolidated Statements of Income		1
		Consolidated Statements of Comprehensive Income		2
		Consolidated Balance Sheets		3
		Consolidated Statements of Changes in Total Equity		4
		Consolidated Statements of Cash Flows		5
		Notes to Consolidated Financial Statements (Unaudited)		6
		1. Introduction and Basis of Presentation		6
		2. Significant Accounting Policies		7
		3. Fair Values		8
		4. Derivative Instruments and Hedging Activities		27
		5. Investment Securities		34
		6. Collateralized Transactions		40
		7. Loans and Allowance for Credit Losses		43
		8. Equity Method Investments		47
		9. Deposits		47
		10. Long-Term Borrowings and Other Secured Financings		47
		11. Commitments, Guarantees and Contingencies		48
		12. Variable Interest Entities and Securitization Activities		53
		13. Regulatory Requirements		59
		14. Total Equity		61
		15. Earnings per Common Share		64
		16. Interest Income and Interest Expense		65
		17. Employee Benefit Plans		65
		18. Income Taxes		66
		19. Segment and Geographic Information		67
		20. Subsequent Events		70
		Report of Independent Registered Public Accounting Firm		71
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		72
		Introduction		72
		Executive Summary		73
		Business Segments		78
		Supplemental Financial Information and Disclosures		90
		Accounting Development Updates		91
		Critical Accounting Policies		91
		Liquidity and Capital Resources		92
Item 3.		Quantitative and Qualitative Disclosures about Market Risk		108
Item 4.		Controls and Procedures		121
Financial Data Supplement (Unaudited)				122
Part II—Other Information
Item 1.		Legal Proceedings		128
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		129
Item 6.		Exhibits		129

 

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Available Information.

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

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

You can access information about our corporate governance atwww.morganstanley.com/about-us-governance. Our Corporate Governance webpage includes:

 

•

Amended and Restated Certificate of Incorporation;

•

Amended and Restated Bylaws;

•

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

•

Corporate Governance Policies;

•

Policy Regarding Communication with the Board of Directors;

•

Policy Regarding Director Candidates Recommended by Shareholders;

•

Policy Regarding Corporate Political Activities;

•

Policy Regarding Shareholder Rights Plan;

•

Equity Ownership Commitment;

•

Code of Ethics and Business Conduct;

•

Code of Conduct; and

•

Integrity Hotline Information.

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

 

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Part I—Financial Information

Item 1.            Financial Statements

MORGAN STANLEY

Consolidated Statements of Income

(in millions, except per share data)

(unaudited)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
Revenues:
Investment banking		$	1,224			$	1,614			$	2,331			$	2,971
Trading			2,746				2,973				4,811				6,623
Investments			126				261				92				527
Commissions and fees			1,020				1,158				2,075				2,344
Asset management, distribution and administration fees			2,637				2,742				5,257				5,423
Other			243				297				323				468
Total non-interest revenues			7,996				9,045				14,889				18,356
Interest income			1,667				1,386				3,414				2,870
Interest expense			754				688				1,602				1,576
Net interest			913				698				1,812				1,294
Net revenues			8,909				9,743				16,701				19,650
Non-interest expenses:
Compensation and benefits			4,015				4,405				7,698				8,929
Occupancy and equipment			329				351				658				693
Brokerage, clearing and exchange fees			484				487				949				950
Information processing and communications			429				438				871				853
Marketing and business development			154				179				288				329
Professional services			547				598				1,061				1,084
Other			468				558				955				1,230
Total non-interest expenses			6,426				7,016				12,480				14,068
Income from continuing operations before income taxes			2,483				2,727				4,221				5,582
Provision for income taxes			833				894				1,411				1,281
Income from continuing operations			1,650				1,833				2,810				4,301
Income (loss) from discontinued operations, net of income taxes			(4)				(2)				(7)				(7)
Net income		$	1,646			$	1,831			$	2,803			$	4,294
Net income applicable to noncontrolling interests			64				24				87				93
Net income applicable to Morgan Stanley		$	1,582			$	1,807			$	2,716			$	4,201
Preferred stock dividends and other			157				142				235				222
Earnings applicable to Morgan Stanley common shareholders		$	1,425			$	1,665			$	2,481			$	3,979
Earnings per basic common share:
Income from continuing operations		$	0.77			$	0.87			$	1.33			$	2.07
Income (loss) from discontinued operations			(0.01)				—				(0.01)				—
Earnings per basic common share		$	0.76			$	0.87			$	1.32			$	2.07
Earnings per diluted common share:
Income from continuing operations		$	0.75			$	0.85			$	1.30			$	2.03
Income (loss) from discontinued operations			—				—				—				—
Earnings per diluted common share		$	0.75			$	0.85			$	1.30			$	2.03
Dividends declared per common share		$	0.15			$	0.15			$	0.30			$	0.25
Average common shares outstanding:
Basic			1,866				1,919				1,875				1,922
Diluted			1,899				1,960				1,907				1,962

See Notes to Consolidated Financial Statements.

 

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MORGAN STANLEY

Consolidated Statements of Comprehensive Income

(dollars in millions)

(unaudited)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
Net income		$	1,646			$	1,831			$	2,803			$	4,294
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments(1)		$	131			$	34			$	317			$	(188)
Change in net unrealized gains (losses) on available for sale securities(2)			143				(228)				538				(28)
Pension, postretirement and other			(5)				(3)				(4)				(1)
Change in net debt valuation adjustments(3)			145				—				348				—
Total other comprehensive income (loss)		$	414			$	(197)			$	1,199			$	(217)
Comprehensive income		$	2,060			$	1,634			$	4,002			$	4,077
Net income applicable to noncontrolling interests			64				24				87				93
Other comprehensive income (loss) applicable to noncontrolling interests			81				(16)				136				(18)
Comprehensive income applicable to Morgan Stanley		$	1,915			$	1,626			$	3,779			$	4,002

 

(1)

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

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

(3)

Debt valuation adjustments (“DVA”) represent the change in the fair value resulting from fluctuations in the Firm’s credit spreads and other credit factors related to liabilities carried at fair value, primarily certain Long-term and Short-term borrowings. Amounts include Provision for (benefit from) income taxes of$80 million and $200 million in the current quarter and current year period, respectively. See Notes 2 and 14 for further information.

See Notes to Consolidated Financial Statements.

 

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MORGAN STANLEY

Consolidated Balance Sheets

(dollars in millions, except share data)

(unaudited)

 

		At June 30, 2016				At December 31, 2015
Assets
Cash and due from banks		$	27,597			$	19,827
Interest bearing deposits with banks			28,536				34,256
Trading assets, at fair value ($141,543 and $127,627 were pledged to various parties)			256,794				239,505
Investment securities (includes $67,726 and $66,759 at fair value)			80,144				71,983
Securities purchased under agreements to resell (includes $555 and $806 at fair value)			97,589				87,657
Securities borrowed			131,281				142,416
Customer and other receivables			52,827				45,407
Loans:
Held for investment (net of allowances of $323 and $225)			77,283				72,559
Held for sale			15,882				13,200
Goodwill			6,581				6,584
Intangible assets (net of accumulated amortization of $2,279 and $2,130) (includes $3and $5 at fair value)			2,833				2,984
Other assets			51,526				51,087
Total assets		$	828,873			$	787,465
Liabilities
Deposits (includes $95 and $125 at fair value)		$	152,693			$	156,034
Short-term borrowings (includes $511 and $1,648 at fair value)			880				2,173
Trading liabilities, at fair value			140,662				128,455
Securities sold under agreements to repurchase (includes $699 and $683 at fair value)			50,328				36,692
Securities loaned			17,241				19,358
Other secured financings (includes $2,921 and $2,854 at fair value)			9,901				9,464
Customer and other payables			201,189				186,626
Other liabilities and accrued expenses			14,112				18,711
Long-term borrowings (includes $37,804 and $33,045 at fair value)			163,492				153,768
Total liabilities			750,498				711,281
Commitments and contingent liabilities (see Note 11)
Equity
Morgan Stanley shareholders’ equity:
Preferred stock (see Note 14)			7,520				7,520
Common stock, $0.01 par value:
Shares authorized: 3,500,000,000; Shares issued: 2,038,893,979; Shares outstanding:1,917,509,492 and 1,920,024,027			20				20
Additional paid-in capital			22,697				24,153
Retained earnings			51,410				49,204
Employee stock trusts			2,873				2,409
Accumulated other comprehensive income (loss)			(905)				(1,656)
Common stock held in treasury, at cost, $0.01 par value (121,384,487 and 118,869,952 shares)			(3,626)				(4,059)
Common stock issued to employee stock trusts			(2,873)				(2,409)
Total Morgan Stanley shareholders’ equity			77,116				75,182
Noncontrolling interests			1,259				1,002
Total equity			78,375				76,184
Total liabilities and equity		$	828,873			$	787,465

See Notes to Consolidated Financial Statements.

 

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MORGAN STANLEY

Consolidated Statements of Changes in Total Equity

Six Months Ended June 30, 2016 and 2015

(dollars in millions)

(unaudited)

 

		Preferred Stock				Common Stock				Additional Paid-in Capital				Retained Earnings				Employee Stock Trusts				Accumulated Other Comprehensive Income (Loss)				Common Stock Held in Treasury at Cost				Common Stock Issued to Employee Stock Trusts				Non- controlling Interests				Total Equity
BALANCE AT DECEMBER 31, 2015		$	7,520			$	20			$	24,153			$	49,204			$	2,409			$	(1,656)			$	(4,059)			$	(2,409)			$	1,002			$	76,184
Cumulative adjustment for accounting change related to DVA(1)			—				—				—				312				—				(312)				—				—				—				—
Net adjustment for accounting change related to consolidation(2)			—				—				—				—				—				—				—				—				106				106
Net income applicable to Morgan Stanley			—				—				—				2,716				—				—				—				—				—				2,716
Net income applicable to noncontrolling interests			—				—				—				—				—				—				—				—				87				87
Dividends			—				—				—				(822)				—				—				—				—				—				(822)
Shares issued under employee plans and related tax effects			—				—				(1,456)				—				464				—				2,062				(464)				—				606
Repurchases of common stock and employee tax withholdings			—				—				—				—				—				—				(1,629)				—				—				(1,629)
Net change in Accumulated other comprehensive income (loss)			—				—				—				—				—				1,063				—				—				136				1,199
Other net decreases			—				—				—				—				—				—				—				—				(72)				(72)
BALANCE AT JUNE 30, 2016		$	7,520			$	20			$	22,697			$	51,410			$	2,873			$	(905)			$	(3,626)			$	(2,873)			$	1,259			$	78,375
BALANCE AT DECEMBER 31, 2014		$	6,020			$	20			$	24,249			$	44,625			$	2,127			$	(1,248)			$	(2,766)			$	(2,127)			$	1,204			$	72,104
Net income applicable to Morgan Stanley			—				—				—				4,201				—				—				—				—				—				4,201
Net income applicable to noncontrolling interests			—				—				—				—				—				—				—				—				93				93
Dividends			—				—				—				(720)				—				—				—				—				—				(720)
Shares issued under employee plans and related tax effects			—				—				(577)				—				314				—				1,423				(314)				—				846
Repurchases of common stock and employee tax withholdings			—				—				—				—				—				—				(1,473)				—				—				(1,473)
Net change in Accumulated other comprehensive income (loss)			—				—				—				—				—				(199)				—				—				(18)				(217)
Issuance of preferred stock			1,500				—				(7)				—				—				—				—				—				—				1,493
Deconsolidation of certain legal entities associated with a real estate fund			—				—				—				—				—				—				—				—				(191)				(191)
Other net decreases			—				—				(10)				—				—				—				—				—				(59)				(69)
BALANCE AT JUNE 30, 2015		$	7,520			$	20			$	23,655			$	48,106			$	2,441			$	(1,447)			$	(2,816)			$	(2,441)			$	1,029			$	76,067

 

(1)

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

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

See Notes to Consolidated Financial Statements.

 

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MORGAN STANLEY

Consolidated Statements of Cash Flows

(dollars in millions)

(unaudited)

 

		Six Months Ended June 30,
		2016				2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	2,803			$	4,294
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Income from equity method investments			(1)				(83)
Compensation payable in common stock and options			492				611
Depreciation and amortization			879				654
Net gain on sale of available for sale securities			(82)				(55)
Impairment charges			67				83
Provision for credit losses on lending activities			131				38
Other operating adjustments			218				37
Changes in assets and liabilities:
Trading assets, net of Trading liabilities			(333)				25,115
Securities borrowed			11,135				(7,261)
Securities loaned			(2,117)				(2,068)
Customer and other receivables and other assets			(10,537)				(601)
Customer and other payables and other liabilities			9,907				(1,482)
Securities purchased under agreements to resell			(9,932)				(23,472)
Securities sold under agreements to repurchase			13,636				(4,263)
Net cash provided by (used for) operating activities			16,266				(8,453)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from (payments for):
Other assets—Premises, equipment and software, net			(645)				(620)
Changes in loans, net			(4,724)				(9,082)
Investment securities:
Purchases			(30,700)				(26,832)
Proceeds from sales			20,274				26,501
Proceeds from paydowns and maturities			3,507				2,796
Other investing activities			(126)				(97)
Net cash used for investing activities			(12,414)				(7,334)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (payments for):
Short-term borrowings			(1,293)				861
Noncontrolling interests			(43)				(60)
Other secured financings			(69)				(280)
Deposits			(3,341)				5,659
Proceeds from:
Excess tax benefits associated with stock-based awards			42				176
Derivatives financing activities			—				312
Issuance of preferred stock, net of issuance costs			—				1,493
Issuance of long-term borrowings			20,628				22,909
Payments for:
Long-term borrowings			(15,900)				(12,963)
Derivatives financing activities			(120)				(257)
Repurchases of common stock and employee tax withholdings			(1,629)				(1,473)
Cash dividends			(791)				(673)
Net cash provided by (used for) financing activities			(2,516)				15,704
Effect of exchange rate changes on cash and cash equivalents			714				(542)
Net increase (decrease) in cash and cash equivalents			2,050				(625)
Cash and cash equivalents, at beginning of period			54,083				46,984
Cash and cash equivalents, at end of period		$	56,133			$	46,359
Cash and cash equivalents include:
Cash and due from banks		$	27,597			$	19,145
Interest bearing deposits with banks			28,536				27,214
Cash and cash equivalents, at end of period		$	56,133			$	46,359

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

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

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

See Notes to Consolidated Financial Statements.

 

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MORGAN STANLEY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

1.            Introduction

and Basis of Presentation

 

 

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MORGAN STANLEY

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

 

2.        Significant

Accounting Policies

 

 

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MORGAN STANLEY

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

 

3.        Fair

Values

Fair Value Measurements

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

		Level 1				Level 2				Level 3				Counterparty and Cash Collateral Netting				Balance at June 30, 2016
		(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. government and agency securities:
U.S. Treasury securities		$	24,565			$	—			$	—			$	—			$	24,565
U.S. agency securities			795				22,085				20				—				22,900
Total U.S. government and agency securities			25,360				22,085				20				—				47,465
Other sovereign government obligations			20,942				6,607				2				—				27,551
Corporate and other debt:
State and municipal securities			—				1,943				10				—				1,953
Residential mortgage-backed securities			—				586				216				—				802
Commercial mortgage-backed securities			—				961				51				—				1,012
Asset-backed securities			—				142				88				—				230
Corporate bonds			—				11,751				276				—				12,027
Collateralized debt and loan obligations			—				443				109				—				552
Loans and lending commitments(1)			—				3,879				5,418				—				9,297
Other debt			—				827				528				—				1,355
Total corporate and other debt			—				20,532				6,696				—				27,228
Corporate equities(2)			100,018				367				572				—				100,957
Securities received as collateral			10,121				7				—				—				10,128
Derivative and other contracts:
Interest rate contracts			791				462,243				540				—				463,574
Credit contracts			—				16,157				304				—				16,461
Foreign exchange contracts			140				76,264				101				—				76,505
Equity contracts			1,368				40,524				637				—				42,529
Commodity contracts			2,847				8,605				4,057				—				15,509
Other			—				16				—				—				16
Netting(3)			(4,184)				(505,871)				(2,537)				(63,844)				(576,436)
Total derivative and other contracts			962				97,938				3,102				(63,844)				38,158
Investments(4):
Principal investments			21				19				769				—				809
Other			295				559				205				—				1,059
Total investments			316				578				974				—				1,868
Physical commodities			—				193				—				—				193
Total trading assets(4)			157,719				148,307				11,366				(63,844)				253,548
AFS securities			31,062				36,664				—				—				67,726
Securities purchased under agreements to resell			—				555				—				—				555
Intangible assets			—				3				—				—				3
Total assets measured at fair value		$	188,781			$	185,529			$	11,366			$	(63,844)			$	321,832

 

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MORGAN STANLEY

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

 

		Level 1				Level 2				Level 3				Counterparty and Cash Collateral Netting				Balance at June 30, 2016
		(dollars in millions)
Liabilities at Fair Value
Deposits		$	—			$	65			$	30			$	—			$	95
Short-term borrowings			—				511				—				—				511
Trading liabilities:
U.S. government and agency securities:
U.S. Treasury securities			12,983				—				—				—				12,983
U.S. agency securities			358				111				—				—				469
Total U.S. government and agency securities			13,341				111				—				—				13,452
Other sovereign government obligations			15,885				2,668				—				—				18,553
Corporate and other debt:
State and municipal securities			—				3				—				—				3
Asset-backed securities			—				449				—				—				449
Corporate bonds			—				5,578				6				—				5,584
Other debt			—				15				3				—				18
Total corporate and other debt			—				6,045				9				—				6,054
Corporate equities(2)			46,440				76				26				—				46,542
Obligation to return securities received as collateral			18,731				7				—				—				18,738
Derivative and other contracts:
Interest rate contracts			969				436,022				775				—				437,766
Credit contracts			—				16,403				1,418				—				17,821
Foreign exchange contracts			82				78,441				102				—				78,625
Equity contracts			1,262				43,177				2,110				—				46,549
Commodity contracts			2,368				7,652				2,759				—				12,779
Other			—				91				11				—				102
Netting(3)			(4,184)				(505,871)				(2,537)				(43,727)				(556,319)
Total derivative and other contracts			497				75,915				4,638				(43,727)				37,323
Total trading liabilities			94,894				84,822				4,673				(43,727)				140,662
Securities sold under agreements to repurchase			—				549				150				—				699
Other secured financings			—				2,480				441				—				2,921
Long-term borrowings			44				35,831				1,929				—				37,804
Total liabilities measured at fair value		$	94,938			$	124,258			$	7,223			$	(43,727)			$	182,692

 

		9

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MORGAN STANLEY

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

 

		Level 1				Level 2				Level 3				Counterparty and Cash Collateral Netting				Balance at December 31, 2015
		(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. government and agency securities:
U.S. Treasury securities		$	17,658			$	—			$	—			$	—			$	17,658
U.S. agency securities			797				17,886				—				—				18,683
Total U.S. government and agency securities			18,455				17,886				—				—				36,341
Other sovereign government obligations			13,559				7,400				4				—				20,963
Corporate and other debt:
State and municipal securities			—				1,651				19				—				1,670
Residential mortgage-backed securities			—				1,456				341				—				1,797
Commercial mortgage-backed securities			—				1,520				72				—				1,592
Asset-backed securities			—				494				25				—				519
Corporate bonds			—				9,959				267				—				10,226
Collateralized debt and loan obligations			—				284				430				—				714
Loans and lending commitments(1)			—				4,682				5,936				—				10,618
Other debt			—				2,263				448				—				2,711
Total corporate and other debt			—				22,309				7,538				—				29,847
Corporate equities(2)			106,296				379				433				—				107,108
Securities received as collateral			11,221				3				1				—				11,225
Derivative and other contracts:
Interest rate contracts			406				323,586				2,052				—				326,044
Credit contracts			—				22,258				661				—				22,919
Foreign exchange contracts			55				64,608				292				—				64,955
Equity contracts			653				38,552				1,084				—				40,289
Commodity contracts			3,140				10,654				3,358				—				17,152
Other			—				219				—				—				219
Netting(3)			(3,840)				(380,443)				(3,120)				(55,562)				(442,965)
Total derivative and other contracts			414				79,434				4,327				(55,562)				28,613
Investments(4):
Principal investments			20				44				486				—				550
Other			163				310				221				—				694
Total investments			183				354				707				—				1,244
Physical commodities			—				321				—				—				321
Total trading assets(4)			150,128				128,086				13,010				(55,562)				235,662
AFS securities			34,351				32,408				—				—				66,759
Securities purchased under agreements to resell			—				806				—				—				806
Intangible assets			—				—				5				—				5
Total assets measured at fair value		$	184,479			$	161,300			$	13,015			$	(55,562)			$	303,232
Liabilities at Fair Value
Deposits		$	—			$	106			$	19			$	—			$	125
Short-term borrowings			—				1,647				1				—				1,648
Trading liabilities:
U.S. government and agency securities:
U.S. Treasury securities			12,932				—				—				—				12,932
U.S. agency securities			854				127				—				—				981
Total U.S. government and agency securities			13,786				127				—				—				13,913
Other sovereign government obligations			10,970				2,558				—				—				13,528
Corporate and other debt:
Commercial mortgage-backed securities			—				2				—				—				2
Corporate bonds			—				5,035				—				—				5,035
Lending commitments			—				3				—				—				3
Other debt			—				5				4				—				9
Total corporate and other debt			—				5,045				4				—				5,049
Corporate equities(2)			47,123				35				17				—				47,175
Obligation to return securities received as collateral			19,312				3				1				—				19,316
Derivative and other contracts:
Interest rate contracts			466				305,151				1,792				—				307,409
Credit contracts			—				22,160				1,505				—				23,665
Foreign exchange contracts			22				65,177				151				—				65,350
Equity contracts			570				42,447				3,115				—				46,132
Commodity contracts			3,012				9,431				2,308				—				14,751
Other			—				43				—				—				43
Netting(3)			(3,840)				(380,443)				(3,120)				(40,473)				(427,876)
Total derivative and other contracts			230				63,966				5,751				(40,473)				29,474
Total trading liabilities			91,421				71,734				5,773				(40,473)				128,455
Securities sold under agreements to repurchase			—				532				151				—				683
Other secured financings			—				2,393				461				—				2,854
Long-term borrowings			—				31,058				1,987				—				33,045
Total liabilities measured at fair value		$	91,421			$	107,470			$	8,392			$	(40,473)			$	166,810

 

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MORGAN STANLEY

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

 

 

AFS—Available for sale

(1)

At June 30, 2016, Loans and lending commitments held at fair value consisted of $7,114 million of corporate loans, $1,721 million of residential real estate loans and $462 million of wholesale real estate loans. At December 31, 2015, Loans and lending commitments held at fair value consisted of $7,286 million of corporate loans, $1,885 million of residential real estate loans and $1,447 million of wholesale real estate loans.

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

(3)

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

(4)

Amounts exclude certain investments that are measured at fair value using the net asset value (“NAV”) per share, which are not classified in the fair value hierarchy. At June 30, 2016 and December 31, 2015, the fair value of these investments was $3,246 million and $3,843 million, respectively. For additional disclosure about such investments, see “Fair Value of Investments Measured at Net Asset Value” herein.

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

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

Additionally, both observable and unobservable inputs may be used to determine the fair value of positions that the Firm has classified within the Level 3 category. As a result, the unrealized gains (losses) during the period for assets and liabilities within the Level 3 category presented in the following tables herein may include changes in fair value during the period that were attributable to both observable and unobservable inputs.

 

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MORGAN STANLEY

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

 

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

 

		Beginning Balance at March 31, 2016				Total Realized and Unrealized Gains (Losses)				Purchases (1)				Sales				Issuances				Settlements				Net Transfers				Ending Balance at June 30, 2016				Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at June 30, 2016
		(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. agency securities		$	8			$	—			$	—			$	(18)			$	—			$	—			$	30			$	20			$	—
Other sovereign government obligations			8				—				—				(3)				—				—				(3)				2				—
Corporate and other debt:
State and municipal securities			5				1				4				—				—				—				—				10				2
Residential mortgage-backed securities			292				3				—				(82)				—				—				3				216				(5)
Commercial mortgage-backed securities			59				(3)				1				(4)				—				—				(2)				51				(5)
Asset-backed securities			4				(4)				6				(1)				—				—				83				88				(4)
Corporate bonds			224				17				116				(35)				—				—				(46)				276				17
Collateralized debt and loan obligations			348				18				3				(178)				—				—				(82)				109				18
Loans and lending commitments			6,185				(46)				360				(484)				—				(596)				(1)				5,418				(55)
Other debt			527				4				13				(19)				—				—				3				528				2
Total corporate and other debt			7,644				(10)				503				(803)				—				(596)				(42)				6,696				(30)
Corporate equities			430				(63)				273				(82)				—				—				14				572				(63)
Net derivative and other contracts(2):
Interest rate contracts			169				(159)				2				—				(7)				42				(282)				(235)				(157)
Credit contracts			(723)				65				1				—				—				93				(550)				(1,114)				53
Foreign exchange contracts			126				(58)				—				—				—				(94)				25				(1)				(47)
Equity contracts			(1,832)				168				50				—				(140)				263				18				(1,473)				(106)
Commodity contracts			1,200				211				5				—				(4)				(88)				(26)				1,298				130
Other			—				—				—				—				—				—				(11)				(11)				—
Total net derivative and other contracts			(1,060)				227				58				—				(151)				216				(826)				(1,536)				(127)
Investments:
Principal investments			743				4				33				(11)				—				—				—				769				6
Other			179				1				25				—				—				—				—				205				1
Total investments			922				5				58				(11)				—				—				—				974				7
Intangible assets			4				—				—				—				—				—				(4)				—				—
Liabilities at Fair Value
Deposits		$	23			$	(1)			$	—			$	—			$	8			$	—			$	(2)			$	30			$	(1)
Trading liabilities:
Corporate and other debt:
Corporate bonds			6				(1)				(5)				29				—				—				(25)				6				(1)
Lending commitments			1				1				—				—				—				—				—				—				—
Other debt			4				—				(1)				—				—				—				—				3				—
Total corporate and other debt			11				—				(6)				29				—				—				(25)				9				(1)
Corporate equities			31				(28)				(33)				5				—				—				(5)				26				—
Obligation to return securities received as collateral			1				—				(1)				—				—				—				—				—				—
Securities sold under agreements to repurchase			151				1				—				—				—				—				—				150				1
Other secured financings			454				(14)				—				—				23				(22)				(28)				441				(14)
Long-term borrowings			1,798				21				—				—				164				(131)				119				1,929				26

 

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MORGAN STANLEY

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

 

		Beginning Balance at December 31, 2015				Total Realized and Unrealized Gains (Losses)				Purchases (1)				Sales				Issuances				Settlements				Net Transfers				Ending Balance at June 30, 2016				Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstand- ing at June 30, 2016
		(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. agency securities		$	—			$	1			$	—			$	(19)			$	—			$	—			$	38			$	20			$	1
Other sovereign government obligations			4				—				—				(5)				—				—				3				2				1
Corporate and other debt:
State and municipal securities			19				1				4				(15)				—				—				1				10				1
Residential mortgage-backed securities			341				(19)				19				(133)				—				—				8				216				(14)
Commercial mortgage-backed securities			72				(10)				—				(19)				—				—				8				51				(11)
Asset-backed securities			25				(7)				7				(18)				—				—				81				88				(8)
Corporate bonds			267				62				113				(128)				—				—				(38)				276				61
Collateralized debt and loan obligations			430				5				22				(224)				—				—				(124)				109				17
Loans and lending commitments			5,936				(111)				970				(720)				—				(672)				15				5,418				(121)
Other debt			448				(2)				133				(63)				—				—				12				528				(2)
Total corporate and other debt			7,538				(81)				1,268				(1,320)				—				(672)				(37)				6,696				(77)
Corporate equities			433				(45)				296				(119)				—				—				7				572				(64)
Securities received as collateral			1				—				—				(1)				—				—				—				—				—
Net derivative and other contracts(2):
Interest rate contracts			260				305				3				—				(21)				(60)				(722)				(235)				205
Credit contracts			(844)				(343)				1				—				—				153				(81)				(1,114)				(360)
Foreign exchange contracts			141				(109)				—				—				—				(201)				168				(1)				(82)
Equity contracts			(2,031)				(321)				71				—				(184)				1,121				(129)				(1,473)				(434)
Commodity contracts			1,050				297				7				—				(4)				(176)				124				1,298				210
Other			—				—				—				—				—				—				(11)				(11)				—
Total net derivative and other contracts			(1,424)				(171)				82				—				(209)				837				(651)				(1,536)				(461)
Investments:
Principal investments			486				(39)				403				(40)				—				(41)				—				769				(37)
Other			221				(17)				1				—				—				—				—				205				(16)
Total investments			707				(56)				404				(40)				—				(41)				—				974				(53)
Intangible assets			5				—				—				—				—				—				(5)				—				—
Liabilities at Fair Value
Deposits		$	19			$	(2)			$	—			$	—			$	13			$	—			$	(4)			$	30			$	(2)
Short-term borrowings			1				—				—				—				—				(1)				—				—				—
Trading liabilities:
Corporate and other debt:
Corporate bonds			—				(5)				(7)				10				—				—				(2)				6				(5)
Other debt			4				2				(3)				4				—				—				—				3				2
Total corporate and other debt			4				(3)				(10)				14				—				—				(2)				9				(3)
Corporate equities			17				(3)				(22)				18				—				—				10				26				(3)
Obligation to return securities received as collateral			1				—				(1)				—				—				—				—				—				—
Securities sold under agreements to repurchase			151				1				—				—				—				—				—				150				1
Other secured financings			461				(32)				—				—				69				(43)				(78)				441				(32)
Long-term borrowings			1,987				(12)				—				—				276				(167)				(179)				1,929				(6)

 

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MORGAN STANLEY

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

 

		Beginning Balance at March 31, 2015				Total Realized and Unrealized Gains (Losses)				Purchases (1)				Sales				Issuances				Settlements				Net Transfers				Ending Balance at June 30, 2015				Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at June 30, 2015
		(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. agency securities		$	—			$	—			$	—			$	(3)			$	—			$	—			$	6			$	3			$	—
Other sovereign government obligations			11				—				5				(1)				—				—				(3)				12				—
Corporate and other debt:
State and municipal securities			—				1				4				(9)				—				—				11				7				1
Residential mortgage-backed securities			296				2				138				(32)				—				—				(26)				378				2
Commercial mortgage-backed securities			180				(4)				5				(9)				—				—				(88)				84				(5)
Asset-backed securities			67				5				11				(64)				—				—				—				19				1
Corporate bonds			424				(4)				228				(150)				—				(2)				(17)				479				(16)
Collateralized debt and loan obligations			822				68				300				(439)				—				(78)				(13)				660				(10)
Loans and lending commitments			4,789				31				1,615				(351)				—				(491)				(81)				5,512				26
Other debt			486				(1)				130				(51)				—				—				—				564				(1)
Total corporate and other debt			7,064				98				2,431				(1,105)				—				(571)				(214)				7,703				(2)
Corporate equities			230				38				266				(92)				—				—				44				486				26
Securities received as collateral			33				—				—				(30)				—				—				—				3				—
Net derivative and other contracts(2):
Interest rate contracts			(496)				95				4				—				(13)				14				160				(236)				135
Credit contracts			(984)				(24)				4				—				(24)				23				16				(989)				(29)
Foreign exchange contracts			297				57				—				—				(1)				43				50				446				82
Equity contracts			(2,472)				(23)				39				—				(54)				206				202				(2,102)				(161)
Commodity contracts			1,345				4				2				—				(112)				(34)				—				1,205				(27)
Total net derivative and other contracts			(2,310)				109				49				—				(204)				252				428				(1,676)				—
Investments:
Principal investments			829				(21)				5				(12)				—				(205)				(15)				581				(21)
Other			391				(4)				—				—				—				—				(87)				300				—
Total investments			1,220				(25)				5				(12)				—				(205)				(102)				881				(21)
Intangible assets			5				1				—				—				—				—				—				6				1
Liabilities at Fair Value
Trading liabilities:
Corporate and other debt:
Corporate bonds		$	23			$	—			$	(21)			$	15			$	—			$	—			$	(2)			$	15			$	—
Other debt			23				—				—				10				—				(29)				—				4				—
Total corporate and other debt			46				—				(21)				25				—				(29)				(2)				19				—
Corporate equities			50				240				(49)				2				—				—				349				112				240
Obligation to return securities received as collateral			33				—				(30)				—				—				—				—				3				—
Securities sold under agreements to repurchase			154				—				—				—				—				—				—				154				—
Other secured financings			133				2				—				—				37				—				—				168				2
Long-term borrowings			1,738				51				—				—				549				(88)				73				2,221				51

 

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MORGAN STANLEY

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

 

		Beginning Balance at December 31, 2014				Total Realized and Unrealized Gains (Losses)				Purchases (1)				Sales				Issuances				Settlements				Net Transfers				Ending Balance at June 30, 2015				Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at June 30, 2015
		(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. agency securities		$	—			$	—			$	3			$	—			$	—			$	—			$	—			$	3			$	—
Other sovereign government obligations			41				1				6				(32)				—				—				(4)				12				1
Corporate and other debt:
State and municipal securities			—				1				4				—				—				—				2				7				1
Residential mortgage-backed securities			175				21				163				(51)				—				—				70				378				12
Commercial mortgage-backed securities			96				(6)				16				(22)				—				—				—				84				(9)
Asset-backed securities			76				(4)				11				(29)				—				—				(35)				19				2
Corporate bonds			386				10				213				(126)				—				(1)				(3)				479				9
Collateralized debt and loan obligations			1,152				145				404				(682)				—				(331)				(28)				660				(6)
Loans and lending commitments			5,874				35				2,082				(209)				—				(2,078)				(192)				5,512				30
Other debt			285				(8)				12				—				—				(1)				276				564				6
Total corporate and other debt			8,044				194				2,905				(1,119)				—				(2,411)				90				7,703				45
Corporate equities			272				64				260				(147)				—				—				37				486				49
Securities received as collateral			—				—				3				—				—				—				—				3				—
Net derivative and other contracts(2):
Interest rate contracts			(173)				188				9				—				(20)				124				(364)				(236)				197
Credit contracts			(743)				(276)				17				—				(54)				31				36				(989)				(284)
Foreign exchange contracts			151				121				—				—				(1)				144				31				446				120
Equity contracts			(2,165)				(73)				69				—				(225)				156				136				(2,102)				(160)
Commodity contracts			1,146				299				3				—				(112)				(72)				(59)				1,205				234
Total net derivative and other contracts			(1,784)				259				98				—				(412)				383				(220)				(1,676)				107
Investments:
Principal investments			835				(4)				15				(46)				—				(205)				(14)				581				(26)
Other			323				(16)				2				(6)				—				—				(3)				300				(12)
Total investments			1,158				(20)				17				(52)				—				(205)				(17)				881				(38)
Intangible assets			6				1				—				—				—				(1)				—				6				1
Liabilities at Fair Value
Trading liabilities:
Corporate and other debt:
Corporate bonds		$	78			$	(2)			$	(12)			$	14			$	—			$	—			$	(67)			$	15			$	(2)
Lending commitments			5				5				—				—				—				—				—				—				5
Other debt			38				—				—				6				—				(39)				(1)				4				—
Total corporate and other debt			121				3				(12)				20				—				(39)				(68)				19				3
Corporate equities			45				19				(75)				25				—				—				136				112				20
Obligation to return securities received as collateral			—				—				—				3				—				—				—				3				—
Securities sold under agreements to repurchase			153				(1)				—				—				—				—				—				154				(1)
Other secured financings			149				(6)				—				—				37				(24)				—				168				2
Long-term borrowings			1,934				65				—				—				612				(300)				40				2,221				59

 

(1)

Loan originations and consolidations of VIEs are included in purchases.

(2)

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

 

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MORGAN STANLEY

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

 

Significant Unobservable Inputs Used in Recurring Level 3 Fair Value Measurements

The following disclosures provide information on the valuation techniques, significant unobservable inputs, and their ranges and averages for each major category of assets and liabilities measured at fair value on a recurring basis with a significant Level 3 balance. The level of aggregation and breadth of products cause the range of inputs to be wide and not evenly distributed across the inventory. Further, the range of unobservable inputs may differ across firms in the financial services industry because of diversity in the types of products included in each firm’s inventory. The following disclosures also include qualitative information on the sensitivity of the fair value measurements to changes in the significant unobservable inputs.

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

 

		Balance at June 30, 2016					Valuation Technique(s) / Significant Unobservable Input(s) / Sensitivity of the Fair Value to Changes in the Unobservable Inputs		Range(1)		Averages(2)
		(dollars in millions)
Assets at Fair Value
Trading assets:
Corporate and other debt:
Residential mortgage-backed securities				$            216			Comparable pricing:
							Comparable bond price / (A)		0 to 79 points		20 points
Commercial mortgage-backed securities				51			Comparable pricing:
							Comparable bond price / (A)		0 to 7 points		1 point
Asset-backed securities				88			Comparable pricing:
							Comparable bond price / (A)		45 to 55 points		46 points
Corporate bonds				276			Comparable pricing(3):
							Comparable bond price / (A)		3 to 135 points		91 points
							Comparable pricing:
							EBITDA multiple / (A)		5 to 10 times		7 times
Collateralized debt and loan obligations				109			Comparable pricing(3):
							Comparable bond price / (A)		20 to 95 points		57 points
							Correlation model:
							Credit correlation / (B)		29% to 61%		42%
Loans and lending commitments				5,418			Corporate loan model:
							Credit spread / (C)		482 to 898 bps		596 bps
							Margin loan model(3):
							Credit spread / (C)(D)		31 to 102 bps		86 bps
							Volatility skew / (C)(D)		20% to 46%		32%
							Discount rate / (C)(D)		1% to 8%		3%
							Expected recovery:
							Asset coverage / (A)		47% to 99%		90%
							Option model:
							Volatility skew / (C)		-1%		-1%
							Comparable pricing:
							Comparable loan price / (A)		43 to 100 points		87 points
							Discounted cash flow:
							Implied weighted average cost of capital / (C)(D)		5% to 6%		6%
							Capitalization rate / (C)(D)		4% to 10%		4%

 

		16

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MORGAN STANLEY

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

 

		Balance at June 30, 2016					Valuation Technique(s) / Significant Unobservable Input(s) / Sensitivity of the Fair Value to Changes in the Unobservable Inputs		Range(1)		Averages(2)
		(dollars in millions)
Other debt				528			Comparable pricing:
							Comparable loan price / (A)		3 to 84 points		66 points
							Comparable pricing:
							Comparable bond price / (A)		7 points		7 points
							Option model:
							At the money volatility / (C)		16% to 53%		53%
							Margin loan model(3):
							Discount rate / (C)		1% to 2%		2%
							Discounted cash flow:
							Discount rate / (C)		10% to 13%		12%
Corporate equities				572			Comparable pricing:
							Comparable equity price / (A)		100%		100%
Net derivative and other contracts(4):
Interest rate contracts				(235)			Option model(3):
							Interest rate - Foreign exchange correlation / (A)(D)		25% to 55%		42% / 42% (5)
							Interest rate volatility skew / (A)(D)		34% to 143%		78% / 77% (5)
							Interest rate quanto correlation / (A)(D)		-8% to 35%		2% / -7% (5)
							Interest rate curve correlation / (C)(D)		19% to 95%		71% / 76% (5)
							Inflation volatility / (A)(D)		0% to 1%		1% / 1% (5)
							Interest rate - Inflation correlation / (A)(D)		-24% to -44%		-34% / -33% (5)
							Interest rate curve / (C)(D)		0% to 1%		1% / 1% (5)
							Foreign exchange volatility skew / (C)(D)		0% to 11%		4% / 6% (5)
							Comparable pricing:
							Comparable bond price / (C)		95 to 100 points		96 points
Credit contracts				(1,114)			Comparable pricing:
							Cash synthetic basis / (C)(D)		5 to 12 points		10 points
							Comparable bond price / (C)(D)		0 to 85 points		26 points
							Correlation model(3):
							Credit correlation / (B)		29% to 92%		49%
Foreign exchange contracts(6)				(1)			Option model:
							Interest rate - Foreign exchange correlation / (A)(D)		25% to 55%		42% / 42% (5)
							Interest rate volatility skew / (A)(D)		34% to 143%		78% / 77% (5)
							Interest rate curve / (A)(D)		0%		0% / 0% (5)
							Interest rate curve correlation / (C)(D)		19% to 94%		73% / 81% (5)
Equity contracts(6)				(1,473)			Option model:
							At the money volatility / (A)(D)		6% to 81%		35%
							Volatility skew / (A)(D)		-4% to 0%		-1%
							Equity - Equity correlation / (A)(D)		40% to 98%		79%
							Equity - Foreign exchange correlation / (C)(D)		-70% to -31%		-42%
							Equity - Interest rate correlation / (C)(D)		-7% to 50%		19% / 12% (5)
Commodity contracts				1,298			Option model:
							Forward power price / (C)(D)		$2 to $95 per megawatt hour		$34 per megawatt hour
							Commodity volatility / (C)(D)		6% to 90%		18%
							Cross commodity correlation / (C)(D)		5% to 99%		93%

 

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MORGAN STANLEY

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

 

		Balance at June 30, 2016					Valuation Technique(s) / Significant Unobservable Input(s) / Sensitivity of the Fair Value to Changes in the Unobservable Inputs		Range(1)		Averages(2)
		(dollars in millions)
Investments:
Principal investments				769			Discounted cash flow:
							Implied weighted average cost of capital / (C)(D)		13% to 16%		15%
							Exit multiple / (A)(D)		8 to 23 times		9 times
							Market approach(3):
							EBITDA multiple / (A)(D)		6 to 25 times		12 times
							Forward capacity price / (A)(D)		$4 to $9		$7
							Comparable pricing:
							Comparable equity price / (A)		43% to 100%		82%
Other				205			Discounted cash flow:
							Implied weighted average cost of capital / (C)(D)		9%		9%
							Exit multiple / (A)(D)		13 times		13 times
							Market approach:
							EBITDA multiple / (A)(D)		6 to 13 times		12 times
							Comparable pricing(3):
							Comparable equity price / (A)		100%		100%
Liabilities at Fair Value
Securities sold under agreements to repurchase				150			Discounted cash flow:
							Funding spread / (A)		117 to 123 bps		120 bps
Other secured financings				441			Option model:
							Volatility skew / (C)		-1%		-1%
							Discounted cash flow(3):
							Discount rate / (C)		4%		4%
							Discounted cash flow:
							Funding spread / (A)		101 to 126 bps		114 bps
Long-term borrowings				1,929			Option model(3):
							At the money volatility / (C)(D)		6% to 48%		29%
							Volatility skew / (C)(D)		-2% to 0%		-1%
							Equity - Equity correlation / (C)(D)		50% to 98%		75%
							Equity - Foreign exchange correlation / (C)(D)		-50% to 11%		-25%
							Option model:
							Interest rate - credit spread correlation / (A)(D)		-52% to 3%		-24% / -23% (5)
							Interest rate - Foreign exchange correlation /
							(A)(D)		53%		53% / 53% (5)
							Interest rate - equity correlation / (A)(D)		7% to 44%		26% / 26% (5)
							Interest rate curve correlation / (C)(D)		40% to 87%		73% / 78% (5)
							Correlation model:
							Credit correlation / (B)		33% to 61%		44%
							Comparable pricing:
							Comparable equity price / (A)		100%		100%

 

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MORGAN STANLEY

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

 

		Balance at December 31, 2015					Valuation Technique(s) / Significant Unobservable Input(s) / Sensitivity of the Fair Value to Changes in the Unobservable Inputs		Range(1)		Averages(2)
		(dollars in millions)
Assets at Fair Value
Trading assets:
Corporate and other debt:
Residential mortgage-backed securities			$	341			Comparable pricing:
							Comparable bond price / (A)		0 to 75 points		32 points
Commercial mortgage-backed securities				72			Comparable pricing:
							Comparable bond price / (A)		0 to 9 points		2 points
Corporate bonds				267			Comparable pricing(3):
							Comparable bond price / (A)		3 to 119 points		90 points
							Comparable pricing:
							EBITDA multiple / (A)		7 to 9 times		8 times
							Structured bond model:
							Discount rate / (C)		15%		15%
Collateralized debt and loan obligations				430			Comparable pricing(3):
							Comparable bond price / (A)		47 to 103 points		67 points
							Correlation model:
							Credit correlation / (B)		39% to 60%		49%
Loans and lending commitments				5,936			Corporate loan model:
							Credit spread / (C)		250 to 866 bps		531 bps
							Margin loan model(3):
							Credit spread / (C)(D)		62 to 499 bps		145 bps
							Volatility skew / (C)(D)		14% to 70%		33%
							Discount rate / (C)(D)		1% to 4%		2%
							Option model:
							Volatility skew / (C)		-1%		-1%
							Comparable pricing:
							Comparable loan price / (A)		35 to 100 points		88 points
							Discounted cash flow:
							Implied weighted average cost of capital / (C)(D)		6% to 8%		7%
							Capitalization rate / (C)(D)		4% to 10%		4%
Other debt				448			Comparable pricing:
							Comparable loan price / (A)		4 to 84 points		59 points
							Comparable pricing:
							Comparable bond price / (A)		8 points		8 points
							Option model:
							At the money volatility / (C)		16% to 53%		53%
							Margin loan model(3):
							Discount rate / (C)		1%		1%
Corporate equities				433			Comparable pricing:
							Comparable price / (A)		50% to 80%		72%
							Comparable pricing(3):
							Comparable equity price / (A)		100%		100%
							Market approach:
							EBITDA multiple / (A)		9 times		9 times

 

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MORGAN STANLEY

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

 

		Balance at December 31, 2015					Valuation Technique(s) / Significant Unobservable Input(s) / Sensitivity of the Fair Value to Changes in the Unobservable Inputs		Range(1)		Averages(2)
		(dollars in millions)
Net derivative and other contracts(4):
Interest rate contracts				260			Option model:
							Interest rate volatility concentration liquidity multiple / (C)(D)		0 to 3 times		2 times
							Interest rate - Foreign exchange correlation / (C)(D)		25% to 62%		43% / 43%(5)
							Interest rate volatility skew / (A)(D)		29% to 82%		43% / 40%(5)
							Interest rate quanto correlation / (A)(D)		-8% to 36%		5% / -6%(5)
							Interest rate curve correlation / (C)(D)		24% to 95%		60% / 69%(5)
							Inflation volatility / (A)(D)		58%		58% / 58%(5)
							Interest rate - Inflation correlation / (A)(D)		-41% to -39%		-41% / -41%(5)
Credit contracts				(844)			Comparable pricing:
							Cash synthetic basis / (C)(D)		5 to 12 points		9 points
							Comparable bond price / (C)(D)		0 to 75 points		24 points
							Correlation model(3):
							Credit correlation / (B)		39% to 97%		57%
Foreign exchange contracts(6)				141			Option model:
							Interest rate - Foreign exchange correlation / (C)(D)		25% to 62%		43% / 43%(5)
							Interest rate volatility skew / (A)(D)		29% to 82%		43% / 40%(5)
							Interest rate curve / (A)(D)		0%		0% / 0%(5)
Equity contracts(6)				(2,031)			Option model:
							At the money volatility / (A)(D)		16% to 65%		32%
							Volatility skew / (A)(D)		-3% to 0%		-1%
							Equity - Equity correlation / (C)(D)		40% to 99%		71%
							Equity - Foreign exchange correlation / (A)(D)		-60% to -11%		-39%
							Equity - Interest rate correlation / (C)(D)		-29% to 50%		16% / 8%(5)
Commodity contracts				1,050			Option model:
							Forward power price / (C)(D)		$3 to $91 per		$32 per
									megawatt hour		megawatt hour
							Commodity volatility / (A)(D)		10% to 92%		18%
							Cross commodity correlation / (C)(D)		43% to 99%		93%
Investments:
Principal investments				486			Discounted cash flow:
							Implied weighted average cost of capital / (C)(D)		16%		16%
							Exit multiple / (A)(D)		8 to 14 times		9 times
							Capitalization rate / (C)(D)		5% to 9%		6%
							Equity discount rate / (C)(D)		20% to 35%		26%
							Market approach(3):
							EBITDA multiple / (A)(D)		8 to 20 times		11 times
							Forward capacity price / (A)(D)		$5 to $9		$7
							Comparable pricing:
							Comparable equity price / (A)		43% to 100%		81%
Other				221			Discounted cash flow:
							Implied weighted average cost of capital / (C)(D)		10%		10%
							Exit multiple / (A)(D)		13 times		13 times
							Market approach:
							EBITDA multiple / (A)		7 to 14 times		12 times
							Comparable pricing(3):
							Comparable equity price / (A)		100%		100%

 

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MORGAN STANLEY

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

 

		Balance at December 31, 2015					Valuation Technique(s) / Significant Unobservable Input(s) / Sensitivity of the Fair Value to Changes in the Unobservable Inputs		Range(1)		Averages(2)
		(dollars in millions)
Liabilities at Fair Value
Securities sold under agreements to repurchase			$	151			Discounted cash flow:
							Funding spread / (A)		86 to 116 bps		105 bps
Other secured financings				461			Option model:
							Volatility skew / (C)		-1%		-1%
							Discounted cash flow(3):
							Discount rate / (C)		4% to 13%		4%
							Discounted cash flow:
							Funding spread / (A)		95 to 113 bps		104 bps
Long-term borrowings				1,987			Option model(3):
							At the money volatility / (C)(D)		20% to 50%		29%
							Volatility skew / (A)(D)		-1% to 0%		-1%
							Equity - Equity correlation / (A)(D)		40% to 97%		77%
							Equity - Foreign exchange correlation / (C)(D)		-70% to -11%		-39%
							Option model:
							Interest rate volatility skew / (A)(D)		50%		50%
							Equity volatility discount / (A)(D)		10%		10%
							Correlation model:
							Credit correlation / (B)		40% to 60%		52%
							Comparable pricing:
							Comparable equity price / (A)		100%		100%

 

bps—Basis points

EBITDA—Earnings before interest, taxes, depreciation and amortization

(1)	The range of significant unobservable inputs is represented in points, percentages, basis points, times or megawatt hours. Points are a percentage of par; for example, 79 points would be 79% of par. A basis point equals 1/100th of 1%; for example, 898 bps would equal 8.98%.

(2)

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

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

(4)

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

(5)

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

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

Sensitivity of the fair value to changes in the unobservable inputs:

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

(B)

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

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

(D)	There are no predictable relationships between the significant unobservable inputs.

 

 

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MORGAN STANLEY

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

 

Fair Value of Investments Measured at Net Asset Value

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

Investments in Certain Funds Measured at NAV per Share

 

		At June 30, 2016								At December 31, 2015
		Fair Value				Commitment				Fair Value				Commitment
		(dollars in millions)
Private equity funds		$	1,698			$	395			$	1,917			$	538
Real estate funds			1,228				111				1,337				128
Hedge funds			320				4				589				4
Total		$	3,246			$	510			$	3,843			$	670

 

 

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MORGAN STANLEY

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

 

Fair Value Option

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

Impact on Earnings of Transactions Under the Fair Value Option Election

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

 

		Trading     Revenues				Interest Income         (Expense)				Gains (Losses) Included in     Net Revenues
		(dollars in millions)
Three Months Ended June 30, 2016
Securities purchased under agreements to resell		$	(1)			$	2			$	1
Deposits(1)			(1)				(1)				(2)
Short-term borrowings(1)			(9)				—				(9)
Securities sold under agreements to repurchase(1)			(3)				(3)				(6)
Long-term borrowings(1)			(1,289)				(130)				(1,419)
Six Months Ended June 30, 2016
Securities purchased under agreements to resell		$	(1)			$	4			$	3
Deposits(1)			(3)				(1)				(4)
Short-term borrowings(1)			36				—				36
Securities sold under agreements to repurchase(1)			(12)				(5)				(17)
Long-term borrowings(1)			(2,254)				(269)				(2,523)
Three Months Ended June 30, 2015
Securities purchased under agreements to resell		$	(2)			$	5			$	3
Short-term borrowings(2)			(2)				—				(2)
Securities sold under agreements to repurchase(2)			6				(2)				4
Long-term borrowings(2)			152				(138)				14
Six Months Ended June 30, 2015
Securities purchased under agreements to resell		$	(3)			$	5			$	2
Short-term borrowings(2)			(42)				—				(42)
Securities sold under agreements to repurchase(2)			4				(3)				1
Long-term borrowings(2)			1,089				(270)				819

 

(1)

Gains (losses) are mainly attributable to changes in foreign currency rates or interest rates or movements in the reference price or index for short-term and long-term borrowings before the impact of related hedges. In accordance with the early adoption of a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities, unrealized DVA gains of $225 million and $548 million are recorded within OCI in the consolidated statements of comprehensive income and not included in this table for the current quarter and current year period, respectively. See Notes 2 and 14 for further information.

(2)

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

 

		23

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MORGAN STANLEY

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

 

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

 

		Three Months Ended June 30,																Six Months Ended June 30,
		2016								2015								2016								2015
		Trading     Revenues				OCI				Trading     Revenues				OCI				Trading     Revenues				OCI				Trading     Revenues				OCI
		(dollars in millions)
Short-term and long-term borrowings(1)		$	—			$	226			$	182			$	—			$	41			$	545			$	307			$	—
Securities sold under agreements to repurchase(1)			—				(1)				—				—				—				3				—				—
Loans and other debt(2)			(14)				—				(6)				—				(114)				—				71				—
Lending commitments(3)			2				—				(1)				—				3				—				8				—

 

(1)

In accordance with the early adoption of a provision of the accounting update, Recognition and Measurement of Financial Assets and Financial Liabilities, for the current quarter and current year period DVA gains (losses) are recorded in OCI when unrealized and in Trading revenues when realized. In the prior year quarter and prior year period, the realized and unrealized DVA gains (losses) are recorded in Trading revenues. The cumulative impact of changes in the Firm’s DVA and the pre-tax amount recognized in AOCI is a gain of $87 million at June 30, 2016. See Notes 2 and 14 for further information.

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

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

 

 

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MORGAN STANLEY

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

 

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

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

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

 

						Fair Value by Level
		Carrying Value at June 30,     2016(1)				Level 1				Level 2				Level 3				Total Gains (Losses) for the Three Months Ended June 30, 2016(2)				Total Gains (Losses) for Six Months Ended June 30, 2016(2)
		(dollars in millions)
Assets:
Loans(3)		$	6,700				$        —			$	4,276			$	2,424			$	(34)			$	(131)
Other assets—Other investments(4)			82				—				—				82				(38)				(40)
Other assets—Premises, equipment and software costs(5)			—				—				—				—				(22)				(27)
Total assets		$	6,782				$        —			$	4,276			$	2,506			$	(94)			$	(198)
Liabilities:
Other liabilities and accrued expenses(3)		$	402				$        —			$	331			$	71			$	13			$	24
Total liabilities		$	402				$        —			$	331			$	71			$	13			$	24

 

						Fair Value by Level
		Carrying Value at June 30,     2015(1)				Level 1				Level 2				Level 3				Total Gains (Losses) for the Three Months Ended June 30, 2015(2)				Total Gains (Losses) for the Six Months Ended June 30, 2015(2)
		(dollars in millions)
Assets:
Loans(3)		$	3,244				$        —			$	2,458			$	786			$	47			$	8
Other assets—Other investments(4)			—				—				—				—				—				(2)
Other assets—Premises, equipment and software costs(5)			—				—				—				—				(2)				(22)
Total assets		$	3,244				$        —			$	2,458			$	786			$	45			$	(16)
Liabilities:
Other liabilities and accrued expenses(3)		$	283				$        —			$	244			$	39			$	(45)				(48)
Total liabilities		$	283				$        —			$	244			$	39			$	(45)				(48)

 

(1)	Carrying values relate only to those assets that had fair value adjustments during the current quarter and prior year quarter.

(2)

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

(3)

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

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

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

 

 

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MORGAN STANLEY

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

 

Financial Instruments Not Measured at Fair Value

For a further discussion of financial instruments not measured at fair value, see Note 3 to the consolidated financial statements in the 2015 Form 10-K. The carrying values of the remaining assets and liabilities not measured at fair value in the following tables approximate fair value due to their short-term nature. The following 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.

 

		At June 30, 2016								Fair Value by Level
		Carrying       Value				Fair Value				Level 1				Level 2				Level 3
		(dollars in millions)
Financial Assets:
Cash and due from banks		$	27,597			$	27,597			$	27,597			$	—			$	—
Interest bearing deposits with banks			28,536				28,536				28,536				—				—
Investment securities—HTM securities			12,418				12,567				3,758				8,809				—
Securities purchased under agreements to resell			97,034				97,042				—				95,140				1,902
Securities borrowed			131,281				131,282				—				131,156				126
Customer and other receivables(1)			48,910				48,815				—				44,033				4,782
Loans(2)			93,165				94,151				—				25,289				68,862
Other assets—Cash deposited with clearing organizations or segregated under federal and other regulations or requirements			32,771				32,771				32,771				—				—
Financial Liabilities:
Deposits		$	152,598			$	152,788			$	—			$	152,788			$	—
Short-term borrowings			369				369				—				369				—
Securities sold under agreements to repurchase			49,629				49,692				—				48,033				1,659
Securities loaned			17,241				17,262				—				17,262				—
Other secured financings			6,980				6,991				—				5,596				1,395
Customer and other payables(1)			197,978				197,978				—				197,978				—
Long-term borrowings			125,688				127,189				—				127,189				—

 

		At December 31, 2015								Fair Value by Level
		Carrying       Value				Fair Value				Level 1				Level 2				Level 3
		(dollars in millions)
Financial Assets:
Cash and due from banks		$	19,827			$	19,827			$	19,827			$	—			$	—
Interest bearing deposits with banks			34,256				34,256				34,256				—				—
Investment securities—HTM securities			5,224				5,188				998				4,190				—
Securities purchased under agreements to resell			86,851				86,837				—				86,186				651
Securities borrowed			142,416				142,414				—				142,266				148
Customer and other receivables(1)			41,676				41,576				—				36,752				4,824
Loans(2)			85,759				86,423				—				19,241				67,182
Other assets—Cash deposited with clearing organizations or segregated under federal and other regulations or requirements			31,469				31,469				31,469				—				—
Financial Liabilities:
Deposits		$	155,909			$	156,163			$	—			$	156,163			$	—
Short-term borrowings			525				525				—				525				—
Securities sold under agreements to repurchase			36,009				36,060				—				34,150				1,910
Securities loaned			19,358				19,382				—				19,192				190
Other secured financings			6,610				6,610				—				5,333				1,277
Customer and other payables(1)			183,895				183,895				—				183,895				—
Long-term borrowings			120,723				123,219				—				123,219				—

 

HTM—Held to maturity

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

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

 

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MORGAN STANLEY

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

 

 

4.	Derivative Instruments and Hedging Activities

For a discussion of the Firm’s derivative instruments and hedging activities, see Note 4 to the consolidated financial statements in the 2015 Form 10-K. 

Fair Value, Notional and Offsetting of Derivative Assets and Liabilities

 

		Derivative Assets at June 30, 2016
		Fair Value																Notional
		Bilateral OTC				Cleared OTC				Exchange Traded				Total				Bilateral OTC				Cleared OTC				Exchange Traded				Total
		(dollars in millions)
Derivatives designated as accounting hedges:
Interest rate contracts		$	3,325			$	3,798			$	—			$	7,123			$	34,003			$	58,245			$	—			$	92,248
Foreign exchange contracts			88				—				—				88				2,795				59				—				2,854
Total derivatives designated as accounting hedges			3,413				3,798				—				7,211				36,798				58,304				—				95,102
Derivatives not designated as accounting hedges(1):
Interest rate contracts			287,757				168,366				328				456,451				3,940,102				6,615,199				1,636,768				12,192,069
Credit contracts			13,734				2,727				—				16,461				434,478				133,037				—				567,515
Foreign exchange contracts			75,891				386				140				76,417				1,851,368				16,653				21,279				1,889,300
Equity contracts			22,043				—				20,486				42,529				341,039				—				259,453				600,492
Commodity contracts			11,785				—				3,724				15,509				72,700				—				83,156				155,856
Other			16				—				—				16				1,135				—				—				1,135
Total derivatives not designated as accounting hedges			411,226				171,479				24,678				607,383				6,640,822				6,764,889				2,000,656				15,406,367
Total gross derivatives(2)		$	414,639			$	175,277			$	24,678			$	614,594			$	6,677,620			$	6,823,193			$	2,000,656			$	15,501,469
Amounts offset:
Counterparty netting			(321,553)				(173,222)				(21,214)				(515,989)
Cash collateral netting			(60,352)				(95)				—				(60,447)
Total derivative assets at fair value included in Trading assets		$	32,734			$	1,960			$	3,464			$	38,158
Amounts not offset(3):
Financial instruments collateral			(12,011)				—				—				(12,011)
Other cash collateral			(23)				—				—				(23)
Net exposure		$	20,700			$	1,960			$	3,464			$	26,124

 

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MORGAN STANLEY

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

 

		Derivative Liabilities at June 30, 2016
		Fair Value																Notional
		Bilateral OTC				Cleared OTC				Exchange Traded				Total				Bilateral OTC				Cleared OTC				Exchange Traded				Total
		(dollars in millions)
Derivatives designated as accounting hedges:
Interest rate contracts		$	—			$	—			$	—			$	—			$	—			$	32			$	—			$	32
Foreign exchange contracts		$	492			$	23			$	—			$	515			$	8,348			$	689			$	—			$	9,037
Total derivatives designated as accounting hedges			492				23				—				515				8,348				721				—				9,069
Derivatives not designated as accounting hedges(1):
Interest rate contracts			265,270				172,084				412				437,766				3,654,941				6,558,339				760,822				10,974,102
Credit contracts			14,888				2,933				—				17,821				489,656				115,979				—				605,635
Foreign exchange contracts			77,614				414				82				78,110				1,837,572				15,817				10,511				1,863,900
Equity contracts			25,633				—				20,916				46,549				342,625				—				261,986				604,611
Commodity contracts			9,390				—				3,389				12,779				68,095				—				64,896				132,991
Other			102				—				—				102				4,817				—				—				4,817
Total derivatives not designated as accounting hedges			392,897				175,431				24,799				593,127				6,397,706				6,690,135				1,098,215				14,186,056
Total gross derivatives(2)		$	393,389			$	175,454			$	24,799			$	593,642			$	6,406,054			$	6,690,856			$	1,098,215			$	14,195,125
Amounts offset:
Counterparty netting			(321,553)				(173,222	)			(21,214	)			(515,989	)
Cash collateral netting			(38,378)				(1,952	)			—				(40,330	)
Total derivative liabilities at fair value included in Trading liabilities		$	33,458			$	280			$	3,585			$	37,323
Amounts not offset(3):
Financial instruments collateral			(11,509)				—				(514	)			(12,023	)
Other cash collateral			(10)				(41	)			—				(51	)
Net exposure		$	21,939			$	239			$	3,071			$	25,249
		Derivative Assets at December 31, 2015
		Fair Value																Notional
		Bilateral OTC				Cleared OTC				Exchange Traded				Total				Bilateral OTC				Cleared OTC				Exchange Traded				Total
		(dollars in millions)
Derivatives designated as accounting hedges:
Interest rate contracts		$	2,825			$	1,442			$	—			$	4,267			$	36,999			$	35,362			$	—			$	72,361
Foreign exchange contracts			166				1				—				167				5,996				167				—				6,163
Total derivatives designated as accounting hedges			2,991				1,443				—				4,434				42,995				35,529				—				78,524
Derivatives not designated as accounting hedges(4):
Interest rate contracts			220,289				101,276				212				321,777				4,348,002				5,748,525				1,218,645				11,315,172
Credit contracts			19,310				3,609				—				22,919				585,731				139,301				—				725,032
Foreign exchange contracts			64,438				295				55				64,788				1,907,290				13,402				7,715				1,928,407
Equity contracts			20,212				—				20,077				40,289				316,770				—				229,859				546,629
Commodity contracts			13,114				—				4,038				17,152				67,449				—				82,313				149,762
Other			219				—				—				219				5,684				—				—				5,684
Total derivatives not designated as accounting hedges			337,582				105,180				24,382				467,144				7,230,926				5,901,228				1,538,532				14,670,686
Total gross derivatives(2)		$	340,573			$	106,623			$	24,382			$	471,578			$	7,273,921			$	5,936,757			$	1,538,532			$	14,749,210
Amounts offset:
Counterparty netting			(265,707	)			(104,294	)			(21,592	)			(391,593	)
Cash collateral netting			(50,335	)			(1,037	)			—				(51,372	)
Total derivative assets at fair value included in Trading assets		$	24,531			$	1,292			$	2,790			$	28,613
Amounts not offset(3):
Financial instruments collateral			(9,190	)			—				—				(9,190	)
Other cash collateral			(9	)			—				—				(9	)
Net exposure		$	15,332			$	1,292			$	2,790			$	19,414

 

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MORGAN STANLEY

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

 

		Derivative Liabilities at December 31, 2015
		Fair Value																Notional
		Bilateral OTC				Cleared OTC				Exchange Traded				Total				Bilateral OTC				Cleared OTC				Exchange Traded				Total
		(dollars in millions)
Derivatives designated as accounting hedges:
Interest rate contracts		$	20			$	250			$	—			$	270			$	3,560			$	9,869			$	—			$	13,429
Foreign exchange contracts			56				6				—				62				4,604				455				—				5,059
Total derivatives designated as accounting hedges			76				256				—				332				8,164				10,324				—				18,488
Derivatives not designated as accounting hedges(4):
Interest rate contracts			203,004				103,852				283				307,139				4,030,039				5,682,322				1,077,710				10,790,071
Credit contracts			19,942				3,723				—				23,665				562,027				131,388				—				693,415
Foreign exchange contracts			65,034				232				22				65,288				1,868,015				13,322				2,655				1,883,992
Equity contracts			25,708				—				20,424				46,132				332,734				—				229,266				562,000
Commodity contracts			10,864				—				3,887				14,751				59,169				—				62,974				122,143
Other			43				—				—				43				4,114				—				—				4,114
Total derivatives not designated as accounting hedges			324,595				107,807				24,616				457,018				6,856,098				5,827,032				1,372,605				14,055,735
Total gross derivatives(2)		$	324,671			$	108,063			$	24,616			$	457,350			$	6,864,262			$	5,837,356			$	1,372,605			$	14,074,223
Amounts offset:
Counterparty netting			(265,707)				(104,294	)			(21,592	)			(391,593	)
Cash collateral netting			(33,332)				(2,951	)			—				(36,283	)
Total derivative liabilities at fair value included in Trading liabilities		$	25,632			$	818			$	3,024			$	29,474
Amounts not offset(3):
Financial instruments collateral			(5,384)				—				(405	)			(5,789	)
Other cash collateral			(5)				—				—				(5	)
Net exposure		$	20,243			$	818			$	2,619			$	23,680

 

OTC—Over-the-counter

(1)

Notional amounts include gross notionals related to open long and short futures contracts of $1,300.0 billion and $372.8 billion, respectively. The unsettled fair value on these futures contracts (excluded from this table) of $1,631 million and $153 million is included in Customer and other receivables and Customer and other payables, respectively, in the consolidated balance sheets.

(2)

Amounts include transactions which are either not subject to master netting agreements or collateral agreements or are subject to such agreements but the Firm has not determined the agreements to be legally enforceable as follows: $4.8 billion of derivative assets and $6.3 billion of derivative liabilities at June 30, 2016, and $4.2 billion of derivative assets and $5.2 billion of derivative liabilities at December 31, 2015.

(3)	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.

(4)

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

 

 

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MORGAN STANLEY

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

 

Gains (Losses) on Trading Instruments

The following table summarizes gains and losses included in Trading revenues in the consolidated statements of income from trading activities. These activities include revenues related to derivative and non-derivative financial instruments. The Firm generally utilizes financial instruments across a variety of product types in connection with their market-making and related risk management strategies. Accordingly, the trading revenues presented in the following 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.

 

		Gains (Losses) Recognized in Trading Revenues
		Three Months Ended June 30,								Six Months Ended June 30,
Product Type		2016				2015				2016				2015
		(dollars in millions)
Interest rate contracts		$	320			$	355			$	626			$	925
Foreign exchange contracts			362				170				599				515
Equity security and index contracts(1)			1,615				1,746				2,945				3,341
Commodity and other contracts(2)			20				140				(124	)			816
Credit contracts			429				380				765				719
Subtotal		$	2,746			$	2,791			$	4,811			$	6,316
Debt valuation adjustments(3)			—				182				—				307
Total trading revenue		$	2,746			$	2,973			$	4,811			$	6,623

 

(1)	Dividend income is included within equity security and index contracts.

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

(3)

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

OTC Derivative Products—Trading Assets

Counterparty Credit Rating and Remaining Maturity of OTC Derivative Assets

 

		Fair Value at June 30, 2016(1)
		Contractual Years to Maturity																Cross-Maturity and Cash Collateral Netting(3)				Net Exposure Post-cash Collateral				Net Exposure Post- collateral(4)
Credit Rating(2)		Less than 1				1 - 3				3 - 5				Over 5
		(dollars in millions)
AAA		$	137			$	396			$	1,312			$	4,360			$	(4,953)			$	1,252			$	1,175
AA			3,156				1,502				1,814				12,226				(12,717)				5,981				3,771
A			11,078				7,607				5,336				28,058				(38,694)				13,385				7,784
BBB			5,794				4,489				2,622				15,861				(19,993)				8,773				6,808
Non-investment grade			3,923				2,505				996				5,370				(7,514)				5,280				3,122
Total		$	24,088			$	16,499			$	12,080			$	65,875			$	(83,871)			$	34,671			$	22,660

 

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MORGAN STANLEY

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

 

		Fair Value at December 31, 2015(1)
		Contractual Years to Maturity																Cross-Maturity and Cash Collateral Netting(3)				Net Exposure  Post-cash Collateral				Net Exposure  Post- collateral(4)
Credit Rating(2)		Less than 1				1-3				3-5				Over 5
		(dollars in millions)
AAA		$	203			$	453			$	827			$	3,665			$	(4,319)			$	829			$	715
AA			2,689				2,000				1,876				9,223				(10,981)				4,807				2,361
A			9,748				8,191				4,774				20,918				(34,916)				8,715				5,448
BBB			3,614				4,863				1,948				11,801				(15,086)				7,140				4,934
Non-investment grade			3,982				2,333				1,157				3,567				(6,716)				4,323				3,166
Total		$	20,236			$	17,840			$	10,582			$	49,174			$	(72,018)			$	25,814			$	16,624

 

(1)	Fair values shown represent the Firm’s net exposure to counterparties related to its OTC derivative products.

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

(3)

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

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

 

 

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MORGAN STANLEY

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

 

 

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

 

		At June 30, 2016
		Protection Sold								Protection Purchased
		Notional				Fair Value     (Asset)/Liability				Notional				Fair Value     (Asset)/Liability
		(dollars in millions)
Single name credit default swaps		$	347,624			$	463			$	338,727			$	(453	)
Index and basket credit default swaps			176,009				726				143,734				(771	)
Tranched index and basket credit default swaps			43,657				(793	)			123,399				2,188
Total		$	567,290			$	396			$	605,860			$	964

 

		At December 31, 2015
		Protection Sold								Protection Purchased
		Notional				Fair Value     (Asset)/Liability				Notional				Fair Value     (Asset)/Liability
		(dollars in millions)
Single name credit default swaps		$	420,806			$	1,980			$	405,361			$	(2,079	)
Index and basket credit default swaps			199,688				(102	)			173,936				(82	)
Tranched index and basket credit default swaps			69,025				(1,093	)			149,631				2,122
Total		$	689,519			$	785			$	728,928			$	(39	)

Credit Ratings of Reference Obligation and Maturities of Credit Protection Sold

 

		At June 30, 2016
		Maximum Potential Payout/Notional																				Fair Value     (Asset)/     Liability(1)
		Years to Maturity
		Less than 1				1-3				3-5				Over 5				Total
		(dollars in millions)
Single name credit default swaps(2):
Investment grade		$	92,734			$	94,348			$	48,928			$	11,097			$	247,107			$	(1,079	)
Non-investment grade			42,370				38,348				18,381				1,418				100,517				1,542
Total		$	135,104			$	132,696			$	67,309			$	12,515			$	347,624			$	463
Index and basket credit default swaps(2):
Investment grade		$	24,110			$	39,948			$	42,887			$	4,060			$	111,005			$	(1,222	)
Non-investment grade			51,914				28,315				13,761				14,671				108,661				1,155
Total		$	76,024			$	68,263			$	56,648			$	18,731			$	219,666			$	(67	)
Total credit default swaps sold		$	211,128			$	200,959			$	123,957			$	31,246			$	567,290			$	396
Other credit contracts			43				25				—				276				344				(17	)
Total credit derivatives and other credit contracts		$	211,171			$	200,984			$	123,957			$	31,522			$	567,634			$	379

 

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MORGAN STANLEY

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

 

		At December 31, 2015
		Maximum Potential Payout/Notional																				Fair Value (Asset)/ Liability(1)
		Years to Maturity
		Less than 1				1-3				3-5				Over 5				Total
		(dollars in millions)
Single name credit default swaps(2):
Investment grade		$	84,543			$	138,467			$	63,754			$	12,906			$	299,670			$	(1,831)
Non-investment grade			38,054				56,261				24,432				2,389				121,136				3,811
Total		$	122,597			$	194,728			$	88,186			$	15,295			$	420,806			$	1,980
Index and basket credit default swaps(2):
Investment grade		$	33,507			$	59,403			$	45,505			$	5,327			$	143,742			$	(1,977)
Non-investment grade			52,590				43,899				15,480				13,002				124,971				782
Total		$	86,097			$	103,302			$	60,985			$	18,329			$	268,713			$	(1,195)
Total credit default swaps sold		$	208,694			$	298,030			$	149,171			$	33,624			$	689,519			$	785
Other credit contracts			19				107				2				332				460				(24)
Total credit derivatives and other credit contracts		$	208,713			$	298,137			$	149,173			$	33,956			$	689,979			$	761

 

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

(2)

In order to provide an indication of the current payment status or performance risk of the CDS, a breakdown of CDS based on the Firm’s internal credit ratings by investment grade and non-investment grade is provided. 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. Internal ratings procedures, methodologies, and models are all independently and formally governed, and models and methodologies are reviewed by a separate model risk management oversight function.

 

 

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MORGAN STANLEY

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

 

5.	Investment Securities

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

AFS and HTM Securities

 

		At June 30, 2016
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(dollars in millions)
AFS debt securities:
U.S. government and agency securities:
U.S. Treasury securities		$	29,923			$	213			$	8			$	30,128
U.S. agency securities(1)			23,221				208				22				23,407
Total U.S. government and agency securities			53,144				421				30				53,535
Corporate and other debt:
Commercial mortgage-backed securities:
Agency			2,139				5				31				2,113
Non-agency			2,159				36				10				2,185
Auto loan asset-backed securities			2,071				7				—				2,078
Corporate bonds			4,009				66				2				4,073
Collateralized loan obligations			502				—				7				495
FFELP student loan asset-backed securities(2)			3,345				—				105				3,240
Total corporate and other debt			14,225				114				155				14,184
Total AFS debt securities			67,369				535				185				67,719
AFS equity securities			15				—				8				7
Total AFS securities			67,384				535				193				67,726
HTM securities:
U.S. government securities:
U.S. Treasury securities			3,705				53				—				3,758
U.S. agency securities(1)			8,713				96				—				8,809
Total HTM securities			12,418				149				—				12,567
Total Investment securities		$	79,802			$	684			$	193			$	80,293

 

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MORGAN STANLEY

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

 

		At December 31, 2015
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(dollars in millions)
AFS debt securities:
U.S. government and agency securities:
U.S. Treasury securities		$	31,555			$	5			$	143			$	31,417
U.S. agency securities(1)			21,103				29				156				20,976
Total U.S. government and agency securities			52,658				34				299				52,393
Corporate and other debt:
Commercial mortgage-backed securities:
Agency			1,906				1				60				1,847
Non-agency			2,220				3				25				2,198
Auto loan asset-backed securities			2,556				—				9				2,547
Corporate bonds			3,780				5				30				3,755
Collateralized loan obligations			502				—				7				495
FFELP student loan asset-backed securities(2)			3,632				—				115				3,517
Total corporate and other debt			14,596				9				246				14,359
Total AFS debt securities			67,254				43				545				66,752
AFS equity securities			15				—				8				7
Total AFS securities			67,269				43				553				66,759
HTM securities:
U.S. government securities:
U.S. Treasury securities			1,001				—				3				998
U.S. agency securities(1)			4,223				1				34				4,190
Total HTM securities			5,224				1				37				5,188
Total Investment securities		$	72,493			$	44			$	590			$	71,947

 

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

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

 

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MORGAN STANLEY

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

 

Investment Securities in an Unrealized Loss Position

 

		At June 30, 2016
		Less than 12 Months								12 Months or Longer								Total
		Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
		(dollars in millions)
AFS debt securities:
U.S. government and agency securities:
U.S. Treasury securities		$	3,028			$	8			$	—			$	—			$	3,028			$	8
U.S. agency securities			5,731				10				1,225				12				6,956				22
Total U.S. government and agency securities			8,759				18				1,225				12				9,984				30
Corporate and other debt:
Commercial mortgage-backed securities:
Agency			31				—				1,181				31				1,212				31
Non-agency			216				—				625				10				841				10
Auto loan asset-backed securities			83				—				204				—				287				—
Corporate bonds			172				1				175				1				347				2
Collateralized loan obligations			—				—				494				7				494				7
FFELP student loan asset-backed securities			583				12				2,637				93				3,220				105
Total corporate and other debt			1,085				13				5,316				142				6,401				155
Total AFS debt securities			9,844				31				6,541				154				16,385				185
AFS equity securities			7				8				—				—				7				8
Total AFS securities			9,851				39				6,541				154				16,392				193
HTM securities:
U.S. government and agency securities:
U.S. agency securities			72				—				—				—				72				—
Total HTM securities			72				—				—				—				72				—
Total Investment securities		$	9,923			$	39			$	6,541			$	154			$	16,464			$	193

 

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MORGAN STANLEY

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

 

		At December 31, 2015
		Less than 12 Months								12 Months or Longer								Total
		Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
		(dollars in millions)
AFS debt securities:
U.S. government and agency securities:
U.S. Treasury securities		$	25,994			$	126			$	2,177			$	17			$	28,171			$	143
U.S. agency securities			14,242				135				639				21				14,881				156
Total U.S. government and agency securities			40,236				261				2,816				38				43,052				299
Corporate and other debt:
Commercial mortgage-backed securities:
Agency			1,185				44				422				16				1,607				60
Non-agency			1,479				21				305				4				1,784				25
Auto loan asset-backed securities			1,644				7				881				2				2,525				9
Corporate bonds			2,149				19				525				11				2,674				30
Collateralized loan obligations			352				5				143				2				495				7
FFELP student loan asset-backed securities			2,558				79				929				36				3,487				115
Total corporate and other debt			9,367				175				3,205				71				12,572				246
Total AFS debt securities			49,603				436				6,021				109				55,624				545
AFS equity securities			7				8				—				—				7				8
Total AFS securities			49,610				444				6,021				109				55,631				553
HTM securities:
U.S. government and agency securities:
U.S. Treasury securities			898				3				—				—				898				3
U.S. agency securities			3,677				34				—				—				3,677				34
Total HTM securities			4,575				37				—				—				4,575				37
Total Investment securities		$	54,185			$	481			$	6,021			$	109			$	60,206			$	590

 

 

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MORGAN STANLEY

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

 

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

 

		At June 30, 2016
		Amortized Cost				Fair Value				Annualized  Average Yield
		(dollars in millions)
AFS debt securities:
U.S. government and agency securities:
U.S. Treasury securities:
Due within 1 year		$	2,698			$	2,702				0.7%
After 1 year through 5 years			22,137				22,317				1.0%
After 5 years through 10 years			5,088				5,109				1.4%
Total			29,923				30,128
U.S. agency securities:
Due within 1 year			200				200				0.7%
After 1 year through 5 years			2,629				2,632				0.5%
After 5 years through 10 years			1,327				1,357				1.9%
After 10 years			19,065				19,218				1.6%
Total			23,221				23,407
Total U.S. government and agency securities			53,144				53,535				1.2%
Corporate and other debt:
Commercial mortgage-backed securities:
Agency:
Due within 1 year			73				74				0.8%
After 1 year through 5 years			404				406				1.0%
After 5 years through 10 years			639				641				1.3%
After 10 years			1,023				992				1.6%
Total			2,139				2,113
Non-agency:
After 10 years			2,159				2,185				1.9%
Total			2,159				2,185
Auto loan asset-backed securities:
Due within 1 year			4				4				0.9%
After 1 year through 5 years			1,902				1,909				1.3%
After 5 years through 10 years			165				165				1.6%
Total			2,071				2,078
Corporate bonds:
Due within 1 year			638				640				1.3%
After 1 year through 5 years			2,655				2,695				1.8%
After 5 years through 10 years			716				738				2.6%
Total			4,009				4,073
Collateralized loan obligations:
After 5 years through 10 years			502				495				1.5%
Total			502				495

 

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MORGAN STANLEY

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

 

		At June 30, 2016
		Amortized Cost				Fair Value				Annualized Average Yield
		(dollars in millions)
FFELP student loan asset-backed securities:
After 1 year through 5 years			59				59				0.6%
After 5 years through 10 years			922				897				0.9%
After 10 years			2,364				2,284				0.9%
Total			3,345				3,240
Total corporate and other debt			14,225				14,184				1.5%
Total AFS debt securities			67,369				67,719				1.3%
AFS equity securities			15				7				— %
Total AFS securities			67,384				67,726				1.3%
HTM securities:
U.S. government securities:
U.S. Treasury securities:
Due within 1 year			200				201				0.7%
After 1 year through 5 years			1,408				1,422				1.1%
After 5 years through 10 years			1,693				1,719				1.7%
After 10 years			404				416				2.5%
Total			3,705				3,758
U.S. agency securities:
After 10 years			8,713				8,809				2.0%
Total			8,713				8,809
Total HTM securities			12,418				12,567				1.8%
Total Investment securities		$	79,802			$	80,293				1.4%

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

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
		(dollars in millions)
Gross realized gains		$	71			$	40			$	85			$	69
Gross realized (losses)			(1)				(10)				(3)				(14)
Total		$	70			$	30			$	82			$	55

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

 

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MORGAN STANLEY

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

 

6.	Collateralized Transactions

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

Offsetting of Certain Collateralized Transactions

 

		At June 30, 2016
		Gross Amounts(1)				Amounts Offset				Net Amounts Presented				Amounts Not Offset(2)				Net Exposure
		(dollars in millions)
Assets
Securities purchased under agreements to resell		$	162,813			$	(65,224)			$	97,589			$	(91,746)			$	5,843
Securities borrowed			138,436				(7,155)				131,281				(124,773)				6,508
Liabilities
Securities sold under agreements to repurchase		$	115,552			$	(65,224)			$	50,328			$	(42,541)			$	7,787
Securities loaned			24,396				(7,155)				17,241				(16,724)				517
		At December 31, 2015
		Gross Amounts(1)				Amounts Offset				Net Amounts Presented				Amounts Not Offset(2)				Net Exposure
		(dollars in millions)
Assets
Securities purchased under agreements to resell		$	135,714			$	(48,057)			$	87,657			$	(84,752)			$	2,905
Securities borrowed			147,445				(5,029)				142,416				(134,250)				8,166
Liabilities
Securities sold under agreements to repurchase		$	84,749			$	(48,057)			$	36,692			$	(31,604)			$	5,088
Securities loaned			24,387				(5,029)				19,358				(18,881)				477

 

(1)

Amounts include transactions which are either not subject to master netting agreements or are subject to such agreements but the Firm has not determined the agreements to be legally enforceable as follows: $5.5 billion of Securities purchased under agreements to resell, $3.7 billion of Securities borrowed, $7.2 billion of Securities sold under agreements to repurchase and $0.4 billion of Securities loaned at June 30, 2016, and $2.6 billion of Securities purchased under agreements to resell, $3.0 billion of Securities borrowed and $4.9 billion of Securities sold under agreements to repurchase at December 31, 2015.

(2)	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 information related to offsetting of derivatives, see Note 4.

 

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MORGAN STANLEY

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

 

Secured Financing Transactions—Maturities and Collateral Pledged

Gross Secured Financing Balances by Remaining Contractual Maturity

 

		At June 30, 2016
		Overnight and Open				Less than 30 Days				30-90 Days				Over 90 Days				Total
		(dollars in millions)
Securities sold under agreements to repurchase(1)		$	38,732			$	30,586			$	20,309			$	25,925			$	115,552
Securities loaned(1)			13,085				50				1,336				9,925				24,396
Gross amount of secured financing included in the offsetting disclosure		$	51,817			$	30,636			$	21,645			$	35,850			$	139,948
Obligation to return securities received as collateral			18,738				—				—				—				18,738
Total		$	70,555			$	30,636			$	21,645			$	35,850			$	158,686
		At December 31, 2015
		Overnight and Open				Less than 30 Days				30-90 Days				Over 90 Days				Total
		(dollars in millions)
Securities sold under agreements to repurchase(1)		$	20,410			$	25,245			$	13,221			$	25,873			$	84,749
Securities loaned(1)			12,247				478				2,156				9,506				24,387
Gross amount of secured financing included in the offsetting disclosure		$	32,657			$	25,723			$	15,377			$	35,379			$	109,136
Obligation to return securities received as collateral			19,316				—				—				—				19,316
Total		$	51,973			$	25,723			$	15,377			$	35,379			$	128,452

 

(1)	Amounts are presented on a gross basis, prior to netting in the consolidated balance sheets.

 

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MORGAN STANLEY

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

 

Gross Secured Financing Balances by Class of Collateral Pledged

 

		At June 30, 2016				At December 31, 2015
		(dollars in millions)
Securities sold under agreements to repurchase(1)
U.S. government and agency securities		$	39,920			$	36,609
State and municipal securities			2,104				173
Other sovereign government obligations			42,329				24,820
Asset-backed securities			745				441
Corporate and other debt			8,638				4,020
Corporate equities			21,515				18,473
Other			301				213
Total securities sold under agreements to repurchase		$	115,552			$	84,749
Securities loaned(1)
U.S. government and agency securities		$	182			$	—
Other sovereign government obligations			7,454				7,336
Corporate and other debt			123				71
Corporate equities			16,602				16,972
Other			35				8
Total securities loaned		$	24,396			$	24,387
Gross amount of secured financing included in the offsetting disclosure		$	139,948			$	109,136
Obligation to return securities received as collateral
Corporate and other debt			—				3
Corporate equities			18,737				19,313
Other			1				—
Total obligation to return securities received as collateral		$	18,738			$	19,316
Total		$	158,686			$	128,452

 

(1)	Amounts are presented on a gross basis, prior to netting in the consolidated balance sheets.

 

 

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MORGAN STANLEY

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

 

 

Cash and Securities Deposited with Clearing Organizations or Segregated

 

		At June 30, 2016				At   December 31, 2015
		(dollars in millions)
Securities(1)		$	23,710			$	14,390
Other assets—Cash deposited with clearing organizations or segregated under federal and other regulations or requirements			32,771				31,469
Total		$	56,481			$	45,859

 

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

 

7.	Loans and Allowance for Credit Losses

Loans

The Firm’s loans held for investment are recorded at amortized cost, and its loans held for sale are recorded at the lower of cost or fair value in the consolidated balance sheets. For a further description of these loans, refer to Note 7 to the consolidated financial statements in the 2015 Form 10-K. See Note 3 for further information regarding Loans and lending commitments held at fair value.

Loans Held for Investment and Held for Sale

 

		At June 30, 2016												At December 31, 2015
Loans by Product Type		Loans Held for  Investment				Loans Held for Sale				Total   Loans(1)(2)				Loans Held for  Investment				Loans Held for Sale				Total Loans(1)(2)
		(dollars in millions)
Corporate loans		$	24,186			$	14,448			$	38,634			$	23,554			$	11,924			$	35,478
Consumer loans			23,337				—				23,337				21,528				—				21,528
Residential real estate loans			22,668				84				22,752				20,863				104				20,967
Wholesale real estate loans			7,415				1,350				8,765				6,839				1,172				8,011
Total loans, gross of allowance for loan losses			77,606				15,882				93,488				72,784				13,200				85,984
Allowance for loan losses			(323)				—				(323)				(225)				—				(225)
Total loans, net of allowance for loan losses		$	77,283			$	15,882			$	93,165			$	72,559			$	13,200			$	85,759

 

(1)	Amounts include loans that are made to non-U.S. borrowers of $8,104 million and $9,789 million at June 30, 2016 and December 31, 2015, respectively.

(2)	Loans at fixed interest rates and floating or adjustable interest rates were $10,102 million and $83,063 million, respectively, at June 30, 2016 and $8,471 million and $77,288 million, respectively, at December 31, 2015.

 

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MORGAN STANLEY

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

 

Credit Quality

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

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

 

		At June 30, 2016
		Corporate				Consumer				Residential   Real Estate				Wholesale   Real Estate				Total
		(dollars in millions)
Pass		$	22,183			$	23,337			$	22,627			$	7,191			$	75,338
Special mention			539				—				—				224				763
Substandard			1,308				—				41				—				1,349
Doubtful			156				—				—				—				156
Loss			—				—				—				—				—
Total loans		$	24,186			$	23,337			$	22,668			$	7,415			$	77,606

 

		At December 31, 2015
		Corporate				Consumer				Residential   Real Estate				Wholesale   Real Estate				Total
		(dollars in millions)
Pass		$	22,040			$	21,528			$	20,828			$	6,839			$	71,235
Special mention			300				—				—				—				300
Substandard			1,202				—				35				—				1,237
Doubtful			12				—				—				—				12
Loss			—				—				—				—				—
Total loans		$	23,554			$	21,528			$	20,863			$	6,839			$	72,784

Allowance for Credit Losses and Impaired Loans

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

Loans by Product Type

 

		At June 30, 2016												At December 31, 2015
		Corporate				Residential   Real Estate				Total				Corporate				Residential   Real Estate				Total
		(dollars in millions)
Impaired loans with allowance		$	244			$	—			$	244			$	39			$	—			$	39
Impaired loans without allowance(1)			338				30				368				89				17				106
Impaired loans unpaid principal balance(2)			593				32				625				130				19				149
Past due 90 days loans and on nonaccrual			1				20				21				1				21				22

 

(1)	At June 30, 2016 and December 31, 2015, no allowance was outstanding for these loans as the present value of the expected future cash flows (or, alternatively, the observable market price of the loan or the fair value of the collateral held) equaled or exceeded the carrying value.

(2)	The impaired loans unpaid principal balance differs from the aggregate amount of impaired loan balances with and without allowance due to various factors, including charge-offs and net deferred loan fees or costs.

 

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MORGAN STANLEY

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

 

Loans by Region

 

		At June 30, 2016																At December 31, 2015
		Americas				EMEA				Asia-   Pacific				Total				Americas				EMEA				Asia-   Pacific				Total
		(dollars in millions)
Impaired loans		$	589			$	23			$	—			$	612			$	108			$	12			$	25			$	145
Past due 90 days loans and on nonaccrual			21				—				—				21				22				—				—				22
Allowance for loan losses			277				43				3				323				183				34				8				225

 

EMEA—Europe, Middle East and Africa

Allowance for Credit Losses on Lending Activities

 

		Corporate				Consumer				Residential   Real Estate				Wholesale   Real Estate				Total
		(dollars in millions)
Allowance for Loan Losses
Balance at December 31, 2015		$	166			$	5			$	17			$	37			$	225
Gross charge-offs			—				—				—				—				—
Gross recoveries			—				—				—				—				—
Net recoveries/(charge-offs)			—				—				—				—				—
Provision for (release of) loan losses(1)			116				(1)				1				12				128
Other(2)			(30)				—				—				—				(30)
Balance at June 30, 2016		$	252			$	4			$	18			$	49			$	323
Allowance for Loan Losses by Impairment Methodology
Inherent		$	147			$	4			$	18			$	49			$	218
Specific			105				—				—				—				105
Total allowance for loan losses at June 30, 2016		$	252			$	4			$	18			$	49			$	323
Loans Evaluated by Impairment Methodology(3)
Inherent		$	23,604			$	23,337			$	22,638			$	7,415			$	76,994
Specific			582				—				30				—				612
Total loans evaluated at June 30, 2016		$	24,186			$	23,337			$	22,668			$	7,415			$	77,606
Allowance for Lending Commitments
Balance at December 31, 2015		$	180			$	1			$	—			$	4			$	185
Provision for lending commitments(4)			1				—				—				2				3
Other			—				(1)				—				—				(1)
Balance at June 30, 2016		$	181			$	—			$	—			$	6			$	187
Allowance for Lending Commitments by Impairment Methodology
Inherent		$	173			$	—			$	—			$	6			$	179
Specific			8				—				—				—				8
Total allowance for lending commitments at June 30, 2016		$	181			$	—			$	—			$	6			$	187
Lending Commitments Evaluated by Impairment Methodology(3)
Inherent		$	63,120			$	5,264			$	327			$	496			$	69,207
Specific			64				—				—				—				64
Total lending commitments evaluated at June 30, 2016		$	63,184			$	5,264			$	327			$	496			$	69,271

 

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MORGAN STANLEY

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

 

		Corporate				Consumer				Residential   Real Estate				Wholesale   Real Estate				Total
		(dollars in millions)
Allowance for Loan Losses
Balance at December 31, 2014		$	118			$	2			$	8			$	21			$	149
Gross charge-offs			—				—				(1)				—				(1)
Gross recoveries			1				—				—				—				1
Net recoveries/(charge-offs)			1				—				(1)				—				—
Provision for loan losses(1)			26				—				2				2				30
Other(2)			(10)				—				—				—				(10)
Balance at June 30, 2015		$	135			$	2			$	9			$	23			$	169
Allowance for Loan Losses by Impairment Methodology
Inherent		$	130			$	2			$	9			$	23			$	164
Specific			5				—				—				—				5
Total allowance for loan losses at June 30, 2015		$	135			$	2			$	9			$	23			$	169
Loans Evaluated by Impairment Methodology(3)
Inherent		$	22,479			$	19,464			$	18,214			$	6,388			$	66,545
Specific			21				—				27				—				48
Total loans evaluated at June 30, 2015		$	22,500			$	19,464			$	18,241			$	6,388			$	66,593
Allowance for Lending Commitments
Balance at December 31, 2014		$	147			$	—			$	—			$	2			$	149
Provision for lending commitments(4)			6				—				—				2				8
Balance at June 30, 2015		$	153			$	—			$	—			$	4			$	157
Allowance for Lending Commitments by Impairment Methodology
Inherent		$	153			$	—			$	—			$	4			$	157
Specific			—				—				—				—				—
Total allowance for lending commitments at June 30, 2015		$	153			$	—			$	—			$	4			$	157
Lending Commitments Evaluated by Impairment Methodology(3)
Inherent		$	65,183			$	4,235			$	289			$	623			$	70,330
Specific			—				—				—				—				—
Total lending commitments evaluated at June 30, 2015		$	65,183			$	4,235			$	289			$	623			$	70,330

 

(1)	The Firm recorded provisions of $16 million and $4 million for loan losses for the current quarter and prior year quarter, respectively.

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

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

(4)	The Firm recorded a release of $13 million and $29 million for commitments for the current quarter and prior year quarter, respectively.

 

 

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MORGAN STANLEY

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

 

 

10.	Long-Term Borrowings and Other Secured Financings

 

 

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MORGAN STANLEY

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

 

 

11.	Commitments, Guarantees and Contingencies

Commitments

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

Commitments

 

		Years to Maturity at June 30, 2016
		Less   than 1				1-3				3-5				Over 5				Total
		(dollars in millions)
Letters of credit and other financial guarantees obtained to satisfy collateral requirements		$	125			$	—			$	1			$	42			$	168
Investment activities			598				93				16				290				997
Corporate lending commitments(1)			15,625				24,405				47,248				1,501				88,779
Consumer lending commitments			5,255				5				—				4				5,264
Residential real estate lending commitments			52				43				87				236				418
Wholesale real estate lending commitments			127				266				137				69				599
Forward-starting reverse repurchase agreements and securities borrowing agreements(2)			69,990				—				—				—				69,990
Underwriting commitments			25				—				—				—				25
Total		$	91,797			$	24,812			$	47,489			$	2,142			$	166,240

 

(1)	Due to the nature of the Firm’s obligations under the commitments, these amounts include certain commitments participated to third parties of $3.9 billion.

(2)	The Firm enters into forward-starting reverse repurchase and securities borrowing agreements that primarily settle within three business days of the trade date, and of the total amount at June 30, 2016, $59.7 billion settled within three business days.

 

 

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MORGAN STANLEY

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

 

Guarantees

Obligations Under Guarantee Arrangements at June 30, 2016

 

		Maximum Potential Payout/Notional																				Carrying Amount (Asset)/ Liability				Collateral/ Recourse
		Years to Maturity
		Less than 1				1-3				3-5				Over 5				Total
		(dollars in millions)
Credit derivative contracts(1)		$	211,128			$	200,959			$	123,957			$	31,246			$	567,290			$	396			$	—
Other credit contracts			43				25				—				276				344				(17)				—
Non-credit derivative contracts(1)			1,087,106				638,791				290,370				540,112				2,556,379				81,420				—
Standby letters of credit and other financial guarantees issued(2)			803				1,091				1,250				5,888				9,032				(123)				6,831
Market value guarantees			63				250				96				15				424				2				6
Liquidity facilities			3,001				—				—				—				3,001				(5)				5,406
Whole loan sales guarantees			—				—				2				23,396				23,398				9				—
Securitization representations and warranties			—				—				—				62,180				62,180				103				—
General partner guarantees			35				39				53				308				435				85				—

 

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

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

 

 

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

 

 

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

 

 

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MORGAN STANLEY

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

 

 

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MORGAN STANLEY

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

 

 

12.	Variable Interest Entities and Securitization Activities

 

 

Consolidated VIEs

Assets and Liabilities by Type of Activity

 

		At June 30, 2016								At December 31, 2015
		VIE Assets				VIE Liabilities				VIE Assets				VIE Liabilities
		(dollars in millions)
Credit-linked notes		$	901			$	—			$	900			$	—
Other structured financings			924				240				787				13
Asset-backed securitizations(1)			319				191				668				423
Other(2)			931				29				245				—
Total		$	3,075			$	460			$	2,600			$	436

 

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

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

 

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MORGAN STANLEY

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

 

Assets and Liabilities by Balance Sheet Caption

 

		At June 30,           2016				At December 31,       2015
		(dollars in millions)
Assets
Cash and due from banks		$	62			$	14
Trading assets, at fair value			1,973				1,842
Customer and other receivables			3				3
Goodwill			18				—
Intangible assets			141				—
Other assets			878				741
Total assets		$	3,075			$	2,600
Liabilities
Other secured financings, at fair value		$	430			$	431
Other liabilities and accrued expenses			30				5
Total liabilities		$	460			$	436

 

 

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MORGAN STANLEY

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

 

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

 

		At June 30, 2016
		Mortgage- and Asset-Backed Securitizations				Collateralized Debt Obligations				Municipal Tender Option Bonds				Other Structured Financings				Other
		(dollars in millions)
VIE assets that the Firm does not consolidate (unpaid principal balance)		$	115,088			$	6,825			$	4,999			$	4,081			$	39,281
Maximum exposure to loss:
Debt and equity interests		$	12,670			$	955			$	31			$	1,712			$	4,706
Derivative and other contracts			—				—				3,001				—				73
Commitments, guarantees and other			612				350				—				363				300
Total maximum exposure to loss		$	13,282			$	1,305			$	3,032			$	2,075			$	5,079
Carrying value of exposure to loss—Assets:
Debt and equity interests		$	12,670			$	955			$	3			$	1,324			$	4,706
Derivative and other contracts			—				—				5				—				27
Total carrying value of exposure to loss—Assets		$	12,670			$	955			$	8			$	1,324			$	4,733
Carrying value of exposure to loss—Liabilities:
Derivative and other contracts		$	—			$	—			$	—			$	—			$	31
Commitments, guarantees and other			—				—				—				2				10
Total carrying value of exposure to loss—Liabilities		$	—			$	—			$	—			$	2			$	41

 

		At December 31, 2015
		Mortgage- and Asset-Backed Securitizations				Collateralized Debt Obligations				Municipal Tender Option Bonds				Other Structured Financings				Other
		(dollars in millions)
VIE assets that the Firm does not consolidate (unpaid principal balance)		$	126,872			$	8,805			$	4,654			$	2,201			$	20,775
Maximum exposure to loss:
Debt and equity interests		$	13,361			$	1,259			$	1			$	1,129			$	3,854
Derivative and other contracts			—				—				2,834				—				67
Commitments, guarantees and other			494				231				—				361				222
Total maximum exposure to loss		$	13,855			$	1,490			$	2,835			$	1,490			$	4,143
Carrying value of exposure to loss—Assets:
Debt and equity interests		$	13,361			$	1,259			$	1			$	685			$	3,854
Derivative and other contracts			—				—				5				—				13
Total carrying value of exposure to loss—Assets		$	13,361			$	1,259			$	6			$	685			$	3,867
Carrying value of exposure to loss—Liabilities:
Derivative and other contracts		$	—			$	—			$	—			$	—			$	15
Commitments, guarantees and other			—				—				—				3				—
Total carrying value of exposure to loss—Liabilities		$	—			$	—			$	—			$	3			$	15

 

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MORGAN STANLEY

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

 

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

 

		At June 30, 2016								At December 31, 2015
		Unpaid Principal Balance				Debt and Equity Interests				Unpaid Principal Balance				Debt and Equity Interests
		(dollars in millions)
Residential mortgages		$	3,708			$	410			$	13,787			$	1,012
Commercial mortgages			55,158				2,576				57,313				2,871
U.S. agency collateralized mortgage obligations			20,853				3,766				13,236				2,763
Other consumer or commercial loans			35,369				5,918				42,536				6,715
Total mortgage- and asset-backed securitization assets		$	115,088			$	12,670			$	126,872			$	13,361

 

 

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MORGAN STANLEY

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

 

Transfers of Assets with Continuing Involvement

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

 

		At June 30, 2016
		Residential Mortgage Loans				Commercial Mortgage Loans				U.S. Agency Collateralized Mortgage Obligations				Credit- Linked Notes and Other(1)
		(dollars in millions)
SPE assets (unpaid principal balance)(2)		$	21,239			$	51,025			$	11,116			$	11,668
Retained interests (fair value):
Investment grade		$	—			$	43			$	755			$	—
Non-investment grade			54				64				—				974
Total retained interests (fair value)		$	54			$	107			$	755			$	974
Interests purchased in the secondary market (fair value):
Investment grade		$	—			$	32			$	142			$	—
Non-investment grade			53				47				—				—
Total interests purchased in the secondary market (fair value)		$	53			$	79			$	142			$	—
Derivative assets (fair value)		$	—			$	291			$	—			$	206
Derivative liabilities (fair value)			—				—				—				449

 

		At December 31, 2015
		Residential Mortgage Loans				Commercial Mortgage Loans				U.S. Agency Collateralized Mortgage Obligations				Credit- Linked Notes and Other(1)
		(dollars in millions)
SPE assets (unpaid principal balance)(2)		$	22,440			$	72,760			$	17,978			$	12,235
Retained interests (fair value):
Investment grade		$	—			$	238			$	649			$	—
Non-investment grade			160				63				—				1,136
Total retained interests (fair value)		$	160			$	301			$	649			$	1,136
Interests purchased in the secondary market (fair value):
Investment grade		$	—			$	88			$	99			$	—
Non-investment grade			60				63				—				10
Total interests purchased in the secondary market (fair value)		$	60			$	151			$	99			$	10
Derivative assets (fair value)		$	—			$	343			$	—			$	151
Derivative liabilities (fair value)			—				—				—				449

 

(1)	Amounts include CLO transactions managed by unrelated third parties.

(2)	Amounts include assets transferred by unrelated transferors.

 

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		At June 30, 2016
		Level 1				Level 2				Level 3				Total
		(dollars in millions)
Retained interests (fair value):
Investment grade		$	—			$	798			$	—			$	798
Non-investment grade			—				15				1,077				1,092
Total retained interests (fair value)		$	—			$	813			$	1,077			$	1,890
Interests purchased in the secondary market (fair value):
Investment grade		$	—			$	174			$	—			$	174
Non-investment grade			—				85				15				100
Total interests purchased in the secondary market (fair value)		$	—			$	259			$	15			$	274
Derivative assets (fair value)		$	—			$	482			$	15			$	497
Derivative liabilities (fair value)			—				102				347				449

 

		At December 31, 2015
		Level 1				Level 2				Level 3				Total
		(dollars in millions)
Retained interests (fair value):
Investment grade		$	—			$	886			$	1			$	887
Non-investment grade			—				17				1,342				1,359
Total retained interests (fair value)		$	—			$	903			$	1,343			$	2,246
Interests purchased in the secondary market (fair value):
Investment grade		$	—			$	187			$	—			$	187
Non-investment grade			—				112				21				133
Total interests purchased in the secondary market (fair value)		$	—			$	299			$	21			$	320
Derivative assets (fair value)		$	—			$	466			$	28			$	494
Derivative liabilities (fair value)			—				110				339				449

 

 

Proceeds from New Securitization Transactions and Retained Interests in Securitization Transactions

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
		(dollars in millions)
Proceeds received from new securitization transactions		$	4,163			$	6,273			$	6,876			$	11,164
Proceeds from retained interests in securitization transactions			502				658				1,133				1,606

 

 

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MORGAN STANLEY

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

 

 

Proceeds from Sales to CLO Entities Sponsored by Non-Affiliates

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
		(dollars in millions)
Proceeds from sale of corporate loans sold to those SPEs		$	—			$	621			$	31			$	966

Net gains on sale of corporate loans to CLO transactions at the time of sale were not material in the current quarter, current year period, prior year quarter and prior year period.

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

 

		At June 30, 2016				At December 31, 2015
		(dollars in millions)
Carrying value of assets derecognized at the time of sale and gross cash proceeds		$	9,524			$	7,878
Fair value of assets sold			9,692				7,935
Fair value of derivative assets recognized in the consolidated balance sheets			218				97
Fair value of derivative liabilities recognized in the consolidated balance sheets			50				40

 

 

13.    Regulatory

Requirements

 

 

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

 

 

The Firm’s Regulatory Capital and Capital Ratios

At June 30, 2016 and December 31, 2015, the Firm’s binding ratios are based on the Advanced Approach transitional rules.

Regulatory Capital Measures and Minimum Regulatory Capital Ratios

 

		At June 30, 2016															At December 31, 2015
		Amount					Ratio					Minimum      Ratio(1)					Amount					Ratio					Minimum      Ratio(1)
		(dollars in millions)
Regulatory capital and capital ratios:
Common Equity Tier 1 capital			$	59,796					16.8	%				5.9	%			$	59,409					15.5	%				4.5	%
Tier 1 capital				66,782					18.8	%				7.4	%				66,722					17.4	%				6.0	%
Total capital				79,830					22.4	%				9.4	%				79,403					20.7	%				8.0	%
Tier 1 leverage(2)				—					8.3	%				4.0	%				—					8.3	%				4.0	%
Assets:
Total RWAs			$	355,982					N/	A				N/	A			$	384,162					N/	A				N/	A
Adjusted average assets(3)				804,511					N/	A				N/	A				803,574					N/	A				N/	A

 

N/A—Not Applicable

(1)	Percentages represent minimum regulatory capital ratios under the transitional rules.

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

(3)

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

 

 

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

 

		Morgan Stanley Bank, N.A.
		At June 30, 2016												At December 31, 2015
		Amount				Ratio				Required Capital     Ratio(1)				Amount				Ratio				Required Capital     Ratio(1)
		(dollars in millions)
Common Equity Tier 1 capital		$	14,523				16.8%				6.5%			$	13,333				15.1%				6.5%
Tier 1 capital			14,523				16.8%				8.0%				13,333				15.1%				8.0%
Total capital			16,321				18.9%				10.0%				15,097				17.1%				10.0%
Tier 1 leverage			14,523				10.9%				5.0%				13,333				10.2%				5.0%

 

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

 

		Morgan Stanley Private Bank, National Association
		At June 30, 2016												At December 31, 2015
		Amount				Ratio				Required Capital Ratio(1)				Amount				Ratio				Required Capital Ratio(1)
		(dollars in millions)
Common Equity Tier 1 capital		$	5,153				28.0%				6.5%			$	4,197				26.5%				6.5%
Tier 1 capital			5,153				28.0%				8.0%				4,197				26.5%				8.0%
Total capital			5,186				28.2%				10.0%				4,225				26.7%				10.0%
Tier 1 leverage			5,153				11.4%				5.0%				4,197				10.5%				5.0%

 

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

 

 

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

 

 

Preferred Stock Outstanding

 

Series		Shares Outstanding At June 30, 2016				Liquidation Preference per Share				Carrying Value
										At June 30, 2016				At December 31, 2015
		(shares in millions)								(dollars in millions)
A			44,000			$	25,000			$	1,100			$	1,100
C(1)			519,882				1,000				408				408
E			34,500				25,000				862				862
F			34,000				25,000				850				850
G			20,000				25,000				500				500
H			52,000				25,000				1,300				1,300
I			40,000				25,000				1,000				1,000
J			60,000				25,000				1,500				1,500
Total										$	7,520			$	7,520

 

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

 

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

 

Accumulated Other Comprehensive Income (Loss)

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

 

		Foreign Currency Translation Adjustments				AFS Securities				Pensions, Postretirement and Other				DVA				Total
		(dollars in millions)
Balance at March 31, 2016		$	(831)			$	76			$	(373)			$	(110)			$	(1,238)
Change in OCI before reclassifications			52				188				(5)				143				378
Amounts reclassified from AOCI(2)(3)			—				(45)				—				—				(45)
Net OCI during the period			52				143				(5)				143				333
Balance at June 30, 2016		$	(779)			$	219			$	(378)			$	33			$	(905)
Balance at March 31, 2015		$	(883)			$	127			$	(510)			$	—				(1,266)
Change in OCI before reclassifications			50				(208)				(4)				—				(162)
Amounts reclassified from AOCI(3)			—				(20)				1				—				(19)
Net OCI during the period			50				(228)				(3)				—				(181)
Balance at June 30, 2015		$	(833)			$	(101)			$	(513)			$	—				(1,447)
Balance at December 31, 2015		$	(963)			$	(319)			$	(374)			$	—			$	(1,656)
Cumulative adjustment for accounting change related to DVA(1)			—				—				—				(312)				(312)
Change in OCI before reclassifications			184				590				(3)				371				1,142
Amounts reclassified from AOCI(2)(3)			—				(52)				(1)				(26)				(79)
Net OCI during the period			184				538				(4)				345				1,063
Balance at June 30, 2016		$	(779)			$	219			$	(378)			$	33			$	(905)
Balance at December 31, 2014		$	(663)			$	(73)			$	(512)			$	—			$	(1,248)
Change in OCI before reclassifications			(170)				7				(4)				—				(167)
Amounts reclassified from AOCI(3)			—				(35)				3				—				(32)
Net OCI during the period			(170)				(28)				(1)				—				(199)
Balance at June 30, 2015		$	(833)			$	(101)			$	(513)			$	—			$	(1,447)

 

(1)

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

(2)

Amounts reclassified from AOCI related to realization of DVA are classified within Trading revenues in the consolidated statements of income. The tax impact in Provision for (benefit from) income taxes resulting from such reclassifications was $(15) million related to DVA in the current year period. See Note 2 for further information.

(3)

Amounts reclassified from AOCI related to realized gains and losses from sales of AFS securities are classified within Other revenues in the consolidated statements of income. The tax impact in Provision for (benefit from) income taxes resulting from such reclassifications was $(26) million in the current quarter and $(30) million in the current year period, and $(11) million in the prior quarter and $(20) million for the prior year period.

 

 

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

 

15.	Earnings per Common Share

Calculation of Basic and Diluted Earnings per Common Share (“EPS”)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
		(in millions, except for per share data)
Basic EPS:
Income from continuing operations		$	1,650			$	1,833			$	2,810			$	4,301
Income (loss) from discontinued operations			(4)				(2)				(7)				(7)
Net income			1,646				1,831				2,803				4,294
Net income applicable to noncontrolling interests			64				24				87				93
Net income applicable to Morgan Stanley			1,582				1,807				2,716				4,201
Less: Preferred stock dividends			(156)				(141)				(234)				(219)
Less: Allocation of (earnings) loss to participating RSUs(1)			(1)				(1)				(1)				(3)
Earnings applicable to Morgan Stanley common shareholders		$	1,425			$	1,665			$	2,481			$	3,979
Weighted average common shares outstanding			1,866				1,919				1,875				1,922
Earnings per basic common share:
Income from continuing operations		$	0.77			$	0.87			$	1.33			$	2.07
Income (loss) from discontinued operations			(0.01)				—				(0.01)				—
Earnings per basic common share		$	0.76			$	0.87			$	1.32			$	2.07
Diluted EPS:
Earnings applicable to Morgan Stanley common shareholders		$	1,425			$	1,665			$	2,481			$	3,979
Weighted average common shares outstanding			1,866				1,919				1,875				1,922
Effect of dilutive securities: Stock options and RSUs(1)			33				41				32				40
Weighted average common shares outstanding and common stock equivalents			1,899				1,960				1,907				1,962
Earnings per diluted common share:
Income from continuing operations		$	0.75			$	0.85			$	1.30			$	2.03
Income (loss) from discontinued operations			—				—				—				—
Earnings per diluted common share		$	0.75			$	0.85			$	1.30			$	2.03

 

(1)

Restricted stock units (“RSUs”) that are considered participating securities are treated as a separate class of securities in the computation of basic EPS, and, therefore, such RSUs are not included as incremental shares in the diluted EPS computations. The diluted EPS computations also do not include weighted average antidilutive RSUs and antidilutive stock options of 14 million shares and 12 million shares for the current quarter and prior year quarter, respectively, and 15 million shares and 12 million shares for the current year period and prior year period, respectively.

 

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16.	Interest Income and Interest Expense

Interest Income and Interest Expense

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
		(dollars in millions)
Interest income(1):
Trading assets(2)		$	526			$	555			$	1,109			$	1,149
Investment securities			237				238				473				438
Loans			680				529				1,327				1,004
Interest bearing deposits with banks			52				22				105				45
Securities purchased under agreements to resell and Securities borrowed(3)			(120)				(200)				(198)				(305)
Customer receivables and Other(4)			292				242				598				539
Total interest income		$	1,667			$	1,386			$	3,414			$	2,870
Interest expense(1):
Deposits		$	15			$	17			$	37			$	35
Short-term borrowings			7				5				14				9
Long-term borrowings			844				915				1,804				1,841
Securities sold under agreements to repurchase and Securities loaned(5)			259				235				513				543
Customer payables and Other(6)			(371)				(484)				(766)				(852)
Total interest expense		$	754			$	688			$	1,602			$	1,576
Net interest		$	913			$	698			$	1,812			$	1,294

 

(1)

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

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

(3)	Includes fees paid on Securities borrowed.

(4)	Includes interest from customer receivables and other interest earning assets.

(5)	Includes fees received on Securities loaned.

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

 

17.	Employee Benefit Plans

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

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

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
		(dollars in millions)
Service cost, benefits earned during the period		$	4			$	5			$	8			$	10
Interest cost on projected benefit obligation			39				38				77				77
Expected return on plan assets			(30)				(29)				(60)				(59)
Net amortization of prior service credit			(5)				(5)				(9)				(10)
Net amortization of actuarial loss			3				7				6				13
Net periodic benefit expense		$	11			$	16			$	22			$	31

 

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

 

18.	Income Taxes

 

 

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

 

19.	Segment and Geographic Information

Segment Information

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

Selected Financial Information

 

		Three Months Ended June 30, 2016
		Institutional Securities(1)				Wealth Management				Investment Management				Intersegment Eliminations				Total
		(dollars in millions)
Total non-interest revenues(2)(3)		$	4,496			$	2,982			$	581			$	(63)			$	7,996
Interest income			966				920				3				(222)				1,667
Interest expense			884				91				1				(222)				754
Net interest			82				829				2				—				913
Net revenues		$	4,578			$	3,811			$	583			$	(63)			$	8,909
Income from continuing operations before income taxes		$	1,506			$	859			$	118			$	—			$	2,483
Provision for income taxes			453				343				37				—				833
Income from continuing operations			1,053				516				81				—				1,650
Income (loss) from discontinued operations, net of income taxes			(4)				—				—				—				(4)
Net income			1,049				516				81				—				1,646
Net income applicable to noncontrolling interests			61				—				3				—				64
Net income applicable to Morgan Stanley		$	988			$	516				$        78			$	—				$        1,582

 

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

 

		Three Months Ended June 30, 2015
		Institutional Securities(1)				Wealth Management				Investment Management				Intersegment Eliminations				Total
		(dollars in millions)
Total non-interest revenues(2)(3)		$	5,205			$	3,138			$	757			$	(55)			$	9,045
Interest income			723				782				—				(119)				1,386
Interest expense			756				45				6				(119)				688
Net interest			(33)				737				(6)				—				698
Net revenues		$	5,172			$	3,875			$	751			$	(55)			$	9,743
Income from continuing operations before income taxes		$	1,622			$	885			$	220			$	—			$	2,727
Provision for income taxes			511				324				59				—				894
Income from continuing operations			1,111				561				161				—				1,833
Income (loss) from discontinued operations, net of income taxes			(2)				—				—				—				(2)
Net income			1,109				561				161				—				1,831
Net income applicable to noncontrolling interests			22				—				2				—				24
Net income applicable to Morgan Stanley		$	1,087			$	561			$	159			$	—			$	1,807

 

		Six Months Ended June 30, 2016
		Institutional Securities(1)				Wealth Management				Investment Management				Intersegment Eliminations				Total
		(dollars in millions)
Total non-interest revenues(2)(3)		$	8,141			$	5,819			$	1,059			$	(130)			$	14,889
Interest income			2,019				1,834				4				(443)				3,414
Interest expense			1,868				174				3				(443)				1,602
Net interest			151				1,660				1				—				1,812
Net revenues		$	8,292			$	7,479			$	1,060			$	(130)			$	16,701
Income from continuing operations before income taxes		$	2,414			$	1,645			$	162			$	—			$	4,221
Provision for income taxes			728				636				47				—				1,411
Income from continuing operations			1,686				1,009				115				—				2,810
Income (loss) from discontinued operations, net of income taxes			(7)				—				—				—				(7)
Net income			1,679				1,009				115				—				2,803
Net income applicable to noncontrolling interests			100				—				(13)				—				87
Net income applicable to Morgan Stanley		$	1,579			$	1,009			$	128			$	—			$	2,716

 

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

 

		Six Months Ended June 30, 2015
		Institutional Securities(1)				Wealth Management				Investment Management				Intersegment Eliminations				Total
		(dollars in millions)
Total non-interest revenues(2)(3)		$	10,751			$	6,283			$	1,431			$	(109)			$	18,356
Interest income			1,593				1,519				1				(243)				2,870
Interest expense			1,714				93				12				(243)				1,576
Net interest			(121)				1,426				(11)				—				1,294
Net revenues		$	10,630			$	7,709			$	1,420			$	(109)			$	19,650
Income from continuing operations before income taxes		$	3,435			$	1,740			$	407			$	—			$	5,582
Provision for income taxes(4)			517				644				120				—				1,281
Income from continuing operations			2,918				1,096				287				—				4,301
Income (loss) from discontinued operations, net of income taxes			(7)				—				—				—				(7)
Net income			2,911				1,096				287				—				4,294
Net income applicable to noncontrolling interests			74				—				19				—				93
Net income applicable to Morgan Stanley		$	2,837			$	1,096			$	268			$	—			$	4,201

 

(1)

In accordance with the early adoption of a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities, for the current quarter and current year period DVA gains (losses) are recorded within OCI when unrealized and in Trading revenues when realized. In the prior year quarter and prior year period, the realized and unrealized DVA gains (losses) are recorded in Trading revenues. See Notes 2 and 14 for further information.

(2)

In certain management fee arrangements, the Firm is entitled to receive performance-based fees (also referred to as incentive fees and includes carried interest) when the return on assets under management exceeds certain benchmark returns or other performance targets. In such arrangements, performance fee revenues are accrued (or reversed) quarterly based on measuring account/fund performance to date versus the performance benchmark stated in the investment management agreement. The Firm’s portion of unrealized cumulative amount of performance-based fee revenue (for which the Firm is not obligated to pay compensation) at risk of reversing if fund performance falls below stated investment management agreement benchmarks was approximately $421 million and $422 million at June 30, 2016 and December 31, 2015, respectively. See Note 11 for information regarding general partner guarantees, which include potential obligations to return performance fee distributions previously received.

(3)

The Firm waives a portion of its fees from certain registered money market funds that comply with the requirements of Rule 2a-7 of the Investment Company Act of 1940. These fee waivers resulted in a reduction of fees of approximately $12 million and $50 million for the current quarter and prior year quarter, respectively, and $35 million and $100 million for the current year period and prior year period, respectively.

(4)

The Firm’s effective tax rate from continuing operations for the prior year period included a net discrete tax benefit of $564 million, within Institutional Securities (see Note 18).

 

 

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MORGAN STANLEY

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

 

Geographic Information

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

Net Revenues by Region

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
		(dollars in millions)
Americas		$	6,538			$	6,777			$	12,290			$	13,707
EMEA			1,312				1,436				2,441				3,198
Asia-Pacific			1,059				1,530				1,970				2,745
Net revenues		$	8,909			$	9,743			$	16,701			$	19,650

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

/s/ Deloitte & Touche LLP

New York, New York

August 3, 2016

 

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Item 2.

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

Introduction

 

 

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Executive Summary
Business Segment Financial Information and Other Statistical Data
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2016				2015				2016				2015
		(dollars in millions, except where noted and per share amounts)
Net revenues:
Institutional Securities		$	4,578			$	5,172			$	8,292			$	10,630
Wealth Management			3,811				3,875				7,479				7,709
Investment Management			583				751				1,060				1,420
Intersegment Eliminations			(63)				(55)				(130)				(109)
Consolidated net revenues		$	8,909			$	9,743			$	16,701			$	19,650
Income from continuing operations applicable to Morgan Stanley:
Institutional Securities		$	992			$	1,089			$	1,586			$	2,844
Wealth Management			516				561				1,009				1,096
Investment Management			78				159				128				268
Income from continuing operations applicable to Morgan Stanley		$	1,586			$	1,809			$	2,723			$	4,208
Income (loss) from discontinued operations applicable to Morgan Stanley			(4)				(2)				(7)				(7)
Net income applicable to Morgan Stanley		$	1,582			$	1,807			$	2,716			$	4,201
Preferred stock dividend and other			157				142				235				222
Earnings applicable to Morgan Stanley common shareholders		$	1,425			$	1,665			$	2,481			$	3,979
Earnings per basic common share(1)		$	0.76			$	0.87			$	1.32			$	2.07
Earnings per diluted common share(1)		$	0.75			$	0.85			$	1.30			$	2.03
Regional net revenues(2):
Americas		$	6,538			$	6,777			$	12,290			$	13,707
EMEA			1,312				1,436				2,441				3,198
Asia-Pacific			1,059				1,530				1,970				2,745
Net revenues		$	8,909			$	9,743			$	16,701			$	19,650
Effective income tax rate from continuing operations			33.5%				32.8%				33.4%				22.9%

 

		At June 30, 2016				At December 31, 2015
		(dollars in millions, except where noted and per share amounts)
Total loans(3)		$	93,165			$	85,759
Total assets		$	828,873			$	787,465
Global Liquidity Reserve managed by bank and non-bank legal entities(4):
Bank legal entities		$	91,062			$	94,328
Non-bank legal entities			116,393				108,936
Total		$	207,455			$	203,264
Total deposits		$	152,693			$	156,034
Long-term borrowings		$	163,492			$	153,768
Maturities of long-term borrowings outstanding (next 12 months)		$	24,244			$	22,396
Book value per common share(5)		$	36.29			$	35.24
Capital ratios (Transitional—Advanced)(6):
Common Equity Tier 1 capital ratio			16.8%				15.5%
Tier 1 capital ratio			18.8%				17.4%
Total capital ratio			22.4%				20.7%
Capital ratios (Transitional—Standardized)(6):
Tier 1 leverage ratio(7)			8.3%				8.3%
Worldwide employees			54,529				56,218

 

EMEA—Europe, Middle East and Africa

(1)	For the calculation of basic and diluted earnings per common share, see Note 15 to the consolidated financial statements in Item 1.

(2)	For a discussion of how the geographic breakdown for net revenues is determined, see Note 21 to the consolidated financial statements in Item 8 of the 2015 Form 10-K.

(3)	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 consolidated balance sheets (see Note 7 to the consolidated financial statements in Item 1).

(4)	For a discussion of Global Liquidity Reserve, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management Framework—Global Liquidity Reserve” in Part II, Item 7 of the 2015 Form 10-K.

(5)	Book value per common share equals common shareholders’ equity of $69,596 million at June 30, 2016 and $67,662 million at December 31, 2015 divided by common shares outstanding of 1,918 million at June 30, 2016 and 1,920 million at December 31, 2015.

(6)	For a discussion of our regulatory capital ratios, see “Liquidity and Capital Resources—Regulatory Requirements” herein.

(7)	See Note 13 to the consolidated financial statements in Item 1 for information on the Tier 1 leverage ratio.

 

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Non-GAAP Financial Measures by Business Segment

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
		(dollars in billions)
Pre-tax profit margin(1):
Institutional Securities			33%				31%				29%				32%
Wealth Management			23%				23%				22%				23%
Investment Management			20%				29%				15%				29%
Consolidated			28%				28%				25%				28%
Average common equity(2)(3):
Institutional Securities		$	43.2			$	35.3			$	43.2			$	36.1
Wealth Management			15.3				11.3				15.3				10.9
Investment Management			2.8				2.3				2.8				2.3
Parent(2)			7.7				18.3				7.3				17.0
Consolidated average common equity		$	69.0			$	67.2			$	68.6			$	66.3
Return on average common equity(2)(3):
Institutional Securities			8.0%				11.3%				6.4%				15.1%
Wealth Management			12.9%				18.2%				12.7%				18.4%
Investment Management			10.6%				27.7%				8.8%				23.5%
Consolidated			8.3%				9.9%				7.2%				12.0%

 

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

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
		(dollars in millions, except per share amounts)
Net revenues
Net revenues—U.S. GAAP		$	8,909			$	9,743			$	16,701			$	19,650
Impact of DVA(4)			—				(182)				—				(307)
Net revenues—non-GAAP		$	8,909			$	9,561			$	16,701			$	19,343
Net income applicable to Morgan Stanley
Net income applicable to Morgan Stanley—U.S. GAAP		$	1,582			$	1,807			$	2,716			$	4,201
Impact of DVA(4)			—				(119)				—				(199)
Net income applicable to Morgan Stanley, excluding DVA—non-GAAP		$	1,582			$	1,688			$	2,716			$	4,002
Impact of net discrete tax benefits(5)			—				—				—				(564)
Net income applicable to Morgan Stanley, excluding DVA and net discrete tax benefits—non-GAAP		$	1,582			$	1,688			$	2,716			$	3,438
Earnings per diluted common share
Earnings per diluted common share—U.S. GAAP		$	0.75			$	0.85			$	1.30			$	2.03
Impact of DVA(4)			—				(0.06)				—				(0.10)
Earnings per diluted common share, excluding DVA—non-GAAP		$	0.75			$	0.79			$	1.30			$	1.93
Impact of net discrete tax benefits(5)			—				—				—				(0.29)
Earnings per diluted common share, excluding DVA and net discrete tax benefits—non-GAAP		$	0.75			$	0.79			$	1.30			$	1.64
Effective income tax rate
Effective income tax rate from continuing operations—U.S. GAAP			33.5%				32.8%				33.4%				22.9%
Impact of net discrete tax benefits(5)			—				—				—				10.2%
Effective income tax rate from continuing operations—non-GAAP			33.5%				32.8%				33.4%				33.1%

 

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Non-GAAP Financial Measures

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

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
		(dollars in billions)
Average common equity(3)(6)
Average common equity		$	69.0			$	67.2			$	68.6			$	66.3
Average common equity, excluding DVA		$	69.1			$	67.9			$	68.7			$	67.1
Average common equity, excluding DVA and net discrete tax benefits		$	69.1			$	67.9			$	68.7			$	66.8
Return on average common equity(3)
Return on average common equity			8.3%				9.9%				7.2%				12.0%
Return on average common equity, excluding DVA			8.3%				9.1%				7.2%				11.3%
Return on average common equity, excluding DVA and net discrete tax benefits			8.3%				9.1%				7.2%				9.6%
Average tangible common equity(6)
Average tangible common equity		$	59.5			$	57.5			$	59.1			$	56.7
Average tangible common equity, excluding DVA		$	59.6			$	58.2			$	59.2			$	57.4
Average tangible common equity, excluding DVA and net discrete tax benefits		$	59.6			$	58.2			$	59.2			$	57.1
Return on average tangible common equity(7)
Return on average tangible common equity			9.6%				11.6%				8.4%				14.1%
Return on average tangible common equity, excluding DVA			9.6%				10.6%				8.4%				13.2%
Return on average tangible common equity, excluding DVA and net discrete tax benefits			9.6%				10.6%				8.4%				11.3%
		At June 30, 2016								At December 31, 2015
Tangible book value per common share(8)		$					31.39			$					30.26

 

DVA—Debt valuation adjustments represent the change in the fair value resulting from fluctuations in our credit spreads and other credit factors related to liabilities carried at fair value, primarily certain Long-term and Short-term borrowings.

(1)

Pre-tax profit margin is a non-GAAP financial measure that we consider to be a useful measure to us, investors and analysts to assess operating performance and represents income from continuing operations before income taxes as a percentage of net revenues, which are two U.S. GAAP reported amounts without adjustment.

(2)

Average common equity for each business segment is determined using our Required Capital framework, an internal capital adequacy measure (see “Liquidity and Capital Resources—Regulatory Requirements—Attribution of Average Common Equity according to the Required Capital Framework” herein). Each business segment’s return on average common equity equals net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity for that segment. Effective tax rates used in the computation are determined on a separate legal entity basis.

(3)

Return on average common equity equals consolidated net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity. Effective January 1, 2016, as a result of the adoption of a provision of the accounting update related to DVA, we have redefined the calculation of the return on average common equity excluding DVA to adjust for DVA only in the denominator. Prior to January 1, 2016, for the return on average common equity, excluding DVA, and excluding DVA and net discrete tax benefits, both the numerator and denominator were adjusted to exclude those items.

(4)

In accordance with the early adoption of a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities, unrealized DVA gains (losses) in the current quarter and current year period are recorded within OCI in the consolidated statements of comprehensive income. In the prior year quarter and prior year period, the DVA gains (losses) were recorded within Trading revenues in the consolidated statements of income. See Notes 2 and 14 to the consolidated financial statements in Item 1 for further information.

(5)	For a discussion of our net discrete tax benefit, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.

(6)

The impact of DVA on average common equity and average tangible common equity was approximately $(106) million and $(714) million in the current quarter and prior year quarter, respectively. The impact of DVA on average common equity and average tangible common equity was approximately $(128) million and $(756) million in the current year period and prior year period, respectively. The impact of the net discrete tax benefit on average common equity and average tangible common equity was approximately $322 million in the prior year period.

(7)

Return on average tangible common equity equals net income applicable to Morgan Stanley less preferred dividends as a percentage of average tangible common equity. Effective January 1, 2016, as a result of the adoption of a provision of the accounting update related to DVA, we have redefined the calculation of return on average tangible common equity excluding DVA to adjust for DVA only in the denominator. Prior to January 1, 2016, for the return on average tangible common equity, excluding DVA, and excluding DVA and net discrete tax benefits, both the numerator and the denominator were adjusted to exclude the impact of DVA and the impact of net discrete tax benefits. The impact of DVA was 1.0% and 0.9% in the prior year quarter and prior year period, respectively. The impact of the net discrete tax benefit was 1.9% in the prior year period.

(8)	Tangible book value per common share equals tangible common equity of $60,185 million at June 30, 2016 and $58,098 million at December 31, 2015 divided by common shares outstanding of 1,918 million at June 30, 2016 and 1,920 million at December 31, 2015.

 

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INSTITUTIONAL SECURITIES

INCOME STATEMENT INFORMATION

 

		Three Months Ended										Six Months Ended										% Change
		June 30,										June 30,										From Prior Year Quarter					From Prior Year Period
		2016					2015					2016					2015
		(dollars in millions)
Revenues:
Investment banking			$	1,108				$	1,440				$	2,098				$	2,613					(23)%					(20)%
Trading				2,498					2,785					4,389					6,207					(10)%					(29)%
Investments				76					16					108					128					N/M					(16)%
Commissions and fees				607					683					1,262					1,356					(11)%					(7)%
Asset management, distribution and administration fees				69					69					142					145					0%					(2)%
Other				138					212					142					302					(35)%					(53)%
Total non-interest revenues				4,496					5,205					8,141					10,751					(14)%					(24)%
Interest income				966					723					2,019					1,593					34%					27%
Interest expense				884					756					1,868					1,714					17%					9%
Net interest				82					(33)					151					(121)					N/M					N/M
Net revenues				4,578					5,172					8,292					10,630					(11)%					(22)%
Compensation and benefits				1,625					1,897					3,007					3,923					(14)%					(23)%
Non-compensation expenses				1,447					1,653					2,871					3,272					(12)%					(12)%
Total non-interest expenses				3,072					3,550					5,878					7,195					(13)%					(18)%
Income from continuing operations before income taxes				1,506					1,622					2,414					3,435					(7)%					(30)%
Provision for income taxes				453					511					728					517					(11)%					41%
Income from continuing operations				1,053					1,111					1,686					2,918					(5)%					(42)%
Income (loss) from discontinued operations, net of income taxes				(4)					(2)					(7)					(7)					N/M					0%
Net income				1,049					1,109					1,679					2,911					(5)%					(42)%
Net income applicable to noncontrolling interests				61					22					100					74					N/M					35%
Net income applicable to Morgan Stanley			$	988				$	1,087				$	1,579				$	2,837					(9)%					(44)%

 

N/M—Not Meaningful

 

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Investment Banking

Investment Banking Revenues

 

		Three Months Ended										Six Months Ended										% Change
		June 30,										June 30,										From Prior Year Quarter					From Prior Year Period
		2016					2015					2016					2015
		(dollars in millions)
Advisory revenues			$	497				$	423				$	1,088				$	894					17%					22%
Underwriting revenues:
Equity underwriting revenues				266					489					426					796					(46)%					(46)%
Fixed income underwriting revenues				345					528					584					923					(35)%					(37)%
Total underwriting revenues				611					1,017					1,010					1,719					(40)%					(41)%
Total investment banking revenues			$	1,108				$	1,440				$	2,098				$	2,613					(23)%					(20)%

Investment Banking Volumes

 

		Three Months Ended June 30,										Six Months Ended June 30,
		2016(1)					2015(1)					2016(1)					2015(1)
		(dollars in billions)
Completed mergers and acquisitions(2)			$	235				$	137				$	526					$262
Equity and equity-related offerings(3)				14					20					22					39
Fixed income offerings(4)				63					73					114					147

 

(1)

Source: Thomson Reuters, data at July 1, 2016. Completed mergers and acquisitions volumes are based on full credit to each of the advisors in a transaction. Equity and equity-related offerings and fixed income offerings are based on full credit for single book managers and equal credit for joint book managers. Transaction volumes may not be indicative of net revenues in a given period. In addition, transaction volumes for prior periods may vary from amounts previously reported due to the subsequent withdrawal or change in the value of a transaction.

(2)	Amounts include transactions of $100 million or more.

(3)	Amounts include Rule 144A issuances and registered public offerings of common stock and convertible securities and rights offerings.

(4)	Amounts include non-convertible preferred stock, mortgage-backed and asset-backed securities, and taxable municipal debt. Amounts include publicly registered and Rule 144A issues. Amounts exclude leveraged loans and self-led issuances.

Investment banking revenues are composed of fees from advisory services and revenues from the underwriting of securities offerings and syndication of loans, net of syndication expenses.

Investment banking revenues of $1,108 million in the current quarter and $2,098 million in the current year period decreased 23% and 20% from the comparable periods due to lower underwriting revenues, partially offset by higher advisory revenues.

 

•

Advisory revenues increased in the current quarter and current year period due to higher completed M&A activity (see Investment Banking Volumes table).

•

Equity underwriting revenues decreased as a result of significantly lower market volumes in both initial public offerings (“IPO”) and follow on offerings, while Fixed income underwriting revenues decreased primarily due to lower bond and loan fees.

 

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Sales and Trading Net Revenues

Sales and Trading Net Revenues

 

		Three Months Ended June 30,								Six Months Ended June 30,								% Change
																		From Prior Year Quarter				From Prior Year Period
		2016				2015				2016				2015
		(dollars in millions)
Trading		$	2,498			$	2,785			$	4,389			$	6,207				(10)%				(29)%
Commissions and fees			607				683				1,262				1,356				(11)%				(7)%
Asset management, distribution and administration fees			69				69				142				145				0%				(2)%
Net interest			82				(33)				151				(121)				N/M				N/M
Total sales and trading net revenues		$	3,256			$	3,504			$	5,944			$	7,587				(7)%				(22)%

 

N/M—Not Meaningful

Sales and Trading Net Revenues by Business

 

		Three Months Ended June 30,								Six Months Ended June 30,								% Change
																		From Prior Year Quarter				From Prior Year Period
		2016				2015				2016				2015
		(dollars in millions)
Equity		$	2,145			$	2,342			$	4,201			$	4,635				(8)%				(9)%
Fixed income and commodities			1,297				1,377				2,170				3,380				(6)%				(36)%
Other			(186)				(215)				(427)				(428)				13%				0%
Total sales and trading net revenues		$	3,256			$	3,504			$	5,944			$	7,587				(7)%				(22)%

Sales and Trading Net Revenues, Excluding DVA in 2015

Sales and trading net revenues, including equity and fixed income and commodities sales and trading net revenues that exclude the impact of DVA in 2015, are non-GAAP financial measures that we consider useful for us, investors and analysts to allow further comparability of period-to-period operating performance.

 

		Three Months Ended June 30,								Six Months Ended June 30,								% Change
																		From Prior Year Quarter				From Prior Year Period
		2016				2015				2016				2015
		(dollars in millions)
Total sales and trading net revenues—U.S. GAAP		$	3,256			$	3,504			$	5,944			$	7,587				(7)%				(22)%
Impact of DVA(1)			—				(182)				—				(307)				(100)%				(100)%
Total sales and trading net revenues—non-GAAP		$	3,256			$	3,322			$	5,944			$	7,280				(2)%				(18)%
Equity sales and trading net revenues—U.S. GAAP		$	2,145			$	2,342			$	4,201			$	4,635				(8)%				(9)%
Impact of DVA(1)			—				(72)				—				(97)				(100)%				(100)%
Equity sales and trading net revenues—non-GAAP		$	2,145			$	2,270			$	4,201			$	4,538				(6)%				(7)%
Fixed income and commodities sales and trading net revenues—U.S. GAAP		$	1,297			$	1,377			$	2,170			$	3,380				(6)%				(36)%
Impact of DVA(1)			—				(110)				—				(210)				(100)%				(100)%
Fixed income and commodities sales and trading net revenues—non-GAAP		$	1,297			$	1,267			$	2,170			$	3,170				2%				(32)%

 

(1)

In accordance with the early adoption of a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities, unrealized DVA gains (losses) in the current quarter and current year period are recorded within OCI in the consolidated statements of comprehensive income. In the prior year quarter and prior year period, the DVA gains (losses) were recorded within Trading revenues in the consolidated statements of income. See Notes 2 and 14 to the consolidated financial statements in Item 1 for further information.

 

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WEALTH MANAGEMENT

INCOME STATEMENT INFORMATION

 

		Three Months Ended June 30,								Six Months Ended June 30,								% Change
																		From Prior   Year Quarter				From Prior Year Period
		2016				2015				2016				2015
		(dollars in millions)
Revenues:
Investment banking		$	123			$	186			$	244			$	378				(34)%				(35)%
Trading			252				196				446				428				29%				4%
Investments			—				13				(2)				15				N/M				N/M
Commissions and fees			423				490				835				1,016				(14)%				(18)%
Asset management, distribution and administration fees			2,082				2,174				4,136				4,289				(4)%				(4)%
Other			102				79				160				157				29%				2%
Total non-interest revenues			2,982				3,138				5,819				6,283				(5)%				(7)%
Interest income			920				782				1,834				1,519				18%				21%
Interest expense			91				45				174				93				102%				87%
Net interest			829				737				1,660				1,426				12%				16%
Net revenues			3,811				3,875				7,479				7,709				(2)%				(3)%
Compensation and benefits			2,152				2,200				4,240				4,425				(2)%				(4)%
Non-compensation expenses			800				790				1,594				1,544				1%				3%
Total non-interest expenses			2,952				2,990				5,834				5,969				(1)%				(2)%
Income from continuing operations before income taxes			859				885				1,645				1,740				(3)%				(5)%
Provision for income taxes			343				324				636				644				6%				(1)%
Net income applicable to Morgan Stanley		$	516			$	561			$	1,009			$	1,096				(8)%				(8)%

 

N/M – Not Meaningful

 

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Statistical Data

Financial Information and Statistical Data (dollars in billions, except where noted)

 

										At June 30, 2016				At December 31, 2015
Client assets										$	2,034			$	1,985
Fee-based client assets(1)										$	820			$	795
Fee-based client assets as a percentage of total client assets											40%				40%
Client liabilities(2)										$	69			$	64
Bank deposit program										$	150			$	149
Investment securities portfolio										$	64.6			$	57.9
Loans and lending commitments										$	61.3			$	55.3
Wealth Management representatives											15,909				15,889
Retail locations											609				608
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2016				2015				2016				2015
Annualized revenues per representative (dollars in thousands)(3)		$	959			$	978			$	941			$	968
Client assets per representative (dollars in millions)(4)		$	128			$	129			$	128			$	129
Fee-based asset flows(5)		$	12.0			$	13.9			$	17.9			$	27.2

 

(1)	Fee-based client assets represent the amount of assets in client accounts where the basis of payment for services is a fee calculated on those assets.

(2)	Client liabilities include securities-based and tailored lending, home loans and margin lending.

(3)	Annualized revenues per representative equal the Wealth Management business segment’s annualized revenues divided by the average representative headcount.

(4)	Client assets per representative equal total period-end client assets divided by period-end representative headcount.

(5)	Fee-based asset flows include net new fee-based assets, net account transfers, dividends, interest and client fees and exclude cash management-related activity.

Net Revenues

Transactional Revenues

 

 

 

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Fee-Based Client Assets Activity and Average Fee Rate by Account Type

For a description of fee-based client assets, including descriptions for the fee based client asset types and rollforward items in the following tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Wealth Management—Fee-Based Client Assets” in Part II, Item 7 of the 2015 Form 10-K.

 

		At March 31, 2016				Inflows				Outflows				Market Impact				At June 30, 2016				Average for the Three Months June 30, 2016
																						Fee Rate
		(dollars in billions)																				(in bps)
Separately managed accounts(1)		$	278			$	9			$	(7)			$	(1)			$	279			31
Unified managed accounts			112				11				(5)				2				120			109
Mutual fund advisory			24				—				(1)				—				23			121
Representative as advisor			114				8				(8)				3				117			88
Representative as portfolio manager			255				17				(12)				5				265			101
Subtotal		$	783			$	45			$	(33)			$	9			$	804			74
Cash management			15				4				(3)				—				16			6
Total fee-based client assets		$	798			$	49			$	(36)			$	9			$	820			73

 

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		At March 31, 2015				Inflows				Outflows				Market Impact				At June 30, 2015				Average for the   Three Months Ended   June 30, 2015
																						Fee Rate
		(dollars in billions)																				(in bps)
Separately managed accounts(1)		$	287			$	13			$	(7)			$	1			$	294			34
Unified managed accounts			99				8				(4)				—				103			114
Mutual fund advisory			30				1				(2)				—				29			121
Representative as advisor			121				8				(8)				(1)				120			89
Representative as portfolio manager			250				16				(11)				(2)				253			104
Subtotal		$	787			$	46			$	(32)			$	(2)			$	799			77
Cash management			16				2				(4)				—				14			6
Total fee-based client assets		$	803			$	48			$	(36)			$	(2)			$	813			75

 

		At December 31, 2015				Inflows				Outflows				Market Impact				At June 30, 2016				Average for the   Six Months Ended   June 30, 2016
																						Fee Rate
		(dollars in billions)																				(in bps)
Separately managed accounts(1)		$	283			$	17			$	(17)			$	(4)			$	279			32
Unified managed accounts			105				21				(9)				3				120			109
Mutual fund advisory			25				1				(3)				—				23			121
Representative as advisor			115				13				(14)				3				117			88
Representative as portfolio manager			252				31				(22)				4				265			102
Subtotal		$	780			$	83			$	(65)			$	6			$	804			74
Cash management			15				7				(6)				—				16			6
Total fee-based client assets		$	795			$	90			$	(71)			$	6			$	820			73

 

		At December 31, 2014				Inflows				Outflows				Market Impact				At June 30, 2015				Average for the   Six Months Ended   June 30, 2015
																						Fee Rate
		(dollars in billions)																				(in bps)
Separately managed accounts(1)		$	285			$	23			$	(14)			$	—			$	294			35
Unified managed accounts			93				15				(7)				2				103			114
Mutual fund advisory			31				1				(3)				—				29			121
Representative as advisor			119				16				(15)				—				120			89
Representative as portfolio manager			241				31				(20)				1				253			104
Subtotal		$	769			$	86			$	(59)			$	3			$	799			77
Cash management			16				3				(5)				—				14			6
Total fee-based client assets		$	785			$	89			$	(64)			$	3			$	813			75

 

bps—Basis points

(1)	Includes non-custody account values reflecting prior quarter-end balances due to a lag in the reporting of asset values by third-party custodians.

 

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INVESTMENT MANAGEMENT

INCOME STATEMENT INFORMATION

 

		Three Months Ended June 30,								Six Months Ended June 30,								% Change
																		From Prior  Year Quarter				From Prior   Year Period
		2016				2015				2016				2015
		(dollars in millions)
Revenues:
Investment banking		$	—			$	—			$	1			$	—				—				N/M
Trading			5				(6)				(5)				(3)				N/M				(67)%
Investments			50				232				(14)				384				(78)%				N/M
Commissions and fees			—				—				3				—				—				N/M
Asset management, distribution and administration fees			517				522				1,043				1,036				(1)%				1%
Other			9				9				31				14				—				121%
Total non-interest revenues			581				757				1,059				1,431				(23)%				(26)%
Interest income			3				—				4				1				N/M				N/M
Interest expense			1				6				3				12				(83)%				(75)%
Net interest			2				(6)				1				(11)				N/M				N/M
Net revenues			583				751				1,060				1,420				(22)%				(25)%
Compensation and benefits			238				308				451				581				(23)%				(22)%
Non-compensation expenses			227				223				447				432				2%				3%
Total non-interest expenses			465				531				898				1,013				(12)%				(11)%
Income from continuing operations before income taxes			118				220				162				407				(46)%				(60)%
Provision for income taxes			37				59				47				120				(37)%				(61)%
Income from continuing operations			81				161				115				287				(50)%				(60)%
Net income			81				161				115				287				(50)%				(60)%
Net income applicable to noncontrolling interests			3				2				(13)				19				50%				N/M
Net income applicable to Morgan Stanley		$	78			$	159			$	128			$	268				(51)%				(52)%

 

N/M – Not Meaningful

 

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Assets Under Management or Supervision and Average Fee Rate by Asset Class

For a description of the rollforward items in the following tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Investment Management—Statistical Data” in Part II, Item 7 of the 2015 Form 10-K.

 

		At March 31, 2016				Inflows				Outflows				Distributions				Market Impact				Foreign Currency Impact				At   June 30,   2016				Average for the   Three Months Ended   June 30, 2016
																														Total AUM				Fee Rate
		(dollars in billions)																																(in bps)
Equity		$	81			$	5			$	(6)			$	—			$	1			$	—			$	81			$	81				74
Fixed income			62				7				(8)				—				—				—				61				61				32
Liquidity			146				291				(289)				—				1				—				149				146				19
Alternative / Other products			116				9				(10)				(1)				1				—				115				116				74
Total assets under management or supervision		$	405			$	312			$	(313)			$	(1)			$	3			$	—			$	406			$	404				48
Shares of minority stake assets			8																								8				8

 

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		At March 31, 2015				Inflows				Outflows				Distributions				Market Impact				Foreign Currency Impact				At June 30, 2015				Average for the Three Months Ended June 30, 2015
																														Total AUM				Fee Rate
		(dollars in billions)																																(in bps)
Equity		$	98			$	3			$	(7)			$	—			$	2			$	—			$	96			$	98				71
Fixed income			65				6				(6)				—				(1)				—				64				65				33
Liquidity			131				306				(305)				—				—				—				132				131				9
Alternative / Other products			112				6				(5)				(2)				(1)				1				111				112				81
Total assets under management or supervision		$	406			$	321			$	(323)			$	(2)			$	—			$	1			$	403			$	406				47
Shares of minority stake assets			7																								7				7

 

		At December 31, 2015				Inflows				Outflows				Distributions				Market Impact				Foreign Currency Impact				At June 30, 2016				Average for the Six Months Ended June 30, 2016
																														Total AUM				Fee Rate
		(dollars in billions)																																(in bps)
Equity		$	83			$	10			$	(12)			$	—			$	—			$	—			$	81			$	80				73
Fixed income			60				12				(14)				—				2				1				61				60				32
Liquidity			149				627				(627)				—				—				—				149				148				18
Alternative / Other products			114				14				(14)				(1)				1				1				115				115				77
Total assets under management or supervision		$	406			$	663			$	(667)			$	(1)			$	3			$	2			$	406			$	403				48
Shares of minority stake assets			8																								8				8

 

		At December 31, 2014				Inflows				Outflows				Distributions				Market Impact				Foreign Currency Impact				At June 30, 2015				Average for the Six Months Ended June 30, 2015
																														Total AUM				Fee Rate
		(dollars in billions)																																(in bps)
Equity		$	99			$	7			$	(14)			$	—			$	5			$	(1)			$	96			$	99				70
Fixed income			65				12				(11)				—				—				(2)				64				65				32
Liquidity			128				589				(585)				—				—				—				132				129				9
Alternative / Other products			111				11				(10)				(2)				1				—				111				112				80
Total assets under management or supervision		$	403			$	619			$	(620)			$	(2)			$	6			$	(3)			$	403			$	405				47
Shares of minority stake assets			7																								7				7

 

bps—Basis points

 

 

 

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Supplemental Financial Information and Disclosures

 

 

U.S. Bank Subsidiaries’ Supplemental Financial Information Excluding Transactions with Affiliated Entities

 

		At June 30, 2016				At December 31, 2015
		(dollars in billions)
U.S. Bank Subsidiaries assets		$	175.1			$	174.2
U.S. Bank Subsidiaries investment securities portfolio(1)			64.6				57.9
Wealth Management U.S. Bank Subsidiaries data:
Securities-based lending and other loans(2)		$	31.4			$	28.6
Residential real estate loans			22.7				20.9
Total		$	54.1			$	49.5
Institutional Securities U.S. Bank Subsidiaries data:
Corporate loans		$	21.2			$	22.9
Wholesale real estate loans			8.9				8.9
Total		$	30.1			$	31.8

 

(1)

The U.S. Bank Subsidiaries investment securities portfolio includes AFS investment securities of $54.2 billion at June 30, 2016 and $53.0 billion at December 31, 2015. The remaining balance represents held to maturity investment securities of $10.4 billion at June 30, 2016 and $4.9 billion at December 31, 2015.

(2)	Other loans primarily include tailored lending.

 

 

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Accounting Development Updates

 

 

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Liquidity and Capital Resources

Senior management establishes liquidity and capital policies. Through various risk and control committees, senior management reviews business performance relative to these policies, monitors the availability of alternative sources of financing, and oversees the liquidity, interest rate and currency sensitivity of our asset and liability position. The Treasury Department, Firm Risk Committee, Asset and Liability Management Committee, and other committees and control groups assist in evaluating, monitoring and controlling the impact that our business activities have on our consolidated balance sheets, liquidity and capital structure. Liquidity and capital matters are reported regularly to the Board and the Board’s Risk Committee.

The 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, business segment and business unit levels. We monitor balance sheet utilization and review variances resulting from business activity or 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, composition of the balance sheet and capital usage.

Total Assets by Business Segment

 

		At June 30, 2016
		Institutional Securities				Wealth     Management				Investment     Management				Total
		(dollars in millions)
Assets
Cash and cash equivalents		$	33,333			$	22,757			$	43			$	56,133
Trading assets, at fair value			252,857				1,175				2,762				256,794
Investment securities			15,495				64,649				—				80,144
Securities purchased under agreements to resell			93,310				4,279				—				97,589
Securities borrowed			130,812				469				—				131,281
Customer and other receivables			30,720				21,597				510				52,827
Loans, net of allowance			38,898				54,267				—				93,165
Other assets(1)			45,948				13,608				1,384				60,940
Total assets		$	641,373			$	182,801			$	4,699			$	828,873
		At December 31, 2015
		Institutional Securities				Wealth Management				Investment Management				Total
		(dollars in millions)
Assets
Cash and cash equivalents		$	22,356			$	31,216			$	511			$	54,083
Trading assets, at fair value			236,174				883				2,448				239,505
Investment securities			14,124				57,858				1				71,983
Securities purchased under agreements to resell			83,205				4,452				—				87,657
Securities borrowed			141,971				445				—				142,416
Customer and other receivables			23,390				21,406				611				45,407
Loans, net of allowance			36,237				49,522				—				85,759
Other assets(1)			45,257				13,926				1,472				60,655
Total assets		$	602,714			$	179,708			$	5,043			$	787,465

 

(1)	Other assets primarily includes Cash deposited with clearing organizations or segregated under federal and other regulations or requirements; Other investments; Premises, equipment and software costs; Goodwill; Intangible assets and deferred tax assets.

 

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Global Liquidity Reserve by Type of Investment

 

		At June 30, 2016				At December 31, 2015
		(dollars in millions)
Cash deposits with banks		$	11,812			$	10,187
Cash deposits with central banks			39,479				39,774
Unencumbered highly liquid securities:
U.S. government obligations			80,560				72,265
U.S. agency and agency mortgage-backed securities			44,635				37,678
Non-U.S. sovereign obligations(1)			17,394				28,999
Other investment grade securities			13,575				14,361
Global Liquidity Reserve		$	207,455			$	203,264

 

(1)	Non-U.S. sovereign obligations are composed of unencumbered German, French, Dutch, U.K., Brazilian and Japanese government obligations.

Global Liquidity Reserve Managed by Bank and Non-Bank Legal Entities

 

		At June 30, 2016				At December 31, 2015				Daily Average Balance Three Months Ended             June 30, 2016
						(dollars in millions)
Bank legal entities:
Domestic		$	85,504			$	88,432			$	86,901
Foreign			5,558				5,896				5,368
Total Bank legal entities			91,062				94,328				92,269
Non-Bank legal entities:
Parent			61,087				54,810				61,380
Non-Parent			17,673				20,001				17,932
Total Domestic			78,760				74,811				79,312
Foreign			37,633				34,125				38,204
Total Non-Bank legal entities			116,393				108,936				117,516
Total		$	207,455			$	203,264			$	209,785

 

 

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Tangible Equity

Tangible Equity Measures—Period End and Average

 

		Balance at								Monthly Average Balance Three Months Ended June 30, 2016
		June 30, 2016				December 31, 2015
		(dollars in millions)
Common equity		$	69,596			$	67,662			$	68,951
Preferred equity			7,520				7,520				7,520
Morgan Stanley shareholders’ equity			77,116				75,182				76,471
Junior subordinated debentures issued to capital trusts			2,853				2,870				2,851
Less: Goodwill and net intangible assets			(9,411)				(9,564)				(9,451)
Tangible Morgan Stanley shareholders’ equity(1)		$	70,558			$	68,488			$	69,871
Common equity		$	69,596			$	67,662			$	68,951
Less: Goodwill and net intangible assets			(9,411)				(9,564)				(9,451)
Tangible common equity(1)		$	60,185			$	58,098			$	59,500

 

(1)	Tangible Morgan Stanley shareholders’ equity and tangible common equity are non-GAAP financial measures that we and investors consider to be a useful measure to assess capital adequacy.

Regulatory Requirements

 

 

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Minimum Risk-Based Capital Ratios: Transitional Provisions

 

 

(1)	These ratios assume the requirements for the G-SIB capital surcharge (3.0%) and countercyclical capital buffer (zero) remain at current levels.

 

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Transitional and Fully Phased-In Regulatory Capital Ratios

 

		At June 30, 2016
		Transitional								Fully Phased-In
		Standardized				Advanced				Standardized				Advanced
		(dollars in millions)
Risk-based capital:
Common Equity Tier 1 capital		$	59,796			$	59,796			$	57,556			$	57,556
Tier 1 capital			66,782				66,782				65,274				65,274
Total capital			80,142				79,830				76,982				76,670
Total RWAs			342,504				355,982				352,692				366,781
Common Equity Tier 1 capital ratio			17.5%				16.8%				16.3%				15.7%
Tier 1 capital ratio			19.5%				18.8%				18.5%				17.8%
Total capital ratio			23.4%				22.4%				21.8%				20.9%
Leverage-based capital:
Adjusted average assets(1)			804,511				N/A				803,377				N/A
Tier 1 leverage ratio(2)			8.3%				N/A				8.1%				N/A
		At December 31, 2015
		Transitional								Fully Phased-In
		Standardized				Advanced				Standardized				Advanced
		(dollars in millions)
Risk-based capital:
Common Equity Tier 1 capital		$	59,409			$	59,409			$	55,441			$	55,441
Tier 1 capital			66,722				66,722				63,000				63,000
Total capital			79,663				79,403				73,858				73,598
Total RWAs			362,920				384,162				373,421				395,277
Common Equity Tier 1 capital ratio			16.4%				15.5%				14.8%				14.0%
Tier 1 capital ratio			18.4%				17.4%				16.9%				15.9%
Total capital ratio			22.0%				20.7%				19.8%				18.6%
Leverage-based capital:
Adjusted average assets(1)			803,574				N/A				801,346				N/A
Tier 1 leverage ratio(2)			8.3%				N/A				7.9%				N/A

 

N/A—Not Applicable

(1)

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

(2)	The minimum Tier 1 leverage ratio requirement is 4.0%.

 

 

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Regulatory Capital Calculated under Advanced Approach Transitional Rules

 

		At June 30, 2016				At December 31, 2015
		(dollars in millions)
Common Equity Tier 1 capital:
Common stock and surplus		$	19,091			$	20,114
Retained earnings			51,410				49,204
Accumulated other comprehensive income (loss)			(905)				(1,656)
Regulatory adjustments and deductions:
Net goodwill			(6,582)				(6,582)
Net intangible assets (other than goodwill and mortgage servicing assets)			(1,698)				(1,192)
Credit spread premium over risk-free rate for derivative liabilities			(428)				(202)
Net deferred tax assets			(888)				(675)
Net after-tax debt valuation adjustments(1)			(20)				156
Adjustments related to accumulated other comprehensive income			61				411
Other adjustments and deductions			(245)				(169)
Total Common Equity Tier 1 capital		$	59,796			$	59,409
Additional Tier 1 capital:
Preferred stock		$	7,520			$	7,520
Trust preferred securities			—				702
Noncontrolling interests			653				678
Regulatory adjustments and deductions:
Net deferred tax assets			(592)				(1,012)
Credit spread premium over risk-free rate for derivative liabilities			(286)				(303)
Net after-tax debt valuation adjustments(1)			(13)				233
Other adjustments and deductions			(156)				(253)
Additional Tier 1 capital		$	7,126			$	7,565
Deduction for investments in covered funds			(140)				(252)
Total Tier 1 capital		$	66,782			$	66,722
Tier 2 capital:
Subordinated debt		$	11,120			$	10,404
Trust preferred securities			1,675				2,106
Other qualifying amounts			58				35
Regulatory adjustments and deductions			195				136
Total Tier 2 capital		$	13,048			$	12,681
Total capital		$	79,830			$	79,403

 

(1)	In connection with the early adoption of a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities, related to DVA, the aggregate balance of net after-tax valuation adjustments was reduced by $77 million as of January 1, 2016.

 

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Roll-forward of Regulatory Capital Calculated under Advanced Approach Transitional Rules

 

		Six Months Ended           June 30, 2016
		(dollars in millions)
Common Equity Tier 1 capital:
Common Equity Tier 1 capital at December 31, 2015		$	59,409
Change related to the following items:
Value of shareholders’ common equity			1,934
Net intangible assets (other than goodwill and mortgage servicing assets)			(506)
Credit spread premium over risk-free rate for derivative liabilities			(226)
Net deferred tax assets			(213)
Net after-tax debt valuation adjustments(1)			(176)
Adjustments related to accumulated other comprehensive income			(350)
Other deductions and adjustments			(76)
Common Equity Tier 1 capital at June 30, 2016		$	59,796
Additional Tier 1 capital:
Additional Tier 1 capital at December 31, 2015		$	7,565
Change related to the following items:
Trust preferred securities			(702)
Noncontrolling interests			(25)
Net deferred tax assets			420
Credit spread premium over risk-free rate for derivative liabilities			17
Net after-tax debt valuation adjustments(1)			(246)
Other adjustments and deductions			97
Additional Tier 1 capital at June 30, 2016			7,126
Deduction for investments in covered funds at December 31, 2015			(252)
Deduction for investments in covered funds			112
Deduction for investments in covered funds at June 30, 2016			(140)
Tier 1 capital at June 30, 2016		$	66,782
Tier 2 capital:
Tier 2 capital at December 31, 2015		$	12,681
Change related to the following items:
Subordinated debt			716
Trust preferred securities			(431)
Noncontrolling interests			23
Other adjustments and deductions			59
Tier 2 capital at June 30, 2016		$	13,048
Total capital at June 30, 2016		$	79,830

 

(1)	In connection with the early adoption of a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities, related to DVA, the aggregate balance of net after-tax valuation adjustments was reduced by $77 million as of January 1, 2016.

 

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Roll-forward of RWAs Calculated under Advanced Approach Transitional Rules

 

		Six Months Ended         June 30, 2016(1)
		(dollars in millions)
Credit risk RWAs:
Balance at December 31, 2015		$	173,586
Change related to the following items:
Derivatives			1,624
Securities financing transactions			1,239
Other counterparty credit risk			79
Securitizations			(3,246)
Credit valuation adjustment			3,256
Investment securities			1,179
Loans			(7,943)
Cash			1,148
Equity investments			(1,201)
Other credit risk(2)			(1,366)
Total change in credit risk RWAs		$	(5,231)
Balance at June 30, 2016		$	168,355
Market risk RWAs:
Balance at December 31, 2015		$	71,476
Change related to the following items:
Regulatory VaR			(1,107)
Regulatory stressed VaR			(5,436)
Incremental risk charge			(64)
Comprehensive risk measure			(1,396)
Specific risk:
Non-securitizations			(577)
Securitizations			(3,308)
Total change in market risk RWAs		$	(11,888)
Balance at June 30, 2016		$	59,588
Operational risk RWAs:
Balance at December 31, 2015		$	139,100
Change in operational risk RWAs(3)			(11,061)
Balance at June 30, 2016		$	128,039
Total RWAs		$	355,982

 

VaR—Value-at-Risk

(1)	The RWAs for each category in the table reflect both on- and off-balance sheet exposures, where appropriate.

(2)	Amount reflects assets not in a defined category, non-material portfolios of exposures and unsettled transactions.

(3)	Amount reflects a reduction in the internal loss data related to litigation utilized in the operational risk capital model.

 

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Average Common Equity by Business Segment and Parent Equity

 

		Three Months Ended(1) June 30,								Six Months Ended(1) June 30,
		2016				2015				2016				2015
		(dollars in billions)
Institutional Securities		$	43.2			$	35.3			$	43.2			$	36.1
Wealth Management			15.3				11.3				15.3				10.9
Investment Management			2.8				2.3				2.8				2.3
Parent			7.7				18.3				7.3				17.0
Total		$	69.0			$	67.2			$	68.6			$	66.3

 

(1)	Amounts are calculated on a monthly basis. Average common equity is a non-GAAP financial measure that we consider to be a useful measure for us, investors and analysts to assess capital adequacy.

 

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Regulatory Developments

 

 

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Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Risk Management

 

 

Trading Risks

95%/One-Day Management VaR

 

		95%/One-Day VaR for the Quarter Ended June 30, 2016																95%/One-Day VaR for the Quarter Ended March 31, 2016
Market Risk Category		Period End				Average				High				Low				Period End				Average				High				Low
		(dollars in millions)
Interest rate and credit spread		$	26				32				38				26			$	35			$	33			$	39			$	28
Equity price			20				17				43				13				16				18				26				14
Foreign exchange rate			10				7				12				6				7				7				11				5
Commodity price			9				10				12				9				11				11				13				10
Less: Diversification benefit(1)(2)			(32)				(28)				N/A				N/A				(30)				(27)				N/A				N/A
Primary Risk Categories		$	33				38				61				31			$	39			$	42			$	53			$	34
Credit Portfolio			22				20				23				18				19				16				20				12
Less: Diversification benefit(1)(2)			(13)				(12)				N/A				N/A				(11)				(12)				N/A				N/A
Total Management VaR		$	42				46				68				39			$	47			$	46			$	55			$	39

 

N/A—Not Applicable

(1)

Diversification benefit equals the difference between the total Management VaR and the sum of the component VaRs. This benefit arises because the simulated one-day losses for each of the components occur on different days; similar diversification benefits also are taken into account within each component.

(2)	The high and low VaR values for the total Management VaR and each of the component VaRs might have occurred on different days during the quarter, and therefore, the diversification benefit is not an applicable measure.

 

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Non-trading Risks

 

 

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Loan and Lending Commitment Portfolio by Business Segment

 

		At June 30, 2016
		Institutional Securities				Wealth Management				Total
		(dollars in millions)
Corporate loans		$	15,938			$	8,248			$	24,186
Consumer loans			—				23,337				23,337
Residential real estate loans			—				22,668				22,668
Wholesale real estate loans			7,415				—				7,415
Loans held for investment, gross of allowance			23,353				54,253				77,606
Allowance for loan losses			(291)				(32)				(323)
Loans held for investment, net of allowance			23,062				54,221				77,283
Corporate loans			14,447				—				14,447
Consumer loans			—				—				—
Residential real estate loans			38				46				84
Wholesale real estate loans			1,351				—				1,351
Loans held for sale			15,836				46				15,882
Corporate loans			7,114				—				7,114
Residential real estate loans			1,721				—				1,721
Wholesale real estate loans			462				—				462
Loans held at fair value			9,297				—				9,297
Total loans(1)			48,195				54,267				102,462
Lending commitments(2)(3)			88,057				7,003				95,060
Total loans and lending commitments(2)(3)		$	136,252			$	61,270			$	197,522

 

		At December 31, 2015
		Institutional Securities				Wealth Management				Total
		(dollars in millions)
Corporate loans		$	16,452			$	7,102			$	23,554
Consumer loans			—				21,528				21,528
Residential real estate loans			—				20,863				20,863
Wholesale real estate loans			6,839				—				6,839
Loans held for investment, gross of allowance			23,291				49,493				72,784
Allowance for loan losses			(195)				(30)				(225)
Loans held for investment, net of allowance			23,096				49,463				72,559
Corporate loans			11,924				—				11,924
Residential real estate loans			45				59				104
Wholesale real estate loans			1,172				—				1,172
Loans held for sale			13,141				59				13,200
Corporate loans			7,286				—				7,286
Residential real estate loans			1,885				—				1,885
Wholesale real estate loans			1,447				—				1,447
Loans held at fair value			10,618				—				10,618
Total loans(1)			46,855				49,522				96,377
Lending commitments(2)(3)			95,572				5,821				101,393
Total loans and lending commitments(2)(3)		$	142,427			$	55,343			$	197,770

 

(1)	Amounts exclude $23.2 billion and $25.3 billion related to margin loans and $4.9 billion related to employee loans at June 30, 2016 and December 31, 2015, respectively. See Notes 6 and 7 to the consolidated financial statements in Item 1 for further information.

(2)

Lending commitments represent the notional amount of legally binding obligations to provide funding to clients for all lending transactions. Since commitments associated with these business activities may expire unused or may not be utilized to full capacity, they do not necessarily reflect the actual future cash funding requirements.

(3)

For syndications led by us, the lending commitments accepted by the borrower but not yet closed are net of the amounts agreed to by counterparties that will participate in the syndication. For syndications that we participate in and do not lead, lending commitments accepted by the borrower but not yet closed include only the amount that we expect will be allocated from the lead, syndicate bank. Due to the nature of our obligations under the commitments, these amounts include certain commitments participated to third parties.

 

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Institutional Securities Loans and Lending Commitments by Credit Rating(1)

 

		At June 30, 2016
		Years to Maturity
		Less than 1				1-3				3-5				Over 5				Total
		(dollars in millions)
AAA		$	263			$	—			$	50			$	—			$	313
AA			3,478				758				4,375				—				8,611
A			2,169				6,517				10,610				1,104				20,400
BBB			11,094				15,909				23,997				844				51,844
Investment grade			17,004				23,184				39,032				1,948				81,168
Non-investment grade			8,040				17,529				18,520				7,134				51,223
Unrated(2)			933				591				94				2,243				3,861
Total		$	25,977			$	41,304			$	57,646			$	11,325			$	136,252

 

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		At December 31, 2015
		Years to Maturity
		Less than 1				1-3				3-5				Over 5				Total
		(dollars in millions)
AAA		$	287			$	24			$	50			$	—			$	361
AA			5,022				2,553				3,735				63				11,373
A			3,996				5,726				11,993				1,222				22,937
BBB			5,089				16,720				23,248				4,086				49,143
Investment grade			14,394				25,023				39,026				5,371				83,814
Non-investment grade			7,768				15,863				22,818				7,779				54,228
Unrated(2)			930				1,091				246				2,118				4,385
Total		$	23,092			$	41,977			$	62,090			$	15,268			$	142,427

 

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

(2)

Unrated loans and lending commitments are primarily trading positions that are measured at fair value and risk managed as a component of Market Risk. For a further discussion of our Market Risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Market Risk” in Part II, Item 7A of the 2015 Form 10-K.

 

 

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Institutional Securities Credit Exposure from Loans and Lending Commitments by Industry

 

Industry(1)		At June 30,   2016				At December 31,   2015
		(dollars in millions)
Real estate		$	17,524			$	17,847
Healthcare			16,891				12,677
Energy			13,512				15,921
Consumer discretionary			13,128				12,098
Utilities			12,646				12,631
Industrials			10,349				10,018
Information technology			8,269				11,122
Consumer staples			8,053				8,597
Funds, exchanges and other financial services(2)			8,052				11,649
Materials			6,698				6,440
Mortgage finance			6,399				8,260
Telecommunications services			4,245				4,403
Insurance			3,793				4,682
Consumer finance			2,768				977
Special purpose vehicles			1,914				3,482
Other			2,011				1,623
Total		$	136,252			$	142,427

 

(1)	Industry categories are based on the Global Industry Classification Standard®.

(2)	Includes mutual funds, pension funds, private equity and real estate funds, exchanges and clearinghouses, and diversified financial services.

 

 

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Wealth Management Lending Activities. The principal Wealth Management lending activities include securities-based lending and residential real estate loans.

Securities-based lending provided to our retail clients is primarily conducted through our Portfolio Loan Account (“PLA”) and Liquidity Access Line (“LAL”) platforms which had an outstanding loan balance of $27.1 billion and $24.9 billion at June 30, 2016 and December 31, 2015, respectively. For more information about our securities-based lending and residential real estate loans, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Lending Activities” in Part II, Item 7A of the 2015 Form 10-K.

For the current quarter, loans and lending commitments associated with the Wealth Management business segment lending activities increased by approximately 5.3%, mainly due to growth in LAL and residential real estate loans.

Wealth Management Lending Activities by Remaining Contractual Maturity

 

		At June 30, 2016
		Years to Maturity
		Less than 1				1-3				3-5				Over 5				Total
		(dollars in millions)
Securities-based lending and other loans		$	28,177			$	1,474			$	1,051			$	869			$	31,571
Residential real estate loans			—				—				48				22,648				22,696
Total		$	28,177			$	1,474			$	1,099			$	23,517			$	54,267
Lending commitments			5,539				823				376				265				7,003
Total loans and lending commitments		$	33,716			$	2,297			$	1,475			$	23,782			$	61,270

 

		At December 31, 2015
		Years to Maturity
		Less than 1				1-3				3-5				Over 5				Total
		(dollars in millions)
Securities-based lending and other loans		$	25,975			$	1,004			$	889			$	749			$	28,617
Residential real estate loans			—				—				35				20,870				20,905
Total		$	25,975			$	1,004			$	924			$	21,619			$	49,522
Lending commitments			5,143				286				115				277				5,821
Total loans and lending commitments		$	31,118			$	1,290			$	1,039			$	21,896			$	55,343

 

 

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Credit Exposure—Derivatives

We incur credit risk as a dealer in OTC derivatives. Credit risk with respect to derivative instruments arises from the failure of a counterparty to perform according to the terms of the contract. In connection with our OTC derivative activities, we generally enter into master netting agreements and collateral arrangements with counterparties. These agreements provide us with the ability to demand collateral, as well as to liquidate collateral and offset receivables and payables covered under the same master netting agreement in the event of counterparty default. We manage our trading positions by employing a variety of risk mitigation strategies. These strategies include diversification of risk exposures and hedging. Hedging activities consist of the purchase or sale of positions in related securities and financial instruments, including a variety of derivative products (e.g., futures, forwards, swaps and options). For credit exposure information on our OTC derivative products, see Note 4 to the consolidated financial statements in Item 1. For a discussion of our credit exposure to derivative contracts, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Credit Exposure—Derivatives” in Part II, Item 7A of the 2015 Form 10-K.

Credit Derivative Portfolio by Counterparty Type

The fair values shown herein are before the application of contractual netting or collateral. For additional credit exposure information on our credit derivative portfolio, see Note 4 to the consolidated financial statements in Item 1.

 

		At June 30, 2016
		Fair Values(1)												Notionals
		Receivable				Payable				Net				Protection Purchased				Protection Sold
		(dollars in millions)
Banks and securities firms		$	11,974			$	12,705			$	(731)			$	435,374			$	388,776
Insurance and other financial institutions			4,424				5,013				(589)				165,290				175,372
Non-financial entities			63				103				(40)				5,196				3,142
Total		$	16,461			$	17,821			$	(1,360)			$	605,860			$	567,290

 

		At December 31, 2015
		Fair Values(1)												Notionals
		Receivable				Payable				Net				Protection Purchased				Protection Sold
		(dollars in millions)
Banks and securities firms		$	16,962			$	17,295			$	(333)			$	533,557			$	491,267
Insurance and other financial institutions			5,842				6,247				(405)				189,439				194,723
Non-financial entities			115				123				(8)				5,932				3,529
Total		$	22,919			$	23,665			$	(746)			$	728,928			$	689,519

 

(1)

Our CDS are classified in either Level 2 or Level 3 of the fair value hierarchy. Approximately 2% and 3% of receivable fair values and 8% and 6% of payable fair values represented Level 3 amounts at June 30, 2016 and December 31, 2015, respectively (see Note 3 to the consolidated financial statements in Item 1).

 

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OTC Derivative Products at Fair Value, Net of Collateral, by Industry

 

Industry(1)		At June 30, 2016				At December 31, 2015
		(dollars in millions)
Utilities		$	4,315			$	3,428
Banks and securities firms			4,266				1,672
Funds, exchanges and other financial services(2)			2,869				2,029
Industrials			1,929				2,304
Regional governments			1,568				1,163
Healthcare			1,400				1,041
Sovereign governments			1,017				524
Not-for-profit organizations			979				794
Special purpose vehicles			958				718
Consumer discretionary			646				725
Insurance			534				380
Energy			529				396
Consumer staples			473				506
Materials			446				473
Information technology			380				294
Other			351				177
Total(3)		$	22,660			$	16,624

 

(1)	Industry categories are based on the Global Industry Classification Standard®.

(2)	Amounts include mutual funds, pension funds, private equity and real estate funds, exchanges and clearinghouses, and diversified financial services.

(3)	For further information on derivative instruments and hedging activities, see Note 4 to the consolidated financial statements in Item 1.

 

 

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Top Ten Country Exposures at June 30, 2016

 

Country		Net Inventory(1)				Net Counterparty Exposure(2)(3)				Loans				Lending Commitments				Exposure Before Hedges				Hedges(4)				Net Exposure(5)
		(dollars in millions)
United Kingdom:
Sovereigns		$	(200)			$	22			$	—			$	—			$	(178)			$	(163)			$	(341)
Non-sovereigns			580				10,381				2,684				5,786				19,431				(2,026)				17,405
Subtotal		$	380			$	10,403			$	2,684			$	5,786			$	19,253			$	(2,189)			$	17,064
Brazil:
Sovereigns		$	4,848			$	—			$	—			$	—			$	4,848			$	(11)			$	4,837
Non-sovereigns			24				307				1,123				33				1,487				(863)				624
Subtotal		$	4,872			$	307			$	1,123			$	33			$	6,335			$	(874)			$	5,461
Germany:
Sovereigns		$	1,254			$	770			$	—			$	—			$	2,024			$	(1,239)			$	785
Non-sovereigns			399				2,005				308				3,467				6,179				(1,795)				4,384
Subtotal		$	1,653			$	2,775			$	308			$	3,467			$	8,203			$	(3,034)			$	5,169
Japan:
Sovereigns		$	1,967			$	154			$	—			$	—			$	2,121			$	(82)			$	2,039
Non-sovereigns			452				2,480				231				—				3,163				(153)				3,010
Subtotal		$	2,419			$	2,634			$	231			$	—			$	5,284			$	(235)			$	5,049
Italy:
Sovereigns		$	1,457			$	19			$	—			$	—			$	1,476			$	44			$	1,520
Non-sovereigns			361				575				11				914				1,861				(254)				1,607
Subtotal		$	1,818			$	594			$	11			$	914			$	3,337			$	(210)			$	3,127
Singapore:
Sovereigns		$	1,873			$	165			$	—			$	—			$	2,038			$	—			$	2,038
Non-sovereigns			19				200				42				30				291				—				291
Subtotal		$	1,892			$	365			$	42			$	30			$	2,329			$	—			$	2,329
Canada:
Sovereigns		$	26			$	69			$	—			$	—			$	95			$	—			$	95
Non-sovereigns			(51)				873				148				1,570				2,540				(341)				2,199
Subtotal		$	(25)			$	942			$	148			$	1,570			$	2,635			$	(341)			$	2,294
China:
Sovereigns		$	135			$	230			$	—			$	—			$	365			$	(542)			$	(177)
Non-sovereigns			880				276				990				275				2,421				(74)				2,347
Subtotal		$	1,015			$	506			$	990			$	275			$	2,786			$	(616)			$	2,170
Netherlands:
Sovereigns		$	(87)			$	—			$	—			$	—			$	(87)			$	(9)			$	(96)
Non-sovereigns			391				747				385				1,065				2,588				(399)				2,189
Subtotal		$	304			$	747			$	385			$	1,065			$	2,501			$	(408)			$	2,093
United Arab Emirates:
Sovereigns		$	(21)			$	1,491			$	—			$	—			$	1,470			$	(35)			$	1,435
Non-sovereigns			(22)				328				47				83				436				(15)				421
Subtotal		$	(43)			$	1,819			$	47			$	83			$	1,906			$	(50)			$	1,856

 

(1)

Net inventory represents exposure to both long and short single-name and index positions (i.e., bonds and equities at fair value and CDS based on a notional amount assuming zero recovery adjusted for any fair value receivable or payable). As a market maker, we may transact in these CDS positions to facilitate client trading. At June 30, 2016, gross purchased protection, gross written protection, and net exposures related to single-name and index credit derivatives for those countries were $(99.4) billion, $98.0 billion and $(1.4) billion, respectively. For a further description of the triggers for purchased credit protection and whether those triggers may limit the effectiveness of our hedges, see “Credit Exposure—Derivatives” herein.

 

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(2)	Net counterparty exposure (i.e., repurchase transactions, securities lending and OTC derivatives) takes into consideration legally enforceable master netting agreements and collateral.

(3)

At June 30, 2016, the benefit of collateral received against counterparty credit exposure was $15.6 billion in the U.K., with 97% of collateral consisting of cash, government obligations of the U.K., U.S. and Italy, and $14.0 billion in Germany with 99% of collateral consisting of cash and government obligations of France, Belgium and Germany. The benefit of collateral received against counterparty credit exposure in the other countries totaled approximately $12.9 billion, with collateral primarily consisting of cash and government obligations of Japan, the U.S. and Brazil. These amounts do not include collateral received on secured financing transactions.

(4)

Amounts represent CDS hedges (purchased and sold) on net counterparty exposure and lending executed by trading desks responsible for hedging counterparty and lending credit risk exposures for us. Amounts are based on the CDS notional amount assuming zero recovery adjusted for any fair value receivable or payable.

(5)	In addition, at June 30, 2016, we had exposure to these countries for overnight deposits with banks of approximately $11.9 billion.

 

 

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FINANCIAL DATA SUPPLEMENT (Unaudited)

Average Balances and Interest Rates and Net Interest Income

 

		Three Months Ended June 30, 2016
		Average       Daily     Balance				Interest				Annualized     Average Rate
		(dollars in millions)
Assets
Interest earning assets:
Trading assets(1):
U.S.		$	100,731			$	459				1.8	%
Non-U.S.			101,631				67				0.3
Investment securities:
U.S.			78,233				237				1.2
Loans:
U.S.			88,908				674				3.0
Non-U.S.			436				6				5.3
Interest bearing deposits with banks:
U.S.			27,821				38				0.6
Non-U.S.			1,429				14				3.8
Securities purchased under agreements to resell and Securities borrowed(2):
U.S.			157,223				(64)				(0.2)
Non-U.S.			82,863				(56)				(0.3)
Customer receivables and Other(3):
U.S.			46,144				233				2.0
Non-U.S.			21,655				59				1.1
Total		$	707,074			$	1,667				0.9	%
Non-interest earning assets			107,742
Total assets		$	814,816
Liabilities and Equity
Interest bearing liabilities:
Deposits:
U.S.		$	152,792			$	10				—	%
Non-U.S.			2,043				5				1.0
Short-term borrowings(4):
U.S.			467				—				0.2
Non-U.S.			651				7				4.6
Long-term borrowings(4):
U.S.			154,745				835				2.2
Non-U.S.			8,198				9				0.4
Trading liabilities(1):
U.S.			31,410				—				—
Non-U.S.			51,385				—				—
Securities sold under agreements to repurchase and Securities loaned(5):
U.S.			31,412				141				1.8
Non-U.S.			31,729				118				1.5
Customer payables and Other(6):
U.S.			124,463				(335)				(1.1)
Non-U.S.			61,729				(36)				(0.2)
Total		$	651,024			$	754				0.5
Non-interest bearing liabilities and equity			163,792
Total liabilities and equity		$	814,816
Net interest income and net interest rate spread						$	913				0.4	%

 

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FINANCIAL DATA SUPPLEMENT (Unaudited)—(Continued)

Average Balances and Interest Rates and Net Interest Income

 

		Three Months Ended June 30, 2015
		Average         Daily Balance				Interest				Annualized     Average Rate
		(dollars in millions)
Assets
Interest earning assets:
Trading assets(1):
U.S.		$	86,632			$	466				2.2	%
Non-U.S.			134,452				89				0.3
Investment securities:
U.S.			71,668				238				1.3
Loans:
U.S.			72,960				526				2.9
Non-U.S.			239				3				5.1
Interest bearing deposits with banks:
U.S.			17,637				14				0.3
Non-U.S.			946				8				3.4
Securities purchased under agreements to resell and Securities borrowed(2):
U.S.			174,981				(182)				(0.4)
Non-U.S.			76,904				(18)				(0.1)
Customer receivables and Other(3):
U.S.			54,343				99				0.7
Non-U.S.			31,137				143				1.9
Total		$	721,899			$	1,386				0.8	%
Non-interest earning assets			125,866
Total assets		$	847,765
Liabilities and Equity
Interest bearing liabilities:
Deposits:
U.S.		$	134,566			$	16				—	%
Non-U.S.			1,884				1				0.2
Short-term borrowings(4):
U.S.			1,157				—				—
Non-U.S.			1,361				5				1.5
Long-term borrowings(4):
U.S.			149,950				907				2.5
Non-U.S.			7,441				8				0.4
Trading liabilities(1):
U.S.			19,703				—				—
Non-U.S.			66,074				—				—
Securities sold under agreements to repurchase and Securities loaned(5):
U.S.			59,501				94				0.6
Non-U.S.			40,621				141				1.4
Customer payables and Other(6):
U.S.			53,206				(483)				(3.7)
Non-U.S.			124,827				(1)				—
Total		$	660,291			$	688				0.4
Non-interest bearing liabilities and equity			187,474
Total liabilities and equity		$	847,765
Net interest income and net interest rate spread						$	698				0.4	%

 

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FINANCIAL DATA SUPPLEMENT (Unaudited)—(Continued)

Average Balances and Interest Rates and Net Interest Income

 

		Six Months Ended June 30, 2016
		Average         Daily Balance				Interest				Annualized     Average Rate
		(dollars in millions)
Assets
Interest earning assets:
Trading assets(1):
U.S.		$	100,057			$	957				1.9	%
Non-U.S.			96,801				152				0.3
Investment securities:
U.S.			76,999				473				1.2
Loans:
U.S.			87,529				1,315				3.0
Non-U.S.			450				12				5.4
Interest bearing deposits with banks:
U.S.			29,289				80				0.5
Non-U.S.			1,225				25				4.1
Securities purchased under agreements to resell and Securities borrowed(2):
U.S.			154,488				(126)				(0.2)
Non-U.S.			84,499				(72)				(0.2)
Customer receivables and Other(3):
U.S.			47,400				468				2.0
Non-U.S.			22,092				130				1.2
Total		$	700,829			$	3,414				1.0	%
Non-interest earning assets			108,150
Total assets		$	808,979
Liabilities and Equity
Interest bearing liabilities:
Deposits:
U.S.		$	154,540			$	27				—	%
Non-U.S.			2,353				10				0.9
Short-term borrowings(4):
U.S.			633				1				0.3
Non-U.S.			621				13				4.3
Long-term borrowings(4):
U.S.			153,073				1,786				2.4
Non-U.S.			7,732				18				0.5
Trading liabilities(1):
U.S.			31,735				—				—
Non-U.S.			49,756				—				—
Securities sold under agreements to repurchase and Securities loaned(5):
U.S.			31,635				271				1.7
Non-U.S.			28,144				242				1.7
Customer payables and Other(6):
U.S.			123,511				(704)				(1.1)
Non-U.S.			61,218				(62)				(0.2)
Total		$	644,951			$	1,602				0.5
Non-interest bearing liabilities and equity			164,028
Total liabilities and equity		$	808,979
Net interest income and net interest rate spread						$	1,812				0.5	%

 

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FINANCIAL DATA SUPPLEMENT (Unaudited)—(Continued)

Average Balances and Interest Rates and Net Interest Income

 

		Six Months Ended June 30, 2015
		Average         Daily Balance				Interest				Annualized     Average Rate
		(dollars in millions)
Assets
Interest earning assets:
Trading assets(1):
U.S.		$	88,677			$	947				2.2	%
Non-U.S.			125,895				202				0.3
Investment securities:
U.S.			71,495				438				1.2
Loans:
U.S.			69,845				995				2.9
Non-U.S.			258				9				7.1
Interest bearing deposits with banks:
U.S.			19,659				31				0.3
Non-U.S.			1,032				14				2.8
Securities purchased under agreements to resell and Securities borrowed(2):
U.S.			166,354				(336)				(0.4)
Non-U.S.			84,918				31				0.1
Customer receivables and Other(3):
U.S.			59,859				270				0.9
Non-U.S.			26,379				269				2.1
Total		$	714,371			$	2,870				0.8	%
Non-interest earning assets			128,876
Total assets		$	843,247
Liabilities and Equity
Interest bearing liabilities:
Deposits:
U.S.		$	133,728			$	33				0.1	%
Non-U.S.			1,646				2				0.2
Short-term borrowings(4):
U.S.			1,158				—				—
Non-U.S.			1,137				9				1.6
Long-term borrowings(4):
U.S.			148,980				1,824				2.5
Non-U.S.			7,892				17				0.4
Trading liabilities(1):
U.S.			19,820				—				—
Non-U.S.			62,582				—				—
Securities sold under agreements to repurchase and Securities loaned(5):
U.S.			64,010				225				0.7
Non-U.S.			36,598				318				1.8
Customer payables and Other(6):
U.S.			57,825				(864)				(3.0)
Non-U.S.			120,318				12				—
Total		$	655,694			$	1,576				0.5
Non-interest bearing liabilities and equity			187,553
Total liabilities and equity		$	843,247
Net interest income and net interest rate spread						$	1,294				0.3	%

 

(1)	Interest expense on Trading liabilities is reported as a reduction of Interest income on Trading assets.

(2)	Includes fees paid on Securities borrowed.

(3)	Includes interest from customer receivables and other interest earning assets.

(4)	The Firm also issues structured notes that have coupon or repayment terms linked to the performance of debt or equity securities, indices, currencies or commodities, which are recorded within Trading revenues (see Note 3 to the consolidated financial statements in Item 1).

(5)	Includes fees received on Securities loaned.

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

 

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FINANCIAL DATA SUPPLEMENT (Unaudited)—(Continued)

Rate/Volume Analysis

Effect of Net Interest Income of Volume and Rate Changes

 

		Three Months Ended June 30, 2016 versus   Three Months Ended June 30, 2015
		Increase (decrease) due to change in:
		Volume				Rate				Net Change
		(dollars in millions)
Interest earning assets
Trading Assets:
U.S.		$	76			$	(83)			$	(7)
Non-U.S.			(22)				—				(22)
Investment securities:
U.S.			22				(23)				(1)
Loans:
U.S.			115				33				148
Non-U.S.			2				1				3
Interest bearing deposits with banks:
U.S.			8				16				24
Non-U.S.			4				2				6
Securities purchased under agreements to resell and Securities borrowed:
U.S.			18				100				118
Non-U.S.			(1)				(37)				(38)
Customer receivables and Other:
U.S.			(15)				149				134
Non-U.S.			(44)				(40)				(84)
Change in interest income		$	163			$	118			$	281
Interest bearing liabilities
Deposits:
U.S.		$	2			$	(8)			$	(6)
Non-U.S.			—				4				4
Short-term borrowings:
U.S.			—				—				—
Non-U.S.			(3)				5				2
Long-term borrowings:
U.S.			29				(101)				(72)
Non-U.S.			1				—				1
Securities sold under agreements to repurchase and Securities loaned:
U.S.			(44)				91				47
Non-U.S.			(31)				8				(23)
Customer payables and Other:
U.S.			(647)				795				148
Non-U.S.			1				(36)				(35)
Change in interest expense		$	(692)			$	758			$	66
Change in net interest income		$	855			$	(640)			$	215

 

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FINANCIAL DATA SUPPLEMENT (Unaudited)—(Continued)

Rate/Volume Analysis

 

		Six Months Ended June 30, 2016 versus   Six Months Ended June 30, 2015
		Increase (decrease) due to change in:
		Volume				Rate				Net Change
		(dollars in millions)
Interest earning assets
Trading assets:
U.S.		$	122			$	(112)			$	10
Non-U.S.			(47)				(3)				(50)
Investment securities:
U.S.			34				1				35
Loans:
U.S.			252				68				320
Non-U.S.			7				(4)				3
Interest bearing deposits with banks:
U.S.			15				34				49
Non-U.S.			3				8				11
Securities purchased under agreements to resell and Securities borrowed:
U.S.			24				186				210
Non-U.S.			—				(103)				(103)
Customer receivables and Other:
U.S.			(56)				254				198
Non-U.S.			(44)				(95)				(139)
Change in interest income		$	310			$	234			$	544
Interest bearing liabilities
Deposits:
U.S.		$	5			$	(11)			$	(6)
Non-U.S.			1				7				8
Short-term borrowings:
U.S.			—				1				1
Non-U.S.			(4)				8				4
Long-term borrowings:
U.S.			50				(88)				(38)
Non-U.S.			—				1				1
Securities sold under agreements to repurchase and Securities loaned:
U.S.			(114)				160				46
Non-U.S.			(73)				(3)				(76)
Customer payables and Other:
U.S.			(981)				1,141				160
Non-U.S.			(6)				(68)				(74)
Change in interest expense		$	(1,122)			$	1,148			$	26
Change in net interest income		$	1,432			$	(914)			$	518

 

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Part II—Other Information

 

Item 1.

Legal Proceedings

 

 

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Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth the information with respect to purchases made by or on behalf of the Firm of its common stock during the quarterly period ended June 30, 2016.

Issuer Purchases of Equity Securities

(dollars in millions, except per share amounts)

 

Period		Total Number of Shares Purchased				Average Price Paid Per Share				Total Number of Shares Purchased as Part of Publicly Announced Plans of Programs(1)				Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
Month #1 (April 1, 2016-April 30, 2016)
Share Repurchase Program(2)			3,670,865			$	27.15				3,670,865			$	525
Employee transactions(3)			1,068,030			$	26.05				—				—
Month #2 (May 1, 2016-May 31, 2016)
Share Repurchase Program(2)			11,623,406			$	26.71				11,623,406			$	215
Employee transactions(3)			13,059			$	27.24				—				—
Month #3 (June 1, 2016-June 30, 2016)
Share Repurchase Program(2)			8,188,782			$	26.25				8,188,782			$	3,500
Employee transactions(3)			16,489			$	27.12				—				—
Quarter ended at June 30, 2016
Share Repurchase Program(2)			23,483,053			$	26.61				23,483,053			$	3,500
Employee transactions(3)			1,097,578			$	26.08				—				—

 

(1)	Share purchases under publicly announced programs are made pursuant to open-market purchases, Rule 10b5-1 plans or privately negotiated transactions (including with employee benefit plans) as market conditions warrant and at prices the Firm deems appropriate and may be suspended at any time.

(2)

The Firm’s Board of Directors has authorized the repurchase of the Firm’s outstanding stock under a share repurchase program (the “Share Repurchase Program”). The Share Repurchase Program is a program for capital management purposes that considers, among other things, business segment capital needs, as well as equity-based compensation and benefit plan requirements. The Share Repurchase Program has no set expiration or termination date. Share repurchases by the Firm are subject to regulatory approval. In June 2016, the Firm received a conditional non-objection from the Federal Reserve to its 2016 capital plan, which included a share repurchase of up to $3.5 billion of the Firm’s outstanding common stock during the period beginning July 1, 2016 through June 30, 2017. During the current quarter, the Firm repurchased approximately $625 million of the Firm’s outstanding common stock as part of its Share Repurchase Program. For further information, see “Liquidity and Capital Resources—Capital Management” in Part I, Item 2.

(3)	Includes shares acquired by the Firm in satisfaction of the tax withholding obligations on stock-based awards and the exercise of stock options granted under the Firm’s stock-based compensation plans.

 

Item 6.

Exhibits

An exhibit index has been filed as part of this Report on Page E-1.

 

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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.

 

Date: August 3, 2016

 

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EXHIBIT INDEX

MORGAN STANLEY

Quarter Ended June 30, 2016

 

Exhibit No.		Description
10.1		Directors’ Equity Capital Accumulation Plan as amended and restated as of August 1, 2016.
10.2		Morgan Stanley Schedule of Non-Employee Directors Annual Compensation, effective as of August 1, 2016.
12		Statement Re: Computation of Ratio of Earnings to Fixed Charges and Computation of Earnings to Fixed Charges and Preferred Stock Dividends.
15		Letter of awareness from Deloitte & Touche LLP, dated August 3, 2016, concerning unaudited interim financial information.
31.1		Rule 13a-14(a) Certification of Chief Executive Officer.
31.2		Rule 13a-14(a) Certification of Chief Financial Officer.
32.1		Section 1350 Certification of Chief Executive Officer.
32.2		Section 1350 Certification of Chief Financial Officer.
101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Income—Three Months and Six Months Ended June 30, 2016 and 2015, (ii) the Consolidated Statements of Comprehensive Income—Three Months and Six Months Ended June 30, 2016 and 2015, (iii) the Consolidated Balance Sheets—June 30, 2016 and December 31, 2015, (iv) the Consolidated Statements of Changes in Total Equity—Six Months Ended June 30, 2016 and 2015, (v) the Consolidated Statements of Cash Flows—Six Months Ended June 30, 2016 and 2015, and (vi) Notes to Consolidated Financial Statements (unaudited).

 

		E-1