Morgan Stanley - 10-Q quarterly report FY2016 Q3

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 September 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 October 31, 2016, there were 1,872,821,289 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.

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Table of Contents

QUARTERLY REPORT ON FORM 10-Q

For the quarter ended September 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		21
5. Investment Securities		28
6. Collateralized Transactions		31
7. Loans and Allowance for Credit Losses		33
8. Equity Method Investments		37
9. Deposits		37
10. Long-Term Borrowings and Other Secured Financings		37
11. Commitments, Guarantees and Contingencies		38
12. Variable Interest Entities and Securitization Activities		43
13. Regulatory Requirements		47
14. Total Equity		49
15. Earnings per Common Share		50
16. Interest Income and Interest Expense		51
17. Employee Benefit Plans		51
18. Income Taxes		51
19. Segment and Geographic Information		52
20. Subsequent Events		54
Report of Independent Registered Public Accounting Firm		55
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations		56
Introduction		56
Executive Summary		57
Business Segments		61
Supplemental Financial Information and Disclosures		71
Accounting Development Updates		71
Critical Accounting Policies		72
Liquidity and Capital Resources		73
Item 3.   Quantitative and Qualitative Disclosures about Market Risk		87
Item 4.   Controls and Procedures		97
Financial Data Supplement (Unaudited)		98
Part II—Other Information
Item 1.   Legal Proceedings		101
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds		102
Item 5.   Other Information		102
Item 6.   Exhibits		102

 

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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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Table of Contents

Part I—Financial Information Item 1. Financial Statements

Consolidated Statements of Income

(Unaudited)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
in millions, except per share data		2016				2015				2016				2015
Revenues
Investment banking		$	1,225			$	1,313			$	3,556			$	4,284
Trading			2,609				2,026				7,420				8,649
Investments			87				(119	)			179				408
Commissions and fees			991				1,115				3,066				3,459
Asset management, distribution and administration fees			2,686				2,732				7,943				8,155
Other			308				(62	)			631				406
Total non-interest revenues			7,906				7,005				22,795				25,361
Interest income			1,734				1,451				5,148				4,321
Interest expense			731				689				2,333				2,265
Net interest			1,003				762				2,815				2,056
Net revenues			8,909				7,767				25,610				27,417
Non-interest expenses
Compensation and benefits			4,097				3,437				11,795				12,366
Occupancy and equipment			339				341				997				1,034
Brokerage, clearing and exchange fees			491				485				1,440				1,435
Information processing and communications			456				447				1,327				1,300
Marketing and business development			130				158				418				487
Professional services			489				576				1,550				1,660
Other			526				849				1,481				2,079
Total non-interest expenses			6,528				6,293				19,008				20,361
Income from continuing operations before income taxes			2,381				1,474				6,602				7,056
Provision for income taxes			749				423				2,160				1,704
Income from continuing operations			1,632				1,051				4,442				5,352
Income (loss) from discontinued operations, net of income taxes			8				(2	)			1				(9	)
Net income		$	1,640			$	1,049			$	4,443			$	5,343
Net income applicable to noncontrolling interests			43				31				130				124
Net income applicable to Morgan Stanley		$	1,597			$	1,018			$	4,313			$	5,219
Preferred stock dividends and other			79				79				314				301
Earnings applicable to Morgan Stanley common shareholders		$	1,518			$	939			$	3,999			$	4,918
Earnings per basic common share
Income from continuing operations		$	0.82			$	0.49			$	2.15			$	2.57
Income (loss) from discontinued operations			0.01				—				—				—
Earnings per basic common share		$	0.83			$	0.49			$	2.15			$	2.57
Earnings per diluted common share
Income from continuing operations		$	0.80			$	0.48			$	2.11			$	2.52
Income (loss) from discontinued operations			0.01				—				—				(0.01	)
Earnings per diluted common share		$	0.81			$	0.48			$	2.11			$	2.51
Dividends declared per common share		$	0.20			$	0.15			$	0.50			$	0.40
Average common shares outstanding
Basic			1,838				1,904				1,863				1,916
Diluted			1,879				1,949				1,898				1,958

 

See Notes to Consolidated Financial Statements		1		September 2016 Form 10-Q

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Consolidated Statements of Comprehensive Income (Unaudited)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
$ in millions		2016				2015				2016				2015
Net income		$	1,640			$	1,049			$	4,443			$	5,343
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments1		$	43			$	(61	)		$	360			$	(249	)
Change in net unrealized gains (losses) on available for sale securities2			(99	)			100				439				72
Pension, postretirement and other			(1	)			4				(5	)			3
Change in net debt valuation adjustments3			(93	)			—				255				—
Total other comprehensive income (loss)		$	(150	)		$	43			$	1,049			$	(174	)
Comprehensive income		$	1,490			$	1,092			$	5,492			$	5,169
Net income applicable to noncontrolling interests			43				31				130				124
Other comprehensive income (loss) applicable to noncontrolling interests			15				15				151				(3	)
Comprehensive income applicable to Morgan Stanley		$	1,432			$	1,046			$	5,211			$	5,048

 

1.

Amounts include Provision for (benefit from) income taxes of $(30) million and $30 million in the quarter ended September 30, 2016 (“current quarter”) and the quarter ended September 30, 2015 (“prior year quarter”), respectively, and $(204) million and $150 million in the nine months ended September 30, 2016 (“current year period”) and the nine months ended September 30, 2015 (“prior year period”), respectively.

2.	Amounts include Provision for (benefit from) income taxes of $(58) million and $57 million in the current quarter and prior year quarter, respectively, and $256 million and $41 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 related to certain Long-term and Short-term borrowings. Amounts include Provision for (benefit from) income taxes of $(50) millionand $150 million in the current quarter and current year period, respectively. See Notes 2 and 14 for further information.

 

September 2016 Form 10-Q		2		See Notes to Consolidated Financial Statements

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Consolidated Balance Sheets

(Unaudited)

 

$ in millions, except share data		At September 30, 2016				At December 31, 2015
Assets
Cash and due from banks		$	26,899			$	19,827
Interest bearing deposits with banks			15,653				34,256
Trading assets, at fair value ($156,351 and $127,627 were pledged to various parties)			273,151				239,505
Investment securities (includes $65,732 and $66,759 at fair value)			78,956				71,983
Securities purchased under agreements to resell (includes $554and $806 at fair value)			90,579				87,657
Securities borrowed			126,280				142,416
Customer and other receivables			51,411				45,407
Loans:
Held for investment (net of allowance of $287 and $225)			80,400				72,559
Held for sale			12,108				13,200
Goodwill			6,584				6,584
Intangible assets (net of accumulated amortization of $2,354and $2,130)			2,747				2,984
Other assets			49,123				51,087
Total assets		$	813,891			$	787,465
Liabilities
Deposits (includes $60 and $125 at fair value)		$	151,843			$	156,034
Short-term borrowings (includes $408 and $1,648 at fair value)			914				2,173
Trading liabilities, at fair value			136,299				128,455
Securities sold under agreements to repurchase (includes $745and $683 at fair value)			46,936				36,692
Securities loaned			16,515				19,358
Other secured financings (includes $3,746 and $2,854 at fair value)			9,812				9,464
Customer and other payables			194,007				186,626
Other liabilities and accrued expenses			15,176				18,711
Long-term borrowings (includes $38,747 and $33,045 at fair value)			163,927				153,768
Total liabilities			735,429				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: 1,876,466,446 and 1,920,024,027			20				20
Additional paid-in capital			22,995				24,153
Retained earnings			52,545				49,204
Employee stock trusts			2,839				2,409
Accumulated other comprehensive income (loss)			(1,070	)			(1,656	)
Common stock held in treasury, at cost, $0.01 par value (162,427,533 and 118,869,952 shares)			(4,861	)			(4,059	)
Common stock issued to employee stock trusts			(2,839	)			(2,409	)
Total Morgan Stanley shareholders’ equity			77,149				75,182
Noncontrolling interests			1,313				1,002
Total equity			78,462				76,184
Total liabilities and equity		$	813,891			$	787,465

 

See Notes to Consolidated Financial Statements		3		September 2016 Form 10-Q

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Consolidated Statements of Changes in Total Equity

Nine Months Ended September 30, 2016 and 2015

(Unaudited)

 

$ in millions		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 DVA1			—				—				—				312				—				(312	)			—				—				—				—
Net adjustment for accounting change related to consolidation2			—				—				—				—				—				—				—				—				106				106
Net income applicable to Morgan Stanley			—				—				—				4,313				—				—				—				—				—				4,313
Net income applicable to noncontrolling interests			—				—				—				—				—				—				—				—				130				130
Dividends			—				—				—				(1,284	)			—				—				—				—				—				(1,284	)
Shares issued under employee plans and related tax effects			—				—				(1,168	)			—				430				—				2,106				(430	)			—				938
Repurchases of common stock and employee tax withholdings			—				—				—				—				—				—				(2,908	)			—				—				(2,908	)
Net change in Accumulated other comprehensive income (loss)			—				—				—				—				—				898				—				—				151				1,049
Other net increase (decreases)			—				—				10				—				—				—				—				—				(76	)			(66	)
Balance at September 30, 2016		$	7,520			$	20			$	22,995			$	52,545			$	2,839			$	(1,070	)		$	(4,861	)		$	(2,839	)		$	1,313			$	78,462
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			—				—				—				5,219				—				—				—				—				—				5,219
Net income applicable to noncontrolling interests			—				—				—				—				—				—				—				—				124				124
Dividends			—				—				—				(1,098	)			—				—				—				—				—				(1,098	)
Shares issued under employee plans and related tax effects			—				—				(356	)			—				272				—				1,445				(272	)			—				1,089
Repurchases of common stock and employee tax withholdings			—				—				—				—				—				—				(2,135	)			—				—				(2,135	)
Net change in Accumulated other comprehensive income (loss)			—				—				—				—				—				(171	)			—				—				(3	)			(174	)
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	)			—				—				—				—				—				(1	)			(11	)
Balance at September 30, 2015		$	7,520			$	20			$	23,876			$	48,746			$	2,399			$	(1,419	)		$	(3,456	)		$	(2,399	)		$	1,133			$	76,420

 

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.

 

September 2016 Form 10-Q		4		See Notes to Consolidated Financial Statements

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Consolidated Statements of Cash Flows

(Unaudited)

 

		Nine Months Ended September 30,
$ in millions		2016				2015
Cash flows from operating activities
Net income		$	4,443			$	5,343
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
(Income) loss from equity method investments			39				(118	)
Compensation payable in common stock and options			794				836
Depreciation and amortization			1,357				1,023
Net gain on sale of available for sale securities			(127	)			(74	)
Impairment charges			102				91
Provision for credit losses on lending activities			138				47
Other operating adjustments			(36	)			264
Changes in assets and liabilities:
Trading assets, net of Trading liabilities			(20,509	)			39,775
Securities borrowed			16,136				(11,537	)
Securities loaned			(2,843	)			(4,575	)
Customer and other receivables and other assets			(2,800	)			5,842
Customer and other payables and other liabilities			3,798				10,351
Securities purchased under agreements to resell			(2,922	)			(43,918	)
Securities sold under agreements to repurchase			10,244				(11,313	)
Net cash provided by (used for) operating activities			7,814				(7,963	)
Cash flows from investing activities
Proceeds from (payments for):
Other assets—Premises, equipment and software, net			(941	)			(964	)
Changes in loans, net			(7,709	)			(11,313	)
Investment securities:
Purchases			(41,230	)			(32,133	)
Proceeds from sales			28,960				32,788
Proceeds from paydowns and maturities			5,956				4,285
Other investing activities			(24	)			(61	)
Net cash used for investing activities			(14,988	)			(7,398	)
Cash flows from financing activities
Net proceeds from (payments for):
Short-term borrowings			(1,233	)			(279	)
Noncontrolling interests			(47	)			(70	)
Other secured financings			(278	)			(1,677	)
Deposits			(4,191	)			13,682
Proceeds from:
Excess tax benefits associated with stock-based awards			51				180
Derivatives financing activities			—				392
Issuance of preferred stock, net of issuance costs			—				1,493
Issuance of long-term borrowings			27,528				30,159
Payments for:
Long-term borrowings			(22,902	)			(17,615	)
Derivatives financing activities			(120	)			(372	)
Repurchases of common stock and employee tax withholdings			(2,908	)			(2,135	)
Cash dividends			(1,311	)			(1,096	)
Net cash provided by (used for) financing activities			(5,411	)			22,662
Effect of exchange rate changes on cash and cash equivalents			1,054				(767	)
Net increase (decrease) in cash and cash equivalents			(11,531	)			6,534
Cash and cash equivalents, at beginning of period			54,083				46,984
Cash and cash equivalents, at end of period		$	42,552			$	53,518
Cash and cash equivalents include:
Cash and due from banks		$	26,899			$	19,244
Interest bearing deposits with banks			15,653				34,274
Cash and cash equivalents, at end of period		$	42,552			$	53,518

Supplemental Disclosure of Cash Flow Information

Cash payments for interest were $1,784 million and $1,456 million.

Cash payments for income taxes, net of refunds, were $504 million and $541 million.

 

See Notes to Consolidated Financial Statements		5		September 2016 Form 10-Q

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Notes to Consolidated Financial Statements (Unaudited)

 

 

September 2016 Form 10-Q		6

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Notes to Consolidated Financial Statements (Unaudited)

 

 

		7		September 2016 Form 10-Q

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Notes to Consolidated Financial Statements (Unaudited)

 

3. Fair Values

Fair Value Measurement

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

$ in millions		Level 1				Level 2				Level 3				Counterparty and Cash Collateral Netting				At September 30, 2016
Assets at Fair Value
Trading assets:
U.S. government and agency securities:
U.S. Treasury securities		$	23,199			$	—			$	—			$	—			$	23,199
U.S. agency securities			2,020				25,398				8				—				27,426
Total U.S. government and agency securities			25,219				25,398				8				—				50,625
Other sovereign government obligations			21,437				6,975				12				—				28,424
Corporate and other debt:
State and municipal securities			—				2,247				4				—				2,251
Residential mortgage-backed securities			—				811				188				—				999
Commercial mortgage-backed securities			—				1,427				64				—				1,491
Asset-backed securities			—				115				12				—				127
Corporate bonds			—				12,896				199				—				13,095
Collateralized debt and loan obligations			—				403				85				—				488
Loans and lending commitments1			—				5,057				4,155				—				9,212
Other debt			—				892				246				—				1,138
Total corporate and other debt			—				23,848				4,953				—				28,801
Corporate equities2			113,805				338				336				—				114,479
Securities received as collateral			12,535				4				1				—				12,540
Derivative and other contracts:
Interest rate contracts			648				417,114				1,116				—				418,878
Credit contracts			—				14,208				516				—				14,724
Foreign exchange contracts			124				51,072				6				—				51,202
Equity contracts			1,363				40,194				1,864				—				43,421
Commodity contracts			2,225				7,279				4,098				—				13,602
Other			—				25				—				—				25
Netting3			(3,758	)			(444,890	)			(2,172	)			(57,947	)			(508,767	)
Total derivative and other contracts			602				85,002				5,428				(57,947	)			33,085
Investments4:
Principal investments			33				19				726				—				778
Other			609				276				210				—				1,095
Total investments			642				295				936				—				1,873
Physical commodities			—				179				—				—				179
Total trading assets4			174,240				142,039				11,674				(57,947	)			270,006
Investment securities—AFS securities			28,997				36,735				—				—				65,732
Securities purchased under agreements to resell			—				554				—				—				554
Intangible assets			—				3				—				—				3
Total assets measured at fair value		$	203,237			$	179,331			$	11,674			$	(57,947	)		$	336,295
Liabilities at Fair Value
Deposits		$	—			$	29			$	31			$	—			$	60
Short-term borrowings			—				406				2				—				408
Trading liabilities:
U.S. government and agency securities:
U.S. Treasury securities			9,500				—				—				—				9,500
U.S. agency securities			786				96				—				—				882
Total U.S. government and agency securities			10,286				96				—				—				10,382
Other sovereign government obligations			18,685				2,110				—				—				20,795
Corporate and other debt:
State and municipal securities			—				230				—				—				230
Asset-backed securities			—				477				—				—				477
Corporate bonds			—				5,873				13				—				5,886
Other debt			—				17				3				—				20
Total corporate and other debt			—				6,597				16				—				6,613
Corporate equities2			44,980				50				19				—				45,049
Obligation to return securities received as collateral			20,929				5				1				—				20,935
Derivative and other contracts:
Interest rate contracts			690				396,224				1,075				—				397,989
Credit contracts			—				14,765				1,399				—				16,164
Foreign exchange contracts			22				56,108				113				—				56,243
Equity contracts			1,305				43,623				1,724				—				46,652
Commodity contracts			2,002				5,860				2,804				—				10,666
Other			—				76				—				—				76
Netting3			(3,758	)			(444,890	)			(2,172	)			(44,449	)			(495,269	)
Total derivative and other contracts			261				71,766				4,943				(44,449	)			32,521
Physical commodities			—				4				—				—				4
Total trading liabilities			95,141				80,628				4,979				(44,449	)			136,299
Securities sold under agreements to repurchase			—				596				149				—				745
Other secured financings			—				3,296				450				—				3,746
Long-term borrowings			43				36,662				2,042				—				38,747
Total liabilities measured at fair value		$	95,184			$	121,617			$	7,653			$	(44,449	)		$	180,005

 

September 2016 Form 10-Q		8

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

$ in millions		Level 1				Level 2				Level 3				Counterparty and Cash Collateral Netting				At December 31, 2015
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 commitments1			—				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 equities2			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
Netting3			(3,840	)			(380,443	)			(3,120	)			(55,562	)			(442,965	)
Total derivative and other contracts			414				79,434				4,327				(55,562	)			28,613
Investments4:
Principal investments			20				44				486				—				550
Other			163				310				221				—				694
Total investments			183				354				707				—				1,244
Physical commodities			—				321				—				—				321
Total trading assets4			150,128				128,086				13,010				(55,562	)			235,662
Investment securities—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 equities2			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
Netting3			(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
AFS—Availablefor sale

1.

At September 30, 2016, loans held at fair value consisted of $7,038 million of corporate loans, $1,338 million of residential real estate loans and $836 million of wholesale real estate loans. At December 31, 2015, loans 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. For additional disclosure about such investments, see “Fair Value of Investments Measured at Net Asset Value” herein.

 

		9		September 2016 Form 10-Q

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

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.

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.

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

 

$ in millions		Beginning Balance at June 30, 2016				Realized and Unrealized Gains (Losses)				Purchases1				Sales				Issuances				Settlements				Net Transfers				Ending Balance at September 30, 2016				Unrealized Gains (Losses) at September 30, 2016
Assets at Fair Value
Trading assets:
U.S. agency securities		$	20			$	—			$	—			$	(18	)		$	—			$	—			$	6			$	8			$	—
Other sovereign government obligations			2				—				6				(1	)			—				—				5				12				—
Corporate and other debt:
State and municipal securities			10				1				—				(7	)			—				—				—				4				—
Residential mortgage-backed securities			216				1				56				(76	)			—				—				(9	)			188				(12	)
Commercial mortgage-backed securities			51				(5	)			12				(1	)			—				—				7				64				(3	)
Asset-backed securities			88				(3	)			6				(79	)			—				—				—				12				—
Corporate bonds			276				(55	)			20				(23	)			—				—				(19	)			199				(55	)
Collateralized debt and loan obligations			109				6				9				(38	)			—				—				(1	)			85				10
Loans and lending commitments			5,418				(12	)			501				(206	)			—				(733	)			(813	)			4,155				(12	)
Other debt			528				—				191				(212	)			—				—				(261	)			246				—
Total corporate and other debt			6,696				(67	)			795				(642	)			—				(733	)			(1,096	)			4,953				(72	)
Corporate equities			572				(28	)			42				(36	)			—				—				(214	)			336				(26	)
Securities received as collateral			—				—				1				—				—				—				—				1				—
Net derivative and other contracts2:
Interest rate contracts			(235	)			(60	)			3				—				(15	)			11				337				41				(45	)
Credit contracts			(1,114	)			147				—				—				—				2				82				(883	)			147
Foreign exchange contracts			(1	)			(27	)			—				—				—				(42	)			(37	)			(107	)			(27	)
Equity contracts			(1,473	)			220				31				(2	)			(37	)			567				834				140				239
Commodity contracts			1,298				269				—				—				(14	)			(170	)			(89	)			1,294				104
Other			(11	)			—				—				—				—				—				11				—				—
Total net derivative and other contracts			(1,536	)			549				34				(2	)			(66	)			368				1,138				485				418
Investments:
Principal investments			769				(29	)			2				(8	)			—				(27	)			19				726				(30	)
Other			205				(12	)			—				—				—				—				17				210				(6	)
Total investments			974				(41	)			2				(8	)			—				(27	)			36				936				(36	)
Liabilities at Fair Value
Deposits		$	30			$	1			$	—			$	—			$	5			$	—			$	(3	)		$	31			$	1
Short-term borrowings			—				—				—				—				—				—				2				2				—
Trading liabilities:
Corporate and other debt:
Corporate bonds			6				(1	)			(3	)			2				—				—				7				13				(1	)
Other debt			3				—				—				—				—				—				—				3				—
Total corporate and other debt			9				(1	)			(3	)			2				—				—				7				16				(1	)
Corporate equities			26				2				(2	)			2				—				—				(5	)			19				—
Obligation to return securities received as collateral			—				—				—				1				—				—				—				1				—
Securities sold under agreements to repurchase			150				1				—				—				—				—				—				149				2
Other secured financings			441				(11	)			—				—				—				(2	)			—				450				(11	)
Long-term borrowings			1,929				(88	)			—				—				193				(147	)			(21	)			2,042				(87	)

 

September 2016 Form 10-Q		10

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

$ in millions		Beginning Balance at December 31, 2015				Realized and Unrealized Gains (Losses)				Purchases1				Sales				Issuances				Settlements				Net Transfers				Ending Balance at September 30, 2016				Unrealized Gains (Losses) at September 30, 2016
Assets at Fair Value
Trading assets:
U.S. agency securities		$	—			$	—			$	3			$	(37	)		$	—			$	—			$	42			$	8			$	—
Other sovereign government obligations			4				—				10				(6	)			—				—				4				12				—
Corporate and other debt:
State and municipal securities			19				—				—				(16	)			—				—				1				4				—
Residential mortgage-backed securities			341				(14	)			64				(201	)			—				—				(2	)			188				(13	)
Commercial mortgage-backed securities			72				(17	)			19				(18	)			—				—				8				64				(15	)
Asset-backed securities			25				(4	)			5				(95	)			—				—				81				12				(3	)
Corporate bonds			267				(4	)			146				(276	)			—				—				66				199				(17	)
Collateralized debt and loan obligations			430				9				13				(295	)			—				—				(72	)			85				16
Loans and lending commitments			5,936				(65	)			921				(860	)			—				(986	)			(791	)			4,155				(51	)
Other debt			448				1				92				(35	)			—				—				(260	)			246				65
Total corporate and other debt			7,538				(94	)			1,260				(1,796	)			—				(986	)			(969	)			4,953				(18	)
Corporate equities			433				(57	)			62				(324	)			—				—				222				336				(80	)
Securities received as collateral			1				—				—				—				—				—				—				1				—
Net derivative and other contracts2:
Interest rate contracts			260				257				3				—				(15	)			(59	)			(405	)			41				(156	)
Credit contracts			(844	)			(255	)			1				—				—				155				60				(883	)			(277	)
Foreign exchange contracts			141				(104	)			—				—				—				(224	)			80				(107	)			(102	)
Equity contracts			(2,031	)			334				816				(2	)			(166	)			1,083				106				140				172
Commodity contracts			1,050				377				33				—				(20	)			(312	)			166				1,294				162
Total net derivative and other contracts			(1,424	)			609				853				(2	)			(201	)			643				7				485				(201	)
Investments:
Principal investments			486				(57	)			374				(29	)			—				(67	)			19				726				(58	)
Other			221				(3	)			—				(8	)			—				—				—				210				(5	)
Total investments			707				(60	)			374				(37	)			—				(67	)			19				936				(63	)
Intangible assets			5				—				—				—				—				—				(5	)			—				—
Liabilities at Fair Value
Deposits		$	19			$	(1	)		$	—			$	—			$	15			$	—			$	(4	)		$	31			$	(1	)
Short-term borrowings			1				—				—				—				—				(1	)			2				2				—
Trading liabilities:
Corporate and other debt:
Corporate bonds			—				(3	)			(7	)			32				—				—				(15	)			13				(3	)
Other debt			4				—				(1	)			—				—				—				—				3				—
Total corporate and other debt			4				(3	)			(8	)			32				—				—				(15	)			16				(3	)
Corporate equities			17				4				(37	)			14				—				—				29				19				32
Obligation to return securities received as collateral			1				—				—				—				—				—				—				1				—
Securities sold under agreements to repurchase			151				2				—				—				—				—				—				149				3
Other secured financings			461				(42	)			—				—				69				(44	)			(78	)			450				(42	)
Long-term borrowings			1,987				(103	)			—				—				366				(262	)			(152	)			2,042				91

 

		11		September 2016 Form 10-Q

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

$ in millions		Beginning Balance at June 30, 2015				Realized and Unrealized Gains (Losses)				Purchases1				Sales				Issuances				Settlements				Net Transfers				Ending Balance at September 30, 2015				Unrealized Gains (Losses) at September 30, 2015
Assets at Fair Value
Trading assets:
U.S. agency securities		$	3			$	—			$	—			$	—			$	—			$	—			$	(3	)		$	—			$	—
Other sovereign government obligations			12				—				5				(4	)			—				—				(2	)			11				—
Corporate and other debt:
State and municipal securities			7				5				12				(5	)			—				—				14				33				5
Residential mortgage-backed securities			378				3				59				(55	)			—				—				19				404				4
Commercial mortgage-backed securities			84				(12	)			17				(6	)			—				—				(4	)			79				(12	)
Asset-backed securities			19				—				13				(7	)			—				—				6				31				—
Corporate bonds			479				(25	)			78				(228	)			—				(50	)			(28	)			226				(6	)
Collateralized debt and loan obligations			660				(7	)			80				(188	)			—				—				—				545				(11	)
Loans and lending commitments			5,512				(78	)			939				(156	)			—				(1,229	)			176				5,164				(53	)
Other debt			564				(22	)			9				(4	)			—				(1	)			(16	)			530				(23	)
Total corporate and other debt			7,703				(136	)			1,207				(649	)			—				(1,280	)			167				7,012				(96	)
Corporate equities			486				10				150				(80	)			—				—				9				575				4
Securities received as collateral			3				—				—				(2	)			—				—				—				1				—
Net derivative and other contracts2:
Interest rate contracts			(236	)			(137	)			12				—				(7	)			74				383				89				(66	)
Credit contracts			(989	)			210				—				—				(74	)			86				(38	)			(805	)			219
Foreign exchange contracts			446				42				3				—				—				(327	)			(98	)			66				45
Equity contracts			(2,102	)			309				16				—				(50	)			(187	)			(27	)			(2,041	)			296
Commodity contracts			1,205				238				—				—				—				(11	)			—				1,432				179
Total net derivative and other contracts			(1,676	)			662				31				—				(131	)			(365	)			220				(1,259	)			673
Investments:
Principal investments			581				26				8				(50	)			—				—				(24	)			541				26
Other			300				11				1				—				—				—				—				312				11
Total investments			881				37				9				(50	)			—				—				(24	)			853				37
Intangible assets			6				(1	)			—				—				—				—				—				5				(1	)
Liabilities at Fair Value
Short-term borrowings		$	—			$	(2	)		$	—			$	—			$	4			$	—			$	63			$	69			$	(2	)
Trading liabilities:
Corporate and other debt:
Corporate bonds			15				9				(10	)			23				—				—				—				19				7
Other debt			4				—				—				—				—				—				—				4				—
Total corporate and other debt			19				9				(10	)			23				—				—				—				23				7
Corporate equities			112				72				(50	)			99				—				—				8				97				73
Obligation to return securities received as collateral			3				—				(2	)			—				—				—				—				1				—
Securities sold under agreements to repurchase			154				—				—				—				—				—				—				154				—
Other secured financings			168				2				—				—				187				(12	)			—				341				2
Long-term borrowings			2,221				61				—				—				237				(81	)			146				2,462				64

 

September 2016 Form 10-Q		12

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

$ in millions		Beginning Balance at December 31, 2014				Realized and Unrealized Gains (Losses)				Purchases1				Sales				Issuances				Settlements				Net Transfers				Ending Balance at September 30, 2015				Unrealized Gains (Losses) at September 30, 2015
Assets at Fair Value
Trading assets:
Other sovereign government obligations		$	41			$	(1	)		$	7			$	(31	)		$	—			$	—			$	(5	)		$	11			$	—
Corporate and other debt:
State and municipal securities			—				5				14				(1	)			—				—				15				33				5
Residential mortgage-backed securities			175				28				172				(57	)			—				—				86				404				19
Commercial mortgage-backed securities			96				(17	)			23				(23	)			—				—				—				79				(19	)
Asset-backed securities			76				(1	)			22				(31	)			—				—				(35	)			31				4
Corporate bonds			386				(19	)			155				(218	)			—				(53	)			(25	)			226				(16	)
Collateralized debt and loan obligations			1,152				141				320				(709	)			—				(331	)			(28	)			545				(7	)
Loans and lending commitments			5,874				(34	)			1,860				(95	)			—				(2,461	)			20				5,164				(62	)
Other debt			285				(13	)			30				(14	)			—				(25	)			267				530				—
Total corporate and other debt			8,044				90				2,596				(1,148	)			—				(2,870	)			300				7,012				(76	)
Corporate equities			272				57				437				(199	)			—				—				8				575				67
Securities received as collateral			—				—				1				—				—				—				—				1				—
Net derivative and other contracts2:
Interest rate contracts			(173	)			(37	)			16				—				(22	)			277				28				89				20
Credit contracts			(743	)			(69	)			6				—				(94	)			86				9				(805	)			(89	)
Foreign exchange contracts			151				133				4				—				(1	)			(197	)			(24	)			66				133
Equity contracts			(2,165	)			(76	)			115				—				(279	)			252				112				(2,041	)			(237	)
Commodity contracts			1,146				345				2				—				(112	)			111				(60	)			1,432				420
Total net derivative and other contracts			(1,784	)			296				143				—				(508	)			529				65				(1,259	)			247
Investments:
Principal investments			835				22				20				(109	)			—				(187	)			(40	)			541				—
Other			323				(5	)			2				(6	)			—				—				(2	)			312				—
Total investments			1,158				17				22				(115	)			—				(187	)			(42	)			853				—
Intangible assets			6				—				—				—				—				(1	)			—				5				—
Liabilities at Fair Value
Short-term borrowings		$	—			$	(2	)		$	—			$	—			$	60			$	—			$	7			$	69			$	(2	)
Trading liabilities:
Corporate and other debt:
Corporate bonds			78				6				(25	)			37				—				—				(65	)			19				6
Lending commitments			5				5				—				—				—				—				—				—				5
Other debt			38				—				(1	)			7				—				(39	)			(1	)			4				—
Total corporate and other debt			121				11				(26	)			44				—				(39	)			(66	)			23				11
Corporate equities			45				90				(88	)			128				—				—				102				97				90
Obligation to return securities received as collateral			—				—				—				1				—				—				—				1				—
Securities sold under agreements to repurchase			153				(1	)			—				—				—				—				—				154				—
Other secured financings			149				(5	)			—				—				223				(36	)			—				341				4
Long-term borrowings			1,934				159				—				—				853				(213	)			47				2,462				157

 

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.

 

		13		September 2016 Form 10-Q

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

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.

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

 

		Predominant Valuation Techniques/Significant Unobservable Inputs/Sensitivity		Range (Weighted Averages or Simple Averages/Median)1
$ in millions				At September 30, 2016		At December 31, 2015
Assets at Fair Value
Residential mortgage-backed securities ($188 million and $341 million)
Comparable pricing:		Comparable bond price / (A)		0 to 9 points (6 points)		0 to 75 points (32 points)
Commercial mortgage-backed securities ($64 million and $72 million)
Comparable pricing:		Comparable bond price / (A)		0 to 11 points (2 points)		0 to 9 points (2 points)
Corporate bonds ($199 million and $267 million)
Comparable pricing:		Comparable bond price / (A)		11 to 127 points (75 points)		3 to 119 points (90 points)
Comparable pricing:		EBITDA multiple / (A)				7 to 9 times (8 times)
Option model:		At the money volatility / (C)		6% to 33% (25%)
Structured bond model:		Discount rate / (C)				15% (15%)
Collateralized debt and loan obligations ($85 million and $430 million)
Comparable pricing:		Comparable bond price / (A)		0 to 80 points (44 points)		47 to 103 points (67 points)
Correlation model:		Credit correlation / (B)		23% to 65% (52%)		39% to 60% (49%)
Loans and lending commitments ($4,155 million and $5,936 million)
Corporate loan model:		Credit spread / (C)		471 to 815 bps (633 bps)		250 to 866 bps (531 bps)
Margin loan model:		Volatility skew / (C)(D)		20% to 83% (36%)		14% to 70% (33%)
		Discount rate / (C)(D)		1% to 9% (2%)		1% to 4% (2%)
		Credit spread / (C)(D)				62 to 499 bps (145 bps)
Expected recovery:		Asset coverage / (A)		47% to 99% (85%)
Option model:		Volatility skew / (C)		-1% (-1%)		-1% (-1%)
Comparable pricing:		Comparable loan price / (A)		41 to 100 points (85 points)		35 to 100 points (88 points)
Discounted cash flow:		Implied weighted average cost of capital / (C)(D)		5% (5%)		6% to 8% (7%)
		Capitalization rate / (C)(D)		4% to 10% (4%)		4% to 10% (4%)
Other debt ($246 million and $448 million)
Comparable pricing:		Comparable loan price / (A)		3 to 87 points (69 points)		4 to 84 points (59 points)
Comparable pricing:		Comparable bond price / (A)		7 points (7 points)		8 points (8 points)
Option model:		At the money volatility / (C)(D)		16% to 53% (42%)		16% to 53% (53%)
		Volatility skew / (C)(D)		-1% to 0% (0%)
Margin loan model:		Discount rate / (C)				1% (1%)
Discounted cash flow:		Discount rate / (C)		6% to 12% (11%)
Corporate equities ($336 million and $433 million)
Comparable pricing:		Comparable equity price / (A)		100% (100%)		100% (100%)
Comparable pricing:		Comparable price / (A)				50% to 80% (72%)
Market approach:		EBITDA multiple / (A)				9 times (9 times)

 

September 2016 Form 10-Q		14

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

		Predominant Valuation Techniques/Significant Unobservable Inputs/Sensitivity		Range (Weighted Averages or Simple Averages/Median)1
$ in millions				At September 30, 2016		At December 31, 2015
Net derivative and other contracts2:
Interest rate contracts ($41 million and $260 million)
Option model:		Interest rate - Foreign exchange correlation / (A)(D)		28% to 58% (44% / 43%)
		Interest rate - Foreign exchange correlation / (C)(D)				25% to 62% (43% / 43%)
		Interest rate volatility skew / (A)(D)		31% to 114% (73% / 67%)		29% to 82% (43% / 40%)
		Interest rate quanto correlation / (A)(D)		-10% to 39% (5% / -4%)		-8% to 36% (5% / -6%)
		Interest rate curve correlation / (C)(D)		19% to 95% (72% / 78%)		24% to 95% (60% / 69%)
		Interest rate curve / (C)(D)		1% (1% / 1%)
		Inflation volatility / (C)(D)		23% to 51% (38% / 37%)
		Inflation volatility / (A)(D)				58% (58% / 58%)
		Interest rate - Inflation correlation / (A)(D)				-41% to -39% (-41% /  -41%)
		Interest rate volatility concentration liquidity multiple / (C)(D)				0 to 3 times (2 times)
Credit contracts ($(883) million and $(844) million)
Comparable pricing:		Cash synthetic basis / (C)(D)		5 to 12 points (11 points)		5 to 12 points (9 points)
		Comparable bond price / (C)(D)		0 to 75 points (24 points)		0 to 75 points (24 points)
Correlation model:		Credit correlation / (B)		24% to 83% (46%)		39% to 97% (57%)
Foreign exchange contracts3 ($(107) million and $141 million)
Option model:		Interest rate - Foreign exchange correlation / (A)(D)		28% to 58% (44% / 43%)
		Interest rate - Foreign exchange correlation / (C)(D)				25% to 62% (43% / 43%)
		Interest rate volatility skew / (A)(D)		31% to 114% (73% / 67%)		29% to 82% (43% / 40%)
		Interest rate curve / (A)(D)		0% (0% / 0%)		0% (0% / 0%)
		Interest rate quanto correlation / (A)(D)		-10% to 39% (5% / -4%)
Equity contracts3 ($140 million and $(2,031) million)
Option model:		At the money volatility / (A)(D)				16% to 65% (32%)
		At the money volatility / (C)(D)		6% to 64% (34%)
		Volatility skew / (A)(D)		-4% to 0% (-1%)		-3% to 0% (-1%)
		Equity - Equity correlation / (C)(D)		40% to 96% (71%)		40% to 99% (71%)
		Equity - Foreign exchange correlation / (C)(D)		-70% to 40% (-24%)
		Equity - Foreign exchange correlation / (A)(D)				-60% to -11% (-39%)
		Equity - Interest rate correlation / (C)(D)		-7% to 52% (15% / 7%)		-29% to 50% (16% / 8%)
Commodity contracts ($1,294 million and $1,050 million)
Option model:		Forward power price / (C)(D)		$9 to $95 ($32) per MWh		$3 to $91 ($32) per MWh
		Commodity volatility / (C)(D)		6% to 57% (18%)
		Commodity volatility / (A)(D)				10% to 92% (18%)
		Cross commodity correlation / (C)(D)		43% to 99% (93%)		43% to 99% (93%)

 

		15		September 2016 Form 10-Q

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

		Predominant Valuation Techniques/Significant Unobservable Inputs/Sensitivity		Range (Weighted Averages or Simple Averages/Median)1
$ in millions				At September 30, 2016		At December 31, 2015
Investments:
Principal investments ($726 million and $486 million)
Discounted cash flow:		Implied weighted average cost of capital / (C)(D)		15% to 18% (17%)		16% (16%)
		Exit multiple / (A)(D)		7 to 21 times (6 times)		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:		EBITDA multiple / (A)(D)		6 to 25 times (12 times)		8 to 20 times (11 times)
		Forward capacity price / (A)(D)		$4 to $9 ($7)		$5 to $9 ($7)
Comparable pricing:		Comparable equity price / (A)		75% to 100% (84%)		43% to 100% (81%)
Other ($210 million and $221 million)
Discounted cash flow:		Implied weighted average cost of capital / (C)(D)		9% (9%)		10% (10%)
		Exit multiple / (A)(D)		12 times (12 times)		13 times (13 times)
Market approach:		EBITDA multiple / (A)		6 to 13 times (11 times)		7 to 14 times (12 times)
Comparable pricing:		Comparable equity price / (A)		100% (100%)		100% (100%)
Liabilities at Fair Value
Securities sold under agreements to repurchase ($149 million and $151 million)
Discounted cash flow:		Funding spread / (A)		118 to 122 bps (119 bps)		86 to 116 bps (105 bps)
Other secured financings ($450 million and $461 million)
Option model:		Volatility skew / (C)		-1% (-1%)		-1% (-1%)
Discounted cash flow:		Discount rate / (C)		4% (4%)		4% to 13% (4%)
Discounted cash flow:		Funding spread / (A)		81 to 110 bps (96 bps)		95 to 113 bps (104 bps)
Long-term borrowings ($2,042 million and $1,987 million)
Option model:		At the money volatility / (C)(D)		6% to 40% (33%)		20% to 50% (29%)
		Volatility skew / (C)(D)		-2% to 0% (-1%)
		Volatility skew / (A)(D)				-1% to 0% (-1%)
		Equity - Equity correlation / (A)(D)		41% to 98% (85%)		40% to 97% (77%)
		Equity - Foreign exchange correlation / (C)(D)		-70% to 9% (-37%)		-70% to -11% (-39%)
Option model:		Interest rate - Foreign exchange correlation / (A)(D)		54% (54% / 54%)
		Interest rate volatility skew / (A)(D)		25% (25% / 25%)		50% (50%)
		Equity volatility discount / (C)(D)		7% to 12% (10% / 10%)
		Equity volatility discount / (A)(D)				10% (10%)
Correlation model:		Credit correlation / (B)				40% to 60% (52%)
Comparable pricing:		Comparable equity price / (A)		100% (100%)		100% (100%)

bps—Basis points. A basis point equals 1/100^th of 1%.

Points—Percentage of par

MWh—Megawatt hours.

EBITDA—Earnings before interest, taxes, depreciation and amortization

1.	Amounts represent weighted averages except where simple averages and the median of the inputs are provided when more relevant.

2.

Credit valuation adjustments (“CVA”) and funding valuation adjustments (“FVA”) are included in the balance but excluded from the Valuation Technique(s) and Significant Unobservable Inputs 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.

3.	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.

 

September 2016 Form 10-Q		16

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

 

		17		September 2016 Form 10-Q

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

 

September 2016 Form 10-Q		18

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

 

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

 

		September 30, 2016																Gains (Losses) for the
		Carrying Value1				Fair Value by Level												Three Months Ended				Nine Months Ended				Income Statement Classification
$ in millions						Level 1				Level 2				Level 3				September 30, 2016
Assets
Loans2		$	6,303			$	—			$	3,296			$	3,007			$	111			$	41			Other revenues
Other assets—Other investments3,4			86				—				—				86				(3)				(44)			Other revenues
Other assets—Premises, equipment and software costs5,6			22				—				22				—				(29)				(56)			Other revenues if held for sale, otherwise Other expenses
Intangible assets3,6			—				—				—				—				(2)				(2)			Other expenses
Total assets		$	6,411			$	—			$	3,318			$	3,093			$	77			$	(61)
Liabilities
Other liabilities and accrued expenses2		$	302			$	—			$	236			$	66			$	52			$	98			Other revenues if held for sale, otherwise Other expenses
Total liabilities		$	302			$	—			$	236			$	66			$	52			$	98
		September 30, 2015																Gains (Losses) for the
		Carrying Value1				Fair Value by Level												Three Months Ended				Nine Months Ended				Income Statement Classification
$ in millions						Level 1				Level 2				Level 3				September 30, 2015
Assets
Loans2		$	5,089			$	—			$	3,060			$	2,029			$	12			$	(201)			Other revenues
Other assets—Other investments3			—				—				—				—				—				(2)			Other revenues
Other assets—Premises, equipment and software costs5			—				—				—				—				(2)				(24)			Other revenues if held for sale, otherwise Other expenses
Total assets		$	5,089			$	—			$	3,060			$	2,029			$	10			$	(227)
Liabilities
Other liabilities and accrued expenses2		$	427			$	—			$	365			$	62			$	144			$	171			Other revenues if held for sale, otherwise Other expenses
Total liabilities		$	427			$	—			$	365			$	62			$	144			$	171

 

1.	Carrying values included only those assets that had fair value adjustments during the current quarter and prior year quarter.

2.

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

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

4.

Losses related to Other assets—Other investments included a loss of approximately $35 million for the current year period in connection with the sale of solar investments and impairments of the remaining unsold solar investments accounted for under the equity method. The fair value of these investments was determined based on the sales price.

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

6.	Losses related to Other assets—Premises, equipment and software costs and Intangible assets included an impairment charge of approximately $25 million for the current quarter in connection with an oil terminal facility, to reduce the carrying value to its estimated fair value less costs to sell.

 

		19		September 2016 Form 10-Q

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

Financial Instruments Not Measured at Fair Value

 

		At September 30, 2016								Fair Value by Level
$ in millions		Carrying Value				Fair Value				Level 1				Level 2				Level 3
Financial Assets
Cash and due from banks		$	26,899			$	26,899			$	26,899			$	—			$	—
Interest bearing deposits with banks			15,653				15,653				15,653				—				—
Investment securities—HTM securities			13,224				13,329				4,544				8,785				—
Securities purchased under agreements to resell			90,025				90,030				—				87,033				2,997
Securities borrowed			126,280				126,282				—				126,147				135
Customer and other receivables1			47,203				47,108				—				42,382				4,726
Loans2			92,508				93,806				—				19,969				73,837
Other assets—Cash deposited with clearing organizations or segregated under federal and other regulations or requirements			30,784				30,784				30,784				—				—
Financial Liabilities
Deposits		$	151,783			$	151,903			$	—			$	151,903			$	—
Short-term borrowings			506				506				—				506				—
Securities sold under agreements to repurchase			46,191				46,251				—				43,243				3,008
Securities loaned			16,515				16,525				—				16,525				—
Other secured financings			6,066				6,071				—				4,665				1,406
Customer and other payables1			190,743				190,743				—				190,743				—
Long-term borrowings			125,180				127,326				—				127,268				58

 

		At December 31, 2015								Fair Value by Level
$ in millions		Carrying Value				Fair Value				Level 1				Level 2				Level 3
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 receivables1			41,676				41,576				—				36,752				4,824
Loans2			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 payables1			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 loans measured at fair value on a non-recurring basis.

 

September 2016 Form 10-Q		20

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

4. Derivative Instruments and Hedging Activities

Fair Value, Notional and Offsetting of Derivative Assets and Liabilities

 

		Derivative Assets at September 30, 2016
		Fair Value																Notional
$ in millions		Bilateral OTC				Cleared OTC				Exchange Traded				Total				Bilateral OTC				Cleared OTC				Exchange Traded				Total
Derivatives designated as accounting hedges
Interest rate contracts		$	2,971			$	3,471			$	—			$	6,442			$	33,772			$	69,219			$	—			$	102,991
Foreign exchange contracts			24				—				—				24				3,355				127				—				3,482
Total derivatives designated as accounting hedges			2,995				3,471				—				6,466				37,127				69,346				—				106,473
Derivatives not designated as accounting hedges1
Interest rate contracts			268,198				144,030				208				412,436				3,696,991				5,940,043				2,054,389				11,691,423
Credit contracts			11,977				2,747				—				14,724				389,167				132,408				—				521,575
Foreign exchange contracts			50,749				305				124				51,178				1,753,186				29,605				18,706				1,801,497
Equity contracts			22,739				—				20,682				43,421				358,008				—				291,873				649,881
Commodity contracts			10,543				—				3,059				13,602				66,102				—				87,714				153,816
Other			25				—				—				25				1,548				—				—				1,548
Total derivatives not designated as accounting hedges			364,231				147,082				24,073				535,386				6,265,002				6,102,056				2,452,682				14,819,740
Total gross derivatives2		$	367,226			$	150,553			$	24,073			$	541,852			$	6,302,129			$	6,171,402			$	2,452,682			$	14,926,213
Amounts offset
Counterparty netting			(285,971	)			(146,721	)			(21,035	)			(453,727	)
Cash collateral netting			(52,879	)			(2,161	)			—				(55,040	)
Total derivative assets at fair value included in Trading assets		$	28,376			$	1,671			$	3,038			$	33,085
Amounts not offset3
Financial instruments collateral			(10,464	)			—				—				(10,464	)
Other cash collateral			(174	)			—				—				(174	)
Net exposure		$	17,738			$	1,671			$	3,038			$	22,447

 

		21		September 2016 Form 10-Q

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

		Derivative Liabilities at September 30, 2016
		Fair Value																Notional
$ in millions		Bilateral OTC				Cleared OTC				Exchange Traded				Total				Bilateral OTC				Cleared OTC				Exchange Traded				Total
Derivatives designated as accounting hedges
Interest rate contracts		$	—			$	—			$	—			$	—			$	7			$	27			$	—			$	34
Foreign exchange contracts			309				23				—				332				5,494				694				—				6,188
Total derivatives designated as accounting hedges			309				23				—				332				5,501				721				—				6,222
Derivatives not designated as accounting hedges1
Interest rate contracts			251,071				146,712				206				397,989				3,634,398				5,741,556				876,249				10,252,203
Credit contracts			13,461				2,703				—				16,164				453,893				118,266				—				572,159
Foreign exchange contracts			55,515				374				22				55,911				1,826,734				33,421				13,943				1,874,098
Equity contracts			25,299				—				21,353				46,652				374,098				—				295,580				669,678
Commodity contracts			7,723				—				2,943				10,666				69,764				—				65,585				135,349
Other			76				—				—				76				4,429				—				—				4,429
Total derivatives not designated as accounting hedges			353,145				149,789				24,524				527,458				6,363,316				5,893,243				1,251,357				13,507,916
Total gross derivatives2		$	353,454			$	149,812			$	24,524			$	527,790			$	6,368,817			$	5,893,964			$	1,251,357			$	13,514,138
Amounts offset
Counterparty netting			(285,971	)			(146,721	)			(21,035	)			(453,727	)
Cash collateral netting			(38,445	)			(3,097	)			—				(41,542	)
Total derivative liabilities at fair value included in Trading liabilities		$	29,038			$	(6	)		$	3,489			$	32,521
Amounts not offset3
Financial instruments collateral			(11,922	)			—				(649	)			(12,571	)
Other cash collateral			(13	)			(3	)			—				(16	)
Net exposure		$	17,103			$	(9	)		$	2,840			$	19,934

 

September 2016 Form 10-Q		22

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

		Derivative Assets at December 31, 2015
		Fair Value																Notional
$ in millions		Bilateral OTC				Cleared OTC				Exchange Traded				Total				Bilateral OTC				Cleared OTC				Exchange Traded				Total
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 hedges4
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 derivatives2		$	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 offset3
Financial instruments collateral			(9,190	)			—				—				(9,190	)
Other cash collateral			(9	)			—				—				(9	)
Net exposure		$	15,332			$	1,292			$	2,790			$	19,414

 

		23		September 2016 Form 10-Q

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

		Derivative Liabilities at December 31, 2015
		Fair Value																Notional
$ in millions		Bilateral OTC				Cleared OTC				Exchange Traded				Total				Bilateral OTC				Cleared OTC				Exchange Traded				Total
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 hedges4
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 derivatives2		$	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 offset3
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 $1,714.6 billion and $431.1 billion, respectively. The unsettled fair value on these futures contracts (excluded from this table) of $1,784 million and $55 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: $4.2 billion of derivative assets and $5.0 billion of derivative liabilities at September 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.

 

 

September 2016 Form 10-Q		24

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

 

OTC Derivative Products—Trading Assets

Counterparty Credit Rating and Remaining Maturity of OTC Derivative Assets

 

		Fair Value at September 30, 20161
		Contractual Years to Maturity																Cross-Maturity and Cash Collateral Netting2				Net Exposure Post-cash Collateral				Net Exposure Post- collateral3
$ in millions		Less than 1				1-3				3-5				Over 5
Credit Rating4
AAA		$	167			$	383			$	991			$	4,603			$	(5,361	)		$	783			$	705
AA			2,095				1,847				1,913				13,532				(13,963	)			5,424				3,252
A			7,940				7,561				4,958				28,357				(37,040	)			11,776				6,345
BBB			3,764				3,895				2,825				14,720				(16,747	)			8,457				6,386
Non-investment grade			2,760				2,102				746				3,433				(5,608	)			3,433				2,721
Total		$	16,726			$	15,788			$	11,433			$	64,645			$	(78,719	)		$	29,873			$	19,409

 

		Fair Value at December 31, 20151
$ in millions		Contractual Years to Maturity																Cross-Maturity and Cash Collateral Netting2				Net Exposure Post-cash Collateral				Net Exposure Post- collateral3
		Less than 1				1-3				3-5				Over 5
Credit Rating4
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.

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.

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

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

 

		25		September 2016 Form 10-Q

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

 

September 2016 Form 10-Q		26

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

Credit Ratings of Reference Obligation and Maturities of Credit Protection Sold

 

		At September 30, 2016
		Maximum Potential Payout/Notional																				Fair Value (Asset)/ Liability1
		Years to Maturity
$ in millions		Less than 1				1-3				3-5				Over 5				Total
Single name credit default swaps2
Investment grade		$	92,473			$	81,544			$	41,534			$	12,856			$	228,407			$	(1,438	)
Non-investment grade			40,204				34,089				14,633				1,507				90,433				250
Total single name credit default swaps			132,677				115,633				56,167				14,363				318,840				(1,188	)
Index and basket credit default swaps2
Investment grade			22,936				35,780				25,744				16,044				100,504				(1,003	)
Non-investment grade			52,148				27,175				14,979				12,498				106,800				318
Total index and basket credit default swaps			75,084				62,955				40,723				28,542				207,304				(685	)
Total credit default swaps sold		$	207,761			$	178,588			$	96,890			$	42,905			$	526,144			$	(1,873	)
Other credit contracts			55				18				—				260				333				(9	)
Total credit derivatives and other credit contracts		$	207,816			$	178,606			$	96,890			$	43,165			$	526,477			$	(1,882	)

 

		At December 31, 2015
		Maximum Potential Payout/Notional																				Fair Value (Asset)/ Liability1
		Years to Maturity
$ in millions		Less than 1				1-3				3-5				Over 5				Total
Single name credit default swaps2
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 single name credit default swaps		$	122,597			$	194,728			$	88,186			$	15,295			$	420,806			$	1,980
Index and basket credit default swaps2
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 index and basket credit default swaps		$	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.

 

		27		September 2016 Form 10-Q

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

 

September 2016 Form 10-Q		28

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

Investment Securities in an Unrealized Loss Position

 

		At September 30, 2016
		Less than 12 Months								12 Months or Longer								Total
$ in millions		Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
AFS debt securities
U.S. government and agency securities:
U.S. Treasury securities		$	6,520			$	54			$	—			$	—			$	6,520			$	54
U.S. agency securities			4,485				6				1,961				12				6,446				18
Total U.S. government and agency securities			11,005				60				1,961				12				12,966				72
Corporate and other debt:
Commercial mortgage-backed securities:
Agency			—				—				1,143				26				1,143				26
Non-agency			149				1				649				7				798				8
Auto loan asset-backed securities			99				—				175				—				274				—
Corporate bonds			333				—				142				1				475				1
Collateralized loan obligations			13				—				498				4				511				4
FFELP student loan asset-backed securities			—				—				2,885				80				2,885				80
Total corporate and other debt			594				1				5,492				118				6,086				119
Total AFS debt securities			11,599				61				7,453				130				19,052				191
AFS equity securities			9				6				—				—				9				6
Total AFS securities			11,608				67				7,453				130				19,061				197
HTM securities
U.S. government and agency securities:
U.S. Treasury securities			1,519				20				—				—				1,519				20
U.S. agency securities			450				1				—				—				450				1
Total HTM securities			1,969				21				—				—				1,969				21
Total Investment securities		$	13,577			$	88			$	7,453			$	130			$	21,030			$	218

 

		29		September 2016 Form 10-Q

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

		At December 31, 2015
		Less than 12 Months								12 Months or Longer								Total
$ in millions		Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
AFS 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

 

 

September 2016 Form 10-Q		30

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

 

		31		September 2016 Form 10-Q

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

 

September 2016 Form 10-Q		32

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

 

		33		September 2016 Form 10-Q

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

 

September 2016 Form 10-Q		34

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

Allowance for Credit Losses on Lending Activities

 

$ in millions		Corporate				Consumer				Residential Real Estate				Wholesale Real Estate				Total
Allowance for Loan Losses
Balance at December 31, 2015		$	166			$	5			$	17			$	37			$	225
Gross charge-offs			(15	)			—				—				—				(15	)
Gross recoveries			—				—				—				—				—
Net recoveries/(charge-offs)			(15	)			—				—				—				(15	)
Provision for (release of) loan losses1			120				(2	)			3				8				129
Other2			(52	)			—				—				—				(52	)
Balance at September 30, 2016		$	219			$	3			$	20			$	45			$	287
Allowance for Loan Losses by Impairment Methodology
Inherent		$	142			$	3			$	20			$	45			$	210
Specific			77				—				—				—				77
Total allowance for loan losses at September 30, 2016		$	219			$	3			$	20			$	45			$	287
Loans Evaluated by Impairment Methodology3
Inherent		$	24,425			$	24,717			$	23,534			$	7,616			$	80,292
Specific			367				—				28				—				395
Total loans evaluated at September 30, 2016		$	24,792			$	24,717			$	23,562			$	7,616			$	80,687
Allowance for Lending Commitments
Balance at December 31, 2015		$	180			$	1			$	—			$	4			$	185
Provision for lending commitments1			9				—				—				—				9
Other			(7	)			—				—				—				(7	)
Balance at September 30, 2016		$	182			$	1			$	—			$	4			$	187
Allowance for Lending Commitments by Impairment Methodology
Inherent		$	180			$	1			$	—			$	4			$	185
Specific			2				—				—				—				2
Total allowance for lending commitments at September 30, 2016		$	182			$	1			$	—			$	4			$	187
Lending Commitments Evaluated by Impairment Methodology3
Inherent		$	64,261			$	5,561			$	326			$	536			$	70,684
Specific			76				—				—				—				76
Total lending commitments evaluated at September 30, 2016		$	64,337			$	5,561			$	326			$	536			$	70,760

 

		35		September 2016 Form 10-Q

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Notes to Consolidated Financial Statements (Unaudited)

 

$ in millions		Corporate				Consumer				Residential Real Estate				Wholesale Real Estate				Total
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 losses1			31				—				3				1				35
Other			(11	)			—				—				—				(11	)
Balance at September 30, 2015		$	139			$	2			$	10			$	22			$	173
Allowance for Loan Losses by Impairment Methodology
Inherent		$	134			$	2			$	10			$	22			$	168
Specific			5				—				—				—				5
Total allowance for loan losses at September 30, 2015		$	139			$	2			$	10			$	22			$	173
Loans Evaluated by Impairment Methodology3
Inherent		$	22,426			$	20,447			$	19,615			$	6,577			$	69,065
Specific			93				—				25				—				118
Total loans evaluated at September 30, 2015		$	22,519			$	20,447			$	19,640			$	6,577			$	69,183
Allowance for Lending Commitments
Balance at December 31, 2014		$	147			$	—			$	—			$	2			$	149
Provision for lending commitments1			11				—				—				1				12
Balance at September 30, 2015		$	158			$	—			$	—			$	3			$	161
Allowance for Lending Commitments by Impairment Methodology
Inherent		$	158			$	—			$	—			$	3			$	161
Total allowance for lending commitments at September 30, 2015		$	158			$	—			$	—			$	3			$	161
Lending Commitments Evaluated by Impairment Methodology3
Inherent		$	65,627			$	4,587			$	310			$	446			$	70,970
Specific			128				—				—				—				128
Total lending commitments evaluated at September 30, 2015		$	65,755			$	4,587			$	310			$	446			$	71,098

 

1.	No material provision was recorded for the current quarter and the prior year quarter, respectively.

2.	Amount includes $51 million of allowance related to loans of $413 million that were transferred to loans held for sale during the current year period.

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

 

 

September 2016 Form 10-Q		36

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Notes to Consolidated Financial Statements (Unaudited)

 

 

		37		September 2016 Form 10-Q

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Notes to Consolidated Financial Statements (Unaudited)

 

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 September 30, 2016
$ in millions		Less than 1				1-3				3-5				Over 5				Total
Letters of credit and other financial guarantees obtained to satisfy collateral requirements		$	122			$	1			$	1			$	42			$	166
Investment activities			551				101				33				273				958
Corporate lending commitments1			16,695				22,606				46,098				1,556				86,955
Consumer lending commitments			5,555				2				—				4				5,561
Residential real estate lending commitments			79				43				96				227				445
Wholesale real estate lending commitments			118				328				111				79				636
Forward-starting securities purchased under agreements to resell and securities borrowed2			70,997				—				—				—				70,997
Underwriting commitments			51				—				—				—				51
Total		$	94,168			$	23,081			$	46,339			$	2,181			$	165,769

 

1.	Due to the nature of the Firm’s obligations under the commitments, these amounts include certain commitments participated to third parties of $5.7 billion.

2.	The Firm enters into forward-starting securities purchased under agreements to resell and securities borrowed agreements that primarily settle within three business days of the trade date, and of the total amount at September 30, 2016, $60.3 billion settled within three business days.

 

 

September 2016 Form 10-Q		38

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Notes to Consolidated Financial Statements (Unaudited)

 

Guarantees

Obligations Under Guarantee Arrangements at September 30, 2016

 

		Maximum Potential Payout/Notional																				Carrying Amount (Asset)/ Liability				Collateral/ Recourse
		Years to Maturity
$ in millions		Less than 1				1-3				3-5				Over 5				Total
Credit derivative contracts1		$	207,761			$	178,588			$	96,890			$	42,905			$	526,144			$	(1,873	)		$	—
Other credit contracts			55				18				—				260				333				(9	)			—
Non-credit derivative contracts1			994,398				644,322				269,117				551,899				2,459,736				73,892				—
Standby letters of credit and other financial guarantees issued2			1,177				651				1,480				5,590				8,898				(129	)			6,886
Market value guarantees			52				254				93				13				412				2				6
Liquidity facilities			3,038				—				—				—				3,038				(5	)			5,404
Whole loan sales guarantees			—				—				2				23,359				23,361				8				—
Securitization representations and warranties			—				—				—				60,333				60,333				103				—
General partner guarantees			8				36				52				309				405				50				—

 

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 $0.8 billion due to the nature of the Firm’s obligations under these arrangements.

 

 

		39		September 2016 Form 10-Q

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Notes to Consolidated Financial Statements (Unaudited)

 

 

September 2016 Form 10-Q		40

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Notes to Consolidated Financial Statements (Unaudited)

 

 

		41		September 2016 Form 10-Q

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Notes to Consolidated Financial Statements (Unaudited)

 

 

September 2016 Form 10-Q		42

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Notes to Consolidated Financial Statements (Unaudited)

 

 

		43		September 2016 Form 10-Q

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Notes to Consolidated Financial Statements (Unaudited)

 

Non-consolidated VIEs

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

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

 

		At September 30, 2016
$ in millions		Mortgage- and Asset-Backed Securitizations				Collateralized  Debt Obligations				Municipal      Tender Option Bonds				Other Structured     Financings				Other
VIE assets that the Firm does not consolidate (unpaid principal balance)		$	120,846			$	4,875			$	5,070			$	4,597			$	39,119
Maximum exposure to loss
Debt and equity interests		$	12,505			$	741			$	45			$	1,639			$	5,011
Derivative and other contracts			—				—				3,038				—				46
Commitments, guarantees and other			714				196				—				373				363
Total maximum exposure to loss		$	13,219			$	937			$	3,083			$	2,012			$	5,420
Carrying value of exposure to loss—Assets
Debt and equity interests		$	12,505			$	741			$	12			$	1,248			$	5,011
Derivative and other contracts			—				—				6				—				15
Total carrying value of exposure to loss—Assets		$	12,505			$	741			$	18			$	1,248			$	5,026

 

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

 

September 2016 Form 10-Q		44

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Notes to Consolidated Financial Statements (Unaudited)

 

 

		45		September 2016 Form 10-Q

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Notes to Consolidated Financial Statements (Unaudited)

 

 

September 2016 Form 10-Q		46

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Notes to Consolidated Financial Statements (Unaudited)

 

 

		47		September 2016 Form 10-Q

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Notes to Consolidated Financial Statements (Unaudited)

 

 

September 2016 Form 10-Q		48

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Notes to Consolidated Financial Statements (Unaudited)

 

 

		49		September 2016 Form 10-Q

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Notes to Consolidated Financial Statements (Unaudited)

 

 

September 2016 Form 10-Q		50

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Notes to Consolidated Financial Statements (Unaudited)

 

 

		51		September 2016 Form 10-Q

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Notes to Consolidated Financial Statements (Unaudited)

 

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 by Business Segment

 

		Three Months Ended September 30, 2016
$ in millions		Institutional Securities1,2				Wealth Management2				Investment Management				Intersegment Eliminations				Total
Total non-interest revenues3,4		$	4,436			$	2,996			$	551			$	(77	)		$	7,906
Interest income			980				979				1				(226	)			1,734
Interest expense			863				94				—				(226	)			731
Net interest			117				885				1				—				1,003
Net revenues		$	4,553			$	3,881			$	552			$	(77	)		$	8,909
Income (loss) from continuing operations before income taxes		$	1,383			$	901			$	97			$	—			$	2,381
Provision (benefit) for income taxes			381				337				31				—				749
Income (loss) from continuing operations			1,002				564				66				—				1,632
Income from discontinued operations, net of income taxes			8				—				—				—				8
Net income (loss)			1,010				564				66				—				1,640
Net income (loss) applicable to noncontrolling interests			44				—				(1	)			—				43
Net income (loss) applicable to Morgan Stanley		$	966			$	564			$	67			$	—			$	1,597

 

		Three Months Ended September 30, 2015
$ in millions		Institutional Securities1				Wealth Management				Investment Management				Intersegment Eliminations				Total
Total non-interest revenues3,4		$	3,889			$	2,889			$	278			$	(51	)		$	7,005
Interest income			825				777				—				(151	)			1,451
Interest expense			810				26				4				(151	)			689
Net interest			15				751				(4	)			—				762
Net revenues		$	3,904			$	3,640			$	274			$	(51	)		$	7,767
Income (loss) from continuing operations before income taxes		$	688			$	824			$	(38	)		$	—			$	1,474
Provision (benefit) for income taxes			141				315				(33	)			—				423
Income (loss) from continuing operations			547				509				(5	)			—				1,051
Income (loss) from discontinued operations, net of income taxes			(3	)			—				1				—				(2	)
Net income (loss)			544				509				(4	)			—				1,049
Net income applicable to noncontrolling interests			26				—				5				—				31
Net income (loss) applicable to Morgan Stanley		$	518			$	509			$	(9	)		$	—			$	1,018

 

		Nine Months Ended September 30, 2016
$ in millions		Institutional Securities1,2				Wealth Management2				Investment Management				Intersegment Eliminations				Total
Total non-interest revenues3,4		$	12,577			$	8,815			$	1,610			$	(207	)		$	22,795
Interest income			2,999				2,813				5				(669	)			5,148
Interest expense			2,731				268				3				(669	)			2,333
Net interest			268				2,545				2				—				2,815
Net revenues		$	12,845			$	11,360			$	1,612			$	(207	)		$	25,610
Income from continuing operations before income taxes		$	3,797			$	2,546			$	259			$	—			$	6,602
Provision for income taxes			1,109				973				78				—				2,160
Income from continuing operations			2,688				1,573				181				—				4,442
Income from discontinued operations, net of income taxes			1				—				—				—				1
Net income			2,689				1,573				181				—				4,443
Net income applicable to noncontrolling interests			144				—				(14	)			—				130
Net income applicable to Morgan Stanley		$	2,545			$	1,573			$	195			$	—			$	4,313

 

September 2016 Form 10-Q		52

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Notes to Consolidated Financial Statements (Unaudited)

 

		Nine Months Ended September 30, 2015
$ in millions		Institutional Securities1				Wealth Management				Investment Management				Intersegment Eliminations				Total
Total non-interest revenues3,4		$	14,640			$	9,172			$	1,709			$	(160)			$	25,361
Interest income			2,418				2,296				1				(394)				4,321
Interest expense			2,524				119				16				(394)				2,265
Net interest			(106	)			2,177				(15)				—				2,056
Net revenues		$	14,534			$	11,349			$	1,694			$	(160)			$	27,417
Income from continuing operations before income taxes		$	4,123			$	2,564			$	369			$	—			$	7,056
Provision for income taxes5			658				959				87				—				1,704
Income from continuing operations			3,465				1,605				282				—				5,352
Income (loss) from discontinued operations, net of income taxes			(10	)			—				1				—				(9)
Net income			3,455				1,605				283				—				5,343
Net income applicable to noncontrolling interests			100				—				24				—				124
Net income applicable to Morgan Stanley		$	3,355			$	1,605			$	259			$	—			$	5,219

 

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.

Effective July 1, 2016, the Wealth Management and Institutional Securities business segments entered into an agreement whereby Institutional Securities assumed management of Wealth Management’s fixed income client-driven trading activities and pays fees to Wealth Management based on distribution activity. Prior periods have not been recast for this new inter-segment agreement due to immateriality.

3.

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 net unrealized cumulative performance-based fees (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 $419 million and $422 million at September 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.

4.

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 $26 million for the current quarter and $52 million for the prior year quarter, and $61 million for the current year period and $152 million for the prior year period.

5.	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).

 

 

		53		September 2016 Form 10-Q

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Notes to Consolidated Financial Statements (Unaudited)

 

20. Subsequent Events

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

Common Stock Dividend

On October 19, 2016, the Firm announced that its Board of Directors declared a quarterly dividend per common share of $0.20. The dividend is payable on November 15, 2016 to common shareholders of record on October 31, 2016.

Long-Term Borrowings

Subsequent to September 30, 2016 and through October 31, 2016, long-term borrowings increased by approximately $2.2 billion, net of maturities. This amount includes the issuance of $2.5 billion of senior debt on October 24, 2016 and $3.0 billion of senior debt on October 27, 2016.

 

September 2016 Form 10-Q		54

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Report of Independent Registered Public Accounting Firm

 

 

/s/ Deloitte & Touche LLP

New York, New York

November 2, 2016

 

		55		September 2016 Form 10-Q

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

 

 

September 2016 Form 10-Q		56

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Management’s Discussion and Analysis

 

Executive Summary

Business Segment Financial Information and Other Statistical Data

 

		Three Months Ended September 30,								Nine Months Ended September 30,
$ in millions, except per share amounts		2016				2015				2016				2015
Net revenues by segment
Institutional Securities		$	4,553			$	3,904			$	12,845			$	14,534
Wealth Management			3,881				3,640				11,360				11,349
Investment Management			552				274				1,612				1,694
Intersegment Eliminations			(77	)			(51	)			(207	)			(160	)
Consolidated net revenues		$	8,909			$	7,767			$	25,610			$	27,417
Net revenues by region1
Americas		$	6,624			$	5,652			$	18,914			$	19,359
EMEA			1,236				1,198				3,677				4,396
Asia-Pacific			1,049				917				3,019				3,662
Consolidated net revenues		$	8,909			$	7,767			$	25,610			$	27,417
Income from continuing operations applicable to Morgan Stanley
Institutional Securities		$	958			$	521			$	2,544			$	3,365
Wealth Management			564				509				1,573				1,605
Investment Management			67				(10	)			195				258
Income from continuing operations applicable to Morgan Stanley			1,589				1,020				4,312				5,228
Income (loss) from discontinued operations applicable to Morgan Stanley			8				(2	)			1				(9	)
Net income applicable to Morgan Stanley			1,597				1,018				4,313				5,219
Preferred stock dividend and other			79				79				314				301
Earnings applicable to Morgan Stanley common shareholders		$	1,518			$	939			$	3,999			$	4,918
Earnings per basic common share2		$	0.83			$	0.49			$	2.15			$	2.57
Earnings per diluted common share2			0.81				0.48				2.11				2.51
Effective income tax rate from continuing operations			31.5	%			28.7	%			32.7	%			24.1	%

 

		At September 30, 2016				At December 31, 2015
Capital ratios (Transitional)3
Common Equity Tier 1 capital ratio			16.8%				15.5%
Tier 1 capital ratio			18.9%				17.4%
Total capital ratio			22.0%				20.7%
Tier 1 leverage ratio4			8.3%				8.3%

 

$ in millions, except per share amounts		At September 30, 2016				At December 31, 2015
Loans5		$	92,508			$	85,759
Total assets		$	813,891			$	787,465
Global Liquidity Reserve6		$	197,094			$	203,264
Deposits		$	151,843			$	156,034
Long-term borrowings		$	163,927			$	153,768
Book value per common share7		$	37.11			$	35.24
Worldwide employees			55,256				56,218

EMEA—Europe, Middle East and Africa

1.	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.

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

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

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

5.	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).

6.	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.

7.	Book value per common share equals common shareholders’ equity of $69,629 million at September 30, 2016 and $67,662 million at December 31, 2015 divided by common shares outstanding of 1,876 million at September 30, 2016 and 1,920 million at December 31, 2015.

 

		57		September 2016 Form 10-Q

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Management’s Discussion and Analysis

 

 

September 2016 Form 10-Q		58

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Management’s Discussion and Analysis

 

 

		59		September 2016 Form 10-Q

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Management’s Discussion and Analysis

 

 

September 2016 Form 10-Q		60

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Management’s Discussion and Analysis

 

Return on Equity Target

We are aiming to improve our return to shareholders, and accordingly have established a target return on average common equity, excluding DVA, (“Return on Equity”) to be achieved by 2017, subject to the successful execution of our strategic objectives. For further information on our Return on Equity target and related assumptions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—Return on Equity Target” in Part II, Item 7 of the 2015 Form 10-K.

Business Segments

Substantially all of our operating revenues and operating expenses are directly attributable to the business segments. Certain revenues and expenses have been allocated to each business segment, generally in proportion to its respective net revenues, non-interest expenses or other relevant measures.

As a result of treating certain intersegment transactions as transactions with external parties, we include an Intersegment Eliminations category to reconcile the business segment results to our consolidated results.

Net Revenues and Compensation Expense

For discussions of our net revenues, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Net Revenues” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Net Revenues by Segment” in Part II, Item 7 of the 2015 Form 10-K. For a discussion of our compensation expense, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Compensation Expense” in Part II, Item 7 of the 2015 Form 10-K.

 

		61		September 2016 Form 10-Q

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Management’s Discussion and Analysis

 

 

September 2016 Form 10-Q		62

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Management’s Discussion and Analysis

 

 

		63		September 2016 Form 10-Q

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Management’s Discussion and Analysis

 

 

September 2016 Form 10-Q		64

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Management’s Discussion and Analysis

 

Other

 

•

Other revenues of $243 million were recognized in the current quarter compared with negative revenues of $112 million in the prior year quarter. Other revenues were $385 million in the current year period and $190 million in the prior year period. Results in both current quarter and current year period reflected mark-to-market gains on loans held for sale compared with mark-to-market losses in the comparable prior year periods, partially offset by lower results related to our 40% stake in Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (see Note 8 to the consolidated financial statements in Item 1 for further information). In the current year period, results also reflected an increase in the allowance for losses on loans held for investment.

Non-interest Expenses

Non-interest expenses of $3,170 million in the current quarter and $9,048 million in the current year period decreased from the comparable prior year periods. Results reflected a 20% reduction in Non-compensation expenses, partially offset by a 26% increase in Compensation and benefits expenses in the current quarter. In the current year period, results reflected an 11% reduction in Compensation and benefits expenses and a 15% reduction in Non-compensation expenses.

 

•

Compensation and benefits expenses increased in the current quarter primarily due to an increase in the fair value of investments to which certain deferred compensation plans are referenced and an increase in discretionary incentive compensation driven mainly by higher revenues. Compensation and benefits expenses decreased in the current year period primarily due to a decrease in discretionary incentive compensation driven mainly by lower revenues and a decrease in salaries due to lower headcount, partially offset by an increase in the fair value of investments to which certain deferred compensation plans are referenced.

 

•

Non-compensation expenses decreased in the current quarter and current year period primarily due to lower litigation costs. In the prior year quarter and prior year period, Non-compensation expenses included a reserve for the settlement of a credit default swap (“CDS”) antitrust litigation. For more information on the CDS antitrust litigation, see “Legal Proceedings” in Part I, Item 3 of the 2015 Form 10-K.

Noncontrolling Interests

Noncontrolling interests primarily relate to Mitsubishi UFJ Financial Group, Inc.’s interest in Morgan Stanley MUFG Securities Co., Ltd.

 

		65		September 2016 Form 10-Q

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Management’s Discussion and Analysis

 

 

September 2016 Form 10-Q		66

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Management’s Discussion and Analysis

 

 

		67		September 2016 Form 10-Q

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Management’s Discussion and Analysis

 

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.

 

$ in billions, Fee Rate in bps		At June 30, 2016				Inflows				Outflows				Market Impact				At September 30, 2016				Average for the Three Months Ended September 30, 2016
																						Fee Rate
Separately managed accounts1		$	279			$	8			$	(15	)		$	7			$	279			28
Unified managed accounts			120				17				(5	)			4				136			106
Mutual fund advisory			23				—				(1	)			1				23			121
Representative as advisor			117				10				(7	)			3				123			87
Representative as portfolio manager			265				19				(12	)			6				278			100
Subtotal		$	804			$	54			$	(40	)		$	21			$	839			73
Cash management			16				2				(2	)			—				16			6
Total fee-based client assets		$	820			$	56			$	(42	)		$	21			$	855			72

 

$ in billions, Fee Rate in bps		At June 30, 2015				Inflows				Outflows				Market Impact				At September 30, 2015				Average for the Three Months Ended September 30, 2015
																						Fee Rate
Separately managed accounts1		$	294			$	13			$	(11	)		$	(18	)		$	278			34
Unified managed accounts			103				6				(4	)			(7	)			98			112
Mutual fund advisory			29				—				(1	)			(3	)			25			120
Representative as advisor			120				7				(7	)			(8	)			112			88
Representative as portfolio manager			253				15				(10	)			(16	)			242			103
Subtotal		$	799			$	41			$	(33	)		$	(52	)		$	755			76
Cash management			14				3				(2	)			—				15			6
Total fee-based client assets		$	813			$	44			$	(35	)		$	(52	)		$	770			74

 

$ in billions, Fee Rate in bps		At December 31, 2015				Inflows				Outflows				Market Impact				At September 30, 2016				Average for the Nine Months Ended September 30, 2016
																						Fee Rate
Separately managed accounts1		$	283			$	24			$	(31	)		$	3			$	279			30
Unified managed accounts			105				37				(13	)			7				136			108
Mutual fund advisory			25				1				(5	)			2				23			121
Representative as advisor			115				22				(20	)			6				123			88
Representative as portfolio manager			252				48				(32	)			10				278			101
Subtotal		$	780			$	132			$	(101	)		$	28			$	839			74
Cash management			15				8				(7	)			—				16			6
Total fee-based client assets		$	795			$	140			$	(108	)		$	28			$	855			73

 

$ in billions, Fee Rate in bps		At December 31, 2014				Inflows				Outflows				Market Impact				At September 30, 2015				Average for the Nine Months Ended September 30, 2015
																						Fee Rate
Separately managed accounts1		$	285			$	34			$	(24	)		$	(17	)		$	278			34
Unified managed accounts			93				21				(10	)			(6	)			98			113
Mutual fund advisory			31				1				(5	)			(2	)			25			121
Representative as advisor			119				22				(20	)			(9	)			112			89
Representative as portfolio manager			241				44				(28	)			(15	)			242			104
Subtotal		$	769			$	122			$	(87	)		$	(49	)		$	755			76
Cash management			16				7				(8	)			—				15			6
Total fee-based client assets		$	785			$	129			$	(95	)		$	(49	)		$	770			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.

 

 

September 2016 Form 10-Q		68

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Investment Management

 

		69		September 2016 Form 10-Q

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AUM 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 June 30, 2016				Inflows				Outflows				Distributions				Market Impact				Foreign Currency Impact				At September 30, 2016				Average for the Three Months Ended September 30, 2016
$ in billions, Fee Rate in bps																														Total AUM				Fee Rate
Equity		$	81			$	4			$	(6	)		$	—			$	4			$	—			$	83			$	83				74
Fixed income			61				6				(5	)			—				1				—				63				62				32
Liquidity			149				358				(352	)			—				(1	)			—				154				151				18
Alternative / Other products			115				4				(4	)			(1	)			2				1				117				116				73
Total assets under management or supervision		$	406			$	372			$	(367	)		$	(1	)		$	6			$	1			$	417			$	412				47
Shares of minority stake assets			8																								7				7

 

		At June 30, 2015				Inflows				Outflows				Distributions				Market Impact				Foreign Currency Impact				At September 30, 2015				Average for the Three Months Ended September 30, 2015
$ in billions, Fee Rate in bps																														Total AUM				Fee Rate
Equity		$	96			$	4			$	(10	)		$	—			$	(10	)		$	1			$	81			$	90				69
Fixed income			64				5				(8	)			—				—				—				61				62				32
Liquidity			132				338				(323	)			—				1				—				148				141				9
Alternative / Other products			111				10				(4	)			(1	)			(1	)			(1	)			114				113				79
Total assets under management or supervision		$	403			$	357			$	(345	)		$	(1	)		$	(10	)		$	—			$	404			$	406				45
Shares of minority stake assets			7																								8				8

 

		At December 31, 2015				Inflows				Outflows				Distributions				Market Impact				Foreign Currency Impact				At September 30, 2016				Average for the Nine Months Ended September 30, 2016
$ in billions, Fee Rate in bps																														Total AUM				Fee Rate
Equity		$	83			$	14			$	(18	)		$	—			$	4			$	—			$	83			$	81				72
Fixed income			60				18				(19	)			—				3				1				63				61				32
Liquidity			149				985				(979	)			—				(1	)			—				154				149				18
Alternative / Other products			114				18				(18	)			(2	)			3				2				117				115				76
Total assets under management or supervision		$	406			$	1,035			$	(1,034	)		$	(2	)		$	9			$	3			$	417			$	406				48
Shares of minority stake assets			8																								7				8

 

		At December 31, 2014				Inflows				Outflows				Distributions				Market Impact				Foreign Currency Impact				At September 30, 2015				Average for the Nine Months Ended September 30, 2015
$ in billions, Fee Rate in bps																														Total AUM				Fee Rate
Equity		$	99			$	11			$	(24	)		$	—			$	(5	)		$	—			$	81			$	96				69
Fixed income			65				17				(19	)			—				—				(2	)			61				64				32
Liquidity			128				927				(908	)			—				1				—				148				133				9
Alternative / Other products			111				21				(14	)			(3	)			—				(1	)			114				112				80
Total assets under management or supervision		$	403			$	976			$	(965	)		$	(3	)		$	(4	)		$	(3	)		$	404			$	405				46
Shares of minority stake assets			7																								8				7

bps—Basis points

 

September 2016 Form 10-Q		70

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		71		September 2016 Form 10-Q

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allowance to reflect impairment of these securities, thereby eliminating the concept of a permanent write-down. This update is effective as of January 1, 2020, with early adoption permitted as of January 1, 2019.

 

•

Leases. This accounting update requires lessees to recognize all leases with terms exceeding one year on the balance sheet which results in the recognition of a right of use asset and corresponding lease liability, including for those leases which we currently classify as operating leases. The right of use asset and lease liability will initially be measured using the present value of the remaining rental payments. The accounting for leases where we are the lessor is largely unchanged. This update is effective as of January 1, 2019 with early adoption permitted.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with U.S. GAAP, which require us to make estimates and assumptions (see Note 1 to the consolidated financial statements in Item 1). We believe that of our significant accounting policies (see Note 2 to the consolidated financial statements in Item 8 of the 2015 Form 10-K and Note 2 to the consolidated financial statements in Item 1), the fair value, goodwill and intangible assets, legal and regulatory contingencies and income taxes policies involve a higher degree of judgment and complexity. For a further discussion about our critical accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in Part II, Item 7 of the 2015 Form 10-K.

 

September 2016 Form 10-Q		72

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		73		September 2016 Form 10-Q

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Management’s Discussion and Analysis

 

 

September 2016 Form 10-Q		74

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Management’s Discussion and Analysis

 

 

		75		September 2016 Form 10-Q

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Management’s Discussion and Analysis

 

 

September 2016 Form 10-Q		76

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Management’s Discussion and Analysis

 

 

		77		September 2016 Form 10-Q

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Management’s Discussion and Analysis

 

 

September 2016 Form 10-Q		78

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Management’s Discussion and Analysis

 

 

Minimum Risk-Based Capital Ratios: Transitional Provisions

 

 

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

 

 

		79		September 2016 Form 10-Q

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September 2016 Form 10-Q		80

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Management’s Discussion and Analysis

 

 

		81		September 2016 Form 10-Q

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Management’s Discussion and Analysis

 

 

September 2016 Form 10-Q		82

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Management’s Discussion and Analysis

 

 

		83		September 2016 Form 10-Q

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Management’s Discussion and Analysis

 

 

September 2016 Form 10-Q		84

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		85		September 2016 Form 10-Q

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to the consolidated financial statements in Item 1. For further information on our lending commitments, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Lending Activities” in Item 3.

Effects of Inflation and Changes in Interest and Foreign Exchange Rates

For a discussion of the effects of inflation and changes in interest and foreign exchange rates on our business and financial results and strategies to mitigate potential exposures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Effects of Inflation and Changes in Interest and Foreign Exchange Rates” in Part II, Item 7 of the 2015 Form 10-K.

U.K. Referendum

On June 23, 2016, the U.K. electorate voted to leave the European Union (the “EU”). It is difficult to predict the future of the U.K.’s relationship with the EU, which uncertainty may increase the volatility in the global financial markets in the short- and medium-term. There are several alternative models of relationship that the U.K. might seek to negotiate with the EU, the timeframe for which is uncertain but could take two years or more. The regulatory framework applicable to financial institutions with significant operations in Europe, such as us, is expected to evolve and specific and meaningful information regarding the long-term consequences of the vote is expected to become clearer over time. We will continue to evaluate various courses of action in the context of the development of the U.K.’s withdrawal from the EU and the referendum’s potential impact on our operations. For further information regarding our exposure to the U.K., see also “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Country Risk Exposure” in Part I, Item 3.

 

September 2016 Form 10-Q		86

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

 

		87		September 2016 Form 10-Q

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Risk Disclosures

 

 

September 2016 Form 10-Q		88

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Risk Disclosures

 

 

		89		September 2016 Form 10-Q

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Risk Disclosures

 

 

September 2016 Form 10-Q		90

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Risk Disclosures

 

 

		91		September 2016 Form 10-Q

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Risk Disclosures

 

 

September 2016 Form 10-Q		92

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Risk Disclosures

 

 

		93		September 2016 Form 10-Q

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collateral function. See Note 6 to the consolidated financial statements in Item 1 for additional information about our collateralized transactions.

Country Risk Exposure

Country risk exposure is the risk that events in, or that affect, a foreign country (any country other than the U.S.) might adversely affect us. We actively manage country risk exposure through a comprehensive risk management framework that combines credit and market fundamentals and allows us to effectively identify, monitor and limit country risk. Country risk exposure before and after hedging is monitored and managed. For a further discussion of our country risk exposure see, “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Country Risk Exposure” in Part II, Item 7A of the 2015 Form 10-K.

Our sovereign exposures consist of financial instruments entered into with sovereign and local governments. Our non-sovereign exposures consist of exposures to primarily corporations and financial institutions. The following table shows our 10 largest non-U.S. country risk net exposures at September 30, 2016. Index credit derivatives are included in the country risk exposure table. Each reference entity within an index is allocated to that reference entity’s country of risk. Index exposures are allocated to the underlying reference entities in proportion to the notional weighting of each reference entity in the index, adjusted for any fair value receivable/payable for that reference entity. Where credit risk crosses multiple jurisdictions, for example, a CDS purchased from an issuer in a specific country that references bonds issued by an entity in a different country, the fair value of the CDS is reflected in the Net Counterparty Exposure column based on the country of the CDS issuer. Further, the notional amount of the CDS adjusted for the fair value of the receivable/payable is reflected in the Net Inventory column based on the country of the underlying reference entity.

 

September 2016 Form 10-Q		94

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Risk Disclosures

 

Top Ten Country Exposures at September 30, 2016

 

$ in millions		Net Inventory1				Net Counterparty Exposure2,3				Loans				Lending Commitments				Exposure Before Hedges				Hedges4				Net Exposure5
Country
United Kingdom:
Sovereigns		$	479			$	28			$	—				$            —			$	507			$	(256	)		$	251
Non-sovereigns			824				10,780				2,476				5,751				19,831				(2,126	)			17,705
Total		$	1,303			$	10,808			$	2,476			$	5,751			$	20,338			$	(2,382	)		$	17,956
Brazil:
Sovereigns		$	4,861			$	—			$	—			$	—			$	4,861			$	(11	)		$	4,850
Non-sovereigns			70				370				981				35				1,456				(802	)			654
Total		$	4,931			$	370			$	981			$	35			$	6,317			$	(813	)		$	5,504
Japan:
Sovereigns		$	1,356			$	92			$	—			$	—			$	1,448			$	(82	)		$	1,366
Non-sovereigns			659				2,442				370				—				3,471				(150	)			3,321
Total		$	2,015			$	2,534			$	370			$	—			$	4,919			$	(232	)		$	4,687
France:
Sovereigns		$	1,593			$	—			$	—			$	—			$	1,593			$	—			$	1,593
Non-sovereigns			(51	)			1,890				179				2,343				4,361				(1,369	)			2,992
Total		$	1,542			$	1,890			$	179			$	2,343			$	5,954			$	(1,369	)		$	4,585
Italy:
Sovereigns		$	1,616			$	(12	)		$	—			$	—			$	1,604			$	—			$	1,604
Non-sovereigns			159				491				—				783				1,433				(259	)			1,174
Total		$	1,775			$	479			$	—			$	783			$	3,037			$	(259	)		$	2,778
Canada:
Sovereigns		$	143			$	37			$	—			$	—			$	180			$	—			$	180
Non-sovereigns			(18	)			931				187				1,517				2,617				(345	)			2,272
Total		$	125			$	968			$	187			$	1,517			$	2,797			$	(345	)		$	2,452
Netherlands:
Sovereigns		$	4			$	—			$	—			$	—			$	4			$	(20	)		$	(16	)
Non-sovereigns			442				719				458				1,091				2,710				(371	)			2,339
Total		$	446			$	719			$	458			$	1,091			$	2,714			$	(391	)		$	2,323
Germany:
Sovereigns		$	(368	)		$	325			$	—			$	—			$	(43	)		$	(1,237	)		$	(1,280	)
Non-sovereigns			76				1,334				279				3,565				5,254				(1,760	)			3,494
Total		$	(292	)		$	1,659			$	279			$	3,565			$	5,211			$	(2,997	)		$	2,214
Singapore:
Sovereigns		$	1,651			$	157			$	—			$	—			$	1,808			$	—			$	1,808
Non-sovereigns			58				232				39				30				359				—				359
Total		$	1,709			$	389			$	39			$	30			$	2,167			$	—			$	2,167
China:
Sovereigns		$	189			$	347			$	—			$	—			$	536			$	(651	)		$	(115	)
Non-sovereigns			921				181				872				257				2,231				(10	)			2,221
Total		$	1,110			$	528			$	872			$	257			$	2,767			$	(661	)		$	2,106

 

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 September 30, 2016, gross purchased protection, gross written protection, and net exposures related to single-name and index credit derivatives for those countries were $(117.0) billion, $115.0 billion and $(1.9) 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.

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 September 30, 2016, the benefit of collateral received against counterparty credit exposure was $13.6 billion in Germany, with 99% of collateral consisting of cash and government obligations of France, Belgium and Germany, and $10.7 billion in the U.K. with 97% of collateral consisting of cash and government obligations of the U.K., the U.S. and Italy. The benefit of collateral received against counterparty credit exposure in the other countries totaled approximately $19.6 billion, with collateral primarily consisting of cash and government obligations of Japan and France. These amounts do not include collateral received on secured financing transactions.

4.

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

5.	In addition, at September 30, 2016, we had exposure to these countries for overnight deposits with banks of approximately $9.1 billion.

 

		95		September 2016 Form 10-Q

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September 2016 Form 10-Q		96

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		97		September 2016 Form 10-Q

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Financial Data Supplement (Unaudited) Average Balances and Interest Rates and Net Interest Income

 

		Three Months Ended September 30,
		2016												2015
$ in millions		Average Daily Balance				Interest				Annualized Average Rate				Average Daily Balance				Interest				Annualized Average Rate
Assets
Interest earning assets
Trading assets1:
U.S.		$	117,063			$	452				1.5	%		$	99,151			$	468				1.9	%
Non-U.S.			98,160				74				0.3				107,577				100				0.4
Investment securities:
U.S.			79,948				289				1.4				62,745				211				1.4
Loans:
U.S.			90,628				692				3.0				77,686				552				2.9
Non-U.S.			382				6				6.0				239				8				13.6
Interest bearing deposits with banks:
U.S.			22,327				32				0.7				29,252				20				0.3
Non-U.S.			1,666				(2	)			(0.6	)			922				9				4.0
Securities purchased under agreements to resell and Securities borrowed2:
U.S.			138,420				(58	)			(0.2	)			173,622				(119	)			(0.3	)
Non-U.S.			84,881				(60	)			(0.3	)			85,061				20				0.1
Customer receivables and Other3:
U.S.			48,637				298				2.4				47,779				325				2.8
Non-U.S.			22,162				11				0.2				28,811				(143	)			(2.0	)
Total		$	704,274			$	1,734				1.0	%		$	712,845			$	1,451				0.8	%
Non-interest earning assets			115,451												114,619
Total assets		$	819,725											$	827,464
Liabilities and Equity
Interest bearing liabilities
Deposits:
U.S.		$	151,485			$	7				—	%		$	141,726			$	16				—	%
Non-U.S.			1,551				5				1.3				2,962				1				0.1
Short-term borrowings4:
U.S.			159				—				0.2				1,300				2				0.6
Non-U.S.			275				(3	)			(4.0	)			1,078				5				1.9
Long-term borrowings4:
U.S.			156,718				808				2.0				152,617				900				2.4
Non-U.S.			9,119				9				0.4				7,343				8				0.4
Trading liabilities1:
U.S.			28,217				—				—				30,693				—				—
Non-U.S.			52,606				—				—				55,641				—				—
Securities sold under agreements to repurchase and Securities loaned5:
U.S.			33,361				133				1.6				45,559				116				1.0
Non-U.S.			33,487				95				1.1				33,032				138				1.7
Customer payables and Other6:
U.S.			123,355				(217	)			(0.7	)			112,001				(291	)			(1.1	)
Non-U.S.			60,404				(106	)			(0.7	)			68,251				(206	)			(1.2	)
Total		$	650,737			$	731				0.5			$	652,203			$	689				0.4
Non-interest bearing liabilities and equity			168,988												175,261
Total liabilities and equity		$	819,725											$	827,464
Net interest income and net interest rate spread						$	1,003				0.5	%						$	762				0.4	%

 

September 2016 Form 10-Q		98

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Financial Data Supplement (Unaudited) Average Balances and Interest Rates and Net Interest Income

 

		Nine Months Ended September 30,
		2016												2015
$ in millions		Average Daily Balance				Interest				Annualized Average Rate				Average Daily Balance				Interest				Annualized Average Rate
Assets
Interest earning assets
Trading assets1:
U.S.		$	106,082			$	1,426				1.8	%		$	98,668			$	1,414				1.9	%
Non-U.S.			96,942				225				0.3				113,321				293				0.3
Investment securities:
U.S.			77,989				762				1.3				68,794				650				1.3
Loans:
U.S.			88,566				2,008				3.0				72,306				1,547				2.9
Non-U.S.			429				18				5.6				253				26				13.7
Interest bearing deposits with banks:
U.S.			26,967				111				0.5				22,450				51				0.3
Non-U.S.			1,362				23				2.3				1,000				23				3.1
Securities purchased under agreements to resell and Securities borrowed2:
U.S.			148,918				(184	)			(0.2	)			170,895				(454	)			(0.4	)
Non-U.S.			84,802				(131	)			(0.2	)			83,061				50				0.1
Customer receivables and Other3:
U.S.			47,723				838				2.3				55,778				596				1.4
Non-U.S.			22,209				52				0.3				27,217				125				0.6
Total		$	701,989			$	5,148				1.0	%		$	713,743			$	4,321				0.8	%
Non-interest earning assets			110,603												123,981
Total assets		$	812,592											$	837,724
Liabilities and Equity
Interest bearing liabilities
Deposits:
U.S.		$	153,501			$	33				—	%		$	136,128			$	48				—	%
Non-U.S.			2,097				15				1.0				2,092				3				0.2
Short-term borrowings4:
U.S.			489				1				0.2				1,195				3				0.3
Non-U.S.			490				11				3.1				1,127				13				1.5
Long-term borrowings4:
U.S.			154,293				2,594				2.2				150,227				2,723				2.4
Non-U.S.			8,202				27				0.4				7,686				26				0.5
Trading liabilities1:
U.S.			30,405				—				—				29,551				—				—
Non-U.S.			50,862				—				—				54,176				—				—
Securities sold under agreements to repurchase and Securities loaned5:
U.S.			32,183				424				1.8				58,306				341				0.8
Non-U.S.			29,970				337				1.5				34,941				456				1.7
Customer payables and Other6:
U.S.			124,000				(826	)			(0.9	)			115,150				(1,154	)			(1.3	)
Non-U.S.			60,402				(283	)			(0.6	)			63,739				(194	)			(0.4	)
Total		$	646,894			$	2,333				0.5			$	654,318			$	2,265				0.5
Non-interest bearing liabilities and equity			165,698												183,406
Total liabilities and equity		$	812,592											$	837,724
Net interest income and net interest rate spread						$	2,815				0.5	%						$	2,056				0.3	%

 

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

 

		99		September 2016 Form 10-Q

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Financial Data Supplement (Unaudited) Rate/Volume Analysis

 

Effect of Net Interest Income of Volume and Rate Changes

 

		Three Months Ended September 30, 2016												Nine Months Ended September 30, 2016
		versus     Three Months Ended September 30, 2015												versus Nine Months Ended September 30, 2015
		Increase (decrease) due to change in:												Increase (decrease) due to change in:
$ in millions		Volume				Rate				Net Change				Volume				Rate				Net Change
Interest earning assets
Trading Assets:
U.S.		$	85			$	(101	)		$	(16	)		$	106			$	(94	)		$	12
Non-U.S.			(9	)			(17	)			(26	)			(42	)			(26	)			(68	)
Investment securities:
U.S.			58				20				78				87				25				112
Loans:
U.S.			92				48				140				348				113				461
Non-U.S.			5				(7	)			(2	)			18				(26	)			(8	)
Interest bearing deposits with banks:
U.S.			(5	)			17				12				10				50				60
Non-U.S.			7				(18	)			(11	)			8				(8	)			—
Securities purchased under agreements to resell and Securities borrowed:
U.S.			24				37				61				58				212				270
Non-U.S.			—				(80	)			(80	)			1				(182	)			(181	)
Customer receivables and Other:
U.S.			6				(33	)			(27	)			(86	)			328				242
Non-U.S.			33				121				154				(23	)			(50	)			(73	)
Change in interest income		$	296			$	(13	)		$	283			$	485			$	342			$	827
Interest bearing liabilities
Deposits:
U.S.		$	1			$	(10	)		$	(9	)		$	6			$	(21	)		$	(15	)
Non-U.S.			—				4				4				—				12				12
Short-term borrowings:
U.S.			(2	)			—				(2	)			(2	)			—				(2	)
Non-U.S.			(4	)			(4	)			(8	)			(7	)			5				(2	)
Long-term borrowings:
U.S.			24				(116	)			(92	)			74				(203	)			(129	)
Non-U.S.			2				(1	)			1				2				(1	)			1
Securities sold under agreements to repurchase and Securities loaned:
U.S.			(31	)			48				17				(153	)			236				83
Non-U.S.			2				(45	)			(43	)			(65	)			(54	)			(119	)
Customer payables and Other:
U.S.			(29	)			103				74				(89	)			417				328
Non-U.S.			24				76				100				10				(99	)			(89	)
Change in interest expense		$	(13	)		$	55			$	42			$	(224	)		$	292			$	68
Change in net interest income		$	309			$	(68	)		$	241			$	709			$	50			$	759

 

September 2016 Form 10-Q		100

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Part II—Other Information

Item 1. Legal Proceedings

 

 

		101		September 2016 Form 10-Q

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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 September 30, 2016.

Issuer Purchases of Equity Securities

 

$ in millions, except per share data		Total Number of Shares Purchased				Average Price Paid Per Share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs1				Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
Month #1 (July 1, 2016-July 31, 2016)
Share Repurchase Program2			5,800,000			$	28.96				5,800,000			$	3,332
Employee transactions3			961,220			$	28.60				—				—
Month #2 (August 1, 2016-August 31, 2016)
Share Repurchase Program2			22,510,000			$	29.43				22,510,000			$	2,670
Employee transactions3			37,638			$	29.11				—				—
Month #3 (September 1, 2016-September 30, 2016)
Share Repurchase Program2			13,189,153			$	31.82				13,189,153			$	2,250
Employee transactions3			22,604			$	31.60				—				—
Quarter ended at September 30, 2016
Share Repurchase Program2			41,499,153			$	30.12				41,499,153			$	2,250
Employee transactions3			1,021,462			$	28.68				—				—

 

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 quarter ended September 30, 2016, the Firm repurchased approximately $1.25 billion 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.

 

 

September 2016 Form 10-Q		102

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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: November 2, 2016

 

		103		September 2016 Form 10-Q

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Exhibit Index

Morgan Stanley

Quarter Ended September 30, 2016

 

Exhibit No.		Description
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 November 2, 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 Nine Months Ended September 30, 2016 and 2015, (ii) the Consolidated Statements of Comprehensive Income—Three Months and Nine Months Ended September 30, 2016 and 2015, (iii) the Consolidated Balance Sheets—September 30, 2016 and December 31, 2015, (iv) the Consolidated Statements of Changes in Total Equity—Nine Months Ended September 30, 2016 and 2015, (v) the Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2016 and 2015, and (vi) Notes to Consolidated Financial Statements (unaudited).

 

E-1