Companies: 10,652     total market cap: $140.274 T
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Morgan Stanley
MS
#49
Rank
$294.18 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$185.10
Share price
1.26%
Change (1 day)
36.98%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services๐Ÿ’ฐ Investment
Categories
  1. Morgan Stanley
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2019 Q3

Morgan Stanley - 10-Q quarterly report FY2019 Q3


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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
Commission File Number 1-11758
mslogo.jpg
(Exact Name of Registrant as specified in its charter)
 
 
 
 
 
 
 
 
 
Delaware
1585 Broadway
36-3145972
(212)
761-4000
 
(State or other jurisdiction of
incorporation or organization)
New York,
NY
10036
(I.R.S. Employer Identification No.)
(Registrant’s telephone number, including area code)
(Address of principal executive offices, including zip code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of each class
Trading
Symbol(s)
Name of exchange on
which registered
Common Stock, $0.01 par value
MS
New York Stock Exchange
Depositary Shares, each representing 1/1,000th interest in a share of Floating Rate
MS/PA
New York Stock Exchange
Non-Cumulative Preferred Stock, Series A, $0.01 par value
Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate
MS/PE
New York Stock Exchange
Non-Cumulative Preferred Stock, Series E, $0.01 par value
Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate
MS/PF
New York Stock Exchange
Non-Cumulative Preferred Stock, Series F, $0.01 par value
Depositary Shares, each representing 1/1,000th interest in a share of 6.625%
MS/PG
New York Stock Exchange
Non-Cumulative Preferred Stock, Series G, $0.01 par value
Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate
MS/PI
New York Stock Exchange
Non-Cumulative Preferred Stock, Series I, $0.01 par value
Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate
MS/PK
New York Stock Exchange
Non-Cumulative Preferred Stock, Series K, $0.01 par value
Global Medium-Term Notes, Series A, Fixed Rate Step-Up Senior Notes Due 2026
MS/26C
New York Stock Exchange
of Morgan Stanley Finance LLC (and Registrant’s guarantee with respect thereto)
Market Vectors ETNs due March 31, 2020 (two issuances)
URR/DDR
NYSE Arca, Inc.
Market Vectors ETNs due April 30, 2020 (two issuances)
CNY/INR
NYSE Arca, Inc.
Morgan Stanley Cushing® MLP High Income Index ETNs due March 21, 2031
MLPY
NYSE Arca, Inc.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒     No  ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.          ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No ☒
As of October 31, 2019, there were 1,618,597,895 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.


QUARTERLY REPORT ON FORM 10-Q
For the quarter ended September 30, 2019
Table of Contents
Part
Item
Page
Financial Information
I
 
1
Management’s Discussion and Analysis of Financial Condition and Results of Operations
I
2

1
Introduction
 
 
1
Executive Summary
 
 
2
Business Segments
 
 
7
Supplemental Financial Information and Disclosures
 
 
18
Accounting Development Updates
 
 
18
Critical Accounting Policies
 
 
19
Liquidity and Capital Resources
 
 
19
Balance Sheet
 
 
19
Regulatory Requirements
 
 
24
Quantitative and Qualitative Disclosures about Risk
I
3

30
Market Risk
 
 
30
Credit Risk
 
 
32
Country and Other Risks
 
 
36
Report of Independent Registered Public Accounting Firm
 
 
39
Consolidated Financial Statements and Notes
I
1

40
Consolidated Income Statements (Unaudited)
 
 
40
Consolidated Comprehensive Income Statements (Unaudited)
 
 
41
Consolidated Balance Sheets (Unaudited at September 30, 2019)
 
 
42
Consolidated Statements of Changes in Total Equity (Unaudited)
 
 
43
Consolidated Cash Flow Statements (Unaudited)
 
 
44
Notes to Consolidated Financial Statements (Unaudited)
 
 
45
1.
Introduction and Basis of Presentation
 
 
45
2.
Significant Accounting Policies
 
 
46
3.
Fair Values
 
 
46
4.
Derivative Instruments and Hedging Activities
 
 
55
5.
Investment Securities
 
 
59
6.
Collateralized Transactions
 
 
62
7.
Loans, Lending Commitments and Allowance for Credit Losses
 
 
63
8.
Equity Method Investments
 
 
65
9.
Deposits
 
 
66
10.
Borrowings and Other Secured Financings
 
 
66
11.
Commitments, Leases, Guarantees and Contingencies
 
 
67
12.
Variable Interest Entities and Securitization Activities
 
 
71
13.
Regulatory Requirements
 
 
74
14.
Total Equity
 
 
76
15.
Earnings per Common Share
 
 
78
16.
Interest Income and Interest Expense
 
 
79
17.
Income Taxes
 
 
79
18.
Segment, Geographic and Revenue Information
 
 
80
Financial Data Supplement (Unaudited)
 
 
83
Glossary of Common Acronyms
 
 
85
Other Information
II
 
87
Legal Proceedings
II
1

87
Unregistered Sales of Equity Securities and Use of Proceeds
II
2

87
Controls and Procedures
I
4

87
Exhibits
II
6

87
Exhibit Index
 
 
E- 1
Signatures
 
 
S-1

i

Available Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. The SEC maintains a website, www.sec.gov, that contains annual, quarterly and current reports, proxy and information statements and other information that issuers file electronically with the SEC. Our electronic SEC filings are available to the public at the SEC’s website.
Our website is www.morganstanley.com. You can access our Investor Relations webpage at www.morganstanley.com/about-us-ir. We make available free of charge, on or through our Investor Relations webpage, our Proxy Statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (“Exchange Act”), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. We also make available, through our Investor Relations webpage, via a link to the SEC’s website, statements of beneficial ownership of our equity securities filed by our directors, officers, 10% or greater shareholders and others under Section 16 of the Exchange Act.
You can access information about our corporate governance at www.morganstanley.com/about-us-governance. Our Corporate Governance webpage includes:
 
•
Amended and Restated Certificate of Incorporation;
•
Amended and Restated Bylaws;
•
Charters for our Audit Committee, Compensation, Management Development and Succession Committee, Nominating and Governance Committee, Operations and Technology Committee, and Risk Committee;
•
Corporate Governance Policies;
•
Policy Regarding Corporate Political Activities;
•
Policy Regarding Shareholder Rights Plan;
•
Equity Ownership Commitment;
•
Code of Ethics and Business Conduct;
•
Code of Conduct;
•
Integrity Hotline Information; and
•
Environmental and Social Policies.
Our Code of Ethics and Business Conduct applies to all directors, officers and employees, including our Chief Executive Officer, Chief Financial Officer and Deputy Chief Financial Officer. We will post any amendments to the Code of Ethics and Business Conduct and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange LLC (“NYSE”) on our website. You can request a copy of these documents, excluding exhibits, at no cost, by contacting Investor Relations, 1585 Broadway, New York, NY 10036 (212-761-4000). The information on our website is not incorporated by reference into this report.
 

ii

Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
 
Morgan Stanley is a global financial services firm that maintains significant market positions in each of its business segments—Institutional Securities, Wealth Management and Investment Management. Morgan Stanley, through its subsidiaries and affiliates, provides a wide variety of products and services to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individuals. Unless the context otherwise requires, the terms “Morgan Stanley,” “Firm,” “us,” “we” or “our” mean Morgan Stanley (the “Parent Company”) together with its consolidated subsidiaries. We define the following as part of our consolidated financial statements (“financial statements”): consolidated income statements (“income statements”), consolidated balance sheets (“balance sheets”) and consolidated cash flow statements (“cash flow statements”). See the “Glossary of Common Acronyms” for the definition of certain acronyms used throughout this Form 10-Q.
A description of the clients and principal products and services of each of our business segments is as follows:

Institutional Securities provides investment banking, sales and trading, lending and other services to corporations, governments, financial institutions, and high to ultra-high net worth clients. Investment banking services consist of capital raising and financial advisory services, including services relating to the underwriting of debt, equity and other securities, as well as advice on mergers and acquisitions, restructurings, real estate and project finance. Sales and trading services include sales, financing, prime brokerage and market-making activities in equity and fixed income products, including foreign exchange and commodities. Lending activities include originating corporate loans, commercial mortgage lending, providing secured lending facilities and extending financing to sales and trading customers. Other activities include investments and research.


 
Wealth Management provides a comprehensive array of financial services and solutions to individual investors and small to medium-sized businesses and institutions covering brokerage and investment advisory services; financial and wealth planning services; annuity and insurance products; securities-based lending, residential real estate loans and other lending products; banking and retirement plan services.
Investment Management provides a broad range of investment strategies and products that span geographies, asset classes, and public and private markets to a diverse group of clients across institutional and intermediary channels. Strategies and products include equity, fixed income, liquidity and alternative/other products. Institutional clients include defined benefit/defined contribution plans, foundations, endowments, government entities, sovereign wealth funds, insurance companies, third-party fund sponsors and corporations. Individual clients are served through intermediaries, including affiliated and non-affiliated distributors.
The results of operations in the past have been, and in the future may continue to be, materially affected by competition; risk factors; and legislative, legal and regulatory developments; as well as other factors. These factors also may have an adverse impact on our ability to achieve our strategic objectives. Additionally, the discussion of our results of operations herein may contain forward-looking statements. These statements, which reflect management’s beliefs and expectations, are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of the risks and uncertainties that may affect our future results, see “Forward-Looking Statements,” “Business—Competition,” “Business—Supervision and Regulation,” and “Risk Factors” in the 2018 Form 10-K, and “Liquidity and Capital Resources—Regulatory Requirements” herein.


 
1
September 2019 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
mslogo.jpg

Executive Summary
Overview of Financial Results
Consolidated Results
Net Revenues
($ in millions)
netrevenues19q3.jpg
Net Income Applicable to Morgan Stanley
($ in millions)
netincome19q3.jpg












 


 
Earnings per Common Share1 


          
earningspercommonshare19q3.jpg
1.
For the calculation of basic and diluted EPS, see Note 15 to the financial statements.

•
We reported net revenues of $10,032 million in the quarter ended September 30, 2019 (“current quarter,” or “3Q 2019”), compared with $9,872 million in the quarter ended September 30, 2018 (“prior year quarter,” or “3Q 2018”). For the current quarter, net income applicable to Morgan Stanley was $2,173 million, or $1.27 per diluted common share, compared with $2,112 million or $1.17 per diluted common share, in the prior year quarter.

•
We reported net revenues of $30,562 million in the nine months ended September 30, 2019 (“current year period,” or “YTD 2019”), compared with $31,559 million in the period ended September 30, 2018 (“prior year period,” or “YTD 2018”). For the current year period, net income applicable to Morgan Stanley was $6,803 million, or $3.89 per diluted common share, compared with $7,217 million or $3.92 per diluted common share, in the prior year period.


September 2019 Form 10-Q
2
 
Table of Contents
 
Management’s Discussion and Analysis
mslogo.jpg

Non-interest Expenses1 
($ in millions)

noninterestexpenses19q3.jpg
1.
The percentages on the bars in the chart represent the contribution of compensation and benefits expenses and non-compensation expenses to total non-interest expenses.
 
•
Compensation and benefits expenses of $4,427 million in the current quarter and $13,609 million in the current year period increased 3% from $4,310 million in the prior year quarter and decreased 2% from $13,845 million in the prior year period. In the current quarter, the increase was primarily attributed to higher discretionary incentive compensation and salaries, partially offset by decreases in the fair value of investments to which certain deferred compensation plans are referenced. In the current year period, the decrease was primarily attributed to lower discretionary incentive compensation and the roll-off of certain acquisition-related employee retention loans, partially offset by higher salaries, increases in the fair value of investments to which certain deferred compensation plans are referenced, and higher deferred compensation associated with carried interest.

•
Non-compensation expenses of $2,895 million in the current quarter and $8,385 million in the current year period increased 7% from $2,711 million in the prior year quarter and increased 1% from $8,334 million in the prior year period. The current quarter increase was primarily due to higher litigation costs, volume-related expenses and investments in technology, partially offset by decreases in professional services expenses. In the current year period, investments in technology were partially offset by a decrease in professional services expenses.
 
Income Taxes
The current quarter included intermittent net discrete tax benefits of $89 million primarily associated with the filing of the 2018 federal tax return and the remeasurement of reserves and related interest due to new information with regard to multi-jurisdiction tax examinations. The current year period and prior year period included intermittent net discrete tax benefits of $190 million and $92 million, respectively, primarily associated with the remeasurement of reserves and related interest due to new information with regard to multi-jurisdiction tax examinations and other matters. For further information, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.

 
3
September 2019 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
mslogo.jpg

Selected Financial Information and Other Statistical Data
 
Three Months Ended September 30,
Nine Months Ended September 30,
$ in millions
2019
2018
2019
2018
Net income applicable to
  Morgan Stanley
$
2,173

$
2,112

$
6,803

$
7,217

Preferred stock dividends and other
113

93

376

356

Earnings applicable to
  Morgan Stanley common shareholders
$
2,060

$
2,019

$
6,427

$
6,861

Expense efficiency ratio1
73.0
%
71.1
%
72.0
%
70.3
%
ROE2
11.2
%
11.5
%
11.8
%
13.1
%
ROTCE2
12.9
%
13.2
%
13.5
%
15.1
%
in millions, except per share and employee data
At
September 30,
2019
At
December 31,
2018
GLR3
$
226,923

$
249,735

Loans4
$
125,522

$
115,579

Total assets
$
902,604

$
853,531

Deposits
$
180,738

$
187,820

Borrowings
$
193,659

$
189,662

Common shares outstanding
1,624

1,700

Common shareholders' equity
$
73,862

$
71,726

Tangible common shareholders’ equity2
$
64,512

$
62,879

Book value per common share5
$
45.49

$
42.20

Tangible book value per common share2, 5
$
39.73

$
36.99

Worldwide employees
60,532

60,348

 
At
September 30,
2019
At
December 31,
2018
Capital ratios6
 
 
Common Equity Tier 1 capital
16.3
%
16.9
%
Tier 1 capital
18.5
%
19.2
%
Total capital
20.9
%
21.8
%
Tier 1 leverage
8.2
%
8.4
%
SLR
6.3
%
6.5
%
1.
The expense efficiency ratio represents total non-interest expenses as a percentage of net revenues.
2.
Represents a non-GAAP measure. See “Selected Non-GAAP Financial Information” herein.
3.
For a discussion of the GLR, see “Liquidity and Capital Resources—Liquidity Risk Management Framework—Global Liquidity Reserve” herein.
4.
Amounts include loans held for investment (net of allowance) and loans held for sale but exclude loans at fair value, which are included in Trading assets in the balance sheets (see Note 7 to the financial statements).
5.
Book value per common share and tangible book value per common share equal common shareholders’ equity and tangible common shareholders’ equity, respectively, divided by common shares outstanding.
6.
At September 30, 2019 and December 31, 2018, our risk-based capital ratios are based on the Standardized Approach rules. For a discussion of our capital ratios, see “Liquidity and Capital Resources—Regulatory Requirements” herein.                                

 
Business Segment Results
Net Revenues by Segment1 
($ in millions)

netrevenuessegment19q3.jpg



















September 2019 Form 10-Q
4
 
Table of Contents
 
Management’s Discussion and Analysis
mslogo.jpg

Net Income Applicable to Morgan Stanley by Segment1 
($ in millions)
   
netincomebysegment19q3.jpg
 
1.
The percentages on the bars in the charts represent the contribution of each business segment to the total of the applicable financial category and may not total to 100% due to intersegment eliminations. See Note 18 to the financial statements for details of intersegment eliminations.

 
•
Institutional Securities net revenues of $5,023 million in the current quarter increased 2% from the prior year quarter primarily reflecting higher revenues in Fixed income sales and trading, partially offset by a decrease in Other revenues. Net revenues of $15,332 million in the current year period decreased 8% from the prior year period, primarily reflecting lower revenues from Equity sales and trading and Investment banking.

•
Wealth Management net revenues of $4,358 million in the current quarter and $13,155 million in the current year period were relatively unchanged compared with the prior year periods.

•
Investment Management net revenues of $764 million in the current quarter and $2,407 million in the current year period each increased 17% from the prior year periods. The current quarter results primarily reflected higher Investments and Asset Management revenues. The current year period results increased primarily due to higher Investments revenues.

Net Revenues by Region1, 2 
($ in millions)
netrevenuesbyregion19q3.jpg
1.
For a discussion of how the geographic breakdown of net revenues is determined, see Note 18 to the financial statements.
2.
The percentages on the bars in the charts represent the contribution of each region to the total.

 
5
September 2019 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
mslogo.jpg

Selected Non-GAAP Financial Information
We prepare our financial statements using U.S. GAAP. From time to time, we may disclose certain “non-GAAP financial measures” in this document or in the course of our earnings releases, earnings and other conference calls, financial presentations, Definitive Proxy Statement and otherwise. A “non-GAAP financial measure” excludes, or includes, amounts from the most directly comparable measure calculated and presented in accordance with U.S. GAAP. We consider the non-GAAP financial measures we disclose to be useful to us, analysts, investors and other stakeholders by providing further transparency about, or an alternate means of assessing, our financial condition, operating results or capital adequacy.
These measures are not in accordance with, or a substitute for, U.S. GAAP and may be different from or inconsistent with non-GAAP financial measures used by other companies. Whenever we refer to a non-GAAP financial measure, we will also generally define it or present the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, along with a reconciliation of the differences between the U.S. GAAP financial measure and the non-GAAP financial measure.
The principal non-GAAP financial measures presented in this document are set forth in the following tables.

Reconciliations from U.S. GAAP to Non-GAAP Consolidated Financial Measures
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
$ in millions, except per share data
2019
2018
2019
2018
Net income applicable to Morgan Stanley
$
2,173

$
2,112

$
6,803

$
7,217

Impact of adjustments
(89
)
(4
)
(190
)
(92
)
Adjusted net income applicable to Morgan Stanley—non-GAAP1
$
2,084

$
2,108

$
6,613

$
7,125

Earnings per diluted common share
$
1.27

$
1.17

$
3.89

$
3.92

Impact of adjustments
(0.06
)
—

(0.12
)
(0.05
)
Adjusted earnings per diluted common share—non-GAAP1
$
1.21

$
1.17

$
3.77

$
3.87

Effective income tax rate
18.2
%
24.4
%
19.1
%
21.9
%
Impact of adjustments
3.2
%
0.2
%
2.2
%
0.9
%
Adjusted effective income tax rate—non-GAAP1
21.4
%
24.6
%
21.3
%
22.8
%
 
$ in millions
At
September 30,
2019
At
December 31,
2018
Tangible equity

U.S. GAAP
 
 
Morgan Stanley shareholders' equity
$
82,382

$
80,246

Less: Goodwill and net intangible assets
(9,350
)
(8,847
)
Tangible Morgan Stanley shareholders' equity—non-GAAP
$
73,032

$
71,399

U.S. GAAP
 
 
Common shareholders' equity
$
73,862

$
71,726

Less: Goodwill and net intangible assets
(9,350
)
(8,847
)
Tangible common shareholders' equity—non-GAAP
$
64,512

$
62,879

Consolidated Non-GAAP Financial Measures
 
Average Monthly Balance
 
Three Months Ended September 30,
Nine Months Ended September 30,
$ in millions
2019
2018
2019
2018
Tangible equity
 
 
 
 
Morgan Stanley shareholders' equity
$
81,912

$
78,760

$
81,028

$
78,165

Less: Goodwill and net intangible assets
(9,389
)
(8,970
)
(9,097
)
(9,020
)
Tangible Morgan Stanley shareholders' equity
$
72,523

$
69,790

$
71,931

$
69,145

Common shareholders' equity
$
73,392

$
70,240

$
72,508

$
69,645

Less: Goodwill and net intangible assets
(9,389
)
(8,970
)
(9,097
)
(9,020
)
Tangible common shareholders' equity
$
64,003

$
61,270

$
63,411

$
60,625

 
Three Months Ended
September 30,
Nine Months Ended
September 30,
$ in billions
2019
2018
2019
2018
Average common equity
 
 
 
 
Unadjusted
$
73.4

$
70.2

$
72.5

$
69.6

Adjusted1
73.4

70.2

72.4

69.6

ROE2
 
 
 
 
Unadjusted
11.2
%
11.5
%
11.8
%
13.1
%
Adjusted1, 3
10.7
%
11.5
%
11.5
%
13.0
%
Average tangible common equity
 
 
 
Unadjusted
$
64.0

$
61.3

$
63.4

$
60.6

Adjusted1
64.0

61.3

63.3

60.6

ROTCE2
 
 
 
 
Unadjusted
12.9
%
13.2
%
13.5
%
15.1
%
Adjusted1, 3
12.3
%
13.2
%
13.1
%
14.9
%


September 2019 Form 10-Q
6
 
Table of Contents
 
Management’s Discussion and Analysis
mslogo.jpg

Non-GAAP Financial Measures by Business Segment
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
$ in billions
2019
2018
2019
2018
Pre-tax margin4
 
 
 
 
Institutional Securities
26
%
32
%
28
%
33
%
Wealth Management
28
%
27
%
28
%
27
%
Investment Management
22
%
16
%
22
%
19
%
Consolidated
27
%
29
%
28
%
30
%
Average common equity5
 
 
 
Institutional Securities
$
40.4

$
40.8

$
40.4

$
40.8

Wealth Management
18.2

16.8

18.2

16.8

Investment Management
2.5

2.6

2.5

2.6

Parent Company
12.3

10.0

11.4

9.4

Consolidated average common equity
$
73.4

$
70.2

$
72.5

$
69.6

Average tangible common equity5
 
 
 
Institutional Securities
$
39.9

$
40.1

$
39.9

$
40.1

Wealth Management
10.2

9.2

10.2

9.2

Investment Management
1.5

1.7

1.5

1.7

Parent Company
12.4

10.3

11.8

9.6

Consolidated average tangible common equity
$
64.0

$
61.3

$
63.4

$
60.6

ROE2, 6
 
 
 
 
Institutional Securities
9.8
%
10.3
%
10.8
%
12.8
%
Wealth Management
20.6
%
21.3
%
20.2
%
20.9
%
Investment Management
22.1
%
12.0
%
21.5
%
15.7
%
Consolidated
11.2
%
11.5
%
11.8
%
13.1
%
ROTCE2, 6
 
 
 
 
Institutional Securities
9.9
%
10.4
%
10.9
%
13.0
%
Wealth Management
36.9
%
38.9
%
36.2
%
38.1
%
Investment Management
35.6
%
18.8
%
34.7
%
24.5
%
Consolidated
12.9
%
13.2
%
13.5
%
15.1
%
 
1.
Adjusted amounts exclude net discrete tax provisions (benefits) that are intermittent and include those that are recurring. Provisions or (benefits) related to conversion of employee share-based awards are expected to occur every year and are considered recurring discrete tax items. For further information on the net discrete tax provisions (benefits), see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.
2.
ROE and ROTCE represent annualized net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity and average tangible common equity, respectively. When excluding intermittent net discrete tax provisions (benefits), both the numerator and average denominator are adjusted.
3.
The calculations used in determining our “ROE and ROTCE Targets” referred to in the following section are the Adjusted ROE and Adjusted ROTCE amounts shown in this table.
4.
Pre-tax margin represents income from continuing operations before income taxes as a percentage of net revenues.
5.
Average common equity and average tangible common equity for each business segment are determined using our Required Capital framework (see “Liquidity and Capital Resources—Regulatory Requirements—Attribution of Average Common Equity According to the Required Capital Framework” herein).
6.
The calculation of ROE and ROTCE by segment uses net income applicable to Morgan Stanley by segment less preferred dividends allocated to each segment as a percentage of average common equity and average tangible common equity, respectively, allocated to each segment.

 
Return on Equity and Tangible Common Equity Targets
We have an ROE Target of 10% to 13% and an ROTCE Target of 11.5% to 14.5%.
Our ROE and ROTCE Targets are forward-looking statements that may be materially affected by many factors, including, among other things: macroeconomic and market conditions; legislative and regulatory developments; industry trading and investment banking volumes; equity market levels; interest rate environment; outsized legal expenses or penalties and the ability to maintain a reduced level of expenses; and capital levels. For further information on our ROE and ROTCE Targets and related assumptions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—Return on Equity and Tangible Common Equity Targets” in the 2018 Form 10-K.

Business Segments
Substantially all of our operating revenues and operating expenses are directly attributable to our business segments. Certain revenues and expenses have been allocated to each business segment, generally in proportion to its respective net revenues, non-interest expenses or other relevant measures.
For an overview of the components of our business segments, net revenues, compensation expense and income taxes, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments” in the 2018 Form 10-K.
With respect to Institutional Securities sales and trading activities, Commodities products and Other also includes Trading revenues from managing derivative counterparty credit risk on behalf of clients, in addition to results from the centralized management of our fixed income derivative counterparty exposures.


 
7
September 2019 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
mslogo.jpg

Institutional Securities
Income Statement Information
 
Three Months Ended
September 30,
 
$ in millions
2019
2018
% Change
Revenues
 
 
 
Investment banking
$
1,535

$
1,459

5
 %
Trading
2,533

2,573

(2
)%
Investments
(18
)
96

(119
)%
Commissions and fees
643

589

9
 %
Asset management
100

112

(11
)%
Other
51

244

(79
)%
Total non-interest revenues
4,844

5,073

(5
)%
Interest income
3,112

2,425

28
 %
Interest expense
2,933

2,569

14
 %
Net interest
179

(144
)
N/M

Net revenues
5,023

4,929

2
 %
Compensation and benefits
1,768

1,626

9
 %
Non-compensation expenses
1,948

1,747

12
 %
Total non-interest expenses
3,716

3,373

10
 %
Income from continuing operations before income taxes
1,307

1,556

(16
)%
Provision for income taxes
189

397

(52
)%
Income from continuing operations
1,118

1,159

(4
)%
Income (loss) from discontinued operations, net of income taxes
—

(3
)
100
 %
Net income
1,118

1,156

(3
)%
Net income applicable to noncontrolling interests
45

36

25
 %
Net income applicable to Morgan Stanley
$
1,073

$
1,120

(4
)%
 

 

 
Nine Months Ended
September 30,
 
$ in millions
2019
2018
% Change
Revenues
 
 
 
Investment banking
$
4,158

$
4,671

(11
)%
Trading
8,221

9,344

(12
)%
Investments
257

234

10
 %
Commissions and fees
1,889

2,007

(6
)%
Asset management
310

324

(4
)%
Other
416

548

(24
)%
Total non-interest revenues
15,251

17,128

(11
)%
Interest income
9,457

6,424

47
 %
Interest expense
9,376

6,809

38
 %
Net interest
81

(385
)
121
 %
Net revenues
15,332

16,743

(8
)%
Compensation and benefits
5,376

5,779

(7
)%
Non-compensation expenses
5,591

5,484

2
 %
Total non-interest expenses
10,967

11,263

(3
)%
Income from continuing operations before income taxes
4,365

5,480

(20
)%
Provision for income taxes
703

1,169

(40
)%
Income from continuing operations
3,662

4,311

(15
)%
Income (loss) from discontinued operations, net of income taxes
—

(7
)
100
 %
Net income
3,662

4,304

(15
)%
Net income applicable to noncontrolling interests
97

100

(3
)%
Net income applicable to Morgan Stanley
$
3,565

$
4,204

(15
)%






















September 2019 Form 10-Q
8
 
Table of Contents
 
Management’s Discussion and Analysis
mslogo.jpg

Investment Banking
Investment Banking Revenues
 
Three Months Ended
September 30,
 
$ in millions
2019
2018
% Change
Advisory
$
550

$
510

8
 %
Underwriting:
 
 
 
   Equity
401

441

(9
)%
   Fixed income
584

508

15
 %
Total Underwriting
985

949

4
 %
Total Investment banking
$
1,535

$
1,459

5
 %
 
Nine Months Ended
September 30,
 
$ in millions
2019
2018
% Change
Advisory
$
1,462

$
1,702

(14
)%
Underwriting:
 
 
 
   Equity
1,286

1,403

(8
)%
   Fixed income
1,410

1,566

(10
)%
Total Underwriting
2,696

2,969

(9
)%
Total Investment banking
$
4,158

$
4,671

(11
)%
Investment Banking Volumes
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
$ in billions
2019
2018
2019
2018
Completed mergers and acquisitions1
$
214

$
170

$
580

$
674

Equity and equity-related offerings2, 3
17

15

47

52

Fixed income offerings2, 4
78

68

196

193

Source: Refinitiv (formerly Thomson Reuters Financial & Risk), data as of October 1, 2019. Transaction volumes may not be indicative of net revenues in a given period. In addition, transaction volumes for prior periods may vary from amounts previously reported due to the subsequent withdrawal, change in value, or change in timing of certain transactions.

1.
Includes transactions of $100 million or more. Based on full credit to each of the advisors in a transaction.
2.
Based on full credit for single book managers and equal credit for joint book managers.
3.
Includes Rule 144A issuances and registered public offerings of common stock, convertible securities and rights offerings.
4.
Includes Rule 144A and publicly registered issuances, non-convertible preferred stock, mortgage-backed and asset-backed securities, and taxable municipal debt. Excludes leveraged loans and self-led issuances.
 
Investment banking revenues of $1,535 million in the current quarter increased 5% from the prior year quarter, reflecting higher results in both our underwriting and advisory businesses. Investment banking revenues of $4,158 million in the current year period decreased 11% from the prior year period, reflecting lower results in both our underwriting and advisory businesses.
 
•
Advisory revenues increased in the current quarter primarily reflecting higher volumes of completed M&A activity, partially offset by the effect of lower fee realizations. In the current year period revenues decreased primarily as a result of lower volumes of completed M&A activity.

•
Equity underwriting revenues decreased in the current quarter primarily reflecting lower revenues in initial public offerings and follow-on offerings, partially offset by an increase in convertible issuances. In the current year period, overall volumes were lower, with revenues decreasing primarily in initial public offerings and convertible issuances, partially offset by an increase in secondary block share trades.

•
Fixed income underwriting revenues increased in the current quarter primarily due to higher overall volumes, with higher revenues in non-investment grade bond and investment grade loan issuance fees. In the current year period, fixed income underwriting revenues decreased, primarily in non-investment grade loan issuance fees, reflecting lower loan market volumes.
See “Investment Banking Volumes” herein.
 
Sales and Trading Net Revenues
By Income Statement Line Item
 
Three Months Ended
September 30,
 
$ in millions
2019
2018
% Change
Trading
$
2,533

$
2,573

(2
)%
Commissions and fees
643

589

9
 %
Asset management
100

112

(11
)%
Net interest
179

(144
)
N/M

Total
$
3,455

$
3,130

10
 %
 
Nine Months Ended
September 30,
 
$ in millions
2019
2018
% Change
Trading
$
8,221

$
9,344

(12
)%
Commissions and fees
1,889

2,007

(6
)%
Asset Management
310

324

(4
)%
Net interest
81

(385
)
121
 %
Total
$
10,501

$
11,290

(7
)%

 
9
September 2019 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
mslogo.jpg

By Business
 
Three Months Ended
September 30,
 
 
 
$ in millions
2019
2018
% Change
Equity
$
1,991

$
2,019

(1
)%
Fixed income
1,430

1,179

21
 %
Other
34

(68
)
150
 %
Total
$
3,455

$
3,130

10
 %
 
Nine Months Ended
September 30,
 
 
 
$ in millions
2019
2018
% Change
Equity
$
6,136

$
7,047

(13
)%
Fixed income
4,273

4,441

(4
)%
Other
92

(198
)
146
 %
Total
$
10,501

$
11,290

(7
)%
Sales and Trading Revenues—Equity and Fixed Income
 
Three Months Ended
September 30, 2019
 
 
 
Net
 
$ in millions
Trading
Fees1
Interest2
Total
Financing
$
1,049

$
88

$
(90
)
$
1,047

Execution services
446

564

(66
)
944

Total Equity
$
1,495

$
652

$
(156
)
$
1,991

Total Fixed income
$
1,329

$
90

$
11

$
1,430

 
Three Months Ended
September 30, 2018
 
 
 
Net
 
$ in millions
Trading
Fees1
Interest2
Total
Financing
$
1,097

$
99

$
(141
)
$
1,055

Execution services
554

524

(114
)
964

Total Equity
$
1,651

$
623

$
(255
)
$
2,019

Total Fixed income
$
1,189

$
78

$
(88
)
$
1,179

 
Nine Months Ended
September 30, 2019
 
 
 
Net
 
$ in millions
Trading
Fees1
Interest2
Total
Financing
$
3,249

$
280

$
(500
)
$
3,029

Execution services
1,597

1,671

(161
)
3,107

Total Equity
$
4,846

$
1,951

$
(661
)
$
6,136

Total Fixed income
$
4,200

$
249

$
(176
)
$
4,273

 
Nine Months Ended
September 30, 2018
 
 
 
Net
 
$ in millions
Trading
Fees1
Interest2
Total
Financing
$
3,704

$
295

$
(479
)
$
3,520

Execution services
2,006

1,793

(272
)
3,527

Total Equity
$
5,710

$
2,088

$
(751
)
$
7,047

Total Fixed income
$
4,203

$
244

$
(6
)
$
4,441


1.
Includes Commissions and fees and Asset management revenues.
2.
Includes funding costs, which are allocated to the businesses based on funding usage.
 
As discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Net Revenues by Segment” in the 2018 Form 10-K, we manage each of the sales and trading businesses based on its aggregate net revenues. We provide qualitative commentary in the discussion of results that follow on the key drivers of period over period variances, as the quantitative impact of the various market dynamics typically cannot be disaggregated.
For additional information on total Trading revenues, see the table “Trading Revenues by Product Type” in Note 18 to the financial statements.
Sales and Trading Net Revenues during the Current Quarter
Equity
Equity sales and trading net revenues of $1,991 million in the current quarter were essentially unchanged compared to the prior year quarter.
•
Financing remained consistent with the prior year quarter as lower Trading revenues were offset by higher Net interest revenues.
•
Execution services was relatively unchanged from the prior year quarter, reflecting lower Trading revenues in derivatives products as a result of less favorable inventory management, partially offset by increased client activity. Higher Commissions and fees were driven by higher client activity in cash equities products.
Fixed Income
Fixed income net revenues of $1,430 million in the current quarter were 21% higher than the prior year quarter, primarily driven by higher results in credit products and commodities products and other, partially offset by lower results in global macro products.
 
•
Global macro products revenues decreased in foreign exchange products, partially offset by an increase in rates products. Trading revenues were lower overall, reflecting unfavorable inventory management as a result of a decline in interest rates and movements in foreign exchange volatility, partially offset by higher levels of client activity, including structured transactions.

•
Credit products Trading revenues increased primarily in securitized and corporate credit products due to improved inventory management and higher client activity.

•
Commodities products and Other Trading revenues increased primarily due to gains from counterparty risk management.


September 2019 Form 10-Q
10
 
Table of Contents
 
Management’s Discussion and Analysis
mslogo.jpg

Fixed income Net interest increased compared to the prior year quarter primarily reflecting changes in funding mix.
Other
 
•
Other sales and trading revenues of $34 million in the current quarter increased from the prior year quarter reflecting changes in funding mix, higher gains on economic hedges related to certain of the Firm’s Borrowings and lower losses on hedges associated with corporate loans. Partially offsetting these increases was a decrease in the fair value of investments to which certain deferred compensation plans are referenced.
Sales and Trading Net Revenues during the Current Year Period
Equity
Equity sales and trading net revenues of $6,136 million in the current year period decreased 13% from the prior year period, reflecting lower results in both our financing and execution services businesses.
 
•
Financing decreased from the prior year period, mainly due to lower average client balances and lower realized spreads, primarily reflected in lower Trading revenues.

•
Execution services decreased from the prior year period, reflecting lower Trading revenues as a result of less favorable inventory management in derivatives products. In addition, Commission and fees decreased due to lower client activity in cash equities products.
Fixed Income
Fixed income net revenues of $4,273 million in the current year period were 4% lower than the prior year period, primarily driven by lower results in global macro products, offset by higher results in credit products.
 
•
Global macro products Trading revenues decreased in both foreign exchange and rates products as a result of unfavorable inventory management as a result of a decline in interest rates and movements in foreign exchange volatility, partially offset by higher levels of client activity.

•
Credit products Trading revenues increased primarily in corporate credit and securitized products due to improved inventory management and higher client activity.

•
Commodities products and Other Trading revenues remained relatively unchanged as gains from counterparty risk management were offset by lower client activity in structured transactions within commodities products.
 
Fixed income Net interest decreased compared to the prior year period primarily reflecting changes in funding mix and lower net spreads in securitized products.
Other
 
•
Other sales and trading revenues of $92 million in the current year period increased from the prior year period reflecting lower costs due to changes in funding mix and balance sheet composition and an increase in the in the fair value of investments to which certain deferred compensation plans are referenced, partially offset by higher losses on hedges associated with corporate loans.

Investments, Other Revenues, Non-interest Expenses, and Income Tax Items
Investments
 
•
Net investment losses of $18 million in the current quarter were driven by mark-to-market losses on remaining holdings subsequent to certain investments' initial public offerings, compared with net investment gains of $96 million in the prior year quarter. In the current year period net investment gains of $257 million were higher compared to the prior year period, primarily as a result of realized gains associated with an investment's public offering in the current year period.
Other Revenues
 
•
Other revenues of $51 million in the current quarter decreased from the prior year quarter, primarily as a result of mark-to-market losses on held for sale loans and an increase in the provision for loan losses. Other revenues of $416 million in the current year period decreased from the prior year period, primarily as a result of an increase in the provision for loan losses compared to the prior year period, which included the recovery of a previously charged off loan. Additionally, lower results from certain equity method investments were partially offset by higher mark-to-market gains on held-for-sale loans in the current year period.
Non-interest Expenses
Non-interest expenses of $3,716 million in the current quarter increased from the prior year quarter, reflecting a 9% increase in Compensation and benefits expenses and a 12% increase in Non-compensation expenses. Non-interest expenses of $10,967 million in the current year period decreased from the prior year period, reflecting a 7% decrease in Compensation and benefits expenses and a 2% increase in Non-compensation expenses.
 
•
Compensation and benefits expenses increased in the current quarter primarily due to increases in discretionary incentive compensation driven by higher revenues as well as higher salaries, partially offset by a decrease in the fair value of

 
11
September 2019 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
mslogo.jpg

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

•
Non-compensation expenses increased in the current quarter primarily due to higher litigation costs, volume-related expenses and investments in technology. In the current year period, Non-compensation expenses increased primarily due to investments in technology.
Income Tax Items
The current quarter and current year period included intermittent net discrete tax benefits of $67 million and $168 million, respectively. The prior year period included intermittent net discrete tax benefits of $88 million. For further information, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.


September 2019 Form 10-Q
12
 
Table of Contents
 
Management’s Discussion and Analysis
mslogo.jpg

Wealth Management
Income Statement Information
 
Three Months Ended
September 30,
 
$ in millions
2019
2018
% Change
Revenues
 
 
 
Investment banking
$
118

$
129

(9
)%
Trading
61

160

(62
)%
Commissions and fees
416

409

2
 %
Asset management
2,639

2,573

3
 %
Other
81

58

40
 %
Total non-interest revenues
3,315

3,329

―%

Interest income
1,378

1,412

(2
)%
Interest expense
335

342

(2
)%
Net interest
1,043

1,070

(3
)%
Net revenues
4,358

4,399

(1
)%
Compensation and benefits
2,340

2,415

(3
)%
Non-compensation expenses
780

790

(1
)%
Total non-interest expenses
3,120

3,205

(3
)%
Income from continuing
operations before income taxes
$
1,238

$
1,194

4
 %
Provision for income taxes
276

281

(2
)%
Net income applicable to Morgan Stanley
$
962

$
913

5
 %
 
Nine Months Ended
September 30,
 
$ in millions
2019
2018
% Change
Revenues
 
 
 
Investment banking
$
365

$
383

(5
)%
Trading
525

404

30
 %
Investments
1

3

(67
)%
Commissions and fees
1,250

1,349

(7
)%
Asset management
7,544

7,582

(1
)%
Other
281

195

44
 %
Total non-interest revenues
9,966

9,916

1
 %
Interest income
4,139

4,012

3
 %
Interest expense
950

830

14
 %
Net interest
3,189

3,182

―%

Net revenues
13,155

13,098

―%

Compensation and benefits
7,184

7,221

(1
)%
Non-compensation expenses
2,302

2,366

(3
)%
Total non-interest expenses
9,486

9,587

(1
)%
Income from continuing
operations before income taxes
$
3,669

$
3,511

5
 %
Provision for income taxes
830

808

3
 %
Net income applicable to Morgan Stanley
$
2,839

$
2,703

5
 %




 
Financial Information and Statistical Data
  
 
At
September 30,
2019
At
December 31,
2018
$ in billions, except employee data
Client assets
$
2,565

$
2,303

Fee-based client assets1
$
1,186

$
1,046

Fee-based client assets as a percentage of total client assets
46
%
45
%
Client liabilities2
$
86

$
83

Investment securities portfolio
$
69.8

$
68.6

Loans and lending commitments
$
88.3

$
82.9

Wealth Management representatives
15,553

15,694

 
Three Months Ended
September 30,
  
2019
2018
Per representative:
 
 
Annualized revenues ($ in thousands)3
$
1,118

$
1,125

Client assets ($ in millions)4
$
165

$
159

Fee-based asset flows ($ in billions)5
$
15.5

$
16.2

 
Nine Months Ended
September 30,
  
2019
2018
Per representative:
 
 
Annualized revenues ($ in thousands)3
$
1,121

$
1,114

Client assets ($ in millions)4
$
165

$
159

Fee-based asset flows ($ in billions)5
$
40.1

$
49.7

 
1.
Fee-based client assets represent the amount of assets in client accounts where the fee for services is calculated based on those assets.
2.
Client liabilities include securities-based and tailored lending, residential real estate loans and margin lending.
3.
Revenues per representative equal Wealth Management’s annualized net revenues divided by the average number of representatives.
4.
Client assets per representative equal total period-end client assets divided by period-end number of representatives.
5.
For a description of the Inflows and Outflows included within Fee-based asset flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Wealth Management—Fee-Based Client Assets” in the 2018 Form 10-K. Excludes institutional cash management-related activity.

 
13
September 2019 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
mslogo.jpg

Transactional Revenues
 
Three Months Ended
September 30,
 
$ in millions
2019
2018
% Change
Investment banking
$
118

$
129

(9
)%
Trading
61

160

(62
)%
Commissions and fees
416

409

2
 %
Total
$
595

$
698

(15
)%
Transactional revenues as a % of Net revenues
14
%
16
%
 
 
Nine Months Ended
September 30,
 
$ in millions
2019
2018
% Change
Investment banking
$
365

$
383

(5
)%
Trading
525

404

30
 %
Commissions and fees
1,250

1,349

(7
)%
Total
$
2,140

$
2,136

N/M

Transactional revenues as a % of Net revenues
16
%
16
%
 
Net Revenues
Transactional Revenues
Transactional revenues of $595 million in the current quarter decreased 15% from the prior year quarter primarily as a result of lower Trading revenues. Transactional revenues of $2,140 million in the current year period were relatively unchanged from the prior year period as a result of higher Trading revenues, offset by lower Commissions and fees.
 
•
Investment banking revenues decreased in the current year periods, with lower revenues from structured product issuances, partially offset by higher revenues from closed-end fund issuances.

•
Trading revenues decreased in the current quarter primarily due to losses related to investments associated with certain employee deferred compensation plans. In the current year period, Trading revenues increased primarily due to higher gains in these investments.

•
Commissions and fees in the current quarter remained relatively unchanged. In the current year period, Commissions and fees decreased primarily due to changes in the mix of client activity in equities.
Asset Management
Asset management revenues of $2,639 million in the current quarter increased 3% from the prior year quarter primarily due to higher fee-based assets levels at the beginning of the current quarter due to market appreciation and positive net flows, partially offset by lower average fee rates predominantly driven by shifts in the mix of fee-based client assets and lower mutual fund distribution fees.
 
Asset management revenues of $7,544 million in the current year period decreased 1% from the prior year period primarily due to lower average fee rates predominantly driven by shifts in the mix of fee-based client assets and lower mutual fund distribution fees, partially offset by the effect of positive net flows.
See “Fee-Based Client Assets—Rollforwards” herein.

Other

Other revenues of $81 million in the current quarter and $281 million in the current year period increased 40% and 44%, respectively, from the prior year periods, primarily due to higher realized gains from the AFS securities portfolio.
 
Net Interest
Net interest of $1,043 million in the current quarter decreased due to changes in our funding mix, partially offset by higher balances of and higher interest rates on Investment securities and Loans.
Net interest of $3,189 million in the current year period was marginally higher than prior year period. The impact of higher interest rates on and higher balances of Investment securities and Loans was partially offset by changes in our funding mix and higher prepayment amortization expense related to mortgage-backed securities.

In addition, we centralized certain internal treasury activities as of January 1, 2019, which partially offset Interest income and Interest expense compared with the prior year periods. This impact is expected to continue in future periods. The effect on Net interest income was not significant in the current quarter or the current year period, nor is it expected to be for the full year 2019.
Non-interest Expenses
Non-interest expenses of $3,120 million in the current quarter decreased from the prior year quarter primarily as a result of Compensation and benefits expenses. Non-interest expenses of $9,486 million in the current year period decreased from the prior year period primarily as a result of Non-compensation expenses.
 
•
Compensation and benefits expenses decreased in the current quarter reflecting decreases in the fair value of investments to which certain deferred compensation plans are referenced and the roll-off of certain acquisition-related employee retention loans, partially offset by higher salaries and the formulaic payout to Wealth Management representatives driven by the mix of revenues. Compensation and benefits expenses decreased in the current year period reflecting the roll-off of certain acquisition-related employee retention loans and a lower formulaic payout to Wealth

September 2019 Form 10-Q
14
 
Table of Contents
 
Management’s Discussion and Analysis
mslogo.jpg

Management representatives driven by the mix of revenues, partially offset by higher salaries and increases 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 as a result of lower professional services expenses. In addition, in the current year period, Non-compensation expenses decreased as a result of lower deposit insurance expense.

Fee-Based Client Assets
Rollforwards
$ in billions
At
June 30,
2019
Inflows
Outflows
Market
Impact
At
September 30,
2019
Separately managed1
$
296

$
15

$
(5
)
$
6

$
312

Unified managed2
292

12

(10
)
1

295

Advisor
149

7

(8
)
—

148

Portfolio manager
400

19

(14
)
2

407

Subtotal
$
1,137

$
53

$
(37
)
$
9

$
1,162

Cash management
22

4

(3
)
1

24

Total fee-based client assets
$
1,159

$
57

$
(40
)
$
10

$
1,186

$ in billions
At
June 30,
2018
Inflows
Outflows
Market
Impact
At
September 30,
2018
Separately managed1
$
267

$
14

$
(6
)
$
(3
)
$
272

Unified managed2
279

12

(9
)
5

287

Advisor
149

7

(8
)
5

153

Portfolio manager
367

18

(12
)
13

386

Subtotal
$
1,062

$
51

$
(35
)
$
20

$
1,098

Cash management
22

4

(4
)
—

22

Total fee-based client assets
$
1,084

$
55

$
(39
)
$
20

$
1,120

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

$
38

$
(15
)
$
10

$
312

Unified managed2
257

35

(30
)
33

295

Advisor
137

20

(24
)
15

148

Portfolio manager
353

54

(38
)
38

407

Subtotal
$
1,026

$
147

$
(107
)
$
96

$
1,162

Cash management
20

12

(12
)
4

24

Total fee-based client assets
$
1,046

$
159

$
(119
)
$
100

$
1,186

$ in billions
At
December 31,
2017
Inflows
Outflows
Market
Impact
At
September 30,
2018
Separately managed1
$
252

$
30

$
(15
)
$
5

$
272

Unified managed2
271

36

(25
)
5

287

Advisor
149

22

(22
)
4

153

Portfolio manager
353

55

(31
)
9

386

Subtotal
$
1,025

$
143

$
(93
)
$
23

$
1,098

Cash management
20

14

(12
)
—

22

Total fee-based client assets
$
1,045

$
157

$
(105
)
$
23

$
1,120

 
Average Fee Rates3 
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
Fee rate in bps
2019
2018
2019
2018
Separately managed
15

15

15

16

Unified managed2
99

98

100

99

Advisor
86

84

87

84

Portfolio manager
96

95

95

95

Subtotal
74

75

74

76

Cash management
6

6

6

6

Total fee-based client assets
73

74

73

74

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
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.
2.
Includes Mutual fund advisory accounts. Prior periods have been recast to conform to the current presentation.
3.
The calculation of average fee rates was changed in the current year period to more closely align with the recognition of the related fee revenue. Prior period rates were not changed due to immateriality.
For a description of fee-based client assets and rollforward items in the previous tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Wealth Management—Fee-Based Client Assets” in the 2018 Form 10-K.

 
15
September 2019 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
mslogo.jpg

Investment Management
Income Statement Information
 
Three Months Ended
September 30,
 
$ in millions
2019
2018
% Change
Revenues
 
 
 
Investment banking
$
—

$
—

―%

Trading
2

2

―%

Investments
105

40

163
 %
Commissions and fees
1

—

N/M

Asset management
664

604

10
 %
Other
—

(3
)
100
 %
Total non-interest revenues
772

643

20
 %
Interest income
4

19

(79
)%
Interest expense
12

9

33
 %
Net interest
(8
)
10

(180
)%
Net revenues
764

653

17
 %
Compensation and benefits
319

269

19
 %
Non-compensation expenses
280

282

(1
)%
Total non-interest expenses
599

551

9
 %
Income from continuing operations before income taxes
$
165

$
102

62
 %
Provision for income taxes
27

18

50
 %
Income from continuing operations
138

84

64
 %
Income (loss) from discontinued operations, net of income taxes
—

2

(100
)%
Net income
138

86

60
 %
Net income applicable to noncontrolling interests
—

6

(100
)%
Net income applicable to Morgan Stanley
$
138

$
80

73
 %























 


 
Nine Months Ended
September 30,
 
$ in millions
2019
2018
% Change
Revenues
 
 
 
Investment banking
$
(1
)
$
—

N/M

Trading
(2
)
23

(109
)%
Investments
543

172

N/M

Commissions and fees
1

—

N/M

Asset management
1,893

1,840

3
 %
Other
(6
)
10

(160
)%
Total non-interest revenues
2,428

2,045

19
 %
Interest income
14

37

(62
)%
Interest expense
35

20

75
 %
Net interest
(21
)
17

N/M

Net revenues
2,407

2,062

17
 %
Compensation and benefits
1,049

845

24
 %
Non-compensation expenses
820

827

(1
)%
Total non-interest expenses
1,869

1,672

12
 %
Income from continuing operations before income taxes
$
538

$
390

38
 %
Provision for income taxes
104

73

42
 %
Income from continuing operations
434

317

37
 %
Income (loss) from discontinued operations, net of income taxes
—

2

(100
)%
Net income
434

319

36
 %
Net income applicable to noncontrolling interests
32

8

N/M

Net income applicable to Morgan Stanley
$
402

$
311

29
 %
Net Revenues
Investments
Investments gains of $105 million in the current quarter and $543 million in the current year period compared with $40 million and $172 million, respectively, in the prior year periods. The increase in the current quarter reflects higher carried interest from Asia private equity and multi-manager private equity funds. The increase in the current year period reflects higher carried interest and investment gains from Asia private equity, infrastructure and real estate funds.
Asset Management
Asset management revenues of $664 million in the current quarter and $1,893 million in the current year period increased 10% and 3%, respectively, from the prior year periods primarily as a result of higher average AUM and the recognition of performance fees in the current quarter related to the monetization of a client asset.
See “Assets Under Management or Supervision” herein.

September 2019 Form 10-Q
16
 
Table of Contents
 
Management’s Discussion and Analysis
mslogo.jpg

Non-interest Expenses
Non-interest expenses of $599 million in the current quarter and $1,869 million in the current year period increased 9% and 12%, respectively, from the prior year periods primarily as a result of increased Compensation and benefits expenses.
 
•
Compensation and benefits expenses increased in the current quarter and current year period primarily due to higher deferred compensation associated with carried interest.

•
Non-compensation expenses in the current quarter and current year period were relatively unchanged from the prior year periods.

Assets Under Management or Supervision
Rollforwards
$ in billions
At
June 30,
2019
Inflows
Outflows
Market
Impact
Other
At
September 30,
2019
Equity
$
128

$
10

$
(8
)
$
(4
)
$
—

$
126

Fixed income
71

6

(4
)
2

(1
)
74

Alternative/Other
135

5

(4
)
2

(3
)
135

Long-term AUM subtotal
334

21

(16
)
—

(4
)
335

Liquidity
163

311

(301
)
(1
)
—

172

Total AUM
$
497

$
332

$
(317
)
$
(1
)
$
(4
)
$
507

Shares of minority stake assets
6

 
 
 
 
6

$ in billions
At
June 30,
2018
Inflows
Outflows
Market
Impact
Other
At
September 30,
2018
Equity
$
114

$
10

$
(9
)
$
3

$
(1
)
$
117

Fixed income
69

6

(4
)
—

—

71

Alternative/Other
132

5

(4
)
1

(1
)
133

Long-term AUM subtotal
315

21

(17
)
4

(2
)
321

Liquidity
159

313

(322
)
1

(1
)
150

Total AUM
$
474

$
334

$
(339
)
$
5

$
(3
)
$
471

Shares of minority stake assets
7

 
 
 
 
7

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

$
28

$
(23
)
$
18

$
—

$
126

Fixed income
68

17

(15
)
5

(1
)
74

Alternative/Other
128

17

(14
)
8

(4
)
135

Long-term AUM subtotal
299

62

(52
)
31

(5
)
335

Liquidity
164

965

(956
)
1

(2
)
172

Total AUM
$
463

$
1,027

$
(1,008
)
$
32

$
(7
)
$
507

Shares of minority stake assets
7

 
 
 
 
6

 
$ in billions
At
December 31,
2017
Inflows
Outflows
Market
Impact
Other1
At
September 30,
2018
Equity
$
105

$
30

$
(23
)
$
6

$
(1
)
$
117

Fixed income
73

20

(20
)
(1
)
(1
)
71

Alternative/Other
128

16

(13
)
2

—

133

Long-term AUM subtotal
306

66

(56
)
7

(2
)
321

Liquidity
176

1,013

(1,039
)
2

(2
)
150

Total AUM
$
482

$
1,079

$
(1,095
)
$
9

$
(4
)
$
471

Shares of minority stake assets
7

 
 
 
 
7


1.
Includes the impact of the Mesa West Capital, LLC acquisition.
Average AUM
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
$ in billions
2019
2018
2019
2018
Equity
$
127

$
116

$
120

$
112

Fixed income
73

70

70

72

Alternative/Other
135

133

133

131

Long-term AUM subtotal
335

319

323

315

Liquidity
169

153

166

159

Total AUM
$
504

472

$
489

474

Shares of minority stake assets
6

7

6

7

Average Fee Rates
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
Fee rate in bps
2019
2018
2019
2018
Equity
76

76
76

76
Fixed income
32

33
32

34
Alternative/Other
62

65
65

67
Long-term AUM
61

62
62

62
Liquidity
17

17
17

18
Total AUM
46

47
47

47
For a description of the asset classes and rollforward items in the previous tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Investment Management—Assets Under Management or Supervision” in the 2018 Form 10-K.
 

 
17
September 2019 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
mslogo.jpg

Supplemental Financial Information and
Disclosures
Income Tax Matters
Effective Tax Rate from Continuing Operations
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
$ in millions
2019
2018
2019
2018
U.S. GAAP
18.2
%
24.4
%
19.1
%
21.9
%
Adjusted effective income tax rate—non-GAAP1
21.4
%
24.6
%
21.3
%
22.8
%
Net discrete tax provisions/(benefits)
 
 
Recurring2
$
—

$
—

$
(127
)
$
(164
)
Intermittent3
$
(89
)
$
(4
)
$
(190
)
$
(92
)
 
1.
The adjusted effective income tax rate is a non-GAAP measure that excludes net discrete tax provisions (benefits) that are intermittent and includes those that are recurring ("Recurring"). For further information on non-GAAP measures, see “Selected Non-GAAP Financial Information” herein.
2.
Provisions or (benefits) related to conversion of employee share-based awards are expected to occur every year and are considered Recurring discrete tax items.
3.
Includes all tax provisions (benefits) that have been determined to be discrete, other than Recurring items as defined above.
The current quarter included intermittent net discrete tax benefits primarily associated with the filing of the 2018 federal tax return and the remeasurement of reserves and related interest due to new information with regard to multi-jurisdiction tax examinations. The current year period and prior year period included intermittent net discrete tax benefits primarily associated with the remeasurement of reserves and related interest due to new information with regard to multi-jurisdiction tax examinations and other matters. See Note 17 to the financial statements for further information.
U.S. Bank Subsidiaries
Our U.S. bank subsidiaries, Morgan Stanley Bank N.A. (“MSBNA”) and Morgan Stanley Private Bank, National Association (“MSPBNA”) (collectively, “U.S. Bank Subsidiaries”) accept deposit accounts, provide loans to a variety of customers, from large corporate and institutional clients to high net worth individuals, and invest in securities. The lending activities in the Institutional Securities business segment primarily include loans and lending commitments to corporate clients. The lending activities in the Wealth Management business segment primarily include securities-based lending, which allows clients to borrow money against the value of qualifying securities, and residential real estate loans.
We expect our lending activities to continue to grow through further market penetration of our client base. For a further discussion of our credit risks, see “Quantitative and Qualitative Disclosures about Risk—Credit Risk.” For a further discussion
 
about loans and lending commitments, see Notes 7 and 11 to the financial statements.
U.S. Bank Subsidiaries’ Supplemental Financial Information1 
$ in billions
At
September 30,
2019
At
December 31,
2018
Assets
$
211.0

$
216.9

Investment securities portfolio:
 
 
Investment securities—AFS
44.0

45.5

Investment securities—HTM
26.7

23.7

Total investment securities
$
70.7

$
69.2

Deposits2
$
179.6

$
187.1

Wealth Management Loans
Securities-based lending and other3
$
47.4

$
44.7

Residential real estate
29.2

27.5

Total
$
76.6

$
72.2

Institutional Securities Loans4
Corporate5:
 
 
Corporate relationship and event-driven lending
$
6.9

$
7.4

Secured lending facilities
25.0

17.5

Securities-based lending and other
5.7

6.0

Commercial and residential real estate
9.8

10.5

Total
$
47.4

$
41.4


1.
Amounts exclude transactions between the bank subsidiaries, as well as deposits from the Parent Company and affiliates.
2.
For further information on deposits, see “Liquidity and Capital Resources—Funding Management—Unsecured Financing” herein.
3.
Other loans primarily include tailored lending.
4.
Prior periods have been conformed to the current presentation.
5.
For a further discussion of corporate loans in the Institutional Securities business segment, see “Credit Risk—Institutional Securities Corporate Loans” herein.
Accounting Development Updates
The Financial Accounting Standards Board has issued certain accounting updates that apply to us. Accounting updates not listed below were assessed and either determined to be not applicable or are not expected to have a significant impact on our financial statements.
The following accounting update is currently being evaluated to determine the ultimate impact of adoption:
 
•
Financial Instruments–Credit Losses. This accounting update impacts the impairment model for certain financial assets measured at amortized cost by requiring a CECL methodology to estimate expected credit losses over the entire life of the financial asset, recorded at inception or purchase. CECL will replace the loss model currently applicable to loans held for investment, HTM securities and

September 2019 Form 10-Q
18
 
Table of Contents
 
Management’s Discussion and Analysis
mslogo.jpg

other receivables carried at amortized cost, such as employee loans.

The update also eliminates the concept of other-than-temporary impairment for AFS securities. Impairments on AFS securities will be required to be recognized in earnings through an allowance when the fair value is less than amortized cost and a credit loss exists or the securities are expected to be sold before recovery of amortized cost.
For certain portfolios, we have determined that there are no expected credit losses, for example based on collateral arrangements for lending and financing transactions such as Securities borrowed, Securities purchased under agreements to resell and certain other portfolios. Also, we have a zero loss expectation for certain financial assets based on the credit quality of the borrower or issuer such as U.S. government and agency securities.
We expect the following portfolios to be primarily impacted: employee loans, commercial real estate, corporate and residential real estate. The models we expect to use for these portfolios upon adoption have been validated and approved for use, and during 2019 we are performing the CECL process quarterly in preparation for adoption on January 1, 2020. Based on preliminary analyses and estimates, we do not expect that the increase in the allowance for credit losses, resulting from the adoption of this standard, will be significant to our financial statements. The ultimate impact will depend upon a number of factors, including macroeconomic conditions, forecasts, and our portfolios at the adoption date.
Critical Accounting Policies
Our financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions (see Note 1 to the financial statements). We believe that of our significant accounting policies (see Note 2 to the financial statements in the 2018 Form 10-K and Note 2 to the financial statements), the fair value, goodwill and intangible assets, legal and regulatory contingencies and income taxes policies involve a higher degree of judgment and complexity. For a further discussion about our critical accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the 2018 Form 10-K.

 
Liquidity and Capital Resources
Senior management, with oversight by the Asset/Liability Management Committee and the Board of Directors (“Board”), establishes and maintains our liquidity and capital policies. Through various risk and control committees, senior management reviews business performance relative to these policies, monitors the availability of alternative sources of financing, and oversees the liquidity, interest rate and currency sensitivity of our asset and liability position. Our Treasury department, Firm Risk Committee, Asset/Liability Management Committee, and other committees and control groups assist in evaluating, monitoring and controlling the impact that our business activities have on our balance sheet, liquidity and capital structure. Liquidity and capital matters are reported regularly to the Board and the Risk Committee of the Board.
Balance Sheet
We monitor and evaluate the composition and size of our balance sheet on a regular basis. Our balance sheet management process includes quarterly planning, business-specific thresholds, monitoring of business-specific usage versus key performance metrics and new business impact assessments.
We establish balance sheet thresholds at the consolidated and business segment levels. We monitor balance sheet utilization and review variances resulting from business activity and market fluctuations. On a regular basis, we review current performance versus established thresholds and assess the need to re-allocate our balance sheet based on business unit needs. We also monitor key metrics, including asset and liability size and capital usage.
Total Assets by Business Segment

At September 30, 2019
$ in millions
IS
WM
IM
Total
Assets




Cash and cash equivalents1
$
68,089

$
11,453

$
114

$
79,656

Trading assets at fair value
274,602

54

2,767

277,423

Investment securities
36,020

69,770

—

105,790

Securities purchased under agreements to resell
86,177

7,190

—

93,367

Securities borrowed
132,123

278

—

132,401

Customer and other receivables
44,036

14,830

648

59,514

Loans, net of allowance2
48,952

76,565

5

125,522

Other assets3
13,869

13,073

1,989

28,931

Total assets
$
703,868

$
193,213

$
5,523

$
902,604

   

 
19
September 2019 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
mslogo.jpg

 
At December 31, 2018
$ in millions
IS
WM
IM
Total
Assets
 
 
 
 
Cash and cash equivalents1
$
69,526

$
17,621

$
49

$
87,196

Trading assets at fair value
263,870

60

2,369

266,299

Investment securities
23,273

68,559

—

91,832

Securities purchased under agreements to resell
80,660

17,862

—

98,522

Securities borrowed
116,207

106

—

116,313

Customer and other receivables
35,777

16,865

656

53,298

Loans, net of allowance2
43,380

72,194

5

115,579

Other assets3
13,734

9,125

1,633

24,492

Total assets
$
646,427

$
202,392

$
4,712

$
853,531

IS—Institutional Securities
WM—Wealth Management
IM—Investment Management
1.
Cash and cash equivalents includes Cash and due from banks, Interest bearing deposits with banks and Restricted cash.
2.
Amounts include loans held for investment (net of allowance) and loans held for sale but exclude loans at fair value, which are included in Trading assets in the balance sheets (see Note 7 to the financial statements).
3.
Other assets primarily includes Goodwill and Intangible assets, premises, equipment and software, ROU assets related to leases, other investments, and deferred tax assets.
A substantial portion of total assets consists of liquid marketable securities and short-term receivables arising principally from sales and trading activities in the Institutional Securities business segment. Total assets increased to $903 billion at September 30, 2019 from $854 billion at December 31, 2018, driven by the Institutional Securities business segment. Within Institutional Securities, the primary increases were: Securities borrowed, due to higher period-end client balances within Equity Financing; Investment securities, primarily U.S. Treasuries; Trading assets, primarily other sovereign government obligations and derivatives; and Loan balances. Wealth Management assets were lower primarily due to decreased Securities purchased under agreements to resell as a result of lower Deposits, partially offset by increased Loan balances.
Liquidity Risk Management Framework
The core components of our Liquidity Risk Management Framework are the Required Liquidity Framework, Liquidity Stress Tests and the GLR, which support our target liquidity profile. For a further discussion about the Firm’s Required Liquidity Framework and Liquidity Stress Tests, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management Framework” in the 2018 Form 10-K.
At September 30, 2019 and December 31, 2018, we maintained sufficient liquidity to meet current and contingent funding obligations as modeled in our Liquidity Stress Tests.
 
Global Liquidity Reserve
We maintain sufficient liquidity reserves to cover daily funding needs and to meet strategic liquidity targets sized by the Required Liquidity Framework and Liquidity Stress Tests. For a further discussion of our GLR, 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 the 2018 Form 10-K. For further information on regulatory developments that may impact our GLR, see "Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments" herein.
GLR by Type of Investment
$ in millions
At
September 30,
2019
At
December 31,
2018
Cash deposits with banks1
$
12,026

$
10,441

Cash deposits with central banks1
32,177

36,109

Unencumbered highly liquid securities:
 
 
U.S. government obligations
102,083

119,138

U.S. agency and agency mortgage-backed securities
47,568

41,473

 Non-U.S. sovereign obligations2
30,317

39,869

Other investment grade securities
2,752

2,705

Total
$
226,923

$
249,735

1.
Included in Cash and due from banks and Interest bearing deposits with banks in the balance sheets.
2.
Primarily composed of unencumbered Japanese, U.K., French, German and Brazilian government obligations.
GLR Managed by Bank and Non-Bank Legal Entities
$ in millions
At
September 30,
2019
At
December 31,
2018
Average Daily Balance
Three Months Ended
September 30, 2019
Bank legal entities


Domestic
$
74,227

$
88,809

$
75,436

Foreign
5,412

4,896

5,163

Total Bank legal entities
79,639

93,705

80,599

Non-Bank legal entities


Domestic:



Parent Company
57,882

64,262

58,023

Non-Parent Company
32,121

40,936

34,210

Total Domestic
90,003

105,198

92,233

Foreign
57,281

50,832

54,202

Total Non-Bank legal entities
147,284

156,030

146,435

Total
$
226,923

$
249,735

$
227,034

  

GLR may fluctuate from period to period based on the overall size and composition of our balance sheet, the maturity profile of our unsecured debt and estimates of funding needs in a stressed environment, among other factors.

September 2019 Form 10-Q
20
 
Table of Contents
 
Management’s Discussion and Analysis
mslogo.jpg

Regulatory Liquidity Framework
Liquidity Coverage Ratio
We and our U.S. Bank Subsidiaries are subject to LCR requirements, including a requirement to calculate each entity’s LCR on each business day. The requirements are designed to ensure that banking organizations have sufficient HQLA to cover net cash outflows arising from significant stress over 30 calendar days, thus promoting the short-term resilience of the liquidity risk profile of banking organizations.
The regulatory definition of HQLA is substantially the same as our GLR, with the primary difference being the treatment of certain cash balances and unencumbered securities.
As of September 30, 2019, we and our U.S. Bank Subsidiaries are compliant with the minimum required LCR of 100%. For further information on regulatory developments that may impact our LCR, see "Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments" herein.
HQLA by Type of Asset and LCR
 
Average Daily Balance
Three Months Ended
$ in millions
September 30,
2019
June 30,
2019
HQLA
 
 
Cash deposits with central banks
$
33,053

$
32,552

Securities1
141,806

141,613

Total
$
174,859

$
174,165

LCR
140
%
154
%
 
1.
Primarily includes U.S. Treasuries, U.S. agency mortgage-backed securities, sovereign bonds and investment grade corporate bonds.
The decrease in the LCR in the current quarter is primarily due to higher net outflows related to derivatives and lending commitments.
Net Stable Funding Ratio
The Basel Committee on Banking Supervision (“Basel Committee”) has previously finalized the NSFR framework. In 2016, the U.S. banking agencies issued a proposal to implement the NSFR in the U.S.; however, a final rule has not yet been issued. For an additional discussion of the NSFR, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Liquidity Framework—Net Stable Funding Ratio” in the 2018 Form 10-K.
Funding Management
We manage our funding in a manner that reduces the risk of disruption to our operations. We pursue a strategy of diversification of secured and unsecured funding sources (by product, investor and region) and attempt to ensure that the
 
tenor of our liabilities equals or exceeds the expected holding period of the assets being financed.
We fund our balance sheet on a global basis through diverse sources. These sources include our equity capital, borrowings, securities sold under agreements to repurchase, securities lending, deposits, letters of credit and lines of credit. We have active financing programs for both standard and structured products targeting global investors and currencies.
 
Secured Financing
For a discussion of our secured financing activities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Funding Management—Secured Financing” in the 2018 Form 10-K.
Collateralized Financing Transactions
$ in millions
At
September 30,
2019
At
December 31,
2018
Securities purchased under agreements to resell and Securities borrowed
$
225,768

$
214,835

Securities sold under agreements to repurchase and Securities loaned
$
69,153

$
61,667

Securities received as collateral1
$
7,785

$
7,668

 
Average Daily Balance
Three Months Ended
$ in millions
September 30,
2019
December 31,
2018
Securities purchased under agreements to resell and Securities borrowed
$
223,449

$
213,974

Securities sold under agreements to repurchase and Securities loaned
$
66,446

$
57,677

 
1.
Securities received as collateral are included in Trading assets in the balance sheets.
See Note 2 to the financial statements in the 2018 Form 10-K and Note 6 to the financial statements for more details on collateralized financing transactions.
In addition to the collateralized financing transactions shown in the previous table, we engage in financing transactions collateralized by customer-owned securities, which are segregated in accordance with regulatory requirements. Receivables under these financing transactions, primarily margin loans, are included in Customer and other receivables in the balance sheets, and payables under these financing transactions, primarily to prime brokerage customers, are included in Customer and other payables in the balance sheets. Our risk exposure on these transactions is mitigated by collateral maintenance policies, which limit our credit exposure to customers and liquidity reserves held against this risk exposure.


 
21
September 2019 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
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Unsecured Financing
For a discussion of our unsecured financing activities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Funding Management—Unsecured Financing” in the 2018 Form 10-K.

Deposits
$ in millions
At
September 30,
2019
At
December 31,
2018
Savings and demand deposits:
 
 
Brokerage sweep deposits1
$
116,649

$
141,255

Savings and other
24,695

13,642

Total Savings and demand deposits
141,344

154,897

Time deposits
39,394

32,923

Total
$
180,738

$
187,820

 
1.
Amounts represent balances swept from client brokerage accounts.
Deposits are primarily sourced from our Wealth Management clients and are considered to have stable, low-cost funding characteristics. Total deposits at September 30, 2019 decreased compared with December 31, 2018, primarily driven by a reduction in Brokerage sweep deposits due to client redeployment of cash into investments and client tax payments, partially offset by higher savings and time deposits.
Borrowings by Remaining Maturity at September 30, 20191 
$ in millions
 Parent Company
 Subsidiaries
Total
Original maturities of one year or less
$
—

$
1,297

$
1,297

Original maturities greater than one year
2019
$
3,224

$
1,724

$
4,948

2020
15,942

4,853

20,795

2021
21,310

4,261

25,571

2022
15,983

3,173

19,156

2023
11,766

2,779

14,545

Thereafter
83,535

23,812

107,347

Total
$
151,760

$
40,602

$
192,362

Total Borrowings
$
151,760

$
41,899

$
193,659

Maturities over next 12 months2
 
 
$
23,498

  
1.
Original maturity in the table is generally based on contractual final maturity. For borrowings with put options, remaining maturity represents the earliest put date.
2.
Includes only borrowings with original maturities greater than one year.
Borrowings of $193,659 million as of September 30, 2019 increased modestly when compared with $189,662 million at December 31, 2018.

We believe that accessing debt investors through multiple distribution channels helps provide consistent access to the unsecured markets. In addition, the issuance of borrowings with original maturities greater than one year allows us to reduce reliance on short-term credit sensitive instruments.
 
Borrowings with original maturities greater than one year are generally managed to achieve staggered maturities, thereby mitigating refinancing risk, and to maximize investor diversification through sales to global institutional and retail clients across regions, currencies and product types.
The availability and cost of financing to us can vary depending on market conditions, the volume of certain trading and lending activities, our credit ratings and the overall availability of credit. We also engage in, and may continue to engage in, repurchases of our borrowings in the ordinary course of business.
For further information on Borrowings, see Note 10 to the financial statements.

Credit Ratings

We rely on external sources to finance a significant portion of our daily operations. The cost and availability of financing generally are impacted by our credit ratings, among other things. In addition, our credit ratings can have an impact on certain trading revenues, particularly in those businesses where longer-term counterparty performance is a key consideration, such as OTC derivative transactions, including credit derivatives and interest rate swaps. When determining credit ratings, rating agencies consider company-specific factors, other industry factors such as regulatory or legislative changes and the macroeconomic environment, among other things.

Our credit ratings do not include any uplift from perceived government support from any rating agency given the significant progress of U.S. financial reform legislation and regulations. Some rating agencies have stated that they currently incorporate various degrees of credit rating uplift from non-governmental third-party sources of potential support.
Parent Company and U.S. Bank Subsidiaries' Senior Unsecured Ratings at October 31, 2019
 
Parent Company
  
Short-Term
Debt
Long-Term
Debt
Rating
Outlook
DBRS, Inc.
R-1 (middle)
A (high)
Stable
Fitch Ratings, Inc.
F1
A
Stable
Moody’s Investors Service, Inc.
P-2
A3
Stable
Rating and Investment Information, Inc.
a-1
A-
Positive
S&P Global Ratings
A-2
BBB+
Stable
 
MSBNA
  
Short-Term
Debt
Long-Term
Debt
Rating
Outlook
Fitch Ratings, Inc.
F1
A+
Stable
Moody’s Investors Service, Inc.
P-1
A1
Stable
S&P Global Ratings
A-1
A+
Stable

September 2019 Form 10-Q
22
 
Table of Contents
 
Management’s Discussion and Analysis
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MSPBNA
  
Short-Term
Debt
Long-Term
Debt
Rating
Outlook
Moody’s Investors Service, Inc.
P-1
A1
Stable
S&P Global Ratings
A-1
A+
Stable
Incremental Collateral or Terminating Payments
In connection with certain OTC derivatives and certain other agreements where we are a liquidity provider to certain financing vehicles associated with the Institutional Securities business segment, we may be required to provide additional collateral, immediately settle any outstanding liability balances with certain counterparties or pledge additional collateral to certain clearing organizations in the event of a future credit rating downgrade irrespective of whether we are in a net asset or net liability position. See Note 4 to the financial statements for additional information on OTC derivatives that contain such contingent features.
While certain aspects of a credit rating downgrade are quantifiable pursuant to contractual provisions, the impact it would have on our business and results of operations in future periods is inherently uncertain and would depend on a number of interrelated factors, including, among other things, the magnitude of the downgrade, the rating relative to peers, the rating assigned by the relevant agency pre-downgrade, individual client behavior and future mitigating actions we might take. The liquidity impact of additional collateral requirements is included in our Liquidity Stress Tests.
Capital Management
We view capital as an important source of financial strength and actively manage our consolidated capital position based upon, among other things, business opportunities, risks, capital availability and rates of return together with internal capital policies, regulatory requirements and rating agency guidelines. In the future, we may expand or contract our capital base to address the changing needs of our businesses.
Common Stock Repurchases
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
in millions, except for per share data
2019
2018
2019
2018
Number of shares
36

24

90

70

Average price per share
$
41.92

$
49.33

$
42.77

$
52.51

Total
$
1,500

$
1,180

$
3,860

$
3,680


For further information on our common stock repurchases, see Note 14 to the financial statements.
For a description of our capital plan, see “Liquidity and Capital Resources—Regulatory Requirements—Capital Plans and Stress Tests.”
 
Common Stock Dividend Announcement
Announcement date
October 17, 2019

Amount per share

$0.35

Date to be paid
November 15, 2019

Shareholders of record as of
October 31, 2019

  
Preferred Stock Dividend Announcement
Announcement date
September 16, 2019
Date paid
October 15, 2019
Shareholders of record as of
September 30, 2019
For additional information on common and preferred stock, see Note 14 to the financial statements.
Off-Balance Sheet Arrangements and Contractual Obligations
Off-Balance Sheet Arrangements
We enter into various off-balance sheet arrangements, including through unconsolidated SPEs and lending-related financial instruments (e.g., guarantees and commitments), primarily in connection with the Institutional Securities and Investment Management business segments.
We utilize SPEs primarily in connection with securitization activities. For information on our securitization activities, see Note 12 to the financial statements.
For information on our commitments, obligations under certain guarantee arrangements and indemnities, see Note 11 to the financial statements. For a further discussion of our lending commitments, see “Quantitative and Qualitative Disclosures about Risk—Credit Risk—Loans and Lending Commitments.”
 
Contractual Obligations
For a discussion about our contractual obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual Obligations” in the 2018 Form 10-K.

 
23
September 2019 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
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Regulatory Requirements

Regulatory Capital Framework
We are an FHC under the Bank Holding Company Act of 1956, as amended (“BHC Act”), and are subject to the regulation and oversight of the Federal Reserve. The Federal Reserve establishes capital requirements for us, including “well-capitalized” standards, and evaluates our compliance with such capital requirements. The OCC establishes similar capital requirements and standards for our U.S. Bank Subsidiaries. For us to remain an FHC, we must remain well-capitalized in accordance with standards established by the Federal Reserve and our U.S. Bank Subsidiaries must remain well-capitalized in accordance with standards established by the OCC. For additional information on regulatory capital requirements for our U.S. Bank Subsidiaries, see Note 13 to the financial statements.
Regulatory capital requirements established by the Federal Reserve are largely based on the Basel III capital standards established by the Basel Committee and also implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).

Regulatory Capital Requirements
We are required to maintain minimum risk-based capital, leverage-based capital and TLAC ratios. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Capital Requirements” in the 2018 Form 10-K. For additional information on TLAC, see Total Loss-Absorbing Capacity herein.
Risk-Based Regulatory Capital. Minimum risk-based capital ratio requirements apply to Common Equity Tier 1 capital, Tier 1 capital and Total capital (which includes Tier 2 capital). Capital standards require certain adjustments to, and deductions from, capital for purposes of determining these ratios.
 
In addition to the minimum risk-based capital ratio requirements, we are subject to the following buffers in 2019:
 
•
A greater than 2.5% Common Equity Tier 1 capital conservation buffer;

•
The Common Equity Tier 1 G-SIB capital surcharge, currently at 3%; and

•
Up to a 2.5% Common Equity Tier 1 CCyB, currently set by U.S. banking agencies at zero.
In 2018, each of these buffers was 75% of the fully phased-in 2019 requirement noted above. Failure to maintain the buffers would result in restrictions on our ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers. For a further discussion of the G-SIB capital surcharge, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—G-SIB Capital Surcharge” in the 2018 Form 10-K.
Our risk-based capital ratios for purposes of determining regulatory compliance are the lower of the capital ratios computed under (i) the standardized approaches for calculating credit risk and market risk RWA (“Standardized Approach”) and (ii) the applicable advanced approaches for calculating credit risk, market risk and operational risk RWA (“Advanced Approach”). The credit risk RWA calculations between the two approaches differ in that the Standardized Approach requires calculation of RWA using prescribed risk weights, whereas the Advanced Approach utilizes models to calculate exposure amounts and risk weights. At September 30, 2019 and December 31, 2018, our ratios for determining regulatory compliance are based on the Standardized Approach rules.
Leverage-Based Regulatory Capital. Minimum leverage-based capital requirements include a Tier 1 leverage ratio and an SLR. We are required to maintain a Tier 1 SLR of 5%, inclusive of an enhanced SLR capital buffer of at least 2% in order to avoid potential limitations on capital distributions, including dividends and stock repurchases, and discretionary bonus payments to executive officers.

September 2019 Form 10-Q
24
 
Table of Contents
 
Management’s Discussion and Analysis
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Regulatory Capital Ratios 
 
At September 30, 2019
$ in millions
Required
Ratio1
Standardized
Advanced
Risk-based capital
 
 
 
Common Equity Tier 1 capital
 
$
64,348

$
64,348

Tier 1 capital
 
72,937

72,937

Total capital
 
82,661

82,397

Total RWA
 
394,875

387,424

Common Equity Tier 1 capital ratio
10.0
%
16.3
%
16.6
%
Tier 1 capital ratio
11.5
%
18.5
%
18.8
%
Total capital ratio
13.5
%
20.9
%
21.3
%
 
 
 
 
$ in millions
 
Required
Ratio1
At
September 30,
2019
Leverage-based capital
 
 
 
Adjusted average assets2
 
 
$
892,912

Tier 1 leverage ratio
 
4.0
%
8.2
%
Supplementary leverage exposure3
 
$
1,155,497

SLR
 
5.0
%
6.3
%
 
At December 31, 2018
$ in millions
Required
Ratio1
Standardized
Advanced
Risk-based capital
 
 
 
Common Equity Tier 1 capital
 
$
62,086

$
62,086

Tier 1 capital
 
70,619

70,619

Total capital
 
80,052

79,814

Total RWA
 
367,309

363,054

Common Equity Tier 1 capital ratio
8.6
%
16.9
%
17.1
%
Tier 1 capital ratio
10.1
%
19.2
%
19.5
%
Total capital ratio
12.1
%
21.8
%
22.0
%
 
 
 
 
$ in millions
 
Required
Ratio1
At
December 31, 2018
Leverage-based capital
 
 
 
Adjusted average assets2
 
 
$
843,074

Tier 1 leverage ratio
 
4.0
%
8.4
%
Supplementary leverage exposure3
 
$
1,092,672

SLR
 
5.0
%
6.5
%
 
1.
Required ratios are inclusive of any buffers applicable as of the date presented. For 2018, the minimum required regulatory capital ratios for risk-based capital are under the transitional rules.
2.
Adjusted average assets represents the denominator of the Tier 1 leverage ratio and is composed of the average daily balance of consolidated on-balance sheet assets during the quarters ended September 30, 2019 and December 31, 2018, reduced by disallowed goodwill, intangible assets, investments in covered funds, defined benefit pension plan assets, after-tax gain on sale from assets sold into securitizations, investments in our own capital instruments, certain deferred tax assets and other capital deductions.
3.
Supplementary leverage exposure is the sum of Adjusted average assets used in the Tier 1 leverage ratio and other adjustments, primarily (i) for derivatives: potential future exposure and the effective notional principal amount of sold credit protection offset by qualifying purchased credit protection; (ii) the counterparty credit risk for repo-style transactions; and (iii) the credit equivalent amount for off-balance sheet exposures.

 
Regulatory Capital
$ in millions
At
September 30,
2019
At
December 31,
2018
Change
Common Equity Tier 1 capital
 
 
 
Common stock and surplus
$
6,389

$
9,843

$
(3,454
)
Retained earnings
69,071

64,175

4,896

AOCI
(1,598
)
(2,292
)
694

Regulatory adjustments and deductions:
 
 
 
Net goodwill
(7,090
)
(6,661
)
(429
)
Net intangible assets (other than goodwill and mortgage servicing assets)
(2,104
)
(2,158
)
54

Other adjustments and deductions1
(320
)
(821
)
501

Total Common Equity Tier 1 capital
$
64,348

$
62,086

$
2,262

Additional Tier 1 capital
 
 
 
Preferred stock
$
8,520

$
8,520

$
—

Noncontrolling interests
483

454

29

Additional Tier 1 capital
$
9,003

$
8,974

$
29

Deduction for investments in covered funds
(414
)
(441
)
27

Total Tier 1 capital
$
72,937

$
70,619

$
2,318

Standardized Tier 2 capital
 
 
 
Subordinated debt
$
9,080

$
8,923

$
157

Noncontrolling interests
114

107

7

Eligible allowance for credit losses
531

440

91

Other adjustments and deductions
(1
)
(37
)
36

Total Standardized Tier 2 capital
$
9,724

$
9,433

$
291

Total Standardized capital
$
82,661

$
80,052

$
2,609

Advanced Tier 2 capital
 
 
 
Subordinated debt
$
9,080

$
8,923

$
157

Noncontrolling interests
114

107

7

Eligible credit reserves
267

202

65

Other adjustments and deductions
(1
)
(37
)
36

Total Advanced Tier 2 capital
$
9,460

$
9,195

$
265

Total Advanced capital
$
82,397

$
79,814

$
2,583

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



 
25
September 2019 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
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RWA Rollforward1 
 
Nine Months Ended
September 30, 2019
$ in millions
Standardized
Advanced
Credit risk RWA
 
 
Beginning balance
$
305,531

$
190,595

Change related to the following items:
 
 
Derivatives
9,202

20,346

Securities financing transactions
11,788

1,093

Securitizations
2,210

2,831

Investment securities
2,103

4,749

Commitments, guarantees and loans
5,896

9,564

Cash
(364
)
(28
)
Equity investments
818

852

Other credit risk2
3,785

3,195

Total change in credit risk RWA
$
35,438

$
42,602

Ending balance
$
340,969

$
233,197

Market risk RWA
 
 
Beginning balance
$
61,778

$
61,857

Change related to the following items:
 
 
Regulatory VaR
(137
)
(137
)
Regulatory stressed VaR
(5,417
)
(5,417
)
Incremental risk charge
(5,227
)
(5,227
)
Comprehensive risk measure
(115
)
(129
)
Specific risk:
 
 
Non-securitizations
3,003

3,003

Securitizations
21

21

Total change in market risk RWA
$
(7,872
)
$
(7,886
)
Ending balance
$
53,906

$
53,971

Operational risk RWA
 
 
Beginning balance
N/A

$
110,602

Change in operational risk RWA
N/A

(10,346
)
Ending balance
N/A

$
100,256

Total RWA at September 30, 2019
$
394,875

$
387,424

 
Regulatory VaR—VaR for regulatory capital requirements
1.
The RWA for each category reflects both on- and off-balance sheet exposures, where appropriate.
2.
Amount reflects assets not in a defined category, non-material portfolios of exposures and unsettled transactions, as applicable.
Credit risk RWA increased in the current year period under the Standardized and Advanced Approaches primarily due to increased exposures in Derivatives and lending commitments, as well as an increase in Other credit risk driven by the Firm’s adoption of the Leases accounting update on January 1, 2019. RWA under the Standardized Approach also increased due to higher exposures for Securities financing transactions, while under the Advanced Approach, in Derivatives, increased exposure also led to increased RWA related to CVA.
Market risk RWA decreased in the current year period under the Standardized and Advanced Approaches primarily due to a decrease in Stressed VaR driven by reduced equity and interest rate risk, and also a decrease in Incremental risk charge mainly as a result of the improved alignment of hedges in credit products.
 
The decrease in operational risk RWA under the Advanced Approach in the current year period reflects a continued reduction in the magnitude and frequency of internal losses utilized in the operational risk capital model related to litigation.

Total Loss-Absorbing Capacity. The Federal Reserve has established external TLAC, long-term debt (“LTD”) and clean holding company requirements for top-tier BHCs of U.S. G-SIBs (“covered BHCs”), including the Parent Company. These requirements include various restrictions, such as requiring eligible LTD to be issued by the covered BHC and be unsecured, have a maturity of one year or more from the date of issuance and not have certain derivative-linked features typically associated with certain types of structured notes. A covered BHC is required to maintain minimum levels of external TLAC and eligible LTD, as well as certain TLAC buffer requirements. Failure to maintain the TLAC buffers would result in restrictions on capital distributions and discretionary bonus payments to executive officers.
Required and Actual TLAC and Eligible LTD Ratios
 
At September 30, 2019
$ in millions
Required Ratio1
Actual
Amount/Ratio
Total Loss-Absorbing Capacity
 
 
External TLAC2
 
$
196,659

External TLAC as a % of RWA
21.5
%
49.8
%
External TLAC as a % of leverage exposure
9.5
%
17.0
%
Eligible LTD3
 
$
116,116

Eligible LTD as a % of RWA
9.0
%
29.4
%
Eligible LTD as a % of leverage exposure
4.5
%
10.0
%
 
1.
Required ratios are inclusive of applicable buffers.
2.
External TLAC consists of Common Equity Tier 1 capital and Additional Tier 1 capital (each excluding any noncontrolling minority interests), as well as eligible LTD.
3.
Consists of TLAC-eligible LTD reduced by 50% for amounts of unpaid principal due to be paid in more than one year but less than two years from September 30, 2019.
For a further discussion of TLAC and related requirements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Regulatory Capital Requirements” in the 2018 Form 10-K.

Capital Plans and Stress Tests
Pursuant to the Dodd-Frank Act, the Federal Reserve has adopted capital planning and stress test requirements for large BHCs, including us, which form part of the Federal Reserve’s annual CCAR framework.
We submitted our 2019 Capital Plan (“Capital Plan”) and company-run stress test results to the Federal Reserve on April 5, 2019. On June 21, 2019, the Federal Reserve published summary results of the Dodd-Frank Act supervisory stress tests of each large BHC, including us. On June 27, 2019, the Federal

September 2019 Form 10-Q
26
 
Table of Contents
 
Management’s Discussion and Analysis
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Reserve published summary results of CCAR and announced it did not object to our 2019 Capital Plan. Our 2019 Capital Plan includes the repurchase of up to $6.0 billion of outstanding common stock for the period beginning July 1, 2019 through June 30, 2020, and an increase in our quarterly common stock dividend to $0.35 per share from $0.30 per share, beginning with the common stock dividend announced on July 18, 2019. We disclosed a summary of the results of our company-run stress tests on June 21, 2019 on our Investor Relations webpage. In addition, we submitted the results of our mid-cycle company-run stress test to the Federal Reserve and on October 28, 2019 disclosed a summary of the results on our Investor Relations webpage.
For a further discussion of our capital plans and stress tests, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Capital Plans and Stress Tests” in the 2018 Form 10-K.

Attribution of Average Common Equity According to the Required Capital Framework
Our required capital (“Required Capital”) estimation is based on the Required Capital framework, an internal capital adequacy measure. Common equity attribution to the business segments is based on capital usage calculated under the Required Capital framework, as well as each business segment’s relative contribution to our total Required Capital.
The Required Capital framework is a risk-based and leverage use-of-capital measure, which is compared with our regulatory capital to ensure that we maintain an amount of going concern capital after absorbing potential losses from stress events, where applicable, at a point in time. The amount of capital allocated to the business segments is generally set at the beginning of each year and remains fixed throughout the year until the next annual reset unless a significant business change occurs (e.g., acquisition or disposition). We define the difference between our total average common equity and the sum of the average common equity amounts allocated to our business segments as Parent common equity. We generally hold Parent common equity for prospective regulatory requirements, organic growth, acquisitions and other capital needs.
The Required Capital framework is expected to evolve over time in response to changes in the business and regulatory environment, for example, to incorporate changes in stress testing or enhancements to modeling techniques. We will continue to evaluate the framework with respect to the impact of future regulatory requirements, as appropriate.
 
Average Common Equity Attribution1 
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
$ in billions
2019
2018
2019
2018
Institutional Securities
$
40.4

$
40.8

$
40.4

$
40.8

Wealth Management
18.2

16.8

18.2

16.8

Investment Management
2.5

2.6

2.5

2.6

Parent
12.3

10.0

11.4

9.4

Total
$
73.4

$
70.2

$
72.5

$
69.6

 
1.
The attribution of average common equity is a non-GAAP financial measure. See “Selected Non-GAAP Financial Information” herein.

Resolution and Recovery Planning
Pursuant to the Dodd-Frank Act, we are required to periodically submit to the Federal Reserve and the FDIC a resolution plan that describes our strategy for a rapid and orderly resolution under the U.S. Bankruptcy Code in the event of our material financial distress or failure. We submitted our 2019 resolution plan on June 28, 2019.
Our preferred resolution strategy is an SPOE strategy. In line with our SPOE strategy, the Parent Company has transferred, and has agreed to transfer on an ongoing basis, certain assets to its wholly owned, direct subsidiary MS Holdings LLC (the “Funding IHC”). In addition, the Parent Company has entered into an amended and restated support agreement with its material entities (including the Funding IHC) and certain other subsidiaries. In the event of a resolution scenario, the Parent Company would be obligated to contribute all of its contributable material assets, other than shares in subsidiaries of the Parent Company and certain other assets, to the Funding IHC. The Funding IHC would then be obligated to provide capital and liquidity, as applicable, to our material entities.
The obligations of the Parent Company and the Funding IHC under the amended and restated support agreement are in most cases secured on a senior basis by the assets of the Parent Company (other than shares in subsidiaries of the Parent Company), and the assets of the Funding IHC. As a result, claims of our material entities, including the Funding IHC, against the assets of the Parent Company (other than shares in subsidiaries of the Parent Company) are effectively senior to unsecured obligations of the Parent Company.
For more information about resolution and recovery planning requirements and our activities in these areas, including the implications of such activities in a resolution scenario, see “Business—Supervision and Regulation—Financial Holding Company—Resolution and Recovery Planning” and “Risk Factors—Legal, Regulatory and Compliance Risk” in the 2018 Form 10-K.


 
27
September 2019 Form 10-Q
Table of Contents
 
Management’s Discussion and Analysis
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Regulatory Developments

Final Rules Amending Liquidity Standards
The Federal Reserve has adopted a final rule to amend the liquidity buffer standards applicable to internal liquidity stress-testing to more closely align those standards with certain requirements under the LCR rule. Additionally, in connection with the adoption of a related final rule, the U.S. banking agencies described HQLA standards under the LCR rule as including a “continuously available” operational requirement. We are currently evaluating these developments, which may result in future changes to our GLR and HQLA calculations.

Final Rule on Revisions to Stress Testing Requirements
The Federal Reserve has adopted a final rule to reduce the number of scenarios in its supervisory stress test from three to two and to modify our existing obligation to perform company-run stress-tests from semiannually to annually. The final rule implements a change required by the Economic Growth, Regulatory Relief and Consumer Protection Act and takes effect for the 2020 stress test cycle.

Final Rule on Revisions to Resolution Planning Requirements
The Federal Reserve and the FDIC have issued a final rule that changes our resolution planning obligations under the Dodd-Frank Act. The rule requires us to file resolution plans once every two years, with interim updates required in certain limited circumstances. The rule also allows us to alternate between submitting a full, detailed resolution plan and a streamlined, targeted resolution plan; our next resolution plan submission is expected to be a targeted resolution plan in 2021. The rule also clarifies the information required to be included in our resolution plan.

Final Rule on Revisions to Volcker Rule Implementing Regulations
The federal financial regulatory agencies responsible for the Volcker Rule’s implementing regulations have finalized revisions to certain elements of those regulations. The changes simplify the application of the Volcker Rule, and focus on proprietary trading and certain requirements imposed in connection with permitted market-making, underwriting and risk-mitigating hedging activities. These revisions become effective on January 1, 2020, with compliance required by January 1, 2021. While simplifying elements of our compliance obligations, we do not expect these revisions to have a material impact on the way we conduct business under the current rule.
 
Final Rule on Security-Based Swap Capital, Margin and Segregation Requirements
The SEC has adopted capital, margin and segregation requirements for security-based swap dealers and amendments to capital and segregation requirements for certain broker-dealers. We expect to register one or more subsidiaries in the future as security-based swap dealers. The compliance date for these security-based swap dealer requirements and broker-dealer amendments is expected to be no earlier than 2021.

Final Rules on Retail Investor Protections
The SEC has released a package of final rules and interpretations relating to the provision of advice by broker-dealers and investment advisers. The package includes new rules on the standards of conduct and required disclosures for broker-dealers when making securities-related recommendations to retail investors, and a new formal interpretation of the fiduciary duty owed by investment advisers. One of the final rules, entitled “Regulation Best Interest,” requires broker-dealers to act in the “best interest” of retail customers at the time a recommendation is made without placing the financial or other interests of the broker-dealer ahead of the interest of the retail customer. Another new rule requires that both broker-dealers and investment advisers provide to retail investors a brief summary document containing information about the relationship between the parties (“Form CRS”). The compliance date for Regulation Best Interest and Form CRS is June 30, 2020.

Proposed Revisions to the Regulatory Capital Treatment for Investments in Certain Unsecured Debt Instruments Issued by G-SIBs
The Federal Reserve, the OCC and the FDIC have issued a proposed rule that would, among other things, modify the regulatory capital framework for Advanced Approach banking organizations, including us. Such firms would be required to make certain deductions from regulatory capital for their investments in certain unsecured debt instruments (including eligible LTD in the TLAC framework) issued by the Parent Company and other G-SIBs.
For a discussion of other regulatory developments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments” in the 2018 Form 10-K.

Other Matters

U.K. Withdrawal from the E.U.
Following the U.K. electorate vote to leave the E.U., the U.K. invoked Article 50 of the Lisbon Treaty on March 29, 2017, and is currently scheduled to leave the E.U., with or

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Management’s Discussion and Analysis
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without a withdrawal agreement in place, on or before January 31, 2020.We have prepared the structure of our European operations for a range of potential outcomes, including for the possibility that the U.K. leaves the E.U. without ratifying a withdrawal agreement, and we expect to be able to continue to serve our clients and customers under each of these potential outcomes.
For more information on the U.K.’s withdrawal from the E.U., our related preparations and the potential impact on our operations, see “Quantitative and Qualitative Disclosures about Risk—Country Risk” herein, and see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Other Matters” and “Risk Factors— International Risk” in the 2018 Form 10-K.

Planned Replacement of London Interbank Offered Rate and Replacement or Reform of Other Interest Rates
Central banks around the world, including the Federal Reserve, have commissioned committees and working groups of market participants and official sector representatives with the goal of finding suitable replacements for LIBOR and replacements or reforms of other interest rate benchmarks (collectively, the “IBORs”).
Our transition plan includes a number of key steps, including continued engagement with central bank and industry working groups and regulators (including participation and leadership on key committees), active client engagement, internal operational readiness, and risk management, among other things, to promote the transition to alternative reference rates.  As part of our firm-wide initiative, we are identifying, assessing and monitoring risks associated with the expected discontinuation or unavailability of IBORs and/or reform of interest rate benchmarks. This also includes taking steps to update operational processes (including to support alternative reference rates) and models, as well as evaluating legacy contracts for any changes that may be required, including the determination of applicable fallbacks. In addition, as part of the transition to alternative reference rates, in 2019 we began issuing debt linked to the Secured Overnight Financing Rate, or SOFR, the alternative rate to U.S. dollar LIBOR selected by the Alternative Reference Rates Committee convened by the Federal Reserve Board and the Federal Reserve Bank of New York.
For a further discussion of the expected replacement of the IBORs and/or reform of interest rate benchmarks, and the related risks and our transition plan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments” and “Risk Factors—Risk Management,” respectively, in the 2018 Form 10-K.
 
 


 
29
September 2019 Form 10-Q

Quantitative and Qualitative Disclosures about Risk

Management believes effective risk management is vital to the success of our business activities. For a discussion of our risk management functions, see “Quantitative and Qualitative Disclosures about Risk—Risk Management” in the 2018 Form 10-K.
Market Risk
Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, volatilities, correlations or other market factors, such as market liquidity, will result in losses for a position or portfolio. Generally, we incur market risk as a result of trading, investing and client facilitation activities, principally within the Institutional Securities business segment where the substantial majority of our VaR for market risk exposures is generated. In addition, we incur market risk within the Wealth Management and Investment Management business segments. The Wealth Management business segment primarily incurs non-trading market risk from lending and deposit-taking activities. The Investment Management business segment primarily incurs non-trading market risk from capital investments in alternative and other funds. For a further discussion of market risk, see “Quantitative and Qualitative Disclosures about Risk—Market Risk” in the 2018 Form 10-K.
Trading Risks
Value-at-Risk. The statistical technique known as VaR is one of the tools we use to measure, monitor and review the market risk exposures of our trading portfolios. The Market Risk Department calculates and distributes daily VaR-based risk measures to various levels of management.
For information regarding our VaR methodology, assumptions and limitations, see “Quantitative and Qualitative Disclosures about Risk—Market Risk—Trading Risks— Value-at-Risk” in the 2018 Form 10-K. On July 1, 2019, we began using a new VaR model. Whereas the previous model used four years of historical data with a volatility adjustment to reflect current market conditions, we now use one year of unadjusted historical data. The difference between the old and new model was not significant. The following tables show VaR under the new model for the current and prior quarter.
We utilize the same VaR model for risk management purposes and for regulatory capital calculations. Our regulators have approved our VaR model for use in regulatory calculations. The portfolio of positions used for our VaR for risk management purposes (“Management VaR”) differs from that used for regulatory capital requirements (“Regulatory VaR”). Management VaR contains certain positions that are excluded from Regulatory VaR. Examples include counterparty CVA and related hedges, as well as loans that are carried at fair value and associated hedges.
 
The following table presents the Management VaR for the Trading portfolio. To further enhance the transparency of traded market risk, the Credit Portfolio VaR has been disclosed as a separate category from the Primary Risk Categories. The Credit Portfolio includes counterparty CVA and related hedges, as well as loans that are carried at fair value and associated hedges.

95%/One-Day Management VaR
 
Three Months Ended
 
September 30, 2019
$ in millions
Period
End
Average
High2
Low2
Interest rate and credit spread
$
28

$
27

$
29

$
25

Equity price
15

16

22

12

Foreign exchange rate
8

13

19

8

Commodity price
18

15

20

12

Less: Diversification benefit1
(29
)
(34
)
N/A

 N/A

Primary Risk Categories3
$
40

$
37

$
42

$
33

Credit Portfolio
16

16

19

15

Less: Diversification benefit1
(14
)
(11
)
 N/A

 N/A

Total Management VaR3
$
42

$
42

$
46

$
37

 
Three Months Ended
 
June 30, 20194
$ in millions
Period
End
Average
High2
Low2
Interest rate and credit spread
$
28

$
29

$
34

$
26

Equity price
15

15

19

12

Foreign exchange rate
17

17

20

13

Commodity price
12

12

13

10

Less: Diversification benefit1
(35
)
(36
)
N/A

N/A

Primary Risk Categories
$
37

$
37

$
41

$
33

Credit Portfolio
16

17

19

15

Less: Diversification benefit1
(8
)
(12
)
N/A

N/A

Total Management VaR
$
45

$
42

$
47

$
39


1.
Diversification benefit equals the difference between the total Management VaR and the sum of the component VaRs. This benefit arises because the simulated one-day losses for each of the components occur on different days; similar diversification benefits also are taken into account within each component.
2.
The high and low VaR values for the total Management VaR and each of the component VaRs might have occurred on different days during the quarter, and therefore, the diversification benefit is not an applicable measure.
3.
For the current quarter, under the VaR model in place prior to July 1, 2019, Average total Management VaR was $43 million and average Management VaR for the Primary Risk Categories was $40 million.
4.
Prior period amounts have been revised to conform to the current presentation.
Average total Management VaR and average Management VaR for the Primary Risk Categories were unchanged from the three-months ended June 30, 2019.
Distribution of VaR Statistics and Net Revenues
One method of evaluating the reasonableness of our VaR model as a measure of our potential volatility of net revenues is to

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Risk Disclosures
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compare VaR with corresponding actual trading revenues. Assuming no intraday trading, for a 95%/one-day VaR, the expected number of times that trading losses should exceed VaR during the year is 13, and, in general, if trading losses were to exceed VaR more than 21 times in a year, the adequacy of the VaR model would be questioned.

We evaluate the reasonableness of our VaR model by comparing the potential declines in portfolio values generated by the model with corresponding actual trading results for the Firm, as well as individual business units. For days where losses exceed the VaR statistic, we examine the drivers of trading losses to evaluate the VaR model’s accuracy relative to realized trading results. There were three days with trading losses in the current quarter, none of which exceeded VaR.
Daily 95%/One-Day Total Management VaR for the Current Quarter
($ in millions)
daily95var19q3.jpg
Daily Net Trading Revenues for the Current Quarter
($ in millions)
dailynettradingrevenues19q3a.jpg
 
The previous histogram shows the distribution for the current quarter of daily net trading revenues. Daily net trading revenues include profits and losses from Interest rate and credit spread, Equity price, Foreign exchange rate, Commodity price, and Credit Portfolio positions and intraday trading activities for our trading businesses. Certain items such as fees, commissions and net interest income are excluded from daily net trading revenues and the VaR model. Revenues required for Regulatory VaR backtesting further exclude intraday trading.
Non-Trading Risks
We believe that sensitivity analysis is an appropriate representation of our non-trading risks. The following sensitivity analyses cover substantially all of the non-trading risk in our portfolio.
Credit Spread Risk Sensitivity1 
$ in millions
At
September 30,
2019
At
June 30,
2019
Derivatives
$
6

$
6

Funding liabilities2
40

40

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

U.S. Bank Subsidiaries’ Net Interest Income Sensitivity Analysis
$ in millions
At
September 30,
2019
At
June 30,
2019
Basis point change
 
 
+100
$
256

$
273

 -100
(751
)
(722
)
The previous table presents an analysis of selected instantaneous upward and downward parallel interest rate shocks on net interest income over the next 12 months for our U.S. Bank Subsidiaries. These shocks are applied to our 12-month forecast for our U.S. Bank Subsidiaries, which incorporates market expectations of interest rates and our forecasted business activity.
We do not manage to any single rate scenario but rather manage net interest income in our U.S. Bank Subsidiaries to optimize across a range of possible outcomes, including non-parallel rate change scenarios. The sensitivity analysis assumes that we take no action in response to these scenarios, assumes there are no changes in other macroeconomic variables normally correlated with changes in interest rates, and includes subjective assumptions regarding customer and market re-pricing behavior and other factors. The change in sensitivity to interest rates between September 30, 2019 and June 30, 2019 is primarily driven by lower market interest rates. 

 
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September 2019 Form 10-Q
Table of Contents
 
Risk Disclosures
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Investments Sensitivity, Including Related Carried Interest
 
Loss from 10% Decline
$ in millions
At
September 30,
2019
At
June 30,
2019
Investments related to Investment Management activities
$
341

$
333

Other investments:
 
 
MUMSS
168

169

Other Firm investments
186

194

MUMSS—Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.
We have exposure to public and private companies through direct investments, as well as through funds that invest in these assets. These investments are predominantly equity positions with long investment horizons, a portion of which is for business facilitation purposes. The market risk related to these investments is measured by estimating the potential reduction in net income associated with a 10% decline in investment values and the related impact on carried interest.
Equity Market Sensitivity
In the Wealth Management and Investment Management business segments, certain fee-based revenue streams are driven by the value of clients’ equity holdings. The overall level of revenues for these streams also depends on multiple additional factors that include, but are not limited to, the level and duration of the equity market increase or decline, price volatility, the geographic and industry mix of client assets, the rate and magnitude of client investments and redemptions, and the impact of such market increase or decline and price volatility on client behavior. Therefore, overall revenues do not correlate completely with changes in the equity markets.
Credit Risk
Credit risk refers to the risk of loss arising when a borrower, counterparty or issuer does not meet its financial obligations to us. We primarily incur credit risk exposure to institutions and individuals through our Institutional Securities and Wealth Management business segments. For a further discussion of our credit risks, see “Quantitative and Qualitative Disclosures about Risk—Credit Risk” in the 2018 Form 10-K.
 
Loans and Lending Commitments
 
At September 30, 2019
$ in millions
IS
WM
IM1
Total
Corporate
$
27,709

$
17,403

$
5

$
45,117

Consumer
—

30,010

—

30,010

Residential real estate
—

29,184

—

29,184

Commercial real estate
6,801

—

—

6,801

Loans held for investment, gross of allowance
34,510

76,597

5

111,112

Allowance for loan losses
(248
)
(49
)
—

(297
)
Loans held for investment, net of allowance
34,262

76,548

5

110,815

Corporate
13,525

—

—

13,525

Residential real estate
—

17

—

17

Commercial real estate
1,165

—

—

1,165

Loans held for sale
14,690

17

—

14,707

Corporate
7,349

—

38

7,387

Residential real estate
1,206

—

—

1,206

Commercial real estate
1,431

—

—

1,431

Loans held at fair value
9,986

—

38

10,024

Total loans
58,938

76,565

43

135,546

Lending commitments2
108,536

11,771

—

120,307

Total loans and lending commitments2
$
167,474

$
88,336

$
43

$
255,853

 
 
At December 31, 2018
$ in millions
IS
WM
IM1
Total
Corporate
$
20,020

$
16,884

$
5

$
36,909

Consumer
—

27,868

—

27,868

Residential real estate
—

27,466

—

27,466

Commercial real estate3
7,810

—

—

7,810

Loans held for investment, gross of allowance
27,830

72,218

5

100,053

Allowance for loan losses
(193
)
(45
)
—

(238
)
Loans held for investment, net of allowance
27,637

72,173

5

99,815

Corporate
13,886

—

—

13,886

Residential real estate
1

21

—

22

Commercial real estate3
1,856

—

—

1,856

Loans held for sale
15,743

21

—

15,764

Corporate
9,150

—

21

9,171

Residential real estate
1,153

—

—

1,153

Commercial real estate3
601

—

—

601

Loans held at fair value
10,904

—

21

10,925

Total loans
54,284

72,194

26

126,504

Lending commitments2
95,065

10,663

—

105,728

Total loans and lending commitments2
$
149,349

$
82,857

$
26

$
232,232


1.
Investment Management business segment loans are related to certain of our activities as an investment advisor and manager. At September 30, 2019, loans held at fair value are the result of the consolidation of an investment vehicle related to these activities.
2.
Due to the nature of our obligations under the commitments, these amounts include certain commitments participated to third parties.
3.
Beginning in 2019, loans previously referred to as Wholesale real estate are referred to as Commercial real estate.

We provide loans and lending commitments to a variety of customers, from large corporate and institutional clients to high net worth individuals. In addition, we purchase loans in the

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secondary market. In the balance sheets, these loans and lending commitments are carried as held for investment, which are recorded at amortized cost; as held for sale, which are recorded at the lower of cost or fair value; or at fair value with changes in fair value recorded in earnings. Loans held for investment and loans held for sale are classified in Loans, and loans held at fair value are classified in Trading assets in the balance sheets. Total loans and lending commitments increased by approximately $24 billion since December 31, 2018 primarily in Corporate within the Institutional Securities business segment due to increases in event-driven lending commitments and growth in secured lending facilities. Also contributing to the increase was growth in Consumer securities-based lending and Residential real estate loans within the Wealth Management business segment.
Credit exposure arising from our loans and lending commitments is measured in accordance with our internal risk management standards. Risk factors considered in determining the aggregate allowance for loan and commitment losses include the borrower’s financial strength, industry, facility structure, loan-to-value ratio, debt service ratio, collateral and covenants. Qualitative and environmental factors such as economic and business conditions, nature and volume of the portfolio and lending terms, and volume and severity of past due loans may also be considered.
See Notes 3, 7 and 11 to the financial statements for further information.
Allowance for Loans and Lending Commitments Held for Investment
$ in millions
At
September 30,
2019
At
December 31,
2018
Loans
$
297

$
238

Lending commitments
234

203

Total allowance for loans and
lending commitments
$
531

$
441

The aggregate allowance for loans and lending commitments increased in the current year period primarily within the Institutional Securities business segment due to loan and lending commitment growth, deterioration of select credits, and certain environmental factors. See Notes 7 and 11 to the financial statements for further information.
Status of Loans Held for Investment
 
At September 30, 2019
At December 31, 2018
  
IS
WM
IS
WM
Current
99.2
%
99.9
%
99.8
%
99.9
%
Nonaccrual1
0.8
%
0.1
%
0.2
%
0.1
%
 
1.
These loans are on nonaccrual status because the loans were past due for a period of 90 days or more or payment of principal or interest was in doubt.
 
Institutional Securities Loans and Lending Commitments1 
 
At September 30, 2019
 
Years to Maturity
 
$ in millions
Less than 1
1-3
3-5
Over 5
Total
Loans
 
 
 
 
 
AA
$
308

$
41

$
—

$
5

$
354

A
814

733

748

363

2,658

BBB
3,095

4,886

3,106

569

11,656

NIG
9,453

16,223

11,709

5,143

42,528

Unrated2
66

76

119

1,481

1,742

Total loans
13,736

21,959

15,682

7,561

58,938

Lending commitments
 
 
 
 
AAA
90

50

—

—

140

AA
2,405

1,362

2,121

—

5,888

A
4,334

6,506

9,600

715

21,155

BBB
10,843

13,710

20,949

546

46,048

NIG
4,261

10,914

15,933

4,140

35,248

Unrated2
2

26

22

7

57

Total lending commitments
21,935

32,568

48,625

5,408

108,536

Total exposure
$
35,671

$
54,527

$
64,307

$
12,969

$
167,474

 
At December 31, 2018
 
Years to Maturity
 
$ in millions
Less than 1
1-3
3-5
Over 5
Total
Loans
 
 
 
 
 
AA
$
7

$
430

$
—

$
19

$
456

A
565

1,580

858

267

3,270

BBB
3,775

4,697

4,251

495

13,218

NIG
7,151

12,882

9,313

5,889

35,235

Unrated2
88

95

160

1,762

2,105

Total loans
11,586

19,684

14,582

8,432

54,284

Lending commitments
 
 
 
 
AAA
90

75

—

—

165

AA
2,491

1,177

2,863

—

6,531

A
2,892

6,006

9,895

502

19,295

BBB
2,993

11,825

19,461

638

34,917

NIG
1,681

10,604

16,075

5,751

34,111

Unrated2
8

—

38

—

46

Total lending commitments
10,155

29,687

48,332

6,891

95,065

Total exposure
$
21,741

$
49,371

$
62,914

$
15,323

$
149,349

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

 
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Institutional Securities Loans and Lending Commitments by Industry
$ in millions
At
September 30,
2019
At
December 31,
2018
Industry
 
 
Financials
$
38,935

$
32,655

Real estate
26,299

24,133

Healthcare
20,219

10,158

Industrials
13,079

13,701

Communications Services
12,563

11,244

Consumer discretionary
9,814

8,314

Energy
9,704

9,847

Utilities
9,675

9,856

Information technology
8,920

9,896

Consumer staples
7,257

7,921

Materials
5,108

5,969

Insurance
3,714

3,744

Other
2,187

1,911

Total
$
167,474

$
149,349

In connection with certain Institutional Securities business segment activities, we provide loans and lending commitments to a diverse group of corporate and other institutional clients. We also purchase a variety of loans in the secondary market. Our loans and lending commitments may have varying terms; may be senior or subordinated; may be secured or unsecured; are generally contingent upon representations, warranties and contractual conditions applicable to the borrower; and may be syndicated, traded or hedged by us.
We also participate in securitization activities, whereby we extend short- or long-term collateralized lines of credit and term loans with various types of collateral, including residential real estate, commercial real estate, corporate and financial assets. These collateralized loans and lending commitments generally provide for overcollateralization. Credit risk with respect to these loans and lending commitments arises from the failure of a borrower to perform according to the terms of the loan agreement or a decline in the underlying collateral value. The Firm monitors collateral levels against the requirements of lending agreements. See Note 12 to the financial statements for information about our securitization activities.
 
Institutional Securities Corporate Loans1 
$ in millions
At
September 30,
2019
At
December 31,
2018
Corporate relationship and
event-driven lending2
$
13,432

$
13,317

Secured lending facilities3
27,834

21,408

Securities-based lending and other4
7,317

8,331

Total Corporate
$
48,583

$
43,056

 
1.
Amounts include loans held for investment, loans held for sale and loans measured at fair value. Loans at fair value are included in Trading assets in the balance sheets.
2.
Relationship and event-driven loans typically consist of revolving lines of credit, term loans and bridge loans. For additional information on event-driven loans, see “Institutional Securities Event-Driven Loans and Lending Commitments” herein.
3.
Secured lending facilities includes loans provided to clients to warehouse loans secured by underlying real estate and other assets.
4.
Securities-based lending and other includes financing extended to sales and trading customers and corporate loans purchased in the secondary market.
  
Institutional Securities Event-Driven Loans and Lending Commitments
 
At September 30, 2019
 
Years to Maturity
 
$ in millions
Less than 1
1-3
3-5
Over 5
Total    
Loans
$
1,198

$
516

$
797

$
2,543

$
5,054

Lending commitments
10,022

3,278

3,086

3,453

19,839

Total loans and lending commitments
$
11,220

$
3,794

$
3,883

$
5,996

$
24,893

 
At December 31, 2018
 
Years to Maturity
 
$ in millions
Less than 1
1-3
3-5
Over 5
Total
Loans
$
2,582

$
287

$
656

$
1,618

$
5,143

Lending commitments
1,506

2,456

2,877

3,658

10,497

Total loans and lending commitments
$
4,088

$
2,743

$
3,533

$
5,276

$
15,640

Event-driven loans and lending commitments, which comprise a portion of corporate loans and lending commitments within the Institutional Securities business segment, are associated with a particular event or transaction, such as to support client merger, acquisition, recapitalization or project finance activities. Event-driven loans and lending commitments typically consist of revolving lines of credit, term loans and bridge loans. Balances may fluctuate as such lending is related to transactions that vary in timing and size from period to period. In the current year period, the increase in Lending commitments is primarily attributable to client transactions in the healthcare industry.

September 2019 Form 10-Q
34
 
Table of Contents
 
Risk Disclosures
mslogo.jpg

Wealth Management Loans and Lending Commitments
 
At September 30, 2019
 
Contractual Years to Maturity
 
$ in millions
Less than 1
1-3
3-5
Over 5
Total
Securities-based lending and other loans
$
40,174

$
3,342

$
2,625

$
1,247

$
47,388

Residential real estate loans
9

18

—

29,150

29,177

Total loans
$
40,183

$
3,360

$
2,625

$
30,397

$
76,565

Lending commitments
9,467

1,792

195

317

11,771

Total loans and lending commitments
$
49,650

$
5,152

$
2,820

$
30,714

$
88,336

Securities-based lending—LAL platform loans
 
$
35,549

 
At December 31, 2018
 
Contractual Years to Maturity
 
$ in millions
Less than 1
1-3
3-5
Over 5
Total
Securities-based lending and other loans
$
38,144

$
3,573

$
2,004

$
1,006

$
44,727

Residential real estate loans
—

30

1

27,436

27,467

Total loans
$
38,144

$
3,603

$
2,005

$
28,442

$
72,194

Lending commitments
9,197

1,151

42

273

10,663

Total loans and lending commitments
$
47,341

$
4,754

$
2,047

$
28,715

$
82,857

Securities-based lending—LAL platform loans
 
$
33,247

The principal Wealth Management lending activities include securities-based lending and residential real estate loans.
Securities-based lending provided to our clients is primarily conducted through our Liquidity Access Line (“LAL”) platform. For more information about our securities-based lending and residential real estate loans, see “Quantitative and Qualitative Disclosures about Risk—Credit Risk—Wealth Management” in the 2018 Form 10-K.
For the current year period, Loans and Lending commitments associated with the Wealth Management business segment increased due to growth in Securities-based lending and Residential real estate loans.
 
Customer and Other Receivables
Margin Loans
 
At September 30, 2019
$ in millions
IS
WM
Total
Customer receivables representing margin loans
$
18,321

$
9,747

$
28,068

 
At December 31, 2018
$ in millions
IS
WM
Total
Customer receivables representing margin loans
$
14,842

$
11,383

$
26,225

The Institutional Securities and Wealth Management business segments provide margin lending arrangements, which allow customers to borrow against the value of qualifying securities. Margin lending activities generally have minimal credit risk due to the value of collateral held and their short-term nature. Amounts may fluctuate from period to period as overall client balances change as a result of market levels, client positioning and leverage.
Employee Loans
$ in millions
At
September 30,
2019
At
December 31,
2018
Balance
$
2,990

$
3,415

Allowance for loan losses
(61
)
(63
)
Balance, net
$
2,929

$
3,352

Remaining repayment term, weighted average in years
4.7

4.3


Employee loans are granted in conjunction with a program established primarily to recruit certain Wealth Management representatives, are full recourse and generally require periodic repayments. We establish an allowance for loan amounts we do not consider recoverable, and the related provision is recorded in Compensation and benefits expense.


 
35
September 2019 Form 10-Q
Table of Contents
 
Risk Disclosures
mslogo.jpg

Derivatives

Fair Value of OTC Derivative Assets
 
Counterparty Credit Rating1
 
$ in millions
AAA
AA
A
BBB
NIG
Total
At September 30, 2019
 
 
 
 
<1 year
$
537

$
4,735

$
36,673

$
21,372

$
6,481

$
69,798

1-3 years
346

2,454

24,447

15,364

8,278

50,889

3-5 years
456

2,629

13,795

8,774

2,900

28,554

Over 5 years
3,749

17,709

94,707

47,846

17,387

181,398

Total, gross
$
5,088

$
27,527

$
169,622

$
93,356

$
35,046

$
330,639

Counterparty netting
(2,025
)
(17,592
)
(138,116
)
(71,427
)
(21,422
)
(250,582
)
Cash and securities collateral
(2,735
)
(8,114
)
(26,764
)
(16,578
)
(9,377
)
(63,568
)
Total, net
$
328

$
1,821

$
4,742

$
5,351

$
4,247

$
16,489

 
Counterparty Credit Rating1
 
$ in millions
AAA
AA
A
BBB
NIG
Total
At December 31, 2018
 
 
 
 
<1 year
$
878

$
7,430

$
38,718

$
15,009

$
7,183

$
69,218

1-3 years
664

2,362

22,239

10,255

7,097

42,617

3-5 years
621

2,096

11,673

6,014

2,751

23,155

Over 5 years
3,535

9,725

67,166

36,087

11,112

127,625

Total, gross
$
5,698

$
21,613

$
139,796

$
67,365

$
28,143

$
262,615

Counterparty netting
(2,325
)
(13,771
)
(113,045
)
(49,658
)
(16,681
)
(195,480
)
Cash and securities collateral
(3,214
)
(5,766
)
(21,931
)
(12,702
)
(8,269
)
(51,882
)
Total, net
$
159

$
2,076

$
4,820

$
5,005

$
3,193

$
15,253

$ in millions
At
September 30,
2019
At
December 31,
2018
Industry
 
Utilities
$
4,550

$
4,324

Financials
3,903

4,480

Industrials
1,313

1,335

Healthcare
1,298

787

Regional governments
864

779

Not-for-profit organizations
742

583

Energy
616

199

Sovereign governments
587

385

Information technology
569

695

Consumer discretionary
494

188

Materials
453

275

Communications services
314

373

Real estate
275

283

Insurance
243

235

Consumer staples
173

216

Other
95

116

Total
$
16,489

$
15,253


1.
Obligor credit ratings are determined internally by CRM.

We incur credit risk as a dealer in OTC derivatives. Credit risk with respect to derivative instruments arises from the possibility that a counterparty may fail to perform according to the terms of the contract. For more information on derivatives, see “Quantitative and Qualitative Disclosures about Risk—Credit Risk—Derivatives” in the 2018 Form 10-K and Note 4 to the financial statements.
 
Country Risk
Country risk exposure is the risk that events in, or that affect, a foreign country (any country other than the U.S.) might adversely affect us. We actively manage country risk exposure through a comprehensive risk management framework that combines credit and market fundamentals and allows us to effectively identify, monitor and limit country risk. For a further discussion of our country risk exposure see, “Quantitative and Qualitative Disclosures about Risk—Country Risk” in the 2018 Form 10-K.
Our sovereign exposures consist of financial contracts and obligations entered into with sovereign and local governments. Our non-sovereign exposures consist of financial contracts and obligations entered into primarily with corporations and financial institutions. Index credit derivatives are included in the following country risk exposure table. Each reference entity within an index is allocated to that reference entity’s country of risk. Index exposures are allocated to the underlying reference entities in proportion to the notional weighting of each reference entity in the index, adjusted for any fair value receivable or payable for that reference entity. Where credit risk crosses multiple jurisdictions, for example, a CDS purchased from an issuer in a specific country that references bonds issued by an entity in a different country, the fair value of the CDS is reflected in the Net Counterparty Exposure row based on the country of the CDS issuer. Further, the notional amount of the CDS adjusted for the fair value of the receivable or payable is reflected in the Net Inventory row based on the country of the underlying reference entity.
Top 10 Non-U.S. Country Exposures at September 30, 2019
United Kingdom
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
(879
)
$
718

$
(161
)
Net counterparty exposure2
4

10,262

10,266

Loans
—

2,583

2,583

Lending commitments
—

5,608

5,608

Exposure before hedges
(875
)
19,171

18,296

Hedges3
(311
)
(1,211
)
(1,522
)
Net exposure
$
(1,186
)
$
17,960

$
16,774

Japan
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
5,621

$
662

$
6,283

Net counterparty exposure2
47

3,560

3,607

Loans
—

324

324

Exposure before hedges
5,668

4,546

10,214

Hedges3
(77
)
(116
)
(193
)
Net exposure
$
5,591

$
4,430

$
10,021


September 2019 Form 10-Q
36
 
Table of Contents
 
Risk Disclosures
mslogo.jpg

Spain
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
15

$
(124
)
$
(109
)
Net counterparty exposure2
—

218

218

Loans
—

3,671

3,671

Lending commitments
—

617

617

Exposure before hedges
15

4,382

4,397

Hedges3
—

(125
)
(125
)
Net exposure
$
15

$
4,257

$
4,272

Germany
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
(2,378
)
$
1

$
(2,377
)
Net counterparty exposure2
96

2,643

2,739

Loans
—

1,097

1,097

Lending commitments
—

3,792

3,792

Exposure before hedges
(2,282
)
7,533

5,251

Hedges3
(231
)
(811
)
(1,042
)
Net exposure
$
(2,513
)
$
6,722

$
4,209

Brazil
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
3,730

$
49

$
3,779

Net counterparty exposure2
—

178

178

Loans
—

37

37

Lending commitments
—

235

235

Exposure before hedges
3,730

499

4,229

Hedges3
(12
)
(32
)
(44
)
Net exposure
$
3,718

$
467

$
4,185

China
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
(284
)
$
964

$
680

Net counterparty exposure2
126

237

363

Loans
—

1,866

1,866

Lending commitments
—

865

865

Exposure before hedges
(158
)
3,932

3,774

Hedges3
(82
)
(80
)
(162
)
Net exposure
$
(240
)
$
3,852

$
3,612

Canada
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
(168
)
$
101

$
(67
)
Net counterparty exposure2
107

1,944

2,051

Loans
—

218

218

Lending commitments
—

1,473

1,473

Exposure before hedges
(61
)
3,736

3,675

Hedges3
—

(140
)
(140
)
Net exposure
$
(61
)
$
3,596

$
3,535

 
France
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
(1,367
)
$
(784
)
$
(2,151
)
Net counterparty exposure2
—

2,585

2,585

Loans
—

595

595

Lending commitments
—

2,851

2,851

Exposure before hedges
(1,367
)
5,247

3,880

Hedges3
(6
)
(553
)
(559
)
Net exposure
$
(1,373
)
$
4,694

$
3,321

India
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
1,624

$
592

$
2,216

Net counterparty exposure2
—

655

655

Loans
—

242

242

Exposure before hedges
1,624

1,489

3,113

Net exposure
$
1,624

$
1,489

$
3,113

Ireland
 
 
 
$ in millions
Sovereigns
Non-sovereigns
Total
Net inventory1
$
(23
)
$
223

$
200

Net counterparty exposure2
3

220

223

Loans
—

2,177

2,177

Lending commitments
—

361

361

Exposure before hedges
(20
)
2,981

2,961

Hedges3
(30
)
—

(30
)
Net exposure
$
(50
)
$
2,981

$
2,931


1.
Net inventory represents exposure to both long and short single-name and index positions (i.e., bonds and equities at fair value and CDS based on a notional amount assuming zero recovery adjusted for the fair value of any receivable or payable).
2.
Net counterparty exposure (e.g., repurchase transactions, securities lending and OTC derivatives) takes into consideration legally enforceable master netting agreements and collateral. Net counterparty exposure is net of the benefit of collateral received. For more information, see “Additional Information—Top 10 Non-U.S. Country Exposures” herein.
3.
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. Amounts are based on the CDS notional amount assuming zero recovery adjusted for any fair value receivable or payable. For further description of the contractual terms for purchased credit protection and whether they may limit the effectiveness of our hedges, see “Quantitative and Qualitative Disclosures about Risk—Credit Risk—Derivatives” in the 2018 Form 10-K.
 
Additional Information—Top 10 Non-U.S. Country Exposures

Benefit of Collateral Received against Net Counterparty Exposure
$ in millions
  
At
September 30,
2019
Counterparty credit exposure
Collateral1
 
Germany
Germany and Austria
$
12,964

United Kingdom
U.K., U.S. and Japan
10,416

Other
Japan, France and U.S.
19,298

 
1.
Collateral primarily consists of cash and government obligations.

 
37
September 2019 Form 10-Q
Table of Contents
 
Risk Disclosures
mslogo.jpg

Country Risk Exposures Related to the U.K.
At September 30, 2019, our country risk exposure in the U.K. included net exposures of $16,774 million (as shown in the Top 10 Country Exposures table) and overnight deposits of $6,013 million. The $17,960 million of exposures to non-sovereigns were diversified across both names and sectors and include $6,445 million to U.K.-focused counterparties that generate more than one-third of their revenues in the U.K., $4,864 million to geographically diversified counterparties, and $5,970 million to exchanges and clearinghouses.
Operational Risk
Operational risk refers to the risk of loss, or of damage to our reputation, resulting from inadequate or failed processes or systems, from human factors or from external events (e.g., fraud, theft, legal and compliance risks, cyber attacks or damage to physical assets). We may incur operational risk across the full scope of our business activities, including revenue-generating activities (e.g., sales and trading) and support and control groups (e.g., information technology and trade processing). For a further discussion about our operational risk, see “Quantitative and Qualitative Disclosures about Risk—Operational Risk” in the 2018 Form 10-K.
Model Risk
Model risk refers to the potential for adverse consequences from decisions based on incorrect or misused model outputs. Model risk can lead to financial loss, poor business and strategic decision making, or damage to a firm’s reputation. The risk inherent in a model is a function of the materiality, complexity and uncertainty around inputs and assumptions. Model risk is generated from the use of models impacting financial statements, regulatory filings, capital adequacy assessments and the formulation of strategy. For a further discussion about our model risk, see “Quantitative and Qualitative Disclosures about Risk—Model Risk” in the 2018 Form 10-K.
 
 
Liquidity Risk
Liquidity risk refers to the risk that we will be unable to finance our operations due to a loss of access to the capital markets or difficulty in liquidating our assets. Liquidity risk also encompasses our ability (or perceived ability) to meet our financial obligations without experiencing significant business disruption or reputational damage that may threaten our viability as a going concern. For a further discussion about our liquidity risk, see “Quantitative and Qualitative Disclosures about Risk—Liquidity Risk” in the 2018 Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” herein.
 
 
Legal and Compliance Risk
Legal and compliance risk includes the risk of legal or regulatory sanctions, material financial loss, including fines, penalties, judgments, damages and/or settlements, or loss to reputation that we may suffer as a result of failure to comply with laws, regulations, rules, related self-regulatory organization standards and codes of conduct applicable to our business activities. This risk also includes contractual and commercial risk, such as the risk that a counterparty’s performance obligations will be unenforceable. It also includes compliance with AML, terrorist financing, and anti-corruption rules and regulations. For a further discussion about our legal and compliance risk, see “Quantitative and Qualitative Disclosures about Risk—Legal and Compliance Risk” in the 2018 Form 10-K.
 

September 2019 Form 10-Q
38
 

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Morgan Stanley:
 
Results of Review of Interim Financial Information
We have reviewed the accompanying condensed consolidated balance sheet of Morgan Stanley and subsidiaries (the “Firm”) as of September 30, 2019, and the related condensed consolidated income statements, comprehensive income statements and statements of changes in total equity for the three-month and nine-month periods ended September 30, 2019 and 2018, and the cash flow statements for the nine-month periods ended September 30, 2019 and 2018, and the related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Firm as of December 31, 2018, and the related consolidated income statement, comprehensive income statement, cash flow statement and statement of changes in total equity for the year then ended (not presented herein) included in the Firm’s Annual Report on Form 10-K; and in our report dated February 26, 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2018 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

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


/s/ Deloitte & Touche LLP
 
New York, New York
November 5, 2019


 
39
September 2019 Form 10-Q
Table of Contents
 
Consolidated Income Statements
(Unaudited)
mslogo.jpg



 
Three Months Ended
September 30,
Nine Months Ended
September 30,
in millions, except per share data
2019
2018
2019
2018
Revenues
 
 
 
 
Investment banking
$
1,635

$
1,567

$
4,467

$
4,994

Trading
2,608

2,752

8,781

9,815

Investments
87

136

801

409

Commissions and fees
990

932

2,935

3,144

Asset management
3,363

3,251

9,632

9,632

Other
131

298

685

748

Total non-interest revenues
8,814

8,936

27,301

28,742

Interest income
4,350

3,627

13,146

9,781

Interest expense
3,132

2,691

9,885

6,964

Net interest
1,218

936

3,261

2,817

Net revenues
10,032

9,872

30,562

31,559

Non-interest expenses
 
 
 
 
Compensation and benefits
4,427

4,310

13,609

13,845

Occupancy and equipment
353

351

1,053

1,033

Brokerage, clearing and exchange fees
637

559

1,860

1,795

Information processing and communications
557

513

1,627

1,487

Marketing and business development
157

152

460

471

Professional services
531

570

1,582

1,660

Other
660

566

1,803

1,888

Total non-interest expenses
7,322

7,021

21,994

22,179

Income from continuing operations before income taxes
2,710

2,851

8,568

9,380

Provision for income taxes
492

696

1,636

2,050

Income from continuing operations
2,218

2,155

6,932

7,330

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

(1
)
—

(5
)
Net income
$
2,218

$
2,154

$
6,932

$
7,325

Net income applicable to noncontrolling interests
45

42

129

108

Net income applicable to Morgan Stanley
$
2,173

$
2,112

$
6,803

$
7,217

Preferred stock dividends
113

93

376

356

Earnings applicable to Morgan Stanley common shareholders
$
2,060

$
2,019

$
6,427

$
6,861

Earnings per common share
 
 
 
 
Basic
$
1.28

$
1.19

$
3.94

$
3.99

Diluted
$
1.27

$
1.17

$
3.89

$
3.92

Average common shares outstanding
 
 
 
 
Basic
1,604

1,697

1,632

1,719

Diluted
1,627

1,727

1,653

1,749


September 2019 Form 10-Q
40
See Notes to Consolidated Financial Statements

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


 
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
$ in millions
2019
2018
2019
2018
Net income
$
2,218

$
2,154

$
6,932

$
7,325

Other comprehensive income (loss), net of tax:
 
 
 
 
Foreign currency translation adjustments
$
(99
)
$
(79
)
$
(56
)
$
(154
)
Change in net unrealized gains (losses) on available-for-sale securities
214

(171
)
1,252

(707
)
Pension, postretirement and other
3

5

7

16

Change in net debt valuation adjustment
337

(743
)
(529
)
347

Total other comprehensive income (loss)
$
455

$
(988
)
$
674

$
(498
)
Comprehensive income
$
2,673

$
1,166

$
7,606

$
6,827

Net income applicable to noncontrolling interests
45

42

129

108

Other comprehensive income (loss) applicable to noncontrolling interests
2

(59
)
(20
)
4

Comprehensive income applicable to Morgan Stanley
$
2,626

$
1,183

$
7,497

$
6,715


See Notes to Consolidated Financial Statements
41
September 2019 Form 10-Q

Table of Contents
 
Consolidated Balance Sheets

mslogo.jpg


$ in millions, except share data
(Unaudited) At
September 30, 2019
At
December 31, 2018
Assets
 
 
Cash and cash equivalents:
 
 
Cash and due from banks
$
35,721

$
30,541

Interest bearing deposits with banks
13,196

21,299

Restricted cash
30,739

35,356

Trading assets at fair value ($116,506 and $120,437 were pledged to various parties)
277,423

266,299

Investment securities (includes $64,714 and $61,061 at fair value)
105,790

91,832

Securities purchased under agreements to resell (includes $4 and $— at fair value)
93,367

98,522

Securities borrowed
132,401

116,313

Customer and other receivables
59,514

53,298

Loans:
 
 
Held for investment (net of allowance of $297 and $238)
110,815

99,815

Held for sale
14,707

15,764

Goodwill
7,139

6,688

Intangible assets (net of accumulated amortization of $3,124 and $2,877)
2,211

2,163

Other assets
19,581

15,641

Total assets
$
902,604

$
853,531

Liabilities
 
 
Deposits (includes $1,622 and $442 at fair value)
$
180,738

$
187,820

Trading liabilities at fair value
143,405

126,747

Securities sold under agreements to repurchase (includes $732 and $812 at fair value)
59,462

49,759

Securities loaned
9,691

11,908

Other secured financings (includes $6,352 and $5,245 at fair value)
9,836

9,466

Customer and other payables
202,915

179,559

Other liabilities and accrued expenses
19,348

17,204

Borrowings (includes $61,654 and $51,184 at fair value)
193,659

189,662

Total liabilities
819,054

772,125

Commitments and contingent liabilities (see Note 11)


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

8,520

Common stock, $0.01 par value:
 
 
Shares authorized: 3,500,000,000; Shares issued: 2,038,893,979; Shares outstanding: 1,623,587,078 and 1,699,828,943
20

20

Additional paid-in capital
23,649

23,794

Retained earnings
69,071

64,175

Employee stock trusts
2,865

2,836

Accumulated other comprehensive income (loss)
(1,598
)
(2,292
)
Common stock held in treasury at cost, $0.01 par value (415,306,901 and 339,065,036 shares)
(17,280
)
(13,971
)
Common stock issued to employee stock trusts
(2,865
)
(2,836
)
Total Morgan Stanley shareholders’ equity
82,382

80,246

Noncontrolling interests
1,168

1,160

Total equity
83,550

81,406

Total liabilities and equity
$
902,604

$
853,531


September 2019 Form 10-Q
42
See Notes to Consolidated Financial Statements

Table of Contents
 
Consolidated Statements of Changes in Total Equity
(Unaudited)
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Three Months Ended
September 30,
Nine Months Ended
September 30,
 
$ in millions
2019
2018
2019
2018
Preferred Stock
 
 
 
 
Beginning and ending balance
$
8,520

$
8,520

$
8,520

$
8,520

Common Stock
 
 
 
 
Beginning and ending balance
20

20

20

20

Additional Paid-in Capital
 
 
 
 
Beginning balance
23,446

23,454

23,794

23,545

Share-based award activity
196

210

(154
)
119

Other net increases
7

—

9

—

Ending balance
23,649

23,664

23,649

23,664

Retained Earnings
 
 
 
 
Beginning balance
67,588

61,835

64,175

57,577

Cumulative adjustments for accounting changes1
—

—

63

306

Net income applicable to Morgan Stanley
2,173

2,112

6,803

7,217

Preferred stock dividends2
(113
)
(93
)
(376
)
(356
)
Common stock dividends2
(577
)
(524
)
(1,594
)
(1,414
)
Ending balance
69,071

63,330

69,071

63,330

Employee Stock Trusts
 
 
 
 
Beginning balance
2,889

2,829

2,836

2,907

Share-based award activity
(24
)
(32
)
29

(110
)
Ending balance
2,865

2,797

2,865

2,797

Accumulated Other Comprehensive Income (Loss)
 
 
 
 
Beginning balance
(2,051
)
(3,070
)
(2,292
)
(3,060
)
Cumulative adjustments for accounting changes1
—

—

—

(437
)
Net change in Accumulated other comprehensive income (loss)
453

(929
)
694

(502
)
Ending balance
(1,598
)
(3,999
)
(1,598
)
(3,999
)
Common Stock Held In Treasury at Cost
 
 
 
 
Beginning balance
(15,799
)
(11,650
)
(13,971
)
(9,211
)
Share-based award activity
57

25

1,138

759

Repurchases of common stock and employee tax withholdings
(1,538
)
(1,207
)
(4,447
)
(4,380
)
Ending balance
(17,280
)
(12,832
)
(17,280
)
(12,832
)
Common Stock Issued to Employee Stock Trusts
 
 
 
 
Beginning balance
(2,889
)
(2,829
)
(2,836
)
(2,907
)
Share-based award activity
24

32

(29
)
110

Ending balance
(2,865
)
(2,797
)
(2,865
)
(2,797
)
Non-Controlling Interests
 
 
 
 
Beginning balance
1,121

1,397

1,160

1,075

Net income applicable to non-controlling interests
45

42

129

108

Net change in Accumulated other comprehensive income (loss)
2

(59
)
(20
)
4

Other net increases (decreases)
—

(9
)
(101
)
184

Ending balance
1,168

1,371

1,168

1,371

Total Equity
$
83,550

$
80,074

$
83,550

$
80,074


1.
Cumulative adjustments for accounting changes relate to the adoption of certain accounting updates during the current and prior year periods. See Notes 2 and 14 for further information.
2.
See Note 14 for information regarding dividends per share for common stock and each class of preferred stock.



See Notes to Consolidated Financial Statements
43
September 2019 Form 10-Q

Table of Contents
 
Consolidated Cash Flow Statements
(Unaudited)
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Nine Months Ended
September 30,
$ in millions
2019
2018
Cash flows from operating activities
 
 
Net income
$
6,932

$
7,325

Adjustments to reconcile net income to net cash provided by (used for) operating activities:
 
 
Stock-based compensation expense
825

743

Depreciation and amortization
1,987

1,375

(Release of) Provision for credit losses on lending activities
104

(27
)
Other operating adjustments
(114
)
(27
)
Changes in assets and liabilities:
 
 
Trading assets, net of Trading liabilities
17,036

10,039

Securities borrowed
(16,088
)
(18,479
)
Securities loaned
(2,217
)
(1,759
)
Customer and other receivables and other assets
(5,135
)
(4,092
)
Customer and other payables and other liabilities
22,721

310

Securities purchased under agreements to resell
5,155

15,172

Securities sold under agreements to repurchase
9,703

3,904

Net cash provided by (used for) operating activities
40,909

14,484

Cash flows from investing activities
 
 
Proceeds from (payments for):
 
 
Other assets—Premises, equipment and software, net
(1,460
)
(1,361
)
Changes in loans, net
(10,079
)
(7,697
)
Investment securities:
 
 
Purchases
(35,078
)
(16,836
)
Proceeds from sales
13,561

2,947

Proceeds from paydowns and maturities
8,183

9,126

Other investing activities
(848
)
(245
)
Net cash provided by (used for) investing activities
(25,721
)
(14,066
)
Cash flows from financing activities
 
 
Net proceeds from (payments for):
 
 
Other secured financings
(587
)
(1,874
)
Deposits
(7,084
)
15,749

Proceeds from issuance of Borrowings
23,697

34,233

Payments for:
 
 
Borrowings
(30,391
)
(28,235
)
Repurchases of common stock and employee tax withholdings
(4,447
)
(4,380
)
Cash dividends
(2,082
)
(1,788
)
Other financing activities
(286
)
(343
)
Net cash provided by (used for) financing activities
(21,180
)
13,362

Effect of exchange rate changes on cash and cash equivalents
(1,548
)
(1,694
)
Net increase (decrease) in cash and cash equivalents
(7,540
)
12,086

Cash and cash equivalents, at beginning of period
87,196

80,395

Cash and cash equivalents, at end of period
$
79,656

$
92,481

 
 
 
Cash and cash equivalents:
 
 
Cash and due from banks
$
35,721

$
36,641

Interest bearing deposits with banks
13,196

22,638

Restricted cash
30,739

33,202

Cash and cash equivalents, at end of period
$
79,656

$
92,481

 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
Cash payments for:
 
 
Interest
$
9,760

$
6,818

Income taxes, net of refunds
1,603

1,009


September 2019 Form 10-Q
44
See Notes to Consolidated Financial Statements

Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
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1. Introduction and Basis of Presentation
The Firm
Morgan Stanley is a global financial services firm that maintains significant market positions in each of its business segments—Institutional Securities, Wealth Management and Investment Management. Morgan Stanley, through its subsidiaries and affiliates, provides a wide variety of products and services to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individuals. Unless the context otherwise requires, the terms “Morgan Stanley” or the “Firm” mean Morgan Stanley (the “Parent Company”) together with its consolidated subsidiaries. See the “Glossary of Common Acronyms” for definitions of certain acronyms used throughout this Form 10-Q.
A description of the clients and principal products and services of each of the Firm’s business segments is as follows:
Institutional Securities provides investment banking, sales and trading, lending and other services to corporations, governments, financial institutions, and high to ultra-high net worth clients. Investment banking services consist of capital raising and financial advisory services, including services relating to the underwriting of debt, equity and other securities, as well as advice on mergers and acquisitions, restructurings, real estate and project finance. Sales and trading services include sales, financing, prime brokerage and market-making activities in equity and fixed income products, including foreign exchange and commodities. Lending activities include originating corporate loans, commercial mortgage lending, providing secured lending facilities and extending financing to sales and trading customers. Other activities include investments and research.
Wealth Management provides a comprehensive array of financial services and solutions to individual investors and small to medium-sized businesses and institutions covering brokerage and investment advisory services; financial and wealth planning services; annuity and insurance products; securities-based lending, residential real estate loans and other lending products; banking and retirement plan services.
Investment Management provides a broad range of investment strategies and products that span geographies, asset classes, and public and private markets to a diverse group of clients across institutional and intermediary channels. Strategies and products include equity, fixed income, liquidity and alternative/other products. Institutional clients include defined benefit/defined contribution plans, foundations, endowments, government entities, sovereign wealth funds, insurance companies, third-party fund sponsors and corporations. Individual clients are served through intermediaries, including affiliated and non-affiliated distributors.
 
Basis of Financial Information
The unaudited consolidated financial statements (“financial statements”) are prepared in accordance with U.S. GAAP, which requires the Firm to make estimates and assumptions regarding the valuations of certain financial instruments, the valuation of goodwill and intangible assets, compensation, deferred tax assets, the outcome of legal and tax matters, allowance for credit losses and other matters that affect its financial statements and related disclosures. The Firm believes that the estimates utilized in the preparation of its financial statements are prudent and reasonable. Actual results could differ materially from these estimates. Intercompany balances and transactions have been eliminated. Certain reclassifications have been made to prior periods to conform to the current presentation.
The Firm has evaluated subsequent events for adjustment to or disclosure in the financial statements through the date of this report and has not identified any recordable or disclosable events not otherwise reported in these financial statements or the notes thereto.
The accompanying financial statements should be read in conjunction with the Firm’s financial statements and notes thereto included in the 2018 Form 10-K. Certain footnote disclosures included in the 2018 Form 10-K have been condensed or omitted from these financial statements as they are not required for interim reporting under U.S. GAAP. The financial statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for the fair presentation of the results for the interim period. The results of operations for interim periods are not necessarily indicative of results for the entire year.
Consolidation
The financial statements include the accounts of the Firm, its wholly owned subsidiaries and other entities in which the Firm has a controlling financial interest, including certain VIEs (see Note 12). For consolidated subsidiaries that are not wholly owned, the third-party holdings of equity interests are referred to as noncontrolling interests. The net income attributable to noncontrolling interests for such subsidiaries is presented as Net income applicable to noncontrolling interests in the consolidated income statements (“income statements”). The portion of shareholders’ equity that is attributable to noncontrolling interests for such subsidiaries is presented as noncontrolling interests, a component of total equity, in the consolidated balance sheets (“balance sheets”).
For a discussion of the Firm’s significant regulated U.S. and international subsidiaries and its involvement with VIEs, see Note 1 to the financial statements in the 2018 Form 10-K.

 
45
September 2019 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
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2. Significant Accounting Policies
For a detailed discussion about the Firm’s significant accounting policies and for further information on accounting updates adopted in the prior year, see Note 2 to the financial statements in the 2018 Form 10-K.
During the nine months ended September 30, 2019 (“current year period”), there were no significant revisions to the Firm’s significant accounting policies, other than for the accounting updates adopted.
Accounting Updates Adopted
The Firm adopted the following accounting updates on January 1, 2019. Prior periods are presented under previous policies.
Leases
Upon the adoption of Leases, the Firm began recognizing in the balance sheet leases with terms exceeding one year as right-of-use (“ROU”) assets and corresponding liabilities. The adoption resulted in an increase to Retained earnings of approximately $63 million, net of tax, related to deferred revenue from previously recorded sale-leaseback transactions. At transition on January 1, 2019, the adoption also resulted in a balance sheet gross-up of approximately $4 billion reflected in Other assets and Other liabilities and accrued expenses. See Note 11 for lease disclosures, including amounts reflected in the September 30, 2019 balance sheet. Prior period amounts were not restated.
As allowed by the guidance, the Firm elected not to reassess the following at transition: whether existing contracts are or contain leases, and for existing leases, lease classification and initial direct costs. In addition, the Firm continues to account for existing land easements as service contracts.
Both at transition and for new leases thereafter, ROU assets and lease liabilities are initially recognized based on the present value of the future minimum lease payments over the lease term, including non-lease components such as fixed common area maintenance costs and other fixed costs such as real estate taxes and insurance.
The discount rates used in determining the present value of leases are the Firm’s incremental borrowing rates, developed based upon each lease’s term and currency of payment. The lease term includes options to extend or terminate the lease when it is reasonably certain that the Firm will exercise that option. For operating leases, the ROU assets also include any prepaid lease payments and initial direct costs incurred and are reduced by lease incentives. For these leases, lease expense is recognized on a straight-line basis over the lease term if the ROU asset has not been impaired or abandoned.
 
Derivatives and Hedging (ASU 2018-16)
The amendments in this update permit use of the OIS rate based on the Secured Overnight Financing Rate as a U.S. benchmark interest rate for hedge accounting purposes. The Firm adopted this update on a prospective basis for qualifying new or redesignated hedging relationships. This update did not impact the Firm’s pre-existing hedges.
Goodwill
The Firm completed its annual goodwill impairment testing as of July 1, 2019. The Firm's impairment testing did not indicate any goodwill impairment, as each of the Firm's reporting units with goodwill had a fair value that was substantially in excess of its carrying value.

 
3. Fair Values
Recurring Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
At September 30, 2019
$ in millions
Level 1
Level 2
Level 3
Netting1
Total
Assets at fair value
 
 
 
 
 
Trading assets:
 
 
 
 
 
U.S. Treasury and agency securities
$
44,129

$
25,280

$
18

$
—

$
69,427

Other sovereign government obligations
33,333

5,512

12

—

38,857

State and municipal securities
—

3,080

1

—

3,081

MABS
—

1,593

401

—

1,994

Loans and lending commitments2
—

5,155

4,869

—

10,024

Corporate and other debt
—

21,646

1,390

—

23,036

Corporate equities3
92,191

459

103

—

92,753

Derivative and other contracts:
 
 
 
 
Interest rate
1,965

220,709

1,502

—

224,176

Credit
—

6,870

849

—

7,719

Foreign exchange
55

64,477

100

—

64,632

Equity
982

46,836

1,082

—

48,900

Commodity and other
1,305

6,866

3,099

—

11,270

Netting1
(3,686
)
(265,103
)
(1,122
)
(54,162
)
(324,073
)
Total derivative and other contracts
621

80,655

5,510

(54,162
)
32,624

Investments4
514

200

785

—

1,499

Physical commodities
—

1,022

—

—

1,022

Total trading assets
170,788

144,602

13,089

(54,162
)
274,317

Investment securities—AFS
34,931

29,783

—

—

64,714

Securities purchased under agreements to resell
—

4

—

—

4

Total assets at fair value
$
205,719

$
174,389

$
13,089

$
(54,162
)
$
339,035



September 2019 Form 10-Q
46
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
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At September 30, 2019
$ in millions
Level 1
Level 2
Level 3
Netting1
Total
Liabilities at fair value
 
 
 
 
 
Deposits
$
—

$
1,477

$
145

$
—

$
1,622

Trading liabilities:
 
 
 
 
 
U.S. Treasury and agency securities
12,826

194

1

—

13,021

Other sovereign government obligations
22,090

1,593

3

—

23,686

Corporate and other debt
—

7,968

4

—

7,972

Corporate equities3
63,197

95

32

—

63,324

Derivative and other contracts:
 
 
 
 
Interest rate
1,730

211,860

714

—

214,304

Credit
—

7,361

744

—

8,105

Foreign exchange
13

66,223

48

—

66,284

Equity
987

46,484

2,463

—

49,934

Commodity and other
1,324

6,456

1,125

—

8,905

Netting1
(3,686
)
(265,103
)
(1,122
)
(42,219
)
(312,130
)
Total derivative and other contracts
368

73,281

3,972

(42,219
)
35,402

Total trading liabilities
98,481

83,131

4,012

(42,219
)
143,405

Securities sold under agreements to repurchase
—

732

—

—

732

Other secured financings
—

6,242

110

—

6,352

Borrowings
—

58,116

3,538

—

61,654

Total liabilities at fair value
$
98,481

$
149,698

$
7,805

$
(42,219
)
$
213,765

 
 
At December 31, 2018
$ in millions
Level 1
Level 2
Level 3
Netting1
Total
Assets at fair value
 
 
 
 
 
Trading assets:
 
 
 
 
 
U.S. Treasury and agency securities
$
38,767

$
29,594

$
54

$
—

$
68,415

Other sovereign government obligations
28,395

5,529

17

—

33,941

State and municipal securities
—

3,161

148

—

3,309

MABS
—

2,154

354

—

2,508

Loans and lending commitments2
—

4,055

6,870

—

10,925

Corporate and other debt
—

18,129

1,076

—

19,205

Corporate equities3
93,626

522

95

—

94,243

Derivative and other contracts:
 
 
 
Interest rate
2,793

155,027

1,045

—

158,865

Credit
—

5,707

421

—

6,128

Foreign exchange
62

63,023

161

—

63,246

Equity
1,256

45,596

1,022

—

47,874

Commodity and other
963

8,517

2,992

—

12,472

Netting1
(4,151
)
(210,190
)
(896
)
(44,175
)
(259,412
)
Total derivative and other contracts
923

67,680

4,745

(44,175
)
29,173

Investments4
412

293

757

—

1,462

Physical commodities
—

536

—

—

536

Total trading assets
162,123

131,653

14,116

(44,175
)
263,717

Investment securities—AFS
36,399

24,662

—

—

61,061

Intangible assets
—

5

—

—

5

Total assets at fair value
$
198,522

$
156,320

$
14,116

$
(44,175
)
$
324,783


 
47
September 2019 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

 
At December 31, 2018
$ in millions
Level 1
Level 2
Level 3
Netting1
Total
Liabilities at fair value
 
 
 
 
 
Deposits
$
—

$
415

$
27

$
—

$
442

Trading liabilities:
 
 
 
 
 
U.S. Treasury and agency securities
11,272

543

—

—

11,815

Other sovereign government obligations
21,391

1,454

—

—

22,845

Corporate and other debt
—

8,550

1

—

8,551

Corporate equities3
56,064

199

15

—

56,278

Derivative and other contracts:
 
 
 
 
Interest rate
2,927

142,746

427

—

146,100

Credit
—

5,772

381

—

6,153

Foreign exchange
41

63,379

86

—

63,506

Equity
1,042

47,091

2,507

—

50,640

Commodity and other
1,228

6,872

940

—

9,040

Netting1
(4,151
)
(210,190
)
(896
)
(32,944
)
(248,181
)
Total derivative and other contracts
1,087

55,670

3,445

(32,944
)
27,258

Total trading liabilities
89,814

66,416

3,461

(32,944
)
126,747

Securities sold under agreements to repurchase
—

812

—

—

812

Other secured financings
—

5,037

208

—

5,245

Borrowings
—

47,378

3,806

—

51,184

Total liabilities at fair value
$
89,814

$
120,058

$
7,502

$
(32,944
)
$
184,430

MABS—Mortgage- and asset-backed securities
1.
For positions with the same counterparty classified in different levels of the fair value hierarchy, both counterparty netting and cash collateral netting are included in the column titled “Netting.” Positions classified within the same level that are with the same counterparty are netted within the column for that level. For further information on derivative instruments and hedging activities, see Note 4.
2.
For a further breakdown by type, see the following Breakdown of Loans and Lending Commitments at Fair Value table.
3.
For trading purposes, the Firm holds or sells short equity securities issued by entities in diverse industries and of varying sizes.
4.
Amounts exclude certain investments that are measured based on NAV per share, which are not classified in the fair value hierarchy. For additional disclosure about such investments, see “Net Asset Value Measurements—Fund Interests” herein.
Breakdown of Loans and Lending Commitments at Fair Value
$ in millions
At
September 30,
2019
At
December 31,
2018
Corporate
$
7,387

$
9,171

Residential real estate
1,206

1,153

Commercial real estate
1,431

601

Total
$
10,024

$
10,925


Unsettled Fair Value of Futures Contracts1 
$ in millions
At
September 30,
2019
At
December 31,
2018
Customer and other receivables, net
$
501

$
615

  
1.
These contracts are primarily Level 1, actively traded, valued based on quoted prices from the exchange and are excluded from the previous recurring fair value tables.
For a description of the valuation techniques applied to the Firm’s major categories of assets and liabilities measured at
 
fair value on a recurring basis, see Note 3 to the financial statements in the 2018 Form 10-K. During the current year period, there were no significant revisions made to the Firm’s valuation techniques.
Rollforward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
$ in millions
2019
2018
2019
2018
Assets at Fair value
U.S. Treasury and agency securities
Beginning balance
$
5

$
—

$
54

$
—

Purchases
11

5

18

5

Sales
—

—

(54
)
—

Net transfers
2

—

—

—

Ending balance
$
18

$
5

$
18

$
5

Unrealized gains (losses)
$
—

$
—

$
—

$
—

Other sovereign government obligations
Beginning balance
$
10

$
5

$
17

$
1

Realized and unrealized gains (losses)
(3
)
—

(2
)
—

Purchases
2

32

13

35

Sales
(2
)
(2
)
(6
)
—

Settlements
—

—

—

—

Net transfers
5

1

(10
)
—

Ending balance
$
12

$
36

$
12

$
36

Unrealized gains (losses)
$
(3
)
$
—

$
(2
)
$
—

State and municipal securities
Beginning balance
$
16

$
2

$
148

$
8

Realized and unrealized gains (losses)
—

—

—

—

Purchases
—

2

—

3

Sales
(2
)
—

(43
)
(7
)
Net transfers
(13
)
—

(104
)
—

Ending balance
$
1

$
4

$
1

$
4

Unrealized gains (losses)
$
—

$
—

$
—

$
—

MABS
Beginning balance
$
480

$
327

$
354

$
423

Realized and unrealized gains (losses)
(10
)
(1
)
(9
)
88

Purchases
5

23

66

73

Sales
(58
)
(46
)
(157
)
(317
)
Settlements
—

(14
)
(39
)
(16
)
Net transfers
(16
)
27

186

65

Ending balance
$
401

$
316

$
401

$
316

Unrealized gains (losses)
$
(8
)
$
(8
)
$
(38
)
$
(6
)
Loans and lending commitments
Beginning balance
$
5,604

$
6,923

$
6,870

$
5,945

Realized and unrealized gains (losses)
(51
)
17

3

16

Purchases and originations
852

2,076

1,934

4,030

Sales
(464
)
(1,184
)
(1,541
)
(978
)
Settlements
(811
)
(777
)
(2,130
)
(1,926
)
Net transfers
(261
)
(320
)
(267
)
(352
)
Ending balance
$
4,869

$
6,735

$
4,869

$
6,735

Unrealized gains (losses)
$
(55
)
$
12

$
283

$
(8
)


September 2019 Form 10-Q
48
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

 
Three Months Ended
September 30,
Nine Months Ended
September 30,
$ in millions
2019
2018
2019
2018
Corporate and other debt
Beginning balance
$
1,364

$
701

$
1,076

$
701

Realized and unrealized gains (losses)
157

(4
)
269

51

Purchases
341

109

632

276

Sales
(474
)
(153
)
(587
)
(227
)
Settlements
—

(6
)
(7
)
(8
)
Net transfers
2

63

7

(83
)
Ending balance
$
1,390

$
710

$
1,390

$
710

Unrealized gains (losses)
$
114

$
9

$
217

$
16

Corporate equities
Beginning balance
$
98

$
171

$
95

$
166

Realized and unrealized gains (losses)
1

(7
)
(41
)
17

Purchases
5

15

44

69

Sales
(16
)
(50
)
(268
)
(134
)
Net transfers
15

(23
)
273

(12
)
Ending balance
$
103

$
106

$
103

$
106

Unrealized gains (losses)
$
7

$
5

$
(38
)
$
14

Investments
Beginning balance
$
785

$
941

$
757

$
1,020

Realized and unrealized gains (losses)
(15
)
5

19

5

Purchases
7

72

28

134

Sales
(7
)
(103
)
(43
)
(209
)
Net transfers
15

(97
)
24

(132
)
Ending balance
$
785

$
818

$
785

$
818

Unrealized gains (losses)
$
(12
)
$
2

$
22

$
5

Net derivative and other contracts:
Interest rate
Beginning balance
$
816

$
567

$
618

$
1,218

Realized and unrealized gains (losses)
(40
)
(3
)
143

(46
)
Purchases
69

12

132

84

Issuances
(11
)
(9
)
(22
)
(38
)
Settlements
2

(2
)
16

(92
)
Net transfers
(48
)
12

(99
)
(549
)
Ending balance
$
788

$
577

$
788

$
577

Unrealized gains (losses)
$
120

$
24

$
214

$
(47
)
Credit
Beginning balance
$
(138
)
$
(2
)
$
40

$
41

Realized and unrealized gains (losses)
(183
)
(39
)
36

(17
)
Purchases
44

4

103

9

Issuances
(19
)
—

(162
)
(40
)
Settlements
389

58

90

30

Net transfers
12

—

(2
)
(2
)
Ending balance
$
105

$
21

$
105

$
21

Unrealized gains (losses)
$
20

$
(41
)
$
41

$
(20
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
$ in millions
2019
2018
2019
2018
Foreign exchange
Beginning balance
$
(29
)
$
(26
)
$
75

$
(112
)
Realized and unrealized gains (losses)
67

(35
)
(83
)
71

Purchases
—

—

—

2

Issuances
—

—

—

(48
)
Settlements
5

2

—

43

Net transfers
9

15

60

—

Ending balance
$
52

$
(44
)
$
52

$
(44
)
Unrealized gains (losses)
$
79

$
(9
)
$
26

$
1

Equity
Beginning balance
$
(1,715
)
$
(1,535
)
$
(1,485
)
$
1,208

Realized and unrealized gains (losses)
(61
)
(149
)
59

83

Purchases
36

29

75

120

Issuances
(207
)
(138
)
(227
)
(1,052
)
Settlements
(56
)
84

(173
)
319

Net transfers
622

38

370

(2,349
)
Ending balance
$
(1,381
)
$
(1,671
)
$
(1,381
)
$
(1,671
)
Unrealized gains (losses)
$
(86
)
$
(132
)
$
81

$
19

Commodity and other
Beginning balance
$
1,861

$
2,032

$
2,052

$
1,446

Realized and unrealized gains (losses)
120

(29
)
35

332

Purchases
126

—

145

80

Issuances
(36
)
(11
)
(71
)
(18
)
Settlements
(107
)
(1
)
(307
)
17

Net transfers
10

29

120

163

Ending balance
$
1,974

$
2,020

$
1,974

$
2,020

Unrealized gains (losses)
$
33

$
(105
)
$
(89
)
$
33

Liabilities at Fair Value
Deposits
Beginning balance
$
138

$
37

$
27

$
47

Realized and unrealized losses (gains)
5

2

16

(1
)
Issuances
23

11

70

27

Settlements
(8
)
—

(12
)
(2
)
Net transfers
(13
)
23

44

2

Ending balance
$
145

$
73

$
145

$
73

Unrealized losses (gains)
$
5

$
2

$
16

$
(1
)
Nonderivative trading liabilities
Beginning balance
$
36

$
25

$
16

$
25

Realized and unrealized losses (gains)
(7
)
—

(37
)
(4
)
Purchases
(13
)
(12
)
(31
)
(15
)
Sales
6

3

36

12

Net transfers
18

(2
)
56

(4
)
Ending balance
$
40

$
14

$
40

$
14

Unrealized losses (gains)
$
(7
)
$
—

$
(37
)
$
(4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
49
September 2019 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

 
Three Months Ended
September 30,
Nine Months Ended
September 30,
$ in millions
2019
2018
2019
2018
Securities sold under agreements to repurchase
Beginning balance
$
—

$
—

$
—

$
150

Net transfers
—

—

—

(150
)
Ending balance
$
—

$
—

$
—

$
—

Unrealized losses (gains)
$
—

$
—

$
—

$
—

Other secured financings
 
 
Beginning balance
$
154

$
170

$
208

$
239

Realized and unrealized losses (gains)
(1
)
2

5

(16
)
Issuances
—

—

—

8

Settlements
—

—

(8
)
(18
)
Net transfers
(43
)
—

(95
)
(41
)
Ending balance
$
110

$
172

$
110

$
172

Unrealized losses (gains)
$
(1
)
$
2

$
5

$
(16
)
Borrowings
Beginning balance
$
3,939

$
3,295

$
3,806

$
2,984

Realized and unrealized losses (gains)
88

56

498

(156
)
Issuances
201

344

610

1,275

Settlements
(260
)
(81
)
(438
)
(339
)
Net transfers
(430
)
6

(938
)
(144
)
Ending balance
$
3,538

$
3,620

$
3,538

$
3,620

Unrealized losses (gains)
$
91

$
55

$
459

$
(168
)
Portion of Unrealized losses (gains) recorded in OCI—Change in net DVA
(23
)
82

68

(45
)

Level 3 instruments may be hedged with instruments classified in Level 1 and/or Level 2. The realized and unrealized gains (losses) for assets and liabilities within the Level 3 category presented in the previous tables do not reflect the related realized and unrealized gains (losses) on hedging instruments that have been classified by the Firm within the Level 1 and/or Level 2 categories.
The unrealized gains (losses) during the period for assets and liabilities within the Level 3 category may include changes in fair value during the period that were attributable to both observable and unobservable inputs. Total realized and unrealized gains (losses) are primarily included in Trading revenues in the income statements.
Additionally, in the previous tables, consolidations of VIEs are included in Purchases and deconsolidations of VIEs are included in Settlements.





 
Significant Unobservable Inputs Used in Recurring and Nonrecurring Level 3 Fair Value Measurements
 
Valuation Techniques and Unobservable Inputs
 
Balance / Range (Average)1
$ in millions, except inputs
At September 30, 2019
At December 31, 2018
Assets Measured at Fair Value on a Recurring Basis
MABS
$
401

$
354

Comparable pricing:
 
Bond price
0 to 97 points
(47 points)

0 to 97 points 
(38 points)

Loans and lending commitments
$
4,869

$
6,870

Margin loan model:
 
 
Discount rate
1% to 7% (2%)

1% to 7% (2%)

Volatility skew
17% to 73% (27%)

19% to 56% (28%)

Credit Spread
9 to 41 bps (26 bps)

14 to 90 bps (36 bps)

Comparable pricing:
 
Loan price
70 to 100 points
(93 points)

60 to 101 points 
(95 points)

Corporate and other debt
$
1,390

$
1,076

Comparable pricing:
 
Bond price
12 to 105 points
(82 points)

12 to 100 points
(72 points)

Discounted cash flow:
 
Recovery rate
36
%
20
 %
Discount rate
N/M

15% to 21% (16%)

Option model:
 
 
At the money volatility
21
%
24% to 78% (50%)

Corporate equities
$
103

$
95

Comparable pricing:
 
Equity price
100
%
100
 %
Investments
$
785

$
757

Discounted cash flow:
 
WACC
15% to 16% (15%)

9% to 15% (10%)

Exit multiple
7 to 16 times (11 times)

7 to 10 times (10 times)

Market approach:
 
 
EBITDA multiple
7 to 25 times (11 times)

6 to 24 times (12 times)

Comparable pricing:
 
Equity price
75% to 100% (99%)

75% to 100% (96%)

Net derivative and other contracts:
 
Interest rate
$
788

$
618

Option model:
 
 
IR volatility skew
34% to 163%
(71% / 71%)

22% to 95% 
(48% / 51%)

Contingency probability
95%

N/M

IR curve correlation
37% to 89% (66% / 67%)

N/M

Bond volatility
4% to 19% (14% / 14%)

N/M

Inflation volatility
23% to 62% (43% / 40%)

23% to 65% (44% / 40%)

IR curve
1
%
1
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

September 2019 Form 10-Q
50
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

 
Balance / Range (Average)1
$ in millions, except inputs
At September 30, 2019
At December 31, 2018
Credit
$
105

$
40

Comparable pricing:
 
Cash-synthetic basis
6 points

8 to 9 points (9 points)

Bond price
0 to 103 points
(55 points)

0 to 75 points 
(26 points)

Credit spread
9 to 507 bps (91 bps)

246 to 499 bps (380 bps)

Funding spread
69 to 131 bps (100 bps)

47 to 98 bps (93 bps)

Correlation model:
 
 
Credit correlation
32% to 62% (36%)

36% to 69% (44%)

Foreign exchange2
$
52

$
75

Option model:
 
 
IR - FX correlation
29% to 56% (47% / 47%)

53% to 56% (55% / 55%)

IR volatility skew
34% to 163%
(71% / 71%)

22% to 95%
(48% / 51%)

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

N/M

Contingency probability
85% to 95% (92% / 95%)

90% to 95% (93% / 95%)

Equity2
$
(1,381
)
$
(1,485
)
Option model:
 
 
At the money volatility
13% to 81% (35%)

17% to 63% (38%)

Volatility skew
-2% to 0% (-1%)

-2% to 0% (-1%)

Equity correlation
5% to 96% (68%)

5% to 96% (71%)

FX correlation
-60% to 55% (-25%)

-60% to 55% (-26%)

IR correlation
-8% to 44% (17% / 15%)

-7% to 45% (15% / 12%)

Commodity and other
$
1,974

$
2,052

Option model:
 
 
Forward power price
$5 to $178 ($28) per MWh

3 to $185 ($31) per 
MWh

Commodity volatility
1% to 96% (19%)

7% to 187% (17%)

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

5% to 99% (93%)

Liabilities Measured at Fair Value on a Recurring Basis
Deposits
$
145

$
27

Option Model:
 
 
At the money volatility
20% to 39% (21%)

N/M

Other secured financings
$
110

$
208

Discounted cash flow:
 
Funding spread
107 to 122 bps (115 bps)

103 to 193 bps (148 bps)

Option model:
 
 
Volatility skew
N/M

-1
 %
At the money volatility
25% to 28% (28%)

10% to 40% (25%)

Borrowings
$
3,538

$
3,806

Option model:
 
 
At the money volatility
6% to 45% (22%)

5% to 35% (22%)

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

-2% to 0% (0%)

Equity correlation
39% to 94% (80%)

45% to 98% (85%)

Equity - FX correlation
-70% to 30% (-22%)

-75% to 50% (-27%)

IR Correlation
N/M

58% to 97% (85% / 91%)

IR - FX Correlation
-33% to 7% (-8% / -8%)

28% to 58% (44% / 44%)

 
 
Balance / Range (Average)1
$ in millions, except inputs
At September 30, 2019
At December 31, 2018
Nonrecurring Fair Value Measurement
Loans
$
1,665

$
1,380

Corporate loan model:
 
Credit spread
54 to 435 bps (220 bps)

97 to 434 bps (181 bps)

Warehouse model:
 
 
Credit spread
183 to 317 bps (220 bps)

223 to 313 bps (247 bps)

Points—Percentage of par
IR—Interest rate
FX—Foreign exchange
1.
A single amount is disclosed for range and average when there is no significant difference between the minimum, maximum and average. Amounts represent weighted averages except where simple averages and the median of the inputs are more relevant.
2.
Includes derivative contracts with multiple risks (i.e., hybrid products).
The previous tables provide information for each major category of assets and liabilities measured at fair value on a recurring and nonrecurring basis with a significant Level 3 balance. The level of aggregation and breadth of products cause the range of inputs to be wide and not evenly distributed across the inventory. 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. In general, there are no predictable relationships between multiple significant unobservable inputs attributable to a given valuation technique.
For a description of the Firm’s significant unobservable inputs and qualitative information about the effect of hypothetical changes in the values of those inputs, see Note 3 to the financial statements in the 2018 Form 10-K. During the current year period, there were no significant revisions made to the descriptions of the Firm’s significant unobservable inputs.
Net Asset Value Measurements
Fund Interests
 
At September 30, 2019
At December 31, 2018
$ in millions
Carrying
Value
Commitment
Carrying
Value
Commitment
Private equity
$
1,542

$
363

$
1,374

$
316

Real estate
1,469

153

1,105

161

Hedge1
95

4

103

4

Total
$
3,106

$
520

$
2,582

$
481

1.
Investments in hedge funds may be subject to initial period lock-up or gate provisions, which restrict an investor from withdrawing from the fund during a certain initial period or restrict the redemption amount on any redemption date, respectively.
For a description of the Firm’s investments in private equity funds, real estate funds and hedge funds, which are measured based on NAV, see Note 3 to the financial statements in the 2018 Form 10-K.
Amounts in the previous table represent the Firm’s carrying value of general and limited partnership interests in fund investments, as well as any carried interest. The carrying

 
51
September 2019 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

amounts are measured based on the NAV of the fund taking into account the distribution terms applicable to the interest held. This same measurement applies whether the fund investments are accounted for under the equity method or fair value.

See Note 11 for information regarding general partner guarantees, which include potential obligations to return performance-based fees in the form of carried interest previously received. See Note 18 for information regarding carried interest at risk of reversal. 

Nonredeemable Funds by Contractual Maturity
 
Carrying Value at September 30, 2019
$ in millions
Private Equity
Real Estate
Less than 5 years
$
765

$
1,151

5-10 years
753

230

Over 10 years
24

88

Total
$
1,542

$
1,469


Fair Value Option
The Firm has elected the fair value option for certain eligible instruments that are risk managed on a fair value basis to mitigate income statement volatility caused by measurement basis differences between the elected instruments and their associated risk management transactions or to eliminate the complexities of applying certain accounting models.
Borrowings Measured at Fair Value on a Recurring Basis
$ in millions
At
September 30,
2019
At
December 31,
2018
Business Unit Responsible for Risk Management
Equity
$
29,508

$
24,494

Interest rates
26,427

22,343

Commodities
3,973

2,735

Credit
1,229

856

Foreign exchange
517

756

Total
$
61,654

$
51,184

 

Net Revenues from Borrowings under the Fair Value Option
 
Three Months Ended September 30,
Nine Months Ended September 30,
$ in millions
2019
2018
2019
2018
Trading revenues
$
(795
)
$
449

$
(5,888
)
$
1,334

Interest expense
93

59

280

234

Net revenues1
$
(888
)
$
390

$
(6,168
)
$
1,100

 
1.
Amounts do not reflect any gains or losses from related economic hedges.
Gains (losses) from changes in fair value are recorded in Trading revenues and are mainly attributable to movements in the reference price or index, interest rates or foreign exchange rates.
 
Gains (Losses) Due to Changes in Instrument-Specific Credit Risk
 
Three Months Ended September 30,
 
2019
2018
$ in millions
Trading
Revenues
OCI
Trading
Revenues
OCI
Borrowings
$
(2
)
$
442

$
(4
)
$
(1,010
)
Loans and other debt1
(3
)
—

55

—

Lending commitments
—

—

(6
)
—

Other
—

1

(32
)
28

 
Nine Months Ended September 30,
 
2019
2018
$ in millions
Trading
Revenues
OCI
Trading
Revenues
OCI
Borrowings
$
(9
)
$
(702
)
$
(22
)
$
425

Loans and other debt1
148

—

199

—

Lending commitments
(2
)
—

(3
)
—

Other
—

(2
)
(32
)
32

$ in millions
At
September 30,
2019
At
December 31,
2018
Cumulative pre-tax DVA gain (loss) recognized in AOCI
$
(532
)
$
172


1.
Loans and other debt instrument-specific credit gains (losses) were determined by excluding the non-credit components of gains and losses.
Difference Between Contractual Principal and Fair Value1 
$ in millions
At
September 30,
2019
At
December 31,
2018
Loans and other debt2
$
13,154

$
13,094

Nonaccrual loans2
10,919

10,831

Borrowings3
(986
)
2,657


1.
Amounts indicate contractual principal greater than or (less than) fair value.
2.
The majority of the difference between principal and fair value amounts for loans and other debt relates to distressed debt positions purchased at amounts well below par.
3.
Borrowings in this table do not include structured notes where the repayment of the initial principal amount fluctuates based on changes in a reference price or index.

The previous tables exclude non-recourse debt from consolidated VIEs, liabilities related to failed sales of financial assets, pledged commodities and other liabilities that have specified assets attributable to them.
Fair Value Loans on Nonaccrual Status
$ in millions
At
September 30,
2019
At
December 31,
2018
Nonaccrual loans
$
839

$
1,497

Nonaccrual loans 90 or more days past due
$
452

$
812


 
 

September 2019 Form 10-Q
52
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

Nonrecurring Fair Value Measurements    
Carrying and Fair Values
 
At September 30, 2019
 
Fair Value
$ in millions
Level 2
Level 31
Total
Assets
 
 
 
Loans
$
1,513

$
1,665

$
3,178

Other assets—Other investments
—

26

26

Other assets—Premises, equipment and software
—

—

—

Total
$
1,513

$
1,691

$
3,204

Liabilities
 
 
 
Other liabilities and accrued expenses—Lending commitments
$
(161
)
$
(64
)
$
(225
)
Total
$
(161
)
$
(64
)
$
(225
)
 
At December 31, 2018
 
Fair Value
$ in millions
Level 2
Level 31
Total
Assets
 
 
 
Loans
$
2,307

$
1,380

$
3,687

Other assets—Other investments
14

100

114

Other assets—Premises, equipment and software
—

—

—

Total
$
2,321

$
1,480

$
3,801

Liabilities
 
 
 
Other liabilities and accrued expenses—Lending commitments
$
292

$
65

$
357

Total
$
292

$
65

$
357

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

 

 
Gains (Losses) from Fair Value Remeasurements1 
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
$ in millions
2019
2018
2019
2018
Assets
 
 
 
 
Loans2
$
(27
)
$
(5
)
$
(12
)
$
1

Other assets—Other investments
(3
)
(2
)
(8
)
(9
)
Other assets—Premises, equipment and software
(4
)
(3
)
(8
)
(13
)
Total
$
(34
)
$
(10
)
$
(28
)
$
(21
)
Liabilities
 
 


Other liabilities and accrued expenses—Lending commitments2
$
(19
)
$
31

$
82

$
41

Total
$
(19
)
$
31

$
82

$
41

 
1.
Gains and losses for Loans and Other assets—Other investments are classified in Other revenues. For other items, gains and losses are recorded in Other revenues if the item is held for sale; otherwise they are recorded in Other expenses.
2.
Nonrecurring changes in the fair value of loans and lending commitments were calculated as follows: for the held-for-investment category, based on the value of the underlying collateral; and for the held-for-sale category, based on recently executed transactions, market price quotations, valuation models that incorporate market observable inputs where possible, such as comparable loan or debt prices and CDS spread levels adjusted for any basis difference between cash and derivative instruments, or default recovery analysis where such transactions and quotations are unobservable.


 
53
September 2019 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

Financial Instruments Not Measured at Fair Value
Carrying and Fair Values
 
At September 30, 2019
 
Carrying
Value
Fair Value
$ in millions
Level 1
Level 2
Level 3
Total
Financial assets
 
 
 
 
Cash and cash equivalents:
 
 
 
 
Cash and due from banks
$
35,721

$
35,721

$
—

$
—

$
35,721

Interest bearing deposits with banks
13,196

13,196

—

—

13,196

Restricted cash
30,739

30,739

—

—

30,739

Investment securities—HTM
41,076

27,816

13,513

662

41,991

Securities purchased under agreements to resell
93,363

—

91,966

1,374

93,340

Securities borrowed
132,401

—

132,406

—

132,406

Customer and other receivables1
54,784

—

51,855

2,880

54,735

Loans2
125,522

—

23,119

102,403

125,522

Other assets
474

—

474

—

474

Financial liabilities
 
 
 
Deposits
$
179,116

$
—

$
179,536

$
—

$
179,536

Securities sold under agreements to repurchase
58,730

—

58,724

—

58,724

Securities loaned
9,691

—

9,694

—

9,694

Other secured financings
3,484

—

3,488

—

3,488

Customer and other payables1
199,944

—

199,944

—

199,944

Borrowings
132,005

—

135,409

10

135,419

 
Commitment
Amount
 
 
 
 
Lending commitments3
$
118,524

$
—

$
889

$
348

$
1,237









 
 
At December 31, 2018
 
Carrying
Value
Fair Value
$ in millions
Level 1
Level 2
Level 3
Total
Financial assets
 
 
 
 
Cash and cash equivalents:
 
 
 
 
Cash and due from banks
$
30,541

$
30,541

$
—

$
—

$
30,541

Interest bearing deposits with banks
21,299

21,299

—

—

21,299

Restricted cash
35,356

35,356

—

—

35,356

Investment securities—HTM
30,771

17,473

12,018

474

29,965

Securities purchased under agreements to resell
98,522

—

97,611

866

98,477

Securities borrowed
116,313

—

116,312

—

116,312

Customer and other receivables1
47,972

—

44,620

3,219

47,839

Loans2
115,579

—

25,604

90,121

115,725

Other assets
461

—

461

—

461

Financial liabilities
 
 
 
Deposits
$
187,378

$
—

$
187,372

$
—

$
187,372

Securities sold under agreements to repurchase
48,947

—

48,385

525

48,910

Securities loaned
11,908

—

11,906

—

11,906

Other secured financings
4,221

—

3,233

994

4,227

Customer and other payables1
176,561

—

176,561

—

176,561

Borrowings
138,478

—

140,085

30

140,115

 
Commitment
Amount
 
 
 
 
Lending commitments3
$
104,844

$
—

$
1,249

$
321

$
1,570


1.
Accrued interest and dividend receivables and payables, where carrying value approximates fair value, have been excluded as these are not financial instruments.
2.
Amounts include loans measured at fair value on a nonrecurring basis.
3.
Represents Lending Commitments accounted for as Held for investment and Held for sale. For a further discussion on lending commitments, see Note 11.
The previous tables exclude certain financial instruments such as equity method investments and all non-financial assets and liabilities such as the value of the long-term relationships with the Firm’s deposit customers.

September 2019 Form 10-Q
54
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

4. Derivative Instruments and Hedging Activities
Fair Values of Derivative Contracts
At September 30, 2019
 
Assets
$ in millions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges
 
 
 
Interest rate
$
761

$
2

$
—

$
763

Foreign exchange
114

8

—

122

Total
875

10

—

885

Not designated as accounting hedges
 
 
Interest rate
216,358

6,090

965

223,413

Credit
4,932

2,787

—

7,719

Foreign exchange
63,326

1,069

115

64,510

Equity
26,395

—

22,505

48,900

Commodity and other
8,797

—

2,473

11,270

Total
319,808

9,946

26,058

355,812

Total gross derivatives
$
320,683

$
9,956

$
26,058

$
356,697

Amounts offset
 
 
 
 
Counterparty netting
(242,002
)
(8,580
)
(24,298
)
(274,880
)
Cash collateral netting
(47,994
)
(1,199
)
—

(49,193
)
Total in Trading assets
$
30,687

$
177

$
1,760

$
32,624

Amounts not offset1
 
 
 
 
Financial instruments collateral
(14,340
)
—

—

(14,340
)
Other cash collateral
(35
)
—

—

(35
)
Net amounts
$
16,312

$
177

$
1,760

$
18,249

Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable
$
2,132


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

$
1

$
—

$
1

Foreign exchange
26

19

—

45

Total
26

20

—

46

Not designated as accounting hedges
 
 
Interest rate
208,515

4,956

832

214,303

Credit
4,649

3,456

—

8,105

Foreign exchange
65,081

1,092

66

66,239

Equity
27,820

—

22,114

49,934

Commodity and other
6,690

—

2,215

8,905

Total
312,755

9,504

25,227

347,486

Total gross derivatives
$
312,781

$
9,524

$
25,227

$
347,532

Amounts offset
 
 
 
 
Counterparty netting
(242,002
)
(8,580
)
(24,298
)
(274,880
)
Cash collateral netting
(36,520
)
(730
)
—

(37,250
)
Total in Trading liabilities
$
34,259

$
214

$
929

$
35,402

Amounts not offset1
 
 
 
 
Financial instruments collateral
(15,526
)
—

(323
)
(15,849
)
Other cash collateral
(26
)
(27
)
—

(53
)
Net amounts
$
18,707

$
187

$
606

$
19,500

Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable
$
3,054





 
At December 31, 2018
 
Assets
$ in millions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges
 
 
 
Interest rate
$
512

$
1

$
—

$
513

Foreign exchange
27

8

—

35

Total
539

9

—

548

Not designated as accounting hedges
 
 
Interest rate
153,768

3,887

697

158,352

Credit
4,630

1,498

—

6,128

Foreign exchange
61,846

1,310

55

63,211

Equity
24,590

—

23,284

47,874

Commodity and other
10,538

—

1,934

12,472

Total
255,372

6,695

25,970

288,037

Total gross derivatives
$
255,911

$
6,704

$
25,970

$
288,585

Amounts offset
 
 
 
 
Counterparty netting
(190,220
)
(5,260
)
(24,548
)
(220,028
)
Cash collateral netting
(38,204
)
(1,180
)
—

(39,384
)
Total in Trading assets
$
27,487

$
264

$
1,422

$
29,173

Amounts not offset1
 
 
 
 
Financial instruments collateral
(12,467
)
—

—

(12,467
)
Other cash collateral
(31
)
—

—

(31
)
Net amounts
$
14,989

$
264

$
1,422

$
16,675

Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable
$
2,206


 
Liabilities
$ in millions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges
 
 
 
Interest rate
$
176

$
—

$
—

$
176

Foreign exchange
62

24

—

86

Total
238

24

—

262

Not designated as accounting hedges
 
 
Interest rate
142,592

2,669

663

145,924

Credit
4,545

1,608

—

6,153

Foreign exchange
62,099

1,302

19

63,420

Equity
27,119

—

23,521

50,640

Commodity and other
6,983

—

2,057

9,040

Total
243,338

5,579

26,260

275,177

Total gross derivatives
$
243,576

$
5,603

$
26,260

$
275,439

Amounts offset
 
 
 
 
Counterparty netting
(190,220
)
(5,260
)
(24,548
)
(220,028
)
Cash collateral netting
(27,860
)
(293
)
—

(28,153
)
Total in Trading liabilities
$
25,496

$
50

$
1,712

$
27,258

Amounts not offset1
 
 
 
 
Financial instruments collateral
(4,709
)
—

(766
)
(5,475
)
Other cash collateral
(53
)
(1
)
—

(54
)
Net amounts
$
20,734

$
49

$
946

$
21,729

Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable
$
4,773


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

See Note 3 for information related to the unsettled fair value of futures contracts not designated as accounting hedges, which are excluded from the previous tables.

 
55
September 2019 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

Notionals of Derivative Contracts
At September 30, 2019
 
Assets
$ in billions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges
Interest rate
$
11

$
142

$
—

$
153

Foreign exchange
5

1

—

6

Total
16

143

—

159

Not designated as accounting hedges
Interest rate
4,465

8,357

858

13,680

Credit
138

92

—

230

Foreign exchange
3,030

119

17

3,166

Equity
404

—

432

836

Commodity and other
105

—

69

174

Total
8,142

8,568

1,376

18,086

Total gross derivatives
$
8,158

$
8,711

$
1,376

$
18,245

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

$
17

$
—

$
17

Foreign exchange
5

2

—

7

Total
5

19

—

24

Not designated as accounting hedges
Interest rate
4,462

8,189

794

13,445

Credit
149

105

—

254

Foreign exchange
2,985

119

15

3,119

Equity
525

—

493

1,018

Commodity and other
84

—

66

150

Total
8,205

8,413

1,368

17,986

Total gross derivatives
$
8,210

$
8,432

$
1,368

$
18,010

















 
 
At December 31, 2018 
 
Assets
$ in billions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges
Interest rate
$
15

$
52

$
—

$
67

Foreign exchange
5

1

—

6

Total
20

53

—

73

Not designated as accounting hedges
Interest rate
4,807

6,708

1,157

12,672

Credit
162

74

—

236

Foreign exchange
2,436

118

14

2,568

Equity
373

—

371

744

Commodity and other
97

—

67

164

Total
7,875

6,900

1,609

16,384

Total gross derivatives
$
7,895

$
6,953

$
1,609

$
16,457

 
Liabilities
$ in billions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges
Interest rate
$
2

$
107

$
—

$
109

Foreign exchange
5

1

—

6

Total
7

108

—

115

Not designated as accounting hedges
Interest rate
4,946

5,735

781

11,462

Credit
162

73

—

235

Foreign exchange
2,451

114

17

2,582

Equity
389

—

602

991

Commodity and other
72

—

65

137

Total
8,020

5,922

1,465

15,407

Total gross derivatives
$
8,027

$
6,030

$
1,465

$
15,522


The Firm believes that the notional amounts of derivative contracts generally overstate its exposure. In most circumstances notional amounts are only used as a reference point from which to calculate amounts owed between the parties to the contract. Furthermore, notional amounts do not reflect the benefit of legally enforceable netting arrangements or risk mitigating transactions.
For a discussion of the Firm’s derivative instruments and hedging activities, see Note 4 to the financial statements in the 2018 Form 10-K.

September 2019 Form 10-Q
56
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

Gains (Losses) on Accounting Hedges
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
$ in millions
2019
2018
2019
2018
Fair Value Hedges—Recognized in Interest Income1
 
 
 
Interest rate contracts
$
(7
)
$
—

$
(26
)
$
—

Investment Securities—AFS
8

—

27

—

Fair Value Hedges—Recognized in Interest Expense
 
 
 
Interest rate contracts
$
1,999

$
(1,124
)
$
6,046

$
(3,584
)
Borrowings
(1,996
)
1,124

(6,111
)
3,563

Net Investment Hedges—Foreign exchange contracts
 
 
 
Recognized in OCI, net of tax
$
251

$
107

$
201

$
354

Forward points excluded from hedge effectiveness testing—Recognized in Interest income
30

13

107

44


Fair Value Hedges—Hedged Items 
$ in millions
At
September 30,
2019
At
December 31,
2018
Investment Securities—AFS
 
 
Carrying amount2 currently or previously hedged
$
689

$
201

Basis adjustments included in carrying amount3
$
30

$
4

Borrowings
 
 
Carrying amount2 currently or previously hedged
$
103,659

$
102,899

Basis adjustments included in carrying amount3
$
4,393

$
(1,689
)

1.
The Firm began designating interest rate swaps as fair value hedges of certain AFS securities in the third quarter of 2018.
2.
Carrying amount represents amortized cost basis.
3.
Hedge accounting basis adjustments for AFS securities and Borrowings are primarily related to outstanding hedges.
Net Derivative Liabilities and Collateral Posted
$ in millions
At
September 30,
2019
At
December 31,
2018
Net derivative liabilities with credit risk-related contingent features
$
27,319

$
16,403

Collateral posted
22,154

11,981


The previous table presents the aggregate fair value of certain derivative contracts that contain credit risk-related contingent features that are in a net liability position for which the Firm has posted collateral in the normal course of business.
 
Incremental Collateral and Termination Payments upon Potential Future Ratings Downgrade
$ in millions
At
September 30,
2019
One-notch downgrade
$
468

Two-notch downgrade
308

Bilateral downgrade agreements included in the amounts above1
$
699

  
1.
Amount represents arrangements between the Firm and other parties where upon the downgrade of one party, the downgraded party must deliver collateral to the other party. These bilateral downgrade arrangements are used by the Firm to manage the risk of counterparty downgrades.
The additional collateral or termination payments that may be called in the event of a future credit rating downgrade vary by contract and can be based on ratings by either or both of Moody’s Investors Service, Inc. (“Moody’s”) and S&P Global Ratings. The previous table shows the future potential collateral amounts and termination payments that could be called or required by counterparties or exchange and clearing organizations in the event of one-notch or two-notch downgrade scenarios based on the relevant contractual downgrade triggers.
Maximum Potential Payout/Notional of Credit Protection Sold1 
 
Years to Maturity at September 30, 2019
$ in billions
< 1
1-3
3-5
Over 5
Total
Single-name CDS
 
 
 
 
 
Investment grade
$
16

$
18

$
26

$
16

$
76

Non-investment grade
8

9

12

5

34

Total
$
24

$
27

$
38

$
21

$
110

Index and basket CDS
 
 
 
Investment grade
$
5

$
10

$
40

$
22

$
77

Non-investment grade
5

3

17

17

42

Total
$
10

$
13

$
57

$
39

$
119

Total CDS sold
$
34

$
40

$
95

$
60

$
229

Other credit contracts
—

—

—

—

—

Total credit protection sold
$
34

$
40

$
95

$
60

$
229

CDS protection sold with identical protection purchased
$
219

 
Years to Maturity at December 31, 2018
$ in billions
< 1
1-3
3-5
Over 5
Total
Single-name CDS
 
 
 
 
 
Investment grade
$
22

$
24

$
19

$
8

$
73

Non-investment grade
10

11

9

1

31

Total
$
32

$
35

$
28

$
9

$
104

Index and basket CDS
 
 
 
Investment grade
$
5

$
10

$
61

$
7

$
83

Non-investment grade
5

6

13

13

37

Total
$
10

$
16

$
74

$
20

$
120

Total CDS sold
$
42

$
51

$
102

$
29

$
224

Other credit contracts
—

—

—

—

—

Total credit protection sold
$
42

$
51

$
102

$
29

$
224

CDS protection sold with identical protection purchased
$
210


 
57
September 2019 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

Fair Value Asset (Liability) of Credit Protection Sold1 
$ in millions
At
September 30,
2019
At
December 31,
2018
Single-name CDS
 
 
Investment grade
$
663

$
118

Non-investment grade
(959
)
(403
)
Total
$
(296
)
$
(285
)
Index and basket CDS
 
 
Investment grade
$
1,040

$
314

Non-investment grade
45

(1,413
)
Total
$
1,085

$
(1,099
)
Total CDS sold
$
789

$
(1,384
)
Other credit contracts
(18
)
(14
)
Total credit protection sold
$
771

$
(1,398
)
  
1.
Investment grade/non-investment grade determination is based on the internal credit rating of the reference obligation. Internal credit ratings serve as the Credit Risk Management Department’s assessment of credit risk and the basis for a comprehensive credit limits framework used to control credit risk. The Firm uses quantitative models and judgment to estimate the various risk parameters related to each obligor.












 
Protection Purchased with CDS
 
Fair Value Asset (Liability)
$ in millions
At September 30, 2019
At December 31, 2018
Single name
$
147

$
277

Index and basket
(977
)
1,333

Tranched index and basket
(345
)
(251
)
Total
$
(1,175
)
$
1,359

 
Notional
$ in billions
At September 30, 2019
At December 31, 2018
Single name
$
119

$
116

Index and basket
120

117

Tranched index and basket
16

14

Total
$
255

$
247


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

The fair value amounts as shown in the previous tables are prior to cash collateral or counterparty netting. For further information on credit derivatives and other contracts, see Note 4 to the financial statements in the 2018 Form 10-K.



























  

September 2019 Form 10-Q
58
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

5. Investment Securities
AFS and HTM Securities
 
At September 30, 2019
$ in millions
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair 
Value
AFS securities
 
 
 
 
U.S. government and agency securities:
 
 
U.S. Treasury securities
$
34,422

$
274

$
88

$
34,608

U.S. agency securities1
21,423

248

88

21,583

Total U.S. government and agency securities
55,845

522

176

56,191

Corporate and other debt:
 
 
 
 
Agency CMBS
4,512

104

36

4,580

Corporate bonds
2,022

14

4

2,032

State and municipal securities
252

13

—

265

FFELP student loan ABS2
1,660

3

17

1,646

Total corporate and other debt
8,446

134

57

8,523

Total AFS securities
64,291

656

233

64,714

HTM securities
 
 
 
 
U.S. government and agency securities:
 
 
U.S. Treasury securities
27,062

764

10

27,816

U.S. agency securities1
13,381

170

38

13,513

Total U.S. government and agency securities
40,443

934

48

41,329

Corporate and other debt:
 
 
 
 
Non-agency CMBS
633

29

—

662

Total HTM securities
41,076

963

48

41,991

Total investment securities
$
105,367

$
1,619

$
281

$
106,705


 
      
       
        
 
At December 31, 2018
$ in millions
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair 
Value
AFS securities
 
 
 
 
U.S. government and agency securities:
 
 
U.S. Treasury securities
$
36,268

$
40

$
656

$
35,652

U.S. agency securities1
20,740

10

497

20,253

Total U.S. government and agency securities
57,008

50

1,153

55,905

Corporate and other debt:
 
 
 
 
Agency CMBS
1,054

—

62

992

Non-agency CMBS
461

—

14

447

Corporate bonds
1,585

—

32

1,553

State and municipal securities
200

2

—

202

FFELP student loan ABS2
1,967

10

15

1,962

Total corporate and other debt
5,267

12

123

5,156

Total AFS securities
62,275

62

1,276

61,061

HTM securities
 
 
 
 
U.S. government and agency securities:
 
 
U.S. Treasury securities
17,832

44

403

17,473

U.S. agency securities1
12,456

8

446

12,018

Total U.S. government and agency securities
30,288

52

849

29,491

Corporate and other debt:
 
 
 
 
Non-agency CMBS
483

—

9

474

Total HTM securities
30,771

52

858

29,965

Total investment securities
$
93,046

$
114

$
2,134

$
91,026

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


 
59
September 2019 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

Investment Securities in an Unrealized Loss Position
 
At September 30, 2019
 
Less than 12 Months
12 Months or Longer
Total
$ in millions
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
AFS securities
 
 
 
 
 
 
U.S. government and agency securities:
 
 
 
 
 
 
U.S. Treasury securities
$
4,233

$
13

$
9,318

$
75

$
13,551

$
88

U.S. agency securities
3,064

15

7,283

73

10,347

88

Total U.S. government and agency securities
7,297

28

16,601

148

23,898

176

Corporate and other debt:
 
 
 
 
 
 
Agency CMBS
837

6

719

30

1,556

36

Corporate bonds
477

3

262

1

739

4

FFELP student loan ABS
490

4

751

13

1,241

17

Total corporate and other debt
1,804

13

1,732

44

3,536

57

Total AFS securities
9,101

41

18,333

192

27,434

233

HTM securities
 
 
 
 
 
 
U.S. government and agency securities:
 
 
 
 
 
 
U.S. Treasury securities
2,811

8

950

2

3,761

10

U.S. agency securities
2,496

7

2,572

31

5,068

38

Total U.S. government and agency securities
5,307

15

3,522

33

8,829

48

Total HTM securities
5,307

15

3,522

33

8,829

48

Total investment securities
$
14,408

$
56

$
21,855

$
225

$
36,263

$
281

 
At December 31, 2018
 
Less than 12 Months
12 Months or Longer
Total
$ in millions
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
AFS securities
 
 
 
 
 
 
U.S. government and agency securities:
 
 
 
 
 
 
U.S. Treasury securities
$
19,937

$
541

$
5,994

$
115

$
25,931

$
656

U.S. agency securities
12,904

383

4,142

114

17,046

497

Total U.S. government and agency securities
32,841

924

10,136

229

42,977

1,153

Corporate and other debt:
 
 
 
 
 
 
Agency CMBS
808

62

—

—

808

62

Non-agency CMBS
—

—

446

14

446

14

Corporate bonds
470

7

1,010

25

1,480

32

FFELP student loan ABS
1,366

15

—

—

1,366

15

Total corporate and other debt
2,644

84

1,456

39

4,100

123

Total AFS securities
35,485

1,008

11,592

268

47,077

1,276

HTM securities
 
 
 
 
 
 
U.S. government and agency securities:
 
 
 
 
 
 
U.S. Treasury securities
—

—

11,161

403

11,161

403

U.S. agency securities
410

1

10,004

445

10,414

446

Total U.S. government and agency securities
410

1

21,165

848

21,575

849

Corporate and other debt:
 
 
 
 
 
 
Non-agency CMBS
206

1

216

8

422

9

Total HTM securities
616

2

21,381

856

21,997

858

Total investment securities
$
36,101

$
1,010

$
32,973

$
1,124

$
69,074

$
2,134


 





 






September 2019 Form 10-Q
60
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

The Firm believes there are no securities in an unrealized loss position that are other-than-temporarily impaired after performing the analysis described in Note 2 to the financial statements in the 2018 Form 10-K. For AFS securities, the Firm does not intend to sell the securities and is not likely to be required to sell the securities prior to recovery of the amortized cost basis. Furthermore, for both AFS and HTM securities, the securities have not experienced credit losses as the unrealized losses reported in the previous table are primarily due to higher interest rates since those securities were purchased.
See Note 12 for additional information on securities issued by VIEs, including U.S. agency mortgage-backed securities, non-agency CMBS and FFELP student loan ABS.
Investment Securities by Contractual Maturity
 
At September 30, 2019
$ in millions
Amortized
Cost
Fair
Value
Annualized
Average
Yield
AFS securities
 
 
 
U.S. government and agency securities:
U.S. Treasury securities:
 
 
 
Due within 1 year
$
6,278

$
6,294

2.1
%
After 1 year through 5 years
23,285

23,415

1.8
%
After 5 years through 10 years
4,859

4,899

1.7
%
Total
34,422

34,608

 
U.S. agency securities:
 
 
 
Due within 1 year
61

61

2.1
%
After 1 year through 5 years
644

641

1.1
%
After 5 years through 10 years
1,416

1,409

1.8
%
After 10 years
19,302

19,472

2.4
%
Total
21,423

21,583

 
Total U.S. government and agency securities
55,845

56,191

2.0
%
Corporate and other debt:
 
 
 
Agency CMBS:
 
 
 
After 1 year through 5 years
615

613

1.8
%
After 5 years through 10 years
2,942

3,029

2.5
%
After 10 years
955

938

2.0
%
Total
4,512

4,580

 
Corporate bonds:
 
 
 
Due within 1 year
109

110

2.3
%
After 1 year through 5 years
1,498

1,509

2.6
%
After 5 years through 10 years
415

413

3.0
%
Total
2,022

2,032

 

 
 
At September 30, 2019
$ in millions
Amortized
Cost
Fair
Value
Annualized
Average
Yield
State and municipal securities:
 
 
 
After 1 year through 5 years
$
10

$
10

2.2
%
After 5 years through 10 years
25

26

2.8
%
After 10 Years
217

229

4.4
%
Total
252

265

 
FFELP student loan ABS:
 
 
 
After 1 year through 5 years
74

72

0.8
%
After 5 years through 10 years
389

382

0.8
%
After 10 years
1,197

1,192

1.2
%
Total
1,660

1,646

 
Total corporate and other debt
8,446

8,523

2.2
%
Total AFS securities
64,291

64,714

2.1
%
HTM securities
 
 
 
U.S. government and agency securities:
U.S. Treasury securities:
 
 
 
Due within 1 year
1,742

1,750

2.2
%
After 1 year through 5 years
15,514

15,778

2.2
%
After 5 years through 10 years
8,722

9,117

2.2
%
After 10 years
1,084

1,171

2.5
%
Total
27,062

27,816

 
U.S. agency securities:
 
 
 
After 5 years through 10 years
25

25

1.9
%
After 10 years
13,356

13,488

2.6
%
Total
13,381

13,513

 
Total U.S. government and agency securities
40,443

41,329

2.3
%
Corporate and other debt:
 
 
 
Non-agency CMBS:
 
 
 
Due within 1 year
93

93

4.8
%
After 1 year through 5 years
85

85

4.0
%
After 5 years through 10 years
374

399

4.1
%
After 10 years
81

85

3.7
%
Total corporate and other debt
633

662

4.1
%
Total HTM securities
41,076

41,991

2.4
%
Total investment securities
$
105,367

$
106,705

2.2
%

Gross Realized Gains (Losses) on Sales of AFS Securities
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
$ in millions
2019
2018
2019
2018
Gross realized gains
$
27

$
5

$
99

$
11

Gross realized (losses)
(1
)
—

(10
)
(3
)
Total1
$
26

$
5

$
89

$
8

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

 

 
61
September 2019 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

6. Collateralized Transactions
Offsetting of Certain Collateralized Transactions
 
At September 30, 2019
$ in millions
Gross
Amounts
Amounts
Offset
Net
Amounts
Presented
Amounts
Not Offset1
Net
Amounts
Assets
 
 
 
 
 
Securities purchased under agreements to resell
$
263,485

$
(170,118
)
$
93,367

$
(91,505
)
$
1,862

Securities borrowed
142,723

(10,322
)
132,401

(126,161
)
6,240

Liabilities
 
 
 
 
 
Securities sold under agreements to repurchase
$
229,626

$
(170,164
)
$
59,462

$
(42,091
)
$
17,371

Securities loaned
19,967

(10,276
)
9,691

(9,660
)
31

Net amounts for which master netting agreements are not in place or may not be legally enforceable
Securities purchased under agreements to resell
$
1,390

Securities borrowed
 
 
1,578

Securities sold under agreements to repurchase
 
15,695

Securities loaned
 
 
 
 
20

 
At December 31, 2018
$ in millions
Gross
Amounts
Amounts
Offset
Net
Amounts
Presented
Amounts
Not Offset1
Net
Amounts
Assets
 
 
 
 
 
Securities purchased under agreements to resell
$
262,976

$
(164,454
)
$
98,522

$
(95,610
)
$
2,912

Securities borrowed
134,711

(18,398
)
116,313

(112,551
)
3,762

Liabilities
 
 
 
 
 
Securities sold under agreements to repurchase
$
214,213

$
(164,454
)
$
49,759

$
(41,095
)
$
8,664

Securities loaned
30,306

(18,398
)
11,908

(11,677
)
231

Net amounts for which master netting agreements are not in place or may not be legally enforceable
Securities purchased under agreements to resell
$
2,579

Securities borrowed
 
 
724

Securities sold under agreements to repurchase
 
6,762

Securities loaned
 
 
 
 
191

1.
Amounts relate to master netting agreements that have been determined by the Firm to be legally enforceable in the event of default but where certain other criteria are not met in accordance with applicable offsetting accounting guidance.
For further discussion of the Firm’s collateralized transactions, see Note 6 to the financial statements in the 2018 Form 10-K. For information related to offsetting of derivatives, see Note 4.


 
Gross Secured Financing Balances by Remaining Contractual Maturity
 
At September 30, 2019
$ in millions
Overnight
and Open
Less than
30 Days
30-90
Days
Over
90 Days
Total
Securities sold under agreements to repurchase
$
78,896

$
74,832

$
31,794

$
44,104

$
229,626

Securities loaned
9,780

4,540

611

5,036

19,967

Total included in the offsetting disclosure
$
88,676

$
79,372

$
32,405

$
49,140

$
249,593

Trading liabilities—
Obligation to return securities received as collateral
21,440

—

—

—

21,440

Total
$
110,116

$
79,372

$
32,405

$
49,140

$
271,033

 
At December 31, 2018
$ in millions
Overnight
and Open
Less than
30 Days
30-90
Days
Over
90 Days
Total
Securities sold under agreements to repurchase
$
56,503

$
93,427

$
35,692

$
28,591

$
214,213

Securities loaned
18,397

3,609

1,985

6,315

30,306

Total included in the offsetting disclosure
$
74,900

$
97,036

$
37,677

$
34,906

$
244,519

Trading liabilities—
Obligation to return securities received as collateral
17,594

—

—

—

17,594

Total
$
92,494

$
97,036

$
37,677

$
34,906

$
262,113

Gross Secured Financing Balances by Class of Collateral Pledged
$ in millions
At
September 30,
2019
At
December 31,
2018
Securities sold under agreements to repurchase
U.S. Treasury and agency securities
$
81,642

$
68,487

State and municipal securities
1,164

925

Other sovereign government obligations
117,949

120,432

ABS
2,338

3,017

Corporate and other debt
7,718

8,719

Corporate equities
18,279

12,079

Other
536

554

Total
$
229,626

$
214,213

Securities loaned
 
 
Other sovereign government obligations
$
10,667

$
19,021

Corporate equities
9,242

10,800

Other
58

485

Total
$
19,967

$
30,306

Total included in the offsetting disclosure
$
249,593

$
244,519

Trading liabilities—Obligation to return securities received as collateral
Corporate equities
$
21,432

$
17,594

Other
8

—

Total
$
21,440

$
17,594

Total
$
271,033

$
262,113




September 2019 Form 10-Q
62
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

Carrying Value of Assets Loaned or Pledged without Counterparty Right to Sell or Repledge
$ in millions
At
September 30,
2019
At
December 31,
2018
Trading assets
$
38,325

$
39,430

Loans (gross of allowance for loan losses)
300

—

Total
$
38,625

$
39,430


The Firm pledges its trading assets and loans to collateralize securities sold under agreements to repurchase, securities loaned, other secured financings and derivatives and to cover customer short sales. Counterparties may or may not have the right to sell or repledge the collateral.
Pledged financial instruments that can be sold or repledged by the secured party are identified as Trading assets (pledged to various parties) in the balance sheets.
Fair Value of Collateral Received with Right to Sell or Repledge 
$ in millions
At
September 30,
2019
At
December 31,
2018
Collateral received with right to sell
or repledge
$
724,356

$
639,610

Collateral that was sold or repledged1
577,354

487,983

1.
Does not include securities used to meet federal regulations for the Firm’s U.S. broker-dealers.
Restricted Cash and Segregated Securities 
$ in millions
At
September 30,
2019
At
December 31,
2018
Restricted cash
$
30,739

$
35,356

Segregated securities1
24,838

26,877

Total
$
55,577

$
62,233

1.
Securities segregated under federal regulations for the Firm’s U.S. broker-dealers are sourced from Securities purchased under agreements to resell and Trading assets in the balance sheets.
The Firm receives collateral in the form of securities in connection with securities purchased under agreements to resell, securities borrowed, securities-for-securities transactions, derivative transactions, customer margin loans and securities-based lending. In many cases, the Firm is permitted to sell or repledge these securities held as collateral and use the securities to secure securities sold under agreements to repurchase, to enter into securities lending and derivative transactions or for delivery to counterparties to cover short positions.
Customer Margin Lending
$ in millions
At
September 30,
2019
At
December 31,
2018
Customer receivables representing margin loans
$
28,068

$
26,225


 
The Firm provides margin lending arrangements which allow customers to borrow against the value of qualifying securities. Receivables under margin lending arrangements are included within Customer and other receivables in the balance sheets. Under these agreements and transactions, the Firm receives collateral, including U.S. government and agency securities, other sovereign government obligations, corporate and other debt, and corporate equities. Customer receivables generated from margin lending activities are collateralized by customer-owned securities held by the Firm. The Firm monitors required margin levels and established credit terms daily and, pursuant to such guidelines, requires customers to deposit additional collateral, or reduce positions, when necessary.
For a further discussion of the Firm’s margin lending activities, see Note 6 to the financial statements in the 2018 Form 10-K.
The Firm has additional secured liabilities. For a further discussion of other secured financings, see Notes 10 and 12.
 
7. Loans, Lending Commitments and Allowance for Credit Losses
Loans by Type
 
At September 30, 2019
$ in millions
Loans Held
for Investment
Loans Held
for Sale
Total Loans
Corporate
$
45,117

$
13,525

$
58,642

Consumer
30,010

—

30,010

Residential real estate
29,184

17

29,201

Commercial real estate
6,801

1,165

7,966

Total loans, gross
111,112

14,707

125,819

Allowance for loan losses
(297
)
—

(297
)
Total loans, net
$
110,815

$
14,707

$
125,522

Fixed rate loans, net
 
 
$
20,233

Floating or adjustable rate loans, net
 
105,289

Loans to non-U.S. borrowers, net
 
20,722

 
At December 31, 2018
$ in millions
Loans Held
for Investment
Loans Held
for Sale
Total Loans
Corporate
$
36,909

$
13,886

$
50,795

Consumer
27,868

—

27,868

Residential real estate
27,466

22

27,488

Commercial real estate1
7,810

1,856

9,666

Total loans, gross
100,053

15,764

115,817

Allowance for loan losses
(238
)
—

(238
)
Total loans, net
$
99,815

$
15,764

$
115,579

Fixed rate loans, net
 
 
$
15,632

Floating or adjustable rate loans, net
 
99,947

Loans to non-U.S. borrowers, net
 
17,568


1.
Beginning in 2019, loans previously referred to as Wholesale real estate are referred to as Commercial real estate.
 

 
63
September 2019 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

Loans Held for Investment before Allowance by Credit Quality
 
At September 30, 2019
$ in millions
Corporate
Consumer
Residential
Real Estate
Commercial
Real Estate
Total
Pass
$
44,152

$
30,005

$
29,051

$
6,618

$
109,826

Special mention
373

—

27

80

480

Substandard
592

5

106

103

806

Doubtful
—

—

—

—

—

Loss
—

—

—

—

—

Total
$
45,117

$
30,010

$
29,184

$
6,801

$
111,112

 
At December 31, 2018
$ in millions
Corporate
Consumer
Residential
Real Estate
Commercial
Real Estate
Total
Pass
$
36,217

$
27,863

$
27,387

$
7,378

$
98,845

Special mention
492

5

—

312

809

Substandard
200

—

79

120

399

Doubtful
—

—

—

—

—

Loss
—

—

—

—

—

Total
$
36,909

$
27,868

$
27,466

$
7,810

$
100,053


Impaired Loans and Lending Commitments before Allowance
 
At September 30, 2019
$ in millions
Corporate
Consumer
Residential
Real Estate
Total
Loans
 
 
 
 
With allowance
$
232

$
—

$
—

$
232

Without allowance1
28

5

92

125

Total impaired loans
$
260

$
5

$
92

$
357

UPB
267

5

94

366

Lending commitments
 
 
 
 
With allowance
$
5

$
—

$
—

$
5

Without allowance1
37

—

—

37

Total impaired lending commitments
$
42

$
—

$
—

$
42

 
At December 31, 2018
$ in millions
Corporate
Consumer
Residential
Real 
Estate
Total
Loans
 
 
 
 
With allowance
$
24

$
—

$
—

$
24

Without allowance1
32

—

69

101

Total impaired loans
$
56

$
—

$
69

$
125

UPB
63

—

70

133

Lending commitments
 
 
 
 
With allowance
$
19

$
—

$
—

$
19

Without allowance1
34

—

—

34

Total impaired lending commitments
$
53

$
—

$
—

$
53

   
1.
No allowance was recorded for these loans and lending commitments as the present value of the expected future cash flows or value of the collateral equaled or exceeded the carrying value.
 
Loans and lending commitments in the previous table have been evaluated for a specific allowance. All remaining loans and lending commitments are assessed under the inherent allowance methodology.
Impaired Loans and Total Allowance by Region
 
At September 30, 2019
$ in millions
Americas
EMEA
Asia
Total
Impaired loans
$
357

$
—

$
—

$
357

Total Allowance for loan losses
227

64

6

297

 
At December 31, 2018
$ in millions
Americas

EMEA

Asia

Total

Impaired loans
$
125

$
—

$
—

$
125

Total Allowance for loan losses
193

42

3

238


Troubled Debt Restructurings
$ in millions
At
September 30,
2019
At
December 31,
2018
Loans
$
46

$
38

Lending commitments
49

45

Allowance for loan losses and lending commitments
5

4


Impaired loans and lending commitments classified as held for investment within corporate loans include TDRs. These restructurings typically include modifications of interest rates, collateral requirements, other loan covenants and payment extensions.
Allowance for Loan Losses Rollforward
$ in millions
Corporate
Consumer
Residential
Real Estate
Commercial
Real Estate
Total
December 31, 2018
$
144

$
7

$
20

$
67

$
238

Gross charge-offs
—

—

(1
)
—

(1
)
Provision (release)1
69

—

5

(6
)
68

Other
(7
)
—

—

(1
)
(8
)
September 30, 2019
$
206

$
7

$
24

$
60

$
297

Inherent
$
188

$
7

$
24

$
60

$
279

Specific
18

—

—

—

18


September 2019 Form 10-Q
64
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

$ in millions
Corporate
Consumer
Residential
Real Estate
Commercial
Real Estate
Total
December 31, 2017
$
126

$
4

$
24

$
70

$
224

Gross charge-offs
(4
)
—

—

—

(4
)
Recoveries2
54

—

—

—

54

Net recoveries (charge-offs)
50

—

—

—

50

Provision (release)1,2
(39
)
1

(4
)
9

(33
)
Other
(2
)
—

—

(8
)
(10
)
September 30, 2018
$
135

$
5

$
20

$
71

$
231

Inherent
$
130

$
5

$
20

$
71

$
226

Specific
5

—

—

—

5


1.
The Firm recorded a provision for loan losses of $34 million in the current quarter and $1 million in the prior year quarter.
2.
The prior year period release was primarily due to the recovery of a previously charged off energy industry related loan.
Allowance for Lending Commitments Rollforward
$ in millions
Corporate
Consumer
Residential
Real Estate
Commercial
Real Estate
Total
December 31, 2018
$
198

$
2

$
—

$
3

$
203

Provision (release)1
34

—

—

2

36

Other
(4
)
(1
)
—

—

(5
)
September 30, 2019
$
228

$
1

$
—

$
5

$
234

Inherent
$
224

$
1

$
—

$
5

$
230

Specific
4

—

—

—

4

$ in millions
Corporate
Consumer
Residential
Real Estate
Commercial
Real Estate
Total
December 31, 2017
$
194

$
1

$
—

$
3

$
198

Provision (release)1
5

—

—

1

6

Other
(2
)
—

—

(1
)
(3
)
September 30, 2018
$
197

$
1

$
—

$
3

$
201

Inherent
$
190

$
1

$
—

$
3

$
194

Specific
7

—

—

—

7



1.
The Firm recorded a provision for lending commitments of $16 million in the current quarter and $1 million in the prior year quarter.
For a further discussion of the Firm’s loans, including loan types and categories, as well as the Firm’s allowance methodology, refer to Notes 2 and 7 to the financial statements in the 2018 Form 10-K. See Note 3 for further information regarding Loans and lending commitments held at fair value. See Note 11 for details of current commitments to lend in the future.
 
Employee Loans
$ in millions
At
September 30,
2019
At
December 31,
2018
Balance
$
2,990

$
3,415

Allowance for loan losses
(61
)
(63
)
Balance, net
$
2,929

$
3,352

Remaining repayment term, weighted average in years
4.7

4.3


Employee loans are granted in conjunction with a program established primarily to recruit certain Wealth Management representatives, are full recourse and generally require periodic repayments. These loans are recorded in Customer and other receivables in the balance sheets. The Firm establishes an allowance for loan amounts it does not consider recoverable, and the related provision is recorded in Compensation and benefits expense.
 
8. Equity Method Investments
Equity Method Investment Balances
$ in millions
At
September 30,
2019
At
December 31,
2018
Investments
$
2,391

$
2,432

 
Three Months Ended
September 30,
Nine Months Ended
September 30,
$ in millions
2019
2018
2019
2018
Income (loss)
$
(13
)
$
8

$
(39
)
$
62


Equity method investments, other than investments in certain fund interests, are summarized above and are included in Other assets in the balance sheets with related income or loss included in Other revenues in the income statements. See “Net Asset Value Measurements—Fund Interests” in Note 3 for the carrying value of the Firm’s fund interests, which are comprised of general and limited partnership interests, as well as any related carried interest.
Japanese Securities Joint Venture
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
$ in millions
2019
2018
2019
2018
Income (loss) from investment in MUMSS
$
(4
)
$
17

$
5

$
99


The Firm and Mitsubishi UFJ Financial Group, Inc. (“MUFG”) formed a joint venture in Japan comprising their respective investment banking and securities businesses by forming two joint venture companies, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (“MUMSS”) and Morgan Stanley MUFG Securities Co., Ltd. (“MSMS”) (the “Joint Venture”). The Firm

 
65
September 2019 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

owns a 40% economic interest in the Joint Venture and MUFG owns the other 60%.
The Firm’s 40% voting interest in MUMSS is accounted for under the equity method within the Institutional Securities business segment, and is included in the equity method investment balances above. The Firm consolidates MSMS into the Institutional Securities business segment, based on its 51% voting interest.
The Firm engages in transactions in the ordinary course of business with MUFG and its affiliates, for example investment banking, financial advisory, sales and trading, derivatives, investment management, lending, securitization and other financial services transactions. Such transactions are on substantially the same terms as those that would be available to unrelated third parties for comparable transactions.


9. Deposits
Deposits
$ in millions
At
September 30,
2019
At
December 31,
2018
Savings and demand deposits
$
141,344

$
154,897

Time deposits
39,394

32,923

Total
$
180,738

$
187,820

Deposits subject to FDIC insurance
$
143,697

$
144,515

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

$
11


Time Deposit Maturities
$ in millions
At
September 30,
2019
2019
$
5,394

2020
18,091

2021
8,274

2022
2,783

2023
2,704

Thereafter
2,148

Total
$
39,394


 
   
10. Borrowings and Other Secured Financings
Borrowings
$ in millions
At
September 30,
2019
At
December 31,
2018
Original maturities of one year or less
$
1,297

$
1,545

Original maturities greater than one year
Senior
$
181,668

$
178,027

Subordinated
10,694

10,090

Total
$
192,362

$
188,117

Total borrowings
$
193,659

$
189,662

Weighted average stated maturity, in years1
6.9

6.5


1.
Only includes borrowings with original maturities greater than one year.
 
Other Secured Financings
$ in millions
At
September 30,
2019
At
December 31,
2018
Original maturities:
 
 
Greater than one year
$
4,476

$
6,772

One year or less
4,089

2,036

Failed sales
1,271

658

Total
$
9,836

$
9,466



Other secured financings include the liabilities related to certain ELNs, transfers of financial assets that are accounted for as financings rather than sales, pledged commodities, consolidated VIEs where the Firm is deemed to be the primary beneficiary and other secured borrowings. These liabilities are generally payable from the cash flows of the related assets accounted for as Trading assets. See Note 12 for further information on other secured financings related to VIEs and securitization activities.
For transfers that fail to meet the accounting criteria for a sale, the Firm continues to recognize the assets in Trading assets at fair value, and the Firm recognizes the associated liabilities in Other secured financings at fair value in the balance sheets.
The assets transferred to certain unconsolidated VIEs in transactions accounted for as failed sales cannot be removed unilaterally by the Firm and are not generally available to the Firm. The related liabilities are also non-recourse to the Firm. In certain other failed sale transactions, the Firm has the right to remove assets or provides additional recourse through derivatives such as total return swaps, guarantees or other forms of involvement.

September 2019 Form 10-Q
66
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

11. Commitments, Leases, Guarantees and Contingencies
Commitments
 
Years to Maturity at September 30, 2019
 
$ in millions
Less
than 1
1-3
3-5
Over 5
Total
Lending:
 
 
 
 
Corporate
$
23,252

$
33,207

$
48,734

$
5,447

$
110,640

Consumer
7,769

6

12

—

7,787

Residential and commercial
real estate
380

1,148

75

277

1,880

Forward-starting
secured financing receivables
75,785

635

—

11,612

88,032

Underwriting
561

—

—

—

561

Investment activities
508

131

50

250

939

Letters of credit and other financial guarantees
189

2

—

2

193

Total
$
108,444

$
35,129

$
48,871

$
17,588

$
210,032

Corporate lending commitments participated to third parties
$
7,867

Forward-starting secured financing receivables settled within three business days
$
60,893


Since commitments associated with these instruments may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.
 
For a further description of these commitments, refer to Note 12 to the financial statements in the 2018 Form 10-K.
Leases
Balance Sheet Amounts Related to Leases
$ in millions
At
September 30,
2019
Other assets—ROU assets
$
3,825

Other liabilities and accrued expenses—
 
Lease liabilities
4,535

Weighted average:
 
Remaining lease term, in years
9.6

Discount rate
3.7
%

  
 
Lease Liabilities
$ in millions
At
September 30,
2019
Remainder of 2019
$
185

2020
719

2021
659

2022
606

2023
554

Thereafter
2,817

Total undiscounted cash flows
$
5,540

Imputed interest
(1,005
)
Amount on balance sheet
$
4,535


Lease Costs
$ in millions
Three Months Ended
September 30, 2019
Nine Months Ended
September 30, 2019
Fixed costs
$
173

$
499

Variable costs1
33

115

Less: Sublease income
(1
)
(3
)
Total lease cost, net
$
205

$
611



1.
Includes common area maintenance charges and other variable costs not included in the measurement of ROU assets and lease liabilities.
Cash Flows Statement Supplemental Information
$ in millions
Three Months Ended
September 30, 2019
Nine Months Ended
September 30, 2019
Cash outflows—Lease liabilities
$
177

$
509

Non-cash—ROU assets recorded for new and modified leases
104

215


Minimum Future Lease Commitments (under Previous GAAP)
$ in millions
At
December 31,
2018
2019
$
677

2020
657

2021
602

2022
555

2023
507

Thereafter
2,639

Total undiscounted cash flows
$
5,637

Minimum rental income to be received in the future under non-cancelable operating subleases
$
7


The Firm’s leases are principally non-cancelable operating real estate leases.

 
67
September 2019 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

Guarantees
Obligations under Guarantee Arrangements at September 30, 2019
 
Maximum Potential Payout/Notional
 
Years to Maturity
 
$ in millions
Less than 1
1-3
3-5
Over 5
Total
Credit derivatives
$
33,594

$
40,198

$
96,188

$
59,432

$
229,412

Other credit contracts
—

—

—

116

116

Non-credit derivatives
1,715,003

1,467,985

434,155

673,378

4,290,521

Standby letters of credit and other financial guarantees issued1
1,018

886

1,410

4,217

7,531

Market value guarantees
85

89

1

—

175

Liquidity facilities
4,545

—

—

—

4,545

Whole loan sales guarantees
—

—

—

23,196

23,196

Securitization representations and warranties
—

—

—

66,530

66,530

General partner guarantees
65

127

12

71

275

Client clearing guarantees
9,746

—

—

—

9,746

$ in millions
Carrying
Amount
Asset
(Liability)
Collateral/
Recourse
Credit derivatives2
$
789

$
—

Other credit contracts
(18
)
—

Non-credit derivatives2
(76,165
)
—

Standby letters of credit and other financial guarantees issued1
224

6,488

Market value guarantees
—

72

Liquidity facilities
6

7,925

Whole loan sales guarantees
—

—

Securitization representations and warranties3
(42
)
—

General partner guarantees
(44
)
—

Client clearing guarantees
—

9,745


1.
These amounts include certain issued standby letters of credit participated to third parties, totaling $0.6 billion of notional and collateral/recourse, due to the nature of the Firm’s obligations under these arrangements.
2.
The carrying amounts of derivative contracts that meet the accounting definition of a guarantee are shown on a gross basis. Therefore the collateral or recourse available to the firm in the form of cash collateral and counterparty netting is not reflected in the Collateral/Recourse amounts above. For further information on derivative contracts, including the effects of cash collateral and counterparty netting, see Note 4.
3.
Primarily related to residential mortgage securitizations.

The Firm has obligations under certain guarantee arrangements, including contracts and indemnification agreements, that contingently require the Firm to make payments to the guaranteed party based on changes in an underlying measure (such as an interest or foreign exchange rate, security or commodity price, an index, or the occurrence or non-occurrence of a specified event) related to an asset, liability or equity security of a guaranteed party. Also included as guarantees are contracts that contingently require the Firm to make payments to the guaranteed party based on another entity’s failure to perform under an agreement, as well as indirect guarantees of the indebtedness of others.
 
In certain situations, collateral may be held by the Firm for those contracts that meet the definition of a guarantee. Generally, the Firm sets collateral requirements by counterparty so that the collateral covers various transactions and products and is not allocated specifically to individual contracts. Also, the Firm may recover amounts related to the underlying asset delivered to the Firm under a derivative contract.
For more information on the nature of the obligation and related business activity for market value guarantees, liquidity facilities, whole loan sales guarantees and general partner guarantees related to certain investment management funds, as well as the other products in the previous table, see Note 12 to the financial statements in the 2018 Form 10-K, except for Clearing member guarantees, which are described below.

Client Clearing Guarantees. In the second quarter of 2019, the Firm became a sponsoring member of the Government Securities Division of the FICC's Sponsored Clearing Model. Clients of the Firm, as sponsored members, can transact in overnight securities repurchase and resale agreements, which are cleared through FICC. As sponsoring member, the Firm guarantees to FICC the prompt and full payment and performance of its clients’ obligations. The amount included in the previous table represents the maximum potential payout the Firm could be responsible for through the guarantee it provides. The Firm minimizes credit exposure under this guarantee by obtaining a security interest in its sponsored member clients’ collateral and their contractual rights under sponsored member transactions. Therefore, the Firm's exposure is estimated to be an amount substantially lower than the maximum potential payout amount.  
Other Guarantees and Indemnities
In the normal course of business, the Firm provides guarantees and indemnifications in a variety of transactions. These provisions generally are standard contractual terms. Certain of these guarantees and indemnifications related to indemnities, exchange and clearinghouse member guarantees and merger and acquisition guarantees are described in Note 12 to the financial statements in the 2018 Form 10-K.
In addition, in the ordinary course of business, the Firm guarantees the debt and/or certain trading obligations (including obligations associated with derivatives, foreign exchange contracts and the settlement of physical commodities) of certain subsidiaries. These guarantees generally are entity or product specific and are required by investors or trading counterparties. The activities of the Firm’s subsidiaries covered by these guarantees (including any related debt or trading obligations) are included in the financial statements.

September 2019 Form 10-Q
68
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

Finance Subsidiary
The Parent Company fully and unconditionally guarantees the securities issued by Morgan Stanley Finance LLC, a 100%-owned finance subsidiary.

Contingencies
Legal. In addition to the matters described below, in the normal course of business, the Firm has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the entities that would otherwise be the primary defendants in such cases are bankrupt or are in financial distress. These actions have included, but are not limited to, residential mortgage and credit crisis-related matters.
While the Firm has identified below any individual proceedings where the Firm believes a material loss to be reasonably possible and reasonably estimable, there can be no assurance that material losses will not be incurred from claims that have not yet been asserted or are not yet determined to be probable or possible and reasonably estimable losses.
The Firm contests liability and/or the amount of damages as appropriate in each pending matter. Where available information indicates that it is probable a liability had been incurred at the date of the financial statements and the Firm can reasonably estimate the amount of that loss, the Firm accrues the estimated loss by a charge to income.
In many proceedings and investigations, however, it is inherently difficult to determine whether any loss is probable or even possible or to estimate the amount of any loss. In addition, even where a loss is possible or an exposure to loss exists in excess of the liability already accrued with respect to a previously recognized loss contingency, it is not always possible to reasonably estimate the size of the possible loss or range of loss.
For certain legal proceedings and investigations, the Firm cannot reasonably estimate such losses, particularly for proceedings and investigations where the factual record is being developed or contested or where plaintiffs or government entities seek substantial or indeterminate damages, restitution, disgorgement or penalties. Numerous issues may need to be resolved, including through potentially lengthy discovery and determination of important factual matters, determination of issues related to class certification and the calculation of damages or other relief, and by addressing novel or unsettled legal questions relevant to the proceedings or investigations in question, before a loss or additional loss or range of loss or
 
additional range of loss can be reasonably estimated for a proceeding or investigation.
For certain other legal proceedings and investigations, the Firm can estimate reasonably possible losses, additional losses, ranges of loss or ranges of additional loss in excess of amounts accrued but does not believe, based on current knowledge and after consultation with counsel, that such losses will have a material adverse effect on the Firm’s financial statements as a whole, other than the matters referred to in the following paragraphs.
On July 15, 2010, China Development Industrial Bank (“CDIB”) filed a complaint against the Firm, styled China Development Industrial Bank v. Morgan Stanley & Co. Incorporated et al., which is pending in the Supreme Court of the State of New York, New York County (“Supreme Court of NY”). The complaint relates to a $275 million CDS referencing the super senior portion of the STACK 2006-1 CDO. The complaint asserts claims for common law fraud, fraudulent inducement and fraudulent concealment and alleges that the Firm misrepresented the risks of the STACK 2006-1 CDO to CDIB, and that the Firm knew that the assets backing the CDO were of poor quality when it entered into the CDS with CDIB. The complaint seeks compensatory damages related to the approximately $228 million that CDIB alleges it has already lost under the CDS, rescission of CDIB’s obligation to pay an additional $12 million, punitive damages, equitable relief, fees and costs. On February 28, 2011, the court denied the Firm’s motion to dismiss the complaint. On December 21, 2018, the court denied the Firm’s motion for summary judgment and granted in part the Firm’s motion for sanctions relating to spoliation of evidence. On January 24, 2019, CDIB filed a notice of appeal from the court’s December 21, 2018 order, and on January 25, 2019, the Firm filed a notice of appeal from the same order. On March 7, 2019, the court denied the relief that CDIB sought in a motion to clarify and resettle the portion of the court’s December 21, 2018 order granting spoliation sanctions. Based on currently available information, the Firm believes it could incur a loss in this action of up to approximately $240 million plus pre- and post-judgment interest, fees and costs.
On July 8, 2013, U.S. Bank National Association, in its capacity as trustee, filed a complaint against the Firm styled U.S. Bank National Association, solely in its capacity as Trustee of the Morgan Stanley Mortgage Loan Trust 2007-2AX (MSM 2007-2AX) v. Morgan Stanley Mortgage Capital Holdings LLC, Successor-by-Merger to Morgan Stanley Mortgage Capital Inc. and GreenPoint Mortgage Funding, Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $650 million, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy

 
69
September 2019 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

procedures in the transaction documents, unspecified damages and interest. On November 24, 2014, the court granted in part and denied in part the Firm’s motion to dismiss the complaint. On April 4, 2019, the court denied the Firm’s motion to renew its motion to dismiss. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $240 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.
On September 19, 2014, Financial Guaranty Insurance Company (“FGIC”) filed a complaint against the Firm in the Supreme Court of NY, styled Financial Guaranty Insurance Company v. Morgan Stanley ABS Capital I Inc. et al. relating to a securitization issued by Basket of Aggregated Residential NIMS 2007-1 Ltd. The complaint asserts claims for breach of contract and alleges, among other things, that the net interest margin securities (“NIMS”) in the trust breached various representations and warranties. FGIC issued a financial guaranty policy with respect to certain notes that had an original balance of approximately $475 million. The complaint seeks, among other relief, specific performance of the NIMS breach remedy procedures in the transaction documents, unspecified damages, reimbursement of certain payments made pursuant to the transaction documents, attorneys’ fees and interest. On November 24, 2014, the Firm filed a motion to dismiss the complaint, which the court denied on January 19, 2017. On September 13, 2018, the Appellate Division, First Department, affirmed the lower court’s order denying the Firm’s motion to dismiss. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $126 million, the unpaid balance of these notes, plus pre- and post-judgment interest, fees and costs, as well as claim payments that FGIC has made and will make in the future.
On September 23, 2014, FGIC filed a complaint against the Firm in the Supreme Court of NY styled Financial Guaranty Insurance Company v. Morgan Stanley ABS Capital I Inc. et al. relating to the Morgan Stanley ABS Capital I Inc. Trust 2007-NC4. The complaint asserts claims for breach of contract and fraudulent inducement and alleges, among other things, that the loans in the trust breached various representations and warranties and defendants made untrue statements and material omissions to induce FGIC to issue a financial guaranty policy on certain classes of certificates that had an original balance of approximately $876 million. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, compensatory, consequential and punitive damages, attorneys’ fees and interest. On January 23, 2017, the court denied the Firm’s motion to dismiss the complaint. On September 13, 2018, the Appellate Division, First Department, affirmed in part and reversed in part the lower court’s order denying the Firm’s
 
motion to dismiss. On December 20, 2018, the Appellate Division denied plaintiff’s motion for leave to appeal the decision of the Appellate Division, First Department, to the New York Court of Appeals ("Court of Appeals") or, in the alternative, for re-argument. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $277 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands from a certificate holder and FGIC that the Firm did not repurchase, plus pre- and post-judgment interest, fees and costs, as well as claim payments that FGIC has made and will make in the future. In addition, plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.
On January 23, 2015, Deutsche Bank National Trust Company, in its capacity as trustee, filed a complaint against the Firm styled Deutsche Bank National Trust Company solely in its capacity as Trustee of the Morgan Stanley ABS Capital I Inc. Trust 2007-NC4 v. Morgan Stanley Mortgage Capital Holdings LLC as Successor-by-Merger to Morgan Stanley Mortgage Capital Inc., and Morgan Stanley ABS Capital I Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $1.05 billion, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, compensatory, consequential, rescissory, equitable and punitive damages, attorneys’ fees, costs and other related expenses, and interest. On December 11, 2015, the court granted in part and denied in part the Firm’s motion to dismiss the complaint. On October 19, 2018, the court granted the Firm’s motion for leave to amend its answer and to stay the case pending resolution of Deutsche Bank National Trust Company’s appeal to the Court of Appeals in another case. On January 17, 2019, the First Department reversed the trial court’s order to the extent that it had granted in part the Firm’s motion to dismiss the complaint. On June 4, 2019, the Appellate Division, First Department, granted Morgan Stanley’s motion for leave to appeal to the Court of Appeals. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $277 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands from a certificate holder and a monoline insurer that the Firm did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.
In matters styled Case number 15/3637 and Case number 15/4353, the Dutch Tax Authority (“Dutch Authority”) has challenged, in the District Court in Amsterdam, the prior set-off by the Firm of approximately €124 million (approximately $135 million) plus accrued interest of withholding tax credits

September 2019 Form 10-Q
70
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
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against the Firm’s corporation tax liabilities for the tax years 2007 to 2013. The Dutch Authority alleges that the Firm was not entitled to receive the withholding tax credits on the basis, inter alia, that a Firm subsidiary did not hold legal title to certain securities subject to withholding tax on the relevant dates. The Dutch Authority has also alleged that the Firm failed to provide certain information to the Dutch Authority and keep adequate books and records. A hearing took place in this matter on September 19, 2017. On April 26, 2018, the District Court in Amsterdam issued a decision dismissing the Dutch Authority’s claims. On June 4, 2018, the Dutch Authority filed an appeal before the Court of Appeal in Amsterdam in matters re-styled Case number 18/00318 and Case number 18/00319. On June 26 and July 2, 2019, a hearing of the Dutch Authority’s appeal was held in the matters styled Case number 15/3637 and Case number 15/4353. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately €124 million (approximately $135 million) plus accrued interest.

12. Variable Interest Entities and Securitization Activities
Consolidated VIEs
Assets and Liabilities by Type of Activity
 
At September 30, 2019
At December 31, 2018
$ in millions
VIE Assets
VIE Liabilities
VIE Assets
VIE Liabilities 
OSF
$
281

$
—

$
267

$
—

MABS1
13

4

59

38

Other2
879

69

809

48

Total
$
1,173

$
73

$
1,135

$
86

OSF—Other structured financings
1.
Amounts include transactions backed by residential mortgage loans, commercial mortgage loans and other types of assets, including consumer or commercial assets. The value of assets is determined based on the fair value of the liabilities and the interests owned by the Firm in such VIEs as the fair values for the liabilities and interests owned are more observable.
2.
Other primarily includes certain operating entities, investment funds and structured transactions.
 
 
Assets and Liabilities by Balance Sheet Caption
$ in millions
At
September 30,
2019
At
December 31,
2018
Assets
 
 
Cash and cash equivalents:
 
 
Cash and due from banks
$
104

$
77

Restricted cash
173

171

Trading assets at fair value
374

314

Customer and other receivables
10

25

Goodwill
—

18

Intangible assets
114

128

Other assets
398

402

Total
$
1,173

$
1,135

Liabilities
 
 
Other secured financings
$
32

$
64

Other liabilities and accrued expenses
41

22

Total
$
73

$
86

Noncontrolling interests
$
160

$
106


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

 
71
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(Unaudited)
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Non-consolidated VIEs
 
At September 30, 2019
$ in millions
MABS1
CDO
MTOB
OSF
Other2
VIE assets (UPB)
$
115,498

$
1,475

$
7,011

$
2,298

$
42,383

Maximum exposure to loss3
 
 
Debt and equity interests
$
15,538

$
157

$
62

$
965

$
10,393

Derivative and other contracts
—

—

4,545

—

2,979

Commitments, guarantees and other
660

—

—

—

783

Total
$
16,198

$
157

$
4,607

$
965

$
14,155

Carrying value of variable interests—Assets
 
 
Debt and equity interests
$
15,538

$
157

$
62

$
964

$
10,393

Derivative and other contracts
—

—

6

—

208

Total
$
15,538

$
157

$
68

$
964

$
10,601

Additional VIE assets owned4
 
 
 
$
11,192

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

$
—

$
—

$
—

$
211

 
At December 31, 20185
$ in millions
MABS1
CDO
MTOB
OSF
Other2
VIE assets (UPB)
$
106,197

$
10,848

$
7,014

$
3,314

$
38,603

Maximum exposure to loss3
 
 
Debt and equity interests
$
15,671

$
1,169

$
—

$
1,622

$
7,967

Derivative and other contracts
—

—

4,449

—

1,768

Commitments, guarantees and other
1,073

3

—

235

509

Total
$
16,744

$
1,172

$
4,449

$
1,857

$
10,244

Carrying value of variable interests–Assets
 
 
Debt and equity interests
$
15,671

$
1,169

$
—

$
1,205

$
7,967

Derivative and other contracts
—

—

6

—

87

Total
$
15,671

$
1,169

$
6

$
1,205

$
8,054

Additional VIE assets owned4
 
 
 
$
12,059

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

$
—

$
—

$
—

$
185


MTOB—Municipal tender option bonds
1.
MABS includes loan– and security–form interests collateralized by pools of residential and commercial mortgages.
2.
Other primarily includes exposures to commercial real estate property and investment funds.
3.
Where notional amounts are utilized in quantifying the maximum exposure related to derivatives, such amounts do not reflect changes in fair value recorded by the Firm.
4.
Additional VIE assets owned represents the carrying value of total exposure to non-consolidated VIEs for which the maximum exposure to loss is less than specific thresholds, primarily interests issued by securitization SPEs. The Firm’s primary risk exposure is to the most subordinate class of beneficial interest and maximum exposure to loss generally equals the fair value of the assets owned. These assets are primarily included in Trading assets and Investment securities and are measured at fair value (see Note 3). The Firm does not provide additional support in these transactions through contractual facilities, guarantees or similar derivatives.
5.
The carrying value and maximum exposure to loss of variable interests related to MABS and Other have been revised to reflect the addition of approximately $11 billion in loans to VIEs that were previously excluded. The VIE asset (UPB) amounts have also been revised by approximately $54 billion. This disclosure-only revision did not impact the Firm’s balance sheets.
 

The majority of the VIEs included in the previous tables are sponsored by unrelated parties; examples of the Firm’s involvement with these VIEs include its secondary market-making activities and the securities held in its Investment securities portfolio (see Note 5).
The Firm’s maximum exposure to loss is dependent on the nature of the Firm’s variable interest in the VIE and is limited to the notional amounts of certain liquidity facilities and other credit support, total return swaps and written put options, as well as the fair value of certain other derivatives and investments the Firm has made in the VIE.
The Firm’s maximum exposure to loss in the previous tables does not include the offsetting benefit of hedges or any reductions associated with the amount of collateral held as part of a transaction with the VIE or any party to the VIE directly against a specific exposure to loss.
Liabilities issued by VIEs generally are non-recourse to the Firm.
Mortgage- and Asset-Backed Securitization Assets
 
At September 30, 2019
At December 31, 20181
$ in millions
UPB
Debt and
Equity
Interests
UPB
Debt and
Equity
Interests
Residential mortgages
$
28,005

$
4,144

$
27,594

$
4,581

Commercial mortgages
49,354

3,969

55,501

4,327

U.S. agency collateralized mortgage obligations
31,997

5,341

14,969

3,443

Other consumer or commercial loans
6,142

2,084

8,133

3,320

Total
$
115,498

$
15,538

$
106,197

$
15,671


1.
The balances as of December 31, 2018 were revised as noted in the Non-consolidated VIEs table herein.
Transfers of Assets with Continuing Involvement
 
At September 30, 20191
$ in millions
RML
CML
U.S. Agency
CMO
CLN and
Other2
SPE assets (UPB)3
$
12,726

$
77,431

$
14,841

$
6,637

Retained interests
Investment grade
$
27

$
620

$
1,463

$
1

Non-investment grade
18

199

—

89

Total
$
45

$
819

$
1,463

$
90

Interests purchased in the secondary market (fair value)
Investment grade
$
7

$
244

$
15

$
5

Non-investment grade
35

22

—

—

Total
$
42

$
266

$
15

$
5

Derivative assets
(fair value)
$
—

$
—

$
—

$
201

Derivative liabilities (fair value)
—

—

—

69


September 2019 Form 10-Q
72
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
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At December 31, 2018
$ in millions
RML
CML
U.S. Agency
CMO
CLN and
Other2
SPE assets (UPB)3
$
14,376

$
68,593

$
16,594

$
14,608

Retained interests
Investment grade
$
17

$
483

$
1,573

$
3

Non-investment grade
(fair value)
4

212

—

210

Total
$
21

$
695

$
1,573

$
213

Interests purchased in the secondary market (fair value)
Investment grade
$
7

$
91

$
102

$
—

Non-investment grade
28

71

—

—

Total
$
35

$
162

$
102

$
—

Derivative assets
(fair value)
$
—

$
—

$
—

$
216

Derivative liabilities (fair value)
—

—

—

178

 
Fair Value At September 30, 2019
$ in millions
Level 2    
Level 3    
Total    
Retained interests
 
 
 
Investment grade
$
1,475

$
17

$
1,492

Non-investment grade
11

107

118

Total
$
1,486

$
124

$
1,610

Interests purchased in the secondary market
Investment grade
$
268

$
3

$
271

Non-investment grade
37

20

57

Total
$
305

$
23

$
328

Derivative assets
$
163

$
38

$
201

Derivative liabilities
65

4

69

 
Fair Value At December 31, 2018
$ in millions
Level 2    
Level 3    
Total    
Retained interests
 
 
 
Investment grade
$
1,580

$
13

$
1,593

Non-investment grade
174

252

426

Total
$
1,754

$
265

$
2,019

Interests purchased in the secondary market
Investment grade
$
193

$
7

$
200

Non-investment grade
83

16

99

Total
$
276

$
23

$
299

Derivative assets
$
121

$
95

$
216

Derivative liabilities
175

3

178



RML—Residential mortgage loans
CML—Commercial mortgage loans
1.
As permitted by applicable guidance, certain transfers of assets where the Firm’s only continuing involvement is a derivative are only reported in the following Assets Sold with Retained Exposure table, and are no longer also included in this table. At December 31, 2018 these transactions were included in CLN and Other and comprised approximately $8 billion in UPB, $20 million in Derivative assets and $119 million in Derivative liabilities.
2.
Amounts include CLO transactions managed by unrelated third parties.
3.
Amounts include assets transferred by unrelated transferors.
The transfers of assets with continuing involvement tables include transactions with SPEs in which the Firm, acting as principal, transferred financial assets with continuing involvement and received sales treatment.
Transferred assets are carried at fair value prior to securitization, and any changes in fair value are recognized in
 
the income statements. The Firm may act as underwriter of the beneficial interests issued by these securitization vehicles, for which Investment banking revenues are recognized. The Firm may retain interests in the securitized financial assets as one or more tranches of the securitization. These retained interests are generally carried at fair value in the balance sheets with changes in fair value recognized in the income statements.
Proceeds from New Securitization Transactions and Sales of Loans
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
$ in millions
2019
2018
2019
2018
New transactions1
$
8,651

$
7,299

$
20,897

$
19,056

Retained interests
902

584

4,424

2,222

Sales of corporate loans to CLO SPEs1, 2
—

17

—

253


1.
Net gains on new transactions and sales of corporate loans to CLO entities at the time of the sale were not material for all periods presented.
2.
Sponsored by non-affiliates.
The Firm has provided, or otherwise agreed to be responsible for, representations and warranties regarding certain assets transferred in securitization transactions sponsored by the Firm (see Note 11).
Assets Sold with Retained Exposure
$ in millions
At
September 30,
2019
At
December 31,
2018
Gross cash proceeds from sale of assets1
$
35,328

$
27,121

Fair value
 
 
Assets sold
$
35,600

$
26,524

Derivative assets recognized
in the balance sheets
534

164

Derivative liabilities recognized
in the balance sheets
250

763


1.
The carrying value of assets derecognized at the time of sale approximates gross cash proceeds.

The Firm enters into transactions in which it sells securities, primarily equities and contemporaneously enters into bilateral OTC derivatives with the purchasers of the securities, through which it retains exposure to the sold securities.
For a discussion of the Firm’s VIEs, the determination and structure of VIEs and securitization activities, see Note 13 to the financial statements in the 2018 Form 10-K.

 
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September 2019 Form 10-Q
Table of Contents
 
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(Unaudited)
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13. Regulatory Requirements
Regulatory Capital Framework and Requirements    
For a discussion of the Firm’s regulatory capital framework, see Note 14 to the financial statements in the 2018 Form 10-K.
The Firm is required to maintain minimum risk-based and leverage-based capital ratios under regulatory capital requirements. A summary of the calculations of regulatory capital, RWA and transition provisions follows.
Minimum risk-based capital ratio requirements apply to Common Equity Tier 1 capital, Tier 1 capital and Total capital (which includes Tier 2 capital). Capital standards require certain adjustments to, and deductions from, capital for purposes of determining these ratios.
In addition to the minimum risk-based capital ratio requirements, the Firm is subject to the following buffers in 2019:
 
•
A greater than 2.5% Common Equity Tier 1 capital conservation buffer;

•
The Common Equity Tier 1 G-SIB capital surcharge, currently at 3%; and

•
Up to a 2.5% Common Equity Tier 1 CCyB, currently set by U.S. banking agencies at zero.
In 2018, each of these buffers was 75% of the fully phased-in 2019 requirement noted above. Failure to maintain the buffers would result in restrictions on the Firm’s ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers.
The Firm’s Regulatory Capital and Capital Ratios
 
At September 30, 2019
$ in millions
Required
Ratio1
Amount
Ratio    
Risk-based capital
 
 
 
Common Equity Tier 1 capital
10.0
%
$
64,348

16.3
%
Tier 1 capital
11.5
%
72,937

18.5
%
Total capital
13.5
%
82,661

20.9
%
Total RWA
 
394,875

 
Leverage-based capital
 
 
 
Tier 1 leverage
4.0
%
$
72,937

8.2
%
Adjusted average assets2
 
892,912

 
SLR
5.0
%
72,937

6.3
%
Supplementary leverage exposure3
 
1,155,497

 
 
 
 
At December 31, 2018
$ in millions
Required
Ratio1
Amount
Ratio    
Risk-based capital
 
 
 
Common Equity Tier 1 capital
8.6
%
$
62,086

16.9
%
Tier 1 capital
10.1
%
70,619

19.2
%
Total capital
12.1
%
80,052

21.8
%
Total RWA
 
367,309

 
Leverage-based capital
 
 
 
Tier 1 leverage
4.0
%
$
70,619

8.4
%
Adjusted average assets2
 
843,074

 
SLR
5.0
%
70,619

6.5
%
Supplementary leverage exposure3
 
1,092,672

 
 
1.
Required ratios are inclusive of any buffers applicable as of the date presented. For 2018, the minimum required regulatory capital ratios for risk-based capital are under the transitional rules.
2.
Adjusted average assets represents the denominator of the Tier 1 leverage ratio and is composed of the average daily balance of consolidated on-balance sheet assets during the quarters ended September 30, 2019 and December 31, 2018, reduced by disallowed goodwill, intangible assets, investments in covered funds, defined benefit pension plan assets, after-tax gain on sale from assets sold into securitizations, investments in the Firm's own capital instruments, certain deferred tax assets and other capital deductions.
3.
Supplementary leverage exposure is the sum of Adjusted average assets used in the Tier 1 leverage ratio and other adjustments, primarily (i) for derivatives: potential future exposure and the effective notional principal amount of sold credit protection offset by qualifying purchased credit protection; (ii) the counterparty credit risk for repo-style transactions; and (iii) the credit equivalent amount for off-balance sheet exposures.
At September 30, 2019 and December 31, 2018, the Firm’s risk-based capital ratios are based on the Standardized Approach rules.

U.S. Bank Subsidiaries’ Regulatory Capital and Capital Ratios    
The OCC establishes capital requirements for the Firm’s U.S. Bank Subsidiaries and evaluates their compliance with such capital requirements. Regulatory capital requirements for the U.S. Bank Subsidiaries are calculated in a similar manner to the Firm’s regulatory capital requirements, although G-SIB capital surcharge requirements do not apply to the U.S. Bank Subsidiaries.
The OCC’s regulatory capital framework includes Prompt Corrective Action (“PCA”) standards, including “well-capitalized” PCA standards that are based on specified regulatory capital ratio minimums. For the Firm to remain an FHC, the U.S. Bank Subsidiaries must remain well-capitalized in accordance with the OCC’s PCA standards. In addition, failure by the U.S. Bank Subsidiaries to meet minimum capital requirements may result in certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on the U.S. Bank Subsidiaries’ and the Firm’s financial statements.

September 2019 Form 10-Q
74
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

At September 30, 2019 and December 31, 2018, the U.S. Bank Subsidiaries’ risk-based capital ratios are based on the Standardized Approach rules, and in each period, the ratios exceeded well-capitalized requirements.
MSBNA’s Regulatory Capital
 
At September 30, 2019
$ in millions
Required
Ratio1
Amount  
Ratio    
Risk-based capital
 
 
 
Common Equity Tier 1 capital
6.5
%
$
16,641

19.9
%
Tier 1 capital
8.0
%
16,641

19.9
%
Total capital
10.0
%
16,953

20.3
%
Leverage-based capital
 
 
 
Tier 1 leverage
5.0
%
$
16,641

11.9
%
SLR
6.0
%
16,641

9.2
%
 
At December 31, 2018
$ in millions
Required
Ratio1
Amount
Ratio
Risk-based capital
 
 
 
Common Equity Tier 1 capital
6.5
%
$
15,221

19.5
%
Tier 1 capital
8.0
%
15,221

19.5
%
Total capital
10.0
%
15,484

19.8
%
Leverage-based capital
 
 
 
Tier 1 leverage
5.0
%
$
15,221

10.5
%
SLR
6.0
%
15,221

8.2
%

MSPBNA’s Regulatory Capital 
 
At September 30, 2019
$ in millions
Required
Ratio1
Amount
Ratio    
Risk-based capital
 
 
 
Common Equity Tier 1 capital
6.5
%
$
8,281

27.3
%
Tier 1 capital
8.0
%
8,281

27.3
%
Total capital
10.0
%
8,331

27.5
%
Leverage-based capital
 
 
 
Tier 1 leverage
5.0
%
$
8,281

10.8
%
SLR
6.0
%
8,281

10.3
%
 
 
At December 31, 2018
$ in millions
Required
Ratio1
Amount
Ratio
Risk-based capital
 
 
 
Common Equity Tier 1 capital
6.5
%
$
7,183

25.2
%
Tier 1 capital
8.0
%
7,183

25.2
%
Total capital
10.0
%
7,229

25.4
%
Leverage-based capital
 
 
 
Tier 1 leverage
5.0
%
$
7,183

10.0
%
SLR
6.0
%
7,183

9.6
%
 
1.
Ratios that are required in order to be considered well-capitalized for U.S. regulatory purposes.

 
U.S. Broker-Dealer Regulatory Capital Requirements
MS&Co. Regulatory Capital
$ in millions
At September 30, 2019
At December 31, 2018
Net capital
$
13,358

$
13,797

Excess net capital
10,453

11,333


MS&Co. is a registered U.S. broker-dealer and registered futures commission merchant and, accordingly, is subject to the minimum net capital requirements of the SEC and the CFTC. MS&Co. has consistently operated with capital in excess of its regulatory capital requirements.
As an Alternative Net Capital broker-dealer, and in accordance with the market and credit risk standards of Appendix E of SEC Rule 15c3-1, MS&Co. is subject to minimum net capital and tentative net capital requirements. In addition, MS&Co. must notify the SEC if its tentative net capital falls below certain levels. At September 30, 2019 and December 31, 2018, MS&Co. has exceeded its net capital requirement and has tentative net capital in excess of the minimum and notification requirements.
MSSB LLC Regulatory Capital
$ in millions
At September 30, 2019
At December 31, 2018
Net capital
$
3,772

$
3,455

Excess net capital
3,634

3,313


MSSB LLC is a registered U.S. broker-dealer and introducing broker for the futures business and, accordingly, is subject to the minimum net capital requirements of the SEC. MSSB LLC has consistently operated with capital in excess of its regulatory capital requirements.

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

 
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September 2019 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
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14. Total Equity
Share Repurchases
 
Three Months Ended September 30,
Nine Months Ended September 30,
$ in millions
2019
2018
2019
2018
Repurchases of common stock under our Share Repurchase Program
$
1,500

$
1,180

$
3,860

$
3,680


The Firm’s 2019 Capital Plan (“Capital Plan”) includes the share repurchase of up to $6.0 billion of outstanding common stock for the period beginning July 1, 2019 through June 30, 2020. Additionally, the Capital Plan includes quarterly common stock dividends of up to $0.35 per share, beginning with the common stock dividend announced on July 18, 2019. For information about the Firm's 2018 Capital Plan, see Note 15 to the financial statements in the 2018 Form 10-K.
A portion of common stock repurchases was conducted under a sales plan with MUFG, whereby MUFG sold shares of the Firm’s common stock to the Firm, as part of the Firm’s Share Repurchase Program. The sales plan is only intended to maintain MUFG’s ownership percentage below 24.9% in order to comply with MUFG’s passivity commitments to the Board of Governors of the Federal Reserve System and has no impact on the strategic alliance between MUFG and the Firm, including the joint ventures in Japan.
 
Common Stock Dividends Per Share
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2019
2018
2019
2018
Dividends declared per common share
$
0.35

$
0.30

$
0.95

$
0.80


Preferred Stock
 
Shares
Outstanding
 
Carrying Value
$ in millions, except
per share data
At
September 30,
2019
Liquidation
Preference
per Share
At
September 30,
2019
At
December 31,
2018
Series
 
 
 
A
44,000

$
25,000

$
1,100

$
1,100

C1
519,882

1,000

408

408

E
34,500

25,000

862

862

F
34,000

25,000

850

850

G
20,000

25,000

500

500

H
52,000

25,000

1,300

1,300

I
40,000

25,000

1,000

1,000

J
60,000

25,000

1,500

1,500

K
40,000

25,000

1,000

1,000

Total
$
8,520

$
8,520

Shares authorized
30,000,000
 
 
1.
Series C is composed of the issuance of 1,160,791 shares of Series C Preferred Stock to MUFG for an aggregate purchase price of $911 million, less the redemption of 640,909 shares of Series C Preferred Stock of $503 million, which were converted to common shares of approximately $705 million.
For a description of Series A through Series K preferred stock issuances, see Note 15 to the financial statements in the 2018 Form 10-K. Preferred stock has a preference over common stock upon liquidation. The Firm’s preferred stock qualifies as Tier 1 capital in accordance with regulatory capital requirements (see Note 13).
Preferred Stock Dividends
$ in millions, except per
share data
Three Months Ended
September 30, 2019
Three Months Ended
September 30, 2018
Per Share1
Total
Per Share1
Total
Series
 
 
 
 
A
$
256

$
11

$
256

$
11

C
25

13

25

13

E
445

15

445

15

F
430

15

430

15

G
414

8

414

8

H
378

20

—

—

I
398

16

398

16

J
—

—

—

—

K
366

15

366

15

Total
 
$
113

 
$
93

  

September 2019 Form 10-Q
76
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

$ in millions, except per
share data
Nine Months Ended
September 30, 2019
Nine Months Ended
September 30, 2018
Per Share1
Total
Per Share1
Total
Series
 
 
 
 
A
$
758

$
33

$
758

$
33

C
75

39

75

39

E
1,336

45

1,336

45

F
1,289

45

1,289

45

G
1,242

24

1,242

24

H
1,059

55

681

35

I
1,195

48

1,195

48

J
694

42

694

42

K
1,097

45

1,097

45

Total
 
$
376

 
$
356

 
1.
Dividends on preferred stock are payable quarterly, except for Series H, which was payable semiannually until July 15, 2019 and is now payable quarterly, and Series J, which is payable semiannually until July 15, 2020, and quarterly thereafter.
Accumulated Other Comprehensive Income (Loss)1 
$ in millions
Foreign
Currency
Translation
Adjustments
AFS
Securities
Pension,
Postretirement
and Other
DVA
Total
June 30, 2019
$
(865
)
$
108

$
(574
)
$
(720
)
$
(2,051
)
OCI during the period
(96
)
214

3

332

453

September 30, 2019
$
(961
)
$
322

$
(571
)
$
(388
)
$
(1,598
)
June 30, 2018
$
(864
)
$
(1,194
)
$
(704
)
$
(308
)
$
(3,070
)
OCI during the period
(54
)
(171
)
5

(709
)
(929
)
September 30, 2018
$
(918
)
$
(1,365
)
$
(699
)
$
(1,017
)
$
(3,999
)
December 31, 2018
$
(889
)
$
(930
)
$
(578
)
$
105

$
(2,292
)
OCI during the period
(72
)
1,252

7

(493
)
694

September 30, 2019
$
(961
)
$
322

$
(571
)
$
(388
)
$
(1,598
)
December 31, 2017
$
(767
)
$
(547
)
$
(591
)
$
(1,155
)
$
(3,060
)
Cumulative adjustment for accounting changes2
(8
)
(111
)
(124
)
(194
)
(437
)
OCI during the period
(143
)
(707
)
16

332

(502
)
September 30, 2018
$
(918
)
$
(1,365
)
$
(699
)
$
(1,017
)
$
(3,999
)
 
1.
Amounts are net of tax and exclude noncontrolling interests.
2.
The cumulative adjustment for accounting changes is primarily the effect of the adoption of the accounting update Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This adjustment was recorded as of January 1, 2018 to reclassify certain income tax effects related to enactment of the Tax Act from AOCI to Retained earnings, primarily related to the remeasurement of deferred tax assets and liabilities resulting from the reduction in the corporate income tax rate to 21%. See Note 2 for further information.

 
Components of Period Changes in OCI
 
Three Months Ended
September 30, 2019
$ in millions
Pre-tax
Gain
(Loss)
Income
Tax Benefit
(Provision)
After-tax
Gain
(Loss)
Non-
controlling
Interests
Net
Foreign currency translation adjustments
OCI activity
$
(26
)
$
(73
)
$
(99
)
$
(3
)
$
(96
)
Reclassified to earnings
—

—

—

—

—

Net OCI
$
(26
)
$
(73
)
$
(99
)
$
(3
)
$
(96
)
Change in net unrealized gains (losses) on AFS securities
OCI activity
$
307

$
(73
)
$
234

$
—

$
234

Reclassified to earnings
(26
)
6

(20
)
—

(20
)
Net OCI
$
281

$
(67
)
$
214

$
—

$
214

Pension, postretirement and other
OCI activity
$
—

$
—

$
—

$
—

$
—

Reclassified to earnings
4

(1
)
3

—

3

Net OCI
$
4

$
(1
)
$
3

$
—

$
3

Change in net DVA
OCI activity
$
441

$
(106
)
$
335

$
5

$
330

Reclassified to earnings
2

—

2

—

2

Net OCI
$
443

$
(106
)
$
337

$
5

$
332

 
Three Months Ended
September 30, 2018
$ in millions
Pre-tax
Gain
(Loss)
Income
Tax Benefit
(Provision)
After-tax
Gain
(Loss)
Non-
controlling
Interests
Net
Foreign currency translation adjustments
OCI activity
$
(44
)
$
(35
)
$
(79
)
$
(25
)
$
(54
)
Reclassified to earnings
—

—

—

—

—

Net OCI
$
(44
)
$
(35
)
$
(79
)
$
(25
)
$
(54
)
Change in net unrealized gains (losses) on AFS securities
OCI activity
$
(219
)
$
51

$
(168
)
$
—

$
(168
)
Reclassified to earnings
(5
)
2

(3
)
—

(3
)
Net OCI
$
(224
)
$
53

$
(171
)
$
—

$
(171
)
Pension, postretirement and other
OCI activity
$
—

$
—

$
—

$
—

$
—

Reclassified to earnings
7

(2
)
5

—

5

Net OCI
$
7

$
(2
)
$
5

$
—

$
5

Change in net DVA
OCI activity
$
(1,018
)
$
248

$
(770
)
$
(34
)
$
(736
)
Reclassified to earnings
36

(9
)
27

—

27

Net OCI
$
(982
)
$
239

$
(743
)
$
(34
)
$
(709
)


 
77
September 2019 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

 
Nine Months Ended
September 30, 20191
$ in millions
Pre-tax
Gain
(Loss)
Income
Tax Benefit
(Provision)
After-tax
Gain
(Loss)
Non-
controlling
Interests
Net
Foreign currency translation adjustments
OCI activity
$
2

$
(58
)
$
(56
)
$
16

$
(72
)
Reclassified to earnings
—

—

—

—

—

Net OCI
$
2

$
(58
)
$
(56
)
$
16

$
(72
)
Change in net unrealized gains (losses) on AFS securities
OCI activity
$
1,726

$
(406
)
$
1,320

$
—

$
1,320

Reclassified to earnings
(89
)
21

(68
)
—

(68
)
Net OCI
$
1,637

$
(385
)
$
1,252

$
—

$
1,252

Pension, postretirement and other
OCI activity
$
—

$
(1
)
$
(1
)
$
—

$
(1
)
Reclassified to earnings
10

(2
)
8

—

8

Net OCI
$
10

$
(3
)
$
7

$
—

$
7

Change in net DVA
OCI activity
$
(713
)
$
177

$
(536
)
$
(36
)
$
(500
)
Reclassified to earnings
9

(2
)
7

—

7

Net OCI
$
(704
)
$
175

$
(529
)
$
(36
)
$
(493
)
   
 
Nine Months Ended
September 30, 20181
$ in millions
Pre-tax
Gain
(Loss)
Income
Tax Benefit
(Provision)
After-tax
Gain
(Loss)
Non-
controlling
Interests
Net
Foreign currency translation adjustments
OCI activity
$
(52
)
$
(102
)
$
(154
)
$
(11
)
$
(143
)
Reclassified to earnings
—

—

—

—

—

Net OCI
$
(52
)
$
(102
)
$
(154
)
$
(11
)
$
(143
)
Change in net unrealized gains (losses) on AFS securities
OCI activity
$
(916
)
$
215

$
(701
)
$
—

$
(701
)
Reclassified to earnings
(8
)
2

(6
)
—

(6
)
Net OCI
$
(924
)
$
217

$
(707
)
$
—

$
(707
)
Pension, postretirement and other
OCI activity
$
2

$
—

$
2

$
—

$
2

Reclassified to earnings
19

(5
)
14

—

14

Net OCI
$
21

$
(5
)
$
16

$
—

$
16

Change in net DVA
OCI activity
$
403

$
(97
)
$
306

$
15

$
291

Reclassified to earnings
54

(13
)
41

—

41

Net OCI
$
457

$
(110
)
$
347

$
15

$
332

 
1.
Exclusive of cumulative adjustments related to the adoption of certain accounting updates. Refer to the following table and Note 2 for further information.

 
Cumulative Adjustments to Retained Earnings Related to the Adoption of Accounting Updates1 
 
Nine Months Ended
$ in millions
September 30, 2019
Leases
$
63

 
Nine Months Ended
$ in millions
September 30, 2018
Revenues from contracts with customers2
$
(32
)
Derivatives and hedging—targeted improvements to accounting for hedging activities2
(99
)
Reclassification of certain tax effects from AOCI2
443

Other3
(6
)
Total
$
306


1.
There were no cumulative adjustments to retained earnings related to the adoption of accounting updates for the three months ended September 30, 2019 and 2018.
2.
See Note 2 to the financial statements in the 2018 Form 10-K for further information.
3.
Other includes the adoption of accounting updates related to Recognition and Measurement of Financial Assets and Financial Liabilities (other than the provision around presenting unrealized DVA in OCI, which the Firm early adopted in 2016) and Derecognition of Nonfinancial Assets. The impact of these adoptions on Retained earnings was not significant.
 
15. Earnings per Common Share
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
in millions, except for per share data
2019
2018
2019
2018
Earnings applicable to Morgan Stanley common shareholders
$
2,060

$
2,019

$
6,427

$
6,861

Basic EPS
 
 
 
 
Weighted average common shares outstanding
1,604

1,697

1,632

1,719

Earnings per basic common share
$
1.28

$
1.19

$
3.94

$
3.99

Diluted EPS
 
 
 
 
Weighted average common shares outstanding
1,604

1,697

1,632

1,719

Effect of dilutive RSUs and PSUs
23

30

21

30

Weighted average common shares outstanding and common stock equivalents
1,627

1,727

1,653

1,749

Earnings per diluted common share
$
1.27

$
1.17

$
3.89

$
3.92

Weighted average antidilutive RSUs (excluded from the computation of diluted EPS)
—

1

2

1



September 2019 Form 10-Q
78
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

16. Interest Income and Interest Expense
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
$ in millions
2019
2018
2019
2018
Interest income
 
 
 
 
Investment securities
$
579

$
440

$
1,563

$
1,281

Loans
1,208

1,085

3,599

3,097

Securities purchased under agreements to resell and Securities borrowed1
871

575

2,865

1,156

Trading assets, net of Trading liabilities
728

571

2,188

1,687

Customer receivables and Other2
964

956

2,931

2,560

Total interest income
$
4,350

$
3,627

$
13,146

$
9,781

 
 
 
 
 
Interest expense
 
 
 
 
Deposits
$
505

$
377

$
1,460

$
809

Borrowings
1,219

1,287

3,941

3,683

Securities sold under agreements to repurchase and Securities loaned3
681

478

2,016

1,326

Customer payables and Other4
727

549

2,468

1,146

Total interest expense
$
3,132

$
2,691

$
9,885

$
6,964

Net interest
$
1,218

$
936

$
3,261

$
2,817

 
1.
Includes fees paid on Securities borrowed.
2.
Includes interest from Customer receivables and Cash and cash equivalents.
3.
Includes fees received on Securities loaned.
4.
Includes fees received from prime brokerage customers for stock loan transactions entered into to cover customers’ short positions.
Interest income and Interest expense are classified in the income statements based on the nature of the instrument and related market conventions. When included as a component of the instrument’s fair value, interest is included within Trading revenues or Investments revenues. Otherwise, it is included within Interest income or Interest expense.
 

k
17. Income Taxes
The Firm is under continuous examination by the IRS and other tax authorities in certain countries, such as Japan and the U.K., and in states and localities in which it has significant business operations, such as New York. The Firm has established a liability for unrecognized tax benefits, and associated interest, if applicable (“tax liabilities”), that it believes is adequate in relation to the potential for additional assessments. Once established, the Firm adjusts such tax liabilities only when new information is available or when an event occurs necessitating a change.
Net Discrete Tax Provisions/(Benefits)
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
$ in millions
2019
2018
2019
2018
Recurring1
$
—

$
—

$
(127
)
$
(164
)
Intermittent
(89
)
(4
)
(190
)
(92
)
 
1. Recurring discrete tax items are related to conversion of employee share-based awards.

The Firm's effective tax rate for the current quarter included intermittent net discrete tax benefits primarily associated with the filing of the 2018 federal tax return and the remeasurement of reserves and related interest due to new information with regard to multi-jurisdiction tax examinations. The Firm’s effective tax rates for the current year period and prior year period included intermittent net discrete tax benefits primarily associated with the remeasurement of reserves and related interest due to new information with regard to multi-jurisdiction tax examinations and other matters.
See Note 11 regarding the Dutch Tax Authority’s challenge, in the District Court in Amsterdam (matters styled Case number 15/3637 and Case number 15/4353), of the Firm’s entitlement to certain withholding tax credits which may impact the balance of unrecognized tax benefits.
It is reasonably possible that significant changes in the balance of unrecognized tax benefits occur within the next 12 months. At this time, however, it is not possible to reasonably estimate the expected change to the total amount of unrecognized tax benefits and the impact on the Firm’s effective tax rate over the next 12 months.
The Firm believes that the resolution of the previous tax examinations will not have a material effect on the annual financial statements, although a resolution could have a material impact in the income statements and on the effective tax rate for any period in which such resolution occurs.

 
79
September 2019 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

18. Segment, Geographic and Revenue Information
Selected Financial Information by Business Segment
 
Three Months Ended September 30, 2019
$ in millions
IS
WM
IM
I/E
Total
Investment banking1
$
1,535

$
118

$
—

$
(18
)
$
1,635

Trading
2,533

61

2

12

2,608

Investments
(18
)
—

105

—

87

Commissions and fees1
643

416

1

(70
)
990

Asset management1
100

2,639

664

(40
)
3,363

Other
51

81

—

(1
)
131

Total non-interest revenues
4,844

3,315

772

(117
)
8,814

Interest income
3,112

1,378

4

(144
)
4,350

Interest expense
2,933

335

12

(148
)
3,132

Net interest
179

1,043

(8
)
4

1,218

Net revenues
$
5,023

$
4,358

$
764

$
(113
)
$
10,032

Income from continuing operations before income taxes
$
1,307

$
1,238

$
165

$
—

$
2,710

Provision for income taxes
189

276

27

—

492

Income from continuing operations
1,118

962

138

—

2,218

Net income
1,118

962

138

—

2,218

Net income applicable to noncontrolling interests
45

—

—

—

45

Net income applicable to Morgan Stanley
$
1,073

$
962

$
138

$
—

$
2,173





























 


 
 
Three Months Ended September 30, 2018
$ in millions
IS
WM
IM
I/E
Total
Investment banking1
$
1,459

$
129

$
—

$
(21
)
$
1,567

Trading
2,573

160

2

17

2,752

Investments
96

—

40

—

136

Commissions and fees1
589

409

—

(66
)
932

Asset management1
112

2,573

604

(38
)
3,251

Other
244

58

(3
)
(1
)
298

Total non-interest revenues
5,073

3,329

643

(109
)
8,936

Interest income
2,425

1,412

19

(229
)
3,627

Interest expense
2,569

342

9

(229
)
2,691

Net interest
(144
)
1,070

10

—

936

Net revenues
$
4,929

$
4,399

$
653

$
(109
)
$
9,872

Income from continuing operations before income taxes
$
1,556

$
1,194

$
102

$
(1
)
$
2,851

Provision for income taxes
397

281

18

—

696

Income from continuing operations
1,159

913

84

(1
)
2,155

Income (loss) from discontinued operations, net of income taxes
(3
)
—

2

—

(1
)
Net income
1,156

913

86

(1
)
2,154

Net income applicable to noncontrolling interests
36

—

6

—

42

Net income applicable to Morgan Stanley
$
1,120

$
913

$
80

$
(1
)
$
2,112





September 2019 Form 10-Q
80
 
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

 
Nine Months Ended September 30, 2019
$ in millions
IS
WM
IM
I/E
Total
Investment banking1
$
4,158

$
365

$
(1
)
$
(55
)
$
4,467

Trading
8,221

525

(2
)
37

8,781

Investments
257

1

543

—

801

Commissions and fees1
1,889

1,250

1

(205
)
2,935

Asset management1
310

7,544

1,893

(115
)
9,632

Other
416

281

(6
)
(6
)
685

Total non-interest revenues
15,251

9,966

2,428

(344
)
27,301

Interest income
9,457

4,139

14

(464
)
13,146

Interest expense
9,376

950

35

(476
)
9,885

Net interest
81

3,189

(21
)
12

3,261

Net revenues
$
15,332

$
13,155

$
2,407

$
(332
)
$
30,562

Income from continuing operations before income taxes
$
4,365

$
3,669

$
538

$
(4
)
$
8,568

Provision for income taxes
703

830

104

(1
)
1,636

Income from continuing operations
3,662

2,839

434

(3
)
6,932

Net income
3,662

2,839

434

(3
)
6,932

Net income applicable to noncontrolling interests
97

—

32

—

129

Net income applicable to Morgan Stanley
$
3,565

$
2,839

$
402

$
(3
)
$
6,803


 
 
Nine Months Ended September 30, 2018
$ in millions
IS
WM
IM
I/E
Total
Investment banking1
$
4,671

$
383

$
—

$
(60
)
$
4,994

Trading
9,344

404

23

44

9,815

Investments
234

3

172

—

409

Commissions and fees1
2,007

1,349

—

(212
)
3,144

Asset management1
324

7,582

1,840

(114
)
9,632

Other
548

195

10

(5
)
748

Total non-interest revenues
17,128

9,916

2,045

(347
)
28,742

Interest income
6,424

4,012

37

(692
)
9,781

Interest expense
6,809

830

20

(695
)
6,964

Net interest
(385
)
3,182

17

3

2,817

Net revenues
$
16,743

$
13,098

$
2,062

$
(344
)
$
31,559

Income from continuing operations before income taxes
$
5,480

$
3,511

$
390

$
(1
)
$
9,380

Provision for income taxes
1,169

808

73

—

2,050

Income from continuing operations
4,311

2,703

317

(1
)
7,330

Income (loss) from discontinued operations, net of income taxes
(7
)
—

2

—

(5
)
Net income
4,304

2,703

319

(1
)
7,325

Net income applicable to noncontrolling interests
100

—

8

—

108

Net income applicable to Morgan Stanley
$
4,204

$
2,703

$
311

$
(1
)
$
7,217


I/E–Intersegment Eliminations
1.
Approximately 85% of Investment Banking revenues in the current quarter, 90% in the current year period and approximately 85% of Investment banking revenues in the prior year periods were accounted for as Revenues from Contracts with Customers. In all periods presented, substantially all of Commissions and fees and Asset management revenues were accounted for under this guidance.
For a discussion about the Firm’s business segments, see Note 21 to the financial statements in the 2018 Form 10-K.
Institutional Securities—Investment Banking Revenues
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
$ in millions
2019
2018
2019
2018
Advisory
$
550

$
510

$
1,462

$
1,702

Underwriting
985

949

2,696

2,969


Trading Revenues by Product Type
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
$ in millions
2019
2018
2019
2018
Interest rate
$
894

$
744

$
2,283

$
2,396

Foreign exchange
69

223

383

622

Equity security and index1
1,076

1,432

4,005

5,094

Commodity and other
300

254

986

1,047

Credit
269

99

1,124

656

Total
$
2,608

$
2,752

$
8,781

$
9,815

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

 
81
September 2019 Form 10-Q
Table of Contents
 
Notes to Consolidated Financial Statements
(Unaudited)
mslogo.jpg

The previous table summarizes gains and losses included in Trading revenues in the income statements. These activities include revenues related to derivative and non-derivative financial instruments. The Firm generally utilizes financial instruments across a variety of product types in connection with its market-making and related risk management strategies. The trading revenues presented in the table are not representative of the manner in which the Firm manages its business activities and are prepared in a manner similar to the presentation of trading revenues for regulatory reporting purposes.
Investment Management Investments Revenues—Net Unrealized Carried Interest
$ in millions
At
September 30,
2019
At
December 31,
2018
Net cumulative unrealized carried interest at risk of reversing
$
553

$
434


The Firm’s portion of net cumulative unrealized carried interest (for which the Firm is not obligated to pay compensation) are at risk of reversing if the fund performance falls below the stated investment management agreement benchmarks. See Note 11 for information regarding general partner guarantees, which include potential obligations to return performance-based fees in the form of carried interest previously received.
Investment Management Asset Management Revenues—Reduction of Fees due to Fee Waivers
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
$ in millions
2019
2018
2019
2018
Fee waivers
$
11

$
11

$
32

$
45


The Firm waives a portion of its fees in the Investment Management business segment from certain registered money market funds that comply with the requirements of Rule 2a-7 of the Investment Company Act of 1940.
Separately, the Firm’s employees, including its senior officers, may participate on the same terms and conditions as other investors in certain funds that the Firm sponsors primarily for client investment, and the Firm may waive or lower applicable fees and charges for its employees.
Net Revenues by Region
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
$ in millions
2019
2018
2019
2018
Americas
$
7,489

$
7,357

$
22,336

$
22,989

EMEA
1,409

1,355

4,687

4,892

Asia
1,134

1,160

3,539

3,678

Total
$
10,032

$
9,872

$
30,562

$
31,559



For a discussion about the Firm’s geographic net revenues, see Note 21 to the financial statements in the 2018 Form 10-K.
 
Revenue Recognized From Prior Services
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
$ in millions
2019
2018
2019
2018
Non-interest revenues
$
841

$
804

$
1,995

$
2,192

The previous table includes revenue from contracts with customers recognized where some or all services were performed in prior periods and is primarily composed of investment banking advisory fees and distribution fees.
Certain Future Expected Revenues
 
At September 30, 2019
$ in millions
2019
2020
2021 - 2025
thereafter
Non-interest revenues
$
57

$
132

$ 63 - $ 89
$
239


The previous table reflects contracts with customers that are longer than one year in duration and the amounts invoiced do not necessarily correspond directly to the value transferred to the customer. These contracts are primarily for the future sale and transport of commodity related products.

Receivables related to Revenues from Contracts with Customers
$ in millions
At
September 30,
2019
At
December 31,
2018
Customer and other receivables
$
2,114

$
2,308


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

Assets by Business Segment
$ in millions
At
September 30,
2019
At
December 31,
2018
Institutional Securities
$
703,868

$
646,427

Wealth Management1
193,213

202,392

Investment Management
5,523

4,712

Total2
$
902,604

$
853,531

 
1.
The Firm acquired Solium Capital Inc. in the second quarter of 2019 and as a result recorded Goodwill of approximately $469 million and Intangible assets of approximately $268 million.
2.
Parent assets have been fully allocated to the business segments.


September 2019 Form 10-Q
82
 
Table of Contents
 
Financial Data Supplement (Unaudited)

mslogo.jpg



Average Balances and Interest Rates and Net Interest Income
 
Three Months Ended September 30,
 
2019
 
2018
$ in millions
Average
Daily Balance
 
Interest
 
Annualized
Average
Rate
 
Average
Daily
Balance
 
Interest
 
Annualized
Average
Rate
Interest earning assets
 
 
 
 
 
 
 
 
 
 
 
Investment securities1
$
104,700

 
$
579

 
2.2
%
 
$
82,594

 
$
440

 
2.1
 %
Loans1
122,320

 
1,208

 
3.9

 
110,592

 
1,085

 
3.9

Securities purchased under agreements to resell and Securities borrowed2:
 
 
 
 
 
 
 
 
 
 
 
U.S.
146,578

 
835

 
2.3

 
139,418

 
637

 
1.8

Non-U.S.
76,871

 
36

 
0.2

 
89,825

 
(62
)
 
(0.3
)
Trading assets, net of Trading liabilities3:
 
 
 
 
 
 
 
 
 
 
 
U.S.
78,169

 
630

 
3.2

 
55,399

 
508

 
3.6

Non-U.S.
17,104

 
98

 
2.3

 
8,637

 
63

 
2.9

Customer receivables and Other4:
 
 
 
 
 
 
 
 
 
 
 
U.S.
62,113

 
703

 
4.5

 
78,025

 
716

 
3.6

Non-U.S.
60,073

 
261

 
1.7

 
56,770

 
240

 
1.7

Total
$
667,928

 
$
4,350

 
2.6
%
 
$
621,260

 
$
3,627

 
2.3
 %
Interest bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
Deposits1
$
179,715

 
$
505

 
1.1
%
 
$
173,921

 
$
377

 
0.9
 %
Borrowings1, 5
196,777

 
1,219

 
2.5

 
191,606

 
1,287

 
2.7

Securities sold under agreements to repurchase and Securities loaned6:
 
 
 
 
 
 
 
 
 
 
 
U.S.
36,335

 
505

 
5.5

 
24,386

 
346

 
5.6

Non-U.S.
30,111

 
176

 
2.3

 
34,960

 
132

 
1.5

Customer payables and Other7:
 
 
 
 
 
 
 
 
 
 
 
U.S.
121,800

 
448

 
1.5

 
120,958

 
321

 
1.1

Non-U.S.
65,036

 
279

 
1.7

 
71,998

 
228

 
1.3

Total
$
629,774

 
$
3,132

 
2.0
%
 
$
617,829

 
$
2,691

 
1.7
 %
Net interest income and net interest rate spread
 
 
$
1,218

 
0.6
%
 
 
 
$
936

 
0.6
 %
 

























 
83
September 2019 Form 10-Q
Table of Contents
 
Financial Data Supplement (Unaudited)

mslogo.jpg



Average Balances and Interest Rates and Net Interest Income
 
Nine Months Ended September 30,
 
2019
 
2018
$ in millions
Average
Daily Balance
 
Interest
 
Annualized
Average
Rate
 
Average
Daily
Balance
 
Interest
 
Annualized
Average
Rate
Interest earning assets
 
 
 
 
 
 
 
 
 
 
 
Investment securities1
$
99,782

 
$
1,563

 
2.1
%
 
$
80,886

 
$
1,281

 
2.1
 %
Loans1
118,926

 
3,599

 
4.0

 
109,001

 
3,097

 
3.8

Securities purchased under agreements to resell and Securities borrowed2:
 
 
 
 
 
 
 
 
 
 
 
U.S.
144,686

 
2,774

 
2.6

 
133,208

 
1,410

 
1.4

Non-U.S.
76,814

 
91

 
0.2

 
89,699

 
(254
)
 
(0.4
)
Trading assets, net of Trading liabilities3:
 
 
 
 
 
 
 
 
 
 
 
U.S.
77,434

 
1,922

 
3.3

 
55,162

 
1,520

 
3.7

Non-U.S.
14,362

 
266

 
2.5

 
7,045

 
167

 
3.2

Customer receivables and Other4:
 
 
 
 
 
 
 
 
 
 
 
U.S.
61,479

 
2,110

 
4.6

 
73,792

 
1,880

 
3.4

Non-U.S.
59,033

 
821

 
1.9

 
56,891

 
680

 
1.6

Total
$
652,516

 
$
13,146

 
2.7
%
 
$
605,684

 
$
9,781

 
2.2
 %
Interest bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
Deposits1
$
178,894

 
$
1,460

 
1.1
%
 
$
166,384

 
$
809

 
0.7
 %
Borrowings1, 5
192,854

 
3,941

 
2.7

 
192,746

 
3,683

 
2.6

Securities sold under agreements to repurchase and Securities loaned6:
 
 
 
 
 
 
 
 
 
 
 
U.S.
32,479

 
1,489

 
6.1

 
24,871

 
952

 
5.1

Non-U.S.
31,555

 
527

 
2.2

 
38,248

 
374

 
1.3

Customer payables and Other7:
 
 
 
 
 
 
 
 
 
 
 
U.S.
116,383

 
1,587

 
1.8

 
121,556

 
577

 
0.6

Non-U.S.
65,331

 
881

 
1.8

 
71,382

 
569

 
1.1

Total
$
617,496

 
$
9,885

 
2.1
%
 
$
615,187

 
$
6,964

 
1.5
 %
Net interest income and net interest rate spread
 
 
$
3,261

 
0.6
%
 
 
 
$
2,817

 
0.7
 %

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


September 2019 Form 10-Q
84
 
Table of Contents
 
Glossary of Common Acronyms
mslogo.jpg


2018 Form
10-K
Annual Report on Form 10-K for year ended December 31, 2018 filed with the SEC
 
 
ABS
Asset-backed securities
 
 
AFS
Available-for-sale
 
 
AML
Anti-money laundering
 
 
AOCI
Accumulated other comprehensive income (loss)
 
 
AUM
Assets under management or supervision
 
 
BEAT
Base erosion and anti-abuse tax
 
 
BHC
Bank holding company
 
 
bps
Basis points; one basis point equals 1/100th of 1%
 
 
CCAR
Comprehensive Capital Analysis and Review
 
 
CCyB
Countercyclical capital buffer
 
 
CDO
Collateralized debt obligation(s), including Collateralized loan obligation(s)
 
 
CDS
Credit default swaps
 
 
CECL
Current expected credit loss
 
 
CFTC
U.S. Commodity Futures Trading Commission
 
 
CLN
Credit-linked note(s)
 
 
CLO
Collateralized loan obligation(s)
 
 
CMBS
Commercial mortgage-backed securities
 
 
CMO
Collateralized mortgage obligation(s)
 
 
CVA
Credit valuation adjustment
 
 
DVA
Debt valuation adjustment
 
 
EBITDA
Earnings before interest, taxes, depreciation and amortization
 
 
ELN
Equity-linked note(s)
 
 
EMEA
Europe, Middle East and Africa
 
 
EPS
Earnings per common share
 
 
E.U.
European Union
 
 
 
FDIC
Federal Deposit Insurance Corporation
 
 
FFELP
Federal Family Education Loan Program
 
 
FFIEC
Federal Financial Institutions Examination Council
 
 
FHC
Financial Holding Company
 
 
FICC
Fixed Income Clearing Corporation
 
 
FICO
Fair Isaac Corporation
 
 
FVA
Funding valuation adjustment
 
 
GILTI
Global Intangible Low-Taxed Income
 
 
GLR
Global liquidity reserve
 
 
G-SIB
Global systemically important banks
 
 
HELOC
Home Equity Line of Credit
 
 
HQLA
High-quality liquid assets
 
 
HTM
Held-to-maturity
 
 
I/E
Intersegment eliminations
 
 
IHC
Intermediate holding company
 
 
IM
Investment Management
 
 
IRS
Internal Revenue Service
 
 
IS
Institutional Securities
 
 
LCR
Liquidity coverage ratio, as adopted by the U.S. banking agencies
 
 
LIBOR
London Interbank Offered Rate
 
 
M&A
Merger, acquisition and restructuring transaction
 
 
MSBNA
Morgan Stanley Bank, N.A.
 
 
MS&Co.
Morgan Stanley & Co. LLC
 
 
MSIP
Morgan Stanley & Co. International plc
 
 
MSMS
Morgan Stanley MUFG Securities Co., Ltd.
 
 
MSPBNA
Morgan Stanley Private Bank, National Association
 
 
MSSB LLC
Morgan Stanley Smith Barney LLC
 
 
MUFG
Mitsubishi UFJ Financial Group, Inc.
 
 

 
85
September 2019 Form 10-Q
Table of Contents
 
Glossary of Common Acronyms
mslogo.jpg


MUMSS
Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.
 
 
MWh
Megawatt hour
 
 
N/A
Not Applicable
 
 
NAV
Net asset value
 
 
N/M
Not Meaningful
 
 
Non-GAAP
Non-generally accepted accounting principles
 
 
NSFR
Net stable funding ratio, as proposed by the U.S. banking agencies
 
 
OCC
Office of the Comptroller of the Currency
 
 
OCI
Other comprehensive income (loss)
 
 
OIS
Overnight index swap
 
 
OTC
Over-the-counter
 
 
PRA
Prudential Regulation Authority
 
 
PSU
Performance-based stock unit
 
 
RMBS
Residential mortgage-backed securities
 
 
ROE
Return on average common equity
 
 
ROTCE
Return on average tangible common equity
 
 
ROU
Right-of-use
 
 
RSU
Restricted stock unit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RWA
Risk-weighted assets
 
 
SEC
U.S. Securities and Exchange Commission
 
 
SLR
Supplementary leverage ratio
 
 
S&P
Standard & Poor’s
 
 
SPE
Special purpose entity
 
 
SPOE
Single point of entry
 
 
TDR
Troubled debt restructuring
 
 
TLAC
Total loss-absorbing capacity
 
 
U.K.
United Kingdom
 
 
UPB
Unpaid principal balance
 
 
U.S.
United States of America
 
 
U.S. DOL
U.S. Department of Labor
 
 
U.S. GAAP
Accounting principles generally accepted in the United States of America
 
 
VaR
Value-at-Risk
 
 
VAT
Value-added tax
 
 
VIE
Variable interest entity
 
 
WACC
Implied weighted average cost of capital
 
 
WM
Wealth Management

September 2019 Form 10-Q
86
 

Other Information

Legal Proceedings
 
The following development has occurred since previously reporting certain matters in the Firm’s 2018 Form 10-K and the Firm's Quarterly Reports on Form 10-Q for the quarterly period ended March 31, 2019 (the "First Quarter Form 10-Q") and the quarterly period ended June 30, 2019 (the "Second Quarter Form 10-Q"). See also the disclosures set forth under “Legal Proceedings” in the 2018 Form 10-K, First Quarter Form 10-Q and Second Quarter Form 10-Q.

Antitrust Related Matter

On August 29, 2019, the court in In re GSE Bonds Antitrust Litigation denied the Firm's motion to dismiss. The case is set for trial in May 2020.
Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Three Months Ended September 30, 2019
$ in millions, except per share data
Total 
Number
of Shares
Purchased1
Average Price
Paid Per Share
Total Shares 
Purchased as
Part of Share Repurchase Program2,3
Dollar Value
of Remaining Authorized Repurchase
July
6,671,014

$
44.95

5,885,400

$
5,735

August
15,912,294

$
40.75

15,892,000

$
5,087

September
14,026,315

$
41.95

14,003,465

$
4,500

Total
36,609,623

$
41.98

35,780,865

 

1.
Includes 828,758 shares acquired by the Firm in satisfaction of the tax withholding obligations on stock-based awards granted under the Firm’s stock-based compensation plans during the three months ended September 30, 2019.
2.
Share purchases under publicly announced programs are made pursuant to open-market purchases, Rule 10b5-1 plans or privately negotiated transactions (including with employee benefit plans) as market conditions warrant and at prices the Firm deems appropriate and may be suspended at any time. On April 18, 2018, the Firm entered into a sales plan with Mitsubishi UFJ Financial Group, Inc. (“MUFG”). See Note 14 to the financial statements for further information on the sales plan.
3.
The Firm’s Board of Directors has authorized the repurchase of the Firm’s outstanding stock under a share repurchase program (the “Share Repurchase Program”). The Share Repurchase Program is a program for capital management purposes that considers, among other things, business segment capital needs, as well as equity-based compensation and benefit plan requirements. The Share Repurchase Program has no set expiration or termination date.
 
Share repurchases by the Firm are subject to regulatory approval. On June 27, 2019, the Federal Reserve published summary results of CCAR and and the Firm received a non-objection to its 2019 Capital Plan. The Firm’s 2019 Capital Plan includes a share repurchase of up to $6.0 billion of its outstanding common stock during the period beginning July 1, 2019 through June 30, 2020. For further information, see “Liquidity and Capital Resources—Capital Plans and Stress Tests.”

 
Controls and Procedures
Under the supervision and with the participation of the Firm’s management, including the Chief Executive Officer and Chief Financial Officer, the Firm conducted an evaluation of the effectiveness of the Firm’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Firm's disclosure controls and procedures were effective as of the end of the period covered by this report.
No change in the Firm’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) occurred during the period covered by this report that materially affected, or is reasonably likely to materially affect, the Firm’s internal control over financial reporting.
Exhibits
An exhibit index has been filed as part of this Report on page E-1.

 
87
September 2019 Form 10-Q

Exhibit Index
Morgan Stanley
Quarter Ended September 30, 2019
 
Exhibit No.
 
Description
 
 
 
15
 
Letter of awareness from Deloitte  & Touche LLP, dated November 5, 2019, concerning unaudited interim financial information.
 
 
 
31.1
 
Rule 13a-14(a) Certification of Chief Executive Officer.
 
 
 
31.2
 
Rule 13a-14(a) Certification of Chief Financial Officer.
 
 
 
32.1
 
Section 1350 Certification of Chief Executive Officer.
 
 
 
32.2
 
Section 1350 Certification of Chief Financial Officer.
 
 
 
101
 
Interactive Data Files pursuant to Rule 405 of Regulation S-T formatted in Inline eXtensible Business Reporting Language (“Inline XBRL”).
 
 
 
104
 
Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).


E- 1

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
MORGAN STANLEY
(Registrant)
 
 
By:
/s/ JONATHAN PRUZAN
 
Jonathan Pruzan
Executive Vice President and
Chief Financial Officer
 
 
By:
/s/ PAUL C. WIRTH
 
Paul C. Wirth
Deputy Chief Financial Officer
Date: November 5, 2019


S-1

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