UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

EXCHANGE ACT OF 1934

For the quarterly period ended ~~March 31,~~June 30, 2016

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

EXCHANGE ACT OF 1934

Commission File Number 1-11758

LOGO

(Exact Name of Registrant as specified in its charter)

Delaware

(State or other jurisdiction of

incorporation or organization)

1585 Broadway

New York, NY 10036

(Address of principal executive offices,
including zip code)

36-3145972

(I.R.S. Employer Identification No.)

(212) 761-4000

(Registrant’s telephone number, including area code)

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

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

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


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

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

As of ~~April~~July 29, 2016, there were ~~1,937,024,359~~1,911,808,935 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.

LOGO

QUARTERLY REPORT ON FORM 10-Q

For the quarter ended ~~March 31,~~June 30, 2016


Table of Contents				Page

Part I—Financial Information
Item 1.	Financial Statements (Unaudited)		1
	~~Condensed~~ Consolidated Statements of Income		1
	~~Condensed~~ Consolidated Statements of Comprehensive Income		2
	~~Condensed~~ Consolidated Balance ~~Sheet~~Sheets		3
	~~Condensed~~ Consolidated Statements of Changes in Total Equity		4
	~~Condensed~~ Consolidated Statements of Cash Flows		5
	~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~		6
	Notes to Consolidated Financial Statements (Unaudited)	6
	1. Introduction and Basis of Presentation		6
	2. Significant Accounting Policies		7
	3. Fair Values		8
	4. Derivative Instruments and Hedging Activities		24	27
	5. Investment Securities		31	34
	6. Collateralized Transactions		36	40
	7. Loans and Allowance for Credit Losses		39	43
	8. Equity Method Investments		44	47
	9. Deposits		44	47
	10. Long-Term Borrowings and Other Secured Financings		44	47
	11. Commitments, Guarantees and Contingencies		45	48
	12. Variable Interest Entities and Securitization Activities		51	53
	13. Regulatory Requirements		57	59
	14. Total Equity		60	61
	15. Earnings per Common Share		62	64
	16. Interest Income and Interest Expense		63	65
	17. Employee Benefit Plans		63	65
	18. Income Taxes		64	66
	19. Segment and Geographic Information		64	67
	20. Subsequent Events		66	70
	Report of Independent Registered Public Accounting Firm		67	71
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		68	72
	Introduction		68	72
	Executive Summary		69	73
	Business Segments		75	78
	Supplemental Financial Information and Disclosures		87	90
	Accounting Development Updates		88	91
	Critical Accounting Policies		89	91
	Liquidity and Capital Resources		90	92
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		~~107~~	108
Item 4.	Controls and Procedures		~~122~~	121
Financial Data Supplement (Unaudited)			~~123~~	122

Part II—Other Information
Item 1.	Legal Proceedings		~~126~~	128
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		~~127~~	129
Item 6.	Exhibits		~~127~~	129


		i

Available Information.

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

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

You can access information about ~~the Company’s~~our corporate governance atwww.morganstanley.com/about-us-governance. ~~The Company’s~~Our Corporate Governance webpage includes:

Amended and Restated Certificate of Incorporation;

Amended and Restated Bylaws;

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

Corporate Governance Policies;

Policy Regarding Communication with the Board of Directors;

Policy Regarding Director Candidates Recommended by Shareholders;

Policy Regarding Corporate Political Activities;

Policy Regarding Shareholder Rights Plan;

Equity Ownership Commitment;

Code of Ethics and Business Conduct;

Code of Conduct; and

Integrity Hotline Information.

Morgan Stanley’s Code of Ethics and Business Conduct applies to all directors, officers and employees, including ~~its~~our Chief Executive Officer, Chief Financial Officer and Deputy Chief Financial Officer. ~~The Company~~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 ~~its~~our internet site. You can request a copy of these documents, excluding exhibits, at no cost, by contacting Investor Relations, 1585 Broadway, New York, NY 10036 (212-761-4000). The information on ~~the Company’s~~our internet site is not incorporated by reference into this report.


		ii

Part I—Financial ~~Information.~~Information

Item 1. Financial Statements

MORGAN STANLEY

~~Item 1.~~

~~Financial Statements.~~

~~MORGAN STANLEY~~

~~Condensed~~ Consolidated Statements of Income

(~~dollars~~ in millions, except ~~share and~~ per share data)

(unaudited)

   Three Months Ended
March 31,
   2016 2015
Revenues:

Investment banking
   $ 1,107    $ 1,357
Trading
   2,065    3,650
Investments
   (34 ) 266
Commissions and fees
   1,055    1,186
Asset management, distribution and administration fees
   2,620    2,681
Other
   80    171


Total non-interest revenues
   6,893    9,311


Interest income
   1,747    1,484
Interest expense
   848    888


Net interest
   899    596


Net revenues
   7,792    9,907


Non-interest expenses:

Compensation and benefits
   3,683    4,524
Occupancy and equipment
   329    342
Brokerage, clearing and exchange fees
   465    463
Information processing and communications
   442    415
Marketing and business development
   134    150
Professional services
   514    486
Other
   487    672


Total non-interest expenses
   6,054    7,052


Income from continuing operations before income taxes
   1,738    2,855
Provision for income taxes
   578    387


Income from continuing operations
   1,160    2,468


Discontinued operations:

Income (loss) from discontinued operations before income taxes
   (5 ) (8 )
Provision for (benefit from) income taxes
   (2 ) (3 )


Income (loss) from discontinued operations
   (3 ) (5 )


Net income
   $ 1,157    $ 2,463
Net income applicable to noncontrolling interests
   23    69


Net income applicable to Morgan Stanley
   $ 1,134    $ 2,394
Preferred stock dividends and other
   79    80


Earnings applicable to Morgan Stanley common shareholders
   $ 1,055    $ 2,314


Earnings per basic common share:

Income from continuing operations
   $ 0.56    $ 1.21
Income (loss) from discontinued operations
   —    (0.01 )


Earnings per basic common share
   $ 0.56    $ 1.20


Earnings per diluted common share:

Income from continuing operations
   $ 0.55    $ 1.18
Income (loss) from discontinued operations
   —    —


Earnings per diluted common share
   $ 0.55    $ 1.18


Dividends declared per common share
   $ 0.15    $ 0.10
Average common shares outstanding:

Basic
     1,883,141,468      1,924,122,199
Diluted
     1,914,840,943      1,962,996,441


	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Revenues:
Investment banking	$	1,224	$	1,614	$	2,331	$	2,971
Trading		2,746		2,973		4,811		6,623
Investments		126		261		92		527
Commissions and fees		1,020		1,158		2,075		2,344
Asset management, distribution and administration fees		2,637		2,742		5,257		5,423
Other		243		297		323		468

Total non-interest revenues		7,996		9,045		14,889		18,356

Interest income		1,667		1,386		3,414		2,870
Interest expense		754		688		1,602		1,576

Net interest		913		698		1,812		1,294

Net revenues		8,909		9,743		16,701		19,650

Non-interest expenses:
Compensation and benefits		4,015		4,405		7,698		8,929
Occupancy and equipment		329		351		658		693
Brokerage, clearing and exchange fees		484		487		949		950
Information processing and communications		429		438		871		853
Marketing and business development		154		179		288		329
Professional services		547		598		1,061		1,084
Other		468		558		955		1,230

Total non-interest expenses		6,426		7,016		12,480		14,068

Income from continuing operations before income taxes		2,483		2,727		4,221		5,582
Provision for income taxes		833		894		1,411		1,281

Income from continuing operations		1,650		1,833		2,810		4,301
Income (loss) from discontinued operations, net of income taxes		(4)		(2)		(7)		(7)

Net income	$	1,646	$	1,831	$	2,803	$	4,294
Net income applicable to noncontrolling interests		64		24		87		93

Net income applicable to Morgan Stanley	$	1,582	$	1,807	$	2,716	$	4,201
Preferred stock dividends and other		157		142		235		222

Earnings applicable to Morgan Stanley common shareholders	$	1,425	$	1,665	$	2,481	$	3,979

Earnings per basic common share:
Income from continuing operations	$	0.77	$	0.87	$	1.33	$	2.07
Income (loss) from discontinued operations		(0.01)		—		(0.01)		—

Earnings per basic common share	$	0.76	$	0.87	$	1.32	$	2.07

Earnings per diluted common share:
Income from continuing operations	$	0.75	$	0.85	$	1.30	$	2.03
Income (loss) from discontinued operations		—		—		—		—

Earnings per diluted common share	$	0.75	$	0.85	$	1.30	$	2.03

Dividends declared per common share	$	0.15	$	0.15	$	0.30	$	0.25
Average common shares outstanding:
Basic		1,866		1,919		1,875		1,922
Diluted		1,899		1,960		1,907		1,962

See Notes to ~~Condensed~~ Consolidated Financial Statements.


		1

MORGAN STANLEY

~~MORGAN STANLEY~~

~~Condensed~~ Consolidated Statements of Comprehensive Income

(dollars in millions)

(unaudited)


	Three Months Ended March 31,					Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015			2016		2015		2016		2015
Net income	$	1,157	$	2,463		$	1,646	$	1,831	$	2,803	$	4,294
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments(1)	$	186	$	(222	)	$	131	$	34	$	317	$	(188)
Change in net unrealized gains on available for sale securities(2)		395		200
Change in net unrealized gains (losses) on available for sale securities(2)							143		(228)		538		(28)
Pension, postretirement and other		1		2			(5)		(3)		(4)		(1)
Change in net debt valuation adjustments(3)		203		—			145		—		348		—

Total other comprehensive income (loss)	$	785	$	(20	)	$	414	$	(197)	$	1,199	$	(217)

Comprehensive income	$	1,942	$	2,443		$	2,060	$	1,634	$	4,002	$	4,077
Net income applicable to noncontrolling interests		23		69			64		24		87		93
Other comprehensive income (loss) applicable to noncontrolling interests		55		(2	)		81		(16)		136		(18)

Comprehensive income applicable to Morgan Stanley	$	1,864	$	2,376		$	1,915	$	1,626	$	3,779	$	4,002

(1)

Amounts include Provision for (benefit from) income taxes of$~~(115)~~(59) million and ~~$174 million.~~$(54) million in the quarter ended June 30, 2016 (“current quarter”) and the quarter ended June 30, 2015 (“prior year quarter”), respectively, and$(174) millionand $120 million in the six months ended June 30, 2016 (“current year period”) and the six months ended June 30, 2015 (“prior year period”), respectively.

(2)	Amounts include Provision for (benefit from) income taxes of$~~230~~84 million and ~~$121 million.~~$(137) million in the current quarter and prior year quarter, respectively, and$314 million and $(16) million in the current year period and prior year period, respectively.

(3)

Debt valuation adjustments (“DVA”) represent the change in the fair value resulting from fluctuations in the ~~Company’s~~Firm’s credit spreads and other credit factors related to liabilities carried at fair value, primarily certain Long-term and Short-term borrowings. Amounts include Provision for (benefit from) income taxes of$~~120 million.~~80 millionand $200 millionin the current quarter and current year period, respectively. See Notes 2 and 14 for further information.

See Notes to ~~Condensed~~ Consolidated Financial Statements.


		2

MORGAN STANLEY

~~Condensed~~ Consolidated Balance ~~Sheet~~Sheets

(dollars in millions, except share data)

(unaudited)

At
March 31,
2016 At
December 31,
2015
Assets

Cash and due from banks
$ 22,797    $ 19,827
Interest bearing deposits with banks
30,841    34,256
Trading assets, at fair value ($130,582 and $127,627 were pledged to various parties)
234,150    228,280
Investment securities (includes$68,167 and $66,759 at fair value)
77,592    71,983
Securities received as collateral, at fair value
8,813    11,225
Securities purchased under agreements to resell (includes$555 and $806 at fair value)
98,774    87,657
Securities borrowed
140,413    142,416
Customer and other receivables
44,762    45,407
Loans:

Held for investment (net of allowances of$330 and $225)
75,566    72,559
Held for sale
13,236    13,200
Goodwill
6,586    6,584
Intangible assets (net of accumulated amortization of$2,204 and $2,130) (includes$4 and $5 at fair value)
2,909    2,984
Other assets
51,058    51,087

Total assets
$     807,497    $ 787,465

Liabilities

Deposits (includes$647 and $125 at fair value)
$ 157,591    $ 156,034
Short-term borrowings (includes$697 and $1,648 at fair value)
1,109    2,173
Trading liabilities, at fair value
115,766    109,139
Obligation to return securities received as collateral, at fair value
17,984    19,316
Securities sold under agreements to repurchase (includes$693 and $683 at fair value)
41,305    36,692
Securities loaned
17,140    19,358
Other secured financings (includes$2,623 and $2,854 at fair value)
9,316    9,464
Customer and other payables
194,003    186,626
Other liabilities and accrued expenses
13,304    18,711
Long-term borrowings (includes$36,008 and $33,045 at fair value)
162,804    153,768

Total liabilities
730,322    711,281

Commitments and contingent liabilities (see Note 11)

Equity

Morgan Stanley shareholders’ equity:

Preferred stock (see Note 14)
7,520    7,520
Common stock, $0.01 par value:

Shares authorized:3,500,000,000; Shares issued:2,038,893,979; Shares outstanding:1,938,294,368 and 1,920,024,027
20    20
Additional paid-in capital
22,526    24,153
Retained earnings
50,272    49,204
Employee stock trusts
2,861    2,409
Accumulated other comprehensive loss
(1,238 ) (1,656 )
Common stock held in treasury, at cost, $0.01 par value (100,599,611 and 118,869,952 shares)
(3,090 ) (4,059 )
Common stock issued to employee stock trusts
(2,861 ) (2,409 )

Total Morgan Stanley shareholders’ equity
76,010    75,182
Noncontrolling interests
1,165    1,002

Total equity
77,175    76,184

Total liabilities and equity
$ 807,497    $     787,465


	At June 30, 2016		At December 31, 2015
Assets
Cash and due from banks	$	27,597	$	19,827
Interest bearing deposits with banks		28,536		34,256
Trading assets, at fair value ($141,543 and $127,627 were pledged to various parties)		256,794		239,505
Investment securities (includes$67,726 and $66,759 at fair value)		80,144		71,983
Securities purchased under agreements to resell (includes$555 and $806 at fair value)		97,589		87,657
Securities borrowed		131,281		142,416
Customer and other receivables		52,827		45,407
Loans:
Held for investment (net of allowances of$323 and $225)		77,283		72,559
Held for sale		15,882		13,200
Goodwill		6,581		6,584
Intangible assets (net of accumulated amortization of$2,279 and $2,130) (includes$3 and $5 at fair value)		2,833		2,984
Other assets		51,526		51,087

Total assets	$	828,873	$	787,465

Liabilities
Deposits (includes$95 and $125 at fair value)	$	152,693	$	156,034
Short-term borrowings (includes$511 and $1,648 at fair value)		880		2,173
Trading liabilities, at fair value		140,662		128,455
Securities sold under agreements to repurchase (includes$699 and $683 at fair value)		50,328		36,692
Securities loaned		17,241		19,358
Other secured financings (includes$2,921 and $2,854 at fair value)		9,901		9,464
Customer and other payables		201,189		186,626
Other liabilities and accrued expenses		14,112		18,711
Long-term borrowings (includes$37,804 and $33,045 at fair value)		163,492		153,768

Total liabilities		750,498		711,281

Commitments and contingent liabilities (see Note 11)
Equity
Morgan Stanley shareholders’ equity:
Preferred stock (see Note 14)		7,520		7,520
Common stock, $0.01 par value:
Shares authorized:3,500,000,000; Shares issued:2,038,893,979; Shares outstanding:1,917,509,492 and 1,920,024,027		20		20
Additional paid-in capital		22,697		24,153
Retained earnings		51,410		49,204
Employee stock trusts		2,873		2,409
Accumulated other comprehensive income (loss)		(905)		(1,656)
Common stock held in treasury, at cost, $0.01 par value (121,384,487 and 118,869,952 shares)		(3,626)		(4,059)
Common stock issued to employee stock trusts		(2,873)		(2,409)

Total Morgan Stanley shareholders’ equity		77,116		75,182
Noncontrolling interests		1,259		1,002

Total equity		78,375		76,184

Total liabilities and equity	$	828,873	$	787,465

See Notes to ~~Condensed~~ Consolidated Financial Statements.


		3

MORGAN STANLEY

~~Condensed~~ Consolidated Statements of Changes in Total Equity

~~Three~~Six Months Ended ~~March 31,~~June 30, 2016 and 2015

(dollars in millions)

(unaudited)


	Preferred Stock		Common Stock		Additional Paid-in Capital			Retained Earnings			Employee Stock Trusts		Accumulated Other Comprehensive Income (Loss)			Common Stock Held in Treasury at Cost			Common Stock Issued to Employee Stock Trusts			Non- controlling Interests			Total Equity			Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings		Employee Stock Trusts		Accumulated Other Comprehensive Income (Loss)		Common Stock Held in Treasury at Cost		Common Stock Issued to Employee Stock Trusts		Non- controlling Interests		Total Equity
BALANCE AT DECEMBER 31, 2015	$	7,520	$	20	$	24,153		$	49,204		$	2,409	$	(1,656	)	$	(4,059	)	$	(2,409	)	$	1,002		$	76,184		$	7,520	$	20	$	24,153	$	49,204	$	2,409	$	(1,656)	$	(4,059)	$	(2,409)	$	1,002	$	76,184
Cumulative adjustment for accounting change related to DVA(1)		—		—		—			312			—		(312	)		—			—			—			—			—		—		—		312		—		(312)		—		—		—		—
Net adjustment for accounting change related to consolidation(2)		—		—		—			—			—		—			—			—			106			106			—		—		—		—		—		—		—		—		106		106
Net income applicable to Morgan Stanley		—		—		—			1,134			—		—			—			—			—			1,134			—		—		—		2,716		—		—		—		—		—		2,716
Net income applicable to non controlling interests		—		—		—			—			—		—			—			—			23			23
Net income applicable to noncontrolling interests																													—		—		—		—		—		—		—		—		87		87
Dividends		—		—		—			(378	)		—		—			—			—			—			(378	)		—		—		—		(822)		—		—		—		—		—		(822)
Shares issued under employee plans and related tax effects		—		—		(1,627	)		—			452		—			1,945			(452	)		—			318			—		—		(1,456)		—		464		—		2,062		(464)		—		606
Repurchases of common stock and employee tax withholdings		—		—		—			—			—		—			(976	)		—			—			(976	)		—		—		—		—		—		—		(1,629)		—		—		(1,629)
Net change in Accumulated other comprehensive income (loss)		—		—		—			—			—		730			—			—			55			785			—		—		—		—		—		1,063		—		—		136		1,199
Other net decreases		—		—		—			—			—		—			—			—			(21	)		(21	)		—		—		—		—		—		—		—		—		(72)		(72)

BALANCE AT MARCH 31, 2016	$	7,520	$	20	$	22,526		$	50,272		$	2,861	$	(1,238	)	$	(3,090	)	$	(2,861	)	$	1,165		$	77,175
BALANCE AT JUNE 30, 2016																												$	7,520	$	20	$	22,697	$	51,410	$	2,873	$	(905)	$	(3,626)	$	(2,873)	$	1,259	$	78,375


BALANCE AT DECEMBER 31, 2014	$	6,020	$	20	$	24,249		$	44,625		$	2,127	$	(1,248	)	$	(2,766	)	$	(2,127	)	$	1,204		$	72,104		$	6,020	$	20	$	24,249	$	44,625	$	2,127	$	(1,248)	$	(2,766)	$	(2,127)	$	1,204	$	72,104
Net income applicable to Morgan Stanley		—		—		—			2,394			—		—			—			—			—			2,394			—		—		—		4,201		—		—		—		—		—		4,201
Net income applicable to non controlling interests		—		—		—			—			—		—			—			—			69			69
Net income applicable to noncontrolling interests																													—		—		—		—		—		—		—		—		93		93
Dividends		—		—		—			(279	)		—		—			—			—			—			(279	)		—		—		—		(720)		—		—		—		—		—		(720)
Shares issued under employee plans and related tax effects		—		—		(887	)		—			304		—			1,398			(304	)		—			511			—		—		(577)		—		314		—		1,423		(314)		—		846
Repurchases of common stock and employee tax withholdings		—		—		—			—			—		—			(839	)		—			—			(839	)		—		—		—		—		—		—		(1,473)		—		—		(1,473)
Net change in Accumulated other comprehensive income (loss)		—		—		—			—			—		(18	)		—			—			(2	)		(20	)		—		—		—		—		—		(199)		—		—		(18)		(217)
Issuance of preferred stock		1,500		—		(7	)		—			—		—			—			—			—			1,493			1,500		—		(7)		—		—		—		—		—		—		1,493
Other net increases		—		—		—			—			—		—			—			—			33			33
Deconsolidation of certain legal entities associated with a real estate fund																													—		—		—		—		—		—		—		—		(191)		(191)
Other net decreases																													—		—		(10)		—		—		—		—		—		(59)		(69)

BALANCE AT MARCH 31, 2015	$	7,520	$	20	$	23,355		$	46,740		$	2,431	$	(1,266	)	$	(2,207	)	$	(2,431	)	$	1,304		$	75,466
BALANCE AT JUNE 30, 2015																												$	7,520	$	20	$	23,655	$	48,106	$	2,441	$	(1,447)	$	(2,816)	$	(2,441)	$	1,029	$	76,067

(1)

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

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

See Notes to ~~Condensed~~ Consolidated Financial Statements.


		4

MORGAN STANLEY

~~Condensed~~ Consolidated Statements of Cash Flows

(dollars in millions)

(unaudited)


	Three Months Ended March 31,						Six Months Ended June 30,
	2016			2015			2016		2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,157		$	2,463		$	2,803	$	4,294
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Income from equity method investments		(15	)		(38	)		(1)		(83)
Compensation payable in common stock and options		217			295			492		611
Depreciation and amortization		415			321			879		654
Net gain on sale of available for sale securities		(12	)		(25	)		(82)		(55)
Impairment charges		8			21			67		83
Provision for credit losses on lending activities		128			63			131		38
Other operating adjustments		93			56			218		37
Changes in assets and liabilities:
Trading assets, net of Trading liabilities		5,814			11,414			(333)		25,115
Securities borrowed		2,003			(13,657	)		11,135		(7,261)
Securities loaned		(2,218	)		308			(2,117)		(2,068)
Customer and other receivables and other assets		899			(5,990	)		(10,537)		(601)
Customer and other payables and other liabilities		2,153			8,052			9,907		(1,482)
Securities purchased under agreements to resell		(11,117	)		(7,944	)		(9,932)		(23,472)
Securities sold under agreements to repurchase		4,613			(8,394	)		13,636		(4,263)

Net cash provided by (used for) operating activities		4,138			(13,055	)		16,266		(8,453)


CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from (payments for):
Other assets—Premises, equipment and software, net		(315	)		(320	)		(645)		(620)
Changes in loans, net		(3,505	)		(2,666	)		(4,724)		(9,082)
Investment securities:
Purchases		(15,211	)		(15,067	)		(30,700)		(26,832)
Proceeds from sales		8,515			13,810			20,274		26,501
Proceeds from paydowns and maturities		1,536			1,290			3,507		2,796
Other investing activities		(136	)		48			(126)		(97)

Net cash used for investing activities		(9,116	)		(2,905	)		(12,414)		(7,334)


CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (payments for):
Short-term borrowings		(1,064	)		618			(1,293)		861
Noncontrolling interests		(5	)		(2	)		(43)		(60)
Other secured financings		(329	)		399			(69)		(280)
Deposits		1,557			2,271			(3,341)		5,659
Proceeds from:
Excess tax benefits associated with stock-based awards		39			173			42		176
Derivatives financing activities		—			226			—		312
Issuance of preferred stock, net of issuance costs		—			1,493			—		1,493
Issuance of long-term borrowings		13,183	��		11,339			20,628		22,909
Payments for:
Long-term borrowings		(7,961	)		(5,334	)		(15,900)		(12,963)
Derivatives financing activities		(120	)		(83	)		(120)		(257)
Repurchases of common stock and employee tax withholdings		(976	)		(839	)		(1,629)		(1,473)
Cash dividends		(436	)		(310	)		(791)		(673)

Net cash provided by financing activities		3,888			9,951
Net cash provided by (used for) financing activities								(2,516)		15,704

Effect of exchange rate changes on cash and cash equivalents		645			(682	)		714		(542)

Net decrease in cash and cash equivalents		(445	)		(6,691	)
Net increase (decrease) in cash and cash equivalents								2,050		(625)
Cash and cash equivalents, at beginning of period		54,083			46,984			54,083		46,984

Cash and cash equivalents, at end of period	$	53,638		$	40,293		$	56,133	$	46,359


Cash and cash equivalents include:
Cash and due from banks	$	22,797		$	19,683		$	27,597	$	19,145
Interest bearing deposits with banks		30,841			20,610			28,536		27,214

Cash and cash equivalents, at end of period	$	53,638		$	40,293		$	56,133	$	46,359

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash payments for interest were$~~613~~1,082 million and ~~$580~~$1,027 million.

Cash payments for income taxes, net of refunds, were$~~122~~340 million and ~~$119~~$342 million.

See Notes to ~~Condensed~~ Consolidated Financial Statements.


		5

MORGAN STANLEY

NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Introduction

~~Introduction~~ and Basis of ~~Presentation.~~Presentation

The ~~Company.~~

Firm

Morgan Stanley, a financial holding company, 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 ~~“Company”~~“Firm” mean Morgan Stanley (the “Parent”) together with its consolidated subsidiaries.

For a description of the clients and principal products and services of each of the ~~Company’s~~Firm’s business segments, see Note 1 to the consolidated financial statements in the ~~Company’s~~Firm’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”).

Basis of Financial ~~Information.~~

Information

The ~~condensed~~ consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which require the ~~Company~~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 ~~condensed~~ consolidated financial statements and related disclosures. The ~~Company~~Firm believes that the estimates utilized in the preparation of its ~~condensed~~ consolidated financial statements are prudent and reasonable. Actual results could differ materially from these estimates. Intercompany balances and transactions have been eliminated.

The accompanying ~~condensed~~ consolidated financial statements should be read in conjunction with the ~~Company’s~~Firm’s consolidated financial statements and notes thereto included in the 2015 Form 10-K. Certain footnote disclosures included in the 2015 Form 10-K have been condensed or omitted from the ~~condensed~~ consolidated financial statements as they are not required for interim reporting under U.S. GAAP. The ~~condensed~~ consolidated 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.~~Consolidation

The ~~condensed~~ consolidated financial statements include the accounts of the ~~Company,~~Firm, its wholly owned subsidiaries and other entities in which the ~~Company~~Firm has a controlling financial interest, including certain variable interest entities (“VIE”) (see Note 12). For consolidated subsidiaries that are less than 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 (loss) applicable to noncontrolling interests in the ~~condensed~~ consolidated statements of income. The portion of shareholders’ equity of such subsidiaries that is attributable to noncontrolling interests for such subsidiaries is presented as noncontrolling interests, a component of total equity, in the ~~condensed~~ consolidated balance ~~sheet.~~

sheets.

For a discussion of the ~~Company’s~~Firm’s VIEs and its significant regulated U.S. and international subsidiaries, see Notes 1 and 2 to the consolidated financial statements in the 2015 Form 10-K. See also Note 2 herein.

~~Condensed~~ Consolidated Statements of ~~Income Presentation.~~Cash Flows Presentation

The ~~Company, through its subsidiaries and affiliates, provides~~adoption of the accounting update,Amendments to the Consolidation Analysis (see Note 2) on January 1, 2016, resulted in a ~~wide variety~~net noncash increase in total assets of ~~products and services~~$126 million. In the prior year quarter, the Firm deconsolidated approximately $191 million in net assets previously attributable to nonredeemable noncontrolling interests that were related to a ~~large~~real estate fund sponsored by the Firm. The deconsolidation resulted in a non-cash reduction of assets of $169 million.

Global Oil Merchanting Business

As a result of entering into a definitive agreement to sell the global oil merchanting unit of the commodities division to Castleton Commodities International LLC, on May 11, 2015, the Firm recognized an impairment charge of $59 million in Other revenues during the prior quarter and ~~diversified group~~prior year period, to reduce the carrying amount of ~~clients. In connection with~~ the ~~delivery of these various products~~unit to its estimated fair value less costs to sell. The Firm closed the

transaction on November 1, 2015. The transaction did not meet the criteria for discontinued operations and ~~services,~~did not have a material impact on the Company manages its revenues and related expenses in the aggregate. As such, when assessing the performance of its businesses, primarily in the Institutional Securities business segment, the Company considers its trading, investment banking, commissions and fees, and interest income, along with the associated interest expense, as one integrated activity.Firm’s financial results.


		6

MORGAN STANLEY

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

~~Condensed Consolidated Statements of Cash Flows Presentation.~~

~~The adoption of the accounting update,~~~~Amendments to the Consolidation Analysis~~ ~~(see Note 2), resulted in a net noncash increase in total assets of $126 million.~~

2. Significant

~~Significant~~ Accounting ~~Policies.~~Policies

For a detailed discussion about the ~~Company’s~~Firm’s significant accounting policies, see Note 2 to the consolidated financial statements in the 2015 Form 10-K.

During the ~~quarter ended March 31, 2016,~~current year period, other than the following, there were no significant updates made to the ~~Company’s~~Firm’s significant accounting policies.

Accounting Standards ~~Adopted.~~

Adopted

The ~~Company~~Firm adopted the following accounting updates as of January 1, 2016.

•

Recognition and Measurement of Financial Assets and Financial Liabilities. In January 2016, the Financial Accounting Standards Board (the “FASB”) issued an accounting update that changes the requirements for the recognition and measurement of certain financial assets and financial liabilities. The ~~Company~~Firm early adopted the provision in this guidance relating to liabilities measured at fair value pursuant to a fair value option election that requires presenting unrealized DVA in Other comprehensive income (loss) (“OCI”), a change from the previous requirement to present DVA in net income. Realized DVA amounts will be recycled from AOCI to Trading revenues. ~~Prior period~~ DVA amounts from periods prior to adoption remain in Trading revenues as previously reported. A cumulative catch up adjustment, net of noncontrolling interests and tax, of $312 million was recorded as of January 1, 2016 to move the cumulative DVA loss amount from Retained earnings into AOCI.

Other provisions of this rule may not be early adopted and will be effective January 1, 2018, and are not expected to have a material impact on the ~~condensed~~ consolidated financial statements.

•

Amendments to the Consolidation Analysis. In February 2015, the FASB issued an accounting update that provides a new consolidation model for certain entities, such as investment funds and limited partnerships. The adoption on January 1, 2016, increased total assets by $131 million, reflecting consolidations of $206 million net of deconsolidations of $75 million. The consolidations resulted primarily from certain ~~merchant banking~~ funds in Investment Management where the ~~Company~~Firm acts as a general partner.

•

Simplifying the Presentation of Debt Issuance Costs.In April 2015, the FASB issued an accounting update that requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt ~~discounts.~~discounts, instead of as an asset as was previously required. This guidance became effective for the ~~Company~~Firm beginning January 1, 2016 and did not have a material impact in the ~~condensed~~ consolidated financial statements.

The ~~Company~~Firm adopted the following accounting updates as of January 1, 2016, which did not have an impact in the ~~condensed~~ consolidated financial statements.

•

Simplifying the Accounting for Measurement-Period Adjustments.


		7

~~MORGAN STANLEY~~

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

•

Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity.

•

Measuring the Financial Assets and Financial Liabilities of a Consolidated Collateralized Financing Entity.

•

Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.


		7

MORGAN STANLEY

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

3. Fair

~~Fair Values.~~Values

Fair Value ~~Measurements.~~

Measurements

For a description of the valuation techniques applied to the ~~Company’s~~Firm’s major categories of assets and liabilities measured at fair value on a recurring basis, see Note 3 to the consolidated financial statements in the 2015 Form 10-K. During the current quarter ~~ended March 31, 2016,~~and current year period, there were no significant updates made to the ~~Company’s~~Firm’s valuation techniques.

Assets and Liabilities Measured at Fair Value on a Recurring ~~Basis.~~Basis


	Level 1			Level 2			Level 3			Counterparty and Cash Collateral Netting			Balance at March 31, 2016			Level 1		Level 2		Level 3		Counterparty and Cash Collateral Netting		Balance at June 30, 2016
	(dollars in millions)															(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. government and agency securities:
U.S. Treasury securities	$	23,545		$	—		$	—		$	—		$	23,545		$	24,565	$	—	$	—	$	—	$	24,565
U.S. agency securities		1,004			20,662			8			—			21,674			795		22,085		20		—		22,900

Total U.S. government and agency securities		24,549			20,662			8			—			45,219			25,360		22,085		20		—		47,465
Other sovereign government obligations		15,835			8,232			8			—			24,075			20,942		6,607		2		—		27,551
Corporate and other debt:
State and municipal securities		—			1,832			5			—			1,837			—		1,943		10		—		1,953
Residential mortgage-backed securities		—			1,337			292			—			1,629			—		586		216		—		802
Commercial mortgage-backed securities		—			1,029			59			—			1,088			—		961		51		—		1,012
Asset-backed securities		—			335			4			—			339			—		142		88		—		230
Corporate bonds		—			9,955			224			—			10,179			—		11,751		276		—		12,027
Collateralized debt and loan obligations		—			295			348			—			643			—		443		109		—		552
Loans and lending commitments(1)		—			3,640			6,185			—			9,825			—		3,879		5,418		—		9,297
Other debt		—			1,358			527			—			1,885			—		827		528		—		1,355

Total corporate and other debt		—			19,781			7,644			—			27,425			—		20,532		6,696		—		27,228
Corporate equities(2)		95,676			366			430			—			96,472			100,018		367		572		—		100,957
Securities received as collateral																	10,121		7		—		—		10,128
Derivative and other contracts:
Interest rate contracts		507			424,488			1,170			—			426,165			791		462,243		540		—		463,574
Credit contracts		—			19,563			738			—			20,301			—		16,157		304		—		16,461
Foreign exchange contracts		77			73,019			224			—			73,320			140		76,264		101		—		76,505
Equity contracts		768			43,027			735			—			44,530			1,368		40,524		637		—		42,529
Commodity contracts		2,925			10,648			4,045			—			17,618			2,847		8,605		4,057		—		15,509
Other		—			19			—			—			19			—		16		—		—		16
Netting(3)		(3,517	)		(477,187	)		(3,606	)		(61,800	)		(546,110	)		(4,184)		(505,871)		(2,537)		(63,844)		(576,436)

Total derivative and other contracts		760			93,577			3,306			(61,800	)		35,843			962		97,938		3,102		(63,844)		38,158
Investments(4):
Principal investments		22			20			743			—			785			21		19		769		—		809
Other		166			324			179			—			669			295		559		205		—		1,059

Total investments		188			344			922			—			1,454			316		578		974		—		1,868
Physical commodities		—			274			—			—			274			—		193		—		—		193

Total trading assets(4)		137,008			143,236			12,318			(61,800	)		230,762			157,719		148,307		11,366		(63,844)		253,548

AFS securities		32,731			35,436			—			—			68,167			31,062		36,664		—		—		67,726
Securities received as collateral		8,811			2			—			—			8,813
Securities purchased under agreements to resell		—			555			—			—			555			—		555		—		—		555
Intangible assets		—			—			4			—			4			—		3		—		—		3

Total assets measured at fair value	$	178,550		$	179,229		$	12,322		$	(61,800	)	$	308,301		$	188,781	$	185,529	$	11,366	$	(63,844)	$	321,832


		8

MORGAN STANLEY

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


	Level 1			Level 2			Level 3			Counterparty and Cash Collateral Netting			Balance at March 31, 2016			Level 1		Level 2		Level 3		Counterparty and Cash Collateral Netting		Balance at June 30, 2016
	(dollars in millions)															(dollars in millions)
Liabilities at Fair Value
Deposits	$	—		$	624		$	23		$	—		$	647		$	—	$	65	$	30	$	—	$	95
Short-term borrowings		—			697			—			—			697			—		511		—		—		511
Trading liabilities:
U.S. government and agency securities:
U.S. Treasury securities		10,553			—			—			—			10,553			12,983		—		—		—		12,983
U.S. agency securities		304			162			—			—			466			358		111		—		—		469

Total U.S. government and agency securities		10,857			162			—			—			11,019			13,341		111		—		—		13,452
Other sovereign government obligations		12,961			3,554			—			—			16,515			15,885		2,668		—		—		18,553
Corporate and other debt:
State and municipal securities																	—		3		—		—		3
Asset-backed securities																	—		449		—		—		449
Corporate bonds		—			6,517			6			—			6,523			—		5,578		6		—		5,584
Lending commitments		—			2			1			—			3
Other debt		—			31			4			—			35			—		15		3		—		18

Total corporate and other debt		—			6,550			11			—			6,561			—		6,045		9		—		6,054
Corporate equities(2)		48,183			60			31			—			48,274			46,440		76		26		—		46,542
Obligation to return securities received as collateral																	18,731		7		—		—		18,738
Derivative and other contracts:
Interest rate contracts		655			397,394			1,001			—			399,050			969		436,022		775		—		437,766
Credit contracts		—			19,806			1,461			—			21,267			—		16,403		1,418		—		17,821
Foreign exchange contracts		49			76,895			98			—			77,042			82		78,441		102		—		78,625
Equity contracts		487			44,825			2,567			—			47,879			1,262		43,177		2,110		—		46,549
Commodity contracts		2,493			9,401			2,845			—			14,739			2,368		7,652		2,759		—		12,779
Other		—			116			—			—			116			—		91		11		—		102
Netting(3)		(3,517	)		(477,187	)		(3,606	)		(42,386	)		(526,696	)		(4,184)		(505,871)		(2,537)		(43,727)		(556,319)

Total derivative and other contracts		167			71,250			4,366			(42,386	)		33,397			497		75,915		4,638		(43,727)		37,323

Total trading liabilities		72,168			81,576			4,408			(42,386	)		115,766			94,894		84,822		4,673		(43,727)		140,662

Obligation to return securities received as collateral		17,980			3			1			—			17,984
Securities sold under agreements to repurchase		—			542			151			—			693			—		549		150		—		699
Other secured financings		—			2,169			454			—			2,623			—		2,480		441		—		2,921
Long-term borrowings		—			34,210			1,798			—			36,008			44		35,831		1,929		—		37,804

Total liabilities measured at fair value	$	90,148		$	119,821		$	6,835		$	(42,386	)	$	174,418		$	94,938	$	124,258	$	7,223	$	(43,727)	$	182,692


		9

MORGAN STANLEY

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


	Level 1			Level 2			Level 3			Counterparty and Cash Collateral Netting			Balance at December 31, 2015			Level 1		Level 2		Level 3		Counterparty and Cash Collateral Netting		Balance at December 31, 2015
	(dollars in millions)															(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. government and agency securities:
U.S. Treasury securities	$	17,658		$	—		$	—		$	—		$	17,658		$	17,658	$	—	$	—	$	—	$	17,658
U.S. agency securities		797			17,886			—			—			18,683			797		17,886		—		—		18,683

Total U.S. government and agency securities		18,455			17,886			—			—			36,341			18,455		17,886		—		—		36,341
Other sovereign government obligations		13,559			7,400			4			—			20,963			13,559		7,400		4		—		20,963
Corporate and other debt:
State and municipal securities		—			1,651			19			—			1,670			—		1,651		19		—		1,670
Residential mortgage-backed securities		—			1,456			341			—			1,797			—		1,456		341		—		1,797
Commercial mortgage-backed securities		—			1,520			72			—			1,592			—		1,520		72		—		1,592
Asset-backed securities		—			494			25			—			519			—		494		25		—		519
Corporate bonds		—			9,959			267			—			10,226			—		9,959		267		—		10,226
Collateralized debt and loan obligations		—			284			430			—			714			—		284		430		—		714
Loans and lending commitments(1)		—			4,682			5,936			—			10,618			—		4,682		5,936		—		10,618
Other debt		—			2,263			448			—			2,711			—		2,263		448		—		2,711

Total corporate and other debt		—			22,309			7,538			—			29,847			—		22,309		7,538		—		29,847
Corporate equities(2)		106,296			379			433			—			107,108			106,296		379		433		—		107,108
Securities received as collateral																	11,221		3		1		—		11,225
Derivative and other contracts:
Interest rate contracts		406			323,586			2,052			—			326,044			406		323,586		2,052		—		326,044
Credit contracts		—			22,258			661			—			22,919			—		22,258		661		—		22,919
Foreign exchange contracts		55			64,608			292			—			64,955			55		64,608		292		—		64,955
Equity contracts		653			38,552			1,084			—			40,289			653		38,552		1,084		—		40,289
Commodity contracts		3,140			10,654			3,358			—			17,152			3,140		10,654		3,358		—		17,152
Other		—			219			—			—			219			—		219		—		—		219
Netting(3)		(3,840	)		(380,443	)		(3,120	)		(55,562	)		(442,965	)		(3,840)		(380,443)		(3,120)		(55,562)		(442,965)

Total derivative and other contracts		414			79,434			4,327			(55,562	)		28,613			414		79,434		4,327		(55,562)		28,613
Investments(4):
Principal investments		20			44			486			—			550			20		44		486		—		550
Other		163			310			221			—			694			163		310		221		—		694

Total investments		183			354			707			—			1,244			183		354		707		—		1,244
Physical commodities		—			321			—			—			321			—		321		—		—		321

Total trading assets(4)		138,907			128,083			13,009			(55,562	)		224,437			150,128		128,086		13,010		(55,562)		235,662

AFS securities		34,351			32,408			—			—			66,759			34,351		32,408		—		—		66,759
Securities received as collateral		11,221			3			1			—			11,225
Securities purchased under agreements to resell		—			806			—			—			806			—		806		—		—		806
Intangible assets		—			—			5			—			5			—		—		5		—		5

Total assets measured at fair value	$	184,479		$	161,300		$	13,015		$	(55,562	)	$	303,232		$	184,479	$	161,300	$	13,015	$	(55,562)	$	303,232


Liabilities at Fair Value
Deposits	$	—		$	106		$	19		$	—		$	125		$	—	$	106	$	19	$	—	$	125
Short-term borrowings		—			1,647			1			—			1,648			—		1,647		1		—		1,648
Trading liabilities:
U.S. government and agency securities:
U.S. Treasury securities		12,932			—			—			—			12,932			12,932		—		—		—		12,932
U.S. agency securities		854			127			—			—			981			854		127		—		—		981

Total U.S. government and agency securities		13,786			127			—			—			13,913			13,786		127		—		—		13,913
Other sovereign government obligations		10,970			2,558			—			—			13,528			10,970		2,558		—		—		13,528
Corporate and other debt:
Commercial mortgage-backed securities		—			2			—			—			2			—		2		—		—		2
Corporate bonds		—			5,035			—			—			5,035			—		5,035		—		—		5,035
Lending commitments		—			3			—			—			3			—		3		—		—		3
Other debt		—			5			4			—			9			—		5		4		—		9

Total corporate and other debt		—			5,045			4			—			5,049			—		5,045		4		—		5,049
Corporate equities(2)		47,123			35			17			—			47,175			47,123		35		17		—		47,175
Obligation to return securities received as collateral																	19,312		3		1		—		19,316
Derivative and other contracts:
Interest rate contracts		466			305,151			1,792			—			307,409			466		305,151		1,792		—		307,409
Credit contracts		—			22,160			1,505			—			23,665			—		22,160		1,505		—		23,665
Foreign exchange contracts		22			65,177			151			—			65,350			22		65,177		151		—		65,350
Equity contracts		570			42,447			3,115			—			46,132			570		42,447		3,115		—		46,132
Commodity contracts		3,012			9,431			2,308			—			14,751			3,012		9,431		2,308		—		14,751
Other		—			43			—			—			43			—		43		—		—		43
Netting(3)		(3,840	)		(380,443	)		(3,120	)		(40,473	)		(427,876	)		(3,840)		(380,443)		(3,120)		(40,473)		(427,876)

Total derivative and other contracts		230			63,966			5,751			(40,473	)		29,474			230		63,966		5,751		(40,473)		29,474

Total trading liabilities		72,109			71,731			5,772			(40,473	)		109,139			91,421		71,734		5,773		(40,473)		128,455

Obligation to return securities received as collateral		19,312			3			1			—			19,316
Securities sold under agreements to repurchase		—			532			151			—			683			—		532		151		—		683
Other secured financings		—			2,393			461			—			2,854			—		2,393		461		—		2,854
Long-term borrowings		—			31,058			1,987			—			33,045			—		31,058		1,987		—		33,045

Total liabilities measured at fair value	$	91,421		$	107,470		$	8,392		$	(40,473	)	$	166,810		$	91,421	$	107,470	$	8,392	$	(40,473)	$	166,810


		10

MORGAN STANLEY

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

AFS—Available for sale

(1)

At ~~March 31,~~June 30, 2016, Loans and lending commitments held at fair value consisted of ~~$7,455~~$7,114 million of corporate loans, ~~$1,727~~$1,721 million of residential real estate loans and ~~$643~~$462 million of wholesale real estate loans. At December 31, 2015, Loans and lending commitments held at fair value consisted of $7,286 million of corporate loans, $1,885 million of residential real estate loans and $1,447 million of wholesale real estate loans.

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

(3)

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

(4)

Amounts exclude certain investments that are measured at fair value using the net asset value (“NAV”) per share, which are not classified in the fair value hierarchy. At ~~March 31,~~June 30, 2016 and December 31, 2015, the fair value of these investments was ~~$3,388~~$3,246 million and $3,843 million, respectively. For additional disclosure about such investments, see “Fair Value of Investments Measured at Net Asset Value” herein.

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

The following tables present additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for ~~the quarters ended March 31, 2016 and 2015, respectively.~~all periods presented. Level 3 instruments may be hedged with instruments classified in Level 1 and Level 2. As a result, the realized and unrealized gains (losses) for assets and liabilities within the Level 3 category presented in the following tables ~~below~~ do not reflect the related realized and unrealized gains (losses) on hedging instruments that have been classified by the ~~Company~~Firm within the Level 1 and/or Level 2 categories.

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


		11

MORGAN STANLEY

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

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


	Beginning Balance at December 31, 2015			Total Realized and Unrealized Gains (Losses)			Purchases (1)			Sales			Issuances			Settlements			Net Transfers			Ending Balance at March 31, 2016			Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at March 31, 2016			Beginning Balance at March 31, 2016		Total Realized and Unrealized Gains (Losses)		Purchases (1)		Sales		Issuances		Settlements		Net Transfers		Ending Balance at June 30, 2016		Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at June 30, 2016
	(dollars in millions)																											(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. agency securities	$	—		$	5		$	—		$	—		$	—		$	—		$	3		$	8		$	5		$	8	$	—	$	—	$	(18)	$	—	$	—	$	30	$	20	$	—
Other sovereign government obligations		4			—			—			(2	)		—			—			6			8			—			8		—		—		(3)		—		—		(3)		2		—
Corporate and other debt:
State and municipal securities		19			—			—			(15	)		—			—			1			5			—			5		1		4		—		—		—		—		10		2
Residential mortgage-backed securities		341			(24	)		19			(67	)		—			—			23			292			(17	)		292		3		—		(82)		—		—		3		216		(5)
Commercial mortgage-backed securities		72			(9	)		—			(15	)		—			—			11			59			(9	)		59		(3)		1		(4)		—		—		(2)		51		(5)
Asset-backed securities		25			(1	)		1			(17	)		—			—			(4	)		4			—			4		(4)		6		(1)		—		—		83		88		(4)
Corporate bonds		267			44			17			(98	)		—			—			(6	)		224			28			224		17		116		(35)		—		—		(46)		276		17
Collateralized debt and loan obligations		430			(14	)		114			(113	)		—			—			(69	)		348			(4	)		348		18		3		(178)		—		—		(82)		109		18
Loans and lending commitments		5,936			(60	)		952			(319	)		—			(351	)		27			6,185			(64	)		6,185		(46)		360		(484)		—		(596)		(1)		5,418		(55)
Other debt		448			5			75			(9	)		—			—			8			527			5			527		4		13		(19)		—		—		3		528		2

Total corporate and other debt		7,538			(59	)		1,178			(653	)		—			(351	)		(9	)		7,644			(61	)		7,644		(10)		503		(803)		—		(596)		(42)		6,696		(30)
Corporate equities		433			11			78			(44	)		—			—			(48	)		430			6			430		(63)		273		(82)		—		—		14		572		(63)
Net derivative and other contracts(2):
Interest rate contracts		260			470			5			—			(14	)		(30	)		(522	)		169			411			169		(159)		2		—		(7)		42		(282)		(235)		(157)
Credit contracts		(844	)		28			—			—			—			67			26			(723	)		24			(723)		65		1		—		—		93		(550)		(1,114)		53
Foreign exchange contracts		141			(61	)		—			—			—			(105	)		151			126			(38	)		126		(58)		—		—		—		(94)		25		(1)		(47)
Equity contracts~~(3)~~		(2,031	)		(135	)		137			—			(128	)		294			31			(1,832	)		(12	)		(1,832)		168		50		—		(140)		263		18		(1,473)		(106)
Commodity contracts		1,050			73			9			—			(61	)		(57	)		186			1,200			68			1,200		211		5		—		(4)		(88)		(26)		1,298		130
Other																													—		—		—		—		—		—		(11)		(11)		—

Total net derivative and other contracts		(1,424	)		375			151			—			(203	)		169			(128	)		(1,060	)		453			(1,060)		227		58		—		(151)		216		(826)		(1,536)		(127)
Investments:
Principal investments		486			(43	)		365			(29	)		—			(41	)		5			743			(43	)		743		4		33		(11)		—		—		—		769		6
Other		221			12			—			(25	)		—			—			(29	)		179			12			179		1		25		—		—		—		—		205		1

Total investments		707			(31	)		365			(54	)		—			(41	)		(24	)		922			(31	)		922		5		58		(11)		—		—		—		974		7
Securities received as collateral		1			—			—			(1	)		—			—			—			—			—
Intangible assets		5			—			—			(1	)		—			—			—			4			(1	)		4		—		—		—		—		—		(4)		—		—
Liabilities at Fair Value
Deposits	$	19		$	(2	)	$	—		$	—		$	2		$	—		$	—		$	23		$	(2	)	$	23	$	(1)	$	—	$	—	$	8	$	—	$	(2)	$	30	$	(1)
Short-term borrowings		1			—			—			—			—			(1	)		—			—			—
Trading liabilities:
Corporate and other debt:
Corporate bonds		—			(4	)		(2	)		9			—			—			(5	)		6			(4	)		6		(1)		(5)		29		—		—		(25)		6		(1)
Lending commitments		—			(1	)		—			—			—			—			—			1			(1	)		1		1		—		—		—		—		—		—		—
Other debt		4			7			—			7			—			—			—			4			7			4		—		(1)		—		—		—		—		3		—

Total corporate and other debt		4			2			(2	)		16			—			—			(5	)		11			2			11		—		(6)		29		—		—		(25)		9		(1)
Corporate equities		17			(4	)		(15	)		13			—			—			12			31			(4	)		31		(28)		(33)		5		—		—		(5)		26		—
Obligation to return securities received as collateral		1			—			—			—			—			—			—			1			—			1		—		(1)		—		—		—		—		—		—
Securities sold under agreements to repurchase		151			—			—			—			—			—			—			151			—			151		1		—		—		—		—		—		150		1
Other secured financings		461			(18	)		—			—			47			(22	)		(50	)		454			(18	)		454		(14)		—		—		23		(22)		(28)		441		(14)
Long-term borrowings		1,987			(46	)		—			—			72			(79	)		(228	)		1,798			(45	)		1,798		21		—		—		164		(131)		119		1,929		26


		12

MORGAN STANLEY

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


	Beginning Balance at December 31, 2014			Total Realized and Unrealized Gains (Losses)			Purchases (1)			Sales			Issuances			Settlements			Net Transfers			Ending Balance at March 31, 2015			Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at March 31, 2015			Beginning Balance at December 31, 2015		Total Realized and Unrealized Gains (Losses)		Purchases (1)		Sales		Issuances		Settlements		Net Transfers		Ending Balance at June 30, 2016		Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstand- ing at June 30, 2016
	(dollars in millions)																											(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. agency securities																												$	—	$	1	$	—	$	(19)	$	—	$	—	$	38	$	20	$	1
Other sovereign government obligations	$	41		$	1		$	2		$	(32	)	$	—		$	—		$	(1	)	$	11		$	1			4		—		—		(5)		—		—		3		2		1
Corporate and other debt:
State and municipal securities																													19		1		4		(15)		—		—		1		10		1
Residential mortgage-backed securities		175			17			58			(40	)		—			—			86			296			12			341		(19)		19		(133)		—		—		8		216		(14)
Commercial mortgage-backed securities		96			(2	)		96			(10	)		—			—			—			180			(2	)		72		(10)		—		(19)		—		—		8		51		(11)
Asset-backed securities		76			(2	)		57			(29	)		—			—			(35	)		67			3			25		(7)		7		(18)		—		—		81		88		(8)
Corporate bonds		386			38			129			(141	)		—			—			12			424			38			267		62		113		(128)		—		—		(38)		276		61
Collateralized debt and loan obligations		1,152			79			241			(397	)		—			(253	)		—			822			2			430		5		22		(224)		—		—		(124)		109		17
Loans and lending commitments		5,874			41			914			(213	)		—			(1,807	)		(20	)		4,789			40			5,936		(111)		970		(720)		—		(672)		15		5,418		(121)
Other debt		285			(10	)		68			(1	)		—			(5	)		149			486			2			448		(2)		133		(63)		—		—		12		528		(2)

Total corporate and other debt		8,044			161			1,563			(831	)		—			(2,065	)		192			7,064			95			7,538		(81)		1,268		(1,320)		—		(672)		(37)		6,696		(77)
Corporate equities		272			19			30			(98	)		—			—			7			230			12			433		(45)		296		(119)		—		—		7		572		(64)
Securities received as collateral																													1		—		—		(1)		—		—		—		—		—
Net derivative and other contracts(2):
Interest rate contracts		(173	)		128			6			—			(11	)		65			(511	)		(496	)		119			260		305		3		—		(21)		(60)		(722)		(235)		205
Credit contracts		(743	)		(247	)		14			—			(30	)		7			15			(984	)		(252	)		(844)		(343)		1		—		—		153		(81)		(1,114)		(360)
Foreign exchange contracts		151			62			—			—			—			97			(13	)		297			62			141		(109)		—		—		—		(201)		168		(1)		(82)
Equity contracts(3)		(2,165	)		(273	)		33			—			(176	)		(54	)		163			(2,472	)		(324	)
Equity contracts																													(2,031)		(321)		71		—		(184)		1,121		(129)		(1,473)		(434)
Commodity contracts		1,146			295			—			—			—			(37	)		(59	)		1,345			262			1,050		297		7		—		(4)		(176)		124		1,298		210
Other																													—		—		—		—		—		—		(11)		(11)		—

Total net derivative and other contracts		(1,784	)		(35	)		53			—			(217	)		78			(405	)		(2,310	)		(133	)		(1,424)		(171)		82		—		(209)		837		(651)		(1,536)		(461)
Investments:
Principal investments		835			17			11			(34	)		—			—			—			829			9			486		(39)		403		(40)		—		(41)		—		769		(37)
Other		323			(12	)		2			(5	)		—			—			83			391			(10	)		221		(17)		1		—		—		—		—		205		(16)

Total investments		1,158			5			13			(39	)		—			—			83			1,220			(1	)		707		(56)		404		(40)		—		(41)		—		974		(53)
Securities received as collateral		—			—			33			—			—			—			—			33			—
Intangible assets		6			—			—			—			—			(1	)		—			5			—			5		—		—		—		—		—		(5)		—		—
Liabilities at Fair Value
Deposits																												$	19	$	(2)	$	—	$	—	$	13	$	—	$	(4)	$	30	$	(2)
Short-term borrowings																													1		—		—		—		—		(1)		—		—		—
Trading liabilities:
Corporate and other debt:
Corporate bonds	$	78		$	(4	)	$	(1	)	$	8		$	—		$	—		$	(66	)	$	23		$	(4	)		—		(5)		(7)		10		—		—		(2)		6		(5)
Lending commitments		5			5			—			—			—			—			—			—			5
Other debt		38			6			(11	)		5			—			—			(3	)		23			6			4		2		(3)		4		—		—		—		3		2

Total corporate and other debt		121			7			(12	)		13			—			—			(69	)		46			7			4		(3)		(10)		14		—		—		(2)		9		(3)
Corporate equities		45			1			—			7			—			—			(1	)		50			1			17		(3)		(22)		18		—		—		10		26		(3)
Obligation to return securities received as collateral		—			—			—			33			—			—			—			33			—			1		—		(1)		—		—		—		—		—		—
Securities sold under agreements to repurchase		153			(1	)		—			—			—			—			—			154			(1	)		151		1		—		—		—		—		—		150		1
Other secured financings		149			(8	)		—			—			—			(24	)		—			133			1			461		(32)		—		—		69		(43)		(78)		441		(32)
Long-term borrowings		1,934			17			—			—			115			(142	)		(152	)		1,738			10			1,987		(12)		—		—		276		(167)		(179)		1,929		(6)


		13

MORGAN STANLEY

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


	Beginning Balance at March 31, 2015		Total Realized and Unrealized Gains (Losses)		Purchases (1)		Sales		Issuances		Settlements		Net Transfers		Ending Balance at June 30, 2015		Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at June 30, 2015
	(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. agency securities	$	—	$	—	$	—	$	(3)	$	—	$	—	$	6	$	3	$	—
Other sovereign government obligations		11		—		5		(1)		—		—		(3)		12		—
Corporate and other debt:
State and municipal securities		—		1		4		(9)		—		—		11		7		1
Residential mortgage-backed securities		296		2		138		(32)		—		—		(26)		378		2
Commercial mortgage-backed securities		180		(4)		5		(9)		—		—		(88)		84		(5)
Asset-backed securities		67		5		11		(64)		—		—		—		19		1
Corporate bonds		424		(4)		228		(150)		—		(2)		(17)		479		(16)
Collateralized debt and loan obligations		822		68		300		(439)		—		(78)		(13)		660		(10)
Loans and lending commitments		4,789		31		1,615		(351)		—		(491)		(81)		5,512		26
Other debt		486		(1)		130		(51)		—		—		—		564		(1)

Total corporate and other debt		7,064		98		2,431		(1,105)		—		(571)		(214)		7,703		(2)
Corporate equities		230		38		266		(92)		—		—		44		486		26
Securities received as collateral		33		—		—		(30)		—		—		—		3		—
Net derivative and other contracts(2):
Interest rate contracts		(496)		95		4		—		(13)		14		160		(236)		135
Credit contracts		(984)		(24)		4		—		(24)		23		16		(989)		(29)
Foreign exchange contracts		297		57		—		—		(1)		43		50		446		82
Equity contracts		(2,472)		(23)		39		—		(54)		206		202		(2,102)		(161)
Commodity contracts		1,345		4		2		—		(112)		(34)		—		1,205		(27)

Total net derivative and other contracts		(2,310)		109		49		—		(204)		252		428		(1,676)		—
Investments:
Principal investments		829		(21)		5		(12)		—		(205)		(15)		581		(21)
Other		391		(4)		—		—		—		—		(87)		300		—

Total investments		1,220		(25)		5		(12)		—		(205)		(102)		881		(21)
Intangible assets		5		1		—		—		—		—		—		6		1
Liabilities at Fair Value
Trading liabilities:
Corporate and other debt:
Corporate bonds	$	23	$	—	$	(21)	$	15	$	—	$	—	$	(2)	$	15	$	—
Other debt		23		—		—		10		—		(29)		—		4		—

Total corporate and other debt		46		—		(21)		25		—		(29)		(2)		19		—
Corporate equities		50		240		(49)		2		—		—		349		112		240
Obligation to return securities received as collateral		33		—		(30)		—		—		—		—		3		—
Securities sold under agreements to repurchase		154		—		—		—		—		—		—		154		—
Other secured financings		133		2		—		—		37		—		—		168		2
Long-term borrowings		1,738		51		—		—		549		(88)		73		2,221		51


		14

MORGAN STANLEY

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


	Beginning Balance at December 31, 2014		Total Realized and Unrealized Gains (Losses)		Purchases (1)		Sales		Issuances		Settlements		Net Transfers		Ending Balance at June 30, 2015		Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at June 30, 2015
	(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. agency securities	$	—	$	—	$	3	$	—	$	—	$	—	$	—	$	3	$	—
Other sovereign government obligations		41		1		6		(32)		—		—		(4)		12		1
Corporate and other debt:
State and municipal securities		—		1		4		—		—		—		2		7		1
Residential mortgage-backed securities		175		21		163		(51)		—		—		70		378		12
Commercial mortgage-backed securities		96		(6)		16		(22)		—		—		—		84		(9)
Asset-backed securities		76		(4)		11		(29)		—		—		(35)		19		2
Corporate bonds		386		10		213		(126)		—		(1)		(3)		479		9
Collateralized debt and loan obligations		1,152		145		404		(682)		—		(331)		(28)		660		(6)
Loans and lending commitments		5,874		35		2,082		(209)		—		(2,078)		(192)		5,512		30
Other debt		285		(8)		12		—		—		(1)		276		564		6

Total corporate and other debt		8,044		194		2,905		(1,119)		—		(2,411)		90		7,703		45
Corporate equities		272		64		260		(147)		—		—		37		486		49
Securities received as collateral		—		—		3		—		—		—		—		3		—
Net derivative and other contracts(2):
Interest rate contracts		(173)		188		9		—		(20)		124		(364)		(236)		197
Credit contracts		(743)		(276)		17		—		(54)		31		36		(989)		(284)
Foreign exchange contracts		151		121		—		—		(1)		144		31		446		120
Equity contracts		(2,165)		(73)		69		—		(225)		156		136		(2,102)		(160)
Commodity contracts		1,146		299		3		—		(112)		(72)		(59)		1,205		234

Total net derivative and other contracts		(1,784)		259		98		—		(412)		383		(220)		(1,676)		107
Investments:
Principal investments		835		(4)		15		(46)		—		(205)		(14)		581		(26)
Other		323		(16)		2		(6)		—		—		(3)		300		(12)

Total investments		1,158		(20)		17		(52)		—		(205)		(17)		881		(38)
Intangible assets		6		1		—		—		—		(1)		—		6		1
Liabilities at Fair Value
Trading liabilities:
Corporate and other debt:
Corporate bonds	$	78	$	(2)	$	(12)	$	14	$	—	$	—	$	(67)	$	15	$	(2)
Lending commitments		5		5		—		—		—		—		—		—		5
Other debt		38		—		—		6		—		(39)		(1)		4		—

Total corporate and other debt		121		3		(12)		20		—		(39)		(68)		19		3
Corporate equities		45		19		(75)		25		—		—		136		112		20
Obligation to return securities received as collateral		—		—		—		3		—		—		—		3		—
Securities sold under agreements to repurchase		153		(1)		—		—		—		—		—		154		(1)
Other secured financings		149		(6)		—		—		37		(24)		—		168		2
Long-term borrowings		1,934		65		—		—		612		(300)		40		2,221		59

(1)

Loan originations and consolidations of VIEs are included in purchases.

(2)

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

~~(3)~~	Net liability Level 3 derivative equity contracts increased by $785 million to correct the fair value level assigned to these contracts at December 31, 2014. The total amount of derivative equity contracts remained unchanged at December 31, 2014.
		15

MORGAN STANLEY

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

Significant Unobservable Inputs Used in Recurring Level 3 Fair Value ~~Measurements.~~

Measurements

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


		13

~~MORGAN STANLEY~~

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

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

   Balance at
March 31, 2016
Valuation Technique(s) /
Significant Unobservable Input(s) /
Sensitivity of the Fair Value to Changes
in the Unobservable Inputs
   Range(1)        Averages(2)
   (dollars in millions)
Assets at Fair Value

Trading assets:

Corporate and other debt:

Residential mortgage-backed securities
   $ 292
Comparable pricing:


Comparable bond price / (A)
   0 to 79 points       27 points
Commercial mortgage-backed securities
   59
Comparable pricing:


Comparable bond price / (A)
   0 to 9 points       1 point
Corporate bonds
   224
Comparable pricing(3):


Comparable bond price / (A)
   3 to 118 points       63 points

Comparable pricing:


EBITDA multiple / (A)
   5 to 10 times       7 times
Collateralized debt and loan obligations
   348
Comparable pricing(3):


Comparable bond price / (A)
   55 to 100 points       66 points

Correlation model:


Credit correlation / (B)
   27% to 60%       37%
Loans and lending commitments
   6,185
Corporate loan model:


Credit spread / (C)
   323 to 989 bps       581 bps

Margin loan model(3):


Credit spread / (C)(D)
   30 to 101 bps       74 bps

Volatility skew / (C)(D)
   19% to 53%       29%

Discount rate / (C)(D)
   1% to 9%       2%

Option model:


Volatility skew / (C)
   -1%       -1%

Comparable pricing:


Comparable loan price / (A)
   38 to 100 points       90 points

Expected recovery:


Asset coverage / (A)
   48% to 100%       91%

Discounted cash flow:


Implied weighted average cost of capital / (C)(D)
   6% to 7%       7%

Capitalization rate / (C)(D)
   4% to 10%       4%
Other debt
   527
Comparable pricing:


Comparable loan price / (A)
   4 to 87 points       65 points

Comparable pricing:


Comparable bond price / (A)
   7 points       7 points

Option model:


At the money volatility / (C)
   16% to 53%       53%

Margin loan model(3):


Discount rate / (C)
   1% to 2%       2%
Corporate equities
   430
Comparable pricing:


Comparable price / (A)
   46% to 59%       54%

Comparable pricing(3):


Comparable equity price / (A)
   100%       100%
Net derivative and other contracts(4):

Interest rate contracts
   169
Option model:


Interest rate volatility concentration


liquidity multiple / (C)(D)
   2 times       2 times

Interest rate—Foreign exchange


correlation / (C)(D)
   25% to 56%         42% /43%(5)

Interest rate volatility skew / (A)(D)
   31% to 116%         66% / 66%(5)

Interest rate quanto correlation / (A)(D)
   -9% to 35%           5% / -7%(5)


		14

~~MORGAN STANLEY~~

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

   Balance at
March 31, 2016
Valuation Technique(s) /
Significant Unobservable Input(s) /
Sensitivity of the Fair Value to Changes
in the Unobservable Inputs
   Range(1)        Averages(2)
   (dollars in millions)

Interest rate curve correlation / (C)(D)
   27% to 96%         69% / 75%(5)

Inflation volatility / (A)(D)
   58% to 60%         59% / 59%(5)

Interest rate-Inflation correlation / (A)(D)
   -40% to 42%       -41% / -41%(5)
Credit contracts
   (723 )
Comparable pricing:


Cash synthetic basis / (C)(D)
   5 to 12 points       10 points

Comparable bond price / (C)(D)
   0 to 75 points       24 points

Correlation model(3):


Credit correlation / (B)
   29% to 90%       42%
Foreign exchange contracts(6)
   126
Option model:


Interest rate - Foreign exchange correlation / (C)(D)
   25% to 56%       42% / 43%(5)

Foreign exchange volatility skew / (C)(D)
   -11% to 4%       0% /0%(5)

Interest rate volatility skew / (A)(D)
   31% to 116%       66% / 66%(5)

Interest rate curve / (A)(D)
   0%       0% / 0%(5)
Equity contracts(6)
   (1,832 )
Option model:


At the money volatility / (A)(D)
   7% to 86%       33%

Volatility skew / (C)(D)
   -5% to 0%       -1%

Equity-Equity correlation / (A)(D)
   40% to 97%       78%

Equity-Foreign exchange correlation / (C)(D)
   -60% to -21%       -36%

Equity-Interest rate correlation / (C)(D)
   -29% to 50%       17% / 8%(5)
Commodity contracts
   1,200
Option model:


Forward power price / (C)(D)
   $1 to $93 per       $31 per
      megawatt hour       megawatt hour

Commodity volatility / (A)(D)
   7% to 55%       17%

Cross commodity correlation / (C)(D)
   43% to 99%       93%
Investments:
Principal investments
   743
Discounted cash flow:


Implied weighted average cost of capital / (C)(D)
   12% to 17%       14%

Exit multiple / (A)(D)
   8 to 14 times       8 times

Market approach(3):


EBITDA multiple / (A)(D)
   6 to 26 times       11 times

Forward capacity price / (A)(D)
   $5 to $9       $7

Comparable pricing:


Comparable equity price / (A)
   43% to 100%       81%
Other
   179
Discounted cash flow:


Implied weighted average cost of capital / (C)(D)
   9%       9%

Exit multiple / (A)(D)
   13 times       13 times

Market approach:


EBITDA multiple / (A)(D)
   6 to 14 times       12 times

Comparable pricing(3):


Comparable equity price / (A)
   100%       100%
Liabilities at Fair Value
Securities sold under agreements to repurchase
   151
Discounted cash flow:


Funding spread / (A)
   104 to 130 bps       120 bps
Other secured financings    454
Option model:


Volatility skew / (C)
   -1%       -1%

Discounted cash flow(3):


Discount rate / (C)
   4% to 14%       5%

Discounted cash flow:


Funding spread / (A)
   94 to 130 bps       112 bps


		15

~~MORGAN STANLEY~~

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

   Balance at
March 31, 2016
Valuation Technique(s) /
Significant Unobservable Input(s) /
Sensitivity of the Fair Value to Changes
in the Unobservable Inputs
   Range(1)        Averages(2)
   (dollars in millions)
Long-term borrowings    1,798
Option model(3):


At the money volatility / (C)(D)
   6% to 55%       28%

Volatility skew / (C)(D)
   -2% to 0%       -1%

Equity-Equity correlation / (C)(D)
   40% to 97%       73%

Equity-Foreign exchange correlation / (A)(D)
   -60% to -13%       -28%

Option model:


Interest rate volatility skew / (A)(D)
   25% to 50%       38%

Equity volatility discount / (C)(D)
   10% to 20%       15%

Option model:


Interest rate-Foreign exchange correlation / (A)(D)
   25% to 56%       42% / 43%(5)

Correlation model:


Credit correlation / (B)
   29% to 60%       42%

Comparable pricing:


Comparable equity price / (A)
   100%       100%

Balance at
December 31, 2015

Valuation Technique(s) /
Significant Unobservable Input(s) /
Sensitivity of the Fair Value to Changes in the
Unobservable Inputs

Range(1)

Averages(2)

Balance at
June 30, 2016

Valuation Technique(s) /

Significant Unobservable Input(s) /

Sensitivity of the Fair Value to Changes

in the Unobservable Inputs

Range(1)

Averages(2)

(dollars in millions)

Assets at Fair Value

Trading assets:

Corporate and other debt:

Residential mortgage-backed securities

341

Comparable pricing:

$ 216

Comparable pricing:

Comparable bond price / (A)

0 to 75 points

32 points

Comparable bond price / (A)

0 to 79 points

20 points

Commercial mortgage-backed securities

Comparable pricing:

Comparable bond price / (A)

0 to 9 points

2 point

Comparable bond price / (A)

0 to 7 points

1 point

Asset-backed securities

Comparable pricing:

Comparable bond price / (A)

45 to 55 points

46 points

Corporate bonds

267

Comparable pricing(3):

276

Comparable pricing(3):

Comparable bond price / (A)

3 to 119 points

90 points

Comparable pricing:

EBITDA multiple / (A)

7 to 9 times

8 times

Comparable bond price / (A)

3 to 135 points

91 points

Structured bond model:

Comparable pricing:

Discount rate / (C)

15%

EBITDA multiple / (A)

5 to 10 times

7 times

Collateralized debt and loan obligations

430

Comparable pricing(3):

109

Comparable pricing(3):

Comparable bond price / (A)

47 to 103 points

67 points

Comparable bond price / (A)

20 to 95 points

57 points

Correlation model:

Credit correlation / (B)

39% to 60%

49%

Credit correlation / (B)

29% to 61%

42%

Loans and lending commitments

5,936

Corporate loan model:

5,418

Corporate loan model:

Credit spread / (C)

250 to 866 bps

531 bps

Credit spread / (C)

482 to 898 bps

596 bps

Margin loan model(3):

Credit spread / (C)(D)

62 to 499 bps

145 bps

Credit spread / (C)(D)

31 to 102 bps

86 bps

Volatility skew / (C)(D)

14% to 70%

33%

Volatility skew / (C)(D)

20% to 46%

32%

Discount rate / (C)(D)

1% to 4%

Discount rate / (C)(D)

1% to 8%

Option model:

Expected recovery:

Volatility skew / (C)

-1%

Asset coverage / (A)

47% to 99%

90%

Comparable pricing:

Option model:

Comparable loan price / (A)

35 to 100 points

88 points

Volatility skew / (C)

-1%

Discounted cash flow:

Comparable pricing:

Implied weighted average cost of capital / (C)(D)

6% to 8%

Comparable loan price / (A)

43 to 100 points

87 points

Capitalization rate / (C)(D)

4% to 10%

Discounted cash flow:

Implied weighted average cost of capital / (C)(D)

5% to 6%

Capitalization rate / (C)(D)

4% to 10%


		16

MORGAN STANLEY

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

Balance at
December 31, 2015

Valuation Technique(s) /
Significant Unobservable Input(s) /
Sensitivity of the Fair Value to Changes in the
Unobservable Inputs

Range(1)

Averages(2)

Balance at
June 30, 2016

Valuation Technique(s) /

Significant Unobservable Input(s) /

Sensitivity of the Fair Value to Changes

in the Unobservable Inputs

Range(1)

Averages(2)

(dollars in millions)

Other debt

448

Comparable pricing:

528

Comparable pricing:

Comparable loan price / (A)

4 to 84 points

59 points

Comparable loan price / (A)

3 to 84 points

66 points

Comparable pricing:

Comparable bond price / (A)

8 points

Comparable bond price / (A)

7 points

Option model:

At the money volatility / (C)

16% to 53%

53%

At the money volatility / (C)

16% to 53%

53%

Margin loan model(3):

Discount rate / (C)

1% to 2%

Corporate equities

433

Comparable pricing:

Comparable price / (A)

50% to 80%

72%

Discounted cash flow:

Comparable pricing(3):

Discount rate / (C)

10% to 13%

12%

Comparable equity price / (A)

100%

Market approach:

Corporate equities

572

Comparable pricing:

EBITDA multiple / (A)

9 times

Comparable equity price / (A)

100%

Net derivative and other contracts(4):

Interest rate contracts

260

Option model:

(235)

Option model(3):

Interest rate - Foreign exchange correlation / (A)(D)

25% to 55%

42% / 42% (5)

Interest rate volatility skew / (A)(D)

34% to 143%

78% / 77% (5)

Interest rate volatility concentration

Interest rate quanto correlation / (A)(D)

-8% to 35%

2% / -7% (5)

liquidity multiple / (C)(D)

0 to 3 times

2 times

Interest rate curve correlation / (C)(D)

19% to 95%

71% / 76% (5)

Interest rate - Foreign exchange correlation / (C)(D)

25% to 62%

43% / 43%(5)

Inflation volatility / (A)(D)

0% to 1%

1% / 1% (5)

Interest rate volatility skew / (A)(D)

29% to 82%

43% / 40%(5)

Interest rate - Inflation correlation / (A)(D)

-24% to -44%

-34% / -33% (5)

Interest rate quanto correlation / (A)(D)

-8% to 36%

5% / -6%(5)

Interest rate curve / (C)(D)

0% to 1%

1% / 1% (5)

Interest rate curve correlation / (C)(D)

24% to 95%

60% / 69%(5)

Foreign exchange volatility skew / (C)(D)

0% to 11%

4% / 6% (5)

Inflation volatility / (A)(D)

58%

58% / 58%(5)

Comparable pricing:

Interest rate - Inflation correlation / (A)(D)

-41% to -39%

-41% / -41%(5)

Comparable bond price / (C)

95 to 100 points

96 points

Credit contracts

(844

)

Comparable pricing:

(1,114)

Comparable pricing:

Cash synthetic basis / (C)(D)

5 to 12 points

9 points

Cash synthetic basis / (C)(D)

5 to 12 points

10 points

Comparable bond price / (C)(D)

0 to 75 points

24 points

Comparable bond price / (C)(D)

0 to 85 points

26 points

Correlation model(3):

Credit correlation / (B)

39% to 97%

57%

Credit correlation / (B)

29% to 92%

49%

Foreign exchange contracts(6)

141

Option model:

(1)

Option model:

Interest rate - Foreign exchange correlation / (C)(D)

25% to 62%

43% / 43%(5)

Interest rate - Foreign exchange correlation / (A)(D)

25% to 55%

42% / 42% (5)

Interest rate volatility skew / (A)(D)

29% to 82%

43% / 40%(5)

Interest rate volatility skew / (A)(D)

34% to 143%

78% / 77% (5)

Interest rate curve / (A)(D)

0% / 0%(5)

Interest rate curve / (A)(D)

0% / 0% (5)

Interest rate curve correlation / (C)(D)

19% to 94%

73% / 81% (5)

Equity contracts(6)

(2,031

)

Option model:

(1,473)

Option model:

At the money volatility / (A)(D)

16% to 65%

32%

At the money volatility / (A)(D)

6% to 81%

35%

Volatility skew / (A)(D)

-3% to 0%

-1%

Volatility skew / (A)(D)

-4% to 0%

-1%

Equity - Equity correlation / (C)(D)

40% to 99%

71%

Equity - Equity correlation / (A)(D)

40% to 98%

79%

Equity - Foreign exchange correlation / (A)(D)

-60% to -11%

-39%

Equity - Foreign exchange correlation / (C)(D)

-70% to -31%

-42%

Equity - Interest rate correlation / (C)(D)

-29% to 50%

16% / 8%(5)

Equity - Interest rate correlation / (C)(D)

-7% to 50%

19% / 12% (5)

Commodity contracts

1,050

Option model:

1,298

Option model:

Forward power price / (C)(D)

$3 to $91 per

$32 per

Forward power price / (C)(D)

$2 to $95 per megawatt hour

$34 per

megawatt hour

Commodity volatility / (C)(D)

6% to 90%

18%

Commodity volatility / (A)(D)

10% to 92%

18%

Cross commodity correlation / (C)(D)

5% to 99%

93%

Cross commodity correlation / (C)(D)

43% to 99%

93%


		17

MORGAN STANLEY

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

Balance at
December 31, 2015

Valuation Technique(s) /
Significant Unobservable Input(s) /
Sensitivity of the Fair Value to Changes in the
Unobservable Inputs

Range(1)

Averages(2)

Balance at
June 30, 2016

Valuation Technique(s) /

Significant Unobservable Input(s) /

Sensitivity of the Fair Value to Changes

in the Unobservable Inputs

Range(1)

Averages(2)

(dollars in millions)

Investments:

Principal investments

486

Discounted cash flow:

769

Discounted cash flow:

Implied weighted average cost of capital / (C)(D)

16%

Exit multiple / (A)(D)

8 to 14 times

9 times

Capitalization rate / (C)(D)

5% to 9%

Implied weighted average cost of capital / (C)(D)

13% to 16%

15%

Equity discount rate / (C)(D)

20% to 35%

26%

Exit multiple / (A)(D)

8 to 23 times

9 times

Market approach(3):

EBITDA multiple / (A)(D)

8 to 20 times

11 times

EBITDA multiple / (A)(D)

6 to 25 times

12 times

Forward capacity price / (A)(D)

$ 5 to $9

$ 7

Forward capacity price / (A)(D)

$4 to $9

Comparable pricing:

Comparable equity price / (A)

43% to 100%

81%

Comparable equity price / (A)

43% to 100%

82%

Other

221

Discounted cash flow:

205

Discounted cash flow:

Implied weighted average cost of capital / (C)(D)

10%

Implied weighted average cost of capital / (C)(D)

Exit multiple / (A)(D)

13 times

Exit multiple / (A)(D)

13 times

Market approach:

EBITDA multiple / (A)

7 to 14 times

12 times

EBITDA multiple / (A)(D)

6 to 13 times

12 times

Comparable pricing(3):

Comparable equity price / (A)

100%

Comparable equity price / (A)

100%

Liabilities at Fair Value

Securities sold under agreements to repurchase

151

Discounted cash flow:

150

Discounted cash flow:

Funding spread / (A)

86 to 116 bps

105 bps

Funding spread / (A)

117 to 123 bps

120 bps

Other secured financings

461

Option model:

441

Option model:

Volatility skew / (C)

-1%

Volatility skew / (C)

-1%

Discounted cash flow(3):

Discount rate / (C)

4% to 13%

Discount rate / (C)

Discounted cash flow:

Funding spread / (A)

95 to 113 bps

104 bps

Funding spread / (A)

101 to 126 bps

114 bps

Long-term borrowings

1,987

Option model(3):

1,929

Option model(3):

At the money volatility / (C)(D)

20% to 50%

29%

At the money volatility / (C)(D)

6% to 48%

29%

Volatility skew / (A)(D)

-1% to 0%

-1%

Volatility skew / (C)(D)

-2% to 0%

-1%

Equity - Equity correlation / (A)(D)

40% to 97%

77%

Equity - Equity correlation / (C)(D)

50% to 98%

75%

Equity - Foreign exchange correlation / (C)(D)

-70% to -11%

-39%

Equity - Foreign exchange correlation / (C)(D)

-50% to 11%

-25%

Option model:

Interest rate volatility skew / (A)(D)

50%

Interest rate - credit spread correlation / (A)(D)

-52% to 3%

-24% / -23% (5)

Equity volatility discount / (A)(D)

10%

Interest rate - Foreign exchange correlation /

Correlation model:

(A)(D)

53%

53% / 53% (5)

Credit correlation / (B)

40% to 60%

52%

Interest rate - equity correlation / (A)(D)

7% to 44%

26% / 26% (5)

Comparable pricing:

Interest rate curve correlation / (C)(D)

40% to 87%

73% / 78% (5)

Comparable equity price / (A)

100%

Correlation model:

Credit correlation / (B)

33% to 61%

44%

Comparable pricing:

Comparable equity price / (A)

100%


		18

MORGAN STANLEY

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


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


		19

MORGAN STANLEY

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


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


		20

MORGAN STANLEY

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


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

bps—Basis ~~points.~~points

EBITDA—Earnings before interest, taxes, depreciation and ~~amortization.~~amortization

(1)	The range of significant unobservable inputs is represented in points, percentages, basis points, times or megawatt hours. Points are a percentage of par; for example, 79 points would be 79% of par. A basis point equals 1/100th of 1%; for example, ~~989~~898 bps would equal ~~9.89%~~8.98%.

(2)

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

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

(4)

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

(5)

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

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


		18

~~MORGAN STANLEY~~

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

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

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

(B)

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

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

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

For a description of the ~~Company’s~~Firm’s significant unobservable inputs ~~included in the March 31, 2016 and December 31, 2015 tables above~~ for all major categories of assets and liabilities, see Note 3 to the consolidated financial statements in the 2015 Form 10-K. The following provides a description of an update to significant unobservable inputs included in the 2015 Form 10-K.

•

Asset ~~Coverage~~—Coverage—the ratio of a borrower’s underlying pledged assets less applicable costs relative to their outstanding debt (while considering the loan’s principal and the seniority and security of the loan commitment).

During the current quarter ~~ended March 31, 2016,~~and current year period, there were no other significant updates made to the ~~Company’s~~Firm’s significant unobservable inputs.


		21

MORGAN STANLEY

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

Fair Value of Investments Measured at Net Asset ~~Value.~~

Value

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

Investments in Certain Funds Measured at NAV per ~~Share.~~Share

   At March 31, 2016    At December 31, 2015
   Fair Value    Commitment    Fair Value    Commitment
   (dollars in millions)
Private equity funds
   $ 1,768       $ 467       $ 1,917       $ 538
Real estate funds
   1,274       113       1,337       128
Hedge funds:

Long-short equity hedge funds
   193       —       422       —
Fixed income/credit-related hedge funds
   52       —       71       —
Event-driven hedge funds
   2       —       2       —
Multi-strategy hedge funds
   99       4       94       4








Total
   $ 3,388       $ 584       $ 3,843       $ 670


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

Total	$	3,246	$	510	$	3,843	$	670

~~Private Equity Funds and Real Estate Funds.~~

Investments in these funds generally are not redeemable due to the closed-ended nature of these funds. Instead, distributions from each fund will be received as the underlying investments of the funds are disposed and monetized.

Fair Value of ~~Certain~~Non-Redeemable Funds by Projected ~~Liquidation Timing.~~Distribution

   At March 31, 2016
Fund Type
   Less than 5 years    5-10 years    Over 10 years    Total
   (dollars in millions)
Private equity funds
   $ 141       $ 926       $ 701       $ 1,768
Real estate funds
   97       708       469       1,274


	At June 30, 2016
	Private Equity Funds		Real Estate Funds
	(dollars in millions)
Less than 5 years	$	128	$	94
5-10 years		911		669
Over 10 years		659		465

Total	$	1,698	$	1,228

~~Hedge Funds.~~Restrictions

Investments in hedge funds may be subject to initial period lock-up restrictions or gates. A hedge fund lock-up provision ~~is a provision that provides that, during a certain initial period,~~restricts an investor ~~may not make~~from making a withdrawal from the fund. The purpose of a gate is to restrict the level of redemptions that an investor in a particular hedge fund can demand on any redemption date.

Redemption Frequency as Percentage of Hedge Fund Fair Value


		At June 30, 2016
Hedge Funds(1)
Quarterly		55%
Every Six Months		20%
Greater than Six Months		19%

___________

(1)	The redemption notice period was primarily three months or greater.

Hedge fund investments representing approximately 6% of the fair value cannot be redeemed currently because the investments include certain initial period lock-up restrictions. The remaining restriction period for these investments was primarily over three years at June 30, 2016. Hedge fund investments representing approximately 26% of the fair value cannot be redeemed as of June 30, 2016 because an exit restriction has been imposed by the hedge fund manager primarily for indefinite periods.


		1922

MORGAN STANLEY

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

Fixed income/credit-related hedge funds, event-driven hedge funds and multi-strategy hedge funds are redeemable at least on a three-month period basis, primarily with a notice period of 90 days or less. At March 31, 2016, approximately 34% of the fair value amount of long-short equity hedge funds was redeemable at least quarterly, 33% is redeemable every six months and 33% of these funds have a redemption frequency of greater than six months. At December 31, 2015, approximately 34% of the fair value amount of long-short equity hedge funds was redeemable at least quarterly, 51% is redeemable every six months and 15% of these funds have a redemption frequency of greater than six months. The notice period for long-short equity hedge funds at March 31, 2016 and December 31, 2015 was primarily greater than six months.

~~Lock-up Restrictions and Gates by Hedge Fund Type.~~

   At March 31, 2016
   Fair Value    Gate Restrictions    Remaining Exit
Restriction Period
   (dollars in millions)
Long-short equity
   $ 193       26%       Indefinite
Fixed income/credit-related
   52       73%       Indefinite
Event-driven
   2       N/A       N/A
Multi-strategy(1)
   99       N/A       N/A

~~(1)~~

~~Approximately 21% of the fair value of multi-strategy investments is subject to lock-up restrictions, which have remaining periods primarily over three years at March 31, 2016.~~

Fair Value ~~Option.~~

Option

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

Impact on Earnings of Transactions Under the Fair Value Option ~~Election.~~Election

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


	Trading Revenues			Interest Income (Expense)			Gains (Losses) Included in Net Revenues			Trading Revenues		Interest Income (Expense)		Gains (Losses) Included in Net Revenues
	(dollars in millions)									(dollars in millions)
Three Months Ended March 31, 2016
Three Months Ended June 30, 2016
Securities purchased under agreements to resell	$	—		$	2		$	2		$	(1)	$	2	$	1
Deposits(1)		(2	)		—			(2	)		(1)		(1)		(2)
Short-term borrowings(1)		45			—			45			(9)		—		(9)
Securities sold under agreements to repurchase(1)		(9	)		(2	)		(11	)		(3)		(3)		(6)
Long-term borrowings(1)		(965	)		(139	)		(1,104	)		(1,289)		(130)		(1,419)

Three Months Ended March 31, 2015
Six Months Ended June 30, 2016
Securities purchased under agreements to resell										$	(1)	$	4	$	3
Deposits(1)											(3)		(1)		(4)
Short-term borrowings(1)											36		—		36
Securities sold under agreements to repurchase(1)											(12)		(5)		(17)
Long-term borrowings(1)											(2,254)		(269)		(2,523)

Three Months Ended June 30, 2015
Securities purchased under agreements to resell	$	(1	)	$	—		$	(1	)	$	(2)	$	5	$	3
Short-term borrowings(2)		(40	)		—			(40	)		(2)		—		(2)
Securities sold under agreements to repurchase(2)		(2	)		(1	)		(3	)		6		(2)		4
Long-term borrowings(2)		937			(132	)		805			152		(138)		14

Six Months Ended June 30, 2015
Securities purchased under agreements to resell										$	(3)	$	5	$	2
Short-term borrowings(2)											(42)		—		(42)
Securities sold under agreements to repurchase(2)											4		(3)		1
Long-term borrowings(2)											1,089		(270)		819

(1)

Gains (losses) are mainly attributable to changes in foreign currency rates or interest rates or movements in the reference price or index for short-term andlong-term borrowings before the impact of related hedges. In accordance with the early adoption of a provision of the accounting updateRecognition and Measurement of Financial Assets and Financial Liabilities, unrealized DVA gains of ~~$323~~$225 million and $548 million are recorded within OCI in the ~~condensed~~ consolidated statements of comprehensive income and not included in ~~the above~~this table for the current quarter ~~ended March 31, 2016.~~and current year period, respectively. See Notes 2 and 14 for further information.

(2)

Gains (losses) recorded in Trading revenues for the prior year quarter ~~ended March 31, 2015~~and prior year period are attributable to DVA and the respective remainder is attributable to changes in foreign currency rates or interest rates or movements in the reference price or index for structured notes before the impact of related hedges.


		2023

MORGAN ~~STANLEY—(Continued)~~STANLEY

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

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

~~Short-Term and Long-Term Borrowings Measured at Fair Value on a Recurring Basis.~~

Business Unit Responsible for Risk Management
   At March 31, 2016    At December 31, 2015
   (dollars in millions)
Equity
   $ 19,006       $ 17,789
Interest rates
   15,657       14,255
Credit and foreign exchange
   1,704       2,266
Commodities
   338       383




Total
   $ 36,705       $ 34,693

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


										Three Months Ended June 30,								Six Months Ended June 30,
	Three Months Ended March 31,									2016				2015				2016				2015
	2016					2015
	Trading Revenues			OCI		Trading Revenues		OCI		Trading Revenues		OCI		Trading Revenues		OCI		Trading Revenues		OCI		Trading Revenues		OCI
	(dollars in millions)									(dollars in millions)
Short-term and long-term borrowings(1)	$	41		$	319	$	125	$	—	$	—	$	226	$	182	$	—	$	41	$	545	$	307	$	—
Securities sold under agreements to repurchase(1)		—			4		—		—		—		(1)		—		—		—		3		—		—
Loans and other debt(2)		(100	)		—		77		—		(14)		—		(6)		—		(114)		—		71		—
Lending commitments(3)		1			—		9		—		2		—		(1)		—		3		—		8		—

(1)

In accordance with the early adoption of a provision of the accounting update,Recognition and Measurement of Financial Assets and Financial Liabilities, for the current quarter ~~ended March 31, 2016~~and current year period DVA gains (losses) are recorded in OCI when unrealized and in Trading revenues when realized. In the prior year quarter ~~ended March 31, 2015,~~and prior year period, the realized and unrealized DVA gains (losses) are recorded in Trading revenues. The cumulative impact of changes in the ~~Company’s~~Firm’s DVA and the pre-tax amount recognized in AOCI is a ~~loss~~gain of ~~$138~~$87 million at ~~March 31,~~June 30, 2016. See Notes 2 and 14 for further information.

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

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

Net Difference of Contractual Principal Amount Over Fair ~~Value.~~Value


	At March 31, 2016		At December 31, 2015		At June 30, 2016		At December 31, 2015
	(dollars in millions)				(dollars in millions)
Loans and other debt(1)	$	14,353	$	14,095	$	15,046	$	14,095
Loans 90 or more days past due and/or on nonaccrual status~~(2)~~(1)		12,177		11,651		12,867		11,651
Short-term and long-term borrowings~~(3)~~(2)		344		508		311		508

____________

(1)	The majority of the difference between principal and fair value amounts for loans and other debt emanates from the distressed debt trading business, which purchases distressed debt at amounts well below par.

(2)	The aggregate fair value of loans that were in nonaccrual status was $2,267 million and $1,853 million at March 31, 2016 and December 31, 2015, respectively, which includes all loans 90 or more days past due of $887 million and $885 million at March 31, 2016 and December 31, 2015, respectively.

~~(3)~~

Short-term and long-term borrowings do not include structured notes where the repayment of the initial principal amount fluctuates based on changes in the reference price or index.

Short-Term and Long-Term Borrowings Measured at Fair Value on a Recurring Basis


	At June 30, 2016		At December 31, 2015

Business Unit Responsible for Risk Management	(dollars in millions)
Equity	$	19,696	$	17,789
Interest rates		16,728		14,255
Credit and foreign exchange		1,570		2,266
Commodities		321		383

Total	$	38,315	$	34,693

Fair Value of Loans in Nonaccrual Status


	At June 30, 2016		At December 31, 2015
	(dollars in millions)
Aggregate fair value of loans in nonaccrual status(1)	$	1,717	$	1,853

____________

(1)	Includes all loans 90 or more days past due in the amount of $514 million and $885 million at June 30, 2016 and December 31, 2015, respectively.

The previous tables ~~above~~ 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.


		24

MORGAN STANLEY

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

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

Basis

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

previous tables.


		21

~~MORGAN STANLEY~~

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

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


	Carrying Value at March 31, 2016			Fair Value by Level								Total Gains (Losses) for the Three Months Ended March 31, 2016(1)							Fair Value by Level
			Level 1			Level 2			Level 3						Carrying Value at June 30, 2016(1)			Level 1			Level 2			Level 3			Total Gains (Losses) for the Three Months Ended June 30, 2016(2)			Total Gains (Losses) for Six Months Ended June 30, 2016(2)
	Carrying Value at March 31, 2016	(dollars in millions)															(dollars in millions)
Assets:
Loans(2)	$	6,515		$	—		$	3,359		$	3,156	$	(80	)
Other assets—Other investments(3)		27			—			—			27		(3	)
Other assets—Premises, equipment and software costs(4)		—			—			—			—		(5	)
Loans(3)																$	6,700			$ —		$	4,276		$	2,424		$	(34)		$	(131)
Other assets—Other investments(4)																	82			—			—			82			(38)			(40)
Other assets—Premises, equipment and software costs(5)																	—			—			—			—			(22)			(27)

Total assets	$	6,542		$	—		$	3,359		$	3,183	$	(88	)		$	6,782			$ —		$	4,276		$	2,506		$	(94)		$	(198)

Liabilities:
Other liabilities and accrued expenses(2)	$	459		$	—		$	379		$	80	$	(20	)
Other liabilities and accrued expenses(3)																$	402			$ —		$	331		$	71		$	13		$	24

Total liabilities	$	459		$	—		$	379		$	80	$	(20	)		$	402			$ —		$	331		$	71		$	13		$	24


	Carrying Value at March 31, 2015			Fair Value by Level								Total Gains (Losses) for the Three Months Ended March 31, 2015(1)
			Level 1			Level 2			Level 3
	Carrying Value at March 31, 2015	(dollars in millions)
Assets:
Loans(2)	$	3,346		$	—		$	2,521		$	825	$	(24	)
Other assets—Other investments(3)		35			—			—			35		(2	)
Other assets—Premises, equipment and software costs(4)		—			—			—			—		(19	)

Total assets	$	3,381		$	—		$	2,521		$	860	$	(45	)

Liabilities:
Other liabilities and accrued expenses(2)	$	245		$	—		$	203		$	42	$	(7	)

Total liabilities	$	245		$	—		$	203		$	42	$	(7	)


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

Total assets	$	3,244		$ —	$	2,458	$	786	$	45	$	(16)

Liabilities:
Other liabilities and accrued expenses(3)	$	283		$ —	$	244	$	39	$	(45)		(48)

Total liabilities	$	283		$ —	$	244	$	39	$	(45)		(48)

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

(2)

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

~~(2)~~(3)

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

~~(3)~~(4)

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

~~(4)~~(5)

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

Included in the losses within the previous table for the current quarter and current year period, there was a loss of approximately $35 million (related to Other assets—Other investments) in connection with the sale of solar invest-

ments and impairments of the remaining unsold solar investments accounted for under the equity method. The fair value of these investments was determined based on the sales price.


		25

MORGAN STANLEY

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

Financial Instruments Not Measured at Fair ~~Value.~~

Value

For a further discussion of financial instruments not measured at fair value, see Note 3 to the consolidated financial statements in the 2015 Form 10-K.

The carrying values of the remaining assets and liabilities not measured at fair value in the following tables ~~below~~ approximate fair value due to their short-term nature.


		22

~~MORGAN STANLEY~~

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

~~Financial Instruments Not Measured at Fair Value.~~

The following tables ~~below~~ 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 ~~our~~the Firm’s deposit customers.


	At March 31, 2016				Fair Value by Level						At June 30, 2016				Fair Value by Level
	Carrying Value		Fair Value		Level 1		Level 2		Level 3		Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(dollars in millions)										(dollars in millions)
Financial Assets:
Cash and due from banks	$	22,797	$	22,797	$	22,797	$	—	$	—	$	27,597	$	27,597	$	27,597	$	—	$	—
Interest bearing deposits with banks		30,841		30,841		30,841		—		—		28,536		28,536		28,536		—		—
Investment securities—HTM securities		9,425		9,478		1,963		7,515		—		12,418		12,567		3,758		8,809		—
Securities purchased under agreements to resell		98,219		98,246		—		97,727		519		97,034		97,042		—		95,140		1,902
Securities borrowed		140,413		140,416		—		140,314		102		131,281		131,282		—		131,156		126
Customer and other receivables(1)		40,935		40,823		—		36,227		4,596		48,910		48,815		—		44,033		4,782
Loans(2)		88,802		89,831		—		21,858		67,973		93,165		94,151		—		25,289		68,862
Other assets—Cash deposited with clearing organizations or segregated under federal and other regulations or requirements		31,808		31,808		31,808		—		—		32,771		32,771		32,771		—		—

Financial Liabilities:
Deposits	$	156,944	$	158,238	$	—	$	158,238	$	—	$	152,598	$	152,788	$	—	$	152,788	$	—
Short-term borrowings		412		412		—		412		—		369		369		—		369		—
Securities sold under agreements to repurchase		40,612		40,684		—		38,701		1,983		49,629		49,692		—		48,033		1,659
Securities loaned		17,140		17,160		—		17,160		—		17,241		17,262		—		17,262		—
Other secured financings		6,693		6,704		—		5,355		1,349		6,980		6,991		—		5,596		1,395
Customer and other payables(1)		191,137		191,137		—		191,137		—		197,978		197,978		—		197,978		—
Long-term borrowings		126,796		128,520		—		128,520		—		125,688		127,189		—		127,189		—


	At December 31, 2015				Fair Value by Level						At December 31, 2015					Fair Value by Level
	Carrying Value		Fair Value		Level 1		Level 2		Level 3		Carrying Value			Fair Value		Level 1		Level 2		Level 3
	(dollars in millions)										(dollars in millions)
Financial Assets:
Cash and due from banks	$	19,827	$	19,827	$	19,827	$	—	$	—	$	19,827		$	19,827	$	19,827	$	—	$	—
Interest bearing deposits with banks		34,256		34,256		34,256		—		—		34,256			34,256		34,256		—		—
Investment securities—HTM securities		5,244		5,188		998		4,190		—		5,224			5,188		998		4,190		—
Securities purchased under agreements to resell		86,851		86,837		—		86,186		651		86,851			86,837		—		86,186		651
Securities borrowed		142,416		142,414		—		142,266		148		142,416			142,414		—		142,266		148
Customer and other receivables(1)		41,676		41,576		—		36,752		4,824		41,676			41,576		—		36,752		4,824
Loans(2)		85,759		86,423		—		19,241		67,182		85,759			86,423		—		19,241		67,182
Other assets—Cash deposited with clearing organizations orsegregated under federal and other regulations or requirements		31,469		31,469		31,469		—		—
Other assets—Cash deposited with clearing organizations or segregated under federal and other regulations or requirements												31,469			31,469		31,469		—		—

Financial Liabilities:
Deposits	$	155,909	$	156,163	$	—	$	156,163	$	—	$	155,909		$	156,163	$	—	$	156,163	$	—
Short-term borrowings		525		525		—		525		—		525			525		—		525		—
Securities sold under agreements to repurchase		36,009		36,060		—		34,150		1,910		36,009			36,060		—		34,150		1,910
Securities loaned		19,358		19,382		—		19,192		190		19,358			19,382		—		19,192		190
Other secured financings		6,610		6,610		—		5,333		1,277		6,610	��		6,610		—		5,333		1,277
Customer and other payables(1)		183,895		183,895		—		183,895		—		183,895			183,895		—		183,895		—
Long-term borrowings		120,723		123,219		—		123,219		—		120,723			123,219		—		123,219		—

HTM—Held to ~~maturity.~~maturity

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

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


		26

MORGAN STANLEY

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

At ~~March 31,~~June 30, 2016 and December 31, 2015, notional amounts of approximately ~~$98.1~~$93.8 billion and $99.5 billion, respectively, of the ~~Company’s~~Firm’s lending commitments were held for investment and held for sale, which are not included in the ~~above~~previous table. The estimated fair value of such lending commitments was a liability of ~~$2,062~~$1,841 million and $2,172

million, respectively, at ~~March 31,~~June 30, 2016 and December 31, 2015. Had these commitments been accounted for at fair value, ~~$1,660~~$1,610 million would have been categorized in Level 2 and ~~$402~~$231 million in Level 3 at ~~March 31,~~June 30, 2016, and $1,791 million would have been categorized in Level 2 and $381 million in Level 3 at December 31, 2015.


		23

~~MORGAN STANLEY~~

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

4.	Derivative Instruments and Hedging ~~Activities.~~Activities

The Company trades and makes markets globally in listed futures, over-the-counter (“OTC”) swaps, forwards, options and other derivatives referencing, among other things, interest rates, currencies, investment grade and non-investment grade corporate credits, loans, bonds, U.S. and other sovereign securities, emerging market bonds and loans, credit indices, asset-backed security indices, property indices, mortgage-related and other asset-backed securities, and real estate loan products. For a ~~further~~ discussion of the ~~Company’s~~Firm’s derivative instruments and hedging activities, see Note 4 to the consolidated financial statements in the 2015 Form 10-K.

~~Fair Value, Notional and Offsetting of Derivative Instruments.~~

Fair Value, Notional and Offsetting of Derivative Assets and ~~Liabilities.~~Liabilities


	Derivative Assets at March 31, 2016																				Derivative Assets at June 30, 2016
	Fair Value												Notional								Fair Value								Notional
	Bilateral OTC			Cleared OTC			Exchange Traded			Total			Bilateral OTC		Cleared OTC		Exchange Traded		Total		Bilateral OTC		Cleared OTC		Exchange Traded		Total		Bilateral OTC		Cleared OTC		Exchange Traded		Total
	(dollars in millions)																				(dollars in millions)
Derivatives designated as accounting hedges:
Interest rate contracts	$	3,209		$	2,897		$	—		$	6,106		$	34,259	$	57,400	$	—	$	91,659	$	3,325	$	3,798	$	—	$	7,123	$	34,003	$	58,245	$	—	$	92,248
Foreign exchange contracts		27			—			—			27			1,527		—		—		1,527		88		—		—		88		2,795		59		—		2,854

Total derivatives designated as accounting hedges		3,236			2,897			—			6,133			35,786		57,400		—		93,186		3,413		3,798		—		7,211		36,798		58,304		—		95,102

Derivatives not designated as accounting hedges(1):
Interest rate contracts		273,635			146,182			242			420,059			4,254,497		5,634,287		1,243,384		11,132,168		287,757		168,366		328		456,451		3,940,102		6,615,199		1,636,768		12,192,069
Credit contracts		16,774			3,527			—			20,301			535,066		157,290		—		692,356		13,734		2,727		—		16,461		434,478		133,037		—		567,515
Foreign exchange contracts		72,794			423			76			73,293			1,900,339		14,915		11,542		1,926,796		75,891		386		140		76,417		1,851,368		16,653		21,279		1,889,300
Equity contracts		21,174			—			23,356			44,530			288,517		—		259,466		547,983		22,043		—		20,486		42,529		341,039		—		259,453		600,492
Commodity contracts		13,786			—			3,832			17,618			67,085		—		82,933		150,018		11,785		—		3,724		15,509		72,700		—		83,156		155,856
Other		19			—			—			19			2,111		—		—		2,111		16		—		—		16		1,135		—		—		1,135

Total derivatives not designated as accounting hedges		398,182			150,132			27,506			575,820			7,047,615		5,806,492		1,597,325		14,451,432		411,226		171,479		24,678		607,383		6,640,822		6,764,889		2,000,656		15,406,367

Total gross derivatives(2)	$	401,418		$	153,029		$	27,506		$	581,953		$	7,083,401	$	5,863,892	$	1,597,325	$	14,544,618	$	414,639	$	175,277	$	24,678	$	614,594	$	6,677,620	$	6,823,193	$	2,000,656	$	15,501,469

Amounts offset:
Counterparty netting		(314,379	)		(149,342	)		(24,456	)		(488,177	)										(321,553)		(173,222)		(21,214)		(515,989)
Cash collateral netting		(55,371	)		(2,562	)		—			(57,933	)										(60,352)		(95)		—		(60,447)

Total derivative assets at fair value included in Trading assets	$	31,668		$	1,125		$	3,050		$	35,843										$	32,734	$	1,960	$	3,464	$	38,158

Amounts not offset(3):
Financial instruments collateral		(10,299	)		—			—			(10,299	)										(12,011)		—		—		(12,011)
Other cash collateral		(13	)		—			—			(13	)										(23)		—		—		(23)

Net exposure	$	21,356		$	1,125		$	3,050		$	25,531										$	20,700	$	1,960	$	3,464	$	26,124


		27

MORGAN STANLEY

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


	Derivative Liabilities at June 30, 2016
	Fair Value												Notional
	Bilateral OTC			Cleared OTC			Exchange Traded			Total			Bilateral OTC		Cleared OTC		Exchange Traded		Total
	(dollars in millions)
Derivatives designated as accounting hedges:
Interest rate contracts	$	—		$	—		$	—		$	—		$	—	$	32	$	—	$	32
Foreign exchange contracts	$	492		$	23		$	—		$	515		$	8,348	$	689	$	—	$	9,037

Total derivatives designated as accounting hedges		492			23			—			515			8,348		721		—		9,069

Derivatives not designated as accounting hedges(1):
Interest rate contracts		265,270			172,084			412			437,766			3,654,941		6,558,339		760,822		10,974,102
Credit contracts		14,888			2,933			—			17,821			489,656		115,979		—		605,635
Foreign exchange contracts		77,614			414			82			78,110			1,837,572		15,817		10,511		1,863,900
Equity contracts		25,633			—			20,916			46,549			342,625		—		261,986		604,611
Commodity contracts		9,390			—			3,389			12,779			68,095		—		64,896		132,991
Other		102			—			—			102			4,817		—		—		4,817

Total derivatives not designated as accounting hedges		392,897			175,431			24,799			593,127			6,397,706		6,690,135		1,098,215		14,186,056

Total gross derivatives(2)	$	393,389		$	175,454		$	24,799		$	593,642		$	6,406,054	$	6,690,856	$	1,098,215	$	14,195,125

Amounts offset:
Counterparty netting		(321,553)			(173,222	)		(21,214	)		(515,989	)
Cash collateral netting		(38,378)			(1,952	)		—			(40,330	)

Total derivative liabilities at fair value included in Trading liabilities	$	33,458		$	280		$	3,585		$	37,323

Amounts not offset(3):
Financial instruments collateral		(11,509)			—			(514	)		(12,023	)
Other cash collateral		(10)			(41	)		—			(51	)

Net exposure	$	21,939		$	239		$	3,071		$	25,249


	Derivative Assets at December 31, 2015
	Fair Value												Notional
	Bilateral OTC			Cleared OTC			Exchange Traded			Total			Bilateral OTC		Cleared OTC		Exchange Traded		Total
	(dollars in millions)
Derivatives designated as accounting hedges:
Interest rate contracts	$	2,825		$	1,442		$	—		$	4,267		$	36,999	$	35,362	$	—	$	72,361
Foreign exchange contracts		166			1			—			167			5,996		167		—		6,163

Total derivatives designated as accounting hedges		2,991			1,443			—			4,434			42,995		35,529		—		78,524

Derivatives not designated as accounting hedges(4):
Interest rate contracts		220,289			101,276			212			321,777			4,348,002		5,748,525		1,218,645		11,315,172
Credit contracts		19,310			3,609			—			22,919			585,731		139,301		—		725,032
Foreign exchange contracts		64,438			295			55			64,788			1,907,290		13,402		7,715		1,928,407
Equity contracts		20,212			—			20,077			40,289			316,770		—		229,859		546,629
Commodity contracts		13,114			—			4,038			17,152			67,449		—		82,313		149,762
Other		219			—			—			219			5,684		—		—		5,684

Total derivatives not designated as accounting hedges		337,582			105,180			24,382			467,144			7,230,926		5,901,228		1,538,532		14,670,686

Total gross derivatives(2)	$	340,573		$	106,623		$	24,382		$	471,578		$	7,273,921	$	5,936,757	$	1,538,532	$	14,749,210

Amounts offset:
Counterparty netting		(265,707	)		(104,294	)		(21,592	)		(391,593	)
Cash collateral netting		(50,335	)		(1,037	)		—			(51,372	)

Total derivative assets at fair value included in Trading assets	$	24,531		$	1,292		$	2,790		$	28,613

Amounts not offset(3):
Financial instruments collateral		(9,190	)		—			—			(9,190	)
Other cash collateral		(9	)		—			—			(9	)

Net exposure	$	15,332		$	1,292		$	2,790		$	19,414


		2428

MORGAN STANLEY

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

Derivative Liabilities
at March 31, 2016
Fair Value Notional
Bilateral
OTC Cleared
OTC Exchange
Traded Total Bilateral
OTC Cleared
OTC Exchange
Traded Total
(dollars in millions)
Derivatives designated as accounting hedges:

Foreign exchange contracts
$ 364    $ 28    $ —    $ 392    $ 8,267    $ 783    $ —    $ 9,050

Total derivatives designated as accounting hedges
364    28    —    392    8,267    783    —    9,050

Derivatives not designated as accounting hedges(1):

Interest rate contracts
251,687    147,016    347    399,050    3,943,566    5,517,043    903,713    10,364,322
Credit contracts
17,616    3,651    —    21,267    569,403    144,845    —    714,248
Foreign exchange contracts
76,098    503    49    76,650    1,960,735    15,602    6,107    1,982,444
Equity contracts
23,973    —    23,906    47,879    331,715    —    252,398    584,113
Commodity contracts
11,240    —    3,499    14,739    62,976    —    65,323    128,299
Other
116    —    —    116    4,858    —    —    4,858

Total derivatives not designated as accounting hedges
380,730    151,170    27,801    559,701    6,873,253    5,677,490    1,227,541    13,778,284

Total gross derivatives(2)
$     381,094    $     151,198    $     27,801    $     560,093    $     6,881,520    $     5,678,273    $     1,227,541    $     13,787,334

Amounts offset:

Counter party netting
(314,379 ) (149,342 ) (24,456 ) (488,177 )
Cash collateral netting
(36,868 ) (1,651 ) —    (38,519 )

Total derivative liabilities at fair value included in Trading liabilities
$ 29,847    $ 205    $ 3,345    $ 33,397

Amounts not offset(3):

Financial instruments collateral
(8,368 ) —    (308 ) (8,676 )
Other cash collateral
(4 ) (25 ) —    (29 )

Net exposure
$ 21,475    $ 180    $ 3,037    $ 24,692

Derivative Assets
at December 31, 2015
Fair Value Notional
Bilateral
OTC Cleared
OTC Exchange
Traded Total Bilateral
OTC Cleared
OTC Exchange
Traded Total
(dollars in millions)
Derivatives designated as accounting hedges:

Interest rate contracts
$ 2,825    $ 1,442    $ —    $ 4,267    $ 36,999    $ 35,362    $ —    $ 72,361
Foreign exchange contracts
166    1    —    167    5,996    167    —    6,163

Total derivatives designated as accounting hedges
2,991    1,443    —    4,434    42,995    35,529    —    78,524

Derivatives not designated as accounting hedges(4):

Interest rate contracts
220,289    101,276    212        321,777    4,348,002    5,748,525    1,218,645    11,315,172
Credit contracts
19,310    3,609    —    22,919    585,731    139,301    —    725,032
Foreign exchange contracts
64,438    295    55    64,788    1,907,290    13,402    7,715    1,928,407
Equity contracts
20,212    —    20,077    40,289    316,770    —    229,859    546,629
Commodity contracts
13,114    —    4,038    17,152    67,449    —    82,313    149,762
Other
219    —    —    219    5,684    —    —    5,684

Total derivatives not designated as accounting hedges
337,582    105,180    24,382    467,144    7,230,926    5,901,228    1,538,532    14,670,686

Total gross derivatives(2)
$     340,573    $     106,623    $     24,382    $ 471,578    $     7,273,921    $     5,936,757    $     1,538,532    $     14,749,210

Amounts offset:

Counter party netting
(265,707 ) (104,294 ) (21,592 ) (391,593 )
Cash collateral netting
(50,335 ) (1,037 ) —    (51,372 )

Total derivative assets at fair value included in Trading assets
$ 24,531    $ 1,292    $ 2,790    $ 28,613

Amounts not offset(3):

Financial instruments collateral
(9,190 ) —    —    (9,190 )
Other cash collateral
(9 ) —    —    (9 )

Net exposure
$ 15,332    $ 1,292    $ 2,790    $ 19,414


		25

~~MORGAN STANLEY~~


	Derivative Liabilities at December 31, 2015
	Fair Value											Notional
	Bilateral OTC		Cleared OTC			Exchange Traded			Total			Bilateral OTC		Cleared OTC		Exchange Traded		Total
	(dollars in millions)
Derivatives designated as accounting hedges:
Interest rate contracts	$	20	$	250		$	—		$	270		$	3,560	$	9,869	$	—	$	13,429
Foreign exchange contracts		56		6			—			62			4,604		455		—		5,059

Total derivatives designated as accounting hedges		76		256			—			332			8,164		10,324		—		18,488

Derivatives not designated as accounting hedges(4):
Interest rate contracts		203,004		103,852			283			307,139			4,030,039		5,682,322		1,077,710		10,790,071
Credit contracts		19,942		3,723			—			23,665			562,027		131,388		—		693,415
Foreign exchange contracts		65,034		232			22			65,288			1,868,015		13,322		2,655		1,883,992
Equity contracts		25,708		—			20,424			46,132			332,734		—		229,266		562,000
Commodity contracts		10,864		—			3,887			14,751			59,169		—		62,974		122,143
Other		43		—			—			43			4,114		—		—		4,114

Total derivatives not designated as accounting hedges		324,595		107,807			24,616			457,018			6,856,098		5,827,032		1,372,605		14,055,735

Total gross derivatives(2)	$	324,671	$	108,063		$	24,616		$	457,350		$	6,864,262	$	5,837,356	$	1,372,605	$	14,074,223

Amounts offset:
Counterparty netting		(265,707)		(104,294	)		(21,592	)		(391,593	)
Cash collateral netting		(33,332)		(2,951	)		—			(36,283	)

Total derivative liabilities at fair value included in Trading liabilities	$	25,632	$	818		$	3,024		$	29,474

Amounts not offset(3):
Financial instruments collateral		(5,384)		—			(405	)		(5,789	)
Other cash collateral		(5)		—			—			(5	)

Net exposure	$	20,243	$	818		$	2,619		$	23,680

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

Derivative Liabilities
at December 31, 2015
Fair Value Notional
Bilateral
OTC Cleared
OTC Exchange
Traded Total Bilateral
OTC Cleared
OTC Exchange
Traded Total
(dollars in millions)
Derivatives designated as accounting hedges:

Interest rate contracts
$ 20    $ 250    $ —    $ 270    $ 3,560    $ 9,869    $ —    $ 13,429
Foreign exchange contracts
56    6    —    62    4,604    455    —    5,059

Total derivatives designated as accounting hedges
76    256    —    332    8,164    10,324    —    18,488

Derivatives not designated as accounting hedges(4):

Interest rate contracts
203,004    103,852    283    307,139    4,030,039    5,682,322    1,077,710    10,790,071
Credit contracts
19,942    3,723    —    23,665    562,027    131,388    —    693,415
Foreign exchange contracts
65,034    232    22    65,288    1,868,015    13,322    2,655    1,883,992
Equity contracts
25,708    —    20,424    46,132    332,734    —    229,266    562,000
Commodity contracts
10,864    —    3,887    14,751    59,169    —    62,974    122,143
Other
43    —    —    43    4,114    —    —    4,114

Total derivatives not designated as accounting hedges
324,595    107,807    24,616    457,018    6,856,098    5,827,032    1,372,605    14,055,735

Total gross derivatives(2)
$     324,671    $     108,063    $     24,616    $     457,350    $     6,864,262    $     5,837,356    $     1,372,605    $     14,074,223

Amounts offset:

Counterparty netting
(265,707 ) (104,294 ) (21,592 ) (391,593 )
Cash collateral netting
(33,332 ) (2,951 ) —    (36,283 )

Total derivative liabilities at fair value included in Trading liabilities
$ 25,632    $ 818    $ 3,024    $ 29,474

Amounts not offset(3):

Financial instruments collateral
(5,384 ) —    (405 ) (5,789 )
Other cash collateral
(5 ) —    —    (5 )

Net exposure
$ 20,243    $ 818    $ 2,619    $ 23,680

OTC—Over-the-counter

(1)

Notional amounts include gross notionals related to open long and short futures contracts of ~~$967.4~~$1,300.0 billion and ~~$399.2~~$372.8 billion, respectively. The unsettled fair value on these futures contracts (excluded from ~~the table above)~~this table) of ~~$895~~$1,631 million and ~~$371~~$153 million is included in Customer and other receivables and Customer and other payables, respectively, in the ~~condensed~~ consolidated balance ~~sheet.~~sheets.

(2)

Amounts include ~~$5.3 billion of derivative assets and $5.8 billion of derivative liabilities at March 31, 2016 and $4.2 billion of derivative assets and $5.2 billion of derivative liabilities at December 31, 2015,~~transactions which are either not subject to master netting agreements or collateral agreements or are subject to such agreements but the ~~Company~~Firm has not determined the agreements to be legally ~~enforceable.~~enforceable as follows: $4.8 billion of derivative assets and $6.3 billion of derivative liabilities at June 30, 2016, and $4.2 billion of derivative assets and $5.2 billion of derivative liabilities at December 31, 2015.

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

(4)

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

For information related to offsetting of certain collateralized transactions, see Note 6.

Gains (Losses) on Fair Value ~~Hedges.~~Hedges

   Gains (Losses)
Recognized in Interest Expense
   Three Months Ended March 31,
Product Type
   2016 2015
           (dollars in millions)
Derivatives
   $ 2,150    $ 758
Borrowings
   (2,289 ) (843 )


Total
   $ (139 ) $ (85 )


	Gains (Losses) Recognized in Interest Expense
	Three Months Ended June 30,				Six Months Ended June 30,
Product Type	2016		2015		2016		2015
	(dollars in millions)
Derivatives	$	969	$	(1,899)	$	3,119	$	(1,141)
Borrowings		(993)		1,861		(3,282)		1,018

Total	$	(24)	$	(38)	$	(163)	$	(123)


		26

~~MORGAN STANLEY~~

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

Gains (Losses) on Derivatives Designated as Net Investment ~~Hedges.~~Hedges


	Gains (Losses) Recognized in OCI (effective portion)					Gains (Losses) Recognized in OCI (effective portion)
	Three Months Ended March 31,					Three Months Ended June 30,				Six Months Ended June 30,
Product Type	2016			2015		2016		2015		2016		2015
	(dollars in millions)					(dollars in millions)
Foreign exchange contracts(1)	$	(224	)	$	262	$	(112)	$	(81)	$	(336)	$	181

___________

(1)

Losses of ~~$20~~$19 million and ~~$44~~$39 million related to the forward points on the hedging instruments were excluded from hedge effectiveness testing and recognized in Interest income during the ~~quarters ended March 31, 2016~~current quarter and ~~2015,~~current year period, respectively. Losses of $36 million and $80 million related to the forward points on the hedging instruments were excluded from hedge effectiveness testing and recognized in Interest income during the prior year quarter and prior year period, respectively.


		29

MORGAN STANLEY

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

Gains (Losses) on Trading ~~Instruments.~~Instruments

The following table ~~below~~ summarizes gains and losses included in Trading revenues in the ~~condensed~~ consolidated statements of income from trading activities. These activities include revenues related to derivative and non-derivative financial instruments. The ~~Company~~Firm generally utilizes financial instruments across a variety of product types in connection with their market-making and related risk management strategies. Accordingly, the trading revenues presented ~~below~~in the following table are not representative of the manner in which the ~~Company~~Firm manages its business activities and are prepared in a manner similar to the presentation of trading revenues for regulatory reporting purposes.


	Gains (Losses) Recognized in Trading Revenues					Gains (Losses) Recognized in Trading Revenues
	Three Months Ended March 31,					Three Months Ended June 30,				Six Months Ended June 30,
Product Type	2016			2015		2016		2015		2016			2015
	(dollars in millions)					(dollars in millions)
Interest rate contracts	$	306		$	570	$	320	$	355	$	626		$	925
Foreign exchange contracts		237			345		362		170		599			515
Equity security and index contracts(1)		1,330			1,595		1,615		1,746		2,945			3,341
Commodity and other contracts(2)		(144	)		676		20		140		(124	)		816
Credit contracts		336			339		429		380		765			719

Subtotal	$	2,065		$	3,525	$	2,746	$	2,791	$	4,811		$	6,316
Debt valuation adjustments(3)		—			125		—		182		—			307

Total trading revenue	$	2,065		$	3,650	$	2,746	$	2,973	$	4,811		$	6,623

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

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

(3)

In accordance with the early adoption of a provision of the accounting updateRecognition and Measurement of Financial Assets and Financial Liabilities, unrealized DVA gains (losses) in the current quarter ~~ended March 31, 2016~~and current year period are recorded within OCI in the ~~condensed~~ consolidated statements of comprehensive income. In the prior year quarter ~~ended March 31, 2015,~~and prior year period, the DVA gains (losses) were recorded within Trading revenues in the ~~condensed~~ consolidated statements of income. See Notes 2 and 14 for further information.

OTC Derivative Products—Trading Assets

Counterparty Credit Rating and Remaining Maturity of OTC Derivative Assets


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

Total	$	24,088	$	16,499	$	12,080	$	65,875	$	(83,871)	$	34,671	$	22,660


		2730

MORGAN STANLEY

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

~~OTC Derivative Products—Trading Assets.~~

~~Counterparty Credit Rating and Remaining Maturity of OTC Derivative Assets.~~

   Fair Value at March 31, 2016(1)
   Contractual Years to Maturity    Cross-Maturity
and Cash
Collateral
Netting(3) Net Exposure
Post-cash
Collateral    Net Exposure
Post-
collateral(4)
Credit Rating(2)
   Less than 1    1-3    3-5    Over 5
   (dollars in millions)
AAA
   $ 182       $ 567       $ 1,344       $ 4,683       $ (5,272 ) $ 1,504       $ 1,425
AA
   2,524       1,488       1,750       12,747       (13,148 ) 5,361       3,045
A
   10,143       7,440       4,984       26,567       (38,249 ) 10,885       7,603
BBB
   4,953       4,487       2,246       13,055       (16,119 ) 8,622       6,426
Non-investment grade
   5,065       2,804       1,277       5,024       (7,762 ) 6,408       3,982












Total
   $   22,867       $   16,786       $   11,601       $   62,076       $ (80,550 ) $ 32,780       $   22,481


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

Total	$	20,236	$	17,840	$	10,582	$	49,174	$	(72,018	)	$	25,814	$	16,624	$	20,236	$	17,840	$	10,582	$	49,174	$	(72,018)			$	25,814			$	16,624

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

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

(3)

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

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

Credit Risk-Related ~~Contingencies.~~

Contingencies

In connection with certain OTC trading agreements, the ~~Company~~Firm may be required to provide additional collateral or immediately settle any outstanding liability balances with certain counterparties in the event of a credit rating downgrade of the ~~Company.~~Firm.

Net Derivative Liabilities and Collateral ~~Posted.~~Posted

The following 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 ~~Company~~Firm has posted collateral in the normal course of business.

       At March 31, 2016
   (dollars in millions)
Net derivative liabilities
   $ 28,798
Collateral posted
   24,146

At June 30, 2016
(dollars in millions)
Net derivative liabilities
$ 28,999
Collateral posted
24,217

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 Standard &


		28

~~MORGAN STANLEY~~

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

Poor’s Ratings Services (“S&P”)~~. The~~.The following table ~~below~~ 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.

Incremental Collateral or Termination Payments upon Potential Future Ratings ~~Downgrade.~~Downgrade

       At March 31, 2016(1)
   (dollars in millions)
One-notch downgrade
   $ 1,148
Two-notch downgrade
   1,496


	At June 30, 2016(1)
	(dollars in millions)
One-notch downgrade	$	1,075
Two-notch downgrade		1,233

__________________

(1)

Amounts include ~~$1,666~~$1,481 million related to bilateral arrangements between the ~~Company~~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 ~~Company~~Firm to manage the risk of counterparty downgrades.

Credit Derivatives and Other Credit ~~Contracts.~~

Contracts

The ~~Company~~Firm enters into credit derivatives, principally through credit default swaps, 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 ~~Company’s~~Firm’s counterparties are banks, broker-dealers and insurance and other financial institutions.


		31

MORGAN STANLEY

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

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


	At March 31, 2016										At June 30, 2016
	Protection Sold					Protection Purchased					Protection Sold					Protection Purchased
	Notional		Fair Value (Asset)/Liability			Notional		Fair Value (Asset)/Liability			Notional		Fair Value (Asset)/Liability			Notional		Fair Value (Asset)/Liability
	(dollars in millions)										(dollars in millions)
Single name credit default swaps	$	402,123	$	1,055		$	387,777	$	(1,100	)	$	347,624	$	463		$	338,727	$	(453	)
Index and basket credit default swaps		214,815		(39	)		181,184		(193	)		176,009		726			143,734		(771	)
Tranched index and basket credit default swaps		68,229		(1,143	)		152,476		2,386			43,657		(793	)		123,399		2,188

Total	$	685,167	$	(127	)	$	721,437	$	1,093		$	567,290	$	396		$	605,860	$	964

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






Total
   $     689,519       $         785    $     728,928       $ (39 )


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

Total	$	689,519	$	785		$	728,928	$	(39	)


		29

~~MORGAN STANLEY~~

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

Credit Ratings of Reference Obligation and Maturities of Credit Protection ~~Sold.~~Sold


	At March 31, 2016													At June 30, 2016
	Maximum Potential Payout/Notional										Fair Value (Asset)/ Liability(1)			Maximum Potential Payout/Notional										Fair Value (Asset)/ Liability(1)
	Years to Maturity													Years to Maturity
	Less than 1		1-3		3-5		Over 5		Total					Less than 1		1-3		3-5		Over 5		Total
	(dollars in millions)													(dollars in millions)
Single name credit default swaps:
Single name credit default swaps(2):
Investment grade	$	87,072	$	123,998	$	57,920	$	13,162	$	282,152	$	(1,367	)	$	92,734	$	94,348	$	48,928	$	11,097	$	247,107	$	(1,079	)
Non-investment grade		41,992		52,389		22,907		2,683		119,971		2,422			42,370		38,348		18,381		1,418		100,517		1,542

Total	$	129,064	$	176,387	$	80,827	$	15,845	$	402,123	$	1,055		$	135,104	$	132,696	$	67,309	$	12,515	$	347,624	$	463

Index and basket credit default swaps:
Index and basket credit default swaps(2):
Investment grade	$	32,276	$	59,013	$	45,293	$	19,020	$	155,602	$	(1,802	)	$	24,110	$	39,948	$	42,887	$	4,060	$	111,005	$	(1,222	)
Non-investment grade		53,291		44,154		12,657		17,340		127,442		620			51,914		28,315		13,761		14,671		108,661		1,155

Total	$	85,567	$	103,167	$	57,950	$	36,360	$	283,044	$	(1,182	)	$	76,024	$	68,263	$	56,648	$	18,731	$	219,666	$	(67	)

Total credit default swaps sold	$	214,631	$	279,554	$	138,777	$	52,205	$	685,167	$	(127	)	$	211,128	$	200,959	$	123,957	$	31,246	$	567,290	$	396

Other credit contracts		27		44		5		323		399		(2	)		43		25		—		276		344		(17	)

Total credit derivatives and other credit contracts	$	214,658	$	279,598	$	138,782	$	52,528	$	685,566	$	(129	)	$	211,171	$	200,984	$	123,957	$	31,522	$	567,634	$	379

   At December 31, 2015
   Maximum Potential Payout/Notional    Fair Value
(Asset)/
Liability(1)
   Years to Maturity
   Less than 1    1-3    3-5    Over 5    Total
   (dollars in millions)
Single name credit default swaps:

Investment grade
   $ 84,543       $ 138,467       $ 63,754       $ 12,906       $ 299,670       $ (1,831 )
Non-investment grade
   38,054       56,261       24,432       2,389       121,136       3,811












Total
   $ 122,597       $ 194,728       $ 88,186       $ 15,295       $ 420,806       $ 1,980












Index and basket credit default swaps:

Investment grade
   $ 33,507       $ 59,403       $ 45,505       $ 5,327       $ 143,742       $ (1,977 )
Non-investment grade
   52,590       43,899       15,480       13,002       124,971       782












Total
   $ 86,097       $ 103,302       $ 60,985       $ 18,329       $ 268,713       $ (1,195 )












Total credit default swaps sold
   $ 208,694       $ 298,030       $ 149,171       $ 33,624       $ 689,519       $     785












Other credit contracts
   19       107       2       332       460       (24 )












Total credit derivatives and other credit contracts
   $   208,713       $   298,137       $   149,173       $   33,956       $   689,979       $ 761


		32

MORGAN STANLEY

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


	At December 31, 2015
	Maximum Potential Payout/Notional										Fair Value (Asset)/ Liability(1)
	Years to Maturity
	Less than 1		1-3		3-5		Over 5		Total
	(dollars in millions)
Single name credit default swaps(2):
Investment grade	$	84,543	$	138,467	$	63,754	$	12,906	$	299,670	$	(1,831)
Non-investment grade		38,054		56,261		24,432		2,389		121,136		3,811

Total	$	122,597	$	194,728	$	88,186	$	15,295	$	420,806	$	1,980

Index and basket credit default swaps(2):
Investment grade	$	33,507	$	59,403	$	45,505	$	5,327	$	143,742	$	(1,977)
Non-investment grade		52,590		43,899		15,480		13,002		124,971		782

Total	$	86,097	$	103,302	$	60,985	$	18,329	$	268,713	$	(1,195)

Total credit default swaps sold	$	208,694	$	298,030	$	149,171	$	33,624	$	689,519	$	785

Other credit contracts		19		107		2		332		460		(24)

Total credit derivatives and other credit contracts	$	208,713	$	298,137	$	149,173	$	33,956	$	689,979	$	761

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

(2)

In order to provide an indication of the current payment status or performance risk of the CDS, a breakdown of CDS based on the Firm’s internal credit ratings by investment grade and non-investment grade is provided. Internal credit ratings serve as the Credit Risk Management Department’s assessment of credit risk, and the basis for a comprehensive credit limits framework used to control credit risk. The Firm uses quantitative models and judgment to estimate the various risk parameters related to each obligor. Internal ratings procedures, methodologies, and models are all independently and formally governed, and models and methodologies are reviewed by a separate model risk management oversight function.

Purchased Credit Protection with Identical Underlying Reference ~~Obligations.~~Obligations

For single name and non-tranched index and basket credit default swaps, the ~~Company~~Firm has purchased protection with a notional amount of approximately ~~$566.4~~$480.1 billion and $577.7 billion at ~~March 31,~~June 30, 2016 and December 31, 2015, respectively, compared with a notional amount of approximately ~~$614.9~~

$521.9 billion and $619.5 billion (included in the ~~tables above)~~previous tables) at ~~March 31,~~June 30, 2016 and December 31, 2015, respectively, of credit protection sold with identical underlying reference obligations.


		30

~~MORGAN STANLEY~~

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

For further information on credit derivatives and other credit contracts, see Note 4 to the consolidated financial statements in the 2015 Form 10-K.


		33

MORGAN STANLEY

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

5.	Investment ~~Securities.~~Securities

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

AFS and HTM ~~Securities.~~Securities


	At March 31, 2016								At June 30, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in millions)								(dollars in millions)
AFS debt securities:
U.S. government and agency securities:
U.S. Treasury securities	$	31,808	$	151	$	1	$	31,958	$	29,923	$	213	$	8	$	30,128
U.S. agency securities(1)		21,662		127		35		21,754		23,221		208		22		23,407

Total U.S. government and agency securities		53,470		278		36		53,712		53,144		421		30		53,535
Corporate and other debt:
Commercial mortgage-backed securities:
Agency		2,154		4		38		2,120		2,139		5		31		2,113
Non-agency		2,164		23		14		2,173		2,159		36		10		2,185
Auto loan asset-backed securities		2,328		2		1		2,329		2,071		7		—		2,078
Corporate bonds		3,930		47		7		3,970		4,009		66		2		4,073
Collateralized loan obligations		502		—		10		492		502		—		7		495
FFELP student loan asset-backed securities(2)		3,489		—		127		3,362		3,345		—		105		3,240

Total corporate and other debt		14,567		76		197		14,446		14,225		114		155		14,184

Total AFS debt securities		68,037		354		233		68,158		67,369		535		185		67,719

AFS equity securities		15		—		6		9		15		—		8		7

Total AFS securities		68,052		354		239		68,167		67,384		535		193		67,726
HTM securities:
U.S. government securities:
U.S. Treasury securities		1,953		10		—		1,963		3,705		53		—		3,758
U.S. agency securities(1)		7,472		44		1		7,515		8,713		96		—		8,809

Total HTM securities		9,425		54		1		9,478		12,418		149		—		12,567

Total Investment securities	$	77,477	$	408	$	240	$	77,645	$	79,802	$	684	$	193	$	80,293


		3134

MORGAN STANLEY

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


	At December 31, 2015								At December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in millions)								(dollars in millions)
AFS debt securities:
U.S. government and agency securities:
U.S. Treasury securities	$	31,555	$	5	$	143	$	31,417	$	31,555	$	5	$	143	$	31,417
U.S. agency securities(1)		21,103		29		156		20,976		21,103		29		156		20,976

Total U.S. government and agency securities		52,658		34		299		52,393		52,658		34		299		52,393
Corporate and other debt:
Commercial mortgage-backed securities:
Agency		1,906		1		60		1,847		1,906		1		60		1,847
Non-agency		2,220		3		25		2,198		2,220		3		25		2,198
Auto loan asset-backed securities		2,556		—		9		2,547		2,556		—		9		2,547
Corporate bonds		3,780		5		30		3,755		3,780		5		30		3,755
Collateralized loan obligations		502		—		7		495		502		—		7		495
FFELP student loan asset-backed securities(2)		3,632		—		115		3,517		3,632		—		115		3,517

Total corporate and other debt		14,596		9		246		14,359		14,596		9		246		14,359

Total AFS debt securities		67,254		43		545		66,752		67,254		43		545		66,752

AFS equity securities		15		—		8		7		15		—		8		7

Total AFS securities		67,269		43		553		66,759		67,269		43		553		66,759
HTM securities:
U.S. government securities:
U.S. Treasury securities		1,001		—		3		998		1,001		—		3		998
U.S. agency securities(1)		4,223		1		34		4,190		4,223		1		34		4,190

Total HTM securities		5,224		1		37		5,188		5,224		1		37		5,188

Total Investment securities	$	72,493	$	44	$	590	$	71,947	$	72,493	$	44	$	590	$	71,947

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

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


		3235

MORGAN STANLEY

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

Investment Securities in an Unrealized Loss ~~Position.~~Position


	At March 31, 2016												At June 30, 2016
	Less than 12 Months				12 Months or Longer				Total				Less than 12 Months				12 Months or Longer				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(dollars in millions)												(dollars in millions)
AFS debt securities:
U.S. government and agency securities:
U.S. Treasury securities	$	1,812	$	1	$	—	$	—	$	1,812	$	1	$	3,028	$	8	$	—	$	—	$	3,028	$	8
U.S. agency securities		5,385		12		2,518		23		7,903		35		5,731		10		1,225		12		6,956		22

Total U.S. government and agency securities		7,197		13		2,518		23		9,715		36		8,759		18		1,225		12		9,984		30
Corporate and other debt:
Commercial mortgage-backed securities:
Agency		328		1		1,206		37		1,534		38		31		—		1,181		31		1,212		31
Non-agency		440		1		656		13		1,096		14		216		—		625		10		841		10
Auto loan asset-backed securities		1,003		1		227		—		1,230		1		83		—		204		—		287		—
Corporate bonds		461		3		388		4		849		7		172		1		175		1		347		2
Collateralized loan obligations		—		—		492		10		492		10		—		—		494		7		494		7
FFELP student loan asset-backed securities		1,678		51		1,661		76		3,339		127		583		12		2,637		93		3,220		105

Total corporate and other debt		3,910		57		4,630		140		8,540		197		1,085		13		5,316		142		6,401		155

Total AFS debt securities		11,107		70		7,148		163		18,255		233		9,844		31		6,541		154		16,385		185

AFS equity securities		10		6		—		—		10		6		7		8		—		—		7		8

Total AFS securities		11,117		76		7,148		163		18,265		239		9,851		39		6,541		154		16,392		193

HTM securities:
U.S. government and agency securities:
U.S. agency securities		777		1		393		—		1,170		1		72		—		—		—		72		—

Total HTM securities		777		1		393		—		1,170		1		72		—		—		—		72		—

Total Investment securities	$	11,894	$	77	$	7,541	$	163	$	19,435	$	240	$	9,923	$	39	$	6,541	$	154	$	16,464	$	193


		3336

MORGAN STANLEY

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


	At December 31, 2015												At December 31, 2015
	Less than 12 Months				12 Months or Longer				Total				Less than 12 Months				12 Months or Longer				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(dollars in millions)												(dollars in millions)
AFS debt securities:
U.S. government and agency securities:
U.S. Treasury securities	$	25,994	$	126	$	2,177	$	17	$	28,171	$	143	$	25,994	$	126	$	2,177	$	17	$	28,171	$	143
U.S. agency securities		14,242		135		639		21		14,881		156		14,242		135		639		21		14,881		156

Total U.S. government and agency securities		40,236		261		2,816		38		43,052		299		40,236		261		2,816		38		43,052		299
Corporate and other debt:
Commercial mortgage-backed securities:
Agency		1,185		44		422		16		1,607		60		1,185		44		422		16		1,607		60
Non-agency		1,479		21		305		4		1,784		25		1,479		21		305		4		1,784		25
Auto loan asset-backed securities		1,644		7		881		2		2,525		9		1,644		7		881		2		2,525		9
Corporate bonds		2,149		19		525		11		2,674		30		2,149		19		525		11		2,674		30
Collateralized loan obligations		352		5		143		2		495		7		352		5		143		2		495		7
FFELP student loan asset-backed securities		2,558		79		929		36		3,487		115		2,558		79		929		36		3,487		115

Total corporate and other debt		9,367		175		3,205		71		12,572		246		9,367		175		3,205		71		12,572		246

Total AFS debt securities		49,603		436		6,021		109		55,624		545		49,603		436		6,021		109		55,624		545

AFS equity securities		7		8		—		—		7		8		7		8		—		—		7		8

Total AFS securities		49,610		444		6,021		109		55,631		553		49,610		444		6,021		109		55,631		553

HTM securities:
U.S. government and agency securities:
U.S. Treasury securities		898		3		—		—		898		3		898		3		—		—		898		3
U.S. agency securities		3,677		34		—		—		3,677		34		3,677		34		—		—		3,677		34

Total HTM securities		4,575		37		—		—		4,575		37		4,575		37		—		—		4,575		37

Total Investment securities	$	54,185	$	481	$	6,021	$	109	$	60,206	$	590	$	54,185	$	481	$	6,021	$	109	$	60,206	$	590

As discussed in Note 2 to the consolidated financial statements in the 2015 Form 10-K, AFS and HTM securities with a current fair value less than their amortized cost are analyzed as part of the ~~Company’s~~Firm’s ongoing assessment of temporary versus other-than-temporarily impaired at the individual security level.

The ~~Company~~Firm believes there are no securities in an unrealized loss position that are other-than-temporarily-impaired at ~~March 31,~~June 30, 2016 and December 31, 2015 for the reasons discussed ~~below.~~

herein.

For AFS debt securities, the ~~Company~~Firm does not intend to sell the securities and is not likely to be required to sell the securities prior to recovery of amortized cost basis. For AFS and HTM debt securities, the securities have not experienced credit losses as the net unrealized losses reported in the previous table ~~above~~ are primarily due to higher interest rates since those securities were purchased. Additionally, the ~~Company~~Firm does not expect to experience a credit loss based on consideration of the relevant information (as discussed in Note 2

to the consolidated financial statements in the 2015 Form 10-K), including for U.S. government and agency securities, the existence of an explicit and implicit guarantee provided by the U.S. government. The risk of credit loss on securities in an unrealized loss position is considered minimal because all of the ~~Company’s~~Firm’s agency securities as well as asset-backed securities (“ABS”), commercial mortgage-backed securities (“CMBS”) and collateralized loan obligations (“CLOs”) are highly rated and because corporate bonds are all investment grade.

For AFS equity securities, the ~~Company~~Firm has the intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in market value.


		34

~~MORGAN STANLEY~~

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

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

   At March 31, 2016
   Amortized Cost        Fair Value        Annualized
Average Yield
   (dollars in millions)
AFS debt securities:

U.S. government and agency securities:

U.S. Treasury securities:

Due within 1 year
   $ 5,194       $ 5,198       0.7 %
After 1 year through 5 years
   25,757       25,885       1.0 %
After 5 years through 10 years
   857       875       1.8 %





Total
   31,808       31,958





U.S. agency securities:

After 1 year through 5 years
   2,774       2,775       0.5 %
After 5 years through 10 years
   1,534       1,560       1.9 %
After 10 years
   17,354       17,419       1.7 %





Total
   21,662       21,754





Total U.S. government and agency securities
   53,470       53,712       1.2 %





Corporate and other debt:

Commercial mortgage-backed securities:

Agency:

Due within 1 year
   102       102       0.8 %
After 1 year through 5 years
   461       461       0.9 %
After 5 years through 10 years
   545       546       1.3 %
After 10 years
   1,046       1,011       1.6 %





Total
   2,154       2,120





Non-agency:

After 10 years
   2,164       2,173       1.9 %





Total
   2,164       2,173





Auto loan asset-backed securities:

Due within 1 year
   24       24       0.8 %
After 1 year through 5 years
   2,146       2,146       1.2 %
After 5 years through 10 years
   158       159       1.5 %





Total
   2,328       2,329





Corporate bonds:

Due within 1 year
   534       535       1.2 %
After 1 year through 5 years
   2,660       2,678       1.7 %
After 5 years through 10 years
   736       757       2.7 %





Total
   3,930       3,970





Collateralized loan obligations:

After 5 years through 10 years
   502       492       1.5 %





Total
   502       492


		35

~~MORGAN STANLEY~~

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

   At March 31, 2016
   Amortized Cost        Fair Value        Annualized
Average Yield
   (dollars in millions)
FFELP student loan asset-backed securities:

After 1 year through 5 years
   72       72       0.6 %
After 5 years through 10 years
   756       737       0.9 %
After 10 years
   2,661       2,553       0.9 %





Total
   3,489       3,362





Total corporate and other debt
   14,567       14,446       1.4 %





Total AFS debt securities
   68,037       68,158       1.3 %





AFS equity securities
   15       9       — %





Total AFS securities
   68,052       68,167       1.3 %





HTM securities:

U.S. government securities:

U.S. Treasury securities:

Due within 1 year
   200       200       0.7 %
After 1 year through 5 years
   1,408       1,418       1.1 %
After 5 years through 10 years
   345       345       1.8 %





Total
   1,953       1,963





U.S. agency securities:

After 10 years
   7,472       7,515       2.1 %





Total
   7,472       7,515





Total HTM securities
   9,425       9,478       1.9 %





Total Investment securities
   $ 77,477       $ 77,645       1.3 %

See Note 12 for additional information on securities issued by VIEs, including U.S. agency mortgage-backed securities, non-agency CMBS, auto loan ABS, CLO and FFELP student loan ABS.


		37

MORGAN STANLEY

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

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


	At June 30, 2016
	Amortized Cost		Fair Value		Annualized Average Yield
	(dollars in millions)
AFS debt securities:
U.S. government and agency securities:
U.S. Treasury securities:
Due within 1 year	$	2,698	$	2,702		0.7%
After 1 year through 5 years		22,137		22,317		1.0%
After 5 years through 10 years		5,088		5,109		1.4%

Total		29,923		30,128

U.S. agency securities:
Due within 1 year		200		200		0.7%
After 1 year through 5 years		2,629		2,632		0.5%
After 5 years through 10 years		1,327		1,357		1.9%
After 10 years		19,065		19,218		1.6%

Total		23,221		23,407

Total U.S. government and agency securities		53,144		53,535		1.2%

Corporate and other debt:
Commercial mortgage-backed securities:
Agency:
Due within 1 year		73		74		0.8%
After 1 year through 5 years		404		406		1.0%
After 5 years through 10 years		639		641		1.3%
After 10 years		1,023		992		1.6%

Total		2,139		2,113

Non-agency:
After 10 years		2,159		2,185		1.9%

Total		2,159		2,185

Auto loan asset-backed securities:
Due within 1 year		4		4		0.9%
After 1 year through 5 years		1,902		1,909		1.3%
After 5 years through 10 years		165		165		1.6%

Total		2,071		2,078

Corporate bonds:
Due within 1 year		638		640		1.3%
After 1 year through 5 years		2,655		2,695		1.8%
After 5 years through 10 years		716		738		2.6%

Total		4,009		4,073

Collateralized loan obligations:
After 5 years through 10 years		502		495		1.5%

Total		502		495


		38

MORGAN STANLEY

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


	At June 30, 2016
	Amortized Cost		Fair Value		Annualized Average Yield
	(dollars in millions)
FFELP student loan asset-backed securities:
After 1 year through 5 years		59		59		0.6%
After 5 years through 10 years		922		897		0.9%
After 10 years		2,364		2,284		0.9%

Total		3,345		3,240

Total corporate and other debt		14,225		14,184		1.5%

Total AFS debt securities		67,369		67,719		1.3%

AFS equity securities		15		7		— %

Total AFS securities		67,384		67,726		1.3%

HTM securities:
U.S. government securities:
U.S. Treasury securities:
Due within 1 year		200		201		0.7%
After 1 year through 5 years		1,408		1,422		1.1%
After 5 years through 10 years		1,693		1,719		1.7%
After 10 years		404		416		2.5%

Total		3,705		3,758

U.S. agency securities:
After 10 years		8,713		8,809		2.0%

Total		8,713		8,809

Total HTM securities		12,418		12,567		1.8%

Total Investment securities	$	79,802	$	80,293		1.4%

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

   Three Months Ended
   March 31,
     2016     2015
   (dollars in millions)
Gross realized gains
   $ 14    $ 29
Gross realized (losses)
   (2 ) (4 )


Total
   $ 12    $ 25


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

Total	$	70	$	30	$	82	$	55

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


		39

MORGAN STANLEY

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

Collateralized ~~Transactions.~~Transactions

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


		36

~~MORGAN STANLEY~~

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

Offsetting of Certain Collateralized ~~Transactions.~~Transactions

   At March 31, 2016
   Gross
Amounts(1)    Amounts
Offset Net Amounts
Presented    Amounts
Not
Offset(2) Net Exposure
   (dollars in millions)
Assets

Securities purchased under agreements to resell
   $ 159,780       $ (61,006 ) $ 98,774       $ (96,204 ) $ 2,570
Securities borrowed
   146,262       (5,849 ) 140,413       (131,872 ) 8,541
Liabilities

Securities sold under agreements to repurchase
   $ 102,311       $ (61,006 ) $ 41,305       $ (34,928 ) $ 6,377
Securities loaned
   22,989       (5,849 ) 17,140       (16,849 ) 291


	At December 31, 2015												At June 30, 2016
	Gross Amounts(1)		Amounts Offset			Net Amounts Presented		Amounts Not Offset(2)			Net Exposure		Gross Amounts(1)		Amounts Offset		Net Amounts Presented		Amounts Not Offset(2)		Net Exposure
	(dollars in millions)												(dollars in millions)
Assets
Securities purchased under agreements to resell	$	135,714	$	(48,057	)	$	87,657	$	(84,752	)	$	2,905	$	162,813	$	(65,224)	$	97,589	$	(91,746)	$	5,843
Securities borrowed		147,445		(5,029	)		142,416		(134,250	)		8,166		138,436		(7,155)		131,281		(124,773)		6,508

Liabilities
Securities sold under agreements to repurchase	$	84,749	$	(48,057	)	$	36,692	$	(31,604	)	$	5,088	$	115,552	$	(65,224)	$	50,328	$	(42,541)	$	7,787
Securities loaned		24,387		(5,029	)		19,358		(18,881	)		477		24,396		(7,155)		17,241		(16,724)		517

													At December 31, 2015
													Gross Amounts(1)		Amounts Offset		Net Amounts Presented		Amounts Not Offset(2)		Net Exposure
													(dollars in millions)
Assets
Securities purchased under agreements to resell													$	135,714	$	(48,057)	$	87,657	$	(84,752)	$	2,905
Securities borrowed														147,445		(5,029)		142,416		(134,250)		8,166

Liabilities
Securities sold under agreements to repurchase													$	84,749	$	(48,057)	$	36,692	$	(31,604)	$	5,088
Securities loaned														24,387		(5,029)		19,358		(18,881)		477

(1)

Amounts include ~~$2.5~~transactions which are either not subject to master netting agreements or are subject to such agreements but the Firm has not determined the agreements to be legally enforceable as follows: $5.5 billion of Securities purchased under agreements to resell, ~~$4.4~~$3.7 billion of Securities borrowed, ~~$6.2~~$7.2 billion of Securities sold under agreements to repurchase and ~~$0.1~~$0.4 billion of Securities loaned at ~~March 31,~~June 30, 2016, and $2.6 billion of Securities purchased under agreements to resell, $3.0 billion of Securities borrowed and $4.9 billion of Securities sold under agreements to repurchase at December 31, ~~2015, which are either not subject to master netting agreements or are subject to such agreements but the Company has not determined the agreements to be legally enforceable.~~2015.

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

For information related to offsetting of derivatives, see Note 4.

~~Secured Financing Transactions—Maturities and Collateral Pledged.~~

~~Gross Secured Financing Balances by Remaining Contractual Maturity.~~

   At March 31, 2016
   Overnight
and Open    Less than
30 Days    30-90 Days    Over
90 Days    Total
   (dollars in millions)
Securities sold under agreements to repurchase(1)
   $ 36,220       $ 18,088       $ 20,689       $ 27,314       $ 102,311
Securities loaned(1)
   11,911       866       2,241       7,971       22,989










Gross amount of secured financing included in the above offsetting disclosure
   $ 48,131       $ 18,954       $ 22,930       $ 35,285       $ 125,300
Obligation to return securities received as collateral
   17,984       —       —       —       17,984










Total
   $ 66,115       $ 18,954       $ 22,930       $ 35,285       $ 143,284


		3740

MORGAN STANLEY

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

   At December 31, 2015
   Overnight
and Open    Less than
30 Days    30-90 Days    Over
90 Days    Total
   (dollars in millions)
Securities sold under agreements to repurchase(1)
   $ 20,410       $ 25,245       $ 13,221       $ 25,873       $ 84,749
Securities loaned(1)
   12,247       478       2,156       9,506       24,387










Gross amount of secured financing included in the above offsetting disclosure
   $ 32,657       $ 25,723       $ 15,377       $ 35,379       $ 109,136
Obligation to return securities received as collateral
   19,316       —       —       —       19,316










Total
   $ 51,973       $ 25,723       $ 15,377       $ 35,379       $ 128,452

Secured Financing Transactions—Maturities and Collateral Pledged

Gross Secured Financing Balances by Remaining Contractual Maturity


	At June 30, 2016
	Overnight and Open		Less than 30 Days		30-90 Days		Over 90 Days		Total
	(dollars in millions)
Securities sold under agreements to repurchase(1)	$	38,732	$	30,586	$	20,309	$	25,925	$	115,552
Securities loaned(1)		13,085		50		1,336		9,925		24,396

Gross amount of secured financing included in the offsetting disclosure	$	51,817	$	30,636	$	21,645	$	35,850	$	139,948
Obligation to return securities received as collateral		18,738		—		—		—		18,738

Total	$	70,555	$	30,636	$	21,645	$	35,850	$	158,686


	At December 31, 2015
	Overnight and Open		Less than 30 Days		30-90 Days		Over 90 Days		Total
	(dollars in millions)
Securities sold under agreements to repurchase(1)	$	20,410	$	25,245	$	13,221	$	25,873	$	84,749
Securities loaned(1)		12,247		478		2,156		9,506		24,387

Gross amount of secured financing included in the offsetting disclosure	$	32,657	$	25,723	$	15,377	$	35,379	$	109,136
Obligation to return securities received as collateral		19,316		—		—		—		19,316

Total	$	51,973	$	25,723	$	15,377	$	35,379	$	128,452

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


		41

MORGAN STANLEY

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

Gross Secured Financing Balances by Class of Collateral ~~Pledged.~~Pledged


	At March 31, 2016		At December 31, 2015		At June 30, 2016		At December 31, 2015
	(dollars in millions)				(dollars in millions)
Securities sold under agreements to repurchase(1)
U.S. government and agency securities	$	42,323	$	36,609	$	39,920	$	36,609
State and municipal securities		1,151		173		2,104		173
Other sovereign government obligations		31,765		24,820		42,329		24,820
Asset-backed securities		356		441		745		441
Corporate and other debt		6,283		4,020		8,638		4,020
Corporate equities		19,740		18,473		21,515		18,473
Other		693		213		301		213

Total securities sold under agreements to repurchase	$	102,311	$	84,749	$	115,552	$	84,749


Securities loaned(1)
U.S. government and agency securities	$	34	$	—	$	182	$	—
Other sovereign government obligations		5,907		7,336		7,454		7,336
Corporate and other debt		91		71		123		71
Corporate equities		16,935		16,972		16,602		16,972
Other		22		8		35		8

Total securities loaned	$	22,989	$	24,387	$	24,396	$	24,387

Gross amount of secured financing included in the above offsetting disclosure	$	125,300	$	109,136
Gross amount of secured financing included in the offsetting disclosure					$	139,948	$	109,136


Obligation to return securities received as collateral
Corporate and other debt	$	—	$	3		—		3
Corporate equities		17,981		19,313		18,737		19,313
Other		3		—		1		—

Total obligation to return securities received as collateral	$	17,984	$	19,316	$	18,738	$	19,316

Total	$	143,284	$	128,452	$	158,686	$	128,452

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

Trading Assets ~~Pledged.~~

Pledged

The ~~Company~~Firm pledges its trading assets to collateralize repurchase agreements and other secured financings. Pledged financial instruments that can be sold or repledged by the secured party are identified as Trading assets (pledged to various


		38

~~MORGAN STANLEY~~

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

parties) in the ~~condensed~~ consolidated balance ~~sheet.~~sheets. At ~~March 31,~~June 30, 2016 and December 31, 2015, the carrying value of Trading assets that have been loaned or pledged to counterparties, where those counterparties do not have the right to sell or repledge the collateral, were ~~$41.9~~$41.1 billion and $35.0 billion, respectively.

Collateral ~~Received.~~

Received

The ~~Company~~Firm receives collateral in the form of securities in connection with reverse repurchase agreements, securities borrowed and derivative transactions, customer margin loans and securities-based lending. In many cases, the ~~Company~~Firm is permitted to sell or repledge these securities held as collateral and use the securities to secure repurchase agreements, to enter into securities lending and derivative transactions or for delivery to counterparties to cover short

positions. The ~~Company~~Firm additionally receives securities as collateral in connection with certain securities-for-securities transactions in which it is the lender. In instances where the ~~Company~~Firm is permitted to sell or repledge these securities, it reports the fair value of the collateral received and the related obligation to return the collateral included in Trading assets and Trading liabilities, respectively, in its ~~condensed~~ consolidated balance ~~sheet.~~sheets. At ~~March 31,~~June 30, 2016 and December 31, 2015, the total fair value of financial instruments received as collateral where the ~~Company~~Firm is permitted to sell or repledge the securities was ~~$537.7~~$528.0 billion and $522.6 billion, respectively, and the fair value of the portion that had been sold or repledged was ~~$415.9~~$407.0 billion and $398.1 billion, respectively.

~~Other.~~

Other

The ~~Company~~Firm also engages in margin lending to clients that allows the client to borrow against the value of qualifying securities and is included within Customer and other receivables in the ~~condensed~~ consolidated balance ~~sheet.~~sheets. Under these agreements and transactions, the ~~Company~~Firm receives collateral,


		42

MORGAN STANLEY

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

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 ~~Company.~~Firm. The ~~Company~~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. At ~~March 31,~~June 30, 2016 and December 31, 2015,

the amounts related to margin lending were approximately ~~$24.6~~$23.2 billion and $25.3 billion, respectively.

For a further discussion of the ~~Company’s~~Firm’s margin lending activities, see Note 6 to the consolidated financial statements in the 2015 Form 10-K.

The ~~Company~~Firm has additional secured liabilities. For further discussion of other secured financings, see Note 10.

Cash and Securities Deposited with Clearing Organizations or ~~Segregated.~~Segregated


	At March 31, 2016		At December 31, 2015		At June 30, 2016		At December 31, 2015
	(dollars in millions)				(dollars in millions)
Securities(1)	$	18,909	$	14,390	$	23,710	$	14,390
Other assets—Cash deposited with clearing organizations or segregated under federal and other regulations or requirements		31,808		31,469		32,771		31,469

Total	$	50,717	$	45,859	$	56,481	$	45,859

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

7.	Loans and Allowance for Credit ~~Losses.~~Losses

~~Loans.~~

Loans

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

See Note 3 for further information regarding Loans and lending commitments held at fair value.


		39

~~MORGAN STANLEY~~

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

Loans Held for Investment and Held for ~~Sale.~~Sale


	At March 31, 2016								At December 31, 2015								At June 30, 2016						At December 31, 2015
Loans by Product Type	Loans Held for Investment			Loans Held for Sale		Total Loans(1)(2)			Loans Held for Investment			Loans Held for Sale		Total Loans(1)(2)			Loans Held for Investment		Loans Held for Sale		Total Loans(1)(2)		Loans Held for Investment		Loans Held for Sale		Total Loans(1)(2)
	(dollars in millions)																(dollars in millions)
Corporate loans	$	25,126		$	12,000	$	37,126		$	23,554		$	11,924	$	35,478		$	24,186	$	14,448	$	38,634	$	23,554	$	11,924	$	35,478
Consumer loans		22,174			—		22,174			21,528			—		21,528			23,337		—		23,337		21,528		—		21,528
Residential real estate loans		21,780			99		21,879			20,863			104		20,967			22,668		84		22,752		20,863		104		20,967
Wholesale real estate loans		6,816			1,137		7,953			6,839			1,172		8,011			7,415		1,350		8,765		6,839		1,172		8,011

Total loans, gross of allowance for loan losses		75,896			13,236		89,132			72,784			13,200		85,984			77,606		15,882		93,488		72,784		13,200		85,984
Allowance for loan losses		(330	)		—		(330	)		(225	)		—		(225	)		(323)		—		(323)		(225)		—		(225)

Total loans, net of allowance for loan losses	$	75,566		$	13,236	$	88,802		$	72,559		$	13,200	$	85,759		$	77,283	$	15,882	$	93,165	$	72,559	$	13,200	$	85,759

(1)	Amounts include loans that are made to non-U.S. borrowers of ~~$9,470~~$8,104 million and $9,789 million at ~~March 31,~~June 30, 2016 and December 31, 2015, respectively.

(2)	Loans at fixed interest rates and floating or adjustable interest rates were ~~$9,384~~$10,102 million and ~~$79,418~~$83,063 million, respectively, at ~~March 31,~~June 30, 2016 and $8,471 million and $77,288 million, respectively, at December 31, 2015.


		43

~~See Note 3 for further information regarding Loans and lending commitments held at fair value.~~

MORGAN STANLEY

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

Credit ~~Quality.~~Quality

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

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


	At March 31, 2016										At June 30, 2016
	Corporate		Consumer		Residential Real Estate		Wholesale Real Estate		Total		Corporate		Consumer		Residential Real Estate		Wholesale Real Estate		Total
	(dollars in millions)										(dollars in millions)
Pass	$	23,129	$	22,174	$	21,745	$	6,816	$	73,864	$	22,183	$	23,337	$	22,627	$	7,191	$	75,338
Special mention		437		—		—		—		437		539		—		—		224		763
Substandard		1,454		—		35		—		1,489		1,308		—		41		—		1,349
Doubtful		106		—		—		—		106		156		—		—		—		156
Loss		—		—		—		—		—		—		—		—		—		—

Total loans	$	25,126	$	22,174	$	21,780	$	6,816	$	75,896	$	24,186	$	23,337	$	22,668	$	7,415	$	77,606

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










Total loans
   $ 23,554       $ 21,528       $ 20,863       $ 6,839       $ 72,784


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

Total loans	$	23,554	$	21,528	$	20,863	$	6,839	$	72,784


		40

~~MORGAN STANLEY~~

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

Allowance for Credit Losses and Impaired ~~Loans.~~

Loans

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

~~Impaired and Past Due~~ Loans ~~Held for Investment.~~by Product Type


	At March 31, 2016						At December 31, 2015						At June 30, 2016						At December 31, 2015
Loans by Product Type	Corporate		Residential Real Estate		Total		Corporate		Residential Real Estate		Total
													Corporate		Residential Real Estate		Total		Corporate		Residential Real Estate		Total
	(dollars in millions)												(dollars in millions)
Impaired loans with allowance	$	245	$	—	$	245	$	39	$	—	$	39	$	244	$	—	$	244	$	39	$	—	$	39
Impaired loans without allowance(1)		382		18		400		89		17		106		338		30		368		89		17		106
Impaired loans unpaid principal balance(2)		636		20		656		130		19		149		593		32		625		130		19		149
Past due 90 days loans and on nonaccrual		1		18		19		1		21		22		1		20		21		1		21		22

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

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

   At March 31, 2016    At December 31, 2015
Loans by Region
   Americas    EMEA    Asia-
Pacific        Total        Americas    EMEA    Asia-
Pacific        Total
   (dollars in millions)
Impaired loans
   $ 572       $ 23       $ 50       $ 645       $ 108       $ 12       $ 25       $ 145
Past due 90 days loans and on nonaccrual
   19       —       —       19       22       —       —       22
Allowance for loan losses
   261       43       26       330       183       34       8       225

~~EMEA—Europe,~~	~~Middle East and Africa.~~
		44

MORGAN STANLEY

~~Troubled Debt Restructurings.~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

~~At March 31, 2016~~Loans by Region


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

EMEA—Europe, Middle East and ~~December 31, 2015, the impaired loans and lending commitments within held~~Africa

Allowance for investment include TDRs of $54.8 million and $44.0 million related to loans and $22.3 million and $34.8 million related to lending commitments, respectively, within corporate loans. At March 31, 2016 and December 31, 2015, the Company recorded an allowance of $8.5 million and $5.1 million, respectively, against these TDRs. These restructurings typically include modifications of interest rates, collateral requirements, other loan covenants, and payment extensions.Credit Losses on Lending Activities


	Corporate		Consumer		Residential Real Estate		Wholesale Real Estate		Total
	(dollars in millions)
Allowance for Loan Losses
Balance at December 31, 2015	$	166	$	5	$	17	$	37	$	225
Gross charge-offs		—		—		—		—		—
Gross recoveries		—		—		—		—		—

Net recoveries/(charge-offs)		—		—		—		—		—

Provision for (release of) loan losses(1)		116		(1)		1		12		128
Other(2)		(30)		—		—		—		(30)

Balance at June 30, 2016	$	252	$	4	$	18	$	49	$	323


Allowance for Loan Losses by Impairment Methodology
Inherent	$	147	$	4	$	18	$	49	$	218
Specific		105		—		—		—		105

Total allowance for loan losses at June 30, 2016	$	252	$	4	$	18	$	49	$	323


Loans Evaluated by Impairment Methodology(3)
Inherent	$	23,604	$	23,337	$	22,638	$	7,415	$	76,994
Specific		582		—		30		—		612

Total loans evaluated at June 30, 2016	$	24,186	$	23,337	$	22,668	$	7,415	$	77,606


Allowance for Lending Commitments
Balance at December 31, 2015	$	180	$	1	$	—	$	4	$	185
Provision for lending commitments(4)		1		—		—		2		3
Other		—		(1)		—		—		(1)

Balance at June 30, 2016	$	181	$	—	$	—	$	6	$	187


Allowance for Lending Commitments by Impairment Methodology
Inherent	$	173	$	—	$	—	$	6	$	179
Specific		8		—		—		—		8

Total allowance for lending commitments at June 30, 2016	$	181	$	—	$	—	$	6	$	187


Lending Commitments Evaluated by Impairment Methodology(3)
Inherent	$	63,120	$	5,264	$	327	$	496	$	69,207
Specific		64		—		—		—		64

Total lending commitments evaluated at June 30, 2016	$	63,184	$	5,264	$	327	$	496	$	69,271


		4145

MORGAN STANLEY

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

~~Allowance for Credit Losses on Lending Activities.~~

   Corporate Consumer Residential
Real Estate    Wholesale
Real Estate    Total
   (dollars in millions)
Allowance for Loan Losses.

Balance at December 31, 2015
   $ 166    $ 5    $ 17       $ 37       $ 225
Gross charge-offs
   —    —    —       —       —
Gross recoveries
   —    —    —       —       —






Net recoveries/(charge-offs)
   —    —    —       —       —






Provision for (release of) loan losses(1)
   109    (1 ) 2       2       112
Other(2)
   (7 ) —    —       —       (7 )






Balance at March 31, 2016
   $ 268    $ 4    $ 19       $ 39       $ 330






Allowance for Loan Losses by Impairment Methodology.

Inherent
   $ 160    $ 4    $ 19       $ 39       $ 222
Specific
   108    —    —       —       108






Total allowance for loan losses at March 31, 2016
   $ 268    $ 4    $ 19       $ 39       $ 330






Loans Evaluated by Impairment Methodology(3).

Inherent
   $ 24,499    $ 22,174    $ 21,762       $ 6,816       $ 75,251
Specific
   627    —    18       —       645






Total loans evaluated at March 31, 2016
   $ 25,126    $ 22,174    $ 21,780       $ 6,816       $ 75,896






Allowance for Lending Commitments.

Balance at December 31, 2015
   $ 180    $ 1    $ —       $ 4       $ 185
Provision for lending commitments(4)
   15    —    —       1       16






Balance at March 31, 2016
   $ 195    $ 1    $ —       $ 5       $ 201






Allowance for Lending Commitments by Impairment Methodology.

Inherent
   $ 184    $ 1    $ —       $ 5       $ 190
Specific
   11    —    —       —       11






Total allowance for lending commitments at March 31, 2016
   $ 195    $ 1    $ —       $ 5       $ 201






Lending Commitments Evaluated by Impairment Methodology(3).

Inherent
   $ 65,682    $ 5,066    $ 327       $ 380       $ 71,455
Specific
   136    —    —       —       136






Total lending commitments evaluated at March 31, 2016
   $ 65,818    $ 5,066    $ 327       $ 380       $ 71,591


		42

~~MORGAN STANLEY~~

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


	Corporate			Consumer		Residential Real Estate		Wholesale Real Estate		Total				Corporate		Consumer		Residential Real Estate		Wholesale Real Estate		Total
	(dollars in millions)													(dollars in millions)
Allowance for Loan Losses.
Allowance for Loan Losses
Balance at December 31, 2014	$	118		$	2	$	8	$	21	$	149			$	118	$	2	$	8	$	21	$	149
Gross charge-offs															—		—		(1)		—		(1)
Gross recoveries		1			—		—		—		1				1		—		—		—		1

Net recoveries/(charge-offs)		1			—		—		—		1				1		—		(1)		—		—

Provision for loan losses(1)		25			—		—		1		26				26		—		2		2		30
Other(2)		(11	)		—		—		—		(11	)			(10)		—		—		—		(10)

Balance at March 31, 2015	$	133		$	2	$	8	$	22	$	165
Balance at June 30, 2015														$	135	$	2	$	9	$	23	$	169

Allowance for Loan Losses by Impairment Methodology.

Allowance for Loan Losses by Impairment Methodology
Inherent	$	128		$	2	$	8	$	22	$	160			$	130	$	2	$	9	$	23	$	164
Specific		5			—		—		—		5				5		—		—		—		5

Total allowance for loan losses at March 31, 2015	$	133		$	2	$	8	$	22	$	165
Total allowance for loan losses at June 30, 2015														$	135	$	2	$	9	$	23	$	169

Loans Evaluated by Impairment Methodology(3).

Loans Evaluated by Impairment Methodology(3)
Inherent	$	21,096		$	17,372	$	16,833	$	5,265	$	60,566			$	22,479	$	19,464	$	18,214	$	6,388	$	66,545
Specific		25			—		20		—		45				21		—		27		—		48

Total loan evaluated at March 31, 2015	$	21,121		$	17,372	$	16,853	$	5,265	$	60,611
Total loans evaluated at June 30, 2015														$	22,500	$	19,464	$	18,241	$	6,388	$	66,593

Allowance for Lending Commitments.

Allowance for Lending Commitments
Balance at December 31, 2014	$	147		$	—	$	—	$	2	$	149			$	147	$	—	$	—	$	2	$	149
Provision for lending commitments(4)		36			—		—		1		37				6		—		—		2		8
Other		(1	)		—		—		—		(1	)

Balance at March 31, 2015	$	182		$	—	$	—	$	3	$	185
Balance at June 30, 2015														$	153	$	—	$	—	$	4	$	157

Allowance for Lending Commitments by Impairment Methodology.

Allowance for Lending Commitments by Impairment Methodology													Allowance for Lending Commitments by Impairment Methodology
Inherent	$	182		$	—	$	—	$	3	$	185			$	153	$	—	$	—	$	4	$	157
Specific		—			—		—		—		—				—		—		—		—		—

Total allowance for lending commitments at March 31, 2015	$	182		$	—	$	—	$	3	$	185
Total allowance for lending commitments at June 30, 2015														$	153	$	—	$	—	$	4	$	157

Lending Commitments Evaluated by Impairment Methodology(3).

Lending Commitments Evaluated by Impairment Methodology(3)													Lending Commitments Evaluated by Impairment Methodology(3)
Inherent	$	70,153		$	3,875	$	287	$	376	$	74,691			$	65,183	$	4,235	$	289	$	623	$	70,330
Specific		26			—		—		—		26				—		—		—		—		—

Total lending commitments evaluated at March 31, 2015	$	70,179		$	3,875	$	287	$	376	$	74,717
Total lending commitments evaluated at June 30, 2015														$	65,183	$	4,235	$	289	$	623	$	70,330

(1)	The ~~Company~~Firm recorded provisions of ~~$112~~$16 million and ~~$26~~$4 million for loan losses for the ~~quarters ended March 31, 2016~~current quarter and ~~2015,~~prior year quarter, respectively.

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

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

(4)	The ~~Company~~Firm recorded ~~provisions~~a release of ~~$16~~$13 million and ~~$37~~$29 million for commitments for the ~~quarters ended March 31, 2016~~current quarter and ~~2015,~~prior year quarter, respectively.

Troubled Debt Restructurings

At June 30, 2016 and December 31, 2015, the impaired loans and lending commitments within held for investment include TDRs of $137.2 million and $44.0 million related to loans and $18.7 million and $34.8 million related to lending commitments, respectively, within corporate loans. At June 30, 2016 and December 31, 2015, the Firm recorded an allowance of $12.1 million and $5.1 million, respectively, against these TDRs. These restructurings

typically include modifications of interest rates, collateral requirements, other loan covenants, and payment extensions.

Employee ~~Loans.~~

Loans

Employee loans are granted primarily in conjunction with a program established in the Wealth Management business segment to retain and recruit certain employees. These loans are recorded in Customer and other receivables in the ~~condensed~~


		46

MORGAN STANLEY

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

consolidated balance ~~sheet.~~sheets. These loans are full recourse, generally require periodic payments and have repayment terms ranging from 21 to 12 years. The ~~Company~~Firm establishes an allowance for loan amounts it does not consider recoverable, which is recorded in Compensation and benefits expense. At ~~March 31,~~June 30, 2016, the ~~Company~~Firm had ~~$4,708~~$4,877 million of employee loans, net of an allowance of approximately ~~$103~~$100 million. At December 31, 2015, the ~~Company~~Firm had $4,923 million of employee loans, net of an allowance of approximately $108 million.


		43

~~MORGAN STANLEY~~

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

8.	Equity Method ~~Investments.~~Investments

~~Overview.~~

Overview

The ~~Company~~Firm has investments accounted for under the equity method of accounting (see Note 1 to the consolidated financial statements in the 2015 Form 10-K) of ~~$3,257~~$3,235 million and $3,144 million at ~~March 31,~~June 30, 2016 and December 31, 2015, respectively, included in Other assets—Other investments in the ~~condensed~~ consolidated balance ~~sheet.~~sheets. Income (loss) from equity method investments was ~~$15~~$(14) million and ~~$38~~$45 million for the ~~quarters ended March 31, 2016~~current quarter and ~~2015,~~prior year quarter, respectively and $1 million and $83 million for the current year period and prior year period, respectively, and is included in Other revenues in the ~~condensed~~ consolidated statements of income. ~~Income from~~In addition, a loss of $35 million was recognized in the current quarter in connection with the sale of solar investments and impairments of the remaining unsold solar investments accounted for under the equity method.

Japanese Securities Joint Venture

Included in the equity method investments ~~for~~is the ~~quarters ended March 31, 2016 and 2015 was primarily related to the Company’s~~Firm’s 40% ~~stake~~voting interest (“40% interest”) in Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (“MUMSS”)~~, as described below.~~

~~Japanese Securities Joint Venture.~~

~~The Company holds a 40% voting interest (“40% interest”) and~~. Mitsubishi UFJ Financial Group, Inc. (“MUFG”) holds a 60% voting ~~interest in MUMSS.~~interest. The ~~Company~~Firm accounts for its equity

method investment in MUMSS within the Institutional Securities business segment. During the ~~quarters ended March 31, 2016~~current quarter and ~~2015,~~prior year quarter, the ~~Company~~Firm recorded income from its 40% interest in MUMSS of ~~$34~~$23 million and ~~$69~~$71 million, respectively, and income of $57 million and $140 million in the current year period and prior year period, respectively, within Other revenues in the ~~condensed~~ consolidated statements of income.

In June 2015, MUMSS paid a dividend of approximately $291 million, of which the Firm received approximately $116 million for its proportionate share of MUMSS.

9.	~~Deposits.~~Deposits

~~Deposits.~~Deposits


	At March 31, 2016(1)		At December 31, 2015(1)		At June 30, 2016(1)			At December 31, 2015(1)
	(dollars in millions)					(dollars in millions)
Savings and demand deposits	$	154,049	$	153,346	$		151,014	$	153,346
Time deposits(2)		3,542		2,688			1,679		2,688

Total(3)	$	157,591	$	156,034	$		152,693	$	156,034

____

(1)

Total deposits subject to the FDIC insurance at ~~March 31,~~June 30, 2016 and December 31, 2015 were ~~$114~~$110 billion and $113 billion, respectively. Of the total time deposits subject to the FDIC insurance at ~~March 31,~~June 30, 2016 and December 31, 2015, ~~$15~~$20 million and $14 million, respectively, met or exceeded the FDIC insurance limit.

(2)	Certain time deposit accounts are carried at fair value under the fair value option (see Note 3).

(3)	~~The Company’s deposits~~Deposits were primarily held in the U.S.

Interest bearing deposits at ~~March 31,~~June 30, 2016 included ~~$154,032~~$151,008 million of savings deposits payable upon demand and ~~$3,044~~$1,043 million of time deposits maturing in 2016, ~~$456~~$578 million of time deposits maturing in 2017 and ~~$10~~$11 million of time deposits maturing in 2018.

10.

Long-Term Borrowings and Other Secured ~~Financings.~~Financings

Long-Term ~~Borrowings.~~Borrowings

Components of Long-term ~~Borrowings.~~Borrowings

   At
March 31, 2016    At
December 31, 2015
   (dollars in millions)
Senior debt
   $ 149,060       $ 140,494
Subordinated debt
   10,895       10,404
Junior subordinated debentures
   2,849       2,870




Total
   $ 162,804       $ 153,768


		44

~~MORGAN STANLEY~~

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


	At June 30, 2016			At December 31, 2015
		(dollars in millions)
Senior debt	$		149,519	$	140,494
Subordinated debt			11,120		10,404
Junior subordinated debentures			2,853		2,870

Total	$		163,492	$	153,768

During the ~~quarter ended March 31, 2016~~current year period and ~~2015,~~prior year period, the ~~Company~~Firm issued notes with a principal amount of approximately ~~$13.2~~$20.6 billion and ~~$11.3~~$22.9 billion, respectively, and approximately ~~$8.0~~$15.9 billion and ~~$5.3~~$13.0 billion, respectively, in aggregate long-term borrowings matured or were retired.

The weighted average maturity of long-term borrowings, based upon stated maturity dates, was approximately ~~6.2~~6.3 years and 6.1 years at ~~March 31,~~June 30, 2016 and December 31, 2015, respectively.


		47

MORGAN STANLEY

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

Other Secured ~~Financings.~~

Financings

Other secured financings include the liabilities related to transfers of financial assets that are accounted for as financings rather than sales, consolidated VIEs where the ~~Company~~Firm is deemed to be the primary beneficiary, pledged commodities, certain equity-linked notes and other secured borrowings. These liabilities are generally payable from the cash flows of the related assets accounted for as Trading ~~assets. See~~assets.See Note 12 for further information on Other secured financings related to VIEs and securitization activities.

Components of Other Secured ~~Financings.~~Financings


	At March 31, 2016		At December 31, 2015		At June 30, 2016			At December 31, 2015
	(dollars in millions)					(dollars in millions)
Secured financings with original maturities greater than one year	$	7,551	$	7,629	$		8,159	$	7,629
Secured financings with original maturities one year or less		1,373		1,435			1,444		1,435
Failed sales(1)		392		400			298		400

Total	$	9,316	$	9,464	$		9,901	$	9,464

_________

(1)	For more information on failed sales, see Note 12.

11.

Commitments, Guarantees and ~~Contingencies.~~Contingencies

~~Commitments.~~

Commitments

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

~~Commitments.~~Commitments

   Years to Maturity at March 31, 2016
   Less than 1    1-3    3-5    Over 5    Total
   (dollars in millions)
Letters of credit and other financial guarantees obtained to satisfy collateral requirements
   $ 114       $ —       $ —       $ 106       $ 220
Investment activities
   550       107       16       302       975
Corporate lending commitments(1)
   17,000       24,758       47,655       4,315       93,728
Consumer lending commitments
   5,059       3       —       4       5,066
Residential real estate lending commitments
   35       71       83       241       430
Wholesale real estate lending commitments
   86       271       20       29       406
Forward-starting reverse repurchase agreements and securities borrowing agreements(2)(3)
   48,472       —       —       —       48,472
Underwriting commitments
   148       —       —       —       148










Total
   $ 71,464       $ 25,210       $ 47,774       $ 4,997       $ 149,445


		45

~~MORGAN STANLEY~~

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


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

Total	$	91,797	$	24,812	$	47,489	$	2,142	$	166,240

(1)	Due to the nature of the ~~Company’s~~Firm’s obligations under the commitments, these amounts include certain commitments participated to third parties of ~~$4.1~~$3.9 billion.

(2)	The ~~Company~~Firm enters into forward-starting reverse repurchase and securities borrowing agreements that primarily settle within three business days of the trade date, and of the total amount at ~~March 31,~~June 30, 2016, ~~$41.6~~$59.7 billion settled within three business days.

~~(3)~~

In addition, the Company has a contingent obligation to provide financing to a clearinghouse through which it clears certain transactions. The financing is required only upon the default of a clearinghouse member. The financing takes the form of a reverse repurchase facility, with a maximum amount of approximately $2.2 billion.

For a further description of these commitments, refer to Note 12 to the consolidated financial statements in the 2015 Form 10-K.

The ~~Company~~Firm sponsors several non-consolidated investment funds for third-party investors where it typically acts as general partner of, and investment advisor to, these funds and typically commits to invest a minority of the capital of such funds, with subscribing third-party investors contributing the majority. The ~~Company’s~~Firm’s employees, including its

senior officers as well as the ~~Company’s~~Firm’s Board of Directors, may participate on the same terms and conditions as other investors in certain of these funds that the ~~Company~~Firm forms primarily for client investment, except that the ~~Company~~Firm may waive or lower applicable fees and charges for its employees. The ~~Company~~Firm has contractual capital commitments, guarantees, lending facilities and counterparty arrangements with respect to these investment funds.


		48

~~Guarantees.~~

MORGAN STANLEY

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

Guarantees

Obligations Under Guarantee Arrangements at ~~March 31, 2016.~~June 30, 2016


	Maximum Potential Payout/Notional										Carrying Amount (Asset)/ Liability			Collateral/ Recourse		Maximum Potential Payout/Notional										Carrying Amount (Asset)/ Liability			Collateral/ Recourse
	Years to Maturity															Years to Maturity
	Less than 1		1-3		3-5		Over 5		Total							Less than 1		1-3		3-5		Over 5		Total
	(dollars in millions)															(dollars in millions)
Credit derivative contracts(1)	$	214,631	$	279,554	$	138,777	$	52,205	$	685,167	$	(127	)	$	—	$	211,128	$	200,959	$	123,957	$	31,246	$	567,290		$	396		$	—
Other credit contracts		27		44		5		323		399		(2	)		—		43		25		—		276		344		(17)			—
Non-credit derivative contracts(1)		1,186,070		699,114		298,000		533,692		2,716,876		74,940			—		1,087,106		638,791		290,370		540,112		2,556,379		81,420			—
Standby letters of credit and other financial guarantees issued(2)		872		1,262		1,139		5,884		9,157		(111	)		6,693		803		1,091		1,250		5,888		9,032		(123)			6,831
Market value guarantees		64		246		98		17		425		3			5		63		250		96		15		424		2			6
Liquidity facilities		3,154		—		—		—		3,154		(5	)		5,029		3,001		—		—		—		3,001		(5)			5,406
Whole loan sales guarantees		—		—		2		23,426		23,428		9			—		—		—		2		23,396		23,398		9			—
Securitization representations and warranties		—		—		—		63,896		63,896		103			—		—		—		—		62,180		62,180		103			—
General partner guarantees		31		36		48		311		426		74			—		35		39		53		308		435		85			—

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

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

The ~~Company~~Firm has obligations under certain guarantee arrangements, including contracts and indemnification agreements, that contingently require the ~~Company~~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 ~~Company~~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.


		46

~~MORGAN STANLEY—(Continued)~~

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

For more information on the nature of the obligation and related business activity for market value guarantees, liquidity facilities, whole loan sale guarantees and general partner guarantees related to ~~private equity and real estate~~certain investment management funds, as well as the other products in the ~~above~~previous table, please see Note 12 to the consolidated financial statements in the 2015Form 10-K.

Other Guarantees and ~~Indemnities.~~

Indemnities

In the normal course of business, the ~~Company~~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 trust preferred securities, indemnities and exchange/

clearinghouse member guarantees are described in Note 12 to the consolidated financial statements in the 2015 Form 10-K.

In addition, in the ordinary course of business, the ~~Company~~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 ~~Company’s~~Firm’s subsidiaries covered by these guarantees (including any related debt or trading obligations) are included in the ~~condensed~~ consolidated financial statements.

Trust Preferred Securities.

The ~~Company~~Firm has established Morgan Stanley Capital Trusts for the limited purpose of issuing trust preferred securities to third parties and lending such proceeds to the ~~Company~~Firm in exchange for junior subordinated debentures. The Morgan Stanley Capital Trusts are SPEs, and only the Parent provides a guarantee for the trust preferred securities. The ~~Company~~Firm has directly guaranteed the repayment of the trust preferred securities to the holders in accordance with the terms thereof. See Note 11 to the consolidated financial statements in the 2015 Form 10-K for details on the ~~Company’s~~Firm’s junior subordinated debentures. Additionally, see Note 20 for further information about subsequent events.


		49

MORGAN STANLEY

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

Finance ~~Subsidiary.~~Subsidiary

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

Contingencies

~~Contingencies.~~

Legal. In the normal course of business, the ~~Company~~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. Over the last several years, the level of litigation and investigatory activity (both formal and informal) by governmental and self-regulatory agencies has increased materially in the financial services industry. As a result, the ~~Company~~Firm expects that it may become the subject of increased claims for damages and other relief and, while the ~~Company~~Firm has identified below any individual proceedings where the ~~Company~~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 ~~Company~~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 consolidated financial statements and the ~~Company~~Firm can reasonably estimate the amount of that loss, the ~~Company~~Firm accrues the estimated loss by a charge to income. The ~~Company’s~~Firm’s future legal expenses may fluctuate from period to period, given the current environment regarding government investigations and private litigation affecting global financial services firms, including the ~~Company.~~


		47

~~MORGAN STANLEY—(Continued)~~

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

Firm.

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 ~~Company~~Firm cannot reasonably estimate such losses, particularly for proceedings and investigations where the factual record is being developed or contested or where plaintiffs or governmental 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 ~~Company~~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 ~~Company’s~~Firm’s consolidated 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 ~~Company,~~Firm, styledChina 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 credit default swap 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 ~~Company~~Firm misrepresented the risks of the STACK 2006-1 CDO to CDIB, and that the ~~Company~~Firm knew that the assets backing the CDO were of poor quality when it entered into the credit default swap with CDIB. The complaint seeks compensatory damages related to the approximately $228 million that CDIB alleges it has already lost under the credit default swap, 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 ~~Company’s~~Firm’s motion to dismiss the complaint. Based on currently available information, the ~~Company~~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 January 25, 2011, the ~~Company~~Firm was named as a defendant inThe Bank of New York Mellon Trust, National Association v. Morgan Stanley Mortgage Capital, Inc., a litigation pending in the United States District Court for the Southern District of New York (“SDNY”). The suit, brought by the trustee of a series of commercial mortgage pass-through certificates, alleges that the ~~Company~~Firm breached certain representations and warranties with respect to an $81 million commercial mortgage loan that was originated and transferred to the trust by the ~~Company.~~Firm. The complaint seeks, among other things, to have the ~~Company~~Firm repurchase the loan and pay additional monetary damages. On June 16, 2014, the court granted the ~~Company’s~~Firm’s supplemental motion for summary judgment, which was appealed by plaintiff. On April 27, 2016, the United States Court of Appeals for the Second


		50

MORGAN STANLEY

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

Circuit vacated the judgment of the SDNY and remanded the case to the SDNY for further proceedings consistent with its opinion. Based on currently available information, the ~~Company~~Firm believes it could incur a loss in this action of up to approximately $81 million, plus pre-judgment interest, fees and costs.

On August 7, 2012, U.S. Bank, in its capacity as trustee, filed a complaint on behalf of Morgan Stanley Mortgage Loan Trust 2006-4SL and Mortgage Pass-Through Certificates, Series 2006-4SL against the ~~Company.~~Firm. The matter is styledMorgan Stanley Mortgage Loan Trust 2006-4SL, et al. v. Morgan Stanley Mortgage Capital Inc. and is 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 $303 million, breached various representations and warranties. The complaint seeks, among other relief, rescission of the mortgage loan purchase agreement underlying the transaction, specific performance and unspecified damages and interest. On August 8, 2014, the court granted in part and denied in part the ~~Company’s~~Firm’s motion to dismiss. Based on currently available information, the ~~Company~~Firm believes that it could incur a loss in this action of up to approximately $149 million, the total original unpaid balance of the mortgage loans for which the


		48

~~MORGAN STANLEY—(Continued)~~

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

~~Company~~ 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 August 8, 2012, U.S. Bank, in its capacity as trustee, filed a complaint on behalf of Morgan Stanley Mortgage Loan Trust 2006-14SL, Mortgage Pass-Through Certificates, Series 2006-14SL, Morgan Stanley Mortgage Loan Trust 2007-4SL and Mortgage Pass-Through Certificates, Series 2007-4SL against the ~~Company~~Firm styledMorgan Stanley Mortgage Loan Trust 2006-14SL, et al. v. Morgan Stanley Mortgage Capital Holdings LLC, as successor in interest to Morgan Stanley MortgageCapital 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 trusts, which had original principal balances of approximately $354 million and $305 million respectively, breached various representations and warranties. The complaint seeks, among other relief, rescission of the mortgage loan purchase agreements underlying the transactions, specific performance and unspecified damages and interest. On August 16, 2013, the court granted in part and denied in part the ~~Company’s~~Firm’s motion to dismiss the complaint. Based on currently available information, the ~~Company~~Firm believes that it could incur a loss in this action of up to approximately $527 million, the total original unpaid balance of the mortgage loans for which the ~~Company~~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 28, 2012, U.S. Bank, in its capacity as trustee, filed a complaint on behalf of Morgan Stanley Mortgage Loan Trust 2006-13ARX against the ~~Company~~Firm styledMorgan Stanley Mortgage Loan Trust 2006-13ARX v. Morgan Stanley Mortgage Capital Holdings LLC, as successor in interest to Morgan Stanley Mortgage Capital Inc., pending in the Supreme Court of NY. The plaintiff filed an amended complaint on January 17, 2013, which 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 $609 million, breached various representations and warranties. The amended complaint seeks, among other relief, declaratory judgment relief, specific performance and unspecified damages and interest. By order dated September 30, 2014, the court granted in part and denied in part the ~~Company’s~~Firm’s motion to dismiss the amended complaint. On July 13, 2015, the plaintiff perfected its appeal from the court’s September 30, 2014 decision. Based on currently available information, the ~~Company~~Firm believes that it could incur a loss in this action of up to approximately $170 million, the total original unpaid balance of the mortgage loans for which the ~~Company~~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 January 10, 2013, U.S. Bank, in its capacity as trustee, filed a complaint on behalf of Morgan Stanley Mortgage Loan Trust 2006-10SL and Mortgage Pass-Through Certificates, Series 2006-10SL against the ~~Company~~Firm styledMorgan Stanley Mortgage Loan Trust 2006-10SL, et al. v. Morgan Stanley Mortgage Capital Holdings LLC, as successor in interest to Morgan Stanley Mortgage Capital 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 $300 million, breached various representations and warranties. The complaint seeks, among other relief, an order requiring the ~~Company~~Firm to comply with the loan breach remedy procedures in the transaction documents, unspecified damages, and interest. On August 8, 2014, the court granted in part and denied in part the ~~Company’s~~Firm’s motion to dismiss the complaint. Based on currently available information, the ~~Company~~Firm believes that it could incur a loss in this action of up to approximately $197 million, the total original unpaid balance of the mortgage loans for which the ~~Company~~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 May 3, 2013, plaintiffs inDeutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al.filed a complaint against the ~~Company,~~Firm, certain affiliates, and other defendants in the Supreme Court of NY. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiffs of certain


		51

MORGAN STANLEY

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

mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by the ~~Company~~Firm to plaintiff currently at issue in this action was approximately


		49

~~MORGAN STANLEY—(Continued)~~

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

~~$644~~ $644 million. The complaint alleges causes of action against the ~~Company~~Firm for common law fraud, fraudulent concealment, aiding and abetting fraud, negligent misrepresentation, and rescission and seeks, among other things, compensatory and punitive damages. On June 10, 2014, the court granted in part and denied in part the ~~Company’s~~Firm’s motion to dismiss the complaint. The ~~Company~~Firm perfected its appeal from that decision on June 12, 2015. At ~~March~~June 25, 2016, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately ~~$262~~$258 million, and the certificates had incurred actual losses of approximately $84 million. Based on currently available information, the ~~Company~~Firm believes it could incur a loss in this action up to the difference between the ~~$262~~$258 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the ~~Company,~~Firm, or upon sale, plus pre- and post-judgment interest, fees and costs. The ~~Company~~Firm may be entitled to be indemnified for some of these losses.

On July 8, 2013, U.S. Bank National Association, in its capacity as trustee, filed a complaint against the ~~Company~~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, as Successor-by-Merger to Morgan Stanley Mortgage Capital Inc. and Greenpoint Mortgage Funding, Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $650 million, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, unspecified damages and interest. On August 22, 2013, the ~~Company~~Firm filed a motion to dismiss the complaint, which was granted in part and denied in part on November 24, 2014. Based on currently available information, the ~~Company~~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 ~~Company~~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 December 30, 2013, Wilmington Trust Company, in its capacity as trustee, filed a complaint against the Firm. The matter is styledWilmington Trust Company v. Morgan

Stanley Mortgage Capital Holdings LLC et al. and is 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 $516 million, breached various representations and warranties. The complaint seeks, among other relief, unspecified damages, attorneys’ fees, costs and interest. On February 28, 2014, the defendants filed a motion to dismiss the complaint, which was granted in part and denied in part on June 14, 2016. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $152 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, plus attorney’s fees, costs and interest, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

On April 28, 2014, Deutsche Bank National Trust Company, in its capacity as trustee for Morgan Stanley Structured Trust I 2007-1, filed a complaint against the ~~Company~~Firm styledDeutsche Bank National Trust Company v. Morgan Stanley Mortgage Capital Holdings LLC, pending in the SDNY. 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 $735 million, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, unspecified compensatory and/or rescissory damages, interest and costs. On April 3, 2015, the court granted in part and denied in part the ~~Company’s~~Firm’s motion to dismiss the complaint. Based on currently available information, the ~~Company~~Firm believes that it could incur a loss in this action of up to approximately $292 million, the total original unpaid balance of the mortgage loans for which the ~~Company~~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 January 23, 2015, Deutsche Bank National Trust Company, in its capacity as trustee, filed a complaint against the ~~Company~~Firm styledDeutsche 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


		52

MORGAN STANLEY

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

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 October 20, 2015, the court granted in part and denied in part the ~~Company’s~~Firm’s motion to dismiss the complaint. Based on currently available

information, the ~~Company~~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 ~~Company~~Firm received repurchase demands from a certificate holder and a monoline insurer that the ~~Company~~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.

12.
		50

~~MORGAN STANLEY—(Continued)~~

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

~~12.~~

Variable Interest Entities and Securitization ~~Activities.~~Activities

Overview.

The ~~Company~~Firm is involved with various special purpose entities (“SPE”) in the normal course of business. In most cases, these entities are deemed to be VIEs. The ~~Company’s~~Firm’s transactions with VIEs primarily include securitizations, municipal tender option bond trusts, credit protection purchased through credit-linked notes, other structured financings, collateralized loan and debt obligations, equity-linked notes, partnership investments and ~~asset~~certain investment management ~~investment~~ funds. The ~~Company’s~~Firm’s continuing involvement in VIEs that it does not consolidate can include ownership of retained interests in ~~Company-sponsored~~Firm-sponsored transactions, interests purchased in the secondary market (both for ~~Company-sponsored~~Firm-sponsored transactions and transactions sponsored by third parties), and derivatives with securitization SPEs (primarily

interest rate derivatives in commercial mortgage and residential mortgage securitizations and credit derivatives in which the ~~Company~~Firm has purchased protection in synthetic CDOs).

For a further discussion on the ~~Company’s~~Firm’s VIEs, the determination and structure of VIEs and securitization activities, see Note 13 to the consolidated financial statements in the 2015 Form 10-K.

As a result of adopting the accounting update,Amendments to the Consolidation Analysis, ~~in the quarter ended March 31,~~on January 1, 2016, certain consolidated entities are now considered VIEs and are included in the balances at ~~March 31,~~June 30, 2016. See Note 2 for further information.

Consolidated ~~VIEs.~~VIEs

Assets and Liabilities by Type of ~~Activity.~~Activity


	At March 31, 2016				At December 31, 2015				At June 30, 2016				At December 31, 2015
	VIE Assets		VIE Liabilities		VIE Assets		VIE Liabilities		VIE Assets		VIE Liabilities		VIE Assets		VIE Liabilities
	(dollars in millions)								(dollars in millions)
Credit-linked notes	$	901	$	—	$	900	$	—	$	901	$	—	$	900	$	—
Other structured financings		791		13		787		13		924		240		787		13
Asset-backed securitizations(1)		651		417		668		423		319		191		668		423
Other(2)		1,069		27		245		—		931		29		245		—

Total	$	3,412	$	457	$	2,600	$	436	$	3,075	$	460	$	2,600	$	436

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

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


		5153

MORGAN ~~STANLEY—(Continued)~~STANLEY

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

Assets and Liabilities by Balance Sheet ~~Caption.~~Caption


		At March 31,		At December 31,
		2016		2015		At June 30, 2016		At December 31, 2015
		(dollars in millions)				(dollars in millions)
Assets	Assets
Cash and due from banks	Cash and due from banks	$	38	$	14	$	62	$	14
Trading assets, at fair value	Trading assets, at fair value		2,109		1,842		1,973		1,842
Customer and other receivables	Customer and other receivables		13		3		3		3
Goodwill	Goodwill		18		—		18		—
Intangible assets	Intangible assets		143		—		141		—
Other assets	Other assets		1,091		741		878		741

Total assets	Total assets	$	3,412	$	2,600	$	3,075	$	2,600

Liabilities	Liabilities
Other secured financings, at fair value	Other secured financings, at fair value	$	426	$	431	$	430	$	431
Other liabilities and accrued expenses	Other liabilities and accrued expenses		31		5		30		5

Total liabilities	Total liabilities	$	457	$	436	$	460	$	436

Consolidated VIE assets and liabilities are presented in the ~~above~~previous tables after intercompany eliminations. The assets owned by many consolidated VIEs cannot be removed unilaterally by the ~~Company~~Firm and are not generally available to the ~~Company.~~Firm. The related liabilities issued by many consolidated VIEs are non-recourse to the ~~Company.~~Firm. In certain other consolidated VIEs, the ~~Company~~Firm either has the unilateral right to remove assets or provide additional recourse through derivatives such as total return swaps, guarantees or other forms of involvement.

As part of the Institutional Securities business segment’s securitization and related activities, the ~~Company~~Firm has provided, or otherwise agreed to be responsible for, representations and warranties regarding certain assets transferred in securitization transactions sponsored by the ~~Company~~Firm (see Note 11).

In general, the ~~Company’s~~Firm’s exposure to loss in consolidated VIEs is limited to losses that would be absorbed on the VIE’s net assets recognized in its financial statements, net of amounts

absorbed by third-party variable interest holders. At ~~March 31,~~June 30, 2016 and December 31, 2015, noncontrolling interests in the ~~condensed~~ consolidated financial statements related to consolidated VIEs were ~~$159~~$257 million and $37 million, respectively. The ~~Company~~Firm also had additional maximum exposure to losses of approximately ~~$74~~$76 million and $72 million at ~~March 31,~~June 30, 2016 and December 31, 2015, respectively, primarily related to certain derivatives, commitments, guarantees and other forms of involvement.

Non-consolidated ~~VIEs.~~

VIEs

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


		5254

MORGAN STANLEY

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

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


	At March 31, 2016										At June 30, 2016
	Mortgage-and Asset-Backed Securitizations		Collateralized Debt Obligations		Municipal Tender Option Bonds		Other Structured Financings		Other		Mortgage- and Asset-Backed Securitizations		Collateralized Debt Obligations		Municipal Tender Option Bonds		Other Structured Financings		Other
	(dollars in millions)										(dollars in millions)
VIE assets that the Company does not consolidate (unpaid principal balance)	$	124,025	$	10,058	$	4,878	$	5,023	$	42,052
VIE assets that the Firm does not consolidate (unpaid principal balance)											$	115,088	$	6,825	$	4,999	$	4,081	$	39,281
Maximum exposure to loss:
Debt and equity interests	$	13,470	$	1,319	$	65	$	1,756	$	4,481	$	12,670	$	955	$	31	$	1,712	$	4,706
Derivative and other contracts		—		—		2,908		—		132		—		—		3,001		—		73
Commitments, guarantees and other		646		588		—		365		319		612		350		—		363		300

Total maximum exposure to loss	$	14,116	$	1,907	$	2,973	$	2,121	$	4,932	$	13,282	$	1,305	$	3,032	$	2,075	$	5,079


Carrying value of exposure to loss—Assets:
Debt and equity interests	$	13,470	$	1,319	$	65	$	1,370	$	4,481	$	12,670	$	955	$	3	$	1,324	$	4,706
Derivative and other contracts		—		—		5		—		41		—		—		5		—		27

Total carrying value of exposure to loss—Assets	$	13,470	$	1,319	$	70	$	1,370	$	4,522	$	12,670	$	955	$	8	$	1,324	$	4,733


Carrying value of exposure to loss—Liabilities:
Derivative and other contracts	$	—	$	—	$	—	$	—	$	49	$	—	$	—	$	—	$	—	$	31
Commitments, guarantees and other		—		—		—		3		11		—		—		—		2		10

Total carrying value of exposure to loss—Liabilities	$	—	$	—	$	—	$	3	$	60	$	—	$	—	$	—	$	2	$	41


	At December 31, 2015
	Mortgage-and Asset-Backed Securitizations		Collateralized Debt Obligations		Municipal Tender Option Bonds		Other Structured Financings		Other
	(dollars in millions)
VIE assets that the Company does not consolidate (unpaid principal balance)	$	126,872	$	8,805	$	4,654	$	2,201	$	20,775
Maximum exposure to loss:
Debt and equity interests	$	13,361	$	1,259	$	1	$	1,129	$	3,854
Derivative and other contracts		—		—		2,834		—		67
Commitments, guarantees and other		494		231		—		361		222

Total maximum exposure to loss	$	13,855	$	1,490	$	2,835	$	1,490	$	4,143

Carrying value of exposure to loss—Assets:
Debt and equity interests	$	13,361	$	1,259	$	1	$	685	$	3,854
Derivative and other contracts		—		—		5		—		13

Total carrying value of exposure to loss—Assets	$	13,361	$	1,259	$	6	$	685	$	3,867

Carrying value of exposure to loss—Liabilities:
Derivative and other contracts	$	—	$	—	$	—	$	—	$	15
Commitments, guarantees and other		—		—		—		3		—

Total carrying value of exposure to loss—Liabilities	$	—	$	—	$	—	$	3	$	15


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

Total maximum exposure to loss	$	13,855	$	1,490	$	2,835	$	1,490	$	4,143


Carrying value of exposure to loss—Assets:
Debt and equity interests	$	13,361	$	1,259	$	1	$	685	$	3,854
Derivative and other contracts		—		—		5		—		13

Total carrying value of exposure to loss—Assets	$	13,361	$	1,259	$	6	$	685	$	3,867


Carrying value of exposure to loss—Liabilities:
Derivative and other contracts	$	—	$	—	$	—	$	—	$	15
Commitments, guarantees and other		—		—		—		3		—

Total carrying value of exposure to loss—Liabilities	$	—	$	—	$	—	$	3	$	15


		5355

MORGAN STANLEY

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

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


									At June 30, 2016					At December 31, 2015
	At March 31, 2016				At December 31, 2015				Unpaid Principal Balance			Debt and Equity Interests		Unpaid Principal Balance		Debt and Equity Interests
	Unpaid Principal Balance		Debt and Equity Interests		Unpaid Principal Balance		Debt and Equity Interests					Debt and Equity Interests		Unpaid Principal Balance		Debt and Equity Interests
	(dollars in millions)								Unpaid Principal Balance		(dollars in millions)
Residential mortgages	$	16,359	$	1,006	$	13,787	$	1,012	$	3,708		$	410	$	13,787	$	1,012
Commercial mortgages		52,151		2,515		57,313		2,871		55,158			2,576		57,313		2,871
U.S. agency collateralized mortgage obligations		17,331		3,503		13,236		2,763		20,853			3,766		13,236		2,763
Other consumer or commercial loans		38,184		6,446		42,536		6,715		35,369			5,918		42,536		6,715

Total mortgage- and asset-backed securitization assets	$	124,025	$	13,470	$	126,872	$	13,361	$	115,088		$	12,670	$	126,872	$	13,361

The ~~Company’s~~Firm’s maximum exposure to loss often differs from the carrying value of the variable interests held by the ~~Company.~~Firm. The maximum exposure to loss is dependent on the nature of the ~~Company’s~~Firm’s variable interest in the VIEs and is limited to the notional amounts of certain liquidity facilities, other credit support, total return swaps, written put options, and the fair value of certain other derivatives and investments the ~~Company~~Firm has made in the VIEs. Liabilities issued by VIEs generally are non-recourse to the ~~Company.~~Firm. Where notional amounts are utilized in quantifying maximum exposure related to derivatives, such amounts do not reflect fair value write-downs already recorded by the ~~Company.~~

Firm.

The ~~Company’s~~Firm’s maximum exposure to loss does not include the offsetting benefit of any financial instruments that the ~~Company~~Firm may utilize to hedge these risks associated with its variable interests. In addition, the ~~Company’s~~Firm’s maximum exposure to loss is not reduced by 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.

Securitization transactions generally involve VIEs. Primarily as a result of its secondary market-making activities, the ~~Company~~Firm owned additional VIE assets mainly issued by ~~securitization~~securi-

tization SPEs for which the maximum exposure to loss is less than specific thresholds. These additional assets totaled ~~$12.6~~$12.7 billion and $12.9 billion at ~~March 31,~~June 30, 2016 and December 31, 2015, respectively. These assets were either retained in connection with transfers of assets by the ~~Company,~~Firm, acquired in connection with secondary market-making activities or held as AFS securities in its Investment securities portfolio (see Note 5), or held as investments in funds. At ~~March 31,~~June 30, 2016 and December 31, 2015, these assets consisted of securities backed by residential mortgage loans, commercial mortgage loans or other consumer loans, such as credit card receivables, automobile loans and student loans, CDOs or CLOs, and investment funds. The ~~Company’s~~Firm’s primary risk exposure is to the securities issued by the SPE owned by the ~~Company,~~Firm, with the risk highest on the most subordinate class of beneficial interests. These assets generally are included in Trading assets—Corporate and other debt, Trading assets—Investments or AFS securities within its Investment securities portfolio and are measured at fair value (see Note 3). The ~~Company~~Firm does not provide additional support in these transactions through contractual facilities, such as liquidity facilities, guarantees or similar derivatives. The ~~Company’s~~Firm’s maximum exposure to loss generally equals the fair value of the assets owned.


		5456

MORGAN STANLEY

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

Transfers of Assets with Continuing Involvement.

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


									At June 30, 2016
	At March 31, 2016								Residential Mortgage Loans			Commercial Mortgage Loans		U.S. Agency Collateralized Mortgage Obligations		Credit- Linked Notes and Other(1)
	Residential Mortgage Loans		Commercial Mortgage Loans		U.S. Agency Collateralized Mortgage Obligations		Credit- Linked Notes and Other(1)					Commercial Mortgage Loans		U.S. Agency Collateralized Mortgage Obligations		Credit- Linked Notes and Other(1)
	(dollars in millions)								Residential Mortgage Loans		(dollars in millions)
SPE assets (unpaid principal balance)(2)	$	21,705	$	55,403	$	14,631	$	12,061	$	21,239		$	51,025	$	11,116	$	11,668
Retained interests (fair value):
Investment grade	$	—	$	85	$	539	$	—	$	—		$	43	$	755	$	—
Non-investment grade		82		96		—		1,137		54			64		—		974

Total retained interests (fair value)	$	82	$	181	$	539	$	1,137	$	54		$	107	$	755	$	974


Interests purchased in the secondary market (fair value):
Investment grade	$	—	$	34	$	63	$	—	$	—		$	32	$	142	$	—
Non-investment grade		47		52		—		5		53			47		—		—

Total interests purchased in the secondary market (fair value)	$	47	$	86	$	63	$	5	$	53		$	79	$	142	$	—

Derivative assets (fair value)	$	—	$	316	$	—	$	231	$	—		$	291	$	—	$	206
Derivative liabilities (fair value)		—		—		—		465		—			—		—		449


									At December 31, 2015
	At December 31, 2015								Residential Mortgage Loans			Commercial Mortgage Loans		U.S. Agency Collateralized Mortgage Obligations		Credit- Linked Notes and Other(1)
	Residential Mortgage Loans		Commercial Mortgage Loans		U.S. Agency Collateralized Mortgage Obligations		Credit- Linked Notes and Other(1)					Commercial Mortgage Loans		U.S. Agency Collateralized Mortgage Obligations		Credit- Linked Notes and Other(1)
	(dollars in millions)								Residential Mortgage Loans		(dollars in millions)
SPE assets (unpaid principal balance)(2)	$	22,440	$	72,760	$	17,978	$	12,235	$	22,440		$	72,760	$	17,978	$	12,235
Retained interests (fair value):
Investment grade	$	—	$	238	$	649	$	—	$	—		$	238	$	649	$	—
Non-investment grade		160		63		—		1,136		160			63		—		1,136

Total retained interests (fair value)	$	160	$	301	$	649	$	1,136	$	160		$	301	$	649	$	1,136


Interests purchased in the secondary market (fair value):
Investment grade	$	—	$	88	$	99	$	—	$	—		$	88	$	99	$	—
Non-investment grade		60		63		—		10		60			63		—		10

Total interests purchased in the secondary market (fair value)	$	60	$	151	$	99	$	10	$	60		$	151	$	99	$	10

Derivative assets (fair value)	$	—	$	343	$	—	$	151	$	—		$	343	$	—	$	151
Derivative liabilities (fair value)		—		—		—		449		—			—		—		449

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

(2)	Amounts include assets transferred by unrelated transferors.


		5557

MORGAN STANLEY

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


	At March 31, 2016								At June 30, 2016
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(dollars in millions)								(dollars in millions)
Retained interests (fair value):
Investment grade	$	—	$	624	$	—	$	624	$	—	$	798	$	—	$	798
Non-investment grade		—		16		1,299		1,315		—		15		1,077		1,092

Total retained interests (fair value)	$	—	$	640	$	1,299	$	1,939	$	—	$	813	$	1,077	$	1,890


Interests purchased in the secondary market (fair value):
Investment grade	$	—	$	97	$	—	$	97	$	—	$	174	$	—	$	174
Non-investment grade		—		84		20		104		—		85		15		100

Total interests purchased in the secondary market (fair value)	$	—	$	181	$	20	$	201	$	—	$	259	$	15	$	274


Derivative assets (fair value)	$	—	$	508	$	39	$	547	$	—	$	482	$	15	$	497
Derivative liabilities (fair value)		—		76		389		465		—		102		347		449


	At December 31, 2015
	Level 1		Level 2		Level 3		Total
	(dollars in millions)
Retained interests (fair value):
Investment grade	$	—	$	886	$	1	$	887
Non-investment grade		—		17		1,342		1,359

Total retained interests (fair value)	$	—	$	903	$	1,343	$	2,246


Interests purchased in the secondary market (fair value):
Investment grade	$	—	$	187	$	—	$	187
Non-investment grade		—		112		21		133

Total interests purchased in the secondary market (fair value)	$	—	$	299	$	21	$	320


Derivative assets (fair value)	$	—	$	466	$	28	$	494
Derivative liabilities (fair value)		—		110		339		449

Transferred assets are carried at fair value prior to securitization, and any changes in fair value are recognized in the ~~condensed~~ consolidated statements of income. The ~~Company~~Firm may act as underwriter of the beneficial interests issued by these securitization vehicles. Investment banking underwriting net revenues are recognized in connection with these

transactions. The ~~Company~~Firm may retain interests in the securitized financial assets as one or more tranches of the securitization. These retained interests are included in the ~~condensed~~ consolidated balance ~~sheet~~sheets at fair value. Any changes in the fair value of such retained interests are recognized in the ~~condensed~~ consolidated statements of income.

Proceeds from New Securitization Transactions and Retained Interests in Securitization ~~Transactions.~~Transactions


	Three Months Ended				Three Months Ended June 30,				Six Months Ended June 30,
	March 31,				2016		2015		2016		2015
	2016		2015		(dollars in millions)
	(dollars in millions)
Proceeds received from new securitization transactions	$	2,713	$	4,891	$	4,163	$	6,273	$	6,876	$	11,164
Proceeds from retained interests in securitization transactions		631		948		502		658		1,133		1,606

Net gains on sale of assets in securitization transactions at the time of the sale were not material in the ~~first~~current quarter, ~~of 2016~~current year period, prior year quarter and ~~2015.~~

prior year period. The ~~Company~~Firm has provided, or otherwise agreed to be

responsible for representations and warranties regarding certain assets transferred in securitization transactions sponsored by the ~~Company~~Firm (see Note 11).


		5658

MORGAN STANLEY

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

Proceeds from Sales to CLO Entities Sponsored by Non-Affiliates.

   Three Months Ended
   March 31,
         2016                2015
   (dollars in millions)
Proceeds from sale of corporate loans sold to those SPEs
   $     31       $     345


	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
	(dollars in millions)

Proceeds from sale of corporate loans sold to those SPEs	$	—	$	621	$	31	$	966

Net gains on sale of corporate loans to CLO transactions at the time of sale were not material in the ~~first~~current quarter, ~~of 2016~~current year period, prior year quarter and ~~2015.~~

prior year period.

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


	At March 31, 2016		At December 31, 2015		At June 30, 2016		At December 31, 2015
	(dollars in millions)				(dollars in millions)
Carrying value of assets derecognized at the time of sale and gross cash proceeds	$	9,020	$	7,878	$	9,524	$	7,878
Fair value of assets sold		9,248		7,935		9,692		7,935
Fair value of derivative assets recognized in the condensed consolidated balance sheet		235		97
Fair value of derivative liabilities recognized in the condensed consolidated balance sheet		8		40
Fair value of derivative assets recognized in the consolidated balance sheets						218		97
Fair value of derivative liabilities recognized in the consolidated balance sheets						50		40

Failed ~~Sales.~~

Sales

For transfers that fail to meet the accounting criteria for a sale, the ~~Company~~Firm continues to recognize the assets in Trading assets at fair value, and the ~~Company~~Firm recognizes the associated liabilities in Other secured financings at fair value in the ~~condensed~~ consolidated balance ~~sheet~~sheets (see Note 10).

The assets transferred to unconsolidated VIEs in transactions accounted for as failed sales cannot be removed unilaterally by the ~~Company~~Firm and are not generally available to the ~~Company.~~Firm. The related liabilities are also non-recourse to the ~~Company.~~

Firm. In certain other failed sale transactions, the ~~Company~~Firm has the right to remove assets or provide additional recourse through derivatives such as total return swaps, guarantees or other forms of involvement.

Carrying Value of Assets and Liabilities Related to Failed ~~Sales.~~Sales

At March 31, 2016    At December 31, 2015
    Assets            Liabilities            Assets            Liabilities
(dollars in millions)
Failed sales
$             392       $             392       $             400       $             400


	At June 30, 2016				At December 31, 2015
	Assets		Liabilities		Assets		Liabilities
	(dollars in millions)
Failed sales	$	298	$	298	$	400	$	400

13. Regulatory

~~Regulatory Requirements.~~Requirements

Regulatory Capital ~~Framework.~~

Framework

For a discussion of the ~~Company’s~~Firm’s regulatory capital framework, see Note 14 to the consolidated financial statements in the 2015Form 10-K.

Risk-Based Capital ~~Requirement.~~

Requirement

The ~~Company~~Firm is required to maintain minimum risk-based and leverage capital ratios under the regulatory capital requirements. The ~~Company’s~~Firm’s binding risk-based capital ratios for regulatory purposes are the lower of the capital ratios


		57

~~MORGAN STANLEY~~

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

computed under the (i) standardized approaches for calculating credit risk-weighted assets (“RWAs”) and market risk RWAs (the “Standardized Approach”); and (ii) applicable advanced approaches for calculating credit risk, market risk and operational risk RWAs (the “Advanced Approach”).

In addition to the minimum risk-based capital ratio requirements, on a fully phased-in basis by 2019, the ~~Company~~Firm will be subject to:

A greater than 2.5% Common Equity Tier 1 capital conservation buffer;

The Common Equity Tier 1 global systemically important bank (“G-SIB”) capital surcharge, ~~which the Federal Reserve calculated as~~currently at 3% ~~for the Company in July 2015;~~; and

Up to a 2.5% Common Equity Tier 1 countercyclical capital buffer, currently set by banking regulators at zero (collectively, the “buffers”).

In 2016, the phase-in amount for each of the buffers is 25% of the fully phased-in buffer requirement. Failure to maintain the buffers will result in restrictions on the ~~Company’s~~ Firm’s


		59

MORGAN STANLEY

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

ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers.

The methods for calculating each of the ~~Company’s~~Firm’s risk-based capital ratios will change through January 1, 2022 as aspects of the capital rules are phased in. These changes may result in differences in the ~~Company’s~~Firm’s reported capital

ratios from one reporting period to the next that are independent of changes to its capital base, asset composition, off-balance sheet exposures or risk profile.

For a further discussion of the ~~Company’s~~Firm’s calculation of risk-based capital ratios, see Note 14 to the consolidated financial statements in the 2015 Form 10-K.

The ~~Company’s~~Firm’s Regulatory Capital and Capital ~~Ratios.~~Ratios

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

Regulatory Capital Measures and Minimum Regulatory Capital ~~Ratios.~~Ratios


	At March 31, 2016						At December 31, 2015						At June 30, 2016									At December 31, 2015
	Amount		Ratio		Minimum Ratio(1)		Amount		Ratio		Minimum Ratio(1)		Amount			Ratio			Minimum Ratio(1)			Amount			Ratio			Minimum Ratio(1)
	(dollars in millions)												(dollars in millions)
Regulatory capital and capital ratios:
Common Equity Tier 1 capital	$	58,514		15.6%		5.9%	$	59,409		15.5%		4.5%		$	59,796		16.8	%		5.9	%		$	59,409		15.5	%		4.5	%
Tier 1 capital		65,198		17.4%		7.4%		66,722		17.4%		6.0%			66,782		18.8	%		7.4	%			66,722		17.4	%		6.0	%
Total capital		77,969		20.9%		9.4%		79,403		20.7%		8.0%			79,830		22.4	%		9.4	%			79,403		20.7	%		8.0	%
Tier 1 leverage(2)		—		8.2%		4.0%		—		8.3%		4.0%			—		8.3	%		4.0	%			—		8.3	%		4.0	%

Assets:
Total RWAs	$	373,925		N/A		N/A	$	384,162		N/A		N/A		$	355,982		N/	A		N/	A		$	384,162		N/	A		N/	A
Adjusted average assets(3)		792,268		N/A		N/A		803,574		N/A		N/A			804,511		N/	A		N/	A			803,574		N/	A		N/	A

N/A—Not ~~Applicable.~~Applicable

(1)

Percentages represent minimum regulatory capital ratios under the transitional rules. These ratios include the following assumptions: (i) G-SIB capital surcharge for the Company remains at 3.0% as calculated by the Federal Reserve in July 2015; and (ii) countercyclical capital buffer remains at zero.

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

(3)

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


		58

~~MORGAN STANLEY~~

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

U.S. Bank Subsidiaries’ Regulatory Capital and Capital ~~Ratios.~~Ratios

Morgan Stanley Bank, N.A. (“MSBNA”) and Morgan Stanley Private Bank, National Association (“MSPBNA”) (collectively, “U.S. Bank Subsidiaries”) are subject to similar regulatory capital requirements as the ~~Company.~~Firm. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on the ~~Company’s~~Firm’s U.S. Bank Subsidiaries’ financial statements. Under

capital adequacy guidelines and the regulatory framework for prompt corrective action, each of the ~~Company’s~~Firm’s U.S. Bank Subsidiaries must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.

At ~~March 31,~~June 30, 2016 and December 31, 2015, the ~~Company’s~~Firm’s U.S. Bank Subsidiaries’ binding ratios are based on the Standardized Approach transitional rules.

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


	Morgan Stanley Bank, N.A.																Morgan Stanley Bank, N.A.
	At March 31, 2016								At December 31, 2015								At June 30, 2016						At December 31, 2015
	Amount		Ratio			Required Capital Ratio(1)			Amount		Ratio			Required Capital Ratio(1)			Amount		Ratio		Required Capital Ratio(1)		Amount		Ratio		Required Capital Ratio(1)
	(dollars in millions)																(dollars in millions)
Common Equity Tier 1 capital	$	13,862		15.5	%		6.5	%	$	13,333		15.1	%		6.5	%	$	14,523		16.8%		6.5%	$	13,333		15.1%		6.5%
Tier 1 capital		13,862		15.5	%		8.0	%		13,333		15.1	%		8.0	%		14,523		16.8%		8.0%		13,333		15.1%		8.0%
Total capital		15,670		17.5	%		10.0	%		15,097		17.1	%		10.0	%		16,321		18.9%		10.0%		15,097		17.1%		10.0%
Tier 1 leverage		13,862		10.1	%		5.0	%		13,333		10.2	%		5.0	%		14,523		10.9%		5.0%		13,333		10.2%		5.0%

   Morgan Stanley Private Bank, National Association
   At March 31, 2016 At December 31, 2015
         Amount               Ratio      Required
Capital
     Ratio(1)          Amount              Ratio       Required
Capital
     Ratio(1)
   (dollars in millions)
Common Equity Tier 1 capital
   $       4,660       27.0 % 6.5 % $         4,197       26.5 % 6.5 %
Tier 1 capital
   4,660       27.0 % 8.0 % 4,197       26.5 % 8.0 %
Total capital
   4,692       27.2 % 10.0 % 4,225       26.7 % 10.0 %
Tier 1 leverage
   4,660       10.9 % 5.0 % 4,197       10.5 % 5.0 %


		60

MORGAN STANLEY

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


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

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

Under regulatory capital requirements adopted by the U.S. federal banking agencies, U.S. depository institutions, in order to be considered well-capitalized, must maintain certain minimum capital ratios. Each U.S. depository institution subsidiary of the ~~Company~~Firm must be well-capitalized in order for the ~~Company~~Firm to continue to qualify as a financial holding company and to continue to engage in the broadest range of financial activities permitted for financial holding companies. At ~~March 31,~~June 30, 2016 and December 31, 2015, the ~~Company’s~~Firm’s U.S. Bank Subsidiaries maintained capital at levels sufficiently in excess of the universally mandated well-capitalized requirements to address any additional capital needs and requirements identified by the U.S. federal banking regulators.

Broker-Dealer Regulatory Capital ~~Requirements.~~

Requirements

Morgan Stanley & Co. LLC (“MS&Co.”) is a registered broker-dealer and registered futures commission merchant and, accordingly, is subject to the minimum net capital requirements of the U.S. Securities and Exchange Commission (“SEC”) and the U.S. Commodity Futures Trading Commission (“CFTC”). MS&Co. has consistently operated with capital in excess of its regulatory capital requirements. MS&Co.’s net capital totaled ~~$10,411~~$10,353 million and $10,254 million at ~~March 31,~~June 30, 2016 and December 31, 2015, respectively, which exceeded the amount required by ~~$8,483~~$8,397 million and $8,458 million, respectively. MS&Co. is required to hold tentative net capital in excess of $1 billion and net capital in excess of $500 million


		59

~~MORGAN STANLEY~~

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

in accordance with the market and credit risk standards of Appendix E of SEC Rule 15c3-1. In addition, MS&Co. is required to notify the SEC in the event that its tentative net capital is less than $5 billion. At ~~March 31,~~June 30, 2016 and December 31, 2015, MS&Co. had tentative net capital in excess of the minimum and the notification requirements.

Morgan Stanley Smith Barney LLC (“MSSB LLC”) is a registered broker-dealer and introducing broker for the futures business and, accordingly, is subject to the minimum net capital requirements of the SEC and the CFTC. MSSB LLC has consistently operated with capital in excess of its regulatory capital requirements. MSSB LLC’s net capital totaled ~~$3,645~~$3,752 million and $3,613 million at ~~March 31,~~

June 30, 2016 and December 31, 2015, respectively, which exceeded the amount required by ~~$3,491~~$3,595 million and $3,459 million, respectively.

Morgan Stanley & Co. International plc (“MSIP”), a London-based broker-dealer subsidiary, is subject to the capital requirements of the Prudential Regulation Authority, and Morgan Stanley MUFG Securities Co., Ltd. (“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.

Other Regulated ~~Subsidiaries.~~

Subsidiaries

Certain other U.S. and non-U.S. subsidiaries of the ~~Company~~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.

14.

~~14.~~

Total ~~Equity.~~Equity

Dividends and Share ~~Repurchases.~~Repurchases

~~During the quarters ended March 31, 2016 and 2015, the Company~~The Firm repurchased approximately $625 million ~~and $250 million, respectively,~~ of ~~the Company’s~~our outstanding common stock as part of ~~its~~our share repurchase ~~program.~~

program during the current quarter and $1,250 million during the current year period. The Firm repurchased approximately $625 million during the prior year quarter and $875 million in the prior year period.

For a description of the ~~share repurchase program,~~2015 capital plan, see Note 15 to the consolidated financial statements in the 2015Form 10-K.

In June 2016, the Firm received a conditional non-objection from the Federal Reserve to its 2016 capital plan. The capital plan included a share repurchase of up to $3.5 billion of the Firm’s outstanding common stock during the period beginning July 1, 2016 through June 30, 2017. Additionally, the capital plan included an increase in the quarterly common stock dividend to $0.20 per share from


		61

~~Preferred Stock.~~

MORGAN STANLEY

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

$0.15 per share during the period beginning with the dividend declared on July 20, 2016 (see Note 20). The Federal Reserve Board also asked the Firm to submit an additional capital plan by December 29, 2016 addressing weaknesses identified in the Firm’s capital planning process.

Preferred Stock

For a description of Series A through Series J preferred stock issuances, see Note 15 to the consolidated financial statements in the 2015Form 10-K. ~~During the quarters ended March 31, 2016 and 2015, dividends~~ Dividends declared on the ~~Company’s~~Firm’s outstanding preferred stock were ~~$78 million.~~$156 million during the current

quarter and $141 million during the prior year quarter, and $234 million during the current year period and $219 million during the prior year period. On June 15, 2016, the Firm announced that the Board declared a quarterly dividend for preferred stock shareholders of record on June 30, 2016 that was paid on July 15, 2016. The ~~Company~~Firm is authorized to issue 30 million shares of preferred stock. The preferred stock has a preference over the 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 ~~Outstanding.~~Outstanding

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




Total
         $ 7,520       $ 7,520


		60

~~MORGAN STANLEY~~

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


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

Total					$	7,520	$	7,520

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


		62

~~The Company’s preferred stock qualifies as Tier 1 capital in accordance with regulatory capital requirements (see Note 13).~~

MORGAN STANLEY

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

Accumulated Other Comprehensive Income (Loss).

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


																Foreign Currency Translation Adjustments		AFS Securities		Pensions, Postretirement and Other		DVA		Total
																(dollars in millions)
Balance at March 31, 2016																$	(831)	$	76	$	(373)	$	(110)	$	(1,238)

Change in OCI before reclassifications																	52		188		(5)		143		378
Amounts reclassified from AOCI(2)(3)																	—		(45)		—		—		(45)

Net OCI during the period																	52		143		(5)		143		333

Balance at June 30, 2016																$	(779)	$	219	$	(378)	$	33	$	(905)


Balance at March 31, 2015																$	(883)	$	127	$	(510)	$	—		(1,266)

Change in OCI before reclassifications																	50		(208)		(4)		—		(162)
Amounts reclassified from AOCI(3)																	—		(20)		1		—		(19)

Net OCI during the period																	50		(228)		(3)		—		(181)

Balance at June 30, 2015																$	(833)	$	(101)	$	(513)	$	—		(1,447)
	Foreign Currency Translation Adjustments			Change in Net Unrealized Gains (Losses) on AFS Securities			Pensions, Postretirement and Other			Debt Valuation Adjustment			Total
	(dollars in millions)
Balance at December 31, 2015	$	(963	)	$	(319	)	$	(374	)	$	—		$	(1,656	)	$	(963)	$	(319)	$	(374)	$	—	$	(1,656)
Cumulative adjustment for accounting change related to DVA(1)		—			—			—			(312	)		(312	)		—		—		—		(312)		(312)
Change in OCI before reclassifications		132			402			2			228			764			184		590		(3)		371		1,142
Amounts reclassified from AOCI(2)		—			(7	)		(1	)		(26	)		(34	)
Amounts reclassified from AOCI(2)(3)																	—		(52)		(1)		(26)		(79)

Net OCI during the period		132			395			1			202			730			184		538		(4)		345		1,063

Balance at March 31, 2016	$	(831	)	$	76		$	(373	)	$	(110	)	$	(1,238	)
Balance at June 30, 2016																$	(779)	$	219	$	(378)	$	33	$	(905)

Balance at December 31, 2014	$	(663	)	$	(73	)	$	(512	)	$	—		$	(1,248	)	$	(663)	$	(73)	$	(512)	$	—	$	(1,248)

Change in OCI before reclassifications		(220	)		215			—			—			(5	)		(170)		7		(4)		—		(167)
Amounts reclassified from AOCI		—			(15	)		2			—			(13	)
Amounts reclassified from AOCI(3)																	—		(35)		3		—		(32)

Net OCI during the period		(220	)		200			2			—			(18	)		(170)		(28)		(1)		—		(199)

Balance at March 31, 2015	$	(883	)	$	127		$	(510	)	$	—		$	(1,266	)
Balance at June 30, 2015																$	(833)	$	(101)	$	(513)	$	—	$	(1,447)

(1)

(2)

Amounts reclassified from AOCI ~~in the quarter ended March 31, 2016 are principally due~~related to ~~the~~ realization of DVA ~~upon early retirement of the associated instruments and~~ are ~~recognized~~classified within Trading revenues in the ~~condensed~~ consolidated statements of income. The ~~associated~~ tax impact in Provision for (benefit from) income taxes resulting from such reclassifications was $(15) ~~million.~~million related to DVA in the current year period. See Note 2 for further information.

(3)

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

~~The Company had no significant reclassifications out of AOCI for the quarters ended March 31, 2016 and 2015.~~Noncontrolling Interests

~~Noncontrolling Interests.~~

Noncontrolling interests were ~~$1,165~~$1,259 million and $1,002 million at ~~March 31,~~June 30, 2016 and December 31, 2015, respectively. The increase in noncontrolling interests was primarily due to the consolidation of certain ~~legal entities associated with merchant banking~~investment management funds sponsored by the ~~Company.~~Firm. See Note 2 for further information on the adoption of the accounting updateAmendments to the Consolidation Analysis.


		6163

MORGAN STANLEY

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

15.	Earnings per Common Share

~~15. Earnings per Common Share.~~

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


	Three Months Ended March 31,						Three Months Ended June 30,				Six Months Ended June 30,
	2016			2015			2016		2015		2016		2015
	(in millions, except for per share data)						(in millions, except for per share data)
Basic EPS:
Income from continuing operations	$	1,160		$	2,468		$	1,650	$	1,833	$	2,810	$	4,301
Income (loss) from discontinued operations		(3	)		(5	)		(4)		(2)		(7)		(7)

Net income		1,157			2,463			1,646		1,831		2,803		4,294
Net income applicable to noncontrolling interests		23			69			64		24		87		93

Net income applicable to Morgan Stanley		1,134			2,394			1,582		1,807		2,716		4,201
Less: Preferred dividends		(78	)		(78	)
Less: Preferred stock dividends								(156)		(141)		(234)		(219)
Less: Allocation of (earnings) loss to participating RSUs(1)		(1	)		(2	)		(1)		(1)		(1)		(3)

Earnings applicable to Morgan Stanley common shareholders	$	1,055		$	2,314		$	1,425	$	1,665	$	2,481	$	3,979

Weighted average common shares outstanding		1,883			1,924			1,866		1,919		1,875		1,922
Earnings per basic common share:
Income from continuing operations	$	0.56		$	1.21		$	0.77	$	0.87	$	1.33	$	2.07
Income (loss) from discontinued operations		—			(0.01	)		(0.01)		—		(0.01)		—

Earnings per basic common share	$	0.56		$	1.20		$	0.76	$	0.87	$	1.32	$	2.07


Diluted EPS:
Earnings applicable to Morgan Stanley common shareholders	$	1,055		$	2,314		$	1,425	$	1,665	$	2,481	$	3,979
Weighted average common shares outstanding		1,883			1,924			1,866		1,919		1,875		1,922
Effect of dilutive securities:
Stock options and RSUs(1)		32			39
Effect of dilutive securities: Stock options and RSUs(1)								33		41		32		40

Weighted average common shares outstanding and common stock equivalents		1,915			1,963			1,899		1,960		1,907		1,962

Earnings per diluted common share:
Income from continuing operations	$	0.55		$	1.18		$	0.75	$	0.85	$	1.30	$	2.03
Income (loss) from discontinued operations		—			—			—		—		—		—

Earnings per diluted common share	$	0.55		$	1.18		$	0.75	$	0.85	$	1.30	$	2.03

(1)

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

~~Antidilutive Securities.~~

~~Securities that were considered antidilutive were excluded from the computation of diluted EPS.~~

~~Outstanding Antidilutive Securities at Period-End.~~

   Three Months Ended
   March 31,
   2016    2015
   (shares in millions)
Stock options
   14       11
RSUs and performance-based stock units
   1       1




Total
   15       12


		6264

MORGAN STANLEY

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

16.	Interest Income and Interest Expense

~~16. Interest Income and Interest Expense.~~

Interest Income and Interest ~~Expense.~~Expense


	Three Months Ended
	March 31,						Three Months Ended June 30,				Six Months Ended June 30,
	2016			2015			2016		2015		2016		2015
	(dollars in millions)						(dollars in millions)
Interest income(1):
Trading assets(2)	$	582		$	594		$	526	$	555	$	1,109	$	1,149
Investment securities		236			201			237		238		473		438
Loans		647			474			680		529		1,327		1,004
Interest bearing deposits with banks		50			22			52		22		105		45
Securities purchased under agreements to resell and Securities borrowed(3)		(78	)		(104	)		(120)		(200)		(198)		(305)
Customer receivables and Other(4)		310			297			292		242		598		539

Total interest income	$	1,747		$	1,484		$	1,667	$	1,386	$	3,414	$	2,870

Interest expense(1):
Deposits	$	22		$	18		$	15	$	17	$	37	$	35
Short-term borrowings		6			4			7		5		14		9
Long-term borrowings		959			926			844		915		1,804		1,841
Securities sold under agreements to repurchase and Securities loaned(5)		264			308			259		235		513		543
Customer payables and Other(6)		(403	)		(368	)		(371)		(484)		(766)		(852)

Total interest expense	$	848		$	888		$	754	$	688	$	1,602	$	1,576

Net interest	$	899		$	596		$	913	$	698	$	1,812	$	1,294

(1)

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

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

(3)	Includes fees paid on Securities borrowed.

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

(5)	Includes fees received on Securities loaned.

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

~~17. Employee Benefit Plans.~~
17.
Employee Benefit Plans

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

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


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

Net periodic benefit expense	$	11		$	15		$	11	$	16	$	22	$	31


		6365

MORGAN STANLEY

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

~~18. Income Taxes.~~
18.
Income Taxes

The ~~Company~~Firm is under continuous examination by the Internal Revenue Service (the “IRS”) and other tax authorities in certain countries, such as Japan and the United Kingdom (“U.K.”), and in states in which it has significant business operations, such as New York. The ~~Company~~Firm is currently at various levels of field examination with respect to audits by the IRS, as well as New York State and New York City, for tax years 2009-2012 and 2007-2009, respectively. The ~~IRS has substantially completed the field examination for the audit of tax years 2006-2008. The Company~~Firm believes that the resolution of these tax matters will not have a material effect in the ~~condensed~~ consolidated balance ~~sheet,~~sheets, although a resolution could have a material impact in the ~~condensed~~ consolidated statements of income for a particular future period and on the effective tax rate for any period in which such resolution occurs.

In April 2016, the ~~Company~~Firm received a notification from the IRS that the Congressional Joint Committee on Taxation approved the final report of an Appeals Office review of matters from tax years ~~1999-2005.~~1999-2005, and the Revenue Agent’s Report reflecting agreed closure of the 2006-2008 tax years. The ~~Company~~Firm has reserved the right to contest certain items, associated with tax years 1999-2005, the resolution of which is not expected to have a material impact on the effective tax rate or the ~~condensed~~ consolidated financial statements.

During 2016, the ~~Company~~Firm expects to reach a conclusion with the U.K. tax authorities on substantially all issues through

tax year 2010, the resolution of which is not expected to have a material impact on the effective tax rate or the ~~condensed~~ consolidated financial statements.

The ~~Company~~Firm has established a liability for unrecognized tax benefits that it believes is adequate in relation to the potential for additional assessments. Once established, the ~~Company~~Firm adjusts liabilities for unrecognized tax benefits only when more information is available or when an event occurs necessitating a change.

It is reasonably possible that significant changes in the balance of unrecognized tax benefits may occur within the next 12 months related to certain tax authority examinations referred to ~~above.~~herein. 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 ~~Company’s~~Firm’s effective tax rate over the next 12 months.

The ~~Company’s~~Firm’s effective tax rate from continuing operations for the ~~quarter ended March 31, 2015~~prior year period included a net discrete tax benefit of $564 million. This net discrete tax benefit was primarily associated with the repatriation of non-U.S. earnings at a cost lower than originally estimated due to an internal restructuring to simplify the ~~Company’s~~Firm’s legal entity organization in the U.K.

~~19. Segment and Geographic Information.~~


		66

~~Segment Information.~~

MORGAN STANLEY

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

19.	Segment and Geographic Information

Segment Information

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

Selected Financial Information

   Three Months Ended June 30, 2016
   Institutional
Securities(1)    Wealth
Management    Investment
Management    Intersegment
Eliminations    Total
   (dollars in millions)
Total non-interest revenues(2)(3)
   $ 4,496       $ 2,982       $ 581       $ (63)       $ 7,996
Interest income
   966       920       3       (222)       1,667
Interest expense
   884       91       1       (222)       754










Net interest
   82       829       2       —       913










Net revenues
   $ 4,578       $ 3,811       $ 583       $ (63)       $ 8,909










Income from continuing operations before income taxes
   $ 1,506       $ 859       $ 118       $ —       $ 2,483
Provision for income taxes
   453       343       37       —       833










Income from continuing operations
   1,053       516       81       —       1,650
Income (loss) from discontinued operations, net of income taxes
   (4)       —       —       —       (4)










Net income
   1,049       516       81       —       1,646
Net income applicable to noncontrolling interests
   61       —       3       —       64










Net income applicable to Morgan Stanley
   $         988       $           516       $        78       $         —       $        1,582










67
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
   Three Months Ended June 30, 2015
   Institutional
Securities(1)    Wealth
Management    Investment
Management    Intersegment
Eliminations    Total
   (dollars in millions)
Total non-interest revenues(2)(3)
   $ 5,205       $ 3,138       $ 757       $ (55)       $ 9,045
Interest income
   723       782       —       (119)       1,386
Interest expense
   756       45       6       (119)       688










Net interest
   (33)       737       (6)       —       698










Net revenues
   $ 5,172       $ 3,875       $ 751       $ (55)       $ 9,743










Income from continuing operations before income taxes
   $ 1,622       $ 885       $ 220       $ —       $ 2,727
Provision for income taxes
   511       324       59       —       894










Income from continuing operations
   1,111       561       161       —       1,833
Income (loss) from discontinued operations, net of income taxes
   (2)       —       —       —       (2)










Net income
   1,109       561       161       —       1,831
Net income applicable to noncontrolling interests
   22       —       2       —       24










Net income applicable to Morgan Stanley
   $         1,087       $         561       $         159       $         —       $         1,807










   Six Months Ended June 30, 2016
   Institutional
Securities(1)    Wealth
Management    Investment
Management    Intersegment
Eliminations    Total
   (dollars in millions)
Total non-interest revenues(2)(3)
   $ 8,141       $ 5,819       $ 1,059       $ (130)       $ 14,889
Interest income
   2,019       1,834       4       (443)       3,414
Interest expense
   1,868       174       3       (443)       1,602










Net interest
   151       1,660       1       —       1,812










Net revenues
   $ 8,292       $ 7,479       $ 1,060       $ (130)       $ 16,701










Income from continuing operations before income taxes
   $ 2,414       $ 1,645       $ 162       $ —       $ 4,221
Provision for income taxes
   728       636       47       —       1,411










Income from continuing operations
   1,686       1,009       115       —       2,810
Income (loss) from discontinued operations, net of income taxes
   (7)       —       —       —       (7)










Net income
   1,679       1,009       115       —       2,803
Net income applicable to noncontrolling interests
   100       —       (13)       —       87










Net income applicable to Morgan Stanley
   $       1,579       $       1,009       $       128       $       —       $       2,716










6468
MORGAN STANLEY
NOTES TO ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

~~Selected Financial Information.~~

   Three Months Ended March 31, 2016
   Institutional
Securities(1) Wealth
Management    Investment
Management Intersegment
Eliminations Total
   (dollars in millions)
Total non-interest revenues(2)(3)
   $ 3,645    $ 2,837       $ 478    $ (67 ) $   6,893
Interest income
   1,053    914       1    (221 ) 1,747
Interest expense
   984    83       2    (221 ) 848




Net interest
   69    831       (1 ) —    899




Net revenues
   $ 3,714    $ 3,668       $ 477    $ (67 ) $ 7,792




Income from continuing operations before income taxes
   $ 908    $ 786       $ 44    $ —    $ 1,738
Provision for income taxes
   275    293       10    —    578




Income from continuing operations
   633    493       34    —    1,160




Discontinued operations:

Income (loss) from discontinued operations before income taxes
   (5 ) —       —    —    (5 )
Provision for (benefit from) income taxes
   (2 ) —       —    —    (2 )




Income (loss) from discontinued operations
   (3 ) —       —    —    (3 )




Net income
   630    493       34    —    1,157
Net income (loss) applicable to noncontrolling interests
   39    —       (16 ) —    23




Net income applicable to Morgan Stanley
   $ 591    $ 493       $ 50    $ —    $ 1,134




   Three Months Ended March 31, 2015 Six Months Ended June 30, 2015
   Institutional
Securities Wealth
Management    Investment
Management Intersegment
Eliminations Total Institutional
Securities(1) Wealth
Management Investment
Management Intersegment
Eliminations Total
   (dollars in millions) (dollars in millions)
Total non-interest revenues(2)(3)
   $ 5,546    $ 3,145       $ 674    $ (54 ) $   9,311    $         10,751    $         6,283    $         1,431    $         (109)    $         18,356
Interest income
   870    737       1    (124 ) 1,484    1,593    1,519    1    (243)    2,870
Interest expense
   958    48       6    (124 ) 888    1,714    93    12    (243)    1,576




Net interest
   (88 ) 689       (5 ) —    596    (121)    1,426    (11)    —    1,294




Net revenues
   $ 5,458    $ 3,834       $ 669    $ (54 ) $ 9,907    $ 10,630    $ 7,709    $ 1,420    $ (109)    $ 19,650




Income from continuing operations before income taxes
   $ 1,813    $ 855       $ 187    $ —    $ 2,855    $ 3,435    $ 1,740    $ 407    $ —    $ 5,582
Provision for income taxes(4)
   6    320       61    —    387    517    644    120    —    1,281




Income from continuing operations
   1,807    535       126    —    2,468    2,918    1,096    287    —    4,301




Discontinued operations:

Income (loss) from discontinued operations before income taxes
   (8 ) —       —    —    (8 )
Provision for (benefit from) income taxes
   (3 ) —       —    —    (3 )




Income (loss) from discontinued operations
   (5 ) —       —    —    (5 )
Income (loss) from discontinued operations, net of income taxes
(7)    —    —    —    (7)




Net income
   1,802    535       126    —    2,463    2,911    1,096    287    —    4,294
Net income applicable to noncontrolling interests
   52    —       17    —    69    74    —    19    —    93




Net income applicable to Morgan Stanley
   $ 1,750    $ 535       $ 109    $ —    $ 2,394    $ 2,837    $ 1,096    $ 268    $ —    $ 4,201




(1)
In accordance with the early adoption of a provision of the accounting updateRecognition and Measurement of Financial Assets and Financial Liabilities, for the current quarter and current year period DVA gains (losses) are recorded within OCI when unrealized and in Trading revenues when realized. In the prior year quarter and prior year period, the realized and unrealized DVA gains (losses) ~~in the quarter ended March 31, 2016~~ are recorded ~~within OCI~~ in ~~the condensed consolidated statements of comprehensive income.~~Trading revenues. See Notes 2 and 14 for further information.
65
~~MORGAN STANLEY~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)~~
(2)
In certain management fee arrangements, the ~~Company~~Firm is entitled to receive performance-based fees (also referred to as incentive fees and includes carried interest) when the return on assets under management exceeds certain benchmark returns or other performance targets. In such arrangements, performance fee revenues are accrued (or reversed) quarterly based on measuring account/fund performance to date versus the performance benchmark stated in the investment management agreement. The ~~Company’s~~Firm’s portion of unrealized cumulative amount of performance-based fee revenue (for which the ~~Company~~Firm is not obligated to pay compensation) at risk of reversing if fund performance falls below stated investment management agreement benchmarks was approximately $421 million and $422 million at ~~both March 31,~~June 30, 2016 and December 31, ~~2015.~~2015, respectively. See Note 11 for information regarding general partner guarantees, which include potential obligations to return performance fee distributions previously received.
(3)
The ~~Company~~Firm waives a portion of its fees from certain registered money market funds that comply with the requirements of Rule 2a-7 of the Investment Company Act of 1940. These fee waivers resulted in a reduction of fees of approximately ~~$23~~$12 million and $50 million ~~respectively,~~ for the ~~quarters ended March 31, 2016~~current quarter and ~~2015.~~prior year quarter, respectively, and $35 million and $100 million for the current year period and prior year period, respectively.
(4)
The ~~Company’s~~Firm’s effective tax rate from continuing operations for the ~~quarter ended March 31, 2015~~prior year period included a net discrete tax benefit of $564 million, within Institutional Securities (see Note 18).

Total Assets by Business ~~Segment.~~Segment

   Institutional
Securities    Wealth
Management    Investment
Management    Total(1)
   (dollars in millions)
At March 31, 2016
   $     621,644       $     181,087       $ 4,766       $     807,497
At December 31, 2015
   $ 602,714       $ 179,708       $ 5,043       $ 787,465
At June 30,

2016
At December 31,

2015

(dollars in millions)
Institutional Securities
$     641,373    $     602,714
Wealth Management
182,801    179,708
Investment Management
4,699    5,043

Total(1)
$ 828,873    $ 787,465

_________
(1) Corporate assets have been fully allocated to the business segments.

~~(1)~~
~~Corporate assets have been fully allocated to the business segments.~~
69
MORGAN STANLEY
~~Geographic Information.~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

Geographic Information
For a discussion about the ~~Company’s~~Firm’s geographic net revenues, see Note 21 to the consolidated financial statements in the 2015 Form10-K.
Net Revenues by ~~Region.~~Region

   Three Months Ended
   March 31,    Three Months Ended
June 30,    Six Months Ended
June 30,
   2016    2015    2016    2015    2016    2015
   (dollars in millions)    (dollars in millions)
Americas
   $ 5,752       $ 6,930       $           6,538       $           6,777       $           12,290       $           13,707
EMEA
   1,129       1,762       1,312       1,436       2,441       3,198
Asia-Pacific
   911       1,215       1,059       1,530       1,970       2,745












Net revenues
   $     7,792       $     9,907       $ 8,909       $ 9,743       $ 16,701       $ 19,650












~~20.    Subsequent Events.~~
20.
Subsequent Events
The ~~Company~~Firm has evaluated subsequent events for adjustment to or disclosure in ~~its condensed~~the consolidated financial statements through the date of this report and has not identified any recordable or disclosable events, not otherwise reported in these ~~condensed~~ consolidated financial statements or the notes thereto, except for the following:
Common Stock ~~Dividend.~~
Dividend
On ~~April 18,~~July 20, 2016, the ~~Company~~Firm announced that its Board of Directors declared a quarterly dividend per common share of ~~$0.15.~~$0.20. The dividend is payable on ~~May 13,~~August 15, 2016 to common shareholders of record on ~~April~~July 29, 2016.
Long-Term ~~Borrowings.~~
Borrowings
Subsequent to ~~March 31,~~June 30, 2016 and through ~~April~~July 29, 2016, long-term borrowings ~~decreased~~increased by approximately ~~$1.2~~$3.4 billion, net of ~~issuances.~~redemptions. This amount includes the issuance of ~~$3.5~~$3.0 billion of senior debt on ~~April 21,~~July 25, 2016.
Trust Preferred Securities
On July 19, 2016, the Firm announced that Morgan Stanley Capital Trust III, Morgan Stanley Capital Trust IV and Morgan Stanley Capital Trust V will redeem all of their issued and outstanding Capital Securities on August 18, 2016, and that Morgan Stanley Capital Trust VIII will redeem all of its issued and outstanding Capital Securities on August 3, 2016, pursuant to the optional redemption provisions provided in the respective governing documents. In the aggregate, $2.8 billion will be redeemed. The Firm will concurrently redeem the related underlying junior subordinated debentures.

6670
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Morgan Stanley:
We have reviewed the accompanying condensed consolidated balance sheet of Morgan Stanley and subsidiaries (the “Company”) as of ~~March 31,~~June 30, 2016, and the related condensed consolidated statements of income and comprehensive income for the three-month and six-month periods ended June 30, 2016 and 2015, and the condensed consolidated statements of cash flows and changes in total equity for the ~~three-month~~six-month periods ended ~~March 31,~~June 30, 2016 and 2015. These interim condensed consolidated financial statements are the responsibility of the management of the Company.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 Public Company Accounting Oversight Board (United States), 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.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them 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), the consolidated statement of financial condition of the Company as of December 31, 2015, and the consolidated statements of income, comprehensive income, cash flows and changes in total equity for the year then ended (not presented herein) included in the Company’s Annual Report on Form 10-K; and in our report dated February 23, 2016, 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, 2015 is fairly stated, in all material respects, in relation to the consolidated statement of financial condition from which it has been derived.

/s/ Deloitte & Touche LLP
~~/s/ Deloitte & Touche LLP~~
~~New York, New York~~
~~May 4,~~
New York, New York
August 3, 2016

6771
Item 2. ~~Item 2.~~
Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations.~~
Operations
~~Introduction.~~Introduction

Morgan Stanley, a financial holding company, 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 “Company”~~“us”, “we”, or “our” mean Morgan Stanley (the “Parent”) together with its consolidated subsidiaries.
A description of the clients and principal products and services of each of ~~the Company’s~~our business segments is as follows:
Institutional Securities provides investment banking, sales and trading and other services to corporations, governments, financial institutions, and high-to-ultra high net worth clients. Investment banking services comprise 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 and market-making activities in equity securities and fixed income products, including foreign exchange and commodities, as well as prime brokerage services. Other services include corporate lending activities and credit products, 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, market-making activities in fixed income securities,
financial and wealth planning services, annuity and insurance products, credit and other lending products, banking and retirement plan services.
Investment Managementprovides 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 comprise equity, fixed income, liquidity and alternative / other products. Institutional clients include defined benefit/defined contribution pensions, foundations, endowments, government entities, sovereign wealth funds, insurance companies, third-party fund sponsors and corporations. Individual clients are serviced through intermediaries, including affiliated and non-affiliated distributors. Strategies and products comprise traditional asset management, including equity, fixed income, liquidity, alternatives and managed futures products as well as merchant banking and real estate investing.
The results of operations in the past have been, and in the future may continue to be, materially affected by competition, risk factors, legislative, legal and regulatory developments, as well as other factors. These factors also may have an adverse impact on ~~the Company’s~~our ability to achieve ~~its~~our strategic objectives. Additionally, the discussion of ~~the Company’s~~our results of operations ~~below~~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 ~~the Company’s~~our future results, see “Forward-Looking Statements” immediately preceding Part I, Item 1, “Business—Competition” and “Business—Supervision and Regulation” in Part I, Item 1, “Risk Factors” in Part I, Item 1A of ~~the Company’s~~our Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”), “Business Segments—Wealth Management—Other Items,” and “Liquidity and Capital ~~Resources—Regulatory Requirements”~~Resources” herein.

6872

Executive Summary
Business Segment Financial Information and Other Statistical Data

Three Months Ended    Six Months Ended
June 30,    June 30,
2016    2015    2016    2015

(dollars in millions, except where noted and
per share amounts)

Net revenues:

Institutional Securities
$           4,578       $           5,172       $           8,292       $           10,630
Wealth Management
3,811       3,875       7,479       7,709
Investment Management
583       751       1,060       1,420
Intersegment Eliminations
(63)       (55)       (130)       (109)







Consolidated net revenues
$ 8,909       $ 9,743       $ 16,701       $ 19,650







Income from continuing operations applicable to Morgan Stanley:

Institutional Securities
$ 992       $ 1,089       $ 1,586       $ 2,844
Wealth Management
516       561       1,009       1,096
Investment Management
78       159       128       268







Income from continuing operations applicable to Morgan Stanley
$ 1,586       $ 1,809       $ 2,723       $ 4,208
Income (loss) from discontinued operations applicable to Morgan Stanley
(4)       (2)       (7)       (7)







Net income applicable to Morgan Stanley
$ 1,582       $ 1,807       $ 2,716       $ 4,201
Preferred stock dividend and other
157       142       235       222







Earnings applicable to Morgan Stanley common shareholders
$ 1,425       $ 1,665       $ 2,481       $ 3,979







Earnings per basic common share(1)
$ 0.76       $ 0.87       $ 1.32       $ 2.07
Earnings per diluted common share(1)
$ 0.75       $ 0.85       $ 1.30       $ 2.03
Regional net revenues(2):

Americas
$ 6,538       $ 6,777       $ 12,290       $ 13,707
EMEA
1,312       1,436       2,441       3,198
Asia-Pacific
1,059       1,530       1,970       2,745







  Net revenues
$ 8,909       $ 9,743       $ 16,701       $ 19,650







Effective income tax rate from continuing operations
33.5%       32.8%       33.4%       22.9%
~~Executive Summary.~~

At June 30, 2016    At December 31, 2015

(dollars in millions, except where noted and
per share amounts)

Total loans(3)
$           93,165       $                       85,759
Total assets
$ 828,873       $ 787,465
Global Liquidity Reserve managed by bank and non-bank legal entities(4):

Bank legal entities
$ 91,062       $ 94,328
Non-bank legal entities
116,393       108,936



  Total
$ 207,455       $ 203,264



Total deposits
$ 152,693       $ 156,034
Long-term borrowings
$ 163,492       $ 153,768
Maturities of long-term borrowings outstanding (next 12 months)
$ 24,244       $ 22,396
Book value per common share(5)
$ 36.29       $ 35.24
Capital ratios (Transitional—Advanced)(6):

Common Equity Tier 1 capital ratio
16.8%       15.5%
Tier 1 capital ratio
18.8%       17.4%
Total capital ratio
22.4%       20.7%
Capital ratios (Transitional—Standardized)(6):

Tier 1 leverage ratio(7)
8.3%       8.3%
Worldwide employees
54,529       56,218
EMEA—Europe, Middle East and Africa
(1)
For the calculation of basic and diluted earnings per common share, see Note 15 to the consolidated financial statements in Item 1.
(2)
For a discussion of how the geographic breakdown for net revenues is determined, see Note 21 to the consolidated financial statements in Item 8 of the 2015 Form 10-K.
(3)
Amounts include loans held for investment (net of allowance) and loans held for sale but exclude loans at fair value, which are included in Trading assets in the consolidated balance sheets (see Note 7 to the consolidated financial statements in Item 1).
(4)
For a discussion of Global Liquidity Reserve, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management Framework—Global Liquidity Reserve” in Part II, Item 7 of the 2015 Form 10-K.
(5)
Book value per common share equals common shareholders’ equity of $69,596 million at June 30, 2016 and $67,662 million at December 31, 2015 divided by common shares outstanding of 1,918 million at June 30, 2016 and 1,920 million at December 31, 2015.
(6)
For a discussion of our regulatory capital ratios, see “Liquidity and Capital Resources—Regulatory Requirements” herein.
(7)
See Note 13 to the consolidated financial statements in Item 1 for information on the Tier 1 leverage ratio.

73
Overview of Financial ~~Results.~~Results
Consolidated ~~Results.~~Results for the Quarter Ended June 30, 2016

~~The Company~~We reported net revenues of ~~$7,792~~$8,909 million in the quarter ended ~~March 31,~~June 30, 2016 (“current quarter”), compared with ~~$9,907~~$9,743 million in the quarter ended ~~March 31,~~June 30, 2015 (“prior year quarter”). For the current quarter, net income applicable to Morgan Stanley was ~~$1,134~~$1,582 million, or ~~$0.55~~$0.75 per diluted common share, compared with income of ~~$2,394~~$1,807 million, or ~~$1.18~~$0.85 per diluted common share, in the prior year quarter.

The prior year quarter included ~~a net discrete tax benefit~~positive revenues due to the impact of ~~$564 million, or $0.29 per diluted common share primarily associated with the repatriation of non-U.S. earnings at a cost lower than originally estimated and~~ debt valuation adjustments (“DVA”) of ~~$125~~$182 million or ~~$0.04~~$0.06 per diluted common share. ~~For a further discussion of~~Excluding DVA, net revenues were $9,561 million and net income applicable to Morgan Stanley was $1,688 million, or $0.79 per diluted common share, in the ~~net discrete tax benefit, see “Supplemental~~prior year quarter (see “Selected Non-Generally Accepted Accounting Principles (“Non-GAAP”) Financial ~~Information and Disclosures—Income Tax Matters” herein.~~Information” herein).

•
Effective January 1, 2016, ~~the Company~~we early adopted a provision of the accounting updateRecognition and Measurement of Financial Assets and Financial Liabilities that requires unrealized gains and losses from debt-related credit spreads and other credit factors to be presented in ~~Other~~other comprehensive income (loss) (“OCI”) as opposed to ~~net revenues and net income.~~Trading revenues. Results for 2015 are not restated pursuant to that guidance.
Consolidated Results for the Six Months Ended June 30, 2016

~~Net~~We reported net revenues ~~were $7,792~~of $16,701 million in the six months ended June 30, 2016 (“current ~~quarter~~year period”), compared with ~~$9,782~~$19,650 million ~~excluding DVA,~~ in the six months ended June 30, 2015 (“prior year ~~quarter, and~~period”). For the current year period, net income applicable to Morgan Stanley was ~~$1,134~~$2,716 million, or ~~$0.55~~$1.30 per diluted common share, ~~in the current quarter~~ compared with ~~$2,314 million excluding DVA, or $1.14 per diluted common share excluding DVA, in the prior year quarter. Excluding both DVA and the net discrete tax benefit, net~~ income ~~applicable to Morgan Stanley was $1,750~~of $4,201 million, or ~~$0.85~~$2.03 per diluted common share in the prior year ~~quarter (see “Selected Non-Generally Accepted Accounting Principles (“Non-GAAP”) Financial Information” herein).~~period.

The prior year period included a net discrete tax benefit of $564 million or $0.29 per diluted common share, primarily associated with the repatriation of non-U.S. earnings at a cost lower than originally estimated, and positive revenues associated with DVA of $307 million or $0.10 per diluted common share. For a further discussion of the net discrete tax benefit, see “Supplemental Financial Information and Disclosures— Income Tax Matters” herein.
Net revenues excluding DVA were $19,343 million in the prior year period, while net income applicable to Morgan Stanley was $4,002 million excluding DVA, or
$1.93 per diluted common share excluding DVA, in the prior year period. Excluding both DVA and the net discrete tax benefit, net income applicable to Morgan Stanley was $3,438 million, or $1.64 per diluted common share, in the prior year period (see “Selected Non-Generally Accepted Accounting Principles (“Non-GAAP”) Financial Information” herein).
Business ~~Segments.~~Segment Net Revenues for the Current Quarter and Current Year Period

Institutional Securities net revenues of ~~$3,714~~$4,578 million in the current quarter and $8,292 million in the current year period decreased ~~32%~~11% and 22% from the ~~prior year quarter~~comparable periods reflecting ~~challenging market conditions in fixed income~~lower underwriting and ~~commodities~~ sales and trading ~~and underwriting, with~~results, partly offset by continued strength in ~~equity sales and trading and~~ merger, acquisition and restructuring transactions (“M&A”) advisory.

Wealth Management net revenues of ~~$3,668~~$3,811 million in the current quarter and $7,479 million in the current year period decreased 4%2% and 3% from the ~~prior year quarter,~~comparable periods reflecting ~~weakness in~~lower transactional revenues, ~~partially~~partly offset by strong growth in net interest income.

Investment Management net revenues of ~~$477~~$583 million in the current quarter and $1,060 million in the current year period decreased ~~29%~~22% and 25% from the ~~prior year quarter~~comparable periods reflecting ~~losses~~lower investment gains and carried interest in infrastructure and private equity ~~and real estate funds and stable asset~~investments. Asset management ~~fees.~~fees were relatively unchanged from the comparable periods.
~~Expenses.~~Consolidated Non-Interest Expenses for the Current Quarter and Current Year Period

Compensation and benefits expenses of ~~$3,683~~$4,015 million in the current quarter and $7,698 million in the current year period decreased ~~19%~~9% and 14% from ~~$4,524~~$4,405 million in the prior year quarter and $8,929 million in the prior year period, primarily due to a decrease in discretionary incentive compensation driven mainly by lower revenues, a decrease in the formulaic payout to Wealth Management representatives linked to lower revenues, and a decrease in salaries due to lower headcount. In the current year period, compensation and benefits expenses also reflected a decrease in the fair value of deferred compensation plan referenced investments and carried ~~interest, and lower headcount.~~interest.

Non-compensation expenses were ~~$2,371~~$2,411 million in the current quarter and $4,782 million in the current year period compared with ~~$2,528~~$2,611 million in the prior year quarter and $5,139 million in the prior year period, representing an 8% and a 6%7% decrease, primarily ~~as a result of~~due to lower litigation ~~costs.~~costs and expense reductions across Professional services, Marketing and business development and Occupancy and equipment.

74
Return on Average Common ~~Equity.~~Equity

The annualized return on average common equity was ~~6.2%~~8.3% in the current ~~quarter.~~quarter and 7.2% in the current year period. For the prior year quarter, the annualized return on average common equity was ~~14.1%~~9.9%, or ~~13.5%~~9.1% excluding DVA. For the prior year period, the annualized return on average common equity was 12.0%, or 11.3% excluding DVA, and ~~10.1%~~9.6% excluding DVA and ~~the~~a net discrete tax ~~benefit.~~benefit (see “Selected Non-Generally Accepted Accounting Principles (“Non-GAAP”) Financial Information” herein).
69
~~Selected Financial Information.~~
~~Business Segment Financial Information and Other Statistical Data.~~

   Three Months Ended
   March 31,
       2016         2015

(dollars in millions, except where noted and
per share amounts)

Net revenues:

Institutional Securities
   $ 3,714    $ 5,458
Wealth Management
   3,668    3,834
Investment Management
   477    669
Intersegment Eliminations
   (67 ) (54 )


Consolidated net revenues
   $ 7,792    $ 9,907


Income from continuing operations applicable to Morgan Stanley:

Institutional Securities
   $ 594    $ 1,755
Wealth Management
   493    535
Investment Management
   50    109


Income from continuing operations applicable to Morgan Stanley
   $ 1,137    $ 2,399
Income (loss) from discontinued operations applicable to Morgan Stanley
   (3 ) (5 )


Net income applicable to Morgan Stanley
   $ 1,134    $ 2,394
Preferred stock dividend and other
   79    80


Earnings applicable to Morgan Stanley common shareholders
   $ 1,055    $ 2,314


Earnings per basic common share(1)
   $ 0.56    $ 1.20
Earnings per diluted common share(1)
   $ 0.55    $ 1.18
Pre-tax profit margin(2):

Institutional Securities
   24 % 33 %
Wealth Management
   21 % 22 %
Investment Management
   9 % 28 %
Consolidated
   22 % 29 %
Average common equity (dollars in billions)(3)(4):

Institutional Securities
   $ 43.2    $ 37.0
Wealth Management
   15.3    10.3
Investment Management
   2.8    2.3
Parent(3)
   6.9    16.0


Consolidated average common equity
   $ 68.2    $ 65.6


Return on average common equity(3)(4):

Institutional Securities
   4.9 % 18.6 %
Wealth Management
   12.6 % 18.9 %
Investment Management
   6.9 % 19.4 %
Consolidated
   6.2 % 14.1 %
Regional net revenues(5):

Americas
   $ 5,752    $ 6,930
EMEA
   1,129    1,762
Asia-Pacific
   911    1,215


Net revenues
   $ 7,792    $ 9,907


Effective income tax rate from continuing operations
   33.3 % 13.6 %
70

   At
March 31, 2016 At
December 31, 2015

(dollars in millions, except where noted and
per share amounts)

Total loans(6)
   $ 88,802    $ 85,759
Total assets
   $ 807,497    $ 787,465
Global Liquidity Reserve managed by bank and non-bank legal entities(7):

Bank legal entities
   $ 95,262    $ 94,328
Non-bank legal entities
   115,807    108,936


Total
   $ 211,069    $ 203,264


Total deposits
   $ 157,591    $ 156,034
Long-term borrowings
   $ 162,804    $ 153,768
Maturities of long-term borrowings outstanding (next 12 months)
   $ 26,071    $ 22,396
Book value per common share(8)
   $ 35.34    $ 35.24
Capital ratios (Transitional—Advanced)(9):

Common Equity Tier 1 capital ratio
   15.6 % 15.5 %
Tier 1 capital ratio
   17.4 % 17.4 %
Total capital ratio
   20.9 % 20.7 %
Capital ratios (Transitional—Standardized)(9):

Tier 1 leverage ratio(10)
   8.2 % 8.3 %
Assets under management or supervision (dollars in billions)(11):

Wealth Management
   $ 787    $ 784
Investment Management
   405    406


Total
   $ 1,192    $ 1,190


Worldwide employees
   54,779    56,218
Selected Non-Generally Accepted Accounting Principles (“Non-GAAP”) Financial ~~Information.~~Information
We prepare our Consolidated Financial Statements using accounting principles generally accepted in the United States (“U.S. GAAP”). From time to time, ~~the Company~~we may disclose certain “non-GAAP financial measures” in the course of ~~its~~
our earnings releases, earnings and other conference calls, financial presentations and otherwise. A “non-GAAP financial measure” excludes, or includes, amounts from the most directly comparable measure calculated and presented in accordance with ~~accounting principles generally accepted in the United States (“~~U.S. ~~GAAP”).~~GAAP. Non-GAAP financial measures disclosed by ~~the Company~~us are provided as additional information to investors and analysts in order to provide them with further transparency about, or as an alternative method for assessing, ~~the Company’s~~our financial condition, operating results or prospective regulatory capital requirements. 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 ~~the Company refers~~we refer to a non-GAAP financial measure, ~~the Company~~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 ~~non-GAAP~~U.S. GAAP financial measure and the ~~U.S. GAAP~~non-GAAP financial measure.
Non-GAAP Financial Measures by Business Segment

Three Months Ended
June 30,    Six Months Ended
June 30,
2016    2015    2016    2015
(dollars in billions)
Pre-tax profit margin(1):

Institutional Securities
33%       31%       29%       32%
Wealth Management
23%       23%       22%       23%
Investment Management
20%       29%       15%       29%
Consolidated
28%       28%       25%       28%
Average common equity(2)(3):

Institutional Securities
$           43.2       $           35.3       $           43.2       $          36.1
Wealth Management
15.3       11.3       15.3       10.9
Investment Management
2.8       2.3       2.8       2.3
Parent(2)
7.7       18.3       7.3       17.0







Consolidated average common equity
$ 69.0       $ 67.2       $ 68.6       $ 66.3







Return on average common equity(2)(3):

Institutional Securities
8.0%       11.3%       6.4%       15.1%
Wealth Management
12.9%       18.2%       12.7%       18.4%
Investment Management
10.6%       27.7%       8.8%       23.5%
Consolidated
8.3%       9.9%       7.2%       12.0%

7175
Reconciliation of Financial Measures from a ~~Non-GAAP~~U.S. GAAP to a ~~U.S. GAAP Basis.~~Non-GAAP Basis


   Three Months Ended
March 31, Three Months Ended
June 30,    Six Months Ended
June 30,
   2016 2015 2016    2015    2016    2015
   (dollars in millions, except per
share amounts) (dollars in millions, except per share amounts)
Net revenues

Net revenues—U.S. GAAP
$           8,909       $           9,743       $           16,701       $           19,650
Impact of DVA(4)
—       (182)       —       (307)







Net revenues—non-GAAP
   $ 7,792    $ 9,782    $ 8,909       $ 9,561       $ 16,701       $ 19,343
Impact of DVA(12)
   —    125


Net revenues—U.S. GAAP
   $ 7,792    $ 9,907








Net income applicable to Morgan Stanley

Net income applicable to Morgan Stanley, excluding DVA and net discrete tax benefits—non-GAAP
   $ 1,134    $ 1,750
Impact of net discrete tax benefits(13)
   —    564
Net income applicable to Morgan Stanley—U.S. GAAP
$ 1,582       $ 1,807       $ 2,716       $ 4,201
Impact of DVA(4)
—       (119)       —       (199)








Net income applicable to Morgan Stanley, excluding DVA—non-GAAP
   $ 1,134    $ 2,314    $ 1,582       $ 1,688       $ 2,716       $ 4,002
Impact of DVA(12)
   —    80
Impact of net discrete tax benefits(5)
—       —       —       (564)








Net income applicable to Morgan Stanley—U.S. GAAP
   $ 1,134    $ 2,394
Net income applicable to Morgan Stanley, excluding DVA and net discrete tax benefits—non-GAAP
$ 1,582       $ 1,688       $ 2,716       $ 3,438








Earnings per diluted common share

Earnings per diluted common share, excluding DVA and net discrete tax benefits—non-GAAP
   $ 0.55    $ 0.85
Impact of net discrete tax benefits(13)
   —    0.29
Earnings per diluted common share—U.S. GAAP
$ 0.75       $ 0.85       $ 1.30       $ 2.03
Impact of DVA(4)
—       (0.06)       —       (0.10)








Earnings per diluted common share, excluding DVA—non-GAAP
   $ 0.55    $ 1.14    $ 0.75       $ 0.79       $ 1.30       $ 1.93
Impact of DVA(12)
   —    0.04
Impact of net discrete tax benefits(5)
—       —       —       (0.29)








Earnings per diluted common share—U.S. GAAP
   $ 0.55    $ 1.18
Earnings per diluted common share, excluding DVA and net discrete tax benefits—non-GAAP
$ 0.75       $ 0.79       $ 1.30       $ 1.64








Effective income tax rate

Effective income tax rate from continuing operations—U.S. GAAP
33.5%       32.8%       33.4%       22.9%
Impact of net discrete tax benefits(5)
—       —       —       10.2%
Effective income tax rate from continuing operations—non-GAAP
   33.3 % 33.3 % 33.5%       32.8%       33.4%       33.1%
Impact of net discrete tax benefits(13)
   —    (19.7) %
Effective income tax rate from continuing operations—U.S. GAAP
   33.3 % 13.6 %

76
Non-GAAP Financial Measures
Average common equity, return on average common equity, average tangible common equity, return on average tangible common equity and tangible book value per common share are all non-GAAP financial measures ~~the Company considers~~we consider to be useful measures to ~~the Company~~us, investors and ~~investors~~analysts to assess capital adequacy and to allow better comparability of period-to-period operating performance. For a discussion of tangible common equity, see “Liquidity and Capital Resources—Tangible Equity” herein.

72
~~Non-GAAP Financial Measures.~~
Three Months Ended
June 30,    Six Months Ended
June 30,
        2016                    2015                    2016                    2015
(dollars in billions)
Average common equity(3)(6)

Average common equity
$           69.0       $           67.2       $           68.6       $           66.3
Average common equity, excluding DVA
$ 69.1       $ 67.9       $ 68.7       $ 67.1
Average common equity, excluding DVA and net discrete tax benefits
$ 69.1       $ 67.9       $ 68.7       $ 66.8
Return on average common equity(3)

Return on average common equity
8.3%       9.9%       7.2%       12.0%
Return on average common equity, excluding DVA
8.3%       9.1%       7.2%       11.3%
Return on average common equity, excluding DVA and net discrete tax benefits
8.3%       9.1%       7.2%       9.6%
Average tangible common equity(6)

Average tangible common equity
$ 59.5       $ 57.5       $ 59.1       $ 56.7
Average tangible common equity, excluding DVA
$ 59.6       $ 58.2       $ 59.2       $ 57.4
Average tangible common equity, excluding DVA and net discrete tax benefits
$ 59.6       $ 58.2       $ 59.2       $ 57.1
Return on average tangible common equity(7)

Return on average tangible common equity
9.6%       11.6%       8.4%       14.1%
Return on average tangible common equity, excluding DVA
9.6%       10.6%       8.4%       13.2%
Return on average tangible common equity, excluding DVA and net discrete tax benefits
9.6%       10.6%       8.4%       11.3%
At June 30, 2016    At December 31, 2015
Tangible book value per common share(8)
$       31.39       $       30.26

   Three Months Ended
March 31,
   2016    2015
   (dollars in millions)
Average common equity(4)(14)

Average common equity, excluding DVA and net discrete tax benefits
   $ 68,331       $ 66,253
Average common equity, excluding DVA
   $ 68,331       $ 66,394
Average common equity
   $ 68,187       $ 65,590
Return on average common equity(4)

Return on average common equity, excluding DVA and net discrete tax benefits
   6.2%       10.1%
Return on average common equity, excluding DVA
   6.2%       13.5%
Return on average common equity
   6.2%       14.1%
Average tangible common equity(14)

Average tangible common equity, excluding DVA and net discrete tax benefits
   $ 58,807       $ 56,550
Average tangible common equity, excluding DVA
   $ 58,807       $ 56,691
Average tangible common equity
   $ 58,663       $ 55,888
Return on average tangible common equity(15)

Return on average tangible common equity, excluding DVA and net discrete tax benefits
   7.2%       11.8%
Return on average tangible common equity, excluding DVA
   7.2%       15.8%
Return on average tangible common equity
   7.2%       16.6%

   At
March 31, 2016    At
December 31, 2015
Tangible book value per common share(16)
   $ 30.44       $ 30.26
~~EMEA—Europe, Middle East and Africa.~~
DVA—Debt valuation adjustments represent the change in the fair value resulting from fluctuations in ~~the Company’s~~our credit spreads and other credit factors related to liabilities carried at fair value, primarily certain Long-term and Short-term borrowings.
(1)
~~For the calculation of basic and diluted earnings per common share, see Note 15 to the condensed consolidated financial statements in Item 1.~~
~~(2)~~
Pre-tax profit margin is a non-GAAP financial measure that ~~the Company considers~~we consider to be a useful measure to ~~the Company~~us, investors and ~~investors~~analysts to assess operating performance and represents income from continuing operations before income taxes as a percentage of net ~~revenues.~~revenues, which are two U.S. GAAP reported amounts without adjustment.
~~(3)~~(2)
Average common equity for each business segment is determined using ~~the Company’s~~our Required Capital framework, an internal capital adequacy measure (see “Liquidity and Capital Resources—Regulatory Requirements—Attribution of Average Common Equity according to the Required Capital Framework” herein). Effective January 1, 2016, the common equity estimation and attribution to the business segments are based on the Company’s fully phased-in regulatory capital, including supplementary leverage and stress losses (which results in more capital being attributed to the business segments), whereas prior periods were attributed based on transitional regulatory capital provisions. Also, beginning in 2016, the amount of capital allocated to the business segments will be set at the beginning of each year, and will remain fixed throughout the year, until the next annual reset. Differences between available and Required Capital will be reflected in Parent equity during the year. Periods prior to 2016 have not been recast under the new methodology. Each business segment’s return on average common equity equals net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity for that segment. Effective tax rates used in the computation are determined on a separate legal entity basis. Average common equity and the return on average common equity for each business segment are non-GAAP financial measures that the Company considers useful for the Company and investors in assessing capital adequacy and to allow better comparability of period-to-period operating performance.
~~(4)~~(3)
Return on average common equity equals consolidated net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity. Effective January 1, 2016, as a result of the adoption of a provision of the accounting update related to DVA, ~~the Company has~~we have redefined the calculation of the return on average common equity
73
excluding DVA to adjust for DVA only in the denominator. Prior to January 1, 2016, for the return on average common equity, excluding DVA, and excluding DVA and net discrete tax benefits, both the numerator and denominator were adjusted to exclude those items. Average common equity, the return on average common equity, and average common equity and the return on average common equity, both excluding DVA, and excluding DVA and net discrete tax benefits, are non-GAAP financial measures that the Company considers useful for the Company and investors in assessing capital adequacy and to allow better comparability of period-to-period operating performance.
~~(5)~~(4)
~~For a discussion of how the geographic breakdown for net revenues is determined, see Note 21 to the consolidated financial statements in Item 8 of the 2015 Form 10-K.~~
~~(6)~~
Amounts include loans held for investment (net of allowance) and loans held for sale but exclude loans at fair value, which are included in Trading assets in the condensed consolidated balance sheet (see Note 7 to the condensed consolidated financial statements in Item 1).
~~(7)~~
For a discussion of Global Liquidity Reserve, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management Framework—Global Liquidity Reserve” in Part II, Item 7 of the 2015 Form 10-K.
~~(8)~~
Book value per common share equals common shareholders’ equity of $68,490 million at March 31, 2016 and $67,662 million at December 31, 2015 divided by common shares outstanding of 1,938 million at March 31, 2016 and 1,920 million at December 31, 2015.
~~(9)~~
~~For a discussion of the Company’s regulatory capital ratios, see “Liquidity and Capital Resources—Regulatory Requirements” herein.~~
~~(10)~~
~~See Note 13 to the condensed consolidated financial statements in Item 1 for information on the Tier 1 leverage ratio.~~
~~(11)~~
~~Amounts exclude the Investment Management business segment’s proportionate share of assets managed by entities in which it owns a minority stake and assets for which fees are not generated.~~
~~(12)~~
In accordance with the early adoption of a provision of the accounting updateRecognition and Measurement of Financial Assets and Financial Liabilities, unrealized DVA gains (losses) in the current quarter and current year period are recorded within ~~Other Comprehensive income (loss) (“OCI”)~~OCI in the ~~condensed~~ consolidated statements of comprehensive income. In the prior year quarter and prior year period, the DVA gains (losses) were recorded within Trading revenues in the ~~condensed~~ consolidated statements of income. See Notes 2 and 14 to the ~~condensed~~ consolidated financial statements in Item 1 for further information.
~~(13)~~(5)
For a discussion of ~~the Company’s~~our net discrete tax benefit, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.
~~(14)~~(6)
The impact of DVA on average common equity and average tangible common equity was approximately ~~$(144)~~$(106) million and ~~$(803)~~$(714) million in the current quarter and prior year quarter, respectively. The impact of DVA on average common equity and average tangible common equity was approximately $(128) million and $(756) million in the current year period and prior year period, respectively. The impact of the net discrete tax benefit on average common equity and average tangible common equity was approximately ~~$141~~$322 million in the prior year ~~quarter.~~period.
~~(15)~~(7)
Return on average tangible common equity equals net income applicable to Morgan Stanley less preferred dividends as a percentage of average tangible common equity. Effective January 1, 2016, as a result of the adoption of a provision of the accounting update related to DVA, ~~the Company has~~we have redefined the calculation of return on average tangible common equity excluding DVA to adjust for DVA only in the denominator. Prior to January 1, 2016, for the return on average tangible common equity, excluding DVA, and excluding DVA and net discrete tax benefits, both the numerator and the denominator were adjusted to exclude the impact of DVA and the impact of net discrete tax benefits. The impact of DVA was ~~0.8%~~1.0% and 0.9% in the prior year ~~quarter.~~quarter and prior year period, respectively. The impact of the net discrete tax benefit was ~~4.0%~~1.9% in the prior year ~~quarter.~~period.
~~(16)~~(8)
Tangible book value per common share equals tangible common equity of ~~$58,999~~$60,185 million at ~~March 31,~~June 30, 2016 and $58,098 million at December 31, 2015 divided by common shares outstanding of ~~1,938~~1,918 million at ~~March 31,~~June 30, 2016 and 1,920 million at December 31, 2015.

77
Return on Equity ~~Target.~~Target
~~The Company is~~We are aiming to improve ~~its~~our return to shareholders, and accordingly ~~has~~have established a target return on average common equity excluding DVA (“Return on Equity”) to be achieved by 2017, subject to the successful execution of ~~its~~our strategic objectives. For further information on ~~the Company’s~~our Return on Equity target and related assumptions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—Return on Equity Target” in Part II, Item 7 of the 2015 Form 10-K.
74
Business ~~Segments.~~Segments
Substantially all of ~~the Company’s~~our operating revenues and operating expenses are directly attributable to ~~its~~the business segments. Certain revenues and expenses have been allocated to each business segment, generally in proportion to its respective net revenues, non-interest expenses or other relevant measures.
As a result of treating certain intersegment transactions as transactions with external parties, ~~the Company includes~~we include an Intersegment Eliminations category to reconcile the business segment results to ~~its~~our consolidated results.
Net ~~Revenues.~~Revenues
For discussions of ~~the Company’s~~our net revenues, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Net Revenues” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Net Revenues by ~~Segments”~~Segment” in Part II, Item 7 of the 2015Form 10-K.
Compensation ~~Expense.~~Expense
For a discussion of ~~the Company’s~~our compensation expense, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Compensation Expense” in Part II, Item 7 of the 2015Form 10-K.
78
INSTITUTIONAL SECURITIES
INCOME STATEMENT INFORMATION
   Three Months Ended    Six Months Ended    % Change
   June 30,    June 30,

From Prior
Year Quarter


From Prior
Year Period
         2016                2015                2016                2015
   (dollars in millions)
Revenues:

Investment banking
   $ 1,108    $ 1,440    $ 2,098    $ 2,613    (23)%    (20)%
Trading
   2,498    2,785    4,389    6,207    (10)%    (29)%
Investments
   76    16    108    128    N/M    (16)%
Commissions and fees
   607    683    1,262    1,356    (11)%    (7)%
Asset management, distribution and administration fees
   69    69    142    145    0%    (2)%
Other
   138    212    142    302    (35)%    (53)%









Total non-interest revenues
   4,496    5,205    8,141    10,751    (14)%    (24)%









Interest income
   966    723    2,019    1,593    34%    27%
Interest expense
   884    756    1,868    1,714    17%    9%









Net interest
   82    (33)    151    (121)    N/M    N/M









Net revenues
   4,578    5,172    8,292    10,630    (11)%    (22)%









Compensation and benefits
   1,625    1,897    3,007    3,923    (14)%    (23)%
Non-compensation expenses
   1,447    1,653    2,871    3,272    (12)%    (12)%









Total non-interest expenses
   3,072    3,550    5,878    7,195    (13)%    (18)%









Income from continuing operations before income taxes
   1,506    1,622    2,414    3,435    (7)%    (30)%
Provision for income taxes
   453    511    728    517    (11)%    41%









Income from continuing operations
   1,053    1,111    1,686    2,918    (5)%    (42)%
Income (loss) from discontinued operations, net of income taxes
   (4)    (2)    (7)    (7)    N/M    0%









Net income
   1,049    1,109    1,679    2,911    (5)%    (42)%
Net income applicable to noncontrolling interests
   61    22    100    74    N/M    35%









Net income applicable to Morgan Stanley
   $     988    $     1,087    $     1,579    $     2,837    (9)%    (44)%









N/M—Not Meaningful

7579
~~INSTITUTIONAL SECURITIES~~Investment Banking
~~INCOME STATEMENT INFORMATION~~

   Three Months Ended
March 31, % Change
from Prior Year
       2016         2015
   (dollars in millions)
Revenues:

Investment banking
   $ 990    $ 1,173    (16)%
Trading
   1,891    3,422    (45)%
Investments
   32    112    (71)%
Commissions and fees
   655    673    (3)%
Asset management, distribution and administration fees
   73    76    (4)%
Other
   4    90    (96)%


Total non-interest revenues
   3,645    5,546    (34)%


Interest income
   1,053    870    21%
Interest expense
   984    958    3%


Net interest
   69    (88 ) N/M


Net revenues
   3,714    5,458    (32)%


Compensation and benefits
   1,382    2,026    (32)%
Non-compensation expenses
   1,424    1,619    (12)%


Total non-interest expenses
   2,806    3,645    (23)%


Income from continuing operations before income taxes
   908    1,813    (50)%
Provision for income taxes
   275    6    N/M


Income from continuing operations
   633    1,807    (65)%


Discontinued operations:

Income (loss) from discontinued operations before income taxes
   (5 ) (8 ) 38%
Provision for (benefit from) income taxes
   (2 ) (3 ) 33%


Income (loss) from discontinued operations
   (3 ) (5 ) 40%


Net income
   630    1,802    (65)%
Net income applicable to noncontrolling interests
   39    52    (25)%


Net income applicable to Morgan Stanley
   $ 591    $ 1,750    (66)%


Amounts applicable to Morgan Stanley:

Income from continuing operations
   $ 594    $ 1,755    (66)%
Income (loss) from discontinued operations
   (3 ) (5 ) 40%


Net income applicable to Morgan Stanley
   $ 591    $ 1,750    (66)%


~~N/M—Not Meaningful.~~
76
~~Investment Banking.~~
~~Investment banking revenues are composed of fees from advisory services and revenues from the underwriting of securities offerings and syndication of loans, net of syndication expenses.~~
Investment Banking ~~Revenues.~~Revenues

   Three Months Ended    Six Months Ended    % Change
   Three Months Ended
March 31,    % Change
from Prior Year    June 30,    June 30,    From Prior
Year Quarter    From Prior
Year Period
       2016            2015                   2016                    2015                    2016                    2015
   (dollars in millions)       (dollars in millions)
Advisory revenues
   $ 591       $ 471       25%       $ 497    $ 423    $ 1,088    $ 894    17%    22%
Underwriting revenues:

Equity underwriting revenues
   160       307       (48)%       266    489    426    796    (46)%    (46)%
Fixed income underwriting revenues
   239       395       (39)%       345    528    584    923    (35)%    (37)%













Total underwriting revenues
   399       702       (43)%       611    1,017    1,010    1,719    (40)%    (41)%













Total investment banking revenues
   $ 990       $ 1,173       (16)%       $     1,108    $     1,440    $     2,098    $     2,613    (23)%    (20)%













Investment Banking ~~Volumes.~~Volumes

   Three Months Ended
March 31,    Three Months Ended
June 30,    Six Months Ended
June 30,
       2016(1)            2015(1)              2016(1)                2015(1)                2016(1)                2015(1)
   (dollars in billions)    (dollars in billions)
Completed mergers and acquisitions(2)
   $ 290       $ 126       $           235              $        137              $       526              $262
Equity and equity-related offerings(3)
   7       19       14              20              22              39
Fixed income offerings(4)
   51       74       63              73              114              147

(1)
Source: Thomson Reuters, data at ~~April 14,~~July 1, 2016. Completed mergers and acquisitions volumes are based on full credit to each of the advisors in a transaction. Equity and equity-related offerings and fixed income offerings are based on full credit for single book managers and equal credit for joint book managers. Transaction volumes may not be indicative of net revenues in a given period. In addition, transaction volumes for prior periods may vary from amounts previously reported due to the subsequent withdrawal or change in the value of a transaction.
(2)
Amounts include transactions of $100 million or more.
(3)
Amounts include Rule 144A issuances and registered public offerings of common stock and convertible securities and rights offerings.
(4)
Amounts include non-convertible preferred stock, mortgage-backed and asset-backed securities, and taxable municipal debt. Amounts include publicly registered and Rule 144A issues. Amounts exclude leveraged loans and self-led issuances.
Investment banking revenues are composed of fees from advisory services and revenues from the underwriting of securities offerings and syndication of loans, net of syndication expenses.
Investment banking revenues of ~~$990~~$1,108 million in the current quarter and $2,098 million in the current year period decreased ~~16%~~23% and 20% from the ~~prior year quarter~~comparable periods due to lower underwriting revenues, partially offset by higher advisory revenues.

Advisory revenues increased in the current quarter and current year period due to higher completed M&A ~~activity. Completed M&A volume~~ activity ~~increased from the prior year quarter~~ (see Investment Banking Volumes ~~table above)~~table).
Equity underwriting revenues decreased ~~reflecting~~as a result of significantly lower market ~~volumes.~~volumes in both initial public offerings (“IPO”) and follow on offerings, while Fixed income underwriting revenues decreased primarily ~~reflecting~~due to lower bond and loan fees.

7780
Sales and Trading Net ~~Revenues.~~Revenues
Sales and Trading Net ~~Revenues.~~Revenues

   Three Months Ended
March 31, % Change
from Prior Year
       2016            2015
   (dollars in millions)
Trading
   $ 1,891       $ 3,422    (45)%
Commissions and fees
   655       673    (3)%
Asset management, distribution and administration fees
   73       76    (4)%
Net interest
   69       (88 ) N/M




Total sales and trading net revenues
   $ 2,688       $ 4,083    (34)%




~~N/M—Not~~
~~Meaningful.~~

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










Total sales and trading net revenues

   $

    3,256



   $

    3,504



   $

    5,944



   $

    7,587





(7)%





(22)%













N/M—Not Meaningful
Sales and Trading Net Revenues by ~~Business.~~Business


   Three Months Ended
June 30,    Six Months Ended
June 30,    % Change
   Three Months Ended
March 31, % Change
from Prior Year    From Prior
Year Quarter    From Prior
Year Period
       2016         2015                2016                    2015                    2016                    2015
   (dollars in millions)    (dollars in millions)
Equity
   $ 2,056    $ 2,293    (10)%       $ 2,145       $ 2,342       $ 4,201       $ 4,635       (8)%       (9)%
Fixed income and commodities
   873    2,003    (56)%       1,297       1,377       2,170       3,380       (6)%       (36)%
Other
   (241 ) (213 ) (13)%       (186)       (215)       (427)       (428)       13%       0%











Total sales and trading net revenues
   $ 2,688    $ 4,083    (34)%       $

    3,256



   $

    3,504



   $

    5,944



   $

    7,587





(7)%





(22)%














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


   Three Months Ended
March 31,    % Change
from Prior Year    Three Months Ended
June 30,    Six Months Ended
June 30,    % Change
       2016            2015           From Prior
Year Quarter    From Prior
Year Period
   (dollars in millions)       2016    2015    2016    2015
Total sales and trading net revenues—non-GAAP
   $ 2,688       $ 3,958       (32)%
   (dollars in millions)
Total sales and trading net revenues—U.S. GAAP
   $         3,256       $         3,504       $         5,944       $         7,587       (7)%       (22)%
Impact of DVA(1)
   —       125       (100)%       —       (182)       —       (307)       (100)%       (100)%













Total sales and trading net revenues
   $ 2,688       $ 4,083       (34)%
Total sales and trading net revenues—non-GAAP
   $ 3,256       $ 3,322       $ 5,944       $ 7,280       (2)%       (18)%









Equity sales and trading net revenues—U.S. GAAP
   $ 2,145       $ 2,342       $ 4,201       $ 4,635       (8)%       (9)%
Impact of DVA(1)
   —       (72)       —       (97)       (100)%       (100)%













Equity sales and trading net revenues—non-GAAP
   $ 2,056       $ 2,268       (9)%       $ 2,145       $ 2,270       $ 4,201       $ 4,538       (6)%       (7)%









Fixed income and commodities sales and trading net revenues—U.S. GAAP
   $ 1,297       $ 1,377       $ 2,170       $ 3,380       (6)%       (36)%
Impact of DVA(1)
   —       25       (100)%       —       (110)       —       (210)       (100)%       (100)%













Equity sales and trading net revenues
   $ 2,056       $ 2,293       (10)%
Fixed income and commodities sales and trading net revenues—non-GAAP
   $ 1,297       $ 1,267       $ 2,170       $ 3,170       2%       (32)%













Fixed income and commodities sales and trading net revenues—non-GAAP
   $ 873       $ 1,903       (54)%
Impact of DVA(1)
   —       100       (100)%





Fixed income and commodities sales and trading net revenues
   $ 873       $ 2,003       (56)%






(1)
In accordance with the early adoption of a provision of the accounting updateRecognition and Measurement of Financial Assets and Financial Liabilities, unrealized DVA gains (losses) in the current quarter and current year period are recorded within OCI in the ~~condensed~~ consolidated statements of comprehensive income. In the prior year quarter and prior year period, the DVA gains (losses) were recorded within Trading revenues in the ~~condensed~~ consolidated statements of income. See Notes 2 and 14 to the ~~condensed~~ consolidated financial statements in Item 1 for further information.
~~Total sales and trading net revenues of $2,688 million in the current quarter decreased 34% from the prior year quarter due to lower equity, fixed income and commodities revenues.~~

7881
Sales and Trading Net Revenues during the Current Quarter
Equity.

Equity sales and trading net revenues ~~of $2,056~~were $2,145 million, a decrease from the ~~prior year quarter primarily~~strong comparable period reflecting ~~declines~~significantly reduced volumes and levels of client engagement in ~~cash equities in volatile global equity markets,~~Asia, partly offset by ~~continued strength~~improved performance in ~~prime brokerage as a result of increased client activity.~~Europe and the U.S.
Fixed Income and ~~Commodities.~~Commodities

Fixed income and commodities net revenues of ~~$873~~$1,297 million decreased from the comparable period. The prior year quarter results included positive DVA revenues of $110 million. Excluding the impact of DVA, fixed income and commodities net revenues were essentially flat with the prior year quarter. ~~Lower commodities~~Results primarily reflected an improved credit market environment and improved revenues from structured transactions in natural gas and power, substantially offset by lower results ~~primarily reflect~~from counterparty risk management activities in the current quarter and the positive impact of a rating upgrade in the prior year quarter, and the absence of revenues from the global oil merchanting business, which was sold on November 1, 2015, and the depressed energy price environment. Lower fixed income results reflect lower levels of client activity in rates and foreign exchange and a challenging credit environment. In the prior year quarter, fixed income and commodities results included a DVA gain of $100 million.2015. For more information on the sale of the global oil merchanting business, see “Management’s Discussion and Analysis of Financial Conditions and Results of ~~Operations—~~Operations — Business ~~Segments—~~Segments — Institutional ~~Securities—~~Securities — Investments, Other Revenues, Non-interest Expenses, Income Tax Items, Dispositions and Other ~~Items—~~Items — 2015 Compared with ~~2014—~~2014 — Dispositions” in Part II, Item 7 of the 2015 Form 10-K.
Sales and Trading Net Revenues during the Current Year Period
Equity
Equity sales and trading net revenues were $4,201 million, a decrease from the strong comparable period primarily reflecting declines in Asia across all products from reduced volumes.
Fixed Income and Commodities
Fixed income and commodities net revenues of $2,170 million decreased from the comparable period. In the prior year period, fixed income and commodities results included positive DVA revenues of $210 million. Excluding the impact of DVA, fixed income and commodities net revenues were lower in the current year period as compared with the prior year period primarily reflecting lower results in interest rate products and foreign exchange, a challenging credit environment early in the current year period, lower commodities results due to the absence of revenues from the global oil merchanting business, as discussed herein, and the depressed energy price environment in the first quarter of 2016.
Investments, Other Revenues, Non-interest Expenses and Other ~~Items.~~Items
~~Investments.~~Investments

Net investment gains of ~~$32~~$76 million in the current quarter ~~decreased 71%~~increased from the ~~prior~~comparable period primarily reflecting higher gains on business related investments.
Net investment gains of $108 million in the current year ~~quarter~~period decreased from the comparable period primarily reflecting losses on investments associated with ~~the Company’s~~our compensation plans and lower gains on principal investments in real ~~estate.~~estate, partly offset by higher gains on business related investments.
~~Other.~~Other

Other revenues of $4$138 million in the current quarter and $142 million in the current year period decreased ~~96%~~35% and 53% from the ~~prior year quarter~~comparable periods primarily due to ~~an increase in the allowance for losses on loans held for investment, mark-to-market losses on loans and commitments held for sale and~~ lower results related to ~~the Company’s~~our 40% stake in Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (“MUMSS”) (see Note 8 to the ~~condensed~~ consolidated financial statements in Item 1 for further information). In the current year period, other revenues also decreased from the comparable period due to an increase in the allowance for losses on loans held for investment.
Non-interest ~~Expenses.~~Expenses
Non-interest expenses of ~~$2,806~~$3,072 million in the current quarter and $5,878 million in the current year period decreased ~~23%~~13% and 18% from the ~~prior year quarter~~comparable periods driven by a ~~32%~~14% and 23% reduction in Compensation and benefits expenses and a 12% reduction in both periods in Non-compensation expenses.

Compensation and benefits expenses decreased in the current quarter and current year period primarily due to a decrease in discretionary incentive compensation driven mainly by lower revenues and a decrease in salaries due to lower headcount. In the current year period, Compensation and benefits expenses also reflected a decrease in the fair value of deferred compensation plan referenced ~~investments and lower headcount.~~investments.

Non-compensation expenses decreased in the current quarter and current year period primarily due to lower litigation ~~costs.~~costs, transaction related expenses in Asia and expense reductions across Professional services, Marketing and business development and Occupancy and equipment.
Noncontrolling ~~Interests.~~Interests
Noncontrolling interests primarily relate to Mitsubishi UFJ Financial Group, Inc.’s interest in Morgan Stanley MUFG Securities Co., Ltd. (“MSMS”).
��
82
WEALTH MANAGEMENT
INCOME STATEMENT INFORMATION
Three Months Ended
June 30, Six Months Ended
June 30,    % Change
   From Prior
  Year Quarter      From Prior
Year Period
2016 2015 2016 2015
(dollars in millions)
Revenues:

Investment banking
$ 123    $ 186    $ 244    $ 378       (34)%       (35)%
Trading
252    196    446    428       29%       4%
Investments
—    13    (2)    15       N/M       N/M
Commissions and fees
423    490    835    1,016       (14)%       (18)%
Asset management, distribution and administration fees
2,082    2,174    4,136    4,289       (4)%       (4)%
Other
102    79    160    157       29%       2%


Total non-interest revenues
2,982    3,138    5,819    6,283       (5)%       (7)%


Interest income
920    782    1,834    1,519       18%       21%
Interest expense
91    45    174    93       102%       87%


Net interest
829    737    1,660    1,426       12%       16%


Net revenues
3,811    3,875    7,479    7,709       (2)%       (3)%


Compensation and benefits
2,152    2,200    4,240    4,425       (2)%       (4)%
Non-compensation expenses
800    790    1,594    1,544       1%       3%


Total non-interest expenses
    2,952        2,990    5,834    5,969       (1)%       (2)%


Income from continuing operations before income taxes
859    885    1,645    1,740       (3)%       (5)%
Provision for income taxes
343    324    636    644       6%       (1)%


Net income applicable to Morgan Stanley
$ 516    $ 561    $     1,009    $     1,096       (8)%       (8)%


N/M – Not Meaningful

7983
~~WEALTH MANAGEMENT~~Statistical Data
~~INCOME STATEMENT INFORMATION~~

   Three Months Ended
March 31,    % Change
from Prior Year
       2016         2015
   (dollars in millions)
Revenues:

Investment banking
   $ 121    $ 192       (37)%
Trading
   194    232       (16)%
Investments
   (2 ) 2       N/M
Commissions and fees
   412    526       (22)%
Asset management, distribution and administration fees
   2,054    2,115       (3)%
Other
   58    78       (26)%



Total non-interest revenues
   2,837    3,145       (10)%



Interest income
   914    737       24%
Interest expense
   83    48       73%



Net interest
   831    689       21%



Net revenues
   3,668    3,834       (4)%



Compensation and benefits
   2,088    2,225       (6)%
Non-compensation expenses
   794    754       5%



Total non-interest expenses
   2,882    2,979       (3)%



Income from continuing operations before income taxes
   786    855       (8)%
Provision for income taxes
   293    320       (8)%



Income from continuing operations
   493    535       (8)%



Discontinued operations:

Income (loss) from discontinued operations before income taxes
   —    —       —
Provision for (benefit from) income taxes
   —    —       —



Income (loss) from discontinued operations
   —    —       —



Net income
   493    535       (8)%
Net income applicable to noncontrolling interests
   —    —       —



Net income applicable to Morgan Stanley
   $ 493    $ 535       (8)%



Amounts applicable to Morgan Stanley:

Income from continuing operations
   $ 493    $ 535       (8)%
Income (loss) from discontinued operations
   —    —       —



Net income applicable to Morgan Stanley
   $ 493    $ 535       (8)%



~~N/M—Not~~
~~Meaningful.~~
80
~~Net Revenues.~~
~~Transactional Revenues.~~

   Three Months
Ended March 31,    % Change
from Prior Year
       2016            2015
   (dollars in millions)
Investment banking
   $ 121       $ 192       (37)%
Trading
   194       232       (16)%
Commissions and fees
   412       526       (22)%





Transactional revenues
   $ 727       $ 950       (23)%





~~Transactional revenues of $727 million in the current quarter decreased 23% from the prior year quarter due to lower revenues in each of Investment banking, Trading and Commissions and fees.~~
~~Investment banking revenues decreased primarily due to reduced levels of underwriting activity.~~
~~Trading revenues decreased primarily due to losses related to investments associated with certain employee deferred compensation plans.~~
~~Commissions and fees decreased primarily due to lower client activity from equity and mutual fund products and alternatives asset classes.~~
~~Asset Management.~~
Asset management, distribution and administration fees of $2,054 million in the current quarter decreased 3% from the prior year quarter primarily due to lower fees from mutual funds reflecting the impact of lower average asset levels and lower average fee rates related to fee-based accounts. (see “Statistical Data” herein).
~~Net Interest.~~
~~Net interest of $831 million in the current quarter increased 21% from the prior year quarter primarily due to higher deposit and loan balances.~~
~~Other.~~
~~Other revenues of $58 million in the current quarter decreased 26% from the prior year quarter primarily due to lower realized gains from the available for sale (“AFS”) securities portfolio.~~
~~Non-interest Expenses.~~
Non-interest expenses of $2,882 million in the current quarter decreased 3% from the prior year quarter primarily due to lower Compensation and benefit expenses partially offset by higher Non-compensation expenses.
Compensation and benefits expenses decreased primarily due to a decrease in the fair value of deferred compensation plan referenced investments and the decrease in formulaic payout to Wealth Management representatives linked to lower net revenues.
~~Non-compensation expenses increased primarily due to higher litigation costs and professional services fees.~~
81
~~Other Items.~~
~~U.S. Department of Labor Conflict of Interest Rule~~.
In April 2016, the U.S. Department of Labor adopted a conflict of interest rule under the Employee Retirement Income Security Act of 1974 that broadens the circumstances under which a firm is considered a fiduciary when transacting with retail investment accounts and sets forth requirements to ensure that advice given by broker-dealers acting as investment advice fiduciaries is impartial. The new fiduciary standard for investment advice will apply on April 10, 2017 and full compliance is required by January 1, 2018. While the Company is still in the process of reviewing the final rule, given the breadth and scale of the Company’s platform and continued investment in technology, the Company believes that it will be able to provide compliant solutions to meet its clients’ investment needs (see also “Business—Supervision and Regulation—Institutional Securities and Wealth Management—Broker-Dealer and Investment Adviser Regulation” in Part I, Item 1 of the 2015 Form 10-K).
~~Statistical Data.~~
Financial Information and Statistical Data (dollars in billions, except where noted).

   At
March 31,
2016 At
December 31,
2015 At
June 30,
2016 At
December 31,
2015
Client assets
   $ 1,999    $ 1,985
Client assets

$ 2,034    $ 1,985
Fee-based client assets(1)
   $ 798    $ 795
Fee-based client assets(1)

$ 820    $ 795
Fee-based client assets as a percentage of total client assets
   40 % 40 %
Fee-based client assets as a percentage of total client assets

40%    40%
Client liabilities(2)
   $ 66    $ 64
Client liabilities(2)

$ 69    $ 64
Bank deposit program
   $ 152    $ 149
Bank deposit program

$ 150    $ 149
Investment securities portfolio
   $ 61.8    $ 57.9
Investment securities portfolio

$ 64.6    $ 57.9
Loans and lending commitments
   $ 58.2    $ 55.3
Loans and lending commitments

$ 61.3    $ 55.3
Wealth Management representatives
   15,888    15,889
Wealth Management representatives

    15,909    15,889
Retail locations
   604    608
Retail locations

609    608
   Three Months Ended
March 31, Three Months Ended Six Months Ended
   2016 2015 June 30, June 30,
      2016             2015       2016 2015
Annualized revenues per representative (dollars in thousands)(3)
   $ 923    $ 959    $ 959    $ 978    $ 941    $ 968
Client assets per representative (dollars in millions)(4)
   $ 126    $ 129    $ 128    $ 129    $ 128    $ 129
Fee-based asset flows(5)
   $ 5.9    $ 13.3    $ 12.0    $ 13.9    $ 17.9    $ 27.2

(1)
Fee-based client assets represent the amount of assets in client accounts where the basis of payment for services is a fee calculated on those assets.
(2)
Client liabilities include securities-based and tailored lending, home loans and margin lending.
(3)
Annualized revenues per representative equal the Wealth Management business segment’s annualized revenues divided by the average representative headcount.
(4)
Client assets per representative equal total period-end client assets divided by period-end representative headcount.
(5)
Fee-based asset flows include net new fee-based assets, net account transfers, dividends, interest and client fees and exclude cash management-related activity.
Net Revenues
Total client liability balances increased to $66 billion at March 31, 2016 from $64 billion at December 31, 2015, primarily due to growth in Liquidity Access Line (“LAL”) securities-based lending product and residential real estate loans. The loans and lending commitments in the Wealth Management business segment continued to growTransactional Revenues
Three Months Ended
June 30, Six Months Ended
June 30, % Change
From Prior
Year Quarter From Prior
Year Period
2016 2015 2016 2015
(dollars in millions)
Investment banking
$ 123    $ 186    $ 244    $ 378    (34)%    (35)%
Trading
252    196    446    428    29%    4%
Commissions and fees
423    490    835    1,016    (14)%    (18)%

Transactional revenues
$       798    $       872    $       1,525    $       1,822    (8)%    (16)%

Transactional revenues of $798 million in the current quarter and $1,525 million in the ~~Company expects this trend~~current year period decreased 8% and 16% from the comparable periods due to ~~continue. See “Supplemental Financial Information~~lower revenues in Investment banking and ~~Disclosures—U.S. Bank Subsidiaries Lending Activities” herein~~Commissions and ~~“Quantitative~~fees, partially offset by higher revenues in Trading.
Investment banking revenues decreased in the current quarter and ~~Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Lending Activities”~~current year period primarily due to reduced levels of underwriting volumes driven by lower levels of new issue activity.
Trading revenues increased in ~~Item 3.~~the current quarter primarily due to gains related to investments associated with certain employee deferred compensation plans and higher revenues from fixed income products. The increase in the current year period was primarily due to higher revenues from fixed income, partially offset by
losses related to investments associated with certain employee deferred compensation plans.
Commissions and fees decreased in the current quarter and current year period reflected lower daily average commissions primarily due to reduced client activity in equity, mutual fund and annuity products.
Asset Management
Asset management, distribution and administration fees of $2,082 million in the current quarter and $4,136 million in the current year period decreased in both periods 4% from the comparable periods primarily due to lower fees from mutual funds reflecting the impact of lower average asset levels and lower average fee rates related to fee-based accounts, partially offset by positive flows (see “Fee-Based Client Assets Activity and Average Fee Rate by Account Type” herein).

8284
Net Interest
Net interest of $829 million in the current quarter and $1,660 million in the current year period increased 12% and 16% from the comparable periods primarily due to higher loan and investment securities balances which were funded by higher average deposits.
Other
Other revenues of $102 million in the current quarter increased 29% from the comparable period, due to higher realized gains from the available for sale (“AFS”) securities portfolio. Other revenues of $160 million in the current year period were relatively unchanged from the comparable period.
Non-interest Expenses
Non-interest expenses of $2,952 million in the current quarter and $5,834 million in the current year period decreased 1% and 2% from the comparable periods.
Compensation and benefits expenses were relatively unchanged in the current quarter. Compensation and benefits expenses decreased in the current year period primarily due to the decrease in formulaic payout to Wealth
Management representatives driven by lower net revenues and a decrease in the fair value of deferred compensation plan referenced investments.
Non-compensation expenses increased in the current quarter due to higher litigation costs, partially offset by lower Federal Deposit Insurance Corporation (“FDIC”) assessment on deposits. Non-compensation expenses increased in the current year period primarily due to higher litigation costs and professional services fees.
Other Items
U.S. Department of Labor Conflict of Interest Rule
In April 2016, the U.S. Department of Labor adopted a conflict of interest rule under the Employee Retirement Income Security Act of 1974 that broadens the circumstances under which a firm is considered a fiduciary when transacting with retail investment accounts and sets forth requirements to ensure that advice given by broker-dealers acting as investment advice fiduciaries is impartial. The new fiduciary standard for investment advice will apply on April 10, 2017 and full compliance is required by January 1, 2018. While we are still assessing the impact of the final rule, given the breadth and scale of our platform and continued investment in technology and infrastructure, we believe that we will be able to provide compliant solutions to meet our clients’ investment needs (see also “Business—Supervision and Regulation—Institutional Securities and Wealth Management—Broker-Dealer and Investment Adviser Regulation” in Part I, Item 1 of the 2015 Form 10-K).
Fee-Based Client ~~Assets.~~
Assets Activity and Average Fee Rate by Account Type
For a description of fee-based client assets, including descriptions for the ~~fee-based~~fee based client asset types and rollforward items in the following tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Wealth Management—Fee-Based Client Assets” in Part II, Item 7 of the 2015 Form 10-K.

~~Fee-Based Client Assets Activity and Average Fee Rate by Account Type.~~
At
March 31,
2016    Inflows    Outflows    Market
Impact    At
June 30,
2016    Average for the
Three Months
June 30,
2016
                       Fee Rate
(dollars in billions)    (in bps)
Separately managed accounts(1)
$         278       $ 9       $ (7)       $         (1)       $         279       31
Unified managed accounts
112       11       (5)       2       120       109
Mutual fund advisory
24       —       (1)       —       23       121
Representative as advisor
114       8       (8)       3       117       88
Representative as portfolio manager
255       17       (12)       5       265       101










    Subtotal
$ 783       $         45       $         (33)       $ 9       $ 804       74
Cash management
15       4       (3)       —       16       6










Total fee-based client assets
$ 798       $ 49       $ (36)       $ 9       $ 820       73











   At
December 31,
2015    Inflows    Outflows Market
Impact At
March 31,
2016    Average for the
Three Months Ended
March 31, 2016
                        Fee Rate
   (dollars in billions)    (in bps)
Separately managed accounts(1)
   $ 283       $ 9       $ (10 ) $ (4 ) $ 278       32
Unified managed accounts
   105       10       (5 ) 2    112       110
Mutual fund advisory
   25       —       (1 ) —    24       121
Representative as advisor
   115       6       (7 ) —    114       88
Representative as portfolio manager
   252       15       (11 ) (1 ) 255       102







Subtotal
   $ 780       $ 40       $ (34 ) $ (3 ) $ 783       75
Cash management
   15       2       (2 ) —    15       6







Total fee-based client assets
   $ 795       $     42       $     (36 ) $     (3 ) $ 798       73







85
At
March 31,
2015    Inflows    Outflows    Market
Impact    At
June 30,
2015    Average for the
  Three Months Ended
June 30,
2015
               Fee Rate
(dollars in billions)    (in bps)
Separately managed accounts(1)
$         287       $         13       $         (7)       $         1       $         294       34
Unified managed accounts
99       8       (4)       —       103       114
Mutual fund advisory
30       1       (2)       —       29       121
Representative as advisor
121       8       (8)       (1)       120       89
Representative as portfolio manager
250       16       (11)       (2)       253       104










    Subtotal
$ 787       $ 46       $ (32)       $ (2)       $ 799       77
Cash management
16       2       (4)       —       14       6










Total fee-based client assets
$ 803       $ 48       $ (36)       $ (2)       $ 813       75











At December 31,
2015    Inflows    Outflows    Market
Impact    At
June 30,
2016    Average for the
  Six Months Ended
June 30,
2016
   At
December 31,
2014    Inflows    Outflows Market
Impact At
March 31,
2015    Average for the
Three Months Ended
March 31, 2015    Fee Rate
                  Fee Rate
   (dollars in billions)    (in bps) (dollars in billions)    (in bps)
Separately managed accounts(1)
   $ 285       $ 11       $ (7 ) $ (2 ) $ 287       35 $ 283       $ 17       $       (17)       $ (4)       $         279       32
Unified managed accounts
   93       8       (4 ) 2    99       115 105       21       (9)                 3       120       109
Mutual fund advisory
   31       —       (2 ) 1    30       121 25       1       (3)       —       23       121
Representative as advisor
   119       9       (8 ) 1    121       89 115       13       (14)       3       117       88
Representative as portfolio manager
   241       16       (10 ) 3    250       105 252       31       (22)       4       265       102

















Subtotal
   $ 769       $ 44       $ (31 ) $ 5    $ 787       77 $ 780       $          83       $ (65)       $ 6       $ 804       74
Cash management
   16       3       (3 ) —    16       6 15       7       (6)       —       16       6

















Total fee-based client assets
   $ 785       $     47       $     (34 ) $     5    $     803       75 $ 795       $ 90       $ (71)       $ 6       $ 820       73

















At December 31,
2014    Inflows    Outflows    Market
Impact    At
June 30,
2015    Average for the
  Six Months Ended
June 30,
2015
               Fee Rate
(dollars in billions)    (in bps)
Separately managed accounts(1)
$ 285       $ 23       $ (14)       $ —       $ 294       35
Unified managed accounts
93       15       (7)       2       103       114
Mutual fund advisory
31       1       (3)       —       29       121
Representative as advisor
119       16       (15)       —       120       89
Representative as portfolio manager
241       31       (20)       1       253       104










    Subtotal
$ 769       $         86       $         (59)       $           3       $         799       77
Cash management
16       3       (5)       —       14       6










Total fee-based client assets
$ 785       $ 89       $ (64)       $ 3       $ 813       75











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

83
~~INVESTMENT MANAGEMENT~~
~~INCOME STATEMENT INFORMATION~~

   Three Months Ended
March 31, % Change
from Prior Year
       2016         2015
   (dollars in millions)
Revenues:

Investment banking
   $ 1    $ —    N/M
Trading
   (10 ) 3    N/M
Investments
   (64 ) 152    (142)%
Commissions and fees
   3    —    N/M
Asset management, distribution and administration fees
   526    514    2%
Other
   22    5    N/M


Total non-interest revenues
   478    674    (29)%


Interest income
   1    1    —
Interest expense
   2    6    (67)%


Net interest
   (1 ) (5 ) 80%


Net revenues
   477    669    (29)%


Compensation and benefits
   213    273    (22)%
Non-compensation expenses
   220    209    5%


Total non-interest expenses
   433    482    (10)%


Income from continuing operations before income taxes
   44    187    (76)%
Provision for income taxes
   10    61    (84)%


Income from continuing operations
   34    126    (73)%


Discontinued operations:

Income from discontinued operations before income taxes
   —    —    —
Provision for (benefit from) income taxes
   —    —    —


Income from discontinued operations
   —    —    —


Net income
   34    126    (73)%
Net income applicable to noncontrolling interests
   (16 ) 17    (194)%


Net income applicable to Morgan Stanley
   $ 50    $ 109    (54)%


Amounts applicable to Morgan Stanley:

Income from continuing operations
   $ 50    $ 109    (54)%
Income from discontinued operations
   —    —    —


Net income applicable to Morgan Stanley
   $ 50    $ 109    (54)%


~~N/M—Not~~
~~Meaningful.~~
8486
~~Net Revenues.~~INVESTMENT MANAGEMENT
INCOME STATEMENT INFORMATION

~~Investments.~~
Investments losses were $64 million in the current quarter compared with gains of $152 million in the prior year quarter reflecting investment markdowns and the reversal of previously accrued carried interest in certain private equity and real estate funds.
Three Months Ended
June 30,    Six Months Ended
June 30,    % Change
      From Prior
Year Quarter      From Prior
Year Period
2016    2015    2016    2015
(dollars in millions)
Revenues:

Investment banking
$ —       $ —       $ 1       $ —       —       N/M
Trading
5       (6)       (5)       (3)       N/M       (67)%
Investments
50       232       (14)       384       (78)%       N/M
Commissions and fees
—       —       3       —       —       N/M
Asset management, distribution and administration fees
517       522       1,043       1,036       (1)%       1%
Other
9       9       31       14       —       121%








Total non-interest revenues
581       757       1,059       1,431       (23)%       (26)%








Interest income
3       —       4       1       N/M       N/M
Interest expense
1       6       3       12       (83)%       (75)%








Net interest
2       (6)       1       (11)       N/M       N/M








Net revenues
583       751       1,060       1,420       (22)%       (25)%








Compensation and benefits
238       308       451       581       (23)%       (22)%
Non-compensation expenses
227       223       447       432       2%       3%








Total non-interest expenses
465       531       898       1,013       (12)%       (11)%








Income from continuing operations before income taxes
118       220       162       407       (46)%       (60)%
Provision for income taxes
37       59       47       120       (37)%       (61)%








Income from continuing operations
81       161       115       287       (50)%       (60)%








Net income
81       161       115       287       (50)%       (60)%
Net income applicable to noncontrolling interests
3       2       (13)       19       50%       N/M








Net income applicable to Morgan Stanley
$         78       $         159       $         128       $         268       (51)%       (52)%









~~Asset Management, Distribution and Administration Fees.~~
~~Asset management, distribution and administration fees of $526 million in the current quarter were relatively unchanged from the prior year quarter.~~
~~Other.~~
Other revenues were $22 million in the current quarter compared to $5 million from the prior year quarter due to higher net revenues associated with the Company’s minority interest investments in certain third-party investment managers.
~~Non-interest Expenses.~~
Non-interest expenses of $433 million in the current quarter decreased 10% from the prior year quarter primarily due to lower Compensation and benefit expenses partially offset by higher Non-compensation expenses.
~~Compensation and benefits expenses decreased primarily due to the decrease in deferred compensation associated with carried interest.~~
~~Non-compensation expenses increased primarily due to higher brokerage and clearing expenses related to liquidity products.~~
~~Other Items.~~
~~Noncontrolling Interests.~~
Noncontrolling interests in the current quarter of $(16) million are primarily related to the consolidation of certain merchant banking funds sponsored by the Company, whereas noncontrolling interests in the prior year quarter of $17 million were primarily related to the consolidation of certain real estate funds sponsored by the Company. See Note 2 to the condensed consolidated financial statements in Item 1 for further information on the adoption of the accounting update~~Amendments to the Consolidation Analysis~~.N/M – Not Meaningful

8587
~~Statistical Data.~~Net Revenues
Investments

Investments gains of $50 million in the current quarter and losses of $14 million in the current year period compared with gains of $232 million and $384 million in the comparable periods, reflected lower investment gains and carried interest in infrastructure and private equity investments. Investments losses in the current year period also reflect the reversal of previously accrued carried interest.
Asset Management, Distribution and Administration Fees
Asset management, distribution and administration fees of $517 million in the current quarter and $1,043 million in the current year period were relatively unchanged from the comparable periods, as asset class balances and fee rates remained stable.
Non-interest Expenses
Non-interest expenses of $465 million in the current quarter and $898 million in the current year period decreased 12% and 11% from the comparable periods primarily due to lower Compensation and benefit expenses.
Compensation and benefits expenses decreased in the current quarter and current year period primarily due to the decrease in deferred compensation associated with carried interest and the decrease in discretionary incentive compensation driven by lower revenues.
Assets Under Management or Supervision
Effective in the second quarter of 2016, the presentation of assets under management or supervision (“AUM”) for Investment Management has been revised to better align asset classes with its present organizational structure. With this change, the Alternative / Other products asset class now includes products in fund of funds, real estate, private equity and credit strategies, as well as multi-asset portfolios. All prior period information has been recast in the new format.
Assets Under Management or Supervision and Average Fee Rate by Asset ~~Class.~~Class

At
December 31,
2015 Inflows Outflows Distributions Market
Impact Foreign
Currency
Impact At March 31,
2016 Average for the
Three Months Ended
March 31,
2016
AUM Fee Rate
(dollars in billions) (in bps)
Traditional Asset Management:

Equity
$ 126    $ 7    $ (9 ) $ —    $ —    $ 1    $ 125    $ 122    69
Fixed income
60    5    (6 ) —    2    1    62    60    32
Liquidity
149    336    (338 ) —    (1 ) —    146    149    17
Alternatives(1)
36    1    (1 ) —    (1 ) —    35    36    57
Managed Futures
3    —    —    —    —    —    3    3    111

Total Traditional Asset Management
374    349    (354 ) —    —    2    371    370    41
Merchant Banking and Real Estate Investing(1)
32    2    —    —    —    —    34    33    121

Total assets under management or supervision
$ 406    $ 351    $ (354 ) $ —    $ —    $ 2    $ 405    $     403    48

Shares of minority stake assets
8    8    8

At
December 31,
2014 Inflows Outflows Distributions Market
Impact Foreign
Currency
Impact At March 31,
2015 Average for the
Three Months Ended
March 31,
2015
AUM Fee Rate
(dollars in billions) (in bps)
Traditional Asset Management:

Equity
$ 141    $ 8    $ (10 ) $ —    $ 4    $ (2 ) $ 141    $ 142    70
Fixed income
65    7    (6 ) —    1    (2 ) 65    65    31
Liquidity
128    283    (280 ) —    1    (1 ) 131    127    8
Alternatives(1)
36    —    —    —    —    —    36    36    64
Managed Futures
3    —    —    —    —    —    3    3    114

Total Traditional Asset Management
373    298    (296 ) —    6    (5 ) 376    373    42
Merchant Banking and Real Estate Investing(1)
30    1    (1 ) (1 ) 1    —    30    31    102

Total assets under management or supervision
$ 403    $ 299    $ (297 ) $ (1 ) $ 7    $ (5 ) $ 406    $     404    47

Shares of minority stake assets
7    7    7
~~AUM—Assets~~
~~under management.~~
~~bps—Basis~~
~~points.~~
~~(1)~~
Assets under management or supervision for Merchant Banking and Real Estate Investing and Alternatives reflect the basis on which management fees are earned. This calculation excludes AUM where no management fees are earned or where the fair value of these assets, including lending commitments, differs from the basis on which management fees are earned. Including these assets, AUM at March 31, 2016 and March 31, 2015 for Merchant Banking and Real Estate Investing were $45 billion and $40 billion, respectively, and for Alternatives were $38 billion and $39 billion, respectively.
For a description of the rollforward items in the ~~above~~following tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Investment Management—Statistical Data” in Part II, Item 7 of the 2015 Form 10-K.
At
March 31,
2016 Inflows Outflows Distributions Market
Impact Foreign
Currency
Impact At
  June 30,
2016 Average for the
  Three Months Ended
June 30,
2016
Total
AUM Fee
Rate
(dollars in billions) (in bps)
Equity
$ 81    $ 5    $ (6)    $ —    $ 1    $     —    $ 81    $ 81    74
Fixed income
62    7    (8)    —        —    —    61    61    32
Liquidity
146    291    (289)    —    1    —    149    146    19
Alternative / Other products
116    9    (10)    (1)    1    —    115    116    74

Total assets under management or supervision
$         405    $     312    $     (313)    $         (1)    $ 3    $ —    $     406    $ 404    48

Shares of minority stake assets
8    8    8

8688
   At
March 31,
2015    Inflows    Outflows    Distributions    Market
Impact    Foreign
Currency
Impact    At
June 30,
2015    Average for the
Three Months Ended
June 30,
2015

                        Total
AUM    Fee
Rate
   (dollars in billions)    (in bps)
Equity
   $ 98          $ 3          $ (7)          $ —           $ 2       $ —           $ 96          $ 98          71
Fixed income
   65          6          (6)          —           (1)       —           64          65          33
Liquidity
   131          306          (305)          —           —       —           132          131          9
Alternative / Other products
   112          6          (5)          (2)          (1)       1          111          112          81

















Total assets under management or supervision
   $ 406          $ 321          $ (323)          $ (2)          $ —       $ 1          $ 403          $ 406          47

















Shares of minority stake assets
   7                         7          7
   At
December 31,
2015    Inflows    Outflows    Distributions    Market
Impact    Foreign
Currency
Impact    At
June 30,
2016    Average for the
Six Months Ended
June 30,
2016

                        Total
AUM    Fee
Rate
   (dollars in billions)    (in bps)
Equity
   $ 83            $ 10          $ (12)          $ —             $ —           $ —           $ 81          $ 80          73
Fixed income
   60            12          (14)          —             2          1          61          60          32
Liquidity
   149            627          (627)          —             —           —           149          148          18
Alternative / Other products
   114            14          (14)          (1)            1          1          115          115          77

















Total assets under management or supervision
   $ 406            $ 663          $ (667)          $ (1)            $ 3          $ 2          $ 406          $ 403          48

















Shares of minority stake assets
   8                           8          8
   At
December 31,
2014    Inflows    Outflows    Distributions    Market
Impact    Foreign
Currency
Impact    At
June 30,
2015    Average for the
Six Months Ended
June 30,
2015

                        Total
AUM    Fee
Rate
   (dollars in billions)    (in bps)
Equity
   $ 99          $ 7          $ (14)          $ —             $ 5          $ (1)          $ 96          $ 99       70
Fixed income
   65          12          (11)          —             —           (2)          64          65       32
Liquidity
   128          589          (585)          —             —           —           132          129       9
Alternative / Other products
   111          11          (10)          (2)            1          —           111          112       80

















Total assets under management or supervision
   $ 403          $ 619          $ (620)          $ (2)            $ 6          $ (3)          $ 403          $ 405       47

















Shares of minority stake assets
   7                         7       7
bps—Basis points
89
Supplemental Financial Information and ~~Disclosures.~~Disclosures

U.S. Bank ~~Subsidiaries.~~Subsidiaries
~~The Company provides~~We provide loans to a variety of customers, from large corporate and institutional clients to high net worth individuals, primarily through ~~its~~our U.S. bank subsidiaries, Morgan Stanley Bank, N.A. (“MSBNA”) and Morgan Stanley Private Bank, National Association (“MSPBNA”) (collectively, “U.S. Bank Subsidiaries”). The lending activities in the Institutional Securities business segment primarily include loans or lending commitments to corporate clients. The lending activities in the Wealth Management business segment primarily include securities-based lending that
allows clients to borrow money against the value of qualifying securities and also include residential real estate loans. ~~The Company expects its~~We expect our lending activities to continue to grow through further penetration of the ~~Institutional Securities and~~ Wealth Management business segments’ client base. For a further discussion of ~~the Company’s~~our credit risks, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk” in Item 3. For further discussion about loans and lending commitments, see Notes 7 and 11 to the ~~condensed~~ consolidated financial statements in Item 1.

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

   At March 31, 2016    At December 31, 2015    At June 30, 2016      At December 31, 2015
   (dollars in billions)    (dollars in billions)
U.S. Bank Subsidiaries assets
   $ 177.0       $ 174.2       $ 175.1       $ 174.2
U.S. Bank Subsidiaries investment securities portfolio(1)
   61.8       57.9       64.6       57.9
Wealth Management U.S. Bank Subsidiaries data:

Securities-based lending and other loans(2)
   $ 30.0       $ 28.6       $ 31.4       $ 28.6
Residential real estate loans
   21.8       20.9       22.7       20.9








Total
   $ 51.8       $ 49.5       $ 54.1       $ 49.5








Institutional Securities U.S. Bank Subsidiaries data:

Corporate loans
   $ 23.9       $ 22.9       $ 21.2       $ 22.9
Wholesale real estate loans
   8.3       8.9       8.9       8.9








Total
   $ 32.2       $ 31.8       $                     30.1       $                     31.8








(1)
The U.S. Bank Subsidiaries investment securities portfolio includes AFS investment securities of ~~$54.1~~$54.2 billion at ~~March 31,~~June 30, 2016 and $53.0 billion at December 31, 2015. The remaining balance represents held to maturity investment securities of ~~$7.7~~$10.4 billion at ~~March 31,~~June 30, 2016 and $4.9 billion at December 31, 2015.
(2)
Other loans primarily include tailored lending.
~~(3)~~
Other lending includes activities related to commercial and residential mortgage lending, asset-backed lending, corporate loans purchased in the secondary market, financing extended to equities and commodities customers, and loans to municipalities.

Income Tax ~~Matters.~~
Matters
The effective tax rate from continuing operations was ~~33.3%~~33.5% and ~~13.6%~~33.4% for the ~~quarters ended March 31, 2016~~current quarter and ~~2015,~~current year period, respectively.
The effective tax rate from continuing operations was 32.8% and 22.9% for the prior year quarter and prior year period, respectively. The results for prior year ~~quarter~~period included a net discrete tax benefit of $564 million, primarily associated with the repatriation of non-U.S. earnings at a cost lower than originally estimated due to an internal restructuring to simplify ~~the Company’s~~our legal entity organization in the U.K. Excluding this net discrete tax benefit, the effective tax rate from continuing operations for the prior year ~~quarter~~period would have been ~~33.3%, which reflects the geographic mix of earnings.~~33.1%.

8790
Accounting Development ~~Updates.~~Updates

The Financial Accounting Standards Board (the “FASB”) issued the following accounting updates which apply to ~~the Company.~~us.
~~These~~The following accounting updates are not expected to have a material impact in the ~~condensed~~ consolidated financial statements:

Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This guidance is effective as of January 1, 2017.

Improvements to Employee Share-Based Payment Accounting. This guidance is effective as of January 1, 2017.

Contingent Put and Call Options in Debt Instruments. This guidance is effective as of January 1, 2017.

Recognition and Measurement of Financial Assets and Financial Liabilities. ~~The~~This guidance is effective ~~for the Company beginning~~as of January 1, 2018. On January 1, 2016, ~~the Company~~we early adopted a specific provision of the accounting update (see Note 2 to the ~~condensed~~ consolidated financial statements in Item 1), with the remainder to be adopted on January 1, 2018.
~~This accounting update will not have an impact in the condensed consolidated financial statements:~~
~~Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.~~
~~This~~The following accounting update will not have a material impact in the ~~condensed~~ consolidated financial statements:

Simplifying the Transition to the Equity Method of Accounting.
The ~~FASB issued the~~ following accounting updates ~~which~~ are currently being evaluated to determine the potential impact of adoption:
Financial Instruments – Credit Losses. This accounting update impacts the impairment model for certain financial assets measured at amortized cost such as loans held for investment and held to maturity debt securities. The amendments in this update will accelerate the recognition of credit losses by replacing the incurred loss impairment methodology with a current expected credit loss (“CECL”) methodology that requires an estimate of expected credit losses over the entire life of the financial asset. Additionally, although the CECL methodology will not apply to AFS debt securities, the update will require establishment of an allowance to reflect impairment of these securities, thereby eliminating the concept of a permanent write-down. This update is effective as of
January 1, 2020, with early adoption permitted as of January 1, 2019.

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

Revenue from Contracts with Customers. ~~The purpose of this~~This accounting update isaims to clarify the principles of revenue recognition, to develop a common revenue recognition standard across all industries for U.S. GAAP and International Financial Reporting Standards and to provide enhanced disclosures for users of the financial statements. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ~~standard~~update is effective onas of January 1, 2018, with early adoption permitted ~~but not before~~as of January 1, 2017.
88
Critical Accounting Policies
~~The Company’s condensed~~Our consolidated financial statements are prepared in accordance with U.S. GAAP, which require ~~the Company~~us to make estimates and assumptions (see Note 1 to the ~~Company’s condensed~~ consolidated financial statements in Item 1). ~~The Company believes~~We believe that of ~~its~~our significant accounting policies (see Note 2 to the ~~Company’s~~ consolidated financial statements in Item 8 of the 2015 Form 10-K and Note 2 to the ~~Company’s condensed~~ consolidated financial statements in Item 1), the fair value, goodwill and intangible assets, legal and regulatory contingencies and income taxes policies involve a higher degree of judgment and complexity. For a further discussion about ~~the Company’s~~our critical accounting policies, see ~~“Management~~“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in Part II, Item 7 of the 2015 Form 10-K.

8991
Liquidity and Capital ~~Resources.~~Resources
~~The Company’s senior~~Senior management establishes liquidity and capital policies. Through various risk and control committees, senior management reviews business performance relative to these policies, monitors the availability of alternative sources of financing, and oversees the liquidity, interest rate and currency sensitivity of ~~the Company’s~~our asset and liability position. The Treasury Department, Firm Risk Committee, Asset and Liability Management Committee, and other committees and control groups assist in evaluating, monitoring and controlling the impact that ~~the Company’s~~our business activities have on ~~its condensed~~our consolidated balance ~~sheet,~~sheets, liquidity and capital structure. Liquidity and capital matters are reported regularly to the Board and the Board’s Risk Committee.
The Balance ~~Sheet.~~Sheet
~~The Company monitors~~We monitor and ~~evaluates~~evaluate the composition and size of ~~its~~our balance sheet on a regular basis. ~~The Company’s~~Our balance sheet management process includes quarterly planning, business-specific ~~limits,~~thresholds, monitoring of business-specific usage versus ~~limits,~~ key performance metrics and new business impact assessments.
~~The Company establishes~~We establish balance sheet ~~limits~~thresholds at the consolidated, business segment and business unit levels. ~~The Company monitors~~We monitor balance sheet ~~usage versus limits~~utilization and ~~reviews~~review variances resulting from business activity or market fluctuations. On a regular basis, ~~the Company reviews~~we review current performance versus ~~limits~~established thresholds and ~~assesses~~assess the need to re-allocate ~~limits~~our balance sheet based on business unit needs. ~~The Company~~We also ~~monitors~~monitor key metrics, including asset and liability size, composition of the balance sheet ~~limit utilization~~ and capital usage.
Total Assets ~~for the Company’s~~by Business ~~Segments.~~Segment

   At March 31, 2016
   Institutional
Securities    Wealth
Management    Investment
Management    Total
   (dollars in millions)
Assets

Cash and cash equivalents
   $ 24,440       $ 28,867       $ 331       $ 53,638
Trading assets, at fair value
   230,468       1,179       2,503       234,150
Investment securities
   15,809       61,783       —       77,592
Securities received as collateral, at fair value
   8,813       —       —       8,813
Securities purchased under agreements to resell
   96,062       2,712       —       98,774
Securities borrowed
   139,851       562       —       140,413
Customer and other receivables
   23,513       20,714       535       44,762
Loans, net of allowance
   36,986       51,816       —       88,802
Other assets(1)
   45,702       13,454       1,397       60,553








Total assets
   $     621,644       $     181,087       $         4,766       $     807,497








   At December 31, 2015
   Institutional
Securities    Wealth
Management    Investment
Management    Total
   (dollars in millions)
Assets

Cash and cash equivalents
   $ 22,356       $ 31,216       $ 511       $ 54,083
Trading assets, at fair value
   224,949       883       2,448       228,280
Investment securities
   14,124       57,858       1       71,983
Securities received as collateral, at fair value
   11,225       —       —       11,225
Securities purchased under agreements to resell
   83,205       4,452       —       87,657
Securities borrowed
   141,971       445       —       142,416
Customer and other receivables
   23,390       21,406       611       45,407
Loans, net of allowance
   36,237       49,522       —       85,759
Other assets(1)
   45,257       13,926       1,472       60,655








Total assets
   $     602,714       $     179,708       $         5,043       $     787,465








90
At June 30, 2016

Institutional
Securities

Wealth
    Management

Investment
    Management
   Total

(dollars in millions)

Assets

Cash and cash equivalents
$         33,333    $       22,757    $             43       $         56,133
Trading assets, at fair value
252,857    1,175    2,762       256,794
Investment securities
15,495    64,649    —       80,144
Securities purchased under agreements to resell
93,310    4,279    —       97,589
Securities borrowed
130,812    469    —       131,281
Customer and other receivables
30,720    21,597    510       52,827
Loans, net of allowance
38,898    54,267    —       93,165
Other assets(1)
45,948    13,608    1,384       60,940



Total assets
$ 641,373    $ 182,801    $ 4,699       $ 828,873



At December 31, 2015

Institutional
Securities

Wealth
Management

Investment
Management
   Total

(dollars in millions)

Assets

Cash and cash equivalents
$ 22,356    $ 31,216    $ 511       $ 54,083
Trading assets, at fair value
236,174    883    2,448       239,505
Investment securities
14,124    57,858    1       71,983
Securities purchased under agreements to resell
83,205    4,452    —       87,657
Securities borrowed
141,971    445    —       142,416
Customer and other receivables
23,390    21,406    611       45,407
Loans, net of allowance
36,237    49,522    —       85,759
Other assets(1)
45,257    13,926    1,472       60,655



Total assets
$ 602,714    $ 179,708    $ 5,043       $ 787,465



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

92
A substantial portion of ~~the Company’s~~ total assets consists of liquid marketable securities and short-term receivables arising principally from sales and trading activities in the Institutional Securities business segment. The liquid nature of these assets provides ~~the Company~~us with flexibility in managing the size of ~~its~~our balance sheet. Total assets increased ~~modestly~~ to ~~$807~~$829 billion at ~~current period end~~June 30, 2016 from $787 billion at ~~prior year end, primarily~~December 31, 2015, due to increases in ~~Securities purchased under agreements to resell and~~ Trading assets, ~~driven~~ primarily ~~by higher levels of high quality liquid assets~~U.S. government agency securities whose valuations increased as U.S. Treasury yields reached multiyear lows in the ~~Company’s Global Liquidity Reserve~~wake of the U.K. referendum. Other sovereign government obligations and ~~increases in~~ over-the-counter (“OTC”) derivative ~~contracts.~~contracts were also driven higher by interest rate and foreign exchange rate volatility which were also partly driven by the U.K. Referendum. See “U.K. Referendum” herein.
Securities Repurchase Agreements and Securities ~~Lending.~~Lending
Securities borrowed or securities purchased under agreements to resell and securities loaned or securities sold under agreements to repurchase are treated as collateralized financings (see Notes 2 and 6 to the ~~condensed~~ consolidated financial statements in Item 1).
Collateralized Financing Transactions and Average ~~Balances.~~Balances

   At March 31, 2016    At December 31, 2015    Average Balance
   Three Months Ended
   March 31, 2016    December 31, 2015 At June 30,
        2016         At December 31,
        2015
   (dollars in millions)

(dollars in millions)

Securities purchased under agreements to resell and Securities borrowed
   $ 239,187       $ 230,073       $         237,887       $         250,605    $     228,870    $     230,073
Securities sold under agreements to repurchase and Securities loaned
   $ 58,445       $ 56,050       $ 56,417       $ 62,373    $ 67,569    $ 56,050

Average Balance
Three Months Ended
            June 30, 2016
(dollars in millions)
Securities purchased under agreements to resell and Securities borrowed
$         240,086
Securities sold under agreements to repurchase and Securities loaned
$         63,141
Securities purchased under agreements to resell and Securities borrowed period-end balances at June 30, 2016 were lower than the average balance during the current quarter driven by a general decrease in requirements for collateral and a reduction in short positions. Securities sold under agreements to repurchase and Securities loaned period-end balances at ~~March 31,~~June 30, 2016 were higher than the average balance during the current quarter which is in line with the ~~average balances during 2016.~~increase of inventory over the period. Securities purchased under agreements to resell and Securities borrowed and Securities sold under agreements to repurchase and Securities loaned period-end balances at December 31, 2015 were lower than the average ~~balances~~balance during 2015. The balances moved in line with client financing activity and with general
movements ~~in firm~~of inventory. Securities financing assets and liabilities also include matched book transactions with minimal market, credit and/or liquidity risk. Matched book transactions accommodate customers, as well as obtain securities for the settlement and financing of inventory positions.
Other Securities Financing.
The customer receivable portion of the securities financing transactions primarily includes customer margin loans, collateralized by customer-owned securities, ~~and customer cash,~~ which isare segregated in accordance with regulatory requirements. The customer payable portion of the securities financing transactions primarily includes payables to ~~the Company’s~~our prime brokerage customers. ~~The Company’s~~Our risk exposure on these transactions is mitigated by collateral maintenance policies that limit ~~the Company’s~~our credit exposure to customers. ~~Included~~Additionally, included within securities financing ~~assets~~transactions were $9$10 billion and $11 billion at ~~March 31,~~June 30, 2016 and December 31, 2015, respectively, ~~recorded in accordance with accounting guidance for the transfer of financial assets that represented offsetting assets and liabilities for~~related to fully collateralized ~~non-cash loan transactions.~~securities-for-securities lending transactions represented in Trading assets.
Liquidity Risk Management ~~Framework.~~
Framework
The primary goal of ~~the Company’s~~our Liquidity Risk Management Framework is to ensure that ~~the Company has~~we have access to adequate funding across a wide range of market conditions. The framework is designed to enable ~~the Company~~us to fulfill ~~its~~our financial obligations and support the execution of ~~its~~our business strategies.
91
The following principles guide ~~the Company’s~~our Liquidity Risk Management Framework:

Sufficient liquid assets should be maintained to cover maturing liabilities and other planned and contingent outflows;

Maturity profile of assets and liabilities should be aligned, with limited reliance on short-term funding;

Source, counterparty, currency, region and term of funding should be diversified; and

Liquidity Stress Tests should anticipate, and account for, periods of limited access to funding.
The core components of ~~the Company’s~~our Liquidity Risk Management Framework are the Required Liquidity Framework, Liquidity Stress Tests and the Global Liquidity Reserve, which support ~~its~~our target liquidity profile. For a further discussion about ~~the Company’s~~our 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 Part II, Item 7 of the 2015 Form 10-K.

93
At ~~March 31,~~June 30, 2016 and December 31, 2015, ~~the Company~~we maintained sufficient liquidity to meet current and contingent funding obligations as modeled in ~~its~~our Liquidity Stress Tests.
Global Liquidity ~~Reserve.~~Reserve
~~The Company maintains~~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 ~~the Company’s~~our Global Liquidity Reserve, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management Framework—Global Liquidity Reserve” in Part II, Item 7 of the 2015 Form 10-K.

Global Liquidity Reserve by Type of ~~Investment.~~Investment

   At March 31, 2016    At December 31, 2015     At June 30, 2016         At December 31, 2015
   (dollars in millions)

(dollars in millions)

Cash deposits with banks
   $ 13,420       $ 10,187    $         11,812    $                 10,187
Cash deposits with central banks
   34,572       39,774    39,479    39,774
Unencumbered highly liquid securities:

U.S. government obligations
   75,985       72,265    80,560    72,265
U.S. agency and agency mortgage-backed securities
   39,940       37,678    44,635    37,678
Non-U.S. sovereign obligations(1)
   33,254       28,999    17,394    28,999
Other investment grade securities
   13,898       14,361    13,575    14,361




Global Liquidity Reserve
   $ 211,069       $ 203,264    $ 207,455    $ 203,264




(1)
Non-U.S. sovereign obligations are composed of unencumbered German, French, Dutch, U.K., Brazilian and Japanese government obligations.
Global Liquidity Reserve Managed by Bank and Non-Bank Legal ~~Entities.~~Entities

      Daily Average Balance
      Three Months Ended March 31,
   At March 31, 2016    At December 31, 2015        2016            2015         At June 30, 2016         At December 31, 2015     Daily Average Balance
Three Months Ended
            June 30, 2016
   (dollars in millions)

(dollars in millions)

Bank legal entities:

Domestic
   $ 89,127       $ 88,432       $ 89,842       $ 82,638    $         85,504    $               88,432    $                 86,901
Foreign
   6,135       5,896       5,812       4,961    5,558    5,896    5,368








Total Bank legal entities
   95,262       94,328       95,654       87,599    91,062    94,328    92,269








Non-Bank legal entities(1):

Domestic
   78,454       74,811       80,952       76,833
Non-Bank legal entities:

Parent
61,087    54,810    61,380
Non-Parent
17,673    20,001    17,932

Total Domestic
78,760    74,811    79,312
Foreign
   37,353       34,125       34,282       31,829    37,633    34,125    38,204








Total Non-Bank legal entities
   115,807       108,936       115,234       108,662    116,393    108,936    117,516








Total
   $ 211,069       $ 203,264       $         210,888       $         196,261    $ 207,455    $ 203,264    $ 209,785








~~(1)~~
The Parent managed $61,134 million and $54,810 million at March 31, 2016 and December 31, 2015, respectively, and averaged $62,209 million and $57,920 million for the three months ended March 31, 2016 and 2015, respectively.
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Regulatory Liquidity ~~Framework.~~
Framework
The Basel Committee on Banking Supervision (the “Basel Committee”) has developed two standards intended for use in liquidity risk supervision: the Liquidity Coverage Ratio (“LCR”) and the Net Stable Funding Ratio (“NSFR”).
Liquidity Coverage ~~Ratio.~~Ratio
The LCR was developed to ensure banking organizations have sufficient high-quality liquid assets to cover net cash outflows arising from significant stress over 30 calendar days. This standard’s objective is to promote the short-term resilience of the liquidity risk profile of banking organizations.
The final rule to implement the LCR in the U.S. (“U.S. LCR”) applies to ~~the Company~~us and ~~its~~our U.S. Bank Subsidiaries and each is required to calculate its respective U.S. LCR on each business day. As of January 1, 2016, ~~the Company~~we and ~~its~~our U.S. Bank Subsidiaries are required to maintain a minimum U.S. LCR of 90%, and this minimum standard will reach the fully phased-in level of 100% beginning on January 1, 2017. In addition, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) has proposed rules that would require large banking organizations, including ~~the Company,~~us, to publicly disclose certain qualitative and quantitative information about their U.S. LCR beginning in the third quarter of 2016. ~~The Company is~~We are compliant with the minimum required U.S. LCR based on current interpretation and ~~continues~~we
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continue to evaluate its impact on ~~the Company’s~~our liquidity and funding requirements.
Net Stable Funding ~~Ratio.~~Ratio
The objective of the NSFR is to reduce funding risk over a one-year horizon by requiring banking organizations to fund their activities with sufficiently stable sources of funding in order to mitigate the risk of future funding stress. The Basel Committee finalized the NSFR framework in 2014. In the second quarter of 2016, the U.S. banking regulators issued a proposal to implement the NSFR in the U.S. The proposal would require a covered company to maintain an amount of available stable funding, which is calculated by applying standardized weightings to its equity and liabilities based on their expected stability, that is no less than the amount of its required stable funding, which is calculated by applying standardized weightings to its assets, derivatives exposures, and certain other off-balance sheet exposures based on their liquidity characteristics. If adopted as proposed, the requirements would apply to ~~the Company~~us and ~~its~~our U.S. Bank Subsidiaries from January 1, 2018. ~~The Company is~~We are evaluating the potential impact of the proposal, which is subject to public comment and further rulemaking procedures.
Funding Management
~~Funding Management.~~
~~The Company manages its~~We manage our funding in a manner that reduces the risk of disruption to ~~the Company’s~~our operations. ~~The Company pursues~~We pursue a strategy of diversification of secured and unsecured funding sources (by product, by investor and by region) and ~~attempts~~attempt to ensure that the tenor of ~~its~~our liabilities equals or exceeds the expected holding period of the assets being financed.
~~The Company funds its~~We fund our balance sheet on a global basis through diverse sources. These sources may include ~~the Company’s~~our equity capital, long-term debt, securities sold under agreements to repurchase (“repurchase agreements”), securities lending, deposits, commercial paper, letters of credit and lines of credit. ~~The Company has~~We have active financing programs for both standard and structured products targeting global investors and currencies.
Secured ~~Financing.~~Financing
For a discussion of ~~the Company’s~~our secured financing activities, see ~~“Management’s~~“Management��s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Funding Management—Secured Financing” in Part II, Item 7 of the 2015Form 10-K.
At ~~March 31,~~June 30, 2016 and December 31, 2015, the weighted average maturity of ~~the Company’s~~our secured financing against less liquid assets was greater than 120 days.
Unsecured Financing.
For a discussion of ~~the Company’s~~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 Part II, Item 7 of the 2015 Form 10-K. When appropriate, ~~the Company~~we may use derivative products to conduct asset and liability management and to make adjustments to ~~its~~our interest rate and structured borrowings risk profile (see Note 4 to the ~~condensed~~ consolidated financial statements in Item 1).
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~~Deposits.~~
Deposits
Available funding sources to ~~the Company’s~~our bank subsidiaries include time deposits, money market deposit accounts, demand deposit accounts, repurchase agreements, federal funds purchased, commercial paper and Federal Home Loan Bank advances. The vast majority of deposits in ~~the Company’s~~our U.S. Bank Subsidiaries are sourced from ~~its~~our retail brokerage accounts and are considered to have stable, low-cost funding characteristics. At ~~March 31,~~June 30, 2016 and December 31, 2015 deposits were ~~$157,591~~$152,693 million and $156,034 million, respectively (see Note 9 to the ~~condensed~~ consolidated financial statements in Item 1).
Short-Term Borrowings
~~Short-Term Borrowings.~~
~~The Company’s~~Our unsecured short-term borrowings may consist of bank loans, bank notes, commercial paper and structured notes with maturities of 12 months or less at issuance. At ~~March 31,~~June 30, 2016 and December 31, 2015, ~~the Company~~we had approximately ~~$1,109~~$880 million and $2,173 million, respectively, in Short-term borrowings.
Long-Term Borrowings
~~Long-Term Borrowings.~~
~~The Company believes~~We believe that accessing debt investors through multiple distribution channels helps provide consistent access to the unsecured markets. In addition, the issuance of long-term debt allows ~~the Company~~us to reduce reliance on short-term credit sensitive instruments. Long-term borrowings 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. Availability and cost of financing to ~~the Company~~us can vary depending on market conditions, the volume of certain trading and lending activities, ~~its~~our credit ratings and the overall availability of credit.
~~The Company~~We may engage in various transactions in the credit markets (including, for example, debt retirements) that ~~it believes~~we believe are in ~~the~~our best interests ~~of the Company~~ and ~~its~~our investors.
~~Long-term Borrowings by Maturity Profile.~~

   Parent    Subsidiaries    Total
   (dollars in millions)
Due in 2016
   $ 12,272       $ 4,032       $ 16,304
Due in 2017
   21,840       1,199       23,039
Due in 2018
   18,296       1,058       19,354
Due in 2019
   20,658       741       21,399
Due in 2020
   16,239       952       17,191
Thereafter
   62,564       2,953       65,517






Total
   $         151,869       $         10,935       $ 162,804






During the quarter ended March 31, 2016, the Company issued notes with a principal amount of approximately $13.2 billion. In connection with these note issuances, the Company generally enters into certain transactions to obtain floating interest rates. The weighted average maturity of the Company’s long-term borrowings, based upon stated maturity dates, was approximately 6.2 years at March 31, 2016. During the quarter ended March 31, 2016, approximately $8.0 billion in aggregate long-term borrowings matured or were retired. Subsequent to March 31, 2016 and through April 29, 2016, long-term borrowings decreased by approximately $1.2 billion, net of issuances. This amount includes the issuance of $3.5 billion of senior debt on April 21, 2016. For a further discussion of the Company’s long-term borrowings, including the amount of senior debt outstanding at March 31, 2016, see Note 10 to the condensed consolidated financial statements in Item 1.
~~Capital Covenants.~~
In April 2007, the Company executed replacement capital covenants in connection with an offering by Morgan Stanley Capital Trust VIII Capital Securities, which become effective after the scheduled redemption date in 2046. Under the terms of the replacement capital covenants, the Company has agreed, for the benefit of certain specified holders of debt, to

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limitations on its ability to redeem or repurchase any of the Capital Securities for specified periods of time. For a complete description of the Capital Securities and the terms of the replacement capital covenants, see the Company’s Current Report on Form 8-K dated April 26, 2007.Long-term Borrowings by Maturity Profile

Parent Subsidiaries Total
(dollars in millions)
Due in 2016
$ 6,807 $ 3,442 $ 10,249
Due in 2017
22,232 1,322 23,554
Due in 2018
18,161 1,126 19,287
Due in 2019
20,534 896 21,430
Due in 2020
16,326 911 17,237
Thereafter
67,752 3,983 71,735

Total
$   151,812 $     11,680 $   163,492

For further information on Long-term borrowings, see Notes 10 and 20 to the consolidated financial statements in Item 1.
Credit ~~Ratings.~~Ratings
~~The Company relies~~We rely on external sources to finance a significant portion of ~~its~~our day-to-day operations. The cost and availability of financing generally are impacted by, among other things, ~~the Company’s~~our credit ratings. In addition, ~~the Company’s~~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. Rating agencies consider company-specific factors; other industry factors such as regulatory or legislative changes; the macroeconomic environment; and perceived levels of government support, among other things.
As of December 2, 2015, ~~the Company’s~~our credit ratings no longer incorporate uplift from perceived government support from any rating agency given the significant progress of the U.S. financial reform legislation and regulations. Meanwhile, 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 and MSBNA’s Senior Unsecured Ratings at ~~April~~July 29, ~~2016.~~2016

Parent ~~Morgan Stanley Bank, N.A.~~
Short-Term
Debt Long-Term
Debt Rating
Outlook
~~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- Stable
Standard & Poor’s Ratings Services
A-2 BBB+ Stable
Morgan Stanley Bank, N.A.
Short-Term
Debt Long-Term
Debt Rating
Outlook
DBRS, Inc.
— — —
Fitch Ratings, Inc.
F1 A ~~Stable~~ F1 A+ Stable
Moody’s Investors Service, Inc.
~~P-2~~ A3 ~~Stable~~ P-1 A1 Stable
Rating and Investment Information, Inc.
~~a-1~~ A- ~~Stable~~ — — —
Standard & Poor’s Ratings Services
~~A-2~~ ~~BBB+~~ ~~Stable~~ A-1 A Positive
Watch
In connection with certain OTC trading agreements and certain other agreements where ~~the Company is~~we are a liquidity provider to certain financing vehicles associated with the Institutional Securities business segment, ~~the Company~~we may be required to provide additional collateral or immediately settle any outstanding liability balances with certain counterparties or pledge additional collateral to certain exchanges and clearing organizations in the event of a future credit rating downgrade irrespective of whether ~~the Company is~~we are in a net asset or net liability position.
The additional collateral or termination payments that may be called in the event of a future credit rating downgrade vary by contract ~~and can~~andcan be based on ratings by either or both of Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Ratings Services (“S&P”). The following table ~~below~~ shows the future potential collateral amounts and termination payments that could be called or required by counterparties or exchanges and clearing organizations in the event of one-notch or two-notch downgrade scenarios, from the lowest of Moody’s or S&P ratings, based on the relevant contractual downgrade triggers.
Incremental Collateral or Terminating Payments upon Potential Future Rating ~~Downgrade.~~Downgrade

   At March 31, 2016    At December 31, 2015
   (dollars in millions)
One-notch downgrade
   $ 1,193       $ 1,169
Two-notch downgrade
   1,776       1,465
   At June 30,
2016    At December 31,
2015
   (dollars in millions)
One-notch downgrade
   $   1,118    $        1,169
Two-notch downgrade
   1,330    1,465
While certain aspects of a credit rating downgrade are quantifiable pursuant to contractual provisions, the impact it would have on ~~the Company’s~~our business and results of operations in future periods is inherently uncertain and would depend on a number of interrelated factors, including, among others, 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 ~~the Company~~we might take. The liquidity impact of additional collateral requirements is included in ~~the Company’s~~our Liquidity Stress Tests.

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Capital ~~Management.~~Management
~~The Company’s senior~~Senior management views capital as an important source of financial strength. ~~The Company~~We actively ~~manages its~~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 and, therefore, in the future may expand or contract ~~its~~our capital base to address the changing needs of ~~its~~our businesses. ~~The Company attempts~~We attempt to maintain total capital, on a consolidated basis, at least equal to the sum of ~~its~~our operating subsidiaries’ required equity.
In March 2015, the Company received no objection from the Federal Reserve to its 2015 capital plan. The capital plan included a share repurchase of up to $3.1 billion of the Company’s outstanding common stock during the period that began April 1, 2015 through June 30, 2016. Additionally, the capital plan included an increase in the Company’s quarterly common stock dividend to $0.15 per share from $0.10 per share that began with the dividend declared on April 20, 2015 (see also “Capital Plans and Stress Tests” herein). During the quarters ended March 31, 2016 and 2015, the CompanyWe repurchased approximately $625 million ~~and $250 million, respectively,~~ of ~~its~~our outstanding common stock as part of ~~its~~our share repurchase program during the current quarter and $1,250 million during the current year period. We repurchased approximately $625 million during the prior year quarter and $875 million in the prior year period (see Note 14 to the ~~condensed~~ consolidated financial statements in Item ~~1 and “Capital Management” herein)~~1).
Pursuant to the share repurchase program, ~~the Company considers,~~we consider, among other things, business segment capital needs, as well as stock-based compensation and benefit plan requirements. Share repurchases under ~~the Company’s~~our program will be exercised from time to time at prices ~~the Company deems~~we deem appropriate subject to various factors, including ~~its~~our capital position and market conditions. The share repurchases may be effected through open market purchases or privately negotiated transactions, including through Rule 10b5-1 plans, and may be suspended at any time. Share repurchases ~~by the Company~~ are subject to regulatory approval (see also “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in Part II, Item 5 of the 2015 Form 10-K).
In June 2016, we received a conditional non-objection from the Federal Reserve to our 2016 capital plan. The capital
plan included a share repurchase of up to $3.5 billion of our outstanding common stock during the period beginning July 1, 2016 through June 30, 2017. Additionally, the capital plan included an increase in the quarterly common stock dividend to $0.20 per share from $0.15 per share during the period beginning with the dividend declared on July 20, 2016 (see Note 20 to the consolidated financial statements in Item 1). The Federal Reserve Board also asked us to submit an additional capital plan by December 29, 2016 addressing weaknesses identified in our capital planning process.
The Board determines the declaration and payment of dividends on a quarterly basis. On ~~April 18,~~July 20, 2016, ~~the Company~~we announced that the Board declared a quarterly dividend per common share of ~~$0.15.~~$0.20. The dividend is payable on ~~May 13,~~August 15, 2016 to common shareholders of record on ~~April~~July 29, 2016 (see Note 20 to the ~~condensed~~ consolidated financial statements in Item 1).
On ~~March~~June 15, 2016, ~~the Company~~we announced that the Board declared a quarterly dividend for preferred stock shareholders of record on ~~March 31,~~June 30, 2016 that was paid on ~~April~~July 15, 2016.
Trust Preferred Securities
On July 19, 2016, ~~(see Note 14~~we announced that Morgan Stanley Capital Trust III, Morgan Stanley Capital Trust IV and Morgan Stanley Capital Trust V will redeem all of their issued and outstanding Capital Securities on August 18, 2016, and that Morgan Stanley Capital Trust VIII will redeem all of its issued and outstanding Capital Securities on August 3, 2016, pursuant to the ~~condensed consolidated financial statements~~optional redemption provisions provided in ~~Item 1).~~the respective governing documents. In the aggregate, $2.8 billion will be redeemed. We will concurrently redeem the related underlying junior subordinated debentures.

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Tangible ~~Equity.~~Equity
Tangible Equity Measures—Period End and ~~Average.~~Average

   Monthly Average Balance
   Balance at Three Months Ended March 31,

Balance at
Monthly Average
Balance
Three Months Ended
June 30, 2016
   March 31, 2016 December 31, 2015 2016 2015 June 30, 2016 December 31, 2015
   (dollars in millions) (dollars in millions)
Common equity
   $ 68,490    $ 67,662    $ 68,187    $ 65,590    $ 69,596    $ 67,662    $ 68,951
Preferred equity
   7,520    7,520    7,520    6,395    7,520    7,520    7,520


Morgan Stanley shareholders’ equity
   76,010    75,182    75,707    71,985    77,116    75,182    76,471
Junior subordinated debentures issued to capital trusts
   2,849    2,870    2,843    4,871    2,853    2,870    2,851
Less: Goodwill and net intangible assets
   (9,491 ) (9,564 ) (9,524 ) (9,702 ) (9,411)    (9,564)    (9,451)


Tangible Morgan Stanley shareholders’ equity(1)
   $ 69,368    $ 68,488    $ 69,026    $ 67,154    $ 70,558    $ 68,488    $ 69,871


Common equity
   $ 68,490    $ 67,662    $ 68,187    $ 65,590    $ 69,596    $ 67,662    $ 68,951
Less: Goodwill and net intangible assets
   (9,491 ) (9,564 ) (9,524 ) (9,702 ) (9,411)    (9,564)    (9,451)


Tangible common equity(1)
   $ 58,999    $ 58,098    $ 58,663    $ 55,888    $ 60,185    $ 58,098    $ 59,500


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

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~~Regulatory Requirements.~~
Regulatory Capital ~~Framework.~~Framework
~~The Company is~~We are a financial holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and isare subject to the regulation and oversight of the Federal Reserve. The Federal Reserve establishes capital requirements for ~~the Company,~~us, including well-capitalized standards, and evaluates ~~its~~our compliance with such capital requirements. The Office of the Comptroller of the Currency (“OCC”) establishes similar capital requirements and standards for ~~the Company’s~~our U.S. Bank Subsidiaries. The regulatory capital requirements 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 (the “Dodd-Frank Act”).
The Basel Committee has finalized revisions to the Basel III framework that, if adopted by the U.S. banking agencies, could result in substantial changes to ~~the Company’s~~our capital requirements. In particular, the Basel Committee has finalized a new standardized approach methodology for calculating counterparty credit risk exposures in derivatives transactions, ~~the standardized approach for measuring counterparty credit risk exposures,~~ and revised frameworks for market risk, interest rate risk in the banking book, and securitization capital requirements. In addition, the Basel Committee has proposed revisions to various regulatory capital standards, the impact of which is uncertain and depends on future rulemakings by the U.S. banking agencies.
Regulatory Capital ~~Requirements.~~Requirements
~~The Company is~~We are required to maintain minimum risk-based and leverage capital ratios under the regulatory capital requirements. A summary of the calculations of regulatory capital, risk-weighted assets (“RWAs”) and transition
provisions follows. For a further discussion of these calculations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Implementation of U.S. Basel III” in Part II, Item 7 of the 2015 Form 10-K.
Regulatory Capital.Minimum risk-based capital ratio requirements apply to Common Equity Tier 1 capital, Tier 1 capital and Total capital. Certain adjustments to and deductions from capital are required for purposes of determining these ratios, such as deductions for goodwill, intangibles, certain deferred tax assets, other amounts in other comprehensive income and investments in the capital instruments of unconsolidated financial institutions. Certain of these adjustments and deductions are also subject to transitional provisions.
In addition to the minimum risk-based capital ratio requirements, on a fully phased-in basis by 2019, ~~the Company~~we will be subject to:

A greater than 2.5% Common Equity Tier 1 capital conservation buffer;

The Common Equity Tier 1 global systemically important bank (“G-SIB”) capital surcharge, ~~which the Federal Reserve calculated as~~currently at 3% ~~for the Company in July 2015;~~; and

Up to a 2.5% Common Equity Tier 1 countercyclical capital buffer, currently set by banking regulators at zero (collectively, the “buffers”).
In 2016, the phase-in amount for each of the buffers is 25% of the fully phased-in buffer requirement. Failure to maintain the buffers will result in restrictions on ~~the Company’s~~our ability to make capital distributions, including the payment of
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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 Part II, Item 7 of the 2015 Form 10-K.
Risk-Weighted Assets.    RWAs reflect both our on- and off-balance sheet risk ~~of the Company~~ as well as capital charges attributable to the risk of loss arising from the following:

Credit risk: The failure of a borrower, counterparty or issuer to meet its financial obligation to ~~the Company;~~us;

Market risk: Adverse changes in the level of one or more market prices, rate, indices, implied volatilities, correlations or other market factors, such as market liquidity; and

97
•
Operational risk: Inadequate or failed processes, people and systems or external events (e.g., fraud, theft, legal
and compliance risks, cyber attacks or damage to physical assets).
~~The Company’s~~Our binding risk-based capital ratios for regulatory purposes are the lower of the capital ratios computed under (i) the standardized approaches for calculating credit risk RWAs and market risk RWAs (the “Standardized Approach”); and (ii) the applicable advanced approaches for calculating credit risk, market risk and operational risk RWAs (the “Advanced Approach”). At ~~March 31,~~June 30, 2016, ~~the Company’s~~our binding ratios are based on the Advanced Approach transitional rules.
The methods for calculating each of ~~the Company’s~~our risk-based capital ratios will change through January 1, 2022 as aspects of the capital rules are phased in. These changes may result in differences in ~~the Company’s~~our reported capital ratios from one reporting period to the next that are independent of changes to ~~its~~our capital base, asset composition, off-balance sheet exposures or risk profile.

Minimum Risk-Based Capital Ratios: Transitional ~~Provisions.~~Provisions

(1)
These ratios ~~include~~assume the ~~following assumptions: (i)~~requirements for the G-SIB capital surcharge ~~for the Company remains at 3.0% as calculated by the Federal Reserve in July 2015;~~(3.0%) and ~~(ii)~~ countercyclical capital buffer ~~remains~~(zero) remain at ~~zero.~~current levels.

9899
Transitional and Fully Phased-In Regulatory Capital ~~Ratios.~~Ratios

   At March 31, 2016
   Transitional Fully Phased-In
   Standardized Advanced Standardized Advanced
   (dollars in millions)
Risk-based capital:

Common Equity Tier 1 capital
   $ 58,514    $ 58,514    $ 56,056    $ 56,056
Tier 1 capital
   65,198    65,198    63,627    63,627
Total capital
   78,345    77,969    75,122    74,746
Total RWAs
   359,179    373,925    369,697    385,074
Common Equity Tier 1 capital ratio
   16.3 % 15.6 % 15.2 % 14.6 %
Tier 1 capital ratio
   18.2 % 17.4 % 17.2 % 16.5 %
Total capital ratio
   21.8 % 20.9 % 20.3 % 19.4 %
Leverage-based capital:

Adjusted average assets(1)
   792,268    N/A    791,096    N/A
Tier 1 leverage ratio(2)
   8.2 % N/A    8.0 % N/A
   At December 31, 2015 At June 30, 2016
   Transitional Fully Phased-In Transitional Fully Phased-In
   Standardized Advanced Standardized Advanced   Standardized       Advanced       Standardized       Advanced
   (dollars in millions) (dollars in millions)
Risk-based capital:

Common Equity Tier 1 capital
   $ 59,409    $ 59,409    $ 55,441    $ 55,441    $           59,796    $           59,796    $           57,556    $           57,556
Tier 1 capital
   66,722    66,722    63,000    63,000    66,782    66,782    65,274    65,274
Total capital
   79,663    79,403    73,858    73,598    80,142    79,830    76,982    76,670
Total RWAs
   362,920    384,162    373,421    395,277    342,504    355,982    352,692    366,781
Common Equity Tier 1 capital ratio
   16.4 % 15.5 % 14.8 % 14.0 % 17.5%    16.8%    16.3%    15.7%
Tier 1 capital ratio
   18.4 % 17.4 % 16.9 % 15.9 % 19.5%    18.8%    18.5%    17.8%
Total capital ratio
   22.0 % 20.7 % 19.8 % 18.6 % 23.4%    22.4%    21.8%    20.9%
Leverage-based capital:

Adjusted average assets(1)
   803,574    N/A    801,346    N/A    804,511    N/A    803,377    N/A
Tier 1 leverage ratio(2)
   8.3 % N/A    7.9 % N/A    8.3%    N/A    8.1%    N/A
At December 31, 2015
Transitional Fully Phased-In
Standardized Advanced Standardized Advanced
(dollars in millions)
Risk-based capital:

Common Equity Tier 1 capital
$ 59,409    $ 59,409    $ 55,441    $ 55,441
Tier 1 capital
66,722    66,722    63,000    63,000
Total capital
79,663    79,403    73,858    73,598
Total RWAs
362,920    384,162    373,421    395,277
Common Equity Tier 1 capital ratio
16.4%    15.5%    14.8%    14.0%
Tier 1 capital ratio
18.4%    17.4%    16.9%    15.9%
Total capital ratio
22.0%    20.7%    19.8%    18.6%
Leverage-based capital:

Adjusted average assets(1)
803,574    N/A    801,346    N/A
Tier 1 leverage ratio(2)
8.3%    N/A    7.9%    N/A

N/A—Not ~~Applicable.~~Applicable
(1)
Adjusted average assets represent the denominator of the Tier 1 leverage ratio and are composed of the average daily balance of consolidated on-balance sheet assets under U.S. GAAP during the calendar quarter, adjusted for disallowed goodwill, transitional intangible assets, certain deferred tax assets, certain investments in the capital instruments of unconsolidated financial institutions and other adjustments.
(2)
The minimum Tier 1 leverage ratio requirement is 4.0%.

The fully phased-in basis pro forma estimates in the ~~above~~previous tables are based on ~~the Company’s~~our current understanding of the capital rules and other factors, which may be subject to change as ~~the Company receives~~we receive additional clarification and implementation guidance from the Federal Reserve and as the interpretation of the regulation evolves over time. These fully phased-in pro forma estimates are non-GAAP financial measures that ~~the Company considers~~we consider to be useful measures for us, investors and analysts in evaluating compliance with new regulatory capital requirements that were not yet effective at ~~March 31,~~June 30, 2016. These preliminary estimates are subject to risks and uncertainties that may cause actual results to differ materially and should not be taken as a projection of what ~~the Company’s~~our capital ratios, RWAs, earnings or other results will actually be at future dates. For a discussion of risks and uncertainties that may affect ~~the~~our future results, ~~of the Company,~~ see “Risk Factors” in Part I, Item 1A of the 2015 Form 10-K.
Well-Capitalized Minimum Regulatory Capital Ratios for U.S. Bank ~~Subsidiaries.~~Subsidiaries

At ~~March 31,~~June 30, 2016
Common Equity Tier 1 risk-based capital ratio
~~6.5~~6.5% %
Tier 1 risk-based capital ratio
~~8.0~~8.0% %
Total risk-based capital ratio
~~10.0~~10.0% %
Tier 1 leverage ratio
~~5.0~~5.0% %
99
For ~~the Company~~us to remain a financial holding company, ~~its~~our U.S. Bank Subsidiaries must qualify as well-capitalized by maintaining the minimum ratio requirements set forth in the ~~above~~previous table. The Federal Reserve has not yet revised the well-capitalized standard for financial holding companies to reflect the higher capital standards required for ~~the Company~~us under the capital rules. Assuming that the Federal Reserve would apply the same or very similar well-capitalized standards to financial holding companies, each of ~~the Company’s~~ our
100
risk-based capital ratios and Tier 1 leverage ratio at ~~March 31,~~June 30, 2016 would have exceeded the revised well-capitalized standard. The Federal Reserve may require ~~the Company and its peer financial holding companies~~ us
to maintain risk- and leverage-based capital ratios
substantially in excess of mandated minimum levels, depending upon general economic conditions and a financial holding company’s particular condition, risk profile and growth plans.

Regulatory Capital Calculated under Advanced Approach Transitional ~~Rules.~~Rules


   At March 31, 2016 At December 31, 2015 At June 30, 2016      At December 31, 2015
   (dollars in millions) (dollars in millions)
Common Equity Tier 1 capital:

Common stock and surplus
   $ 19,456    $ 20,114    $ 19,091       $ 20,114
Retained earnings
   50,272    49,204    51,410       49,204
Accumulated other comprehensive income (loss)
   (1,238 ) (1,656 ) (905)       (1,656)
Regulatory adjustments and deductions:

Net goodwill
   (6,585 ) (6,582 ) (6,582)       (6,582)
Net intangible assets (other than goodwill and mortgage servicing assets)
   (1,743 ) (1,192 ) (1,698)       (1,192)
Credit spread premium over risk-free rate for derivative liabilities
   (389 ) (202 ) (428)       (202)
Net deferred tax assets
   (1,187 ) (675 ) (888)       (675)
Net after-tax debt valuation adjustments(1)
   66    156    (20)       156
Adjustments related to accumulated other comprehensive income
   116    411    61       411
Other adjustments and deductions
   (254 ) (169 ) (245)       (169)




Total Common Equity Tier 1 capital
   $ 58,514    $ 59,409    $ 59,796       $ 59,409




Additional Tier 1 capital:

Preferred stock
   $ 7,520    $ 7,520    $ 7,520       $ 7,520
Trust preferred securities
   —    702    —       702
Noncontrolling interests
   607    678    653       678
Regulatory adjustments and deductions:

Net deferred tax assets
   (791 ) (1,012 ) (592)       (1,012)
Credit spread premium over risk-free rate for derivative liabilities
   (259 ) (303 ) (286)       (303)
Net after-tax debt valuation adjustments(1)
   44    233    (13)       233
Other adjustments and deductions
   (171 ) (253 ) (156)       (253)




Additional Tier 1 capital
   $ 6,950    $ 7,565    $ 7,126       $ 7,565



Deduction for investments in covered funds
   (266 ) (252 ) (140)       (252)




Total Tier 1 capital
   $ 65,198    $ 66,722    $ 66,782       $ 66,722




Tier 2 capital:

Subordinated debt
   $ 10,895    $ 10,404    $ 11,120       $ 10,404
Trust preferred securities
   1,672    2,106    1,675       2,106
Other qualifying amounts
   56    35    58       35
Regulatory adjustments and deductions
   148    136    195       136




Total Tier 2 capital
   $ 12,771    $ 12,681    $ 13,048       $ 12,681




Total capital
   $ 77,969    $ 79,403    $ 79,830       $ 79,403




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

~~100~~101
Roll-forward of Regulatory Capital Calculated under Advanced Approach Transitional ~~Rules.~~Rules

   Three Months Ended
   March 31, 2016
   (dollars in millions)
Common Equity Tier 1 capital:

Common Equity Tier 1 capital at December 31, 2015
   $ 59,409
Change related to the following items:

Value of shareholders’ common equity
   828
Net goodwill
   (3 )
Net intangible assets (other than goodwill and mortgage servicing assets)
   (551 )
Credit spread premium over risk-free rate for derivative liabilities
   (187 )
Net deferred tax assets
   (512 )
Net after-tax debt valuation adjustments(1)
   (90 )
Adjustments related to accumulated other comprehensive income
   (295 )
Other deductions and adjustments
   (85 )


Common Equity Tier 1 capital at March 31, 2016
   $ 58,514


Additional Tier 1 capital:

Additional Tier 1 capital at December 31, 2015
   $ 7,565
Change related to the following items:

Trust preferred securities
   (702 )
Noncontrolling interests
   (71 )
Net deferred tax assets
   221
Credit spread premium over risk-free rate for derivative liabilities
   44
Net after-tax debt valuation adjustments(1)
   (189 )
Other adjustments and deductions
   82


Additional Tier 1 capital at March 31, 2016
   6,950



Deduction for investments in covered funds at December 31, 2015
   (252 )
Deduction for investments in covered funds
   (14 )


Deduction for investments in covered funds at March 31, 2016
   (266 )


Tier 1 capital at March 31, 2016
   $ 65,198


Tier 2 capital:

Tier 2 capital at December 31, 2015
   $ 12,681
Change related to the following items:

Subordinated debt
   491
Trust preferred securities
   (434 )
Noncontrolling interests
   21
Other adjustments and deductions
   12


Tier 2 capital at March 31, 2016
   $ 12,771


Total capital at March 31, 2016
   $ 77,969


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

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

~~101~~102
Roll-forward of RWAs Calculated under Advanced Approach Transitional ~~Rules.~~Rules

   Three Months Ended
March 31, 2016(1) Six Months Ended

      June 30, 2016(1)

   (dollars in millions) (dollars in millions)
Credit risk RWAs:

Balance at December 31, 2015
   $ 173,586 $ 173,586
Change related to the following items:

Derivatives
   2,069    1,624
Securities financing transactions
   1,349    1,239
Other counterparty credit risk
   (6 ) 79
Securitizations
   989    (3,246)
Credit valuation adjustment
   2,483    3,256
Investment securities
   508    1,179
Loans
   (2,041 ) (7,943)
Cash
   627    1,148
Equity investments
   (832 ) (1,201)
Other credit risk(2)
   (1,576 ) (1,366)


Total change in credit risk RWAs
   $ 3,570    $ (5,231)


Balance at March 31, 2016
   $ 177,156
Balance at June 30, 2016
$ 168,355



Market risk RWAs:

Balance at December 31, 2015
   $ 71,476    $ 71,476
Change related to the following items:

Regulatory VaR
   (304 ) (1,107)
Regulatory stressed VaR
   (1,829 ) (5,436)
Incremental risk charge
   495    (64)
Comprehensive risk measure
   (836 ) (1,396)
Specific risk:

Non-securitizations
   (1,161 ) (577)
Securitizations
   (906 ) (3,308)


Total change in market risk RWAs
   $ (4,541 ) $ (11,888)


Balance at March 31, 2016
   $ 66,935
Balance at June 30, 2016
$ 59,588



Operational risk RWAs:

Balance at December 31, 2015
   $ 139,100    $ 139,100
Change in operational risk RWAs(3)
   (9,266 ) (11,061)


Balance at March 31, 2016
   $ 129,834
Balance at June 30, 2016
$ 128,039


Total RWAs
$ 355,982

VaR—Value-at-Risk
~~VaR—Value-at-Risk.~~
(1)
The RWAs for each category in the table reflect both on- and off-balance sheet exposures, where appropriate.
(2)
Amount reflects assets not in a defined category, non-material portfolios of exposures and unsettled transactions.
(3)
Amount reflects a reduction in the internal loss data related to litigation utilized in the operational risk capital model.

103
Supplementary Leverage ~~Ratio.~~Ratio
~~The Company~~We and ~~its~~our U.S. Bank Subsidiaries are required to publicly disclose ~~their~~our supplementary leverage ratios, which will become effective as a capital standard on January 1, 2018. By January 1, 2018, ~~the Company~~we must also maintain a Tier 1 supplementary leverage capital buffer of at least 2% in addition to the 3% minimum supplementary leverage ratio (for a total of at least 5%), in order to avoid limitations on capital distributions, including dividends and stock repurchases, and discretionary bonus payments to executive officers. In addition, beginning in 2018, ~~the Company’s~~our U.S. Bank Subsidiaries must maintain a supplementary leverage ratio of 6% to be considered well-capitalized.
~~102~~
~~The Company’s~~ Pro Forma Supplementary Leverage Exposure and Ratio on a Transitional ~~Basis.~~Basis

   At March 31, 2016    At December 31, 2015    At June 30,
2016    At December 31,
2015
   (dollars in millions)    (dollars in millions)
Total assets
   $ 807,497       $ 787,465       $ 828,873       $          787,465
Average total assets(1)
   $ 803,267       $ 813,715       $ 814,816       $          813,715
Adjustments(2)(3)
   263,871       284,090       252,291       284,090








Pro forma supplementary leverage exposure
   $ 1,067,138       $ 1,097,805       $ 1,067,107       $      1,097,805








Pro forma supplementary leverage ratio
   6.1%       6.1%       6.3%       6.1%
____________

(1)
Computed as the average daily balance of consolidated total assets under U.S. GAAP during the calendar quarter.
(2)
Computed as the arithmetic mean of the month-end balances over the calendar quarter.
(3)
Adjustments are to: (i) incorporate derivative exposures, including adding the related potential future exposure (including for derivatives cleared for clients), grossing up cash collateral netting where qualifying criteria are not met, and adding the effective notional principal amount of sold credit protection offset by qualifying purchased credit protection; (ii) reflect the counterparty credit risk for repo-style transactions; (iii) add the credit equivalent amount for off-balance sheet exposures; and (iv) apply other adjustments to Tier 1 capital, including disallowed goodwill, transitional intangible assets, certain deferred tax assets and certain investments in the capital instruments of unconsolidated financial institutions.
Based on ~~the Company’s~~our current understanding of the rules and other factors, ~~the Company estimates its~~we estimate our pro forma fully phased-in supplementary leverage ratio to be approximately ~~6.0%~~6.1% and 5.8% at ~~March 31,~~June 30, 2016 and December 31, 2015, respectively. This estimate utilizes a fully phased-in Tier 1 capital numerator and a fully phased-in denominator of approximately $1,066.0 billion and $1,095.6 billion at ~~March 31,~~June 30, 2016 and December 31, 2015, respectively, which takes into consideration the Tier 1 capital deductions that would be applicable in 2018 after the phase-in period has ended.
U.S. Subsidiary Banks’ Pro Forma Supplementary Leverage Ratios on a Transitional ~~Basis.~~Basis

   At March 31, 2016    At December 31, 2015
Morgan Stanley Bank, N.A.
     7.4%         7.3%
Morgan Stanley Private Bank, National Association
   10.6%       10.3%
   At June 30, 2016    At December 31, 2015
MSBNA
   8.0%       7.3%
MSPBNA
   11.0%       10.3%
The pro forma supplementary leverage exposures and pro forma supplementary leverage ratios, both on transitional and fully phased-in bases, are non-GAAP financial measures that ~~the Company considers~~we consider to be useful measures for us, investors and analysts in evaluating prospective compliance with new regulatory capital requirements that have not yet become effective. ~~The Company’s~~Our estimates are subject to risks and uncertainties that may cause actual results to differ materially from estimates based on these regulations. Further, these expectations should not be taken as projections of what ~~the Company’s~~our supplementary leverage ratios, earnings, assets or exposures will actually be at future dates. For a discussion of risks and uncertainties that may affect ~~the~~our future results, ~~of the Company,~~ see “Risk Factors” in Part I, Item 1A of the 2015 Form 10-K.
Total Loss-Absorbing Capacity and Long-Term Debt ~~Requirements.~~Requirements
The Federal Reserve has proposed a rule for top-tier bank holding companies of U.S. G-SIBs (“covered BHCs”), including the Parent, that establishes external total loss-absorbing capacity (“TLAC”) and long-term debt (“LTD”) requirements. The proposal contains various definitions and restrictions, such as requiring eligible LTD to be unsecured, have a remaining maturity of ~~at least~~ one year or more, and not have derivative-linked features, such as structured notes. The proposal would also impose restrictions on certain liabilities that covered BHCs may incur or have outstanding, including structured notes, as well as require all U.S. banking organizations supervised by the Federal Reserve with assets of at least $1 billion to make certain deductions from capital for their investments in unsecured debt issued by covered BHCs. For a further discussion of TLAC and LTD requirements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Total Loss-Absorbing Capacity and Long-Term Debt Requirements” in Part II, Item 7 of the 2015 Form 10-K. For discussions about the implication of the single point of entry (“SPOE”) resolution strategy and the TLAC proposal, see “Business—Supervision and Regulation—Financial Holding Company—Resolution and Recovery Planning” in Part I, Item 1 and “Risk Factors—Legal, Regulatory and Compliance Risk” in Part I, Item 1A of the 2015 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 bank holding companies, including ~~the Company,~~us, which form part of the Federal Reserve’s annual Comprehensive Capital Analysis and Review (“CCAR”) framework.
On April 5, 2016, we submitted our 2016 CCAR capital plan, and summary results of the Dodd-Frank Act and CCAR supervisory stress tests were published by the Federal Reserve in June. We exceeded all stressed capital ratio minimum requirements in the Federal Reserve severely adverse scenario, and our quantitative capital results improved from our prior year submission. In June

~~103~~104
~~The Company~~2016, we received a conditional non-objection from the Federal Reserve to ~~its 2015~~our 2016 capital plan (see “Capital Management” herein). The Company submitted its 2016 capital plan and company-run stress test results to the Federal Reserve on April 5, 2016. The Company expects that the Federal Reserve will provide its response to the Company’s 2016 capital plan and publish summary results of the CCAR and Dodd-Frank Act supervisory stress tests of each large bank holding company, including the Company, by June 30, 2016. The Company isAs required, ~~to disclose~~we disclosed a summary of the ~~results~~result of ~~its~~our company-run stress tests ~~within 15 days of the date~~on June 23, 2016. The Federal Reserve Board also asked us to submit an additional capital plan by December 29, 2016 addressing weaknesses identified in our capital planning process. Future capital distributions may be restricted if these identified weaknesses are not satisfactorily addressed when the Federal Reserve ~~discloses~~reviews our resubmitted capital plan. Pursuant to the ~~results~~conditional non-objection, we are able to execute the capital actions set forth in our 2016 capital plan, which include increasing our common stock dividend to $0.20 per share beginning in the third quarter of 2016 and executing share repurchases of $3.5 billion during the ~~supervisory stress tests.~~period July 1, 2016 through June 30, 2017. In addition, ~~the Company~~we must submit the results of ~~its~~our mid-cycle company-run stress test to the Federal Reserve by October 5, 2016 and disclose a summary of the results between October 5, 2016 and November 4, 2016.
The Dodd-Frank Act also requires each of ~~the Company’s~~our U.S. Bank Subsidiaries to conduct an annual stress test. MSBNA and MSPBNA submitted their 2016 annual company-run stress tests to the OCC on April 5, 2016 and ~~will publish~~published a summary of their stress test results ~~between~~on June ~~15, 2016 and July 15,~~23, 2016.
For a further discussion of ~~the Company’s~~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 Part II, Item 7 of the 2015 Form 10-K.
Attribution of Average Common Equity according to the Required Capital ~~Framework.~~Framework
~~The Company’s~~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 by
the Required Capital framework, as well as each business segment’s relative contribution to ~~the Company’s~~our total Required Capital. Required Capital is assessed for each business segment and further attributed to product lines. This process is intended to align capital with the risks in each business segment in order to allow senior management to evaluate returns on a risk-adjusted basis.
The Required Capital framework is a risk-based and leverage use-of-capital measure, which is compared with ~~the Company’s~~our regulatory capital to ensure that ~~the Company maintains~~we maintain an amount of going concern capital after absorbing potential losses from stress events, where applicable, at a point in time. ~~The Company defines~~We define the difference between ~~its~~our total average common equity and the sum of the average common equity amounts allocated to ~~its~~our business segments as Parent equity. ~~The Company~~We generally ~~holds~~hold Parent equity for prospective regulatory requirements, organic growth, acquisitions and other capital needs.
Effective January 1, 2016, the common equity estimation and attribution to the business segments are based on ~~the Company’s~~our fully phased-in regulatory capital, including supplementary leverage and stress losses (which results in more capital being attributed to the business segments), whereas prior periods were attributed based on transitional regulatory capital provisions. Also, beginning in 2016, the amount of capital allocated to the business segments will be set at the beginning of each year, and will remain fixed throughout the year, until the next annual reset. Differences between available and Required Capital will be reflected in Parent equity during the year. Periods prior to 2016 have not been recast under the new methodology.
The Required Capital framework ~~will~~is expected to evolve over time in response to changes in the business and regulatory environment and to incorporate enhancements in modeling techniques. ~~The Company~~We will continue to evaluate the framework with respect to the impact of future regulatory requirements, as appropriate.

Average Common Equity by Business Segment and Parent ~~Equity.~~Equity

   Three Months Ended(1)
   March 31, 2016    January 1, 2016    December 31, 2015    March 31, 2015 Three Months Ended(1)
June 30, Six Months Ended(1)
June 30,
   Current Methodology    Prior Methodology                  2016                                    2015                                    2016                                    2015
   (dollars in billions) (dollars in billions)
Institutional Securities
   $ 43.2       $         43.2       $ 32.3       $         37.0    $ 43.2    $ 35.3    $ 43.2    $ 36.1
Wealth Management
   15.3       15.3       12.0       10.3    15.3    11.3    15.3    10.9
Investment Management
   2.8       2.8       2.0       2.3    2.8    2.3    2.8    2.3
Parent
   6.9       6.4       21.4       16.0    7.7    18.3    7.3    17.0








Total
   $ 68.2       $ 67.7       $ 67.7       $ 65.6    $ 69.0    $ 67.2    $ 68.6    $ 66.3








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

~~104~~105
Regulatory Developments
Resolution and Recovery ~~Planning.~~Planning
Pursuant to the Dodd-Frank Act, ~~the Company is~~we are required to submit to the Federal Reserve and the ~~Federal Deposit Insurance Corporation (“FDIC”)~~FDIC an annual resolution plan that describes ~~its~~our strategy for a rapid and orderly resolution under the U.S. Bankruptcy Code in the event of our material financial distress or ~~failure of the Company. The Company’s~~failure. Our preferred resolution strategy, which is set out in ~~its~~our 2015 resolution plan, is an SPOE strategy. On April 12, 2016, the Federal Reserve and the FDIC notified ~~the Company~~us of certain shortcomings in ~~its~~our 2015 resolution plan. The Federal Reserve, but not the FDIC, viewed one of the shortcomings as a deficiency, ~~but because~~and there was not a joint determination that our 2015 resolution plan was not ~~made, this was~~credible or would not ~~a notice of deficiency. The Company is~~facilitate an orderly resolution under the U.S. Bankruptcy Code. We are required to respond with a status report on ~~its~~our actions to address the shortcomings and a public section that explains those actions by October 1, 2016. ~~Its~~Our next full resolution plan submission will be on July 1, 2017. If the Federal Reserve and the FDIC were, at a later time, to jointly determine that ~~the Company’s~~our 2017 resolution plan is not credible or would not facilitate an orderly resolution, and if ~~the Company~~we were unable to address any deficiencies at that later time, ~~the Company~~we or any of ~~its~~our subsidiaries may be subjected to more stringent capital, leverage, or liquidity requirements or restrictions on ~~its~~our growth, activities, or operations, or, after a two-year period, ~~the Company~~we may be required to divest assets or operations.
In May 2016, the Federal Reserve proposed a rule that would impose contractual requirements on certain “qualified financial contracts” (“covered QFCs”) to which U.S. G-SIBs, including ~~the Company,~~us, and their subsidiaries (“covered entities”) are parties. While national banks and savings associations are not “covered entities” under the proposed rule, the OCC is expected to propose a rule that would subject national banks, including ~~the Company’s~~our U.S. Bank Subsidiaries, to substantively identical requirements. Under the proposal, covered QFCs must expressly provide that transfer restrictions and default rights against a covered entity are limited to the same extent as provided under the Federal Deposit Insurance Act and Title II of the Dodd-Frank Act and their implementing regulations. In addition, covered QFCs may not permit the exercise of cross-default rights against a covered entity based on an affiliate’s entry into insolvency, resolution or similar proceedings. If adopted as proposed, the requirements would take effect at the start of the first calendar quarter that begins at least one year after the final rule is issued. ~~The Company is~~We are evaluating the potential impact of the proposal, which is subject to public comment and further rulemaking procedures.
For more information about resolution and recovery planning requirements and ~~the~~our activities ~~of the Company and its U.S. Bank Subsidiaries~~ in these areas, see “Business—Supervision and Regulation—Financial Holding Company—Resolution and Recovery Planning” in Part I, Item 1 of the 2015 Form 10-K.
Single-Counterparty Credit ~~Limits.~~Limits
In March 2016, the Federal Reserve re-proposed rules that would establish single-counterparty credit limits for large banking organizations (“covered companies”), with more stringent limits for the largest covered companies. U.S. G-SIBs, including ~~the Company,~~us, would be subject to a limit of 15% of Tier 1 capital for credit exposures to any “major counterparty” (defined as other U.S. G-SIBs, foreign G-SIBs and nonbank systemically important financial institutions supervised by the Federal Reserve) and to a limit of 25% of Tier 1 capital for credit exposures to any other unaffiliated counterparty. ~~The Company is~~We are evaluating the potential impact of the proposed rules.
Compensation ~~Practices.~~Practices
In the second quarter of 2016, ~~the majority of~~ the federal regulatory agencies required under the Dodd-Frank Act to issue regulations relating to the compensation practices of covered financial institutions, including ~~the Company,~~us, re-proposed rules that if implemented would require, among other things, the deferral of a percentage of certain incentive-based compensation for senior executives and certain other employees and, under certain circumstances, “clawback” of incentive-based compensation. ~~The Company is~~We are evaluating the proposal, which is subject to public comment and further rulemaking procedures.
Legacy Covered Funds under the Volcker Rule
~~U.K. Referendum.~~
~~A referendum~~The Volcker Rule prohibits certain investments and relationships by banking entities, such as us, with “covered funds,” with a number of exemptions and exclusions. The Federal Reserve has extended the conformance period until July 21, 2017 for investments in, and relationships with, covered funds that were in place before December 31, 2013, referred to as “legacy covered funds.” On July 7, 2016, the Federal Reserve stated that it will continue to consider whether to take action regarding the ~~U.K.’s continued membership~~additional extended five-year transition period for certain legacy covered funds that are also illiquid funds and that it expects to provide more information in the ~~European Union (“EU”)~~near term as to how it will ~~take place on June 23, 2016. A determination~~address applications by banking entities seeking the statutory extension for this limited category of legacy covered funds. We currently have investments in, and relationships with, legacy covered funds that are illiquid. We expect to ~~exit~~be able to divest or conform many of our legacy covered fund investments and relationships by July 2017, but, for certain illiquid funds, we expect to request further conformance extensions.
Proposed U.S. Department of the ~~EU could impact~~Treasury Regulations
On April 4, 2016, the ~~markets and financial institutions with significant operations in Europe, such~~U.S. Department of the Treasury released proposed regulations under Section 385 of the U.S. tax code addressing, among other things, the treatment of certain related-party indebtedness as ~~the Company.~~equity for U.S. federal income tax purposes. The proposed regulations are

~~105~~106
subject to change, and may or may not be issued as final in their current form. If adopted as proposed, the requirements would generally be effective for financial instruments issued after April 4, 2016. We are currently evaluating the potential adverse impact on our future effective tax rate of the proposed regulations.
Off-Balance Sheet ~~Arrangements.~~Arrangements
~~The Company enters~~We enter into various off-balance sheet arrangements, including through unconsolidated special purpose entities (“SPEs”) and lending-related financial instruments (e.g., guarantees and commitments), primarily in connection with the Institutional Securities and Investment Management business segments.
~~The Company utilizes~~We utilize SPEs primarily in connection with securitization activities. For information on ~~the Company’s~~our securitization activities, see Note 12 to the ~~condensed~~ consolidated financial statements in Item 1.
For information on ~~the Company’s~~our commitments, obligations under certain guarantee arrangements and indemnities, see Note 11 to the ~~condensed~~ consolidated financial statements in Item 1. For further information on ~~the Company’s~~our lending commitments, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Lending Activities” in Item 3.
Effects of Inflation and Changes in Interest and Foreign Exchange ~~Rates.~~
Rates
For a discussion of the effects of inflation and changes in interest and foreign exchange rates on ~~the Company’s~~our business and financial results and strategies to mitigate potential exposures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Effects of Inflation and Changes in Interest and Foreign Exchange Rates” in Part II, Item 7 of the 2015 Form 10-K.
U.K. Referendum
On June 23, 2016, the U.K. electorate voted to leave the European Union (the “EU”). It is difficult to predict the future of the U.K.’s relationship with the EU, which uncertainty may increase the volatility in the global financial markets in the short- and medium-term. There are several alternative models of relationship that the U.K. might seek to negotiate with the EU, the timeframe for which is uncertain but could take two years or more. The regulatory framework applicable to financial institutions with significant operations in Europe, such as us, is expected to evolve and specific and meaningful information regarding the long-term consequences of the vote is expected to become clearer over time. We will continue to evaluate various courses of action in the context of the development of the U.K.’s withdrawal from the EU and the referendum’s potential impact on our operations. For further information regarding our exposure to the U.K., see also “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Country Risk Exposure” in Part I, Item 3.

~~106~~107
Item 3. ~~Item 3.~~
Quantitative and Qualitative Disclosures about Market ~~Risk.~~
Risk
Risk ~~Management.~~Management

Management believes effective risk management is vital to the success of ~~the Company’s~~our business activities. For a discussion of ~~the Company’s~~our risk management functions, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management” in Part II, Item 7A of the 2015 Form 10-K.
Market ~~Risk.~~
Risk
Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, implied volatilities (the price volatility of the underlying instrument imputed from option prices), correlations or other market factors, such as market liquidity, will result in losses for a position or portfolio. Generally, ~~the Company incurs~~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 ~~the Company’s~~our Value-at-Risk (“VaR”) for market risk exposures is generated. In addition, ~~the Company incurs~~we incur trading-related market risk within the Wealth Management business segment. The Institutional Securities and Wealth Management business segments incur non-trading interest rate risk primarily from lending and deposit taking activities. The Investment Management business segment primarily incurs ~~principally~~ non-trading market risk ~~primarily~~ from investments in private equity and real estate funds. For a further discussion of market risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Market Risk” in Part II, Item 7A of the 2015 Form 10-K.
VaR
~~VaR.~~
~~The Company uses~~We use the statistical technique known as VaR as one of the tools used to measure, monitor and review the market risk exposures of ~~its~~our trading portfolios. The Market Risk Department calculates and distributes daily VaR-based risk measures to various levels of management.
VaR Methodology, Assumptions and Limitations.For information regarding ~~the Company’s~~our VaR methodology, assumptions and limitations, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Market Risk—Sales and Trading and Related Activities—VaR Methodology, Assumptions and Limitations” in Part II, Item 7A of the 2015 Form 10-K.
~~The Company utilizes~~We utilize the same VaR model for risk management purposes as well as for regulatory capital calculations as approved by ~~the Company’s~~our regulators.
The portfolio of positions used for ~~the Company’s~~our VaR for risk management purposes (“Management VaR”) differs from that used for regulatory capital requirements (“Regulatory VaR”)~~, as~~. Management VaR contains certain positions that are excluded from Regulatory VaR. Examples include counterparty Credit Valuation Adjustments (“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, on a period-end, quarterly average and quarterly high and low basis. To further enhance the transparency of the 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.~~
~~107~~
~~Trading Risks.~~

Trading Risks
95%/One-Day Management ~~VaR.~~VaR

   95%/One-Day VaR for the Quarter
Ended March 31, 2016    95%/One-Day VaR for the
Quarter Ended December 31, 2015 95%/One-Day VaR for the
Quarter Ended June 30, 2016 95%/One-Day VaR for the
Quarter Ended March 31, 2016
Market Risk Category
   Period
End Average High    Low    Period
End Average High    Low Period
End Average High Low Period
End Average High Low
   (dollars in millions) (dollars in millions)
Interest rate and credit spread
   $ 35    $ 33    $ 39       $ 28       $ 28    $ 31    $ 42       $ 27    $ 26    32    38    26    $ 35    $ 33    $ 39    $ 28
Equity price
   16    18    26       14       17    18    25       16    20    17    43    13    16    18    26    14
Foreign exchange rate
   7    7    11       5       6    11    20       6    10    7    12    6    7    7    11    5
Commodity price
   11    11    13       10       10    12    18       10    9    10    12    9    11    11    13    10
Less: Diversification benefit(1)(2)
   (30 ) (27 ) N/A       N/A       (23 ) (29 ) N/A       N/A    (32)    (28)    N/A    N/A    (30)    (27)    N/A    N/A






Primary Risk Categories
   $ 39    $ 42    $ 53       $ 34       $ 38    $ 43    $ 53       $ 38    $         33            38            61            31    $         39    $         42    $         53    $         34






Credit Portfolio
   19    16    20       12       12    13    14       12    22    20    23    18    19    16    20    12
Less: Diversification benefit(1)(2)
   (11 ) (12 ) N/A       N/A       (9 ) (10 ) N/A       N/A    (13)    (12)    N/A    N/A    (11)    (12)    N/A    N/A






Total Management VaR
   $     47    $     46    $     55       $     39       $     41    $     46    $     53       $     41    $ 42    46    68    39    $ 47    $ 46    $ 55    $ 39






~~N/A—Not~~
~~Applicable.~~
N/A—Not Applicable
(1)
Diversification benefit equals the difference between the total Management VaR and the sum of the component VaRs. This benefit arises because the simulated one-day losses for each of the components occur on different days; similar diversification benefits also are taken into account within each component.
(2)
The high and low VaR values for the total Management VaR and each of the component VaRs might have occurred on different days during the quarter, and therefore, the diversification benefit is not an applicable measure.

108
The average Total Management VaR for the quarter ended June 30, 2016 (“current quarter”) was $46 million, which was consistent with $46 million for the quarter ended March 31, 2016 (“last quarter”).
The average Management VaR for the Primary Risk Categories for the current quarter ~~ended March 31, 2016~~ was ~~$42~~$38 million ~~which was relatively consistent~~compared with ~~$43~~$42 million for the ~~quarter ended December 31, 2015.~~
last quarter. The ~~average Management VaR for the Credit Portfolio for the quarter ended March 31, 2016 was $16 million compared with $13 million for the quarter ended December 31, 2015. The increase~~decrease was driven by ~~higher market volatility.~~an overall reduction in risk exposures across the Sales and Trading businesses.
Distribution of VaR Statistics and Net Revenues for the ~~quarter ended March 31, 2016.~~    Current Quarter.One method of evaluating the reasonableness of ~~the Company’s~~our VaR model as a measure of ~~the Company’s~~our potential volatility of net revenues is to compare VaR with 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. ~~The Company evaluates~~We evaluate the reasonableness of ~~its~~our VaR model by comparing the potential declines in portfolio values generated by the model with actual trading results for the ~~Company,~~Firm, as well as individual business units. For days where losses exceed the VaR statistic, ~~the Company examines~~we examine the drivers of trading losses to evaluate the VaR model’s accuracy relative to realized trading results.
The distribution of VaR Statistics and Net Revenues is presented in the following histograms ~~below~~ for the Total Trading populations.
~~108~~
Total Trading.    As shown in the 95%/One-Day Management VaR table, the average 95%/one-day Total Management VaR for the current quarter ~~ended March 31, 2016~~ was $46 million. The following histogram ~~below~~ presents the distribution of the daily 95%/one-day Total Management VaR for the current quarter, ~~ended March 31, 2016,~~ which was in a range between $40 million and ~~$55~~$50 million for approximately ~~97%~~91% of trading days during the quarter.

109
The following histogram ~~below~~ shows the distribution for the current quarter ~~ended March 31, 2016~~ of daily net trading revenues, including 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 ~~the Company’s~~our Trading businesses. Daily net trading revenues also include intraday trading activities but exclude certain items not captured in the VaR model, such as fees, commissions and net interest
income. Daily net trading revenues differ from the definition of revenues required for Regulatory VaR backtesting, which further excludes intraday trading. During the current quarter, ~~ended March 31, 2016, the Company~~we experienced net trading losses on 83 days, of which no day was in excess of the 95%/one-day Total Management VaR.

~~Non-trading Risks.~~

~~The Company believes~~
Non-trading Risks
We believe that sensitivity analysis is an appropriate representation of ~~the Company’s~~our non-trading risks. Reflected below is this analysis covering substantially all of the non-trading risk in ~~the Company’s~~our portfolio.
Counterparty Exposure Related to ~~the Company’s~~Our Own Credit Spread.The credit spread risk sensitivity of the counterparty exposure related to ~~the Company’s~~our own credit spread corresponded to an increase in value of approximately $7 million ~~and $6 million~~ for each 1 basis point widening in ~~the Company’s~~our credit spread level at both June 30, 2016 and March 31, ~~2016 and December 31, 2015, respectively.~~2016.
Funding Liabilities.The credit spread risk sensitivity of ~~the Company’s~~our mark-to-market funding liabilities corresponded to an increase in value of approximately ~~$13~~$15 million and ~~$11~~$13 million for each 1 basis point widening in ~~the Company’s~~our credit spread level at June 30, 2016 and March 31, 2016, ~~and December 31, 2015,~~ respectively.
Interest Rate Risk Sensitivity.The following table ~~below~~ presents an analysis of selected instantaneous upward and downward parallel interest rate shocks on net interest income over the next 12 months for ~~the Company’s~~our U.S. Bank Subsidiaries. These shocks are applied to ~~the Company’s~~our 12-month forecast for ~~its~~our U.S. Bank Subsidiaries, which incorporates market expectations of interest rates and ~~the Company’s~~our forecasted business activity, including ~~its~~our deposit deployment strategy and asset-liability management hedges.
~~110~~
U.S. Bank Subsidiaries’ Net Interest Income Sensitivity ~~Analysis.~~Analysis

   At
  March 31, 2016   At
  December 31, 2015
   (dollars in millions)
+200 basis points
   $ (202 ) $ (149 )
+100 basis points
   (79 ) (84 )
–100 basis points
   (534 ) (512 )
  At June 30, 2016     At March 31, 2016
(dollars in millions)
+200 basis points
$ (204)    $ (202)
+100 basis points
(21)    (79)
–100 basis points
(532)    (534)
At June 30, 2016 and March 31, 2016, ~~and December 31, 2015,~~ large instantaneous interest rates shocks had a negative impact to ~~the Company’s~~our U.S. Bank Subsidiaries’ projected net interest income over the following 12 months due to composition of the banks’ assets as well as expected deposit pricing behavior at higher levels of interest rates. ~~The Company does~~We do not manage to any single rate scenario but rather ~~manages~~manage net interest income in ~~its~~our U.S. Bank Subsidiaries to optimize across a range of possible outcomes. The sensitivity analysis assumes that ~~the Company takes~~we take no action in response to these scenarios and does not assume any change in other macroeconomic variables normally correlated with changes in interest rates.
Investments.    ~~The Company makes investments in both~~We have exposure to public and private ~~companies.~~companies through direct investments as well as through funds that invest in these assets. These investments are predominantly equity positions with long investment horizons, ~~the majority~~a portion of which are for business facilitation purposes. The market risk related to these investments is measured by estimating the potential reduction in net income associated
110
with a 10% decline in investment values and related impact on performance fees.
Investments Sensitivity, Including Related Performance ~~Fees.~~Fees

   10% Sensitivity
   At
    March 31, 2016        At
    December 31, 2015
   (dollars in millions)
Investments related to Investment Management activities:

Real estate funds
   $ 137       $ 139
Private equity and infrastructure funds
   125       131
Traditional asset management and hedge fund investments
   100       101
Other investments:

Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.
   159       142
Other Company investments
   169       194
10% Sensitivity
At
June 30, 2016 At
March 31, 2016
(dollars in millions)
Investments related to Investment Management activities
$           375    $           362
Other investments:

Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.
175    159
Other Firm investments
162    169
Equity Market ~~Sensitivity.~~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 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 decline and price volatility on client behavior. Therefore, overall revenues do not correlate completely with changes in the equity markets.
Credit ~~Risk.~~
Risk
Credit risk refers to the risk of loss arising when a borrower, counterparty or issuer does not meet its financial obligations to ~~the Company. The Company~~us. We primarily ~~incurs~~incur credit risk exposure to institutions and individuals through ~~its~~our Institutional Securities and Wealth Management business segments. For a further discussion of ~~the Company’s~~our credit risks, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk” in Part II, Item 7A of the 2015 Form 10-K. Also, see Notes 7 and 11 to the ~~condensed~~ consolidated financial statements in Item 1 for additional information about ~~the Company’s~~our loans and lending commitments, respectively.
~~111~~
Lending ~~Activities.~~Activities
~~The Company provides~~We provide loans and lending commitments to a variety of customers, from large corporate and institutional clients to high net worth individuals. In addition, ~~the Company purchases~~we purchase loans in the secondary market. In the ~~condensed~~ consolidated balance ~~sheet,~~sheets, these loans and lending commitments are carried at either fair value with changes in fair value recorded in earnings; held for investment, which are recorded at amortized cost; or held for sale, which are recorded at lower of cost or fair value. 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 ~~condensed~~ consolidated balance ~~sheet.~~sheets. See Notes 3, 7 and 11 to the ~~condensed~~ consolidated financial statements in Item 1 for further information.
~~Loan and Lending Commitment Portfolio by Business Segment.~~

   At March 31, 2016
   Institutional
Securities Wealth
Management Total
   (dollars in millions)
Corporate loans
   $ 17,288    $ 7,838    $ 25,126
Consumer loans
   —    22,174    22,174
Residential real estate loans
   —    21,780    21,780
Wholesale real estate loans
   6,816    —    6,816


Loans held for investment, gross of allowance
   24,104    51,792    75,896
Allowance for loan losses
   (297 ) (33 ) (330 )


Loans held for investment, net of allowance
   23,807    51,759    75,566


Corporate loans
   12,000    —    12,000
Residential real estate loans
   42    57    99
Wholesale real estate loans
   1,137    —    1,137


Loans held for sale
   13,179    57    13,236


Corporate loans
   7,455    —    7,455
Residential real estate loans
   1,727    —    1,727
Wholesale real estate loans
   643    —    643


Loans held at fair value
   9,825    —    9,825


Total loans(1)
   46,811    51,816    98,627
Lending commitments(2)(3)
   93,272    6,358    99,630


Total loans and lending commitments(2)(3)
   $         140,083    $         58,174    $         198,257


~~112~~111

   At December 31, 2015
   Institutional
Securities Wealth
Management Total
   (dollars in millions)
Corporate loans
   $         16,452    $         7,102    $         23,554
Consumer loans
   —    21,528    21,528
Residential real estate loans
   —    20,863    20,863
Wholesale real estate loans
   6,839    —    6,839


Loans held for investment, gross of allowance
   23,291    49,493    72,784
Allowance for loan losses
   (195 ) (30 ) (225 )


Loans held for investment, net of allowance
   23,096    49,463    72,559


Corporate loans
   11,924    —    11,924
Residential real estate loans
   45    59    104
Wholesale real estate loans
   1,172    —    1,172


Loans held for sale
   13,141    59    13,200


Corporate loans
   7,286    —    7,286
Residential real estate loans
   1,885    —    1,885
Wholesale real estate loans
   1,447    —    1,447


Loans held at fair value
   10,618    —    10,618


Total loans(1)
   46,855    49,522    96,377
Lending commitments(2)(3)
   95,572    5,821    101,393


Total loans and lending commitments(2)(3)
   $ 142,427    $ 55,343    $ 197,770


Loan and Lending Commitment Portfolio by Business Segment

At June 30, 2016
Institutional
Securities    Wealth
Management    Total
(dollars in millions)
Corporate loans
$ 15,938       $ 8,248       $ 24,186
Consumer loans
—       23,337       23,337
Residential real estate loans
—       22,668       22,668
Wholesale real estate loans
7,415       —       7,415





Loans held for investment, gross of allowance
23,353       54,253       77,606
Allowance for loan losses
(291)       (32)       (323)





Loans held for investment, net of allowance
23,062       54,221       77,283





Corporate loans
14,447       —       14,447
Consumer loans
—       —       —
Residential real estate loans
38       46       84
Wholesale real estate loans
1,351       —       1,351





Loans held for sale
15,836       46       15,882





Corporate loans
7,114       —       7,114
Residential real estate loans
1,721       —       1,721
Wholesale real estate loans
462       —    �� 462





Loans held at fair value
9,297       —       9,297





Total loans(1)
48,195       54,267       102,462
Lending commitments(2)(3)
88,057       7,003       95,060





Total loans and lending commitments(2)(3)
$       136,252       $       61,270       $       197,522






At December 31, 2015
Institutional
Securities    Wealth
Management    Total
(dollars in millions)
Corporate loans
$ 16,452       $ 7,102       $ 23,554
Consumer loans
—       21,528       21,528
Residential real estate loans
—       20,863       20,863
Wholesale real estate loans
6,839       —       6,839





Loans held for investment, gross of allowance
23,291       49,493       72,784
Allowance for loan losses
(195)       (30)       (225)





Loans held for investment, net of allowance
23,096       49,463       72,559





Corporate loans
11,924       —       11,924
Residential real estate loans
45       59       104
Wholesale real estate loans
1,172       —       1,172





Loans held for sale
13,141       59       13,200





Corporate loans
7,286       —       7,286
Residential real estate loans
1,885       —       1,885
Wholesale real estate loans
1,447       —       1,447





Loans held at fair value
10,618       —       10,618





Total loans(1)
46,855       49,522       96,377
Lending commitments(2)(3)
95,572       5,821       101,393





Total loans and lending commitments(2)(3)
$       142,427       $         55,343       $       197,770





(1)
Amounts exclude ~~$24.6~~$23.2 billion and $25.3 billion related to margin loans and ~~$4.7 billion and~~ $4.9 billion related to employee loans at ~~March 31,~~June 30, 2016 and December 31, 2015, respectively. See Notes 6 and 7 to the ~~condensed~~ consolidated financial statements in Item 1 for further information.
(2)
Lending commitments represent the notional amount of legally binding obligations to provide funding to clients for all lending transactions. Since commitments associated with these business activities may expire unused or may not be utilized to full capacity, they do not necessarily reflect the actual future cash funding requirements.
(3)
For syndications led by ~~the Company,~~us, the lending commitments accepted by the borrower but not yet closed are net of the amounts agreed to by counterparties that will participate in the syndication. For syndications that ~~the Company participates~~we participate in and ~~does~~do not lead, lending commitments accepted by the borrower but not yet closed include only the amount that ~~the Company expects it~~we expect will be allocated from the lead, syndicate bank. Due to the nature of ~~the Company’s~~our obligations under the commitments, these amounts include certain commitments participated to third parties.

112
~~The Company’s~~
Our credit exposure from ~~its~~our loans and lending commitments is measured in accordance with ~~the Company’s~~our internal risk management standards. Risk factors considered in determining the aggregate allowance for loan and commitment losses include the borrower’s financial strength, seniority of the loan, collateral type, volatility of collateral value, debt cushion, loan-to-value ratio, debt service ratio, covenants and counterparty type. At ~~March 31,~~June 30, 2016 and December 31, 2015, the allowance for loan losses related to loans that were accounted for as held for investment was ~~$330~~$323 million and $225 million, respectively, and the allowance for commitment losses related to lending commitments that were accounted for as held for investment was ~~$201~~$187 million and $185 million, respectively. The aggregate allowance for loan and commitment losses increased over the ~~quarter~~six months ended ~~March 31,~~June 30, 2016 primarily due to specific reserves on exposures to counterparties in the energy sector and other select downgrades. See “Institutional Securities Lending Exposure Related to the Energy Industry” herein and Note 7 to the ~~condensed~~ consolidated financial statements in Item 1 for further information.
Institutional Securities Lending Activities.In connection with certain of ~~its~~our Institutional Securities business segment activities, ~~the Company provides~~we provide loans and lending commitments to a diverse group of corporate and other institutional clients. These activities include corporate lending, commercial and
residential mortgage lending, asset-backed lending, corporate loans purchased in the secondary market, financing extended to equities and commodities customers, and loans to municipalities. These 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 ~~the Company.~~us.
~~113~~
Institutional Securities loans and lending commitments are mainly related to relationship-based and event-driven lending to select corporate clients. Relationship-based loans and lending commitments are used for general corporate purposes, working capital and liquidity purposes by ~~the Company’s~~our Investment Banking clients and typically consist of revolving lines of credit, letter of credit facilities and term loans. In connection with the relationship-based lending activities, ~~the Company~~we had hedges (which included ~~single name,~~single-name, sector and index hedges) with a notional amount of ~~$10.2~~$18.4 billion and $12.0 billion at ~~March 31,~~June 30, 2016 and December 31, 2015, respectively. Event-driven loans and lending commitments are associated with a particular event or transaction, such as to support client merger, acquisition, recapitalization and project finance activities. Event-driven loans and lending commitments typically consist of revolving lines of credit, term loans and bridge loans.

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


   At March 31, 2016 At June 30, 2016
   Years to Maturity    Years to Maturity
   Less than 1    1-3    3-5    Over 5    Total Less than 1    1-3    3-5    Over 5    Total
   (dollars in millions) (dollars in millions)
AAA
   $ 287       $ 24       $ 50       $ —       $ 361    $ 263       $ —       $ 50       $ —       $ 313
AA
   4,999       1,794       4,096       —       10,889    3,478       758       4,375       —       8,611
A
   3,788       6,645       9,924       1,099       21,456    2,169       6,517       10,610       1,104       20,400
BBB
   7,582       16,614       24,800       3,165       52,161    11,094       15,909       23,997       844       51,844


















Investment grade
   16,656       25,077       38,870       4,264       84,867    17,004       23,184       39,032       1,948       81,168
Non-investment grade
   9,374       16,717       20,875       4,413       51,379    8,040       17,529       18,520       7,134       51,223
Unrated(2)
   832       801       56       2,148       3,837    933       591       94       2,243       3,861


















Total
   $     26,862       $     42,595       $     59,801       $     10,825       $     140,083    $     25,977       $     41,304       $     57,646       $     11,325       $   136,252


















   At December 31, 2015
   Years to Maturity
   Less than 1    1-3    3-5    Over 5    Total
   (dollars in millions)
AAA
   $ 287       $ 24       $ 50       $ —       $ 361
AA
   5,022       2,553       3,735       63       11,373
A
   3,996       5,726       11,993       1,222       22,937
BBB
   5,089       16,720       23,248       4,086       49,143










Investment grade
   14,394       25,023       39,026       5,371       83,814
Non-investment grade
   7,768       15,863       22,818       7,779       54,228
Unrated(2)
   930       1,091       246       2,118       4,385










Total
   $     23,092       $     41,977       $     62,090       $     15,268       $     142,427










113

At December 31, 2015
Years to Maturity
Less than 1    1-3    3-5    Over 5    Total
(dollars in millions)
AAA
$ 287       $ 24       $ 50       $ —       $ 361
AA
5,022       2,553       3,735       63       11,373
A
3,996       5,726       11,993       1,222       22,937
BBB
5,089       16,720       23,248       4,086       49,143









Investment grade
14,394       25,023       39,026       5,371       83,814
Non-investment grade
7,768       15,863       22,818       7,779       54,228
Unrated(2)
930       1,091       246       2,118       4,385









Total
$     23,092       $     41,977       $     62,090       $     15,268       $   142,427









(1)
Obligor credit ratings are determined by the Credit Risk Management Department.
(2)
Unrated loans and lending commitments are primarily trading positions that are measured at fair value and risk managed as a component of Market Risk. For a further discussion of ~~the Company’s~~our Market Risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Market Risk” in Part II, Item 7A of the 2015 Form 10-K.

At ~~March 31,~~both June 30, 2016 and December 31, 2015, the aggregate amount of investment grade loans was ~~$15.4 billion and~~ $15.8 billion, respectively, the aggregate amount of non-investment grade loans was ~~$27.7~~$28.7 billion and $26.9 billion, respectively, and the aggregate amount of unrated loans was $3.7 billion and $4.2 billion, respectively.
Event-Driven Loans and Lending ~~Commitments.~~Commitments

   At March 31, 2016    At December 31, 2015
      (dollars in billions)
Event-driven loans
   $ 5.9       $ 5.4
Event-driven lending commitments
   16.0       17.8




Total
   $ 21.9       $ 23.2




Event-driven loans and lending commitments to non-investment grade borrowers
   $ 10.6       $ 13.5

At June 30,
2016    At
December 31,
2015
(dollars in billions)
Event-driven loans
$ 9.6       $ 5.4
Event-driven lending
commitments
13.1       17.8



Total
$ 22.7       $ 23.2



Event-driven loans and lending commitments to non-investment grade borrowers
$ 13.0       $ 13.5
~~114~~
Maturity Profile of Event-driven Loans and Lending Commitments.

   At March 31, 2016 At December 31, 2015
Less than 1 year
   34 % 24 %
1-3 years
   21 % 21 %
3-5 years
   24 % 24 %
Over 5 years
   21 % 31 %
   At June 30,
2016    At December 31,
2015
Less than 1 year
   36%       24%
1-3 years
   20%       21%
3-5 years
   17%       24%
Over 5 years
   27%       31%
At ~~March 31,~~June 30, 2016, approximately 98% of the Institutional Securities business segment loans held for investment were current, while approximately 2% were on nonaccrual status, and at December 31, 2015, approximately 99% of the Institutional Securities business segment loans held for investment were current, while approximately 1% were 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.

114
Institutional Securities Credit Exposure from Loans and Lending Commitments by ~~Industry.~~Industry


Industry(1)
   At March 31, 2016    At December 31, 2015 At June 30,

2016
   At December 31,

2015

   (dollars in millions)

(dollars in millions)

Real estate
   $ 16,761       $ 17,847    $ 17,524       $ 17,847
Healthcare
16,891       12,677
Energy
   14,828       15,921    13,512       15,921
Healthcare
   14,143       12,677
Consumer discretionary
   13,612       12,098    13,128       12,098
Utilities
   12,967       12,631    12,646       12,631
Funds, exchanges and other financial services(2)
   10,544       11,649
Industrials
   10,128       10,018    10,349       10,018
Information technology
   8,462       11,122    8,269       11,122
Consumer staples
8,053       8,597
Funds, exchanges and other financial services(2)
8,052       11,649
Materials
6,698       6,440
Mortgage finance
   8,327       8,260    6,399       8,260
Consumer staples
   7,770       8,597
Materials
   6,424       6,440
Telecommunications services
   5,005       4,403    4,245       4,403
Insurance
   4,588       4,682    3,793       4,682
Consumer finance
2,768       977
Special purpose vehicles
   2,754       3,482    1,914       3,482
Consumer finance
   2,168       977
Other
   1,602       1,623    2,011       1,623






Total
   $             140,083       $             142,427    $         136,252       $ 142,427






(1)
Industry categories are based on the Global Industry Classification Standard^®.
(2)
Includes mutual funds, pension funds, private equity and real estate funds, exchanges and clearinghouses, and diversified financial services.

Institutional Securities Lending Exposures Related to the Energy Industry.At ~~March 31,~~June 30, 2016, Institutional Securities’ loans and lending commitments related to the energy industry were ~~$14.8~~$13.5 billion, of which approximately ~~60%~~64% are accounted for as held for investment and ~~40%~~36% are accounted for as either held for sale or at fair value. Additionally, approximately ~~60%~~59% of the total energy industry loans and lending commitments were to investment grade counterparties. At ~~March 31,~~June 30, 2016, the energy industry portfolio included ~~$1.8~~$1.7 billion in loans and ~~$2.3~~$1.9 billion in lending commitments to Oil and Gas Exploration and Production (“E&P”) companies. The E&P lending commitments were primarily to investment grade counterparties. The E&P loans were substantially all to non-investment grade counterparties, which are generally subject to periodic borrowing base reassessments based on the value of the underlying oil and gas reserves pledged as collateral. In limited situations, ~~the Company~~we may extend the period related to borrowing base reassessments typically in conjunction with taking certain risk mitigating actions with the borrower. ~~During~~Over the ~~quarter~~six months ended ~~March 31,~~June 30, 2016, ~~the Company~~we increased the allowance for loan and commitment losses on held for investment energy exposures and incurred mark-to-market losses on fair value ~~and held for sale~~ energy loans. See “Credit Risk—Lending Activities” herein for further information. To the extent commodities prices, or oil prices, remain at ~~quarter-end~~quarter-
end levels, or deteriorate further, ~~the Company~~we may incur additional lending losses.
At December 31, 2015, Institutional Securities’ loans and lending commitments related to the energy industry were $15.9 billion. Approximately 60% of these energy industry loans and lending commitments were to investment grade counterparties. At December 31, 2015, the energy industry portfolio included $1.7 billion in loans and $2.7 billion in lending commitments to E&P companies. The E&P loans were substantially all to non-investment grade counterparties which are subject to semi-annual borrowing base reassessments based on the value of the underlying oil and gas reserves pledged as collateral. The E&P lending commitments were primarily to investment grade counterparties.
~~115~~
Institutional Securities Margin Lending.In addition to the activities noted above, Institutional Securities ~~lending activities include~~provides margin lending, which allows the client to borrow against the value of qualifying securities. At ~~March 31,~~June 30, 2016 and December 31, 2015, the amounts related to margin lending were ~~$10.2~~$8.7 billion and $10.6 billion, respectively, which were classified within Customer and other receivables in the ~~condensed~~ consolidated balance ~~sheet.~~sheets.

115
~~Other~~Wealth Management Lending Activities.The principal Wealth Management lending activities include securities-based lending and residential real estate loans.
Securities-based lending provided to our retail clients is primarily conducted through our Portfolio Loan Account (“PLA”) and Liquidity Access Line (“LAL”) platforms which had an outstanding loan balance of $27.1 billion and $24.9 billion at June 30, 2016 and December 31, 2015, respectively. For more information about our securities-based lending and residential real estate loans, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Lending Activities” in Part II, Item 7A of the 2015 Form 10-K.
For the current quarter, loans and lending commitments associated with the Wealth Management business segment lending activities increased by approximately 5.3%, mainly due to growth in LAL and residential real estate loans.
Wealth Management Lending Activities by Remaining Contractual Maturity

At June 30, 2016
Years to Maturity
Less than 1    1-3    3-5    Over 5    Total
(dollars in millions)
Securities-based lending and other loans
$ 28,177       $ 1,474       $ 1,051       $ 869       $ 31,571
Residential real estate loans
—       —       48       22,648       22,696









Total
$ 28,177       $ 1,474       $ 1,099       $ 23,517       $ 54,267
Lending commitments
5,539       823       376       265       7,003









Total loans and lending commitments
$      33,716       $      2,297       $      1,475       $      23,782       $      61,270










At December 31, 2015
Years to Maturity
Less than 1    1-3    3-5    Over 5    Total
(dollars in millions)
Securities-based lending and other loans
$ 25,975       $ 1,004       $ 889       $ 749       $ 28,617
Residential real estate loans
—       —       35       20,870       20,905









Total
$ 25,975       $ 1,004       $ 924       $ 21,619       $ 49,522
Lending commitments
5,143       286       115       277       5,821









Total loans and lending commitments
$      31,118       $      1,290       $      1,039       $      21,896       $      55,343









At June 30, 2016 and December 31, 2015, approximately 99.9% of the Wealth Management business segment loans held for investment were current, while approximately 0.1% were 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.
The Wealth Management business segment also provides margin lending to clients and had an outstanding balance of $14.5 billion and $14.7 billion at June 30, 2016 and December 31, 2015, respectively, which were classified within Customer and other receivables within the consolidated balance sheets.
In addition, the Wealth Management business segment has employee loans that are granted primarily in conjunction with programs established by us to retain and recruit certain employees. These loans are recorded in Customer and other receivables in the consolidated balance sheets. These loans are full recourse, generally require periodic payments and have repayment terms ranging from 1 to 12 years. We establish an allowance for loan amounts we do not consider recoverable, which is recorded in Compensation and benefits expense.
116
Credit Exposure—Derivatives
We incur credit risk as a dealer in OTC derivatives. Credit risk with respect to derivative instruments arises from the failure of a counterparty to perform according to the terms of the contract. In connection with our OTC derivative activities, we generally enter into master netting agreements and collateral arrangements with counterparties. These agreements provide us with the ability to demand collateral, as well as to liquidate collateral and offset receivables and payables covered under the same master netting agreement in the event of counterparty default. We manage our trading positions by employing a variety of risk mitigation strategies. These strategies include diversification of risk exposures and hedging. Hedging activities consist of the purchase or sale of positions in related securities and financial instruments, including a variety of derivative products (e.g., futures, forwards, swaps and options). For credit exposure information on our OTC derivative products, see Note 4 to the consolidated financial statements in Item 1. For a discussion of our credit exposure to derivative contracts, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Credit Exposure—Derivatives” in Part II, Item 7A of the 2015 Form 10-K.
Credit Derivative Portfolio by Counterparty Type
The fair values shown herein are before the application of contractual netting or collateral. For additional credit exposure information on our credit derivative portfolio, see Note 4 to the consolidated financial statements in Item 1.
   At June 30, 2016
   Fair Values(1)    Notionals
   Receivable    Payable    Net    Protection
Purchased    Protection
Sold


(dollars in millions)

Banks and securities firms
   $ 11,974       $ 12,705       $ (731)       $ 435,374       $ 388,776
Insurance and other financial institutions
   4,424       5,013       (589)       165,290       175,372
Non-financial entities
   63       103       (40)       5,196       3,142










Total
   $     16,461       $     17,821       $     (1,360)       $     605,860       $     567,290










   At December 31, 2015
   Fair Values(1)    Notionals
   Receivable    Payable    Net    Protection
Purchased    Protection Sold


(dollars in millions)

Banks and securities firms
   $ 16,962       $ 17,295       $ (333)       $ 533,557       $ 491,267
Insurance and other financial institutions
   5,842       6,247       (405)       189,439       194,723
Non-financial entities
   115       123       (8)       5,932       3,529










Total
   $     22,919       $     23,665       $     (746)       $     728,928       $     689,519










(1)
Our CDS are classified in either Level 2 or Level 3 of the fair value hierarchy. Approximately 2% and 3% of receivable fair values and 8% and 6% of payable fair values represented Level 3 amounts at June 30, 2016 and December 31, 2015, respectively (see Note 3 to the consolidated financial statements in Item 1).
117
OTC Derivative Products at Fair Value, Net of Collateral, by Industry

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




Total(3)
   $ 22,660       $ 16,624




(1)
Industry categories are based on the Global Industry Classification Standard^®.
(2)
Amounts include mutual funds, pension funds, private equity and real estate funds, exchanges and clearinghouses, and diversified financial services.
(3)
For further information on derivative instruments and hedging activities, see Note 4 to the consolidated financial statements in Item 1.
Other
In addition to the activities noted above, there are other credit risks managed by the Credit Risk Management Department and various business areas within the Institutional Securities business segment. ~~The Company participates~~We participate in securitization activities whereby ~~it extends~~we extend short-term or long-term funding to clients through loans and lending commitments that are secured by the assets of the borrower and generally provide for over-collateralization, including commercial real estate loans, loans secured by loan pools, commercial company loans, and secured lines of revolving credit. 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. See Note 12 to the ~~condensed~~ consolidated financial statements in Item 1 for information about ~~the Company’s~~our securitization activities. In addition, a collateral management group monitors collateral levels against requirements and oversees the administration of the collateral function. See Note 6 to the ~~condensed~~ consolidated financial statements in Item 1 for additional information about ~~the Company’s~~our collateralized transactions.
~~Wealth Management Lending Activities.~~    ~~The principal Wealth Management lending activities include securities-based lending and residential real estate loans.~~
Securities-based lending provided to the Company’s retail clients is primarily conducted through its Portfolio Loan Account (“PLA”) and Liquidity Access Line (“LAL”) platforms which had an outstanding loan balance of $25.7 billion and $24.9 billion at March 31, 2016 and December 31, 2015, respectively. These loans allow the client to borrow money against the value of qualifying securities for any purpose other than purchasing securities. The Company establishes approved credit lines against qualifying securities and monitors terms daily and, pursuant to such guidelines, requires customers to deposit additional collateral, or reduce debt positions, when necessary. These credit lines are primarily uncommitted loan facilities, as the Company reserves the right to not make any advances, or may terminate these credit lines at any time. Factors considered in the review of these loans include, but are not limited to, the loan amount, the client’s credit profile, the degree of leverage, collateral diversification, price volatility and liquidity of the collateral.
Residential real estate loans consist of first and second lien mortgages, including HELOC loans. The Company’s underwriting policy is designed to ensure that all borrowers pass an assessment of capacity and willingness to pay, which includes an analysis utilizing industry standard credit scoring models (~~e.g.~~, Fair Isaac Corporation (“FICO”) scores), debt ratios and assets of the borrower. Loan-to-value ratios are determined based on independent third-party property appraisal/valuations, and security lien position is established through title/ownership reports. The vast majority of mortgage and HELOC loans are held for investment in the Wealth Management business segment’s loan portfolio.
For the quarter ended March 31, 2016, loans and lending commitments associated with the Wealth Management business segment lending activities increased by approximately 5.1%, mainly due to growth in LAL and residential real estate loans.
~~Wealth Management Lending Activities by Remaining Contractual Maturity.~~

   At March 31, 2016
   Years to Maturity
   Less than 1    1-3    3-5    Over 5    Total
   (dollars in millions)
Securities-based lending and other loans
   $ 26,865       $ 1,191       $ 1,106       $ 837       $ 29,999
Residential real estate loans
   —       —       50       21,767       21,817










Total
   $ 26,865       $ 1,191       $ 1,156       $ 22,604       $ 51,816
Lending commitments
   5,373       186       529       270       6,358










Total loans and lending commitments
   $     32,238       $     1,377       $     1,685       $     22,874       $     58,174










~~116~~

   At December 31, 2015
   Years to Maturity
   Less than 1    1-3    3-5    Over 5    Total
   (dollars in millions)
Securities-based lending and other loans
   $     25,975       $     1,004       $        889       $ 749       $     28,617
Residential real estate loans
   —       —       35           20,870       20,905










Total
   $ 25,975       $ 1,004       $ 924       $ 21,619       $ 49,522
Lending commitments
   5,143       286       115       277       5,821










Total loans and lending commitments
   $ 31,118       $ 1,290       $ 1,039       $ 21,896       $ 55,343










At March 31, 2016 and December 31, 2015, approximately 99.9% of the Wealth Management business segment loans held for investment were current, while approximately 0.1% were 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.
The Wealth Management business segment also provides margin lending to clients and had an outstanding balance of $14.4 billion and $14.7 billion at March 31, 2016 and December 31, 2015, respectively, which were classified within Customer and other receivables within the condensed consolidated balance sheet.
In addition, the Wealth Management business segment has employee loans that are granted primarily in conjunction with programs established by the Company to retain and recruit certain employees. These loans are recorded in Customer and other receivables in the condensed consolidated balance sheet. These loans are full recourse, generally require periodic payments and have repayment terms ranging from 2 to 12 years. The Company establishes an allowance for loan amounts it does not consider recoverable, which is recorded in Compensation and benefits expense.
~~Credit Exposure—Derivatives.~~
The Company incurs credit risk as a dealer in OTC derivatives. Credit risk with respect to derivative instruments arises from the failure of a counterparty to perform according to the terms of the contract. In connection with its OTC derivative activities, the Company generally enters into master netting agreements and collateral arrangements with counterparties. These agreements provide the Company with the ability to demand collateral, as well as to liquidate collateral and offset receivables and payables covered under the same master netting agreement in the event of counterparty default. The Company manages its trading positions by employing a variety of risk mitigation strategies. These strategies include diversification of risk exposures and hedging. Hedging activities consist of the purchase or sale of positions in related securities and financial instruments, including a variety of derivative products (~~e.g.~~~~, futures, forwards, swaps and options). For credit exposure information on the Company’s OTC derivative products, see Note 4 to the condensed consolidated financial statements in Item 1.~~
~~Credit Derivatives~~.    For a discussion of the Company’s credit exposure to derivative contracts, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Credit Exposure—Derivatives” in Part II, Item 7A of the 2015 Form 10-K.
~~Credit Derivative Portfolio by Counterparty Type.~~

   At March 31, 2016
   Fair Values(1) Notionals
   Receivable    Payable    Net Protection
Purchased    Protection
Sold
   (dollars in millions)
Banks and securities firms
   $ 14,791       $ 15,244       $ (453 ) $ 515,969       $ 475,416
Insurance and other financial institutions
   5,423       5,909       (486 ) 199,358       206,180
Non-financial entities
   87       114       (27 ) 6,110       3,571








Total
   $     20,301       $     21,267       $     (966 ) $     721,437       $     685,167








~~117~~

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








Total
   $     22,919       $     23,665       $     (746 ) $     728,928       $     689,519








~~(1)~~
The Company’s CDS are classified in either Level 2 or Level 3 of the fair value hierarchy. Approximately 4% and 3% of receivable fair values and 7% and 6% of payable fair values represented Level 3 amounts at March 31, 2016 and December 31, 2015, respectively (see Note 3 to the condensed consolidated financial statements in Item 1).
The fair values shown above are before the application of contractual netting or collateral. For additional credit exposure information on the Company’s credit derivative portfolio, see Note 4 to the condensed consolidated financial statements in Item 1.
~~OTC Derivative Products at Fair Value, Net of Collateral, by Industry.~~

Industry(1)
   At March 31, 2016    At December 31, 2015
   (dollars in millions)
Banks and securities firms
   $ 4,239       $ 1,672
Utilities
   4,040       3,428
Funds, exchanges and other financial services(2)
   2,753       2,029
Industrials
   2,337       2,304
Regional governments
   1,562       1,163
Healthcare
   1,215       1,041
Sovereign governments
   1,003       524
Not-for-profit organizations
   981       794
Special purpose vehicles
   822       718
Information technology
   624       294
Consumer discretionary
   588       725
Consumer staples
   561       506
Materials
   552       473
Insurance
   390       380
Energy
   366       396
Other
   448       177




Total(3)
   $             22,481       $             16,624




~~(1)~~
~~Industry categories are based on the Global Industry Classification Standard~~^®.
~~(2)~~
~~Amounts include mutual funds, pension funds, private equity and real estate funds, exchanges and clearinghouses, and diversified financial services.~~
~~(3)~~
~~For further information on derivative instruments and hedging activities, see Note 4 to the condensed consolidated financial statements in Item 1.~~
Country Risk ~~Exposure.~~
Exposure
Country risk exposure is the risk that events in, or that affect, a foreign country (any country other than the U.S.) might adversely affect ~~the Company. The Company~~us. We actively ~~manages~~manage country risk exposure through a comprehensive risk management
framework that combines credit and market fundamentals and allows ~~the Company~~us to effectively identify, monitor and limit country risk. Country risk exposure before and after hedging is monitored and managed. For a further discussion of ~~the Company’s~~our country risk exposure see, “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Country Risk Exposure” in Part II, Item 7A of the 2015 Form 10-K.
~~118~~
~~The Company’s~~Our sovereign exposures consist of financial instruments entered into with sovereign and local governments. ~~Its~~Our non-sovereign exposures consist of exposures to primarily corporations and financial institutions. The following table shows ~~the Company’s~~our 10 largest non-U.S. country risk net exposures at ~~March 31,~~June 30, 2016. Index credit derivatives are included in the country risk exposure table. Each reference entity within an index is allocated to that reference entity’s country of risk. Index exposures are allocated to the underlying reference entities in proportion to the notional weighting of each reference entity in the index, adjusted for any fair value receivable/payable for that reference entity. Where credit risk crosses multiple jurisdictions, for example, a CDS purchased from an issuer in a specific country that references bonds issued by an entity in a different country, the fair value of the CDS is reflected in the Net Counterparty Exposure column based on the country of the CDS issuer. Further, the notional amount of the CDS adjusted for the fair value of the receivable/payable is reflected in the Net Inventory column based on the country of the underlying reference entity.

~~119~~118
Top Ten Country Exposures at ~~March 31,~~June 30, 2016.


Country
   Net Inventory(1) Net
Counterparty
Exposure(2)(3)    Loans    Lending
Commitments    Exposure Before
Hedges Hedges(4) Net Exposure(5) Net Inventory(1) Net
Counterparty
Exposure(2)(3) Loans Lending
Commitments Exposure Before
Hedges Hedges(4) Net Exposure(5)
   (dollars in millions) (dollars in millions)
United Kingdom:

Sovereigns
   $ 351    $ 56       $ —       $ —       $ 407    $ (165 ) $ 242    $ (200)    $ 22    $ —    $ —    $ (178)    $ (163)    $ (341)
Non-sovereigns
   490    9,842       3,890       6,242       20,464    (1,960 ) 18,504    580    10,381    2,684    5,786    19,431    (2,026)    17,405








Subtotal
   $ 841    $ 9,898       $ 3,890       $ 6,242       $ 20,871    $ (2,125 ) $ 18,746    $ 380    $ 10,403    $ 2,684    $ 5,786    $ 19,253    $ (2,189)    $ 17,064








Brazil:

Sovereigns
   $ 4,127    $ —       $ —       $ —       $ 4,127    $ —    $ 4,127    $ 4,848    $ —    $ —    $ —    $ 4,848    $ (11)    $ 4,837
Non-sovereigns
   13    434       1,093       91       1,631    (698 ) 933    24    307    1,123    33    1,487    (863)    624








Subtotal
   $ 4,140    $ 434       $         1,093       $ 91       $ 5,758    $ (698 ) $ 5,060    $ 4,872    $ 307    $ 1,123    $ 33    $ 6,335    $ (874)    $ 5,461








Germany

Germany:

Sovereigns
   $ 143    $ 755       $ —       $ —       $ 898    $ (1,628 ) $ (730 ) $ 1,254    $ 770    $ —    $ —    $ 2,024    $ (1,239)    $ 785
Non-sovereigns
   107    1,696       358       3,962       6,123    (1,759 ) 4,364    399    2,005    308    3,467    6,179    (1,795)    4,384








Subtotal
   $ 250    $ 2,451       $ 358       $ 3,962       $ 7,021    $ (3,387 ) $ 3,634    $ 1,653    $ 2,775    $ 308    $ 3,467    $ 8,203    $ (3,034)    $ 5,169








France:

Japan:

Sovereigns
   $ (363 ) $ 1       $ —       $ —       $ (362 ) $ —    $ (362 ) $ 1,967    $ 154    $ —    $ —    $ 2,121    $ (82)    $ 2,039
Non-sovereigns
   (178 ) 2,293       16       2,443       4,574    (921 ) 3,653    452    2,480    231    —    3,163    (153)    3,010








Subtotal
   $ (541 ) $ 2,294       $ 16       $ 2,443       $ 4,212    $ (921 ) $ 3,291    $ 2,419    $ 2,634    $ 231    $ —    $ 5,284    $ (235)    $ 5,049








China

Italy:

Sovereigns
   $ 341    $ 273       $ —       $ —       $ 614    $ (344 ) $ 270    $ 1,457    $ 19    $ —    $ —    $ 1,476    $ 44    $ 1,520
Non-sovereigns
   1,188    287       936       632       3,043    (73 ) 2,970    361    575    11    914    1,861    (254)    1,607








Subtotal
   $ 1,529    $ 560       $ 936       $ 632       $ 3,657    $ (417 ) $ 3,240    $ 1,818    $ 594    $ 11    $ 914    $ 3,337    $ (210)    $ 3,127








Canada

Singapore:

Sovereigns
   $ (27 ) $ 48       $ —       $ —       $ 21    $ —    $ 21    $ 1,873    $ 165    $ —    $ —    $ 2,038    $ —    $ 2,038
Non-sovereigns
   (30 ) 1,288       213       1,587       3,058    (201 ) 2,857    19    200    42    30    291    —    291








Subtotal
   $ (57 ) $ 1,336       $ 213       $ 1,587       $ 3,079    $ (201 ) $ 2,878    $ 1,892    $ 365    $ 42    $ 30    $ 2,329    $ —    $ 2,329








Singapore

Canada:

Sovereigns
   $ 1,980    $ 256       $ —       $ —       $ 2,236    $ —    $ 2,236    $ 26    $ 69    $ —    $ —    $ 95    $ —    $ 95
Non-sovereigns
   49    313       45       122       529    (29 ) 500    (51)    873    148    1,570    2,540    (341)    2,199








Subtotal
   $ 2,029    $ 569       $ 45       $ 122       $ 2,765    $ (29 ) $ 2,736    $ (25)    $ 942    $ 148    $ 1,570    $ 2,635    $ (341)    $ 2,294








Italy

China:

Sovereigns
   $ 1,014    $ 7       $ —       $ —       $ 1,021    $ 12    $ 1,033    $ 135    $ 230    $ —    $ —    $ 365    $ (542)    $ (177)
Non-sovereigns
   245    860       11       698       1,814    (205 ) 1,609    880    276    990    275    2,421    (74)    2,347








Subtotal
   $ 1,259    $ 867       $ 11       $ 698       $ 2,835    $ (193 ) $ 2,642    $ 1,015    $ 506    $ 990    $ 275    $ 2,786    $ (616)    $ 2,170








United Arab Emirates

Netherlands:

Sovereigns
   $ 7    $ 1,359       $ —       $ —       $ 1,366    $ (80 ) $ 1,286    $ (87)    $ —    $ —    $ —    $ (87)    $ (9)    $ (96)
Non-sovereigns
   (18 ) 400       370       55       807    (15 ) 792    391    747    385    1,065    2,588    (399)    2,189








Subtotal
   $ (11 ) $ 1,759       $ 370       $ 55       $ 2,173    $ (95 ) $ 2,078    $ 304    $ 747    $ 385    $ 1,065    $ 2,501    $ (408)    $ 2,093








Netherlands

United Arab Emirates:

Sovereigns
   $ 88    $ —       $ —       $ —       $ 88    $ —    $ 88    $ (21)    $ 1,491    $ —    $ —    $ 1,470    $ (35)    $ 1,435
Non-sovereigns
   231    694       359       1,053       2,337    (363 ) 1,974    (22)    328    47    83    436    (15)    421








Subtotal
   $         319    $         694       $     359       $         1,053       $         2,425    $     (363 ) $         2,062    $ (43)    $ 1,819    $ 47    $ 83    $ 1,906    $ (50)    $ 1,856








(1)
Net inventory represents exposure to both long and short single-name and index positions (i.e., bonds and equities at fair value and CDS based on a notional amount assuming zero recovery adjusted for any fair value receivable or payable). As a market maker, ~~the Company transacts~~we may transact in these CDS positions to facilitate client trading. At ~~March 31,~~June 30, 2016, gross purchased protection, gross written protection, and net exposures related to single-name and index credit derivatives for those countries were ~~$(148.2)~~$(99.4) billion, ~~$146.4~~$98.0 billion and ~~$(1.8)~~$(1.4) billion, respectively. For a further description of the triggers for purchased credit protection and whether those triggers may limit the effectiveness of ~~the Company’s~~our hedges, see “Credit Exposure—Derivatives” herein.
119
(2)
Net counterparty exposure (i.e., repurchase transactions, securities lending and OTC derivatives) takes into consideration legally enforceable master netting agreements and collateral.
~~120~~
(3)
At ~~March 31,~~June 30, 2016, the benefit of collateral received against counterparty credit exposure was ~~$12.6~~$15.6 billion in ~~Germany,~~the U.K., with 97% of collateral consisting of cash, ~~and~~ government obligations of ~~France~~the U.K., U.S. and ~~Germany,~~Italy, and ~~$11.1~~$14.0 billion in ~~the U.K.~~Germany with 99% of collateral consisting of cash and government obligations of ~~the U.K.~~France, Belgium and ~~U.S.~~Germany. The benefit of collateral received against counterparty credit exposure in the other countries totaled approximately ~~$14.0~~$12.9 billion, with collateral primarily consisting of cash and government obligations of ~~Brazil,~~Japan, the U.S. and ~~France.~~Brazil. These amounts do not include collateral received on secured financing transactions.
(4)
Amounts represent CDS hedges (purchased and sold) on net counterparty exposure and lending executed by trading desks responsible for hedging counterparty and lending credit risk exposures for ~~the Company.~~us. Amounts are based on the CDS notional amount assuming zero recovery adjusted for any fair value receivable or payable.
(5)
In addition, at ~~March 31,~~June 30, 2016, ~~the Company~~we had exposure to these countries for overnight deposits with banks of approximately ~~$6.3~~$11.9 billion.

Country Risk Exposure Related to ~~Brazil.~~    the United Kingdom.At ~~March 31,~~June 30, 2016, our country risk exposures in the ~~Company’s~~U.K. included net exposures of $17,064 million (shown in the previous table) and overnight deposits of $4,774 million. The $17,405 million (shown in the previous table) of exposures to non-sovereigns were diversified across both names and sectors. Of this exposure, $14,884 million is to investment grade counterparties, with the largest single component ($4,483 million) to exchanges and clearing houses.
Country Risk Exposure Related to Brazil.     At June 30, 2016, our country risk exposures in Brazil included net exposures of ~~$5,060~~$5,461 million (shown in the ~~above~~previous table). ~~The Company’s~~Our sovereign net exposures in Brazil were principally in the form of local currency government bonds held onshore to support client activity. The ~~$933~~$624 million (shown in the ~~above~~previous table) of exposures to non-sovereigns were diversified across both names and sectors.
Country Risk Exposure Related to China.At ~~March 31,~~June 30, 2016, ~~the Company’s~~our country risk exposures in China included net exposures of ~~$3,240~~$2,170 million (shown in the ~~above~~previous table) and overnight deposits with international banks of ~~$406~~$391 million. The ~~$2,970~~$2,347 million (shown in the ~~above~~previous table) of exposures to non-sovereigns were diversified across both names and sectors and were primarily concentrated in high-quality positions with negligible direct exposure to onshore equities.
Operational Risk
~~Operational Risk.~~
Operational risk refers to the risk of loss, or of damage to ~~the Company’s~~our reputation, resulting from inadequate or failed processes, people and systems 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). On March 4, 2016, the Basel Committee on Banking Supervision updated its proposal for calculating operational risk regulatory capital. Under the proposal, which would eliminate the use of an internal model-based approach, required levels of operational risk
regulatory capital would generally be determined under a standardized approach based primarily on a financial statement-based measure of operational risk exposure and adjustments based on the particular institution’s historic operational loss record. ~~The Company is~~We are evaluating the potential impact of the proposal, which is subject to public comment and further rulemaking procedures. For a further discussion about ~~the Company’s~~our operational risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Operational Risk” in Part II, Item 7A, of the 2015 Form10-K.
Liquidity and Funding ~~Risk.~~Risk
Liquidity and funding risk refers to the risk that ~~the Company~~we will be unable to finance ~~its~~our operations due to a loss of access to the capital markets or difficulty in liquidating its assets. Liquidity and funding risk also encompasses our 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 ~~the Company’s~~our operational risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Liquidity and Funding Risk” in Part II, Item 7A, of the 2015Form 10-K.
Legal and Compliance ~~Risk.~~
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 ~~the Company~~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 ~~its~~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 anti-money laundering and terrorist financing rules and regulations. For a further discussion about ~~the Company’s~~our operational risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Legal and Compliance Risk” in Part II, Item 7A, of the 2015 Form 10-K.

~~121~~120
Item 4. ~~Item 4.~~
Controls and ~~Procedures.~~
Procedures
Under the supervision and with the participation of the ~~Company’s~~Firm’s management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the ~~Company’s~~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, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
No change in the ~~Company’s~~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 ~~Company’s~~Firm’s internal control over financial reporting.

~~122~~121
FINANCIAL DATA SUPPLEMENT (Unaudited)
Average Balances and Interest Rates and Net Interest Income

   Three Months Ended March 31, 2016 Three Months Ended June 30, 2016
   Average
Daily
Balance    Interest Average
Rate       Average
Daily
    Balance             Interest           Annualized
Average
Rate
   (dollars in millions) (dollars in millions)
Assets

Interest earning assets:

Trading assets(1):

U.S.
   $ 98,478       $ 498    2.1 % $ 100,731       $ 459    1.8 %
Non-U.S.
   92,876       84    0.4    101,631       67    0.3
Investment securities:

U.S.
   75,765       236    1.3    78,233       237    1.2
Loans:

U.S.
   86,427       641    3.0    88,908       674    3.0
Non-U.S.
   187       6    13.0    436       6    5.3
Interest bearing deposits with banks:

U.S.
   30,762       41    0.5    27,821       38    0.6
Non-U.S.
   1,080       9    3.4    1,429       14    3.8
Securities purchased under agreements to resell and Securities borrowed(2):

U.S.
   151,763       (62 ) (0.2 ) 157,223       (64)    (0.2)
Non-U.S.
   86,124       (16 ) (0.1 ) 82,863       (56)    (0.3)
Customer receivables and Other(3):

U.S.
   47,806       236    2.0    46,144       233    2.0
Non-U.S.
   23,382       74    1.3    21,655       59    1.1






Total
   $ 694,650       $ 1,747    1.0 % $ 707,074       $           1,667    0.9 %




Non-interest earning assets
   108,617       107,742





Total assets
   $ 803,267       $         814,816





Liabilities and Equity

Interest bearing liabilities:

Deposits:

U.S.
   $ 156,179       $ 17    — % $ 152,792       $ 10    — %
Non-U.S.
   2,772       5    0.7    2,043       5    1.0
Short-term borrowings(4):

U.S.
   889       —    —    467       —    0.2
Non-U.S.
   501       6    4.9    651       7    4.6
Long-term borrowings(4):

U.S.
   151,441       950    2.5    154,745       835    2.2
Non-U.S.
   7,226       9    0.5    8,198       9    0.4
Trading liabilities(1):

U.S.
   31,851       —    —    31,410       —    —
Non-U.S.
   48,337       —    —    51,385       —    —
Securities sold under agreements to repurchase and Securities loaned(5):

U.S.
   31,431       140    1.8    31,412       141    1.8
Non-U.S.
   24,986       124    2.0    31,729       118    1.5
Customer payables and Other(6):

U.S.
   117,917       (376 ) (1.3 ) 124,463       (335)    (1.1)
Non-U.S.
   65,349       (27 ) (0.2 ) 61,729       (36)    (0.2)






Total
   $ 638,879       $ 848    0.5    $ 651,024       $ 754    0.5




Non-interest bearing liabilities and equity
   164,388       163,792





Total liabilities and equity
   $ 803,267       $ 814,816





Net interest income and net interest rate spread
      $ 899    0.5 %    $ 913            0.4 %




~~123~~122
FINANCIAL DATA SUPPLEMENT (Unaudited)—(Continued)
Average Balances and Interest Rates and Net Interest Income

   Three Months Ended March 31, 2015 Three Months Ended June 30, 2015
   Average
Daily
Balance    Interest Average Rate         Average
Daily
Balance            Interest             Annualized
Average
Rate
   (dollars in millions) (dollars in millions)
Assets

Interest earning assets:

Trading assets(1):

U.S.
   $ 89,652       $ 481    2.2 % $ 86,632       $ 466    2.2 %
Non-U.S.
   118,355       113    0.4    134,452       89    0.3
Investment securities:

U.S.
   69,824       201    1.2    71,668       238    1.3
Loans:

U.S.
   66,686       469    2.9    72,960       526    2.9
Non-U.S.
   282       5    7.2    239       3    5.1
Interest bearing deposits with banks:

U.S.
   21,719       16    0.3    17,637       14    0.3
Non-U.S.
   1,131       6    2.2    946       8    3.4
Securities purchased under agreements to resell and Securities borrowed(2):

U.S.
   175,084       (153 ) (0.4 ) 174,981       (182)    (0.4)
Non-U.S.
   75,596       49    0.3    76,904       (18)    (0.1)
Customer receivables and Other(3):

U.S.
   65,288       171    1.1    54,343       99    0.7
Non-U.S.
   23,211       126    2.2    31,137       143    1.9






Total
   $ 706,828       $ 1,484    0.9 % $         721,899       $            1,386    0.8 %




Non-interest earning assets
   131,899       125,866





Total assets
   $ 838,727       $ 847,765





Liabilities and Equity

Interest bearing liabilities:

Deposits:

U.S.
   $ 132,882       $ 17    0.1 % $ 134,566       $ 16    — %
Non-U.S.
   1,397       1    0.3    1,884       1    0.2
Short-term borrowings(4):

U.S.
   1,130       —    —    1,157       —    —
Non-U.S.
   933       4    1.7    1,361       5    1.5
Long-term borrowings(4):

U.S.
   147,865       917    2.5    149,950       907    2.5
Non-U.S.
   8,493       9    0.4    7,441       8    0.4
Trading liabilities(1):

U.S.
   19,403       —    —    19,703       —    —
Non-U.S.
   59,604       —    —    66,074       —    —
Securities sold under agreements to repurchase and Securities loaned(5):

U.S.
   65,005       131    0.8    59,501       94    0.6
Non-U.S.
   36,137       177    2.0    40,621       141    1.4
Customer payables and Other(6):

U.S.
   120,351       (381 ) (1.3 ) 53,206       (483)    (3.7)
Non-U.S.
   57,849       13    0.1    124,827       (1)    —






Total
   $ 651,049       $ 888    0.6    $ 660,291       $ 688    0.4




Non-interest bearing liabilities and equity
   187,678       187,474





Total liabilities and equity
   $ 838,727       $ 847,765





Net interest income and net interest rate spread
      $ 596    0.3 %    $ 698                0.4 %




123
FINANCIAL DATA SUPPLEMENT (Unaudited)—(Continued)
Average Balances and Interest Rates and Net Interest Income
Six Months Ended June 30, 2016
        Average
Daily
Balance            Interest             Annualized
Average
Rate
(dollars in millions)
Assets

Interest earning assets:

Trading assets(1):

U.S.
$ 100,057       $ 957    1.9 %
Non-U.S.
96,801       152    0.3
Investment securities:

U.S.
76,999       473    1.2
Loans:

U.S.
87,529       1,315    3.0
Non-U.S.
450       12    5.4
Interest bearing deposits with banks:

U.S.
29,289       80    0.5
Non-U.S.
1,225       25    4.1
Securities purchased under agreements to resell and Securities borrowed(2):

U.S.
154,488       (126)    (0.2)
Non-U.S.
84,499       (72)    (0.2)
Customer receivables and Other(3):

U.S.
47,400       468    2.0
Non-U.S.
22,092       130    1.2



Total
$        700,829       $           3,414    1.0 %


Non-interest earning assets
108,150


Total assets
$ 808,979


Liabilities and Equity

Interest bearing liabilities:

Deposits:

U.S.
$ 154,540       $ 27    — %
Non-U.S.
2,353       10    0.9
Short-term borrowings(4):

U.S.
633       1    0.3
Non-U.S.
621       13    4.3
Long-term borrowings(4):

U.S.
153,073       1,786    2.4
Non-U.S.
7,732       18    0.5
Trading liabilities(1):

U.S.
31,735       —    —
Non-U.S.
49,756       —    —
Securities sold under agreements to repurchase and Securities loaned(5):

U.S.
31,635       271    1.7
Non-U.S.
28,144       242    1.7
Customer payables and Other(6):

U.S.
123,511       (704)    (1.1)
Non-U.S.
61,218       (62)    (0.2)



Total
$ 644,951       $ 1,602    0.5


Non-interest bearing liabilities and equity
164,028


Total liabilities and equity
$ 808,979


Net interest income and net interest rate spread
   $ 1,812              0.5 %


124
FINANCIAL DATA SUPPLEMENT (Unaudited)—(Continued)
Average Balances and Interest Rates and Net Interest Income
Six Months Ended June 30, 2015
        Average
Daily
Balance            Interest             Annualized
Average
Rate
(dollars in millions)
Assets

Interest earning assets:

Trading assets(1):

U.S.
$ 88,677       $ 947    2.2 %
Non-U.S.
125,895       202    0.3
Investment securities:

U.S.
71,495       438    1.2
Loans:

U.S.
69,845       995    2.9
Non-U.S.
258       9    7.1
Interest bearing deposits with banks:

U.S.
19,659       31    0.3
Non-U.S.
1,032       14    2.8
Securities purchased under agreements to resell and Securities borrowed(2):

U.S.
166,354       (336)    (0.4)
Non-U.S.
84,918       31    0.1
Customer receivables and Other(3):

U.S.
59,859       270    0.9
Non-U.S.
26,379       269    2.1



Total
$ 714,371       $ 2,870    0.8 %


Non-interest earning assets
128,876


Total assets
$ 843,247


Liabilities and Equity

Interest bearing liabilities:

Deposits:

U.S.
$ 133,728       $ 33    0.1 %
Non-U.S.
1,646       2    0.2
Short-term borrowings(4):

U.S.
1,158       —    —
Non-U.S.
1,137       9    1.6
Long-term borrowings(4):

U.S.
148,980       1,824    2.5
Non-U.S.
7,892       17    0.4
Trading liabilities(1):

U.S.
19,820       —    —
Non-U.S.
62,582       —    —
Securities sold under agreements to repurchase and Securities loaned(5):

U.S.
64,010       225    0.7
Non-U.S.
36,598       318    1.8
Customer payables and Other(6):

U.S.
57,825       (864)    (3.0)
Non-U.S.
120,318       12    —



Total
$        655,694       $          1,576    0.5


Non-interest bearing liabilities and equity
187,553


Total liabilities and equity
$ 843,247


Net interest income and net interest rate spread
   $ 1,294            0.3 %


(1)
Interest expense on Trading liabilities is reported as a reduction of Interest income on Trading assets.
(2)
Includes fees paid on ~~securities~~Securities borrowed.
(3)
Includes interest from customer receivables and other interest earning assets.
(4)
The ~~Company~~Firm also issues structured notes that have coupon or repayment terms linked to the performance of debt or equity securities, indices, currencies or commodities, which are recorded within Trading revenues (see Note 3)3 to the consolidated financial statements in Item 1).
(5)
Includes fees received on Securities loaned.
(6)
Includes fees received from prime brokerage customers for stock loan transactions incurred to cover customers’ short positions.

~~124~~125
FINANCIAL DATA SUPPLEMENT (Unaudited)—(Continued)
Rate/Volume Analysis
Effect of Net Interest Income of Volume and Rate Changes


   Three Months Ended March 31, 2016 versus
Three Months Ended March 31, 2015    Three Months Ended June 30, 2016 versus

Three Months Ended June 30, 2015

   Increase (decrease) due to change in:

Increase (decrease) due to change in:

   Volume Rate Net Change

Volume


Rate


Net Change

   (dollars in millions)

(dollars in millions)

Interest earning assets

Trading assets:

Trading Assets:

U.S.
   $ 47    $ (30 ) $ 17       $ 76       $ (83)       $ (7)
Non-U.S.
   (24 ) (5 ) (29 )    (22)       —       (22)
Investment securities:

U.S.
   17    18    35       22       (23)       (1)
Loans:

U.S.
   139    33    172       115       33       148
Non-U.S.
   (2 ) 3    1       2       1       3
Interest bearing deposits with banks:

U.S.
   7    18    25       8       16       24
Non-U.S.
   —    3    3       4       2       6
Securities purchased under agreements to resell and Securities borrowed:

U.S.
   20    71    91       18       100       118
Non-U.S.
   7    (72 ) (65 )    (1)       (37)       (38)
Customer receivables and Other:

U.S.
   (46 ) 111    65       (15)       149       134
Non-U.S.
   1    (53 ) (52 )    (44)       (40)       (84)








Change in interest income
   $ 166    $ 97    $ 263       $ 163       $ 118       $ 281








Interest bearing liabilities

Deposits:

U.S.
   $ 3    $ (3 ) $ —       $ 2       $ (8)       $ (6)
Non-U.S.
   1    3    4       —       4       4
Short-term borrowings:

U.S.
   —    —    —       —       —       —
Non-U.S.
   (2 ) 4    2       (3)       5       2
Long-term borrowings:

U.S.
   22    11    33       29       (101)       (72)
Non-U.S.
   (1 ) 1    —       1       —       1
Securities sold under agreements to repurchase and Securities loaned:

U.S.
   (68 ) 77    9       (44)       91       47
Non-U.S.
   (55 ) 2    (53 )    (31)       8       (23)
Customer payables and Other:

U.S.
   8    (3 ) 5       (647)       795       148
Non-U.S.
   2    (42 ) (40 )    1       (36)       (35)








Change in interest expense
   $ (90 ) $ 50    $ (40 )    $ (692)       $ 758       $ 66








Change in net interest income
   $ 256    $ 47    $ 303       $ 855       $ (640)       $ 215








~~125~~126
~~Part II—Other Information.~~FINANCIAL DATA SUPPLEMENT (Unaudited)—(Continued)
Rate/Volume Analysis

   Six Months Ended June 30, 2016 versus

Six Months Ended June 30, 2015



Increase (decrease) due to change in:



Volume


Rate


Net Change



(dollars in millions)

Interest earning assets


Trading assets:


U.S.
   $ 122       $ (112)       $ 10

Non-U.S.
   (47)       (3)       (50)

Investment securities:


U.S.
   34       1       35

Loans:


U.S.
   252       68       320

Non-U.S.
   7       (4)       3

Interest bearing deposits with banks:


U.S.
   15       34       49

Non-U.S.
   3       8       11

Securities purchased under agreements to resell and Securities borrowed:


U.S.
   24       186       210

Non-U.S.
   —       (103)       (103)

Customer receivables and Other:


U.S.
   (56)       254       198

Non-U.S.
   (44)       (95)       (139)






Change in interest income
   $ 310       $ 234       $ 544






Interest bearing liabilities


Deposits:


U.S.
   $ 5       $ (11)       $ (6)

Non-U.S.
   1       7       8

Short-term borrowings:


U.S.
   —       1       1

Non-U.S.
   (4)       8       4

Long-term borrowings:


U.S.
   50       (88)       (38)

Non-U.S.
   —       1       1

Securities sold under agreements to repurchase and Securities loaned:


U.S.
   (114)       160       46

Non-U.S.
   (73)       (3)       (76)

Customer payables and Other:


U.S.
   (981)       1,141       160

Non-U.S.
   (6)       (68)       (74)






Change in interest expense
   $ (1,122)       $ 1,148       $ 26






Change in net interest income
   $ 1,432       $ (914)       $ 518






127
Part II—Other Information
Item 1. ~~Item 1.~~
Legal ~~Proceedings.~~
Proceedings

The following new matters and developments have occurred since previously reporting certain matters in the ~~Company’s~~Firm’s Annual Report on Form 10-K for the year ended December 31, 2015 (the ~~“2015~~“Form 10-K”) and the Firm’s Quarterly Report on Form ~~10-K”~~10-Q for the quarterly period ended March 31, 2016 (the “First Quarter Form 10-Q”). See also the disclosures set forth under “Legal Proceedings” in Part I, Item 3 of the ~~2015~~ Form ~~10-K.~~10-K and Part II, Item 1 of the First Quarter Form 10-Q.
Residential Mortgage and Credit Crisis Related ~~Matters.~~Matters
Civil Litigation
~~Regulatory and Governmental Matters.~~
On April 1,29, 2016, inRoyal Park Investments SA/NV v. Merrill Lynch et al., the Firm filed a motion to dismiss the amended complaint.
On May 23, 2016, the ~~California Attorney General’s Office~~parties inHSH Nordbank AG, et al. v. Morgan Stanleyet al.reached an agreement in principle to settle the litigation.
On June 14, 2016, inWilmington Trust Company v. Morgan Stanley Mortgage Capital Holdings LLC et al., the court granted in part and denied in part the Firm’s motion to dismiss.
On July 20, 2016, the Firm filed ~~an action against the Company and certain affiliates~~a demurrer in ~~California state court styled~~California v. Morgan Stanley, et al., on behalf of California investors, including the California Public Employees’ Retirement System and the California Teachers’ Retirement System. The complaint alleges that the Company made misrepresentations and omissions regarding residential mortgage-backed securities and notes issued by the Cheyne SIV, and asserts violations of the California False Claims Act and other state laws and seeks treble damages, civil penalties, disgorgement, and injunctive relief.
~~Civil Litigation.~~
On ~~April 21,~~July 27, 2016, ~~the Company filed a motion for summary judgment~~ inThe Charles Schwab Corp. v. BNP Paribas Securities Corp., et al., the Firm reached an agreement with the plaintiff to settle the litigation.
Other Litigation
On ~~April 12,~~July 11, 2016, the ~~court in~~~~Deutsche Bank National Trust Company, as Trustee~~Firm received an invitation to respond to a proposed claim (“Proposed Claim”) by the public prosecutor for Court of Accounts for the ~~Morgan Stanley ABS Capital I Inc. Trust, Series 2007-NC1 v. Morgan Stanley ABS Capital I, Inc.granted~~Republic of Italy. The Proposed Claim relates to certain derivative transactions between the Republic of Italy and the Firm. The transactions were originally entered into between 1999 and 2005, and were terminated in ~~part~~December 2011 and ~~denied in part~~January 2012. The Proposed Claim alleges, inter alia, that the ~~Company’s motion to dismiss the amended complaint, dismissing all claims except a single claim, regarding which the motion~~Firm was ~~denied without prejudice.~~
~~On April 12, 2016, the court in~~~~Deutsche Bank National Trust Company, solely in its capacity~~acting as ~~Trustee for Morgan Stanley ABS Capital I Inc. Trust, Series 2007-NC3 v. Morgan Stanley Mortgage Capital Holdings LLC, as Successor-by-Merger to Morgan Stanley Mortgage Capital Inc.~~ ~~granted the Company’s motion to dismiss the complaint, and granted the plaintiff the ability to seek to replead certain aspects~~an agent of the ~~complaint.~~
~~Commercial Mortgage Related Matter.~~
~~On April 27, 2016, in~~~~The Bank~~Republic of ~~New York Mellon Trust, National Association v. Morgan Stanley Mortgage Capital, Inc.,~~ ~~the United States Court of Appeals for the Second Circuit vacated the judgment~~Italy, that some or all of the ~~United States District Court~~derivative transactions were improper and that the termination of the transactions was also improper. The Proposed Claim indicates that, if a proceeding is initiated against the Firm, the public prosecutor would be asserting administrative claims against the Firm for Euro 2.879 billion. The Firm does not agree with the ~~Southern District of New York (“SDNY”)~~Proposed Claim and ~~remanded the case~~intends to present its defenses to the ~~SDNY for further proceedings consistent with its opinion.~~public prosecutor.
~~Other Litigation.~~
~~On October 20, 2014, a purported class action complaint was filed against the Company and other defendants styled~~~~Genesee County Employees’ Retirement System v. Bank of America Corporation et al.~~ ~~in the SDNY. The action was later consolidated with four similar actions in SDNY under the lead case styled~~~~Alaska Electrical Pension Fund v. Bank of America Corporation et al.~~ A consolidated amended complaint was filed on February 2, 2015 asserting claims for alleged violations of the Sherman Act, breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, and tortious interference with contract. The consolidated amended complaint alleges, among other things, that the defendants engaged in antitrust violations with regards to the process of setting ISDAfix, a financial benchmark and seeks treble damages, injunctive relief, attorneys’ fees and other relief. On March 28, 2016, the court granted in part and denied in part the defendants’ motion to dismiss the consolidated amended complaint.
~~Wealth Management Related Matters.~~
~~On March 21, 2016, the arbitration panel in~~ ~~Lynnda L. Speer, as Personal Representative of the Estate of Roy M. Speer, et al. v. Morgan Stanley Smith Barney LLC, et al.~~ ~~issued an award in favor of plaintiffs in the amount of $32.8 million, plus attorneys’ fees and costs.~~

~~126~~128
Item 2. ~~Item 2.~~
Unregistered Sales of Equity Securities and Use of ~~Proceeds.~~
Proceeds
The following table ~~below~~ sets forth the information with respect to purchases made by or on behalf of the ~~Company~~Firm of its common stock during the quarterly period ended ~~March 31,~~June 30, 2016.
Issuer Purchases of Equity Securities
(dollars in millions, except per share amounts)


Period
Total
    Number of
Shares
Purchased     Average Price
Paid Per
Share Total Number of
Shares Purchased
    as Part of Publicly
Announced Plans
of Programs(1)     Approximate Dollar
Value of Shares
that May Yet be
Purchased Under
the Plans or
Programs Total Number of
Shares Purchased Average Price
Paid Per Share Total Number of
Shares Purchased as
Part of Publicly
Announced Plans of
Programs(1) Approximate Dollar
Value of Shares that
May Yet be
Purchased Under
the Plans or
Programs
Month #1 (January 1, 2016-January 31, 2016)

Month #1 (April 1, 2016-April 30, 2016)

Share Repurchase Program(2)
3,710,000    $ 25.33    3,710,000    $ 1,156    3,670,865    $ 27.15    3,670,865    $ 525
Employee transactions(3)
12,348,182    $ 26.26    —    —    1,068,030    $ 26.05    —    —
Month #2 (February 1, 2016-February 29, 2016)

Month #2 (May 1, 2016-May 31, 2016)

Share Repurchase Program(2)
14,360,000    $ 24.09    14,360,000    $ 810    11,623,406    $ 26.71    11,623,406    $ 215
Employee transactions(3)
1,000,818    $ 23.91    —    —    13,059    $ 27.24    —    —
Month #3 (March 1, 2016-March 31, 2016)

Month #3 (June 1, 2016-June 30, 2016)

Share Repurchase Program(2)
7,266,941    $ 25.46    7,266,941    $ 625    8,188,782    $ 26.25    8,188,782    $ 3,500
Employee transactions(3)
91,048    $ 24.87    —    —    16,489    $ 27.12    —    —
Quarter ended at March 31, 2016

Quarter ended at June 30, 2016

Share Repurchase Program(2)
25,336,941    $ 24.67    25,336,941    $ 625    23,483,053    $ 26.61    23,483,053    $ 3,500
Employee transactions(3)
13,440,048    $ 26.08    —    —    1,097,578    $ 26.08    —    —

(1)
Share purchases under publicly announced programs are made pursuant to open-market purchases, Rule 10b5-1 plans or privately negotiated transactions (including with employee benefit plans) as market conditions warrant and at prices the ~~Company~~Firm deems appropriate and may be suspended at any time.
(2)
The ~~Company’s~~Firm’s Board of Directors has authorized the repurchase of the ~~Company’s~~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 ~~Company~~Firm are subject to regulatory approval. In ~~March 2015,~~June 2016, the ~~Company~~Firm received ~~no objection~~a conditional non-objection from the Federal Reserve to its 2016 capital plan, which included a share repurchase of up to ~~$3.1~~$3.5 billion of the ~~Company’s~~Firm’s outstanding common stock ~~that began in~~during the ~~second quarter of 2015~~period beginning July 1, 2016 through ~~the end of the second quarter of 2016 under the Company’s 2015 capital plan.~~June 30, 2017. During the current quarter, ~~ended March 31, 2016,~~ the ~~Company~~Firm repurchased approximately $625 million of the ~~Company’s~~Firm’s outstanding common stock as part of its Share Repurchase Program. For further information, see ~~“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity~~“Liquidity and Capital Resources—Capital Management” in Part I, Item 2.
(3)
Includes shares acquired by the ~~Company~~Firm in satisfaction of the tax withholding obligations on stock-based awards and the exercise of stock options granted under the ~~Company’s~~Firm’s stock-based compensation plans.

Item 6. ~~Item 6.~~Exhibits
~~Exhibits.~~
An exhibit index has been filed as part of this Report on Page E-1.

~~127~~129
~~SIGNATURE~~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.

M~~ORGAN~~ S~~TANLEY~~MORGAN STANLEY
(~~REGISTRANT~~)(Registrant)
~~By:~~
/S/ By:                     /s/ JONATHAN PRUZAN

Jonathan Pruzan
Executive Vice President and
Chief Financial Officer
By:
/S/                         /s/ PAUL C. WIRTH

Paul C. Wirth
Deputy Chief Financial Officer
Date: ~~May 4,~~August 3, 2016

~~128~~130
EXHIBIT INDEX
MORGAN STANLEY
Quarter Ended ~~March 31,~~June 30, 2016

Exhibit
No.

Description
10.1

~~Fourth Amendment to Investor Agreement, dated~~
Directors’ Equity Capital Accumulation Plan as amended and restated as of ~~April 6, 2016, by and between Morgan Stanley and Mitsubishi UFJ Financial Group, Inc.~~August 1, 2016.
10.2

~~Memorandum to Colm Kelleher Regarding Relocation to New York, dated February 25,~~
Morgan Stanley Schedule of Non-Employee Directors Annual Compensation, effective as of August 1, 2016.
12

Statement Re: Computation of Ratio of Earnings to Fixed Charges and Computation of Earnings to Fixed Charges and Preferred Stock Dividends.
15

Letter of awareness from Deloitte & Touche LLP, dated ~~May 4,~~August 3, 2016, concerning unaudited interim financial information.
31.1

Rule 13a-14(a) Certification of Chief Executive Officer.
31.2

Rule 13a-14(a) Certification of Chief Financial Officer.
32.1

Section 1350 Certification of Chief Executive Officer.
32.2

Section 1350 Certification of Chief Financial Officer.
101

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the ~~Condensed Consolidated Balance Sheet—March 31, 2016 and December 31, 2015, (ii) the Condensed~~ Consolidated Statements of Income—Three Months and Six Months Ended ~~March 31,~~June 30, 2016 and 2015, ~~(iii)~~(ii) the ~~Condensed~~ Consolidated Statements of Comprehensive Income—Three Months and Six Months Ended ~~March 31,~~June 30, 2016 and 2015, ~~(iv)~~(iii) the ~~Condensed~~ Consolidated ~~Statements of Cash Flows—Three Months Ended March 31,~~Balance Sheets—June 30, 2016 and December 31, 2015, ~~(v)~~(iv) the ~~Condensed~~ Consolidated Statements of Changes in Total Equity—~~Three~~Six Months Ended ~~March 31,~~June 30, 2016 and 2015, (v) the Consolidated Statements of Cash Flows—Six Months Ended June 30, 2016 and 2015, and (vi) Notes to ~~Condensed~~ Consolidated Financial Statements (unaudited).

E-1


	At March 31, 2016			At December 31, 2015
Assets
Cash and due from banks	$	22,797		$	19,827
Interest bearing deposits with banks		30,841			34,256
Trading assets, at fair value ($130,582 and $127,627 were pledged to various parties)		234,150			228,280
Investment securities (includes$68,167 and $66,759 at fair value)		77,592			71,983
Securities received as collateral, at fair value		8,813			11,225
Securities purchased under agreements to resell (includes$555 and $806 at fair value)		98,774			87,657
Securities borrowed		140,413			142,416
Customer and other receivables		44,762			45,407
Loans:
Held for investment (net of allowances of$330 and $225)		75,566			72,559
Held for sale		13,236			13,200
Goodwill		6,586			6,584
Intangible assets (net of accumulated amortization of$2,204 and $2,130) (includes$4 and $5 at fair value)		2,909			2,984
Other assets		51,058			51,087

Total assets	$	807,497		$	787,465

Liabilities
Deposits (includes$647 and $125 at fair value)	$	157,591		$	156,034
Short-term borrowings (includes$697 and $1,648 at fair value)		1,109			2,173
Trading liabilities, at fair value		115,766			109,139
Obligation to return securities received as collateral, at fair value		17,984			19,316
Securities sold under agreements to repurchase (includes$693 and $683 at fair value)		41,305			36,692
Securities loaned		17,140			19,358
Other secured financings (includes$2,623 and $2,854 at fair value)		9,316			9,464
Customer and other payables		194,003			186,626
Other liabilities and accrued expenses		13,304			18,711
Long-term borrowings (includes$36,008 and $33,045 at fair value)		162,804			153,768

Total liabilities		730,322			711,281

Commitments and contingent liabilities (see Note 11)
Equity
Morgan Stanley shareholders’ equity:
Preferred stock (see Note 14)		7,520			7,520
Common stock, $0.01 par value:
Shares authorized:3,500,000,000; Shares issued:2,038,893,979; Shares outstanding:1,938,294,368 and 1,920,024,027		20			20
Additional paid-in capital		22,526			24,153
Retained earnings		50,272			49,204
Employee stock trusts		2,861			2,409
Accumulated other comprehensive loss		(1,238	)		(1,656	)
Common stock held in treasury, at cost, $0.01 par value (100,599,611 and 118,869,952 shares)		(3,090	)		(4,059	)
Common stock issued to employee stock trusts		(2,861	)		(2,409	)

Total Morgan Stanley shareholders’ equity		76,010			75,182
Noncontrolling interests		1,165			1,002

Total equity		77,175			76,184

Total liabilities and equity	$	807,497		$	787,465


	At March 31, 2016
Fund Type	Less than 5 years		5-10 years		Over 10 years		Total
	(dollars in millions)
Private equity funds	$	141	$	926	$	701	$	1,768
Real estate funds		97		708		469		1,274


	Derivative Assets at December 31, 2015
	Fair Value												Notional
	Bilateral OTC			Cleared OTC			Exchange Traded			Total			Bilateral OTC		Cleared OTC		Exchange Traded		Total
	(dollars in millions)
Derivatives designated as accounting hedges:
Interest rate contracts	$	2,825		$	1,442		$	—		$	4,267		$	36,999	$	35,362	$	—	$	72,361
Foreign exchange contracts		166			1			—			167			5,996		167		—		6,163

Total derivatives designated as accounting hedges		2,991			1,443			—			4,434			42,995		35,529		—		78,524

Derivatives not designated as accounting hedges(4):
Interest rate contracts		220,289			101,276			212			321,777			4,348,002		5,748,525		1,218,645		11,315,172
Credit contracts		19,310			3,609			—			22,919			585,731		139,301		—		725,032
Foreign exchange contracts		64,438			295			55			64,788			1,907,290		13,402		7,715		1,928,407
Equity contracts		20,212			—			20,077			40,289			316,770		—		229,859		546,629
Commodity contracts		13,114			—			4,038			17,152			67,449		—		82,313		149,762
Other		219			—			—			219			5,684		—		—		5,684

Total derivatives not designated as accounting hedges		337,582			105,180			24,382			467,144			7,230,926		5,901,228		1,538,532		14,670,686

Total gross derivatives(2)	$	340,573		$	106,623		$	24,382		$	471,578		$	7,273,921	$	5,936,757	$	1,538,532	$	14,749,210

Amounts offset:
Counter party netting		(265,707	)		(104,294	)		(21,592	)		(391,593	)
Cash collateral netting		(50,335	)		(1,037	)		—			(51,372	)

Total derivative assets at fair value included in Trading assets	$	24,531		$	1,292		$	2,790		$	28,613

Amounts not offset(3):
Financial instruments collateral		(9,190	)		—			—			(9,190	)
Other cash collateral		(9	)		—			—			(9	)

Net exposure	$	15,332		$	1,292		$	2,790		$	19,414


	Fair Value at March 31, 2016(1)
	Contractual Years to Maturity								Cross-Maturity and Cash Collateral Netting(3)			Net Exposure Post-cash Collateral		Net Exposure Post- collateral(4)
Credit Rating(2)	Less than 1		1-3		3-5		Over 5		Cross-Maturity and Cash Collateral Netting(3)			Net Exposure Post-cash Collateral		Net Exposure Post- collateral(4)
	(dollars in millions)
AAA	$	182	$	567	$	1,344	$	4,683	$	(5,272	)	$	1,504	$	1,425
AA		2,524		1,488		1,750		12,747		(13,148	)		5,361		3,045
A		10,143		7,440		4,984		26,567		(38,249	)		10,885		7,603
BBB		4,953		4,487		2,246		13,055		(16,119	)		8,622		6,426
Non-investment grade		5,065		2,804		1,277		5,024		(7,762	)		6,408		3,982

Total	$	22,867	$	16,786	$	11,601	$	62,076	$	(80,550	)	$	32,780	$	22,481


	At March 31, 2016
	(dollars in millions)
Net derivative liabilities	$	28,798
Collateral posted		24,146


	At March 31, 2016(1)
	(dollars in millions)
One-notch downgrade	$	1,148
Two-notch downgrade		1,496


	At March 31, 2016
	Overnight and Open		Less than 30 Days		30-90 Days		Over 90 Days		Total
	(dollars in millions)
Securities sold under agreements to repurchase(1)	$	36,220	$	18,088	$	20,689	$	27,314	$	102,311
Securities loaned(1)		11,911		866		2,241		7,971		22,989

Gross amount of secured financing included in the above offsetting disclosure	$	48,131	$	18,954	$	22,930	$	35,285	$	125,300
Obligation to return securities received as collateral		17,984		—		—		—		17,984

Total	$	66,115	$	18,954	$	22,930	$	35,285	$	143,284


	At March 31, 2016								At December 31, 2015
Loans by Region	Americas		EMEA		Asia- Pacific		Total		Americas		EMEA		Asia- Pacific		Total
	(dollars in millions)
Impaired loans	$	572	$	23	$	50	$	645	$	108	$	12	$	25	$	145
Past due 90 days loans and on nonaccrual		19		—		—		19		22		—		—		22
Allowance for loan losses		261		43		26		330		183		34		8		225


	Years to Maturity at March 31, 2016
	Less than 1		1-3		3-5		Over 5		Total
	(dollars in millions)
Letters of credit and other financial guarantees obtained to satisfy collateral requirements	$	114	$	—	$	—	$	106	$	220
Investment activities		550		107		16		302		975
Corporate lending commitments(1)		17,000		24,758		47,655		4,315		93,728
Consumer lending commitments		5,059		3		—		4		5,066
Residential real estate lending commitments		35		71		83		241		430
Wholesale real estate lending commitments		86		271		20		29		406
Forward-starting reverse repurchase agreements and securities borrowing agreements(2)(3)		48,472		—		—		—		48,472
Underwriting commitments		148		—		—		—		148

Total	$	71,464	$	25,210	$	47,774	$	4,997	$	149,445


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

Total					$	7,520	$	7,520


	Three Months Ended June 30, 2016
	Institutional Securities(1)		Wealth Management		Investment Management		Intersegment Eliminations		Total
	(dollars in millions)
Total non-interest revenues(2)(3)	$	4,496	$	2,982	$	581	$	(63)	$	7,996
Interest income		966		920		3		(222)		1,667
Interest expense		884		91		1		(222)		754

Net interest		82		829		2		—		913

Net revenues	$	4,578	$	3,811	$	583	$	(63)	$	8,909

Income from continuing operations before income taxes	$	1,506	$	859	$	118	$	—	$	2,483
Provision for income taxes		453		343		37		—		833

Income from continuing operations		1,053		516		81		—		1,650
Income (loss) from discontinued operations, net of income taxes		(4)		—		—		—		(4)

Net income		1,049		516		81		—		1,646
Net income applicable to noncontrolling interests		61		—		3		—		64

Net income applicable to Morgan Stanley	$	988	$	516		$ 78	$	—		$ 1,582


	Three Months Ended March 31, 2015														Six Months Ended June 30, 2015
	Institutional Securities			Wealth Management		Investment Management			Intersegment Eliminations			Total			Institutional Securities(1)		Wealth Management		Investment Management		Intersegment Eliminations		Total
	(dollars in millions)														(dollars in millions)
Total non-interest revenues(2)(3)	$	5,546		$	3,145	$	674		$	(54	)	$	9,311		$	10,751	$	6,283	$	1,431	$	(109)	$	18,356
Interest income		870			737		1			(124	)		1,484			1,593		1,519		1		(243)		2,870
Interest expense		958			48		6			(124	)		888			1,714		93		12		(243)		1,576

Net interest		(88	)		689		(5	)		—			596			(121)		1,426		(11)		—		1,294

Net revenues	$	5,458		$	3,834	$	669		$	(54	)	$	9,907		$	10,630	$	7,709	$	1,420	$	(109)	$	19,650

Income from continuing operations before income taxes	$	1,813		$	855	$	187		$	—		$	2,855		$	3,435	$	1,740	$	407	$	—	$	5,582
Provision for income taxes(4)		6			320		61			—			387			517		644		120		—		1,281

Income from continuing operations		1,807			535		126			—			2,468			2,918		1,096		287		—		4,301

Discontinued operations:
Income (loss) from discontinued operations before income taxes		(8	)		—		—			—			(8	)
Provision for (benefit from) income taxes		(3	)		—		—			—			(3	)

Income (loss) from discontinued operations		(5	)		—		—			—			(5	)
Income (loss) from discontinued operations, net of income taxes																(7)		—		—		—		(7)

Net income		1,802			535		126			—			2,463			2,911		1,096		287		—		4,294
Net income applicable to noncontrolling interests		52			—		17			—			69			74		—		19		—		93

Net income applicable to Morgan Stanley	$	1,750		$	535	$	109		$	—		$	2,394		$	2,837	$	1,096	$	268	$	—	$	4,201

~~(1)~~	~~Corporate assets have been fully allocated to the business segments.~~
		69


Executive Summary

Business Segment Financial Information and Other Statistical Data
	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2016		2015		2016		2015
	(dollars in millions, except where noted and per share amounts)
Net revenues:
Institutional Securities	$	4,578	$	5,172	$	8,292	$	10,630
Wealth Management		3,811		3,875		7,479		7,709
Investment Management		583		751		1,060		1,420
Intersegment Eliminations		(63)		(55)		(130)		(109)

Consolidated net revenues	$	8,909	$	9,743	$	16,701	$	19,650

Income from continuing operations applicable to Morgan Stanley:
Institutional Securities	$	992	$	1,089	$	1,586	$	2,844
Wealth Management		516		561		1,009		1,096
Investment Management		78		159		128		268

Income from continuing operations applicable to Morgan Stanley	$	1,586	$	1,809	$	2,723	$	4,208
Income (loss) from discontinued operations applicable to Morgan Stanley		(4)		(2)		(7)		(7)

Net income applicable to Morgan Stanley	$	1,582	$	1,807	$	2,716	$	4,201
Preferred stock dividend and other		157		142		235		222

Earnings applicable to Morgan Stanley common shareholders	$	1,425	$	1,665	$	2,481	$	3,979

Earnings per basic common share(1)	$	0.76	$	0.87	$	1.32	$	2.07
Earnings per diluted common share(1)	$	0.75	$	0.85	$	1.30	$	2.03
Regional net revenues(2):
Americas	$	6,538	$	6,777	$	12,290	$	13,707
EMEA		1,312		1,436		2,441		3,198
Asia-Pacific		1,059		1,530		1,970		2,745

Net revenues	$	8,909	$	9,743	$	16,701	$	19,650

Effective income tax rate from continuing operations		33.5%		32.8%		33.4%		22.9%


	At March 31, 2016		At December 31, 2015
Tangible book value per common share(16)	$	30.44	$	30.26


	Three Months Ended						Six Months Ended						% Change
	June 30,						June 30,						From Prior Year Quarter		From Prior Year Period
	2016			2015			2016			2015			From Prior Year Quarter		From Prior Year Period
	(dollars in millions)
Revenues:
Investment banking		$	1,108		$	1,440		$	2,098		$	2,613		(23)%		(20)%
Trading			2,498			2,785			4,389			6,207		(10)%		(29)%
Investments			76			16			108			128		N/M		(16)%
Commissions and fees			607			683			1,262			1,356		(11)%		(7)%
Asset management, distribution and administration fees			69			69			142			145		0%		(2)%
Other			138			212			142			302		(35)%		(53)%

Total non-interest revenues			4,496			5,205			8,141			10,751		(14)%		(24)%

Interest income			966			723			2,019			1,593		34%		27%
Interest expense			884			756			1,868			1,714		17%		9%

Net interest			82			(33)			151			(121)		N/M		N/M

Net revenues			4,578			5,172			8,292			10,630		(11)%		(22)%

Compensation and benefits			1,625			1,897			3,007			3,923		(14)%		(23)%
Non-compensation expenses			1,447			1,653			2,871			3,272		(12)%		(12)%

Total non-interest expenses			3,072			3,550			5,878			7,195		(13)%		(18)%

Income from continuing operations before income taxes			1,506			1,622			2,414			3,435		(7)%		(30)%
Provision for income taxes			453			511			728			517		(11)%		41%

Income from continuing operations			1,053			1,111			1,686			2,918		(5)%		(42)%
Income (loss) from discontinued operations, net of income taxes			(4)			(2)			(7)			(7)		N/M		0%

Net income			1,049			1,109			1,679			2,911		(5)%		(42)%
Net income applicable to noncontrolling interests			61			22			100			74		N/M		35%

Net income applicable to Morgan Stanley		$	988		$	1,087		$	1,579		$	2,837		(9)%		(44)%


	Three Months Ended March 31,						% Change from Prior Year
	2016			2015			% Change from Prior Year
	(dollars in millions)
Revenues:
Investment banking	$	990		$	1,173			(16)%
Trading		1,891			3,422			(45)%
Investments		32			112			(71)%
Commissions and fees		655			673			(3)%
Asset management, distribution and administration fees		73			76			(4)%
Other		4			90			(96)%

Total non-interest revenues		3,645			5,546			(34)%

Interest income		1,053			870			21%
Interest expense		984			958			3%

Net interest		69			(88	)		N/M

Net revenues		3,714			5,458			(32)%

Compensation and benefits		1,382			2,026			(32)%
Non-compensation expenses		1,424			1,619			(12)%

Total non-interest expenses		2,806			3,645			(23)%

Income from continuing operations before income taxes		908			1,813			(50)%
Provision for income taxes		275			6			N/M

Income from continuing operations		633			1,807			(65)%

Discontinued operations:
Income (loss) from discontinued operations before income taxes		(5	)		(8	)		38%
Provision for (benefit from) income taxes		(2	)		(3	)		33%

Income (loss) from discontinued operations		(3	)		(5	)		40%

Net income		630			1,802			(65)%
Net income applicable to noncontrolling interests		39			52			(25)%

Net income applicable to Morgan Stanley	$	591		$	1,750			(66)%

Amounts applicable to Morgan Stanley:
Income from continuing operations	$	594		$	1,755			(66)%
Income (loss) from discontinued operations		(3	)		(5	)		40%

Net income applicable to Morgan Stanley	$	591		$	1,750			(66)%


	Three Months Ended March 31,				% Change from Prior Year
	2016		2015
	(dollars in millions)
Investment banking	$	121	$	192		(37)%
Trading		194		232		(16)%
Commissions and fees		412		526		(22)%

Transactional revenues	$	727	$	950		(23)%


	Three Months Ended June 30,				Six Months Ended June 30,				% Change
	Three Months Ended June 30,				Six Months Ended June 30,				From Prior Year Quarter		From Prior Year Period
	2016		2015		2016		2015		From Prior Year Quarter		From Prior Year Period
	(dollars in millions)
Investment banking	$	123	$	186	$	244	$	378		(34)%		(35)%
Trading		252		196		446		428		29%		4%
Commissions and fees		423		490		835		1,016		(14)%		(18)%

Transactional revenues	$	798	$	872	$	1,525	$	1,822		(8)%		(16)%


	At March 31, 2016		Inflows		Outflows		Market Impact		At June 30, 2016		Average for the Three Months June 30, 2016
	At March 31, 2016		Inflows		Outflows		Market Impact		At June 30, 2016		Fee Rate
	(dollars in billions)										(in bps)
Separately managed accounts(1)	$	278	$	9	$	(7)	$	(1)	$	279	31
Unified managed accounts		112		11		(5)		2		120	109
Mutual fund advisory		24		—		(1)		—		23	121
Representative as advisor		114		8		(8)		3		117	88
Representative as portfolio manager		255		17		(12)		5		265	101

Subtotal	$	783	$	45	$	(33)	$	9	$	804	74
Cash management		15		4		(3)		—		16	6

Total fee-based client assets	$	798	$	49	$	(36)	$	9	$	820	73


	At March 31, 2015		Inflows		Outflows		Market Impact		At June 30, 2015		Average for the Three Months Ended June 30, 2015
	At March 31, 2015		Inflows		Outflows		Market Impact		At June 30, 2015		Fee Rate

	(dollars in billions)										(in bps)
Separately managed accounts(1)	$	287	$	13	$	(7)	$	1	$	294	34
Unified managed accounts		99		8		(4)		—		103	114
Mutual fund advisory		30		1		(2)		—		29	121
Representative as advisor		121		8		(8)		(1)		120	89
Representative as portfolio manager		250		16		(11)		(2)		253	104

Subtotal	$	787	$	46	$	(32)	$	(2)	$	799	77
Cash management		16		2		(4)		—		14	6

Total fee-based client assets	$	803	$	48	$	(36)	$	(2)	$	813	75


																			At December 31, 2015				Inflows		Outflows				Market Impact			At June 30, 2016			Average for the Six Months Ended June 30, 2016
	At December 31, 2014		Inflows			Outflows				Market Impact				At March 31, 2015				Average for the Three Months Ended March 31, 2015	At December 31, 2015						Outflows			Fee Rate	Market Impact			At June 30, 2016
	At December 31, 2014									Market Impact			Fee Rate	At March 31, 2015
	(dollars in billions)																	(in bps)	(dollars in billions)																(in bps)
Separately managed accounts(1)	$	285	Inflows	$	11	Outflows		$	(7	)		$	(2	)		$	287		35		$	283	Inflows			$	17			$	(17)		$	(4)		$	279	32
Unified managed accounts		93		8			(4	)			2				99			115		105				21		(9)				3			120		109
Mutual fund advisory		31		—			(2	)			1				30			121		25				1		(3)				—			23		121
Representative as advisor		119		9			(8	)			1				121			89		115				13		(14)				3			117		88
Representative as portfolio manager		241		16			(10	)			3				250			105		252				31		(22)				4			265		102

Subtotal	$	769	$	44		$	(31	)		$	5			$	787			77	$	780			$	83	$	(65)			$	6		$	804		74
Cash management		16		3			(3	)			—				16			6		15				7		(6)				—			16		6

Total fee-based client assets	$	785	$	47		$	(34	)		$	5			$	803			75	$	795			$	90	$	(71)			$	6		$	820		73


	At December 31, 2014		Inflows		Outflows		Market Impact		At June 30, 2015		Average for the Six Months Ended June 30, 2015
	At December 31, 2014		Inflows		Outflows		Market Impact		At June 30, 2015		Fee Rate

	(dollars in billions)										(in bps)
Separately managed accounts(1)	$	285	$	23	$	(14)	$	—	$	294	35
Unified managed accounts		93		15		(7)		2		103	114
Mutual fund advisory		31		1		(3)		—		29	121
Representative as advisor		119		16		(15)		—		120	89
Representative as portfolio manager		241		31		(20)		1		253	104

Subtotal	$	769	$	86	$	(59)	$	3	$	799	77
Cash management		16		3		(5)		—		14	6

Total fee-based client assets	$	785	$	89	$	(64)	$	3	$	813	75


	At March 31, 2016				At December 31, 2015			Average Balance
				Three Months Ended
				March 31, 2016					December 31, 2015		At June 30, 2016		At December 31, 2015
			(dollars in millions)											(dollars in millions)
Securities purchased under agreements to resell and Securities borrowed			$	239,187					$	230,073	$	237,887	$	250,605	$	228,870	$	230,073
Securities sold under agreements to repurchase and Securities loaned	$	58,445				$	56,050		$	56,417	$	62,373	$	67,569	$	56,050


	Average Balance Three Months Ended June 30, 2016
	(dollars in millions)
Securities purchased under agreements to resell and Securities borrowed	$	240,086
Securities sold under agreements to repurchase and Securities loaned	$	63,141


					Daily Average Balance
					Three Months Ended March 31,
	At March 31, 2016		At December 31, 2015		2016		2015		At June 30, 2016		At December 31, 2015		Daily Average Balance Three Months Ended June 30, 2016
	(dollars in millions)										(dollars in millions)
Bank legal entities:
Domestic	$	89,127	$	88,432	$	89,842	$	82,638	$	85,504	$	88,432	$	86,901
Foreign		6,135		5,896		5,812		4,961		5,558		5,896		5,368

Total Bank legal entities		95,262		94,328		95,654		87,599		91,062		94,328		92,269

Non-Bank legal entities(1):
Domestic		78,454		74,811		80,952		76,833
Non-Bank legal entities:
Parent										61,087		54,810		61,380
Non-Parent										17,673		20,001		17,932

Total Domestic										78,760		74,811		79,312
Foreign		37,353		34,125		34,282		31,829		37,633		34,125		38,204

Total Non-Bank legal entities		115,807		108,936		115,234		108,662		116,393		108,936		117,516

Total	$	211,069	$	203,264	$	210,888	$	196,261	$	207,455	$	203,264	$	209,785


							Monthly Average Balance
	Balance at						Three Months Ended March 31,						Balance at				Monthly Average Balance Three Months Ended June 30, 2016
	March 31, 2016			December 31, 2015			2016			2015			June 30, 2016		December 31, 2015
	(dollars in millions)												(dollars in millions)
Common equity	$	68,490		$	67,662		$	68,187		$	65,590		$	69,596	$	67,662	$	68,951
Preferred equity		7,520			7,520			7,520			6,395			7,520		7,520		7,520

Morgan Stanley shareholders’ equity		76,010			75,182			75,707			71,985			77,116		75,182		76,471
Junior subordinated debentures issued to capital trusts		2,849			2,870			2,843			4,871			2,853		2,870		2,851
Less: Goodwill and net intangible assets		(9,491	)		(9,564	)		(9,524	)		(9,702	)		(9,411)		(9,564)		(9,451)

Tangible Morgan Stanley shareholders’ equity(1)	$	69,368		$	68,488		$	69,026		$	67,154		$	70,558	$	68,488	$	69,871

Common equity	$	68,490		$	67,662		$	68,187		$	65,590		$	69,596	$	67,662	$	68,951
Less: Goodwill and net intangible assets		(9,491	)		(9,564	)		(9,524	)		(9,702	)		(9,411)		(9,564)		(9,451)

Tangible common equity(1)	$	58,999		$	58,098		$	58,663		$	55,888		$	60,185	$	58,098	$	59,500


	At March 31, 2016
	Transitional						Fully Phased-In
	Standardized			Advanced			Standardized			Advanced
	(dollars in millions)
Risk-based capital:
Common Equity Tier 1 capital	$	58,514		$	58,514		$	56,056		$	56,056
Tier 1 capital		65,198			65,198			63,627			63,627
Total capital		78,345			77,969			75,122			74,746
Total RWAs		359,179			373,925			369,697			385,074
Common Equity Tier 1 capital ratio		16.3	%		15.6	%		15.2	%		14.6	%
Tier 1 capital ratio		18.2	%		17.4	%		17.2	%		16.5	%
Total capital ratio		21.8	%		20.9	%		20.3	%		19.4	%
Leverage-based capital:
Adjusted average assets(1)		792,268			N/A			791,096			N/A
Tier 1 leverage ratio(2)		8.2	%		N/A			8.0	%		N/A


	At ~~March 31,~~June 30, 2016
Common Equity Tier 1 risk-based capital ratio		~~6.5~~6.5%	%
Tier 1 risk-based capital ratio		~~8.0~~8.0%	%
Total risk-based capital ratio		~~10.0~~10.0%	%
Tier 1 leverage ratio		~~5.0~~5.0%	%


	Six Months Ended June 30, 2016
	(dollars in millions)
Common Equity Tier 1 capital:
Common Equity Tier 1 capital at December 31, 2015	$	59,409
Change related to the following items:
Value of shareholders’ common equity		1,934
Net intangible assets (other than goodwill and mortgage servicing assets)		(506)
Credit spread premium over risk-free rate for derivative liabilities		(226)
Net deferred tax assets		(213)
Net after-tax debt valuation adjustments(1)		(176)
Adjustments related to accumulated other comprehensive income		(350)
Other deductions and adjustments		(76)

Common Equity Tier 1 capital at June 30, 2016	$	59,796

Additional Tier 1 capital:
Additional Tier 1 capital at December 31, 2015	$	7,565
Change related to the following items:
Trust preferred securities		(702)
Noncontrolling interests		(25)
Net deferred tax assets		420
Credit spread premium over risk-free rate for derivative liabilities		17
Net after-tax debt valuation adjustments(1)		(246)
Other adjustments and deductions		97

Additional Tier 1 capital at June 30, 2016		7,126


Deduction for investments in covered funds at December 31, 2015		(252)
Deduction for investments in covered funds		112

Deduction for investments in covered funds at June 30, 2016		(140)

Tier 1 capital at June 30, 2016	$	66,782

Tier 2 capital:
Tier 2 capital at December 31, 2015	$	12,681
Change related to the following items:
Subordinated debt		716
Trust preferred securities		(431)
Noncontrolling interests		23
Other adjustments and deductions		59

Tier 2 capital at June 30, 2016	$	13,048

Total capital at June 30, 2016	$	79,830