UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
x☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016March 31, 2017
OR
¨☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number1-11758
(Exact Name of Registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 1585 Broadway New York, NY 10036 (Address of principal executive offices, including zip code) | 36-3145972 (I.R.S. Employer Identification No.) | (212)761-4000 (Registrant’s telephone number, including area code) |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ¨☐
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x☒ No ¨☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer | Accelerated Filer | |
Non-Accelerated Filer | Smaller reporting company | |
(Do not check if a smaller reporting company) | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ¨☐ No x☒
As of July 29, 2016,May 1, 2017, there were 1,911,808,9351,849,782,135 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.
QUARTERLY REPORT ON FORM10-Q
For the quarter ended June 30, 2016March 31, 2017
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Table of Contents | Part | Item | Page | |||||||||
I | 1 | |||||||||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 2 | 1 | ||||||||||
1 | ||||||||||||
2 | ||||||||||||
6 | ||||||||||||
15 | ||||||||||||
15 | ||||||||||||
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3 | 29 | |||||||||||
4 | 39 | |||||||||||
40 | ||||||||||||
1 | 41 | |||||||||||
41 | ||||||||||||
41 | ||||||||||||
42 | ||||||||||||
43 | ||||||||||||
Consolidated Statements of Changes in Total Equity (Unaudited) | 44 | |||||||||||
45 | ||||||||||||
46 | ||||||||||||
46 | ||||||||||||
47 | ||||||||||||
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12. Variable Interest Entities and Securitization Activities | 79 | |||||||||||
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II | 91 | |||||||||||
1 | 91 | |||||||||||
2 | 92 | |||||||||||
6 | 92 | |||||||||||
S-1 | ||||||||||||
E-1 |
i
Available Information.Information
We file annual, quarterly and current reports, proxy statements and other information with the U.S. Securities and Exchange Commission (the “SEC”). You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements and other information that issuers (including us) file electronically with the SEC. Our electronic SEC filings are available to the public at the SEC’s internet site,www.sec.gov.
Our internet site iswww.morganstanley.com. You can access our Investor Relations webpage atwww.morganstanley.com/about-us-ir. We make available free of charge, on or through our Investor Relations webpage, our proxy statements, Annual Reports on Form10-K, Quarterly Reports onForm 10-Q, Current Reports on Form8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. We also make available, through our Investor Relations webpage, via a link to the SEC’s internet site, statements of beneficial ownership of our equity securities filed by our directors, officers, 10% or greater shareholders and others under Section 16 of the Exchange Act.
You can access information about our corporate governance atwww.morganstanley.com/about-us-governance. Our Corporate Governance webpage includes:
Amended and Restated Certificate of Incorporation;
Amended and Restated Bylaws;
Charters for itsour 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.Information; and
Environmental and Social Policies.
Morgan Stanley’sOur Code of Ethics and Business Conduct applies to all directors, officers and employees, including our Chief Executive Officer, Chief Financial Officer and Deputy Chief Financial Officer. We will post any amendments to the Code of Ethics and Business Conduct and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange LLC (“NYSE”) on our internet site. You can request a copy of these documents, excluding exhibits, at no cost, by contacting Investor Relations, 1585 Broadway, New York, NY 10036(212-761-4000). The information on our internet site is not incorporated by reference into this report.
ii
Part I—Financial Information
MORGAN STANLEY
Consolidated Statements of Income
(in millions, except per share data)
(unaudited)
Three Months Ended June 30,
| Six Months Ended June 30,
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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 | ||||||||||||
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Total non-interest revenues |
|
7,996 |
|
|
9,045 |
|
|
14,889 |
|
|
18,356 |
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Interest income |
|
1,667 |
|
|
1,386 |
|
|
3,414 |
|
|
2,870 |
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Interest expense | 754 | 688 | 1,602 | 1,576 | ||||||||||||
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Net interest |
|
913 |
|
|
698 |
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1,812 |
|
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1,294 |
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Net revenues |
|
8,909 |
|
|
9,743 |
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|
16,701 |
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19,650 |
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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 | ||||||||||||
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Total non-interest expenses |
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6,426 |
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|
7,016 |
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12,480 |
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|
14,068 |
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Income from continuing operations before income taxes |
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2,483 |
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2,727 |
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4,221 |
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5,582 |
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Provision for income taxes | 833 | 894 | 1,411 | 1,281 | ||||||||||||
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Income from continuing operations |
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1,650 |
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1,833 |
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2,810 |
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4,301 |
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Income (loss) from discontinued operations, net of income taxes | (4) | (2) | (7) | (7) | ||||||||||||
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Net income |
$ |
1,646 |
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$ |
1,831 |
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$ |
2,803 |
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$ |
4,294 |
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Net income applicable to noncontrolling interests | 64 | 24 | 87 | 93 | ||||||||||||
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Net income applicable to Morgan Stanley |
$ |
1,582 |
|
$ |
1,807 |
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$ |
2,716 |
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$ |
4,201 |
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Preferred stock dividends and other | 157 | 142 | 235 | 222 | ||||||||||||
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Earnings applicable to Morgan Stanley common shareholders |
$ |
1,425 |
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$ |
1,665 |
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$ |
2,481 |
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$ |
3,979 |
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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) | — | ||||||||||||
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Earnings per basic common share |
$ |
0.76 |
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$ |
0.87 |
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$ |
1.32 |
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$ |
2.07 |
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Earnings per diluted common share: | ||||||||||||||||
Income from continuing operations | $ | 0.75 | $ | 0.85 | $ | 1.30 | $ | 2.03 | ||||||||
Income (loss) from discontinued operations | — | — | — | — | ||||||||||||
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Earnings per diluted common share |
$ |
0.75 |
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$ |
0.85 |
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$ |
1.30 |
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$ |
2.03 |
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Dividends declared per common share |
$ |
0.15 |
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$ |
0.15 |
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$ |
0.30 |
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$ |
0.25 |
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Average common shares outstanding: | ||||||||||||||||
Basic | 1,866 | 1,919 | 1,875 | 1,922 | ||||||||||||
Diluted | 1,899 | 1,960 | 1,907 | 1,962 |
See Notes to Consolidated Financial Statements.
MORGAN STANLEY
Consolidated Statements of Comprehensive Income
(dollars in millions)
(unaudited)
Three Months Ended June 30,
| Six Months Ended June 30,
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2016 |
2015 |
2016 |
2015 | |||||||||||||
Net income | $ | 1,646 | $ | 1,831 | $ | 2,803 | $ | 4,294 | ||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Foreign currency translation adjustments(1) | $ | 131 | $ | 34 | $ | 317 | $ | (188) | ||||||||
Change in net unrealized gains (losses) on available for sale | 143 | (228) | 538 | (28) | ||||||||||||
Pension, postretirement and other | (5) | (3) | (4) | (1) | ||||||||||||
Change in net debt valuation adjustments(3) | 145 | — | 348 | — | ||||||||||||
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Total other comprehensive income (loss) |
$ |
414 |
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$ |
(197) |
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$ |
1,199 |
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$ |
(217) |
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Comprehensive income |
$ |
2,060 |
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$ |
1,634 |
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$ |
4,002 |
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$ |
4,077 |
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Net income applicable to noncontrolling interests | 64 | 24 | 87 | 93 | ||||||||||||
Other comprehensive income (loss) applicable to noncontrolling interests | 81 | (16) | 136 | (18) | ||||||||||||
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Comprehensive income applicable to Morgan Stanley |
$ |
1,915 |
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$ |
1,626 |
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$ |
3,779 |
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$ |
4,002 |
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See Notes to Consolidated Financial Statements.
Consolidated Balance Sheets
(dollars in millions, except share data)
(unaudited)
At June 30, 2016
| At December 31, 2015
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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 | ||||||
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Total assets |
$ |
828,873 |
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$ |
787,465 |
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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 | ||||||
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Total liabilities |
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750,498 |
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711,281 |
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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) | ||||||
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Total Morgan Stanley shareholders’ equity |
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77,116 |
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75,182 |
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Noncontrolling interests | 1,259 | 1,002 | ||||||
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Total equity |
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78,375 |
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76,184 |
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Total liabilities and equity |
$ |
828,873 |
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$ |
787,465 |
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See Notes to Consolidated Financial Statements.
Consolidated Statements of Changes in Total Equity
Six Months Ended June 30, 2016 and 2015
(dollars in millions)
(unaudited)
Preferred Stock
| Common Stock
| Additional Paid-in Capital
| Retained Earnings
| Employee Stock Trusts
| Accumulated Other Comprehensive Income (Loss)
| Common Stock Held in Treasury at Cost
| Common Stock Issued to Employee Stock Trusts
| Non- controlling Interests
| Total Equity
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BALANCE AT DECEMBER 31, 2015 | $ | 7,520 | $ | 20 | $ | 24,153 | $ | 49,204 | $ | 2,409 | $ | (1,656) | $ | (4,059) | $ | (2,409) | $ | 1,002 | $ | 76,184 | ||||||||||||||||||||
Cumulative adjustment for accounting change related to DVA(1) | — | — | — | 312 | — | (312) | — | — | — | — | ||||||||||||||||||||||||||||||
Net adjustment for accounting change related to consolidation(2) | — | — | — | — | — | — | — | — | 106 | 106 | ||||||||||||||||||||||||||||||
Net income applicable to Morgan Stanley | — | — | — | 2,716 | — | — | — | — | — | 2,716 | ||||||||||||||||||||||||||||||
Net income applicable to noncontrolling interests | — | — | — | — | — | — | — | — | 87 | 87 | ||||||||||||||||||||||||||||||
Dividends | — | — | — | (822) | — | — | — | — | — | (822) | ||||||||||||||||||||||||||||||
Shares issued under employee plans and related tax effects | — | — | (1,456) | — | 464 | — | 2,062 | (464) | — | 606 | ||||||||||||||||||||||||||||||
Repurchases of common stock and employee tax withholdings | — | — | — | — | — | — | (1,629) | — | — | (1,629) | ||||||||||||||||||||||||||||||
Net change in Accumulated other comprehensive income (loss) | — | — | — | — | — | 1,063 | — | — | 136 | 1,199 | ||||||||||||||||||||||||||||||
Other net decreases | — | — | — | — | — | — | — | — | (72) | (72) | ||||||||||||||||||||||||||||||
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BALANCE AT JUNE 30, 2016 | $ | 7,520 | $ | 20 | $ | 22,697 | $ | 51,410 | $ | 2,873 | $ | (905) | $ | (3,626) | $ | (2,873) | $ | 1,259 | $ | 78,375 | ||||||||||||||||||||
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BALANCE AT DECEMBER 31, 2014 | $ | 6,020 | $ | 20 | $ | 24,249 | $ | 44,625 | $ | 2,127 | $ | (1,248) | $ | (2,766) | $ | (2,127) | $ | 1,204 | $ | 72,104 | ||||||||||||||||||||
Net income applicable to Morgan Stanley | — | — | — | 4,201 | — | — | — | — | — | 4,201 | ||||||||||||||||||||||||||||||
Net income applicable to noncontrolling interests | — | — | — | — | — | — | — | — | 93 | 93 | ||||||||||||||||||||||||||||||
Dividends | — | — | — | (720) | — | — | — | — | — | (720) | ||||||||||||||||||||||||||||||
Shares issued under employee plans and related tax effects | — | — | (577) | — | 314 | — | 1,423 | (314) | — | 846 | ||||||||||||||||||||||||||||||
Repurchases of common stock and employee tax withholdings | — | — | — | — | — | — | (1,473) | — | — | (1,473) | ||||||||||||||||||||||||||||||
Net change in Accumulated other comprehensive income (loss) | — | — | — | — | — | (199) | — | — | (18) | (217) | ||||||||||||||||||||||||||||||
Issuance of preferred stock | 1,500 | — | (7) | — | — | — | — | — | — | 1,493 | ||||||||||||||||||||||||||||||
Deconsolidation of certain legal entities associated with a real estate fund | — | — | — | — | — | — | — | — | (191) | (191) | ||||||||||||||||||||||||||||||
Other net decreases | — | — | (10) | — | — | — | — | — | (59) | (69) | ||||||||||||||||||||||||||||||
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BALANCE AT JUNE 30, 2015 | $ | 7,520 | $ | 20 | $ | 23,655 | $ | 48,106 | $ | 2,441 | $ | (1,447) | $ | (2,816) | $ | (2,441) | $ | 1,029 | $ | 76,067 | ||||||||||||||||||||
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See Notes to Consolidated Financial Statements.
Consolidated Statements of Cash Flows
(dollars in millions)
(unaudited)
Six Months Ended June 30,
| ||||||||
2016 |
2015 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 2,803 | $ | 4,294 | ||||
Adjustments to reconcile net income to net cash provided by (used for) operating activities: | ||||||||
Income from equity method investments | (1) | (83) | ||||||
Compensation payable in common stock and options | 492 | 611 | ||||||
Depreciation and amortization | 879 | 654 | ||||||
Net gain on sale of available for sale securities | (82) | (55) | ||||||
Impairment charges | 67 | 83 | ||||||
Provision for credit losses on lending activities | 131 | 38 | ||||||
Other operating adjustments | 218 | 37 | ||||||
Changes in assets and liabilities: | ||||||||
Trading assets, net of Trading liabilities | (333) | 25,115 | ||||||
Securities borrowed | 11,135 | (7,261) | ||||||
Securities loaned | (2,117) | (2,068) | ||||||
Customer and other receivables and other assets | (10,537) | (601) | ||||||
Customer and other payables and other liabilities | 9,907 | (1,482) | ||||||
Securities purchased under agreements to resell | (9,932) | (23,472) | ||||||
Securities sold under agreements to repurchase | 13,636 | (4,263) | ||||||
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Net cash provided by (used for) operating activities |
|
16,266 |
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(8,453) |
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CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Proceeds from (payments for): | ||||||||
Other assets—Premises, equipment and software, net | (645) | (620) | ||||||
Changes in loans, net | (4,724) | (9,082) | ||||||
Investment securities: | ||||||||
Purchases | (30,700) | (26,832) | ||||||
Proceeds from sales | 20,274 | 26,501 | ||||||
Proceeds from paydowns and maturities | 3,507 | 2,796 | ||||||
Other investing activities | (126) | (97) | ||||||
|
|
|
| |||||
Net cash used for investing activities |
|
(12,414) |
|
|
(7,334) |
| ||
|
|
|
| |||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Net proceeds from (payments for): | ||||||||
Short-term borrowings | (1,293) | 861 | ||||||
Noncontrolling interests | (43) | (60) | ||||||
Other secured financings | (69) | (280) | ||||||
Deposits | (3,341) | 5,659 | ||||||
Proceeds from: | ||||||||
Excess tax benefits associated with stock-based awards | 42 | 176 | ||||||
Derivatives financing activities | — | 312 | ||||||
Issuance of preferred stock, net of issuance costs | — | 1,493 | ||||||
Issuance of long-term borrowings | 20,628 | 22,909 | ||||||
Payments for: | ||||||||
Long-term borrowings | (15,900) | (12,963) | ||||||
Derivatives financing activities | (120) | (257) | ||||||
Repurchases of common stock and employee tax withholdings | (1,629) | (1,473) | ||||||
Cash dividends | (791) | (673) | ||||||
|
|
|
| |||||
Net cash provided by (used for) financing activities |
|
(2,516) |
|
|
15,704 |
| ||
|
|
|
| |||||
Effect of exchange rate changes on cash and cash equivalents |
|
714 |
|
|
(542) |
| ||
|
|
|
| |||||
Net increase (decrease) in cash and cash equivalents |
|
2,050 |
|
|
(625) |
| ||
Cash and cash equivalents, at beginning of period | 54,083 | 46,984 | ||||||
|
|
|
| |||||
Cash and cash equivalents, at end of period |
$ |
56,133 |
|
$ |
46,359 |
| ||
|
|
|
| |||||
Cash and cash equivalents include: | ||||||||
Cash and due from banks | $ | 27,597 | $ | 19,145 | ||||
Interest bearing deposits with banks | 28,536 | 27,214 | ||||||
|
|
|
| |||||
Cash and cash equivalents, at end of period |
$ |
56,133 |
|
$ |
46,359 |
| ||
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest were$1,082 million and $1,027 million.
Cash payments for income taxes, net of refunds, were$340 million and $342 million.
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
The 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 “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 Firm’s business segments, see Note 1 to the consolidated financial statements in the Firm’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”).
Basis of Financial Information
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which require the Firm to make estimates and assumptions regarding the valuations of certain financial instruments, the valuation of goodwill and intangible assets, compensation, deferred tax assets, the outcome of legal and tax matters, allowance for credit losses and other matters that affect its consolidated financial statements and related disclosures. The Firm believes that the estimates utilized in the preparation of its consolidated financial statements are prudent and reasonable. Actual results could differ materially from these estimates. Intercompany balances and transactions have been eliminated.
The accompanying consolidated financial statements should be read in conjunction with the 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 consolidated financial statements as they are not required for interim reporting under U.S. GAAP. The 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
The consolidated financial statements include the accounts of the Firm, its wholly owned subsidiaries and other entities in which the Firm has a controlling financial interest, including certain 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 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 consolidated balance sheets.
For a discussion of the 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.
Consolidated Statements of Cash Flows Presentation
The adoption of the accounting update,Amendments to the Consolidation Analysis (see Note 2) on January 1, 2016, resulted in a net noncash increase in total assets of $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 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 prior year period, to reduce the carrying amount of the 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 did not have a material impact on the Firm’s financial results.
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
|
For a detailed discussion about the Firm’s significant accounting policies, see Note 2 to the consolidated financial statements in the 2015 Form 10-K.
During the current year period, other than the following, there were no significant updates made to the Firm’s significant accounting policies.
Accounting Standards Adopted
The Firm adopted the following accounting updates as of January 1, 2016.
|
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 consolidated financial statements.
|
|
The Firm adopted the following accounting updates as of January 1, 2016, which did not have an impact in the consolidated financial statements.
|
|
|
|
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
|
Fair Value Measurements
For a description of the valuation techniques applied to the Firm’s major categories of assets and liabilities measured at fair value on a recurring basis, see Note 3 to the consolidated financial statements in the 2015 Form 10-K. During the current quarter and current year period, there were no significant updates made to the Firm’s valuation techniques.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Level 1
| Level 2
| Level 3
| Counterparty and Cash Collateral Netting
| Balance at June 30, 2016
| ||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Assets at Fair Value | ||||||||||||||||||||
Trading assets: | ||||||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||||||
U.S. Treasury securities | $ | 24,565 | $ | — | $ | — | $ | — | $ | 24,565 | ||||||||||
U.S. agency securities | 795 | 22,085 | 20 | — | 22,900 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total U.S. government and agency securities |
|
25,360 |
|
|
22,085 |
|
|
20 |
|
|
— |
|
|
47,465 |
| |||||
Other sovereign government obligations | 20,942 | 6,607 | 2 | — | 27,551 | |||||||||||||||
Corporate and other debt: | ||||||||||||||||||||
State and municipal securities | — | 1,943 | 10 | — | 1,953 | |||||||||||||||
Residential mortgage-backed securities | — | 586 | 216 | — | 802 | |||||||||||||||
Commercial mortgage-backed securities | — | 961 | 51 | — | 1,012 | |||||||||||||||
Asset-backed securities | — | 142 | 88 | — | 230 | |||||||||||||||
Corporate bonds | — | 11,751 | 276 | — | 12,027 | |||||||||||||||
Collateralized debt and loan obligations | — | 443 | 109 | — | 552 | |||||||||||||||
Loans and lending commitments(1) | — | 3,879 | 5,418 | — | 9,297 | |||||||||||||||
Other debt | — | 827 | 528 | — | 1,355 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total corporate and other debt |
|
— |
|
|
20,532 |
|
|
6,696 |
|
|
— |
|
|
27,228 |
| |||||
Corporate equities(2) | 100,018 | 367 | 572 | — | 100,957 | |||||||||||||||
Securities received as collateral | 10,121 | 7 | — | — | 10,128 | |||||||||||||||
Derivative and other contracts: | ||||||||||||||||||||
Interest rate contracts | 791 | 462,243 | 540 | — | 463,574 | |||||||||||||||
Credit contracts | — | 16,157 | 304 | — | 16,461 | |||||||||||||||
Foreign exchange contracts | 140 | 76,264 | 101 | — | 76,505 | |||||||||||||||
Equity contracts | 1,368 | 40,524 | 637 | — | 42,529 | |||||||||||||||
Commodity contracts | 2,847 | 8,605 | 4,057 | — | 15,509 | |||||||||||||||
Other | — | 16 | — | — | 16 | |||||||||||||||
Netting(3) | (4,184) | (505,871) | (2,537) | (63,844) | (576,436) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total derivative and other contracts |
|
962 |
|
|
97,938 |
|
|
3,102 |
|
|
(63,844) |
|
|
38,158 |
| |||||
Investments(4): | ||||||||||||||||||||
Principal investments | 21 | 19 | 769 | — | 809 | |||||||||||||||
Other | 295 | 559 | 205 | — | 1,059 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total investments |
|
316 |
|
|
578 |
|
|
974 |
|
|
— |
|
|
1,868 |
| |||||
Physical commodities | — | 193 | — | — | 193 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total trading assets(4) |
|
157,719 |
|
|
148,307 |
|
|
11,366 |
|
|
(63,844) |
|
|
253,548 |
| |||||
|
|
|
|
|
|
|
|
|
| |||||||||||
AFS securities |
|
31,062 |
|
|
36,664 |
|
|
— |
|
|
— |
|
|
67,726 |
| |||||
Securities purchased under agreements to resell | — | 555 | — | — | 555 | |||||||||||||||
Intangible assets | — | 3 | — | — | 3 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total assets measured at fair value |
$ |
188,781 |
|
$ |
185,529 |
|
$ |
11,366 |
|
$ |
(63,844) |
|
$ |
321,832 |
| |||||
|
|
|
|
|
|
|
|
|
|
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Level 1
| Level 2
| Level 3
| Counterparty and Cash Collateral Netting
| Balance at June 30, 2016
| ||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Liabilities at Fair Value | ||||||||||||||||||||
Deposits | $ | — | $ | 65 | $ | 30 | $ | — | $ | 95 | ||||||||||
Short-term borrowings | — | 511 | — | — | 511 | |||||||||||||||
Trading liabilities: | ||||||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||||||
U.S. Treasury securities | 12,983 | — | — | — | 12,983 | |||||||||||||||
U.S. agency securities | 358 | 111 | — | — | 469 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total U.S. government and agency securities |
|
13,341 |
|
|
111 |
|
|
— |
|
|
— |
|
|
13,452 |
| |||||
Other sovereign government obligations | 15,885 | 2,668 | — | — | 18,553 | |||||||||||||||
Corporate and other debt: | ||||||||||||||||||||
State and municipal securities | — | 3 | — | — | 3 | |||||||||||||||
Asset-backed securities | — | 449 | — | — | 449 | |||||||||||||||
Corporate bonds | — | 5,578 | 6 | — | 5,584 | |||||||||||||||
Other debt | — | 15 | 3 | — | 18 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total corporate and other debt |
|
— |
|
|
6,045 |
|
|
9 |
|
|
— |
|
|
6,054 |
| |||||
Corporate equities(2) | 46,440 | 76 | 26 | — | 46,542 | |||||||||||||||
Obligation to return securities received as collateral | 18,731 | 7 | — | — | 18,738 | |||||||||||||||
Derivative and other contracts: | ||||||||||||||||||||
Interest rate contracts | 969 | 436,022 | 775 | — | 437,766 | |||||||||||||||
Credit contracts | — | 16,403 | 1,418 | — | 17,821 | |||||||||||||||
Foreign exchange contracts | 82 | 78,441 | 102 | — | 78,625 | |||||||||||||||
Equity contracts | 1,262 | 43,177 | 2,110 | — | 46,549 | |||||||||||||||
Commodity contracts | 2,368 | 7,652 | 2,759 | — | 12,779 | |||||||||||||||
Other | — | 91 | 11 | — | 102 | |||||||||||||||
Netting(3) | (4,184) | (505,871) | (2,537) | (43,727) | (556,319) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total derivative and other contracts |
|
497 |
|
|
75,915 |
|
|
4,638 |
|
|
(43,727) |
|
|
37,323 |
| |||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total trading liabilities |
|
94,894 |
|
|
84,822 |
|
|
4,673 |
|
|
(43,727) |
|
|
140,662 |
| |||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Securities sold under agreements to repurchase |
|
— |
|
|
549 |
|
|
150 |
|
|
— |
|
|
699 |
| |||||
Other secured financings | — | 2,480 | 441 | — | 2,921 | |||||||||||||||
Long-term borrowings | 44 | 35,831 | 1,929 | — | 37,804 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total liabilities measured at fair value |
$ |
94,938 |
|
$ |
124,258 |
|
$ |
7,223 |
|
$ |
(43,727) |
|
$ |
182,692 |
| |||||
|
|
|
|
|
|
|
|
|
|
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Level 1 | Level 2 | Level 3 | Counterparty and Cash Collateral Netting | Balance at December 31, 2015 | ||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Assets at Fair Value | ||||||||||||||||||||
Trading assets: | ||||||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||||||
U.S. Treasury securities | $ | 17,658 | $ | — | $ | — | $ | — | $ | 17,658 | ||||||||||
U.S. agency securities | 797 | 17,886 | — | — | 18,683 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total U.S. government and agency securities | 18,455 | 17,886 | — | — | 36,341 | |||||||||||||||
Other sovereign government obligations | 13,559 | 7,400 | 4 | — | 20,963 | |||||||||||||||
Corporate and other debt: | ||||||||||||||||||||
State and municipal securities | — | 1,651 | 19 | — | 1,670 | |||||||||||||||
Residential mortgage-backed securities | — | 1,456 | 341 | — | 1,797 | |||||||||||||||
Commercial mortgage-backed securities | — | 1,520 | 72 | — | 1,592 | |||||||||||||||
Asset-backed securities | — | 494 | 25 | — | 519 | |||||||||||||||
Corporate bonds | — | 9,959 | 267 | — | 10,226 | |||||||||||||||
Collateralized debt and loan obligations | — | 284 | 430 | — | 714 | |||||||||||||||
Loans and lending commitments(1) | — | 4,682 | 5,936 | — | 10,618 | |||||||||||||||
Other debt | — | 2,263 | 448 | — | 2,711 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total corporate and other debt | — | 22,309 | 7,538 | — | 29,847 | |||||||||||||||
Corporate equities(2) | 106,296 | 379 | 433 | — | 107,108 | |||||||||||||||
Securities received as collateral | 11,221 | 3 | 1 | — | 11,225 | |||||||||||||||
Derivative and other contracts: | ||||||||||||||||||||
Interest rate contracts | 406 | 323,586 | 2,052 | — | 326,044 | |||||||||||||||
Credit contracts | — | 22,258 | 661 | — | 22,919 | |||||||||||||||
Foreign exchange contracts | 55 | 64,608 | 292 | — | 64,955 | |||||||||||||||
Equity contracts | 653 | 38,552 | 1,084 | — | 40,289 | |||||||||||||||
Commodity contracts | 3,140 | 10,654 | 3,358 | — | 17,152 | |||||||||||||||
Other | — | 219 | — | — | 219 | |||||||||||||||
Netting(3) | (3,840) | (380,443) | (3,120) | (55,562) | (442,965) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total derivative and other contracts | 414 | 79,434 | 4,327 | (55,562) | 28,613 | |||||||||||||||
Investments(4): | ||||||||||||||||||||
Principal investments | 20 | 44 | 486 | — | 550 | |||||||||||||||
Other | 163 | 310 | 221 | — | 694 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total investments | 183 | 354 | 707 | — | 1,244 | |||||||||||||||
Physical commodities | — | 321 | — | — | 321 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total trading assets(4) | 150,128 | 128,086 | 13,010 | (55,562) | 235,662 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
AFS securities | 34,351 | 32,408 | — | — | 66,759 | |||||||||||||||
Securities purchased under agreements to resell | — | 806 | — | — | 806 | |||||||||||||||
Intangible assets | — | — | 5 | — | 5 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total assets measured at fair value | $ | 184,479 | $ | 161,300 | $ | 13,015 | $ | (55,562) | $ | 303,232 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Liabilities at Fair Value | ||||||||||||||||||||
Deposits | $ | — | $ | 106 | $ | 19 | $ | — | $ | 125 | ||||||||||
Short-term borrowings | — | 1,647 | 1 | — | 1,648 | |||||||||||||||
Trading liabilities: | ||||||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||||||
U.S. Treasury securities | 12,932 | — | — | — | 12,932 | |||||||||||||||
U.S. agency securities | 854 | 127 | — | — | 981 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total U.S. government and agency securities | 13,786 | 127 | — | — | 13,913 | |||||||||||||||
Other sovereign government obligations | 10,970 | 2,558 | — | — | 13,528 | |||||||||||||||
Corporate and other debt: | ||||||||||||||||||||
Commercial mortgage-backed securities | — | 2 | — | — | 2 | |||||||||||||||
Corporate bonds | — | 5,035 | — | — | 5,035 | |||||||||||||||
Lending commitments | — | 3 | — | — | 3 | |||||||||||||||
Other debt | — | 5 | 4 | — | 9 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total corporate and other debt | — | 5,045 | 4 | — | 5,049 | |||||||||||||||
Corporate equities(2) | 47,123 | 35 | 17 | — | 47,175 | |||||||||||||||
Obligation to return securities received as collateral | 19,312 | 3 | 1 | — | 19,316 | |||||||||||||||
Derivative and other contracts: | ||||||||||||||||||||
Interest rate contracts | 466 | 305,151 | 1,792 | — | 307,409 | |||||||||||||||
Credit contracts | — | 22,160 | 1,505 | — | 23,665 | |||||||||||||||
Foreign exchange contracts | 22 | 65,177 | 151 | — | 65,350 | |||||||||||||||
Equity contracts | 570 | 42,447 | 3,115 | — | 46,132 | |||||||||||||||
Commodity contracts | 3,012 | 9,431 | 2,308 | — | 14,751 | |||||||||||||||
Other | — | 43 | — | — | 43 | |||||||||||||||
Netting(3) | (3,840) | (380,443) | (3,120) | (40,473) | (427,876) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total derivative and other contracts | 230 | 63,966 | 5,751 | (40,473) | 29,474 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total trading liabilities | 91,421 | 71,734 | 5,773 | (40,473) | 128,455 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Securities sold under agreements to repurchase | — | 532 | 151 | — | 683 | |||||||||||||||
Other secured financings | — | 2,393 | 461 | — | 2,854 | |||||||||||||||
Long-term borrowings | — | 31,058 | 1,987 | — | 33,045 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total liabilities measured at fair value | $ | 91,421 | $ | 107,470 | $ | 8,392 | $ | (40,473) | $ | 166,810 | ||||||||||
|
|
|
|
|
|
|
|
|
|
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
AFS—Available for sale
|
|
|
|
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for all periods presented. Level 3 instruments may be hedged with instruments classified in Level 1 and Level 2. As a result, the realized and unrealized gains (losses) for assets and liabilities within the Level 3 category presented in the following tables do not reflect the related realized and unrealized gains (losses) on hedging instruments that have been classified by the Firm within the Level 1 and/or Level 2 categories.
Additionally, both observable and unobservable inputs may be used to determine the fair value of positions that the Firm has classified within the Level 3 category. As a result, the unrealized gains (losses) during the period for assets and liabilities within the Level 3 category presented in the following tables herein may include changes in fair value during the period that were attributable to both observable and unobservable inputs.
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Roll-forward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis
Beginning Balance at March 31, 2016 | Total Realized and Unrealized Gains (Losses) | Purchases (1) | Sales | Issuances | Settlements | Net Transfers | Ending Balance at June 30, 2016 | Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at June 30, 2016 | ||||||||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||||||||||
Assets at Fair Value | ||||||||||||||||||||||||||||||||||||
Trading assets: | ||||||||||||||||||||||||||||||||||||
U.S. agency securities | $ | 8 | $ | — | $ | — | $ | (18) | $ | — | $ | — | $ | 30 | $ | 20 | $ | — | ||||||||||||||||||
Other sovereign government obligations | 8 | — | — | (3) | — | — | (3) | 2 | — | |||||||||||||||||||||||||||
Corporate and other debt: | ||||||||||||||||||||||||||||||||||||
State and municipal securities | 5 | 1 | 4 | — | — | — | — | 10 | 2 | |||||||||||||||||||||||||||
Residential mortgage-backed securities | 292 | 3 | — | (82) | — | — | 3 | 216 | (5) | |||||||||||||||||||||||||||
Commercial mortgage-backed securities | 59 | (3) | 1 | (4) | — | — | (2) | 51 | (5) | |||||||||||||||||||||||||||
Asset-backed securities | 4 | (4) | 6 | (1) | — | — | 83 | 88 | (4) | |||||||||||||||||||||||||||
Corporate bonds | 224 | 17 | 116 | (35) | — | — | (46) | 276 | 17 | |||||||||||||||||||||||||||
Collateralized debt and loan obligations | 348 | 18 | 3 | (178) | — | — | (82) | 109 | 18 | |||||||||||||||||||||||||||
Loans and lending commitments | 6,185 | (46) | 360 | (484) | — | (596) | (1) | 5,418 | (55) | |||||||||||||||||||||||||||
Other debt | 527 | 4 | 13 | (19) | — | — | 3 | 528 | 2 | |||||||||||||||||||||||||||
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Total corporate and other debt | 7,644 | (10) | 503 | (803) | — | (596) | (42) | 6,696 | (30) | |||||||||||||||||||||||||||
Corporate equities | 430 | (63) | 273 | (82) | — | — | 14 | 572 | (63) | |||||||||||||||||||||||||||
Net derivative and other contracts(2): | ||||||||||||||||||||||||||||||||||||
Interest rate contracts | 169 | (159) | 2 | — | (7) | 42 | (282) | (235) | (157) | |||||||||||||||||||||||||||
Credit contracts | (723) | 65 | 1 | — | — | 93 | (550) | (1,114) | 53 | |||||||||||||||||||||||||||
Foreign exchange contracts | 126 | (58) | — | — | — | (94) | 25 | (1) | (47) | |||||||||||||||||||||||||||
Equity contracts | (1,832) | 168 | 50 | — | (140) | 263 | 18 | (1,473) | (106) | |||||||||||||||||||||||||||
Commodity contracts | 1,200 | 211 | 5 | — | (4) | (88) | (26) | 1,298 | 130 | |||||||||||||||||||||||||||
Other | — | — | — | — | — | — | (11) | (11) | — | |||||||||||||||||||||||||||
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Total net derivative and other contracts | (1,060) | 227 | 58 | — | (151) | 216 | (826) | (1,536) | (127) | |||||||||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||||||||||
Principal investments | 743 | 4 | 33 | (11) | — | — | — | 769 | 6 | |||||||||||||||||||||||||||
Other | 179 | 1 | 25 | — | — | — | — | 205 | 1 | |||||||||||||||||||||||||||
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Total investments | 922 | 5 | 58 | (11) | — | — | — | 974 | 7 | |||||||||||||||||||||||||||
Intangible assets | 4 | — | — | — | — | — | (4) | — | — | |||||||||||||||||||||||||||
Liabilities at Fair Value | ||||||||||||||||||||||||||||||||||||
Deposits | $ | 23 | $ | (1) | $ | — | $ | — | $ | 8 | $ | — | $ | (2) | $ | 30 | $ | (1) | ||||||||||||||||||
Trading liabilities: | ||||||||||||||||||||||||||||||||||||
Corporate and other debt: | ||||||||||||||||||||||||||||||||||||
Corporate bonds | 6 | (1) | (5) | 29 | — | — | (25) | 6 | (1) | |||||||||||||||||||||||||||
Lending commitments | 1 | 1 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Other debt | 4 | — | (1) | — | — | — | — | 3 | — | |||||||||||||||||||||||||||
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Total corporate and other debt | 11 | — | (6) | 29 | — | — | (25) | 9 | (1) | |||||||||||||||||||||||||||
Corporate equities | 31 | (28) | (33) | 5 | — | — | (5) | 26 | — | |||||||||||||||||||||||||||
Obligation to return securities received as collateral | 1 | — | (1) | — | — | — | — | — | — | |||||||||||||||||||||||||||
Securities sold under agreements to repurchase | 151 | 1 | — | — | — | — | — | 150 | 1 | |||||||||||||||||||||||||||
Other secured financings | 454 | (14) | — | — | 23 | (22) | (28) | 441 | (14) | |||||||||||||||||||||||||||
Long-term borrowings | 1,798 | 21 | — | — | 164 | (131) | 119 | 1,929 | 26 |
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Beginning Balance at December 31, 2015 | Total Realized and Unrealized Gains (Losses) | Purchases (1) | Sales | Issuances | Settlements | Net Transfers | Ending Balance at June 30, 2016 | Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstand- ing at June 30, 2016 | ||||||||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||||||||||
Assets at Fair Value | ||||||||||||||||||||||||||||||||||||
Trading assets: | ||||||||||||||||||||||||||||||||||||
U.S. agency securities | $ | — | $ | 1 | $ | — | $ | (19) | $ | — | $ | — | $ | 38 | $ | 20 | $ | 1 | ||||||||||||||||||
Other sovereign government obligations | 4 | — | — | (5) | — | — | 3 | 2 | 1 | |||||||||||||||||||||||||||
Corporate and other debt: | ||||||||||||||||||||||||||||||||||||
State and municipal securities | 19 | 1 | 4 | (15) | — | — | 1 | 10 | 1 | |||||||||||||||||||||||||||
Residential mortgage-backed securities | 341 | (19) | 19 | (133) | — | — | 8 | 216 | (14) | |||||||||||||||||||||||||||
Commercial mortgage-backed securities | 72 | (10) | — | (19) | — | — | 8 | 51 | (11) | |||||||||||||||||||||||||||
Asset-backed securities | 25 | (7) | 7 | (18) | — | — | 81 | 88 | (8) | |||||||||||||||||||||||||||
Corporate bonds | 267 | 62 | 113 | (128) | — | — | (38) | 276 | 61 | |||||||||||||||||||||||||||
Collateralized debt and loan obligations | 430 | 5 | 22 | (224) | — | — | (124) | 109 | 17 | |||||||||||||||||||||||||||
Loans and lending commitments | 5,936 | (111) | 970 | (720) | — | (672) | 15 | 5,418 | (121) | |||||||||||||||||||||||||||
Other debt | 448 | (2) | 133 | (63) | — | — | 12 | 528 | (2) | |||||||||||||||||||||||||||
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Total corporate and other debt | 7,538 | (81) | 1,268 | (1,320) | — | (672) | (37) | 6,696 | (77) | |||||||||||||||||||||||||||
Corporate equities | 433 | (45) | 296 | (119) | — | — | 7 | 572 | (64) | |||||||||||||||||||||||||||
Securities received as collateral | 1 | — | — | (1) | — | — | — | — | — | |||||||||||||||||||||||||||
Net derivative and other contracts(2): | ||||||||||||||||||||||||||||||||||||
Interest rate contracts | 260 | 305 | 3 | — | (21) | (60) | (722) | (235) | 205 | |||||||||||||||||||||||||||
Credit contracts | (844) | (343) | 1 | — | — | 153 | (81) | (1,114) | (360) | |||||||||||||||||||||||||||
Foreign exchange contracts | 141 | (109) | — | — | — | (201) | 168 | (1) | (82) | |||||||||||||||||||||||||||
Equity contracts | (2,031) | (321) | 71 | — | (184) | 1,121 | (129) | (1,473) | (434) | |||||||||||||||||||||||||||
Commodity contracts | 1,050 | 297 | 7 | — | (4) | (176) | 124 | 1,298 | 210 | |||||||||||||||||||||||||||
Other | — | — | — | — | — | — | (11) | (11) | — | |||||||||||||||||||||||||||
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Total net derivative and other contracts | (1,424) | (171) | 82 | — | (209) | 837 | (651) | (1,536) | (461) | |||||||||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||||||||||
Principal investments | 486 | (39) | 403 | (40) | — | (41) | — | 769 | (37) | |||||||||||||||||||||||||||
Other | 221 | (17) | 1 | — | — | — | — | 205 | (16) | |||||||||||||||||||||||||||
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Total investments | 707 | (56) | 404 | (40) | — | (41) | — | 974 | (53) | |||||||||||||||||||||||||||
Intangible assets | 5 | — | — | — | — | — | (5) | — | — | |||||||||||||||||||||||||||
Liabilities at Fair Value | ||||||||||||||||||||||||||||||||||||
Deposits | $ | 19 | $ | (2) | $ | — | $ | — | $ | 13 | $ | — | $ | (4) | $ | 30 | $ | (2) | ||||||||||||||||||
Short-term borrowings | 1 | — | — | — | — | (1) | — | — | — | |||||||||||||||||||||||||||
Trading liabilities: | ||||||||||||||||||||||||||||||||||||
Corporate and other debt: | ||||||||||||||||||||||||||||||||||||
Corporate bonds | — | (5) | (7) | 10 | — | — | (2) | 6 | (5) | |||||||||||||||||||||||||||
Other debt | 4 | 2 | (3) | 4 | — | — | — | 3 | 2 | |||||||||||||||||||||||||||
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Total corporate and other debt | 4 | (3) | (10) | 14 | — | — | (2) | 9 | (3) | |||||||||||||||||||||||||||
Corporate equities | 17 | (3) | (22) | 18 | — | — | 10 | 26 | (3) | |||||||||||||||||||||||||||
Obligation to return securities received as collateral | 1 | — | (1) | — | — | — | — | — | — | |||||||||||||||||||||||||||
Securities sold under agreements to repurchase | 151 | 1 | — | — | — | — | — | 150 | 1 | |||||||||||||||||||||||||||
Other secured financings | 461 | (32) | — | — | 69 | (43) | (78) | 441 | (32) | |||||||||||||||||||||||||||
Long-term borrowings | 1,987 | (12) | — | — | 276 | (167) | (179) | 1,929 | (6) |
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) | |||||||||||||||||||||||||||
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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) | |||||||||||||||||||||||||||
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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 | — | |||||||||||||||||||||||||||
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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 | — | |||||||||||||||||||||||||||
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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 |
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 | |||||||||||||||||||||||||||
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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 | |||||||||||||||||||||||||||
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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) | |||||||||||||||||||||||||||
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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 | — | |||||||||||||||||||||||||||
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| |||||||||||||||||||
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 |
|
|
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Significant Unobservable Inputs Used in Recurring Level 3 Fair Value Measurements
The following disclosures provide information on the valuation techniques, significant unobservable inputs, and their ranges and averages for each major category of assets and liabilities measured at fair value on a recurring basis with a significant Level 3 balance. The level of aggregation and breadth of products cause the range of inputs to be wide and not evenly distributed across the inventory. Further, the range of unobservable inputs may differ across firms in the financial services industry because of diversity in the types of products included in each firm’s inventory. The following disclosures also include qualitative information on the sensitivity of the fair value measurements to changes in the significant unobservable inputs.
Recurring Level 3 Fair Value Measurements Valuation Techniques and Sensitivity of Unobservable Inputs
Balance at June 30, 2016 | Valuation Technique(s) / Significant Unobservable Input(s) / Sensitivity of the Fair Value to Changes in the Unobservable Inputs | Range(1) | Averages(2) | ||||||||
(dollars in millions) | |||||||||||
Assets at Fair Value | |||||||||||
Trading assets:
| |||||||||||
Corporate and other debt: | |||||||||||
Residential mortgage-backed securities | $ 216 | Comparable pricing: | |||||||||
Comparable bond price / (A)
| 0 to 79 points
| 20 points
| |||||||||
Commercial mortgage-backed securities |
|
51 |
|
Comparable pricing: | |||||||
Comparable bond price / (A) | 0 to 7 points | 1 point | |||||||||
Asset-backed securities | 88 | Comparable pricing: | |||||||||
Comparable bond price / (A)
| 45 to 55 points
| 46 points
| |||||||||
Corporate bonds |
|
276 |
|
Comparable pricing(3): | |||||||
Comparable bond price / (A) | 3 to 135 points | 91 points | |||||||||
Comparable pricing: | |||||||||||
EBITDA multiple / (A)
| 5 to 10 times
| 7 times
| |||||||||
Collateralized debt and loan obligations | 109 | Comparable pricing(3): | |||||||||
Comparable bond price / (A) | 20 to 95 points | 57 points | |||||||||
Correlation model: | |||||||||||
Credit correlation / (B)
| 29% to 61%
| 42%
| |||||||||
Loans and lending commitments |
|
5,418 |
|
Corporate loan model: | |||||||
Credit spread / (C) | 482 to 898 bps | 596 bps | |||||||||
Margin loan model(3): | |||||||||||
Credit spread / (C)(D) | 31 to 102 bps | 86 bps | |||||||||
Volatility skew / (C)(D) | 20% to 46% | 32% | |||||||||
Discount rate / (C)(D) | 1% to 8% | 3% | |||||||||
Expected recovery: | |||||||||||
Asset coverage / (A) | 47% to 99% | 90% | |||||||||
Option model: | |||||||||||
Volatility skew / (C) | -1% | -1% | |||||||||
Comparable pricing: | |||||||||||
Comparable loan price / (A) | 43 to 100 points | 87 points | |||||||||
Discounted cash flow: | |||||||||||
Implied weighted average cost of capital / (C)(D) | 5% to 6% | 6% | |||||||||
Capitalization rate / (C)(D)
| 4% to 10%
| 4%
|
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Balance at June 30, 2016 | Valuation Technique(s) / Significant Unobservable Input(s) / Sensitivity of the Fair Value to Changes in the Unobservable Inputs | Range(1) | Averages(2) | ||||||||
(dollars in millions) | |||||||||||
Other debt | 528 | Comparable pricing: | |||||||||
Comparable loan price / (A) | 3 to 84 points | 66 points | |||||||||
Comparable pricing: | |||||||||||
Comparable bond price / (A) | 7 points | 7 points | |||||||||
Option model: | |||||||||||
At the money volatility / (C) | 16% to 53% | 53% | |||||||||
Margin loan model(3): | |||||||||||
Discount rate / (C) | 1% to 2% | 2% | |||||||||
Discounted cash flow: | |||||||||||
Discount rate / (C) | 10% to 13% | 12% | |||||||||
Corporate equities |
|
572 |
|
Comparable pricing: | |||||||
Comparable equity price / (A) | 100% | 100% | |||||||||
Net derivative and other contracts(4): | |||||||||||
Interest rate contracts | (235) | Option model(3): | |||||||||
Interest rate - Foreign exchange correlation / (A)(D) | 25% to 55% | 42% / 42% (5) | |||||||||
Interest rate volatility skew / (A)(D) | 34% to 143% | 78% / 77% (5) | |||||||||
Interest rate quanto correlation / (A)(D) | -8% to 35% | 2% / -7% (5) | |||||||||
Interest rate curve correlation / (C)(D) | 19% to 95% | 71% / 76% (5) | |||||||||
Inflation volatility / (A)(D) | 0% to 1% | 1% / 1% (5) | |||||||||
Interest rate - Inflation correlation / (A)(D) | -24% to -44% | -34% / -33% (5) | |||||||||
Interest rate curve / (C)(D) | 0% to 1% | 1% / 1% (5) | |||||||||
Foreign exchange volatility skew / (C)(D) | 0% to 11% | 4% / 6% (5) | |||||||||
Comparable pricing: | |||||||||||
Comparable bond price / (C) | 95 to 100 points | 96 points | |||||||||
Credit contracts |
|
(1,114) |
|
Comparable pricing: | |||||||
Cash synthetic basis / (C)(D) | 5 to 12 points | 10 points | |||||||||
Comparable bond price / (C)(D) | 0 to 85 points | 26 points | |||||||||
Correlation model(3): | |||||||||||
Credit correlation / (B) | 29% to 92% | 49% | |||||||||
Foreign exchange contracts(6) |
|
(1) |
|
Option model: | |||||||
Interest rate - Foreign exchange correlation / (A)(D) | 25% to 55% | 42% / 42% (5) | |||||||||
Interest rate volatility skew / (A)(D) | 34% to 143% | 78% / 77% (5) | |||||||||
Interest rate curve / (A)(D) | 0% | 0% / 0% (5) | |||||||||
Interest rate curve correlation / (C)(D) | 19% to 94% | 73% / 81% (5) | |||||||||
Equity contracts(6) |
|
(1,473) |
|
Option model: | |||||||
At the money volatility / (A)(D) | 6% to 81% | 35% | |||||||||
Volatility skew / (A)(D) | -4% to 0% | -1% | |||||||||
Equity - Equity correlation / (A)(D) | 40% to 98% | 79% | |||||||||
Equity - Foreign exchange correlation / (C)(D) | -70% to -31% | -42% | |||||||||
Equity - Interest rate correlation / (C)(D) | -7% to 50% | 19% / 12% (5) | |||||||||
Commodity contracts | 1,298 | Option model: | |||||||||
Forward power price / (C)(D) | $2 to $95 per megawatt hour | $34 per megawatt hour | |||||||||
Commodity volatility / (C)(D) | 6% to 90% | 18% | |||||||||
Cross commodity correlation / (C)(D) | 5% to 99% | 93% |
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Balance at June 30, 2016 | Valuation Technique(s) / Significant Unobservable Input(s) / Sensitivity of the Fair Value to Changes in the Unobservable Inputs | Range(1) | Averages(2) | ||||||||
(dollars in millions) | |||||||||||
Investments: | |||||||||||
Principal investments | 769 | Discounted cash flow: | |||||||||
Implied weighted average cost of capital / (C)(D) | 13% to 16% | 15% | |||||||||
Exit multiple / (A)(D) | 8 to 23 times | 9 times | |||||||||
Market approach(3): | |||||||||||
EBITDA multiple / (A)(D) | 6 to 25 times | 12 times | |||||||||
Forward capacity price / (A)(D) | $4 to $9 | $7 | |||||||||
Comparable pricing: | |||||||||||
Comparable equity price / (A) | 43% to 100% | 82% | |||||||||
Other | 205 | Discounted cash flow: | |||||||||
Implied weighted average cost of capital / (C)(D) | 9% | 9% | |||||||||
Exit multiple / (A)(D) | 13 times | 13 times | |||||||||
Market approach: | |||||||||||
EBITDA multiple / (A)(D) | 6 to 13 times | 12 times | |||||||||
Comparable pricing(3): | |||||||||||
Comparable equity price / (A) | 100% | 100% | |||||||||
Liabilities at Fair Value | |||||||||||
Securities sold under agreements to repurchase | 150 | Discounted cash flow: | |||||||||
Funding spread / (A) | 117 to 123 bps | 120 bps | |||||||||
Other secured financings | 441 | Option model: | |||||||||
Volatility skew / (C) | -1% | -1% | |||||||||
Discounted cash flow(3): | |||||||||||
Discount rate / (C) | 4% | 4% | |||||||||
Discounted cash flow: | |||||||||||
Funding spread / (A) | 101 to 126 bps | 114 bps | |||||||||
Long-term borrowings | 1,929 | Option model(3): | |||||||||
At the money volatility / (C)(D) | 6% to 48% | 29% | |||||||||
Volatility skew / (C)(D) | -2% to 0% | -1% | |||||||||
Equity - Equity correlation / (C)(D) | 50% to 98% | 75% | |||||||||
Equity - Foreign exchange correlation / (C)(D) | -50% to 11% | -25% | |||||||||
Option model: | |||||||||||
Interest rate - credit spread correlation / (A)(D) | -52% to 3% | -24% / -23% (5) | |||||||||
Interest rate - Foreign exchange correlation / | |||||||||||
(A)(D) | 53% | 53% / 53% (5) | |||||||||
Interest rate - equity correlation / (A)(D) | 7% to 44% | 26% / 26% (5) | |||||||||
Interest rate curve correlation / (C)(D) | 40% to 87% | 73% / 78% (5) | |||||||||
Correlation model: | |||||||||||
Credit correlation / (B) | 33% to 61% | 44% | |||||||||
Comparable pricing: | |||||||||||
Comparable equity price / (A) | 100% | 100% |
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 |
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 | 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 | 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% |
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Balance at December 31, 2015 | Valuation Technique(s) / Significant Unobservable Input(s) / Sensitivity of the Fair Value to Changes in the Unobservable Inputs | Range(1) | Averages(2) | ||||||||
(dollars in millions) | |||||||||||
Liabilities at Fair Value | |||||||||||
Securities sold under agreements to repurchase | $ | 151 | Discounted cash flow: | ||||||||
Funding spread / (A) | 86 to 116 bps | 105 bps | |||||||||
Other secured financings | 461 | Option model: | |||||||||
Volatility skew / (C) | -1% | -1% | |||||||||
Discounted cash flow(3): | |||||||||||
Discount rate / (C) | 4% to 13% | 4% | |||||||||
Discounted cash flow: | |||||||||||
Funding spread / (A) | 95 to 113 bps | 104 bps | |||||||||
Long-term borrowings | 1,987 | Option model(3): | |||||||||
At the money volatility / (C)(D) | 20% to 50% | 29% | |||||||||
Volatility skew / (A)(D) | -1% to 0% | -1% | |||||||||
Equity - Equity correlation / (A)(D) | 40% to 97% | 77% | |||||||||
Equity - Foreign exchange correlation / (C)(D) | -70% to -11% | -39% | |||||||||
Option model: | |||||||||||
Interest rate volatility skew / (A)(D) | 50% | 50% | |||||||||
Equity volatility discount / (A)(D) | 10% | 10% | |||||||||
Correlation model: | |||||||||||
Credit correlation / (B) | 40% to 60% | 52% | |||||||||
Comparable pricing: | |||||||||||
Comparable equity price / (A) | 100% | 100% |
bps—Basis points
EBITDA—Earnings before interest, taxes, depreciation and amortization
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|
|
|
Sensitivity of the fair value to changes in the unobservable inputs:
|
|
|
|
For a description of the Firm’s significant unobservable inputs 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.
|
During the current quarter and current year period, there were no other significant updates made to the Firm’s significant unobservable inputs.
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Fair Value of Investments Measured at Net Asset Value
For a description of the Firm’s investments in private equity funds, real estate funds and hedge funds measured at fair value based on NAV, see Note 3 to the consolidated financial statements in the 2015 Form 10-K.
Investments in Certain Funds Measured at NAV per Share
At June 30, 2016 | At December 31, 2015 | |||||||||||||||
Fair Value | Commitment | Fair Value | Commitment | |||||||||||||
(dollars in millions) | ||||||||||||||||
Private equity funds | $ | 1,698 | $ | 395 | $ | 1,917 | $ | 538 | ||||||||
Real estate funds | 1,228 | 111 | 1,337 | 128 | ||||||||||||
Hedge funds | 320 | 4 | 589 | 4 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 3,246 | $ | 510 | $ | 3,843 | $ | 670 | ||||||||
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|
|
Fair Value of Non-Redeemable Funds by Projected Distribution
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 | ||||
|
|
|
|
Restrictions
Investments in hedge funds may be subject to initial period lock-up restrictions or gates. A hedge fund lock-up provision restricts an investor 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
| ||
| ||
| ||
|
___________
|
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.
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Fair Value Option
The Firm elected the fair value option for certain eligible instruments that are risk managed on a fair value basis to mitigate income statement volatility caused by measurement basis differences between the elected instruments and their associated risk management transactions or to eliminate complexities of applying certain accounting models.
Impact on Earnings of Transactions Under the Fair Value Option Election
In addition to the amounts in the following table, as discussed in Note 2 to the consolidated financial statements in the 2015 Form 10-K, instruments within Trading assets or Trading liabilities are measured at fair value. The amounts in this table are included within Net revenues and do not reflect gains or losses on related hedging instruments, if any.
Trading Revenues | Interest Income (Expense) | Gains (Losses) Included in Net Revenues | ||||||||||
(dollars in millions) | ||||||||||||
Three Months Ended June 30, 2016 | ||||||||||||
Securities purchased under agreements to resell | $ | (1) | $ | 2 | $ | 1 | ||||||
Deposits(1) | (1) | (1) | (2) | |||||||||
Short-term borrowings(1) | (9) | — | (9) | |||||||||
Securities sold under agreements to repurchase(1) | (3) | (3) | (6) | |||||||||
Long-term borrowings(1) | (1,289) | (130) | (1,419) | |||||||||
Six Months Ended June 30, 2016 | ||||||||||||
Securities purchased under agreements to resell | $ | (1) | $ | 4 | $ | 3 | ||||||
Deposits(1) | (3) | (1) | (4) | |||||||||
Short-term borrowings(1) | 36 | — | 36 | |||||||||
Securities sold under agreements to repurchase(1) | (12) | (5) | (17) | |||||||||
Long-term borrowings(1) | (2,254) | (269) | (2,523) | |||||||||
Three Months Ended June 30, 2015 | ||||||||||||
Securities purchased under agreements to resell | $ | (2) | $ | 5 | $ | 3 | ||||||
Short-term borrowings(2) | (2) | — | (2) | |||||||||
Securities sold under agreements to repurchase(2) | 6 | (2) | 4 | |||||||||
Long-term borrowings(2) | 152 | (138) | 14 | |||||||||
Six Months Ended June 30, 2015 | ||||||||||||
Securities purchased under agreements to resell | $ | (3) | $ | 5 | $ | 2 | ||||||
Short-term borrowings(2) | (42) | — | (42) | |||||||||
Securities sold under agreements to repurchase(2) | 4 | (3) | 1 | |||||||||
Long-term borrowings(2) | 1,089 | (270) | 819 |
|
|
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Gains (Losses) due to Changes in Instrument-Specific Credit Risk
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||||||
Trading Revenues | OCI | Trading Revenues | OCI | Trading Revenues | OCI | Trading Revenues | OCI | |||||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||||||
Short-term and long-term borrowings(1) | $ | — | $ | 226 | $ | 182 | $ | — | $ | 41 | $ | 545 | $ | 307 | $ | — | ||||||||||||||||
Securities sold under agreements to repurchase(1) | — | (1) | — | — | — | 3 | — | — | ||||||||||||||||||||||||
Loans and other debt(2) | (14) | — | (6) | — | (114) | — | 71 | — | ||||||||||||||||||||||||
Lending commitments(3) | 2 | — | (1) | — | 3 | — | 8 | — |
|
|
|
Net Difference of Contractual Principal Amount Over Fair Value
At June 30, 2016 | At December 31, 2015 | |||||||
(dollars in millions) | ||||||||
Loans and other debt(1) | $ | 15,046 | $ | 14,095 | ||||
Loans 90 or more days past due and/or on nonaccrual status(1) | 12,867 | 11,651 | ||||||
Short-term and long-term borrowings(2) | 311 | 508 |
____________
|
|
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 |
____________
|
The previous tables exclude non-recourse debt from consolidated VIEs, liabilities related to failed sales of financial assets, pledged commodities and other liabilities that have specified assets attributable to them.
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Certain assets and liabilities were measured at fair value on a non-recurring basis and are not included in the previous tables.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Fair Value by Level | ||||||||||||||||||||||||
Carrying Value at June 30, 2016(1) | Level 1 | Level 2 | Level 3 | Total Gains (Losses) for the Three Months Ended June 30, 2016(2) | Total Gains (Losses) for Six Months Ended June 30, 2016(2) | |||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Loans(3) | $ | 6,700 | $ — | $ | 4,276 | $ | 2,424 | $ | (34) | $ | (131) | |||||||||||||
Other assets—Other investments(4) | 82 | — | — | 82 | (38) | (40) | ||||||||||||||||||
Other assets—Premises, equipment and software | — | — | — | — | (22) | (27) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total assets | $ | 6,782 | $ — | $ | 4,276 | $ | 2,506 | $ | (94) | $ | (198) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Liabilities: | ||||||||||||||||||||||||
Other liabilities and accrued expenses(3) | $ | 402 | $ — | $ | 331 | $ | 71 | $ | 13 | $ | 24 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total liabilities | $ | 402 | $ — | $ | 331 | $ | 71 | $ | 13 | $ | 24 | |||||||||||||
|
|
|
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|
|
|
|
|
|
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 | — | — | — | — | (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) | ||||||||||||||
|
|
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|
|
|
|
|
|
|
|
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.
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Financial Instruments Not Measured at Fair Value
For a further discussion of financial instruments not measured at fair value, see Note 3 to the consolidated financial statements in the 2015 Form 10-K. The carrying values of the remaining assets and liabilities not measured at fair value in the following tables approximate fair value due to their short-term nature. The following tables exclude certain financial instruments such as equity method investments and all non-financial assets and liabilities such as the value of the long-term relationships with the Firm’s deposit customers.
At June 30, 2016 | Fair Value by Level | |||||||||||||||||||
Carrying Value | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Financial Assets: | ||||||||||||||||||||
Cash and due from banks | $ | 27,597 | $ | 27,597 | $ | 27,597 | $ | — | $ | — | ||||||||||
Interest bearing deposits with banks | 28,536 | 28,536 | 28,536 | — | — | |||||||||||||||
Investment securities—HTM securities | 12,418 | 12,567 | 3,758 | 8,809 | — | |||||||||||||||
Securities purchased under agreements to resell | 97,034 | 97,042 | — | 95,140 | 1,902 | |||||||||||||||
Securities borrowed | 131,281 | 131,282 | — | 131,156 | 126 | |||||||||||||||
Customer and other receivables(1) | 48,910 | 48,815 | — | 44,033 | 4,782 | |||||||||||||||
Loans(2) | 93,165 | 94,151 | — | 25,289 | 68,862 | |||||||||||||||
Other assets—Cash deposited with clearing organizations or segregated under federal and other regulations or requirements | 32,771 | 32,771 | 32,771 | — | — | |||||||||||||||
Financial Liabilities: | ||||||||||||||||||||
Deposits | $ | 152,598 | $ | 152,788 | $ | — | $ | 152,788 | $ | — | ||||||||||
Short-term borrowings | 369 | 369 | — | 369 | — | |||||||||||||||
Securities sold under agreements to repurchase | 49,629 | 49,692 | — | 48,033 | 1,659 | |||||||||||||||
Securities loaned | 17,241 | 17,262 | — | 17,262 | — | |||||||||||||||
Other secured financings | 6,980 | 6,991 | — | 5,596 | 1,395 | |||||||||||||||
Customer and other payables(1) | 197,978 | 197,978 | — | 197,978 | — | |||||||||||||||
Long-term borrowings | 125,688 | 127,189 | — | 127,189 | — |
At December 31, 2015 | Fair Value by Level | |||||||||||||||||||
Carrying Value | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Financial Assets: | ||||||||||||||||||||
Cash and due from banks | $ | 19,827 | $ | 19,827 | $ | 19,827 | $ | — | $ | — | ||||||||||
Interest bearing deposits with banks | 34,256 | 34,256 | 34,256 | — | — | |||||||||||||||
Investment securities—HTM securities | 5,224 | 5,188 | 998 | 4,190 | — | |||||||||||||||
Securities purchased under agreements to resell | 86,851 | 86,837 | — | 86,186 | 651 | |||||||||||||||
Securities borrowed | 142,416 | 142,414 | — | 142,266 | 148 | |||||||||||||||
Customer and other receivables(1) | 41,676 | 41,576 | — | 36,752 | 4,824 | |||||||||||||||
Loans(2) | 85,759 | 86,423 | — | 19,241 | 67,182 | |||||||||||||||
Other assets—Cash deposited with clearing organizations or segregated under federal and other regulations or requirements | 31,469 | 31,469 | 31,469 | — | — | |||||||||||||||
Financial Liabilities: | ||||||||||||||||||||
Deposits | $ | 155,909 | $ | 156,163 | $ | — | $ | 156,163 | $ | — | ||||||||||
Short-term borrowings | 525 | 525 | — | 525 | — | |||||||||||||||
Securities sold under agreements to repurchase | 36,009 | 36,060 | — | 34,150 | 1,910 | |||||||||||||||
Securities loaned | 19,358 | 19,382 | — | 19,192 | 190 | |||||||||||||||
Other secured financings | 6,610 | �� | 6,610 | — | 5,333 | 1,277 | ||||||||||||||
Customer and other payables(1) | 183,895 | 183,895 | — | 183,895 | — | |||||||||||||||
Long-term borrowings | 120,723 | 123,219 | — | 123,219 | — |
HTM—Held to maturity
|
|
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
At June 30, 2016 and December 31, 2015, notional amounts of approximately $93.8 billion and $99.5 billion, respectively, of the Firm’s lending commitments were held for investment and held for sale, which are not included in the previous table. The estimated fair value of such lending commitments was a liability of $1,841 million and $2,172
million, respectively, at June 30, 2016 and December 31, 2015. Had these commitments been accounted for at fair value, $1,610 million would have been categorized in Level 2 and $231 million in Level 3 at June 30, 2016, and $1,791 million would have been categorized in Level 2 and $381 million in Level 3 at December 31, 2015.
|
For a discussion of the Firm’s derivative instruments and hedging activities, see Note 4 to the consolidated financial statements in the 2015 Form 10-K.
Fair Value, Notional and Offsetting of Derivative Assets and Liabilities
Derivative Assets at June 30, 2016 | ||||||||||||||||||||||||||||||||
Fair Value | Notional | |||||||||||||||||||||||||||||||
Bilateral OTC | Cleared OTC | Exchange Traded | Total | Bilateral OTC | Cleared OTC | Exchange Traded | Total | |||||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||||||
Derivatives designated as accounting hedges: | ||||||||||||||||||||||||||||||||
Interest rate contracts | $ | 3,325 | $ | 3,798 | $ | — | $ | 7,123 | $ | 34,003 | $ | 58,245 | $ | — | $ | 92,248 | ||||||||||||||||
Foreign exchange contracts | 88 | — | — | 88 | 2,795 | 59 | — | 2,854 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total derivatives designated as accounting hedges | 3,413 | 3,798 | — | 7,211 | 36,798 | 58,304 | — | 95,102 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Derivatives not designated as accounting hedges(1): | ||||||||||||||||||||||||||||||||
Interest rate contracts | 287,757 | 168,366 | 328 | 456,451 | 3,940,102 | 6,615,199 | 1,636,768 | 12,192,069 | ||||||||||||||||||||||||
Credit contracts | 13,734 | 2,727 | — | 16,461 | 434,478 | 133,037 | — | 567,515 | ||||||||||||||||||||||||
Foreign exchange contracts | 75,891 | 386 | 140 | 76,417 | 1,851,368 | 16,653 | 21,279 | 1,889,300 | ||||||||||||||||||||||||
Equity contracts | 22,043 | — | 20,486 | 42,529 | 341,039 | — | 259,453 | 600,492 | ||||||||||||||||||||||||
Commodity contracts | 11,785 | — | 3,724 | 15,509 | 72,700 | — | 83,156 | 155,856 | ||||||||||||||||||||||||
Other | 16 | — | — | 16 | 1,135 | — | — | 1,135 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total derivatives not designated as accounting hedges | 411,226 | 171,479 | 24,678 | 607,383 | 6,640,822 | 6,764,889 | 2,000,656 | 15,406,367 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total gross derivatives(2) | $ | 414,639 | $ | 175,277 | $ | 24,678 | $ | 614,594 | $ | 6,677,620 | $ | 6,823,193 | $ | 2,000,656 | $ | 15,501,469 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Amounts offset: | ||||||||||||||||||||||||||||||||
Counterparty netting | (321,553) | (173,222) | (21,214) | (515,989) | ||||||||||||||||||||||||||||
Cash collateral netting | (60,352) | (95) | — | (60,447) | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total derivative assets at fair value included in Trading assets | $ | 32,734 | $ | 1,960 | $ | 3,464 | $ | 38,158 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Amounts not offset(3): | ||||||||||||||||||||||||||||||||
Financial instruments collateral | (12,011) | — | — | (12,011) | ||||||||||||||||||||||||||||
Other cash collateral | (23) | — | — | (23) | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Net exposure | $ | 20,700 | $ | 1,960 | $ | 3,464 | $ | 26,124 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
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 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Derivative Liabilities at December 31, 2015 | ||||||||||||||||||||||||||||||||
Fair Value | Notional | |||||||||||||||||||||||||||||||
Bilateral OTC | Cleared OTC | Exchange Traded | Total | Bilateral OTC | Cleared OTC | Exchange Traded | Total | |||||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||||||
Derivatives designated as accounting hedges: | ||||||||||||||||||||||||||||||||
Interest rate contracts | $ | 20 | $ | 250 | $ | — | $ | 270 | $ | 3,560 | $ | 9,869 | $ | — | $ | 13,429 | ||||||||||||||||
Foreign exchange contracts | 56 | 6 | — | 62 | 4,604 | 455 | — | 5,059 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Total derivatives designated as accounting hedges | 76 | 256 | — | 332 | 8,164 | 10,324 | — | 18,488 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Derivatives not designated as accounting hedges(4): | ||||||||||||||||||||||||||||||||
Interest rate contracts | 203,004 | 103,852 | 283 | 307,139 | 4,030,039 | 5,682,322 | 1,077,710 | 10,790,071 | ||||||||||||||||||||||||
Credit contracts | 19,942 | 3,723 | — | 23,665 | 562,027 | 131,388 | — | 693,415 | ||||||||||||||||||||||||
Foreign exchange contracts | 65,034 | 232 | 22 | 65,288 | 1,868,015 | 13,322 | 2,655 | 1,883,992 | ||||||||||||||||||||||||
Equity contracts | 25,708 | — | 20,424 | 46,132 | 332,734 | — | 229,266 | 562,000 | ||||||||||||||||||||||||
Commodity contracts | 10,864 | — | 3,887 | 14,751 | 59,169 | — | 62,974 | 122,143 | ||||||||||||||||||||||||
Other | 43 | — | — | 43 | 4,114 | — | — | 4,114 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Total derivatives not designated as accounting hedges | 324,595 | 107,807 | 24,616 | 457,018 | 6,856,098 | 5,827,032 | 1,372,605 | 14,055,735 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Total gross derivatives(2) | $ | 324,671 | $ | 108,063 | $ | 24,616 | $ | 457,350 | $ | 6,864,262 | $ | 5,837,356 | $ | 1,372,605 | $ | 14,074,223 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Amounts offset: | ||||||||||||||||||||||||||||||||
Counterparty netting | (265,707) | (104,294 | ) | (21,592 | ) | (391,593 | ) | |||||||||||||||||||||||||
Cash collateral netting | (33,332) | (2,951 | ) | — | (36,283 | ) | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Total derivative liabilities at fair value included in Trading liabilities | $ | 25,632 | $ | 818 | $ | 3,024 | $ | 29,474 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Amounts not offset(3): | ||||||||||||||||||||||||||||||||
Financial instruments collateral | (5,384) | — | (405 | ) | (5,789 | ) | ||||||||||||||||||||||||||
Other cash collateral | (5) | — | — | (5 | ) | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Net exposure | $ | 20,243 | $ | 818 | $ | 2,619 | $ | 23,680 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
OTC—Over-the-counter
|
|
|
|
For information related to offsetting of certain collateralized transactions, see Note 6.
Gains (Losses) on Fair Value Hedges
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) | ||||||||
|
|
|
|
|
|
|
|
Gains (Losses) on Derivatives Designated as Net Investment Hedges
Gains (Losses) Recognized in OCI (effective portion) | ||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
Product Type | 2016 | 2015 | 2016 | 2015 | ||||||||||||
(dollars in millions) | ||||||||||||||||
Foreign exchange contracts(1) | $ | (112) | $ | (81) | $ | (336) | $ | 181 |
___________
|
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Gains (Losses) on Trading Instruments
The following table summarizes gains and losses included in Trading revenues in the consolidated statements of income from trading activities. These activities include revenues related to derivative and non-derivative financial instruments. The Firm generally utilizes financial instruments across a variety of product types in connection with their market-making and related risk management strategies. Accordingly, the trading revenues presented in the following table are not representative of the manner in which the Firm manages its business activities and are prepared in a manner similar to the presentation of trading revenues for regulatory reporting purposes.
Gains (Losses) Recognized in Trading Revenues | ||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
Product Type | 2016 | 2015 | 2016 | 2015 | ||||||||||||
(dollars in millions) | ||||||||||||||||
Interest rate contracts | $ | 320 | $ | 355 | $ | 626 | $ | 925 | ||||||||
Foreign exchange contracts | 362 | 170 | 599 | 515 | ||||||||||||
Equity security and index contracts(1) | 1,615 | 1,746 | 2,945 | 3,341 | ||||||||||||
Commodity and other contracts(2) | 20 | 140 | (124 | ) | 816 | |||||||||||
Credit contracts | 429 | 380 | 765 | 719 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Subtotal | $ | 2,746 | $ | 2,791 | $ | 4,811 | $ | 6,316 | ||||||||
Debt valuation adjustments(3) | — | 182 | — | 307 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total trading revenue | $ | 2,746 | $ | 2,973 | $ | 4,811 | $ | 6,623 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTC Derivative Products—Trading Assets
Counterparty Credit Rating and Remaining Maturity of OTC Derivative Assets
Fair Value at June 30, 2016(1) | ||||||||||||||||||||||||||||
Contractual Years to Maturity | Cross-Maturity and Cash Collateral Netting(3) | Net Exposure Post-cash Collateral | Net Exposure Post- collateral(4) | |||||||||||||||||||||||||
Credit Rating(2) | Less than 1 | 1 - 3 | 3 - 5 | Over 5 | ||||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||
AAA | $ | 137 | $ | 396 | $ | 1,312 | $ | 4,360 | $ | (4,953) | $ | 1,252 | $ | 1,175 | ||||||||||||||
AA | 3,156 | 1,502 | 1,814 | 12,226 | (12,717) | 5,981 | 3,771 | |||||||||||||||||||||
A | 11,078 | 7,607 | 5,336 | 28,058 | (38,694) | 13,385 | 7,784 | |||||||||||||||||||||
BBB | 5,794 | 4,489 | 2,622 | 15,861 | (19,993) | 8,773 | 6,808 | |||||||||||||||||||||
Non-investment grade | 3,923 | 2,505 | 996 | 5,370 | (7,514) | 5,280 | 3,122 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Total | $ | 24,088 | $ | 16,499 | $ | 12,080 | $ | 65,875 | $ | (83,871) | $ | 34,671 | $ | 22,660 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Fair Value at December 31, 2015(1) | ||||||||||||||||||||||||||||
Contractual Years to Maturity | Cross-Maturity and Cash Collateral Netting(3) | Net Exposure Post-cash Collateral | Net Exposure Post- collateral(4) | |||||||||||||||||||||||||
Credit Rating(2) | Less than 1 | 1-3 | 3-5 | Over 5 | ||||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||
AAA | $ | 203 | $ | 453 | $ | 827 | $ | 3,665 | $ | (4,319) | $ | 829 | $ | 715 | ||||||||||||||
AA | 2,689 | 2,000 | 1,876 | 9,223 | (10,981) | 4,807 | 2,361 | |||||||||||||||||||||
A | 9,748 | 8,191 | 4,774 | 20,918 | (34,916) | 8,715 | 5,448 | |||||||||||||||||||||
BBB | 3,614 | 4,863 | 1,948 | 11,801 | (15,086) | 7,140 | 4,934 | |||||||||||||||||||||
Non-investment grade | 3,982 | 2,333 | 1,157 | 3,567 | (6,716) | 4,323 | 3,166 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 20,236 | $ | 17,840 | $ | 10,582 | $ | 49,174 | $ | (72,018) | $ | 25,814 | $ | 16,624 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk-Related Contingencies
In connection with certain OTC trading agreements, the 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 Firm.
Net Derivative Liabilities and Collateral 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 Firm has posted collateral in the normal course of business.
| ||||
|
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 & Poor’s Ratings Services (“S&P”).The following table shows the future potential collateral amounts and
termination payments that could be called or required by counterparties or exchange and clearing organizations in the event of one-notch or two-notch downgrade scenarios based on the relevant contractual downgrade triggers.
Incremental Collateral or Termination Payments upon Potential Future Ratings Downgrade
| ||||
|
__________________
|
Credit Derivatives and Other Credit Contracts
The 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 Firm’s counterparties are banks, broker-dealers and insurance and other financial institutions.
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Notional and Fair Value of Protection Sold and Protection Purchased through Credit Default Swaps
At June 30, 2016 | ||||||||||||||||
Protection Sold | Protection Purchased | |||||||||||||||
Notional | Fair Value (Asset)/Liability | Notional | Fair Value (Asset)/Liability | |||||||||||||
(dollars in millions) | ||||||||||||||||
Single name credit default swaps | $ | 347,624 | $ | 463 | $ | 338,727 | $ | (453 | ) | |||||||
Index and basket credit default swaps | 176,009 | 726 | 143,734 | (771 | ) | |||||||||||
Tranched index and basket credit default swaps | 43,657 | (793 | ) | 123,399 | 2,188 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total | $ | 567,290 | $ | 396 | $ | 605,860 | $ | 964 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015 | ||||||||||||||||
Protection Sold | Protection Purchased | |||||||||||||||
Notional | Fair Value (Asset)/Liability | Notional | Fair Value (Asset)/Liability | |||||||||||||
(dollars in millions) | ||||||||||||||||
Single name credit default swaps | $ | 420,806 | $ | 1,980 | $ | 405,361 | $ | (2,079 | ) | |||||||
Index and basket credit default swaps | 199,688 | (102 | ) | 173,936 | (82 | ) | ||||||||||
Tranched index and basket credit default swaps | 69,025 | (1,093 | ) | 149,631 | 2,122 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total | $ | 689,519 | $ | 785 | $ | 728,928 | $ | (39 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
Credit Ratings of Reference Obligation and Maturities of Credit Protection Sold
At June 30, 2016 | ||||||||||||||||||||||||
Maximum Potential Payout/Notional | Fair Value (Asset)/ Liability(1) | |||||||||||||||||||||||
Years to Maturity | ||||||||||||||||||||||||
Less than 1 | 1-3 | 3-5 | Over 5 | Total | ||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||
Single name credit default swaps(2): | ||||||||||||||||||||||||
Investment grade | $ | 92,734 | $ | 94,348 | $ | 48,928 | $ | 11,097 | $ | 247,107 | $ | (1,079 | ) | |||||||||||
Non-investment grade | 42,370 | 38,348 | 18,381 | 1,418 | 100,517 | 1,542 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total | $ | 135,104 | $ | 132,696 | $ | 67,309 | $ | 12,515 | $ | 347,624 | $ | 463 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Index and basket credit default swaps(2): | ||||||||||||||||||||||||
Investment grade | $ | 24,110 | $ | 39,948 | $ | 42,887 | $ | 4,060 | $ | 111,005 | $ | (1,222 | ) | |||||||||||
Non-investment grade | 51,914 | 28,315 | 13,761 | 14,671 | 108,661 | 1,155 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total | $ | 76,024 | $ | 68,263 | $ | 56,648 | $ | 18,731 | $ | 219,666 | $ | (67 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total credit default swaps sold | $ | 211,128 | $ | 200,959 | $ | 123,957 | $ | 31,246 | $ | 567,290 | $ | 396 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Other credit contracts | 43 | 25 | — | 276 | 344 | (17 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total credit derivatives and other credit contracts | $ | 211,171 | $ | 200,984 | $ | 123,957 | $ | 31,522 | $ | 567,634 | $ | 379 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased Credit Protection with Identical Underlying Reference Obligations
For single name and non-tranched index and basket credit default swaps, the Firm has purchased protection with a notional amount of approximately $480.1 billion and $577.7 billion at June 30, 2016 and December 31, 2015, respectively, compared with a notional amount of approximately
$521.9 billion and $619.5 billion (included in the previous tables) at June 30, 2016 and December 31, 2015, respectively, of credit protection sold with identical underlying reference obligations.
For further information on credit derivatives and other credit contracts, see Note 4 to the consolidated financial statements in the 2015 Form 10-K.
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
The following tables present information about the Firm’s AFS securities, which are carried at fair value, and HTM securities, which are carried at amortized cost. The net unrealized gains or losses on AFS securities are reported on an after-tax basis as a component of AOCI.
AFS and HTM Securities
At June 30, 2016 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
(dollars in millions) | ||||||||||||||||
AFS debt securities: | ||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||
U.S. Treasury securities | $ | 29,923 | $ | 213 | $ | 8 | $ | 30,128 | ||||||||
U.S. agency securities(1) | 23,221 | 208 | 22 | 23,407 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total U.S. government and agency securities | 53,144 | 421 | 30 | 53,535 | ||||||||||||
Corporate and other debt: | ||||||||||||||||
Commercial mortgage-backed securities: | ||||||||||||||||
Agency | 2,139 | 5 | 31 | 2,113 | ||||||||||||
Non-agency | 2,159 | 36 | 10 | 2,185 | ||||||||||||
Auto loan asset-backed securities | 2,071 | 7 | — | 2,078 | ||||||||||||
Corporate bonds | 4,009 | 66 | 2 | 4,073 | ||||||||||||
Collateralized loan obligations | 502 | — | 7 | 495 | ||||||||||||
FFELP student loan asset-backed securities(2) | 3,345 | — | 105 | 3,240 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total corporate and other debt | 14,225 | 114 | 155 | 14,184 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total AFS debt securities | 67,369 | 535 | 185 | 67,719 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
AFS equity securities | 15 | — | 8 | 7 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total AFS securities | 67,384 | 535 | 193 | 67,726 | ||||||||||||
HTM securities: | ||||||||||||||||
U.S. government securities: | ||||||||||||||||
U.S. Treasury securities | 3,705 | 53 | — | 3,758 | ||||||||||||
U.S. agency securities(1) | 8,713 | 96 | — | 8,809 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total HTM securities | 12,418 | 149 | — | 12,567 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Investment securities | $ | 79,802 | $ | 684 | $ | 193 | $ | 80,293 | ||||||||
|
|
|
|
|
|
|
|
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
At December 31, 2015 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
(dollars in millions) | ||||||||||||||||
AFS debt securities: | ||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||
U.S. Treasury securities | $ | 31,555 | $ | 5 | $ | 143 | $ | 31,417 | ||||||||
U.S. agency securities(1) | 21,103 | 29 | 156 | 20,976 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total U.S. government and agency securities | 52,658 | 34 | 299 | 52,393 | ||||||||||||
Corporate and other debt: | ||||||||||||||||
Commercial mortgage-backed securities: | ||||||||||||||||
Agency | 1,906 | 1 | 60 | 1,847 | ||||||||||||
Non-agency | 2,220 | 3 | 25 | 2,198 | ||||||||||||
Auto loan asset-backed securities | 2,556 | — | 9 | 2,547 | ||||||||||||
Corporate bonds | 3,780 | 5 | 30 | 3,755 | ||||||||||||
Collateralized loan obligations | 502 | — | 7 | 495 | ||||||||||||
FFELP student loan asset-backed securities(2) | 3,632 | — | 115 | 3,517 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total corporate and other debt | 14,596 | 9 | 246 | 14,359 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total AFS debt securities | 67,254 | 43 | 545 | 66,752 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
AFS equity securities | 15 | — | 8 | 7 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total AFS securities | 67,269 | 43 | 553 | 66,759 | ||||||||||||
HTM securities: | ||||||||||||||||
U.S. government securities: | ||||||||||||||||
U.S. Treasury securities | 1,001 | — | 3 | 998 | ||||||||||||
U.S. agency securities(1) | 4,223 | 1 | 34 | 4,190 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total HTM securities | 5,224 | 1 | 37 | 5,188 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Investment securities | $ | 72,493 | $ | 44 | $ | 590 | $ | 71,947 | ||||||||
|
|
|
|
|
|
|
|
|
|
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Investment Securities in an Unrealized Loss Position
At June 30, 2016 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | |||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||
AFS debt securities: | ||||||||||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||||||||||
U.S. Treasury securities | $ | 3,028 | $ | 8 | $ | — | $ | — | $ | 3,028 | $ | 8 | ||||||||||||
U.S. agency securities | 5,731 | 10 | 1,225 | 12 | 6,956 | 22 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total U.S. government and agency securities | 8,759 | 18 | 1,225 | 12 | 9,984 | 30 | ||||||||||||||||||
Corporate and other debt: | ||||||||||||||||||||||||
Commercial mortgage-backed securities: | ||||||||||||||||||||||||
Agency | 31 | — | 1,181 | 31 | 1,212 | 31 | ||||||||||||||||||
Non-agency | 216 | — | 625 | 10 | 841 | 10 | ||||||||||||||||||
Auto loan asset-backed securities | 83 | — | 204 | — | 287 | — | ||||||||||||||||||
Corporate bonds | 172 | 1 | 175 | 1 | 347 | 2 | ||||||||||||||||||
Collateralized loan obligations | — | — | 494 | 7 | 494 | 7 | ||||||||||||||||||
FFELP student loan asset-backed securities | 583 | 12 | 2,637 | 93 | 3,220 | 105 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total corporate and other debt | 1,085 | 13 | 5,316 | 142 | 6,401 | 155 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total AFS debt securities | 9,844 | 31 | 6,541 | 154 | 16,385 | 185 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
AFS equity securities | 7 | 8 | — | — | 7 | 8 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total AFS securities | 9,851 | 39 | 6,541 | 154 | 16,392 | 193 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
HTM securities: | ||||||||||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||||||||||
U.S. agency securities | 72 | — | — | — | 72 | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total HTM securities | 72 | — | — | — | 72 | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Investment securities | $ | 9,923 | $ | 39 | $ | 6,541 | $ | 154 | $ | 16,464 | $ | 193 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
At December 31, 2015 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | |||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||
AFS debt securities: | ||||||||||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||||||||||
U.S. Treasury securities | $ | 25,994 | $ | 126 | $ | 2,177 | $ | 17 | $ | 28,171 | $ | 143 | ||||||||||||
U.S. agency securities | 14,242 | 135 | 639 | 21 | 14,881 | 156 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total U.S. government and agency securities | 40,236 | 261 | 2,816 | 38 | 43,052 | 299 | ||||||||||||||||||
Corporate and other debt: | ||||||||||||||||||||||||
Commercial mortgage-backed securities: | ||||||||||||||||||||||||
Agency | 1,185 | 44 | 422 | 16 | 1,607 | 60 | ||||||||||||||||||
Non-agency | 1,479 | 21 | 305 | 4 | 1,784 | 25 | ||||||||||||||||||
Auto loan asset-backed securities | 1,644 | 7 | 881 | 2 | 2,525 | 9 | ||||||||||||||||||
Corporate bonds | 2,149 | 19 | 525 | 11 | 2,674 | 30 | ||||||||||||||||||
Collateralized loan obligations | 352 | 5 | 143 | 2 | 495 | 7 | ||||||||||||||||||
FFELP student loan asset-backed securities | 2,558 | 79 | 929 | 36 | 3,487 | 115 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total corporate and other debt | 9,367 | 175 | 3,205 | 71 | 12,572 | 246 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total AFS debt securities | 49,603 | 436 | 6,021 | 109 | 55,624 | 545 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
AFS equity securities | 7 | 8 | — | — | 7 | 8 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total AFS securities | 49,610 | 444 | 6,021 | 109 | 55,631 | 553 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
HTM securities: | ||||||||||||||||||||||||
U.S. government and agency securities: | ||||||||||||||||||||||||
U.S. Treasury securities | 898 | 3 | — | — | 898 | 3 | ||||||||||||||||||
U.S. agency securities | 3,677 | 34 | — | — | 3,677 | 34 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total HTM securities | 4,575 | 37 | — | — | 4,575 | 37 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Investment securities | $ | 54,185 | $ | 481 | $ | 6,021 | $ | 109 | $ | 60,206 | $ | 590 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
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 Firm’s ongoing assessment of temporary versus other-than-temporarily impaired at the individual security level.
The Firm believes there are no securities in an unrealized loss position that are other-than-temporarily-impaired at June 30, 2016 and December 31, 2015 for the reasons discussed herein.
For AFS debt securities, the Firm does not intend to sell the securities and is not likely to be required to sell the securities prior to recovery of 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 are primarily due to higher interest rates since those securities were purchased. Additionally, the 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 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 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.
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.
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 | ||||||||||
|
|
|
|
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
At June 30, 2016 | ||||||||||||
Amortized Cost | Fair Value | Annualized Average Yield | ||||||||||
(dollars in millions) | ||||||||||||
FFELP student loan asset-backed securities: | ||||||||||||
After 1 year through 5 years | 59 | 59 | 0.6% | |||||||||
After 5 years through 10 years | 922 | 897 | 0.9% | |||||||||
After 10 years | 2,364 | 2,284 | 0.9% | |||||||||
|
|
|
| |||||||||
Total | 3,345 | 3,240 | ||||||||||
|
|
|
| |||||||||
Total corporate and other debt | 14,225 | 14,184 | 1.5% | |||||||||
|
|
|
| |||||||||
Total AFS debt securities | 67,369 | 67,719 | 1.3% | |||||||||
|
|
|
| |||||||||
AFS equity securities | 15 | 7 | — % | |||||||||
|
|
|
| |||||||||
Total AFS securities | 67,384 | 67,726 | 1.3% | |||||||||
|
|
|
| |||||||||
HTM securities: | ||||||||||||
U.S. government securities: | ||||||||||||
U.S. Treasury securities: | ||||||||||||
Due within 1 year | 200 | 201 | 0.7% | |||||||||
After 1 year through 5 years | 1,408 | 1,422 | 1.1% | |||||||||
After 5 years through 10 years | 1,693 | 1,719 | 1.7% | |||||||||
After 10 years | 404 | 416 | 2.5% | |||||||||
|
|
|
| |||||||||
Total | 3,705 | 3,758 | ||||||||||
|
|
|
| |||||||||
U.S. agency securities: | ||||||||||||
After 10 years | 8,713 | 8,809 | 2.0% | |||||||||
|
|
|
| |||||||||
Total | 8,713 | 8,809 | ||||||||||
|
|
|
| |||||||||
Total HTM securities | 12,418 | 12,567 | 1.8% | |||||||||
|
|
|
| |||||||||
Total Investment securities | $ | 79,802 | $ | 80,293 | 1.4% | |||||||
|
|
|
|
Gross Realized Gains and Gross Realized (Losses) on Sales of AFS Securities
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(dollars in millions) | ||||||||||||||||
Gross realized gains | $ | 71 | $ | 40 | $ | 85 | $ | 69 | ||||||||
Gross realized (losses) | (1) | (10) | (3) | (14) | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 70 | $ | 30 | $ | 82 | $ | 55 | ||||||||
|
|
|
|
|
|
|
|
Gross realized gains and losses are recognized in Other revenues in the consolidated statements of income.
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
The Firm enters into reverse repurchase agreements, repurchase agreements, securities borrowed and securities loaned transactions to, among other things, acquire securities to cover short positions and settle other securities obligations, to accommodate customers’ needs and to finance its inventory positions. For further discussion of the Firm’s collateralized transactions, see Note 6 to the consolidated financial statements in the 2015 Form 10-K.
Offsetting of Certain Collateralized Transactions
At June 30, 2016 | ||||||||||||||||||||
Gross Amounts(1) | Amounts Offset | Net Amounts Presented | Amounts Not Offset(2) | Net Exposure | ||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Securities purchased under agreements to resell | $ | 162,813 | $ | (65,224) | $ | 97,589 | $ | (91,746) | $ | 5,843 | ||||||||||
Securities borrowed | 138,436 | (7,155) | 131,281 | (124,773) | 6,508 | |||||||||||||||
Liabilities | ||||||||||||||||||||
Securities sold under agreements to repurchase | $ | 115,552 | $ | (65,224) | $ | 50,328 | $ | (42,541) | $ | 7,787 | ||||||||||
Securities loaned | 24,396 | (7,155) | 17,241 | (16,724) | 517 | |||||||||||||||
At December 31, 2015 | ||||||||||||||||||||
Gross Amounts(1) | Amounts Offset | Net Amounts Presented | Amounts Not Offset(2) | Net Exposure | ||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Securities purchased under agreements to resell | $ | 135,714 | $ | (48,057) | $ | 87,657 | $ | (84,752) | $ | 2,905 | ||||||||||
Securities borrowed | 147,445 | (5,029) | 142,416 | (134,250) | 8,166 | |||||||||||||||
Liabilities | ||||||||||||||||||||
Securities sold under agreements to repurchase | $ | 84,749 | $ | (48,057) | $ | 36,692 | $ | (31,604) | $ | 5,088 | ||||||||||
Securities loaned | 24,387 | (5,029) | 19,358 | (18,881) | 477 |
|
|
For information related to offsetting of derivatives, see Note 4.
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Secured Financing Transactions—Maturities and Collateral Pledged
Gross Secured Financing Balances by Remaining Contractual Maturity
At June 30, 2016 | ||||||||||||||||||||
Overnight and Open | Less than 30 Days | 30-90 Days | Over 90 Days | Total | ||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Securities sold under agreements to repurchase(1) | $ | 38,732 | $ | 30,586 | $ | 20,309 | $ | 25,925 | $ | 115,552 | ||||||||||
Securities loaned(1) | 13,085 | 50 | 1,336 | 9,925 | 24,396 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Gross amount of secured financing included in the offsetting disclosure | $ | 51,817 | $ | 30,636 | $ | 21,645 | $ | 35,850 | $ | 139,948 | ||||||||||
Obligation to return securities received as collateral | 18,738 | — | — | — | 18,738 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total | $ | 70,555 | $ | 30,636 | $ | 21,645 | $ | 35,850 | $ | 158,686 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
At December 31, 2015 | ||||||||||||||||||||
Overnight and Open | Less than 30 Days | 30-90 Days | Over 90 Days | Total | ||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Securities sold under agreements to repurchase(1) | $ | 20,410 | $ | 25,245 | $ | 13,221 | $ | 25,873 | $ | 84,749 | ||||||||||
Securities loaned(1) | 12,247 | 478 | 2,156 | 9,506 | 24,387 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Gross amount of secured financing included in the offsetting disclosure | $ | 32,657 | $ | 25,723 | $ | 15,377 | $ | 35,379 | $ | 109,136 | ||||||||||
Obligation to return securities received as collateral | 19,316 | — | — | — | 19,316 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total | $ | 51,973 | $ | 25,723 | $ | 15,377 | $ | 35,379 | $ | 128,452 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Gross Secured Financing Balances by Class of Collateral Pledged
At June 30, 2016 | At December 31, 2015 | |||||||
(dollars in millions) | ||||||||
Securities sold under agreements to repurchase(1) | ||||||||
U.S. government and agency securities | $ | 39,920 | $ | 36,609 | ||||
State and municipal securities | 2,104 | 173 | ||||||
Other sovereign government obligations | 42,329 | 24,820 | ||||||
Asset-backed securities | 745 | 441 | ||||||
Corporate and other debt | 8,638 | 4,020 | ||||||
Corporate equities | 21,515 | 18,473 | ||||||
Other | 301 | 213 | ||||||
|
|
|
|
|
| |||
Total securities sold under agreements to repurchase | $ | 115,552 | $ | 84,749 | ||||
|
|
|
|
|
| |||
Securities loaned(1) | ||||||||
U.S. government and agency securities | $ | 182 | $ | — | ||||
Other sovereign government obligations | 7,454 | 7,336 | ||||||
Corporate and other debt | 123 | 71 | ||||||
Corporate equities | 16,602 | 16,972 | ||||||
Other | 35 | 8 | ||||||
|
|
|
|
|
| |||
Total securities loaned | $ | 24,396 | $ | 24,387 | ||||
|
|
|
|
|
| |||
Gross amount of secured financing included in the offsetting disclosure | $ | 139,948 | $ | 109,136 | ||||
|
|
|
|
|
| |||
Obligation to return securities received as collateral | ||||||||
Corporate and other debt | — | 3 | ||||||
Corporate equities | 18,737 | 19,313 | ||||||
Other | 1 | — | ||||||
|
|
|
|
|
| |||
Total obligation to return securities received as collateral | $ | 18,738 | $ | 19,316 | ||||
|
|
|
|
|
| |||
Total | $ | 158,686 | $ | 128,452 | ||||
|
|
|
|
|
|
|
Trading Assets Pledged
The 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 parties) in the consolidated balance sheets. At 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 $41.1 billion and $35.0 billion, respectively.
Collateral Received
The 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 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 Firm additionally receives securities as collateral in connection with certain securities-for-securities transactions in which it is the lender. In instances where the 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 consolidated balance sheets. At June 30, 2016 and December 31, 2015, the total fair value of financial instruments received as collateral where the Firm is permitted to sell or repledge the securities was $528.0 billion and $522.6 billion, respectively, and the fair value of the portion that had been sold or repledged was $407.0 billion and $398.1 billion, respectively.
Other
The 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 consolidated balance sheets. Under these agreements and transactions, the Firm receives collateral,
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 Firm. The Firm monitors required margin levels and established credit terms daily and, pursuant to such guidelines, requires customers to deposit additional collateral, or reduce positions, when necessary. At June 30, 2016 and December 31, 2015,
the amounts related to margin lending were approximately $23.2 billion and $25.3 billion, respectively.
For a further discussion of the Firm’s margin lending activities, see Note 6 to the consolidated financial statements in the 2015 Form 10-K.
The Firm has additional secured liabilities. For further discussion of other secured financings, see Note 10.
Cash and Securities Deposited with Clearing Organizations or Segregated
At June 30, 2016 | At December 31, 2015 | |||||||
(dollars in millions) | ||||||||
Securities(1) | $ | 23,710 | $ | 14,390 | ||||
Other assets—Cash deposited with clearing organizations or segregated under federal and other regulations or requirements | 32,771 | 31,469 | ||||||
|
|
|
| |||||
Total | $ | 56,481 | $ | 45,859 | ||||
|
|
|
|
|
Loans
The Firm’s loans held for investment are recorded at amortized cost, and its loans held for sale are recorded at the lower of cost or fair value in the consolidated balance sheets. For a further description of these loans, refer to Note 7 to the consolidated financial statements in the 2015 Form 10-K. See Note 3 for further information regarding Loans and lending commitments held at fair value.
Loans Held for Investment and Held for Sale
At June 30, 2016 | At December 31, 2015 | |||||||||||||||||||||||
Loans by Product Type | Loans Held for Investment | Loans Held for Sale | Total | Loans Held for Investment | Loans Held for Sale | Total Loans(1)(2) | ||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||
Corporate loans | $ | 24,186 | $ | 14,448 | $ | 38,634 | $ | 23,554 | $ | 11,924 | $ | 35,478 | ||||||||||||
Consumer loans | 23,337 | — | 23,337 | 21,528 | — | 21,528 | ||||||||||||||||||
Residential real estate loans | 22,668 | 84 | 22,752 | 20,863 | 104 | 20,967 | ||||||||||||||||||
Wholesale real estate loans | 7,415 | 1,350 | 8,765 | 6,839 | 1,172 | 8,011 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total loans, gross of allowance for loan losses | 77,606 | 15,882 | 93,488 | 72,784 | 13,200 | 85,984 | ||||||||||||||||||
Allowance for loan losses | (323) | — | (323) | (225) | — | (225) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total loans, net of allowance for loan losses | $ | 77,283 | $ | 15,882 | $ | 93,165 | $ | 72,559 | $ | 13,200 | $ | 85,759 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Credit Quality
For a further discussion about the Firm’s evaluation of credit transactions and monitoring and credit quality indicators, see Note 7 to the consolidated financial statements in the 2015 Form 10-K.
Credit Quality Indicators for Loans Held for Investment, Gross of Allowance for Loan Losses, by Product Type
At June 30, 2016 | ||||||||||||||||||||
Corporate | Consumer | Residential Real Estate | Wholesale Real Estate | Total | ||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Pass | $ | 22,183 | $ | 23,337 | $ | 22,627 | $ | 7,191 | $ | 75,338 | ||||||||||
Special mention | 539 | — | — | 224 | 763 | |||||||||||||||
Substandard | 1,308 | — | 41 | — | 1,349 | |||||||||||||||
Doubtful | 156 | — | — | — | 156 | |||||||||||||||
Loss | — | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total loans | $ | 24,186 | $ | 23,337 | $ | 22,668 | $ | 7,415 | $ | 77,606 | ||||||||||
|
|
|
|
|
|
|
|
|
|
At December 31, 2015 | ||||||||||||||||||||
Corporate | Consumer | Residential Real Estate | Wholesale Real Estate | Total | ||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Pass | $ | 22,040 | $ | 21,528 | $ | 20,828 | $ | 6,839 | $ | 71,235 | ||||||||||
Special mention | 300 | — | — | — | 300 | |||||||||||||||
Substandard | 1,202 | — | 35 | — | 1,237 | |||||||||||||||
Doubtful | 12 | — | — | — | 12 | |||||||||||||||
Loss | — | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total loans | $ | 23,554 | $ | 21,528 | $ | 20,863 | $ | 6,839 | $ | 72,784 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Allowance for Credit Losses and Impaired Loans
For factors considered by the Firm in determining the allowance for loan losses and impairments, see Notes 2 and 7 to the consolidated financial statements in the 2015 Form 10-K.
Loans by Product Type
At June 30, 2016 | At December 31, 2015 | |||||||||||||||||||||||
Corporate | Residential Real Estate | Total | Corporate | Residential Real Estate | Total | |||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||
Impaired loans with allowance | $ | 244 | $ | — | $ | 244 | $ | 39 | $ | — | $ | 39 | ||||||||||||
Impaired loans without allowance(1) | 338 | 30 | 368 | 89 | 17 | 106 | ||||||||||||||||||
Impaired loans unpaid principal balance(2) | 593 | 32 | 625 | 130 | 19 | 149 | ||||||||||||||||||
Past due 90 days loans and on nonaccrual | 1 | 20 | 21 | 1 | 21 | 22 |
|
|
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Loans by Region
At June 30, 2016 | At December 31, 2015 | |||||||||||||||||||||||||||||||
Americas | EMEA | Asia- Pacific | Total | Americas | EMEA | Asia- Pacific | Total | |||||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||||||
Impaired loans | $ | 589 | $ | 23 | $ | — | $ | 612 | $ | 108 | $ | 12 | $ | 25 | $ | 145 | ||||||||||||||||
Past due 90 days loans and on nonaccrual | 21 | — | — | 21 | 22 | — | — | 22 | ||||||||||||||||||||||||
Allowance for loan losses | 277 | 43 | 3 | 323 | 183 | 34 | 8 | 225 |
EMEA—Europe, Middle East and Africa
Allowance for Credit Losses on Lending Activities
Corporate | Consumer | Residential Real Estate | Wholesale Real Estate | Total | ||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Allowance for Loan Losses | ||||||||||||||||||||
Balance at December 31, 2015 | $ | 166 | $ | 5 | $ | 17 | $ | 37 | $ | 225 | ||||||||||
Gross charge-offs | — | — | — | — | — | |||||||||||||||
Gross recoveries | — | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net recoveries/(charge-offs) | — | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Provision for (release of) loan losses(1) | 116 | (1) | 1 | 12 | 128 | |||||||||||||||
Other(2) | (30) | — | — | — | (30) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance at June 30, 2016 | $ | 252 | $ | 4 | $ | 18 | $ | 49 | $ | 323 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Allowance for Loan Losses by Impairment Methodology | ||||||||||||||||||||
Inherent | $ | 147 | $ | 4 | $ | 18 | $ | 49 | $ | 218 | ||||||||||
Specific | 105 | — | — | — | 105 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total allowance for loan losses at June 30, 2016 | $ | 252 | $ | 4 | $ | 18 | $ | 49 | $ | 323 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Loans Evaluated by Impairment Methodology(3) | ||||||||||||||||||||
Inherent | $ | 23,604 | $ | 23,337 | $ | 22,638 | $ | 7,415 | $ | 76,994 | ||||||||||
Specific | 582 | — | 30 | — | 612 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total loans evaluated at June 30, 2016 | $ | 24,186 | $ | 23,337 | $ | 22,668 | $ | 7,415 | $ | 77,606 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Allowance for Lending Commitments | ||||||||||||||||||||
Balance at December 31, 2015 | $ | 180 | $ | 1 | $ | — | $ | 4 | $ | 185 | ||||||||||
Provision for lending commitments(4) | 1 | — | — | 2 | 3 | |||||||||||||||
Other | — | (1) | — | — | (1) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance at June 30, 2016 | $ | 181 | $ | — | $ | — | $ | 6 | $ | 187 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Allowance for Lending Commitments by Impairment Methodology |
| |||||||||||||||||||
Inherent | $ | 173 | $ | — | $ | — | $ | 6 | $ | 179 | ||||||||||
Specific | 8 | — | — | — | 8 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total allowance for lending commitments at June 30, 2016 | $ | 181 | $ | — | $ | — | $ | 6 | $ | 187 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Lending Commitments Evaluated by Impairment Methodology(3) |
| |||||||||||||||||||
Inherent | $ | 63,120 | $ | 5,264 | $ | 327 | $ | 496 | $ | 69,207 | ||||||||||
Specific | 64 | — | — | — | 64 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total lending commitments evaluated at June 30, 2016 | $ | 63,184 | $ | 5,264 | $ | 327 | $ | 496 | $ | 69,271 | ||||||||||
|
|
|
|
|
|
|
|
|
|
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Corporate | Consumer | Residential Real Estate | Wholesale Real Estate | Total | ||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Allowance for Loan Losses | ||||||||||||||||||||
Balance at December 31, 2014 | $ | 118 | $ | 2 | $ | 8 | $ | 21 | $ | 149 | ||||||||||
Gross charge-offs | — | — | (1) | — | (1) | |||||||||||||||
Gross recoveries | 1 | — | — | — | 1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net recoveries/(charge-offs) | 1 | — | (1) | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Provision for loan losses(1) | 26 | — | 2 | 2 | 30 | |||||||||||||||
Other(2) | (10) | — | — | — | (10) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance at June 30, 2015 | $ | 135 | $ | 2 | $ | 9 | $ | 23 | $ | 169 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Allowance for Loan Losses by Impairment Methodology | ||||||||||||||||||||
Inherent | $ | 130 | $ | 2 | $ | 9 | $ | 23 | $ | 164 | ||||||||||
Specific | 5 | — | — | — | 5 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total allowance for loan losses at June 30, 2015 | $ | 135 | $ | 2 | $ | 9 | $ | 23 | $ | 169 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Loans Evaluated by Impairment Methodology(3) | ||||||||||||||||||||
Inherent | $ | 22,479 | $ | 19,464 | $ | 18,214 | $ | 6,388 | $ | 66,545 | ||||||||||
Specific | 21 | — | 27 | — | 48 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total loans evaluated at June 30, 2015 | $ | 22,500 | $ | 19,464 | $ | 18,241 | $ | 6,388 | $ | 66,593 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Allowance for Lending Commitments | ||||||||||||||||||||
Balance at December 31, 2014 | $ | 147 | $ | — | $ | — | $ | 2 | $ | 149 | ||||||||||
Provision for lending commitments(4) | 6 | — | — | 2 | 8 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance at June 30, 2015 | $ | 153 | $ | — | $ | — | $ | 4 | $ | 157 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Allowance for Lending Commitments by Impairment Methodology |
| |||||||||||||||||||
Inherent | $ | 153 | $ | — | $ | — | $ | 4 | $ | 157 | ||||||||||
Specific | — | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total allowance for lending commitments at June 30, 2015 | $ | 153 | $ | — | $ | — | $ | 4 | $ | 157 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Lending Commitments Evaluated by Impairment Methodology(3) |
| |||||||||||||||||||
Inherent | $ | 65,183 | $ | 4,235 | $ | 289 | $ | 623 | $ | 70,330 | ||||||||||
Specific | — | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total lending commitments evaluated at June 30, 2015 | $ | 65,183 | $ | 4,235 | $ | 289 | $ | 623 | $ | 70,330 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
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
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
consolidated balance sheets. These loans are full recourse, generally require periodic payments and have repayment terms ranging from 1 to 12 years. The Firm establishes an allowance for loan amounts it does not consider recoverable, which is recorded in Compensation and benefits expense. At June 30, 2016, the Firm had $4,877 million of employee loans, net of an allowance of approximately $100 million. At December 31, 2015, the Firm had $4,923 million of employee loans, net of an allowance of approximately $108 million.
Overview
The 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 $3,235 million and $3,144 million at June 30, 2016 and December 31, 2015, respectively, included in Other assets—Other investments in the consolidated balance sheets. Income (loss) from equity method investments was $(14) million and $45 million for the current quarter and 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 consolidated statements of income. 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 is the Firm’s 40% voting interest (“40% interest”) in Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (“MUMSS”). Mitsubishi UFJ Financial Group, Inc. (“MUFG”) holds a 60% voting interest. The Firm accounts for its equity
method investment in MUMSS within the Institutional Securities business segment. During the current quarter and prior year quarter, the Firm recorded income from its 40% interest in MUMSS of $23 million and $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 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.
Deposits
At June 30, 2016(1) | At December 31, 2015(1) | |||||||||||||||
(dollars in millions) | ||||||||||||||||
Savings and demand deposits | $ | 151,014 | $ | 153,346 | ||||||||||||
Time deposits(2) | 1,679 | 2,688 | ||||||||||||||
|
|
|
| |||||||||||||
Total(3) | $ | 152,693 | $ | 156,034 | ||||||||||||
|
|
|
|
____
|
|
|
Interest bearing deposits at June 30, 2016 included $151,008 million of savings deposits payable upon demand and $1,043 million of time deposits maturing in 2016, $578 million of time deposits maturing in 2017 and $11 million of time deposits maturing in 2018.
Long-Term Borrowings
Components of Long-term Borrowings
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 current year period and prior year period, the Firm issued notes with a principal amount of approximately $20.6 billion and $22.9 billion, respectively, and approximately $15.9 billion and $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 6.3 years and 6.1 years at June 30, 2016 and December 31, 2015, respectively.
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Other Secured 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 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 Note 12 for further information on Other secured financings related to VIEs and securitization activities.
Components of Other Secured Financings
At June 30, 2016 | At December 31, 2015 | |||||||||||||||
(dollars in millions) | ||||||||||||||||
Secured financings with original maturities greater than one year | $ | 8,159 | $ | 7,629 | ||||||||||||
Secured financings with original maturities one year or less | 1,444 | 1,435 | ||||||||||||||
Failed sales(1) | 298 | 400 | ||||||||||||||
|
|
|
| |||||||||||||
Total | $ | 9,901 | $ | 9,464 | ||||||||||||
|
|
|
|
_________
|
Commitments
The Firm’s commitments are summarized in the following table by years to maturity. Since commitments associated with these instruments may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.
Commitments
Years to Maturity at June 30, 2016 | ||||||||||||||||||||
Less
than 1 | 1-3 | 3-5 | Over 5 | Total | ||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Letters of credit and other financial guarantees obtained to satisfy collateral requirements | $ | 125 | $ | — | $ | 1 | $ | 42 | $ | 168 | ||||||||||
Investment activities | 598 | 93 | 16 | 290 | 997 | |||||||||||||||
Corporate lending commitments(1) | 15,625 | 24,405 | 47,248 | 1,501 | 88,779 | |||||||||||||||
Consumer lending commitments | 5,255 | 5 | — | 4 | 5,264 | |||||||||||||||
Residential real estate lending commitments | 52 | 43 | 87 | 236 | 418 | |||||||||||||||
Wholesale real estate lending commitments | 127 | 266 | 137 | 69 | 599 | |||||||||||||||
Forward-starting reverse repurchase agreements and securities borrowing agreements(2) | 69,990 | — | — | — | 69,990 | |||||||||||||||
Underwriting commitments | 25 | — | — | — | 25 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 91,797 | $ | 24,812 | $ | 47,489 | $ | 2,142 | $ | 166,240 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
For a further description of these commitments, refer to Note 12 to the consolidated financial statements in the 2015 Form 10-K.
The 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 Firm’s employees, including its
senior officers as well as the Firm’s Board of Directors, may participate on the same terms and conditions as other investors in certain of these funds that the Firm forms primarily for client investment, except that the Firm may waive or lower applicable fees and charges for its employees. The Firm has contractual capital commitments, guarantees, lending facilities and counterparty arrangements with respect to these investment funds.
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Guarantees
Obligations Under Guarantee Arrangements at June 30, 2016
Maximum Potential Payout/Notional | Carrying Amount (Asset)/ Liability | Collateral/ Recourse | ||||||||||||||||||||||||||
Years to Maturity | ||||||||||||||||||||||||||||
Less than 1 | 1-3 | 3-5 | Over 5 | Total | ||||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||
Credit derivative contracts(1) | $ | 211,128 | $ | 200,959 | $ | 123,957 | $ | 31,246 | $ | 567,290 | $ | 396 | $ | — | ||||||||||||||
Other credit contracts | 43 | 25 | — | 276 | 344 | (17) | — | |||||||||||||||||||||
Non-credit derivative contracts(1) | 1,087,106 | 638,791 | 290,370 | 540,112 | 2,556,379 | 81,420 | — | |||||||||||||||||||||
Standby letters of credit and other financial guarantees issued(2) | 803 | 1,091 | 1,250 | 5,888 | 9,032 | (123) | 6,831 | |||||||||||||||||||||
Market value guarantees | 63 | 250 | 96 | 15 | 424 | 2 | 6 | |||||||||||||||||||||
Liquidity facilities | 3,001 | — | — | — | 3,001 | (5) | 5,406 | |||||||||||||||||||||
Whole loan sales guarantees | — | — | 2 | 23,396 | 23,398 | 9 | — | |||||||||||||||||||||
Securitization representations and warranties | — | — | — | 62,180 | 62,180 | 103 | — | |||||||||||||||||||||
General partner guarantees | 35 | 39 | 53 | 308 | 435 | 85 | — |
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The Firm has obligations under certain guarantee arrangements, including contracts and indemnification agreements, that contingently require the Firm to make payments to the guaranteed party based on changes in an underlying measure (such as an interest or foreign exchange rate, security or commodity price, an index, or the occurrence or non-occurrence of a specified event) related to an asset, liability or equity security of a guaranteed party. Also included as guarantees are contracts that contingently require the Firm to make payments to the guaranteed party based on another entity’s failure to perform under an agreement, as well as indirect guarantees of the indebtedness of others.
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 certain investment management funds, as well as the other products in the previous table, please see Note 12 to the consolidated financial statements in the 2015Form 10-K.
Other Guarantees and Indemnities
In the normal course of business, the Firm provides guarantees and indemnifications in a variety of transactions. These provisions generally are standard contractual terms. Certain of these guarantees and indemnifications related to 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 Firm guarantees the debt and/or certain trading obligations (including obligations associated with derivatives, foreign exchange contracts and the settlement of physical commodities) of certain subsidiaries. These guarantees generally are entity or product specific and are required by investors or trading counterparties. The activities of the Firm’s subsidiaries covered by these guarantees (including any related debt or trading obligations) are included in the consolidated financial statements.
Trust Preferred Securities
The 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 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 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 Firm’s junior subordinated debentures. Additionally, see Note 20 for further information about subsequent events.
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Finance Subsidiary
The Parent Company fully and unconditionally guarantees the securities issued by Morgan Stanley Finance LLC, a 100%-owned finance subsidiary.
Contingencies
Legal. In the normal course of business, the Firm has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the entities that would otherwise be the primary defendants in such cases are bankrupt or are in financial distress. These actions have included, but are not limited to, residential mortgage and credit crisis related matters. 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 Firm expects that it may become the subject of increased claims for damages and other relief and, while the Firm has identified below any individual proceedings where the Firm believes a material loss to be reasonably possible and reasonably estimable, there can be no assurance that material losses will not be incurred from claims that have not yet been asserted or are not yet determined to be probable or possible and reasonably estimable losses.
The Firm contests liability and/or the amount of damages as appropriate in each pending matter. Where available information indicates that it is probable a liability had been incurred at the date of the consolidated financial statements and the Firm can reasonably estimate the amount of that loss, the Firm accrues the estimated loss by a charge to income. The 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 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 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 Firm can estimate reasonably possible losses, additional losses, ranges of loss or ranges of additional loss in excess of amounts accrued, but does not believe, based on current knowledge and after consultation with counsel, that such losses will have a material adverse effect on the Firm’s 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 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 Firm misrepresented the risks of the STACK 2006-1 CDO to CDIB, and that the Firm knew that the assets backing the CDO were of poor quality when it entered into the 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 Firm’s motion to dismiss the complaint. Based on currently available information, the Firm believes it could incur a loss in this action of up to approximately $240 million plus pre- and post-judgment interest, fees and costs.
On January 25, 2011, the 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 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 Firm. The complaint seeks, among other things, to have the Firm repurchase the loan and pay additional monetary damages. On June 16, 2014, the court granted the 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
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 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 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 Firm’s motion to dismiss. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $149 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.
On 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 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 Firm’s motion to dismiss the complaint. Based on currently available information, the 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 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 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 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 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 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 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 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 Firm’s motion to dismiss the complaint. Based on currently available information, the 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 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 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
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 Firm to plaintiff currently at issue in this action was approximately $644 million. The complaint alleges causes of action against the 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 Firm’s motion to dismiss the complaint. The Firm perfected its appeal from that decision on June 12, 2015. At June 25, 2016, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $258 million, and the certificates had incurred actual losses of approximately $84 million. Based on currently available information, the Firm believes it could incur a loss in this action up to the difference between the $258 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Firm, or upon sale, plus pre- and post-judgment interest, fees and costs. The 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 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 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 Firm believes that it could incur a loss in this action of up to approximately $240 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.
On 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 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 Firm’s motion to dismiss the complaint. Based on currently available information, the 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 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 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
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 Firm’s motion to dismiss the complaint. Based on currently available
information, the Firm believes that it could incur a loss in this action of up to approximately $277 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands from a certificate holder and a monoline insurer that the Firm did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.
Overview
The 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 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 certain investment management funds. The Firm’s continuing involvement in VIEs that it does not consolidate can include ownership of retained interests in Firm-sponsored transactions, interests purchased in the secondary market (both for 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 Firm has purchased protection in synthetic CDOs).
For a further discussion on the 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, on January 1, 2016, certain consolidated entities are now considered VIEs and are included in the balances at June 30, 2016. See Note 2 for further information.
Consolidated VIEs
Assets and Liabilities by Type of Activity
At June 30, 2016 | At December 31, 2015 | |||||||||||||||
VIE Assets | VIE Liabilities | VIE Assets | VIE Liabilities | |||||||||||||
(dollars in millions) | ||||||||||||||||
Credit-linked notes | $ | 901 | $ | — | $ | 900 | $ | — | ||||||||
Other structured financings | 924 | 240 | 787 | 13 | ||||||||||||
Asset-backed securitizations(1) | 319 | 191 | 668 | 423 | ||||||||||||
Other(2) | 931 | 29 | 245 | — | ||||||||||||
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Total | $ | 3,075 | $ | 460 | $ | 2,600 | $ | 436 | ||||||||
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MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Assets and Liabilities by Balance Sheet Caption
At June 30,
2016 | At December 31,
2015 | |||||||
(dollars in millions) | ||||||||
Assets | ||||||||
Cash and due from banks | $ | 62 | $ | 14 | ||||
Trading assets, at fair value | 1,973 | 1,842 | ||||||
Customer and other receivables | 3 | 3 | ||||||
Goodwill | 18 | — | ||||||
Intangible assets | 141 | — | ||||||
Other assets | 878 | 741 | ||||||
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Total assets | $ | 3,075 | $ | 2,600 | ||||
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Liabilities | ||||||||
Other secured financings, at fair value | $ | 430 | $ | 431 | ||||
Other liabilities and accrued expenses | 30 | 5 | ||||||
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Total liabilities | $ | 460 | $ | 436 | ||||
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Consolidated VIE assets and liabilities are presented in the previous tables after intercompany eliminations. The assets owned by many consolidated VIEs cannot be removed unilaterally by the Firm and are not generally available to the Firm. The related liabilities issued by many consolidated VIEs are non-recourse to the Firm. In certain other consolidated VIEs, the 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 Firm has provided, or otherwise agreed to be responsible for, representations and warranties regarding certain assets transferred in securitization transactions sponsored by the Firm (see Note 11).
In general, the 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 June 30, 2016 and December 31, 2015, noncontrolling interests in the consolidated financial statements related to consolidated VIEs were $257 million and $37 million, respectively. The Firm also had additional maximum exposure to losses of approximately $76 million and $72 million at June 30, 2016 and December 31, 2015, respectively, primarily related to certain derivatives, commitments, guarantees and other forms of involvement.
Non-consolidated VIEs
The following tables include all VIEs in which the Firm has determined that its maximum exposure to loss is greater than specific thresholds or meets certain other criteria. Most of the VIEs included in the following tables are sponsored by unrelated parties; the Firm’s involvement generally is the result of its secondary market-making activities, securities held in its Investment securities portfolio (see Note 5), and certain investments in funds.
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Non-Consolidated VIE Assets and Liabilities, Maximum and Carrying Value of Exposure to Loss
At June 30, 2016 | ||||||||||||||||||||
Mortgage- and |
Collateralized | Municipal Tender Option Bonds | Other Structured Financings | Other | ||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
VIE assets that the Firm does not consolidate (unpaid principal balance) | $ | 115,088 | $ | 6,825 | $ | 4,999 | $ | 4,081 | $ | 39,281 | ||||||||||
Maximum exposure to loss: | ||||||||||||||||||||
Debt and equity interests | $ | 12,670 | $ | 955 | $ | 31 | $ | 1,712 | $ | 4,706 | ||||||||||
Derivative and other contracts | — | — | 3,001 | — | 73 | |||||||||||||||
Commitments, guarantees and other | 612 | 350 | — | 363 | 300 | |||||||||||||||
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Total maximum exposure to loss | $ | 13,282 | $ | 1,305 | $ | 3,032 | $ | 2,075 | $ | 5,079 | ||||||||||
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Carrying value of exposure to loss—Assets: | ||||||||||||||||||||
Debt and equity interests | $ | 12,670 | $ | 955 | $ | 3 | $ | 1,324 | $ | 4,706 | ||||||||||
Derivative and other contracts | — | — | 5 | — | 27 | |||||||||||||||
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Total carrying value of exposure to loss—Assets | $ | 12,670 | $ | 955 | $ | 8 | $ | 1,324 | $ | 4,733 | ||||||||||
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Carrying value of exposure to loss—Liabilities: | ||||||||||||||||||||
Derivative and other contracts | $ | — | $ | — | $ | — | $ | — | $ | 31 | ||||||||||
Commitments, guarantees and other | — | — | — | 2 | 10 | |||||||||||||||
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Total carrying value of exposure to loss—Liabilities | $ | — | $ | — | $ | — | $ | 2 | $ | 41 | ||||||||||
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At December 31, 2015 | ||||||||||||||||||||
Mortgage- and | 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 | |||||||||||||||
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Total maximum exposure to loss | $ | 13,855 | $ | 1,490 | $ | 2,835 | $ | 1,490 | $ | 4,143 | ||||||||||
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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 | |||||||||||||||
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Total carrying value of exposure to loss—Assets | $ | 13,361 | $ | 1,259 | $ | 6 | $ | 685 | $ | 3,867 | ||||||||||
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Carrying value of exposure to loss—Liabilities: | ||||||||||||||||||||
Derivative and other contracts | $ | — | $ | — | $ | — | $ | — | $ | 15 | ||||||||||
Commitments, guarantees and other | — | — | — | 3 | — | |||||||||||||||
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Total carrying value of exposure to loss—Liabilities | $ | — | $ | — | $ | — | $ | 3 | $ | 15 | ||||||||||
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MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Non-Consolidated VIE Mortgage- and Asset-Backed Securitization Assets
At June 30, 2016 | At December 31, 2015 | |||||||||||||||
Unpaid | Debt and Equity Interests | Unpaid Principal Balance | Debt and Equity Interests | |||||||||||||
(dollars in millions) | ||||||||||||||||
Residential mortgages | $ | 3,708 | $ | 410 | $ | 13,787 | $ | 1,012 | ||||||||
Commercial mortgages | 55,158 | 2,576 | 57,313 | 2,871 | ||||||||||||
U.S. agency collateralized mortgage obligations | 20,853 | 3,766 | 13,236 | 2,763 | ||||||||||||
Other consumer or commercial loans | 35,369 | 5,918 | 42,536 | 6,715 | ||||||||||||
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Total mortgage- and asset-backed securitization assets | $ | 115,088 | $ | 12,670 | $ | 126,872 | $ | 13,361 | ||||||||
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The Firm’s maximum exposure to loss often differs from the carrying value of the variable interests held by the Firm. The maximum exposure to loss is dependent on the nature of the 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 Firm has made in the VIEs. Liabilities issued by VIEs generally are non-recourse to the 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 Firm.
The Firm’s maximum exposure to loss does not include the offsetting benefit of any financial instruments that the Firm may utilize to hedge these risks associated with its variable interests. In addition, the 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 Firm owned additional VIE assets mainly issued by securi-
tization SPEs for which the maximum exposure to loss is less than specific thresholds. These additional assets totaled $12.7 billion and $12.9 billion at June 30, 2016 and December 31, 2015, respectively. These assets were either retained in connection with transfers of assets by the 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 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 Firm’s primary risk exposure is to the securities issued by the SPE owned by the 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 Firm does not provide additional support in these transactions through contractual facilities, such as liquidity facilities, guarantees or similar derivatives. The Firm’s maximum exposure to loss generally equals the fair value of the assets owned.
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Transfers of Assets with Continuing Involvement
Transactions with SPEs in which the Firm, acting as principal, transferred financial assets with continuing involvement and received sales treatment are shown herein.
At June 30, 2016 | ||||||||||||||||
Residential Mortgage Loans | Commercial Mortgage Loans |
U.S. Agency | Credit- Linked Notes and Other(1) | |||||||||||||
(dollars in millions) | ||||||||||||||||
SPE assets (unpaid principal balance)(2) | $ | 21,239 | $ | 51,025 | $ | 11,116 | $ | 11,668 | ||||||||
Retained interests (fair value): | ||||||||||||||||
Investment grade | $ | — | $ | 43 | $ | 755 | $ | — | ||||||||
Non-investment grade | 54 | 64 | — | 974 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total retained interests (fair value) | $ | 54 | $ | 107 | $ | 755 | $ | 974 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Interests purchased in the secondary market (fair value): | ||||||||||||||||
Investment grade | $ | — | $ | 32 | $ | 142 | $ | — | ||||||||
Non-investment grade | 53 | 47 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total interests purchased in the secondary market (fair value) | $ | 53 | $ | 79 | $ | 142 | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Derivative assets (fair value) | $ | — | $ | 291 | $ | — | $ | 206 | ||||||||
Derivative liabilities (fair value) | — | — | — | 449 |
At December 31, 2015 | ||||||||||||||||
Residential Mortgage Loans | Commercial Mortgage Loans |
U.S. Agency | Credit- Linked Notes and Other(1) | |||||||||||||
(dollars in millions) | ||||||||||||||||
SPE assets (unpaid principal balance)(2) | $ | 22,440 | $ | 72,760 | $ | 17,978 | $ | 12,235 | ||||||||
Retained interests (fair value): | ||||||||||||||||
Investment grade | $ | — | $ | 238 | $ | 649 | $ | — | ||||||||
Non-investment grade | 160 | 63 | — | 1,136 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total retained interests (fair value) | $ | 160 | $ | 301 | $ | 649 | $ | 1,136 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Interests purchased in the secondary market (fair value): | ||||||||||||||||
Investment grade | $ | — | $ | 88 | $ | 99 | $ | — | ||||||||
Non-investment grade | 60 | 63 | — | 10 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total interests purchased in the secondary market (fair value) | $ | 60 | $ | 151 | $ | 99 | $ | 10 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Derivative assets (fair value) | $ | — | $ | 343 | $ | — | $ | 151 | ||||||||
Derivative liabilities (fair value) | — | — | — | 449 |
|
|
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
At June 30, 2016 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(dollars in millions) | ||||||||||||||||
Retained interests (fair value): | ||||||||||||||||
Investment grade | $ | — | $ | 798 | $ | — | $ | 798 | ||||||||
Non-investment grade | — | 15 | 1,077 | 1,092 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total retained interests (fair value) | $ | — | $ | 813 | $ | 1,077 | $ | 1,890 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Interests purchased in the secondary market (fair value): | ||||||||||||||||
Investment grade | $ | — | $ | 174 | $ | — | $ | 174 | ||||||||
Non-investment grade | — | 85 | 15 | 100 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total interests purchased in the secondary market (fair value) | $ | — | $ | 259 | $ | 15 | $ | 274 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Derivative assets (fair value) | $ | — | $ | 482 | $ | 15 | $ | 497 | ||||||||
Derivative liabilities (fair value) | — | 102 | 347 | 449 |
At December 31, 2015 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(dollars in millions) | ||||||||||||||||
Retained interests (fair value): | ||||||||||||||||
Investment grade | $ | — | $ | 886 | $ | 1 | $ | 887 | ||||||||
Non-investment grade | — | 17 | 1,342 | 1,359 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total retained interests (fair value) | $ | — | $ | 903 | $ | 1,343 | $ | 2,246 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Interests purchased in the secondary market (fair value): | ||||||||||||||||
Investment grade | $ | — | $ | 187 | $ | — | $ | 187 | ||||||||
Non-investment grade | — | 112 | 21 | 133 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total interests purchased in the secondary market (fair value) | $ | — | $ | 299 | $ | 21 | $ | 320 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Derivative assets (fair value) | $ | — | $ | 466 | $ | 28 | $ | 494 | ||||||||
Derivative liabilities (fair value) | — | 110 | 339 | 449 |
Transferred assets are carried at fair value prior to securitization, and any changes in fair value are recognized in the consolidated statements of income. The 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 Firm may retain interests in the securitized financial assets as one or more tranches of the securitization. These retained interests are included in the consolidated balance sheets at fair value. Any changes in the fair value of such retained interests are recognized in the consolidated statements of income.
Proceeds from New Securitization Transactions and Retained Interests in Securitization Transactions
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(dollars in millions) | ||||||||||||||||
Proceeds received from new securitization transactions | $ | 4,163 | $ | 6,273 | $ | 6,876 | $ | 11,164 | ||||||||
Proceeds from retained interests in securitization transactions | 502 | 658 | 1,133 | 1,606 |
Net gains on sale of assets in securitization transactions at the time of the sale were not material in the current quarter, current year period, prior year quarter and prior year period. The Firm has provided, or otherwise agreed to be
responsible for representations and warranties regarding certain assets transferred in securitization transactions sponsored by the Firm (see Note 11).
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Proceeds from Sales to CLO Entities Sponsored by Non-Affiliates
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(dollars in millions) | ||||||||||||||||
Proceeds from sale of corporate loans sold to those SPEs | $ | — | $ | 621 | $ | 31 | $ | 966 |
Net gains on sale of corporate loans to CLO transactions at the time of sale were not material in the current quarter, current year period, prior year quarter and prior year period.
The Firm also enters into transactions in which it sells equity securities and contemporaneously enters into bilateral OTC equity derivatives with the purchasers of the securities, through which it retains the exposure to the securities as shown in the following table.
At June 30, 2016 | At December 31, 2015 | |||||||
(dollars in millions) | ||||||||
Carrying value of assets derecognized at the time of sale and gross cash proceeds | $ | 9,524 | $ | 7,878 | ||||
Fair value of assets sold | 9,692 | 7,935 | ||||||
Fair value of derivative assets recognized in the consolidated balance sheets | 218 | 97 | ||||||
Fair value of derivative liabilities recognized in the consolidated balance sheets | 50 | 40 |
Failed Sales
For transfers that fail to meet the accounting criteria for a sale, the Firm continues to recognize the assets in Trading assets at fair value, and the Firm recognizes the associated liabilities in Other secured financings at fair value in the consolidated balance sheets (see Note 10).
The assets transferred to unconsolidated VIEs in transactions accounted for as failed sales cannot be removed unilaterally by the Firm and are not generally available to the Firm. The related liabilities are also non-recourse to the
Firm. In certain other failed sale transactions, the Firm has the right to remove assets or 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
At June 30, 2016 | At December 31, 2015 | |||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||
(dollars in millions) | ||||||||||||||||
Failed sales | $ | 298 | $ | 298 | $ | 400 | $ | 400 |
|
Regulatory Capital Framework
For a discussion of the Firm’s regulatory capital framework, see Note 14 to the consolidated financial statements in the 2015Form 10-K.
Risk-Based Capital Requirement
The Firm is required to maintain minimum risk-based and leverage capital ratios under the regulatory capital requirements. The Firm’s binding risk-based capital ratios for regulatory purposes are the lower of the capital ratios 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 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, currently at 3%; 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 Firm’s
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 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 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 Firm’s calculation of risk-based capital ratios, see Note 14 to the consolidated financial statements in the 2015 Form 10-K.
The Firm’s Regulatory Capital and Capital Ratios
At June 30, 2016 and December 31, 2015, the Firm’s binding ratios are based on the Advanced Approach transitional rules.
Regulatory Capital Measures and Minimum Regulatory Capital Ratios
At June 30, 2016 | At December 31, 2015 | |||||||||||||||||||||||||||||
Amount | Ratio | Minimum Ratio(1) | Amount | Ratio | Minimum Ratio(1) | |||||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||||
Regulatory capital and capital ratios: | ||||||||||||||||||||||||||||||
Common Equity Tier 1 capital | $ | 59,796 | 16.8 | % | 5.9 | % | $ | 59,409 | 15.5 | % | 4.5 | % | ||||||||||||||||||
Tier 1 capital | 66,782 | 18.8 | % | 7.4 | % | 66,722 | 17.4 | % | 6.0 | % | ||||||||||||||||||||
Total capital | 79,830 | 22.4 | % | 9.4 | % | 79,403 | 20.7 | % | 8.0 | % | ||||||||||||||||||||
Tier 1 leverage(2) | — | 8.3 | % | 4.0 | % | — | 8.3 | % | 4.0 | % | ||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||
Total RWAs | $ | 355,982 | N/ | A | N/ | A | $ | 384,162 | N/ | A | N/ | A | ||||||||||||||||||
Adjusted average assets(3) | 804,511 | N/ | A | N/ | A | 803,574 | N/ | A | N/ | A |
N/A—Not Applicable
|
|
|
U.S. Bank Subsidiaries’ Regulatory Capital and Capital 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 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 Firm’s U.S. Bank Subsidiaries’ financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective action, each of the 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 June 30, 2016 and December 31, 2015, the 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
Morgan Stanley Bank, N.A. | ||||||||||||||||||||||||
At June 30, 2016 | At December 31, 2015 | |||||||||||||||||||||||
Amount | Ratio | Required Capital Ratio(1) | Amount | Ratio | Required Capital Ratio(1) | |||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||
Common Equity Tier 1 capital | $ | 14,523 | 16.8% | 6.5% | $ | 13,333 | 15.1% | 6.5% | ||||||||||||||||
Tier 1 capital | 14,523 | 16.8% | 8.0% | 13,333 | 15.1% | 8.0% | ||||||||||||||||||
Total capital | 16,321 | 18.9% | 10.0% | 15,097 | 17.1% | 10.0% | ||||||||||||||||||
Tier 1 leverage | 14,523 | 10.9% | 5.0% | 13,333 | 10.2% | 5.0% |
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% |
|
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 Firm must be well-capitalized in order for the 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 June 30, 2016 and December 31, 2015, the 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
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 $10,353 million and $10,254 million at June 30, 2016 and December 31, 2015, respectively, which exceeded the amount required by $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 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 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 $3,752 million and $3,613 million at
June 30, 2016 and December 31, 2015, respectively, which exceeded the amount required by $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
Certain other U.S. and non-U.S. subsidiaries of the Firm are subject to various securities, commodities and banking regulations, and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. These subsidiaries have consistently operated with capital in excess of their local capital adequacy requirements.
Dividends and Share Repurchases
The Firm repurchased approximately $625 million of our outstanding common stock as part of our share repurchase 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 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
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. Dividends declared on the Firm’s outstanding preferred stock were $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 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
Series | Shares Outstanding At June 30, 2016 | Liquidation Preference per Share | Carrying Value | |||||||||||||
At June 30, 2016 | At December 31, 2015 | |||||||||||||||
(shares in millions) | (dollars in millions) | |||||||||||||||
A | 44,000 | $ | 25,000 | $ | 1,100 | $ | 1,100 | |||||||||
C(1) | 519,882 | 1,000 | 408 | 408 | ||||||||||||
E | 34,500 | 25,000 | 862 | 862 | ||||||||||||
F | 34,000 | 25,000 | 850 | 850 | ||||||||||||
G | 20,000 | 25,000 | 500 | 500 | ||||||||||||
H | 52,000 | 25,000 | 1,300 | 1,300 | ||||||||||||
I | 40,000 | 25,000 | 1,000 | 1,000 | ||||||||||||
J | 60,000 | 25,000 | 1,500 | 1,500 | ||||||||||||
|
|
|
| |||||||||||||
Total | $ | 7,520 | $ | 7,520 | ||||||||||||
|
|
|
|
|
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
Foreign Currency Translation Adjustments | AFS Securities | Pensions, Postretirement and Other | DVA | Total | ||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Balance at March 31, 2016 | $ | (831) | $ | 76 | $ | (373) | $ | (110) | $ | (1,238) | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Change in OCI before reclassifications | 52 | 188 | (5) | 143 | 378 | |||||||||||||||
Amounts reclassified from AOCI(2)(3) | — | (45) | — | — | (45) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net OCI during the period | 52 | 143 | (5) | 143 | 333 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance at June 30, 2016 | $ | (779) | $ | 219 | $ | (378) | $ | 33 | $ | (905) | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance at March 31, 2015 | $ | (883) | $ | 127 | $ | (510) | $ | — | (1,266) | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Change in OCI before reclassifications | 50 | (208) | (4) | — | (162) | |||||||||||||||
Amounts reclassified from AOCI(3) | — | (20) | 1 | — | (19) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net OCI during the period | 50 | (228) | (3) | — | (181) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance at June 30, 2015 | $ | (833) | $ | (101) | $ | (513) | $ | — | (1,447) | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance at December 31, 2015 | $ | (963) | $ | (319) | $ | (374) | $ | — | $ | (1,656) | ||||||||||
Cumulative adjustment for accounting change related to DVA(1) | — | — | — | (312) | (312) | |||||||||||||||
Change in OCI before reclassifications | 184 | 590 | (3) | 371 | 1,142 | |||||||||||||||
Amounts reclassified from AOCI(2)(3) | — | (52) | (1) | (26) | (79) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net OCI during the period | 184 | 538 | (4) | 345 | 1,063 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance at June 30, 2016 | $ | (779) | $ | 219 | $ | (378) | $ | 33 | $ | (905) | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance at December 31, 2014 | $ | (663) | $ | (73) | $ | (512) | $ | — | $ | (1,248) | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Change in OCI before reclassifications | (170) | 7 | (4) | — | (167) | |||||||||||||||
Amounts reclassified from AOCI(3) | — | (35) | 3 | — | (32) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net OCI during the period | (170) | (28) | (1) | — | (199) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance at June 30, 2015 | $ | (833) | $ | (101) | $ | (513) | $ | — | $ | (1,447) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling Interests
Noncontrolling interests were $1,259 million and $1,002 million at June 30, 2016 and December 31, 2015, respectively. The increase in noncontrolling interests was primarily due to the consolidation of certain investment management funds sponsored by the Firm. See Note 2 for further information on the adoption of the accounting updateAmendments to the Consolidation Analysis.
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Calculation of Basic and Diluted Earnings per Common Share (“EPS”)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(in millions, except for per share data) | ||||||||||||||||
Basic EPS: | ||||||||||||||||
Income from continuing operations | $ | 1,650 | $ | 1,833 | $ | 2,810 | $ | 4,301 | ||||||||
Income (loss) from discontinued operations | (4) | (2) | (7) | (7) | ||||||||||||
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Net income | 1,646 | 1,831 | 2,803 | 4,294 | ||||||||||||
Net income applicable to noncontrolling interests | 64 | 24 | 87 | 93 | ||||||||||||
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Net income applicable to Morgan Stanley | 1,582 | 1,807 | 2,716 | 4,201 | ||||||||||||
Less: Preferred stock dividends | (156) | (141) | (234) | (219) | ||||||||||||
Less: Allocation of (earnings) loss to participating RSUs(1) | (1) | (1) | (1) | (3) | ||||||||||||
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Earnings applicable to Morgan Stanley common shareholders | $ | 1,425 | $ | 1,665 | $ | 2,481 | $ | 3,979 | ||||||||
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Weighted average common shares outstanding | 1,866 | 1,919 | 1,875 | 1,922 | ||||||||||||
Earnings per basic common share: | ||||||||||||||||
Income from continuing operations | $ | 0.77 | $ | 0.87 | $ | 1.33 | $ | 2.07 | ||||||||
Income (loss) from discontinued operations | (0.01) | — | (0.01) | — | ||||||||||||
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Earnings per basic common share | $ | 0.76 | $ | 0.87 | $ | 1.32 | $ | 2.07 | ||||||||
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Diluted EPS: | ||||||||||||||||
Earnings applicable to Morgan Stanley common shareholders | $ | 1,425 | $ | 1,665 | $ | 2,481 | $ | 3,979 | ||||||||
Weighted average common shares outstanding | 1,866 | 1,919 | 1,875 | 1,922 | ||||||||||||
Effect of dilutive securities: Stock options and RSUs(1) | 33 | 41 | 32 | 40 | ||||||||||||
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Weighted average common shares outstanding and common stock equivalents | 1,899 | 1,960 | 1,907 | 1,962 | ||||||||||||
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Earnings per diluted common share: | ||||||||||||||||
Income from continuing operations | $ | 0.75 | $ | 0.85 | $ | 1.30 | $ | 2.03 | ||||||||
Income (loss) from discontinued operations | — | — | — | — | ||||||||||||
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Earnings per diluted common share | $ | 0.75 | $ | 0.85 | $ | 1.30 | $ | 2.03 | ||||||||
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MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Interest Income and Interest Expense
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(dollars in millions) | ||||||||||||||||
Interest income(1): | ||||||||||||||||
Trading assets(2) | $ | 526 | $ | 555 | $ | 1,109 | $ | 1,149 | ||||||||
Investment securities | 237 | 238 | 473 | 438 | ||||||||||||
Loans | 680 | 529 | 1,327 | 1,004 | ||||||||||||
Interest bearing deposits with banks | 52 | 22 | 105 | 45 | ||||||||||||
Securities purchased under agreements to resell and Securities borrowed(3) | (120) | (200) | (198) | (305) | ||||||||||||
Customer receivables and Other(4) | 292 | 242 | 598 | 539 | ||||||||||||
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| |||||||||
Total interest income | $ | 1,667 | $ | 1,386 | $ | 3,414 | $ | 2,870 | ||||||||
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| |||||||||
Interest expense(1): | ||||||||||||||||
Deposits | $ | 15 | $ | 17 | $ | 37 | $ | 35 | ||||||||
Short-term borrowings | 7 | 5 | 14 | 9 | ||||||||||||
Long-term borrowings | 844 | 915 | 1,804 | 1,841 | ||||||||||||
Securities sold under agreements to repurchase and Securities loaned(5) | 259 | 235 | 513 | 543 | ||||||||||||
Customer payables and Other(6) | (371) | (484) | (766) | (852) | ||||||||||||
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| |||||||||
Total interest expense | $ | 754 | $ | 688 | $ | 1,602 | $ | 1,576 | ||||||||
|
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| |||||||||
Net interest | $ | 913 | $ | 698 | $ | 1,812 | $ | 1,294 | ||||||||
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The Firm sponsors various retirement plans for the majority of its U.S. and non-U.S. employees. The Firm provides certain other postretirement benefits, primarily health care and life insurance, to eligible U.S. employees.
Components of Net Periodic Benefit Expense (Income) for Pension and Other Postretirement Plans
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(dollars in millions) | ||||||||||||||||
Service cost, benefits earned during the period | $ | 4 | $ | 5 | $ | 8 | $ | 10 | ||||||||
Interest cost on projected benefit obligation | 39 | 38 | 77 | 77 | ||||||||||||
Expected return on plan assets | (30) | (29) | (60) | (59) | ||||||||||||
Net amortization of prior service credit | (5) | (5) | (9) | (10) | ||||||||||||
Net amortization of actuarial loss | 3 | 7 | 6 | 13 | ||||||||||||
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Net periodic benefit expense | $ | 11 | $ | 16 | $ | 22 | $ | 31 | ||||||||
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MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
The 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 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 Firm believes that the resolution of these tax matters will not have a material effect in the consolidated balance sheets, although a resolution could have a material impact in the 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 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, and the Revenue Agent’s Report reflecting agreed closure of the 2006-2008 tax years. The 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 consolidated financial statements.
During 2016, the 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 consolidated financial statements.
The 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 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 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 Firm’s effective tax rate over the next 12 months.
The Firm’s effective tax rate from continuing operations for the 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 Firm’s legal entity organization in the U.K.
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Segment Information
For a discussion about the Firm’s business segments, see Note 21 to the consolidated financial statements in the 2015 Form 10-K.
Selected Financial Information
Three Months Ended June 30, 2016 | ||||||||||||||||||||
Institutional Securities(1) | Wealth Management | Investment Management | Intersegment Eliminations | Total | ||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Total non-interest revenues(2)(3) | $ | 4,496 | $ | 2,982 | $ | 581 | $ | (63) | $ | 7,996 | ||||||||||
Interest income | 966 | 920 | 3 | (222) | 1,667 | |||||||||||||||
Interest expense | 884 | 91 | 1 | (222) | 754 | |||||||||||||||
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Net interest | 82 | 829 | 2 | — | 913 | |||||||||||||||
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Net revenues | $ | 4,578 | $ | 3,811 | $ | 583 | $ | (63) | $ | 8,909 | ||||||||||
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Income from continuing operations before income taxes | $ | 1,506 | $ | 859 | $ | 118 | $ | — | $ | 2,483 | ||||||||||
Provision for income taxes | 453 | 343 | 37 | — | 833 | |||||||||||||||
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| |||||||||||
Income from continuing operations | 1,053 | 516 | 81 | — | 1,650 | |||||||||||||||
Income (loss) from discontinued operations, net of income taxes | (4) | — | — | — | (4) | |||||||||||||||
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| |||||||||||
Net income | 1,049 | 516 | 81 | — | 1,646 | |||||||||||||||
Net income applicable to noncontrolling interests | 61 | — | 3 | — | 64 | |||||||||||||||
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| |||||||||||
Net income applicable to Morgan Stanley | $ | 988 | $ | 516 | $ 78 | $ | — | $ 1,582 | ||||||||||||
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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 | |||||||||||||||
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| |||||||||||
Net interest | (33) | 737 | (6) | — | 698 | |||||||||||||||
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| |||||||||||
Net revenues | $ | 5,172 | $ | 3,875 | $ | 751 | $ | (55) | $ | 9,743 | ||||||||||
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| |||||||||||
Income from continuing operations before income taxes | $ | 1,622 | $ | 885 | $ | 220 | $ | — | $ | 2,727 | ||||||||||
Provision for income taxes | 511 | 324 | 59 | — | 894 | |||||||||||||||
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| |||||||||||
Income from continuing operations | 1,111 | 561 | 161 | — | 1,833 | |||||||||||||||
Income (loss) from discontinued operations, net of income taxes | (2) | — | — | — | (2) | |||||||||||||||
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| |||||||||||
Net income | 1,109 | 561 | 161 | — | 1,831 | |||||||||||||||
Net income applicable to noncontrolling interests | 22 | — | 2 | — | 24 | |||||||||||||||
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| |||||||||||
Net income applicable to Morgan Stanley | $ | 1,087 | $ | 561 | $ | 159 | $ | — | $ | 1,807 | ||||||||||
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|
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 | |||||||||||||||
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| |||||||||||
Net interest | 151 | 1,660 | 1 | — | 1,812 | |||||||||||||||
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| |||||||||||
Net revenues | $ | 8,292 | $ | 7,479 | $ | 1,060 | $ | (130) | $ | 16,701 | ||||||||||
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| |||||||||||
Income from continuing operations before income taxes | $ | 2,414 | $ | 1,645 | $ | 162 | $ | — | $ | 4,221 | ||||||||||
Provision for income taxes | 728 | 636 | 47 | — | 1,411 | |||||||||||||||
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|
|
|
|
|
| |||||||||||
Income from continuing operations | 1,686 | 1,009 | 115 | — | 2,810 | |||||||||||||||
Income (loss) from discontinued operations, net of income taxes | (7) | — | — | — | (7) | |||||||||||||||
|
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|
|
|
|
|
|
| |||||||||||
Net income | 1,679 | 1,009 | 115 | — | 2,803 | |||||||||||||||
Net income applicable to noncontrolling interests | 100 | — | (13) | — | 87 | |||||||||||||||
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|
|
|
|
|
|
| |||||||||||
Net income applicable to Morgan Stanley | $ | 1,579 | $ | 1,009 | $ | 128 | $ | — | $ | 2,716 | ||||||||||
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|
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Six Months Ended June 30, 2015 | ||||||||||||||||||||
Institutional Securities(1) | Wealth Management | Investment Management | Intersegment Eliminations | Total | ||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Total non-interest revenues(2)(3) | $ | 10,751 | $ | 6,283 | $ | 1,431 | $ | (109) | $ | 18,356 | ||||||||||
Interest income | 1,593 | 1,519 | 1 | (243) | 2,870 | |||||||||||||||
Interest expense | 1,714 | 93 | 12 | (243) | 1,576 | |||||||||||||||
|
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|
|
|
|
|
| |||||||||||
Net interest | (121) | 1,426 | (11) | — | 1,294 | |||||||||||||||
|
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|
|
|
|
|
|
| |||||||||||
Net revenues | $ | 10,630 | $ | 7,709 | $ | 1,420 | $ | (109) | $ | 19,650 | ||||||||||
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| |||||||||||
Income from continuing operations before income taxes | $ | 3,435 | $ | 1,740 | $ | 407 | $ | — | $ | 5,582 | ||||||||||
Provision for income taxes(4) | 517 | 644 | 120 | — | 1,281 | |||||||||||||||
|
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|
|
|
|
|
|
| |||||||||||
Income from continuing operations | 2,918 | 1,096 | 287 | — | 4,301 | |||||||||||||||
Income (loss) from discontinued operations, net of income taxes | (7) | — | — | — | (7) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net income | 2,911 | 1,096 | 287 | — | 4,294 | |||||||||||||||
Net income applicable to noncontrolling interests | 74 | — | 19 | — | 93 | |||||||||||||||
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|
| |||||||||||
Net income applicable to Morgan Stanley | $ | 2,837 | $ | 1,096 | $ | 268 | $ | — | $ | 4,201 | ||||||||||
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Total Assets by Business Segment
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 | ||||||
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| |||||
Total(1) | $ | 828,873 | $ | 787,465 | ||||
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|
_________
(1) Corporate assets have been fully allocated to the business segments.
MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
Geographic Information
For a discussion about the Firm’s geographic net revenues, see Note 21 to the consolidated financial statements in the 2015 Form10-K.
Net Revenues by Region
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(dollars in millions) | ||||||||||||||||
Americas | $ | 6,538 | $ | 6,777 | $ | 12,290 | $ | 13,707 | ||||||||
EMEA | 1,312 | 1,436 | 2,441 | 3,198 | ||||||||||||
Asia-Pacific | 1,059 | 1,530 | 1,970 | 2,745 | ||||||||||||
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| |||||||||
Net revenues | $ | 8,909 | $ | 9,743 | $ | 16,701 | $ | 19,650 | ||||||||
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The Firm has evaluated subsequent events for adjustment to or disclosure in the consolidated financial statements through the date of this report and has not identified any recordable or disclosable events, not otherwise reported in these consolidated financial statements or the notes thereto, except for the following:
Common Stock Dividend
On July 20, 2016, the Firm announced that its Board of Directors declared a quarterly dividend per common share of $0.20. The dividend is payable on August 15, 2016 to common shareholders of record on July 29, 2016.
Long-Term Borrowings
Subsequent to June 30, 2016 and through July 29, 2016, long-term borrowings increased by approximately $3.4 billion, net of redemptions. This amount includes the issuance of $3.0 billion of senior debt on 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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMFinancial Information
To the BoardManagement’s Discussion and Analysis of DirectorsFinancial Condition and ShareholdersResults of Morgan Stanley:Operations
We have reviewed the accompanying condensed consolidated balance sheet of Morgan Stanley and subsidiaries (the “Company”) as of 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 six-month periods ended 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
New York, New York
August 3, 2016
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 “us”, “we”,Stanley,” “Firm,” “us,” “we,” or “our” mean Morgan Stanley (the “Parent”“Parent Company”) together with its consolidated subsidiaries.
A description of the clients and principal products and services of each of our business segments is as follows:
Institutional Securities provides investment banking, sales and trading, lending and other services to corporations, governments, financial institutions, and high-to-ultra high to ultra-high net worth clients. Investment banking services compriseconsist of capital raising and financial advisory services, including services relating to the underwriting of debt, equity and other securities, as well as advice on mergers and acquisitions, restructurings, real estate and project finance. Sales and trading services include sales, financing and market-making activities in equity securities and fixed income products, including foreign exchangeprime brokerage services, global macro, credit and commodities as well as prime brokerage services.products. Lending services include originating and/or purchasing corporate loans, commercial and residential mortgage lending, asset-backed lending, financing extended to equities and commodities customers, and loans to municipalities. Other services include corporate lending activitiesinvestment and credit products, investments and research.research activities.
Wealth Management provides a comprehensive array of financial services and solutions to individual investors and small-to-medium sizedsmall tomedium-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 compriseinclude equity, fixed income, liquidity and alternative / alternative/other products. Institutional clients include defined benefit/defined contribution pensions,plans, foundations, endowments, government entities, sovereign wealth funds, insurance companies, third-party fund sponsors and corporations. Individual clients are serviced through intermediaries, including affiliated andnon-affiliated distributors.
The results of operations in the past have been, and in the future may continue to be, materially affected by competition,competition; risk factors,factors; and legislative, legal and regulatory developments,developments; as well as other factors. These factors also may have an adverse impact on our ability to achieve our strategic objectives. Additionally, the discussion of our results of operations herein may contain forward-looking statements. These statements, which reflect management’s beliefs and expectations, are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of the risks and uncertainties that may affect our future results, see “Forward-Looking Statements” 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 our Annual Report on Form10-K for the year ended December 31, 20152016 (the “2015“2016 Form10-K”), “Business Segments—Wealth Management—Other Items,” and “Liquidity and Capital Resources”Resources—Regulatory Requirements” herein.
March 2017 Form 10-Q |
Management’s Discussion and Analysis |
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 | ||||||
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|
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| |||||
Total | $ | 207,455 | $ | 203,264 | ||||
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|
|
| |||||
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 |
Overview of Financial Results
Consolidated Results
Net Revenues
($ in millions)
EMEA—Europe, Middle East and Africa
Net Income Applicable to Morgan Stanley
($ in millions)
Earnings per Common Share1
For the calculation of basic and diluted earnings per common share, see Note 15 to the consolidated financial |
We reported net revenues of $9,745 million in the quarter ended March 31, 2017 (“current quarter,” or “1Q 2017”), compared with $7,792 million in the quarter ended March 31, 2016 (“prior year quarter,” or “1Q 2016”). For the current quarter, net income applicable to Morgan Stanley was $1,930 million, or $1.00 per diluted common share, compared with $1,134 million, or $0.55 per diluted common share, in the prior year quarter.
Results for the current quarter included a recurring-type of discrete tax benefit of $112 million associated with the accounting update related to employee share-based payments.
Non-interest Expenses
($ in millions)
Compensation and benefits expenses of $4,466 million in the current quarter increased 21% from $3,683 million in the prior year quarter, primarily due to increases in discretionary incentive compensation driven mainly by higher revenues and increases in the fair value of investments to which certain deferred compensation plans are referenced.
Non-compensation expenses were $2,471 million in the current quarter compared with $2,371 million in the prior year quarter, representing a 4% increase, primarily as a result of higher litigation costs and volume-driven expenses.
March 2017 Form 10-Q | 2 |
Management’s Discussion and Analysis |
Return on Average Common Equity
The annualized return on average common equity (“ROE”) was 10.7% in the current quarter compared with 6.2% in the prior year quarter (see “SelectedNon-Generally Accepted Accounting Principles(“Non-GAAP”) Financial Information” herein).
Business Segment Results
Net Revenues by Segment1, 2
($ in millions)
Net Income Applicable to Morgan Stanley by Segment2, 3
($ in millions)
1. | The total amount of Net Revenues by Segment also includes intersegment eliminations of $(74) million and $(67) million in |
The percentages on the sides of the charts represent the contribution of each business segment to the total. Amounts do not necessarily total to 100% due to intersegment eliminations, where applicable. |
3. | The total amount of Net Income Applicable to Morgan Stanley by Segment also includes intersegment eliminations of $2 million in the current quarter. |
Institutional Securities net revenues of $5,152 million in the current quarter increased 39% compared with $3,714 million in the prior year quarter, primarily as a result of higher sales and trading and Investment banking revenues.
Wealth Management net revenues of $4,058 million in the current quarter increased 11% from $3,668 million in the prior year quarter, primarily as a result of growth in Net interest income and higher transactional and asset management fee revenues.
Investment Management net revenues of $609 million in the current quarter increased 28% from $477 million in the prior year quarter, primarily driven by investment gains in certain private equity and real estate funds compared with losses in the prior year quarter.
Net Revenues by Region1
($ in millions)
EMEA—Europe, Middle East and Africa
1. | For a discussion of how the geographic breakdown for net revenues is determined, see Note 21 to the consolidated financial statements in Item 8 of the |
3 | March 2017 Form 10-Q |
Management’s Discussion and Analysis |
Selected Financial Information and Other Statistical Data
Three Months Ended March 31, | ||||||||
$ in millions | 2017 | 2016 | ||||||
Income from continuing operations applicable to Morgan Stanley | $ | 1,952 | $ | 1,137 | ||||
Income (loss) from discontinued operations applicable to Morgan Stanley | (22 | ) | (3 | ) | ||||
Net income applicable to Morgan Stanley | 1,930 | 1,134 | ||||||
Preferred stock dividends and other | 90 | 79 | ||||||
Earnings applicable to Morgan Stanley common shareholders | $ | 1,840 | $ | 1,055 | ||||
Effective income tax rate from continuing operations | 29.0 | % | 33.3 | % |
At March 31, 2017 | At December 31, 2016 | |||||||
Capital ratios (Transitional—Advanced)1 |
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Common Equity Tier 1 capital ratio | 17.4 | % | 16.9 | % | ||||
Tier 1 capital ratio | 19.9 | % | 19.0 | % | ||||
Total capital ratio | 22.9 | % | 22.0 | % | ||||
Capital ratios (Transitional—Standardized)1 |
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Tier 1 leverage ratio2 | 8.5 | % | 8.4 | % |
in millions, except per share amounts | At March 31, 2017 | At December 31, 2016 | ||||||
Loans3 | $ | 95,953 | $ | 94,248 | ||||
Total assets | $ | 832,391 | $ | 814,949 | ||||
Global Liquidity Reserve4 | $ | 197,647 | $ | 202,297 | ||||
Deposits | $ | 152,109 | $ | 155,863 | ||||
Long-term borrowings | $ | 172,688 | $ | 164,775 | ||||
Common shareholders’ equity | $ | 69,404 | $ | 68,530 | ||||
Common shares outstanding | 1,852 | 1,852 | ||||||
Book value per common share5 | $ | 37.48 | $ | 36.99 | ||||
Worldwide employees | 55,607 | 55,311 |
1. | For a discussion of our regulatory capital ratios, see “Liquidity and Capital Resources—Regulatory Requirements” herein. |
See Note 13 to the consolidated financial statements for information on the Tier 1 leverage ratio. |
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 |
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 |
Book value per common share equals common shareholders’ equity |
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Overview of Financial Results
Consolidated Results for the Quarter Ended June 30, 2016
We reported net revenues of $8,909 million in the quarter ended June 30, 2016 (“current quarter”), compared with $9,743 million in the quarter ended June 30, 2015 (“prior year quarter”). For the current quarter, net income applicable to Morgan Stanley was $1,582 million, or $0.75 per diluted common share, compared with income of $1,807 million, or $0.85 per diluted common share, in the prior year quarter.
The prior year quarter included positive revenues due to the impact of debt valuation adjustments (“DVA”) of $182 million or $0.06 per diluted common share. 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 prior year quarter (see “Selected SelectedNon-Generally Accepted Accounting Principles(“Non-GAAP”) Financial Information” herein).
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Consolidated Results for the Six Months Ended June 30, 2016Information
We reported net revenues of $16,701 million in the six months ended June 30, 2016 (“current year period”), compared with $19,650 million in the six months ended June 30, 2015 (“prior year period”). For the current year period, net income applicable to Morgan Stanley was $2,716 million, or $1.30 per diluted common share, compared with income of $4,201 million, or $2.03 per diluted common share in the prior year 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
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Business Segment Net Revenues for the Current Quarter and Current Year Period
Institutional Securities net revenues of $4,578 million in the current quarter and $8,292 million in the current year period decreased 11% and 22% from the comparable periods reflecting lower underwriting and sales and trading results, partly offset by continued strength in merger, acquisition and restructuring transactions (“M&A”) advisory.
Wealth Management net revenues of $3,811 million in the current quarter and $7,479 million in the current year period decreased 2% and 3% from the comparable periods reflecting lower transactional revenues, partly offset by strong growth in net interest income.
Investment Management net revenues of $583 million in the current quarter and $1,060 million in the current year period decreased 22% and 25% from the comparable periods reflecting lower investment gains and carried interest in infrastructure and private equity investments. Asset management fees were relatively unchanged from the comparable periods.
Consolidated Non-Interest Expenses for the Current Quarter and Current Year Period
Compensation and benefits expenses of $4,015 million in the current quarter and $7,698 million in the current year period decreased 9% and 14% from $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.
Non-compensation expenses were $2,411 million in the current quarter and $4,782 million in the current year period compared with $2,611 million in the prior year quarter and $5,139 million in the prior year period, representing an 8% and a 7% decrease, primarily due to lower litigation costs and expense reductions across Professional services, Marketing and business development and Occupancy and equipment.
Return on Average Common Equity
The annualized return on average common equity was 8.3% in the current quarter and 7.2% in the current year period. For the prior year quarter, the annualized return on average common equity was 9.9%, or 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 9.6% excluding DVA and a net discrete tax benefit (see “Selected Non-Generally Accepted Accounting Principles (“Non-GAAP”) Financial Information” herein).
Selected Non-Generally Accepted Accounting Principles (“Non-GAAP”) Financial Information
We prepare our Consolidated Financial Statementsconsolidated financial statements using accounting principles generally accepted in the United States of America (“U.S. GAAP”). From time to time, we may disclose certain “non-GAAP“non-GAAP financial measures” in this document, or in the course of
our earnings releases, earnings and other conference calls, financial presentations, definitive proxy statement and otherwise. A “non-GAAP“non-GAAP financial measure” excludes, or includes, amounts from the most directly comparable measure calculated and presented in accordance with U.S. GAAP.Non-GAAP financial measures disclosed by 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, 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 withnon-GAAP financial measures used by other companies. Whenever we refer to anon-GAAP financial measure, we will also generally define it or present the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, along with a reconciliation of the differences between the U.S. GAAP financial measure and thenon-GAAP financial measure.
The principal non-GAAP financial measure.
measures presented in this document are set forth below.
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 | ||||||||||||
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Consolidated average common equity | $ | 69.0 | $ | 67.2 | $ | 68.6 | $ | 66.3 | ||||||||
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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% |
Three Months Ended March 31, | ||||||||
$ in billions | 2017 | 2016 | ||||||
Pre-tax profit margin1
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Institutional Securities | 34 | % | 24 | % | ||||
Wealth Management | 24 | % | 21 | % | ||||
Investment Management | 17 | % | 9 | % | ||||
Consolidated | 29 | % | 22 | % | ||||
Average common equity2
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Institutional Securities | $ | 40.2 | $ | 43.2 | ||||
Wealth Management | 17.2 | 15.3 | ||||||
Investment Management | 2.4 | 2.8 | ||||||
Parent Company | 9.2 | 6.9 | ||||||
Consolidated average common equity | $ | 69.0 | $ | 68.2 | ||||
Return on average common equity2
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Institutional Securities | 11.4 | % | 4.9 | % | ||||
Wealth Management | 14.6 | % | 12.6 | % | ||||
Investment Management | 11.1 | % | 6.9 | % | ||||
Consolidated | 10.7 | % | 6.2 | % |
March 2017 Form 10-Q |
Reconciliation of Financial Measures from a U.S. GAAP to a Non-GAAP Basis
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(dollars in millions, except per share amounts) | ||||||||||||||||
Net revenues | ||||||||||||||||
Net revenues—U.S. GAAP | $ | 8,909 | $ | 9,743 | $ | 16,701 | $ | 19,650 | ||||||||
Impact of DVA(4) | — | (182) | — | (307) | ||||||||||||
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Net revenues—non-GAAP | $ | 8,909 | $ | 9,561 | $ | 16,701 | $ | 19,343 | ||||||||
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Net income applicable to Morgan Stanley | ||||||||||||||||
Net income applicable to Morgan Stanley—U.S. GAAP | $ | 1,582 | $ | 1,807 | $ | 2,716 | $ | 4,201 | ||||||||
Impact of DVA(4) | — | (119) | — | (199) | ||||||||||||
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Net income applicable to Morgan Stanley, excluding DVA—non-GAAP | $ | 1,582 | $ | 1,688 | $ | 2,716 | $ | 4,002 | ||||||||
Impact of net discrete tax benefits(5) | — | — | — | (564) | ||||||||||||
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Net income applicable to Morgan Stanley, excluding DVA and net discrete tax benefits—non-GAAP | $ | 1,582 | $ | 1,688 | $ | 2,716 | $ | 3,438 | ||||||||
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Earnings per diluted common share | ||||||||||||||||
Earnings per diluted common share—U.S. GAAP | $ | 0.75 | $ | 0.85 | $ | 1.30 | $ | 2.03 | ||||||||
Impact of DVA(4) | — | (0.06) | — | (0.10) | ||||||||||||
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Earnings per diluted common share, excluding DVA—non-GAAP | $ | 0.75 | $ | 0.79 | $ | 1.30 | $ | 1.93 | ||||||||
Impact of net discrete tax benefits(5) | — | — | — | (0.29) | ||||||||||||
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Earnings per diluted common share, excluding DVA and net discrete tax benefits—non-GAAP | $ | 0.75 | $ | 0.79 | $ | 1.30 | $ | 1.64 | ||||||||
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Effective income tax rate | ||||||||||||||||
Effective income tax rate from continuing operations—U.S. GAAP | 33.5% | 32.8% | 33.4% | 22.9% | ||||||||||||
Impact of net discrete tax benefits(5) | — | — | — | 10.2% | ||||||||||||
Effective income tax rate from continuing operations—non-GAAP | 33.5% | 32.8% | 33.4% | 33.1% |
Non-GAAP Financial Measures
Average common equity, return on average common equity, average tangible common equity, return on average tangible common equity and tangible book value per common share are all non-GAAP financial measures we consider to be useful measures to us, investors and analysts to assess capital adequacy and to allow better comparability of period-to-period operating performance. For a discussion of tangible common equity, see “Liquidity and Capital Resources—Tangible Equity” herein.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
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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% | ||||||||||||
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Tangible book value per common share(8) | $ | 31.39 | $ | 30.26 |
Reconciliations from U.S. GAAP toNon-GAAP Consolidated Financial Measures
Three Months Ended March 31, | ||||||||
$ in millions, except per share data | 2017 | 2016 | ||||||
Net income applicable to Morgan Stanley
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U.S. GAAP | $ | 1,930 | $ | 1,134 | ||||
Impact of discrete tax provision3 | 14 | — | ||||||
Net income applicable to Morgan Stanley, excluding discrete tax provision—non-GAAP4 | $ | 1,944 | $ | 1,134 | ||||
Earnings per diluted common share
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U.S. GAAP | $ | 1.00 | $ | 0.55 | ||||
Impact of discrete tax provision3 | 0.01 | — | ||||||
Earnings per diluted common share, excluding discrete taxprovision—non-GAAP4 | $ | 1.01 | $ | 0.55 | ||||
Effective income tax rate
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U.S. GAAP | 29.0 | % | 33.3 | % | ||||
Impact of discrete tax provision3 | (0.5 | )% | — | |||||
Effective income tax rate from continuing operations, excluding discrete taxprovision—non-GAAP4 | 28.5 | % | 33.3 | % |
DVA—Debt valuation adjustments represent the change in the fair value resulting from fluctuations in our credit spreads and other credit factors related to liabilities carried at fair value, primarily certain Long-term and Short-term borrowings.
Pre-tax profit margin is anon-GAAP financial measure that we consider to be a useful measure to us, investors and analysts to assess operating performance and represents income from continuing operations before income taxes as a percentage of net |
Average common equity and return on average common equity arenon-GAAP financial measures we consider to be useful measures to us, investors and analysts to assess capital adequacy and to allow better comparability ofperiod-to-period operating performance. Average common equity for each business segment is determined at the beginning of each year using our Required Capital framework, an internal capital adequacy measure (see “Liquidity and Capital Resources—Regulatory Requirements—Attribution of Average Common Equity |
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Net income applicable to Morgan Stanley, excluding discrete tax provision, earnings per diluted common share, excluding discrete tax provision and effective income tax rate from continuing operations, excluding discrete tax provision, are non-GAAP financial measures we consider to be useful measures to us, investors and analysts to allow better comparability of period-to-period operating performance. |
Consolidated Non-GAAP Financial Measures
Three Months Ended March 31, | ||||||||
$ in billions | 2017 | 2016 | ||||||
Average common equity1, 3, 4, 5
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Unadjusted | $ | 69.0 | $ | 68.2 | ||||
Excluding DVA | 69.6 | 68.3 | ||||||
Excluding DVA and discrete tax provision | 69.6 | 68.3 | ||||||
Return on average common equity1, 2, 3, 4
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Unadjusted | 10.7 | % | 6.2 | % | ||||
Excluding DVA | 10.6 | % | 6.2 | % | ||||
Excluding DVA and discrete tax provision | 10.7 | % | 6.2 | % | ||||
Average tangible common equity1, 3, 4, 5
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Unadjusted | $ | 59.7 | $ | 58.7 | ||||
Excluding DVA | 60.3 | 58.8 | ||||||
Excluding DVA and discrete tax provision | 60.3 | 58.8 | ||||||
Return on average tangible common equity1, 2, 3, 4
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Unadjusted | 12.3 | % | 7.2 | % | ||||
Excluding DVA | 12.2 | % | 7.2 | % | ||||
Excluding DVA and discrete tax provision | 12.3 | % | 7.2 | % | ||||
Expense efficiency ratio1, 6 | 71.2 | % | 77.7 | % |
At March 31, 2017 | At December 31, 2016 | |||||||
Tangible book value per common share1, 7 | $ | 32.49 | $ | 31.98 |
DVA—Debt valuation adjustment represents the change in the fair value resulting from fluctuations in our credit spreads and other credit factors related to liabilities carried at fair value under the fair value option, primarily certain Long-term and Short-term borrowings.
1. | The average common equity, return on average common equity, average tangible common equity, return on average tangible common equity, the expense efficiency ratio and the tangible book value per common share measures set forth in this table are all non-GAAP financial measures we consider to be useful measures to us, investors and analysts to assess capital adequacy and to allow better comparability of period-to-period operating performance. For a discussion of tangible common equity, see “Liquidity and Capital Resources—Tangible Equity” herein. |
2. | Return on average common equity equals annualized consolidated net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity. Return on average tangible common equity equals annualized net income applicable to Morgan Stanley less preferred dividends as a percentage of average tangible common equity. |
3. | When excluding DVA, it is only excluded from the denominator. When excluding the discrete tax provision, both the numerator and denominator are adjusted to exclude that item. |
4. | The calculation used in determining the Firm’s “ROE Target” is return on average common equity excluding DVA and discrete tax items as set forth above. Beginning in 2017, with the adoption of the accounting updateImprovements to Employee Share-Based Payment Accounting, the income tax consequences related to share-based payments are required to be recognized in Provision for income taxes in the consolidated income statements, and treated as a discrete item, upon the conversion of employee share-based awards. The impact of the income tax consequences upon conversion of the awards may be either a benefit or a provision. Conversion of employee share-based awards to Firm shares will primarily occur in the first quarter of each year. The above exclusion calculations for returns on average common equity and tangible common equity have not been adjusted for these income tax consequences as we anticipate conversion activity each quarter. See Note 2 to the consolidated financial statements for information on the adoption of the accounting updateImprovements to Employee Share-Based Payment Accounting. |
5. | The impact of DVA on average common equity and average tangible common equity was approximately |
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7. Tangible book value per common share equals tangible common equity of $60,175 million at March 31, 2017 and $59,234 million at December 31, 2016 divided by common shares outstanding of 1,852 million at both March 31, 2017 and December 31, 2016.
Management’s Discussion and Analysis |
Return on Equity Target
We are aiminghave an ROE Target of 9% to improve our return to shareholders, and accordingly have established a target return on average common equity excluding DVA (“Return on Equity”)11% to be achieved by 2017, subject2017. Our ROE Target and the related strategies and goals are forward-looking statements that may be materially affected by many factors, including, among other things: macroeconomic and market conditions; legislative and regulatory developments; industry trading and investment banking volumes; equity market levels; interest rate environment; legal expenses and the ability to the successful execution of our strategic objectives.reduce expenses in general; capital levels; and discrete tax items. For further information on our Return on Equity targetROE 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 20152016 Form10-K.
Substantially all of our operating revenues and operating expenses are directly attributable to the business segments. Certain revenues and expenses have been allocated to each business segment, generally in proportion to its respective net revenues,non-interest expenses or other relevant measures.
As a result of treating certain intersegment transactions as transactions with external parties, we include an Intersegment Eliminations category to reconcile the business segment results to our consolidated results.
Net Revenues, Compensation Expense and Income Taxes
For discussions of our net revenues, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Net Revenues” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Net Revenues by Segment” in Part II, Item 7 of the 20152016 FormForm 10-K.
Compensation Expense
For a discussion of our compensation expense, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Compensation Expense” in Part II, Item 7 of the 20152016 Form10-K. For a discussion of our Income Tax expense, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Income Taxes” in Part II, Item 7 of the 2016 Form10-K.
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
Management’s Discussion and Analysis |
Institutional Securities
Income Statement Information
Three Months Ended March 31, | ||||||||||||
$ in millions | 2017 | 2016 | % Change | |||||||||
Revenues | ||||||||||||
Investment banking | $ | 1,417 | $ | 990 | 43 | % | ||||||
Trading | 3,012 | 1,891 | 59 | % | ||||||||
Investments | 66 | 32 | 106 | % | ||||||||
Commissions and fees | 620 | 655 | (5 | )% | ||||||||
Asset management, distribution and administration fees | 91 | 73 | 25 | % | ||||||||
Other | 173 | 4 | N/ | M | ||||||||
Totalnon-interest revenues | 5,379 | 3,645 | 48 | % | ||||||||
Interest income | 1,124 | 1,053 | 7 | % | ||||||||
Interest expense | 1,351 | 984 | 37 | % | ||||||||
Net interest | (227 | ) | 69 | N/ | M | |||||||
Net revenues | 5,152 | 3,714 | 39 | % | ||||||||
Compensation and benefits | 1,870 | 1,382 | 35 | % | ||||||||
Non-compensation expenses | 1,552 | 1,424 | 9 | % | ||||||||
Totalnon-interest expenses | 3,422 | 2,806 | 22 | % | ||||||||
Income from continuing operations before income taxes | 1,730 | 908 | 91 | % | ||||||||
Provision for income taxes | 459 | 275 | 67 | % | ||||||||
Income from continuing operations | 1,271 | 633 | 101 | % | ||||||||
Income (loss) from discontinued operations, net of income taxes | (22 | ) | (3 | ) | N/ | M | ||||||
Net income | 1,249 | 630 | 98 | % | ||||||||
Net income applicable to noncontrolling interests | 35 | 39 | (10 | )% | ||||||||
Net income applicable to Morgan Stanley | $ | 1,214 | $ | 591 | 105 | % |
N/M—Not Meaningful
Investment Banking
Investment Banking Revenues
Three Months Ended | Six Months Ended | % Change | ||||||||||||||||||||||||||||
June 30, | June 30, | From Prior Year Quarter | From Prior Year Period | |||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||||
Advisory revenues | $ | 497 | $ | 423 | $ | 1,088 | $ | 894 | 17% | 22% | ||||||||||||||||||||
Underwriting revenues: | ||||||||||||||||||||||||||||||
Equity underwriting revenues | 266 | 489 | 426 | 796 | (46)% | (46)% | ||||||||||||||||||||||||
Fixed income underwriting revenues | 345 | 528 | 584 | 923 | (35)% | (37)% | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Total underwriting revenues | 611 | 1,017 | 1,010 | 1,719 | (40)% | (41)% | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Total investment banking revenues | $ | 1,108 | $ | 1,440 | $ | 2,098 | $ | 2,613 | (23)% | (20)% | ||||||||||||||||||||
|
|
|
|
|
|
|
|
Three Months Ended March 31, | ||||||||||||
$ in millions | 2017 | 2016 | % Change | |||||||||
Advisory | $ | 496 | $ | 591 | (16)% | |||||||
Underwriting revenues: | ||||||||||||
Equity | 390 | 160 | 144% | |||||||||
Fixed income | 531 | 239 | 122% | |||||||||
Total underwriting | 921 | 399 | 131% | |||||||||
Total investment banking | $ | 1,417 | $ | 990 | 43% |
Investment Banking Volumes
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||
2016(1) | 2015(1) | 2016(1) | 2015(1) | |||||||||||||||||
(dollars in billions) | ||||||||||||||||||||
Completed mergers and acquisitions(2) | $ | 235 | $ | 137 | $ | 526 | $262 | |||||||||||||
Equity and equity-related offerings(3) | 14 | 20 | 22 | 39 | ||||||||||||||||
Fixed income offerings(4) | 63 | 73 | 114 | 147 |
Three Months Ended March 31, | ||||||||
$ in billions | 20171 | 20161 | ||||||
Completed mergers and acquisitions2 | $ | 150 | $ | 297 | ||||
Equity and equity-related offerings3 | 10 | 7 | ||||||
Fixed income offerings4 | 71 | 51 |
Source: Thomson Reuters, data at |
Amounts include transactions of $100 million or more. |
Amounts include Rule 144A issuances and registered public offerings of common stock and convertible securities and rights offerings. |
Amounts includenon-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 andself-led issuances. |
Investment banking revenues are composed of fees from advisory services and revenues from the underwriting of securities offerings and syndication of loans, net of syndication expenses.
Investment banking revenues of $1,108$1,417 million in the current quarter and $2,098 million in the current year period decreased 23% and 20%increased 43% from the comparable periodsprior year quarter due to lowerhigher underwriting revenues, partially offset by highera decrease in advisory revenues.revenues in the current quarter.
Advisory revenues increased indecreased reflecting the current quarterlower levels of global completed merger, acquisition and current year period due to higher completed restructuring transactions (“M&A&A”) activity (see Investment Banking Volumes table)., partially offset by higher fee realization.
Equity underwriting revenues decreasedincreased as a result of significantly lowerhigher global market volumes in both initial public offerings (“IPO”) and follow onfollow-on offerings while(see Investment Banking Volumes table), as well as higher fee realization. Fixed income underwriting revenues decreasedincreased in the current quarter, primarily due to lowerhigher bond andnon-investment grade loan fees.
Sales and Trading Net Revenues
By Income Statement Line Item
Three Months Ended March 31, | ||||||||||||
$ in millions | 2017 | 2016 | % Change | |||||||||
Trading | $ | 3,012 | $ | 1,891 | 59 | % | ||||||
Commissions and fees | 620 | 655 | (5 | )% | ||||||||
Asset management, distribution and administration fees | 91 | 73 | 25 | % | ||||||||
Net interest | (227 | ) | 69 | N/ | M | |||||||
Total | $ | 3,496 | $ | 2,688 | 30 | % |
N/M—Not Meaningful
March 2017 Form 10-Q |
Management’s Discussion and Analysis |
By Business
Three Months Ended March 31, | ||||||||
$ in millions | 2017 | 2016 | ||||||
Equity | $ | 2,016 | $ | 2,056 | ||||
Fixed income | 1,714 | 873 | ||||||
Other | (234 | ) | (241 | ) | ||||
Total | $ | 3,496 | $ | 2,688 |
Sales and Trading Activities—Equity and Fixed Income
Following is a description of the sales and trading activities within our equities and fixed income businesses as well as how their results impact the income statement line items, followed by a presentation and explanation of results.
Equities—Financing.We provide financing and prime brokerage services to our clients active in the equity markets through a variety of products including margin lending, securities lending and swaps. Results from this business are largely driven by the difference between financing income earned and financing costs incurred, which are reflected in Net interest for securities and equity lending products and in Trading revenues for derivative products.
Equities—Execution services. We make markets for our clients in equity-related securities and derivative products, including providing liquidity and hedging products. A significant portion of the results for this business is generated by commissions and fees from executing and clearing client transactions on major stock and derivative exchanges as well as fromover-the-counter (“OTC”) transactions. Market-making also generates gains and losses on inventory, which are reflected in Trading revenues.
Fixed income—Within fixed income we make markets in order to facilitate client activity as part of the following products and services.
• | Global macro products. We make markets for our clients in interest rate, foreign exchange and emerging market products, including exchange-traded and OTC securities, loans and derivative instruments. The results of this market-making activity are primarily driven by gains and losses from buying and selling positions to stand ready for and satisfy client demand and are recorded in Trading revenues. |
• | Credit products. We make markets in credit-sensitive products, such as corporate bonds and mortgage securities and other securitized products, and related derivative instruments. The values of positions in this business are sensitive to changes in credit spreads and interest rates, which result in gains and losses reflected in Trading revenues. Due to the amount and type of theinterest-bearing securities and loans |
making up this business, a significant portion of the results is also reflected in Net interest revenues. |
• | Commodities products. We make markets in various commodity products related primarily to electricity, natural gas, oil, and precious metals, with the results primarily reflected in Trading revenues. |
Sales and Trading Net Revenues
SalesRevenues—Equity and Trading Net RevenuesFixed Income
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)%
|
| ||||||
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017 | ||||||||||||||||
$ in millions | Trading | Fees1 | Net Interest2 | Total | ||||||||||||
Financing | $ | 931 | $ | 89 | $ | (188 | ) | $ | 832 | |||||||
Execution services | 664 | 568 | (48 | ) | 1,184 | |||||||||||
Total Equity | $ | 1,595 | $ | 657 | $ | (236 | ) | $ | 2,016 | |||||||
Total Fixed Income | $ | 1,598 | $ | 54 | $ | 62 | $ | 1,714 |
Three Months Ended | ||||||||||||||||
March 31, 2016 | ||||||||||||||||
$ in millions | Trading | Fees1 | Net Interest2 | Total | ||||||||||||
Financing | $ | 886 | $ | 86 | $ | 40 | $ | 1,012 | ||||||||
Execution services | 509 | 600 | (65 | ) | 1,044 | |||||||||||
Total Equity | $ | 1,395 | $ | 686 | $ | (25 | ) | $ | 2,056 | |||||||
Total Fixed Income | $ | 555 | $ | 40 | $ | 278 | $ | 873 |
N/M—Not Meaningful
1. | Includes Commissions and fees and Asset management, distribution and administration fees. |
2. | Funding costs are allocated to the businesses based on funding usage and are included in Net interest. |
We manage each of the sales and trading businesses based on its aggregate net revenues, which are comprised of the consolidated income statement line items quantified in the previous table. Trading revenues are affected by a variety of market dynamics, including volumes,bid-offer spreads, and inventory prices, as well as impacts from hedging activity, which are interrelated. We provide qualitative commentary in the discussion of results that follow on the key drivers of period over period variances, as the quantitative impact of the various market dynamics typically cannot be disaggregated.
Sales andFor additional information on total Trading Netrevenues, see the table “Trading Revenues by BusinessProduct Type” in Note 4 to the consolidated financial statements.
Three Months Ended June 30, | Six Months Ended June 30, | % Change | ||||||||||||||||||||||
From Prior Year Quarter | From Prior Year Period | |||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||
Equity | $ | 2,145 | $ | 2,342 | $ | 4,201 | $ | 4,635 | (8)% | (9)% | ||||||||||||||
Fixed income and commodities | 1,297 | 1,377 | 2,170 | 3,380 | (6)% | (36)% | ||||||||||||||||||
Other | (186) | (215) | (427) | (428) | 13% | 0% | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total sales and trading net revenues
| $
| 3,256
|
| $
| 3,504
|
| $
| 5,944
|
| $
| 7,587
|
|
| (7)%
|
|
| (22)%
|
| ||||||
|
|
|
|
|
|
|
|
Sales and Trading Net Revenues, Excluding DVA in 2015Equity
Sales and trading net revenues, including equity and fixed income and commoditiesEquity sales and trading net revenues that excludeof $2,016 million in the impact of DVAcurrent quarter were lower than the prior year quarter, reflecting lower results in 2015, are non-GAAP financial measures that we consider useful for us, investors and analysts to allow further comparability of period-to-period operating performance.our financing businesses driven by higher funding costs, partially offset by strong results in our execution services 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) | ||||||||||||||||||||||||
Total sales and trading net revenues—U.S. GAAP | $ | 3,256 | $ | 3,504 | $ | 5,944 | $ | 7,587 | (7)% | (22)% | ||||||||||||||
Impact of DVA(1) | — | (182) | — | (307) | (100)% | (100)% | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total sales and trading net revenues—non-GAAP | $ | 3,256 | $ | 3,322 | $ | 5,944 | $ | 7,280 | (2)% | (18)% | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Equity sales and trading net revenues—U.S. GAAP | $ | 2,145 | $ | 2,342 | $ | 4,201 | $ | 4,635 | (8)% | (9)% | ||||||||||||||
Impact of DVA(1) | — | (72) | — | (97) | (100)% | (100)% | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Equity sales and trading net revenues—non-GAAP | $ | 2,145 | $ | 2,270 | $ | 4,201 | $ | 4,538 | (6)% | (7)% | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Fixed income and commodities sales and trading net revenues—U.S. GAAP | $ | 1,297 | $ | 1,377 | $ | 2,170 | $ | 3,380 | (6)% | (36)% | ||||||||||||||
Impact of DVA(1) | — | (110) | — | (210) | (100)% | (100)% | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Fixed income and commodities sales and trading net revenues—non-GAAP | $ | 1,297 | $ | 1,267 | $ | 2,170 | $ | 3,170 | 2% | (32)% | ||||||||||||||
|
|
|
|
|
|
|
|
Financing revenues decreased 18% from the prior year quarter as Net interest revenues declined from higher net
|
March 2017 Form 10-Q |
Sales and Trading Net Revenues during the Current Quarter
Equity
Management’s Discussion and Analysis |
interest costs, reflecting increased liquidity requirements, and an increased proportion of lower spread transactions. |
Equity sales and trading net revenues were $2,145 million, a decrease
Execution services increased 13% from the strong comparable periodprior year quarter, primarily reflecting significantly reduced volumes and levels of client engagementimproved results in Asia, partlyTrading revenues due to a lower volatility environment compared with the prior year quarter when increased volatility resulted in inventory losses. This was partially offset by improved performancelower fees in Europe and the U.S.cash products driven by reduced market volumes.
Fixed Income and Commodities
Fixed income and commodities net revenues of $1,297$1,714 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. Results primarily reflected an improved credit market environment and improved revenues from structured transactions in natural gas and power, substantially offset by lower results from counterparty risk management activities in the current quarter were 96% higher than the prior year quarter, driven by an increase in Trading revenues reflecting strong performance across products and regions on improved market conditions.
Credit products increased due to a more favorable credit environment in the positive impact of a rating upgradecurrent quarter compared with the widening spread environment in the prior year quarter and the absencethat resulted in inventory losses. This was partially offset by a lower level of revenues from the global oil merchanting business, which was sold on November 1, 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 — Business Segments — Institutional Securities — Investments, Other Revenues, Non-interest Expenses, Income Tax Items, Dispositions and Other Items — 2015 Compared with 2014 — Dispositions”interest realized 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 allsecuritized 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 asquarter.
Global macro products increased due to a more favorable environment across products compared with the prior year period primarily reflecting lowerquarter when results inwere impacted by inventory losses. This was partially offset by higher interest rate products and foreign exchange, a challenging credit environment earlycosts in the current year period, lower commodities resultsquarter which were impacted by interest products inventory management.
Commodities products increased due to the absence of revenues from the global oil merchanting business, as discussed herein,increased structured transactions and the depressed energy price environmentcustomer flow in the first quarter of 2016.electricity and natural gas products and an improved credit environment.
Investments, Other Revenues,Non-interest Expenses and Other Items
Investments
Net investment gains of $76$66 million in the current quarter increased from the comparable periodprior year quarter, primarily reflecting higheras a result of gains on business related investments.
Net investment gains of $108 million in the current year period decreased from the comparable period primarily reflecting losses on investments associated with our compensation plans and lower gains on principal investmentscompared with losses in real estate, partly offset by higher gains on business related investments.the prior year quarter.
Other
Other revenues of $138$173 million in the current quarter and $142 millionincreased from the prior year quarter, primarily reflectingmark-to-market gains on loans held for sale in the current year period decreased 35% and 53% from the comparable periods primarily due to lower results related to our 40% stake in Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (“MUMSS”) (see Note 8 to the 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 increasequarter compared withmark-to-market losses in the allowance for lossesprior year quarter and a decrease in the provision on loans held for investment.
Non-interest Expenses
Non-interest expenses of $3,072$3,422 million in the current quarter and $5,878 million in the current year period decreased 13% and 18%increased from the comparable periods driven byprior year quarter, primarily reflecting a 14% and 23% reduction35% increase in Compensation and benefits expenses and a 12% reduction9% increase in both periodsNon-compensation expenses in Non-compensation expenses.the current quarter.
Compensation and benefits expenses decreasedincreased in the current quarter, and current year period primarily due to a decreaseincreases in discretionary incentive compensation driven mainly by lowerhigher 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 investments to which certain deferred compensation plan referenced investments.plans are referenced.
Non-compensation expenses decreasedincreased in the current quarter, and current year period primarily due to lowerhigher litigation costs transaction related expenses in Asia and Brokerage, clearing and exchange fees expense reductions across Professional services, Marketing and business development and Occupancy and equipment.due to higher volumes.
Noncontrolling Interests
Noncontrolling interests primarily relate to Mitsubishi UFJ Financial Group, Inc.’s interest in Morgan Stanley MUFG Securities Co., Ltd. (“MSMS”).
March 2017 Form 10-Q |
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)% | ||||||||||||||
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N/M – Not Meaningful
Management’s Discussion and Analysis |
Wealth Management
Income Statement Information
Three Months Ended March 31, | % Change | |||||||||||
$ in millions | 2017 | 20161 | ||||||||||
Revenues | ||||||||||||
Investment banking | $ | 145 | $ | 121 | 20% | |||||||
Trading | 238 | 194 | 23% | |||||||||
Investments | 1 | (2 | ) | 150% | ||||||||
Commissions and fees | 440 | 412 | 7% | |||||||||
Asset management, distribution and administration fees | 2,184 | 2,054 | 6% | |||||||||
Other | 56 | 58 | (3)% | |||||||||
Totalnon-interest revenues | 3,064 | 2,837 | 8% | |||||||||
Interest income | 1,079 | 914 | 18% | |||||||||
Interest expense | 85 | 83 | 2% | |||||||||
Net interest | 994 | 831 | 20% | |||||||||
Net revenues | 4,058 | 3,668 | 11% | |||||||||
Compensation and benefits | 2,317 | 2,088 | 11% | |||||||||
Non-compensation expenses | 768 | 794 | (3)% | |||||||||
Totalnon-interest expenses | 3,085 | 2,882 | 7% | |||||||||
Income from continuing operations before income taxes | 973 | 786 | 24% | |||||||||
Provision for income taxes | 326 | 293 | 11% | |||||||||
Net income applicable to Morgan Stanley | $ | 647 | $ | 493 | 31% |
1. | Effective July 1, 2016, the Institutional Securities and Wealth Management business segments entered into an agreement, whereby Institutional Securities assumed management of Wealth Management’s fixed income client-driven trading activities and employees. Institutional Securities now pays fees to Wealth Management based on distribution activity (collectively, the “Fixed Income Integration”). Prior periods have not been recast for this new intersegment agreement due to immateriality. |
Statistical Data
Financial Information and Statistical Data (dollars in billions, except where noted)
At June 30, 2016 | At December 31, 2015 | |||||||||||||||||||||||
$ in billions | At March 31, 2017 | At December 31, 2016 | ||||||||||||||||||||||
Client assets | Client assets |
| $ | 2,034 | $ | 1,985 | $ | 2,187 | $ | 2,103 | ||||||||||||||
Fee-based client assets(1) |
| $ | 820 | $ | 795 | |||||||||||||||||||
Fee-based client assets1 | $ | 927 | $ | 877 | ||||||||||||||||||||
Fee-based client assets as a percentage of total client assets | Fee-based client assets as a percentage of total client assets |
| 40% | 40% | 42% | 42% | ||||||||||||||||||
Client liabilities(2) |
| $ | 69 | $ | 64 | |||||||||||||||||||
Client liabilities2 | $ | 74 | $ | 73 | ||||||||||||||||||||
Bank deposit program | Bank deposit program |
| $ | 150 | $ | 149 | $ | 149 | $ | 153 | ||||||||||||||
Investment securities portfolio | Investment securities portfolio |
| $ | 64.6 | $ | 57.9 | $ | 62.6 | $ | 63.9 | ||||||||||||||
Loans and lending commitments | Loans and lending commitments |
| $ | 61.3 | $ | 55.3 | $ | 70.3 | $ | 68.7 | ||||||||||||||
Wealth Management representatives | Wealth Management representatives |
| 15,909 | 15,889 | 15,777 | 15,763 | ||||||||||||||||||
Retail locations |
| 609 | 608 | |||||||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||
Annualized revenues per representative (dollars in thousands)(3) | $ | 959 | $ | 978 | $ | 941 | $ | 968 | ||||||||||||||||
Client assets per representative (dollars in millions)(4) | $ | 128 | $ | 129 | $ | 128 | $ | 129 | ||||||||||||||||
Fee-based asset flows(5) | $ | 12.0 | $ | 13.9 | $ | 17.9 | $ | 27.2 |
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
Annualized revenues per representative | ||||||||
(dollars in thousands)3 | $ | 1,029 | $ | 923 | ||||
Client assets per representative | ||||||||
(dollars in millions)4 | $ | 139 | $ | 126 | ||||
Fee-based asset flows5 | ||||||||
(dollars in billions) | $ | 18.8 | $ | 5.9 |
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. |
Client liabilities include securities-based and tailored lending, |
Annualized revenues per representative equal |
Client assets per representative equal totalperiod-end client assets divided byperiod-end representative headcount. |
Fee-based asset flows include net newfee-based assets, net account transfers, dividends, interest and client fees and exclude institutional cash management-related activity. |
Transactional Revenues
Three Months Ended March 31, | % Change | |||||||||||
$ in millions | 2017 | 2016 | ||||||||||
Investment banking | $ | 145 | $ | 121 | 20% | |||||||
Trading | 238 | 194 | 23% | |||||||||
Commissions and fees | 440 | 412 | 7% | |||||||||
Total | $ | 823 | $ | 727 | 13% |
March 2017 Form 10-Q | 10 |
Management’s Discussion and Analysis |
Net Revenues
Transactional 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)% | ||||||||||||||||||
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Transactional revenues | $ | 798 | $ | 872 | $ | 1,525 | $ | 1,822 | (8)% | (16)% | ||||||||||||||
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Transactional revenues of $798$823 million in the current quarter and $1,525 million in the current year period decreased 8% and 16%increased 13% from the comparable periods due to lower revenues in Investment banking and Commissions and fees, partially offset byprior year quarter primarily reflecting higher revenues in Trading.related to investments associated with certain employee deferred compensation plans.
Investment banking revenues decreasedincreased in the current quarter and current year period primarily due to reduced levelshigher revenues from the distribution of underwriting volumes drivenstructured products and equities, partially offset by lower levels of new issuepreferred stock underwriting activity.
Trading revenues increased in 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 decreases from the Fixed Income Integration.
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Commissions and fees decreasedincreased in the current quarter primarily related to the Fixed Income Integration and current year period reflectedto higher equities activity, partially offset by lower daily average commissions primarily due to reduced client activity in equity, mutual fund and annuity products.product revenues.
Asset Management
Asset management, distribution and administration fees of $2,082$2,184 million in the current quarter and $4,136 million in the current year period decreased in both periods 4%increased 6% from the comparable periodsprior year quarter primarily due to lower fees from mutual funds reflecting the impact of lower average asset levelsmarket appreciation and lower average fee rates related to fee-based accounts,positive flows, partially offset by positive flows (see “Fee-Basedlower average client fee rates. See“Fee-Based Client Assets Activity and Average Fee Rate by Account Type” herein).herein.
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$994 million in the current quarter increased 29%20% from the comparable period,prior year quarter primarily 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.loan balances and higher interest rates.
Non-interest Expenses
Non-interest expenses of $2,952$3,085 million in the current quarter and $5,834 million in the current year period decreased 1% and 2%increased 7% from the comparable periods.prior year quarter.
Compensation and benefits expenses were relatively unchangedincreased in the current quarter. Compensationquarter primarily due to higher revenues and benefitsincreases in the fair value of investments to which certain deferred compensation plans are referenced.
Non-compensation expenses decreased in the current year periodquarter primarily due to the decrease in formulaic payout to Wealthlower professional service costs.
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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 Activity and Average Fee Rate by Account Type
For a description offee-based client assets, including descriptions for the fee based client asset types and rollforward items in the following tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—WealthManagement—Fee-Based Client Assets”Assets Activity and Average Fee Rate by Account Type” in Part II, Item 7 of the 20152016 Form10-K.
At March 31, 2016 | Inflows | Outflows | Market Impact | At June 30, 2016 | Average for the Three Months June 30, 2016 | |||||||||||||||||
Fee Rate | ||||||||||||||||||||||
(dollars in billions) | (in bps) | |||||||||||||||||||||
Separately managed accounts(1) | $ | 278 | $ | 9 | $ | (7) | $ | (1) | $ | 279 | 31 | |||||||||||
Unified managed accounts | 112 | 11 | (5) | 2 | 120 | 109 | ||||||||||||||||
Mutual fund advisory | 24 | — | (1) | — | 23 | 121 | ||||||||||||||||
Representative as advisor | 114 | 8 | (8) | 3 | 117 | 88 | ||||||||||||||||
Representative as portfolio manager | 255 | 17 | (12) | 5 | 265 | 101 | ||||||||||||||||
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Subtotal | $ | 783 | $ | 45 | $ | (33) | $ | 9 | $ | 804 | 74 | |||||||||||
Cash management | 15 | 4 | (3) | — | 16 | 6 | ||||||||||||||||
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Total fee-based client assets | $ | 798 | $ | 49 | $ | (36) | $ | 9 | $ | 820 | 73 | |||||||||||
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At December 31, 2016 | Inflows | Outflows | Market Impact | At March 31, 2017 | Average for the Three Months Ended March 31, 2017 | |||||||||||||||||
$ in billions, Fee Rate in bps | Fee Rate1 | |||||||||||||||||||||
Separately managed accounts2,3 | $ | 222 | $ | 9 | $ | (5 | ) | $ | 4 | $ | 230 | 16 | ||||||||||
Unified managed accounts3 | 204 | 13 | (9 | ) | 9 | 217 | 100 | |||||||||||||||
Mutual fund advisory | 21 | — | (1 | ) | 1 | 21 | 120 | |||||||||||||||
Representative as advisor | 125 | 10 | (7 | ) | 5 | 133 | 86 | |||||||||||||||
Representative as portfolio manager | 285 | 20 | (11 | ) | 11 | 305 | 98 | |||||||||||||||
Subtotal | $ | 857 | $ | 52 | $ | (33 | ) | $ | 30 | $ | 906 | 77 | ||||||||||
Cash management | 20 | 3 | (2 | ) | — | 21 | 6 | |||||||||||||||
Totalfee-based client assets | $ | 877 | $ | 55 | $ | (35 | ) | $ | 30 | $ | 927 | 75 |
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 | ||||||||||||||||
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Subtotal | $ | 787 | $ | 46 | $ | (32) | $ | (2) | $ | 799 | 77 | |||||||||||
Cash management | 16 | 2 | (4) | — | 14 | 6 | ||||||||||||||||
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Total fee-based client assets | $ | 803 | $ | 48 | $ | (36) | $ | (2) | $ | 813 | 75 | |||||||||||
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Management’s Discussion and Analysis |
At December 31, 2015 | Inflows | Outflows | Market Impact | At June 30, 2016 | Average for the Six Months Ended June 30, 2016 | |||||||||||||||||
Fee Rate | ||||||||||||||||||||||
(dollars in billions) | (in bps) | |||||||||||||||||||||
Separately managed accounts(1) | $ | 283 | $ | 17 | $ | (17) | $ | (4) | $ | 279 | 32 | |||||||||||
Unified managed accounts | 105 | 21 | (9) | 3 | 120 | 109 | ||||||||||||||||
Mutual fund advisory | 25 | 1 | (3) | — | 23 | 121 | ||||||||||||||||
Representative as advisor | 115 | 13 | (14) | 3 | 117 | 88 | ||||||||||||||||
Representative as portfolio manager | 252 | 31 | (22) | 4 | 265 | 102 | ||||||||||||||||
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Subtotal | $ | 780 | $ | 83 | $ | (65) | $ | 6 | $ | 804 | 74 | |||||||||||
Cash management | 15 | 7 | (6) | — | 16 | 6 | ||||||||||||||||
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Total fee-based client assets | $ | 795 | $ | 90 | $ | (71) | $ | 6 | $ | 820 | 73 | |||||||||||
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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 | ||||||||||||||||
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Subtotal | $ | 769 | $ | 86 | $ | (59) | $ | 3 | $ | 799 | 77 | |||||||||||
Cash management | 16 | 3 | (5) | — | 14 | 6 | ||||||||||||||||
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Total fee-based client assets | $ | 785 | $ | 89 | $ | (64) | $ | 3 | $ | 813 | 75 | |||||||||||
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At December 31, 2015 | Inflows | Outflows | Market Impact | At March 31, 2016 | Average for the Three Months Ended March 31, 2016 | |||||||||||||||||
$ in billions, Fee Rate in bps | Fee Rate1 | |||||||||||||||||||||
Separately managed accounts2 | $ | 283 | $ | 9 | $ | (10 | ) | $ | (4 | ) | $ | 278 | 37 | |||||||||
Unified managed accounts | 105 | 10 | (5 | ) | 2 | 112 | 109 | |||||||||||||||
Mutual fund advisory | 25 | — | (1 | ) | — | 24 | 121 | |||||||||||||||
Representative as advisor | 115 | 6 | (7 | ) | — | 114 | 87 | |||||||||||||||
Representative as portfolio manager | 252 | 15 | (11 | ) | (1 | ) | 255 | 102 | ||||||||||||||
Subtotal | $ | 780 | $ | 40 | $ | (34 | ) | $ | (3 | ) | $ | 783 | 78 | |||||||||
Cash management | 15 | 2 | (2 | ) | — | 15 | 6 | |||||||||||||||
Totalfee-based client assets | $ | 795 | $ | 42 | $ | (36 | ) | $ | (3 | ) | $ | 798 | 77 |
bps—Basis points
Certain data enhancements during the current quarter resulted in a modification to the “Fee Rate” calculations. Prior periods have been restated to reflect the revised calculations. |
2. | Includesnon-custody account values reflecting priorquarter-end balances due to a lag in the reporting of asset values by third-party custodians. |
3. | A shift in client assets of approximately $66 billion in the fourth quarter of 2016 from separately managed accounts to unified managed accounts resulted in a lower average fee rate for those platforms but did not impact the average fee rate for total fee-based client assets. |
INVESTMENT MANAGEMENT
INCOME STATEMENT INFORMATION
Three Months Ended June 30, | Six Months Ended June 30, | % Change | ||||||||||||||||||||||
From Prior Year Quarter | From Prior Year Period | |||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Investment banking | $ | — | $ | — | $ | 1 | $ | — | — | N/M | ||||||||||||||
Trading | 5 | (6) | (5) | (3) | N/M | (67)% | ||||||||||||||||||
Investments | 50 | 232 | (14) | 384 | (78)% | N/M | ||||||||||||||||||
Commissions and fees | — | — | 3 | — | — | N/M | ||||||||||||||||||
Asset management, distribution and administration fees | 517 | 522 | 1,043 | 1,036 | (1)% | 1% | ||||||||||||||||||
Other | 9 | 9 | 31 | 14 | — | 121% | ||||||||||||||||||
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Total non-interest revenues | 581 | 757 | 1,059 | 1,431 | (23)% | (26)% | ||||||||||||||||||
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Interest income | 3 | — | 4 | 1 | N/M | N/M | ||||||||||||||||||
Interest expense | 1 | 6 | 3 | 12 | (83)% | (75)% | ||||||||||||||||||
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Net interest | 2 | (6) | 1 | (11) | N/M | N/M | ||||||||||||||||||
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Net revenues | 583 | 751 | 1,060 | 1,420 | (22)% | (25)% | ||||||||||||||||||
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Compensation and benefits | 238 | 308 | 451 | 581 | (23)% | (22)% | ||||||||||||||||||
Non-compensation expenses | 227 | 223 | 447 | 432 | 2% | 3% | ||||||||||||||||||
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Total non-interest expenses | 465 | 531 | 898 | 1,013 | (12)% | (11)% | ||||||||||||||||||
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Income from continuing operations before income taxes | 118 | 220 | 162 | 407 | (46)% | (60)% | ||||||||||||||||||
Provision for income taxes | 37 | 59 | 47 | 120 | (37)% | (61)% | ||||||||||||||||||
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Income from continuing operations | 81 | 161 | 115 | 287 | (50)% | (60)% | ||||||||||||||||||
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Net income | 81 | 161 | 115 | 287 | (50)% | (60)% | ||||||||||||||||||
Net income applicable to noncontrolling interests | 3 | 2 | (13) | 19 | 50% | N/M | ||||||||||||||||||
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Net income applicable to Morgan Stanley | $ | 78 | $ | 159 | $ | 128 | $ | 268 | (51)% | (52)% | ||||||||||||||
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N/M – Not Meaningful
Management’s Discussion and Analysis |
Investment Management
Three Months Ended March 31, | ||||||||||||
$ in millions | 2017 | 2016 | % Change | |||||||||
Revenues | ||||||||||||
Investment banking | $ | — | $ | 1 | (100 | )% | ||||||
Trading | (11 | ) | (10 | ) | (10 | )% | ||||||
Investments | 98 | (64 | ) | N | /M | |||||||
Commissions and fees | — | 3 | (100 | )% | ||||||||
Asset management, distribution and administration fees | 517 | 526 | (2 | )% | ||||||||
Other | 4 | 22 | (82 | )% | ||||||||
Totalnon-interest revenues | 608 | 478 | 27 | % | ||||||||
Interest income | 1 | 1 | — | |||||||||
Interest expense | — | 2 | (100 | )% | ||||||||
Net interest | 1 | (1 | ) | 200 | % | |||||||
Net revenues | 609 | 477 | 28 | % | ||||||||
Compensation and benefits | 279 | 213 | 31 | % | ||||||||
Non-compensation expenses | 227 | 220 | 3 | % | ||||||||
Totalnon-interest expenses | 506 | 433 | 17 | % | ||||||||
Income from continuing operations before income taxes | 103 | 44 | 134 | % | ||||||||
Provision for income taxes | 30 | 10 | 200 | % | ||||||||
Net income | 73 | 34 | 115 | % | ||||||||
Net income (loss) applicable to noncontrolling interests | 6 | (16 | ) | 138 | % | |||||||
Net income applicable to Morgan Stanley | $ | 67 | $ | 50 | 34 | % |
N/M—Not Meaningful
Net Revenues
Investments
Investments gains of $50$98 million in the current quarter and losses of $14 million inincreased from the currentprior 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.quarter primarily driven by
gains in certain private equity and real estate funds compared with losses in the prior year quarter. |
Asset Management, Distribution and Administration Fees
Asset management, distribution and administration fees of $517 million in the current quarter decreased 2% from the prior year quarter primarily reflecting higher management fees in the prior year quarter from the completion of certain fund raisings in alternative/other products. This decrease was partially offset by higher fee rates and $1,043 millionhigher average assets under management or supervision (“AUM”) for the other product areas in the current year period were relatively unchanged from the comparable periods, as asset class balancesquarter (see “AUM and fee rates remained stable.Average Fee Rate by Asset Class” herein).
Non-interest Expenses
Non-interest expenses of $465$506 million in the current quarter and $898 million in the current year period decreased 12% and 11%increased 17% from the comparable periodsprior year quarter, primarily due to lowerhigher Compensation and benefitbenefits expenses.
Compensation and benefits expenses decreasedincreased in the current quarter and current year period primarily due to the decreasean increase in deferred compensation associated with carried interestinterest.
Non-compensation expenses increased, primarily due to higher brokerage clearing and the decrease in discretionary incentive compensation drivenexchange fees, partially offset by lower revenues.professional service fees.
Assets Under Management or Supervision
Effective in the second quarter of 2016, the presentation of assets under management or supervision (“AUM”)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.
13 | March 2017 Form 10-Q |
Assets Under Management or SupervisionManagement’s Discussion and Analysis
AUM and Average Fee Rate by Asset Class
For a description of the rollforward items in the following tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Investment Management—Statistical Data”Assets Under Management or Supervision” in Part II, Item 7 of the 20152016 Form10-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 | At December 31, | Inflows | Outflows | Market Impact | Other1 | At March 31, | Average for the Three Months Ended March 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total AUM | Fee Rate | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
$ in billions, Fee Rate in bps | At December 31, | Inflows | Outflows | Market Impact | Other1 | At March 31, | Total AUM | Fee Rate | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(dollars in billions) | (in bps) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity | $ | 81 | $ | 5 | $ | (6) | $ | — | $ | 1 | $ | — | $ | 81 | $ | 81 | 74 | $ | 79 | $ | 5 | $ | (5 | ) | $ | 8 | $ | — | $ | 87 | $ | 83 | 74 | |||||||||||||||||||||||||||||||||||
Fixed income | 62 | 7 | (8) | — | — | — | 61 | 61 | 32 | 60 | 5 | (5 | ) | 1 | 1 | 62 | 62 | 33 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Liquidity | 146 | 291 | (289) | — | 1 | — | 149 | 146 | 19 | 163 | 328 | (338 | ) | — | — | 153 | 157 | 18 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Alternative / Other products | 116 | 9 | (10) | (1) | 1 | — | 115 | 116 | 74 | 115 | 7 | (4 | ) | 1 | — | 119 | 117 | 71 | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Total assets under management or supervision | $ | 405 | $ | 312 | $ | (313) | $ | (1) | $ | 3 | $ | — | $ | 406 | $ | 404 | 48 | $ | 417 | $ | 345 | $ | (352 | ) | $ | 10 | $ | 1 | $ | 421 | $ | 419 | 46 | |||||||||||||||||||||||||||||||||||
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Shares of minority stake assets | 8 | 8 | 8 | 8 | 7 | 7 |
At December 31, | Inflows | Outflows | Market Impact | Other1 | At March 31, | Average for the Three Months Ended March 31, 2016 | ||||||||||||||||||||||||||
$ in billions, Fee Rate in bps | Total AUM | Fee Rate | ||||||||||||||||||||||||||||||
Equity | $ | 83 | $ | 5 | $ | (6 | ) | $ | (1 | ) | — | $ | 81 | $ | 79 | 71 | ||||||||||||||||
Fixed income | 60 | 5 | (6 | ) | 2 | 1 | 62 | 60 | 32 | |||||||||||||||||||||||
Liquidity | 149 | 336 | (338 | ) | (1 | ) | — | 146 | 149 | 17 | ||||||||||||||||||||||
Alternative / Other products | 114 | 5 | (4 | ) | — | 1 | 116 | 115 | 81 | |||||||||||||||||||||||
Total assets under management or supervision | $ | 406 | $ | 351 | $ | (354 | ) | $ | — | 2 | $ | 405 | $ | 403 | 48 | |||||||||||||||||
Shares of minority stake assets | 8 | 8 | 8 |
bps—Basis points
1. | Includes distributions and foreign currency impact. |
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 | |||||||||||||||||||||||||||
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Total assets under management or supervision | $ | 406 | $ | 321 | $ | (323) | $ | (2) | $ | — | $ | 1 | $ | 403 | $ | 406 | 47 | |||||||||||||||||||
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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 | |||||||||||||||||||||||||||
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Total assets under management or supervision | $ | 406 | $ | 663 | $ | (667) | $ | (1) | $ | 3 | $ | 2 | $ | 406 | $ | 403 | 48 | |||||||||||||||||||
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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 | |||||||||||||||||||||||||||
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Total assets under management or supervision | $ | 403 | $ | 619 | $ | (620) | $ | (2) | $ | 6 | $ | (3) | $ | 403 | $ | 405 | 47 | |||||||||||||||||||
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Shares of minority stake assets | 7 | 7 | 7 |
bps—Basis points
Management’s Discussion and Analysis |
Supplemental Financial Information and Disclosures
U.S. Bank Subsidiaries
We provide loans to a variety of customers, from large corporate and institutional clients to high net worth individuals, primarily through 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. We expect our lending activities to continue to grow through further market penetration of the Wealth Management business segments’segment’s client base. For a further discussion of our credit risks, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk” in Item 3.Risk.” For further discussion about loans and lending commitments, see Notes 7 and 11 to the consolidated financial statements in Item 1.
statements.
U.S. Bank Subsidiaries’ Supplemental Financial Information Excluding Transactions with Affiliated Entitiesthe Parent Company
At June 30, 2016 | At December 31, 2015 | |||||||||||||||
(dollars in billions) | ||||||||||||||||
$ in billions | At March 31, | At December 31, | ||||||||||||||
U.S. Bank Subsidiaries assets | $ | 175.1 | $ | 174.2 | $ | 179.4 | $ | 180.7 | ||||||||
U.S. Bank Subsidiaries investment securities portfolio(1) | 64.6 | 57.9 | ||||||||||||||
Wealth Management U.S. Bank Subsidiaries data: | ||||||||||||||||
Securities-based lending and other loans(2) | $ | 31.4 | $ | 28.6 | ||||||||||||
Residential real estate loans | 22.7 | 20.9 | ||||||||||||||
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U.S. Bank Subsidiaries investment securities portfolio: | ||||||||||||||||
Investment securities—AFS | 48.5 | 50.3 | ||||||||||||||
Investment securities—HTM | 14.1 | 13.6 | ||||||||||||||
Total | $ | 54.1 | $ | 49.5 | $ | 62.6 | $ | 63.9 | ||||||||
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Institutional Securities U.S. Bank Subsidiaries data: | ||||||||||||||||
Wealth Management U.S. Bank Subsidiaries data | Wealth Management U.S. Bank Subsidiaries data |
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Securities-based lending and other loans1 | $ | 36.6 | $ | 36.0 | ||||||||||||
Residential real estate loans | 25.0 | 24.4 | ||||||||||||||
Total | $ | 61.6 | $ | 60.4 | ||||||||||||
Institutional Securities U.S. Bank Subsidiaries data | Institutional Securities U.S. Bank Subsidiaries data |
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Corporate loans | $ | 21.2 | $ | 22.9 | $ | 19.2 | $ | 20.3 | ||||||||
Wholesale real estate loans | 8.9 | 8.9 | 10.3 | 9.9 | ||||||||||||
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Total | $ | 30.1 | $ | 31.8 | $ | 29.5 | $ | 30.2 | ||||||||
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AFS—Available for sale
HTM—Held to maturity
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Other loans primarily include tailored lending. |
Income Tax Matters
The effective tax rate from continuing operations was 33.5% and 33.4% for the current quarter and current year period, respectively.Effective Tax Rate
Three Months Ended | ||||||||
March 31, 2017 | March 31, 2016 | |||||||
From continuing operations | 29.0 | % | 33.3 | % |
The effective tax rate from continuing operations was 32.8% and 22.9% for the prior yearcurrent quarter and prior year period, respectively. The results for prior year period includedincludes a net discrete tax benefit of $564$98 million, primarily resulting from a $112 million recurring-type benefit associated with the repatriationadoption of non-U.S. earnings at a cost lower than originally estimated duenew accounting guidance related to an internal restructuring to simplify 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 period would have been 33.1%.
Accounting Development Updates
The Financial Accounting Standards Board (the “FASB”) issued the following accounting updates which apply to us.
The following accounting updates are not expected to have a material impact in the 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. This guidance is effective as of January 1, 2018. On January 1, 2016, we early adopted a specific provision of the accounting update (seeemployee share-based payments. See Note 2 to the consolidated financial statements in Item 1), withfor information on the remainderadoption of the accounting updateImprovements to Employee Share-Based Payment Accounting.
Accounting Development Updates
The Financial Accounting Standards Board issued the following accounting updates that apply to us.
Accounting updates not listed below were assessed and determined to be adopted on January 1, 2018.
The following accounting update willeither not applicable or are not expected to have a materialsignificant impact in theon our consolidated financial statements:statements.
Simplifying the Transition to the Equity Method of Accounting.
The following accounting updates are currently being evaluated to determine the potential impact of adoption:
• | Revenue from Contracts with Customers. This accounting update aims 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 revenues 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. We will adopt the guidance on January 1, 2018 and are currently evaluating the method of adoption. |
Financial Instruments – Credit Losses. ThisWe expect this accounting update impactsto potentially change the impairment modeltiming and presentation of certain revenues, as well as the timing and presentation of certain related costs, for certain financial assets measured at amortized cost such as loans held for investmentInvestment banking fees and heldAsset management, distribution and administration fees. Outside of Investment Management performance fees in the form of carried interest, discussed further in the following paragraph, these changes are not expected to maturity debt securities. The amendments in this update will acceleratebe significant.
Regarding the recognition of credit losses by replacingperformance fees from fund management activities in the incurred loss impairment methodology with aform of carried interest that are subject to reversal, we are currently assessing the alternative accounting approaches available for these arrangements. If we consider the equity method of accounting
15 | March 2017 Form 10-Q |
Management’s Discussion and Analysis |
principles to apply to carried interest, the current expected credit loss (“CECL”) methodology that requires an estimaterecognition of expected credit losses oversuch fees would remain essentially unchanged. If the entire lifefees are deemed in the scope of the financial asset. Additionally, althoughnew revenue guidance, we would defer recognition until such fees are no longer subject to reversal, which would cause a significant delay in the CECL methodology will not apply to AFS debt securities, the update will require establishment of an allowance to reflect impairmentrecognition of these securities, thereby eliminatingfees as revenue.
We will continue to assess the conceptimpact of a permanent write-down.the new rule as we progress through the implementation of the new standard; therefore, additional impacts may be identified prior to adoption.
• | Gains and Losses from the Derecognition of Nonfinancial Assets.This accounting update clarifies the guidance on how to account for the derecognition of nonfinancial assets and in substance nonfinancial assets and also provides guidance on the accounting for partial sales of nonfinancial assets. This update is effective as of January 1, 2018. |