0000895421 us-gaap:FairValueInputsLevel2Member us-gaap:USTreasuryAndGovernmentMember us-gaap:FairValueMeasurementsRecurringMember 2020-09-30
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

☒

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

EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

OR

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

EXCHANGE ACT OF 1934

2020

Commission File Number1-11758

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(Exact Namename of Registrant as specified in its charter)

Delaware

1585 Broadway36-3145972(212)761-4000
(State or other jurisdiction of

incorporation or organization)

1585 Broadway

New York,

NY10036

(I.R.S. Employer Identification No.)(Registrant’s telephone number, including area code)
(Address of principal executive offices, including zip code)

Securities registered pursuant to Section 12(b) of the Act:
 

36-3145972

(I.R.S. Employer Identification No.)

Title of each class
Trading
Symbol(s)

(212)761-4000

(

Name of exchange on
which registered
Common Stock, $0.01 par valueMSNew York Stock Exchange
Depositary Shares, each representing 1/1,000th interest in a share of Floating RateMS/PANew York Stock Exchange
Non-Cumulative Preferred Stock, Series A, $0.01 par value
Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating RateMS/PENew York Stock Exchange
Non-Cumulative Preferred Stock, Series E, $0.01 par value
Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating RateMS/PFNew York Stock Exchange
Non-Cumulative Preferred Stock, Series F, $0.01 par value
Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating RateMS/PINew York Stock Exchange
Non-Cumulative Preferred Stock, Series I, $0.01 par value
Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating RateMS/PKNew York Stock Exchange
Non-Cumulative Preferred Stock, Series K, $0.01 par value
Depository Shares, each representing 1/1000th interest in a share of 4.875%MS/PLNew York Stock Exchange
Non-Cumulative Preferred Stock, Series L, $0.01 par value
Global Medium-Term Notes, Series A, Fixed Rate Step-Up Senior Notes Due 2026MS/26CNew York Stock Exchange
of Morgan Stanley Finance LLC (and Registrant’s telephone number, including area code)

guarantee with respect thereto)
Morgan Stanley Cushing® MLP High Income Index ETNs due March 21, 2031MLPYNYSE Arca, Inc.

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

Indicate by check mark whether the Registrant has submitted electronically 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  ☒    No  ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act. (Check one):

Large accelerated filer

☒Accelerated Filer  ☒

filer		☐

Accelerated Filer  ☐

Non-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 ☒

As of October 31, 2017,30, 2020, there were 1,807,899,1611,809,198,248 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.


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QUARTERLY REPORT ON FORM10-Q

For the quarter ended September 30, 2017

Table of Contents Part Item  Page 

Financial Information

 I     1 

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

   2   1 

Introduction

       1 

Executive Summary

       2 

Business Segments

       7 

Supplemental Financial Information and Disclosures

       18 

Accounting Development Updates

       18 

Critical Accounting Policies

       19 

Liquidity and Capital Resources

       19 

Quantitative and Qualitative Disclosures about Market Risk

   3   32 

Controls and Procedures

   4   42 

Report of Independent Registered Public Accounting Firm

       43 

Financial Statements

   1   44 

Consolidated Financial Statements and Notes

       44 

Consolidated Income Statements (Unaudited)

       44 

Consolidated Comprehensive Income Statements (Unaudited)

       45 

Consolidated Balance Sheets (Unaudited at September 30, 2017)

       46 

Consolidated Statements of Changes in Total Equity (Unaudited)

       47 

Consolidated Cash Flow Statements (Unaudited)

       48 

Notes to Consolidated Financial Statements (Unaudited)

       49 

  1. Introduction and Basis of Presentation

       49 

  2. Significant Accounting Policies

       50 

  3. Fair Values

       51 

  4. Derivative Instruments and Hedging Activities

       63 

  5. Investment Securities

       67 

  6. Collateralized Transactions

       70 

  7. Loans and Allowance for Credit Losses

       72 

  8. Equity Method Investments

       75 

  9. Deposits

       75 

10. Long-Term Borrowings and Other Secured Financings

       75 

11. Commitments, Guarantees and Contingencies

       76 

12. Variable Interest Entities and Securitization Activities

       80 

13. Regulatory Requirements

       83 

14. Total Equity

       86 

15. Earnings per Common Share

       88 

16. Interest Income and Interest Expense

       88 

17. Employee Benefit Plans

       89 

18. Income Taxes

       89 

19. Segment and Geographic Information

       89 

20. Subsequent Events

       91 

Financial Data Supplement (Unaudited)

       92 

Other Information

 II     95 

Legal Proceedings

   1   95 

Unregistered Sales of Equity Securities and Use of Proceeds

   2   96 

Exhibits

   6   96 

Exhibit Index

       E-1 

 

Signatures

      

 

 

 

S-1

 

 

2020

Table of ContentsPartItemPage
Risk Factors
II1A
1
Financial Information
I 
2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
I2
2
Introduction
  
2
Executive Summary
  
3
Business Segments
  
9
Supplemental Financial Information
  
20
Accounting Development Updates
  
20
Critical Accounting Policies
  
21
Liquidity and Capital Resources
  
21
Balance Sheet
  
21
Regulatory Requirements
  
26
Quantitative and Qualitative Disclosures about Risk
I3
34
Market Risk
  
34
Credit Risk
  
36
Country and Other Risks
  
42
Report of Independent Registered Public Accounting Firm
  
45
Consolidated Financial Statements and Notes
I1
46
Consolidated Income Statements (Unaudited)
  
46
Consolidated Comprehensive Income Statements (Unaudited)
  
47
Consolidated Balance Sheets (Unaudited at September 30, 2020)
  
48
Consolidated Statements of Changes in Total Equity (Unaudited)
  
49
Consolidated Cash Flow Statements (Unaudited)
  
50
Notes to Consolidated Financial Statements (Unaudited)
  
51
1.
Introduction and Basis of Presentation
  
51
2.
Significant Accounting Policies
  
52
3.
Acquisitions
  
54
4.
Cash and Cash Equivalents
  
55
5.
Fair Values
  
55
6.
Fair Value Option
  
61
7.
Derivative Instruments and Hedging Activities
  
63
8.
Investment Securities
  
66
9.
Collateralized Transactions
  
69
10.
Loans, Lending Commitments and Related Allowance for Credit Losses
  
70
11.
Other Assets—Equity Method Investments
  
73
12.
Deposits
  
73
13.
Borrowings and Other Secured Financings
  
74
14.
Commitments, Guarantees and Contingencies
  
74
15.
Variable Interest Entities and Securitization Activities
  
77
16.
Regulatory Requirements
  
79
17.
Total Equity
  
82
18.
Interest Income and Interest Expense
  
84
19.
Income Taxes
  
84
20.
Segment, Geographic and Revenue Information
  
85
Financial Data Supplement (Unaudited)
  
88
Glossary of Common Terms and Acronyms
  
89
Other Information
II 
91
Legal Proceedings
II1
91
Unregistered Sales of Equity Securities and Use of Proceeds
II2
91
Controls and Procedures
I4
92
Exhibits
II6
92
Signatures
  
S-1

i

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Available Information

We file annual, quarterly and current reports, proxy statements and other information with the U.S. Securities and Exchange Commission (the “SEC”). You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at1-800-SEC-0330 for information on the public reference room.SEC. The SEC maintains an internet site,a website, www.sec.gov, that contains annual, quarterly and current reports, proxy and information statements and other information that issuers file electronically with the SEC. Our electronic SEC filings are available to the public at the SEC’s internet site.

website.

Our internet sitewebsite 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 Reportsproxy statements, annual reports on Form10-K, Quarterly Reports quarterly reports onForm 10-Q, Current Reports 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(“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,website, statements of beneficial ownership of our equity securities filed by our directors, officers, 10% or greater shareholders and others under Section 16 of the Exchange Act.

You can access information about our corporate governance atwww.morganstanley.com/about-us-governance.about-us-governance and our sustainability initiatives at www.morganstanley.com/about-us/sustainability-at-morgan-stanley. Our Corporate Governance webpage includes:

Amended and Restated Certificate of Incorporation;

webpages include:

Amended and Restated Bylaws;

•
Amended and Restated Certificate of Incorporation;
•
Amended and Restated Bylaws;
•
Charters for our Audit Committee, Compensation, Management Development and Succession Committee, Nominating and Governance Committee, Operations and Technology Committee, and Risk Committee;
•
Corporate Governance Policies;
•
Policy Regarding Corporate Political Activities;
•
Policy Regarding Shareholder Rights Plan;
•
Equity Ownership Commitment;
•
Code of Ethics and Business Conduct;
•
Code of Conduct;
•
Integrity Hotline Information;
•
Environmental and Social Policies; and
•
Sustainability Report.

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

Corporate Governance Policies;

Policy Regarding Corporate Political Activities;

Policy Regarding Shareholder Rights Plan;

Equity Ownership Commitment;

Code of Ethics and Business Conduct;

Code of Conduct;

Integrity Hotline Information; and

Environmental and Social Policies.

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


ii

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Risk Factors
In addition to “Risk Factors” in Part I, Item 1A of the 2019 Form 10-K, please refer to the risk factors under Item 8.01 “Other Matters” in each of the the Current Reports on Form 8-K filed with the SEC on April 16, 2020 and October 2, 2020, respectively.

1September 2020 Form 10-Q
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Financial Information


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

Introduction

Morgan Stanley a financial holding company, is a global financial services firm that maintains significant market positions in each of its business segments—Institutional Securities, Wealth Management and Investment Management. Morgan Stanley, through its subsidiaries and affiliates, provides a wide variety of products and services to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individuals. Unless the context otherwise requires, the terms “Morgan Stanley,” “Firm,” “us,” “we,”“we” or “our” mean Morgan Stanley (the “Parent Company”) together with its consolidated subsidiaries.

See the “Glossary of Common Terms and Acronyms” for the definition of certain terms and acronyms used throughout this Form 10-Q.

A description of the clients and principal products and services of each of our business segments is as follows:

Institutional Securities provides investment banking, sales and trading, lending and other services to corporations, governments, financial institutions and high to ultra-high net worth clients. Investment banking services consist of capital raising and financial advisory services, including services relating to the underwriting of debt, equity and other securities, as well as advice on mergers and acquisitions, restructurings, real estate and project finance. Sales and trading services include sales, financing, prime brokerage and market-making activities in the equity and fixed income products, including prime brokerage services, global macro, credit and commodities products.businesses. Lending servicesactivities include originating and/or purchasing corporate loans and commercial real estate loans, providing secured lending facilities, and residential mortgage lending, asset-backed lending,extending financing to sales and financing extended to equitiestrading customers. Other activities include Asia wealth management services, investments and commodities customers and municipalities. Other services include investment and research activities.

research.

Wealth Management provides a comprehensive array of financial services and solutions to individual investors and

small tomedium-sized businesses/ businesses and institutions coveringcovering: brokerage and investment advisory services,services; financial and wealth planning services,services; stock plan administration services; annuity and insurance products, creditproducts; securities-based lending, residential real estate loans and other lending products, bankingproducts; 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, which are offered through a variety of investment vehicles, include equity, fixed income, liquidity and alternative/other products. Institutional clients include defined benefit/defined contribution plans, foundations, endowments, government entities, sovereign wealth funds, insurance companies, third-party fund sponsors and corporations. Individual clients are servicedgenerally served through intermediaries, including affiliated andnon-affiliated distributors.

Management’s Discussion and Analysis includes certain metrics which we believe to be useful to us, investors, analysts and other stakeholders by providing further transparency about, or an additional means of assessing, our financial condition and operating results. Such metrics, when used, are defined and may be different from or inconsistent with metrics used by other companies.
The results of operations in the past have been, and in the future may continue to be, materially affected byby: competition; risk factors; and legislative, legal and regulatory developments; as well asand 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,Statements,” “Business—Competition” andCompetition,” “Business—Supervision and Regulation” in Part I, Item 1,Regulation,” and “Risk Factors” herein and in Part I, Item 1A of our Annual Report onthe 2019 Form10-K, for the year ended December 31, 2016 (the “2016 Form10-K”) and “Liquidity and Capital Resources—Regulatory Requirements” herein.

In addition, see “Executive Summary” herein and “Risk Factors” for information on the current and possible future effects of the COVID-19 pandemic on our results.


1September 2017 Form 10-Q

September 2020 Form 10-Q2
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Management’s Discussion and AnalysisLOGO
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Executive Summary

Overview of Financial Results

Consolidated Results

Results—Three Months Ended September 30, 2020

Firm Net revenues were up 16% and Net income applicable to Morgan Stanley was up 25%, reflecting strength across all business segments, and resulting in an annualized ROTCE of 15.0% (see “Non-GAAP Financial Measures” herein).
Institutional Securities Net revenues of $6,062 million increased as a result of higher sales and trading and strength in equity underwriting.
Wealth Management delivered pre-tax income of $1.1 billion with a pre-tax profit margin of 24%, reflecting strong fee-based flows and increased loan and deposit balances.
Investment Management reported long-term net flows of $10.4 billion and AUM of $715 billion driving revenue growth of 38%.
Our provision for credit losses on loans and lending commitments was $111 million.
At September 30, 2020, our standardized Common Equity Tier 1 capital ratio was 17.4%.
Strategic Transactions
•
On October 2, 2020, we completed the acquisition of E*TRADE Financial Corporation (“E*TRADE”). For further information, see “Business Segments—Wealth Management.”
On October 8, 2020, we entered into a definitive agreement under which we will acquire Eaton Vance Corp. (“Eaton Vance”), subject to customary closing conditions. For further information, see “Business Segments—Investment Management.”
Net Revenues

($ in millions)

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Net Income Applicable to Morgan Stanley

($ in millions)

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Earnings per Diluted Common Share1

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1.

For the calculation of basic and diluted earnings per common share, see Note 15 to the financial statements.

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We reported net revenues of $9,197$11,657 million in the three monthsquarter ended September 30, 20172020 (“current quarter,” or “3Q 2017”2020”), compared with $8,909$10,032 million in the three monthsquarter ended September 30, 20162019 (“prior year quarter,” or “3Q 2016”2019”). For the current quarter, net income applicable to Morgan Stanley was $1,781$2,717 million, or $0.93$1.66 per diluted common share, compared with $1,597$2,173 million or $0.81$1.27 per diluted common share, in the prior year quarter.

We reported net revenues of $28,445$34,558 million in the nine months ended September 30, 20172020 (“current year period,” or “YTD 2017”2020”), compared with $25,610$30,562 million in the nine monthsperiod ended September 30, 20162019 (“prior year period,” or “YTD 2016”2019”). For the current year period, net income applicable to Morgan Stanley was $5,468$7,611 million, or $2.79$4.62 per diluted common share, compared with $4,313$6,803 million or $2.11$3.89 per diluted common share, in the prior year period.



3September 2020 Form 10-Q
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Management’s Discussion and Analysis
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Non-interest Expenses

1

($ in millions)

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1.The percentages on the bars in the chart represent the contribution of compensation and benefits expenses and non-compensation expenses to the total.
Current Quarter
Compensation and benefits expenses of $4,169$5,086 million in the current quarter increased 15% from the prior year quarter, primarily as a result of increases in discretionary incentive compensation and $12,887the formulaic payout to Wealth Management representatives, driven by higher revenues, and higher expenses related to certain deferred compensation plans linked to investment performance.
Non-compensation expenses of $3,084 million in the current quarter increased 7% from the prior year quarter, primarily as a result of higher volume-related expenses and increased information processing and communication expenses, partially offset by a decrease in marketing and business development expenses.
Current Year Period
Compensation and benefits expenses of $15,404 million in the current year period increased 2% and 9%, respectively,13% from $4,097 million in the prior year quarter and $11,795 million in the prior year period. The current quarter resultsperiod, primarily reflectedas a result of increases in discretionary incentive compensation and the formulaic payout to Wealth Management representatives, linked todriven by higher revenues, and deferredpartially offset by lower compensation associated with carried interest and certain deferred compensation plans linked to investment performance.
•
Non-compensation expenses of $9,166 million in the current year period increased 9% from the prior year period, primarily as a result of higher volume-related expenses, an increase in the provision for credit losses for lending commitments and off-balance sheet instruments, and increased information processing and communication expenses. These increases were partially offset by a decrease in marketing and business development expenses.
Income Taxes
The current quarter included intermittent net discrete tax benefits of $113 million, principally associated with the remeasurement of reserves and related interest as a result of new information pertaining to the resolution of tax examinations in certain jurisdictions. The prior year quarter included intermittent net discrete tax benefits of $89 million primarily associated with the Investment Management business segment, partially offset byfiling of the 2018 federal tax return and the remeasurement of reserves and related interest as a decrease in discretionary incentive compensation mainly driven by lower revenues inresult of new information pertaining to the Institutional Securities business segment. resolution of multi-jurisdiction tax examinations.
The current year period resultsincluded intermittent net discrete tax benefits of $10 million. The prior year period included intermittent net discrete tax benefits of $190 million, primarily reflected increases inassociated with the fair valueremeasurement of investmentsreserves and related interest as a result of new information pertaining to which certain deferred compensation plans are referenced, discretionary incentive compensation mainly driven by higher revenues, the formulaic payout to

resolution of multi-jurisdiction tax examinations and other matters. For further information, see “Supplemental Financial Information—Income Tax Matters”
herein.

September 20172020 Form 10-Q24 

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Wealth Management representatives linked to higher revenues, and deferred compensation associated with carried interest.

Non-compensation expenses were $2,546 million in the current quarter and $7,626 million in the current year period compared with $2,431 million in the prior year quarter and $7,213 million in the prior year period, representing a 5% and a 6% increase, respectively. These increases were primarily as a result of higher volume-driven expenses. In addition,non-compensation expenses increased in the current year period due to a provision related to a United Kingdom (“U.K.”) indirect tax (i.e. value-added tax or “VAT”) matter and higher litigation costs. For further discussion of the U.K. VAT matter, see “Institutional Securities—Investments, Other Revenues,Non-interest Expenses and Other Items—Other Items” herein.

Expense Efficiency Ratio

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The expense efficiency ratio was 73.0% in the current quarter and 72.1% in the current year period. The expense efficiency ratio was 73.3% in the prior year quarter and 74.2% in the prior year period (see “SelectedNon-Generally Accepted Accounting Principles(“Non-GAAP”) Financial Information” herein).

Return on Average Common Equity

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The annualized return on average common equity (“ROE”) was 9.6% in the current quarter and 9.8% in the current year period. The annualized ROE was 8.7% in the prior year quarter and 7.7% in the prior year period (see “SelectedNon-Generally Accepted Accounting Principles(“Non-GAAP”) Financial Information” herein).

Business Segment Results

Net Revenues by Segment1 2

($ in millions)

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3September 2017 Form 10-Q
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Management’s Discussion and AnalysisLOGO



Net Income Applicable to Morgan Stanley by Segment1 3

($ in millions)

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1.

The percentages on the bars in the charts represent the contribution of each business segment to the total. Amounts dototal of the applicable financial category and may not necessarily totalsum to 100% due to intersegment eliminations, where applicable.

eliminations. See Note 20 to the financial statements for details of intersegment eliminations.
Current Quarter
2.

The total amount

•
Institutional Securities net revenues of Net Revenues by Segment also includes intersegment eliminations of $(74) million and $(77)$6,062 million in the current quarter andincreased 21% from the prior year quarter respectively,primarily due to higher sales and $(223) milliontrading and $(207)equity underwriting revenues.
Wealth Management net revenues of $4,657 million in the current quarter increased 7% principally due to gains from investments associated with certain employee deferred compensation plans. Excluding these investment gains, revenues increased modestly, reflecting higher Asset management revenues on positive net flows, partially offset by lower Net interest.
Investment Management net revenues of $1,056 million in the current quarter increased 38% from the prior year quarter, primarily due to higher Investments revenues, driven by accrued carried interest and investment gains in an Asia private equity fund, and higher Asset management revenues as a result of higher average AUM.

5September 2020 Form 10-Q
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Management’s Discussion and Analysis
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Current Year Period
•
Institutional Securities net revenues of $18,944 million in the current year period andincreased 24% from the prior year period, respectively.

period. The increase is primarily due to higher sales and trading and underwriting revenues, partially offset by losses on loans and lending commitments held for sale, an increase in the provision for credit losses on loans held for investment, and a decrease in advisory revenues.
3.

The total amount

•
Wealth Management net revenues of Net Income Applicable to Morgan Stanley by Segment also includes intersegment eliminations of $(4) million in the current quarter and $(2)$13,374 million in the current year period.

period increased 2% from the prior year period, primarily due to higher Asset management revenues, largely as a result of market appreciation, and higher Commissions and fees, partially offset by lower Net interest.

Institutional Securities net revenues of $4,376 million in the current quarter and $14,290 million in the current year period decreased 4% from the prior year quarter and increased 11% from the prior year period. The current quarter results primarily reflected lower revenues from fixed income sales and trading, partially offset by higher underwriting and advisory revenues. The current year period results primarily reflected higher revenues from underwriting and fixed income sales and trading.

WealthInvestment Management net revenues of $4,220 million in the current quarter and $12,429$2,634 million in the current year period increased 9% both from the prior year quarter and the prior year period. The current quarter and the current year period results reflected growth in assetprimarily due to higher Asset management fee revenues and Net interest income.

Investment Management net revenuesas a result of $675 million in the current quarter and $1,949 million in the current year period increased 22% from the prior year quarter and increased 21% from the prior year period. The current quarter and the current year period results primarily reflected higher carried interest and investment gains and growth in asset management fee revenues.

average AUM.

Net Revenues by Region1, 2

($ in millions)

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EMEA—Europe, Middle East and Africa

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1.

The percentages on the bars in the charts represent the contribution of each region to the total.

2.For a discussion of how the geographic breakdown forof net revenues is determined, see Note 2120 to the consolidated financial statements in the 20162019 Form10-K.

Current quarter revenues in Asia increased 58%, primarily driven by Equity sales and trading within the Institutional Securities business segment. Americas revenues increased 12%,
 

primarily driven by Institutional Securities business segment sales and trading, as well as the Wealth Management business segment. EMEA revenues were relatively unchanged in the current quarter.

Current year period revenues in Asia increased 44% and the Americas increased 11%, primarily driven by the Institutional Securities business segment. EMEA revenues were relatively unchanged in the current year period.
Coronavirus Disease (“COVID-19”) Pandemic
The COVID-19 pandemic and related voluntary and government-imposed social and business restrictions have had, and will likely continue to have, a severe impact on global economic conditions and the environment in which we operate our businesses. We have implemented a return-to-workplace program, which is phased based on role, location and employee willingness and ability to return, and focused on the health and safety of all staff. The Firm continues to be fully operational, with more than 85% of global employees and more than 90% of employees in the Americas working from home as of September 30, 2020.
Though we are unable to estimate the extent of the impact, the ongoing COVID-19 pandemic and related global economic crisis may have adverse impacts on our future operating results. To date, given our unique business model, economic conditions have affected our businesses in different ways. We have increased our allowance for credit losses on loans and lending commitments, and the persistence of low interest rates has continued to negatively affect our net interest margin in the Wealth Management business segment. Overall for the Firm, increased client trading and capital markets activity, particularly in the first half of the year, has benefited Institutional Securities business segment results in Sales and trading and Investment banking underwriting revenues. However, the high levels of client trading and capital markets activity experienced in the current year period may not be repeated and Investment banking advisory activity may continue to be subdued. Refer to “Risk Factors” herein and Forward Looking Statements in the 2019 Form 10-K.
We continue to use the elements of our Enterprise Risk Management framework to manage the significant uncertainty in the present economic and market conditions. See “Quantitative and Qualitative Disclosures about Risk” in the 2019 Form 10-K for further information.

September 20172020 Form 10-Q46 

Table of Contents
Management’s Discussion and AnalysisLOGO
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Selected Financial Information and Other Statistical Data

  Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
$ in millions 2017  2016  2017  2016 

Income from continuing operations applicable to Morgan Stanley

 $1,775  $1,589  $5,489  $4,312  

Income (loss) from discontinued operations applicable to Morgan Stanley

  6   8   (21)   1  

Net income applicable to Morgan Stanley

  1,781   1,597   5,468   4,313  

Preferred stock dividends and other

  93   79   353   314  

Earnings applicable to Morgan Stanley common shareholders

 $1,688  $      1,518  $5,115  $      3,999  

Effective income tax rate from continuing operations

        28.1%   31.5%         29.7%   32.7% 

   At September 30,
2017		  At December 31,
2016		 

 Capital ratios

 

 Common Equity Tier 1 capital ratio1

  16.9%   16.9%  

 Tier 1 capital ratio1

  19.3%   19.0%  

 Total capital ratio1

  22.2%   22.0%  

 Tier 1 leverage ratio

  8.4%   8.4%  

 Three Months Ended September 30,Nine Months Ended September 30,
$ in millions2020201920202019
Net income applicable to Morgan Stanley$2,717
$2,173
$7,611
$6,803
Preferred stock dividends120
113
377
376
Earnings applicable to Morgan Stanley common shareholders$2,597
$2,060
$7,234
$6,427
     
Expense efficiency ratio1
70.1%73.0%71.1%72.0%
ROE2
13.2%11.2%12.6%11.8%
Adjusted ROE3
12.6%10.7%12.5%11.5%
ROTCE2,3
15.0%12.9%14.3%13.5%
Adjusted ROTCE3
14.3%12.3%14.2%13.1%
Pre-tax profit margin4
29.9%27.0%28.9%28.0%
Pre-tax profit margin by segment4
   
Institutional Securities34%26%32%28%
Wealth Management24%28%25%28%
Investment Management30%22%26%22%
in millions, except per share and employee dataAt
September 30,
2020		At
December 31,
2019
Liquidity resources5
$267,292
$215,868
Loans6
$146,237
$130,637
Total assets$955,940
$895,429
Deposits$239,253
$190,356
Borrowings$203,444
$192,627
Common shares outstanding1,576
1,594
Common shareholders' equity$79,874
$73,029
Tangible common shareholders’ equity3
$70,646
$63,780
Book value per common share7
$50.67
$45.82
Tangible book value per common share3,7
$44.81
$40.01
Worldwide employees63,051
60,431
Capital ratios8
  
Common Equity Tier 1 capital—Advanced16.9%16.9%
Common Equity Tier 1 capital—Standardized17.4%16.4%
Tier 1 capital—Advanced19.0%19.2%
Tier 1 capital—Standardized19.5%18.6%
Tier 1 leverage8.3%8.3%
SLR9
7.4%6.4%
1.

At September 30, 2017, our capital ratios are based on the Standardized Approach transitional rules. At December 31, 2016, our capital ratios were based on the Advanced Approach transitional rules.

The expense efficiency ratio represents total non-interest expenses as a percentage of net revenues.
2.ROE and ROTCE represent annualized earnings applicable to Morgan Stanley common shareholders as a percentage of average common equity and average tangible common equity, respectively.
3.Represents a non-GAAP financial measure. See “Selected Non-GAAP Financial Information” herein.
4.Pre-tax profit margin represents income before income taxes as a percentage of net revenues.
5.For a discussion of our regulatory capital ratios,Liquidity resources, see “Liquidity and Capital Resources—Regulatory Requirements”Liquidity Risk Management Framework—Liquidity Resources” herein.

in millions, except per share and
employee data		 At September 30,
2017		  At December 31,
2016		 

Loans1

 $104,431  $94,248 

Total assets

 $853,693  $814,949 

Global Liquidity Reserve2

 $189,966  $202,297 

Deposits

 $154,639  $155,863 

Long-term borrowings

 $191,677  $164,775 

Common shareholders’ equity

 $70,458  $68,530 

Common shares outstanding

  1,812   1,852 

Book value per common share3

 $38.87  $36.99 

Worldwide employees

  57,702   55,311 

1.

6.Amounts include loans held for investment (net of allowance) and loans held for sale but exclude loans at fair value, which are included in Trading assets in the balance sheets (see Note 710 to the financial statements).

2.

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 2016 Form10-K.

3.7.

Book value per common share equalsand tangible book value per common share equal common shareholders’ equity and tangible common shareholders’ equity, respectively, divided by common shares outstanding.

8.At September 30, 2020 and December 31, 2019, our risk-based capital ratios are based on the Advanced Approach and the Standardized Approach rules, respectively. For a discussion of our capital ratios, see “Liquidity and Capital Resources—Regulatory Requirements” herein.
9.At September 30, 2020, our SLR reflects the impact of a Federal Reserve interim final rule in effect until March 31, 2021. For further information, see “Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments” herein.

SelectedNon-Generally Accepted Accounting Principles(“Non-GAAP”) Non-GAAP Financial Information

We prepare our financial statements using accounting principles generally accepted in the United States of America (“U.S. GAAP”).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 Statementdefinitive 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. We consider thenon-GAAP financial measures we disclose to be useful to us, investors, analysts and analystsother stakeholders by providing further transparency about, or an alternate means of assessing, our financial condition, operating results, prospective regulatory capital requirements or capital adequacy.
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 principalnon-GAAP financial measures presented in this document are set forth below.

Reconciliations from U.S. GAAP toNon-GAAP Consolidated Financial Measures

  Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
$ in millions, except per share data 2017  2016  2017  2016 

Net income applicable to Morgan Stanley

 

 

U.S. GAAP

 $1,781  $    1,597  $5,468  $      4,313 

Impact of discrete tax provision1

  (83)   —    (65)   —  

Net income applicable to Morgan Stanley, excluding discrete taxprovision—non-GAAP

 $1,698  $1,597  $5,403  $4,313 

Earnings per diluted common share

 

 

U.S. GAAP

 $0.93  $0.81  $2.79  $2.11 

Impact of discrete tax provision1

  (0.05)   —    (0.03)   —  

Earnings per diluted common share, excluding discrete taxprovision—non-GAAP

 $0.88  $0.81  $2.76  $2.11 

Effective income tax rate

    

U.S. GAAP

        28.1%   31.5%         29.7%   32.7% 

Impact of discrete tax provision1

  3.3%   —    0.8%   —  

Effective income tax rate from continuing operations, excluding discrete taxprovision—non-GAAP

  31.4%   31.5%   30.5%   32.7% 
in the following tables.

5September 2017 Form 10-Q

7September 2020 Form 10-Q
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Management’s Discussion and AnalysisLOGO
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Tangible Equity

        Monthly Average Balance 
        

Three Months
Ended

September 30,

  

Nine Months
Ended

September 30,

 
$ in millions 

At

September 30,
2017

  

At

December 31,
2016

  2017  2016  2017  2016 

U.S. GAAP

      

Common equity

  $70,458  $68,530   $70,487  $69,531  $69,786  $68,859 

Preferred equity

  8,520   7,520    8,520   7,520   8,420   7,520 

Morgan Stanley shareholders’ equity

  78,978   76,050    79,007   77,051   78,206   76,379 

Junior subordinated debentures issued to capital trusts

  —     —      —     1,427   —     2,278 

Less: Goodwill and net intangible assets

  (9,079)   (9,296)   (9,120)   (9,368)   (9,192)   (9,447) 

Morgan Stanley tangible shareholders’equity—non-GAAP

  $69,899  $66,754   $69,887  $69,110  $69,014  $69,210 

U.S. GAAP

      

Common equity

  $70,458  $68,530   $70,487  $69,531  $69,786  $68,859 

Less: Goodwill and net intangible assets

  (9,079)   (9,296)   (9,120)   (9,368)   (9,192)   (9,447) 

Tangible commonequity—non-GAAP

  $61,379  $59,234   $61,367  $60,163  $60,594  $59,412 


Reconciliations from U.S. GAAP to Non-GAAP ConsolidatedNon-GAAP Financial Measures

  Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
$ in billions      2017            2016            2017            2016      

Average common equity1, 2

 

   

Unadjusted

 $70.5  $69.5  $69.8  $68.9 

Excluding DVA

  71.3   69.6   70.4   69.0 

Excluding DVA and discrete tax provision (benefit)

  71.2   69.6   70.4   69.0 

Return on average common equity1, 3, 4

 

  

Unadjusted

  9.6%   8.7%   9.8%   7.7% 

Excluding DVA

  9.5%   8.7%   9.7%   7.7% 

Excluding DVA and discrete tax provision (benefit)

  9.0%   8.7%   9.6%   7.7% 

Average tangible common equity1, 2, 5

 

  

Unadjusted

 $61.4  $60.2  $60.6  $59.4 

Excluding DVA

  62.1   60.2   61.2   59.5 

Excluding DVA and discrete tax provision (benefit)

  62.1   60.2   61.3   59.5 

Return on average tangible common equity1, 4

 

 

Unadjusted

  11.0%   10.1%   11.3%   9.0% 

Excluding DVA

  10.9%   10.1%   11.1%   9.0% 

Excluding DVA and discrete tax provision (benefit)

  10.3%   10.1%   11.0%   9.0% 

Expense efficiency ratio6

  73.0%   73.3%   72.1%   74.2% 

   At September 30,
2017		  At December 31,
2016		 
Tangible book value per common share5 $33.86  $31.98 

 Three Months Ended
September 30,		Nine Months Ended
September 30,
$ in millions, except per share data2020201920202019
Earnings applicable to Morgan Stanley common shareholders$2,597
$2,060
$7,234
$6,427
Impact of adjustments(113)(89)(10)(190)
Adjusted earnings applicable to Morgan Stanley common shareholders—non-GAAP1
$2,484
$1,971
$7,224
$6,237
Earnings per diluted common share$1.66
$1.27
$4.62
$3.89
Impact of adjustments(0.07)(0.06)—
(0.12)
Adjusted earnings per diluted common share—non-GAAP1
$1.59
$1.21
$4.62
$3.77
Effective income tax rate21.1%18.2%22.2%19.1%
Impact of adjustments3.2%3.2%0.1%2.2%
Adjusted effective income tax rate—non-GAAP1
24.3%21.4%22.3%21.3%
 Average Monthly Balance
 Three Months Ended September 30,Nine Months Ended September 30,
$ in millions2020201920202019
Tangible equity    
Morgan Stanley shareholders' equity$87,210
$81,912
$85,378
$81,028
Less: Goodwill and net intangible assets(9,260)(9,389)(9,248)(9,097)
Tangible Morgan Stanley shareholders' equity—Non-GAAP$77,950
$72,523
$76,130
$71,931
Common shareholders' equity$78,690
$73,392
$76,858
$72,508
Less: Goodwill and net intangible assets(9,260)(9,389)(9,248)(9,097)
Tangible common shareholders' equity—Non-GAAP$69,430
$64,003
$67,610
$63,411
 Three Months Ended
September 30,		Nine Months Ended
September 30,
$ in billions2020201920202019
Average common equity    
Unadjusted—GAAP$78.7
$73.4
$76.9
$72.5
Adjusted1—Non-GAAP
78.7
73.4
76.9
72.4
ROE2
    
Unadjusted—GAAP13.2%11.2%12.6%11.8%
Adjusted—Non-GAAP1, 3
12.6%10.7%12.5%11.5%
Average tangible common equity—Non-GAAP
Unadjusted$69.4
$64.0
$67.6
$63.4
Adjusted1
69.4
64.0
67.6
63.3
ROTCE2—Non-GAAP
    
Unadjusted15.0%12.9%14.3%13.5%
Adjusted1, 3
14.3%12.3%14.2%13.1%
Non-GAAP Financial Measures by Business Segment

  Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
$ in billions 2017  2016  2017  2016 

Pre-tax profit margin7

    

Institutional Securities

  28%   30%   31%   30% 

Wealth Management

  27%   23%   25%   22% 

Investment Management

  19%   18%   19%   16% 

Consolidated

  27%   27%   28%   26% 

Average common equity8

 

  

Institutional Securities

 $40.2  $43.2  $40.2  $43.2 

Wealth Management

  17.2   15.3   17.2   15.3 

Investment Management

  2.4   2.8   2.4   2.8 

Parent Company

  10.7   8.2   10.0   7.6 

Consolidated average common equity

 $70.5  $      69.5  $69.8  $      68.9 

Return on average common equity4

 

  

Institutional Securities

  8.9%   8.3%   9.6%   7.1% 

Wealth Management

      15.8%   14.5%       15.0%   13.3% 

Investment Management

  18.8%   9.3%   15.4%   9.0% 

Consolidated

  9.6%   8.7%   9.8%   7.7% 

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.

 Three Months Ended
September 30,		Nine Months Ended
September 30,
$ in billions2020201920202019
Average common equity4, 5
   
Institutional Securities$42.8
$40.4
$42.8
$40.4
Wealth Management18.2
18.2
18.2
18.2
Investment Management2.6
2.5
2.6
2.5
Average tangible common equity4, 5
   
Institutional Securities$42.3
$39.9
$42.3
$39.9
Wealth Management10.4
10.2
10.4
10.2
Investment Management1.7
1.5
1.7
1.5
ROE6
    
Institutional Securities14.5%9.8%13.4%10.8%
Wealth Management17.9%20.6%18.2%20.2%
Investment Management34.0%22.1%23.0%21.5%
ROTCE6
    
Institutional Securities14.7%9.9%13.5%10.9%
Wealth Management31.4%36.9%31.7%36.2%
Investment Management52.6%35.6%35.6%34.7%
1.

Beginning in 2017, with the adoption of the accounting updateImprovements to Employee Share-Based Payment Accounting, the incomeAdjusted amounts exclude net discrete tax consequencesprovisions (benefits) that are intermittent and include those that are recurring. Provisions (benefits) related to share-based payments are required to be recognized in Provision for income taxes in the income statements upon the conversion of employee share-based awards which primarilyare expected to occur in the first quarter of each year. The impact of the income tax consequences upon conversion of the awards may be either a benefit or a provisionevery year and, is treated as a discrete item. When excludingsuch, are considered recurring discrete tax provision (benefit) above onlyitems. For further information on net discrete tax provisions (benefits) other than income tax consequences arising from conversion activity are excluded as we anticipate conversion activity each quarter. See Note 2 to the financial statements for information on the adoption of the accounting updateImprovements to Employee Share-Based Payment Accounting. For further information on the discrete tax provision,, see “Supplemental Financial Information and Disclosures—Information—Income Tax Matters” herein.

2.

The impact of DVA on average common equityROE and average tangible common equity was approximately $(775) million and $(62) million in the current quarter and prior year quarter, respectively, and approximately $(652) million and $(118) million in the current year period and prior year period, respectively.

3.

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.

4.

Return on average common equity and return on average tangible common equity equalROTCE represent annualized net incomeearnings applicable to Morgan Stanley less preferred dividendscommon shareholders as a percentage of average common equity and average tangible common equity, respectively, on a consolidated or business segment basis as indicated.respectively. When excluding DVA, it is only excluded from the denominator. When excluding theintermittent net discrete tax provision (benefit)provisions (benefits), both the numerator and average denominator are adjusted.

5.

Tangible book value per common share equals tangible common equity divided by common shares outstanding.

6.

The expense efficiency ratio represents totalnon-interest expenses as a percentage of net revenues.

7.

Pre-tax profit margin represents income from continuing operations before income taxes as a percentage of net revenues.

September 2017 Form 10-Q3.6
The calculations used in determining our “ROE and ROTCE Targets” referred to in the following section are the Adjusted ROE and Adjusted ROTCE amounts shown in this table.

Management’s Discussion4.Average common equity and AnalysisLOGO

8.

Averageaverage tangible 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"Liquidity and Capital Resources—Regulatory Requirements—Attribution of Average Common Equity According to the Required Capital Framework” herein).

5.
The sums of the segments' Average common equity and remains fixed throughoutAverage tangible common equity do not equal the year until the next annual reset.

Consolidated measures due to Parent equity.

6.
The calculation of ROE and ROTCE by segment uses annualized net income applicable to Morgan Stanley by segment less preferred dividends allocated to each segment as a percentage of average common equity and average tangible common equity, respectively, allocated to each segment.


September 2020 Form 10-Q8
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Management’s Discussion and Analysis
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Return on Tangible Common Equity Target

We have

In January 2020, we established an ROEROTCE Target of 9%13% to 11%15% to be achieved by 2017. over the next two years.
Our ROEROTCE Target and the related strategies and goals areis a forward-looking statementsstatement that was based on a normal market environment and may be materially affected by many factors, including, among other things: mergers and acquisitions; macroeconomic and market conditions; legislative and regulatory developments; industry trading and investment banking volumes; equity market levels; interest rate environment; outsized legal expenses andor penalties; the ability to reduce expenses in general;maintain a reduced level of expenses; and capital levels;levels.
With the COVID–19 pandemic, and discrete tax items. the current global economic crisis, it is uncertain that the ROTCE Target will be met within the originally stated time frame. See “Coronavirus Disease (COVID–19) Pandemic” herein and “Risk Factors” for further information on market and economic conditions and their effects on our financial results.
For further information on our ROE Target and related assumptions,non-GAAP measures (ROTCE excluding intermittent net discrete tax items), see “Management’s Discussion and Analysis“Selected Non-GAAP Financial Information” herein. For information on the impact of intermittent net discrete tax items, see “Supplemental Financial Condition and Results of Operations—Executive Summary—Return on Equity Target” in Part II, Item 7 of the 2016 Form10-K.

Information—Income Tax Matters” herein.

Business Segments

Substantially all of our operating revenues and operating expenses are directly attributable to theour 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

For an overview 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 discussionscomponents of our business segments, 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 2016 Form10-K. For a discussion of our compensation expense see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Compensation Expense” in Part II, Item 7 of the 2016 Form10-K. For a discussion of income taxes, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Income Taxes”Segments” in Part II, Item 7 of the 20162019 Form10-K.



7September 2017 Form 10-Q

9September 2020 Form 10-Q
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Management’s Discussion and AnalysisLOGO
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Institutional Securities

Income Statement Information

  Three Months Ended
September 30,		     
$ in millions           2017              2016       % Change 

Revenues

    

Investment banking

 $1,270  $1,104     15% 

Trading

  2,504   2,393     5% 

Investments

  52   36     44% 

Commissions and fees

  561   592     (5)% 

Asset management, distribution and administration fees

  88   68     29% 

Other

  143   243     (41)% 

Totalnon-interest revenues

  4,618   4,436     4% 

Interest income

  1,421   980     45% 

Interest expense

  1,663   863     93% 

Net interest

  (242)   117     N/M 

Net revenues

  4,376   4,553     (4)% 

Compensation and benefits

  1,532   1,657     (8)% 

Non-compensation expenses

  1,608   1,513     6% 

Totalnon-interest expenses

  3,140   3,170     (1)% 

Income from continuing operations before income taxes

  1,236   1,383     (11)% 

Provision for income taxes

  260   381     (32)% 

Income from continuing operations

  976   1,002     (3)% 

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

  6   8     (25)% 

Net income

  982   1,010     (3)% 

Net income applicable to noncontrolling interests

  9   44     (80)% 

Net income applicable to
Morgan Stanley

 $973  $966     1% 
  

Nine Months Ended

September 30,

     
$ in millions           2017              2016       % Change 

Revenues

    

Investment banking

 $4,100  $3,202     28% 

Trading

  8,241   6,782     22% 

Investments

  155   144     8% 

Commissions and fees

  1,811   1,854     (2)% 

Asset management, distribution and administration fees

  268   210     28% 

Other

  442   385     15% 

Totalnon-interest revenues

  15,017   12,577     19% 

Interest income

  3,788   2,999     26% 

Interest expense

  4,515   2,731     65% 

Net interest

  (727)   268     N/M 

Net revenues

  14,290   12,845     11% 

Compensation and benefits

  5,069   4,664     9% 

Non-compensation expenses

  4,812   4,384     10% 

Totalnon-interest expenses

  9,881   9,048     9% 

Income from continuing operations before income taxes

  4,409   3,797     16% 

Provision for income taxes

  1,132   1,109     2% 

Income from continuing operations

  3,277   2,688     22% 

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

  (21)   1     N/M 

Net income

  3,256   2,689     21% 

Net income applicable to
noncontrolling interests

  77   144     (47)% 

Net income applicable to
Morgan Stanley

 $3,179  $2,545     25% 

N/M—Not Meaningful

 Three Months Ended
September 30,		 
$ in millions20202019% Change
Revenues   
Investment banking$1,707
$1,535
11 %
Trading2,807
2,533
11 %
Investments87
(18)N/M
Commissions and fees639
643
(1)%
Asset management114
100
14 %
Other114
51
124 %
Total non-interest revenues5,468
4,844
13 %
Interest income1,086
3,112
(65)%
Interest expense492
2,933
(83)%
Net interest594
179
N/M
Net revenues6,062
5,023
21 %
Compensation and benefits2,001
1,768
13 %
Non-compensation expenses2,013
1,948
3 %
Total non-interest expenses4,014
3,716
8 %
Income before provision for income taxes2,048
1,307
57 %
Provision for income taxes385
189
104 %
Net income1,663
1,118
49 %
Net income applicable to noncontrolling interests16
45
(64)%
Net income applicable to Morgan Stanley$1,647
$1,073
53 %

 

 Nine Months Ended
September 30,		 
$ in millions20202019% Change
Revenues   
Investment banking$4,902
$4,158
18 %
Trading10,375
8,221
26 %
Investments98
257
(62)%
Commissions and fees2,230
1,889
18 %
Asset management342
310
10 %
Other(628)416
N/M
Total non-interest revenues17,319
15,251
14 %
Interest income4,809
9,457
(49)%
Interest expense3,184
9,376
(66)%
Net interest1,625
81
N/M
Net revenues18,944
15,332
24 %
Compensation and benefits6,767
5,376
26 %
Non-compensation expenses6,186
5,591
11 %
Total non-interest expenses12,953
10,967
18 %
Income before provision for income taxes5,991
4,365
37 %
Provision for income taxes1,326
703
89 %
Net income4,665
3,662
27 %
Net income applicable to noncontrolling interests75
97
(23)%
Net income applicable to Morgan Stanley$4,590
$3,565
29 %

Investment Banking
Investment Banking Revenues
 Three Months Ended
September 30,		 
$ in millions20202019% Change
Advisory$357
$550
(35)%
Underwriting:

 
   Equity874
401
118 %
   Fixed income476
584
(18)%
Total Underwriting1,350
985
37 %
Total Investment banking$1,707
$1,535
11 %
 Nine Months Ended
September 30,		 
$ in millions20202019% Change
Advisory$1,181
$1,462
(19)%
Underwriting:

 
Equity2,092
1,286
63 %
Fixed income1,629
1,410
16 %
Total Underwriting3,721
2,696
38 %
Total Investment banking$4,902
$4,158
18 %

September 20172020 Form 10-Q810 

Table of Contents
Management’s Discussion and AnalysisLOGO
mslogo3q20.jpg


Investment Banking

Investment Banking Revenues

   Three Months Ended
September 30,		     
$ in millions      2017           2016       % Change 

Advisory

  $555   $504    10% 

Underwriting:

      

Equity

   273    236    16% 

Fixed income

   442    364    21% 

Total underwriting

   715    600    19% 

Total investment banking

  $1,270   $1,104    15% 
   Nine Months Ended
September 30,		     
$ in millions      2017           2016       % Change 

Advisory

  $1,555   $1,592    (2)% 

Underwriting:

      

Equity

   1,068    662    61% 

Fixed income

   1,477    948    56% 

Total underwriting

   2,545    1,610    58% 

Total investment banking

  $4,100   $3,202    28% 

Investment Banking Volumes

  Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
$ in billions     2017          2016          2017          2016     

Completed mergers and acquisitions1

 $229  $190  $585  $728  

Equity andequity-

related offerings2, 3

  16   13   46   34  

Fixed income offerings2, 4

  60   72   201   185  

Volumes

 Three Months Ended
September 30,		Nine Months Ended
September 30,
$ in billions2020201920202019
Completed mergers and acquisitions1
$88
$215
$633
$582
Equity and equity-related offerings2, 3
25
17
74
47
Fixed income offerings2, 4
91
90
304
211
Source: Thomson Reuters,Refinitiv data atas of October 2, 2017.1, 2020. Transaction volumes may not be indicative of net revenues in a given period. In addition, transaction volumes for prior periods may vary from amounts previously reported due to the subsequent withdrawal, change in value or change in the valuetiming of a transaction.

certain transactions.
1.

Amounts include

Includes transactions of $100 million or more. Completed mergers and acquisitions volumes are basedBased on full credit to each of the advisors in a transaction.

2.

Equity and equity-related offerings and fixed income offerings are based

Based on full credit for single book managers and equal credit for joint book managers.

3.

Amounts include

Includes Rule 144A issuances and registered public offerings of common stock, and convertible securities and rights offerings.

4.

Amounts include

Includes Rule 144A and publicly registered issuances, non-convertible preferred stock, mortgage-backed and asset-backed securities, and taxable municipal debt. Amounts include publicly registered and Rule 144A issuances. Amounts excludeExcludes leveraged loans andself-led issuances.

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

Current Quarter

Investment banking revenues of $1,270$1,707 million in the current quarter increased 11% from the prior year quarter, reflecting an increase in revenues in our Equity underwriting business, partially offset by a decrease in revenues in our Advisory and $4,100Fixed income underwriting businesses.

Advisory revenues decreased in the current quarter primarily as a result of lower volumes of completed M&A activity.

Equity underwriting revenues increased, primarily in initial public offerings, follow-on offerings and secondary block share trades, on overall higher volumes in the current quarter.

Fixed income underwriting revenues decreased in the current quarter primarily in non-investment grade and investment grade loan issuances, reflecting lower event-driven activity.
Investment Banking Revenues in the Current Year Period
Investment banking revenues of $4,902 million in the current year period increased 15% and 28%18% from the comparable prior year periods. Theperiod, reflecting an increase in the current quarter reflected both higherrevenues in our underwriting and advisory revenues. The increasebusinesses, partially offset by a decrease in the current year period was due to higher underwriting revenues.

revenues in our Advisory revenues increased in the current quarter reflecting the higher volumes of completed merger, acquisition and restructuring transactions (“M&A”) (see Investment Banking Volumes table). business.

Advisory revenues decreased in the current year period as there were fewer completed transactions.

Equity underwriting revenues increased, primarily in follow-on offerings, secondary block share trades, initial public offerings and convertible issuances, on overall higher volumes in the current year period.

Fixed income underwriting revenues increased, primarily in investment grade and non-investment grade bond issuances, partially offset by investment grade loan issuances, on overall higher volumes.
See “Investment Banking Volumes” herein.
Sales and Trading Net Revenues

By Income Statement Line Item
 Three Months Ended
September 30,		 
$ in millions20202019% Change
Trading$2,807
$2,533
11 %
Commissions and fees639
643
(1)%
Asset management114
100
14 %
Net interest594
179
N/M
Total$4,154
$3,455
20 %
 Nine Months Ended
September 30,		 
$ in millions20202019% Change
Trading$10,375
$8,221
26%
Commissions and fees2,230
1,889
18%
Asset management342
310
10%
Net interest1,625
81
N/M
Total$14,572
$10,501
39%
By Business
 Three Months Ended
September 30,		 
  
$ in millions20202019% Change
Equity$2,262
$1,991
14 %
Fixed Income1,924
1,430
35 %
Other(32)34
(194)%
Total$4,154
$3,455
20 %
 Nine Months Ended
September 30,		 
  
$ in millions20202019% Change
Equity$7,303
$6,136
19%
Fixed Income7,160
4,273
68%
Other109
92
18%
Total$14,572
$10,501
39%


11September 2020 Form 10-Q
Table of Contents
Management’s Discussion and Analysis
mslogo3q20.jpg

Sales and Trading Revenues—Equity and Fixed Income
 Three Months Ended
September 30, 2020
   Net 
$ in millionsTrading
Fees1
Interest2
Total
Financing$929
$108
$116
$1,153
Execution services606
580
(77)1,109
Total Equity$1,535
$688
$39
$2,262
Total Fixed Income$1,420
$65
$439
$1,924
 Three Months Ended
September 30, 2019
   Net 
$ in millionsTrading
Fees1
Interest2
Total
Financing$1,049
$88
$(90)$1,047
Execution services446
564
(66)944
Total Equity$1,495
$652
$(156)$1,991
Total Fixed Income$1,329
$90
$11
$1,430

 Nine Months Ended
September 30, 2020
   Net 
$ in millionsTrading
Fees1
Interest2
Total
Financing$2,847
$325
$172
$3,344
Execution services2,134
2,014
(189)3,959
Total Equity$4,981
$2,339
$(17)$7,303
Total Fixed Income$5,661
$234
$1,265
$7,160
 Nine Months Ended
September 30, 2019
   Net 
$ in millionsTrading
Fees1
Interest2
Total
Financing$3,249
$280
$(500)$3,029
Execution services1,597
1,671
(161)3,107
Total Equity$4,846
$1,951
$(661)$6,136
Total Fixed Income$4,200
$249
$(176)$4,273
1.
Includes Commissions and fees and Asset management revenues.
2.
Includes funding costs, which are allocated to the businesses based on funding usage.
Sales and Trading Net Revenues in the Current Quarter
Equity
Equity sales and trading net revenues of $2,262 million in the current quarter increased 14% from the prior year quarter, reflecting increases in both our execution services and financing businesses.
Financing revenues increased from the prior year quarter, primarily driven by client activity. The effect of lower volumesinterest rates was an increase in Net interest driven by lower funding costs, partially offset by reduced Trading revenues.
Execution services revenues increased from the prior year quarter primarily due to higher Trading revenues reflecting
favorable inventory management results and higher client activity in derivatives products.
Fixed Income
Fixed Income sales and trading net revenues of completed M&A,$1,924 million in the current quarter were 35% higher than the prior year quarter, reflecting strong performance across all products.
Global macro products revenues increased primarily due to improved inventory management in rates and foreign exchange products, partially offset by lower levels of client activity across all products.
Credit products revenues increased primarily driven by improved inventory management and higher client activity, which benefited from an active primary market in the current quarter. Net interest revenues increased reflecting lower funding costs.
Commodities products and Other revenues increased primarily due to favorable inventory management in Commodities, mainly in precious metals products.
Other
Other sales and trading losses of $32 million in the current quarter primarily reflect losses on economic hedges related to certain Borrowings and corporate lending activity, partially offset by gains from investments associated with certain employee deferred compensation plans.
Sales and Trading Net Revenues in the Current Year Period
Equity
Equity sales and trading net revenues of $7,303 million in the current year period increased 19% from the prior year period, reflecting increases in both our execution services and financing businesses.
Financing revenues increased from the prior year period, primarily driven by client activity. The effect of lower interest rates was an increase in Net interest driven by lower funding costs, partially offset by reduced Trading revenues.
Execution services revenues increased from the prior year period, reflecting higher client activity and favorable inventory management results in cash equities and derivatives, partially offset by the positive impact of counterparty exposure losses.

September 2020 Form 10-Q12
Table of Contents
Management’s Discussion and Analysis
mslogo3q20.jpg

Fixed Income
Fixed Income sales and trading net revenues of $7,160 million in the current year period were 68% higher fee realizations.

than the prior year period, reflecting strong performance across all products.

Equity underwritingGlobal macro products revenues increased primarily due to higher client activity in both rates and foreign exchange products and improved inventory management results.

Credit products revenues increased primarily due to higher client activity in corporate credit and securitized products from higher volumes and wider bid-offer spreads, partially offset by the effect of widening credit spreads on inventory. Net interest revenues increased reflecting lower funding costs and higher average balances in secured lending facilities.
Commodities products and Other revenues increased primarily reflecting favorable inventory management and higher client activity in commodities, partially offset by lower client structuring activity within derivatives counterparty credit risk management.
Other
Other sales and trading revenues of $109 million in the current year period increased from the prior year period reflecting gains on hedges associated with corporate lending activity, partially offset by lower yields on liquidity investments, lower gains from investments associated with certain employee deferred compensation plans and losses on economic hedges related to certain Borrowings.

Investments, Other Revenues, Non-interest Expenses, and Income Tax Items
Investments
Net investments gains of $87 million in the current quarter include gains on certain business-related investments compared with losses in the prior year quarter.
Net investments gains of $98 million in the current year period include gains on certain business-related investments. The prior year period included gains associated with an investment’s initial public offering.
Other Revenues
Other revenues of $114 million in the current quarter increased compared to the prior year quarter primarily as a result of mark-to-market gains on loans and lending commitments held for sale as credit spreads tightened, partially offset by an increase in the provision for credit losses on loans held for investment.
Other net losses of $628 million in the current year period were primarily as a result of mark-to-market losses on loans
and lending commitments held for sale as credit spreads widened and an increase in the provision for credit losses on loans held for investment.
Non-interest Expenses
Non-interest expenses of $4,014 million in the current quarter increased from the prior year quarter, primarily reflecting a 13% increase in Compensation and benefits expenses.
Compensation and benefits expenses increased in the current quarter primarily due to increases in discretionary incentive compensation, driven by higher revenues, and current year period as a result of higher global market volumes in bothfollow-on and initial public offerings (see Investment Banking Volumes table). In the current year period, equity underwriting revenues also increased as a result of higher levels of deal activity. Fixed income underwriting revenuesexpenses related to certain deferred compensation plans linked to investment performance.

Non-compensation expenses increased in the current quarter primarily due to highernon-investment grade bond fees volume-related expenses and loan fees. Fixed income underwritinginformation processing and communications expenses, partially offset by lower litigation costs.
Non-interest expenses of $12,953 million in the current year period increased from the prior year period, reflecting a 26% increase in Compensation and benefits expenses and an 11% increase in Non-compensation expenses.
Compensation and benefits expenses increased in the current year period primarily due to increases in discretionary incentive compensation, driven by higher revenues, partially offset by lower expenses related to certain deferred compensation plans linked to investment performance.

Non-compensation expenses increased in the current year period primarily due to higher bond feesvolume-related expenses, an increase in the provision for credit losses for lending commitments held for investment andnon-investment grade loan fees.

Sales off-balance sheet instruments, and Trading Net Revenues

By higher information processing and communications expenses. Partially offsetting these increases were lower marketing and business development expenses.

Income Statement Line Item

  Three Months Ended
September 30,		     
$ in millions         2017            2016       % Change 

Trading

 $2,504  $2,393    5% 

Commissions and fees

  561   592    (5)% 

Asset management, distribution and administration fees

  88   68    29% 

Net interest

  (242)   117    N/M 

Total

 $2,911  $3,170    (8)% 
  Nine Months Ended
September 30,		     
$ in millions 2017  2016   % Change 

Trading

 $8,241  $6,782    22% 

Commissions and fees

  1,811   1,854    (2)% 

Asset management, distribution and administration fees

  268   210    28% 

Net interest

  (727)   268    N/M 

Total

 $9,593  $9,114    5% 

N/M—Not Meaningful

Tax Items
The current quarter and prior year quarter included intermittent net discrete tax benefits of $115 million and $67 million, respectively.

The current year period and prior year period included intermittent net discrete tax benefits of $17 million and $168 million, respectively.
For further information, see “Supplemental Financial Information—Income Tax Matters” herein.

9September 2017 Form 10-Q

13September 2020 Form 10-Q
Table of Contents
Management’s Discussion and AnalysisLOGO

By Business

  Three Months Ended
September 30,		     
$ in millions       2017            2016       % Change 

Equity

 $    1,891  $1,883    —% 

Fixed income

  1,167   1,479    (21)% 

Other

  (147)   (192)    23% 

Total

 $2,911  $3,170    (8)% 
  Nine Months Ended
September 30,		     
$ in millions       2017            2016       % Change 

Equity

 $6,062  $            6,084    —% 

Fixed income

  4,120   3,649    13% 

Other

  (589)   (619)    5% 

Total

 $9,593  $9,114    5% 

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

mslogo3q20.jpg

Wealth Management

Income Statement Information
 Three Months Ended
September 30,		 
$ in millions20202019% Change
Revenues   
Investment banking$135
$118
14 %
Trading268
61
N/M
Investments1
—
N/M
Commissions and fees477
416
15 %
Asset management2,793
2,639
6 %
Other94
81
16 %
Total non-interest revenues3,768
3,315
14 %
Interest income1,065
1,378
(23)%
Interest expense176
335
(47)%
Net interest889
1,043
(15)%
Net revenues4,657
4,358
7 %
Compensation and benefits2,684
2,340
15 %
Non-compensation expenses853
780
9 %
Total non-interest expenses3,537
3,120
13 %
Income before provision for income taxes$1,120
$1,238
(10)%
Provision for income taxes278
276
1 %
Net income applicable to Morgan Stanley$842
$962
(12)%

 Nine Months Ended
September 30,		 
$ in millions20202019% Change
Revenues   
Investment banking$403
$365
10 %
Trading413
525
(21)%
Investments9
1
N/M
Commissions and fees1,538
1,250
23 %
Asset management7,980
7,544
6 %
Other216
281
(23)%
Total non-interest revenues10,559
9,966
6 %
Interest income3,468
4,139
(16)%
Interest expense653
950
(31)%
Net interest2,815
3,189
(12)%
Net revenues13,374
13,155
2 %
Compensation and benefits7,625
7,184
6 %
Non-compensation expenses2,432
2,302
6 %
Total non-interest expenses10,057
9,486
6 %
Income before provision for income taxes$3,317
$3,669
(10)%
Provision for income taxes758
830
(9)%
Net income applicable to Morgan Stanley$2,559
$2,839
(10)%



Financial Information and Statistical Data
 At
September 30,
2020		At
December 31,
2019
$ in billions, except employee data
Client assets$2,852
$2,700
Fee-based client assets1
$1,333
$1,267
Fee-based client assets as a percentage of total client assets47%47%
Client liabilities2
$100
$90
Investment securities$88.6
$67.2
Loans and lending commitments$105.9
$93.2
Wealth Management representatives15,469
15,468
 Three Months Ended
September 30,
 20202019
Per representative:  
Annualized revenues ($ in thousands)3
$1,207
$1,118
Client assets ($ in millions)4
$184
$165
Fee-based asset flows ($ in billions)5
$23.8
$15.5
 Nine Months Ended
September 30,
 20202019
Per representative:  
Annualized revenues ($ in thousands)3
$1,155
$1,121
Client assets ($ in millions)4
$184
$165
Fee-based asset flows ($ in billions)5
$53.3
$40.1
1.

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

Fee-based client assets represent the amount and type of assets in client accounts where the interest-bearing securities and loans making up this business, a significant portion of the resultsfee for services is also reflected in Net interest revenues.

•

Commodities products and Other. 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. Other activities include the results from the centralized management of our fixed income derivative counterparty exposures, which are primarily recorded in Trading revenues.

Sales and Trading Net Revenues—Equity and Fixed Income

  

Three Months Ended

September 30, 2017

 
$ in millions     Trading        Fees1    Net
    Interest2  		  Total 

Financing

 $1,029  $92  $(206)  $915 

Execution services

  540   495   (59)   976 

Total Equity

 $1,569  $587  $(265)  $1,891 

Total Fixed income

 $1,073  $65  $29  $1,167 

  

Three Months Ended

September 30, 2016

 
$ in millions     Trading        Fees1    Net
Interest2		  Total 

Financing

 $872  $83  $(110)  $845 

Execution services

  536   541   (39)   1,038 

Total Equity

 $1,408  $624  $(149)  $1,883 

Total Fixed income

 $1,209  $38  $232  $1,479 

  

Nine Months Ended

September 30, 2017

 
$ in millions     Trading        Fees1    Net
    Interest2  		  Total 

Financing

 $3,126  $269  $(621)  $2,774 

Execution services

  1,805   1,643   (160)   3,288 

Total Equity

 $4,931  $1,912  $(781)  $6,062 

Total Fixed income

 $3,785  $167  $168  $4,120 

  

Nine Months Ended

September 30, 2016

 
$ in millions     Trading        Fees1    Net
    Interest2  		  Total 

Financing

 $2,797  $259  $(152)  $2,904 

Execution services

  1,621   1,690   (131)   3,180 

Total Equity

 $4,418  $1,949  $(283)  $6,084 

Total Fixed income

 $2,782  $115  $752  $3,649 

1.

Includes Commissions and fees and Asset management, distribution and administration fees.

calculated based on those assets.
2.

Funding costs are allocated to the businesses based on funding usage

Client liabilities include securities-based and are included in Net interest.

other loans (including tailored lending), residential real estate loans and margin lending.

3.Revenues per representative equals Wealth Management’s annualized net revenues divided by the average number of representatives.
4.
Client assets per representative equals total period-end client assets divided by period-end number of representatives.
5.Excludes institutional cash management-related activity. For a description of the Inflows and Outflows included within Fee-based asset flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Wealth Management” in the 2019 Form 10-K.

September 20172020 Form 10-Q1014 

Table of Contents
Management’s Discussion and AnalysisLOGO
mslogo3q20.jpg

We manage each of the sales and trading businesses based on its aggregate net revenues, which are comprised of the 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.

For additional information on total Trading revenues, see the table “Trading

Transactional Revenues by Product Type” in Note 4 to the financial statements.

Sales and Trading

 Three Months Ended
September 30,		 
$ in millions20202019% Change
Investment banking$135
$118
14%
Trading268
61
N/M
Commissions and fees477
416
15%
Total$880
$595
48%
Transactional revenues as a % of Net revenues19%14% 
 Nine Months Ended
September 30,		 
$ in millions20202019% Change
Investment banking$403
$365
10 %
Trading413
525
(21)%
Commissions and fees1,538
1,250
23 %
Total$2,354
$2,140
10 %
Transactional revenues as a % of Net revenues18%16% 
Net Revenues during the Current Quarter

Equity

Equity sales and trading net

Transactional Revenues
Transactional revenues of $1,891$880 million in the current quarter were relatively unchangedincreased 48% from the prior year quarter reflectingprimarily as a result of higher resultsTrading revenues and higher Commissions and fees.
Trading revenues increased in our financing business,the current quarter primarily due to gains from investments associated with certain employee deferred compensation plans, partially offset by lower resultsfixed income revenues.
Commissions and fees increased in execution services.

the current quarter primarily due to increased client activity in equities.

FinancingTransactional revenues of $2,354 million in the current year period increased 8%10% from the prior year period primarily as a result of higher Commissions and fees, partially offset by lower Trading revenues.

Trading revenues decreased in the current year period primarily due to lower fixed income revenues.
Commissions and fees increased in the current year period primarily due to increased client activity in equities.
Asset Management
Asset management revenues of $2,793 million in the current quarter increased 6% compared with the prior year quarter due to higher client activity in equity swaps reflected in Trading revenues,fee-based asset levels during the current quarter as a result of positive net flows and market appreciation, partially offset by lower Net interestaverage fee rates.
Asset management revenues due to a shiftof $7,980 million in the mix of financing transactions.

Execution services decreasedcurrent year period increased 6% from the prior year quarterperiod primarily

due to higher fee-based asset levels during the current year period as reduceda result of market volumesappreciation and positive net flows, partially offset by lower average fee rates.
See “Fee-Based Client Assets—Rollforwards” herein.
Other
Other revenues of $216 million in the United States resultedcurrent year period decreased 23% from the prior year period primarily due to lower realized gains from the AFS securities portfolio and an increase in the provision for credit losses.
Net Interest
Net interest of $889 million and $2,815 million decreased 15% and 12%, from the prior year periods primarily due to the net effect of lower commissions and fees, while reduced Trading revenues from derivative products wereinterest rates, partially offset by increased Trading revenues from cash equity products.

growth in Loans and increases in investment portfolio balances driven by higher brokerage sweep deposits.

Fixed Income

Fixed income net revenues

Non-interest Expenses
Non-interest expenses of $1,167$3,537 million in the current quarter were 21% lower thanincreased 13% from the prior year quarter, primarily as a result of higher Compensation and benefits expenses.
Compensation and benefits expenses increased in the current quarter, primarily due to higher expenses related to certain deferred compensation plans linked to investment performance and an increase in the formulaic payout to Wealth Management representatives, driven by higher compensable revenues.
Non-compensation expenses increased in the current quarter, reflecting a regulatory charge, as well as expenses associated with the E*TRADE acquisition, partially offset by lower resultsmarketing and business development expenses.
Non-interest expenses of $10,057 million in creditthe current year period increased 6% from the prior year period, primarily as a result of higher Compensation and global macro products.

benefits expenses.

Credit products decreasedCompensation and benefits expenses increased in the current year period primarily due to tighter corporate credit spreadsan increase in the formulaic payout to Wealth Management representatives, driven by higher compensable revenues, as well as higher salaries.

Non-compensation expenses increased in the current year period, reflecting a regulatory charge, as well as expenses associated with the E*TRADE acquisition and incremental expenses related to Solium Capital, Inc., partially offset by lower volatility compared withmarketing and business development expenses.


15September 2020 Form 10-Q
Table of Contents
Management’s Discussion and Analysis
mslogo3q20.jpg

Fee-Based Client Assets

Rollforwards
$ in billionsAt
June 30,
2020		InflowsOutflows
Market
Impact
At
September 30,
2020
Separately managed1
$313
$19
$(4)$14
$342
Unified managed305
16
(12)18
327
Advisor149
8
(8)9
158
Portfolio manager431
21
(16)23
459
Subtotal$1,198
$64
$(40)$64
$1,286
Cash management38
12
(3)—
47
Total fee-based client assets$1,236
$76
$(43)$64
$1,333
$ in billionsAt
June 30,
2019		InflowsOutflows
Market
Impact
At
September 30,
2019
Separately managed1
$296
$15
$(5)$6
$312
Unified managed292
12
(10)1
295
Advisor149
7
(8)—
148
Portfolio manager400
19
(14)2
407
Subtotal$1,137
$53
$(37)$9
$1,162
Cash management22
4
(3)1
24
Total fee-based client assets$1,159
$57
$(40)$10
$1,186
$ in billionsAt
December 31, 2019		InflowsOutflows
Market
Impact
At
September 30,
2020
Separately managed1
$322
$37
$(14)$(3)$342
Unified managed313
43
(33)4
327
Advisor155
22
(21)2
158
Portfolio manager435
62
(43)5
459
Subtotal$1,225
$164
$(111)$8
$1,286
Cash management42
21
(16)—
47
Total fee-based client assets$1,267
$185
$(127)$8
$1,333
$ in billionsAt
December 31, 2018		InflowsOutflows
Market
Impact
At
September 30,
2019
Separately managed1
$279
$38
$(15)$10
$312
Unified managed257
35
(30)33
295
Advisor137
20
(24)15
148
Portfolio manager353
54
(38)38
407
Subtotal$1,026
$147
$(107)$96
$1,162
Cash management20
12
(12)4
24
Total fee-based client assets$1,046
$159
$(119)$100
$1,186
1.Includes non-custody account values reflecting prior quarter-end balances due to a lag in the reporting of asset values by third-party custodians.


Average Fee Rates
 Three Months Ended
September 30,		Nine Months Ended
September 30,
Fee rate in bps2020201920202019
Separately managed15
15
14
15
Unified managed99
99
99
100
Advisor85
86
85
87
Portfolio manager94
96
94
95
Subtotal73
74
72
74
Cash management5
6
5
6
Total fee-based client assets71
73
70
73
For a description of fee-based client assets and rollforward items in the previous tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Wealth Management—Fee-Based Client Assets” in the 2019 Form 10-K.
Acquisition of E*TRADE
On October 2, 2020, we completed the acquisition of E*TRADE principally via the issuance of approximately $11 billion of common shares. In addition, we issued $0.7 billion of preferred shares in exchange for E*TRADE’s existing preferred stock. We believe the combination will increase the scale and breadth of Morgan Stanley’s Wealth Management franchise, and position us to be an industry leader in Wealth Management across all channels and wealth segments.

The business activities of E*TRADE will be reported within the Wealth Management business segment beginning in the fourth quarter of 2020, and the following table illustrates how E*TRADE’s primary revenues will be presented.
E*TRADE RevenuesMorgan Stanley Revenues
Net interest incomeNet interest
Fees and service charges
Commissions and fees1
Asset management
CommissionsCommissions and fees
1.The primary element of this mapping is revenues from order flow payments.

Non-interest expenses are also expected to be impacted by integration costs. For additional information on the acquisition of E*TRADE, see Note 3 to the financial statements.



September 2020 Form 10-Q16
Table of Contents
Management’s Discussion and Analysis
mslogo3q20.jpg

Investment Management
Income Statement Information
 Three Months Ended
September 30,		 
$ in millions20202019% Change
Revenues   
Trading$2
$2
— %
Investments258
105
146 %
Commissions and fees1
1
— %
Asset management795
664
20 %
Other1
—
N/M
Total non-interest revenues1,057
772
37 %
Interest income7
4
75 %
Interest expense8
12
(33)%
Net interest(1)(8)88 %
Net revenues1,056
764
38 %
Compensation and benefits401
319
26 %
Non-compensation expenses340
280
21 %
Total non-interest expenses741
599
24 %
Income before provision for income taxes315
165
91 %
Provision for income taxes72
27
167 %
Net income243
138
76 %
Net income applicable to noncontrolling interests18
—
N/M
Net income applicable to Morgan Stanley$225
$138
63 %


 Nine Months Ended
September 30,		 
$ in millions20202019% Change
Revenues  
Investment banking$—
$(1)100 %
Trading(13)(2)N/M
Investments552
543
2 %
Commissions and fees1
1
— %
Asset management2,144
1,893
13 %
Other(39)(6)N/M
Total non-interest revenues2,645
2,428
9 %
Interest income22
14
57 %
Interest expense33
35
(6)%
Net interest(11)(21)48 %
Net revenues2,634
2,407
9 %
Compensation and benefits1,012
1,049
(4)%
Non-compensation expenses948
820
16 %
Total non-interest expenses1,960
1,869
5 %
Income before provision for income taxes674
538
25 %
Provision for income taxes136
104
31 %
Net income538
434
24 %
Net income applicable to noncontrolling interests81
32
153 %
Net income applicable to Morgan Stanley$457
$402
14 %
Net Revenues
Investments
Investments revenues of $258 million in the current quarter increased 146% from the prior year quarter, which impacted Trading revenues. In addition, Net interest revenues decreasedprimarily due to a lower level ofhigher accrued carried interest realizedand investment gains in securitized products in the current quarter.

Global macro products decreased due to lower market and interest rate volatility, which reduced Trading revenues. In addition, Net interest revenues decreased due to the effect of interest rate products inventory management.

Commodities products and Other remained relatively unchangedan Asia private equity fund, principally driven by gains from the prior year quarter.

an underlying investment.

Sales and Trading Net Revenues during the Current Year Period

Equity

Equity sales and trading netInvestments revenues of $6,062$552 million in the current year period were relatively unchanged from the prior year period reflecting lower resultsas higher accrued carried interest and investment gains in our financing business,an Asia private equity fund, principally driven by gains from an underlying investment, were mostly offset by higher resultsthe reversal of accrued carried interest and investment losses in execution services.

real estate, infrastructure and certain private equity funds.

FinancingAsset Management

Asset management revenues decreased 4% from the prior year period as Net interest revenues declined from higher net interest costs, reflecting increased liquidity requirements and a shiftof $795 million in the mix of financing transactions, partially offset by higher client activity in equity swaps reflected in Trading revenues.

Execution services increased 3% from the prior year period primarily due to improved results in cash equity inventory management reflected in Trading revenues, partially offset by lower commissionscurrent quarter and fees driven by reduced market volumes in the United States.

Fixed Income

Fixed income net revenues of $4,120$2,144 million in the current year period wereincreased 20% and 13% higher thanfrom the prior year period, driven by higher results across all three product areas.

Credit products increased due to the absence of inventory losses driven by a widening spread environment in thequarter and prior year period, which increased Trading revenues. This was partially offsetrespectively, primarily as a result of higher average AUM, driven by a lower levelstrong investment performance and positive long-term net flows.

See “Assets Under Management or Supervision” herein.

17September 2020 Form 10-Q
Table of Contents
Management’s Discussion and Analysis
mslogo3q20.jpg

Other
Other losses of interest realized in securitized products$39 million in the current year period which reduced Net interest revenues.

primarily reflect an impairment of an investment in a third-party asset manager in the second quarter of 2020.

Global macro productsNon-interest Expenses

Non-interest expenses of $741 million in the current quarter increased due24% from the prior year quarter as a result of higher Compensation and benefits expenses and higher Non-compensation expenses.
Compensation and benefits expenses increased in the current quarter primarily as a result of higher expenses related to increased Trading revenuescertain deferred compensation plans linked to investment performance, increases in foreign exchange driven by market volatility, and structured interest rate productsdiscretionary incentive compensation driven by higher client activity. This was partially offset byAsset management revenues, and higher interest costs impacting Net interest revenues in the current year period which resulted from interest rate products inventory management.

compensation associated with carried interest.

Commodities products and Other increased due to improved metals trading, commodities lending results and the absence of losses from counterparty risk management incurred in the prior year period.

Investments, Other Revenues,Non-interest Expenses and Other Items

Investments

Net investment gains of $52 millionNon-compensation expenses in the current quarter increased from the prior year quarter primarily as a result of higher gainsfee sharing paid to intermediaries on real estate investments,higher average AUM.

Non-interest expenses of $1,960 million in the current year period increased 5% from the prior year period primarily as a result of higher Non-compensation expenses.
Compensation and benefits expenses decreased in the current year period primarily as a result of lower compensation associated with carried interest partially offset by lower gains on equities businesshigher expenses related investments.

to certain deferred compensation plans linked to investment performance, and increases in discretionary incentive compensation driven by higher Asset management revenues.

11September 2017 Form 10-Q

Management’s Discussion and AnalysisLOGO

Net investment gains of $155 millionNon-compensation expenses in the current year period increased from the prior year period primarily reflecting gains on investments associated with our compensation plans in the current year period compared with losses in the prior year period and higher gains on real estate investments, partially offset by lower gains on equities business related investments.

Other

Other revenues of $143 million in the current quarter decreased from the prior year quarter primarily reflecting lowermark-to-market gains on loans held for sale. Other revenues of $442 million in the current year period increased from the prior year period primarily reflecting a decrease in the provision on loans held for investment.

Non-interest Expenses

Non-interest expenses of $3,140 million in the current quarter were relatively unchanged from the prior year quarter primarily reflecting an 8% decrease in Compensation and benefits expenses and a 6% increase inNon-compensation expenses.Non-interest expenses of $9,881 million in the current year period increased from the prior year period reflecting a 9% increase in Compensation and benefits expenses and a 10% increase inNon-compensation expenses.

Compensation and benefits expenses decreased in the current quarter primarily due to decreases in discretionary incentive compensation driven mainly by lower revenues,

and lower amortization of deferred cash and equity awards. Compensation and benefits expenses increased in the current year period primarily due to increases in discretionary incentive compensation driven mainly by higher revenues and the fair value of investments to which certain deferred compensation plans are referenced.

Non-compensation expenses increased in the current quarter and current year period primarily due to higher volume-driven expenses and litigation costs. In addition to higher volume-driven expenses and litigation costs,non-compensation expenses increased in the current year period due to a provision related to the U.K. VAT matter (see Other Items below).

Other Items

During the second quarter, the Firm self-identified an issue regarding VAT on intercompany services provided by certain overseas affiliates to our U.K. group. The Firm is reviewing the reporting of U.K. VAT as the focus and nature of services shifted among geographic locations. In the current year period, we have recorded a provision of $86 million that incorporates potential additional VAT, interest and penalties for this exposure. We are actively working with Her Majesty’s Revenue and Customs to resolve this matter. The provision reflected is based on currently available information and analyses, and our review of this matter is continuing.

September 2017 Form 10-Q12

Management’s Discussion and AnalysisLOGO

Wealth Management

Income Statement Information

  Three Months Ended
September 30,		    
 $ in millions         2017            2016    % Change   

 Revenues

   

 Investment banking

 $125  $129   (3)%  

 Trading

  212   229   (7)%  

 Investments

  1   —   N/M  

 Commissions and fees

  402   433   (7)%  

 Asset management, distribution
and administration fees

  2,393   2,133   12%  

 Other

  62   72   (14)%  

 Totalnon-interest revenues

  3,195   2,996   7%  

 Interest income

  1,155   979   18%  

 Interest expense

  130   94   38%  

 Net interest

  1,025   885   16%  

 Net revenues

  4,220   3,881   9%  

 Compensation and benefits

  2,326   2,203   6%  

 Non-compensation expenses

  775   777   —%  

 Totalnon-interest expenses

  3,101   2,980   4%  

 Income from continuing
operations before income taxes

  1,119   901   24%  

 Provision for income taxes

  421   337   25%  

 Net income applicable to
Morgan Stanley

 $698  $564   24% 

  Nine Months Ended
September 30,		    
 $ in millions         2017            20161    % Change   

 Revenues

   

 Investment banking

 $405  $373   9%  

 Trading

  657   675   (3)%  

 Investments

  3   (2)   N/M  

 Commissions and fees

  1,266   1,268   —%  

 Asset management, distribution and administration fees

  6,879   6,269   10%  

 Other

  191   232   (18)%  

 Totalnon-interest revenues

  9,401   8,815   7%  

 Interest income

  3,348   2,813   19%  

 Interest expense

  320   268   19%  

 Net interest

  3,028   2,545   19%  

 Net revenues

  12,429   11,360   9%  

 Compensation and benefits

  6,940   6,443   8%  

 Non-compensation expenses

  2,340   2,371   (1)%  

 Totalnon-interest expenses

  9,280   8,814   5%  

 Income from continuing operations
before income taxes

  3,149   2,546   24%  

 Provision for income taxes

  1,139   973   17%  

 Net income applicable to
Morgan Stanley

 $2,010  $1,573   28%  

N/M – Not Meaningful

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.

Financial Information and Statistical Data

 $ in billions  At
September 30,
2017 		   At
December 31,
2016		 

 Client assets

  $2,307    $2,103  

 Fee-based client assets1

  $1,003    $877  

 Fee-based client assets as a percentage of total client assets

   43%     42%  

 Client liabilities2

  $78    $73  

 Investment securities portfolio

  $60.6    $63.9  

 Loans and lending commitments

  $76.2    $68.7  

 Wealth Management
representatives

   15,759     15,763  

  Three Months Ended
September 30,		 
             2017                  2016       

Annualized revenues per representative (dollars in thousands)3

 $1,071  $977 

Client assets per representative
(dollars in millions)4

 $146  $132 

Fee-based asset flows5
(dollars in billions)

 $15.8  $13.5 

  Nine Months Ended
September 30,		 
             2017                  2016       

Annualized revenues per representative (dollars in thousands)3

 $1,051  $953  

Client assets per representative
(dollars in millions)4

 $146  $132  

Fee-based asset flows5
(dollars in billions)

 $54.5  $31.4  

1.

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

2.

Client liabilities include securities-based and tailored lending, residential real estate loans and margin lending.

3.

Annualized revenues per representative equal Wealth Management’s annualized revenues divided by the average representative headcount.

4.

Client assets per representative equal totalperiod-end client assets divided byperiod-end representative headcount.

5.

Fee-based asset flows include net newfee-based assets, net account transfers, dividends, interest and client fees and exclude institutional cash management-related activity.

13September 2017 Form 10-Q

Management’s Discussion and AnalysisLOGO

Net Revenues

Transactional Revenues

  Three Months Ended
September 30,		     
 $ in millions           2017                2016     % Change   

 Investment banking

 $125  $129    (3)%  

Trading

  212   229    (7)%  

 Commissions and fees

  402   433    (7)%  

 Total

 $739  $791    (7)%  

  Nine Months Ended
September 30,		     
 $ in millions           2017            2016   % Change   

 Investment banking

 $405  $373    9%  

 Trading

  657   675    (3)%  

 Commissions and fees

  1,266   1,268    —%  

 Total

 $2,328  $2,316    1%  

Transactional revenues of $739 million in the current quarter decreased 7% from the prior year quarter primarily reflecting lower Commissions and fees and Trading revenues.

Transactional revenues of $2,328 million in the current year period increased 1% from the prior year period primarily reflecting higher revenues in Investment banking revenues, partially offset by decreased Trading revenues.

Investment banking revenues were relatively unchanged in the current quarter. The increase in the current year period was due to higher revenues from structured products and equity syndicate activities, partially offset by lower preferred stock syndicate activity.

Trading revenues decreased in the current quarter primarily due to lower client activity in fixed income products. In addition to lower client activity, Trading revenues decreased in the current year period due to lower revenues related to the Fixed Income Integration, partially offset by gains related to investments associated with certain employee deferred compensation plans.

Commissions and fees decreased in the current quarter primarily due to decreased activity in equities, mutual funds and annuities. Commissions and fees were relatively unchanged in the current year period, with decreased activity in annuities and mutual funds essentially offset by the impact of the Fixed Income Integration.

Asset Management

Asset management, distribution and administration fees of $2,393 million in the current quarter and $6,879 million in the current year period increased 12% and 10%, respectively. The increase in both periods is primarily due to market appreciation and net positive flows. See“Fee-Based Client Assets” herein.

Net Interest

Net interest of $1,025 million in the current quarter and $3,028 million in the current year period increased 16% and 19%, respectively, primarily due to higher loan balances and higher interest rates, partially offset by higher interest paid on deposits.

Other

Other revenues of $62 million in the current quarter and $191 million in the current year period decreased 14% and 18%, respectively, due to lower realized gains from the available for sale (“AFS”) securities portfolio.

Non-interest Expenses

Non-interest expenses of $3,101 million in the current quarter and $9,280 million in the current year period increased 4% and 5%, respectively, as a result of the increase in Compensation and benefits expenses.

Compensation and benefits expenses increased in the current quarter primarily due to the formulaic payout to Wealth Management representatives linked to higher revenues. In addition to the higher formulaic payout, Compensation and benefits expenses increased in the current year period due to increases in the fair value of investments to which certain deferred compensation plans are referenced.

Non-compensation expenses were relatively unchanged in the current quarter.Non-compensation expenses decreased in the current year period primarily due to lower litigation and information processing costs, partially offset by higher deposit insurance expense and higher consulting fees related to strategic initiatives.

Fee-Based Client Assets

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 Activity and Average Fee Rate by Account Type” in Part II, Item 7 of the 2016 Form10-K.

September 2017 Form 10-Q14

Management’s Discussion and AnalysisLOGO

Fee-Based Client Assets Rollforward

$ in billions At
June 30,
2017		  Inflows  Outflows  Market
Impact		  At
September 30,
2017		 

Separately
managed accounts1, 2

 $237  $8  $(5)  $3  $243  

Unified managed accounts2

  228   11   (7)   7   239  

Mutual fund
advisory

  21   1   (1)   —   21  

Representative as advisor

  138   9   (7)   4   144  

Representative as
portfolio
manager

  321   18   (11)   10   338  

Subtotal

 $945  $47  $(31)  $24  $985  

Cash management

  17   3   (2)   —   18  

Totalfee-based
client assets

 $962  $50  $(33)  $24  $1,003  

$ in billions 

At

June 30,
2016

  Inflows  Outflows  Market
Impact		  

At

September 30,
2016

 

Separately
managed
accounts1

 $279  $8  $(15)  $7  $279  

Unified managed
accounts

  120   17   (5)   4   136  

Mutual fund
advisory

  23   —   (1)   1   23  

Representative as
advisor

  117   10   (7)   3   123  

Representative as portfolio manager

  265   19   (12)   6   278  

Subtotal

 $804  $54  $(40)  $21  $839  

Cash management

  16   2   (2)   —   16  

Totalfee-based
client assets

 $820  $56  $(42)  $21  $855  

$ in billions 

At

December 31,
2016

  Inflows  Outflows  Market
Impact		  

At

September 30,
2017

 

Separately managed accounts1, 2

 $222  $24  $(16)  $13  $243  

Unified managed accounts2

  204   36   (22)   21   239  

Mutual fund advisory

  21   1   (3)   2   21  

Representative as advisor

  125   27   (20)   12   144  

Representative as portfolio manager

  285   57   (29)   25   338  

Subtotal

 $857  $145  $(90)  $73  $985  

Cash management

  20   9   (11)   —   18  

Totalfee-based client assets

 $877  $154  $(101)  $73  $1,003  

$ in billions 

At

December 31,
2015

  Inflows  Outflows  Market
Impact		  

At

September 30,
2016

 

Separately managed accounts1

 $283  $24  $(31)  $3  $279  

Unified managed accounts

  105   37   (13)   7   136  

Mutual fund advisory

  25   1   (5)   2   23  

Representative as advisor

  115   22   (20)   6   123  

Representative as portfolio manager

  252   48   (32)   10   278  

Subtotal

 $780  $132  $(101)  $28  $839  

Cash management

  15   8   (7)   —   16  

Totalfee-based client assets

 $795  $140  $(108)  $28  $855  

Average Fee Rates3

   Three Months Ended
September 30,		   Nine Months Ended
September 30,		 
Fee Rate in bps  2017   2016   2017   2016 

Separately managed
accounts2

   17    35    16    36  

Unified managed
accounts2

   97    104    98    106  

Mutual fund advisory

   118    119    118    119  

Representative as
advisor

   84    85    84    85  

Representative as
portfolio manager

   94    98    96    99  

Subtotal

   76    76    76    77  

Cash management

   6    6    6    6  

Totalfee-based
client assets

   75    75    75    76  

bps—Basis points

1.

Includesnon-custody account values reflecting priorquarter-end balances due to a lag in the reporting of asset values by third-party custodians.

2.

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 totalfee-based client assets.

3.

Certain data enhancements made in the first quarter of 2017 resulted in a modification to the “Fee Rate” calculations. Prior periods have been restated to reflect the revised calculations.

15September 2017 Form 10-Q

Management’s Discussion and AnalysisLOGO

Investment Management

Income Statement Information

  

Three Months Ended

September 30,

    
$ in millions 2017  2016  % Change 

Revenues

   

Investment banking

 $—  $(2)   N/M 

Trading

  (7)   (3)   (133)% 

Investments

  114   51   124% 

Asset management, distribution
and administration fees

  568   508   12% 

Other

  1   (3)   133% 

Totalnon-interest revenues

  676   551   23% 

Interest income

  1   1   —% 

Interest expense

  2   —   N/M 

Net interest

  (1)   1   (200)% 

Net revenues

  675   552   22% 

Compensation and benefits

  311   237   31% 

Non-compensation expenses

  233   218   7% 

Totalnon-interest expenses

  544   455   20% 

Income from continuing
operations before income taxes

  131   97   35% 

Provision for income taxes

  16   31   (48)% 

Net income

  115   66   74% 

Net income (loss) applicable to noncontrolling interests

  1   (1)   200% 

Net income applicable to
Morgan Stanley

 $114  $67   70% 
  

Nine Months Ended

September 30,

    
$ in millions 2017  2016  % Change 

Revenues

   

 

Investment banking

 $—  $(1)   N/M 

Trading

  (21)   (8)   (163)% 

Investments

  337   37   N/M 

Commissions and fees

  —   3   N/M 

Asset management, distribution and administration fees

  1,624   1,551   5% 

Other

  9   28   (68)% 

Totalnon-interest revenues

  1,949   1,610   21% 

Interest income

  3   5   (40)% 

Interest expense

  3   3   —% 

Net interest

  —   2   N/M 

Net revenues

  1,949   1,612   21% 

Compensation and benefits

  878   688   28% 

Non-compensation expenses

  695   665   5% 

Totalnon-interest expenses

  1,573   1,353   16% 

Income from continuing
operations before income taxes

  376   259   45% 

Provision for income taxes

  87   78   12% 

Net income

  289   181   60% 

Net income (loss) applicable to noncontrolling interests

  8   (14)   157% 

Net income applicable to
Morgan Stanley

 $281  $195   44% 

N/M – Not Meaningful

Net Revenues

Investments

Investments gains of $114 million in the current quarter compared with $51 million in the prior year quarter reflected higher carried interest principally in Infrastructure investments, partially offset by weaker investment performance which resulted in the reversal of previously accrued carried interest in Private Equity.

Investments gains of $337 million in the current year period compared with $37 million in the prior year period reflected higher carried interest and performance gains in all asset classes.

Asset Management, Distribution and Administration Fees

Asset management, distribution and administration fees of $568 million increased 12% in the current quarter compared to the prior year quarter as a result of higher average assets under management or supervision (“AUM”) across all asset classes and higher performance fees.

Asset management, distribution and administration fees of $1,624 million increased 5% in the current year period comparedfee sharing paid to the prior year period primarily as a result ofintermediaries on higher average AUM.

See “Assets Under Management or Supervision” herein.

Non-interest Expenses

Non-interest expenses of $544 million in the current quarter and $1,573 million in the current year period increased 20% and 16% from the comparable prior periods primarily due to higher Compensation and benefits expenses.

Compensation and benefits expenses increased in the current quarter and current year period due to higher discretionary incentive compensation and an increase in deferred compensation associated with carried interest.

Non-compensation expenses increased in the current quarter and current year period primarily due to higher brokerage, clearing and exchange fees.

Assets Under Management or Supervision

Rollforwards
$ in billionsAt
June 30,
2020		InflowsOutflows
Market
Impact
OtherAt
September 30,
2020
Equity$168
$24
$(14)$23
$1
$202
Fixed income84
8
(5)1
4
92
Alternative/Other145
6
(7)4
2
150
Long-term AUM subtotal397
38
(26)28
7
444
Liquidity268
319
(317)—
1
271
Total AUM$665
$357
$(343)$28
$8
$715
$ in billionsAt
June 30,
2019		InflowsOutflows
Market
Impact
OtherAt
September 30,
2019
Equity$128
$10
$(8)$(4)$—
$126
Fixed income71
6
(4)2
(1)74
Alternative/Other135
5
(4)2
(3)135
Long-term AUM subtotal334
21
(16)—
(4)335
Liquidity163
311
(301)(1)—
172
Total AUM$497
$332
$(317)$(1)$(4)$507
$ in billionsAt
December 31,
2019		InflowsOutflows
Market
Impact
OtherAt
September 30,
2020
Equity$138
$56
$(35)$42
$1
$202
Fixed income79
29
(20)1
3
92
Alternative/Other139
21
(15)(1)6
150
Long-term AUM subtotal356
106
(70)42
10
444
Liquidity196
1,174
(1,100)1
—
271
Total AUM$552
$1,280
$(1,170)$43
$10
$715
$ in billionsAt
December 31,
2018		InflowsOutflows
Market
Impact
OtherAt
September 30,
2019
Equity$103
$28
$(23)$18
$—
$126
Fixed income68
17
(15)5
(1)74
Alternative/Other128
17
(14)8
(4)135
Long-term AUM subtotal299
62
(52)31
(5)335
Liquidity164
965
(956)1
(2)172
Total AUM$463
$1,027
$(1,008)$32
$(7)$507
Average AUM
 Three Months Ended
September 30,		Nine Months Ended
September 30,
$ in billions2020201920202019
Equity$190
$127
$159
$120
Fixed income90
73
84
70
Alternative/Other148
135
143
133
Long-term AUM subtotal428
335
386
323
Liquidity267
169
244
166
Total AUM$695
504
$630
$489
Average Fee Rates
 Three Months Ended
September 30,		Nine Months Ended
September 30,
Fee rate in bps2020201920202019
Equity76
7675
76
Fixed income29
3229
32
Alternative/Other58
6259
65
Long-term AUM60
6159
62
Liquidity15
1716
17
Total AUM43
4642
47
For a description of the asset classes and rollforward items in the followingprevious tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Investment Management—Assets Under Management or Supervision” in Part II, Item 7 of the 20162019 Form10-K.


September 20172020 Form 10-Q1618 
Table of Contents
Management’s Discussion and Analysis
mslogo3q20.jpg


Planned Acquisition of Eaton Vance
On October 8, 2020, we entered into a definitive agreement under which we will acquire Eaton Vance Corp. (“Eaton Vance”), a leading provider of advanced investment management strategies and wealth management solutions, in a cash and stock transaction valued, as of the announcement, at approximately $7 billion, based on the closing price of our common stock and the number of Eaton Vance’s fully diluted shares outstanding on October 7, 2020. Under the terms of the agreement, Eaton Vance common stockholders will receive $28.25 in cash and 0.5833 shares of our common shares for each Eaton Vance common share. In addition, Eaton Vance common shareholders will receive a one-time special cash dividend of $4.25 per share to be paid pre-closing by Eaton Vance. The acquisition is subject to customary closing conditions, and is expected to close in the second quarter of 2021.


19September 2020 Form 10-Q
Table of Contents
Management’s Discussion and AnalysisLOGO

AUM Rollforwards

$ in billions 

At

June 30,
2017

  Inflows  Outflows  Market
Impact		  Other1  

At

September 30,
2017

 

Equity

 $      94  $    5  $(6)  $    4  $    —  $      97  

Fixed income

  66   7   (5)   1   —   69  

Liquidity

  154   279   (277)   1   (1)   156  

Alternative /
Other
products

  121   5   (3)   1   1   125  

Total AUM

 $435  $296  $(291)  $7  $—  $447  

Shares of minority
stake assets

  8                   7  
$ in billions 

At

June 30,

2016

  Inflows  Outflows  Market
Impact		  Other1  

At

September 30,
2016

 

Equity

 $      81  $      4  $(6)  $     4  $    —  $                83  

Fixed income

  61   6   (5)   1   —   63  

Liquidity

  149   358   (352)   (1)   —   154  

Alternative /
Other
products

  115   4   (4)   2   —   117  

Total AUM

 $406  $372  $(367)  $6  $—  $417  

Shares of minority
stake assets

  8                   7  

$ in billions 

At

December 31,
2016

  Inflows  Outflows  Market
Impact		  Other1  

At

September 30,
2017

 

Equity

 $        79  $      16  $(16)  $      17  $      1  $              97  

Fixed income

  60   20   (16)   3   2   69  

Liquidity

  163   915   (923)   1   —   156  

Alternative /
Other
products

  115   18   (13)   5   —   125  

Total AUM

 $417  $969  $(968)  $26  $3  $447  

Shares of minority
stake assets

  8                   7  

$ in billions 

At

December 31,
2015

  Inflows  Outflows  Market
Impact		  Other1  

At

September 30,
2016

 

Equity

 $          83  $      14  $(18)  $      4  $      —  $              83  

Fixed income

  60   18   (19)   3   1   63  

Liquidity

  149   985   (979)   (1)   —   154  

Alternative /
Other
products

  114   18   (18)   3   —   117  

Total AUM

 $406  $1,035  $(1,034)  $9  $1  $417  

Shares of minority
stake assets

  8                   7  
mslogo3q20.jpg

Average AUM

  Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
$ in billions 2017  2016  2017  2016 

Equity

 $             96  $             83  $             90  $             81  

Fixed income

  68   62   65   61  

Liquidity

  156   151   155   149  

Alternative /
Other
products

  123   116   120   115  

Total AUM

 $443  $412  $430  $406  

Shares of minority
stake assets

  7   7   7   8  

Average Fee Rate

  Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
Fee Rate in bps     2017          2016          2017          2016     

Equity

  75   74   74   72  

Fixed income

  34   32   33   32  

Liquidity

  18   18   18   18  

Alternative /
Other
products

  68   73   69   76  

Total AUM

               47                47                46                48  

AUM—Assets under management or supervision

bps—Basis points

1.

Includes distributions and foreign currency impact.


Supplemental Financial Information
Income Tax Matters
Effective Tax Rate
 Three Months Ended
September 30,		Nine Months Ended
September 30,
$ in millions2020201920202019
U.S. GAAP21.1%18.2%22.2%19.1%
Adjusted effective income tax rate—non-GAAP1
24.3%21.4%22.3%21.3%
Net discrete tax provisions (benefits)  
Recurring2
$—
$—
$(94)$(127)
Intermittent3
(113)(89)(10)(190)
1.17September 2017 Form 10-QThe adjusted effective income tax rate is a non-GAAP measure that excludes net discrete tax provisions (benefits) that are intermittent and includes those that are recurring. For further information on non-GAAP measures, see “Selected Non-GAAP Financial Information” herein.

Management’s Discussion2.
Provisions (benefits) related to conversion of employee share-based awards are expected to occur every year and, Analysis
LOGOas such, are considered recurring discrete tax items.

3.Includes all tax provisions (benefits) that have been determined to be discrete, other than Recurring items as defined above.

Supplemental Financial InformationThe current quarter included intermittent net discrete tax benefits principally associated with the remeasurement of reserves and Disclosures

related interest as a result of new information pertaining to the resolution of tax examinations in certain jurisdictions.

The prior year quarter included intermittent net discrete tax benefits primarily associated with the filing of the 2018 federal tax return and the remeasurement of reserves and related interest as a result of new information pertaining to the resolution of multi-jurisdiction tax examinations.
The prior year period included intermittent net discrete tax benefits primarily associated with the remeasurement of reserves and related interest as a result of new information pertaining to the resolution of multi-jurisdiction tax examinations and other matters. See Note 19 to the financial statements for further information.
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

Our U.S. bank subsidiaries as of September 30, 2020, Morgan Stanley Bank N.A. (“MSBNA”) and Morgan Stanley Private Bank, National Association (“MSPBNA”) (collectively, “U.S. Bank Subsidiaries”). The lending activities accept deposits; provide loans to corporations, governments, financial institutions and high to ultra-high net worth clients; and invest in securities. Lending activity recorded in the U.S. Bank Subsidiaries from the Institutional Securities business segment primarily includeincludes loans orand lending commitments to corporate clients. The lending activitiesLending activity recorded in the U.S. Bank Subsidiaries from the Wealth Management business segment primarily includeincludes securities-based lending, thatwhich 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 client base within the Institutional Securities and Wealth Management business segments.
For a further discussion of our credit risks, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk.” For a further discussion about loans and lending commitments, see Notes 710 and 1114 to the financial statements.

U.S. Bank Subsidiaries’ Supplemental Financial Information Excluding Transactions with the Parent Company

$ in billions 

At
September 30,

2017

  At
December 31,
2016		 

U.S. Bank Subsidiaries assets1

 $182.2  $176.8  

U.S. Bank Subsidiaries investment securities portfolio:

  

Investment securities—AFS

  42.7   50.3  

Investment securities—HTM

  18.1   13.6  

Total investment securities

 $60.8  $63.9  

Deposits2

 $154.2  $154.7  

 

Wealth Management U.S. Bank Subsidiaries data

 

Securities-based lending and other loans3

 $40.1  $36.0  

Residential real estate loans

  26.2   24.4  

Total

 $66.3  $60.4  

 

Institutional Securities U.S. Bank Subsidiaries data

 

Corporate loans

 $22.3  $20.3  

Wholesale real estate loans

  10.1   9.9  

Total

 $                    32.4  $                30.2  

AFS—Available for sale

HTM—Held to maturity

1
$ in billionsAt
September 30,
2020		At
December 31,
2019
Assets$266.2
$219.6
Investment securities portfolio:  
Investment securities—AFS62.9
42.4
Investment securities—HTM28.2
26.1
Total investment securities$91.1
$68.5
Deposits2
$238.0
$189.3
Wealth Management Loans3
Residential real estate$33.6
$30.2
Securities-based lending and Other4
57.7
49.9
Total$91.3
$80.1
Institutional Securities Loans3
Corporate$7.8
$5.6
Secured lending facilities28.2
26.8
Commercial and Residential real estate8.6
12.0
Securities-based lending and Other4.7
5.4
Total$49.3
$49.8

1.

Certain revisions have been made to prior periods to conform to

Amounts exclude transactions between the current presentation.

bank subsidiaries, as well as deposits from the Parent Company and affiliates.
2.

For further information on deposits, see “Liquidity and Capital Resources—Funding Management—Unsecured Financing” herein.

3.

For a further discussion of loans in the Wealth Management and Institutional Securities business segments, see “Quantitative and Qualitative Disclosures about Risk—Credit Risk” herein.

4.Other loans primarily include tailored lending.

Income Tax Matters

Effective Tax Rate

  Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
       2017          2016          2017          2016     

From continuing operations

  28.1%   31.5%   29.7%   32.7% 

The effective tax rate for the current quarter and current year period reflects a recurring-type discrete tax benefit of $11 million and $139 million, respectively, associated with the adoption of new accounting guidance related to employee share-based payments, and other net discrete tax benefits of $83 million and $65 million, respectively, primarily resulting from the remeasurement of certain deferred taxes. See Note 2 to the financial statements for information on the adoption of the accounting updateImprovements to Employee Share-Based Payment Accounting.

Accounting Development Updates

The Financial Accounting Standards Board has issued certain accounting updates, that apply to us butwhich we have either determined are not yet effective for the Firm. Accounting updates not listed below were assessed and determined to be either not applicable or are not expected to have a significant impact on our financial statements.

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, develop a common revenue recognition standard across all industries for U.S. GAAP and 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. The update is not applicable to financial instruments. We will adopt the guidance on January 1, 2018 and apply the modified retrospective method of adoption.

This accounting update will change the presentation of certain costs related to underwriting and advisory activities so that such costs will be recorded in the relevantnon-interest expense line item versus the current practice of netting such costs against Investment banking revenues. This change is estimated to gross up Investment banking revenues and affected expenses for the Institutional Securities segment by approximately5%-10%. Similarly, certain costs related to the selling and distribution of investment funds will no longer be netted against Asset management, distribution and administration fees, and therefore is expected to result in a gross up of such Investment


September 20172020 Form 10-Q1820 

Table of Contents
Management’s Discussion and AnalysisLOGO

Management revenues and affected expenses by less than 5%. These changes will not have an impact on net income.

In addition, the timing of the recognition of certain performance fees from fund management activities, not in the form of carried interest, is generally expected to be deferred within a fiscal year until the fees are no longer probable of being reversed. Thus, the recognition of such revenues, which are recorded in Asset management, distribution and administration fees within the Investment Management segment, which approximated $60 million in 2016 and were recognized throughout the year, are generally expected to be recognized in the fourth quarter of each fiscal year based on current fee arrangements.

The recognition of performance fees from fund management activities in the form of carried interest that are subject to reversal will remain essentially unchanged. We will apply the equity method of accounting to such carried interest, thus excluding them from the scope of this standard.

We will continue to assess the impact of the new standard as we progress through the implementation process and as industry interpretations are resolved; therefore, additional impacts may be identified prior to adoption.

•

Hedge Accounting.This accounting update aims to better align the hedge accounting requirements with an entity’s risk management strategies and improve the financial reporting of hedging relationships. It will also result in simplification of the application of hedge accounting related to the assessment of hedge effectiveness. This update is effective as of January 1, 2019 with early adoption permitted.

•

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

•

Financial Instruments–Credit Losses. This accounting update impacts the impairment model for certain financial assets measured at amortized cost by requiring a current expected credit loss (“CECL”) methodology to estimate expected credit losses over the entire life of the financial asset, recorded at inception or purchase. CECL will replace the loss model currently applicable to loans held for invest-

mslogo3q20.jpg

ment, HTM securities and other receivables carried at amortized cost.

The update also eliminates the concept of other-than-temporary impairment for AFS securities. Impairments on AFS securities will be required to be recognized in earnings through an allowance, when the fair value is less than amortized cost and a credit loss exists or the securities are expected to be sold before recovery of amortized cost.

Under the update, there may be an ability to determine there are no expected credit losses in certain circumstances, e.g., based on collateral arrangements for lending and financing transactions or based on the credit quality of the borrower or issuer.

Overall, the amendments in this update are expected to accelerate the recognition of credit losses for portfolios where CECL models will be applied. This update is effective as of January 1, 2020 with early adoption permitted as of January  1, 2019.


Critical Accounting Policies

Our financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions (see Note 1 to the financial statements). We believe that of our significant accounting policies (see Note 2 to the consolidated financial statements in the 20162019 Form10-K and Note 2 to the financial statements), the fair value, goodwill and intangible assets, legal and regulatory contingencies and income taxes policies involve a higher degree of judgment and complexity. For a further discussion about our critical accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in Part II, Item 7 of the 20162019 Form10-K.

Liquidity and Capital Resources

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

Committee of the Board.

19September 2017 Form 10-Q

Management’s Discussion and AnalysisLOGO

The Balance Sheet

We monitor and evaluate the composition and size of our balance sheet on a regular basis. Our balance sheet management process includes quarterly planning, business-specific thresholds, monitoring of business-specific usage versus key performance metrics and new business impact assessments.

We establish balance sheet thresholds at the consolidated and business segment levels. We monitor balance sheet utilization and review variances resulting from business activity orand market fluctuations. On a regular basis, we review current performance versus established thresholds and assess the need tore-allocate our balance sheet based on business unit needs. We also monitor key metrics, including asset and liability size and capital usage.

Total Assets by Business Segment

  At September 30, 2017 

$ in millions

 Institutional
Securities		  Wealth
Management		  Investment
Management		    Total   

Assets

    

Cash and cash equivalents1

 $31,100  $17,026  $65  $48,191  

Trading assets at fair value

  282,555   68   2,465   285,088  

Investment securities

  18,532   60,554   —   79,086  

Securities purchased under
agreements to resell

  84,223   5,883   —   90,106  

Securities borrowed

  132,597   295   —   132,892  

Customer and other
receivables

  35,725   18,061   602   54,388  

Loans, net of allowance

  38,171   66,255   5   104,431  

Other assets2

  45,378   12,486   1,647   59,511  

Total assets

 $668,281  $180,628  $4,784  $853,693  

  At December 31, 2016 
$ in millions Institutional
Securities		  Wealth
Management		  Investment
Management		  Total 

Assets

    

Cash and cash equivalents1

 $25,291  $18,022  $68  $43,381  

Trading assets at fair value

  259,680   64   2,410   262,154  

Investment securities

  16,222   63,870   —   80,092  

Securities purchased under
agreements to resell

  96,735   5,220   —   101,955  

Securities borrowed

  124,840   396   —   125,236  

Customer and other
receivables

  26,624   19,268   568   46,460  

Loans, net of allowance

  33,816   60,427   5   94,248  

Other assets2

  45,941   13,868   1,614   61,423  

Total assets

 $629,149  $181,135  $4,665  $814,949  

 At September 30, 2020
$ in millionsISWMIMTotal
Assets



Cash and cash equivalents$72,592
$22,018
$162
$94,772
Trading assets at fair value289,528
298
4,142
293,968
Investment securities42,149
88,556
—
130,705
Securities purchased under agreements to resell73,637
14,646
—
88,283
Securities borrowed100,175
628
—
100,803
Customer and other receivables57,593
14,067
877
72,537
Loans1
54,918
91,302
17
146,237
Other assets2
13,731
12,910
1,994
28,635
Total assets$704,323
$244,425
$7,192
$955,940
 At December 31, 2019
$ in millionsISWMIMTotal
Assets    
Cash and cash equivalents$67,657
$14,247
$267
$82,171
Trading assets at fair value293,477
47
3,586
297,110
Investment securities38,524
67,201
—
105,725
Securities purchased under agreements to resell80,744
7,480
—
88,224
Securities borrowed106,199
350
—
106,549
Customer and other receivables39,743
15,190
713
55,646
Loans1
50,557
80,075
5
130,637
Other assets2
14,300
13,092
1,975
29,367
Total assets$691,201
$197,682
$6,546
$895,429
IS—Institutional Securities
WM—Wealth Management
IM—Investment Management
1.

CashAmounts include loans held for investment, net of allowance, and cash equivalents include cash and due from banks and interest bearing deposits with banks.

loans held for sale but exclude loans at fair value, which are included in Trading assets in the balance sheets (see Note 10 to the financial statements).
2.

Other assets primarily includes Cash deposited with clearing organizations or segregated under federalGoodwill and other regulations or requirements; Other investments; Premises,Intangible assets, premises, equipment and software, costs; Goodwill; IntangibleROU assets related to leases, other investments, and deferred tax assets.

A substantial portion of total assets consists of liquid marketable securities and short-term receivables arising principally from sales and trading activities in the Institutional Securities business segment. Total assets increased to $853.7$956 billion at September 30, 20172020 from $814.9$895 billion at December 31, 2016, primarily2019.

Wealth Management assets increased driven by an increasecontinued growth in trading inventory within Institutional Securities, along with loan growth across both Institutional SecuritiesLoans as well as in the investment portfolio, comprising Investment securities, Cash and Wealth Management. The change in trading inventory reflects increased trading activity in U.S. government and agency securities and Other sovereign government obligations, along with higher market values for corporate equities compared with December 31, 2016.

Securities Repurchase Agreementscash equivalents, and Securities Lending

Securities borrowed or securities purchased under agreements to resell, as a result of significantly higher deposits in this segment.

Institutional Securities’ assets were also higher, reflecting increases within Customer and securities loaned or securities sold under agreements to repurchase are treated as collateralized financings (see Note 2 to the consolidated financial statementsother receivables, primarily in the 2016 Form10-K and Note 6 to the financial statements).

Collateralized Financing Transactions

$ in millions  At
September 30,
2017		   At
December 31,
2016		 

Securities purchased under agreements to resell and Securities borrowed

  $222,998   $227,191  

Securities sold under agreements
to repurchase and Securities loaned

  $69,613   $70,472  

Securities received as collateral1

  $12,995   $13,737  

  

Daily Average Balance

Three Months Ended

 

$ in millions

 September 30,
2017		  December 31, 
2016		 

Securities purchased under agreements
to resell and Securities borrowed

 $227,146  $224,355  

Securities sold under agreements
to repurchase and Securities loaned

 $68,563  $68,908  

1.

Included in Trading assets in the balance sheets.

Customer Securities Financing

The customer receivable portion of the securities financing transactions primarily includes customer margin loans, collateralized by customer-owned securities, which are segregated in accordance with regulatory requirements. The customer payable portion of the securities financing transactions primarily includes payables to our prime brokerage customers. Our risk exposure on these transactions is mitigated by collateral maintenance policies that limit our credit exposure to customers and liquidity reserves held against this risk exposure.

Equity financing.

September 2017 Form 10-Q20

Management’s Discussion and AnalysisLOGO

Liquidity Risk Management Framework

The primary goal of our Liquidity Risk Management Framework is to ensure that we have access to adequate funding across a wide range of market conditions and time horizons. The framework is designed to enable us to fulfill our financial obligations and support the execution of our business strategies.

The core components of our Liquidity Risk Management Framework are the Required Liquidity Framework, Liquidity Stress Tests and the Global Liquidity Reserve (“GLR”),Resources, which support our target

21September 2020 Form 10-Q
Table of Contents
Management’s Discussion and Analysis
mslogo3q20.jpg

liquidity profile. For a further discussion about the Firm’s Required Liquidity Framework and Liquidity Stress Tests, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management Framework” in Part II, Item 7 of the 20162019 Form10-K.

At September 30, 20172020 and December 31, 2016,2019, we maintained sufficient liquidity to meet current and contingent funding obligations as modeled in our Liquidity Stress Tests.

Global

Liquidity Reserve

Resources

We maintain sufficient global liquidity reserves pursuantresources, which consist of HQLA and cash deposits with banks (“Liquidity Resources”) to ourcover daily funding needs and to meet strategic liquidity targets sized by the Required Liquidity Framework. For further discussionFramework and Liquidity Stress Tests. The total amount of Liquidity Resources is actively managed by us considering the following components: unsecured debt maturity profile; balance sheet size and composition; funding needs in a stressed environment, inclusive of contingent cash outflows; legal entity, regional and segment liquidity requirements; regulatory requirements; and collateral requirements.
The amount of Liquidity Resources we hold is based on our GLR, see “Management’s Discussionrisk tolerance and Analysis of Financial Conditionis subject to change depending on market and Results of Operations—Firm-specific events. The Liquidity Resources are primarily held within the Parent Company and Capital Resources—its major operating subsidiaries. The Total HQLA values in the tables immediately following are different from Eligible HQLA which, in accordance with the LCR rule, also takes into account certain regulatory weightings and other operational considerations.
Liquidity Risk Management Framework—Global Liquidity Reserve” in Part II, Item 7 of the 2016 Form10-K.

GLRResources by Type of Investment

$ in millions  

At

September 30,

2017

   

At

December 31,
2016

 

 Cash deposits with banks

  $9,684   $                8,679  

 Cash deposits with central banks

   33,566    30,568  

 Unencumbered highly liquid securities:

    

 U.S. government obligations

   67,677    78,615  

 U.S. agency and agency mortgage-backed securities

   51,676    46,360  

 Non-U.S. sovereign obligations1

   24,110    30,884  

 Investments in money market funds

   2    —   

Other investment grade securities

   3,251    7,191  

Total

  $189,966   $202,297  

1
$ in millionsAt
September 30,
2020		At
December 31, 2019
Cash deposits with central banks$41,639
$35,025
Unencumbered HQLA Securities2:
  
U.S. government obligations113,058
88,754
U.S. agency and agency mortgage-backed securities63,961
50,732
Non-U.S. sovereign obligations3
37,470
29,909
Other investment grade securities1,398
1,591
Total HQLA2
$257,526
$206,011
Cash deposits with banks (non-HQLA)9,766
9,857
Total Liquidity Resources$267,292
$215,868
1.

Non-U.S. sovereign obligations are primarily

In the first quarter of 2020, we changed our internal measure of liquidity from the Global Liquidity Reserve to Liquidity Resources, which is more closely aligned with the regulatory definition of HQLA. Prior periods have been recast to conform to the current presentation.
2.HQLA is presented prior to applying weightings and includes all HQLA held in subsidiaries.
3.
Primarily composed of unencumbered Japanese, UK, French, German French,and Dutch U.K. and Japanese government obligations.

4.

GLR Managed

Liquidity Resources by Bank andNon-Bank Legal Entities

  

At

September 30,
2017

   

At

December 31,
2016

   

Daily Average
Balance

Three Months
Ended

 
 $ in millions     September 30,
2017		 

 Bank legal entities

 

 Domestic

 $                72,567   $                74,411   $                68,746  

 Foreign

  4,248    4,238    4,297  

 Total Bank legal entities

  76,815    78,649    73,043  

 Non-Bank legal entities

 

 Domestic:

     

 Parent Company

  39,747    66,514    50,893  

 Non-Parent Company

  31,754    18,801    33,934  

 Total Domestic

  71,501    85,315    84,827  

 Foreign

  41,650    38,333    44,244  

 TotalNon-Bank legal entities

  113,151    123,648    129,071  

 Total

 $189,966   $202,297   $202,114  

1

$ in millionsAt
September 30,
2020		At
December 31, 2019
Average Daily Balance
Three Months Ended
September 30, 2020
Bank legal entities

Domestic$115,821
$75,894
$113,991
Foreign5,384
4,049
5,624
Total Bank legal entities121,205
79,943
119,615
Non-Bank legal entities

Domestic:


Parent Company62,561
53,128
74,587
Non-Parent Company30,215
28,905
34,341
Total Domestic92,776
82,033
108,928
Foreign53,311
53,892
55,933
Total Non-Bank legal entities146,087
135,925
164,861
Total Liquidity Resources$267,292
$215,868
$284,476
1.In the first quarter of 2020, we changed our internal measure of liquidity from the Global Liquidity Reserve to Liquidity Resources, which is more closely aligned with the regulatory definition of HQLA. Prior periods have been recast to conform to the current presentation.
Liquidity Resources may fluctuate from period to period based on the overall size and composition of our balance sheet, the maturity profile of our unsecured debt and estimates of funding needs in a stressed environment, among other factors. Liquidity Resources increased in the current year period primarily due to an increase in deposits.
Regulatory Liquidity Framework

Liquidity Coverage Ratio

We and our U.S. Bank Subsidiaries are subject to LCR requirements, including a requirement to calculate each entity’s LCR on each business day. The Basel Committee on Banking Supervision’s (“Basel Committee”) Liquidity Coverage Ratio (“LCR”) standard isrequirements are designed to ensure that banking organizations have sufficient high-quality liquid assets (“HQLA”)Eligible HQLA to cover net cash outflows arising from significant stress over 30 calendar days. The standard’s objective is to promotedays, thus promoting the short-term resilience of the liquidity risk profile of banking organizations. WeIn determining Eligible HQLA for LCR purposes, weightings (or asset haircuts) are applied to HQLA and our U.S. Bank Subsidiariescertain HQLA held in subsidiaries are subject to the LCR requirements issued by U.S. banking regulators (“U.S. LCR”)excluded.
As of September 30, 2020, which are based on the Basel Committee’s LCR, including a requirement to calculate each entity’s U.S. LCR on each business day. Wewe and our U.S. Bank Subsidiaries are compliant with the minimum required U.S. LCR of 100%.

HQLA by Type of Asset and LCR

  

At

September 30,
2017

  

    At    

    December 31,    
    2016    

  

Daily Average

Balance

Three Months

Ended

 
 $ in millions   

September 30,

2017

 
  

 HQLA

   

 Cash deposits with central banks

 $33,614  $30,569  $40,841 

 Securities1

  125,426   129,524   134,363 

 Total

 $159,040  $160,093  $175,204 

 LCR

          130% 

1.

Primarily includes U.S. Treasuries; U.S. agency mortgage-backed securities; sovereign bonds; investment-grade corporate bonds; and publicly traded common equities.


21September 2017 Form 10-Q

September 2020 Form 10-Q22
Table of Contents
Management’s Discussion and AnalysisLOGO
mslogo3q20.jpg


Liquidity Coverage Ratio
 Average Daily Balance
Three Months Ended
$ in millionsSeptember 30,
2020		June 30,
2020
Eligible HQLA1
  
Cash deposits with central banks$36,481
$52,369
Securities2
170,817
155,251
Total Eligible HQLA1
$207,298
$207,620
LCR136%147%
1.Under the LCR rule, Eligible HQLA is calculated using weightings and excluding certain HQLA held in subsidiaries.
2.Primarily includes U.S. Treasuries, U.S. agency mortgage-backed securities, sovereign bonds and investment grade corporate bonds.
The regulatory definitiondecrease in the LCR in the current quarter is due to higher average outflows, primarily related to secured funding with remaining maturities of HQLA is substantially the same as our GLR. GLR includes cash placed at institutions otherless than central banks that is considered an inflow for LCR purposes. HQLA includes a portion of cash placed at central banks, certain unencumbered investment grade corporate bonds and publicly traded common equities, which do not meet the definition of our GLR.

30 days.

Net Stable Funding Ratio

The objective ofU.S. banking agencies have finalized a rule to implement the Net Stable Funding Ratio (“NSFR”) is to reduce funding risk over aone-year horizon by requiringNSFR, which requires large banking organizations to fund their activities withmaintain sufficiently stable sources of funding in order to mitigate the risk of future funding stress.

The Basel Committee finalized the NSFR framework in 2014. In May 2016, the U.S. banking regulators issuedover a proposal to implement the NSFR in the U.S., which wouldone-year time horizon, and will apply to us and our U.S. Bank Subsidiaries. Our preliminary estimates, basedThese requirements become effective on the current proposal, indicate that actionsJuly 1, 2021 and we will be necessary to meetin compliance with the requirement, which we expect to accomplishfinal rule by the effective date of any final rule. For an additional discussion of NSFR, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Liquidity Framework—Net Stable Funding Ratio” in Part II, Item 7 of the 2016 Form10-K.

date.

Funding Management

We manage our funding in a manner that reduces the risk of disruption to our operations. We pursue a strategy of diversification of secured and unsecured funding sources (by product, investor and region) and attempt to ensure that the tenor of our liabilities equals or exceeds the expected holding period of the assets being financed.

We fund our balance sheet on a global basis through diverse sources. These sources may include our equity capital, long-term borrowings, securities sold under agreements to repurchase, (“repurchase agreements”), securities lending, deposits, letters of credit and lines of credit. We have active financing programs for both standard and structured products targeting global investors and currencies.

Secured Financing

For a discussion of our secured financing activities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Funding Management—Secured Financing” in Part II, Item 7 of the 20162019 Form 10-K.

At

Collateralized Financing Transactions
$ in millionsAt
September 30,
2020		At
December 31,
2019
Securities purchased under agreements to resell and Securities borrowed$189,086
$194,773
Securities sold under agreements to repurchase and Securities loaned$49,300
$62,706
Securities received as collateral1
$8,799
$13,022
 Average Daily Balance
Three Months Ended
$ in millionsSeptember 30,
2020		December 31,
2019
Securities purchased under agreements to resell and Securities borrowed$182,181
$210,257
Securities sold under agreements to repurchase and Securities loaned$58,474
$64,870
1.Included within Trading assets in the balance sheets.
Securities sold under agreements to repurchase and Securities loaned decreased to $49 billion at September 30, 2017 and2020 from $63 billion at December 31, 2016,2019 primarily as a result of changes to our funding profile as a result of changes in the weighted average maturitycomposition of our securedassets and liabilities.
See Note 2 to the financial statements in the 2019 Form 10-K and Note 9 to the financial statements for more details on collateralized financing of less liquid assets was greater than 120 days.

transactions.

In addition to the collateralized financing transactions shown in the previous table, we engage in financing transactions collateralized by customer-owned securities, which are segregated in accordance with regulatory requirements. Receivables under these financing transactions, primarily margin loans, are included in Customer and other receivables in the balance sheets, and payables under these financing transactions, primarily to prime brokerage customers, are included in Customer and other payables in the balance sheets. Our risk exposure on these transactions is mitigated by collateral maintenance policies. We also hold related liquidity reserves.

Unsecured Financing

For a discussion of our unsecured financing activities, see “Management’s Discussion and Analysis of FinancingFinancial Condition and Results of Operations—Liquidity and Capital Resources—Funding Management—Unsecured Financing” in Part II, Item 7 of the 20162019 Form10-K and see Note 4 to the financial statements.

10-K.


23September 2020 Form 10-Q
Table of Contents
Management’s Discussion and Analysis
mslogo3q20.jpg

Deposits

$ in millions  

At

September 30,

2017

   

At

December 31,

2016

 

Savings and demand deposits: Brokerage sweep deposits1

  

$

          135,152 

 

  

$

          153,042 

 

Savings and other

   5,555     1,517  

Total Savings and demand deposits

   140,707     154,559  

Time deposits2

   13,932     1,304  

Total

  $154,639    $155,863  

$ in millionsAt
September 30,
2020		At
December 31,
2019
Savings and demand deposits:  
Brokerage sweep deposits1
$164,146
$121,077
Savings and other38,431
28,388
Total Savings and demand deposits202,577
149,465
Time deposits36,676
40,891
Total$239,253
$190,356
1.

RepresentsAmounts represent balances swept from client brokerage accounts. Also referred to as the Bank Deposit program.

2.

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

Deposits are primarily sourced from our Wealth Management clients and are considered to have stable,low-cost funding characteristics. Total deposits at September 30, 2020 increased compared with December 31, 2019, primarily driven by continued increases in brokerage sweep and savings deposits.
Borrowings by Remaining Maturity at September 30, 20201
$ in millionsParent CompanySubsidiariesTotal
Original maturities of one year or less$—
$4,553
$4,553
Original maturities greater than one year
2020$641
$828
$1,469
202119,964
6,186
26,150
202216,418
4,011
20,429
202315,316
4,657
19,973
202415,938
5,436
21,374
Thereafter83,172
26,324
109,496
Total$151,449
$47,442
$198,891
Total Borrowings$151,449
$51,995
$203,444
Maturities over next 12 months2
  $20,247
1.Original maturity in the table is generally based on contractual final maturity. For borrowings with put options, remaining maturity represents the earliest put date.
2.Includes only borrowings with original maturities greater than one year.
Borrowings of $203 billion as of September 30, 2017 were relatively unchanged2020 increased modestly when compared with $193 billion at December 31, 2016, with the decrease in brokerage sweep deposits, primarily due to client deployment of cash into the markets, largely offset by an increase in time deposits and savings and other deposits, primarily due to growth in certificates of deposits and savings products.

Short-Term Borrowings

$ in millions  

At

September 30,

2017

   

At

December 31,

2016

 

Short-term borrowings

  $1,087   $941  

Our unsecured short-term borrowings primarily consist of structured notes, bank loans and bank notes with original maturities of 12 months or less.

Long-Term Borrowings

2019.

We believe that accessing debt investors through multiple distribution channels helps provide consistent access to the unsecured markets. In addition, the issuance of long-term borrowings with original maturities greater than one year allows us to reduce reliance on short-term credit sensitive instruments. Long-term borrowingsBorrowings with original maturities greater than one year are generally managed to achieve staggered maturities, thereby mitigating refinancing risk, and to maximize investor diversification through sales to global institutional and retail clients across regions, currencies and product types. Availability
The availability and cost of financing to us can vary depending on market conditions, the volume of certain trading and lending activities, our credit ratings and the overall availability of credit.

We also engage in, and may continue to engage in, repurchases of our borrowings in the ordinary course of business.
 

September 2017 Form 10-Q22

Management’s Discussion and AnalysisLOGO

We may engage in various transactions in the credit markets (including, for example, debt retirements) that we believe are in our investors’ best interests.

Long-term Borrowings by Maturity at September 30, 2017

$ in millions  

Parent

Company

   Subsidiaries   Total 

2017

  $4,605   $3,685   $8,290 

2018

   18,816    2,244    21,060 

2019

   21,841    2,033    23,874 

2020

   19,362    2,075    21,437 

2021

   15,862    1,449    17,311 

Thereafter

   88,786    10,919    99,705 

Total

  $                169,272   $                22,405   $                191,677 

Maturities over next 12 months

 

  $25,792 

Long-term Borrowings increased to $191,677 million as of September 30, 2017, compared with $164,775 million at December 31, 2016. This increase is a result of issuances, partially offset by maturities and retirements, presented in the table below.

$ in millions  Nine Months Ended
September 30, 2017		 

Issued

  $45,334 

Matured or retired

   24,480 

For further information on long-term borrowings,Borrowings, see Note 1013 to the financial statements.

Credit Ratings

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

Our credit ratings do not include any uplift from perceived government support from any rating agency given See also “Risk Factors— Liquidity Risk” in the significant progress of the U.S. financial reform legislation and regulations. Some rating agencies have stated that they currently incorporate various degrees of credit rating uplift fromnon-governmental third-party sources of potential support.

2019 Form 10-K.

Parent Company and MSBNA’s Senior UnsecuredU.S. Bank Subsidiaries' Issuer Ratings at October 31, 2017

30, 2020
 Parent Company
 Short-term
Short-Term
Debt		Long-term
Long-Term
Debt		Rating

Outlook

DBRS, Inc.

R-1 (middle)A (high)Stable

Fitch Ratings, Inc.

F1AStable  Negative

Moody’s Investors Service, Inc.

P-1P-2A2A3Stable  Rating Under Review

Rating and Investment Information, Inc.

a-1a-1A-AStable

Standard & Poor’sS&P Global Ratings

A-2BBB+Stable
MSBNA
Short-Term
Debt		Long-Term
Debt		Rating
Outlook
Fitch Ratings, Inc.F1A+Negative
Moody’s Investors Service, Inc.P-1Aa3Stable
S&P Global RatingsA-1A+Stable
MSPBNA
Short-Term
Debt		Long-Term
Debt		Rating
Outlook
Moody’s Investors Service, Inc.P-1Aa3Stable
S&P Global RatingsA-1A+Stable
On April 22, 2020, Fitch Ratings, Inc. placed the Parent Company and MSBNA ratings on Negative outlook, a change from Stable, related to their expectation of significant operating environment headwinds due to the disruption to economic activity and financial markets from the COVID-19 pandemic.
On October 2, 2020, Moody’s Investors Service, Inc. (“Moody’s”) upgraded the issuer ratings of the Parent Company from A3 to A2 and U.S. Bank Subsidiaries from A1 to Aa3 and changed the outlooks to Stable. On October 29, Moody’s placed issuer ratings of the Parent Company under review for possible upgrade, changing their outlook from Stable to Rating Under Review.

September 2020 Form 10-Q24
Table of Contents
 Morgan Stanley Bank, N.A.
Management’s Discussion and AnalysisShort-term
Debt		Long-term
Debt		Rating  
Outlook  

Fitch Ratings, Inc.

F1A+Stable  

Moody’s Investors Service, Inc.

P-1A1Stable  

Standard & Poor’s Global Ratings

A-1A+Stable  
mslogo3q20.jpg


Incremental Collateral or Terminating Payments
In connection with certain OTC trading agreementsderivatives and certain other agreements where we are a liquidity provider to certain financing vehicles associated with the Institutional Securities business segment, we may be required to provide additional collateral, immediately settle any outstanding liability balances with certain counterparties or pledge additional collateral to certain exchanges and clearing organizations in the event of a future credit rating downgrade irrespective of whether we are in a net asset or net liability position.

The See Note 7 to the financial statements for additional collateral or termination paymentsinformation on OTC derivatives that may be called in the event of a future credit rating downgrade vary by contract andcan be based on ratings by either or both of Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Global Ratings (“S&P”). The following table shows the future potential collateral amounts and termination payments that could be called or required by counterparties or exchanges and clearing organizations in the event ofone-notch ortwo-notch downgrade scenarios, from the lowest of Moody’s or S&P ratings, based on the relevant contractual downgrade triggers.

Incremental Collateral or Terminating Payments upon Potential Future Rating Downgrade

$ in millions  At September 30,
2017		   At December 31,
2016		 

One-notch downgrade

  $856   $1,292 

Two-notch downgrade

   635    875 

contain such contingent features.

While certain aspects of a credit rating downgrade are quantifiable pursuant to contractual provisions, the impact it would have on our business and results of operations in future periods is inherently uncertain and would depend on a number of interrelated factors, including, among others,other things, the magnitude of the downgrade, the rating relative to peers, the rating assigned by the relevant agencypre-downgrade, individual client behavior and future mitigating actions we might take. The liquidity impact of additional collateral requirements is included in our Liquidity Stress Tests.

23September 2017 Form 10-Q

Management’s Discussion and AnalysisLOGO

Capital Management

We view capital as an important source of financial strength and actively manage our consolidated capital position based upon, among other things, business opportunities, risks, capital availability and rates of return together with internal capital policies, regulatory requirements and rating agency guidelines and, therefore, inguidelines. In the future, we may expand or contract our capital base to address the changing needs of our businesses. We attempt to maintain total capital, on a consolidated basis, at least equal to
Common Stock Repurchases
 Three Months Ended
September 30,		Nine Months Ended
September 30,
in millions, except for per share data2020201920202019
Number of shares—
36
29
90
Average price per share$—
$41.92
$46.01
$42.77
Total$—
$1,500
$1,347
$3,860
On March 15, 2020, the sum of our operating subsidiaries’ required equity.

Common Stock

   Three Months Ended
September 30,		   Nine Months Ended
September 30,		 
$ in millions  2017  2016     2017      2016   

Repurchases of
common stock

  $        1,250  $        1,250   $        2,500  $        2,500 

From time to time we repurchase our outstanding common stock which includes ourFinancial Services Forum announced that its eight U.S. Bank members, including us, had voluntarily suspended their share repurchase program. For a descriptionprograms. On June 25, 2020, the Federal Reserve published summary results of our share repurchase program, see “Unregistered Sales of Equity SecuritiesCCAR and Use of Proceeds.”

The Board determines the declaration and payment of dividends on a quarterly basis. On October 17, 2017, we announced that large BHCs generally would be restricted in making share repurchases during the Board declared a quarterly dividend per common sharecurrent quarter, and on September 30, 2020, the restrictions were extended through the fourth quarter of $0.25. The dividend is payable2020. For more information on November 15, 2017 to common shareholders of record on October 31, 2017.

For a description of our 2017 capital plan, see “Liquidity and Capital Resources—Regulatory Requirements—Capital Plans and Stress Tests.”

PreferredTests” herein.

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

Dividend Announcement

Announcement dateOctober 15, 2020
Amount per share
$0.35
Date to be paidNovember 13, 2020
Shareholders of record as ofOctober 30, 2020


On September 15, 2017, weJune 25, 2020, the Federal Reserve announced that it would limit common stock dividend payments in the Board declared quarterly dividendscurrent quarter for preferred stock shareholders of recordall large BHCs, and on September 29, 2017 that30, 2020, the restrictions were paid on October 16, 2017.

extended through the fourth quarter of 2020. For additional information, see “Liquidity and Capital Resources—Regulatory Requirements—Capital Plans and Stress Tests” herein.

Preferred Stock Dividend Announcement
Announcement dateSeptember 15, 2020
Date paidOctober 15, 2020
Shareholders of record as ofSeptember 30, 2020
For additional information on common and preferred stock, see Note 17 to the financial statements.
Off-Balance Sheet Arrangements and Contractual Obligations
Off-Balance Sheet Arrangements
We enter into various off-balance sheet arrangements, including through unconsolidated SPEs and lending-related financial instruments (e.g., guarantees and commitments), primarily in connection with the Institutional Securities and Investment Management business segments.
We utilize SPEs primarily in connection with securitization activities. For information on our securitization activities, see Note 14 to the financial statements in the 2019 Form 10-K.
For information on our commitments, obligations under certain guarantee arrangements and indemnities, see Note 14 to the financial statements.

For a further discussion of our lending commitments, see “Quantitative and Qualitative Disclosures about Risk—Credit Risk—Loans and Lending Commitments.”

Contractual Obligations
For a discussion about our contractual obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual Obligations” in the 2019 Form 10-K.

25September 2020 Form 10-Q
Table of Contents
Management’s Discussion and Analysis
mslogo3q20.jpg

Regulatory Requirements

Regulatory Capital Framework

We are a financial holding companyan FHC under the Bank Holding Company Act of 1956, as amended (the “BHC(“BHC Act”), and are subject to the regulation and oversight of the Board of Governors of the Federal Reserve System (the “Federal Reserve”).Reserve. The Federal Reserve establishes capital requirements for us,

including well-capitalized“well-capitalized” standards, and evaluates our compliance with such capital requirements. The Office of the Comptroller of the Currency (“OCC”) establishes similarRegulatory capital requirements and standards for our U.S. Bank Subsidiaries. The regulatory capital requirementsestablished by the Federal Reserve are largely based on the Basel III capital standards established by the Basel Committee and also implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank(“Dodd-Frank Act”).

The Basel Committee has published revisionsOCC establishes similar capital requirements and standards for our U.S. Bank Subsidiaries. For us to certainremain an FHC, we must remain well-capitalized in accordance with standards in its capital framework, and is actively considering potential revisions to other capital standards, that, if adoptedestablished by the Federal Reserve and our U.S. banking agencies, could substantially changeBank Subsidiaries must remain well-capitalized in accordance with standards established by the U.S.OCC. For additional information on regulatory capital framework.requirements for our U.S. Bank Subsidiaries, see Note 16 to the financial statements.

Regulatory Capital Requirements
We are required to maintain minimum risk-based and leverage-based capital and TLAC ratios. For additional discussion of regulatory capital framework,more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Regulatory Capital Framework”Requirements” in Part II, Item 7 of the 20162019 Form10-K.

Regulatory Capital Requirements

We are required to maintain minimum risk-based For additional information on TLAC, see “Total Loss-Absorbing Capacity, Long-Term Debt and leverage capital ratios under the regulatory capital requirements. A summary of the calculations of regulatory capital, risk-weighted assets (“RWAs”) and transition provisions follows.

Clean Holding Company Requirements” herein.

Risk-Based Regulatory Capital.Minimum risk-based capital ratio requirements apply to Common Equity Tier 1 capital, Tier 1 capital and Total capital (which includes Tier 2 capital). CertainCapital standards require certain adjustments to, and deductions from, capital are required for purposes of determining these ratios, such as goodwill, intangible assets, certain deferred tax assets, other amounts in Accumulated other comprehensive income (loss) (��AOCI”) and investments in the capital instruments of unconsolidated financial institutions. Certain of these adjustments and deductions are also subject to transitional provisions.

In addition to the minimum risk-based capital ratio requirements, on a fullyphased-in basis by 2019, we will be subject to:

A greater than 2.5% Common Equity Tier 1 capital conservation buffer;

ratios.

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 (“CCyB”), currently set by U.S. banking regulators at zero (collectively, the “buffers”).

In 2017, thephase-in amount for each of the buffers is 50% of the fullyphased-in buffer requirement. Failure to main-

 

Risk-Based Regulatory Capital Ratio Requirements
 
At
September 30, 2020
Beginning
 October 1, 2020
 Standardized and AdvancedStandardizedAdvanced
Capital buffers    
Capital conservation buffer2.5%—
2.5%
Stress capital buffer (“SCB”)1
N/A
5.7%N/A
G-SIB capital surcharge2
3%3%3%
CCyB3
0%0%0%
Capital buffer requirement4
5.5%8.7%5.5%
  
At
September 30, 2020
Beginning
 October 1, 2020
 Regulatory MinimumStandardized and AdvancedStandardizedAdvanced
Required ratios5
    
Common Equity Tier 1 capital ratio4.5%10.0%13.2%10.0%
Tier 1 capital ratio6.0%11.5%14.7%11.5%
Total capital ratio8.0%13.5%16.7%13.5%
September 2017 Form 10-Q1.24For additional information on the SCB, see “Capital Plans and Stress Tests” and “Regulatory Developments—Stress Capital Buffer Final Rule” herein.

Management’s2.For a further discussion of the G-SIB capital surcharge, see “Management’s Discussion and AnalysisLOGO of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—G-SIB Capital Surcharge” in the 2019 Form 10-K.

tain the buffers would result in restrictions on our ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers. For a further discussion of theG-SIB capital surcharge, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—RegulatoryRequirements—G-SIB Capital Surcharge” in Part II, Item 7 of the 2016 Form10-K.

See “Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements” herein for additional capital requirements effective January 1, 2019.

Risk-Weighted Assets.RWAs reflect both ouron- andoff-balance sheet risk as well as capital charges attributable to the risk of loss arising from the following:

Credit risk: The failure of a borrower, counterparty or issuer to meet its financial obligations to us;

Market risk: Adverse changes in the level of one or more market prices, rates, indices, volatilities, correlations or other market factors, such as market liquidity; and

•
3.

Operational risk: Inadequate or failed processes or systems, human factors or from external events (e.g.The CCyB can be set up to 2.5%, fraud, theft, legal and compliance risks, cyber attacks or damage to physical assets).

but is currently set by the U.S. banking agencies at zero.

For a further discussion of our market, credit and operational risks, see “Quantitative and Qualitative Disclosures about Market Risk.”

4.The capital buffer requirement represents the amount of Common Equity Tier 1 capital we must maintain above the minimum risk-based capital requirements in order to avoid restrictions on our ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers. Beginning October 1, 2020, our Standardized Approach capital buffer requirement is equal to the sum of our SCB, G-SIB capital surcharge and CCyB, and our Advanced Approach capital buffer requirement is equal to our 2.5% capital conservation buffer, G-SIB capital surcharge and CCyB.
5.Required ratios represent the regulatory minimum plus the capital buffer requirement.

Our risk-based capital ratios for purposes of determining regulatory compliance are the lower of the capital ratios computed under (i) the standardized approaches for calculating credit risk and market risk RWAs (the “StandardizedRWA (“Standardized Approach”) andor (ii) the applicable advanced approaches for calculating credit risk, market risk and operational risk RWAs (the “AdvancedRWA (“Advanced Approach”). The credit risk RWA calculations between the two approaches differ in that the Standardized Approach requires calculation of RWAsRWA using prescribed risk weights, whereas the Advanced Approach utilizes models to calculate exposure amounts and risk weights. At September 30, 2017,2020 and December 31, 2019, our ratios for determining regulatory compliance are based on the Standardized Approach transitional rules. For prior periods, the ratios were based on the Advanced Approach transitional rules.

The methods for calculating eachand the Standardized Approach rules, respectively.

Leverage-Based Regulatory Capital. Minimum leverage-based capital requirements include a Tier 1 leverage ratio and an SLR. We are required to maintain an SLR of 5%, inclusive of an enhanced SLR capital buffer of at least 2%.
As of September 30, 2020, our risk-based and leverage-based capital amounts and ratios, will change through January 1, 2022 as aspectswell as RWA, adjusted average assets and supplementary leverage exposure are calculated

September 2020 Form 10-Q26
Table of Contents
Management’s Discussion and Analysis
mslogo3q20.jpg

excluding the effect of the capital rules are phased in. These changes may result in differences inadoption of CECL based on our reported capital ratios from one reporting periodelection to the next that are independent of changes to our capital base, asset composition,off-balance sheet exposures or risk profile.

defer this effect over a five-year transition period. For further information, see “Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments” herein.

Minimum Risk-BasedRegulatory Capital Ratios: Transitional Provisions

LOGO

Ratios 
 At September 30, 2020
$ in millions
Required
Ratio1
StandardizedAdvanced
Risk-based capital   
Common Equity Tier 1 capital $71,157
$71,157
Tier 1 capital 79,905
79,905
Total capital 90,018
89,763
Total RWA 408,850
420,081
Common Equity Tier 1 capital ratio10.0%17.4%16.9%
Tier 1 capital ratio11.5%19.5%19.0%
Total capital ratio13.5%22.0%21.4%
    
$ in millions 
Required
Ratio1
At
September 30,
2020
Leverage-based capital   
Adjusted average assets2
  $962,435
Tier 1 leverage ratio 4.0%8.3%
Supplementary leverage exposure3,4
 $1,084,348
SLR4
 5.0%7.4%

 At December 31, 2019
$ in millions
Required
Ratio1
StandardizedAdvanced
Risk-based capital   
Common Equity Tier 1 capital $64,751
$64,751
Tier 1 capital 73,443
73,443
Total capital 82,708
82,423
Total RWA 394,177
382,496
Common Equity Tier 1 capital ratio10.0%16.4%16.9%
Tier 1 capital ratio11.5%18.6%19.2%
Total capital ratio13.5%21.0%21.5%
    
$ in millions 
Required
Ratio1
At
December 31,
2019
Leverage-based capital   
Adjusted average assets2
  $889,195
Tier 1 leverage ratio 4.0%8.3%
Supplementary leverage exposure3
 $1,155,177
SLR 5.0%6.4%
1.

These

Required ratios assumeare inclusive of any buffers applicable as of the requirements fordate presented. Failure to maintain theG-SIB buffers would result in restrictions on our ability to make capital surcharge (3.0%)distributions, including the payment of dividends and CCyB (zero) remain at current levels. See “Total Loss-Absorbing Capacity, Long-Term Debtthe repurchase of stock, and Clean Holding Company Requirements” herein for additional capital requirements effective January 1, 2019.

to pay discretionary bonuses to executive officers.

Transitional and FullyPhased-In Regulatory Capital Ratios

  At September 30, 2017 
  Transitional  Pro Forma Fully Phased-In 
$ in millions Standardized  Advanced  Standardized  Advanced 

Risk-based capital

    

Common Equity Tier 1
capital

 $62,214   $    62,214   $61,603   $    61,603  

Tier 1 capital

  71,006    71,006    70,276    70,276  

Total capital

  81,861    81,652    81,148    80,939  

Total RWAs

  368,629    358,219    378,334    368,507  

Common Equity Tier 1
capital ratio

  16.9%   17.4%   16.3%   16.7% 

Tier 1 capital ratio

  19.3%   19.8%   18.6%   19.1% 

Total capital ratio

  22.2%   22.8%   21.4%   22.0% 

Leverage-based capital

    

Adjusted average assets1

 $    841,360    N/A   $    840,845    N/A  

Tier 1 leverage ratio2

  8.4%   N/A    8.4%   N/A  

  At December 31, 2016 
  Transitional  Pro Forma Fully Phased-In 
$ in millions Standardized  Advanced  Standardized  Advanced 

Risk-based capital

    

Common Equity
Tier 1 capital

 $60,398  $60,398  $58,616  $58,616 

Tier 1 capital

  68,097   68,097   66,315   66,315 

Total capital

  78,917   78,642   77,155   76,881 

Total RWAs

  340,191   358,141   351,101   369,709 

Common Equity
Tier 1 capital ratio

  17.8%   16.9%   16.7%   15.9% 

Tier 1 capital ratio

  20.0%   19.0%   18.9%   17.9% 

Total capital ratio

  23.2%   22.0%   22.0%   20.8% 

Leverage-based capital

    

Adjusted average assets1

 $811,402   N/A  $810,288   N/A 

Tier 1 leverage ratio2

  8.4%   N/A   8.2%   N/A 

N/A—Not Applicable

1.

2.
Adjusted average assets representrepresents the denominator of the Tier 1 leverage ratio and areis composed of the average daily balance of consolidatedon-balance sheet assets under U.S. GAAP duringfor the current quarter andquarters ending on the quarter ended December 31, 2016 adjusted forrespective balance sheet dates, reduced by disallowed goodwill, transitional intangible assets, investments in covered funds, defined benefit pension plan assets, after-tax gain on sale from assets sold into securitizations, investments in our own capital instruments, certain deferred tax assets certain investments in the capital instruments of unconsolidated financial institutions and other adjustments.

capital deductions.
2.

The minimum

3.
Supplementary leverage exposure is the sum of Adjusted average assets used in the Tier 1 leverage ratio requirement is 4.0%.

25September 2017 Form 10-Q

Management’s Discussion and AnalysisLOGO

The fullyphased-in pro forma estimates in the previous tables are based on our current understanding of the capital rules and other factors, which may be subject to change as we receive additional clarification and implementation guidance from the Federal Reserve and as the interpretation of the regulations evolves over time. These fullyphased-in pro forma estimates arenon-GAAP financial measures because they were not yet effective at September 30, 2017. These preliminary estimates are subject to risks and uncertainties that may cause actual results to differ materially and should not be taken as a projection of what our capital, capital ratios, RWAs, earnings or other results will actually be at future dates. For a discussion of risks and uncertainties that may affect our future results, see “Risk Factors” in Part I, Item 1A of the 2016 Form10-K.

Well-Capitalized Minimum Regulatory Capital Ratios for U.S. Bank Subsidiaries

At September 30, 2017

Common Equity Tier 1 risk-based capital ratio

6.5%

Tier 1 risk-based capital ratio

8.0%

Total risk-based capital ratio

10.0%

Tier 1 leverage ratio

5.0%

For us to remain a financial holding company, our U.S. Bank Subsidiaries must qualify as well-capitalized by maintaining the minimum ratio requirements set forth in the previous table. The Federal Reserve has not yet revised the well-capitalized standard for financial holding companies to reflect the higher capital standards required for us under the capital rules. Assuming that the Federal Reserve would apply the same or very similar well-capitalized standards to financial holding companies, each of our risk-based capital ratios and Tier 1 leverage ratio at September 30, 2017 would have exceeded the revised well-capitalized standard. The Federal Reserve may require us to maintain risk- and leverage-based capital ratios substantially in excess of mandated minimum levels, depending upon general economic conditions and a financial holding company’s particular condition, risk profile and growth plans.

Regulatory Capital Calculated under Transitional Rules

$ in millions  

At

September 30,

2017

  

At
December 31,

2016

 

Common Equity Tier 1 capital

   

Common stock and surplus

  $15,448  $17,494 

Retained earnings

   57,554   53,679 

AOCI

   (2,544)   (2,643) 

Regulatory adjustments and deductions:

 

Net goodwill

   (6,519)   (6,526) 

Net intangible assets (other than goodwill and mortgage servicing assets)

   (1,991)   (1,631) 

Other adjustments and deductions1

   266   25 

Total Common Equity Tier 1 capital

  $62,214  $60,398 

Additional Tier 1 capital

   

Preferred stock

  $8,520  $7,520 

Noncontrolling interests

   544   613 

Other adjustments and deductions2

   33   (246) 

Additional Tier 1 capital

  $9,097  $7,887 

Deduction for investments in covered funds

   (305)   (188) 

Total Tier 1 capital

  $71,006  $68,097 

Standardized Tier 2 capital

   

Subordinated debt

  $10,341  $10,303 

Noncontrolling interests

   95   62 

Eligible allowance for credit losses

   426   464 

Other adjustments and deductions

   (7)   (9) 

Total Standardized Tier 2 capital

  $10,855  $10,820 

Total Standardized capital

  $81,861  $78,917 

Advanced Tier 2 capital

   

Subordinated debt

  $10,341  $10,303 

Noncontrolling interests

   95   62 

Eligible credit reserves

   217   189 

Other adjustments and deductions

   (7)   (9) 

Total Advanced Tier 2 capital

  $10,646  $10,545 

Total Advanced capital

  $81,652  $78,642 

September 2017 Form 10-Q26

Management’s Discussion and AnalysisLOGO

Regulatory Capital Rollforward Calculated under Transitional Rules

$ in millions  Nine Months Ended
 September 30, 2017 		 
  

Common Equity Tier 1 capital

  

Common Equity Tier 1 capital at December 31, 2016

  $60,398  

Change related to the following items:

  

Value of shareholders’ common equity

   1,928  

Net goodwill

   7  

Net intangible assets (other than goodwill and mortgage servicing assets)

   (360) 

Other adjustments and deductions1

   241  

Common Equity Tier 1 capital at September 30, 2017

  $62,214  

Additional Tier 1 capital

  

Additional Tier 1 capital at December 31, 2016

  $7,887  

New issuance of qualifying preferred stock

   1,000  

Change related to the following items:

  

Noncontrolling interests

   (69) 

Other adjustments and deductions2

   279  

Additional Tier 1 capital at September 30, 2017

   9,097  

Deduction for investments in covered funds at
December 31, 2016

   (188) 

Change in deduction for investments in covered funds

   (117) 

Deduction for investments in covered funds at
September 30, 2017

   (305) 

Tier 1 capital at September 30, 2017

  $71,006  

Standardized Tier 2 capital

  

Tier 2 capital at December 31, 2016

  $10,820  

Change related to the following items:

  

Eligible allowance for credit losses

   (38) 

Other changes, adjustments and deductions3

   73  

Standardized Tier 2 capital at September 30, 2017

  $10,855  

Total Standardized capital at September 30, 2017

  $81,861  

Advanced Tier 2 capital

  

Tier 2 capital at December 31, 2016

  $10,545  

Change related to the following items:

  

Eligible credit reserves

   28  

Other changes, adjustments and deductions3

   73  

Advanced Tier 2 capital at September 30, 2017

  $10,646  

Total Advanced capital at September 30, 2017

  $81,652  

1.

Other adjustments, and deductions used in the calculation of Common Equity Tier 1 capital include credit spread premium over risk-free rate for derivative liabilities, net deferred tax assets, netafter-tax DVA and adjustments related to AOCI.

2.

Other adjustments and deductions used in the calculation of Additional Tier 1 capital include credit spread premium over risk-free rateprimarily: (i) for derivatives, liabilities, net deferred tax assets and netafter-tax DVA.

3.

Other changes, adjustments and deductions used in the calculations of Standardized and Advanced Tier 2 capital include changes in subordinated debt and noncontrolling interests.

RWAs Rollforward Calculated under Transitional Rules

   Nine Months Ended 
   September 30, 20171 
$ in millions  Standardized   Advanced 

Credit risk RWAs

    

Balance at December 31, 2016

  $       278,874   $       169,231 

Change related to the following items:

    

Derivatives

   7,013     166  

Securities financing transactions

   5,892     3,246  

Securitizations

   1,559     1,224  

Investment securities

   (3,044)    (1,467) 

Commitments, guarantees and loans

   213     (4,317) 

Cash

   (103)    (592) 

Equity investments

   (889)    (946) 

Other credit risk2

   1,795     1,650  

Total change in credit risk RWAs

  $12,436    $(1,036) 

Balance at September 30, 2017

  $291,310    $168,195  

Market risk RWAs

    

Balance at December 31, 2016

  $61,317    $60,872  

Change related to the following items:

    

Regulatory VaR

   523     523  

Regulatory stressed VaR

   11,304     11,304  

Incremental risk charge

   2,662     2,662  

Comprehensive risk measure

   (3,923)    (3,543) 

Specific risk:

    

Non-securitizations

   4,065     4,065  

Securitizations

   1,371     1,409  

Total change in market risk RWAs

  $16,002    $16,420  

Balance at September 30, 2017

  $77,319    $77,292  

Operational risk RWAs

    

Balance at December 31, 2016

  $N/A    $128,038  

Change in operational risk RWAs

   N/A     (15,306) 

Balance at September 30, 2017

  $N/A    $112,732  

Total RWAs

  $368,629    $358,219  

VaR—Value-at-Risk

N/A—Not Applicable

1.

The RWAs for each category in the table reflect bothon- andoff-balance sheet exposures, where appropriate.

2.

Amount reflects assets not in a defined category,non-material portfolios of exposures and unsettled transactions, as applicable.

The decrease of $15,306 million in operational risk RWAs in the current year period under the Advanced Approach reflects a reduction in the internal loss data related to litigation utilized in the operational risk capital model.

Regulatory stressed VaR increased $11,304 million in the current year period under both the Standardized and the Advanced Approaches. These increases were primarily driven by increases in trading inventory across the equities, global macro, and credit businesses within Institutional Securities, in response to client demand.

27September 2017 Form 10-Q

Management’s Discussion and AnalysisLOGO

Supplementary Leverage Ratio

We and our U.S. Bank Subsidiaries are required to publicly disclose our supplementary leverage ratios, which will become effective as a capital standard on January 1, 2018. By January 1, 2018, we must also maintain a Tier 1 supplementary leverage capital buffer of at least 2% in addition to the 3% minimum supplementary leverage ratio (for a total of at least 5%), in order to avoid limitations on capital distributions, including dividends and stock repurchases, and discretionary bonus payments to executive officers. In addition, beginning in 2018, our U.S. Bank Subsidiaries must maintain a supplementary leverage ratio of 6% to be considered well-capitalized.

Pro Forma Supplementary Leverage Exposure and Ratio

  At September 30, 2017  At December 31, 2016 

$ in millions

 Transitional
basis		  Fully
phased-in1		  Transitional
basis		  Fully
phased-in1		 

Average total assets2

 $850,616  $850,616  $820,536  $820,536 

Adjustments3, 4

  237,305   236,789   242,113   240,999 

Pro forma supplementary leverage exposure

 $1,087,921  $1,087,405  $1,062,649  $1,061,535 

 

Pro forma supplementary leverage ratio

  6.5%   6.5%   6.4%   6.2% 

1.

Estimated amounts utilize fullyphased-in Tier 1 capital and take into consideration the Tier 1 capital deductions that would be applicable in 2018 after thephase-in period has ended.

2.

Computed as the average daily balance of consolidated total assets under U.S. GAAP during the current quarter and the quarter ended December 31, 2016.

3.

Computed as the arithmetic mean of themonth-end balances over the current quarter and the quarter ended December 31, 2016.

4.

Adjustments are to: (i) incorporate derivative exposures, including adding the related potential future exposure (including for derivatives cleared for clients), grossing up cash collateral netting where qualifying criteria are not met and adding the effective notional principal amount of sold credit protection offset by qualifying purchased credit protection; (ii) reflect the counterparty credit risk for repo-style transactions; and (iii) add the credit equivalent amount foroff-balance sheet exposures;exposures.

4.Based on a Federal Reserve interim final rule in effect until March 31, 2021, our SLR and (iv) apply otherSupplementary leverage exposure as of September 30, 2020 reflect the exclusion of U.S. Treasury securities and deposits at Federal Reserve Banks. As of September 30, 2020, the impact of the interim final rule on our SLR was an improvement of 87 bps. For further information, see “Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments” herein.

27September 2020 Form 10-Q
Table of Contents
Management’s Discussion and Analysis
mslogo3q20.jpg

Regulatory Capital
$ in millionsAt
September 30,
2020		At
December 31,
2019		Change
Common Equity Tier 1 capital   
Common stock and surplus$4,350
$5,228
$(878)
Retained earnings76,353
70,589
5,764
AOCI(537)(2,788)2,251
Regulatory adjustments and deductions:  
Net goodwill(7,242)(7,081)(161)
Net intangible assets(1,776)(2,012)236
Other adjustments and deductions1
9
815
(806)
Total Common Equity Tier 1
capital
$71,157
$64,751
$6,406
Additional Tier 1 capital   
Preferred stock$8,520
$8,520
$—
Noncontrolling interests625
607
18
Additional Tier 1 capital$9,145
$9,127
$18
Deduction for investments in covered funds(397)(435)38
Total Tier 1 capital$79,905
$73,443
$6,462
Standardized Tier 2 capital   
Subordinated debt$8,681
$8,538
$143
Noncontrolling interests147
143
4
Eligible ACL1,287
590
697
Other adjustments and deductions(2)(6)4
Total Standardized Tier 2
capital
$10,113
$9,265
$848
Total Standardized capital$90,018
$82,708
$7,310
Advanced Tier 2 capital   
Subordinated debt$8,681
$8,538
$143
Noncontrolling interests147
143
4
Eligible credit reserves1,032
305
727
Other adjustments and
 deductions
(2)(6)4
Total Advanced Tier 2 capital$9,858
$8,980
$878
Total Advanced capital$89,763
$82,423
$7,340
1.Other adjustments toand deductions used in the calculation of Common Equity Tier 1 capital including disallowed goodwill, transitional intangibleprimarily includes net after-tax DVA, the credit spread premium over risk-free rate for derivative liabilities, defined benefit pension plan assets, after-tax gain on sale from assets sold into securitizations, investments in our own capital instruments and certain deferred tax assets and certain investments in the capital instruments of unconsolidated financial institutions.

assets.

The pro forma fullyphased-in supplementary leverage

RWA Rollforward
 Nine Months Ended
September 30, 2020
$ in millionsStandardizedAdvanced
Credit risk RWA  
Balance at December 31, 2019$342,684
$228,927
Change related to the following items:  
Derivatives4,622
24,322
Securities financing transactions(9,314)514
Securitizations(1,595)(3,016)
Investment securities2,468
3,904
Commitments, guarantees and loans5,017
1,776
Cash718
1,838
Equity investments3,027
3,207
Other credit risk1
(601)(762)
Total change in credit risk RWA$4,342
$31,783
Balance at September 30, 2020$347,026
$260,710
Market risk RWA  
Balance at December 31, 2019$51,493
$51,597
Change related to the following items:  
Regulatory VaR9,673
9,673
Regulatory stressed VaR1,987
1,987
Incremental risk charge180
180
Comprehensive risk measure210
106
Specific risk:  
Non-securitization(99)(99)
Securitization(1,620)(1,620)
Total change in market risk RWA$10,331
$10,227
Balance at September 30, 2020$61,824
$61,824
Operational risk RWA  
Balance at December 31, 2019N/A
$101,972
Change in operational risk RWAN/A
(4,425)
Balance at September 30, 2020N/A
$97,547
Total RWA$408,850
$420,081
Regulatory VaR—VaR for regulatory capital requirements

1.Amounts reflect assets not in a defined category, non-material portfolios of exposures and unsettled transactions, as applicable.
Credit risk RWA increased in the current year period under both the Standardized and Advanced Approaches primarily from an increase in Derivatives exposure driven by market volatility, an increase in Investment securities mainly due to increased exposures to U.S. government and agency securities, and an increase in Equity investments due to increased exposure and ratios, shownmarket value gains. Under the Standardized Approach, increased exposures in lending activities within the Wealth Management and Institutional Securities business segments were partially offset by a decrease in Securities financing transactions. Under the Advanced Approach, the increased exposure in Derivatives and higher credit spread volatilities also led to an increase in RWA related to CVA.
Market risk RWA increased in the previous table, are based on our current understandingyear period under both the Standardized and Advanced Approaches primarily due to an increase in Regulatory VaR mainly as a result of rules and other factors.

U.S. Subsidiary Banks’ Pro Forma Supplementary Leverage Ratios on a Transitional Basis

    At September 30, 2017   At December 31, 2016 

MSBNA

   8.9%    7.7% 

MSPBNA

   9.4%    10.2% 

The pro forma transitional and fullyphased-in supplementary leverage exposures and ratios arenon-GAAP financial measures because they have not yet become effective. Our estimates are subject to risks and uncertainties that may cause actual results to differ materially from estimates based on these regulations. Further, these expectations should not be

higher market volatility.

taken as projections of what our supplementary leverage ratios, earnings, assets or exposures will actually be at future dates. For a discussion of risks and uncertainties that may affect our future results, see “Risk Factors” in Part I, Item 1A of the 2016 Form10-K.


September 2020 Form 10-Q28
Table of Contents
Management’s Discussion and Analysis
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Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements

On December 15, 2016, the

The Federal Reserve adopted a final rule fortop-tier bank holding companies of U.S.G-SIBs (“covered BHCs”), including the Parent Company, that establisheshas established external total loss-absorbing capacity (“TLAC”),TLAC, long-term debt (“LTD”) and clean holding company requirements. The final rule contains various definitions and restrictions, such as requiringrequirements for top-tier BHCs of U.S. G-SIBs (“covered BHCs”), including the Parent Company. These requirements are designed to ensure that covered BHCs will have enough loss-absorbing resources at the point of failure to be recapitalized through the conversion of eligible LTD to be issuedequity or otherwise by the covered BHCimposing losses on eligible LTD or other forms of TLAC where an SPOE resolution strategy is used.
Required and be unsecured, have a maturity of one year or more from the date of issuanceActual TLAC and not have certain derivative-linked features typically associated with certain types of structured notes. We expectEligible LTD Ratios
   
Actual
Amount/Ratio
$ in millionsRegulatory Minimum
Required 
Ratio1
At
September 30,
2020		At
December 31,
2019
External TLAC2
  $202,472
$196,888
External TLAC as a % of RWA18.0%21.5%48.2%49.9%
External TLAC as a % of leverage exposure7.5%9.5%18.7%17.0%
Eligible LTD3
  $114,952
$113,624
Eligible LTD as a % of RWA9.0%9.0%27.4%28.8%
Eligible LTD as a % of leverage exposure4.5%4.5%10.6%9.8%
1.
Required ratios are inclusive of applicable buffers.The final rule imposes TLAC buffer requirements on top of both the risk-based and leverage exposure-based external TLAC minimum requirements. The risk-based TLAC buffer is equal to the sum of 2.5%, our Method 1 G-SIB surcharge and the CCyB, if any, as a percentage of total RWA. The leverage exposure-based TLAC buffer is equal to 2% of our total leverage exposure. Failure to maintain the buffers would result in restrictions on our ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers.
2.
External TLAC consists of Common Equity Tier 1 capital and Additional Tier 1 capital (each excluding any noncontrolling minority interests), as well as eligible LTD.
3.Consists of TLAC-eligible LTD reduced by 50% for amounts of unpaid principal due to be paid in more than one year but less than two years from each respective balance sheet date.
We are in compliance with all TLAC requirements as of the rule by January 1, 2019, the date that compliance is required.

September 30, 2020 and December 31, 2019. For a further discussion of TLAC and LTDrelated requirements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Regulatory Capital Requirements—Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements” in Part II, Item 7 of the 20162019 Form10-K. For discussions about the interaction between the single point of entry resolution strategy and the TLAC and LTD requirements, see “Business—Supervision and Regulation—Financial Holding Company—Resolution and Recovery Planning” in Part I, Item 1 and “Risk Factors—Legal, Regulatory and Compliance Risk” in Part I, Item 1A of the 2016 Form10-K.

Capital Plans and Stress Tests

Pursuant to the Dodd-Frank Act, the Federal Reserve has adopted capital planning and stress test requirements for large bank holding companies, including us,BHCs, which form part of the Federal Reserve’s annual Comprehensive Capital Analysis and Review (“CCAR”)CCAR framework.

We submitted our 2017 capital plan2020 Capital Plan (“Capital Plan”) andcompany-run stress test results to the Federal Reserve on April 5, 2017.6, 2020. On June 22, 2017,25, 2020, the Federal Reserve published
summary results of the Dodd-Frank Actits supervisory stress tests of each large bank holding company, including us.BHC. On June 28, 2017, the Federal Reserve published summary results of CCAR and announced that they did not object to our 2017 Capital Plan (“Capital Plan”). The Capital Plan includes the repurchase of up to $5.0 billion of outstanding common stock for the period beginning July 1, 2017 through June 30, 2018, an increase

September 2017 Form 10-Q28

Management’s Discussion and AnalysisLOGO

from $3.5 billion in the 2016 Capital Plan. Additionally, the Capital Plan includes an increase in our quarterly common stock dividend to $0.25 per share from $0.20 per share, beginning with the common stock dividend declared on July 19, 2017. We29, 2020, we disclosed a summary of the results of ourcompany-run stress tests on June 23, 2017 on our Investor Relations website. In addition,On September 4, 2020, we submittedannounced we will be subject to an SCB of 5.7% beginning October 1, 2020, which reflects the Federal Reserve’s corrected 2020 supervisory stress test results. We had previously announced that we would be subject to an SCB of 5.9%, which reflected the Federal Reserve’s original 2020 supervisory stress test results released in June 2020.Together with other features of the regulatory capital framework, this revised SCB results in an aggregate Standardized Approach Common Equity Tier 1 required ratio of 13.2%. Generally, our SCB will be updated annually based on the results of the supervisory stress test. See “Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments—Stress Capital Buffer Final Rule” herein for additional information on the SCB.

The Federal Reserve required each large BHC to update and resubmit its capital plan. On November 2, 2020, we resubmitted ourmid-cyclecompany-run 2020 Capital Plan and company-run stress test toresults based on revised scenarios released by the Federal Reserve on October 5, 2017 and disclosed aSeptember 17, 2020. We expect that the Federal Reserve will publish summary results of the results on October 20, 2017 on our Investor Relations website.

The Dodd-Frank Act also requires eachsecond round of our U.S. Bank Subsidiaries to conduct an annual stress test. MSBNA and MSPBNA submitted their 2017 annualcompany-runsupervisory stress tests for each large BHC, including us, by the end of this year.

Based on the Federal Reserve announcement on June 25, 2020, all large BHCs were subject to capital action restrictions in the current quarter. Except as noted below, these restrictions generally prohibit large BHCs from making any capital distribution (excluding any capital distribution arising from the issuance of a capital instrument eligible for inclusion in the numerator of a regulatory capital ratio), unless otherwise approved by the Federal Reserve. Large BHCs are, however, authorized to make share repurchases relating to issuances of common stock related to employee stock ownership plans; provided that a BHC does not increase the amount of its common stock dividends, to pay common stock dividends that do not exceed an amount equal to the OCCaverage of the BHC’s net income for the four preceding calendar quarters, unless otherwise specified by the Federal Reserve; and to make scheduled payments on April 5, 2017additional Tier 1 and published a summaryTier 2 capital instruments. On September 30, 2020, the Federal Reserve announced that such capital action restrictions would be extended through the fourth quarter of their stress test results on June 23, 2017 on our Investor Relations website.

2020. For a further discussion of our capital plans, and stress tests, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Balance Sheet—Capital PlansManagement” herein and Stress Tests” in Part II, Item 7 of the 20162019 Form10-K.

Attribution of Average Common Equity According to the Required Capital Framework

Our required capital (“Required Capital”) estimation is based on the Required Capital framework, an internal capital adequacy measure. Common equity attribution to the business segments

29September 2020 Form 10-Q
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Management’s Discussion and Analysis
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is based on capital usage calculated byunder the Required Capital framework, as well as each business segment’s relative contribution to our total Required Capital. Required Capital is assessed for each business segment and further attributed to product lines. This process is intended to align capital with the risks in each business segment in order to allow senior management to evaluate returns on a risk-adjusted basis.

The Required Capital framework is a risk-based and leverageuse-of-capitalleverage-based capital measure, which is compared with our regulatory capital to ensure that we maintain an amount of going concern capital after absorbing potential losses from stress events, where applicable, at a point in time. The amount of capital allocated to the business segments is generally set at the beginning of each year and remains fixed throughout the year until the next annual reset unless a significant business change occurs (e.g., acquisition or disposition). We define the difference between our total average common equity and the sum of the average common equity amounts allocated to our business segments as Parent Companycommon equity. We generally hold Parent Companycommon equity for prospective regulatory requirements, organic growth, acquisitions and other capital needs.

Common equity estimation and attribution

We are currently evaluating potential updates to the business segments are based on our pro forma fullyphased-in regulatory capital estimates, including supplementary leverage, and incorporates our internal stress tests. The amount of capital

allocated to the business segments is set at the beginning of each year and remains fixed throughout the year until the next annual reset. Differences between available and Required Capital are attributed to Parent Company equity during the year.

The Required Capital framework is expected to evolve over time in responsetake into account changes to changes inour risk-based capital requirements resulting from the businessSCB and regulatory environment. Wewe will continue to evaluate the framework with respect to the impact of other future regulatory requirements, as appropriate.

Average Common Equity Attribution

   Three Months Ended
September 30,		   Nine Months Ended
September 30,		 
$ in billions      2017           2016           2017           2016     

Institutional Securities

  $40.2   $43.2   $40.2   $43.2  

Wealth Management

   17.2    15.3    17.2    15.3  

Investment Management

   2.4    2.8    2.4    2.8  

Parent Company

   10.7    8.2    10.0    7.6  

Total1

  $70.5   $69.5   $69.8   $68.9  

1
 Three Months Ended
September 30,		Nine Months Ended
September 30,
$ in billions2020201920202019
Institutional Securities$42.8
$40.4
$42.8
$40.4
Wealth Management18.2
18.2
18.2
18.2
Investment Management2.6
2.5
2.6
2.5
Parent15.1
12.3
13.3
11.4
Total$78.7
$73.4
$76.9
$72.5
1.

Average

The attribution of average common equity to the business segments is anon-GAAP financial measure.

See “Selected Non-GAAP Financial Information” herein.

Regulatory Developments

Resolution and Recovery Planning

Pursuant to the Dodd-Frank Act, we are required to periodically submit to the Federal Reserve and the Federal Deposit Insurance Corporation (“FDIC”) an annualFDIC a resolution plan that describes our strategy for a rapid and orderly resolution under the U.S. Bankruptcy Code in the event of our material financial distress or failure.

Our next resolution plan submission will be a targeted resolution plan in July 2021.

As described in our most recent resolution plan, which was submitted on June 28, 2019, our preferred resolution strategy which is set out inan SPOE strategy. In line with our 2017 resolution plan, is a single point of entry strategy. We submitted our full 2017 resolution plan on June 30, 2017. We previously submitted a status report in respect of certain shortcomings identified in our 2015 resolution plan on September 30, 2016. As indicated in our 2017 resolution plan,SPOE strategy, the Parent Company has transferred, and has agreed to transfer on an ongoing basis, certain assets to its wholly owned, direct subsidiary Morgan Stanley Holdings LLC (the “Funding IHC”). In addition, the Parent Company has entered into an amended and restated its support agreement with its material entities (including the Funding IHC) and certain other subsidiaries. UnderIn the amended and restated support agreement, upon the occurrenceevent of a resolution scenario, the Parent Company would be obligated to contribute or loan on a subordinated basis all of its Contributable Assets to our
material assets, other than shares in subsidiaries ofentities and/or the Parent Company and certain intercompany receivables,Funding IHC. The Funding IHC would be obligated to provide capital and liquidity, as applicable, to our material subsidiaries.entities. The obligationscombined implication of the SPOE resolution strategy and the requirement to maintain certain levels of TLAC is that losses in resolution would be imposed on the holders of eligible long-term debt and other forms of eligible TLAC issued by the Parent Company underbefore any losses are imposed on the amended and restated support agreement are secured on a senior basis by the assetsholders of the Parent Company (other than shares in subsidiaries of the Parent Company). As a result, claimsdebt securities of our materialoperating subsidiaries against the assets of the Parent Company (other than shares in subsidiaries of the Parent Company) are effectively senior to unsecured obligations of the Parent Company.

or before putting U.S. taxpayers at risk.

29September 2017 Form 10-Q

Management’s Discussion and AnalysisLOGO

In September 2017, the Federal Reserve and the FDIC extended the next resolution plan filing deadline for eight large domestic banks, including us, by one year to July 1, 2019.

In September 2016, the OCC issued final guidelines that establish enforceable standards for recovery planning by national banks and certain other institutions with total consolidated assets of $50 billion or more, calculated on a rolling four-quarter average basis, including MSBNA and MSPBNA. The guidelines were effective on January 1, 2017; MSBNA must be in compliance by January 1, 2018 and MSPBNA must be in compliance by October 1, 2018.

In September 2017, the Federal Reserve issued a final rule that would impose contractual requirements on certain “qualified financial contracts” (“covered QFCs”) to which U.S.G-SIBs, including us, and their subsidiaries (“covered entities”) are parties. While national banks and savings associations are not “covered entities” under the final Federal Reserve rule, the OCC is expected to issue a final rule that would subject national banks that are subsidiaries of U.S.G-SIBs, including our U.S. Bank Subsidiaries, as well as certain other institutions, to substantively identical requirements. Under the Federal Reserve’s final rule, covered QFCs must generally expressly provide that transfer restrictions and default rights against a covered entity are limited to the same extent as they would be under the Federal Deposit Insurance Act and Title II of the Dodd-Frank Act and their implementing regulations. In addition, covered QFCs may not, among other things, permit the exercise of any cross-default right against a covered entity based on an affiliate’s entry into insolvency, resolution or similar proceedings, subject to certain creditor protections. There is aphased-in compliance schedule based on counterparty type, with the first compliance date of January 1, 2019.

For more information about resolution and recovery planning requirements and our activities in these areas, including the implications of such activities in a resolution scenario, see “Business—Supervision and Regulation—Financial Holding Company—Resolution and Recovery Planning” in Part I, Item 1,Planning,” “Risk Factors—Legal, Regulatory and Compliance Risk” in Part I, Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Developments—Requirements—Resolution and Recovery Planning” in Part II, Item 7 of the 20162019 Form10-K.

Legacy Covered Funds under

Regulatory Developments
Final Rule on the Volcker Rule

Regulatory Capital Treatment for Investments in Certain Unsecured Debt Instruments Issued by G-SIBs

The Volcker Rule prohibits “banking entities,”U.S. banking agencies have issued a final rule that, among other things, modifies the regulatory capital framework for large U.S. banking organizations, including us and our affiliates,U.S. Bank Subsidiaries. Under the final rule, such organizations are required to make certain deductions from engagingregulatory capital for their investments in certain “proprietary trading” activities, as definedunsecured debt instruments (including eligible LTD in the TLAC framework) issued by the Parent Company and other G-SIBs. These requirements become effective on April 1, 2021 and we expect to be in compliance with the final rule by the effective date.
CFTC Final Rule on Capital Requirements for Swap Dealers
The CFTC has finalized rules establishing capital requirements for CFTC-registered swap dealers not subject to regulation by a prudential regulator. Compliance with these rules, which will apply to a number of our subsidiaries that are CFTC-registered swap dealers, is required by October 6, 2021.
Final Rule to Amend the Covered Fund Provisions of the Volcker Rule subject to

exemptionsThe Federal financial regulatory agencies responsible for underwriting, market-making-related activities, risk-mitigating hedging and certain other activities. Thethe Volcker Rule also prohibitsRule’s implementing regulations have finalized a rule that revises the prohibition on certain investments and relationships by banking entities with “covereddefined covered funds. The final rule adds certain new exclusions from the definition of covered fund, while streamlining others. It also simplifies certain restrictions on


September 2020 Form 10-Q30
Table of Contents
Management’s Discussion and Analysis
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inter-affiliate relationships with covered funds. The final rule was effective October 1, 2020.
Stress Capital Buffer Final Rule
The Federal Reserve has adopted a final rule to integrate its annual capital planning and stress testing requirements with existing applicable regulatory capital requirements. The final rule, which applies to certain BHCs, introduces an SCB and related changes to the capital planning and stress testing processes.
The SCB applies only with respect to Standardized Approach risk-based capital requirements and replaces the existing Common Equity Tier 1 capital conservation buffer of 2.5%. The SCB is the greater of (i) the maximum decline in our Common Equity Tier 1 capital ratio under the severely adverse scenario over the supervisory stress test measurement period plus the sum of the four quarters of planned common stock dividends divided by the projected RWAs from the quarter in which the Firm’s projected Common Equity Tier 1 capital ratio reaches its minimum in the supervisory stress test and (ii) 2.5%. Beginning October 1, 2020, risk-based regulatory capital requirements under the Standardized Approach include the SCB, as summarized above, as well as our Common Equity Tier 1 GSIB capital surcharge and any applicable Common Equity Tier 1 CCyB.
The final rule makes related changes to capital planning and stress testing processes for BHCs subject to the SCB. In particular, the supervisory stress test will assume that BHCs generally maintain a constant level of assets and RWAs throughout the projection period. In addition, the supervisory stress test will no longer assume that BHCs make all planned capital distributions, although the SCB will incorporate the dollar amount of four quarters of planned common stock dividends, as summarized above.
The final rule does not change regulatory capital requirements under the Advanced Approach, the Tier 1 leverage ratio or the SLR.
Regulatory Developments in Response to COVID-19
In the United States, the Federal Reserve, the other U.S. state and federal financial regulatory agencies and Congress have taken actions to mitigate disruptions to economic activity and financial stability resulting from COVID-19.
Federal Reserve and other U.S. Banking Agency Actions
The Federal Reserve has established, or has taken steps to establish, a range of facilities and programs to support the U.S. economy and U.S. marketplace participants in response to economic disruptions associated with COVID-19. Through these facilities and programs, the Federal Reserve has taken steps to directly or indirectly purchase assets or debt instruments
from, or make loans to, U.S. companies, financial institutions, municipalities and other market participants. In the current year period, we have participated as principal, as well as on behalf of clients, in certain of these facilities and programs and we may participate in other of these facilities and programs in the future.
In addition, the Federal Reserve has taken a range of other actions to support the flow of credit to households and businesses. For example, the Federal Reserve has set the target range for the federal funds” rate at 0 to 0.25% and has increased its holdings of U.S. Treasury securities and agency mortgage-backed securities, purchased agency commercial mortgage-backed securities, and established a facility to purchase corporate debt securities and shares of exchange-traded funds holding such securities. The Federal Reserve has also encouraged depository institutions to borrow from the discount window and has lowered the primary credit rate for such borrowings by 150 basis points to 0.25% while extending the term of such loans up to 90 days. In addition, reserve requirements have been reduced to zero.
Acting in concert with the other U.S. banking agencies, the Federal Reserve has also issued statements encouraging banking organizations to use their capital and liquidity buffers as they lend to households and businesses affected by COVID-19.
Further, the Federal Reserve along with the other U.S. banking agencies, issued guidance stating that granting certain concessions to borrowers that are current on existing loans, either individually or as part of a numberprogram for creditworthy borrowers who are experiencing short-term financial or operational problems as a result of exemptionsthe COVID-19 pandemic, generally would not be considered TDRs under applicable U.S. GAAP. This guidance also clarifies that efforts to work with borrowers of one-to-four family residential mortgages impacted by the COVID-19 pandemic and exclusions. Inmeeting certain criteria will not result in such loans being deemed restructured or modified for purposes of regulatory capital requirements.
The Federal Reserve and other U.S. banking agencies have also issued a series of rulemakings in response to the COVID-19 pandemic, including to facilitate banking organizations’ use of their capital buffers:
•
Supplementary Leverage Ratio Interim Final Rules. The Federal Reserve has adopted an interim final rule that excludes, on a temporary basis, U.S. Treasury securities and deposits at Federal Reserve Banks from our supplementary leverage exposure from April 1, 2020 to March 31, 2021.
A similar interim final rule issued by the OCC along with the other U.S. banking agencies provides national banks, including MSBNA and MSPBNA, an optional election, which is considered on a case-by-case basis by the OCC if received after June 2017, we received30, 2020, to apply similar relief. If elected and approved, a national bank must receive prior approval from the OCC before making any capital distributions while the

31September 2020 Form 10-Q
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exclusion is in effect. As of September 30, 2020, neither MSBNA nor MSPBNA made this optional election.
•
Revisions to Definition of Eligible Retained Income. The U.S. banking agencies have adopted as final an interim final rule, which was effective March 20, 2020, amending the definition of eligible retained income in their respective capital rules. As amended, eligible retained income is defined by the U.S. banking agencies as the greater of (i) net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, and (ii) the average of net income over the preceding four quarters. This definition applies with respect to any payout restrictions applicable in the event of a breach of any regulatory capital buffers, including any applicable CCyB, G-SIB capital surcharge, capital conservation buffer, the enhanced SLR and, once effective, SCB, which replaces the capital conservation buffer under the Standardized Approach.
Separately, the Federal Reserve has adopted as final an interim final rule, which was effective March 26, 2020, amending the definition of our applicationeligible retained income under its TLAC rule to be consistent with the revised definition of eligible retained income in the regulatory capital framework, as summarized above.
•
Regulatory Capital and Stress Testing Developments Related to Implementation of CECL. The U.S. banking agencies have adopted a final rule, consistent with an interim final rule which was effective March 31, 2020, altering, for purposes of the regulatory capital and TLAC requirements, the required adoption time period for CECL. We have elected to apply a transition method provided by the rule, under which the effects of CECL on our regulatory capital and TLAC requirements are deferred for two years, followed by a three-year phase-in of the aggregate capital effects of the two-year deferral.
Non-U.S. Central Bank Actions
In addition to actions taken by the Federal Reserve, many non-U.S. central banks have announced similar facilities and programs in response to the economic and market disruptions associated with COVID-19. Firm subsidiaries operating in non-U.S. markets may participate, or perform customer facilitation roles, in such non-U.S. facilities or programs.
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”)
The CARES Act was signed into law on March 27, 2020. Pursuant to the CARES Act, the U.S. Treasury has the authority to provide loans, guarantees and other investments in support of eligible businesses, states and municipalities affected by the economic effects of COVID-19. Some of these funds may also be used to support the several Federal Reserve programs and facilities described in “Federal Reserve Actions” previously or additional programs or facilities that are established by the
Federal Reserve under its Section 13(3) authority and meet certain criteria. Among other provisions, the CARES Act also includes funding for the Small Business Administration to expand lending, relief from certain U.S. GAAP requirements to allow COVID-19-related loan modifications to not be categorized as TDRs and a range of incentives to encourage deferment, forbearance or modification of consumer credit and mortgage contracts.
The CARES Act also includes several measures that temporarily adjust existing laws or regulations. These include providing the FDIC with additional authority to guarantee the deposits of solvent insured depository institutions held in non-interest-bearing business transaction accounts to a maximum amount specified by the FDIC, reinstating the FDIC’s Temporary Liquidity Guarantee Authority to guarantee debt obligations of solvent insured depository institutions or depository institution holding companies, temporarily allowing the U.S. Treasury to fully guarantee money market mutual funds and granting additional authority to the OCC to provide certain exemptions to the lending limits imposed on national banks.
Other Matters
U.K. Withdrawal from the E.U.
On January 31, 2020, the U.K. withdrew from the E.U. under the terms of a withdrawal agreement between the U.K. and the E.U. The withdrawal agreement provides for a five-year extensiontransition period to the end of December 2020, during which time the U.K. will continue to apply E.U. law as if it were a member state, and U.K. firms’ rights to provide financial services in E.U. member states will continue. Access to the E.U. market after the transition period remains subject to conform investments in certain legacy Volcker covered funds that are also illiquid funds. The approval covers essentially allnegotiation.
We have prepared the structure of ournon-conforming investments in, European operations for a range of potential outcomes, including for the possibility that U.K. financial firms’ access to E.U. markets after the transition period is limited, and relationships with, legacy covered funds subjectwe expect to the Volcker Rule.

be able to continue to serve our clients and customers under each of these potential outcomes.

For more information about Volcker Rule requirementson the U.K.’s withdrawal from the E.U., our related preparations and our activities in these areas, including the conformance periods applicable to certain covered funds and our application for a statutory extension, see “Business—Supervision and Regulation—Financial Holding Company—Activities Restrictions under the Volcker Rule” in Part I, Item 1 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Developments—Legacy Covered Funds under the Volcker Rule” in Part II, Item 7 of the 2016 Form10-K.

U.S. Department of Labor Conflict of Interest Rule

The U.S. Department of Labor’s final Conflict of Interest Rule went into effect on June 9, 2017, with certain aspects subject tophased-in compliance. Full compliance is currently scheduled to be required by January 1, 2018, but the U.S. Department of Labor recently proposed to delay the full compliance date to July 1, 2019. In addition, the U.S. Department of Labor is undertaking an examination of the rule which may result in changes to the rule or related exemptions or a further change in the full compliance date. For a discussion of the U.S. Department of Labor Conflict of Interest Rule, see “Business—Supervision and Regulation—Institutional Securities and Wealth Management” in Part I, Item 1 of the 2016 Form10-K.

U.K. Referendum

Following the U.K. electorate vote to leave the European Union, the U.K. invoked Article 50 of the Lisbon Treaty on March 29, 2017. For further discussion of U.K. referendum’s potential impact on our operations, see “Risk Factors—International Risk” in Part I, Item 1A of the 20162019 Form10-K. For further information regarding our exposure to the U.K., see also “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Country Risk Exposure.”

and Other Risks."

September 2017 Form 10-Q30

Management’s Discussion and AnalysisLOGO

ExpectedPlanned Replacement of LIBOR

London Interbank Offered Rate and Replacement or Reform of Other Interest Rates

Central banks around the world, including the Federal Reserve, have commissioned committees and working groups of market participants and others withofficial sector representatives to replace LIBOR and replace or reform other interest rate benchmarks (collectively, the goal of finding suitable replacements for“IBORs”). Accordingly, we have established

September 2020 Form 10-Q32
Table of Contents
Management’s Discussion and Analysis
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and are undertaking a Firmwide IBOR transition plan to promote the London Interbank Offered Rate (“LIBOR”) based more fully on observable market transactions. It is expected that a transition away fromto alternative reference rates, which takes into account the widespread useconsiderable uncertainty regarding the availability of LIBOR to alternative rates will occur over the course of the next several years.

Effects of Inflation and Changes in Interest and Foreign Exchange Rates

beyond 2021.

For a further discussion of the effectsexpected replacement of inflationthe IBORs and/or reform of interest rate benchmarks, and changes in interestthe related risks and foreign exchange rates on our business and financial results and strategies to mitigate potential exposures,transition plan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Effects of InflationRegulatory Requirements—Other Matters” and Changes“Risk Factors—Risk Management,” respectively, in Interest and Foreign Exchange Rates” in Part II, Item 7 of the 20162019 Form10-K.

Off-Balance Sheet Arrangements

We enter into variousoff-balance sheet arrangements, including through unconsolidated special purpose entities (“SPEs”) and lending-related financial instruments (e.g., guarantees and commitments), primarily in connection with the Institutional Securities and Investment Management business segments.

We utilize SPEs primarily in connection with securitization activities. For information on our securitization activities, see Note 12 to the financial statements.

For information on our commitments, obligations under certain guarantee arrangements and indemnities, see Note 11 to the financial statements. For further information on our lending commitments, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Lending Activities.”


31September 2017 Form 10-Q

33September 2020 Form 10-Q
Table of ContentsQuantitative and Qualitative Disclosures about Market Risk
 
LOGO
mslogo3q20.jpg


Quantitative and Qualitative Disclosures about Risk Management

Management believes effective risk management is vital to the success of our business activities. For a discussion of our Enterprise Risk Management framework and risk management functions, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management” in Part II, Item 7A of the 20162019 Form10-K.

Market Risk

Market risk refers to the risk that a change in the level of one or more market prices, rates, spreads, indices, volatilities, correlations or other market factors, such as market liquidity, will result in losses for a position or portfolio. Generally, we incur market risk as a result of trading, investing and client facilitation activities, principally within the Institutional Securities business segment where the substantial majority of ourValue-at-Risk (“VaR”) VaR for market risk exposures is generated. In addition, we incur non-trading market risk, principally within the Wealth Management and Investment Management business segments. The Wealth Management business segment primarily incursnon-trading market risk from lending and deposit-taking activities. The Investment Management business segment primarily incursnon-trading market risk from capital investments in real estate fundsalternative and investments in private equity vehicles.other funds. For a further discussion of market risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Market Risk” in Part II, Item 7Athe 2019 Form 10-K.
Trading Risks
We are exposed to a wide range of risks related to interest rates and credit spreads, equity prices, foreign exchange rates and commodity prices, and the 2016 Form10-K.

VaR

associated implied volatilities and spreads, related to the global markets in which we conduct our trading activities.

The statistical technique known as VaR is one of the tools we use to measure, monitor and review the market risk exposures of our trading portfolios. The Market Risk Department calculates and distributes daily VaR-based risk measures to various levels of management.

VaR Methodology, Assumptions and Limitations.

For information regarding our primary risk exposures and market risk management, VaR methodology, assumptions and limitations, see “Quantitative and Qualitative Disclosures about Risk—Market Risk—Risk Management—Market Risk—Sales and Trading and Related Activities—VaR Methodology, Assumptions and Limitations”Risks” in Part II, Item 7A of the 20162019 Form10-K.

We utilize the same VaR model for risk management purposes and for regulatory capital calculations. Our regulators have approved our VaR model for use in regulatory calculations.

The portfolio of positions used for our VaR for risk management purposes (“Management VaR”) differs from that used for regulatory capital requirements (“Regulatory VaR”).

Management VaR contains certain positions that are excluded from Regulatory VaR. Examples include counterparty credit valuation adjustment (“CVA”) and related hedges, as well as loans that are carried at fair value and associated hedges.

The following table presents the



95%/One-Day Management VaR for the Trading portfolio, on aperiod-end, quarterly average and quarterly high and low basis. To further enhance the transparency of the traded market risk, the Credit Portfolio VaR has been disclosed as a separate category from the Primary Risk Categories. The Credit Portfolio includes counterparty CVA and related hedges, as well as loans that are carried at fair value and associated hedges.

Trading Risks

95% /One-Day Management VaR

  

95%/One-Day VaR for

the Three Months Ended

 
  September 30, 2017 

$ in millions

 

Period

End

  Average  High  Low 

Interest rate and credit spread

 $28  $31  $42  $25 

Equity price

  13   14   18   12 

Foreign exchange rate

  9   9   13   6 

Commodity price

  9   9   10   7 

Less: Diversification benefit1, 2

  (26)   (25)   N/A   N/A 

Primary Risk Categories

 $33  $38  $47  $32 

Credit Portfolio

  10   11   11   10 

Less: Diversification benefit1, 2

  (6)   (6)   N/A   N/A 

Total Management VaR

 $37  $43  $50  $36 
  95%/One-Day VaR for
the Three Months Ended		 
  June 30, 2017 
$ in millions 

Period

End

  Average  High  Low 

Interest rate and credit spread

 $35  $35  $44   $27  

Equity price

  15   18   26    15  

Foreign exchange rate

  10   11   15    8  

Commodity price

  9   9   10    8  

Less: Diversification benefit1, 2

  (27)   (27)         N/A         N/A 

Primary Risk Categories

 $          42  $          46  $60   $36  

Credit Portfolio

  11   12   14    11  

Less: Diversification benefit1, 2

  (7)   (7)   N/A    N/A 

Total Management VaR

 $46  $51  $64   $41  

N/A—Not Applicable

 Three Months Ended
 September 30, 2020
$ in millions
Period
End
Average
High2
Low2
Interest rate and credit spread$32
$38
$49
$29
Equity price27
30
39
19
Foreign exchange rate11
9
12
7
Commodity price17
22
29
16
Less: Diversification benefit1
(38)(53)N/A
N/A
Primary Risk Categories$49
$46
$57
$37
Credit Portfolio21
25
31
20
Less: Diversification benefit1
(8)(13)N/A
N/A
Total Management VaR$62
$58
$78
$45
 Three Months Ended
 June 30, 2020
$ in millions
Period
End
Average
High2
Low2
Interest rate and credit spread$42
$47
$59
$36
Equity price38
25
38
20
Foreign exchange rate10
11
15
8
Commodity price25
16
25
11
Less: Diversification benefit1
(68)(49)N/A
N/A
Primary Risk Categories$47
$50
$62
$44
Credit Portfolio26
25
30
23
Less: Diversification benefit1
(1)(15)N/A
N/A
Total Management VaR$72
$60
$78
$47
1.

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

2.

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

September 2017 Form 10-Q32

Risk DisclosuresLOGO

The averageAverage total Management VaR for the three months ended September 30, 2017 (“current quarter”) was $43 million compared with $51 million for the three months ended June 30, 2017 (“last quarter”). The averageand Management VaR for the Primary Risk Categories fordecreased from the current quarter was $38 million compared with $46 million last quarter. These decreases werethree months ended June 30, 2020 primarily drivenas a result of reduced credit spread risk partially offset by reduced market volatility and decreases in trading inventory across the equities and credit businesses within Institutional Securities.

increased equity risk.


September 2020 Form 10-Q34
Table of Contents
Risk Disclosures
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Distribution of VaR Statistics and Net Revenues for the Current Quarter.One method of evaluating the reasonableness of our VaR model as a measure of our potential volatility of net revenues is to compare VaR with corresponding actual trading revenues. Assuming no intraday trading, for a95%/one-day VaR, the expected number of times that trading losses should exceed VaR during the year is 13, and, in general, if trading losses were to exceed VaR more than 21 times in a year, the adequacy of the VaR model would be questioned.
We evaluate the reasonableness of our VaR model by comparing the potential declines in portfolio values generated by the model with corresponding actual trading results for the Firm, as well as individual business units. For days where losses exceed the VaR statistic, we examine the drivers of trading losses to evaluate the VaR model’s accuracy relative to realized trading results.

The distribution of VaR Statistics and Net Revenues is presented There were no loss days in the following histograms for the Total Trading populations.

Total Trading.As shown in thecurrent quarter.

Daily 95%/One-Day Management VaR table on the preceding page, the average95%/one-day total Management VaR for the current quarter was $43 million. The following histogram presents the distribution of the daily95%/one-day total Management VaR for the current quarter, which was in a range between $35 million and $50 million for approximately 97% of trading days during the current quarter.

Daily 95% /One-day Total Management VaR for the Three Months Ended September 30, 2017

Current Quarter

($ in millions)

LOGO

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Daily Net Trading Revenues for the Current Quarter
($ in millions)
a3q20pnl.jpg
The followingprevious histogram shows the distribution for the current quarter of daily net trading revenues includingfor the current quarter. Daily net trading revenues include profits and losses from Interest rate and credit spread, Equity price, Foreign exchange rate, Commodity price, and Credit Portfolio positions and intraday trading activities for our Tradingtrading businesses. Daily net trading revenues also include intraday trading activities but exclude certainCertain items not captured in the VaR model, such as fees, commissions and net interest income. Dailyincome are excluded from daily net trading revenues differ fromand the definition of revenuesVaR model. Revenues required for Regulatory VaR backtesting which further excludesexclude intraday trading. During the current quarter, we experienced net trading losses on three days, which were not in excess of the95%/one-day Total Management VaR.

Daily Net Trading Revenues for the Three Months Ended September 30, 2017

($ in millions)

LOGO

Non-Trading Risks

We believe that sensitivity analysis is an appropriate representation of ournon-trading risks. Reflected below is this analysis coveringThe following sensitivity analyses cover substantially all of thenon-trading risk in our portfolio.

Counterparty Exposure Related to Our Own

Credit Spread.Spread Risk Sensitivity1
$ in millionsAt
September 30,
2020		At
June 30,
2020
Derivatives$7
$7
Funding liabilities2
46
45
1.
Amounts represent the potential gain for each 1 bps widening of our credit spread.
2.
Relates to Borrowings carried at fair value.
U.S. Bank Subsidiaries’ Net Interest Income Sensitivity Analysis
$ in millionsAt
September 30,
2020		At
June 30,
2020
Basis point change  
+100$1,014
$599
 -100(338)(351)
The credit spread risk sensitivity of the counterparty exposure related to our own credit spread corresponded to an increase in value of approximately $6 million for each 1 basis point widening in our credit spread level at both September 30, 2017 and June 30, 2017.

Funding Liabilities.The credit spread risk sensitivity of ourmark-to-market structured note liabilities corresponded to an increase in value of approximately $28 million and $26 million for each 1 basis point widening in our credit spread level at September 30, 2017 and June 30, 2017, respectively.

Interest Rate Risk Sensitivity.The followingprevious table presents an analysis of selected instantaneous upward and downward parallel interest rate shocks (subject to a floor of zero percent in the downward scenario) on net interest income over the next 12 months for our U.S. Bank Subsidiaries. These shocks

33September 2017 Form 10-Q

Risk DisclosuresLOGO

are applied to our12-month forecast for our U.S. Bank Subsidiaries, which incorporates market expectations of interest rates and our forecasted business activity, including our deposit deployment strategy and asset-liability management hedges.

U.S. Bank Subsidiaries’ Net Interest Income Sensitivity Analysis

$ in millions 

At

September 30, 2017

  

At

June 30, 2017

 

Basis point change

  

+200

 $566  $716  

+100

  433   413  

-100

  (647)   (577) 

activity.

We do not manage to any single rate scenario but rather manage net interest income in our U.S. Bank Subsidiaries to optimize across a range of possible outcomes.outcomes, including non-parallel rate change scenarios. The sensitivity analysis assumes that we take no action in response to these scenarios, assumes there are no changes in other macroeconomic variables normally correlated with changes in interest rates, and includes subjective assumptions regarding customer and marketre-pricing behavior and other factors. The change in sensitivity to interest rates in the positive 100 basis point scenario betweenSeptember 30, 2020 and June 30, 2017 and September 30, 2017 is related2020 was primarily driven by the impact of changes to overall changes in our asset-liability positioning and higher market rates.

Investments.assumptions as a result of an analysis of deposit pricing through a full interest rate cycle.


35September 2020 Form 10-Q
Table of Contents
Risk Disclosures
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Investments Sensitivity, Including Related Carried Interest
 Loss from 10% Decline
$ in millionsAt
September 30,
2020		At
June 30,
2020
Investments related to Investment Management activities$349
$329
Other investments:  
MUMSS176
170
Other Firm investments203
188
MUMSS—Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.
We have exposure to public and private companies through direct investments, as well as through funds that invest in these assets. These investments are predominantly equity positions with long investment horizons, a portion of which areis for business facilitation purposes. The market risk related to these investments is measured by estimating the potential reduction in net income associated with a 10% decline in investment values and related impact on performance fees.

Investmentsperformance-based fees, as applicable.

Asset Management Revenue Sensitivity Including Related Performance Fees

  10% Sensitivity 
$ in millions 

At

September 30,

2017

  

At

June 30,

        2017        

 

Investments related to Investment Management activities

 $321  $326  

Other investments:

  

Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.

  174   171  

Other Firm investments

  155   151  

Equity Market Sensitivity.    InCertain asset management revenues in the Wealth Management and Investment Management business segments certainfee-based revenue streams are driven by the valuederived from management fees, which are based on fee-based client assets in Wealth Management or AUM in Investment Management (together, “client holdings”). The assets underlying client holdings are primarily composed of clients’ equity, holdings.fixed income and alternative investments, and are sensitive to changes in related markets. The overall level of revenues for these streams alsorevenues depends on multiple additional factors that include, but are not limited to, the level and duration of the equitya market increase or decline, price volatility, the geographic and industry mix of client assets, and client behavior such as the rate and magnitude of client investments and redemptions, and the impact of such market increase or decline and price volatility on client behavior.redemptions. Therefore, overall revenues do not correlate completely with changes in the equityrelated markets.

Credit Risk

Credit risk refers to the risk of loss arising when a borrower, counterparty or issuer does not meet its financial obligations to us. We are primarily incurexposed to credit risk exposure tofrom institutions and individuals through our Institutional Securities and Wealth Management business segments. For a further discussion of our credit risks, see “Quantitative and Qualitative Disclosures about Market Risk–Risk Management–Risk—Credit Risk” in Part II, Item 7A of the 20162019 Form10-K. Also, see Notes 7 and 11 to the financial statements for additional information about our loans and lending commitments, respectively.

Lending Activities included in

Loans and Trading Assets

We provideLending Commitments

 At September 30, 2020
$ in millionsHFIHFSFVOTotal
Institutional Securities:    
Corporate$7,628
$8,552
$14
$16,194
Secured lending facilities26,496
3,521
445
30,462
Commercial and Residential real estate7,265
928
1,593
9,786
Securities-based lending and Other1,277
57
5,729
7,063
Total Institutional Securities42,666
13,058
7,781
63,505
Wealth Management:    
Residential real estate33,674
12
—
33,686
Securities-based lending and Other57,723
—
—
57,723
Total Wealth Management91,397
12
—
91,409
Total Investment Management1
6
11
552
569
Total loans134,069
13,081
8,333
155,483
ACL(913)  (913)
Total loans, net of ACL$133,156
$13,081
$8,333
$154,570
Lending commitments2
   $120,098
Total exposure





$274,668
 At December 31, 2019
$ in millionsHFIHFSFVOTotal
Institutional Securities:    
Corporate$5,426
$6,192
$20
$11,638
Secured lending facilities24,502
4,200
951
29,653
Commercial and Residential real estate7,859
2,049
3,290
13,198
Securities-based lending and Other503
123
6,814
7,440
Total Institutional Securities38,290
12,564
11,075
61,929
Wealth Management:    
Residential real estate30,184
13
—
30,197
Securities-based lending and Other49,930
—
—
49,930
Total Wealth Management80,114
13
—
80,127
Total Investment Management1
5
—
251
256
Total loans118,409
12,577
11,326
142,312
ACL(349)  (349)
Total loans, net of ACL$118,060
$12,577
$11,326
$141,963
Lending commitments2
   $120,068
Total exposure





$262,031
HFI—Held for investment; HFS—Held for sale; FVO—Fair value option
Total exposure—consists of Total loans, net of ACL, and lendingLending commitments to a variety of customers, from large corporate and institutional clients to high net worth individuals. In addition, we purchase loans in the secondary market. In the balance sheets, these loans and lending commitments are carried as held for investment, which are recorded at amortized cost; as held for sale, which are recorded at the lower of cost or fair value; or at fair value with changes in fair value recorded in earnings. Loans held for investment and loans held for sale are classified in Loans, and loans held at fair value are classified in Trading assets in the balance sheets. See Notes 3, 7 and 11 to the financial statements for further information.

1.Investment Management business segment loans are related to certain of our activities as an investment advisor and manager. At September 2017 Form 10-Q3430, 2020 and December 31, 2019, loans held at fair value are predominantly the result of the consolidation of CLO vehicles, managed by Investment Management, composed primarily of senior secured loans to corporations.

Risk DisclosuresLOGO

Loans and Lending Commitments

  At September 30, 2017 

$ in millions

 IS  WM  IM1  Total 

Corporate loans

 $    16,201  $    13,480  $        5  $    29,686 

Consumer loans

  —   26,616   —   26,616 

Residential real estate loans

  —   26,150   —   26,150 

Wholesale real estate loans

  9,000   —   —   9,000 

Loans held for investment,
gross of allowance

  25,201   66,246   5   91,452 

Allowance for loan losses

  (203)   (42)   —   (245) 

Loans held for investment,
net of allowance

  24,998   66,204   5   91,207 

Corporate loans

  12,524   —   —   12,524 

Residential real estate loans

  9   51   —   60 

Wholesale real estate loans

  640   —   —   640 

Loans held for sale

  13,173   51   —   13,224 

Corporate loans

  6,420   —   21   6,441 

Residential real estate loans

  690   —   —   690 

Wholesale real estate loans

  1,157   —   —   1,157 

Loans held at fair value

  8,267   —   21   8,288 

Total loans

  46,438   66,255   26   112,719 

Lending commitments2,3

  89,329   9,994   —   99,323 

Total loans and lending commitments2,3

 $135,767  $76,249  $26  $212,042 

  At December 31, 2016 

$ in millions

 IS  WM  IM1  Total 

Corporate loans

 $    13,858  $    11,162  $        5  $    25,025  

Consumer loans

  —   24,866   —   24,866  

Residential real estate loans

  —   24,385   —   24,385  

Wholesale real estate loans

  7,702   —   —   7,702  

Loans held for investment,
gross of allowance

  21,560   60,413   5   81,978  

Allowance for loan losses

  (238)   (36)   —   (274) 

Loans held for investment,
net of allowance

  21,322   60,377   5   81,704  

Corporate loans

  10,710   —   —   10,710  

Residential real estate loans

  11   50   —   61  

Wholesale real estate loans

  1,773   —   —   1,773  

Loans held for sale

  12,494   50   —   12,544  

Corporate loans

  7,199   —   18   7,217  

Residential real estate loans

  966   —   —   966  

Wholesale real estate loans

  519   —   —   519  

Loans held at fair value

  8,684   —   18   8,702  

Total loans

  42,500   60,427   23   102,950  

Lending commitments2,3

  90,143   8,299   —   98,442  

Total loans and lending commitments2,3

 $132,643  $68,726  $23  $201,392  

IS—Institutional Securities

WM—Wealth Management

IM—Investment Management

1.

Loans in Investment Management are entered into in conjunction with certain investment advisory activities.

2.

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


We provide loans and lending commitments to a variety of customers including large corporate and institutional clients as well as high to ultra-high net worth individuals. In addition, we purchase loans in the secondary market. Loans and lending

September 2020 Form 10-Q36
Table of Contents
Risk Disclosures
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commitments are either held for investment, held for sale or carried at fair value. For more information on these loan classifications, see Note 2 to the financial statements in the 2019 Form 10-K.
Total loans and lending commitments increased by approximately $13 billion since December 31, 2019, primarily due to growth within the Wealth Management business segment driven by securities-based loans and residential real estate loans. Within the Institutional Securities business segment, growth in loans and lending commitments was primarily driven by Secured lending facilities and Corporate, partially offset by a decrease in Commercial real estate.
See Notes 5, 10 and 14 to the financial statements for further information.
Beginning late in the first quarter of 2020 and following in part from the U.S. government’s enactment of the CARES Act, we have received requests from certain clients for modifications of their credit agreements with us, which in some cases include deferral of their loan payments. Requests for loan payment deferrals related to Residential real estate loans are immediately granted, while Commercial real estate loan deferrals require careful consideration prior to approval. As of September 30, 2020, the unpaid principal balance of loans with approved deferrals of principal and interest payments currently in place amounted to less than $2 billion, with approximately one-third in each of our Wealth Management business segment commercial real estate-related tailored lending portfolio, which is included within Securities-based lending and Other, our Wealth Management business segment Residential real estate loans and our Institutional Securities business segment, primarily within Commercial real estate.
In addition to these principal and interest deferrals, we are also working with clients regarding modifications of certain other terms under their original loan agreements that do not impact contractual loan payments. We have granted such relief to certain borrowers, primarily within Secured lending facilities and Corporate loans. Such modifications include agreements to modify margin calls for Secured lending facilities, typically in return for additional payments which improve loan-to-value ratios. In some cases we have agreed to temporarily not enforce certain covenants, for example debt or interest coverage ratios, typically in return for other structural enhancements.
Granting loan deferral or modification requests does not necessarily mean that we will incur credit losses and we do not believe modifications have had a material impact on the risk profile of our loan portfolio. Modifications are considered in our evaluation of overall credit risk. Generally, loans with payment deferrals remain on accrual status and loans with other modifications remain on current status.
Requests for deferrals and other modifications could continue in future periods given the ongoing uncertain global economic
and market conditions. See “Executive Summary—Coronavirus Disease (COVID-19) Pandemic,” and “Risk Factors” herein for further information. See also “Forward Looking Statements” in the 2019 Form 10-K. For additional information on regulatory guidance which permits certain loan modifications for borrowers impacted by COVID-19 to not be accounted for and reported as TDRs and the Firm’s accounting policies for such modifications, see “Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments” herein and Note 2 to the financial statements, respectively. For information on HFI loans on nonaccrual status, see “Status of Loans Held for Investment” herein and Notes 2 and 10 to the financial statements. For HFI loans modified and reported as TDRs, see Notes 2 and 10 to the financial statements.
Allowance for Credit Losses—Loans and Lending Commitments
$ in millions 
December 31, 20191
$590
Effect of CECL adoption(41)
Gross charge-offs(59)
Recoveries5
Net (charge-offs) recoveries(54)
Provision2
757
Other8
September 30, 2020$1,260
ACL—Loans$913
ACL—Lending commitments347
1.At December 31, 2019, the ACL for Loans and Lending commitments was $349 million and $241 million, respectively.
3.

For syndications led by us, any

2.In the current quarter, the provision for loan losses was $63 million and the provision for losses on lending commitments accepted bywas $48 million. In the borrower but not yet closed are net of amounts syndicated. For syndications that we participate incurrent year period, the provision for loan losses was $601 million and do not lead, anythe provision for losses on lending commitments accepted by the borrower but not yet closed include only the amount that we expect will be

was $156 million.

allocated from the lead syndicate bank. Due to the nature of our obligations under the commitments, these amounts include certain commitments participated to third parties.

Our creditCredit exposure arising from our loans and lending commitments is measured in accordance with our internal risk management standards. Risk factors considered in determining the aggregate allowance for loan and commitment losses include the borrower’s financial strength, seniority of the loan, collateral type, volatility of collateral value, debt cushion,industry, facility structure, loan-to-value ratio, debt service ratio, covenantscollateral and counterparty type.covenants. Qualitative and environmental factors such as economic and business conditions, nature and volume of the portfolio and lending terms, and volume and severity of past due loans may also be considered.

Allowance for Loans and Lending Commitments Held for Investment

$ in millions  At September 30,
2017		   At December 31,
2016		 

Loans

  $245   $274  

Commitments

   181    190  

The aggregate allowance for loanloans and commitment losses decreased duringlending commitments increased in the current year period, principally reflecting the provision for credit losses within the Institutional Securities business segment primarily dueresulting from the continued economic impact of COVID-19. This provision was the result of risks related to thecharge-offvulnerable sectors and higher downgrade sensitivity, changes in asset quality trends, as well as revisions to our forecasts reflecting expected future market and macroeconomic conditions. The base scenario used in our ACL models as of an energySeptember 30, 2020 was generated using a combination of industry related loan.consensus economic forecasts, forward rates, and internally developed and validated models. Given the

37September 2020 Form 10-Q
Table of Contents
Risk Disclosures
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nature of our lending portfolio, the most sensitive model input is U.S. GDP. The base scenario, among other things, assumes a continued recovery in the last quarter of 2020 through 2021, supported by fiscal stimulus and monetary policy measures. See Note 72 to the financial statements for further information.

a discussion of the Firm’s ACL methodology under CECL.

Status of Loans Held for Investment

   At September 30,
2017		  At December 31,
2016		 
        IS          WM          IS          WM     

Current

   99.4%   99.9%   98.6%   99.9% 

Non-accrual1

   0.6%   0.1%   1.4%   0.1% 

 At September 30, 2020At December 31, 2019
 ISWMISWM
Accrual99.1%99.8%99.0%99.9%
Nonaccrual1
0.9%0.2%1.0%0.1%
1.

These loans are on nonaccrual status because the loans were past due for a period of 90 days or more or payment of principal or interest was in doubt.

Institutional Securities

In connection with certain Loans and Lending Commitments1

 At September 30, 2020
 Contractual Years to Maturity 
$ in millionsLess than 11-33-5Over 5Total
Loans     
AA$274
$—
$—
$—
$274
A874
1,062
39
229
2,204
BBB3,958
5,726
3,314
295
13,293
BB12,683
7,920
6,273
491
27,367
Other NIG5,403
6,519
3,791
2,423
18,136
Unrated2
63
151
155
1,056
1,425
Total loans, net of ACL23,255
21,378
13,572
4,494
62,699
Lending commitments    
AAA—
50
—
—
50
AA4,157
1,267
1,878
—
7,302
A6,310
8,290
7,901
564
23,065
BBB5,422
15,408
15,761
310
36,901
BB4,150
7,154
7,291
1,311
19,906
Other NIG979
8,491
5,533
3,193
18,196
Unrated2
4
1
21
20
46
Total lending commitments21,022
40,661
38,385
5,398
105,466
Total exposure$44,277
$62,039
$51,957
$9,892
$168,165
 At December 31, 2019
 Contractual Years to Maturity 
$ in millionsLess than 11-33-5Over 5Total
Loans     
AA$7
$50
$—
$5
$62
A955
923
516
277
2,671
BBB2,297
5,589
3,592
949
12,427
BB9,031
11,189
9,452
1,449
31,121
Other NIG4,020
5,635
2,595
1,143
13,393
Unrated2
117
82
131
1,628
1,958
Total loans, net of ACL16,427
23,468
16,286
5,451
61,632
Lending commitments    
AAA—
50
—
—
50
AA2,838
908
2,509
—
6,255
A6,461
7,287
9,371
298
23,417
BBB7,548
13,780
20,560
753
42,641
BB2,464
5,610
8,333
1,526
17,933
Other NIG2,193
4,741
7,062
2,471
16,467
Unrated2
—
9
107
7
123
Total lending commitments21,504
32,385
47,942
5,055
106,886
Total exposure$37,931
$55,853
$64,228
$10,506
$168,518
NIG–Non-investment grade
1.
Counterparty credit ratings are internally determined by the Credit Risk Management Department (“CRM”).
2.Unrated loans and lending commitments are primarily trading positions that are measured at fair value and risk-managed as a component of market risk. For a further discussion of our market risk, see “Market Risk” herein.
Institutional Securities Loans and Lending Commitments by Industry
$ in millionsAt
September 30,
2020		At
December 31,
2019
Industry  
Financials$41,916
$40,992
Real estate24,827
28,348
Industrials15,650
13,136
Communications services12,529
12,165
Consumer discretionary11,253
9,589
Healthcare10,788
14,113
Energy10,088
9,461
Utilities9,994
9,905
Information technology9,808
9,201
Consumer staples8,476
9,724
Materials5,626
5,577
Insurance3,975
3,755
Other3,235
2,552
Total exposure$168,165
$168,518
Sectors Currently in Focus due to COVID-19
The continuing effect on economic activity of COVID-19 and related governmental actions have impacted borrowers in many sectors and industries. While we are carefully monitoring all of our Institutional Securities business segment exposures, certain sectors are more sensitive to the current economic environment and are continuing to receive heightened focus. The sectors

September 2020 Form 10-Q38
Table of Contents
Risk Disclosures
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currently in focus are: air travel, retail, upstream energy, lodging and leisure, and healthcare services and systems. As of September 30, 2020, exposures to these sectors are included across the Industrials, Financials, Real estate, Consumer discretionary, Energy and Healthcare industries in the previous table, and in aggregate represent approximately 10% of total Institutional Securities business segment lending exposure. The substantial majority of these exposures are either investment grade and/or secured by collateral. The future developments of COVID-19 and related government actions and their effect on the economic environment remain uncertain; therefore, the sectors impacted and the extent of the impacts may change over time. Refer to “Risk Factors” herein.
Institutional Securities Lending Activities
The Institutional Securities business segment lending activities we provideinclude Corporate, Secured lending facilities, Commercial real estate and Securities-based lending and Other. Over 90% of our total lending exposure, which consists of loans and lending commitments, to a diverse group of corporateis investment grade and/or secured by collateral.
Corporate comprises relationship and other institutional clients. These activities include originating and purchasing corporate loans, commercial and residential mortgage lending, asset-backed lending, financing extended to equities and commodities customers and municipalities. Theseevent-driven loans and lending commitments, which typically consist of revolving lines of credit, term loans and bridge loans; may have varying terms; may be senior or subordinated; may be secured or unsecured; are generally contingent upon representations, warranties and contractual conditions applicable to the borrower; and may be syndicated, traded or hedged by us.

We also participate in securitization activities whereby we extend short-term or long-term fundinghedged. For additional information on event-driven loans, see “Institutional Securities Event-Driven Loans and Lending Commitments” herein.

Secured lending facilities include loans provided to clients, through

35September 2017 Form 10-Q

Risk DisclosuresLOGO

which are collateralized by various assets including residential and commercial real estate mortgage loans, corporate loans, and lending commitments that are secured by the assets of the borrower andother assets. These facilities generally provide for over-collateralization, including commercial real estate loans, loans secured by loan pools, commercial company loans, and secured lines of revolving credit.overcollateralization. Credit risk with respect to these loans and lending commitments arises from the failure of a borrower to perform according to the terms of the loan agreement and/or a decline in the underlying collateral value. See Note 12 to the financial statements for information about our securitization activities. In addition, a collateral management groupThe Firm monitors collateral levels against the requirements of lending agreements.

Commercial real estate loans are primarily senior, secured by underlying real estate and oversees the administrationtypically in term loan form. In addition, as part of the collateral function. See Note 6 to the financial statements for additional information about our collateralized transactions.

certain of its trading and securitization activities, Institutional Securities may also hold residential real estate loans.

Securities-based lending and Other includes financing extended to sales and trading customers and corporate loans purchased in the secondary market.
Institutional Securities Event-Driven Loans and lending commitments are mainly related to relationship-based and event-driven lending to select corporate clients. Relationship-based loans and lending commitments are used for general corporate purposes, working capital and liquidity purposes by our investment banking clients and typically consist of revolving lines of credit, letter of credit facilities and term loans. In connection with the relationship-based lending activities, we had hedges (which included single-name and index hedges) with a notional amount of $17.1 billion and $20.2 billion at September 30, 2017 and December 31, 2016, respectively.

Lending Commitments

 At September 30, 2020
 Contractual Years to Maturity 
$ in millionsLess than 11-33-5Over 5Total
Loans, net of ACL$1,891
$1,185
$710
$1,216
$5,002
Lending commitments2,346
5,088
2,257
3,697
13,388
Total exposure$4,237
$6,273
$2,967
$4,913
$18,390
 At December 31, 2019
 Contractual Years to Maturity 
$ in millionsLess than 11-33-5Over 5Total
Loans, net of ACL$1,194
$1,024
$839
$390
$3,447
Lending commitments7,921
5,012
2,285
3,090
18,308
Total exposure$9,115
$6,036
$3,124
$3,480
$21,755
Event-driven loans and lending commitments are associated with a particular event or transaction, such as to support client merger, acquisition, recapitalization andor project finance activities. Event-driven loansBalances may fluctuate as such lending is related to transactions that vary in timing and lending commitments typically consist of revolving lines of credit, term loans and bridge loans.

size from period to period.

Institutional Securities Loans and Lending Commitments by Credit Rating1

   At September 30, 2017 
   Years to Maturity     
$ in millions  Less than 1   1-3   3-5   Over 5   Total 

Loans

          

AAA

  $—   $—   $—   $—   $—  

AA

   —    —    32    5    37  

A

   1,437    1,911    1,061    705    5,114  

BBB

   2,186    4,537    3,105    379    10,207  

NIG

   5,658    13,017    4,838    5,455    28,968  

Unrated2

   211    149    244    1,508    2,112  

Total Loans

   9,492    19,614    9,280    8,052    46,438  

Lending Commitments

          

AAA

   —    165    —    —    165  

AA

   3,726    473    3,731    —    7,930  

A

   2,824    5,288    11,672    647    20,431  

BBB

   3,321    10,245    16,935    395    30,896  

NIG

   2,486    11,796    12,278    3,266    29,826  

Unrated2

   17    31    12    21    81  

Total Lending Commitments

   12,374    27,998    44,628    4,329    89,329  

Total Exposure

  $21,866   $47,612   $53,908   $12,381   $135,767  
Held for Investment
   At December 31, 2016 
   Years to Maturity     
$ in millions  Less than 1   1-3   3-5   Over 5   Total 

Loans

          

AAA

  $—   $—   $—   $—   $— 

AA

   —    —    38    —    38 

A

   235    775    1,391    552    2,953 

BBB

   1,709    6,473    2,768    1,362    12,312 

NIG

   4,667    12,114    5,629    2,304    24,714 

Unrated2

   699    126    175    1,483    2,483 

Total Loans

   7,310    19,488    10,001    5,701    42,500 

Lending Commitments

 

        

AAA

   50    105    50    —    205 

AA

   3,724    451    3,989    —    8,164 

A

   1,994    4,610    11,135    392    18,131 

BBB

   6,261    9,006    18,148    653    34,068 

NIG

   2,839    8,934    14,267    3,418    29,458 

Unrated2

   107    6    —    4    117 

Total Lending Commitments

   14,975    23,112    47,589    4,467    90,143 

Total Exposure

  $22,285   $42,600   $57,590   $10,168   $132,643 

 At September 30, 2020
$ in millionsLoansLending CommitmentsTotal
Corporate$7,628
$65,358
$72,986
Secured lending facilities26,496
8,122
34,618
Commercial real estate7,265
286
7,551
Other1,277
1,178
2,455
Total, before ACL$42,666
$74,944
$117,610
ACL$(806)$(342)$(1,148)
 At December 31, 2019
$ in millionsLoansLending CommitmentsTotal
Corporate$5,426
$61,716
$67,142
Secured lending facilities24,502
6,105
30,607
Commercial real estate7,859
425
8,284
Other503
832
1,335
Total, before ACL$38,290
$69,078
$107,368
ACL$(297)$(236)$(533)



1.

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

39September 2020 Form 10-Q
2.

Unrated loans and lending commitments are primarily trading positions that are measured at fair value and risk managed as a component

Table of Market Risk. For a further discussion of our Market Contents
Risk see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Market Risk” herein.

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Institutional Securities Allowance for Credit Losses—Loans and Lending Commitments by Industry

$ in millions  At September 30,
2017		   At December 31,
2016		 

Industry1

    

Real estate

  $23,235   $19,807 

Information technology

   13,907    8,602 

Consumer discretionary

   12,129    12,059 

Industrials

   12,110    11,465 

Energy

   11,074    11,757 

Funds, exchanges and
other financial services2

   10,639    11,481 

Healthcare

   10,014    11,534 

Utilities

   9,407    9,216 

Consumer staples

   7,282    7,329 

Materials

   6,129    7,630 

Mortgage finance

   5,826    6,296 

Telecommunications services

   4,722    6,156 

Insurance

   3,986    4,190 

Consumer finance

   2,949    2,847 

Other

   2,358    2,274 

Total

  $135,767   $132,643 

$ in millionsCorporateSecured lending facilitiesCommercial real estateOtherTotal
At December 31, 2019     
ACL—Loans$115
$101
$75
$6
$297
ACL—Lending commitments$201
$27
$7
$1
$236
Total$316
$128
$82
$7
$533
Effect of CECL adoption(43)(53)35
3
(58)
Gross charge-offs(33)—
(26)—
(59)
Recoveries3
—
—
2
5
Net (charge-offs) recoveries(30)—
(26)2
(54)
Provision (release)1
400
155
180
(16)719
Other3
1
(38)42
8
Total at
September 30, 2020
$646
$231
$233
$38
$1,148
ACL—Loans$367
$191
$222
$26
$806
ACL—Lending commitments279
40
11
12
342
1.

Industry categories are basedIn the current quarter, the provision for loan losses was $66 million and the provision for losses on lending commitments was $47 million. In the Global Industry Classification Standard®.

current year period, the provision for loan losses was $562 million and the provision for losses on lending commitments was $157 million.
2.

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

September 2017 Form 10-Q 36 

Risk Disclosures LOGO

Event-DrivenInstitutional Securities HFI Loans—Ratios of Allowance for Credit Losses to Balance Before Allowance

 At
September 30,
2020		At
December 31,
2019
Corporate4.8%2.1%
Secured lending facilities0.7%0.4%
Commercial real estate3.1%1.0%
Other2.0%1.2%
Total Institutional Securities loans1.9%0.8%
Wealth Management Loans and Lending Commitments

  At September 30, 2017 
  Years to Maturity    
$ in millions Less than 1  1-3  3-5  Over 5  Total 

Loans

 $996  $1,738  $749  $4,568  $8,051 

Lending commitments

  3,001   1,559   2,601   2,304   9,465 

Total loans and lending commitments

 $3,997  $3,297  $3,350  $6,872  $17,516 
  At December 31, 2016 
  Years to Maturity    
$ in millions Less than 1  1-3  3-5  Over 5  Total 

Loans

 $666  $1,593  $1,216  $1,622  $5,097 

Lending commitments

  6,594   1,460   4,807   3,391   16,252 

Total loans and lending commitments

 $  7,260  $  3,053  $  6,023  $  5,013  $  21,349 

Institutional Securities Lending Exposures Related to the Energy Industry.At September 30, 2017, Institutional Securities’ loans and lending commitments related to the energy industry were $11.1 billion, of which approximately 68% are accounted for as held for investment and 32% are accounted for as either held for sale or at fair value. Additionally, approximately 55% of the total energy industry loans and lending commitments were to investment grade counterparties.

At September 30, 2017, the energy industry portfolio included $1.1 billion in loans and $2.1 billion in lending commitments to Oil and Gas Exploration and Production (“E&P”) companies. The E&P loans were tonon-investment grade counterparties, which are generally subject to periodic borrowing base reassessments based on the value of the underlying oil and gas reserves pledged as collateral. In limited situations, we may extend the period related to borrowing base reassessments typically in conjunction with taking certain risk mitigating actions with the borrower. Approximately 51% of the E&P lending commitments were to investment grade counterparties. To the extent oil and natural gas prices deteriorate, we may incur lending losses.

Wealth Management

 At September 30, 2020
 Contractual Years to Maturity 
$ in millionsLess than 11-33-5Over 5Total
Securities-based lending and Other$49,714
$4,411
$1,869
$1,680
$57,674
Residential real estate11
4
1
33,612
33,628
Total loans, net of ACL$49,725
$4,415
$1,870
$35,292
$91,302
Lending commitments11,797
2,240
326
269
14,632
Total exposure$61,522
$6,655
$2,196
$35,561
$105,934
 At December 31, 2019
 Contractual Years to Maturity 
$ in millionsLess than 11-33-5Over 5Total
Securities-based lending and Other$41,863
$3,972
$2,783
$1,284
$49,902
Residential real estate13
11
—
30,149
30,173
Total loans, net of ACL$41,876
$3,983
$2,783
$31,433
$80,075
Lending commitments10,219
2,564
71
307
13,161
Total exposure$52,095
$6,547
$2,854
$31,740
$93,236
The principal Wealth Management business segment lending activities include securities-based lending and residential real estate loans.

Securities-based lending providedallows clients to our retail clients is primarily conducted through our Portfolio Loan Account (“PLA”) and Liquidity Access Line (“LAL”) platforms.borrow money against the value of qualifying securities, generally for any purpose other than purchasing, trading or carrying securities, or refinancing margin debt. For more information about our securities-based lending and residential real estate loans, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Lending Activities”Risk” in Part II, Item 7A of the 20162019 Form 10-K.

For the current quarter, loansyear period, Loans and lendingLending commitments associated with the Wealth Management business segment lending activities increased, driven by approximately 3%, primarily due to growth in securities-based lendingloans and otherresidential real estate loans.

Wealth Management Allowance for Credit Losses—Loans and Lending Commitments by Remaining Contractual Maturity

  At September 30, 2017 
  Years to Maturity    
$ in millions Less than 1  1-3  3-5  Over 5  Total 

Securities-based lending
and other loans1

 $33,947  $3,303  $1,713  $1,114  $40,077  

Residential real estate loans

  —   16   27   26,135   26,178  

Total Loans

 $33,947  $3,319  $1,740  $27,249  $66,255  

Lending commitments

  6,950   2,515   228   301   9,994  

Total loans and lending commitments

 $40,897  $5,834  $1,968  $27,550  $76,249  
  At December 31, 2016 
  Years to Maturity    
$ in millions Less than 1  1-3  3-5  Over 5  Total 

Securities-based lending
and other loans1

 $  30,547  $  2,983  $  1,304  $1,179  $36,013  

Residential real estate loans

  —   —   45     24,369   24,414  

Total Loans

 $30,547  $2,983  $1,349  $25,548  $  60,427  

Lending commitments

  6,372   1,413   268   246   8,299  

Total loans and lending commitments

 $36,919  $4,396  $1,617  $25,794  $68,726  

$ in millions 
December 31, 20191
$57
Effect of CECL adoption17
Provision2
38
September 30, 2020$112
ACL—Loans$107
ACL—Lending commitments5
1.

PLA and LAL platforms had an outstanding loan balance of $31.8 billion and $29.7 billion at September 30, 2017 andAt December 31, 2016,2019, the total ACL for Loans and Lending commitments was $52 million and $5 million, respectively.

Lending Activities included in
2.In the current quarter, the release for loan losses was $3 million and the provision for losses on lending commitments was $1 million. In the current year period the provision for loan losses was $39 million and the release for losses on lending commitments was $1 million.


At September 30, 2020, more than 75% of Wealth Management residential real estate loans were to borrowers with “Exceptional” or “Very Good” FICO scores (i.e., exceeding 740). Additionally, Wealth Management’s securities-based lending portfolio remains well-collateralized and subject to daily client margining, which includes requiring customers to deposit additional collateral, or reduce debt positions, when necessary.
Customer and Other Receivables

Margin Loans

  At September 30, 2017 
$ in millions Institutional
Securities		   Wealth
Management		   Total 

Net customer receivables representing margin loans

 $16,613   $11,996   $    28,609  

  At December 31, 2016 
$ in millions Institutional
Securities		   Wealth
Management		   Total 

Net customer receivables representing margin loans

 $11,876   $12,483   $    24,359  

 At September 30, 2020
$ in millionsISWMTotal
Customer receivables representing margin loans$35,604
$9,054
$44,658
 At December 31, 2019
$ in millionsISWMTotal
Customer receivables representing margin loans$22,216
$9,700
$31,916
The Institutional Securities and Wealth Management business segments provide margin lending arrangements, which allow the clientcustomers to borrow against the value of qualifying securities.securities, primarily for the purpose of purchasing additional securities, as

September 2020 Form 10-Q40
Table of Contents
Risk Disclosures
mslogo3q20.jpg

well as to collateralize short positions. Margin lending activities generally have minimallower credit risk due to the value of collateral held and their short-term nature.

Amounts may fluctuate from period to period as overall client balances change as a result of market levels, client positioning and leverage.
Employee Loans

$ in millionsAt
September 30,
2020		At
December 31,
2019
Currently employed by the Firm$2,940
N/A
No longer employed by the Firm142
N/A
Employee loans$3,082
$2,980
ACL1
(165)(61)
Employee loans, net of ACL$2,917
$2,919
Remaining repayment term, weighted average in years5.1
4.8
1.37September 2017 Form 10-QThe change in ACL includes a $124 million increase due to the adoption of CECL on January 1, 2020.

Risk DisclosuresLOGO

Employee Loans

$ in millions (except repayment terms)  At
September 30,
2017		  At
December 31,
2016		 

Employee loans:

   

Balance

  $4,317  $4,804  

Allowance for loan losses

   (79)   (89)  

Balance, net

  $4,238  $4,715  

Repayment term range, in years

   1 to 20   1 to 12  

Employee loans are generally granted in conjunction with a program established primarily to retain and recruit certain employees,Wealth Management representatives and are full recourse and generally require periodic repayments. We establish an allowance for loan amounts to terminated employees that we do not consider recoverable, whichThe ACL as of September 30, 2020 was calculated under CECL, while the ACL at December 31, 2019 was calculated under the prior incurred loss model. The related provision is recorded in Compensation and benefits expense.expense in the income statements. See Note 72 to the financial statements for a further description of ourthe CECL allowance methodology, including credit quality indicators, for employee loans.

Credit Exposure— For additional information on employee loans, see Note 10 to the financial statements.

Derivatives

Fair Value of OTC Derivative Assets
 
Counterparty Credit Rating1
 
$ in millionsAAAAAABBBNIGTotal
At September 30, 2020    
Less than 1 year$667
$10,653
$36,327
$23,017
$10,481
$81,145
1-3 years641
5,332
17,817
13,616
7,196
44,602
3-5 years389
5,091
11,562
8,447
3,648
29,137
Over 5 years4,496
34,274
87,181
64,958
16,119
207,028
Total, gross$6,193
$55,350
$152,887
$110,038
$37,444
$361,912
Counterparty netting(3,107)(42,447)(122,838)(83,836)(22,686)(274,914)
Cash and securities collateral(2,897)(10,830)(25,423)(20,621)(8,865)(68,636)
Total, net$189
$2,073
$4,626
$5,581
$5,893
$18,362
 
Counterparty Credit Rating1
 
$ in millionsAAAAAABBBNIGTotal
At December 31, 2019    
Less than 1 year$371
$9,195
$31,789
$22,757
$6,328
$70,440
1-3 years378
5,150
17,707
11,495
9,016
43,746
3-5 years502
4,448
9,903
6,881
3,421
25,155
Over 5 years3,689
24,675
70,765
40,542
14,587
154,258
Total, gross$4,940
$43,468
$130,164
$81,675
$33,352
$293,599
Counterparty netting(2,172)(33,521)(103,452)(62,345)(19,514)(221,004)
Cash and securities collateral(2,641)(8,134)(22,319)(14,570)(10,475)(58,139)
Total, net$127
$1,813
$4,393
$4,760
$3,363
$14,456
$ in millionsAt
September 30,
2020		At
December 31,
2019
Industry 
Utilities$4,407
$4,275
Financials4,394
3,448
Industrials1,796
914
Healthcare1,442
991
Regional governments966
791
Information technology901
659
Not-for-profit organizations796
657
Energy775
524
Materials590
325
Sovereign governments549
403
Consumer staples385
129
Consumer discretionary371
370
Communications services325
381
Insurance302
214
Real estate287
315
Other76
60
Total$18,362
$14,456

1.
Counterparty credit ratings are determined internally by CRM.

We incurare exposed to credit risk as a dealer in OTC derivatives. Credit risk with respect to derivative instruments arises from the possibility that a counterparty may fail to perform according to the terms of the contract. In connection withthe current year period, our OTC derivative activities, we generally enter into master netting agreements and collateral arrangements with counterparties. These agreements provide us with the ability to demand collateral, as well as to liquidate collateral and offset receivables and payables covered under the same master netting agreement in the event of counterparty default.

Fair values as shown below represent the Firm’s net exposure to counterparties related to itscredit risk arising from OTC derivative products. Obligor credit ratings are determined internally byderivatives has increased, primarily as a function of the Credit Risk Management Department.

effect of market factors and

Counterparty Credit Rating and Remaining Contractual Maturity of OTC Derivative Assets

  Fair Value at September 30, 2017 
  Contractual Years to Maturity  Total
Derivative
Assets		 
$ in millions Less than 1  1-3  3-5  Over 5  

Credit Rating

     

AAA

 $129  $328  $359  $3,183  $3,999  

AA

  1,666   1,716   1,987   7,822   13,191  

A

  6,536   5,597   3,760   19,947   35,840  

BBB

  3,554   2,718   1,712   12,806   20,790  

Non-investment grade

  2,551   2,634   3,539   2,472   11,196  

Total

 $14,436  $12,993  $11,357  $46,230  $85,016  

   Fair Value at September 30, 2017 
$ in millions  Total
Derivative
Assets		   

Cross-
Maturity

and Cash

Collateral

Netting1

  

Net Amounts

Post-cash

Collateral

   

Net Amounts

Post-
collateral2

 

Credit Rating

       

AAA

  $3,999   $(3,011)  $988   $913  

AA

   13,191    (8,178)   5,013    2,397  

A

   35,840    (26,352)   9,488    5,108  

BBB

   20,790    (14,388)   6,402    4,609  

Non-investment grade

   11,196    (5,277)   5,919    2,542  

Total

  $85,016   $(57,206)  $27,810   $15,569  

  Fair Value at December 31, 2016 
  Contractual Years to Maturity  Total
Derivative
Assets		 
$ in millions Less than 1  1-3  3-5  Over 5  

Credit Rating

     

AAA

 $150  $428  $918  $2,931  $4,427  

AA

  3,177   2,383   2,942   10,194   18,696  

A

  9,244   6,676   5,495   21,322   42,737  

BBB

  4,423   3,085   2,434   13,023   22,965  

Non-investment grade

  2,283   1,702   1,722   1,794   7,501  

Total

 $19,277  $    14,274  $    13,511  $    49,264  $96,326  

   Fair Value at December 31, 2016 
$ in millions  Total
Derivative
Assets		   

Cross-
Maturity

and Cash

Collateral
Netting1

  Net Amounts
Post-cash
Collateral		   Net
Amounts
Post-
collateral2		 

Credit Rating

       

AAA

  $4,427   $(3,900)  $527   $485  

AA

   18,696    (11,813)   6,883    4,114  

A

   42,737    (31,425)   11,312    6,769  

BBB

   22,965    (16,629)   6,336    4,852  

Non-investment grade

   7,501    (4,131)   3,370    1,915  

Total

  $96,326   $(67,898)  $28,428   $18,135  

1.

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

2.

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


September 2017 Form 10-Q38

Risk Disclosures41September 2020 Form 10-Q
Table of Contents
 
LOGORisk Disclosures
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OTC Derivative Products at Fair Value, Net of Collateral, by Industry

$ in millions  At
September 30,
2017		   At
December 31,
20161		 

Industry2

    

Utilities

  $4,020   $4,184  

Funds, exchanges and
other financial services3

   2,707    2,756  

Regional governments

   1,069    1,352  

Sovereign governments

   1,044    709  

Industrials

   1,032    1,644  

Healthcare

   949    1,103  

Banks and securities firms

   772    1,485  

Not-for-profit organizations

   717    830  

Information technology

   542    267  

Hedge funds

   539    233  

Energy

   464    533  

Consumer discretionary

   445    590  

Insurance

   313    570  

Materials

   284    235  

Special purpose vehicles

   228    821  

Consumer staples

   176    567  

Other

   268    256  

Total4

  $15,569   $18,135  

1.

The amounts included in the December 31, 2016 industry categories have been revised due to previous misclassifications. The total remains unchanged.

2.

Industry categories are based

volatility on the Global Industry Classification Standard®.

3.

Amounts include mutual funds, pension funds, private equity and real estate funds, exchanges and clearinghouses, consumer finance, mortgage finance and other diversified financial services.

4.

For further information on derivative instruments and hedging activities, see Note 4 to the financial statements.

We manage our trading positions by employing a variety of risk mitigation strategies. These strategies include diversification of risk exposures and hedging. Hedging activities consist of the purchase or sale of positions in related securities and financial instruments, including a variety of derivative products (e.g., futures, forwards, swaps and options). For a discussionvaluation of our creditpositions, although exposure and related credit derivative contracts,has declined since peaking in March 2020. For more information on derivatives, see “Quantitative and Qualitative Disclosures about Market Risk–Risk Management–Risk—Credit Risk–Credit Exposure–Risk—Derivatives” in Part II, Item 7A of the 20162019 Form10-K.

Credit Derivative Portfolio by Counterparty Type

  At September 30, 2017 
  Fair Values1  Notionals 
$ in millions Receivable   Payable   Net  Protection
Purchased		   Protection
Sold		 

Banks and
securities firms

 $5,191   $5,623   $(432)  $208,611   $178,670  

Insurance and other
financial institutions

  3,679    4,358    (679)   163,291    160,493  

Non-financial
entities

  34    52    (18)   3,146    1,195  

Total

 $8,904   $10,033   $(1,129)  $375,048   $340,358  

   At December 31, 2016 
   Fair Values1  Notionals 
$ in millions  Receivable   Payable   Net  Protection
Purchased		   Protection
Sold		 

Banks and securities firms

  $8,516   $9,397   $(881)  $319,830   $273,462  

Insurance and other financial institutions

   3,619    3,901    (282)   144,527    151,999  

Non-financial entities

   94    127    (33)   5,832    4,269  

Total

  $12,229   $13,425   $(1,196)  $470,189   $429,730  

1.

Our Credit Default Swaps (“CDS”) are classified in either Level 2 or Level 3 of the fair value hierarchy. Approximately 4% of receivable fair values represented Level 3 amounts at September 30, 2017 10-K and December 31, 2016. Approximately 7% of payable fair values represented Level 3 amounts at September 30, 2017 and December 31, 2016. See Note 3 to the financial statements for further information.

The fair values shown in the previous table are before the application of contractual netting or collateral. For additional credit exposure information on our credit derivative portfolio, see Note 47 to the financial statements.


Country Risk Exposure

Country risk exposure is the risk that events in, or that affect, a foreign country (any country other than the U.S.) might adversely affect us. We actively manage country risk exposure through a comprehensive risk management framework that combines credit and market fundamentals and allows us to effectively identify, monitor and limit country risk. Country risk exposure before and after hedging is monitored and managed. For a further discussion of our country risk exposure see, “Quantitative and Qualitative Disclosures about Market Risk–Risk Management–Risk—Country Risk Exposure”and Other Risks” in Part II, Item 7A of the 20162019 Form10-K.

Our sovereign exposures consist of financial instrumentscontracts and obligations entered into with sovereign and local governments. Ournon-sovereign exposures consist of exposures tofinancial contracts and obligations entered into primarily with corporations and financial institutions. The following table shows our 10 largestnon-U.S. country risk net exposures at September 30, 2017. Index credit derivatives are included in the following country risk exposure table. Each reference entity within an index is allocated to that reference entity’s country of risk. Index exposures are allocated to the underlying reference entities in proportion to the notional weighting of each reference entity in the index, adjusted for any fair value receivable/receivable or payable for that reference entity. Where credit risk crosses multiple jurisdictions, for example, a CDS purchased from an issuer in a specific country that references bonds issued by an entity in a different country, the fair value of the CDS is reflected in the Net Counterparty Exposure columnrow based on the country of the CDS issuer. Further, the notional amount of the CDS adjusted for the fair value of the receivable/receivable or payable is reflected in the Net Inventory columnrow based on the country of the underlying reference entity.

Top 10 Non-U.S. Country Exposures at September 30, 2020
United Kingdom   
$ in millionsSovereignsNon-sovereignsTotal
Net inventory1
$1,145
$928
$2,073
Net counterparty exposure2
69
11,183
11,252
Loans—
2,831
2,831
Lending commitments—
6,607
6,607
Exposure before hedges1,214
21,549
22,763
Hedges3
(311)(1,470)(1,781)
Net exposure$903
$20,079
$20,982
 

Germany   
$ in millionsSovereignsNon-sovereignsTotal
Net inventory1
$(1,168)$(14)$(1,182)
Net counterparty exposure2
214
3,280
3,494
Loans—
2,092
2,092
Lending commitments(1)4,428
4,427
Exposure before hedges(955)9,786
8,831
Hedges3
(286)(867)(1,153)
Net exposure$(1,241)$8,919
$7,678
Japan   
$ in millionsSovereignsNon-sovereignsTotal
Net inventory1
$2,182
$512
$2,694
Net counterparty exposure2
57
4,505
4,562
Loans—
562
562
Exposure before hedges2,239
5,579
7,818
Hedges3
(96)(228)(324)
Net exposure$2,143
$5,351
$7,494
France   
$ in millionsSovereignsNon-sovereignsTotal
Net inventory1
$1,214
$(334)$880
Net counterparty exposure2
18
3,444
3,462
Loans—
525
525
Lending commitments—
3,047
3,047
Exposure before hedges1,232
6,682
7,914
Hedges3
(6)(815)(821)
Net exposure$1,226
$5,867
$7,093
Spain   
$ in millionsSovereignsNon-sovereignsTotal
Net inventory1
$(809)$28
$(781)
Net counterparty exposure2
7
284
291
Loans—
4,061
4,061
Lending commitments—
620
620
Exposure before hedges(802)4,993
4,191
Hedges3
—
(123)(123)
Net exposure$(802)$4,870
$4,068
Australia   
$ in millionsSovereignsNon-sovereignsTotal
Net inventory1
$1,893
$261
$2,154
Net counterparty exposure2
6
637
643
Loans—
392
392
Lending commitments—
798
798
Exposure before hedges1,899
2,088
3,987
Hedges3
—
(174)(174)
Net exposure$1,899
$1,914
$3,813
India   
$ in millionsSovereignsNon-sovereignsTotal
Net inventory1
$1,795
$595
$2,390
Net counterparty exposure2
—
821
821
Loans—
205
205
Exposure before hedges1,795
1,621
3,416
Net exposure$1,795
$1,621
$3,416

39September 2017 Form 10-Q

Risk DisclosuresSeptember 2020 Form 10-Q42 
LOGO
Table of Contents
Risk Disclosures
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Top Ten Country Exposures at September 30, 2017

$ in millions Net Inventory1  

Net

Counterparty

Exposure2

  Loans  Lending
Commitments		  Exposure
Before Hedges		  Hedges3  Net Exposure 

Country

       

United Kingdom:

       

Sovereigns

 $487  $29  $—  $—  $516  $(280)  $236 

Non-sovereigns

  306   8,516   1,843   5,976   16,641   (1,916)   14,725 

Total

 $793  $8,545  $1,843  $5,976  $17,157  $(2,196)  $14,961 

Japan:

       

Sovereigns

 $5,391  $54  $—  $—  $5,445  $(103)  $5,342 

Non-sovereigns

  696   3,365   65   —   4,126   (114)   4,012 

Total

 $6,087  $3,419  $65  $—  $9,571  $(217)  $9,354 

Brazil:

       

Sovereigns

 $3,729  $—  $—  $—  $3,729  $(11)  $3,718 

Non-sovereigns

  196   577   755   75   1,603   (343)   1,260 

Total

 $3,925  $577  $755  $75  $5,332  $(354)  $4,978 

Canada:

       

Sovereigns

 $84  $25  $—  $—  $109  $—  $109 

Non-sovereigns

  211   1,885   110   1,605   3,811   (384)   3,427 

Total

 $295  $1,910  $110  $1,605  $3,920  $(384)  $3,536 

India:

       

Sovereigns

 $1,503  $—  $—  $—  $1,503  $—  $1,503 

Non-sovereigns

  615   467   —   —   1,082   —   1,082 

Total

 $2,118  $467  $—  $—  $2,585  $—  $2,585 

Italy:

       

Sovereigns

 $1,201  $(14)  $—  $—  $1,187  $9  $1,196 

Non-sovereigns

  99   447   348   748   1,642   (286)   1,356 

Total

 $1,300  $433  $348  $748  $2,829  $(277)  $2,552 

China:

       

Sovereigns

 $(24)  $227  $—  $—  $203  $(79)  $124 

Non-sovereigns

  774   215   657   524   2,170   (10)   2,160 

Total

 $750  $442  $657  $524  $2,373  $(89)  $2,284 

Singapore:

       

Sovereigns

 $1,670  $107  $—  $—  $1,777  $—  $1,777 

Non-sovereigns

  70   189   106   37   402   —   402 

Total

 $1,740  $296  $106  $37  $2,179  $—  $2,179 

Netherlands:

       

Sovereigns

 $(286)  $—  $—  $—  $(286)  $(20)  $(306) 

Non-sovereigns

  125   565   922   1,156   2,768   (383)   2,385 

Total

 $(161)  $565  $922  $1,156  $2,482  $(403)  $2,079 

Ireland:

       

Sovereigns

 $(57)  $3  $—  $—  $(54)  $(81)  $(135) 

Non-sovereigns

  52   205   1,770   149   2,176   —   2,176 

Total

 $(5)  $208  $1,770  $149  $2,122  $(81)  $2,041 


China   
$ in millionsSovereignsNon-sovereignsTotal
Net inventory1
$(184)$1,506
$1,322
Net counterparty exposure2
103
481
584
Loans—
772
772
Lending commitments—
765
765
Exposure before hedges(81)3,524
3,443
Hedges3
(82)(122)(204)
Net exposure$(163)$3,402
$3,239
Canada   
$ in millionsSovereignsNon-sovereignsTotal
Net inventory1
$(66)$330
$264
Net counterparty exposure2
60
1,477
1,537
Loans—
155
155
Lending commitments—
1,380
1,380
Exposure before hedges(6)3,342
3,336
Hedges3
—
(108)(108)
Net exposure$(6)$3,234
$3,228
Netherlands   
$ in millionsSovereignsNon-sovereignsTotal
Net inventory1
$(5)$280
$275
Net counterparty exposure2
—
760
760
Loans—
420
420
Lending commitments—
1,768
1,768
Exposure before hedges(5)3,228
3,223
Hedges3
(32)(210)(242)
Net exposure$(37)$3,018
$2,981

1.

Net inventory represents exposure to both long and short single-name and index positions (i.e., bonds and equities at fair value and CDS based on a notional amount assuming zero recovery adjusted for anythe fair value of any receivable or payable).

2.

Net counterparty exposure (i.e.e.g., repurchase transactions, securities lending and OTC derivatives) takes into considerationis net of the benefit of collateral received and also is net by counterparty when legally enforceable master netting agreements and collateral.

are in place. For more information, see “Additional Information—Top 10 Non-U.S. Country Exposures” herein.
3.

Amounts represent net CDS hedges (purchased and sold) on net counterparty exposure and lending executed by trading desks responsible for hedging counterparty and lending credit risk exposures for us.exposures. Amounts are based on the CDS notional amount assuming zero recovery adjusted for any fair value receivable or payable. For a further description of the contractual terms for purchased credit protection and whether they may limit the effectiveness of our hedges, see “Credit Exposure—“Quantitative and Qualitative Disclosures about Risk—Credit Risk—Derivatives” herein.

in the 2019 Form 10-K.

Additional Information—Top 10 Non-U.S. Country Exposures

Collateral Held against Net Counterparty Exposure1
$ in millions At
September 30,
2020
Country of Risk
Collateral2
 
GermanyJapan and France$13,464
United KingdomU.K., U.S. and Spain12,093
OtherJapan, U.S. and Canada23,884
1.The benefit of collateral received is reflected in the Top 10 Non-U.S. Country Exposures at September 2017 Form 10-Q4030, 2020.

Risk Disclosures2.LOGO

As a market maker, we may transact in CDS positions to facilitate client trading. Exposures related to single-name and index credit derivatives for those countries shown in the previous table were

Primarily consists of cash as well as follows:

Credit Derivatives Included in Net Inventory

$ in millions  At September 30,
2017		 

Gross purchased protection

  $(61,795) 

Gross written protection

   60,031 

Net exposure

  $(1,764) 

Net counterparty exposure shown in the Top Ten Country Exposure table above includes the benefit of collateral received, which is typically composed of cash and government obligations.

Benefit of Collateral Received Against Counterparty Credit Exposure

$ in millions  At September 30,
2017		 

U.K.1

  $8,334 

Japan2

   4,824 

Other3

   5,133 

1.

Primarily obligations of the U.K., the U.S. and Italy.

countries listed.
2.

Primarily obligations of Japan.

3.

Primarily obligations of the Netherlands and the U.K.

Country Risk Exposures Related to the United Kingdom.U.K.
At September 30, 2017,2020, our country risk exposures in the U.K. included net exposures of $14,961$20,982 million as(as shown in the table above,Top 10 Non-U.S. Country Exposures table) and overnight deposits of $7,137$6,168 million. The $14,725$20,079 million of exposures tonon-sovereigns were diversified across both names and sectors. Of these exposures, $4,699sectors and include $6,753 million were to U.K. focusedU.K.-focused counterparties that generate more thanone-third of their revenues in the U.K., $4,858$5,163 million were to geographically diversified counterparties, and $4,934$7,273 million were to exchanges and clearing houses.

Country Risk Exposures Related to Brazil.    At September 30, 2017, our country risk exposures in Brazil included net exposures of $4,978 million as shown in the table above. Our sovereign net exposures in Brazil were principally in the form of local currency government bonds held onshore to support client activity. The $1,260 million of exposures tonon-sovereigns were diversified across both names and sectors.

clearinghouses.

Operational Risk

Operational risk refers to the risk of loss, or of damage to our reputation, resulting from inadequate or failed processes or systems, from human factors or from external events (e.g., fraud,

theft, legal and compliance risks, cyber attacks or damage to physical assets). We may incur operational risk across the full scope of our business activities, including revenue-generating activities (e.g., sales and trading) and support and control groups (e.g., information technology and trade processing). For a further discussion about our operational risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Operational Risk” in Part II, Item 7Athe 2019 Form 10-K. In addition, for further information on market and economic conditions and their effects on risk in general, see “Management’s Discussion and Analysis of the 2016 Form10-K.

Financial Condition and Results of Operations—Executive Summary—Coronavirus Disease (COVID-19) Pandemic” and “Risk Factors” herein.

Model Risk

Model risk refers to the potential for adverse consequences from decisions based on incorrect or misused model outputs. Model risk can lead to financial loss, poor business and strategic decision making or damage to the Firm’sour reputation. The risk inherent in a model is a function of the materiality, complexity and uncertainty around inputs and assumptions. Model risk is generated from the use of models impacting financial statements, regulatory filings, capital adequacy assessments and the formulation of business strategies.strategy. For a further discussion about our model risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Model Risk” in Part II, Item 7A of the 20162019 Form10-K.

Liquidity Risk

Liquidity risk refers to the risk that we will be unable to finance our operations due to a loss of access to the capital markets or difficulty in liquidating our assets. Liquidity risk also encompasses our ability (or perceived ability) to meet our financial obligations without experiencing significant business disruption or reputational damage that may threaten our viability as a going concern. For a further discussion about our liquidity risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Liquidity Risk” in Part II, Item 7A of the 20162019 Form10-K and “Management’s Discussion and Analysis of Financial Condition and Results of

43September 2020 Form 10-Q
Table of Contents
Risk Disclosures
mslogo3q20.jpg

Operations—Liquidity and Capital Resources” herein. In addition, for further information on market and economic conditions and their effects on risk in Part I, Item 2.

general, see “Risk Factors” herein.

Legal and Compliance Risk

Legal and compliance risk includes the risk of legal or regulatory sanctions, material financial loss, including fines, penalties, judgments, damages and/or settlements, or loss to reputation that we may suffer as a result of failure to comply with laws, regulations, rules, related self-regulatory organization standards and codes of conduct applicable to our business activities. This risk also includes contractual and commercial risk, such as the risk that a counterparty’s performance obligations will be unenforceable. It also includes compliance with anti-money launderingAML, terrorist financing, and terrorist financinganti-corruption rules and regulations. For a further discussion about our legal and compliance risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Legal and Compliance Risk” in Part II, Item 7A of the 20162019 Form10-K.

 

41September 2017 Form 10-Q


LOGO

Controls and Procedures

Under the supervision and with the participation of the Firm’s management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the Firm’s disclosure controls and procedures (as defined in Rule13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

No change in the Firm’s internal control over financial reporting (as defined in Rule13a-15(f) of the Exchange Act) occurred during the period covered by this report that materially affected, or is reasonably likely to materially affect, the Firm’s internal control over financial reporting.

September 20172020 Form 10-Q4244 

Table of Contents
 



Report of Independent Registered Public Accounting Firm


To the Board of Directors and Shareholders of Morgan Stanley:

Results of Review of Interim Financial Information
We have reviewed the accompanying condensed consolidated balance sheet of Morgan Stanley and subsidiaries (the “Firm”) as of September 30, 2017,2020, and the related condensed consolidated income statements, and comprehensive income statements for the three-month and nine-month periods ended September 30, 2017 and 2016, and the cash flow statements, and statements of changes in total equity for the three-month and nine-month periods ended September 30, 20172020 and 2016. These condensed consolidated2019, and the cash flow statements for the nine-month periods ended September 30, 2020 and 2019, and the related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements areinformation for it to be in conformity with accounting principles generally accepted in the responsibilityUnited States of the management of the Firm.

America.

We conducted our reviewshave previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB), the consolidated balance sheet of the Firm as of December 31, 2019, and the related consolidated income statement, comprehensive income statement, cash flow statement and statement of changes in total equity for the year then ended (not presented herein) included in the Firm’s Annual Report on Form 10-K; and in our report dated February 27, 2020, 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, 2019 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.


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

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 balance sheet of the Firm as of December 31, 2016, and the consolidated income statement, comprehensive income statement, cash flow statement and statement of changes in total equity for the year then ended (not presented herein) included in the Firm’s Annual Report on Form10-K; and in our report dated February 27, 2017, 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, 2016 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 







/s/ Deloitte & Touche LLP

New York, New York

November 3, 2017

2020




43September 2017 Form 10-Q

Financial Statements45LOGOSeptember 2020 Form 10-Q

Consolidated Financial Statements and Notes

Consolidated Income Statements

(Unaudited)

  Three Months Ended
September 30,		     Nine Months Ended
September 30,		 
in millions, except per share data        2017                 2016                    2017                2016        

Revenues

      

Investment banking

 $1,380   $1,225       $4,455  $3,556  

Trading

  2,704    2,609        8,870   7,420  

Investments

  167    87        495   179  

Commissions and fees

  937    991        2,997   3,066  

Asset management, distribution and administration fees

  3,026    2,686        8,695   7,943  

Other

  200    308        628   631  

Totalnon-interest revenues

  8,414    7,906        26,140   22,795  

Interest income

  2,340    1,734        6,411   5,148  

Interest expense

  1,557    731        4,106   2,333  

Net interest

  783    1,003        2,305   2,815  

Net revenues

  9,197    8,909        28,445   25,610  

Non-interest expenses

      

Compensation and benefits

  4,169    4,097        12,887   11,795  

Occupancy and equipment

  330    339        990   997  

Brokerage, clearing and exchange fees

  522    491        1,556   1,440  

Information processing and communications

  459    456        1,320   1,327  

Marketing and business development

  128    130        419   418  

Professional services

  534    489        1,622   1,550  

Other

  573    526        1,719   1,481  

Totalnon-interest expenses

  6,715    6,528        20,513   19,008  

Income from continuing operations before income taxes

  2,482    2,381        7,932   6,602  

Provision for income taxes

  697    749        2,358   2,160  

Income from continuing operations

  1,785    1,632        5,574   4,442  

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

  6    8        (21)   1  

Net income

 $1,791   $1,640       $5,553  $4,443  

Net income applicable to noncontrolling interests

  10    43        85   130  

Net income applicable to Morgan Stanley

 $1,781   $1,597       $5,468  $4,313  

Preferred stock dividends and other

  93    79        353   314  

Earnings applicable to Morgan Stanley common shareholders

 $1,688   $1,518       $5,115  $3,999  

Earnings per basic common share

      

Income from continuing operations

 $0.95   $0.82       $2.87  $2.15  

Income (loss) from discontinued operations

  —    0.01        (0.01)   —  

Earnings per basic common share

 $0.95   $0.83       $2.86  $2.15  

Earnings per diluted common share

      

Income from continuing operations

 $0.93   $0.80       $2.81  $2.11  

Income (loss) from discontinued operations

  —    0.01        (0.02)   —  

Earnings per diluted common share

 $0.93   $0.81       $2.79  $2.11  

Dividends declared per common share

 $0.25   $0.20       $0.65  $0.50  

Average common shares outstanding

      

Basic

  1,776    1,838        1,789   1,863  

Diluted

  1,818    1,879        1,830   1,898  

Table of Contents
Consolidated Income Statements
(Unaudited)
mslogo3q20.jpg


 Three Months Ended
September 30,		Nine Months Ended
September 30,
in millions, except per share data2020201920202019
Revenues    
Investment banking$1,826
$1,635
$5,239
$4,467
Trading3,092
2,608
10,831
8,781
Investments346
87
659
801
Commissions and fees1,037
990
3,499
2,935
Asset management3,664
3,363
10,346
9,632
Other206
131
(458)685
Total non-interest revenues10,171
8,814
30,116
27,301
Interest income2,056
4,350
7,917
13,146
Interest expense570
3,132
3,475
9,885
Net interest1,486
1,218
4,442
3,261
Net revenues11,657
10,032
34,558
30,562
Non-interest expenses    
Compensation and benefits5,086
4,427
15,404
13,609
Brokerage, clearing and exchange fees697
637
2,153
1,860
Information processing and communications616
557
1,768
1,627
Professional services542
531
1,526
1,582
Occupancy and equipment373
353
1,103
1,053
Marketing and business development78
157
273
460
Other778
660
2,343
1,803
Total non-interest expenses8,170
7,322
24,570
21,994
Income before provision for income taxes3,487
2,710
9,988
8,568
Provision for income taxes736
492
2,221
1,636
Net income$2,751
$2,218
$7,767
$6,932
Net income applicable to noncontrolling interests34
45
156
129
Net income applicable to Morgan Stanley$2,717
$2,173
$7,611
$6,803
Preferred stock dividends120
113
377
376
Earnings applicable to Morgan Stanley common shareholders$2,597
$2,060
$7,234
$6,427
Earnings per common share    
Basic$1.68
$1.28
$4.68
$3.94
Diluted$1.66
$1.27
$4.62
$3.89
Average common shares outstanding    
Basic1,542
1,604
1,546
1,632
Diluted1,566
1,627
1,565
1,653

September 20172020 Form 10-Q4446See Notes to Consolidated Financial Statements


Table of Contents
Consolidated Comprehensive Income Statements

(Unaudited)

LOGO
mslogo3q20.jpg

   

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
$ in millions        2017              2016              2017              2016       

Net income

  $1,791  $1,640  $5,553  $4,443  

Other comprehensive income (loss), net of tax:

     

Foreign currency translation adjustments

  $61  $43   223   360  

Change in net unrealized gains (losses) onavailable-for-sale securities

   26   (99)   218   439  

Pension, postretirement and other

   —   (1)   4   (5) 

Change in net debt valuation adjustment

   (149)   (93)   (323)   255  

Total other comprehensive income (loss)

  $(62)  $(150)  $122  $1,049  

Comprehensive income

  $1,729  $1,490  $5,675  $5,492  

Net income applicable to noncontrolling interests

   10   43   85   130  

Other comprehensive income (loss) applicable to noncontrolling interests

   (6)   15   23   151  

Comprehensive income applicable to Morgan Stanley

  $1,725  $1,432  $5,567  $5,211  



 Three Months Ended
September 30,		Nine Months Ended
September 30,
$ in millions2020201920202019
Net income$2,751
$2,218
$7,767
$6,932
Other comprehensive income (loss), net of tax:    
Foreign currency translation adjustments110
(99)(1)(56)
Change in net unrealized gains (losses) on available-for-sale securities(62)214
1,558
1,252
Pension, postretirement and other5
3
29
7
Change in net debt valuation adjustment(563)337
744
(529)
Total other comprehensive income (loss)$(510)$455
$2,330
$674
Comprehensive income$2,241
$2,673
$10,097
$7,606
Net income applicable to noncontrolling interests34
45
156
129
Other comprehensive income (loss) applicable to noncontrolling interests28
2
79
(20)
Comprehensive income applicable to Morgan Stanley$2,179
$2,626
$9,862
$7,497

See Notes to Consolidated Financial Statements4547September 20172020 Form 10-Q


Table of Contents
Consolidated Balance Sheets

LOGO
mslogo3q20.jpg

$ in millions, except share data  (Unaudited)
At
September 30,
2017		  At
December 31,
2016		 

Assets

   

Cash and due from banks

  $24,047  $22,017  

Interest bearing deposits with banks

   24,144   21,364  

Trading assets at fair value ($158,445and $152,548 were pledged to various parties)

   285,088   262,154  

Investment securities (includes$54,954 and $63,170 at fair value)

   79,086   80,092  

Securities purchased under agreements to resell (includes$101 and $302 at fair value)

   90,106   101,955  

Securities borrowed

   132,892   125,236  

Customer and other receivables

   54,388   46,460  

Loans:

   

Held for investment (net of allowance of$245 and $274)

   91,207   81,704  

Held for sale

   13,224   12,544  

Goodwill

   6,590   6,577  

Intangible assets (net of accumulated amortization of$2,651 and $2,421)

   2,491   2,721  

Other assets

   50,430   52,125  

Total assets

  $853,693  $814,949  

Liabilities

   

Deposits (includes$174 and $63 at fair value)

  $154,639  $155,863  

Short-term borrowings (includes$658 and $406 at fair value)

   1,087   941  

Trading liabilities at fair value

   127,237   128,194  

Securities sold under agreements to repurchase (includes$810 and $729 at fair value)

   53,983   54,628  

Securities loaned

   15,630   15,844  

Other secured financings (includes$6,514and $5,041 at fair value)

   14,244   11,118  

Customer and other payables

   198,792   190,513  

Other liabilities and accrued expenses

   16,290   15,896  

Long-term borrowings (includes$46,231 and $38,736 at fair value)

   191,677   164,775  

Total liabilities

   773,579   737,772  

Commitments and contingent liabilities (see Note 11)

   

Equity

   

Morgan Stanley shareholders’ equity:

   

Preferred stock

   8,520   7,520  

Common stock, $0.01 par value:

   

Shares authorized:3,500,000,000; Shares issued:2,038,893,979; Shares outstanding:1,812,472,419 and 1,852,481,601

   20   20  

Additionalpaid-in capital

   23,389   23,271  

Retained earnings

   57,554   53,679  

Employee stock trusts

   2,899   2,851  

Accumulated other comprehensive income (loss)

   (2,544)   (2,643) 

Common stock held in treasury at cost, $0.01 par value (226,421,560and 186,412,378 shares)

   (7,961)   (5,797) 

Common stock issued to employee stock trusts

   (2,899)   (2,851) 

Total Morgan Stanley shareholders’ equity

   78,978   76,050  

Noncontrolling interests

   1,136   1,127  

Total equity

   80,114   77,177  

Total liabilities and equity

  $853,693  $814,949  



$ in millions, except share data(Unaudited)
At
September 30,
2020		At
December 31,
2019
Assets  
Cash and cash equivalents$94,772
$82,171
Trading assets at fair value ($122,933 and $128,386 were pledged to various parties)
293,968
297,110
Investment securities (includes $84,536 and $62,223 at fair value)
130,705
105,725
Securities purchased under agreements to resell (includes $15 and $4 at fair value)
88,283
88,224
Securities borrowed100,803
106,549
Customer and other receivables72,537
55,646
Loans:  
Held for investment (net of allowance of $913 and $349)
133,156
118,060
Held for sale13,081
12,577
Goodwill7,348
7,143
Intangible assets (net of accumulated amortization of $3,442 and $3,204)
1,880
2,107
Other assets19,407
20,117
Total assets$955,940
$895,429
Liabilities  
Deposits (includes $3,679 and $2,099 at fair value)
$239,253
$190,356
Trading liabilities at fair value145,016
133,356
Securities sold under agreements to repurchase (includes $1,166 and $733 at fair value)
41,376
54,200
Securities loaned7,924
8,506
Other secured financings (includes $10,185 and $7,809 at fair value)
13,857
14,698
Customer and other payables192,300
197,834
Other liabilities and accrued expenses22,952
21,155
Borrowings (includes $69,144 and $64,461 at fair value)
203,444
192,627
Total liabilities866,122
812,732
Commitments and contingent liabilities (see Note 14)


Equity  
Morgan Stanley shareholders’ equity:  
Preferred stock8,520
8,520
Common stock, $0.01 par value:  
Shares authorized: 3,500,000,000; Shares issued: 2,038,893,979; Shares outstanding: 1,576,447,988 and 1,593,973,680
20
20
Additional paid-in capital24,015
23,935
Retained earnings76,061
70,589
Employee stock trusts2,992
2,918
Accumulated other comprehensive income (loss)(537)(2,788)
Common stock held in treasury at cost, $0.01 par value (462,445,991 and 444,920,299 shares)
(19,685)(18,727)
Common stock issued to employee stock trusts(2,992)(2,918)
Total Morgan Stanley shareholders’ equity88,394
81,549
Noncontrolling interests1,424
1,148
Total equity89,818
82,697
Total liabilities and equity$955,940
$895,429

September 20172020 Form 10-Q4648See Notes to Consolidated Financial Statements


Table of Contents
Consolidated Statements of Changes in Total Equity

(Unaudited)

LOGO
mslogo3q20.jpg

$ in millions

  

Preferred

Stock

   

Common

Stock

   

Additional

Paid-in

Capital

  

Retained

Earnings

  

Employee

Stock

Trusts

  

Accumulated

Other

Comprehensive

Income (Loss)

  

Common

Stock

Held in

Treasury

at Cost

  

Common

Stock

Issued to

Employee

Stock

Trusts

  

Non-

controlling

Interests

  

Total

Equity

 

Balance at December 31, 2016

  $7,520   $20   $23,271  $53,679  $2,851  $(2,643)  $(5,797)  $(2,851)  $1,127   $     77,177  

Cumulative adjustment for accounting
changes1

   —    —    45   (35)   —   —   —   —   —   10  

Net income applicable to Morgan Stanley

   —    —    —   5,468   —   —   —   —   —   5,468  

Net income applicable to noncontrolling interests

   —    —    —   —   —   —   —   —   85   85  

Dividends

   —    —    —   (1,558)   —   —   —   —   —   (1,558) 

Shares issued under employee plans

   —    —    79   —   48   —   844   (48)   —   923  

Repurchases of common stock and employee tax withholdings

   —    —    —   —   —   —   (3,008)   —   —   (3,008) 

Net change in Accumulated other comprehensive income (loss)

   —    —    —   —   —   99   —   —   23   122  

Issuance of preferred stock

   1,000    —    (6)   —   —   —   —   —   —   994  

Other net decreases

   —    —    —   —   —   —   —   —   (99)   (99) 

Balance at September 30, 2017

  $8,520   $20   $23,389  $57,554  $2,899  $(2,544)  $(7,961)  $(2,899)  $1,136   $     80,114  

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 DVA2

   —    —    —   312   —   (312)   —   —   —   —  

Net adjustment for accounting change related to consolidation3

   —    —    —   —   —   —   —   —   106   106  

Net income applicable to Morgan Stanley

   —    —    —   4,313   —   —   —   —   —   4,313  

Net income applicable to noncontrolling interests

   —    —    —   —   —   —   —   —   130   130  

Dividends

   —    —    —   (1,284)   —   —   —   —   —   (1,284) 

Shares issued under employee plans and related tax effects

   —    —    (1,168)   —   430   —   2,106   (430)   —   938  

Repurchases of common stock and employee tax withholdings

   —    —    —   —   —   —   (2,908)   —   —   (2,908) 

Net change in Accumulated other comprehensive income (loss)

   —    —    —   —   —   898   —   —   151   1,049  

Other net increase (decreases)

   —    —    10   —   —   —   —   —   (76)   (66) 

Balance at September 30, 2016

  $7,520   $20   $    22,995  $    52,545  $2,839  $(1,070)  $(4,861)  $(2,839)  $1,313   $     78,462  



 Three Months Ended
September 30,		Nine Months Ended
September 30,
$ in millions2020201920202019
Preferred Stock    
Beginning and ending balance$8,520
$8,520
$8,520
$8,520
Common Stock    
Beginning and ending balance20
20
20
20
Additional Paid-in Capital    
Beginning balance23,782
23,446
23,935
23,794
Share-based award activity232
196
79
(154)
Other net increases1
7
1
9
Ending balance24,015
23,649
24,015
23,649
Retained Earnings    
Beginning balance74,015
67,588
70,589
64,175
Cumulative adjustments for accounting changes1
0
0
(100)63
Net income applicable to Morgan Stanley2,717
2,173
7,611
6,803
Preferred stock dividends2
(120)(113)(377)(376)
Common stock dividends2
(551)(577)(1,662)(1,594)
Ending balance76,061
69,071
76,061
69,071
Employee Stock Trusts    
Beginning balance3,018
2,889
2,918
2,836
Share-based award activity(26)(24)74
29
Ending balance2,992
2,865
2,992
2,865
Accumulated Other Comprehensive Income (Loss)    
Beginning balance1
(2,051)(2,788)(2,292)
Net change in Accumulated other comprehensive income (loss)(538)453
2,251
694
Ending balance(537)(1,598)(537)(1,598)
Common Stock Held In Treasury at Cost    
Beginning balance(19,693)(15,799)(18,727)(13,971)
Share-based award activity38
57
882
1,138
Repurchases of common stock and employee tax withholdings(30)(1,538)(1,840)(4,447)
Ending balance(19,685)(17,280)(19,685)(17,280)
Common Stock Issued to Employee Stock Trusts    
Beginning balance(3,018)(2,889)(2,918)(2,836)
Share-based award activity26
24
(74)(29)
Ending balance(2,992)(2,865)(2,992)(2,865)
Non-Controlling Interests    
Beginning balance1,364
1,121
1,148
1,160
Net income applicable to non-controlling interests34
45
156
129
Net change in Accumulated other comprehensive income (loss) applicable to non-controlling interests28
2
79
(20)
Other net increases (decreases)(2)0
41
(101)
Ending balance1,424
1,168
1,424
1,168
Total Equity$89,818
$83,550
$89,818
$83,550

1.

The cumulative adjustment relates to the adoption of the following accounting updates on January 1, 2017: Improvements to Employee Share-Based Payment Accounting,for which the Firm recorded a cumulativecatch-up adjustment to reflect its election to account for forfeitures as they occur (see Note

See Notes 2 and 17 for further information); andIntra-Entity Transfers of Assets Other Than Inventory,information regarding cumulative adjustments for which the Firm recorded a cumulativecatch-up adjustment to reflect the tax impact from an intercompany sale of assets.

accounting changes.
2.

Debt valuation adjustment (“DVA”) represents the change in the fair value resulting from fluctuations in the Firm’s credit spreads and other credit factors related to liabilities carried at fair value under the fair value option, primarily related to certain Long-term and Short-term borrowings. In accordance with the early adoption of a provision of the accounting updateRecognition and Measurement of Financial Assets and Financial Liabilities, a cumulativecatch-up adjustment was recorded as of January 1, 2016 to move the cumulative unrealized DVA amount, net of noncontrolling interests and tax, related to outstanding liabilities under the fair value option election from Retained earnings into Accumulated other comprehensive income (loss) (“AOCI”).

See Note 2 to the consolidated financial statements in the Firm’s Annual Report on Form10-K17 for the year ended December 31, 2016 (the “2016 Form10-K”) and Note 14information regarding dividends per share for further information.

each class of stock.
3.

In accordance with the accounting updateAmendments to the Consolidation Analysis, a net adjustment was recorded as of January 1, 2016 to both consolidate and deconsolidate certain entities under the new guidance. See Note 2 to the consolidated financial statements in the 2016 Form10-K for further information.




See Notes to Consolidated Financial Statements4749September 20172020 Form 10-Q


Table of Contents
Consolidated Cash Flow Statements

(Unaudited)

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Nine Months Ended

September 30,

 
$ in millions  2017  2016 

Cash flows from operating activities

   

Net income

  $5,553  $4,443  

Adjustments to reconcile net income to net cash provided by (used for) operating activities:

   

(Income) loss from equity method investments

   —   39  

Compensation payable in common stock and options

   775   794  

Depreciation and amortization

   1,340   1,357  

Net gain on sale ofavailable-for-sale securities

   (27)   (127) 

Impairment charges

   13   102  

Provision for credit losses on lending activities

   32   138  

Other operating adjustments

   (48)   (36) 

Changes in assets and liabilities:

   

Trading assets, net of Trading liabilities

   (18,599)   (20,509) 

Securities borrowed

   (7,656)   16,136  

Securities loaned

   (214)   (2,843) 

Customer and other receivables and other assets

   (6,682)   (2,800) 

Customer and other payables and other liabilities

   8,196   3,849  

Securities purchased under agreements to resell

   11,849   (2,922) 

Securities sold under agreements to repurchase

   (645)   10,244  

Net cash provided by (used for) operating activities

   (6,113)   7,865  

Cash flows from investing activities

   

Proceeds from (payments for):

   

Other assets—Premises, equipment and software, net

   (1,177)   (941) 

Changes in loans, net

   (9,350)   (7,709) 

Investment securities:

   

Purchases

   (19,713)   (41,230) 

Proceeds from sales

   16,111   28,960  

Proceeds from paydowns and maturities

   5,378   5,956  

Other investing activities

   (77)   (24) 

Net cash provided by (used for) investing activities

   (8,828)   (14,988) 

Cash flows from financing activities

   

Net proceeds from (payments for):

   

Short-term borrowings

   64   (1,233) 

Noncontrolling interests

   (43)   (47) 

Other secured financings

   1,400   (278) 

Deposits

   (1,224)   (4,191) 

Proceeds from:

   

Derivatives financing activities

   73   —  

Issuance of preferred stock, net of issuance costs

   994   —  

Issuance of long-term borrowings

   45,334   27,528  

Payments for:

   

Long-term borrowings

   (24,480)   (22,902) 

Derivatives financing activities

   (73)   (120) 

Repurchases of common stock and employee tax withholdings

   (3,008)   (2,908) 

Cash dividends

   (1,562)   (1,311) 

Other financing activities

   58   —  

Net cash provided by (used for) financing activities

   17,533   (5,462) 

Effect of exchange rate changes on cash and cash equivalents

   2,218   1,054  

Net increase (decrease) in cash and cash equivalents

   4,810   (11,531) 

Cash and cash equivalents, at beginning of period

   43,381   54,083  

Cash and cash equivalents, at end of period

  $48,191  $42,552  

Cash and cash equivalents include:

   

Cash and due from banks

  $24,047  $26,899  

Interest bearing deposits with banks

   24,144   15,653  

Cash and cash equivalents, at end of period

  $                  48,191  $                  42,552  

Supplemental Disclosure of Cash Flow Information

Cash payments for interest were$3,422 millionand $1,784 million.

Cash payments for income taxes, net of refunds, were$967 millionand $504 million.



 Nine Months Ended
September 30,
$ in millions20202019
Cash flows from operating activities  
Net income$7,767
$6,932
Adjustments to reconcile net income to net cash provided by (used for) operating activities:  
Stock-based compensation expense802
825
Depreciation and amortization2,363
1,987
Provision for (Release of) credit losses on lending activities757
104
Other operating adjustments663
(114)
Changes in assets and liabilities:  
Trading assets, net of Trading liabilities18,442
17,036
Securities borrowed5,746
(16,088)
Securities loaned(582)(2,217)
Customer and other receivables and other assets(17,098)(5,135)
Customer and other payables and other liabilities(5,818)22,721
Securities purchased under agreements to resell(59)5,155
Securities sold under agreements to repurchase(12,824)9,703
Net cash provided by (used for) operating activities159
40,909
Cash flows from investing activities  
Proceeds from (payments for):  
Other assets—Premises, equipment and software, net(905)(1,460)
Changes in loans, net(13,592)(10,079)
Investment securities:  
Purchases(41,147)(35,078)
Proceeds from sales7,220
13,561
Proceeds from paydowns and maturities11,240
8,183
Other investing activities(254)(848)
Net cash provided by (used for) investing activities(37,438)(25,721)
Cash flows from financing activities  
Net proceeds from (payments for):  
Other secured financings229
(587)
Deposits48,734
(7,084)
Proceeds from issuance of Borrowings42,169
23,697
Payments for:  
Borrowings(38,151)(30,391)
Repurchases of common stock and employee tax withholdings(1,840)(4,447)
Cash dividends(2,008)(2,082)
Other financing activities(208)(286)
Net cash provided by (used for) financing activities48,925
(21,180)
Effect of exchange rate changes on cash and cash equivalents955
(1,548)
Net increase (decrease) in cash and cash equivalents12,601
(7,540)
Cash and cash equivalents, at beginning of period82,171
87,196
Cash and cash equivalents, at end of period$94,772
$79,656
Supplemental Disclosure of Cash Flow Information  
Cash payments for:  
Interest$3,747
$9,760
Income taxes, net of refunds1,675
1,603

September 20172020 Form 10-Q4850See Notes to Consolidated Financial Statements


Table of Contents
Notes to Consolidated Financial Statements

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1. Introduction and Basis of Presentation

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 Company”) together with its consolidated subsidiaries.

See the “Glossary of Common Terms and Acronyms” for the definition of certain terms and acronyms used throughout this Form 10-Q.

A description of the clients and principal products and services of each of the Firm’s business segments is as follows:

Institutional Securities provides investment banking, sales and trading, lending and other services to corporations, governments, financial institutions and high to ultra-high net worth clients. Investment banking services consist of capital raising and financial advisory services, including services relating to the underwriting of debt, equity and other securities, as well as advice on mergers and acquisitions, restructurings, real estate and project finance. Sales and trading services include sales, financing, prime brokerage and market-making activities in the equity and fixed income products, including prime brokerage services, global macro, credit and commodities products.businesses. Lending servicesactivities include originating and/or purchasing corporate loans and commercial real estate loans, providing secured lending facilities, and residential mortgage lending, asset-backed lending,extending financing to sales and financing extended to equitiestrading customers. Other activities include Asia wealth management services, investments and commodities customers and municipalities. Other services include investment and research activities.

research.

Wealth Management provides a comprehensive array of financial services and solutions to individual investors and small tomedium-sized businesses/ businesses and institutions coveringcovering: brokerage and investment advisory services,services; financial and wealth planning services,services; stock plan administration services; annuity and insurance products, creditproducts; securities-based lending, residential real estate loans and other lending products, bankingproducts; 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, which are offered through a variety of investment vehicles, include equity, fixed income, liquidity and alternative/other products. Institutional clients include defined benefit/defined contribution plans, foundations, endowments, government entities, sovereign wealth funds, insurance companies, third-party fund sponsors and
corporations. Individual clients are servicedgenerally served through intermediaries, including affiliated andnon-affiliated distributors.

Basis of Financial Information

The unaudited consolidated financial statements (“financial statements”) are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”),GAAP, which requirerequires the Firm to make estimates and assumptions regarding the valuations of certain financial instruments, the valuationvaluations of goodwill and intangible assets, compensation, deferred tax assets, the outcome of legal and tax matters, allowance for credit lossesdeferred tax assets, ACL, and other matters that affect its financial statements and related disclosures. The Firm believes that the estimates utilized in the preparation of its financial statements are prudent and reasonable. Actual results could differ materially from these estimates. Intercompany balances and transactions have been eliminated.
Certain reclassifications have been made to prior periods to conform to the current presentation.

The Notes are an integral part of the Firm's financial statements. The Firm has evaluated subsequent events for adjustment to or disclosure in these financial statements through the date of this report and has not identified any recordable or disclosable events not otherwise reported in these financial statements or the notes thereto.

The accompanying financial statements should be read in conjunction with the Firm’s consolidated financial statements and notes thereto included in the 20162019 Form10-K. Certain footnote disclosures included in the 20162019 Form10-K have been condensed or omitted from these financial statements as they are not required for interim reporting under U.S. GAAP. The financial statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for the fair presentation of the results for the interim period. The results of operations for interim periods are not necessarily indicative of results for the entire year.

Consolidation

The financial statements include the accounts of the Firm, its wholly owned subsidiaries and other entities in which the Firm has a controlling financial interest, including certain variable interest entities (“VIE”)VIEs (see Note 12)15). Intercompany balances and transactions have been eliminated. For consolidated subsidiaries that are less thannot wholly owned, the third-party holdings of equity interests are referred to as noncontrolling interests. The net income attributable to noncontrolling interests for such subsidiaries is presented as Net income applicable to noncontrolling interests in the consolidated income statements (“income statements”).statements. The portion of shareholders’ equity that is attributable to noncontrolling interests for such subsidiaries is presented as noncontrolling interests, a component of totalTotal equity, in the consolidated balance sheets (“balance sheets”).

sheets.

For a discussion of the Firm’s involvement with VIEs and its significant regulated U.S. and international subsidiaries and its involvement with VIEs, see NotesNote 1 and 2 to the consolidated financial statements in the 20162019 Form10-K.


49September 2017 Form 10-Q

51September 2020 Form 10-Q
Table of Contents
Notes to Consolidated Financial Statements

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2. Significant Accounting Policies

For a detailed discussion about the Firm’s significant accounting policies and for further information on accounting updates adopted in the prior year, see Note 2 to the consolidated financial statements in the 20162019 Form10-K.

During the nine months ended September 30, 2017(“2020 (“current year period”), other than the following, there were no significant updates maderevisions to the Firm’s significant accounting policies.

policies, other than for the accounting updates adopted.

Accounting StandardsUpdates Adopted

in 2020

Reference Rate Reform
The Firm adopted the followingReference Rate Reform accounting update in the current year period. There was no impact to the Firm’s financial statements upon initial adoption.
This accounting update provides optional accounting relief to entities with contracts, hedge accounting relationships or other transactions that reference LIBOR or other interest rate benchmarks for which the referenced rate is expected to be discontinued or replaced. The Firm is applying the accounting relief as relevant contract and hedge accounting relationship modifications are made during the course of the reference rate reform transition period. The optional relief generally allows for contract modifications solely related to the replacement of the reference rate to be accounted for as a continuation of the existing contract instead of as an extinguishment of the contract, and would therefore not trigger certain accounting impacts that would otherwise be required. It also allows entities to change certain critical terms of existing hedge accounting relationships that are affected by reference rate reform, and these changes would not require de-designating the hedge accounting relationship. The optional relief ends December 31, 2022.
Financial Instruments—Credit Losses
The Firm adopted the Financial Instruments—Credit Losses accounting update on January 1, 2017.

•

Improvements to Employee Share-Based Payment Accounting. This accounting update simplifies the accounting for employee share-based payments, including the recognition of forfeitures, the classification of income tax consequences, and the classification within the consolidated cash flow statements (“cash flow statements”).

Beginning in 2017,2020.

This accounting update impacted the income tax consequences relatedimpairment model for certain financial assets measured at amortized cost by requiring a CECL methodology to share-based payments are requiredestimate expected credit losses over the entire life of the financial asset, recorded at inception or purchase. CECL replaced the loss model previously applicable to loans held for investment, HTM securities and other receivables carried at amortized cost, such as employee loans.
The update also eliminated the concept of other-than-temporary impairment for AFS securities and instead requires impairments on AFS securities to be recognized in Provisionearnings through an allowance when the fair value is less than amortized cost and a credit loss exists, and through a permanent reduction of the
amortized cost basis when the securities are expected to be sold before recovery of amortized cost.

For certain portfolios, we determined that there are de minimus or zero expected credit losses, for income taxesexample, for lending and financing transactions, such as Securities borrowed, Securities purchased under agreements to resell and certain other portfolios where collateral arrangements are being followed. Also, we have zero expected credit losses for certain financial assets based on the credit quality of the borrower or issuer, such as U.S. government and agency securities.

At transition on January 1, 2020, the adoption of this accounting standard resulted in an increase in the income statements uponallowance for credit losses of $131 million with a corresponding reduction in Retained earnings of $100 million, net of tax. The adoption impact was primarily attributable to a $124 million increase in the conversionallowance for credit losses on employee loans.

The following discussion highlights changes to the Firm’s accounting policies as a result of employee share-based awards insteadthis adoption.
Instruments Measured at Amortized Cost and Certain Off-Balance Sheet Credit Exposures
Allowance for Credit Losses
The ACL for financial instruments measured at amortized cost and certain off-balance sheet exposures (e.g., HFI loans and lending commitments, HTM securities, customer and other receivables and certain guarantees) represents an estimate of additionalpaid-in capital. The impactexpected credit losses over the entire life of the income tax consequences upon conversionfinancial instrument.
Factors considered by management when determining the ACL include payment status, fair value of collateral, expected payments of principal and interest, as well as internal or external information relating to past events, current conditions and reasonable and supportable forecasts. The Firm’s three forecasts include assumptions about certain macroeconomic variables including, but not limited to, U.S. gross domestic product, equity market indices, unemployment rates, as well as commercial real estate and home price indices. At the conclusion of the awardsFirm’s reasonable and supportable forecast period of 13 quarters, there is a gradual reversion back to historical averages.
The ACL is measured on a collective basis when similar risk characteristics exist for multiple instruments considering all available information relevant to assessing the collectability of cash flows. Generally, the Firm applies a probability of default/loss given default model for instruments that are collectively assessed, under which the ACL is calculated as the product of probability of default, loss given default and exposure at default. These parameters are forecast for each collective group of assets using a scenario-based statistical model and at the conclusion of the Firm’s reasonable and supportable forecast period, the parameters gradually revert back to historical averages.

September 2020 Form 10-Q52
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Notes to Consolidated Financial Statements
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If the instrument does not share similar risk characteristics with other instruments, including when it is probable that the Firm will be unable to collect the full payment of principal and interest on the instrument when due, the ACL is measured on an individual basis. The Firm generally applies a discounted cash flow method for instruments that are individually assessed.

The Firm may also elect to use an approach that considers the fair value of the collateral when measuring the ACL if the loan is collateral dependent (i.e., repayment of the loan is expected to be either a benefitprovided substantially by the sale or a provision. Conversionoperation of employee share-based awardsthe underlying collateral and the borrower is experiencing financial difficulty).

Additionally, the Firm can elect to Firm shares will primarily occuruse an approach to measure the ACL using the fair value of collateral where the borrower is required to, and reasonably expected to, continually adjust and replenish the amount of collateral securing the instrument to reflect changes in the first quarterfair value of each year. The impact of recognizing excess tax benefits upon conversion of awards in the quarter in which the accounting update was adopted (three months ended March 31, 2017) was a $112 million benefit to Provision for income taxes. The classification of cash flows from excess tax benefits was moved from the financing section to the operating section of the cash flow statements, and was applied on a retrospective basis.

In addition, this accounting update permits an entity to elect whether to continue to estimate the total forfeitures, or to account for forfeitures on an actual basis as they occur.such collateral. The Firm has elected to accountuse this approach for forfeiturescertain securities-based loans, customer receivables representing margin loans, Securities purchased under agreements to resell and Securities borrowed.

Credit quality indicators considered in developing the ACL include:
Corporate loans, Secured lending facilities, Commercial real estate loans and securities, and Other loans: Internal risk ratings developed by the Credit Risk Management Department which are refreshed at least annually, and more frequently as necessary. These ratings generally correspond to external ratings published by S&P. The Firm also considers transaction structure, including type of collateral, collateral terms, and position of the obligation within the capital structure. In addition, for Commercial real estate, the Firm considers property type and location, net operating income, LTV ratios, among others, as well as commercial real estate price and credit spread indices and capitalization rates.
Residential real estate loans: Loan origination Fair Isaac Corporation (“FICO”) credit scores as determined by independent credit agencies in the United States and loan-to-value (“LTV”) ratios.
Employee loans: Employment status, which includes those currently employed by the Firm and for which the Firm can deduct any unpaid amounts due to it through certain compensation arrangements; and those no longer employed by the Firm where such compensation arrangements are no longer applicable.
For Securities-based loans, the Firm generally measures the ACL based on the fair value of collateral.
Qualitative and environmental factors such as economic and business conditions, the nature and volume of the portfolio, and lending terms and the volume and severity of past due loans are also considered in the ACL calculations.
Presentation of ACL and Provision for Credit Losses
ACL
Provision for
credit losses
Instruments measured at amortized cost (e.g., HFI loans, HTM securities and customer and other receivables)
Contra assetOther revenue
Employee loansContra assetCompensation and benefits expense
Off-balance sheet instruments (e.g., HFI lending commitments and certain guarantees)
Other liabilities and accrued expensesOther expense
Troubled Debt Restructurings (“TDRs”)
The Firm may modify the terms of certain loans for economic or legal reasons related to a borrower’s financial difficulties by granting one or more concessions that the Firm would not otherwise consider. Such modifications are accounted for and reported as a TDR, except for certain modifications related to the Coronavirus Disease (“COVID-19”) as noted in “Modifications and Nonaccrual Status for Borrowers Impacted by COVID-19” herein. A loan that has been modified in a TDR is generally considered to be impaired and is evaluated individually. TDRs are also generally classified as nonaccrual and may be returned to accrual status only after the Firm expects repayment of the remaining contractual principal and interest and there is sustained repayment performance for a reasonable period.
Nonaccrual
The Firm places financial instruments on nonaccrual status if principal or interest is past due for a period of 90 days or more or payment of principal or interest is in doubt unless the obligation is well-secured and in the process of collection, or in certain cases when related to COVID-19 as noted in “Modifications and Nonaccrual Status for Borrowers Impacted by COVID-19” herein. For any instrument placed on nonaccrual status, the Firm reverses any unpaid interest accrued with an actual basisoffsetting reduction to Interest income. Principal and interest payments received on nonaccrual instruments are applied to principal if there is doubt regarding the ultimate collectability of principal. If collection of the principal is not in doubt, interest income is realized on a cash basis. If neither principal nor interest collection is in doubt and the instruments are brought current, instruments are generally placed on accrual status and interest income is recognized using the effective interest method.
Modifications and Nonaccrual Status for Borrowers Impacted by COVID-19
In the first quarter of 2020, the Firm elected to apply the guidance issued by Congress in the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) as they occur. This changewell as by the U.S. banking agencies stating that certain concessions granted to borrowers that are current on existing loans, either individually or as part of a program for creditworthy borrowers who are experiencing short-term financial or operational problems as a result of COVID-19, generally would not be considered TDRs.

53September 2020 Form 10-Q
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Notes to Consolidated Financial Statements
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Additionally, these loans generally would not be considered nonaccrual status unless collectability concerns exist despite the modification provided. For loans remaining on accrual status, the Firm elected to continue recognizing interest income during the modification periods.
ACL Write-offs
The Firm writes-off a financial instrument in the period that it is deemed uncollectible and records a reduction in the ACL and the balance of the financial instrument in the balance sheet. However, for accrued interest receivable balances that are separately recorded from the related financial instruments, the Firm's nonaccrual policy requires that accrued interest receivable be written off against Interest income when the related financial instrument is placed in nonaccrual status. Accordingly, the Firm elected not to measure an ACL for accrued interest receivables. However, in the case of loans which are modified as a result of COVID-19 and remain on accrual status due to the relief noted in “Modifications and Nonaccrual Status for Borrowers Impacted by COVID-19,” accrued interest receivable balances are assessed for any required ACL.
Available-for-Sale (“AFS”) Investment Securities

AFS securities are reported at fair value in the balance sheets. Interest income, including amortization of premiums and accretion of discounts, is included in Interest income in the Income statements. Unrealized gains are recorded in OCI and unrealized losses are recorded either in OCI or in Other revenues as described below.

AFS securities in an unrealized loss position are first evaluated to determine whether there is an intent to sell or it is more likely than not the Firm will be required to be applied usingsell before recovery of the amortized cost basis. If so, the entire unrealized loss is recognized in Other revenues, as any previously established ACL is written off and the amortized cost basis is written down to the fair value of the security.

For all other AFS securities in an unrealized loss position, any portion of unrealized losses representing a modified retrospective approach,credit loss is recognized in Other revenues and uponas an increase to the ACL for AFS securities, with the remainder of unrealized losses recognized in OCI. When considering whether a credit loss exists, relevant information as discussed in Note 2 of the 2019 Form 10-K is considered, except that with the adoption of Financial Instruments—Credit Losses in 2020, the Firm recorded a cumulativecatch-up adjustment, decreasing Retained earningslength of time the fair value has been less than the amortized cost basis is no longer considered.
Presentation of ACL and Provision for Credit Losses
ACL
Provision for
credit losses
AFS securitiesContra Investment securitiesOther revenue
Nonaccrual & ACL Write-Offs on AFS Securities
AFS securities follow the same nonaccrual and write-off guidance as discussed in “Instruments Measured at Amortized Cost and Certain Off-Balance Sheet Credit Exposures” herein, except as set forth in “Modifications and Nonaccrual Status for Borrowers Impacted by approximately $30 million net of tax, increasing Additionalpaid-in capital by approximately $45 million and increasing deferred tax assets by approximately $15 million.

COVID-19.”

Goodwill

The Firm completed its annual goodwill impairment testing as of July 1, 2017.2020. The Firm’s impairment testing did not indicate any goodwill impairment, as each of the Firm’s reporting units with goodwill had a fair value that was substantially in excess of its carrying value.

3. Acquisitions
Acquisition of E*TRADE
On October 2, 2020, the Firm completed the acquisition of 100% of E*TRADE Financial Corporation (“E*TRADE”) in a stock-for-stock transaction, which is expected to increase the scale and breadth of the Wealth Management business segment. Given the recency of the closing, the purchase accounting analysis is still preliminary, however, the transaction is expected to result in the addition of approximately $77 billion in assets, inclusive of approximately $5 billion of Goodwill and $3 billion of Intangible assets. Total consideration for the transaction was approximately $11.9 billion, which principally consists of the $11 billion fair value of 233 million common shares issued from Common stock held in treasury, at an exchange ratio of 1.0432 per E*TRADE common share. In addition, the Firm issued Series M and Series N preferred shares with a fair value of approximately $0.7 billion in exchange for E*TRADE’s existing preferred stock.
Planned Acquisition of Eaton Vance
On October 8, 2020, the Firm entered into a definitive agreement under which it will acquire Eaton Vance Corp. (“Eaton Vance”) in a cash and stock transaction valued, as of the announcement, at approximately $7 billion, based on the closing price of the Firm’s common stock and the number of Eaton Vance’s fully diluted shares outstanding on October 7, 2020. Under the terms of the agreement, Eaton Vance common stockholders will receive $28.25 in cash and 0.5833 Morgan Stanley common shares for each Eaton Vance common share. In addition, Eaton Vance common shareholders will receive a one-time special cash dividend of $4.25 per share to be paid pre-closing by Eaton Vance. The acquisition is subject to customary closing conditions, and is expected to close in the second quarter of 2021.

September 20172020 Form 10-Q5054 

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Notes to Consolidated Financial Statements

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4. Cash and Cash Equivalents
Cash and cash equivalents consist of Cash and due from banks and Interest bearing deposits with banks. Cash equivalents are highly liquid investments with remaining maturities of three months or less from the acquisition date that are readily convertible to cash and are not held for trading purposes.
$ in millionsAt
September 30,
2020		At
December 31,
2019
Cash and due from banks$13,840
$6,763
Interest bearing deposits with banks80,932
75,408
Total Cash and cash equivalents$94,772
$82,171
Restricted cash$37,186
$32,512

Cash and cash equivalents also include Restricted cash such as cash segregated in compliance with federal or other regulations, including minimum reserve requirements set by the Federal Reserve Bank and other central banks, and the Firm's initial margin deposited with clearing organizations.
3.
5. Fair Values

Recurring Fair Value Measurement

Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

  At September 30, 2017 
$ in millions Level 1  Level 2  Level 3  Netting1  Total 

Assets at Fair Value

     

Trading assets:

     

U.S. Treasury and
agency securities

 $27,538  $23,186  $—    $—    $50,724 

Other sovereign
government
obligations2

  25,428   6,201   104   —     31,733 

Corporate and other debt:

 

    

State and municipal
securities

  —     2,123   10   —     2,133 

MABS

  —     2,399   274   —     2,673 

Corporate bonds

  —     14,164   419   —     14,583 

CDO

  —     313   76   —     389 

Loans and lending
commitments3

  —     3,423   4,865   —     8,288 

Other debt

  —     1,041   193   —     1,234 

Total corporate
and other debt

  —     23,463   5,837   —     29,300 

Corporate equities4

  137,028   425   296   —     137,749 

Derivative and
other contracts:

     

Interest rate

  581   183,561   1,658   —     185,800 

Credit

  —     8,527   377   —     8,904 

Foreign exchange

  93   53,842   47   —     53,982 

Equity

  1,056   44,986   3,402   —     49,444 

Commodity and
other

  1,240   4,929   4,107   —     10,276 

Netting1

  (2,896)   (225,857)   (1,853)   (46,425)   (277,031) 

Total derivative and
other contracts

  74   69,988   7,738   (46,425)   31,375 

Investments5

  316   257   925   —     1,498 

Physical commodities

  —     157   —     —     157 

Total trading assets5

  190,384   123,677   14,900   (46,425)   282,536 

Investment securities— AFS

  25,022   29,932   —     —     54,954 

Securities purchased
under agreements
to resell

  —     101   —     —     101 

Intangible assets

  —     3   —     —     3 

Total assets
at fair value

 $215,406  $153,713  $14,900  $(46,425)  $337,594 

  At September 30, 2017 
$ in millions Level 1  Level 2  Level 3  Netting1  Total 

Liabilities at Fair Value

     

Deposits

 $—  $68  $106  $—  $174 

Short-term borrowings

  —   658   —   —   658 

Trading liabilities:

     

U.S. Treasury and
agency securities

  14,574   61   —   —   14,635 

Other sovereign
government
obligations2

  24,351   1,432   —   —   25,783 

Corporate and other debt:

 

    

Corporate bonds

  —   7,044   6   —   7,050 

Other debt

  —   342   2   —   344 

Total corporate and other debt

  —   7,386   8   —   7,394 

Corporate equities4

  54,778   157   51   —   54,986 

Derivative and other contracts:

     

Interest rate

  478   165,399   582   —   166,459 

Credit

  —   9,353   680   —   10,033 

Foreign exchange

  52   54,198   125   —   54,375 

Equity

  1,252   47,603   2,171   —   51,026 

Commodity and
other

  1,233   3,879   2,573   —   7,685 

Netting1

  (2,896)   (225,857)   (1,853)   (34,533)   (265,139) 

Total derivative and
other contracts

  119   54,575   4,278   (34,533)   24,439 

Total trading liabilities

  93,822   63,611   4,337   (34,533)   127,237 

Securities sold under agreements to repurchase

  —   661   149   —   810 

Other secured
financings

  —   6,264   250   —   6,514 

Long-term borrowings

  35   43,593   2,603   —   46,231 

Total liabilities
at fair value

 $93,857  $114,855  $7,445  $(34,533)  $181,624 
 At September 30, 2020
$ in millionsLevel 1Level 2Level 3
Netting1
Total
Assets at fair value     
Trading assets:     
U.S. Treasury and agency securities$41,488
$27,033
$122
$—
$68,643
Other sovereign government obligations31,171
5,909
10
—
37,090
State and municipal securities0
1,479
0
—
1,479
MABS0
999
443
—
1,442
Loans and lending commitments2
0
3,982
4,351
—
8,333
Corporate and other debt0
27,158
2,727
—
29,885
Corporate equities3
102,975
655
135
—
103,765
Derivative and other contracts:    
Interest rate2,784
239,900
1,114
—
243,798
Credit0
9,138
768
—
9,906
Foreign exchange16
67,016
152
—
67,184
Equity1,244
65,115
1,127
—
67,486
Commodity and other3,022
12,031
3,480
—
18,533
Netting1
(5,913)(304,977)(1,060)(59,715)(371,665)
Total derivative and other contracts1,153
88,223
5,581
(59,715)35,242
Investments4
664
144
821
—
1,629
Physical commodities0
2,615
0
—
2,615
Total trading assets4
177,451
158,197
14,190
(59,715)290,123
Investment securities—AFS46,946
37,590
0
—
84,536
Securities purchased under agreements to resell0
15
0
—
15
Total assets at fair value$224,397
$195,802
$14,190
$(59,715)$374,674

 

 At September 30, 2020
$ in millionsLevel 1Level 2Level 3
Netting1
Total
Liabilities at fair value     
Deposits$0
$3,574
$105
$—
$3,679
Trading liabilities:     
U.S. Treasury and agency securities11,311
462
1
—
11,774
Other sovereign government obligations25,589
1,513
0
—
27,102
Corporate and other debt0
8,623
2
—
8,625
Corporate equities3
59,950
344
57
—
60,351
Derivative and other contracts:    
Interest rate2,942
226,788
478
—
230,208
Credit0
9,602
652
—
10,254
Foreign exchange17
65,390
53
—
65,460
Equity1,219
75,900
3,272
—
80,391
Commodity and other3,025
10,304
1,676
—
15,005
Netting1
(5,913)(304,977)(1,060)(52,204)(364,154)
Total derivative and other contracts1,290
83,007
5,071
(52,204)37,164
Total trading liabilities98,140
93,949
5,131
(52,204)145,016
Securities sold under agreements to repurchase0
718
448
—
1,166
Other secured financings0
9,876
309
—
10,185
Borrowings0
65,063
4,081
—
69,144
Total liabilities at fair value$98,140
$173,180
$10,074
$(52,204)$229,190
 At December 31, 2019
$ in millionsLevel 1Level 2Level 3
Netting1
Total
Assets at fair value     
Trading assets:     
U.S. Treasury and agency securities$36,866
$28,992
$22
$—
$65,880
Other sovereign government obligations23,402
4,347
5
—
27,754
State and municipal securities0
2,790
1
—
2,791
MABS0
1,690
438
—
2,128
Loans and lending commitments2
0
6,253
5,073
—
11,326
Corporate and other debt0
22,124
1,396
—
23,520
Corporate equities3
123,942
652
97
—
124,691
Derivative and other contracts:   
Interest rate1,265
182,977
1,239
—
185,481
Credit0
6,658
654
—
7,312
Foreign exchange15
64,260
145
—
64,420
Equity1,219
48,927
922
—
51,068
Commodity and other1,079
7,255
2,924
—
11,258
Netting1
(2,794)(235,947)(993)(47,804)(287,538)
Total derivative and other contracts784
74,130
4,891
(47,804)32,001
Investments4
481
252
858
—
1,591
Physical commodities0
1,907
0
—
1,907
Total trading assets4
185,475
143,137
12,781
(47,804)293,589
Investment securities—AFS32,902
29,321
0
—
62,223
Securities purchased under agreements to resell0
4
0
—
4
Total assets at fair value$218,377
$172,462
$12,781
$(47,804)$355,816

51September 2017 Form 10-Q

September 2020 Form 10-Q

55
Table of Contents
Notes to Consolidated Financial Statements

(Unaudited)

LOGO
mslogo3q20.jpg

  At December 31, 2016 

$ in millions

 Level 1  Level 2  Level 3  Netting1  Total 

Assets at Fair Value

     

Trading assets:

     

U.S. Treasury and
agency securities

 $27,579  $20,392  $74  $—  $48,045  

Other sovereign
government
obligations

  14,005   5,497   6   —   19,508  

Corporate and other debt:

State and municipal
securities

  —   2,355   250   —   2,605  

MABS

  —   1,691   217   —   1,908  

Corporate bonds

  —   11,051   232   —   11,283  

CDO

  —   602   63   —   665  

Loans and lending
commitments3

  —   3,580   5,122   —   8,702  

Other debt

  —   1,360   180   —   1,540  

Total corporate and
other debt

  —   20,639   6,064   —   26,703  

Corporate equities4

  131,574   352   446   —   132,372  

Derivative and other
contracts:

     

Interest rate

  1,131   300,406   1,373   —   302,910  

Credit

  —   11,727   502   —   12,229  

Foreign exchange

  231   74,921   13   —   75,165  

Equity

  1,185   35,736   1,708   —   38,629  

Commodity and
other

  2,808   6,734   3,977   —   13,519  

Netting1

  (4,378)   (353,543)   (1,944)   (51,381)   (411,246) 

Total derivative and
other contracts

  977   75,981   5,629   (51,381)   31,206  

Investments5

  237   197   958   —   1,392  

Physical commodities

  —   112   —   —   112  

Total trading assets5

  174,372   123,170   13,177   (51,381)   259,338  

Investment securities—AFS

  29,120   34,050   —   —   63,170  

Securities purchased
under agreements to
resell

  —   302   —   —   302  

Intangible assets

  —   3   —   —   3  

Total assets
at fair value

 $  203,492  $157,525  $13,177  $(51,381)  $322,813  
  At December 31, 2016 
$ in millions Level 1  Level 2  Level 3  Netting1  Total 

Liabilities at Fair Value

     

Deposits

 $—  $21  $42  $—  $63  

Short-term borrowings

  —   404   2   —   406  

Trading liabilities:

     

U.S. Treasury and
agency securities

  11,636   61   —   —   11,697  

Other sovereign
government
obligations

  20,658   2,430   —   —   23,088  

Corporate and other debt:

 

    

Corporate bonds

  —   5,572   34   —   5,606  

Other debt

  —   549   2   —   551  

Total corporate
and other debt

  —   6,121   36   —   6,157  

Corporate equities4

  57,847   54   35   —   57,936  

Derivative and other
contracts:

     

Interest rate

  1,244   285,379   953   —   287,576  

Credit

  —   12,550   875   —   13,425  

Foreign exchange

  17   75,510   56   —   75,583  

Equity

  1,162   37,828   1,524   —   40,514  

Commodity and
other

  2,663   6,845   2,377   —   11,885  

Netting1

  (4,378)   (353,543)   (1,944)   (39,803)   (399,668) 

Total derivative and
other contracts

  708   64,569   3,841   (39,803)   29,315  

Physical commodities

  —   1   —   —   1  

Total trading liabilities

  90,849   73,236   3,912   (39,803)   128,194  

Securities sold under
agreements to
repurchase

  —   580   149   —   729  

Other secured
financings

  —   4,607   434   —   5,041  

Long-term borrowings

  47   36,677   2,012   —   38,736  

Total liabilities
at fair value

 $90,896  $115,525  $6,551  $(39,803)  $173,169  

MABS—

 At December 31, 2019
$ in millionsLevel 1Level 2Level 3
Netting1
Total
Liabilities at fair value     
Deposits$0
$1,920
$179
$—
$2,099
Trading liabilities:     
U.S. Treasury and agency securities11,191
34
0
—
11,225
Other sovereign government obligations21,837
1,332
1
—
23,170
Corporate and other debt0
7,410
0
—
7,410
Corporate equities3
63,002
79
36
—
63,117
Derivative and other contracts:    
Interest rate1,144
171,025
462
—
172,631
Credit0
7,391
530
—
7,921
Foreign exchange6
67,473
176
—
67,655
Equity1,200
49,062
2,606
—
52,868
Commodity and other1,194
7,118
1,312
—
9,624
Netting1
(2,794)(235,947)(993)(42,531)(282,265)
Total derivative and other contracts750
66,122
4,093
(42,531)28,434
Total trading liabilities96,780
74,977
4,130
(42,531)133,356
Securities sold under agreements to repurchase0
733
0
—
733
Other secured financings0
7,700
109
—
7,809
Borrowings0
60,373
4,088
—
64,461
Total liabilities at fair value$96,780
$145,703
$8,506
$(42,531)$208,458
MABS—Mortgage- and asset-backed securities

AFS—Available for sale

CDO—Collateralized debt obligations, including collateralized loan obligations

1.

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

7.
2.

During the current year period, the Firm transferred from Level 2 to Level 1 $1.3 billion and $1.8 billion of Trading assets—Other sovereign government obligations and Trading liabilities—Other sovereign government obligations, respectively, due to increased market activity in these instruments.

3.

For a further breakdown by type, see the following Detail of Loans and Lending Commitments at Fair Value table.

4.

3.
For trading purposes, the Firm holds or sells short equity securities issued by entities in diverse industries and of varying sizes.

5.

4.
Amounts exclude certain investments that are measured at fair value using the net asset value (“NAV”)based on NAV per share, which are not classified in the fair value hierarchy. For additional disclosure about such investments, see “Fair“Net Asset Value of Investments Measured at NAV”Measurements” herein.

Loans and Lending Commitments at Fair Value 
$ in millions  

At

September 30, 2017

   

At

December 31, 2016 

 

Corporate

  $6,441   $7,217  

Residential real estate

   690    966  

Wholesale real estate

   1,157    519  

Total

  $8,288   $8,702  
Detail of Loans and Lending Commitments at Fair Value1
$ in millionsAt
September 30,
2020		At
December 31,
2019
Corporate$14
$20
Secured lending facilities445
951
Commercial Real Estate769
2,098
Residential Real Estate824
1,192
Securities-based lending and Other loans6,281
7,065
Total$8,333
$11,326


September 2017 Form 10-Q1.52Loans previously classified as corporate have been further disaggregated; prior period balances have been revised to conform with current period presentation.
Unsettled Fair Value of Futures Contracts1

$ in millionsAt
September 30,
2020		At
December 31,
2019
Customer and other receivables, net$589
$365

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Unsettled Fair Value of Futures Contracts1 
$ in millions  

At

September 30, 2017

   

At

December 31, 2016

 

Long

    

Customer and other receivables

  $977   $784  

Short

    

Customer and other payables

  $140   $174  

1.

These contracts are primarily Level 1, actively traded, valued based on quoted prices from the exchange and are excluded from the previous recurring fair value tables.

For a description of the valuation techniques applied to the Firm’s major categories of assets and liabilities measured at fair value on a recurring basis, see Note 3 to the consolidated financial statements in the 20162019 Form10-K. During the current year period,quarter, there were no significant updatesrevisions made to the Firm’s valuation techniques.

Changes in

Rollforward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended September 30, 2017

(“current quarter”), the three months ended September 30, 2016 (“prior year quarter”), the current year period and the nine months ended September 30, 2016 (“prior year period”).

 Three Months Ended
September 30,		Nine Months Ended
September 30,
$ in millions2020201920202019
U.S. Treasury and agency securities
Beginning balance$97
$5
$22
$54
Realized and unrealized gains (losses)(1)0
0
0
Purchases109
11
133
18
Sales(36)0
(42)(54)
Net transfers(47)2
9
0
Ending balance$122
$18
$122
$18
Unrealized gains (losses)$(1)$0
$0
$0
Other sovereign government obligations
Beginning balance$11
$10
$5
$17
Realized and unrealized gains (losses)(1)(3)0
(2)
Purchases1
2
8
13
Sales(1)(2)(3)(6)
Net transfers0
5
0
(10)
Ending balance$10
$12
$10
$12
Unrealized gains (losses)$0
$(3)$0
$(2)
State and municipal securities
Beginning balance$0
$16
$1
$148
Sales0
(2)0
(43)
Net transfers0
(13)(1)(104)
Ending balance$0
$1
$0
$1
Unrealized gains (losses)$0
$0
$0
$0
MABS
Beginning balance$379
$480
$438
$354
Realized and unrealized gains (losses)13
(10)(60)(9)
Purchases13
5
172
66
Sales(54)(58)(162)(157)
Settlements0
0
0
(39)
Net transfers92
(16)55
186
Ending balance$443
$401
$443
$401
Unrealized gains (losses)$8
$(8)$(35)$(38)
Loans and lending commitments
Beginning balance$4,068
$5,604
$5,073
$6,870
Realized and unrealized gains (losses)20
(51)(161)3
Purchases and originations846
852
1,926
1,934
Sales(725)(464)(1,139)(1,541)
Settlements(285)(811)(1,907)(2,130)
Net transfers1
427
(261)559
(267)
Ending balance$4,351
$4,869
$4,351
$4,869
Unrealized gains (losses)$27
$(55)$(137)$283


September 2020 Form 10-Q56
Table of Contents
Notes to Consolidated Financial Statements
(Unaudited)
mslogo3q20.jpg

 Three Months Ended
September 30,		Nine Months Ended
September 30,
$ in millions2020201920202019
Corporate and other debt
Beginning balance$2,686
$1,364
$1,396
$1,076
Realized and unrealized gains (losses)(107)157
(184)269
Purchases451
341
2,217
632
Sales(325)(474)(425)(587)
Settlements0
0
(311)(7)
Net transfers22
2
34
7
Ending balance$2,727
$1,390
$2,727
$1,390
Unrealized gains (losses)$(96)$114
$(186)$217
Corporate equities
Beginning balance$83
$98
$97
$95
Realized and unrealized gains (losses)32
1
0
(41)
Purchases32
5
42
44
Sales(27)(16)(27)(268)
Net transfers15
15
23
273
Ending balance$135
$103
$135
$103
Unrealized gains (losses)$39
$7
$14
$(38)
Investments
Beginning balance$759
$785
$858
$757
Realized and unrealized gains (losses)55
(15)(6)19
Purchases7
7
37
28
Sales(16)(7)(37)(43)
Net transfers16
15
(31)24
Ending balance$821
$785
$821
$785
Unrealized gains (losses)$44
$(12)$(19)$22
Net derivatives: Interest rate
Beginning balance$760
$816
$777
$618
Realized and unrealized gains (losses)(147)(40)(95)143
Purchases36
69
153
132
Issuances(15)(11)(41)(22)
Settlements(31)2
36
16
Net transfers33
(48)(194)(99)
Ending balance$636
$788
$636
$788
Unrealized gains (losses)$(139)$120
$(37)$214
Net derivatives: Credit
Beginning balance$131
$(138)$124
$40
Realized and unrealized gains (losses)(16)(183)11
36
Purchases17
44
66
103
Issuances(51)(19)(101)(162)
Settlements10
389
61
90
Net transfers25
12
(45)(2)
Ending balance$116
$105
$116
$105
Unrealized gains (losses)$(16)$20
$2
$41
     

 Three Months Ended
September 30,		Nine Months Ended
September 30,
$ in millions2020201920202019
Net derivatives: Foreign exchange
Beginning balance$17
$(29)$(31)$75
Realized and unrealized gains (losses)86
67
202
(83)
Purchases0
0
3
0
Issuances(4)0
(5)0
Settlements(9)5
(27)0
Net transfers9
9
(43)60
Ending balance$99
$52
$99
$52
Unrealized gains (losses)$75
$79
$136
$26
Net derivatives: Equity
Beginning balance$(1,884)$(1,715)$(1,684)$(1,485)
Realized and unrealized gains (losses)3
(61)75
59
Purchases19
36
192
75
Issuances(181)(207)(706)(227)
Settlements(151)(56)(167)(173)
Net transfers49
622
145
370
Ending balance$(2,145)$(1,381)$(2,145)$(1,381)
Unrealized gains (losses)$32
$(86)$(143)$81
Net derivatives: Commodity and other
Beginning balance$2,087
$1,861
$1,612
$2,052
Realized and unrealized gains (losses)(29)120
373
35
Purchases1
126
26
145
Issuances(40)(36)(65)(71)
Settlements(181)(107)(101)(307)
Net transfers(34)10
(41)120
Ending balance$1,804
$1,974
$1,804
$1,974
Unrealized gains (losses)$(251)$33
$(6)$(89)
Deposits
Beginning balance$90
$138
$179
$27
Realized and unrealized losses (gains)4
5
8
16
Issuances0
23
0
70
Settlements(2)(8)(13)(12)
Net transfers13
(13)(69)44
Ending balance$105
$145
$105
$145
Unrealized losses (gains)$4
$5
$8
$16
Nonderivative trading liabilities
Beginning balance$74
$36
$37
$16
Realized and unrealized losses (gains)(6)(7)(21)(37)
Purchases(7)(13)(23)(31)
Sales5
6
23
36
Settlements0
0
3
0
Net transfers(6)18
41
56
Ending balance$60
$40
$60
$40
Unrealized losses (gains)$(4)$(7)$(21)$(37)


57September 2020 Form 10-Q
Table of Contents
Notes to Consolidated Financial Statements
(Unaudited)
mslogo3q20.jpg

 Three Months Ended
September 30,		Nine Months Ended
September 30,
$ in millions2020201920202019
Securities sold under agreements to repurchase
Beginning balance$440
$0
$0
$0
Realized and unrealized losses (gains)8
0
(22)0
Issuances0
0
470
0
Ending balance$448
$0
$448
$0
Unrealized losses (gains)$8
$0
$(22)$0
Other secured financings  
Beginning balance$300
$154
$109
$208
Realized and unrealized losses (gains)11
(1)(1)5
Issuances3
0
10
0
Settlements(5)0
(208)(8)
Net transfers0
(43)399
(95)
Ending balance$309
$110
$309
$110
Unrealized losses (gains)$11
$(1)$(1)$5
Borrowings
Beginning balance$4,135
$3,939
$4,088
$3,806
Realized and unrealized losses (gains)(32)88
(284)498
Issuances194
201
992
610
Settlements(70)(260)(346)(438)
Net transfers(146)(430)(369)(938)
Ending balance$4,081
$3,538
$4,081
$3,538
Unrealized losses (gains)$(33)$91
$(282)$459
Portion of Unrealized losses (gains) recorded in OCI—Change in net DVA22
(23)(124)68

1.Net transfers in the current year period reflect the largely offsetting impacts of transfers in of $857 million of equity margin loans and transfers out of $707 million of equity margin loans. The loans were transferred into Level 3 in the first quarter as the significance of the margin loan rate input increased as a result of reduced liquidity, and transferred out of Level 3 in the second quarter as liquidity conditions improved reducing the significance of the input.
Level 3 instruments may be hedged with instruments classified in Level 1 and Level 2. As a result, theThe realized and unrealized gains (losses)or losses for assets and liabilities within the Level 3 category presented in the followingprevious tables do not reflect the related realized and unrealized gains (losses)or 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

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. Total realized and unrealized gains (losses) are primarily included in Trading revenues in the income statements.

Additionally, in the previous tables, consolidations of VIEs are included in Purchases and deconsolidations of VIEs are included in Settlements.

 

Rollforward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Current Quarter

$ in millions Beginning
Balance at
June 30, 2017		  Realized
and
Unrealized
Gains
(Losses)		  Purchases1  Sales and
Issuances2		  Settlements1  Net
Transfers		  Ending
Balance at
September 30,
2017		  Unrealized
Gains
(Losses) at
September 30,
2017		 

Assets at Fair Value

        

Trading assets:

        

Other sovereign government obligations

 $100  $2  $86  $(82)  $—  $(2)  $104  $1 

Corporate and other debt:

        

State and municipal securities

  9   —   4   (3)   —   —   10   — 

MABS

  264   4   52   (54)   —   8   274   1 

Corporate bonds

  449   29   120   (144)   —   (35)   419   27 

CDO

  58   7   20   (15)   (4)   10   76   6 

Loans and lending commitments

  4,864   25   1,772   (1,431)   (236)   (129)   4,865   17 

Other debt

  186   5   80   (82)   —   4   193   1 

Total corporate and other debt

  5,830   70   2,048   (1,729)   (240)   (142)   5,837   52 

Corporate equities

  500   (9)   24   (268)   —   49   296   — 

Net derivative and other contracts3:

        

Interest rate

  970   105   13   (29)   33   (16)   1,076   92 

Credit

  (305)   (33)   7   (9)   35   2   (303)   (33) 

Foreign exchange

  2   (59)   9   —   17   (47)   (78)   (50) 

Equity

  1,093   114   60   (77)   79   (38)   1,231   110 

Commodity and other

  1,509   158   1   (1)   (112)   (21)   1,534   45 

Total net derivative and other contracts

  3,269   285   90   (116)   52   (120)   3,460   164 

Investments

  946   (4)   13   (17)   (16)   3   925   (5) 

Liabilities at Fair Value

        

Deposits

 $79  $(1)  $—  $32  $—  $(6)  $106  $(1) 

Trading liabilities:

        

Corporate and other debt:

        

Corporate bonds

  13   (2)   (18)   9   —   —   6   (1) 

Other debt

  2   —   —   —   —   —   2   — 

Total corporate and other debt

  15   (2)   (18)   9   —   —   8   (1) 

Corporate equities

  28   1   (10)   24   —   10   51   2 

Securities sold under agreements to repurchase

  148   (1)   —   —   —   —   149   (1) 

Other secured financings

  244   (5)   —   2   (1)   —   250   (5) 

Long-term borrowings

  2,646   (53)   —   679   (49)   (726)   2,603   (47) 

1.

Loan originations and consolidations of VIEs are included in purchases and deconsolidations of VIEs are included in settlements.

2.

Amounts related to entering into Net derivatives and other contracts, Deposits, Short-term borrowings, Other secured financings and Long-term borrowings primarily represent issuances. Amounts for other line items primarily represent sales.

3.

Net derivative and other contracts represent Trading assets—Derivative and other contracts, net of Trading liabilities—Derivative and other contracts.

53September 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Rollforward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Prior Year Quarter

$ in millions Beginning
Balance at
June 30, 2016		  Realized
and
Unrealized
Gains
(Losses)		  Purchases1  Sales and
Issuances2		  Settlements1  Net
Transfers		  Ending
Balance at
September 30,
2016		  

Unrealized
Gains

(Losses) at
September 30,
2016

 

Assets at Fair Value

        

Trading assets:

        

U.S. Treasury and agency securities

 $20  $—  $—  $(18)  $—  $6  $8  $— 

Other sovereign government obligations

  2   —   6   (1)   —   5   12   — 

Corporate and other debt:

        

State and municipal securities

  10   1   —   (7)   —   —   4   — 

MABS

  355   (7)   74   (156)   —   (2)   264   (15) 

Corporate bonds

  276   (55)   20   (23)   —   (19)   199   (55) 

CDO

  109   6   9   (38)   —   (1)   85   10 

Loans and lending commitments

  5,418   (12)   501   (206)   (733)   (813)   4,155   (12) 

Other debt

  528   —   191   (212)   —   (261)   246   — 

Total corporate and other debt

  6,696   (67)   795   (642)   (733)   (1,096)   4,953   (72) 

Corporate equities

  572   (28)   43   (36)   —   (214)   337   (26) 

Net derivative and other contracts3:

        

Interest rate

  (235)   (60)   3   (15)   11   337   41   (45) 

Credit

  (1,114)   147   —   —   2   82   (883)   147 

Foreign exchange

  (1)   (27)   —   —   (42)   (37)   (107)   (27) 

Equity

  (1,473)   220   31   (39)   567   834   140   239 

Commodity and other

  1,287   269   —   (14)   (170)   (78)   1,294   104 

Total net derivative and other contracts

  (1,536)   549   34   (68)   368   1,138   485   418 

Investments

  974   (41)   2   (8)   (27)   36   936   (36) 

Liabilities at Fair Value

        

Deposits

 $30  $1  $—  $5  $—  $(3)  $31  $1 

Short-term borrowings

  —   —   —   —   —   2   2   — 

Trading liabilities:

        

Corporate and other debt:

        

Corporate bonds

  6   (1)   (3)   2   —   7   13   (1) 

Other debt

  3   —   —   —   —   —   3   — 

Total corporate and other debt

  9   (1)   (3)   2   —   7   16   (1) 

Corporate equities

  26   2   (2)   3   —   (5)   20   — 

Securities sold under agreements to repurchase

  150   1   —   —   —   —   149   2 

Other secured financings

  441   (11)   —   —   (2)   —   450   (11) 

Long-term borrowings

  1,929   (88)   —   193   (147)   (21)   2,042   (87) 

1.

Loan originations and consolidations of VIEs are included in purchases and deconsolidations of VIEs are included in settlements.

2.

Amounts related to entering into Net derivatives and other contracts, Deposits, Short-term borrowings, Other secured financings and Long-term borrowings primarily represent issuances. Amounts for other line items primarily represent sales.

3.

Net derivative and other contracts represent Trading assets—Derivative and other contracts, net of Trading liabilities—Derivative and other contracts.

September 2017 Form 10-Q54

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Rollforward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Current Year Period

$ in millions Beginning
Balance at
December 31,
2016		  Realized
and
Unrealized
Gains
(Losses)		  Purchases1  Sales and
Issuances2		  Settlements1  Net
Transfers		  Ending
Balance at
September 30,
2017		  Unrealized
Gains
(Losses) at
September 30,
2017		 

Assets at Fair Value

        

Trading assets:

        

U.S. Treasury and agency securities

 $74  $(1)  $—  $(240)  $—  $167  $—  $— 

Other sovereign government obligations

  6   —   104   (5)   —   (1)   104   — 

Corporate and other debt:

        

State and municipal securities

  250   3   6   (81)   —   (168)   10   — 

MABS

  217   49   120   (120)   (16)   24   274   13 

Corporate bonds

  232   30   310   (205)   —   52   419   (6) 

CDO

  63   6   33   (18)   (7)   (1)   76   3 

Loans and lending commitments

  5,122   88   2,470   (1,927)   (964)   76   4,865   85 

Other debt

  180   31   94   (160)   —   48   193   6 

Total corporate and other debt

  6,064   207   3,033   (2,511)   (987)   31   5,837   101 

Corporate equities

  446   8   74   (604)   —   372   296   3 

Net derivative and other contracts3:

        

Interest rate

  420   137   36   (42)   658   (133)   1,076   146 

Credit

  (373)   (18)   6   (9)   96   (5)   (303)   (34) 

Foreign exchange

  (43)   (92)   9   —   48   —   (78)   (72) 

Equity

  184   168   816   (231)   209   85   1,231   277 

Commodity and other

  1,600   523   13   (21)   (431)   (150)   1,534   88 

Total net derivative and other contracts

  1,788   718   880   (303)   580   (203)   3,460   405 

Investments

  958   16   96   (44)   (78)   (23)   925   10 

Liabilities at Fair Value

        

Deposits

 $42  $(2)  $—  $62  $—  $—  $106  $(2) 

Short-term borrowings

  2   —   —   —   (2)   —   —   — 

Trading liabilities:

        

Corporate and other debt:

        

Corporate bonds

  34   (1)   (54)   98   —   (73)   6   — 

Other debt

  2   —   (1)   1   —   —   2   — 

Total corporate and other debt

  36   (1)   (55)   99   —   (73)   8   — 

Corporate equities

  35   —   (69)   27   —   58   51   (1) 

Securities sold under agreements to repurchase

  149   —   —   —   —   —   149   1 

Other secured financings

  434   (28)   —   54   (223)   (43)   250   (21) 

Long-term borrowings

  2,012   (142)   —   1,418   (326)   (643)   2,603   (136) 

1.

Loan originations and consolidations of VIEs are included in purchases and deconsolidations of VIEs are included in settlements.

2.

Amounts related to entering into Net derivatives and other contracts, Deposits, Short-term borrowings, Other secured financings and Long-term borrowings primarily represent issuances. Amounts for other line items primarily represent sales.

3.

Net derivative and other contracts represent Trading assets—Derivative and other contracts, net of Trading liabilities—Derivative and other contracts.

55September 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Rollforward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Prior Year Period

$ in millions  

Beginning

Balance at
December 31,
2015

  Realized
and
Unrealized
Gains
(Losses)		  Purchases1  Sales and
Issuances2		  Settlements1  Net
Transfers		  Ending
Balance at
September 30,
2016		  Unrealized
Gains
(Losses) at
September 30,
2016		 

Assets at Fair Value

         

Trading assets:

         

U.S. Treasury and agency securities

  $—  $—  $3  $(37)  $—  $42  $8  $—  

Other sovereign government obligations

   4   —   10   (6)   —   4   12   —  

Corporate and other debt:

         

State and municipal securities

   19   —   —   (16)   —   1   4   —  

MABS

   438   (35)   88   (314)   —   87   264   (31) 

Corporate bonds

   267   (4)   146   (276)   —   66   199   (17) 

CDO

   430   9   13   (295)   —   (72)   85   16  

Loans and lending commitments

   5,936   (65)   921   (860)   (986)   (791)   4,155   (51) 

Other debt

   448   1   92   (35)   —   (260)   246   65  

Total corporate and other debt

   7,538   (94)   1,260   (1,796)   (986)   (969)   4,953   (18) 

Corporate equities

   434   (57)   62   (324)   —   222   337   (80) 

Net derivative and other contracts3:

         

Interest rate

   260   257   3   (15)   (59)   (405)   41   (156) 

Credit

   (844)   (255)   1   —   155   60   (883)   (277) 

Foreign exchange

   141   (104)   —   —   (224)   80   (107)   (102) 

Equity

   (2,031)   334   816   (168)   1,083   106   140   172  

Commodity and other

   1,050   377   33   (20)   (312)   166   1,294   162  

Total net derivative and other contracts

   (1,424)   609   853   (203)   643   7   485   (201) 

Investments

   707   (60)   374   (37)   (67)   19   936   (63) 

Intangible assets

   5   —   —   —   —   (5)   —   —  

Liabilities at Fair Value

         

Deposits

  $19  $(1)  $—  $15  $—  $(4)  $31  $(1) 

Short-term borrowings

   1   —   —   —   (1)   2   2   —  

Trading liabilities:

         

Corporate and other debt:

         

Corporate bonds

   —   (3)   (7)   32   —   (15)   13   (3) 

Other debt

   4   —   (1)   —   —   —   3   —  

Total corporate and other debt

   4   (3)   (8)   32   —   (15)   16   (3) 

Corporate equities

   18   4   (37)   14   —   29   20   32  

Securities sold under agreements to repurchase

   151   2   —   —   —   —   149   3  

Other secured financings

   461   (42)   —   69   (44)   (78)   450   (42) 

Long-term borrowings

   1,987   (103)   —   366   (262)   (152)   2,042   91  

1.

Loan originations and consolidations of VIEs are included in purchases and deconsolidations of VIEs are included in settlements.

2.

Amounts related to entering into Net derivatives and other contracts, Deposits, Short-term borrowings, Other secured financings and Long-term borrowings primarily represent issuances. Amounts for other line items primarily represent sales.

3.

Net derivative and other contracts represent Trading assets—Derivative and other contracts, net of Trading liabilities—Derivative and other contracts.

Significant Unobservable Inputs Used in Recurring and Nonrecurring Level 3 Fair Value Measurements

Valuation Techniques and Unobservable Inputs

 
Balance / Range (Average)1
$ in millions, except inputsAt September 30, 2020At December 31, 2019
Assets Measured at Fair Value on a Recurring Basis
U.S. Treasury and agency securities$122
$22
Comparable pricing:  
Bond price102 to 108 points (104 points)
N/M
MABS$443
$438
Comparable pricing: 
Bond price0 to 80 points (47 points)
0 to 96 points (47 points)
Loans and lending commitments$4,351
$5,073
Margin loan model:  
Discount rateN/A
1% to 9% (2%)
Volatility skewN/A
15% to 80% (28%)
Credit SpreadN/A
9 to 39 bps (19 bps)
Margin loan rate1% to 5% (3%)
N/A
Comparable pricing: 
Loan price70 to 103 points (96 points)
69 to 100 points (93 points)
Corporate and other debt$2,727
$1,396
Comparable pricing: 
Bond price10 to 103 points (94 points)
11 to 108 points (84 points)
Discounted cash flow: 
Recovery rate51% to 62% (53% / 51%)
35%
Option model:  
At the money volatility21%21%
Corporate equities$135
$97
Comparable pricing: 
Equity price100%100%
Investments$821
$858
Discounted cash flow: 
WACC10% to 21% (15%)
8% to 17% (15%)
Exit multiple7 to 17 times (11 times)
7 to 16 times (11 times)
Market approach:  
EBITDA multiple8 to 29 times (11 times)
7 to 24 times (11 times)
Comparable pricing: 
Equity price50% to 100% (98%)
75% to 100% (99%)
Net derivative and other contracts: 
Interest rate$636
$777
Option model:  
IR volatility skew0% to 162% (62% / 75%)
24% to 156% (63% / 59%)
IR curve correlation59% to 97% (87% / 92%)
47% to 90% (72% / 72%)
Bond volatility4% to 32% (13% / 8%)
4% to 15% (13% / 14%)
Inflation volatility25% to 64% (44% / 42%)
24% to 63% (44% / 41%)
IR curve1%1%
  
   
   
   
   

September 2020 Form 10-Q58
Table of Contents
Notes to Consolidated Financial Statements
(Unaudited)
mslogo3q20.jpg

 
Balance / Range (Average)1
$ in millions, except inputsAt September 30, 2020At December 31, 2019
Credit$116
$124
Credit default swap model: 
Cash-synthetic basis6 points
6 points
Bond price0 to 95 points (52 points)
0 to 104 points (45 points)
Credit spread20 to 435 bps (79 bps)
9 to 469 bps (81 bps)
Funding spread71 to 138 bps (116 bps)
47 to 117 bps (84 bps)
Correlation model:  
Credit correlation29% to 56% (35%)
29% to 62% (36%)
Foreign exchange2
$99
$(31)
Option model:  
IR - FX correlation13% to 59% (37% / 37%)
32% to 56% (46% / 46%)
IR volatility skew0% to 162% (62% / 75%)
24% to 156% (63% / 59%)
IR curve8% to 9% (8% / 8%)
10% to 11% (10% / 10%)
Foreign exchange volatility skew-7% to -5% (-6% / -6%)
N/A
Contingency probability95% (95%)
85% to 95% (94% / 95%)
Equity2
$(2,145)$(1,684)
Option model:  
At the money volatility16% to 92% (42%)
9% to 90% (36%)
Volatility skew-2% to 0% (-1%)
-2% to 0% (-1%)
Equity correlation5% to 96% (70%)
5% to 98% (70%)
FX correlation-60% to 60% (-17%)
-79% to 60% (-37%)
IR correlation-7% to 44% (20% / 18%)
-11% to 44% (18% / 16%)
Commodity and other$1,804
$1,612
Option model:  
Forward power price$-1 to $116 ($28) per MWh
$3 to $182 ($28) per MWh
Commodity volatility8% to 95% (19%)
7% to 183% (18%)
Cross-commodity correlation43% to 99% (92%)
43% to 99% (93%)
Liabilities Measured at Fair Value on a Recurring Basis
Deposits$105
$179
Option Model:  
Equity at the money volatility7% to 23% (7%)
16% to 37% (20%)
Corporate equities$57
$36
Comparable pricing:

Equity price100% (100%)
N/M
Securities sold under agreements to repurchase$448
$0
Discounted cash flow:
Funding spread105 to 130 bps (114 bps)
N/A
Other secured financings$309
$109
Discounted cash flow: 
Funding spread110 bps (110 bps)
111 to 124 bps (117 bps)
Comparable pricing: 
Loan price25 to 101 points (68 points)
N/A
   
   
   
 
Balance / Range (Average)1
$ in millions, except inputsAt September 30, 2020At December 31, 2019
Borrowings$4,081
$4,088
Option model:  
At the money volatility6% to 70% (23%)
5% to 44% (21%)
Volatility skew-2% to 0% (0%)
-2% to 0% (0%)
Equity correlation37% to 98% (81%)
38% to 94% (78%)
Equity - FX correlation-72% to 13% (-28%)
-75% to 26% (-25%)
IR - FX Correlation-28% to 6% (-6% / -6%)
-26% to 10% (-7% / -7%)
Nonrecurring Fair Value Measurement
Loans$2,088
$1,500
Corporate loan model: 
Credit spread52 bps to 668 bps (380 bps)
69 to 446 bps (225 bps)
Warehouse model:  
Credit spread191 bps to 580 bps (379 bps)
287 to 318 bps (297 bps)
Points—Percentage of par
IR—Interest rate
FX—Foreign exchange
1.
A single amount is disclosed for range and average when there is no significant difference between the minimum, maximum and average. Amounts represent weighted averages except where simple averages and the median of the inputs are more relevant.
2.
Includes derivative contracts with multiple risks (i.e., hybrid products).
The following disclosuresprevious tables provide information on the valuation techniques, significant unobservable inputs, and theirthe ranges and averages for each major category of assets and liabilities measured at fair value on a recurring and nonrecurring basis with a significant Level 3 balance. The level of aggregation and breadth of products cause the range of inputs to be wide and not evenly distributed across the inventory.inventory of financial instruments. 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. For

qualitative information on the sensitivity of the fair value measurements to changes in the significant unobservable inputs, see Note 3 to the consolidated financial statements in the 2016 Form10-K. ThereGenerally, there are no predictable relationships between multiple significant unobservable inputs attributable to a given valuation technique. A single amount is disclosed when

Other than as follows, during the current year period, there iswere no significant difference betweenrevisions made to the minimum, maximum and average (weighted average descriptions of the Firm’s significant unobservable inputs. For margin loans, the margin loan rate is the annualized rate that reflects the possibility of losses as a result of movements in the price of the underlying margin loan collateral. The rate is calibrated from the previously disclosed discount rate, credit spread and/or simple average / median).

September 2017 Form 10-Q56

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

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

   

Predominant Valuation Techniques/

Significant Unobservable Inputs

  Range (Weighted Average or Simple Average/Median)1
$ in millions            At September 30, 2017                  At December 31, 2016        

Recurring Fair Value Measurement

    

Assets at Fair Value

    

U.S. Treasury and agency securities($— and $74)

    

Comparable pricing:

  Comparable bond price  N/A  96 to 105 points (102 points)

Other sovereign government obligations ($104 and $6)

    

Comparable pricing:

  Comparable bond price  86 to 97 points (88 points)  N/M 

State and municipal securities ($10 and $250)

    

Comparable pricing:

  Comparable bond price  N/M  53 to 100 points (91 points) 

MABS ($274 and $217)

    

Comparable pricing:

  Comparable bond price  0 to 100 points (33 points)  0 to 86 points (27 points) 

Corporate bonds ($419 and $232)

    

Comparable pricing:

  Comparable bond price  3 to 132 points (60 points)  3 to 130 points (70 points) 

Discounted cash flow:

  Recovery rate  5% to 33% (25%)  N/A 

Option model:

  At the money volatility  16% to 35% (25%)  23% to 33% (30%) 

CDO ($76 and $63)

    

Comparable pricing:

  Comparable bond price  15 to 101 points (66 points)  0 to 103 points (50 points) 

Correlation model:

  Credit correlation  43% to 54% (51%)  N/M 

Loans and lending commitments ($4,865and $5,122)

    

Corporate loan model:

  Credit spread  N/M  402 to 672 bps (557 bps) 

Expected recovery:

  Asset coverage  37% to 100% (83%)  43% to 100% (83%) 

Margin loan model:

  Discount rate  1% to 3% (1%)  2% to 8% (3%) 
   Volatility skew  8% to 43% (19%)  21% to 63% (33%) 

Comparable pricing:

  Comparable loan price  46 to 102 points (92 points)  45 to 100 points (84 points) 

Discounted cash flow:

  Implied weighted average cost of capital  N/M  5% 
   Capitalization rate  N/M  4% to 10% (4%) 

Other debt ($193 and $180)

    

Option model:

  At the money volatility  17% to 52% (47%)  16% to 52% (52%) 

Discounted cash flow:

  Discount rate  7% to 18% (9%)  7% to 12% (11%) 

Comparable pricing:

  Comparable loan price  1 to 5 points (2 points)  1 to 74 points (23 points) 

Corporate equities ($296 and $446)

    

Comparable pricing:

  Comparable equity price  100%  100% 

Net derivative and other contracts2:

    

Interest rate ($1,076 and $420)

    

Option model:

  Interest rate — Foreign exchange correlation  N/M  28% to 58% (44% / 43%) 
   Interest rate volatility skew  29% to 106% (44% / 44%)  19% to 117% (55% / 56%) 
   Interest rate quanto correlation  N/M  -17% to 31% (1% /-5%) 
   Interest rate curve correlation  30% to 96% (75% / 78%)  28% to 96% (68% / 72%) 
   Inflation volatility  24% to 64% (45% / 43%)  23% to 55% (40% / 39%) 
   Interest rate curve  1% to 2% (1% / 1%)  N/M 

Credit ($(303)and $(373))

    

Comparable pricing:

  Cash synthetic basis  14 to 15 points (14 points)  5 to 12 points (11 points) 
   Comparable bond price  0 to 70 points (25 points)  0 to 70 points (23 points) 

Correlation model:

  Credit correlation  29% to 99% (51%)  32% to 70% (45%) 

Foreign exchange3 ($(78)and $(43))

    

Option model:

  Interest rate — Foreign exchange correlation  27% to 59% (44% / 44%)  28% to 58% (44% / 43%) 
   Interest rate volatility skew  N/M  34% to 117% (55% / 56%) 
   Contingency probability  95%  N/M 
   Interest rate quanto correlation  N/M  -17% to 31% (1% /-5%) 

57September 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

   

Predominant Valuation Techniques/

Significant Unobservable Inputs

  Range (Weighted Average or Simple Average/Median)1
$ in millions            At September 30, 2017                  At December 31, 2016        

Equity3 ($1,231and $184)

    

Option model:

  At the money volatility  5% to 55% (36%)  7% to 66% (33%) 
   Volatility skew  -3% to 0%(-1%)  -4% to 0%(-1%) 
   Equity — Equity correlation  5% to 99% (73%)  25% to 99% (73%) 
   Equity — Foreign exchange correlation  -70% to 30%(-28%)  -63% to 30%(-43%) 
   Equity — Interest rate correlation  -7% to 52% (17% / 21%)  -8% to 52% (12% / 4%) 

Commodity and other ($1,534and $1,600)

    

Option model:

  Forward power price  $6 to $84 ($30) per MWh  $7 to $90 ($32) per MWh 
   Commodity volatility  5% to 56% (16%)  6% to 130% (18%) 
   Cross-commodity correlation  5% to 99% (92%)  5% to 99% (92%) 

Investments ($925 and $958)

    

Discounted cash flow:

  Implied weighted average cost of capital  N/M  10% 
   Exit multiple  N/M  10 to 24 times (11 times) 

Market approach:

  EBITDA multiple  6 to 24 times (12 times)  6 to 24 times (12 times) 

Comparable pricing:

  Comparable equity price  45% to 100% (90%)  75% to 100% (93%) 

Liabilities at Fair Value

    

Deposits ($106and $42)

    

Option model:

  At the money volatility  15% to 37% (32%)  N/M 
   Volatility skew  -1% to 0%(-1%)  N/M 

Securities sold under agreements to repurchase ($149and $149)

    

Discounted cash flow:

  Funding spread  145 to 154 bps (151 bps)  118 to 127 bps (121 bps) 

Other secured financings ($250 and $434)

    

Discounted cash flow:

  Funding spread  38 to 81 bps (60 bps)  63 to 92 bps (78 bps) 

Option model:

  Volatility skew  -1%  -1% 
   At the money volatility  10% to 40% (25%)  N/M 

Comparable pricing:

  Comparable bond price  14 to 58 points (30 points)  N/M 

Discounted cash flow:

  Discount rate  N/M  4% 

Long-term borrowings ($2,603and $2,012)

    

Option model:

  At the money volatility  5% to 35% (21%)  7% to 42% (30%) 
   Volatility skew  -3% to 0%(-1%)  -2% to 0%(-1%) 
   Equity — Equity correlation  36% to 98% (88%)  35% to 99% (84%) 
   Equity — Foreign exchange correlation  -51% to 10%(-32%)  -63% to 13%(-40%) 

Option model:

  Interest rate volatility skew  

29% to 106% (44% / 44%)

  25% 
   Equity volatility discount  8% to 11% (9% / 8%)  7% to 11% (10% / 10%) 
   Interest rate — Foreign exchange correlation  21% to 22% (23% / 22%)  N/M 

Comparable pricing:

  Comparable equity price  100%  N/M 

Nonrecurring Fair Value Measurement

    

Assets at Fair Value

    

Loans ($1,448and $2,443)

    

Corporate loan model:

  Credit spread  86 to 563 bps (229 bps)  90 to 487 bps (208 bps) 

Expected recovery:

  Asset coverage  73% to 95% (84%)  73% to 99% (97%) 

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

Points—Percentage of par

MWh—Megawatt hours

EBITDA—Earnings before interest, taxes, depreciation and amortization

N/A—Not Applicable

N/M—Not Meaningful

1.

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

2.

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

3.

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

September 2017 Form 10-Q58

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

volatility measures. For a description of the Firm’s significant unobservable inputs and related sensitivity,qualitative information about the effect of hypothetical changes in the values of those inputs, see Note 3 to the consolidated financial statements in the 20162019 Form10-K. The following significant unobservable inputs were added during the current year period.



•
59September 2020 Form 10-Q
Table of Contents
 

Contingency probability—probability associated with the realization of an underlying event upon which the value of an asset is contingent. In general, an increase (decrease)

Notes to the contingency probability for an asset would result in a higher (lower) fair value.

Consolidated Financial Statements
(Unaudited)
mslogo3q20.jpg


Net Asset Value Measurements
Fund Interests
 At September 30, 2020At December 31, 2019
$ in millions
Carrying
Value
Commitment
Carrying
Value
Commitment
Private equity$2,400
$614
$2,078
$450
Real estate1,383
140
1,349
150
Hedge1
62
0
94
4
Total$3,845
$754
$3,521
$604
•

Recovery rate—amount expressed as a percentage of par that is expected to be received when a credit event occurs. In general, an increase (decrease) to the recovery rate for an asset would result in a higher (lower) fair value.

Fair Value of Investments Measured at NAV

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 2016 Form10-K.

Investments in Certain Funds Measured at NAV per Share

   At September 30, 2017  At December 31, 2016 
$ in millions  Fair Value  Commitment  Fair Value  Commitment   

Private equity

 $1,580  $359  $1,566  $335   

Real estate

  885   168   1,103   136   

Hedge1

  87   4   147   4   

Total

 $2,552  $531  $2,816  $475   

1.

Investments in hedge funds may be subject to initial periodlock-up or gate provisions, which restrict an investor from withdrawing from the fund during a certain initial period or restrict the redemption amount on any redemption date, respectively.

Amounts in the previous table represent the Firm’s carrying value of general and limited partnership interests in fund investments, as well as any related performance-based fees in the form of carried interest. The carrying amounts are measured based on the NAV of the fund taking into account the distribution terms applicable to the interest held. This same measurement applies whether the fund investments are accounted for under the equity method or fair value.
For a description of the Firm’s investments in private equity funds, real estate funds and hedge funds, which are measured based on NAV, see Note 3 to the financial statements in the 2019 Form 10-K.
See Note 14 for information regarding general partner guarantees, which include potential obligations to return performance fee distributions previously received. See Note 20 for information regarding unrealized carried interest at risk of reversal. 
Nonredeemable Funds by Contractual Maturity

  Fair Value at September 30, 2017 
$ in millions     Private Equity           Real Estate     

Less than 5 years

 $408   $77 

5-10 years

  1,005    490 

Over 10 years

  167    318 

Total

 $1,580   $885 

 Carrying Value at September 30, 2020
$ in millionsPrivate EquityReal Estate
Less than 5 years$1,551
$415
5-10 years765
374
Over 10 years84
594
Total$2,400
$1,383

Nonrecurring Fair Value Measurements    
Carrying and Fair Values
 At September 30, 2020
 Fair Value
$ in millionsLevel 2
Level 31
Total
Assets   
Loans$4,827
$2,088
$6,915
Other assets—Other investments0
18
18
Total$4,827
$2,106
$6,933
Liabilities   
Other liabilities and accrued expenses—Lending commitments$221
$69
$290
Total$221
$69
$290
 At December 31, 2019
 Fair Value
$ in millionsLevel 2
Level 31
Total
Assets   
Loans$1,543
$1,500
$3,043
Other assets—Other investments0
113
113
Total$1,543
$1,613
$3,156
Liabilities   
Other liabilities and accrued expenses—Lending commitments$132
$69
$201
Total$132
$69
$201
1.
For significant Level 3 balances, refer to “Significant Unobservable Inputs Used in Recurring and Nonrecurring Level 3 Fair Value Measurements” section herein for details of the significant unobservable inputs used for nonrecurring fair value measurement.
Gains (Losses) from Fair Value Remeasurements1
 Three Months Ended
September 30,		Nine Months Ended
September 30,
$ in millions2020201920202019
Assets    
Loans2
$(43)$(27)$(467)$(12)
Intangibles(1)0
(1)0
Other assets—Other investments3
(2)(3)(54)(8)
Other assets—Premises, equipment and software4
(29)(4)(35)(8)
Total$(75)$(34)$(557)$(28)
Liabilities  

Other liabilities and accrued expenses—Lending commitments2
$25
$(19)$(54)$82
Total$25
$(19)$(54)$82
1.
Gains and losses for Loans and Other assets—Other investments are classified in Other revenues. For other items, gains and losses are recorded in Other revenues if the item is held for sale; otherwise, they are recorded in Other expenses.
2.
Nonrecurring changes in the fair value of loans and lending commitments were calculated as follows: for the held-for-investment category, based on the value of the underlying collateral; and for the held-for-sale category, based on recently executed transactions, market price quotations, valuation models that incorporate market observable inputs where possible, such as comparable loan or debt prices and CDS spread levels adjusted for any basis difference between cash and derivative instruments, or default recovery analysis where such transactions and quotations are unobservable.
3.Losses related to Other assets—Other investments were determined using techniques that included discounted cash flow models, methodologies that incorporate multiples of certain comparable companies and recently executed transactions.
4.
Losses related to Other assets—Premises, equipment and software generally include impairments as well as write-offs related to the disposal of certain assets.

September 2020 Form 10-Q60
Table of Contents
Notes to Consolidated Financial Statements
(Unaudited)
mslogo3q20.jpg

Financial Instruments Not Measured at Fair Value
 At September 30, 2020
 
Carrying
Value
Fair Value
$ in millionsLevel 1Level 2Level 3Total
Financial assets    
Cash and cash equivalents$94,772
$94,772
$0
$0
$94,772
Investment securities—HTM46,169
30,893
17,200
861
48,954
Securities purchased under agreements to resell88,268
0
86,756
1,538
88,294
Securities borrowed100,803
0
100,804
0
100,804
Customer and other receivables1
68,541
0
65,624
2,903
68,527
Loans2
146,237
0
25,942
121,217
147,159
Other assets466
0
466
0
466
Financial liabilities   
Deposits$235,574
$0
$235,924
$0
$235,924
Securities sold under agreements to repurchase40,210
0
39,876
375
40,251
Securities loaned7,924
0
7,921
0
7,921
Other secured financings3,672
0
3,672
0
3,672
Customer and other payables1
189,754
0
189,754
0
189,754
Borrowings134,300
0
138,925
5
138,930
 Commitment
Amount		    
Lending commitments3
$118,966
$0
$965
$406
$1,371

 At December 31, 2019
 
Carrying
Value
Fair Value
$ in millionsLevel 1Level 2Level 3Total
Financial assets    
Cash and cash equivalents$82,171
$82,171
$0
$0
$82,171
Investment securities—HTM43,502
30,661
12,683
789
44,133
Securities purchased under agreements to resell88,220
0
86,794
1,442
88,236
Securities borrowed106,549
0
106,551
0
106,551
Customer and other receivables1
51,134
0
48,215
2,872
51,087
Loans2
130,637
0
22,293
108,059
130,352
Other assets495
0
495
0
495
Financial liabilities   
Deposits$188,257
$0
$188,639
$0
$188,639
Securities sold under agreements to repurchase53,467
0
53,486
0
53,486
Securities loaned8,506
0
8,506
0
8,506
Other secured financings6,889
0
6,800
92
6,892
Customer and other payables1
195,035
0
195,035
0
195,035
Borrowings128,166
0
133,563
10
133,573
 Commitment
Amount		    
Lending commitments3
$119,004
$0
$748
$338
$1,086
1.Accrued interest and dividend receivables and payables have been excluded. Carrying value approximates fair value for these receivables and payables.
2.
Amounts include loans measured at fair value on a nonrecurring basis.
3.Represents Lending commitments accounted for as Held for Investment and Held for Sale. For a further discussion on lending commitments, see Note 14.
The previous tables exclude certain financial instruments such as equity method investments and all non-financial assets and liabilities such as the value of the long-term relationships with the Firm’s deposit customers.


61September 2020 Form 10-Q
Table of Contents
Notes to Consolidated Financial Statements
(Unaudited)
mslogo3q20.jpg

6. Fair Value Option

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

Earnings Impact of InstrumentsBorrowings Measured at Fair Value on a Recurring Basis

$ in millionsAt
September 30,
2020		At
December 31,
2019
Business Unit Responsible for Risk Management
Equity$31,673
$30,214
Interest rates28,986
27,298
Commodities5,097
4,501
Credit1,257
1,246
Foreign exchange2,131
1,202
Total$69,144
$64,461

Net Revenues from Borrowings under the Fair Value Option

$ in millions

 

Trading

Revenues

  

Interest

Income

(Expense)

  Net
Revenues		 

Three Months Ended September 30, 2017

 

  

Securities purchased under
agreements to resell

 $(1)  $1  $ —  

Deposits

  (1)   —   (1) 

Short-term borrowings

  (7)   —   (7) 

Securities sold under agreements
to repurchase

  6   (5)   1  

Long-term borrowings

  (957)   (107)   (1,064) 

Three Months Ended September 30, 2016

 

  

Securities purchased under
agreements to resell

 $(1)  $2  $1  

Deposits

  2   —   2  

Short-term borrowings

  (39)   —   (39) 

Securities sold under agreements
to repurchase

  7   (4)   3  

Long-term borrowings

  (1,068)   (116)   (1,184) 

Nine Months Ended September 30, 2017

 

  

Securities purchased under
agreements to resell

 $(2)  $3  $1 

Deposits

  (2)   —   (2) 

Short-term borrowings

  (16)   (1)   (17) 

Securities sold under agreements to repurchase

  5   (13)   (8) 

Long-term borrowings

  (3,468)   (337)   (3,805) 

Nine Months Ended September 30, 2016

 

  

Securities purchased under
agreements to resell

 $(2)  $6  $4  

Deposits

  (1)   (1)   (2) 

Short-term borrowings

  (3)   —   (3) 

Securities sold under agreements to repurchase

  (5)   (9)   (14) 

Long-term borrowings

  (3,322)   (385)   (3,707) 

 Three Months Ended
September 30,		Nine Months Ended
September 30,
$ in millions2020201920202019
Trading revenues$(1,455)$(795)$(1,447)$(5,888)
Interest expense77
93
241
280
Net revenues1
$(1,532)$(888)$(1,688)$(6,168)
1.Amounts do not reflect any gains or losses from related economic hedges.
Gains (losses) from changes in fair value are recorded in Trading revenues and are mainly attributable to changes in foreign currency rates or interest rates or movements in the reference price or index, for short-term and long-term borrowings before the impact of related hedges.

The amounts in the previous table are included within Net revenues and do not reflect any gainsinterest rates or losses on related hedging instruments. In addition to the amounts in the previous table, as discussed in Note 2 to the consolidated financial statements in the 2016 Form10-K, instruments within Trading assets or Trading liabilities are measured at fair value.

foreign exchange rates.
 

Gains (Losses) Due to Changes in Instrument-Specific Credit Risk
 Three Months Ended September 30,
 20202019
$ in millions
Trading
Revenues
OCI
Trading
Revenues
OCI
Loans and other debt1
$56
$0
$(3)$0
Lending commitments(3)0
0
0
Deposits0
(19)0
1
Borrowings(8)(720)(2)442
 Nine Months Ended September 30,
 20202019
$ in millions
Trading
Revenues
OCI
Trading
Revenues
OCI
Loans and other debt1
$(183)$0
$148
$0
Lending commitments(2)0
(2)0
Deposits0
(10)0
(2)
Borrowings(14)991
(9)(702)
$ in millionsAt
September 30,
2020		At
December 31,
2019
Cumulative pre-tax DVA gain (loss) recognized in AOCI$(1,017)$(1,998)
59September 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Gains (Losses) Due to Changes in Instrument-Specific Credit Risk 
   Three Months Ended September 30, 
   2017  2016 

$ in millions

  Trading
Revenues		   OCI  Trading
Revenues		  OCI 

Short-term and long-term borrowings1

  $9   $(226)  $(5)  $(140) 

Securities sold under agreements to repurchase1

   —    (3)   —   (3) 

Loans and other debt2

   49    —   26   — 

Lending commitments3

   —    —   —   — 
   Nine Months Ended September 30, 
   2017  2016 

$ in millions

  Trading
Revenues		   OCI  Trading
Revenues		  OCI 

Short-term and long-term borrowings1

  $1   $(493)  $36  $405 

Securities sold under agreements to repurchase1

   —    (6)   —   — 

Loans and other debt2

   94    —   (88)   — 

Lending commitments3

   —    —   3   — 

$ in millions  

At

September 30, 2017

  

At

December 31, 2016

 

Cumulativepre-tax DVA gain

(loss) recognized in AOCI

  $(1,420)  $(921) 

OCI—Other comprehensive income (loss)

1.

Unrealized DVA gains (losses) are recorded in OCI and, when realized, in Trading revenues. See Note 2 to the consolidated financial statements in the 2016 Form10-K and Note 14 for further information.

2.

Loans and other debt instrument-specific credit gains (losses) were determined by excluding thenon-credit components of gains and losses.

Difference Between Contractual Principal and Fair Value1
$ in millionsAt
September 30,
2020		At
December 31,
2019
Loans and other debt2
$13,552
$13,037
Nonaccrual loans2
11,411
10,849
Borrowings3
(2,103)(1,665)
1.
Amounts indicate contractual principal greater than or (less than) fair value.
3.

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

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

$ in millions  

At

September 30,

2017

   

At

December 31,

2016

 

Business Unit Responsible for Risk Management

 

Equity

  $25,300   $21,066  

Interest rates

   19,822    16,051  

Foreign exchange

   782    1,114  

Credit

   753    647  

Commodities

   232    264  

Total

  $46,889   $39,142  

Excess of Contractual Principal Amount Over Fair Value

$ in millions  

At

September 30,

2017

   

At

December 31,

2016

 

Loans and other debt1

  $12,911   $13,495  

Loans 90 or more days past due and/or on nonaccrual status1

   11,116    11,502  

Short-term and long-term borrowings2

   906    720  

1.2.

The majority of the difference between principal and fair value amounts for loans and other debt relates to distressed debt positions purchased at amounts well below par.

2.

Short-term and long-term

3.Excludes borrowings do not include structured notes where the repayment of the initial principal amount fluctuates based on changes in a reference price or index.

Fair Value Loans on Nonaccrual Status

$ in millions  

At

September 30,

2017

   

At

December 31,

2016

 

Nonaccrual loans

  $1,429   $1,536  

Nonaccrual loans 90 or more
days past due

  $760   $787  

The previous tables excludenon-recourse debt from consolidated VIEs, liabilities related to failed salestransfers of financial assets treated as collateralized financings, pledged commodities and other liabilities that have specified assets attributable to them.

Fair Value Loans on Nonaccrual Status
$ in millionsAt
September 30,
2020		At
December 31,
2019
Nonaccrual loans$1,119
$1,100
Nonaccrual loans 90 or more days past due$238
$330



September 20172020 Form 10-Q6062 

Table of Contents
Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Gains (Losses)1

   Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
$ in millions  2017  2016  2017  2016 

Assets

     

Loans2

  $—  $111  $41  $41   

Other Assets—Other
investments3

   (6)   (3)   (6)   (44)  

Other assets—Premises,
equipment and
software costs4

   (1)   (29)   (7)   (56)  

Intangible assets5

   —   (2)   —   (2)  

Total

  $(7)  $77  $28  $(61)  

Liabilities

     

Other liabilities and
accrued expenses—
Lending commitments2

  $4  $52  $64  $98   

Total

  $4  $52  $64  $        98   

1.

Gains and losses for Loans and Other assets—Other investments are classified in Other revenues. For other items, gains and losses are recorded in Other revenues if the item is held for sale, otherwise in Other expenses.

2.

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

3.

Losses related to Other assets—Other investments were determined using techniques that included discounted cash flow models, methodologies that incorporate multiples of certain comparable companies and recently executed transactions.

4.

Losses related to Other assets—Premises, equipment and software costs were determined using techniques that included a default recovery analysis and recently executed transactions.

5.

Losses related to Intangible assets were determined using techniques that included discounted cash flow models and methodologies that incorporate multiples of certain comparable companies.

Carrying and Fair Values

  At September 30, 2017 
     Fair Value by Level 

$ in millions

 Total  Level 2  Level 31 

Assets

   

 

Loans

 

 

$

 

2,713

 

 

 

 

$

 

1,265

 

 

 

 

$

 

1,448

 

 

Other Assets—Other
investments

  42   —   42 

Total assets

 $            2,755  $            1,265  $            1,490 

Liabilities

   

Other liabilities and
accrued expenses—
Lending commitments

 $196  $154  $42 

Total liabilities

 $196  $154  $42 
mslogo3q20.jpg
  At December 31, 2016 
     Fair Value by Level 

$ in millions

 Total  Level 2  Level 31 

Assets

   

 

Loans

 

 

$

 

4,913

 

 

 

 

$

 

2,470

 

 

 

 

$

 

2,443

 

 

Other assets—Other
investments

  123   —   123 

Other assets—Premises,
equipment and
software costs

  25   22   3 

Total assets

 $5,061  $2,492  $2,569 

Liabilities

   

Other liabilities and
accrued expenses—
Lending commitments

 $226  $166  $60 

Total liabilities

 $            226  $            166  $            60 

1.

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

Financial Instruments Not Measured at Fair Value

  At September 30, 2017 
  

Carrying  

Value  

  Fair Value 

$ in millions

  Level 1  Level 2  Level 3  Total 

Financial Assets

                    

Cash and due
from banks

 $24,047  $24,047  $—  $—  $24,047 

Interest bearing
deposits with banks

  24,144   24,144   —   —   24,144 

Investment securities—HTM

  24,132   11,260   12,250   247   23,757 

Securities purchased under agreements to resell

  90,005   —   85,679   4,282   89,961 

Securities borrowed

  132,892   —   132,883   10   132,893 

Customer and other
receivables1

  48,579   —   44,340   4,115   48,455 

Loans2

  104,431   —   19,476   86,223   105,699 

Other assets3

  32,731   32,731   —   —   32,731 

Financial Liabilities

     

Deposits

 $    154,465  $        —  $    154,465  $        —  $    154,465 

Short-term borrowings

  429   —   429   —   429 

Securities sold under agreements to repurchase

  53,173   —   48,505   4,656   53,161 

Securities loaned

  15,630   —   15,240   402   15,642 

Other secured
financings

  7,730   —   6,440   1,297   7,737 

Customer and
other payables1

  195,304   —   195,304   —   195,304 

Long-term
borrowings

  145,446   —   150,625   39   150,664 

61September 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

  At December 31, 2016 
  

Carrying

Value

  Fair Value 

$ in millions

  Level 1  Level 2  Level 3  Total 

Financial Assets

 

Cash and due
from banks

 $22,017  $22,017  $—  $—  $22,017  

Interest bearing
deposits with
banks

  21,364   21,364   —   —   21,364  

Investment securities—
HTM

  16,922   5,557   10,896   —   16,453  

Securities purchased
under agreements
to resell

  101,653   —   97,825   3,830   101,655  

Securities borrowed

  125,236   —   125,093   147   125,240  

Customer and other receivables1

  41,679   —   36,962   4,575   41,537  

Loans2

  94,248   —   20,906     74,121   95,027  

Other assets3

  33,979   33,979   —   —   33,979  

Financial Liabilities

 

Deposits

 $155,800  $—  $155,800  $—  $155,800  

Short-term
borrowings

  535   —   535   —   535  

Securities sold
under agreements
to repurchase

  53,899   —   50,941   2,972   53,913  

Securities loaned

  15,844   —   15,853   —   15,853  

Other secured
financings

  6,077   —   4,792   1,290   6,082  

Customer and
other payables1

  187,497   —   187,497   —   187,497  

Long-term
borrowings

    126,039   —     129,826   51     129,877  

HTM—Held to maturity

1.

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

2.

Amounts include loans measured at fair value on a nonrecurring basis.

3.

Cash deposited with clearing organizations or segregated under federal and other regulations or requirements.

Lending Commitments—Held for Investment and Held for Sale

$ in millions

 

Commitment

amount1

  Fair Value 
  Total  Level 2  Level 3 

September 30, 2017

 $96,939  $    1,084  $        636  $        448 

December 31, 2016

  97,409   1,241   973   268 

1.

For further discussion on lending commitments, see Note 11.

The previous tables exclude certain financial instruments such as equity method investments and allnon-financial assets and liabilities such as the value of the long-term relationships with the Firm’s deposit customers. For further discussion of the contents and valuation techniques of financial instruments not measured at fair value, see Note 3 to the consolidated financial statements in the 2016 Form10-K. During the current year period, there were no significant updates made to the Firm’s valuation techniques for financial instruments not measured at fair value.


September 2017 Form 10-Q62

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

4. 7. Derivative Instruments and Hedging Activities

Derivative

Fair Values

of Derivative Contracts

At September 30, 2017

  Assets 

$ in millions

 Bilateral
OTC		  Cleared
OTC1		  Exchange-
Traded		  Total 

Designated as accounting hedges

 

Interest rate contracts

 $1,380  $1  $—  $1,381 

Foreign exchange contracts

  93   9   —   102 

Total

  1,473   10   —   1,483 

Not designated as accounting hedges

 

Interest rate contracts

  177,955   6,223   241   184,419 

Credit contracts

  6,599   2,305   —   8,904 

Foreign exchange contracts

  53,024   763   93   53,880 

Equity contracts

  26,915   —   22,529   49,444 

Commodity and other contracts

  8,117   —   2,159   10,276 

Total

  272,610   9,291   25,022   306,923 

Total gross derivatives

 $274,083  $9,301  $25,022  $308,406 

Amounts offset

    

Counterparty netting

  (206,283)   (6,917)   (21,470)   (234,670) 

Cash collateral netting

  (40,379)   (1,982)   —   (42,361) 

Total in Trading assets

 $27,421  $402  $3,552  $31,375 

Amounts not offset2

    

Financial instruments collateral

  (12,241)   —   —   (12,241) 

Other cash collateral

  (13)   —   —   (13) 

Net amounts3

 $15,167  $402  $3,552  $19,121 

Not subject to legally enforceable master netting or
collateral agreements3

 

Derivative assets

             $3,848 

  Liabilities 

$ in millions

 Bilateral
OTC		  Cleared
OTC1		  Exchange-
Traded		  Total 

Designated as accounting hedges

 

Interest rate contracts

 $66  $—  $—  $66 

Foreign exchange contracts

  47   21   —   68 

Total

  113   21��  —   134 

Not designated as accounting hedges

 

Interest rate contracts

  161,790   4,419   184   166,393 

Credit contracts

  7,475   2,558   —   10,033 

Foreign exchange contracts

  53,580   675   52   54,307 

Equity contracts

  29,189   —   21,837   51,026 

Commodity and other contracts

  5,596   —   2,089   7,685 

Total

  257,630   7,652   24,162   289,444 

Total gross derivatives

 $257,743  $7,673  $24,162  $289,578 

Amounts offset

    

Counterparty netting

  (206,283)   (6,917)   (21,470)   (234,670) 

Cash collateral netting

  (30,021)   (448)   —   (30,469) 

Total in Trading liabilities

 $21,439  $308  $2,692  $24,439 

Amounts not offset2

    

Financial instruments collateral

  (5,035)   —   (497)   (5,532) 

Other cash collateral

  (10)   (81)   —   (91) 

Net amounts3

 $16,394  $227  $2,195  $18,816 

Not subject to legally enforceable master netting or
collateral agreements3

 

Derivative liabilities

             $3,508 
2020

 Assets
$ in millions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges   
Interest rate$1,109
$4
$0
$1,113
Foreign exchange63
9
0
72
Total1,172
13
0
1,185
Not designated as accounting hedges  
Interest rate232,894
9,261
530
242,685
Credit6,889
3,017
0
9,906
Foreign exchange65,734
1,299
79
67,112
Equity28,255
0
39,231
67,486
Commodity and other13,378
0
5,155
18,533
Total347,150
13,577
44,995
405,722
Total gross derivatives$348,322
$13,590
$44,995
$406,907
Amounts offset    
Counterparty netting(263,488)(11,426)(42,320)(317,234)
Cash collateral netting(52,608)(1,823)0
(54,431)
Total in Trading assets$32,226
$341
$2,675
$35,242
Amounts not offset1
    
Financial instruments collateral(14,117)0
0
(14,117)
Other cash collateral(88)0
0
(88)
Net amounts$18,021
$341
$2,675
$21,037
Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable$2,848

 Liabilities
$ in millions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges   
Interest rate$0
$0
$0
$0
Foreign exchange92
40
0
132
Total92
40
0
132
Not designated as accounting hedges  
Interest rate222,102
7,258
848
230,208
Credit6,638
3,616
0
10,254
Foreign exchange63,885
1,405
38
65,328
Equity38,518
0
41,873
80,391
Commodity and other9,910
0
5,095
15,005
Total341,053
12,279
47,854
401,186
Total gross derivatives$341,145
$12,319
$47,854
$401,318
Amounts offset    
Counterparty netting(263,488)(11,426)(42,320)(317,234)
Cash collateral netting(46,148)(772)0
(46,920)
Total in Trading liabilities$31,509
$121
$5,534
$37,164
Amounts not offset1
    
Financial instruments collateral(9,085)0
(2,240)(11,325)
Other cash collateral(62)(3)0
(65)
Net amounts$22,362
$118
$3,294
$25,774
Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable5,282


At December 31, 2016

  Assets 

$ in millions

 Bilateral
OTC		  Cleared
OTC		  Exchange-
Traded		  Total 

Designated as accounting hedges

 

Interest rate contracts

 $1,924  $1,049  $—  $2,973  

Foreign exchange contracts

  249   18   —   267  

Total

  2,173   1,067   —   3,240  

Not designated as accounting hedges

 

Interest rate contracts

  200,336   99,217   384   299,937  

Credit contracts

  9,837   2,392   —   12,229  

Foreign exchange contracts

  73,645   1,022   231   74,898  

Equity contracts

  20,710   —   17,919   38,629  

Commodity and other contracts

  9,792   —   3,727   13,519  

Total

  314,320   102,631   22,261   439,212  

Total gross derivatives

 $316,493  $103,698  $22,261  $442,452  

Amounts offset

    

Counterparty netting

  (243,488)   (100,477)   (19,607)   (363,572)  

Cash collateral netting

  (45,875)   (1,799)   —   (47,674)  

Total in Trading assets

 $27,130  $1,422  $2,654  $31,206  

Amounts not offset2

    

Financial instruments collateral

  (10,293)   —   —   (10,293)  

Other cash collateral

  (124)   —   —   (124)  

Net amounts3

 $16,713  $1,422  $2,654  $20,789  

Not subject to legally enforceable master netting or
collateral agreements3

 

Derivative assets

             $3,656  

  Liabilities 

$ in millions

 Bilateral
OTC		  Cleared
OTC		  Exchange-
Traded		  Total 

Designated as accounting hedges

 

Interest rate contracts

 $77  $647  $—  $724  

Foreign exchange contracts

  15   25   —   40  

Total

  92   672   —   764  

Not designated as accounting hedges

 

Interest rate contracts

  183,063   103,392   397   286,852  

Credit contracts

  11,024   2,401   —   13,425  

Foreign exchange contracts

  74,575   952   16   75,543  

Equity contracts

  22,531   —   17,983   40,514  

Commodity and other contracts

  8,303   —   3,582   11,885  

Total

  299,496   106,745   21,978   428,219  

Total gross derivatives

 $299,588  $107,417  $21,978  $428,983  

Amounts offset

    

Counterparty netting

  (243,488)   (100,477)   (19,607)   (363,572)  

Cash collateral netting

  (30,405)   (5,691)   —   (36,096)  

Total in Trading liabilities

 $25,695  $1,249  $2,371  $29,315  

Amounts not offset2

    

Financial instruments collateral

  (7,638)   —   (585)   (8,223)  

Other cash collateral

  (10)   (1)   —   (11)  

Net amounts3

 $18,047  $1,248  $1,786  $21,081  

Not subject to legally enforceable master netting or
collateral agreements3

 

Derivative liabilities

             $3,497  
2019
 Assets
$ in millions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges   
Interest rate$673
$0
$0
$673
Foreign exchange41
1
0
42
Total714
1
0
715
Not designated as accounting hedges  
Interest rate179,450
4,839
519
184,808
Credit4,895
2,417
0
7,312
Foreign exchange62,957
1,399
22
64,378
Equity27,621
0
23,447
51,068
Commodity and other9,306
0
1,952
11,258
Total284,229
8,655
25,940
318,824
Total gross derivatives$284,943
$8,656
$25,940
$319,539
Amounts offset    
Counterparty netting(213,710)(7,294)(24,037)(245,041)
Cash collateral netting(41,222)(1,275)0
(42,497)
Total in Trading assets$30,011
$87
$1,903
$32,001
Amounts not offset1
    
Financial instruments collateral(15,596)0
0
(15,596)
Other cash collateral(46)0
0
(46)
Net amounts$14,369
$87
$1,903
$16,359
Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable$1,900


 Liabilities
$ in millions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges   
Interest rate$1
$0
$0
$1
Foreign exchange121
38
0
159
Total122
38
0
160
Not designated as accounting hedges  
Interest rate168,597
3,597
436
172,630
Credit4,798
3,123
0
7,921
Foreign exchange65,965
1,492
39
67,496
Equity30,135
0
22,733
52,868
Commodity and other7,713
0
1,911
9,624
Total277,208
8,212
25,119
310,539
Total gross derivatives$277,330
$8,250
$25,119
$310,699
Amounts offset    
Counterparty netting(213,710)(7,294)(24,037)(245,041)
Cash collateral netting(36,392)(832)0
(37,224)
Total in Trading liabilities$27,228
$124
$1,082
$28,434
Amounts not offset1
    
Financial instruments collateral(7,747)0
(287)(8,034)
Other cash collateral(14)0
0
(14)
Net amounts$19,467
$124
$795
$20,386
Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable$3,680

63September 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

OTC—Over-the-counter

1.

Effective in the first quarter of 2017, the Chicago Mercantile Exchange amended its rulebook for cleared OTC derivatives, resulting in the characterization of variation margin transfers as settlement payments as opposed to cash posted as collateral. In the quarter of adoption, the cleared OTC gross derivative assets and liabilities, and related counterparty and cash collateral netting amounts in total decreased by approximately $13 billion and $20 billion, respectively. Effective in the third quarter of 2017, derivatives cleared through LCH Clearnet Limited became subject to the rulebook under which variation margin transfers are settlement payments. As a result, cleared OTC gross derivative assets and liabilities, and related counterparty and cash collateral netting amounts in total decreased by approximately $62 billion and $59 billion, respectively.

2.

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


3.

Net amounts include transactions that are either not subject to master netting agreements or collateral agreements, or are subject to such agreements but the Firm has not determined the agreements to be legally enforceable.

63September 2020 Form 10-Q

Table of Contents
Notes to Consolidated Financial Statements
(Unaudited)
mslogo3q20.jpg

See Note 35 for information related to the unsettled fair value of futures contracts not designated as accounting hedges, which are excluded from the table above.

previous tables.

Notionals of Derivative Notionals

Contracts

At September 30, 2017

   Assets 

$ in billions

  Bilateral
OTC		   Cleared
OTC		   Exchange-
Traded		   Total 

Designated as accounting hedges

 

Interest rate contracts

  $24   $44   $        —   $68 

Foreign exchange contracts

   6    1    —    7 

Total

   30    45    —    75 

Not designated as accounting hedges

 

Interest rate contracts

   3,952    6,675    2,880    13,507 

Credit contracts

   242    110    —    352 

Foreign exchange contracts

   2,224    77    30    2,331 

Equity contracts

   388            —    323    711 

Commodity and other contracts

   85    —    80    165 

Total

   6,891    6,862    3,313    17,066 

Total gross derivatives

  $6,921   $6,907   $3,313   $17,141 

   Liabilities 

$ in billions

  Bilateral
OTC		   Cleared
OTC		   Exchange-
Traded		   Total 

Designated as accounting hedges

 

Interest rate contracts

  $2   $97   $—   $99 

Foreign exchange contracts

   3    1    —            4 

Total

   5    98    —    103 

Not designated as accounting hedges

 

Interest rate contracts

   3,919    6,749    1,028    11,696 

Credit contracts

   271    92            —    363 

Foreign exchange contracts

   2,137    74    14    2,225 

Equity contracts

   409    —    381    790 

Commodity and other contracts

   67    —    69    136 

Total

   6,803    6,915    1,492    15,210 

Total gross derivatives

  $6,808   $7,013   $1,492   $15,313 
2020

 Assets
$ in billions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges
Interest rate$6
$120
$0
$126
Foreign exchange6
1
0
7
Total12
121
0
133
Not designated as accounting hedges
Interest rate4,234
6,726
409
11,369
Credit136
124
0
260
Foreign exchange2,941
102
10
3,053
Equity466
0
416
882
Commodity and other118
0
79
197
Total7,895
6,952
914
15,761
Total gross derivatives$7,907
$7,073
$914
$15,894
 Liabilities
$ in billions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges
Interest rate$0
$64
$0
$64
Foreign exchange6
2
0
8
Total6
66
0
72
Not designated as accounting hedges
Interest rate4,108
6,596
668
11,372
Credit143
128
0
271
Foreign exchange2,943
100
8
3,051
Equity473
0
579
1,052
Commodity and other91
0
76
167
Total7,758
6,824
1,331
15,913
Total gross derivatives$7,764
$6,890
$1,331
$15,985
















At December 31, 2016

   Assets 

$ in billions

  Bilateral
OTC		   Cleared
OTC		   Exchange-
Traded		   Total 

Designated as accounting hedges

 

Interest rate contracts

  $30   $38   $—   $68 

Foreign exchange contracts

   6    —    —    6 

Total

   36    38    —    74 

Not designated as accounting hedges

 

Interest rate contracts

   3,586    6,224    2,586    12,396 

Credit contracts

   333    112    —    445 

Foreign exchange contracts

   1,580    52    13    1,645 

Equity contracts

   338    —    242    580 

Commodity and other contracts

   67    —    79    146 

Total

   5,904    6,388    2,920    15,212 

Total gross derivatives

  $    5,940       $6,426   $2,920   $    15,286 

    Liabilities 

$ in billions

  Bilateral
OTC		   Cleared
OTC		   Exchange-
Traded		   Total 

Designated as accounting hedges

 

Interest rate contracts

  $2   $52   $—   $54 

Foreign exchange contracts

   1    1    —    2 

Total

   3    53    —    56 

Not designated as accounting hedges

 

Interest rate contracts

   3,462    6,087    897    10,446 

Credit contracts

   359    96    —    455 

Foreign exchange contracts

   1,557    48    14    1,619 

Equity contracts

   321    —    273    594 

Commodity and other contracts

   78    —    59    137 

Total

   5,777    6,231    1,243    13,251 

Total gross derivatives

  $    5,780   $6,284   $1,243   $    13,307 

For information related2019

 Assets
$ in billions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges
Interest rate$14
$94
$0
$108
Foreign exchange2
0
0
2
Total16
94
0
110
Not designated as accounting hedges
Interest rate4,230
7,398
732
12,360
Credit136
79
0
215
Foreign exchange2,667
91
10
2,768
Equity429
0
419
848
Commodity and other99
0
61
160
Total7,561
7,568
1,222
16,351
Total gross derivatives$7,577
$7,662
$1,222
$16,461
 Liabilities
$ in billions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges
Interest rate$0
$71
$0
$71
Foreign exchange9
2
0
11
Total9
73
0
82
Not designated as accounting hedges
Interest rate4,185
6,866
666
11,717
Credit153
84
0
237
Foreign exchange2,841
91
14
2,946
Equity455
0
515
970
Commodity and other85
0
61
146
Total7,719
7,041
1,256
16,016
Total gross derivatives$7,728
$7,114
$1,256
$16,098

The Firm believes that the notional amounts of derivative contracts generally overstate its exposure. In most circumstances, notional amounts are used only as a reference point from which to offsettingcalculate amounts owed between the parties to the contract. Furthermore, notional amounts do not reflect the benefit of certain collateralized transactions, see Note 6. legally enforceable netting arrangements or risk mitigating transactions.
For a discussion of the Firm’sFirm's derivative instruments and hedging activities, see Note 45 to the consolidated financial statements in the 20162019 Form10-K.

Gains (Losses) on Fair Value Hedges

   Recognized in Interest Expense 
   Three Months Ended
September 30,		   Nine Months Ended
September 30,		 
$ in millions  2017  2016   2017  2016 

Derivatives

  $    (218)  $    (733)   $(878)  $2,386 

Borrowings

   175   790    670       (2,492) 

Total

  $(43)  $57   $    (208)  $(106) 

September 20172020 Form 10-Q64 

Table of Contents
Notes to Consolidated Financial Statements

(Unaudited)

LOGO
mslogo3q20.jpg


Gains (Losses) on Net InvestmentAccounting Hedges

   Three Months
Ended
September 30,		  Nine Months
Ended
September 30,		 
$ in millions  2017  2016  2017  2016 

Foreign exchange contracts

                 

Effective portion—OCI

  $    (88)  $    (60)  $    (340)  $    (396) 

Forward points excluded from hedge effectiveness testing—Interest income

  $(3)  $(20)  $(22)  $(59) 

Trading Revenues by Product Type

  Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
$ in millions     2017           2016        2017       2016   

Interest rate contracts

 $648   $357  $1,693   $983  

Foreign exchange contracts

  181    170   613    769  

Equity security and index contracts1

  1,416    1,415   4,875    4,360  

Commodity and other contracts

  223    63   522    (61) 

Credit contracts

  236    604   1,167    1,369  

Total

 $2,704   $2,609  $8,870   $7,420  

 Three Months EndedNine Months Ended
 September 30,September 30,
$ in millions2020201920202019
Fair value hedges—Recognized in Interest income 
Interest rate contracts$12
$(7)$(68)$(26)
Investment Securities—AFS(11)8
78
27
Fair value hedges—Recognized in Interest expense 
Interest rate contracts$(1,004)$1,999
$5,908
$6,046
Deposits1
62
0
(153)0
Borrowings915
(1,996)(5,844)(6,111)
Net investment hedges—Foreign exchange contracts 
Recognized in OCI$(260)$251
$54
$201
Forward points excluded from hedge effectiveness testing—Recognized in Interest income(6)30
19
107

Fair Value Hedges—Hedged Items 
$ in millionsAt
September 30,
2020		At
December 31,
2019
Investment Securities—AFS  
Amortized cost basis currently or previously hedged$2,146
$917
Basis adjustments included in amortized cost2
$74
$14
Deposits1
  
Carrying amount currently or previously hedged
$18,241
$5,435
Basis adjustments included in carrying amount2
$146
$(7)
Borrowings  
Carrying amount currently or previously hedged$107,653
$102,456
Basis adjustments included in carrying amount—Outstanding hedges
$7,697
$2,593
Basis adjustments included in carrying amount—Terminated hedges
$(762)$0

1.

Dividend income is included within equity security and index contracts.

The Firm began designating interest rate swaps as fair value hedges of certain Deposits in the fourth quarter of 2019.

2.Hedge accounting basis adjustments are primarily related to outstanding hedges.

Net Derivative Liabilities and Collateral Posted
$ in millionsAt
September 30,
2020		At
December 31,
2019
Net derivative liabilities with credit risk-related contingent features$27,659
$21,620
Collateral posted23,426
17,392

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

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.

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.

Net Derivative Liabilities

Incremental Collateral and Collateral Posted

$ in millions

  At September 30,
2017		   At December 31, 
2016		 

Net derivative liabilities with credit risk-related contingent features

  $19,359   $22,939  

Collateral posted

   14,499    17,040  
Termination Payments upon Potential Future Ratings Downgrade

$ in millionsAt
September 30,
2020
One-notch downgrade$246
Two-notch downgrade315
Bilateral downgrade agreements included in the amounts above1
$487
1.
Amount represents arrangements between the Firm and other parties where upon the downgrade of one party, the downgraded party must deliver collateral to the other party. These bilateral downgrade arrangements are used by the Firm to manage the risk of counterparty downgrades.
The additional collateral or termination payments that may be called in the event of a future credit rating downgrade vary by contract and can be based on ratings by either or both of Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’sS&P Global Ratings (“S&P”).The followingRatings. The previous table shows the future potential collateral amounts and termination payments that could be called or required by counterparties or exchange and clearing organizations in the event ofone-notch ortwo-notch downgrade scenarios based on the relevant contractual downgrade triggers.

Incremental Collateral or Termination Payments upon

Maximum Potential Future Ratings Downgrade

$ in millions  At September 30, 20171 

One-notch downgrade

  $592 

Two-notch downgrade

   512 

Payout/Notional of Credit Protection Sold1
 Years to Maturity at September 30, 2020
$ in billions< 11-33-5Over 5Total
Single-name CDS     
Investment grade$10
$16
$31
$13
$70
Non-investment grade6
10
15
4
35
Total$16
$26
$46
$17
$105
Index and basket CDS   
Investment grade$3
$11
$44
$35
$93
Non-investment grade6
6
25
20
57
Total$9
$17
$69
$55
$150
Total CDS sold$25
$43
$115
$72
$255
Other credit contracts0
0
0
0
0
Total credit protection sold$25
$43
$115
$72
$255
CDS protection sold with identical protection purchased$222
 Years to Maturity at December 31, 2019
$ in billions< 11-33-5Over 5Total
Single-name CDS     
Investment grade$16
$17
$33
$9
$75
Non-investment grade9
9
16
1
35
Total$25
$26
$49
$10
$110
Index and basket CDS   
Investment grade$4
$7
$46
$11
$68
Non-investment grade7
4
17
10
38
Total$11
$11
$63
$21
$106
Total CDS sold$36
$37
$112
$31
$216
Other credit contracts0
0
0
0
0
Total credit protection sold$36
$37
$112
$31
$216
CDS protection sold with identical protection purchased$187

65September 2020 Form 10-Q
Table of Contents
Notes to Consolidated Financial Statements
(Unaudited)
mslogo3q20.jpg

Fair Value Asset (Liability) of Credit Protection Sold1
$ in millionsAt
September 30,
2020		At
December 31,
2019
Single-name CDS  
Investment grade$764
$1,057
Non-investment grade(969)(540)
Total$(205)$517
Index and basket CDS  
Investment grade$994
$1,052
Non-investment grade(2,546)134
Total$(1,552)$1,186
Total CDS sold$(1,757)$1,703
Other credit contracts(4)(17)
Total credit protection sold$(1,761)$1,686
1.

Amounts include $873 million

Investment grade/non-investment grade determination is based on the internal credit rating of the reference obligation. Internal credit ratings serve as the Credit Risk Management Department’s assessment of credit risk and the basis for a comprehensive credit limits framework used to control credit risk. The Firm uses quantitative models and judgment to estimate the various risk parameters related to bilateral arrangements between the Firm and other parties where upon the downgrade of one party, the downgraded party must deliver collateral to the other party. These bilateral downgrade arrangements are used by the Firm to manage the risk of counterparty downgrades.

each obligor.

Credit Derivatives and Other Credit Contracts

Protection Purchased with CDS
 Notional
$ in billionsAt
September 30,
2020		At
December 31,
2019
Single name$115
$118
Index and basket143
103
Tranched index and basket18
15
Total$276
$236
 Fair Value Asset (Liability)
$ in millionsAt
September 30,
2020		At
December 31,
2019
Single name$72
$(723)
Index and basket1,276
(1,139)
Tranched index and basket61
(450)
Total$1,409
$(2,312)
The Firm enters into credit derivatives, principally credit default swaps,CDS, under which it receives or provides protection against the risk of default on a set of debt obligations issued by a specified reference entity or entities. A majority of the Firm’s counterparties for these derivatives are banks, broker-dealers, and insurance and other financial institutions.


The fair value amounts as shown in the previous tables are prior to cash collateral or counterparty netting. For further information on credit derivatives and other credit contracts, see Note 45 to the consolidated financial statements in the 20162019 Form10-K.

Protection Sold and Purchased with Credit Default Swaps

   At September 30, 2017 
   Protection Sold  Protection Purchased 

$ in millions

  Notional   

Fair Value
(Asset)/

Liability

  Notional   

Fair Value
(Asset)/

Liability

 

Credit default swaps

       

Single name

  $173,202   $(1,400)  $189,290   $1,803 

Index and basket

   145,107    (237)   141,565    264 

Tranched index and basket

   22,049    (367)   44,193    1,066 

Total

  $340,358   $(2,004)  $375,048   $3,133 

Portion of single name and non-tranched index and basket with identical underlying reference obligations

  $315,931    —  $327,959    — 








 

65September 2017 Form 10-Q

8. Investment Securities
AFS and HTM Securities
 At September 30, 2020
$ in millions
Amortized
Cost1
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair 
Value
AFS securities    
U.S. government and agency securities:  
U.S. Treasury securities$45,796
$1,150
$0
$46,946
U.S. agency securities2
26,887
769
6
27,650
Total U.S. government and agency securities72,683
1,919
6
74,596
Corporate and other debt:    
Agency CMBS4,653
355
1
5,007
Corporate bonds1,756
43
1
1,798
State and municipal securities1,682
60
18
1,724
FFELP student loan ABS3
1,455
0
44
1,411
Total corporate and other debt9,546
458
64
9,940
Total AFS securities82,229
2,377
70
84,536
HTM securities    
U.S. government and agency securities:  
U.S. Treasury securities28,754
2,138
0
30,892
U.S. agency securities2
16,598
610
7
17,201
Total U.S. government and agency securities45,352
2,748
7
48,093
Corporate and other debt:    
Non-agency CMBS817
45
1
861
Total HTM securities46,169
2,793
8
48,954
Total investment securities$128,398
$5,170
$78
$133,490


Notes to Consolidated Financial Statements

(Unaudited)

LOGO

   At December 31, 2016 
   Protection Sold  Protection Purchased 

$ in millions

  Notional   

Fair Value
(Asset)/

Liability

  Notional   

Fair Value
(Asset)/

Liability

 

Credit default swaps

       

Single name

  $266,918   $(753)  $269,623   $826  

Index and basket

   130,383    374   122,061    (481) 

Tranched index and basket

   32,429    (670)   78,505    1,900  

Total

  $429,730   $(1,049)  $470,189   $2,245  

Portion of single name and non-tranched index and basket with identical underlying reference obligations

  $395,536    —  $389,221    —  

Fair value amounts as shown in the table below are on a gross basis prior to cash collateral or counterparty netting. In order to provide an indication of the current payment status or performance risk of the credit default swaps, a breakdown of credit default swaps based on the Firm’s internal credit ratings by investment grade andnon-investment grade is provided. Internal credit ratings serve as the Credit Risk Management Department’s assessment of credit risk and the basis for a comprehensive credit limits framework used to control credit risk. The Firm uses quantitative models and judgment to estimate the various risk parameters related to each obligor.

Credit Ratings of Reference Obligation and Maturities of Credit Protection Sold

   At September 30, 2017 
   Maximum Potential Payout/Notional   

Fair Value

(Asset)/

Liability

 
   Years to Maturity   
$ in millions  Less than 1   1-3   3-5   Over 5   Total   

Single name credit default swaps

            

Investment grade

  $46,372   $44,877   $21,662   $11,411   $124,322   $(1,220) 

Non-investment grade

   20,527    19,378    6,959    2,016    48,880    (180) 

Total single name credit default swaps

   66,899    64,255    28,621    13,427    173,202    (1,400) 

Index and basket credit default swaps

            

Investment grade

   23,097    13,752    28,918    19,124    84,891    (885) 

Non-investment grade

   28,650    7,293    25,129    21,193    82,265    281  

Total index and basket credit default swaps

   51,747    21,045    54,047    40,317    167,156    (604) 

Total credit default swaps sold

  $118,646   $85,300   $82,668   $53,744   $340,358   $(2,004) 

Other credit contracts

   14            —              —      135    149    13  

Total credit derivatives and other credit contracts

  $118,660   $85,300   $82,668   $53,879   $340,507   $(1,991) 

   At December 31, 2016 
   Maximum Potential Payout/Notional   

Fair Value

(Asset)/

Liability

 
   Years to Maturity   
$ in millions  Less than 1   1-3   3-5   Over 5   Total   

Single name credit default swaps

            

Investment grade

  $79,449   $70,796   $34,529   $10,293   $195,067   $(1,060) 

Non-investment grade

   34,571    25,820    10,436    1,024    71,851    307  

Total single name credit default swaps

  $114,020   $96,616   $44,965   $11,317   $266,918   $(753) 

Index and basket credit default swaps

            

Investment grade

  $26,530   $21,388   $35,060   $9,096   $92,074   $(846) 

Non-investment grade

   26,135    22,983    11,759    9,861    70,738    550  

Total index and basket credit default swaps

  $52,665   $44,371   $46,819   $18,957   $162,812   $(296) 

Total credit default swaps sold

  $166,685   $140,987   $91,784   $30,274   $429,730   $(1,049) 

Other credit contracts

   49    6    —    215    270    —  

Total credit derivatives and other credit contracts

  $166,734   $    140,993   $    91,784   $    30,489   $    430,000   $(1,049) 

September 20172020 Form 10-Q66 

Table of Contents
Notes to Consolidated Financial Statements

(Unaudited)

LOGO
mslogo3q20.jpg

5. Investment Securities

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

AFS and HTM Securities

   At September 30, 2017 
$ in millions  Amortized
Cost		   Gross
Unrealized
Gains		   Gross
Unrealized
Losses		   Fair
Value		 

AFS debt securities

        

U.S. government and agency securities:

        

U.S. Treasury securities

  $24,706   $—   $425   $24,281  

U.S. agency securities1

   24,018    42    164    23,896  

Total U.S. government and agency securities

   48,724    42    589    48,177  

Corporate and other debt:

        

CMBS:

        

Agency

   1,452    2    42    1,412  

Non-agency

   1,215    4    7    1,212  

Corporate bonds

   1,486    13    7    1,492  

CLO

   434    1    —    435  

FFELP student loan ABS2

   2,217    13    8    2,222  

Total corporate and other debt

   6,804    33    64    6,773  

Total AFS debt securities

   55,528    75    653    54,950  

AFS equity securities

   15    —    11    4  

Total AFS securities

   55,543    75    664    54,954  

HTM securities

        

U.S. government and agency securities:

        

U.S. Treasury securities

   11,501    7    249    11,259  

U.S. agency securities1

   12,384    18    151    12,251  

Total U.S. government and agency securities

   23,885    25    400    23,510  

Corporate and other debt:

        

CMBS:

        

Non-agency

   247    1    1    247  

Total corporate and other debt

   247    1    1    247  

Total HTM securities

   24,132    26    401    23,757  

Total investment securities

  $79,675   $101   $1,065   $78,711  
   At December 31, 2016 
 $ in millions  Amortized
Cost		   Gross
Unrealized
Gains		   Gross
Unrealized
Losses		   Fair
Value		 

 AFS debt securities

        

 U.S. government and agency securities:

        

U.S. Treasury securities

  $28,371   $1   $545   $27,827  

U.S. agency securities1

   22,348    14    278    22,084  

 Total U.S. government and agency securities

   50,719    15    823    49,911  

 Corporate and other debt:

        

CMBS:

        

Agency

   1,850    2    44    1,808  

Non-agency

   2,250    11    16    2,245  

Auto loan ABS

   1,509    1    1    1,509  

Corporate bonds

   3,836    7    22    3,821  

CLO

   540    —    1    539  

FFELP student loan ABS2

   3,387    5    61    3,331  

 Total corporate and other debt

   13,372    26    145    13,253  

 Total AFS debt securities

   64,091    41    968    63,164  

 AFS equity securities

   15    —    9    6  

 Total AFS securities

   64,106    41    977    63,170  

 HTM securities

        

 U.S. government and agency securities:

        

U.S. Treasury securities

   5,839    1    283    5,557  

U.S. agency securities1

   11,083    1    188    10,896  

 Total HTM securities

   16,922    2    471    16,453  

 Total investment securities

  $81,028   $43   $1,448   $79,623  

CMBS—Commercial mortgage-backed securities

CLO—Collateralized loan obligations

ABS—Asset-backed securities


 At December 31, 2019
$ in millions
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair 
Value
AFS securities    
U.S. government and agency securities:  
U.S. Treasury securities$32,465
$224
$111
$32,578
U.S. agency securities2
20,725
249
100
20,874
Total U.S. government and agency securities53,190
473
211
53,452
Corporate and other debt:    
Agency CMBS4,810
55
57
4,808
Corporate bonds1,891
17
1
1,907
State and municipal securities481
22
0
503
FFELP student loan ABS3
1,580
1
28
1,553
Total corporate and other debt8,762
95
86
8,771
Total AFS securities61,952
568
297
62,223
HTM securities    
U.S. government and agency securities:  
U.S. Treasury securities30,145
568
52
30,661
U.S. agency securities2
12,589
151
57
12,683
Total U.S. government and agency securities42,734
719
109
43,344
Corporate and other debt:    
Non-agency CMBS768
22
1
789
Total HTM securities43,502
741
110
44,133
Total investment securities$105,454
$1,309
$407
$106,356
1.

Amounts are net of any ACL.

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

CMOs.
2.

FFELP—Federal Family Education Loan Program. Amounts

3.Underlying loans are backed by a guarantee, ultimately from the U.S. Department of Education, of at least 95% of the principal balance and interest on such loans.

outstanding.
In the first quarter of 2020, the Firm transferred certain municipal securities from Trading assets into AFS securities as a result of a change in intent due to the severe deterioration in liquidity for these instruments. These securities had a fair value of $441 million at the end of the first quarter of 2020.
 

67September 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Investment

Investment Securities in an Unrealized Loss Position

   At September 30, 2017 
   Less than 12 Months   12 Months or Longer   Total 
 $ in millions  Fair Value   Gross     
Unrealized
Losses     		   Fair Value   Gross     
Unrealized
Losses    		   Fair Value   Gross      
Unrealized 
Losses     		 

 AFS debt securities

            

 U.S. government and agency securities:

            

 U.S. Treasury securities

  $21,910   $364   $2,371   $61   $24,281   $425  

 U.S. agency securities

   10,737    136    1,431    28    12,168    164  

 Total U.S. government and agency securities

   32,647    500    3,802    89    36,449    589  

 Corporate and other debt:

            

 CMBS:

            

 Agency

   991    42    —    —    991    42  

 Non-agency

   192    2    571    5    763    7  

 Corporate bonds

   186    1    332    6    518    7  

 FFELP student loan ABS

   1,058    8    —    —    1,058    8  

 Total corporate and other debt

   2,427    53    903    11    3,330    64  

 Total AFS debt securities

   35,074    553    4,705    100    39,779    653  

 AFS equity securities

   —    —    4    11    4    11  

 Total AFS securities

   35,074    553    4,709    111    39,783    664  

 HTM securities

            

 U.S. government and agency securities:

            

 U.S. Treasury securities

   9,848    249    —    —    9,848    249  

 U.S. agency securities

   10,084    151    —    —    10,084    151  

 Total U.S. government and agency securities

   19,932    400    —    —    19,932    400  

 Corporate and other debt:

            

 CMBS:

            

 Non-agency

   71    1    —    —    71    1  

 Total corporate and other debt

   71    1    —    —    71    1  

 Total HTM securities

   20,003    401    —    —    20,003    401  

 Total investment securities

  $            55,077   $            954   $            4,709   $            111   $            59,786   $            1,065  

September 2017 Form 10-Q68

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

  At December 31, 2016 
  Less than 12 Months  12 Months or Longer  Total 
 $ in millions Fair Value  Gross     
Unrealized
Losses    		  Fair Value  Gross     
Unrealized
Losses    		  Fair Value  Gross      
Unrealized 
Losses     		 

 AFS debt securities

      

 U.S. government and agency securities:

      

 U.S. Treasury securities

 $25,323  $545  $—  $—  $25,323  $545  

 U.S. agency securities

  16,760   278   125   —   16,885   278  

 Total U.S. government and agency securities

  42,083   823   125   —   42,208   823  

 Corporate and other debt:

      

 CMBS:

      

 Agency

  1,245   44   —   —   1,245   44  

 Non-agency

  763   11   594   5   1,357   16  

 Auto loan ABS

  659   1   123   —   782   1  

 Corporate bonds

  2,050   21   142   1   2,192   22  

 CLO

  178   —   239   1   417   1  

 FFELP student loan ABS

  2,612   61   —   —   2,612   61  

 Total corporate and other debt

  7,507   138   1,098   7   8,605   145  

 Total AFS debt securities

  49,590   961   1,223   7   50,813   968  

 AFS equity securities

  6   9   —   —   6   9  

 Total AFS securities

  49,596   970   1,223   7   50,819   977  

 HTM securities

      

 U.S. government and agency securities:

      

 U.S. Treasury securities

  5,057   283   —   —   5,057   283  

 U.S. agency securities

  10,612   188   —   —   10,612   188  

 Total HTM securities

  15,669   471   —   —   15,669   471  

 Total investment securities

 $            65,265  $            1,441  $            1,223  $            7  $            66,488  $            1,448  

As discussed in Note 2 to the consolidated financial statements in the 2016 Form10-K,
 At September 30,
2020		At December 31,
2019
$ in millionsFair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
U.S. government and agency securities:  
U.S. Treasury securities    
Less than12 months$0
$0
$4,793
$28
12 months or longer0
0
7,904
83
Total0
0
12,697
111
U.S. agency securities    
Less than12 months1,198
3
2,641
20
12 months or longer1,294
3
7,697
80
Total2,492
6
10,338
100
Total U.S. government and agency securities:  
Less than12 months1,198
3
7,434
48
12 months or longer1,294
3
15,601
163
Total2,492
6
23,035
211
Corporate and other debt:    
Agency CMBS    
Less than12 months17
0
2,294
26
12 months or longer189
1
681
31
Total206
1
2,975
57
Corporate bonds    
Less than12 months127
0
194
1
12 months or longer21
1
44
0
Total148
1
238
1
State and municipal securities   
Less than12 months606
18
0
0
Total606
18
0
0
FFELP student loan ABS   
Less than12 months322
1
91
0
12 months or longer1,089
43
1,165
28
Total1,411
44
1,256
28
Total Corporate and other debt:
  
Less than12 months1,072
19
2,579
27
12 months or longer1,299
45
1,890
59
Total2,371
64
4,469
86
Total AFS securities in an unrealized loss position 
Less than12 months2,270
22
10,013
75
12 months or longer2,593
48
17,491
222
Total$4,863
$70
$27,504
$297


For 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 temporarily 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 September 30, 2017 and December 31, 2016 forhave credit losses after performing the reasons discussed herein.

For AFS debt securities,analysis described in Note 2. Additionally, the Firm does not intend to sell the securities and is not likely to be required to sell the securities prior to recovery of the amortized cost basis. For AFS and HTM debt securities,Furthermore, the securities have not experienced credit losses as the net unrealized losses reported in the previous tablethey are primarily due to higher interest rates since those securities were purchased.

Additionally, for U.S. government and agency securities, the existence of an explicit and implicit guarantee provided by the U.S. government is consideredpredominantly investment grade and the Firm does not expectexpects to experiencerecover the amortized cost basis.

As of September 30, 2020, the HTM securities net carrying amount reflects an ACL of $24 million related to Non-agency CMBS. See Note 2 for a credit loss (as discusseddescription of the ACL methodology

67September 2020 Form 10-Q
Table of Contents
Notes to Consolidated Financial Statements
(Unaudited)
mslogo3q20.jpg

used beginning in 2020 following the Firm’s adoption of CECL and see Note 2 to the consolidated financial statements in the 20162019 Form 10-K). The risk of10-K for prior period credit loss onconsiderations. There were 0 HTM securities in an unrealized loss position is considered minimal because the Firm’s U.S. governmentas of December 31, 2019 that were other-than-temporarily impaired. As of September 30, 2020, and agencyDecember 31, 2019, Non-Agency CMBS HTM securities as well as ABS, CMBSwere predominantly on accrual status and CLO, 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 1215 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.

Investment Securities by Contractual Maturity

  At September 30, 2017 
$ in millions Amortized
Cost		  Fair Value  Annualized
Average
Yield		 

AFS debt securities

   

U.S. government and agency securities:

 

U.S. Treasury securities:

   

Due within 1 year

 $5,300  $5,286   0.9% 

After 1 year through 5 years

  14,129   13,954   1.4% 

After 5 years through 10 years

  5,277   5,041   1.5% 

Total

  24,706   24,281     

U.S. agency securities:

   

Due within 1 year

  1,300   1,302   0.2% 

After 1 year through 5 years

  2,570   2,564   0.9% 

After 5 years through 10 years

  1,250   1,246   1.9% 

After 10 years

  18,898   18,784   1.8% 

Total

  24,018   23,896     

Total U.S. government and agency securities

  48,724   48,177   1.5% 
 At September 30, 2020
$ in millions
Amortized
Cost1
Fair
Value		Annualized
Average
Yield
AFS securities   
U.S. government and agency securities:
U.S. Treasury securities:   
Due within 1 year$15,671
$15,741
0.9%
After 1 year through 5 years27,523
28,399
1.5%
After 5 years through 10 years2,602
2,806
1.7%
Total45,796
46,946
 
U.S. agency securities:   
Due within 1 year215
215
0.8%
After 1 year through 5 years70
71
1.6%
After 5 years through 10 years1,235
1,274
1.8%
After 10 years25,367
26,090
1.9%
Total26,887
27,650
 
Total U.S. government and agency securities72,683
74,596
1.5%
Corporate and other debt:   
Agency CMBS:   
Due within 1 year44
45
2.5%
After 1 year through 5 years535
547
1.8%
After 5 years through 10 years3,399
3,728
2.5%
After 10 years675
687
1.8%
Total4,653
5,007
 
Corporate bonds:   
Due within 1 year210
213
2.5%
After 1 year through 5 years1,269
1,301
2.6%
After 5 years through 10 years266
273
2.7%
After 10 years11
11
1.7%
Total1,756
1,798
 
State and municipal securities:   
Due within 1 year3
3
1.8%
After 1 year through 5 years16
16
2.2%
After 5 years through 10 years103
109
2.6%
After 10 Years1,560
1,596
2.7%
Total1,682
1,724
 
    
 

 At September 30, 2020
$ in millions
Amortized
Cost1
Fair
Value		Annualized
Average
Yield
FFELP student loan ABS:   
After 1 year through 5 years93
88
0.8%
After 5 years through 10 years257
241
0.8%
After 10 years1,105
1,082
1.2%
Total1,455
1,411
 
Total corporate and other debt9,546
9,940
2.3%
Total AFS securities82,229
84,536
1.6%
    
HTM securities   
U.S. government and agency securities:
U.S. Treasury securities:   
Due within 1 year$3,065
$3,095
2.6%
After 1 year through 5 years16,991
17,880
2.0%
After 5 years through 10 years7,616
8,572
2.2%
After 10 years1,082
1,345
2.5%
Total28,754
30,892
 
U.S. agency securities:   
After 5 years through 10 years279
288
1.9%
After 10 years16,319
16,913
2.0%
Total16,598
17,201
 
Total U.S. government and agency securities45,352
48,093
2.2%
Corporate and other debt:   
Non-agency CMBS:   
Due within 1 year110
109
4.6%
After 1 year through 5 years77
78
3.7%
After 5 years through 10 years576
616
3.8%
After 10 years54
58
3.8%
Total corporate and other debt817
861
3.9%
Total HTM securities46,169
48,954
2.2%
Total investment securities$128,398
$133,490
1.8%
1.69September 2017 Form 10-QAmounts are net of any ACL.

Notes to Consolidated Financial Statements

(Unaudited)

  LOGO

  At September 30, 2017 
$ in millions  Amortized 
Cost		   Fair Value  Annualized
Average
Yield		 

Corporate and other debt:

   

CMBS:

 

Agency:

   

Due within 1 year

  18   18   1.1% 

After 1 year through 5 years

  283   282   1.4% 

After 5 years through 10 years

  300   301   1.2% 

After 10 years

  851   811   1.6% 

Total

  1,452   1,412     

Non-agency:

   

After 5 years through 10 years

  36   35   2.5% 

After 10 years

  1,179   1,177   1.8% 

Total

  1,215   1,212     

Corporate bonds:

   

Due within 1 year

  46   46   1.2% 

After 1 year through 5 years

  1,218   1,225   2.4% 

After 5 years through 10 years

  222   221   2.3% 

Total

  1,486   1,492     

CLO:

   

After 5 years through 10 years

  236   236   1.5% 

After 10 years

  198   199   2.4% 

Total

  434   435     

FFELP student loan ABS:

 

After 1 year through 5 years

  52   51   0.8% 

After 5 years through 10 years

  393   390   0.8% 

After 10 years

  1,772   1,781   1.1% 

Total

  2,217   2,222     

Total corporate and other debt

  6,804   6,773   1.6% 

Total AFS debt securities

  55,528   54,950   1.5% 

AFS equity securities

  15   4   —% 

Total AFS securities

  55,543   54,954   1.5% 

HTM securities

   

U.S. government securities:

   

U.S. Treasury securities:

   

Due within 1 year

  300   300   0.6% 

After 1 year through 5 years

  5,163   5,151   1.5% 

After 5 years through 10 years

  5,311   5,157   1.9% 

After 10 years

  727   651   2.3% 

Total

  11,501   11,259     

U.S. agency securities:

   

After 10 years

  12,384   12,251   2.4% 

Total

  12,384   12,251     

Total U.S. government and agency securities

  23,885   23,510   2.0% 

Corporate and other debt:

   

CMBS:

   

Non-agency:

   

After 1 year through 5 years

  99   99   3.6% 

After 5 years through 10 years

  148   148   3.7% 

Total

  247   247     

Total corporate and other debt

  247   247   3.7% 

Total HTM securities

  24,132   23,757   2.1% 

Total investment securities

 $79,675  $78,711   1.7% 

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

    Three Months Ended  
September 30,		     Nine Months Ended  
September 30,		 
$ in millions 2017   2016   2017  2016 

Gross realized gains

 $11   $45   $38  $130 

Gross realized (losses)

  —    —    (11)   (3) 

Total

 $            11   $            45   $            27  $            127 

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

6. Collateralized Transactions

The Firm enters into securities purchased under agreements to resell, securities sold under agreements to repurchase, 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 2016 Form10-K.

Offsetting of Certain Collateralized Transactions

  At September 30, 2017 

$ in millions

 Gross
Amounts		  

Amounts

Offset

  Net
Amounts
Presented		  Amounts
Not
Offset1		  Net
Amounts		 

Assets

     

Securities purchased
under agreements
to resell

 $174,387  $(84,281)  $90,106  $(84,895)  $5,211  

Securities borrowed

  145,923   (13,031)   132,892   (128,616)   4,276  

Liabilities

     

Securities sold
under agreements
to repurchase

 $138,264  $(84,281)  $53,983  $(46,145)  $7,838  

Securities loaned

  28,662   (13,032)   15,630   (15,550)   80  

Not subject to legally enforceable master netting agreements2

 

 

Securities purchased under agreements to resell

 

 $4,599  

Securities borrowed

 

  720  

Securities sold under agreements to repurchase

 

  6,521  

Securities loaned

 

  7  
 Three Months Ended
September 30,		Nine Months Ended
September 30,
$ in millions2020201920202019
Gross realized gains$55
$27
$120
$99
Gross realized (losses)0
(1)(14)(10)
Total1
$55
$26
$106
$89
 

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

September 20172020 Form 10-Q7068 

Table of Contents
Notes to Consolidated Financial Statements

(Unaudited)

LOGO
mslogo3q20.jpg

  At December 31, 2016 

$ in millions

 Gross
 Amounts 		   Amounts 
Offset		  Net
Amounts
 Presented 		   Amounts 
Not
Offset1		  Net
 Amounts 		 

Assets

     

Securities purchased
under agreements
to resell

 $  182,888  $    (80,933)  $101,955  $(93,365)  $8,590  

Securities borrowed

  129,934   (4,698)   125,236   (118,974)   6,262  

Liabilities

     

Securities sold
under agreements
to repurchase

 $135,561  $(80,933)  $54,628  $(47,933)  $6,695  

Securities loaned

  20,542   (4,698)   15,844   (15,670)   174  

Not subject to legally enforceable master netting agreements2

 

Securities purchased under agreements to resell

 

 $7,765  

Securities borrowed

                  2,591  

Securities sold under agreements to repurchase

 

  6,500  

Securities loaned

                  154  


9. Collateralized Transactions
Offsetting of Certain Collateralized Transactions
 At September 30, 2020
$ in millions
Gross
Amounts
Amounts
Offset
Net
Amounts
Presented
Amounts
Not Offset1
Net
Amounts
Assets     
Securities purchased under agreements to resell$199,725
$(111,442)$88,283
$(86,057)$2,226
Securities borrowed104,642
(3,839)100,803
(97,169)3,634
Liabilities     
Securities sold under agreements to repurchase$152,760
$(111,384)$41,376
$(35,742)$5,634
Securities loaned11,821
(3,897)7,924
(7,725)199
Net amounts for which master netting agreements are not in place or may not be legally enforceable
Securities purchased under agreements to resell$2,117
Securities borrowed  601
Securities sold under agreements to repurchase 4,698
Securities loaned    149
 At December 31, 2019
$ in millions
Gross
Amounts
Amounts
Offset
Net
Amounts
Presented
Amounts
Not Offset1
Net
Amounts
Assets     
Securities purchased under agreements to resell$247,545
$(159,321)$88,224
$(85,200)$3,024
Securities borrowed109,528
(2,979)106,549
(101,850)4,699
Liabilities     
Securities sold under agreements to repurchase$213,519
$(159,319)$54,200
$(44,549)$9,651
Securities loaned11,487
(2,981)8,506
(8,324)182
Net amounts for which master netting agreements are not in place or may not be legally enforceable
Securities purchased under agreements to resell$2,255
Securities borrowed  1,181
Securities sold under agreements to repurchase 8,033
Securities loaned    101
1.

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

2.

Represents amounts within Net Amounts related to transactions that are either not subject to master netting agreements or are subject to such agreements but the Firm has not determined the agreements to be legally enforceable.

For further discussion of the Firm’s collateralized transactions, see Note 7 to the financial statements in the 2019 Form 10-K. For information related to offsetting of derivatives, see Note 4.

Maturities and Collateral Pledged

7.

Gross Secured Financing Balances by Remaining Contractual Maturity

  At September 30, 2017 

$ in millions

 

Overnight

 and Open 

  

 Less than 

30 Days

   30-90 
Days		  

Over

 90 Days 

   Total  

Securities sold under
agreements to
repurchase

 $38,581  $38,455  $18,398  $42,830  $138,264  

Securities loaned

  17,274   541   1,426   9,421   28,662  

Total included in the offsetting disclosure

 $55,855  $38,996  $19,824  $52,251  $166,926  

Trading liabilities—
Obligation to return
securities received
as collateral

  21,208   —   —   —   21,208  

Total

 $77,063  $38,996  $19,824  $52,251  $188,134  
  At December 31, 2016 

$ in millions

 

 Overnight 

and Open

  

 Less than 

30 Days

   30-90 
Days		  

Over

 90 Days 

   Total  

Securities sold
under agreements
to repurchase

 $  41,549  $  36,703  $  24,648  $  32,661  $  135,561  

Securities loaned

  9,487   851   2,863   7,341   20,542  

Total included in the
offsetting disclosure

 $51,036  $37,554  $27,511  $40,002  $156,103  

Trading liabilities—
Obligation to return
securities received
as collateral

  20,262   —   —   —   20,262  

Total

 $71,298  $37,554  $27,511  $40,002  $176,365  

 At September 30, 2020
$ in millions
Overnight
and Open
Less than
30 Days
30-90
Days
Over
90 Days
Total
Securities sold under agreements to repurchase$69,210
$37,965
$13,144
$32,441
$152,760
Securities loaned5,752
278
1,169
4,622
11,821
Total included in the offsetting disclosure$74,962
$38,243
$14,313
$37,063
$164,581
Trading liabilities—
Obligation to return securities received as collateral		21,753
0
0
0
21,753
Total$96,715
$38,243
$14,313
$37,063
$186,334
 At December 31, 2019
$ in millions
Overnight
and Open
Less than
30 Days
30-90
Days
Over
90 Days
Total
Securities sold under agreements to repurchase$67,158
$81,300
$26,904
$38,157
$213,519
Securities loaned2,378
3,286
516
5,307
11,487
Total included in the offsetting disclosure$69,536
$84,586
$27,420
$43,464
$225,006
Trading liabilities—
Obligation to return securities received as collateral		23,877
0
0
0
23,877
Total$93,413
$84,586
$27,420
$43,464
$248,883
Gross Secured Financing Balances by Class of Collateral Pledged

$ in millions  

At            

 September 30, 

2017          

  

At

 December 31, 
2016

 

Securities sold under agreements to repurchase

 

U.S. government and agency securities

  $40,758  $56,372  

State and municipal securities

   828   1,363  

Other sovereign government obligations

   64,529   42,790  

Asset-backed securities

   2,267   1,918  

Corporate and other debt

   8,244   9,086  

Corporate equities

   20,773   23,152  

Other

   865   880  

Total securities sold under agreements to repurchase

  $138,264  $135,561  

Securities loaned

   

Other sovereign government obligations

   13,259   4,762  

Corporate and other debt

   9   73  

Corporate equities

   15,152   15,693  

Other

   242   14  

Total securities loaned

  $28,662  $20,542  

Total included in the offsetting disclosure

  $166,926  $156,103  

Trading liabilities—Obligation to return securities received as collateral

 

Corporate equities

  $21,208  $20,262  

Total

  $188,134  $176,365  

$ in millionsAt
September 30,
2020		At
December 31,
2019
Securities sold under agreements to repurchase
U.S. Treasury and agency securities$55,759
$68,895
State and municipal securities864
905
Other sovereign government obligations70,281
109,414
ABS1,945
2,218
Corporate and other debt4,923
6,066
Corporate equities18,256
25,563
Other732
458
Total$152,760
$213,519
Securities loaned  
Other sovereign government obligations$4,254
$3,026
Corporate equities7,034
8,422
Other533
39
Total$11,821
$11,487
Total included in the offsetting disclosure$164,581
$225,006
Trading liabilities—Obligation to return securities received as collateral
Corporate equities$21,724
$23,873
Other29
4
Total$21,753
$23,877
Total$186,334
$248,883


69September 2020 Form 10-Q
Table of Contents
Notes to Consolidated Financial Statements
(Unaudited)
mslogo3q20.jpg

Carrying Value of Assets Loaned or Pledged

without Counterparty Right to Sell or Repledge

$ in millionsAt
September 30,
2020		At
December 31,
2019
Trading assets$34,952
$41,201
Loans, before ACL0
750
Total$34,952
$41,951

The Firm pledges certain of its trading assets and loans to collateralize securities sold under agreements to repurchase, securities loaned, other secured financings and derivatives.derivatives and to cover customer short sales. Counterparties may or may not have the right to sell or repledge the collateral.

Pledged financial instruments that can be sold or repledged by the secured party are identified as Trading assets (pledged to various parties) in the balance sheets.

71September 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

CarryingFair Value of Assets Loaned or Pledged without

CounterpartyCollateral Received with Right to Sell or Repledge

$ in millions 

At

 September 30, 

2017

  

At

 December 31, 

2016

 

Trading assets

 $37,800  $41,358  

Loans (gross of allowance for loan losses)

  570   —  

Total

 $38,370  $41,358  

Collateral Received

$ in millionsAt
September 30,
2020		At
December 31,
2019
Collateral received with right to sell
or repledge		$609,445
$679,280
Collateral that was sold or repledged1
455,883
539,412
1.
Does not include securities used to meet federal regulations for the Firm’s U.S. broker-dealers.
Securities Segregated for Regulatory Purposes
$ in millionsAt
September 30,
2020		At
December 31,
2019
Segregated securities1
$27,679
$25,061
1.Securities segregated under federal regulations for the Firm’s U.S. broker-dealers are sourced from Securities purchased under agreements to resell and Trading assets in the balance sheets.
The Firm receives collateral in the form of securities in connection with securities purchased under agreements to resell, securities borrowed, securities-for-securities transactions, derivative transactions, customer margin loans and securities-based lending. In many cases, the Firm is permitted to sell or repledge these securities held asthis collateral and use the securities to secure securities sold under agreements to repurchase, to enter into securities lending and derivative transactions or for delivery to counterparties to cover short positions.

The Firm also receives securities as collateral in connection with certainsecurities-for-securities transactions. In instances where the Firm is the lender and 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 balance sheets.

Fair Value of Collateral Received with Right to Sell or Repledge

$ in millions 

At

 September 30, 

2017

  

At

 December 31, 

2016

 

Collateral received with right to sell or repledge

 $575,915  $561,239  

Collateral that was sold or repledged

  470,555   430,911  

Customer Margin Lending and Other

$ in millions 

At

 September 30, 

2017

  

At

 December 31, 

2016

 

Net customer receivables representing margin loans

 $28,609  $24,359  

$ in millionsAt
September 30,
2020		At
December 31,
2019
Customer receivables representing margin loans$44,658
$31,916

The Firm engages inprovides margin lending to clients that allows the clientarrangements which allow customers to borrow against the value of qualifying securities. Margin loansReceivables under margin lending arrangements are included within Customer and other receivables in the balance sheets.
Under these agreements and transactions, the Firm receives collateral, includingwhich includes U.S. government and agency securities, other sovereign government obligations, corporate and other debt, and corporate equities. Customer receivables generated from margin lending activities are collateralized by customer-owned securities held by the Firm. The Firm monitors required margin levels and established credit terms daily and, pursuant to such guidelines,

requires customers to deposit additional collateral, or reduce positions, when necessary.

For a further discussion of the Firm’s margin lending activities, see Note 67 to the consolidated financial statements in the 20162019 Form10-K.

Other Secured Financings
The Firm has additional secured liabilities. For a further discussion of other secured financings, see Note 13.
10.

Cash Loans, Lending Commitments and Securities Deposited with Clearing Organizations or Segregated

$ in millions 

At

 September 30, 

2017

  

At

 December 31, 

2016

 

Segregated securities1

 $17,491  $23,756  

Other assets—Cash deposited with clearing organizations or segregated under federal and other regulations or requirements

  32,731   33,979  

Total

 $50,222  $57,735  

1.

Securities segregated under federal regulations for the Firm’s U.S. broker-dealers are sourced from Securities purchased under agreements to resell and Trading assets in the balance sheets.

7. Loans andRelated Allowance for Credit Losses

Loans

The

As of September 30, 2020, the Firm’s loans held for investment are recorded at amortized cost, and its loans held for sale are recorded atloan portfolio consists of the lowerfollowing types of cost or fair value in the balance sheets. For a further description of these loans, refer to Note 7 to the consolidated financial statements in the 2016 Form10-K. See Note 3 for further information regarding Loans and lending commitments held at fair value.

Loans by Type

  At September 30, 2017 
$ in millions   Loans Held  
for
Investment		    Loans Held  
for Sale		  Total     
  Loans   		 

Corporate loans

 $29,686  $12,524  $42,210   

Consumer loans

  26,616   —   26,616   

Residential real estate loans

  26,150   60   26,210   

Wholesale real estate loans

  9,000   640   9,640   

Total loans, gross

  91,452   13,224   104,676   

Allowance for loan losses

  (245)   —   (245)  

Total loans, net

 $91,207  $13,224  $104,431   
loans:

•
Corporate.    Corporate includes revolving lines of credit, term loans and bridge loans made to corporate entities for a variety of purposes.
•
Secured lending facilities.    Secured lending facilities include loans provided to clients, which are collateralized by various assets including residential and commercial real estate mortgage loans, corporate loans, and other assets.
•
Residential Real Estate.    Residential real estate loans mainly include non-conforming loans and HELOC.
•
Commercial Real Estate.    Commercial real estate loans include owner-occupied loans and income-producing loans.
•
Securities-based lending and Other.    Securities-based lending includes loans which allow clients to borrow money against the value of qualifying securities for any suitable purpose other than purchasing, trading, or carrying securities or refinancing margin debt. The majority of these loans are structured as revolving lines of credit. Other primarily includes certain loans originated in the tailored lending business within the Wealth Management business segment.

September 20172020 Form 10-Q7270 

Table of Contents
Notes to Consolidated Financial Statements

(Unaudited)

LOGO
mslogo3q20.jpg

  At December 31, 2016 
$ in millions Loans Held
for
  Investment  		    Loans Held  
for Sale		  

Total

    Loans    

 

Corporate loans

 $25,025  $10,710  $35,735  

Consumer loans

  24,866   —   24,866  

Residential real estate loans

  24,385   61   24,446  

Wholesale real estate loans

  7,702   1,773   9,475  

Total loans, gross

  81,978   12,544   94,522  

Allowance for loan losses

  (274)   —   (274) 

Total loans, net

 $81,704  $12,544  $94,248  


Loans by Interest Rate Type

$ in millions 

  At September 30,  

2017

    At December 31,  
2016		 

Fixed

 $13,323  $11,895  

Floating or adjustable

  91,108   82,353  

Total loans, net

 $104,431  $94,248  

Loans toNon-U.S. Borrowers

$ in millions 

  At September 30,  

2017

    At December 31,  
2016		 

Loans, net of allowance

 $8,883  $9,388  

Credit Quality

For a further discussion about the Firm’s evaluation of credit transactions and monitoring and credit quality indicators, as well as 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 2016Form 10-K.

1

 At September 30, 2020
$ in millions
Loans Held
for Investment
Loans Held
for Sale
Total Loans
Corporate$7,628
$8,552
$16,180
Secured lending facilities26,496
3,521
30,017
Commercial real estate7,265
891
8,156
Residential real estate33,674
49
33,723
Securities-based lending and Other loans59,006
68
59,074
Total loans134,069
13,081
147,150
ACL(913)


(913)
Total loans, net$133,156
$13,081
$146,237
Fixed rate loans, net  $31,342
Floating or adjustable rate loans, net 114,895
Loans to non-U.S. borrowers, net 23,591
 At December 31, 2019
$ in millions
Loans Held
for Investment
Loans Held
for Sale
Total Loans
Corporate$5,426
$6,192
$11,618
Secured lending facilities24,502
4,200
28,702
Commercial real estate7,859
2,049
9,908
Residential real estate30,184
13
30,197
Securities-based lending and Other loans50,438
123
50,561
Total loans118,409
12,577
130,986
ACL(349) (349)
Total loans, net$118,060
$12,577
$130,637
Fixed rate loans, net  $22,716
Floating or adjustable rate loans, net 107,921
Loans to non-U.S. borrowers, net 21,617

1.Loans previously classified as corporate have been further disaggregated; prior period balances have been revised to conform with current period presentation.

Loans Held for Investment before Allowance by Credit Quality

  At September 30, 2017 

$ in millions

 Corporate  Consumer  

Residential

Real Estate

  

Wholesale

Real Estate

  Total 

Pass

 $28,735  $26,613  $26,092  $8,435  $89,875  

Special mention

  435   3   —   250   688  

Substandard

  509   —   58   315   882  

Doubtful

  7   —   —   —   7  

Loss

  —   —   —   —   —  

Total

 $29,686  $26,616  $26,150  $9,000  $91,452  

  At December 31, 2016 
$ in millions Corporate  Consumer  

Residential

Real Estate

  

Wholesale

Real Estate

  Total 

Pass

 $23,409  $24,853  $24,345  $7,294  $79,901  

Special mention

  288   13   —   218   519  

Substandard

  1,259   —   40   190   1,489  

Doubtful

  69   —   —   —   69  

Loss

  —   —   —   —   —  

Total

 $25,025  $24,866  $24,385  $7,702  $81,978  
Origination Year

The following loans and lending commitments have been evaluated for a specific allowance. All remaining loans and lending commitments are assessed under the inherent allowance methodology.

Impaired Loans and Lending Commitments Before Allowance

  At September 30, 2017 
$ in millions   Corporate  

  Residential

  Real Estate

        Total       

Loans

   

With allowance

 $15  $—  $15  

Without allowance1

  146   46   192  

Unpaid principal balance2

  170   47   217  

Lending Commitments

   

With allowance

 $1  $—  $1  

Without allowance1

  221   —   221  

  At December 31, 2016 
$ in millions   Corporate  

  Residential

  Real Estate

        Total       

Loans

   

With allowance

 $104  $—  $104  

Without allowance1

  206   35   241  

Unpaid principal balance2

  316   38   354  

Lending Commitments

   

With allowance

 $—  $—  $—  

Without allowance1

  89   —   89  

1.

At September 30, 2017 and December 31, 2016, no allowance was recorded for these loans and lending commitments as the present value of the expected future cash flows (or, alternatively, the observable market price of the instrument or the fair value of the collateral held) equaled or exceeded the carrying value.

2.

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

Impaired Loans and Allowance by Region

  At September 30, 2017 
$ in millions   Americas    EMEA  Asia-
  Pacific  		  Total   

Impaired loans

 $188  $9  $10  $207  

Allowance for loan losses

  209   33   3   245  

  At December 31, 2016 
$ in millions   Americas    EMEA  Asia-
  Pacific  		  Total   

Impaired loans

 $320  $9  $16  $345  

Allowance for loan losses

  245   28   1   274  

EMEA—Europe, Middle East and Africa

 At September 30, 2020
 Corporate
$ in millionsInvestment GradeNon-Investment GradeTotal
Revolving Loans$1,556
$4,264
$5,820
2020582
176
758
2019279
159
438
2018195
0
195
20170
64
64
2016114
0
114
Prior127
112
239
Total$2,853
$4,775
$7,628

 

 At September 30, 2020
 Secured lending facilities
$ in millionsInvestment GradeNon-Investment GradeTotal
Revolving Loans$4,457
$14,832
$19,289
2020206
378
584
2019297
2,000
2,297
20181,063
1,449
2,512
2017245
570
815
20160
620
620
Prior0
379
379
Total$6,268
$20,228
$26,496
 At September 30, 2020
 Commercial real estate
$ in millionsInvestment GradeNon-Investment GradeTotal
2020$17
$744
761
2019637
2,318
2,955
2018601
1,053
1,654
2017188
629
817
2016235
451
686
Prior0
392
392
Total$1,678
$5,587
$7,265
 At September 30, 2020
 Residential real estate
 by FICO Scores by LTV Ratio Total
$ in millions≥ 740680-739≤ 679 ≤ 80%> 80% 
Revolving Loans$89
$34
$5
 $128
$0
 $128
20206,438
1,337
138
 7,487
426
 7,913
20195,791
1,306
175
 6,812
460
 7,272
20182,442
685
83
 2,952
258
 3,210
20172,875
732
93
 3,436
264
 3,700
20163,524
953
134
 4,305
306
 4,611
Prior4,814
1,716
310
 6,094
746
 6,840
Total$25,973
$6,763
$938
 $31,214
$2,460
 $33,674
 At September 30, 2020
 
Securities-based lending1
Other2
 
$ in millionsInvestment GradeNon-Investment GradeTotal
Revolving Loans$47,251
$4,238
$684
$52,173
20200
860
431
1,291
201918
1,106
674
1,798
2018232
334
456
1,022
20170
663
116
779
20160
579
113
692
Prior16
1,068
167
1,251
Total$47,517
$8,848
$2,641
$59,006
1. Securities-based loans are subject to collateral maintenance provisions, and at September 30, 2020, these loans are predominantly over-collateralized. For more information on the ACL methodology related to securities-based loans, see Note 2.
2. Other loans primarily include certain loans originated in the tailored lending business within the Wealth Management business segment.


73September 2017 Form 10-Q

71September 2020 Form 10-Q
Table of Contents
Notes to Consolidated Financial Statements

(Unaudited)

LOGO
mslogo3q20.jpg


Past Due Status of Loans Held for Investment before Allowance
 At September 30, 2020
$ in millionsCurrent
Past Due1
Total
Corporate$7,628
$0
$7,628
Secured lending facilities26,496
0
26,496
Commercial real estate7,264
1
7,265
Residential real estate33,476
198
33,674
Securities-based lending and Other loans58,881
125
59,006
Total$133,745
$324
$134,069
1.The majority of the amounts are past due for a period of 90 days or more.

Nonaccrual Loans Held for Investment before Allowance
$ in millionsAt
September 30,
2020		At
December 31,
2019
Corporate$184
$299
Commercial real estate185
85
Residential real estate92
94
Securities-based lending and Other loans133
5
Total1
$594
$483
Nonaccrual loans without an ACL$91
$120
1.Includes all HFI loans that are 90 days or more past due.

See Note 2 for a description of the ACL calculated under the CECL methodology, including credit quality indicators, used for HFI loans beginning in 2020.
Troubled Debt Restructurings

$ in millions 

  At September 30,  

2017

    At December 31,  
2016		 

Loans

 $69  $67  

Lending commitments

  11   14  

Allowance for loan losses

  10   —  

Impaired loans and lending commitments classified as held for investment within corporate loans include troubled

$ in millionsAt
September 30,
2020		At
December 31,
2019
Loans, before ACL$166
$92
Lending commitments32
32
ACL on Loans and Lending commitments32
16

Troubled debt restructurings as shown in the previous table. These restructurings typically include modifications of interest rates, collateral requirements, other loan covenants and payment extensions.

See Note 2 for further information on TDR guidance issued by Congress in the CARES Act as well as by the U.S. banking agencies.

For a discussion of the Firm’s ACL methodology under the prior incurred loss model, including credit quality indicators, used for HFI loans as of December 31, 2019, and a further discussion of the Firm’s loans, see Notes 2 and 8 in the 2019 Form 10-K.
Allowance for LoanCredit Losses Rollforward

$ in millions  Corporate  Consumer   

Residential

Real
Estate

   Wholesale
Real
Estate		       Total     

December 31, 2016

  $195  $4   $20   $55   $274 

Gross charge-offs

   (75)   —    —    —    (75) 

Recoveries

   1   —    —    —    1 

Net recoveries (charge-offs)

   (74)   —    —    —    (74) 

Provision (release)1

   26   —    4    12    42 

Other

   2   —    —    1    3 

September 30, 2017

  $149  $4   $24   $68   $245 

Inherent

  $142  $4   $24   $68   $238 

Specific

   7   —    —    —    7 

$ in millions  Corporate  Consumer  

Residential

Real
Estate

   Wholesale
Real
Estate		       Total     

December 31, 2015

  $166  $5  $17   $37   $225 

Gross charge-offs

   (15)   —   —    —    (15) 

Gross recoveries

   —   —   —    —    — 

Net recoveries (charge-offs)

   (15)   —   —    —    (15) 

Provision (release)1

   120   (2)   3    8    129 

Other2

   (52)   —   —    —    (52) 

September 30, 2016

  $219  $3  $20   $45   $287 

Inherent

  $142  $3  $20   $45   $210 

Specific

   77   —   —    —    77 

Rollforward—Loans
$ in millionsCorporateSecured lending facilitiesCREResidential real estateSBL and OtherTotal
December 31, 2019$115
$101
$75
$25
$33
$349
Effect of CECL adoption(2)(42)34
21
(2)9
Gross charge-offs(33)0
(26)0
0
(59)
Recoveries3
0
0
0
2
5
Net (charge-offs) recoveries(30)0
(26)0
2
(54)
Provision (release)1
281
131
173
12
4
601
Other3
1
(34)0
38
8
September 30, 2020$367
$191
$222
$58
$75
$913
$ in millionsCorporateSecured lending facilitiesCREResidential real estateSBL and OtherTotal
December 31, 2018$62
$60
$67
$20
$29
$238
Gross charge-offs0
0
0
(1)0
(1)
Provision (release)1
40
28
(6)5
1
68
Other(6)(1)(1)0
0
(8)
September 30, 2019$96
$87
$60
$24
$30
$297
1.

The Firm recorded provisions of $13 million and $1 millionprovision for loan losses forwas $63 million in the current quarter and $34 million in the prior year quarter, respectively.

quarter.
2.

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

Allowance for Credit Losses Rollforward—Lending Commitments Rollforward

$ in millions Corporate  Consumer  

Residential

Real
Estate

  Wholesale
Real
Estate		      Total     

December 31, 2016

 $185  $1  $—  $4  $190 

Provision (release)1

  (10)   —   —   —   (10) 

Other

  1   —   —   —   1 

September 30, 2017

 $176  $1  $—  $4  $181 

Inherent

 $173  $1  $—  $4  $178 

Specific

  3   —   —   —   3 

$ in millions Corporate  Consumer  

Residential

Real
Estate

  Wholesale
Real
Estate		      Total     

December 31, 2015

 $180  $1  $—  $4  $185 

Provision (release)1

  9   —   —   —   9 

Other

  (7)   —   —   —   (7) 

September 30, 2016

 $182  $1  $—  $4  $187 

Inherent

 $180  $1  $—  $4  $185 

Specific

  2   —   —   —   2 

$ in millionsCorporateSecured lending facilitiesCREResidential real estateSBL and OtherTotal
December 31, 2019$201
$27
$7
$0
$6
$241
Effect of CECL adoption(41)(11)1
2
(1)(50)
Provision (release)1
119
24
7
(1)7
156
Other0
0
(4)0
4
0
September 30, 2020$279
$40
$11
$1
$16
$347
$ in millionsCorporateSecured lending facilitiesCREResidential real estateSBL and OtherTotal
December 31, 2018$178
$16
$3
$0
$6
$203
Provision (release)1
27
7
2
0
0
36
Other(4)0
0
0
(1)(5)
September 30, 2019$201
$23
$5
$0
$5
$234
CRE—Commercial real estate
SBL—Securities-based lending
1.

The Firm recorded a release of $6 million, and a provision of $6 million(release) for lending commitments forwas $48 million in the current quarter and $16 million in the prior year quarter, respectively.

quarter.

The aggregate allowance for loans and lending commitments increased in the current year period, principally reflecting the

September 2020 Form 10-Q72
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Notes to Consolidated Financial Statements
(Unaudited)
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provision for credit losses within the Institutional Securities business segment primarily resulting from the continued economic impact of COVID-19. This provision was the result of risks related to vulnerable sectors and higher downgrade sensitivity, changes in asset quality trends, as well as revisions to our forecasts reflecting expected future market and macroeconomic conditions. The base scenario used in our ACL models as of September 30, 2020 was generated using a combination of industry consensus economic forecasts, forward rates, and internally developed and validated models. Given the nature of our lending portfolio, the most sensitive model input is U.S. GDP. The base scenario, among other things, assumes a continued recovery in the last quarter of 2020 through 2021, supported by fiscal stimulus and monetary policy measures. For a further discussion of the Firm’s loans as well as the Firm’s allowance methodology prior to the adoption of CECL, refer to Notes 2 and 8 to the financial statements in the 2019 Form 10-K. See Note 5 for further information regarding Loans and lending commitments held at fair value. See Note 14 for details of current commitments to lend in the future.
Employee Loans

$ in millions 

At September 30,

2017

    At December 31,
2016		 

Balance

 $4,317  $4,804 

Allowance for loan losses

  (79)   (89) 

Balance, net

 $4,238  $4,715 

Repayment term range, in years

  1 to 20   1 to 12 

$ in millionsAt
September 30,
2020		At
December 31,
2019
Currently employed by the Firm1
$2,940
N/A
No longer employed by the Firm2
142
N/A
Employee loans$3,082
$2,980
ACL3
(165)(61)
Employee loans, net of ACL$2,917
$2,919
Remaining repayment term, weighted average in years5.1
4.8
1.These loans are predominantly current.
2.These loans are predominantly past due for a period of 90 days or more.
3.The change in ACL includes a $124 million increase due to the adoption of CECL in the first quarter of 2020.
Employee loans are granted in conjunction with a program established primarily to retain and recruit certain employees,Wealth Management representatives, are full recourse and generally require periodic repayments.repayments, and are due in full upon termination of employment with the Firm. These loans are recorded in Customer and other receivables in the balance sheets. The Firm establishes an allowance for loan amounts it does not consider recoverable, andACL as of September 30, 2020 was calculated under the CECL methodology, while the ACL at December 31, 2019 was calculated under the prior incurred loss model. The related provision is recorded in Compensation and benefits expense.

expense in the income statements. See Note 2 for a description of the CECL allowance methodology, including credit quality indicators, for employee loans.
 

11. Other Assets—Equity Method Investments
Equity Method Investments
$ in millionsAt
September 30,
2020		At
December 31,
2019
Investments$2,338
$2,363
 Three Months Ended
September 30,		Nine Months Ended
September 30,
$ in millions2020201920202019
Income (loss)1
$10
$(13)$(24)$(39)

September 2017 Form 10-Q1.74The current year period includes an impairment of the Investment Management business segment’s investment in a third-party asset manager.

Notes to Consolidated Financial Statements

(Unaudited)

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8. Equity Method Investments

Overview

The Firm’smethod investments, accounted for under the equity method of accounting (see Note 1 to the consolidated financial statementsother than investments in the 2016 Form10-K)certain fund interests, are summarized above and are included in Other assets in the balance sheets. Income (loss) from equity method investments issheets with related income or loss included in Other revenues in the income statements.

Equity Method Investment Balances

$ in millions At
September 30, 2017		  At
December 31, 2016		 

Investments

 $2,766  $2,837  

  Three Months Ended
September 30,		  Nine Months Ended  
September 30,		 
$ in millions 2017  2016  2017  2016 

Income (loss)

 $—  $(40)  $—  $(39)  

See “Net Asset Value Measurements—Fund Interests” in Note 5 for the carrying value of certain of the Firm’s fund interests, which are comprised of general and limited partnership interests, as well as any related carried interest.

Japanese Securities Joint Venture

Included in the equity method investments is the Firm’s 40% voting interest (“40% interest”) in

 Three Months Ended
September 30,		Nine Months Ended
September 30,
$ in millions2020201920202019
Income (loss) from investment in MUMSS$15
$(4)$46
$5

For more information on Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (“MUMSS”). and other relationships with Mitsubishi UFJ Financial Group, Inc. (“MUFG”) holds a 60% voting interest. The Firm accounts for its equity method investment in MUMSS within, see Note 10 to the Institutional Securities business segment. The Firm records income from its 40% interest in MUMSS within Other revenuesfinancial statements in the income statements.

  Three Months Ended
September 30,		  Nine Months Ended  
September 30,		 
$ in millions 2017  2016  2017  2016 

Income from investment in MUMSS

 $25  $26  $96  $83  

In addition to MUMSS, the Firm held other equity method investments that were not individually significant.

2019 Form 10-K.


9.
12. Deposits

Deposits

$ in millions   At September 30,
2017		    At December 31,
2016		 

Savings and demand deposits

 $140,707  $154,559  

Time deposits1

  13,932   1,304  

Total2

 $154,639  $155,863  

Deposits subject to FDIC insurance

 $121,896  $127,992  

Time deposits that equal or exceed the FDIC insurance limit

 $10  $46  

Interest Bearing Deposits

$ in millionsAt
September 30,
2020		At
December 31,
2019
Savings and demand deposits$202,577
$149,465
Time deposits36,676
40,891
Total$239,253
$190,356
Deposits subject to FDIC insurance$173,173
$149,966
Time deposits that equal or exceed the FDIC insurance limit$20
$12


73September 2020 Form 10-Q
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Notes to Consolidated Financial Statements
(Unaudited)
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Time Deposit Maturities

$ in millions  

At

       September 30, 2017  

 

2017

  $3,447  

2018

   9,456  

2019

   861  

2020

   —  

2021

   8  

Thereafter

   160  

FDIC—Federal Deposit Insurance Corporation

1.

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

2.

Deposits were primarily held in the U.S.

$ in millionsAt
September 30,
2020
2020$5,457
202117,986
20224,984
20234,086
20242,784
Thereafter1,379
Total$36,676

10. Long-Term
13. Borrowings and Other Secured Financings

Long-Term

Borrowings

$ in millions 

At

  September 30,
2017

  

At

  December 31,
2016

 

Senior

 $181,336  $154,472  

Subordinated

  10,341   10,303  

Total

 $191,677  $164,775  

Weighted average stated maturity, in years

  6.7   5.9  

$ in millionsAt
September 30,
2020		At
December 31,
2019
Original maturities of one year or less$4,553
$2,567
Original maturities greater than one year
Senior$187,717
$179,519
Subordinated11,174
10,541
Total$198,891
$190,060
Total borrowings$203,444
$192,627
Weighted average stated maturity, in years1
7.4
6.9

1.Only includes borrowings with original maturities greater than one year.
Other Secured Financings

$ in millionsAt
September 30,
2020
At
December 31, 20191
Original maturities:  
One year or less$9,141
$7,103
Greater than one year4,716
7,595
Total$13,857
$14,698
Transfers of assets accounted for as secured financings$1,108
$1,115


1.Prior period balances have been conformed to the current presentation.
Other secured financings include the liabilities related to certain ELNs, transfers of financial assets that are accounted for as financings rather than sales, pledged commodities, consolidated VIEs where the Firm is deemed to be the primary beneficiary 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.Seeassets. See Note 1215 for further information on Otherother secured financings related to VIEs and securitization activities.

Other Secured Financings by Original Maturity

For transfers of assets that fail to meet accounting criteria for a sale, the Firm continues to record the assets and Type

$ in millions  

At

  September 30,
2017

  

At

  December 31,
2016

 

Secured financings

   

Original maturities:

         

Greater than one year

  $11,037  $9,404  

One year or less

   2,349   1,429  

Failed sales1

   858   285  

Total

  $14,244  $11,118  

1.

For more information on failed sales, see Note 12.

recognizes the associated liabilities in the balance sheets.

 

14. Commitments, Guarantees and Contingencies
Commitments
 Years to Maturity at September 30, 2020 
$ in millionsLess than 11-33-5Over 5Total
Lending:    
Corporate$14,707
$36,048
$37,002
$4,888
$92,645
Secured lending facilities5,554
3,693
1,302
133
10,682
Commercial and Residential real estate137
226
38
260
661
Securities-based lending and Other12,421
2,934
369
386
16,110
Forward-starting secured financing receivables81,340
0
0
0
81,340
Central counterparty1
300
0
0
9,329
9,629
Underwriting675
0
0
0
675
Investment activities947
241
41
286
1,515
Letters of credit and other financial guarantees172
1
0
3
176
Total$116,253
$43,143
$38,752
$15,285
$213,433
Lending commitments participated to third parties$8,647
Forward-starting secured financing receivables settled within three business days$72,771

1.75September 2017 Form 10-QBeginning in the first quarter of 2020, commitments to central counterparties are presented separately; these commitments were previously included in Corporate Lending commitments and Forward-starting secured financing receivables depending on the type of agreement. These commitments relate to the Firm’s membership in certain clearinghouses and are contingent upon the default of a clearinghouse member or other stress events.

Notes to Consolidated Financial Statements

(Unaudited)

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11. Commitments, Guarantees and Contingencies

Commitments

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

      Years to Maturity at September 30,    
2017		    
$ in millions Less
than 1		  1-3  3-5  Over 5   Total  

Lending:

     

Corporate

 $13,001  $30,194  $44,669  $4,122  $91,986  

Consumer

  6,182   —   2   3   6,187  

Residential real
estate

  17   39   70   273   399  

Wholesale real
estate

  124   281   114   232   751  

Forward-starting
secured financing
receivables1

  68,538   —   —   —   68,538  

Investment
activities

  504   180   55   259   998  

Letters of credit and
other financial
guarantees

  157   1   1   44   203  

Total

 $88,523  $30,695  $44,911  $4,933  $169,062  

Corporate lending commitments participated to third parties

 

 $6,335  

Forward-starting secured financing receivables
settled within three business days1

 

 $60,013  

1.

Represents forward-starting securities purchased under agreements to resell and securities borrowed agreements.

For a further description of these commitments, refer to Note 1213 to the consolidated financial statements in the 20162019 Form10-K.


September 2020 Form 10-Q74
Table of Contents
Notes to Consolidated Financial Statements
(Unaudited)
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Guarantees

Maximum Potential Payout/Notional of Obligations under Guarantee Arrangements at September 30, 2017

  Maximum Potential Payout/Notional 
  Years to Maturity    
$ in millions 

Less

than 1

  1-3  3-5  Over 5   Total  

Credit derivatives

 $118,646  $85,300  $82,668  $53,744  $340,358  

Other credit contracts

  14   —   —   135   149  

Non-credit derivatives

  1,592,809   1,029,404   374,956   573,755   3,570,924  

Standby letters of credit and other financial guarantees issued1

  782   909   1,406   4,956   8,053  

Market value
guarantees

  40   62   69   —   171  

Liquidity facilities

  3,237   —   —   —   3,237  

Whole loan sales
guarantees

  —   —   1   23,260   23,261  

Securitization
representations
and warranties

  —   —   —   58,423   58,423  

General partner
guarantees

  34   49   332   25   440  

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

Credit derivatives2

         $(2,004)  $        —  

Other credit contracts

 

      13   —  

Non-credit derivatives2

 

      38,611   —  

Standby letters of credit and other
financial guarantees issued1

 

      (186)   6,593  

Market value guarantees

 

      1   4  

Liquidity facilities

          (5)   5,342  

Whole loan sales guarantees

 

      8   —  

Securitization representations and warranties

 

  91   —  

General partner guarantees

 

      53   —  

 Years to Maturity at September 30, 2020
$ in millionsLess than 11-33-5Over 5Total
Credit derivatives$25,206
$42,799
$114,950
$72,312
$255,267
Other credit contracts0
190
0
104
294
Non-credit derivatives1,531,263
1,122,139
367,428
779,686
3,800,516
Standby letters of credit and other financial guarantees issued1
1,082
1,475
758
3,967
7,282
Market value guarantees92
28
0
0
120
Liquidity facilities4,342
0
0
0
4,342
Whole loan sales guarantees1
0
9
23,176
23,186
Securitization representations and warranties0
0
0
67,024
67,024
General partner guarantees59
161
12
115
347
Client clearing guarantees92
0
0
0
92
$ in millionsCarrying Amount Asset (Liability)
Credit derivatives2
$(1,757)
Other credit contracts(4)
Non-credit derivatives2
(88,369)
Standby letters of credit and other financial guarantees issued1
113
Market value guarantees0
Liquidity facilities6
Whole loan sales guarantees0
Securitization representations and warranties3
(42)
General partner guarantees(66)
Client clearing guarantees0

1.

These amounts include certain issued standby letters of credit participated to third parties, totaling $0.7$0.6 billion of notional and collateral/recourse, due to the nature of the Firm’s obligations under these arrangements.

As of September 30, 2020, the carrying amount of standby letters of credit and other financial guarantees issued includes an allowance for credit losses of $86 million.
2.

CarryingThe carrying amounts of derivative contracts that meet the accounting definition of a guarantee are shown on a gross basis prior to cash collateral or counterparty netting.basis. For further information on derivativederivatives contracts, see Note 4.

7.

September 2017 Form 10-Q3.76
Primarily related to residential mortgage securitizations.

Notes to Consolidated Financial Statements

(Unaudited)

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The Firm also 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 ornon-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.

Client Clearing Guarantees. In certain situations, collateral may be held bythe first quarter of 2020, FICC’s sponsored clearing model was updated such that the Firm could be responsible for those contracts that meet the definitionliquidation of a guarantee. Generally, the Firm sets collateral requirements by counterparty so that the collateral covers various transactionssponsored member’s account and products and is not allocated specifically to individual contracts. Also, the Firm may recover amounts relatedguarantees any resulting loss to the underlying asset deliveredFICC in the event the sponsored member fails to fully pay any net liquidation amount due from the sponsored member to the Firm underFICC. Accordingly, the derivative contract.

Firm’s maximum potential payout amount as of September 30, 2020 reflects the total of the estimated net liquidation amounts for sponsored member accounts.

For more information on the nature of the obligationobligations and related business activityactivities for market valueour guarantees, liquidity facilities, whole loan sales guarantees and general partner guarantees related to certain investment management funds, as well as the other products in the previous table, see Note 1213 to the consolidated financial statements in the 20162019 Form10-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 indemnities, exchange/exchange and clearinghouse member guarantees and merger and acquisition guarantees are described in Note 1213 to the consolidated financial statements in the 20162019 Form10-K.

In addition, in the ordinary course of business, the Firm guarantees the debt and/or certain trading obligations (including obligations associated with derivatives, foreign exchange contracts and the settlement of physical commodities) of certain subsidiaries. These guarantees generally are entity or product specific and are required by investors or trading counterparties. The activities of the Firm’s subsidiaries covered by these guarantees (including any related debt or trading obligations) are included in the financial statements.

Finance Subsidiary

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


Contingencies

Legal.    
In addition to the matters described in the following paragraphs, 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 relatedcredit 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 will continue to be the subject of elevated claims for damages and other relief and, while


75September 2020 Form 10-Q
Table of Contents
Notes to Consolidated Financial Statements
(Unaudited)
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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.

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 governmentalgovernment 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

77September 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

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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, styledChinaDevelopment Industrial Bank v. Morgan Stanley & Co. Incorporated et al.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 swapCDS referencing the super senior portion of the STACK2006-1 CDO. The complaint asserts claims for common law fraud, fraudulent inducement and fraudulent concealment and alleges that the Firm misrepresented the risks of the STACK2006-1 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 swapCDS 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,CDS, rescission of CDIB’s obligation to pay an additional $12 million, punitive damages, equitable relief, fees and costs. On February 28, 2011, the court denied the Firm’s motion to dismiss the complaint. On December 21, 2018, the court denied the Firm’s motion for summary judgment and granted in part the Firm’s motion for sanctions relating to spoliation of evidence. On January 24, 2019, CDIB filed a notice of appeal from the court’s December 21, 2018 order, and on January 25, 2019, the Firm filed a notice of appeal from the same order. On March 7, 2019, the court denied the relief that CDIB sought in a motion to clarify and resettle the portion of the court’s December 21, 2018 order granting spoliation sanctions. On May 21, 2020, the Appellate Division, First Department (“First Department”), modified the Supreme Court of NY’s order to deny the Firm’s motion for sanctions relating to spoliation of evidence and otherwise affirmed the denial of the Firm’s motion for summary judgment. On June 19, 2020, the Firm moved for leave to appeal the First Department’s decision to the New York Court of Appeals (“Court of Appeals”), which the First Department denied on July 24, 2020. Based on currently available information, the Firm believes it could incur a loss in this action of up to approximately $240 million pluspre- and post-judgment interest, fees and costs.

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 styledMorganStanley Mortgage Loan Trust 2006-14SL, 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 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 under-

lying 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. On August 16, 2016, the Firm moved for summary judgment and the plaintiffs moved for partial summary judgment. 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, pluspre- 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 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 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. On June 20, 2017 the Appellate Division, First Department, affirmed the lower court’s June 10, 2014 order. On July 28, 2017, the Firm filed a motion for leave to appeal that decision to the New York Court of Appeals. On October 3, 2017, the Appellate Division, First Department denied the Firm’s motion for leave to appeal. At September 25, 2017, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $232 million, and the certificates had incurred actual losses of approximately $87 million. Based on currently available information, the Firm believes it could incur a loss in this action up to the difference between the $232 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, pluspre- 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, asSuccessor-by-Merger to Morgan Stanley

September 2017 Form 10-Q78

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

MortgageCapital 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, pluspre- 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 for Morgan Stanley Mortgage LoanTrust 2007-12, filed a complaint against the Firm styledWilmington Trust Company v. MorganStanley Mortgage Capital Holdings LLC et al., 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, interest and costs. 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. The plaintiff filed a notice of appeal of that order on August 17, 2016, and the appeal was fully briefed on May 5, 2017. On July 11, 2017, the Appellate Division, First Department affirmed in part and reversed in part the trial court’s order that granted in part the Firm’s motion to dismiss. On August 10, 2017, plaintiff filed a motion for leave to appeal the Appellate Division, First Department’s July 11, 2017 decision and order. On September 26, 2017, the Appellate Division, First Department denied plaintiff’s motion for leave to appeal. 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 I2007-1, filed a complaint against the Firm styledDeutsche Bank National Trust Company v. Morgan Stanley Mortgage

Capital Holdings LLC, pending in the United States District Court for the Southern District of New York. 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. On May 8, 2017, the Firm moved for summary judgment. 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, pluspre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

On September 19,23, 2014, Financial Guaranty Insurance Company (“FGIC”) filed a complaint against the Firm in the Supreme Court of NY styledFinancial Guaranty Insurance Company v. Morgan Stanley ABS Capital I Inc. et al. relating to a securitization issued by Basket of Aggregated Residential NIMS2007-1 Ltd. The complaint asserts claims for breach of contract and alleges, among other things, that the net interest margin securities (“NIMS”) in the trust breached various representations and warranties. FGIC issued a financial guaranty policy with respect to certain notes that had an original balance of approximately $475 million. The complaint seeks, among other relief, specific performance of the NIMS breach remedy procedures in the transaction documents, unspecified damages, reimbursement of certain payments made pursuant to the transaction documents, attorneys’ fees and interest. On November 24, 2014, the Firm filed a motion to dismiss the complaint, which the court denied on January 19, 2017. On February 24, 2017, the Firm filed a notice of appeal of the court’s order. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $126 million, the unpaid balance of these notes, pluspre- and post-judgment interest, fees and costs, as well as claim payments that FGIC has made and will make in the future.

On September 23, 2014, FGIC filed a complaint against the Firm in the Supreme Court of NY styledFinancial Guaranty Insurance Company v. Morgan Stanley ABS Capital I Inc. et al.relating to the Morgan Stanley ABS Capital I Inc. Trust 2007-NC4. The complaint asserts claims for breach of contract and fraudulent inducement and alleges, among other things, that the loans in the trust breached various representations and warranties and defendants made untrue statements

79September 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

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and material omissions to induce FGIC to issue a financial guaranty policy on certain classes of certificates that had an original balance of approximately $876 million. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, compensatory, consequential and punitive damages, attorneys’ fees and interest. On January 23, 2017, the court denied the Firm’s motion to dismiss the complaint. On February 24, 2017,September 13, 2018, the Firm filed a noticeFirst Department affirmed in part and reversed in part the lower court’s order denying the Firm’s motion to dismiss. On December 20, 2018, the First Department denied plaintiff’s motion for leave to appeal its decision to the Court of appeal ofAppeals or, in the court’s order.alternative, for re-argument. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $277 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands from a certificate holder and FGIC that the Firm did not repurchase, pluspre- and post-judgmentpost- judgment interest, fees and costs, as well as claim payments that FGIC has


September 2020 Form 10-Q76
Table of Contents
Notes to Consolidated Financial Statements
(Unaudited)
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made and will make in the future. In addition, plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

On January 23, 2015, Deutsche Bank National Trust Company, in its capacity as trustee, filed a complaint against the Firm 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 HoldingsLLC asSuccessor-by-Merger to Morgan Stanley Mortgage Capital Inc., and Morgan Stanley ABS Capital I Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $1.05 billion, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, compensatory, consequential, rescissory, equitable and punitive damages, attorneys’ fees, costs and other related expenses, and interest. On December 11, 2015, the court granted in part and denied in part the Firm’s motion to dismiss the complaint. On February 11, 2016, plaintiffOctober 19, 2018, the court granted the Firm’s motion for leave to amend its answer and to stay the case pending resolution of Deutsche Bank National Trust Company’s appeal to the Court of Appeals in another case, styled Deutsche Bank National Trust Company v. Barclays Bank PLC, regarding the applicable statute of limitations. On January 17, 2019, the First Department reversed the trial court’s order to the extent that it had granted in part the Firm’s motion to dismiss the complaint. On June 4, 2019, the First Department granted the Firm’s motion for leave to appeal to the Court of Appeals. On March 19, 2020, the Firm filed a notice of appeal of that order, and the appeal was fully briefed on August 19, 2016.motion for partial summary judgment. 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, pluspre- 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.

Tax

In matters styledCase number 15/3637 andCase number 15/4353, the Dutch Tax Authority (“Dutch Authority”) is challenging in the District Court in Amsterdam,Dutch courts, the priorset-off by the Firm of approximately €124 million (plus(approximately $145 million) plus accrued interest)interest of withholding tax credits against the Firm’s corporation tax liabilities for the tax years 2007 to 2013. The Dutch Authority alleges that the Firm was not entitled to receive the withholding tax credits on the basis, inter alia, that a Firm subsidiary did not hold legal title to certain securities subject to withholding tax on the relevant dates. The Dutch Authority has also alleged that the Firm failed to provide certain information to the Dutch Authority and keep adequate books and records. The Firm does not agreeOn April 26, 2018, the District Court in Amsterdam issued a decision dismissing the Dutch Authority’s claims with these allegations. A hearing took place on September 19, 2017. Based on currently available information,respect
to certain of the tax years in dispute. On May 12, 2020, the Court of Appeal in Amsterdam granted the Dutch Authority’s appeal in matters re-styled Case number 18/00318 and Case number 18/00319. On June 22, 2020, the Firm believes that it could incur a lossfiled an appeal against the decision of the Court of Appeal in this action of up to approximately €124 million (plus accrued interest).

Amsterdam before the Dutch High Court.

12.
15. Variable Interest Entities and Securitization Activities

Overview

For a discussion of the Firm’s VIEs, the determination and structure of VIEs and securitization activities, see Note 13 to the consolidated financial statements in the 2016 Form10-K.

Consolidated VIEs

VIE Assets and Liabilities by Type of Activity

  At September 30, 2017  At December 31, 2016 

$ in millions

 

VIE

Assets

  VIE
Liabilities		  

VIE

Assets

  VIE
Liabilities		 

Credit-linked notes

 $100  $—  $501  $—  

Other structured financings

  398   3   602   10  

MABS1

  90   69   397   283  

Other2

  1,156   260   910   25  

Total

 $1,744  $332  $2,410  $318  

 At September 30, 2020At December 31, 2019
$ in millionsVIE AssetsVIE LiabilitiesVIE AssetsVIE Liabilities 
OSF$672
$429
$696
$391
MABS1
447
108
265
4
Other2
942
42
987
66
Total$2,061
$579
$1,948
$461
OSF—Other structured financings
1.

Amounts include transactions backed by residential mortgage loans, commercial mortgage loans and other types of assets, including consumer or commercial assets.assets and may be in loan or security form. The value of assets is determined based on the fair value of the liabilities and the interests owned by the Firm in such VIEs becauseas the fair values for the liabilities and interests owned are more observable.

2.

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

 

September 2017 Form 10-Q80

Notes to Consolidated Financial Statements

(Unaudited)

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Consolidated VIE Assets and Liabilities by Balance Sheet Caption

$ in millions At September 30,
2017		  At December 31,
2016		 

Assets

  

Cash and due from banks

 $82  $74  

Trading assets at fair value

  741   1,295  

Customer and other receivables

  15   13  

Goodwill

  18   18  

Intangible assets

  160   177  

Other assets

  728   833  

Total

 $1,744  $2,410  

Liabilities

  

Other secured financings at fair value

 $297  $289  

Other liabilities and accrued expenses

  35   29  

Total

 $332  $318  

$ in millionsAt
September 30,
2020		At
December 31,
2019
Assets  
Cash and cash equivalents$284
$488
Trading assets at fair value1,376
943
Customer and other receivables8
18
Intangible assets101
111
Other assets292
388
Total$2,061
$1,948
Liabilities  
Other secured financings$536
$422
Other liabilities and accrued expenses43
39
Total$579
$461
Noncontrolling interests$275
$192

Consolidated VIE assets and liabilities are presented in the previous tables after intercompany eliminations. MostGenerally, most assets owned by consolidated VIEs cannot be removed unilaterally by the Firm and are not generally available to the Firm. MostFirm while the related liabilities issued by consolidated VIEs arenon-recourse to the Firm. InHowever, in certain other consolidated VIEs, the Firm either has the unilateral right to remove assets or provides additional recourse through derivatives such as total return swaps, guarantees or other forms of involvement.

In general, the Firm’s exposure to loss in consolidated VIEs is limited to losses that would be absorbed on the VIE’sVIE net assets recognized in its financial statements, net of amounts absorbed by third-party variable interest holders.

Select Information Related


77September 2020 Form 10-Q
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Notes to Consolidated Financial Statements
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Non-consolidated VIEs

$ in millions  At September 30,
2017		   At December 31,
2016		 

Noncontrolling interests

  $197   $228  

Maximum exposure to losses1

   —    78  

 At September 30, 2020
$ in millions
MABS1
CDOMTOBOSF
Other2
VIE assets (UPB)$136,362
$3,744
$6,404
$2,190
$50,040
Maximum exposure to loss3
  
Debt and equity interests$16,821
$390
$0
$1,059
$10,581
Derivative and other contracts0
0
4,342
0
3,853
Commitments, guarantees and other810
0
0
0
685
Total$17,631
$390
$4,342
$1,059
$15,119
Carrying value of variable interests—Assets  
Debt and equity interests$16,821
$390
$0
$1,059
$10,581
Derivative and other contracts0
0
6
0
621
Total$16,821
$390
$6
$1,059
$11,202
Additional VIE assets owned4
   $11,832
Carrying value of variable interests—Liabilities  
Derivative and other contracts$0
$0
$1
$0
$114
Total$0
$0
$1
$0
$114
 At December 31, 2019
$ in millions
MABS1
CDOMTOBOSF
Other2
VIE assets (UPB)$125,603
$2,976
$6,965
$2,288
$51,305
Maximum exposure to loss3
  
Debt and equity interests$16,314
$240
$0
$1,009
$11,977
Derivative and other contracts0
0
4,599
0
2,995
Commitments, guarantees and other631
0
0
0
266
Total$16,945
$240
$4,599
$1,009
$15,238
Carrying value of variable interests–Assets
  
Debt and equity interests$16,314
$240
$0
$1,008
$11,977
Derivative and other contracts0
0
6
0
388
Total$16,314
$240
$6
$1,008
$12,365
Additional VIE assets owned4
   $11,453
Carrying value of variable interests—Liabilities  
Derivative and other contracts$0
$0
$0
$0
$444

MTOB—Municipal tender option bonds
1.

Primarily

Amounts include transactions backed by residential mortgage loans, commercial mortgage loans and other types of assets, including consumer or commercial assets. and may be in loan or security form.
2.
Other primarily includes exposures to commercial real estate property and investment funds.
3.
Where notional amounts are utilized in quantifying the maximum exposure related to certain derivatives, commitments, guarantees and other forms of involvementsuch amounts do not recognizedreflect changes in fair value recorded by the financial statements.

Firm.

Non-consolidated VIEs

4.
Additional VIE assets owned represents the carrying value of total exposure to non-consolidated VIEs for which the maximum exposure to loss is less than specific thresholds, primarily interests issued by securitization SPEs. The Firm’s maximum exposure to loss generally equals the fair value of the assets owned. These assets are primarily included in Trading assets and Investment securities and are measured at fair value (see Note 5). The Firm does not provide additional support in these transactions through contractual facilities, guarantees or similar derivatives.


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

8).

Non-consolidated VIEs

   At September 30, 2017 
$ in millions  MABS   CDO   MTOB   OSF   Other 

VIE assets (unpaid principal balance)

  $78,134   $7,153   $5,149   $3,709   $33,041  

Maximum exposure to loss

 

  

Debt and equity interests

  $8,908   $1,162   $44   $1,551   $5,684  

Derivative and other contracts

   —    —    3,237    —    50  

Commitments, guarantees and other

   850    1,007    —    169    451  

Total

  $9,758   $2,169   $3,281   $1,720   $6,185  

 

Carrying value of exposure to loss—Assets

 

  

Debt and equity interests

  $8,908   $1,162   $44   $1,145   $5,684  

Derivative and other contracts

   —    —    6    —    5  

Total

  $8,908   $1,162   $50   $1,145   $5,689  

  At December 31, 2016 

$ in millions

 MABS  CDO  MTOB  OSF  Other 

VIE assets (unpaid principal balance)

 $101,916  $11,341  $4,857  $4,293  $39,077  

Maximum exposure to loss

 

 

Debt and equity interests

 $11,243  $1,245  $50  $1,570  $4,877  

Derivative and other contracts

  —   —   2,812   —   45  

Commitments, guarantees and other

  684   99   —   187   228  

Total

 $11,927  $1,344  $2,862  $1,757  $5,150  

 

Carrying value of exposure to loss—Assets

 

 

Debt and equity interests

 $11,243  $1,245  $49  $1,183  $4,877  

Derivative and other contracts

  —   —   5   —   18  

Total

 $11,243  $1,245  $54  $1,183  $4,895  

MTOB—Municipal tender option bonds

OSF—Other structured financings

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

  

At

September 30, 2017

  

At

December 31, 2016 

 
$ in millions Unpaid
Principal
Balance		  Debt and
Equity
Interests		  Unpaid
Principal
Balance		  Debt and
Equity
Interests		 

Residential mortgages

 $13,043  $910  $4,775  $458  

Commercial mortgages

  43,920   1,964   54,021   2,656  

U.S. agency collateralized mortgage obligations

  12,015   2,723   14,796   2,758  

Other consumer or commercial loans

  9,156   3,311   28,324   5,371  

Total

 $78,134  $8,908  $101,916  $11,243  

The Firm’s maximum exposure to loss presented above often differs from the carrying value of the variable interests held by the Firm. The maximum exposure to loss presented above is dependent on the nature of the Firm’s variable interest in the VIEsVIE and is limited to the notional amounts of certain liquidity facilities and other credit support, total return swaps

81September 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

and written put options, andas well as the fair value of certain other derivatives and investments the Firm has made in the VIEs. Liabilities issued by VIEs generally arenon-recourse to the Firm. Where notional amounts are utilized in quantifying the maximum exposure related to derivatives, such amounts do not reflect fair value write-downs already recorded by the Firm.

VIE.

The Firm’s maximum exposure to loss presented abovein the previous tables does not include the offsetting benefit of hedges or any financial instruments that the Firm may utilize to hedge these risksreductions associated with its variable interests. In addition, the Firm’s maximum exposure to loss presented above 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

Liabilities issued by securitization SPEs for which the maximum exposure to loss is less than specific thresholds. These additional assets totaled $11.9 billion and $11.7 billion at September 30, 2017 and December 31, 2016, respectively.

These assets were either retained in connection with transfers of assets by the Firm, acquired in connection with secondary market-making activities, held as AFS securities in its Investment securities portfolio (see Note 5), or held as investments in funds. At September 30, 2017 and December 31, 2016, 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 isVIEs generally are non-recourse to the securities issued by the SPE owned by the Firm,Firm.

Detail of Mortgage- and Asset-Backed Securitization Assets
 At September 30, 2020At December 31, 2019
$ in millionsUPB
Debt and
Equity
Interests
UPB
Debt and
Equity
Interests
Residential mortgages$20,056
$3,264
$30,353
$3,993
Commercial mortgages59,111
3,940
53,892
3,881
U.S. agency collateralized mortgage obligations52,335
8,021
36,366
6,365
Other consumer or commercial loans4,860
1,596
4,992
2,075
Total$136,362
$16,821
$125,603
$16,314

Transferred Assets with the highest risk 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). Continuing Involvement
 At September 30, 2020
$ in millionsRMLCML
U.S. Agency
CMO
CLN and
Other1
SPE assets (UPB)2
$7,225
$81,900
$22,951
$12,223
Retained interests
Investment grade$47
$794
$745
$0
Non-investment grade16
221
0
89
Total$63
$1,015
$745
$89
Interests purchased in the secondary market
Investment grade$1
$129
$26
$0
Non-investment grade24
60
0
0
Total$25
$189
$26
$0
Derivative assets$0
$0
$0
$500
Derivative liabilities0
0
0
127

September 2020 Form 10-Q78
Table of Contents
Notes to Consolidated Financial Statements
(Unaudited)
mslogo3q20.jpg

 At December 31, 2019
$ in millionsRMLCML
U.S. Agency
CMO
CLN and
Other1
SPE assets (UPB)2
$9,850
$86,203
$19,132
$8,410
Retained interests
Investment grade$29
$720
$2,376
$1
Non-investment grade17
254
0
92
Total$46
$974
$2,376
$93
Interests purchased in the secondary market
Investment grade$6
$197
$77
$0
Non-investment grade75
51
0
0
Total$81
$248
$77
$0
Derivative assets$0
$0
$0
$339
Derivative liabilities0
0
0
145
 Fair Value At September 30, 2020
$ in millionsLevel 2Level 3Total
Retained interests   
Investment grade$771
$22
$793
Non-investment grade5
72
77
Total$776
$94
$870
Interests purchased in the secondary market
Investment grade$154
$2
$156
Non-investment grade66
18
84
Total$220
$20
$240
Derivative assets$495
$5
$500
Derivative liabilities126
1
127
 Fair Value at December 31, 2019
$ in millionsLevel 2Level 3Total
Retained interests   
Investment grade$2,401
$4
$2,405
Non-investment grade6
97
103
Total$2,407
$101
$2,508
Interests purchased in the secondary market
Investment grade$278
$2
$280
Non-investment grade68
58
126
Total$346
$60
$406
Derivative assets$337
$2
$339
Derivative liabilities144
1
145


RML—Residential mortgage loans
CML—Commercial mortgage loans
1.
Amounts include CLO transactions managed by unrelated third parties.
2.
Amounts include assets transferred by unrelated transferors.
The Firm does not provide additional support in theseprevious tables include 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.

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

Transfers of Assets with Continuing Involvement

  At September 30, 2017 
$ in millions 

Residential
Mortgage
Loans

  Commercial
Mortgage
Loans		  U.S. Agency
Collateralized
Mortgage
Obligations		  

Credit-
Linked
Notes and

Other1

 

SPE assets (unpaid principal balance)2

 $16,173   $55,682   $11,363   $11,602  

Retained interests

    

Investment grade3

 $—   $233   $682   $5  

Non-investment grade
(fair value)

  2    139    —    638  

Total

 $2   $372   $682   $643  

Interests purchased in the secondary market (fair value)

 

 

Investment grade

 $—   $68   $26   $—  

Non-investment grade

  38    81    —    —  

Total

 $38   $149   $26   $—  

Derivative assets (fair value)

 $—   $—   $—   $239  

Derivative liabilities (fair value)

  —    —    —    72  
  

 

At December 31, 2016

 
$ in millions 

Residential
Mortgage
Loans

  Commercial
Mortgage
Loans		  U.S. Agency
Collateralized
Mortgage
Obligations		  

Credit-
Linked
Notes and

Other1

 

SPE assets (unpaid principal balance)2

 $19,381   $43,104   $11,092   $11,613  

Retained interests (fair value)

    

Investment grade

 $—   $22   $375   $—  

Non-investment grade

  4    79    —    826  

Total

 $4   $101   $375   $826  

Interests purchased in the secondary market (fair value) 

 

 

Investment grade

 $—   $30   $26   $—  

Non-investment grade

  23    75    —    —  

Total

 $23   $105   $26   $—  

Derivative assets (fair value)

 $—   $261   $—   $89  

Derivative liabilities (fair value)

  —    —    —    459  

1.

Amounts include CLO transactions managed by unrelated third parties.

2.

Amounts include assetstreatment. The transferred by unrelated transferors.

3.

Amounts include $692 million of investment grade retained interests at fair value.

   Fair Value at September 30, 2017 
$ in millions      Level 2           Level 3           Total     

Retained interests

      

 

Investment grade

  

 

$

 

687 

 

 

  

 

$

 

5 

 

 

  

 

$

 

692 

 

 

Non-investment grade

   48     731     779  

Total

  $735    $736    $1,471  

Interests purchased in the secondary market

 

Investment grade

  $93    $1    $94  

Non-investment grade

   106     13     119  

Total

  $199    $14    $213  

Derivative assets

  $77    $162    $239  

Derivative liabilities

   67     5     72  

September 2017 Form 10-Q82

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

  Fair Value at December 31, 2016 
$ in millions       Level 2              Level 3              Total       

Retained interests

   

Investment grade

 $385  $12  $397  

Non-investment grade

  14   895   909  

Total

 $399  $907  $1,306  

Interests purchased in the secondary market

 

Investment grade

 $56  $—  $56  

Non-investment grade

  84   14   98  

Total

 $140  $14  $154  

Derivative assets

 $348  $2  $350  

Derivative liabilities

  98   361   459  

Transferred assets are carried at fair value prior to securitization, and any changes in fair value are recognized in the income statements. The Firm may act as underwriter of the beneficial interests issued by these securitization vehicles.vehicles, for which Investment banking underwriting net revenues are recognized in connection with these transactions.recognized. The Firm may retain interests in the securitized financial assets as one or more tranches of the securitization. These retained interests are generally carried at fair value in the balance sheets with changes in fair value recognized in the income statements.

Fair value for these interests is measured using techniques that are consistent

with the valuation techniques applied to the Firm’s major categories of assets and liabilities as described in Note 2 in the 2019 Form 10-K and Note 5 herein. Further, as permitted by applicable guidance, certain transfers of assets where the Firm’s only continuing involvement is a derivative are only reported in the following Assets Sold with Retained Exposure table.
Proceeds from New Securitization Transactions and Sales of Loans

  

Three Months Ended

 

September 30,

  

Nine Months Ended

 

September 30,

 
$ in millions     2017          2016          2017          2016     

New transactions1

 $6,875  $6,819  $17,622  $13,695  

Retained interests

  648   768   1,607   1,901  

Sales of corporate loans to
CLO SPEs1,2

  56   199   148   230  

 Three Months Ended
September 30,		Nine Months Ended
September 30,
$ in millions2020201920202019
New transactions1
$12,969
$8,651
$30,629
$20,897
Retained interests1,991
902
7,215
4,424
Sales of corporate loans to CLO SPEs1, 2
234
0
373
0

1.

Net gains on new transactions and sales of corporate loans to CLO entities at the time of the sale were not material for all periods presented.

2.

Sponsored bynon-affiliates.

The Firm has provided, or otherwise agreed to be responsible for, representations and warranties regarding certain assets transferred in securitization transactions sponsored by the Firm (see Note 11)14).

Assets Sold with Retained Exposure
$ in millionsAt
September 30,
2020		At
December 31,
2019
Gross cash proceeds from sale of assets1
$31,800
$38,661
Fair value  
Assets sold$32,006
$39,137
Derivative assets recognized
in the balance sheets		631
647
Derivative liabilities recognized
in the balance sheets		423
152

1.
The carrying value of assets derecognized at the time of sale approximates gross cash proceeds.
The Firm also enters into transactions in which it sells equity securities, primarily equities and contemporaneously enters into bilateral OTC equity derivatives with the purchasers of the securities, through which it retains the exposure to the securities as shownsold securities.
For a discussion of the Firm’s VIEs, the determination and structure of VIEs and securitization activities, see Note 14 to the financial statements in the following table.

2019 Form 10-K.

Assets Sold with Retained Exposure

$ in millions 

 At September 30, 

2017

   At December 31, 
2016		 

Carrying value of assets derecognized at
the time of sale and gross cash
proceeds

 $14,458  $11,209  

Fair value

  

Assets sold

  14,618   11,301  

Derivative assets recognized in the
balance sheets

  177   128  

Derivative liabilities recognized in the
balance sheets

  17   36  

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 balance sheets (see Note 10).

The assets transferred to certain unconsolidated VIEs in transactions accounted for as failed sales cannot be removed unilaterally by the Firm and are not generally available to the Firm. The related liabilities are alsonon-recourse to the Firm. In certain other failed sale transactions, the Firm has the right to remove assets or provides additional recourse through derivatives such as total return swaps, guarantees or other forms of involvement.

Carrying Value of Assets and Liabilities Related to Failed Sales

  

At September 30,

2017

  

At December 31,

2016

 
$ in millions   Assets      Liabilities      Assets      Liabilities   

Failed sales

 $858  $858  $285  $285  

13.

16.Regulatory Requirements

Regulatory Capital Framework and Requirements

For a discussion of the Firm’s regulatory capital framework, see Note 1415 to the consolidated financial statements in the 20162019 Form10-K.

The Firm is required to maintain minimum risk-based and leverageleverage-based capital ratios under the regulatory capital requirements. A summary of the calculations of regulatory capital risk-weighted assets (“RWAs”) and transition provisionsRWA follows.

The Firm’s risk-based capital ratios for purposes of determining regulatory compliance are the lower of the capital ratios computed under (i) the standardized approaches for calculating credit risk and market risk RWAs (the “Standardized Approach”) and (ii) the applicable advanced approaches for calculating credit risk, market risk and operational risk RWAs (the “Advanced Approach”).


83September 2017 Form 10-Q

79September 2020 Form 10-Q
Table of Contents
Notes to Consolidated Financial Statements

(Unaudited)

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Minimum risk-based capital ratio requirements apply to Common Equity Tier 1 capital, Tier 1 capital and Total capital. Certaincapital (which includes Tier 2 capital). Capital standards require certain adjustments to, and deductions from, capital are required for purposes of determining these ratios. At September 30, 2020 and December 31, 2019, the Firm’s ratios suchfor determining regulatory compliance are based on the Advanced Approach and the Standardized Approach rules, respectively.
In the current year period, the U.S. banking agencies have adopted an interim final rule altering, for purposes of the regulatory capital rules, the required adoption time period for CECL. As of September 30, 2020, the risk-based and leverage-based capital amounts and ratios, as goodwill, intangiblewell as RWA, adjusted average assets certain deferred tax assets, other amountsand supplementary leverage exposure are calculated excluding the effect of the adoption of CECL based on our election to defer this effect over a five-year transition period in AOCI and investments inaccordance with the capital instruments of unconsolidated financial institutions. Certain of these adjustments and deductions are also subject to transitional provisions.

interim final rule.

In addition to the minimum risk-based capital ratio requirements, on a fullyphased-in basis by 2019, the Firm will beis subject to:

A greater than 2.5%to the following Common Equity Tier 1 capital conservation buffer;

buffers:

•
A greater than 2.5% capital conservation buffer;

The Common Equity Tier 1 global systemically important bankG-SIB capital surcharge, currently at 3%; and


Up to a 2.5% Common Equity Tier 1 countercyclical capital buffer,CCyB, currently set by U.S. banking regulatorsagencies at zero (collectively, the “buffers”).

zero.

In 2017, thephase-in amount for each of the buffers is 50% of the fullyphased-in buffer requirement. Failure to maintain the buffers will result in restrictions on the Firm’s ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers.

The 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 2016 Form10-K.

The Firm’s Regulatory Capital and Capital Ratios

At September 30, 2017, the Firm’s ratios are based on the Standardized Approach transitional rules. At December 31, 2016, the Firm’s ratios were based on the Advanced Approach transitional rules.

Regulatory Capital

   At September 30, 2017 

$ in millions

      Amount         Ratio     Minimum
Capital
Ratio1		 

Common Equity Tier 1 capital

  $62,214      16.9%      7.3%  

Tier 1 capital

   71,006      19.3%      8.8%  

Total capital

   81,861      22.2%      10.8%  

Tier 1 leverage

   —      8.4%      4.0%  

Total RWAs

  $368,629      N/A      N/A 

Adjusted average assets2

   841,360      N/A      N/A 
   

 

At December 31, 2016

 

$ in millions

      Amount         Ratio     Minimum
Capital
Ratio1		 

Common Equity Tier 1 capital

  $60,398      16.9%      5.9%  

Tier 1 capital

   68,097      19.0%      7.4%  

Total capital

   78,642      22.0%      9.4%  

Tier 1 leverage

   —      8.4%      4.0%  

Total RWAs

  $358,141      N/A      N/A 

Adjusted average assets2

   811,402      N/A      N/A 

N/A—Not Applicable

 At September 30, 2020
$ in millions
Required
Ratio1
AmountRatio
Risk-based capital   
Common Equity Tier 1
capital
10.0%$71,157
16.9%
Tier 1 capital11.5%79,905
19.0%
Total capital13.5%89,763
21.4%
Total RWA 420,081
 
$ in millions 
Required
Ratio1
At
September 30,
2020
Leverage-based capital   
Adjusted average assets2
  $962,435
Tier 1 leverage ratio 4.0%8.3%
Supplementary leverage exposure3,4
  $1,084,348
SLR3
 5.0%7.4%

 At December 31, 2019
$ in millions
Required
Ratio1
AmountRatio
Risk-based capital   
Common Equity Tier 1 capital10.0%$64,751
16.4%
Tier 1 capital11.5%73,443
18.6%
Total capital13.5%82,708
21.0%
Total RWA 394,177
 
$ in millions 
Required
Ratio1
At
December 31,
2019
Leverage-based capital   
Adjusted average assets2
  $889,195
Tier 1 leverage ratio 4.0%8.3%
Supplementary leverage
 exposure3,4
  $1,155,177
SLR3
 5.0%6.4%
1.

Percentages represent minimum regulatory

Required ratios are inclusive of any buffers applicable as of the date presented. Failure to maintain the buffers would result in restrictions on the Firm’s ability to make capital ratios underdistributions, including the transitional rules.

payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers.
2.

Adjusted average assets representrepresents the denominator of the Tier 1 leverage ratio and areis composed of the average daily balance of consolidatedon-balance sheet assets under U.S. GAAP duringfor the current quarter andquarters ending on the quarter ended December 31, 2016, respectively, adjusted forrespective balance sheet dates, reduced by disallowed goodwill, transitional intangible assets, certain deferred taxinvestments in covered funds, defined benefit pension plan assets, certainafter-tax gain on sale from assets sold into securitizations, investments in the Firm’s own capital instruments, of unconsolidated financial institutionscertain defined tax assets and other adjustments.

capital deductions.

3.Based on a Federal Reserve interim final rule in effect until March 31, 2021, the Firm’s SLR and Supplementary leverage exposure as of September 30, 2020 reflect the exclusion of U.S. Treasury securities and deposits at Federal Reserve Banks.
4.
Supplementary leverage exposure is the sum of Adjusted average assets used in the Tier 1 leverage ratio and other adjustments, primarily: (i) for derivatives, potential future exposure and the effective notional principal amount of sold credit protection offset by qualifying purchased credit protection; (ii) the counterparty credit risk for repo-style transactions; and (iii) the credit equivalent amount for off-balance sheet exposures.

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

The OCC establishes capital requirements for the Firm’s U.S. bank subsidiaries, which as of September 30, 2020 include Morgan Stanley Bank, N.A. (“MSBNA”) and Morgan Stanley Private Bank, National Association (“MSPBNA”) (collectively, the “U.S. Bank Subsidiaries”), and evaluates their compliance with such capital requirements. Regulatory capital requirements for the U.S. Bank Subsidiaries are subjectcalculated in a similar manner to similarthe Firm’s regulatory capital requirements, asalthough G-SIB capital surcharge requirements do not apply to the Firm. FailureU.S. Bank Subsidiaries.
The OCC’s regulatory capital framework includes Prompt Corrective Action (“PCA”) standards, including “well-capitalized” PCA standards that are based on specified regulatory capital ratio minimums. For the Firm to remain an FHC, the U.S. Bank Subsidiaries must remain well-capitalized

September 2020 Form 10-Q80
Table of Contents
Notes to Consolidated Financial Statements
(Unaudited)
mslogo3q20.jpg

in accordance with the OCC’s PCA standards. In addition, failure by the U.S. Bank Subsidiaries to meet minimum capital requirements can initiatemay result in certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on the U.S. Bank Subsidiaries’ financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, each ofFirm’s financial statements.
At September 30, 2020 and December 31, 2019, the U.S. Bank Subsidiaries must meet specificSubsidiaries’ risk-based capital guidelines that involve quantitative measures of its assets, liabilities and certainoff-balance sheet items as calculated under regulatory accounting practices.

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. Under regulatory capital requirements adopted by the U.S. federal banking agencies, U.S. depository institutions must maintain certain minimum capital ratios in order to be considered well-capitalized. At September 30, 2017 and December 31, 2016, the Firm’s U.S. Bank Subsidi-

September 2017 Form 10-Q84

Notes to Consolidated Financial Statements

(Unaudited)

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aries 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.

At September 30, 2017 and December 31, 2016, the U.S. Bank Subsidiaries’ ratios are based on the Standardized Approach transitional rules.

At September 30, 2020, the risk-based and leverage-based capital amounts and ratios are calculated excluding the effect of the adoption of CECL based on our election to defer this effect over a five-year transition period.

MSBNA’s Regulatory Capital

  At September 30, 2017 

 $ in millions

 Amount   Ratio  Minimum
Capital
Ratio1		 

 Common Equity Tier 1 capital

 $14,839    19.3%   6.5% 

 Tier 1 capital

  14,839    19.3%   8.0% 

 Total capital

  15,110    19.7%   10.0% 

 Tier 1 leverage

  14,839    11.8%   5.0% 
  

 

At December 31, 2016

 

 $ in millions

 Amount   Ratio  Minimum
Capital
Ratio1		 

 Common Equity Tier 1 capital

 $13,398    16.9%   6.5% 

 Tier 1 capital

  13,398    16.9%   8.0% 

 Total capital

  14,858    18.7%   10.0% 

 Tier 1 leverage

  13,398    10.5%   5.0% 

 At September 30, 2020
$ in millions
Well-Capitalized
Requirement
Required
Ratio1
AmountRatio
Risk-based capital    
Common Equity Tier 1
capital
6.5%7.0%$17,764
19.7%
Tier 1 capital8.0%8.5%17,764
19.7%
Total capital10.0%10.5%18,442
20.4%
Leverage-based capital    
Tier 1 leverage5.0%4.0%$17,764
10.7%
SLR6.0%3.0%17,764
8.5%
 At December 31, 2019
$ in millions
Well-Capitalized
Requirement
Required
Ratio1
AmountRatio
Risk-based capital    
Common Equity Tier 1 capital6.5%7.0%$15,919
18.5%
Tier 1 capital8.0%8.5%15,919
18.5%
Total capital10.0%10.5%16,282
18.9%
Leverage-based capital    
Tier 1 leverage5.0%4.0%$15,919
11.3%
SLR6.0%3.0%15,919
8.7%

MSPBNA’s Regulatory Capital
 At September 30, 2020
$ in millions
Well-Capitalized
Requirement
Required
Ratio1
AmountRatio
Risk-based capital    
Common Equity Tier 1 capital6.5%7.0%$8,528
23.4%
Tier 1 capital8.0%8.5%8,528
23.4%
Total capital10.0%10.5%8,611
23.6%
Leverage-based capital    
Tier 1 leverage5.0%4.0%$8,528
8.2%
SLR6.0%3.0%8,528
7.8%
 At December 31, 2019
$ in millions
Well-Capitalized
Requirement
Required
Ratio1
AmountRatio
Risk-based capital    
Common Equity Tier 1 capital6.5%7.0%$7,962
24.8%
Tier 1 capital8.0%8.5%7,962
24.8%
Total capital10.0%10.5%8,016
25.0%
Leverage-based capital    
Tier 1 leverage5.0%4.0%$7,962
9.9%
SLR6.0%3.0%7,962
9.4%

1.

CapitalRequired ratios that are requiredinclusive of any buffers applicable as of the date presented. Failure to maintain the buffers would result in orderrestrictions on the U.S. Bank Subsidiaries' ability to be considered well-capitalized for U.S. regulatory purposes.

make capital distributions, including the payment of dividends.

MSPBNA’s Regulatory Capital

  At September 30, 2017 

 $ in millions

 Amount   Ratio  Minimum
Capital
Ratio1		 

 Common Equity Tier 1 capital

 $6,082    24.6%   6.5% 

 Tier 1 capital

  6,082    24.6%   8.0% 

 Total capital

  6,124    24.8%   10.0% 

 Tier 1 leverage

  6,082    9.8%   5.0% 
  

 

At December 31, 2016

 

 $ in millions

 Amount   Ratio  Minimum
Capital
Ratio1		 

 Common Equity Tier 1 capital

 $5,589    26.1%   6.5% 

 Tier 1 capital

  5,589    26.1%   8.0% 

 Total capital

  5,626    26.3%   10.0% 

 Tier 1 leverage

  5,589    10.6%   5.0% 

1.

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


U.S. Broker-Dealer Regulatory Capital Requirements

MS&Co. Regulatory Capital

$ in millions At September 30, 2017  At December 31, 2016 

Net capital

 $10,613  $10,311  

Excess net capital

  8,558   8,034  

Morgan Stanley & Co. LLC (“

$ in millionsAt September 30,
2020		At December 31,
2019
Net capital$14,183
$13,708
Excess net capital10,217
10,686

MS&Co.”) is a registered U.S. broker-dealer and registered futures commission merchant and, accordingly, is subject to the minimum net capital requirements of the U.S. Securities and Exchange Commission (“SEC”)SEC and the U.S. Commodity Futures Trading Commission (“CFTC”).CFTC. MS&Co. has consistently operated with capital in excess of its regulatory capital requirements.

As an Alternative Net Capital broker-dealer, and in accordance with the market and credit risk standardsSecurities Exchange Act of 1934 (“Exchange Act”) Rule 15c3-1, Appendix E, of SEC Rule 15c3-1, MS&Co. is subject to minimum net capital and tentative net capital requirements. In addition, MS&Co. must notify the SEC if its tentative net capital falls below certain levels. At September 30, 20172020 and December 31, 2016,2019, MS&Co. has exceeded its net capital requirement and has tentative net capital in excess of the minimum and notification requirements.

MSSB LLC Regulatory Capital

$ in millions At September 30, 2017  At December 31, 2016 

Net capital

 $2,573  $3,946 

Excess net capital

  2,415   3,797 

Morgan Stanley Smith Barney LLC (“

$ in millionsAt September 30,
2020		At December 31,
2019
Net capital$2,758
$3,387
Excess net capital2,581
3,238

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

Other Regulated Subsidiaries

Morgan Stanley & Co. International plc (“MSIP”),

MSIP, a London-based broker-dealer subsidiary, is subject to the capital requirements of the Prudential Regulation Authority,PRA, and Morgan Stanley MUFG Securities Co., Ltd. (“MSMS”),MSMS, a Tokyo-based broker-dealer subsidiary, is subject to the capital requirements

81September 2020 Form 10-Q
Table of Contents
Notes to Consolidated Financial Statements
(Unaudited)
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of the Financial Services Agency. MSIP and MSMS have consistently operated with capital in excess of their respective regulatory capital requirements.

Certain other U.S. andnon-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.

17. Total Equity
Preferred Stock
 
Shares
Outstanding
 Carrying Value
$ in millions, except per share dataAt
September 30,
2020
Liquidation
Preference
per Share
At
September 30,
2020		At
December 31,
2019
Series   
A44,000
$25,000
$1,100
$1,100
C1
519,882
1,000
408
408
E34,500
25,000
862
862
F34,000
25,000
850
850
H52,000
25,000
1,300
1,300
I40,000
25,000
1,000
1,000
J60,000
25,000
1,500
1,500
K40,000
25,000
1,000
1,000
L20,000
25,000
500
500
Total$8,520
$8,520
Shares authorized30,000,000 
1.85September 2017 Form 10-QSeries C preferred stock is held by MUFG.

Notes to Consolidated Financial Statements

(Unaudited)

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14. Total Equity

Dividends and Share Repurchases

  Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
$ in millions     2017          2016                  2017                  2016         

Repurchases of common stock

 $1,250  $1,250  $2,500  $2,500 

On June 28, 2017, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) announced that they did not object to the Firm’s 2017 capital plan (“Capital Plan”). The Capital Plan includes the share repurchase of up to $5.0 billion of outstanding common stock for the period beginning July 1, 2017 through June 30, 2018, an increase from $3.5 billion in the 2016 Capital Plan. Additionally, the Capital Plan includes an increase in the quarterly common stock dividend to $0.25 per share from $0.20 per share, beginning with the common stock dividend declared on July 19, 2017.

On October 17, 2017, the Firm announced that the Board of Directors (the “Board”) declared a quarterly dividend per common share of $0.25. The dividend is payable on November 15, 2017 to common shareholders of record on October 31, 2017.

Preferred Stock

  Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
$ in millions     2017          2016          2017          2016     

Dividends declared

 $93  $78  $353  $312 

For a description of Series A through Series KL preferred stock issuances, see Note 1516 to the consolidated financial statements in the 20162019 Form10-K. On September 15, 2017, the Firm announced that the Board declared quarterly dividends for preferred stock shareholders of record on September 29, 2017 that were paid on October 16, 2017. 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 and is included in Tier 1 capital in accordance with regulatory capital requirements (see Note 13)16).

Series K Preferred Stock.

Common Shares Outstanding for Basic and Diluted EPS
 Three Months Ended
September 30,		Nine Months Ended
September 30,
in millions2020201920202019
Weighted average common shares outstanding, basic1,542
1,604
1,546
1,632
Effect of dilutive Stock options, RSUs and PSUs24
23
19
21
Weighted average common shares outstanding and common stock equivalents, diluted1,566
1,627
1,565
1,653
Weighted average antidilutive common stock equivalents (excluded from the computation of diluted EPS)0
0
7
2

Share Repurchases
 Three Months Ended September 30,Nine Months Ended September 30,
$ in millions2020201920202019
Repurchases of common stock under the Firm's Share Repurchase Program$0
$1,500
$1,347
$3,860

On March 15, 2020, the Financial Services Forum announced that each of its eight member banks, including the Firm, had voluntarily suspended their share repurchase programs. On June 25, 2020, the Federal Reserve published summary results of CCAR and announced that large BHCs, including the Firm, generally would be restricted in making share repurchases during the current quarter, and on September 30, 2020, the restrictions were extended through the fourth quarter of 2020.
A portion of common stock repurchases was conducted under a sales plan with MUFG, whereby MUFG sold shares of the Firm’s common stock to the Firm, as part of the Firm’s Share Repurchase Program. The Series K Preferred Stock offering (netsales plan is only intended to maintain MUFG’s ownership percentage below 24.9% in order to comply with MUFG’s passivity commitments to the Board of related issuance costs)Governors of the Federal Reserve System and has no impact on the strategic alliance between MUFG and the Firm, including the joint ventures in January 2017 resulted in proceeds of approximately $994 million.

Japan.

Preferred Stock Outstanding

  Shares
Outstanding		  

Liquidation
Preference
per Share

 

  Carrying Value 
$ in millions,
except per
share data		 At
September 30,
2017		   At
September 30,
2017		  At
December 31,
2016		 

Series

                

A

  44,000   $          25,000  $                    1,100  $                1,100  

C1

  519,882   1,000   408   408  

E

  34,500   25,000   862   862  

F

  34,000   25,000   850   850  

G

  20,000   25,000   500   500  

H

  52,000   25,000   1,300   1,300  

I

  40,000   25,000   1,000   1,000  

J

  60,000   25,000   1,500   1,500  

K

  40,000   25,000   1,000   —  

Total

 

 $8,520  $7,520  

Dividends
$ in millions, except per
share data
Three Months Ended
September 30, 2020		Three Months Ended
September 30, 2019
Per Share1
Total
Per Share1
Total
Preferred Stock Series    
A$256
$11
$256
$11
C25
13
25
13
E445
15
445
15
F430
15
430
15
G2
0
0
414
8
H3
248
13
378
20
I398
16
398
16
J4
261
16
0
0
K366
15
366
15
L305
6
0
0
Total Preferred stock $120
 $113
Common stock0.35
$551
$0.35
$577

September 2020 Form 10-Q82
Table of Contents
Notes to Consolidated Financial Statements
(Unaudited)
mslogo3q20.jpg

$ in millions, except per
share data
Nine Months Ended
September 30, 2020		Nine Months Ended
September 30, 2019
Per Share1
Total
Per Share1
Total
Preferred Stock Series    
A$761
$33
$758
$33
C75
39
75
39
E1,336
45
1,336
45
F1,289
44
1,289
45
G2
0
0
1,242
24
H3
897
47
1,059
55
I1,195
48
1,195
48
J4
955
58
694
42
K1,097
45
1,097
45
L914
18
0
0
Total Preferred stock $377
 $376
Common stock1.05
$1,662
$0.95
$1,594

1.

Series C is composed of the issuance of 1,160,791 shares of Series C

Common and Preferred Stock to MUFG for an aggregate purchase price of $911 million, less the redemption of 640,909 shares of Series C Preferred Stock of $503 million, which were converted to common shares of approximately $705 million.

dividends are payable quarterly, unless otherwise noted.

Comprehensive Income (Loss)

2.Series G preferred stock was redeemed during the first quarter of 2020. For further information, see Note 16 to the financial statements in the 2019 Form 10-K.
3.
Series H was payable semiannually until July 15, 2019, and is now payable quarterly.
4.
Series J was payable semiannually until July 15, 2020, and is now payable quarterly.

Cumulative Adjustments to Beginning Retained Earnings Related to the Adoption of Accounting Updates
 Nine Months Ended
$ in millionsSeptember 30, 2020
Financial Instruments—Credit Losses$(100)
 Nine Months Ended
$ in millionsSeptember 30, 2019
Leases$63

Accumulated Other Comprehensive Income (Loss)1

$ in millions Foreign
Currency
Translation
Adjustments		  AFS
Securities		  Pensions,
Postretirement
and Other		  DVA  Total 

June 30, 2017

 $(856)  $(396)  $(470)  $    (766)  $    (2,488) 

OCI during the period

  61   26   —   (143)   (56) 

September 30, 2017

 $(795)  $(370)  $(470)  $(909)  $(2,544) 

 

June 30, 2016

 $(779)  $219  $(378)  $33  $(905) 

OCI during the period

  25   (99)   (1)   (90)   (165) 

September 30, 2016

 $(754)  $120  $(379)  $(57)  $(1,070) 

 

December 31, 2016

 $(986)  $(588)  $(474)  $(595)  $(2,643) 

OCI during the period

  191   218   4   (314)   99  

September 30, 2017

 $(795)  $(370)  $(470)  $(909)  $(2,544) 

 

December 31, 2015

 $(963)  $(319)  $(374)  $—  $(1,656) 

Cumulative adjustment for
accounting change
related to DVA2

  —   —   —   (312)   (312) 

OCI during the period

  209   439   (5)   255   898  

September 30, 2016

 $(754)  $120  $(379)  $(57)  $(1,070) 

$ in millionsCTA
AFS
Securities
Pension,
Postretirement
and Other
DVATotal
June 30, 2020$(1,017)$1,827
$(620)$(189)$1
OCI during the period81
(62)5
(562)(538)
September 30, 2020$(936)$1,765
$(615)$(751)$(537)
June 30, 2019$(865)$108
$(574)$(720)$(2,051)
OCI during the period(96)214
3
332
453
September 30, 2019$(961)$322
$(571)$(388)$(1,598)
December 31, 2019$(897)$207
$(644)$(1,454)$(2,788)
OCI during the period(39)1,558
29
703
2,251
September 30, 2020$(936)$1,765
$(615)$(751)$(537)
December 31, 2018$(889)$(930)$(578)$105
$(2,292)
OCI during the period(72)1,252
7
(493)694
September 30, 2019$(961)$322
$(571)$(388)$(1,598)
CTA—Cumulative foreign currency translation adjustments
1.

Amounts are net of tax and noncontrolling interests.

2.

In accordance with the early adoption of a provision of the accounting updateRecognition and Measurement of Financial Assets and Financial Liabilities, a cumulativecatch-up adjustment was recorded as of January 1, 2016 to move the cumulative unrealized DVA amount, net of noncontrolling interests and tax, related to outstanding liabilities under the fair value option election from Retained earnings into AOCI. See Note 2 to the consolidated financial statements in the 2016 Form10-K for further information.

 

Components of Period Changes in OCI
 Three Months Ended
September 30, 2020
$ in millionsPre-tax
Gain
(Loss)		Income
Tax Benefit
(Provision)		After-tax
Gain
(Loss)		Non-
controlling
Interests		Net
CTA
OCI activity$34
$76
$110
$29
$81
Reclassified to earnings0
0
0
0
0
Net OCI$34
$76
$110
$29
$81
Change in net unrealized gains (losses) on AFS securities
OCI activity$(26)$6
$(20)$0
$(20)
Reclassified to earnings(55)13
(42)0
(42)
Net OCI$(81)$19
$(62)$0
$(62)
Pension, postretirement and other
OCI activity$(1)$1
$0
$0
$0
Reclassified to earnings6
(1)5
0
5
Net OCI$5
$0
$5
$0
$5
Change in net DVA
OCI activity$(747)$178
$(569)$(1)$(568)
Reclassified to earnings8
(2)6
0
6
Net OCI$(739)$176
$(563)$(1)$(562)
 Three Months Ended
September 30, 2019
$ in millionsPre-tax
Gain
(Loss)		Income
Tax Benefit
(Provision)		After-tax
Gain
(Loss)		Non-
controlling
Interests		Net
CTA
OCI activity$(26)$(73)$(99)$(3)$(96)
Reclassified to earnings0
0
0
0
0
Net OCI$(26)$(73)$(99)$(3)$(96)
Change in net unrealized gains (losses) on AFS securities
OCI activity$307
$(73)$234
$0
$234
Reclassified to earnings(26)6
(20)0
(20)
Net OCI$281
$(67)$214
$0
$214
Pension, postretirement and other
OCI activity$0
$0
$0
$0
$0
Reclassified to earnings4
(1)3
0
3
Net OCI$4
$(1)$3
$0
$3
Change in net DVA
OCI activity$441
$(106)$335
$5
$330
Reclassified to earnings2
0
2
0
2
Net OCI$443
$(106)$337
$5
$332



September 2017 Form 10-Q86

83September 2020 Form 10-Q
Table of Contents
Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Period Changes in OCI Components

  Three Months Ended 
  

 

September 30, 2017

 
 $ in millions Pre-tax
gain (loss)		  Income tax
benefit
(provision)		  After-tax
gain (loss)		  

Non-

controlling
interests

    Net   

 Foreign currency translation adjustments

 

 

 OCI activity

 $             19  $             42  $             61  $              —  $              61   

 Reclassified to
earnings

  —   —   —   —   —   

 Net OCI

 $19  $42  $61  $—  $61   

 

 Change in net unrealized gains (losses) on AFS securities

 

 

 OCI activity

 $52  $(19)  $33  $—  $33   

 Reclassified to
earnings1

  (11)   4   (7)   —   (7)  

 Net OCI

 $41  $(15)  $26  $—  $26   

 

 Pension, postretirement and other

 

 

 OCI activity

 $—  $—  $—  $—  $—   

 Reclassified to
earnings1

  1   (1)   —   —   —   

 Net OCI

 $1  $(1)  $—  $—  $—   

 

 Change in net DVA

 

 

 OCI activity

 $(220)  $77  $(143)  $(6)  $(137)  

 Reclassified to
earnings1

  (9)   3   (6)   —   (6)  

 Net OCI

 $(229)  $80  $(149)  $(6)  $(143)  

  Three Months Ended 
  

 

September 30, 2016

 
 $ in millions Pre-tax
gain (loss)		  Income tax
benefit
(provision)		  After-tax
gain (loss)		  

Non-

controlling
interests

    Net   

 Foreign currency translation adjustments

 

 

 OCI activity

 $              13  $              30  $              43  $              18  $              25   

 Reclassified to
earnings

  —   —   —   —   —   

 Net OCI

 $13  $30  $43  $18  $25   

 

 Change in net unrealized gains (losses) on AFS securities

 

 

 OCI activity

 $(112)  $41  $(71)  $—  $(71)  

 Reclassified to
earnings1

  (45)   17   (28)   —   (28)  

 Net OCI

 $(157)  $58  $(99)  $—  $(99)  

 

 Pension, postretirement and other

 

 

 OCI activity

 $—  $—  $—  $—  $—   

 Reclassified to
earnings1

  (1)   —   (1)   —   (1)  

 Net OCI

 $(1)  $—  $(1)  $—  $(1)  

 

 Change in net DVA

 

 

 OCI activity

 $(149)  $52  $(97)  $(3)  $(94)  

 Reclassified to
earnings1

  6   (2)   4   —   4   

 Net OCI

 $(143)  $50  $(93)  $(3)  $(90)  
mslogo3q20.jpg

  Nine Months Ended 
  

 

September 30, 2017

 
 $ in millions Pre-tax
gain (loss)		  Income tax
benefit
(provision)		  After-tax
gain (loss)		  

Non-

controlling
interests

    Net   

 Foreign currency translation adjustments

 

 

 OCI activity

 $63  $160  $223  $32  $191   

 Reclassified to
earnings

                —                 —                 —                 —                 —   

 Net OCI

 $63  $160  $223  $32  $191   

 

 Change in net unrealized gains (losses) on AFS securities

 

 

 OCI activity

 $374  $(139)  $235  $—  $235   

 Reclassified to
earnings1

  (27)   10   (17)   —   (17)  

 Net OCI

 $347  $(129)  $218  $—  $218   

 

 Pension, postretirement and other

 

 

 OCI activity

 $3  $—  $3  $—  $3   

 Reclassified to
earnings1

  2   (1)   1   —   1   

 Net OCI

 $5  $(1)  $4  $—  $4   

 

 Change in net DVA

 

 

 OCI activity

 $(498)  $175  $(323)  $(9)  $(314)  

 Reclassified to earnings1

  (1)   1   —   —   —   

 Net OCI

 $(499)  $176  $(323)  $(9)  $(314)  

  Nine Months Ended 
  

 

September 30, 20162

 
 $ in millions Pre-tax
gain (loss)		  Income tax
benefit
(provision)		  After-tax
gain (loss)		  

Non-

controlling
interests

    Net   

 Foreign currency translation adjustments

 

 

 OCI activity

 $            156  $            204  $            360  $            151  $            209   

 Reclassified to
earnings

  —   —   —   —   —   

 Net OCI

 $156  $204  $360  $151  $209   

 

 Change in net unrealized gains (losses) on AFS securities

 

 

 OCI activity

 $822  $(303)  $519  $—  $519   

 Reclassified to
earnings1

  (127)   47   (80)   —   (80)  

 Net OCI

 $695  $(256)  $439  $—  $439   

 

 Pension, postretirement and other

 

 

 OCI activity

 $(6)  $3  $(3)  $—  $(3)  

 Reclassified to
earnings1

  (3)   1   (2)   —   (2)  

 Net OCI

 $(9)  $4  $(5)  $—  $(5)  

 

 Change in net DVA

 

 

 OCI activity

 $440  $(163)  $277  $—  $277   

 Reclassified to
earnings1

  (35)   13   (22)   —   (22)  

 Net OCI

 $405  $(150)  $255  $—  $255   

1.

Amounts reclassified to earnings related to: realized gains and losses from sales of AFS securities are classified within Other revenues in the income statements; Pension, postretirement and other are classified within Compensation and benefits expenses in the income statements; and realization of DVA are classified within Trading revenues in the income statements.

2.

Exclusive of 2016 cumulative adjustment for accounting change related to DVA.


87September 2017 Form 10-Q
 Nine Months Ended
September 30, 2020
$ in millionsPre-tax
Gain
(Loss)		Income
Tax Benefit
(Provision)		After-tax
Gain
(Loss)		Non-
controlling
Interests		Net
CTA
OCI activity$19
$(17)$2
$38
$(36)
Reclassified to earnings(3)0
(3)0
(3)
Net OCI$16
$(17)$(1)$38
$(39)
Change in net unrealized gains (losses) on AFS securities
OCI activity$2,142
$(503)$1,639
$0
$1,639
Reclassified to earnings(106)25
(81)0
(81)
Net OCI$2,036
$(478)$1,558
$0
$1,558
Pension, postretirement and other
OCI activity$20
$(4)$16
$0
$16
Reclassified to earnings16
(3)13
0
13
Net OCI$36
$(7)$29
$0
$29
Change in net DVA
OCI activity$967
$(233)$734
$41
$693
Reclassified to earnings14
(4)10
0
10
Net OCI$981
$(237)$744
$41
$703

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Noncontrolling Interests

$ in millions  At September 30, 2017    At December 31, 2016  

Noncontrolling interests

  $                               1,136   $                             1,127  

 Nine Months Ended
September 30, 2019
$ in millionsPre-tax
Gain
(Loss)		Income
Tax Benefit
(Provision)		After-tax
Gain
(Loss)		Non-
controlling
Interests		Net
CTA
OCI activity$2
$(58)$(56)$16
$(72)
Reclassified to earnings0
0
0
0
0
Net OCI$2
$(58)$(56)$16
$(72)
Change in net unrealized gains (losses) on AFS securities
OCI activity$1,726
$(406)$1,320
$0
$1,320
Reclassified to earnings(89)21
(68)0
(68)
Net OCI$1,637
$(385)$1,252
$0
$1,252
Pension, postretirement and other
OCI activity$0
$(1)$(1)$0
$(1)
Reclassified to earnings10
(2)8
0
8
Net OCI$10
$(3)$7
$0
$7
Change in net DVA
OCI activity$(713)$177
$(536)$(36)$(500)
Reclassified to earnings9
(2)7
0
7
Net OCI$(704)$175
$(529)$(36)$(493)


15. Earnings per Common Share

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

  Three Months Ended  Nine Months Ended 
  

 

September 30,

  

 

September 30,

 
in millions, except for per share data 2017  2016  2017   2016  

Basic EPS

    

Income from continuing operations

 $    1,785  $    1,632  $    5,574  $    4,442  

Income (loss) from discontinued
operations

  6   8   (21)   1  

Net income

  1,791   1,640   5,553   4,443  

Net income applicable to
noncontrolling interests

  10   43   85   130  

Net income applicable to Morgan
Stanley

  1,781   1,597   5,468   4,313  

Less: Preferred stock dividends and other

  (93)   (79)   (353)   (314) 

Earnings applicable to Morgan
Stanley common shareholders

 $1,688  $1,518  $5,115  $3,999  

Weighted average common
shares outstanding

  1,776   1,838   1,789   1,863  

Earnings per basic common share

 

  

Income from continuing operations

 $0.95  $0.82  $2.87  $2.15  

Income (loss) from discontinued
operations

  —   0.01   (0.01)   —  

Earnings per basic common share

 $0.95  $0.83  $2.86  $2.15  

Diluted EPS

    

Earnings applicable to Morgan
Stanley common shareholders

 $1,688  $1,518  $5,115  $3,999  

Weighted average common shares
outstanding

  1,776   1,838   1,789   1,863  

Effect of dilutive securities:

    

Stock options and RSUs1

  42   41   41   35  

Weighted average common shares outstanding and common stock equivalents

  1,818   1,879   1,830   1,898  

Earnings per diluted common share

 

  

Income from continuing operations

 $0.93  $0.80  $2.81  $2.11  

Income (loss) from discontinued operations

  —   0.01   (0.02)   —  

Earnings per diluted common share

 $0.93  $0.81  $2.79  $2.11  

Weighted average antidilutive RSUs and stock options (excluded from the computation of diluted EPS)1

  —   14   —   15  

1.

Restricted stock units (“RSUs”) that are considered participating securities are treated as a separate class of securities in the computation of basic EPS, and, therefore, such RSUs are not included as incremental shares in the diluted EPS computations.

16.18. Interest Income and Interest Expense

  Three Months Ended     Nine Months Ended 
  

 

September 30,

     

 

September 30,

 
$ in millions 2017  2016      2017   2016  

Interest income1

     

Investment securities

 $      �� 313  $        289      $        943  $        762  

Loans

  853   698       2,399   2,026  

Interest bearing deposits with banks

  84   30       206   134  

Securities purchased under
agreements to resell
and Securities borrowed2

  76   (118)       86   (315) 

Trading assets, net
of Trading liabilities

  506   526       1,461   1,651  

Customer receivables and Other3

  508   309       1,316   890  

Total interest income

 $2,340  $1,734      $6,411  $5,148  

 

Interest expense1

     

Deposits

 $63  $12      $88  $48  

Short-term and Long-term
borrowings

  1,109   814       3,197   2,633  

Securities sold under
agreements to repurchase
and Securities loaned4

  325   228       912   761  

Customer payables and Other5

  60   (323)       (91)   (1,109) 

Total interest expense

 $1,557  $731      $4,106  $2,333  

Net interest

 $783  $1,003      $2,305  $2,815  

 Three Months Ended
September 30,		Nine Months Ended
September 30,
$ in millions2020201920202019
Interest income    
Investment securities$529
$579
$1,603
$1,563
Loans967
1,208
3,171
3,599
Securities purchased under agreements to resell and Securities borrowed1
(187)871
70
2,865
Trading assets, net of Trading liabilities537
728
1,902
2,188
Customer receivables and Other2
210
964
1,171
2,931
Total interest income$2,056
$4,350
$7,917
$13,146
     
Interest expense    
Deposits$178
$505
$804
$1,460
Borrowings714
1,219
2,534
3,941
Securities sold under agreements to repurchase and Securities loaned3
165
681
883
2,016
Customer payables and Other4
(487)727
(746)2,468
Total interest expense$570
$3,132
$3,475
$9,885
Net interest$1,486
$1,218
$4,442
$3,261
1.

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

2.

Includes fees paid on Securities borrowed.

3.

2.
Includes interest from customer receivablesCash and cash deposited with clearing organizations or segregated under federal and other regulations or requirements.

equivalents.
4.

3.
Includes fees received on Securities loaned.

5.

4.
Includes fees received from prime brokerage customers for stock loan transactions incurredentered into to cover customers’ short positions.

September 2017 Form 10-Q88

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

17. Employee Benefit Plans

The Firm sponsors various retirement plans forInterest income and Interest expense are classified in the majority of its U.S. andnon-U.S. employees. The Firm provides certain other postretirement benefits, primarily health care and life insurance, to eligible U.S. employees.

Componentsincome statements based on the nature of the Net Periodic Benefit Expense (Income) for Pensioninstrument and Other Postretirement Plans

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
$ in millions 2017  2016  2017  2016 

Service cost, benefits earned during the period

 $4  $6  $12  $14  

Interest cost on projected benefit
obligation

  37   38   112   115  

Expected return on plan assets

  (29)   (31)   (87)   (91) 

Net amortization of prior service
credit

  (4)   (4)   (12)   (13) 

Net amortization of actuarial loss

  4   3   12   9  

Net periodic benefit expense
(income)

 $12  $12  $37  $34  

related market conventions. When included as a component of the instrument’s fair value, interest is included within Trading revenues or Investments revenues. Otherwise, it is included within Interest income or Interest expense. k

Accrued Interest
$ in millionsAt
September 30,
2020		At
December 31,
2019
Customer and other receivables$2,244
$1,661
Customer and other payables2,545
2,223

18.
19. Income Taxes

The Firm is under continuous examination by the Internal Revenue Service (the “IRS”)IRS and other tax authorities in certain countries, such as Japan and the United Kingdom (“U.K.”), and in states and localities in which it has significant business operations, such as New York.
The Firm believes that the resolution of these tax examinations will not have a material effect on the annual financial statements, although a resolution could have a material impact in the income statements and on the effective tax rate for any period in which such resolutions occur.

September 2020 Form 10-Q84
Table of Contents
Notes to Consolidated Financial Statements
(Unaudited)
mslogo3q20.jpg

The Firm has established a liability for unrecognized tax benefits, and associated interest, if applicable (“tax liabilities”), that it believes is adequate in relation to the potential for additional assessments. Once established, the Firm adjusts such tax liabilities only when new information is available or when an event occurs necessitating a change.

The Firm

It 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 2007-2014, respectively. In April 2016, the Firm received a notification from the IRSreasonably possible that the Congressional Joint Committee on Taxation approved the final report of an Appeals Office review of matters from tax years 1999-2005. In June 2016, the Firm received an amended Revenue Agent’s Report for tax years 2006-2008. Over the next 12 months the Firm expects to receive new information related to multi-year IRS field audit examinations that may prompt an overall net decreasesignificant changes in the Firm’s recorded tax liabilities.

The Firm believes that the resolution of the above tax matters will not have a material effect on the annual financial statements, although a resolution could have a material impact on the income statements and effective tax rate for any period in which such resolution occurs.

In March 2017, the Firm filed claims with the IRS to contest certain items associated with tax years 1999-2005, the resolution of which is not expected to have a material impact on the annual financial statements or effective tax rate. Additionally, during 2017, 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 annual financial statements or effective tax rate.

See Note 11 regarding the Dutch Tax Authority’s challenge, in the District Court in Amsterdam (matters styledCase number15/3637andCase number 15/4353), of the Firm’s entitlement to certain withholding tax credits which may impact the balance of unrecognized tax benefits.

benefits may occur within the next 12 months. At this time, however, it is not possible to reasonably estimate the expected change to the total amount of unrecognized tax benefits and the impact on the Firm’s effective tax rate over the next 12 months.

Net Discrete Tax Provisions (Benefits)
 Three Months Ended
September 30,		Nine Months Ended
September 30,
$ in millions2020201920202019
Recurring1
$0
$0
$(94)$(127)
Intermittent(113)(89)(10)(190)
1. Recurring discrete tax items are related to conversion of employee share-based awards.
The current quarter included intermittent net discrete tax benefits principally associated with the remeasurement of reserves and related interest as a result of new information pertaining to the resolution of tax examinations in certain jurisdictions.
The prior year quarter included intermittent net discrete tax benefits primarily associated with the filing of the 2018 federal tax return and the remeasurement of reserves and related interest as a result of new information pertaining to the resolution of multi-jurisdiction tax examinations.
The prior year period included intermittent net discrete tax benefits primarily associated with the remeasurement of reserves and related interest as a result of new information pertaining to the resolution of multi-jurisdiction tax examinations and other matters.
19.
20. Segment, Geographic and GeographicRevenue Information

Selected Financial Information by Business Segment Information

 Three Months Ended September 30, 2020
$ in millionsISWMIMI/ETotal
Investment banking$1,707
$135
$0
$(16)$1,826
Trading2,807
268
2
15
3,092
Investments87
1
258
0
346
Commissions and fees1
639
477
1
(80)1,037
Asset management1
114
2,793
795
(38)3,664
Other114
94
1
(3)206
Total non-interest revenues5,468
3,768
1,057
(122)10,171
Interest income1,086
1,065
7
(102)2,056
Interest expense492
176
8
(106)570
Net interest594
889
(1)4
1,486
Net revenues$6,062
$4,657
$1,056
$(118)$11,657
Income before provision for income taxes$2,048
$1,120
$315
$4
$3,487
Provision for income taxes385
278
72
1
736
Net income1,663
842
243
3
2,751
Net income applicable to noncontrolling interests16
0
18
0
34
Net income applicable to Morgan Stanley$1,647
$842
$225
$3
$2,717
 Three Months Ended September 30, 2019
$ in millionsISWMIMI/ETotal
Investment banking$1,535
$118
$0
$(18)$1,635
Trading2,533
61
2
12
2,608
Investments(18)0
105
0
87
Commissions and fees1
643
416
1
(70)990
Asset management1
100
2,639
664
(40)3,363
Other51
81
0
(1)131
Total non-interest revenues4,844
3,315
772
(117)8,814
Interest income3,112
1,378
4
(144)4,350
Interest expense2,933
335
12
(148)3,132
Net interest179
1,043
(8)4
1,218
Net revenues$5,023
$4,358
$764
$(113)$10,032
Income before provision for income taxes$1,307
$1,238
$165
$0
$2,710
Provision for income taxes189
276
27
0
492
Net income1,118
962
138
0
2,218
Net income applicable to noncontrolling interests45
0
0
0
45
Net income applicable to Morgan Stanley$1,073
$962
$138
$0
$2,173





85September 2020 Form 10-Q
Table of Contents
Notes to Consolidated Financial Statements
(Unaudited)
mslogo3q20.jpg

 Nine Months Ended September 30, 2020
$ in millionsISWMIMI/ETotal
Investment banking$4,902
$403
$0
$(66)$5,239
Trading10,375
413
(13)56
10,831
Investments98
9
552
0
659
Commissions and fees1
2,230
1,538
1
(270)3,499
Asset management1
342
7,980
2,144
(120)10,346
Other(628)216
(39)(7)(458)
Total non-interest revenues17,319
10,559
2,645
(407)30,116
Interest income4,809
3,468
22
(382)7,917
Interest expense3,184
653
33
(395)3,475
Net interest1,625
2,815
(11)13
4,442
Net revenues$18,944
$13,374
$2,634
$(394)$34,558
Income before provision for income taxes$5,991
$3,317
$674
$6
$9,988
Provision for income taxes1,326
758
136
1
2,221
Net income4,665
2,559
538
5
7,767
Net income applicable to noncontrolling interests75
0
81
0
156
Net income applicable to Morgan Stanley$4,590
$2,559
$457
$5
$7,611
 Nine Months Ended September 30, 2019
$ in millionsISWMIMI/ETotal
Investment banking$4,158
$365
$(1)$(55)$4,467
Trading8,221
525
(2)37
8,781
Investments257
1
543
0
801
Commissions and fees1
1,889
1,250
1
(205)2,935
Asset management1
310
7,544
1,893
(115)9,632
Other416
281
(6)(6)685
Total non-interest revenues15,251
9,966
2,428
(344)27,301
Interest income9,457
4,139
14
(464)13,146
Interest expense9,376
950
35
(476)9,885
Net interest81
3,189
(21)12
3,261
Net revenues$15,332
$13,155
$2,407
$(332)$30,562
Income before provision for income taxes$4,365
$3,669
$538
$(4)$8,568
Provision for income taxes703
830
104
(1)1,636
Net income3,662
2,839
434
(3)6,932
Net income applicable to noncontrolling interests97
0
32
0
129
Net income applicable to Morgan Stanley$3,565
$2,839
$402
$(3)$6,803

I/E–Intersegment Eliminations
1.Substantially all revenues are from contracts with customers.

For a discussion about the Firm’s business segments, see Note 21 to the consolidated financial statements in the 20162019 Form10-K.

Selected Financial Information by Business Segment

  Three Months Ended September 30, 2017 
$ in millions   IS       WM       IM1, 2       I/E       Total    

Totalnon-interest revenues

 $    4,618  $3,195  $676  $(75)  $8,414  

Interest income

  1,421   1,155   1   (237)   2,340  

Interest expense

  1,663   130   2   (238)   1,557  

Net interest

  (242)   1,025   (1)   1   783  

Net revenues

 $4,376  $4,220  $675  $(74)  $9,197  

Income from continuing operations before income taxes

 $1,236  $1,119  $131  $(4)  $2,482  

Provision for income taxes

  260   421   16   —   697  

Income from continuing operations

  976   698   115   (4)   1,785  

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

  6   —   —   —   6  

Net income

  982   698   115   (4)   1,791  

Net income applicable to noncontrolling interests

  9   —   1   —   10  

Net income applicable
to Morgan Stanley

 $973  $698  $114  $(4)  $1,781  
 

Detail of Investment Banking Revenues
 Three Months Ended
September 30,		Nine Months Ended
September 30,
$ in millions2020201920202019
Institutional Securities Advisory$357
$550
$1,181
$1,462
Institutional Securities Underwriting1,350
985
3,721
2,696
Firm Investment banking revenues from contracts with customers95%85%92%90%

Trading Revenues by Product Type
 Three Months Ended
September 30,		Nine Months Ended
September 30,
$ in millions2020201920202019
Interest rate$511
$894
$2,593
$2,283
Foreign exchange138
69
603
383
Equity security and index1
1,478
1,076
4,494
4,005
Commodity and other495
300
1,363
986
Credit470
269
1,778
1,124
Total$3,092
$2,608
$10,831
$8,781
1.89September 2017 Form 10-Q
Dividend income is included within equity security and index contracts.
The previous table summarizes realized and unrealized gains and losses, from derivative and non-derivative financial instruments, included in Trading revenues in the income statements. The Firm generally utilizes financial instruments across a variety of product types in connection with its market-making and related risk management strategies. The trading revenues presented in the table are not representative of the manner in which the Firm manages its business activities and are prepared in a manner similar to the presentation of trading revenues for regulatory reporting purposes.

Investment Management Investments Revenues—Net Cumulative Unrealized Carried Interest
$ in millionsAt
September 30,
2020		At
December 31,
2019
Net cumulative unrealized performance-based fees at risk of reversing$761
$774

The Firm’s portion of net cumulative performance-based fees in the form of unrealized carried interest, for which the Firm is not obligated to pay compensation, are at risk of reversing when the return in certain funds fall below specified performance targets. See Note 14 for information regarding general partner guarantees, which include potential obligations to return performance fee distributions previously received.

September 2020 Form 10-Q

86
Table of Contents
Notes to Consolidated Financial Statements

(Unaudited)

LOGO
mslogo3q20.jpg

  Three Months Ended September 30, 2016 
$ in millions IS  WM  IM1, 2  I/E  Total 

Totalnon-interest
revenues

 $   4,436  $   2,996  $     551  $(77)  $   7,906   

Interest income

  980   979   1     (226)   1,734   

Interest expense

  863   94   —   (226)   731   

Net interest

  117   885   1   —   1,003   

Net revenues

 $4,553  $3,881  $552  $(77)  $8,909   

Income from continuing
operations before
income taxes

 $1,383  $901  $97  $—  $2,381   

Provision for income taxes

  381   337   31   —   749   

Income from continuing
operations

  1,002   564   66   —   1,632   

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

  8   —   —   —   8   

Net income

  1,010   564   66   —   1,640   

Net income (loss) applicable
to noncontrolling interests

  44   —   (1)   —   43   

Net income applicable
to Morgan Stanley

 $966  $564  $67  $—  $1,597   
  

 

Nine Months Ended September 30, 2017

 
$ in millions IS3  WM  IM1, 2  I/E  Total 

Totalnon-interest
revenues

 $15,017  $9,401  $1,949  $(227)  $26,140  

Interest income

  3,788   3,348   3   (728)   6,411  

Interest expense

  4,515   320   3   (732)   4,106  

Net interest

  (727)   3,028   —   4   2,305  

Net revenues

 $14,290  $12,429  $1,949  $(223)  $28,445  

Income from continuing
operations before
income taxes

 $4,409  $3,149  $376  $(2)  $7,932  

Provision for income taxes

  1,132   1,139   87   —   2,358  

Income from continuing
operations

  3,277   2,010   289   (2)   5,574  

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

  (21)   —   —   —   (21) 

Net income

  3,256   2,010   289   (2)   5,553  

Net income applicable
to noncontrolling interests

  77   —   8   —   85  

Net income applicable
to Morgan Stanley

 $3,179  $2,010  $281  $(2)  $5,468  
  Nine Months Ended September 30, 2016 
$ in millions IS4  WM4  IM1, 2  I/E  Total 

Totalnon-interest
revenues

 $12,577  $8,815  $1,610  $(207)  $22,795  

Interest income

  2,999   2,813   5   (669)   5,148  

Interest expense

  2,731   268   3   (669)   2,333  

Net interest

  268   2,545   2   —   2,815  

Net revenues

 $  12,845  $  11,360  $    1,612  $  (207)  $25,610  

Income from continuing
operations before
income taxes

 $3,797  $2,546  $259  $—  $6,602  

Provision for income taxes

  1,109   973   78   —   2,160  

Income from continuing
operations

  2,688   1,573   181   —   4,442  

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

  1   —   —   —   1  

Net income

  2,689   1,573   181   —   4,443  

Net income (loss) applicable
to noncontrolling interests

  144   —   (14)   —   130  

Net income applicable
to Morgan Stanley

 $2,545  $1,573  $195  $—  $4,313  

IS—Institutional Securities

WM—Wealth Management

IM—

Investment Management

I/E—Intersegment eliminations

1.

For further information on fee waiver amounts see the table below.

2.

For further information on net unrealized performance-based fee amounts see the table below.

3.

During the current year period, the Firm recorded a provision of $86 million for potential additional value-added tax, interest and penalties in relation to certain intercompany service activities provided to our U.K. group.

4.

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.

Asset Management Revenues—Reduction of Fees Due to Fee Waivers

 Three Months Ended
September 30,		Nine Months Ended
September 30,
$ in millions2020201920202019
Fee waivers$37
$11
$70
$32

The Firm waives a portion of its fees in the Investment Management business segment from certain registered money market funds that comply with the requirements of Rule 2a-7 of the Investment Company Act of 1940.

Reduction of Fees due to


Certain Other Fee Waivers

  Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
$ in millions       2017              2016              2017              2016       

Fee waivers

 $20  $26  $66  $61  

In

Separately, the Firm’s employees, including its senior officers, may participate on the same terms and conditions as other investors in certain management fee arrangements,funds that the Firm is entitled to receive performance-based fees (also referred to as incentivesponsors primarily for client investment, and the Firm may waive or lower applicable fees and includes carried interest) when the return on assets under management exceeds certain benchmark returns or other performance targets. In such arrangements, performance fee revenues are accrued (or reversed) quarterly based on measuring account/fund performance to date versus the performance benchmark stated in the investment management

charges for its employees.

September 2017 Form 10-Q90

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

agreement. The Firm’s portion of net unrealized cumulative performance-based fees (for which the Firm is not obligated to pay compensation) are at risk of reversing if the fund performance falls below the stated investment management agreement benchmarks. See Note 11 for information regarding general partner guarantees, which include potential obligations to return performance fee distributions previously received.

Net Unrealized Performance-based Fees

$ in millions 

  At September 30,  

2017

  

  At December 31,  

2016

 

Net unrealized cumulative
performance-based fees at risk of reversing

 $450  $397  

Total AssetsRevenues by Business Segment

$ in millions 

  At September 30,  

2017

  

   At December 31,   

2016

 

Institutional Securities

 $668,281  $629,149  

Wealth Management

  180,628   181,135  

Investment Management

  4,784   4,665  

Total1

 $853,693  $814,949  

1.

Corporate assets have been fully allocated to the business segments.

Geographic Information

Region

 Three Months Ended
September 30,		Nine Months Ended
September 30,
$ in millions2020201920202019
Americas$8,387
$7,489
$24,798
$22,336
EMEA1,473
1,409
4,670
4,687
Asia1,797
1,134
5,090
3,539
Total$11,657
$10,032
$34,558
$30,562


For a discussion about the Firm’s geographic net revenues, see Note 21 to the consolidated financial statements in the 20162019 Form10-K.

Net Revenues by Region

  Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
$ in millions       2017              2016              2017              2016       

Americas

 $6,833  $6,624  $20,667  $18,914  

EMEA

  1,325   1,236   4,420   3,677  

Asia-Pacific

  1,039   1,049   3,358   3,019  

Net revenues

 $9,197  $8,909  $28,445  $25,610  

20. Subsequent Events

Revenue Recognized from Prior Services
 Three Months Ended
September 30,		Nine Months Ended
September 30,
$ in millions2020201920202019
Non-interest revenues$556
$841
$1,616
$1,995
The previous table includes revenue from contracts with customers recognized where some or all services were performed in prior periods and is primarily composed of investment banking advisory fees and distribution fees.

Receivables from Contracts with Customers
$ in millionsAt
September 30,
2020		At
December 31,
2019
Customer and other receivables$2,854
$2,916

Receivables from contracts with customers, which are included within Customer and other receivables in the balance sheets, arise when the Firm has evaluated subsequent events for adjustment to or disclosure in the financial statements through the date of this reportboth recorded revenues and has not identified any recordable or disclosable events not otherwise reported in these financial statements or the notes thereto.

right per the contract to bill the customer.

 

Assets by Business Segment
$ in millionsAt
September 30,
2020		At
December 31,
2019
Institutional Securities$704,323
$691,201
Wealth Management244,425
197,682
Investment Management7,192
6,546
Total1
$955,940
$895,429
1. Parent assets have been fully allocated to the business segments.



91September 2017 Form 10-Q

87September 2020 Form 10-Q
Table of Contents
Financial Data Supplement (Unaudited)

Average Balances and Interest Rates and Net Interest Income


LOGO
mslogo3q20.jpg

   Three Months Ended September 30, 
   2017  2016 
$ in millions  

Average

Daily Balance

     Interest    

Annualized

  Average Rate  

  

Average

Daily Balance

   Interest   

Annualized    

Average Rate    

 

Interest earning assets1

          

Investment securities2

  $73,599   $313   1.7%  $79,948   $289    1.4 % 

Loans2

   99,655    853   3.4   91,010    698    3.0     

Interest bearing deposits with banks2

   25,196    84   1.3   23,993    30    0.5     

Securities purchased under agreements
to resell and Securities borrowed3:

          

U.S.

   128,127    190   0.6   138,420    (58)    (0.2)    

Non-U.S.

   99,019    (114)   (0.5)   84,881    (60)    (0.3)    

Trading assets, net of Trading liabilities4:

          

U.S.

   58,000    463   3.2   52,490    452    3.4     

Non-U.S.

   5,826    43   3.0   12,001    74    2.4     

Customer receivables and Other5:

          

U.S.

   47,916    364   3.0   48,637    298    2.4     

Non-U.S.

   25,429    144   2.2   22,162    11    0.2     

Total

  $562,767   $2,340   1.7%  $553,542   $1,734    1.2 % 

Interest bearing liabilities1

 

        

Deposits2

  $150,116   $63   0.2%  $153,036   $12    — % 

Short-term and Long-term borrowings2, 6

   192,575    1,109   2.3   166,271    814    1.9     

Securities sold under agreements
to repurchase and Securities loaned7:

                            

U.S.

   30,027    234   3.1   33,361    133    1.6     

Non-U.S.

   38,536    91   0.9   33,487    95    1.1     

Customer payables and Other8:

                            

U.S.

   129,365    (13)   —   125,931    (217)    (0.7)    

Non-U.S.

   66,697    73   0.4   64,241    (106)    (0.7)    

Total

  $607,316   $1,557   1.0%  $576,327   $731    0.5 % 

Net interest income
and net interest rate spread

       $783   0.7%       $1,003    0.7 % 




Average Balances and Interest Rates and Net Interest Income
 Three Months Ended September 30,
 20202019
$ in millions
Average
Daily
Balance
Interest
Annualized
Average
Rate
Average
Daily
Balance
Interest
Annualized
Average
Rate
Interest earning assets
Investment securities1
$133,726
$529
1.6 %$104,700
$579
2.2%
Loans1
144,985
967
2.7
122,320
1,208
3.9
Securities purchased under agreements to resell and Securities borrowed2:
U.S.123,614
(99)(0.3)146,578
835
2.3
Non-U.S.58,567
(88)(0.6)76,871
36
0.2
Trading assets, net of Trading liabilities3:
U.S.78,417
443
2.2
78,169
630
3.2
Non-U.S.21,092
94
1.8
17,104
98
2.3
Customer receivables and Other4:
U.S.81,908
171
0.8
62,113
703
4.5
Non-U.S.63,657
39
0.2
60,073
261
1.7
Total$705,966
$2,056
1.2 %$667,928
$4,350
2.6%
Interest bearing liabilities
Deposits1
$236,119
$178
0.3 %$179,715
$505
1.1%
Borrowings1, 5
205,166
714
1.4
196,777
1,219
2.5
Securities sold under agreements to repurchase and Securities loaned6:
U.S.30,154
81
1.1
36,335
505
5.5
Non-U.S.28,320
84
1.2
30,111
176
2.3
Customer payables and Other7:
U.S.119,846
(399)(1.3)121,800
448
1.5
Non-U.S.64,524
(88)(0.5)65,036
279
1.7
Total$684,129
$570
0.3 %$629,774
$3,132
2.0%
Net interest income and net interest rate spread$1,486
0.9 % $1,218
0.6%


 Nine Months Ended September 30,
 20202019
$ in millions
Average
Daily
Balance
Interest
Annualized
Average
Rate
Average
Daily
Balance
Interest
Annualized
Average
Rate
Interest earning assets
Investment securities1
$122,613
$1,603
1.7 %$99,782
$1,563
2.1%
Loans1
142,261
3,171
3.0
118,926
3,599
4.0
Securities purchased under agreements to resell and Securities borrowed2:
U.S.127,868
194
0.2
144,686
2,774
2.6
Non-U.S.59,831
(124)(0.3)76,814
91
0.2
Trading assets, net of Trading liabilities3:
U.S.76,418
1,558
2.7
77,434
1,922
3.3
Non-U.S.22,570
344
2.0
14,362
266
2.5
Customer receivables and Other4:
U.S.78,705
892
1.5
61,479
2,110
4.6
Non-U.S.61,699
279
0.6
59,033
821
1.9
Total$691,965
$7,917
1.5 %$652,516
$13,146
2.7%
Interest bearing liabilities
Deposits1
$223,733
$804
0.5 %$178,894
$1,460
1.1%
Borrowings1, 5
199,855
2,534
1.7
192,854
3,941
2.7
Securities sold under agreements to repurchase and Securities loaned6:
U.S.30,315
501
2.2
32,479
1,489
6.1
Non-U.S.29,315
382
1.7
31,555
527
2.2
Customer payables and Other7:
U.S.123,662
(693)(0.7)116,383
1,587
1.8
Non-U.S.64,608
(53)(0.1)65,331
881
1.8
Total$671,488
$3,475
0.7 %$617,496
$9,885
2.1%
Net interest income and net interest rate spread$4,442
0.8 % $3,261
0.6%

September 2017 Form 10-Q92

Financial Data Supplement (Unaudited)

Average Balances and Interest Rates and Net Interest Income

LOGO

   Nine Months Ended September 30, 
   2017  2016 
$ in millions  

Average

Daily Balance

     Interest    

Annualized

  Average Rate  

  

Average

Daily Balance

   Interest   Annualized  
Average Rate  		 

Interest earning assets1

          

Investment securities2

  $76,356   $943   1.7%      $77,989   $762    1.3 % 

Loans2

   97,099    2,399   3.3   88,995    2,026    3.0     

Interest bearing deposits with banks2

   21,685    206   1.3   28,329    134    0.6     

Securities purchased under agreements
to resell and Securities borrowed3:

          

U.S.

   126,738    406   0.4   148,918    (184)    (0.2)    

Non-U.S.

   96,419    (320)   (0.4)   84,802    (131)    (0.2)    

Trading assets, net of Trading liabilities4:

          

U.S.

   58,260    1,385   3.2   48,274    1,426    3.9     

Non-U.S.

   3,701    76   2.7   14,706    225    2.0     

Customer receivables and Other5:

          

U.S.

   49,155    950   2.6   47,723    838    2.3     

Non-U.S.

   24,514    366   2.0   22,209    52    0.3     

Total

  $553,927   $6,411   1.5%      $561,945   $5,148    1.2 % 

Interest bearing liabilities1

 

        

Deposits2

  $150,244   $88   0.1%      $155,598   $48    — % 

Short-term and Long-term borrowings2, 6

   181,544    3,197   2.4   163,474    2,633    2.2     

Securities sold under agreements
to repurchase and Securities loaned7:

          

U.S.

   31,958    651   2.7   32,183    424    1.8     

Non-U.S.

   39,449    261   0.9   29,970    337    1.5     

Customer payables and Other8:

          

U.S.

   128,420    (196)   (0.2)   126,468    (826)    (0.9)    

Non-U.S.

   64,257    105   0.2   64,221    (283)    (0.6)    

Total

  $595,872   $4,106   0.9%      $571,914   $2,333    0.5 % 

Net interest income
and net interest rate spread

       $2,305   0.6%       $      2,815    0.7 % 

1.

Certain revisions have been made to prior periods to conform to the current presentation.

2.

Amounts include primarily U.S. balances.

3.

2.
Includes fees paid on Securities borrowed.

4.

Trading assets, net of Trading liabilities exclude

3.
Excludes non-interest earning assets andnon-interest bearing liabilities, such as equity securities.

5.

4.
Includes interest from customer receivablesCash and cash deposited with clearing organizations or segregated under federal and other regulations or requirements.

equivalents.
6.

The Firm also issues structured notes that have coupon or repayment terms linked to the performance

5.
Includes borrowings carried at fair value, whose interest expense is considered part of debt or equity securities, indices, currencies or commodities, which arefair value and therefore is recorded within Trading revenues (see Note 3 to the financial statements).

revenues.
7.

6.Includes fees received on Securities loaned.

The annualized average rate was calculated using (a) interest expense incurred on all securities sold under agreements to repurchase and securities loaned transactions, whether or not such transactions were reported in the balance sheets and (b) net average on-balance sheet balances, which exclude certain securities-for-securities transactions.
8.

7.
Includes fees received from prime brokerage customers for stock loan transactions incurredentered into to cover customers’ short positions.

93September 2017 Form 10-Q


Financial Data Supplement (Unaudited)

Rate/Volume Analysis

LOGO

Effect of Volume and Rate Changes on Net Interest Income

   

Three Months Ended September 30, 2017

versus

Three Months Ended September 30, 2016

   

Nine Months Ended September 30, 2017

versus

Nine Months Ended September 30, 2016

 
   

Increase (decrease)

due to change in:

      

Increase (decrease)

due to change in:

    
$ in millions      Volume      Rate  Net Change       Volume      Rate  Net Change 

Interest earning assets

 

  

Investment securities

  $(23)  $47  $24   $(16)  $197  $181  

Loans

   66   89   155    184   189   373  

Interest bearing deposits with banks

   2   52   54    (31)   103   72  

Securities purchased under agreements
to resell and Securities borrowed:

 

  

U.S.

   4   244   248    27   563   590  

Non-U.S.

   (10)   (44)   (54)    (18)   (171)   (189) 

Trading assets, net of Trading liabilities:

        

U.S.

   47   (36)   11    295   (336)   (41) 

Non-U.S.

   (38)   7   (31)    (168)   19   (149) 

Customer receivables and Other:

 

  

U.S.

   (4)   70   66    25   87   112  

Non-U.S.

   2   131   133    5   309   314  

Change in interest income

  $46  $560  $606   $303  $960  $1,263  

Interest bearing liabilities

 

  

Deposits

  $—  $51  $51   $(2)  $42  $40  

Short-term and Long-term borrowings

   129   166   295    291   273   564  

Securities sold under agreements
to repurchase and Securities loaned:

        

U.S.

   (13)   114   101    (3)   230   227  

Non-U.S.

   14   (18)   (4)    107   (183)   (76) 

Customer payables and Other:

 

  

U.S.

   (6)   210   204    (13)   643   630  

Non-U.S.

   (4)   183   179    —   388   388  

Change in interest expense

  $120  $            706  $826   $380  $        1,393  $1,773  

Change in net interest income

  $(74)  $(146)  $(220)   $(77)  $(433)  $(510) 

September 20172020 Form 10-Q9488 
Table of Contents
Glossary of Common Terms and Acronyms
mslogo3q20.jpg



2019 Form 10-KAnnual report on Form 10-K for year ended December 31, 2019 filed with the SEC


ABSAsset-backed securities


ACLAllowance for credit losses
AFSAvailable-for-sale


AMLAnti-money laundering


AOCIAccumulated other comprehensive income (loss)


AUMAssets under management or supervision


Balance sheetsConsolidated balance sheets


BEATBase erosion and anti-abuse tax


BHCBank holding company


bpsBasis points; one basis point equals 1/100th of 1%


Cash flow statementsConsolidated cash flow statements


CCARComprehensive Capital Analysis and Review


CCyBCountercyclical capital buffer


CDOCollateralized debt obligation(s), including Collateralized loan obligation(s)


CDSCredit default swaps


CECLCurrent Expected Credit Losses, as calculated under the Financial Instruments—Credit Losses accounting update


CFTCU.S. Commodity Futures Trading Commission


CLNCredit-linked note(s)


CLOCollateralized loan obligation(s)


CMBSCommercial mortgage-backed securities


CMOCollateralized mortgage obligation(s)


CVACredit valuation adjustment


DVADebt valuation adjustment


EBITDAEarnings before interest, taxes, depreciation and amortization
ELNEquity-linked note(s)


EMEAEurope, Middle East and Africa


EPSEarnings per common share


E.U.European Union


FDICFederal Deposit Insurance Corporation


FFELPFederal Family Education Loan Program


FFIECFederal Financial Institutions Examination Council


FHCFinancial Holding Company


FICCFixed Income Clearing Corporation


FICOFair Isaac Corporation


Financial statementsConsolidated financial statements


FVAFunding valuation adjustment


GILTIGlobal Intangible Low-Taxed Income


G-SIBGlobal systemically important banks


HELOCHome Equity Line of Credit


HQLAHigh-quality liquid assets


HTMHeld-to-maturity


I/EIntersegment eliminations


IHCIntermediate holding company


IMInvestment Management


Income statementsConsolidated income statements


IRSInternal Revenue Service


ISInstitutional Securities


LCRLiquidity coverage ratio, as adopted by the U.S. banking agencies


LIBORLondon Interbank Offered Rate


M&AMerger, acquisition and restructuring transaction


MSBNAMorgan Stanley Bank, N.A.


MS&Co.Morgan Stanley & Co. LLC



89September 2020 Form 10-Q
Table of Contents
 
LOGOGlossary of Common Terms and Acronyms
mslogo3q20.jpg



MSIPMorgan Stanley & Co. International plc


MSMSMorgan Stanley MUFG Securities Co., Ltd.


MSPBNAMorgan Stanley Private Bank, National Association


MSSBMorgan Stanley Smith Barney LLC


MUFGMitsubishi UFJ Financial Group, Inc.


MUMSSMitsubishi UFJ Morgan Stanley Securities Co., Ltd.


MWhMegawatt hour


N/ANot Applicable


N/MNot Meaningful


NAVNet asset value


Non-GAAPNon-generally accepted accounting principles


NSFRNet stable funding ratio, as proposed by the U.S. banking agencies


OCCOffice of the Comptroller of the Currency


OCIOther comprehensive income (loss)


OISOvernight index swap


OTCOver-the-counter


OTTIOther-than-temporary impairment


PRAPrudential Regulation Authority


PSUPerformance-based stock unit


RMBSResidential mortgage-backed securities


ROEReturn on average common equity


ROTCEReturn on average tangible common equity


ROURight-of-use


RSURestricted stock unit


RWARisk-weighted assets


SECU.S. Securities and Exchange Commission


SLRSupplementary leverage ratio


SOFRSecured Overnight Financing Rate


S&PStandard & Poor’s


SPESpecial purpose entity


SPOESingle point of entry


TDRTroubled debt restructuring


TLACTotal loss-absorbing capacity


U.K.United Kingdom


UPBUnpaid principal balance


U.S.United States of America


U.S. GAAPAccounting principles generally accepted in the United States of America


VaRValue-at-Risk


VIEVariable interest entity


WACCImplied weighted average cost of capital


WMWealth Management

September 2020 Form 10-Q90
Table of Contents
mslogo3q20.jpg

Other Information

None.
Legal Proceedings

The following new matters and developments have occurred since previously reporting certain matters in the Firm’s Annual Report on2019 Form10-K, for the year ended December 31, 2016 (the “Form10-K”), the Firm’s Quarterly ReportReports on Form10-Q for the quarterly period ended March 31, 20172020 (the “First Quarter Form10-Q”) and the Firm’s Quarterly Report on Form10-Q for thequarterly period endingended June 30, 20172020 (the “Second Quarter Form10-Q”). See also the disclosures set forth under “Legal Proceedings” in Part I, Item 3 of the 2019 Form10-K, and Part II, Item 1 of the First Quarter Form10-Q, and the Second Quarter Form10-Q.


Residential Mortgage and Credit Crisis Related Matters

Matter

On August 10, 2017,July 24, 2020, the plaintiffFirst Department inWilmington Trust CompanyChina Development Industrial Bank v. Morgan Stanley Mortgage Capital Holdings LLC& Co. Incorporated, et al.filed a motion for leave to appeal the Appellate Division, First Department’s July 11, 2017 decision and order granting in part and denying in part the Firm’s motion to dismiss. On September 26, 2017, the Appellate Division, First Department denied plaintiff’s motion for leave to appeal.

On August 25, 2017, the parties inMorgan Stanley Mortgage Loan Trust 2006-4SL, et al. v. Morgan Stanley Mortgage Capital Inc. andMorgan 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. entered into agreements to settle the litigations, which are subject to court approval.

On September 11, 2017, the Firm moved to dismiss the second amended complaint inPhoenix Light SF Limited, et al. v. Morgan Stanley, et al.

On October 3, 2017, the Appellate Division, First Department denied the Firm’s motion for leave to appeal to the First Department’s decision denying the Firm’s motion for sanctions relating to spoliation of evidence and otherwise affirming the order of the Supreme Court of NY denying the Firm’s motion for summary judgment.


On September 2, 2020, the parties inDeutscheZentral-Genossenschaftsbank AG et al.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 et al.

Mortgage Capital Holdings LLC, Successor-by-Merger to Morgan Stanley Mortgage Capital Inc. and GreenPoint Mortgage Funding, Inc. entered into a settlement agreement, which was approved in a Trust Instructional Proceeding on October 20, 2020. 

Other Matters

On September 8, 2017, the court inIn Re Foreign Exchange Benchmark Rates Antitrust Litigation granted an order preliminarily approving the Firm’s settlement.

On October 5, 2017, various institutional investors filed a claim against

European Matter
The plaintiff and the Firm and another bank in a matter styledCase number BS99-6998/2017,filedare due to file final submissions in the City Court of Copenhagen, Denmark concerning their roles as underwritersAppeal of the initial public offering (“IPO”) in March 2014 of the Danish company OW Bunker A/S. The claim is based on alleged prospectus liability and seeks damages of DKK 534,270,456 (approximately US$85 million) plus interest in respect of alleged losses arising from investing in shares in OW Bunker, which entered into bankruptcy in November 2014. Separately, on September 12, 2017, representatives of another group of institutional investors gave formal notice of their intention to commence legal proceedings against the Firm and the other bank. The investors are expected to join the Firm and the other bank to pending proceedings in Copenhagen, Denmark against various other parties involvedMilan in the IPO in a matter styledCase numberB-2073-16. The investors are expected to claim damages of DKK 766,066,012 (approximately US$121 million) plus interest, also on the basis of alleged prospectus liability.

On October 12, 2017, the Firm reached a settlement in principle with the Environmental Protection Agency in the amount of approximately $1 million on the Firm’s self-disclosure regarding certain reformulated blendstock the Firm blended and sold during 2013 and 2014.

OnBanco Popolare Societá Cooperativa v. Morgan Stanley & Co. International plc & others by November 3, 2017, the Firm intends to file its opposition to plaintiffs’ motion for class certification inAlaska Electrical Pension Fund et al. v. Bank of America et al. (formerly styledGenesee County Employees’ Retirement System v. Bank of America Corporation et al.).

23, 2020.

 

95September 2017 Form 10-Q

LOGO

Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth the information with respect to purchases made by or on behalf of the Firm of its common stock during the quarterly period ended September 30, 2017.

Issuer Purchases of Equity Securities

$ in millions, except per share data  Total Number of
Shares
Purchased		  

Average Price

Paid Per Share

  Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs1		  Approximate
Dollar Value of
Shares that May
Yet be Purchased
Under the Plans or
Programs		 

Month #1 (July 1, 2017—July 31, 2017)

     

Share Repurchase Program2

   2,729,000  $47.07   2,729,000  $4,872  

Employee transactions3

   769,637  $46.21   —   —   

Month #2 (August 1, 2017—August 31, 2017)

     

Share Repurchase Program2

   13,740,000  $46.56   13,740,000  $4,232  

Employee transactions3

   96,764  $46.66   —   —  

 

Month #3 (September 1, 2017—September 30, 2017)

     

Share Repurchase Program2

   10,448,247  $46.12   10,448,247  $3,750  

Employee transactions3

   192,674  $46.11   —   —  

Quarter ended at September 30, 2017

     

Share Repurchase Program2

   26,917,247  $46.44   26,917,247  $3,750  

Employee transactions3

   1,059,075  $46.23   —   —  

Three Months Ended September 30, 2020
$ in millions, except per share data
Total 
Number of Shares Purchased1
Average Price Paid Per Share
Total Shares 
Purchased as Part of Share Repurchase Program2,3
Dollar Value of Remaining Authorized Repurchase
July30,610
$48.10
—
$—
August560,008
$48.90
—
$—
September18,360
$52.08
—
$—
Total608,978
$48.96
—
 

1.

Refers to shares acquired by the Firm in satisfaction of the tax withholding obligations on stock-based awards granted under the Firm’s stock-based compensation plans during the three months ended September 30, 2020.

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

On April 18, 2018, the Firm entered into a sales plan with Mitsubishi UFJ Financial Group, Inc. (“MUFG”). See Note 17 to the financial statements for further information on the sales plan.
2.

3.
The Firm’s Board of Directors has authorized the repurchase of the Firm’s outstanding stock under a share repurchase program (the “Share Repurchase Program”). from time to time as conditions warrant and subject to regulatory non-objection. The Share Repurchase Program is a program for capital management purposes that considers, among other things, business segment capital needs, as well as equity-based compensation and benefit plan requirements. The Share Repurchase Program has no set expiration or termination date. Share repurchases by the Firm are subject to regulatory approval. On June 28, 2017, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) announced that they did not object to our 2017 capital plan, which included a share repurchase of up to $5.0 billion of the Firm’s outstanding common stock during the period beginning July 1, 2017 through June 30, 2018. During the quarter ended September 30, 2017, the Firm repurchased approximately $1.25 billion of the Firm’s outstanding common stock as part of its Share Repurchase Program. For further information, see “Liquidity and Capital Resources—Capital Management” in Part I, Item 2.

3.

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

Exhibits

An exhibit index has been filed as part

Share repurchases by the Firm are subject to regulatory non-objection. On June 27, 2019, the Federal Reserve published summary results of this ReportCCAR and the Firm received a non-objection to its 2019 Capital Plan. The Firm’s 2019 Capital Plan includes a share repurchase of up to $6.0 billion of its outstanding common stock during the period beginning July 1, 2019 through June 30, 2020. On March 15, 2020, the Financial Services Forum announced that each of its eight member banks, including the Firm, had voluntarily suspended their share repurchase programs. As a result, $1.7 billion of share repurchase authorization expired unused on pageE-1.

June 30, 2020. On June 25, 2020, the Federal Reserve published summary results of CCAR and announced that large BHCs, including the Firm, generally would be restricted in making share repurchases during the current quarter, and on September 30, 2020, the restrictions were extended through the fourth quarter of 2020. For further information, see “Liquidity and Capital Resources—Regulatory Requirements—Capital Plans and Stress Tests.”


September 2017 Form 10-Q96

91September 2020 Form 10-Q

Exhibit Index

Morgan Stanley

Quarter Ended September 30, 2017

      Exhibit No.      

Description

12

Table of Contents
 

Statement Re: Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends (unaudited).

mslogo3q20.jpg

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

15

Exhibit No.		Description
 

3.1

Amended and Restated Certificate of Incorporation of Morgan Stanley, as amended to date.
10.1
Form of Aircraft Time-Sharing Agreement.
15
Letter of awareness from Deloitte  & Touche LLP, dated November 3, 2017,2020, concerning unaudited interim financial information.

31.1

Rule 13a-14(a) Certification of Chief Executive Officer.

31.2

Rule 13a-14(a) Certification of Chief Financial Officer.

32.1

Section 1350 Certification of Chief Executive Officer.

32.2

Section 1350 Certification of Chief Financial Officer.

101

Interactive data filesData Files pursuant to Rule 405 of RegulationS-T (unaudited): (i) the Consolidated Income Statements—Three Months formatted in Inline eXtensible Business Reporting Language (“Inline XBRL”).

104Cover Page Interactive Data File (formatted in Inline XBRL and Nine Months Ended September 30, 2017 and 2016, (ii) the Consolidated Comprehensive Income Statements—Three Months and Nine Months Ended September 30, 2017 and 2016, (iii) the Consolidated Balance Sheets—at September 30, 2017 and December 31, 2016, (iv) the Consolidated Statements of Changescontained in Total Equity—Nine Months Ended September 30, 2017 and 2016, (v) the Consolidated Cash Flow Statements—Nine Months Ended September 30, 2017 and 2016, and (vi) Notes to Consolidated Financial Statements.

Exhibit 101).


E-1September 2017 Form 10-Q

September 2020 Form 10-Q92 
LOGO
Table of Contents
mslogo3q20.jpg


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

MORGAN STANLEY
(Registrant)
 

MORGAN STANLEY

(Registrant)

By:
/s/ JONATHAN PRUZAN

 By:

/s/ JONATHAN PRUZAN

Jonathan Pruzan

Executive Vice President and

Chief Financial Officer

By:
/s/ RAJA J. AKRAM
 

 By:

/s/ PAUL C. WIRTH

Paul C. Wirth

Raja J. Akram
Deputy Chief Financial Officer,

Chief Accounting Officer and Controller

Date: November 3, 2017

S-1September 2017 Form 10-Q
2020



S-1