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, 2017March 31, 2018

OR

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

EXCHANGE ACT OF 1934

Commission File Number1-11758

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(Exact Name of Registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of

incorporation or organization)

  

1585 Broadway

New York, NY 10036

(Address of principal executive offices, including zip code)

  

36-3145972

(I.R.S. Employer Identification No.)

  

(212)761-4000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    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  ☐

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,April 30, 2018, there were 1,807,899,1611,770,260,439 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, 2017March 31, 2018

 

Table of Contents Part Item  Page    Part    Item    Page 

Financial Information

 I    1    I       1 

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

 2   1    I    2    1 

Introduction

    1          1 

Executive Summary

    2          2 

Business Segments

    7          6 

Supplemental Financial Information and Disclosures

    18          14 

Accounting Development Updates

    18          15 

Critical Accounting Policies

    19          15 

Liquidity and Capital Resources

    19          15 

Quantitative and Qualitative Disclosures about Market Risk

 3   32    I    3    29 

Controls and Procedures

 4   42 

Report of Independent Registered Public Accounting Firm

    43          39 

Financial Statements

 1   44    I    1    40 

Consolidated Financial Statements and Notes

    44          40 

Consolidated Income Statements (Unaudited)

    44          40 

Consolidated Comprehensive Income Statements (Unaudited)

    45          41 

Consolidated Balance Sheets (Unaudited at September 30, 2017)

    46 

Consolidated Balance Sheets (Unaudited at March 31, 2018)

         42 

Consolidated Statements of Changes in Total Equity (Unaudited)

    47          43 

Consolidated Cash Flow Statements (Unaudited)

    48          44 

Notes to Consolidated Financial Statements (Unaudited)

    49          45 

1. Introduction and Basis of Presentation

    49          45 

2. Significant Accounting Policies

    50          46 

3. Fair Values

    51          48 

4. Derivative Instruments and Hedging Activities

    63          57 

5. Investment Securities

    67          61 

6. Collateralized Transactions

    70          64 

7. Loans and Allowance for Credit Losses

    72 

7. Loans, Lending Commitments and Allowance for Credit Losses

         65 

8. Equity Method Investments

    75          67 

9. Deposits

    75          68 

10. Long-Term Borrowings and Other Secured Financings

    75 

10. Borrowings and Other Secured Financings

         68 

11. Commitments, Guarantees and Contingencies

    76          68 

12. Variable Interest Entities and Securitization Activities

    80          72 

13. Regulatory Requirements

    83          76 

14. Total Equity

    86          78 

15. Earnings per Common Share

    88          80 

16. Interest Income and Interest Expense

    88          80 

17. Employee Benefit Plans

    89          80 

18. Income Taxes

    89          81 

19. Segment and Geographic Information

    89          81 

20. Subsequent Events

    91 

20. Revenues from Contracts with Customers

         82 

21. Subsequent Events

         83 

Financial Data Supplement (Unaudited)

    92          84 
Glossary of Common Acronyms         86 

Other Information

 II    95    II       88 

Legal Proceedings

 1   95    II    1    88 

Unregistered Sales of Equity Securities and Use of Proceeds

 2   96    II    2    89 
Controls and Procedures   I    4    90 

Exhibits

 6   96    II    6    90 

Exhibit Index

    E-1          E-1 

Signatures

   

 

 

 

S-1

 

 

         S-1 

 

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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”).SEC. You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet site,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.

Our internet site iswww.morganstanley.com. You can access our Investor Relations webpage atwww.morganstanley.com/about-us-ir. We make available free of charge, on or through our Investor Relations webpage, our Proxy Statements, Annual Reports on Form10-K, Quarterly Reports onForm 10-Q, Current Reports on Form8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange(“Exchange Act”), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. We also make available, through our Investor Relations webpage, via a link to the SEC’s internet site, statements of beneficial ownership of our equity securities filed by our directors, officers, 10% or greater shareholders and others under Section 16 of the Exchange Act.

You can access information about our corporate governance atwww.morganstanley.com/about-us-governance. Our Corporate Governance webpage includes:

 

Amended and Restated Certificate of Incorporation;

Amended and Restated Bylaws;

Charters for 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. You can request a copy of these documents, excluding exhibits, at no cost, by contacting Investor Relations, 1585 Broadway, New York, NY 10036(212-761-4000). The information on our internet site is not incorporated by reference into this report.

 

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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. We define the following as part of our consolidated financial statements (“financial statements”): consolidated income statements (“income statements”), consolidated balance sheets (“balance sheets”), and consolidated cash flow statements (“cash flow statements”). See the “Glossary of Common Acronyms” for definitions of certain acronyms used throughout thisForm 10-Q.

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

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

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

small tomedium-sized businesses/businesses and institutions covering brokerage and investment advisory services, financial and wealth planning services, annuity and insurance products, credit and other lending products, banking and retirement plan services.

Investment Managementprovides a broad range of investment strategies and products that span geographies, asset classes, and public and private markets to a diverse group of clients across institutional and intermediary channels. Strategies and products 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 serviced through intermediaries, including affiliated andnon-affiliated distributors.

The results of operations in the past have been, and in the future may continue to be, materially affected by competition; risk factors; and legislative, legal and regulatory developments; as well as other factors. These factors also may have an adverse impact on our ability to achieve our strategic objectives. Additionally, the discussion of our results of operations herein may contain forward-looking statements. These statements, which reflect management’s beliefs and expectations, are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of the risks and uncertainties that may affect our future results, see “Forward-Looking Statements” immediately preceding Part I, Item 1,Statements,” “Business—Competition” and “Business—Supervision and Regulation” in Part I, Item 1,Regulation,” “Risk Factors” in Part I, Item 1A of our Annual Report onthe 2017 Form10-K for the year ended December 31, 2016 (the “2016 Form10-K”) and “Liquidity and Capital Resources—Regulatory Requirements” herein.

 

 

  1  September 2017March 2018 Form 10-Q

Management’s Discussion and Analysis  LOGOLOGO

 

Executive Summary

Overview of Financial Results

 

Consolidated Results

Net Revenues

($ in millions)

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Net Income Applicable to Morgan Stanley

($ in millions)

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Earnings per Common Share1

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1.

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

We reported net revenues of $9,197$11,077 million in the three monthsquarter ended September 30, 2017March 31, 2018 (“current quarter,” or “3Q 2017”“1Q 2018”), compared with $8,909$9,745 million in the three monthsquarter ended September 30, 2016March 31, 2017 (“prior year quarter,” or “3Q 2016”“1Q 2017”). For the current quarter, net income applicable to Morgan Stanley was $1,781$2,668 million, or $0.93$1.45 per diluted common share, compared with $1,597$1,930 million, or $0.81$1.00 per diluted common share, in the prior year quarter.

We reported net revenues of $28,445 million in the nine months ended September 30, 2017 (“current year period,” or “YTD 2017”), compared with $25,610 million in the nine months ended September 30, 2016 (“prior year period,” or “YTD 2016”). For the current year period, net income applicable to Morgan Stanley was $5,468 million, or $2.79 per diluted common share, compared with $4,313 million, or $2.11 per diluted common share in the prior year period.

Non-interest Expenses

($ in millions)

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Compensation and benefits expenses of $4,169$4,914 million in the current quarter and $12,887 million in the current year period increased 2% and 9%, respectively,10% from $4,097$4,466 million in the prior year quarter, and $11,795 millionprimarily due to increases in the prior year period. The current quarter results primarily reflected increases indiscretionary incentive compensation across segments, the formulaic payout to Wealth Management representatives linked to higher revenues and deferred compensation associated with carried interest in the Investment Management business segment,salaries, partially offset by a decrease in discretionary incentive compensation mainly driven by lower revenues in the Institutional Securities business segment. The current year period results primarily reflected increases in the fair value of investments to which certain deferred compensation plans are referenced, discretionary incentive compensation mainly driven by higher revenues, the formulaic payout toreferenced.

•

Non-compensation expenses were $2,743 million in the current quarter compared with $2,471 million in the prior year quarter representing an 11% increase. This increase was primarily a result of higher volume-related expenses and the gross presentation of certain expenses due to the adoption of the accounting updateRevenue from Contracts with Customers (see Notes 2 and 20 to the financial statements for further information). These results were partially offset in the current quarter by the reversal of a portion of previously recorded provisions related to U.K. VAT matters.

 

 

September 2017March 2018 Form 10-Q  2  

Management’s Discussion and Analysis  LOGO

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

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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 Ratio1

 

 

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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 Equity2

 

 

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Return on Average Tangible Common Equity2

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1.

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

2.

Represents anon-GAAP measure. See “SelectedNon-GAAP Financial Information” herein.

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

Management’s Discussion and AnalysisLOGO

Net Income Applicable to Morgan Stanley by Segment1, 3

($ in millions)

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1.

The percentages in the charts represent the contribution of each business segment to the total. Amounts do not necessarily total to 100% due to intersegment eliminations, where applicable.

2.

The total amount of Net Revenues by Segment also includes intersegment eliminations of $(74)$(115) million and $(77)$(74) million in the current quarter and prior year quarter, respectively, and $(223) million and $(207) million in the current year period and prior year period, respectively.

3.

The total amount of Net Income Applicable to Morgan Stanley by Segment also includes intersegment eliminations of $(4)$2 million in the current quarter and $(2) million in the currentprior year period.quarter.

 

Institutional Securities net revenues of $4,376$6,100 million in the current quarter and $14,290 million in the current year period decreased 4%increased 18% from the prior year quarter, and increased 11% from the prior year period. The current quarter results primarily reflected lower revenues from fixed incomereflecting higher sales and trading partially offset by higher underwriting and advisory revenues. The current year period results primarily reflected higherInvestment banking revenues from underwriting and fixed income sales and trading.across all regions.

Wealth Management net revenues of $4,220$4,374 million in the current quarter and $12,429 million in the current year period increased 9% both8% from the prior year quarter, and the prior year period. The current quarter and the current year period results reflectedprimarily reflecting growth in assetAsset management fee revenues and Net interest income.revenues.

 

Investment Management net revenues of $675$718 million in the current quarter and $1,949 million in the current year period increased 22%18% from the prior year quarter, and increased 21%primarily reflecting higher revenues 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.Asset management.

3March 2018 Form 10-Q

Management’s Discussion and AnalysisLOGO

Net Revenues by Region1

($ in millions)

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EMEA—Europe, Middle East and Africa

1.

For a discussion of how the geographic breakdown for net revenues is determined, see Note 2119 to the consolidated financial statements in the 2016 Form10-K.statements.

September 2017 Form 10-Q4

Management’s Discussion and AnalysisLOGO

Selected Financial Information and Other Statistical Data

 

 Three Months Ended
September 30,		 Nine Months Ended
September 30,		   Three Months Ended
March 31,		 
$ in millions 2017 2016 2017 2016       2018           2017     

Income from continuing operations applicable to Morgan Stanley

 $1,775  $1,589  $5,489  $4,312    $2,670   $    1,952 

Income (loss) from discontinued operations applicable to Morgan Stanley

  6  8   (21)  1     (2)    (22) 

Net income applicable to Morgan Stanley

  1,781  1,597   5,468  4,313     2,668    1,930 

Preferred stock dividends and other

  93  79   353  314     93    90 

Earnings applicable to Morgan Stanley common shareholders

 $1,688  $      1,518  $5,115  $      3,999    $2,575   $1,840 

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%  
in millions, except per share and
employee data		 At March 31,
2018		  At December 31,
2017		 

GLR1

 $206,463  $    192,660 

Loans2

 $109,135  $104,126 

Total assets

 $858,495  $851,733 

Deposits

 $160,424  $159,436 

Borrowings

 $194,964  $192,582 

Common shareholders’ equity

 $69,514  $68,871 

Common shares outstanding

  1,774   1,788 

Book value per common share3

 $39.19  $38.52 

Worldwide employees

  57,810   57,633 
in millions, except per share and
employee data		 At March 31,
2018		  At December 31,
2017		 

Capital ratios4

  

Common Equity Tier 1 capital ratio

  15.5%   16.5% 

Tier 1 capital ratio

  17.7%   18.9% 

Total capital ratio

  20.3%   21.7% 

Tier 1 leverage ratio

  8.2%   8.3% 

 

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. For a discussion of our regulatory capital ratios,the GLR, see “Liquidity“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements” herein.Liquidity Risk Management Framework—Global Liquidity Reserve” in the 2017Form 10-K.

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 

1.2.

Amounts include loans held for investment (net of allowance) and loans held for sale but exclude loans at fair value, which are included in Trading assets in the balance sheets (see Note 7 to the financial statements).

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.

Book value per common share equals common shareholders’ equity divided by common shares outstanding.

4.

Beginning in 2018, our capital ratios are based on the Standardized Approach fullyphased-in rules. At December 31, 2017, our capital ratios were based on the Standardized Approach transitional rules. For a discussion of our regulatory capital ratios, see “Liquidity and Capital Resources—Regulatory Requirements” 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 financial measures” in this document or in the course of our earnings releases, earnings and other conference calls, financial presentations, Definitive Proxy Statement and otherwise. A“non-GAAP financial measure” excludes, or includes, amounts from the most directly comparable measure calculated and presented in accordance with U.S. GAAP. We consider thenon-GAAP financial measures we disclose to be useful to us, investors and analysts 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% 
 

 

March 2018 Form 10-Q  54  September 2017 Form 10-Q

Management’s Discussion and Analysis  LOGOLOGO

 

Tangible EquityReconciliations from U.S. GAAP toNon-GAAP Consolidated Financial Measures

 

        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 
   Three Months Ended
March 31,		 
$ in millions, except per share data      2018           2017     

Net income applicable to Morgan Stanley

  $2,668   $    1,930 

Impact of adjustments

   —    14 

Adjusted net income applicable to MorganStanley—non-GAAP1

  $2,668    1,944 

Earnings per diluted common share

  $1.45   $1.00 

Impact of adjustments

   —    0.01 

Adjusted earnings per diluted commonshare—non-GAAP1

  $1.45   $1.01 

Effective income tax rate

   20.9%    29.0% 

Impact of adjustments

   —%    (0.5)% 

Adjusted effective income tax rate—non-GAAP1

   20.9%    28.5% 

        Average Monthly
Balance		 
  At March 31,
2018		  At December 31,
2017		  Three Months
Ended March 31,		 
$ in millions   2018  2017 

Tangible Equity

                

U.S. GAAP

    

Morgan Stanley shareholders’ equity

 $78,034  $77,391  $77,507  $77,259 

Less: Goodwill and net intangible assets

  (9,129)   (9,042)   (9,043)   (9,262) 

Morgan Stanley tangible shareholders’equity—non-GAAP

 $68,905  $68,349  $68,464  $67,997 

U.S. GAAP

    

Common equity

 $69,514  $68,871  $68,987  $68,989 

Less: Goodwill and net intangible assets

  (9,129)   (9,042)   (9,043)   (9,262) 

Tangible commonequity—non-GAAP

 $60,385  $59,829  $    59,944  $    59,727 

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% 
   Three Months Ended
March 31,		 
$ in billions  2018   2017 

Average common equity

    

Unadjusted

  $69.0   $69.0 

Adjusted1

   69.0    69.0 

ROE2

 

  

Unadjusted

   14.9%        10.7% 

Adjusted1, 3

       14.9%    10.7% 

Average tangible common equity

 

  

Unadjusted

  $59.9   $59.7 

Adjusted1

   59.9    59.7 

ROTCE2

 

  

Unadjusted

   17.2%    12.3% 

Adjusted1, 3

   17.2%    12.4% 

 

   At September 30,
2017		  At December 31,
2016		 
Tangible book value per common share5 $33.86  $31.98 
    At March 31,
2018		   

At December 31,

2017

 

Tangible book value per common share4

  $34.04   $33.46 

Non-GAAP Financial Measures by Business Segment

 

 Three Months Ended
September 30,		 Nine Months Ended
September 30,		   Three Months Ended
March 31,		 
$ in billions 2017 2016 2017 2016   2018   2017 

Pre-tax profit margin7

    

Pre-tax profit margin5

    

Institutional Securities

  28%  30%   31%  30%    35%    34% 

Wealth Management

  27%  23%   25%  22%    27%    24% 

Investment Management

  19%  18%   19%  16%    21%    17% 

Consolidated

  27%  27%   28%  26%    31%    29% 

Average common equity8

 

  

Average common equity6

    

Institutional Securities

 $40.2  $43.2  $40.2  $43.2   $            40.8   $            40.2 

Wealth Management

  17.2  15.3   17.2  15.3    16.8    17.2 

Investment Management

  2.4  2.8   2.4  2.8    2.6    2.4 

Parent Company

  10.7  8.2   10.0  7.6    8.8    9.2 

Consolidated average common equity

 $70.5  $      69.5  $69.8  $      68.9   $69.0   $69.0 

Return on average common equity4

 

  

Average tangible common equity6

Average tangible common equity6

 

  

Institutional Securities

  $40.1   $39.6 

Wealth Management

   9.2    9.3 

Investment Management

   1.7    1.6 

Parent Company

   8.9    9.2 

Consolidated average
tangible common equity

  $59.9   $59.7 

ROE2, 7

ROE2, 7

 

  

Institutional Securities

  8.9%  8.3%   9.6%  7.1%    15.2%    11.4% 

Wealth Management

      15.8%  14.5%       15.0%  13.3%    21.3%    14.6% 

Investment Management

  18.8%  9.3%   15.4%  9.0%    19.3%    11.1% 

Consolidated

  9.6%  8.7%   9.8%  7.7%    14.9%    10.7% 

ROTCE2, 7

ROTCE2, 7

 

  

Institutional Securities

   15.5%    11.5% 

Wealth Management

   38.9%    27.0% 

Investment Management

   30.3%    16.3% 

Consolidated

   17.2%    12.3% 

DVA—Debt valuation adjustment represents the change in the fair value resulting from fluctuations in our credit spreads and other credit factors related to liabilities carried at fair value under the fair value option, primarily certain Long-term and Short-term borrowings.

1.

Beginning in 2017, with the adoption of the accounting updateImprovements to Employee Share-Based Payment Accounting, the incomeAdjusted amounts exclude intermittent net discrete tax provisions (benefits). Income tax consequences related toassociated with employee share-based paymentsawards are required to be recognized in Provision for income taxes in the income statements uponbut are excluded from the conversion of employee share-based awards, which primarily 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 provision and is treated as a discrete item. When excluding discrete tax provision (benefit) above onlyintermittent net discrete tax provisions (benefits) other than income tax consequences arising from conversion activity are excludedadjustment 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 net discrete tax provision,provisions (benefits), see “Supplemental Financial Information and Disclosures—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 equityROTCE equal annualized net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity and average tangible common equity, respectively, on a consolidated or business segment basis as indicated. When excluding DVA, it is only excluded from the denominator. When excluding theintermittent net discrete tax provision (benefit)provisions (benefits), both the numerator and denominator are adjusted.

5.3.

The calculations used in determining the Firm’s “ROE and ROTCE Targets” referred to below are the Adjusted ROE and Adjusted ROTCE amounts shown in this table.

4.

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.

7.5.

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

September 2017 Form 10-Q6

Management’s Discussion and AnalysisLOGO

8.6.

Average common equity and average tangible common equity for each business segment isare determined at the beginning of each year using our Required Capital framework an internal capital adequacy measure (see “Liquidity and Capital Resources—Regulatory Requirements—Attribution of Average Common Equity According to the Required Capital Framework” herein) and remains fixed throughout the year until the next annual reset..

7.

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

5March 2018 Form 10-Q

Management’s Discussion and Analysis

LOGO

Return on Equity Targetand Tangible Common Equity Targets

We haveIn January 2018, we established an ROE Target of 9%10% to 11%13% for the medium term, which is equivalent to be achieved by 2017. an ROTCE Target of 11.5% to 14.5%.

Our ROE Target and the related strategies and goalsROTCE Targets are forward-looking statements that may be materially affected by many factors, including, among other things: macroeconomic and market conditions; legislative and regulatory developments; industry trading and investment banking volumes; equity market levels; interest rate environment; outsize legal expenses or penalties and the ability to reduce expenses in general;maintain a reduced level of expenses; capital levels; and intermittent discrete tax items. For further information on our ROE Targetand ROTCE Targets and related assumptions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—Return on Equity Target”and Tangible Common Equity Targets” in Part II, Item 7 of the 20162017 Form10-K.

Business Segments

Substantially all of our operating revenues and operating expenses are directly attributable to the business segments.

Certain revenues and expenses have been allocated to each business segment, generally in proportion to its respective net revenues,non-interest expenses or other relevant measures.

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

Net Revenues, Compensation Expense and Income Taxes

For discussionsan overview of the components of our net revenues, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Net Revenues” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Net Revenues by Segment” in Part II, Item 7 of the 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 20162017 Form10-K.

 

 

7September 2017 Form 10-Q

Management’s Discussion and AnalysisLOGO

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

September 2017March 2018 Form 10-Q  86  

Management’s Discussion and Analysis  LOGOLOGO

 

Institutional Securities

Income Statement Information

  Three Months Ended
March 31,		    
$ in millions 2018  2017  % Change 

Revenues

   

Investment banking

 $        1,513  $        1,417   7% 

Trading

  3,643   3,012   21% 

Investments

  49   66   (26)% 

Commissions and fees

  744   620   20% 

Asset management

  110   91   21% 

Other

  136   173   (21)% 

Totalnon-interest revenues

  6,195   5,379   15% 

Interest income

  1,804   1,124   60% 

Interest expense

  1,899   1,351   41% 

Net interest

  (95)   (227)   58% 

Net revenues

  6,100   5,152   18% 

Compensation and benefits

  2,160   1,870   16% 

Non-compensation expenses

  1,828   1,552           18% 

Totalnon-interest expenses

  3,988   3,422   17% 

Income from continuing operations before income taxes

  2,112   1,730   22% 

Provision for income taxes

  449   459   (2)% 

Income from continuing operations

  1,663   1,271   31% 

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

  (2)   (22)   91% 

Net income

  1,661   1,249   33% 

Net income applicable to
noncontrolling interests

  34   35   (3)% 

Net income applicable to
Morgan Stanley

 $1,627  $1,214   34% 

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  
   Three Months Ended
March 31,		     
$ in millions  2018   2017   % Change 

Advisory

  $574   $496    16% 

Underwriting:

      

Equity

   421    390    8% 

Fixed income

   518    531    (2)% 

Total underwriting

   939    921    2% 

Total investment banking

  $        1,513   $        1,417    7% 

Investment Banking Volumes

   Three Months Ended
March 31,		 
$ in billions  2018   2017 

Completed mergers and acquisitions1

  $        145   $        163 

Equity and equity-related offerings2, 3

   21    10 

Fixed income offerings2, 4

   54    75 

Source: Thomson Reuters, data at Octoberas of April 2, 2017.2018. Transaction volumes may not be indicative of net revenues in a given period. In addition, transaction volumes for prior periods may vary from amounts previously reported due to the subsequent withdrawal or change in the value of a transaction.

 

1.

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

2.

Equity and equity-related offerings and fixed income offerings are based on full credit for single book managers and equal credit for joint book managers.

3.

Amounts include Rule 144A issuances and registered public offerings of common stock and convertible securities and rights offerings.

4.

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

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

Investment banking revenues of $1,270$1,513 million in the current quarter and $4,100 million in the current year period increased 15% and 28%7% from the comparable prior year periods.quarter. The adoption of the accounting updateRevenue from Contracts with Customers had the effect of increasing the revenues reported in investment banking by approximately $60 million compared with the prior year quarter (see Notes 2 and 20 to the financial statements for further information). The drivers of the increase in our Investment banking revenues, other than the current quarter reflected both higher underwriting and advisory revenues. The increase ineffect of the current year period was due to higher underwriting revenues.above accounting update, were:

 

Advisory revenues increased in the current quarter primarily reflecting the higher volumes of completed merger, acquisition and restructuring transactions (“M&A”) (see Investment Banking Volumes table). Advisory revenues decreased in the current year period reflecting the lower volumes of completed M&A partially offset by the positive impact of higher fee realizations.realizations on larger transactions.

 

Equity underwriting revenues increased in the current quarter and current year periodprimarily as a result of higher global market volumes in bothfollow-on and initial public offerings (see Investment Banking Volumes table). In, partially offset by the current year period, equity underwriting revenues also increased as a resulteffect of higher levels of deal activity. lower fee realizations.

Fixed income underwriting revenues increaseddecreased in the current quarter primarily due to highernon-investment gradelower market volumes, which resulted in lower bond fees, and loan fees. Fixed income underwriting revenues increased in the current year period primarily due topartially offset by higher bond fees andnon-investment grade loan fees.

7March 2018 Form 10-Q

Management’s Discussion and AnalysisLOGO

Sales and Trading Net Revenues

By 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

9September 2017 Form 10-Q

Management’s Discussion and AnalysisLOGO

   Three Months Ended
March 31,		     
$ in millions  2018   2017   % Change 

Trading

  $        3,643   $        3,012    21% 

Commissions and fees

   744    620    20% 

Asset management

   110    91    21% 

Net interest

   (95)    (227)    58% 

Total

  $4,402   $3,496    26% 

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

other securitized products, and related derivative instruments. The values of positions in this business are sensitive to changes in credit spreads and interest rates, which result in gains and losses reflected in Trading revenues. Due to the amount and type of the interest-bearing securities and loans making up this business, a significant portion of the results 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.

   Three Months Ended
March 31,		     
$ in millions  2018   2017   % Change 

Equity

  $        2,558   $        2,016    27% 

Fixed income

   1,873    1,714    9% 

Other

   (29)    (234)    88% 

Total

  $4,402   $3,496    26% 

Sales and Trading Net Revenues—Equity and Fixed Income

 

 

Three Months Ended

September 30, 2017

   Three Months Ended
March 31, 2018		 
$ in millions     Trading       Fees1   Net
    Interest2  		 Total   Trading   Fees1   Net
Interest2		   Total 

Financing

 $1,029  $92  $(206)  $915   $1,234   $107   $(146)   $1,195 

Execution services

  540   495   (59)   976    791    664    (92)    1,363 

Total Equity

 $1,569  $587  $(265)  $1,891   $2,025   $    771   $(238)   $    2,558 

Total Fixed income

 $1,073  $65  $29  $1,167   $    1,715   $83   $          75   $1,873 

 

  

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

   Three Months Ended
March 31, 2017		 
$ in millions     Trading       Fees1   Net
    Interest2  		 Total   Trading   Fees1   Net
Interest2		   Total 

Financing

 $2,797  $259  $(152)  $2,904   $931   $89   $(188)   $832 

Execution services

 1,621  1,690  (131)  3,180    664    568    (48)    1,184 

Total Equity

 $4,418  $1,949  $(283)  $6,084   $1,595   $    657   $(236)   $2,016 

Total Fixed income

 $2,782  $115  $752  $3,649   $    1,598   $54   $      62   $    1,714 

 

1.

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

2.

Funding costs are allocated to the businesses based on funding usage and are included in Net interest.

September 2017 Form 10-Q10

Management’s Discussion and AnalysisLOGO

WeAs discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Net Revenues by Segment” in the 2017Form 10-K, 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.revenues. We provide qualitative commentary in the discussion of results that follow on the key drivers of period over period variances, as the quantitative impact of the various market dynamics typically cannot be disaggregated.

For additional information on total Trading revenues, see the table “Trading Revenues by Product Type” in Note 4 to the financial statements.

Sales and Trading Net Revenues during the Current Quarter

Equity

Equity sales and trading net revenues of $1,891$2,558 million in the current quarter were relatively unchangedincreased 27% from the prior year quarter, reflecting higher results in both our financing business, offset by lower results inbusinesses and execution services.

 

Financing revenues increased 8% from the prior year quarter, due toprimarily reflecting higher client activity in equity swapsacross all products as reflected in Trading revenues, partially offset by lower Net interest revenues due to a shift in the mix of financing transactions.revenues.

 

Execution services decreased 6%increased from the prior year quarter, as reduced market volumesprimarily reflecting higher Trading revenues driven by higher client activity in the United States resulted in lower commissionsderivatives products. In addition, Commissions and fees while reduced Trading revenuesincreased from derivative products were offset by increased Trading revenues fromhigher client activity in cash equityequities products.

Fixed Income

Fixed income net revenues of $1,167$1,873 million in the current quarter were 21% lower9% higher than in the prior year quarter, primarily driven by higher results in global macro products and commodities products and other, partially offset by lower results in credit and global macro products.

Credit products decreased due to tighter corporate credit spreads and lower volatility compared with the prior year quarter, which impacted Trading revenues. In addition, Net interest revenues decreased due to a lower level of interest realized 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 unchanged from the prior year quarter.

Sales and Trading Net Revenues during the Current Year Period

Equity

Equity sales and trading net revenues of $6,062 million in the current year period were relatively unchanged from the prior year period, reflecting lower results in our financing business, offset by higher results in execution services.

Financing revenues decreased 4% from the prior year period as Net interest revenues declined from higher net interest costs, reflecting increased liquidity requirements and a shift 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 commissions and fees driven by reduced market volumes in the United States.

Fixed Income

Fixed income net revenues of $4,120 million in the current year period were 13% higher than 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 the prior year period, which increased Trading revenues. This was partially offset by a lower level of interest realized in securitized products in the current year period, which reduced Net interest revenues.

 

Global macro products increased due to increasedhigher Trading revenues in foreign exchange driven by market volatility,inventory management and structured interest rate products driven by higher client activity. This wasactivity, partially offset by higher interest costs impacting Net interestlower client activity in structured rates.

Credit products Trading revenues indecreased primarily due to the current year period which resulted from interest rate productseffect of the widening of corporate credit spreads on inventory management.prices.

 

Commodities products and Otherother increased primarily due to improved metals trading, commodities lending results and the absence of losseshigher Trading revenues from hedging counterparty risk management incurredand increased Commodities structured transactions and customer flow in the prior year period.

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

Investments

Net investment gains of $52 million in the current quarter increased from the prior year quarter primarily as a result of higher gains on real estate investments, partially offset by lower gains on equities business related investments.

11September 2017 Form 10-Q

Management’s Discussion and AnalysisLOGO

Net investment gains of $155 million 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.natural gas products.

Other

Other revenuessales and trading net losses of $143$29 million in the current quarter decreased from the prior year quarter, primarily reflecting lowermark-to-market gainshigher revenues 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 provisioneconomic hedges 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 focuslong-term debt 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 workinglower losses associated 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.corporate loan hedging activity.

 

 

September 2017March 2018 Form 10-Q  128  

Management’s Discussion and Analysis  LOGOLOGO

Investments, Other Revenues andNon-interest Expenses

Investments

Net investment gains of $49 million in the current quarter decreased from the prior year quarter as a result of losses on investments to which certain deferred compensation plans are referenced in the current quarter compared with gains in the prior year quarter.

Other Revenues

Other revenues of $136 million in the current quarter decreased from the prior year quarter, primarily reflecting lower gains associated withheld-for-sale corporate loans.

Non-interest Expenses

Non-interest expenses of $3,988 million in the current quarter increased from the prior year quarter, primarily reflecting a 16% increase in Compensation and benefits expenses and an 18% increase inNon-compensation expenses in the current quarter.

Compensation and benefits expenses increased in the current quarter, primarily due to increases in discretionary incentive compensation driven by higher revenues and salaries.

•

Non-compensation expenses increased in the current quarter, primarily as a result of higher volume-related expenses and the gross presentation of certain expenses due to the adoption of the accounting updateRevenue from Contracts with Customers (see Notes 2 and 20 to the financial statements for further information). These results were partially offset in the current quarter by the reversal of a portion of previously recorded provisions related to U.K. VAT matters.

9March 2018 Form 10-Q

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.

  Three Months Ended
March 31,		    
$ in millions     2018          2017      % Change 

Revenues

   

Investment banking

 $140  $145   (3)% 

Trading

  109   238   (54)% 

Investments

  —   1   N/M 

Commissions and fees

  498   440   13% 

Asset management

  2,495   2,184   14% 

Other

  63   56   13% 

Totalnon-interest revenues

  3,305   3,064   8% 

Interest income

  1,280   1,079   19% 

Interest expense

  211   85   148% 

Net interest

  1,069   994   8% 

Net revenues

  4,374   4,058   8% 

Compensation and benefits

  2,450   2,317   6% 

Non-compensation expenses

  764   768   (1)% 

Totalnon-interest expenses

  3,214   3,085   4% 

Income from continuing operations before income taxes

  1,160   973   19% 

Provision for income taxes

  246   326   (25)% 

Net income applicable to Morgan Stanley

 $914  $647   41% 

Financial Information and Statistical Data

 

$ in billions  At
September 30,
2017 		   At
December 31,
2016		   At
March 31,
2018		   At
December 31,
2017		 

Client assets

  $2,307    $2,103    $2,371   $2,373 

Fee-based client assets1

  $1,003    $877    $1,058   $1,045 

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

   43%     42%     45%    44% 

Client liabilities2

  $78    $73    $80   $80 

Investment securities portfolio

  $60.6    $63.9    $60.7   $59.2 

Loans and lending commitments

  $76.2    $68.7    $78.7   $77.3 

Wealth Management
representatives

   15,759     15,763     15,682    15,712 

 

  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  
   Three Months Ended
March 31,		 
        2018           2017     

Per representative:

    

Annualized revenues ($ in thousands)3

  $1,115   $1,029 

Client assets ($ in millions)4

  $151   $139 

Fee-based asset flows ($ in billions)5

  $18.2   $18.8 

 

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.

Transactional Revenues

   Three Months Ended
March 31,		     
$ in millions  2018   2017   % Change 

Investment banking

  $140   $145    (3)% 

Trading

   109    238    (54)% 

Commissions and fees

   498    440    13% 

Total

  $747   $823    (9)% 

Transactional revenues as a % of Net revenues

   17%    20%   

Net Revenues

Transactional Revenues

Transactional revenues of $747 million in the current quarter decreased 9% from the prior year quarter primarily as a result of decreased Trading revenues, partially offset by increased Commissions and fees.

Investment banking revenues were relatively unchanged in the current quarter compared with prior year quarter.

Trading revenues decreased in the current quarter primarily as a result of losses related to investments associated with certain employee deferred compensation plans and lower client activity in fixed income products.

Commissions and fees increased in the current quarter primarily as a result of higher client trading activity in equities.

 

 

March 2018 Form 10-Q  1310  September 2017 Form 10-Q

Management’s Discussion and Analysis  LOGOLOGO

 

Net Revenues

Transactional RevenuesAsset Management

  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%  

TransactionalAsset management revenues of $739$2,495 million in the current quarter decreased 7%increased 14% 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 impacteffect 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. flows on averagefee-based client assets.

See“Fee-Based Client Assets”Assets Rollforwards” herein.

Net Interest

Net interest of $1,025$1,069 million in the current quarter and $3,028 million inincreased 8% from the currentprior year period increased 16% and 19%, respectively,quarter primarily due to higher loan balances andas a result of higher interest rates partially offset byand higher interest paid on deposits.loan balances.

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$3,214 million in the current quarter and $9,280 million in the current year period increased 4% and 5%, respectively, as a result offrom the increase in Compensation and benefits expenses.prior year quarter.

 

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, Compensationrevenues and benefits expenses increasedincreases in the current year period due to increasessalaries, partially offset by decreases 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 currentquarter compared with prior 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.quarter.

Fee-Based Client Assets

For a description offee-based client assets, including descriptions forof 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”Assets” in Part II, Item 7 of the 20162017 Form10-K.

September 2017 Form 10-Q14

Management’s Discussion and AnalysisLOGO

Fee-Based Client Assets RollforwardRollforwards

 

$ 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

December 31,
2017

  Inflows  Outflows  Market
Impact		  

At

March 31,
2018

 

Separately managed1

 $252  $10  $(6)  $4  $260 

Unified managed

  250   14   (8)   (2)   254 

Mutual fund advisory

  21   —   (1)       —   20 

Advisor

  149   9   (9)   (2)   147 

Portfolio manager

  353   21   (12)   (6)   356 

Subtotal

 $1,025  $54  $(36)  $(6)  $1,037 

Cash management

  20   4   (3)   —   21 

Totalfee-based client assets

 $1,045  $    58  $    (39)  $(6)  $    1,058 

 

$ 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

March 31,
2017

 

Separately managed1

 $222  $9  $(5)  $4  $230 

Unified managed

  204   13   (9)   9   217 

Mutual fund advisory

  21   —   (1)   1   21 

Advisor

  125   10   (7)   5   133 

Portfolio manager

  285   20   (11)   11   305 

Subtotal

 $857  $    52  $    (33)  $    30  $    906 

Cash management

  20   3   (2)   —   21 

Totalfee-based client assets

 $877  $55  $(35)  $30  $927 

$ 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  
   Three Months Ended
March 31,		 
Fee rate in bps      2018           2017         

Separately managed

   16    16 

Unified managed

   98    100 

Mutual fund advisory

   119    120 

Advisor

   85    86 

Portfolio manager

   96    98 

Subtotal

   76    77 

Cash management

   6    6 

Totalfee-based client assets

   75    75 

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.

 

 

  1511  September 2017March 2018 Form 10-Q

Management’s Discussion and Analysis  LOGOLOGO

 

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

  Three Months Ended
March 31,		    
$ in millions     2018          2017      % Change 

Revenues

   

Trading

 $5  $(11)   145% 

Investments

  77   98   (21)% 

Asset management

  626   517   21% 

Other

  10   4   150% 

Totalnon-interest revenues

  718   608   18% 

Interest income

  1   1   —% 

Interest expense

  1   —   N/M 

Net interest

  —   1   N/M 

Net revenues

  718   609   18% 

Compensation and benefits

  304   279   9% 

Non-compensation expenses

  266   227   17% 

Totalnon-interest expenses

  570   506   13% 

Income from continuing operations before income taxes

  148   103   44% 

Provision for income taxes

  19   30   (37)% 

Net income

  129   73   77% 

Net income (loss) applicable to noncontrolling interests

  2   6   (67)% 

Net income applicable to
Morgan Stanley

 $127  $67   90% 

Net Revenues

Investments

Investments gains of $114$77 million in the current quarter compared with $51 million indecreased 21% from the prior year quarter reflected higher carried interest principally in Infrastructure investments, partially offset by weaker investment performance which resulted in the reversalprimarily as a result of previously accruedlower carried interest in Private Equity.certain private equity funds.

Asset Management

Investments gainsAsset management revenues of $337$626 million in the current year period compared with $37 million inquarter increased 21% from 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 compared to the prior year period primarily as a result of higher average AUM.AUM across all asset classes. In addition, Asset management revenues increased as a result of the gross presentation of distribution fees due to the adoption of the accounting updateRevenue from Contracts with Customers (see Notes 2 and 20 to the financial statements for further details).

In addition to the gross presentation described above, the timing of the recognition of certain performance fees 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 a greater portion of such revenues is expected to be recognized in the second half of each fiscal year based on current fee arrangements.

See “Assets Under Management or Supervision” herein.

Non-interest Expenses

Non-interest expenses of $544$570 million in the current quarter and $1,573 million in the current year period increased 20% and 16%13% from the comparable prior periodsyear quarter primarily due to higheras a result of increases in both Compensation and benefits expenses andNon-compensation expenses.

 

Compensation and benefits expenses increased in the current quarter and current year period due to higherprimarily as a result of increases in discretionary incentive compensation driven mainly by higher revenues, increases in salaries, 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.

•

Non-compensation expenses increased in the current quarter primarily as a result of the gross presentation of distribution fees due to adoption of the accounting updateRevenue from Contracts with Customers along with higher fee sharing on increased AUM balances. See Asset Management above.

Assets Under Management or Supervision

For a description of the asset classes and rollforward items in the following 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 20162017 Form10-K.

AUM Rollforwards

$ in billions At
December 31,
2017		  Inflows  Outflows  Market
Impact		  Other1  At
March 31,
2018		 

Equity

 $105  $9  $(7)  $1  $1  $109 

Fixed income

  73   7   (8)   (1)   1   72 

Alternative/Other

  128   4   (4)   —   3   131 

Long-term AUM subtotal

  306   20   (19)   —   5   312 

Liquidity

  176   325   (344)   —   —   157 

Total AUM

 $482  $345  $(363)  $—  $5  $469 

Shares of minority stake assets

  7                   7 
$ in billions At
December 31,
2016		  Inflows  Outflows  Market
Impact		  Other1  At
March 31,
2017		 

Equity

 $79  $5  $(5)  $8  $—  $87 

Fixed income

  60   5   (5)   1   1   62 

Alternative/Other

  115   7   (4)   1   —   119 

Long-term AUM subtotal

  254   17   (14)   10   1   268 

Liquidity

  163   328   (338)   —   —   153 

Total AUM

 $417  $345  $(352)  $10  $1  $421 

Shares of minority stake assets

  8                   7 

1.

Includes distributions and foreign currency impact for both periods and the impact of the Mesa West Capital, LLC acquisition in the current quarter.

 

 

September 2017March 2018 Form 10-Q  1612  

Management’s Discussion and Analysis  LOGOLOGO

 

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  

Average AUM

 

 Three Months Ended
September 30,		 Nine Months Ended
September 30,		   Three Months Ended
March 31,		 
$ in billions 2017 2016 2017 2016             2018                       2017           

Equity

 $             96  $             83  $             90  $             81    $109   $83 

Fixed income

  68  62   65  61     73    62 

Alternative/Other

   129    117 

Long-term AUM subtotal

   311    262 

Liquidity

  156  151   155  149     163    157 

Alternative /
Other
products

  123  116   120  115  

Total AUM

 $443  $412  $430  $406    $474   $419 

Shares of minority
stake assets

  7  7   7  8     7    7 

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.

   Three Months Ended
March 31,		 
Fee rate in bps            2018                       2017           

Equity

   76    74 

Fixed income

   35    33 

Alternative/Other

   68    71 

Long-term AUM

   63    63 

Liquidity

   18    18 

Total AUM

   47    46 
 

 

  1713  September 2017March 2018 Form 10-Q

Management’s Discussion and Analysis  LOGOLOGO

 

Supplemental Financial Information and Disclosures

Income Tax Matters

Effective Tax Rate from Continuing Operations

   Three Months Ended
March 31,		 
        2018           2017     

U.S. GAAP

   20.9%    29.0% 

Adjusted effective income taxrate—non-GAAP1

   20.9%    28.5% 

1.

Adjusted amounts exclude an intermittent net discrete tax provision of $14 million in the prior year quarter. Income tax consequences associated with employee share-based awards are recognized in Provision for income taxes in the income statements but are excluded from the intermittent net discrete tax provisions (benefits) adjustment as we anticipate conversion activity each quarter. For further information onnon-GAAP measures, see “SelectedNon-GAAP Financial Information” herein.

The effective tax rates include recurring-type discrete tax benefits associated with employee share-based payments of $147 million and $112 million in the current quarter and prior year quarter, respectively.

The effective tax rate reflects our current assumptions, estimates and interpretations related to the U.S. Tax Cuts and Jobs Act (“Tax Act”) and other factors. The Tax Act, enacted on December 22, 2017, significantly revised U.S. corporate income tax law by, among other things, reducing the corporate income tax rate to 21%, and implementing a modified territorial tax system that includes aone-time transition tax on deemed repatriated earnings ofnon-U.S. subsidiaries; imposes a minimum tax on global intangiblelow-taxed income (“GILTI”) and an alternative base erosion and anti-abuse tax (“BEAT”) on U.S. corporations that make deductible payments tonon-U.S. related persons in excess of specified amounts; and broadens the tax base by partially or wholly eliminating tax deductions for certain historically deductible expenses.

Our estimates may change as additional clarification and implementation guidance continue to be received from the U.S. Treasury Department and as the interpretation of the Tax Act evolves over time. Taking into account continuing developments related to provisions of the Tax Act such as the modified territorial tax system and GILTI, we expect our effective tax rate from continuing operations for 2018 to be approximately 22% to 25% (see “Forward-Looking Statements” in the 2017 Form10-K).

U.S. Bank Subsidiaries

We provide loans to a variety of customers, from large corporate and institutional clients to high net worth individuals, primarily through our U.S. bank subsidiaries, Morgan Stanley Bank N.A. (“MSBNA”) and Morgan Stanley Private Bank, National Association (“MSPBNA”) (collectively, “U.S. Bank Subsidiaries”). The lending activities in the Institutional Securities business segment primarily include loans orand lending commitments to corporate clients. The lending activities in the Wealth Management business segment primarily includeinclude: securities-based lending, thatwhich allows clients to borrow money against the value of qualifying securitiessecurities; 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.base. For a further discussion of our credit risks, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk.” For further discussion about loans and lending commitments, see Notes 7 and 11 to the financial statements.

U.S. Bank Subsidiaries’ Supplemental Financial Information Excluding Transactions with the Parent Company1

 

$ in billions 

At
September 30,

2017

 At
December 31,
2016		   

At
    March 31,    

2018

   At
  December 31,  
2017		 

U.S. Bank Subsidiaries assets1

 $182.2  $176.8  

U.S. Bank Subsidiaries investment securities portfolio:

  

Assets

  $188.3   $185.3 

Investment securities portfolio:

    

Investment securities—AFS

  42.7  50.3     43.1    42.0 

Investment securities—HTM

  18.1  13.6     18.0    17.5 

Total investment securities

 $60.8  $63.9    $61.1   $59.5 

Deposits2

 $154.2  $154.7    $160.1   $159.1 

Wealth Management U.S. Bank Subsidiaries data

 

Wealth Management

Wealth Management

 

Securities-based lending and other loans3

 $40.1  $36.0    $41.7   $41.2 

Residential real estate loans

  26.2  24.4     26.6    26.7 

Total

 $66.3  $60.4    $68.3   $67.9 

Institutional Securities U.S. Bank Subsidiaries data

 

Institutional Securities

Institutional Securities

 

Corporate loans

 $22.3  $20.3    $27.4   $24.2 

Wholesale real estate loans

  10.1  9.9     12.4    12.2 

Total

 $                    32.4  $                30.2    $39.8   $36.4 

AFS—Available for sale

HTM—Held to maturity

1.

Certain revisions have been made to prior periods to conform toAmounts exclude transactions with the current presentation.Parent Company and between the bank subsidiaries.

2.

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

3.

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% 
March 2018 Form 10-Q14

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.

Management’s Discussion and AnalysisLOGO

Accounting Development Updates

The Financial Accounting Standards Board has issued certain accounting updates that apply to us but are not yet effective for the Firm.us. 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 2017 Form 10-Q18

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 onin 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 accounting for leases where we are the lessor is largely unchanged.

The right of use asset and lease liability will initially be measured using the present value of the remaining rental payments. TheThis change to the accounting for leases where we are lessee requires modifications to our lease accounting systems and determining the lessor is largely unchanged.present value of the remaining rental payments. Key aspects of the latter include concluding upon the discount rate and determining whether to include non-lease components in rental payments. 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”)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-

ment,investment, 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 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 20162017 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 20162017 Form10-K.

Liquidity and Capital Resources

Senior management, with oversight by the Asset and 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. The Treasury Department,department, Firm Risk Committee, Asset and 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.

19September 2017 Form 10-Q
Committee of the Board.

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 or 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.

15March 2018 Form 10-Q

Management’s Discussion and AnalysisLOGO

Total Assets by Business Segment

 

 At September 30, 2017  At March 31, 2018 

$ in millions

 Institutional
Securities		 Wealth
Management		 Investment
Management		   Total    IS WM IM Total 

Assets

        

Cash and cash equivalents1

 $31,100  $17,026  $65  $48,191   $74,096  $13,173  $75  $87,344 

Trading assets at fair value

  282,555   68   2,465   285,088    269,200   85   3,759   273,044 

Investment securities

  18,532   60,554   —   79,086    19,913   60,728   —   80,641 

Securities purchased under
agreements to resell

  84,223   5,883   —   90,106    72,460   7,786   —   80,246 

Securities borrowed

  132,597   295   —   132,892    135,608   227   —   135,835 

Customer and other
receivables

  35,725   18,061   602   54,388    48,257   17,973   605   66,835 

Loans, net of allowance

  38,171   66,255   5   104,431  

Other assets2

  45,378   12,486   1,647   59,511  

Loans, net of allowance2

  40,804   68,326   5   109,135 

Other assets3

  14,447   9,305   1,663   25,415 

Total assets

 $668,281  $180,628  $4,784  $853,693   $  674,785  $  177,603  $  6,107  $  858,495 
 At December 31, 2017 
$ in millions IS WM IM Total 

Assets

    

Cash and cash equivalents1

 $63,597  $16,733  $65  $80,395 

Trading assets at fair value

 295,678  59  2,545  298,282 

Investment securities

 19,556  59,246   —  78,802 

Securities purchased under agreements to resell

 74,732  9,526   —  84,258 

Securities borrowed

 123,776  234   —  124,010 

Customer and other receivables

 36,803  18,763  621  56,187 

Loans, net of allowance2

 36,269  67,852  5  104,126 

Other assets3

 14,563  9,596  1,514  25,673 

Total assets

 $664,974  $182,009  $4,750  $851,733 

IS—Institutional Securities

  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  

WM—Wealth Management

IM—Investment Management

1.

Cash and cash equivalents include cashincludes Cash and due from banks, and interestInterest bearing deposits with banks.banks and Restricted cash.

2.

Amounts include loans held for investment (net of allowance) and loans held for sale but exclude loans at fair value, which are included in Trading assets in the balance sheets (see Note 7 to the financial statements).

3.

Other assets primarily includes Cash deposited with clearing organizations or segregated under federal andGoodwill, Intangible assets, premises, equipment, software, other regulations or requirements; Other investments; Premises, equipment and software costs; Goodwill; Intangible assetsinvestments, 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$858.5 billion at September 30, 2017March 31, 2018 from $814.9$851.7 billion at December 31, 2016,2017, primarily driven by an increase in trading inventoryCustomer and other receivables and growth within the Institutional Securities along with loan growth across bothportfolios. Trading Assets within the Institutional Securities business segment declined as we sold inventory in Equities to support increased demand and Wealth Management. The changechanges in trading inventory reflects increased trading activityclient positioning. This was offset by increases in U.S. governmentSecurities borrowed and agency securities and Other sovereign government obligations, along with higher market values for corporate equities compared with December 31, 2016.GLR cash deposits. For further information regarding our GLR, see “Global Liquidity Reserve” herein.

Securities Repurchase Agreements and Securities Lending

Securities borrowed or securities purchased under agreements to resell and securities loaned or securities sold under agreements to repurchase are treated as collateralized financings (see Note 2 to the consolidated financial statements in the 20162017 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  
$ in millions  At
March 31,
2018		   At
December 31,
2017		 

Securities purchased under agreements to resell and Securities borrowed

  $        216,081   $        208,268 

Securities sold under agreements to repurchase and Securities loaned

  $65,131   $70,016 

Securities received as collateral1

  $8,693   $13,749 
   Average Daily Balance
Three Months Ended		 
$ in millions           March 31,
         2018		   December 31,
2017		 

Securities purchased under agreements to resell and Securities borrowed

  $211,753   $214,343 

Securities sold under agreements to repurchase and Securities loaned

  $65,684   $66,879 

 

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.

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”),GLR, which support our target liquidity profile. For further discussion about the Firm’s Required Liquidity Framework and Liquidity Stress Tests, see “Management’s Discussion and Analysis of Financial

March 2018 Form 10-Q16

Management’s Discussion and AnalysisLOGO

Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management Framework” in Part II, Item 7 of the 20162017 Form10-K.

At September 30, 2017March 31, 2018 and December 31, 2016,2017, we maintained sufficient liquidity to meet current and contingent funding obligations as modeled in our Liquidity Stress Tests.

Global Liquidity Reserve

We maintain sufficient global liquidity reserves pursuant to our Required Liquidity Framework. For further discussion of our GLR, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management Framework—Global Liquidity Reserve” in Part II, Item 7 of the 2016 2017Form10-K.

GLR by Type of Investment

 

$ in millions  

At

September 30,

2017

   

At

December 31,
2016

   

At

March 31,
2018

   At
December 31,
2017		 

Cash deposits with banks

  $9,684   $                8,679  

Cash deposits with central banks

   33,566    30,568  

Cash deposits with banks1

  $9,930   $7,167 

Cash deposits with central banks1

   37,243    33,791 

Unencumbered highly liquid securities:

        

U.S. government obligations

   67,677    78,615     84,155    73,422 

U.S. agency and agency mortgage-backed securities

   51,676    46,360     51,805    55,750 

Non-U.S. sovereign obligations1

   24,110    30,884  

Investments in money market funds

   2    —   

Non-U.S. sovereign obligations2

   20,334    19,424 

Other investment grade securities

   3,251    7,191     2,996    3,106 

Total

  $189,966   $202,297    $        206,463   $        192,660 

 

1.

Primarily included in Cash and due from banks and Interest bearing deposits with banks in the balance sheets.

2.

Non-U.S. sovereign obligations are primarily composed of unencumbered German, French, Dutch, U.K. and Japanese government obligations.

GLR Managed by Bank andNon-Bank Legal Entities

 

 

At

September 30,
2017

   

At

December 31,
2016

   

Daily Average
Balance

Three Months
Ended

  

At
March 31,

2018

 

  

At
December 31,

2017

 

  

Average Daily     
Balance     
Three Months Ended     

 

 
$ in millions   September 30,
2017		  March 31, 2018      

Bank legal entities

Bank legal entities

 

 

Domestic

 $                72,567   $                74,411   $                68,746   $68,826  $70,364  $69,955 

Foreign

  4,248    4,238    4,297    4,602  4,756   4,263 

Total Bank legal entities

  76,815    78,649    73,043    73,428  75,120   74,218 

Non-Bank legal entities

Non-Bank legal entities

 

Non-Bank legal entities

 

  

Domestic:

        

Parent Company

  39,747    66,514    50,893    48,998  41,642   44,184 

Non-Parent Company

  31,754    18,801    33,934    32,415  35,264   32,356 

Total Domestic

  71,501    85,315    84,827    81,413  76,906   76,540 

Foreign

  41,650    38,333    44,244    51,622  40,634   44,216 

TotalNon-Bank legal entities

  113,151    123,648    129,071    133,035  117,540   120,756 

Total

 $189,966   $202,297   $202,114   $    206,463  $    192,660  $    194,974 

Regulatory Liquidity Framework

Liquidity Coverage Ratio

We and our U.S. Bank Subsidiaries are subject to the 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”)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. We and our U.S. Bank Subsidiaries are subject to the LCR requirements issued by U.S. banking regulators (“U.S. LCR”), which are based on the Basel Committee’s LCR, including a requirement to calculate each entity’s U.S. LCR on each business day. We 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

   Average Daily Balance
Three Months Ended		 
$ in millions 

September 30,

2017

       March 31, 2018   December 31, 2017 
 

HQLA

       

Cash deposits with central banks

 $33,614  $30,569  $40,841   $33,350   $33,450 

Securities1

  125,426  129,524   134,363    125,015    125,269 

Total

 $159,040  $160,093  $175,204   $158,365   $158,719 

LCR

  130%    121%    128% 

 

1.

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

The decrease in the LCR in the current quarter is due to an increase in net outflows (the denominator of the ratio) driven by the impact of an increase in lending commitments, primarily within the Institutional Securities business segment.

21September 2017 Form 10-Q

Management’s Discussion and AnalysisLOGO

The regulatory definition of HQLA is substantially the same as our GLR. GLR includes cash placed at institutions other 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.

Net Stable Funding Ratio

The objective of the Net Stable Funding Ratio (“NSFR”)NSFR is to reduce funding risk over aone-year horizon by requiring banking organizations to fund their activities with sufficiently stable sources of funding in order to mitigate the risk of future funding stress.

The Basel Committee on Banking Supervision (“Basel Committee”) has previously finalized the NSFR framework in 2014.framework. In May 2016, the U.S. banking regulatorsagencies issued a proposal to implement the NSFR in the U.S., which would apply to us and our U.S. Bank Subsidiaries. Our preliminary estimates, based on the current proposal, indicate that actions will be necessary to meet the requirement, which we would expect to

17March 2018 Form 10-Q

Management’s Discussion and AnalysisLOGO

accomplish by the effective date of any final rule. Our preliminary estimates are subject to risks and uncertainties that may cause actual results based on the final rule to differ materially from estimates. For an additional discussion of the NSFR, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Liquidity Framework—Net Stable Funding Ratio” in Part II, Item 7 of the 2016 2017Form10-K.

Funding Management

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

We fund our balance sheet on a global basis through diverse sources. These sources may include our equity capital, long-term borrowings, securitiesSecurities 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 20162017 FormForm 10-K.

At September 30, 2017March 31, 2018 and December 31, 2016,2017, the weighted average maturity of our secured financing of less liquid assets was greater than 120 days.

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 20162017 Form10-K and see Note 4 to the financial statements.

Deposits

 

$ in millions  

At

September 30,

2017

   

At

December 31,

2016

   At March 31,
2018		   At
December 31,
2017		 

Savings and demand deposits: Brokerage sweep deposits1

  

$

          135,152 

 

  

$

          153,042 

 

Savings and demand deposits:

    

Brokerage sweep deposits1

  $129,177   $135,946 

Savings and other

   5,555     1,517     9,181    8,541 

Total Savings and demand deposits

   140,707     154,559     138,358    144,487 

Time deposits2

   13,932     1,304     22,066    14,949 

Total

  $154,639    $155,863    $        160,424   $        159,436 

 

1.

Represents 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 as of September 30, 2017at March 31, 2018 were relatively unchangedup slightly compared with December 31, 2016, with the decrease2017, primarily driven by measures to increase Time deposits and Savings and other deposits, partially offset by a reduction in brokerageBrokerage 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.investments.

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

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 2017March 2018 Form 10-Q  2218  

Management’s Discussion and Analysis  LOGOLOGO

 

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 Remaining Maturity at September 30, 2017March 31, 20181

 

$ in millions  

Parent

Company

   Subsidiaries   Total   Parent
Company		   Subsidiaries   Total 

2017

  $4,605   $3,685   $8,290 

Original maturities of one year or less

  $—     $1,256   $1,256 

Original maturities greater than one year

Original maturities greater than one year

 

  

2018

   18,816    2,244    21,060   $12,783   $3,318   $16,101 

2019

   21,841    2,033    23,874    21,765    3,769    25,534 

2020

   19,362    2,075    21,437    18,775    2,284    21,059 

2021

   15,862    1,449    17,311    20,163    2,650    22,813 

2022

   15,261    1,985    17,246 

Thereafter

   88,786    10,919    99,705    78,873    12,082    90,955 

Total

  $                169,272   $                22,405   $                191,677   $167,620   $26,088   $193,708 

Maturities over next 12 months

 

  $25,792 

Total Borrowings

  $      167,620   $      27,344   $      194,964 

Maturities over next 12 months2

Maturities over next 12 months2

 

  $23,029 

Long-term

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 increased to $191,677$194,964 million as of September 30, 2017,March 31, 2018 compared with $164,775$192,582 million at December 31, 2016.2017. This increase is a result of issuances, partially offset primarily by maturities and retirements as presented in the table below.following table.

 

$ in millions  Nine Months Ended
September 30, 2017		   Three Months Ended
March 31, 2018		 

Issued

  $45,334   $15,370 

Matured or retired

   24,480    11,377 

For further information on long-term borrowings,Borrowings, see Note 10 to the financial statements.

Credit Ratings

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

Our credit ratings do not include any uplift from perceived government support from any rating agency given the significant progress of 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.

Parent Company and MSBNA’s Senior Unsecured Ratings at October 31, 2017

 

Parent Company and MSBNA Senior Unsecured Ratings at April 30, 2018

  Parent Company
   Short-termShort-Term
Debt		 Long-termLong-Term
Debt		 Rating
Outlook

DBRS, Inc.

 R-1 (middle) A (high) Stable

Fitch Ratings, Inc.

 F1 A Stable

Moody’s Investors Service, Inc.

 P-2 A3 Stable

Rating and Investment Information, Inc.

 a-1 A- Stable

Standard & Poor’sS&P Global Ratings

 A-2 BBB+ Stable

   Morgan Stanley Bank, N.A.MSBNA
    Short-termShort-Term
Debt		  Long-termLong-Term
Debt		  Rating
Outlook		 

Fitch Ratings, Inc.

  F1  A+  Stable 

Moody’s Investors Service, Inc.

  P-1  A1  Stable 

Standard & Poor’sS&P Global Ratings

  A-1  A+  Stable 

In connection with certain OTC trading agreements 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 additional collateral or termination payments 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’sS&P Global Ratings (“S&P”).Ratings. 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 ratings or S&P ratings,Global 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		   

At
March 31,

2018

   

At
December 31,

2017

 

One-notch downgrade

  $856   $1,292   $806   $822 

Two-notch downgrade

   635    875    611    596 

19March 2018 Form 10-Q

Management’s Discussion and AnalysisLOGO

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, 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, in the future 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 the sum of our operating subsidiaries’ required equity.

Common Stock

 

  Three Months Ended
September 30,		   Nine Months Ended
September 30,		   Three Months Ended
March 31,		 
$ in millions  2017 2016     2017     2016      2018    2017 

Repurchases of
common stock

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

Repurchases of common stock under our share repurchase program

  $        1,250   $        750 

From time to time we repurchase our outstanding common stock, which includesincluding as part of our share repurchase program. As previously announced, on April 18, 2018, we entered into a sales plan with Mitsubishi UFJ Financial Group, Inc. (“MUFG”) whereby MUFG will sell shares of the Firm’s common stock to us, as part of our share repurchase program. The sales plan is only intended to maintain MUFG’s ownership percentage below 24.9% in order to comply with MUFG’s passivity commitments to the Federal Reserve and will have no impact on the strategic alliance between MUFG and us, including the joint venture in Japan. For a description of our share repurchase program, see “Unregistered Sales of Equity Securities and Use of Proceeds.”

The Board determines the declaration and payment of dividends on a quarterly basis. On October 17, 2017, we announced that 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.

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

Common Stock Dividend Announcement

Announcement date

April 18, 2018

Amount per share

$0.25

Date to be paid

May 15, 2018

Shareholders of record as of

April 30, 2018

Preferred Stock

On September 15, 2017, we announced that the Board declared quarterly dividends for preferred stock shareholders of record on September 29, 2017 that were paid on October 16, 2017.Preferred Stock Dividend Announcement

Announcement date

March 15, 2018

Date paid

April 16, 2018

Shareholders of record as of

March 29, 2018

For additional information on common and preferred stock, see Note 14 to the financial statements.

Regulatory Requirements

Regulatory Capital Framework

We are a financial holding company (“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(“Federal Reserve”). The Federal Reserve establishes capital requirements for us,

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

The Basel Committee has published revisions to certain standards in its capital framework, and is actively considering potential revisions to other capital standards, that, if adopted by the U.S. banking agencies, could substantially change the U.S. regulatory capital framework. For additional discussion of regulatory capital framework, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Regulatory Capital Framework” in Part II, Item 7 of the 2016 Form10-K.

Regulatory Capital Requirements

We are required to maintain minimum risk-based and leverage capital ratios under the regulatory capital requirements. A summary of the calculations ofFor more information on our regulatory capital risk-weighted assets (“RWAs”)requirements, see “Management’s Discussion and transition provisions follows.Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Regulatory Capital Requirements” in the 2017 Form10-K.

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). 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”)AOCI and investments in the capital instruments of unconsolidated financial institutions. Certain of these adjustments and deductions are also subject to transitional provisions.

March 2018 Form 10-Q20

Management’s Discussion and AnalysisLOGO

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

 

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

 

The Common Equity Tier 1 global systemically important bank(“G-SIB”)G-SIB capital surcharge, currently at 3%; and

 

Up to a 2.5% Common Equity Tier 1 countercyclical capital buffer (“CCyB”),CCyB, currently set by U.S. banking regulatorsagencies at zero (collectively, the “buffers”).zero.

In 2017 thephase-in amount forand 2018, each of the buffers is 50% and 75%, respectively, of the fullyphased-in buffer requirement.2019 requirement noted above. Failure to main-

September 2017 Form 10-Q24

Management’s Discussion and AnalysisLOGO

tainmaintain 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 2017Form10-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

•

Operational risk: Inadequate or failed processes or systems, human factors or from external events (e.g., fraud, theft, legal and compliance risks, cyber attacks or damage to physical assets).

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

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”) and (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 RWAs using prescribed risk weights, whereas the Advanced Approach utilizes models to calculate exposure amountsAt March 31, 2018 and risk weights. At September 30,December 31, 2017, our ratios 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 each of our risk-based capital ratios will change throughEffective January 1, 2022 as aspects2019, Common Equity Tier 1 capital, Tier 1 capital and Total capital requirements, inclusive of thebuffers, will increase to 10.0%, 11.5%, and 13.5%, respectively.

See “Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements” herein for additional capital rules are phased in. These changes may result in differences in our reported capital ratios from one reporting period to the next that are independent of changes to our capital base, asset composition,off-balance sheet exposures or risk profile.requirements effective January 1, 2019.

Minimum Risk-Based Capital Ratios: Transitional Provisions

LOGO

1.

These ratios assume the requirements for theG-SIB capital surcharge (3.0%) and CCyB (zero) remain at current levels. See “Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements” herein for additional capital requirements effective January 1, 2019.

Transitional and FullyPhased-InRegulatory Capital Ratios

 

 At September 30, 2017   At March 31, 2018 
 Transitional Pro Forma Fully Phased-In       FullyPhased-In 
$ in millions Standardized Advanced Standardized Advanced   Required
Ratio		   Standardized   Advanced 

Risk-based capital

          

Common Equity Tier 1
capital

 $62,214   $    62,214   $61,603   $    61,603      $60,568   $60,568 

Tier 1 capital

  71,006    71,006    70,276    70,276        69,213    69,213 

Total capital

  81,861    81,652    81,148    80,939        79,363    79,138 

Total RWAs

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

Total RWA

      390,390    378,442 

Common Equity Tier 1
capital ratio

  16.9%   17.4%   16.3%   16.7%    8.6%    15.5%    16.0% 

Tier 1 capital ratio

  19.3%   19.8%   18.6%   19.1%    10.1%    17.7%    18.3% 

Total capital ratio

  22.2%   22.8%   21.4%   22.0%    12.1%    20.3%    20.9% 

Leverage-based capital

          

Adjusted average assets1

 $    841,360    N/A   $    840,845    N/A       $      846,868    N/A 

Tier 1 leverage ratio2

  8.4%   N/A    8.4%   N/A  

Tier 1 leverage ratio

   4.0%    8.2%    N/A 

 

 At December 31, 2016  At December 31, 2017 
 Transitional Pro Forma Fully Phased-In    Transitional2 FullyPhased-In 
$ in millions Standardized Advanced Standardized Advanced  Required
Ratio		 Standardized Advanced Standardized Advanced 

Risk-based capital

         

Common Equity
Tier 1 capital

 $60,398  $60,398  $58,616  $58,616 

Common Equity

     

Tier 1 capital

 $61,134  $61,134  $60,564  $60,564 

Tier 1 capital

 68,097  68,097  66,315  66,315  69,938  69,938  69,120  69,120 

Total capital

 78,917  78,642  77,155  76,881  80,275  80,046  79,470  79,240 

Total RWAs

 340,191  358,141  351,101  369,709 

Total RWA

 369,578  350,212  377,241  358,324 

Common Equity
Tier 1 capital ratio

 17.8%  16.9%  16.7%  15.9%  7.3%  16.5%  17.5%  16.1%  16.9% 

Tier 1 capital ratio

 20.0%  19.0%  18.9%  17.9%  8.8%  18.9%  20.0%  18.3%  19.3% 

Total capital ratio

 23.2%  22.0%  22.0%  20.8%  10.8%  21.7%  22.9%  21.1%  22.1% 

Leverage-based capital

         

Adjusted average assets1

 $811,402  N/A  $810,288  N/A  $    842,270  N/A  $    841,756  N/A 

Tier 1 leverage ratio2

 8.4%  N/A  8.2%  N/A 

Tier 1 leverage ratio

 4.0%  8.3%  N/A  8.2%  N/A 

N/A—Not Applicable

1.

Adjusted average assets represent the denominator of the Tier 1 leverage ratio and are composed of the average daily balance of consolidatedon-balance sheet assets under U.S. GAAP during the current quarter and the quarter ended December 31, 20162017 adjusted for disallowed goodwill, transitional intangible assets, certain deferred tax assets, certain investments in the capital instruments of unconsolidated financial institutions and other adjustments.

2.

The minimum Tier 1 leverage ratio requirement is 4.0%.Regulatory compliance was determined based on capital ratios calculated under transitional rules until December 31, 2017.

At December 31, 2017, the pro formafully phased-in estimated amounts utilize fullyphased-in Tier 1 capital, including the fullyphased-in Tier 1 capital deductions that applied beginning January 1, 2018. These pro formafully phased-in estimateswere non-GAAP financial measures because the related capital rules were not yet effective at December 31, 2017. These estimates were based on our understanding of the capital rules and other factors at the time.

 

 

  2521  September 2017March 2018 Form 10-Q

Management’s Discussion and Analysis  LOGOLOGO

 

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 RatiosRatio Requirements for U.S. Bank Subsidiaries

 

    At September 30, 2017March 31, 2018 

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% 

SLR

6.0%

For us to remain a financial holding company,an FHC, 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 companiesFHCs to reflect the higher capital standards required forof us under the capital rules. Assuming that the Federal Reserve would apply the same or very similar well-capitalized standards to financial holding companies,FHCs, each of our risk-based capital ratios, and Tier 1 leverage ratio and SLR at September 30, 2017March 31, 2018 would have exceeded the revised well-capitalized standard. The Federal Reserve may require usan FHC to maintain risk- and leverage-based capital ratios substantially in excess of mandated minimumwell-capitalized levels, depending upon general economic conditions and a financial holding company’sthe FHC’s particular condition, risk profile and growth plans.

Regulatory compliance was determined based on capital ratios including regulatory capital and RWA calculated under the transitional rules until December 31, 2017. The regulatory capital analyses in the following tables are presented using pro forma fullyphased-in estimates as of December 31, 2017, which are equivalent to amounts calculated as of March 31, 2018.

FullyPhased-InRegulatory Capital Calculated under Transitional Rules

 

$ in millions  

At

September 30,

2017

 

At
December 31,

2016

  

At

March 31, 2018

 

At

December 31, 20171

 

Common Equity Tier 1 capital

     

Common stock and surplus

  $15,448  $17,494  $12,911  $14,354 

Retained earnings

   57,554  53,679   60,009  57,577 

AOCI

   (2,544)  (2,643)   (3,406)  (3,060) 

Regulatory adjustments and deductions:

Regulatory adjustments and deductions:

 

  

Net goodwill

   (6,519)  (6,526)   (6,716)  (6,599) 

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

   (1,991)  (1,631)   (2,424)  (2,446) 

Other adjustments and deductions1

   266  25 

Other adjustments and deductions2

  194  738 

Total Common Equity Tier 1 capital

  $62,214  $60,398  $60,568  $60,564 

Additional Tier 1 capital

     

Preferred stock

  $8,520  $7,520  $8,520  $8,520 

Noncontrolling interests

   544  613   482  415 

Other adjustments and deductions2

   33  (246) 

Other adjustments and deductions

  (23)  (23) 

Additional Tier 1 capital

  $9,097  $7,887  $8,979  $8,912 

Deduction for investments in covered funds

   (305)  (188)   (334)  (356) 

Total Tier 1 capital

  $71,006  $68,097  $69,213  $69,120 

Standardized Tier 2 capital

     

Subordinated debt

  $10,341  $10,303  $9,612  $9,839 

Noncontrolling interests

   95  62   113  98 

Eligible allowance for credit losses

   426  464   448  423 

Other adjustments and deductions

   (7)  (9)   (23)  (10) 

Total Standardized Tier 2 capital

  $10,855  $10,820  $10,150  $10,350 

Total Standardized capital

  $81,861  $78,917  $79,363  $79,470 

Advanced Tier 2 capital

     

Subordinated debt

  $10,341  $10,303  $9,612  $9,839 

Noncontrolling interests

   95  62   113  98 

Eligible credit reserves

   217  189   223  193 

Other adjustments and deductions

   (7)  (9)   (23)  (10) 

Total Advanced Tier 2 capital

  $10,646  $10,545  $9,925  $10,120 

Total Advanced capital

  $81,652  $78,642  $79,138  $              79,240 
 

 

September 2017March 2018 Form 10-Q  2622  

Management’s Discussion and Analysis  LOGOLOGO

 

FullyPhased-InRegulatory Capital Rollforward Calculated under Transitional Rules

 

$ in millions  Nine Months Ended
 September 30, 2017 		  Three Months Ended
March 31, 2018		 

Common Equity Tier 1 capital

   

Common Equity Tier 1 capital at December 31, 2016

  $60,398  

Common Equity Tier 1 capital at December 31, 20171

 $60,564 

Change related to the following items:

   

Value of shareholders’ common equity

   1,928    643 

Net goodwill

   7    (117) 

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

   (360)   22 

Other adjustments and deductions1

   241  

Common Equity Tier 1 capital at September 30, 2017

  $62,214  

Other adjustments and deductions2

  (544) 

Common Equity Tier 1 capital at March 31, 2018

 $60,568 

Additional Tier 1 capital

   

Additional Tier 1 capital at December 31, 2016

  $7,887  

New issuance of qualifying preferred stock

   1,000  

Additional Tier 1 capital at December 31, 20171

 $8,912 

Change related to the following items:

   

Noncontrolling interests

   (69)   67 

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) 

Other adjustments and deductions

  — 

Additional Tier 1 capital at March 31, 2018

  8,979 

Deduction for investments in covered funds at December 31, 2017

 (356) 

Change in deduction for investments in covered funds

   (117)   22 

Deduction for investments in covered funds at
September 30, 2017

   (305) 

Tier 1 capital at September 30, 2017

  $71,006  

Deduction for investments in covered funds at March 31, 2018

  (334) 

Tier 1 capital at March 31, 2018

 $69,213 

Standardized Tier 2 capital

   

Tier 2 capital at December 31, 2016

  $10,820  

Tier 2 capital at December 31, 20171

 $10,350 

Change related to the following items:

   

Eligible allowance for credit losses

   (38)   25 

Other changes, adjustments and deductions3

   73    (225) 

Standardized Tier 2 capital at September 30, 2017

  $10,855  

Total Standardized capital at September 30, 2017

  $81,861  

Standardized Tier 2 capital at March 31, 2018

 $10,150 

Total Standardized capital at March 31, 2018

 $79,363 

Advanced Tier 2 capital

   

Tier 2 capital at December 31, 2016

  $10,545  

Tier 2 capital at December 31, 20171

 $10,120 

Change related to the following items:

   

Eligible credit reserves

   28    30 

Other changes, adjustments and deductions3

   73    (225) 

Advanced Tier 2 capital at September 30, 2017

  $10,646  

Total Advanced capital at September 30, 2017

  $81,652  

Advanced Tier 2 capital at March 31, 2018

 $9,925 

Total Advanced capital at March 31, 2018

 $79,138 

 

1.

The pro forma fullyphased-in estimates as of December 31, 2017 arenon-GAAP financial measures. See “SelectedNon-GAAP Financial Information” herein.

2.

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 rate 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.

RWAsFullyPhased-In RWA Rollforward Calculated under Transitional Rules

 

  Nine Months Ended 
  September 30, 20171   Three Months Ended
March 31, 20181		 
$ in millions  Standardized   Advanced   Standardized   Advanced 

Credit risk RWAs

    

Balance at December 31, 2016

  $       278,874   $       169,231 

Credit risk RWA

    

Balance at December 31, 20172

  $301,946   $170,754 

Change related to the following items:

        

Derivatives

   7,013     166     (229)    3,568 

Securities financing transactions

   5,892     3,246     177    2,242 

Securitizations

   1,559     1,224     (357)    (1,277) 

Investment securities

   (3,044)    (1,467)    (270)    320 

Commitments, guarantees and loans

   213     (4,317)    12,934    15,090 

Cash

   (103)    (592)    784    294 

Equity investments

   (889)    (946)    2,726    2,887 

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  

Other credit risk3

   634    236 

Total change in credit risk RWA

  $16,399   $23,360 

Balance at March 31, 2018

  $318,345   $194,114 

Market risk RWA

    

Balance at December 31, 20172

  $75,295   $74,907 

Change related to the following items:

        

Regulatory VaR

   523     523     1,187    1,187 

Regulatory stressed VaR

   11,304     11,304     235    235 

Incremental risk charge

   2,662     2,662     2,968    2,968 

Comprehensive risk measure

   (3,923)    (3,543)    (2,135)    (1,947) 

Specific risk:

          

Non-securitizations

   4,065     4,065     (2,590)    (2,590) 

Securitizations

   1,371     1,409     (2,915)    (2,917) 

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  

Total change in market risk RWA

  $(3,250)   $(3,064) 

Balance at March 31, 2018

  $72,045   $71,843 

Operational risk RWA

    

Balance at December 31, 20172

  $N/A   $112,663 

Change in operational risk RWA

   N/A    (178) 

Balance at March 31, 2018

  $N/A   $112,485 

Total RWA

  $390,390   $    378,442 

Regulatory VaR—Value-at-Risk

N/A—Not ApplicableVaR for regulatory capital requirements

1.

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

2.

The pro forma fullyphased-in estimates as of December 31, 2017 arenon-GAAP financial measures. See “SelectedNon-GAAP Financial Information” herein.

3.

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 operationalCredit risk RWAsRWA increased in the current year periodquarter under the Standardized and Advanced Approaches primarily due to increased exposures in corporate lending within the Institutional Securities business segment. Credit risk RWA also increased under the Advanced Approach reflects a reductiondue to increased exposures in the internal loss data related to litigation utilized in the operationalderivatives.

Market risk capital model.

Regulatory stressed VaR increased $11,304 millionRWA decreased in the current year periodquarter under both the Standardized and the Advanced Approaches. These increases wereApproaches primarily driven by increasesdue to a decrease in trading inventory across the equities, global macro, and credit businesses within Institutional Securities, in response to client demand.standardized specific risk charges.

 

 

  2723  September 2017March 2018 Form 10-Q

Management’s Discussion and Analysis  LOGOLOGO

 

The decrease in operational risk RWA under the Advanced Approach reflects a reduction in the internal loss frequency related to litigation utilized in the operational risk capital model.

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% 
   At March 31,
2018		   At December 31, 2017 

$ in millions

  Fully Phased-in   Transitional
Basis1		   Fully
Phased-in2		 

Average total assets3

  $856,738   $851,510   $851,510 

Adjustments4, 5

   234,780    231,173    230,660 

Supplementary leverage exposure

  $1,091,518   $      1,082,683   $      1,082,170 

SLR

   6.3%    6.5%    6.4% 

 

1.

Transitional provisions applied until December 31, 2017.

2.

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

2.3.

Computed as the average daily balance of consolidated total assets under U.S. GAAP during the current quarter and the quarter ended December 31, 2016.2017.

3.4.

Computed as the arithmetic meanaverage of themonth-end balances over the current quarter and the quarter ended December 31, 2016.2017.

4.5.

Adjustments are to: (i) incorporate derivative exposures, including adding the related potential future exposure (including for derivatives cleared for clients), grossing up cash collateral netting where qualifying criteria are not met and adding the effective notional principal amount of sold credit protection offset by qualifying purchased credit protection; (ii) reflect the counterparty credit risk for repo-style transactions; (iii) add the credit equivalent amount foroff-balance sheet exposures; and (iv) apply other adjustments to Tier 1 capital, including disallowed goodwill, transitional intangible assets, certain deferred tax assets and certain investments in the capital instruments of unconsolidated financial institutions.

The pro forma fullyphased-inSLR became effective as a capital standard on January 1, 2018. We are required to maintain a Tier 1 supplementary leverage exposureratio of 3% as well as an enhanced SLR capital buffer of at least 2% (for a total of at least 5%) in order to avoid limitations on capital distributions, including dividends and ratios, shown in the previous table, are based onstock repurchases, and discretionary bonus payments to executive officers. In addition, our current understandingU.S. Bank Subsidiaries must maintain an SLR of rules and other factors.6% to be considered well-capitalized.

U.S. Subsidiary Banks’ Pro FormaBank Subsidiaries’ FullyPhased-In Supplementary Leverage Ratios on a Transitional Basis

 

  At September 30, 2017   At December 31, 2016   At March 31, 2018   At December 31, 20171 

MSBNA

   8.9%    7.7%    9.0%    9.1% 

MSPBNA

   9.4%    10.2%    9.3%    9.3% 

1.

Estimated amounts utilize fullyphased-in Tier 1 capital, including the fullyphased-in Tier 1 capital deductions that apply beginning January 1, 2018.

The pro forma transitional andfullyphased-in supplementary supplementary leverage exposures and ratiosarenon-GAAP financial financial measures because they havewere 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 beeffective at December 31, 2017.

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.

Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements

On December 15, 2016, the Federal Reserve adopted a final rule fortop-tier bank holding companiesBHCs of U.S.G-SIBsG-SIB (“covered BHCs”BHC”), including the Parent Company, that establishes 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 requiring eligible LTD to be issued by the covered BHC and be unsecured, have a maturity of one year or more from the date of issuance and not have certain derivative-linked features typically associated with certain types of structured notes. We expect to be in compliance with all requirements of the rule by January 1, 2019, the date that compliance is required.

The Federal Reserve’s proposed modifications to the enhanced SLR would also make corresponding changes to the calibration of the TLAC leverage-based requirements, as well as certain other technical changes to the TLAC rule. For a further discussion of the enhanced SLR, see “Regulatory Developments—Proposed Modifications to the Enhanced SLR and to the SLR Applicable to Our U.S. Bank Subsidiaries” herein.

For a further discussion of TLAC and LTD requirements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements” in Part II, Item 7 of the 20162017 Form10-K. For discussions about the interaction between the single point of entrySPOE 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 20162017 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,BHCs, including us, which form part of the Federal Reserve’s annual Comprehensive Capital Analysis and Review (“CCAR”)CCAR framework.

We submitted our 2017 capital plan2018 Capital Plan (“Capital Plan”) andcompany-run stress test results to the Federal Reserve on April 5, 2017. On June 22, 2017,2018. We expect that the Federal Reserve publishedwill provide its response to our 2018 Capital Plan by June 30, 2018. There could be a range of potential outcomes to our Capital Plan whereby the Federal Reserve could object to, or otherwise require us to modify, such plan. See “Risk Factors” in the 2017 Form 10-K. The Federal Reserve is expected to publish summary results of the CCAR and Dodd-Frank Act supervisory stress tests of each large bank holding company,BHC, including us. 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 increaseus, by

 

 

September 2017March 2018 Form 10-Q  2824  

Management’s Discussion and Analysis  LOGOLOGO

 

from $3.5 billion in the 2016 Capital Plan. Additionally, the Capital Plan includes an increase in our quarterly common stock dividendJune 30, 2018. We are required to $0.25 per share from $0.20 per share, beginning with the common stock dividend declared on July 19, 2017. We discloseddisclose a summary of the results ofourcompany-run stress tests within 15 days of the date the Federal Reserve discloses the results of the supervisory stress tests on June 23, 2017 on our Investor Relations website.tests. In addition, we submittedmust submit the results ofourmid-cyclecompany-run mid-cycle company-run stress stress test to the Federal Reserve onby October 5, 20172018 and discloseddisclose a summary of the results onbetween October 20, 2017 on our Investor Relations website.5, 2018 and November 4, 2018.

The Dodd-Frank Act also requires each of our U.S. Bank Subsidiaries to conduct an annual stress test. MSBNA and MSPBNA submitted their 20172018 annualcompany-run stress tests to the OCC on April 5, 20172018 and publishedmust publish a summary of their stress test results onbetween June 23, 2017 on our Investor Relations website.15, 2018 and July 15, 2018.

For a further discussion of our capital plans and stress tests, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Capital Plans and Stress Tests” in Part II, Item 7 of the 20162017 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 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-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. 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 Company equity. We generally hold Parent Company equity for prospective regulatory requirements, organic growth, acquisitions and other capital needs.

Common equity estimation and attribution to the business segments are based on our pro forma fullyphased-in regulatory capital estimates, including supplementary leverage, and incorporates our internal stress tests.rules. 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.reset unless a significant business change occurs (e.g., acquisition or disposition). 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 response to changes in the business and regulatory environment.environment, for example, to incorporate changes in stress

testing or enhancements to modeling techniques. We will continue to evaluate the framework with respect to the impact of future regulatory requirements, as appropriate.

Average Common Equity Attribution1

 

  Three Months Ended
September 30,		   Nine Months Ended
September 30,		   Three Months Ended
March 31,		 
$ in billions      2017           2016           2017           2016       2018   2017 

Institutional Securities

  $40.2   $43.2   $40.2   $43.2        $40.8   $40.2 

Wealth Management

   17.2    15.3    17.2    15.3     16.8    17.2 

Investment Management

   2.4    2.8    2.4    2.8     2.6    2.4 

Parent Company

   10.7    8.2    10.0    7.6     8.8    9.2 

Total1

  $70.5   $69.5   $69.8   $68.9  

Total

      $            69.0   $            69.0 

 

1.

Average common equity is anon-GAAP financial measure. See “SelectedNon-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 preferred resolution strategy, which is set out in our 2017 resolution plan, is a single point of entryan SPOE 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, theThe Parent Company has amended and restated its support agreement with its material subsidiaries.entities, as defined in our 2017 resolution plan. Under the secured amended and restated support agreement, upon the occurrence of a resolution scenario, the Parent Company would be obligated to contribute or loan on a subordinated basis all of its contributable material assets, other than shares in subsidiaries of the Parent Company and certain intercompany receivables, to provide capital and liquidity, as applicable, to our material subsidiaries. entities.

The obligations of the Parent Company under the secured amended and restated support agreement are in most cases secured on a senior basis by the assets of the Parent Company (other than shares in subsidiaries of the Parent Company). As a result, claims of our material subsidiariesentities 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.

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,and “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—Resolution and Recovery Planning” in Part II, Item 7 of the 20162017 Form10-K.

25March 2018 Form 10-Q

Management’s Discussion and AnalysisLOGO

Legacy Covered Funds under the Volcker Rule

The Volcker Rule prohibits “banking entities,” including us and our affiliates, from engaging in certain “proprietary trading” activities, as defined in the Volcker Rule, subject to

exemptions for underwriting, market-making-related activities, risk-mitigating hedging and certain other activities. The Volcker Rule also prohibits certain investments and relationships by banking entities with “covered funds,” with a number of exemptions and exclusions. In June 2017, we received approval from the Federal Reserve of our application for a five-year extension of the transition period to conform investments in certain legacy Volcker covered funds that are also illiquid funds. The approval covers essentially all of ournon-conforming investments in, and relationships with, legacy covered funds subject to the Volcker Rule.

For more information about the Volcker Rule, requirements 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 20162017 Form10-K.

U.S. Department of Labor Conflict of Interest Rule and SEC Standards of Conduct for Investment Professionals

The U.S. Department of Labor’sDOL’s final Conflict of Interest Rule under ERISA went into effect on June 9, 2017, with certain aspects subject tophased-in compliance. Full compliance is currentlywith the rule’s related exemptions was 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,However, on March 15, 2018, the U.S. DepartmentCourt of Labor is undertaking an examinationAppeals for the Fifth Circuit vacated the Conflict of Interest Rule and accompanying exemptions in their entirety. While the U.S. DOL could appeal to the U.S. Supreme Court, the order to vacate the rule which may result in changes to the rule or related exemptions or a further change in the full compliance date.could take effect as soon as May 7, 2018. For a discussion of the U.S. Department of LaborDOL Conflict of Interest Rule, see “Business—Supervision and Regulation—Institutional Securities and Wealth Management” in Part I, Item 1the 2017 Form 10-K.

On April 18, 2018, the SEC released for public comment a package of proposed rulemaking on the standards of conduct and required disclosures for broker-dealers and investment advisers. One of the 2016 Formproposals, entitled “Regulation Best Interest,” would require broker-dealers to act in the “best interest” of retail customers at the time a recommendation is made without placing the financial or other interests of the broker-dealer ahead of the interest of the retail customer. Additionally, the SEC proposed a new requirement for both broker-dealers and investment advisers to provide a brief relationship summary to retail investors with information intended to clarify the relationship between the parties. Finally, the SEC issued a proposed interpretation regarding the fiduciary duty that investment advisers owe their clients. We are reviewing the SEC’s package of proposed rules.

Proposed Stress Buffer Requirements

On April 10, 2018, the Federal Reserve issued a proposal to integrate its annual capital planning and stress testing requirements with certain ongoing regulatory capital requirements. The proposal, which would apply to certain BHCs, including us, would introduce a stress capital buffer and a stress leverage buffer (collectively, “Stress Buffer

Requirements”) and related changes to the capital planning and stress testing processes. Under the proposal, Stress Buffer Requirements would apply only with respect to the Standardized Approach and Tier 1 leverage regulatory capital requirements and would generally be effective on October 1, 2019.

In the Standardized Approach, the stress capital buffer would replace the existing Common Equity Tier 1 capital conservation buffer, which will be 2.5% as of January 1, 2019. The Standardized Approach stress capital buffer would equal 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 ratios of the dollar amount of our planned common stock dividends to our projected RWA for each of the fourth through seventh quarters of the supervisory stress test projection period, and (ii) 2.5%. Regulatory capital requirements under the Standardized Approach would include the stress capital buffer, as summarized above, as well as our Common Equity Tier 110-K.G-SIB capital surcharge and any applicable Common Equity Tier 1 CCyB.

Like the stress capital buffer, the stress leverage buffer would be calculated based on the results of our annual supervisory stress tests. The stress leverage buffer would equal the maximum decline in our Tier 1 leverage ratio under the severely adverse scenario, plus the sum of the ratios of the dollar amount of our planned common stock dividends to our projected leverage ratio denominator for each of the fourth through seventh quarters of the supervisory stress test projection period. No floor would be established for the stress leverage buffer, which would apply in addition to the current minimum Tier 1 leverage ratio of 4%.

The proposal would make related changes to capital planning and stress testing processes for BHCs subject to the Stress Buffer Requirements. In particular, the proposal would limit projected capital actions to planned common stock dividends in the fourth through seventh quarters of the supervisory stress test projection period and would assume that BHCs maintain a constant level of assets and RWA throughout the supervisory stress test projection period.

The proposal does not change regulatory capital requirements under the Advanced Approach or the SLR, although the Federal Reserve and the OCC have separately proposed to modify the enhanced SLR requirements, as summarized below. If the proposal is adopted in its current form, limitations on capital distributions and discretionary bonus payments to executive officers would be determined by the most stringent limitation, if any, as determined under the Standardized Approach or the Tier 1 leverage ratio, inclusive of Stress Buffer Requirements, or the Advanced Approach or SLR or TLAC requirements, inclusive of applicable buffers.

March 2018 Form 10-Q26

Management’s Discussion and AnalysisLOGO

Proposed Modifications to the Enhanced SLR and to the SLR Applicable to Our U.S. Bank Subsidiaries

On April 11, 2018, the Federal Reserve proposed modifications to the enhanced SLR that would replace the current 2% enhanced SLR buffer applicable to U.S.G-SIBs, including us, with a leverage buffer equal to 50% of our Common Equity Tier 1G-SIB capital surcharge, which is currently 3%. Under the proposal, our enhanced SLR buffer would become 1.5%, for a total enhanced SLR requirement of 4.5%, assuming that ourG-SIB capital surcharge remains the same when the proposal becomes effective, which may be as early as 2018 under the proposal.

As part of the same proposal, the Federal Reserve and the OCC also proposed to align the well-capitalized SLR standard applicable to our U.S. Bank Subsidiaries with the proposed enhanced SLR buffer applicable to the Firm. Under the proposal, the well-capitalized SLR requirement for our U.S. Bank Subsidiaries would change from the current 6% to 3% plus 50% of our current Common Equity Tier 1G-SIB capital surcharge, for a total well-capitalized SLR requirement of 4.5%, assuming that ourG-SIB capital surcharge remains the same when the proposal becomes effective.

Proposed Regulatory Capital Adjustments Related to Implementation of the Current Expected Credit Losses Methodology

On April 17, 2018, the U.S. banking agencies issued a proposal to revise the regulatory capital framework applicable to banking organizations, including us and our U.S. Bank Subsidiaries, to address the new accounting standard for credit losses, known as a CECL methodology. For a further discussion of CECL, see “Accounting Development Updates— Financial Instruments—Credit Losses” herein.

The proposal modifies the regulatory capital rules to identify which credit loss allowances under the new accounting standard are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in, over a three-year period, the adverse effects on regulatory capital that may result from the adoption of the new accounting standard. The proposal requires a banking organization that has adopted a CECL methodology to include the provision for credit losses beginning in the 2020 stress test cycle.

U.K. ReferendumWithdrawal from the E.U.

Following the U.K. electorate vote to leave the European Union,E.U., the U.K. invoked Article 50 of the Lisbon Treaty on March 29, 2017.2017, which triggered atwo-year period, subject to extension

(which would need the unanimous approval of the E.U. Member States), during which the U.K. government has been negotiating its withdrawal agreement with the E.U. For further discussion of U.K. referendum’sthe potential impact of the U.K.’s withdrawal from the E.U. on our operations, see “Risk Factors—International Risk” in Part I, Item 1A of the 20162017 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.”

September 2017 Form 10-Q30

Management’s Discussion and AnalysisLOGO

Expected Replacement of LIBORLondon Interbank Offered Rate

Central banks around the world, including the Federal Reserve, have commissioned working groups of market participants and othersofficial sector representatives with the goal of finding suitable replacements for the London Interbank Offered Rate (“LIBOR”)LIBOR based more fully on observable market transactions. It is expected that a transition away from the widespread use of LIBOR to alternative rates will occur over the course of the next severalfew years. The U.K. Financial Conduct Authority (“FCA”), which regulates LIBOR, has announced that it has commitments from panel banks to continue to contribute to LIBOR through the end of 2021, but that it will not use its powers to compel contributions beyond such date. Accordingly, there is considerable uncertainty regarding the publication of such rates beyond 2021.

On April 3, 2018, the Federal Reserve Bank of New York commenced publication of three reference rates based on overnight U.S. Treasury repurchase agreement transactions, including the Secured Overnight Financing Rate (“SOFR”), which has been recommended as an alternative to U.S. dollar LIBOR by the Alternative Reference Rates Committee. Further, the Bank of England has commenced publication of a reformed Sterling Overnight Index Average (“reformed SONIA”), comprised of a broader set of overnight Sterling money market transactions, as of April 23, 2018. Reformed SONIA has been recommended as the alternative to Sterling LIBOR by the Working Group on Sterling Risk-Free Reference Rates.

Although the full impact of such reforms and actions, together with any transition away from LIBOR, including the potential or actual discontinuance of LIBOR publication, remains unclear, these changes may have an adverse impact on the value of, return on and trading markets for a broad array of financial products, including any LIBOR-based securities, loans and derivatives that are included in our financial assets and liabilities. Such reforms and actions may also require extensive changes to the contracts that govern these LIBOR-based products, as well as our systems and processes.

27March 2018 Form 10-Q

Management’s Discussion and AnalysisLOGO

Effects of Inflation and Changes in Interest and Foreign Exchange Rates

For a discussion of the effects of inflation and changes in interest and foreign exchange rates on our business and financial results and strategies to mitigate potential exposures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Effects of Inflation and Changes in Interest and Foreign Exchange Rates” in Part II, Item 7 of the 20162017 Form10-K.

Off-Balance Sheet Arrangements and Contractual Obligations

Off-Balance Sheet Arrangements

We enter into variousoff-balance sheet arrangements, including through unconsolidated special purpose entities (“SPEs”)SPEs and lending-related financial instruments (e.g.(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.Activities Included in Loans and Trading Assets.”

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 2017 Form10-K.

 

 

March 2018 Form 10-Q  3128  September 2017 Form 10-Q

Quantitative and Qualitative Disclosures about Market Risk  LOGOLOGO

 

Quantitative and Qualitative Disclosures about Market Risk

Risk Management

Management believes effective risk management is vital to the success of our business activities. For a discussion of our risk management functions, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management” in Part II, Item 7A of the 20162017 Form10-K.

Market Risk

Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, volatilities, correlations or other market factors, such as market liquidity, will result in losses for a position or portfolio. Generally, we incur market risk as a result of trading, investing and client facilitation activities, principally within the Institutional Securities business segment where the substantial majority of ourValue-at-Risk (“VaR”) VaR for market risk exposures is generated. In addition, we incur market risk within the Wealth Management and Investment Management business segments. The Wealth Management business segment primarily 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 7A of the 20162017 Form10-K.

VaRValue-at-Risk    

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

VaR Methodology, Assumptions and Limitations.    For information regarding our VaR methodology, assumptions and limitations, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Market Risk—Sales and Trading and Related Activities—VaR Methodology, Assumptions and Limitations” in Part II, Item 7A of the 20162017 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”)CVA and related hedges, as well as loans that are carried at fair value and associated hedges.

The following table presents the Management VaR for the Trading portfolio, on 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  95%/One-Day VaR for
the Three Months Ended
March 31, 2018		 

$ in millions

 

Period

End

 Average High Low  

    Period    

End

 Average High Low 

Interest rate and credit spread

 $28  $31  $42  $25      $41  $35  $46  $30 

Equity price

  13   14   18   12   16   14   17   11 

Foreign exchange rate

  9   9   13   6   10   9   13   7 

Commodity price

  9   9   10   7   10   9   11   7 

Less: Diversification benefit1, 2

  (26)   (25)   N/A   N/A   (27)   (25)   N/A   N/A 

Primary Risk Categories

 $33  $38  $47  $32      $50  $    42  $  51  $  36 

Credit Portfolio

  10   11   11   10   11   10   11   9 

Less: Diversification benefit1, 2

  (6)   (6)   N/A   N/A   (7)   (6)   N/A   N/A 

Total Management VaR

 $37  $43  $50  $36      $54  $46  $55  $40 
 95%/One-Day VaR for
the Three Months Ended		  95%/One-Day VaR for
the Three Months Ended
December 31, 2017		 
 June 30, 2017 
$ in millions 

Period

End

 Average High Low  

Period

End

 Average High Low 

Interest rate and credit spread

 $35  $35  $44   $27       $32  $29  $36  $24 

Equity price

 15  18  26   15   11  13  15  10 

Foreign exchange rate

 10  11  15   8   9  8  11  6 

Commodity price

 9  9  10   8   7  8  11  6 

Less: Diversification benefit1, 2

 (27)  (27)        N/A        N/A  (20)  (23)  N/A  N/A 

Primary Risk Categories

 $          42  $          46  $60   $36       $39  $  35  $   41  $   30 

Credit Portfolio

 11  12  14   11   9  9  10  8 

Less: Diversification benefit1, 2

 (7)  (7)  N/A   N/A  (5)  (6)  N/A  N/A 

Total Management VaR

 $46  $51  $64   $41       $43  $38  $44  $34 

N/A—Not Applicable

1.

Diversification benefit equals the difference between the total Management VaR and the sum of the component VaRs. This benefit arises because the 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.

Average total Management VaR and average Management VaR for the Primary Risk Categories of $46 million and $42 million, respectively, increased from the three-months ended December 31, 2017, primarily as a result of increases in trading inventory across the Fixed Income Macro and Credit trading businesses in the Institutional Securities business segment and increased market volatility, particularly in Equities.

 

 

September 2017 Form 10-Q  3229  March 2018 Form 10-Q

Risk Disclosures  LOGOLOGO

 

The average 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 average Management VaR for the Primary Risk Categories for the current quarter was $38 million compared with $46 million last quarter. These decreases were primarily driven by reduced market volatility and decreases in trading inventory across the equities and credit businesses within Institutional Securities.

Distribution of VaR Statistics and Net Revenues for the Current Quarter.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. During the current quarter, we experienced net trading losses on one day, which was not in excess of the95%/one-day Total Management VaR.

The distribution of VaR Statisticsstatistics and Net Revenuesnet revenues is presented in the following histograms for the Total Trading populations.

Total Trading.    As shown in the95%/One-Day Management VaR table, on the preceding page, the average95%/one-day total Management VaR for the current quarter was $43$46 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.

Daily95%/One-dayOne-Day Total Management VaR for the Three Months Ended September 30, 2017Current Quarter

($ in millions)

 

LOGO

LOGO

The following histogram shows the distribution for the current quarter of daily net trading revenues, including profits and losses from Interest rate and credit spread, Equity price, Foreign exchange rate, Commodity price, and Credit Portfolio positions and intraday trading activities, for our

Trading businesses. Daily net trading revenues also include intraday trading activities but exclude certain items not captured in the VaR model, such as fees, commissions and net interest income. Daily net trading revenues differ from the definition of revenues required for Regulatory VaR backtesting, which further excludes intraday trading. During the current quarter, 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, 2017Current Quarter

($ in millions)

 

LOGOLOGO

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.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 Credit Spread Risk Sensitivity1 basis point widening in our credit spread level at September 30, 2017 and June 30, 2017, respectively.

$ in millions  At
March 31, 2018		   At
December 31, 2017		 

Derivatives

  $6   $6 

Funding liabilities2

   31    29 

1.

Amounts represent the increase in value for each 1 bps widening of our credit spread.

2.

Relates to structured note liabilities carried at fair value.

Interest Rate Risk Sensitivity.    The following table presents an analysis of selected instantaneous upward and downward parallel interest rate shocks on net interest income over the next 12 months for our U.S. Bank Subsidiaries. These shocks

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.

March 2018 Form 10-Q30

Risk DisclosuresLOGO

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

 

$ in millions 

At

September 30, 2017

 

At

June 30, 2017

   

At

March 31, 2018

   

At

December 31, 2017

 

Basis point change

      

+200

 $566  $716    $438   $489 

+100

  433  413     226    367 

-100

  (647)  (577)    (464)    (500) 

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, includingnon-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 between June 30, 2017March 31, 2018 and September 30,December 31, 2017 is related to overall changes in our asset-liability positioningprofile and higher market rates.

Investments.    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 are 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.

Investments 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  
   Loss from 10% Decline 
$ in millions  

At

March 31,

2018

   

At

December 31,

2017

 

Investments related to Investment

    

Management activities

  $321   $316 

Other investments:

    

MUMSS

   172    168 

Other Firm investments

   187    178 

MUMSS—Mitsubishi UFJ Morgan Stanley Securities Co., LTD.

Equity Market Sensitivity.    In the Wealth Management and Investment Management business segments, certainfee-based revenue streams are driven by the value of clients’ equity holdings. The overall level of revenues for these streams also depends on multiple additional factors that include, but are not limited to, the level and duration of the equity market increase or decline, price volatility, the geographic and industry mix of client assets, the rate and magnitude of client investments and redemptions, and the impact of such market

increase or decline and price volatility on client behavior. Therefore, overall revenues do not correlate completely with changes in the equity markets.

Credit Risk

Credit risk refers to the risk of loss arising when a borrower, counterparty or issuer does not meet its financial obligations to us. We primarily incur credit risk exposure to institutions and individuals through our Institutional Securities and Wealth Management business segments. For a further discussion of our credit risks, see “Quantitative and Qualitative Disclosures about Market Risk–Risk Management–Credit Risk” in Part II, Item 7A of the 20162017 Form10-K. Also, see Notes 7 and 11 to the financial statements for additional information about our loans and lending commitments, respectively.

Lending Activities includedIncluded in Loans and Trading Assets

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

 

 

September 2017 Form 10-Q  3431  March 2018 Form 10-Q

Risk Disclosures  LOGOLOGO

 

Loans and Lending Commitments

 

 At September 30, 2017  At March 31, 2018 

$ in millions

 IS WM IM1 Total  IS WM IM1 Total 

Corporate loans

 $    16,201  $    13,480  $        5  $    29,686  $17,005  $14,893  $5  $31,903 

Consumer loans

  —   26,616   —   26,616   —   26,877   —   26,877 

Residential real estate loans

  —   26,150   —   26,150   —   26,566   —   26,566 

Wholesale real estate loans

  9,000   —   —   9,000   10,021   —   —   10,021 

Loans held for investment,
gross of allowance

  25,201   66,246   5   91,452   27,026   68,336   5   95,367 

Allowance for loan losses

  (203)   (42)   —   (245)   (201)   (42)   —   (243) 

Loans held for investment,
net of allowance

  24,998   66,204   5   91,207   26,825   68,294   5   95,124 

Corporate loans

  12,524   —   —   12,524   12,000   —   —   12,000 

Residential real estate loans

  9   51   —   60   1   32   —   33 

Wholesale real estate loans

  640   —   —   640   1,978   —   —   1,978 

Loans held for sale

  13,173   51   —   13,224   13,979   32   —   14,011 

Corporate loans

  6,420   —   21   6,441   9,323   —   23   9,346 

Residential real estate loans

  690   —   —   690   706   —   —   706 

Wholesale real estate loans

  1,157   —   —   1,157   1,770   —   1,171   2,941 

Loans held at fair value

  8,267   —   21   8,288   11,799   —   1,194   12,993 

Total loans

  46,438   66,255   26   112,719   52,603   68,326   1,199   122,128 

Lending commitments2,3

  89,329   9,994   —   99,323 

Total loans and lending commitments2,3

 $135,767  $76,249  $26  $212,042 

Lending commitments2, 3

  109,025   10,404   187   119,616 

Total loans and lending commitments2, 3

 $    161,628  $    78,730  $    1,386  $    241,744 

 

  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

  At December 31, 2017 
$ in millions IS  WM  IM  Total 

Corporate loans

 $15,332  $14,417  $5  $29,754 

Consumer loans

  —   26,808   —   26,808 

Residential real estate loans

  —   26,635   —   26,635 

Wholesale real estate loans

  9,980   —   —   9,980 

Loans held for investment, gross of allowance

  25,312   67,860   5   93,177 

Allowance for loan losses

  (182)   (42)   —   (224) 

Loans held for investment, net of allowance

  25,130   67,818   5   92,953 

Corporate loans

  9,456   —   —   9,456 

Residential real estate loans

  1   34   —   35 

Wholesale real estate loans

  1,682   —   —   1,682 

Loans held for sale

  11,139   34   —   11,173 

Corporate loans

  8,336   —   22   8,358 

Residential real estate loans

  799   —   —   799 

Wholesale real estate loans

  1,579   —   —   1,579 

Loans held at fair value

  10,714   —   22   10,736 

Total loans

  46,983   67,852   27   114,862 

Lending commitments2, 3

  92,588   9,481   —   102,069 

Total loans and lending commitments2, 3

 $    139,571  $    77,333  $        27  $    216,931 

 

1.

Loans in Investment Management business segment loans are entered into in conjunction with certain investment advisory activities. The increase in fair value loans in the current quarter is a result of the consolidation of a fund managed by Mesa West Capital, LLC that primarily invests in commercial real estate loans with remaining maturities of less than 5 years.

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.

3.

For syndications led by us, any lending commitments accepted by the borrower but not yet closed are net of amounts syndicated. For syndications that we participate in and do not lead, any lending commitments accepted by the borrower but not yet closed include only the amount that we expect will be

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.

Total loans and lending commitments increased by approximately $25 billion in the current quarter, primarily due to increases in Corporate lending commitments within the Institutional Securities business segment.

Our credit exposure 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,loan-to-value ratio, debt service ratio, covenants and counterparty type. 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		   At
March 31,
2018		   At
December 31,
2017		 

Loans

  $245   $274    $                243   $224 

Commitments

   181    190  

Lending commitments

   205    198 

The aggregate allowance for loanloans and lending commitment losses decreasedincreased during the current year periodquarter primarily due to overall portfolio changes and qualitative and environmental factors impacting thecharge-off of an energy industry related loan. inherent allowance within the Institutional Securities business segment. See Note 7 to the financial statements for further information.

Status of Loans Held for Investment

 

  At September 30,
2017		 At December 31,
2016		   At March 31, 2018   At December 31, 2017 
      IS         WM         IS         WM           IS             WM               IS             WM     

Current

   99.4%   99.9%  98.6%  99.9%    99.7%    99.9%    99.5%    99.9% 

Non-accrual1

   0.6%   0.1%  1.4%  0.1%    0.3%    0.1%    0.5%    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.

March 2018 Form 10-Q32

Risk DisclosuresLOGO

Institutional Securities

In connection with certain Institutional Securities business segment activities, we provide loans and lending commitments to a diverse group of corporate and other institutional clients. These activities include originating and purchasing corporate loans, commercial and residential mortgage lending, asset-backed lending, financing extended to equities and commodities customers and loans to municipalities. These loans and lending commitments may have varying terms; may be senior or subordinated; may be secured or unsecured; are generally contingent upon representations, warranties and contractual conditions applicable to the borrower; and may be syndicated, traded or hedged by us.

We also participate in securitization activities, whereby we extend short-term or long-term funding to clients through

35September 2017 Form 10-Q

Risk DisclosuresLOGO

loans and lending commitments that are secured by the assets of the borrower and generally provide for over-collateralization, including commercial real estate loans, loans secured by loan pools, commercial companycorporate loans and secured lines of revolving credit. Credit risk with respect to these loans and lending commitments arises from the failure of a borrower to perform according to the terms of the loan agreement or a decline in the underlying collateral value. See Note 12 to the financial statements for information about our securitization activities. In addition, a collateral management group monitors collateral levels against requirements and oversees the administration of the collateral function. See Note 6 to the financial statements for additional information about our collateralized transactions.

Institutional Securities loans and lending commitments are mainly related to relationship-based and event-driven lending to select corporate clients. Relationship-based loans and lending commitments are used for general corporate purposes, working capital and liquidity purposes by 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.

Event-driven loans and lending commitments are associated with a particular event or transaction, such as to support client merger, acquisition, recapitalization and project finance activities. Event-driven loans and lending commitments typically consist of revolving lines of credit, term loans and bridge loans.

Institutional Securities Loans and Lending Commitments by Credit 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  
  At December 31, 2016  At March 31, 2018 
  Years to Maturity      Years to Maturity   
$ in millions  Less than 1   1-3   3-5   Over 5   Total  Less than 1 1-3 3-5 Over 5 Total 

Loans

               

AA

 $—  $450  $28  $5  $483 

A

  1,435   2,262   1,287   389   5,373 

BBB

  3,626   8,398   3,709   875   16,608 

NIG

  6,213   10,940   7,521   3,199   27,873 

Unrated2

  59   98   262   1,847   2,266 

Total loans

  11,333   22,148   12,807   6,315   52,603 

Lending commitments

Lending commitments

 

    

AAA

  $—   $—   $—   $—   $—   —   165   —   —   165 

AA

   —    —    38    —    38   3,127   1,348   2,707   —   7,182 

A

   235    775    1,391    552    2,953   4,374   14,521   11,316   425   30,636 

BBB

   1,709    6,473    2,768    1,362    12,312   4,865   14,276   18,546   166   37,853 

NIG

   4,667    12,114    5,629    2,304    24,714   1,436   11,241   13,636   6,801   33,114 

Unrated2

   699    126    175    1,483    2,483   1   25   10   39   75 

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 

Total lending
commitments

  13,803   41,576   46,215   7,431   109,025 

Total exposure

 $25,136  $    63,724  $    59,022  $    13,746  $    161,628 

 

  At December 31, 2017 
  Years to Maturity    
$ in millions Less than 1  1-3  3-5  Over 5  Total 

Loans

     

AA

 $14  $503  $30  $5  $552 

A

  1,608   1,710   1,235   693   5,246 

BBB

  2,791   6,558   3,752   646   13,747 

NIG

  4,760   12,311   4,480   3,245   24,796 

Unrated2

  243   291   621   1,487   2,642 

Total loans

  9,416   21,373   10,118   6,076   46,983 

Lending commitments

 

    

AAA

  —   165   —   —   165 

AA

  3,745   1,108   3,002   —   7,855 

A

  3,769   5,533   11,774   197   21,273 

BBB

  3,987   12,345   16,818   1,095   34,245 

NIG

  4,159   9,776   12,279   2,698   28,912 

Unrated2

  9   40   42   47   138 

Total lending
commitments

  15,669   28,967   43,915   4,037   92,588 

Total exposure

 $25,085  $    50,340  $    54,033  $    10,113  $    139,571 

NIG–Non-investment

grade

1.

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

2.

Unrated loans and lending commitments are primarily trading positions that are measured at fair value and risk managed as a component of Market Risk. For a further discussion of our Market Risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Market Risk” herein.

Institutional Securities Loans and Lending Commitments by Industry

 

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

At

March 31,

2018

   

At

December 31,

2017

 

Industry1

    

Industry

    

Real estate

  $23,235   $19,807   $28,847   $28,426 

Information technology

   13,907    8,602 

Financials

   27,224    22,112 

Consumer discretionary

   12,129    12,059    15,706    11,555 

Industrials

   12,110    11,465    13,768    11,090 

Information technology

   12,434    11,862 

Insurance

   10,747    4,739 

Healthcare

   10,456    9,956 

Energy

   11,074    11,757    10,354    10,233 

Funds, exchanges and
other financial services2

   10,639    11,481 

Healthcare

   10,014    11,534 

Utilities

   9,407    9,216    10,296    9,592 

Consumer staples

   7,282    7,329    10,054    8,315 

Materials

   6,129    7,630    5,123    5,069 

Mortgage finance

   5,826    6,296 

Telecommunications services

   4,722    6,156    4,533    4,172 

Insurance

   3,986    4,190 

Consumer finance

   2,949    2,847 

Other

   2,358    2,274    2,086    2,450 

Total

  $135,767   $132,643   $        161,628   $        139,571 

Institutional Securities business segment 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

1.

Industry categories are based on the Global Industry Classification Standard®.

2.

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

 

 

September 2017 Form 10-Q  3633  March 2018 Form 10-Q

Risk Disclosures  LOGOLOGO

 

revolving lines of credit, letter of credit facilities and term loans. In connection with the relationship-based lending activities, we enter into hedges, as detailed below.

Relationship-based Lending Activities Hedges—Notional Amounts

$ in billions

  

At

March 31,

2018

   

At

December 31,

2017

 

Single-name and index CDS

  $15.0   $16.6 

Event-Driven Loans and Lending Commitments

 

 At September 30, 2017  At March 31, 2018 
 Years to Maturity     Years to Maturity   
$ in millions Less than 1 1-3 3-5 Over 5 Total    Less than 1 1-3 3-5 Over 5 Total 

Loans

 $996  $1,738  $749  $4,568  $8,051    $2,631  $689  $518  $1,835  $5,673 

Lending commitments

  3,001   1,559   2,601   2,304   9,465   2,902   11,963   3,262   3,982   22,109 

Total loans and lending commitments

 $3,997  $3,297  $3,350  $6,872  $17,516    $5,533  $  12,652  $  3,780  $  5,817  $  27,782 
 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’

  At December 31, 2017 
  Years to Maturity    
$ in millions   Less than 1  1-3  3-5  Over 5  Total 

Loans

   $1,458  $1,058  $639  $2,012  $5,167 

Lending commitments

  1,272   3,206   2,091   1,874   8,443 

Total loans and lending commitments

   $2,730  $  4,264  $  2,730  $  3,886  $  13,610 

Event-driven loans and lending commitments relatedare associated with a particular event or transaction, such as to the energy industry were $11.1 billion, of which approximately 68% are accounted for as held for investmentsupport client merger, acquisition, recapitalization and 32% are accounted for as either held for sale or at fair value. Additionally, approximately 55% of the total energy industryproject finance activities. Event-driven loans and lending commitments were to investment grade counterparties.

At September 30, 2017, the energy industry portfolio included $1.1 billion intypically consist of revolving lines of credit, term loans and $2.1 billionbridge loans. The increase in event-driven lending commitments in the current quarter is primarily due 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 onan increase in held-for-sale commitments driven by new client transactions in the valuelatter part 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.quarter.

Wealth Management

The principal Wealth Management lending activities include securities-based lending and residential real estate loans.

Securities-based lending provided to our retail clients is primarily conducted through our Portfolio Loan Account (“PLA”) and Liquidity Access Line (“LAL”) platforms.platform. For more information about our securities-based lending and residential real estate loans, see “Quantitative and Qualitative Disclosures about Market Risk—Risk–Risk Management—Management–Credit Risk—Risk–Lending Activities” in Part II, Item 7A of the 20162017 FormForm 10-K.

Wealth Management Loans and Lending Commitments

  At March 31, 2018 
  Contractual Years to Maturity    
$ in millions   Less than 1  1-3  3-5  Over 5  Total 

Securities-based lending and other loans1

   $34,730  $3,789  $1,849  $1,382  $41,750 

Residential real estate loans

  —   30   10   26,536   26,576 

Total loans

   $34,730  $3,819  $1,859  $27,918  $68,326 

Lending commitments

  7,392   2,283   444   285   10,404 

Total loans and lending commitments

   $42,122  $  6,102  $  2,303  $  28,203  $  78,730 

  At December 31, 2017 
  Contractual Years to Maturity    
$ in millions   Less than 1  1-3  3-5  Over 5  Total 

Securities-based lending and other loans1

   $34,389  $3,687  $1,899  $1,231  $41,206 

Residential real estate loans

  —   24   15   26,607   26,646 

Total loans

   $34,389  $3,711  $1,914  $27,838  $67,852 

Lending commitments

  7,253   1,827   120   281   9,481 

Total loans and lending commitments

   $41,642  $  5,538  $  2,034  $  28,119  $  77,333 

1.

The Liquidity Access Line platform had an outstanding loan balance of $32.1 billion and $32.2 billion at March 31, 2018 and December 31, 2017, respectively.

For the current quarter, loans and lending commitments associated with the Wealth Management business segment lending activities increased by approximately 3%2%, primarily due to growth in securities-based lending and other loans.

Wealth Management 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  

1.

PLA and LAL platforms had an outstanding loan balance of $31.8 billion and $29.7 billion at September 30, 2017 and December 31, 2016, respectively.

Lending Activities includedIncluded in Customer and Other Receivables

Margin Loans

 

 At September 30, 2017   At March 31, 2018 
$ in millions Institutional
Securities		   Wealth
Management		   Total   IS   WM   Total 

Net customer receivables representing margin loans

 $16,613   $11,996   $    28,609    $    22,396   $    11,986   $    34,382 

 

 At December 31, 2016   At December 31, 2017 
$ in millions Institutional
Securities		   Wealth
Management		   Total   IS   WM   Total 

Net customer receivables representing margin loans

 $11,876   $12,483   $    24,359    $    19,977   $    12,135   $    32,112 

The Institutional Securities and Wealth Management business segments provide margin lending arrangements which allow the client to borrow against the value of qualifying securities. Margin lending activities generally have minimal credit risk due to the value of collateral held and their short-term nature.

 

 

March 2018 Form 10-Q  3734  September 2017 Form 10-Q

Risk Disclosures  LOGOLOGO

 

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  

$ in millions

  

At

March 31,

2018

   

At

December 31,

2017

 

Employee loans:

    

Balance

  $3,687   $    4,185 

Allowance for loan losses

   (75)    (77) 

Balance, net

  $3,612   $4,108 

Repayment term range, in years

   1 to 20    1 to 20 

Employee loans are generally granted to retain and recruit certain employees, are full recourse and generally require periodic repayments. We establish an allowance for loan amounts to terminated employees that we do not consider recoverable, which is recorded in Compensation and benefits expense. See Note 7 to the financial statements for a further description of our employee loans.

Credit Exposure—Derivatives

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

Fair values as shown below represent the Firm’s net exposure to counterparties related to its OTC derivative products. Obligor credit ratings are determined internally by the Credit Risk Management Department.

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 DisclosuresLOGO

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 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 discussion of our credit exposure and related credit derivative contracts, see “Quantitative and Qualitative Disclosuresdisclosures about Market Risk–Risk Management–Credit Risk–Credit Exposure–Derivatives” in Part II, Item 7A of the 20162017 Form10-K.

Fair values as shown below represent the Firm’s net exposure to counterparties related to its OTC derivative products. Obligor credit ratings are determined internally by the Credit Risk Management department.

Counterparty Credit Rating and Remaining Contractual Maturity of OTC Derivative Portfolio by Counterparty TypeAssets at Fair Value

 

  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  
  Credit Rating    
              Non-    
              investment    
$ in millions AAA  AA  A  BBB  grade  Total 

At March 31, 2018

 

    

< 1 year

 $543  $5,281  $37,768  $12,570  $6,192  $62,354 

1-3 years

  690   3,687   22,356   7,981   4,425   39,139 

3-5 years

  767   2,907   15,236   5,093   4,989   28,992 

Over 5 years

  4,813   11,955   77,582   36,990   12,395   143,735 

Total, gross

 $  6,813  $  23,830  $  152,942  $  62,634  $    28,001  $  274,220 

Counterparty Netting

  (3,339)   (15,278)   (123,256)   (44,638)   (15,195)   (201,706) 

Cash and Securities collateral

  (3,158)   (6,512)   (24,812)   (12,055)   (9,077)   (55,614) 

Total, net

 $316  $2,040  $4,874  $5,941  $3,729  $16,900 

 

   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  
  Credit Rating1    
$ in millions AAA  AA  A  BBB  

Non-

investment

grade

  Total 

At December 31, 2017

 

    

< 1 year

 $356  $5,302  $36,001  $11,577  $5,904  $59,140 

1-3 years

  558   4,118   23,137   8,887   4,827   41,527 

3-5 years

  702   3,183   15,577   5,489   4,879   29,830 

Over 5 years

  5,470   11,667   78,779   37,286   12,079   145,281 

Total, gross

 $  7,086  $  24,270  $  153,494  $  63,239  $  27,689  $  275,778 

Counterparty Netting

  (3,018)   (15,261)   (125,378)   (45,421)   (15,828)   (204,906) 

Cash and Securities collateral

  (3,188)   (6,785)   (23,257)   (12,844)   (9,123)   (55,197) 

Total, net

 $880  $2,224  $4,859  $4,974  $2,738  $15,675 

 

1.

Our Credit Default Swaps (“CDS”) are classified in either Level 2 or Level 3 ofPrior period amounts have been revised to conform to the fair value hierarchy. Approximately 4% of receivable fair values represented Level 3 amounts at September 30, 2017current presentation.

OTC Derivative Products at Fair Value, Net of Collateral, by Industry

$ in millions

  

At

March 31,

2018

   

At

December 31,

2017

 

Industry

  

Utilities

  $4,912   $4,382 

Financials

   4,245    3,330 

Industrials

   1,335    1,124 

Regional governments

   1,002    1,005 

Information technology

   869    715 

Healthcare

   842    882 

Energy

   656    646 

Not-for-profit organizations

   633    703 

Sovereign governments

   502    1,084 

Consumer discretionary

   463    464 

Real estate

   378    374 

Materials

   276    329 

Insurance

   243    206 

Consumer staples

   118    161 

Other

   426    270 

Total1

  $16,900   $    15,675 

1.

For further information on derivative instruments and December 31, 2016. Approximately 7% of payable fair values represented Level 3 amounts at September 30, 2017 and December 31, 2016. Seehedging activities, see Note 34 to the financial statements for further information.statements.

The fair values shown in the previous table are before the application of contractual netting or collateral.

35March 2018 Form 10-Q

Risk DisclosuresLOGO

For additional credit exposure information on our credit derivative portfolio, see Note 4 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–Country Risk Exposure” in Part II, Item 7A of the 20162017 Form10-K.

Our sovereign exposures consist of financial instruments entered into with sovereign and local governments. Ournon-sovereign exposures consist of exposures tofinancial instruments

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.March 31, 2018. Index credit derivatives are included in the country risk exposure table. Each reference entity within an index is allocated to that reference entity’s country of risk. Index exposures are allocated to the underlying reference entities in proportion to the notional weighting of each reference entity in the index, adjusted for any fair value receivable/payable for that reference entity. Where credit risk crosses multiple jurisdictions, for example, a CDS purchased from an issuer in a specific country that references bonds issued by an entity in a different country, the fair value of the CDS is reflected in the Net Counterparty Exposure column based on the country of the CDS issuer. Further, the notional amount of the CDS adjusted for the fair value of the receivable/payable is reflected in the Net Inventory column based on the country of the underlying reference entity.

 

 

March 2018 Form 10-Q  3936  September 2017 Form 10-Q

Risk Disclosures  LOGOLOGO

 

Top Ten Country Exposures at September 30, 2017March 31, 2018

 

$ in millions Net Inventory1 

Net

Counterparty

Exposure2

 Loans Lending
Commitments		 Exposure
Before Hedges		 Hedges3 Net Exposure   Net Inventory1   

Net

Counterparty

Exposure2

   Loans   Lending
Commitments		   Exposure
before Hedges		   Hedges3   Net Exposure 

Country

                     

United Kingdom:

       

U.K.:

              

Sovereigns

  $(836)   $53   $—   $—   $(783)   $(357)   $(1,140) 

Non-sovereigns

   1,003    10,249    2,533    7,022    20,807    (1,875)    18,932 

Total

  $167   $    10,302   $    2,533   $    7,022   $    20,024   $(2,232)   $    17,792 

Germany:

              

Sovereigns

  $1,645   $460   $—   $—   $2,105   $(858)   $1,247 

Non-sovereigns

   328    2,200    1,132    3,787    7,447    (1,317)    6,130 

Total

  $1,973   $2,660   $1,132   $3,787   $9,552   $(2,175)   $7,377 

France:

              

Sovereigns

  $(924)   $2   $—   $—   $(922)   $(50)   $(972) 

Non-sovereigns

   9    1,862    294    4,100    6,265    (748)    5,517 

Total

  $(915)   $1,864   $294   $4,100   $5,343   $(798)   $4,545 

Spain:

              

Sovereigns

 $487  $29  $—  $—  $516  $(280)  $236   $(1,648)   $—   $—   $—   $(1,648)   $            —   $(1,648) 

Non-sovereigns

  306   8,516   1,843   5,976   16,641   (1,916)   14,725    54    283    3,249    2,748    6,334    (193)    6,141 

Total

 $793  $8,545  $1,843  $5,976  $17,157  $(2,196)  $14,961   $(1,594)   $283   $3,249   $2,748   $4,686   $(193)   $4,493 

Japan:

                     

Sovereigns

 $5,391  $54  $—  $—  $5,445  $(103)  $5,342   $164   $84   $— �� $—   $248   $(118)   $130 

Non-sovereigns

  696   3,365   65   —   4,126   (114)   4,012    476    3,783    —    —    4,259    (118)    4,141 

Total

 $6,087  $3,419  $65  $—  $9,571  $(217)  $9,354   $640   $3,867   $—   $—   $4,507   $(236)   $4,271 

Canada:

              

Sovereigns

  $(326)   $48   $—   $—   $(278)   $—   $(278) 

Non-sovereigns

   574    2,033    92    1,417    4,116    (278)    3,838 

Total

  $248   $2,081   $92   $1,417   $3,838   $(278)   $3,560 

China:

              

Sovereigns

  $659   $188   $—   $—   $847   $(54)   $793 

Non-sovereigns

   737    228    1,291    434    2,690    (10)    2,680 

Total

  $1,396   $416   $1,291   $434   $3,537   $(64)   $3,473 

Brazil:

                     

Sovereigns

 $3,729  $—  $—  $—  $3,729  $(11)  $3,718   $2,561   $—   $—   $—   $2,561   $(12)   $2,549 

Non-sovereigns

  196   577   755   75   1,603   (343)   1,260    69    167    26    451    713    (16)    697 

Total

 $3,925  $577  $755  $75  $5,332  $(354)  $4,978   $2,630   $167   $26   $451   $3,274   $(28)   $3,246 

Canada:

       

Netherlands:

              

Sovereigns

 $84  $25  $—  $—  $109  $—  $109   $(75)   $—   $—   $—   $(75)   $(20)   $(95) 

Non-sovereigns

  211   1,885   110   1,605   3,811   (384)   3,427    374    733    1,150    1,153    3,410    (305)    3,105 

Total

 $295  $1,910  $110  $1,605  $3,920  $(384)  $3,536   $299   $733   $1,150   $1,153   $3,335   $(325)   $3,010 

India:

                     

Sovereigns

 $1,503  $—  $—  $—  $1,503  $—  $1,503   $1,744   $—   $—   $—   $1,744   $—   $1,744 

Non-sovereigns

  615   467   —   —   1,082   —   1,082    696    534    —    —    1,230    —    1,230 

Total

 $2,118  $467  $—  $—  $2,585  $—  $2,585   $2,440   $534   $—   $—   $2,974   $—   $2,974 

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 

 

1.

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

2.

Net counterparty exposure (i.e., repurchase transactions, securities lending and OTC derivatives) takes into consideration legally enforceable master netting agreements and collateral.

3.

Amounts represent CDS hedges (purchased and sold) on net counterparty exposure and lending executed by trading desks responsible for hedging counterparty and lending credit risk exposures for us. 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—Derivatives” herein.

 

September 2017 Form 10-Q  4037  March 2018 Form 10-Q

Risk Disclosures  LOGOLOGO

 

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 as follows:

Credit Derivatives Included in Net Inventory

 

$ in millions  At September 30,
2017		   

At

March 31,

2018

 

Gross purchased protection

  $(61,795)   $(78,994) 

Gross written protection

   60,031            76,135 

Net exposure

  $(1,764)   $(2,859) 

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

Benefit of Collateral Received Againstagainst Counterparty Credit Exposure

 

$ in millions  At September 30,
2017		 

U.K.1

  $8,334 

Japan2

   4,824 

Other3

   5,133 

$ in millions

  

Collateral1

  

At

March 31,

2018

 

Counterparty credit exposure

    

U.K.

  U.K., U.S. and Japan  $9,215 

Germany

  Belgium and Germany   9,193 

Other

  Japan, France and Spain   14,696 

 

1.

Primarily obligationsCollateral primarily consists of the U.K., the U.S.cash and Italy.

2.

Primarily obligations of Japan.

3.

Primarily obligations of the Netherlands and the U.K.government obligations.

Country Risk Exposures Related to the United Kingdom.U.K. At September 30, 2017,March 31, 2018, our country risk exposures in the U.K. included net exposures of $14,961$17,792 million as shown in the Top Ten Country Exposures table, above, and overnight deposits of $7,137$7,047 million. The $14,725$18,932 million of exposures tonon-sovereigns were diversified across both names and sectors. Of these exposures, $4,699$6,168 million were to U.K. focusedU.K.-focused counterparties that generate more thanone-third of their revenues in the U.K., $4,858$5,562 million were to geographically diversified counterparties, and $4,934$6,248 million were to exchanges and clearing houses.clearinghouses.

Country Risk Exposures Related to Brazil. At September 30, 2017,March 31, 2018, our country risk exposures in Brazil included net exposures of $4,978$3,246 million as shown in the table above.Top Ten Country Exposures table. 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$697 million of exposures tonon-sovereigns were diversified across both names and sectors.

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 7A of the 20162017 Form10-K.

Model Risk

Model risk refers to the potential for adverse consequences from decisions based on incorrect or misused model outputs. Model risk can lead to financial loss, poor business and strategic decision making, or damage to the Firm’s reputation. The risk inherent in a model is a function of the materiality, complexity and uncertainty around inputs and assumptions. Model risk is generated from the use of models impacting financial statements, regulatory filings, capital adequacy assessments and the formulation of business strategies.strategy. For a further discussion about our model risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk–Risk Management—Management–Model Risk” in Part II, Item 7A of the 20162017 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 20162017 Form10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in Part I, Item 2.Resources.”

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 and terrorist financing 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 20162017 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 2017March 2018 Form 10-Q  4238  

  

 

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,March 31, 2018, 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 nine-monththree-month periods ended September 30,March 31, 2018 and 2017, and 2016. These condensed consolidatedthe 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, 2017, 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 Form10-K; and in our report dated February 27, 2018, 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, 2017 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

May 4, 2018

New York, New York

November 3, 2017

 

  4339  September 2017March 2018 Form 10-Q

Financial Statements

Consolidated Financial Statements and Notes

Consolidated Income Statements

(Unaudited)

  LOGOLOGO

 

Consolidated Financial Statements and Notes

Consolidated Income Statements

(Unaudited)

 Three Months Ended
September 30,		     Nine Months Ended
September 30,		   Three Months Ended
March 31,		 
in millions, except per share data        2017                 2016                  2017               2016                  2018                   2017         

Revenues

          

Investment banking

 $1,380   $1,225     $4,455  $3,556    $1,634   $        1,545 

Trading

  2,704    2,609      8,870  7,420     3,770    3,235 

Investments

  167    87      495  179     126    165 

Commissions and fees

  937    991      2,997  3,066     1,173    1,033 

Asset management, distribution and administration fees

  3,026    2,686      8,695  7,943  

Asset management

   3,192    2,767 

Other

  200    308      628  631     207    229 

Totalnon-interest revenues

  8,414    7,906      26,140  22,795     10,102    8,974 

Interest income

  2,340    1,734      6,411  5,148     2,860    1,965 

Interest expense

  1,557    731      4,106  2,333     1,885    1,194 

Net interest

  783    1,003      2,305  2,815     975    771 

Net revenues

  9,197    8,909      28,445  25,610     11,077    9,745 

Non-interest expenses

          

Compensation and benefits

  4,169    4,097      12,887  11,795     4,914    4,466 

Occupancy and equipment

  330    339      990  997     336    327 

Brokerage, clearing and exchange fees

  522    491      1,556  1,440     627    509 

Information processing and communications

  459    456      1,320  1,327     478    428 

Marketing and business development

  128    130      419  418     140    136 

Professional services

  534    489      1,622  1,550     510    527 

Other

  573    526      1,719  1,481     652    544 

Totalnon-interest expenses

  6,715    6,528      20,513  19,008     7,657    6,937 

Income from continuing operations before income taxes

  2,482    2,381      7,932  6,602     3,420    2,808 

Provision for income taxes

  697    749      2,358  2,160     714    815 

Income from continuing operations

  1,785    1,632      5,574  4,442     2,706    1,993 

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

  6    8      (21)  1     (2)    (22) 

Net income

 $1,791   $1,640     $5,553  $4,443    $2,704   $1,971 

Net income applicable to noncontrolling interests

  10    43      85  130     36    41 

Net income applicable to Morgan Stanley

 $1,781   $1,597     $5,468  $4,313    $2,668   $1,930 

Preferred stock dividends and other

  93    79      353  314     93    90 

Earnings applicable to Morgan Stanley common shareholders

 $1,688   $1,518     $5,115  $3,999    $2,575   $1,840 

Earnings per basic common share

          

Income from continuing operations

 $0.95   $0.82     $2.87  $2.15    $1.48   $1.03 

Income (loss) from discontinued operations

  —    0.01      (0.01)   —     —    (0.01) 

Earnings per basic common share

 $0.95   $0.83     $2.86  $2.15    $1.48   $1.02 

Earnings per diluted common share

          

Income from continuing operations

 $0.93   $0.80     $2.81  $2.11    $1.46   $1.01 

Income (loss) from discontinued operations

  —    0.01      (0.02)   —     (0.01)    (0.01) 

Earnings per diluted common share

 $0.93   $0.81     $2.79  $2.11    $1.45   $1.00 

Dividends declared per common share

 $0.25   $0.20     $0.65  $0.50    $0.25   $0.20 

Average common shares outstanding

          

Basic

  1,776    1,838      1,789  1,863     1,740    1,801 

Diluted

  1,818    1,879      1,830  1,898     1,771    1,842 

 

September 2017March 2018 Form 10-Q  4440 See Notes to Consolidated Financial Statements

Consolidated Comprehensive Income Statements

(Unaudited)

  LOGOLOGO

 

  

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

   Three Months Ended
March 31,		 
$ in millions        2017             2016             2017             2016                 2018                   2017         

Net income

  $1,791  $1,640  $5,553  $4,443    $2,704   $        1,971 

Other comprehensive income (loss), net of tax:

           

Foreign currency translation adjustments

  $61  $43   223  360    $117   $150 

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

   26  (99)   218  439     (410)    84 

Pension, postretirement and other

   —  (1)   4  (5)    5    — 

Change in net debt valuation adjustment

   (149)  (93)   (323)  255     451    9 

Total other comprehensive income (loss)

  $(62)  $(150)  $122  $1,049    $163   $243 

Comprehensive income

  $1,729  $1,490  $5,675  $5,492    $2,867   $2,214 

Net income applicable to noncontrolling interests

   10  43   85  130     36    41 

Other comprehensive income (loss) applicable to noncontrolling interests

   (6)  15   23  151     72    50 

Comprehensive income applicable to Morgan Stanley

  $1,725  $1,432  $5,567  $5,211    $2,759   $2,123 

 

See Notes to Consolidated Financial Statements  4541  September 2017March 2018 Form 10-Q

Consolidated Balance Sheets  LOGOLOGO

 

$ in millions, except share data  (Unaudited)
At
September 30,
2017		 At
December 31,
2016		   (Unaudited)
At
March 31,
2018		   At
December 31,
2017		 

Assets

       

Cash and cash equivalents:

    

Cash and due from banks

  $24,047  $22,017    $29,073   $        24,816 

Interest bearing deposits with banks

   24,144  21,364     22,980    21,348 

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  

Restricted cash

   35,291    34,231 

Trading assets at fair value ($163,158and $169,735 were pledged to various parties)

   273,044    298,282 

Investment securities (includes$56,749and $55,203 at fair value)

   80,641    78,802 

Securities purchased under agreements to resell

   80,246    84,258 

Securities borrowed

   132,892  125,236     135,835    124,010 

Customer and other receivables

   54,388  46,460     66,835    56,187 

Loans:

       

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

   91,207  81,704  

Held for investment (net of allowance of$243 and $224)

   95,124    92,953 

Held for sale

   13,224  12,544     14,011    11,173 

Goodwill

   6,590  6,577     6,706    6,597 

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

   2,491  2,721  

Intangible assets (net of accumulated amortization of$2,817 and $2,730)

   2,427    2,448 

Other assets

   50,430  52,125     16,282    16,628 

Total assets

  $853,693  $814,949    $858,495   $851,733 

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  

Deposits (includes$242 and $204 at fair value)

  $160,424   $159,436 

Trading liabilities at fair value

   127,237  128,194     139,023    131,295 

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

   53,983  54,628  

Securities sold under agreements to repurchase (includes$792 and $800 at fair value)

   51,575    56,424 

Securities loaned

   15,630  15,844     13,556    13,592 

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

   14,244  11,118  

Other secured financings (includes$3,423and $3,863 at fair value)

   10,275    11,271 

Customer and other payables

   198,792  190,513     194,924    191,510 

Other liabilities and accrued expenses

   16,290  15,896     14,265    17,157 

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

   191,677  164,775  

Borrowings (includes$47,533 and $46,912 at fair value)

   194,964    192,582 

Total liabilities

   773,579  737,772     779,006    773,267 

Commitments and contingent liabilities (see Note 11)

       

Equity

       

Morgan Stanley shareholders’ equity:

       

Preferred stock

   8,520  7,520     8,520    8,520 

Common stock, $0.01 par value:

       

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

   20  20  

Shares authorized:3,500,000,000; Shares issued:2,038,893,979; Shares outstanding:1,773,934,393 and 1,788,086,805

   20    20 

Additionalpaid-in capital

   23,389  23,271     23,260    23,545 

Retained earnings

   57,554  53,679     60,009    57,577 

Employee stock trusts

   2,899  2,851     2,907    2,907 

Accumulated other comprehensive income (loss)

   (2,544)  (2,643)    (3,406)    (3,060) 

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

   (7,961)  (5,797) 

Common stock held in treasury at cost, $0.01 par value (264,959,586 and 250,807,174 shares)

   (10,369)    (9,211) 

Common stock issued to employee stock trusts

   (2,899)  (2,851)    (2,907)    (2,907) 

Total Morgan Stanley shareholders’ equity

   78,978  76,050     78,034    77,391 

Noncontrolling interests

   1,136  1,127     1,455    1,075 

Total equity

   80,114  77,177     79,489    78,466 

Total liabilities and equity

  $853,693  $814,949    $858,495   $851,733 

 

September 2017March 2018 Form 10-Q  4642 See Notes to Consolidated Financial Statements

Consolidated Statements of Changes in Total Equity

(Unaudited)

  LOGOLOGO

 

$ 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

  

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, 2017

 $8,520  $20  $23,545  $57,577  $2,907  $(3,060)  $(9,211)  $(2,907)  $1,075  $78,466 

Cumulative adjustment for accounting changes1

  —   —   —   306   —   (437)   —   —   —   (131) 

Net income applicable to Morgan Stanley

  —   —   —   2,668   —   —   —   —   —   2,668 

Net income applicable to noncontrolling interests

  —   —   —   —   —   —   —   —   36   36 

Dividends

  —   —   —   (542)   —   —   —   —   —   (542) 

Shares issued under employee plans

  —   —   (285)   —   —   —   710   —   —   425 

Repurchases of common stock and employee tax withholdings

  —   —   —   —   —   —   (1,868)   —   —   (1,868) 

Net change in Accumulated other comprehensive income (loss)

  —   —   —   —   —   91   —   —   72   163 

Other net increases

  —   —   —   —   —   —   —   —   272   272 

Balance at March 31, 2018

 $    8,520  $    20  $    23,260  $    60,009  $    2,907  $(3,406)  $(10,369)  $(2,907)  $1,455  $79,489 

Balance at December 31, 2016

  $7,520   $20   $23,271  $53,679  $2,851  $(2,643)  $(5,797)  $(2,851)  $1,127  $     77,177   $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    —   —  45  (35)   —   —   —   —   —  10 

Net income applicable to Morgan Stanley

   —    —    —   5,468   —   —   —   —   —   5,468    —   —   —  1,930   —   —   —   —   —  1,930 

Net income applicable to noncontrolling interests

   —    —    —   —   —   —   —   —   85   85    —   —   —   —   —   —   —   —  41  41 

Dividends

   —    —    —   (1,558)   —   —   —   —   —   (1,558)   —   —   —  (465)   —   —   —   —   —  (465) 

Shares issued under employee plans

   —    —    79   —   48   —   844   (48)   —   923    —   —  (430)   —  186   —              803  (186)   —  373 

Repurchases of common stock and employee tax withholdings

   —    —    —   —   —   —   (3,008)   —   —   (3,008)   —   —   —   —   —   —  (1,161)   —   —  (1,161) 

Net change in Accumulated other comprehensive income (loss)

   —    —    —   —   —   99   —   —   23   122    —   —   —   —   —              193   —   —  50  243 

Issuance of preferred stock

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

Other net decreases

   —    —    —   —   —   —   —   —   (99)   (99)   —   —   —   —   —   —   —   —  (58)  (58) 

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  

Balance at March 31, 2017

 $8,520  $20  $22,880  $55,109  $3,037  $(2,450)  $(6,155)  $(3,037)  $    1,160  $    79,084 

 

1.

The cumulative adjustment relatesadjustments relate to the adoption of the followingcertain accounting updates on January 1, 2017: Improvements to Employee Share-Based Payment Accounting,for whichduring the Firm recorded a cumulativecatch-up adjustment to reflect its election to account for forfeitures as they occur (see Notecurrent and prior year quarters. See Notes 2 for further information); andIntra-Entity Transfers of Assets Other Than Inventory, for which the Firm recorded a cumulativecatch-up adjustment to reflect the tax impact from an intercompany sale of assets.

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-K for the year ended December 31, 2016 (the “2016 Form10-K”) and Note 14 for further information.

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 Statements  4743  September 2017March 2018 Form 10-Q

Consolidated Cash Flow Statements

(Unaudited)

  LOGOLOGO

 

   

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.

   Three Months Ended
March 31,		 
$ in millions          2018                   2017         

Cash flows from operating activities

    

Net income

  $2,704   $1,971 

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

    

(Income) loss from equity method investments

   (50)    (9) 

Stock-based compensation expense

   321    269 

Depreciation and amortization

   390    434 

Net gain on sale of available-for-sale securities

   —    (2) 

Impairment charges

   8    5 

Provision for credit losses on lending activities

   26    25 

Other operating adjustments

   5    (74) 

Changes in assets and liabilities:

    

Trading assets, net of Trading liabilities

   33,832    (12,838) 

Securities borrowed

   (11,825)    13,433 

Securities loaned

   (36)    3,090 

Customer and other receivables and other assets

   (13,019)    (1,687) 

Customer and other payables and other liabilities

   1,129    (3,556) 

Securities purchased under agreements to resell

   4,012    (2,868) 

Securities sold under agreements to repurchase

   (4,849)    1,897 

Net cash provided by (used for) operating activities

   12,648    90 

Cash flows from investing activities

    

Proceeds from (payments for):

    

Other assets—Premises, equipment and software, net

   (410)    (350) 

Changes in loans, net

   (3,801)    (1,105) 

Investment securities:

    

Purchases

   (5,482)    (6,449) 

Proceeds from sales

   810    3,604 

Proceeds from paydowns and maturities

   2,125    2,071 

Other investing activities

   (164)    61 

Net cash provided by (used for) investing activities

   (6,922)    (2,168) 

Cash flows from financing activities

    

Net proceeds from (payments for):

    

Noncontrolling interests

   (5)    (2) 

Other secured financings

   (2,101)    199 

Deposits

   988    (3,754) 

Proceeds from:

    

Derivatives financing activities

   —    48 

Issuance of preferred stock, net of issuance costs

   —    994 

Issuance of Borrowings

   15,370    18,433 

Payments for:

    

Borrowings

   (11,377)    (11,538) 

Repurchases of common stock and employee tax withholdings

   (1,868)    (1,161) 

Cash dividends

   (599)    (511) 

Other financing activities

   (45)    14 

Net cash provided by (used for) financing activities

   363    2,722 

Effect of exchange rate changes on cash and cash equivalents

   860    877 

Net increase (decrease) in cash and cash equivalents

   6,949    1,521 

Cash and cash equivalents, at beginning of period

   80,395    77,360 

Cash and cash equivalents, at end of period

  $87,344   $78,881 

Cash and cash equivalents:

    

Cash and due from banks

  $29,073   $        22,081 

Interest bearing deposits with banks

   22,980    20,773 

Restricted cash

   35,291    36,027 

Cash and cash equivalents, at end of period

  $87,344   $78,881 

Supplemental Disclosure of Cash Flow Information

    

Cash payments for:

    

Interest

  $1,407   $737 

Income taxes, net of refunds

   250    262 

 

September 2017March 2018 Form 10-Q  4844  See Notes to Consolidated Financial Statements

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

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 Acronyms” for definitions of certain acronyms used throughout this Form 10-Q.

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

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

Investment Managementprovides a broad range of investment strategies and products that span geographies, asset classes, and public and private markets to a diverse group of clients across institutional and intermediary channels. Strategies and products 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 serviced 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 valuation of goodwill and intangible assets, compensation, deferred tax assets, the outcome of legal and tax matters, allowance for credit losses and other matters that affect its financial statements and related disclosures. The Firm believes that the estimates utilized in the preparation of its financial statements are prudent and reasonable. Actual results could differ materially from these estimates. Intercompany balances and transactions have been eliminated. Certain reclassifications have been made to prior periods to conform to the current presentation.

The accompanying financial statements should be read in conjunction with the Firm’s consolidated financial statements and notes thereto included in the 20162017 Form10-K. Certain footnote disclosures included in the 20162017 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). For consolidated subsidiaries that are less than wholly owned, the third-party holdings of equity interests are referred to as noncontrolling interests. The net income attributable to noncontrolling interests for such subsidiaries is presented as Net income applicable to noncontrolling interests in the consolidated income statements (“income statements”). The portion of shareholders’ equity that is attributable to noncontrolling interests for such subsidiaries is presented as noncontrolling interests, a component of total equity, in the consolidated balance sheets (“balance sheets”).

45March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

For a discussion of the Firm’s involvement with VIEs and its significant regulated U.S. and international subsidiaries, see Notes 1 and 2 to the consolidated financial statements in the 2016 2017Form10-K.

49September 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

2. Significant Accounting Policies

For a detailed discussion about the Firm’s significant accounting policies, see Note 2 to the consolidated financial statements in the 20162017 Form10-K.

During the ninethree months ended September 30, 2017(“March 31, 2018 (“current year period”quarter”), other than the following, there were no significant updates maderevisions to the Firm’s significant accounting policies.policies, other than the following and the accounting updates adopted.

Carried Interest

The Firm is entitled to receive performance-based fees (also referred to as incentive fees, and includes carried interest) when the return on assets under management exceeds certain benchmark returns or other performance targets. Beginning January 1, 2018, when the Firm earns carried interest from funds as specified performance thresholds are met, that carried interest and any related general or limited partner interest is accounted for under the equity method of accounting and measured based on the Firm’s claim on the NAV of the fund at the reporting date taking into account the distribution terms applicable to the interest held. Performance-based fees in the form of carried interest considered equity method investments are therefore outside the scope of the policies for revenue from contracts with customers discussed below. See Note 11 for information regarding general partner guarantees, which include potential obligations to return performance fee distributions previously received.

Accounting StandardsUpdates Adopted

The Firm adopted the following accounting update onupdates in the current quarter. Prior year quarter results are presented under previous policies. See Note 14 for a summary of the Retained earnings impacts of these and other minor adoptions effective this quarter.

Revenue from Contracts with Customers

On January 1, 2017.2018, we adoptedRevenue from Contracts with Customers using the modified retrospective method, which resulted in a net decrease to Retained earnings of $32 million, net of tax. Prior period amounts were not restated. See Note 20 for new disclosures related to the adoption of this standard.

Our revised accounting policy in accordance with this adoption is effective January 1, 2018, and is discussed below.

Revenue Recognition

Revenues are recognized when the promised goods or services are delivered to our customers, in an amount that is based on the consideration the Firm expects to receive in exchange for those goods or services when such amounts are not probable of significant reversal.

 

• 

Improvements to Employee Share-Based Payment AccountingInvestment Banking. 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, theRevenue from investment banking activities consists of revenues earned from underwriting primarily equity and fixed income tax consequencessecurities and advisory fees for mergers, acquisitions, restructuring and advisory assignments.

Underwriting revenues are generally recognized on trade date if there is no uncertainty or contingency related to share-based payments are requiredthe amount to be paid. Underwriting costs are deferred and recognized in Provision for income taxesthe relevant non-compensation expense line items when the related underwriting revenues are recorded.

Advisory fees are recognized as advice is provided to the client, based on the estimated progress of work and when the revenue is not probable of a significant reversal. Advisory costs are recognized as incurred in the income statements upon the conversion of employee share-based awards instead of additionalpaid-in capital. The impact of the income tax consequences upon conversion of the awards may be either a benefit or a provision. Conversion of employee share-based awards to Firm shares will primarily occur in the first quarter of each year. The impact of recognizing excess tax benefits upon conversion of awards in the quarterrelevant non-compensation expense line items, including when reimbursed.

•

Commissions and Fees

Commission and fee revenues result from transaction-based arrangements in which the accounting update was adopted (three months ended March 31, 2017) wasclient is charged a $112 million benefitfee for the execution of transactions. Such revenues primarily arise from transactions in equity securities; services related to Provision for income taxes. The classificationsales and trading activities; and sales of cash flows from excess tax benefits was moved frommutual funds, alternative funds, futures, insurance products and options. Commission and fee revenues are recognized on trade date when the financing sectionperformance obligation is satisfied.

•

Asset Management Revenues

Asset management, distribution and administration fees are generally based on related asset levels being managed, such as the AUM of a customer’s account, or the net asset value of a fund. These fees are generally recognized when services are performed and the fees become known. Management fees are reduced by estimated fee waivers and expense caps, if any, provided 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. The Firm has elected to account for forfeitures on an actual basis as they occur. This change is required to be applied using a modified retrospective approach, and upon adoption, the Firm recorded a cumulativecatch-up adjustment, decreasing Retained earnings by approximately $30 million net of tax, increasing Additionalpaid-in capital by approximately $45 million and increasing deferred tax assets by approximately $15 million.

Goodwill

The Firm completed its annual goodwill impairment testing as of July 1, 2017. 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.customer.

 

 

September 2017March 2018 Form 10-Q  5046  

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

Performance-based fees not in the form of carried interest are recorded when the annual performance target is met and the revenue is not probable of a significant reversal. Performance-based fees in the form of carried interest are considered equity method investments and are therefore outside the scope of these policies for revenue from contracts with customers.

Sales commissions paid by the Firm in connection with the sale of certain classes of shares of its open-end mutual fund products are accounted for as deferred commission assets and amortized to expense over the expected life of the contract. The Firm periodically tests deferred commission assets for recoverability based on cash flows expected to be received in future periods. Other asset management and distribution costs are recognized as incurred in the relevant non-compensation expense line items.

•

Other Items

Revenue from commodities-related contracts is recognized as the promised goods or services are delivered to the customer.

Receivables from contracts with customers are recognized in Customer and other receivables in the balance sheets when the underlying performance obligations have been satisfied and the Firm has the right per the contract to bill the customer. Contract assets are recognized in Other assets when the Firm has satisfied its performance obligations, but customer payment is conditional. Contract liabilities are recognized in Other liabilities when the Firm has collected payment from a customer based on the terms of the contract, but the underlying performance obligations are not yet satisfied.

For contracts with a term less than one year, incremental costs to obtain the contract are expensed as incurred. Revenues are not discounted when payment is expected within one year.

The Firm presents, net within revenues, all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Firm from a customer.

Derivatives and Hedging–Targeted Improvements to Accounting for Hedging Activities

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 also results in simplification of the application of hedge accounting related to the assessment of hedge effectiveness.

The Firm early adopted this accounting update in the first quarter of 2018. Upon adoption, the Firm recorded a cumulative catch-up adjustment, decreasing Retained earnings by $99 million, net of tax. This adjustment represents the cumulative effect of applying the new rules from the inception of certain fair value hedges of the interest rate risk of our borrowings, in particular the provision allowing only the benchmark rate component of coupon cash flows to be hedged.

Effective January 1, 2018, in accordance with this adoption, the Firm has updated its accounting policies to permit the hedged item in a fair value hedge of interest rate risk to be defined as including only the benchmark rate component of contractual coupon cash flows, and to allow for hedging part of the contractual term of the hedged instrument. The accounting policy also requires the entire gain or loss from revaluing hedges of net investments in foreign operations at the spot rate to be reported within AOCI.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

This accounting update, which the Firm elected to early adopt as of January 1, 2018, allows companies to reclassify from AOCI to Retained earnings the stranded tax effects associated with enactment of the Tax Act on December 22, 2017. These stranded tax effects resulted from the requirement to reflect the total amount of the remeasurement of and other adjustments to deferred tax assets and liabilities in 2017 income from continuing operations, regardless of whether the deferred taxes were originally recorded in AOCI. Accordingly, as of January 1, 2018, the Firm recorded a net increase to Retained earnings as a result of the reclassification of $443 million of such stranded tax effects previously recorded in AOCI, which were primarily the result of the remeasurement of deferred tax assets and liabilities associated with the change in tax rates.

Aside from the above treatment related to the Tax Act, the Firm releases stranded tax effects from AOCI into earnings once the related category of instruments or transactions giving rise to these effects no longer exists. For further detail on the tax effects reclassified, refer to Note 14 to the financial statements.

47March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

 

3. Fair Values

Fair Value Measurement

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 March 31, 2018 
$ in millions Level 1  Level 2  Level 3  Netting1  Total 

Assets at fair value

     

Trading assets:

     

U.S. Treasury and agency securities

 $22,675  $23,430  $—  $—  $46,105 

Other sovereign government obligations

  18,185   9,371   7   —   27,563 

State and municipal securities

  —   3,235   2   —   3,237 

MABS

  —   1,799   342   —   2,141 

Loans and lending commitments2

  —   4,865   8,128   —   12,993 

Corporate and other debt

  —   21,392   814   —   22,206 

Corporate equities3

  120,280   494   233   —   121,007 

Derivative and other contracts:

 

 

Interest rate

  989   176,030   1,250   —   178,269 

Credit

  —   6,971   362   —   7,333 

Foreign exchange

  45   53,504   29   —   53,578 

Equity

  1,165   44,506   3,871   —   49,542 

Commodity and other

  383   6,908   4,576   —   11,867 

Netting1

  (1,665)   (216,759)   (1,581)   (47,436)   (267,441) 

Total derivative and other contracts

  917   71,160   8,507   (47,436)   33,148 

Investments4

  482   372   1,012   —   1,866 

Physical commodities

  —   205   —   —   205 

Total trading assets4

  162,539   136,323   19,045   (47,436)   270,471 

Investment securities— AFS

  29,979   26,770   —   —   56,749 

Intangible assets

  —   3   —   —   3 

Total assets at fair value

 $192,518  $163,096  $19,045  $(47,436)  $327,223 

 

  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 March 31, 2018 
$ in millions Level 1  Level 2  Level 3  Netting1  Total 

Liabilities at fair value

     

Deposits

 $—  $198  $44  $—  $242 

Trading liabilities:

     

U.S. Treasury and agency securities

  20,182   32   —   —   20,214 

Other sovereign government obligations

  24,281   3,890   3   —   28,174 

Corporate and other debt

  —   7,886   4   —   7,890 

Corporate equities3

  56,667   60   32   —   56,759 

Derivative and other contracts:

 

 

Interest rate

  1,043   159,538   580   —   161,161 

Credit

  —   7,456   392   —   7,848 

Foreign exchange

  31   53,408   62   —   53,501 

Equity

  1,054   46,616   2,856   —   50,526 

Commodity and other

  543   5,680   2,916   —   9,139 

Netting1

  (1,665)   (216,759)   (1,581)   (36,184)   (256,189) 

Total derivative and other contracts

  1,006   55,939   5,225   (36,184)   25,986 

Total trading liabilities

  102,136   67,807   5,264   (36,184)   139,023 

Securities sold under agreements to repurchase

  —   792   —   —   792 

Other secured financings

  —   3,203   220   —   3,423 

Borrowings

  —   43,907   3,626   —   47,533 

Total liabilities at fair value

 $102,136  $115,907  $9,154  $(36,184)  $191,013 
 

 

March 2018 Form 10-Q  5148  September 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

  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, 2017 
$ in millions Level 1  Level 2  Level 3  Netting1  Total 

Assets at fair value

     

Trading assets:

     

U.S. Treasury and agency securities

 $22,077  $26,888  $—  $—  $48,965 

Other sovereign government obligations

  20,234   7,825   1   —   28,060 

State and municipal securities

  —   3,592   8   —   3,600 

MABS

  —   2,364   423   —   2,787 

Loans and lending commitments2

  —   4,791   5,945   —   10,736 

Corporate and other debt

  —   16,837   701   —   17,538 

Corporate equities3

  149,697   492   166   —   150,355 

Derivative and other contracts:

 

 

Interest rate

  472   178,704   1,763   —   180,939 

Credit

  —   7,602   420   —   8,022 

Foreign exchange

  58   53,724   15   —   53,797 

Equity

  1,101   40,359   3,530   —   44,990 

Commodity and other

  1,126   5,390   4,147   —   10,663 

Netting1

  (2,088)   (216,764)   (1,575)   (47,171)   (267,598) 

Total derivative and other contracts

  669   69,015   8,300   (47,171)   30,813 

Investments4

  297   523   1,020   —   1,840 

Physical commodities

  —   1,024   —   —   1,024 

Total trading assets4

  192,974   133,351   16,564   (47,171)   295,718 

Investment securities— AFS

  27,522   27,681   —   —   55,203 

Intangible assets

  —   3   —   —   3 

Total assets at fair value

 $220,496  $161,035  $16,564  $(47,171)  $350,924 
  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  
  At December 31, 2017 
$ in millions Level 1  Level 2  Level 3  Netting1  Total 

Liabilities at fair value

     

Deposits

 $—  $157  $47  $—  $204 

Trading liabilities:

     

U.S. Treasury and agency securities

  17,802   24   —   —   17,826 

Other sovereign government obligations

  24,857   2,016   —   —   26,873 

Corporate and other debt

  —   7,141   3   —   7,144 

Corporate equities3

  52,653   82   22   —   52,757 

Derivative and other contracts:

 

 

Interest rate

  364   162,239   545   —   163,148 

Credit

  —   8,166   379   —   8,545 

Foreign exchange

  23   55,118   127   —   55,268 

Equity

  1,001   44,666   2,322   —   47,989 

Commodity and other

  1,032   5,156   2,701   —   8,889 

Netting1

  (2,088)   (216,764)   (1,575)   (36,717)   (257,144) 

Total derivative and other contracts

  332   58,581   4,499   (36,717)   26,695 

Total trading liabilities

  95,644   67,844   4,524   (36,717)   131,295 

Securities sold under agreements to repurchase

  —   650   150   —   800 

Other secured financings

  —   3,624   239   —   3,863 

Borrowings

  —   43,928   2,984   —   46,912 

Total liabilities at fair value

 $95,644  $116,203  $7,944  $(36,717)  $183,074 

MABS—Mortgage- and asset-backed securities

AFS—Available for sale

CDO—Collateralized debt obligations, including collateralized loan obligations
MABS—Mortgage-

and asset-backed securities

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.

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 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 Value of Investments Measured at NAV”“Measured Based on Net Asset Value” herein.

Loans and Lending Commitments at Fair Value

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  

$ in millions  At
March 31, 2018		   At
December 31, 2017		 

Corporate

  $9,346   $8,358 

Residential real estate

   706    799 

Wholesale real estate

   2,941    1,579 

Total

  $12,993   $10,736 
 

 

September 2017 Form 10-Q  5249  March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

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  

Unsettled Fair Value of Futures Contracts1

$ in millions At
March 31, 2018		  At
December 31, 2017		 

Customer and other receivables, net

 $714  $831 

 

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 20162017 Form10-K. During the current year period,quarter, there were no significant updatesrevisions made to the Firm’s valuation techniques.

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

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

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

 

 

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		  Beginning
Balance at
December 31,
2017		 Realized and
Unrealized
Gains
(Losses)		 Purchases1 Sales and
Issuances2		 Settlements1 Net Transfers Ending
Balance at
March 31,
2018		 Unrealized Gains
(Losses)		 

Assets at Fair Value

        

Assets at fair value

        

Trading assets:

                

Other sovereign government obligations

 $100  $2  $86  $(82)  $—  $(2)  $104  $1  $1  $—  $7  $—  $—  $(1)  $7  $— 

Corporate and other debt:

        

State and municipal securities

 9   —   4   (3)   —   —   10   —  8   —   1   (7)   —   —   2   — 

MABS

 264   4   52   (54)   —   8   274   1  423   77   64   (238)   (16)   32   342   2 

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  5,945   28   3,740   (283)   (1,218)   (84)   8,128   (9) 

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 and other debt

 701   1   350   (243)   —   5   814   (1) 

Corporate equities

 500   (9)   24   (268)   —   49   296   —  166   —   166   (132)   —   33   233   (9) 

Net derivative and other contracts3:

                

Interest rate

 970   105   13   (29)   33   (16)   1,076   92  1,218   52   32   (41)   (81)   (510)   670   75 

Credit

 (305)   (33)   7   (9)   35   2   (303)   (33)  41   (107)   —   —   38   (2)   (30)   (109) 

Foreign exchange

 2   (59)   9   —   17   (47)   (78)   (50)  (112)   57   —   (31)   33   20   (33)   (9) 

Equity

 1,093   114   60   (77)   79   (38)   1,231   110  1,208   356   142   (799)   159   (51)   1,015   315 

Commodity and other

 1,509   158   1   (1)   (112)   (21)   1,534   45  1,446   217   13   (6)   (57)   47   1,660   149 

Total net derivative and other contracts

 3,269   285   90   (116)   52   (120)   3,460   164  3,801   575   187   (877)   92   (496)   3,282   421 

Investments

 946   (4)   13   (17)   (16)   3   925   (5)  1,020   44   21   (78)   —   5   1,012   22 

Liabilities at Fair Value

        

Liabilities at fair value

        

Deposits

 $79  $(1)  $—  $32  $—  $(6)  $106  $(1)  $47  $1  $—  $9  $(1)  $(10)  $44  $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) 

Other sovereign government obligations

  —   —   —   3   —   —   3   — 

Corporate and other debt

 3   —   (2)   1   —   2   4   — 

Corporate equities

 28   1   (10)   24   —   10   51   2  22   4   (5)   11   —   8   32   4 

Securities sold under agreements to repurchase

 148   (1)   —   —   —   —   149   (1)  150   —   —   —   —   (150)   —   — 

Other secured financings

 244   (5)   —   2   (1)   —   250   (5)  239   13   —   4   (10)   —   220   13 

Long-term borrowings

 2,646   (53)   —   679   (49)   (726)   2,603   (47) 

Borrowings

 2,984   102   —   640   (83)   187   3,626   99 

 

1.

Loan originations and consolidations of VIEs are included in purchasesPurchases and deconsolidations of VIEs are included in settlements.Settlements.

2.

Amounts related to entering into Net derivativesderivative and other contracts, Deposits, Short-term borrowings, Other secured financings and Long-term borrowingsBorrowings 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. Amounts are presented before counterparty netting.

 

March 2018 Form 10-Q  5350  September 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

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

  Beginning
Balance at
December 31,
2016		 Realized and
Unrealized
Gains
(Losses)		 Purchases1 Sales and
Issuances2		 Settlements1 Net Transfers Ending
Balance at
March 31,
2017		 Unrealized Gains
(Losses)		 

Assets at Fair Value

        

Assets at fair value

        

Trading assets:

                

U.S. Treasury and agency securities

 $20  $—  $—  $(18)  $—  $6  $8  $—  $74  $—  $42  $(241)  $—  $167  $42  $— 

Other sovereign government obligations

 2   —  6  (1)   —  5  12   —  6   —  61  (2)   —   —  65   — 

Corporate and other debt:

        

State and municipal securities

 10  1   —  (7)   —   —  4   —  250   —  2  (2)   —  (195)  55   — 

MABS

 355  (7)  74  (156)   —  (2)  264  (15)  217  7  39  (56)  (11)  20  216  (1) 

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)  5,122  53  757  (555)  (985)  87  4,479  39 

Other debt

 528   —  191  (212)   —  (261)  246   — 

Total corporate and other debt

 6,696  (67)  795  (642)  (733)  (1,096)  4,953  (72) 

Corporate and other debt

 475  21  262  (142)  (1)  102  717  3 

Corporate equities

 572  (28)  43  (36)   —  (214)  337  (26)  446  (1)  41  (105)   —  (71)  310  3 

Net derivative and other contracts3:

                

Interest rate

 (235)  (60)  3  (15)  11  337  41  (45)  420  (114)  46  (24)  16  (46)  298  (127) 

Credit

 (1,114)  147   —   —  2  82  (883)  147  (373)  (25)  6  (5)  41  5  (351)  (33) 

Foreign exchange

 (1)  (27)   —   —  (42)  (37)  (107)  (27)  (43)  (36)  1   —  11  (4)  (71)  (20) 

Equity

 (1,473)  220  31  (39)  567  834  140  239  184  (144)  83  (121)  231  (16)  217  (81) 

Commodity and other

 1,287  269   —  (14)  (170)  (78)  1,294  104  1,600  127  6  (28)  (69)  (133)  1,503  34 

Total net derivative and other contracts

 (1,536)  549  34  (68)  368  1,138  485  418  1,788  (192)  142  (178)  230  (194)  1,596  (227) 

Investments

 974  (41)  2  (8)  (27)  36  936  (36)  958  8  62  (3)  (66)  2  961  8 

Liabilities at Fair Value

        

Liabilities at fair value

        

Deposits

 $30  $1  $—  $5  $—  $(3)  $31  $1  $42  $(1)  $—  $13  $—  $—  $56  $(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 and other debt

 36  (1)  (119)  101   —  17  36  (1) 

Corporate equities

 26  2  (2)  3   —  (5)  20   —  35  12  (68)  26   —  21  2   — 

Securities sold under agreements to repurchase

 150  1   —   —   —   —  149  2  149  1   —   —   —   —  148  1 

Other secured financings

 441  (11)   —   —  (2)   —  450  (11)  434  (19)   —  13  (220)  (43)  203  (12) 

Long-term borrowings

 1,929  (88)   —  193  (147)  (21)  2,042  (87) 

Borrowings

 2,014  (59)   —  270  (165)  (86)  2,092  (58) 

 

1.

Loan originations and consolidations of VIEs are included in purchasesPurchases and deconsolidations of VIEs are included in settlements.Settlements.

2.

Amounts related to entering into Net derivativesderivative and other contracts, Deposits, Short-term borrowings, Other secured financings and Long-term borrowingsBorrowings 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 Amounts 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.presented before counterparty netting.

Significant Unobservable Inputs Used in Recurring and Nonrecurring Level 3 Fair Value Measurements

The following disclosures provide information on the valuation techniques, significant unobservable inputs, and their ranges and averages for each major category of assets and liabilities measured at fair value on a recurring and nonrecurring basis with a significant Level 3 balance. The level of aggregation and breadth of products cause the range of inputs to be wide and not evenly distributed across the inventory. Further, the range of unobservable inputs may differ across firms in the financial services industry because of diversity in the types of products included in each firm’s inventory. 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 20162017 Form10-K. There are no predictable relationships between multiple significant unobservable inputs attributable to a given valuation technique. A single amount is disclosed when there is no significant difference between the minimum, maximum and average (weighted average or simple average / average/median).

 

September 201751March 2018 Form 10-Q

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, except inputs   At March 31, 2018  At December 31, 2017

Recurring Fair Value Measurement

  

Assets at fair value

  

MABS ($342and $423)

     

Comparable pricing:

 Comparable bond price  0 to 95 points (41 points)  0 to 95 points (26 points)

Loans and lending commitments ($8,128and $5,945)

    

Margin loan model:

 Discount rate  0% to 3% (1%)  0% to 3% (1%)
  Volatility skew  9% to 67% (28%)  7% to 41% (22%)

Comparable pricing:

 Comparable loan price  55 to 101 points (97 points)  55 to 102 points (95 points)

Corporate and other debt ($814 and $701)

    

Comparable pricing:

 Comparable bond price  3 to 100 points (70 points)  3 to 134 points (59 points)

Discounted cash flow:

 Recovery rate  16%  6% to 36% (27%)
  Discount rate  7% to 20% (15%)  7% to 20% (14%)

Option model:

 At the money volatility  15% to 52% (33%)  17% to 52% (52%)

Corporate equities ($233and $166)

    

Comparable pricing:

 Comparable equity price  100%  100%

Net derivative and other contracts2:

    

Interest rate ($670 and $1,218)

    

Option model:

 Interest rate volatility skew  29% to 106% (40% / 43%)  31% to 97% (41% / 47%)
  Inflation volatility  23% to 61% (44% / 41%)  23% to 63% (44% / 41%)
  Interest rate curve  1% to 2% (2% / 2%)  2%

Credit ($(30)and $41)

    

Comparable pricing:

 Cash synthetic basis  10 to 11 points (11 points)  12 to 13 points (12 points)
  Comparable bond price  0 to 75 points (25 points)  0 to 75 points (25 points)

Correlation model:

 Credit correlation  39% to 67% (50%)  38% to 100% (48%)

Foreign exchange3 ($(33)and $(112))

    

Option model:

 Interest rate - Foreign exchange correlation  55% to 57% (56% / 56%)  54% to 57% (56% / 56%)
  Interest rate volatility skew  29% to 106% (40% / 43%)  31% to 97% (41% / 47%)
  Contingency probability  90% to 95% (93% / 93%)  95% to 100% (96% / 95%)

Equity3 ($1,015 and $1,208)

    

Option model:

 At the money volatility  14% to 55% (35%)  7% to 54% (32%)
  Volatility skew  -3% to 0% (-1%)  -5% to 0% (-1%)
  Equity - Equity correlation  5% to 99% (76%)  5% to 99% (76%)
  Equity - Foreign exchange correlation  -62% to 55% (-42%)  -55% to 40% (36%)
  Equity - Interest rate correlation  -7% to 48% (18% / 14%)  -7% to 49% (18% / 20%)

Commodity and other ($1,660and $1,446)

    

Option model:

 Forward power price  $2 to $212 ($30) per MWh  $4 to $102 ($31) per MWh
  Commodity volatility  5% to 167% (14%)  7% to 205% (17%)
  Cross-commodity correlation  5% to 99% (92%)  5% to 99% (92%)

Investments ($1,012and $1,020)

    

Discounted cash flow:

 WACC  9% to 15% (9%)  8% to 15% (9%)
  Exit multiple  8 to 10 times (10 times)  8 to 11 times (10 times)

Market approach:

 EBITDA multiple  6 to 24 times (11 times)  6 to 25 times (11 times)

Comparable pricing:

 Comparable equity price  35% to 100% (93%)  45% to 100% (92%)

March 2018 Form 10-Q  5652  

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

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%) 
  

Predominant Valuation Techniques/

    Significant Unobservable Inputs

  

Range (Weighted Average or Simple Average/Median)1

$ in millions, except inputs   At March 31, 2018  At December 31, 2017

Liabilities at Fair Value

     

Securities sold under agreements to repurchase ($— and $150)

    

Discounted cash flow:

 Funding spread  N/A  107 to 126 bps (120 bps)

Other secured financings ($220 and $239)

    

Discounted cash flow:

 Funding spread  54 to 93 bps (74 bps)  39 to 76 bps (57 bps)

Option model:

 Volatility skew  -1%  -1%
  At the money volatility  10% to 40% (26%)  10% to 40% (26%)

Borrowings ($3,626and $2,984)

    

Option model:

 At the money volatility  5% to 33% (23%)  5% to 35% (22%)
  Volatility skew  -2% to 0% (0%)  -2% to 0% (0%)
  Equity - Equity correlation  45% to 95% (81%)  39% to 95% (86%)
  Equity - Foreign exchange correlation  -43% to 30% (-26%)  -55% to 10% (-18%)

Nonrecurring Fair Value Measurement

    

Assets at fair value

     

Loans ($1,057and $924)

     

Corporate loan model:

 Credit spread  94 to 432 bps (206 bps)  93 to 563 bps (239 bps)

Expected recovery:

 Asset coverage  95% to 99% (95%)  95% to 99% (95%)

 

Points—Percentage
57September 2017 Form 10-Q

of par

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

For a description of the Firm’s significant unobservable inputs and related sensitivity, see Note 3 to the consolidated financial statements in the 20162017 Form10-K. The following During the current quarter, there were no significant revisions made to the Firm’s significant unobservable inputs were added during the current year period.inputs.

•

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) to the contingency probability for an asset would result in a higher (lower) fair value.

•

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.

FairMeasured Based on Net Asset Value of Investments Measured at NAV

For a description of the Firm’s investments in private equity funds, real estate funds and hedge funds, which are measured at fair value based on NAV, see Note 3 to the consolidated financial statements in the 20162017 Form10-K.

Investments in Certain Funds Measured at NAV per Share

 

  At September 30, 2017 At December 31, 2016  At March 31, 2018 At December 31, 2017 
$ in millions  Fair Value Commitment Fair Value Commitment    Carrying
Value		 Commitment Carrying
Value		 Commitment 

Private equity

 $1,580  $359  $1,566  $335    $1,678  $304  $1,674  $308 

Real estate

  885   168  1,103  136     796   181  800  183 

Hedge1

  87   4  147  4     99   4  90  4 

Total

 $2,552  $531  $2,816  $475    $2,573  $489  $2,564  $495 

 

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 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 investments are accounted for under the equity method or fair value.

See Note 11 for information regarding general partner guarantees, which include potential obligations to return performance fee distributions previously received. See Note 19 for information regarding related performance fees at risk of reversal, including performance fees in the form of carried interest.

Nonredeemable Funds by Contractual Maturity

 

 Fair Value at September 30, 2017   Carrying Value at March 31, 2018 
$ in millions     Private Equity           Real Estate           Private Equity           Real Estate     

Less than 5 years

 $408   $77   $430   $60 

5-10 years

  1,005    490    1,054    527 

Over 10 years

  167    318    194    209 

Total

 $1,580   $885   $1,678   $796 

Fair Value Option

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

53March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Earnings Impact of Instruments 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) 
$ in millions  Trading
Revenues		   Interest
Income
(Expense)		   Net
Revenues		 

Three Months Ended March 31, 2018

 

          

Borrowings

  $26   $(102)   $(76) 

Three Months Ended March 31, 2017

 

Borrowings

  $(1,625)   $(119)   $(1,744) 

Gains (losses) are mainly attributable to changes in foreign currency rates or interest rates or movements in the reference price or index for short-term and long-term borrowings before the impact of related hedges.index.

The amounts in the previous table are included within Net revenues and do not reflect any gains or losses on related hedging instruments. In addition

Gains (Losses) Due to the amountsChanges 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.Instrument-Specific Credit Risk

  Three Months Ended March 31, 
  2018  2017 
$ in millions Trading
Revenues		      OCI      Trading
Revenues		      OCI     

Borrowings

 $(15)  $593  $(4)  $14 

Securities sold under agreements to repurchase

  —   2   —   (3) 

Loans and other debt1

  81   —   (3)   — 

Lending commitments2

  2   —   —   — 

$ in millions  

At

March 31,

2018

   

At

December 31,
2017

 

Cumulative pre-tax DVA gain (loss) recognized in AOCI

  $(1,236)   $(1,831) 

 

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.

3.2.

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

   

At

March 31,
2018

   At
December 31,
2017		 

Business Unit Responsible for Risk Management

Business Unit Responsible for Risk Management

 

Business Unit Responsible for Risk Management

 

Equity

  $25,300   $21,066    $25,181   $25,903 

Interest rates

   19,822    16,051     19,744    19,230 

Foreign exchange

   782    1,114     622    666 

Credit

   753    647     855    815 

Commodities

   232    264     1,131    298 

Total

  $46,889   $39,142    $47,533   $46,912 

Excess of Contractual Principal Amount Over Fair Value

 

$ in millions  

At

September 30,

2017

   

At

December 31,

2016

   

At

March 31,
2018

   At
December 31,
2017		 

Loans and other debt1

  $12,911   $13,495    $14,843   $13,481 

Loans 90 or more days past due and/or on nonaccrual status1

   11,116    11,502     11,834    11,253 

Short-term and long-term borrowings2

   906    720  

Borrowings2

   897    71 

 

1.

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 borrowingsBorrowings 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

   

At

March 31,
2018

   At
December 31,
2017		 

Nonaccrual loans

  $1,429   $1,536    $1,315   $1,240 

Nonaccrual loans 90 or more
days past due

  $760   $787    $654   $779 

The previous tables excludenon-recourse debt from consolidated VIEs, liabilities related to failed sales of financial assets, pledged commodities and other liabilities that have specified assets attributable to them.

Measured at Fair Value on a Nonrecurring Basis

Carrying and Fair Values

   At March 31, 2018 
   Fair Value 
$ in millions  Level 2   Level 31   Total 

Assets

      

Loans

  $1,352   $1,057   $2,409 

Other assets—Premises, equipment and software

   —    —    — 

Total

  $1,352   $1,057   $2,409 

Liabilities

      

Other liabilities and accrued expenses—Lending commitments

  $173   $40   $213 

Total

  $173   $40   $213 
 

 

September 2017March 2018 Form 10-Q  6054  

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

   At December 31, 2017 
   Fair Value 
$ in millions  Level 2   Level 31   Total 

Assets

      

Loans

  $1,394   $924   $2,318 

Other assets—Other investments

   —    144    144 

Total

  $1,394   $1,068   $2,462 

Liabilities

      

Other liabilities and accrued expenses—Lending commitments

  $158   $38   $196 

Total

  $158   $38   $196 

Assets and Liabilities Measured at

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 on a Nonrecurring Basis

Gains (Losses)Remeasurements1

 

  Three Months Ended
September 30,		 Nine Months Ended
September 30,		   Three Months Ended
March 31,		 
$ in millions  2017 2016 2017 2016   2018   2017 

Assets

         

Loans2

  $—  $111  $41  $41     $8   $32 

Other Assets—Other
investments3

   (6)  (3)   (6)  (44)  

Other assets—Premises,
equipment and
software costs4

   (1)  (29)   (7)  (56)  

Intangible assets5

   —  (2)   —  (2)  

Other assets—Premises, equipment and software3

   (8)    (5) 

Total

  $(7)  $77  $28  $(61)    $—   $27 

Liabilities

         

Other liabilities and
accrued expenses—
Lending commitments2

  $4  $52  $64  $98   

Other liabilities and accrued expenses—Lending commitments2

  $6   $11 

Total

  $4  $52  $64  $        98     $6   $11 

 

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 swapCDS 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 
  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 
  At March 31, 2018 
  Carrying  Fair Value 
$ in millions Value  Level 1  Level 2  Level 3  Total 

Financial Assets

     

Cash and cash equivalents:

 

    

Cash and due from banks

 $29,073  $  29,073  $—  $—  $29,073 

Interest bearing deposits with banks

  22,980   22,980   —   —   22,980 

Restricted cash

  35,291   35,291   —   —   35,291 

Investment securities—HTM

  23,892   11,327   11,270   322   22,919 

Securities purchased under agreements to resell

  80,246   —   80,175   16   80,191 

Securities borrowed

  135,835   —   135,781   —   135,781 

Customer and other receivables1

  61,017   —   57,405   3,433   60,838 

Loans2

  109,135   —   25,687   83,146   108,833 

Other assets

  438   —   438   —   438 

Financial Liabilities

     

Deposits

 $  160,182  $—  $  160,172  $—  $  160,172 

Securities sold under agreements to repurchase

  50,783   —   50,763   1   50,764 

Securities loaned

  13,556   —   13,623   —   13,623 

Other secured financings

  6,852   —   6,265   607   6,872 

Customer and other payables1

  191,332   —   191,332   —   191,332 

Borrowings

  147,431   —   151,664   27   151,691 

 

61September 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO
  At December 31, 2017 
  Carrying  Fair Value 
$ in millions Value  Level 1  Level 2  Level 3  Total 

Financial Assets

     

Cash and cash equivalents:

 

    

Cash and due from banks

 $24,816  $24,816  $—  $—  $24,816 

Interest bearing deposits with banks

  21,348   21,348   —   —   21,348 

Restricted cash

  34,231   34,231   —   —   34,231 

Investment securities—HTM

  23,599   11,119   11,673   289   23,081 

Securities purchased under agreements to resell

  84,258   —   78,239   5,978   84,217 

Securities borrowed

  124,010   —   124,018   1   124,019 

Customer and other receivables1

  51,269   —   47,159   3,984   51,143 

Loans2

  104,126   —   21,290     82,928   104,218 

Other assets

  433   —   433   —   433 

Financial Liabilities

     

Deposits

 $  159,232  $—  $  159,232  $—  $  159,232 

Securities sold under agreements to repurchase

  55,624   —   51,752   3,867   55,619 

Securities loaned

  13,592   —   13,191   401   13,592 

Other secured financings

  7,408   —   5,987   1,431   7,418 

Customer and other payables1

  188,464   —   188,464   —   188,464 

Borrowings

  145,670   —   151,692   30   151,722 

 

  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.

55March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

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 
   

Commitment

Amount1

   Fair Value 
$ in millions    Level 2   Level 3   Total 

March 31, 2018

  $117,582   $  643   $  185   $    828 

December 31, 2017

   100,151    620    174    794 

 

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,quarter, there were no significant updates made to the Firm’s valuation techniques for financial instruments not measured at fair value.

 

 

September 2017March 2018 Form 10-Q  6256  

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

4. Derivative Instruments and Hedging Activities

Derivative Fair Values

Derivative Fair Values 

At March 31, 2018

 

  Assets 
$ in millions 

Bilateral

OTC

  

Cleared

OTC

  Exchange-
Traded		  Total 

Designated as accounting hedges

 

 

Interest rate contracts

 $804  $1  $—  $805 

Foreign exchange contracts

  43   7   —   50 

Total

  847   8   —   855 

Not designated as accounting hedges

 

 

Interest rate contracts

  175,200   1,742   522   177,464 

Credit contracts

  5,352   1,981   —   7,333 

Foreign exchange contracts

  52,711   764   53   53,528 

Equity contracts

  25,320   —   24,222   49,542 

Commodity and other contracts

  10,295   —   1,572   11,867 

Total

  268,878   4,487   26,369   299,734 

Total gross derivatives

 $    269,725  $    4,495  $    26,369  $    300,589 

Amounts offset

 

 

Counterparty netting

  (198,282)   (3,424)   (22,787)   (224,493) 

Cash collateral netting

  (42,284)   (664)   —   (42,948) 

Total in Trading assets

 $29,159  $407  $3,582  $33,148 

Amounts not offset1

 

 

Financial instruments collateral

  (12,646)   —   —   (12,646) 

Other cash collateral

  (20)   —   —   (20) 

Net amounts

 $16,493  $407  $3,582  $20,482 

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

 

 $3,876 

At September 30, 2017

  Liabilities 
$ in millions Bilateral
OTC		  Cleared
OTC		  Exchange-
Traded		  Total 

Designated as accounting hedges

 

 

Interest rate contracts

 $174  $1  $—  $175 

Foreign exchange contracts

  107   22   —   129 

Total

  281   23   —   304 

Not designated as accounting hedges

 

 

Interest rate contracts

  159,276   1,267   443   160,986 

Credit contracts

  5,723   2,125   —   7,848 

Foreign exchange contracts

  52,493   835   44   53,372 

Equity contracts

  26,778   —   23,748   50,526 

Commodity and other contracts

  7,583   —   1,556   9,139 

Total

  251,853   4,227   25,791   281,871 

Total gross derivatives

 $    252,134  $    4,250  $25,791  $    282,175 

Amounts offset

 

 

Counterparty netting

  (198,282)   (3,424)   (22,787)   (224,493) 

Cash collateral netting

  (31,280)   (416)   —   (31,696) 

Total in Trading liabilities

 $22,572  $410  $3,004  $25,986 

Amounts not offset1

 

 

Financial instruments collateral

  (4,966)   —   (374)   (5,340) 

Other cash collateral

  (38)   (26)   —   (64) 

Net amounts

 $17,568  $384  $2,630  $20,582 

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

 

 $4,366 

 

At December 31, 2017

 
  Assets 
$ in millions Bilateral
OTC		  Cleared
OTC		  Exchange-
Traded		  Total 

Designated as accounting hedges

 

 

Interest rate contracts

 $1,057  $—  $—  $1,057 

Foreign exchange contracts

  57   6   —   63 

Total

  1,114   6   —   1,120 

Not designated as accounting hedges

 

 

Interest rate contracts

  177,948   1,700   234   179,882 

Credit contracts

  5,740   2,282   —   8,022 

Foreign exchange contracts

  52,878   798   58   53,734 

Equity contracts

  24,452   —   20,538   44,990 

Commodity and other contracts

  8,861   —   1,802   10,663 

Total

  269,879   4,780   22,632   297,291 

Total gross derivatives

 $    270,993  $    4,786  $    22,632  $    298,411 

Amounts offset

 

 

Counterparty netting

  (201,051)   (3,856)   (19,861)   (224,768) 

Cash collateral netting

  (42,141)   (689)   —   (42,830) 

Total in Trading assets

 $27,801  $241  $2,771  $30,813 

Amounts not offset1

 

 

Financial instruments collateral

  (12,363)   —   —   (12,363) 

Other cash collateral

  (4)   —   —   (4) 

Net amounts

 $15,434  $241  $2,771  $18,446 

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

 

 $3,154 

 

  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 

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  
  Liabilities 
$ in millions Bilateral
OTC		  Cleared
OTC		  Exchange-
Traded		  Total 

Designated as accounting hedges

 

 

Interest rate contracts

 $67  $1  $—  $68 

Foreign exchange contracts

  72   57   —   129 

Total

  139   58   —   197 

Not designated as accounting hedges

 

 

Interest rate contracts

  161,758   1,178   144   163,080 

Credit contracts

  6,273   2,272   —   8,545 

Foreign exchange contracts

  54,191   925   23   55,139 

Equity contracts

  27,993   —   19,996   47,989 

Commodity and other contracts

  7,117   —   1,772   8,889 

Total

  257,332   4,375   21,935   283,642 

Total gross derivatives

 $    257,471  $    4,433  $    21,935  $    283,839 

Amounts offset

 

 

Counterparty netting

  (201,051)   (3,856)   (19,861)   (224,768) 

Cash collateral netting

  (31,892)   (484)   —   (32,376) 

Total in Trading liabilities

 $24,528  $93  $2,074  $26,695 

Amounts not offset1

 

 

Financial instruments collateral

  (5,523)   —   (412)   (5,935) 

Other cash collateral

  (18)   (14)   —   (32) 

Net amounts

 $18,987  $79  $1,662  $20,728 

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

 

 $3,751 

 

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.

57March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

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

Derivative Notionals

At September 30, 2017

At March 31, 2018

 

  Assets 
$ in billions Bilateral
OTC		  Cleared
OTC		  Exchange-
Traded		  Total 

Designated as accounting hedges

 

 

Interest rate contracts

 $20  $26  $—  $46 

Foreign exchange contracts

  5   —   —   5 

Total

  25   26   —   51 

Not designated as accounting hedges

 

 

Interest rate contracts

  4,449   7,472   3,477   15,398 

Credit contracts

  165   90   —   255 

Foreign exchange contracts

  2,223   89   8   2,320 

Equity contracts

  402   —   383   785 

Commodity and other contracts

  94   —   61   155 

Total

  7,333   7,651   3,929   18,913 

Total gross derivatives

 $    7,358  $    7,677  $3,929  $    18,964 

 

  Assets  Liabilities 

$ in billions

  Bilateral
OTC		   Cleared
OTC		   Exchange-
Traded		   Total  Bilateral
OTC		 Cleared
OTC		 Exchange-
Traded		 Total 

Designated as accounting hedges

Designated as accounting hedges

 

Designated as accounting hedges

 

 

Interest rate contracts

  $24   $44   $        —   $68  $2  $133  $—  $135 

Foreign exchange contracts

   6    1    —    7   4   2   —   6 

Total

   30    45    —    75   6   135   —   141 

Not designated as accounting hedges

Not designated as accounting hedges

 

Not designated as accounting hedges

 

 

Interest rate contracts

   3,952    6,675    2,880    13,507   4,614   7,074   1,181   12,869 

Credit contracts

   242    110    —    352   188   83   —   271 

Foreign exchange contracts

   2,224    77    30    2,331   2,184   98   14   2,296 

Equity contracts

   388            —    323    711   425   —   474   899 

Commodity and other contracts

   85    —    80    165   74   —   53   127 

Total

   6,891    6,862    3,313    17,066   7,485   7,255   1,722   16,462 

Total gross derivatives

  $6,921   $6,907   $3,313   $17,141  $    7,491  $    7,390  $  1,722  $    16,603 

 

At December 31, 2017

At December 31, 2017

 

  Liabilities  Assets 

$ in billions

  Bilateral
OTC		   Cleared
OTC		   Exchange-
Traded		   Total  Bilateral
OTC		 Cleared
OTC		 Exchange-
Traded		 Total 

Designated as accounting hedges

Designated as accounting hedges

 

Designated as accounting hedges

 

 

Interest rate contracts

  $2   $97   $—   $99  $20  $46  $—  $66 

Foreign exchange contracts

   3    1    —            4  4   —   —  4 

Total

   5    98    —    103  24  46   —  70 

Not designated as accounting hedges

Not designated as accounting hedges

 

Not designated as accounting hedges

 

 

Interest rate contracts

   3,919    6,749    1,028    11,696  3,999  6,458  2,714  13,171 

Credit contracts

   271    92            —    363  194  100   —  294 

Foreign exchange contracts

   2,137    74    14    2,225  1,960  67  9  2,036 

Equity contracts

   409    —    381    790  397   —  334  731 

Commodity and other contracts

   67    —    69    136  86   —  72  158 

Total

   6,803    6,915    1,492    15,210  6,636  6,625  3,129  16,390 

Total gross derivatives

  $6,808   $7,013   $1,492   $15,313  $    6,660  $    6,671  $    3,129  $    16,460 
  Liabilities 
$ in billions Bilateral
OTC		  Cleared
OTC		  Exchange-
Traded		  Total 

Designated as accounting hedges

 

 

Interest rate contracts

 $2  $102  $—  $104 

Foreign exchange contracts

  4   2   —   6 

Total

  6   104   —   110 

Not designated as accounting hedges

 

 

Interest rate contracts

  4,199   6,325   1,089   11,613 

Credit contracts

  226   80   —   306 

Foreign exchange contracts

  2,014   78   51   2,143 

Equity contracts

  394   —   405   799 

Commodity and other contracts

  68   —   61   129 

Total

  6,901   6,483   1,606   14,990 

Total gross derivatives

 $    6,907  $    6,587  $    1,606  $    15,100 

At December 31, 2016The Firm believes that the notional amounts of the derivative contracts generally overstate its exposure.

   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 related to offsetting of certain collateralized transactions, see Note 6. For a discussion of the Firm’s derivative instruments and hedging activities, see Note 4 to the consolidated financial statements in the 20162017 Form10-K.

Gains (Losses) on Accounting Hedges

   Three Months Ended 
   March 31, 
$ in millions  2018   2017 

Fair Value Hedges—Recognized in Interest Expense

 

     

Interest rate contracts

  $(1,841)   $(805) 

Borrowings

           1,852            717 

Net Investment Hedges—Foreign exchange contracts

 

  

Recognized in OCI

  $(148)   $(205) 

Forward points excluded from hedge effectiveness testing—Interest income

   7   $(9) 

Borrowings under 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) 
$ in millions  At March 31,
2018		 

Carrying amount of Borrowings currently or previously hedged

  $107,264 

Basis adjustments included in carrying amount—outstanding hedges

   2,035 

Hedge accounting basis adjustments for Borrowings are primarily related to outstanding hedges.

 

 

September 2017March 2018 Form 10-Q  6458  

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

Gains (Losses) on Net Investment 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 
 Three Months Ended
September 30,		 Nine Months Ended
September 30,		   March 31, 
$ in millions     2017           2016       2017       2016     2018   2017 

Interest rate contracts

 $648   $357  $1,693   $983    $871   $594 

Foreign exchange contracts

  181    170   613    769     261    235 

Equity security and index contracts1

  1,416    1,415   4,875    4,360     1,877    1,641 

Commodity and other contracts

  223    63   522    (61)    435    189 

Credit contracts

  236    604   1,167    1,369     326    576 

Total

 $2,704   $2,609  $8,870   $7,420    $      3,770   $      3,235 

 

1.

Dividend income is included within equity security and index contracts.

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, theThe 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 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  
$ in millions  At
March 31,
2018		   At
December 31,
2017		 

Net derivative liabilities with credit risk-related contingent features

  $        17,213   $20,675 

Collateral posted

   15,244    16,642 

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”).TheRatings. The following table shows the future potential collateral amounts and termination payments that could be called or required by counterparties or exchange and clearing organizations in the event ofone-notch ortwo-notch

downgrade scenarios based on the relevant contractual downgrade triggers.

Incremental Collateral or Termination Payments upon Potential Future Ratings Downgrade

 

$ in millions  At September 30, 20171   At
March 31,
2018		 

One-notch downgrade

  $592   $              618 

Two-notch downgrade

   512    409 

Bilateral downgrade agreements included in the amounts above1

  $910 

 

1.

Amounts include $873 million related to bilateralAmount 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.

Credit Derivatives and Other Credit Contracts

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.

For further information on credit derivatives and other credit contracts, see Note 4 to the consolidated financial statements in the 20162017 Form10-K.

Protection Sold and Purchased with Credit Default SwapsCDS

 

 At March 31, 2018 
  At September 30, 2017  Notional Fair Value (Asset)/Liability 
  Protection Sold Protection Purchased  Protection Protection Protection Protection 

$ in millions

  Notional   

Fair Value
(Asset)/

Liability

 Notional   

Fair Value
(Asset)/

Liability

  Sold Purchased Sold Purchased 

Credit default swaps

       

Single name

  $173,202   $(1,400)  $189,290   $1,803  $133,209  $152,446  $(1,148)  $1,580 

Index and basket

   145,107    (237)   141,565    264   103,531   98,822   (163)   5 

Tranched index and basket

   22,049    (367)   44,193    1,066   12,330   25,506   (276)   517 

Total

  $340,358   $(2,004)  $375,048   $3,133  $    249,070  $    276,774  $(1,587)  $2,102 

Portion of single name and non-tranched index and basket with identical underlying reference obligations

  $315,931    —  $327,959    — 

Single name and non-tranched index and basket with identical underlying reference obligations

 $233,572  $250,376   

  At December 31, 2017 
  Notional  Fair Value (Asset)/Liability 
  Protection  Protection  Protection  Protection 
$ in millions Sold  Purchased  Sold  Purchased 

Single name

 $146,948  $164,773  $(1,277)  $1,658 

Index and basket

  131,073   120,348   (341)   209 

Tranched index and basket

  11,864   24,498   (342)   616 

Total

 $    289,885  $    309,619  $(1,960)  $2,483 

Single name and non-tranched index and basket with identical underlying reference obligations

 $274,473  $281,162   
 

 

  6559  September 2017March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

   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,CDS, a breakdown of credit default swapsCDS 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   At March 31, 2018 
  Maximum Potential Payout/Notional   

Fair Value

(Asset)/

Liability

   Maximum Potential Payout/Notional   Fair Value
(Asset)/
Liability		 
  Years to Maturity     Years to Maturity   
$ in millions  Less than 1   1-3   3-5   Over 5   Total     Less than 1   1-3   3-5   Over 5   Total   

Single name credit default swaps

            

Single name CDS

            

Investment grade

  $46,372   $44,877   $21,662   $11,411   $124,322   $(1,220)   $33,332   $35,927   $17,621   $10,658   $97,538   $(1,124) 

Non-investment grade

   20,527    19,378    6,959    2,016    48,880    (180)    12,994    13,871    6,813    1,993    35,671    (24) 

Total single name credit default swaps

   66,899    64,255    28,621    13,427    173,202    (1,400) 

Index and basket credit default swaps

            

Total single name CDS

  $46,326   $49,798   $24,434   $12,651   $133,209   $(1,148) 

Index and basket CDS

            

Investment grade

   23,097    13,752    28,918    19,124    84,891    (885)   $29,448   $14,049   $16,003   $10,902   $70,402   $(811) 

Non-investment grade

   28,650    7,293    25,129    21,193    82,265    281     5,941    6,139    17,681    15,698    45,459    372 

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) 

Total index and basket CDS

  $35,389   $20,188   $33,684   $26,600   $115,861   $(439) 

Total CDS sold

  $81,715   $69,986   $58,118   $39,251   $249,070   $(1,587) 

Other credit contracts

   14            —              —      135    149    13     —    2    —    127    129    20 

Total credit derivatives and other credit contracts

  $118,660   $85,300   $82,668   $53,879   $340,507   $(1,991)   $81,715   $69,988   $58,118   $39,378   $249,199   $(1,567) 

 

  At December 31, 2016   At December 31, 2017 
  Maximum Potential Payout/Notional   

Fair Value

(Asset)/

Liability

   Maximum Potential Payout/Notional   Fair Value
(Asset)/
Liability		 
  Years to Maturity     Years to Maturity   
$ in millions  Less than 1   1-3   3-5   Over 5   Total     Less than 1   1-3   3-5   Over 5   Total   

Single name credit default swaps

            

Single name CDS

            

Investment grade

  $79,449   $70,796   $34,529   $10,293   $195,067   $(1,060)   $39,721   $42,591   $18,157   $8,872   $109,341   $(1,167) 

Non-investment grade

   34,571    25,820    10,436    1,024    71,851    307     14,213    16,293    6,193    908    37,607    (110) 

Total single name credit default swaps

  $114,020   $96,616   $44,965   $11,317   $266,918   $(753) 

Index and basket credit default swaps

            

Total single name CDS

  $53,934   $58,884   $24,350   $9,780   $146,948   $(1,277) 

Index and basket CDS

            

Investment grade

  $26,530   $21,388   $35,060   $9,096   $92,074   $(846)   $29,046   $15,418   $37,343   $6,807   $88,614   $(1,091) 

Non-investment grade

   26,135    22,983    11,759    9,861    70,738    550     5,246    7,371    32,417    9,289    54,323    408 

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) 

Total index and basket CDS

  $34,292   $22,789   $69,760   $16,096   $142,937   $(683) 

Total CDS sold

  $88,226   $81,673   $94,110   $25,876   $289,885   $(1,960) 

Other credit contracts

   49    6    —    215    270    —     2    —    —    134    136    16 

Total credit derivatives and other credit contracts

  $166,734   $    140,993   $    91,784   $    30,489   $    430,000   $(1,049)   $88,228   $81,673   $94,110   $26,010   $290,021   $(1,944) 

 

September 2017March 2018 Form 10-Q  6660  

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

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  At March 31, 2018 
$ in millions  Amortized
Cost		   Gross
Unrealized
Gains		   Gross
Unrealized
Losses		   Fair
Value		  Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair Value 

AFS debt securities

        

AFS securities

    

U.S. government and agency securities:

            

U.S. Treasury securities

  $24,706   $—   $425   $24,281   $30,032  $—  $833  $    29,199 

U.S. agency securities1

   24,018    42    164    23,896    22,084   32   504   21,612 

Total U.S. government and agency securities

   48,724    42    589    48,177    52,116   32   1,337   50,811 

Corporate and other debt:

            

CMBS:

        

Agency

   1,452    2    42    1,412  

Non-agency

   1,215    4    7    1,212  

Agency CMBS

  1,302   2   59   1,245 

Non-agency CMBS

  857   2   17   842 

Corporate bonds

   1,486    13    7    1,492    1,346   —   28   1,318 

CLO

   434    1    —    435    351   1   —   352 

FFELP student loan ABS2

   2,217    13    8    2,222    2,173   15   7   2,181 

Total corporate and other debt

   6,804    33    64    6,773    6,029   20   111   5,938 

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    58,145   52   1,448   56,749 

HTM securities

            

U.S. government and agency securities:

            

U.S. Treasury securities

   11,501    7    249    11,259    11,817   —   490   11,327 

U.S. agency securities1

   12,384    18    151    12,251    11,747   —   477   11,270 

Total U.S. government and agency securities

   23,885    25    400    23,510    23,564   —   967   22,597 

Corporate and other debt:

            

CMBS:

        

Non-agency

   247    1    1    247  

Total corporate and other debt

   247    1    1    247  

Non-agency CMBS

  328   —   6   322 

Total HTM securities

   24,132    26    401    23,757    23,892   —   973   22,919 

Total investment securities

  $79,675   $101   $1,065   $78,711   $82,037  $52  $2,421  $79,668 
  At December 31, 2016  At December 31, 2017 
$ in millions  Amortized
Cost		   Gross
Unrealized
Gains		   Gross
Unrealized
Losses		   Fair
Value		  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   $26,842  $—  $589  $26,253 

U.S. agency securities1

   22,348    14    278    22,084   22,803  28  247  22,584 

Total U.S. government and agency securities

   50,719    15    823    49,911   49,645  28  836  48,837 

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  

Agency CMBS

 1,370  2  49  1,323 

Non-agency CMBS

 1,102   —  8  1,094 

Corporate bonds

   3,836    7    22    3,821   1,379  5  12  1,372 

CLO

   540    —    1    539   398  1   —  399 

FFELP student loan ABS2

   3,387    5    61    3,331   2,165  15  7  2,173 

Total corporate and other debt

   13,372    26    145    13,253   6,414  23  76  6,361 

Total AFS debt securities

   64,091    41    968    63,164   56,059  51  912  55,198 

AFS equity securities

   15    —    9    6   15   —  10  5 

Total AFS securities

   64,106    41    977    63,170   56,074  51  922  55,203 

HTM securities

            

U.S. government and agency securities:

            

U.S. Treasury securities

   5,839    1    283    5,557   11,424   —  305  11,119 

U.S. agency securities1

   11,083    1    188    10,896   11,886  7  220  11,673 

Total U.S. government and agency securities

 23,310  7  525  22,792 

Corporate and other debt:

    

Non-agency CMBS

 289  1  1  289 

Total HTM securities

   16,922    2    471    16,453   23,599  8  526  23,081 

Total investment securities

  $81,028   $43   $1,448   $79,623   $79,673  $59  $1,448  $    78,284 

CMBS—Commercial mortgage-backed securities

CLO—Collateralized loan obligations

ABS—Asset-backed securities

1.

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 are backed by a guarantee from the U.S. Department of Education of at least 95% of the principal balance and interest on such loans.

 

 

  6761  September 2017March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

Investment Securities in an Unrealized Loss Position

 

  At March 31, 2018 
  At September 30, 2017   Less than 12 Months   12 Months or Longer   Total 
  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     		   Fair Value   Gross
Unrealized
Losses		   Fair Value   Gross
Unrealized
Losses		   Fair Value   Gross
Unrealized
Losses		 

AFS debt securities

            

AFS securities

            

U.S. government and agency securities:

                        

U.S. Treasury securities

  $21,910   $364   $2,371   $61   $24,281   $425    $25,041   $711   $3,958   $122   $28,999   $833 

U.S. agency securities

   10,737    136    1,431    28    12,168    164     12,634    402    2,417    102    15,051    504 

Total U.S. government and agency securities

   32,647    500    3,802    89    36,449    589     37,675    1,113    6,375    224    44,050    1,337 

Corporate and other debt:

                        

CMBS:

            

Agency

   991    42    —    —    991    42  

Non-agency

   192    2    571    5    763    7  

Agency CMBS

   910    59    —    —    910    59 

Non-agency CMBS

   309    7    242    10    551    17 

Corporate bonds

   186    1    332    6    518    7     809    13    383    15    1,192    28 

FFELP student loan ABS

   1,058    8    —    —    1,058    8     1,006    7    —    —    1,006    7 

Total corporate and other debt

   2,427    53    903    11    3,330    64     3,034    86    625    25    3,659    111 

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     40,709    1,199    7,000    249    47,709    1,448 

HTM securities

                        

U.S. government and agency securities:

                        

U.S. Treasury securities

   9,848    249    —    —    9,848    249     6,585    177    4,742    313    11,327    490 

U.S. agency securities

   10,084    151    —    —    10,084    151     4,404    119    6,866    358    11,270    477 

Total U.S. government and agency securities

   19,932    400    —    —    19,932    400     10,989    296    11,608    671    22,597    967 

Corporate and other debt:

                        

CMBS:

            

Non-agency

   71    1    —    —    71    1  

Total corporate and other debt

   71    1    —    —    71    1  

Non-agency CMBS

   220    6    —    —    220    6 

Total HTM securities

   20,003    401    —    —    20,003    401     11,209    302    11,608    671    22,817    973 

Total investment securities

  $            55,077   $            954   $            4,709   $            111   $            59,786   $            1,065    $51,918   $1,501   $18,608   $920   $70,526   $2,421 

   At December 31, 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

  $21,941   $495   $4,287   $94   $26,228   $589 

U.S. agency securities

   12,673    192    2,513    55    15,186    247 

Total U.S. government and agency securities

   34,614    687    6,800    149    41,414    836 

Corporate and other debt:

            

Agency CMBS

   930    49    —    —    930    49 

Non-agency CMBS

   257    1    559    7    816    8 

Corporate bonds

   316    3    389    9    705    12 

FFELP student loan ABS

   984    7    —    —    984    7 

Total corporate and other debt

   2,487    60    948    16    3,435    76 

Total AFS debt securities

   37,101    747    7,748    165    44,849    912 

AFS equity securities

   —    —    5    10    5    10 

Total AFS securities

   37,101    747    7,753    175    44,854    922 

HTM securities

            

U.S. government and agency securities:

            

U.S. Treasury securities

   6,608    86    4,512    219    11,120    305 

U.S. agency securities

   2,879    24    7,298    196    10,177    220 

Total U.S. government and agency securities

   9,487    110    11,810    415    21,297    525 

Corporate and other debt:

            

Non-agency CMBS

   124    1    —    —    124    1 

Total HTM securities

   9,611    111    11,810    415    21,421    526 

Total investment securities

  $46,712   $858   $19,563   $590   $66,275   $1,448 

 

September 2017March 2018 Form 10-Q  6862  

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

  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, 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,other-than-temporarily impaired after performing the analysis described in Note 2 to the financial statements in the 2017 and December 31, 2016 for the reasons discussed herein.

Form 10-K. For AFS debt securities, the Firm does not intend to sell the securities and is not likely to be required to sell the securities prior to recovery of amortized cost basis. ForFurthermore, for AFS and HTM debt securities, the securities have not experienced credit losses as the net unrealized losses reported in the previous table are primarily due to higher interest rates since those securities were purchased.

Additionally, for U.S. government and agency securities, the existence of an explicit and implicit guarantee provided by the U.S. government is considered and the Firm does not expect to experience a credit loss (as discussed in Note 2 to the consolidated financial statements in the 2016 Form 10-K). The risk of credit loss on securities in an unrealized loss position is considered minimal because the Firm’s U.S. government and agency securities, as well as ABS, CMBS 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 12 for additional information on securities issued by VIEs, including U.S. agency mortgage-backed securities,non-agency CMBS, auto loan ABS, CLO and FFELP student loan ABS.

Investment Securities by Contractual Maturity

 

 At September 30, 2017   At March 31, 2018 
$ in millions Amortized
Cost		 Fair Value Annualized
Average
Yield		   

Amortized

Cost

   Fair Value   

Annualized

Average

Yield

 

AFS debt securities

   

AFS securities

      

U.S. government and agency securities:

U.S. government and agency securities:

 

      

U.S. Treasury securities:

         

Due within 1 year

 $5,300  $5,286   0.9%   $6,153   $6,132    0.9% 

After 1 year through 5 years

  14,129   13,954   1.4%    19,385    18,906    1.6% 

After 5 years through 10 years

  5,277   5,041   1.5%    4,494    4,161    1.4% 

Total

  24,706   24,281      30,032    29,199    

U.S. agency securities:

         

Due within 1 year

  1,300   1,302   0.2%    43    42    1.1% 

After 1 year through 5 years

  2,570   2,564   0.9%    1,899    1,883    1.0% 

After 5 years through 10 years

  1,250   1,246   1.9%    1,555    1,506    1.8% 

After 10 years

  18,898   18,784   1.8%    18,587    18,181    2.0% 

Total

  24,018   23,896          22,084        21,612    

Total U.S. government and agency securities

  48,724   48,177   1.5%    52,116    50,811    1.6% 

Corporate and other debt:

      

Agency CMBS:

      

Due within 1 year

   19    19    1.3% 

After 1 year through 5 years

   431    430    1.3% 

After 5 years through 10 years

   47    47    1.2% 

After 10 years

   805    749    1.6% 

Total

   1,302    1,245    

   At March 31, 2018 

$ in millions

  

Amortized
Cost

   Fair Value   Annualized
Average
Yield		 

Non-agency CMBS:

      

After 5 years through 10 years

  $36   $35    2.5% 

After 10 years

   821    807    1.9% 

Total

   857    842      

Corporate bonds:

      

Due within 1 year

   97    97    1.6% 

After 1 year through 5 years

   1,175    1,150    2.4% 

After 5 years through 10 years

   74    71    2.5% 

Total

   1,346    1,318      

CLO:

      

After 5 years through 10 years

   153    153    1.5% 

After 10 years

   198    199    2.4% 

Total

   351    352      

FFELP student loan ABS:

      

After 1 year through 5 years

   48    47    0.8% 

After 5 years through 10 years

   390    388    0.8% 

After 10 years

   1,735    1,746    1.1% 

Total

   2,173    2,181      

Total corporate and other debt

   6,029    5,938    1.6% 

Total AFS securities

   58,145    56,749    1.6% 

HTM securities

      

U.S. government securities:

      

U.S. Treasury securities:

      

Due within 1 year

   2,027    2,012    1.2% 

After 1 year through 5 years

   3,952    3,871    1.8% 

After 5 years through 10 years

   5,112    4,807    1.9% 

After 10 years

   726    637    2.3% 

Total

   11,817    11,327      

U.S. agency securities:

               

After 5 years through 10 years

   34    33    1.9% 

After 10 years

   11,713    11,237    2.6% 

Total

   11,747    11,270      

Total U.S. government and agency

      

securities

   23,564    22,597    2.2% 

Corporate and other debt:

      

Non-agency CMBS:

      

After 1 year through 5 years

   92    92    3.6% 

After 5 years through 10 years

   217    212    3.9% 

After 10 years

   19    18    4.1% 

Total corporate and other debt

   328    322    3.8% 

Total HTM securities

   23,892    22,919    2.2% 

Total investment securities

  $82,037   $79,668    1.8% 
 

 

  6963  September 2017March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

    LOGOLOGO

 

  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 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 20162017 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  
  At March 31, 2018 
$ in millions Gross
Amounts		  

Amounts

Offset

  Net
Amounts
Presented		  

Amounts

Not

Offset1

  Net
Amounts		 

Assets

     

Securities purchased under agreements to resell

 $  185,498  $  (105,252)  $80,246  $(74,843)  $  5,403 

Securities borrowed

  149,347   (13,512)     135,835     (132,271)   3,564 

Liabilities

     

Securities sold under agreements to repurchase

 $156,827  $(105,252)  $51,575  $(45,207)  $6,368 

Securities loaned

  27,068   (13,512)   13,556   (13,336)   220 

Net amounts for which master netting agreements are not in place or may not be legally enforceable

 

Securities purchased under agreements to resell

 

 $5,212 

Securities borrowed

                  669 

Securities sold under agreements to repurchase

 

  5,118 

Securities loaned

                  194 

 

September 2017 Form 10-Q70

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

 At December 31, 2016  At December 31, 2017 

$ in millions

 Gross
 Amounts 		  Amounts 
Offset		 Net
Amounts
 Presented 		  Amounts 
Not
Offset1		 Net
 Amounts 		  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   $  199,044  $  (114,786)  $84,258  $(78,009)  $  6,249 

Securities borrowed

 129,934  (4,698)  125,236  (118,974)  6,262   133,431  (9,421)    124,010    (119,358)  4,652 

Liabilities

          

Securities sold
under agreements
to repurchase

 $135,561  $(80,933)  $54,628  $(47,933)  $6,695   $171,210  $(114,786)  $56,424  $(48,067)  $8,357 

Securities loaned

 20,542  (4,698)  15,844  (15,670)  174   23,014  (9,422)  13,592  (13,271)  321 

Not subject to legally enforceable master netting agreements2

 

Net amounts for which master netting agreements are not in place or may not be legally enforceable

Net amounts for which master netting agreements are not in place or may not be legally enforceable

 

Securities purchased under agreements to resell

Securities purchased under agreements to resell

 

 $7,765  

Securities purchased under agreements to resell

 

 $5,687 

Securities borrowed

 2,591   572 

Securities sold under agreements to repurchase

Securities sold under agreements to repurchase

 

 6,500  

Securities sold under agreements to repurchase

 

 6,945 

Securities loaned

 154   307 

 

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 information related to offsetting of derivatives, see Note 4.

Maturities and Collateral Pledged

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  At March 31, 2018 

$ in millions

 

 Overnight 

and Open

 

 Less than 

30 Days

  30-90 
Days		 

Over

 90 Days 

  Total   

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   $39,192  $49,822  $27,926  $39,887  $156,827 

Securities loaned

 9,487  851  2,863  7,341  20,542    16,869   603   2,045   7,551   27,068 

Total included in the
offsetting disclosure

 $51,036  $37,554  $27,511  $40,002  $156,103   $56,061  $50,425  $29,971  $47,438  $183,895 

Trading liabilities—
Obligation to return
securities received
as collateral

 20,262   —   —   —  20,262    18,136   —   610   —   18,746 

Total

 $71,298  $37,554  $27,511  $40,002  $176,365   $74,197  $  50,425  $  30,581  $  47,438  $  202,641 

  At December 31, 2017 
$ in millions 

Overnight

and Open

  

Less than

30 Days

  30-90
Days		  

Over

90 Days

  Total 

Securities sold under agreements to repurchase

 $41,332  $66,593  $28,682  $34,603  $171,210 

Securities loaned

  12,130   873   1,577   8,434   23,014 

Total included in the offsetting disclosure

 $53,462  $67,466  $30,259  $43,037  $194,224 

Trading liabilities— Obligation to return securities received as collateral

  22,555   —   —   —   22,555 

Total

 $76,017  $  67,466  $  30,259  $  43,037  $  216,779 

Gross Secured Financing Balances by Class of Collateral Pledged

 

$ in millions  

At            

 September 30, 

2017          

 

At

 December 31, 
2016

   

At

March 31,

2018

   

At

December 31,
2017

 

Securities sold under agreements to repurchase

Securities sold under agreements to repurchase

 

Securities sold under agreements to repurchase

 

U.S. government and agency securities

  $40,758  $56,372    $37,361   $43,346 

State and municipal securities

   828  1,363     1,643    2,451 

Other sovereign government obligations

   64,529  42,790     78,844    87,141 

Asset-backed securities

   2,267  1,918  

ABS

   2,204    1,130 

Corporate and other debt

   8,244  9,086     10,063    7,737 

Corporate equities

   20,773  23,152     25,893    28,497 

Other

   865  880     819    908 

Total securities sold under agreements to repurchase

  $138,264  $135,561  

Total

  $      156,827   $171,210 

Securities loaned

         

U.S. government and agency securities

  $6   $81 

Other sovereign government obligations

   13,259  4,762     14,077    9,489 

Corporate and other debt

   9  73     28    14 

Corporate equities

   15,152  15,693     12,770    13,174 

Other

   242  14     187    256 

Total securities loaned

  $28,662  $20,542  

Total

  $27,068   $23,014 

Total included in the offsetting disclosure

  $166,926  $156,103    $183,895   $194,224 

Trading liabilities—Obligation to return securities received as collateral

Trading liabilities—Obligation to return securities received as collateral

 

Trading liabilities—Obligation to return securities received as collateral

 

Corporate equities

  $21,208  $20,262    $18,746   $22,555 

Total

  $188,134  $176,365    $202,641   $216,779 

March 2018 Form 10-Q64

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Assets Pledged

The Firm pledges its trading assets and loans to collateralize securities sold under agreements to repurchase, securities loaned, other secured financings and derivatives. 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

Carrying Value of Assets Loaned or Pledged without

Counterparty Right to Sell or Repledge

Carrying Value of Assets Loaned or Pledged without
Counterparty Right to Sell or Repledge		Carrying Value of Assets Loaned or Pledged without
Counterparty Right to Sell or Repledge		 
$ in millions 

At

 September 30, 

2017

 

At

 December 31, 

2016

   

At

March 31,

2018

   

At

December 31,

2017

 

Trading assets

 $37,800  $41,358    $      34,590   $31,324 

Loans (gross of allowance for loan losses)

  570   —     342    228 

Total

 $38,370  $41,358    $34,932   $31,552 

Collateral Received

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

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

Fair Value of Collateral Received with Right to Sell or RepledgeFair Value of Collateral Received with Right to Sell or Repledge 
$ in millions 

At

 September 30, 

2017

 

At

 December 31, 

2016

   

At

March 31,

2018

   

At

December 31,

2017

 

Collateral received with right to sell or repledge

 $575,915  $561,239    $      597,886   $599,244 

Collateral that was sold or repledged

  470,555  430,911     471,985    475,113 

Customer Margin Lending and Other

 

$ in millions 

At

 September 30, 

2017

 

At

 December 31, 

2016

   

At

March 31,

2018

   

At

December 31,

2017

 

Net customer receivables representing margin loans

 $28,609  $24,359    $      34,382   $32,112 

The Firm engages inprovides margin lending to clients that allowsarrangements which allow the client to borrow against the value of qualifying securities. Margin loans are included within Customer and other receivables in the balance sheets. Under these agreements and transactions, the Firm receives collateral, including U.S.

government and agency securities, other sovereign government obligations, corporate and other debt, and corporate equities. Customer receivables generated from margin lending activities are collateralized by customer-owned securities held by the Firm. The Firm monitors required margin levels and established credit terms daily and, pursuant to such guidelines,

requires customers to deposit additional collateral, or reduce positions, when necessary.

For a further discussion of the Firm’s margin lending activities, see Note 6 to the consolidated financial statements in the 20162017 Form10-K.

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

Cash and Securities Deposited with Clearing Organizations or Segregated

Restricted Cash and Segregated SecuritiesRestricted Cash and Segregated Securities 
$ in millions 

At

 September 30, 

2017

 

At

 December 31, 

2016

  

At

March 31,

2018

 

At

December 31,

2017

 

Restricted cash

 $35,291  $34,231 

Segregated securities1

 $17,491  $23,756    18,917  20,549 

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   $54,208  $54,780 

 

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, Lending Commitments and Allowance for Credit Losses

Loans

The Firm’s loans held for investment are recorded at amortized cost, and its loans held for sale are recorded at the lower of cost or fair value in the balance sheets. For a further description of these loans, refer to Note 7 to the consolidated financial statements in the 20162017 Form10-K. See Note 3 for further information regarding Loans and lending commitments held at fair value.

Loans by Type See Note 11 for details of current commitments to lend in the future.

 

Loans by TypeLoans by Type 
 At September 30, 2017  At March 31, 2018 
$ in millions   Loans Held  
for
Investment		   Loans Held  
for Sale		 Total     
  Loans   		  Loans Held
for Investment		 Loans Held
for Sale		 Total Loans 

Corporate loans

 $29,686  $12,524  $42,210    $31,903  $12,000  $43,903 

Consumer loans

  26,616   —   26,616     26,877   —   26,877 

Residential real estate loans

  26,150   60   26,210     26,566   33   26,599 

Wholesale real estate loans

  9,000   640   9,640     10,021   1,978   11,999 

Total loans, gross

  91,452   13,224   104,676     95,367   14,011   109,378 

Allowance for loan losses

  (245)   —   (245)    (243)   —   (243) 

Total loans, net

 $91,207  $13,224  $104,431    $95,124  $  14,011  $  109,135 
 

 

September 2017 Form 10-Q  7265  March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

  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

  At December 31, 2017 
$ in millions Loans Held
for Investment		  Loans Held
for Sale		  Total
Loans		 

Corporate loans

 $29,754  $9,456  $39,210 

Consumer loans

  26,808   —   26,808 

Residential real estate loans

  26,635   35   26,670 

Wholesale real estate loans

  9,980   1,682   11,662 

Total loans, gross

  93,177   11,173   104,350 

Allowance for loan losses

  (224)   —   (224) 

Total loans, net

 $92,953  $  11,173  $  104,126 

 

$ 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

Loans by Interest Rate Type        
$ in millions  

At

March 31,
2018

   At
December 31,
2017		 

Fixed

  $14,252   $13,339 

Floating or adjustable

   94,883    90,787 

Total loans, net

  $109,135   $104,126 

 

Loans to Non-U.S. BorrowersLoans to Non-U.S. Borrowers
$ in millions 

  At September 30,  

2017

   At December 31,  
2016		 

At

March 31,
2018

At
December 31,
2017

Loans, net of allowance

 $8,883  $9,388  

Loans, net

$16,110$9,977

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 20162017 Form 10-K.

Loans Held for Investment before Allowance by Credit Quality

 

Loans Held for Investment before Allowance by Credit
Quality		Loans Held for Investment before Allowance by Credit
Quality		 
 At September 30, 2017  At March 31, 2018 

$ in millions

 Corporate Consumer 

Residential

Real Estate

 

Wholesale

Real Estate

 Total  Corporate Consumer Residential
Real Estate		 Wholesale
Real Estate		 Total 

Pass

 $28,735  $26,613  $26,092  $8,435  $89,875   $31,327  $26,872  $26,492  $9,126  $93,817 

Special mention

  435   3   —   250   688    162   5   —   460   627 

Substandard

  509   —   58   315   882    405   —   74   435   914 

Doubtful

  7   —   —   —   7    9   —   —   —   9 

Loss

  —   —   —   —   —    —   —   —   —   — 

Total

 $29,686  $26,616  $26,150  $9,000  $91,452   $31,903  $  26,877  $  26,566  $  10,021  $  95,367 

 

 At December 31, 2016  At December 31, 2017 
$ in millions Corporate Consumer 

Residential

Real Estate

 

Wholesale

Real Estate

 Total  Corporate Consumer 

Residential

Real Estate

 

Wholesale

Real Estate

 Total 

Pass

 $23,409  $24,853  $24,345  $7,294  $79,901   $29,166  $26,802  $26,562  $9,480  $92,010 

Special mention

 288  13   —  218  519   188  6   —  200  394 

Substandard

 1,259   —  40  190  1,489   393   —  73  300  766 

Doubtful

 69   —   —   —  69   7   —   —   —  7 

Loss

  —   —   —   —   —    —   —   —   —   — 

Total

 $25,025  $24,866  $24,385  $7,702  $81,978   $29,754  $  26,808  $  26,635  $  9,980  $  93,177 

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  

Impaired Loans and Lending Commitments before
Allowance		Impaired Loans and Lending Commitments before
Allowance		 
 At December 31, 2016   At March 31, 2018 
$ in millions   Corporate 

  Residential

  Real Estate

       Total         Corporate   Residential
Real Estate		   Total 

Loans

         

With allowance

 $104  $—  $104    $15   $—   $15 

Without allowance1

 206  35  241     69    49    118 

Unpaid principal balance2

 316  38  354  

UPB

   95    51    146 

Lending Commitments

         

Without allowance1

  $            226   $—   $            226 
  At December 31, 2017 
$ in millions  Corporate   Residential
Real Estate		   Total 

Loans

      

With allowance

 $—  $—  $—    $16   $—   $16 

Without allowance1

 89   —  89     118    45    163 

UPB

   146    46    192 

Lending Commitments

      

Without allowance1

  $199   $—   $199 

 

1.

At September 30, 2017March 31, 2018 and December 31, 2016,2017, 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

 

Impaired Loans and Allowance by RegionImpaired Loans and Allowance by Region   
 At September 30, 2017  At March 31, 2018 
$ in millions   Americas   EMEA Asia-
  Pacific  		 Total    Americas EMEA Asia Total 

Impaired loans

 $188  $9  $10  $207   $          129  $—  $4  $133 

Allowance for loan losses

  209   33   3   245    199  $          42  $2  $243 
 At December 31, 2017 
$ in millions Americas EMEA Asia Total 

Impaired loans

 $160  $9  $          10  $          179 

Allowance for loan losses

 194  27  3  224 

 

  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

73September 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Troubled Debt Restructurings

Troubled Debt RestructuringsTroubled Debt Restructurings 
$ in millions 

  At September 30,  

2017

   At December 31,  
2016		   At
March 31,
2018		   At
December 31,
2017		 

Loans

 $69  $67    $              52   $51 

Lending commitments

  11  14     25    28 

Allowance for loan losses

  10   —  

Allowance for loan losses and lending commitments

   6    10 

Impaired loans and lending commitments classified as held for investment within corporate loans include troubled debt restructuringsTDRs as shown in the previous table. These restructurings typically include modifications of interest rates, collateral requirements, other loan covenants and payment extensions.

Allowance for Loan Losses Rollforward

$ in millions  Corporate  Consumer   

Residential

Real
Estate

   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 

 

1.

The Firm recorded provisions of $13 million and $1 million for loan losses for the current quarter and prior year quarter, respectively.

2.March 2018 Form 10-Q

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

66

Allowance for 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 

1.

The Firm recorded a release of $6 million, and a provision of $6 million for lending commitments for the current quarter and prior year quarter, respectively.Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Employee Loans

Allowance for Loan Losses Rollforward    
$ in millions Corporate  Consumer  

Residential

Real
Estate

  Wholesale
Real
Estate		  Total 

December 31, 2017

 $126  $4  $24  $70  $224 

Provision (release)

  6   —   (1)   14   19 

Other

  (1)   —   —   1   — 

March 31, 2018

 $131  $4  $23  $85  $243 

Inherent

 $126  $4  $23  $85  $            238 

Specific

  5   —   —   —   5 

 

$ 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 millions Corporate  Consumer  

Residential

Real
Estate

  Wholesale
Real
Estate		  Total 

December 31, 2016

 $195  $4  $20  $55  $274 

Recoveries

  1   —   —   —   1 

Provision (release)

  13   —   —   9   22 

March 31, 2017

 $209  $4  $20  $64  $297 

Inherent

 $142  $4  $20  $64  $            230 

Specific

  67   —   —   —   67 

Allowance for Lending Commitments Rollforward 
$ in millions Corporate  Consumer  

Residential

Real
Estate

  Wholesale
Real
Estate		  Total 

December 31, 2017

 $194  $1  $—  $3  $198 

Provision (release)

  7   —   —   —   7 

Other

  —   —   —   —   — 

March 31, 2018

 $201  $1  $—  $3  $            205 

Inherent

 $200  $1  $—  $3  $204 

Specific

  1   —   —   —   1 

$ in millions Corporate  Consumer  

Residential

Real
Estate

  Wholesale
Real
Estate		  Total 

December 31, 2016

 $185  $1  $—  $4  $190 

Provision (release)

  3   —   —   —   3 

March 31, 2017

 $188  $1  $—  $4  $193 

Inherent

 $186  $1  $—  $4  $            191 

Specific

  2   —   —   —   2 

Employee Loans 
$ in millions  At March 31,
2018		   At
December 31,
2017		 

Balance

  $3,687   $4,185 

Allowance for loan losses

   (75)    (77) 

Balance, net

  $3,612   $4,108 

Repayment term range, in years

               1 to 20    1 to 20 

Employee loans are granted in conjunction with a program established to retain and recruit certain employees, are full recourse and generally require periodic repayments. These loans are recorded in Customer and other receivables in the balance sheets. The Firm establishes an allowance for loan amounts it does not consider recoverable, and the related provision is recorded in Compensation and benefits expense.

September 2017 Form 10-Q74

Notes to Consolidated Financial Statements

(Unaudited)

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8. Equity Method Investments

Overview

The Firm’sEquity method investments accounted for under the equity method of accounting (see Note 1 to the consolidated financial statementsother than certain investments in the 2016 Form10-K)funds are summarized below and 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. See the Measured Based on Net Asset Value table in Note 3 for the carrying value of the Firm’s fund interests, which are comprised of general and limited partnership interests, as well as any related performance fees in the form of carried interest.

Equity Method Investment Balances

 

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

At

March 31, 2018

   

At

December 31, 2017

 

Investments

 $2,766  $2,837    $                    2,662   $                    2,623 

 

 Three Months Ended
September 30,		 Nine Months Ended  
September 30,		   Three Months Ended March 31, 
$ in millions 2017 2016 2017 2016           2018                   2017         

Income (loss)

 $—  $(40)  $—  $(39)    $50   $              9 

Japanese Securities Joint Venture

Included in the equity method investments is the Firm’s 40% voting interest (“40% interest”) in Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (“MUMSS”). Mitsubishi UFJ Financial Group, Inc. (“MUFG”) holds a 60% voting interest. The Firm accounts for its equity method investment in MUMSS within the Institutional Securities business segment. The Firm records income from its 40% interest in MUMSS within Other revenues in the income statements.

 

 Three Months Ended
September 30,		 Nine Months Ended  
September 30,		  Three Months Ended March 31, 
$ in millions 2017 2016 2017 2016          2018                 2017         

Income from investment in MUMSS

 $25  $26  $96  $83   $56  $                    48 

In addition to MUMSS, the Firm held other equity method investments that were not individually significant.

67March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

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9. 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  
$ in millions At March 31,
2018		  At December 31,
2017		 

Savings and demand deposits

 $138,358  $144,487 

Time deposits

  22,066   14,949 

Total

 $160,424  $159,436 

Deposits subject to FDIC insurance

 $            129,968  $            127,017 

Time deposits that equal or exceed the FDIC insurance limit

 $10  $38 

Interest Bearing 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 millions  

At

March 31, 2018

 

2018

  $13,164 

2019

   4,803 

2020

   2,257 

2021

   747 

2022

   418 

Thereafter

   677 

10. Long-Term Borrowings and Other Secured Financings

Long-Term Borrowings

 

$ in millions 

At

  September 30,
2017

 

At

  December 31,
2016

   

At

March 31,

2018

   

At

December 31,

2017

 

Original maturities of one year or less

  $1,256   $1,519 

Original maturities greater than one year

    

Senior

 $181,336  $154,472    $183,712   $180,835 

Subordinated

  10,341  10,303     9,996    10,228 

Total

 $191,677  $164,775    $193,708   $        191,063 

Weighted average stated maturity, in years

  6.7  5.9  

Total borrowings

  $        194,964   $192,582 

Weighted average stated maturity, in years1

   6.6    6.6 

1.

Includes only borrowings with original maturities greater than one year.

Other Secured Financings

Other secured financings include the liabilities related to pledged commodities, certain ELNs, transfers of financial assets that are accounted for as financings rather than sales, consolidated VIEs where the Firm is deemed to be the primary beneficiary pledged commodities, certain equity-linked notes and other secured borrowings. These liabilities are generally payable from the cash flows of the related assets accounted for as Trading assets.Seeassets. See Note 12 for further information on Otherother secured financings related to VIEs and securitization activities.

Other Secured Financings by Original Maturity and Type

 

$ in millions  

At

  September 30,
2017

 

At

  December 31,
2016

   

At

March 31,

2018

   

At

December 31,

2017

 

Secured financings

   

Original maturities:

         

Greater than one year

  $11,037  $9,404    $        8,159   $8,685 

One year or less

   2,349  1,429     1,406    2,034 

Failed sales1

   858  285     710    552 

Total

  $14,244  $11,118    $            10,275   $            11,271 

 

1.

For more information on failed sales, see Note 12.

75September 2017 Form 10-Q

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.

  Years to Maturity at March 31, 2018 
$ in millions 

Less

than 1

  1-3  3-5  Over 5  Total 

Lending:

     

Corporate

 $14,447  $43,086  $46,618  $7,454  $111,605 

Consumer

  6,598   —   8   3   6,609 

Residential real estate

  5   64   33   259   361 

Wholesale real estate

  183   833   25   —   1,041 

Forward-starting secured financing receivables

  85,399   —   —   1,177   86,576 

Underwriting

  344   —   —   —   344 

Investment activities

  527   96   62   230   915 

Letters of credit and other financial guarantees

  195   —   1   41   237 

Total

 $  107,698  $  44,079  $  46,747  $  9,164  $  207,688 

Corporate lending commitments participated to third parties

 

 $6,877 

Forward-starting secured financing receivables settled within three business days

 

 $72,754 

For a further description of these commitments, refer to Note 12 to the consolidated financial statements in the 20162017 Form10-K.

March 2018 Form 10-Q68

Notes to Consolidated Financial Statements

(Unaudited)

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Guarantees

Obligations under Guarantee Arrangements at September 30, 2017March 31, 2018

 

 Maximum Potential Payout/Notional  Maximum Potential Payout/Notional 
 Years to Maturity     Years to Maturity 
$ in millions 

Less

than 1

 1-3 3-5 Over 5  Total   Less
than 1		 1-3 3-5 Over 5 Total 

Credit derivatives

 $118,646  $85,300  $82,668  $53,744  $340,358   $81,715  $69,986  $58,118  $39,251  $249,070 

Other credit contracts

  14   —   —   135   149    —   2   —   127   129 

Non-credit derivatives

  1,592,809   1,029,404   374,956   573,755   3,570,924    1,903,988   1,196,331   379,171   639,749   4,119,239 

Standby letters of credit and other financial guarantees issued1

  782   909   1,406   4,956   8,053    806   1,114   1,272   4,903   8,095 

Market value
guarantees

  40   62   69   —   171    40   62   58   —   160 

Liquidity facilities

  3,237   —   —   —   3,237    3,367   —   —   —   3,367 

Whole loan sales
guarantees

  —   —   1   23,260   23,261    —   1   1   23,223   23,225 

Securitization
representations
and warranties

  —   —   —   58,423   58,423    —   —   —   60,861   60,861 

General partner
guarantees

  34   49   332   25   440    33   52   324   27   436 

 

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

Credit derivatives2

Credit derivatives2

     $(2,004)  $        —    $(1,587)   $— 

Other credit contracts

Other credit contracts

 

    13   —     20    — 

Non-credit derivatives2

Non-credit derivatives2

 

    38,611   —     45,314    — 

Standby letters of credit and other
financial guarantees issued1

Standby letters of credit and other
financial guarantees issued1

 

    (186)   6,593     (182)    6,588 

Market value guarantees

Market value guarantees

 

    1   4     —    — 

Liquidity facilities

Liquidity facilities

      (5)   5,342     (5)    5,475 

Whole loan sales guarantees

Whole loan sales guarantees

 

    8   —     8    — 

Securitization representations and warranties

Securitization representations and warranties

 

  91   —     91    — 

General partner guarantees

General partner guarantees

 

    53   —     59    — 

 

1.

These amounts include certain issued standby letters of credit participated to third parties, totaling $0.7 billion of notional and collateral/recourse, due to the nature of the Firm’s obligations under these arrangements.

2.

Carrying amounts of derivative contracts are shown on a gross basis prior to cash collateral or counterparty netting. For further information on derivative contracts, see Note 4.

September 2017 Form 10-Q76

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.

In certain situations, collateral may be held by the Firm for those contracts that meet the definition of a guarantee. Generally, the Firm sets collateral requirements by counterparty so that the collateral covers various transactions and products and is not allocated specifically to individual contracts. Also, the Firm may recover amounts related to the underlying asset delivered to the Firm under the derivative contract.

For more information on the nature of the obligation and related business activity for market value guarantees, liquidity facilities, whole loan sales guarantees and general partner guarantees related to certain investment management funds, as well as the other products in the previous table, see Note 12 to the consolidated financial statements in the 20162017 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/clearinghouse member guarantees and merger and acquisition guarantees are described in Note 12 to the consolidated financial statements in the 20162017 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%-owned finance subsidiary.

Contingencies

Legal. In addition to the matters described below, in the normal course of business, the Firm has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or

69March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

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 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, styledChina Development Industrial Bank v. Morgan Stanley & Co. Incorporated et alal.., 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. 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$634 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,October 3, 2017, the Firm filed aAppellate Division denied the Firm’s 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 SeptemberMarch 25, 2017,2018, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $232$211 million, and the certificates had incurred

March 2018 Form 10-Q70

Notes to Consolidated Financial Statements

(Unaudited)

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actual losses of approximately $87$89 million. Based on currently available information, the Firm believes it could incur a loss in this action up to the difference between the $232$211 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 styledU.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)

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MortgageCapital Inc. and GreenPoint Mortgage Funding,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.appeal to the New York Court of Appeals. 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, 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.denial of its motion to dismiss the complaint and perfected its appeal on November 22, 2017. 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, the Firm filed a notice of appeal of the court’s order.order and perfected its appeal on November 22, 2017. Based on currently available information, the Firm believes

71March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

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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-judgment interest, fees and costs, as well as claim payments that FGIC has made and will make in the future. In addition, plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

On January 23, 2015, Deutsche Bank National Trust Company, in its capacity as trustee, filed a complaint against the Firm 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, plaintiff filed a notice of appeal of that order, and the appeal was fully briefed on August 19, 2016. 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.

In matters styledCase number 15/3637 andCase number 15/4353,, the Dutch Tax Authority (“Dutch Authority”) is challenging, in the District Court in Amsterdam, the priorset-off by the Firm of approximately €124 million (plus(approximately $152 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 agree with these allegations. A hearing took place in this matter on September 19, 2017. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately €124 million (plus(approximately $152 million) plus accrued interest).interest. On April 26, 2018, the District Court in Amsterdam issued a decision in matters styledCase number 15/3637 andCase number 15/4353 dismissing the Dutch Authority’s claims. The Dutch Authority has until June 7, 2018 to file any appeal.

12. Variable12.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 20162017 Form10-K.

Consolidated VIEs

Assets and Liabilities by Type of Activity

Assets and Liabilities by Type of Activity 
             
  At March 31, 2018  At December 31, 2017 
$ in millions VIE Assets  VIE Liabilities  VIE Assets  VIE Liabilities 

OSF

 $361  $1  $378  $3 

MABS1

  234   197   249   210 

Other2

  2,718   1,131   1,174   250 

Total

 $3,313  $1,329  $1,801  $463 

  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  

OSF—Other structured financings

1.

Amounts include transactions backed by residential mortgage loans, commercial mortgage loans and other types of assets, including consumer or commercial assets. The value of assets is determined based on the fair value of the liabilities and the interests owned by the Firm in such VIEs becauseas the fair values for the liabilities and interests owned are more observable.

2.

Other primarily includes investment funds, certain operating entities, investment fundsCLOs and structured transactions. At March 31, 2018, Other includes the consolidation of a fund managed by Mesa West Capital, LLC, which was acquired in the current quarter.

 

 

September 2017March 2018 Form 10-Q  8072  

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

Assets and Liabilities by Balance Sheet Caption

 

  At March 31,   At December 31, 
$ in millions At September 30,
2017		 At December 31,
2016		   2018   2017 

Assets

      

Cash and cash equivalents:

    

Cash and due from banks

 $82  $74    $103   $69 

Restricted cash

   223    222 

Trading assets at fair value

  741  1,295     2,345    833 

Customer and other receivables

  15  13     21    19 

Goodwill

  18  18     18    18 

Intangible assets

  160  177     149    155 

Other assets

  728  833     454    485 

Total

 $1,744  $2,410    $3,313   $1,801 

Liabilities

      

Other secured financings at fair value

 $297  $289  

Other secured financings

  $1,305   $438 

Other liabilities and accrued expenses

  35  29     24    25 

Total

 $332  $318    $1,329   $463 

Consolidated VIE assets and liabilities are presented in the previous tables after intercompany eliminations. Most assets owned by consolidated VIEs cannot be removed unilaterally by the Firm and are not generally available to the Firm. Most related liabilities issued by consolidated VIEs arenon-recourse to the Firm. In certain other consolidated VIEs, the Firm either has the unilateral right to remove assets or provides additional recourse through derivatives such as total return swaps, guarantees or other forms of involvement.

In general, the Firm’s exposure to loss in consolidated VIEs is limited to losses that would be absorbed on the VIE’sVIE net assets recognized in its financial statements, net of amounts absorbed by third-party variable interest holders.

Select Information Related to Consolidated VIEs

 

  At March 31,   At December 31, 
$ in millions  At September 30,
2017		   At December 31,
2016		   2018   2017 

Noncontrolling interests

  $197   $228    $                494   $189 

Maximum exposure to losses1

   —    78  

1.

Primarily related to certain derivatives, commitments, guarantees and other forms of involvement not recognized in the financial statements.

Non-consolidated VIEs

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

Non-consolidated VIEs

Non-consolidated VIEs 
  At March 31, 2018 
$ in millions MABS  CDO  MTOB  OSF  Other 

VIE assets (UPB)

 $    76,854  $    14,445  $    5,439  $    3,307  $    19,959 

Maximum exposure to loss

 

  

Debt and equity interests

 $9,075  $2,163  $81  $1,589  $4,654 

Derivative and other contracts

  —   —   3,367   —   2,317 

Commitments, guarantees and other

  882   902   —   161   327 

Total

 $9,957  $3,065  $3,448  $1,750  $7,298 

Carrying value of exposure to loss—Assets

 

  

Debt and equity interests

 $9,075  $2,163  $51  $1,185  $4,654 

Derivative and other contracts

  —   —   5   —   111 

Total

 $9,075  $2,163  $56  $1,185  $4,765 

 

  At September 30, 2017  At December 31, 2017 
$ in millions  MABS   CDO   MTOB   OSF   Other  MABS CDO MTOB OSF Other 

VIE assets (unpaid principal balance)

  $78,134   $7,153   $5,149   $3,709   $33,041  

VIE assets (UPB)

 $    89,288  $    9,807  $    5,306  $    3,322  $    31,934 

Maximum exposure to loss

Maximum exposure to loss

 

  

Maximum exposure to loss

 

   

Debt and equity interests

  $8,908   $1,162   $44   $1,551   $5,684   $10,657  $1,384  $80  $1,628  $4,730 

Derivative and other contracts

   —    —    3,237    —    50    —   —  3,333   —  1,686 

Commitments, guarantees and other

   850    1,007    —    169    451   1,214  668   —  164  433 

Total

  $9,758   $2,169   $3,281   $1,720   $6,185   $11,871  $2,052  $3,413  $1,792  $6,849 

Carrying value of exposure to loss—Assets

Carrying value of exposure to loss—Assets

 

  

Carrying value of exposure to loss—Assets

 

  

Debt and equity interests

  $8,908   $1,162   $44   $1,145   $5,684   $10,657  $1,384  $43  $1,202  $4,730 

Derivative and other contracts

   —    —    6    —    5    —   —  5   —  184 

Total

  $8,908   $1,162   $50   $1,145   $5,689   $10,657  $1,384  $48  $1,202  $4,914 

 

  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

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 VIEs and is limited to the notional amounts of certain liquidity facilities, other credit support, total return swaps,

 

 

  8173  September 2017March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

The Firm’s maximum exposure to loss presented in the previous table often differs from the carrying value of the variable interests held by the Firm. The maximum exposure to loss presented in the previous table is dependent on the nature of the Firm’s variable interest in the VIE and is limited to the notional amounts of certain liquidity facilities, other credit support, total return swaps, written put options, and the fair value of certain other derivatives and investments the Firm has made in the VIEs.VIE. 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.

The Firm’s maximum exposure to loss presented abovein the previous table does not include the offsetting benefit of any financial instruments that the Firm may utilize to hedge these risks associated with its variable interests. In addition, the Firm’s maximum exposure to loss presented abovein the previous table 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.

Non-consolidated VIEs Mortgage- and Asset-Backed Securitization Assets

  At March 31, 2018  At December 31, 2017 
$ in millions UPB  Debt and
Equity
Interests		  UPB   Debt and
Equity
Interests		 

Residential mortgages

 $13,564  $782  $15,636   $1,272 

Commercial mortgages

  35,886   1,934   46,464    2,331 

U.S. agency collateralized mortgage obligations

  14,405   3,150   16,223    3,439 

Other consumer or commercial loans

  12,999   3,209   10,965    3,615 

Total

 $    76,854  $    9,075  $    89,288   $    10,657 

Securitization transactions generally involve VIEs. Primarily as a result of its secondary market-making activities, the Firm owned additional VIE assets mainly 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.

Additional VIE Assets Owned

$ in millions  

At March 31,

 

2018

   

At December 31,

 

2017

 

VIE assets

  $12,314   $11,318 

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, 2017March 31, 2018 and December 31, 2016,2017, these assets consisted of securities backed by residential mortgage loans, commercial mortgage loans or other consumer loans, such as credit card receivables, automobile loans and student loans, CDOs or CLOs, and investment funds.

The Firm’s primary risk exposure is to the securities issued by the SPESPEs owned by the Firm, 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). The Firm does not provide additional support in these transactions through contractual facilities, such as liquidity facilities, guarantees or similar derivatives. The Firm’s maximum exposure to loss generally equals the fair value of the assets owned.

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 March 31, 2018 
 At September 30, 2017 
$ in millions 

Residential
Mortgage
Loans

 Commercial
Mortgage
Loans		 U.S. Agency
Collateralized
Mortgage
Obligations		 

Credit-
Linked
Notes and

Other1

  RML CML U.S. Agency
CMO		 CLN and
Other1		 

SPE assets (unpaid principal balance)2

 $16,173   $55,682   $11,363   $11,602  

SPE assets (UPB)2

 $    14,978  $    59,607  $    14,751  $    16,823 

Retained interests

        

Investment grade3

 $—   $233   $682   $5  

Investment grade

 $—  $324  $825  $5 

Non-investment grade
(fair value)

  2    139    —    638    1   107   —   308 

Total

 $2   $372   $682   $643   $1  $431  $825  $313 

Interests purchased in the secondary market (fair value)

Interests purchased in the secondary market (fair value)

 

 

Interests purchased in the secondary market (fair value)

 

 

Investment grade

 $—   $68   $26   $—   $—  $112  $71  $— 

Non-investment grade

  38    81    —    —    16   57   —   15 

Total

 $38   $149   $26   $—   $16  $169  $71  $15 

Derivative assets (fair value)

 $—   $—   $—   $239   $—  $—  $—  $191 

Derivative liabilities (fair value)

  —    —    —    72    —   —   —   119 
 

 

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  

 

March 2018 Form 10-Q74

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

  At December 31, 2017 
$ in millions RML  CML  U.S. Agency
CMO		  

CLN and

Other1

 

SPE assets(UPB)2

 $15,555  $62,744  $11,612  $17,060 

Retained interests

    

Investment grade

 $—  $293  $407  $4 

Non-investment grade (fair value)

  1   98   —   478 

Total

 $1  $391  $407  $482 

Interests purchased in the secondary market (fair value)

 

 

Investment grade

 $—  $94  $439  $— 

Non-investment grade

  16   66   —   4 

Total

 $16  $160  $439  $4 

Derivative assets (fair value)

 $1  $—  $—  $226 

Derivative liabilities (fair value)

  —   —   —   85 

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.

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    Fair Value at March 31, 2018 
$ in millions       Level 2             Level 3             Total         Level 2   Level 3   Total 

Retained interests

         

Investment grade

 $385  $12  $397    $831   $5   $836 

Non-investment grade

 14  895  909     13    403    416 

Total

 $399  $907  $1,306    $844   $408   $1,252 

Interests purchased in the secondary market

Interests purchased in the secondary market

 

Interests purchased in the secondary market

 

Investment grade

 $56  $—  $56    $182   $1   $183 

Non-investment grade

 84  14  98     52    36    88 

Total

 $140  $14  $154    $        234   $37   $        271 

Derivative assets

 $348  $2  $350    $50   $        141   $191 

Derivative liabilities

 98  361  459     114    5    119 
   Fair Value at December 31, 2017 
$ in millions  Level 2   Level 3   Total 

Retained interests

      

Investment grade

  $407   $4   $411 

Non-investment grade

   22    555    577 

Total

  $        429   $        559   $        988 

Interests purchased in the secondary market

Interests purchased in the secondary market

 

Investment grade

  $531   $2   $533 

Non-investment grade

   57    29    86 

Total

  $588   $31   $619 

Derivative assets

  $78   $149   $227 

Derivative liabilities

   81    4    85 

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. Investment banking underwriting net revenues are recognized in connection with these transactions. The Firm may retain interests in the securitized financial assets as one or more tranches of the securitization. These retained interests are generally carried at fair value in the balance sheets with changes in fair value recognized in the income statements.

Proceeds from New Securitization Transactions and Sales of Loans

 

 

Three Months Ended

 

September 30,

 

Nine Months Ended

 

September 30,

   

Three Months Ended

 

March 31,

 
$ in millions     2017         2016         2017         2016       2018   2017 

New transactions1

 $6,875  $6,819  $17,622  $13,695    $            6,134   $            5,997 

Retained interests

  648  768   1,607  1,901     481    430 

Sales of corporate loans to
CLO SPEs1,2

  56  199   148  230  

Sales of corporate loans to CLO SPEs1, 2

   94    179 

 

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).

The Firm also enters into transactions in which it sells equity securities and contemporaneously enters into bilateral OTC equity derivatives with the purchasers of the securities, through which it retains the exposure to the securities as shown in the following table.

Assets Sold with Retained Exposure

 

$ in millions 

 At September 30, 

2017

  At December 31, 
2016		   

At March 31,

 

2018

   

At December 31,

 

2017

 

Carrying value of assets derecognized at
the time of sale and gross cash
proceeds

 $14,458  $11,209    $                26,800   $                19,115 

Fair value

      

Assets sold

  14,618  11,301    $26,566   $19,138 

Derivative assets recognized in the
balance sheets

  177  128     2    176 

Derivative liabilities recognized in the
balance sheets

  17  36     236    153 

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

   At March 31, 2018   At December 31, 2017 
$ in millions   Assets     Liabilities     Assets     Liabilities     Assets   Liabilities   Assets   Liabilities 

Failed sales

 $858  $858  $285  $285    $        710   $        710   $        552   $        552 

75March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

13. Regulatory Requirements

Regulatory Capital Framework and Requirements

For a discussion of the Firm’s regulatory capital framework, see Note 14 to the consolidated financial statements in the 2016 2017Form10-K.

The Firm is required to maintain minimum risk-based and leverage capital ratios under the regulatory capital requirements. A summary of the calculations of regulatory capital, risk-weighted assets (“RWAs”)RWA and transition provisions 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 “StandardizedRWA (“Standardized Approach”) and (ii) the applicable advanced approaches for calculating credit risk, market risk and operational risk RWAs (the “AdvancedRWA (“Advanced Approach”).

83September 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Minimum risk-based capital ratio requirements apply to Common Equity Tier 1 capital, Tier 1 capital and Total capital.capital (which includes Tier 2 capital). 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 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 the Firm will be subject to:to the following buffers:

 

A greater than 2.5% Common Equity Tier 1 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 forand 2018, each of the buffers is 50% and 75%, respectively, of the fullyphased-in buffer requirement.2019 requirement noted above. 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 20162017 Form10-K.

The Firm’s Regulatory Capital and Capital Ratios

At September 30,March 31, 2018 and December 31, 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    At March 31, 2018 

$ in millions

      Amount         Ratio     Minimum
Capital
Ratio1		   Amount   Ratio   Required
Ratio1		 

Common Equity Tier 1 capital

  $62,214      16.9%      7.3%    $60,568    15.5%     8.6%  

Tier 1 capital

   71,006      19.3%      8.8%     69,213    17.7%     10.1%  

Total capital

   81,861      22.2%      10.8%     79,363    20.3%     12.1%  

Total RWA

   390,390    N/A     N/A  

Tier 1 leverage

   —      8.4%      4.0%     69,213    8.2%     4.0%  

Total RWAs

  $368,629      N/A      N/A 

Adjusted average assets2

   841,360      N/A      N/A    846,868    N/A     N/A  

SLR3

   69,213    6.3%     5.0%  

Supplementary leverage exposure

     1,091,518    N/A     N/A  
  

 

At December 31, 2016

    At December 31, 2017 

$ in millions

      Amount         Ratio     Minimum
Capital
Ratio1		   Amount   Ratio   Required
Ratio1		 

Common Equity Tier 1 capital

  $60,398      16.9%      5.9%    $      61,134    16.5%     7.3%  

Tier 1 capital

   68,097      19.0%      7.4%     69,938    18.9%     8.8%  

Total capital

   78,642      22.0%      9.4%     80,275    21.7%     10.8%  

Total RWA

   369,578    N/A     N/A  

Tier 1 leverage

   —      8.4%      4.0%     69,938    8.3%     4.0%  

Total RWAs

  $358,141      N/A      N/A 

Adjusted average assets2

   811,402      N/A      N/A    842,270    N/A     N/A  

N/A—Not Applicable

1.

Percentages represent minimum required regulatory capital ratios under the transitional rules. Regulatory compliance was determined based on capital ratios calculated under the transitional rules until December 31, 2017.

2.

Adjusted average assets represent the denominator of the Tier 1 leverage ratio and are composed of the average daily balance of consolidatedon-balance sheet assets under U.S. GAAP during the current quarter and the quarter ended December 31, 2016,2017, respectively, adjusted for disallowed goodwill, transitional intangible assets, certain deferred tax assets, certain investments in the capital instruments of unconsolidated financial institutions and other adjustments.adjustments

3.

The SLR became effective as a capital standard on January 1, 2018.

U.S. Bank Subsidiaries’ Regulatory Capital and Capital Ratios

Morgan StanleyThe Firm’s U.S. Bank N.A. (“MSBNA”) and Morgan Stanley Private Bank, National Association (“MSPBNA”) (collectively, “U.S. Bank Subsidiaries”)Subsidiaries are subject to similar regulatory capital requirements as the Firm. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on the U.S. Bank Subsidiaries’ and the Firm’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, each of the U.S. Bank Subsidiaries must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certainoff-balance sheet items as calculated under regulatory accounting practices.

March 2018 Form 10-Q76

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

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, 2017March 31, 2018 and December 31, 2016,2017, the Firm’s U.S. Bank Subsidi-

September 2017 Form 10-Q84

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

ariesSubsidiaries 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, 2017March 31, 2018 and December 31, 2016,2017, the U.S. Bank Subsidiaries’ ratios are based on the Standardized Approach transitional rules.

MSBNA’s Regulatory Capital

 

   At March 31, 2018 
$ in millions  Amount       Ratio       Required  
Ratio1  		 

Common Equity Tier 1 capital

  $    15,514    19.7%    6.5% 

Tier 1 capital

   15,514    19.7%    8.0% 

Total capital

   15,785    20.1%    10.0% 

Tier 1 leverage

   15,514    11.8%    5.0% 

SLR2

      9.0%    6.0% 
 At September 30, 2017    At December 31, 2017 

$ in millions

 Amount   Ratio Minimum
Capital
Ratio1		   Amount       Ratio       Required  
Ratio1  		 

Common Equity Tier 1 capital

 $14,839    19.3%   6.5%   $15,196    20.5%    6.5% 

Tier 1 capital

  14,839    19.3%   8.0%    15,196    20.5%    8.0% 

Total capital

  15,110    19.7%   10.0%    15,454    20.8%    10.0% 

Tier 1 leverage

  14,839    11.8%   5.0%    15,196    11.8%    5.0% 
 

 

At December 31, 2016

 
MSPBNA’s Regulatory CapitalMSPBNA’s Regulatory Capital   
   At March 31, 2018 

$ in millions

 Amount   Ratio Minimum
Capital
Ratio1		   Amount       Ratio       Required  
Ratio1  		 

Common Equity Tier 1 capital

 $13,398    16.9%  6.5%   $6,382    24.2%    6.5% 

Tier 1 capital

 13,398    16.9%  8.0%    6,382    24.2%    8.0% 

Total capital

 14,858    18.7%  10.0%    6,425    24.4%    10.0% 

Tier 1 leverage

 13,398    10.5%  5.0%    6,382    9.7%    5.0% 

SLR2

      9.3%    6.0% 
   At December 31, 2017 
$ in millions  Amount       Ratio       Required  
Ratio1  		 

Common Equity Tier 1 capital

  $6,215    24.4%    6.5% 

Tier 1 capital

   6,215    24.4%    8.0% 

Total capital

   6,258    24.6%    10.0% 

Tier 1 leverage

   6,215    9.7%    5.0% 

 

1.

Capital ratiosRatios that are required in order to be considered well-capitalized for U.S. regulatory purposes. Regulatory compliance was determined based on capital ratios calculated under the transitional rules until December 31, 2017.

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% 

1.2.

Capital ratios that are required in order to be considered well-capitalized for U.S. regulatory purposes.The SLR became effective as a capital standard on January 1, 2018.

U.S. Broker-Dealer Regulatory Capital Requirements

MS&Co. Regulatory Capital

 

$ in millions At September 30, 2017 At December 31, 2016   At March 31, 2018   At December 31, 2017 

Net capital

 $10,613  $10,311    $                             12,661   $                             10,142 

Excess net capital

  8,558  8,034     10,303    8,018 

Morgan Stanley & Co. LLC (“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 standards of Appendix E of SEC Rule 15c3-1, MS&Co. is subject to minimum net capital and tentative net capital requirements. In addition, MS&Co. must notify the SEC if its tentative net capital falls below certain levels. At September 30, 2017March 31, 2018 and December 31, 2016,2017, 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   At March 31, 2018   At December 31, 2017 

Net capital

 $2,573  $3,946   $                             2,919   $                             2,567 

Excess net capital

  2,415  3,797    2,759    2,400 

Morgan Stanley Smith Barney LLC (“MSSB LLC”)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 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.

 

 

  8577  September 2017March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

14. Total Equity

Dividends and Share Repurchases

 

 Three Months Ended
September 30,		 Nine Months Ended
September 30,		   Three Months Ended
March 31,		 
$ in millions     2017         2016                 2017                 2016           2018   2017 

Repurchases of common stock

 $1,250  $1,250  $2,500  $2,500 

Repurchases of common stock under the Firm’s share repurchase program

  $                1,250   $                750 

On June 28, 2017, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) announced that they did not object to theThe Firm’s 2017 capital planCapital 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 dividenddividends of up 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.share.

Preferred Stock

 

 Three Months Ended
September 30,		 Nine Months Ended
September 30,		   

Three Months Ended

 

March 31,

 
$ in millions     2017         2016         2017         2016       2018   2017 

Dividends declared

 $93  $78  $353  $312   $                93   $                90 

For a description of Series A through Series K preferred stock issuances, see Note 15 to the consolidated financial statements in the 20162017 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 Tier 1 capital in accordance with regulatory capital requirements (see Note 13).

Series K Preferred Stock.The Series K Preferred Stock offering (net of related issuance costs) in January 2017 resulted in proceeds of approximately $994 million.

Preferred Stock Outstanding

 

 Shares
Outstanding		 

Liquidation
Preference
per Share

 

  Carrying Value   Shares
Outstanding		       Carrying Value 
$ in millions,
except per
share data		 At
September 30,
2017		 At
September 30,
2017		 At
December 31,
2016		   At
March 31,
2018		   Liquidation
Preference
per Share		   At
March 31,
2018		   At
December 31,
2017		 

Series

         

A

  44,000   $          25,000  $                    1,100  $                1,100     44,000   $        25,000   $1,100   $1,100 

C1

  519,882   1,000   408  408     519,882    1,000    408    408 

E

  34,500   25,000   862  862     34,500    25,000    862    862 

F

  34,000   25,000   850  850     34,000    25,000    850    850 

G

  20,000   25,000   500  500     20,000    25,000    500    500 

H

  52,000   25,000   1,300  1,300     52,000    25,000    1,300    1,300 

I

  40,000   25,000   1,000  1,000     40,000    25,000    1,000    1,000 

J

  60,000   25,000   1,500  1,500     60,000    25,000    1,500    1,500 

K

  40,000   25,000   1,000   —     40,000    25,000    1,000    1,000 

Total

Total

 

 $8,520  $7,520        $    8,520   $    8,520 

 

1.

Series C is composed of the issuance of 1,160,791 shares of Series C Preferred Stock to MUFG for an aggregate purchase price of $911 million, less the redemption of 640,909 shares of Series C Preferred Stock of $503 million, which were converted to common shares of approximately $705 million.

Comprehensive Income (Loss)

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 millions Foreign
Currency
Translation
Adjustments		  AFS
Securities		  Pension,
Postretirement
and Other		  DVA  Total 

December 31, 2017

 $(767)  $(547)  $(591)  $(1,155)  $(3,060) 

Cumulative adjustment for accounting changes2

  (8)   (111)   (124)   (194)   (437) 

OCI during the period

  60   (410)               5   436           91 

March 31, 2018

 $(715)  $(1,068)  $(710)  $(913)  $(3,406) 

December 31, 2016

 $(986)  $(588)  $(474)  $(595)  $(2,643) 

OCI during the period

  107             84   —               2   193 

March 31, 2017

 $(879)  $(504)  $(474)  $(593)  $(2,450) 

 

1.

Amounts net of tax and noncontrolling interests.

2.

In accordance withThe cumulative adjustment for accounting changes is primarily the earlyeffect of the adoption of a provision of the accounting updateRecognition and MeasurementReclassification of Financial Assets and Financial LiabilitiesCertain Tax Effects from Accumulated Other Comprehensive Income, a cumulativecatch-up. This adjustment was recorded as of January 1, 20162018 to move the cumulative unrealized DVA amount, net of noncontrolling interests andreclassify certain income tax effects related to outstanding liabilities underenactment of the fair value option electionTax Act from AOCI to Retained earnings, into AOCI.primarily related to the remeasurement of deferred tax assets and liabilities resulting from the reduction in corporate income tax rate to 21%. See Note 2 to the consolidated financial statements in the 2016 Form10-K for further information.

 

 

September 2017March 2018 Form 10-Q  8678  

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

Components of 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)  

  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

  

Three Months Ended

 

March 31, 20181

 
$ in millions Pre-tax
gain (loss)		 Income tax
benefit
(provision)		 After-tax
gain (loss)		 

Non-

controlling
interests

   Net    Pre-tax
Gain
(Loss)		 Income
Tax
Benefit
(Provision)		 After-
tax Gain
(Loss)		 Non-
controlling
Interests		 Net 

Foreign currency translation adjustments

Foreign currency translation adjustments

 

Foreign currency translation adjustments

 

  

OCI activity

 $            156  $            204  $            360  $            151  $            209    $78  $39  $117  $57  $60 

Reclassified to
earnings

  —   —   —   —   —     —   —   —   —   — 

Net OCI

 $156  $204  $360  $151  $209    $78  $39  $117  $57  $60 

Change in net unrealized gains (losses) on AFS securities

Change in net unrealized gains (losses) on AFS securities

 

Change in net unrealized gains (losses) on AFS securities

 

 

OCI activity

 $822  $(303)  $519  $—  $519    $(535)  $125  $(410)  $—  $(410) 

Reclassified to
earnings1

 (127)  47  (80)   —  (80)  

Reclassified to earnings

  —   —   —   —   — 

Net OCI

 $695  $(256)  $439  $—  $439    $(535)  $        125  $(410)  $—  $(410) 

Pension, postretirement and other

Pension, postretirement and other

 

Pension, postretirement and other

 

  

OCI activity

 $(6)  $3  $(3)  $—  $(3)   $—  $—  $—  $—  $— 

Reclassified to
earnings1

 (3)  1  (2)   —  (2)  

Reclassified to earnings

  6   (1)   5   —   5 

Net OCI

 $(9)  $4  $(5)  $—  $(5)   $6  $(1)  $5  $—  $5 

Change in net DVA

Change in net DVA

 

     

OCI activity

 $440  $(163)  $277  $—  $277    $580  $(140)  $440  $15  $425 

Reclassified to
earnings1

 (35)  13  (22)   —  (22)  

Reclassified to earnings

  15   (4)   11   —   11 

Net OCI

 $405  $(150)  $255  $—  $255    $  595  $(144)  $      451  $        15  $      436 
 

Three Months Ended

 

March 31, 2017

 
$ in millions Pre-tax
Gain
(Loss)		 Income
Tax
Benefit
(Provision)		 After-
tax Gain
(Loss)		 Non-
controlling
Interests		 Net 

Foreign currency translation adjustments

Foreign currency translation adjustments

 

  

OCI activity

 $43  $107  $150  $43  $107 

Reclassified to earnings

  —   —   —   —   — 

Net OCI

 $43  $107  $150  $43  $107 

Change in net unrealized gains (losses) on AFS securities

Change in net unrealized gains (losses) on AFS securities

 

  

OCI activity

 $137  $(52)  $85  $—  $85 

Reclassified to earnings

 (2)  1  (1)   —  (1) 

Net OCI

 $135  $(51)  $84  $—  $84 

Change in net DVA

     

OCI activity

 $7  $(1)  $6  $7  $(1) 

Reclassified to earnings

 4  (1)  3   —  3 

Net OCI

 $        11  $(2)  $9  $7  $        2 

 

1.

Amounts reclassifiedExclusive of 2018 cumulative adjustments related to earnings related to: realized gains and losses from salesthe adoption of AFS securities are classified within Other revenuescertain accounting updates in the income statements; Pension, postretirementcurrent quarter. Refer to the table below and Note 2 for further information.

Cumulative Adjustments to Retained Earnings

$ in millions

Three Months Ended

March 31, 2018

Revenue from contracts with customers

    $(32) 

Derivatives and hedging–targeted improvements to accounting for hedging activities

(99) 

Reclassification of certain tax effects from AOCI

443

Other1

(6) 

Total

    $306
$ in millionsThree Months Ended
March 31, 2017

Improvements to employee share-based payment accounting2

(30) 

Intra-entity transfers of assets other are classified within Compensationthan inventory

(5) 

Total

    $(35) 

1.

Other includes the adoption of accounting updates related toRecognition and benefits expensesMeasurement of Financial Assets and Financial Liabilities (other than the provision around presenting unrealized DVA in the income statements;OCI which we early adopted in 2016) and realizationDerecognition of DVA are classified within Trading revenues in the income statements.Nonfinancial Assets. The impact of these adoptions on Retained earnings was not significant.

2.

Exclusive of 2016 cumulative adjustmentSee Note 2 to the 2017 Form 10-K for accounting change related to DVA.further information.

Amounts in the previous table represent cumulative adjustments related to the adoption of the accounting updates during the current and prior year quarters. See Note 2 for further information.

 

 

  8779  September 2017March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

Noncontrolling Interests

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

Noncontrolling interests

  $                               1,136   $                             1,127  

15. Earnings per Common Share

Calculation of Basic and Diluted Earnings per Common Share (“EPS”)EPS

 

 Three Months Ended Nine Months Ended 
 

 

September 30,

 

 

September 30,

   

Three Months Ended

 

March 31,

 
in millions, except for per share data 2017 2016 2017  2016    2018   2017 

Basic EPS

        

Income from continuing operations

 $    1,785  $    1,632  $    5,574  $    4,442    $2,706   $1,993 

Income (loss) from discontinued
operations

  6  8   (21)  1     (2)    (22) 

Net income

  1,791  1,640   5,553  4,443     2,704    1,971 

Net income applicable to
noncontrolling interests

  10  43   85  130     36    41 

Net income applicable to Morgan
Stanley

  1,781  1,597   5,468  4,313     2,668    1,930 

Less: Preferred stock dividends and other

  (93)  (79)   (353)  (314) 

Preferred stock dividends and other

   93    90 

Earnings applicable to Morgan
Stanley common shareholders

 $1,688  $1,518  $5,115  $3,999    $2,575   $1,840 

Weighted average common
shares outstanding

  1,776  1,838   1,789  1,863     1,740    1,801 

Earnings per basic common share

Earnings per basic common share

 

      

Income from continuing operations

 $0.95  $0.82  $2.87  $2.15    $1.48   $1.03 

Income (loss) from discontinued
operations

  —  0.01   (0.01)   —     —    (0.01) 

Earnings per basic common share

 $0.95  $0.83  $2.86  $2.15    $1.48   $1.02 

Diluted EPS

        

Earnings applicable to Morgan
Stanley common shareholders

 $1,688  $1,518  $5,115  $3,999    $2,575   $1,840 

Weighted average common shares
outstanding

  1,776  1,838   1,789  1,863     1,740    1,801 

Effect of dilutive securities:

    

Stock options and RSUs1

  42  41   41  35  

Effect of dilutive securities: Stock options and RSUs1

   31    41 

Weighted average common shares outstanding and common stock equivalents

  1,818  1,879   1,830  1,898             1,771            1,842 

Earnings per diluted common share

Earnings per diluted common share

 

      

Income from continuing operations

 $0.93  $0.80  $2.81  $2.11    $1.46   $1.01 

Income (loss) from discontinued operations

  —  0.01   (0.02)   —     (0.01)    (0.01) 

Earnings per diluted common share

 $0.93  $0.81  $2.79  $2.11    $1.45   $1.00 

Weighted average antidilutive RSUs and stock options (excluded from the computation of diluted EPS)1

  —  14   —  15     1    — 

 

1.

Restricted stock units (“RSUs”)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.computation.

16. Interest Income and Interest Expense

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.

  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

 

March 31,

 
$ in millions      2018   2017 

Interest income

    

Investment securities

  $424   $326 

Loans

   938    748 

Securities purchased under agreements to resell and Securities borrowed1

   215    (18) 

Trading assets, net of Trading liabilities

   540    463 

Customer receivables and Other2

   743    446 

Total interest income

  $2,860   $1,965 

Interest expense

    

Deposits

  $159   $11 

Borrowings

   1,138    1,022 

Securities sold under agreements to repurchase and Securities loaned3

   402    248 

Customer payables and Other4

   186    (87) 

Total interest expense

  $        1,885   $        1,194 

Net interest

  $975   $771 

 

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 customerCustomer receivables, Restricted cash and cash depositedInterest bearing deposits with clearing organizations or segregated under federal and other regulations or requirements.banks.

4.3.

Includes fees received on Securities loaned.

5.4.

Includes fees received from prime brokerage customers for stock loan transactions incurred to cover customers’ short positions.

17. Employee Benefit Plans

The Firm sponsors various retirement plans for the majority of its U.S. employees. The Firm provides certain other postretirement benefits, primarily health care and life insurance, to eligible U.S. employees.

Components of Net Periodic Benefit Expense (Income) for Pension and Other Postretirement Plans

   

Three Months Ended

 

March 31,

 
$ in millions      2018   2017 

Service cost, benefits earned during the period

  $4   $4 

Interest cost on projected benefit obligation

   34    37 

Expected return on plan assets

   (28)    (29) 

Net amortization of prior service credit

   —    (4) 

Net amortization of actuarial loss

   6    4 

Net periodic benefit expense (income)

  $            16   $            12 
 

 

September 2017March 2018 Form 10-Q  8880  

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

17. Employee Benefit Plans

The Firm sponsors various retirement plans for 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.

Components of the Net Periodic Benefit Expense (Income) for Pension 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  

18. 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 in which it has significant business operations, such as New York. The Firm has established a liability for unrecognized tax benefits, and associated interest, if applicable (“tax liabilities”), that it believes is adequate in relation to the potential for additional assessments. Once established, the Firm adjusts such tax liabilities only when new information is available or when an event occurs necessitating a change.

During the fourth quarter of 2017, the Firm agreed to proposed adjustments associated with the expected closure of the IRS field audits for tax years 2006-2008. The Firm expects final closure of these tax years in the second quarter of 2018. The Firm is currently at various levels of field examination with respect to audits by the IRS, as well as New York State and New York City, for tax years 2009-2012 and 2007-2014, respectively. In April 2016, the Firm received a notification from the IRS that the Congressional Joint Committee on Taxation approved the final report of an Appeals Office review of matters from tax years 1999-2005. 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 decrease 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 onin the income statements and effective tax rate for any period in which such resolution occurs.

In March 2017,Furthermore, by the end of the first quarter of 2018, 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 reachreached a conclusion with the U.K. tax authorities on substantially allcertain issues through tax year 2010, the resolution of which isdid 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.

It is reasonably possible that significant changes in the balance of unrecognized tax benefits occur within the next 12 months. At this time, however, it is not possible to reasonably estimate the expected change to the total amount of unrecognized tax benefits and the impact on the Firm’s effective tax rate over the next 12 months.

19. Segment and Geographic Information

Segment Information

For a discussion about the Firm’s business segments, see Note 21 to the consolidated financial statements in the 20162017 Form10-K.

Selected Financial Information by Business Segment

 

 Three Months Ended September 30, 2017           Three Months Ended March 31, 2018         
$ in millions   IS      WM      IM1, 2      I/E      Total     IS WM IM I/E Total 

Totalnon-interest revenues

 $    4,618  $3,195  $676  $(75)  $8,414   $6,195  $3,305  $718  $(116)  $10,102 

Interest income

  1,421   1,155   1   (237)   2,340    1,804   1,280   1   (225)   2,860 

Interest expense

  1,663   130   2   (238)   1,557    1,899   211   1   (226)   1,885 

Net interest

  (242)   1,025   (1)   1   783    (95)   1,069   —   1   975 

Net revenues

 $4,376  $4,220  $675  $(74)  $9,197   $6,100  $  4,374  $718  $(115)  $11,077 

Income from continuing operations before income taxes

 $1,236  $1,119  $131  $(4)  $2,482   $2,112  $1,160  $148  $—  $3,420 

Provision for income taxes

  260   421   16   —   697    449   246   19   —   714 

Income from continuing operations

  976   698   115   (4)   1,785    1,663   914   129   —   2,706 

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

  6   —   —   —   6    (2)   —   —   —   (2) 

Net income

  982   698   115   (4)   1,791    1,661   914   129   —   2,704 

Net income applicable to noncontrolling interests

  9   —   1   —   10    34   —   2   —   36 

Net income applicable
to Morgan Stanley

 $973  $698  $114  $(4)  $1,781   $  1,627  $914  $    127  $—  $2,668 
          Three Months Ended March 31, 2017         
$ in millions IS WM IM I/E Total 

Total non-interest revenues

 $5,379  $3,064  $608  $(77)  $8,974 

Interest income

 1,124  1,079  1  (239)  1,965 

Interest expense

 1,351  85   —  (242)  1,194 

Net interest

 (227)  994  1  3  771 

Net revenues

 $5,152  $4,058  $609  $(74)  $    9,745 

Income from continuing operations before income taxes

 $1,730  $973  $103  $2  $2,808 

Provision for income taxes

 459  326  30   —  815 

Income from continuing operations

 1,271  647  73  2  1,993 

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

 (22)   —   —   —  (22) 

Net income

 1,249  647  73  2  1,971 

Net income applicable to noncontrolling interests

 35   —  6   —  41 

Net income applicable to Morgan Stanley

 $1,214  $647  $67  $        2  $1,930 

I/E–Intersegment Eliminations

 

 

  8981  September 2017March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

  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 SecuritiesTotal Assets by Business Segment

WM—Wealth Management

IM—Investment Management

I/E—Intersegment eliminations

$ in millions  

At

March 31,

2018

   At
December 31,
2017		 

Institutional Securities

  $674,785   $664,974 

Wealth Management

   177,603    182,009 

Investment Management

   6,107    4,750 

Total1

  $            858,495   $            851,733 

 

1.

For further information on fee waiver amounts seeParent assets have been fully allocated to 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.segments.

Additional Information – Investment Management

Net Unrealized Performance-based Fees

$ in millions  At
March 31,
2018		   At
December 31,
2017		 

Net cumulative unrealized performance-based fees at risk of reversing

  $                    441   $                    442 

The Firm waives aFirm’s portion of itsnet cumulative unrealized performance-based fees in(for which the Investment Management business segment from certain registered money market funds that comply withFirm is not obligated to pay compensation) are at risk of reversing if the requirements of Rule 2a-7 offund performance falls below the Investment Company Act of 1940.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.

Reduction of Fees due to Fee Waivers

 

 Three Months Ended
September 30,		 Nine Months Ended
September 30,		   Three Months Ended March 31, 
$ in millions       2017             2016             2017             2016         2018   2017 

Fee waivers

 $20  $26  $66  $61    $                        18   $                        23 

In certain management fee arrangements, theThe Firm is entitled to receive performance-basedwaives a portion of its fees (also referred to as incentive fees and includes carried interest) when the return on assets under management exceeds certain benchmark returns or other performance targets. In such arrangements, performance fee revenues are accrued (or reversed) quarterly based on measuring account/fund performance to date versus the performance benchmark stated in the investment managementInvestment 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.

Geographic Information

For a discussion about the Firm’s geographic net revenues, see Note 21 to the financial statements in the 2017 Form10-K.

Net Revenues by Region

   Three Months Ended March 31, 
$ in millions  2018   2017 

Americas

  $8,018   $7,088 

EMEA

   1,708    1,489 

Asia

   1,351    1,168 

Total

  $                11,077   $                9,745 

20. Revenues from Contracts with Customers

These disclosures are made in accordance with the adoption of the accounting updateRevenue from Contracts with Customers, as such, they relate only to the subset of revenues generated from contracts with customers, which excludes certain revenues primarily reflected in Trading and Interest income.

For a detailed discussion about the Firm’s revenue recognition accounting policies, see Note 2. For further segment and geographic information of the Firm’s total revenues, see Note 19. For a discussion about the Firm’s business segments, see Note 21 to the financial statements in the 2017 Form 10-K.

Customer Contract Revenue by Business Segment

  Three Months Ended March 31, 2018 
$ in millions IS  WM  IM  I/E  Total 

Investment banking1

 $1,308  $140  $—  $(19)  $1,429 

Commissions and fees

  744   498   —   (69)   1,173 

Asset management

  110   2,495   626   (39)   3,192 

Other customer contract revenues2

  59   59   —   (2)   116 

Total revenues from contracts with customers3

 $  2,221  $  3,192  $    626  $  (129)  $  5,910 

1.

Investment banking includes revenues from underwriting equity and fixed income securities and advisory fees.

2.

Includes Trading and Other revenues from contracts with customers.

3.

Includes $902 million in total consolidated revenue recognized in the current quarter from services performed over multiple periods related primarily to investment banking advisory fees, and distribution fees.

Customer Contract Revenue by Region

$ in millions  Three Months Ended
March 31, 2018		 

Americas

  $4,738 

EMEA

   622 

Asia

   550 

Total

  $5,910 

Change in Revenue as a Result of Application of the New Revenue Recognition Standard1

$ in millions  Three Months Ended
March 31, 2018		 

Investment banking2

  $60 

Commissions and fees

   2 

Asset management

   9 

Other customer contract revenues

   12 

Total change

  $83 

1.

The accounting update requires, among other things, a gross presentation of certain costs that were previously netted against revenues. As a result, the Firm recorded an increase to net revenues and noncompensation expenses of $79 million, which was reported as follows: $72 million in the Institutional Securities business segment; $23 million in the Investment. Management business segment; and $(16) million in Intersegment Eliminations related to intersegment activity.

2.

The effect of changing to a gross presentation on advisory fees and total underwriting fees within the Institutional Securities business segment in the current quarter was $15 million and $45 million, respectively.

 

 

September 2017March 2018 Form 10-Q  9082  

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

agreement. The Firm’s portion of net unrealized cumulative performance-based fees (for which the Firm is not obligatedBalance Sheet Amounts Related 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 FeesCustomer Contracts Revenue

 

$ in millions 

  At September 30,  

2017

 

  At December 31,  

2016

   At
March 31,
2018		   At
January 1,
2018		 

Net unrealized cumulative
performance-based fees at risk of reversing

 $450  $397  

Customer and other receivables

  $            2,697   $            2,805 

Total Assets by Business SegmentOther Liabilities—Contract Liabilities Rollforward

 

$ 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  
$ in millions  Three Months Ended
March 31, 2018		 

January 1, 2018

  $155 

Recognized contract liabilities

   184 

Contract liabilities recognized into revenue

   (160) 

March 31, 2018

  $179 

Current quarter activity in contract liabilities relates primarily to Wealth Management advisory and managed account fees that are billed in advance and recognized into revenue as the underlying services are provided.

Certain Future Expected Revenues

   At March 31, 2018 
$ in millions  2018   2019   2020   Thereafter   Total 

Other customer contract revenues1

  $89   $118   $95   $310   $612 

 

1.

Corporate assets have been fully allocated to the business segments.Primarily includes commodities-related contracts with customers.

Geographic Information

For a discussion about the Firm’s geographic netThe previous table presents expected revenues see Note 21from current obligations to the consolidated financial statementsperform services in the 2016 Form10-K.future. It excludes the following: revenue subject to potentially significant reversal, revenues from contracts shorter than one year, and revenues from billings that are commensurate with the value of the services performed at each stage of the contract.

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  

20.21. Subsequent Events

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

 

 

  9183  September 2017March 2018 Form 10-Q

Financial Data Supplement (Unaudited)

Average Balances and Interest Rates and Net Interest Income

  LOGOLOGO

 

   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 % 

  Three Months Ended March 31, 
  2018  2017 
    Average       Annualized      Average       Annualized 
    Daily       Average      Daily       Average 
$ in millions    Balance     Interest  Rate        Balance     Interest  Rate 

Interest earning assets1

           

Investment securities2

 $  80,532  $  424   2.1%    $  80,693  $  326   1.6% 

Loans2

    104,407     938   3.6       95,364     748   3.2 

Securities purchased under agreements to resell and Securities borrowed3:

           

U.S.

    124,172     309   1.0       124,809     77   0.2 

Non-U.S.

    87,581     (94)   (0.4)       97,415     (95)   (0.4) 

Trading assets, net of Trading liabilities4:

           

U.S.

    53,488     487   3.7       54,498     445   3.3 

Non-U.S.

    5,059     53   4.2       3,201     18   2.3 

Customer receivables and Other5:

           

U.S.

    71,382     542   3.1       68,918     336   2.0 

Non-U.S.

    34,131     201   2.4       24,851     110   1.8 

Total

 $  560,752  $  2,860   2.1%    $  549,749  $  1,965   1.4% 

Interest bearing liabilities1

           

Deposits2

 $  159,948  $  159   0.4%    $  153,674  $  11   —% 

Borrowings2, 6

    194,558     1,138   2.4       171,000     1,022   2.4 

Securities sold under agreements to repurchase and Securities loaned7:

           

U.S.

    25,009     286   4.6       33,900     172   2.1 

Non-U.S.

    40,675     116   1.2       39,774     76   0.8 

Customer payables and Other8:

           

U.S.

    121,438     49   0.2       121,923     (86)   (0.3) 

Non-U.S.

    69,646     137   0.8       58,556     (1)   — 

Total

 $  611,274  $  1,885   1.3%    $  578,827  $  1,194   0.8% 

Net interest income and net interest rate spread

       $  975   0.8%          $  771   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 revisionsPrior period amounts have been made to prior periodsrevised to conform to the current presentation.

2.

Amounts include primarily U.S. balances.

3.

Includes fees paid on Securities borrowed.

4.

Trading assets, net of Trading liabilities excludenon-interest earning assets andnon-interest bearing liabilities, such as equity securities.

5.

Includes interest from customerCustomer receivables, Restricted cash and cash depositedInterest bearing deposits with clearing organizations or segregated under federal and other regulations or requirements.banks.

6.

The Firm also issues structured notes that have coupon or repayment terms linked to the performance of debt or equity securities, indices, currencies or commodities, which are recorded within Trading revenues (see Note 3 to the financial statements).

7.

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.

Includes fees received from prime brokerage customers for stock loan transactions incurred to cover customers’ short positions.

 

March 2018 Form 10-Q  9384  September 2017 Form 10-Q

Financial Data Supplement (Unaudited)

Rate/Volume Analysis

  LOGOLOGO

 

Effect of Volume and Rate Changes on Net Interest Income

 

 

Three Months Ended March 31, 2018

versus

 
  

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

  Three Months Ended March 31, 2017 
  

Increase (decrease)

due to change in:

      

Increase (decrease)

due to change in:

     

Increase (Decrease)

Due to Change in:

    
$ in millions      Volume     Rate Net Change       Volume     Rate Net Change    Volume       Rate       Net Change 

Interest earning assets

Interest earning assets

 

          

Investment securities

  $(23)  $47  $24   $(16)  $197  $181   $   (1)   $   99  $            98 

Loans

   66   89   155    184   189   373       71       119   190 

Interest bearing deposits with banks

   2   52   54    (31)   103   72  

Securities purchased under agreements
to resell and Securities borrowed:

Securities purchased under agreements
to resell and Securities borrowed:

 

          

U.S.

   4   244   248    27   563   590       —       232   232 

Non-U.S.

   (10)   (44)   (54)    (18)   (171)   (189)      10       (9)   1 

Trading assets, net of Trading liabilities:

                

U.S.

   47   (36)   11    295   (336)   (41)      (8)       50   42 

Non-U.S.

   (38)   7   (31)    (168)   19   (149)      10       25   35 

Customer receivables and Other:

Customer receivables and Other:

 

          

U.S.

   (4)   70   66    25   87   112       12       194   206 

Non-U.S.

   2   131   133    5   309   314       41       50   91 

Change in interest income

  $46  $560  $606   $303  $960  $1,263   $   135   $   760  $895 

Interest bearing liabilities

Interest bearing liabilities

 

          

Deposits

  $—  $51  $51   $(2)  $42  $40   $   —   $   148  $148 

Short-term and Long-term borrowings

   129   166   295    291   273   564  

Borrowings

     141       (25)   116 

Securities sold under agreements
to repurchase and Securities loaned:

                

U.S.

   (13)   114   101    (3)   230   227       (45)       159   114 

Non-U.S.

   14   (18)   (4)    107   (183)   (76)      2       38   40 

Customer payables and Other:

Customer payables and Other:

 

          

U.S.

   (6)   210   204    (13)   643   630       —       135   135 

Non-U.S.

   (4)   183   179    —   388   388       —       138   138 

Change in interest expense

  $120  $            706  $826   $380  $        1,393  $1,773   $   98   $   593  $            691 

Change in net interest income

  $(74)  $(146)  $(220)   $(77)  $(433)  $(510)  $   37   $   167  $            204 

 

September 85March 2018 Form 10-Q

Glossary of Common AcronymsLOGO

2017 Form 10-K—Annual Report on Form 10-K for year ended December 31, 2017 filed with the SEC

ABS—Asset-backed securities

AFS—Available-for-sale

AML—Anti-money laundering

AOCI—Accumulated other comprehensive income (loss)

AUM—Assets under management or supervision

BHC—Bank holding company

bps—Basis points; one basis point equals 1/100th of 1%

CCAR—Comprehensive Capital Analysis and Review

CCyB—Countercyclical capital buffer

CDO—Collateralized debt obligations, including collateralized loan obligations

CDS—Credit default swaps

CECL—Current expected credit loss

CFTC—U.S. Commodity Futures Trading Commission

CLN—Credit-linked notes

CLO—Collateralized loan obligations

CMBS—Commercial mortgage-backed securities

CMO—Collateralized mortgage obligations

CVA—Credit valuation adjustment

DVA—Debt valuation adjustment

EBITDA—Earnings before interest, taxes, depreciation and amortization

ELN—Equity-linked notes

EMEA—Europe, Middle East and Africa

EPS—Earnings per common share

ERISA—Employee Retirement Income Security Act of 1974

E.U.—European Union

FDIC—Federal Deposit Insurance Corporation

FFELP—Family Education Loan Program

FVA—Funding valuation adjustment

GLR—Global liquidity reserve

G-SIB—Global systemically important banks

HQLA—High-quality liquid assets

HTM—Held-to-maturity

I/E—Intersegment eliminations

IM—Investment Management

IRS—Internal Revenue Service

IS—Institutional Securities

LCR—Liquidity coverage ratio, as adopted by the U.S. banking agencies

LIBOR—London Interbank Offered Rate

M&A—Merger, acquisition and restructuring transaction

MSBNA—Morgan Stanley Bank, N.A.

MS&Co.—Morgan Stanley & Co. LLC

MSIP—Morgan Stanley & Co. International plc

MSMS—Morgan Stanley MUFG Securities Co., Ltd.

MSPBNA—Morgan Stanley Private Bank, National Association

MSSB LLC—Morgan Stanley Smith Barney LLC

MUFG—Mitsubishi UFJ Financial Group, Inc.

MUMSS—Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.

MWh—Megawatt hour

N/A—Not Applicable

NAV—Net asset value

N/M—Not Meaningful

Non-GAAP—Non-generally accepted accounting principles

NSFR—Net stable funding ratio, as proposed by the U.S. banking agencies

OCC—Office of the Comptroller of the Currency

OCI—Other comprehensive income (loss)

OTC—Over-the-counter

PRA—Prudential Regulation Authority

RMBS—Residential mortgage-backed securities

ROE—Return on average common equity

ROTCE—Return on average tangible common equity

RSU—Restricted stock units

RWA—Risk-weighted assets

SEC—U.S. Securities and Exchange Commission

SLR—Supplementary leverage ratio

S&P—Standard & Poor’s

SPE—Special purpose entity

SPOE—Single point of entry

March 2018 Form 10-Q  9486  

Glossary of Common Acronyms  LOGOLOGO

TDR—Troubled debt restructuring

TLAC—Total loss-absorbing capacity

U.K.—United Kingdom

UPB—Unpaid principal balance

U.S.—United States of America

U.S. DOL—U.S. Department of Labor

U.S. GAAP—Accounting principles generally accepted in the United States of America

VaR—Value-at-Risk

VAT—Value-added tax

VIE—Variable interest entities

WACC—Implied weighted average cost of capital

WM—Wealth Management

87March 2018 Form 10-Q

LOGO

 

Other Information

Legal Proceedings

 

The following new matters and developments have occurred since previously reporting certain matters in the Firm’s Annual Report on2017 Form10-K for the year ended December 31, 2016 (the “Form10-K”), the Firm’s Quarterly Report on Form10-Q for the quarterly period ended March 31, 2017 (the “First Quarter Form10-Q”) and the Firm’s Quarterly Report on Form10-Q for the period ending June 30, 2017 (the “Second Quarter Form10-Q”). 10-K. See also the disclosures set forth under “Legal Proceedings” in Part I, Item 3 of the 2017 Form10-K and Part II, Item 1 of the First Quarter Form10-Q and the Second Quarter Form10-Q. 10-K.

Residential Mortgage and Credit Crisis Related Matters

On August 10, 2017,March 8, 2018, the plaintiffcourt denied the Firm’s renewed motion to dismiss the notification claims inWilmingtonDeutsche Bank National Trust Company, as Trustee for the Morgan Stanley ABS Capital I Inc. Trust, Series 2007-NC1 v. Morgan Stanley ABS Capital I, Inc.

On March 8, 2018, the court granted plaintiff’s motion to amend its complaint to include failure to notify claims inDeutsche Bank National Trust Company, solely in its capacity as Trustee for Morgan Stanley ABS Capital I Inc. Trust, Series 2007-NC3 v. Morgan Stanley Mortgage Capital Holdings LLC, et al.as Successor-by-Merger to Morgan Stanley Mortgage Capital Inc. On March 19, 2018, the Firm filed a motion for leavean answer 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.amended complaint.

On August 25, 2017,March 9, 2018, the parties inMorgan Stanley Mortgage Loan Trust 2006-4SL, et al. v. Morgan Stanley Mortgage Capital Inc. andMorgan Stanley Mortgage Loan Trust 2006-10SL,2006-14SL, et al. v. Morgan Stanley Mortgage Capital Holdings LLC, as successor in interest to MorganStanley Mortgage Capital Inc.Inc. entered into agreements to settle the litigations,litigation, which are subject to court approval.

On September 11, 2017,April 4, 2018, the Firm moved to dismiss the second amended complaintparties inPhoenix Light SF Limited, et al.Deutsche Bank National Trust Company, solely in its capacity as trustee for Morgan Stanley Structured Trust I 2007-1 v. Morgan Stanley et al.Mortgage Capital Holdings LLC filed a stipulation voluntarily dismissing the action, with prejudice, pursuant to a settlement.

On October 3, 2017, the Appellate Division, First Department denied the Firm’s motion for leave to appeal inDeutscheZentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al.

OtherEuropean 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 againstMarch 30, 2018, the Firm and another bankfiled its defense to the claim brought by the public prosecutor for the Court of Accounts for the Republic of Italy in athe matter styledCase number BS99-6998/2017,2012/00406/MNVfiled. A hearing was held on April 19, 2018. The timing of a decision is uncertain.

On March 20, 2018, the hearing on the parties’ final submissions inBanco Popolare Societá Cooperativa v. Morgan Stanley & Co. International plc & otherswas adjourned to May 17, 2018.

On April 26, 2018, the District Court in the City Court of Copenhagen, Denmark concerning their roles as underwriters of the initial public offering (“IPO”)Amsterdam issued a decision 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 involved in the IPO in a mattermatters styledCase numberB-2073-16 15/3637. andCase number 15/4353 dismissing the Dutch Tax Authority’s claims. 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.

On November 3, 2017, the Firm intendsDutch Tax Authority has until June 7, 2018 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.).any appeal.

 

 

March 2018 Form 10-Q  9588  September 2017 Form 10-Q

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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 periodcurrent quarter ended September 30, 2017.March 31, 2018.

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		   

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)

     

Month #1 (January 1, 2018—January 31, 2018)

      

Share Repurchase Program2

   2,729,000  $47.07   2,729,000  $4,872     3,466,000  $57.14    3,466,000  $2,302 

Employee transactions3

   769,637  $46.21   —   —      10,078,944  $55.81    —   — 

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)

     

Month #2 (February 1, 2018—February 28, 2018)

      

Share Repurchase Program2

   10,448,247  $46.12   10,448,247  $3,750     10,170,000  $54.81    10,170,000  $1,745 

Employee transactions3

   192,674  $46.11   —   —     838,924  $56.86    —   — 

Quarter ended at September 30, 2017

     

Month #3 (March 1, 2018—March 31, 2018)

      

Share Repurchase Program2

   26,917,247  $46.44   26,917,247  $3,750     8,691,835  $56.89    8,691,835  $1,250 

Employee transactions3

   1,059,075  $46.23   —   —     142,392  $56.05    —   — 

Quarter ended at March 31, 2018

      

Share Repurchase Program2

   22,327,835  $55.98    22,327,835  $1,250 

Employee transactions3

   11,060,260  $55.89    —   — 

 

1.

Share purchases under publicly announced programs are made pursuant to open-market purchases, Rule 10b5-1 plans or privately negotiated transactions (including with employee benefit plans) as market conditions warrant and at prices the Firm deems appropriate and may be suspended at any time. As previously announced, on April 18, 2018, the Firm entered into a sales plan with Mitsubishi UFJ Financial Group, Inc. (“MUFG”) and Morgan Stanley & Co. LLC (“MS&Co.”) whereby MUFG will sell shares of the Firm’s common stock to the Firm, through its agent MS&Co., as part of the Company’s share repurchase program (as defined below). The sales plan is only intended to maintain MUFG’s ownership percentage below 24.9% in order to comply with MUFG’s passivity commitments to the Federal Reserve and will have no impact on the strategic alliance between MUFG and the Firm, including the joint venture in Japan.

2.

The Firm’s Board of Directors has authorized the repurchase of the Firm’s outstanding stock under a share repurchase program (the “Share Repurchase Program”). The Share Repurchase Program is a program for capital management purposes that considers, among other things, business segment capital needs, as well as equity-based compensation and benefit plan requirements. The Share Repurchase Program has no set expiration or termination date. Share repurchases by the Firm are subject to regulatory approval. 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,March 31, 2018, 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.Management.”

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.

89March 2018 Form 10-Q

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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 Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

No change in the Firm’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) occurred during the period covered by this report that materially affected, or is reasonably likely to materially affect, the Firm’s internal control over financial reporting.

Exhibits

An exhibit index has been filed as part of this Report on pageE-1.

 

September 2017March 2018 Form 10-Q  9690  

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Exhibit Index

Morgan Stanley

Quarter Ended September 30, 2017March 31, 2018

 

    Exhibit No.

 

Description

 

10.1

Amended and Restated Trust Agreement dated as of January 1, 2018 by and between Morgan Stanley and State Street Bank and Trust Company.

12

 

Statement Re: Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends (unaudited).

15

 

Letter of awareness from Deloitte & Touche LLP, dated November 3, 2017,May 4, 2018, concerning unaudited interim financial information.

31.1

 

Rule 13a-14(a) Certification of Chief Executive Officer.

31.2

 

Rule 13a-14(a) Certification of Chief Financial Officer.

32.1

 

Section 1350 Certification of Chief Executive Officer.

32.2

 

Section 1350 Certification of Chief Financial Officer.

101

 

Interactive data files pursuant to Rule 405 of RegulationS-T (unaudited): (i) the Consolidated Income Statements—Three Months Ended March 31, 2018 and Nine Months Ended September 30, 2017, and 2016, (ii) the Consolidated Comprehensive Income Statements—Three Months Ended March 31, 2018 and Nine Months Ended September 30, 2017, and 2016, (iii) the Consolidated Balance Sheets—at September 30, 2017March 31, 2018 and December 31, 2016,2017, (iv) the Consolidated Statements of Changes in Total Equity—NineThree Months Ended September 30,March 31, 2018 and 2017, and 2016, (v) the Consolidated Cash Flow Statements—NineThree Months Ended September 30,March 31, 2018 and 2017, and 2016, and (vi) Notes to Consolidated Financial Statements.

 

  E-1  September 2017 Form 10-Q

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

MORGAN STANLEY

(Registrant)

By:

/s/                    /s/ JONATHAN PRUZAN

Jonathan Pruzan

Executive Vice President and

Chief Financial Officer

By:

/s/                        /s/  PAUL C. WIRTH

Paul C. Wirth

Deputy Chief Financial Officer

Date: November 3, 2017May 4, 2018

 

  S-1  September 2017 Form 10-Q