Edgar Filing: MORGAN STANLEY

Form 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

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

EXCHANGE ACT OF 1934

Commission File Number 1-11758

LOGO

(Exact Name of Registrant as specified in its charter)

Delaware

(State or other jurisdiction of

incorporation or organization)

1585 Broadway

New York, NY 10036

(Address of principal executive offices, including zip code)

36-3145972

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

(212) 761-4000

(Registrant’s telephone number, including area code)

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

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

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


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

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

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

LOGO

QUARTERLY REPORT ON FORM 10-Q

For the quarter ended June 30, 2016


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

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


		i

Available Information.

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

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

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

•

Amended and Restated Certificate of Incorporation;

•

Amended and Restated Bylaws;

•

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

•

Corporate Governance Policies;

•

Policy Regarding Communication with the Board of Directors;

•

Policy Regarding Director Candidates Recommended by Shareholders;

•

Policy Regarding Corporate Political Activities;

•

Policy Regarding Shareholder Rights Plan;

•

Equity Ownership Commitment;

•

Code of Ethics and Business Conduct;

•

Code of Conduct; and

•

Integrity Hotline Information.

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


		ii

Part I—Financial Information

Item 1. Financial Statements

MORGAN STANLEY

Consolidated Statements of Income

(in millions, except per share data)

(unaudited)


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

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

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

Net interest		913		698		1,812		1,294

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

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

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

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

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

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

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

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

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

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

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

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

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

See Notes to Consolidated Financial Statements.


		1

MORGAN STANLEY

Consolidated Statements of Comprehensive Income

(dollars in millions)

(unaudited)


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

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

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

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

(1)

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

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

(3)

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

See Notes to Consolidated Financial Statements.


		2

MORGAN STANLEY

Consolidated Balance Sheets

(dollars in millions, except share data)

(unaudited)


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

Total assets	$	828,873	$	787,465

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

Total liabilities		750,498		711,281

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

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

Total equity		78,375		76,184

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

See Notes to Consolidated Financial Statements.


		3

MORGAN STANLEY

Consolidated Statements of Changes in Total Equity

Six Months Ended June 30, 2016 and 2015

(dollars in millions)

(unaudited)


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

BALANCE AT JUNE 30, 2016	$	7,520	$	20	$	22,697	$	51,410	$	2,873	$	(905)	$	(3,626)	$	(2,873)	$	1,259	$	78,375


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

BALANCE AT JUNE 30, 2015	$	7,520	$	20	$	23,655	$	48,106	$	2,441	$	(1,447)	$	(2,816)	$	(2,441)	$	1,029	$	76,067

(1)

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

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

See Notes to Consolidated Financial Statements.


		4

MORGAN STANLEY

Consolidated Statements of Cash Flows

(dollars in millions)

(unaudited)


	Six Months Ended June 30,
	2016		2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	2,803	$	4,294
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Income from equity method investments		(1)		(83)
Compensation payable in common stock and options		492		611
Depreciation and amortization		879		654
Net gain on sale of available for sale securities		(82)		(55)
Impairment charges		67		83
Provision for credit losses on lending activities		131		38
Other operating adjustments		218		37
Changes in assets and liabilities:
Trading assets, net of Trading liabilities		(333)		25,115
Securities borrowed		11,135		(7,261)
Securities loaned		(2,117)		(2,068)
Customer and other receivables and other assets		(10,537)		(601)
Customer and other payables and other liabilities		9,907		(1,482)
Securities purchased under agreements to resell		(9,932)		(23,472)
Securities sold under agreements to repurchase		13,636		(4,263)

Net cash provided by (used for) operating activities		16,266		(8,453)


CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from (payments for):
Other assets—Premises, equipment and software, net		(645)		(620)
Changes in loans, net		(4,724)		(9,082)
Investment securities:
Purchases		(30,700)		(26,832)
Proceeds from sales		20,274		26,501
Proceeds from paydowns and maturities		3,507		2,796
Other investing activities		(126)		(97)

Net cash used for investing activities		(12,414)		(7,334)


CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (payments for):
Short-term borrowings		(1,293)		861
Noncontrolling interests		(43)		(60)
Other secured financings		(69)		(280)
Deposits		(3,341)		5,659
Proceeds from:
Excess tax benefits associated with stock-based awards		42		176
Derivatives financing activities		—		312
Issuance of preferred stock, net of issuance costs		—		1,493
Issuance of long-term borrowings		20,628		22,909
Payments for:
Long-term borrowings		(15,900)		(12,963)
Derivatives financing activities		(120)		(257)
Repurchases of common stock and employee tax withholdings		(1,629)		(1,473)
Cash dividends		(791)		(673)

Net cash provided by (used for) financing activities		(2,516)		15,704

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

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

Cash and cash equivalents, at end of period	$	56,133	$	46,359


Cash and cash equivalents include:
Cash and due from banks	$	27,597	$	19,145
Interest bearing deposits with banks		28,536		27,214

Cash and cash equivalents, at end of period	$	56,133	$	46,359

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

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

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

See Notes to Consolidated Financial Statements.


		5

MORGAN STANLEY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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”) together with its consolidated subsidiaries.

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

Basis of Financial Information

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

The accompanying consolidated financial statements should be read in conjunction with the Firm’s consolidated financial statements and notes thereto included in the 2015 Form 10-K. Certain footnote disclosures included in the 2015 Form 10-K have been condensed or omitted from the consolidated financial statements as they are not required for interim reporting under U.S. GAAP. The consolidated financial statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for the fair presentation of the results for the

interim period. The results of operations for interim periods are not necessarily indicative of results for the entire year.

Consolidation

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

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

Consolidated Statements of Cash Flows Presentation

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

Global Oil Merchanting Business

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

transaction on November 1, 2015. The transaction did not meet the criteria for discontinued operations and did not have a material impact on the Firm’s financial results.


		6

MORGAN STANLEY

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

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 2015 Form 10-K.

During the current year period, other than the following, there were no significant updates made to the Firm’s significant accounting policies.

Accounting Standards Adopted

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

•

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

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

•

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

•

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

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

•

Simplifying the Accounting for Measurement-Period Adjustments.

•

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

•

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

•

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


		7

MORGAN STANLEY

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

3. Fair

Values

Fair Value Measurements

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis


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

Total U.S. government and agency securities		25,360		22,085		20		—		47,465
Other sovereign government obligations		20,942		6,607		2		—		27,551
Corporate and other debt:
State and municipal securities		—		1,943		10		—		1,953
Residential mortgage-backed securities		—		586		216		—		802
Commercial mortgage-backed securities		—		961		51		—		1,012
Asset-backed securities		—		142		88		—		230
Corporate bonds		—		11,751		276		—		12,027
Collateralized debt and loan obligations		—		443		109		—		552
Loans and lending commitments(1)		—		3,879		5,418		—		9,297
Other debt		—		827		528		—		1,355

Total corporate and other debt		—		20,532		6,696		—		27,228
Corporate equities(2)		100,018		367		572		—		100,957
Securities received as collateral		10,121		7		—		—		10,128
Derivative and other contracts:
Interest rate contracts		791		462,243		540		—		463,574
Credit contracts		—		16,157		304		—		16,461
Foreign exchange contracts		140		76,264		101		—		76,505
Equity contracts		1,368		40,524		637		—		42,529
Commodity contracts		2,847		8,605		4,057		—		15,509
Other		—		16		—		—		16
Netting(3)		(4,184)		(505,871)		(2,537)		(63,844)		(576,436)

Total derivative and other contracts		962		97,938		3,102		(63,844)		38,158
Investments(4):
Principal investments		21		19		769		—		809
Other		295		559		205		—		1,059

Total investments		316		578		974		—		1,868
Physical commodities		—		193		—		—		193

Total trading assets(4)		157,719		148,307		11,366		(63,844)		253,548

AFS securities		31,062		36,664		—		—		67,726
Securities purchased under agreements to resell		—		555		—		—		555
Intangible assets		—		3		—		—		3

Total assets measured at fair value	$	188,781	$	185,529	$	11,366	$	(63,844)	$	321,832


		8

MORGAN STANLEY

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


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

Total U.S. government and agency securities		13,341		111		—		—		13,452
Other sovereign government obligations		15,885		2,668		—		—		18,553
Corporate and other debt:
State and municipal securities		—		3		—		—		3
Asset-backed securities		—		449		—		—		449
Corporate bonds		—		5,578		6		—		5,584
Other debt		—		15		3		—		18

Total corporate and other debt		—		6,045		9		—		6,054
Corporate equities(2)		46,440		76		26		—		46,542
Obligation to return securities received as collateral		18,731		7		—		—		18,738
Derivative and other contracts:
Interest rate contracts		969		436,022		775		—		437,766
Credit contracts		—		16,403		1,418		—		17,821
Foreign exchange contracts		82		78,441		102		—		78,625
Equity contracts		1,262		43,177		2,110		—		46,549
Commodity contracts		2,368		7,652		2,759		—		12,779
Other		—		91		11		—		102
Netting(3)		(4,184)		(505,871)		(2,537)		(43,727)		(556,319)

Total derivative and other contracts		497		75,915		4,638		(43,727)		37,323

Total trading liabilities		94,894		84,822		4,673		(43,727)		140,662

Securities sold under agreements to repurchase		—		549		150		—		699
Other secured financings		—		2,480		441		—		2,921
Long-term borrowings		44		35,831		1,929		—		37,804

Total liabilities measured at fair value	$	94,938	$	124,258	$	7,223	$	(43,727)	$	182,692


		9

MORGAN STANLEY

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


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

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

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

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

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

Total trading assets(4)		150,128		128,086		13,010		(55,562)		235,662

AFS securities		34,351		32,408		—		—		66,759
Securities purchased under agreements to resell		—		806		—		—		806
Intangible assets		—		—		5		—		5

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


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

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

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

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

Total trading liabilities		91,421		71,734		5,773		(40,473)		128,455

Securities sold under agreements to repurchase		—		532		151		—		683
Other secured financings		—		2,393		461		—		2,854
Long-term borrowings		—		31,058		1,987		—		33,045

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


		10

MORGAN STANLEY

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

AFS—Available for sale

(1)

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

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

(3)

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

(4)

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

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

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

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


		11

MORGAN STANLEY

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

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


	Beginning Balance at March 31, 2016		Total Realized and Unrealized Gains (Losses)		Purchases (1)		Sales		Issuances		Settlements		Net Transfers		Ending Balance at June 30, 2016		Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at June 30, 2016
	(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. agency securities	$	8	$	—	$	—	$	(18)	$	—	$	—	$	30	$	20	$	—
Other sovereign government obligations		8		—		—		(3)		—		—		(3)		2		—
Corporate and other debt:
State and municipal securities		5		1		4		—		—		—		—		10		2
Residential mortgage-backed securities		292		3		—		(82)		—		—		3		216		(5)
Commercial mortgage-backed securities		59		(3)		1		(4)		—		—		(2)		51		(5)
Asset-backed securities		4		(4)		6		(1)		—		—		83		88		(4)
Corporate bonds		224		17		116		(35)		—		—		(46)		276		17
Collateralized debt and loan obligations		348		18		3		(178)		—		—		(82)		109		18
Loans and lending commitments		6,185		(46)		360		(484)		—		(596)		(1)		5,418		(55)
Other debt		527		4		13		(19)		—		—		3		528		2

Total corporate and other debt		7,644		(10)		503		(803)		—		(596)		(42)		6,696		(30)
Corporate equities		430		(63)		273		(82)		—		—		14		572		(63)
Net derivative and other contracts(2):
Interest rate contracts		169		(159)		2		—		(7)		42		(282)		(235)		(157)
Credit contracts		(723)		65		1		—		—		93		(550)		(1,114)		53
Foreign exchange contracts		126		(58)		—		—		—		(94)		25		(1)		(47)
Equity contracts		(1,832)		168		50		—		(140)		263		18		(1,473)		(106)
Commodity contracts		1,200		211		5		—		(4)		(88)		(26)		1,298		130
Other		—		—		—		—		—		—		(11)		(11)		—

Total net derivative and other contracts		(1,060)		227		58		—		(151)		216		(826)		(1,536)		(127)
Investments:
Principal investments		743		4		33		(11)		—		—		—		769		6
Other		179		1		25		—		—		—		—		205		1

Total investments		922		5		58		(11)		—		—		—		974		7
Intangible assets		4		—		—		—		—		—		(4)		—		—
Liabilities at Fair Value
Deposits	$	23	$	(1)	$	—	$	—	$	8	$	—	$	(2)	$	30	$	(1)
Trading liabilities:
Corporate and other debt:
Corporate bonds		6		(1)		(5)		29		—		—		(25)		6		(1)
Lending commitments		1		1		—		—		—		—		—		—		—
Other debt		4		—		(1)		—		—		—		—		3		—

Total corporate and other debt		11		—		(6)		29		—		—		(25)		9		(1)
Corporate equities		31		(28)		(33)		5		—		—		(5)		26		—
Obligation to return securities received as collateral		1		—		(1)		—		—		—		—		—		—
Securities sold under agreements to repurchase		151		1		—		—		—		—		—		150		1
Other secured financings		454		(14)		—		—		23		(22)		(28)		441		(14)
Long-term borrowings		1,798		21		—		—		164		(131)		119		1,929		26


		12

MORGAN STANLEY

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


	Beginning Balance at December 31, 2015		Total Realized and Unrealized Gains (Losses)		Purchases (1)		Sales		Issuances		Settlements		Net Transfers		Ending Balance at June 30, 2016		Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstand- ing at June 30, 2016
	(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. agency securities	$	—	$	1	$	—	$	(19)	$	—	$	—	$	38	$	20	$	1
Other sovereign government obligations		4		—		—		(5)		—		—		3		2		1
Corporate and other debt:
State and municipal securities		19		1		4		(15)		—		—		1		10		1
Residential mortgage-backed securities		341		(19)		19		(133)		—		—		8		216		(14)
Commercial mortgage-backed securities		72		(10)		—		(19)		—		—		8		51		(11)
Asset-backed securities		25		(7)		7		(18)		—		—		81		88		(8)
Corporate bonds		267		62		113		(128)		—		—		(38)		276		61
Collateralized debt and loan obligations		430		5		22		(224)		—		—		(124)		109		17
Loans and lending commitments		5,936		(111)		970		(720)		—		(672)		15		5,418		(121)
Other debt		448		(2)		133		(63)		—		—		12		528		(2)

Total corporate and other debt		7,538		(81)		1,268		(1,320)		—		(672)		(37)		6,696		(77)
Corporate equities		433		(45)		296		(119)		—		—		7		572		(64)
Securities received as collateral		1		—		—		(1)		—		—		—		—		—
Net derivative and other contracts(2):
Interest rate contracts		260		305		3		—		(21)		(60)		(722)		(235)		205
Credit contracts		(844)		(343)		1		—		—		153		(81)		(1,114)		(360)
Foreign exchange contracts		141		(109)		—		—		—		(201)		168		(1)		(82)
Equity contracts		(2,031)		(321)		71		—		(184)		1,121		(129)		(1,473)		(434)
Commodity contracts		1,050		297		7		—		(4)		(176)		124		1,298		210
Other		—		—		—		—		—		—		(11)		(11)		—

Total net derivative and other contracts		(1,424)		(171)		82		—		(209)		837		(651)		(1,536)		(461)
Investments:
Principal investments		486		(39)		403		(40)		—		(41)		—		769		(37)
Other		221		(17)		1		—		—		—		—		205		(16)

Total investments		707		(56)		404		(40)		—		(41)		—		974		(53)
Intangible assets		5		—		—		—		—		—		(5)		—		—
Liabilities at Fair Value
Deposits	$	19	$	(2)	$	—	$	—	$	13	$	—	$	(4)	$	30	$	(2)
Short-term borrowings		1		—		—		—		—		(1)		—		—		—
Trading liabilities:
Corporate and other debt:
Corporate bonds		—		(5)		(7)		10		—		—		(2)		6		(5)
Other debt		4		2		(3)		4		—		—		—		3		2

Total corporate and other debt		4		(3)		(10)		14		—		—		(2)		9		(3)
Corporate equities		17		(3)		(22)		18		—		—		10		26		(3)
Obligation to return securities received as collateral		1		—		(1)		—		—		—		—		—		—
Securities sold under agreements to repurchase		151		1		—		—		—		—		—		150		1
Other secured financings		461		(32)		—		—		69		(43)		(78)		441		(32)
Long-term borrowings		1,987		(12)		—		—		276		(167)		(179)		1,929		(6)


		13

MORGAN STANLEY

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


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

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

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

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

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


		14

MORGAN STANLEY

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


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

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

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

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

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

(1)

Loan originations and consolidations of VIEs are included in purchases.

(2)

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


		15

MORGAN STANLEY

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

Significant Unobservable Inputs Used in Recurring Level 3 Fair Value Measurements

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

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


	Balance at June 30, 2016		Valuation Technique(s) / Significant Unobservable Input(s) / Sensitivity of the Fair Value to Changes in the Unobservable Inputs	Range(1)	Averages(2)
	(dollars in millions)
Assets at Fair Value
Trading assets:
Corporate and other debt:
Residential mortgage-backed securities		$ 216	Comparable pricing:
			Comparable bond price / (A)	0 to 79 points	20 points
Commercial mortgage-backed securities		51	Comparable pricing:
			Comparable bond price / (A)	0 to 7 points	1 point
Asset-backed securities		88	Comparable pricing:
			Comparable bond price / (A)	45 to 55 points	46 points
Corporate bonds		276	Comparable pricing(3):
			Comparable bond price / (A)	3 to 135 points	91 points
			Comparable pricing:
			EBITDA multiple / (A)	5 to 10 times	7 times
Collateralized debt and loan obligations		109	Comparable pricing(3):
			Comparable bond price / (A)	20 to 95 points	57 points
			Correlation model:
			Credit correlation / (B)	29% to 61%	42%
Loans and lending commitments		5,418	Corporate loan model:
			Credit spread / (C)	482 to 898 bps	596 bps
			Margin loan model(3):
			Credit spread / (C)(D)	31 to 102 bps	86 bps
			Volatility skew / (C)(D)	20% to 46%	32%
			Discount rate / (C)(D)	1% to 8%	3%
			Expected recovery:
			Asset coverage / (A)	47% to 99%	90%
			Option model:
			Volatility skew / (C)	-1%	-1%
			Comparable pricing:
			Comparable loan price / (A)	43 to 100 points	87 points
			Discounted cash flow:
			Implied weighted average cost of capital / (C)(D)	5% to 6%	6%
			Capitalization rate / (C)(D)	4% to 10%	4%


		16

MORGAN STANLEY

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


	Balance at June 30, 2016		Valuation Technique(s) / Significant Unobservable Input(s) / Sensitivity of the Fair Value to Changes in the Unobservable Inputs	Range(1)	Averages(2)
	(dollars in millions)
Other debt		528	Comparable pricing:
			Comparable loan price / (A)	3 to 84 points	66 points
			Comparable pricing:
			Comparable bond price / (A)	7 points	7 points
			Option model:
			At the money volatility / (C)	16% to 53%	53%
			Margin loan model(3):
			Discount rate / (C)	1% to 2%	2%
			Discounted cash flow:
			Discount rate / (C)	10% to 13%	12%
Corporate equities		572	Comparable pricing:
			Comparable equity price / (A)	100%	100%
Net derivative and other contracts(4):
Interest rate contracts		(235)	Option model(3):
			Interest rate - Foreign exchange correlation / (A)(D)	25% to 55%	42% / 42% (5)
			Interest rate volatility skew / (A)(D)	34% to 143%	78% / 77% (5)
			Interest rate quanto correlation / (A)(D)	-8% to 35%	2% / -7% (5)
			Interest rate curve correlation / (C)(D)	19% to 95%	71% / 76% (5)
			Inflation volatility / (A)(D)	0% to 1%	1% / 1% (5)
			Interest rate - Inflation correlation / (A)(D)	-24% to -44%	-34% / -33% (5)
			Interest rate curve / (C)(D)	0% to 1%	1% / 1% (5)
			Foreign exchange volatility skew / (C)(D)	0% to 11%	4% / 6% (5)
			Comparable pricing:
			Comparable bond price / (C)	95 to 100 points	96 points
Credit contracts		(1,114)	Comparable pricing:
			Cash synthetic basis / (C)(D)	5 to 12 points	10 points
			Comparable bond price / (C)(D)	0 to 85 points	26 points
			Correlation model(3):
			Credit correlation / (B)	29% to 92%	49%
Foreign exchange contracts(6)		(1)	Option model:
			Interest rate - Foreign exchange correlation / (A)(D)	25% to 55%	42% / 42% (5)
			Interest rate volatility skew / (A)(D)	34% to 143%	78% / 77% (5)
			Interest rate curve / (A)(D)	0%	0% / 0% (5)
			Interest rate curve correlation / (C)(D)	19% to 94%	73% / 81% (5)
Equity contracts(6)		(1,473)	Option model:
			At the money volatility / (A)(D)	6% to 81%	35%
			Volatility skew / (A)(D)	-4% to 0%	-1%
			Equity - Equity correlation / (A)(D)	40% to 98%	79%
			Equity - Foreign exchange correlation / (C)(D)	-70% to -31%	-42%
			Equity - Interest rate correlation / (C)(D)	-7% to 50%	19% / 12% (5)
Commodity contracts		1,298	Option model:
			Forward power price / (C)(D)	$2 to $95 per megawatt hour	$34 per megawatt hour
			Commodity volatility / (C)(D)	6% to 90%	18%
			Cross commodity correlation / (C)(D)	5% to 99%	93%


		17

MORGAN STANLEY

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


	Balance at June 30, 2016		Valuation Technique(s) / Significant Unobservable Input(s) / Sensitivity of the Fair Value to Changes in the Unobservable Inputs	Range(1)	Averages(2)
	(dollars in millions)
Investments:
Principal investments		769	Discounted cash flow:
			Implied weighted average cost of capital / (C)(D)	13% to 16%	15%
			Exit multiple / (A)(D)	8 to 23 times	9 times
			Market approach(3):
			EBITDA multiple / (A)(D)	6 to 25 times	12 times
			Forward capacity price / (A)(D)	$4 to $9	$7
			Comparable pricing:
			Comparable equity price / (A)	43% to 100%	82%
Other		205	Discounted cash flow:
			Implied weighted average cost of capital / (C)(D)	9%	9%
			Exit multiple / (A)(D)	13 times	13 times
			Market approach:
			EBITDA multiple / (A)(D)	6 to 13 times	12 times
			Comparable pricing(3):
			Comparable equity price / (A)	100%	100%
Liabilities at Fair Value
Securities sold under agreements to repurchase		150	Discounted cash flow:
			Funding spread / (A)	117 to 123 bps	120 bps
Other secured financings		441	Option model:
			Volatility skew / (C)	-1%	-1%
			Discounted cash flow(3):
			Discount rate / (C)	4%	4%
			Discounted cash flow:
			Funding spread / (A)	101 to 126 bps	114 bps
Long-term borrowings		1,929	Option model(3):
			At the money volatility / (C)(D)	6% to 48%	29%
			Volatility skew / (C)(D)	-2% to 0%	-1%
			Equity - Equity correlation / (C)(D)	50% to 98%	75%
			Equity - Foreign exchange correlation / (C)(D)	-50% to 11%	-25%
			Option model:
			Interest rate - credit spread correlation / (A)(D)	-52% to 3%	-24% / -23% (5)
			Interest rate - Foreign exchange correlation /
			(A)(D)	53%	53% / 53% (5)
			Interest rate - equity correlation / (A)(D)	7% to 44%	26% / 26% (5)
			Interest rate curve correlation / (C)(D)	40% to 87%	73% / 78% (5)
			Correlation model:
			Credit correlation / (B)	33% to 61%	44%
			Comparable pricing:
			Comparable equity price / (A)	100%	100%


		18

MORGAN STANLEY

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


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


		19

MORGAN STANLEY

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


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