10-Q 1 d812414d10q.htm FORM 10-Q Form 10-Q
Table of Contents

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 September 30, 2014

OR

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

EXCHANGE ACT OF 1934

Commission File Number 1-11758

 

 

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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  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 October 31, 2014, there were 1,957,403,208 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.


Table of Contents

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QUARTERLY REPORT ON FORM 10-Q

For the quarter ended September 30, 2014

 

Table of Contents    Page  

Part I—Financial Information

  

Item 1.

  Financial Statements (unaudited)      1   
 

Condensed Consolidated Statements of Financial Condition—September 30, 2014 and December 31, 2013

     1   
 

Condensed Consolidated Statements of Income—Three and Nine Months Ended September  30, 2014 and 2013

     2   
 

Condensed Consolidated Statements of Comprehensive Income—Three and Nine Months Ended September 30, 2014 and 2013

     3   
 

Condensed Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2014 and 2013

     4   
 

Condensed Consolidated Statements of Changes in Total Equity—Nine Months Ended September 30, 2014 and 2013

     5   
 

Notes to Condensed Consolidated Financial Statements (unaudited)

     7   
 

Report of Independent Registered Public Accounting Firm

     98   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      99   
 

Introduction

     99   
 

Executive Summary

     100   
 

Business Segments

     108   
 

Accounting Development Updates

     126   
 

Other Matters

     128   
 

Critical Accounting Policies

     132   
 

Liquidity and Capital Resources

     136   

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      158   

Item 4.

  Controls and Procedures      175   

Financial Data Supplement (unaudited)

     176   

Part II—Other Information

  

Item 1.

  Legal Proceedings      182   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      186   

Item 6.

  Exhibits      186   

 

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Table of Contents

AVAILABLE INFORMATION

Morgan Stanley files 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 Morgan Stanley) file electronically with the SEC. Morgan Stanley’s electronic SEC filings are available to the public at the SEC’s internet site, www.sec.gov.

Morgan Stanley’s internet site is www.morganstanley.com. You can access Morgan Stanley’s Investor Relations webpage at www.morganstanley.com/about/ir. Morgan Stanley makes available free of charge, on or through its Investor Relations webpage, its 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. Morgan Stanley also makes available, through its Investor Relations webpage, via a link to the SEC’s internet site, statements of beneficial ownership of Morgan Stanley’s equity securities filed by its directors, officers, 10% or greater shareholders and others under Section 16 of the Exchange Act.

Morgan Stanley has a Corporate Governance webpage. You can access information about Morgan Stanley’s corporate governance at www.morganstanley.com/about/company/governance. Morgan Stanley posts the following on its Corporate Governance webpage:

 

   

Amended and Restated Certificate of Incorporation;

 

   

Amended and Restated Bylaws;

 

   

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

 

   

Code of Ethics and Business Conduct;

 

   

Code of Conduct; and

 

   

Integrity Hotline information.

Morgan Stanley’s Code of Ethics and Business Conduct applies to all directors, officers and employees, including its Chief Executive Officer, Chief Financial Officer and Deputy Chief Financial Officer. Morgan Stanley will post any amendments to the Code of Ethics and Business Conduct and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange LLC (“NYSE”) on its 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 Morgan Stanley’s internet site is not incorporated by reference into this report.

 

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Table of Contents

Part I—Financial Information.

 

Item 1. Financial Statements.

MORGAN STANLEY

Condensed Consolidated Statements of Financial Condition

(dollars in millions, except share data)

(unaudited)

 

     September 30,
2014
    December 31,
2013
 

Assets

    

Cash and due from banks ($49 and $544 at September 30, 2014 and December 31, 2013, respectively, related to consolidated variable interest entities, generally not available to the Company)

   $ 20,242     $ 16,602  

Interest bearing deposits with banks

     35,584       43,281  

Cash deposited with clearing organizations or segregated under federal and other regulations or requirements ($149 and $117 at September 30, 2014 and December 31, 2013, respectively, related to consolidated variable interest entities, generally not available to the Company)

     45,106       39,203  

Trading assets, at fair value ($126,689 and $151,078 were pledged to various parties at September 30, 2014 and December 31, 2013, respectively) ($1,122 and $2,825 at September 30, 2014 and December 31, 2013, respectively, related to consolidated variable interest entities, generally not available to the Company)

     252,482       280,744  

Available for sale securities, at fair value

     63,547       53,430  

Securities received as collateral, at fair value

     16,694       20,508  

Federal funds sold and securities purchased under agreements to resell (includes $863 and $866 at fair value at September 30, 2014 and December 31, 2013, respectively)

     98,994       118,130  

Securities borrowed

     140,303       129,707  

Customer and other receivables

     54,839       57,104  

Loans:

    

Held for investment (net of allowances of $141 and $156 at September 30, 2014 and December 31, 2013, respectively)

     51,465       36,545  

Held for sale

     6,744       6,329  

Other investments ($488 and $561 at September 30, 2014 and December 31, 2013, respectively, related to consolidated variable interest entities, generally not available to the Company)

     4,515       5,086  

Premises, equipment and software costs (net of accumulated depreciation of $6,128 and $6,420 at September 30, 2014 and December 31, 2013, respectively) ($194 and $201 at September 30, 2014 and December 31, 2013, respectively, related to consolidated variable interest entities, generally not available to the Company)

     5,642       6,019  

Goodwill

     6,589       6,595  

Intangible assets (net of accumulated amortization of $1,924 and $1,703 at September 30, 2014 and December 31, 2013, respectively) (includes $6 and $8 at fair value at September 30, 2014 and December 31, 2013, respectively)

     3,054       3,286  

Other assets ($15 and $11 at September 30, 2014 and December 31, 2013, respectively, related to consolidated variable interest entities, generally not available to the Company)

     8,711       10,133  
  

 

 

   

 

 

 

Total assets

   $ 814,511     $ 832,702  
  

 

 

   

 

 

 

Liabilities

    

Deposits (includes $0 and $185 at fair value at September 30, 2014 and December 31, 2013, respectively).

   $ 124,382     $ 112,379  

Commercial paper and other short-term borrowings (includes $1,473 and $1,347 at fair value at September 30, 2014 and December 31, 2013, respectively)

     1,760       2,142  

Trading liabilities, at fair value ($1 and $33 at September 30, 2014 and December 31, 2013, respectively, related to consolidated variable interest entities, generally non-recourse to the Company)

     118,896       104,521  

Obligation to return securities received as collateral, at fair value

     22,944       24,568  

Securities sold under agreements to repurchase (includes $609 and $561 at fair value at September 30, 2014 and December 31, 2013, respectively)

     83,706       145,676  

Securities loaned

     27,657       32,799  

Other secured financings (includes $4,367 and $5,206 at fair value at September 30, 2014 and December 31, 2013, respectively) ($380 and $543 at September 30, 2014 and December 31, 2013, respectively, related to consolidated variable interest entities, generally non-recourse to the Company)

     12,019       14,215  

Customer and other payables

     181,899       157,125  

Other liabilities and accrued expenses ($72 and $76 at September 30, 2014 and December 31, 2013, respectively, related to consolidated variable interest entities, generally non-recourse to the Company)

     14,880       16,672  

Long-term borrowings (includes $33,159 and $35,637 at fair value at September 30, 2014 and December 31, 2013, respectively)

     152,357       153,575  
  

 

 

   

 

 

 

Total liabilities

     740,500       763,672  
  

 

 

   

 

 

 

Commitments and contingent liabilities (see Note 11)

    

Equity

    

Morgan Stanley shareholders’ equity:

    

Preferred stock (see Note 13)

     6,020       3,220  

Common stock, $0.01 par value:

    

Shares authorized: 3,500,000,000 at September 30, 2014 and December 31, 2013;

    

Shares issued: 2,038,893,979 at September 30, 2014 and December 31, 2013;

    

Shares outstanding: 1,958,386,188 and 1,944,868,751 at September 30, 2014 and December 31, 2013, respectively

     20       20  

Additional paid-in capital

     23,922       24,570  

Retained earnings

     46,573       42,172  

Employee stock trusts

     2,127       1,718  

Accumulated other comprehensive loss

     (1,115     (1,093

Common stock held in treasury, at cost, $0.01 par value:

    

Shares outstanding: 80,507,791 and 94,025,228 at September 30, 2014 and December 31, 2013, respectively

     (2,502     (2,968

Common stock issued to employee stock trusts

     (2,127     (1,718
  

 

 

   

 

 

 

Total Morgan Stanley shareholders’ equity

     72,918       65,921  

Nonredeemable noncontrolling interests

     1,093       3,109  
  

 

 

   

 

 

 

Total equity

     74,011       69,030  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 814,511     $ 832,702  
  

 

 

   

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

MORGAN STANLEY

Condensed Consolidated Statements of Income

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

(unaudited)

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2014     2013     2014     2013  

Revenues:

       

Investment banking

  $ 1,551     $ 1,160     $ 4,492     $ 3,687  

Trading

    2,448       2,259       7,926       7,847  

Investments

    138       728       724       1,254  

Commissions and fees

    1,124       1,079       3,478       3,463  

Asset management, distribution and administration fees

    2,716       2,389       7,886       7,139  

Other

    373       231       873       762  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest revenues

    8,350       7,846       25,379       24,152  
 

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

    1,384       1,261       3,977       3,873  

Interest expense

    827       1,151       2,845       3,377  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net interest

    557       110       1,132       496  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

    8,907       7,956       26,511       24,648  
 

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expenses:

       

Compensation and benefits

    4,214       3,966       12,720       12,284  

Occupancy and equipment

    350       374       1,069       1,129  

Brokerage, clearing and exchange fees

    437       416       1,338       1,300  

Information processing and communications

    396       404       1,231       1,322  

Marketing and business development

    160       151       472       448  

Professional services

    522       448       1,506       1,346  

Other

    608       832       1,653       2,059  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expenses

    6,687       6,591       19,989       19,888  
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

    2,220       1,365       6,522       4,760  

Provision for income taxes

    463       363       1,263       1,288  
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    1,757       1,002       5,259       3,472  
 

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations:

       

Income (loss) from discontinued operations before income taxes

    (8     14       (11     (58

Provision for (benefit from) income taxes

    (3     (2     (5     (26
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations

    (5     16       (6     (32
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 1,752     $ 1,018     $ 5,253     $ 3,440  

Net income applicable to redeemable noncontrolling interests

    —         —         —         222  

Net income applicable to nonredeemable noncontrolling interests

    59       112       156       370  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income applicable to Morgan Stanley

  $ 1,693     $ 906     $ 5,097     $ 2,848  

Preferred stock dividends and other

    64       26       199       229  
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings applicable to Morgan Stanley common shareholders

  $ 1,629     $ 880     $ 4,898     $ 2,619  
 

 

 

   

 

 

   

 

 

   

 

 

 

Amounts applicable to Morgan Stanley:

       

Income from continuing operations

  $ 1,698     $ 890     $ 5,103     $ 2,880  

Income (loss) from discontinued operations

    (5     16       (6     (32
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income applicable to Morgan Stanley

  $ 1,693     $ 906     $ 5,097     $ 2,848  
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per basic common share:

       

Income from continuing operations

  $ 0.85     $ 0.45     $ 2.55     $ 1.39  

Income (loss) from discontinued operations

    —         0.01       (0.01 )     (0.02 )
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per basic common share

  $ 0.85     $ 0.46     $ 2.54     $ 1.37  
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per diluted common share:

       

Income from continuing operations

  $ 0.83     $ 0.44     $ 2.49     $ 1.36  

Income (loss) from discontinued operations

    —         0.01       —         (0.02 )
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per diluted common share

  $ 0.83     $ 0.45     $ 2.49     $ 1.34  
 

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share

  $ 0.10     $ 0.05     $ 0.25     $ 0.15  

Average common shares outstanding:

       

Basic

    1,922,995,835       1,909,350,788       1,925,172,108       1,906,097,564  
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    1,970,922,473       1,964,812,610       1,970,091,170       1,952,146,477  
 

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

MORGAN STANLEY

Condensed Consolidated Statements of Comprehensive Income

(dollars in millions)

(unaudited)

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
         2014             2013              2014             2013      

Net income

   $ 1,752     $ 1,018      $ 5,253     $ 3,440  

Other comprehensive income (loss), net of tax:

         

Foreign currency translation adjustments(1)

   $ (327   $ 125      $ (175   $ (321

Amortization of cash flow hedges(2)

     1       1        3       3  

Change in net unrealized gains (losses) on available for sale securities(3)

     (102     33        134       (336

Pension, postretirement and other related adjustments(4)

     (16     4        (10     15  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total other comprehensive income (loss)

   $ (444   $ 163      $ (48   $ (639
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 1,308     $ 1,181      $ 5,205     $ 2,801  

Net income applicable to redeemable noncontrolling interests

     —         —          —         222  

Net income applicable to nonredeemable noncontrolling interests

     59       112        156       370  

Other comprehensive income (loss) applicable to nonredeemable noncontrolling interests

     (62     8        (26     (141
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income applicable to Morgan Stanley

   $ 1,311     $ 1,061      $ 5,075     $ 2,350  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Amounts are net of provision for (benefit from) income taxes of $249 million and $(124) million for the quarters ended September 30, 2014 and 2013, respectively, and $137 million and $176 million for the nine months ended September 30, 2014 and 2013, respectively.
(2) Amounts are net of provision for income taxes of $1 million and $1 million for the quarters ended September 30, 2014 and 2013, respectively, and $2 million and $2 million for the nine months ended September 30, 2014 and 2013, respectively.
(3) Amounts are net of provision for (benefit from) income taxes of $(70) million and $23 million for the quarters ended September 30, 2014 and 2013, respectively, and $92 million and $(230) million for the nine months ended September 30, 2014 and 2013, respectively.
(4) Amounts are net of provision for (benefit from) income taxes of $(8) million and $2 million for the quarters ended September 30, 2014 and 2013, respectively, and $(6) million and $13 million for the nine months ended September 30, 2014 and 2013, respectively.

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

MORGAN STANLEY

Condensed Consolidated Statements of Cash Flows

(dollars in millions)

(unaudited)

 

     Nine Months Ended
September 30,
 
     2014     2013  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 5,253     $ 3,440  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Income from equity method investments

     (108     (400

Compensation payable in common stock and options

     933       850  

Depreciation and amortization

     748       1,084  

Net gain on sale of available for sale securities

     (36     (43

Impairment charges

     85       182  

Provision for credit losses on lending activities

     1       116  

Other operating activities

     (167     58  

Changes in assets and liabilities:

    

Cash deposited with clearing organizations or segregated under federal and other regulations or requirements

     (5,903     (6,422

Trading assets, net of Trading liabilities

     39,205       (5,944

Securities borrowed

     (10,596     (17,468

Securities loaned

     (5,142     (4,042

Customer and other receivables and other assets

     2,931       6,761  

Customer and other payables and other liabilities

     23,335       21,500  

Federal funds sold and securities purchased under agreements to resell

     19,136       424  

Securities sold under agreements to repurchase

     (61,935     16,724  
  

 

 

   

 

 

 

Net cash provided by operating activities

     7,740       16,820  
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Proceeds from (payments for):

    

Premises, equipment and software

     (533     (944

Business dispositions, net of cash disposed

     962       569  

Loans

     (13,974     (6,046

Purchases of available for sale securities

     (24,581     (20,497

Sales of available for sale securities

     11,212       9,052  

Maturities and redemptions of available for sale securities

     3,415       3,760  

Other investing activities

     (264     117  
  

 

 

   

 

 

 

Net cash used for investing activities

     (23,763     (13,989
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net proceeds from (payments for):

    

Commercial paper and other short-term borrowings

     (382     195  

Noncontrolling interests

     (189     (549

Other secured financings

     (1,725     (1,395

Deposits

     12,003       21,541  

Proceeds from:

    

Excess tax benefits associated with stock-based awards

     91       8  

Derivatives financing activities

     784       244  

Issuance of preferred stock, net of issuance costs

     2,782       854  

Issuance of long-term borrowings

     26,529       24,766  

Payments for:

    

Long-term borrowings

     (24,731     (31,084

Derivatives financing activities

     (384     (237

Repurchases of common stock and related employee tax withholdings

     (1,172     (451

Purchase of additional stake in Wealth Management JV

     —         (4,725

Cash dividends

     (652     (358
  

 

 

   

 

 

 

Net cash provided by financing activities

     12,954       8,809  
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (939     (298
  

 

 

   

 

 

 

Effect of cash and cash equivalents related to variable interest entities

     (49     (465
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (4,057     10,877  

Cash and cash equivalents, at beginning of period

     59,883       46,904  
  

 

 

   

 

 

 

Cash and cash equivalents, at end of period

   $ 55,826     $ 57,781  
  

 

 

   

 

 

 

Cash and cash equivalents include:

    

Cash and due from banks

   $ 20,242     $ 14,333  

Interest bearing deposits with banks

     35,584       43,448  
  

 

 

   

 

 

 

Cash and cash equivalents, at end of period

   $ 55,826     $ 57,781  
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash payments for interest were $2,116 million and $3,372 million for the nine months ended September 30, 2014 and 2013, respectively.

Cash payments for income taxes were $620 million and $598 million for the nine months ended September 30, 2014 and 2013, respectively.

See Notes to Condensed Consolidated Financial Statements.

 

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MORGAN STANLEY

Condensed Consolidated Statements of Changes in Total Equity

Nine Months Ended September 30, 2014

(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-
redeemable
Non-
controlling
Interests
    Total
Equity
 

BALANCE AT DECEMBER 31, 2013

  $ 3,220     $ 20     $ 24,570     $ 42,172     $ 1,718     $ (1,093   $ (2,968   $ (1,718   $ 3,109     $ 69,030  

Net income applicable to Morgan Stanley

    —         —         —         5,097       —         —         —         —         —         5,097  

Net income applicable to nonredeemable noncontrolling interests

    —         —         —         —         —         —         —         —         156       156  

Dividends

    —         —         —         (696     —         —         —         —         —         (696

Shares issued under employee plans and related tax effects

    —         —         (627     —         409       —         1,638       (409     —         1,011  

Repurchases of common stock and related employee tax withholdings

    —         —         —         —         —         —         (1,172     —         —         (1,172

Net change in Accumulated other comprehensive income

    —         —         —         —         —         (22     —         —         (26     (48

Issuance of preferred stock

    2,800       —         (18     —         —         —         —         —         —         2,782  

Deconsolidation of certain legal entities associated with a real estate fund

    —         —         —         —         —         —         —         —         (1,606     (1,606

Other net decreases

    —         —         (3     —         —         —         —         —         (540     (543
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT SEPTEMBER 30, 2014

  $ 6,020     $ 20     $ 23,922     $ 46,573     $ 2,127     $ (1,115   $ (2,502   $ (2,127   $ 1,093     $ 74,011  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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MORGAN STANLEY

Condensed Consolidated Statements of Changes in Total Equity—(Continued)

 

Nine Months Ended September 30, 2013

(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-
Redeemable
Non-
controlling
Interests
    Total
Equity
 

BALANCE AT DECEMBER 31, 2012

  $ 1,508     $ 20     $ 23,426     $ 39,912     $ 2,932     $ (516   $ (2,241   $ (2,932   $ 3,319     $ 65,428   

Net income applicable to Morgan Stanley

    —         —         —         2,848       —         —         —         —         —         2,848   

Net income applicable to nonredeemable noncontrolling interests

    —         —         —         —         —         —         —         —         370       370   

Dividends

    —         —         —         (372     —         —         —         —         —         (372

Shares issued under employee plans and related tax effects

    —         —         817       —         (1,179     —         (28     1,179       —         789   

Repurchases of common stock and related employee tax withholdings

    —         —         —         —         —         —         (451     —         —         (451

Net change in Accumulated other comprehensive income

    —         —         —         —         —         (498     —         —         (141     (639

Issuance of preferred stock

    862       —         (8     —         —         —         —         —         —         854   

Wealth Management JV redemption value adjustment

    —         —         —         (151     —         —         —         —         —         (151

Other net decreases

    —         —         —         —         —         —         —         —         (435     (435
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT SEPTEMBER 30, 2013

  $ 2,370     $ 20     $ 24,235     $ 42,237     $ 1,753     $ (1,014   $ (2,720   $ (1,753   $ 3,113     $ 68,241   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Introduction and Basis of Presentation.

The Company.    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. The Company, through its subsidiaries and affiliates, provides a wide variety of products and services to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individuals. Unless the context otherwise requires, the terms “Morgan Stanley” or the “Company” mean Morgan Stanley (the “Parent”) together with its consolidated subsidiaries.

A summary of the activities of each of the Company’s business segments is as follows:

Institutional Securities provides financial advisory and capital raising services, including: advice on mergers and acquisitions, restructurings, real estate and project finance; corporate lending; sales, trading, financing and market-making activities in equity and fixed income securities and related products, including foreign exchange and commodities; and investment activities.

Wealth Management provides brokerage and investment advisory services to individual investors and small-to-medium sized businesses and institutions covering various investment alternatives; financial and wealth planning services; annuity and other insurance products; credit and other lending products; cash management services; retirement services; and engages in fixed income trading, which primarily facilitates clients’ trading or investments in such securities.

Investment Management provides a broad array of investment strategies that span the risk/return spectrum across geographies, asset classes and public and private markets to a diverse group of clients across the institutional and intermediary channels as well as high net worth clients.

Global Oil Merchanting Business, CanTerm and TransMontaigne.

On December 20, 2013, the Company and a subsidiary of Rosneft Oil Company (“Rosneft”) entered into a Purchase Agreement pursuant to which the Company would sell the global oil merchanting unit of its commodities division (the “global oil merchanting business”) to Rosneft. In the current environment there can be no assurance that the transaction will close, particularly in light of the existing contractual requirement that all necessary approvals be received by December 20, 2014, when the Purchase Agreement will expire. The Company continues to operate the global oil merchanting business in the ordinary course, and should the transaction not close, the Company would consider a variety of options that take into account the interests of the Company’s shareholders, clients and employees. For the foregoing reasons, the global oil merchanting business is no longer classified as held for sale.

On March 27, 2014, the Company completed the sale of Canterm Canadian Terminals Inc. (“CanTerm”), a public storage terminal operator for refined products with two distribution terminals in Canada. Due to a change in the Company’s expected level of continuing involvement with CanTerm, it is no longer considered to be a discontinued operation, and as such, the results of CanTerm are reported as a component of continuing operations within the Institutional Securities business segment for all periods presented. As a result of this change, previously disclosed earnings per diluted common share (“diluted EPS”) from discontinued operations of $0.02 per share are included in diluted EPS from continuing operations for the nine months ended September 30, 2014.

On July 1, 2014, the Company completed the sale of its ownership stake in TransMontaigne Inc., a U.S.-based oil storage, marketing and transportation company, as well as related physical inventory and the assumption of the Company’s obligations under certain terminal storage contracts, to NGL Energy Partners LP. The gain on sale, which was included in continuing operations, was approximately $101 million for the quarter and nine months ended September 30, 2014.

 

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MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Discontinued Operations.    Pre-tax gain (loss) amounts for the quarter and nine months ended September 30, 2014 were not significant. Pre-tax gain (loss) amounts for the quarter and nine months ended September 30, 2013 were $14 million and $(58) million, respectively, included in discontinued operations, primarily related to the prior sale of Saxon and a principal investment.

Prior-period amounts have been recast for discontinued operations.

Basis of Financial Information.    The condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which require the Company 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 litigation and tax matters, allowance for credit losses and other matters that affect the condensed consolidated financial statements and related disclosures. The Company believes that the estimates utilized in the preparation of the condensed consolidated financial statements are prudent and reasonable. Actual results could differ materially from these estimates. Intercompany balances and transactions have been eliminated.

The condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (“2013 Form 10-K”). The condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are, in the opinion of management, necessary for the fair presentation of the results for the interim period. The results of operations for interim periods are not necessarily indicative of results for the entire year.

Consolidation.    The condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and other entities in which the Company has a controlling financial interest, including certain variable interest entities (“VIE”) (see Note 7). For consolidated subsidiaries that are less than wholly owned, the third-party holdings of equity interests are referred to as noncontrolling interests. The portion of net income attributable to noncontrolling interests for such subsidiaries is presented as either Net income (loss) applicable to redeemable noncontrolling interests or Net income (loss) applicable to nonredeemable noncontrolling interests in the condensed consolidated statements of income. The portion of shareholders’ equity of such subsidiaries that is redeemable would be presented as Redeemable noncontrolling interests outside of the equity section in the condensed consolidated statements of financial condition. The portion of shareholders’ equity of such subsidiaries that is nonredeemable is presented as Nonredeemable noncontrolling interests, a component of total equity, in the condensed consolidated statements of financial condition.

For entities where (1) the total equity investment at risk is sufficient to enable the entity to finance its activities without additional subordinated financial support and (2) the equity holders bear the economic residual risks and returns of the entity and have the power to direct the activities of the entity that most significantly affect its economic performance, the Company consolidates those entities it controls either through a majority voting interest or otherwise. For VIEs (i.e., entities that do not meet these criteria), the Company consolidates those entities where the Company has the power to make the decisions that most significantly affect the economic performance of the VIE and has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE, except for certain VIEs that are money market funds, are investment companies or are entities qualifying for accounting purposes as investment companies. Generally, the Company consolidates those entities when it absorbs a majority of the expected losses or a majority of the expected residual returns, or both, of the entities.

For investments in entities in which the Company does not have a controlling financial interest but has significant influence over operating and financial decisions, the Company generally applies the equity method of accounting with net gains and losses recorded within Other revenues. Where the Company has elected to measure certain eligible investments at fair value in accordance with the fair value option, net gains and losses are recorded within Investments revenues (see Note 4).

 

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MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Equity and partnership interests held by entities qualifying for accounting purposes as investment companies are carried at fair value.

The Company’s significant regulated U.S. and international subsidiaries include Morgan Stanley & Co. LLC (“MS&Co.”), Morgan Stanley Smith Barney LLC (“MSSB LLC”), Morgan Stanley & Co. International plc (“MSIP”), Morgan Stanley MUFG Securities Co., Ltd. (“MSMS”), Morgan Stanley Bank, N.A. (“MSBNA”) and Morgan Stanley Private Bank, National Association (“MSPBNA”).

Income Statement Presentation.    The Company, 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. In connection with the delivery of the various products and services to clients, the Company manages its revenues and related expenses in the aggregate. As such, when assessing the performance of its businesses, primarily in its Institutional Securities business segment, the Company considers its trading, investment banking, commissions and fees, and interest income, along with the associated interest expense, as one integrated activity.

 

2. Significant Accounting Policies.

For a detailed discussion about the Company’s significant accounting policies, see Note 2 to the consolidated financial statements in the 2013 Form 10-K.

During the quarter and nine months ended September 30, 2014, other than the following, no updates were made to the Company’s significant accounting policies.

Condensed Consolidated Statements of Cash Flows.

For purposes of the condensed consolidated statements of cash flows, cash and cash equivalents consist of Cash and due from banks and Interest bearing deposits with banks, which are highly liquid investments with original maturities of three months or less, held for investment purposes, and readily convertible to known amounts of cash.

On April 1, 2014, the Company deconsolidated approximately $1.6 billion in total assets that were related to certain legal entities associated with a real estate fund sponsored by the Company. The deconsolidation resulted in a non-cash reduction of assets of $1.3 billion. The Company had no significant non-cash activities in the nine months ended September 30, 2013.

Goodwill.

The Company completed its annual goodwill impairment testing at July 1, 2014. The Company’s impairment testing did not indicate any goodwill impairment, as each of the Company’s reporting units with goodwill had a fair value that was substantially in excess of its carrying value. Adverse market or economic events could result in impairment charges in future periods.

Accounting Standards Adopted.

Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date.    In February 2013, the Financial Accounting Standards Board (the “FASB”) issued an accounting update that requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay and any additional amount the reporting entity expects to

 

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MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

pay on behalf of its co-obligors. This update also requires additional disclosures about those obligations. This guidance became effective for the Company retrospectively beginning on January 1, 2014. The adoption of this accounting guidance did not have a material impact on the Company’s condensed consolidated financial statements.

Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.    In March 2013, the FASB issued an accounting update requiring the parent entity to release any related cumulative translation adjustment into net income when the parent ceases to have a controlling financial interest in a subsidiary that is a foreign entity. When the parent ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity, the related cumulative translation adjustment would be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. This guidance became effective for the Company prospectively beginning on January 1, 2014. The adoption of this accounting guidance did not have a material impact on the Company’s condensed consolidated financial statements.

Amendments to the Scope, Measurement, and Disclosure Requirements of an Investment Company.    In June 2013, the FASB issued an accounting update that modifies the criteria used in defining an investment company under U.S. GAAP and sets forth certain measurement and disclosure requirements. This update requires an investment company to measure noncontrolling interests in another investment company at fair value and requires an entity to disclose the fact that it is an investment company, and provide information about changes, if any, in its status as an investment company. An entity will also need to include disclosures around financial support that has been provided or is contractually required to be provided to any of its investees. This guidance became effective for the Company prospectively beginning January 1, 2014. The adoption of this accounting guidance did not have a material impact on the Company’s condensed consolidated financial statements.

Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.    In July 2013, the FASB issued an accounting update providing guidance on the financial statement presentation of an unrecognized tax benefit when a deferred tax asset from a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. This guidance requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to such deferred tax asset if a settlement in such manner is expected in the event the uncertain tax position is disallowed. This guidance became effective for the Company beginning January 1, 2014. This guidance was applied prospectively to unrecognized tax benefits that existed at the effective date. The adoption of this accounting guidance did not have a material impact on the Company’s condensed consolidated financial statements.

Accounting for Investments in Qualified Affordable Housing Projects.    In January 2014, the FASB issued an accounting update providing guidance on accounting for investments in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The Company adopted this guidance on April 1, 2014, as early adoption is permitted. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements. For further information on the adoption of this guidance, see Note 17.

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.    In April 2014, the FASB issued an accounting update that changes the requirements and disclosure for reporting discontinued operations. The new guidance defines a discontinued operation as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. Individually significant components that have

 

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MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

been disposed of or are held for sale that do not meet the definition of a discontinued operation require new disclosures. The Company adopted this guidance on April 1, 2014, as early adoption is permitted. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

 

3. Wealth Management JV.

In 2009, the Company and Citigroup Inc. (“Citi”) consummated the combination of each institution’s respective wealth management business. The combined businesses operated as the “Wealth Management JV”. Prior to September 2012, the Company owned 51% and Citi owned 49% of the Wealth Management JV. In September 2012, the Company purchased an additional 14% stake in the Wealth Management JV from Citi for $1.89 billion, increasing the Company’s interest from 51% to 65%. In June 2013, the Company purchased the remaining 35% stake in the Wealth Management JV for $4.725 billion, increasing the Company’s interest from 65% to 100%.

For the quarters ended September 30, 2014 and 2013 and the nine months ended September 30, 2014, no results were attributed to Citi since the Company owned 100% of the Wealth Management JV. For the nine months ended September 30, 2013, Citi’s 35% interest was reported on the balance sheet as redeemable noncontrolling interest and the results related to its 35% interest were reported in net income (loss) applicable to redeemable noncontrolling interests in the condensed consolidated statement of income.

Concurrent with the acquisition of the remaining 35% stake in the Wealth Management JV, the deposit sweep agreement between Citi and the Company was terminated. During the quarter and nine months ended September 30, 2014, $5 billion and $14 billion, respectively, of deposits held by Citi relating to the Company’s customer accounts were transferred to the Company’s depository institutions. At September 30, 2014, approximately $13 billion of additional deposits are scheduled to be transferred to the Company’s depository institutions on an agreed-upon basis through June 2015.

 

4. Fair Value Disclosures.

Fair Value Measurements.

For a description of the valuation techniques applied to the Company’s major categories of assets and liabilities measured at fair value on a recurring basis, see Note 4 to the consolidated financial statements in the 2013 Form 10-K.

 

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MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following fair value hierarchy tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis at September 30, 2014 and December 31, 2013.

Assets and Liabilities Measured at Fair Value on a Recurring Basis at September 30, 2014.

 

     Quoted
Prices in
Active

Markets
for
Identical
Assets
(Level 1)
    Significant
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
    Counterparty
and Cash
Collateral
Netting
    Balance at
September 30,
2014
 
     (dollars in millions)  

Assets at Fair Value

          

Trading assets:

          

U.S. government and agency securities:

          

U.S. Treasury securities

   $ 19,259     $ —       $ —       $ —       $ 19,259  

U.S. agency securities

     976       13,788       —         —         14,764  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. government and agency securities

     20,235       13,788       —         —         34,023  

Other sovereign government obligations

     22,746       7,982       13       —         30,741  

Corporate and other debt:

          

State and municipal securities

     —         1,656       —         —         1,656  

Residential mortgage-backed securities

     —         1,486       81       —         1,567  

Commercial mortgage-backed securities

     —         1,428       57       —         1,485  

Asset-backed securities

     —         773       111       —         884  

Corporate bonds

     —         17,007       506       —         17,513  

Collateralized debt and loan obligations

     —         627       1,271       —         1,898  

Loans and lending commitments

     —         6,436       7,507       —         13,943  

Other debt

     —         1,420       155       —         1,575  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

     —         30,833       9,688       —         40,521  

Corporate equities(1)

     102,539       1,011       241       —         103,791  

Derivative and other contracts:

          

Interest rate contracts

     665       438,182       2,685       —         441,532  

Credit contracts

     —         30,381       1,597       —         31,978  

Foreign exchange contracts

     71       70,609       265       —         70,945  

Equity contracts

     1,209       54,189       1,353       —         56,751  

Commodity contracts

     3,133       10,101       2,177       —         15,411  

Other

     —         251       —         —         251  

Netting(2)

     (4,017     (511,875     (4,130     (61,831     (581,853
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative and other contracts

     1,061       91,838       3,947       (61,831     35,015  

Investments:

          

Private equity funds

     —         —         2,493       —         2,493  

Real estate funds

     —         6       1,811       —         1,817  

Hedge funds

     —         351       364       —         715  

Principal investments

     66       5       913       —         984  

Other

     202       70       393       —         665  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

     268       432       5,974       —         6,674  

Physical commodities

     —         1,717       —         —         1,717  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total trading assets

     146,849       147,601       19,863       (61,831     252,482  

Available for sale securities

     33,367       30,180       —         —         63,547  

Securities received as collateral

     16,652       42       —         —         16,694  

Federal funds sold and securities purchased under agreements to resell

     —         863       —         —         863  

Intangible assets(3)

     —         —         6       —         6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets measured at fair value

   $ 196,868     $ 178,686     $ 19,869     $ (61,831   $ 333,592  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

LOGO   12  


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

     Quoted
Prices in
Active

Markets
for
Identical
Assets
(Level 1)
    Significant
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
    Counterparty
and Cash
Collateral
Netting
    Balance at
September 30,
2014
 
     (dollars in millions)  

Liabilities at Fair Value

          

Commercial paper and other short-term borrowings

   $ —       $ 1,473     $ —       $ —       $ 1,473  

Trading liabilities:

          

U.S. government and agency securities:

          

U.S. Treasury securities

     16,718       —         —         —         16,718  

U.S. agency securities

     1,157       83       —         —         1,240  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. government and agency securities

     17,875       83       —         —         17,958  

Other sovereign government obligations

     16,974       2,486       2       —         19,462  

Corporate and other debt:

          

State and municipal securities

     —         4       —         —         4  

Corporate bonds

     —         6,057       48       —         6,105  

Collateralized debt and loan obligations

     —         1       —         —         1  

Unfunded lending commitments

     —         3       —         —         3  

Other debt

     —         251       35       —         286  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

     —         6,316       83       —         6,399  

Corporate equities(1)

     34,487       1,531       3       —         36,021  

Derivative and other contracts:

          

Interest rate contracts

     492       417,021       2,672       —         420,185  

Credit contracts

     —         29,330       2,279       —         31,609  

Foreign exchange contracts

     2       70,012       111       —         70,125  

Equity contracts

     920       59,026       2,541       —         62,487  

Commodity contracts

     3,023       10,887       1,010       —         14,920  

Other

     —         43       —         —         43  

Netting(2)

     (4,017     (511,875     (4,130     (40,291     (560,313
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative and other contracts

     420       74,444       4,483       (40,291     39,056  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total trading liabilities

     69,756       84,860       4,571       (40,291     118,896  

Obligation to return securities received as collateral

     22,880       64       —         —         22,944  

Securities sold under agreements to repurchase

     —         456       153       —         609  

Other secured financings

     —         4,205       162       —         4,367  

Long-term borrowings

     —         31,238       1,921       —         33,159  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities measured at fair value

   $ 92,636     $ 122,296     $ 6,807     $ (40,291   $ 181,448  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The Company holds or sells short for trading purposes equity securities issued by entities in diverse industries and of varying size.
(2) 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 level. For further information on derivative instruments and hedging activities, see Note 10.
(3) Amount represents mortgage servicing rights (“MSR”) accounted for at fair value.

Transfers Between Level 1 and Level 2 During the Quarter and Nine Months Ended September 30, 2014.

For assets and liabilities that were transferred between Level 1 and Level 2 during the period, fair values are ascribed as if the assets or liabilities had been transferred as of the beginning of the period.

In the quarter and nine months ended September 30, 2014, there were no material transfers between Level 1 and Level 2.

 

  13   LOGO


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2013.

 

     Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
    Significant
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
    Counterparty
and Cash
Collateral
Netting
    Balance at
December 31,
2013
 
     (dollars in millions)  

Assets at Fair Value

          

Trading assets:

          

U.S. government and agency securities:

          

U.S. Treasury securities

   $ 32,083     $ —       $ —       $ —       $ 32,083  

U.S. agency securities

     1,216       17,720       —         —         18,936  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. government and agency securities

     33,299       17,720       —         —         51,019  

Other sovereign government obligations

     25,363       6,610       27       —         32,000  

Corporate and other debt:

          

State and municipal securities

     —         1,615       —         —         1,615  

Residential mortgage-backed securities

     —         2,029       47       —         2,076  

Commercial mortgage-backed securities

     —         1,534       108       —         1,642  

Asset-backed securities

     —         878       103       —         981  

Corporate bonds

     —         16,592       522       —         17,114  

Collateralized debt and loan obligations

     —         802       1,468       —         2,270  

Loans and lending commitments

     —         7,483       5,129       —         12,612  

Other debt

     —         6,365       27       —         6,392  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

     —         37,298       7,404       —         44,702  

Corporate equities(1)

     107,818       1,206       190       —         109,214  

Derivative and other contracts:

          

Interest rate contracts

     750       526,127       2,475       —         529,352  

Credit contracts

     —         42,258       2,088       —         44,346  

Foreign exchange contracts

     52       61,570       179       —         61,801  

Equity contracts

     1,215       51,656       1,234       —         54,105  

Commodity contracts

     2,396       8,595       2,380       —         13,371  

Other

     —         43       —         —         43  

Netting(2)

     (3,836     (606,878     (4,931     (54,906     (670,551
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative and other contracts

     577       83,371       3,425       (54,906     32,467  

Investments:

          

Private equity funds

     —         —         2,531       —         2,531  

Real estate funds

     —         6       1,637       —         1,643  

Hedge funds

     —         377       432       —         809  

Principal investments

     43       42       2,160       —         2,245  

Other

     202       45       538       —         785  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

     245       470       7,298       —         8,013  

Physical commodities

     —         3,329       —         —         3,329  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total trading assets

     167,302       150,004       18,344       (54,906     280,744  

Available for sale securities

     24,412       29,018       —         —         53,430  

Securities received as collateral

     20,497       11       —         —         20,508  

Federal funds sold and securities purchased under agreements to resell

     —         866       —         —         866  

Intangible assets(3)

     —         —         8       —         8  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets measured at fair value

   $ 212,211     $ 179,899     $ 18,352     $ (54,906   $ 355,556  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

LOGO   14  


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

     Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
    Significant
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
    Counterparty
and Cash
Collateral
Netting
    Balance at
December 31,
2013
 
     (dollars in millions)  

Liabilities at Fair Value

          

Deposits

   $ —       $ 185     $ —       $ —       $ 185  

Commercial paper and other short-term borrowings

     —         1,346       1       —         1,347  

Trading liabilities:

          

U.S. government and agency securities:

          

U.S. Treasury securities

     15,963       —         —         —         15,963  

U.S. agency securities

     2,593       116       —         —         2,709  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. government and agency securities

     18,556       116       —         —         18,672  

Other sovereign government obligations

     14,717       2,473       —         —         17,190  

Corporate and other debt:

          

State and municipal securities

     —         15       —         —         15  

Corporate bonds

     —         5,033       22       —         5,055  

Collateralized debt and loan obligations

     —         3       —         —         3  

Unfunded lending commitments

     —         127       2       —         129  

Other debt

     —         1,144       48       —         1,192  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

     —         6,322       72       —         6,394  

Corporate equities(1)

     27,983       513       8       —         28,504  

Derivative and other contracts:

          

Interest rate contracts

     675       504,292       2,362       —         507,329  

Credit contracts

     —         40,391       2,235       —         42,626  

Foreign exchange contracts

     23       61,925       111       —         62,059  

Equity contracts

     1,033       57,797       2,065       —         60,895  

Commodity contracts

     2,637       8,749       1,500       —         12,886  

Other

     —         72       4       —         76  

Netting(2)

     (3,836     (606,878     (4,931     (36,465     (652,110
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative and other contracts

     532       66,348       3,346       (36,465     33,761  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total trading liabilities

     61,788       75,772       3,426       (36,465     104,521  

Obligation to return securities received as collateral

     24,549       19       —         —         24,568  

Securities sold under agreements to repurchase

     —         407       154       —         561  

Other secured financings

     —         4,928       278       —         5,206  

Long-term borrowings

     —         33,750       1,887       —         35,637  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities measured at fair value

   $ 86,337     $ 116,407     $ 5,746     $ (36,465   $ 172,025  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The Company holds or sells short for trading purposes equity securities issued by entities in diverse industries and of varying size.
(2) 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 level. For further information on derivative instruments and hedging activities, see Note 10.
(3) Amount represents MSRs accounted for at fair value.

Transfers Between Level 1 and Level 2 During the Quarter and Nine Months Ended September 30, 2013.

For assets and liabilities that were transferred between Level 1 and Level 2 during the period, fair values are ascribed as if the assets or liabilities had been transferred as of the beginning of the period.

In the quarter and nine months ended September 30, 2013, there were no material transfers between Level 1 and Level 2.

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

The following tables present additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the quarters and nine months ended September 30, 2014 and 2013, respectively. Level 3 instruments

 

  15   LOGO


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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 tables below do not reflect the related realized and unrealized gains (losses) on hedging instruments that have been classified by the Company within the Level 1 and/or Level 2 categories.

Additionally, both observable and unobservable inputs may be used to determine the fair value of positions that the Company 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 tables below may include changes in fair value during the period that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.

For assets and liabilities that were transferred into Level 3 during the period, gains (losses) are presented as if the assets or liabilities had been transferred into Level 3 at the beginning of the period; similarly, for assets and liabilities that were transferred out of Level 3 during the period, gains (losses) are presented as if the assets or liabilities had been transferred out at the beginning of the period.

 

LOGO   16  


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Quarter Ended September 30, 2014.

 

    Beginning
Balance at
June 30,
2014
    Total
Realized and
Unrealized
Gains
(Losses)(1)
    Purchases     Sales     Issuances     Settlements     Net
Transfers
    Ending
Balance at
September 30,
2014
    Unrealized
Gains

(Losses) for
Level 3

Assets/
Liabilities
Outstanding

at September 30,
2014(2)
 
    (dollars in millions)  

Assets at Fair Value

                 

Trading assets:

                 

Other sovereign government obligations

  $ 14     $ (1   $ —       $ (1   $ —       $ —       $ 1     $ 13     $ (1

Corporate and other debt:

                 

State and municipal securities

    4       —         —         —         —         —         (4     —         —    

Residential mortgage-backed securities

    55       11       33       (7     —         (11     —         81       11  

Commercial mortgage-backed securities

    47       (1     1       (3     —         —         13       57       (2

Asset-backed securities

    65       5       27       (8     —         —         22       111       5  

Corporate bonds

    510       36       99       (148     —         —         9       506       38  

Collateralized debt and loan obligations

    1,332       8       299       (362     —         (6     —         1,271       6  

Loans and lending commitments

    5,829       (20     2,138       (676     —         (721     957       7,507       (24

Other debt

    22       —         135       (3     —         —         1       155       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

    7,864       39       2,732       (1,207     —         (738     998       9,688       34  

Corporate equities

    243       (2     30       (41     —         —         11       241       7  

Net derivative and other contracts(3):

                 

Interest rate contracts

    (109     (15     7       —         (3     (17     150       13       (22

Credit contracts

    (710     209       7       —         (64     (108     (16     (682     140  

Foreign exchange contracts

    109       (27     6       (3     —         70       (1     154       (25

Equity contracts

    (1,097     (6     56       —         (59     (105     23       (1,188     (9

Commodity contracts

    1,132       73       36       —         —         (62     (12     1,167       12  

Other

    (3     (1     —         —         —         4       —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net derivative and other contracts

    (678     233       112       (3     (126     (218     144       (536     96  

Investments:

                 

Private equity funds

    2,555       60       31       (153     —         —         —         2,493       11  

Real estate funds

    1,813       67       8       (77     —         —         —         1,811       86  

Hedge funds

    371       (1     1       (23     —         —         16       364       (1

Principal investments

    883       (1     22       (23     —         —         32       913       (1

Other

    380       (3     14       —         —         —         2       393       (3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

    6,002       122       76       (276     —         —         50       5,974       92  

Intangible assets

    6       —         —         —         —         —         —         6       —    

Liabilities at Fair Value

                 

Trading liabilities:

                 

Other sovereign government obligations

  $ —       $  —       $ —       $ —       $ —       $ —       $ 2     $ 2     $  —    

Corporate and other debt:

                 

Corporate bonds

    14       1       (8     46       —         —         (3     48       1  

Unfunded lending commitments

    12       12       —         —         —         —         —         —         —    

Other debt

    42       5       —         —         —         (2     —         35       5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

    68       18       (8     46       —         (2     (3     83       6  

Corporate equities

    6       (5     (12     2       —         —         2       3       (4

Securities sold under agreements to repurchase

    155       2       —         —         —         —         —         153       2  

Other secured financings

    135       —         —         —         4       (3     26       162       —    

Long-term borrowings

    1,779       72       —         —         136       (108     186       1,921       72  

 

(1) Total realized and unrealized gains (losses) are primarily included in Trading revenues in the condensed consolidated statements of income except for $122 million related to Trading assets—Investments, which is included in Investments revenues.
(2) Amounts represent unrealized gains (losses) for the quarter ended September 30, 2014 related to assets and liabilities still outstanding at September 30, 2014.
(3) 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 10.

 

  17   LOGO


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

In the quarter ended September 30, 2014, there were no material transfers into or out of Level 3.

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Nine Months Ended September 30, 2014.

 

    Beginning
Balance at
December 31,
2013
    Total
Realized and
Unrealized
Gains
(Losses)(1)
    Purchases     Sales     Issuances     Settlements     Net
Transfers
    Ending
Balance at
September 30,
2014
    Unrealized
Gains

(Losses) for
Level 3 Assets/
Liabilities
Outstanding

at September 30,
2014(2)
 
    (dollars in millions)  

Assets at Fair Value

                 

Trading assets:

                 

Other sovereign government obligations

  $ 27     $ (1   $ 7     $ (21   $ —       $ —       $ 1     $ 13     $ (1

Corporate and other debt:

                 

Residential mortgage-backed securities

    47       34       30       (9     —         (20     (1     81       29  

Commercial mortgage-backed securities

    108       11       22       (97     —         —         13       57       (3

Asset-backed securities

    103       (3     58       (93     —         —         46       111       (3

Corporate bonds

    522       107       185       (302     —         —         (6     506       84  

Collateralized debt and loan obligations

    1,468       137       716       (940     —         (109     (1     1,271       45  

Loans and lending commitments

    5,129       (202     3,962       (327     —         (1,299     244       7,507       (181

Other debt

    27       4       128       (6     —         (2     4       155       3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

    7,404       88       5,101       (1,774     —         (1,430     299       9,688       (26

Corporate equities

    190       17       83       (47     —         —         (2     241       10  

Net derivative and other contracts(3):

                 

Interest rate contracts

    113       (4     8       —         (3     (61     (40     13       4  

Credit contracts

    (147     (434     52       —         (118     10       (45     (682     (475

Foreign exchange contracts

    68       (6     6       (1     —         106       (19     154       (2

Equity contracts

    (831     (19     223       (1     (273     (370     83       (1,188     (66

Commodity contracts

    880       177       200       —         —         (90     —         1,167       99  

Other

    (4     (1     —         —         —         5       —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net derivative and other contracts

    79       (287     489       (2     (394     (400     (21     (536     (440

Investments:

                 

Private equity funds

    2,531       357       141       (537     —         —         1       2,493       130  

Real estate funds

    1,637       212       142       (180     —         —         —         1,811       263  

Hedge funds

    432       17       36       (44     —         —         (77     364       17  

Principal investments

    2,160       49       36       (124     —         (1,234     26       913       129  

Other

    538       (13     17       (11     —         —         (138     393       (6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

    7,298       622       372       (896     —         (1,234     (188     5,974       533  

Intangible assets

    8       —         —         —         —         (2     —         6       (1

 

LOGO   18  


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

    Beginning
Balance at
December 31,
2013
    Total
Realized and
Unrealized
Gains
(Losses)(1)
    Purchases     Sales     Issuances     Settlements     Net
Transfers
    Ending
Balance at
September 30,
2014
    Unrealized
Gains

(Losses) for
Level 3 Assets/
Liabilities
Outstanding

at September 30,
2014(2)
 
    (dollars in millions)  

Liabilities at Fair Value

                 

Commercial paper and other short-term borrowings

  $ 1     $ —       $ —       $ —       $ —       $ (1   $ —       $ —       $ —    

Trading liabilities:

                 

Other sovereign government obligations

    —         —         —         —         —         —         2       2       —    

Corporate and other debt:

                 

Corporate bonds

    22       2       (46     85       —         —         (11     48       3  

Unfunded lending commitments

    2       2       —         —         —         —         —         —         —    

Other debt

    48       15       —         —         —         1       1       35       5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

    72       19       (46     85       —         1       (10     83       8  

Corporate equities

    8       (6     (16     2       —         —         3       3       (6

Securities sold under agreements to repurchase

    154       1       —         —         —         —         —         153       1  

Other secured financings

    278       (9     —         —         21       (188     42       162       (6

Long-term borrowings

    1,887       17       —         —         372       (289     (32     1,921       15  

 

(1) Total realized and unrealized gains (losses) are primarily included in Trading revenues in the condensed consolidated statements of income except for $622 million related to Trading assets—Investments, which is included in Investments revenues.
(2) Amounts represent unrealized gains (losses) for the nine months ended September 30, 2014 related to assets and liabilities still outstanding at September 30, 2014.
(3) 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 10.

In the nine months ended September 30, 2014, there were no material transfers into or out of Level 3.

 

  19   LOGO


Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Quarter Ended September 30, 2013.

 

    Beginning
Balance at
June 30,
2013
    Total
Realized and
Unrealized
Gains
(Losses)(1)
    Purchases     Sales     Issuances     Settlements     Net
Transfers
    Ending
Balance at
September 30,
2013
    Unrealized
Gains

(Losses) for
Level 3 Assets/
Liabilities
Outstanding

at September 30,
2013(2)
 
    (dollars in millions)  

Assets at Fair Value

                 

Trading assets:

                 

Other sovereign government obligations

  $ 4     $ —       $ 2     $ (4   $ —       $ —       $ —       $ 2     $ —    

Corporate and other debt:

                 

Residential mortgage-backed securities

    19       (2     72       (3     —         —         4       90       (3

Commercial mortgage-backed securities

    181       (2     39       (61     —         —         (7     150       5  

Asset-backed securities

    108       —         13       (23     —         —         1       99       —    

Corporate bonds

    509       43       76       (79     —         —         (12     537       36  

Collateralized debt obligations

    1,333       60       269       (206     —         (55     (21     1,380       28  

Loans and lending commitments

    5,243       (72     530       (112     —         (1,279     (212     4,098       (111

Other debt

    12       —         14       (5     —         —         —         21       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

    7,405       27       1,013       (489     —         (1,334     (247     6,375       (45

Corporate equities

    256       (25     38       (20     —         —         (6     243       (3

Net derivative and other contracts(3):

                 

Interest rate contracts

    16       262       4       —         (72     11       89       310       111  

Credit contracts

    685       (259     41       —