10-Q 1 d52951d10q.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 June 30, 2015

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 July 31, 2015, there were 1,953,385,490 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 June 30, 2015

 

Table of Contents    Page  

Part I—Financial Information

  

Item 1.

  Financial Statements (unaudited)      1   
 

Condensed Consolidated Statements of Income—Three and Six Months Ended June 30, 2015 and 2014

     1   
 

Condensed Consolidated Statements of Comprehensive Income—Three and Six Months Ended June 30, 2015 and 2014

     2   
 

Condensed Consolidated Statements of Financial Condition—June 30, 2015 and December 31, 2014

     3   
 

Condensed Consolidated Statements of Changes in Total Equity—Six Months Ended June  30, 2015 and 2014

     4   
 

Condensed Consolidated Statements of Cash Flows—Six Months Ended June 30, 2015 and 2014

     5   
 

Notes to Condensed Consolidated Financial Statements (unaudited)

     6   
 

1. Introduction and Basis of Presentation

     6   
 

2. Significant Accounting Policies

     7   
 

3. Fair Value Disclosures

     8   
 

4. Investment Securities

     32   
 

5. Collateralized Transactions

     37   
 

6. Variable Interest Entities and Securitization Activities

     42   
 

7. Loans and Allowance for Loan Losses

     49   
 

8. Deposits

     54   
 

9. Long-Term Borrowings and Other Secured Financings

     55   
 

10. Derivative Instruments and Hedging Activities

     55   
 

11. Commitments, Guarantees and Contingencies

     66   
 

12. Regulatory Requirements

     71   
 

13. Total Equity

     74   
 

14. Earnings per Common Share

     78   
 

15. Interest Income and Interest Expense

     79   
 

16. Employee Benefit Plans

     80   
 

17. Income Taxes

     80   
 

18. Segment and Geographic Information

     81   
 

19. Equity Method Investments

     84   
 

20. Subsequent Events

     84   
 

Report of Independent Registered Public Accounting Firm

     86   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      87   
 

Introduction

     87   
 

Executive Summary

     88   
 

Business Segments

     97   
 

Supplemental Financial Information and Disclosures

     115   
 

Accounting Development Updates

     117   
 

Critical Accounting Policies

     118   
 

Liquidity and Capital Resources

     119   

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      141   

Item 4.

  Controls and Procedures      157   

Financial Data Supplement (unaudited)

     158   

Part II—Other Information

  

Item 1.

  Legal Proceedings      164   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      166   

Item 6.

  Exhibits      166   

 

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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-us-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-us-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 Income

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

(unaudited)

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2015     2014     2015     2014  

Revenues:

       

Investment banking

  $ 1,614      $ 1,633      $ 2,971      $ 2,941   

Trading

    2,973        2,516        6,623        5,478   

Investments

    261        227        527        586   

Commissions and fees

    1,158        1,138        2,344        2,354   

Asset management, distribution and administration fees

    2,742        2,621        5,423        5,170   

Other

    297        206        468        500   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest revenues

    9,045        8,341        18,356        17,029   
 

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

    1,386        1,250        2,870        2,593   

Interest expense

    688        983        1,576        2,018   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net interest

    698        267        1,294        575   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

    9,743        8,608        19,650        17,604   
 

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expenses:

       

Compensation and benefits

    4,405        4,200        8,929        8,506   

Occupancy and equipment

    351        358        693        719   

Brokerage, clearing and exchange fees

    487        458        950        901   

Information processing and communications

    438        411        853        835   

Marketing and business development

    179        165        329        312   

Professional services

    598        531        1,084        984   

Other

    558        553        1,230        1,045   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expenses

    7,016        6,676        14,068        13,302   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

    2,727        1,932        5,582        4,302   

Provision for income taxes

    894        15        1,281        800   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    1,833        1,917        4,301        3,502   
 

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations:

       

Income (loss) from discontinued operations before income taxes

    (2     (1     (10     (3

Provision for (benefit from) income taxes

    —          (1     (3     (2
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations

    (2     —          (7     (1
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 1,831      $ 1,917      $ 4,294      $ 3,501   

Net income applicable to nonredeemable noncontrolling interests

    24        18        93        97   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income applicable to Morgan Stanley

  $ 1,807      $ 1,899      $ 4,201      $ 3,404   

Preferred stock dividends and other

    142        79        222        135   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings applicable to Morgan Stanley common shareholders

  $ 1,665      $ 1,820      $ 3,979      $ 3,269   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per basic common share:

       

Income from continuing operations

  $ 0.87      $ 0.94      $ 2.07      $ 1.70   

Income (loss) from discontinued operations

    —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per basic common share

  $ 0.87      $ 0.94      $ 2.07      $ 1.70   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per diluted common share:

       

Income from continuing operations

  $ 0.85      $ 0.92      $ 2.03      $ 1.66   

Income (loss) from discontinued operations

    —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per diluted common share

  $ 0.85      $ 0.92      $ 2.03      $ 1.66   
 

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share

  $ 0.15      $ 0.10      $ 0.25      $ 0.15   

Average common shares outstanding:

       

Basic

    1,919,087,127        1,928,250,328        1,921,604,663        1,926,260,244   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    1,960,355,702        1,969,698,239        1,961,676,071        1,969,675,518   
 

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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MORGAN STANLEY

Condensed Consolidated Statements of Comprehensive Income

(dollars in millions)

(unaudited)

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
         2015             2014              2015             2014      

Net income

   $ 1,831      $ 1,917       $ 4,294      $ 3,501   

Other comprehensive income (loss), net of tax:

         

Foreign currency translation adjustments(1)

   $ 34      $ 86       $ (188   $ 152   

Amortization of cash flow hedges(2)

     —          1         1        2   

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

     (228     162         (28     236   

Pension, postretirement and other related adjustments(4)

     (3     4         (2     6   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total other comprehensive income (loss)

   $ (197   $ 253       $ (217   $ 396   
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 1,634      $ 2,170       $ 4,077      $ 3,897   

Net income applicable to nonredeemable noncontrolling interests

     24        18         93        97   

Other comprehensive income (loss) applicable to nonredeemable noncontrolling interests

     (16     18         (18     36   
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income applicable to Morgan Stanley

   $ 1,626      $ 2,134       $ 4,002      $ 3,764   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Amounts include provision for (benefit from) income taxes of $(54) million and $(56) million for the quarters ended June 30, 2015 and 2014, respectively, and $120 million and $(112) million for the six months ended June 30, 2015 and 2014, respectively.
(2) Amounts include provision for income taxes of $1 million for the quarter ended June 30, 2015 and $1 million and $1 million for the six months ended June 30, 2015 and 2014, respectively.
(3) Amounts include provision for (benefit from) income taxes of $(137) million and $112 million for the quarters ended June 30, 2015 and 2014, respectively, and $(16) million and $162 million for the six months ended June 30, 2015 and 2014, respectively.
(4) Amounts include provision for (benefit from) income taxes of $(1) million and $1 million for the quarters ended June 30, 2015 and 2014, respectively, and $(1) million and $2 million for the six months ended June 30, 2015 and 2014, respectively.

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

MORGAN STANLEY

Condensed Consolidated Statements of Financial Condition

(dollars in millions, except share data)

(unaudited)

 

     June 30,
2015
    December 31,
2014
 

Assets

    

Cash and due from banks ($10 and $45 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)

   $ 19,145      $ 21,381   

Interest bearing deposits with banks

     27,214        25,603   

Cash deposited with clearing organizations or segregated under federal and other regulations or requirements ($165 and $149 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)

     33,652        40,607   

Trading assets, at fair value ($127,737 and $127,342 were pledged to various parties at June 30, 2015 and December 31, 2014, respectively) ($625 and $966 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)

     250,279        256,801   

Investment securities (includes $63,709 and $69,216 at fair value at June 30, 2015 and December 31, 2014, respectively)

     66,132        69,316   

Securities received as collateral, at fair value

     15,492        21,316   

Securities purchased under agreements to resell (includes $810 and $1,113 at fair value at June 30, 2015 and December 31, 2014, respectively)

     106,760        83,288   

Securities borrowed

     143,969        136,708   

Customer and other receivables

     57,115        48,961   

Loans:

    

Held for investment (net of allowances of $169 and $149 at June 30, 2015 and December 31, 2014, respectively)

     66,424        57,119   

Held for sale

     9,469        9,458   

Other investments ($387 and $467 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)

     4,172        4,355   

Premises, equipment and software costs (net of accumulated depreciation of $6,660 and $6,219 at June 30, 2015 and December 31, 2014, respectively) ($187 and $191 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)

     6,182        6,108   

Goodwill

     6,594        6,588   

Intangible assets (net of accumulated amortization of $1,969 and $1,824 at June 30, 2015 and December 31, 2014, respectively) (includes $6 at fair value at June 30, 2015 and December 31, 2014, respectively)

     3,151        3,159   

Other assets ($50 and $59 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)

     10,005        10,742   
  

 

 

   

 

 

 

Total assets

   $ 825,755      $ 801,510   
  

 

 

   

 

 

 

Liabilities

    

Deposits

   $ 139,203      $ 133,544   

Short-term borrowings (includes $2,825 and $1,765 at fair value at June 30, 2015 and December 31, 2014, respectively)

     3,122        2,261   

Trading liabilities, at fair value (includes $0 and $1 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally non-recourse to the Company)

     125,152        107,381   

Obligation to return securities received as collateral, at fair value

     23,250        25,685   

Securities sold under agreements to repurchase (includes $594 and $612 at fair value at June 30, 2015 and December 31, 2014, respectively)

     65,619        69,949   

Securities loaned

     23,151        25,219   

Other secured financings (includes $4,074 and $4,504 at fair value at June 30, 2015 and December 31, 2014, respectively) ($299 and $348 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally non-recourse to the Company)

     11,688        12,085   

Customer and other payables

     181,494        181,069   

Other liabilities and accrued expenses ($3 and $72 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally non-recourse to the Company)

     18,920        19,441   

Long-term borrowings (includes $32,994 and $31,774 at fair value at June 30, 2015 and December 31, 2014, respectively)

     158,089        152,772   
  

 

 

   

 

 

 

Total liabilities

     749,688        729,406   
  

 

 

   

 

 

 

Commitments and contingent liabilities (see Note 11)

    

Equity

    

Morgan Stanley shareholders’ equity:

    

Preferred stock (see Note 13)

     7,520        6,020   

Common stock, $0.01 par value:

    

Shares authorized: 3,500,000,000 at June 30, 2015 and December 31, 2014;

    

Shares issued: 2,038,893,979 at June 30, 2015 and December 31, 2014;

    

Shares outstanding: 1,955,655,320 and 1,950,980,142 at June 30, 2015 and December 31, 2014, respectively

     20        20   

Additional paid-in capital

     23,655        24,249   

Retained earnings

     48,106        44,625   

Employee stock trusts

     2,441        2,127   

Accumulated other comprehensive loss

     (1,447     (1,248

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

    

Shares outstanding: 83,238,659 and 87,913,837 at June 30, 2015 and December 31, 2014, respectively

     (2,816     (2,766

Common stock issued to employee stock trusts

     (2,441     (2,127
  

 

 

   

 

 

 

Total Morgan Stanley shareholders’ equity

     75,038        70,900   

Nonredeemable noncontrolling interests

     1,029        1,204   
  

 

 

   

 

 

 

Total equity

     76,067        72,104   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 825,755      $ 801,510   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

MORGAN STANLEY

Condensed Consolidated Statements of Changes in Total Equity

Six Months Ended June 30, 2015 and 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, 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 nonredeemable 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

    —          —          —          —          —          (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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    —          —          —          3,404        —          —          —          —          —          3,404   

Net income applicable to nonredeemable noncontrolling interests

    —          —          —          —          —          —          —          —          97        97   

Dividends

    —          —          —          (431     —          —          —          —          —          (431

Shares issued under employee plans and related tax effects

    —          —          (950     —          429        —          1,627        (429     —          677   

Repurchases of common stock and employee tax withholdings

    —          —          —          —          —          —          (964     —          —          (964

Net change in Accumulated other comprehensive income

    —          —          —          —          —          360        —          —          36        396   

Issuance of preferred stock

    1,800        —          (12     —          —          —          —          —          —          1,788   

Deconsolidation of certain legal entities associated with a real estate fund

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

Other net decreases

    —          —          —          —          —          —          —          —          (190     (190
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT JUNE 30, 2014

  $ 5,020      $ 20      $ 23,608      $ 45,145      $ 2,147      $ (733   $ (2,305   $ (2,147   $ 1,446      $ 72,201   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

     Six Months Ended
June 30,
 
     2015     2014  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 4,294      $ 3,501   

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

    

Income from equity method investments

     (83     (76

Compensation payable in common stock and options

     611        629   

Depreciation and amortization

     654        612   

Net gain on sale of available for sale securities

     (55     (16

Impairment charges

     83        77   

Provision for credit losses on lending activities

     38        15   

Other operating activities

     37        (131

Changes in assets and liabilities:

    

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

     6,955        (5,510

Trading assets, net of Trading liabilities

     25,115        26,647   

Securities borrowed

     (7,261     (17,759

Securities loaned

     (2,068     (1,991

Customer and other receivables and other assets

     (7,556     2,904   

Customer and other payables and other liabilities

     (1,482     21,972   

Securities purchased under agreements to resell

     (23,472     9,174   

Securities sold under agreements to repurchase

     (4,263     (34,221
  

 

 

   

 

 

 

Net cash provided by (used for) operating activities

     (8,453     5,827   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Proceeds from (payments for):

    

Premises, equipment and software, net

     (620     (413

Business dispositions, net of cash disposed

     —          167   

Loans:

    

Purchases, net of proceeds from sales

     (221     (679

Originations, net of repayments

     (8,861     (11,119

Investment securities:

    

Purchases

     (26,832     (19,329

Proceeds from sales

     26,501        5,499   

Proceeds from paydowns and maturities

     2,796        2,153   

Other investing activities

     (97     (388
  

 

 

   

 

 

 

Net cash used for investing activities

     (7,334     (24,109
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net proceeds from (payments for):

    

Short-term borrowings

     861        (359

Nonredeemable noncontrolling interests

     (60     (189

Other secured financings

     (280     194   

Deposits

     5,659        5,316   

Proceeds from:

    

Excess tax benefits associated with stock-based awards

     176        85   

Derivatives financing activities

     312        360   

Issuance of preferred stock, net of issuance costs

     1,493        1,788   

Issuance of long-term borrowings

     22,909        14,825   

Payments for:

    

Long-term borrowings

     (12,963     (21,342

Derivatives financing activities

     (257     (170

Repurchases of common stock and employee tax withholdings

     (1,473     (964

Cash dividends

     (673     (387
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     15,704        (843
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (542     127   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (625     (18,998

Cash and cash equivalents, at beginning of period

     46,984        59,883   
  

 

 

   

 

 

 

Cash and cash equivalents, at end of period

   $ 46,359      $ 40,885   
  

 

 

   

 

 

 

Cash and cash equivalents include:

    

Cash and due from banks

   $ 19,145      $ 18,863   

Interest bearing deposits with banks

     27,214        22,022   
  

 

 

   

 

 

 

Cash and cash equivalents, at end of period

   $ 46,359      $ 40,885   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash payments for interest were $1,027 million and $1,162 million for the six months ended June 30, 2015 and 2014, respectively.

Cash payments for income taxes were $342 million and $374 million for the six months ended June 30, 2015 and 2014, respectively.

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

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. 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 “Company” mean Morgan Stanley (the “Parent”) together with its consolidated subsidiaries.

For a summary of the activities of each of the Company’s business segments, see Note 1 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Form 10-K”).

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 Company recognized an impairment charge of $59 million in Other revenues during the quarter and six months ended June 30, 2015, to reduce the carrying amount of the unit to its estimated fair value less costs to sell. The transaction does not meet the criteria for discontinued operations and is not expected to have a material impact on the Company’s financial results. The Company expects to close the transaction during the second half of 2015 (see Note 3).

CanTerm.    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. As a result of the Company’s level of continuing involvement with CanTerm, the results of CanTerm are reported as a component of continuing operations within the Company’s Institutional Securities business segment for all periods presented. The gain on sale was approximately $45 million and is included in the condensed consolidated statement of income for the six months ended June 30, 2014.

Basis of Financial Information.    The Company’s 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 legal and tax matters, allowance for credit losses and other matters that affect its condensed consolidated financial statements and related disclosures. The Company believes that the estimates utilized in the preparation of its 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 do not include all of the information and notes required by U.S. GAAP for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the 2014 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 6). 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

 

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Table of Contents

MORGAN STANLEY

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

 

nonredeemable noncontrolling interests in the Company’s condensed consolidated statements of income. The portion of shareholders’ equity of such subsidiaries that is attributable to noncontrolling interests for such subsidiaries is presented as Nonredeemable noncontrolling interests, a component of total equity, in the Company’s condensed consolidated statements of financial condition.

For a discussion of the Company’s VIEs and its significant regulated U.S. and international subsidiaries, see Note 1 to the consolidated financial statements in the 2014 Form 10-K.

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 2014 Form 10-K.

During the quarter and six months ended June 30, 2015, other than the following, there were no significant updates made to the Company’s significant accounting policies.

Accounting Standards Adopted.

Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.    In June 2014, the Financial Accounting Standards Board (the “FASB”) issued an accounting update requiring repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. This accounting update also requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty (a repurchase financing), which will result in secured borrowing accounting for the repurchase agreement. This guidance became effective for the Company beginning January 1, 2015. In addition, new disclosures are required for sales of financial assets where the Company retains substantially all the exposure throughout the term and for the collateral pledged and remaining maturity of repurchase and securities lending agreements, which were effective January 1, 2015, and April 1, 2015, respectively. 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 Notes 5 and 6.

Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).    In May 2015, the FASB issued an accounting update that removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured at net asset value (“NAV”) per share, or its equivalent using the practical expedient. The Company adopted this guidance retrospectively during the second quarter of 2015, as early adoption is permitted. For further information on the adoption of this guidance, see Note 3.

Condensed Consolidated Statements of Cash Flows.

In the second quarter of 2015, the Company deconsolidated approximately $191 million in net assets previously attributable to nonredeemable noncontrolling interests that were related to a real estate fund sponsored by the Company. The deconsolidation resulted in a non-cash reduction of assets of $169 million. In the second quarter of 2014, the Company deconsolidated approximately $1.6 billion in net assets previously attributable to nonredeemable noncontrolling interests related to certain legal entities associated with another real estate fund sponsored by the Company. The deconsolidation resulted in a non-cash reduction of assets of $1.3 billion.

 

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Table of Contents

MORGAN STANLEY

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

 

 

3. 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 2014 Form 10-K.

The following fair value hierarchy tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis at June 30, 2015 and December 31, 2014.

Assets and Liabilities Measured at Fair Value on a Recurring Basis at June 30, 2015.

 

     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
June 30,
2015
 
     (dollars in millions)  

Assets at Fair Value

          

Trading assets:

          

U.S. government and agency securities:

          

U.S. Treasury securities

   $ 16,664      $ —        $ —        $ —        $ 16,664   

U.S. agency securities

     1,331        16,793        3        —          18,127   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. government and agency securities

     17,995        16,793        3        —          34,791   

Other sovereign government obligations

     17,317        9,023        12        —          26,352   

Corporate and other debt:

          

State and municipal securities

     —          1,987        7        —          1,994   

Residential mortgage-backed securities

     —          2,118        378        —          2,496   

Commercial mortgage-backed securities

     —          1,319        84        —          1,403   

Asset-backed securities

     —          839        19        —          858   

Corporate bonds

     —          14,321        479        —          14,800   

Collateralized debt and loan obligations

     —          362        660        —          1,022   

Loans and lending commitments

     —          6,595        5,512        —          12,107   

Other debt

     —          2,168        564        —          2,732   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

     —          29,709        7,703        —          37,412   

Corporate equities(1)

     109,680        1,045        486        —          111,211   

Derivative and other contracts:

          

Interest rate contracts

     827        352,457        2,211        —          355,495   

Credit contracts

     —          24,053        886        —          24,939   

Foreign exchange contracts

     60        63,005        492        —          63,557   

Equity contracts

     633        47,745        1,121        —          49,499   

Commodity contracts

     3,380        11,427        3,145        —          17,952   

Other

     —          145        —          —          145   

Netting(2)

     (4,515     (416,622     (4,211     (53,700     (479,048
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative and other contracts

     385        82,210        3,644        (53,700     32,539   

Investments:

          

Investments measured at NAV(3)

             4,534   

Principal investments

     57        25        581        —          663   

Other

     193        222        300        —          715   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

     250        247        881        —          5,912   

Physical commodities

     —          2,062        —          —          2,062   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total trading assets

     145,627        141,089        12,729        (53,700     250,279   

AFS securities

     28,478        35,231        —          —          63,709   

Securities received as collateral

     15,480        9        3        —          15,492   

Securities purchased under agreements to resell

     —          810        —          —          810   

Intangible assets(4)

     —          —          6        —          6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets measured at fair value

   $ 189,585      $ 177,139      $ 12,738      $ (53,700   $ 330,296   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(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
June 30,
2015
 
     (dollars in millions)  

Liabilities at Fair Value

          

Short-term borrowings

   $ —        $ 2,825      $ —        $ —        $ 2,825   

Trading liabilities:

          

U.S. government and agency securities:

          

U.S. Treasury securities

     15,679        —          —          —          15,679   

U.S. agency securities

     1,111        179        —          —          1,290   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. government and agency securities

     16,790        179        —          —          16,969   

Other sovereign government obligations

     18,040        2,353        —          —          20,393   

Corporate and other debt:

          

State and municipal securities

     —          2        —          —          2   

Corporate bonds

     —          5,906        15        —          5,921   

Unfunded lending commitments

     —          6        —          —          6   

Other debt

     —          4        4        —          8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

     —          5,918        19        —          5,937   

Corporate equities(1)

     42,192        1,577        112        —          43,881   

Derivative and other contracts:

          

Interest rate contracts

     766        330,343        2,447        —          333,556   

Credit contracts

     —          23,178        1,875        —          25,053   

Foreign exchange contracts

     12        66,247        46        —          66,305   

Equity contracts

     490        54,568        3,223        —          58,281   

Commodity contracts

     3,811        11,448        1,940        —          17,199   

Other

     —          169        —          —          169   

Netting(2)

     (4,515     (416,622     (4,211     (37,243     (462,591
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative and other contracts

     564        69,331        5,320        (37,243     37,972   

Total trading liabilities

     77,586        79,358        5,451        (37,243     125,152   

Obligation to return securities received as collateral

     23,237        10        3        —          23,250   

Securities sold under agreements to repurchase

     —          440        154        —          594   

Other secured financings

     —          3,906        168        —          4,074   

Long-term borrowings

     —          30,773        2,221        —          32,994   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities measured at fair value

   $ 100,823      $ 117,312      $ 7,997      $ (37,243   $ 188,889   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

AFS—available for sale

(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) Certain investments that are measured at fair value using the NAV per share, or its equivalent, are not classified in the fair value hierarchy. For additional disclosure about such investments, see “Fair Value of Investments that are Measured at Net Asset Value” herein.
(4) Amount represents mortgage servicing rights (“MSRs”) accounted for at fair value.

 

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Table of Contents

MORGAN STANLEY

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

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 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
December 31,
2014
 
     (dollars in millions)  

Assets at Fair Value

          

Trading assets:

          

U.S. government and agency securities:

          

U.S. Treasury securities

   $ 16,961      $ —        $ —        $ —        $ 16,961   

U.S. agency securities

     850        18,193        —          —          19,043   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. government and agency securities

     17,811        18,193        —          —          36,004   

Other sovereign government obligations

     15,149        7,888        41        —          23,078   

Corporate and other debt:

          

State and municipal securities

     —          2,049        —          —          2,049   

Residential mortgage-backed securities

     —          1,991        175        —          2,166   

Commercial mortgage-backed securities

     —          1,484        96        —          1,580   

Asset-backed securities

     —          583        76        —          659   

Corporate bonds

     —          15,800        386        —          16,186   

Collateralized debt and loan obligations

     —          741        1,152        —          1,893   

Loans and lending commitments

     —          6,088        5,874        —          11,962   

Other debt

     —          2,167        285        —          2,452   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

     —          30,903        8,044        —          38,947   

Corporate equities(1)

     112,490        1,357        272        —          114,119   

Derivative and other contracts:

          

Interest rate contracts

     663        495,026        2,484        —          498,173   

Credit contracts

     —          30,813        1,369        —          32,182   

Foreign exchange contracts

     83        72,769        249        —          73,101   

Equity contracts(2)

     571        45,967        1,586        —          48,124   

Commodity contracts

     4,105        18,042        2,268        —          24,415   

Other

     —          376        —          —          376   

Netting(3)

     (4,910     (564,127     (4,220     (66,720     (639,977
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative and other contracts

     512        98,866        3,736        (66,720     36,394   

Investments:

          

Investments measured at NAV(4)

             5,009   

Principal investments

     58        3        835        —          896   

Other

     225        198        323        —          746   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

     283        201        1,158        —          6,651   

Physical commodities

     —          1,608        —          —          1,608   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total trading assets

     146,245        159,016        13,251        (66,720     256,801   

AFS securities

     37,200        32,016        —          —          69,216   

Securities received as collateral

     21,265        51        —          —          21,316   

Securities purchased under agreements to resell

     —          1,113        —          —          1,113   

Intangible assets(5)

     —          —          6        —          6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets measured at fair value

   $ 204,710      $ 192,196      $ 13,257      $ (66,720   $ 348,452   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(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,
2014
 
     (dollars in millions)  

Liabilities at Fair Value

          

Short-term borrowings

   $ —          1,765      $ —        $ —        $ 1,765   

Trading liabilities:

          

U.S. government and agency securities:

          

U.S. Treasury securities

     14,199        —          —          —          14,199   

U.S. agency securities

     1,274        85        —          —          1,359   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. government and agency securities

     15,473        85        —          —          15,558   

Other sovereign government obligations

     11,653        2,109        —          —          13,762   

Corporate and other debt:

          

State and municipal securities

     —          1        —          —          1   

Corporate bonds

     —          5,943        78        —          6,021   

Unfunded lending commitments

     —          10        5        —          15   

Other debt

     —          63        38        —          101   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

     —          6,017        121        —          6,138   

Corporate equities(1)

     31,340        326        45        —          31,711   

Derivative and other contracts:

          

Interest rate contracts

     602        469,319        2,657        —          472,578   

Credit contracts

     —          29,997        2,112        —          32,109   

Foreign exchange contracts

     21        72,233        98        —          72,352   

Equity contracts(2)

     416        51,405        3,751        —          55,572   

Commodity contracts

     4,817        15,584        1,122        —          21,523   

Other

     —          172        —          —          172   

Netting(3)

     (4,910     (564,127     (4,220     (40,837     (614,094
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative and other contracts

     946        74,583        5,520        (40,837     40,212   

Total trading liabilities

     59,412        83,120        5,686        (40,837     107,381   

Obligation to return securities received as collateral

     25,629        56        —          —          25,685   

Securities sold under agreements to repurchase

     —          459        153        —          612   

Other secured financings

     —          4,355        149        —          4,504   

Long-term borrowings

     —          29,840        1,934        —          31,774   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities measured at fair value

   $ 85,041      $ 119,595      $ 7,922      $ (40,837   $ 171,721   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The Company holds or sells short for trading purposes equity securities issued by entities in diverse industries and of varying size.
(2) Level 3 asset derivative equity contracts increased by $57 million with a corresponding decrease in the balance of Level 2 asset derivative equity contracts, and the balance of Level 3 liability derivative equity contracts increased by $842 million with a corresponding decrease in the balance of Level 2 liability derivative equity contracts to correct the fair value level assigned to these contracts at December 31, 2014. The total amount of asset and liability derivative equity contracts remained unchanged.
(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 level. For further information on derivative instruments and hedging activities, see Note 10.
(4) Certain investments that are measured at fair value using the NAV per share, or its equivalent, are not classified in the fair value hierarchy. For additional disclosure about such investments, see “Fair Value of Investments that are Measured at Net Asset Value” herein.
(5) Amount represents MSRs accounted for at fair value.

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 six months ended June 30, 2015 and 2014, respectively. 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

 

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Table of Contents

MORGAN STANLEY

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

 

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.

 

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Table of Contents

MORGAN STANLEY

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

 

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.

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Quarter Ended June 30, 2015

 

    Beginning
Balance at
March 31,
2015
    Total
Realized
and
Unrealized
Gains
(Losses)(1)
    Purchases     Sales     Issuances     Settlements     Net
Transfers
    Ending
Balance at
June 30,
2015
    Unrealized
Gains

(Losses) for
Level 3

Assets/
Liabilities
Outstanding

at June 30,
2015(2)
 
    (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   

Net derivative and other contracts(3):

                 

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        —     

Securities received as collateral

    33        —          —          (30     —          —          —          3        —     

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   

 

(1) Total realized and unrealized gains (losses) are primarily included in Trading revenues in the condensed consolidated statements of income except for $(25) million related to Trading assets—Investments, which is included in Investments revenues.
(2) Amounts represent unrealized gains (losses) for the quarter ended June 30, 2015 related to assets and liabilities still outstanding at June 30, 2015.
(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.

 

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Table of Contents

MORGAN STANLEY

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

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Six Months Ended June 30, 2015

 

    Beginning
Balance at
December 31,
2014
    Total
Realized and
Unrealized
Gains
(Losses)(1)
    Purchases     Sales     Issuances     Settlements     Net
Transfers
    Ending
Balance at
June 30,
2015
    Unrealized
Gains
(Losses) for
Level 3
Assets/
Liabilities
Outstanding
at June 30,
2015(2)
 
    (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   

Net derivative and other contracts(3):

                 

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(4)

    (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

Securities received as collateral

    —          —          3        —          —          —          —          3        —     

Intangible assets

    6        1        —          —          —          (1     —          6        1   

 

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Table of Contents

MORGAN STANLEY

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

 

    Beginning
Balance at
December 31,
2014
    Total
Realized and
Unrealized
Gains
(Losses)(1)
    Purchases     Sales     Issuances     Settlements     Net
Transfers
    Ending
Balance at
June 30,
2015
    Unrealized
Gains
(Losses) for
Level 3
Assets/
Liabilities
Outstanding
at June 30,
2015(2)
 
    (dollars in millions)  

Liabilities at Fair Value

                 

Trading liabilities:

                 

Corporate and other debt:

                 

Corporate bonds

  $ 78      $ (2   $ (12   $ 14      $ —        $ —        $ (67   $ 15      $ (2

Unfunded 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) Total realized and unrealized gains (losses) are primarily included in Trading revenues in the Company’s condensed consolidated statements of income except for $(20) million related to Trading assets—Investments, which is included in Investments revenues.
(2) Amounts represent unrealized gains (losses) for the quarter ended June 30, 2015 related to assets and liabilities still outstanding at June 30, 2015.
(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.
(4) Net liability Level 3 derivative equity contracts increased by $785 million to correct the fair value level assigned to these contracts at December 31, 2014. The total amount of derivative equity contracts remained unchanged at December 31, 2014.

 

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Table of Contents

MORGAN STANLEY

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

 

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

 

    Beginning
Balance at
March 31,
2014
    Total
Realized and
Unrealized
Gains
(Losses)(1)
    Purchases     Sales     Issuances     Settlements     Net
Transfers
    Ending
Balance at
June 30,
2014
    Unrealized
Gains
(Losses) for
Level 3
Assets/
Liabilities
Outstanding
at June 30,
2014(2)
 
    (dollars in millions)  

Assets at Fair Value

                 

Trading assets:

                 

Other sovereign government obligations

  $ 8      $ —        $ 7      $ (2   $ —        $ —        $ 1      $ 14      $ —     

Corporate and other debt:

                 

State and municipal securities

    —          —          4        —          —          —          —          4        —     

Residential mortgage-backed securities

    51        10        1        (7     —          —          —          55        8   

Commercial mortgage-backed securities

    80        5        14        (52     —          —          —          47        (1

Asset-backed securities

    146        —          28        (115     —          —          6        65        —     

Corporate bonds

    538        64        100        (223     —          —          31        510        42   

Collateralized debt obligations

    1,293        79        497        (534     —          (27     24        1,332        32   

Loans and lending commitments

    4,988        146        1,505        (423     —          (304     (83     5,829        188   

Other debt

    31        2        8        (17     —          (2     —          22        2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

    7,127        306        2,157        (1,371     —          (333     (22     7,864        271   

Corporate equities

    263        16        68        (29     —          —          (75     243        11   

Net derivative and other contracts(3):

                 

Interest rate contracts

    (121     (64     1        —          —          77        (2     (109     (25

Credit contracts

    (231     (362     8        —          (8     (157     40        (710     (357

Foreign exchange contracts

    52        21        3        (1     —          30        4        109        21   

Equity contracts

    (1,099     3        29        (1     (32     (102     105        (1,097     (25

Commodity contracts

    1,074        (43     108        —          —          (7     —          1,132        (55

Other

    (1     (1     —          —          —          (1     —          (3     (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net derivative and other contracts

    (326     (446     149        (2     (40     (160     147        (678     (442

Investments:

                 

Principal investments

    2,193        (14     16        (72     —          (1,234     (6     883        65   

Other

    521        2        2        (10     —          —          (135     380        9   

Securities received as collateral

    3        —          —          —          —          (3     —          —          —     

Intangible assets

    7        (1     —          —          —          —          —          6        (1

Liabilities at Fair Value

                 

Trading liabilities:

                 

Corporate and other debt:

                 

Corporate bonds

  $ 3      $ (1   $ (4   $ 13      $ —        $ —        $ 1      $ 14      $ —     

Unfunded lending commitments

    6        (5     —          1        —          —          —          12        (5

Other debt

    68        11        —          5        —          (20     —          42        2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt