10-Q 1 d97616d10q.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, 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 October 30, 2015, there were 1,936,223,959 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.


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QUARTERLY REPORT ON FORM 10-Q

For the quarter ended September 30, 2015

 

Table of Contents    Page  

Part I—Financial Information

  

Item 1.

 

Financial Statements (unaudited)

     1   
   

Condensed Consolidated Statements of Income—Three and Nine Months Ended September  30, 2015 and 2014

     1   
   

Condensed Consolidated Statements of Comprehensive Income—Three and Nine Months Ended September 30, 2015 and 2014

     2   
   

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

     3   
   

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

     4   
   

Condensed Consolidated Statements of Cash Flows—Nine Months Ended September 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 Values

     8   
   

4. Derivative Instruments and Hedging Activities

     30   
   

5. Investment Securities

     43   
   

6. Collateralized Transactions

     49   
   

7. Loans and Allowance for Credit Losses

     52   
   

8. Equity Method Investments

     57   
   

9. Deposits

     57   
   

10. Long-Term Borrowings and Other Secured Financings

     58   
   

11. Commitments, Guarantees and Contingencies

     59   
   

12. Variable Interest Entities and Securitization Activities

     65   
   

13. Regulatory Requirements

     72   
    14. Total Equity      75   
    15. Earnings per Common Share      79   
    16. Interest Income and Interest Expense      80   
    17. Employee Benefit Plans      81   
    18. Income Taxes      81   
    19. Segment and Geographic Information      82   
    20. Subsequent Events      85   
 

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   
            Business Segments      97   
            Supplemental Financial Information and Disclosures      116   
            Accounting Development Updates      118   
            Critical Accounting Policies      119   
            Liquidity and Capital Resources      120   

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 5.

 

Other Information

     167   

Item 6.

 

Exhibits

     167   

 

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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
September 30,
    Nine Months Ended
September 30,
 
    2015     2014     2015     2014  

Revenues:

       

Investment banking

  $ 1,313      $ 1,551      $ 4,284      $ 4,492   

Trading

    2,026        2,448        8,649        7,926   

Investments

    (119     138        408        724   

Commissions and fees

    1,115        1,124        3,459        3,478   

Asset management, distribution and administration fees

    2,732        2,716        8,155        7,886   

Other

    (62     373        406        873   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest revenues

    7,005        8,350        25,361        25,379   
 

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

    1,451        1,384        4,321        3,977   

Interest expense

    689        827        2,265        2,845   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net interest

    762        557        2,056        1,132   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

    7,767        8,907        27,417        26,511   
 

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expenses:

       

Compensation and benefits

    3,437        4,214        12,366        12,720   

Occupancy and equipment

    341        350        1,034        1,069   

Brokerage, clearing and exchange fees

    485        437        1,435        1,338   

Information processing and communications

    447        396        1,300        1,231   

Marketing and business development

    158        160        487        472   

Professional services

    576        522        1,660        1,506   

Other

    849        608        2,079        1,653   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expenses

    6,293        6,687        20,361        19,989   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

    1,474        2,220        7,056        6,522   

Provision for income taxes

    423        463        1,704        1,263   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    1,051        1,757        5,352        5,259   
 

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations:

       

Income (loss) from discontinued operations before income taxes

    (4     (8     (13     (11

Provision for (benefit from) income taxes

    (2     (3     (4     (5
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations

    (2     (5     (9     (6
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 1,049      $ 1,752      $ 5,343      $ 5,253   

Net income applicable to nonredeemable noncontrolling interests

    31        59        124        156   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income applicable to Morgan Stanley

  $ 1,018      $ 1,693      $ 5,219      $ 5,097   

Preferred stock dividends and other

    79        64        301        199   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings applicable to Morgan Stanley common shareholders

  $ 939      $ 1,629      $ 4,918      $ 4,898   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per basic common share:

       

Income from continuing operations

  $ 0.49      $ 0.85      $ 2.57      $ 2.55   

Income (loss) from discontinued operations

    —          —          —          (0.01
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per basic common share

  $ 0.49      $ 0.85      $ 2.57      $ 2.54   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per diluted common share:

       

Income from continuing operations

  $ 0.48      $ 0.83      $ 2.52      $ 2.49   

Income (loss) from discontinued operations

    —          —          (0.01     —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per diluted common share

  $ 0.48      $ 0.83      $ 2.51      $ 2.49   
 

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share

  $ 0.15      $ 0.10      $ 0.40      $ 0.25   

Average common shares outstanding:

       

Basic

    1,904,213,493        1,922,995,835        1,915,807,606        1,925,172,108   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    1,949,281,601        1,970,922,473        1,957,544,581        1,970,091,170   
 

 

 

   

 

 

   

 

 

   

 

 

 

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,
 
         2015             2014             2015             2014      

Net income

   $ 1,049      $ 1,752      $ 5,343      $ 5,253   

Other comprehensive income (loss), net of tax:

        

Foreign currency translation adjustments(1)

   $ (61   $ (327   $ (249   $ (175

Change in net unrealized gains (losses) on available for sale securities(2)

     100        (102     72        134   

Pension, postretirement and other(3)

     4        (15     3        (7
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

   $ 43      $ (444   $ (174   $ (48
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 1,092      $ 1,308      $ 5,169      $ 5,205   

Net income applicable to nonredeemable noncontrolling interests

     31        59        124        156   

Other comprehensive income (loss) applicable to nonredeemable noncontrolling interests

     15        (62     (3     (26
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income applicable to Morgan Stanley

   $ 1,046      $ 1,311      $ 5,048      $ 5,075   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Amounts include provision for (benefit from) income taxes of $30 million and $249 million for the quarters ended September 30, 2015 and 2014, respectively, and $150 million and $137 million for the nine months ended September 30, 2015 and 2014, respectively.
(2) Amounts include provision for (benefit from) income taxes of $57 million and $(70) million for the quarters ended September 30, 2015 and 2014, respectively, and $41 million and $92 million for the nine months ended September 30, 2015 and 2014, respectively.
(3) Amounts include provision for (benefit from) income taxes of $(2) million and $(7) million for the quarters ended September 30, 2015 and 2014, respectively, and $(2) million and $(4) million for the nine months ended September 30, 2015 and 2014, respectively.

See Notes to Condensed Consolidated Financial Statements.

 

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MORGAN STANLEY

Condensed Consolidated Statements of Financial Condition

(dollars in millions, except share data)

(unaudited)

 

     September 30,
2015
    December 31,
2014
 

Assets

    

Cash and due from banks ($13 and $45 at September 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)

   $ 19,244      $ 21,381   

Interest bearing deposits with banks

     34,274        25,603   

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

     35,552        40,607   

Trading assets, at fair value ($129,632 and $127,342 were pledged to various parties at September 30, 2015 and December 31, 2014, respectively) ($834 and $966 at September 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)

     237,811        256,801   

Investment securities (includes $61,159 and $69,216 at fair value at September 30, 2015 and December 31, 2014, respectively)

     64,689        69,316   

Securities received as collateral, at fair value

     9,456        21,316   

Securities purchased under agreements to resell (includes $809 and $1,113 at fair value at September 30, 2015 and December 31, 2014, respectively)

     127,206        83,288   

Securities borrowed

     148,245        136,708   

Customer and other receivables

     50,070        48,961   

Loans:

    

Held for investment (net of allowances of $173 and $149 at September 30, 2015 and December 31, 2014, respectively)

     69,010        57,119   

Held for sale

     9,199        9,458   

Other investments ($364 and $467 at September 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)

     4,282        4,355   

Premises, equipment and software costs (net of accumulated depreciation of $6,906 and $6,219 at September 30, 2015 and December 31, 2014, respectively) ($187 and $191 at September 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)

     6,259        6,108   

Goodwill

     6,587        6,588   

Intangible assets (net of accumulated amortization of $2,050 and $1,824 at September 30, 2015 and December 31, 2014, respectively) (includes $5 and $6 at fair value at September 30, 2015 and December 31, 2014, respectively)

     3,069        3,159   

Other assets ($57 and $59 at September 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)

     9,160        10,742   
  

 

 

   

 

 

 

Total assets

   $ 834,113      $ 801,510   
  

 

 

   

 

 

 

Liabilities

    

Deposits

   $ 147,226      $ 133,544   

Short-term borrowings (includes $1,768 and $1,765 at fair value at September 30, 2015 and December 31, 2014, respectively)

     1,982        2,261   

Trading liabilities, at fair value

     125,525        107,381   

Obligation to return securities received as collateral, at fair value

     20,328        25,685   

Securities sold under agreements to repurchase (includes $597 and $612 at fair value at September 30, 2015 and December 31, 2014, respectively)

     58,570        69,949   

Securities loaned

     20,644        25,219   

Other secured financings (includes $3,450 and $4,504 at fair value at September 30, 2015 and December 31, 2014, respectively) ($456 and $348 at September 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally non-recourse to the Company)

     10,171        12,085   

Customer and other payables

     193,775        181,069   

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

     19,129        19,441   

Long-term borrowings (includes $31,387 and $31,774 at fair value at September 30, 2015 and December 31, 2014, respectively)

     160,343        152,772   
  

 

 

   

 

 

 

Total liabilities

     757,693        729,406   
  

 

 

   

 

 

 

Commitments and contingent liabilities (see Note 11)

    

Equity

    

Morgan Stanley shareholders’ equity:

    

Preferred stock (see Note 14)

     7,520        6,020   

Common stock, $0.01 par value:

    

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

    

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

    

Shares outstanding: 1,938,069,312 and 1,950,980,142 at September 30, 2015 and December 31, 2014, respectively

     20        20   

Additional paid-in capital

     23,876        24,249   

Retained earnings

     48,746        44,625   

Employee stock trusts

     2,399        2,127   

Accumulated other comprehensive loss

     (1,419     (1,248

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

    

Shares outstanding: 100,824,667 and 87,913,837 at September 30, 2015 and December 31, 2014, respectively

     (3,456     (2,766

Common stock issued to employee stock trusts

     (2,399     (2,127
  

 

 

   

 

 

 

Total Morgan Stanley shareholders’ equity

     75,287        70,900   

Nonredeemable noncontrolling interests

     1,133        1,204   
  

 

 

   

 

 

 

Total equity

     76,420        72,104   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 834,113      $ 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

Nine Months Ended September 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

    —          —          —          5,219        —          —          —          —          —          5,219   

Net income applicable to nonredeemable noncontrolling interests

    —          —          —          —          —          —          —          —          124        124   

Dividends

    —          —          —          (1,098     —          —          —          —          —          (1,098

Shares issued under employee plans and related tax effects

    —          —          (356     —          272        —          1,445        (272     —          1,089   

Repurchases of common stock and employee tax withholdings

    —          —          —          —          —          —          (2,135     —          —          (2,135

Net change in Accumulated other comprehensive income

    —          —          —          —          —          (171     —          —          (3     (174

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     —          —          —          —          —          (1     (11
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT SEPTEMBER 30, 2015

  $ 7,520      $ 20      $ 23,876      $ 48,746      $ 2,399      $ (1,419   $ (3,456   $ (2,399   $ 1,133      $ 76,420   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 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 Cash Flows

(dollars in millions)

(unaudited)

 

     Nine Months Ended
September 30,
 
     2015     2014  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 5,343      $ 5,253   

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

    

Income from equity method investments

     (118     (108

Compensation payable in common stock and options

     836        933   

Depreciation and amortization

     1,023        748   

Net gain on sale of available for sale securities

     (74     (36

Impairment charges

     91        85   

Provision for credit losses on lending activities

     47        1   

Other operating activities

     264        (167

Changes in assets and liabilities:

    

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

     5,055        (5,903

Trading assets, net of Trading liabilities

     39,775        39,156   

Securities borrowed

     (11,537     (10,596

Securities loaned

     (4,575     (5,142

Customer and other receivables and other assets

     787        2,931   

Customer and other payables and other liabilities

     10,351        23,335   

Securities purchased under agreements to resell

     (43,918     19,136   

Securities sold under agreements to repurchase

     (11,313     (61,935
  

 

 

   

 

 

 

Net cash provided by (used for) operating activities

     (7,963     7,691   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Proceeds from (payments for):

    

Premises, equipment and software, net

     (964     (533

Business dispositions, net of cash disposed

     —          962   

Loans:

    

Purchases, net of proceeds from sales

     (1,053     (797

Originations, net of repayments

     (10,260     (13,177

Investment securities:

    

Purchases

     (32,133     (24,581

Proceeds from sales

     32,788        11,212   

Proceeds from paydowns and maturities

     4,285        3,415   

Other investing activities

     (61     (264
  

 

 

   

 

 

 

Net cash used for investing activities

     (7,398     (23,763
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net proceeds from (payments for):

    

Short-term borrowings

     (279     (382

Nonredeemable noncontrolling interests

     (70     (189

Other secured financings

     (1,677     (1,725

Deposits

     13,682        12,003   

Proceeds from:

    

Excess tax benefits associated with stock-based awards

     180        91   

Derivatives financing activities

     392        784   

Issuance of preferred stock, net of issuance costs

     1,493        2,782   

Issuance of long-term borrowings

     30,159        26,529   

Payments for:

    

Long-term borrowings

     (17,615     (24,731

Derivatives financing activities

     (372     (384

Repurchases of common stock and employee tax withholdings

     (2,135     (1,172

Cash dividends

     (1,096     (652
  

 

 

   

 

 

 

Net cash provided by financing activities

     22,662        12,954   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (767     (939
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     6,534        (4,057

Cash and cash equivalents, at beginning of period

     46,984        59,883   
  

 

 

   

 

 

 

Cash and cash equivalents, at end of period

   $ 53,518      $ 55,826   
  

 

 

   

 

 

 

Cash and cash equivalents include:

    

Cash and due from banks

   $ 19,244      $ 20,242   

Interest bearing deposits with banks

     34,274        35,584   
  

 

 

   

 

 

 

Cash and cash equivalents, at end of period

   $ 53,518      $ 55,826   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash payments for interest were $1,456 million and $2,116 million for the nine months ended September 30, 2015 and 2014, respectively.

Cash payments for income taxes were $541 million and $620 million for the nine months ended September 30, 2015 and 2014, respectively.

See Notes to Condensed Consolidated Financial Statements.

 

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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”).

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 accompanying condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the 2014 Form 10-K. Certain footnote disclosures included in the 2014 Form 10-K have been condensed or omitted from the condensed consolidated financial statements as they are not required for interim reporting under U.S. GAAP. 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 12). For consolidated subsidiaries that are less than wholly owned, the third-party holdings of equity interests are referred to as noncontrolling interests. The net income attributable to noncontrolling interests for such subsidiaries is presented as Net income (loss) applicable to 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.

 

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MORGAN STANLEY

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

 

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.

Statements of Cash Flows Presentation.

During 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. During 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.

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 $10 million and $69 million in Other revenues in the Company’s condensed consolidated statements of income in the quarter and nine months ended September 30, 2015, respectively, to reduce the carrying amount of the unit to its estimated fair value less costs to sell. The Company closed the transaction on November 1, 2015. 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 (see Note 3).

TransMontaigne.

On July 1, 2014, the Company completed the sale of its ownership stake in TransMontaigne Inc. (“TransMontaigne”), 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.

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 the nine months ended September 30, 2014. The gain on sale was approximately $45 million and is included in the condensed consolidated statement of income for the nine months ended September 30, 2014.

 

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.

 

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MORGAN STANLEY

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

 

During the quarter and nine months ended September 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 6 and 12.

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.

Goodwill.

The Company completed its annual goodwill impairment testing at July 1, 2015. 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. However, adverse market or economic events could result in impairment charges in future periods.

 

3. Fair Values.

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.

 

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MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(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, 2015 and December 31, 2014.

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

At September 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
September 30,
2015
 
    (dollars in millions)  

Assets at Fair Value

         

Trading assets:

         

U.S. government and agency securities:

         

U.S. Treasury securities

  $ 18,359      $ —        $ —        $ —        $ 18,359   

U.S. agency securities

    1,328        18,690        —          —          20,018   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. government and agency securities

    19,687        18,690        —          —          38,377   

Other sovereign government obligations

    19,597        7,493        11        —          27,101   

Corporate and other debt:

         

State and municipal securities

    —          1,954        33        —          1,987   

Residential mortgage-backed securities

    —          1,746        404        —          2,150   

Commercial mortgage-backed securities

    —          1,868        79        —          1,947   

Asset-backed securities

    —          771        31        —          802   

Corporate bonds

    —          13,207        226        —          13,433   

Collateralized debt and loan obligations

    —          187        545        —          732   

Loans and lending commitments

    —          6,170        5,164        —          11,334   

Other debt

    —          1,714        530        —          2,244   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

    —          27,617        7,012        —          34,629   

Corporate equities(1)

    96,023        491        575        —          97,089   

Derivative and other contracts:

         

Interest rate contracts

    860        368,503        2,160        —          371,523   

Credit contracts

    —          23,844        937        —          24,781   

Foreign exchange contracts

    102        70,801        347        —          71,250   

Equity contracts

    876        49,833        951        —          51,660   

Commodity contracts

    3,392        14,646        3,203        —          21,241   

Other

    —          364        —          —          364   

Netting(2)

    (4,652     (437,820     (3,981     (61,072     (507,525
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative and other contracts

    578        90,171        3,617        (61,072     33,294   

Investments:

         

Investments measured at NAV(3)

            4,278   

Principal investments

    23        97        541        —          661   

Other

    149        204        312        —          665   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

    172        301        853        —          5,604   

Physical commodities

    —          1,717        —          —          1,717   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total trading assets

    136,057        146,480        12,068        (61,072     237,811   

AFS securities

    27,765        33,394        —          —          61,159   

Securities received as collateral

    9,455        —          1        —          9,456   

Securities purchased under agreements to resell

    —          809        —          —          809   

Intangible assets(4)

    —          —          5        —          5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets measured at fair value

  $ 173,277      $ 180,683      $ 12,074      $ (61,072   $ 309,240   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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
September 30,
2015
 
    (dollars in millions)  

Liabilities at Fair Value

         

Short-term borrowings

  $ —        $ 1,699      $ 69      $ —        $ 1,768   

Trading liabilities:

         

U.S. government and agency securities:

         

U.S. Treasury securities

    14,524        —          —          —          14,524   

U.S. agency securities

    1,026        135        —          —          1,161   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. government and agency securities

    15,550        135        —          —          15,685   

Other sovereign government obligations

    13,611        2,379        —          —          15,990   

Corporate and other debt:

         

State and municipal securities

    —          3        —          —          3   

Corporate bonds

    —          6,783        19        —          6,802   

Lending commitments

    —          2        —          —          2   

Other debt

    —          7        4        —          11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

    —          6,795        23        —          6,818   

Corporate equities(1)

    50,017        1,145        97        —          51,259   

Derivative and other contracts:

         

Interest rate contracts

    780        346,806        2,071        —          349,657   

Credit contracts

    —          22,900        1,742        —          24,642   

Foreign exchange contracts

    60        72,593        281        —          72,934   

Equity contracts

    691        53,728        2,992        —          57,411   

Commodity contracts

    3,845        13,551        1,771        —          19,167   

Other

    —          51        —          —          51   

Netting(2)

    (4,652     (437,820     (3,981     (41,636     (488,089
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative and other contracts

    724        71,809        4,876        (41,636     35,773   

Total trading liabilities

    79,902        82,263        4,996        (41,636     125,525   

Obligation to return securities received as collateral

    20,327        —          1        —          20,328   

Securities sold under agreements to repurchase

    —          443        154        —          597   

Other secured financings

    —          3,109        341        —          3,450   

Long-term borrowings

    —          28,925        2,462        —          31,387   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities measured at fair value

  $ 100,229      $ 116,439      $ 8,023      $ (41,636   $ 183,055   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

AFS—available for sale

(1) For trading purposes, the Company holds or sells short 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 shared level. For further information on derivative instruments and hedging activities, see Note 4.
(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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MORGAN STANLEY

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

 

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   

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) For trading purposes, the Company holds or sells short equity securities issued by entities in diverse industries and of varying size.
(2) The balance of 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 shared level. For further information on derivative instruments and hedging activities, see Note 4.
(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.

 

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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.

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, 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 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.

 

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Table of Contents

MORGAN STANLEY

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

 

Three Months Ended September 30, 2015.

 

    Beginning
Balance at
June 30,
2015
    Total
Realized and
Unrealized
Gains
(Losses)(1)
    Purchases(2)     Sales     Issuances     Settlements     Net
Transfers
    Ending
Balance at
September 30,
2015
    Unrealized
Gains

(Losses)
for Level 3
Assets/
Liabilities
Outstanding at
September 30,
2015(3)
 
    (dollars in millions)  

Assets at Fair Value

                 

Trading assets:

                 

U.S. agency securities

  $ 3      $ —        $ —        $ —        $ —        $ —        $ (3   $ —        $ —     

Other sovereign government obligations

    12        —          5        (4     —          —          (2     11        —     

Corporate and other debt:

                 

State and municipal securities

    7        5        12        (5     —          —          14        33        5   

Residential mortgage-backed securities

    378        3        59        (55     —          —          19        404        4   

Commercial mortgage-backed securities

    84        (12     17        (6     —          —          (4     79        (12

Asset-backed securities

    19        —          13        (7     —          —          6        31        —     

Corporate bonds

    479        (25     78        (228     —          (50     (28     226        (6

Collateralized debt and loan obligations

    660        (7     80        (188     —          —          —          545        (11

Loans and lending commitments

    5,512        (78     939        (156     —          (1,229     176        5,164        (53

Other debt

    564        (22     9        (4     —          (1     (16     530        (23
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

    7,703        (136     1,207        (649     —          (1,280     167        7,012        (96

Corporate equities

    486        10        150        (80     —          —          9        575        4   

Net derivative and other contracts(4):

                 

Interest rate contracts

    (236     (137     12        —          (7     74        383        89        (66

Credit contracts

    (989     210        —          —          (74     86        (38     (805     219   

Foreign exchange contracts

    446        42        3        —          —          (327     (98     66        45   

Equity contracts

    (2,102     309        16        —          (50     (187     (27     (2,041     296   

Commodity contracts

    1,205        238        —          —          —          (11     —          1,432        179   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net derivative and other contracts

    (1,676     662        31        —          (131     (365     220        (1,259     673   

Investments:

                 

Principal investments

    581        26        8        (50     —          —          (24     541        26   

Other

    300        11        1        —          —          —          —          312        11   
Securities received as collateral     3        —          —          (2     —          —          —          1        —     
Intangible assets     6        (1     —          —          —          —          —          5        (1

Liabilities at Fair Value

                 
Short-term borrowings   $ —        $ (2   $ —        $ —        $ 4      $ —        $ 63      $ 69      $ (2
Trading liabilities:                  

Corporate and other debt:

                 

Corporate bonds

    15        9        (10     23        —          —          —          19        7   

Other debt

    4        —          —          —          —          —          —          4        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

    19        9        (10     23        —          —          —          23        7   

Corporate equities

    112        72        (50     99        —          —          8        97        73   

Obligation to return securities received as collateral

    3        —          (2     —          —          —          —          1        —     

Securities sold under agreements to repurchase

    154        —          —          —          —          —          —          154        —     

Other secured financings

    168        2        —          —          187        (12     —          341        2   

Long-term borrowings

    2,221        61        —          —          237        (81     146        2,462        64   

 

(1) Total realized and unrealized gains (losses) are primarily included in Trading revenues in the condensed consolidated statements of income except for $37 million related to Trading assets—Investments, which is included in Investments revenues.
(2) Loan originations are included in purchases.
(3) Amounts represent unrealized gains (losses) for the quarter ended September 30, 2015 related to assets and liabilities still outstanding at September 30, 2015.
(4) Net derivative and other contracts represent Trading assets—Derivative and other contracts net of Trading liabilities—Derivative and other contracts. For further information on derivative instruments and hedging activities, see Note 4.

 

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Table of Contents

MORGAN STANLEY

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

 

Nine Months Ended September 30, 2015.

 

    Beginning
Balance at
December 31,
2014
    Total
Realized and
Unrealized
Gains
(Losses)(1)
    Purchases(2)     Sales     Issuances     Settlements     Net
Transfers
    Ending
Balance at
September 30,
2015
    Unrealized
Gains

(Losses)
for Level 3
Assets/
Liabilities
Outstanding at
September 30,
2015(3)
 
    (dollars in millions)  

Assets at Fair Value

                 

Trading assets:

                 

Other sovereign government obligations

  $ 41      $ (1   $ 7      $ (31   $ —        $ —        $ (5   $ 11      $ —     

Corporate and other debt:

                 

State and municipal securities

    —          5        14        (1     —          —          15        33        5   

Residential mortgage-backed securities

    175        28        172        (57     —          —          86        404        19   

Commercial mortgage-backed securities

    96        (17     23        (23     —          —          —          79        (19

Asset-backed securities

    76        (1     22        (31     —          —          (35     31        4   

Corporate bonds

    386        (19     155        (218     —          (53     (25     226        (16

Collateralized debt and loan obligations

    1,152        141        320        (709     —          (331     (28     545        (7

Loans and lending commitments

    5,874        (34     1,860        (95     —          (2,461     20        5,164        (62

Other debt

    285        (13     30        (14     —          (25     267        530        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

    8,044        90        2,596        (1,148     —          (2,870     300        7,012        (76

Corporate equities

    272        57        437        (199     —          —          8        575        67   

Net derivative and other contracts(4):

                 

Interest rate contracts

    (173     (37     16        —          (22     277        28        89        20   

Credit contracts

    (743     (69     6        —          (94     86        9        (805     (89

Foreign exchange contracts

    151        133        4        —          (1     (197     (24     66        133   

Equity contracts(5)

    (2,165     (76     115        —          (279     252        112        (2,041     (237

Commodity contracts

    1,146        345        2        —          (112     111        (60     1,432        420   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net derivative and other contracts

    (1,784     296        143        —          (508     529        65        (1,259     247   

Investments:

                 

Principal investments

    835        22        20        (109     —          (187     (40     541        —     

Other

    323        (5     2        (6     —          —          (2     312        —     
Securities received as collateral     —          —          1        —          —          —          —          1        —     
Intangible assets     6        —          —          —          —          (1     —          5        —     

Liabilities at Fair Value

                 
Short-term borrowings   $ —        $ (2   $ —        $ —        $ 60      $ —        $ 7      $ 69      $ (2
Trading liabilities:                  

Corporate and other debt:

                 

Corporate bonds

    78        6        (25     37        —          —          (65     19        6   

Lending commitments

    5        5        —          —          —          —          —          —          5   

Other debt

    38        —          (1     7        —          (39     (1     4        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate and other debt

    121        11        (26     44        —          (39     (66     23        11   

Corporate equities

    45        90        (88     128        —          —          102        97        90   

Obligation to return securities received as collateral

    —          —          —          1        —          —          —          1        —     

Securities sold under agreements to repurchase

    153        (1     —          —          —          —          —          154        —     

Other secured financings

    149        (5     —          —          223        (36     —          341        4   

Long-term borrowings

    1,934        159        —          —          853        (213     47        2,462        157   

 

(1) Total realized and unrealized gains (losses) are primarily included in Trading revenues in the Company’s condensed consolidated statements of income except for $17 million related to Trading assets—Investments, which is included in Investments revenues.
(2) Loan originations are included in purchases.
(3) Amounts represent unrealized gains (losses) for the nine months ended September 30, 2015 related to assets and liabilities still outstanding at September 30, 2015.
(4) Net derivative and other contracts represent Trading assets—Derivative and other contracts net of Trading liabilities—Derivative and other contracts. For further information on derivative instruments and hedging activities, see Note 4.
(5) 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)

 

Three Months Ended September 30, 2014.

 

    Beginning
Balance at
June 30,
2014
    Total
Realized and
Unrealized
Gains
(Losses)(1)
    Purchases(2)     Sales     Issuances     Settlements     Net
Transfers
    Ending
Balance at
September 30,
2014
    Unrealized
Gains

(Losses)
for Level 3
Assets/
Liabilities
Outstanding at
September 30,
2014(3)
 
    (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 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(4):

                 

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:

                 

Principal investments

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

Other

    380        (3     14        —          —          —          2        393        (3

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   

Lending commitments

    12        12        —          —          —          —          —          —          —     

Other debt

    42        5        —          —          —          (2     —          35        5