10-Q 1 d437627d10q.htm FORM 10-Q Form 10-Q
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

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  ☒    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  ☒    No  ☐

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

 

Large Accelerated Filer  ☒

 

Accelerated Filer  ☐

Non-Accelerated Filer  ☐

 

Smaller reporting company  ☐

(Do not check if a smaller reporting company)

 

Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.            ☐

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

As of October 31, 2017, there were 1,807,899,161 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.


Table of Contents

QUARTERLY REPORT ON FORM 10-Q

For the quarter ended September 30, 2017

 

Table of Contents   Part   Item    Page  

Financial Information

  I          1  

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

      2      1  

Introduction

             1  

Executive Summary

             2  

Business Segments

             7  

Supplemental Financial Information and Disclosures

             18  

Accounting Development Updates

             18  

Critical Accounting Policies

             19  

Liquidity and Capital Resources

             19  

Quantitative and Qualitative Disclosures about Market Risk

      3      32  

Controls and Procedures

      4      42  

Report of Independent Registered Public Accounting Firm

             43  

Financial Statements

      1      44  

Consolidated Financial Statements and Notes

             44  

Consolidated Income Statements (Unaudited)

             44  

Consolidated Comprehensive Income Statements (Unaudited)

             45  

Consolidated Balance Sheets (Unaudited at September 30, 2017)

             46  

Consolidated Statements of Changes in Total Equity (Unaudited)

             47  

Consolidated Cash Flow Statements (Unaudited)

             48  

Notes to Consolidated Financial Statements (Unaudited)

             49  

  1. Introduction and Basis of Presentation

             49  

  2. Significant Accounting Policies

             50  

  3. Fair Values

             51  

  4. Derivative Instruments and Hedging Activities

             63  

  5. Investment Securities

             67  

  6. Collateralized Transactions

             70  

  7. Loans and Allowance for Credit Losses

             72  

  8. Equity Method Investments

             75  

  9. Deposits

             75  

10. Long-Term Borrowings and Other Secured Financings

             75  

11. Commitments, Guarantees and Contingencies

             76  

12. Variable Interest Entities and Securitization Activities

             80  

13. Regulatory Requirements

             83  

14. Total Equity

             86  

15. Earnings per Common Share

             88  

16. Interest Income and Interest Expense

             88  

17. Employee Benefit Plans

             89  

18. Income Taxes

             89  

19. Segment and Geographic Information

             89  

20. Subsequent Events

             91  

Financial Data Supplement (Unaudited)

             92  

Other Information

  II          95  

Legal Proceedings

      1      95  

Unregistered Sales of Equity Securities and Use of Proceeds

      2      96  

Exhibits

      6      96  

Exhibit Index

             E-1  

 

Signatures

          

 

 

 

S-1

 

 

 

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Available Information

We file annual, quarterly and current reports, proxy statements and other information with the U.S. Securities and Exchange Commission (the “SEC”). 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, www.sec.gov, that contains annual, quarterly and current reports, proxy and information statements and other information that issuers file electronically with the SEC. Our electronic SEC filings are available to the public at the SEC’s internet site.

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

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

 

   

Amended and Restated Certificate of Incorporation;

   

Amended and Restated Bylaws;

   

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

   

Corporate Governance Policies;

   

Policy Regarding Corporate Political Activities;

   

Policy Regarding Shareholder Rights Plan;

   

Equity Ownership Commitment;

   

Code of Ethics and Business Conduct;

   

Code of Conduct;

   

Integrity Hotline Information; and

   

Environmental and Social Policies.

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

 

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Financial Information

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

Introduction

 

Morgan Stanley, a financial holding company, is a global financial services firm that maintains significant market positions in each of its business segments—Institutional Securities, Wealth Management and Investment Management. Morgan Stanley, through its subsidiaries and affiliates, provides a wide variety of products and services to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individuals. Unless the context otherwise requires, the terms “Morgan Stanley,” “Firm,” “us,” “we,” or “our” mean Morgan Stanley (the “Parent Company”) together with its consolidated subsidiaries.

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

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

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

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

Investment Management provides a broad range of investment strategies and products that span geographies, asset classes, and public and private markets to a diverse group of clients across institutional and intermediary channels. Strategies and products include equity, fixed income, liquidity and alternative/other products. Institutional clients include defined benefit/defined contribution plans, foundations, endowments, government entities, sovereign wealth funds, insurance companies, third-party fund sponsors and corporations. Individual clients are serviced through intermediaries, including affiliated and non-affiliated distributors.

The results of operations in the past have been, and in the future may continue to be, materially affected by competition; risk factors; and legislative, legal and regulatory developments; as well as other factors. These factors also may have an adverse impact on our ability to achieve our strategic objectives. Additionally, the discussion of our results of operations herein may contain forward-looking statements. These statements, which reflect management’s beliefs and expectations, are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of the risks and uncertainties that may affect our future results, see “Forward-Looking Statements” immediately preceding Part I, Item 1, “Business—Competition” and “Business—Supervision and Regulation” in Part I, Item 1, “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”) and “Liquidity and Capital Resources—Regulatory Requirements” herein.

 

 

  1   September 2017 Form 10-Q


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Management’s Discussion and Analysis   LOGO

 

Executive Summary

Overview of Financial Results

 

Consolidated Results

Net Revenues

($ in millions)

 

 

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Net Income Applicable to Morgan Stanley

($ in millions)

 

 

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Earnings per Common Share1

 

 

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1.

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

 

 

We reported net revenues of $9,197 million in the three months ended September 30, 2017 (“current quarter,” or “3Q 2017”), compared with $8,909 million in the three months ended September 30, 2016 (“prior year quarter,” or “3Q 2016”). For the current quarter, net income applicable to Morgan Stanley was $1,781 million, or $0.93 per diluted common share, compared with $1,597 million, or $0.81 per diluted common share, in the prior year quarter.

 

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

Non-interest Expenses

($ in millions)

 

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

 

 

September 2017 Form 10-Q   2  


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Management’s Discussion and Analysis   LOGO

 

   

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

 

 

Non-compensation expenses were $2,546 million in the current quarter and $7,626 million in the current year period compared with $2,431 million in the prior year quarter and $7,213 million in the prior year period, representing a 5% and a 6% increase, respectively. These increases were primarily as a result of higher volume-driven expenses. In addition, non-compensation expenses increased in the current year period due to a provision related to a United Kingdom (“U.K.”) indirect tax (i.e. value-added tax or “VAT”) matter and higher litigation costs. For further discussion of the U.K. VAT matter, see “Institutional Securities—Investments, Other Revenues, Non-interest Expenses and Other Items—Other Items” herein.

Expense Efficiency Ratio

 

 

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The expense efficiency ratio was 73.0% in the current quarter and 72.1% in the current year period. The expense efficiency ratio was 73.3% in the prior year quarter and 74.2% in the prior year period (see “Selected Non-Generally Accepted Accounting Principles (“Non-GAAP”) Financial Information” herein).

Return on Average Common Equity

 

 

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The annualized return on average common equity (“ROE”) was 9.6% in the current quarter and 9.8% in the current year period. The annualized ROE was 8.7% in the prior year quarter and 7.7% in the prior year period (see “Selected Non-Generally Accepted Accounting Principles (“Non-GAAP”) Financial Information” herein).

Business Segment Results

Net Revenues by Segment1, 2

($ in millions)

 

 

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  3   September 2017 Form 10-Q


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Management’s Discussion and Analysis   LOGO

 

Net Income Applicable to Morgan Stanley by Segment1, 3

($ in millions)

 

 

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1.

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

2.

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

3.

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

 

 

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

 

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

 

 

Investment Management net revenues of $675 million in the current quarter and $1,949 million in the current year period increased 22% from the prior year quarter and increased 21% from the prior year period. The current quarter and the current year period results primarily reflected higher carried interest and investment gains and growth in asset management fee revenues.

Net Revenues by Region1

($ in millions)

 

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EMEA—Europe, Middle East and Africa

1.

For a discussion of how the geographic breakdown for net revenues is determined, see Note 21 to the consolidated financial statements in the 2016 Form 10-K.

 

 

September 2017 Form 10-Q   4  


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Management’s Discussion and Analysis   LOGO

 

Selected Financial Information and Other Statistical Data

 

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

Income from continuing operations applicable to Morgan Stanley

  $ 1,775     $ 1,589     $ 5,489     $ 4,312   

Income (loss) from discontinued operations applicable to Morgan Stanley

    6       8       (21      

Net income applicable to Morgan Stanley

    1,781       1,597       5,468       4,313   

Preferred stock dividends and other

    93       79       353       314   

Earnings applicable to Morgan Stanley common shareholders

  $ 1,688     $       1,518     $ 5,115     $       3,999   

Effective income tax rate from continuing operations

          28.1%       31.5%             29.7%       32.7%  

 

     At September 30,
2017
    At December 31,
2016
 

 Capital ratios

 

 Common Equity Tier 1 capital ratio1

    16.9%       16.9%   

 Tier 1 capital ratio1

    19.3%       19.0%   

 Total capital ratio1

    22.2%       22.0%   

 Tier 1 leverage ratio

    8.4%       8.4%   

 

1.

At September 30, 2017, our capital ratios are based on the Standardized Approach transitional rules. At December 31, 2016, our capital ratios were based on the Advanced Approach transitional rules. For a discussion of our regulatory capital ratios, see “Liquidity and Capital Resources—Regulatory Requirements” herein.

 

in millions, except per share and
employee data
  At September 30,
2017
    At December 31,
2016
 

Loans1

  $ 104,431     $ 94,248  

Total assets

  $ 853,693     $ 814,949  

Global Liquidity Reserve2

  $ 189,966     $ 202,297  

Deposits

  $ 154,639     $ 155,863  

Long-term borrowings

  $ 191,677     $ 164,775  

Common shareholders’ equity

  $ 70,458     $ 68,530  

Common shares outstanding

    1,812       1,852  

Book value per common share3

  $ 38.87     $ 36.99  

Worldwide employees

    57,702       55,311  

 

1.

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

2.

For a discussion of Global Liquidity Reserve, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management Framework—Global Liquidity Reserve” in Part II, Item 7 of the 2016 Form 10-K.

3.

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

Selected Non-Generally Accepted Accounting Principles (“Non-GAAP”) Financial Information

We prepare our financial statements using accounting principles generally accepted in the United States of America (“U.S. GAAP”). From time to time, we may disclose certain “non-GAAP financial measures” in this document, or in the course of our earnings releases, earnings and other conference calls, financial presentations, Definitive Proxy Statement and otherwise. A “non-GAAP financial measure” excludes, or includes, amounts from the most directly comparable measure calculated and presented in accordance with U.S. GAAP. We consider the non-GAAP financial measures we disclose to be useful to us, investors and analysts by providing further transparency about, or an alternate means of assessing, our financial condition, operating results, prospective regulatory capital requirements, or capital adequacy. These measures are not in accordance with, or a substitute for, U.S. GAAP and may be different from or inconsistent with non-GAAP financial measures used by other companies. Whenever we refer to a non-GAAP financial measure, we will also generally define it or present the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, along with a reconciliation of the differences between the U.S. GAAP financial measure and the non-GAAP financial measure.

The principal non-GAAP financial measures presented in this document are set forth below.

Reconciliations from U.S. GAAP to Non-GAAP Consolidated Financial Measures

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
$ in millions, except per share data   2017     2016     2017     2016  

Net income applicable to Morgan Stanley

 

 

U.S. GAAP

  $ 1,781     $     1,597     $ 5,468     $       4,313  

Impact of discrete tax provision1

    (83     —        (65     —   

Net income applicable to Morgan Stanley, excluding discrete tax provision—non-GAAP

  $ 1,698     $ 1,597     $ 5,403     $ 4,313  

Earnings per diluted common share

 

 

U.S. GAAP

  $ 0.93     $ 0.81     $ 2.79     $ 2.11  

Impact of discrete tax provision1

    (0.05     —        (0.03     —   

Earnings per diluted common share, excluding discrete tax provision—non-GAAP

  $ 0.88     $ 0.81     $ 2.76     $ 2.11  

Effective income tax rate

       

U.S. GAAP

          28.1%       31.5%             29.7%       32.7%  

Impact of discrete tax provision1

    3.3%       —        0.8%       —   

Effective income tax rate from continuing operations, excluding discrete tax provision—non-GAAP

    31.4%       31.5%       30.5%       32.7%  
 

 

  5   September 2017 Form 10-Q


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Management’s Discussion and Analysis   LOGO

 

Tangible Equity

 

                Monthly Average Balance  
               

Three Months
Ended

September 30,

   

Nine Months
Ended

September 30,

 
$ in millions  

At

September 30,
2017

   

At

December 31,
2016

    2017     2016     2017     2016  

U.S. GAAP

           

Common equity

   $ 70,458     $ 68,530      $ 70,487     $ 69,531     $ 69,786     $ 68,859  

Preferred equity

    8,520       7,520        8,520       7,520       8,420       7,520  

Morgan Stanley shareholders’ equity

    78,978       76,050        79,007       77,051       78,206       76,379  

Junior subordinated debentures issued to capital trusts

    —         —          —         1,427       —         2,278  

Less: Goodwill and net intangible assets

    (9,079     (9,296)       (9,120     (9,368     (9,192     (9,447

Morgan Stanley tangible shareholders’ equity—non-GAAP

   $ 69,899     $ 66,754      $ 69,887     $ 69,110     $ 69,014     $ 69,210  

U.S. GAAP

           

Common equity

   $ 70,458     $ 68,530      $ 70,487     $ 69,531     $ 69,786     $ 68,859  

Less: Goodwill and net intangible assets

    (9,079     (9,296)       (9,120     (9,368     (9,192     (9,447

Tangible common equity—non-GAAP

   $ 61,379     $ 59,234      $ 61,367     $ 60,163     $ 60,594     $ 59,412  

Consolidated Non-GAAP Financial Measures

 

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

Average common equity1, 2

 

     

Unadjusted

  $ 70.5     $ 69.5     $ 69.8     $ 68.9  

Excluding DVA

    71.3       69.6       70.4       69.0  

Excluding DVA and discrete tax provision (benefit)

    71.2       69.6       70.4       69.0  

Return on average common equity1, 3, 4

 

   

Unadjusted

    9.6%       8.7%       9.8%       7.7%  

Excluding DVA

    9.5%       8.7%       9.7%       7.7%  

Excluding DVA and discrete tax provision (benefit)

    9.0%       8.7%       9.6%       7.7%  

Average tangible common equity1, 2, 5

 

   

Unadjusted

  $ 61.4     $ 60.2     $ 60.6     $ 59.4  

Excluding DVA

    62.1       60.2       61.2       59.5  

Excluding DVA and discrete tax provision (benefit)

    62.1       60.2       61.3       59.5  

Return on average tangible common equity1, 4

 

 

Unadjusted

    11.0%       10.1%       11.3%       9.0%  

Excluding DVA

    10.9%       10.1%       11.1%       9.0%  

Excluding DVA and discrete tax provision (benefit)

    10.3%       10.1%       11.0%       9.0%  

Expense efficiency ratio6

    73.0%       73.3%       72.1%       74.2%  

 

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

Non-GAAP Financial Measures by Business Segment

 

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

Pre-tax profit margin7

       

Institutional Securities

    28%       30%       31%       30%  

Wealth Management

    27%       23%       25%       22%  

Investment Management

    19%       18%       19%       16%  

Consolidated

    27%       27%       28%       26%  

Average common equity8

 

   

Institutional Securities

  $ 40.2     $ 43.2     $ 40.2     $ 43.2  

Wealth Management

    17.2       15.3       17.2       15.3  

Investment Management

    2.4       2.8       2.4       2.8  

Parent Company

    10.7       8.2       10.0       7.6  

Consolidated average common equity

  $ 70.5     $       69.5     $ 69.8     $       68.9  

Return on average common equity4

 

   

Institutional Securities

    8.9%       8.3%       9.6%       7.1%  

Wealth Management

        15.8%       14.5%           15.0%       13.3%  

Investment Management

    18.8%       9.3%       15.4%       9.0%  

Consolidated

    9.6%       8.7%       9.8%       7.7%  

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

1.

Beginning in 2017, with the adoption of the accounting update Improvements to Employee Share-Based Payment Accounting, the income tax consequences related to share-based payments are required to be recognized in Provision for income taxes in the income statements upon the conversion of employee share-based awards, which primarily occur in the first quarter of each year. The impact of the income tax consequences upon conversion of the awards may be either a benefit or a provision and is treated as a discrete item. When excluding discrete tax provision (benefit) above only discrete tax provisions (benefits) other than income tax consequences arising from conversion activity are excluded as we anticipate conversion activity each quarter. See Note 2 to the financial statements for information on the adoption of the accounting update Improvements to Employee Share-Based Payment Accounting. For further information on the discrete tax provision, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.

2.

The impact of DVA on average common equity and average tangible common equity was approximately $(775) million and $(62) million in the current quarter and prior year quarter, respectively, and approximately $(652) million and $(118) million in the current year period and prior year period, respectively.

3.

The calculation used in determining the Firm’s “ROE Target” is return on average common equity excluding DVA and discrete tax items as set forth above.

4.

Return on average common equity and return on average tangible common equity equal annualized net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity and average tangible common equity, respectively, on a consolidated or business segment basis as indicated. When excluding DVA, it is only excluded from the denominator. When excluding the discrete tax provision (benefit), both the numerator and denominator are adjusted.

5.

Tangible book value per common share equals tangible common equity divided by common shares outstanding.

6.

The expense efficiency ratio represents total non-interest expenses as a percentage of net revenues.

7.

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

 

 

September 2017 Form 10-Q   6  


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8.

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

Return on Equity Target

We have an ROE Target of 9% to 11% to be achieved by 2017. Our ROE Target and the related strategies and goals are forward-looking statements that may be materially affected by many factors, including, among other things: macroeconomic and market conditions; legislative and regulatory developments; industry trading and investment banking volumes; equity market levels; interest rate environment; legal expenses and the ability to reduce expenses in general; capital levels; and discrete tax items. For further information on our ROE Target and related assumptions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—Return on Equity Target” in Part II, Item 7 of the 2016 Form 10-K.

Business Segments

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

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

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

Net Revenues, Compensation Expense and Income Taxes

For discussions of our net revenues, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Net Revenues” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Net Revenues by Segment” in Part II, Item 7 of the 2016 Form 10-K. For a discussion of our compensation expense, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Compensation Expense” in Part II, Item 7 of the 2016 Form 10-K. For a discussion of income taxes, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Income Taxes” in Part II, Item 7 of the 2016 Form 10-K.

 

 

  7   September 2017 Form 10-Q


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Institutional Securities

Income Statement Information

 

    Three Months Ended
September 30,
        
$ in millions             2017                 2016          % Change  

Revenues

      

Investment banking

  $ 1,270     $ 1,104         15%  

Trading

    2,504       2,393         5%  

Investments

    52       36         44%  

Commissions and fees

    561       592         (5)%  

Asset management, distribution and administration fees

    88       68         29%  

Other

    143       243         (41)%  

Total non-interest revenues

    4,618       4,436         4%  

Interest income

    1,421       980         45%  

Interest expense

    1,663       863         93%  

Net interest

    (242)       117         N/M  

Net revenues

    4,376       4,553         (4)%  

Compensation and benefits

    1,532       1,657         (8)%  

Non-compensation expenses

    1,608       1,513         6%  

Total non-interest expenses

    3,140       3,170         (1)%  

Income from continuing operations before income taxes

    1,236       1,383         (11)%  

Provision for income taxes

    260       381         (32)%  

Income from continuing operations

    976       1,002         (3)%  

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

    6              (25)%  

Net income

    982       1,010         (3)%  

Net income applicable to noncontrolling interests

    9       44         (80)%  

Net income applicable to
Morgan Stanley

  $ 973     $ 966         1%  
   

Nine Months Ended

September 30,

        
$ in millions             2017                 2016          % Change  

Revenues

      

Investment banking

  $ 4,100     $ 3,202         28%  

Trading

    8,241       6,782         22%  

Investments

    155       144         8%  

Commissions and fees

    1,811       1,854         (2)%  

Asset management, distribution and administration fees

    268       210         28%  

Other

    442       385         15%  

Total non-interest revenues

    15,017       12,577         19%  

Interest income

    3,788       2,999         26%  

Interest expense

    4,515       2,731         65%  

Net interest

    (727)       268         N/M  

Net revenues

    14,290       12,845         11%  

Compensation and benefits

    5,069       4,664         9%  

Non-compensation expenses

    4,812       4,384         10%  

Total non-interest expenses

    9,881       9,048         9%  

Income from continuing operations before income taxes

    4,409       3,797         16%  

Provision for income taxes

    1,132       1,109         2%  

Income from continuing operations

    3,277       2,688         22%  

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

    (21)              N/M  

Net income

    3,256       2,689         21%  

Net income applicable to
noncontrolling interests

    77       144         (47)%  

Net income applicable to
Morgan Stanley

  $ 3,179     $ 2,545         25%  

N/M—Not Meaningful

 

 

September 2017 Form 10-Q   8  


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Management’s Discussion and Analysis   LOGO

 

Investment Banking

 

Investment Banking Revenues

 

     Three Months Ended
September 30,
        
$ in millions        2017              2016          % Change  

Advisory

   $ 555      $ 504        10%  

Underwriting:

        

Equity

     273        236        16%  

Fixed income

     442        364        21%  

Total underwriting

     715        600        19%  

Total investment banking

   $ 1,270      $ 1,104        15%  
     Nine Months Ended
September 30,
        
$ in millions        2017              2016          % Change  

Advisory

   $ 1,555      $ 1,592        (2)%  

Underwriting:

        

Equity

     1,068        662        61%  

Fixed income

     1,477        948        56%  

Total underwriting

     2,545        1,610        58%  

Total investment banking

   $ 4,100      $ 3,202        28%  

 

Investment Banking Volumes

 

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

Completed mergers and acquisitions1

  $ 229     $ 190     $ 585     $ 728   

Equity and equity-

related offerings2, 3

    16       13       46       34   

Fixed income offerings2, 4

    60       72       201       185   

Source: Thomson Reuters, data at October 2, 2017. Transaction volumes may not be indicative of net revenues in a given period. In addition, transaction volumes for prior periods may vary from amounts previously reported due to the subsequent withdrawal or change in the value of a transaction.

 

1.

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

2.

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

3.

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

4.

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

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

Investment banking revenues of $1,270 million in the current quarter and $4,100 million in the current year period increased 15% and 28% from the comparable prior year periods. The increase in the current quarter reflected both higher underwriting and advisory revenues. The increase in the current year period was due to higher underwriting revenues.

 

 

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

 

 

Equity underwriting revenues increased in the current quarter and current year period as a result of higher global market volumes in both follow-on and initial public offerings (see Investment Banking Volumes table). In the current year period, equity underwriting revenues also increased as a result of higher levels of deal activity. Fixed income underwriting revenues increased in the current quarter primarily due to higher non-investment grade bond fees and loan fees. Fixed income underwriting revenues increased in the current year period primarily due to higher bond fees and non-investment grade loan fees.

Sales and Trading Net Revenues

By Income Statement Line Item

 

    Three Months Ended
September 30,
        
$ in millions           2017               2016          % Change  

Trading

  $ 2,504     $ 2,393        5%  

Commissions and fees

    561       592        (5)%  

Asset management, distribution and administration fees

    88       68        29%  

Net interest

    (242)       117        N/M  

Total

  $ 2,911     $ 3,170        (8)%  
    Nine Months Ended
September 30,
        
$ in millions   2017     2016      % Change  

Trading

  $ 8,241     $ 6,782        22%  

Commissions and fees

    1,811       1,854        (2)%  

Asset management, distribution and administration fees

    268       210        28%  

Net interest

    (727)       268        N/M  

Total

  $ 9,593     $ 9,114        5%  

N/M—Not Meaningful

 

 

  9   September 2017 Form 10-Q


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By Business

 

    Three Months Ended
September 30,
        
$ in millions         2017               2016          % Change  

Equity

  $     1,891     $ 1,883        —%  

Fixed income

    1,167       1,479        (21)%  

Other

    (147)       (192)        23%  

Total

  $ 2,911     $ 3,170        (8)%  
    Nine Months Ended
September 30,
        
$ in millions         2017               2016          % Change  

Equity

  $ 6,062     $             6,084        —%  

Fixed income

    4,120       3,649        13%  

Other

    (589)       (619)        5%  

Total

  $ 9,593     $ 9,114        5%  

Sales and Trading Activities—Equity and Fixed Income

Following is a description of the sales and trading activities within our equities and fixed income businesses as well as how their results impact the income statement line items, followed by a presentation and explanation of results.

Equities—Financing. We provide financing and prime brokerage services to our clients active in the equity markets through a variety of products including margin lending, securities lending and swaps. Results from this business are largely driven by the difference between financing income earned and financing costs incurred, which are reflected in Net interest for securities and equity lending products and in Trading revenues for derivative products.

Equities—Execution services. We make markets for our clients in equity-related securities and derivative products, including providing liquidity and hedging products. A significant portion of the results for this business is generated by commissions and fees from executing and clearing client transactions on major stock and derivative exchanges as well as from over-the-counter (“OTC”) transactions. Market-making also generates gains and losses on inventory, which are reflected in Trading revenues.

Fixed income—Within fixed income we make markets in order to facilitate client activity as part of the following products and services.

 

 

Global macro products. We make markets for our clients in interest rate, foreign exchange and emerging market products, including exchange-traded and OTC securities, loans and derivative instruments. The results of this market-making activity are primarily driven by gains and losses from buying and selling positions to stand ready for and satisfy client demand, and are recorded in Trading revenues.

 

 

Credit products. We make markets in credit-sensitive products, such as corporate bonds and mortgage securities and

   

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

 

 

Commodities products and Other. We make markets in various commodity products related primarily to electricity, natural gas, oil, and precious metals, with the results primarily reflected in Trading revenues. Other activities include the results from the centralized management of our fixed income derivative counterparty exposures, which are primarily recorded in Trading revenues.

Sales and Trading Net Revenues—Equity and Fixed Income

 

   

Three Months Ended

September 30, 2017

 
$ in millions       Trading           Fees1       Net
    Interest2  
    Total  

Financing

  $ 1,029     $ 92     $ (206   $ 915  

Execution services

    540       495       (59     976  

Total Equity

  $ 1,569     $ 587     $ (265   $ 1,891  

Total Fixed income

  $ 1,073     $ 65     $ 29     $ 1,167  

 

   

Three Months Ended

September 30, 2016

 
$ in millions       Trading           Fees1       Net
Interest2
    Total  

Financing

  $ 872     $ 83     $ (110   $ 845  

Execution services

    536       541       (39     1,038  

Total Equity

  $ 1,408     $ 624     $ (149   $ 1,883  

Total Fixed income

  $ 1,209     $ 38     $ 232     $ 1,479  

 

   

Nine Months Ended

September 30, 2017

 
$ in millions       Trading           Fees1       Net
    Interest2  
    Total  

Financing

  $ 3,126     $ 269     $ (621   $ 2,774  

Execution services

    1,805       1,643       (160     3,288  

Total Equity

  $ 4,931     $ 1,912     $ (781   $ 6,062  

Total Fixed income

  $ 3,785     $ 167     $ 168     $ 4,120  

 

   

Nine Months Ended

September 30, 2016

 
$ in millions       Trading           Fees1       Net
    Interest2  
    Total  

Financing

  $ 2,797     $ 259     $ (152   $ 2,904  

Execution services

    1,621       1,690       (131     3,180  

Total Equity

  $ 4,418     $ 1,949     $ (283   $ 6,084  

Total Fixed income

  $ 2,782     $ 115     $ 752     $ 3,649  

 

1.

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

2.

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

 

 

September 2017 Form 10-Q   10  


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Management’s Discussion and Analysis   LOGO

 

We manage each of the sales and trading businesses based on its aggregate net revenues, which are comprised of the income statement line items quantified in the previous table. Trading revenues are affected by a variety of market dynamics, including volumes, bid-offer spreads, and inventory prices, as well as impacts from hedging activity, which are interrelated. We provide qualitative commentary in the discussion of results that follow on the key drivers of period over period variances, as the quantitative impact of the various market dynamics typically cannot be disaggregated.

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

Sales and Trading Net Revenues during the Current Quarter

Equity

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

 

 

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

 

 

Execution services decreased 6% from the prior year quarter as reduced market volumes in the United States resulted in lower commissions and fees, while reduced Trading revenues from derivative products were offset by increased Trading revenues from cash equity products.

Fixed Income

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

 

 

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

 

 

Global macro products decreased due to lower market and interest rate volatility, which reduced Trading revenues. In addition, Net interest revenues decreased due to the effect of interest rate products inventory management.

 

 

Commodities products and Other remained relatively unchanged from the prior year quarter.

Sales and Trading Net Revenues during the Current Year Period

Equity

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

 

 

Financing revenues decreased 4% from the prior year period as Net interest revenues declined from higher net interest costs, reflecting increased liquidity requirements and a shift in the mix of financing transactions, partially offset by higher client activity in equity swaps reflected in Trading revenues.

 

 

Execution services increased 3% from the prior year period primarily due to improved results in cash equity inventory management reflected in Trading revenues, partially offset by lower commissions and fees driven by reduced market volumes in the United States.

Fixed Income

Fixed income net revenues of $4,120 million in the current year period were 13% higher than the prior year period, driven by higher results across all three product areas.

 

 

Credit products increased due to the absence of inventory losses driven by a widening spread environment in the prior year period, which increased Trading revenues. This was partially offset by a lower level of interest realized in securitized products in the current year period, which reduced Net interest revenues.

 

 

Global macro products increased due to increased Trading revenues in foreign exchange driven by market volatility, and structured interest rate products driven by higher client activity. This was partially offset by higher interest costs impacting Net interest revenues in the current year period which resulted from interest rate products inventory management.

 

 

Commodities products and Other increased due to improved metals trading, commodities lending results and the absence of losses from counterparty risk management incurred in the prior year period.

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

Investments

 

 

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

 

 

  11   September 2017 Form 10-Q


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Net investment gains of $155 million in the current year period increased from the prior year period primarily reflecting gains on investments associated with our compensation plans in the current year period compared with losses in the prior year period and higher gains on real estate investments, partially offset by lower gains on equities business related investments.

Other

 

 

Other revenues of $143 million in the current quarter decreased from the prior year quarter primarily reflecting lower mark-to-market gains on loans held for sale. Other revenues of $442 million in the current year period increased from the prior year period primarily reflecting a decrease in the provision on loans held for investment.

Non-interest Expenses

Non-interest expenses of $3,140 million in the current quarter were relatively unchanged from the prior year quarter primarily reflecting an 8% decrease in Compensation and benefits expenses and a 6% increase in Non-compensation expenses. Non-interest expenses of $9,881 million in the current year period increased from the prior year period reflecting a 9% increase in Compensation and benefits expenses and a 10% increase in Non-compensation expenses.

 

 

Compensation and benefits expenses decreased in the current quarter primarily due to decreases in discretionary incentive compensation driven mainly by lower revenues,

   

and lower amortization of deferred cash and equity awards. Compensation and benefits expenses increased in the current year period primarily due to increases in discretionary incentive compensation driven mainly by higher revenues and the fair value of investments to which certain deferred compensation plans are referenced.

 

 

Non-compensation expenses increased in the current quarter and current year period primarily due to higher volume-driven expenses and litigation costs. In addition to higher volume-driven expenses and litigation costs, non-compensation expenses increased in the current year period due to a provision related to the U.K. VAT matter (see Other Items below).

Other Items

During the second quarter, the Firm self-identified an issue regarding VAT on intercompany services provided by certain overseas affiliates to our U.K. group. The Firm is reviewing the reporting of U.K. VAT as the focus and nature of services shifted among geographic locations. In the current year period, we have recorded a provision of $86 million that incorporates potential additional VAT, interest and penalties for this exposure. We are actively working with Her Majesty’s Revenue and Customs to resolve this matter. The provision reflected is based on currently available information and analyses, and our review of this matter is continuing.

 

 

September 2017 Form 10-Q   12  


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Management’s Discussion and Analysis   LOGO

 

Wealth Management

Income Statement Information

 

    Three Months Ended
September 30,
       
 $ in millions           2017               2016       % Change    

 Revenues

     

 Investment banking

  $ 125     $ 129       (3)%   

 Trading

    212       229       (7)%   

 Investments

    1             N/M   

 Commissions and fees

    402       433       (7)%   

 Asset management, distribution
and administration fees

    2,393       2,133       12%   

 Other

    62       72       (14)%   

 Total non-interest revenues

    3,195       2,996       7%   

 Interest income

    1,155       979       18%   

 Interest expense

    130       94       38%   

 Net interest

    1,025       885       16%   

 Net revenues

    4,220       3,881       9%   

 Compensation and benefits

    2,326       2,203       6%   

 Non-compensation expenses

    775       777       —%   

 Total non-interest expenses

    3,101       2,980       4%   

 Income from continuing
operations before income taxes

    1,119       901       24%   

 Provision for income taxes

    421       337       25%   

 Net income applicable to
Morgan Stanley

  $ 698     $ 564       24%  

 

    Nine Months Ended
September 30,
       
 $ in millions           2017               20161       % Change    

 Revenues

     

 Investment banking

  $ 405     $ 373       9%   

 Trading

    657       675       (3)%   

 Investments

    3       (2     N/M   

 Commissions and fees

    1,266       1,268       —%   

 Asset management, distribution and administration fees

    6,879       6,269       10%   

 Other

    191       232       (18)%   

 Total non-interest revenues

    9,401       8,815       7%   

 Interest income

    3,348       2,813       19%   

 Interest expense

    320       268       19%   

 Net interest

    3,028       2,545       19%   

 Net revenues

    12,429       11,360       9%   

 Compensation and benefits

    6,940       6,443       8%   

 Non-compensation expenses

    2,340       2,371       (1)%   

 Total non-interest expenses

    9,280       8,814       5%   

 Income from continuing operations
before income taxes

    3,149       2,546       24%   

 Provision for income taxes

    1,139       973       17%   

 Net income applicable to
Morgan Stanley

  $ 2,010     $ 1,573       28%   

N/M – Not Meaningful

1.

Effective July 1, 2016, the Institutional Securities and Wealth Management business segments entered into an agreement, whereby Institutional Securities assumed management of Wealth Management’s fixed income client-driven trading activities and employees. Institutional Securities now pays fees to Wealth Management based on distribution activity (collectively, the “Fixed Income Integration”). Prior periods have not been recast for this new intersegment agreement due to immateriality.

 

Financial Information and Statistical Data

 

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

 Client assets

   $ 2,307       $ 2,103   

 Fee-based client assets1

   $ 1,003       $ 877   

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

     43%         42%   

 Client liabilities2

   $ 78       $ 73   

 Investment securities portfolio

   $ 60.6       $ 63.9   

 Loans and lending commitments

   $ 76.2       $ 68.7   

 Wealth Management
representatives

     15,759         15,763   

 

    Three Months Ended
September 30,
 
               2017                     2016        

Annualized revenues per representative (dollars in thousands)3

  $ 1,071     $ 977  

Client assets per representative
(dollars in millions)4

  $ 146     $ 132  

Fee-based asset flows5
(dollars in billions)

  $ 15.8     $ 13.5  

 

    Nine Months Ended
September 30,
 
               2017                     2016        

Annualized revenues per representative (dollars in thousands)3

  $ 1,051     $ 953   

Client assets per representative
(dollars in millions)4

  $ 146     $ 132   

Fee-based asset flows5
(dollars in billions)

  $ 54.5     $ 31.4   

 

1.

Fee-based client assets represent the amount of assets in client accounts where the basis of payment for services is a fee calculated on those assets.

2.

Client liabilities include securities-based and tailored lending, residential real estate loans and margin lending.

3.

Annualized revenues per representative equal Wealth Management’s annualized revenues divided by the average representative headcount.

4.

Client assets per representative equal total period-end client assets divided by period-end representative headcount.

5.

Fee-based asset flows include net new fee-based assets, net account transfers, dividends, interest and client fees and exclude institutional cash management-related activity.

 

 

  13   September 2017 Form 10-Q


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Management’s Discussion and Analysis   LOGO

 

Net Revenues

Transactional Revenues

 

    Three Months Ended
September 30,
        
 $ in millions             2017                   2016        % Change    

 Investment banking

  $ 125     $ 129        (3)%   

Trading

    212       229        (7)%   

 Commissions and fees

    402       433        (7)%   

 Total

  $ 739     $ 791        (7)%   

 

    Nine Months Ended
September 30,
        
 $ in millions             2017               2016      % Change    

 Investment banking

  $ 405     $ 373        9%   

 Trading

    657       675        (3)%   

 Commissions and fees

    1,266       1,268        —%   

 Total

  $ 2,328     $ 2,316        1%   

Transactional revenues of $739 million in the current quarter decreased 7% from the prior year quarter primarily reflecting lower Commissions and fees and Trading revenues.

Transactional revenues of $2,328 million in the current year period increased 1% from the prior year period primarily reflecting higher revenues in Investment banking revenues, partially offset by decreased Trading revenues.

 

 

Investment banking revenues were relatively unchanged in the current quarter. The increase in the current year period was due to higher revenues from structured products and equity syndicate activities, partially offset by lower preferred stock syndicate activity.

 

 

Trading revenues decreased in the current quarter primarily due to lower client activity in fixed income products. In addition to lower client activity, Trading revenues decreased in the current year period due to lower revenues related to the Fixed Income Integration, partially offset by gains related to investments associated with certain employee deferred compensation plans.

 

 

Commissions and fees decreased in the current quarter primarily due to decreased activity in equities, mutual funds and annuities. Commissions and fees were relatively unchanged in the current year period, with decreased activity in annuities and mutual funds essentially offset by the impact of the Fixed Income Integration.

Asset Management

 

 

Asset management, distribution and administration fees of $2,393 million in the current quarter and $6,879 million in the current year period increased 12% and 10%, respectively. The increase in both periods is primarily due to market appreciation and net positive flows. See “Fee-Based Client Assets” herein.

Net Interest

 

 

Net interest of $1,025 million in the current quarter and $3,028 million in the current year period increased 16% and 19%, respectively, primarily due to higher loan balances and higher interest rates, partially offset by higher interest paid on deposits.

Other

 

 

Other revenues of $62 million in the current quarter and $191 million in the current year period decreased 14% and 18%, respectively, due to lower realized gains from the available for sale (“AFS”) securities portfolio.

Non-interest Expenses

Non-interest expenses of $3,101 million in the current quarter and $9,280 million in the current year period increased 4% and 5%, respectively, as a result of the increase in Compensation and benefits expenses.

 

 

Compensation and benefits expenses increased in the current quarter primarily due to the formulaic payout to Wealth Management representatives linked to higher revenues. In addition to the higher formulaic payout, Compensation and benefits expenses increased in the current year period due to increases in the fair value of investments to which certain deferred compensation plans are referenced.

 

 

Non-compensation expenses were relatively unchanged in the current quarter. Non-compensation expenses decreased in the current year period primarily due to lower litigation and information processing costs, partially offset by higher deposit insurance expense and higher consulting fees related to strategic initiatives.

Fee-Based Client Assets

For a description of fee-based client assets, including descriptions for the fee based client asset types and rollforward items in the following tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Wealth Management—Fee-Based Client Assets Activity and Average Fee Rate by Account Type” in Part II, Item 7 of the 2016 Form 10-K.

 

 

September 2017 Form 10-Q   14  


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Management’s Discussion and Analysis   LOGO

 

Fee-Based Client Assets Rollforward

 

$ in billions   At
June 30,
2017
    Inflows     Outflows     Market
Impact
    At
September 30,
2017
 

Separately
managed accounts1, 2

  $ 237     $ 8     $ (5   $ 3     $ 243   

Unified managed accounts2

    228       11       (7     7       239   

Mutual fund
advisory

    21       1       (1           21   

Representative as advisor

    138       9       (7     4       144   

Representative as
portfolio
manager

    321       18       (11     10       338   

Subtotal

  $ 945     $ 47     $ (31   $ 24     $ 985   

Cash management

    17       3       (2           18   

Total fee-based
client assets

  $ 962     $ 50     $ (33   $ 24     $ 1,003   

 

$ in billions  

At

June 30,
2016

    Inflows     Outflows     Market
Impact
   

At

September 30,
2016

 

Separately
managed
accounts1

  $ 279     $ 8     $ (15   $ 7     $ 279   

Unified managed
accounts

    120       17       (5     4       136   

Mutual fund
advisory

    23             (1     1       23   

Representative as
advisor

    117       10       (7     3       123   

Representative as portfolio manager

    265       19       (12     6       278   

Subtotal

  $ 804     $ 54     $ (40   $ 21     $ 839   

Cash management

    16       2       (2           16   

Total fee-based
client assets

  $ 820     $ 56     $ (42   $ 21     $ 855   

 

 

$ in billions  

At

December 31,
2016

    Inflows     Outflows     Market
Impact
   

At

September 30,
2017

 

Separately managed accounts1, 2

  $ 222     $ 24     $ (16   $ 13     $ 243   

Unified managed accounts2

    204       36       (22     21       239   

Mutual fund advisory

    21       1       (3     2       21   

Representative as advisor

    125       27       (20     12       144   

Representative as portfolio manager

    285       57       (29     25       338   

Subtotal

  $ 857     $ 145     $ (90   $ 73     $ 985   

Cash management

    20       9       (11           18   

Total fee-based client assets

  $ 877     $ 154     $ (101   $ 73     $ 1,003   

 

$ in billions  

At

December 31,
2015

    Inflows     Outflows     Market
Impact
   

At

September 30,
2016

 

Separately managed accounts1

  $ 283     $ 24     $ (31   $ 3     $ 279   

Unified managed accounts

    105       37       (13     7       136   

Mutual fund advisory

    25       1       (5     2       23   

Representative as advisor

    115       22       (20     6       123   

Representative as portfolio manager

    252       48       (32     10       278   

Subtotal

  $ 780     $ 132     $ (101   $ 28     $ 839   

Cash management

    15       8       (7           16   

Total fee-based client assets

  $ 795     $ 140     $ (108   $ 28     $ 855   

Average Fee Rates3

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
Fee Rate in bps    2017      2016      2017      2016  

Separately managed
accounts2

     17        35        16        36   

Unified managed
accounts2

     97        104        98        106   

Mutual fund advisory

     118        119        118        119   

Representative as
advisor

     84        85        84        85   

Representative as
portfolio manager

     94        98        96        99   

Subtotal

     76        76        76        77   

Cash management

     6        6        6         

Total fee-based
client assets

     75        75        75        76   

bps—Basis points

1.

Includes non-custody account values reflecting prior quarter-end balances due to a lag in the reporting of asset values by third-party custodians.

2.

A shift in client assets of approximately $66 billion in the fourth quarter of 2016 from separately managed accounts to unified managed accounts resulted in a lower average fee rate for those platforms but did not impact the average fee rate for total fee-based client assets.

3.

Certain data enhancements made in the first quarter of 2017 resulted in a modification to the “Fee Rate” calculations. Prior periods have been restated to reflect the revised calculations.

 

 

  15   September 2017 Form 10-Q


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Management’s Discussion and Analysis   LOGO

 

Investment Management

Income Statement Information

 

   

Three Months Ended

September 30,

       
$ in millions   2017     2016     % Change  

Revenues

     

Investment banking

  $     $ (2     N/M  

Trading

    (7     (3     (133)%  

Investments

    114       51       124%  

Asset management, distribution
and administration fees

    568       508       12%  

Other

    1       (3     133%  

Total non-interest revenues

    676       551       23%  

Interest income

    1       1       —%  

Interest expense

    2             N/M  

Net interest

    (1     1       (200)%  

Net revenues

    675       552       22%  

Compensation and benefits

    311       237       31%  

Non-compensation expenses

    233       218       7%  

Total non-interest expenses

    544       455       20%  

Income from continuing
operations before income taxes

    131       97       35%  

Provision for income taxes

    16       31       (48)%  

Net income

    115       66       74%  

Net income (loss) applicable to noncontrolling interests

    1       (1     200%  

Net income applicable to
Morgan Stanley

  $ 114     $ 67       70%  
   

Nine Months Ended

September 30,

       
$ in millions   2017     2016     % Change  

Revenues

     

 

Investment banking

  $     $ (1     N/M  

Trading

    (21     (8     (163)%  

Investments

    337       37       N/M  

Commissions and fees

          3       N/M  

Asset management, distribution and administration fees

    1,624       1,551       5%  

Other

    9       28       (68)%  

Total non-interest revenues

    1,949       1,610       21%  

Interest income

    3       5       (40)%  

Interest expense

    3       3       —%  

Net interest

          2       N/M  

Net revenues

    1,949       1,612       21%  

Compensation and benefits

    878       688       28%  

Non-compensation expenses

    695       665       5%  

Total non-interest expenses

    1,573       1,353       16%  

Income from continuing
operations before income taxes

    376       259       45%  

Provision for income taxes

    87       78       12%  

Net income

    289       181       60%  

Net income (loss) applicable to noncontrolling interests

    8       (14     157%  

Net income applicable to
Morgan Stanley

  $ 281     $ 195       44%  

N/M – Not Meaningful

Net Revenues

Investments

 

 

Investments gains of $114 million in the current quarter compared with $51 million in the prior year quarter reflected higher carried interest principally in Infrastructure investments, partially offset by weaker investment performance which resulted in the reversal of previously accrued carried interest in Private Equity.

 

 

Investments gains of $337 million in the current year period compared with $37 million in the prior year period reflected higher carried interest and performance gains in all asset classes.

Asset Management, Distribution and Administration Fees

 

 

Asset management, distribution and administration fees of $568 million increased 12% in the current quarter compared to the prior year quarter as a result of higher average assets under management or supervision (“AUM”) across all asset classes and higher performance fees.

 

 

Asset management, distribution and administration fees of $1,624 million increased 5% in the current year period compared to the prior year period primarily as a result of higher average AUM.

See “Assets Under Management or Supervision” herein.

Non-interest Expenses

Non-interest expenses of $544 million in the current quarter and $1,573 million in the current year period increased 20% and 16% from the comparable prior periods primarily due to higher Compensation and benefits expenses.

 

 

Compensation and benefits expenses increased in the current quarter and current year period due to higher discretionary incentive compensation and an increase in deferred compensation associated with carried interest.

 

 

Non-compensation expenses increased in the current quarter and current year period primarily due to higher brokerage, clearing and exchange fees.

Assets Under Management or Supervision

For a description of the asset classes and rollforward items in the following tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Investment Management—Assets Under Management or Supervision” in Part II, Item 7 of the 2016 Form 10-K.

 

 

September 2017 Form 10-Q   16  


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Management’s Discussion and Analysis   LOGO

 

AUM Rollforwards

 

$ in billions  

At

June 30,
2017

    Inflows     Outflows     Market
Impact
    Other1    

At

September 30,
2017

 

Equity

  $       94     $     5     $ (6   $     4     $     —     $       97   

Fixed income

    66       7       (5     1             69   

Liquidity

    154       279       (277     1       (1     156   

Alternative /
Other
products

    121       5       (3     1       1       125   

Total AUM

  $ 435     $ 296     $ (291   $ 7     $     $ 447   

Shares of minority
stake assets

    8                                        
$ in billions  

At

June 30,

2016

    Inflows     Outflows     Market
Impact
    Other1    

At

September 30,
2016

 

Equity

  $       81     $       4     $ (6   $      4     $     —     $                 83   

Fixed income

    61       6       (5     1             63   

Liquidity

    149       358       (352     (1           154   

Alternative /
Other
products

    115       4       (4     2             117   

Total AUM

  $ 406     $ 372     $ (367   $ 6     $     $ 417   

Shares of minority
stake assets

    8                                        

 

$ in billions  

At

December 31,
2016

    Inflows     Outflows     Market
Impact
    Other1    

At

September 30,
2017

 

Equity

  $         79     $       16     $ (16   $       17     $       1     $               97   

Fixed income

    60       20       (16     3       2       69   

Liquidity

    163       915       (923     1             156   

Alternative /
Other
products

    115       18       (13     5             125   

Total AUM

  $ 417     $ 969     $ (968   $ 26     $ 3     $ 447   

Shares of minority
stake assets

    8                                        

 

$ in billions  

At

December 31,
2015

    Inflows     Outflows     Market
Impact
    Other1    

At

September 30,
2016

 

Equity

  $           83     $       14     $ (18   $       4     $       —     $               83   

Fixed income

    60       18       (19     3       1       63   

Liquidity

    149       985       (979     (1           154   

Alternative /
Other
products

    114       18       (18     3             117   

Total AUM

  $ 406     $ 1,035     $ (1,034   $ 9     $ 1     $ 417   

Shares of minority
stake assets

    8                                        

Average AUM

 

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

Equity

  $              96     $              83     $              90     $              81   

Fixed income

    68       62       65       61   

Liquidity

    156       151       155       149   

Alternative /
Other
products

    123       116       120       115   

Total AUM

  $ 443     $ 412     $ 430     $ 406   

Shares of minority
stake assets

    7       7       7        

Average Fee Rate

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
Fee Rate in bps       2017             2016             2017             2016      

Equity

    75       74       74       72   

Fixed income

    34       32       33       32   

Liquidity

    18       18       18       18   

Alternative /
Other
products

    68       73       69       76   

Total AUM

                 47                    47                    46                    48   

AUM—Assets under management or supervision

bps—Basis points

1.

Includes distributions and foreign currency impact.

 

 

  17   September 2017 Form 10-Q


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Management’s Discussion and Analysis   LOGO

 

Supplemental Financial Information and Disclosures

U.S. Bank Subsidiaries

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

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

 

$ in billions  

At
September 30,

2017

    At
December 31,
2016
 

U.S. Bank Subsidiaries assets1

  $ 182.2     $ 176.8   

U.S. Bank Subsidiaries investment securities portfolio:

   

Investment securities—AFS

    42.7       50.3   

Investment securities—HTM

    18.1       13.6   

Total investment securities

  $ 60.8     $ 63.9   

Deposits2

  $ 154.2     $ 154.7   

 

Wealth Management U.S. Bank Subsidiaries data

 

Securities-based lending and other loans3

  $ 40.1     $ 36.0   

Residential real estate loans

    26.2       24.4   

Total

  $ 66.3     $ 60.4   

 

Institutional Securities U.S. Bank Subsidiaries data

 

Corporate loans

  $ 22.3     $ 20.3   

Wholesale real estate loans

    10.1       9.9   

Total

  $                     32.4     $                 30.2   

AFS—Available for sale

HTM—Held to maturity

1.

Certain revisions have been made to prior periods to conform to the current presentation.

2.

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

3.

Other loans primarily include tailored lending.

Income Tax Matters

Effective Tax Rate

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
         2017             2016             2017             2016      

From continuing operations

    28.1%       31.5%       29.7%       32.7%  

The effective tax rate for the current quarter and current year period reflects a recurring-type discrete tax benefit of $11 million and $139 million, respectively, associated with the adoption of new accounting guidance related to employee share-based payments, and other net discrete tax benefits of $83 million and $65 million, respectively, primarily resulting from the remeasurement of certain deferred taxes. See Note 2 to the financial statements for information on the adoption of the accounting update Improvements to Employee Share-Based Payment Accounting.

Accounting Development Updates

The Financial Accounting Standards Board has issued certain accounting updates that apply to us but are not yet effective for the Firm. Accounting updates not listed below were assessed and determined to be either not applicable or are not expected to have a significant impact on our financial statements.

The following accounting updates are currently being evaluated to determine the potential impact of adoption:

 

 

Revenue from Contracts with Customers. This accounting update aims to clarify the principles of revenue recognition, develop a common revenue recognition standard across all industries for U.S. GAAP and provide enhanced disclosures for users of the financial statements. The core principle of this guidance is that an entity should recognize revenues to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The update is not applicable to financial instruments. We will adopt the guidance on January 1, 2018 and apply the modified retrospective method of adoption.

This accounting update will change the presentation of certain costs related to underwriting and advisory activities so that such costs will be recorded in the relevant non-interest expense line item versus the current practice of netting such costs against Investment banking revenues. This change is estimated to gross up Investment banking revenues and affected expenses for the Institutional Securities segment by approximately 5%-10%. Similarly, certain costs related to the selling and distribution of investment funds will no longer be netted against Asset management, distribution and administration fees, and therefore is expected to result in a gross up of such Investment

 

 

September 2017 Form 10-Q   18  


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Management’s Discussion and Analysis   LOGO

 

Management revenues and affected expenses by less than 5%. These changes will not have an impact on net income.

In addition, the timing of the recognition of certain performance fees from fund management activities, not in the form of carried interest, is generally expected to be deferred within a fiscal year until the fees are no longer probable of being reversed. Thus, the recognition of such revenues, which are recorded in Asset management, distribution and administration fees within the Investment Management segment, which approximated $60 million in 2016 and were recognized throughout the year, are generally expected to be recognized in the fourth quarter of each fiscal year based on current fee arrangements.

The recognition of performance fees from fund management activities in the form of carried interest that are subject to reversal will remain essentially unchanged. We will apply the equity method of accounting to such carried interest, thus excluding them from the scope of this standard.

We will continue to assess the impact of the new standard as we progress through the implementation process and as industry interpretations are resolved; therefore, additional impacts may be identified prior to adoption.

 

 

Hedge Accounting. This accounting update aims to better align the hedge accounting requirements with an entity’s risk management strategies and improve the financial reporting of hedging relationships. It will also result in simplification of the application of hedge accounting related to the assessment of hedge effectiveness. This update is effective as of January 1, 2019 with early adoption permitted.

 

 

Leases. This accounting update requires lessees to recognize on the balance sheet all leases with terms exceeding one year, which results in the recognition of a right of use asset and corresponding lease liability, including for those leases that we currently classify as operating leases. The right of use asset and lease liability will initially be measured using the present value of the remaining rental payments. The accounting for leases where we are the lessor is largely unchanged. This update is effective as of January 1, 2019 with early adoption permitted.

 

 

Financial Instruments–Credit Losses. This accounting update impacts the impairment model for certain financial assets measured at amortized cost by requiring a current expected credit loss (“CECL”) methodology to estimate expected credit losses over the entire life of the financial asset, recorded at inception or purchase. CECL will replace the loss model currently applicable to loans held for invest-

   

ment, HTM securities and other receivables carried at amortized cost.

The update also eliminates the concept of other-than-temporary impairment for AFS securities. Impairments on AFS securities will be required to be recognized in earnings through an allowance, when the fair value is less than amortized cost and a credit loss exists or the securities are expected to be sold before recovery of amortized cost.

Under the update, there may be an ability to determine there are no expected credit losses in certain circumstances, e.g., based on collateral arrangements for lending and financing transactions or based on the credit quality of the borrower or issuer.

Overall, the amendments in this update are expected to accelerate the recognition of credit losses for portfolios where CECL models will be applied. This update is effective as of January 1, 2020 with early adoption permitted as of January  1, 2019.

Critical Accounting Policies

Our financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions (see Note 1 to the financial statements). We believe that of our significant accounting policies (see Note 2 to the consolidated financial statements in the 2016 Form 10-K and Note 2 to the financial statements), the fair value, goodwill and intangible assets, legal and regulatory contingencies and income taxes policies involve a higher degree of judgment and complexity. For a further discussion about our critical accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in Part II, Item 7 of the 2016 Form 10-K.

Liquidity and Capital Resources

Senior management establishes liquidity and capital policies. Through various risk and control committees, senior management reviews business performance relative to these policies, monitors the availability of alternative sources of financing, and oversees the liquidity, interest rate and currency sensitivity of our asset and liability position. The Treasury Department, Firm Risk Committee, Asset and Liability Management Committee, and other committees and control groups assist in evaluating, monitoring and controlling the impact that our business activities have on our balance sheets, liquidity and capital structure. Liquidity and capital matters are reported regularly to the Board of Directors (the “Board”) and the Board’s Risk Committee.

 

 

  19   September 2017 Form 10-Q


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The Balance Sheet

We monitor and evaluate the composition and size of our balance sheet on a regular basis. Our balance sheet management process includes quarterly planning, business-specific thresholds, monitoring of business-specific usage versus key performance metrics and new business impact assessments.

We establish balance sheet thresholds at the consolidated and business segment levels. We monitor balance sheet utilization and review variances resulting from business activity or market fluctuations. On a regular basis, we review current performance versus established thresholds and assess the need to re-allocate our balance sheet based on business unit needs. We also monitor key metrics, including asset and liability size and capital usage.

Total Assets by Business Segment

 

    At September 30, 2017  

$ in millions

  Institutional
Securities
    Wealth
Management
    Investment
Management
      Total    

Assets

       

Cash and cash equivalents1

  $ 31,100     $ 17,026     $ 65     $ 48,191   

Trading assets at fair value

    282,555       68       2,465       285,088   

Investment securities

    18,532       60,554             79,086   

Securities purchased under
agreements to resell

    84,223       5,883             90,106   

Securities borrowed

    132,597       295             132,892   

Customer and other
receivables

    35,725       18,061       602       54,388   

Loans, net of allowance

    38,171       66,255       5       104,431   

Other assets2

    45,378       12,486       1,647       59,511   

Total assets

  $ 668,281     $ 180,628     $ 4,784     $ 853,693   

 

    At December 31, 2016  
$ in millions   Institutional
Securities
    Wealth
Management
    Investment
Management
    Total  

Assets

       

Cash and cash equivalents1

  $ 25,291     $ 18,022     $ 68     $ 43,381   

Trading assets at fair value

    259,680       64       2,410       262,154   

Investment securities

    16,222       63,870             80,092   

Securities purchased under
agreements to resell

    96,735       5,220             101,955   

Securities borrowed

    124,840       396             125,236   

Customer and other
receivables

    26,624       19,268       568       46,460   

Loans, net of allowance

    33,816       60,427       5       94,248   

Other assets2

    45,941       13,868       1,614       61,423   

Total assets

  $ 629,149     $ 181,135     $ 4,665     $ 814,949   

 

1.

Cash and cash equivalents include cash and due from banks and interest bearing deposits with banks.

2.

Other assets primarily includes Cash deposited with clearing organizations or segregated under federal and other regulations or requirements; Other investments; Premises, equipment and software costs; Goodwill; Intangible assets and deferred tax assets.

A substantial portion of total assets consists of liquid marketable securities and short-term receivables arising principally from sales and trading activities in the Institutional Securities business segment. Total assets increased to $853.7 billion at September 30, 2017 from $814.9 billion at December 31, 2016, primarily driven by an increase in trading inventory within Institutional Securities, along with loan growth across both Institutional Securities and Wealth Management. The change in trading inventory reflects increased trading activity in U.S. government and agency securities and Other sovereign government obligations, along with higher market values for corporate equities compared with December 31, 2016.

Securities Repurchase Agreements and Securities Lending

Securities borrowed or securities purchased under agreements to resell and securities loaned or securities sold under agreements to repurchase are treated as collateralized financings (see Note 2 to the consolidated financial statements in the 2016 Form 10-K and Note 6 to the financial statements).

Collateralized Financing Transactions

 

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

Securities purchased under agreements to resell and Securities borrowed

   $ 222,998      $ 227,191   

Securities sold under agreements
to repurchase and Securities loaned

   $ 69,613      $ 70,472   

Securities received as collateral1

   $ 12,995      $ 13,737   

 

   

Daily Average Balance

Three Months Ended

 

$ in millions

  September 30,
2017
    December 31, 
2016
 

Securities purchased under agreements
to resell and Securities borrowed

  $ 227,146     $ 224,355   

Securities sold under agreements
to repurchase and Securities loaned

  $ 68,563     $ 68,908   

 

1.

Included in Trading assets in the balance sheets.

Customer Securities Financing

The customer receivable portion of the securities financing transactions primarily includes customer margin loans, collateralized by customer-owned securities, which are segregated in accordance with regulatory requirements. The customer payable portion of the securities financing transactions primarily includes payables to our prime brokerage customers. Our risk exposure on these transactions is mitigated by collateral maintenance policies that limit our credit exposure to customers and liquidity reserves held against this risk exposure.

 

 

September 2017 Form 10-Q   20  


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Liquidity Risk Management Framework

The primary goal of our Liquidity Risk Management Framework is to ensure that we have access to adequate funding across a wide range of market conditions and time horizons. The framework is designed to enable us to fulfill our financial obligations and support the execution of our business strategies.

The core components of our Liquidity Risk Management Framework are the Required Liquidity Framework, Liquidity Stress Tests and the Global Liquidity Reserve (“GLR”), which support our target liquidity profile. For further discussion about the Firm’s Required Liquidity Framework and Liquidity Stress Tests, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management Framework” in Part II, Item 7 of the 2016 Form 10-K.

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

Global Liquidity Reserve

We maintain sufficient global liquidity reserves pursuant to our Required Liquidity Framework. For further discussion of our GLR, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management Framework—Global Liquidity Reserve” in Part II, Item 7 of the 2016 Form 10-K.

GLR by Type of Investment

 

$ in millions   

At

September 30,

2017

    

At

December 31,
2016

 

 Cash deposits with banks

   $ 9,684      $                 8,679   

 Cash deposits with central banks

     33,566        30,568   

 Unencumbered highly liquid securities:

     

 U.S. government obligations

     67,677        78,615   

 U.S. agency and agency mortgage-backed securities

     51,676        46,360   

 Non-U.S. sovereign obligations1

     24,110        30,884   

 Investments in money market funds

     2        —    

Other investment grade securities

     3,251        7,191   

Total

   $ 189,966      $ 202,297   

 

1.

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

GLR Managed by Bank and Non-Bank Legal Entities

 

   

At

September 30,
2017

    

At

December 31,
2016

    

Daily Average
Balance

Three Months
Ended

 
 $ in millions         September 30,
2017
 

 Bank legal entities

 

 Domestic

  $                 72,567      $                 74,411      $                 68,746   

 Foreign

    4,248        4,238        4,297   

 Total Bank legal entities

    76,815        78,649        73,043   

 Non-Bank legal entities

 

 Domestic:

       

 Parent Company

    39,747        66,514        50,893   

 Non-Parent Company

    31,754        18,801        33,934   

 Total Domestic

    71,501        85,315        84,827   

 Foreign

    41,650        38,333        44,244   

 Total Non-Bank legal entities

    113,151        123,648        129,071   

 Total

  $ 189,966      $ 202,297      $ 202,114   

Regulatory Liquidity Framework

Liquidity Coverage Ratio

The Basel Committee on Banking Supervision’s (“Basel Committee”) Liquidity Coverage Ratio (“LCR”) standard is designed to ensure that banking organizations have sufficient high-quality liquid assets (“HQLA”) to cover net cash outflows arising from significant stress over 30 calendar days. The standard’s objective is to promote the short-term resilience of the liquidity risk profile of banking organizations. We and our U.S. Bank Subsidiaries are subject to the LCR requirements issued by U.S. banking regulators (“U.S. LCR”), which are based on the Basel Committee’s LCR, including a requirement to calculate each entity’s U.S. LCR on each business day. We and our U.S. Bank Subsidiaries are compliant with the minimum required U.S. LCR of 100%.

HQLA by Type of Asset and LCR

 

   

At

September 30,
2017

   

    At    

    December 31,    
    2016    

   

Daily Average

Balance

Three Months

Ended

 
 $ in millions      

September 30,

2017

 
   

 HQLA

     

 Cash deposits with central banks

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

 Securities1

    125,426       129,524       134,363  

 Total

  $ 159,040     $ 160,093     $ 175,204  

 LCR

                    130%  

 

1.

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

 

 

  21   September 2017 Form 10-Q


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The regulatory definition of HQLA is substantially the same as our GLR. GLR includes cash placed at institutions other than central banks that is considered an inflow for LCR purposes. HQLA includes a portion of cash placed at central banks, certain unencumbered investment grade corporate bonds and publicly traded common equities, which do not meet the definition of our GLR.

Net Stable Funding Ratio

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

The Basel Committee finalized the NSFR framework in 2014. In May 2016, the U.S. banking regulators issued a proposal to implement the NSFR in the U.S., which would apply to us and our U.S. Bank Subsidiaries. Our preliminary estimates, based on the current proposal, indicate that actions will be necessary to meet the requirement, which we expect to accomplish by the effective date of any final rule. For an additional discussion of NSFR, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Liquidity Framework—Net Stable Funding Ratio” in Part II, Item 7 of the 2016 Form 10-K.

Funding Management

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

We fund our balance sheet on a global basis through diverse sources. These sources may include our equity capital, long-term borrowings, securities sold under agreements to repurchase (“repurchase agreements”), securities lending, deposits, letters of credit and lines of credit. We have active financing programs for both standard and structured products targeting global investors and currencies.

Secured Financing

For a discussion of our secured financing activities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Funding Management—Secured Financing” in Part II, Item 7 of the 2016 Form 10-K.

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

Unsecured Financing

For a discussion of our unsecured financing activities, see “Management’s Discussion and Analysis of Financing Condition and Results of Operations—Liquidity and Capital Resources—Funding Management—Unsecured Financing” in Part II, Item 7 of the 2016 Form 10-K and see Note 4 to the financial statements.

Deposits

 

$ in millions   

At

September 30,

2017

    

At

December 31,

2016

 

Savings and demand deposits: Brokerage sweep deposits1

  

$

          135,152 

 

  

$

          153,042 

 

Savings and other

     5,555         1,517   

Total Savings and demand deposits

     140,707         154,559   

Time deposits2

     13,932         1,304   

Total

   $ 154,639       $ 155,863   

 

1.

Represents balances swept from client brokerage accounts. Also referred to as the Bank Deposit program.

2.

Certain time deposit accounts are carried at fair value under the fair value option (see Note 3 to the financial statements).

Deposits are primarily sourced from our Wealth Management clients, and are considered to have stable, low-cost funding characteristics. Total deposits as of September 30, 2017 were relatively unchanged compared with December 31, 2016, with the decrease in brokerage sweep deposits, primarily due to client deployment of cash into the markets, largely offset by an increase in time deposits and savings and other deposits, primarily due to growth in certificates of deposits and savings products.

Short-Term Borrowings

 

$ in millions   

At

September 30,

2017

    

At

December 31,

2016

 

Short-term borrowings

   $ 1,087      $ 941   

Our unsecured short-term borrowings primarily consist of structured notes, bank loans and bank notes with original maturities of 12 months or less.

Long-Term Borrowings

We believe that accessing debt investors through multiple distribution channels helps provide consistent access to the unsecured markets. In addition, the issuance of long-term borrowings allows us to reduce reliance on short-term credit sensitive instruments. Long-term borrowings are generally managed to achieve staggered maturities, thereby mitigating refinancing risk, and to maximize investor diversification through sales to global institutional and retail clients across regions, currencies and product types. Availability and cost of financing to us can vary depending on market conditions, the volume of certain trading and lending activities, our credit ratings and the overall availability of credit.

 

 

September 2017 Form 10-Q   22  


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We may engage in various transactions in the credit markets (including, for example, debt retirements) that we believe are in our investors’ best interests.

Long-term Borrowings by Maturity at September 30, 2017

 

$ in millions   

Parent

Company

     Subsidiaries      Total  

2017

   $ 4,605      $ 3,685      $ 8,290  

2018

     18,816        2,244        21,060  

2019

     21,841        2,033        23,874  

2020

     19,362        2,075        21,437  

2021

     15,862        1,449        17,311  

Thereafter

     88,786        10,919        99,705  

Total

   $                 169,272      $                 22,405      $                 191,677  

Maturities over next 12 months

 

   $ 25,792  

Long-term Borrowings increased to $191,677 million as of September 30, 2017, compared with $164,775 million at December 31, 2016. This increase is a result of issuances, partially offset by maturities and retirements, presented in the table below.

 

$ in millions    Nine Months Ended
September 30, 2017
 

Issued

   $ 45,334  

Matured or retired

     24,480  

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

Credit Ratings

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

Our credit ratings do not include any uplift from perceived government support from any rating agency given the significant progress of the U.S. financial reform legislation and regulations. Some rating agencies have stated that they currently incorporate various degrees of credit rating uplift from non-governmental third-party sources of potential support.

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

 

     Parent Company
      Short-term
Debt
   Long-term
Debt
   Rating  
Outlook  

DBRS, Inc.

   R-1 (middle)    A (high)    Stable  

Fitch Ratings, Inc.

   F1    A    Stable  

Moody’s Investors Service, Inc.

   P-2    A3    Stable  

Rating and Investment Information, Inc.

   a-1    A-    Stable  

Standard & Poor’s Global Ratings

   A-2    BBB+    Stable  
     Morgan Stanley Bank, N.A.
      Short-term
Debt
   Long-term
Debt
   Rating  
Outlook  

Fitch Ratings, Inc.

   F1    A+    Stable  

Moody’s Investors Service, Inc.

   P-1    A1    Stable  

Standard & Poor’s Global Ratings

   A-1    A+    Stable  

In connection with certain OTC trading agreements and certain other agreements where we are a liquidity provider to certain financing vehicles associated with the Institutional Securities business segment, we may be required to provide additional collateral, immediately settle any outstanding liability balances with certain counterparties or pledge additional collateral to certain exchanges and clearing organizations in the event of a future credit rating downgrade irrespective of whether we are in a net asset or net liability position.

The additional collateral or termination payments that may be called in the event of a future credit rating downgrade vary by contract and can be based on ratings by either or both of Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Global Ratings (“S&P”). The following table shows the future potential collateral amounts and termination payments that could be called or required by counterparties or exchanges and clearing organizations in the event of one-notch or two-notch downgrade scenarios, from the lowest of Moody’s or S&P ratings, based on the relevant contractual downgrade triggers.

Incremental Collateral or Terminating Payments upon Potential Future Rating Downgrade

 

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

One-notch downgrade

   $ 856      $ 1,292  

Two-notch downgrade

     635        875  

While certain aspects of a credit rating downgrade are quantifiable pursuant to contractual provisions, the impact it would have on our business and results of operations in future periods is inherently uncertain and would depend on a number of interrelated factors, including, among others, the magnitude of the downgrade, the rating relative to peers, the rating assigned by the relevant agency pre-downgrade, individual client behavior and future mitigating actions we might take. The liquidity impact of additional collateral requirements is included in our Liquidity Stress Tests.

 

 

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Capital Management

We view capital as an important source of financial strength and actively manage our consolidated capital position based upon, among other things, business opportunities, risks, capital availability and rates of return together with internal capital policies, regulatory requirements and rating agency guidelines and, therefore, in the future may expand or contract our capital base to address the changing needs of our businesses. We attempt to maintain total capital, on a consolidated basis, at least equal to the sum of our operating subsidiaries’ required equity.

Common Stock

 

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

Repurchases of
common stock

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

From time to time we repurchase our outstanding common stock which includes our share repurchase program. For a description of our share repurchase program, see “Unregistered Sales of Equity Securities and Use of Proceeds.”

The Board determines the declaration and payment of dividends on a quarterly basis. On October 17, 2017, we announced that the Board declared a quarterly dividend per common share of $0.25. The dividend is payable on November 15, 2017 to common shareholders of record on October 31, 2017.

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

Preferred Stock

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

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

Regulatory Requirements

Regulatory Capital Framework

We are a financial holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and are subject to the regulation and oversight of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Federal Reserve establishes capital requirements for us,

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

The Basel Committee has published revisions to certain standards in its capital framework, and is actively considering potential revisions to other capital standards, that, if adopted by the U.S. banking agencies, could substantially change the U.S. regulatory capital framework. For additional discussion of regulatory capital framework, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Regulatory Capital Framework” in Part II, Item 7 of the 2016 Form 10-K.

Regulatory Capital Requirements

We are required to maintain minimum risk-based and leverage capital ratios under the regulatory capital requirements. A summary of the calculations of regulatory capital, risk-weighted assets (“RWAs”) and transition provisions follows.

Regulatory Capital.    Minimum risk-based capital ratio requirements apply to Common Equity Tier 1 capital, Tier 1 capital and Total capital (which includes Tier 2 capital). Certain adjustments to and deductions from capital are required for purposes of determining these ratios, such as goodwill, intangible assets, certain deferred tax assets, other amounts in Accumulated other comprehensive income (loss) (“AOCI”) and investments in the capital instruments of unconsolidated financial institutions. Certain of these adjustments and deductions are also subject to transitional provisions.

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

 

 

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

 

 

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

 

 

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

In 2017, the phase-in amount for each of the buffers is 50% of the fully phased-in buffer requirement. Failure to main-

 

 

September 2017 Form 10-Q   24  


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tain the buffers would result in restrictions on our ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers. For a further discussion of the G-SIB capital surcharge, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—G-SIB Capital Surcharge” in Part II, Item 7 of the 2016 Form 10-K.

See “Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements” herein for additional capital requirements effective January 1, 2019.

Risk-Weighted Assets.    RWAs reflect both our on- and off-balance sheet risk as well as capital charges attributable to the risk of loss arising from the following:

 

 

Credit risk: The failure of a borrower, counterparty or issuer to meet its financial obligations to us;

 

 

Market risk: Adverse changes in the level of one or more market prices, rates, indices, volatilities, correlations or other market factors, such as market liquidity; and

 

 

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

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

Our risk-based capital ratios for purposes of determining regulatory compliance are the lower of the capital ratios computed under (i) the standardized approaches for calculating credit risk and market risk RWAs (the “Standardized Approach”) and (ii) the applicable advanced approaches for calculating credit risk, market risk and operational risk RWAs (the “Advanced Approach”). The credit risk RWA calculations between the two approaches differ in that the Standardized Approach requires calculation of RWAs using prescribed risk weights, whereas the Advanced Approach utilizes models to calculate exposure amounts and risk weights. At September 30, 2017, our ratios are based on the Standardized Approach transitional rules. For prior periods, the ratios were based on the Advanced Approach transitional rules.

The methods for calculating each of our risk-based capital ratios will change through January 1, 2022 as aspects of the capital rules are phased in. These changes may result in differences in our reported capital ratios from one reporting period to the next that are independent of changes to our capital base, asset composition, off-balance sheet exposures or risk profile.

Minimum Risk-Based Capital Ratios: Transitional Provisions

 

 

LOGO

 

1.

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

Transitional and Fully Phased-In Regulatory Capital Ratios

 

    At September 30, 2017  
    Transitional     Pro Forma Fully Phased-In  
$ in millions   Standardized     Advanced     Standardized     Advanced  

Risk-based capital

       

Common Equity Tier 1
capital

  $ 62,214      $     62,214      $ 61,603      $     61,603   

Tier 1 capital

    71,006        71,006        70,276        70,276   

Total capital

    81,861        81,652        81,148        80,939   

Total RWAs

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

Common Equity Tier 1
capital ratio

    16.9%       17.4%       16.3%       16.7%  

Tier 1 capital ratio

    19.3%       19.8%       18.6%       19.1%  

Total capital ratio

    22.2%       22.8%       21.4%       22.0%  

Leverage-based capital

       

Adjusted average assets1

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

Tier 1 leverage ratio2

    8.4%       N/A        8.4%       N/A   

 

    At December 31, 2016  
    Transitional     Pro Forma Fully Phased-In  
$ in millions   Standardized     Advanced     Standardized     Advanced  

Risk-based capital

       

Common Equity
Tier 1 capital

  $ 60,398     $ 60,398     $ 58,616     $ 58,616  

Tier 1 capital

    68,097       68,097       66,315       66,315  

Total capital

    78,917       78,642       77,155       76,881  

Total RWAs

    340,191       358,141       351,101       369,709  

Common Equity
Tier 1 capital ratio

    17.8%       16.9%       16.7%       15.9%  

Tier 1 capital ratio

    20.0%       19.0%       18.9%       17.9%  

Total capital ratio

    23.2%       22.0%       22.0%       20.8%  

Leverage-based capital

       

Adjusted average assets1

  $ 811,402       N/A     $ 810,288       N/A  

Tier 1 leverage ratio2

    8.4%       N/A       8.2%       N/A  

N/A—Not Applicable

1.

Adjusted average assets represent the denominator of the Tier 1 leverage ratio and are composed of the average daily balance of consolidated on-balance sheet assets under U.S. GAAP during the current quarter and the quarter ended December 31, 2016 adjusted for disallowed goodwill, transitional intangible assets, certain deferred tax assets, certain investments in the capital instruments of unconsolidated financial institutions and other adjustments.

2.

The minimum Tier 1 leverage ratio requirement is 4.0%.

 

 

  25   September 2017 Form 10-Q


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The fully phased-in pro forma estimates in the previous tables are based on our current understanding of the capital rules and other factors, which may be subject to change as we receive additional clarification and implementation guidance from the Federal Reserve and as the interpretation of the regulations evolves over time. These fully phased-in pro forma estimates are non-GAAP financial measures because they were not yet effective at September 30, 2017. These preliminary estimates are subject to risks and uncertainties that may cause actual results to differ materially and should not be taken as a projection of what our capital, capital ratios, RWAs, earnings or other results will actually be at future dates. For a discussion of risks and uncertainties that may affect our future results, see “Risk Factors” in Part I, Item 1A of the 2016 Form 10-K.

Well-Capitalized Minimum Regulatory Capital Ratios for U.S. Bank Subsidiaries

 

      At September 30, 2017  

Common Equity Tier 1 risk-based capital ratio

     6.5%  

Tier 1 risk-based capital ratio

     8.0%  

Total risk-based capital ratio

     10.0%  

Tier 1 leverage ratio

     5.0%  

For us to remain a financial holding company, our U.S. Bank Subsidiaries must qualify as well-capitalized by maintaining the minimum ratio requirements set forth in the previous table. The Federal Reserve has not yet revised the well-capitalized standard for financial holding companies to reflect the higher capital standards required for us under the capital rules. Assuming that the Federal Reserve would apply the same or very similar well-capitalized standards to financial holding companies, each of our risk-based capital ratios and Tier 1 leverage ratio at September 30, 2017 would have exceeded the revised well-capitalized standard. The Federal Reserve may require us to maintain risk- and leverage-based capital ratios substantially in excess of mandated minimum levels, depending upon general economic conditions and a financial holding company’s particular condition, risk profile and growth plans.

Regulatory Capital Calculated under Transitional Rules

 

$ in millions   

At

September 30,

2017

   

At
December 31,

2016

 

Common Equity Tier 1 capital

    

Common stock and surplus

   $ 15,448     $ 17,494  

Retained earnings

     57,554       53,679  

AOCI

     (2,544     (2,643)  

Regulatory adjustments and deductions:

 

Net goodwill

     (6,519     (6,526)  

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

     (1,991     (1,631)  

Other adjustments and deductions1

     266       25  

Total Common Equity Tier 1 capital

   $ 62,214     $ 60,398  

Additional Tier 1 capital

    

Preferred stock

   $ 8,520     $ 7,520  

Noncontrolling interests

     544       613  

Other adjustments and deductions2

     33       (246)  

Additional Tier 1 capital

   $ 9,097     $ 7,887  

Deduction for investments in covered funds

     (305     (188)  

Total Tier 1 capital

   $ 71,006     $ 68,097  

Standardized Tier 2 capital

    

Subordinated debt

   $ 10,341     $ 10,303  

Noncontrolling interests

     95       62  

Eligible allowance for credit losses

     426       464  

Other adjustments and deductions

     (7     (9)  

Total Standardized Tier 2 capital

   $ 10,855     $ 10,820  

Total Standardized capital

   $ 81,861     $ 78,917  

Advanced Tier 2 capital

    

Subordinated debt

   $ 10,341     $ 10,303  

Noncontrolling interests

     95       62  

Eligible credit reserves

     217       189  

Other adjustments and deductions

     (7     (9)  

Total Advanced Tier 2 capital

   $ 10,646     $ 10,545  

Total Advanced capital

   $ 81,652     $ 78,642  
 

 

September 2017 Form 10-Q   26  


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Regulatory Capital Rollforward Calculated under Transitional Rules

 

$ in millions    Nine Months Ended
 September 30, 2017 
 
  

Common Equity Tier 1 capital

  

Common Equity Tier 1 capital at December 31, 2016

   $ 60,398   

Change related to the following items:

  

Value of shareholders’ common equity

     1,928   

Net goodwill

      

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

     (360)  

Other adjustments and deductions1

     241   

Common Equity Tier 1 capital at September 30, 2017

   $ 62,214   

Additional Tier 1 capital

  

Additional Tier 1 capital at December 31, 2016

   $ 7,887   

New issuance of qualifying preferred stock

     1,000   

Change related to the following items:

  

Noncontrolling interests

     (69)  

Other adjustments and deductions2

     279   

Additional Tier 1 capital at September 30, 2017

     9,097   

Deduction for investments in covered funds at
December 31, 2016

     (188)  

Change in deduction for investments in covered funds

     (117)  

Deduction for investments in covered funds at
September 30, 2017

     (305)  

Tier 1 capital at September 30, 2017

   $ 71,006   

Standardized Tier 2 capital

  

Tier 2 capital at December 31, 2016

   $ 10,820   

Change related to the following items:

  

Eligible allowance for credit losses

     (38)  

Other changes, adjustments and deductions3

     73   

Standardized Tier 2 capital at September 30, 2017

   $ 10,855   

Total Standardized capital at September 30, 2017

   $ 81,861   

Advanced Tier 2 capital

  

Tier 2 capital at December 31, 2016

   $ 10,545   

Change related to the following items:

  

Eligible credit reserves

     28   

Other changes, adjustments and deductions3

     73   

Advanced Tier 2 capital at September 30, 2017

   $ 10,646   

Total Advanced capital at September 30, 2017

   $ 81,652   

 

1.

Other adjustments and deductions used in the calculation of Common Equity Tier 1 capital include credit spread premium over risk-free rate for derivative liabilities, net deferred tax assets, net after-tax DVA and adjustments related to AOCI.

2.

Other adjustments and deductions used in the calculation of Additional Tier 1 capital include credit spread premium over risk-free rate for derivatives liabilities, net deferred tax assets and net after-tax DVA.

3.

Other changes, adjustments and deductions used in the calculations of Standardized and Advanced Tier 2 capital include changes in subordinated debt and noncontrolling interests.

RWAs Rollforward Calculated under Transitional Rules

 

     Nine Months Ended  
     September 30, 20171  
$ in millions    Standardized      Advanced  

Credit risk RWAs

     

Balance at December 31, 2016

   $        278,874      $        169,231  

Change related to the following items:

     

Derivatives

     7,013         166   

Securities financing transactions

     5,892         3,246   

Securitizations

     1,559         1,224   

Investment securities

     (3,044)        (1,467)  

Commitments, guarantees and loans

     213         (4,317)  

Cash

     (103)        (592)  

Equity investments

     (889)        (946)  

Other credit risk2

     1,795         1,650   

Total change in credit risk RWAs

   $ 12,436       $ (1,036)  

Balance at September 30, 2017

   $ 291,310       $ 168,195   

Market risk RWAs

     

Balance at December 31, 2016

   $ 61,317       $ 60,872   

Change related to the following items:

     

Regulatory VaR

     523         523   

Regulatory stressed VaR

     11,304         11,304   

Incremental risk charge

     2,662         2,662   

Comprehensive risk measure

     (3,923)        (3,543)  

Specific risk:

     

Non-securitizations

     4,065         4,065   

Securitizations

     1,371         1,409   

Total change in market risk RWAs

   $ 16,002       $ 16,420   

Balance at September 30, 2017

   $ 77,319       $ 77,292   

Operational risk RWAs

     

Balance at December 31, 2016

   $ N/A       $ 128,038   

Change in operational risk RWAs

     N/A         (15,306)  

Balance at September 30, 2017

   $ N/A       $ 112,732   

Total RWAs

   $ 368,629       $ 358,219   

VaR—Value-at-Risk

N/A—Not Applicable

1.

The RWAs for each category in the table reflect both on- and off-balance sheet exposures, where appropriate.

2.

Amount reflects assets not in a defined category, non-material portfolios of exposures and unsettled transactions, as applicable.

The decrease of $15,306 million in operational risk RWAs in the current year period under the Advanced Approach reflects a reduction in the internal loss data related to litigation utilized in the operational risk capital model.

Regulatory stressed VaR increased $11,304 million in the current year period under both the Standardized and the Advanced Approaches. These increases were primarily driven by increases in trading inventory across the equities, global macro, and credit businesses within Institutional Securities, in response to client demand.

 

 

  27   September 2017 Form 10-Q


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Supplementary Leverage Ratio

We and our U.S. Bank Subsidiaries are required to publicly disclose our supplementary leverage ratios, which will become effective as a capital standard on January 1, 2018. By January 1, 2018, we must also maintain a Tier 1 supplementary leverage capital buffer of at least 2% in addition to the 3% minimum supplementary leverage ratio (for a total of at least 5%), in order to avoid limitations on capital distributions, including dividends and stock repurchases, and discretionary bonus payments to executive officers. In addition, beginning in 2018, our U.S. Bank Subsidiaries must maintain a supplementary leverage ratio of 6% to be considered well-capitalized.

Pro Forma Supplementary Leverage Exposure and Ratio

 

    At September 30, 2017     At December 31, 2016  

$ in millions

  Transitional
basis
    Fully
phased-in1
    Transitional
basis
    Fully
phased-in1
 

Average total assets2

  $ 850,616     $ 850,616     $ 820,536     $ 820,536  

Adjustments3, 4

    237,305       236,789       242,113       240,999  

Pro forma supplementary leverage exposure

  $ 1,087,921     $ 1,087,405     $ 1,062,649     $ 1,061,535  

 

Pro forma supplementary leverage ratio

    6.5%       6.5%       6.4%       6.2%  

 

1.

Estimated amounts utilize fully phased-in Tier 1 capital and take into consideration the Tier 1 capital deductions that would be applicable in 2018 after the phase-in period has ended.

2.

Computed as the average daily balance of consolidated total assets under U.S. GAAP during the current quarter and the quarter ended December 31, 2016.

3.

Computed as the arithmetic mean of the month-end balances over the current quarter and the quarter ended December 31, 2016.

4.

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

The pro forma fully phased-in supplementary leverage exposure and ratios, shown in the previous table, are based on our current understanding of rules and other factors.

U.S. Subsidiary Banks’ Pro Forma Supplementary Leverage Ratios on a Transitional Basis

 

      At September 30, 2017      At December 31, 2016  

MSBNA

     8.9%        7.7%  

MSPBNA

     9.4%        10.2%  

The pro forma transitional and fully phased-in supplementary leverage exposures and ratios are non-GAAP financial measures because they have not yet become effective. Our estimates are subject to risks and uncertainties that may cause actual results to differ materially from estimates based on these regulations. Further, these expectations should not be

taken as projections of what our supplementary leverage ratios, earnings, assets or exposures will actually be at future dates. For a discussion of risks and uncertainties that may affect our future results, see “Risk Factors” in Part I, Item 1A of the 2016 Form 10-K.

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

On December 15, 2016, the Federal Reserve adopted a final rule for top-tier bank holding companies of U.S. G-SIBs (“covered BHCs”), including the Parent Company, that establishes external total loss-absorbing capacity (“TLAC”), long-term debt (“LTD”) and clean holding company requirements. The final rule contains various definitions and restrictions, such as requiring eligible LTD to be issued by the covered BHC and be unsecured, have a maturity of one year or more from the date of issuance and not have certain derivative-linked features typically associated with certain types of structured notes. We expect to be in compliance with all requirements of the rule by January 1, 2019, the date that compliance is required.

For a further discussion of TLAC and LTD requirements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements” in Part II, Item 7 of the 2016 Form 10-K. For discussions about the interaction between the single point of entry resolution strategy and the TLAC and LTD requirements, see “Business—Supervision and Regulation—Financial Holding Company—Resolution and Recovery Planning” in Part I, Item 1 and “Risk Factors—Legal, Regulatory and Compliance Risk” in Part I, Item 1A of the 2016 Form 10-K.

Capital Plans and Stress Tests

Pursuant to the Dodd-Frank Act, the Federal Reserve has adopted capital planning and stress test requirements for large bank holding companies, including us, which form part of the Federal Reserve’s annual Comprehensive Capital Analysis and Review (“CCAR”) framework.

We submitted our 2017 capital plan and company-run stress test results to the Federal Reserve on April 5, 2017. On June 22, 2017, the Federal Reserve published summary results of the Dodd-Frank Act supervisory stress tests of each large bank holding company, including us. On June 28, 2017, the Federal Reserve published summary results of CCAR and announced that they did not object to our 2017 Capital Plan (“Capital Plan”). The Capital Plan includes the repurchase of up to $5.0 billion of outstanding common stock for the period beginning July 1, 2017 through June 30, 2018, an increase

 

 

September 2017 Form 10-Q   28  


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from $3.5 billion in the 2016 Capital Plan. Additionally, the Capital Plan includes an increase in our quarterly common stock dividend to $0.25 per share from $0.20 per share, beginning with the common stock dividend declared on July 19, 2017. We disclosed a summary of the results of our company-run stress tests on June 23, 2017 on our Investor Relations website. In addition, we submitted the results of our mid-cycle company-run stress test to the Federal Reserve on October 5, 2017 and disclosed a summary of the results on October 20, 2017 on our Investor Relations website.

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

For a further discussion of our capital plans and stress tests, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Capital Plans and Stress Tests” in Part II, Item 7 of the 2016 Form 10-K.

Attribution of Average Common Equity According to the Required Capital Framework

Our required capital (“Required Capital”) estimation is based on the Required Capital framework, an internal capital adequacy measure. Common equity attribution to the business segments is based on capital usage calculated by the Required Capital framework, as well as each business segment’s relative contribution to our total Required Capital. Required Capital is assessed for each business segment and further attributed to product lines. This process is intended to align capital with the risks in each business segment in order to allow senior management to evaluate returns on a risk-adjusted basis.

The Required Capital framework is a risk-based and leverage use-of-capital measure, which is compared with our regulatory capital to ensure that we maintain an amount of going concern capital after absorbing potential losses from stress events, where applicable, at a point in time. We define the difference between our total average common equity and the sum of the average common equity amounts allocated to our business segments as Parent Company equity. We generally hold Parent Company equity for prospective regulatory requirements, organic growth, acquisitions and other capital needs.

Common equity estimation and attribution to the business segments are based on our pro forma fully phased-in regulatory capital estimates, including supplementary leverage, and incorporates our internal stress tests. The amount of capital

allocated to the business segments is set at the beginning of each year and remains fixed throughout the year until the next annual reset. Differences between available and Required Capital are attributed to Parent Company equity during the year.

The Required Capital framework is expected to evolve over time in response to changes in the business and regulatory environment. We will continue to evaluate the framework with respect to the impact of future regulatory requirements, as appropriate.

Average Common Equity Attribution

 

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

Institutional Securities

   $ 40.2      $ 43.2      $ 40.2      $ 43.2   

Wealth Management

     17.2        15.3        17.2        15.3   

Investment Management

     2.4        2.8        2.4        2.8   

Parent Company

     10.7        8.2        10.0        7.6   

Total1

   $ 70.5      $ 69.5      $ 69.8      $ 68.9   

 

1.

Average common equity is a non-GAAP financial measure.

Regulatory Developments

Resolution and Recovery Planning

Pursuant to the Dodd-Frank Act, we are required to submit to the Federal Reserve and the Federal Deposit Insurance Corporation (“FDIC”) an annual resolution plan that describes our strategy for a rapid and orderly resolution under the U.S. Bankruptcy Code in the event of our material financial distress or failure.

Our preferred resolution strategy, which is set out in our 2017 resolution plan, is a single point of entry strategy. We submitted our full 2017 resolution plan on June 30, 2017. We previously submitted a status report in respect of certain shortcomings identified in our 2015 resolution plan on September 30, 2016. As indicated in our 2017 resolution plan, the Parent Company has amended and restated its support agreement with its material subsidiaries. Under the amended and restated support agreement, upon the occurrence of a resolution scenario, the Parent Company would be obligated to contribute or loan on a subordinated basis all of its material assets, other than shares in subsidiaries of the Parent Company and certain intercompany receivables, to provide capital and liquidity, as applicable, to our material subsidiaries. The obligations of the Parent Company under the amended and restated support agreement are secured on a senior basis by the assets of the Parent Company (other than shares in subsidiaries of the Parent Company). As a result, claims of our material subsidiaries against the assets of the Parent Company (other than shares in subsidiaries of the Parent Company) are effectively senior to unsecured obligations of the Parent Company.

 

 

  29   September 2017 Form 10-Q


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In September 2017, the Federal Reserve and the FDIC extended the next resolution plan filing deadline for eight large domestic banks, including us, by one year to July 1, 2019.

In September 2016, the OCC issued final guidelines that establish enforceable standards for recovery planning by national banks and certain other institutions with total consolidated assets of $50 billion or more, calculated on a rolling four-quarter average basis, including MSBNA and MSPBNA. The guidelines were effective on January 1, 2017; MSBNA must be in compliance by January 1, 2018 and MSPBNA must be in compliance by October 1, 2018.

In September 2017, the Federal Reserve issued a final rule that would impose contractual requirements on certain “qualified financial contracts” (“covered QFCs”) to which U.S. G-SIBs, including us, and their subsidiaries (“covered entities”) are parties. While national banks and savings associations are not “covered entities” under the final Federal Reserve rule, the OCC is expected to issue a final rule that would subject national banks that are subsidiaries of U.S. G-SIBs, including our U.S. Bank Subsidiaries, as well as certain other institutions, to substantively identical requirements. Under the Federal Reserve’s final rule, covered QFCs must generally expressly provide that transfer restrictions and default rights against a covered entity are limited to the same extent as they would be under the Federal Deposit Insurance Act and Title II of the Dodd-Frank Act and their implementing regulations. In addition, covered QFCs may not, among other things, permit the exercise of any cross-default right against a covered entity based on an affiliate’s entry into insolvency, resolution or similar proceedings, subject to certain creditor protections. There is a phased-in compliance schedule based on counterparty type, with the first compliance date of January 1, 2019.

For more information about resolution and recovery planning requirements and our activities in these areas, including the implications of such activities in a resolution scenario, see “Business—Supervision and Regulation—Financial Holding Company—Resolution and Recovery Planning” in Part I, Item 1, “Risk Factors—Legal, Regulatory and Compliance Risk” in Part I, Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Developments—Resolution and Recovery Planning” in Part II, Item 7 of the 2016 Form 10-K.

Legacy Covered Funds under the Volcker Rule

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

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

For more information about Volcker Rule requirements and our activities in these areas, including the conformance periods applicable to certain covered funds and our application for a statutory extension, see “Business—Supervision and Regulation—Financial Holding Company—Activities Restrictions under the Volcker Rule” in Part I, Item 1 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Developments—Legacy Covered Funds under the Volcker Rule” in Part II, Item 7 of the 2016 Form 10-K.

U.S. Department of Labor Conflict of Interest Rule

The U.S. Department of Labor’s final Conflict of Interest Rule went into effect on June 9, 2017, with certain aspects subject to phased-in compliance. Full compliance is currently scheduled to be required by January 1, 2018, but the U.S. Department of Labor recently proposed to delay the full compliance date to July 1, 2019. In addition, the U.S. Department of Labor is undertaking an examination of the rule which may result in changes to the rule or related exemptions or a further change in the full compliance date. For a discussion of the U.S. Department of Labor Conflict of Interest Rule, see “Business—Supervision and Regulation—Institutional Securities and Wealth Management” in Part I, Item 1 of the 2016 Form 10-K.

U.K. Referendum

Following the U.K. electorate vote to leave the European Union, the U.K. invoked Article 50 of the Lisbon Treaty on March 29, 2017. For further discussion of U.K. referendum’s potential impact on our operations, see “Risk Factors—International Risk” in Part I, Item 1A of the 2016 Form 10-K. For further information regarding our exposure to the U.K., see also “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Country Risk Exposure.”

 

 

September 2017 Form 10-Q   30  


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Expected Replacement of LIBOR

Central banks around the world, including the Federal Reserve, have commissioned working groups of market participants and others with the goal of finding suitable replacements for the London Interbank Offered Rate (“LIBOR”) based more fully on observable market transactions. It is expected that a transition away from the widespread use of LIBOR to alternative rates will occur over the course of the next several years.

Effects of Inflation and Changes in Interest and Foreign Exchange Rates

For a discussion of the effects of inflation and changes in interest and foreign exchange rates on our business and financial results and strategies to mitigate potential exposures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Effects of Inflation and Changes in Interest and Foreign Exchange Rates” in Part II, Item 7 of the 2016 Form 10-K.

Off-Balance Sheet Arrangements

We enter into various off-balance sheet arrangements, including through unconsolidated special purpose entities (“SPEs”) and lending-related financial instruments (e.g., guarantees and commitments), primarily in connection with the Institutional Securities and Investment Management business segments.

We utilize SPEs primarily in connection with securitization activities. For information on our securitization activities, see Note 12 to the financial statements.

For information on our commitments, obligations under certain guarantee arrangements and indemnities, see Note 11 to the financial statements. For further information on our lending commitments, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Lending Activities.”

 

 

  31   September 2017 Form 10-Q


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Risk Management

Management believes effective risk management is vital to the success of our business activities. For a discussion of our risk management functions, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management” in Part II, Item 7A of the 2016 Form 10-K.

Market Risk

Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, volatilities, correlations or other market factors, such as market liquidity, will result in losses for a position or portfolio. Generally, we incur market risk as a result of trading, investing and client facilitation activities, principally within the Institutional Securities business segment where the substantial majority of our Value-at-Risk (“VaR”) for market risk exposures is generated. In addition, we incur market risk within the Wealth Management and Investment Management business segments. The Wealth Management business segment primarily incurs non-trading market risk from lending and deposit-taking activities. The Investment Management business segment primarily incurs non-trading market risk from capital investments in real estate funds and investments in private equity vehicles. For a further discussion of market risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Market Risk” in Part II, Item 7A of the 2016 Form 10-K.

VaR

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

VaR Methodology, Assumptions and Limitations.    For information regarding our VaR methodology, assumptions and limitations, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Market Risk—Sales and Trading and Related Activities—VaR Methodology, Assumptions and Limitations” in Part II, Item 7A of the 2016 Form 10-K.

We utilize the same VaR model for risk management purposes and for regulatory capital calculations. Our regulators have approved our VaR model for use in regulatory calculations.

The portfolio of positions used for our VaR for risk management purposes (“Management VaR”) differs from that used for regulatory capital requirements (“Regulatory VaR”).

Management VaR contains certain positions that are excluded from Regulatory VaR. Examples include counterparty credit valuation adjustment (“CVA”) and related hedges, as well as loans that are carried at fair value and associated hedges.

The following table presents the Management VaR for the Trading portfolio, on a period-end, quarterly average and quarterly high and low basis. To further enhance the transparency of the traded market risk, the Credit Portfolio VaR has been disclosed as a separate category from the Primary Risk Categories. The Credit Portfolio includes counterparty CVA and related hedges, as well as loans that are carried at fair value and associated hedges.

Trading Risks

95% / One-Day Management VaR

 

   

95%/One-Day VaR for

the Three Months Ended

 
    September 30, 2017  

$ in millions

 

Period

End

    Average     High     Low  

Interest rate and credit spread

  $ 28     $ 31     $ 42     $ 25  

Equity price

    13       14       18       12  

Foreign exchange rate

    9       9       13       6  

Commodity price

    9       9       10       7  

Less: Diversification benefit1, 2

    (26     (25     N/A       N/A  

Primary Risk Categories

  $ 33     $ 38     $ 47     $ 32  

Credit Portfolio

    10       11       11       10  

Less: Diversification benefit1, 2

    (6     (6     N/A       N/A  

Total Management VaR

  $ 37     $ 43     $ 50     $ 36  
    95%/One-Day VaR for
the Three Months Ended
 
    June 30, 2017  
$ in millions  

Period

End

    Average     High     Low  

Interest rate and credit spread

  $ 35     $ 35     $ 44      $ 27   

Equity price

    15       18       26        15   

Foreign exchange rate

    10       11       15         

Commodity price

    9       9       10         

Less: Diversification benefit1, 2

    (27     (27           N/A             N/A  

Primary Risk Categories

  $           42     $           46     $ 60      $ 36   

Credit Portfolio

    11       12       14        11   

Less: Diversification benefit1, 2

    (7     (7     N/A        N/A  

Total Management VaR

  $ 46     $ 51     $ 64      $ 41   

N/A—Not Applicable

1.

Diversification benefit equals the difference between the total Management VaR and the sum of the component VaRs. This benefit arises because the simulated one-day losses for each of the components occur on different days; similar diversification benefits also are taken into account within each component.

2.

The high and low VaR values for the total Management VaR and each of the component VaRs might have occurred on different days during the quarter, and therefore, the diversification benefit is not an applicable measure.

 

 

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The average total Management VaR for the three months ended September 30, 2017 (“current quarter”) was $43 million compared with $51 million for the three months ended June 30, 2017 (“last quarter”). The average Management VaR for the Primary Risk Categories for the current quarter was $38 million compared with $46 million last quarter. These decreases were primarily driven by reduced market volatility and decreases in trading inventory across the equities and credit businesses within Institutional Securities.

Distribution of VaR Statistics and Net Revenues for the Current Quarter.    One method of evaluating the reasonableness of our VaR model as a measure of our potential volatility of net revenues is to compare VaR with corresponding actual trading revenues. Assuming no intraday trading, for a 95%/one-day VaR, the expected number of times that trading losses should exceed VaR during the year is 13, and, in general, if trading losses were to exceed VaR more than 21 times in a year, the adequacy of the VaR model would be questioned. We evaluate the reasonableness of our VaR model by comparing the potential declines in portfolio values generated by the model with corresponding actual trading results for the Firm, as well as individual business units. For days where losses exceed the VaR statistic, we examine the drivers of trading losses to evaluate the VaR model’s accuracy relative to realized trading results.

The distribution of VaR Statistics and Net Revenues is presented in the following histograms for the Total Trading populations.

Total Trading.    As shown in the 95%/One-Day Management VaR table on the preceding page, the average 95%/one-day total Management VaR for the current quarter was $43 million. The following histogram presents the distribution of the daily 95%/one-day total Management VaR for the current quarter, which was in a range between $35 million and $50 million for approximately 97% of trading days during the current quarter.

Daily 95% / One-day Total Management VaR for the Three Months Ended September 30, 2017

($ in millions)

 

 

LOGO

The following histogram shows the distribution for the current quarter of daily net trading revenues, including profits and losses from Interest rate and credit spread, Equity price, Foreign exchange rate, Commodity price, and Credit Portfolio positions and intraday trading activities, for our Trading businesses. Daily net trading revenues also include intraday trading activities but exclude certain items not captured in the VaR model, such as fees, commissions and net interest income. Daily net trading revenues differ from the definition of revenues required for Regulatory VaR backtesting, which further excludes intraday trading. During the current quarter, we experienced net trading losses on three days, which were not in excess of the 95%/one-day Total Management VaR.

Daily Net Trading Revenues for the Three Months Ended September 30, 2017

($ in millions)

 

 

LOGO

Non-Trading Risks

We believe that sensitivity analysis is an appropriate representation of our non-trading risks. Reflected below is this analysis covering substantially all of the non-trading risk in our portfolio.

Counterparty Exposure Related to Our Own Credit Spread.    The credit spread risk sensitivity of the counterparty exposure related to our own credit spread corresponded to an increase in value of approximately $6 million for each 1 basis point widening in our credit spread level at both September 30, 2017 and June 30, 2017.

Funding Liabilities.    The credit spread risk sensitivity of our mark-to-market structured note liabilities corresponded to an increase in value of approximately $28 million and $26 million for each 1 basis point widening in our credit spread level at September 30, 2017 and June 30, 2017, respectively.

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

 

 

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are applied to our 12-month forecast for our U.S. Bank Subsidiaries, which incorporates market expectations of interest rates and our forecasted business activity, including our deposit deployment strategy and asset-liability management hedges.

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

 

$ in millions  

At

September 30, 2017

   

At

June 30, 2017

 

Basis point change

   

+200

  $ 566     $ 716   

+100

    433       413   

-100

    (647     (577)  

We do not manage to any single rate scenario but rather manage net interest income in our U.S. Bank Subsidiaries to optimize across a range of possible outcomes. The sensitivity analysis assumes that we take no action in response to these scenarios, assumes there are no changes in other macroeconomic variables normally correlated with changes in interest rates, and includes subjective assumptions regarding customer and market re-pricing behavior and other factors. The change in sensitivity to interest rates between June 30, 2017 and September 30, 2017 is related to overall changes in our asset-liability positioning and higher market rates.

Investments.    We have exposure to public and private companies through direct investments, as well as through funds that invest in these assets. These investments are predominantly equity positions with long investment horizons, a portion of which are for business facilitation purposes. The market risk related to these investments is measured by estimating the potential reduction in net income associated with a 10% decline in investment values and related impact on performance fees.

Investments Sensitivity, Including Related Performance Fees

 

    10% Sensitivity  
$ in millions  

At

September 30,

2017

   

At

June 30,

        2017        

 

Investments related to Investment Management activities

  $ 321     $ 326   

Other investments:

   

Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.

    174       171   

Other Firm investments

    155       151   

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

Credit Risk

Credit risk refers to the risk of loss arising when a borrower, counterparty or issuer does not meet its financial obligations to us. We primarily incur credit risk exposure to institutions and individuals through our Institutional Securities and Wealth Management business segments. For a further discussion of our credit risks, see “Quantitative and Qualitative Disclosures about Market Risk–Risk Management–Credit Risk” in Part II, Item 7A of the 2016 Form 10-K. Also, see Notes 7 and 11 to the financial statements for additional information about our loans and lending commitments, respectively.

Lending Activities included in Loans and Trading Assets

We provide loans and lending commitments to a variety of customers, from large corporate and institutional clients to high net worth individuals. In addition, we purchase loans in the secondary market. In the balance sheets, these loans and lending commitments are carried as held for investment, which are recorded at amortized cost; as held for sale, which are recorded at the lower of cost or fair value; or at fair value with changes in fair value recorded in earnings. Loans held for investment and loans held for sale are classified in Loans, and loans held at fair value are classified in Trading assets in the balance sheets. See Notes 3, 7 and 11 to the financial statements for further information.

 

 

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Loans and Lending Commitments

 

    At September 30, 2017  

$ in millions

  IS     WM     IM1     Total  

Corporate loans

  $     16,201     $     13,480     $         5     $     29,686  

Consumer loans

          26,616             26,616  

Residential real estate loans

          26,150             26,150  

Wholesale real estate loans

    9,000                   9,000  

Loans held for investment,
gross of allowance

    25,201       66,246       5       91,452  

Allowance for loan losses

    (203     (42           (245

Loans held for investment,
net of allowance

    24,998       66,204       5       91,207  

Corporate loans

    12,524                   12,524  

Residential real estate loans

    9       51             60  

Wholesale real estate loans

    640                   640  

Loans held for sale

    13,173       51             13,224  

Corporate loans

    6,420             21       6,441  

Residential real estate loans

    690                   690  

Wholesale real estate loans

    1,157                   1,157  

Loans held at fair value

    8,267             21       8,288  

Total loans

    46,438       66,255       26       112,719  

Lending commitments2,3

    89,329       9,994             99,323  

Total loans and lending commitments2,3

  $ 135,767     $ 76,249     $ 26     $ 212,042  

 

    At December 31, 2016  

$ in millions

  IS     WM     IM1     Total  

Corporate loans

  $     13,858     $     11,162     $         5     $     25,025   

Consumer loans

          24,866             24,866   

Residential real estate loans

          24,385             24,385   

Wholesale real estate loans

    7,702                   7,702   

Loans held for investment,
gross of allowance

    21,560       60,413       5       81,978   

Allowance for loan losses

    (238     (36           (274)  

Loans held for investment,
net of allowance

    21,322       60,377       5       81,704   

Corporate loans

    10,710                   10,710   

Residential real estate loans

    11       50             61   

Wholesale real estate loans

    1,773                   1,773   

Loans held for sale

    12,494       50             12,544   

Corporate loans

    7,199             18       7,217   

Residential real estate loans

    966                   966   

Wholesale real estate loans

    519                   519   

Loans held at fair value

    8,684             18       8,702   

Total loans

    42,500       60,427       23       102,950   

Lending commitments2,3

    90,143       8,299             98,442   

Total loans and lending commitments2,3

  $ 132,643     $ 68,726     $ 23     $ 201,392   

IS—Institutional Securities

WM—Wealth Management

IM—Investment Management

 

1.

Loans in Investment Management are entered into in conjunction with certain investment advisory activities.

2.

Lending commitments represent the notional amount of legally binding obligations to provide funding to clients for lending transactions. Since commitments associated with these business activities may expire unused or may not be utilized to full capacity, they do not necessarily reflect the actual future cash funding requirements.

3.

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

 

allocated from the lead syndicate bank. Due to the nature of our obligations under the commitments, these amounts include certain commitments participated to third parties.

Our credit exposure from our loans and lending commitments is measured in accordance with our internal risk management standards. Risk factors considered in determining the aggregate allowance for loan and commitment losses include the borrower’s financial strength, seniority of the loan, collateral type, volatility of collateral value, debt cushion, loan-to-value ratio, debt service ratio, covenants and counterparty type. Qualitative and environmental factors such as economic and business conditions, nature and volume of the portfolio and lending terms, and volume and severity of past due loans may also be considered.

Allowance for Loans and Lending Commitments Held for Investment

 

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

Loans

   $ 245      $ 274   

Commitments

     181        190   

The aggregate allowance for loan and commitment losses decreased during the current year period primarily due to the charge-off of an energy industry related loan. See Note 7 to the financial statements for further information.

Status of Loans Held for Investment

 

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

Current

     99.4     99.9     98.6     99.9%  

Non-accrual1

     0.6     0.1     1.4     0.1%  

 

1.

These loans are on nonaccrual status because the loans were past due for a period of 90 days or more or payment of principal or interest was in doubt.

Institutional Securities

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

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

 

 

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

Institutional Securities loans and lending commitments are mainly related to relationship-based and event-driven lending to select corporate clients. Relationship-based loans and lending commitments are used for general corporate purposes, working capital and liquidity purposes by our investment banking clients and typically consist of revolving lines of credit, letter of credit facilities and term loans. In connection with the relationship-based lending activities, we had hedges (which included single-name and index hedges) with a notional amount of $17.1 billion and $20.2 billion at September 30, 2017 and December 31, 2016, respectively.

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

Institutional Securities Loans and Lending Commitments by Credit Rating1

 

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

Loans

              

AAA

   $      $      $      $      $ —   

AA

                   32        5        37   

A

     1,437        1,911        1,061        705        5,114   

BBB

     2,186        4,537        3,105        379        10,207   

NIG

     5,658        13,017        4,838        5,455        28,968   

Unrated2

     211        149        244        1,508        2,112   

Total Loans

     9,492        19,614        9,280        8,052        46,438   

Lending Commitments

              

AAA

            165                      165   

AA

     3,726        473        3,731               7,930   

A

     2,824        5,288        11,672        647        20,431   

BBB

     3,321        10,245        16,935        395        30,896   

NIG

     2,486        11,796        12,278        3,266        29,826   

Unrated2

     17        31        12        21        81   

Total Lending Commitments

     12,374        27,998        44,628        4,329        89,329   

Total Exposure

   $ 21,866      $ 47,612      $ 53,908      $ 12,381      $ 135,767   
     At December 31, 2016  
     Years to Maturity         
$ in millions    Less than 1      1-3      3-5      Over 5      Total  

Loans

              

AAA

   $      $      $      $      $  

AA

                   38               38  

A

     235        775        1,391        552        2,953  

BBB

     1,709        6,473        2,768        1,362        12,312  

NIG

     4,667        12,114        5,629        2,304        24,714  

Unrated2

     699        126        175        1,483        2,483  

Total Loans

     7,310        19,488        10,001        5,701        42,500  

Lending Commitments

 

           

AAA

     50        105        50               205  

AA

     3,724        451        3,989               8,164  

A

     1,994        4,610        11,135        392        18,131  

BBB

     6,261        9,006        18,148        653        34,068  

NIG

     2,839        8,934        14,267        3,418        29,458  

Unrated2

     107        6               4        117  

Total Lending Commitments

     14,975        23,112        47,589        4,467        90,143  

Total Exposure

   $ 22,285      $ 42,600      $ 57,590      $ 10,168      $ 132,643  

 

1.

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

2.

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

Institutional Securities Loans and Lending Commitments by Industry

 

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

Industry1

     

Real estate

   $ 23,235      $ 19,807  

Information technology

     13,907        8,602  

Consumer discretionary

     12,129        12,059  

Industrials

     12,110        11,465  

Energy

     11,074        11,757  

Funds, exchanges and
other financial services2

     10,639        11,481  

Healthcare

     10,014        11,534  

Utilities

     9,407        9,216  

Consumer staples

     7,282        7,329  

Materials

     6,129        7,630  

Mortgage finance

     5,826        6,296  

Telecommunications services

     4,722        6,156  

Insurance

     3,986        4,190  

Consumer finance

     2,949        2,847  

Other

     2,358        2,274  

Total

   $ 135,767      $ 132,643  

 

1.

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

2.

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

 

 

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Event-Driven Loans and Lending Commitments

 

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

Loans

  $ 996     $ 1,738     $ 749     $ 4,568     $ 8,051  

Lending commitments

    3,001       1,559       2,601       2,304       9,465  

Total loans and lending commitments

  $ 3,997     $ 3,297     $ 3,350     $ 6,872     $ 17,516  
    At December 31, 2016  
    Years to Maturity        
$ in millions   Less than 1     1-3     3-5     Over 5     Total  

Loans

  $ 666     $ 1,593     $ 1,216     $ 1,622     $ 5,097  

Lending commitments

    6,594       1,460       4,807       3,391       16,252  

Total loans and lending commitments

  $   7,260     $   3,053     $   6,023     $   5,013     $   21,349  

Institutional Securities Lending Exposures Related to the Energy Industry. At September 30, 2017, Institutional Securities’ loans and lending commitments related to the energy industry were $11.1 billion, of which approximately 68% are accounted for as held for investment and 32% are accounted for as either held for sale or at fair value. Additionally, approximately 55% of the total energy industry loans and lending commitments were to investment grade counterparties.

At September 30, 2017, the energy industry portfolio included $1.1 billion in loans and $2.1 billion in lending commitments to Oil and Gas Exploration and Production (“E&P”) companies. The E&P loans were to non-investment grade counterparties, which are generally subject to periodic borrowing base reassessments based on the value of the underlying oil and gas reserves pledged as collateral. In limited situations, we may extend the period related to borrowing base reassessments typically in conjunction with taking certain risk mitigating actions with the borrower. Approximately 51% of the E&P lending commitments were to investment grade counterparties. To the extent oil and natural gas prices deteriorate, we may incur lending losses.

Wealth Management

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

Securities-based lending provided to our retail clients is primarily conducted through our Portfolio Loan Account (“PLA”) and Liquidity Access Line (“LAL”) platforms. For more information about our securities-based lending and residential real estate loans, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Lending Activities” in Part II, Item 7A of the 2016 Form 10-K.

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

Wealth Management Loans and Lending Commitments by Remaining Contractual Maturity

 

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

Securities-based lending
and other loans1

  $ 33,947     $ 3,303     $ 1,713     $ 1,114     $ 40,077   

Residential real estate loans

          16       27       26,135       26,178   

Total Loans

  $ 33,947     $ 3,319     $ 1,740     $ 27,249     $ 66,255   

Lending commitments

    6,950       2,515       228       301       9,994   

Total loans and lending commitments

  $ 40,897     $ 5,834     $ 1,968     $ 27,550     $ 76,249   
    At December 31, 2016  
    Years to Maturity        
$ in millions   Less than 1     1-3     3-5     Over 5     Total  

Securities-based lending
and other loans1

  $   30,547     $   2,983     $   1,304     $ 1,179     $ 36,013   

Residential real estate loans

                45         24,369       24,414   

Total Loans

  $ 30,547     $ 2,983     $ 1,349     $ 25,548     $   60,427   

Lending commitments

    6,372       1,413       268       246       8,299   

Total loans and lending commitments

  $ 36,919     $ 4,396     $ 1,617     $ 25,794     $ 68,726   

 

1.

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

Lending Activities included in Customer and Other Receivables

Margin Loans

 

    At September 30, 2017  
$ in millions   Institutional
Securities
     Wealth
Management
     Total  

Net customer receivables representing margin loans

  $ 16,613      $ 11,996      $     28,609   

 

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

Net customer receivables representing margin loans

  $ 11,876      $ 12,483      $     24,359   

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

 

 

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Employee Loans

$ in millions (except repayment terms)    At
September 30,
2017
    At
December 31,
2016
 

Employee loans:

    

Balance

   $ 4,317     $ 4,804   

Allowance for loan losses

     (79     (89)   

Balance, net

   $ 4,238     $ 4,715   

Repayment term range, in years

     1 to 20       1 to 12   

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

Credit Exposure—Derivatives

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

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

Counterparty Credit Rating and Remaining Contractual Maturity of OTC Derivative Assets

 

    Fair Value at September 30, 2017  
    Contractual Years to Maturity     Total
Derivative
Assets
 
$ in millions   Less than 1     1-3     3-5     Over 5    

Credit Rating

         

AAA

  $ 129     $ 328     $ 359     $ 3,183     $ 3,999   

AA

    1,666       1,716       1,987       7,822       13,191   

A

    6,536       5,597       3,760       19,947       35,840   

BBB

    3,554       2,718       1,712       12,806       20,790   

Non-investment grade

    2,551       2,634       3,539       2,472       11,196   

Total

  $ 14,436     $ 12,993     $ 11,357     $ 46,230     $ 85,016   

 

     Fair Value at September 30, 2017  
$ in millions    Total
Derivative
Assets
    

Cross-
Maturity

and Cash

Collateral

Netting1

   

Net Amounts

Post-cash

Collateral

    

Net Amounts

Post-
collateral2

 

Credit Rating

          

AAA

   $ 3,999      $ (3,011   $ 988      $ 913   

AA

     13,191        (8,178     5,013        2,397   

A

     35,840        (26,352     9,488        5,108   

BBB

     20,790        (14,388     6,402        4,609   

Non-investment grade

     11,196        (5,277     5,919        2,542   

Total

   $ 85,016      $ (57,206   $ 27,810      $ 15,569   

 

    Fair Value at December 31, 2016  
    Contractual Years to Maturity     Total
Derivative
Assets
 
$ in millions   Less than 1     1-3     3-5     Over 5    

Credit Rating

         

AAA

  $ 150     $ 428     $ 918     $ 2,931     $ 4,427   

AA

    3,177       2,383       2,942       10,194       18,696   

A

    9,244       6,676       5,495       21,322       42,737   

BBB

    4,423       3,085       2,434       13,023       22,965   

Non-investment grade

    2,283       1,702       1,722       1,794       7,501   

Total

  $ 19,277     $     14,274     $     13,511     $     49,264     $ 96,326   

 

     Fair Value at December 31, 2016  
$ in millions    Total
Derivative
Assets
    

Cross-
Maturity

and Cash

Collateral
Netting1

    Net Amounts
Post-cash
Collateral
     Net
Amounts
Post-
collateral2
 

Credit Rating

          

AAA

   $ 4,427      $ (3,900   $ 527      $ 485   

AA

     18,696        (11,813     6,883        4,114   

A

     42,737        (31,425     11,312        6,769   

BBB

     22,965        (16,629     6,336        4,852   

Non-investment grade

     7,501        (4,131     3,370        1,915   

Total

   $ 96,326      $ (67,898   $ 28,428      $ 18,135   

 

1.

Amounts represent the netting of receivable balances with payable balances for the same counterparty across maturity categories. Receivable and payable balances with the same counterparty in the same maturity category are netted within such maturity category, where appropriate. Cash collateral received is netted on a counterparty basis, provided legal right of offset exists.

2.

Fair value is shown net of collateral received (primarily cash and U.S. government and agency securities).

 

 

September 2017 Form 10-Q   38  


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

 

$ in millions    At
September 30,
2017
     At
December 31,
20161
 

Industry2

     

Utilities

   $ 4,020      $ 4,184   

Funds, exchanges and
other financial services3

     2,707        2,756   

Regional governments

     1,069        1,352   

Sovereign governments

     1,044        709   

Industrials

     1,032        1,644   

Healthcare

     949        1,103   

Banks and securities firms

     772        1,485   

Not-for-profit organizations

     717        830   

Information technology

     542        267   

Hedge funds

     539        233   

Energy

     464        533   

Consumer discretionary

     445        590   

Insurance

     313        570   

Materials

     284        235   

Special purpose vehicles

     228        821   

Consumer staples

     176        567   

Other

     268        256   

Total4

   $ 15,569      $ 18,135   

 

1.

The amounts included in the December 31, 2016 industry categories have been revised due to previous misclassifications. The total remains unchanged.

2.

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

3.

Amounts include mutual funds, pension funds, private equity and real estate funds, exchanges and clearinghouses, consumer finance, mortgage finance and other diversified financial services.

4.

For further information on derivative instruments and hedging activities, see Note 4 to the financial statements.

We manage our trading positions by employing a variety of risk mitigation strategies. These strategies include diversification of risk exposures and hedging. Hedging activities consist of the purchase or sale of positions in related securities and financial instruments, including a variety of derivative products (e.g., futures, forwards, swaps and options). For a discussion of our credit exposure and related credit derivative contracts, see “Quantitative and Qualitative Disclosures about Market Risk–Risk Management–Credit Risk–Credit Exposure–Derivatives” in Part II, Item 7A of the 2016 Form 10-K.

Credit Derivative Portfolio by Counterparty Type

 

    At September 30, 2017  
    Fair Values1     Notionals  
$ in millions   Receivable      Payable      Net     Protection
Purchased
     Protection
Sold
 

Banks and
securities firms

  $ 5,191      $ 5,623      $ (432   $ 208,611      $ 178,670   

Insurance and other
financial institutions

    3,679        4,358        (679     163,291        160,493   

Non-financial
entities

    34        52        (18     3,146        1,195   

Total

  $ 8,904      $ 10,033      $ (1,129   $ 375,048      $ 340,358   

 

     At December 31, 2016  
     Fair Values1     Notionals  
$ in millions    Receivable      Payable      Net     Protection
Purchased
     Protection
Sold
 

Banks and securities firms

   $ 8,516      $ 9,397      $ (881   $ 319,830      $ 273,462   

Insurance and other financial institutions

     3,619        3,901        (282     144,527        151,999   

Non-financial entities

     94        127        (33     5,832        4,269   

Total

   $ 12,229      $ 13,425      $ (1,196)     $ 470,189      $ 429,730   

 

1.

Our Credit Default Swaps (“CDS”) are classified in either Level 2 or Level 3 of the fair value hierarchy. Approximately 4% of receivable fair values represented Level 3 amounts at September 30, 2017 and December 31, 2016. Approximately 7% of payable fair values represented Level 3 amounts at September 30, 2017 and December 31, 2016. See Note 3 to the financial statements for further information.

The fair values shown in the previous table are before the application of contractual netting or collateral. For additional credit exposure information on our credit derivative portfolio, see Note 4 to the financial statements.

Country Risk Exposure

Country risk exposure is the risk that events in, or that affect, a foreign country (any country other than the U.S.) might adversely affect us. We actively manage country risk exposure through a comprehensive risk management framework that combines credit and market fundamentals and allows us to effectively identify, monitor and limit country risk. Country risk exposure before and after hedging is monitored and managed. For a further discussion of our country risk exposure see, “Quantitative and Qualitative Disclosures about Market Risk–Risk Management–Country Risk Exposure” in Part II, Item 7A of the 2016 Form 10-K.

Our sovereign exposures consist of financial instruments entered into with sovereign and local governments. Our non-sovereign exposures consist of exposures to primarily corporations and financial institutions. The following table shows our 10 largest non-U.S. country risk net exposures at September 30, 2017. Index credit derivatives are included in the country risk exposure table. Each reference entity within an index is allocated to that reference entity’s country of risk. Index exposures are allocated to the underlying reference entities in proportion to the notional weighting of each reference entity in the index, adjusted for any fair value receivable/payable for that reference entity. Where credit risk crosses multiple jurisdictions, for example, a CDS purchased from an issuer in a specific country that references bonds issued by an entity in a different country, the fair value of the CDS is reflected in the Net Counterparty Exposure column based on the country of the CDS issuer. Further, the notional amount of the CDS adjusted for the fair value of the receivable/payable is reflected in the Net Inventory column based on the country of the underlying reference entity.

 

 

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Top Ten Country Exposures at September 30, 2017

 

$ in millions   Net Inventory1    

Net

Counterparty

Exposure2

    Loans     Lending
Commitments
    Exposure
Before Hedges
    Hedges3     Net Exposure  

Country

             

United Kingdom:

             

Sovereigns

  $ 487     $ 29     $     $     $ 516     $ (280   $ 236  

Non-sovereigns

    306       8,516       1,843       5,976       16,641       (1,916     14,725  

Total

  $ 793     $ 8,545     $ 1,843     $ 5,976     $ 17,157     $ (2,196   $ 14,961  

Japan:

             

Sovereigns

  $ 5,391     $ 54     $     $     $ 5,445     $ (103   $ 5,342  

Non-sovereigns

    696       3,365       65             4,126       (114     4,012  

Total

  $ 6,087     $ 3,419     $ 65     $     $ 9,571     $ (217   $ 9,354  

Brazil:

             

Sovereigns

  $ 3,729     $     $     $     $ 3,729     $ (11   $ 3,718  

Non-sovereigns

    196       577       755       75       1,603       (343     1,260  

Total

  $ 3,925     $ 577     $ 755     $ 75     $ 5,332     $ (354   $ 4,978  

Canada:

             

Sovereigns

  $ 84     $ 25     $     $     $ 109     $     $ 109  

Non-sovereigns

    211       1,885       110       1,605       3,811       (384     3,427  

Total

  $ 295     $ 1,910     $ 110     $ 1,605     $ 3,920     $ (384   $ 3,536  

India:

             

Sovereigns

  $ 1,503     $     $     $     $ 1,503     $     $ 1,503  

Non-sovereigns

    615       467                   1,082             1,082  

Total

  $ 2,118     $ 467     $     $     $ 2,585     $     $ 2,585  

Italy:

             

Sovereigns

  $ 1,201     $ (14   $     $     $ 1,187     $ 9     $ 1,196  

Non-sovereigns

    99       447       348       748       1,642       (286     1,356  

Total

  $ 1,300     $ 433     $ 348     $ 748     $ 2,829     $ (277   $ 2,552  

China:

             

Sovereigns

  $ (24   $ 227     $     $     $ 203     $ (79   $ 124  

Non-sovereigns

    774       215       657       524       2,170       (10     2,160  

Total

  $ 750     $ 442     $ 657     $ 524     $ 2,373     $ (89   $ 2,284  

Singapore:

             

Sovereigns

  $ 1,670     $ 107     $     $     $ 1,777     $     $ 1,777  

Non-sovereigns

    70       189       106       37       402             402  

Total

  $ 1,740     $ 296     $ 106     $ 37     $ 2,179     $     $ 2,179  

Netherlands:

             

Sovereigns

  $ (286   $     $     $     $ (286   $ (20   $ (306

Non-sovereigns

    125       565       922       1,156       2,768       (383     2,385  

Total

  $ (161   $ 565     $ 922     $ 1,156     $ 2,482     $ (403   $ 2,079  

Ireland:

             

Sovereigns

  $ (57   $ 3     $     $     $ (54   $ (81   $ (135

Non-sovereigns

    52       205       1,770       149       2,176             2,176  

Total

  $ (5   $ 208     $ 1,770     $ 149     $ 2,122     $ (81   $ 2,041  

 

1.

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

2.

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

3.

Amounts represent CDS hedges (purchased and sold) on net counterparty exposure and lending executed by trading desks responsible for hedging counterparty and lending credit risk exposures for us. Amounts are based on the CDS notional amount assuming zero recovery adjusted for any fair value receivable or payable. For a further description of the contractual terms for purchased credit protection and whether they may limit the effectiveness of our hedges, see “Credit Exposure—Derivatives” herein.

 

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As a market maker, we may transact in CDS positions to facilitate client trading. Exposures related to single-name and index credit derivatives for those countries shown in the previous table were as follows:

Credit Derivatives Included in Net Inventory

 

$ in millions    At September 30,
2017
 

Gross purchased protection

   $ (61,795

Gross written protection

     60,031  

Net exposure

   $ (1,764

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

Benefit of Collateral Received Against Counterparty Credit Exposure

 

$ in millions    At September 30,
2017
 

U.K.1

   $ 8,334  

Japan2

     4,824  

Other3

     5,133  

 

1.

Primarily obligations of the U.K., the U.S. and Italy.

2.

Primarily obligations of Japan.

3.

Primarily obligations of the Netherlands and the U.K.

Country Risk Exposures Related to the United Kingdom.    At September 30, 2017, our country risk exposures in the U.K. included net exposures of $14,961 million as shown in the table above, and overnight deposits of $7,137 million. The $14,725 million of exposures to non-sovereigns were diversified across both names and sectors. Of these exposures, $4,699 million were to U.K. focused counterparties that generate more than one-third of their revenues in the U.K., $4,858 million were to geographically diversified counterparties, and $4,934 million were to exchanges and clearing houses.

Country Risk Exposures Related to Brazil.    At September 30, 2017, our country risk exposures in Brazil included net exposures of $4,978 million as shown in the table above. Our sovereign net exposures in Brazil were principally in the form of local currency government bonds held onshore to support client activity. The $1,260 million of exposures to non-sovereigns were diversified across both names and sectors.

Operational Risk

Operational risk refers to the risk of loss, or of damage to our reputation, resulting from inadequate or failed processes or systems, human factors or from external events (e.g., fraud,

theft, legal and compliance risks, cyber attacks or damage to physical assets). We may incur operational risk across the full scope of our business activities, including revenue-generating activities (e.g., sales and trading) and support and control groups (e.g., information technology and trade processing). For a further discussion about our operational risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Operational Risk” in Part II, Item 7A of the 2016 Form 10-K.

Model Risk

Model risk refers to the potential for adverse consequences from decisions based on incorrect or misused model outputs. Model risk can lead to financial loss, poor business and strategic decision making, or damage to the Firm’s reputation. The risk inherent in a model is a function of the materiality, complexity and uncertainty around inputs and assumptions. Model risk is generated from the use of models impacting financial statements, regulatory filings, capital adequacy assessments and the formulation of business strategies. For a further discussion about our model risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Model Risk” in Part II, Item 7A of the 2016 Form 10-K.

Liquidity Risk

Liquidity risk refers to the risk that we will be unable to finance our operations due to a loss of access to the capital markets or difficulty in liquidating our assets. Liquidity risk also encompasses our ability (or perceived ability) to meet our financial obligations without experiencing significant business disruption or reputational damage that may threaten our viability as a going concern. For a further discussion about our liquidity risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Liquidity Risk” in Part II, Item 7A of the 2016 Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in Part I, Item 2.

Legal and Compliance Risk

Legal and compliance risk includes the risk of legal or regulatory sanctions, material financial loss, including fines, penalties, judgments, damages and/or settlements, or loss to reputation that we may suffer as a result of failure to comply with laws, regulations, rules, related self-regulatory organization standards and codes of conduct applicable to our business activities. This risk also includes contractual and commercial risk, such as the risk that a counterparty’s performance obligations will be unenforceable. It also includes compliance with anti-money laundering and terrorist financing rules and regulations. For a further discussion about our legal and compliance risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Legal and Compliance Risk” in Part II, Item 7A of the 2016 Form 10-K.

 

 

  41   September 2017 Form 10-Q


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Controls and Procedures

Under the supervision and with the participation of the Firm’s management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the Firm’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

No change in the Firm’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) occurred during the period covered by this report that materially affected, or is reasonably likely to materially affect, the Firm’s internal control over financial reporting.

 

 

September 2017 Form 10-Q   42  


Table of Contents
 

 

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Morgan Stanley:

 

We have reviewed the accompanying condensed consolidated balance sheet of Morgan Stanley and subsidiaries (the “Firm”) as of September 30, 2017, and the related condensed consolidated income statements and comprehensive income statements for the three-month and nine-month periods ended September 30, 2017 and 2016, and the cash flow statements and statements of changes in total equity for the nine-month periods ended September 30, 2017 and 2016. These condensed consolidated interim financial statements are the responsibility of the management of the Firm.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Firm as of December 31, 2016, and the consolidated income statement, comprehensive income statement, cash flow statement and statement of changes in total equity for the year then ended (not presented herein) included in the Firm’s Annual Report on Form 10-K; and in our report dated February 27, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2016 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

 

/s/ Deloitte & Touche LLP

New York, New York

November 3, 2017

 

  43   September 2017 Form 10-Q


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Financial Statements   LOGO

 

Consolidated Financial Statements and Notes

Consolidated Income Statements

(Unaudited)

 

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

Revenues

          

Investment banking

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

Trading

    2,704        2,609                8,870       7,420   

Investments

    167        87                495       179   

Commissions and fees

    937        991                2,997       3,066   

Asset management, distribution and administration fees

    3,026        2,686                8,695       7,943   

Other

    200        308                628       631   

Total non-interest revenues

    8,414        7,906                26,140       22,795   

Interest income

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

Interest expense

    1,557        731                4,106       2,333   

Net interest

    783        1,003                2,305       2,815   

Net revenues

    9,197        8,909                28,445       25,610   

Non-interest expenses

          

Compensation and benefits

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

Occupancy and equipment

    330        339                990       997   

Brokerage, clearing and exchange fees

    522        491                1,556       1,440   

Information processing and communications

    459        456                1,320       1,327   

Marketing and business development

    128        130                419       418   

Professional services

    534        489                1,622       1,550   

Other

    573        526                1,719       1,481   

Total non-interest expenses

    6,715        6,528                20,513       19,008   

Income from continuing operations before income taxes

    2,482        2,381                7,932       6,602   

Provision for income taxes

    697        749                2,358       2,160   

Income from continuing operations

    1,785        1,632                5,574       4,442   

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

    6                      (21      

Net income

  $ 1,791      $ 1,640              $ 5,553     $ 4,443   

Net income applicable to noncontrolling interests

    10        43                85       130   

Net income applicable to Morgan Stanley

  $ 1,781      $ 1,597              $ 5,468     $ 4,313   

Preferred stock dividends and other

    93        79                353       314   

Earnings applicable to Morgan Stanley common shareholders

  $ 1,688      $ 1,518              $ 5,115     $ 3,999   

Earnings per basic common share

          

Income from continuing operations

  $ 0.95      $ 0.82              $ 2.87     $ 2.15   

Income (loss) from discontinued operations

           0.01                (0.01     —   

Earnings per basic common share

  $ 0.95      $ 0.83              $ 2.86     $ 2.15   

Earnings per diluted common share

          

Income from continuing operations

  $ 0.93      $ 0.80              $ 2.81     $ 2.11   

Income (loss) from discontinued operations

           0.01                (0.02     —   

Earnings per diluted common share

  $ 0.93      $ 0.81              $ 2.79     $ 2.11   

Dividends declared per common share

  $ 0.25      $ 0.20              $ 0.65     $ 0.50   

Average common shares outstanding

          

Basic

    1,776        1,838                1,789       1,863   

Diluted

    1,818        1,879                1,830       1,898   

 

September 2017 Form 10-Q   44   See Notes to Consolidated Financial Statements


Table of Contents

Consolidated Comprehensive Income Statements

(Unaudited)

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Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
$ in millions          2017                 2016                 2017                 2016        

Net income

   $ 1,791     $ 1,640     $ 5,553     $ 4,443   

Other comprehensive income (loss), net of tax:

        

Foreign currency translation adjustments

   $ 61     $ 43       223       360   

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

     26       (99     218       439   

Pension, postretirement and other

           (1     4       (5)  

Change in net debt valuation adjustment

     (149     (93     (323     255   

Total other comprehensive income (loss)

   $ (62   $ (150   $ 122     $ 1,049   

Comprehensive income

   $ 1,729     $ 1,490     $ 5,675     $ 5,492   

Net income applicable to noncontrolling interests

     10       43       85       130   

Other comprehensive income (loss) applicable to noncontrolling interests

     (6     15       23       151   

Comprehensive income applicable to Morgan Stanley

   $ 1,725     $ 1,432     $ 5,567     $ 5,211   

 

See Notes to Consolidated Financial Statements   45   September 2017 Form 10-Q


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Consolidated Balance Sheets   LOGO

 

 

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

Assets

    

Cash and due from banks

   $ 24,047     $ 22,017   

Interest bearing deposits with banks

     24,144       21,364   

Trading assets at fair value ($158,445 and $152,548 were pledged to various parties)

     285,088       262,154   

Investment securities (includes $54,954 and $63,170 at fair value)

     79,086       80,092   

Securities purchased under agreements to resell (includes $101 and $302 at fair value)

     90,106       101,955   

Securities borrowed

     132,892       125,236   

Customer and other receivables

     54,388       46,460   

Loans:

    

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

     91,207       81,704   

Held for sale

     13,224       12,544   

Goodwill

     6,590       6,577   

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

     2,491       2,721   

Other assets

     50,430       52,125   

Total assets

   $ 853,693     $ 814,949   

Liabilities

    

Deposits (includes $174 and $63 at fair value)

   $ 154,639     $ 155,863   

Short-term borrowings (includes $658 and $406 at fair value)

     1,087       941   

Trading liabilities at fair value

     127,237       128,194   

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

     53,983       54,628   

Securities loaned

     15,630       15,844   

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

     14,244       11,118   

Customer and other payables

     198,792       190,513   

Other liabilities and accrued expenses

     16,290       15,896   

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

     191,677       164,775   

Total liabilities

     773,579       737,772   

Commitments and contingent liabilities (see Note 11)

    

Equity

    

Morgan Stanley shareholders’ equity:

    

Preferred stock

     8,520       7,520   

Common stock, $0.01 par value:

    

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

     20       20   

Additional paid-in capital

     23,389       23,271   

Retained earnings

     57,554       53,679   

Employee stock trusts

     2,899       2,851   

Accumulated other comprehensive income (loss)

     (2,544     (2,643)  

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

     (7,961     (5,797)  

Common stock issued to employee stock trusts

     (2,899     (2,851)  

Total Morgan Stanley shareholders’ equity

     78,978       76,050   

Noncontrolling interests

     1,136       1,127   

Total equity

     80,114       77,177   

Total liabilities and equity

   $ 853,693     $ 814,949   

 

September 2017 Form 10-Q   46   See Notes to Consolidated Financial Statements


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Consolidated Statements of Changes in Total Equity

(Unaudited)

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$ in millions

  

Preferred

Stock

    

Common

Stock

    

Additional

Paid-in

Capital

   

Retained

Earnings

   

Employee

Stock

Trusts

   

Accumulated

Other

Comprehensive

Income (Loss)

   

Common

Stock

Held in

Treasury

at Cost

   

Common

Stock

Issued to

Employee

Stock

Trusts

   

Non-

controlling

Interests

   

Total

Equity

 

Balance at December 31, 2016

   $ 7,520      $ 20      $ 23,271     $ 53,679     $ 2,851     $ (2,643   $ (5,797   $ (2,851   $ 1,127       $     77,177   

Cumulative adjustment for accounting
changes1

                   45       (35                                   10   

Net income applicable to Morgan Stanley

                         5,468                                     5,468   

Net income applicable to noncontrolling interests

                                                       85       85   

Dividends

                         (1,558                                   (1,558)  

Shares issued under employee plans

                   79             48             844       (48           923   

Repurchases of common stock and employee tax withholdings

                                           (3,008                 (3,008)  

Net change in Accumulated other comprehensive income (loss)

                                     99                   23       122   

Issuance of preferred stock

     1,000               (6                                         994   

Other net decreases

                                                       (99     (99)  

Balance at September 30, 2017

   $ 8,520      $ 20      $ 23,389     $ 57,554     $ 2,899     $ (2,544   $ (7,961   $ (2,899   $ 1,136       $     80,114   

Balance at December 31, 2015

   $ 7,520      $ 20      $ 24,153     $ 49,204     $ 2,409     $ (1,656   $ (4,059   $ (2,409   $ 1,002       $     76,184   

Cumulative adjustment for accounting change related to DVA2

                         312             (312                       —   

Net adjustment for accounting change related to consolidation3

                                                       106       106   

Net income applicable to Morgan Stanley

                         4,313                                     4,313   

Net income applicable to noncontrolling interests

                                                       130       130   

Dividends

                         (1,284                                   (1,284)  

Shares issued under employee plans and related tax effects

                   (1,168           430             2,106       (430           938   

Repurchases of common stock and employee tax withholdings

                                           (2,908                 (2,908)  

Net change in Accumulated other comprehensive income (loss)

                                     898                   151       1,049   

Other net increase (decreases)

                   10                                     (76     (66)  

Balance at September 30, 2016

   $ 7,520      $ 20      $     22,995     $     52,545     $ 2,839     $ (1,070   $ (4,861   $ (2,839   $ 1,313       $     78,462   

 

1.

The cumulative adjustment relates to the adoption of the following accounting updates on January 1, 2017: Improvements to Employee Share-Based Payment Accounting, for which the Firm recorded a cumulative catch-up adjustment to reflect its election to account for forfeitures as they occur (see Note 2 for further information); and Intra-Entity Transfers of Assets Other Than Inventory, for which the Firm recorded a cumulative catch-up adjustment to reflect the tax impact from an intercompany sale of assets.

2.

Debt valuation adjustment (“DVA”) represents the change in the fair value resulting from fluctuations in the Firm’s credit spreads and other credit factors related to liabilities carried at fair value under the fair value option, primarily related to certain Long-term and Short-term borrowings. In accordance with the early adoption of a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities, a cumulative catch-up adjustment was recorded as of January 1, 2016 to move the cumulative unrealized DVA amount, net of noncontrolling interests and tax, related to outstanding liabilities under the fair value option election from Retained earnings into Accumulated other comprehensive income (loss) (“AOCI”). See Note 2 to the consolidated financial statements in the Firm’s Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”) and Note 14 for further information.

3.

In accordance with the accounting update Amendments to the Consolidation Analysis, a net adjustment was recorded as of January 1, 2016 to both consolidate and deconsolidate certain entities under the new guidance. See Note 2 to the consolidated financial statements in the 2016 Form 10-K for further information.

 

See Notes to Consolidated Financial Statements   47   September 2017 Form 10-Q


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Consolidated Cash Flow Statements

(Unaudited)

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Nine Months Ended

September 30,

 
$ in millions    2017     2016  

Cash flows from operating activities

    

Net income

   $ 5,553     $ 4,443   

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

    

(Income) loss from equity method investments

           39   

Compensation payable in common stock and options

     775       794   

Depreciation and amortization

     1,340       1,357   

Net gain on sale of available-for-sale securities

     (27     (127)  

Impairment charges

     13       102   

Provision for credit losses on lending activities

     32       138   

Other operating adjustments

     (48     (36)  

Changes in assets and liabilities:

    

Trading assets, net of Trading liabilities

     (18,599     (20,509)  

Securities borrowed

     (7,656     16,136   

Securities loaned

     (214     (2,843)  

Customer and other receivables and other assets

     (6,682     (2,800)  

Customer and other payables and other liabilities

     8,196       3,849   

Securities purchased under agreements to resell

     11,849       (2,922)  

Securities sold under agreements to repurchase

     (645     10,244   

Net cash provided by (used for) operating activities

     (6,113     7,865   

Cash flows from investing activities

    

Proceeds from (payments for):

    

Other assets—Premises, equipment and software, net

     (1,177     (941)  

Changes in loans, net

     (9,350     (7,709)  

Investment securities:

    

Purchases

     (19,713     (41,230)  

Proceeds from sales

     16,111       28,960   

Proceeds from paydowns and maturities

     5,378       5,956   

Other investing activities

     (77     (24)  

Net cash provided by (used for) investing activities

     (8,828     (14,988)  

Cash flows from financing activities

    

Net proceeds from (payments for):

    

Short-term borrowings

     64       (1,233)  

Noncontrolling interests

     (43     (47)  

Other secured financings

     1,400       (278)  

Deposits

     (1,224     (4,191)  

Proceeds from:

    

Derivatives financing activities

     73       —   

Issuance of preferred stock, net of issuance costs

     994       —   

Issuance of long-term borrowings

     45,334       27,528   

Payments for:

    

Long-term borrowings

     (24,480     (22,902)  

Derivatives financing activities

     (73     (120)  

Repurchases of common stock and employee tax withholdings

     (3,008     (2,908)  

Cash dividends

     (1,562     (1,311)  

Other financing activities

     58       —   

Net cash provided by (used for) financing activities

     17,533       (5,462)  

Effect of exchange rate changes on cash and cash equivalents

     2,218       1,054   

Net increase (decrease) in cash and cash equivalents

     4,810       (11,531)  

Cash and cash equivalents, at beginning of period

     43,381       54,083   

Cash and cash equivalents, at end of period

   $ 48,191     $ 42,552   

Cash and cash equivalents include:

    

Cash and due from banks

   $ 24,047     $ 26,899   

Interest bearing deposits with banks

     24,144       15,653   

Cash and cash equivalents, at end of period

   $                   48,191     $                   42,552   

Supplemental Disclosure of Cash Flow Information

Cash payments for interest were $3,422 million and $1,784 million.

Cash payments for income taxes, net of refunds, were $967 million and $504 million.

 

September 2017 Form 10-Q   48   See Notes to Consolidated Financial Statements


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

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1. Introduction and Basis of Presentation

 

The Firm

Morgan Stanley, a financial holding company, is a global financial services firm that maintains significant market positions in each of its business segments—Institutional Securities, Wealth Management and Investment Management. Morgan Stanley, through its subsidiaries and affiliates, provides a wide variety of products and services to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individuals. Unless the context otherwise requires, the terms “Morgan Stanley” or the “Firm” mean Morgan Stanley (the “Parent Company”) together with its consolidated subsidiaries.

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

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

Wealth Management provides a comprehensive array of financial services and solutions to individual investors and small to medium-sized businesses/institutions covering brokerage and investment advisory services, financial and wealth planning services, annuity and insurance products, credit and other lending products, banking and retirement plan services.

Investment Management provides a broad range of investment strategies and products that span geographies, asset classes, and public and private markets to a diverse group of clients across institutional and intermediary channels. Strategies and products include equity, fixed income, liquidity and alternative/other products. Institutional clients include defined benefit/defined contribution plans, foundations, endowments, government entities, sovereign wealth funds, insurance companies, third-party fund sponsors and corporations. Individual clients are serviced through intermediaries, including affiliated and non-affiliated distributors.

Basis of Financial Information

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

The accompanying financial statements should be read in conjunction with the Firm’s consolidated financial statements and notes thereto included in the 2016 Form 10-K. Certain footnote disclosures included in the 2016 Form 10-K have been condensed or omitted from these financial statements as they are not required for interim reporting under U.S. GAAP. The financial statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for the fair presentation of the results for the interim period. The results of operations for interim periods are not necessarily indicative of results for the entire year.

Consolidation

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

For a discussion of the Firm’s involvement with VIEs and its significant regulated U.S. and international subsidiaries, see Notes 1 and 2 to the consolidated financial statements in the 2016 Form 10-K.

 

 

  49   September 2017 Form 10-Q


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Notes to Consolidated Financial Statements

(Unaudited)

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2. Significant Accounting Policies

For a detailed discussion about the Firm’s significant accounting policies, see Note 2 to the consolidated financial statements in the 2016 Form 10-K.

During the nine months ended September 30, 2017 (“current year period”), other than the following, there were no significant updates made to the Firm’s significant accounting policies.

Accounting Standards Adopted

The Firm adopted the following accounting update on January 1, 2017.

 

 

Improvements to Employee Share-Based Payment Accounting. This accounting update simplifies the accounting for employee share-based payments, including the recognition of forfeitures, the classification of income tax consequences, and the classification within the consolidated cash flow statements (“cash flow statements”).

Beginning in 2017, the income tax consequences related to share-based payments are required to be recognized in Provision for income taxes in the income statements upon the conversion of employee share-based awards instead of additional paid-in capital. The impact of the income tax consequences upon conversion of the awards may be either a benefit or a provision. Conversion of employee share-based awards to Firm shares will primarily occur in the first quarter of each year. The impact of recognizing excess tax benefits upon conversion of awards in the quarter in which the accounting update was adopted (three months ended March 31, 2017) was a $112 million benefit to Provision for income taxes. The classification of cash flows from excess tax benefits was moved from the financing section to the operating section of the cash flow statements, and was applied on a retrospective basis.

In addition, this accounting update permits an entity to elect whether to continue to estimate the total forfeitures, or to account for forfeitures on an actual basis as they occur. The Firm has elected to account for forfeitures on an actual basis as they occur. This change is required to be applied using a modified retrospective approach, and upon adoption, the Firm recorded a cumulative catch-up adjustment, decreasing Retained earnings by approximately $30 million net of tax, increasing Additional paid-in capital by approximately $45 million and increasing deferred tax assets by approximately $15 million.

Goodwill

The Firm completed its annual goodwill impairment testing as of July 1, 2017. The Firm’s impairment testing did not indicate any goodwill impairment, as each of the Firm’s reporting units with goodwill had a fair value that was substantially in excess of its carrying value.

 

 

September 2017 Form 10-Q   50  


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Notes to Consolidated Financial Statements

(Unaudited)

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3. Fair Values

Fair Value Measurement

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

    At September 30, 2017  
$ in millions   Level 1     Level 2     Level 3     Netting1     Total  

Assets at Fair Value

         

Trading assets:

         

U.S. Treasury and
agency securities

  $ 27,538     $ 23,186     $ —       $ —       $ 50,724  

Other sovereign
government
obligations2

    25,428       6,201       104       —         31,733  

Corporate and other debt:

 

       

State and municipal
securities

    —         2,123       10       —         2,133  

MABS

    —         2,399       274       —         2,673  

Corporate bonds

    —         14,164       419       —         14,583  

CDO

    —         313       76       —         389  

Loans and lending
commitments3

    —         3,423       4,865       —         8,288  

Other debt

    —         1,041       193       —         1,234  

Total corporate
and other debt

    —         23,463       5,837       —         29,300  

Corporate equities4

    137,028       425       296       —         137,749  

Derivative and
other contracts:

         

Interest rate

    581       183,561       1,658       —         185,800  

Credit

    —         8,527       377       —         8,904  

Foreign exchange

    93       53,842       47       —         53,982  

Equity

    1,056       44,986       3,402       —         49,444  

Commodity and
other

    1,240       4,929       4,107       —         10,276  

Netting1

    (2,896     (225,857     (1,853     (46,425     (277,031

Total derivative and
other contracts

    74       69,988       7,738       (46,425     31,375  

Investments5

    316       257       925       —         1,498  

Physical commodities

    —         157       —         —         157  

Total trading assets5

    190,384       123,677       14,900       (46,425     282,536  

Investment securities— AFS

    25,022       29,932       —         —         54,954  

Securities purchased
under agreements
to resell

    —         101       —         —         101  

Intangible assets

    —         3       —         —         3  

Total assets
at fair value

  $ 215,406     $ 153,713     $ 14,900     $ (46,425   $ 337,594  

 

    At September 30, 2017  
$ in millions   Level 1     Level 2     Level 3     Netting1     Total  

Liabilities at Fair Value

         

Deposits

  $     $ 68     $ 106     $     $ 174  

Short-term borrowings

          658                   658  

Trading liabilities:

         

U.S. Treasury and
agency securities

    14,574       61                   14,635  

Other sovereign
government
obligations2

    24,351       1,432                   25,783  

Corporate and other debt:

 

       

Corporate bonds

          7,044       6             7,050  

Other debt

          342       2             344  

Total corporate and other debt

          7,386       8             7,394  

Corporate equities4

    54,778       157       51             54,986  

Derivative and other contracts:

         

Interest rate

    478       165,399       582             166,459  

Credit

          9,353       680             10,033  

Foreign exchange

    52       54,198       125             54,375  

Equity

    1,252       47,603       2,171             51,026  

Commodity and
other

    1,233       3,879       2,573             7,685  

Netting1

    (2,896     (225,857     (1,853     (34,533     (265,139

Total derivative and
other contracts

    119       54,575       4,278       (34,533     24,439  

Total trading liabilities

    93,822       63,611       4,337       (34,533     127,237  

Securities sold under agreements to repurchase

          661       149             810  

Other secured
financings

          6,264       250             6,514  

Long-term borrowings

    35       43,593       2,603             46,231  

Total liabilities
at fair value

  $ 93,857     $ 114,855     $ 7,445     $ (34,533   $ 181,624  
 

 

  51   September 2017 Form 10-Q


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Notes to Consolidated Financial Statements

(Unaudited)

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    At December 31, 2016  

$ in millions

  Level 1     Level 2     Level 3     Netting1     Total  

Assets at Fair Value

         

Trading assets:

         

U.S. Treasury and
agency securities

  $ 27,579     $ 20,392     $ 74     $     $ 48,045   

Other sovereign
government
obligations

    14,005       5,497       6             19,508   

Corporate and other debt:

State and municipal
securities

          2,355       250             2,605   

MABS

          1,691       217             1,908   

Corporate bonds

          11,051       232             11,283   

CDO

          602       63             665   

Loans and lending
commitments3

          3,580       5,122             8,702   

Other debt

          1,360       180             1,540   

Total corporate and
other debt

          20,639       6,064             26,703   

Corporate equities4

    131,574       352       446             132,372   

Derivative and other
contracts:

         

Interest rate

    1,131       300,406       1,373             302,910   

Credit

          11,727       502             12,229   

Foreign exchange

    231       74,921       13             75,165   

Equity

    1,185       35,736       1,708             38,629   

Commodity and
other

    2,808       6,734       3,977             13,519   

Netting1

    (4,378     (353,543     (1,944     (51,381     (411,246)  

Total derivative and
other contracts

    977       75,981       5,629       (51,381     31,206   

Investments5

    237       197       958             1,392   

Physical commodities

          112                   112   

Total trading assets5

    174,372       123,170       13,177       (51,381     259,338   

Investment securities—AFS

    29,120       34,050                   63,170   

Securities purchased
under agreements to
resell

          302                   302   

Intangible assets

          3                    

Total assets
at fair value

  $   203,492     $ 157,525     $ 13,177     $ (51,381   $ 322,813   
    At December 31, 2016  
$ in millions   Level 1     Level 2     Level 3     Netting1     Total  

Liabilities at Fair Value

         

Deposits

  $     $ 21     $ 42     $     $ 63   

Short-term borrowings

          404       2             406   

Trading liabilities:

         

U.S. Treasury and
agency securities

    11,636       61                   11,697   

Other sovereign
government
obligations

    20,658       2,430                   23,088   

Corporate and other debt:

 

       

Corporate bonds

          5,572       34             5,606   

Other debt

          549       2             551   

Total corporate
and other debt

          6,121       36             6,157   

Corporate equities4

    57,847       54       35             57,936   

Derivative and other
contracts:

         

Interest rate

    1,244       285,379       953             287,576   

Credit

          12,550       875             13,425   

Foreign exchange

    17       75,510       56             75,583   

Equity

    1,162       37,828       1,524             40,514   

Commodity and
other

    2,663       6,845       2,377             11,885   

Netting1

    (4,378     (353,543     (1,944     (39,803     (399,668)  

Total derivative and
other contracts

    708       64,569       3,841       (39,803     29,315   

Physical commodities

          1                    

Total trading liabilities

    90,849       73,236       3,912       (39,803     128,194   

Securities sold under
agreements to
repurchase

          580       149             729   

Other secured
financings

          4,607       434             5,041   

Long-term borrowings

    47       36,677       2,012             38,736   

Total liabilities
at fair value

  $ 90,896     $ 115,525     $ 6,551     $ (39,803   $ 173,169   

MABS—Mortgage- and asset-backed securities

AFS—Available for sale

CDO—Collateralized debt obligations, including collateralized loan obligations

1.

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

2.

During the current year period, the Firm transferred from Level 2 to Level 1 $1.3 billion and $1.8 billion of Trading assets—Other sovereign government obligations and Trading liabilities—Other sovereign government obligations, respectively, due to increased market activity in these instruments.

3.

For further breakdown by type, see the following Loans and Lending Commitments at Fair Value table.

4.

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

5.

Amounts exclude certain investments that are measured at fair value using the net asset value (“NAV”) per share, which are not classified in the fair value hierarchy. For additional disclosure about such investments, see “Fair Value of Investments Measured at NAV” herein.

 

Loans and Lending Commitments at Fair Value  
$ in millions   

At

September 30, 2017

    

At

December 31, 2016 

 

Corporate

   $ 6,441      $ 7,217   

Residential real estate

     690        966   

Wholesale real estate

     1,157        519   

Total

   $ 8,288      $ 8,702   
 

 

September 2017 Form 10-Q   52  


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

  LOGO

 

Unsettled Fair Value of Futures Contracts1  
$ in millions   

At

September 30, 2017

    

At

December 31, 2016

 

Long

     

Customer and other receivables

   $ 977      $ 784   

Short

     

Customer and other payables

   $ 140      $ 174   

 

1.

These contracts are primarily Level 1, actively traded, valued based on quoted prices from the exchange and are excluded from the previous recurring fair value tables.

For a description of the valuation techniques applied to the Firm’s major categories of assets and liabilities measured at fair value on a recurring basis, see Note 3 to the consolidated financial statements in the 2016 Form 10-K. During the current year period, there were no significant updates made to the Firm’s valuation techniques.

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

The following tables present additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended September 30, 2017

(“current quarter”), the three months ended September 30, 2016 (“prior year quarter”), the current year period and the nine months ended September 30, 2016 (“prior year period”). Level 3 instruments may be hedged with instruments classified in Level 1 and Level 2. As a result, the realized and unrealized gains (losses) for assets and liabilities within the Level 3 category presented in the following tables do not reflect the related realized and unrealized gains (losses) on hedging instruments that have been classified by the Firm within the Level 1 and/or Level 2 categories.

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

 

 

Rollforward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Current Quarter

 

$ in millions   Beginning
Balance at
June 30, 2017
    Realized
and
Unrealized
Gains
(Losses)
    Purchases1     Sales and
Issuances2
    Settlements1     Net
Transfers
    Ending
Balance at
September 30,
2017
    Unrealized
Gains
(Losses) at
September 30,
2017
 

Assets at Fair Value

               

Trading assets:

               

Other sovereign government obligations

  $ 100     $ 2     $ 86     $ (82   $     $ (2   $ 104     $ 1  

Corporate and other debt:

               

State and municipal securities

    9             4       (3                 10        

MABS

    264       4       52       (54           8       274       1  

Corporate bonds

    449       29       120       (144           (35     419       27  

CDO

    58       7       20       (15     (4     10       76       6  

Loans and lending commitments

    4,864       25       1,772       (1,431     (236     (129     4,865       17  

Other debt

    186       5       80       (82           4       193       1  

Total corporate and other debt

    5,830       70       2,048       (1,729     (240     (142     5,837       52  

Corporate equities

    500       (9     24       (268           49       296        

Net derivative and other contracts3:

               

Interest rate

    970       105       13       (29     33       (16     1,076       92  

Credit

    (305     (33     7       (9     35       2       (303     (33

Foreign exchange

    2       (59     9             17       (47     (78     (50

Equity

    1,093       114       60       (77     79       (38     1,231       110  

Commodity and other

    1,509       158       1       (1     (112     (21     1,534       45  

Total net derivative and other contracts

    3,269       285       90       (116     52       (120     3,460       164  

Investments

    946       (4     13       (17     (16     3       925       (5

Liabilities at Fair Value

               

Deposits

  $ 79     $ (1   $     $ 32     $     $ (6   $ 106     $ (1

Trading liabilities:

               

Corporate and other debt:

               

Corporate bonds

    13       (2     (18     9                   6       (1

Other debt

    2                                     2        

Total corporate and other debt

    15       (2     (18     9                   8       (1

Corporate equities

    28       1       (10     24             10       51       2  

Securities sold under agreements to repurchase

    148       (1                             149       (1

Other secured financings

    244       (5           2       (1           250       (5

Long-term borrowings

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

 

1.

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

2.

Amounts related to entering into Net derivatives and other contracts, Deposits, Short-term borrowings, Other secured financings and Long-term borrowings primarily represent issuances. Amounts for other line items primarily represent sales.

3.

Net derivative and other contracts represent Trading assets—Derivative and other contracts, net of Trading liabilities—Derivative and other contracts.

 

  53   September 2017 Form 10-Q


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

  LOGO

 

Rollforward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Prior Year Quarter

 

$ in millions   Beginning
Balance at
June 30, 2016
    Realized
and
Unrealized
Gains
(Losses)
    Purchases1     Sales and
Issuances2
    Settlements1     Net
Transfers
    Ending
Balance at
September 30,
2016
   

Unrealized
Gains

(Losses) at
September 30,
2016

 

Assets at Fair Value

               

Trading assets:

               

U.S. Treasury and agency securities

  $ 20     $     $     $ (18   $     $ 6     $ 8     $  

Other sovereign government obligations

    2             6       (1           5       12        

Corporate and other debt:

               

State and municipal securities

    10       1             (7                 4        

MABS

    355       (7     74       (156           (2     264       (15

Corporate bonds

    276       (55     20       (23           (19     199       (55

CDO

    109       6       9       (38           (1     85       10  

Loans and lending commitments

    5,418       (12     501       (206     (733     (813     4,155       (12

Other debt

    528             191       (212           (261     246        

Total corporate and other debt

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

Corporate equities

    572       (28     43       (36           (214     337       (26

Net derivative and other contracts3:

               

Interest rate

    (235     (60     3       (15     11       337       41       (45

Credit

    (1,114     147                   2       82       (883     147  

Foreign exchange

    (1     (27                 (42     (37     (107     (27

Equity

    (1,473     220       31       (39     567       834       140       239  

Commodity and other

    1,287       269             (14     (170     (78     1,294       104  

Total net derivative and other contracts

    (1,536     549       34       (68     368       1,138       485       418  

Investments

    974       (41     2       (8     (27     36       936       (36

Liabilities at Fair Value

               

Deposits

  $ 30     $ 1     $     $ 5     $     $ (3   $ 31     $ 1  

Short-term borrowings

                                  2       2        

Trading liabilities:

               

Corporate and other debt:

               

Corporate bonds

    6       (1     (3     2             7       13       (1

Other debt

    3                                     3        

Total corporate and other debt

    9       (1     (3     2             7       16       (1

Corporate equities

    26       2       (2     3             (5     20        

Securities sold under agreements to repurchase

    150       1                               149       2  

Other secured financings

    441       (11                 (2           450       (11

Long-term borrowings

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

 

1.

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

2.

Amounts related to entering into Net derivatives and other contracts, Deposits, Short-term borrowings, Other secured financings and Long-term borrowings primarily represent issuances. Amounts for other line items primarily represent sales.

3.

Net derivative and other contracts represent Trading assets—Derivative and other contracts, net of Trading liabilities—Derivative and other contracts.

 

September 2017 Form 10-Q   54  


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

  LOGO

 

Rollforward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Current Year Period

 

$ in millions   Beginning
Balance at
December 31,
2016
    Realized
and
Unrealized
Gains
(Losses)
    Purchases1     Sales and
Issuances2
    Settlements1     Net
Transfers
    Ending
Balance at
September 30,
2017
    Unrealized
Gains
(Losses) at
September 30,
2017
 

Assets at Fair Value

               

Trading assets:

               

U.S. Treasury and agency securities

  $ 74     $ (1   $     $ (240   $     $ 167     $     $  

Other sovereign government obligations

    6             104       (5           (1     104        

Corporate and other debt:

               

State and municipal securities

    250       3       6       (81           (168     10        

MABS

    217       49       120       (120     (16     24       274       13  

Corporate bonds

    232       30       310       (205           52       419       (6

CDO

    63       6       33       (18     (7     (1     76       3  

Loans and lending commitments

    5,122       88       2,470       (1,927     (964     76       4,865       85  

Other debt

    180       31       94       (160           48       193       6  

Total corporate and other debt

    6,064       207       3,033       (2,511     (987     31       5,837       101  

Corporate equities

    446       8       74       (604           372       296       3  

Net derivative and other contracts3:

               

Interest rate

    420       137       36       (42     658       (133     1,076       146  

Credit

    (373     (18     6       (9     96       (5     (303     (34

Foreign exchange

    (43     (92     9             48             (78     (72

Equity

    184       168       816       (231     209       85       1,231       277  

Commodity and other

    1,600       523       13       (21     (431     (150     1,534       88  

Total net derivative and other contracts

    1,788       718       880       (303     580       (203     3,460       405  

Investments

    958       16       96       (44     (78     (23     925       10  

Liabilities at Fair Value

               

Deposits

  $ 42     $ (2   $     $ 62     $     $     $ 106     $ (2

Short-term borrowings

    2                         (2                  

Trading liabilities:

               

Corporate and other debt:

               

Corporate bonds

    34       (1     (54     98             (73     6        

Other debt

    2             (1     1                   2        

Total corporate and other debt

    36       (1     (55     99             (73     8        

Corporate equities

    35             (69     27             58       51       (1

Securities sold under agreements to repurchase

    149                                     149       1  

Other secured financings

    434       (28           54       (223     (43     250       (21

Long-term borrowings

    2,012       (142           1,418       (326     (643     2,603       (136

 

1.

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

2.

Amounts related to entering into Net derivatives and other contracts, Deposits, Short-term borrowings, Other secured financings and Long-term borrowings primarily represent issuances. Amounts for other line items primarily represent sales.

3.

Net derivative and other contracts represent Trading assets—Derivative and other contracts, net of Trading liabilities—Derivative and other contracts.

 

  55   September 2017 Form 10-Q


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

  LOGO

 

Rollforward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Prior Year Period

 

$ in millions   

Beginning

Balance at
December 31,
2015

    Realized
and
Unrealized
Gains
(Losses)
    Purchases1     Sales and
Issuances2
    Settlements1     Net
Transfers
    Ending
Balance at
September 30,
2016
    Unrealized
Gains
(Losses) at
September 30,
2016
 

Assets at Fair Value

                

Trading assets:

                

U.S. Treasury and agency securities

   $     $     $ 3     $ (37   $     $ 42     $ 8     $ —   

Other sovereign government obligations

     4             10       (6           4       12       —   

Corporate and other debt:

                

State and municipal securities

     19                   (16           1       4       —   

MABS

     438       (35     88       (314           87       264       (31)  

Corporate bonds

     267       (4     146       (276           66       199       (17)  

CDO

     430       9       13       (295           (72     85       16   

Loans and lending commitments

     5,936       (65     921       (860     (986     (791     4,155       (51)  

Other debt

     448       1       92       (35           (260     246       65   

Total corporate and other debt

     7,538       (94     1,260       (1,796     (986     (969     4,953       (18)  

Corporate equities

     434       (57     62       (324           222       337       (80)  

Net derivative and other contracts3:

                

Interest rate

     260       257       3       (15     (59     (405     41       (156)  

Credit

     (844     (255     1             155       60       (883     (277)  

Foreign exchange

     141       (104                 (224     80       (107     (102)  

Equity

     (2,031     334       816       (168     1,083       106       140       172   

Commodity and other

     1,050       377       33       (20     (312     166       1,294       162   

Total net derivative and other contracts

     (1,424     609       853       (203     643       7       485       (201)  

Investments

     707       (60     374       (37     (67     19       936       (63)  

Intangible assets

     5                               (5           —   

Liabilities at Fair Value

                

Deposits

   $ 19     $ (1   $     $ 15     $     $ (4   $ 31     $ (1)  

Short-term borrowings

     1                         (1     2       2       —   

Trading liabilities:

                

Corporate and other debt:

                

Corporate bonds

           (3     (7     32             (15     13       (3)  

Other debt

     4             (1                       3       —   

Total corporate and other debt

     4       (3     (8     32             (15     16       (3)  

Corporate equities

     18       4       (37     14             29       20       32   

Securities sold under agreements to repurchase

     151       2                               149        

Other secured financings

     461       (42           69       (44     (78     450       (42)  

Long-term borrowings

     1,987       (103           366       (262     (152     2,042       91   

 

1.

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

2.

Amounts related to entering into Net derivatives and other contracts, Deposits, Short-term borrowings, Other secured financings and Long-term borrowings primarily represent issuances. Amounts for other line items primarily represent sales.

3.

Net derivative and other contracts represent Trading assets—Derivative and other contracts, net of Trading liabilities—Derivative and other contracts.

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

 

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

qualitative information on the sensitivity of the fair value measurements to changes in the significant unobservable inputs, see Note 3 to the consolidated financial statements in the 2016 Form 10-K. There are no predictable relationships between multiple significant unobservable inputs attributable to a given valuation technique. A single amount is disclosed when there is no significant difference between the minimum, maximum and average (weighted average or simple average / median).

 

 

September 2017 Form 10-Q   56  


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

 

    

Predominant Valuation Techniques/

Significant Unobservable Inputs

   Range (Weighted Average or Simple Average/Median)1
$ in millions               At September 30, 2017                    At December 31, 2016        

Recurring Fair Value Measurement

     

Assets at Fair Value

     

U.S. Treasury and agency securities ($— and $74)

     

Comparable pricing:

   Comparable bond price    N/A    96 to 105 points (102 points)

Other sovereign government obligations ($104 and $6)

     

Comparable pricing:

   Comparable bond price    86 to 97 points (88 points)    N/M 

State and municipal securities ($10 and $250)

     

Comparable pricing:

   Comparable bond price    N/M    53 to 100 points (91 points) 

MABS ($274 and $217)

     

Comparable pricing:

   Comparable bond price    0 to 100 points (33 points)    0 to 86 points (27 points) 

Corporate bonds ($419 and $232)

     

Comparable pricing:

   Comparable bond price    3 to 132 points (60 points)    3 to 130 points (70 points) 

Discounted cash flow:

   Recovery rate    5% to 33% (25%)    N/A 

Option model:

   At the money volatility    16% to 35% (25%)    23% to 33% (30%) 

CDO ($76 and $63)

     

Comparable pricing:

   Comparable bond price    15 to 101 points (66 points)    0 to 103 points (50 points) 

Correlation model:

   Credit correlation    43% to 54% (51%)    N/M 

Loans and lending commitments ($4,865 and $5,122)

     

Corporate loan model:

   Credit spread    N/M    402 to 672 bps (557 bps) 

Expected recovery:

   Asset coverage    37% to 100% (83%)    43% to 100% (83%) 

Margin loan model:

   Discount rate    1% to 3% (1%)    2% to 8% (3%) 
     Volatility skew    8% to 43% (19%)    21% to 63% (33%) 

Comparable pricing:

   Comparable loan price    46 to 102 points (92 points)    45 to 100 points (84 points) 

Discounted cash flow:

   Implied weighted average cost of capital    N/M    5% 
     Capitalization rate    N/M    4% to 10% (4%) 

Other debt ($193 and $180)

     

Option model:

   At the money volatility    17% to 52% (47%)    16% to 52% (52%) 

Discounted cash flow:

   Discount rate    7% to 18% (9%)    7% to 12% (11%) 

Comparable pricing:

   Comparable loan price    1 to 5 points (2 points)    1 to 74 points (23 points) 

Corporate equities ($296 and $446)

     

Comparable pricing:

   Comparable equity price    100%    100% 

Net derivative and other contracts2:

     

Interest rate ($1,076 and $420)

     

Option model:

   Interest rate — Foreign exchange correlation    N/M    28% to 58% (44% / 43%) 
     Interest rate volatility skew    29% to 106% (44% / 44%)    19% to 117% (55% / 56%) 
     Interest rate quanto correlation    N/M    -17% to 31% (1% / -5%) 
     Interest rate curve correlation    30% to 96% (75% / 78%)    28% to 96% (68% / 72%) 
     Inflation volatility    24% to 64% (45% / 43%)    23% to 55% (40% / 39%) 
     Interest rate curve    1% to 2% (1% / 1%)    N/M 

Credit ($(303) and $(373))

     

Comparable pricing:

   Cash synthetic basis    14 to 15 points (14 points)    5 to 12 points (11 points) 
     Comparable bond price    0 to 70 points (25 points)    0 to 70 points (23 points) 

Correlation model:

   Credit correlation    29% to 99% (51%)    32% to 70% (45%) 

Foreign exchange3 ($(78) and $(43))

     

Option model:

   Interest rate — Foreign exchange correlation    27% to 59% (44% / 44%)    28% to 58% (44% / 43%) 
     Interest rate volatility skew    N/M    34% to 117% (55% / 56%) 
     Contingency probability    95%    N/M 
     Interest rate quanto correlation    N/M    -17% to 31% (1% / -5%) 

 

  57   September 2017 Form 10-Q


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Predominant Valuation Techniques/

Significant Unobservable Inputs

   Range (Weighted Average or Simple Average/Median)1
$ in millions               At September 30, 2017                    At December 31, 2016        

Equity3 ($1,231 and $184)

     

Option model:

   At the money volatility    5% to 55% (36%)    7% to 66% (33%) 
     Volatility skew    -3% to 0% (-1%)    -4% to 0% (-1%) 
     Equity — Equity correlation    5% to 99% (73%)    25% to 99% (73%) 
     Equity — Foreign exchange correlation    -70% to 30% (-28%)    -63% to 30% (-43%) 
     Equity — Interest rate correlation    -7% to 52% (17% / 21%)    -8% to 52% (12% / 4%) 

Commodity and other ($1,534 and $1,600)

     

Option model:

   Forward power price    $6 to $84 ($30) per MWh    $7 to $90 ($32) per MWh 
     Commodity volatility    5% to 56% (16%)    6% to 130% (18%) 
     Cross-commodity correlation    5% to 99% (92%)    5% to 99% (92%) 

Investments ($925 and $958)

     

Discounted cash flow:

   Implied weighted average cost of capital    N/M    10% 
     Exit multiple    N/M    10 to 24 times (11 times) 

Market approach:

   EBITDA multiple    6 to 24 times (12 times)    6 to 24 times (12 times) 

Comparable pricing:

   Comparable equity price    45% to 100% (90%)    75% to 100% (93%) 

Liabilities at Fair Value

     

Deposits ($106 and $42)

     

Option model:

   At the money volatility    15% to 37% (32%)    N/M 
     Volatility skew    -1% to 0% (-1%)    N/M 

Securities sold under agreements to repurchase ($149 and $149)

     

Discounted cash flow:

   Funding spread    145 to 154 bps (151 bps)    118 to 127 bps (121 bps) 

Other secured financings ($250 and $434)

     

Discounted cash flow:

   Funding spread    38 to 81 bps (60 bps)    63 to 92 bps (78 bps) 

Option model:

   Volatility skew    -1%    -1% 
     At the money volatility    10% to 40% (25%)    N/M 

Comparable pricing:

   Comparable bond price    14 to 58 points (30 points)    N/M 

Discounted cash flow:

   Discount rate    N/M    4% 

Long-term borrowings ($2,603 and $2,012)

     

Option model:

   At the money volatility    5% to 35% (21%)    7% to 42% (30%) 
     Volatility skew    -3% to 0% (-1%)    -2% to 0% (-1%) 
     Equity — Equity correlation    36% to 98% (88%)    35% to 99% (84%) 
     Equity — Foreign exchange correlation    -51% to 10% (-32%)    -63% to 13% (-40%) 

Option model:

   Interest rate volatility skew   

29% to 106% (44% / 44%)

   25% 
     Equity volatility discount    8% to 11% (9% / 8%)    7% to 11% (10% / 10%) 
     Interest rate — Foreign exchange correlation    21% to 22% (23% / 22%)    N/M 

Comparable pricing:

   Comparable equity price    100%    N/M 

Nonrecurring Fair Value Measurement

     

Assets at Fair Value

     

Loans ($1,448 and $2,443)

     

Corporate loan model:

   Credit spread    86 to 563 bps (229 bps)    90 to 487 bps (208 bps) 

Expected recovery:

   Asset coverage    73% to 95% (84%)    73% to 99% (97%) 

bps—Basis points. One basis point equals 1/100th of 1%.

Points—Percentage of par

MWh—Megawatt hours

EBITDA—Earnings before interest, taxes, depreciation and amortization

N/A—Not Applicable

N/M—Not Meaningful

1.

Amounts represent weighted averages except where simple averages and the median of the inputs are provided when more relevant.

2.

Credit valuation adjustment (“CVA”) and funding valuation adjustments (“FVA”) are included in the balance but excluded from the Valuation Technique(s) and Significant Unobservable Inputs in the previous table. CVA is a Level 3 input when the underlying counterparty credit curve is unobservable. FVA is a Level 3 input in its entirety given the lack of observability of funding spreads in the principal market.

3.

Includes derivative contracts with multiple risks (i.e., hybrid products).

 

September 2017 Form 10-Q   58  


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(Unaudited)

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For a description of the Firm’s significant unobservable inputs and related sensitivity, see Note 3 to the consolidated financial statements in the 2016 Form 10-K. The following significant unobservable inputs were added during the current year period.

 

 

Contingency probability—probability associated with the realization of an underlying event upon which the value of an asset is contingent. In general, an increase (decrease) to the contingency probability for an asset would result in a higher (lower) fair value.

 

 

Recovery rate—amount expressed as a percentage of par that is expected to be received when a credit event occurs. In general, an increase (decrease) to the recovery rate for an asset would result in a higher (lower) fair value.

Fair Value of Investments Measured at NAV

For a description of the Firm’s investments in private equity funds, real estate funds and hedge funds measured at fair value based on NAV, see Note 3 to the consolidated financial statements in the 2016 Form 10-K.

Investments in Certain Funds Measured at NAV per Share

 

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

Private equity

  $ 1,580     $ 359     $ 1,566     $ 335    

Real estate

    885       168       1,103       136    

Hedge1

    87       4       147       4    

Total

  $ 2,552     $ 531     $ 2,816     $ 475    

 

1.

Investments in hedge funds may be subject to initial period lock-up or gate provisions, which restrict an investor from withdrawing from the fund during a certain initial period or restrict the redemption amount on any redemption date, respectively.

Nonredeemable Funds by Contractual Maturity

 

    Fair Value at September 30, 2017  
$ in millions       Private Equity              Real Estate      

Less than 5 years

  $ 408      $ 77  

5-10 years

    1,005        490  

Over 10 years

    167        318  

Total

  $ 1,580      $ 885  

Fair Value Option

The Firm elected the fair value option for certain eligible instruments that are risk managed on a fair value basis to mitigate income statement volatility caused by measurement basis differences between the elected instruments and their associated risk management transactions or to eliminate complexities of applying certain accounting models.

Earnings Impact of Instruments under the Fair Value Option

 

$ in millions

 

Trading

Revenues

   

Interest

Income

(Expense)

    Net
Revenues
 

Three Months Ended September 30, 2017

 

   

Securities purchased under
agreements to resell

  $ (1   $ 1     $  —   

Deposits

    (1           (1)  

Short-term borrowings

    (7           (7)  

Securities sold under agreements
to repurchase

    6       (5      

Long-term borrowings

    (957     (107     (1,064)  

Three Months Ended September 30, 2016

 

   

Securities purchased under
agreements to resell

  $ (1   $ 2     $  

Deposits

    2              

Short-term borrowings

    (39           (39)  

Securities sold under agreements
to repurchase

    7       (4      

Long-term borrowings

    (1,068     (116     (1,184)  

Nine Months Ended September 30, 2017

 

   

Securities purchased under
agreements to resell

  $ (2   $ 3     $ 1  

Deposits

    (2           (2)  

Short-term borrowings

    (16     (1     (17)  

Securities sold under agreements to repurchase

    5       (13     (8)  

Long-term borrowings

    (3,468     (337     (3,805)  

Nine Months Ended September 30, 2016

 

   

Securities purchased under
agreements to resell

  $ (2   $ 6     $  

Deposits

    (1     (1     (2)  

Short-term borrowings

    (3           (3)  

Securities sold under agreements to repurchase

    (5     (9     (14)  

Long-term borrowings

    (3,322     (385     (3,707)  

Gains (losses) are mainly attributable to changes in foreign currency rates or interest rates or movements in the reference price or index for short-term and long-term borrowings before the impact of related hedges.

The amounts in the previous table are included within Net revenues and do not reflect any gains or losses on related hedging instruments. In addition to the amounts in the previous table, as discussed in Note 2 to the consolidated financial statements in the 2016 Form 10-K, instruments within Trading assets or Trading liabilities are measured at fair value.

 

 

  59   September 2017 Form 10-Q


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Gains (Losses) Due to Changes in Instrument-Specific Credit Risk  
     Three Months Ended September 30,  
     2017     2016  

$ in millions

   Trading
Revenues
     OCI     Trading
Revenues
    OCI  

Short-term and long-term borrowings1

   $ 9      $ (226   $ (5   $ (140)  

Securities sold under agreements to repurchase1

            (3           (3)  

Loans and other debt2

     49              26        

Lending commitments3

                         
     Nine Months Ended September 30,  
     2017     2016  

$ in millions

   Trading
Revenues
     OCI     Trading
Revenues
    OCI  

Short-term and long-term borrowings1

   $ 1      $ (493   $ 36     $ 405  

Securities sold under agreements to repurchase1

            (6            

Loans and other debt2

     94              (88      

Lending commitments3

                  3        

 

$ in millions   

At

September 30, 2017

   

At

December 31, 2016

 

Cumulative pre-tax DVA gain

(loss) recognized in AOCI

   $ (1,420   $ (921)  

 

OCI—Other comprehensive income (loss)

1.

Unrealized DVA gains (losses) are recorded in OCI and, when realized, in Trading revenues. See Note 2 to the consolidated financial statements in the 2016 Form 10-K and Note 14 for further information.

2.

Loans and other debt instrument-specific credit gains (losses) were determined by excluding the non-credit components of gains and losses.

3.

Gains (losses) on lending commitments were generally determined based on the difference between estimated expected client yields and contractual yields at each respective period-end.

Short-Term and Long-Term Borrowings Measured at Fair Value on a Recurring Basis

 

$ in millions   

At

September 30,

2017

    

At

December 31,

2016

 

Business Unit Responsible for Risk Management

 

Equity

   $ 25,300      $ 21,066   

Interest rates

     19,822        16,051   

Foreign exchange

     782        1,114   

Credit

     753        647   

Commodities

     232        264   

Total

   $ 46,889      $ 39,142   

Excess of Contractual Principal Amount Over Fair Value

 

$ in millions   

At

September 30,

2017

    

At

December 31,

2016

 

Loans and other debt1

   $ 12,911      $ 13,495   

Loans 90 or more days past due and/or on nonaccrual status1

     11,116        11,502   

Short-term and long-term borrowings2

     906        720   

 

1.

The majority of the difference between principal and fair value amounts for loans and other debt relates to distressed debt positions purchased at amounts well below par.

2.

Short-term and long-term borrowings do not include structured notes where the repayment of the initial principal amount fluctuates based on changes in a reference price or index.

Fair Value Loans on Nonaccrual Status

 

$ in millions   

At

September 30,

2017

    

At

December 31,

2016

 

Nonaccrual loans

   $ 1,429      $ 1,536   

Nonaccrual loans 90 or more
days past due

   $ 760      $ 787   

The previous tables exclude non-recourse debt from consolidated VIEs, liabilities related to failed sales of financial assets, pledged commodities and other liabilities that have specified assets attributable to them.

 

 

September 2017 Form 10-Q   60  


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Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Gains (Losses)1

 

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

Assets

        

Loans2

   $     $ 111     $ 41     $ 41    

Other Assets—Other
investments3

     (6     (3     (6     (44)   

Other assets—Premises,
equipment and
software costs4

     (1     (29     (7     (56)   

Intangible assets5

           (2           (2)   

Total

   $ (7   $ 77     $ 28     $ (61)   

Liabilities

        

Other liabilities and
accrued expenses—
Lending commitments2

   $ 4     $ 52     $ 64     $ 98    

Total

   $ 4     $ 52     $ 64     $         98    

 

1.

Gains and losses for Loans and Other assets—Other investments are classified in Other revenues. For other items, gains and losses are recorded in Other revenues if the item is held for sale, otherwise in Other expenses.

2.

Nonrecurring changes in the fair value of loans and lending commitments were calculated as follows: for the held for investment category, based on the value of the underlying collateral; and for the held for sale category, based on recently executed transactions, market price quotations, valuation models that incorporate market observable inputs where possible, such as comparable loan or debt prices and credit default swap spread levels adjusted for any basis difference between cash and derivative instruments, or default recovery analysis where such transactions and quotations are unobservable.

3.

Losses related to Other assets—Other investments were determined using techniques that included discounted cash flow models, methodologies that incorporate multiples of certain comparable companies and recently executed transactions.

4.

Losses related to Other assets—Premises, equipment and software costs were determined using techniques that included a default recovery analysis and recently executed transactions.

5.

Losses related to Intangible assets were determined using techniques that included discounted cash flow models and methodologies that incorporate multiples of certain comparable companies.

Carrying and Fair Values

 

    At September 30, 2017  
          Fair Value by Level  

$ in millions

  Total     Level 2     Level 31  

Assets

     

 

Loans

 

 

$

 

2,713

 

 

 

 

$

 

1,265

 

 

 

 

$

 

1,448

 

 

Other Assets—Other
investments

    42             42  

Total assets

  $             2,755     $             1,265     $             1,490  

Liabilities

     

Other liabilities and
accrued expenses—
Lending commitments

  $ 196     $ 154     $ 42  

Total liabilities

  $ 196     $ 154     $ 42  
    At December 31, 2016  
          Fair Value by Level  

$ in millions

  Total     Level 2     Level 31  

Assets

     

 

Loans

 

 

$

 

4,913

 

 

 

 

$

 

2,470

 

 

 

 

$

 

2,443

 

 

Other assets—Other
investments

    123             123  

Other assets—Premises,
equipment and
software costs

    25       22       3  

Total assets

  $ 5,061     $ 2,492     $ 2,569  

Liabilities

     

Other liabilities and
accrued expenses—
Lending commitments

  $ 226     $ 166     $ 60  

Total liabilities

  $             226     $             166     $             60  

 

1.

For significant Level 3 balances, refer to “Significant Unobservable Inputs Used in Recurring and Nonrecurring Level 3 Fair Value Measurements” section herein for details of the significant unobservable inputs used for nonrecurring fair value measurement.

Financial Instruments Not Measured at Fair Value

 

    At September 30, 2017  
   

Carrying  

Value  

    Fair Value  

$ in millions

    Level 1     Level 2     Level 3     Total  

Financial Assets

                                       

Cash and due
from banks

  $ 24,047     $ 24,047     $     $     $ 24,047  

Interest bearing
deposits with banks

    24,144       24,144                   24,144  

Investment securities—HTM

    24,132       11,260       12,250       247       23,757  

Securities purchased under agreements to resell

    90,005             85,679       4,282       89,961  

Securities borrowed

    132,892             132,883       10       132,893  

Customer and other
receivables1

    48,579             44,340       4,115       48,455  

Loans2

    104,431             19,476       86,223       105,699  

Other assets3

    32,731       32,731                   32,731  

Financial Liabilities

         

Deposits

  $     154,465     $         —     $     154,465     $         —     $     154,465  

Short-term borrowings

    429             429             429  

Securities sold under agreements to repurchase

    53,173             48,505       4,656       53,161  

Securities loaned

    15,630             15,240       402       15,642  

Other secured
financings

    7,730             6,440       1,297       7,737  

Customer and
other payables1

    195,304             195,304             195,304  

Long-term
borrowings

    145,446             150,625       39       150,664  
 

 

  61   September 2017 Form 10-Q


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    At December 31, 2016  
   

Carrying

Value

    Fair Value  

$ in millions

    Level 1     Level 2     Level 3     Total  

Financial Assets

 

Cash and due
from banks

  $ 22,017     $ 22,017     $     $     $ 22,017   

Interest bearing
deposits with
banks

    21,364       21,364                   21,364   

Investment securities—
HTM

    16,922       5,557       10,896             16,453   

Securities purchased
under agreements
to resell

    101,653             97,825       3,830       101,655   

Securities borrowed

    125,236             125,093       147       125,240   

Customer and other receivables1

    41,679             36,962       4,575       41,537   

Loans2

    94,248             20,906         74,121       95,027   

Other assets3

    33,979       33,979                   33,979   

Financial Liabilities

 

Deposits

  $ 155,800     $     $ 155,800     $     $ 155,800   

Short-term
borrowings

    535             535             535   

Securities sold
under agreements
to repurchase

    53,899             50,941       2,972       53,913   

Securities loaned

    15,844             15,853             15,853   

Other secured
financings

    6,077             4,792       1,290       6,082   

Customer and
other payables1

    187,497             187,497             187,497   

Long-term
borrowings

      126,039               129,826       51         129,877   

HTM—Held to maturity

1.

Accrued interest, fees, and dividend receivables and payables where carrying value approximates fair value have been excluded.

2.

Amounts include loans measured at fair value on a nonrecurring basis.

3.

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

Lending Commitments—Held for Investment and Held for Sale

 

$ in millions

 

Commitment

amount1

    Fair Value  
    Total     Level 2     Level 3  

September 30, 2017

  $ 96,939     $     1,084     $         636     $         448  

December 31, 2016

    97,409       1,241       973       268  

 

1.

For further discussion on lending commitments, see Note 11.

The previous tables exclude certain financial instruments such as equity method investments and all non-financial assets and liabilities such as the value of the long-term relationships with the Firm’s deposit customers. For further discussion of the contents and valuation techniques of financial instruments not measured at fair value, see Note 3 to the consolidated financial statements in the 2016 Form 10-K. During the current year period, there were no significant updates made to the Firm’s valuation techniques for financial instruments not measured at fair value.

 

 

September 2017 Form 10-Q   62  


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(Unaudited)

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4. Derivative Instruments and Hedging Activities

Derivative Fair Values

At September 30, 2017

 

    Assets  

$ in millions

  Bilateral
OTC
    Cleared
OTC1
    Exchange-
Traded
    Total  

Designated as accounting hedges

 

Interest rate contracts

  $ 1,380     $ 1     $     $ 1,381  

Foreign exchange contracts

    93       9             102  

Total

    1,473       10             1,483  

Not designated as accounting hedges

 

Interest rate contracts

    177,955       6,223       241       184,419  

Credit contracts

    6,599       2,305             8,904  

Foreign exchange contracts

    53,024       763       93       53,880  

Equity contracts

    26,915             22,529       49,444  

Commodity and other contracts

    8,117             2,159       10,276  

Total

    272,610       9,291       25,022       306,923  

Total gross derivatives

  $ 274,083     $ 9,301     $ 25,022     $ 308,406  

Amounts offset

       

Counterparty netting

    (206,283)       (6,917)       (21,470)       (234,670)  

Cash collateral netting

    (40,379)       (1,982)             (42,361)  

Total in Trading assets

  $ 27,421     $ 402     $ 3,552     $ 31,375  

Amounts not offset2

       

Financial instruments collateral

    (12,241)                   (12,241)  

Other cash collateral

    (13)                   (13)  

Net amounts3

  $ 15,167     $ 402     $ 3,552     $ 19,121  

Not subject to legally enforceable master netting or
collateral agreements3

 

Derivative assets

                          $ 3,848  

 

    Liabilities  

$ in millions

  Bilateral
OTC
    Cleared
OTC1
    Exchange-
Traded
    Total  

Designated as accounting hedges

 

Interest rate contracts

  $ 66     $     $     $ 66  

Foreign exchange contracts

    47       21             68  

Total

    113       21             134  

Not designated as accounting hedges

 

Interest rate contracts

    161,790       4,419       184       166,393  

Credit contracts

    7,475       2,558             10,033  

Foreign exchange contracts

    53,580       675       52       54,307  

Equity contracts

    29,189             21,837       51,026  

Commodity and other contracts

    5,596             2,089       7,685  

Total

    257,630       7,652       24,162       289,444  

Total gross derivatives

  $ 257,743     $ 7,673     $ 24,162     $ 289,578  

Amounts offset

       

Counterparty netting

    (206,283)       (6,917)       (21,470)       (234,670)  

Cash collateral netting

    (30,021)       (448)             (30,469)  

Total in Trading liabilities

  $ 21,439     $ 308     $ 2,692     $ 24,439  

Amounts not offset2

       

Financial instruments collateral

    (5,035)             (497)       (5,532)  

Other cash collateral

    (10)       (81)             (91)  

Net amounts3

  $ 16,394     $ 227     $ 2,195     $ 18,816  

Not subject to legally enforceable master netting or
collateral agreements3

 

Derivative liabilities

                          $ 3,508  

At December 31, 2016

 

    Assets  

$ in millions

  Bilateral
OTC
    Cleared
OTC
    Exchange-
Traded
    Total  

Designated as accounting hedges

 

Interest rate contracts

  $ 1,924     $ 1,049     $     $ 2,973   

Foreign exchange contracts

    249       18             267   

Total

    2,173       1,067             3,240   

Not designated as accounting hedges

 

Interest rate contracts

    200,336       99,217       384       299,937   

Credit contracts

    9,837       2,392             12,229   

Foreign exchange contracts

    73,645       1,022       231       74,898   

Equity contracts

    20,710             17,919       38,629   

Commodity and other contracts

    9,792             3,727       13,519   

Total

    314,320       102,631       22,261       439,212   

Total gross derivatives

  $ 316,493     $ 103,698     $ 22,261     $ 442,452   

Amounts offset

       

Counterparty netting

    (243,488     (100,477     (19,607     (363,572)   

Cash collateral netting

    (45,875     (1,799           (47,674)   

Total in Trading assets

  $ 27,130     $ 1,422     $ 2,654     $ 31,206   

Amounts not offset2

       

Financial instruments collateral

    (10,293                 (10,293)   

Other cash collateral

    (124                 (124)   

Net amounts3

  $ 16,713     $ 1,422     $ 2,654     $ 20,789   

Not subject to legally enforceable master netting or
collateral agreements3

 

Derivative assets

                          $ 3,656   

 

    Liabilities  

$ in millions

  Bilateral
OTC
    Cleared
OTC
    Exchange-
Traded
    Total  

Designated as accounting hedges

 

Interest rate contracts

  $ 77     $ 647     $     $ 724   

Foreign exchange contracts

    15       25             40   

Total

    92       672             764   

Not designated as accounting hedges

 

Interest rate contracts

    183,063       103,392       397       286,852   

Credit contracts

    11,024       2,401             13,425   

Foreign exchange contracts

    74,575       952       16       75,543   

Equity contracts

    22,531             17,983       40,514   

Commodity and other contracts

    8,303             3,582       11,885   

Total

    299,496       106,745       21,978       428,219   

Total gross derivatives

  $ 299,588     $ 107,417     $ 21,978     $ 428,983   

Amounts offset

       

Counterparty netting

    (243,488     (100,477     (19,607     (363,572)   

Cash collateral netting

    (30,405     (5,691           (36,096)   

Total in Trading liabilities

  $ 25,695     $ 1,249     $ 2,371     $ 29,315   

Amounts not offset2

       

Financial instruments collateral

    (7,638           (585     (8,223)   

Other cash collateral

    (10     (1           (11)   

Net amounts3

  $ 18,047     $ 1,248     $ 1,786     $ 21,081   

Not subject to legally enforceable master netting or
collateral agreements3

 

Derivative liabilities

                          $ 3,497   
 

 

  63   September 2017 Form 10-Q


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(Unaudited)

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OTC—Over-the-counter

1.

Effective in the first quarter of 2017, the Chicago Mercantile Exchange amended its rulebook for cleared OTC derivatives, resulting in the characterization of variation margin transfers as settlement payments as opposed to cash posted as collateral. In the quarter of adoption, the cleared OTC gross derivative assets and liabilities, and related counterparty and cash collateral netting amounts in total decreased by approximately $13 billion and $20 billion, respectively. Effective in the third quarter of 2017, derivatives cleared through LCH Clearnet Limited became subject to the rulebook under which variation margin transfers are settlement payments. As a result, cleared OTC gross derivative assets and liabilities, and related counterparty and cash collateral netting amounts in total decreased by approximately $62 billion and $59 billion, respectively.

2.

Amounts relate to master netting agreements and collateral agreements that have been determined by the Firm to be legally enforceable in the event of default but where certain other criteria are not met in accordance with applicable offsetting accounting guidance.

3.

Net amounts include transactions that are either not subject to master netting agreements or collateral agreements, or are subject to such agreements but the Firm has not determined the agreements to be legally enforceable.

See Note 3 for information related to the unsettled fair value of futures contracts not designated as accounting hedges, which are excluded from the table above.

Derivative Notionals

At September 30, 2017

 

     Assets  

$ in billions

   Bilateral
OTC
     Cleared
OTC
     Exchange-
Traded
     Total  

Designated as accounting hedges

 

Interest rate contracts

   $ 24      $ 44      $         —      $ 68  

Foreign exchange contracts

     6        1               7  

Total

     30        45               75  

Not designated as accounting hedges

 

Interest rate contracts

     3,952        6,675        2,880        13,507  

Credit contracts

     242        110               352  

Foreign exchange contracts

     2,224        77        30        2,331  

Equity contracts

     388                —        323        711  

Commodity and other contracts

     85               80        165  

Total

     6,891        6,862        3,313        17,066  

Total gross derivatives

   $ 6,921      $ 6,907      $ 3,313      $ 17,141  

 

     Liabilities  

$ in billions

   Bilateral
OTC
     Cleared
OTC
     Exchange-
Traded
     Total  

Designated as accounting hedges

 

Interest rate contracts

   $ 2      $ 97      $      $ 99  

Foreign exchange contracts

     3        1                       4  

Total

     5        98               103  

Not designated as accounting hedges

 

Interest rate contracts

     3,919        6,749        1,028        11,696  

Credit contracts

     271        92                —        363  

Foreign exchange contracts

     2,137        74        14        2,225  

Equity contracts

     409               381        790  

Commodity and other contracts

     67               69        136  

Total

     6,803        6,915        1,492        15,210  

Total gross derivatives

   $ 6,808      $ 7,013      $ 1,492      $ 15,313  

At December 31, 2016

 

     Assets  

$ in billions

   Bilateral
OTC
     Cleared
OTC
     Exchange-
Traded
     Total  

Designated as accounting hedges

 

Interest rate contracts

   $ 30      $ 38      $      $ 68  

Foreign exchange contracts

     6                      6  

Total

     36        38               74  

Not designated as accounting hedges

 

Interest rate contracts

     3,586        6,224        2,586        12,396  

Credit contracts

     333        112               445  

Foreign exchange contracts

     1,580        52        13        1,645  

Equity contracts

     338               242        580  

Commodity and other contracts

     67               79        146  

Total

     5,904        6,388        2,920        15,212  

Total gross derivatives

   $     5,940          $ 6,426      $ 2,920      $     15,286  

 

      Liabilities  

$ in billions

   Bilateral
OTC
     Cleared
OTC
     Exchange-
Traded
     Total  

Designated as accounting hedges

 

Interest rate contracts

   $ 2      $ 52      $      $ 54  

Foreign exchange contracts

     1        1               2  

Total

     3        53               56  

Not designated as accounting hedges

 

Interest rate contracts

     3,462        6,087        897        10,446  

Credit contracts

     359        96               455  

Foreign exchange contracts

     1,557        48        14        1,619  

Equity contracts

     321               273        594  

Commodity and other contracts

     78               59        137  

Total

     5,777        6,231        1,243        13,251  

Total gross derivatives

   $     5,780      $ 6,284      $ 1,243      $     13,307  

For information related to offsetting of certain collateralized transactions, see Note 6. For a discussion of the Firm’s derivative instruments and hedging activities, see Note 4 to the consolidated financial statements in the 2016 Form 10-K.

Gains (Losses) on Fair Value Hedges

 

     Recognized in Interest Expense  
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
$ in millions    2017     2016      2017     2016  

Derivatives

   $     (218)     $     (733)      $ (878   $ 2,386  

Borrowings

     175       790        670           (2,492)  

Total

   $ (43   $ 57      $     (208)     $ (106)  
 

 

September 2017 Form 10-Q   64  


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Gains (Losses) on Net Investment Hedges

 

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

Foreign exchange contracts

                                

Effective portion—OCI

   $     (88   $     (60   $     (340   $     (396

Forward points excluded from hedge effectiveness testing—Interest income

   $ (3   $ (20   $ (22   $ (59)  

Trading Revenues by Product Type

 

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

Interest rate contracts

  $ 648      $ 357     $ 1,693      $ 983   

Foreign exchange contracts

    181        170       613        769   

Equity security and index contracts1

    1,416        1,415       4,875        4,360   

Commodity and other contracts

    223        63       522        (61)  

Credit contracts

    236        604       1,167        1,369   

Total

  $ 2,704      $ 2,609     $ 8,870      $ 7,420   

 

1.

Dividend income is included within equity security and index contracts.

The previous table summarizes gains and losses included in Trading revenues in the income statements. These activities include revenues related to derivative and non-derivative financial instruments. The Firm generally utilizes financial instruments across a variety of product types in connection with its market-making and related risk management strategies. Accordingly, the trading revenues presented in the previous table are not representative of the manner in which the Firm manages its business activities and are prepared in a manner similar to the presentation of trading revenues for regulatory reporting purposes.

Credit Risk-Related Contingencies

In connection with certain OTC trading agreements, the Firm may be required to provide additional collateral or immediately settle any outstanding liability balances with certain counterparties in the event of a credit rating downgrade of the Firm.

The following table presents the aggregate fair value of certain derivative contracts that contain credit risk-related contingent features that are in a net liability position for which the Firm has posted collateral in the normal course of business.

Net Derivative Liabilities and Collateral Posted

 

$ in millions

   At September 30,
2017
     At December 31, 
2016
 

Net derivative liabilities with credit risk-related contingent features

   $ 19,359      $ 22,939   

Collateral posted

     14,499        17,040   

The additional collateral or termination payments that may be called in the event of a future credit rating downgrade vary by contract and can be based on ratings by either or both of Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Global Ratings (“S&P”). The following table shows the future potential collateral amounts and termination payments that could be called or required by counterparties or exchange and clearing organizations in the event of one-notch or two-notch downgrade scenarios based on the relevant contractual downgrade triggers.

Incremental Collateral or Termination Payments upon Potential Future Ratings Downgrade

 

$ in millions    At September 30, 20171  

One-notch downgrade

   $ 592  

Two-notch downgrade

     512  

 

1.

Amounts include $873 million related to bilateral arrangements between the Firm and other parties where upon the downgrade of one party, the downgraded party must deliver collateral to the other party. These bilateral downgrade arrangements are used by the Firm to manage the risk of counterparty downgrades.

Credit Derivatives and Other Credit Contracts

The Firm enters into credit derivatives, principally credit default swaps, under which it receives or provides protection against the risk of default on a set of debt obligations issued by a specified reference entity or entities. A majority of the Firm’s counterparties for these derivatives are banks, broker-dealers, and insurance and other financial institutions.

For further information on credit derivatives and other credit contracts, see Note 4 to the consolidated financial statements in the 2016 Form 10-K.

Protection Sold and Purchased with Credit Default Swaps

 

     At September 30, 2017  
     Protection Sold     Protection Purchased  

$ in millions

   Notional     

Fair Value
(Asset)/

Liability

    Notional     

Fair Value
(Asset)/

Liability

 

Credit default swaps

          

Single name

   $ 173,202      $ (1,400   $ 189,290      $ 1,803  

Index and basket

     145,107        (237     141,565        264  

Tranched index and basket

     22,049        (367     44,193        1,066  

Total

   $ 340,358      $ (2,004   $ 375,048      $ 3,133  

Portion of single name and non-tranched index and basket with identical underlying reference obligations

   $ 315,931            $ 327,959         
 

 

  65   September 2017 Form 10-Q


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     At December 31, 2016  
     Protection Sold     Protection Purchased  

$ in millions

   Notional     

Fair Value
(Asset)/

Liability

    Notional     

Fair Value
(Asset)/

Liability

 

Credit default swaps

          

Single name

   $ 266,918      $ (753   $ 269,623      $ 826   

Index and basket

     130,383        374       122,061        (481)  

Tranched index and basket

     32,429        (670     78,505        1,900   

Total

   $ 429,730      $ (1,049   $ 470,189      $ 2,245   

Portion of single name and non-tranched index and basket with identical underlying reference obligations

   $ 395,536            $ 389,221        —   

Fair value amounts as shown in the table below are on a gross basis prior to cash collateral or counterparty netting. In order to provide an indication of the current payment status or performance risk of the credit default swaps, a breakdown of credit default swaps based on the Firm’s internal credit ratings by investment grade and non-investment grade is provided. Internal credit ratings serve as the Credit Risk Management Department’s assessment of credit risk and the basis for a comprehensive credit limits framework used to control credit risk. The Firm uses quantitative models and judgment to estimate the various risk parameters related to each obligor.

 

 

Credit Ratings of Reference Obligation and Maturities of Credit Protection Sold

 

     At September 30, 2017  
     Maximum Potential Payout/Notional     

Fair Value

(Asset)/

Liability

 
     Years to Maturity     
$ in millions    Less than 1      1-3      3-5      Over 5      Total     

Single name credit default swaps

                 

Investment grade

   $ 46,372      $ 44,877      $ 21,662      $ 11,411      $ 124,322      $ (1,220)  

Non-investment grade

     20,527        19,378        6,959        2,016        48,880        (180)  

Total single name credit default swaps

     66,899        64,255        28,621        13,427        173,202        (1,400)  

Index and basket credit default swaps

                 

Investment grade

     23,097        13,752        28,918        19,124        84,891        (885)  

Non-investment grade

     28,650        7,293        25,129        21,193        82,265        281   

Total index and basket credit default swaps

     51,747        21,045        54,047        40,317        167,156        (604)  

Total credit default swaps sold

   $ 118,646      $ 85,300      $ 82,668      $ 53,744      $ 340,358      $ (2,004)  

Other credit contracts

     14                —                  —          135        149        13   

Total credit derivatives and other credit contracts

   $ 118,660      $ 85,300      $ 82,668      $ 53,879      $ 340,507      $ (1,991)  

 

     At December 31, 2016  
     Maximum Potential Payout/Notional     

Fair Value

(Asset)/

Liability

 
     Years to Maturity     
$ in millions    Less than 1      1-3      3-5      Over 5      Total     

Single name credit default swaps

                 

Investment grade

   $ 79,449      $ 70,796      $ 34,529      $ 10,293      $ 195,067      $ (1,060)  

Non-investment grade

     34,571        25,820        10,436        1,024        71,851        307   

Total single name credit default swaps

   $ 114,020      $ 96,616      $ 44,965      $ 11,317      $ 266,918      $ (753)  

Index and basket credit default swaps

                 

Investment grade

   $ 26,530      $ 21,388      $ 35,060      $ 9,096      $ 92,074      $ (846)  

Non-investment grade

     26,135        22,983        11,759        9,861        70,738        550   

Total index and basket credit default swaps

   $ 52,665      $ 44,371      $ 46,819      $ 18,957      $ 162,812      $ (296)  

Total credit default swaps sold

   $ 166,685      $ 140,987      $ 91,784      $ 30,274      $ 429,730      $ (1,049)  

Other credit contracts

     49        6               215        270        —   

Total credit derivatives and other credit contracts

   $ 166,734      $     140,993      $     91,784      $     30,489      $     430,000      $ (1,049)  

 

September 2017 Form 10-Q   66  


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5. Investment Securities

The following tables present information about the Firm’s AFS securities, which are carried at fair value, and HTM securities, which are carried at amortized cost. The net unrealized gains or losses on AFS securities are reported on an after-tax basis as a component of AOCI.

AFS and HTM Securities

 

     At September 30, 2017  
$ in millions    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

AFS debt securities

           

U.S. government and agency securities:

           

U.S. Treasury securities

   $ 24,706      $      $ 425      $ 24,281   

U.S. agency securities1

     24,018        42        164        23,896   

Total U.S. government and agency securities

     48,724        42        589        48,177   

Corporate and other debt:

           

CMBS:

           

Agency

     1,452        2        42        1,412   

Non-agency

     1,215        4        7        1,212   

Corporate bonds

     1,486        13        7        1,492   

CLO

     434        1               435   

FFELP student loan ABS2

     2,217        13        8        2,222   

Total corporate and other debt

     6,804        33        64        6,773   

Total AFS debt securities

     55,528        75        653        54,950   

AFS equity securities

     15               11         

Total AFS securities

     55,543        75        664        54,954   

HTM securities

           

U.S. government and agency securities:

           

U.S. Treasury securities

     11,501        7        249        11,259   

U.S. agency securities1

     12,384        18        151        12,251   

Total U.S. government and agency securities

     23,885        25        400        23,510   

Corporate and other debt:

           

CMBS:

           

Non-agency

     247        1        1        247   

Total corporate and other debt

     247        1        1        247   

Total HTM securities

     24,132        26        401        23,757   

Total investment securities

   $ 79,675      $ 101      $ 1,065      $ 78,711   
     At December 31, 2016  
 $ in millions    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

 AFS debt securities

           

 U.S. government and agency securities:

           

U.S. Treasury securities

   $ 28,371      $ 1      $ 545      $ 27,827   

U.S. agency securities1

     22,348        14        278        22,084   

 Total U.S. government and agency securities

     50,719        15        823        49,911   

 Corporate and other debt:

           

CMBS:

           

Agency

     1,850        2        44        1,808   

Non-agency

     2,250        11        16        2,245   

Auto loan ABS

     1,509        1        1        1,509   

Corporate bonds

     3,836        7        22        3,821   

CLO

     540               1        539   

FFELP student loan ABS2

     3,387        5        61        3,331   

 Total corporate and other debt

     13,372        26        145        13,253   

 Total AFS debt securities

     64,091        41        968        63,164   

 AFS equity securities

     15               9         

 Total AFS securities

     64,106        41        977        63,170   

 HTM securities

           

 U.S. government and agency securities:

           

U.S. Treasury securities

     5,839        1        283        5,557   

U.S. agency securities1

     11,083        1        188        10,896   

 Total HTM securities

     16,922        2        471        16,453   

 Total investment securities

   $ 81,028      $ 43      $ 1,448      $ 79,623   

CMBS—Commercial mortgage-backed securities

CLO—Collateralized loan obligations

ABS—Asset-backed securities

1.

U.S. agency securities consist mainly of agency-issued debt, agency mortgage pass-through pool securities and collateralized mortgage obligations.

2.

FFELP—Federal Family Education Loan Program. Amounts are backed by a guarantee from the U.S. Department of Education of at least 95% of the principal balance and interest on such loans.

 

 

  67   September 2017 Form 10-Q


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

  LOGO

 

Investment Securities in an Unrealized Loss Position

 

     At September 30, 2017  
     Less than 12 Months      12 Months or Longer      Total  
 $ in millions    Fair Value      Gross     
Unrealized
Losses     
     Fair Value      Gross     
Unrealized
Losses    
     Fair Value      Gross      
Unrealized 
Losses     
 

 AFS debt securities

                 

 U.S. government and agency securities:

                 

 U.S. Treasury securities

   $ 21,910      $ 364      $ 2,371      $ 61      $ 24,281      $ 425   

 U.S. agency securities

     10,737        136        1,431        28        12,168        164   

 Total U.S. government and agency securities

     32,647        500        3,802        89        36,449        589   

 Corporate and other debt:

                 

 CMBS:

                 

 Agency

     991        42                      991        42   

 Non-agency

     192        2        571        5        763         

 Corporate bonds

     186        1        332        6        518         

 FFELP student loan ABS

     1,058        8                      1,058         

 Total corporate and other debt

     2,427        53        903        11        3,330        64   

 Total AFS debt securities

     35,074        553        4,705        100        39,779        653   

 AFS equity securities

                   4        11        4        11   

 Total AFS securities

     35,074        553        4,709        111        39,783        664   

 HTM securities

                 

 U.S. government and agency securities:

                 

 U.S. Treasury securities

     9,848        249                      9,848        249   

 U.S. agency securities

     10,084        151                      10,084        151   

 Total U.S. government and agency securities

     19,932        400                      19,932        400   

 Corporate and other debt:

                 

 CMBS:

                 

 Non-agency

     71        1                      71         

 Total corporate and other debt

     71        1                      71         

 Total HTM securities

     20,003        401                      20,003        401   

 Total investment securities

   $             55,077      $             954      $             4,709      $             111      $             59,786      $             1,065   

 

September 2017 Form 10-Q   68  


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

  LOGO

 

    At December 31, 2016  
    Less than 12 Months     12 Months or Longer     Total  
 $ in millions   Fair Value     Gross     
Unrealized
Losses    
    Fair Value     Gross     
Unrealized
Losses    
    Fair Value     Gross      
Unrealized 
Losses     
 

 AFS debt securities

           

 U.S. government and agency securities:

           

 U.S. Treasury securities

  $ 25,323     $ 545     $     $     $ 25,323     $ 545   

 U.S. agency securities

    16,760       278       125             16,885       278   

 Total U.S. government and agency securities

    42,083       823       125             42,208       823   

 Corporate and other debt:

           

 CMBS:

           

 Agency

    1,245       44                   1,245       44   

 Non-agency

    763       11       594       5       1,357       16   

 Auto loan ABS

    659       1       123             782        

 Corporate bonds

    2,050       21       142       1       2,192       22   

 CLO

    178             239       1       417        

 FFELP student loan ABS

    2,612       61                   2,612       61   

 Total corporate and other debt

    7,507       138       1,098       7       8,605       145   

 Total AFS debt securities

    49,590       961       1,223       7       50,813       968   

 AFS equity securities

    6       9                   6        

 Total AFS securities

    49,596       970       1,223       7       50,819       977   

 HTM securities

           

 U.S. government and agency securities:

           

 U.S. Treasury securities

    5,057       283                   5,057       283   

 U.S. agency securities

    10,612       188                   10,612       188   

 Total HTM securities

    15,669       471                   15,669       471   

 Total investment securities

  $             65,265     $             1,441     $             1,223     $             7     $             66,488     $             1,448   

 

As discussed in Note 2 to the consolidated financial statements in the 2016 Form 10-K, AFS and HTM securities with a current fair value less than their amortized cost are analyzed as part of the Firm’s ongoing assessment of temporarily versus other-than-temporarily impaired at the individual security level.

The Firm believes there are no securities in an unrealized loss position that are other-than-temporarily-impaired at September 30, 2017 and December 31, 2016 for the reasons discussed herein.

For AFS debt securities, the Firm does not intend to sell the securities and is not likely to be required to sell the securities prior to recovery of amortized cost basis. For AFS and HTM debt securities, the securities have not experienced credit losses as the net unrealized losses reported in the previous table are primarily due to higher interest rates since those securities were purchased.

Additionally, for U.S. government and agency securities, the existence of an explicit and implicit guarantee provided by the U.S. government is considered and the Firm does not expect to experience a credit loss (as discussed in Note 2 to the consolidated financial statements in the 2016 Form 10-K). The risk of credit loss on securities in an unrealized loss position is considered minimal because the Firm’s U.S. government and agency securities, as well as ABS, CMBS and CLO, are highly rated and because corporate bonds are all investment grade.

For AFS equity securities, the Firm has the intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in market value.

See Note 12 for additional information on securities issued by VIEs, including U.S. agency mortgage-backed securities, non-agency CMBS, auto loan ABS, CLO and FFELP student loan ABS.

Investment Securities by Contractual Maturity

 

    At September 30, 2017  
$ in millions   Amortized
Cost
    Fair Value     Annualized
Average
Yield
 

AFS debt securities

     

U.S. government and agency securities:

 

U.S. Treasury securities:

     

Due within 1 year

  $ 5,300     $ 5,286       0.9%  

After 1 year through 5 years

    14,129       13,954       1.4%  

After 5 years through 10 years

    5,277       5,041       1.5%  

Total

    24,706       24,281          

U.S. agency securities:

     

Due within 1 year

    1,300       1,302       0.2%  

After 1 year through 5 years

    2,570       2,564       0.9%  

After 5 years through 10 years

    1,250       1,246       1.9%  

After 10 years

    18,898       18,784       1.8%  

Total

    24,018       23,896          

Total U.S. government and agency securities

    48,724       48,177       1.5%  
 

 

  69   September 2017 Form 10-Q


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Notes to Consolidated Financial Statements

(Unaudited)

     LOGO

 

    At September 30, 2017  
$ in millions    Amortized 
Cost
     Fair Value     Annualized
Average
Yield
 

Corporate and other debt:

     

CMBS:

 

Agency:

     

Due within 1 year

    18       18       1.1

After 1 year through 5 years

    283       282       1.4

After 5 years through 10 years

    300       301       1.2

After 10 years

    851       811       1.6

Total

    1,452       1,412          

Non-agency:

     

After 5 years through 10 years

    36       35       2.5

After 10 years

    1,179       1,177       1.8

Total

    1,215       1,212          

Corporate bonds:

     

Due within 1 year

    46       46       1.2

After 1 year through 5 years

    1,218       1,225       2.4

After 5 years through 10 years

    222       221       2.3

Total

    1,486       1,492          

CLO:

     

After 5 years through 10 years

    236       236       1.5

After 10 years

    198       199       2.4

Total

    434       435          

FFELP student loan ABS:

 

After 1 year through 5 years

    52       51       0.8

After 5 years through 10 years

    393       390       0.8

After 10 years

    1,772       1,781       1.1

Total

    2,217       2,222          

Total corporate and other debt

    6,804       6,773       1.6

Total AFS debt securities

    55,528       54,950       1.5

AFS equity securities

    15       4      

Total AFS securities

    55,543       54,954       1.5

HTM securities

     

U.S. government securities:

     

U.S. Treasury securities:

     

Due within 1 year

    300       300       0.6

After 1 year through 5 years

    5,163       5,151       1.5

After 5 years through 10 years

    5,311       5,157       1.9

After 10 years

    727       651       2.3

Total

    11,501       11,259          

U.S. agency securities:

     

After 10 years

    12,384       12,251       2.4

Total

    12,384       12,251          

Total U.S. government and agency securities

    23,885       23,510       2.0

Corporate and other debt:

     

CMBS:

     

Non-agency:

     

After 1 year through 5 years

    99       99       3.6

After 5 years through 10 years

    148       148       3.7

Total

    247       247          

Total corporate and other debt

    247       247       3.7

Total HTM securities

    24,132       23,757       2.1

Total investment securities

  $ 79,675     $ 78,711       1.7

Gross Realized Gains and Losses on Sales of AFS Securities

 

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

Gross realized gains

  $ 11      $ 45      $ 38     $ 130  

Gross realized (losses)

                  (11     (3

Total

  $             11      $             45      $             27     $             127  

Gross realized gains and losses are recognized in Other revenues in the income statements.

6. Collateralized Transactions

The Firm enters into securities purchased under agreements to resell, securities sold under agreements to repurchase, securities borrowed and securities loaned transactions to, among other things, acquire securities to cover short positions and settle other securities obligations, to accommodate customers’ needs and to finance its inventory positions. For further discussion of the Firm’s collateralized transactions, see Note 6 to the consolidated financial statements in the 2016 Form 10-K.

Offsetting of Certain Collateralized Transactions

 

    At September 30, 2017  

$ in millions

  Gross
Amounts
   

Amounts

Offset

    Net
Amounts
Presented
    Amounts
Not
Offset1
    Net
Amounts
 

Assets

         

Securities purchased
under agreements
to resell

  $ 174,387     $ (84,281   $ 90,106     $ (84,895   $ 5,211   

Securities borrowed

    145,923       (13,031     132,892       (128,616     4,276   

Liabilities

         

Securities sold
under agreements
to repurchase

  $ 138,264     $ (84,281   $ 53,983     $ (46,145   $ 7,838   

Securities loaned

    28,662       (13,032     15,630       (15,550     80   

Not subject to legally enforceable master netting agreements2

 

 

Securities purchased under agreements to resell

 

  $ 4,599   

Securities borrowed

 

    720   

Securities sold under agreements to repurchase

 

    6,521   

Securities loaned

 

     
 

 

September 2017 Form 10-Q   70  


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

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    At December 31, 2016  

$ in millions

  Gross
 Amounts 
     Amounts 
Offset
    Net
Amounts
 Presented 
     Amounts 
Not
Offset1
    Net
 Amounts 
 

Assets

         

Securities purchased
under agreements
to resell

  $   182,888     $     (80,933)     $ 101,955     $ (93,365   $ 8,590   

Securities borrowed

    129,934       (4,698)       125,236       (118,974     6,262   

Liabilities

         

Securities sold
under agreements
to repurchase

  $ 135,561     $ (80,933)     $ 54,628     $ (47,933   $ 6,695   

Securities loaned

    20,542       (4,698)       15,844       (15,670     174   

Not subject to legally enforceable master netting agreements2

 

Securities purchased under agreements to resell

 

  $ 7,765   

Securities borrowed

                                    2,591   

Securities sold under agreements to repurchase

 

    6,500   

Securities loaned

                                    154   

 

1.

Amounts relate to master netting agreements that have been determined by the Firm to be legally enforceable in the event of default but where certain other criteria are not met in accordance with applicable offsetting accounting guidance.

2.

Represents amounts within Net Amounts related to transactions that are either not subject to master netting agreements or are subject to such agreements but the Firm has not determined the agreements to be legally enforceable.

For information related to offsetting of derivatives, see Note 4.

Maturities and Collateral Pledged

Gross Secured Financing Balances by Remaining Contractual Maturity

 

    At September 30, 2017  

$ in millions

 

Overnight

 and Open 

   

 Less than 

30 Days

     30-90 
Days
   

Over

 90 Days 

     Total   

Securities sold under
agreements to
repurchase

  $ 38,581     $ 38,455     $ 18,398     $ 42,830     $ 138,264   

Securities loaned

    17,274       541       1,426       9,421       28,662   

Total included in the offsetting disclosure

  $ 55,855     $ 38,996     $ 19,824     $ 52,251     $ 166,926   

Trading liabilities—
Obligation to return
securities received
as collateral

    21,208                         21,208   

Total

  $ 77,063     $ 38,996     $ 19,824     $ 52,251     $ 188,134   
    At December 31, 2016  

$ in millions

 

 Overnight 

and Open

   

 Less than 

30 Days

     30-90 
Days
   

Over

 90 Days 

     Total   

Securities sold
under agreements
to repurchase

  $   41,549     $   36,703     $   24,648     $   32,661     $   135,561   

Securities loaned

    9,487       851       2,863       7,341       20,542   

Total included in the
offsetting disclosure

  $ 51,036     $ 37,554     $ 27,511     $ 40,002     $ 156,103   

Trading liabilities—
Obligation to return
securities received
as collateral

    20,262                         20,262   

Total

  $ 71,298     $ 37,554     $ 27,511     $ 40,002     $ 176,365   

Gross Secured Financing Balances by Class of Collateral Pledged

 

$ in millions   

At            

 September 30, 

2017          

   

At

 December 31, 
2016

 

Securities sold under agreements to repurchase

 

U.S. government and agency securities

   $ 40,758     $ 56,372   

State and municipal securities

     828       1,363   

Other sovereign government obligations

     64,529       42,790   

Asset-backed securities

     2,267       1,918   

Corporate and other debt

     8,244       9,086   

Corporate equities

     20,773       23,152   

Other

     865       880   

Total securities sold under agreements to repurchase

   $ 138,264     $ 135,561   

Securities loaned

    

Other sovereign government obligations

     13,259       4,762   

Corporate and other debt

     9       73   

Corporate equities

     15,152       15,693   

Other

     242       14   

Total securities loaned

   $ 28,662     $ 20,542   

Total included in the offsetting disclosure

   $ 166,926     $ 156,103   

Trading liabilities—Obligation to return securities received as collateral

 

Corporate equities

   $ 21,208     $ 20,262   

Total

   $ 188,134     $ 176,365   

Assets Pledged

The Firm pledges its trading assets and loans to collateralize securities sold under agreements to repurchase, securities loaned, other secured financings and derivatives. Counterparties may or may not have the right to sell or repledge the collateral.

Pledged financial instruments that can be sold or repledged by the secured party are identified as Trading assets (pledged to various parties) in the balance sheets.

 

 

  71   September 2017 Form 10-Q


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

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Carrying Value of Assets Loaned or Pledged without

Counterparty Right to Sell or Repledge

 

$ in millions  

At

 September 30, 

2017

   

At

 December 31, 

2016

 

Trading assets

  $ 37,800     $ 41,358   

Loans (gross of allowance for loan losses)

    570       —   

Total

  $ 38,370     $ 41,358   

Collateral Received

The Firm receives collateral in the form of securities in connection with securities purchased under agreements to resell, securities borrowed, derivative transactions, customer margin loans and securities-based lending. In many cases, the Firm is permitted to sell or repledge these securities held as collateral and use the securities to secure securities sold under agreements to repurchase, to enter into securities lending and derivative transactions or for delivery to counterparties to cover short positions.

The Firm also receives securities as collateral in connection with certain securities-for-securities transactions. In instances where the Firm is the lender and permitted to sell or repledge these securities, it reports the fair value of the collateral received and the related obligation to return the collateral included in Trading assets and Trading liabilities, respectively, in its balance sheets.

Fair Value of Collateral Received with Right to Sell or Repledge

 

$ in millions  

At

 September 30, 

2017

   

At

 December 31, 

2016

 

Collateral received with right to sell or repledge

  $ 575,915     $ 561,239   

Collateral that was sold or repledged

    470,555       430,911   

Customer Margin Lending and Other

 

$ in millions  

At

 September 30, 

2017

   

At

 December 31, 

2016

 

Net customer receivables representing margin loans

  $ 28,609     $ 24,359   

The Firm engages in margin lending to clients that allows the client to borrow against the value of qualifying securities. Margin loans are included within Customer and other receivables in the balance sheets. Under these agreements and transactions, the Firm receives collateral, including U.S. government and agency securities, other sovereign government obligations, corporate and other debt, and corporate equities. Customer receivables generated from margin lending activities are collateralized by customer-owned securities held by the Firm. The Firm monitors required margin levels and established credit terms daily and, pursuant to such guidelines,

requires customers to deposit additional collateral, or reduce positions, when necessary.

For a further discussion of the Firm’s margin lending activities, see Note 6 to the consolidated financial statements in the 2016 Form 10-K.

The Firm has additional secured liabilities. For a further discussion of other secured financings, see Note 10.

Cash and Securities Deposited with Clearing Organizations or Segregated

 

$ in millions  

At

 September 30, 

2017

   

At

 December 31, 

2016

 

Segregated securities1

  $ 17,491     $ 23,756   

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

    32,731       33,979   

Total

  $ 50,222     $ 57,735   

 

1.

Securities segregated under federal regulations for the Firm’s U.S. broker-dealers are sourced from Securities purchased under agreements to resell and Trading assets in the balance sheets.

7. Loans and Allowance for Credit Losses

Loans

The Firm’s loans held for investment are recorded at amortized cost, and its loans held for sale are recorded at the lower of cost or fair value in the balance sheets. For a further description of these loans, refer to Note 7 to the consolidated financial statements in the 2016 Form 10-K. See Note 3 for further information regarding Loans and lending commitments held at fair value.

Loans by Type

 

    At September 30, 2017  
$ in millions     Loans Held  
for
Investment
      Loans Held  
for Sale
    Total     
  Loans   
 

Corporate loans

  $ 29,686     $ 12,524     $ 42,210    

Consumer loans

    26,616             26,616    

Residential real estate loans

    26,150       60       26,210    

Wholesale real estate loans

    9,000       640       9,640    

Total loans, gross

    91,452       13,224       104,676    

Allowance for loan losses

    (245           (245)   

Total loans, net

  $ 91,207     $ 13,224     $ 104,431    
 

 

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    At December 31, 2016  
$ in millions   Loans Held
for
  Investment  
      Loans Held  
for Sale
   

Total

    Loans    

 

Corporate loans

  $ 25,025     $ 10,710     $ 35,735   

Consumer loans

    24,866             24,866   

Residential real estate loans

    24,385       61       24,446   

Wholesale real estate loans

    7,702       1,773       9,475   

Total loans, gross

    81,978       12,544       94,522   

Allowance for loan losses

    (274           (274)  

Total loans, net

  $ 81,704     $ 12,544     $ 94,248   

Loans by Interest Rate Type

 

$ in millions  

  At September 30,  

2017

      At December 31,  
2016
 

Fixed

  $ 13,323     $ 11,895   

Floating or adjustable

    91,108       82,353   

Total loans, net

  $ 104,431     $ 94,248   

Loans to Non-U.S. Borrowers

 

$ in millions  

  At September 30,  

2017

      At December 31,  
2016
 

Loans, net of allowance

  $ 8,883     $ 9,388   

Credit Quality

For a further discussion about the Firm’s evaluation of credit transactions and monitoring and credit quality indicators, as well as factors considered by the Firm in determining the allowance for loan losses and impairments, see Notes 2 and 7 to the consolidated financial statements in the 2016 Form 10-K.

Loans Held for Investment before Allowance by Credit Quality

 

    At September 30, 2017  

$ in millions

  Corporate     Consumer    

Residential

Real Estate

   

Wholesale

Real Estate

    Total  

Pass

  $ 28,735     $ 26,613     $ 26,092     $ 8,435     $ 89,875   

Special mention

    435       3             250       688   

Substandard

    509             58       315       882   

Doubtful

    7                          

Loss

                            —   

Total

  $ 29,686     $ 26,616     $ 26,150     $ 9,000     $ 91,452   

 

    At December 31, 2016  
$ in millions   Corporate     Consumer    

Residential

Real Estate

   

Wholesale

Real Estate

    Total  

Pass

  $ 23,409     $ 24,853     $ 24,345     $ 7,294     $ 79,901   

Special mention

    288       13             218       519   

Substandard

    1,259             40       190       1,489   

Doubtful

    69                         69   

Loss

                            —   

Total

  $ 25,025     $ 24,866     $ 24,385     $ 7,702     $ 81,978   

The following loans and lending commitments have been evaluated for a specific allowance. All remaining loans and lending commitments are assessed under the inherent allowance methodology.

Impaired Loans and Lending Commitments Before Allowance

 

 

    At September 30, 2017  
$ in millions     Corporate    

  Residential

  Real Estate

          Total        

Loans

     

With allowance

  $ 15     $     $ 15   

Without allowance1

    146       46       192   

Unpaid principal balance2

    170       47       217   

Lending Commitments

     

With allowance

  $ 1     $     $  

Without allowance1

    221             221   

 

    At December 31, 2016  
$ in millions     Corporate    

  Residential

  Real Estate

          Total        

Loans

     

With allowance

  $ 104     $     $ 104   

Without allowance1

    206       35       241   

Unpaid principal balance2

    316       38       354   

Lending Commitments

     

With allowance

  $     $     $ —   

Without allowance1

    89             89   

 

1.

At September 30, 2017 and December 31, 2016, no allowance was recorded for these loans and lending commitments as the present value of the expected future cash flows (or, alternatively, the observable market price of the instrument or the fair value of the collateral held) equaled or exceeded the carrying value.

2.

The impaired loans unpaid principal balance differs from the aggregate amount of impaired loan balances with and without allowance due to various factors, including charge-offs and net deferred loan fees or costs.

Impaired Loans and Allowance by Region

 

    At September 30, 2017  
$ in millions     Americas       EMEA     Asia-
  Pacific  
    Total    

Impaired loans

  $ 188     $ 9     $ 10     $ 207   

Allowance for loan losses

    209       33       3       245   

 

    At December 31, 2016  
$ in millions     Americas       EMEA     Asia-
  Pacific  
    Total    

Impaired loans

  $ 320     $ 9     $ 16     $ 345   

Allowance for loan losses

    245       28       1       274   

EMEA—Europe, Middle East and Africa

 

 

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Troubled Debt Restructurings

 

$ in millions  

  At September 30,  

2017

      At December 31,  
2016
 

Loans

  $ 69     $ 67   

Lending commitments

    11       14   

Allowance for loan losses

    10       —   

Impaired loans and lending commitments classified as held for investment within corporate loans include troubled debt restructurings as shown in the previous table. These restructurings typically include modifications of interest rates, collateral requirements, other loan covenants and payment extensions.

Allowance for Loan Losses Rollforward

 

$ in millions    Corporate     Consumer     

Residential

Real
Estate

     Wholesale
Real
Estate
         Total      

December 31, 2016

   $ 195     $ 4      $ 20      $ 55      $ 274  

Gross charge-offs

     (75                          (75

Recoveries

     1                            1  

Net recoveries (charge-offs)

     (74                          (74

Provision (release)1

     26              4        12        42  

Other

     2                     1        3  

September 30, 2017

   $ 149     $ 4      $ 24      $ 68      $ 245  

Inherent

   $ 142     $ 4      $ 24      $ 68      $ 238  

Specific

     7                            7  

 

$ in millions    Corporate     Consumer    

Residential

Real
Estate

     Wholesale
Real
Estate
         Total      

December 31, 2015

   $ 166     $ 5     $ 17      $ 37      $ 225  

Gross charge-offs

     (15                         (15

Gross recoveries

                                

Net recoveries (charge-offs)

     (15                         (15

Provision (release)1

     120       (2     3        8        129  

Other2

     (52                         (52

September 30, 2016

   $ 219     $ 3     $ 20      $ 45      $ 287  

Inherent

   $ 142     $ 3     $ 20      $ 45      $ 210  

Specific

     77                           77  

 

1.

The Firm recorded provisions of $13 million and $1 million for loan losses for the current quarter and prior year quarter, respectively.

2.

Amount includes the impact related to the transfer to loans held for sale and foreign currency translation adjustments.

Allowance for Lending Commitments Rollforward

 

$ in millions   Corporate     Consumer    

Residential

Real
Estate

    Wholesale
Real
Estate
        Total      

December 31, 2016

  $ 185     $ 1     $     $ 4     $ 190  

Provision (release)1

    (10                       (10

Other

    1                         1  

September 30, 2017

  $ 176     $ 1     $     $ 4     $ 181  

Inherent

  $ 173     $ 1     $     $ 4     $ 178  

Specific

    3                         3  

 

$ in millions   Corporate     Consumer    

Residential

Real
Estate

    Wholesale
Real
Estate
        Total      

December 31, 2015

  $ 180     $ 1     $     $ 4     $ 185  

Provision (release)1

    9                         9  

Other

    (7                       (7

September 30, 2016

  $ 182     $ 1     $     $ 4     $ 187  

Inherent

  $ 180     $ 1     $     $ 4     $ 185  

Specific

    2                         2  

 

1.

The Firm recorded a release of $6 million, and a provision of $6 million for lending commitments for the current quarter and prior year quarter, respectively.

Employee Loans

 

$ in millions  

At September 30,

2017

      At December 31,
2016
 

Balance

  $ 4,317     $ 4,804  

Allowance for loan losses

    (79     (89

Balance, net

  $ 4,238     $ 4,715  

Repayment term range, in years

    1 to 20       1 to 12  

Employee loans are granted in conjunction with a program established to retain and recruit certain employees, are full recourse and generally require periodic repayments. These loans are recorded in Customer and other receivables in the balance sheets. The Firm establishes an allowance for loan amounts it does not consider recoverable, and the related provision is recorded in Compensation and benefits expense.

 

 

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8. Equity Method Investments

Overview

The Firm’s investments accounted for under the equity method of accounting (see Note 1 to the consolidated financial statements in the 2016 Form 10-K) are included in Other assets in the balance sheets. Income (loss) from equity method investments is included in Other revenues in the income statements.

Equity Method Investment Balances

 

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

Investments

  $ 2,766     $ 2,837   

 

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

Income (loss)

  $     $ (40   $     $ (39)   

Japanese Securities Joint Venture

Included in the equity method investments is the Firm’s 40% voting interest (“40% interest”) in Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (“MUMSS”). Mitsubishi UFJ Financial Group, Inc. (“MUFG”) holds a 60% voting interest. The Firm accounts for its equity method investment in MUMSS within the Institutional Securities business segment. The Firm records income from its 40% interest in MUMSS within Other revenues in the income statements.

 

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

Income from investment in MUMSS

  $ 25     $ 26     $ 96     $ 83   

In addition to MUMSS, the Firm held other equity method investments that were not individually significant.

9. Deposits

Deposits

 

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

Savings and demand deposits

  $ 140,707     $ 154,559   

Time deposits1

    13,932       1,304   

Total2

  $ 154,639     $ 155,863   

Deposits subject to FDIC insurance

  $ 121,896     $ 127,992   

Time deposits that equal or exceed the FDIC insurance limit

  $ 10     $ 46   

Interest Bearing Time Deposit Maturities

 

$ in millions   

At

       September 30, 2017  

 

2017

   $ 3,447   

2018

     9,456   

2019

     861   

2020

     —   

2021

      

Thereafter

     160   

FDIC—Federal Deposit Insurance Corporation

1.

Certain time deposit accounts are carried at fair value under the fair value option (see Note 3).

2.

Deposits were primarily held in the U.S.

10. Long-Term Borrowings and Other Secured Financings

Long-Term Borrowings

 

$ in millions  

At

  September 30,
2017

   

At

  December 31,
2016

 

Senior

  $ 181,336     $ 154,472   

Subordinated

    10,341       10,303   

Total

  $ 191,677     $ 164,775   

Weighted average stated maturity, in years

    6.7       5.9   

Other Secured Financings

Other secured financings include the liabilities related to transfers of financial assets that are accounted for as financings rather than sales, consolidated VIEs where the Firm is deemed to be the primary beneficiary, pledged commodities, certain equity-linked notes and other secured borrowings. These liabilities are generally payable from the cash flows of the related assets accounted for as Trading assets. See Note 12 for further information on Other secured financings related to VIEs and securitization activities.

Other Secured Financings by Original Maturity and Type

 

$ in millions   

At

  September 30,
2017

   

At

  December 31,
2016

 

Secured financings

    

Original maturities:

                

Greater than one year

   $ 11,037     $ 9,404   

One year or less

     2,349       1,429   

Failed sales1

     858       285   

Total

   $ 14,244     $ 11,118   

 

1.

For more information on failed sales, see Note 12.

 

 

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11. Commitments, Guarantees and Contingencies

Commitments

The Firm’s commitments are summarized in the following table by years to maturity. Since commitments associated with these instruments may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.

 

        Years to Maturity at September 30,    
2017
       
$ in millions   Less
than 1
    1-3     3-5     Over 5      Total   

Lending:

         

Corporate

  $ 13,001     $ 30,194     $ 44,669     $ 4,122     $ 91,986   

Consumer

    6,182             2       3       6,187   

Residential real
estate

    17       39       70       273       399   

Wholesale real
estate

    124       281       114       232       751   

Forward-starting
secured financing
receivables1

    68,538                         68,538   

Investment
activities

    504       180       55       259       998   

Letters of credit and
other financial
guarantees

    157       1       1       44       203   

Total

  $ 88,523     $ 30,695     $ 44,911     $ 4,933     $ 169,062   

Corporate lending commitments participated to third parties

 

  $ 6,335   

Forward-starting secured financing receivables
settled within three business days1

 

  $ 60,013   

 

1.

Represents forward-starting securities purchased under agreements to resell and securities borrowed agreements.

For a further description of these commitments, refer to Note 12 to the consolidated financial statements in the 2016 Form 10-K.

Guarantees

Obligations under Guarantee Arrangements at September 30, 2017

 

    Maximum Potential Payout/Notional  
    Years to Maturity        
$ in millions  

Less

than 1

    1-3     3-5     Over 5      Total   

Credit derivatives

  $ 118,646     $ 85,300     $ 82,668     $ 53,744     $ 340,358   

Other credit contracts

    14                   135       149   

Non-credit derivatives

    1,592,809       1,029,404       374,956       573,755       3,570,924   

Standby letters of credit and other financial guarantees issued1

    782       909       1,406       4,956       8,053   

Market value
guarantees

    40       62       69             171   

Liquidity facilities

    3,237                         3,237   

Whole loan sales
guarantees

                1       23,260       23,261   

Securitization
representations
and warranties

                      58,423       58,423   

General partner
guarantees

    34       49       332       25       440   

 

$ in millions                      Carrying
Amount
(Asset)/
Liability
     Collateral/ 
 Recourse 
 

Credit derivatives2

                  $ (2,004   $         —   

Other credit contracts

 

            13       —   

Non-credit derivatives2

 

            38,611       —   

Standby letters of credit and other
financial guarantees issued1

 

            (186     6,593   

Market value guarantees

 

            1        

Liquidity facilities

                    (5     5,342   

Whole loan sales guarantees

 

            8       —   

Securitization representations and warranties

 

    91       —   

General partner guarantees

 

            53       —   

 

1.

These amounts include certain issued standby letters of credit participated to third parties, totaling $0.7 billion of notional and collateral/recourse, due to the nature of the Firm’s obligations under these arrangements.

2.

Carrying amounts of derivative contracts are shown on a gross basis prior to cash collateral or counterparty netting. For further information on derivative contracts, see Note 4.

 

 

September 2017 Form 10-Q   76  


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The Firm also has obligations under certain guarantee arrangements, including contracts and indemnification agreements, that contingently require the Firm to make payments to the guaranteed party based on changes in an underlying measure (such as an interest or foreign exchange rate, security or commodity price, an index, or the occurrence or non-occurrence of a specified event) related to an asset, liability or equity security of a guaranteed party. Also included as guarantees are contracts that contingently require the Firm to make payments to the guaranteed party based on another entity’s failure to perform under an agreement, as well as indirect guarantees of the indebtedness of others.

In certain situations, collateral may be held by the Firm for those contracts that meet the definition of a guarantee. Generally, the Firm sets collateral requirements by counterparty so that the collateral covers various transactions and products and is not allocated specifically to individual contracts. Also, the Firm may recover amounts related to the underlying asset delivered to the Firm under the derivative contract.

For more information on the nature of the obligation and related business activity for market value guarantees, liquidity facilities, whole loan sales guarantees and general partner guarantees related to certain investment management funds, as well as the other products in the previous table, see Note 12 to the consolidated financial statements in the 2016 Form 10-K.

Other Guarantees and Indemnities

In the normal course of business, the Firm provides guarantees and indemnifications in a variety of transactions. These provisions generally are standard contractual terms. Certain of these guarantees and indemnifications related to indemnities, exchange/clearinghouse member guarantees and merger and acquisition guarantees are described in Note 12 to the consolidated financial statements in the 2016 Form 10-K.

In addition, in the ordinary course of business, the Firm guarantees the debt and/or certain trading obligations (including obligations associated with derivatives, foreign exchange contracts and the settlement of physical commodities) of certain subsidiaries. These guarantees generally are entity or product specific and are required by investors or trading counterparties. The activities of the Firm’s subsidiaries covered by these guarantees (including any related debt or trading obligations) are included in the financial statements.

Finance Subsidiary

The Parent Company fully and unconditionally guarantees the securities issued by Morgan Stanley Finance LLC, a 100%-owned finance subsidiary.

Contingencies

Legal.    In the normal course of business, the Firm has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the entities that would otherwise be the primary defendants in such cases are bankrupt or are in financial distress. These actions have included, but are not limited to, residential mortgage and credit-crisis related matters.

Over the last several years, the level of litigation and investigatory activity (both formal and informal) by governmental and self-regulatory agencies has increased materially in the financial services industry. As a result, the Firm expects that it will continue to be the subject of elevated claims for damages and other relief and, while the Firm has identified below any individual proceedings where the Firm believes a material loss to be reasonably possible and reasonably estimable, there can be no assurance that material losses will not be incurred from claims that have not yet been asserted or are not yet determined to be probable or possible and reasonably estimable losses.

The Firm contests liability and/or the amount of damages as appropriate in each pending matter. Where available information indicates that it is probable a liability had been incurred at the date of the consolidated financial statements and the Firm can reasonably estimate the amount of that loss, the Firm accrues the estimated loss by a charge to income.

In many proceedings and investigations, however, it is inherently difficult to determine whether any loss is probable or even possible or to estimate the amount of any loss. In addition, even where a loss is possible or an exposure to loss exists in excess of the liability already accrued with respect to a previously recognized loss contingency, it is not always possible to reasonably estimate the size of the possible loss or range of loss.

For certain legal proceedings and investigations, the Firm cannot reasonably estimate such losses, particularly for proceedings and investigations where the factual record is being developed or contested or where plaintiffs or governmental entities seek substantial or indeterminate damages, restitution, disgorgement or penalties. Numerous issues may need to be resolved, including through potentially lengthy discovery and determination of important factual matters, determination of issues related to class certification and the

 

 

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calculation of damages or other relief, and by addressing novel or unsettled legal questions relevant to the proceedings or investigations in question, before a loss or additional loss or range of loss or additional range of loss can be reasonably estimated for a proceeding or investigation.

For certain other legal proceedings and investigations, the Firm can estimate reasonably possible losses, additional losses, ranges of loss or ranges of additional loss in excess of amounts accrued, but does not believe, based on current knowledge and after consultation with counsel, that such losses will have a material adverse effect on the Firm’s consolidated financial statements as a whole, other than the matters referred to in the following paragraphs.

On July 15, 2010, China Development Industrial Bank (“CDIB”) filed a complaint against the Firm, styled China Development Industrial Bank v. Morgan Stanley & Co. Incorporated et al., which is pending in the Supreme Court of the State of New York, New York County (“Supreme Court of NY”). The complaint relates to a $275 million credit default swap referencing the super senior portion of the STACK 2006-1 CDO. The complaint asserts claims for common law fraud, fraudulent inducement and fraudulent concealment and alleges that the Firm misrepresented the risks of the STACK 2006-1 CDO to CDIB, and that the Firm knew that the assets backing the CDO were of poor quality when it entered into the credit default swap with CDIB. The complaint seeks compensatory damages related to the approximately $228 million that CDIB alleges it has already lost under the credit default swap, rescission of CDIB’s obligation to pay an additional $12 million, punitive damages, equitable relief, fees and costs. On February 28, 2011, the court denied the Firm’s motion to dismiss the complaint. Based on currently available information, the Firm believes it could incur a loss in this action of up to approximately $240 million plus pre- and post-judgment interest, fees and costs.

On August 8, 2012, U.S. Bank, in its capacity as trustee, filed a complaint on behalf of Morgan Stanley Mortgage Loan Trust 2006-14SL, Mortgage Pass-Through Certificates, Series 2006-14SL, Morgan Stanley Mortgage Loan Trust 2007-4SL and Mortgage Pass-Through Certificates, Series 2007-4SL against the Firm styled Morgan Stanley Mortgage Loan Trust 2006-14SL, et al. v. Morgan Stanley Mortgage Capital Holdings LLC, as successor in interest to Morgan Stanley Mortgage Capital Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trusts, which had original principal balances of approximately $354 million and $305 million respectively, breached various representations and warranties. The complaint seeks, among other relief, rescission of the mortgage loan purchase agreements under-

lying the transactions, specific performance and unspecified damages and interest. On August 16, 2013, the court granted in part and denied in part the Firm’s motion to dismiss the complaint. On August 16, 2016, the Firm moved for summary judgment and the plaintiffs moved for partial summary judgment. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $527 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

On May 3, 2013, plaintiffs in Deutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al. filed a complaint against the Firm, certain affiliates, and other defendants in the Supreme Court of NY. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by the Firm to plaintiff was approximately $644 million. The complaint alleges causes of action against the Firm for common law fraud, fraudulent concealment, aiding and abetting fraud, negligent misrepresentation, and rescission and seeks, among other things, compensatory and punitive damages. On June 10, 2014, the court granted in part and denied in part the Firm’s motion to dismiss the complaint. On June 20, 2017 the Appellate Division, First Department, affirmed the lower court’s June 10, 2014 order. On July 28, 2017, the Firm filed a motion for leave to appeal that decision to the New York Court of Appeals. On October 3, 2017, the Appellate Division, First Department denied the Firm’s motion for leave to appeal. At September 25, 2017, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $232 million, and the certificates had incurred actual losses of approximately $87 million. Based on currently available information, the Firm believes it could incur a loss in this action up to the difference between the $232 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Firm, or upon sale, plus pre- and post-judgment interest, fees and costs. The Firm may be entitled to be indemnified for some of these losses.

On July 8, 2013, U.S. Bank National Association, in its capacity as trustee, filed a complaint against the Firm styled U.S. Bank National Association, solely in its capacity as Trustee of the Morgan Stanley Mortgage Loan Trust 2007-2AX (MSM 2007-2AX) v. Morgan Stanley Mortgage Capital Holdings LLC, as Successor-by-Merger to Morgan Stanley

 

 

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Mortgage Capital Inc. and GreenPoint Mortgage Funding, Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $650 million, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, unspecified damages and interest. On August 22, 2013, the Firm filed a motion to dismiss the complaint, which was granted in part and denied in part on November 24, 2014. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $240 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

On December 30, 2013, Wilmington Trust Company, in its capacity as trustee for Morgan Stanley Mortgage Loan Trust 2007-12, filed a complaint against the Firm styled Wilmington Trust Company v. Morgan Stanley Mortgage Capital Holdings LLC et al., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $516 million, breached various representations and warranties. The complaint seeks, among other relief, unspecified damages, attorneys’ fees, interest and costs. On February 28, 2014, the defendants filed a motion to dismiss the complaint, which was granted in part and denied in part on June 14, 2016. The plaintiff filed a notice of appeal of that order on August 17, 2016, and the appeal was fully briefed on May 5, 2017. On July 11, 2017, the Appellate Division, First Department affirmed in part and reversed in part the trial court’s order that granted in part the Firm’s motion to dismiss. On August 10, 2017, plaintiff filed a motion for leave to appeal the Appellate Division, First Department’s July 11, 2017 decision and order. On September 26, 2017, the Appellate Division, First Department denied plaintiff’s motion for leave to appeal. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $152 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, plus attorney’s fees, costs and interest, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

On April 28, 2014, Deutsche Bank National Trust Company, in its capacity as trustee for Morgan Stanley Structured Trust I 2007-1, filed a complaint against the Firm styled Deutsche Bank National Trust Company v. Morgan Stanley Mortgage

Capital Holdings LLC, pending in the United States District Court for the Southern District of New York. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $735 million, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, unspecified compensatory and/or rescissory damages, interest and costs. On April 3, 2015, the court granted in part and denied in part the Firm’s motion to dismiss the complaint. On May 8, 2017, the Firm moved for summary judgment. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $292 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

On September 19, 2014, Financial Guaranty Insurance Company (“FGIC”) filed a complaint against the Firm in the Supreme Court of NY, styled Financial Guaranty Insurance Company v. Morgan Stanley ABS Capital I Inc. et al. relating to a securitization issued by Basket of Aggregated Residential NIMS 2007-1 Ltd. The complaint asserts claims for breach of contract and alleges, among other things, that the net interest margin securities (“NIMS”) in the trust breached various representations and warranties. FGIC issued a financial guaranty policy with respect to certain notes that had an original balance of approximately $475 million. The complaint seeks, among other relief, specific performance of the NIMS breach remedy procedures in the transaction documents, unspecified damages, reimbursement of certain payments made pursuant to the transaction documents, attorneys’ fees and interest. On November 24, 2014, the Firm filed a motion to dismiss the complaint, which the court denied on January 19, 2017. On February 24, 2017, the Firm filed a notice of appeal of the court’s order. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $126 million, the unpaid balance of these notes, plus pre- and post-judgment interest, fees and costs, as well as claim payments that FGIC has made and will make in the future.

On September 23, 2014, FGIC filed a complaint against the Firm in the Supreme Court of NY styled Financial Guaranty Insurance Company v. Morgan Stanley ABS Capital I Inc. et al. relating to the Morgan Stanley ABS Capital I Inc. Trust 2007-NC4. The complaint asserts claims for breach of contract and fraudulent inducement and alleges, among other things, that the loans in the trust breached various representations and warranties and defendants made untrue statements

 

 

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and material omissions to induce FGIC to issue a financial guaranty policy on certain classes of certificates that had an original balance of approximately $876 million. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, compensatory, consequential and punitive damages, attorneys’ fees and interest. On January 23, 2017, the court denied the Firm’s motion to dismiss the complaint. On February 24, 2017, the Firm filed a notice of appeal of the court’s order. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $277 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands from a certificate holder and FGIC that the Firm did not repurchase, plus pre- and post-judgment interest, fees and costs, as well as claim payments that FGIC has made and will make in the future. In addition, plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

On January 23, 2015, Deutsche Bank National Trust Company, in its capacity as trustee, filed a complaint against the Firm styled Deutsche Bank National Trust Company solely in its capacity as Trustee of the Morgan Stanley ABS Capital I Inc. Trust 2007-NC4 v. Morgan Stanley Mortgage Capital Holdings LLC as Successor-by-Merger to Morgan Stanley Mortgage Capital Inc., and Morgan Stanley ABS Capital I Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $1.05 billion, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, compensatory, consequential, rescissory, equitable and punitive damages, attorneys’ fees, costs and other related expenses, and interest. On December 11, 2015, the court granted in part and denied in part the Firm’s motion to dismiss the complaint. On February 11, 2016, plaintiff filed a notice of appeal of that order, and the appeal was fully briefed on August 19, 2016. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $277 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands from a certificate holder and a monoline insurer that the Firm did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

In matters styled Case number 15/3637 and Case number 15/4353, the Dutch Tax Authority (“Dutch Authority”) is challenging, in the District Court in Amsterdam, the prior set-off by the Firm of approximately €124 million (plus accrued interest) of withholding tax credits against the Firm’s corporation tax liabilities for the tax years 2007 to 2013. The Dutch Authority alleges that the Firm was not entitled to receive the withholding tax credits on the basis, inter alia, that a Firm subsidiary did not hold legal title to certain securities subject to withholding tax on the relevant dates. The Dutch Authority has also alleged that the Firm failed to provide certain information to the Dutch Authority and keep adequate books and records. The Firm does not agree with these allegations. A hearing took place on September 19, 2017. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately €124 million (plus accrued interest).

12. Variable Interest Entities and Securitization Activities

Overview

For a discussion of the Firm’s VIEs, the determination and structure of VIEs and securitization activities, see Note 13 to the consolidated financial statements in the 2016 Form 10-K.

Consolidated VIEs

Assets and Liabilities by Type of Activity

 

    At September 30, 2017     At December 31, 2016  

$ in millions

 

VIE

Assets

    VIE
Liabilities
   

VIE

Assets

    VIE
Liabilities
 

Credit-linked notes

  $ 100     $     $ 501     $ —   

Other structured financings

    398       3       602       10   

MABS1

    90       69       397       283   

Other2

    1,156       260       910       25   

Total

  $ 1,744     $ 332     $ 2,410     $ 318   

 

1.

Amounts include transactions backed by residential mortgage loans, commercial mortgage loans and other types of assets, including consumer or commercial assets. The value of assets is determined based on the fair value of the liabilities and the interests owned by the Firm in such VIEs because the fair values for the liabilities and interests owned are more observable.

2.

Other primarily includes certain operating entities, investment funds and structured transactions.

 

 

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Assets and Liabilities by Balance Sheet Caption

 

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

Assets

   

Cash and due from banks

  $ 82     $ 74   

Trading assets at fair value

    741       1,295   

Customer and other receivables

    15       13   

Goodwill

    18       18   

Intangible assets

    160       177   

Other assets

    728       833   

Total

  $ 1,744     $ 2,410   

Liabilities

   

Other secured financings at fair value

  $ 297     $ 289   

Other liabilities and accrued expenses

    35       29   

Total

  $ 332     $ 318   

Consolidated VIE assets and liabilities are presented in the previous tables after intercompany eliminations. Most assets owned by consolidated VIEs cannot be removed unilaterally by the Firm and are not generally available to the Firm. Most related liabilities issued by consolidated VIEs are non-recourse to the Firm. In certain other consolidated VIEs, the Firm either has the unilateral right to remove assets or provides additional recourse through derivatives such as total return swaps, guarantees or other forms of involvement.

In general, the Firm’s exposure to loss in consolidated VIEs is limited to losses that would be absorbed on the VIE’s net assets recognized in its financial statements, net of amounts absorbed by third-party variable interest holders.

Select Information Related to Consolidated VIEs

 

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

Noncontrolling interests

   $ 197      $ 228   

Maximum exposure to losses1

            78   

 

1.

Primarily related to certain derivatives, commitments, guarantees and other forms of involvement not recognized in the financial statements.

Non-consolidated VIEs

The following tables include all VIEs in which the Firm has determined that its maximum exposure to loss is greater than specific thresholds or meets certain other criteria and exclude exposure to loss from liabilities due to immateriality. Most of the VIEs included in the following tables are sponsored by unrelated parties; the Firm’s involvement generally is the result of its secondary market-making activities, securities held in its Investment securities portfolio (see Note 5) and certain investments in funds.

Non-consolidated VIEs

 

     At September 30, 2017  
$ in millions    MABS      CDO      MTOB      OSF      Other  

VIE assets (unpaid principal balance)

   $ 78,134      $ 7,153      $ 5,149      $ 3,709      $ 33,041   

Maximum exposure to loss

 

  

Debt and equity interests

   $ 8,908      $ 1,162      $ 44      $ 1,551      $ 5,684   

Derivative and other contracts

                   3,237               50   

Commitments, guarantees and other

     850        1,007               169        451   

Total

   $ 9,758      $ 2,169      $ 3,281      $ 1,720      $ 6,185   

 

Carrying value of exposure to loss—Assets

 

  

Debt and equity interests

   $ 8,908      $ 1,162      $ 44      $ 1,145      $ 5,684   

Derivative and other contracts

                   6                

Total

   $ 8,908      $ 1,162      $ 50      $ 1,145      $ 5,689   

 

    At December 31, 2016  

$ in millions

  MABS     CDO     MTOB     OSF     Other  

VIE assets (unpaid principal balance)

  $ 101,916     $ 11,341     $ 4,857     $ 4,293     $ 39,077   

Maximum exposure to loss

 

 

Debt and equity interests

  $ 11,243     $ 1,245     $ 50     $ 1,570     $ 4,877   

Derivative and other contracts

                2,812             45   

Commitments, guarantees and other

    684       99             187       228   

Total

  $ 11,927     $ 1,344     $ 2,862     $ 1,757     $ 5,150   

 

Carrying value of exposure to loss—Assets

 

 

Debt and equity interests

  $ 11,243     $ 1,245     $ 49     $ 1,183     $ 4,877   

Derivative and other contracts

                5             18   

Total

  $ 11,243     $ 1,245     $ 54     $ 1,183     $ 4,895   

MTOB—Municipal tender option bonds

OSF—Other structured financings

Non-consolidated VIE Mortgage- and Asset-Backed Securitization Assets

 

   

At

September 30, 2017

   

At

December 31, 2016 

 
$ in millions   Unpaid
Principal
Balance
    Debt and
Equity
Interests
    Unpaid
Principal
Balance
    Debt and
Equity
Interests
 

Residential mortgages

  $ 13,043     $ 910     $ 4,775     $ 458   

Commercial mortgages

    43,920       1,964       54,021       2,656   

U.S. agency collateralized mortgage obligations

    12,015       2,723       14,796       2,758   

Other consumer or commercial loans

    9,156       3,311       28,324       5,371   

Total

  $ 78,134     $ 8,908     $ 101,916     $ 11,243   

The Firm’s maximum exposure to loss presented above often differs from the carrying value of the variable interests held by the Firm. The maximum exposure to loss presented above is dependent on the nature of the Firm’s variable interest in the VIEs and is limited to the notional amounts of certain liquidity facilities, other credit support, total return swaps,

 

 

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written put options, and the fair value of certain other derivatives and investments the Firm has made in the VIEs. Liabilities issued by VIEs generally are non-recourse to the Firm. Where notional amounts are utilized in quantifying the maximum exposure related to derivatives, such amounts do not reflect fair value write-downs already recorded by the Firm.

The Firm’s maximum exposure to loss presented above does not include the offsetting benefit of any financial instruments that the Firm may utilize to hedge these risks associated with its variable interests. In addition, the Firm’s maximum exposure to loss presented above is not reduced by the amount of collateral held as part of a transaction with the VIE or any party to the VIE directly against a specific exposure to loss.

Securitization transactions generally involve VIEs. Primarily as a result of its secondary market-making activities, the Firm owned additional VIE assets mainly issued by securitization SPEs for which the maximum exposure to loss is less than specific thresholds. These additional assets totaled $11.9 billion and $11.7 billion at September 30, 2017 and December 31, 2016, respectively.

These assets were either retained in connection with transfers of assets by the Firm, acquired in connection with secondary market-making activities, held as AFS securities in its Investment securities portfolio (see Note 5), or held as investments in funds. At September 30, 2017 and December 31, 2016, these assets consisted of securities backed by residential mortgage loans, commercial mortgage loans or other consumer loans, such as credit card receivables, automobile loans and student loans, CDOs or CLOs, and investment funds.

The Firm’s primary risk exposure is to the securities issued by the SPE owned by the Firm, with the highest risk on the most subordinate class of beneficial interests. These assets generally are included in Trading assets—Corporate and other debt, Trading assets—Investments or AFS securities within its Investment securities portfolio and are measured at fair value (see Note 3). The Firm does not provide additional support in these transactions through contractual facilities, such as liquidity facilities, guarantees or similar derivatives. The Firm’s maximum exposure to loss generally equals the fair value of the assets owned.

Transactions with SPEs in which the Firm, acting as principal, transferred financial assets with continuing involvement and received sales treatment are shown in the following tables.

Transfers of Assets with Continuing Involvement

 

    At September 30, 2017  
$ in millions  

Residential
Mortgage
Loans

    Commercial
Mortgage
Loans
    U.S. Agency
Collateralized
Mortgage
Obligations
   

Credit-
Linked
Notes and

Other1

 

SPE assets (unpaid principal balance)2

  $ 16,173      $ 55,682      $ 11,363      $ 11,602   

Retained interests

       

Investment grade3

  $ —      $ 233      $ 682      $  

Non-investment grade
(fair value)

          139        —        638   

Total

  $     $ 372      $ 682      $ 643   

Interests purchased in the secondary market (fair value)

 

 

Investment grade

  $ —      $ 68      $ 26      $ —   

Non-investment grade

    38        81        —        —   

Total

  $ 38      $ 149      $ 26      $ —   

Derivative assets (fair value)

  $ —      $ —      $ —      $ 239   

Derivative liabilities (fair value)

    —        —        —        72   
   

 

At December 31, 2016

 
$ in millions  

Residential
Mortgage
Loans

    Commercial
Mortgage
Loans
    U.S. Agency
Collateralized
Mortgage
Obligations
   

Credit-
Linked
Notes and

Other1

 

SPE assets (unpaid principal balance)2

  $ 19,381      $ 43,104      $ 11,092      $ 11,613   

Retained interests (fair value)

       

Investment grade

  $ —      $ 22      $ 375      $ —   

Non-investment grade

          79        —        826   

Total

  $     $ 101      $ 375      $ 826   

Interests purchased in the secondary market (fair value) 

 

 

Investment grade

  $ —      $ 30      $ 26      $ —   

Non-investment grade

    23        75        —        —   

Total

  $ 23      $ 105      $ 26      $ —   

Derivative assets (fair value)

  $ —      $ 261      $ —      $ 89   

Derivative liabilities (fair value)

    —        —        —        459   

 

1.

Amounts include CLO transactions managed by unrelated third parties.

2.

Amounts include assets transferred by unrelated transferors.

3.

Amounts include $692 million of investment grade retained interests at fair value.

 

     Fair Value at September 30, 2017  
$ in millions        Level 2              Level 3              Total      

Retained interests

        

 

Investment grade

  

 

$

 

687 

 

 

  

 

$

 

 

 

  

 

$

 

692 

 

 

Non-investment grade

     48         731         779   

Total

   $ 735       $ 736       $ 1,471   

Interests purchased in the secondary market

 

Investment grade

   $ 93       $      $ 94   

Non-investment grade

     106         13         119   

Total

   $ 199       $ 14       $ 213   

Derivative assets

   $ 77       $ 162       $ 239   

Derivative liabilities

     67                72   
 

 

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    Fair Value at December 31, 2016  
$ in millions         Level 2                 Level 3                 Total        

Retained interests

     

Investment grade

  $ 385     $ 12     $ 397   

Non-investment grade

    14       895       909   

Total

  $ 399     $ 907     $ 1,306   

Interests purchased in the secondary market

 

Investment grade

  $ 56     $     $ 56   

Non-investment grade

    84       14       98   

Total

  $ 140     $ 14     $ 154   

Derivative assets

  $ 348     $ 2     $ 350   

Derivative liabilities

    98       361       459   

Transferred assets are carried at fair value prior to securitization, and any changes in fair value are recognized in the income statements. The Firm may act as underwriter of the beneficial interests issued by these securitization vehicles. Investment banking underwriting net revenues are recognized in connection with these transactions. The Firm may retain interests in the securitized financial assets as one or more tranches of the securitization. These retained interests are generally carried at fair value in the balance sheets with changes in fair value recognized in the income statements.

Proceeds from New Securitization Transactions and Sales of Loans

 

   

Three Months Ended

 

September 30,

   

Nine Months Ended

 

September 30,

 
$ in millions       2017             2016             2017             2016      

New transactions1

  $ 6,875     $ 6,819     $ 17,622     $ 13,695   

Retained interests

    648       768       1,607       1,901   

Sales of corporate loans to
CLO SPEs1,2

    56       199       148       230   

 

1.

Net gains on new transactions and sales of corporate loans to CLO entities at the time of the sale were not material for all periods presented.

2.

Sponsored by non-affiliates.

The Firm has provided, or otherwise agreed to be responsible for, representations and warranties regarding certain assets transferred in securitization transactions sponsored by the Firm (see Note 11).

The Firm also enters into transactions in which it sells equity securities and contemporaneously enters into bilateral OTC equity derivatives with the purchasers of the securities, through which it retains the exposure to the securities as shown in the following table.

Assets Sold with Retained Exposure

 

$ in millions  

 At September 30, 

2017

     At December 31, 
2016
 

Carrying value of assets derecognized at
the time of sale and gross cash
proceeds

  $ 14,458     $ 11,209   

Fair value

   

Assets sold

    14,618       11,301   

Derivative assets recognized in the
balance sheets

    177       128   

Derivative liabilities recognized in the
balance sheets

    17       36   

Failed Sales

For transfers that fail to meet the accounting criteria for a sale, the Firm continues to recognize the assets in Trading assets at fair value, and the Firm recognizes the associated liabilities in Other secured financings at fair value in the balance sheets (see Note 10).

The assets transferred to certain unconsolidated VIEs in transactions accounted for as failed sales cannot be removed unilaterally by the Firm and are not generally available to the Firm. The related liabilities are also non-recourse to the Firm. In certain other failed sale transactions, the Firm has the right to remove assets or provides additional recourse through derivatives such as total return swaps, guarantees or other forms of involvement.

Carrying Value of Assets and Liabilities Related to Failed Sales

 

   

At September 30,

2017

   

At December 31,

2016

 
$ in millions     Assets         Liabilities         Assets         Liabilities    

Failed sales

  $ 858     $ 858     $ 285     $ 285   

13. Regulatory Requirements

Regulatory Capital Framework and Requirements

For a discussion of the Firm’s regulatory capital framework, see Note 14 to the consolidated financial statements in the 2016 Form 10-K.

The Firm is required to maintain minimum risk-based and leverage capital ratios under the regulatory capital requirements. A summary of the calculations of regulatory capital, risk-weighted assets (“RWAs”) and transition provisions follows.

The Firm’s risk-based capital ratios for purposes of determining regulatory compliance are the lower of the capital ratios computed under (i) the standardized approaches for calculating credit risk and market risk RWAs (the “Standardized Approach”) and (ii) the applicable advanced approaches for calculating credit risk, market risk and operational risk RWAs (the “Advanced Approach”).

 

 

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Minimum risk-based capital ratio requirements apply to Common Equity Tier 1 capital, Tier 1 capital and Total capital. Certain adjustments to and deductions from capital are required for purposes of determining these ratios, such as goodwill, intangible assets, certain deferred tax assets, other amounts in AOCI and investments in the capital instruments of unconsolidated financial institutions. Certain of these adjustments and deductions are also subject to transitional provisions.

In addition to the minimum risk-based capital ratio requirements, on a fully phased-in basis by 2019, the Firm will be subject to:

 

 

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

 

 

The Common Equity Tier 1 global systemically important bank capital surcharge, currently at 3%; and

 

 

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

In 2017, the phase-in amount for each of the buffers is 50% of the fully phased-in buffer requirement. Failure to maintain the buffers will result in restrictions on the Firm’s ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers.

The methods for calculating each of the Firm’s risk-based capital ratios will change through January 1, 2022 as aspects of the capital rules are phased in. These changes may result in differences in the Firm’s reported capital ratios from one reporting period to the next that are independent of changes to its capital base, asset composition, off-balance sheet exposures or risk profile.

For a further discussion of the Firm’s calculation of risk-based capital ratios, see Note 14 to the consolidated financial statements in the 2016 Form 10-K.

The Firm’s Regulatory Capital and Capital Ratios

At September 30, 2017, the Firm’s ratios are based on the Standardized Approach transitional rules. At December 31, 2016, the Firm’s ratios were based on the Advanced Approach transitional rules.

Regulatory Capital

 

     At September 30, 2017  

$ in millions

       Amount            Ratio        Minimum
Capital
Ratio1
 

Common Equity Tier 1 capital

   $ 62,214          16.9%          7.3%   

Tier 1 capital

     71,006          19.3%          8.8%   

Total capital

     81,861          22.2%          10.8%   

Tier 1 leverage

              8.4%          4.0%   

Total RWAs

   $ 368,629          N/A          N/A  

Adjusted average assets2

     841,360          N/A          N/A  
    

 

At December 31, 2016

 

$ in millions

       Amount            Ratio        Minimum
Capital
Ratio1
 

Common Equity Tier 1 capital

   $ 60,398          16.9%          5.9%   

Tier 1 capital

     68,097          19.0%          7.4%   

Total capital

     78,642          22.0%          9.4%   

Tier 1 leverage

              8.4%          4.0%   

Total RWAs

   $ 358,141          N/A          N/A  

Adjusted average assets2

     811,402          N/A          N/A  

N/A—Not Applicable

1.

Percentages represent minimum regulatory capital ratios under the transitional rules.

2.

Adjusted average assets represent the denominator of the Tier 1 leverage ratio and are composed of the average daily balance of consolidated on-balance sheet assets under U.S. GAAP during the current quarter and the quarter ended December 31, 2016, respectively, adjusted for disallowed goodwill, transitional intangible assets, certain deferred tax assets, certain investments in the capital instruments of unconsolidated financial institutions and other adjustments.

U.S. Bank Subsidiaries’ Regulatory Capital and Capital Ratios

Morgan Stanley Bank, N.A. (“MSBNA”) and Morgan Stanley Private Bank, National Association (“MSPBNA”) (collectively, “U.S. Bank Subsidiaries”) are subject to similar regulatory capital requirements as the Firm. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on the U.S. Bank Subsidiaries’ financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, each of the U.S. Bank Subsidiaries must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.

Each U.S. depository institution subsidiary of the Firm must be well-capitalized in order for the Firm to continue to qualify as a financial holding company and to continue to engage in the broadest range of financial activities permitted for financial holding companies. Under regulatory capital requirements adopted by the U.S. federal banking agencies, U.S. depository institutions must maintain certain minimum capital ratios in order to be considered well-capitalized. At September 30, 2017 and December 31, 2016, the Firm’s U.S. Bank Subsidi-

 

 

September 2017 Form 10-Q   84  


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aries maintained capital at levels sufficiently in excess of the universally mandated well-capitalized requirements to address any additional capital needs and requirements identified by the U.S. federal banking regulators.

At September 30, 2017 and December 31, 2016, the U.S. Bank Subsidiaries’ ratios are based on the Standardized Approach transitional rules.

MSBNA’s Regulatory Capital

 

    At September 30, 2017  

 $ in millions

  Amount      Ratio     Minimum
Capital
Ratio1
 

 Common Equity Tier 1 capital

  $ 14,839        19.3     6.5%  

 Tier 1 capital

    14,839        19.3     8.0%  

 Total capital

    15,110        19.7     10.0%  

 Tier 1 leverage

    14,839        11.8     5.0%  
   

 

At December 31, 2016

 

 $ in millions

  Amount      Ratio     Minimum
Capital
Ratio1
 

 Common Equity Tier 1 capital

  $ 13,398        16.9     6.5%  

 Tier 1 capital

    13,398        16.9     8.0%  

 Total capital

    14,858        18.7     10.0%  

 Tier 1 leverage

    13,398        10.5     5.0%  

 

1.

Capital ratios that are required in order to be considered well-capitalized for U.S. regulatory purposes.

MSPBNA’s Regulatory Capital

 

    At September 30, 2017  

 $ in millions

  Amount      Ratio     Minimum
Capital
Ratio1
 

 Common Equity Tier 1 capital

  $ 6,082        24.6     6.5%  

 Tier 1 capital

    6,082        24.6     8.0%  

 Total capital

    6,124        24.8     10.0%  

 Tier 1 leverage

    6,082        9.8     5.0%  
   

 

At December 31, 2016

 

 $ in millions

  Amount      Ratio     Minimum
Capital
Ratio1
 

 Common Equity Tier 1 capital

  $ 5,589        26.1     6.5%  

 Tier 1 capital

    5,589        26.1     8.0%  

 Total capital

    5,626        26.3     10.0%  

 Tier 1 leverage

    5,589        10.6     5.0%  

 

1.

Capital ratios that are required in order to be considered well-capitalized for U.S. regulatory purposes.

U.S. Broker-Dealer Regulatory Capital Requirements

MS&Co. Regulatory Capital

 

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

Net capital

  $ 10,613     $ 10,311   

Excess net capital

    8,558       8,034   

Morgan Stanley & Co. LLC (“MS&Co.”) is a registered U.S. broker-dealer and registered futures commission merchant and, accordingly, is subject to the minimum net capital requirements of the U.S. Securities and Exchange Commission (“SEC”) and the U.S. Commodity Futures Trading Commission (“CFTC”). MS&Co. has consistently operated with capital in excess of its regulatory capital requirements.

As an Alternative Net Capital broker-dealer, and in accordance with the market and credit risk standards of Appendix E of SEC Rule 15c3-1, MS&Co. is subject to minimum net capital and tentative net capital requirements. In addition, MS&Co. must notify the SEC if its tentative net capital falls below certain levels. At September 30, 2017 and December 31, 2016, MS&Co. has exceeded its net capital requirement and has tentative net capital in excess of the minimum and notification requirements.

MSSB LLC Regulatory Capital

 

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

Net capital

  $ 2,573     $ 3,946  

Excess net capital

    2,415       3,797  

Morgan Stanley Smith Barney LLC (“MSSB LLC”) is a registered U.S. broker-dealer and introducing broker for the futures business and, accordingly, is subject to the minimum net capital requirements of the SEC. MSSB LLC has consistently operated with capital in excess of its regulatory capital requirements.

Other Regulated Subsidiaries

Morgan Stanley & Co. International plc (“MSIP”), a London-based broker-dealer subsidiary, is subject to the capital requirements of the Prudential Regulation Authority, and Morgan Stanley MUFG Securities Co., Ltd. (“MSMS”), a Tokyo-based broker-dealer subsidiary, is subject to the capital requirements of the Financial Services Agency. MSIP and MSMS have consistently operated with capital in excess of their respective regulatory capital requirements.

Certain other U.S. and non-U.S. subsidiaries of the Firm are subject to various securities, commodities and banking regulations, and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. These subsidiaries have consistently operated with capital in excess of their local capital adequacy requirements.

 

 

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14. Total Equity

Dividends and Share Repurchases

 

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

Repurchases of common stock

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

On June 28, 2017, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) announced that they did not object to the Firm’s 2017 capital plan (“Capital Plan”). The Capital Plan includes the share repurchase of up to $5.0 billion of outstanding common stock for the period beginning July 1, 2017 through June 30, 2018, an increase from $3.5 billion in the 2016 Capital Plan. Additionally, the Capital Plan includes an increase in the quarterly common stock dividend to $0.25 per share from $0.20 per share, beginning with the common stock dividend declared on July 19, 2017.

On October 17, 2017, the Firm announced that the Board of Directors (the “Board”) declared a quarterly dividend per common share of $0.25. The dividend is payable on November 15, 2017 to common shareholders of record on October 31, 2017.

Preferred Stock

 

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

Dividends declared

  $ 93     $ 78     $ 353     $ 312  

For a description of Series A through Series K preferred stock issuances, see Note 15 to the consolidated financial statements in the 2016 Form 10-K. On September 15, 2017, the Firm announced that the Board declared quarterly dividends for preferred stock shareholders of record on September 29, 2017 that were paid on October 16, 2017. The Firm is authorized to issue 30 million shares of preferred stock. The preferred stock has a preference over the common stock upon liquidation. The Firm’s preferred stock qualifies as Tier 1 capital in accordance with regulatory capital requirements (see Note 13).

Series K Preferred Stock. The Series K Preferred Stock offering (net of related issuance costs) in January 2017 resulted in proceeds of approximately $994 million.

Preferred Stock Outstanding

 

    Shares
Outstanding
   

Liquidation
Preference
per Share

 

    Carrying Value  
$ in millions,
except per
share data
  At
September 30,
2017
      At
September 30,
2017
    At
December 31,
2016
 

Series

                               

A

    44,000      $           25,000     $                     1,100     $                 1,100   

C1

    519,882       1,000       408       408   

E

    34,500       25,000       862       862   

F

    34,000       25,000       850       850   

G

    20,000       25,000       500       500   

H

    52,000       25,000       1,300       1,300   

I

    40,000       25,000       1,000       1,000   

J

    60,000       25,000       1,500       1,500   

K

    40,000       25,000       1,000       —   

Total

 

  $ 8,520     $ 7,520   

 

1.

Series C is composed of the issuance of 1,160,791 shares of Series C Preferred Stock to MUFG for an aggregate purchase price of $911 million, less the redemption of 640,909 shares of Series C Preferred Stock of $503 million, which were converted to common shares of approximately $705 million.

Comprehensive Income (Loss)

Accumulated Other Comprehensive Income (Loss)1

 

$ in millions   Foreign
Currency
Translation
Adjustments
    AFS
Securities
    Pensions,
Postretirement
and Other
    DVA     Total  

June 30, 2017

  $ (856   $ (396   $ (470   $     (766   $     (2,488)  

OCI during the period

    61       26             (143     (56)  

September 30, 2017

  $ (795   $ (370   $ (470   $ (909   $ (2,544)  

 

June 30, 2016

  $ (779   $ 219     $ (378   $ 33     $ (905)  

OCI during the period

    25       (99     (1     (90     (165)  

September 30, 2016

  $ (754   $ 120     $ (379   $ (57   $ (1,070)  

 

December 31, 2016

  $ (986   $ (588   $ (474   $ (595   $ (2,643)  

OCI during the period

    191       218       4       (314     99   

September 30, 2017

  $ (795   $ (370   $ (470   $ (909   $ (2,544)  

 

December 31, 2015

  $ (963   $ (319   $ (374   $     $ (1,656)  

Cumulative adjustment for
accounting change
related to DVA2

                      (312     (312)  

OCI during the period

    209       439       (5     255       898   

September 30, 2016

  $ (754   $ 120     $ (379   $ (57   $ (1,070)  

 

1.

Amounts net of tax and noncontrolling interests.

2.

In accordance with the early adoption of a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities, a cumulative catch-up adjustment was recorded as of January 1, 2016 to move the cumulative unrealized DVA amount, net of noncontrolling interests and tax, related to outstanding liabilities under the fair value option election from Retained earnings into AOCI. See Note 2 to the consolidated financial statements in the 2016 Form 10-K for further information.

 

 

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Period Changes in OCI Components

 

    Three Months Ended  
   

 

September 30, 2017

 
 $ in millions   Pre-tax
gain (loss)
    Income tax
benefit
(provision)
    After-tax
gain (loss)
   

Non-

controlling
interests

      Net    

 Foreign currency translation adjustments

 

 

 OCI activity

  $              19     $              42     $              61     $               —     $               61    

 Reclassified to
earnings

                            —    

 Net OCI

  $ 19     $ 42     $ 61     $     $ 61    

 

 Change in net unrealized gains (losses) on AFS securities

 

 

 OCI activity

  $ 52     $ (19   $ 33     $     $ 33    

 Reclassified to
earnings1

    (11     4       (7           (7)   

 Net OCI

  $ 41     $ (15   $ 26     $     $ 26    

 

 Pension, postretirement and other

 

 

 OCI activity

  $     $     $     $     $ —    

 Reclassified to
earnings1

    1       (1                 —    

 Net OCI

  $ 1     $ (1   $     $     $ —    

 

 Change in net DVA

 

 

 OCI activity

  $ (220   $ 77     $ (143   $ (6   $ (137)   

 Reclassified to
earnings1

    (9     3       (6           (6)   

 Net OCI

  $ (229   $ 80     $ (149   $ (6   $ (143)   

 

    Three Months Ended  
   

 

September 30, 2016

 
 $ in millions   Pre-tax
gain (loss)
    Income tax
benefit
(provision)
    After-tax
gain (loss)
   

Non-

controlling
interests

      Net    

 Foreign currency translation adjustments

 

 

 OCI activity

  $               13     $               30     $               43     $               18     $               25    

 Reclassified to
earnings

                            —    

 Net OCI

  $ 13     $ 30     $ 43     $ 18     $ 25    

 

 Change in net unrealized gains (losses) on AFS securities

 

 

 OCI activity

  $ (112   $ 41     $ (71   $     $ (71)   

 Reclassified to
earnings1

    (45     17       (28           (28)   

 Net OCI

  $ (157   $ 58     $ (99   $     $ (99)   

 

 Pension, postretirement and other

 

 

 OCI activity

  $     $     $     $     $ —    

 Reclassified to
earnings1

    (1           (1           (1)   

 Net OCI

  $ (1   $     $ (1   $     $ (1)   

 

 Change in net DVA

 

 

 OCI activity

  $ (149   $ 52     $ (97   $ (3   $ (94)   

 Reclassified to
earnings1

    6       (2     4             4    

 Net OCI

  $ (143   $ 50     $ (93   $ (3   $ (90)   

 

 

    Nine Months Ended  
   

 

September 30, 2017

 
 $ in millions   Pre-tax
gain (loss)
    Income tax
benefit
(provision)
    After-tax
gain (loss)
   

Non-

controlling
interests

      Net    

 Foreign currency translation adjustments

 

 

 OCI activity

  $ 63     $ 160     $ 223     $ 32     $ 191    

 Reclassified to
earnings

                  —                     —                     —                     —                     —    

 Net OCI

  $ 63     $ 160     $ 223     $ 32     $ 191    

 

 Change in net unrealized gains (losses) on AFS securities

 

 

 OCI activity

  $ 374     $ (139   $ 235     $     $ 235    

 Reclassified to
earnings1

    (27     10       (17           (17)   

 Net OCI

  $ 347     $ (129   $ 218     $     $ 218    

 

 Pension, postretirement and other

 

 

 OCI activity

  $ 3     $     $ 3     $     $ 3    

 Reclassified to
earnings1

    2       (1     1             1    

 Net OCI

  $ 5     $ (1   $ 4     $     $ 4    

 

 Change in net DVA

 

 

 OCI activity

  $ (498   $ 175     $ (323   $ (9   $ (314)   

 Reclassified to earnings1

    (1     1                   —    

 Net OCI

  $ (499   $ 176     $ (323   $ (9   $ (314)   

 

    Nine Months Ended  
   

 

September 30, 20162

 
 $ in millions   Pre-tax
gain (loss)
    Income tax
benefit
(provision)
    After-tax
gain (loss)
   

Non-

controlling
interests

      Net    

 Foreign currency translation adjustments

 

 

 OCI activity

  $             156     $             204     $             360     $             151     $             209    

 Reclassified to
earnings

                            —    

 Net OCI

  $ 156     $ 204     $ 360     $ 151     $ 209    

 

 Change in net unrealized gains (losses) on AFS securities

 

 

 OCI activity

  $ 822     $ (303   $ 519     $     $ 519    

 Reclassified to
earnings1

    (127     47       (80           (80)   

 Net OCI

  $ 695     $ (256   $ 439     $     $ 439    

 

 Pension, postretirement and other

 

 

 OCI activity

  $ (6   $ 3     $ (3   $     $ (3)   

 Reclassified to
earnings1

    (3     1       (2           (2)   

 Net OCI

  $ (9   $ 4     $ (5   $     $ (5)   

 

 Change in net DVA

 

 

 OCI activity

  $ 440     $ (163   $ 277     $     $ 277    

 Reclassified to
earnings1

    (35     13       (22           (22)   

 Net OCI

  $ 405     $ (150   $ 255     $     $ 255    

 

1.

Amounts reclassified to earnings related to: realized gains and losses from sales of AFS securities are classified within Other revenues in the income statements; Pension, postretirement and other are classified within Compensation and benefits expenses in the income statements; and realization of DVA are classified within Trading revenues in the income statements.

2.

Exclusive of 2016 cumulative adjustment for accounting change related to DVA.

 

 

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Noncontrolling Interests

 

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

Noncontrolling interests

   $                                1,136      $                              1,127   

15. Earnings per Common Share

Calculation of Basic and Diluted Earnings per Common Share (“EPS”)

 

    Three Months Ended     Nine Months Ended  
   

 

September 30,

   

 

September 30,

 
in millions, except for per share data   2017     2016     2017      2016   

Basic EPS

       

Income from continuing operations

  $     1,785     $     1,632     $     5,574     $     4,442   

Income (loss) from discontinued
operations

    6       8       (21      

Net income

    1,791       1,640       5,553       4,443   

Net income applicable to
noncontrolling interests

    10       43       85       130   

Net income applicable to Morgan
Stanley

    1,781       1,597       5,468       4,313   

Less: Preferred stock dividends and other

    (93     (79     (353     (314)  

Earnings applicable to Morgan
Stanley common shareholders

  $ 1,688     $ 1,518     $ 5,115     $ 3,999   

Weighted average common
shares outstanding

    1,776       1,838       1,789       1,863   

Earnings per basic common share

 

   

Income from continuing operations

  $ 0.95     $ 0.82     $ 2.87     $ 2.15   

Income (loss) from discontinued
operations

          0.01       (0.01     —   

Earnings per basic common share

  $ 0.95     $ 0.83     $ 2.86     $ 2.15   

Diluted EPS

       

Earnings applicable to Morgan
Stanley common shareholders

  $ 1,688     $ 1,518     $ 5,115     $ 3,999   

Weighted average common shares
outstanding

    1,776       1,838       1,789       1,863   

Effect of dilutive securities:

       

Stock options and RSUs1

    42       41       41       35   

Weighted average common shares outstanding and common stock equivalents

    1,818       1,879       1,830       1,898   

Earnings per diluted common share

 

   

Income from continuing operations

  $ 0.93     $ 0.80     $ 2.81     $ 2.11   

Income (loss) from discontinued operations

          0.01       (0.02     —   

Earnings per diluted common share

  $ 0.93     $ 0.81     $ 2.79     $ 2.11   

Weighted average antidilutive RSUs and stock options (excluded from the computation of diluted EPS)1

          14             15   

 

1.

Restricted stock units (“RSUs”) that are considered participating securities are treated as a separate class of securities in the computation of basic EPS, and, therefore, such RSUs are not included as incremental shares in the diluted EPS computations.

16. Interest Income and Interest Expense

 

    Three Months Ended           Nine Months Ended  
   

 

September 30,

         

 

September 30,

 
$ in millions   2017     2016            2017      2016   

Interest income1

         

Investment securities

  $         313     $         289             $         943     $         762   

Loans

    853       698               2,399       2,026   

Interest bearing deposits with banks

    84       30               206       134   

Securities purchased under
agreements to resell
and Securities borrowed2

    76       (118             86       (315)  

Trading assets, net
of Trading liabilities

    506       526               1,461       1,651   

Customer receivables and Other3

    508       309               1,316       890   

Total interest income

  $ 2,340     $ 1,734             $ 6,411     $ 5,148   

 

Interest expense1

         

Deposits

  $ 63     $ 12             $ 88     $ 48   

Short-term and Long-term
borrowings

    1,109       814               3,197       2,633   

Securities sold under
agreements to repurchase
and Securities loaned4

    325       228               912       761   

Customer payables and Other5

    60       (323             (91     (1,109)  

Total interest expense

  $ 1,557     $ 731             $ 4,106     $ 2,333   

Net interest

  $ 783     $ 1,003             $ 2,305     $ 2,815   

 

1.

Interest income and Interest expense are classified in the income statements based on the nature of the instrument and related market conventions. When included as a component of the instrument’s fair value, interest is included within Trading revenues or Investments revenues. Otherwise, it is included within Interest income or Interest expense.

2.

Includes fees paid on Securities borrowed.

3.

Includes interest from customer receivables and cash deposited with clearing organizations or segregated under federal and other regulations or requirements.

4.

Includes fees received on Securities loaned.

5.

Includes fees received from prime brokerage customers for stock loan transactions incurred to cover customers’ short positions.

 

 

September 2017 Form 10-Q   88  


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17. Employee Benefit Plans

The Firm sponsors various retirement plans for the majority of its U.S. and non-U.S. employees. The Firm provides certain other postretirement benefits, primarily health care and life insurance, to eligible U.S. employees.

Components of the Net Periodic Benefit Expense (Income) for Pension and Other Postretirement Plans

 

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

Service cost, benefits earned during the period

  $ 4     $ 6     $ 12     $ 14   

Interest cost on projected benefit
obligation

    37       38       112       115   

Expected return on plan assets

    (29     (31     (87     (91)  

Net amortization of prior service
credit

    (4     (4     (12     (13)  

Net amortization of actuarial loss

    4       3       12        

Net periodic benefit expense
(income)

  $ 12     $ 12     $ 37     $ 34   

18. Income Taxes

The Firm is under continuous examination by the Internal Revenue Service (the “IRS”) and other tax authorities in certain countries, such as Japan and the United Kingdom (“U.K.”), and in states in which it has significant business operations, such as New York. The Firm has established a liability for unrecognized tax benefits, and associated interest, if applicable (“tax liabilities”), that it believes is adequate in relation to the potential for additional assessments. Once established, the Firm adjusts such tax liabilities only when new information is available or when an event occurs necessitating a change.

The Firm is currently at various levels of field examination with respect to audits by the IRS, as well as New York State and New York City, for tax years 2009-2012 and 2007-2014, respectively. In April 2016, the Firm received a notification from the IRS that the Congressional Joint Committee on Taxation approved the final report of an Appeals Office review of matters from tax years 1999-2005. In June 2016, the Firm received an amended Revenue Agent’s Report for tax years 2006-2008. Over the next 12 months the Firm expects to receive new information related to multi-year IRS field audit examinations that may prompt an overall net decrease in the Firm’s recorded tax liabilities.

The Firm believes that the resolution of the above tax matters will not have a material effect on the annual financial statements, although a resolution could have a material impact on the income statements and effective tax rate for any period in which such resolution occurs.

In March 2017, the Firm filed claims with the IRS to contest certain items associated with tax years 1999-2005, the resolution of which is not expected to have a material impact on the annual financial statements or effective tax rate. Additionally, during 2017, the Firm expects to reach a conclusion with the U.K. tax authorities on substantially all issues through tax year 2010, the resolution of which is not expected to have a material impact on the annual financial statements or effective tax rate.

See Note 11 regarding the Dutch Tax Authority’s challenge, in the District Court in Amsterdam (matters styled Case number 15/3637 and Case number 15/4353), of the Firm’s entitlement to certain withholding tax credits which may impact the balance of unrecognized tax benefits.

19. Segment and Geographic Information

Segment Information

For a discussion about the Firm’s business segments, see Note 21 to the consolidated financial statements in the 2016 Form 10-K.

Selected Financial Information by Business Segment

 

    Three Months Ended September 30, 2017  
$ in millions     IS          WM          IM1, 2          I/E          Total     

Total non-interest revenues

  $     4,618     $ 3,195     $ 676     $ (75   $ 8,414   

Interest income

    1,421       1,155       1       (237     2,340   

Interest expense

    1,663       130       2       (238     1,557   

Net interest

    (242     1,025       (1     1       783   

Net revenues

  $ 4,376     $ 4,220     $ 675     $ (74   $ 9,197   

Income from continuing operations before income taxes

  $ 1,236     $ 1,119     $ 131     $ (4   $ 2,482   

Provision for income taxes

    260       421       16             697   

Income from continuing operations

    976       698       115       (4     1,785   

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

    6                          

Net income

    982       698       115       (4     1,791   

Net income applicable to noncontrolling interests

    9             1             10   

Net income applicable
to Morgan Stanley

  $ 973     $ 698     $ 114     $ (4   $ 1,781   
 

 

  89   September 2017 Form 10-Q


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    Three Months Ended September 30, 2016  
$ in millions   IS     WM     IM1, 2     I/E     Total  

Total non-interest
revenues

  $    4,436     $    2,996     $      551     $ (77   $    7,906    

Interest income

    980       979       1         (226     1,734    

Interest expense

    863       94             (226     731    

Net interest

    117       885       1             1,003    

Net revenues

  $ 4,553     $ 3,881     $ 552     $ (77   $ 8,909    

Income from continuing
operations before
income taxes

  $ 1,383     $ 901     $ 97     $     $ 2,381    

Provision for income taxes

    381       337       31             749    

Income from continuing
operations

    1,002       564       66             1,632    

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

    8                         8    

Net income

    1,010       564       66             1,640    

Net income (loss) applicable
to noncontrolling interests

    44             (1           43    

Net income applicable
to Morgan Stanley

  $ 966     $ 564     $ 67     $     $ 1,597    
   

 

Nine Months Ended September 30, 2017

 
$ in millions   IS3     WM     IM1, 2     I/E     Total  

Total non-interest
revenues

  $ 15,017     $ 9,401     $ 1,949     $ (227   $ 26,140   

Interest income

    3,788       3,348       3       (728     6,411   

Interest expense

    4,515       320       3       (732     4,106   

Net interest

    (727     3,028             4       2,305   

Net revenues

  $ 14,290     $ 12,429     $ 1,949     $ (223   $ 28,445   

Income from continuing
operations before
income taxes

  $ 4,409     $ 3,149     $ 376     $ (2   $ 7,932   

Provision for income taxes

    1,132       1,139       87             2,358   

Income from continuing
operations

    3,277       2,010       289       (2     5,574   

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

    (21                       (21)  

Net income

    3,256       2,010       289       (2     5,553   

Net income applicable
to noncontrolling interests

    77             8             85   

Net income applicable
to Morgan Stanley

  $ 3,179     $ 2,010     $ 281     $ (2   $ 5,468   
    Nine Months Ended September 30, 2016  
$ in millions   IS4     WM4     IM1, 2     I/E     Total  

Total non-interest
revenues

  $ 12,577     $ 8,815     $ 1,610     $ (207   $ 22,795   

Interest income

    2,999       2,813       5       (669     5,148   

Interest expense

    2,731       268       3       (669     2,333   

Net interest

    268       2,545       2             2,815   

Net revenues

  $   12,845     $   11,360     $     1,612     $   (207   $ 25,610   

Income from continuing
operations before
income taxes

  $ 3,797     $ 2,546     $ 259     $     $ 6,602   

Provision for income taxes

    1,109       973       78             2,160   

Income from continuing
operations

    2,688       1,573       181             4,442   

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

    1                          

Net income

    2,689       1,573       181             4,443   

Net income (loss) applicable
to noncontrolling interests

    144             (14           130   

Net income applicable
to Morgan Stanley

  $ 2,545     $ 1,573     $ 195     $     $ 4,313   

IS—Institutional Securities

WM—Wealth Management

IM—Investment Management

I/E—Intersegment eliminations

 

1.

For further information on fee waiver amounts see the table below.

2.

For further information on net unrealized performance-based fee amounts see the table below.

3.

During the current year period, the Firm recorded a provision of $86 million for potential additional value-added tax, interest and penalties in relation to certain intercompany service activities provided to our U.K. group.

4.

Effective July 1, 2016, the Institutional Securities and Wealth Management business segments entered into an agreement, whereby Institutional Securities assumed management of Wealth Management’s fixed income client-driven trading activities and employees. Institutional Securities now pays fees to Wealth Management based on distribution activity (collectively, the “Fixed Income Integration”). Prior periods have not been recast for this new intersegment agreement due to immateriality.

The Firm waives a portion of its fees in the Investment Management business segment from certain registered money market funds that comply with the requirements of Rule 2a-7 of the Investment Company Act of 1940.

Reduction of Fees due to Fee Waivers

 

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

Fee waivers

  $ 20     $ 26     $ 66     $ 61   

In certain management fee arrangements, the Firm is entitled to receive performance-based fees (also referred to as incentive fees and includes carried interest) when the return on assets under management exceeds certain benchmark returns or other performance targets. In such arrangements, performance fee revenues are accrued (or reversed) quarterly based on measuring account/fund performance to date versus the performance benchmark stated in the investment management

 

 

September 2017 Form 10-Q   90  


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agreement. The Firm’s portion of net unrealized cumulative performance-based fees (for which the Firm is not obligated to pay compensation) are at risk of reversing if the fund performance falls below the stated investment management agreement benchmarks. See Note 11 for information regarding general partner guarantees, which include potential obligations to return performance fee distributions previously received.

Net Unrealized Performance-based Fees

 

$ in millions  

  At September 30,  

2017

   

  At December 31,  

2016

 

Net unrealized cumulative
performance-based fees at risk of reversing

  $ 450     $ 397   

Total Assets by Business Segment

 

$ in millions  

  At September 30,  

2017

   

   At December 31,   

2016

 

Institutional Securities

  $ 668,281     $ 629,149   

Wealth Management

    180,628       181,135   

Investment Management

    4,784       4,665   

Total1

  $ 853,693     $ 814,949   

 

1.

Corporate assets have been fully allocated to the business segments.

Geographic Information

For a discussion about the Firm’s geographic net revenues, see Note 21 to the consolidated financial statements in the 2016 Form 10-K.

Net Revenues by Region

 

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

Americas

  $ 6,833     $ 6,624     $ 20,667     $ 18,914   

EMEA

    1,325       1,236       4,420       3,677   

Asia-Pacific

    1,039       1,049       3,358       3,019   

Net revenues

  $ 9,197     $ 8,909     $ 28,445     $ 25,610   

20. Subsequent Events

The Firm has evaluated subsequent events for adjustment to or disclosure in the financial statements through the date of this report and has not identified any recordable or disclosable events not otherwise reported in these financial statements or the notes thereto.

 

 

  91   September 2017 Form 10-Q


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Average Balances and Interest Rates and Net Interest Income

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     Three Months Ended September 30,  
     2017     2016  
$ in millions   

Average

Daily Balance

       Interest      

Annualized

  Average Rate  

   

Average

Daily Balance

     Interest     

Annualized    

Average Rate    

 

Interest earning assets1

               

Investment securities2

   $ 73,599      $ 313       1.7   $ 79,948      $ 289        1.4 %  

Loans2

     99,655        853       3.4       91,010        698        3.0      

Interest bearing deposits with banks2

     25,196        84       1.3       23,993        30        0.5      

Securities purchased under agreements
to resell and Securities borrowed3:

               

U.S.

     128,127        190       0.6       138,420        (58)        (0.2)     

Non-U.S.

     99,019        (114     (0.5     84,881        (60)        (0.3)     

Trading assets, net of Trading liabilities4:

               

U.S.

     58,000        463       3.2       52,490        452        3.4      

Non-U.S.

     5,826        43       3.0       12,001        74        2.4      

Customer receivables and Other5:

               

U.S.

     47,916        364       3.0       48,637        298        2.4      

Non-U.S.

     25,429        144       2.2       22,162        11        0.2      

Total

   $ 562,767      $ 2,340       1.7   $ 553,542      $ 1,734        1.2 %  

Interest bearing liabilities1

 

            

Deposits2

   $ 150,116      $ 63       0.2   $ 153,036      $ 12        — %  

Short-term and Long-term borrowings2, 6

     192,575        1,109       2.3       166,271        814        1.9      

Securities sold under agreements
to repurchase and Securities loaned7:

                                                   

U.S.

     30,027        234       3.1       33,361        133        1.6      

Non-U.S.

     38,536        91       0.9       33,487        95        1.1      

Customer payables and Other8:

                                                   

U.S.

     129,365        (13           125,931        (217)        (0.7)     

Non-U.S.

     66,697        73       0.4       64,241        (106)        (0.7)     

Total

   $ 607,316      $ 1,557       1.0   $ 576,327      $ 731        0.5 %  

Net interest income
and net interest rate spread

            $ 783       0.7            $ 1,003        0.7 %  

 

September 2017 Form 10-Q   92  


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Average Balances and Interest Rates and Net Interest Income

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     Nine Months Ended September 30,  
     2017     2016  
$ in millions   

Average

Daily Balance

       Interest      

Annualized

  Average Rate  

   

Average

Daily Balance

     Interest      Annualized  
Average Rate  
 

Interest earning assets1

               

Investment securities2

   $ 76,356      $ 943       1.7       $ 77,989      $ 762        1.3 %  

Loans2

     97,099        2,399       3.3       88,995        2,026        3.0      

Interest bearing deposits with banks2

     21,685        206       1.3       28,329        134        0.6      

Securities purchased under agreements
to resell and Securities borrowed3:

               

U.S.

     126,738        406       0.4       148,918        (184)        (0.2)     

Non-U.S.

     96,419        (320     (0.4     84,802        (131)        (0.2)     

Trading assets, net of Trading liabilities4:

               

U.S.

     58,260        1,385       3.2       48,274        1,426        3.9      

Non-U.S.

     3,701        76       2.7       14,706        225        2.0      

Customer receivables and Other5:

               

U.S.

     49,155        950       2.6       47,723        838        2.3      

Non-U.S.

     24,514        366       2.0       22,209        52        0.3      

Total

   $ 553,927      $ 6,411       1.5       $ 561,945      $ 5,148        1.2 %  

Interest bearing liabilities1

 

            

Deposits2

   $ 150,244      $ 88       0.1       $ 155,598      $ 48        — %  

Short-term and Long-term borrowings2, 6

     181,544        3,197       2.4       163,474        2,633        2.2      

Securities sold under agreements
to repurchase and Securities loaned7:

               

U.S.

     31,958        651       2.7       32,183        424        1.8      

Non-U.S.

     39,449        261       0.9       29,970        337        1.5      

Customer payables and Other8:

               

U.S.

     128,420        (196     (0.2     126,468        (826)        (0.9)     

Non-U.S.

     64,257        105       0.2       64,221        (283)        (0.6)     

Total

   $ 595,872      $ 4,106       0.9       $ 571,914      $ 2,333        0.5 %  

Net interest income
and net interest rate spread

            $ 2,305       0.6            $       2,815        0.7 %  

 

1.

Certain revisions have been made to prior periods to conform to the current presentation.

2.

Amounts include primarily U.S. balances.

3.

Includes fees paid on Securities borrowed.

4.

Trading assets, net of Trading liabilities exclude non-interest earning assets and non-interest bearing liabilities, such as equity securities.

5.

Includes interest from customer receivables and cash deposited with clearing organizations or segregated under federal and other regulations or requirements.

6.

The Firm also issues structured notes that have coupon or repayment terms linked to the performance of debt or equity securities, indices, currencies or commodities, which are recorded within Trading revenues (see Note 3 to the financial statements).

7.

Includes fees received on Securities loaned.

8.

Includes fees received from prime brokerage customers for stock loan transactions incurred to cover customers’ short positions.

 

  93   September 2017 Form 10-Q


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Rate/Volume Analysis

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Effect of Volume and Rate Changes on Net Interest Income

 

    

Three Months Ended September 30, 2017

versus

Three Months Ended September 30, 2016

    

Nine Months Ended September 30, 2017

versus

Nine Months Ended September 30, 2016

 
    

Increase (decrease)

due to change in:

          

Increase (decrease)

due to change in:

       
$ in millions        Volume         Rate     Net Change          Volume         Rate     Net Change  

Interest earning assets

 

   

Investment securities

   $ (23   $ 47     $ 24      $ (16   $ 197     $ 181   

Loans

     66       89       155        184       189       373   

Interest bearing deposits with banks

     2       52       54        (31     103       72   

Securities purchased under agreements
to resell and Securities borrowed:

 

   

U.S.

     4       244       248        27       563       590   

Non-U.S.

     (10     (44     (54      (18     (171     (189)  

Trading assets, net of Trading liabilities:

             

U.S.

     47       (36     11        295       (336     (41)  

Non-U.S.

     (38     7       (31      (168     19       (149)  

Customer receivables and Other:

 

   

U.S.

     (4     70       66        25       87       112   

Non-U.S.

     2       131       133        5       309       314   

Change in interest income

   $ 46     $ 560     $ 606      $ 303     $ 960     $ 1,263   

Interest bearing liabilities

 

   

Deposits

   $     $ 51     $ 51      $ (2   $ 42     $ 40   

Short-term and Long-term borrowings

     129       166       295        291       273       564   

Securities sold under agreements
to repurchase and Securities loaned:

             

U.S.

     (13     114       101        (3     230       227   

Non-U.S.

     14       (18     (4      107       (183     (76)  

Customer payables and Other:

 

   

U.S.

     (6     210       204        (13     643       630   

Non-U.S.

     (4     183       179              388       388   

Change in interest expense

   $ 120     $             706     $ 826      $ 380     $         1,393     $ 1,773   

Change in net interest income

   $ (74   $ (146   $ (220    $ (77   $ (433   $ (510)  

 

September 2017 Form 10-Q   94  


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Other Information

Legal Proceedings

 

The following new matters and developments have occurred since previously reporting certain matters in the Firm’s Annual Report on Form 10-K for the year ended December 31, 2016 (the “Form 10-K”), the Firm’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017 (the “First Quarter Form 10-Q”) and the Firm’s Quarterly Report on Form 10-Q for the period ending June 30, 2017 (the “Second Quarter Form 10-Q”). See also the disclosures set forth under “Legal Proceedings” in Part I, Item 3 of the Form 10-K and Part II, Item 1 of the First Quarter Form 10-Q and the Second Quarter Form 10-Q.

Residential Mortgage and Credit Crisis Related Matters

On August 10, 2017, the plaintiff in Wilmington Trust Company v. Morgan Stanley Mortgage Capital Holdings LLC et al. filed a motion for leave to appeal the Appellate Division, First Department’s July 11, 2017 decision and order granting in part and denying in part the Firm’s motion to dismiss. On September 26, 2017, the Appellate Division, First Department denied plaintiff’s motion for leave to appeal.

On August 25, 2017, the parties in Morgan Stanley Mortgage Loan Trust 2006-4SL, et al. v. Morgan Stanley Mortgage Capital Inc. and Morgan Stanley Mortgage Loan Trust 2006-10SL, et al. v. Morgan Stanley Mortgage Capital Holdings LLC, as successor in interest to Morgan Stanley Mortgage Capital Inc. entered into agreements to settle the litigations, which are subject to court approval.

On September 11, 2017, the Firm moved to dismiss the second amended complaint in Phoenix Light SF Limited, et al. v. Morgan Stanley, et al.

On October 3, 2017, the Appellate Division, First Department denied the Firm’s motion for leave to appeal in Deutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al.

Other Matters

On September 8, 2017, the court in In Re Foreign Exchange Benchmark Rates Antitrust Litigation granted an order preliminarily approving the Firm’s settlement.

On October 5, 2017, various institutional investors filed a claim against the Firm and another bank in a matter styled Case number BS 99-6998/2017, filed in the City Court of Copenhagen, Denmark concerning their roles as underwriters of the initial public offering (“IPO”) in March 2014 of the Danish company OW Bunker A/S. The claim is based on alleged prospectus liability and seeks damages of DKK 534,270,456 (approximately US$85 million) plus interest in respect of alleged losses arising from investing in shares in OW Bunker, which entered into bankruptcy in November 2014. Separately, on September 12, 2017, representatives of another group of institutional investors gave formal notice of their intention to commence legal proceedings against the Firm and the other bank. The investors are expected to join the Firm and the other bank to pending proceedings in Copenhagen, Denmark against various other parties involved in the IPO in a matter styled Case number B-2073-16. The investors are expected to claim damages of DKK 766,066,012 (approximately US$121 million) plus interest, also on the basis of alleged prospectus liability.

On October 12, 2017, the Firm reached a settlement in principle with the Environmental Protection Agency in the amount of approximately $1 million on the Firm’s self-disclosure regarding certain reformulated blendstock the Firm blended and sold during 2013 and 2014.

On November 3, 2017, the Firm intends to file its opposition to plaintiffs’ motion for class certification in Alaska Electrical Pension Fund et al. v. Bank of America et al. (formerly styled Genesee County Employees’ Retirement System v. Bank of America Corporation et al.).

 

 

  95   September 2017 Form 10-Q


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Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth the information with respect to purchases made by or on behalf of the Firm of its common stock during the quarterly period ended September 30, 2017.

Issuer Purchases of Equity Securities

 

$ in millions, except per share data    Total Number of
Shares
Purchased
   

Average Price

Paid Per Share

    Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs1
    Approximate
Dollar Value of
Shares that May
Yet be Purchased
Under the Plans or
Programs
 

Month #1 (July 1, 2017—July 31, 2017)

        

Share Repurchase Program2

     2,729,000     $ 47.07       2,729,000     $ 4,872   

Employee transactions3

     769,637     $ 46.21             —    

Month #2 (August 1, 2017—August 31, 2017)

        

Share Repurchase Program2

     13,740,000     $ 46.56       13,740,000     $ 4,232   

Employee transactions3

     96,764     $ 46.66             —   

 

Month #3 (September 1, 2017—September 30, 2017)

        

Share Repurchase Program2

     10,448,247     $ 46.12       10,448,247     $ 3,750   

Employee transactions3

     192,674     $ 46.11             —   

Quarter ended at September 30, 2017

        

Share Repurchase Program2

     26,917,247     $ 46.44       26,917,247     $ 3,750   

Employee transactions3

     1,059,075     $ 46.23             —   

 

1.

Share purchases under publicly announced programs are made pursuant to open-market purchases, Rule 10b5-1 plans or privately negotiated transactions (including with employee benefit plans) as market conditions warrant and at prices the Firm deems appropriate and may be suspended at any time.

2.

The Firm’s Board of Directors has authorized the repurchase of the Firm’s outstanding stock under a share repurchase program (the “Share Repurchase Program”). The Share Repurchase Program is a program for capital management purposes that considers, among other things, business segment capital needs, as well as equity-based compensation and benefit plan requirements. The Share Repurchase Program has no set expiration or termination date. Share repurchases by the Firm are subject to regulatory approval. On June 28, 2017, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) announced that they did not object to our 2017 capital plan, which included a share repurchase of up to $5.0 billion of the Firm’s outstanding common stock during the period beginning July 1, 2017 through June 30, 2018. During the quarter ended September 30, 2017, the Firm repurchased approximately $1.25 billion of the Firm’s outstanding common stock as part of its Share Repurchase Program. For further information, see “Liquidity and Capital Resources—Capital Management” in Part I, Item 2.

3.

Includes shares acquired by the Firm in satisfaction of the tax withholding obligations on stock-based awards and the exercise of stock options granted under the Firm’s stock-based compensation plans.

Exhibits

An exhibit index has been filed as part of this Report on page E-1.

 

September 2017 Form 10-Q   96  


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Exhibit Index

Morgan Stanley

Quarter Ended September 30, 2017

 

      Exhibit No.      

 

 

Description

 

12

 

Statement Re: Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends (unaudited).

15

 

Letter of awareness from Deloitte  & Touche LLP, dated November 3, 2017, concerning unaudited interim financial information.

31.1

  Rule 13a-14(a) Certification of Chief Executive Officer.

31.2

  Rule 13a-14(a) Certification of Chief Financial Officer.

32.1

  Section 1350 Certification of Chief Executive Officer.

32.2

  Section 1350 Certification of Chief Financial Officer.

101

 

Interactive data files pursuant to Rule 405 of Regulation S-T (unaudited): (i) the Consolidated Income Statements—Three Months and Nine Months Ended September 30, 2017 and 2016, (ii) the Consolidated Comprehensive Income Statements—Three Months and Nine Months Ended September 30, 2017 and 2016, (iii) the Consolidated Balance Sheets—at September 30, 2017 and December 31, 2016, (iv) the Consolidated Statements of Changes in Total Equity—Nine Months Ended September 30, 2017 and 2016, (v) the Consolidated Cash Flow Statements—Nine Months Ended September 30, 2017 and 2016, and (vi) Notes to Consolidated Financial Statements.

 

  E-1   September 2017 Form 10-Q


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

MORGAN STANLEY

(Registrant)

 

 By:

 

   /s/ JONATHAN PRUZAN
    

Jonathan Pruzan

Executive Vice President and

Chief Financial Officer

 

 By:

 

   /s/ PAUL C. WIRTH
    

Paul C. Wirth

Deputy Chief Financial Officer

Date: November 3, 2017

 

  S-1   September 2017 Form 10-Q