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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

OR

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

EXCHANGE ACT OF 1934

Commission File Number 1-11758

 

 

(Exact Name of Registrant as specified in its charter)

 

Delaware (State or other jurisdiction of incorporation or organization)		1585 Broadway New York, NY 10036 (Address of principal executive offices, including zip code)		36-3145972 (I.R.S. Employer Identification No.)		(212) 761-4000 (Registrant’s telephone number, including area code)

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

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

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

 

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

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

As of April 30, 2015, there were 1,970,026,803 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.

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QUARTERLY REPORT ON FORM 10-Q

For the quarter ended March 31, 2015

 

Table of Contents				Page
Part I—Financial Information
Item 1.		Financial Statements (unaudited)			1
		Condensed Consolidated Statements of Financial Condition—March 31, 2015 and December 31, 2014			1
		Condensed Consolidated Statements of Income—Three Months Ended March 31, 2015 and 2014			2
		Condensed Consolidated Statements of Comprehensive Income—Three Months Ended March 31, 2015 and 2014			3
		Condensed Consolidated Statements of Cash Flows—Three Months Ended March 31, 2015 and 2014			4
		Condensed Consolidated Statements of Changes in Total Equity—Three Months Ended March 31, 2015 and 2014			5
		Notes to Condensed Consolidated Financial Statements (unaudited)			6
		Report of Independent Registered Public Accounting Firm			86
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			87
		Introduction			87
		Executive Summary			88
		Business Segments			95
		Accounting Development Updates			109
		Other Matters			111
		Critical Accounting Policies			113
		Liquidity and Capital Resources			117
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			139
Item 4.		Controls and Procedures			157
Financial Data Supplement (unaudited)					158
Part II—Other Information
Item 1.		Legal Proceedings			161
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			163
Item 6.		Exhibits			163

 

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AVAILABLE INFORMATION

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

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

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

 

•

Amended and Restated Certificate of Incorporation;

 

•

Amended and Restated Bylaws;

 

•

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

 

•

Corporate Governance Policies;

 

•

Policy Regarding Communication with the Board of Directors;

 

•

Policy Regarding Director Candidates Recommended by Shareholders;

 

•

Policy Regarding Corporate Political Activities;

 

•

Policy Regarding Shareholder Rights Plan;

 

•

Code of Ethics and Business Conduct;

 

•

Code of Conduct; and

 

•

Integrity Hotline information.

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

 

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Part I—Financial Information.

 

Item 1.

Financial Statements.

MORGAN STANLEY

Condensed Consolidated Statements of Financial Condition

(dollars in millions, except share data)

(unaudited)

 

		March 31, 2015				December 31, 2014
Assets
Cash and due from banks ($43 and $45 at March 31, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)		$	19,683			$	21,381
Interest bearing deposits with banks			20,610				25,603
Cash deposited with clearing organizations or segregated under federal and other regulations or requirements ($156 and $149 at March 31, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)			40,340				40,607
Trading assets, at fair value ($134,954 and $127,342 were pledged to various parties at March 31, 2015 and December 31, 2014, respectively) ($905 and $966 at March 31, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)			259,160				256,801
Investment securities (includes $67,830 and $69,216 at fair value at March 31, 2015 and December 31, 2014, respectively)			69,462				69,316
Securities received as collateral, at fair value			22,328				21,316
Securities purchased under agreements to resell (includes $1,112 and $1,113 at fair value at March 31, 2015 and December 31, 2014, respectively)			91,232				83,288
Securities borrowed			150,365				136,708
Customer and other receivables			56,733				48,961
Loans:
Held for investment (net of allowances of $165 and $149 at March 31, 2015 and December 31, 2014, respectively)			60,446				57,119
Held for sale			8,257				9,458
Other investments ($449 and $467 at March 31, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)			4,321				4,355
Premises, equipment and software costs (net of accumulated depreciation of $6,408 and $6,219 at March 31, 2015 and December 31, 2014, respectively) ($190 and $191 at March 31, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)			6,141				6,108
Goodwill			6,597				6,588
Intangible assets (net of accumulated amortization of $1,896 and $1,824 at March 31, 2015 and December 31, 2014, respectively) (includes $5 and $6 at fair value at March 31, 2015 and December 31, 2014, respectively)			3,064				3,159
Other assets ($59 at March 31, 2015 and December 31, 2014, related to consolidated variable interest entities, generally not available to the Company)			10,360				10,742
Total assets		$	829,099			$	801,510
Liabilities
Deposits		$	135,815			$	133,544
Short-term borrowings (includes $2,468 and $1,765 at fair value at March 31, 2015 and December 31, 2014, respectively)			2,879				2,261
Trading liabilities, at fair value ($1 at March 31, 2015 and December 31, 2014, related to consolidated variable interest entities, generally non-recourse to the Company)			125,057				107,381
Obligation to return securities received as collateral, at fair value			27,384				25,685
Securities sold under agreements to repurchase (includes $605 and $612 at fair value at March 31, 2015 and December 31, 2014, respectively)			61,488				69,949
Securities loaned			25,527				25,219
Other secured financings (includes $4,241 and $4,504 at fair value at March 31, 2015 and December 31, 2014, respectively) ($321 and $348 at March 31, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally non-recourse to the Company)			12,207				12,085
Customer and other payables			190,175				181,069
Other liabilities and accrued expenses ($68 and $72 at March 31, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally non-recourse to the Company)			17,556				19,441
Long-term borrowings (includes $31,261 and $31,774 at fair value at March 31, 2015 and December 31, 2014, respectively)			155,545				152,772
Total liabilities			753,633				729,406
Commitments and contingent liabilities (see Note 11)			—				—
Equity
Morgan Stanley shareholders’ equity:
Preferred stock (see Note 13)			7,520				6,020
Common stock, $0.01 par value:
Shares authorized: 3,500,000,000 at March 31, 2015 and December 31, 2014;
Shares issued: 2,038,893,979 at March 31, 2015 and December 31, 2014;
Shares outstanding: 1,971,443,739 and 1,950,980,142 at March 31, 2015 and December 31, 2014, respectively			20				20
Additional paid-in capital			23,355				24,249
Retained earnings			46,740				44,625
Employee stock trusts			2,431				2,127
Accumulated other comprehensive loss			(1,266	)			(1,248	)
Common stock held in treasury, at cost, $0.01 par value:
Shares outstanding: 67,450,240 and 87,913,837 at March 31, 2015 and December 31, 2014, respectively			(2,207	)			(2,766	)
Common stock issued to employee stock trusts			(2,431	)			(2,127	)
Total Morgan Stanley shareholders’ equity			74,162				70,900
Nonredeemable noncontrolling interests			1,304				1,204
Total equity			75,466				72,104
Total liabilities and equity		$	829,099			$	801,510

See Notes to Condensed Consolidated Financial Statements.

 

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MORGAN STANLEY

Condensed Consolidated Statements of Income

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

(unaudited)

 

		Three Months Ended March 31,
		2015				2014
Revenues:
Investment banking		$	1,357			$	1,308
Trading			3,650				2,962
Investments			266				359
Commissions and fees			1,186				1,216
Asset management, distribution and administration fees			2,681				2,549
Other			171				294
Total non-interest revenues			9,311				8,688
Interest income			1,484				1,343
Interest expense			888				1,035
Net interest			596				308
Net revenues			9,907				8,996
Non-interest expenses:
Compensation and benefits			4,524				4,306
Occupancy and equipment			342				361
Brokerage, clearing and exchange fees			463				443
Information processing and communications			415				424
Marketing and business development			150				147
Professional services			486				453
Other			672				492
Total non-interest expenses			7,052				6,626
Income from continuing operations before income taxes			2,855				2,370
Provision for income taxes			387				785
Income from continuing operations			2,468				1,585
Discontinued operations:
Income (loss) from discontinued operations before income taxes			(8	)			(2	)
Provision for (benefit from) income taxes			(3	)			(1	)
Income (loss) from discontinued operations			(5	)			(1	)
Net income		$	2,463			$	1,584
Net income applicable to nonredeemable noncontrolling interests			69				79
Net income applicable to Morgan Stanley		$	2,394			$	1,505
Preferred stock dividends and other			80				56
Earnings applicable to Morgan Stanley common shareholders		$	2,314			$	1,449
Amounts applicable to Morgan Stanley:
Income from continuing operations		$	2,399			$	1,506
Income (loss) from discontinued operations			(5	)			(1	)
Net income applicable to Morgan Stanley		$	2,394			$	1,505
Earnings per basic common share:
Income from continuing operations		$	1.21			$	0.75
Income (loss) from discontinued operations			(0.01	)			—
Earnings per basic common share		$	1.20			$	0.75
Earnings per diluted common share:
Income from continuing operations		$	1.18			$	0.74
Income (loss) from discontinued operations			—				—
Earnings per diluted common share		$	1.18			$	0.74
Dividends declared per common share		$	0.10			$	0.05
Average common shares outstanding:
Basic			1,924,122,199				1,924,270,160
Diluted			1,962,996,441				1,969,652,798

See Notes to Condensed Consolidated Financial Statements.

 

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MORGAN STANLEY

Condensed Consolidated Statements of Comprehensive Income

(dollars in millions)

(unaudited)

 

		Three Months Ended March  31,
		2015				2014
Net income		$	2,463			$	1,584
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments(1)		$	(222	)		$	66
Amortization of cash flow hedges(2)			1				1
Change in net unrealized gains on available for sale securities(3)			200				74
Pension, postretirement and other related adjustments(4)			1				2
Total other comprehensive income (loss)		$	(20	)		$	143
Comprehensive income		$	2,443			$	1,727
Net income applicable to nonredeemable noncontrolling interests			69				79
Other comprehensive income (loss) applicable to nonredeemable noncontrolling interests			(2	)			18
Comprehensive income applicable to Morgan Stanley		$	2,376			$	1,630

 

(1)	Amounts include provision for (benefit from) income taxes of $174 million and $(56) million for the quarters ended March 31, 2015 and 2014, respectively.

(2)	Amount includes provision for income taxes of $1 million for the quarter ended March 31, 2014.

(3)	Amounts include provision for income taxes of $121 million and $51 million for the quarters ended March 31, 2015 and 2014, respectively.

(4)	Amount includes provision for income taxes of $1 million for the quarter ended March 31, 2014.

See Notes to Condensed Consolidated Financial Statements.

 

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MORGAN STANLEY

Condensed Consolidated Statements of Cash Flows

(dollars in millions)

(unaudited)

 

		Three Months Ended March  31,
		2015				2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	2,463			$	1,584
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Income from equity method investments			(38	)			(56	)
Compensation payable in common stock and options			295				311
Depreciation and amortization			321				326
Net gain on sale of available for sale securities			(25	)			(6	)
Impairment charges			21				33
Provision (release) for credit losses on lending activities			63				(10	)
Other operating activities			56				(113	)
Changes in assets and liabilities:
Cash deposited with clearing organizations or segregated under federal and other regulations or requirements			267				(4,448	)
Trading assets, net of Trading liabilities			11,414				30,790
Securities borrowed			(13,657	)			(17,888	)
Securities loaned			308				(429	)
Customer and other receivables and other assets			(6,257	)			(1,241	)
Customer and other payables and other liabilities			8,052				16,866
Securities purchased under agreements to resell			(7,944	)			10,554
Securities sold under agreements to repurchase			(8,394	)			(31,492	)
Net cash provided by (used for) operating activities			(13,055	)			4,781
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from (payments for):
Premises, equipment and software, net			(320	)			2
Business dispositions, net of cash disposed			—				135
Loans:
Originations and purchases			(11,622	)			(10,814	)
Maturities, payments and sales			8,956				6,254
Investment securities:
Purchases			(15,067	)			(8,188	)
Proceeds from sales			13,810				1,853
Proceeds from paydowns and maturities			1,290				981
Other investing activities			48				(41	)
Net cash used for investing activities			(2,905	)			(9,818	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (payments for):
Short-term borrowings			618				(356	)
Nonredeemable noncontrolling interests			(2	)			(9	)
Other secured financings			399				(1,719	)
Deposits			2,271				4,269
Proceeds from:
Excess tax benefits associated with stock-based awards			173				84
Derivatives financing activities			226				150
Issuance of preferred stock, net of issuance costs			1,493				—
Issuance of long-term borrowings			11,339				7,701
Payments for:
Long-term borrowings			(5,334	)			(8,786	)
Derivatives financing activities			(83	)			—
Repurchases of common stock and employee tax withholdings			(839	)			(672	)
Cash dividends			(310	)			(143	)
Net cash provided by financing activities			9,951				519
Effect of exchange rate changes on cash and cash equivalents			(682	)			59
Net decrease in cash and cash equivalents			(6,691	)			(4,459	)
Cash and cash equivalents, at beginning of period			46,984				59,883
Cash and cash equivalents, at end of period		$	40,293			$	55,424
Cash and cash equivalents include:
Cash and due from banks		$	19,683			$	13,785
Interest bearing deposits with banks			20,610				41,639
Cash and cash equivalents, at end of period		$	40,293			$	55,424

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash payments for interest were $580 million and $606 million for the quarters ended March 31, 2015 and 2014, respectively.

Cash payments for income taxes were $119 million and $128 million for the quarters ended March 31, 2015 and 2014, respectively.

See Notes to Condensed Consolidated Financial Statements.

 

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MORGAN STANLEY

Condensed Consolidated Statements of Changes in Total Equity

Three Months Ended March 31, 2015 and 2014

(dollars in millions)

(unaudited)

 

		Preferred Stock				Common Stock				Additional Paid-in Capital				Retained Earnings				Employee Stock Trusts				Accumulated Other Comprehensive Income (Loss)				Common Stock Held in Treasury at Cost				Common Stock Issued to Employee Stock Trusts				Non- redeemable Non- controlling Interests				Total Equity
BALANCE AT DECEMBER 31, 2014		$	6,020			$	20			$	24,249			$	44,625			$	2,127			$	(1,248	)		$	(2,766	)		$	(2,127	)		$	1,204			$	72,104
Net income applicable to Morgan Stanley			—				—				—				2,394				—				—				—				—				—				2,394
Net income applicable to nonredeemable noncontrolling interests			—				—				—				—				—				—				—				—				69				69
Dividends			—				—				—				(279	)			—				—				—				—				—				(279	)
Shares issued under employee plans and related tax effects			—				—				(887	)			—				304				—				1,398				(304	)			—				511
Repurchases of common stock and employee tax withholdings			—				—				—				—				—				—				(839	)			—				—				(839	)
Net change in Accumulated other comprehensive income			—				—				—				—				—				(18	)			—				—				(2	)			(20	)
Issuance of preferred stock			1,500				—				(7	)			—				—				—				—				—				—				1,493
Other net increases			—				—				—				—				—				—				—				—				33				33
BALANCE AT MARCH 31, 2015		$	7,520			$	20			$	23,355			$	46,740			$	2,431			$	(1,266	)		$	(2,207	)		$	(2,431	)		$	1,304			$	75,466
BALANCE AT DECEMBER 31, 2013		$	3,220			$	20			$	24,570			$	42,172			$	1,718			$	(1,093	)		$	(2,968	)		$	(1,718	)		$	3,109			$	69,030
Net income applicable to Morgan Stanley			—				—				—				1,505				—				—				—				—				—				1,505
Net income applicable to nonredeemable noncontrolling interests			—				—				—				—				—				—				—				—				79				79
Dividends			—				—				—				(155	)			—				—				—				—				—				(155	)
Shares issued under employee plans and related tax effects			—				—				(1,206	)			—				381				—				1,553				(381	)			—				347
Repurchases of common stock and employee tax withholdings			—				—				—				—				—				—				(672	)			—				—				(672	)
Net change in Accumulated other comprehensive income			—				—				—				—				—				125				—				—				18				143
Other net decreases			—				—				—				—				—				—				—				—				(9	)			(9	)
BALANCE AT MARCH 31, 2014		$	3,220			$	20			$	23,364			$	43,522			$	2,099			$	(968	)		$	(2,087	)		$	(2,099	)		$	3,197			$	70,268

See Notes to Condensed Consolidated Financial Statements.

 

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MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

1.	Introduction and Basis of Presentation.

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

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

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

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

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

CanTerm.    On March 27, 2014, the Company completed the sale of Canterm Canadian Terminals Inc. (“CanTerm”), a public storage terminal operator for refined products with two distribution terminals in Canada. As a result of the Company’s level of continuing involvement with CanTerm, the results of CanTerm are reported as a component of continuing operations within the Company’s Institutional Securities business segment for all periods presented. The gain on sale was approximately $45 million.

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

The condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Form 10-K”). The condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are, in the opinion of management, necessary for the fair presentation of the results for the interim period. The results of operations for interim periods are not necessarily indicative of results for the entire year.

Prior period amounts have been recast for the Company’s adoption of Investments in Qualified Affordable Housing Projects, which the Company adopted on April 1, 2014.

 

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MORGAN STANLEY

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

 

Consolidation.    The condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and other entities in which the Company has a controlling financial interest, including certain variable interest entities (“VIE”) (see Note 6). For consolidated subsidiaries that are less than wholly owned, the third-party holdings of equity interests are referred to as noncontrolling interests. The net income attributable to noncontrolling interests for such subsidiaries is presented as Net income (loss) applicable to nonredeemable noncontrolling interests in the Company’s condensed consolidated statements of income. The portion of shareholders’ equity of such subsidiaries that is attributable to noncontrolling interests for such subsidiaries is presented as Nonredeemable noncontrolling interests, a component of total equity, in the Company’s condensed consolidated statements of financial condition.

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

For investments in entities in which the Company does not have a controlling financial interest but has significant influence over operating and financial decisions, the Company generally applies the equity method of accounting with net gains and losses recorded within Other revenues (see Note 19). Where the Company has elected to measure certain eligible investments at fair value in accordance with the fair value option, net gains and losses are recorded within Investments revenues (see Note 3).

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

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

Income Statement Presentation.    The Company, through its subsidiaries and affiliates, provides a wide variety of products and services to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individuals. In connection with the delivery of the various products and services to clients, the Company manages its revenues and related expenses in the aggregate. As such, when assessing the performance of its businesses, primarily in its Institutional Securities business segment, the Company considers its trading, investment banking, commissions and fees, and interest income, along with the associated interest expense, as one integrated activity.

 

2.	Significant Accounting Policies.

For a detailed discussion about the Company’s significant accounting policies, see Note 2 to the consolidated financial statements in the 2014 Form 10-K.

During the quarter ended March 31, 2015, other than the following, there were no significant updates made to the Company’s significant accounting policies.

 

		7

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MORGAN STANLEY

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

 

Accounting Standards Adopted.

Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.    In January 2014, the FASB issued an accounting update clarifying when an in-substance repossession or foreclosure occurs; that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. This guidance became effective for the Company beginning January 1, 2015 and will be applied prospectively. The adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements.

Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.    In June 2014, the FASB issued an accounting update requiring repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. This accounting update also requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty (a repurchase financing), which will result in secured borrowing accounting for the repurchase agreement. This guidance became effective for the Company beginning January 1, 2015. In addition, new disclosures are required for sales of financial assets where the Company retains substantially all the exposure throughout the term and for the collateral pledged and remaining maturity of repurchase and securities lending agreements, which are effective January 1, 2015, and April 1, 2015, respectively. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

 

3.	Fair Value Disclosures.

Fair Value Measurements.

For a description of the valuation techniques applied to the Company’s major categories of assets and liabilities measured at fair value on a recurring basis, see Note 4 to the consolidated financial statements in the 2014 Form 10-K.

 

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MORGAN STANLEY

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

 

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis at March 31, 2015.

 

		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Counterparty and Cash Collateral Netting				Balance at March 31, 2015
		(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. government and agency securities:
U.S. Treasury securities		$	17,077			$	—			$	—			$	—			$	17,077
U.S. agency securities			794				20,542				—				—				21,336
Total U.S. government and agency securities			17,871				20,542				—				—				38,413
Other sovereign government obligations			17,844				8,582				11				—				26,437
Corporate and other debt:
State and municipal securities			—				2,389				—				—				2,389
Residential mortgage-backed securities			—				1,772				296				—				2,068
Commercial mortgage-backed securities			—				1,373				180				—				1,553
Asset-backed securities			—				854				67				—				921
Corporate bonds			—				15,089				424				—				15,513
Collateralized debt and loan obligations			—				668				822				—				1,490
Loans and lending commitments			—				6,605				4,789				—				11,394
Other debt			—				2,368				486				—				2,854
Total corporate and other debt			—				31,118				7,064				—				38,182
Corporate equities(1)			108,266				765				230				—				109,261
Derivative and other contracts:
Interest rate contracts			759				492,341				2,021				—				495,121
Credit contracts			—				27,064				988				—				28,052
Foreign exchange contracts			134				88,293				356				—				88,783
Equity contracts			702				49,364				1,308				—				51,374
Commodity contracts			4,623				14,799				3,350				—				22,772
Other			—				332				—				—				332
Netting(2)			(5,658	)			(557,465	)			(4,682	)			(79,871	)			(647,676	)
Total derivative and other contracts			560				114,728				3,341				(79,871	)			38,758
Investments:
Private equity funds			—				—				2,523				—				2,523
Real estate funds			—				7				1,726				—				1,733
Hedge funds			—				321				362				—				683
Principal investments			55				1				829				—				885
Other			213				145				391				—				749
Total investments			268				474				5,831				—				6,573
Physical commodities			—				1,536				—				—				1,536
Total trading assets			144,809				177,745				16,477				(79,871	)			259,160
AFS securities			34,134				33,696				—				—				67,830
Securities received as collateral			22,249				46				33				—				22,328
Securities purchased under agreements to resell			—				1,112				—				—				1,112
Intangible assets(3)			—				—				5				—				5
Total assets measured at fair value		$	201,192			$	212,599			$	16,515			$	(79,871	)		$	350,435

 

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MORGAN STANLEY

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

 

		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Counterparty and Cash Collateral Netting				Balance at March 31, 2015
		(dollars in millions)
Liabilities at Fair Value
Short-term borrowings		$	—			$	2,468			$	—			$	—			$	2,468
Trading liabilities:
U.S. government and agency securities:
U.S. Treasury securities			14,714				—				—				—				14,714
U.S. agency securities			797				247				—				—				1,044
Total U.S. government and agency securities			15,511				247				—				—				15,758
Other sovereign government obligations			15,740				2,336				—				—				18,076
Corporate and other debt:
State and municipal securities			—				8				—				—				8
Corporate bonds			—				5,447				23				—				5,470
Unfunded lending commitments			—				6				—				—				6
Other debt			—				13				23				—				36
Total corporate and other debt			—				5,474				46				—				5,520
Corporate equities(1)			38,250				226				50				—				38,526
Derivative and other contracts:
Interest rate contracts			682				465,492				2,517				—				468,691
Credit contracts			—				26,091				1,972				—				28,063
Foreign exchange contracts			84				88,496				59				—				88,639
Equity contracts			794				54,805				3,780				—				59,379
Commodity contracts			4,957				13,769				2,005				—				20,731
Other			—				84				—				—				84
Netting(2)			(5,658	)			(557,465	)			(4,682	)			(50,605	)			(618,410	)
Total derivative and other contracts			859				91,272				5,651				(50,605	)			47,177
Total trading liabilities			70,360				99,555				5,747				(50,605	)			125,057
Obligation to return securities received as collateral			27,303				48				33				—				27,384
Securities sold under agreements to repurchase			—				451				154				—				605
Other secured financings			—				4,108				133				—				4,241
Long-term borrowings			—				29,523				1,738				—				31,261
Total liabilities measured at fair value		$	97,663			$	136,153			$	7,805			$	(50,605	)		$	191,016

 

AFS—available for sale

(1)	The Company holds or sells short for trading purposes equity securities issued by entities in diverse industries and of varying size.

(2)

For positions with the same counterparty that cross over the levels of the fair value hierarchy, both counterparty netting and cash collateral netting are included in the column titled “Counterparty and Cash Collateral Netting.” For contracts with the same counterparty, counterparty netting among positions classified within the same level is included within that level. For further information on derivative instruments and hedging activities, see Note 10.

(3)	Amount represents mortgage servicing rights (“MSRs”) accounted for at fair value.

Transfers Between Level 1 and Level 2 During the Quarter Ended March 31, 2015.

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

During the quarter ended March 31, 2015, there were no material transfers between Level 1 and Level 2.

 

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MORGAN STANLEY

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

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2014.

 

		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Counterparty and Cash Collateral Netting				Balance at December 31, 2014
		(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. government and agency securities:
U.S. Treasury securities		$	16,961			$	—			$	—			$	—			$	16,961
U.S. agency securities			850				18,193				—				—				19,043
Total U.S. government and agency securities			17,811				18,193				—				—				36,004
Other sovereign government obligations			15,149				7,888				41				—				23,078
Corporate and other debt:
State and municipal securities			—				2,049				—				—				2,049
Residential mortgage-backed securities			—				1,991				175				—				2,166
Commercial mortgage-backed securities			—				1,484				96				—				1,580
Asset-backed securities			—				583				76				—				659
Corporate bonds			—				15,800				386				—				16,186
Collateralized debt and loan obligations			—				741				1,152				—				1,893
Loans and lending commitments			—				6,088				5,874				—				11,962
Other debt			—				2,167				285				—				2,452
Total corporate and other debt			—				30,903				8,044				—				38,947
Corporate equities(1)			112,490				1,357				272				—				114,119
Derivative and other contracts:
Interest rate contracts			663				495,026				2,484				—				498,173
Credit contracts			—				30,813				1,369				—				32,182
Foreign exchange contracts			83				72,769				249				—				73,101
Equity contracts(2)			571				45,967				1,586				—				48,124
Commodity contracts			4,105				18,042				2,268				—				24,415
Other			—				376				—				—				376
Netting(3)			(4,910	)			(564,127	)			(4,220	)			(66,720	)			(639,977	)
Total derivative and other contracts			512				98,866				3,736				(66,720	)			36,394
Investments:
Private equity funds			—				—				2,569				—				2,569
Real estate funds			—				7				1,746				—				1,753
Hedge funds			—				344				343				—				687
Principal investments			58				3				835				—				896
Other			225				198				323				—				746
Total investments			283				552				5,816				—				6,651
Physical commodities			—				1,608				—				—				1,608
Total trading assets			146,245				159,367				17,909				(66,720	)			256,801
AFS securities			37,200				32,016				—				—				69,216
Securities received as collateral			21,265				51				—				—				21,316
Securities purchased under agreements to resell			—				1,113				—				—				1,113
Intangible assets(4)			—				—				6				—				6
Total assets measured at fair value		$	204,710			$	192,547			$	17,915			$	(66,720	)		$	348,452

 

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MORGAN STANLEY

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

 

		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Counterparty and Cash Collateral Netting				Balance at December 31, 2014
		(dollars in millions)
Liabilities at Fair Value
Short-term borrowings		$	—			$	1,765			$	—			$	—			$	1,765
Trading liabilities:
U.S. government and agency securities:
U.S. Treasury securities			14,199				—				—				—				14,199
U.S. agency securities			1,274				85				—				—				1,359
Total U.S. government and agency securities			15,473				85				—				—				15,558
Other sovereign government obligations			11,653				2,109				—				—				13,762
Corporate and other debt:
State and municipal securities			—				1				—				—				1
Corporate bonds			—				5,943				78				—				6,021
Unfunded lending commitments			—				10				5				—				15
Other debt			—				63				38				—				101
Total corporate and other debt			—				6,017				121				—				6,138
Corporate equities(1)			31,340				326				45				—				31,711
Derivative and other contracts:
Interest rate contracts			602				469,319				2,657				—				472,578
Credit contracts			—				29,997				2,112				—				32,109
Foreign exchange contracts			21				72,233				98				—				72,352
Equity contracts(2)			416				51,405				3,751				—				55,572
Commodity contracts			4,817				15,584				1,122				—				21,523
Other			—				172				—				—				172
Netting(3)			(4,910	)			(564,127	)			(4,220	)			(40,837	)			(614,094	)
Total derivative and other contracts			946				74,583				5,520				(40,837	)			40,212
Total trading liabilities			59,412				83,120				5,686				(40,837	)			107,381
Obligation to return securities received as collateral			25,629				56				—				—				25,685
Securities sold under agreements to repurchase			—				459				153				—				612
Other secured financings			—				4,355				149				—				4,504
Long-term borrowings			—				29,840				1,934				—				31,774
Total liabilities measured at fair value		$	85,041			$	119,595			$	7,922			$	(40,837	)		$	171,721

 

(1)	The Company holds or sells short for trading purposes equity securities issued by entities in diverse industries and of varying size.

(2)

Level 3 asset derivative equity contracts increased by $57 million with a corresponding decrease in the balance of Level 2 asset derivative equity contracts, and the balance of Level 3 liability derivative equity contracts increased by $842 million with a corresponding decrease in the balance of Level 2 liability derivative equity contracts to correct the fair value level assigned to these contracts at December 31, 2014. The total amount of asset and liability derivative equity contracts remained unchanged.

(3)

For positions with the same counterparty that cross over the levels of the fair value hierarchy, both counterparty netting and cash collateral netting are included in the column titled “Counterparty and Cash Collateral Netting.” For contracts with the same counterparty, counterparty netting among positions classified within the same level is included within that level. For further information on derivative instruments and hedging activities, see Note 10.

(4)	Amount represents MSRs accounted for at fair value.

Transfers Between Level 1 and Level 2 During the Quarter Ended March 31, 2014.

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

During the quarter ended March 31, 2014, there were no material transfers between Level 1 and Level 2.

 

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MORGAN STANLEY

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

 

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

The following tables present additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the quarters ended March 31, 2015 and 2014, respectively. Level 3 instruments may be hedged with instruments classified in Level 1 and Level 2. As a result, the realized and unrealized gains (losses) for assets and liabilities within the Level 3 category presented in the tables below do not reflect the related realized and unrealized gains (losses) on hedging instruments that have been classified by the Company within the Level 1 and/or Level 2 categories.

Additionally, both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category. As a result, the unrealized gains (losses) during the period for assets and liabilities within the Level 3 category presented in the tables below may include changes in fair value during the period that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.

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

 

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MORGAN STANLEY

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

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Quarter Ended March 31, 2015.

 

		Beginning Balance at December 31, 2014				Total Realized and Unrealized Gains (Losses)(1)				Purchases				Sales				Issuances				Settlements				Net Transfers				Ending Balance at March 31, 2015				Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at March 31, 2015(2)
		(dollars in millions)
Assets at Fair Value
Trading assets:
Other sovereign government obligations		$	41			$	1			$	2			$	(32	)		$	—			$	—			$	(1	)		$	11			$	1
Corporate and other debt:
Residential mortgage-backed securities			175				17				58				(40	)			—				—				86				296				12
Commercial mortgage-backed securities			96				(2	)			96				(10	)			—				—				—				180				(2	)
Asset-backed securities			76				(2	)			57				(29	)			—				—				(35	)			67				3
Corporate bonds			386				38				129				(141	)			—				—				12				424				38
Collateralized debt and loan obligations			1,152				79				241				(397	)			—				(253	)			—				822				2
Loans and lending commitments			5,874				41				914				(213	)			—				(1,807	)			(20	)			4,789				40
Other debt			285				(10	)			68				(1	)			—				(5	)			149				486				2
Total corporate and other debt			8,044				161				1,563				(831	)			—				(2,065	)			192				7,064				95
Corporate equities			272				19				30				(98	)			—				—				7				230				12
Net derivative and other contracts(3):
Interest rate contracts			(173	)			128				6				—				(11	)			65				(511	)			(496	)			119
Credit contracts			(743	)			(247	)			14				—				(30	)			7				15				(984	)			(252	)
Foreign exchange contracts			151				62				—				—				—				97				(13	)			297				62
Equity contracts(4)			(2,165	)			(273	)			33				—				(176	)			(54	)			163				(2,472	)			(324	)
Commodity contracts			1,146				295				—				—				—				(37	)			(59	)			1,345				262
Total net derivative and other contracts			(1,784	)			(35	)			53				—				(217	)			78				(405	)			(2,310	)			(133	)
Investments:
Private equity funds			2,569				103				26				(175	)			—				—				—				2,523				86
Real estate funds			1,746				62				25				(107	)			—				—				—				1,726				41
Hedge funds			343				20				27				(28	)			—				—				—				362				20
Principal investments			835				17				11				(34	)			—				—				—				829				9
Other			323				(12	)			2				(5	)			—				—				83				391				(10	)
Total investments			5,816				190				91				(349	)			—				—				83				5,831				146
Securities received as collateral			—				—				33				—				—				—				—				33				—
Intangible assets			6				—				—				—				—				(1	)			—				5				—

 

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MORGAN STANLEY

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

 

		Beginning Balance at December 31, 2014				Total Realized and Unrealized Gains (Losses)(1)				Purchases				Sales				Issuances				Settlements				Net Transfers				Ending Balance at March 31, 2015				Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at March 31, 2015(2)
		(dollars in millions)
Liabilities at Fair Value
Trading liabilities:
Corporate and other debt:
Corporate bonds		$	78			$	(4	)		$	(1	)		$	8			$	—			$	—			$	(66	)		$	23			$	(4	)
Unfunded lending commitments			5				5				—				—				—				—				—				—				5
Other debt			38				6				(11	)			5				—				—				(3	)			23				6
Total corporate and other debt			121				7				(12	)			13				—				—				(69	)			46				7
Corporate equities			45				1				—				7				—				—				(1	)			50				1
Obligation to return securities received as collateral			—				—				—				33				—				—				—				33				—
Securities sold under agreements to repurchase			153				(1	)			—				—				—				—				—				154				(1	)
Other secured financings			149				(8	)			—				—				—				(24	)			—				133				1
Long-term borrowings			1,934				17				—				—				115				(142	)			(152	)			1,738				10

 

(1)	Total realized and unrealized gains (losses) are primarily included in Trading revenues in the Company’s condensed consolidated statements of income except for $190 million related to Trading assets—Investments, which is included in Investments revenues.

(2)	Amounts represent unrealized gains (losses) for the quarter ended March 31, 2015 related to assets and liabilities still outstanding at March 31, 2015.

(3)	Net derivative and other contracts represent Trading assets—Derivative and other contracts net of Trading liabilities—Derivative and other contracts. For further information on derivative instruments and hedging activities, see Note 10.

(4)	Net liability Level 3 derivative equity contracts increased by $785 million to correct the fair value level assigned to these contracts at December 31, 2014. The total amount of derivative equity contracts remained unchanged at December 31, 2014.

During the quarter ended March 31, 2015, there were no material transfers into or out of Level 3.

 

		15

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Table of Contents

MORGAN STANLEY

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

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Quarter Ended March 31, 2014.

 

		Beginning Balance at December 31, 2013				Total Realized and Unrealized Gains (Losses)(1)				Purchases				Sales				Issuances				Settlements				Net Transfers				Ending Balance at March 31, 2014				Unrealized Gains (Losses) for Level 3  Assets/ Liabilities Outstanding at March 31, 2014(2)
		(dollars in millions)
Assets at Fair Value
Trading assets:
Other sovereign government obligations		$	27			$	2			$	—			$	(20	)		$	—			$	—			$	(1	)		$	8			$	1
Corporate and other debt:
Residential mortgage-backed securities			47				5				2				(8	)			—				—				5				51				4
Commercial mortgage-backed securities			108				8				45				(81	)			—				—				—				80				—
Asset-backed securities			103				17				7				(3	)			—				—				22				146				17
Corporate bonds			522				20				183				(188	)			—				(8	)			9				538				21
Collateralized debt and loan obligations			1,468				52				283				(494	)			—				(51	)			35				1,293				12
Loans and lending commitments			5,129				(289	)			670				(122	)			—				(383	)			(17	)			4,988				(292	)
Other debt			27				1				2				(3	)			—				—				4				31				—
Total corporate and other debt			7,404				(186	)			1,192				(899	)			—				(442	)			58				7,127				(238	)
Corporate equities			190				(1	)			90				(21	)			—				—				5				263				(3	)
Net derivative and other contracts(3):
Interest rate contracts			113				(133	)			9				—				(7	)			(51	)			(52	)			(121	)			(150	)
Credit contracts			(147	)			(77	)			39				—				(70	)			36				(12	)			(231	)			67
Foreign exchange contracts			68				(7	)			—				—				—				8				(17	)			52				(6	)
Equity contracts			(831	)			49				144				(1	)			(277	)			(106	)			(77	)			(1,099	)			10
Commodity contracts			880				163				56				—				—				(25	)			—				1,074				152
Other			(4	)			(1	)			—				—				—				4				—				(1	)			(1	)
Total net derivative and other contracts			79				(6	)			248				(1	)			(354	)			(134	)			(158	)			(326	)			72
Investments:
Private equity funds			2,531				171				75				(201	)			—				—				—				2,576				90
Real estate funds			1,637				52				15				(61	)			—				—				—				1,643				46
Hedge funds			432				13				18				(12	)			—				—				(57	)			394				13
Principal investments			2,160				61				—				(12	)			—				—				(16	)			2,193				47
Other			538				(14	)			10				(11	)			—				—				(2	)			521				(14	)
Total investments			7,298				283				118				(297	)			—				—				(75	)			7,327				182
Securities received as collateral			—				—				—				—				—				—				3				3				—
Intangible assets			8				—				—				—				—				(1	)			—				7				—
Liabilities at Fair Value
Short-term borrowings		$	1			$	—			$	—			$	—			$	—			$	(1	)		$	—			$	—			$	—
Trading liabilities:
Corporate and other debt:
Corporate bonds			22				4				(46	)			40				—				—				(9	)			3				3
Unfunded lending commitments			2				(4	)			—				—				—				—				—				6				(4	)
Other debt			48				—				(5	)			—				—				—				25				68				—
Total corporate and other debt			72				—				(51	)			40				—				—				16				77				(1	)
Corporate equities			8				1				(3	)			2				—				—				4				10				—
Obligation to return securities received as collateral			—				—				—				—				—				—				3				3				—
Securities sold under agreements to repurchase			154				—				—				—				—				—				—				154				—
Other secured financings			278				(4	)			—				—				1				(8	)			—				275				(4	)
Long-term borrowings			1,887				(25	)			—				—				185				(176	)			(43	)			1,878				(27	)

 

(1)	Total realized and unrealized gains (losses) are primarily included in Trading revenues in the Company’s condensed consolidated statements of income except for $283 million related to Trading assets—Investments, which is included in Investments revenues.

(2)	Amounts represent unrealized gains (losses) for the quarter ended March 31, 2014 related to assets and liabilities still outstanding at March 31, 2014.

(3)	Net derivative and other contracts represent Trading assets—Derivative and other contracts, net of Trading liabilities—Derivative and other contracts. For further information on derivative instruments and hedging activities, see Note 10.

 

		16

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Table of Contents

MORGAN STANLEY

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

 

During the quarter ended March 31, 2014, there were no material transfers into or out of Level 3.

Quantitative Information about and Sensitivity of Significant Unobservable Inputs Used in Recurring Level 3 Fair Value Measurements at March 31, 2015 and December 31, 2014.

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

At March 31, 2015.

 

Balance at March  31, 2015 (dollars in millions)

Valuation Technique(s)

Significant Unobservable Input(s) / Sensitivity of the Fair Value to Changes in the Unobservable Inputs

Range(1)

Averages(2)

Assets

Trading assets:

Corporate and other debt:

Residential mortgage-backed securities

$

296

Comparable pricing

Comparable bond price / (A)

0 to 80 points

34 points

Commercial mortgage-backed securities

180

Comparable pricing

Comparable bond price / (A)

0 to 100 points

56 points

Asset-backed securities

67

Comparable pricing

Comparable bond price / (A)

63 to 75 points

73 points

Corporate bonds

424

Comparable pricing

Comparable bond price / (A)

3 to 125 points

93 points

Collateralized debt and loan obligations

822

Comparable pricing(3)

Comparable bond price / (A)

20 to 105 points

77 points

Correlation model

Credit correlation / (B)

43% to 62%

50%

Loans and lending commitments

4,789

Corporate loan model

Credit spread / (C)

24 to 726 basis points

362 basis points

Margin loan model

Credit spread / (C)(D)

150 to 467 basis points

208 basis points

Volatility skew / (C)(D)

10% to 43%

20%

Discount rate / (C)(D)

2% to 3%

3%

Option model

Volatility skew / (C)

-1%

-1%

Comparable pricing(3)

Comparable loan price / (A)

50 to 105 points

88 points

Other debt

486

Comparable pricing

Comparable loan price / (A)

0 to 77 points

47 points

Comparable pricing

Comparable bond price / (A)

15 points

15 points

Option model

At the money volatility / (A)

15% to 54%

15%

Margin loan model(3)

Discount rate / (C)

0% to 5%

3%

Corporate equities(4)

230

Net asset value

Discount to net asset value / (C)

0% to 78%

39%

Comparable pricing

Comparable price / (A)

7% to 88%

79%

Comparable pricing(3)

Comparable equity price / (A)

100%

100%

Market approach

EBITDA multiple / (A)(D)

4 to 10 times

7 times

Price / Book ratio / (A)(D)

0 times

0 times

Net derivative and other contracts(5):

Interest rate contracts

(496

)

Option model

Interest rate volatility concentration liquidity multiple / (C)(D)

0 to 3 times

2 times

 

		17

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Table of Contents

MORGAN STANLEY

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

 

Balance at March  31, 2015 (dollars in millions)

Valuation Technique(s)

Significant Unobservable Input(s) / Sensitivity of the Fair Value to Changes in the Unobservable Inputs

Range(1)

Averages(2)

Interest rate - Foreign exchange correlation / (C)(D)

28% to 62%

44% / 43%(6)

Interest rate volatility skew / (A)(D)

31% to 92%

45% / 46%(6)

Interest rate quanto correlation / (C)(D)

-18% to 35%

3% / -8%(6)

Interest rate curve correlation / (C)(D)

19% to 95%

65% / 81%(6)

Inflation volatility / (A)(D)

60% to 64%

62% / 63%(6)

Interest rate - Inflation correlation / (A)(D)

-42% to -40%

-41% / -40%(6)

Credit contracts

(984

)

Comparable pricing

Cash synthetic basis / (C)(D)

5 to 13 points

9 points

Comparable bond price / (C)(D)

0 to 60 points

18 points

Correlation model(3)

Credit correlation / (B)

43% to 99%

60%

Foreign exchange contracts(7)

297

Option model

Interest rate quanto correlation / (C)(D)

-18% to 35%

3% / -8%(6)

Interest rate - Credit spread correlation / (A)(D)

-55% to -6%

-18% / -11%(6)

Interest rate curve correlation / (C)(D)

19% to 95%

65% / 81%(6)

Interest rate - Foreign exchange correlation / (C)(D)

28% to 62%

44% / 43%(6)

Interest rate volatility skew / (A)(D)

31% to 92%

45% / 46%(6)

Interest rate curve / (A)(D)

0% to 1%

0% / 0%(6)

Equity contracts(7)

(2,472

)

Option model

At the money volatility / (A)(D)

10% to 58%

32%

Volatility skew / (A)(D)

-3% to 0%

-1%

Equity - Equity correlation / (C)(D)

40% to 99%

68%

Equity - Foreign exchange correlation / (A)(D)

-40% to 10%

-15%

Equity - Interest rate correlation / (C)(D)

-18% to 71%

24% / 9%(6)

Commodity contracts

1,345

Option model

Forward power price / (C)(D)

$6 to $98 per Megawatt hour

$36 per Megawatt hour

Commodity volatility / (A)(D)

9% to 70%

17%

Cross commodity correlation / (C)(D)

33% to 100%

93%

Investments(4):

Principal investments

829

Discounted cash flow

Implied weighted average cost of capital / (C)(D)

11%

11%

Exit multiple / (A)(D)

10 times

10 times

Discounted cash flow

Equity discount rate / (C)

25%

25%

Market approach(3)

EBITDA multiple / (A)(D)

4 to 18 times

10 times

Price / Earnings ratio / (A)(D)

32 times

32 times

Forward capacity price / (A)(D)

$5 to $7

$7

Comparable pricing

Comparable equity price / (A)

100%

100%

Other

391

Discounted cash flow

Implied weighted average cost of capital / (C)(D)

10%

10%

Exit multiple / (A)(D)

10 times

10 times

Market approach(3)

EBITDA multiple / (A)(D)

8 to 11 times

9 times

Price / Earnings ratio / (A)(D)

19 times

19 times

Comparable pricing

Comparable equity price / (A)

100%

100%

Liabilities

Securities sold under agreements to repurchase

154

Discounted cash flow

Funding spread / (A)

75 to 85 basis points

80 basis points

Other secured financings

133

Comparable pricing

Comparable bond price / (A)

100 points

100 points

Discounted cash flow

Discount rate / (C)

14%

14%

Discounted cash flow(3)

Funding spread / (A)

74 to 94 basis points

84 basis points

Long-term borrowings

1,738

Option model(3)

At the money volatility / (C)(D)

20% to 51%

30%

Volatility skew / (C)(D)

-2% to 0%

-1%

Equity - Equity correlation / (A)(D)

40% to 90%

64%

Equity - Foreign exchange correlation / (C)(D)

-70% to 35%

-33%

Option model

Equity alpha / (A)

18% to 85%

69%

Correlation model

Credit correlation / (B)

47% to 62%

50%

 

		18

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Table of Contents

MORGAN STANLEY

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

 

 

EBITDA—Earnings before interest, taxes, depreciation and amortization

(1)	The ranges of significant unobservable inputs are represented in points, percentages, basis points, times or megawatt hours. Points are a percentage of par; for example, 80 points would be 80% of par. A basis point equals 1/100th of 1%; for example, 726 basis points would equal 7.26%.

(2)

Amounts represent weighted averages except where simple averages and the median of the inputs are provided (see footnote 6 below). Weighted averages are calculated by weighting each input by the fair value of the respective financial instruments except for collateralized debt and loan obligations, principal investments, other debt, corporate bonds, long-term borrowings and derivative instruments where some or all inputs are weighted by risk.

(3)	This is the predominant valuation technique for this major asset or liability class.

(4)	Investments in funds measured using an unadjusted net asset value (“NAV”) are excluded.

(5)

Credit Valuation Adjustment (“CVA”) and Funding Valuation Adjustments (“FVA”) are included in the balance, but excluded from the Valuation Technique(s) and Significant Unobservable Input(s) in the table above. 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.

(6)

The data structure of the significant unobservable inputs used in valuing interest rate contracts, foreign exchange contracts and certain equity contracts may be in a multi-dimensional form, such as a curve or surface, with risk distributed across the structure. Therefore, a simple average and median, together with the range of data inputs, may be more appropriate measurements than a single point weighted average.

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

Sensitivity of the fair value to changes in the unobservable inputs:

(A)	Significant increase (decrease) in the unobservable input in isolation would result in a significantly higher (lower) fair value measurement.

(B)

Significant changes in credit correlation may result in a significantly higher or lower fair value measurement. Increasing (decreasing) correlation drives a redistribution of risk within the capital structure such that junior tranches become less (more) risky and senior tranches become more (less) risky.

(C)	Significant increase (decrease) in the unobservable input in isolation would result in a significantly lower (higher) fair value measurement.

(D)	There are no predictable relationships between the significant unobservable inputs.

At December 31, 2014.

 

Balance at December 31, 2014 (dollars in millions)

Valuation Technique(s)

Significant Unobservable Input(s) / Sensitivity of the Fair Value to Changes in the Unobservable Inputs

Range(1)

Averages(2)

Assets

Trading assets:

Corporate and other debt:

Residential mortgage-backed securities

$

175

Comparable pricing

Comparable bond price / (A)

3 to 90 points

15 points

Commercial mortgage-backed securities

96

Comparable pricing

Comparable bond price / (A)

0 to 7 points

1 points

Asset-backed securities

76

Comparable pricing

Comparable bond price / (A)

0 to 62 points

23 points

Corporate bonds

386

Comparable pricing

Comparable bond price / (A)

1 to 160 points

90 points

Collateralized debt and loan obligations

1,152

Comparable pricing(3)

Comparable bond price / (A)

20 to 100 points

66 points

Correlation model

Credit correlation / (B)

47% to 65%

56%

Loans and lending commitments