MS 10-Q Quarterly Report March 31, 2019 | Alphaminr

MS 10-Q Quarter ended March 31, 2019

MORGAN STANLEY
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10-Q 1 d673523d10q.htm FORM 10-Q Form 10-Q
Table of Contents

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 March 31, 2019

Commission File Number 1-11758

LOGO

(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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of exchange on
which registered

Trading

Symbol(s)

Common Stock, $0.01 par value

New York Stock Exchange MS

Depositary Shares, each representing 1/1,000th interest in a share of Floating Rate
Non-Cumulative Preferred Stock, Series A, $0.01 par value

New York Stock Exchange MS/PA

Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series E, $0.01 par value

New York Stock Exchange MS/PE

Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series F, $0.01 par value

New York Stock Exchange MS/PF

Depositary Shares, each representing 1/1,000th interest in a share of 6.625%
Non-Cumulative Preferred Stock, Series G, $0.01 par value

New York Stock Exchange MS/PG

Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series I, $0.01 par value

New York Stock Exchange MS/PI

Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series K, $0.01 par value

New York Stock Exchange MS/PK

Global Medium-Term Notes, Series A, Fixed Rate Step-Up Senior Notes Due 2026 of
Morgan Stanley Finance LLC (and Registrant’s guarantee with respect thereto)

New York Stock Exchange MS/26C

Market Vectors ETNs due March 31, 2020 (two issuances)

NYSE Arca, Inc. URR/DDR

Market Vectors ETNs due April 30, 2020 (two issuances)

NYSE Arca, Inc. CNY/INR

Morgan Stanley Cushing ® MLP High Income Index ETNs due March 21, 2031

NYSE Arca, Inc. MLPY

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 every Interactive Data File required to be submitted 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 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    ☐

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 April 30, 2019, there were 1,682,234,555 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.


Table of Contents

LOGO

QUARTERLY REPORT ON FORM 10-Q

For the quarter ended March 31, 2019

Table of Contents Part Item Page

Financial Information

I 1

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

I 2 1

Introduction

1

Executive Summary

2

Business Segments

6

Supplemental Financial Information and Disclosures

13

Accounting Development Updates

13

Critical Accounting Policies

14

Liquidity and Capital Resources

14

Balance Sheet

14

Regulatory Requirements

19

Quantitative and Qualitative Disclosures about Risk

I 3 24

Market Risk

24

Credit Risk

26

Country and Other Risks

30

Report of Independent Registered Public Accounting Firm

33

Consolidated Financial Statements and Notes

I 1 34

Consolidated Income Statements (Unaudited)

34

Consolidated Comprehensive Income Statements (Unaudited)

35

Consolidated Balance Sheets (Unaudited at March 31, 2019)

36

Consolidated Statements of Changes in Total Equity (Unaudited)

37

Consolidated Cash Flow Statements (Unaudited)

38

Notes to Consolidated Financial Statements (Unaudited)

39

1.

Introduction and Basis of Presentation

39

2.

Significant Accounting Policies

40

3.

Fair Values

40

4.

Derivative Instruments and Hedging Activities

48

5.

Investment Securities

51

6.

Collateralized Transactions

54

7.

Loans, Lending Commitments and Allowance for Credit Losses

55

8.

Equity Method Investments

57

9.

Deposits

58

10.

Borrowings and Other Secured Financings

58

11.

Commitments, Leases, Guarantees and Contingencies

58

12.

Variable Interest Entities and Securitization Activities

63

13.

Regulatory Requirements

65

14.

Total Equity

67

15.

Earnings per Common Share

69

16.

Interest Income and Interest Expense

69

17.

Income Taxes

69

18.

Segment, Geographic and Revenue Information

70

19.

Subsequent Events

71

Financial Data Supplement (Unaudited)

72

Glossary of Common Acronyms

73

Other Information

II 75

Legal Proceedings

II 1 75

Unregistered Sales of Equity Securities and Use of Proceeds

II 2 76

Controls and Procedures

I 4 77

Exhibits

II 6 77

Exhibit Index

E-1

Signatures

S-1

i


Table of Contents

LOGO

Available Information

We file annual, quarterly and current reports, proxy statements and other information with the SEC. 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 (“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 Gover-nance 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.

ii


Table of Contents

LOGO

Management’s

Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Morgan Stanley 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. We define the following as part of our consolidated financial statements (“financial statements”): consolidated income statements (“income statements”), consolidated balance sheets (“balance sheets”) and consolidated cash flow statements (“cash flow statements”). See the “Glossary of Common Acronyms” for the definition of certain acronyms used throughout this Form 10-Q.

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, prime brokerage and market-making activities in equity and fixed income products, including foreign exchange and commodities. Lending activities include originating corporate loans, commercial mortgage lending, providing secured lending facilities and extending financing to sales and trading customers. Other activities include investments and research.

Wealth Management provides a comprehensive array of financial services and solutions to individual investors and small to medium-sized businesses and institutions covering brokerage and investment advisory services; financial and wealth planning services; annuity and insurance products; securities-based lending, residential real estate loans 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 served 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,” “Business—Competition,” “Business—Supervision and Regulation,” and “Risk Factors” in the 2018 Form 10-K, and “Liquidity and Capital Resources—Regulatory Requirements” herein.

1 March 2019 Form 10-Q


Table of Contents

LOGO

Management’s Discussion and Analysis

Executive Summary

Overview of Financial Results

Consolidated Results

Net Revenues

($ in millions)

LOGO

Net Income Applicable to Morgan Stanley

($ in millions)

LOGO

Earnings per Common Share 1

LOGO

1.

For the calculation of basic and diluted EPS, see Note 15 to the financial statements.

We reported net revenues of $10,286 million in the quarter ended March 31, 2019 (“current quarter,” or “1Q 2019”), compared with $11,077 million in the quarter ended March 31, 2018 (“prior year quarter,” or “1Q 2018”). For the current quarter, net income applicable to Morgan Stanley was $2,429 million, or $1.39 per diluted common share, compared with $2,668 million or $1.45 per diluted common share, in the prior year quarter.

Non-interest Expenses 1

($ in millions)

LOGO

1.

The percentages on the bars in the chart represent the contribution of compensation and benefits expenses and non-compensation expenses to total non-interest expenses.

Compensation and benefits expenses of $4,651 million in current quarter decreased 5% from $4,914 million in the prior year quarter, primarily due to decreases in discretionary incentive compensation and the formulaic payout to Wealth Management representatives, both driven by lower revenues. These decreases were partially offset by increases in the fair value of investments to which certain deferred compensation plans are referenced and higher salaries.

Non-compensation expenses were $2,680 million in the current quarter compared with $2,743 million in the prior year quarter, representing a 2% decrease. This decrease was primarily due to lower litigation and volume-related expenses, partially offset by increased investment in technology.

Income Taxes

The current quarter includes intermittent net discrete tax benefits of $101 million, primarily associated with the remeasurement of reserves and related interest due to new information with regard to multi-jurisdiction tax examinations. For further information, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.

March 2019 Form 10-Q 2


Table of Contents

LOGO

Management’s Discussion and Analysis

Selected Financial Information and Other Statistical Data

Three Months Ended
March 31,
$ in millions 2019 2018

Income from continuing operations applicable to Morgan Stanley

$ 2,429 $ 2,670

Income (loss) from discontinued operations applicable to Morgan Stanley

(2 )

Net income applicable to Morgan Stanley

2,429 2,668

Preferred stock dividends and other

93 93

Earnings applicable to Morgan Stanley common shareholders

$ 2,336 $ 2,575

Expense efficiency ratio 1

71.3% 69.1%

ROE 2

13.1% 14.9%

ROTCE 2

14.9% 17.2%

in millions, except per share and employee data


At

March 31,

2019



At

December 31,

2018


GLR 3

$ 233,148 $ 249,735

Loans 4

$ 116,197 $ 115,579

Total assets

$ 875,964 $ 853,531

Deposits

$ 179,731 $ 187,820

Borrowings

$ 190,691 $ 189,662

Common shares outstanding

1,686 1,700

Common shareholders’ equity

$ 72,204 $ 71,726

Tangible common shareholders’ equity 2

$ 63,434 $ 62,879

Book value per common share 5

$ 42.83 $ 42.20

Tangible book value per common share 2, 5

$ 37.62 $ 36.99

Worldwide employees

60,469 60,348

At

March 31,

2019

At

December 31,

2018

Capital ratios 6

Common Equity Tier 1 capital

16.7% 16.9%

Tier 1 capital

19.0% 19.2%

Total capital

21.6% 21.8%

Tier 1 leverage

8.4% 8.4%

SLR

6.5% 6.5%

1.

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

2.

Represents a non-GAAP measure. See “Selected Non-GAAP Financial Information” herein.

3.

For a discussion of the GLR, see “Liquidity and Capital Resources—Liquidity Risk Management Framework—Global Liquidity Reserve” herein.

4.

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).

5.

Book value per common share and tangible book value per common share equal common shareholders’ equity and tangible common shareholders’ equity, respectively, divided by common shares outstanding.

6.

At March 31, 2019 and December 31 2018, our risk-based capital ratios are based on the Standardized Approach rules. For a discussion of our capital ratios, see “Liquidity and Capital Resources—Regulatory Requirements” herein.

Business Segment Results

Net Revenues by Segment 1, 2

($ in millions)

LOGO

Net Income Applicable to Morgan Stanley by Segment 1, 3

($ in millions)

LOGO

1.

The percentages on the bars in the charts represent the contribution of each business segment to the total of the applicable financial category and may not total to 100% due to intersegment eliminations.

2.

The total amount of Net Revenues by Segment includes intersegment eliminations of $(103) million and $(115) million in the current quarter and prior year quarter, respectively.

3.

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

Institutional Securities net revenues of $5,196 million in the current quarter decreased 15% from the prior year quarter, primarily reflecting lower revenues from both sales and trading and Investment banking.

Wealth Management net revenues were relatively unchanged from the prior year quarter.

Investment Management net revenues of $804 million in the current quarter increased 12% from the prior year quarter, primarily reflecting higher revenues from Investments.

3 March 2019 Form 10-Q


Table of Contents

LOGO

Management’s Discussion and Analysis

Net Revenues by Region 1, 2

($ in millions)

LOGO

1.

For a discussion of how the geographic breakdown of net revenues is determined, see Note 18 to the financial statements.

2.

The percentages on the bars in the charts represent the contribution of each region to the total.

Selected Non-GAAP Financial Information

We prepare our financial statements using 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, analysts, investors and other stakeholders 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 in the following tables.

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

Three Months Ended
March 31,
$ in millions, except per share data 2019 2018

Net income applicable to
Morgan Stanley

$ 2,429 $ 2,668

Impact of adjustments

(101 )

Adjusted net income applicable to Morgan Stanley—non-GAAP 1

$ 2,328 $ 2,668

Earnings per diluted common share

$ 1.39 $ 1.45

Impact of adjustments

(0.06 )

Adjusted earnings per diluted common share—non-GAAP 1

$ 1.33 $ 1.45

Effective income tax rate

16.5% 20.9%

Impact of adjustments

3.4% —%

Adjusted effective income tax rate—non-GAAP 1

19.9% 20.9%

$ in millions

At

March 31,

2019

At
December 31,
2018

Tangible equity

U.S. GAAP

Morgan Stanley shareholders’ equity

$ 80,724 $ 80,246

Less: Goodwill and net intangible assets

(8,770 ) (8,847 )

Tangible Morgan Stanley shareholders’ equity—non-GAAP

$ 71,954 $ 71,399

U.S. GAAP

Common shareholders’ equity

$ 72,204 $ 71,726

Less: Goodwill and net intangible assets

(8,770 ) (8,847 )

Tangible common shareholders’

equity—non-GAAP

$ 63,434 $ 62,879

March 2019 Form 10-Q 4


Table of Contents

LOGO

Management’s Discussion and Analysis

Consolidated Non-GAAP Financial Measures

Average Monthly Balance
Three Months Ended
March 31,
$ in millions 2019 2018

Tangible equity

Morgan Stanley shareholders’ equity

$ 80,115 $ 77,507

Less: Goodwill and net intangible assets

(8,806 ) (9,043 )

Tangible Morgan Stanley shareholders’ equity

$ 71,309 $ 68,464

Common shareholders’ equity

$ 71,595 $ 68,987

Less: Goodwill and net intangible assets

(8,806 ) (9,043 )

Tangible common shareholders’ equity

$ 62,789 $ 59,944

Three Months Ended
March 31,
$ in billions 2019 2018

Average common equity

Unadjusted

$ 71.6 $ 69.0

Adjusted 1

71.5 69.0

ROE 2

Unadjusted

13.1% 14.9%

Adjusted 1, 3

12.5% 14.9%

Average tangible common equity

Unadjusted

$ 62.8 $ 59.9

Adjusted 1

62.7 59.9

ROTCE 2

Unadjusted

14.9% 17.2%

Adjusted 1, 3

14.2% 17.2%

Non-GAAP Financial Measures by Business Segment

Three Months Ended

March 31,

$ in billions 2019 2018

Pre-tax margin 4

Institutional Securities

31% 35%

Wealth Management

27% 27%

Investment Management

22% 21%

Consolidated

29% 31%

Average common equity 5

Institutional Securities

$ 40.4 $ 40.8

Wealth Management

18.2 16.8

Investment Management

2.5 2.6

Parent

10.5 8.8

Consolidated average common equity

$ 71.6 $ 69.0

Average tangible common equity 5

Institutional Securities

$ 39.9 $ 40.1

Wealth Management

10.2 9.2

Investment Management

1.5 1.7

Parent

11.2 8.9

Consolidated average tangible common equity

$ 62.8 $ 59.9

ROE 2, 6

Institutional Securities

12.9% 15.2%

Wealth Management

19.8% 21.3%

Investment Management

21.9% 19.3%

Consolidated

13.1% 14.9%

ROTCE 2, 6

Institutional Securities

13.0% 15.5%

Wealth Management

35.6% 38.9%

Investment Management

35.3% 30.3%

Consolidated

14.9% 17.2%

1.

Adjusted amounts exclude intermittent net discrete tax provisions (benefits). We consider certain income tax consequences associated with employee share-based awards recognized in Provision for income taxes in the income statements to be recurring-type (“Recurring”) discrete tax items, as we anticipate some level of conversion activity each quarter. Accordingly, these Recurring discrete tax provisions (benefits) are not part of the adjustment for intermittent net discrete tax provisions (benefits). For further information on the net discrete tax provisions (benefits), see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.

2.

ROE and ROTCE represent annualized net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity and average tangible common equity, respectively. When excluding intermittent net discrete tax provisions (benefits), both the numerator and average denominator are adjusted.

3.

The calculations used in determining our “ROE and ROTCE Targets” referred to in the following section are the Adjusted ROE and Adjusted ROTCE amounts shown in this table.

4.

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

5.

Average common equity and average tangible common equity for each business segment are determined using our Required Capital framework (see “Liquidity and Capital Resources—Regulatory Requirements—Attribution of Average Common Equity According to the Required Capital Framework” herein).

6.

The calculation of ROE and ROTCE by segment uses net income applicable to Morgan Stanley by segment less preferred dividends allocated to each segment as a percentage of average common equity and average tangible common equity, respectively, allocated to each segment.

5 March 2019 Form 10-Q


Table of Contents

LOGO

Management’s Discussion and Analysis

Return on Equity and Tangible Common Equity Targets

We have established an ROE Target of 10% to 13% and an ROTCE Target of 11.5% to 14.5%.

Our ROE and ROTCE Targets 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; outsized legal expenses or penalties and the ability to maintain a reduced level of expenses; and capital levels. For further information on our ROE and ROTCE Targets and related assumptions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—Return on Equity and Tangible Common Equity Targets” in the 2018 Form 10-K.

Business Segments

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

For an overview of the components of our business segments, net revenues, compensation expense and income taxes, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments” in the 2018 Form 10-K.

With respect to Institutional Securities sales and trading activities, Commodities products and Other also includes Trading revenues from managing derivative counterparty credit risk on behalf of clients, in addition to results from the centralized management of our fixed income derivative counterparty exposures.

March 2019 Form 10-Q 6


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Management’s Discussion and Analysis

Institutional Securities

Income Statement Information

Three Months Ended
March 31,
$ in millions 2019 2018 % Change

Revenues

Investment banking

$ 1,151 $ 1,513 (24)%

Trading

3,130 3,643 (14)%

Investments

81 49 65%

Commissions and fees

621 744 (17)%

Asset management

107 110 (3)%

Other

222 136 63%

Total non-interest revenues

5,312 6,195 (14)%

Interest income

3,056 1,804 69%

Interest expense

3,172 1,899 67%

Net interest

(116 ) (95 ) (22)%

Net revenues

5,196 6,100 (15)%

Compensation and benefits

1,819 2,160 (16)%

Non-compensation expenses

1,782 1,828 (3)%

Total non-interest expenses

3,601 3,988 (10)%

Income from continuing operations before income taxes

1,595 2,112 (24)%

Provision for income taxes

190 449 (58)%

Income from continuing operations

1,405 1,663 (16)%

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

(2 ) 100%

Net income

1,405 1,661 (15)%

Net income applicable to noncontrolling interests

34 34 —%

Net income applicable to Morgan Stanley

$ 1,371 $ 1,627 (16)%

Investment Banking

Investment Banking Revenues

Three Months Ended
March 31,
$ in millions 2019 2018 % Change

Advisory

$ 406 $ 574 (29)%

Underwriting:

Equity

339 421 (19)%

Fixed income

406 518 (22)%

Total Underwriting

745 939 (21)%

Total Investment banking

$ 1,151 $ 1,513 (24)%

Investment Banking Volumes

Three Months Ended
March 31,
$ in billions 2019 2018

Completed mergers and acquisitions 1

$ 187 $ 170

Equity and equity-related offerings 2, 3

14 22

Fixed income offerings 2, 4

54 58

Source: Refinitiv (formerly Thomson Reuters Financial & Risk), data as of April 1, 2019. 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, change in value, or change in timing of certain transactions.

1.

Includes transactions of $100 million or more. Based on full credit to each of the advisors in a transaction.

2.

Based on full credit for single book managers and equal credit for joint book managers.

3.

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

4.

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

Investment banking revenues of $1,151 million in the current quarter decreased 24%, reflecting lower results in both our advisory and underwriting businesses.

Advisory revenues decreased in the current quarter primarily due to the effect of lower fee realizations.

Equity underwriting revenues decreased in the current quarter primarily as a result of lower volumes. Revenues decreased primarily in initial public offerings, follow-ons and convertible issuances, partially offset by an increase in secondary block share trades.

Fixed income underwriting revenues decreased in the current quarter due to the effect of lower fee realizations and lower volumes. Revenues decreased primarily in non-investment grade loan fees.

See “Investment Banking Volumes” herein.

7 March 2019 Form 10-Q


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Management’s Discussion and Analysis

Sales and Trading Net Revenues

By Income Statement Line Item

Three Months Ended
March 31,
$ in millions 2019 2018 % Change

Trading

$ 3,130 $ 3,643 (14 )%

Commissions and fees

621 744 (17 )%

Asset management

107 110 (3 )%

Net interest

(116 ) (95 ) (22 )%

Total

$ 3,742 $ 4,402 (15 )%

By Business

Three Months Ended

March 31,

$ in millions 2019 2018 % Change

Equity

$ 2,015 $ 2,558 (21)%

Fixed income

1,710 1,873 (9)%

Other

17 (29 ) 159%

Total

$ 3,742 $ 4,402 (15)%

Sales and Trading Revenues—Equity and Fixed Income

Three Months Ended
March 31, 2019
Net
$ in millions Trading Fees 1 Interest 2 Total

Financing

$ 1,115 $ 98 $ (258 ) $ 955

Execution services

551 553 (44 ) 1,060

Total Equity

$ 1,666 $ 651 $ (302 ) $ 2,015

Total Fixed income

$ 1,727 $ 78 $ (95 ) $ 1,710

Three Months Ended
March 31, 2018
Net
$ in millions Trading Fees 1 Interest 2 Total

Financing

$ 1,234 $ 107 $ (146 ) $ 1,195

Execution services

791 664 (92 ) 1,363

Total Equity

$ 2,025 $ 771 $ (238 ) $ 2,558

Total Fixed income

$ 1,715 $ 83 $ 75 $ 1,873

1.

Includes Commissions and fees and Asset management revenues.

2.

Includes funding costs, which are allocated to the businesses based on funding usage.

As discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Net Revenues by Segment” in the 2018 Form 10-K, we manage each of the sales and trading businesses based on its aggregate net revenues. 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 18 to the financial statements.

Equity

Equity sales and trading net revenues of $2,015 million in the current quarter decreased 21% from the prior year quarter, reflecting lower results in both our financing and execution services businesses.

Financing decreased from the prior year quarter, primarily due to lower average client balances, which resulted in lower Trading and Net interest revenues. Additionally, Net interest revenues decreased due to higher funding costs attributable to higher rates and changes in funding mix.

Execution services decreased from the prior year quarter, reflecting lower Trading revenues as a result of less favorable inventory management and lower client activity in derivatives products. In addition, Commissions and fees decreased due to lower client activity in cash equities products.

Fixed Income

Fixed income net revenues of $1,710 million in the current quarter were 9% lower than the prior year quarter, primarily driven by lower revenues in global macro products and lower Net interest revenues due to higher funding costs, partially offset by higher revenues in credit products and commodities products and other.

Global macro products revenues decreased reflecting unfavorable inventory management while the level of client activity remained consistent.

Credit products Trading revenues increased primarily in corporate credit products driven by higher client activity, partially offset by lower client activity in securitized products.

Commodities products and Other Trading revenues increased primarily as a result of gains from client structuring activity within derivatives counterparty credit risk management and effective inventory management in commodities, partially offset by decreased client activity in structured transactions within commodities.

Other

Other sales and trading net gains of $17 million in the current quarter increased from the prior year quarter, primarily due to an increase in the fair value of investments to which certain deferred compensation plans are referenced, partially offset by higher losses on hedges associated with corporate loans.

March 2019 Form 10-Q 8


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Management’s Discussion and Analysis

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

Investments

Net investment gains of $81 million in the current quarter increased from the prior year quarter as a result of higher revenues driven by a fund distribution and gains on real estate limited partnership investments.

Other Revenues

Other revenues of $222 million in the current quarter increased from the prior year quarter, primarily reflecting higher mark-to-market gains on held for sale loans, partially offset by lower results from certain equity method investments.

Non-interest Expenses

Non-interest expenses of $3,601 million in the current quarter decreased from the prior year quarter, reflecting a 16% decrease in Compensation and benefits expenses and a 3% decrease in Non-compensation expenses.

Compensation and benefits expenses decreased in the current quarter, primarily due to decreases in discretionary incentive compensation driven by lower revenues, partially offset by increases in the fair value of investments to which certain deferred compensation plans are referenced and higher salaries.

Non-compensation expenses decreased in the current quarter, primarily due to lower litigation and volume-related expenses, partially offset by increased investment in technology and higher professional service expenses.

Income Tax Items

The current quarter includes intermittent net discrete tax benefits of $101 million. For further information, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.

9 March 2019 Form 10-Q


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Management’s Discussion and Analysis

Wealth Management

Income Statement Information

Three Months Ended
March 31,
$ in millions 2019 2018 % Change

Revenues

Investment banking

$ 109 $ 140 (22)%

Trading

302 109 177%

Investments

1 N/M

Commissions and fees

406 498 (18)%

Asset management

2,361 2,495 (5)%

Other

80 63 27%

Total non-interest revenues

3,259 3,305 (1)%

Interest income

1,413 1,280 10%

Interest expense

283 211 34%

Net interest

1,130 1,069 6%

Net revenues

4,389 4,374 —%

Compensation and benefits

2,462 2,450 —%

Non-compensation expenses

739 764 (3)%

Total non-interest expenses

3,201 3,214 —%

Income from continuing operations before income taxes

1,188 1,160 2%

Provision for income taxes

264 246 7%

Net income applicable to Morgan Stanley

$ 924 $ 914 1%

Financial Information and Statistical Data

At

March 31,

At
December 31,
$ in billions, except employee data 2019 2018

Client assets

$ 2,476 $ 2,303

Fee-based client assets 1

$ 1,116 $ 1,046

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

45% 45%

Client liabilities 2

$ 82 $ 83

Investment securities portfolio

$ 71.3 $ 68.6

Loans and lending commitments

$ 83.6 $ 82.9

Wealth Management representatives

15,708 15,694

Three Months Ended
March 31,
2019 2018

Per representative:

Annualized revenues ($ in thousands) 3

$ 1,118 $ 1,115

Client assets ($ in millions) 4

$ 158 $ 151

Fee-based asset flows ($ in billions) 5

$ 14.8 $ 18.2

1.

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

2.

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

3.

Revenues per representative equal Wealth Management’s annualized net revenues divided by the average number of representatives.

4.

Client assets per representative equal total period-end client assets divided by period-end number of representatives.

5.

For a description of the Inflows and Outflows included within Fee-based asset flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Wealth Management—Fee-Based Client Assets” in the 2018 Form 10-K. Excludes institutional cash management-related activity.

Transactional Revenues

Three Months Ended
March 31,
$ in millions 2019 2018 % Change

Investment banking

$ 109 $ 140 (22)%

Trading

302 109 177%

Commissions and fees

406 498 (18)%

Total

$ 817 $ 747 9%

Transactional revenues as a % of Net revenues

19% 17%

Net Revenues

Transactional Revenues

Transactional revenues of $817 million in the current quarter increased 9% from the prior year quarter as a result of higher Trading revenues, partially offset by lower Commissions and fees and Investment banking revenues.

Investment banking revenues decreased in the current quarter primarily due to lower revenues from structured products issuances.

Trading revenues increased in the current quarter primarily due to gains related to investments associated with certain employee deferred compensation plans compared with losses in the prior year quarter.

Commissions and fees decreased in the current quarter primarily due to decreased client activity in equities.

Asset Management

Asset management revenues of $2,361 million in the current quarter decreased 5% from the prior year quarter primarily reflecting lower fee-based client assets levels at the beginning of the current quarter due to fourth quarter market depreciation, partially offset by positive net flows.

See “Fee-Based Client Assets—Rollforwards” herein.

March 2019 Form 10-Q 10


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Management’s Discussion and Analysis

Net Interest

Net interest of $1,130 million in the current quarter increased 6% from the prior year quarter primarily as a result of higher interest rates on loans and cash management activities and higher investment securities balances, partially offset by the effect of higher interest rates on Deposits due to changes in funding mix.

In addition, we centralized certain internal treasury activities as of January 1, 2019, which partially offset the increases in Interest income and Interest expense compared with the prior year quarter. This impact is expected to continue in future periods. The effect on Net interest income was not significant in the current quarter, nor is it expected to be for the full year 2019.

Non-interest Expenses

Non-interest expenses of $3,201 million were relatively unchanged from the prior year quarter.

Compensation and benefits expenses increased modestly from the prior year quarter, reflecting increases in the fair value of investments to which certain deferred compensation plans are referenced and salaries, offset by decreases in the formulaic payout to Wealth Management representatives linked to lower revenues and the roll-off of certain merger-related employee retention loans.

Non-compensation expenses decreased due to lower consulting fees and deposit insurance expenses.

Fee-Based Client Assets

Rollforwards

$ in billions

At

December 31,
2018

Inflows Outflows Market
Impact

At

March 31,

2019

Separately managed 1

$ 279 $ 14 $ (5 ) $ (12 ) $ 276

Unified managed 2

257 13 (11 ) 24 283

Advisor

137 8 (9 ) 11 147

Portfolio manager

353 19 (14 ) 33 391

Subtotal

$ 1,026 $ 54 $ (39 ) $ 56 $ 1,097

Cash management

20 4 (5 ) 19

Total fee-based
client assets

$ 1,046 $ 58 $ (44 ) $ 56 $ 1,116

$ in billions

At

December 31,
2017

Inflows Outflows Market
Impact

At

March 31,

2018

Separately managed 1

$ 252 $ 10 $ (6 ) $ 4 $ 260

Unified managed 2

271 14 (9 ) (2 ) 274

Advisor

149 9 (9 ) (2 ) 147

Portfolio manager

353 21 (12 ) (6 ) 356

Subtotal

$ 1,025 $ 54 $ (36 ) $ (6 ) $ 1,037

Cash management

20 4 (3 ) 21

Total fee-based
client assets

$ 1,045 $ 58 $ (39 ) $ (6 ) $ 1,058

Average Fee Rates 3

Three Months Ended
March 31,
Fee rate in bps 2019 2018

Separately managed

14 16

Unified managed 2

101 99

Advisor

88 85

Portfolio manager

96 96

Subtotal

74 76

Cash management

6 6

Total fee-based client assets

73 75

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.

Includes Mutual fund advisory accounts. Prior periods have been recast to conform to the current presentation.

3.

The calculation of average fee rates was changed in the current quarter to more closely align with the recognition of the related fee revenue. Prior period rates were not changed due to immateriality.

For a description of fee-based client assets and rollforward items in the previous tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Wealth Management—Fee-Based Client Assets” in the 2018 Form 10-K.

11 March 2019 Form 10-Q


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Management’s Discussion and Analysis

Investment Management

Income Statement Information

Three Months Ended
March 31,
$ in millions 2019 2018 % Change

Revenues

Trading

$ (3 ) $ 5 (160)%

Investments

191 77 148%

Asset management

617 626 (1)%

Other

3 10 (70)%

Total non-interest revenues

808 718 13%

Interest income

4 1 N/M

Interest expense

8 1 N/M

Net interest

(4 ) N/M

Net revenues

804 718 12%

Compensation and benefits

370 304 22%

Non-compensation expenses

260 266 (2)%

Total non-interest expenses

630 570 11%

Income from continuing operations before income taxes

174 148 18%

Provision for income taxes

33 19 74%

Net income

141 129 9%

Net income applicable to noncontrolling interests

5 2 150%

Net income applicable to Morgan Stanley

$ 136 $ 127 7%

Net Revenues

Investments

Investments gains of $191 million in the current quarter increased 148% from the prior year quarter primarily as a result of higher carried interest in certain Asia private equity and infrastructure funds.

Asset Management

Asset management revenues of $617 million in the current quarter were relatively unchanged from the prior year quarter, as average AUM and average fee rates remained stable.

See “Assets Under Management or Supervision” herein.

Non-interest Expenses

Non-interest expenses of $630 million in the current quarter increased 11% from the prior year quarter primarily as a result of higher compensation and benefits expenses.

Compensation and benefits expenses increased in the current quarter primarily due to deferred compensation associated with carried interest.

Non-compensation expenses were relatively unchanged from the prior year quarter.

Assets Under Management or Supervision

Rollforwards

$ in billions

At

December 31,

2018

Inflows Outflows Market
Impact
Other

At

March 31,

2019

Equity

$ 103 $ 9 $ (8 ) $ 16 $ $ 120

Fixed income

68 6 (7 ) 1 68

Alternative/Other

128 5 (4 ) 5 (1 ) 133

Long-term AUM subtotal

299 20 (19 ) 22 (1 ) 321

Liquidity

164 343 (348 ) 1 (1 ) 159

Total AUM

$ 463 $ 363 $ (367 ) $ 23 $ (2 ) $ 480

Shares of minority
stake assets

7 6

$ in billions

At

December 31,
2017

Inflows Outflows Market
Impact
Other 1

At

March 31,

2018

Equity

$ 105 $ 9 $ (7 ) $ 1 $ 1 $ 109

Fixed income

73 7 (8 ) (1 ) 1 72

Alternative/Other

128 4 (4 ) 3 131

Long-term AUM subtotal

306 20 (19 ) 5 312

Liquidity

176 325 (344 ) 157

Total AUM

$ 482 $ 345 $ (363 ) $ $ 5 $ 469

Shares of minority
stake assets

7 7

1.

Includes the impact of the Mesa West Capital, LLC acquisition.

Average AUM

Three Months Ended
March 31,
$ in billions 2019 2018

Equity

$ 113 $ 109

Fixed income

68 73

Alternative/Other

131 129

Long-term AUM subtotal

312 311

Liquidity

163 163

Total AUM

$ 475 $ 474

Shares of minority stake assets

6 7

Average Fee Rates

Three Months Ended

March 31,

Fee rate in bps 2019 2018

Equity

76 76

Fixed income

32 35

Alternative/Other

68 68

Long-term AUM

63 63

Liquidity

17 18

Total AUM

47 47

For a description of the asset classes and rollforward items in the previous tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Investment Management—Assets Under Management or Supervision” in the 2018 Form 10-K.

March 2019 Form 10-Q 12


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Management’s Discussion and Analysis

Supplemental Financial Information and

Disclosures

Income Tax Matters

Effective Tax Rate from Continuing Operations

Three Months Ended
March 31,
$ in millions 2019 2018

U.S. GAAP

16.5 % 20.9 %

Adjusted effective income tax rate—non-GAAP 1

19.9 % 20.9 %

Net discrete tax provisions/(benefits)

Recurring 2

$ (107 ) $ (147 )

Intermittent 3

$ (101 ) $

1.

Adjusted effective income tax rate is a non-GAAP measure that excludes intermittent net discrete tax provisions (benefits). For further information on non-GAAP measures, see “Selected Non-GAAP Financial Information” herein.

2.

We consider certain income tax consequences associated with employee share-based awards recognized in Provision for income taxes in the income statements to be Recurring discrete tax items as we anticipate some level of conversion activity each quarter. Accordingly, these Recurring discrete tax provisions (benefits) are not part of the adjustment for intermittent net discrete tax provisions (benefits).

3.

Includes all tax provisions (benefits) that have been determined to be discrete, other than Recurring items as defined above.

The current quarter includes intermittent net discrete tax benefits primarily associated with the remeasurement of reserves and related interest due to new information with regard to multi-jurisdiction tax examinations.

U.S. Bank Subsidiaries

Our U.S. bank subsidiaries, Morgan Stanley Bank N.A. (“MSBNA”) and Morgan Stanley Private Bank, National Association (“MSPBNA”) (collectively, “U.S. Bank Subsidiaries”) accept deposit accounts, provide loans to a variety of customers, from large corporate and institutional clients to high net worth individuals, and invest in securities. The lending activities in the Institutional Securities business segment primarily include loans and lending commitments to corporate clients. The lending activities in the Wealth Management business segment primarily include securities-based lending, which allows clients to borrow money against the value of qualifying securities, and residential real estate loans.

We expect our lending activities to continue to grow through further market penetration of our client base. For a further discussion of our credit risks, see “Quantitative and Qualitative Disclosures about Risk—Credit Risk.” For a further discussion about loans and lending commitments, see Notes 7 and 11 to the financial statements.

U.S. Bank Subsidiaries’ Supplemental Financial Information 1

$ in billions At
March 31,
2019
At
December 31,
2018

Assets

$ 210.3 $ 216.9

Investment securities portfolio:

Investment securities—AFS

44.5 45.5

Investment securities—HTM

27.8 23.7

Total investment securities

$ 72.3 $ 69.2

Deposits 2

$ 179.1 $ 187.1

Wealth Management Loans

Securities-based lending and other 3

$ 43.5 $ 44.7

Residential real estate

28.0 27.5

Total

$ 71.5 $ 72.2

Institutional Securities Loans 4

Corporate 5 :

Corporate relationship and
event-driven lending

$ 7.4 $ 7.4

Secured lending facilities

19.3 17.5

Securities-based lending and other

5.6 6.0

Commercial and residential real estate

11.8 10.5

Total

$ 44.1 $ 41.4

1.

Amounts exclude transactions between the bank subsidiaries, as well as deposits from the Parent Company and affiliates.

2.

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

3.

Other loans primarily include tailored lending.

4.

Prior periods have been conformed to the current presentation.

5.

For a further discussion of Corporate loans in the Institutional Securities business segment, see “Credit Risk—Institutional Securities Corporate Loans” herein.

Accounting Development Updates

The Financial Accounting Standards Board has issued certain accounting updates that apply to us. 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 update is currently being evaluated to determine the potential impact of adoption:

Financial Instruments–Credit Losses. This accounting update impacts the impairment model for certain financial assets measured at amortized cost by requiring a 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 investment, HTM securities and other receivables carried at amortized cost, such as employee loans.

13 March 2019 Form 10-Q


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Management’s Discussion and Analysis

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.

For certain portfolios, we have determined that there are no expected credit losses, for example based on collateral arrangements for lending and financing transactions such as for Securities borrowed, Securities purchased under agreements to resell and certain other portfolios. Also, we have a zero loss expectation for certain financial assets based on the credit quality of the borrower or issuer such as U.S. government and agency securities.

We expect the following portfolios to be primarily impacted: employee loans, commercial real estate, corporate and residential real estate. The models we expect to use for these portfolios in the future are in the process of being tested. Based on preliminary analyses and estimates, we do not expect the increase in the allowance for credit losses resulting from the adoption of this standard will be significant to our financial statements. The ultimate impact will depend upon macroeconomic conditions, forecasts and our portfolios at the adoption date. This update is effective as of January 1, 2020.

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 financial statements in the 2018 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 the 2018 Form 10-K.

Liquidity and Capital Resources

Senior management, with oversight by the Asset/Liability Management Committee and the Board of Directors (“Board”), establishes and maintains our 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. Our Treasury department, Firm Risk Committee, Asset/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 sheet, liquidity and capital structure. Liquidity and capital matters are reported regularly to the Board and the Risk Committee of the Board.

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 and 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 March 31, 2019

$ in millions

IS WM IM Total

Assets

Cash and cash equivalents 1

$ 66,685 $ 13,952 $ 45 $ 80,682

Trading assets at fair value

262,249 52 2,517 264,818

Investment securities

26,619 71,325 97,944

Securities purchased under agreements to resell

87,061 9,509 96,570

Securities borrowed

138,710 181 138,891

Customer and other receivables

36,314 15,732 621 52,667

Loans, net of allowance 2

44,742 71,450 5 116,197

Other assets 3

13,390 12,696 2,109 28,195

Total assets

$ 675,770 $ 194,897 $ 5,297 $ 875,964

March 2019 Form 10-Q 14


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Management’s Discussion and Analysis

At December 31, 2018

$ in millions

IS WM IM Total

Assets

Cash and cash equivalents 1

$ 69,526 $ 17,621 $ 49 $ 87,196

Trading assets at fair value

263,870 60 2,369 266,299

Investment securities

23,273 68,559 91,832

Securities purchased under agreements to resell

80,660 17,862 98,522

Securities borrowed

116,207 106 116,313

Customer and other receivables

35,777 16,865 656 53,298

Loans, net of allowance 2

43,380 72,194 5 115,579

Other assets 3

13,734 9,125 1,633 24,492

Total assets

$ 646,427 $ 202,392 $ 4,712 $ 853,531

IS—Institutional Securities

WM—Wealth Management

IM—Investment Management

1.

Cash and cash equivalents includes Cash and due from banks, Interest bearing deposits with banks and Restricted cash.

2.

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).

3.

Other assets primarily includes Goodwill, Intangible assets, premises, equipment, software, other investments, ROU assets related to leases 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 $876 billion at March 31, 2019 from $854 billion at December 31, 2018, primarily due to higher Securities borrowed and Securities purchased under agreements to resell in the Institutional Securities business segment as a result of higher period-end client balances and Trading liabilities. These increases were partially offset by lower Securities purchased under agreements to resell within the Wealth Management business segment as a result of lower Deposits.

Liquidity Risk Management Framework

The core components of our Liquidity Risk Management Framework are the Required Liquidity Framework, Liquidity Stress Tests and the GLR, which support our target liquidity profile. For a 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 the 2018 Form 10-K.

At March 31, 2019 and December 31, 2018, we maintained sufficient liquidity to meet current and contingent funding obligations as modeled in our Liquidity Stress Tests.

Global Liquidity Reserve

We maintain sufficient liquidity reserves to cover daily funding needs and to meet strategic liquidity targets sized by

the Required Liquidity Framework and Liquidity Stress Tests. For a 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 the 2018 Form 10-K.

GLR by Type of Investment

$ in millions At
March 31,
2019
At
December 31,
2018

Cash deposits with banks 1

$ 11,457 $ 10,441

Cash deposits with central banks 1

34,170 36,109

Unencumbered highly liquid securities:

U.S. government obligations

105,425 119,138

U.S. agency and agency mortgage-backed securities

42,228 41,473

Non-U.S. sovereign obligations 2

36,341 39,869

Other investment grade securities

3,527 2,705

Total

$ 233,148 $ 249,735

1.

Included in Cash and due from banks and Interest bearing deposits with banks in the balance sheets.

2.

Primarily composed of unencumbered Japanese, U.K., Brazilian and French government obligations.

GLR Managed by Bank and Non-Bank Legal Entities

$ in millions

At

March 31,
2019

At
December 31,
2018

Average Daily Balance
Three Months Ended
March 31, 2019

Bank legal entities

Domestic

$ 80,296 $ 88,809 $ 80,670

Foreign

5,492 4,896 4,672

Total Bank legal entities

85,788 93,705 85,342

Non-Bank legal entities

Domestic:

Parent Company

52,086 64,262 62,283

Non-Parent Company

40,807 40,936 39,980

Total Domestic

92,893 105,198 102,263

Foreign

54,467 50,832 54,820

Total Non-Bank legal entities

147,360 156,030 157,083

Total

$ 233,148 $ 249,735 $ 242,425

Regulatory Liquidity Framework

Liquidity Coverage Ratio

We and our U.S. Bank Subsidiaries are subject to LCR requirements, including a requirement to calculate each entity’s LCR on each business day. The requirements are designed to ensure that banking organizations have sufficient HQLA to cover net cash outflows arising from significant stress over 30 calendar days, thus promoting the short-term resilience of the liquidity risk profile of banking organizations.

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Management’s Discussion and Analysis

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.

Based on our daily calculations, we and our U.S. Bank Subsidiaries are compliant with the minimum required LCR of 100%.

HQLA by Type of Asset and LCR

Average Daily Balance

Three Months Ended

$ in millions

March 31,

2019

December 31,
2018

HQLA

Cash deposits with central banks

$ 37,070 $ 44,225

Securities 1

155,713 150,792

Total

$ 192,783 $ 195,017

LCR

150% 145%

1.

Primarily includes U.S. Treasuries, U.S. agency mortgage-backed securities, sovereign bonds and investment grade corporate bonds.

The increase in the LCR in the current quarter is due to a reduction in net outflows (i.e., the denominator of the ratio) primarily driven by higher cash inflows from Securities borrowed and Securities purchased under agreements to resell, and due to certain securities-for-securities transactions.

Net Stable Funding Ratio

The Basel Committee on Banking Supervision (“Basel Commit-tee”) has previously finalized the NSFR framework. In May 2016, the U.S. banking agencies issued a proposal to implement the NSFR in the U.S. however, a final rule has not yet been issued in the U.S. For an additional discussion of the 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 the 2018 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 include our equity capital, borrowings, securities sold under agreements to repurchase, 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 Re-sources—Funding Management—Secured Financing” in the 2018 Form 10-K.

Collateralized Financing Transactions

$ in millions At
March 31,
2019
At
December 31,
2018

Securities purchased under agreements to resell and Securities borrowed

$ 235,461 $ 214,835

Securities sold under agreements to repurchase and Securities loaned

$ 60,456 $ 61,667

Securities received as collateral 1

$ 5,426 $ 7,668

Average Daily Balance
Three Months Ended
$ in millions

March 31,

2019

December 31,
2018

Securities purchased under agreements to resell and Securities borrowed

$          219,062 $          213,974

Securities sold under agreements to repurchase and Securities loaned

$            58,965 $            57,677

1.

Securities received as collateral are included in Trading assets in the balance sheets.

See Note 2 to the financial statements in the 2018 Form 10-K and Note 6 to the financial statements for more details on collateralized financing transactions.

In addition to the collateralized financing transactions shown in the previous table, we engage in financing transactions collateralized by customer-owned securities, which are segregated in accordance with regulatory requirements. Receivables under these financing transactions, primarily margin loans, are included in Customer and other receivables in the balance sheets, and payables under these financing transactions, primarily to prime brokerage customers, are included in Customer and other payables in the balance sheets. 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.

Unsecured Financing

For a discussion of our unsecured financing activities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Funding Management—Unsecured Financing” in the 2018 Form 10-K.

March 2019 Form 10-Q 16


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Management’s Discussion and Analysis

Deposits

$ in millions

At

March 31,

2019

At
December 31,
2018

Savings and demand deposits:

Brokerage sweep deposits 1

$            127,678 $            141,255

Savings and other

15,523 13,642

Total Savings and demand

deposits

143,201 154,897

Time deposits

36,530 32,923

Total

$            179,731 $            187,820

1.

Amounts represent balances swept from client brokerage accounts.

Deposits are primarily sourced from our Wealth Management clients and are considered to have stable, low-cost funding characteristics. Total deposits at March 31, 2019 decreased compared with December 31, 2018, due to a decrease in Brokerage sweep deposits driven by redeployment of client cash partially offset by increases in Time deposits and Savings and other deposits driven by promotional offerings.

Borrowings by Remaining Maturity at March 31, 2019 1

$ in millions

Parent
Company
Subsidiaries Total

Original maturities of one year or less

$ $ 1,498 $ 1,498

Original maturities greater than one year

2019

$ 14,187 $ 3,937 $ 18,124

2020

15,690 4,082 19,772

2021

21,256 3,936 25,192

2022

14,952 2,322 17,274

2023

11,624 2,642 14,266

Thereafter

75,346 19,219 94,565

Total

$ 153,055 $ 36,138 $ 189,193

Total Borrowings

$ 153,055 $ 37,636 $ 190,691

Maturities over next 12 months 2

26,068

1.

Original maturity in the table is generally based on contractual final maturity. For borrowings with put options, remaining maturity represents the earliest put date.

2.

Includes only borrowings with original maturities greater than one year.

Borrowings of $190,691 million as of March 31, 2019 were relatively unchanged compared with $189,662 million at December 31, 2018.

We believe that accessing debt investors through multiple distribution channels helps provide consistent access to the unsecured markets. In addition, the issuance of borrowings with original maturities greater than one year allows us to reduce reliance on short-term credit sensitive instruments. Borrowings with original maturities greater than one year 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.

The 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. We also engage in, and may continue to engage in, repurchases of our borrowings in the ordinary course of business.

For further information on 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. When determining credit ratings, 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 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 U.S. Bank Subsidiaries’ Senior Unsecured Ratings at April 30, 2019

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- Positive

S&P Global Ratings

A-2 BBB+ Stable

17 March 2019 Form 10-Q


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Management’s Discussion and Analysis

MSBNA
Short-Term
Debt
Long-Term
Debt
Rating
Outlook

Fitch Ratings, Inc.

F1 A+ Stable

Moody’s Investors Service, Inc.

P-1 A1 Stable

S&P Global Ratings

A-1 A+ Stable

MSPBNA
Short-Term
Debt
Long-Term
Debt
Rating
Outlook

Moody’s Investors Service, Inc.

P-1 A1 Stable

S&P Global Ratings

A-1 A+ Stable

Incremental Collateral or Terminating Payments

In connection with certain OTC derivatives 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 clearing organizations in the event of a future credit rating downgrade irrespective of whether we are in a net asset or net liability position. See Note 4 to the financial statements for additional information on OTC derivatives that contain such contingent features.

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 other things, 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.

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. In the future, we may expand or contract our capital base to address the changing needs of our businesses.

Common Stock Repurchases

Three Months Ended March 31,
in millions, except for per share data 2019 2018

Repurchases

$ 1,180 $ 1,250

Number of shares

28 22

Average price per share

$ 42.19 $ 55.98

From time to time we repurchase our outstanding common stock as part of our Share Repurchase Program. A portion of common stock repurchases in the current quarter was conducted under a sales plan with Mitsubishi UFJ Financial Group, Inc. (“MUFG”), whereby MUFG sold shares of the Firm’s common stock to us, as part of our Share Repurchase Program. The sales plan is only intended to maintain MUFG’s ownership percentage below 24.9% in order to comply with MUFG’s passivity commitments to the Board of Governors of the Federal Reserve System (“Federal Reserve”) and has no impact on the strategic alliance between MUFG and us, including our joint ventures in Japan. For a description of our Share Repurchase Program, see “Unregistered Sales of Equity Securities and Use of Proceeds.”

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

Common Stock Dividend Announcement

Announcement date

April 17, 2019

Amount per share

$0.30

Date to be paid

May 15, 2019

Shareholders of record as of

April 30, 2019

Preferred Stock Dividend Announcement

Announcement date

March 15, 2019

Date paid

April 15, 2019

Shareholders of record as of

March 29, 2019

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

Off-Balance Sheet Arrangements and Contractual Obligations

Off-Balance Sheet Arrangements

We enter into various off-balance sheet arrangements, including through unconsolidated 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 Risk—Credit Risk—Loans and Lending Commitments.”

March 2019 Form 10-Q 18


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Management’s Discussion and Analysis

Contractual Obligations

For a discussion about our contractual obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual Obligations” in the 2018 Form 10-K.

Regulatory Requirements

Regulatory Capital Framework

We are an FHC under the Bank Holding Company Act of 1956, as amended (“BHC Act”), and are subject to the regulation and oversight of the Federal Reserve. The Federal Reserve establishes capital requirements for us, including “well-capitalized” standards, and evaluates our compliance with such capital requirements. The OCC establishes similar capital requirements and standards for our U.S. Bank Subsidiaries. For us to remain an FHC, we must remain well-capitalized in accordance with standards established by the Federal Reserve and our U.S. Bank Subsidiaries must remain well-capitalized in accordance with standards established by the OCC. For additional information on regulatory capital requirements for our U.S. Bank Subsidiaries, see Note 13 to the financial statements.

Regulatory capital requirements established by the Federal Reserve 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 (“Dodd-Frank Act”).

Regulatory Capital Requirements

We are required to maintain minimum risk-based capital, leverage-based capital and total loss-absorbing capacity (“TLAC”) ratios. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Capital Requirements” in the 2018 Form 10-K. For additional information on TLAC, see Total Loss-Absorbing Capacity herein.

Risk-Based 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 AOCI and investments in the capital instruments of unconsolidated financial institutions.

In addition to the minimum risk-based capital ratio requirements, we are subject to the following buffers in 2019:

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

The Common Equity Tier 1 G-SIB capital surcharge, currently at 3%; and

Up to a 2.5% Common Equity Tier 1 CCyB, currently set by U.S. banking agencies at zero.

In 2018, each of these buffers was 75% of the fully phased-in 2019 requirement noted above. Failure to maintain 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 the 2018 Form 10-K.

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 RWA (“Standardized Approach”) and (ii) the applicable advanced approaches for calculating credit risk, market risk and operational risk RWA (“Advanced Approach”). The credit risk RWA calculations between the two approaches differ in that the Standardized Approach requires calculation of RWA using prescribed risk weights, whereas the Advanced Approach utilizes models to calculate exposure amounts and risk weights. At March 31, 2019 and December 31, 2018, our ratios for determining regulatory compliance are based on the Standardized Approach rules.

Leverage-Based Regulatory Capital . Minimum leverage-based capital requirements include a Tier 1 leverage ratio and an SLR. We are required to maintain a Tier 1 SLR of 5%, inclusive of an enhanced SLR capital buffer of at least 2% in order to avoid potential limitations on capital distributions, including dividends and stock repurchases, and discretionary bonus payments to executive officers.

19 March 2019 Form 10-Q


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Management’s Discussion and Analysis

Regulatory Capital Ratios

At March 31, 2019
$ in millions Required
Ratio 1
Standardized Advanced

Risk-based capital

Common Equity Tier 1 capital

$ 63,344 $ 63,344

Tier 1 capital

71,910 71,910

Total capital

81,570 81,284

Total RWA

378,420 366,353

Common Equity Tier 1 capital ratio

10.0% 16.7% 17.3%

Tier 1 capital ratio

11.5% 19.0% 19.6%

Total capital ratio

13.5% 21.6% 22.2%

Leverage-based capital

Adjusted average assets 2

$ 855,192 N/A

Tier 1 leverage ratio

4.0% 8.4% N/A

Supplementary leverage exposure 3

N/A $ 1,104,264

SLR

5.0% N/A 6.5%

At December 31, 2018
$ in millions Required
Ratio 1
Standardized Advanced

Risk-based capital

Common Equity Tier 1 capital

$ 62,086 $ 62,086

Tier 1 capital

70,619 70,619

Total capital

80,052 79,814

Total RWA

367,309 363,054

Common Equity Tier 1 capital ratio

8.6% 16.9% 17.1%

Tier 1 capital ratio

10.1% 19.2% 19.5%

Total capital ratio

12.1% 21.8% 22.0%

Leverage-based capital

Adjusted average assets 2

$ 843,074 N/A

Tier 1 leverage ratio

4.0% 8.4% N/A

Supplementary leverage exposure 3

N/A $ 1,092,672

SLR

5.0% N/A 6.5%

1.

Required ratios are inclusive of any buffers applicable as of the date presented. For 2018, the minimum required regulatory capital ratios for risk-based capital are under the transitional rules.

2.

Adjusted average assets represents the denominator of the Tier 1 leverage ratio and is composed of the average daily balance of consolidated on-balance sheet assets under U.S. GAAP during the quarters ended March 31, 2019 and December 31, 2018, adjusted for disallowed goodwill, intangible assets, certain deferred tax assets, certain investments in the capital instruments of unconsolidated financial institutions and other capital deductions.

3.

Supplementary leverage exposure is the sum of Adjusted average assets used in the Tier 1 leverage ratio and other adjustments, primarily (i) potential future exposure for derivative exposures, gross-up for cash collateral netting where qualifying criteria are not met, and the effective notional principal amount of sold credit protection offset by qualifying purchased credit protection; (ii) the counterparty credit risk for repo-style transactions; and (iii) the credit equivalent amount for off-balance sheet exposures.

Regulatory Capital

$ in millions At
March 31,
2019
At
December 31,
2018
Change

Common Equity Tier 1 capital

Common stock and surplus

$ 8,616 $ 9,843 $ (1,227 )

Retained earnings

66,061 64,175 1,886

AOCI

(2,473 ) (2,292 ) (181 )

Regulatory adjustments and deductions:

Net goodwill

(6,655 ) (6,661 ) 6

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

(2,084 ) (2,158 ) 74

Other adjustments and deductions 1

(121 ) (821 ) 700

Total Common Equity Tier 1 capital

$ 63,344 $ 62,086 $ 1,258

Additional Tier 1 capital

Preferred stock

$ 8,520 $ 8,520 $

Noncontrolling interests

475 454 21

Additional Tier 1 capital

$ 8,995 $ 8,974 $ 21

Deduction for investments in covered funds

(429 ) (441 ) 12

Total Tier 1 capital

$ 71,910 $ 70,619 $ 1,291

Standardized Tier 2 capital

Subordinated debt

$ 9,087 $ 8,923 $ 164

Noncontrolling interests

112 107 5

Eligible allowance for credit losses

470 440 30

Other adjustments and deductions

(9 ) (37 ) 28

Total Standardized Tier 2 capital

$ 9,660 $ 9,433 $ 227

Total Standardized capital

$ 81,570 $ 80,052 $ 1,518

Advanced Tier 2 capital

Subordinated debt

$ 9,087 $ 8,923 $ 164

Noncontrolling interests

112 107 5

Eligible credit reserves

184 202 (18 )

Other adjustments and deductions

(9 ) (37 ) 28

Total Advanced Tier 2 capital

$ 9,374 $ 9,195 $ 179

Total Advanced capital

$ 81,284 $ 79,814 $ 1,470

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 other net after-tax adjustments related to AOCI.

March 2019 Form 10-Q 20


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Management’s Discussion and Analysis

RWA Rollforward

At March 31, 2019 1
$ in millions Standardized Advanced

Credit risk RWA

Balance at December 31, 2018

$ 305,531 $ 190,595

Change related to the following items:

Derivatives

2,095 7,246

Securities financing transactions

8,269 2,353

Securitizations

358 402

Investment securities

1,503 2,616

Commitments, guarantees and loans

2,067 1,648

Cash

(610 ) (361 )

Equity investments

369 390

Other credit risk 2

4,105 4,263

Total change in credit risk RWA

$ 18,156 $ 18,557

Balance at March 31, 2019

$ 323,687 $ 209,152

Market risk RWA

Balance at December 31, 2018

$ 61,778 $ 61,857

Change related to the following items:

Regulatory VaR

(610 ) (610 )

Regulatory stressed VaR

(2,934 ) (2,934 )

Incremental risk charge

(4,980 ) (4,980 )

Comprehensive risk measure

96 55

Specific risk:

Non-securitizations

1,141 1,141

Securitizations

242 242

Total change in market risk RWA

$ (7,045 ) $ (7,086 )

Balance at March 31, 2019

$ 54,733 $ 54,771

Operational risk RWA

Balance at December 31, 2018

N/A $ 110,602

Change in operational risk RWA

N/A (8,172 )

Balance at March 31, 2019

N/A $ 102,430

Total RWA

$ 378,420 $ 366,353

Regulatory

VaR—VaR for regulatory capital requirements

1.

The RWA for each category reflects 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.

Credit risk RWA increased in the current quarter under the Standardized and Advanced Approaches primarily due to increased exposures in Securities financing transactions and Derivatives, and an increase in Other credit risk mainly driven by the Firm’s adoption of the Leases accounting update on January 1, 2019. Under the Advanced Approach, the increased derivatives exposure also led to increased RWA related to CVA.

Market risk RWA decreased in the current quarter under the Standardized and Advanced Approaches primarily due to a decrease in the Incremental risk charge driven by reduced exposures and improved hedging in credit products.

The decrease in operational risk RWA under the Advanced Approach in the current quarter reflects a continued reduction in the magnitude of internal losses utilized in the operational risk capital model related to litigation.

Total Loss-Absorbing Capacity . The Federal Reserve has established external TLAC, long-term debt (“LTD”) and clean holding company requirements for top-tier BHCs of U.S. G-SIBs (“covered BHCs”), including the Parent Company. These requirements include 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. A covered BHC is required to maintain minimum levels of external TLAC and eligible LTD, as well as certain TLAC buffer requirements. Failure to maintain the TLAC buffers would result in restrictions on capital distributions and discretionary bonus payments to executive officers.

Required and Actual TLAC and Eligible LTD Ratios

At March 31, 2019

$ in millions

Required Ratio 1 Actual
Amount/Ratio

Total Loss-Absorbing Capacity

External TLAC 2

$                198,965

External TLAC as a % of RWA

21.5 % 52.6%

External TLAC as a % of
leverage exposure

9.5 % 18.0%

Eligible LTD 3

$                120,983

Eligible LTD as a % of RWA

9.0 % 32.0%

Eligible LTD as a % of
leverage exposure

4.5 % 11.0%

1.

Required ratios are inclusive of any buffers applicable as of the date presented.

2.

External TLAC consists of Common Equity Tier 1 capital and Additional Tier 1 capital (each excluding any noncontrolling minority interests), as well as eligible LTD.

3.

Consists of TLAC-eligible LTD reduced by 50% for amounts of unpaid principal due to be paid in more than one year but less than two years from March 31, 2019.

For a further discussion of TLAC and related requirements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Regulatory Capital Requirements” in the 2018 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 BHCs, including us, which form part of the Federal Reserve’s annual CCAR framework.

We submitted our 2019 Capital Plan (“Capital Plan”) and company-run stress test results to the Federal Reserve on April 5, 2019. We expect that the Federal Reserve will provide its response to our 2019 Capital Plan by June 30, 2019. There could be a range of potential outcomes to our Capital Plan whereby the Federal Reserve could object to, or otherwise require us to modify, such plan. See “Risk Factors”

21 March 2019 Form 10-Q


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Management’s Discussion and Analysis

in the 2018 Form 10-K. The Federal Reserve is expected to publish summary results of the CCAR and Dodd-Frank Act supervisory stress tests of each large BHC, including us, by June 30, 2019. We are required to disclose a summary of the results of our company-run stress tests within 15 days of the date the Federal Reserve discloses the results of the supervisory stress tests. In addition, we must submit the results of our mid-cycle company-run stress test to the Federal Reserve by October 5, 2019 and disclose a summary of the results within 30 days of the submission date.

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 the 2018 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 under the Required Capital framework, as well as each business segment’s relative contribution to our total Required Capital.

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. The amount of capital allocated to the business segments is generally set at the beginning of each year and remains fixed throughout the year until the next annual reset unless a significant business change occurs ( e.g. , acquisition or disposition). 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 common equity. We generally hold Parent common equity for prospective regulatory requirements, organic growth, acquisitions and other capital needs.

The Required Capital framework is expected to evolve over time in response to changes in the business and regulatory environment, for example, to incorporate changes in stress testing or enhancements to modeling techniques. We will continue to evaluate the framework with respect to the impact of future regulatory requirements, as appropriate.

Average Common Equity Attribution 1

Three Months Ended
March 31,
$ in billions 2019 2018

Institutional Securities

$ 40.4 $ 40.8

Wealth Management

18.2 16.8

Investment Management

2.5 2.6

Parent

10.5 8.8

Total

$ 71.6 $ 69.0

1.

Average common equity is a non-GAAP financial measure. See “Selected Non-GAAP Financial Information” herein.

Resolution and Recovery Planning

Pursuant to the Dodd-Frank Act, we are required to periodically submit to the Federal Reserve and the FDIC a 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 is an SPOE strategy. Currently, upon the occurrence of a resolution scenario, the Parent Company would be obligated, under a support agreement with its material entities, to contribute or loan on a subordinated basis all of its contributable 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 entities.

The obligations of the Parent Company under the existing support agreement are in most cases 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 entities 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.

In further development of our SPOE strategy, we have created a wholly owned, direct subsidiary of the Parent Company, MS Holdings LLC (the “Funding IHC”), to serve as a resolution funding vehicle. We expect that, prior to the submission of our 2019 resolution plan by July 1, 2019, the Parent Company will contribute certain of its assets to the Funding IHC and enter into an updated support agreement with the Funding IHC as well as certain other subsidiaries to facilitate the execution of our SPOE strategy. The updated agreement will

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Management’s Discussion and Analysis

obligate the Parent Company to transfer capital and liquidity to the Funding IHC, and that the Parent Company and/or the Funding IHC will recapitalize and provide liquidity to material entities in the event of our material financial distress or failure.

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” and “Risk Factors—Legal, Regulatory and Compliance Risk” in the 2018 Form 10-K.

Regulatory Developments

Proposed Revisions to the Regulatory Capital Treatment for Investments in Certain Unsecured Debt Instruments Issued by G-SIBs

The Federal Reserve, the OCC and the FDIC have issued a proposed rule that would, among other things, modify the regulatory capital framework for Advanced Approach banking organizations, including us. Such firms would be required to make certain deductions from regulatory capital for their investments in certain unsecured debt instruments (including eligible LTD in the TLAC framework) issued by the Parent Company and other G-SIBs.

Proposed Revisions to Resolution Planning Requirements

The Federal Reserve and the FDIC have issued a proposed rule that would change our resolution planning obligations under the Dodd-Frank Act. The proposed rule would require us to file resolution plans once every two years and would allow us to alternate between submitting a full, detailed resolution plan and a streamlined, targeted resolution plan. The proposed rule also makes certain changes to the information required to be included in our resolution plan.

For a discussion of other regulatory developments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments” in the 2018 Form 10-K.

Other Matters

U.K. Withdrawal from the E.U.

Following the U.K. electorate vote to leave the E.U., the U.K. invoked Article 50 of the Lisbon Treaty on March 29, 2017, which triggered a two-year period during which the U.K. government negotiated a form of withdrawal agreement with the E.U. The U.K. government and the E.U. have agreed to delay the U.K.’s scheduled withdrawal from the E.U. until

October 31, 2019. However, if the U.K. does not hold elections to the European Parliament in accordance with applicable E.U. law and ratify the withdrawal agreement by the applicable deadlines, the U.K.’s withdrawal date would become June 1, 2019. Absent any further changes to this time schedule, the U.K. is expected to leave the E.U. by October 31, 2019 at the latest. Discussions are ongoing within the U.K. Parliament on the negotiated withdrawal agreement and the alternatives to it, and between the U.K. government and the E.U.

For more information on the U.K.’s withdrawal from the E.U., our related preparations and the potential impact on our operations, see “Quantitative and Qualitative Disclosures about Risk—Country Risk” herein, and see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Other Matters” and “Risk Factors—International Risk” in the 2018 Form 10-K.

Expected Replacement of London Interbank Offered Rate and Replacement or Reform of Other Interest Rates

Central banks around the world, including the Federal Reserve, have commissioned working groups of market participants and official sector representatives with the goal of finding suitable replacements for LIBOR and replacements or reforms of other interest rate benchmarks, such as EURIBOR and EONIA (collectively, the “IBORs”).

For a further discussion of the expected replacement of the IBORs and/or reform of interest rate benchmarks, and the related risks and our transition plan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments” and “Risk Factors—Legal, Regulatory and Compliance Risk,” respectively, in the 2018 Form 10-K.

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Quantitative and Qualitative Disclosures about Risk

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 Risk—Risk Management” in the 2018 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 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 alternative and other funds. For a further discussion of market risk, see “Quantitative and Qualitative Disclosures about Risk—Market Risk” in the 2018 Form 10-K.

Trading Risks

Value-at-Risk. 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.

For information regarding our VaR methodology, assumptions and limitations, see “Quantitative and Qualitative Disclosures about Risk—Market Risk—Trading Risks—Value-at-Risk” in the 2018 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 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. To further enhance the transparency of 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.

95%/One-Day Management VaR

Three Months Ended
March 31, 2019

$ in millions

Period

End

Average High 2 Low 2

Interest rate and credit spread

$ 32 $ 32 $ 39 $ 26

Equity price

15 16 19 12

Foreign exchange rate

15 14 16 11

Commodity price

9 10 12 9

Less: Diversification benefit 1

(32 ) (32 ) N/A N/A

Primary Risk Categories

$ 39 $ 40 $ 48 $ 36

Credit Portfolio

17 16 18 14

Less: Diversification benefit 1

(12 ) (10 ) N/A N/A

Total Management VaR

$ 44 $ 46 $ 55 $ 42

Three Months Ended
December 31, 2018

$ in millions

Period

End

Average High 2 Low 2

Interest rate and credit spread

$ 38 $ 36 $ 51 $ 25

Equity price

14 13 18 12

Foreign exchange rate

13 13 16 11

Commodity price

13 12 18 7

Less: Diversification benefit 1

(27 ) (30 ) N/A N/A

Primary Risk Categories

$ 51 $ 44 $ 62 $ 34

Credit Portfolio

15 13 16 11

Less: Diversification benefit 1

(9 ) (8 ) N/A N/A

Total Management VaR

$ 57 $ 49 $ 67 $ 39

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.

Average total Management VaR and average Management VaR for the Primary Risk Categories decreased from the three-months ended December 31, 2018, primarily as a result of reduced interest rate and credit spread exposure in the Fixed Income Division of the Institutional Securities business segment.

Distribution of VaR Statistics and Net Revenues

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.

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Risk Disclosures

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. There were no days with trading losses in the current quarter.

Daily 95%/One-Day Total Management VaR for the Current Quarter 1

($ in millions)

LOGO

1.

The average 95%/one-day total Management VaR for the current quarter was $46 million.

Daily Net Trading Revenues for the Current Quarter

($ in millions)

LOGO

The previous histogram shows the distribution for the current quarter of daily net trading revenues. Daily net trading revenues include 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. Certain items such as fees, commissions and net

interest income are excluded from daily net trading revenues and the VaR model. Revenues required for Regulatory VaR backtesting further exclude intraday trading.

Non-Trading Risks

We believe that sensitivity analysis is an appropriate representation of our non-trading risks. The following sensitivity analyses cover substantially all of the non-trading risk in our portfolio.

Credit Spread Risk Sensitivity 1

$ in millions

At
March 31,
2019
At
December 31,
2018

Derivatives

$ 6 $ 6

Funding liabilities 2

37 34

1.

Amounts represent the potential gain for each 1 bps widening of our credit spread.

2.

Relates to structured note liabilities carried at fair value.

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

$ in millions At
March 31,
2019
At
December 31,
2018

Basis point change

+200

$ 484 $ 340

+100

274 182

- 100

(619 ) (428 )

The previous 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 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.

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, including non-parallel rate change scenarios. 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 March 31, 2019 and December 31, 2018 is primarily driven by a flatter yield curve, expectations of deposit pricing and changes in our asset-liability profile.

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Risk Disclosures

Investments Sensitivity, Including Related Carried Interest

Loss from 10% Decline

$ in millions

At
March 31,
2019
At
December 31,
2018

Investments related to Investment Management activities

$ 334 $ 298

Other investments:

MUMSS

164 165

Other Firm investments

187 179

MUMSS—Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.

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 is 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 carried interest. The change in investments sensitivity related to Investment Management activities between December 31, 2018 and March 31, 2019 is primarily the result of higher carried interest.

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 Risk—Credit Risk” in the 2018 Form 10-K.

Loans and Lending Commitments

At March 31, 2019
$ in millions IS WM IM 1 Total

Corporate

$ 22,283 $ 16,136 $ 5 $ 38,424

Consumer

27,300 27,300

Residential real estate

28,037 28,037

Commercial real estate

7,764 7,764

Loans held for investment, gross of allowance

30,047 71,473 5 101,525

Allowance for loan losses

(215 ) (44 ) (259 )

Loans held for investment, net of allowance

29,832 71,429 5 101,266

Corporate

12,469 12,469

Residential real estate

1 21 22

Commercial real estate

2,440 2,440

Loans held for sale

14,910 21 14,931

Corporate

8,286 21 8,307

Residential real estate

1,282 1,282

Commercial real estate

1,766 1,766

Loans held at fair value

11,334 21 11,355

Total loans

56,076 71,450 26 127,552

Lending commitments 2

102,174 12,147 114,321

Total loans and lending commitments 2

$ 158,250 $ 83,597 $ 26 $ 241,873

At December 31, 2018
$ in millions IS WM IM 1 Total

Corporate

$ 20,020 $ 16,884 $ 5 $ 36,909

Consumer

27,868 27,868

Residential real estate

27,466 27,466

Commercial real estate 3

7,810 7,810

Loans held for investment, gross of allowance

27,830 72,218 5 100,053

Allowance for loan losses

(193 ) (45 ) (238 )

Loans held for investment, net of allowance

27,637 72,173 5 99,815

Corporate

13,886 13,886

Residential real estate

1 21 22

Commercial real estate 3

1,856 1,856

Loans held for sale

15,743 21 15,764

Corporate

9,150 21 9,171

Residential real estate

1,153 1,153

Commercial real estate 3

601 601

Loans held at fair value

10,904 21 10,925

Total loans

54,284 72,194 26 126,504

Lending commitments 2

95,065 10,663 105,728

Total loans and lending commitments 2

$ 149,349 $ 82,857 $ 26 $ 232,232

1.

Investment Management business segment loans are entered into in conjunction with certain investment advisory activities.

2.

Due to the nature of our obligations under the commitments, these amounts include certain commitments participated to third parties.

3.

Beginning in 2019, loans previously referred to as Wholesale real estate are referred to as Commercial real estate.

March 2019 Form 10-Q 26


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Risk Disclosures

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. Total loans and lending commitments increased by approximately $10 billion primarily due to increases in event-driven lending commitments within the Institutional Securities business segment.

Credit exposure arising 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, industry, facility structure, loan-to-value ratio, debt service ratio, collateral and covenants. 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.

See Notes 3, 7 and 11 to the financial statements for further information.

Allowance for Loans and Lending Commitments Held for Investment

At At
March 31, December 31,
$ in millions 2019 2018

Loans

$ 259 $ 238

Lending commitments

211 203

Total allowance for loans and
lending commitments

$ 470 $ 441

The aggregate allowance for loans and lending commitments increased in the current quarter primarily in Institutional Securities as a result of select downgrades within Corporate loans as well as growth in lending commitments. See Notes 7 and 11 to the financial statements for further information.

Status of Loans Held for Investment

At March 31, 2019 At December 31, 2018
IS WM IS WM

Current

99.1 % 99.9 % 99.8 % 99.9 %

Nonaccrual 1

0.9 % 0.1 % 0.2 % 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 Loans and Lending Commitments 1

At March 31, 2019
Years to Maturity

$ in millions

Less than 1 1-3 3-5 Over 5 Total

Loans

AA

$ 369 $ 52 $ $ 19 $ 440

A

712 1,686 999 264 3,661

BBB

3,101 5,070 4,380 401 12,952

NIG

5,966 15,002 10,348 5,646 36,962

Unrated 2

87 26 234 1,714 2,061

Total loans

10,235 21,836 15,961 8,044 56,076

Lending commitments

AAA

90 50 140

AA

2,520 1,163 2,757 6,440

A

9,716 5,539 9,857 428 25,540

BBB

3,259 12,132 21,084 374 36,849

NIG

1,637 10,832 15,833 4,750 33,052

Unrated 2

8 134 11 153

Total lending commitments

17,230 29,716 49,665 5,563 102,174

Total exposure

$ 27,465 $ 51,552 $ 65,626 $ 13,607 $ 158,250

At December 31, 2018
Years to Maturity

$ in millions

Less than 1 1-3 3-5 Over 5 Total

Loans

AA

$ 7 $ 430 $ $ 19 $ 456

A

565 1,580 858 267 3,270

BBB

3,775 4,697 4,251 495 13,218

NIG

7,151 12,882 9,313 5,889 35,235

Unrated 2

88 95 160 1,762 2,105

Total loans

11,586 19,684 14,582 8,432 54,284

Lending commitments

AAA

90 75 165

AA

2,491 1,177 2,863 6,531

A

2,892 6,006 9,895 502 19,295

BBB

2,993 11,825 19,461 638 34,917

NIG

1,681 10,604 16,075 5,751 34,111

Unrated 2

8 38 46

Total lending commitments

10,155 29,687 48,332 6,891 95,065

Total exposure

$ 21,741 $ 49,371 $ 62,914 $ 15,323 $ 149,349

NIG–Non-investment

grade

1.

Obligor credit ratings are internally determined by CRM.

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 “Market Risk” herein.

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Risk Disclosures

Institutional Securities Loans and Lending Commitments by Industry

$ in millions

At

March 31,
2019

At
December 31,
2018

Industry

Financials

$ 34,152 $ 32,655

Real estate

26,666 24,133

Healthcare

17,348 10,158

Communications services

12,427 11,244

Industrials

11,398 13,701

Energy

9,774 9,847

Utilities

9,360 9,856

Information technology

9,086 9,896

Consumer discretionary

8,087 8,314

Consumer staples

7,583 7,921

Materials

7,033 5,969

Insurance

3,637 3,744

Other

1,699 1,911

Total

$            158,250 $            149,349

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. We also purchase a variety of loans in the secondary market. Our 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- or long-term collateralized lines of credit and term loans with various types of collateral, including residential real estate, commercial real estate, corporate and financial assets. These collateralized loans and lending commitments generally provide for over­collateralization. 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. The Firm monitors collateral levels against the requirements of lending agreements. See Note 12 to the financial statements for information about our securitization activities.

Institutional Securities Corporate Loans 1

$ in millions At
March 31,
2019

At
December 31,
2018

Corporate relationship and
event-driven lending 2

$ 13,248 $ 13,317

Secured lending facilities 3

22,388 21,408

Securities-based lending and other 4

7,402 8,331

Total Corporate

$ 43,038 $ 43,056

1.

Amounts include loans held for investment, loans held for sale and loans measured at fair value. Loans at fair value are included in Trading assets in the balance sheets.

2.

Relationship and event-driven loans typically consist of revolving lines of credit, term loans and bridge loans. For additional information on event-driven loans, see “Institutional Securities Event-Driven Loans and Lending Commitments” herein.

3.

Secured lending facilities includes loans provided to clients to warehouse loans secured by underlying real estate and other assets.

4.

Securities-based lending and other includes financing extended to sales and trading customers and corporate loans purchased in the secondary market.

Institutional Securities Event-Driven Loans and Lending Commitments

At March 31, 2019
Years to Maturity
$ in millions Less than 1 1-3 3-5 Over 5 Total

Loans

$ 2,010 $ 307 $ 476 $ 1,784 $ 4,577

Lending commitments

7,594 2,816 3,192 2,436 16,038

Total loans and lending commitments

$ 9,604 $ 3,123 $ 3,668 $ 4,220 $ 20,615

At December 31, 2018
Years to Maturity
$ in millions Less than 1 1-3 3-5 Over 5 Total

Loans

$ 2,582 $ 287 $ 656 $ 1,618 $ 5,143

Lending commitments

1,506 2,456 2,877 3,658 10,497

Total loans and lending commitments

$ 4,088 $ 2,743 $ 3,533 $ 5,276 $ 15,640

Event-driven loans and lending commitments, which comprise a portion of corporate loans and lending commitments within the Institutional Securities business segment, are associated with a particular event or transaction, such as to support client merger, acquisition, recapitalization or project finance activities. Event-driven loans and lending commitments typically consist of revolving lines of credit, term loans and bridge loans. Amounts may fluctuate as they are transaction-specific, the timing and size of which can vary from period to period.

Wealth Management Loans and Lending Commitments

At March 31, 2019
Contractual Years to Maturity
$ in millions Less than 1 1-3 3-5 Over 5 Total

Securities-based lending and other loans

$ 36,455 $ 3,352 $ 2,467 $ 1,138 $ 43,412

Residential real estate loans

1 29 28,008 28,038

Total loans

$ 36,456 $ 3,381 $ 2,467 $ 29,146 $ 71,450

Lending commitments

9,872 1,619 378 278 12,147

Total loans and lending commitments

$ 46,328 $ 5,000 $ 2,845 $ 29,424 $ 83,597

Securities-based lending—LAL platform loans

$ 32,731

At December 31, 2018
Contractual Years to Maturity
$ in millions Less than 1 1-3 3-5 Over 5 Total

Securities-based lending and other loans

$ 38,144 $ 3,573 $ 2,004 $ 1,006 $ 44,727

Residential real estate loans

30 1 27,436 27,467

Total loans

$ 38,144 $ 3,603 $ 2,005 $ 28,442 $ 72,194

Lending commitments

9,197 1,151 42 273 10,663

Total loans and lending commitments

$ 47,341 $ 4,754 $ 2,047 $ 28,715 $ 82,857

Securities-based lending—LAL platform loans

$ 33,247

March 2019 Form 10-Q 28


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Risk Disclosures

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

Securities-based lending provided to our clients is primarily conducted through our Liquidity Access Line (“LAL”) platform. For more information about our securities-based lending and residential real estate loans, see “Quantitative and Qualitative Disclosures about Risk—Credit Risk—Wealth Management” in the 2018 Form 10-K.

For the current quarter, Loans and Lending commitments associated with the Wealth Management business segment were relatively unchanged.

Customer and Other Receivables

Margin Loans

At March 31, 2019
$ in millions IS WM Total

Customer receivables representing margin loans

$ 16,800 $ 10,627 $ 27,427

At December 31, 2018
$ in millions IS WM Total

Customer receivables representing margin loans

$ 14,842 $ 11,383 $ 26,225

The Institutional Securities and Wealth Management business segments provide margin lending arrangements, which allow customers 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. Amounts may fluctuate from period to period as overall client balances change as a result of market levels, client positioning and leverage.

Employee Loans

$ in millions

At
March 31,
2019
At
December 31,
2018

Balance

$ 3,011 $ 3,415

Allowance for loan losses

(64 ) (63 )

Balance, net

$ 2,947 $ 3,352

Repayment term range, in years

1 to 20 1 to 20

Employee loans are granted in conjunction with a program established primarily to recruit certain Wealth Management representatives, 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.

Derivatives

Fair Value of OTC Derivative Assets

Counterparty Credit Rating 1

$ in millions

AAA AA A BBB NIG Total

At March 31, 2019

<1 year

$ 353 $ 6,123 $ 38,006 $ 12,809 $ 5,577 $ 62,868

1-3 years

387 2,222 23,295 8,452 6,346 40,702

3-5 years

533 2,112 11,960 5,162 2,826 22,593

Over 5 years

3,662 11,190 79,733 34,492 12,249 141,326

Total, gross

$ 4,935 $ 21,647 $ 152,994 $ 60,915 $ 26,998 $ 267,489

Counterparty netting

(1,851 ) (13,737 ) (124,569 ) (44,232 ) (16,326 ) (200,715 )

Cash and securities collateral

(2,889 ) (6,115 ) (22,866 ) (11,830 ) (7,691 ) (51,391 )

Total, net

$ 195 $ 1,795 $ 5,559 $ 4,853 $ 2,981 $ 15,383

Counterparty Credit Rating 1

$ in millions

AAA AA A BBB NIG Total

At December 31, 2018

<1 year

$ 878 $ 7,430 $ 38,718 $ 15,009 $ 7,183 $ 69,218

1-3 years

664 2,362 22,239 10,255 7,097 42,617

3-5 years

621 2,096 11,673 6,014 2,751 23,155

Over 5 years

3,535 9,725 67,166 36,087 11,112 127,625

Total, gross

$ 5,698 $ 21,613 $ 139,796 $ 67,365 $ 28,143 $ 262,615

Counterparty netting

(2,325 ) (13,771 ) (113,045 ) (49,658 ) (16,681 ) (195,480 )

Cash and securities collateral

(3,214 ) (5,766 ) (21,931 ) (12,702 ) (8,269 ) (51,882 )

Total, net

$ 159 $ 2,076 $ 4,820 $ 5,005 $ 3,193 $ 15,253

$ in millions

At

March 31,
2019

At
December 31,
2018

Industry

Utilities

$ 4,472 $ 4,324

Financials

4,108 4,480

Industrials

1,110 1,335

Healthcare

916 787

Regional governments

916 779

Information technology

758 695

Not-for-profit organizations

630 583

Communication services

395 373

Sovereign governments

367 385

Energy

350 199

Consumer discretionary

311 188

Real estate

285 283

Materials

275 275

Insurance

181 235

Consumer staples

161 216

Other

148 116

Total

$            15,383 $ 15,253

1.

Obligor credit ratings are determined internally by CRM.

29 March 2019 Form 10-Q


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Risk Disclosures

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. For more information on derivatives, see “Quantitative and Qualitative Disclosures about Risk—Credit Risk—Derivatives” in the 2018 Form 10-K and Note 4 to the financial statements.

Country Risk

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. For a further discussion of our country risk exposure see, “Quantitative and Qualitative Disclosures about Risk—Country Risk” in the 2018 Form 10-K.

Our sovereign exposures consist of financial contracts and obligations entered into with sovereign and local governments. Our non-sovereign exposures consist of financial contracts and obligations entered into primarily with corporations and financial institutions. Index credit derivatives are included in the following 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 or 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 row based on the country of the CDS issuer. Further, the notional amount of the CDS adjusted for the fair value of the receivable or payable is reflected in the Net Inventory row based on the country of the underlying reference entity.

Top 10 Non-U.S. Country Exposures at March 31, 2019

United Kingdom

$ in millions Sovereigns Non-sovereigns Total

Net inventory 1

$ (719 ) $ 317 $ (402 )

Net counterparty exposure 2

1 9,526 9,527

Loans

2,840 2,840

Lending commitments

4,610 4,610

Exposure before hedges

(718 ) 17,293 16,575

Hedges 3

(312 ) (1,381 ) (1,693 )

Net exposure

$ (1,030 ) $ 15,912 $ 14,882

Japan

$ in millions Sovereigns Non-sovereigns Total

Net inventory 1

$ 4,533 $ 81 $ 4,614

Net counterparty exposure 2

61 3,057 3,118

Loans

316 316

Exposure before hedges

4,594 3,454 8,048

Hedges 3

(117 ) (115 ) (232 )

Net exposure

$ 4,477 $ 3,339 $ 7,816

Germany

$ in millions Sovereigns Non-sovereigns Total

Net inventory 1

$ 328 $ 160 $ 488

Net counterparty exposure 2

170 1,938 2,108

Loans

1,063 1,063

Lending commitments

3,198 3,198

Exposure before hedges

498 6,359 6,857

Hedges 3

(268 ) (1,051 ) (1,319 )

Net exposure

$ 230 $ 5,308 $ 5,538

Brazil

$ in millions Sovereigns Non-sovereigns Total

Net inventory 1

$ 4,846 $ 95 $ 4,941

Net counterparty exposure 2

232 232

Loans

40 40

Lending commitments

269 269

Exposure before hedges

4,846 636 5,482

Hedges 3

(12 ) (18 ) (30 )

Net exposure

$ 4,834 $ 618 $ 5,452

Spain

$ in millions Sovereigns Non-sovereigns Total

Net inventory 1

$ (857 ) $ (62 ) $ (919 )

Net counterparty exposure 2

204 204

Loans

3,675 3,675

Lending commitments

1,684 1,684

Exposure before hedges

(857 ) 5,501 4,644

Hedges 3

(128 ) (128 )

Net exposure

$ (857 ) $ 5,373 $ 4,516

Australia

$ in millions Sovereigns Non-sovereigns Total

Net inventory 1

$ 1,932 $ 495 $ 2,427

Net counterparty exposure 2

4 451 455

Loans

95 95

Lending commitments

796 796

Exposure before hedges

1,936 1,837 3,773

Hedges 3

(104 ) (104 )

Net exposure

$ 1,936 $ 1,733 $ 3,669

China

$ in millions Sovereigns Non-sovereigns Total

Net inventory 1

$ 200 $ 869 $ 1,069

Net counterparty exposure 2

113 180 293

Loans

1,242 1,242

Lending commitments

1,150 1,150

Exposure before hedges

313 3,441 3,754

Hedges 3

(112 ) (40 ) (152 )

Net exposure

$ 201 $ 3,401 $ 3,602

March 2019 Form 10-Q 30


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Risk Disclosures

Canada

$ in millions Sovereigns Non-sovereigns Total

Net inventory 1

$ (367 ) $ 111 $ (256 )

Net counterparty exposure 2

41 1,811 1,852

Loans

91 91

Lending commitments

1,800 1,800

Exposure before hedges

(326 ) 3,813 3,487

Hedges 3

(171 ) (171 )

Net exposure

$ (326 ) $ 3,642 $ 3,316

Netherlands

$ in millions Sovereigns Non-sovereigns Total

Net inventory 1

$ (204 ) $ 156 $ (48 )

Net counterparty exposure 2

709 709

Loans

1,427 1,427

Lending commitments

1,385 1,385

Exposure before hedges

(204 ) 3,677 3,473

Hedges 3

(32 ) (229 ) (261 )

Net exposure

$ (236 ) $ 3,448 $ 3,212

India

$ in millions Sovereigns Non-sovereigns Total

Net inventory 1

$ 1,500 $ 633 $ 2,133

Net counterparty exposure 2

599 599

Lending commitments

95 95

Exposure before hedges

1,500 1,327 2,827

Net exposure

$ 1,500 $ 1,327 $ 2,827

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 the fair value of any receivable or payable).

2.

Net counterparty exposure ( e.g. , repurchase transactions, securities lending and OTC derivatives) takes into consideration legally enforceable master netting agreements and collateral. Net counterparty exposure is net of the benefit of collateral received. For more information, see “Additional Information—Top 10 Non-U.S. Country Exposures” herein.

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. 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 “Quantitative and Qualitative Disclosures about Risk—Credit Risk—Derivatives” in the 2018 Form 10-K.

Additional Information—Top 10 Non-U.S. Country Exposures

Single-Name and Index Credit Derivatives Included in Net Inventory

$ in millions

At

March 31,
2019

Gross purchased protection

$ (61,098 )

Gross written protection

57,463

Net exposure

$ (3,635 )

Benefit of Collateral Received against Net Counterparty Exposure

$ in millions

At

March 31,
2019

Counterparty credit exposure

Collateral 1

Germany

Germany and Italy $ 10,110

United Kingdom

U.K., U.S. and Italy 8,661

Other

France, Japan and U.S. 11,150

1.

Collateral primarily consists of cash and government obligations.

Country Risk Exposures Related to the U.K.

At March 31, 2019, our country risk exposures in the U.K. included net exposures of $14,882 million as shown in the Top 10 Country Exposures table, and overnight deposits of $7,605 million. The $15,912 million of exposures to non-sovereigns were diversified across both names and sectors. Of these exposures, $6,377 million were to U.K.-focused counterparties that generate more than one-third of their revenues in the U.K., $3,586 million were to geographically diversified counterparties, and $5,671 million were to exchanges and clearinghouses.

Operational Risk

Operational risk refers to the risk of loss, or of damage to our reputation, resulting from inadequate or failed processes or systems, from 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 Risk—Operational Risk” in the 2018 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 a 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 strategy. For a further discussion about our model risk, see “Quantitative and Qualitative Disclosures about Risk––Model Risk” in the 2018 Form 10-K.

31 March 2019 Form 10-Q


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Risk Disclosures

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 Risk—Liquidity Risk” in the 2018 Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” herein.

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 AML, terrorist financing, and anti-corruption rules and regulations. For a further discussion about our legal and compliance risk, see “Quantitative and Qualitative Disclosures about Risk—Legal and Compliance Risk” in the 2018 Form 10-K.

March 2019 Form 10-Q 32


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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Morgan Stanley:

Results of Review of Interim Financial Information

We have reviewed the accompanying condensed consolidated balance sheet of Morgan Stanley and subsidiaries (the “Firm”) as of March 31, 2019, and the related condensed consolidated income statements, comprehensive income statements, cash flow statements and statements of changes in total equity for the three-month periods ended March 31, 2019 and 2018, and the related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it 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) (PCAOB), the consolidated balance sheet of the Firm as of December 31, 2018, and the related 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 26, 2019, 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, 2018 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

This interim financial information is the responsibility of the Firm’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Firm in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with the standards of the PCAOB. 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 PCAOB, 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.

/s/ Deloitte & Touche LLP

New York, New York

May 3, 2019

33 March 2019 Form 10-Q


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Consolidated Income Statements

(Unaudited)

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Three Months Ended
March 31,
in millions, except per share data 2019 2018

Revenues

Investment banking

$ 1,242 $ 1,634

Trading

3,441 3,770

Investments

273 126

Commissions and fees

966 1,173

Asset management

3,049 3,192

Other

301 207

Total non-interest revenues

9,272 10,102

Interest income

4,290 2,860

Interest expense

3,276 1,885

Net interest

1,014 975

Net revenues

10,286 11,077

Non-interest expenses

Compensation and benefits

4,651 4,914

Occupancy and equipment

347 336

Brokerage, clearing and exchange fees

593 627

Information processing and communications

532 478

Marketing and business development

141 140

Professional services

514 510

Other

553 652

Total non-interest expenses

7,331 7,657

Income from continuing operations before income taxes

2,955 3,420

Provision for income taxes

487 714

Income from continuing operations

2,468 2,706

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

(2 )

Net income

$ 2,468 $ 2,704

Net income applicable to noncontrolling interests

39 36

Net income applicable to Morgan Stanley

$ 2,429 $ 2,668

Preferred stock dividends and other

93 93

Earnings applicable to Morgan Stanley common shareholders

$ 2,336 $ 2,575

Earnings per common share

Basic

$ 1.41 $ 1.48

Diluted

$ 1.39 $ 1.45

Average common shares outstanding

Basic

1,658 1,740

Diluted

1,677 1,771

March 2019 Form 10-Q 34 See Notes to Consolidated Financial Statements


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Consolidated Comprehensive Income Statements

(Unaudited)

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Three Months Ended

March 31,

$ in millions 2019 2018

Net income

$ 2,468 $ 2,704

Other comprehensive income (loss), net of tax:

Foreign currency translation adjustments

$ (22 ) $ 117

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

429 (410 )

Pension, postretirement and other

1 5

Change in net debt valuation adjustment

(620 ) 451

Total other comprehensive income (loss)

$ (212 ) $ 163

Comprehensive income

$ 2,256 $ 2,867

Net income applicable to noncontrolling interests

39 36

Other comprehensive income (loss) applicable to noncontrolling interests

(31 ) 72

Comprehensive income applicable to Morgan Stanley

$ 2,248 $ 2,759

See Notes to Consolidated Financial Statements 35 March 2019 Form 10-Q


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Consolidated Balance Sheets

$ in millions, except share data

(Unaudited)
At
March 31,
2019
At
December 31,
2018

Assets

Cash and cash equivalents:

Cash and due from banks

$ 35,472 $ 30,541

Interest bearing deposits with banks

14,498 21,299

Restricted cash

30,712 35,356

Trading assets at fair value ( $103,750 and $120,437 were pledged to various parties)

264,818 266,299

Investment securities (includes $61,641 and $61,061 at fair value)

97,944 91,832

Securities purchased under agreements to resell (includes $5 and $ at fair value)

96,570 98,522

Securities borrowed

138,891 116,313

Customer and other receivables

52,667 53,298

Loans:

Held for investment (net of allowance of $259 and $238)

101,266 99,815

Held for sale

14,931 15,764

Goodwill

6,686 6,688

Intangible assets (net of accumulated amortization of $2,952 and $2,877)

2,084 2,163

Other assets

19,425 15,641

Total assets

$ 875,964 $ 853,531

Liabilities

Deposits (includes $692 and $442 at fair value)

$ 179,731 $ 187,820

Trading liabilities at fair value

144,565 126,747

Securities sold under agreements to repurchase (includes $622 and $812 at fair value)

47,948 49,759

Securities loaned

12,508 11,908

Other secured financings (includes $4,283 and $5,245 at fair value)

8,043 9,466

Customer and other payables

193,092 179,559

Other liabilities and accrued expenses

17,494 17,204

Borrowings (includes $56,464 and $51,184 at fair value)

190,691 189,662

Total liabilities

794,072 772,125

Commitments and contingent liabilities (see Note 11)

Equity

Morgan Stanley shareholders’ equity:

Preferred stock

8,520 8,520

Common stock, $0.01 par value:

Shares authorized: 3,500,000,000 ; Shares issued: 2,038,893,979 ; Shares outstanding: 1,685,996,391 and 1,699,828,943

20 20

Additional paid-in capital

23,178 23,794

Retained earnings

66,061 64,175

Employee stock trusts

3,000 2,836

Accumulated other comprehensive income (loss)

(2,473 ) (2,292 )

Common stock held in treasury at cost, $0.01 par value ( 352,897,588 and 339,065,036 shares)

(14,582 ) (13,971 )

Common stock issued to employee stock trusts

(3,000 ) (2,836 )

Total Morgan Stanley shareholders’ equity

80,724 80,246

Noncontrolling interests

1,168 1,160

Total equity

81,892 81,406

Total liabilities and equity

$ 875,964 $ 853,531

March 2019 Form 10-Q 36 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, 2018

$ 8,520 $ 20 $ 23,794 $ 64,175 $ 2,836 $ (2,292 ) $ (13,971 ) $ (2,836 ) $ 1,160 $ 81,406

Cumulative adjustments for accounting changes 1

63 63

Net income applicable to Morgan Stanley

2,429 2,429

Net income applicable to noncontrolling interests

39 39

Preferred stock dividends 2

(93 ) (93 )

Common stock dividends ($0.30 per share)

(513 ) (513 )

Shares issued under employee plans

(618 ) 164 1,034 (164 ) 416

Repurchases of common stock and employee tax withholdings

(1,645 ) (1,645 )

Net change in Accumulated other comprehensive income (loss)

(181 ) (31 ) (212 )

Other net increases

2 2

Balance at March 31, 2019

$ 8,520 $ 20 $ 23,178 $ 66,061 $ 3,000 $ (2,473 ) $ (14,582 ) $ (3,000 ) $ 1,168 $ 81,892

Balance at December 31, 2017

$ 8,520 $ 20 $ 23,545 $ 57,577 $ 2,907 $ (3,060 ) $ (9,211 ) $ (2,907 ) $ 1,075 $ 78,466

Cumulative adjustments for accounting changes 1

306 (437 ) (131 )

Net income applicable to Morgan Stanley

2,668 2,668

Net income applicable to noncontrolling interests

36 36

Preferred stock dividends 2

(93 ) (93 )

Common stock dividends ($0.25 per share)

(449 ) (449 )

Shares issued under employee plans

(285 ) 710 425

Repurchases of common stock and employee tax withholdings

(1,868 ) (1,868 )

Net change in Accumulated other comprehensive income (loss)

91 72 163

Other net increases

272 272

Balance at March 31, 2018

$ 8,520 $ 20 $ 23,260 $ 60,009 $ 2,907 $ (3,406 ) $ (10,369 ) $ (2,907 ) $ 1,455 $ 79,489

1.

Cumulative adjustments for accounting changes relate to the adoption of certain accounting updates during the current and prior year quarters. See Notes 2 and 14 for further information.

2.

See Note 14 for information regarding dividends per share for each class of preferred stock.

See Notes to Consolidated Financial Statements 37 March 2019 Form 10-Q


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Consolidated Cash Flow Statements

(Unaudited)

Three Months Ended
March 31,
$ in millions 2019 2018

Cash flows from operating activities

Net income

$ 2,468 $ 2,704

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

Stock-based compensation expense

293 321

Depreciation and amortization

658 390

Provision for credit losses on lending activities

36 26

Other operating adjustments

(92 ) (37 )

Changes in assets and liabilities:

Trading assets, net of Trading liabilities

23,977 33,832

Securities borrowed

(22,578 ) (11,825 )

Securities loaned

600 (36 )

Customer and other receivables and other assets

1,567 (13,019 )

Customer and other payables and other liabilities

9,971 1,129

Securities purchased under agreements to resell

1,952 4,012

Securities sold under agreements to repurchase

(1,811 ) (4,849 )

Net cash provided by (used for) operating activities

17,041 12,648

Cash flows from investing activities

Proceeds from (payments for):

Other assets—Premises, equipment and software, net

(529 ) (410 )

Changes in loans, net

(1,329 ) (3,801 )

Investment securities:

Purchases

(15,895 ) (5,482 )

Proceeds from sales

7,875 810

Proceeds from paydowns and maturities

2,663 2,125

Other investing activities

(12 ) (164 )

Net cash provided by (used for) investing activities

(7,227 ) (6,922 )

Cash flows from financing activities

Net proceeds from (payments for):

Other secured financings

(1,575 ) (2,101 )

Deposits

(8,089 ) 988

Proceeds from:

Issuance of Borrowings

8,091 15,370

Payments for:

Borrowings

(11,927 ) (11,377 )

Repurchases of common stock and employee tax withholdings

(1,645 ) (1,868 )

Cash dividends

(663 ) (599 )

Other financing activities

(56 ) (50 )

Net cash provided by (used for) financing activities

(15,864 ) 363

Effect of exchange rate changes on cash and cash equivalents

(464 ) 860

Net increase (decrease) in cash and cash equivalents

(6,514 ) 6,949

Cash and cash equivalents, at beginning of period

87,196 80,395

Cash and cash equivalents, at end of period

$ 80,682 $ 87,344

Cash and cash equivalents:

Cash and due from banks

$ 35,472 $ 29,073

Interest bearing deposits with banks

14,498 22,980

Restricted cash

30,712 35,291

Cash and cash equivalents, at end of period

$ 80,682 $87,344

Supplemental Disclosure of Cash Flow Information

Cash payments for:

Interest

$ 2,896 $ 1,407

Income taxes, net of refunds

245 250

March 2019 Form 10-Q 38 See Notes to Consolidated Financial Statements


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Notes to Consolidated Financial Statements

(Unaudited)

1. Introduction and Basis of Presentation

The Firm

Morgan Stanley 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. See the “Glossary of Common Acronyms” for definitions of certain acronyms used throughout this Form 10-Q.

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, prime brokerage and market-making activities in equity and fixed income products, including foreign exchange and commodities. Lending activities include originating corporate loans, commercial mortgage lending, providing secured lending facilities and extending financing to sales and trading customers. Other activities include investments and research.

Wealth Management provides a comprehensive array of financial services and solutions to individual investors and small to medium-sized businesses and institutions covering brokerage and investment advisory services; financial and wealth planning services; annuity and insurance products; securities-based lending, residential real estate loans 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 served through intermediaries, including affiliated and non-affiliated distributors.

Basis of Financial Information

The unaudited consolidated financial statements (“financial statements”) are prepared in accordance with U.S. GAAP, which requires 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 financial statements and notes thereto included in the 2018 Form 10-K. Certain footnote disclosures included in the 2018 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 VIEs (see Note 12). For consolidated subsidiaries that are not 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 Note 1 to the financial statements in the 2018 Form 10-K.

39 March 2019 Form 10-Q


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Notes to Consolidated Financial Statements

(Unaudited)

2. Significant Accounting Policies

For a detailed discussion about the Firm’s significant accounting policies, see Note 2 to the financial statements in the 2018 Form 10-K.

During the three months ended March 31, 2019 (“current quarter”), there were no significant revisions to the Firm’s significant accounting policies, other than for the accounting updates adopted.

Accounting Updates Adopted

The Firm adopted the following accounting updates on January 1, 2019. Prior periods are presented under previous policies.

Leases

The Firm adopted Leases , and recognized leases with terms exceeding one year in the March 31, 2019 balance sheet as right-of-use (“ROU”) assets and corresponding liabilities. The adoption resulted in an increase to Retained earnings of approximately $63 million, net of tax, related to deferred revenue from previously recorded sale-leaseback transactions. At transition on January 1, 2019, the adoption also resulted in a balance sheet gross-up of approximately $4 billion reflected in Other assets and Other liabilities and accrued expenses. See Note 11 for lease disclosures, including amounts reflected in the March 31, 2019 balance sheet. Prior period amounts were not restated.

As allowed by the guidance, the Firm elected not to reassess the following at transition: whether existing contracts are or contain leases, and for existing leases, lease classification and initial direct costs. In addition, the Firm continues to account for existing land easements as service contracts.

Both at transition and for new leases thereafter, ROU assets and lease liabilities are initially recognized based on the present value of the future minimum lease payments over the lease term, including non-lease components such as fixed common area maintenance costs and other fixed costs such as real estate taxes and insurance.

The discount rates used in determining the present value of leases are the Firm’s incremental borrowing rates, developed based upon each lease’s term and currency of payment. The lease term includes options to extend or terminate the lease when it is reasonably certain that the Firm will exercise that option. For operating leases, the ROU assets also include any

prepaid lease payments and initial direct costs incurred and are reduced by lease incentives. For these leases, lease expense is recognized on a straight-line basis over the lease term if the ROU asset has not been impaired or abandoned.

Derivatives and Hedging (ASU 2018-16)

The amendments in this update permit use of the OIS rate based on the Secured Overnight Financing Rate as a U.S. benchmark interest rate for hedge accounting purposes. The Firm adopted this update on a prospective basis for qualifying new or redesignated hedging relationships. This update did not impact the Firm’s pre-existing hedges.

3. Fair Values

Recurring Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

At March 31, 2019
$ in millions Level 1 Level 2 Level 3 Netting 1 Total

Assets at fair value

Trading assets:

U.S. Treasury and agency securities

$ 47,877 $ 22,821 $ 7 $ $ 70,705

Other sovereign government obligations

29,063 4,890 5 33,958

State and municipal securities

3,175 12 3,187

MABS

1,864 301 2,165

Loans and lending commitments 2

5,012 6,343 11,355

Corporate and other debt

20,014 1,061 21,075

Corporate equities 3

88,020 527 152 88,699

Derivative and other contracts:

Interest rate

3,238 166,248 998 170,484

Credit

5,696 485 6,181

Foreign exchange

22 60,900 59 60,981

Equity

1,621 38,006 1,293 40,920

Commodity and other

593 7,002 2,902 10,497

Netting 1

(3,633 ) (212,585 ) (873 ) (43,036 ) (260,127 )

Total derivative and other contracts

1,841 65,267 4,864 (43,036 ) 28,936

Investments 4

369 149 974 1,492

Physical commodities

441 441

Total trading assets 4

167,170 124,160 13,719 (43,036 ) 262,013

Investment securities—AFS

32,527 29,114 61,641

Securities purchased under agreements to resell

5 5

Total assets at fair value

$ 199,697 $ 153,279 $ 13,719 $ (43,036) $ 323,659

March 2019 Form 10-Q 40


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Notes to Consolidated Financial Statements

(Unaudited)

At March 31, 2019
$ in millions Level 1 Level 2 Level 3 Netting 1 Total

Liabilities at fair value

Deposits

$ $ 593 $ 99 $ $ 692

Trading liabilities:

U.S. Treasury and agency securities

13,169 251 13,420

Other sovereign government obligations

25,301 1,970 27,271

Corporate and other debt

9,030 23 9,053

Corporate equities 3

64,961 94 20 65,075

Derivative and other contracts:

Interest rate

3,271 155,949 447 159,667

Credit

6,019 746 6,765

Foreign exchange

11 59,864 54 59,929

Equity

1,393 40,912 3,053 45,358

Commodity and other

732 5,444 796 6,972

Netting 1

(3,633 ) (212,585 ) (873 ) (31,854 ) (248,945 )

Total derivative and other contracts

1,774 55,603 4,223 (31,854 ) 29,746

Total trading liabilities

105,205 66,948 4,266 (31,854 ) 144,565

Securities sold under agreements to repurchase

622 622

Other secured financings

4,130 153 4,283

Borrowings

52,689 3,775 56,464

Total liabilities at fair value

$ 105,205 $ 124,982 $ 8,293 $ (31,854 ) $ 206,626

At December 31, 2018
$ in millions Level 1 Level 2 Level 3 Netting 1 Total

Assets at fair value

Trading assets:

U.S. Treasury and agency securities

$ 38,767 $ 29,594 $ 54 $ $ 68,415

Other sovereign government obligations

28,395 5,529 17 33,941

State and municipal securities

3,161 148 3,309

MABS

2,154 354 2,508

Loans and lending commitments 2

4,055 6,870 10,925

Corporate and other debt

18,129 1,076 19,205

Corporate equities 3

93,626 522 95 94,243

Derivative and other contracts:

Interest rate

2,793 155,027 1,045 158,865

Credit

5,707 421 6,128

Foreign exchange

62 63,023 161 63,246

Equity

1,256 45,596 1,022 47,874

Commodity and other

963 8,517 2,992 12,472

Netting 1

(4,151 ) (210,190 ) (896 ) (44,175 ) (259,412 )

Total derivative and other contracts

923 67,680 4,745 (44,175 ) 29,173

Investments 4

412 293 757 1,462

Physical commodities

536 536

Total trading assets 4

162,123 131,653 14,116 (44,175 ) 263,717

Investment securities—AFS

36,399 24,662 61,061

Intangible assets

5 5

Total assets at fair value

$ 198,522 $ 156,320 $ 14,116 $ (44,175 ) $ 324,783
At December 31, 2018
$ in millions Level 1 Level 2 Level 3 Netting 1 Total

Liabilities at fair value

Deposits

$ $ 415 $ 27 $ $ 442

Trading liabilities:

U.S. Treasury and agency securities

11,272 543 11,815

Other sovereign government obligations

21,391 1,454 22,845

Corporate and other debt

8,550 1 8,551

Corporate equities 3

56,064 199 15 56,278

Derivative and other contracts:

Interest rate

2,927 142,746 427 146,100

Credit

5,772 381 6,153

Foreign exchange

41 63,379 86 63,506

Equity

1,042 47,091 2,507 50,640

Commodity and other

1,228 6,872 940 9,040

Netting 1

(4,151 ) (210,190 ) (896 ) (32,944 ) (248,181 )

Total derivative and other contracts

1,087 55,670 3,445 (32,944 ) 27,258

Total trading liabilities

89,814 66,416 3,461 (32,944 ) 126,747

Securities sold under agreements to repurchase

812 812

Other secured financings

5,037 208 5,245

Borrowings

47,378 3,806 51,184

Total liabilities at fair value

$ 89,814 $ 120,058 $ 7,502 $ (32,944 ) $ 184,430

MABS—Mortgage-

and asset-backed securities

1.

For positions with the same counterparty classified in different 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 the column for that level. For further information on derivative instruments and hedging activities, see Note 4.

2.

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

3.

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

4.

Amounts exclude certain investments that are measured based on NAV per share, which are not classified in the fair value hierarchy. For additional disclosure about such investments, see “Net Asset Value Measurements—Fund Interests” herein.

Breakdown of Loans and Lending Commitments at Fair Value

$ in millions At
March 31,
2019
At
December 31,
2018

Corporate

$ 8,307 $ 9,171

Residential real estate

1,282 1,153

Commercial real estate

1,766 601

Total

$ 11,355 $ 10,925

Unsettled Fair Value of Futures Contracts 1
$ in millions At
March 31,
2019
At
December 31,
2018

Customer and other receivables, net

$ 727 $ 615

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 financial statements in the 2018 Form 10-K. During the current quarter, there were no significant revisions made to the Firm’s valuation techniques.

41 March 2019 Form 10-Q


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Notes to Consolidated Financial Statements

(Unaudited)

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

Three Months Ended

March 31,

$ in millions 2019 2018

Assets at Fair value

U.S. Treasury and agency securities

Beginning balance

$ 54 $

Sales

(50 )

Net transfers

3

Ending balance

$ 7 $

Unrealized gains (losses)

$ $

Other sovereign government obligations

Beginning balance

$ 17 $ 1

Purchases

2 7

Sales

(2 )

Net transfers

(12 ) (1 )

Ending balance

$ 5 $ 7

Unrealized gains (losses)

$ $

State and municipal securities

Beginning balance

$ 148 $ 8

Realized and unrealized gains (losses)

1

Purchases

10 1

Sales

(44 ) (7 )

Net transfers

(103 )

Ending balance

$ 12 $ 2

Unrealized gains (losses)

$ 1 $

MABS

Beginning balance

$ 354 $ 423

Realized and unrealized gains (losses)

(7 ) 77

Purchases

19 64

Sales

(83 ) (238 )

Settlements

(3 ) (16 )

Net transfers

21 32

Ending balance

$ 301 $ 342

Unrealized gains (losses)

$ (14 ) $ 2

Loans and lending commitments

Beginning balance

$ 6,870 $ 5,945

Realized and unrealized gains (losses)

28

Purchases and originations

1,255 3,740

Sales

(108 ) (283 )

Settlements

(820 ) (1,218 )

Net transfers

(854 ) (84 )

Ending balance

$ 6,343 $ 8,128

Unrealized gains (losses)

$ (7 ) $ (9 )

Corporate and other debt

Beginning balance

$ 1,076 $ 701

Realized and unrealized gains (losses)

43 1

Purchases

204 350

Sales

(127 ) (243 )

Settlements

(3 )

Net transfers

(132 ) 5

Ending balance

$ 1,061 $ 814

Unrealized gains (losses)

$ 41 $ (1 )

Three Months Ended

March 31,

$ in millions 2019 2018

Corporate equities

Beginning balance

$ 95 $ 166

Realized and unrealized gains (losses)

6

Purchases

51 166

Sales

(9 ) (132 )

Net transfers

9 33

Ending balance

$ 152 $ 233

Unrealized gains (losses)

$ 7 $ (9 )

Investments

Beginning balance

$ 757 $ 1,020

Realized and unrealized gains (losses)

10 44

Purchases

10 21

Sales

(4 ) (78 )

Net transfers

201 5

Ending balance

$ 974 $ 1,012

Unrealized gains (losses)

$ 14 $ 22

Net derivative and other contracts:

Interest rate

Beginning balance

$ 618 $ 1,218

Realized and unrealized gains (losses)

(48 ) 52

Purchases

24 32

Issuances

(19 ) (41 )

Settlements

(12 ) (81 )

Net transfers

(12 ) (510 )

Ending balance

$ 551 $ 670

Unrealized gains (losses)

$ (43 ) $ 75

Credit

Beginning balance

$ 40 $ 41

Realized and unrealized gains (losses)

162 (107 )

Purchases

26

Issuances

(442 )

Settlements

(33 ) 38

Net transfers

(14 ) (2 )

Ending balance

$ (261 ) $ (30 )

Unrealized gains (losses)

$ 167 $ (109 )

Foreign exchange

Beginning balance

$ 75 $ (112 )

Realized and unrealized gains (losses)

(113 ) 57

Purchases

1

Issuances

(31 )

Settlements

8 33

Net transfers

34 20

Ending balance

$ 5 $ (33 )

Unrealized gains (losses)

$ 3 $ (9 )

Equity

Beginning balance

$ (1,485 ) $ 1,208

Realized and unrealized gains (losses)

(191 ) 356

Purchases

34 142

Issuances

(193 ) (799 )

Settlements

139 159

Net transfers

(64 ) (51 )

Ending balance

$ (1,760 ) $ 1,015

Unrealized gains (losses)

$ (203 ) $ 315

March 2019 Form 10-Q 42


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Notes to Consolidated Financial Statements

(Unaudited)

Three Months Ended March 31,
$ in millions 2019 2018

Commodity and other

Beginning balance

$ 2,052 $ 1,446

Realized and unrealized gains (losses)

43 217

Purchases

5 13

Issuances

(1 ) (6 )

Settlements

(81 ) (57 )

Net transfers

88 47

Ending balance

$ 2,106 $ 1,660

Unrealized gains (losses)

$ (25 ) $ 149

Liabilities at Fair Value

Deposits

Beginning balance

$ 27 $ 47

Realized and unrealized losses (gains)

6 (1 )

Issuances

24 9

Settlements

(1 ) (1 )

Net transfers

43 (10 )

Ending balance

$ 99 $ 44

Unrealized losses (gains)

$ 6 $ (1 )

Nonderivative trading liabilities

Beginning balance

$ 16 $ 25

Realized and unrealized losses (gains)

(1 ) (4 )

Purchases

(6 ) (7 )

Sales

23 15

Net transfers

11 10

Ending balance

$ 43 $ 39

Unrealized losses (gains)

$ (1 ) $ (4 )

Securities sold under agreements to repurchase

Beginning balance

$ $ 150

Net transfers

(150 )

Ending balance

$ $

Unrealized losses (gains)

$ $

Other secured financings

Beginning balance

$ 208 $ 239

Realized and unrealized losses (gains)

4 (13 )

Issuances

4

Settlements

(7 ) (10 )

Net transfers

(52 )

Ending balance

$ 153 $ 220

Unrealized losses (gains)

$ 4 $ (13 )

Borrowings

Beginning balance

$ 3,806 $ 2,984

Realized and unrealized losses (gains)

287 (102 )

Issuances

264 640

Settlements

(115 ) (83 )

Net transfers

(467 ) 187

Ending balance

$ 3,775 $ 3,626

Unrealized losses (gains)

$ 276 $ (99 )

Portion of Unrealized losses (gains) recorded in OCI—Change in net DVA

59 (44 )

Level 3 instruments may be hedged with instruments classified in Level 1 and Level 2. The realized and unrealized gains (losses) for assets and liabilities within the Level 3 category presented in the previous 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.

The unrealized gains (losses) during the period for assets and liabilities within the Level 3 category 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.

Additionally, in the previous tables, consolidations of VIEs are included in Purchases and deconsolidations of VIEs are included in Settlements.

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

Valuation Techniques and Unobservable Inputs

Balance / Range (Average 1 )

$ in millions, except inputs

At March 31, 2019 At December 31, 2018

Assets Measured at Fair Value on a Recurring Basis

MABS

$ 301 $ 354

Comparable pricing:

Bond price

1 to 91 points (37 points) 0 to 97 points (38 points)

Loans and lending commitments

$ 6,343 $ 6,870

Margin loan model:

Discount rate

1% to 6% (2%) 1% to 7% (2%)

Volatility skew

18% to 57% (25%) 19% to 56% (28%)

Credit Spread

11 to 62 bps (27 bps) 14 to 90 bps (36 bps)

Comparable pricing:

Loan price

85 to 104 points (98 points) 60 to 101 points (95 points)

Corporate and other debt

$ 1,061 $ 1,076

Comparable pricing:

Bond price

12 to 100 points (72 points) 12 to 100 points (72 points)

Discounted cash flow:

Recovery rate

27% 20%

Discount rate

N/M 15% to 21% (16%)

Option model:

At the money volatility

24% to 70% (56%) 24% to 78% (50%)

Corporate equities

$ 152 $95

Comparable pricing:

Equity price

100% 100%

Investments

$ 974 $ 757

Discounted cash flow:

WACC

9% to 16% (11%) 9% to 15% (10%)

Exit multiple

9 to 10 times (10 times) 7 to 10 times (10 times)

Market approach:

EBITDA multiple

5 to 24 times (10 times) 6 to 24 times (12 times)

Comparable pricing:

Equity price

75% to 100% (99%) 75% to 100% (96%)

Net derivative and other contracts:

Interest rate

$ 551 $ 618

Option model:

IR volatility skew

23% to 98% (59% / 61%) 22% to 95% (48% / 51%)

Inflation volatility

22% to 62% (42% / 39%) 23% to 65% (44% / 40%)

IR curve

1% 1%

43 March 2019 Form 10-Q


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Notes to Consolidated Financial Statements

(Unaudited)

Balance / Range (Average 1 )
$ in millions, except inputs At March 31, 2019 At December 31, 2018

Credit

$ (261 ) $ 40

Comparable pricing:

Cash-synthetic basis

12 points 8 to 9 points (9 points )

Bond price

0 to 83 points (38 points ) 0 to 75 points (26 points )

Credit spread

227 to 584 bps (307 bps ) 246 to 499 bps (380 bps )

Funding spread

42 to 112 bps (91 bps ) 47 to 98 bps (93 bps )

Correlation model:

Credit correlation

36% to 68% (42% ) 36% to 69% (44% )

Foreign exchange 2

$ 5 $ 75

Option model:

IR FX correlation

5% to 57% (36% / 36% ) 53% to 56% (55% / 55% )

IR volatility skew

23% to 98% (59% / 61% ) 22% to 95% (48% / 51% )

Contingency probability

80% to 95% (90% / 90% ) 90% to 95% (93% / 95% )

Equity 2

$ (1,760 ) $ (1,485 )

Option model:

At the money volatility

6% to 69% (36% ) 17% to 63% (38% )

Volatility skew

-2% to 0% (-1% ) -2% to 0% (-1% )

Equity correlation

5% to 96% (65% ) 5% to 96% (71% )

FX correlation

-60% to 55% (-21% ) -60% to 55% (-26% )

IR correlation

-7% to 45% (16% / 13% ) -7% to 45% (15% / 12% )

Commodity and other

$ 2,106 $ 2,052

Option model:

Forward power price

$ 4 to $172 ($30) per MWh $ 3 to $185 ($31) per MWh

Commodity volatility

7% to 130% (16% ) 7% to 187% (17% )

Cross-commodity correlation

5% to 99% (93% ) 5% to 99% (93% )

Liabilities Measured at Fair Value on a Recurring Basis

Deposits

$ 99 $ 27

Option Model

At the money volatility

15% to 42% (21% ) N/M

Other secured financings

$ 153 $ 208

Discounted cash flow:

Funding spread

112 to 205 bps (158 bps ) 103 to 193 bps (148 bps )

Option model:

Volatility skew

N/M -1%

At the money volatility

10% to 40% (26% ) 10% to 40% (25% )

Borrowings

$ 3,775 $ 3,806

Option model:

At the money volatility

6% to 34% (21% ) 5% to 35% (22% )

Volatility skew

-2% to 0% (0% ) -2% to 0% (0% )

Equity correlation

38% to 98% (81% ) 45% to 98% (85% )

Equity - FX correlation

-55% to 30% (-27% ) -75% to 50% (-27% )

IR Correlation

N/M 58% to 97% (85% / 91% )

IR FX Correlation

27% to 58% (39% / 34% ) 28% to 58% (44% / 44% )

Nonrecurring Fair Value Measurement

Loans

$ 1,166 $ 1,380

Corporate loan model:

Credit spread

72 to 366 bps (150 bps ) 97 to 434 bps (181 bps )

Warehouse model:

Credit spread

262 to 309 bps (299 bps ) 223 to 313 bps (247 bps )

Points—Percentage of par

IR—Interest rate

FX—Foreign exchange

1.

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

2.

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

The previous tables provide information 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. 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.

For a description of the Firm’s significant unobservable inputs and qualitative information about the effect of hypothetical changes in the values of those inputs, see Note 3 to the financial statements in the 2018 Form 10-K. During the current quarter, there were no significant revisions made to the descriptions of the Firm’s significant unobservable inputs.

Net Asset Value Measurements

Fund Interests

At March 31, 2019 At December 31, 2018
$ in millions Carrying
Value
Commitment Carrying
Value
Commitment

Private equity

$ 1,455 $ 314 $ 1,374 $ 316

Real estate

1,248 149 1,105 161

Hedge 1

102 4 103 4

Total

$ 2,805 $ 467 $ 2,582 $ 481

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.

For a description of the Firm’s investments in private equity funds, real estate funds and hedge funds, which are measured based on NAV, see Note 3 to the financial statements in the 2018 Form 10-K.

Amounts in the previous table represent the Firm’s carrying value of general and limited partnership interests in fund investments, as well as any carried interest. The carrying amounts are measured based on the NAV of the fund taking into account the distribution terms applicable to the interest held. This same measurement applies whether the fund investments are accounted for under the equity method or fair value.

See Note 11 for information regarding general partner guarantees, which include potential obligations to return performance-based fees in the form of carried interest previously received. See Note 18 for information regarding carried interest at risk of reversal.

March 2019 Form 10-Q 44


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Notes to Consolidated Financial Statements

(Unaudited)

Nonredeemable Funds by Contractual Maturity

Carrying Value at March 31, 2019
$ in millions Private Equity Real Estate

Less than 5 years

$ 705 $ 634

5-10 years

723 555

Over 10 years

27 59

Total

$ 1,455 $ 1,248

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 the complexities of applying certain accounting models.

Borrowings Measured at Fair Value on a Recurring Basis

$ in millions

At

March 31,

2019

At
December 31,
2018

Business Unit Responsible for Risk Management

Equity

$ 27,807 $ 24,494

Interest rates

23,945 22,343

Commodities

3,209 2,735

Credit

981 856

Foreign exchange

522 756

Total

$ 56,464 $ 51,184

Earnings Impact of Borrowings under the Fair Value Option

Three Months Ended March 31,
$ in millions 2019 2018

Trading revenues

$ (2,903 ) $ 26

Interest expense

(93 ) (102 )

Net revenues 1

$ (2,996 ) $ (76 )

1.

Amounts do not reflect any gains or losses from related economic hedges.

Gains (losses) are mainly attributable to movements in the reference price or index, interest rates or foreign exchange rates.

Gains (Losses) Due to Changes in Instrument-Specific Credit Risk

Three Months Ended March 31,
2019 2018
$ in millions Trading
Revenues
OCI Trading
Revenues
OCI

Borrowings

$ (4 ) $ (816 ) $ (15 ) $ 593

Loans and other debt 1

93 81

Lending commitments

(1 ) 2

Other

(4 ) 2

$ in millions

At

March 31,

2019

At

December 31,

2018

Cumulative pre-tax DVA gain (loss) recognized in AOCI

$ (648 ) $ 172

1.

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

Excess of Contractual Principal Amount Over Fair Value

$ in millions

At
March 31,
2019
At
December 31,
2018

Loans and other debt 1

$ 13,031 $ 13,094

Nonaccrual loans 1

10,677 10,831

Borrowings 2

730 2,657

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.

Borrowings in this table do not include structured notes where the repayment of the initial principal amount fluctuates based on changes in a reference price or index.

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.

Fair Value Loans on Nonaccrual Status

$ in millions At
March 31,
2019
At
December 31,
2018

Nonaccrual loans

$ 1,198 $ 1,497

Nonaccrual loans 90 or more
days past due

$ 769 $ 812

45 March 2019 Form 10-Q


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Notes to Consolidated Financial Statements

(Unaudited)

Nonrecurring Fair Value Measurements

Carrying and Fair Values

At March 31, 2019
Fair Value

$ in millions

Level 2 Level 3 1 Total

Assets

Loans

$ 2,160 $ 1,166 $ 3,326

Other assets—Other investments

30 30

Other assets—Premises, equipment and software

Total

$ 2,160 $ 1,196 $ 3,356

Liabilities

Other liabilities and accrued expenses—Lending commitments

$ 186 $ 49 $ 235

Total

$ 186 $ 49 $ 235

At December 31, 2018
Fair Value

$ in millions

Level 2 Level 3 1 Total

Assets

Loans

$ 2,307 $ 1,380 $ 3,687

Other assets—Other investments

14 100 114

Other assets—Premises, equipment and software

Total

$ 2,321 $ 1,480 $ 3,801

Liabilities

Other liabilities and accrued expenses—Lending commitments

$ 292 $ 65 $ 357

Total

$ 292 $ 65 $ 357

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.

Gains (Losses) from Fair Value Remeasurements 1

Three Months Ended
March 31,
$ in millions 2019 2018

Assets

Loans 2

$ 36 $ 8

Other assets—Other investments

(5 )

Other assets—Premises, equipment and software

(2 ) (8 )

Total

$ 29 $

Liabilities

Other liabilities and accrued expenses—Lending commitments 2

$ 67 $ 6

Total

$ 67 $ 6

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 they are recorded 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 CDS spread levels adjusted for any basis difference between cash and derivative instruments, or default recovery analysis where such transactions and quotations are unobservable.

March 2019 Form 10-Q 46


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Notes to Consolidated Financial Statements

(Unaudited)

Financial Instruments Not Measured at Fair Value

Carrying and Fair Values

At March 31, 2019

Carrying

Value

Fair Value
$ in millions Level 1 Level 2 Level 3 Total

Financial assets

Cash and cash equivalents:

Cash and due from banks

$ 35,472 $ 35,472 $ $ $ 35,472

Interest bearing deposits with banks

14,498 14,498 14,498

Restricted cash

30,712 30,712 30,712

Investment securities—HTM

36,303 21,270 14,218 536 36,024

Securities purchased under agreements to resell

96,565 95,841 714 96,555

Securities borrowed

138,891 138,891 138,891

Customer and other receivables 1

47,854 44,907 2,836 47,743

Loans 2

116,197 24,888 91,610 116,498

Other assets

461 461 461

Financial liabilities

Deposits

$ 179,039 $ $ 179,168 $ $ 179,168

Securities sold under agreements to repurchase

47,326 46,765 550 47,315

Securities loaned

12,508 12,508 12,508

Other secured financings

3,760 3,539 226 3,765

Customer and other payables 1

189,712 189,712 189,712

Borrowings

134,227 137,906 30 137,936

Commitment
Amount

Lending commitments 3

$ 113,418 $ $ 947 $ 294 $ 1,241

At December 31, 2018

Carrying

Value

Fair Value
$ in millions Level 1 Level 2 Level 3 Total

Financial assets

Cash and cash equivalents:

Cash and due from banks

$ 30,541 $ 30,541 $ $ $ 30,541

Interest bearing deposits with banks

21,299 21,299 21,299

Restricted cash

35,356 35,356 35,356

Investment securities—HTM

30,771 17,473 12,018 474 29,965

Securities purchased under agreements to resell

98,522 97,611 866 98,477

Securities borrowed

116,313 116,312 116,312

Customer and other receivables 1

47,972 44,620 3,219 47,839

Loans 2

115,579 25,604 90,121 115,725

Other assets

461 461 461

Financial liabilities

Deposits

$ 187,378 $ $ 187,372 $ $ 187,372

Securities sold under agreements to repurchase

48,947 48,385 525 48,910

Securities loaned

11,908 11,906 11,906

Other secured financings

4,221 3,233 994 4,227

Customer and other payables 1

176,561 176,561 176,561

Borrowings

138,478 140,085 30 140,115

Commitment
Amount

Lending commitments 3

$ 104,844 $ $ 1,249 $ 321 $ 1,570

1.

Accrued interest 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.

Represents Lending Commitments accounted for as Held for Investment and Held for Sale. For a 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.

47 March 2019 Form 10-Q


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Notes to Consolidated Financial Statements

(Unaudited)

4. Derivative Instruments and Hedging Activities

Fair Values of Derivative Contracts

At March 31, 2019

Assets

$ in millions

Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total

Designated as accounting hedges

Interest rate

$ 489 $ 1 $ $ 490

Foreign exchange

107 14 121

Total

596 15 611

Not designated as accounting hedges

Interest rate

164,693 4,602 699 169,994

Credit

4,327 1,854 6,181

Foreign exchange

59,462 1,336 62 60,860

Equity

21,593 19,327 40,920

Commodity and other

9,011 1,486 10,497

Total

259,086 7,792 21,574 288,452

Total gross derivatives

$ 259,682 $ 7,807 $ 21,574 $ 289,063

Amounts offset

Counterparty netting

(194,262 ) (6,453 ) (20,683 ) (221,398 )

Cash collateral netting

(37,487 ) (1,242 ) (38,729 )

Total in Trading assets

$ 27,933 $ 112 $ 891 $ 28,936

Amounts not offset 1

Financial instruments collateral

(12,603 ) (12,603 )

Other cash collateral

(59 ) (59 )

Net amounts

$ 15,271 $ 112 $ 891 $ 16,274

Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable

$ 2,118

Liabilities

$ in millions

Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total

Designated as accounting hedges

Interest rate

$ 88 $ 3 $ $ 91

Foreign exchange

17 32 49

Total

105 35 140

Not designated as accounting hedges

Interest rate

155,653 3,395 528 159,576

Credit

4,631 2,134 6,765

Foreign exchange

58,577 1,302 1 59,880

Equity

25,681 19,677 45,358

Commodity and other

5,514 1,458 6,972

Total

250,056 6,831 21,664 278,551

Total gross derivatives

$ 250,161 $ 6,866 $ 21,664 $ 278,691

Amounts offset

Counterparty netting

(194,262 ) (6,453 ) (20,683 ) (221,398 )

Cash collateral netting

(27,167 ) (380 ) (27,547 )

Total in Trading liabilities

$ 28,732 $ 33 $ 981 $ 29,746

Amounts not offset 1

Financial instruments collateral

(8,466 ) (392 ) (8,858 )

Other cash collateral

(48 ) (30 ) (78 )

Net amounts

$ 20,218 $ 3 $ 589 $ 20,810

Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable

$ 3,116

At December 31, 2018

Assets

$ in millions

Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total

Designated as accounting hedges

Interest rate

$ 512 $ 1 $ $ 513

Foreign exchange

27 8 35

Total

539 9 548

Not designated as accounting hedges

Interest rate

153,768 3,887 697 158,352

Credit

4,630 1,498 6,128

Foreign exchange

61,846 1,310 55 63,211

Equity

24,590 23,284 47,874

Commodity and other

10,538 1,934 12,472

Total

255,372 6,695 25,970 288,037

Total gross derivatives

$ 255,911 $ 6,704 $ 25,970 $ 288,585

Amounts offset

Counterparty netting

(190,220 ) (5,260 ) (24,548 ) (220,028 )

Cash collateral netting

(38,204 ) (1,180 ) (39,384 )

Total in Trading assets

$ 27,487 $ 264 $ 1,422 $ 29,173

Amounts not offset 1

Financial instruments collateral

(12,467 ) (12,467 )

Other cash collateral

(31 ) (31 )

Net amounts

$ 14,989 $ 264 $ 1,422 $ 16,675

Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable

$ 2,206

Liabilities

$ in millions

Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total

Designated as accounting hedges

Interest rate

$ 176 $ $ $ 176

Foreign exchange

62 24 86

Total

238 24 262

Not designated as accounting hedges

Interest rate

142,592 2,669 663 145,924

Credit

4,545 1,608 6,153

Foreign exchange

62,099 1,302 19 63,420

Equity

27,119 23,521 50,640

Commodity and other

6,983 2,057 9,040

Total

243,338 5,579 26,260 275,177

Total gross derivatives

$ 243,576 $ 5,603 $ 26,260 $ 275,439

Amounts offset

Counterparty netting

(190,220 ) (5,260 ) (24,548 ) (220,028 )

Cash collateral netting

(27,860 ) (293 ) (28,153 )

Total in Trading liabilities

$ 25,496 $ 50 $ 1,712 $ 27,258

Amounts not offset 1

Financial instruments collateral

(4,709 ) (766 ) (5,475 )

Other cash collateral

(53 ) (1 ) (54 )

Net amounts

$ 20,734 $ 49 $ 946 $ 21,729

Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable

$ 4,773

1.

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.

See Note 3 for information related to the unsettled fair value of futures contracts not designated as accounting hedges, which are excluded from the previous tables.

March 2019 Form 10-Q 48


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Notes to Consolidated Financial Statements

(Unaudited)

Notionals of Derivative Contracts

At March 31, 2019

Assets

$ in billions

Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total

Designated as accounting hedges

Interest rate

$ 15 $ 83 $ $ 98

Foreign exchange

10 1 11

Total

25 84 109

Not designated as accounting hedges

Interest rate

4,785 7,900 1,042 13,727

Credit

139 74 213

Foreign exchange

2,731 104 13 2,848

Equity

455 367 822

Commodity and other

98 68 166

Total

8,208 8,078 1,490 17,776

Total gross derivatives

$ 8,233 $ 8,162 $ 1,490 $ 17,885

Liabilities

$ in billions

Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total

Designated as accounting hedges

Interest rate

$ 2 $ 75 $ $ 77

Foreign exchange

2 1 3

Total

4 76 80

Not designated as accounting hedges

Interest rate

4,956 7,059 880 12,895

Credit

156 84 240

Foreign exchange

2,748 102 12 2,862

Equity

410 558 968

Commodity and other

80 64 144

Total

8,350 7,245 1,514 17,109

Total gross derivatives

$ 8,354 $ 7,321 $ 1,514 $ 17,189

At December 31, 2018

Assets

$ in billions

Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total

Designated as accounting hedges

Interest rate

$ 15 $ 52 $ $ 67

Foreign exchange

5 1 6

Total

20 53 73

Not designated as accounting hedges

Interest rate

4,807 6,708 1,157 12,672

Credit

162 74 236

Foreign exchange

2,436 118 14 2,568

Equity

373 371 744

Commodity and other

97 67 164

Total

7,875 6,900 1,609 16,384

Total gross derivatives

$ 7,895 $ 6,953 $ 1,609 $ 16,457
Liabilities

$ in billions

Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total

Designated as accounting hedges

Interest rate

$ 2 $ 107 $ $ 109

Foreign exchange

5 1 6

Total

7 108 115

Not designated as accounting hedges

Interest rate

4,946 5,735 781 11,462

Credit

162 73 235

Foreign exchange

2,451 114 17 2,582

Equity

389 602 991

Commodity and other

72 65 137

Total

8,020 5,922 1,465 15,407

Total gross derivatives

$ 8,027 $ 6,030 $ 1,465 $ 15,522

The Firm believes that the notional amounts of derivative contracts generally overstate its exposure. In most circumstances notional amounts are only used as a reference point from which to calculate amounts owed between the parties to the contract. Furthermore, notional amounts do not reflect the benefit of legally enforceable netting arrangements or risk mitigating transactions.

For a discussion of the Firm’s derivative instruments and hedging activities, see Note 4 to the financial statements in the 2018 Form 10-K.

Gains (Losses) on Accounting Hedges

Three Months Ended
March 31,
$ in millions 2019 2018

Fair Value Hedges—Recognized in Interest Expense

Interest rate contracts

$ 1,577 $ (1,841 )

Borrowings

(1,621 ) 1,852

Net Investment Hedges—Foreign exchange contracts

Recognized in OCI, net of tax

$ 64 $ (148 )

Forward points excluded from hedge effectiveness testing—Recognized in Interest income

35 7

Fair Value Hedges—Hedged Items

$ in millions At March 31,
2019
At December 31,
2018

Investment Securities—AFS 1

Carrying amount 2 currently or
previously hedged

$ 413 $ 201

Borrowings

Carrying amount 2 currently or
previously hedged

$ 103,460 $ 102,899

Basis adjustments included in
carrying amount 3

$ (74 ) $ (1,689 )

1.

Amounts recognized in interest income and basis adjustments related to AFS securities were not material.

2.

Carrying amount represents amortized cost basis.

3.

Hedge accounting basis adjustments for Borrowings are primarily related to outstanding hedges.

49 March 2019 Form 10-Q


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Notes to Consolidated Financial Statements

(Unaudited)

Net Derivative Liabilities and Collateral Posted

$ in millions At
March 31,
2019
At
December 31,
2018

Net derivative liabilities with credit risk-related contingent features

$ 18,373 $ 16,403

Collateral posted

14,473 11,981

The previous 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.

Incremental Collateral and Termination Payments upon Potential Future Ratings Downgrade

$ in millions At
March 31,
2019

One-notch downgrade

$ 452

Two-notch downgrade

277

Bilateral downgrade agreements included in the amounts above 1

$ 685

1.

Amount represents 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.

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 S&P Global Ratings. The previous 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.

Maximum Potential Payout/Notional of Credit Protection Sold 1

Years to Maturity at March 31, 2019
$ in millions < 1 1-3 3-5 Over 5 Total

Single-name CDS

Investment grade

$ 19,721 $ 21,800 $ 20,305 $ 11,743 $ 73,569

Non-investment grade

9,173 12,154 8,908 3,159 33,394

Total

$ 28,894 $ 33,954 $ 29,213 $ 14,902 $ 106,963

Index and basket CDS

Investment grade

$ 4,886 $ 9,022 $ 36,038 $ 22,143 $ 72,089

Non-investment grade

5,608 5,482 10,281 14,131 35,502

Total

$ 10,494 $ 14,504 $ 46,319 $ 36,274 $ 107,591

Total CDS sold

$ 39,388 $ 48,458 $ 75,532 $ 51,176 $ 214,554

Other credit contracts

105 105

Total credit protection sold

$ 39,388 $ 48,458 $ 75,532 $ 51,281 $ 214,659

CDS protection sold with identical protection purchased

$ 199,507
Years to Maturity at December 31, 2018
$ in millions < 1 1-3 3-5 Over 5 Total

Single-name CDS

Investment grade

$ 22,297 $ 23,876 $ 19,469 $ 7,844 $ 73,486

Non-investment grade

10,135 11,061 9,020 861 31,077

Total

$ 32,432 $ 34,937 $ 28,489 $ 8,705 $ 104,563

Index and basket CDS

Investment grade

$ 5,341 $ 9,901 $ 60,887 $ 6,816 $ 82,945

Non-investment grade

4,574 5,820 12,855 13,272 36,521

Total

$ 9,915 $ 15,721 $ 73,742 $ 20,088 $ 119,466

Total CDS sold

$ 42,347 $ 50,658 $ 102,231 $ 28,793 $ 224,029

Other credit contracts

116 116

Total credit protection sold

$ 42,347 $ 50,658 $ 102,231 $ 28,909 $ 224,145

CDS protection sold with identical protection purchased

$ 209,972

Fair Value Asset (Liability) of Credit Protection Sold 1

$ in millions At
March 31,
2019
At
December 31,
2018

Single-name CDS

Investment grade

$ 401 $ 118

Non-investment grade

(440 ) (403 )

Total

$ (39 ) $ (285 )

Index and basket CDS

Investment grade

$ 708 $ 314

Non-investment grade

(460 ) (1,413 )

Total

$ 248 $ (1,099 )

Total CDS sold

$ 209 $ (1,384 )

Other credit contracts

(8 ) (14 )

Total credit protection sold

$ 201 $ (1,398 )

1.

Investment grade/non-investment grade determination is based on the internal credit rating of the reference obligation. 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 judgement to estimate the various risk parameters related to each obligor.

Protection Purchased with CDS

At March 31, 2019
$ in millions Fair Value Asset (Liability) Notional

Single name

$ (148 ) $ 116,753

Index and basket

(170 ) 105,819

Tranched index and basket

(475 ) 15,677

Total

$ (793 ) $ 238,249

At December 31, 2018
$ in millions Fair Value Asset (Liability) Notional

Single name

$ 277 $ 116,333

Index and basket

1,333 117,022

Tranched index and basket

(251 ) 13,524

Total

$ 1,359 $ 246,879

March 2019 Form 10-Q 50


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Notes to Consolidated Financial Statements

(Unaudited)

The Firm enters into credit derivatives, principally CDS, 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.

The fair value amounts as shown in the previous tables are prior to cash collateral or counterparty netting. For further information on credit derivatives and other contracts, see Note 4 to the financial statements in the 2018 Form 10-K.

5. Investment Securities

AFS and HTM Securities
At March 31, 2019

$ in millions

Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value

AFS securities

U.S. government and agency securities:

U.S. Treasury securities

$ 32,144 $ 83 $ 448 $ 31,779

U.S. agency securities 1

23,857 82 318 23,621

Total U.S. government and agency securities

56,001 165 766 55,400

Corporate and other debt:

Agency CMBS

1,965 18 54 1,929

Non-agency CMBS

343 7 336

Corporate bonds

1,724 4 10 1,718

State and municipal securities

394 6 400

FFELP student loan ABS 2

1,868 6 16 1,858

Total corporate and other debt

6,294 34 87 6,241

Total AFS securities

62,295 199 853 61,641

HTM securities

U.S. government and agency securities:

U.S. Treasury securities

21,349 172 251 21,270

U.S. agency securities 1

14,424 46 252 14,218

Total U.S. government and agency securities

35,773 218 503 35,488

Corporate and other debt:

Non-agency CMBS

530 7 1 536

Total HTM securities

36,303 225 504 36,024

Total investment securities

$ 98,598 $ 424 $ 1,357 $ 97,665
At December 31, 2018
$ in millions Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value

AFS securities

U.S. government and agency securities:

U.S. Treasury securities

$ 36,268 $ 40 $ 656 $ 35,652

U.S. agency securities 1

20,740 10 497 20,253

Total U.S. government and agency securities

57,008 50 1,153 55,905

Corporate and other debt:

Agency CMBS

1,054 62 992

Non-agency CMBS

461 14 447

Corporate bonds

1,585 32 1,553

State and municipal securities

200 2 202

FFELP student loan ABS 2

1,967 10 15 1,962

Total corporate and other debt

5,267 12 123 5,156

Total AFS securities

62,275 62 1,276 61,061

HTM securities

U.S. government and agency securities:

U.S. Treasury securities

17,832 44 403 17,473

U.S. agency securities 1

12,456 8 446 12,018

Total U.S. government and agency securities

30,288 52 849 29,491

Corporate and other debt:

Non-agency CMBS

483 9 474

Total HTM securities

30,771 52 858 29,965

Total investment securities

$ 93,046 $ 114 $ 2,134 $ 91,026

1.

U.S. agency securities consist mainly of agency-issued debt, agency mortgage pass-through pool securities and CMOs.

2.

Underlying loans are backed by a guarantee, ultimately from the U.S. Department of Education, of at least 95% of the principal balance and interest outstanding.

51 March 2019 Form 10-Q


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Notes to Consolidated Financial Statements

(Unaudited)

Investment Securities in an Unrealized Loss Position

At March 31, 2019
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 securities

U.S. government and agency securities:

U.S. Treasury securities

$ 124 $ $ 22,670 $ 448 $ 22,794 $ 448

U.S. agency securities

3,641 29 13,307 289 16,948 318

Total U.S. government and agency securities

3,765 29 35,977 737 39,742 766

Corporate and other debt:

Agency CMBS

64 802 54 866 54

Non-agency CMBS

336 7 336 7

Corporate bonds

276 1 818 9 1,094 10

FFELP student loan ABS

615 5 702 11 1,317 16

Total corporate and other debt

955 6 2,658 81 3,613 87

Total AFS securities

4,720 35 38,635 818 43,355 853

HTM securities

U.S. government and agency securities:

U.S. Treasury securities

99 9,495 251 9,594 251

U.S. agency securities

303 2 9,505 250 9,808 252

Total U.S. government and agency securities

402 2 19,000 501 19,402 503

Corporate and other debt:

Non-agency CMBS

66 1 110 176 1

Total HTM securities

468 3 19,110 501 19,578 504

Total investment securities

$ 5,188 $ 38 $ 57,745 $ 1,319 $ 62,933 $ 1,357

At December 31, 2018
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 securities

U.S. government and agency securities:

U.S. Treasury securities

$ 19,937 $ 541 $ 5,994 $ 115 $ 25,931 $ 656

U.S. agency securities

12,904 383 4,142 114 17,046 497

Total U.S. government and agency securities

32,841 924 10,136 229 42,977 1,153

Corporate and other debt:

Agency CMBS

808 62 808 62

Non-agency CMBS

446 14 446 14

Corporate bonds

470 7 1,010 25 1,480 32

FFELP student loan ABS

1,366 15 1,366 15

Total corporate and other debt

2,644 84 1,456 39 4,100 123

Total AFS securities

35,485 1,008 11,592 268 47,077 1,276

HTM securities

U.S. government and agency securities:

U.S. Treasury securities

11,161 403 11,161 403

U.S. agency securities

410 1 10,004 445 10,414 446

Total U.S. government and agency securities

410 1 21,165 848 21,575 849

Corporate and other debt:

Non-agency CMBS

206 1 216 8 422 9

Total HTM securities

616 2 21,381 856 21,997 858

Total investment securities

$ 36,101 $ 1,010 $ 32,973 $ 1,124 $ 69,074 $ 2,134

March 2019 Form 10-Q 52


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Notes to Consolidated Financial Statements

(Unaudited)

The Firm believes there are no securities in an unrealized loss position that are other-than-temporarily impaired after performing the analysis described in Note 2 to the financial statements in the 2018 Form 10-K. For AFS 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 the amortized cost basis. Furthermore, for both AFS and HTM securities, the securities have not experienced credit losses as the unrealized losses reported in the previous table are primarily due to higher interest rates since those securities were purchased.

See Note 12 for additional information on securities issued by VIEs, including U.S. agency mortgage-backed securities, non-agency CMBS and FFELP student loan ABS.

Investment Securities by Contractual Maturity

At March 31, 2019
$ in millions Amortized
Cost
Fair
Value
Annualized
Average
Yield

AFS securities

U.S. government and agency securities:

U.S. Treasury securities:

Due within 1 year

$ 4,665 $ 4,647 1.7 %

After 1 year through 5 years

22,997 22,730 1.9 %

After 5 years through 10 years

4,482 4,402 2.1 %

Total

32,144 31,779

U.S. agency securities:

Due within 1 year

498 496 1.1 %

After 1 year through 5 years

699 691 1.1 %

After 5 years through 10 years

1,584 1,554 1.8 %

After 10 years

21,076 20,880 2.4 %

Total

23,857 23,621

Total U.S. government and agency securities

56,001 55,400 2.1 %

Corporate and other debt:

Agency CMBS:

After 1 year through 5 years

228 227 1.4 %

After 5 years through 10 years

994 1,011 3.2 %

After 10 years

743 691 1.6 %

Total

1,965 1,929

Non-agency CMBS:

After 1 year through 5 years

36 35 2.5 %

After 10 years

307 301 2.3 %

Total

343 336

Corporate bonds:

Due within 1 year

23 23 1.4 %

After 1 year through 5 years

1,427 1,421 2.6 %

After 5 years through 10 years

274 274 3.3 %

Total

1,724 1,718
At March 31, 2019
$ in millions Amortized
Cost
Fair
Value
Annualized
Average
Yield

State and municipal securities:

After 5 years through 10 years

$ 209 $ 209 3.5 %

After 10 Years

185 191 4.7 %

Total

394 400

FFELP student loan ABS:

After 1 year through 5 years

78 77 0.8 %

After 5 years through 10 years

418 411 0.8 %

After 10 years

1,372 1,370 1.2 %

Total

1,868 1,858

Total corporate and other debt

6,294 6,241 2.2 %

Total AFS securities

62,295 61,641 2.1 %

HTM securities

U.S. government and agency securities:

U.S. Treasury securities:

Due within 1 year

774 771 1.4 %

After 1 year through 5 years

9,504 9,525 2.4 %

After 5 years through 10 years

9,987 9,953 2.3 %

After 10 years

1,084 1,021 2.5 %

Total

21,349 21,270

U.S. agency securities:

After 5 years through 10 years

28 28 1.9 %

After 10 years

14,396 14,190 2.7 %

Total

14,424 14,218

Total U.S. government and agency securities

35,773 35,488 2.5 %

Corporate and other debt:

Non-agency CMBS:

Due within 1 year

61 61 4.4 %

After 1 year through 5 years

86 86 4.8 %

After 5 years through 10 years

344 350 4.1 %

After 10 years

39 39 4.4 %

Total corporate and other debt

530 536 4.3 %

Total HTM securities

36,303 36,024 2.5 %

Total investment securities

$ 98,598 $ 97,665 2.3 %

Gross Realized Gains (Losses) on Sales of AFS Securities

Three Months Ended
March 31,
$ in millions 2019 2018

Gross realized gains

$ 19 $ 1

Gross realized (losses)

(9 ) (1 )

Total 1

$ 10 $

1.

Realized gains and losses are recognized in Other revenues in the income statements.

53 March 2019 Form 10-Q


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Notes to Consolidated Financial Statements

(Unaudited)

6. Collateralized Transactions

Offsetting of Certain Collateralized Transactions
At March 31, 2019
$ in millions Gross
Amounts

Amounts

Offset

Net

Amounts
Presented

Amounts

Not Offset 1

Net
Amounts

Assets

Securities purchased under agreements to resell

$ 254,681 $ (158,111 ) $ 96,570 $ (93,718 ) $ 2,852

Securities borrowed

161,154 (22,263 ) 138,891 (134,107 ) 4,784

Liabilities

Securities sold under agreements to repurchase

$ 206,059 $ (158,111 ) $ 47,948 $ (41,675 ) $ 6,273

Securities loaned

34,771 (22,263 ) 12,508 (12,382 ) 126

Net amounts for which master netting agreements are not in place or may not be legally enforceable

Securities purchased under agreements to resell

$ 2,419

Securities borrowed

773

Securities sold under agreements to repurchase

5,148

Securities loaned

107

At December 31, 2018

$ in millions

Gross
Amounts
Amounts
Offset
Net
Amounts
Presented

Amounts

Not Offset 1

Net
Amounts

Assets

Securities purchased under agreements to resell

$ 262,976 $ (164,454 ) $ 98,522 $ (95,610 ) $ 2,912

Securities borrowed

134,711 (18,398 ) 116,313 (112,551 ) 3,762

Liabilities

Securities sold under agreements to repurchase

$ 214,213 $ (164,454 ) $ 49,759 $ (41,095 ) $ 8,664

Securities loaned

30,306 (18,398 ) 11,908 (11,677 ) 231

Net amounts for which master netting agreements are not in place or may not be legally enforceable

Securities purchased under agreements to resell

$ 2,579

Securities borrowed

724

Securities sold under agreements to repurchase

6,762

Securities loaned

191

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.

For further discussion of the Firm’s collateralized transactions, see Note 6 to the financial statements in the 2018 Form 10-K. For information related to offsetting of derivatives, see Note 4.

Gross Secured Financing Balances by Remaining Contractual
Maturity
At March 31, 2019

$ in millions

Overnight

and Open

Less than

30 Days

30-90
Days

Over

90 Days

Total

Securities sold under agreements to repurchase

$ 72,663 $ 53,332 $ 42,658 $ 37,406 $ 206,059

Securities loaned

19,131 6,858 2,715 6,067 34,771

Total included in the offsetting disclosure

$ 91,794 $ 60,190 $ 45,373 $ 43,473 $ 240,830

Trading liabilities— Obligation to return securities received as collateral

19,861 19,861

Total

$ 111,655 $ 60,190 $ 45,373 $ 43,473 $ 260,691

At December 31, 2018

$ in millions

Overnight

and Open

Less than

30 Days

30-90
Days

Over

90 Days

Total

Securities sold under agreements to repurchase

$ 56,503 $ 93,427 $ 35,692 $ 28,591 $ 214,213

Securities loaned

18,397 3,609 1,985 6,315 30,306

Total included in the offsetting disclosure

$ 74,900 $ 97,036 $ 37,677 $ 34,906 $ 244,519

Trading liabilities— Obligation to return securities received as collateral

17,594 17,594

Total

$ 92,494 $ 97,036 $ 37,677 $ 34,906 $ 262,113

Gross Secured Financing Balances by Class of Collateral
Pledged

$ in millions

At

March 31,

2019

At

December 31,
2018

Securities sold under agreements to repurchase

U.S. Treasury and agency securities

$ 59,851 $ 68,487

State and municipal securities

1,633 925

Other sovereign government obligations

123,089 120,432

ABS

2,112 3,017

Corporate and other debt

7,327 8,719

Corporate equities

11,624 12,079

Other

423 554

Total

$ 206,059 $ 214,213

Securities loaned

Other sovereign government obligations

$ 22,656 $ 19,021

Corporate equities

11,736 10,800

Other

379 485

Total

$ 34,771 $ 30,306

Total included in the offsetting disclosure

$ 240,830 $ 244,519

Trading liabilities—Obligation to return securities received as collateral

Corporate equities

$ 19,861 $ 17,594

Total

$ 260,691 $ 262,113

March 2019 Form 10-Q 54


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Notes to Consolidated Financial Statements

(Unaudited)

Carrying Value of Assets Loaned or Pledged without
Counterparty Right to Sell or Repledge

$ in millions

At

March 31,

2019

At
December 31,
2018

Trading assets

$                35,543 $                39,430

The Firm pledges its trading assets to collateralize securities sold under agreements to repurchase, securities loaned, other secured financings and derivatives and to cover customer short sales. 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.

Fair Value of Collateral Received with Right to Sell or Repledge

$ in millions

At

March 31,

2019

At

December 31,
2018

Collateral received with right to sell
or repledge

$                697,669 $                639,610

Collateral that was sold or repledged 1

553,625 487,983

1.

Does not include securities used to meet federal regulations for the Firm’s U.S. broker-dealers.

Restricted Cash and Segregated Securities

$ in millions

At

March 31,
2019

At
December 31,
2018

Restricted cash

$            30,712 $            35,356

Segregated securities 1

24,752 26,877

Total

$            55,464 $            62,233

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.

The Firm receives collateral in the form of securities in connection with securities purchased under agreements to resell, securities borrowed, securities-for-securities transactions, 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.

Customer Margin Lending

$ in millions

At

March 31,
2019

At
December 31,
2018

Customer receivables representing margin loans

$        27,427 $        26,225

The Firm provides margin lending arrangements which allow customers to borrow against the value of qualifying securities. Receivables under margin lending arrangements 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 financial statements in the 2018 Form 10-K.

The Firm has additional secured liabilities. For a further discussion of other secured financings, see Notes 10 and 12.

7. Loans, Lending Commitments and Allowance for Credit Losses

Loans by Type

At March 31, 2019
$ in millions Loans Held
for Investment
Loans Held
for Sale
Total Loans

Corporate

$ 38,424 $ 12,469 $ 50,893

Consumer

27,300 27,300

Residential real estate

28,037 22 28,059

Commercial real estate

7,764 2,440 10,204

Total loans, gross

101,525 14,931 116,456

Allowance for loan losses

(259 ) (259 )

Total loans, net

$ 101,266 $ 14,931 $ 116,197

Fixed rate loans, net

$ 16,450

Floating or adjustable rate loans, net

99,747

Loans to non-U.S. borrowers, net

18,072

At December 31, 2018
$ in millions Loans Held
for Investment
Loans Held
for Sale
Total Loans

Corporate

$ 36,909 $ 13,886 $ 50,795

Consumer

27,868 27,868

Residential real estate

27,466 22 27,488

Commercial real estate 1

7,810 1,856 9,666

Total loans, gross

100,053 15,764 115,817

Allowance for loan losses

(238 ) (238 )

Total loans, net

$ 99,815 $ 15,764 $ 115,579

Fixed rate loans, net

$ 15,632

Floating or adjustable rate loans, net

99,947

Loans to non-U.S. borrowers, net

17,568

1.

Beginning in 2019, loans previously referred to as Wholesale real estate are referred to as Commercial real estate.

55 March 2019 Form 10-Q


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Notes to Consolidated Financial Statements

(Unaudited)

Loans Held for Investment before Allowance by Credit Quality

At March 31, 2019

$ in millions

Corporate Consumer

Residential

Real Estate



Commercial

Real Estate


Total

Pass

$ 37,806 $ 27,294 $ 27,954 $ 7,332 $ 100,386

Special mention

171 9 312 492

Substandard

447 6 74 120 647

Doubtful

Loss

Total

$ 38,424 $ 27,300 $ 28,037 $ 7,764 $ 101,525

At December 31, 2018

$ in millions

Corporate Consumer

Residential

Real Estate



Commercial

Real Estate


Total

Pass

$ 36,217 $ 27,863 $ 27,387 $ 7,378 $ 98,845

Special mention

492 5 312 809

Substandard

200 79 120 399

Doubtful

Loss

Total

$ 36,909 $ 27,868 $ 27,466 $ 7,810 $ 100,053

Impaired Loans and Lending Commitments before Allowance

At March 31, 2019
$ in millions Corporate Consumer Residential
Real Estate
Total

Loans

With allowance

$ 265 $ $ $ 265

Without allowance 1

20 5 65 90

Total impaired loans

$ 285 $ 5 $ 65 $ 355

UPB

292 5 66 363

Lending commitments

With allowance

$ 17 $ $ $ 17

Without allowance 1

45 45

Total impaired lending commitments

62 62
At December 31, 2018
$ in millions Corporate Consumer Residential
Real Estate
Total

Loans

With allowance

$ 24 $ $ $ 24

Without allowance 1

32 69 101

Total impaired loans

$ 56 $ $ 69 $ 125

UPB

63 70 133

Lending commitments

With allowance

$ 19 $ $ $ 19

Without allowance 1

34 34

Total impaired lending commitments

53 53

1.

No allowance was recorded for these loans and lending commitments as the present value of the expected future cash flows or value of the collateral equaled or exceeded the carrying value.

Loans and lending commitments in the previous table have been evaluated for a specific allowance. All remaining loans and lending commitments are assessed under the inherent allowance methodology.

Impaired Loans and Total Allowance by Region

At March 31, 2019
$ in millions Americas EMEA Asia Total

Impaired loans

$ 355 $ $ $ 355

Total Allowance for loan losses

211 46 2 259
At December 31, 2018

$ in millions

Americas EMEA Asia Total

Impaired loans

$ 125 $ $ $ 125

Total Allowance for loan losses

193 42 3 238

Troubled Debt Restructurings

$ in millions



At
March 31,
2019




At
December 31,
2018


Loans

$ 93 $ 38

Lending commitments

68 45

Allowance for loan losses and lending commitments

5 4

Impaired loans and lending commitments classified as held for investment within corporate loans include TDRs 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


Commercial
Real Estate

Total

December 31, 2018

$ 144 $ 7 $ 20 $ 67 $ 238

Provision (release)

26 (1 ) 2 27

Other

(6 ) (6 )

March 31, 2019

$ 164 $ 6 $ 22 $ 67 $ 259

Inherent

$ 150 $ 6 $ 22 $ 67 $ 245

Specific

14 14

$ in millions

Corporate Consumer
Residential
Real Estate


Commercial
Real Estate

Total

December 31, 2017

$ 126 $ 4 $ 24 $ 70 $ 224

Provision (release)

6 (1 ) 14 19

Other

(1 ) 1

March 31, 2018

$ 131 $ 4 $ 23 $ 85 $ 243

Inherent

$ 126 $ 4 $ 23 $ 85 $ 238

Specific

5 5

March 2019 Form 10-Q 56


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Notes to Consolidated Financial Statements

(Unaudited)

Allowance for Lending Commitments Rollforward

$ in millions

Corporate Consumer
Residential
Real Estate


Commercial
Real Estate

Total

December 31, 2018

$ 198 $ 2 $ $ 3 $ 203

Provision (release)

8 1 9

Other

(1) (1)

March 31, 2019

$ 206 $ 1 $ $ 4 $ 211

Inherent

$ 202 $ 1 $ $ 4 $ 207

Specific

4 4

$ in millions

Corporate Consumer
Residential
Real Estate


Commercial
Real Estate

Total

December 31, 2017

$ 194 $ 1 $ $ 3 $ 198

Provision (release)

7 7

Other

March 31, 2018

$ 201 $ 1 $ $ 3 $ 205

Inherent

$ 200 $ 1 $ $ 3 $ 204

Specific

1 1

For a further discussion of the Firm’s loans, including loan types and categories, as well as the Firm’s allowance methodology, refer to Notes 2 and 7 to the financial statements in the 2018 Form 10-K. See Note 3 for further information regarding Loans and lending commitments held at fair value. See Note 11 for details of current commitments to lend in the future.

Employee Loans

$ in millions



At
March 31,
2019




At
December 31,
2018


Balance

$ 3,011 $ 3,415

Allowance for loan losses

(64) (63)

Balance, net

$ 2,947 $ 3,352

Repayment term range, in years

1 to 20 1 to 20

Employee loans are granted in conjunction with a program established primarily to recruit certain Wealth Management representatives, 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.

8. Equity Method Investments

Equity Method Investment Balances

$ in millions



At
March 31,
2019




At
December 31,
2018


Investments

$ 2,391 $ 2,432
Three Months Ended
March 31,

$ in millions

2019 2018

Income (loss)

$ (10 ) $ 50

Equity method investments, other than certain investments in funds, are summarized above and are included in Other assets in the balance sheets with related income or loss included in Other revenues in the income statements. See “Net Asset Value Measurements—Fund Interests” in Note 3 for the carrying value of the Firm’s fund interests, which are comprised of general and limited partnership interests, as well as any related carried interest.

Japanese Securities Joint Venture

Three Months Ended
March 31,

$ in millions

2019 2018

Income from investment in MUMSS

$ 3 $ 56

The Firm and Mitsubishi UFJ Financial Group, Inc. (“MUFG”) formed a joint venture in Japan comprising their respective investment banking and securities businesses by forming two joint venture companies, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (“MUMSS”) and Morgan Stanley MUFG Securities Co., Ltd. (“MSMS”) (the “Joint Venture”). The Firm owns a 40% economic interest in the Joint Venture and MUFG owns the other 60%.

The Firm’s 40% voting interest in MUMSS is accounted for under the equity method within the Institutional Securities business segment, and is included in the equity method investment balances above. The Firm consolidates MSMS into the Institutional Securities business segment, based on its 51% voting interest.

The Firm engages in transactions in the ordinary course of business with MUFG and its affiliates, for example investment banking, financial advisory, sales and trading, derivatives, investment management, lending, securitization and other financial services transactions. Such transactions are on substantially the same terms as those that would be available to unrelated third parties for comparable transactions.

57 March 2019 Form 10-Q


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Notes to Consolidated Financial Statements

(Unaudited)

9. Deposits

Deposits

$ in millions

At
March 31,
2019
At
December 31,
2018

Savings and demand deposits

$ 143,201 $ 154,897

Time deposits

36,530 32,923

Total

$ 179,731 $ 187,820

Deposits subject to FDIC insurance

$ 141,737 $ 144,515

Time deposits that equal or exceed the FDIC insurance limit

$ 22 $ 11

Time Deposit Maturities

$ in millions At
March 31,
2019

2019

$ 14,100

2020

13,381

2021

4,272

2022

1,866

2023

2,069

Thereafter

842

Total

$ 36,530

10. Borrowings and Other Secured Financings

Borrowings

$ in millions

At
March 31,
2019
At
December 31,
2018

Original maturities of one year or less

$ 1,498 $ 1,545

Original maturities greater than one year

Senior

$ 178,926 $ 178,027

Subordinated

10,267 10,090

Total

$ 189,193 $ 188,117

Total borrowings

$ 190,691 $ 189,662

Weighted average stated maturity, in years 1

6.7 6.5

1.

Only includes borrowings with original maturities greater than one year.

Other Secured Financings

$ in millions

At
March 31,
2019
At
December 31,
2018

Original maturities:

Greater than one year

$ 5,254 $ 6,772

One year or less

2,074 2,036

Failed sales

715 658

Total

$ 8,043 $ 9,466

Other secured financings include the liabilities related to certain ELNs, transfers of financial assets that are accounted for as financings rather than sales, pledged commodities, consolidated VIEs where the Firm is deemed to be the primary beneficiary 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.

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.

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.

11. Commitments, Leases, Guarantees and Contingencies

Commitments

Years to Maturity at
March 31, 2019
$ in millions Less
than 1
1-3 3-5 Over 5 Total

Lending:

Corporate

$ 19,594 $ 30,583 $ 49,944 $ 5,286 $ 105,407

Consumer

7,442 1 11 7,454

Residential and commercial
real estate

66 751 89 554 1,460

Forward-starting
secured financing receivables

121,612 8,322 129,934

Underwriting

2,299 2,299

Investment activities

513 93 49 243 898

Letters of credit and other financial guarantees

187 1 2 190

Total

$ 151,713 $ 31,429 $ 50,093 $ 14,407 $ 247,642

Corporate lending commitments participated to third parties

$ 8,674

Forward-starting secured financing receivables settled within three business days

$ 110,917

Since commitments associated with these instruments may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.

March 2019 Form 10-Q 58


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Notes to Consolidated Financial Statements

(Unaudited)

For a further description of these commitments, refer to Note 12 to the financial statements in the 2018 Form 10-K.

Leases

Balance Sheet Amounts Related to Leases

$ in millions

At

March 31,

2019

Other assets—ROU assets

$ 3,886

Other liabilities and accrued expenses—

Lease liabilities

4,653

Weighted average:

Remaining lease term, in years

10.0

Discount rate

3.7%

Lease Liabilities

$ in millions

At

March 31,

2019

Remainder of 2019

$ 552

2020

687

2021

634

2022

583

2023

532

Thereafter

2,766

Total undiscounted cash flows

$ 5,754

Difference between undiscounted and discounted cash flows

1,101

Amount on balance sheet

$ 4,653

Lease Costs

$ in millions Three Months Ended
March 31, 2019

Fixed costs

$ 170

Variable costs 1

34

Less: Sublease income

(1 )

Total lease cost, net

203

1.

Includes common area maintenance charges and other variable costs not included in the measurement of ROU assets and lease liabilities.

Cash Flows Statement Supplemental Information

$ in millions Three Months Ended
March 31, 2019

Cash outflows—Lease liabilities

$ 165

Non-cash—ROU assets recorded for new and modified leases

40

Minimum Future Lease Commitments (under Previous GAAP)

$ in millions

At

December 31,

2018

2019

$ 677

2020

657

2021

602

2022

555

2023

507

Thereafter

2,639

Total undiscounted cash flows

$ 5,637

Minimum rental income to be received in the future under non-cancelable operating subleases

$ 7

The Firm’s leases are principally non-cancelable operating real estate leases.

Guarantees

Obligations under Guarantee Arrangements at March 31, 2019

Maximum Potential Payout/Notional
Years to Maturity
$ in millions Less than 1 1-3 3-5 Over 5 Total

Credit derivatives

$ 39,388 $ 48,458 $ 75,532 $ 51,176 $ 214,554

Other credit contracts

105 105

Non-credit derivatives

1,585,096 1,425,027 450,368 791,729 4,252,220

Standby letters of credit and other financial guarantees issued 1

1,015 1,037 1,302 4,174 7,528

Market value guarantees

104 103 4 211

Liquidity facilities

4,478 4,478

Whole loan sales guarantees

1 23,175 23,176

Securitization representations and warranties

64,939 64,939

General partner guarantees

9 112 162 50 333

$ in millions




Carrying
Amount
Asset
(Liability)




Collateral/
Recourse

Credit derivatives 2

$ 209 $

Other credit contracts

(8 )

Non-credit derivatives 2

(41,254 )

Standby letters of credit and other financial guarantees issued 1

222 6,350

Market value guarantees

107

Liquidity facilities

6 7,620

Whole loan sales guarantees

(9 )

Securitization representations and warranties 3

(42 )

General partner guarantees

(71 )

1.

These amounts include certain issued standby letters of credit participated to third parties, totaling $0.6 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.

3.

Primarily related to residential mortgage securitizations.

59 March 2019 Form 10-Q


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Notes to Consolidated Financial Statements

(Unaudited)

The Firm 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 a 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 financial statements in the 2018 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 and clearinghouse member guarantees and merger and acquisition guarantees are described in Note 12 to the financial statements in the 2018 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 addition to the matters described below, 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.

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 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 government 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 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.

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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 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 CDS 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 CDS with CDIB. The complaint seeks compensatory damages related to the approximately $228 million that CDIB alleges it has already lost under the CDS, 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. On December 21, 2018, the court denied the Firm’s motion for summary judgment and granted in part the Firm’s motion for sanctions relating to spoliation of evidence. On January 24, 2019, CDIB filed a notice of appeal from the court’s December 21, 2018 order, and on January 25, 2019, the Firm filed a notice of appeal from the same order. On March 7, 2019, the court denied the relief that CDIB sought in a motion to clarify and resettle the portion of the court’s December 21, 2018 order granting spoliation sanctions. 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 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, Successor-by-Merger to Morgan Stanley 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 November 24, 2014, the court granted in part and denied in part the Firm’s motion to dismiss the complaint. On April 4, 2019, the court denied the Firm’s motion to renew its motion to dismiss. 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 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 September 13, 2018, the Appellate Division, First Department, affirmed the lower court’s order denying the Firm’s motion to dismiss. 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 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

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(Unaudited)

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 September 13, 2018, the Appellate Division, First Department, affirmed in part and reversed in part the lower court’s order denying the Firm’s motion to dismiss. On December 20, 2018, the Appellate Division denied plaintiff’s motion for leave to appeal the decision of the Appellate Division, First Department, to the New York Court of Appeals or, in the alternative, for re-argument. 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 October 19, 2018, the court granted the Firm’s motion for leave to amend its answer and to stay the case pending resolution of Deutsche Bank National Trust Company’s appeal to the New York Court of Appeals in another case. On January 17, 2019, the First Department reversed the trial court’s order to the extent that it had granted in part the Firm’s motion to dismiss the complaint. On February 15, 2019, the Firm filed a motion for leave to appeal, or in the alternative, for the re-argument of the First

Department’s decision. 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”) has challenged, in the District Court in Amsterdam, the prior set-off by the Firm of approximately €124 million (approximately $139 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. A hearing took place in this matter on September 19, 2017. On April 26, 2018, the District Court in Amsterdam issued a decision dismissing the Dutch Authority’s claims. On June 4, 2018, the Dutch Authority filed an appeal before the Court of Appeal in Amsterdam in matters re-styled Case number 18/00318 and Case number 18/ 00319. A hearing of the Dutch Authority’s appeal has been scheduled for June 26, 2019. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately €124 million (approximately $139 million) plus accrued interest.

Matters settled. On April 1, 2016, the California Attorney General’s Office filed an action against the Firm in California state court styled California v. Morgan Stanley, et al. , on behalf of California investors, including the California Public Employees’ Retirement System and the California Teachers’ Retirement System. The complaint alleges that the Firm made misrepresentations and omissions regarding RMBS and notes issued by the Cheyne SIV, and asserts violations of the California False Claims Act and other state laws and seeks treble damages, civil penalties, disgorgement, and injunctive relief. On April 24, 2019, the parties reached an agreement to settle the litigation.

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Notes to Consolidated Financial Statements

(Unaudited)

12. Variable Interest Entities and Securitization Activities

Consolidated VIEs

Assets and Liabilities by Type of Activity

At March 31, 2019 At December 31, 2018
$ in millions VIE Assets VIE Liabilities VIE Assets VIE Liabilities

OSF

$ 260 $ $ 267 $

MABS 1

37 18 59 38

Other 2

842 63 809 48

Total

$ 1,139 $ 81 $ 1,135 $ 86

OSF—Other structured financings

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 as the fair values for the liabilities and interests owned are more observable.

2.

Other primarily includes certain operating entities, investment funds and structured transactions.

Assets and Liabilities by Balance Sheet Caption

$ in millions

At

March 31,
2019

At
December 31,
2018

Assets

Cash and cash equivalents:

Cash and due from banks

$ 92 $ 77

Restricted cash

171 171

Trading assets at fair value

311 314

Customer and other receivables

21 25

Goodwill

18 18

Intangible assets

104 128

Other assets

422 402

Total

$ 1,139 $ 1,135

Liabilities

Other secured financings

$ 49 $ 64

Other liabilities and accrued expenses

32 22

Total

$ 81 $ 86

Noncontrolling interests

$ 115 $ 106

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 net assets

recognized in its financial statements, net of amounts absorbed by third-party variable interest holders.

Non-consolidated VIEs

At March 31, 2019

$ in millions

MABS CDO MTOB OSF Other

VIE assets (UPB)

$ 75,970 $ 9,766 $ 7,110 $ 3,302 $ 19,512

Maximum exposure to loss 1

Debt and equity interests

$ 8,080 $ 938 $ 3 $ 1,613 $ 5,261

Derivative and other contracts

4,478 1,966

Commitments, guarantees and other

735 211 327

Total

$ 8,815 $ 938 $ 4,481 $ 1,824 $ 7,554

Carrying value of exposure to loss—Assets

Debt and equity interests

$ 8,080 $ 938 $ 3 $ 1,194 $ 5,261

Derivative and other contracts

6 228

Total

$ 8,080 $ 938 $ 9 $ 1,194 $ 5,489

Additional VIE assets owned 2

$ 11,144

Carrying value of exposure to loss—Liabilities

Derivative and other contracts

$ $ $ $ $ 205

At December 31, 2018

$ in millions

MABS CDO MTOB OSF Other

VIE assets (UPB)

$ 71,287 $ 10,848 $ 7,014 $ 3,314 $ 19,682

Maximum exposure to loss 1

Debt and equity interests

$ 8,234 $ 1,169 $ $ 1,622 $ 4,645

Derivative and other contracts

4,449 1,768

Commitments, guarantees and other

397 3 235 327

Total

$ 8,631 $ 1,172 $ 4,449 $ 1,857 $ 6,740

Carrying value of exposure to loss—Assets

Debt and equity interests

$ 8,234 $ 1,169 $ $ 1,205 $ 4,645

Derivative and other contracts

6 87

Total

$ 8,234 $ 1,169 $ 6 $ 1,205 $ 4,732

Additional VIE assets owned 2

$ 11,969

Carrying value of exposure to loss—Liabilities

Derivative and other contracts

$ $ $ $ $ 185

MTOB—Municipal tender option bonds

1.

Where notional amounts are utilized in quantifying the maximum exposure related to derivatives, such amounts do not reflect changes in fair value recorded by the Firm.

2.

Additional VIE assets owned represents the carrying value of total exposure to non-consolidated VIEs for which the maximum exposure to loss is less than specific thresholds, primarily interests issued by securitization SPEs. The Firm’s primary risk exposure is to the most subordinate class of beneficial interest and maximum exposure to loss generally equals the fair value of the assets owned. These assets are primarily included in Trading assets and Investment securities and are measured at fair value (see Note 3). The Firm does not provide additional support in these transactions through contractual facilities, guarantees or similar derivatives.

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Notes to Consolidated Financial Statements

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The majority of the VIEs included in the previous tables are sponsored by unrelated parties; the Firm’s involvement generally is the result of its secondary market-making activities and securities held in its Investment securities portfolio (see Note 5).

The Firm’s maximum exposure to loss is dependent on the nature of the Firm’s variable interest in the VIE and is limited to:

notional amounts of certain liquidity facilities;

other credit support;

total return swaps;

written put options; and

fair value of certain other derivatives and investments the Firm has made in the VIE.

The Firm’s maximum exposure to loss in the previous tables does not include the offsetting benefit of hedges or any reductions associated with 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.

Liabilities issued by VIEs generally are non-recourse to the Firm.

Mortgage- and Asset-Backed Securitization Assets

At March 31, 2019 At December 31, 2018
$ in millions UPB Debt and
Equity
Interests
UPB Debt and
Equity
Interests

Residential mortgages

$ 6,590 $ 628 $ 6,954 $ 745

Commercial mortgages

41,021 1,754 42,974 1,237

U.S. agency collateralized mortgage obligations

15,072 2,640 14,969 3,443

Other consumer or commercial loans

13,287 3,058 6,390 2,809

Total

$ 75,970 $ 8,080 $ 71,287 $ 8,234

Transfers of Assets with Continuing Involvement

At March 31, 2019
$ in millions

RML

CML U.S. Agency
CMO

CLN and

Other 1

SPE assets (UPB) 2

$ 13,937 $ 73,268 $ 22,907 $ 15,068

Retained interests

Investment grade

$ 17 $ 525 $ 349 $ 2

Non-investment grade

4 166 90

Total

$ 21 $ 691 $ 349 $ 92

Interests purchased in the secondary market (fair value)

Investment grade

$ 9 $ 72 $ 246 $

Non-investment grade

14 100

Total

$ 23 $ 172 $ 246 $

Derivative assets (fair value)

$ $ $ $ 129

Derivative liabilities (fair value)

106
At December 31, 2018
$ in millions

RML

CML U.S. Agency
CMO

CLN and

Other 1

SPE assets (UPB) 2

$ 14,376 $ 68,593 $ 16,594 $ 14,608

Retained interests

Investment grade

$ 17 $ 483 $ 1,573 $ 3

Non-investment grade
(fair value)

4 212 210

Total

$ 21 $ 695 $ 1,573 $ 213

Interests purchased in the secondary market (fair value)

Investment grade

$ 7 $ 91 $ 102 $

Non-investment grade

28 71

Total

$ 35 $ 162 $ 102 $

Derivative assets (fair value)

$ $ $ $ 216

Derivative liabilities (fair value)

178

RML—Residential mortgage loans

CML—Commercial mortgage loans

1.

Amounts include CLO transactions managed by unrelated third parties.

2.

Amounts include assets transferred by unrelated transferors.

Fair Value at March 31, 2019

$ in millions

Level 2 Level 3 Total

Retained interests

Investment grade

$ 356 $ 24 $ 380

Non-investment grade

7 94 101

Total

$ 363 $ 118 $ 481

Interests purchased in the secondary market

Investment grade

$ 320 $ 7 $ 327

Non-investment grade

101 13 114

Total

$ 421 $ 20 $ 441

Derivative assets

$ 47 $ 82 $ 129

Derivative liabilities

104 2 106

Fair Value at December 31,2018

$ in millions

Level 2 Level 3 Total

Retained interests

Investment grade

$ 1,580 $ 13 $ 1,593

Non-investment grade

174 252 426

Total

$ 1,754 $ 265 $ 2,019

Interests purchased in the secondary market

Investment grade

$ 193 $ 7 $ 200

Non-investment grade

83 16 99

Total

$ 276 $ 23 $ 299

Derivative assets

$ 121 $ 95 $ 216

Derivative liabilities

175 3 178

The transfers of assets with continuing involvement tables include transactions with SPEs in which the Firm, acting as principal, transferred financial assets with continuing involvement and received sales treatment.

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,

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Notes to Consolidated Financial Statements

(Unaudited)

for which Investment banking revenues are recognized. 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

March 31,

$ in millions 2019 2018

New transactions 1

$ 4,733 $ 6,134

Retained interests

2,887 481

Sales of corporate loans to CLO SPEs 1, 2

94

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).

Assets Sold with Retained Exposure

$ in millions

At

March 31,

2019

At

December 31,
2018

Gross cash proceeds from sale of assets 1

$ 27,444 $ 27,121

Fair value

Assets sold

$ 27,560 $ 26,524

Derivative assets recognized
in the balance sheets

264 164

Derivative liabilities recognized
in the balance sheets

73 763

1.

The carrying value of assets derecognized at the time of sale approximates gross cash proceeds.

The Firm enters into transactions in which it sells securities, primarily equities and contemporaneously enters into bilateral OTC derivatives with the purchasers of the securities, through which it retains exposure to the sold securities.

For a discussion of the Firm’s VIEs, the determination and structure of VIEs and securitization activities, see Note 13 to the financial statements in the 2018 Form 10-K.

13.

Regulatory Requirements

Regulatory Capital Framework and Requirements

For a discussion of the Firm’s regulatory capital framework, see Note 14 to the financial statements in the 2018 Form 10-K.

The Firm is required to maintain minimum risk-based and leverage-based capital ratios under regulatory capital requirements. A summary of the calculations of regulatory capital, RWA and transition provisions follows.

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 AOCI and investments in the capital instruments of unconsolidated financial institutions.

In addition to the minimum risk-based capital ratio requirements, the Firm is subject to the following buffers in 2019:

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

The Common Equity Tier 1 G-SIB capital surcharge, currently at 3%; and

Up to a 2.5% Common Equity Tier 1 CCyB, currently set by U.S. banking agencies at zero.

In 2018, each of these buffers was 75% of the fully phased-in 2019 requirement noted above. Failure to maintain the buffers would 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 Firm’s Regulatory Capital and Capital Ratios

At March 31, 2019
$ in millions Required
Ratio 1
Amount Ratio

Risk-based capital

Common Equity Tier 1 capital

10.0 % $ 63,344 16.7 %

Tier 1 capital

11.5 % 71,910 19.0 %

Total capital

13.5 % 81,570 21.6 %

Total RWA

378,420

Leverage-based capital

Tier 1 leverage

4.0 % $ 71,910 8.4 %

Adjusted average assets 2

855,192

SLR

5.0 % 71,910 6.5 %

Supplementary leverage exposure 3

1,104,264

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Notes to Consolidated Financial Statements

(Unaudited)

At December 31, 2018
$ in millions Required
Ratio 1
Amount Ratio

Risk-based capital

Common Equity Tier 1 capital

8.6 % $ 62,086 16.9 %

Tier 1 capital

10.1 % 70,619 19.2 %

Total capital

12.1 % 80,052 21.8 %

Total RWA

367,309

Leverage-based capital

Tier 1 leverage

4.0 % $ 70,619 8.4 %

Adjusted average assets 2

843,074

SLR

5.0 % 70,619 6.5 %

Supplementary leverage exposure 3

1,092,672

1.

Required ratios are inclusive of any buffers applicable as of the date presented. For 2018, the minimum required regulatory capital ratios for risk-based capital are under the transitional rules.

2.

Adjusted average assets represents the denominator of the Tier 1 leverage ratio and is composed of the average daily balance of consolidated on-balance sheet assets under U.S. GAAP during the quarters ended March 31, 2019 and December 31, 2018, adjusted for disallowed goodwill, intangible assets, certain deferred tax assets, certain investments in the capital instruments of unconsolidated financial institutions and other adjustments.

3.

Supplementary leverage exposure is the sum of Adjusted average assets used in the Tier 1 leverage ratio and other adjustments, primarily (i) potential future exposure for derivative exposures, gross-up for cash collateral netting where qualifying criteria are not met, and the effective notional principal amount of sold credit protection offset by qualifying purchased credit protection; (ii) the counterparty credit risk for repo-style transactions; and (iii) the credit equivalent amount for off-balance sheet exposures.

At March 31, 2019 and December 31, 2018, the Firm’ risk-based capital ratios are based on the Standardized Approach rules.

U.S. Bank Subsidiaries’ Regulatory Capital and Capital Ratios

The OCC establishes capital requirements for the Firm’s U.S. Bank Subsidiaries and evaluates their compliance with such capital requirements. Regulatory capital requirements for the U.S. Bank Subsidiaries are calculated in a similar manner to the Firm’s regulatory capital requirements, although G-SIB capital surcharge requirements do not apply to the U.S. Bank Subsidiaries.

The OCC’s regulatory capital framework includes Prompt Corrective Action (“PCA”) standards, including “well-capitalized” PCA standards that are based on specified regulatory capital ratio minimums. For the Firm to remain an FHC, the U.S. Bank Subsidiaries must remain well-capitalized in accordance with the OCC’s PCA standards. In addition, failure by the U.S. Bank Subsidiaries to meet minimum capital requirements may result in certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on the U.S. Bank Subsidiaries’ and the Firm’s financial statements.

At March 31, 2019 and December 31, 2018, the U.S. Bank Subsidiaries’ risk-based capital ratios are based on the Standardized Approach rules, and in each period, the ratios exceeded well-capitalized requirements.

MSBNA’s Regulatory Capital
At March 31, 2019

$ in millions

Required
Ratio 1
Amount Ratio

Risk-based capital

Common Equity Tier 1 capital

6.5 % $ 16,285 19.9 %

Tier 1 capital

8.0 % 16,285 19.9 %

Total capital

10.0 % 16,569 20.2 %

Leverage-based capital

Tier 1 leverage

5.0 % $ 16,285 11.1 %

SLR

6.0 % 16,285 8.7 %
At December 31, 2018

$ in millions

Required
Ratio 1
Amount Ratio

Risk-based capital

Common Equity Tier 1 capital

6.5 % $ 15,221 19.5 %

Tier 1 capital

8.0 % 15,221 19.5 %

Total capital

10.0 % 15,484 19.8 %

Leverage-based capital

Tier 1 leverage

5.0 % $ 15,221 10.5 %

SLR

6.0 % 15,221 8.2 %

MSPBNA’s Regulatory Capital
At March 31, 2019

$ in millions

Required
Ratio 1
Amount Ratio

Risk-based capital

Common Equity Tier 1 capital

6.5 % $ 7,545 26.4 %

Tier 1 capital

8.0 % 7,545 26.4 %

Total capital

10.0 % 7,590 26.6 %

Leverage-based capital

Tier 1 leverage

5.0 % $ 7,545 10.1 %

SLR

6.0 % 7,545 9.7 %

At December 31, 2018
$ in millions Required
Ratio 1
Amount Ratio

Risk-based capital

Common Equity Tier 1 capital

6.5 % $ 7,183 25.2%

Tier 1 capital

8.0 % 7,183 25.2%

Total capital

10.0 % 7,229 25.4%

Leverage-based capital

Tier 1 leverage

5.0 % $ 7,183 10.0%

SLR

6.0 % 7,183 9.6%

1.

Ratios that are required in order to be considered well-capitalized for U.S. regulatory purposes.

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Notes to Consolidated Financial Statements

(Unaudited)

U.S. Broker-Dealer Regulatory Capital Requirements
MS&Co. Regulatory Capital
$ in millions At March 31, 2019 At December 31, 2018

Net capital

$ 13,925 $ 13,797

Excess net capital

11,403 11,333

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 SEC and the 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 March 31, 2019 and December 31, 2018, 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 March 31, 2019 At December 31, 2018

Net capital

$ 3,041 $ 3,455

Excess net capital

2,901 3,313

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

MSIP, a London-based broker-dealer subsidiary, is subject to the capital requirements of the PRA, and 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.

14. Total Equity

Share Repurchases

Three Months Ended
March 31,
$ in millions 2019 2018

Repurchases of common stock under our Share Repurchase Program

$ 1,180 $ 1,250

The Firm’s 2018 Capital Plan (“Capital Plan”) includes the share repurchase of up to $4.7 billion of outstanding common stock for the period beginning July 1, 2018 through June 30, 2019. Additionally, the Capital Plan includes quarterly common stock dividends of up to $0.30 per share.

A portion of common stock repurchases in the current quarter was conducted under a sales plan with MUFG, whereby MUFG sold shares of the Firm’s common stock to the Firm, as part of the Firm’s Share Repurchase Program. The sales plan is only intended to maintain MUFG’s ownership percentage below 24.9% in order to comply with MUFG’s passivity commitments to the Board of Governors of the Federal Reserve System and has no impact on the strategic alliance between MUFG and the Firm, including the joint ventures in Japan.

Preferred Stock Outstanding

Shares
Outstanding
Carrying Value

$ in millions, except

per share data

At
March 31,
2019
Liquidation
Preference
per Share
At
March 31,
2019
At
December 31,
2018

Series

A

44,000 $ 25,000 $ 1,100 $ 1,100

C 1

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 1,000

Total

$ 8,520 $ 8,520

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.

For a description of Series A through Series K preferred stock issuances, see Note 15 to the financial statements in the 2018 Form 10-K. 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).

67 March 2019 Form 10-Q


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Notes to Consolidated Financial Statements

(Unaudited)

Preferred Stock Dividends

$ in millions, except per

share data

Three Months Ended
March 31, 2019
Three Months Ended
March 31, 2018
Per Share 1 Total Per Share 1 Total

Series

A

$ 250 $ 11 $ 250 $ 11

C

25 13 25 13

E

445 15 445 15

F

430 15 430 15

G

414 8 414 8

I

398 16 398 16

K

366 15 366 15

Total

$ 93 $ 93

1.

In addition to the dividends on the series of preferred stock included above, which are payable quarterly, Series H and J are payable semiannually until July 15, 2019 and July 15, 2020, respectively, and quarterly thereafter.

Accumulated Other Comprehensive Income (Loss) 1

$ in millions

Foreign
Currency
Translation
Adjustments
AFS
Securities
Pension,
Postretirement
and Other
DVA Total

December 31, 2018

$ (889) $ (930) $ (578) $ 105 $ (2,292)

OCI during the period

(12) 429 1 (599) (181)

March 31, 2019

$ (901) $ (501) $ (577) $ (494) $ (2,473)

December 31, 2017

$ (767) $ (547) $ (591) $ (1,155) $ (3,060)

Cumulative adjustment for accounting changes 2

(8) (111) (124) (194) (437)

OCI during the period

60 (410) 5 436 91

March 31, 2018

$ (715) $ (1,068) $ (710) $ (913) $ (3,406)

1.

Amounts are net of tax and exclude noncontrolling interests.

2.

The cumulative adjustment for accounting changes is primarily the effect of the adoption of the accounting update Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income . This adjustment was recorded as of January 1, 2018 to reclassify certain income tax effects related to enactment of the Tax Act from AOCI to Retained earnings, primarily related to the remeasurement of deferred tax assets and liabilities resulting from the reduction in the corporate income tax rate to 21%. See Note 2 for further information.

Components of Period Changes in OCI

Three Months Ended

March 31, 2019 1

$ in millions

Pre-tax

Gain

(Loss)

Income
Tax Benefit
(Provision)

After-tax
Gain

(Loss)

Non-
controlling
Interests
Net

Foreign currency translation adjustments

OCI activity

$ (4) $ (18) $ (22) $ (10) $ (12)

Reclassified to earnings

Net OCI

$ (4) $ (18) $ (22) $ (10) $ (12)

Change in net unrealized gains (losses) on AFS securities

OCI activity

$ 570 $ (133) $ 437 $ $ 437

Reclassified to earnings

(10) 2 (8) (8)

Net OCI

$ 560 $ (131) $ 429 $ $ 429

Pension, postretirement and other

OCI activity

$ $ (1) $ (1) $ $ (1)

Reclassified to earnings

3 (1) 2 2

Net OCI

$ 3 $ (2) $ 1 $ $ 1

Change in net DVA

OCI activity

$ (824) $ 201 $ (623) $ (21) $ (602)

Reclassified to earnings

4 (1) 3 3

Net OCI

$ (820) $ 200 $ (620) $ (21) $ (599)
Three Months Ended
March 31, 2018 1
$ in millions

Pre-tax

Gain

(Loss)

Income
Tax Benefit
(Provision)

After-tax
Gain

(Loss)

Non-
controlling
Interests
Net

Foreign currency translation adjustments

OCI activity

$ 78 $ 39 $ 117 $ 57 $ 60

Reclassified to earnings

Net OCI

$ 78 $ 39 $ 117 $ 57 $ 60

Change in net unrealized gains (losses) on AFS securities

OCI activity

$ (535) $ 125 $ (410) $ $ (410)

Reclassified to earnings

Net OCI

$ (535) $ 125 $ (410) $ $ (410)

Pension, postretirement and other

OCI activity

$ $ $ $ $

Reclassified to earnings

6 (1) 5 5

Net OCI

$ 6 $ (1) $ 5 $ $ 5

Change in net DVA

OCI activity

$ 580 $ (140) $ 440 $ 15 $ 425

Reclassified to earnings

15 (4) 11 11

Net OCI

$ 595 $ (144) $ 451 $ 15 $ 436

1.

Exclusive of cumulative adjustments related to the adoption of certain accounting updates. Refer to the table below and Note 2 for further information.

Cumulative Adjustments to Retained Earnings Related to
Adoption of Accounting Updates

Three Months Ended
$ in millions March 31, 2019

Leases

$ 63
Three Months Ended
$ in millions March 31, 2018

Revenues from contracts with customers 1

(32)

Derivatives and hedging—targeted improvements to accounting for hedging activities 1

(99)

Reclassification of certain tax effects from AOCI 1

$ 443

Other 2

(6)

Total

$ 306

1.

See Note 2 to the 2018 Form 10-K for further information.

2.

Other includes the adoption of accounting updates related to Recognition and Measurement of Financial Assets and Financial Liabilities (other than the provision around presenting unrealized DVA in OCI, which the Firm early adopted in 2016) and Derecognition of Nonfinancial Assets . The impact of these adoptions on Retained earnings was not significant.

March 2019 Form 10-Q 68


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Notes to Consolidated Financial Statements

(Unaudited)

15.

Earnings per Common Share

Three Months Ended

March 31,

in millions, except for per share data 2019 2018

Earnings applicable to Morgan
Stanley common shareholders

$ 2,336 $ 2,575

Basic EPS

Weighted average common shares outstanding

1,658 1,740

Earnings per basic common share

$ 1.41 $ 1.48

Diluted EPS

Weighted average common shares outstanding

1,658 1,740

Effect of dilutive RSUs and PSUs

19 31

Weighted average common
shares outstanding and
common stock equivalents

1,677 1,771

Earnings per diluted common share

$ 1.39 $ 1.45

Weighted average antidilutive RSUs
(excluded from the computation of diluted EPS)

6 1

16.

Interest Income and Interest Expense

Three Months Ended
March 31,
$ in millions 2019 2018

Interest income

Investment securities

$ 475 $ 424

Loans

1,195 938

Securities purchased under agreements to resell and Securities borrowed 1

947 215

Trading assets, net of Trading liabilities

713 540

Customer receivables and Other 2

960 743

Total interest income

$ 4,290 $ 2,860

Interest expense

Deposits

$ 462 $ 159

Borrowings

1,380 1,138

Securities sold under agreements to repurchase and Securities loaned 3

600 402

Customer payables and Other 4

834 186

Total interest expense

$ 3,276 $ 1,885

Net interest

$ 1,014 $ 975

1.

Includes fees paid on Securities borrowed.

2.

Includes interest from Customer receivables and Cash and cash equivalents.

3.

Includes fees received on Securities loaned.

4.

Includes fees received from prime brokerage customers for stock loan transactions entered into to cover customers’ short positions.

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.

17. Income Taxes

The Firm is under continuous examination by the IRS and other tax authorities in certain countries, such as Japan and the U.K., and in states and localities 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 believes that the resolution of the above tax examinations will not have a material effect on the annual financial statements, although a resolution could have a material impact in the income statements and on the effective tax rate for any period in which such resolution occurs.

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.

It is reasonably possible that significant changes in the balance of unrecognized tax benefits occur within the next 12 months. At this time, however, it is not possible to reasonably estimate the expected change to the total amount of unrecognized tax benefits and the impact on the Firm’s effective tax rate over the next 12 months.

The Firm’s effective tax rate for the current quarter included recurring-type discrete tax benefits associated with employee share-based payments of $107 million. The Firm’s effective tax rate for the current quarter included an intermittent net discrete tax benefit of $101 million primarily associated with the remeasurement of reserves and related interest due to new information with regard to multi-jurisdiction tax examinations.

69 March 2019 Form 10-Q


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Notes to Consolidated Financial Statements

(Unaudited)

18. Segment, Geographic and Revenue

Information

Segment

Information

Selected Financial Information by Business Segment

Three Months Ended March 31, 2019
$ in millions IS WM IM I/E Total

Investment banking 1, 2

$ 1,151 $ 109 $ $ (18 ) $ 1,242

Trading

3,130 302 (3 ) 12 3,441

Investments

81 1 191 273

Commissions and fees 1

621 406 (61 ) 966

Asset management 1

107 2,361 617 (36 ) 3,049

Other

222 80 3 (4 ) 301

Total non-interest revenues 3, 4

5,312 3,259 808 (107 ) 9,272

Interest income

3,056 1,413 4 (183 ) 4,290

Interest expense

3,172 283 8 (187 ) 3,276

Net interest

(116 ) 1,130 (4 ) 4 1,014

Net revenues

$ 5,196 $ 4,389 $ 804 $ (103 ) $ 10,286

Income from continuing operations before income taxes

$ 1,595 $ 1,188 $ 174 $ (2 ) $ 2,955

Provision for income taxes

190 264 33 487

Income from continuing operations

1,405 924 141 (2 ) 2,468

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

Net income

1,405 924 141 (2 ) 2,468

Net income applicable to noncontrolling interests

34 5 39

Net income applicable to Morgan Stanley

$ 1,371 $ 924 $ 136 $ (2 ) $ 2,429
Three Months Ended March 31, 2018
$ in millions IS WM IM I/E Total

Investment banking 1, 2

$ 1,513 $ 140 $ $ (19 ) $ 1,634

Trading

3,643 109 5 13 3,770

Investments

49 77 126

Commissions and fees 1

744 498 (69 ) 1,173

Asset management 1

110 2,495 626 (39 ) 3,192

Other

136 63 10 (2 ) 207

Total non-interest
revenues 3, 4

6,195 3,305 718 (116 ) 10,102

Interest income

1,804 1,280 1 (225 ) 2,860

Interest expense

1,899 211 1 (226 ) 1,885

Net interest

(95 ) 1,069 1 975

Net revenues

$ 6,100 $ 4,374 $ 718 $ (115 ) $ 11,077

Income from continuing operations before income taxes

$ 2,112 $ 1,160 $ 148 $ $ 3,420

Provision for income taxes

449 246 19 714

Income from continuing operations

1,663 914 129 2,706

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

(2 ) (2 )

Net income

1,661 914 129 2,704

Net income applicable to noncontrolling interests

34 2 36

Net income applicable to Morgan Stanley

$ 1,627 $ 914 $ 127 $ $ 2,668

I/E–Intersegment Eliminations

1.

Approximately 85% of Investment banking revenues and substantially all of Commissions and fees and Asset management revenues in the current quarter and prior year quarter were accounted for under the Revenues from Contracts with Customers accounting update.

2.

Current quarter Institutional Securities Investment banking revenues are composed of $406 million of Advisory and $745 million of Underwriting revenues. Prior year quarter Institutional Securities Investment banking revenues are composed of $574 million of Advisory and $939 million of Underwriting revenues.

3.

The Firm enters into certain contracts which contain a current obligation to perform services in the future. Excluding contracts where billing is commensurate with the value of the services performed at each stage of the contract, contracts with variable consideration that is subject to reversal, and contracts with less than one year duration, we expect to record the following approximate revenues in the future: $105 million in the remainder of 2019 and $105 million in 2020; between $40 million and $70 million per year in 2021 through 2025; and $10 million per year thereafter through 2035. These revenues are primarily related to certain commodities contracts with customers.

4.

Includes $671 million and $902 million in revenue recognized in the current quarter and prior year quarter, respectively, where some or all services were performed in prior periods. This amount is primarily composed of investment banking advisory fees and distribution fees.

For a discussion about the Firm’s business segments, see Note 21 to the financial statements in the 2018 Form 10-K.

March 2019 Form 10-Q 70


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Notes to Consolidated Financial Statements

(Unaudited)

Total Assets by Business Segment

$ in millions At
March 31,
2019
At
December 31,
2018

Institutional Securities

$ 675,770 $ 646,427

Wealth Management

194,897 202,392

Investment Management

5,297 4,712

Total 1

$ 875,964 $ 853,531

1.

Parent assets have been fully allocated to the business segments.

Additional

Segment Information—Investment Management

Net Unrealized Carried Interest

At At
March 31, December 31,
$ in millions 2019 2018

Net cumulative unrealized carried interest at risk of reversing

$ 469 $ 434

The Firm’s portion of net cumulative unrealized carried interest (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-based fees in the form of carried interest previously received.

Reduction of Fees due to Fee Waivers

Three Months Ended March 31,
$ in millions 2019 2018

Fee waivers

$ 11 $ 18

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.

Separately, the Firm’s employees, including its senior officers, may participate on the same terms and conditions as other investors in certain funds that the Firm sponsors primarily for client investment, and the Firm may waive or lower applicable fees and charges for its employees.

Geographic Information

Net Revenues by Region

Three Months Ended March 31,
$ in millions 2019 2018

Americas

$ 7,321 $ 8,018

EMEA

1,702 1,708

Asia

1,263 1,351

Total

$ 10,286 $ 11,077

For a discussion about the Firm’s geographic net revenues, see Note 21 to the financial statements in the 2018 Form 10-K.

Revenue Information

Trading Revenues by Product Type

Three Months Ended March 31,
$ in millions 2019 2018

Interest rate

$ 785 $ 871

Foreign exchange

241 261

Equity security and index 1

1,451 1,877

Commodity and other

422 435

Credit

542 326

Total

$ 3,441 $ 3,770

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. The trading revenues presented in the 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.

Receivables related to Revenues from Contracts with Customers

At At
March 31, December 31,
$ in millions 2019 2018

Customer and other receivables

$ 2,206 $ 2,308

Receivables from contracts with customers, which are included within Customer and other receivables in the balance sheets, arise when the Firm has both recorded revenues and has the right per the contract to bill the customer.

19. 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.

71 March 2019 Form 10-Q


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Financial Data Supplement (Unaudited)

Average Balances and Interest Rates and Net Interest Income

Three Months Ended March 31,
2019 2018

$ in millions


Average

Daily Balance


Interest


Annualized

Average
Rate





Average

Daily
Balance



Interest

Annualized
Average
Rate


Interest earning assets

Investment securities 1

$ 94,906 $ 475 2.0 % $ 80,532 $ 424 2.1 %

Loans 1

116,698 1,195 4.2 104,407 938 3.6

Securities purchased under agreements to resell and Securities borrowed 2:

U.S.

141,806 934 2.7 124,172 309 1.0

Non-U.S.

77,256 13 0.1 87,581 (94 ) (0.4)

Trading assets, net of Trading liabilities 3:

U.S.

74,152 631 3.5 53,488 487 3.7

Non-U.S.

11,861 82 2.8 5,059 53 4.2

Customer receivables and Other 4:

U.S.

63,649 697 4.4 74,118 542 3.0

Non-U.S.

55,142 263 1.9 50,080 201 1.6

Total

$ 635,470 $ 4,290 2.7 % $ 579,437 $ 2,860 2.0 %

Interest bearing liabilities

Deposits 1

$ 181,017 $ 462 1.0 % $ 159,948 $ 159 0.4 %

Borrowings 1, 5

189,181 1,380 3.0 194,558 1,138 2.4

Securities sold under agreements to repurchase and Securities loaned 6:

U.S.

26,615 450 6.9 25,009 286 4.6

Non-U.S.

32,350 150 1.9 40,675 116 1.2

Customer payables and Other 7:

U.S.

117,932 554 1.9 121,438 49 0.2

Non-U.S.

65,498 280 1.7 69,646 137 0.8

Total

$ 612,593 $ 3,276 2.2 % $ 611,274 $ 1,885 1.3 %

Net interest income and net interest rate spread

$ 1,014 0.5 % $ 975 0.7 %

1.

Amounts include primarily U.S. balances.

2.

Includes fees paid on Securities borrowed.

3.

Excludes non-interest earning assets and non-interest bearing liabilities, such as equity securities.

4.

Includes interest from Customer receivables and Cash and cash equivalents. Prior period amounts have been revised to conform to the current presentation.

5.

Includes structured notes, whose interest expense is considered part of its value and therefore is recorded within Trading revenues.

6.

Includes fees received on Securities loaned. The annualized average rate was calculated using (a) interest expense incurred on all securities sold under agreements to repurchase and securities loaned transactions, whether or not such transactions were reported in the balance sheets and (b) net average on-balance sheet balances, which exclude certain securities-for-securities transactions.

7.

Includes fees received from prime brokerage customers for stock loan transactions entered into to cover customers’ short positions.

March 2019 Form 10-Q 72


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Glossary of Common Acronyms

2018 Form 10-K

Annual Report on Form 10-K for year ended December 31, 2018 filed with the SEC

ABS

Asset-backed securities

AFS

Available-for-sale

AML

Anti-money laundering

AOCI

Accumulated other comprehensive income (loss)

AUM

Assets under management or supervision

BEAT

Base erosion and anti-abuse tax

BHC

Bank holding company

bps

Basis points; one basis point equals 1/100th of 1%

CCAR

Comprehensive Capital Analysis and Review

CCyB

Countercyclical capital buffer

CDO

Collateralized debt obligation(s), including Collateralized loan obligation(s)

CDS

Credit default swaps

CECL

Current expected credit loss

CFTC

U.S. Commodity Futures Trading Commission

CLN

Credit-linked note(s)

CLO

Collateralized loan obligation(s)

CMBS

Commercial mortgage-backed securities

CMO

Collateralized mortgage obligation(s)

CVA

Credit valuation adjustment

DVA

Debt valuation adjustment

EBITDA

Earnings before interest, taxes, depreciation and amortization

ELN

Equity-linked note(s)

EMEA

Europe, Middle East and Africa

EPS

Earnings per common share

E.U.

European Union

FDIC

Federal Deposit Insurance Corporation

FFELP

Federal Family Education Loan Program

FFIEC

Federal Financial Institutions Examination Council

FHC

Financial Holding Company

FICO

Fair Isaac Corporation

FVA

Funding valuation adjustment

GILTI

Global Intangible Low-Taxed Income

GLR

Global liquidity reserve

G-SIB

Global systemically important banks

HELOC

Home Equity Line of Credit

HQLA

High-quality liquid assets

HTM

Held-to-maturity

I/E

Intersegment eliminations

IHC

Intermediate holding company

IM

Investment Management

IRS

Internal Revenue Service

IS

Institutional Securities

LCR

Liquidity coverage ratio, as adopted by the U.S. banking agencies

LIBOR

London Interbank Offered Rate

M&A

Merger, acquisition and restructuring transaction

MSBNA

Morgan Stanley Bank, N.A.

73 March 2019 Form 10-Q


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Glossary of Common Acronyms

MS&Co.

Morgan Stanley & Co. LLC

MSIP

Morgan Stanley & Co. International plc

MSMS

Morgan Stanley MUFG Securities Co., Ltd.

MSPBNA

Morgan Stanley Private Bank, National Association

MSSB LLC

Morgan Stanley Smith Barney LLC

MUFG

Mitsubishi UFJ Financial Group, Inc.

MUMSS

Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.

MWh

Megawatt hour

N/A

Not Applicable

NAV

Net asset value

N/M

Not Meaningful

Non-GAAP

Non-generally accepted accounting principles

NSFR

Net stable funding ratio, as proposed by the U.S. banking agencies

OCC

Office of the Comptroller of the Currency

OCI

Other comprehensive income (loss)

OIS

Overnight index swap

OTC

Over-the-counter

PRA

Prudential Regulation Authority

PSU

Performance-based stock unit

RMBS

Residential mortgage-backed securities

ROE

Return on average common equity

ROTCE

Return on average tangible common equity

ROU

Right-of-use

RSU

Restricted stock unit

RWA

Risk-weighted assets

SEC

U.S. Securities and Exchange Commission

SLR

Supplementary leverage ratio

S&P

Standard & Poor’s

SPE

Special purpose entity

SPOE

Single point of entry

TDR

Troubled debt restructuring

TLAC

Total loss-absorbing capacity

U.K.

United Kingdom

UPB

Unpaid principal balance

U.S.

United States of America

U.S. DOL

U.S. Department of Labor

U.S. GAAP

Accounting principles generally accepted in the United States of America

VaR

Value-at-Risk

VAT

Value-added tax

VIE

Variable interest entity

WACC

Implied weighted average cost of capital

WM

Wealth Management

March 2019 Form 10-Q 74


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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 2018 Form 10-K. See also the disclosures set forth under “Legal Proceedings” in the 2018 Form 10-K.

Residential Mortgage and Credit Crisis Related Matters

On February 15, 2019, the Firm filed a motion for leave to appeal, or in the alternative, for the re-argument of the First Department’s January 17, 2019 decision in 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.

On March 7, 2019, in the matter styled China Development Industrial Bank v. Morgan Stanley & Co, Incorporated, et al, the court denied the relief that CDIB sought in a motion to clarify and resettle the portion of the court’s December 21, 2018 order granting spoliation sanctions.

On April 4, 2019, the court denied the Firm’s motion to renew its motion to dismiss in 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, Successor-by-Merger to Morgan Stanley Mortgage Capital Inc. and GreenPoint Mortgage Funding, Inc.

On April 24, 2019, the parties in California v. Morgan Stanley, et al., reached an agreement to settle the litigation.

Antitrust Related Matter

Beginning on March 25, 2019, the Firm was named as a defendant in a series of putative class action complaints filed in the Southern District of New York, the first of which is styled Alaska Electrical Pension Fund v. BofA Secs., Inc., et al . Each complaint alleges a conspiracy to fix prices and restrain competition in the market for unsecured bonds issued by the following Government-Sponsored Enterprises: the Federal National Mortgage Associate; the Federal Home Loan Mortgage Corporation; the Federal Farm Credit Banks Funding Corporation; and the Federal Home Loan Banks. The purported class period for each suit is from January 1, 2012 to June 1, 2018. Each complaint raises a claim under Section 1 of the Sherman Act and seeks, among other things, injunctive relief and treble compensatory damages.

European Matters

On March 7, 2019, the Appellate Division of the Court of Accounts for the Republic of Italy issued a decision in the matter styled Case No. 2012/00406/MNV affirming the decision below declining jurisdiction and dismissing the claim against the Firm. On April 19, 2019, the public prosecutor filed an appeal with the Italian Supreme Court seeking to overturn this decision.

On March 11, 2019, the plaintiff in the matter styled Banco Popolare Societá Cooperativa v Morgan Stanley & Co. International plc & others filed an appeal in the Court of Appeal of Milan against the lower Milan court’s decision dated September 11, 2018 dismissing the claim against the Firm.

75 March 2019 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 current quarter ended March 31, 2019.

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 Programs 1
Approximate
Dollar Value of
Shares that May
Yet be Purchased
Under the Plans or
Programs

Month #1 (January 1, 2019—January 31, 2019)

Share Repurchase Program 2

4,408,695 $ 42.54 4,408,695 $ 2,172

Employee transactions 3

10,089,356 $ 42.52

Month #2 (February 1, 2019—February 28, 2019)

Share Repurchase Program 2

8,886,000 $ 41.83 8,886,000 $ 1,801

Employee transactions 3

709,539 $ 42.18

Month #3 (March 1, 2019—March 31, 2019)

Share Repurchase Program 2

14,672,111 $ 42.31 14,672,111 $ 1,180

Employee transactions 3

156,953 $ 42.01

Quarter ended at March 31, 2019

Share Repurchase Program 2

27,966,806 $ 42.19 27,966,806 $ 1,180

Employee transactions 3

10,955,848 $ 42.49

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. On April 18, 2018, the Firm entered into a sales plan with Mitsubishi UFJ Financial Group, Inc. (“MUFG”) and Morgan Stanley & Co. LLC (“MS&Co.”) whereby MUFG sold shares of the Firm’s common stock to the Firm, through the Firm’s agent MS&Co., as part of the Company’s Share Repurchase Program (as defined below). The sales plan is only intended to maintain MUFG’s ownership percentage below 24.9% in order to comply with MUFG’s passivity commitments to the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and has no impact on the strategic alliance between MUFG and the Firm, including the joint ventures in Japan.

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, 2018, the Federal Reserve published summary results of CCAR and the Firm received a conditional non-objection to its 2018 Capital Plan, where the only condition was that the Firm’s capital distributions not exceed the greater of the actual distributions it made over the previous four calendar quarters or the annualized average of actual distributions over the previous eight calendar quarters. As a result, the Firm’s 2018 Capital Plan includes a share repurchase of up to $4.7 billion of its outstanding common stock during the period beginning July 1, 2018 through June 30, 2019. During the quarter ended March 31, 2019, the Firm repurchased approximately $1.2 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.”

3.

Includes shares acquired by the Firm in satisfaction of the tax withholding obligations on stock-based awards granted under the Firm’s stock-based compensation plans.

March 2019 Form 10-Q 76


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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.

Exhibits

An exhibit index has been filed as part of this Report on page E-1.

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Exhibit Index

Morgan Stanley

Quarter Ended March 31, 2019

Exhibit No. Description
15

Letter of awareness from Deloitte  & Touche LLP, dated May 3, 2019, concerning unaudited interim financial information.

23

Consent of Shearman  & Sterling LLP, as Special Tax Counsel for Certain Structured Product Issuances.

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 Ended March 31, 2019 and 2018, (ii) the Consolidated Comprehensive Income Statements—Three Months Ended March 31, 2019 and 2018, (iii) the Consolidated Balance Sheets—Unaudited at March 31, 2019 and at December 31, 2018, (iv) the Consolidated Statements of Changes in Total Equity—Three Months Ended March 31, 2019 and 2018, (v) the Consolidated Cash Flow Statements—Three Months Ended March 31, 2019 and 2018, and (vi) Notes to Consolidated Financial Statements.

E-1


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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 / J ONATHAN P RUZAN

Jonathan Pruzan

Executive Vice President and

Chief Financial Officer

By:

/ S / P AUL C. W IRTH

Paul C. Wirth

Deputy Chief Financial Officer

Date: May 3, 2019

S-1

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