Edgar Filing: MORGAN STANLEY

FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

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

EXCHANGE ACT OF 1934

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)

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

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

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


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

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

As of October 31, 2013, there were 1,951,340,420 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.

LOGO

QUARTERLY REPORT ON FORM 10-Q

For the quarter ended September 30, 2013


Table of Contents		Page
Part I—Financial Information
Item 1.	Financial Statements (unaudited)		1
	Condensed Consolidated Statements of Financial Condition—September 30, 2013 and December 31, 2012		1
	Condensed Consolidated Statements of Income—Three and Nine Months Ended September 30, 2013 and 2012		2
	Condensed Consolidated Statements of Comprehensive Income—Three and Nine Months Ended September 30, 2013 and 2012		3
	Condensed Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2013 and 2012		4
	Condensed Consolidated Statements of Changes in Total Equity—Nine Months Ended September 30, 2013 and 2012		5
	Notes to Condensed Consolidated Financial Statements (unaudited)		7
	Report of Independent Registered Public Accounting Firm		98
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		99
	Introduction		99
	Executive Summary		100
	Business Segments		110
	Accounting Developments		126
	Other Matters		127
	Critical Accounting Policies		129
	Liquidity and Capital Resources		133
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		150
Item 4.	Controls and Procedures		165
Financial Data Supplement (unaudited)			166

Part II—Other Information
Item 1.	Legal Proceedings		172
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		176
Item 6.	Exhibits		176


		i

AVAILABLE INFORMATION

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

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

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

•

Amended and Restated Certificate of Incorporation;

•

Amended and Restated Bylaws;

•

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

•

Corporate Governance Policies;

•

Policy Regarding Communication with the Board of Directors;

•

Policy Regarding Director Candidates Recommended by Shareholders;

•

Policy Regarding Corporate Political Contributions;

•

Policy Regarding Shareholder Rights Plan;

•

Code of Ethics and Business Conduct;

•

Code of Conduct; and

•

Integrity Hotline information.

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


		ii

Part I—Financial Information.

Item 1.

Financial Statements.

MORGAN STANLEY

Condensed Consolidated Statements of Financial Condition

(dollars in millions, except share data)

(unaudited)


	September 30, 2013			December 31, 2012
Assets
Cash and due from banks ($465 and $526 at September 30, 2013 and December 31, 2012, respectively, related to consolidated variable interest entities generally not available to the Company)	$	14,333		$	20,878
Interest bearing deposits with banks		43,448			26,026
Cash deposited with clearing organizations or segregated under federal and other regulations or requirements		37,392			30,970
Trading assets, at fair value (approximately $150,255 and $147,348 were pledged to various parties at September 30, 2013 and December 31, 2012, respectively; $2,994 and $3,505 related to consolidated variable interest entities, generally not available to the Company at September 30, 2013 and December 31, 2012, respectively)		273,658			267,603
Securities available for sale, at fair value		46,866			39,869
Securities received as collateral, at fair value		16,042			14,278
Federal funds sold and securities purchased under agreements to resell (includes $868 and $621 at fair value at September 30, 2013 and December 31, 2012, respectively)		133,988			134,412
Securities borrowed		139,169			121,701
Customer and other receivables		57,710			64,288
Loans (net of allowances of $166 and $106 at September 30, 2013 and December 31, 2012, respectively)		37,734			29,046
Other investments		5,083			4,999
Premises, equipment and software costs (net of accumulated depreciation of $6,205 and $5,525 at September 30, 2013 and December 31, 2012, respectively) ($213 and $224 at September 30, 2013 and December 31, 2012, respectively, related to consolidated variable interest entities, generally not available to the Company)		6,008			5,946
Goodwill		6,591			6,650
Intangible assets (net of accumulated amortization of $1,509 and $1,250 at September 30, 2013 and December 31, 2012, respectively) (includes $8 and $7 at fair value at September 30, 2013 and December 31, 2012, respectively)		3,514			3,783
Other assets ($523 and $593 at September 30, 2013 and December 31, 2012, respectively, related to consolidated variable interest entities, generally not available to the Company)		10,687			10,511

Total assets	$	832,223		$	780,960

Liabilities
Deposits (includes $1,411 and $1,485 at fair value at September 30, 2013 and December 31, 2012, respectively)	$	104,807		$	83,266
Commercial paper and other short-term borrowings (includes $1,623 and $725 at fair value at September 30, 2013 and December 31, 2012, respectively)		2,333			2,138
Trading liabilities, at fair value		122,645			120,122
Obligation to return securities received as collateral, at fair value		20,899			18,226
Securities sold under agreements to repurchase (includes $554 and $363 at fair value at September 30, 2013 and December 31, 2012, respectively)		139,398			122,674
Securities loaned		32,807			36,849
Other secured financings (includes $6,145 and $9,466 at fair value at September 30, 2013 and December 31, 2012, respectively) ($587 and $976 at September 30, 2013 and December 31, 2012, respectively, related to consolidated variable entities and are non-recourse to the Company)		14,528			15,727
Customer and other payables		152,091			127,722
Other liabilities and accrued expenses ($75 and $117 at September 30, 2013 and December 31, 2012, respectively, related to consolidated variable interest entities and are non-recourse to the Company)		16,669			14,928
Long-term borrowings (includes $36,719 and $44,044 at fair value at September 30, 2013 and December 31, 2012, respectively)		157,805			169,571

Total liabilities		763,982			711,223

Commitments and contingent liabilities (see Note 12)
Redeemable noncontrolling interests (see Notes 3 and 14)		—			4,309
Equity
Morgan Stanley shareholders’ equity:
Preferred stock		2,370			1,508
Common stock, $0.01 par value:
Shares authorized: 3,500,000,000 at September 30, 2013 and December 31, 2012;
Shares issued: 2,038,893,979 at September 30, 2013 and December 31, 2012;
Shares outstanding: 1,953,350,711 at September 30, 2013 and 1,974,042,123 at December 31, 2012		20			20
Additional Paid-in capital		24,235			23,426
Retained earnings		42,237			39,912
Employee stock trust		1,753			2,932
Accumulated other comprehensive loss		(1,014	)		(516	)
Common stock held in treasury, at cost, $0.01 par value; 85,543,268 shares at September 30, 2013 and 64,851,856 shares at December 31, 2012		(2,720	)		(2,241	)
Common stock issued to employee trust		(1,753	)		(2,932	)

Total Morgan Stanley shareholders’ equity		65,128			62,109
Nonredeemable noncontrolling interests		3,113			3,319

Total equity		68,241			65,428

Total liabilities, redeemable noncontrolling interests and equity	$	832,223		$	780,960

See Notes to Condensed Consolidated Financial Statements.


		1

MORGAN STANLEY

Condensed Consolidated Statements of Income

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

(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Revenues:
Investment banking	$	1,160		$	1,152		$	3,687		$	3,319
Trading		2,259			607			7,847			5,478
Investments		728			290			1,254			438
Commissions and fees		1,080			988			3,465			3,205
Asset management, distribution and administration fees		2,390			2,257			7,140			6,677
Other		204			141			700			403

Total non-interest revenues		7,821			5,435			24,093			19,520

Interest income		1,311			1,379			4,131			4,244
Interest expense		1,200			1,534			3,631			4,618

Net interest		111			(155	)		500			(374	)

Net revenues		7,932			5,280			24,593			19,146

Non-interest expenses:
Compensation and benefits		3,968			3,928			12,289			11,989
Occupancy and equipment		375			386			1,131			1,152
Brokerage, clearing and exchange fees		416			359			1,300			1,167
Information processing and communications		405			493			1,323			1,439
Marketing and business development		151			138			448			439
Professional services		449			476			1,347			1,365
Other		829			983			2,059			1,939

Total non-interest expenses		6,593			6,763			19,897			19,490

Income (loss) from continuing operations before income taxes		1,339			(1,483	)		4,696			(344	)
Provision for (benefit from) income taxes		339			(525	)		1,226			(247	)

Income (loss) from continuing operations		1,000			(958	)		3,470			(97	)

Discontinued operations:
Gain (loss) from discontinued operations		16			(11	)		(55	)		68
Provision for (benefit from) income taxes		(2	)		(13	)		(25	)		43

Net gain (loss) from discontinued operations		18			2			(30	)		25

Net income (loss)	$	1,018		$	(956	)	$	3,440		$	(72	)
Net income applicable to redeemable noncontrolling interests		—			8			222			8
Net income applicable to nonredeemable noncontrolling interests		112			59			370			446

Net income (loss) applicable to Morgan Stanley	$	906		$	(1,023	)	$	2,848		$	(526	)

Earnings (loss) applicable to Morgan Stanley common shareholders	$	880		$	(1,047	)	$	2,619		$	(599	)

Amounts applicable to Morgan Stanley:
Income (loss) from continuing operations	$	888		$	(1,008	)	$	2,878		$	(525	)
Net gain (loss) from discontinued operations		18			(15	)		(30	)		(1	)

Net income (loss) applicable to Morgan Stanley	$	906		$	(1,023	)	$	2,848		$	(526	)

Earnings (loss) per basic common share:
Income (loss) from continuing operations	$	0.45		$	(0.55	)	$	1.39		$	(0.32	)
Net gain (loss) from discontinued operations		0.01			—			(0.02	)		—

Earnings (loss) per basic common share	$	0.46		$	(0.55	)	$	1.37		$	(0.32	)

Earnings (loss) per diluted common share:
Income (loss) from continuing operations	$	0.44		$	(0.55	)	$	1.36		$	(0.32	)
Net gain (loss) from discontinued operations		0.01			—			(0.02	)		—

Earnings (loss) per diluted common share	$	0.45		$	(0.55	)	$	1.34		$	(0.32	)

Dividends declared per common share	$	0.05		$	0.05		$	0.15		$	0.15
Average common shares outstanding:
Basic		1,909,350,788			1,889,300,631			1,906,097,564			1,883,813,883

Diluted		1,964,812,610			1,889,300,631			1,952,146,477			1,883,813,883

See Notes to Condensed Consolidated Financial Statements.


		2

MORGAN STANLEY

Condensed Consolidated Statements of Comprehensive Income

(dollars in millions)

(unaudited)


	Three Months Ended September 30,					Nine Months Ended September 30,
	2013		2012			2013			2012
Net income (loss)	$	1,018	$	(956	)	$	3,440		$	(72	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments(1)	$	125	$	43		$	(321	)	$	(88	)
Amortization of cash flow hedges(2)		1		2			3			5
Change in net unrealized gains (losses) on securities available for sale(3)		33		62			(336	)		84
Pension, postretirement and other related adjustments(4)		4		(4	)		15			15

Total other comprehensive income (loss)	$	163	$	103		$	(639	)	$	16

Comprehensive income (loss)	$	1,181	$	(853	)	$	2,801		$	(56	)
Net income applicable to redeemable noncontrolling interests		—		8			222			8
Net income applicable to nonredeemable noncontrolling interests		112		59			370			446
Other comprehensive income (loss) applicable to redeemable noncontrolling interests		—		(1	)		—			(1	)
Other comprehensive income (loss) applicable to nonredeemable noncontrolling interests		8		29			(141	)		5

Comprehensive income (loss) applicable to Morgan Stanley	$	1,061	$	(948	)	$	2,350		$	(514	)

(1)	Amounts are net of provision for (benefit from) income taxes of $(124) million and $(150) million for the quarters ended September 30, 2013 and 2012, respectively, and $176 million and $26 million for the nine months ended September 30, 2013 and 2012, respectively.

(2)	Amounts are net of provision for income taxes of $1 million and $1 million for the quarters ended September 30, 2013 and 2012, respectively, and $2 million and $3 million for the nine months ended September 30, 2013 and 2012, respectively.

(3)	Amounts are net of provision for (benefit from) income taxes of $23 million and $46 million for the quarters ended September 30, 2013 and 2012, respectively, and $(230) million and $63 million for the nine months ended September 30, 2013 and 2012, respectively.

(4)	Amounts are net of provision for income taxes of $2 million and $8 million for the quarters ended September 30, 2013 and 2012, respectively, and $13 million and $18 million for the nine months ended September 30, 2013 and 2012, respectively.

See Notes to Condensed Consolidated Financial Statements.


		3

MORGAN STANLEY

Condensed Consolidated Statements of Cash Flows

(dollars in millions)

(unaudited)


	Nine Months Ended September 30,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	3,440		$	(72	)
Adjustments to reconcile net income to net cash provided by operating activities:
(Income) loss on equity method investees		(339	)		24
Compensation payable in common stock and options		850			898
Depreciation and amortization		1,084			1,218
Gain on business dispositions		(34	)		(108	)
Gain on sale of securities available for sale		(43	)		(53	)
Impairment charges		182			224
Provision for credit losses on lending activities		116			127
Other non-cash adjustments to net income		31			1
Changes in assets and liabilities:
Cash deposited with clearing organizations or segregated under federal and other regulations or requirements		(6,422	)		607
Trading assets, net of Trading liabilities		(5,944	)		31,556
Securities borrowed		(17,468	)		(11,471	)
Securities loaned		(4,042	)		5,458
Customer and other receivables and other assets		6,761			(23,746	)
Customer and other payables and other liabilities		21,500			9,765
Federal funds sold and securities purchased under agreements to resell		424			(6,127	)
Securities sold under agreements to repurchase		16,724			14,465

Net cash provided by operating activities		16,820			22,766

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from (payments for):
Premises, equipment and software costs		(944	)		(865	)
Business dispositions, net of cash disposed		569			1,536
Loans, net		(6,046	)		(1,739	)
Purchases of securities available for sale		(20,497	)		(17,492	)
Sales, maturities and redemptions of securities available for sale		12,812			8,200
Other investing activities		117			6

Net cash used for investing activities		(13,989	)		(10,354	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (payments for):
Commercial paper and other short-term borrowings		195			(720	)
Noncontrolling interests		(549	)		(186	)
Other secured financings		(1,395	)		(4,291	)
Deposits		21,541			5,095
Proceeds from:
Excess tax benefits associated with stock-based awards		8			42
Derivatives financing activities		244			220
Issuance of Series E Preferred Stock		854			—
Issuance of long-term borrowings		24,766			16,196
Payments for:
Long-term borrowings		(31,084	)		(36,386	)
Derivatives financing activities		(237	)		(118	)
Repurchases of common stock		(451	)		(222	)
Purchase of additional stake in Morgan Stanley Smith Barney Holdings LLC		(4,725	)		(1,890	)
Cash dividends		(358	)		(349	)

Net cash provided by (used for) financing activities		8,809			(22,609	)

Effect of exchange rate changes on cash and cash equivalents		(298	)		(42	)

Effect of cash and cash equivalents related to variable interest entities		(465	)		(487	)

Net increase (decrease) in cash and cash equivalents		10,877			(10,726	)
Cash and cash equivalents, at beginning of period		46,904			47,312

Cash and cash equivalents, at end of period	$	57,781		$	36,586

Cash and cash equivalents include:
Cash and due from banks	$	14,333		$	18,239
Interest bearing deposits with banks		43,448			18,347

Cash and cash equivalents, at end of period	$	57,781		$	36,586

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash payments for interest were $3,372 million and $3,423 million for the nine months ended September 30, 2013 and 2012, respectively.

Cash payments for income taxes were $598 million and $330 million for the nine months ended September 30, 2013 and 2012, respectively.

See Notes to Condensed Consolidated Financial Statements.


		4

MORGAN STANLEY

Condensed Consolidated Statements of Changes in Total Equity

Nine Months Ended September 30, 2013

(dollars in millions)

(unaudited)


	Preferred Stock		Common Stock		Additional Paid-in Capital			Retained Earnings			Employee Stock Trust			Accumulated Other Comprehensive Income (Loss)			Common Stock Held in Treasury at Cost			Common Stock Issued to Employee Trust			Non- redeemable Non- controlling Interests			Total Equity
BALANCE AT DECEMBER 31, 2012	$	1,508	$	20	$	23,426		$	39,912		$	2,932		$	(516	)	$	(2,241	)	$	(2,932	)	$	3,319		$	65,428
Net income applicable to Morgan Stanley		—		—		—			2,848			—			—			—			—			—			2,848
Net income applicable to nonredeemable noncontrolling interests		—		—		—			—			—			—			—			—			370			370
Dividends		—		—		—			(372	)		—			—			—			—			—			(372	)
Shares issued under employee plans and related tax effects		—		—		817			—			(1,179	)		—			(28	)		1,179			—			789
Repurchases of common stock		—		—		—			—			—			—			(451	)		—			—			(451	)
Foreign currency translation adjustments		—		—		—			—			—			(180	)		—			—			(141	)		(321	)
Net change in cash flow hedges		—		—		—			—			—			3			—			—			—			3
Change in net unrealized losses on securities available for sale		—		—		—			—			—			(336	)		—			—			—			(336	)
Pension, postretirement and other related adjustments		—		—		—			—			—			15			—			—			—			15
Issuance of Series E Preferred Stock		862		—		(8	)		—			—			—			—			—			—			854
Morgan Stanley Smith Barney Holdings LLC redemption value adjustment		—		—		—			(151	)		—			—			—			—			—			(151	)
Other net decreases		—		—		—			—			—			—			—			—			(435	)		(435	)

BALANCE AT SEPTEMBER 30, 2013	$	2,370	$	20	$	24,235		$	42,237		$	1,753		$	(1,014	)	$	(2,720	)	$	(1,753	)	$	3,113		$	68,241

See Notes to Condensed Consolidated Financial Statements.


		5

MORGAN STANLEY

Condensed Consolidated Statements of Changes in Total Equity—(Continued)

Nine Months Ended September 30, 2012

(dollars in millions)

(unaudited)


	Preferred Stock		Common Stock		Additional Paid-in Capital			Retained Earnings			Employee Stock Trust			Accumulated Other Comprehensive Income (Loss)			Common Stock Held in Treasury at Cost			Common Stock Issued to Employee Trust			Non- Redeemable Non- controlling Interests			Total Equity
BALANCE AT DECEMBER 31, 2011	$	1,508	$	20	$	22,836		$	40,341		$	3,166		$	(157	)	$	(2,499	)	$	(3,166	)	$	8,029		$	70,078
Net loss applicable to Morgan Stanley		—		—		—			(526	)		—			—			—			—			—			(526	)
Net income applicable to nonredeemable noncontrolling interests		—		—		—			—			—			—			—			—			446			446
Dividends		—		—		—			(374	)		—			—			—			—			—			(374	)
Shares issued under employee plans and related tax effects		—		—		473			—			(187	)		—			495			187			—			968
Repurchases of common stock		—		—		—			—			—			—			(222	)		—			—			(222	)
Foreign currency translation adjustments		—		—		—			—			—			(88	)		—			—			—			(88	)
Net change in cash flow hedges		—		—		—			—			—			5			—			—			—			5
Change in net unrealized gains on securities available for sale		—		—		—			—			—			84			—			—			—			84
Pension, postretirement and other related adjustments		—		—		—			—			—			10			—			—			5			15
Purchase of additional stake in Morgan Stanley Smith Barney Holdings LLC		—		—		(107	)		—			—			—			—			—			(1,718	)		(1,825	)
Reclassification to redeemable noncontrolling interests		—		—		—			—			—			—			—			—			(4,296	)		(4,296	)
Other net increases		—		—		—			—			—			—			—			—			905			905

BALANCE AT SEPTEMBER 30, 2012	$	1,508	$	20	$	23,202		$	39,441		$	2,979		$	(146	)	$	(2,226	)	$	(2,979	)	$	3,371		$	65,170

See Notes to Condensed Consolidated Financial Statements.


		6

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	Introduction and Basis of Presentation.

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

Effective with the quarter ended June 30, 2013, the Global Wealth Management Group and Asset Management business segments were re-titled Wealth Management and Investment Management, respectively.

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

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

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

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

Discontinued Operations.

Quilter. On April 2, 2012, the Company completed the sale of Quilter & Co. Ltd. (“Quilter”), its retail wealth management business in the United Kingdom (“U.K.”). The results of Quilter are reported as discontinued operations within the Wealth Management business segment for all periods presented.

Saxon. On October 24, 2011, the Company announced that it had reached an agreement to sell Saxon, a provider of servicing and subservicing of residential mortgage loans, to Ocwen Financial Corporation. The transaction, which was restructured as a sale of Saxon’s assets during the first quarter of 2012, was substantially completed in the second quarter of 2012. The results of Saxon are reported as discontinued operations within the Institutional Securities business segment for all periods presented.

Prior period amounts have been recast for discontinued operations. See Note 21 for additional information on discontinued operations.

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


		7

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Intercompany balances and transactions have been eliminated.

In the quarter ended March 31, 2013, the Company renamed “Principal transactions—Trading” revenues as “Trading” revenues and “Principal transactions—Investments” revenues as “Investments” revenues in the condensed consolidated statements of income, and “Financial instruments owned” as “Trading assets,” “Financial instruments sold, not yet purchased” as “Trading liabilities,” “Receivables” as “Customer and other receivables” and “Payables” as “Customer and other payables” in the condensed consolidated statements of financial condition.

The condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (the “Form 10-K”). The condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are, in the opinion of management, necessary for the fair presentation of the results for the interim period. The results of operations for interim periods are not necessarily indicative of results for the entire year.

Consolidation. The condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and other entities in which the Company has a controlling financial interest, including certain variable interest entities (“VIE”) (see Note 7). For consolidated subsidiaries that are less than wholly owned, the third-party holdings of equity interests are referred to as noncontrolling interests. The portion of net income attributable to noncontrolling interests for such subsidiaries is presented as either Net income (loss) applicable to redeemable noncontrolling interests or Net income (loss) applicable to nonredeemable noncontrolling interests in the condensed consolidated statements of income. The portion of the shareholders’ equity of such subsidiaries that is redeemable is presented as Redeemable noncontrolling interests outside of the equity section in the condensed consolidated statements of financial condition. The portion of the shareholders’ equity of such subsidiaries that is nonredeemable is presented as Nonredeemable noncontrolling interests, a component of total equity, in the condensed consolidated statements of financial condition.

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

For investments in entities in which the Company does not have a controlling financial interest but has significant influence over operating and financial decisions, the Company generally applies the equity method of accounting with net gains and losses recorded within Other revenues. Where the Company has elected to measure certain eligible investments at fair value in accordance with the fair value option, net gains and losses are recorded within Investments revenues (see Note 4).

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

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


		8

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

2.	Significant Accounting Policies.

For a detailed discussion about the Company’s significant accounting policies, see Note 2 to the consolidated financial statements for the year ended December 31, 2012 included in the Form 10-K.

During the nine months ended September 30, 2013, no updates were made to the Company’s significant accounting policies.

Condensed Consolidated Statements of Cash Flows.

For purposes of the condensed consolidated statements of cash flows, cash and cash equivalents consist of Cash and due from banks and Interest bearing deposits with banks, which are highly liquid investments with original maturities of three months or less, held for investment purposes, and readily convertible to known amounts of cash.

In the nine months ended September 30, 2012, the Company’s significant non-cash activities included approximately $1.1 billion of net assets received from Citigroup, Inc. (“Citi”) related to Citi’s required equity contribution in connection with the Morgan Stanley Smith Barney Holdings LLC (“Wealth Management JV”) platform integration (see Notes 3 and 14).

Accounting Developments.

Disclosures about Offsetting Assets and Liabilities. In January 2013, the Financial Accounting Standards Board (the “FASB”) issued an accounting update that clarified the intended scope of the new balance sheet offsetting disclosures to derivatives, repurchase agreements, and securities lending transactions to the extent that they are either offset in the financial statements or subject to an enforceable master netting arrangement or similar agreement. These disclosure requirements became effective for the Company beginning on January 1, 2013. Since these amended principles require only additional disclosures concerning offsetting and related arrangements, adoption has not affected the Company’s condensed consolidated statements of income or financial condition (see Notes 6 and 11).

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. In February 2013, the FASB issued an accounting update that created new disclosure requirements requiring entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (“GAAP”) to be reclassified in its entirety to net income. The disclosure requirements became effective for the Company beginning on January 1, 2013. Since these amended principles require only additional disclosures concerning amounts reclassified out of accumulated other comprehensive income, adoption has not affected the Company’s condensed consolidated statements of comprehensive income or notes to the condensed consolidated financial statements (see Note 14).


		9

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. In July 2013, the FASB issued an accounting update that included amendments permitting the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to interest rates on direct Treasury obligations of the U.S. government and the London Interbank Offered Rate (“LIBOR”). The amendments also removed the restriction on using different benchmark rates for similar hedges. The amendments became effective for the Company for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of this accounting guidance did not have a material impact on the Company’s condensed consolidated financial statements.

3.	Morgan Stanley Smith Barney Holdings LLC.

On May 31, 2009, the Company and Citi consummated the combination of each institution’s respective wealth management business. The combined businesses operated as the Wealth Management JV through June 2013.

Prior to September 2012, the Company owned 51% and Citi owned 49% of the Wealth Management JV. On September 17, 2012, the Company purchased an additional 14% stake in the Wealth Management JV from Citi for $1.89 billion, increasing the Company’s interest from 51% to 65%. In addition, in September 2012, the terms of the Wealth Management JV agreement regarding the purchase of the remaining 35% interest were amended, which resulted in a reclassification of approximately $4.3 billion from nonredeemable noncontrolling interests to redeemable noncontrolling interests during the third quarter of 2012. Prior to September 17, 2012, Citi’s results related to its 49% interest were reported in net income (loss) applicable to nonredeemable noncontrolling interests in the condensed consolidated statements of income. Subsequent to the purchase of the additional 14% stake, Citi’s results related to its 35% interest were reported in net income (loss) applicable to redeemable noncontrolling interests in the condensed consolidated statements of income. In connection with the Company’s acquisition of the additional 14% stake in the Wealth Management JV and pursuant to an amended deposit sweep agreement between Citi and the Company, in October 2012 $5.4 billion of deposits held by Citi relating to customer accounts were transferred to the Company’s depository institutions at no premium based on a valuation agreement reached between Citi and the Company, and as such were no longer swept to Citi.

In June 2013, the Company received final regulatory approval to acquire the remaining 35% stake in the Wealth Management JV. On June 28, 2013, the Company purchased the remaining 35% interest for $4.725 billion, increasing the Company’s interest from 65% to 100%. The Company recorded a negative adjustment to retained earnings of approximately $151 million (net of tax) to reflect the difference between the purchase price for the 35% interest in the Wealth Management JV and its carrying value. This adjustment negatively impacted the calculation of basic and diluted earnings per share for the nine months ended September 30, 2013 (see Note 15).

Additionally, in conjunction with the purchase of the remaining 35% interest, in June 2013 the Company redeemed all of the Class A Preferred Interests in the Wealth Management JV owned by Citi and its affiliates for approximately $2.028 billion and repaid to Citi $880 million in senior debt.

Concurrent with the acquisition of the remaining 35% stake in the Wealth Management JV, the deposit sweep agreement between Citi and the Company was terminated. During the quarter ended September 30, 2013, approximately $21 billion of deposits held by Citi relating to customer accounts were transferred to the Company’s depository institutions. At September 30, 2013, approximately $35 billion of deposits will be transferred to the Company’s depository institutions on an agreed upon basis through June 2015 (see Note 22).


		10

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4.	Fair Value Disclosures.

Fair Value Measurements.

A description of the valuation techniques applied to the Company’s major categories of assets and liabilities measured at fair value on a recurring basis follows.

Trading Assets and Trading Liabilities.

U.S. Government and Agency Securities.

•

U.S. Treasury Securities. U.S. Treasury securities are valued using quoted market prices. Valuation adjustments are not applied. Accordingly, U.S. Treasury securities are generally categorized in Level 1 of the fair value hierarchy.

•

U.S. Agency Securities. U.S. agency securities are composed of three main categories consisting of agency-issued debt, agency mortgage pass-through pool securities and collateralized mortgage obligations. Non-callable agency-issued debt securities are generally valued using quoted market prices. Callable agency-issued debt securities are valued by benchmarking model-derived prices to quoted market prices and trade data for identical or comparable securities. The fair value of agency mortgage pass-through pool securities is model-driven based on spreads of the comparable To-be-announced (“TBA”) security. Collateralized mortgage obligations are valued using quoted market prices and trade data adjusted by subsequent changes in related indices for identical or comparable securities. Actively traded non-callable agency-issued debt securities are generally categorized in Level 1 of the fair value hierarchy. Callable agency-issued debt securities, agency mortgage pass-through pool securities and collateralized mortgage obligations are generally categorized in Level 2 of the fair value hierarchy.

Other Sovereign Government Obligations.

•

Foreign sovereign government obligations are valued using quoted prices in active markets when available. These bonds are generally categorized in Level 1 of the fair value hierarchy. If the market is less active or prices are dispersed, these bonds are categorized in Level 2 of the fair value hierarchy.

Corporate and Other Debt.

•

State and Municipal Securities. The fair value of state and municipal securities is determined using recently executed transactions, market price quotations and pricing models that factor in, where applicable, interest rates, bond or credit default swap spreads and volatility. These bonds are generally categorized in Level 2 of the fair value hierarchy.

•

Residential Mortgage-Backed Securities (“RMBS”), Commercial Mortgage-Backed Securities (“CMBS”) and other Asset-Backed Securities (“ABS”). RMBS, CMBS and other ABS may be valued based on price or spread data obtained from observed transactions or independent external parties such as vendors or brokers. When position-specific external price data are not observable, the fair value determination may require benchmarking to similar instruments and/or analyzing expected credit losses, default and recovery rates, and/or applying discounted cash flow techniques. In evaluating the fair value of each security, the Company considers security collateral-specific attributes, including payment priority, credit enhancement levels, type of collateral, delinquency rates and loss severity. In addition, for RMBS borrowers, Fair Isaac Corporation (“FICO”) scores and the level of documentation for the loan are also considered. Market standard models, such as Intex, Trepp or others, may be deployed to model the specific collateral composition and cash flow structure of each transaction. Key inputs to these models are market spreads, forecasted credit losses, default and prepayment rates for each asset category. Valuation levels of RMBS and CMBS indices are also used as an additional data point for benchmarking purposes or to price outright index positions.


		11

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

RMBS, CMBS and other ABS are generally categorized in Level 2 of the fair value hierarchy. If external prices or significant spread inputs are unobservable or if the comparability assessment involves significant subjectivity related to property type differences, cash flows, performance and other inputs, then RMBS, CMBS and other ABS are categorized in Level 3 of the fair value hierarchy.

•

Corporate Bonds. The fair value of corporate bonds is determined using recently executed transactions, market price quotations (where observable), bond spreads, credit default swap spreads, at the money volatility and/or volatility skew obtained from independent external parties such as vendors and brokers adjusted for any basis difference between cash and derivative instruments. The spread data used are for the same maturity as the bond. If the spread data do not reference the issuer, then data that reference a comparable issuer are used. When position-specific external price data are not observable, fair value is determined based on either benchmarking to similar instruments or cash flow models with yield curves, bond or single-name credit default swap spreads and recovery rates as significant inputs. Corporate bonds are generally categorized in Level 2 of the fair value hierarchy; in instances where prices, spreads or any of the other aforementioned key inputs are unobservable, they are categorized in Level 3 of the fair value hierarchy.

•

Collateralized Debt Obligation (“CDO”). The Company holds cash CDOs that typically reference a tranche of an underlying synthetic portfolio of single name credit default swaps collateralized by corporate bonds (“credit-linked notes”) or cash portfolio of asset-backed securities (“asset-backed CDOs”). Credit correlation, a primary input used to determine the fair value of credit-linked notes, is usually unobservable and derived using a benchmarking technique. The other credit-linked note model inputs such as credit spreads, including collateral spreads, and interest rates are typically observable. Asset-backed CDOs are valued based on an evaluation of the market and model input parameters sourced from similar positions as indicated by primary and secondary market activity. Each asset-backed CDO position is evaluated independently taking into consideration available comparable market levels, underlying collateral performance and pricing, and deal structures, as well as liquidity. Cash CDOs are categorized in Level 2 of the fair value hierarchy when either the credit correlation input is insignificant or comparable market transactions are observable. In instances where the credit correlation input is deemed to be significant or comparable market transactions are unobservable, cash CDOs are categorized in Level 3 of the fair value hierarchy.

•

Corporate Loans and Lending Commitments. The fair value of corporate loans is determined using recently executed transactions, market price quotations (where observable), implied yields from comparable debt, and market observable credit default swap spread levels obtained from independent external parties such as vendors and brokers adjusted for any basis difference between cash and derivative instruments, along with proprietary valuation models and default recovery analysis where such transactions and quotations are unobservable. The fair value of contingent corporate lending commitments is determined by using executed transactions on comparable loans and the anticipated market price based on pricing indications from syndicate banks and customers. The valuation of loans and lending commitments also takes into account fee income that is considered an attribute of the contract. Corporate loans and lending commitments are categorized in Level 2 of the fair value hierarchy except in instances where prices or significant spread inputs are unobservable, in which case they are categorized in Level 3 of the fair value hierarchy.

•

Mortgage Loans. Mortgage loans are valued using observable prices based on transactional data or third-party pricing for identical or comparable instruments, when available. Where position-specific external prices are not observable, the Company estimates fair value based on benchmarking to prices and rates observed in the primary market for similar loan or borrower types or based on the present value of expected future cash flows using its best estimates of the key assumptions, including forecasted credit losses, prepayment rates, forward yield curves and discount rates commensurate with the risks involved


		12

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

or a methodology that utilizes the capital structure and credit spreads of recent comparable securitization transactions. Mortgage loans valued based on observable market data for identical or comparable instruments are categorized in Level 2 of the fair value hierarchy. Where observable prices are not available, due to the subjectivity involved in the comparability assessment related to mortgage loan vintage, geographical concentration, prepayment speed and projected loss assumptions, mortgage loans are categorized in Level 3 of the fair value hierarchy. Mortgage loans are presented within Loans and lending commitments in the fair value hierarchy table.

•

Auction Rate Securities (“ARS”). The Company primarily holds investments in Student Loan Auction Rate Securities (“SLARS”) and Municipal Auction Rate Securities (“MARS”) with interest rates that are reset through periodic auctions. SLARS are ABS backed by pools of student loans. MARS are municipal bonds often wrapped by municipal bond insurance. ARS were historically traded and valued as floating rate notes, priced at par due to the auction mechanism. Beginning in fiscal 2008, uncertainties in the credit markets have resulted in auctions failing for certain types of ARS. Once the auctions failed, ARS could no longer be valued using observations of auction market prices. Accordingly, the fair value of ARS is determined using independent external market data where available and an internally developed methodology to discount for the lack of liquidity and non-performance risk.

Inputs that impact the valuation of SLARS are independent external market data, the underlying collateral types, level of seniority in the capital structure, amount of leverage in each structure, credit rating and liquidity considerations. Inputs that impact the valuation of MARS are recently executed transactions, the maximum rate, quality of underlying issuers/insurers and evidence of issuer calls/prepayment. ARS are generally categorized in Level 2 of the fair value hierarchy as the valuation technique relies on observable external data. SLARS and MARS are presented within Asset-backed securities and State and municipal securities, respectively, in the fair value hierarchy table.

Corporate Equities.

•

Exchange-Traded Equity Securities. Exchange-traded equity securities are generally valued based on quoted prices from the exchange. To the extent these securities are actively traded, valuation adjustments are not applied, and they are categorized in Level 1 of the fair value hierarchy; otherwise, they are categorized in Level 2 or Level 3 of the fair value hierarchy.

•

Unlisted Equity Securities. Unlisted equity securities are valued based on an assessment of each underlying security, considering rounds of financing and third-party transactions, discounted cash flow analyses and market-based information, including comparable company transactions, trading multiples and changes in market outlook, among other factors. These securities are generally categorized in Level 3 of the fair value hierarchy.

•

Fund Units. Listed fund units are generally marked to the exchange-traded price or net asset value (“NAV”) and are categorized in Level 1 of the fair value hierarchy if actively traded on an exchange or in Level 2 of the fair value hierarchy if trading is not active. Unlisted fund units are generally marked to NAV and categorized as Level 2; however, positions which are not redeemable at the measurement date or in the near future are categorized in Level 3 of the fair value hierarchy.

Derivative and Other Contracts.

•

Listed Derivative Contracts. Listed derivatives that are actively traded are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy. Listed derivatives that are not actively traded are valued using the same approaches as those applied to over-the-counter (“OTC”) derivatives; they are generally categorized in Level 2 of the fair value hierarchy.


		13

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

•

OTC Derivative Contracts. OTC derivative contracts include forward, swap and option contracts related to interest rates, foreign currencies, credit standing of reference entities, equity prices or commodity prices.

Depending on the product and the terms of the transaction, the fair value of OTC derivative products can be either observed or modeled using a series of techniques and model inputs from comparable benchmarks, including closed-form analytic formulas, such as the Black-Scholes option-pricing model, and simulation models or a combination thereof. Many pricing models do not entail material subjectivity because the methodologies employed do not necessitate significant judgment, and the pricing inputs are observed from actively quoted markets, as is the case for generic interest rate swaps, certain option contracts and certain credit default swaps. In the case of more established derivative products, the pricing models used by the Company are widely accepted by the financial services industry. A substantial majority of OTC derivative products valued by the Company using pricing models fall into this category and are categorized in Level 2 of the fair value hierarchy.

Other derivative products, including complex products that have become illiquid, require more judgment in the implementation of the valuation technique applied due to the complexity of the valuation assumptions and the reduced observability of inputs. This includes certain types of interest rate derivatives with both volatility and correlation exposure and credit derivatives including credit default swaps on certain mortgage-backed or asset-backed securities, basket credit default swaps and CDO-squared positions (a CDO-squared position is a special purpose vehicle that issues interests, or tranches, that are backed by tranches issued by other CDOs) where direct trading activity or quotes are unobservable. These instruments involve significant unobservable inputs and are categorized in Level 3 of the fair value hierarchy.

Derivative interests in credit default swaps on certain mortgage-backed or asset-backed securities, for which observability of external price data is limited, are valued based on an evaluation of the market and model input parameters sourced from similar positions as indicated by primary and secondary market activity. Each position is evaluated independently taking into consideration available comparable market levels as well as cash-synthetic basis, or the underlying collateral performance and pricing, behavior of the tranche under various cumulative loss and prepayment scenarios, deal structures (e.g., non-amortizing reference obligations, call features, etc.) and liquidity. While these factors may be supported by historical and actual external observations, the determination of their value as it relates to specific positions nevertheless requires significant judgment.

For basket credit default swaps and CDO-squared positions, the correlation input between reference credits is unobservable for each specific swap or position and is benchmarked to standardized proxy baskets for which correlation data are available. The other model inputs such as credit spread, interest rates and recovery rates are observable. In instances where the correlation input is deemed to be significant, these instruments are categorized in Level 3 of the fair value hierarchy; otherwise, these instruments are categorized in Level 2 of the fair value hierarchy.

The Company trades various derivative structures with commodity underlyings. Depending on the type of structure, the model inputs generally include interest rate yield curves, commodity underlier price curves, implied volatility of the underlying commodities and, in some cases, the implied correlation between these inputs. The fair value of these products is determined using executed trades and broker and consensus data to provide values for the aforementioned inputs. Where these inputs are unobservable, relationships to observable commodities and data points, based on historic and/or implied observations, are employed as a technique to estimate the model input values. Commodity derivatives are generally categorized in Level 2 of the fair value hierarchy; in instances where significant inputs are unobservable, they are categorized in Level 3 of the fair value hierarchy.

For further information on derivative instruments and hedging activities, see Note 11.


		14

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Investments.

•

The Company’s investments include direct investments in equity securities as well as investments in private equity funds, real estate funds and hedge funds, which include investments made in connection with certain employee deferred compensation plans. Direct investments are presented in the fair value hierarchy table as Principal investments and Other. Initially, the transaction price is generally considered by the Company as the exit price and is the Company’s best estimate of fair value.

After initial recognition, in determining the fair value of non-exchange-traded internally and externally managed funds, the Company generally considers the NAV of the fund provided by the fund manager to be the best estimate of fair value. For non-exchange-traded investments either held directly or held within internally managed funds, fair value after initial recognition is based on an assessment of each underlying investment, considering rounds of financing and third-party transactions, discounted cash flow analyses and market-based information, including comparable company transactions, trading multiples and changes in market outlook, among other factors. Exchange-traded direct equity investments are generally valued based on quoted prices from the exchange.

Exchange-traded direct equity investments that are actively traded are categorized in Level 1 of the fair value hierarchy. Non-exchange-traded direct equity investments and investments in private equity and real estate funds are generally categorized in Level 3 of the fair value hierarchy. Investments in hedge funds that are redeemable at the measurement date or in the near future are categorized in Level 2 of the fair value hierarchy; otherwise, they are categorized in Level 3 of the fair value hierarchy.

Physical Commodities.

•

The Company trades various physical commodities, including crude oil and refined products, natural gas, base and precious metals, and agricultural products. Fair value for physical commodities is determined using observable inputs, including broker quotations and published indices. Physical commodities are categorized in Level 2 of the fair value hierarchy; in instances where significant inputs are unobservable, they are categorized in Level 3 of the fair value hierarchy.

Securities Available for Sale.

•

Securities available for sale are composed of U.S. government and agency securities (e.g., U.S. Treasury securities, agency-issued debt, agency mortgage pass-through securities and collateralized mortgage obligations), CMBS, Federal Family Education Loan Program (“FFELP”) student loan asset-backed securities, auto loan asset-backed securities, corporate bonds and equity securities. Actively traded U.S. Treasury securities, non-callable agency-issued debt securities and equity securities are generally categorized in Level 1 of the fair value hierarchy. Callable agency-issued debt securities, agency mortgage pass-through securities, collateralized mortgage obligations, CMBS, FFELP student loan asset-backed securities, auto loan asset-backed securities and corporate bonds are generally categorized in Level 2 of the fair value hierarchy. For further information on securities available for sale, see Note 5.

Deposits.

•

Time Deposits. The fair value of certificates of deposit is determined using third-party quotations. These deposits are generally categorized in Level 2 of the fair value hierarchy.

Commercial Paper and Other Short-Term Borrowings/Long-Term Borrowings.

•

Structured Notes. The Company issues structured notes that have coupon or repayment terms linked to the performance of debt or equity securities, indices, currencies or commodities. Fair value of structured


		15

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

notes is determined using valuation models for the derivative and debt portions of the notes. These models incorporate observable inputs referencing identical or comparable securities, including prices to which the notes are linked, interest rate yield curves, option volatility and currency, commodity or equity prices. Independent, external and traded prices for the notes are considered as well. The impact of the Company’s own credit spreads is also included based on the Company’s observed secondary bond market spreads. Most structured notes are categorized in Level 2 of the fair value hierarchy.

Securities Purchased under Agreements to Resell and Securities Sold under Agreements to Repurchase.

•

The fair value of a reverse repurchase agreement or repurchase agreement is computed using a standard cash flow discounting methodology. The inputs to the valuation include contractual cash flows and collateral funding spreads, which are estimated using various benchmarks, interest rate yield curves and option volatilities. In instances where the unobservable inputs are deemed significant, reverse repurchase agreements and repurchase agreements are categorized in Level 3 of the fair value hierarchy; otherwise, they are categorized in Level 2 of the fair value hierarchy.

The following fair value hierarchy tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis at September 30, 2013 and December 31, 2012.


		16

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Assets and Liabilities Measured at Fair Value on a Recurring Basis at September 30, 2013.


	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Counterparty and Cash Collateral Netting			Balance at September 30, 2013
	(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. government and agency securities:
U.S. Treasury securities	$	38,453		$	8		$	—		$	—		$	38,461
U.S. agency securities		2,030			21,381			—			—			23,411

Total U.S. government and agency securities		40,483			21,389			—			—			61,872
Other sovereign government obligations		24,605			7,076			2			—			31,683
Corporate and other debt:
State and municipal securities		—			1,580			—			—			1,580
Residential mortgage-backed securities		—			2,525			90			—			2,615
Commercial mortgage-backed securities		—			1,343			150			—			1,493
Asset-backed securities		—			875			99			—			974
Corporate bonds		—			16,862			537			—			17,399
Collateralized debt obligations		—			263			1,380			—			1,643
Loans and lending commitments		—			9,364			4,098			—			13,462
Other debt		—			5,669			21			—			5,690

Total corporate and other debt		—			38,481			6,375			—			44,856
Corporate equities(1)		86,385			1,199			243			—			87,827
Derivative and other contracts:
Interest rate contracts		2,129			585,689			2,880			—			590,698
Credit contracts		—			46,729			2,942			—			49,671
Foreign exchange contracts		21			55,992			129			—			56,142
Equity contracts		1,254			53,406			1,448			—			56,108
Commodity contracts		2,886			12,197			2,264			—			17,347
Other		—			36			—			—			36
Netting(2)		(5,321	)		(664,134	)		(5,657	)		(59,452	)		(734,564	)

Total derivative and other contracts		969			89,915			4,006			(59,452	)		35,438
Investments:
Private equity funds		—			1			2,449			—			2,450
Real estate funds		—			6			1,523			—			1,529
Hedge funds		—			373			431			—			804
Principal investments		29			672			2,338			—			3,039
Other		187			71			494			—			752

Total investments		216			1,123			7,235			—			8,574
Physical commodities		—			3,408			—			—			3,408

Total trading assets		152,658			162,591			17,861			(59,452	)		273,658
Securities available for sale		19,854			27,012			—			—			46,866
Securities received as collateral		15,981			61			—			—			16,042
Federal funds sold and securities purchased under agreements to resell		—			868			—			—			868
Intangible assets(3)		—			—			8			—			8

Total assets measured at fair value	$	188,493		$	190,532		$	17,869		$	(59,452	)	$	337,442


		17

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Counterparty and Cash Collateral Netting			Balance at September 30, 2013
	(dollars in millions)
Liabilities at Fair Value
Deposits	$	—		$	1,411		$	—		$	—		$	1,411
Commercial paper and other short-term borrowings		—			1,620			3			—			1,623
Trading liabilities:
U.S. government and agency securities:
U.S. Treasury securities		16,432			—			—			—			16,432
U.S. agency securities		3,041			127			—			—			3,168

Total U.S. government and agency securities		19,473			127			—			—			19,600
Other sovereign government obligations		21,468			2,375			—			—			23,843
Corporate and other debt:
State and municipal securities		—			32			—			—			32
Residential mortgage-backed securities		—			—			4			—			4
Commercial mortgage-backed securities		—			4			—			—			4
Corporate bonds		—			8,191			5			—			8,196
Collateralized debt obligations		—			6			—			—			6
Unfunded lending commitments		—			154			4			—			158
Other debt		—			277			9			—			286

Total corporate and other debt		—			8,664			22			—			8,686
Corporate equities(1)		31,842			496			10			—			32,348
Derivative and other contracts:
Interest rate contracts		2,527			560,796			2,570			—			565,893
Credit contracts		—			45,344			2,232			—			47,576
Foreign exchange contracts		9			56,668			164			—			56,841
Equity contracts		893			59,261			3,079			—			63,233
Commodity contracts		3,236			12,505			1,409			—			17,150
Other		—			203			1			—			204
Netting(2)		(5,321	)		(664,134	)		(5,657	)		(37,617	)		(712,729	)

Total derivative and other contracts		1,344			70,643			3,798			(37,617	)		38,168

Total trading liabilities		74,127			82,305			3,830			(37,617	)		122,645
Obligation to return securities received as collateral		20,829			70			—			—			20,899
Securities sold under agreements to repurchase		—			404			150			—			554
Other secured financings		—			5,885			260			—			6,145
Long-term borrowings		—			34,406			2,313			—			36,719

Total liabilities measured at fair value	$	94,956		$	126,101		$	6,556		$	(37,617	)	$	189,996

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

(2)

For positions with the same counterparty that cross over the levels of the fair value hierarchy, both counterparty netting and cash collateral netting are included in the column titled “Counterparty and Cash Collateral Netting.” For contracts with the same counterparty, counterparty netting among positions classified within the same level is included within that level. For further information on derivative instruments and hedging activities, see Note 11.

(3)	Amount represents mortgage servicing rights (“MSR”) accounted for at fair value. See Note 7 for further information on MSRs.

Transfers Between Level 1 and Level 2 During the Quarter and Nine Months Ended September 30, 2013.

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

In the quarter and nine months ended September 30, 2013, there were no material transfers between Level 1 and Level 2.


		18

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2012.


	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Counterparty and Cash Collateral Netting			Balance at December 31, 2012
	(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. government and agency securities:
U.S. Treasury securities	$	24,662		$	14		$	—		$	—		$	24,676
U.S. agency securities		1,451			27,888			—			—			29,339

Total U.S. government and agency securities		26,113			27,902			—			—			54,015
Other sovereign government obligations		37,669			5,487			6			—			43,162
Corporate and other debt:
State and municipal securities		—			1,558			—			—			1,558
Residential mortgage-backed securities		—			1,439			45			—			1,484
Commercial mortgage-backed securities		—			1,347			232			—			1,579
Asset-backed securities		—			915			109			—			1,024
Corporate bonds		—			18,403			660			—			19,063
Collateralized debt obligations		—			685			1,951			—			2,636
Loans and lending commitments		—			12,617			4,694			—			17,311
Other debt		—			4,457			45			—			4,502

Total corporate and other debt		—			41,421			7,736			—			49,157
Corporate equities(1)		68,072			1,067			288			—			69,427
Derivative and other contracts:
Interest rate contracts		446			819,581			3,774			—			823,801
Credit contracts		—			63,234			5,033			—			68,267
Foreign exchange contracts		34			52,729			31			—			52,794
Equity contracts		760			37,074			766			—			38,600
Commodity contracts		4,082			14,256			2,308			—			20,646
Other		—			143			—			—			143
Netting(2)		(4,740	)		(883,733	)		(6,947	)		(72,634	)		(968,054	)

Total derivative and other contracts		582			103,284			4,965			(72,634	)		36,197
Investments:
Private equity funds		—			—			2,179			—			2,179
Real estate funds		—			6			1,370			—			1,376
Hedge funds		—			382			552			—			934
Principal investments		185			83			2,833			—			3,101
Other		199			71			486			—			756

Total investments		384			542			7,420			—			8,346
Physical commodities		—			7,299			—			—			7,299

Total trading assets		132,820			187,002			20,415			(72,634	)		267,603
Securities available for sale		14,466			25,403			—			—			39,869
Securities received as collateral		14,232			46			—			—			14,278
Federal funds sold and securities purchased under agreements to resell		—			621			—			—			621
Intangible assets(3)		—			—			7			—			7

Total assets measured at fair value	$	161,518		$	213,072		$	20,422		$	(72,634	)	$	322,378


		19

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Counterparty and Cash Collateral Netting			Balance at December 31, 2012
	(dollars in millions)
Liabilities at Fair Value
Deposits	$	—		$	1,485		$	—		$	—		$	1,485
Commercial paper and other short-term borrowings		—			706			19			—			725
Trading liabilities:
U.S. government and agency securities:
U.S. Treasury securities		20,098			21			—			—			20,119
U.S. agency securities		1,394			107			—			—			1,501

Total U.S. government and agency securities		21,492			128			—			—			21,620
Other sovereign government obligations		27,583			2,031			—			—			29,614
Corporate and other debt:
State and municipal securities		—			47			—			—			47
Residential mortgage-backed securities		—			—			4			—			4
Corporate bonds		—			3,942			177			—			4,119
Collateralized debt obligations		—			328			—			—			328
Unfunded lending commitments		—			305			46			—			351
Other debt		—			156			49			—			205

Total corporate and other debt		—			4,778			276			—			5,054
Corporate equities(1)		25,216			1,655			5			—			26,876
Derivative and other contracts:
Interest rate contracts		533			789,715			3,856			—			794,104
Credit contracts		—			61,283			3,211			—			64,494
Foreign exchange contracts		2			56,021			390			—			56,413
Equity contracts		748			39,212			1,910			—			41,870
Commodity contracts		4,530			15,702			1,599			—			21,831
Other		—			54			7			—			61
Netting(2)		(4,740	)		(883,733	)		(6,947	)		(46,395	)		(941,815	)

Total derivative and other contracts		1,073			78,254			4,026			(46,395	)		36,958

Total trading liabilities		75,364			86,846			4,307			(46,395	)		120,122
Obligation to return securities received as collateral		18,179			47			—			—			18,226
Securities sold under agreements to repurchase		—			212			151			—			363
Other secured financings		—			9,060			406			—			9,466
Long-term borrowings		—			41,255			2,789			—			44,044

Total liabilities measured at fair value	$	93,543		$	139,611		$	7,672		$	(46,395	)	$	194,431

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

(2)

(3)	Amount represents MSRs accounted for at fair value. See Note 7 for further information on MSRs.

Transfers Between Level 1 and Level 2 During the Quarter Ended September 30, 2012.

Trading assets—Derivative and other contracts and Trading liabilities—Derivative and other contracts. During the quarter ended September 30, 2012, the Company reclassified approximately $1.2 billion of derivative assets and approximately $1.5 billion of derivative liabilities from Level 2 to Level 1 as these listed derivatives became actively traded and were valued based on quoted prices from the exchange. Also during the quarter ended September 30, 2012, the Company reclassified approximately $0.5 billion of derivative assets and approximately $0.5 billion of derivative liabilities from Level 1 to Level 2 as transactions in these contracts did not occur with sufficient frequency and volume to constitute an active market.


		20

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Transfers Between Level 1 and Level 2 During the Nine Months Ended September 30, 2012.

Trading assets—Derivative and other contracts and Trading liabilities—Derivative and other contracts. During the nine months ended September 30, 2012, the Company reclassified approximately $2.7 billion of derivative assets and approximately $2.6 billion of derivative liabilities from Level 2 to Level 1 as these listed derivatives became actively traded and were valued based on quoted prices from the exchange. Also during the nine months ended September 30, 2012, the Company reclassified approximately $0.3 billion of derivative assets and approximately $0.3 billion of derivative liabilities from Level 1 to Level 2 as transactions in these contracts did not occur with sufficient frequency and volume to constitute an active market.

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

The following tables present additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the quarters and nine months ended September 30, 2013 and 2012, respectively. Level 3 instruments may be hedged with instruments classified in Level 1 and Level 2. As a result, the realized and unrealized gains (losses) for assets and liabilities within the Level 3 category presented in the tables below do not reflect the related realized and unrealized gains (losses) on hedging instruments that have been classified by the Company within the Level 1 and/or Level 2 categories.

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

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


		21

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Quarter Ended September 30, 2013.


	Beginning Balance at June 30, 2013			Total Realized and Unrealized Gains (Losses)(1)			Purchases			Sales			Issuances			Settlements			Net Transfers			Ending Balance at September 30, 2013			Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at September 30, 2013(2)
	(dollars in millions)
Assets at Fair Value
Trading assets:
Other sovereign government obligations	$	4		$	—		$	2			(4	)	$	—		$	—		$	—		$	2		$	—
Corporate and other debt:
Residential mortgage-backed securities		19			(2	)		72			(3	)		—			—			4			90			(3	)
Commercial mortgage-backed securities		181			(2	)		39			(61	)		—			—			(7	)		150			5
Asset-backed securities		108			—			13			(23	)		—			—			1			99			—
Corporate bonds		509			43			76			(79	)		—			—			(12	)		537			36
Collateralized debt obligations		1,333			60			269			(206	)		—			(55	)		(21	)		1,380			28
Loans and lending commitments		5,243			(72	)		530			(112	)		—			(1,279	)		(212	)		4,098			(111	)
Other debt		12			—			14			(5	)		—			—			—			21			—

Total corporate and other debt		7,405			27			1,013			(489	)		—			(1,334	)		(247	)		6,375			(45	)
Corporate equities		256			(25	)		38			(20	)		—			—			(6	)		243			(3	)
Net derivative and other contracts(3):
Interest rate contracts		16			262			4			—			(72	)		11			89			310			111
Credit contracts		685			(259	)		41			—			(46	)		(146	)		435			710			(448	)
Foreign exchange contracts		(96	)		6			—			—			—			61			(6	)		(35	)		6
Equity contracts		(1,284	)		(309	)		102			—			(190	)		39			11			(1,631	)		(429	)
Commodity contracts		781			45			4			—			(1	)		23			3			855			73
Other		(6	)		—			—			—			—			5			—			(1	)		(2	)

Total net derivative and other contracts		96			(255	)		151			—			(309	)		(7	)		532			208			(689	)
Investments:
Private equity funds		2,286			213			24			(74	)		—			—			—			2,449			163
Real estate funds		1,422			159			18			(76	)		—			—			—			1,523			196
Hedge funds		407			5			7			(17	)		—			—			29			431			5
Principal investments		2,822			84			10			(125	)		—			—			(453	)		2,338			71
Other		385			16			3			—			—			—			90			494			16

Total investments		7,322			477			62			(292	)		—			—			(334	)		7,235			451
Intangible assets		9			—			—			—			—			(1	)		—			8			—

Liabilities at Fair Value
Commercial paper and other short-term borrowings	$	—		$	—		$	—		$	—		$	—		$	—		$	3		$	3		$	—
Trading liabilities:
Corporate and other debt:
Residential mortgage-backed securities		4			—			—			—			—			—			—			4			—
Corporate bonds		42			(15	)		(64	)		26			—			—			(14	)		5			(17	)
Unfunded lending commitments		8			4			—			—			—			—			—			4			4
Other debt		11			1			(1	)		—			—			—			—			9			—

Total corporate and other debt		65			(10	)		(65	)		26			—			—			(14	)		22			(13	)
Corporate equities		16			(5	)		(19	)		8			—			—			—			10			(9	)
Securities sold under agreements to repurchase		148			(2	)		—			—			—			—			—			150			(2	)
Other secured financings		256			(5	)		—			—			—			(1	)		—			260			(5	)
Long-term borrowings		2,705			(98	)		—			—			188			(344	)		(334	)		2,313			(89	)

(1)	Total realized and unrealized gains (losses) are primarily included in Trading revenues in the condensed consolidated statements of income except for $477 million related to Trading assets—Investments, which is included in Investments revenues.

(2)	Amounts represent unrealized gains (losses) for the quarter ended September 30, 2013 related to assets and liabilities still outstanding at September 30, 2013.


		22

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(3)	Net derivative and other contracts represent Trading assets—Derivative and other contracts net of Trading liabilities—Derivative and other contracts. For further information on derivative instruments and hedging activities, see Note 11.

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Nine Months Ended September 30, 2013.


	Beginning Balance at December 31, 2012			Total Realized and Unrealized Gains (Losses)(1)			Purchases		Sales			Issuances			Settlements			Net Transfers			Ending Balance at September 30, 2013			Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at September 30, 2013(2)
	(dollars in millions)
Assets at Fair Value
Trading assets:
Other sovereign government obligations	$	6		$	—		$	3	$	(8	)	$	—		$	—		$	1		$	2		$	—
Corporate and other debt:
Residential mortgage-backed securities		45			29			85		(45	)		—			—			(24	)		90			8
Commercial mortgage-backed securities		232			6			78		(166	)		—			—			—			150			7
Asset-backed securities		109			1			4		(15	)		—			—			—			99			—
Corporate bonds		660			64			327		(462	)		—			(12	)		(40	)		537			15
Collateralized debt obligations		1,951			276			612		(1,405	)		—			(53	)		(1	)		1,380			118
Loans and lending commitments		4,694			(308	)		1,607		(316	)		—			(1,838	)		259			4,098			(306	)
Other debt		45			(3	)		15		(36	)		—			—			—			21			1

Total corporate and other debt		7,736			65			2,728		(2,445	)		—			(1,903	)		194			6,375			(157	)
Corporate equities		288			(36	)		142		(164	)		—			—			13			243			(4	)
Net derivative and other contracts(3):
Interest rate contracts		(82	)		237			10		—			(86	)		185			46			310			157
Credit contracts		1,822			(1,133	)		184		—			(278	)		(369	)		484			710			(1,187	)
Foreign exchange contracts		(359	)		117			—		—			—			215			(8	)		(35	)		106
Equity contracts		(1,144	)		(293	)		123		(1	)		(232	)		(156	)		72			(1,631	)		(369	)
Commodity contracts		709			90			40		—			(19	)		36			(1	)		855			124
Other		(7	)		(4	)		—		—			—			10			—			(1	)		(6	)

Total net derivative and other contracts		939			(986	)		357		(1	)		(615	)		(79	)		593			208			(1,175	)
Investments:
Private equity funds		2,179			432			96		(258	)		—			—			—			2,449			409
Real estate funds		1,370			287			61		(195	)		—			—			—			1,523			402
Hedge funds		552			5			46		(154	)		—			—			(18	)		431			6
Principal investments		2,833			96			106		(286	)		—			—			(411	)		2,338			63
Other		486			36			3		(30	)		—			—			(1	)		494			37

Total investments		7,420			856			312		(923	)		—			—			(430	)		7,235			917
Intangible assets		7			7			—		—			—			(6	)		—			8			3


		23

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


	Beginning Balance at December 31, 2012		Total Realized and Unrealized Gains (Losses)(1)			Purchases			Sales		Issuances		Settlements			Net Transfers			Ending Balance at September 30, 2013		Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at September 30, 2013(2)
	(dollars in millions)
Liabilities at Fair Value
Commercial paper and other short-term borrowings	$	19	$	—		$	—		$	—	$	—	$	(1	)	$	(15	)	$	3	$	—
Trading liabilities:
Corporate and other debt:
Residential mortgage-backed securities		4		—			—			—		—		—			—			4		—
Corporate bonds		177		(5	)		(154	)		76		—		—			(99	)		5		(5	)
Unfunded lending commitments		46		42			—			—		—		—			—			4		42
Other debt		49		13			(31	)		2		—		—			2			9		6

Total corporate and other debt		276		50			(185	)		78		—