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 June 30, 2015

¨ 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 July 31, 2015, there were 1,953,385,490 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 June 30, 2015


Table of Contents		Page
Part I—Financial Information
Item 1.	Financial Statements (unaudited)		1
	Condensed Consolidated Statements of Income—Three and Six Months Ended June 30, 2015 and 2014		1
	Condensed Consolidated Statements of Comprehensive Income—Three and Six Months Ended June 30, 2015 and 2014		2
	Condensed Consolidated Statements of Financial Condition—June 30, 2015 and December 31, 2014		3
	Condensed Consolidated Statements of Changes in Total Equity—Six Months Ended June 30, 2015 and 2014		4
	Condensed Consolidated Statements of Cash Flows—Six Months Ended June 30, 2015 and 2014		5
	Notes to Condensed Consolidated Financial Statements (unaudited)		6
	1. Introduction and Basis of Presentation		6
	2. Significant Accounting Policies		7
	3. Fair Value Disclosures		8
	4. Investment Securities		32
	5. Collateralized Transactions		37
	6. Variable Interest Entities and Securitization Activities		42
	7. Loans and Allowance for Loan Losses		49
	8. Deposits		54
	9. Long-Term Borrowings and Other Secured Financings		55
	10. Derivative Instruments and Hedging Activities		55
	11. Commitments, Guarantees and Contingencies		66
	12. Regulatory Requirements		71
	13. Total Equity		74
	14. Earnings per Common Share		78
	15. Interest Income and Interest Expense		79
	16. Employee Benefit Plans		80
	17. Income Taxes		80
	18. Segment and Geographic Information		81
	19. Equity Method Investments		84
	20. Subsequent Events		84
	Report of Independent Registered Public Accounting Firm		86
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		87
	Introduction		87
	Executive Summary		88
	Business Segments		97
	Supplemental Financial Information and Disclosures		115
	Accounting Development Updates		117
	Critical Accounting Policies		118
	Liquidity and Capital Resources		119
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		141
Item 4.	Controls and Procedures		157
Financial Data Supplement (unaudited)			158

Part II—Other Information
Item 1.	Legal Proceedings		164
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		166
Item 6.	Exhibits		166


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

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

•

Amended and Restated Certificate of Incorporation;

•

Amended and Restated Bylaws;

•

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

•

Corporate Governance Policies;

•

Policy Regarding Communication with the Board of Directors;

•

Policy Regarding Director Candidates Recommended by Shareholders;

•

Policy Regarding Corporate Political Activities;

•

Policy Regarding Shareholder Rights Plan;

•

Code of Ethics and Business Conduct;

•

Code of Conduct; and

•

Integrity Hotline information.

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


		ii

Part I—Financial Information.

Item 1.

Financial Statements.

MORGAN STANLEY

Condensed Consolidated Statements of Income

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

(unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Revenues:
Investment banking	$	1,614		$	1,633		$	2,971		$	2,941
Trading		2,973			2,516			6,623			5,478
Investments		261			227			527			586
Commissions and fees		1,158			1,138			2,344			2,354
Asset management, distribution and administration fees		2,742			2,621			5,423			5,170
Other		297			206			468			500

Total non-interest revenues		9,045			8,341			18,356			17,029

Interest income		1,386			1,250			2,870			2,593
Interest expense		688			983			1,576			2,018

Net interest		698			267			1,294			575

Net revenues		9,743			8,608			19,650			17,604

Non-interest expenses:
Compensation and benefits		4,405			4,200			8,929			8,506
Occupancy and equipment		351			358			693			719
Brokerage, clearing and exchange fees		487			458			950			901
Information processing and communications		438			411			853			835
Marketing and business development		179			165			329			312
Professional services		598			531			1,084			984
Other		558			553			1,230			1,045

Total non-interest expenses		7,016			6,676			14,068			13,302

Income from continuing operations before income taxes		2,727			1,932			5,582			4,302
Provision for income taxes		894			15			1,281			800

Income from continuing operations		1,833			1,917			4,301			3,502

Discontinued operations:
Income (loss) from discontinued operations before income taxes		(2	)		(1	)		(10	)		(3	)
Provision for (benefit from) income taxes		—			(1	)		(3	)		(2	)

Income (loss) from discontinued operations		(2	)		—			(7	)		(1	)

Net income	$	1,831		$	1,917		$	4,294		$	3,501
Net income applicable to nonredeemable noncontrolling interests		24			18			93			97

Net income applicable to Morgan Stanley	$	1,807		$	1,899		$	4,201		$	3,404
Preferred stock dividends and other		142			79			222			135

Earnings applicable to Morgan Stanley common shareholders	$	1,665		$	1,820		$	3,979		$	3,269

Earnings per basic common share:
Income from continuing operations	$	0.87		$	0.94		$	2.07		$	1.70
Income (loss) from discontinued operations		—			—			—			—

Earnings per basic common share	$	0.87		$	0.94		$	2.07		$	1.70

Earnings per diluted common share:
Income from continuing operations	$	0.85		$	0.92		$	2.03		$	1.66
Income (loss) from discontinued operations		—			—			—			—

Earnings per diluted common share	$	0.85		$	0.92		$	2.03		$	1.66

Dividends declared per common share	$	0.15		$	0.10		$	0.25		$	0.15
Average common shares outstanding:
Basic		1,919,087,127			1,928,250,328			1,921,604,663			1,926,260,244

Diluted		1,960,355,702			1,969,698,239			1,961,676,071			1,969,675,518

See Notes to Condensed Consolidated Financial Statements.


		1

MORGAN STANLEY

Condensed Consolidated Statements of Comprehensive Income

(dollars in millions)

(unaudited)


	Three Months Ended June 30,					Six Months Ended June 30,
	2015			2014		2015			2014
Net income	$	1,831		$	1,917	$	4,294		$	3,501
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments(1)	$	34		$	86	$	(188	)	$	152
Amortization of cash flow hedges(2)		—			1		1			2
Change in net unrealized gains (losses) on available for sale securities(3)		(228	)		162		(28	)		236
Pension, postretirement and other related adjustments(4)		(3	)		4		(2	)		6

Total other comprehensive income (loss)	$	(197	)	$	253	$	(217	)	$	396

Comprehensive income	$	1,634		$	2,170	$	4,077		$	3,897
Net income applicable to nonredeemable noncontrolling interests		24			18		93			97
Other comprehensive income (loss) applicable to nonredeemable noncontrolling interests		(16	)		18		(18	)		36

Comprehensive income applicable to Morgan Stanley	$	1,626		$	2,134	$	4,002		$	3,764

(1)	Amounts include provision for (benefit from) income taxes of $(54) million and $(56) million for the quarters ended June 30, 2015 and 2014, respectively, and $120 million and $(112) million for the six months ended June 30, 2015 and 2014, respectively.

(2)	Amounts include provision for income taxes of $1 million for the quarter ended June 30, 2015 and $1 million and $1 million for the six months ended June 30, 2015 and 2014, respectively.

(3)	Amounts include provision for (benefit from) income taxes of $(137) million and $112 million for the quarters ended June 30, 2015 and 2014, respectively, and $(16) million and $162 million for the six months ended June 30, 2015 and 2014, respectively.

(4)	Amounts include provision for (benefit from) income taxes of $(1) million and $1 million for the quarters ended June 30, 2015 and 2014, respectively, and $(1) million and $2 million for the six months ended June 30, 2015 and 2014, respectively.

See Notes to Condensed Consolidated Financial Statements.


		2

MORGAN STANLEY

Condensed Consolidated Statements of Financial Condition

(dollars in millions, except share data)

(unaudited)


	June 30, 2015			December 31, 2014
Assets
Cash and due from banks ($10 and $45 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)	$	19,145		$	21,381
Interest bearing deposits with banks		27,214			25,603
Cash deposited with clearing organizations or segregated under federal and other regulations or requirements ($165 and $149 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)		33,652			40,607
Trading assets, at fair value ($127,737 and $127,342 were pledged to various parties at June 30, 2015 and December 31, 2014, respectively) ($625 and $966 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)		250,279			256,801
Investment securities (includes $63,709 and $69,216 at fair value at June 30, 2015 and December 31, 2014, respectively)		66,132			69,316
Securities received as collateral, at fair value		15,492			21,316
Securities purchased under agreements to resell (includes $810 and $1,113 at fair value at June 30, 2015 and December 31, 2014, respectively)		106,760			83,288
Securities borrowed		143,969			136,708
Customer and other receivables		57,115			48,961
Loans:
Held for investment (net of allowances of $169 and $149 at June 30, 2015 and December 31, 2014, respectively)		66,424			57,119
Held for sale		9,469			9,458
Other investments ($387 and $467 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)		4,172			4,355
Premises, equipment and software costs (net of accumulated depreciation of $6,660 and $6,219 at June 30, 2015 and December 31, 2014, respectively) ($187 and $191 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)		6,182			6,108
Goodwill		6,594			6,588
Intangible assets (net of accumulated amortization of $1,969 and $1,824 at June 30, 2015 and December 31, 2014, respectively) (includes $6 at fair value at June 30, 2015 and December 31, 2014, respectively)		3,151			3,159
Other assets ($50 and $59 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)		10,005			10,742

Total assets	$	825,755		$	801,510

Liabilities
Deposits	$	139,203		$	133,544
Short-term borrowings (includes $2,825 and $1,765 at fair value at June 30, 2015 and December 31, 2014, respectively)		3,122			2,261
Trading liabilities, at fair value (includes $0 and $1 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally non-recourse to the Company)		125,152			107,381
Obligation to return securities received as collateral, at fair value		23,250			25,685
Securities sold under agreements to repurchase (includes $594 and $612 at fair value at June 30, 2015 and December 31, 2014, respectively)		65,619			69,949
Securities loaned		23,151			25,219
Other secured financings (includes $4,074 and $4,504 at fair value at June 30, 2015 and December 31, 2014, respectively) ($299 and $348 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally non-recourse to the Company)		11,688			12,085
Customer and other payables		181,494			181,069
Other liabilities and accrued expenses ($3 and $72 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally non-recourse to the Company)		18,920			19,441
Long-term borrowings (includes $32,994 and $31,774 at fair value at June 30, 2015 and December 31, 2014, respectively)		158,089			152,772

Total liabilities		749,688			729,406

Commitments and contingent liabilities (see Note 11)
Equity
Morgan Stanley shareholders’ equity:
Preferred stock (see Note 13)		7,520			6,020
Common stock, $0.01 par value:
Shares authorized: 3,500,000,000 at June 30, 2015 and December 31, 2014;
Shares issued: 2,038,893,979 at June 30, 2015 and December 31, 2014;
Shares outstanding: 1,955,655,320 and 1,950,980,142 at June 30, 2015 and December 31, 2014, respectively		20			20
Additional paid-in capital		23,655			24,249
Retained earnings		48,106			44,625
Employee stock trusts		2,441			2,127
Accumulated other comprehensive loss		(1,447	)		(1,248	)
Common stock held in treasury, at cost, $0.01 par value:
Shares outstanding: 83,238,659 and 87,913,837 at June 30, 2015 and December 31, 2014, respectively		(2,816	)		(2,766	)
Common stock issued to employee stock trusts		(2,441	)		(2,127	)

Total Morgan Stanley shareholders’ equity		75,038			70,900
Nonredeemable noncontrolling interests		1,029			1,204

Total equity		76,067			72,104

Total liabilities and equity	$	825,755		$	801,510

See Notes to Condensed Consolidated Financial Statements.


		3

MORGAN STANLEY

Condensed Consolidated Statements of Changes in Total Equity

Six Months Ended June 30, 2015 and 2014

(dollars in millions)

(unaudited)


	Preferred Stock		Common Stock		Additional Paid-in Capital			Retained Earnings			Employee Stock Trusts		Accumulated Other Comprehensive Income (Loss)			Common Stock Held in Treasury at Cost			Common Stock Issued to Employee Stock Trusts			Non- redeemable Non- controlling Interests			Total Equity
BALANCE AT DECEMBER 31, 2014	$	6,020	$	20	$	24,249		$	44,625		$	2,127	$	(1,248	)	$	(2,766	)	$	(2,127	)	$	1,204		$	72,104
Net income applicable to Morgan Stanley		—		—		—			4,201			—		—			—			—			—			4,201
Net income applicable to nonredeemable noncontrolling interests		—		—		—			—			—		—			—			—			93			93
Dividends		—		—		—			(720	)		—		—			—			—			—			(720	)
Shares issued under employee plans and related tax effects		—		—		(577	)		—			314		—			1,423			(314	)		—			846
Repurchases of common stock and employee tax withholdings		—		—		—			—			—		—			(1,473	)		—			—			(1,473	)
Net change in Accumulated other comprehensive income		—		—		—			—			—		(199	)		—			—			(18	)		(217	)
Issuance of preferred stock		1,500		—		(7	)		—			—		—			—			—			—			1,493
Deconsolidation of certain legal entities associated with a real estate fund		—		—		—			—			—		—			—			—			(191	)		(191	)
Other net decreases		—		—		(10	)		—			—		—			—			—			(59	)		(69	)

BALANCE AT JUNE 30, 2015	$	7,520	$	20	$	23,655		$	48,106		$	2,441	$	(1,447	)	$	(2,816	)	$	(2,441	)	$	1,029		$	76,067

BALANCE AT DECEMBER 31, 2013	$	3,220	$	20	$	24,570		$	42,172		$	1,718	$	(1,093	)	$	(2,968	)	$	(1,718	)	$	3,109		$	69,030
Net income applicable to Morgan Stanley		—		—		—			3,404			—		—			—			—			—			3,404
Net income applicable to nonredeemable noncontrolling interests		—		—		—			—			—		—			—			—			97			97
Dividends		—		—		—			(431	)		—		—			—			—			—			(431	)
Shares issued under employee plans and related tax effects		—		—		(950	)		—			429		—			1,627			(429	)		—			677
Repurchases of common stock and employee tax withholdings		—		—		—			—			—		—			(964	)		—			—			(964	)
Net change in Accumulated other comprehensive income		—		—		—			—			—		360			—			—			36			396
Issuance of preferred stock		1,800		—		(12	)		—			—		—			—			—			—			1,788
Deconsolidation of certain legal entities associated with a real estate fund		—		—		—			—			—		—			—			—			(1,606	)		(1,606	)
Other net decreases		—		—		—			—			—		—			—			—			(190	)		(190	)

BALANCE AT JUNE 30, 2014	$	5,020	$	20	$	23,608		$	45,145		$	2,147	$	(733	)	$	(2,305	)	$	(2,147	)	$	1,446		$	72,201

See Notes to Condensed Consolidated Financial Statements.


		4

MORGAN STANLEY

Condensed Consolidated Statements of Cash Flows

(dollars in millions)

(unaudited)


	Six Months Ended June 30,
	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	4,294		$	3,501
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Income from equity method investments		(83	)		(76	)
Compensation payable in common stock and options		611			629
Depreciation and amortization		654			612
Net gain on sale of available for sale securities		(55	)		(16	)
Impairment charges		83			77
Provision for credit losses on lending activities		38			15
Other operating activities		37			(131	)
Changes in assets and liabilities:
Cash deposited with clearing organizations or segregated under federal and other regulations or requirements		6,955			(5,510	)
Trading assets, net of Trading liabilities		25,115			26,647
Securities borrowed		(7,261	)		(17,759	)
Securities loaned		(2,068	)		(1,991	)
Customer and other receivables and other assets		(7,556	)		2,904
Customer and other payables and other liabilities		(1,482	)		21,972
Securities purchased under agreements to resell		(23,472	)		9,174
Securities sold under agreements to repurchase		(4,263	)		(34,221	)

Net cash provided by (used for) operating activities		(8,453	)		5,827

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from (payments for):
Premises, equipment and software, net		(620	)		(413	)
Business dispositions, net of cash disposed		—			167
Loans:
Purchases, net of proceeds from sales		(221	)		(679	)
Originations, net of repayments		(8,861	)		(11,119	)
Investment securities:
Purchases		(26,832	)		(19,329	)
Proceeds from sales		26,501			5,499
Proceeds from paydowns and maturities		2,796			2,153
Other investing activities		(97	)		(388	)

Net cash used for investing activities		(7,334	)		(24,109	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (payments for):
Short-term borrowings		861			(359	)
Nonredeemable noncontrolling interests		(60	)		(189	)
Other secured financings		(280	)		194
Deposits		5,659			5,316
Proceeds from:
Excess tax benefits associated with stock-based awards		176			85
Derivatives financing activities		312			360
Issuance of preferred stock, net of issuance costs		1,493			1,788
Issuance of long-term borrowings		22,909			14,825
Payments for:
Long-term borrowings		(12,963	)		(21,342	)
Derivatives financing activities		(257	)		(170	)
Repurchases of common stock and employee tax withholdings		(1,473	)		(964	)
Cash dividends		(673	)		(387	)

Net cash provided by (used for) financing activities		15,704			(843	)

Effect of exchange rate changes on cash and cash equivalents		(542	)		127

Net decrease in cash and cash equivalents		(625	)		(18,998	)
Cash and cash equivalents, at beginning of period		46,984			59,883

Cash and cash equivalents, at end of period	$	46,359		$	40,885

Cash and cash equivalents include:
Cash and due from banks	$	19,145		$	18,863
Interest bearing deposits with banks		27,214			22,022

Cash and cash equivalents, at end of period	$	46,359		$	40,885

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash payments for interest were $1,027 million and $1,162 million for the six months ended June 30, 2015 and 2014, respectively.

Cash payments for income taxes were $342 million and $374 million for the six months ended June 30, 2015 and 2014, respectively.

See Notes to Condensed Consolidated Financial Statements.


		5

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.	Introduction and Basis of Presentation.

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

For a summary of the activities of each of the Company’s business segments, see Note 1 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Form 10-K”).

Global Oil Merchanting Business. As a result of entering into a definitive agreement to sell the global oil merchanting unit of the commodities division to Castleton Commodities International LLC, on May 11, 2015, the Company recognized an impairment charge of $59 million in Other revenues during the quarter and six months ended June 30, 2015, to reduce the carrying amount of the unit to its estimated fair value less costs to sell. The transaction does not meet the criteria for discontinued operations and is not expected to have a material impact on the Company’s financial results. The Company expects to close the transaction during the second half of 2015 (see Note 3).

CanTerm. On March 27, 2014, the Company completed the sale of Canterm Canadian Terminals Inc. (“CanTerm”), a public storage terminal operator for refined products with two distribution terminals in Canada. As a result of the Company’s level of continuing involvement with CanTerm, the results of CanTerm are reported as a component of continuing operations within the Company’s Institutional Securities business segment for all periods presented. The gain on sale was approximately $45 million and is included in the condensed consolidated statement of income for the six months ended June 30, 2014.

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

The condensed consolidated financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the 2014 Form 10-K. The condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are, in the opinion of management, necessary for the fair presentation of the results for the interim period. The results of operations for interim periods are not necessarily indicative of results for the entire year.

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


		6

MORGAN STANLEY

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

nonredeemable noncontrolling interests in the Company’s condensed consolidated statements of income. The portion of shareholders’ equity of such subsidiaries that is attributable to noncontrolling interests for such subsidiaries is presented as Nonredeemable noncontrolling interests, a component of total equity, in the Company’s condensed consolidated statements of financial condition.

For a discussion of the Company’s VIEs and its significant regulated U.S. and international subsidiaries, see Note 1 to the consolidated financial statements in the 2014 Form 10-K.

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

2.	Significant Accounting Policies.

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

During the quarter and six months ended June 30, 2015, other than the following, there were no significant updates made to the Company’s significant accounting policies.

Accounting Standards Adopted.

Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. In June 2014, the Financial Accounting Standards Board (the “FASB”) issued an accounting update requiring repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. This accounting update also requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty (a repurchase financing), which will result in secured borrowing accounting for the repurchase agreement. This guidance became effective for the Company beginning January 1, 2015. In addition, new disclosures are required for sales of financial assets where the Company retains substantially all the exposure throughout the term and for the collateral pledged and remaining maturity of repurchase and securities lending agreements, which were effective January 1, 2015, and April 1, 2015, respectively. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements. For further information on the adoption of this guidance, see Notes 5 and 6.

Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). In May 2015, the FASB issued an accounting update that removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured at net asset value (“NAV”) per share, or its equivalent using the practical expedient. The Company adopted this guidance retrospectively during the second quarter of 2015, as early adoption is permitted. For further information on the adoption of this guidance, see Note 3.

Condensed Consolidated Statements of Cash Flows.

In the second quarter of 2015, the Company deconsolidated approximately $191 million in net assets previously attributable to nonredeemable noncontrolling interests that were related to a real estate fund sponsored by the Company. The deconsolidation resulted in a non-cash reduction of assets of $169 million. In the second quarter of 2014, the Company deconsolidated approximately $1.6 billion in net assets previously attributable to nonredeemable noncontrolling interests related to certain legal entities associated with another real estate fund sponsored by the Company. The deconsolidation resulted in a non-cash reduction of assets of $1.3 billion.


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MORGAN STANLEY

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

3.	Fair Value Disclosures.

Fair Value Measurements.

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

The following fair value hierarchy tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis at June 30, 2015 and December 31, 2014.

Assets and Liabilities Measured at Fair Value on a Recurring Basis at June 30, 2015.


	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Counterparty and Cash Collateral Netting			Balance at June 30, 2015
	(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. government and agency securities:
U.S. Treasury securities	$	16,664		$	—		$	—		$	—		$	16,664
U.S. agency securities		1,331			16,793			3			—			18,127

Total U.S. government and agency securities		17,995			16,793			3			—			34,791
Other sovereign government obligations		17,317			9,023			12			—			26,352
Corporate and other debt:
State and municipal securities		—			1,987			7			—			1,994
Residential mortgage-backed securities		—			2,118			378			—			2,496
Commercial mortgage-backed securities		—			1,319			84			—			1,403
Asset-backed securities		—			839			19			—			858
Corporate bonds		—			14,321			479			—			14,800
Collateralized debt and loan obligations		—			362			660			—			1,022
Loans and lending commitments		—			6,595			5,512			—			12,107
Other debt		—			2,168			564			—			2,732

Total corporate and other debt		—			29,709			7,703			—			37,412
Corporate equities(1)		109,680			1,045			486			—			111,211
Derivative and other contracts:
Interest rate contracts		827			352,457			2,211			—			355,495
Credit contracts		—			24,053			886			—			24,939
Foreign exchange contracts		60			63,005			492			—			63,557
Equity contracts		633			47,745			1,121			—			49,499
Commodity contracts		3,380			11,427			3,145			—			17,952
Other		—			145			—			—			145
Netting(2)		(4,515	)		(416,622	)		(4,211	)		(53,700	)		(479,048	)

Total derivative and other contracts		385			82,210			3,644			(53,700	)		32,539
Investments:
Investments measured at NAV(3)														4,534
Principal investments		57			25			581			—			663
Other		193			222			300			—			715

Total investments		250			247			881			—			5,912
Physical commodities		—			2,062			—			—			2,062

Total trading assets		145,627			141,089			12,729			(53,700	)		250,279
AFS securities		28,478			35,231			—			—			63,709
Securities received as collateral		15,480			9			3			—			15,492
Securities purchased under agreements to resell		—			810			—			—			810
Intangible assets(4)		—			—			6			—			6

Total assets measured at fair value	$	189,585		$	177,139		$	12,738		$	(53,700	)	$	330,296


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MORGAN STANLEY

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


	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Counterparty and Cash Collateral Netting			Balance at June 30, 2015
	(dollars in millions)
Liabilities at Fair Value
Short-term borrowings	$	—		$	2,825		$	—		$	—		$	2,825
Trading liabilities:
U.S. government and agency securities:
U.S. Treasury securities		15,679			—			—			—			15,679
U.S. agency securities		1,111			179			—			—			1,290

Total U.S. government and agency securities		16,790			179			—			—			16,969
Other sovereign government obligations		18,040			2,353			—			—			20,393
Corporate and other debt:
State and municipal securities		—			2			—			—			2
Corporate bonds		—			5,906			15			—			5,921
Unfunded lending commitments		—			6			—			—			6
Other debt		—			4			4			—			8

Total corporate and other debt		—			5,918			19			—			5,937
Corporate equities(1)		42,192			1,577			112			—			43,881
Derivative and other contracts:
Interest rate contracts		766			330,343			2,447			—			333,556
Credit contracts		—			23,178			1,875			—			25,053
Foreign exchange contracts		12			66,247			46			—			66,305
Equity contracts		490			54,568			3,223			—			58,281
Commodity contracts		3,811			11,448			1,940			—			17,199
Other		—			169			—			—			169
Netting(2)		(4,515	)		(416,622	)		(4,211	)		(37,243	)		(462,591	)

Total derivative and other contracts		564			69,331			5,320			(37,243	)		37,972
Total trading liabilities		77,586			79,358			5,451			(37,243	)		125,152
Obligation to return securities received as collateral		23,237			10			3			—			23,250
Securities sold under agreements to repurchase		—			440			154			—			594
Other secured financings		—			3,906			168			—			4,074
Long-term borrowings		—			30,773			2,221			—			32,994

Total liabilities measured at fair value	$	100,823		$	117,312		$	7,997		$	(37,243	)	$	188,889

AFS—available for sale

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

(2)

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

(3)	Certain investments that are measured at fair value using the NAV per share, or its equivalent, are not classified in the fair value hierarchy. For additional disclosure about such investments, see “Fair Value of Investments that are Measured at Net Asset Value” herein.

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


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MORGAN STANLEY

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

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


	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Counterparty and Cash Collateral Netting			Balance at December 31, 2014
	(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. government and agency securities:
U.S. Treasury securities	$	16,961		$	—		$	—		$	—		$	16,961
U.S. agency securities		850			18,193			—			—			19,043

Total U.S. government and agency securities		17,811			18,193			—			—			36,004
Other sovereign government obligations		15,149			7,888			41			—			23,078
Corporate and other debt:
State and municipal securities		—			2,049			—			—			2,049
Residential mortgage-backed securities		—			1,991			175			—			2,166
Commercial mortgage-backed securities		—			1,484			96			—			1,580
Asset-backed securities		—			583			76			—			659
Corporate bonds		—			15,800			386			—			16,186
Collateralized debt and loan obligations		—			741			1,152			—			1,893
Loans and lending commitments		—			6,088			5,874			—			11,962
Other debt		—			2,167			285			—			2,452

Total corporate and other debt		—			30,903			8,044			—			38,947
Corporate equities(1)		112,490			1,357			272			—			114,119
Derivative and other contracts:
Interest rate contracts		663			495,026			2,484			—			498,173
Credit contracts		—			30,813			1,369			—			32,182
Foreign exchange contracts		83			72,769			249			—			73,101
Equity contracts(2)		571			45,967			1,586			—			48,124
Commodity contracts		4,105			18,042			2,268			—			24,415
Other		—			376			—			—			376
Netting(3)		(4,910	)		(564,127	)		(4,220	)		(66,720	)		(639,977	)

Total derivative and other contracts		512			98,866			3,736			(66,720	)		36,394
Investments:
Investments measured at NAV(4)														5,009
Principal investments		58			3			835			—			896
Other		225			198			323			—			746

Total investments		283			201			1,158			—			6,651
Physical commodities		—			1,608			—			—			1,608

Total trading assets		146,245			159,016			13,251			(66,720	)		256,801
AFS securities		37,200			32,016			—			—			69,216
Securities received as collateral		21,265			51			—			—			21,316
Securities purchased under agreements to resell		—			1,113			—			—			1,113
Intangible assets(5)		—			—			6			—			6

Total assets measured at fair value	$	204,710		$	192,196		$	13,257		$	(66,720	)	$	348,452


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MORGAN STANLEY

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


	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Counterparty and Cash Collateral Netting			Balance at December 31, 2014
	(dollars in millions)
Liabilities at Fair Value
Short-term borrowings	$	—			1,765		$	—		$	—		$	1,765
Trading liabilities:
U.S. government and agency securities:
U.S. Treasury securities		14,199			—			—			—			14,199
U.S. agency securities		1,274			85			—			—			1,359

Total U.S. government and agency securities		15,473			85			—			—			15,558
Other sovereign government obligations		11,653			2,109			—			—			13,762
Corporate and other debt:
State and municipal securities		—			1			—			—			1
Corporate bonds		—			5,943			78			—			6,021
Unfunded lending commitments		—			10			5			—			15
Other debt		—			63			38			—			101

Total corporate and other debt		—			6,017			121			—			6,138
Corporate equities(1)		31,340			326			45			—			31,711
Derivative and other contracts:
Interest rate contracts		602			469,319			2,657			—			472,578
Credit contracts		—			29,997			2,112			—			32,109
Foreign exchange contracts		21			72,233			98			—			72,352
Equity contracts(2)		416			51,405			3,751			—			55,572
Commodity contracts		4,817			15,584			1,122			—			21,523
Other		—			172			—			—			172
Netting(3)		(4,910	)		(564,127	)		(4,220	)		(40,837	)		(614,094	)

Total derivative and other contracts		946			74,583			5,520			(40,837	)		40,212
Total trading liabilities		59,412			83,120			5,686			(40,837	)		107,381
Obligation to return securities received as collateral		25,629			56			—			—			25,685
Securities sold under agreements to repurchase		—			459			153			—			612
Other secured financings		—			4,355			149			—			4,504
Long-term borrowings		—			29,840			1,934			—			31,774

Total liabilities measured at fair value	$	85,041		$	119,595		$	7,922		$	(40,837	)	$	171,721

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

(2)

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

(3)

(4)	Certain investments that are measured at fair value using the NAV per share, or its equivalent, are not classified in the fair value hierarchy. For additional disclosure about such investments, see “Fair Value of Investments that are Measured at Net Asset Value” herein.

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

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 six months ended June 30, 2015 and 2014, respectively. Level 3 instruments may be hedged with instruments classified in Level 1 and Level 2. As a result, the realized and unrealized gains (losses) for


		11

MORGAN STANLEY

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

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.


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MORGAN STANLEY

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

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.

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Quarter Ended June 30, 2015


	Beginning Balance at March 31, 2015			Total Realized and Unrealized Gains (Losses)(1)			Purchases			Sales			Issuances			Settlements			Net Transfers			Ending Balance at June 30, 2015			Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at June 30, 2015(2)
	(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. agency securities	$	—		$	—		$	—		$	(3	)	$	—		$	—		$	6		$	3		$	—
Other sovereign government obligations		11			—			5			(1	)		—			—			(3	)		12			—
Corporate and other debt:
State and municipal securities		—			1			4			(9	)		—			—			11			7			1
Residential mortgage-backed securities		296			2			138			(32	)		—			—			(26	)		378			2
Commercial mortgage-backed securities		180			(4	)		5			(9	)		—			—			(88	)		84			(5	)
Asset-backed securities		67			5			11			(64	)		—			—			—			19			1
Corporate bonds		424			(4	)		228			(150	)		—			(2	)		(17	)		479			(16	)
Collateralized debt and loan obligations		822			68			300			(439	)		—			(78	)		(13	)		660			(10	)
Loans and lending commitments		4,789			31			1,615			(351	)		—			(491	)		(81	)		5,512			26
Other debt		486			(1	)		130			(51	)		—			—			—			564			(1	)

Total corporate and other debt		7,064			98			2,431			(1,105	)		—			(571	)		(214	)		7,703			(2	)
Corporate equities		230			38			266			(92	)		—			—			44			486			26
Net derivative and other contracts(3):
Interest rate contracts		(496	)		95			4			—			(13	)		14			160			(236	)		135
Credit contracts		(984	)		(24	)		4			—			(24	)		23			16			(989	)		(29	)
Foreign exchange contracts		297			57			—			—			(1	)		43			50			446			82
Equity contracts		(2,472	)		(23	)		39			—			(54	)		206			202			(2,102	)		(161	)
Commodity contracts		1,345			4			2			—			(112	)		(34	)		—			1,205			(27	)

Total net derivative and other contracts		(2,310	)		109			49			—			(204	)		252			428			(1,676	)		—
Investments:
Principal investments		829			(21	)		5			(12	)		—			(205	)		(15	)		581			(21	)
Other		391			(4	)		—			—			—			—			(87	)		300			—
Securities received as collateral		33			—			—			(30	)		—			—			—			3			—
Intangible assets		5			1			—			—			—			—			—			6			1

Liabilities at Fair Value
Trading liabilities:
Corporate and other debt:
Corporate bonds	$	23		$	—		$	(21	)	$	15		$	—		$	—		$	(2	)	$	15		$	—
Other debt		23			—			—			10			—			(29	)		—			4			—

Total corporate and other debt		46			—			(21	)		25			—			(29	)		(2	)		19			—
Corporate equities		50			240			(49	)		2			—			—			349			112			240
Obligation to return securities received as collateral		33			—			(30	)		—			—			—			—			3			—
Securities sold under agreements to repurchase		154			—			—			—			—			—			—			154			—
Other secured financings		133			2			—			—			37			—			—			168			2
Long-term borrowings		1,738			51			—			—			549			(88	)		73			2,221			51

(1)	Total realized and unrealized gains (losses) are primarily included in Trading revenues in the condensed consolidated statements of income except for $(25) million related to Trading assets—Investments, which is included in Investments revenues.

(2)	Amounts represent unrealized gains (losses) for the quarter ended June 30, 2015 related to assets and liabilities still outstanding at June 30, 2015.

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


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MORGAN STANLEY

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

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Six Months Ended June 30, 2015


	Beginning Balance at December 31, 2014			Total Realized and Unrealized Gains (Losses)(1)			Purchases		Sales			Issuances			Settlements			Net Transfers			Ending Balance at June 30, 2015			Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at June 30, 2015(2)
	(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. agency securities	$	—		$	—		$	3	$	—		$	—		$	—		$	—		$	3		$	—
Other sovereign government obligations		41			1			6		(32	)		—			—			(4	)		12			1
Corporate and other debt:
State and municipal securities		—			1			4		—			—			—			2			7			1
Residential mortgage-backed securities		175			21			163		(51	)		—			—			70			378			12
Commercial mortgage-backed securities		96			(6	)		16		(22	)		—			—			—			84			(9	)
Asset-backed securities		76			(4	)		11		(29	)		—			—			(35	)		19			2
Corporate bonds		386			10			213		(126	)		—			(1	)		(3	)		479			9
Collateralized debt and loan obligations		1,152			145			404		(682	)		—			(331	)		(28	)		660			(6	)
Loans and lending commitments		5,874			35			2,082		(209	)		—			(2,078	)		(192	)		5,512			30
Other debt		285			(8	)		12		—			—			(1	)		276			564			6

Total corporate and other debt		8,044			194			2,905		(1,119	)		—			(2,411	)		90			7,703			45
Corporate equities		272			64			260		(147	)		—			—			37			486			49
Net derivative and other contracts(3):
Interest rate contracts		(173	)		188			9		—			(20	)		124			(364	)		(236	)		197
Credit contracts		(743	)		(276	)		17		—			(54	)		31			36			(989	)		(284	)
Foreign exchange contracts		151			121			—		—			(1	)		144			31			446			120
Equity contracts(4)		(2,165	)		(73	)		69		—			(225	)		156			136			(2,102	)		(160	)
Commodity contracts		1,146			299			3		—			(112	)		(72	)		(59	)		1,205			234

Total net derivative and other contracts		(1,784	)		259			98		—			(412	)		383			(220	)		(1,676	)		107
Investments:
Principal investments		835			(4	)		15		(46	)		—			(205	)		(14	)		581			(26	)
Other		323			(16	)		2		(6	)		—			—			(3	)		300			(12	)
Securities received as collateral		—			—			3		—			—			—			—			3			—
Intangible assets		6			1			—		—			—			(1	)		—			6			1


		14

MORGAN STANLEY

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


	Beginning Balance at December 31, 2014		Total Realized and Unrealized Gains (Losses)(1)			Purchases			Sales		Issuances		Settlements			Net Transfers			Ending Balance at June 30, 2015		Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at June 30, 2015(2)
	(dollars in millions)

Liabilities at Fair Value
Trading liabilities:
Corporate and other debt:
Corporate bonds	$	78	$	(2	)	$	(12	)	$	14	$	—	$	—		$	(67	)	$	15	$	(2	)
Unfunded lending commitments		5		5			—			—		—		—			—			—		5
Other debt		38		—			—			6		—		(39	)		(1	)		4		—

Total corporate and other debt		121		3			(12	)		20		—		(39	)		(68	)		19		3
Corporate equities		45		19			(75	)		25		—		—			136			112		20
Obligation to return securities received as collateral		—		—			—			3		—		—			—			3		—
Securities sold under agreements to repurchase		153		(1	)		—			—		—		—			—			154		(1	)
Other secured financings		149		(6	)		—			—		37		(24	)		—			168		2
Long-term borrowings		1,934		65			—			—		612		(300	)		40			2,221		59

(1)	Total realized and unrealized gains (losses) are primarily included in Trading revenues in the Company’s condensed consolidated statements of income except for $(20) million related to Trading assets—Investments, which is included in Investments revenues.

(2)	Amounts represent unrealized gains (losses) for the quarter ended June 30, 2015 related to assets and liabilities still outstanding at June 30, 2015.

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

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


		15

MORGAN STANLEY

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

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Quarter Ended June 30, 2014


	Beginning Balance at March 31, 2014			Total Realized and Unrealized Gains (Losses)(1)			Purchases			Sales			Issuances			Settlements			Net Transfers			Ending Balance at June 30, 2014			Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at June 30, 2014(2)
	(dollars in millions)
Assets at Fair Value
Trading assets:
Other sovereign government obligations	$	8		$	—		$	7		$	(2	)	$	—		$	—		$	1		$	14		$	—
Corporate and other debt:
State and municipal securities		—			—			4			—			—			—			—			4			—
Residential mortgage-backed securities		51			10			1			(7	)		—			—			—			55			8
Commercial mortgage-backed securities		80			5			14			(52	)		—			—			—			47			(1	)
Asset-backed securities		146			—			28			(115	)		—			—			6			65			—
Corporate bonds		538			64			100			(223	)		—			—			31			510			42
Collateralized debt obligations		1,293			79			497			(534	)		—			(27	)		24			1,332			32
Loans and lending commitments		4,988			146			1,505			(423	)		—			(304	)		(83	)		5,829			188
Other debt		31			2			8			(17	)		—			(2	)		—			22			2

Total corporate and other debt		7,127			306			2,157			(1,371	)		—			(333	)		(22	)		7,864			271
Corporate equities		263			16			68			(29	)		—			—			(75	)		243			11
Net derivative and other contracts(3):
Interest rate contracts		(121	)		(64	)		1			—			—			77			(2	)		(109	)		(25	)
Credit contracts		(231	)		(362	)		8			—			(8	)		(157	)		40			(710	)		(357	)
Foreign exchange contracts		52			21			3			(1	)		—			30			4			109			21
Equity contracts		(1,099	)		3			29			(1	)		(32	)		(102	)		105			(1,097	)		(25	)
Commodity contracts		1,074			(43	)		108			—			—			(7	)		—			1,132			(55	)
Other		(1	)		(1	)		—			—			—			(1	)		—			(3	)		(1	)

Total net derivative and other contracts		(326	)		(446	)		149			(2	)		(40	)		(160	)		147			(678	)		(442	)
Investments:
Principal investments		2,193			(14	)		16			(72	)		—			(1,234	)		(6	)		883			65
Other		521			2			2			(10	)		—			—			(135	)		380			9
Securities received as collateral		3			—			—			—			—			(3	)		—			—			—
Intangible assets		7			(1	)		—			—			—			—			—			6			(1	)
Liabilities at Fair Value
Trading liabilities:
Corporate and other debt:
Corporate bonds	$	3		$	(1	)	$	(4	)	$	13		$	—		$	—		$	1		$	14		$	—
Unfunded lending commitments		6			(5	)		—			1			—			—			—			12			(5	)
Other debt		68			11			—			5			—			(20	)		—			42			2