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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

 

OR

 

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

EXCHANGE ACT OF 1934

 

Commission File Number 1-11758

 

 

(Exact Name of Registrant as specified in its charter)

 

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

 

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

 

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

 

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

 

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

 

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

 

As of April 29, 2016, there were 1,937,024,359 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.

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QUARTERLY REPORT ON FORM 10-Q

For the quarter ended March 31, 2016

 

Table of Contents				Page
Part I—Financial Information
Item 1.		Financial Statements (Unaudited)			1
		Condensed Consolidated Statements of Income			1
		Condensed Consolidated Statements of Comprehensive Income			2
		Condensed Consolidated Balance Sheet			3
		Condensed Consolidated Statements of Changes in Total Equity			4
		Condensed Consolidated Statements of Cash Flows			5
		Notes to Condensed Consolidated Financial Statements (Unaudited)			6
		1. Introduction and Basis of Presentation			6
		2. Significant Accounting Policies			7
		3. Fair Values			8
		4. Derivative Instruments and Hedging Activities			24
		5. Investment Securities			31
		6. Collateralized Transactions			36
		7. Loans and Allowance for Credit Losses			39
		8. Equity Method Investments			44
		9. Deposits			44
		10. Long-Term Borrowings and Other Secured Financings			44
		11. Commitments, Guarantees and Contingencies			45
		12. Variable Interest Entities and Securitization Activities			51
		13. Regulatory Requirements			57
		14. Total Equity			60
		15. Earnings per Common Share			62
		16. Interest Income and Interest Expense			63
		17. Employee Benefit Plans			63
		18. Income Taxes			64
		19. Segment and Geographic Information			64
		20. Subsequent Events			66
		Report of Independent Registered Public Accounting Firm			67
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			68
		Introduction			68
		Executive Summary			69
		Business Segments			75
		Supplemental Financial Information and Disclosures			87
		Accounting Development Updates			88
		Critical Accounting Policies			89
		Liquidity and Capital Resources			90
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			107
Item 4.		Controls and Procedures			122
Financial Data Supplement (Unaudited)					123
Part II—Other Information
Item 1.		Legal Proceedings			126
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			127
Item 6.		Exhibits			127

 

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Available Information.

 

The Company 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 the Company files 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 the Company) file electronically with the SEC. The Company’s electronic SEC filings are available to the public at the SEC’s internet site, www.sec.gov.

 

The Company’s internet site is www.morganstanley.com. You can access the Company’s Investor Relations webpage at www.morganstanley.com/about-us-ir. The Company 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. The Company also makes available, through its Investor Relations webpage, via a link to the SEC’s internet site, statements of beneficial ownership of the Company’s equity securities filed by its directors, officers, 10% or greater shareholders and others under Section 16 of the Exchange Act.

 

You can access information about the Company’s corporate governance at www.morganstanley.com/about-us-governance. The Company’s Corporate Governance webpage includes:

•

Amended and Restated Certificate of Incorporation;

•

Amended and Restated Bylaws;

•

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

•

Equity Ownership Commitment;

•

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. The Company 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 the Company’s internet site is not incorporated by reference into this report.

 

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Part I—Financial Information.

 

Item 1.

Financial Statements.

 

MORGAN STANLEY

Condensed Consolidated Statements of Income

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

(unaudited)

 

		Three Months Ended March 31,
		2016				2015
Revenues:
Investment banking		$	1,107			$	1,357
Trading			2,065				3,650
Investments			(34	)			266
Commissions and fees			1,055				1,186
Asset management, distribution and administration fees			2,620				2,681
Other			80				171
Total non-interest revenues			6,893				9,311
Interest income			1,747				1,484
Interest expense			848				888
Net interest			899				596
Net revenues			7,792				9,907
Non-interest expenses:
Compensation and benefits			3,683				4,524
Occupancy and equipment			329				342
Brokerage, clearing and exchange fees			465				463
Information processing and communications			442				415
Marketing and business development			134				150
Professional services			514				486
Other			487				672
Total non-interest expenses			6,054				7,052
Income from continuing operations before income taxes			1,738				2,855
Provision for income taxes			578				387
Income from continuing operations			1,160				2,468
Discontinued operations:
Income (loss) from discontinued operations before income taxes			(5	)			(8	)
Provision for (benefit from) income taxes			(2	)			(3	)
Income (loss) from discontinued operations			(3	)			(5	)
Net income		$	1,157			$	2,463
Net income applicable to noncontrolling interests			23				69
Net income applicable to Morgan Stanley		$	1,134			$	2,394
Preferred stock dividends and other			79				80
Earnings applicable to Morgan Stanley common shareholders		$	1,055			$	2,314
Earnings per basic common share:
Income from continuing operations		$	0.56			$	1.21
Income (loss) from discontinued operations			—				(0.01	)
Earnings per basic common share		$	0.56			$	1.20
Earnings per diluted common share:
Income from continuing operations		$	0.55			$	1.18
Income (loss) from discontinued operations			—				—
Earnings per diluted common share		$	0.55			$	1.18
Dividends declared per common share		$	0.15			$	0.10
Average common shares outstanding:
Basic			1,883,141,468				1,924,122,199
Diluted			1,914,840,943				1,962,996,441

 

See Notes to Condensed Consolidated Financial Statements.

 

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MORGAN STANLEY

Condensed Consolidated Statements of Comprehensive Income

(dollars in millions)

(unaudited)

 

		Three Months Ended March 31,
		2016				2015
Net income		$	1,157			$	2,463
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments(1)		$	186			$	(222	)
Change in net unrealized gains on available for sale securities(2)			395				200
Pension, postretirement and other			1				2
Change in net debt valuation adjustments(3)			203				—
Total other comprehensive income (loss)		$	785			$	(20	)
Comprehensive income		$	1,942			$	2,443
Net income applicable to noncontrolling interests			23				69
Other comprehensive income (loss) applicable to noncontrolling interests			55				(2	)
Comprehensive income applicable to Morgan Stanley		$	1,864			$	2,376

 

(1)	Amounts include Provision for (benefit from) income taxes of $(115) million and $174 million.

(2)	Amounts include Provision for (benefit from) income taxes of $230 million and $121 million.

(3)

Debt valuation adjustments (“DVA”) represent the change in the fair value resulting from fluctuations in the Company’s credit spreads and other credit factors related to liabilities carried at fair value, primarily certain Long-term and Short-term borrowings. Amounts include Provision for (benefit from) income taxes of $120 million. See Notes 2 and 14 for further information.

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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MORGAN STANLEY

Condensed Consolidated Balance Sheet

(dollars in millions, except share data)

(unaudited)

 

		At March  31, 2016				At December  31, 2015
Assets
Cash and due from banks		$	22,797			$	19,827
Interest bearing deposits with banks			30,841				34,256
Trading assets, at fair value ($130,582 and $127,627 were pledged to various parties)			234,150				228,280
Investment securities (includes $68,167 and $66,759 at fair value)			77,592				71,983
Securities received as collateral, at fair value			8,813				11,225
Securities purchased under agreements to resell (includes $555 and $806 at fair value)			98,774				87,657
Securities borrowed			140,413				142,416
Customer and other receivables			44,762				45,407
Loans:
Held for investment (net of allowances of $330 and $225)			75,566				72,559
Held for sale			13,236				13,200
Goodwill			6,586				6,584
Intangible assets (net of accumulated amortization of $2,204 and $2,130) (includes $4 and $5 at fair value)			2,909				2,984
Other assets			51,058				51,087
Total assets		$	807,497			$	787,465
Liabilities
Deposits (includes $647 and $125 at fair value)		$	157,591			$	156,034
Short-term borrowings (includes $697 and $1,648 at fair value)			1,109				2,173
Trading liabilities, at fair value			115,766				109,139
Obligation to return securities received as collateral, at fair value			17,984				19,316
Securities sold under agreements to repurchase (includes $693 and $683 at fair value)			41,305				36,692
Securities loaned			17,140				19,358
Other secured financings (includes $2,623 and $2,854 at fair value)			9,316				9,464
Customer and other payables			194,003				186,626
Other liabilities and accrued expenses			13,304				18,711
Long-term borrowings (includes $36,008 and $33,045 at fair value)			162,804				153,768
Total liabilities			730,322				711,281
Commitments and contingent liabilities (see Note 11)
Equity
Morgan Stanley shareholders’ equity:
Preferred stock (see Note 14)			7,520				7,520
Common stock, $0.01 par value:
Shares authorized: 3,500,000,000; Shares issued: 2,038,893,979; Shares outstanding: 1,938,294,368 and 1,920,024,027			20				20
Additional paid-in capital			22,526				24,153
Retained earnings			50,272				49,204
Employee stock trusts			2,861				2,409
Accumulated other comprehensive loss			(1,238	)			(1,656	)
Common stock held in treasury, at cost, $0.01 par value (100,599,611 and 118,869,952 shares)			(3,090	)			(4,059	)
Common stock issued to employee stock trusts			(2,861	)			(2,409	)
Total Morgan Stanley shareholders’ equity			76,010				75,182
Noncontrolling interests			1,165				1,002
Total equity			77,175				76,184
Total liabilities and equity		$	807,497			$	787,465

 

See Notes to Condensed Consolidated Financial Statements.

 

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MORGAN STANLEY

Condensed Consolidated Statements of Changes in Total Equity

Three Months Ended March 31, 2016 and 2015

(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- controlling Interests				Total Equity
BALANCE AT DECEMBER 31, 2015		$	7,520			$	20			$	24,153			$	49,204			$	2,409			$	(1,656	)		$	(4,059	)		$	(2,409	)		$	1,002			$	76,184
Cumulative adjustment for accounting change related to DVA(1)			—				—				—				312				—				(312	)			—				—				—				—
Net adjustment for accounting change related to consolidation(2)			—				—				—				—				—				—				—				—				106				106
Net income applicable to Morgan Stanley			—				—				—				1,134				—				—				—				—				—				1,134
Net income applicable to non controlling interests			—				—				—				—				—				—				—				—				23				23
Dividends			—				—				—				(378	)			—				—				—				—				—				(378	)
Shares issued under employee plans and related tax effects			—				—				(1,627	)			—				452				—				1,945				(452	)			—				318
Repurchases of common stock and employee tax withholdings			—				—				—				—				—				—				(976	)			—				—				(976	)
Net change in Accumulated other comprehensive income (loss)			—				—				—				—				—				730				—				—				55				785
Other net decreases			—				—				—				—				—				—				—				—				(21	)			(21	)
BALANCE AT MARCH 31, 2016		$	7,520			$	20			$	22,526			$	50,272			$	2,861			$	(1,238	)		$	(3,090	)		$	(2,861	)		$	1,165			$	77,175
BALANCE AT DECEMBER 31, 2014		$	6,020			$	20			$	24,249			$	44,625			$	2,127			$	(1,248	)		$	(2,766	)		$	(2,127	)		$	1,204			$	72,104
Net income applicable to Morgan Stanley			—				—				—				2,394				—				—				—				—				—				2,394
Net income applicable to non controlling interests			—				—				—				—				—				—				—				—				69				69
Dividends			—				—				—				(279	)			—				—				—				—				—				(279	)
Shares issued under employee plans and related tax effects			—				—				(887	)			—				304				—				1,398				(304	)			—				511
Repurchases of common stock and employee tax withholdings			—				—				—				—				—				—				(839	)			—				—				(839	)
Net change in Accumulated other comprehensive income (loss)			—				—				—				—				—				(18	)			—				—				(2	)			(20	)
Issuance of preferred stock			1,500				—				(7	)			—				—				—				—				—				—				1,493
Other net increases			—				—				—				—				—				—				—				—				33				33
BALANCE AT MARCH 31, 2015		$	7,520			$	20			$	23,355			$	46,740			$	2,431			$	(1,266	)		$	(2,207	)		$	(2,431	)		$	1,304			$	75,466

 

(1)

In accordance with the early adoption of a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities, a cumulative catch up adjustment was recorded as of January 1, 2016 to move the cumulative DVA amount, net of noncontrolling interest and tax, related to outstanding liabilities under the fair value option election from Retained earnings into Accumulated other comprehensive income (loss) (“AOCI”). See Notes 2 and 14 for further information.

(2)	In accordance with the accounting update Amendments to the Consolidation Analysis, a net adjustment was recorded as of January 1, 2016 to consolidate or deconsolidate certain entities under the new guidance. See Note 2 for further information.

 

See Notes to Condensed Consolidated Financial Statements.

 

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MORGAN STANLEY

Condensed Consolidated Statements of Cash Flows

(dollars in millions)

(unaudited)

 

		Three Months Ended March 31,
		2016				2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	1,157			$	2,463
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Income from equity method investments			(15	)			(38	)
Compensation payable in common stock and options			217				295
Depreciation and amortization			415				321
Net gain on sale of available for sale securities			(12	)			(25	)
Impairment charges			8				21
Provision for credit losses on lending activities			128				63
Other operating adjustments			93				56
Changes in assets and liabilities:
Trading assets, net of Trading liabilities			5,814				11,414
Securities borrowed			2,003				(13,657	)
Securities loaned			(2,218	)			308
Customer and other receivables and other assets			899				(5,990	)
Customer and other payables and other liabilities			2,153				8,052
Securities purchased under agreements to resell			(11,117	)			(7,944	)
Securities sold under agreements to repurchase			4,613				(8,394	)
Net cash provided by (used for) operating activities			4,138				(13,055	)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from (payments for):
Other assets—Premises, equipment and software, net			(315	)			(320	)
Changes in loans, net			(3,505	)			(2,666	)
Investment securities:
Purchases			(15,211	)			(15,067	)
Proceeds from sales			8,515				13,810
Proceeds from paydowns and maturities			1,536				1,290
Other investing activities			(136	)			48
Net cash used for investing activities			(9,116	)			(2,905	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (payments for):
Short-term borrowings			(1,064	)			618
Noncontrolling interests			(5	)			(2	)
Other secured financings			(329	)			399
Deposits			1,557				2,271
Proceeds from:
Excess tax benefits associated with stock-based awards			39				173
Derivatives financing activities			—				226
Issuance of preferred stock, net of issuance costs			—				1,493
Issuance of long-term borrowings			13,183				11,339
Payments for:
Long-term borrowings			(7,961	)			(5,334	)
Derivatives financing activities			(120	)			(83	)
Repurchases of common stock and employee tax withholdings			(976	)			(839	)
Cash dividends			(436	)			(310	)
Net cash provided by financing activities			3,888				9,951
Effect of exchange rate changes on cash and cash equivalents			645				(682	)
Net decrease in cash and cash equivalents			(445	)			(6,691	)
Cash and cash equivalents, at beginning of period			54,083				46,984
Cash and cash equivalents, at end of period		$	53,638			$	40,293
Cash and cash equivalents include:
Cash and due from banks		$	22,797			$	19,683
Interest bearing deposits with banks			30,841				20,610
Cash and cash equivalents, at end of period		$	53,638			$	40,293

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash payments for interest were $613 million and $580 million.

Cash payments for income taxes, net of refunds, were $122 million and $119 million.

 

See Notes to Condensed Consolidated Financial Statements.

 

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MORGAN STANLEY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

1.	Introduction and Basis of Presentation.

 

The Company.

 

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

 

For a description of the clients and principal products and services 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, 2015 (the “2015 Form 10-K”).

 

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. 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 accompanying condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the 2015 Form 10-K. Certain footnote disclosures included in the 2015 Form 10-K have been condensed or omitted from the condensed consolidated financial statements as they are not required for interim reporting under U.S. GAAP. 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 12). For consolidated subsidiaries that are less than wholly owned, the third-party holdings of equity interests are referred to as noncontrolling interests. The net income attributable to noncontrolling interests for such subsidiaries is presented as Net income (loss) applicable to noncontrolling interests in the 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 noncontrolling interests, a component of total equity, in the condensed consolidated balance sheet.

 

For a discussion of the Company’s VIEs and its significant regulated U.S. and international subsidiaries, see Notes 1 and 2 to the consolidated financial statements in the 2015 Form 10-K. See also Note 2 herein.

 

Condensed Consolidated Statements of Income Presentation.

 

The Company, through its subsidiaries and affiliates, provides a wide variety of products and services to a large and diversified group of clients. In connection with the delivery of these various products and services, the Company manages its revenues and related expenses in the aggregate. As such, when assessing the performance of its businesses, primarily in the 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.

 

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MORGAN STANLEY

 

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

 

Condensed Consolidated Statements of Cash Flows Presentation.

 

The adoption of the accounting update, Amendments to the Consolidation Analysis (see Note 2), resulted in a net noncash increase in total assets of $126 million.

 

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 2015 Form 10-K.

 

During the quarter ended March 31, 2016, other than the following, there were no significant updates made to the Company’s significant accounting policies.

 

Accounting Standards Adopted.

 

The Company adopted the following accounting updates as of January 1, 2016.

 

•

Recognition and Measurement of Financial Assets and Financial Liabilities.    In January 2016, the Financial Accounting Standards Board (the “FASB”) issued an accounting update that changes the requirements for the recognition and measurement of financial assets and financial liabilities. The Company early adopted the provision in this guidance relating to liabilities measured at fair value pursuant to a fair value option election that requires presenting unrealized DVA in Other comprehensive income (loss) (“OCI”), a change from the previous requirement to present DVA in net income. Realized DVA amounts will be recycled from AOCI to Trading revenues. Prior period DVA amounts remain in Trading revenues as previously reported. A cumulative catch up adjustment, net of noncontrolling interests and tax, of $312 million was recorded as of January 1, 2016 to move the cumulative DVA loss amount from Retained earnings into AOCI.

 

Other provisions of this rule may not be early adopted and will be effective January 1, 2018, and are not expected to have a material impact on the condensed consolidated financial statements.

 

•

Amendments to the Consolidation Analysis.    In February 2015, the FASB issued an accounting update that provides a new consolidation model for certain entities, such as investment funds and limited partnerships. The adoption on January 1, 2016, increased total assets by $131 million, reflecting consolidations of $206 million net of deconsolidations of $75 million. The consolidations resulted primarily from certain merchant banking funds in Investment Management where the Company acts as a general partner.

 

•

Simplifying the Presentation of Debt Issuance Costs.    In April 2015, the FASB issued an accounting update that requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. This guidance became effective for the Company beginning January 1, 2016 and did not have a material impact in the condensed consolidated financial statements.

 

The Company adopted the following accounting updates as of January 1, 2016, which did not have an impact in the condensed consolidated financial statements.

 

•

Simplifying the Accounting for Measurement-Period Adjustments.

 

		7

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MORGAN STANLEY

 

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

 

•

Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity.

 

•

Measuring the Financial Assets and Financial Liabilities of a Consolidated Collateralized Financing Entity.

 

•

Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.

 

3.	Fair Values.

 

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 3 to the consolidated financial statements in the 2015 Form 10-K. During the quarter ended March 31, 2016, there were no significant updates made to the Company’s valuation techniques.

 

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

 

		Level 1				Level 2				Level 3				Counterparty and Cash Collateral Netting				Balance at March 31, 2016
		(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. government and agency securities:
U.S. Treasury securities		$	23,545			$	—			$	—			$	—			$	23,545
U.S. agency securities			1,004				20,662				8				—				21,674
Total U.S. government and agency securities			24,549				20,662				8				—				45,219
Other sovereign government obligations			15,835				8,232				8				—				24,075
Corporate and other debt:
State and municipal securities			—				1,832				5				—				1,837
Residential mortgage-backed securities			—				1,337				292				—				1,629
Commercial mortgage-backed securities			—				1,029				59				—				1,088
Asset-backed securities			—				335				4				—				339
Corporate bonds			—				9,955				224				—				10,179
Collateralized debt and loan obligations			—				295				348				—				643
Loans and lending commitments(1)			—				3,640				6,185				—				9,825
Other debt			—				1,358				527				—				1,885
Total corporate and other debt			—				19,781				7,644				—				27,425
Corporate equities(2)			95,676				366				430				—				96,472
Derivative and other contracts:
Interest rate contracts			507				424,488				1,170				—				426,165
Credit contracts			—				19,563				738				—				20,301
Foreign exchange contracts			77				73,019				224				—				73,320
Equity contracts			768				43,027				735				—				44,530
Commodity contracts			2,925				10,648				4,045				—				17,618
Other			—				19				—				—				19
Netting(3)			(3,517	)			(477,187	)			(3,606	)			(61,800	)			(546,110	)
Total derivative and other contracts			760				93,577				3,306				(61,800	)			35,843
Investments(4):
Principal investments			22				20				743				—				785
Other			166				324				179				—				669
Total investments			188				344				922				—				1,454
Physical commodities			—				274				—				—				274
Total trading assets(4)			137,008				143,236				12,318				(61,800	)			230,762
AFS securities			32,731				35,436				—				—				68,167
Securities received as collateral			8,811				2				—				—				8,813
Securities purchased under agreements to resell			—				555				—				—				555
Intangible assets			—				—				4				—				4
Total assets measured at fair value		$	178,550			$	179,229			$	12,322			$	(61,800	)		$	308,301

 

		8

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MORGAN STANLEY

 

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

 

		Level 1				Level 2				Level 3				Counterparty and Cash Collateral Netting				Balance at March 31, 2016
		(dollars in millions)
Liabilities at Fair Value
Deposits		$	—			$	624			$	23			$	—			$	647
Short-term borrowings			—				697				—				—				697
Trading liabilities:
U.S. government and agency securities:
U.S. Treasury securities			10,553				—				—				—				10,553
U.S. agency securities			304				162				—				—				466
Total U.S. government and agency securities			10,857				162				—				—				11,019
Other sovereign government obligations			12,961				3,554				—				—				16,515
Corporate and other debt:
Corporate bonds			—				6,517				6				—				6,523
Lending commitments			—				2				1				—				3
Other debt			—				31				4				—				35
Total corporate and other debt			—				6,550				11				—				6,561
Corporate equities(2)			48,183				60				31				—				48,274
Derivative and other contracts:
Interest rate contracts			655				397,394				1,001				—				399,050
Credit contracts			—				19,806				1,461				—				21,267
Foreign exchange contracts			49				76,895				98				—				77,042
Equity contracts			487				44,825				2,567				—				47,879
Commodity contracts			2,493				9,401				2,845				—				14,739
Other			—				116				—				—				116
Netting(3)			(3,517	)			(477,187	)			(3,606	)			(42,386	)			(526,696	)
Total derivative and other contracts			167				71,250				4,366				(42,386	)			33,397
Total trading liabilities			72,168				81,576				4,408				(42,386	)			115,766
Obligation to return securities received as collateral			17,980				3				1				—				17,984
Securities sold under agreements to repurchase			—				542				151				—				693
Other secured financings			—				2,169				454				—				2,623
Long-term borrowings			—				34,210				1,798				—				36,008
Total liabilities measured at fair value		$	90,148			$	119,821			$	6,835			$	(42,386	)		$	174,418

 

		9

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MORGAN STANLEY

 

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

 

		Level 1				Level 2				Level 3				Counterparty and Cash Collateral Netting				Balance at December 31, 2015
		(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. government and agency securities:
U.S. Treasury securities		$	17,658			$	—			$	—			$	—			$	17,658
U.S. agency securities			797				17,886				—				—				18,683
Total U.S. government and agency securities			18,455				17,886				—				—				36,341
Other sovereign government obligations			13,559				7,400				4				—				20,963
Corporate and other debt:
State and municipal securities			—				1,651				19				—				1,670
Residential mortgage-backed securities			—				1,456				341				—				1,797
Commercial mortgage-backed securities			—				1,520				72				—				1,592
Asset-backed securities			—				494				25				—				519
Corporate bonds			—				9,959				267				—				10,226
Collateralized debt and loan obligations			—				284				430				—				714
Loans and lending commitments(1)			—				4,682				5,936				—				10,618
Other debt			—				2,263				448				—				2,711
Total corporate and other debt			—				22,309				7,538				—				29,847
Corporate equities(2)			106,296				379				433				—				107,108
Derivative and other contracts:
Interest rate contracts			406				323,586				2,052				—				326,044
Credit contracts			—				22,258				661				—				22,919
Foreign exchange contracts			55				64,608				292				—				64,955
Equity contracts			653				38,552				1,084				—				40,289
Commodity contracts			3,140				10,654				3,358				—				17,152
Other			—				219				—				—				219
Netting(3)			(3,840	)			(380,443	)			(3,120	)			(55,562	)			(442,965	)
Total derivative and other contracts			414				79,434				4,327				(55,562	)			28,613
Investments(4):
Principal investments			20				44				486				—				550
Other			163				310				221				—				694
Total investments			183				354				707				—				1,244
Physical commodities			—				321				—				—				321
Total trading assets(4)			138,907				128,083				13,009				(55,562	)			224,437
AFS securities			34,351				32,408				—				—				66,759
Securities received as collateral			11,221				3				1				—				11,225
Securities purchased under agreements to resell			—				806				—				—				806
Intangible assets			—				—				5				—				5
Total assets measured at fair value		$	184,479			$	161,300			$	13,015			$	(55,562	)		$	303,232
Liabilities at Fair Value
Deposits		$	—			$	106			$	19			$	—			$	125
Short-term borrowings			—				1,647				1				—				1,648
Trading liabilities:
U.S. government and agency securities:
U.S. Treasury securities			12,932				—				—				—				12,932
U.S. agency securities			854				127				—				—				981
Total U.S. government and agency securities			13,786				127				—				—				13,913
Other sovereign government obligations			10,970				2,558				—				—				13,528
Corporate and other debt:
Commercial mortgage-backed securities			—				2				—				—				2
Corporate bonds			—				5,035				—				—				5,035
Lending commitments			—				3				—				—				3
Other debt			—				5				4				—				9
Total corporate and other debt			—				5,045				4				—				5,049
Corporate equities(2)			47,123				35				17				—				47,175
Derivative and other contracts:
Interest rate contracts			466				305,151				1,792				—				307,409
Credit contracts			—				22,160				1,505				—				23,665
Foreign exchange contracts			22				65,177				151				—				65,350
Equity contracts			570				42,447				3,115				—				46,132
Commodity contracts			3,012				9,431				2,308				—				14,751
Other			—				43				—				—				43
Netting(3)			(3,840	)			(380,443	)			(3,120	)			(40,473	)			(427,876	)
Total derivative and other contracts			230				63,966				5,751				(40,473	)			29,474
Total trading liabilities			72,109				71,731				5,772				(40,473	)			109,139
Obligation to return securities received as collateral			19,312				3				1				—				19,316
Securities sold under agreements to repurchase			—				532				151				—				683
Other secured financings			—				2,393				461				—				2,854
Long-term borrowings			—				31,058				1,987				—				33,045
Total liabilities measured at fair value		$	91,421			$	107,470			$	8,392			$	(40,473	)		$	166,810

 

		10

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MORGAN STANLEY

 

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

 

 

AFS—Available for sale

(1)

At March 31, 2016, Loans and lending commitments held at fair value consisted of $7,455 million of corporate loans, $1,727 million of residential real estate loans and $643 million of wholesale real estate loans. At December 31, 2015, Loans and lending commitments held at fair value consisted of $7,286 million of corporate loans, $1,885 million of residential real estate loans and $1,447 million of wholesale real estate loans.

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

(3)

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

(4)

Amounts exclude certain investments that are measured at fair value using the net asset value (“NAV”) per share, which are not classified in the fair value hierarchy. At March 31, 2016 and December 31, 2015, the fair value of these investments was $3,388 million and $3,843 million, respectively. For additional disclosure about such investments, see “Fair Value of Investments Measured at Net Asset Value” herein.

 

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

 

The following tables present additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the quarters ended March 31, 2016 and 2015, 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 and unobservable inputs.

 

		11

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MORGAN STANLEY

 

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

 

Roll-forward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis.

 

		Beginning Balance at December 31, 2015				Total Realized and Unrealized Gains (Losses)				Purchases (1)				Sales				Issuances				Settlements				Net Transfers				Ending Balance at March 31, 2016				Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at March 31, 2016
		(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. agency securities		$	—			$	5			$	—			$	—			$	—			$	—			$	3			$	8			$	5
Other sovereign government obligations			4				—				—				(2	)			—				—				6				8				—
Corporate and other debt:
State and municipal securities			19				—				—				(15	)			—				—				1				5				—
Residential mortgage-backed securities			341				(24	)			19				(67	)			—				—				23				292				(17	)
Commercial mortgage-backed securities			72				(9	)			—				(15	)			—				—				11				59				(9	)
Asset-backed securities			25				(1	)			1				(17	)			—				—				(4	)			4				—
Corporate bonds			267				44				17				(98	)			—				—				(6	)			224				28
Collateralized debt and loan obligations			430				(14	)			114				(113	)			—				—				(69	)			348				(4	)
Loans and lending commitments			5,936				(60	)			952				(319	)			—				(351	)			27				6,185				(64	)
Other debt			448				5				75				(9	)			—				—				8				527				5
Total corporate and other debt			7,538				(59	)			1,178				(653	)			—				(351	)			(9	)			7,644				(61	)
Corporate equities			433				11				78				(44	)			—				—				(48	)			430				6
Net derivative and other contracts(2):
Interest rate contracts			260				470				5				—				(14	)			(30	)			(522	)			169				411
Credit contracts			(844	)			28				—				—				—				67				26				(723	)			24
Foreign exchange contracts			141				(61	)			—				—				—				(105	)			151				126				(38	)
Equity contracts(3)			(2,031	)			(135	)			137				—				(128	)			294				31				(1,832	)			(12	)
Commodity contracts			1,050				73				9				—				(61	)			(57	)			186				1,200				68
Total net derivative and other contracts			(1,424	)			375				151				—				(203	)			169				(128	)			(1,060	)			453
Investments:
Principal investments			486				(43	)			365				(29	)			—				(41	)			5				743				(43	)
Other			221				12				—				(25	)			—				—				(29	)			179				12
Total investments			707				(31	)			365				(54	)			—				(41	)			(24	)			922				(31	)
Securities received as collateral			1				—				—				(1	)			—				—				—				—				—
Intangible assets			5				—				—				(1	)			—				—				—				4				(1	)
Liabilities at Fair Value
Deposits		$	19			$	(2	)		$	—			$	—			$	2			$	—			$	—			$	23			$	(2	)
Short-term borrowings			1				—				—				—				—				(1	)			—				—				—
Trading liabilities:
Corporate and other debt:
Corporate bonds			—				(4	)			(2	)			9				—				—				(5	)			6				(4	)
Lending commitments			—				(1	)			—				—				—				—				—				1				(1	)
Other debt			4				7				—				7				—				—				—				4				7
Total corporate and other debt			4				2				(2	)			16				—				—				(5	)			11				2
Corporate equities			17				(4	)			(15	)			13				—				—				12				31				(4	)
Obligation to return securities received as collateral			1				—				—				—				—				—				—				1				—
Securities sold under agreements to repurchase			151				—				—				—				—				—				—				151				—
Other secured financings			461				(18	)			—				—				47				(22	)			(50	)			454				(18	)
Long-term borrowings			1,987				(46	)			—				—				72				(79	)			(228	)			1,798				(45	)

 

		12

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MORGAN STANLEY

 

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

 

		Beginning Balance at December 31, 2014				Total Realized and Unrealized Gains (Losses)						Purchases (1)				Sales				Issuances				Settlements				Net Transfers				Ending Balance at March 31, 2015				Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at March 31, 2015
		(dollars in millions)
Assets at Fair Value
Trading assets:
Other sovereign government obligations		$	41			$	1					$	2			$	(32	)		$	—			$	—			$	(1	)		$	11			$	1
Corporate and other debt:
Residential mortgage-backed securities			175				17						58				(40	)			—				—				86				296				12
Commercial mortgage-backed securities			96				(2	)					96				(10	)			—				—				—				180				(2	)
Asset-backed securities			76				(2	)					57				(29	)			—				—				(35	)			67				3
Corporate bonds			386				38						129				(141	)			—				—				12				424				38
Collateralized debt and loan obligations			1,152				79						241				(397	)			—				(253	)			—				822				2
Loans and lending commitments			5,874				41						914				(213	)			—				(1,807	)			(20	)			4,789				40
Other debt			285				(10	)					68				(1	)			—				(5	)			149				486				2
Total corporate and other debt			8,044				161						1,563				(831	)			—				(2,065	)			192				7,064				95
Corporate equities			272				19						30				(98	)			—				—				7				230				12
Net derivative and other contracts(2):
Interest rate contracts			(173	)			128						6				—				(11	)			65				(511	)			(496	)			119
Credit contracts			(743	)			(247	)					14				—				(30	)			7				15				(984	)			(252	)
Foreign exchange contracts			151				62						—				—				—				97				(13	)			297				62
Equity contracts(3)			(2,165	)			(273	)					33				—				(176	)			(54	)			163				(2,472	)			(324	)
Commodity contracts			1,146				295						—				—				—				(37	)			(59	)			1,345				262
Total net derivative and other contracts			(1,784	)			(35	)					53				—				(217	)			78				(405	)			(2,310	)			(133	)
Investments:
Principal investments			835				17						11				(34	)			—				—				—				829				9
Other			323				(12	)					2				(5	)			—				—				83				391				(10	)
Total investments			1,158				5						13				(39	)			—				—				83				1,220				(1	)
Securities received as collateral			—				—						33				—				—				—				—				33				—
Intangible assets			6				—						—				—				—				(1	)			—				5				—
Liabilities at Fair Value
Trading liabilities:
Corporate and other debt:
Corporate bonds		$	78			$	(4	)				$	(1	)		$	8			$	—			$	—			$	(66	)		$	23			$	(4	)
Lending commitments			5				5						—				—				—				—				—				—				5
Other debt			38				6						(11	)			5				—				—				(3	)			23				6
Total corporate and other debt			121				7						(12	)			13				—				—				(69	)			46				7
Corporate equities			45				1						—				7				—				—				(1	)			50				1
Obligation to return securities received as collateral			—				—						—				33				—				—				—				33				—
Securities sold under agreements to repurchase			153				(1	)					—				—				—				—				—				154				(1	)
Other secured financings			149				(8	)					—				—				—				(24	)			—				133				1
Long-term borrowings			1,934				17						—				—				115				(142	)			(152	)			1,738				10

 

(1)	Loan originations and consolidations of VIEs are included in purchases.

(2)	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 4.

(3)	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.

 

Significant Unobservable Inputs Used in Recurring Level 3 Fair Value Measurements.

 

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

 

		13

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Table of Contents

MORGAN STANLEY

 

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

 

Recurring Level 3 Fair Value Measurements Valuation Techniques and Sensitivity of Unobservable Inputs.

 

Balance at March 31, 2016

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

Range(1)

Averages(2)

(dollars in millions)

Assets at Fair Value

Trading assets:

Corporate and other debt:

Residential mortgage-backed securities

$

292

Comparable pricing:

Comparable bond price / (A)

0 to 79 points

27 points

Commercial mortgage-backed securities

59

Comparable pricing:

Comparable bond price / (A)

0 to 9 points

1 point

Corporate bonds

224

Comparable pricing(3):

Comparable bond price / (A)

3 to 118 points

63 points

Comparable pricing:

EBITDA multiple / (A)

5 to 10 times

7 times

Collateralized debt and loan obligations

348

Comparable pricing(3):

Comparable bond price / (A)

55 to 100 points

66 points

Correlation model:

Credit correlation / (B)

27% to 60%

37%

Loans and lending commitments

6,185

Corporate loan model:

Credit spread / (C)

323 to 989 bps

581 bps

Margin loan model(3):

Credit spread / (C)(D)

30 to 101 bps

74 bps

Volatility skew / (C)(D)

19% to 53%

29%

Discount rate / (C)(D)

1% to 9%

2%

Option model:

Volatility skew / (C)

-1%

-1%

Comparable pricing:

Comparable loan price / (A)

38 to 100 points

90 points

Expected recovery:

Asset coverage / (A)

48% to 100%

91%

Discounted cash flow:

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

6% to 7%

7%

Capitalization rate / (C)(D)

4% to 10%

4%

Other debt

527

Comparable pricing:

Comparable loan price / (A)

4 to 87 points

65 points

Comparable pricing:

Comparable bond price / (A)

7 points

7 points

Option model:

At the money volatility / (C)

16% to 53%

53%

Margin loan model(3):

Discount rate / (C)

1% to 2%

2%

Corporate equities

430

Comparable pricing:

Comparable price / (A)

46% to 59%

54%

Comparable pricing(3):

Comparable equity price / (A)

100%

100%

Net derivative and other contracts(4):

Interest rate contracts

169

Option model:

Interest rate volatility concentration

liquidity multiple / (C)(D)

2 times

2 times

Interest rate—Foreign exchange

correlation / (C)(D)

25% to 56%

42% /43%(5)

Interest rate volatility skew / (A)(D)

31% to 116%

66% / 66%(5)

Interest rate quanto correlation / (A)(D)

-9% to 35%

5% / -7%(5)

 

		14

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Table of Contents

MORGAN STANLEY

 

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

 

Balance at March 31, 2016

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

Range(1)

Averages(2)

(dollars in millions)

Interest rate curve correlation / (C)(D)

27% to 96%

69% / 75%(5)

Inflation volatility / (A)(D)

58% to 60%

59% / 59%(5)

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

-40% to 42%

-41% / -41%(5)

Credit contracts

(723

)

Comparable pricing:

Cash synthetic basis / (C)(D)

5 to 12 points

10 points

Comparable bond price / (C)(D)

0 to 75 points

24 points

Correlation model(3):

Credit correlation / (B)

29% to 90%

42%

Foreign exchange contracts(6)

126

Option model:

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

25% to 56%

42% / 43%(5)

Foreign exchange volatility skew / (C)(D)

-11% to 4%

0% /0%(5)

Interest rate volatility skew / (A)(D)

31% to 116%

66% / 66%(5)

Interest rate curve / (A)(D)

0%

0% / 0%(5)

Equity contracts(6)

(1,832

)

Option model:

At the money volatility / (A)(D)

7% to 86%

33%

Volatility skew / (C)(D)

-5% to 0%

-1%

Equity-Equity correlation / (A)(D)

40% to 97%

78%

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

-60% to -21%

-36%

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

-29% to 50%

17% / 8%(5)

Commodity contracts

1,200

Option model:

Forward power price / (C)(D)

$1 to $93 per

$31 per

megawatt hour

megawatt hour

Commodity volatility / (A)(D)

7% to 55%

17%

Cross commodity correlation / (C)(D)

43% to 99%

93%

Investments:

Principal investments

743

Discounted cash flow:

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

12% to 17%

14%

Exit multiple / (A)(D)

8 to 14 times

8 times

Market approach(3):

EBITDA multiple / (A)(D)

6 to 26 times

11 times

Forward capacity price / (A)(D)

$5 to $9

$7

Comparable pricing:

Comparable equity price / (A)

43% to 100%

81%

Other

179

Discounted cash flow:

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

9%

9%

Exit multiple / (A)(D)

13 times

13 times

Market approach:

EBITDA multiple / (A)(D)

6 to 14 times

12 times

Comparable pricing(3):

Comparable equity price / (A)

100%

100%

Liabilities at Fair Value

Securities sold under agreements to repurchase

151

Discounted cash flow:

Funding spread / (A)

104 to 130 bps

120 bps

Other secured financings

454

Option model:

Volatility skew / (C)

-1%

-1%

Discounted cash flow(3):

Discount rate / (C)

4% to 14%

5%

Discounted cash flow:

Funding spread / (A)

94 to 130 bps

112 bps

 

		15

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Table of Contents

MORGAN STANLEY

 

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

 

Balance at March 31, 2016

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

Range(1)

Averages(2)

(dollars in millions)

Long-term borrowings

1,798

Option model(3):

At the money volatility / (C)(D)

6% to 55%

28%

Volatility skew / (C)(D)

-2% to 0%

-1%

Equity-Equity correlation / (C)(D)

40% to 97%

73%

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

-60% to -13%

-28%

Option model:

Interest rate volatility skew / (A)(D)

25% to 50%

38%

Equity volatility discount / (C)(D)

10% to 20%

15%

Option model:

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

25% to 56%

42% / 43%(5)

Correlation model:

Credit correlation / (B)

29% to 60%

42%

Comparable pricing:

Comparable equity price / (A)

100%

100%

 

Balance at December 31, 2015

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

Range(1)

Averages(2)

(dollars in millions)

Assets at Fair Value

Trading assets:

Corporate and other debt:

Residential mortgage-backed securities

$

341

Comparable pricing:

Comparable bond price / (A)

0 to 75 points

32 points

Commercial mortgage-backed securities

72

Comparable pricing:

Comparable bond price / (A)

0 to 9 points

2 point

Corporate bonds

267

Comparable pricing(3):

Comparable bond price / (A)

3 to 119 points

90 points

Comparable pricing:

EBITDA multiple / (A)

7 to 9 times

8 times

Structured bond model: