Edgar Filing: MORGAN STANLEY

Form 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

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

EXCHANGE ACT OF 1934

Commission File Number 1-11758

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(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 ☒ 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 ☒ No ☐

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


Large Accelerated Filer ☒		Accelerated Filer ☐
Non-Accelerated Filer ☐		Smaller reporting company ☐
(Do not check if a smaller reporting company)		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of July 31, 2017, there were 1,836,580,691 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.

QUARTERLY REPORT ON FORM 10-Q

For the quarter ended June 30, 2017


Table of Contents	Part		Item		Page
Financial Information		I				1
Management’s Discussion and Analysis of Financial Condition and Results of Operations				2		1
Introduction						1
Executive Summary						2
Business Segments						7
Supplemental Financial Information and Disclosures						18
Accounting Development Updates						18
Critical Accounting Policies						19
Liquidity and Capital Resources						19
Quantitative and Qualitative Disclosures about Market Risk				3		31
Controls and Procedures				4		41
Report of Independent Registered Public Accounting Firm						42
Financial Statements				1		43
Consolidated Financial Statements and Notes						43
Consolidated Income Statements (Unaudited)						43
Consolidated Comprehensive Income Statements (Unaudited)						44
Consolidated Balance Sheets (Unaudited at June 30, 2017)						45
Consolidated Statements of Changes in Total Equity (Unaudited)						46
Consolidated Cash Flow Statements (Unaudited)						47
Notes to Consolidated Financial Statements (Unaudited)						48
1. Introduction and Basis of Presentation						48
2. Significant Accounting Policies						49
3. Fair Values						50
4. Derivative Instruments and Hedging Activities						62
5. Investment Securities						67
6. Collateralized Transactions						71
7. Loans and Allowance for Credit Losses						73
8. Equity Method Investments						76
9. Deposits						76
10. Long-Term Borrowings and Other Secured Financings						77
11. Commitments, Guarantees and Contingencies						77
12. Variable Interest Entities and Securitization Activities						82
13. Regulatory Requirements						85
14. Total Equity						87
15. Earnings per Common Share						89
16. Interest Income and Interest Expense						90
17. Employee Benefit Plans						90
18. Income Taxes						90
19. Segment and Geographic Information						91
20. Subsequent Events						92
Financial Data Supplement (Unaudited)						93
Other Information		II				96
Legal Proceedings				1		96
Unregistered Sales of Equity Securities and Use of Proceeds				2		98
Exhibits				6		98
Signatures						99
Exhibit Index						E-1

Available Information

We file 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, www.sec.gov, that contains annual, quarterly and current reports, proxy and information statements and other information that issuers file electronically with the SEC. Our electronic SEC filings are available to the public at the SEC’s internet site.

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

You can access information about our corporate governance at www.morganstanley.com/about-us-governance. Our Corporate Governance webpage includes:

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Amended and Restated Certificate of Incorporation;

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Amended and Restated Bylaws;

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

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Corporate Governance Policies;

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Policy Regarding Communication with the Board of Directors;

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Policy Regarding Director Candidates Recommended by Shareholders;

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Policy Regarding Corporate Political Activities;

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Policy Regarding Shareholder Rights Plan;

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Equity Ownership Commitment;

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Code of Ethics and Business Conduct;

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Code of Conduct;

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Integrity Hotline Information; and

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Environmental and Social Policies.

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

Financial Information

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

Introduction

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,” “Firm,” “us,” “we,” or “our” mean Morgan Stanley (the “Parent Company”) together with its consolidated subsidiaries.

A description of the clients and principal products and services of each of our business segments is as follows:

Institutional Securities provides investment banking, sales and trading, lending and other services to corporations, governments, financial institutions, and high to ultra-high net worth clients. Investment banking services consist of capital raising and financial advisory services, including services relating to the underwriting of debt, equity and other securities, as well as advice on mergers and acquisitions, restructurings, real estate and project finance. Sales and trading services include sales, financing and market-making activities in equity and fixed income products, including prime brokerage services, global macro, credit and commodities products. Lending services include originating and/or purchasing corporate loans, commercial and residential mortgage lending, asset-backed lending, financing extended to equities and commodities customers, and loans to municipalities. Other services include investment and research activities.

Wealth Management provides a comprehensive array of financial services and solutions to individual investors and small to medium-sized businesses/institutions covering

brokerage and investment advisory services, financial and wealth planning services, annuity and insurance products, credit and other lending products, banking and retirement plan services.

Investment Management provides a broad range of investment strategies and products that span geographies, asset classes, and public and private markets to a diverse group of clients across institutional and intermediary channels. Strategies and products include equity, fixed income, liquidity and alternative/other products. Institutional clients include defined benefit/defined contribution plans, foundations, endowments, government entities, sovereign wealth funds, insurance companies, third-party fund sponsors and corporations. Individual clients are serviced through intermediaries, including affiliated and non-affiliated distributors.

The results of operations in the past have been, and in the future may continue to be, materially affected by competition; risk factors; and legislative, legal and regulatory developments; as well as other factors. These factors also may have an adverse impact on our ability to achieve our strategic objectives. Additionally, the discussion of our results of operations herein may contain forward-looking statements. These statements, which reflect management’s beliefs and expectations, are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of the risks and uncertainties that may affect our future results, see “Forward-Looking Statements” immediately preceding Part I, Item 1, “Business—Competition” and “Business—Supervision and Regulation” in Part I, Item 1, “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”) and “Liquidity and Capital Resources—Regulatory Requirements” herein.


		1		June 2017 Form 10-Q


Management’s Discussion and Analysis

Executive Summary

Overview of Financial Results

Consolidated Results

Net Revenues

($ in millions)

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Net Income Applicable to Morgan Stanley

($ in millions)

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Earnings per Common Share¹

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1.	For the calculation of basic and diluted earnings per common share, see Note 15 to the consolidated financial statements.

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We reported net revenues of $9,503 million in the three months ended June 30, 2017 (“current quarter,” or “2Q 2017”), compared with $8,909 million in the three months ended June 30, 2016 (“prior year quarter,” or “2Q 2016”). For the current quarter, net income applicable to Morgan Stanley was $1,757 million, or $0.87 per diluted common share, compared with $1,582 million, or $0.75 per diluted common share, in the prior year quarter.

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We reported net revenues of $19,248 million in the six months ended June 30, 2017 (“current year period,” or “YTD 2017”), compared with $16,701 million in the six months ended June 30, 2016 (“prior year period,” or “YTD 2016”). For the current year period, net income applicable to Morgan Stanley was $3,687 million, or $1.87 per diluted common share, compared with income of $2,716 million, or $1.30 per diluted common share in the prior year period.

Non-interest Expenses

($ in millions)

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Compensation and benefits expenses of $4,252 million in the current quarter and $8,718 million in the current year period increased 6% and 13%, respectively, from $4,015 million in the prior year quarter and $7,698 million in the prior year period, primarily due to increases in incentive compensation driven mainly by higher revenues and


June 2017 Form 10-Q		2


Management’s Discussion and Analysis

the fair value of investments to which certain deferred compensation plans are referenced.

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Non-compensation expenses were $2,609 million in the current quarter and $5,080 million in the current year period compared with $2,411 million in the prior year quarter and $4,782 million in the prior year period, representing an 8% and a 6% increase, respectively. These increases were primarily as a result of higher Brokerage, clearing and exchange fees expense and other volume-driven expenses and a provision related to a United Kingdom (“U.K.”) indirect tax (i.e. value-added tax or “VAT”) matter. In addition to these drivers, non-compensation expenses increased in the current year period due to higher litigation costs. For further discussion of the U.K. VAT matter, see “Institutional Securities—Investments, Other Revenues, Non-interest Expenses and Other Items—Other Items” herein.

Expense Efficiency Ratio

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The expense efficiency ratio was 72.2% in the current quarter and 71.7% in the current year period. The expense efficiency ratio was 72.1% in the prior year quarter and 74.7% in the prior year period (see “Selected Non-Generally Accepted Accounting Principles (“Non-GAAP”) Financial Information” herein).

Return on Average Common Equity

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The annualized return on average common equity (“ROE”) was 9.1% in the current quarter and 9.9% in the current

year period. The annualized ROE was 8.3% in the prior year quarter and 7.2% in the prior year period (see “Selected Non-Generally Accepted Accounting Principles (“Non-GAAP”) Financial Information” herein).

Business Segment Results

Net Revenues by Segment^{1, 2}

($ in millions)

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		3		June 2017 Form 10-Q


Management’s Discussion and Analysis

Net Income Applicable to Morgan Stanley by Segment^2,
3

($ in millions)

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1.	The total amount of Net Revenues by Segment also includes intersegment eliminations of $(75) million and $(63) million in the current quarter and prior year quarter, respectively, and $(149) million and $(130) million in the current year period and prior year period, respectively.

2.	The percentages on the sides of the charts represent the contribution of each business segment to the total. Amounts do not necessarily total to 100% due to intersegment eliminations, where applicable.

3.	The total amount of Net Income Applicable to Morgan Stanley by Segment also includes intersegment eliminations of $2 million in the current year period.

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Institutional Securities net revenues of $4,762 million in the current quarter and $9,914 million in the current year period increased 4% from the prior year quarter and increased 20% from the prior year period. The current quarter results primarily reflected higher revenues from underwriting and strength in equity sales and trading. The current year period results primarily reflected higher revenues from fixed income sales and trading and underwriting.

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Wealth Management net revenues of $4,151 million in the current quarter and $8,209 million in the current year period increased 9% from the prior year quarter and increased 10% from the prior year period. The current

quarter and the current year period results reflected growth in asset management fee revenues and Net interest income. In addition to these drivers, the current year period results reflected higher transactional revenues.

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Investment Management net revenues of $665 million in the current quarter and $1,274 million in the current year period increased 14% from the prior year quarter and increased 20% from the prior year period. The current quarter results primarily reflected higher investment gains and carried interest and growth in asset management fee revenues. Current year period results primarily reflected investment gains compared with losses in the prior year period and positive carried interest in the current year period.

Net Revenues by Region¹

($ in millions)

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EMEA—Europe, Middle East and Africa

1.	For a discussion of how the geographic breakdown for net revenues is determined, see Note 21 to the consolidated financial statements in Item 8 of the 2016 Form 10-K.


June 2017 Form 10-Q		4


Management’s Discussion and Analysis

Selected Financial Information and Other Statistical Data


	Three Months Ended June 30,						Six Months Ended June 30,
$ in millions	2017			2016			2017			2016
Income from continuing operations applicable to Morgan Stanley	$	1,762		$	1,586		$	3,714		$	2,723
Income (loss) from discontinued operations applicable to Morgan Stanley		(5	)		(4	)		(27	)		(7	)
Net income applicable to Morgan Stanley		1,757			1,582			3,687			2,716
Preferred stock dividends and other		170			157			260			235
Earnings applicable to Morgan Stanley common shareholders	$	1,587		$	1,425		$	3,427		$	2,481
Effective income tax rate from continuing operations		32.0	%		33.5	%		30.5	%		33.4	%


	At June 30, 2017			At December 31, 2016
Capital ratios (Transitional-Advanced)¹
Common Equity Tier 1 capital ratio		16.6	%		16.9	%
Tier 1 capital ratio		19.0	%		19.0	%
Total capital ratio		21.9	%		22.0	%
Capital ratios (Transitional-Standardized)¹
Tier 1 leverage ratio²		8.5	%		8.4	%


in millions, except per share and employee data	At June 30, 2017		At December 31, 2016
Loans³	$	97,639	$	94,248
Total assets	$	841,016	$	814,949
Global Liquidity Reserve⁴	$	188,296	$	202,297
Deposits	$	144,913	$	155,863
Long-term borrowings	$	184,112	$	164,775
Common shareholders’ equity	$	70,306	$	68,530
Common shares outstanding		1,840		1,852
Book value per common share⁵	$	38.22	$	36.99
Worldwide employees		56,187		55,311

1.	For a discussion of our regulatory capital ratios, see “Liquidity and Capital Resources—Regulatory Requirements” herein.

2.	See Note 13 to the consolidated financial statements for information on the Tier 1 leverage ratio.

3.	Amounts include loans held for investment (net of allowance) and loans held for sale but exclude loans at fair value, which are included in Trading assets in the consolidated balance sheets (see Note 7 to the consolidated financial statements).

4.	For a discussion of Global Liquidity Reserve, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management Framework—Global Liquidity Reserve” in Part II, Item 7 of the 2016 Form 10-K.

5.	Book value per common share equals common shareholders’ equity divided by common shares outstanding.

Selected Non-Generally Accepted Accounting Principles (“Non-GAAP”) Financial Information

We prepare our consolidated financial statements using accounting principles generally accepted in the United States of America (“U.S. GAAP”). From time to time, we may disclose certain “non-GAAP financial measures” in this document, or in the course of our earnings releases, earnings and other conference calls, financial presentations, Definitive Proxy Statement and otherwise. A “non-GAAP financial measure” excludes, or includes, amounts from the most directly comparable measure calculated and presented in accordance with U.S. GAAP. We consider the non-GAAP financial measures we disclose to be useful to us, investors and analysts by providing further transparency about, or an alternate means of assessing, our financial condition, operating results, prospective regulatory capital requirements, or capital adequacy. These measures are not in accordance with, or a substitute for, U.S. GAAP and may be different from or inconsistent with non-GAAP financial measures used by other companies. Whenever we refer to a non-GAAP financial measure, we will also generally define it or present the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, along with a reconciliation of the differences between the U.S. GAAP financial measure and the non-GAAP financial measure.

The principal non-GAAP financial measures presented in this document are set forth below.

Non-GAAP Financial Measures by Business Segment


	Three Months Ended June 30,						Six Months Ended June 30,
$ in billions	2017			2016			2017			2016
Pre-tax profit margin¹
Institutional Securities		30	%		33	%		32	%		29	%
Wealth Management		25	%		23	%		25	%		22	%
Investment Management		21	%		20	%		19	%		15	%
Consolidated		28	%		28	%		28	%		25	%
Average common equity²
Institutional Securities	$	40.2		$	43.2		$	40.2		$	43.2
Wealth Management		17.2			15.3			17.2			15.3
Investment Management		2.4			2.8			2.4			2.8
Parent Company		10.1			7.7			9.7			7.3
Consolidated average common equity	$	69.9		$	69.0		$	69.5		$	68.6
Return on average common equity²
Institutional Securities		8.5	%		8.0	%		9.9	%		6.4	%
Wealth Management		14.6	%		12.9	%		14.6	%		12.7	%
Investment Management		16.3	%		10.6	%		13.7	%		8.8	%
Consolidated		9.1	%		8.3	%		9.9	%		7.2	%


		5		June 2017 Form 10-Q


Management’s Discussion and Analysis

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


	Three Months Ended June 30,						Six Months Ended June 30,
$ in millions, except per share data	2017			2016			2017			2016
Net income applicable to Morgan Stanley
U.S. GAAP	$	1,757		$	1,582		$	3,687		$	2,716
Impact of discrete tax provision³		4			—			18			—
Net income applicable to Morgan Stanley, excluding discrete tax provision—non-GAAP	$	1,761		$	1,582		$	3,705		$	2,716
Earnings per diluted common share
U.S. GAAP	$	0.87		$	0.75		$	1.87		$	1.30
Impact of discrete tax provision³		—			—			0.01			—
Earnings per diluted common share, excluding discrete tax provision—non-GAAP	$	0.87		$	0.75		$	1.88		$	1.30
Effective income tax rate
U.S. GAAP		32.0	%		33.5	%		30.5	%		33.4	%
Impact of discrete tax provision³		(0.1	)%		—			(0.4	)%		—
Effective income tax rate from continuing
operations, excluding discrete tax provision—non-GAAP		31.9	%		33.5	%		30.1	%		33.4	%

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

Average common equity for each business segment is determined at the beginning of each year using our Required Capital framework, an internal capital adequacy measure (see “Liquidity and Capital Resources—Regulatory Requirements—Attribution of Average Common Equity According to the Required Capital Framework” herein) and will remain fixed throughout the year until the next annual reset. Each business segment’s return on average common equity equals annualized net income applicable to Morgan Stanley less an allocation of preferred dividends as a percentage of average common equity for that segment. Consolidated return on average common equity equals annualized consolidated net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity.

Beginning in 2017, with the adoption of the accounting update Improvements to Employee Share-Based Payment Accounting, the income tax consequences related to share-based payments are required to be recognized in Provision for income taxes in the consolidated income statements upon the conversion of employee share-based awards, which primarily occur in the first quarter of each year. The impact of the income tax consequences upon conversion of the awards may be either a benefit or a provision and is treated as a discrete item. The non-GAAP financial measures for net income applicable to Morgan Stanley, earnings per diluted common share and effective income tax rate above exclude discrete tax provisions other than income tax consequences arising from conversion activity as we anticipate conversion activity each quarter. See Note 2 to the consolidated financial statements for information on the adoption of the accounting update Improvements to Employee Share-Based Payment Accounting. For further information on the discrete tax provision, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.

Consolidated Non-GAAP Financial Measures


	Three Months Ended June 30,						Six Months Ended June 30,
$ in billions	2017			2016			2017			2016
Average common equity^{1, 2, 3}
Unadjusted	$	69.9		$	69.0		$	69.5		$	68.6
Excluding DVA		70.5			69.1			70.1			68.7
Excluding DVA and discrete tax provision (benefit)		70.5			69.1			70.1			68.7
Return on average common equity^{1, 2, 4, 5}
Unadjusted		9.1	%		8.3	%		9.9	%		7.2	%
Excluding DVA		9.0	%		8.3	%		9.8	%		7.2	%
Excluding DVA and discrete tax provision (benefit)		9.0	%		8.3	%		9.8	%		7.2	%
Average tangible common equity^{1, 2, 3}^,⁶
Unadjusted	$	60.7		$	59.5		$	60.2		$	59.1
Excluding DVA		61.3			59.6			60.8			59.2
Excluding DVA and discrete tax provision (benefit)		61.3			59.6			60.8			59.2
Return on average tangible common equity^{1, 2, 5}
Unadjusted		10.4	%		9.6	%		11.4	%		8.4	%
Excluding DVA		10.3	%		9.6	%		11.3	%		8.4	%
Excluding DVA and discrete tax provision (benefit)		10.4	%		9.6	%		11.3	%		8.4	%

Expense efficiency ratio⁷		72.2	%		72.1	%		71.7	%		74.7	%


	At June 30, 2017		At December 31, 2016
Tangible book value per common share⁶	$	33.24	$	31.98

DVA—Debt valuation adjustment represents the change in the fair value resulting from fluctuations in our credit spreads and other credit factors related to liabilities carried at fair value under the fair value option, primarily certain Long-term and Short-term borrowings.

1.	When excluding DVA, it is only excluded from the denominator. When excluding the discrete tax provision (benefit), both the numerator and denominator are adjusted to exclude that item.

Beginning in 2017, with the adoption of the accounting update Improvements to Employee Share-Based Payment Accounting, the income tax consequences related to share-based payments are required to be recognized in Provision for income taxes in the consolidated income statements upon the conversion of employee share-based awards, which primarily occur in the first quarter of each year. The impact of the income tax consequences upon conversion of the awards may be either a benefit or a provision and is treated as a discrete item. When excluding discrete tax provision (benefit) from average common equity, return on average common equity, average tangible common equity and return on average tangible common equity above only discrete tax provisions (benefits) other than income tax consequences arising from conversion activity are excluded as we anticipate conversion activity each quarter. See Note 2 to the consolidated financial statements for information on the adoption of the accounting update Improvements to Employee Share-Based Payment Accounting.

The impact of DVA on average common equity and average tangible common equity was approximately $(612) million and $(106) million in the current quarter and prior year quarter, respectively. The impact of DVA on average common equity and average tangible common equity was approximately $(599) million and $(128) million in the current year period and prior year period, respectively.

4.	The calculation used in determining the Firm’s “ROE Target” is return on average common equity excluding DVA and discrete tax items as set forth above.

Return on average common equity equals annualized consolidated net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity. Return on average tangible common equity equals annualized net income applicable to Morgan Stanley less preferred dividends as a percentage of average tangible common equity.


June 2017 Form 10-Q		6


Management’s Discussion and Analysis

6.	For a discussion of tangible common equity, see “Liquidity and Capital Resources—Tangible Equity” herein. Tangible book value per common share equals tangible common equity divided by common shares outstanding.

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

Return on Equity Target

We have an ROE Target of 9% to 11% to be achieved by 2017. Our ROE Target and the related strategies and goals are forward-looking statements that may be materially affected by many factors, including, among other things: macroeconomic and market conditions; legislative and regulatory developments; industry trading and investment banking volumes; equity market levels; interest rate environment; legal expenses and the ability to reduce expenses in general; capital levels; and discrete tax items. For further information on our ROE Target and related assumptions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—Return on Equity Target” in Part II, Item 7 of the 2016 Form 10-K.

Business Segments

Substantially all of our operating revenues and operating expenses are directly attributable to the business segments. Certain revenues and expenses have been allocated to each business segment, generally in proportion to its respective net revenues, non-interest expenses or other relevant measures.

As a result of treating certain intersegment transactions as transactions with external parties, we include an Intersegment Eliminations category to reconcile the business segment results to our consolidated results.

Net Revenues, Compensation Expense and Income Taxes

For discussions of our net revenues, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Net Revenues” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Net Revenues by Segment” in Part II, Item 7 of the 2016 Form 10-K. For a discussion of our compensation expense, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Compensation Expense” in Part II, Item 7 of the 2016 Form 10-K. For a discussion of our Income Tax expense, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Income Taxes” in Part II, Item 7 of the 2016 Form 10-K.


		7		June 2017 Form 10-Q


Management’s Discussion and Analysis

Institutional Securities

Income Statement Information

Three Months Ended
June 30,

$ in millions

2017

2016

% Change

Revenues

Investment banking

1,413

1,108

28%

Trading

2,725

2,498

Investments

(51)%

Commissions and fees

630

607

Asset management, distribution and administration fees

29%

Other

126

138

(9)%

Total non-interest revenues

5,020

4,496

12%

Interest income

1,243

966

29%

Interest expense

1,501

884

70%

Net interest

(258

)

N/M

Net revenues

4,762

4,578

Compensation and benefits

1,667

1,625

Non-compensation expenses

1,652

1,447

14%

Total non-interest expenses

3,319

3,072

Income from continuing operations before income taxes

1,443

1,506

(4)%

Provision for income taxes

413

453

(9)%

Income from continuing operations

1,030

1,053

(2)%

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

)

(25)%

Net income

1,025

1,049

(2)%

Net income applicable to noncontrolling interests

(46)%

Net income applicable to Morgan Stanley

992

988

—%

Six Months Ended
June 30,

$ in millions

2017

2016

% Change

Revenues

Investment banking

2,830

2,098

35%

Trading

5,737

4,389

31%

Investments

103

108

(5)%

Commissions and fees

1,250

1,262

(1)%

Asset management, distribution and administration fees

180

142

27%

Other

299

142

111%

Total non-interest revenues

10,399

8,141

28%

Interest income

2,367

2,019

17%

Interest expense

2,852

1,868

53%

Net interest

(485

)

151

N/M

Net revenues

9,914

8,292

20%

Compensation and benefits

3,537

3,007

18%

Non-compensation expenses

3,204

2,871

12%

Total non-interest expenses

6,741

5,878

15%

Income from continuing operations before income taxes

3,173

2,414

31%

Provision for income taxes

872

728

20%

Income from continuing operations

2,301

1,686

36%

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

(27

)

N/M

Net income

2,274

1,679

35%

Net income applicable to noncontrolling interests

100

(32)%

Net income applicable to Morgan Stanley

2,206

1,579

40%

N/M—Not Meaningful


June 2017 Form 10-Q		8


Management’s Discussion and Analysis

Investment Banking

Investment Banking Revenues

Three Months Ended
June 30,

$ in millions

2017

2016

% Change

Advisory

504

497

Underwriting revenues:

Equity

405

266

52%

Fixed income

504

345

46%

Total underwriting

909

611

49%

Total investment banking

1,413

1,108

28%

Six Months Ended
June 30,

$ in millions

2017

2016

% Change

Advisory

1,000

1,088

(8)%

Underwriting revenues:

Equity

795

426

87%

Fixed income

1,035

584

77%

Total underwriting

1,830

1,010

81%

Total investment banking

2,830

2,098

35%

Investment Banking Volumes


	Three Months Ended June 30,				Six Months Ended June 30,
$ in billions	2017¹		2016¹		2017¹		2016¹
Completed mergers and acquisitions²	$	205	$	241	$	356	$	538
Equity and equity-related offerings³		20		14		30		21
Fixed income offerings⁴		67		62		142		113

Source: Thomson Reuters, data at July 12, 2017. Completed mergers and acquisitions volumes are based on full credit to each of the advisors in a transaction. Equity and equity-related offerings and fixed income offerings are based on full credit for single book managers and equal credit for joint book managers. Transaction volumes may not be indicative of net revenues in a given period. In addition, transaction volumes for prior periods may vary from amounts previously reported due to the subsequent withdrawal or change in the value of a transaction.

2.	Amounts include transactions of $100 million or more.

3.	Amounts include Rule 144A issuances and registered public offerings of common stock and convertible securities and rights offerings.

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

Investment banking revenues are composed of fees from advisory services and revenues from the underwriting of securities offerings and syndication of loans, net of syndication expenses.

Investment banking revenues of $1,413 million in the current quarter and $2,830 million in the current year period increased 28% and 35% from the comparable prior year periods. The increase in the current quarter primarily reflected higher underwriting revenues. The increase in the current year period was due to higher underwriting revenues, partially offset by lower advisory revenues.

•

Advisory revenues were relatively unchanged in the current quarter and decreased in the current year period reflecting the lower volumes of completed merger, acquisition and restructuring transactions (see Investment Banking Volumes table), offset by the positive impact of higher fee realizations.

•

Equity underwriting revenues increased in the current quarter and current year period as a result of higher global market volumes in both follow-on and initial public offerings (see Investment Banking Volumes table). In the current year period, equity underwriting revenues also increased as a result of higher fee realizations. Fixed income underwriting revenues increased in the current quarter and current year period primarily due to higher non-investment grade loan fees and bond fees.

Sales and Trading Net Revenues

By Income Statement Line Item


	Three Months Ended June 30,
$ in millions	2017			2016		% Change
Trading	$	2,725		$	2,498	9%
Commissions and fees		630			607	4%
Asset management, distribution and administration fees		89			69	29%
Net interest		(258	)		82	N/M
Total	$	3,186		$	3,256	(2)%


	Six Months Ended June 30,
$ in millions	2017			2016		% Change
Trading	$	5,737		$	4,389	31%
Commissions and fees		1,250			1,262	(1)%
Asset management, distribution and administration fees		180			142	27%
Net interest		(485	)		151	N/M
Total	$	6,682		$	5,944	12%

N/M—Not Meaningful


		9		June 2017 Form 10-Q


Management’s Discussion and Analysis

By Business


	Three Months Ended June 30,
$ in millions	2017			2016			% Change
Equity	$	2,155		$	2,145		—%
Fixed income		1,239			1,297		(4)%
Other		(208	)		(186	)	(12)%
Total	$	3,186		$	3,256		(2)%


	Six Months Ended June 30,
$ in millions	2017			2016			% Change
Equity	$	4,171		$	4,201		(1)%
Fixed income		2,953			2,170		36%
Other		(442	)		(427	)	(4)%
Total	$	6,682		$	5,944		12%

Sales and Trading Activities—Equity and Fixed Income

Following is a description of the sales and trading activities within our equities and fixed income businesses as well as how their results impact the income statement line items, followed by a presentation and explanation of results.

Equities—Financing. We provide financing and prime brokerage services to our clients active in the equity markets through a variety of products including margin lending, securities lending and swaps. Results from this business are largely driven by the difference between financing income earned and financing costs incurred, which are reflected in Net interest for securities and equity lending products and in Trading revenues for derivative products.

Equities—Execution services. We make markets for our clients in equity-related securities and derivative products, including providing liquidity and hedging products. A significant portion of the results for this business is generated by commissions and fees from executing and clearing client transactions on major stock and derivative exchanges as well as from over-the-counter (“OTC”) transactions. Market-making also generates gains and losses on inventory, which are reflected in Trading revenues.

Fixed income—Within fixed income we make markets in order to facilitate client activity as part of the following products and services.

•

Global macro products. We make markets for our clients in interest rate, foreign exchange and emerging market products, including exchange-traded and OTC securities, loans and derivative instruments. The results of this market-making activity are primarily driven by gains and losses from buying and selling positions to stand ready for and satisfy client demand, and are recorded in Trading revenues.

•

Credit products. We make markets in credit-sensitive products, such as corporate bonds and mortgage securities

and other securitized products, and related derivative instruments. The values of positions in this business are sensitive to changes in credit spreads and interest rates, which result in gains and losses reflected in Trading revenues. Due to the amount and type of the interest-bearing securities and loans making up this business, a significant portion of the results is also reflected in Net interest revenues.

•

Commodities products and Other. We make markets in various commodity products related primarily to electricity, natural gas, oil, and precious metals, with the results primarily reflected in Trading revenues. Other activities include the results from the centralized management of our fixed income derivative counterparty exposures, which are primarily recorded in Trading revenues.

Sales and Trading Net Revenues—Equity and Fixed Income


	Three Months Ended June 30, 2017
$ in millions	Trading		Fees¹		Net Interest²			Total
Financing	$	1,166	$	88	$	(227	)	$	1,027
Execution services		601		580		(53	)		1,128
Total Equity	$	1,767	$	668	$	(280	)	$	2,155
Total Fixed Income	$	1,114	$	48	$	77		$	1,239


	Three Months Ended June 30, 2016
$ in millions	Trading		Fees¹		Net Interest²			Total
Financing	$	1,039	$	90	$	(82	)	$	1,047
Execution services		576		549		(27	)		1,098
Total Equity	$	1,615	$	639	$	(109	)	$	2,145
Total Fixed Income	$	1,018	$	37	$	242		$	1,297

Six Months Ended
June 30, 2017

$ in millions

Trading

Fees¹

Net
Interest²

Total

Financing

2,097

177

(415

)

1,859

Execution services

1,265

1,148

(101

)

2,312

Total Equity

3,362

1,325

(516

)

4,171

Total Fixed Income

2,712

102

139

2,953


	Six Months Ended June 30, 2016
$ in millions	Trading		Fees¹		Net Interest²			Total
Financing	$	1,925	$	176	$	(42	)	$	2,059
Execution services		1,085		1,149		(92	)		2,142
Total Equity	$	3,010	$	1,325	$	(134	)	$	4,201
Total Fixed Income	$	1,573	$	77	$	520		$	2,170

1.	Includes Commissions and fees and Asset management, distribution and administration fees.

2.	Funding costs are allocated to the businesses based on funding usage and are included in Net interest.


June 2017 Form 10-Q		10


Management’s Discussion and Analysis

We manage each of the sales and trading businesses based on its aggregate net revenues, which are comprised of the consolidated income statement line items quantified in the previous table. Trading revenues are affected by a variety of market dynamics, including volumes, bid-offer spreads, and inventory prices, as well as impacts from hedging activity, which are interrelated. We provide qualitative commentary in the discussion of results that follow on the key drivers of period over period variances, as the quantitative impact of the various market dynamics typically cannot be disaggregated.

For additional information on total Trading revenues, see the table “Trading Revenues by Product Type” in Note 4 to the consolidated financial statements.

Sales and Trading Net Revenues during the Current Quarter

Equity

Equity sales and trading net revenues of $2,155 million in the current quarter were relatively unchanged from the prior year quarter, reflecting higher results in execution services, offset by lower results in our financing business.

•

Financing revenues decreased 2% from the prior year quarter as Net interest revenues declined from higher net interest costs, reflecting increased liquidity requirements and an increased proportion of lower spread transactions, partially offset by higher client activity in equity swaps reflected in Trading.

•

Execution services increased 3% from the prior year quarter primarily reflecting higher revenues from derivative products and improved commissions and fees driven by increased client activity, partially offset by higher net interest costs.

Fixed Income

Fixed income net revenues of $1,239 million in the current quarter were 4% lower than the prior year quarter, driven by a decrease in Net interest revenues across all three product areas, partially offset by an increase in Trading revenues.

•

Credit products decreased due to a lower level of interest realized in securitized products and tighter bid-offer spreads in the current quarter.

•

Global macro products decreased due to higher interest costs in the current quarter which resulted from interest rate products inventory management. This was partially offset by improved performance in foreign exchange and emerging markets trading activity principally due to specific market events.

•

Commodities products and Other increased due to the absence of losses from counterparty risk management incurred in the prior year quarter, partially offset by a decrease in Commodities structured transactions.

Sales and Trading Net Revenues during the Current Year Period

Equity

Equity sales and trading net revenues of $4,171 million in the current year period were relatively unchanged from the prior year period, reflecting lower results in our financing business, offset by higher results in execution services.

•

Financing revenues decreased 10% from the prior year period as Net interest revenues declined from higher net interest costs, reflecting increased liquidity requirements and an increased proportion of lower spread transactions, partially offset by higher client activity in equity swaps reflected in Trading.

•

Execution services increased 8% from the prior year period primarily reflecting improved results in Trading revenues compared with the prior year period when increased volatility resulted in inventory losses.

Fixed Income

Fixed income net revenues of $2,953 million in the current year period were 36% higher than the prior year period, driven by an increase in Trading revenues, partially offset by a decline in Net interest revenues.

•

Credit products increased due to the absence of inventory losses driven by a widening spread environment in the prior year period. This was partially offset by a lower level of interest realized in securitized products in the current year period.

•

Global macro products increased due to a more favorable environment across products compared with the prior year period when results were impacted by inventory losses. This was partially offset by higher interest costs in the current year period which resulted from interest rate products inventory management.

•

Commodities products and Other increased due to improved energy trading and the absence of losses from counterparty risk management incurred in the prior year period.


		11		June 2017 Form 10-Q


Management’s Discussion and Analysis

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

Investments

•

Net investment gains of $37 million in the current quarter decreased from the prior year quarter primarily as a result of lower gains on equities business related investments.

•

Net investment gains of $103 million in the current year period decreased from the prior year period primarily reflecting lower gains on business related investments, partially offset by gains on investments associated with our compensation plans compared with losses in the prior year period.

Other

•

Other revenues of $126 million in the current quarter were relatively unchanged from the prior year quarter. Other revenues of $299 million in the current year period increased from the prior year period primarily reflecting mark-to-market gains on loans held for sale in the current year period compared with mark-to-market losses in the prior year period and a decrease in the provision on loans held for investment.

Non-interest Expenses

Non-interest expenses of $3,319 million in the current quarter increased from the comparable prior year period primarily reflecting a 3% increase in Compensation and benefits expenses and a 14% increase in Non-compensation expenses. Non-interest expenses of $6,741 million in the current year period reflect an 18% increase in Compensation and benefits expenses and a 12% increase in Non-compensation expenses.

•

Compensation and benefits expenses increased in the current quarter and current year period primarily due to increases in discretionary incentive compensation driven mainly by higher revenues and the fair value of investments to which certain deferred compensation plans are referenced.

•

Non-compensation expenses increased in the current quarter and current year period primarily due to higher Brokerage, clearing and exchange fees expense and other volume-driven expenses and a provision related to the U.K. VAT matter (see Other Items below). In addition to these drivers, non-compensation expenses increased in the current year period due to higher litigation costs.

Other Items

The Firm self-identified an issue regarding VAT on intercompany services provided by certain overseas affiliates to our U.K. Group. The Firm is reviewing the reporting of U.K. VAT as additional support service centers were added to our operations over the years, and the focus and nature of their intended services shifted among geographic locations. During the current quarter, we have recorded a provision of $86 million that incorporates potential additional VAT, interest and penalties for this exposure. We are actively working with Her Majesty’s Revenue and Customs to resolve this matter. The provision reflected is based on currently available information and analyses, and our review of this matter is continuing.


June 2017 Form 10-Q		12


Management’s Discussion and Analysis

Wealth Management

Income Statement Information

Three Months Ended
June 30,

% Change

$ in millions

2017

2016¹

Revenues

Investment banking

135

123

10%

Trading

207

252

(18)%

Investments

—

N/M

Commissions and fees

424

423

—%

Asset management, distribution and administration fees

2,302

2,082

11%

Other

102

(28)%

Total non-interest revenues

3,142

2,982

Interest income

1,114

920

21%

Interest expense

105

15%

Net interest

1,009

829

22%

Net revenues

4,151

3,811

Compensation and benefits

2,297

2,152

Non-compensation expenses

797

800

—%

Total non-interest expenses

3,094

2,952

Income from continuing operations before income taxes

1,057

859

23%

Provision for income taxes

392

343

14%

Net income applicable to Morgan Stanley

665

516

29%

Six Months Ended
June 30,

% Change

$ in millions

2017

2016¹

Revenues

Investment banking

280

244

15%

Trading

445

446

—%

Investments

)

200%

Commissions and fees

864

835

Asset management, distribution and administration fees

4,486

4,136

Other

129

160

(19)%

Total non-interest revenues

6,206

5,819

Interest income

2,193

1,834

20%

Interest expense

190

174

Net interest

2,003

1,660

21%

Net revenues

8,209

7,479

10%

Compensation and benefits

4,614

4,240

Non-compensation expenses

1,565

1,594

(2)%

Total non-interest expenses

6,179

5,834

Income from continuing operations before income taxes

2,030

1,645

23%

Provision for income taxes

718

636

13%

Net income applicable to Morgan Stanley

1,312

1,009

30%

N/M – Not Meaningful

Effective July 1, 2016, the Institutional Securities and Wealth Management business segments entered into an agreement, whereby Institutional Securities assumed management of Wealth Management’s fixed income client-driven trading activities and employees. Institutional Securities now pays fees to Wealth Management based on distribution activity (collectively, the “Fixed Income Integration”). Prior periods have not been recast for this new intersegment agreement due to immateriality.

Statistical Data

Financial Information and Statistical Data


$ in billions	At June 30, 2017		At December 31, 2016
Client assets	$	2,239	$	2,103
Fee-based client assets¹	$	962	$	877
Fee-based client assets as a percentage of total client assets		43%		42%
Client liabilities²	$	77	$	73
Bank deposit program	$	139	$	153
Investment securities portfolio	$	53.5	$	63.9
Loans and lending commitments	$	74.2	$	68.7
Wealth Management representatives		15,777		15,763


	Three Months Ended June 30,
	2017		2016
Annualized revenues per representative
(dollars in thousands)³	$	1,052	$	959
Client assets per representative
(dollars in millions)⁴	$	142	$	128
Fee-based asset flows⁵
(dollars in billions)	$	19.9	$	12.0

	Six Months Ended June 30,
	2017		2016
Annualized revenues per representative
(dollars in thousands)³	$	1,041	$	941
Client assets per representative
(dollars in millions)⁴	$	142	$	128
Fee-based asset flows⁵
(dollars in billions)	$	38.7	$	17.9

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

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

3.	Annualized revenues per representative equal Wealth Management’s annualized revenues divided by the average representative headcount.

4.	Client assets per representative equal total period-end client assets divided by period-end representative headcount.

5.	Fee-based asset flows include net new fee-based assets, net account transfers, dividends, interest and client fees and exclude institutional cash management-related activity.


		13		June 2017 Form 10-Q


Management’s Discussion and Analysis

Transactional Revenues


	Three Months Ended June 30,				% Change
$ in millions	2017		2016		% Change
Investment banking	$	135	$	123		10%
Trading		207		252		(18)%
Commissions and fees		424		423		—%
Total	$	766	$	798		(4)%

	Six Months Ended June 30,				% Change
$ in millions	2017		2016		% Change
Investment banking	$	280	$	244		15%
Trading		445		446		—%
Commissions and fees		864		835		3%
Total	$	1,589	$	1,525		4%

Net Revenues

Transactional Revenues

Transactional revenues of $766 million in the current quarter decreased 4% from the prior year quarter primarily reflecting lower Trading revenues, partially offset by higher Investment banking revenues.

Transactional revenues of $1,589 million in the current year period increased 4% from the prior year period primarily reflecting higher revenues in Investment banking and Commissions and fees.

•

Investment banking revenues increased in the current quarter primarily due to higher revenues from structured products and equity syndicate activities, partially offset by lower fixed income revenues as a result of the Fixed Income Integration and lower preferred stock underwriting activity. The increase in the current year period was due to higher revenues from structured products and equity syndicate activities, partially offset by lower preferred stock underwriting activity.

•

Trading revenues decreased in the current quarter primarily due to the Fixed Income Integration, partially offset by gains related to investments associated with certain employee deferred compensation plans. Trading revenues in the current year period were relatively unchanged as lower revenues related to the Fixed Income Integration were largely offset by gains related to investments associated with certain employee deferred compensation plans.

•

Commissions and fees were relatively unchanged in the current quarter. Commissions and fees increased in the current year period primarily due to the Fixed Income Integration and to higher equities activity, partially offset by lower annuity product revenues.

Asset Management

•

Asset management, distribution and administration fees of $2,302 million in the current quarter and $4,486 million in the current year period increased 11% from the prior year quarter and increased 8% from the prior year period. The increase in each respective period is primarily due to market appreciation and net positive flows, partially offset by lower average client fee rates. See “Fee-Based Client Assets Activity and Average Fee Rate by Account Type” herein.

Net Interest

•

Net interest of $1,009 million in the current quarter and $2,003 million in the current year period increased 22% and 21%, respectively, from the comparable prior year periods primarily due to higher interest rates and higher loan balances, partially offset by lower investment portfolio balances.

Other

•

Other revenues of $73 million in the current quarter and $129 million in the current year period decreased 28% and 19%, respectively, from the comparable prior year periods, due to lower realized gains from the available for sale (“AFS”) securities portfolio.

Non-interest Expenses

Non-interest expenses of $3,094 million in the current quarter and $6,179 million in the current year period increased 5% and 6%, respectively, from the comparable prior year periods.

•

Compensation and benefits expenses in the current quarter and current year period increased primarily due to higher revenues and increases in the fair value of investments to which certain deferred compensation plans are referenced.

•

Non-compensation expenses were relatively unchanged in the current quarter. Non-compensation expenses decreased in the current year period primarily due to lower litigation and information processing costs, partially offset by higher deposit insurance expenses.


June 2017 Form 10-Q		14


Management’s Discussion and Analysis

Fee-Based Client Assets Activity and Average Fee Rate by Account Type

For a description of fee-based client assets, including descriptions for the fee based client asset types and rollforward items in the following tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Wealth Management—Fee-Based Client Assets Activity and Average Fee Rate by Account Type” in Part II, Item 7 of the 2016 Form 10-K.


	At March 31, 2017		Inflows		Outflows			Market Impact			At June 30, 2017		Average for the Three Months Ended June 30, 2017
$ in billions, Fee Rate in bps	At March 31, 2017		Inflows		Outflows			Market Impact			At June 30, 2017		Fee Rate¹

Separately managed accounts^{2, 3}	$	230	$	8	$	(7	)	$	6		$	237	17
Unified managed accounts³		217		13		(7	)		5			228	98
Mutual fund advisory		21		—		(1	)		1			21	118
Representative as advisor		133		10		(8	)		3			138	84
Representative as portfolio manager		305		23		(11	)		4			321	96
Subtotal	$	906	$	54	$	(34	)	$	19		$	945	77
Cash management		21		2		(6	)		—			17	6
Total fee-based client assets	$	927	$	56	$	(40	)	$	19		$	962	75

	At March 31, 2016		Inflows		Outflows			Market Impact			At June 30, 2016		Average for the Three Months Ended June 30, 2016
$ in billions, Fee Rate in bps	At March 31, 2016		Inflows		Outflows			Market Impact			At June 30, 2016		Fee Rate¹

Separately managed accounts²	$	278	$	9	$	(7	)	$	(1	)	$	279	37
Unified managed accounts		112		11		(5	)		2			120	106
Mutual fund advisory		24		—		(1	)		—			23	119
Representative as advisor		114		8		(8	)		3			117	85
Representative as portfolio manager		255		17		(12	)		5			265	99
Subtotal	$	783	$	45	$	(33	)	$	9		$	804	78
Cash management		15		4		(3	)		—			16	6
Total fee-based client assets	$	798	$	49	$	(36	)	$	9		$	820	76

	At December 31, 2016		Inflows		Outflows			Market Impact			At June 30, 2017		Average for the Six Months Ended June 30, 2017
$ in billions, fee rate in bps	At December 31, 2016		Inflows		Outflows			Market Impact			At June 30, 2017		Fee Rate¹

Separately managed accounts^{2, 3}	$	222	$	16	$	(11	)	$	10		$	237	16
Unified managed accounts³		204		25		(15	)		14			228	98
Mutual fund advisory		21		1		(3	)		2			21	118
Representative as advisor		125		19		(14	)		8			138	85
Representative as portfolio manager		285		42		(21	)		15			321	97
Subtotal	$	857	$	103	$	(64	)	$	49		$	945	76
Cash management		20		5		(8	)		—			17	6
Total fee-based client assets	$	877	$	108	$	(72	)	$	49		$	962	75

	At December 31, 2015		Inflows		Outflows			Market Impact			At June 30, 2016		Average for the Six Months Ended June 30, 2016
$ in billions, Fee Rate in bps	At December 31, 2015		Inflows		Outflows			Market Impact			At June 30, 2016		Fee Rate¹

Separately managed accounts²	$	283	$	17	$	(17	)	$	(4	)	$	279	37
Unified managed accounts		105		21		(9	)		3			120	107
Mutual fund advisory		25		1		(3	)		—			23	119
Representative as advisor		115		13		(14	)		3			117	86
Representative as portfolio manager		252		31		(22	)		4			265	100
Subtotal	$	780	$	83	$	(65	)	$	6		$	804	77
Cash management		15		7		(6	)		—			16	6
Total fee-based client assets	$	795	$	90	$	(71	)	$	6		$	820	76

bps—Basis points

1.	Certain data enhancements made in the first quarter of 2017 resulted in a modification to the “Fee Rate” calculations. Prior periods have been restated to reflect the revised calculations.

2.	Includes non-custody account values reflecting prior quarter-end balances due to a lag in the reporting of asset values by third-party custodians.

3.	A shift in client assets of approximately $66 billion in the fourth quarter of 2016 from separately managed accounts to unified managed accounts resulted in a lower average fee rate for those platforms but did not impact the average fee rate for total fee-based client assets.


		15		June 2017 Form 10-Q


Management’s Discussion and Analysis

Investment Management

Income Statement Information


	Three Months Ended June 30,
$ in millions	2017			2016			% Change
Revenues
Trading	$	(3	)	$	5			(160	)%
Investments		125			50			150	%
Asset management, distribution and administration fees		539			517			4	%
Other		4			9			(56	)%
Total non-interest revenues		665			581			14	%
Interest income		1			3			(67	)%
Interest expense		1			1			—	%
Net interest		—			2			(100	)%
Net revenues		665			583			14	%
Compensation and benefits		288			238			21	%
Non-compensation expenses		235			227			4	%
Total non-interest expenses		523			465			12	%
Income from continuing operations before income taxes		142			118			20	%
Provision for income taxes		41			37			11	%
Net income		101			81			25	%
Net income applicable to noncontrolling interests		1			3			(67	)%
Net income applicable to Morgan Stanley	$	100		$	78			28	%

	Six Months Ended June 30,
$ in millions	2017			2016			% Change
Revenues
Investment banking	$	—		$	1			(100	)%
Trading		(14	)		(5	)		(180	)%
Investments		223			(14	)		N/M
Commissions and fees		—			3			(100	)%
Asset management, distribution and administration fees		1,056			1,043			1	%
Other		8			31			(74	)%
Total non-interest revenues		1,273			1,059			20	%
Interest income		2			4			(50	)%
Interest expense		1			3			(67	)%
Net interest		1			1			—	%
Net revenues		1,274			1,060			20	%
Compensation and benefits		567			451			26	%
Non-compensation expenses		462			447			3	%
Total non-interest expenses		1,029			898			15	%
Income from continuing operations before income taxes		245			162			51	%
Provision for income taxes		71			47			51	%
Net income		174			115			51	%
Net income (loss) applicable to noncontrolling interests		7			(13	)		(154	)%
Net income applicable to Morgan Stanley	$	167		$	128			30	%

N/M – Not Meaningful

Net Revenues

Investments

•

Investments gains of $125 million in the current quarter compared with Investment gains of $50 million in the prior quarter reflected higher realized gains and higher carried interest in Infrastructure and Private Equity investments.

•

Investments gains of $223 million in the current year period reflected gains and positive carried interest in all Alternative/Other products. Investments losses in the prior year period reflected losses and the reversal of previously accrued carried interest in certain Private Equity and Real Estate investments.

Asset Management, Distribution and Administration Fees

•

Asset management, distribution and administration fees of $539 million increased 4% in the current quarter compared to the prior year quarter primarily as a result of higher average assets under management or supervision (“AUM”) in Equity and Fixed income products, with higher performance fees, partially offset by lower fee rates in Liquidity products and Alternative/Other products.

•

Asset management, distribution and administration fees of $1,056 million were relatively unchanged in the current year period, reflecting higher average AUM in Equity and Fixed income products, essentially offset by lower fee rates in Alternative/Other products.

See “AUM and Average Fee Rate by Asset Class” herein.

Non-interest Expenses

Non-interest expenses of $523 million in the current quarter and $1,029 million in the current year period increased 12% and 15% from the comparable periods primarily due to higher Compensation and benefit expenses.

•

Compensation and benefits expenses increased in the current quarter and current year period principally due to an increase in deferred compensation associated with carried interest.

•

Non-compensation expenses increased in the current quarter and current year period primarily due to higher brokerage, clearing and exchange fees, partially offset by lower professional service fees.


June 2017 Form 10-Q		16


Management’s Discussion and Analysis

Assets Under Management or Supervision

AUM and Average Fee Rate by Asset Class

For a description of the rollforward items in the following tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Investment Management—Assets Under Management or Supervision” in Part II, Item 7 of the 2016 Form 10-K.


	At March 31, 2017		Inflows		Outflows			Market Impact		Other¹			At June 30, 2017		Average for the Three Months Ended June 30, 2017
$ in billions, Fee Rate in bps	At March 31, 2017		Inflows		Outflows			Market Impact		Other¹			At June 30, 2017		Total AUM		Fee Rate

Equity	$	87	$	6	$	(5	)	$	5	$	1		$	94	$	91		73
Fixed income		62		8		(6	)		1		1			66		64		33
Liquidity		153		308		(308	)		—		1			154		153		17
Alternative / Other products		119		6		(6	)		3		(1	)		121		120		70
Total assets under management or supervision	$	421	$	328	$	(325	)	$	9	$	2		$	435	$	428		46
Shares of minority stake assets		7												8		8

	At March 31, 2016		Inflows		Outflows			Market Impact		Other¹			At June 30, 2016		Average for the Three Months Ended June 30, 2016
$ in billions, Fee Rate in bps	At March 31, 2016		Inflows		Outflows			Market Impact		Other¹			At June 30, 2016		Total AUM		Fee Rate

Equity	$	81	$	5	$	(6	)	$	1	$	—		$	81	$	81		74
Fixed income		62		7		(8	)		—		—			61		61		32
Liquidity		146		291		(289	)		1		—			149		146		19
Alternative / Other products		116		9		(10	)		1		(1	)		115		116		74
Total assets under management or supervision	$	405	$	312	$	(313	)	$	3	$	(1	)	$	406	$	404		48
Shares of minority stake assets		8												8		8

	At December 31, 2016		Inflows		Outflows			Market Impact		Other¹			At June 30, 2017		Average for the Six Months Ended June 30, 2017
$ in billions, Fee Rate in bps	At December 31, 2016		Inflows		Outflows			Market Impact		Other¹			At June 30, 2017		Total AUM		Fee Rate

Equity	$	79	$	11	$	(10	)	$	13	$	1		$	94	$	87		74
Fixed income		60		13		(11	)		2		2			66		63		33
Liquidity		163		636		(646	)		—		1			154		155		18
Alternative / Other products		115		13		(10	)		4		(1	)		121		119		70
Total assets under management or supervision	$	417	$	673	$	(677	)	$	19	$	3		$	435	$	424		46
Shares of minority stake assets		8												8		8

	At December 31, 2015		Inflows		Outflows			Market Impact		Other¹			At June 30, 2016		Average for the Six Months Ended June 30, 2016
$ in billions, Fee Rate in bps	At December 31, 2015		Inflows		Outflows			Market Impact		Other¹			At June 30, 2016		Total AUM		Fee Rate

Equity	$	83	$	10	$	(12	)	$	—		—		$	81	$	80		73
Fixed income		60		12		(14	)		2		1			61		60		32
Liquidity		149		627		(627	)		—		—			149		148		18
Alternative / Other products		114		14		(14	)		1		—			115		115		77
Total assets under management or supervision	$	406	$	663	$	(667	)	$	3		1		$	406	$	403		48
Shares of minority stake assets		8												8		8

bps—Basis points

1.	Includes distributions and foreign currency impact.


		17		June 2017 Form 10-Q


Management’s Discussion and Analysis

Supplemental Financial Information and Disclosures

U.S. Bank Subsidiaries

We provide loans to a variety of customers, from large corporate and institutional clients to high net worth individuals, primarily through our U.S. bank subsidiaries, Morgan Stanley Bank, N.A. (“MSBNA”) and Morgan Stanley Private Bank, National Association (“MSPBNA”) (collectively, “U.S. Bank Subsidiaries”). The lending activities in the Institutional Securities business segment primarily include loans or lending commitments to corporate clients. The lending activities in the Wealth Management business segment primarily include securities-based lending that allows clients to borrow money against the value of qualifying securities and also include residential real estate loans. We expect our lending activities to continue to grow through further market penetration of the Wealth Management business segment’s client base. For a further discussion of our credit risks, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk.” For further discussion about loans and lending commitments, see Notes 7 and 11 to the consolidated financial statements.

U.S. Bank Subsidiaries’ Supplemental Financial Information Excluding Transactions with the Parent Company


$ in billions	At June 30, 2017		At December 31, 2016
U.S. Bank Subsidiaries assets	$	175.4	$	180.7
U.S. Bank Subsidiaries investment securities portfolio:
Investment securities—AFS		38.3		50.3
Investment securities—HTM		15.3		13.6
Total	$	53.6	$	63.9

Wealth Management U.S. Bank Subsidiaries data
Securities-based lending and other loans¹	$	39.4	$	36.0
Residential real estate loans		25.7		24.4
Total	$	65.1	$	60.4

Institutional Securities U.S. Bank Subsidiaries data
Corporate loans	$	20.0	$	20.3
Wholesale real estate loans		10.7		9.9
Total	$	30.7	$	30.2

AFS—Available for sale

HTM—Held to maturity

1.	Other loans primarily include tailored lending.

AFS Investment securities in our U.S. Bank Subsidiaries decreased as of June 30, 2017 as compared with December 31, 2016 primarily as a result of sales of securities to fund changes in our liquidity profile including deposit outflows, growth in loans and growth in HTM securities.

Income Tax Matters

Effective Tax Rate


	Three Months Ended June 30,					Six Months Ended June 30,
		2017		2016			2017		2016
From continuing operations		32.0	%	33.5	%		30.5	%	33.4	%

The effective tax rate for the current year period includes net discrete tax benefits of $110 million, primarily resulting from a $128 million recurring-type benefit in the current year period associated with the adoption of new accounting guidance related to employee share-based payments. See Note 2 to the consolidated financial statements for information on the adoption of the accounting update Improvements to Employee Share-Based Payment Accounting.

Accounting Development Updates

The Financial Accounting Standards Board issued accounting updates that apply to us but are not yet effective for the Firm.

Accounting updates not listed below were assessed and determined to be either not applicable or are not expected to have a significant impact on our consolidated financial statements.

The following accounting updates are currently being evaluated to determine the potential impact of adoption:

•

Revenue from Contracts with Customers. This accounting update aims to clarify the principles of revenue recognition, to develop a common revenue recognition standard across all industries for U.S. GAAP and to provide enhanced disclosures for users of the financial statements. The core principle of this guidance is that an entity should recognize revenues to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We will adopt the guidance on January 1, 2018 and expect to apply the modified retrospective method of adoption.

We expect this accounting update to potentially change the timing and presentation of certain revenues, as well as the timing and presentation of certain related costs for Investment banking fees and Asset management, distribution and administration fees. Subject to the resolution of certain industry interpretations, these changes are not expected to be significant.

The recognition of performance fees from fund management activities in the form of carried interest that are subject to reversal is expected to remain essentially unchanged. We expect to apply the equity method of accounting to such carried interest, thus excluding them from the scope of this standard.


June 2017 Form 10-Q		18


Management’s Discussion and Analysis

We will continue to assess the impact of the new standard as we progress through the implementation process and as industry interpretations are resolved; therefore, additional impacts may be identified prior to adoption.

•

Leases. This accounting update requires lessees to recognize on the balance sheet all leases with terms exceeding one year, which results in the recognition of a right of use asset and corresponding lease liability, including for those leases that we currently classify as operating leases. The right of use asset and lease liability will initially be measured using the present value of the remaining rental payments. The accounting for leases where we are the lessor is largely unchanged. This update is effective as of January 1, 2019.

•

Financial Instruments–Credit Losses. This accounting update impacts the impairment model for certain financial assets measured at amortized cost such as loans held for investment and HTM securities. The amendments in this update will accelerate the recognition of credit losses by replacing the incurred loss impairment methodology with a current expected credit loss (“CECL”) methodology that requires an estimate of expected credit losses over the entire life of the financial asset. Additionally, although the CECL methodology will not apply to AFS debt securities, the update will require establishment of an allowance to reflect impairment of these securities, thereby eliminating the concept of a permanent write-down. This update is effective as of January 1, 2020.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions (see Note 1 to the consolidated financial statements). We believe that of our significant accounting policies (see Note 2 to the consolidated financial statements in Item 8 of the 2016 Form 10-K and Note 2 to the consolidated financial statements), the fair value, goodwill and intangible assets, legal and regulatory contingencies and income taxes policies involve a higher degree of judgment and complexity. For a further discussion about our critical accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in Part II, Item 7 of the 2016 Form 10-K.

Liquidity and Capital Resources

Senior management establishes liquidity and capital policies. Through various risk and control committees, senior management reviews business performance relative to these policies, monitors the availability of alternative sources of financing, and oversees the liquidity, interest rate and currency sensitivity of our asset and liability position. The Treasury Department, Firm Risk Committee, Asset and Liability Management Committee, and other committees and control groups assist in evaluating, monitoring and controlling the impact that our business activities have on our consolidated balance sheets, liquidity and capital structure. Liquidity and capital matters are reported regularly to the Board of Directors (the “Board”) and the Board’s Risk Committee.

The Balance Sheet

We monitor and evaluate the composition and size of our balance sheet on a regular basis. Our balance sheet management process includes quarterly planning, business-specific thresholds, monitoring of business-specific usage versus key performance metrics and new business impact assessments.

We establish balance sheet thresholds at the consolidated and business segment levels. We monitor balance sheet utilization and review variances resulting from business activity or market fluctuations. On a regular basis, we review current performance versus established thresholds and assess the need to re-allocate our balance sheet based on business unit needs. We also monitor key metrics, including asset and liability size and capital usage.

Total Assets by Business Segment

At June 30, 2017

$ in millions

Institutional
Securities

Wealth
Management

Investment
Management

Total

Assets

Cash and cash equivalents¹

30,203

14,391

44,659

Trading assets at fair value

288,255

2,470

290,802

Investment securities

18,077

53,499

—

71,576

Securities purchased under agreements to resell

90,490

6,918

—

97,408

Securities borrowed

126,428

294

—

126,722

Customer and other receivables

35,954

18,380

583

54,917

Loans, net of allowance

32,528

65,106

97,639

Other assets²

43,668

12,070

1,555

57,293

Total assets

665,603

170,735

4,678

841,016


		19		June 2017 Form 10-Q


Management’s Discussion and Analysis


	At December 31, 2016
$ in millions	Institutional Securities		Wealth Management		Investment Management		Total
Assets
Cash and cash equivalents¹	$	25,291	$	18,022	$	68	$	43,381
Trading assets at fair value		259,680		64		2,410		262,154
Investment securities		16,222		63,870		—		80,092
Securities purchased under agreements to resell		96,735		5,220		—		101,955
Securities borrowed		124,840		396		—		125,236
Customer and other receivables		26,624		19,268		568		46,460
Loans, net of allowance		33,816		60,427		5		94,248
Other assets²		45,941		13,868		1,614		61,423
Total assets	$	629,149	$	181,135	$	4,665	$	814,949

1.	Cash and cash equivalents include cash and due from banks and interest bearing deposits with banks.

2.	Other assets primarily includes Cash deposited with clearing organizations or segregated under federal and other regulations or requirements; Other investments; Premises, equipment and software costs; Goodwill; Intangible assets and deferred tax assets.

A substantial portion of total assets consists of liquid marketable securities and short-term receivables arising principally from sales and trading activities in the Institutional Securities business segment. Total assets increased to $841.0 billion at June 30, 2017 from $814.9 billion at December 31, 2016, primarily driven by an increase in trading inventory within Institutional Securities. The increase reflects higher market values for corporate equities compared with December 31, 2016, along with increased trading activity across fixed income products including U.S. government and agency securities and Other sovereign government obligations.

Securities Repurchase Agreements and Securities Lending

Securities borrowed or securities purchased under agreements to resell and securities loaned or securities sold under agreements to repurchase are treated as collateralized financings (see Note 2 to the consolidated financial statements in the 2016 Form 10-K and Note 6 to the consolidated financial statements).

Collateralized Financing Transactions


$ in millions	At June 30, 2017		At December 31, 2016
Securities purchased under agreements to resell and Securities borrowed¹	$	224,130	$	227,191
Securities sold under agreements to repurchase and Securities loaned¹	$	67,559	$	70,472
Securities received as collateral²	$	14,408	$	13,737


	Daily Average Balance Three Months Ended
$ in millions	June 30, 2017		December 31, 2016
Securities purchased under agreements to resell and Securities borrowed¹	$	220,045	$	224,355
Securities sold under agreements to repurchase and Securities loaned¹	$	72,040	$	68,908

1.	Differences between period end balances and average balances were not significant.

2.	Included in Trading assets in the consolidated balance sheets.

Customer Securities Financing

The customer receivable portion of the securities financing transactions primarily includes customer margin loans, collateralized by customer-owned securities, which are segregated in accordance with regulatory requirements. The customer payable portion of the securities financing transactions primarily includes payables to our prime brokerage customers. Our risk exposure on these transactions is mitigated by collateral maintenance policies that limit our credit exposure to customers and liquidity reserves held against this risk exposure.

Liquidity Risk Management Framework

The primary goal of our Liquidity Risk Management Framework is to ensure that we have access to adequate funding across a wide range of market conditions and time horizons. The framework is designed to enable us to fulfill our financial obligations and support the execution of our business strategies.

The core components of our Liquidity Risk Management Framework are the Required Liquidity Framework, Liquidity Stress Tests and the Global Liquidity Reserve (“GLR”), which support our target liquidity profile. For further discussion about the Firm’s Required Liquidity Framework and Liquidity Stress Tests, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Liquidity and Capital Resources—Liquidity Risk Management Framework” in Part II, Item 7 of the 2016 Form 10-K.

At June 30, 2017 and December 31, 2016, we maintained sufficient liquidity to meet current and contingent funding obligations as modeled in our Liquidity Stress Tests.

Global Liquidity Reserve

We maintain sufficient global liquidity reserves pursuant to our Required Liquidity Framework. For further discussion of our GLR, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management Framework—Global Liquidity Reserve” in Part II, Item 7 of the 2016 Form 10-K.


June 2017 Form 10-Q		20


Management’s Discussion and Analysis

GLR by Type of Investment


$ in millions	At June 30, 2017		At December 31, 2016
Cash deposits with banks	$	10,057	$	8,679
Cash deposits with central banks		29,427		30,568
Unencumbered highly liquid securities:
U.S. government obligations		71,336		78,615
U.S. agency and agency mortgage-backed securities		52,967		46,360
Non-U.S. sovereign obligations¹		21,290		30,884
Other investment grade securities		3,219		7,191
Total	$	188,296	$	202,297

1.	Non-U.S. sovereign obligations are primarily composed of unencumbered German, French, Dutch, U.K. and Japanese government obligations.

GLR Managed by Bank and Non-Bank Legal Entities

June 30,
2017

December 31,
2016

Daily Average
Balance
Three Months
Ended

$ in millions

June 30,
2017

Bank legal entities

Domestic

62,897

74,411

65,976

Foreign

4,145

4,238

3,949

Total Bank legal entities

67,042

78,649

69,925

Non-Bank legal entities

Domestic:

Parent Company

48,987

66,514

56,070

Non-Parent Company

32,953

18,801

31,557

Total Domestic

81,940

85,315

87,627

Foreign

39,314

38,333

42,620

Total Non-Bank legal entities

121,254

123,648

130,247

Total

188,296

202,297

200,172

The reduction in total GLR as of June 30, 2017 compared with December 31, 2016, reflecting the decrease in our AFS Investment securities, was primarily related to the reduction in our deposits balance and growth in loans.

Regulatory Liquidity Framework

Liquidity Coverage Ratio

The Basel Committee on Banking Supervision’s (“Basel Committee”) Liquidity Coverage Ratio (“LCR”) standard is designed to ensure that banking organizations have sufficient high-quality liquid assets (“HQLA”) to cover net cash outflows arising from significant stress over 30 calendar days. The standard’s objective is to promote the short-term resilience of the liquidity risk profile of banking organizations. We and our U.S. Bank Subsidiaries are subject to the LCR requirements issued by U.S. banking regulators (“U.S. LCR”), which are based on the Basel Committee’s LCR, including a requirement to calculate each entity’s U.S. LCR on each business day.

HQLA by Type of Asset


$ in millions	At June 30, 2017		At December 31, 2016
Cash¹	$	29,608	$	30,569
Securities²		138,666		129,524
Total³	$	168,274	$	160,093

1.	Cash on deposit with central banks.

2.	Primarily includes U.S. Treasuries; U.S. agency mortgage-backed securities; sovereign bonds; investment-grade corporate bonds; and publicly traded common equities.

3.	Excludes excess HQLA held at U.S. Bank Subsidiaries.

The regulatory definition of HQLA is substantially the same as our GLR. Differences include cash placed at institutions other than central banks, which is included in our GLR but considered an inflow for LCR purposes, and certain unencumbered investment grade corporate bonds and publicly traded common equities, which are includable in HQLA but do not meet the definition of GLR.

We and our U.S. Bank Subsidiaries are required to maintain a minimum of 100% of the fully phased-in U.S. LCR. We and our U.S. Bank Subsidiaries are compliant with the minimum required U.S. LCR based on current interpretations.

Net Stable Funding Ratio

The objective of the Net Stable Funding Ratio (“NSFR”) is to reduce funding risk over a one-year horizon by requiring banking organizations to fund their activities with sufficiently stable sources of funding in order to mitigate the risk of future funding stress.

The Basel Committee finalized the NSFR framework in 2014. In May 2016, the U.S. banking regulators issued a proposal to implement the NSFR in the U.S. If adopted as proposed, the requirements would apply to us and our U.S. Bank Subsidiaries beginning January 1, 2018. We continue to evaluate the potential impact of the proposal, which is subject to further rulemaking procedures following the closing of the public comment period in August 2016. Our preliminary estimates, based on the current proposal, indicate that actions will be necessary to meet the requirement, which we expect to accomplish by the effective date of the final rule. For an additional discussion of NSFR, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Liquidity Framework—Net Stable Funding Ratio” in Part II, Item 7 of the 2016 Form 10-K.


		21		June 2017 Form 10-Q


Management’s Discussion and Analysis

Funding Management

We manage our funding in a manner that reduces the risk of disruption to our operations. We pursue a strategy of diversification of secured and unsecured funding sources (by product, investor and region) and attempt to ensure that the tenor of our liabilities equals or exceeds the expected holding period of the assets being financed.

We fund our balance sheet on a global basis through diverse sources. These sources may include our equity capital, long-term borrowings, securities sold under agreements to repurchase (“repurchase agreements”), securities lending, deposits, letters of credit and lines of credit. We have active financing programs for both standard and structured products targeting global investors and currencies.

Secured Financing

For a discussion of our secured financing activities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Funding Management—Secured Financing” in Part II, Item 7 of the 2016 Form 10-K.

At June 30, 2017 and December 31, 2016, the weighted average maturity of our secured financing of less liquid assets was greater than 120 days.

Unsecured Financing

For a discussion of our unsecured financing activities, see “Management’s Discussion and Analysis of Financing Condition and Results of Operations—Liquidity and Capital Resources—Funding Management—Unsecured Financing” in Part II, Item 7 of the 2016 Form 10-K and see Note 4 to the consolidated financial statements.

Deposits


$ in millions	At June 30, 2017		At December 31, 2016
Deposits	$	144,913	$	155,863

The majority of deposits in our U.S. Bank Subsidiaries are sourced from our retail brokerage accounts and are considered to have stable, low-cost funding characteristics. Available funding sources to our U.S. Bank Subsidiaries include demand deposit accounts, money market deposit accounts, time deposits, repurchase agreements, federal funds purchased and Federal Home Loan Bank advances. The reduction in Deposits as of June 30, 2017 compared with December 31, 2016 was primarily due to client deployment of cash into the markets and typical seasonal client tax payments.

Short-Term Borrowings

$ in millions

June 30, 2017

December 31, 2016

Short-term borrowings

916

941

Our unsecured short-term borrowings primarily consist of structured notes, bank loans and bank notes with original maturities of 12 months or less.

Long-Term Borrowings

We believe that accessing debt investors through multiple distribution channels helps provide consistent access to the unsecured markets. In addition, the issuance of long-term borrowings allows us to reduce reliance on short-term credit sensitive instruments. Long-term borrowings are generally managed to achieve staggered maturities, thereby mitigating refinancing risk, and to maximize investor diversification through sales to global institutional and retail clients across regions, currencies and product types. Availability and cost of financing to us can vary depending on market conditions, the volume of certain trading and lending activities, our credit ratings and the overall availability of credit.

We may engage in various transactions in the credit markets (including, for example, debt retirements) that we believe are in our investors’ best interests.

Long-term Borrowings by Maturity at June 30, 2017

$ in millions

Parent
Company

Subsidiaries

Total

2017

8,742

4,079

12,821

2018

18,532

2,044

20,576

2019

21,738

1,567

23,305

2020

19,238

1,860

21,098

2021

15,826

1,350

17,176

Thereafter

80,485

8,651

89,136

Total

164,561

19,551

184,112

Maturities over next 12 months

28,823

Approximate net increase in long-term borrowings June 30, 2017 through July 28, 2017

7,518

Includes:

Senior debt issuance on July 24, 2017

7,000

For further information on long-term borrowings, see Note 10 to the consolidated financial statements.


June 2017 Form 10-Q		22


Management’s Discussion and Analysis

Credit Ratings

We rely on external sources to finance a significant portion of our daily operations. The cost and availability of financing generally are impacted by our credit ratings, among other things. In addition, our credit ratings can have an impact on certain trading revenues, particularly in those businesses where longer-term counterparty performance is a key consideration, such as OTC derivative transactions, including credit derivatives and interest rate swaps. Rating agencies consider company-specific factors; other industry factors such as regulatory or legislative changes and the macroeconomic environment, among other things.

Our credit ratings do not include any uplift from perceived government support from any rating agency given the significant progress of the U.S. financial reform legislation and regulations. Some rating agencies have stated that they currently incorporate various degrees of credit rating uplift from non-governmental third-party sources of potential support.

Parent Company and MSBNA’s Senior Unsecured Ratings at July 28, 2017


	Parent Company
	Short-term Debt	Long-term Debt	Rating Outlook
DBRS, Inc.	R-1 (middle)	A (high)	Stable
Fitch Ratings, Inc.	F1	A	Stable
Moody’s Investors Service, Inc.	P-2	A3	Stable
Rating and Investment Information, Inc.	a-1	A-	Stable
Standard & Poor’s Global Ratings	A-2	BBB+	Stable


	Morgan Stanley Bank, N.A.
	Short-term Debt	Long-term Debt	Rating Outlook
Fitch Ratings, Inc.	F1	A+	Stable
Moody’s Investors Service, Inc.	P-1	A1	Stable
Standard & Poor’s Global Ratings	A-1	A+	Stable

In connection with certain OTC trading agreements and certain other agreements where we are a liquidity provider to certain financing vehicles associated with the Institutional Securities business segment, we may be required to provide additional collateral, immediately settle any outstanding liability balances with certain counterparties or pledge additional collateral to certain exchanges and clearing organizations in the event of a future credit rating downgrade irrespective of whether we are in a net asset or net liability position.

The additional collateral or termination payments that may be called in the event of a future credit rating downgrade vary by contract and can be based on ratings by either or both of Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Global Ratings (“S&P”). The following table shows

the future potential collateral amounts and termination payments that could be called or required by counterparties or exchanges and clearing organizations in the event of one-notch or two-notch downgrade scenarios, from the lowest of Moody’s or S&P ratings, based on the relevant contractual downgrade triggers.

Incremental Collateral or Terminating Payments upon Potential Future Rating Downgrade


$ in millions	At June 30, 2017		At December 31, 2016
One-notch downgrade	$	950	$	1,292
Two-notch downgrade		720		875

While certain aspects of a credit rating downgrade are quantifiable pursuant to contractual provisions, the impact it would have on our business and results of operations in future periods is inherently uncertain and would depend on a number of interrelated factors, including, among others, the magnitude of the downgrade, the rating relative to peers, the rating assigned by the relevant agency pre-downgrade, individual client behavior and future mitigating actions we might take. The liquidity impact of additional collateral requirements is included in our Liquidity Stress Tests.

Capital Management

We view capital as an important source of financial strength and actively manage our consolidated capital position based upon, among other things, business opportunities, risks, capital availability and rates of return together with internal capital policies, regulatory requirements and rating agency guidelines and, therefore, in the future may expand or contract our capital base to address the changing needs of our businesses. We attempt to maintain total capital, on a consolidated basis, at least equal to the sum of our operating subsidiaries’ required equity.

Common Stock

We repurchased approximately $500 million of our outstanding common stock as part of our share repurchase program during the current quarter and $1,250 million during the current year period. We repurchased approximately $625 million during the prior year quarter and $1,250 million in the prior year period (see Note 14 to the consolidated financial statements).

For a description of our share repurchase program, see “Unregistered Sales of Equity Securities and Use of Proceeds.”

For a description of our 2017 capital plan, see “Liquidity and Capital Resources—Regulatory Requirements—Capital Plans and Stress Tests.”


		23		June 2017 Form 10-Q


Management’s Discussion and Analysis

Preferred Stock

On June 15, 2017, we announced that the Board declared quarterly dividends for preferred stock shareholders of record on June 30, 2017 that were paid on July 17, 2017.

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

Tangible Equity


	At June 30, 2017			At December 31, 2016			Monthly Average Balance Three Months Ended
$ in millions	At June 30, 2017			At December 31, 2016			June 30, 2017
Common equity	$	70,306		$	68,530		$	69,916
Preferred equity		8,520			7,520			8,520
Morgan Stanley shareholders’ equity		78,826			76,050			78,436
Less: Goodwill and net intangible assets		(9,156	)		(9,296	)		(9,194	)
Morgan Stanley tangible shareholders’ equity¹	$	69,670		$	66,754		$	69,242
Common equity	$	70,306		$	68,530		$	69,916
Less: Goodwill and net intangible assets		(9,156	)		(9,296	)		(9,194	)
Tangible common equity¹	$	61,150		$	59,234		$	60,722

1.	Morgan Stanley tangible shareholders’ equity and tangible common equity are non-GAAP financial measures.

Regulatory Requirements

Regulatory Capital Framework

We are a financial holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and are subject to the regulation and oversight of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Federal Reserve establishes capital requirements for us, including well-capitalized standards, and evaluates our compliance with such capital requirements. The Office of the Comptroller of the Currency (“OCC”) establishes similar capital requirements and standards for our U.S. Bank Subsidiaries. The regulatory capital requirements are largely based on the Basel III capital standards established by the Basel Committee and also implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).

The Basel Committee has recently published revisions to certain standards in its capital framework, and is actively considering potential revisions to other capital standards, that, if adopted by the U.S. banking agencies, could substantially change the U.S. regulatory capital framework. For additional discussion of regulatory capital framework, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Regulatory Capital Framework” in Part II, Item 7 of the 2016 Form 10-K.

Regulatory Capital Requirements

We are required to maintain minimum risk-based and leverage capital ratios under the regulatory capital requirements. A summary of the calculations of regulatory capital, risk-weighted assets (“RWAs”) and transition provisions follows.

Regulatory Capital. Minimum risk-based capital ratio requirements apply to Common Equity Tier 1 capital, Tier 1 capital and Total capital (which includes Tier 2 capital). Certain adjustments to and deductions from capital are required for purposes of determining these ratios, such as goodwill, intangible assets, certain deferred tax assets, other amounts in Accumulated other comprehensive income (loss) (“AOCI”) and investments in the capital instruments of unconsolidated financial institutions. Certain of these adjustments and deductions are also subject to transitional provisions.

In addition to the minimum risk-based capital ratio requirements, on a fully phased-in basis by 2019, we will be subject to:

•

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

•

The Common Equity Tier 1 global systemically important bank (“G-SIB”) capital surcharge, currently at 3%; and

•

Up to a 2.5% Common Equity Tier 1 countercyclical capital buffer (“CCyB”), currently set by U.S. banking regulators at zero (collectively, the “buffers”).

In 2017, the phase-in amount for each of the buffers is 50% of the fully phased-in buffer requirement. Failure to maintain the buffers would result in restrictions on our ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers. For a further discussion of the G-SIB capital surcharge, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—G-SIB Capital Surcharge” in Part II, Item 7 of the 2016 Form 10-K.

See “Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements” herein for additional capital requirements effective January 1, 2019.

Risk-Weighted Assets. RWAs reflect both our on- and off-balance sheet risk as well as capital charges attributable to the risk of loss arising from the following:

•

Credit risk: The failure of a borrower, counterparty or issuer to meet its financial obligations to us;


June 2017 Form 10-Q		24


Management’s Discussion and Analysis

•

Market risk: Adverse changes in the level of one or more market prices, rates, indices, implied volatilities, correlations or other market factors, such as market liquidity; and

•

Operational risk: Inadequate or failed processes or systems, human factors or from external events (e.g., fraud, theft, legal and compliance risks, cyber attacks or damage to physical assets).

For a further discussion of our market, credit and operational risks, see “Quantitative and Qualitative Disclosures about Market Risk.”

Our binding risk-based capital ratios for regulatory purposes are the lower of the capital ratios computed under (i) the standardized approaches for calculating credit risk and market risk RWAs (the “Standardized Approach”) and (ii) the applicable advanced approaches for calculating credit risk, market risk and operational risk RWAs (the “Advanced Approach”). The credit risk RWA calculations between the two approaches differ in that the Standardized Approach requires calculation of RWAs using prescribed risk weights, whereas the Advanced Approach utilizes models to calculate exposure amounts and risk weights. At June 30, 2017, our binding ratios are based on the Advanced Approach transitional rules.

The methods for calculating each of our risk-based capital ratios will change through January 1, 2022 as aspects of the capital rules are phased in. These changes may result in differences in our reported capital ratios from one reporting period to the next that are independent of changes to our capital base, asset composition, off-balance sheet exposures or risk profile.

Minimum Risk-Based Capital Ratios: Transitional Provisions

LOGO

1.	These ratios assume the requirements for the G-SIB capital surcharge (3.0%) and CCyB (zero) remain at current levels. See “Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements” herein for additional capital requirements effective January 1, 2019.

Transitional and Fully Phased-In Regulatory Capital Ratios

At June 30, 2017

Transitional

Pro Forma Fully Phased-In

$ in millions

Standardized

Advanced

Standardized

Advanced

Risk-based capital

Common Equity Tier 1 capital

61,604

60,862

Tier 1 capital

70,380

69,603

Total capital

81,302

81,025

80,537

80,261

Total RWAs

368,963

370,679

379,191

381,520

Common Equity Tier 1 capital ratio

16.7

16.6

16.1

16.0

Tier 1 capital ratio

19.1

19.0

18.4

18.2

Total capital ratio

22.0

21.9

21.2

21.0

Leverage-based capital

Adjusted average assets¹

828,365

N/A

827,842

N/A

Tier 1 leverage ratio²

8.5

N/A

8.4

N/A


		At December 31, 2016
		Transitional						Pro Forma Fully Phased-In
$ in millions	Standardized			Advanced			Standardized			Advanced
Risk-based capital
Common Equity Tier 1 capital	$	60,398		$	60,398		$	58,616		$	58,616
Tier 1 capital		68,097			68,097			66,315			66,315
Total capital		78,917			78,642			77,155			76,881
Total RWAs		340,191			358,141			351,101			369,709
Common Equity Tier 1 capital ratio		17.8	%		16.9	%		16.7	%		15.9	%
Tier 1 capital ratio		20.0	%		19.0	%		18.9	%		17.9	%
Total capital ratio		23.2	%		22.0	%		22.0	%		20.8	%
Leverage-based capital
Adjusted average assets¹	$	811,402			N/A		$	810,288			N/A
Tier 1 leverage ratio²		8.4	%		N/A			8.2	%		N/A

N/A—Not Applicable

Adjusted average assets represent the denominator of the Tier 1 leverage ratio and are composed of the average daily balance of consolidated on-balance sheet assets under U.S. GAAP during the calendar quarter ended June 30, 2017 and December 31, 2016 adjusted for disallowed goodwill, transitional intangible assets, certain deferred tax assets, certain investments in the capital instruments of unconsolidated financial institutions and other adjustments.

2.	The minimum Tier 1 leverage ratio requirement is 4.0%.

The fully phased-in pro forma estimates in the previous tables are based on our current understanding of the capital rules and other factors, which may be subject to change as we receive additional clarification and implementation guidance from the Federal Reserve and as the interpretation of the regulations evolves over time. These fully phased-in pro forma estimates are non-GAAP financial measures because they were not yet effective at June 30, 2017. These preliminary estimates are subject to risks and uncertainties that may cause actual results to differ materially and should not be taken as a projection of what our capital, capital ratios, RWAs, earnings or other results will actually be at future dates. For a discussion of risks and uncertainties that may affect our future results, see “Risk Factors” in Part I, Item 1A of the 2016 Form 10-K.


		25		June 2017 Form 10-Q


Management’s Discussion and Analysis

Well-Capitalized Minimum Regulatory Capital Ratios for U.S. Bank Subsidiaries


	At June 30, 2017
Common Equity Tier 1 risk-based capital ratio		6.5%
Tier 1 risk-based capital ratio		8.0%
Total risk-based capital ratio		10.0%
Tier 1 leverage ratio		5.0%

For us to remain a financial holding company, our U.S. Bank Subsidiaries must qualify as well-capitalized by maintaining the minimum ratio requirements set forth in the previous table. The Federal Reserve has not yet revised the well-capitalized standard for financial holding companies to reflect the higher capital standards required for us under the capital rules. Assuming that the Federal Reserve would apply the same or very similar well-capitalized standards to financial holding companies, each of our risk-based capital ratios and Tier 1 leverage ratio at June 30, 2017 would have exceeded the revised well-capitalized standard. The Federal Reserve may require us to maintain risk- and leverage-based capital ratios substantially in excess of mandated minimum levels, depending upon general economic conditions and a financial holding company’s particular condition, risk profile and growth plans.

Regulatory Capital Calculated under Transitional Rules


$ in millions	At June 30, 2017			At December 31, 2016
Common Equity Tier 1 capital
Common stock and surplus	$	16,469		$	17,494
Retained earnings		56,325			53,679
AOCI		(2,488	)		(2,643	)
Regulatory adjustments and deductions:
Net goodwill		(6,532	)		(6,526	)
Net intangible assets (other than goodwill and mortgage servicing assets)		(2,051	)		(1,631	)
Other adjustments and deductions¹		(119	)		25
Total Common Equity Tier 1 capital	$	61,604		$	60,398
Additional Tier 1 capital
Preferred stock	$	8,520		$	7,520
Noncontrolling interests		489			613
Other adjustments and deductions²		(66	)		(246	)
Additional Tier 1 capital	$	8,943		$	7,887
Deduction for investments in covered funds		(167	)		(188	)
Total Tier 1 capital	$	70,380		$	68,097
Standardized Tier 2 capital
Subordinated debt	$	10,351		$	10,303
Noncontrolling interests		80			62
Eligible allowance for credit losses		493			464
Other adjustments and deductions		(2	)		(9	)
Total Standardized Tier 2 capital	$	10,922		$	10,820
Total Standardized capital	$	81,302		$	78,917
Advanced Tier 2 capital
Subordinated debt	$	10,351		$	10,303
Noncontrolling interests		80			62
Eligible credit reserves		216			189
Other adjustments and deductions		(2	)		(9	)
Total Advanced Tier 2 capital	$	10,645		$	10,545
Total Advanced capital	$	81,025		$	78,642


June 2017 Form 10-Q		26


Management’s Discussion and Analysis

Regulatory Capital Rollforward Calculated under Transitional Rules


$ in millions	Six Months Ended June 30, 2017
Common Equity Tier 1 capital
Common Equity Tier 1 capital at December 31, 2016	$	60,398
Change related to the following items:
Value of shareholders’ common equity		1,776
Net goodwill		(6	)
Net intangible assets (other than goodwill and mortgage servicing assets)		(420	)
Other adjustments and deductions¹		(144	)
Common Equity Tier 1 capital at June 30, 2017	$	61,604
Additional Tier 1 capital
Additional Tier 1 capital at December 31, 2016	$	7,887
New issuance of qualifying preferred stock		1,000
Change related to the following items:
Noncontrolling interests		(124	)