Edgar Filing: MORGAN STANLEY

Form 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

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

EXCHANGE ACT OF 1934

Commission File Number 1-11758

LOGO

(Exact Name of Registrant as specified in its charter)

Delaware

(State or other jurisdiction of

incorporation or organization)

1585 Broadway

New York, NY 10036

(Address of principal executive offices, including zip code)

36-3145972

(I.R.S. Employer Identification No.)

(212) 761-4000

(Registrant’s telephone number, including area code)

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

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

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


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

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

As of October 30, 2015, there were 1,936,223,959 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.

LOGO

QUARTERLY REPORT ON FORM 10-Q

For the quarter ended September 30, 2015


Table of Contents			Page
Part I—Financial Information
Item 1.	Financial Statements (unaudited)			1
		Condensed Consolidated Statements of Income—Three and Nine Months Ended September 30, 2015 and 2014		1
		Condensed Consolidated Statements of Comprehensive Income—Three and Nine Months Ended September 30, 2015 and 2014		2
		Condensed Consolidated Statements of Financial Condition—September 30, 2015 and December 31, 2014		3
		Condensed Consolidated Statements of Changes in Total Equity—Nine Months Ended September 30, 2015 and 2014		4
		Condensed Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2015 and 2014		5
	Notes to Condensed Consolidated Financial Statements (unaudited)			6
		1. Introduction and Basis of Presentation		6
		2. Significant Accounting Policies		7
		3. Fair Values		8
		4. Derivative Instruments and Hedging Activities		30
		5. Investment Securities		43
		6. Collateralized Transactions		49
		7. Loans and Allowance for Credit Losses		52
		8. Equity Method Investments		57
		9. Deposits		57
		10. Long-Term Borrowings and Other Secured Financings		58
		11. Commitments, Guarantees and Contingencies		59
		12. Variable Interest Entities and Securitization Activities		65
		13. Regulatory Requirements		72
		14. Total Equity		75
		15. Earnings per Common Share		79
		16. Interest Income and Interest Expense		80
		17. Employee Benefit Plans		81
		18. Income Taxes		81
		19. Segment and Geographic Information		82
		20. Subsequent Events		85
	Report of Independent Registered Public Accounting Firm			86
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			87
		Introduction		87
		Business Segments		97
		Supplemental Financial Information and Disclosures		116
		Accounting Development Updates		118
		Critical Accounting Policies		119
		Liquidity and Capital Resources		120
Item 3.	Quantitative and Qualitative Disclosures about Market Risk			141
Item 4.	Controls and Procedures			157
Financial Data Supplement (unaudited)				158

Part II—Other Information
Item 1.	Legal Proceedings			164
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			166
Item 5.	Other Information			167
Item 6.	Exhibits			167


		i

AVAILABLE INFORMATION

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

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

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

•

Amended and Restated Certificate of Incorporation;

•

Amended and Restated Bylaws;

•

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

•

Corporate Governance Policies;

•

Policy Regarding Communication with the Board of Directors;

•

Policy Regarding Director Candidates Recommended by Shareholders;

•

Policy Regarding Corporate Political Activities;

•

Policy Regarding Shareholder Rights Plan;

•

Code of Ethics and Business Conduct;

•

Code of Conduct; and

•

Integrity Hotline information.

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


		ii

Part I—Financial Information.

Item 1.

Financial Statements.

MORGAN STANLEY

Condensed Consolidated Statements of Income

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

(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Revenues:
Investment banking	$	1,313		$	1,551		$	4,284		$	4,492
Trading		2,026			2,448			8,649			7,926
Investments		(119	)		138			408			724
Commissions and fees		1,115			1,124			3,459			3,478
Asset management, distribution and administration fees		2,732			2,716			8,155			7,886
Other		(62	)		373			406			873

Total non-interest revenues		7,005			8,350			25,361			25,379

Interest income		1,451			1,384			4,321			3,977
Interest expense		689			827			2,265			2,845

Net interest		762			557			2,056			1,132

Net revenues		7,767			8,907			27,417			26,511

Non-interest expenses:
Compensation and benefits		3,437			4,214			12,366			12,720
Occupancy and equipment		341			350			1,034			1,069
Brokerage, clearing and exchange fees		485			437			1,435			1,338
Information processing and communications		447			396			1,300			1,231
Marketing and business development		158			160			487			472
Professional services		576			522			1,660			1,506
Other		849			608			2,079			1,653

Total non-interest expenses		6,293			6,687			20,361			19,989

Income from continuing operations before income taxes		1,474			2,220			7,056			6,522
Provision for income taxes		423			463			1,704			1,263

Income from continuing operations		1,051			1,757			5,352			5,259

Discontinued operations:
Income (loss) from discontinued operations before income taxes		(4	)		(8	)		(13	)		(11	)
Provision for (benefit from) income taxes		(2	)		(3	)		(4	)		(5	)

Income (loss) from discontinued operations		(2	)		(5	)		(9	)		(6	)

Net income	$	1,049		$	1,752		$	5,343		$	5,253
Net income applicable to nonredeemable noncontrolling interests		31			59			124			156

Net income applicable to Morgan Stanley	$	1,018		$	1,693		$	5,219		$	5,097
Preferred stock dividends and other		79			64			301			199

Earnings applicable to Morgan Stanley common shareholders	$	939		$	1,629		$	4,918		$	4,898

Earnings per basic common share:
Income from continuing operations	$	0.49		$	0.85		$	2.57		$	2.55
Income (loss) from discontinued operations		—			—			—			(0.01	)

Earnings per basic common share	$	0.49		$	0.85		$	2.57		$	2.54

Earnings per diluted common share:
Income from continuing operations	$	0.48		$	0.83		$	2.52		$	2.49
Income (loss) from discontinued operations		—			—			(0.01	)		—

Earnings per diluted common share	$	0.48		$	0.83		$	2.51		$	2.49

Dividends declared per common share	$	0.15		$	0.10		$	0.40		$	0.25
Average common shares outstanding:
Basic		1,904,213,493			1,922,995,835			1,915,807,606			1,925,172,108

Diluted		1,949,281,601			1,970,922,473			1,957,544,581			1,970,091,170

See Notes to Condensed Consolidated Financial Statements.


		1

MORGAN STANLEY

Condensed Consolidated Statements of Comprehensive Income

(dollars in millions)

(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Net income	$	1,049		$	1,752		$	5,343		$	5,253
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments(1)	$	(61	)	$	(327	)	$	(249	)	$	(175	)
Change in net unrealized gains (losses) on available for sale securities(2)		100			(102	)		72			134
Pension, postretirement and other(3)		4			(15	)		3			(7	)

Total other comprehensive income (loss)	$	43		$	(444	)	$	(174	)	$	(48	)

Comprehensive income	$	1,092		$	1,308		$	5,169		$	5,205
Net income applicable to nonredeemable noncontrolling interests		31			59			124			156
Other comprehensive income (loss) applicable to nonredeemable noncontrolling interests		15			(62	)		(3	)		(26	)

Comprehensive income applicable to Morgan Stanley	$	1,046		$	1,311		$	5,048		$	5,075

(1)	Amounts include provision for (benefit from) income taxes of $30 million and $249 million for the quarters ended September 30, 2015 and 2014, respectively, and $150 million and $137 million for the nine months ended September 30, 2015 and 2014, respectively.

(2)	Amounts include provision for (benefit from) income taxes of $57 million and $(70) million for the quarters ended September 30, 2015 and 2014, respectively, and $41 million and $92 million for the nine months ended September 30, 2015 and 2014, respectively.

(3)	Amounts include provision for (benefit from) income taxes of $(2) million and $(7) million for the quarters ended September 30, 2015 and 2014, respectively, and $(2) million and $(4) million for the nine months ended September 30, 2015 and 2014, respectively.

See Notes to Condensed Consolidated Financial Statements.


		2

MORGAN STANLEY

Condensed Consolidated Statements of Financial Condition

(dollars in millions, except share data)

(unaudited)


	September 30, 2015			December 31, 2014
Assets
Cash and due from banks ($13 and $45 at September 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)	$	19,244		$	21,381
Interest bearing deposits with banks		34,274			25,603
Cash deposited with clearing organizations or segregated under federal and other regulations or requirements ($165 and $149 at September 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)		35,552			40,607
Trading assets, at fair value ($129,632 and $127,342 were pledged to various parties at September 30, 2015 and December 31, 2014, respectively) ($834 and $966 at September 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)		237,811			256,801
Investment securities (includes $61,159 and $69,216 at fair value at September 30, 2015 and December 31, 2014, respectively)		64,689			69,316
Securities received as collateral, at fair value		9,456			21,316
Securities purchased under agreements to resell (includes $809 and $1,113 at fair value at September 30, 2015 and December 31, 2014, respectively)		127,206			83,288
Securities borrowed		148,245			136,708
Customer and other receivables		50,070			48,961
Loans:
Held for investment (net of allowances of $173 and $149 at September 30, 2015 and December 31, 2014, respectively)		69,010			57,119
Held for sale		9,199			9,458
Other investments ($364 and $467 at September 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)		4,282			4,355
Premises, equipment and software costs (net of accumulated depreciation of $6,906 and $6,219 at September 30, 2015 and December 31, 2014, respectively) ($187 and $191 at September 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)		6,259			6,108
Goodwill		6,587			6,588
Intangible assets (net of accumulated amortization of $2,050 and $1,824 at September 30, 2015 and December 31, 2014, respectively) (includes $5 and $6 at fair value at September 30, 2015 and December 31, 2014, respectively)		3,069			3,159
Other assets ($57 and $59 at September 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)		9,160			10,742

Total assets	$	834,113		$	801,510

Liabilities
Deposits	$	147,226		$	133,544
Short-term borrowings (includes $1,768 and $1,765 at fair value at September 30, 2015 and December 31, 2014, respectively)		1,982			2,261
Trading liabilities, at fair value		125,525			107,381
Obligation to return securities received as collateral, at fair value		20,328			25,685
Securities sold under agreements to repurchase (includes $597 and $612 at fair value at September 30, 2015 and December 31, 2014, respectively)		58,570			69,949
Securities loaned		20,644			25,219
Other secured financings (includes $3,450 and $4,504 at fair value at September 30, 2015 and December 31, 2014, respectively) ($456 and $348 at September 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally non-recourse to the Company)		10,171			12,085
Customer and other payables		193,775			181,069
Other liabilities and accrued expenses ($3 and $72 at September 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally non-recourse to the Company)		19,129			19,441
Long-term borrowings (includes $31,387 and $31,774 at fair value at September 30, 2015 and December 31, 2014, respectively)		160,343			152,772

Total liabilities		757,693			729,406

Commitments and contingent liabilities (see Note 11)
Equity
Morgan Stanley shareholders’ equity:
Preferred stock (see Note 14)		7,520			6,020
Common stock, $0.01 par value:
Shares authorized: 3,500,000,000 at September 30, 2015 and December 31, 2014;
Shares issued: 2,038,893,979 at September 30, 2015 and December 31, 2014;
Shares outstanding: 1,938,069,312 and 1,950,980,142 at September 30, 2015 and December 31, 2014, respectively		20			20
Additional paid-in capital		23,876			24,249
Retained earnings		48,746			44,625
Employee stock trusts		2,399			2,127
Accumulated other comprehensive loss		(1,419	)		(1,248	)
Common stock held in treasury, at cost, $0.01 par value:
Shares outstanding: 100,824,667 and 87,913,837 at September 30, 2015 and December 31, 2014, respectively		(3,456	)		(2,766	)
Common stock issued to employee stock trusts		(2,399	)		(2,127	)

Total Morgan Stanley shareholders’ equity		75,287			70,900
Nonredeemable noncontrolling interests		1,133			1,204

Total equity		76,420			72,104

Total liabilities and equity	$	834,113		$	801,510

See Notes to Condensed Consolidated Financial Statements.


		3

MORGAN STANLEY

Condensed Consolidated Statements of Changes in Total Equity

Nine Months Ended September 30, 2015 and 2014

(dollars in millions)

(unaudited)


	Preferred Stock		Common Stock		Additional Paid-in Capital			Retained Earnings			Employee Stock Trusts		Accumulated Other Comprehensive Income (Loss)			Common Stock Held in Treasury at Cost			Common Stock Issued to Employee Stock Trusts			Non- redeemable Non- controlling Interests			Total Equity
BALANCE AT DECEMBER 31, 2014	$	6,020	$	20	$	24,249		$	44,625		$	2,127	$	(1,248	)	$	(2,766	)	$	(2,127	)	$	1,204		$	72,104
Net income applicable to Morgan Stanley		—		—		—			5,219			—		—			—			—			—			5,219
Net income applicable to nonredeemable noncontrolling interests		—		—		—			—			—		—			—			—			124			124
Dividends		—		—		—			(1,098	)		—		—			—			—			—			(1,098	)
Shares issued under employee plans and related tax effects		—		—		(356	)		—			272		—			1,445			(272	)		—			1,089
Repurchases of common stock and employee tax withholdings		—		—		—			—			—		—			(2,135	)		—			—			(2,135	)
Net change in Accumulated other comprehensive income		—		—		—			—			—		(171	)		—			—			(3	)		(174	)
Issuance of preferred stock		1,500		—		(7	)		—			—		—			—			—			—			1,493
Deconsolidation of certain legal entities associated with a real estate fund		—		—		—			—			—		—			—			—			(191	)		(191	)
Other net decreases		—		—		(10	)		—			—		—			—			—			(1	)		(11	)

BALANCE AT SEPTEMBER 30, 2015	$	7,520	$	20	$	23,876		$	48,746		$	2,399	$	(1,419	)	$	(3,456	)	$	(2,399	)	$	1,133		$	76,420

BALANCE AT DECEMBER 31, 2013	$	3,220	$	20	$	24,570		$	42,172		$	1,718	$	(1,093	)	$	(2,968	)	$	(1,718	)	$	3,109		$	69,030
Net income applicable to Morgan Stanley		—		—		—			5,097			—		—			—			—			—			5,097
Net income applicable to nonredeemable noncontrolling interests		—		—		—			—			—		—			—			—			156			156
Dividends		—		—		—			(696	)		—		—			—			—			—			(696	)
Shares issued under employee plans and related tax effects		—		—		(627	)		—			409		—			1,638			(409	)		—			1,011
Repurchases of common stock and employee tax withholdings		—		—		—			—			—		—			(1,172	)		—			—			(1,172	)
Net change in Accumulated other comprehensive income		—		—		—			—			—		(22	)		—			—			(26	)		(48	)
Issuance of preferred stock		2,800		—		(18	)		—			—		—			—			—			—			2,782
Deconsolidation of certain legal entities associated with a real estate fund		—		—		—			—			—		—			—			—			(1,606	)		(1,606	)
Other net decreases		—		—		(3	)		—			—		—			—			—			(540	)		(543	)

BALANCE AT SEPTEMBER 30, 2014	$	6,020	$	20	$	23,922		$	46,573		$	2,127	$	(1,115	)	$	(2,502	)	$	(2,127	)	$	1,093		$	74,011

See Notes to Condensed Consolidated Financial Statements.


		4

MORGAN STANLEY

Condensed Consolidated Statements of Cash Flows

(dollars in millions)

(unaudited)


	Nine Months Ended September 30,
	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	5,343		$	5,253
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Income from equity method investments		(118	)		(108	)
Compensation payable in common stock and options		836			933
Depreciation and amortization		1,023			748
Net gain on sale of available for sale securities		(74	)		(36	)
Impairment charges		91			85
Provision for credit losses on lending activities		47			1
Other operating activities		264			(167	)
Changes in assets and liabilities:
Cash deposited with clearing organizations or segregated under federal and other regulations or requirements		5,055			(5,903	)
Trading assets, net of Trading liabilities		39,775			39,156
Securities borrowed		(11,537	)		(10,596	)
Securities loaned		(4,575	)		(5,142	)
Customer and other receivables and other assets		787			2,931
Customer and other payables and other liabilities		10,351			23,335
Securities purchased under agreements to resell		(43,918	)		19,136
Securities sold under agreements to repurchase		(11,313	)		(61,935	)

Net cash provided by (used for) operating activities		(7,963	)		7,691

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from (payments for):
Premises, equipment and software, net		(964	)		(533	)
Business dispositions, net of cash disposed		—			962
Loans:
Purchases, net of proceeds from sales		(1,053	)		(797	)
Originations, net of repayments		(10,260	)		(13,177	)
Investment securities:
Purchases		(32,133	)		(24,581	)
Proceeds from sales		32,788			11,212
Proceeds from paydowns and maturities		4,285			3,415
Other investing activities		(61	)		(264	)

Net cash used for investing activities		(7,398	)		(23,763	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (payments for):
Short-term borrowings		(279	)		(382	)
Nonredeemable noncontrolling interests		(70	)		(189	)
Other secured financings		(1,677	)		(1,725	)
Deposits		13,682			12,003
Proceeds from:
Excess tax benefits associated with stock-based awards		180			91
Derivatives financing activities		392			784
Issuance of preferred stock, net of issuance costs		1,493			2,782
Issuance of long-term borrowings		30,159			26,529
Payments for:
Long-term borrowings		(17,615	)		(24,731	)
Derivatives financing activities		(372	)		(384	)
Repurchases of common stock and employee tax withholdings		(2,135	)		(1,172	)
Cash dividends		(1,096	)		(652	)

Net cash provided by financing activities		22,662			12,954

Effect of exchange rate changes on cash and cash equivalents		(767	)		(939	)

Net decrease in cash and cash equivalents		6,534			(4,057	)
Cash and cash equivalents, at beginning of period		46,984			59,883

Cash and cash equivalents, at end of period	$	53,518		$	55,826

Cash and cash equivalents include:
Cash and due from banks	$	19,244		$	20,242
Interest bearing deposits with banks		34,274			35,584

Cash and cash equivalents, at end of period	$	53,518		$	55,826

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash payments for interest were $1,456 million and $2,116 million for the nine months ended September 30, 2015 and 2014, respectively.

Cash payments for income taxes were $541 million and $620 million for the nine months ended September 30, 2015 and 2014, respectively.

See Notes to Condensed Consolidated Financial Statements.


		5

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.	Introduction and Basis of Presentation.

The Company.

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

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

Basis of Financial Information.

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

The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the 2014 Form 10-K. Certain footnote disclosures included in the 2014 Form 10-K have been condensed or omitted from the condensed consolidated financial statements as they are not required for interim reporting under U.S. GAAP. The condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are, in the opinion of management, necessary for the fair presentation of the results for the interim period. The results of operations for interim periods are not necessarily indicative of results for the entire year.

Consolidation.

The condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and other entities in which the Company has a controlling financial interest, including certain variable interest entities (“VIE”) (see Note 12). For consolidated subsidiaries that are less than wholly owned, the third-party holdings of equity interests are referred to as noncontrolling interests. The net income attributable to noncontrolling interests for such subsidiaries is presented as Net income (loss) applicable to nonredeemable noncontrolling interests in the Company’s condensed consolidated statements of income. The portion of shareholders’ equity of such subsidiaries that is attributable to noncontrolling interests for such subsidiaries is presented as Nonredeemable noncontrolling interests, a component of total equity, in the Company’s condensed consolidated statements of financial condition.

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


		6

MORGAN STANLEY

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

Income Statement Presentation.

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

Statements of Cash Flows Presentation.

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

Global Oil Merchanting Business.

As a result of entering into a definitive agreement to sell the global oil merchanting unit of the commodities division to Castleton Commodities International LLC, on May 11, 2015, the Company recognized an impairment charge of $10 million and $69 million in Other revenues in the Company’s condensed consolidated statements of income in the quarter and nine months ended September 30, 2015, respectively, to reduce the carrying amount of the unit to its estimated fair value less costs to sell. The Company closed the transaction on November 1, 2015. The transaction does not meet the criteria for discontinued operations and is not expected to have a material impact on the Company’s financial results (see Note 3).

TransMontaigne.

On July 1, 2014, the Company completed the sale of its ownership stake in TransMontaigne Inc. (“TransMontaigne”), a U.S.-based oil storage, marketing and transportation company, as well as related physical inventory and the assumption of the Company’s obligations under certain terminal storage contracts, to NGL Energy Partners LP. The gain on sale, which was included in continuing operations, was approximately $101 million for the quarter and nine months ended September 30, 2014.

CanTerm.

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

2.	Significant Accounting Policies.

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


		7

MORGAN STANLEY

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

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

Accounting Standards Adopted.

Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.

In June 2014, the Financial Accounting Standards Board (the “FASB”) issued an accounting update requiring repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. This accounting update also requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty (a repurchase financing), which will result in secured borrowing accounting for the repurchase agreement. This guidance became effective for the Company beginning January 1, 2015. In addition, new disclosures are required for sales of financial assets where the Company retains substantially all the exposure throughout the term and for the collateral pledged and remaining maturity of repurchase and securities lending agreements, which were effective January 1, 2015, and April 1, 2015, respectively. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements. For further information on the adoption of this guidance, see Notes 6 and 12.

Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).

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

Goodwill.

The Company completed its annual goodwill impairment testing at July 1, 2015. The Company’s impairment testing did not indicate any goodwill impairment, as each of the Company’s reporting units with goodwill had a fair value that was substantially in excess of its carrying value. However, adverse market or economic events could result in impairment charges in future periods.

3.	Fair Values.

Fair Value Measurements.

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


		8

MORGAN STANLEY

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

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

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

At September 30, 2015.


	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Counterparty and Cash Collateral Netting			Balance at September 30, 2015
	(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. government and agency securities:
U.S. Treasury securities	$	18,359		$	—		$	—		$	—		$	18,359
U.S. agency securities		1,328			18,690			—			—			20,018

Total U.S. government and agency securities		19,687			18,690			—			—			38,377
Other sovereign government obligations		19,597			7,493			11			—			27,101
Corporate and other debt:
State and municipal securities		—			1,954			33			—			1,987
Residential mortgage-backed securities		—			1,746			404			—			2,150
Commercial mortgage-backed securities		—			1,868			79			—			1,947
Asset-backed securities		—			771			31			—			802
Corporate bonds		—			13,207			226			—			13,433
Collateralized debt and loan obligations		—			187			545			—			732
Loans and lending commitments		—			6,170			5,164			—			11,334
Other debt		—			1,714			530			—			2,244

Total corporate and other debt		—			27,617			7,012			—			34,629
Corporate equities(1)		96,023			491			575			—			97,089
Derivative and other contracts:
Interest rate contracts		860			368,503			2,160			—			371,523
Credit contracts		—			23,844			937			—			24,781
Foreign exchange contracts		102			70,801			347			—			71,250
Equity contracts		876			49,833			951			—			51,660
Commodity contracts		3,392			14,646			3,203			—			21,241
Other		—			364			—			—			364
Netting(2)		(4,652	)		(437,820	)		(3,981	)		(61,072	)		(507,525	)

Total derivative and other contracts		578			90,171			3,617			(61,072	)		33,294
Investments:
Investments measured at NAV(3)														4,278
Principal investments		23			97			541			—			661
Other		149			204			312			—			665

Total investments		172			301			853			—			5,604
Physical commodities		—			1,717			—			—			1,717

Total trading assets		136,057			146,480			12,068			(61,072	)		237,811
AFS securities		27,765			33,394			—			—			61,159
Securities received as collateral		9,455			—			1			—			9,456
Securities purchased under agreements to resell		—			809			—			—			809
Intangible assets(4)		—			—			5			—			5

Total assets measured at fair value	$	173,277		$	180,683		$	12,074		$	(61,072	)	$	309,240


		9

MORGAN STANLEY

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


	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Counterparty and Cash Collateral Netting			Balance at September 30, 2015
	(dollars in millions)
Liabilities at Fair Value
Short-term borrowings	$	—		$	1,699		$	69		$	—		$	1,768
Trading liabilities:
U.S. government and agency securities:
U.S. Treasury securities		14,524			—			—			—			14,524
U.S. agency securities		1,026			135			—			—			1,161

Total U.S. government and agency securities		15,550			135			—			—			15,685
Other sovereign government obligations		13,611			2,379			—			—			15,990
Corporate and other debt:
State and municipal securities		—			3			—			—			3
Corporate bonds		—			6,783			19			—			6,802
Lending commitments		—			2			—			—			2
Other debt		—			7			4			—			11

Total corporate and other debt		—			6,795			23			—			6,818
Corporate equities(1)		50,017			1,145			97			—			51,259
Derivative and other contracts:
Interest rate contracts		780			346,806			2,071			—			349,657
Credit contracts		—			22,900			1,742			—			24,642
Foreign exchange contracts		60			72,593			281			—			72,934
Equity contracts		691			53,728			2,992			—			57,411
Commodity contracts		3,845			13,551			1,771			—			19,167
Other		—			51			—			—			51
Netting(2)		(4,652	)		(437,820	)		(3,981	)		(41,636	)		(488,089	)

Total derivative and other contracts		724			71,809			4,876			(41,636	)		35,773
Total trading liabilities		79,902			82,263			4,996			(41,636	)		125,525
Obligation to return securities received as collateral		20,327			—			1			—			20,328
Securities sold under agreements to repurchase		—			443			154			—			597
Other secured financings		—			3,109			341			—			3,450
Long-term borrowings		—			28,925			2,462			—			31,387

Total liabilities measured at fair value	$	100,229		$	116,439		$	8,023		$	(41,636	)	$	183,055

AFS—available for sale

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

(2)

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

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

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


		10

MORGAN STANLEY

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

At December 31, 2014.


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

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

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

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

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

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

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


		11

MORGAN STANLEY

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


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

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

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

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

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

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

(2)

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

(3)

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

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


		12

MORGAN STANLEY

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

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

The following tables present additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the quarters and nine months ended September 30, 2015 and 2014, respectively. Level 3 instruments may be hedged with instruments classified in Level 1 and Level 2. As a result, the realized and unrealized gains (losses) for assets and liabilities within the Level 3 category presented in the tables below do not reflect the related realized and unrealized gains (losses) on hedging instruments that have been classified by the Company within the Level 1 and/or Level 2 categories.

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

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


		13

MORGAN STANLEY

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

Three Months Ended September 30, 2015.


	Beginning Balance at June 30, 2015			Total Realized and Unrealized Gains (Losses)(1)			Purchases(2)			Sales			Issuances			Settlements			Net Transfers			Ending Balance at September 30, 2015			Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at September 30, 2015(3)
	(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. agency securities	$	3		$	—		$	—		$	—		$	—		$	—		$	(3	)	$	—		$	—
Other sovereign government obligations		12			—			5			(4	)		—			—			(2	)		11			—
Corporate and other debt:
State and municipal securities		7			5			12			(5	)		—			—			14			33			5
Residential mortgage-backed securities		378			3			59			(55	)		—			—			19			404			4
Commercial mortgage-backed securities		84			(12	)		17			(6	)		—			—			(4	)		79			(12	)
Asset-backed securities		19			—			13			(7	)		—			—			6			31			—
Corporate bonds		479			(25	)		78			(228	)		—			(50	)		(28	)		226			(6	)
Collateralized debt and loan obligations		660			(7	)		80			(188	)		—			—			—			545			(11	)
Loans and lending commitments		5,512			(78	)		939			(156	)		—			(1,229	)		176			5,164			(53	)
Other debt		564			(22	)		9			(4	)		—			(1	)		(16	)		530			(23	)

Total corporate and other debt		7,703			(136	)		1,207			(649	)		—			(1,280	)		167			7,012			(96	)
Corporate equities		486			10			150			(80	)		—			—			9			575			4
Net derivative and other contracts(4):
Interest rate contracts		(236	)		(137	)		12			—			(7	)		74			383			89			(66	)
Credit contracts		(989	)		210			—			—			(74	)		86			(38	)		(805	)		219
Foreign exchange contracts		446			42			3			—			—			(327	)		(98	)		66			45
Equity contracts		(2,102	)		309			16			—			(50	)		(187	)		(27	)		(2,041	)		296
Commodity contracts		1,205			238			—			—			—			(11	)		—			1,432			179

Total net derivative and other contracts		(1,676	)		662			31			—			(131	)		(365	)		220			(1,259	)		673
Investments:
Principal investments		581			26			8			(50	)		—			—			(24	)		541			26
Other		300			11			1			—			—			—			—			312			11
Securities received as collateral		3			—			—			(2	)		—			—			—			1			—
Intangible assets		6			(1	)		—			—			—			—			—			5			(1	)

Liabilities at Fair Value
Short-term borrowings	$	—		$	(2	)	$	—		$	—		$	4		$	—		$	63		$	69		$	(2	)
Trading liabilities:
Corporate and other debt:
Corporate bonds		15			9			(10	)		23			—			—			—			19			7
Other debt		4			—			—			—			—			—			—			4			—

Total corporate and other debt		19			9			(10	)		23			—			—			—			23			7
Corporate equities		112			72			(50	)		99			—			—			8			97			73
Obligation to return securities received as collateral		3			—			(2	)		—			—			—			—			1			—
Securities sold under agreements to repurchase		154			—			—			—			—			—			—			154			—
Other secured financings		168			2			—			—			187			(12	)		—			341			2
Long-term borrowings		2,221			61			—			—			237			(81	)		146			2,462			64

(1)	Total realized and unrealized gains (losses) are primarily included in Trading revenues in the condensed consolidated statements of income except for $37 million related to Trading assets—Investments, which is included in Investments revenues.

(2)	Loan originations are included in purchases.

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

(4)	Net derivative and other contracts represent Trading assets—Derivative and other contracts net of Trading liabilities—Derivative and other contracts. For further information on derivative instruments and hedging activities, see Note 4.


		14

MORGAN STANLEY

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

Nine Months Ended September 30, 2015.


	Beginning Balance at December 31, 2014			Total Realized and Unrealized Gains (Losses)(1)			Purchases(2)			Sales			Issuances			Settlements			Net Transfers			Ending Balance at September 30, 2015			Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at September 30, 2015(3)
	(dollars in millions)
Assets at Fair Value
Trading assets:
Other sovereign government obligations	$	41		$	(1	)	$	7		$	(31	)	$	—		$	—		$	(5	)	$	11		$	—
Corporate and other debt:
State and municipal securities		—			5			14			(1	)		—			—			15			33			5
Residential mortgage-backed securities		175			28			172			(57	)		—			—			86			404			19
Commercial mortgage-backed securities		96			(17	)		23			(23	)		—			—			—			79			(19	)
Asset-backed securities		76			(1	)		22			(31	)		—			—			(35	)		31			4
Corporate bonds		386			(19	)		155			(218	)		—			(53	)		(25	)		226			(16	)
Collateralized debt and loan obligations		1,152			141			320			(709	)		—			(331	)		(28	)		545			(7	)
Loans and lending commitments		5,874			(34	)		1,860			(95	)		—			(2,461	)		20			5,164			(62	)
Other debt		285			(13	)		30			(14	)		—			(25	)		267			530			—

Total corporate and other debt		8,044			90			2,596			(1,148	)		—			(2,870	)		300			7,012			(76	)
Corporate equities		272			57			437			(199	)		—			—			8			575			67
Net derivative and other contracts(4):
Interest rate contracts		(173	)		(37	)		16			—			(22	)		277			28			89			20
Credit contracts		(743	)		(69	)		6			—			(94	)		86			9			(805	)		(89	)
Foreign exchange contracts		151			133			4			—			(1	)		(197	)		(24	)		66			133
Equity contracts(5)		(2,165	)		(76	)		115			—			(279	)		252			112			(2,041	)		(237	)
Commodity contracts		1,146			345			2			—			(112	)		111			(60	)		1,432			420

Total net derivative and other contracts		(1,784	)		296			143			—			(508	)		529			65			(1,259	)		247
Investments:
Principal investments		835			22			20			(109	)		—			(187	)		(40	)		541			—
Other		323			(5	)		2			(6	)		—			—			(2	)		312			—
Securities received as collateral		—			—			1			—			—			—			—			1			—
Intangible assets		6			—			—			—			—			(1	)		—			5			—

Liabilities at Fair Value
Short-term borrowings	$	—		$	(2	)	$	—		$	—		$	60		$	—		$	7		$	69		$	(2	)
Trading liabilities:
Corporate and other debt:
Corporate bonds		78			6			(25	)		37			—			—			(65	)		19			6
Lending commitments		5			5			—			—			—			—			—			—			5
Other debt		38			—			(1	)		7			—			(39	)		(1	)		4			—

Total corporate and other debt		121			11			(26	)		44			—			(39	)		(66	)		23			11
Corporate equities		45			90			(88	)		128			—			—			102			97			90
Obligation to return securities received as collateral		—			—			—			1			—			—			—			1			—
Securities sold under agreements to repurchase		153			(1	)		—			—			—			—			—			154			—
Other secured financings		149			(5	)		—			—			223			(36	)		—			341			4
Long-term borrowings		1,934			159			—			—			853			(213	)		47			2,462			157

(1)	Total realized and unrealized gains (losses) are primarily included in Trading revenues in the Company’s condensed consolidated statements of income except for $17 million related to Trading assets—Investments, which is included in Investments revenues.

(2)	Loan originations are included in purchases.

(3)	Amounts represent unrealized gains (losses) for the nine months ended September 30, 2015 related to assets and liabilities still outstanding at September 30, 2015.

(4)	Net derivative and other contracts represent Trading assets—Derivative and other contracts net of Trading liabilities—Derivative and other contracts. For further information on derivative instruments and hedging activities, see Note 4.

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


		15

MORGAN STANLEY

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

Three Months Ended September 30, 2014.


	Beginning Balance at June 30, 2014			Total Realized and Unrealized Gains (Losses)(1)			Purchases(2)			Sales			Issuances			Settlements			Net Transfers			Ending Balance at September 30, 2014			Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at September 30, 2014(3)
	(dollars in millions)
Assets at Fair Value
Trading assets:
Other sovereign government obligations	$	14		$	(1	)	$	—		$	(1	)	$	—		$	—		$	1		$	13		$	(1	)
Corporate and other debt:
State and municipal securities		4			—			—			—			—			—			(4	)		—			—
Residential mortgage-backed securities		55			11			33			(7	)		—			(11	)		—			81			11
Commercial mortgage-backed securities		47			(1	)		1			(3	)		—			—			13			57			(2	)
Asset-backed securities		65			5			27			(8	)		—			—			22			111			5
Corporate bonds		510			36			99			(148	)		—			—			9			506			38
Collateralized debt obligations		1,332			8			299			(362	)		—			(6	)		—			1,271			6
Loans and lending commitments		5,829			(20	)		2,138			(676	)		—			(721	)		957			7,507			(24	)
Other debt		22			—			135			(3	)		—			—			1			155			—

Total corporate and other debt		7,864			39			2,732			(1,207	)		—			(738	)		998			9,688			34
Corporate equities		243			(2	)		30			(41	)		—			—			11			241			7
Net derivative and other contracts(4):
Interest rate contracts		(109	)		(15	)		7			—			(3	)		(17	)		150			13			(22	)
Credit contracts		(710	)		209			7			—			(64	)		(108	)		(16	)		(682	)		140
Foreign exchange contracts		109			(27	)		6			(3	)		—			70			(1	)		154			(25	)
Equity contracts		(1,097	)		(6	)		56			—			(59	)		(105	)		23			(1,188	)		(9	)
Commodity contracts		1,132			73			36			—			—			(62	)		(12	)		1,167			12
Other		(3	)		(1	)		—			—			—			4			—			—			—

Total net derivative and other contracts		(678	)		233			112			(3	)		(126	)		(218	)		144			(536	)		96
Investments:
Principal investments		883			(1	)		22			(23	)		—			—			32			913			(1	)
Other		380			(3	)		14			—			—			—			2			393			(3	)
Intangible assets		6			—			—			—			—			—			—			6			—

Liabilities at Fair Value
Trading liabilities:
Other sovereign government obligations	$	—		$	—		$	—		$	—		$	—		$	—		$	2		$	2		$	—
Corporate and other debt:
Corporate bonds		14			1			(8	)		46			—			—			(3	)		48			1
Lending commitments		12			12			—			—			—			—			—			—			—
Other debt		42			5			—			—			—			(2