UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the year ended December 31, 20172018
Commission File Number1-11758
(Exact name of Registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 1585 Broadway New York, NY 10036 (Address of principal executive offices, | 36-3145972 (I.R.S. Employer Identification No.) | (212)761-4000 (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of exchange on | |||
Common Stock, $0.01 par value | New York Stock Exchange | |||
Depositary Shares, each representing 1/1,000th interest in a share of Floating RateNon-Cumulative Preferred Stock, Series A, $0.01 par value | New York Stock Exchange | |||
Depositary Shares, each representing 1/1,000th interest in a share ofFixed-to-Floating RateNon-Cumulative Preferred Stock, Series E, $0.01 par value | New York Stock Exchange | |||
Depositary Shares, each representing 1/1,000th interest in a share ofFixed-to-Floating RateNon-Cumulative Preferred Stock, Series F, $0.01 par value | New York Stock Exchange | |||
Depositary Shares, each representing 1/1,000th interest in a share of 6.625%Non-Cumulative Preferred Stock, Series G, $0.01 par value | New York Stock Exchange | |||
Depositary Shares, each representing 1/1,000th interest in a share ofFixed-to-Floating RateNon-Cumulative Preferred Stock, Series I, $0.01 par value | New York Stock Exchange | |||
Depositary Shares, each representing 1/1,000th interest in a share ofFixed-to-Floating RateNon-Cumulative Preferred Stock, Series K, $0.01 par value | New York Stock Exchange | |||
Global Medium-Term Notes, Series A, Fixed RateStep-Up Senior Notes | New York Stock Exchange | |||
Market Vectors ETNs due March 31, 2020 (two issuances); Market Vectors ETNs due April 30, 2020 (two issuances) | NYSE Arca, Inc. | |||
Morgan Stanley Cushing® MLP High Income Index ETNs due March 21, 2031 | NYSE Arca, Inc. |
Indicate by check mark if Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☒ NO ☐
Indicate by check mark if Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒
Indicate by check mark whether 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 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 RegulationS-T 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 if disclosure of delinquent filers pursuant to Item 405 of RegulationS-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to thisForm 10-K. ☒
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a 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 Rule12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ☒ | Accelerated Filer ☐ | |||
Non-Accelerated Filer ☐ | 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 Registrant is a shell company (as defined in Exchange Act Rule12b-2). YES ☐ NO ☒
As of June 30, 2017,2018, the aggregate market value of the common stock of Registrant held bynon-affiliates of Registrant was approximately $77,833,014,763.$79,320,949,858. This calculation does not reflect a determination that persons are affiliates for any other purposes.
As of January 31, 2018,2019, there were 1,791,846,3881,708,787,567 shares of Registrant’s common stock, $0.01 par value, outstanding.
Documents Incorporated by Reference: Portions of Registrant’s definitive proxy statement for its 2018 annual meeting of shareholders are incorporated by reference in Part III of this Form10-K.
ANNUAL REPORT ON FORM10-K
for the year ended December 31, 20172018
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 12 | 184 | ||||||||
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Forward-Looking Statements
We have included in or incorporated by reference into this report, and from time to time may make in our public filings, press releases or other public statements, certain statements, including (without limitation) those under “Legal Proceedings,”Proceedings”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures about Market Risk” that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, our management may make forward-looking statements to analysts, investors, representatives of the media and others. These forward-looking statements are not historical facts and represent only our beliefs regarding future events, many of which, by their nature, are inherently uncertain and beyond our control.
The nature of our business makes predicting the future trends of our revenues, expenses, and net income difficult. The risks and uncertainties involved in our businesses could affect the matters referred to in such statements, and it is possible that our actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. Important factors that could cause actual results to differ from those in the forward-looking statements include (without limitation):
the effect of market conditions, particularly in the global equity, fixed income, currency, credit and commodities markets, including corporate and mortgage (commercial and residential) lending and commercial real estate markets and energy markets;
the level of individual investor participation in the global markets as well as the level of client assets;
the flow of investment capital into or from Assetsassets under management or supervision;
the level and volatility of equity, fixed income and commodity prices, interest rates, inflation and currency values and other market indices;
the availability and cost of both credit and capital as well as the credit ratings assigned to our unsecured short-term and long-term debt;
technological changes instituted by us, our competitors or counterparties and technological risks, business continuity and related operational risks;risks, including breaches or other disruptions of our or a third party’s (or third parties thereof) operations or systems;
risk associated with cybersecurity threats, including data protection and cybersecurity risk management;
our ability to manage effectively our capital and liquidity, including approval of our capital plans by our banking regulators;
the impact of current, pending and future legislation (including with respect to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”)) or changes thereto, regulation (including capital, leverage, funding, liquidity and recovery and resolution requirements and our ability to address such requirements), policies (includingincluding fiscal and monetary policies established by central banks and financial regulators, and regulators;
changes to global trade policies),policies and tariffs, government debt ceilings and funding, reforms of LIBOR, EURIBOR and other indices, and other legal and regulatory actions in the U.S. and worldwide;
changes in tax laws and regulations globally, including the interpretation and application of the U.S. Tax Cuts and Jobs Act (“Tax Act”);
the effectiveness of our risk management policies;processes;
our ability to effectively respond to an economic downturn, or other market disruptions;
the effect of economic and political conditions and geopolitical events, including, for example, the U.K.’s anticipated withdrawal from the E.U. and a government shutdown in the United States;
the actions and initiatives of current and potential competitors as well as governments, central banks, regulators and self-regulatory organizations;
our ability to provide innovative products and services and execute our strategic objectives;
the effect of economic and political conditions and geopolitical events, including the U.K. anticipated withdrawal from the E.U.;
sovereign risk;
the performance and results of our acquisitions, divestitures, joint ventures, strategic alliances or other strategic arrangements;
investor, consumer and business sentiment and confidence in the financial markets;
our reputation and the general perception of the financial services industry;
inflation, natural disasters, pandemics and acts of war or terrorism; and
other risks and uncertainties detailed under “Business—Competition” and “Business—Supervision and Regulation,”Regulation”, “Risk Factors” and elsewhere throughout this report.
Accordingly, you are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update publicly or revise any forward-looking statements to reflect the impact of circumstances or events that arise after the dates they are made, whether as a result of new information, future events or otherwise except as required by applicable law. You should, however, consult further disclosures we may make in future filings of our Annual Reports on Form10-K, Quarterly Reports on Form10-Q and Current Reports on Form8-K and any amendments thereto or in future press releases or other public statements.
iii
Available Information
We file annual, quarterly and current reports, proxy statements and other information with 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 at1-800-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 iswww.morganstanley.com. You can access our Investor Relations webpage atwww.morganstanley.com/about-us-ir. We make available free of charge, on or through our Investor Relations webpage, our Proxy Statements, Annual Reports on Form10-K, Quarterly Reports onForm 10-Q, Current Reports on Form8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (“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 atwww.morganstanley.com/about-us-governance. Our Corporate Governance webpage includes:
Amended and Restated Certificate of Incorporation;
Amended and Restated Bylaws;
Charters for our Audit Committee, Compensation, Management Development and Succession Committee, Nominating and Governance Committee, Operations and Technology Committee, and Risk Committee;
Corporate Governance Policies;
Policy Regarding Corporate Political Activities;
Policy Regarding Shareholder Rights Plan;
Equity Ownership Commitment;
Code of Ethics and Business Conduct;
Code of Conduct;
Integrity Hotline Information; and
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.
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We are a global financial services firm that, through our subsidiaries and affiliates, advises, and originates, trades, manages and distributes capital for, governments, institutions and individuals. We were originally incorporated under the laws of the State of Delaware in 1981, and our predecessor companies date back to 1924. We are an FHC regulated by the Board of Governors of the Federal Reserve System (“Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (“BHC Act”). We conduct our business from our headquarters in and around New York City, our regional offices and branches throughout the U.S. and our principal offices in London, Tokyo, Hong Kong and other world financial centers. As of December 31, 2017,2018, we had 57,63360,348 employees worldwide. Unless the context otherwise requires, the terms “Morgan Stanley,” the “Firm,” “us,” “we,” and “our” mean Morgan Stanley (the “Parent Company”) together with its consolidated subsidiaries. We define the following as part of our consolidated financial statements (“financial statements”): consolidated income statements (“income statements”), consolidated balance sheets (“balance sheets”), and consolidated cash flow statements (“cash flow statements”). See the “Glossary of Common Acronyms” for definitionsthe definition of certain acronyms used throughout the 20172018 Form10-K.
Financial information concerning us, our business segments and geographic regions for each of the 12 months ended December 31, 2017,2018, December 31, 20162017 and December 31, 20152016 is included in the financial statements and the notes thereto and in “Financial Statements and Supplementary Data.”
We are a global financial services firm that maintains significant market positions in each of our business segments—Institutional Securities, Wealth Management and Investment Management. Through our subsidiaries and affiliates, we provide a wide variety of products and services to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individuals. Additional information related to our business segments, respective clients, and products and services provided is included under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
All aspects of our businesses are highly competitive, and we expect them to remain so. We compete in the U.S. and globally for clients, market share and human talent. Operating within the financial services industry on a global basis
presents, among other things, technological, risk management, regulatory and other infrastructure challenges that require effective resource allocation in order for us to remain competitive. Our competitive position depends on our reputation and the quality and consistency of our long-term investment performance. Our ability to sustain or improve our competitive position also depends substantially on our ability to continue to attract and retain highly qualified employees while managing compensation and other costs. We compete with commercial banks, brokerage firms, insurance companies, exchanges, electronic trading and clearing platforms, financial data repositories, sponsors of mutual funds, hedge funds and private equity funds, energy companies, financial technology firms and other companies offering financial or ancillary services in the U.S., globally and digitally or through the internet. In addition, restrictive laws and regulations applicable to certain U.S. financial services institutions, such as Morgan Stanley, which may prohibit us from engaging in certain transactions and impose more stringent capital and liquidity requirements, can put us at a competitive disadvantage to competitors in certain businesses not subject to these same requirements. See also “Supervision and Regulation” belowherein and “Risk Factors.”
Institutional Securities and Wealth Management
Our competitive position for our Institutional Securities and Wealth Management business segments depends on innovation, execution capability and relative pricing. We compete directly in the U.S. and globally with other securities and financial services firms and broker-dealers and with others on a regional or product basis. Additionally, there is increased competition driven by established firms as well as the emergence of new firms and business models (including innovative uses of technology) competing for the same clients and assets or offering similar products and services.
Our ability to access capital at competitive rates (which is generally impacted by our credit ratings), to commit and to deploy capital efficiently, particularly in our capital-intensive underwriting and sales, trading, financing and market-making activities, also affects our competitive position. Corporate clients may request that we provide loans or lending commitments in connection with certain investment banking activities and such requests are expected to continue.
It is possible that competition may become even more intense as we continue to compete with financial or other institutions that may be larger, or better capitalized, or may have a stronger local presence and longer operating history in certain geographies or products. Many of these firms have the ability to offer a wide range of products and services, and on different platforms, that may enhance their competitive position and could result in pricing pressure on our businesses. In addition, our business is subject to extensive regulation in the U.S. and abroad, while certain of our
1 | December |
U.S. and abroad, while certain of our competitors may be subject to less stringent legal and regulatory regimes than us, thereby putting us at a competitive disadvantage.
We continue to experience intense price competition in some of our businesses. In particular, the ability to execute securities trades electronically on exchanges and through other automated trading markets has increased the pressure on trading commissions and comparable fees. The trend toward direct access to automated, electronic markets will likely increase as additional trading moves to more automated platforms. It is also possible that we will experience competitive pressures in these and other areas in the future as some of our competitors seek to obtain market share by reducing prices (in the form of commissions or pricing).
Investment Management
Our ability to compete successfully in the asset management industry is affected by several factors, including our reputation, investment objectives, quality of investment professionals, performance of investment strategies or product offerings relative to peers and appropriate benchmark indices, advertising and sales promotion efforts, fee levels, the effectiveness of and access to distribution channels and investment pipelines, and the types and quality of products offered. Our investment products, including alternative investment products, may compete with investments offered by other investment managers with passive investment products or who may be subject to less stringent legal and regulatory regimes than us.
As a major financial services firm, we are subject to extensive regulation by U.S. federal and state regulatory agencies and securities exchanges and by regulators and exchanges in each of the major markets where we conduct our business. Legislative and regulatory responses to the 2007-2008 financial crisis, both in the U.S. and worldwide, have resulted in major changes to the way we are regulated and conduct our business. These laws and regulations includeinclude: the Dodd-Frank Act; risk-based capital, leverage and liquidity standards adopted or being developed by the Basel Committee on Banking Supervision (“Basel Committee”), including Basel III, and the national implementation of those standards; capital planning and stress testing requirements; and new recovery and resolution regimes in the U.S. and other jurisdictions. Some areas of post-financial crisis regulation are still subject to final rulemaking or transition periods.
We continue to monitor the changing political, tax and regulatory environment; it is likely that there will be further changes in the way major financial institutions are regulated in both the U.S. and other markets in which we operate,
although it remains difficult to predict the exact impact these changes will have on our business, financial condition, results of operations and cash flows for a particular future period and we expect to remain subject to extensive supervision and regulation.
Financial Holding Company
Consolidated Supervision. We have operated as a BHC and FHC under the BHC Act since September 2008. As a BHC, we are subject to comprehensive consolidated supervision, regulation and examination by the Federal Reserve. Under existing regulation, theThe Federal Reserve has heightened authority to examine, prescribe regulations and take action with respect to all of our subsidiaries. In particular, we are, or will become, subject to (among other things): significantly revised and expanded regulation and supervision; more intensive scrutiny of our businesses and plans for expansion of those businesses; activities limitations;limitations on activities; a systemic risk regime that imposes heightened capital and liquidity requirements; restrictions on activities and investments imposed by a section of the BHC Act added by the Dodd-Frank Act referred to as the “Volcker Rule”; and comprehensive derivatives regulation. In addition, the Consumer Financial Protection Bureau has primary rulemaking, enforcement and examination authority over us and our subsidiaries with respect to federal consumer protection laws, to the extent applicable.
Scope of Permitted Activities. The BHC Act limits the activities of BHCs and FHCs and grants the Federal Reserve authority to limit our ability to conduct activities. We must obtain the Federal Reserve’s approval before engaging in certain banking and other financial activities both in the U.S. and internationally.
The BHC Act grandfathers “activities related to the trading, sale or investment in commodities and underlying physical properties,” provided that we were engaged in “any of such activities as of September 30, 1997 in the U.S.” and provided that certain other conditions that are within our reasonable control are satisfied. We currently engage in our commodities activities pursuant to the BHC Act grandfather exemption as well as other authorities under the BHC Act.
Activities Restrictions under the Volcker Rule. The Volcker Rule prohibits “banking entities,” including us and our affiliates, from engaging in certain “proprietary trading” activities, as defined in the Volcker Rule, subject to exemptions for underwriting, market-making-related activities, risk-mitigating hedging and certain other activities. The Volcker Rule also prohibits certain investments and relationships by banking entities with “covered funds,” with a number of exemptions and exclusions. Banking entities were required to bring all of their activities and investments into conformance with the Volcker Rule by July 21, 2015, subject to certain
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extensions. In June 2017, the Federal Reserve approved our application for a five-year extension of the transition period to conform investments in certain legacy covered funds that are also illiquid funds. The approval covers essentially all of ourour non-conforming investments in, and relationships with, legacy covered funds subject to the Volcker Rule. The Volcker Rule also requires that deductions be made from a BHC’s Tier 1 capital for permissible investments in covered funds. In addition, the Volcker Rule requires banking entities to have comprehensive compliance programs reasonably designed to ensure and monitor compliance with the Volcker Rule.
The federal financial regulatory agencies responsible for the Volcker Rule’s implementing regulations have proposed, but have not yet finalized, revisions to certain elements of those regulations. The proposed changes focus on proprietary trading and certain requirements imposed in connection with permitted market making, underwriting and risk-mitigating hedging activities. The impact of this proposal on us will not be known with certainty until final rules are issued.
Capital Standards. The Federal Reserve establishes capital requirements, including well-capitalized standards, for large BHCs and evaluates our compliance with such requirements. The OCC establishes similar capital requirements and standards for Morgan Stanley Bank, N.A. (“MSBNA”) and Morgan Stanley Private Bank, National Association (“MSPBNA”) (collectively, our “U.S. Bank Subsidiaries”).
Regulatory Capital Framework. The regulatory capital requirements for us and our U.S. Bank Subsidiaries are largely based on the Basel III capital standards established by the Basel Committee, and also implementas supplemented by certain provisions of the Dodd-Frank Act. We are subject to various risk-based capital requirements with various transition provisions, measured against our Common Equity Tier 1 capital, Tier 1 capital and Total capital bases, leverage-based capital requirements, including the SLR, and additional capital buffers above generally applicable minimum standards for BHCs.
In December 2017, theThe Basel Committee released its agreement onhas published a comprehensive set of revisions to its Basel III Framework. The revised requirements are expected to take effect starting January 2022, subject to U.S. banking agencies issuing implementation proposals. The impact on us of any revisions to the Basel Committee’s capital standards is uncertain and depends on future rulemakings by the U.S. banking agencies.
Regulated Subsidiaries. In addition, many of our regulated subsidiaries are, or are expected to be in the future, subject to regulatory capital requirements, including regulated subsidiaries registered as “swap dealers” with the CFTC or “security-based swap dealers” with the SEC (collectively, “Swaps
“Swaps Entities”) or registered as broker-dealers or futures commission merchants. Specific regulatory capital requirements vary by regulated subsidiary, and in many cases these standards are not yet established or are subject to ongoing rulemakings that could substantially modify requirements.
For more information about the specific capital requirements applicable to us and our U.S. Bank Subsidiaries, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements.”
Capital Planning, Stress Tests and Capital Distributions. Pursuant to the Dodd-Frank Act, the Federal Reserve has adopted capital planning and stress test requirements for large BHCs, including Morgan Stanley. The Dodd-Frank Act also requires each of our U.S. Bank Subsidiaries to conduct an annual stress test. For more information about the capital planning and stress test requirements, including proposed changes to those requirements that would integrate them with certain ongoing regulatory capital requirements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Regulatory Developments—Proposed Stress Buffer Requirements.”
In addition to capital planning requirements, the OCC,Federal Reserve, the Federal ReserveOCC and the FDIC have the authority to prohibit or to limit the payment of dividends by the banking organizations they supervise, including us and our U.S. Bank Subsidiaries, if, in the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the banking organization. All of these policies and other requirements could affect our ability to pay dividends and/or repurchase stock, or require us to provide capital assistance to our U.S. Bank Subsidiaries under circumstances which we would not otherwise decide to do so.
Liquidity Standards. In addition to capital regulations, the U.S. banking agencies and the Basel Committee have adopted, or are in the process of considering,adopting, liquidity standards. We and our U.S. Bank Subsidiaries are subject to the U.S. banking agencies’ LCR requirements, which generally follow Basel Committee standards. Similarly, if the proposed NSFR requirements are adopted by the U.S. banking agencies, we and our U.S. Bank Subsidiaries will become subject to NSFR requirements, if adopted by the U.S. banking agencies, and the proposed NSFR requirementswhich generally follow Basel Committee standards.
In addition to the LCR and NSFR, we and many of our regulated subsidiaries, including those registered as Swaps Entities with the CFTC or SEC, are, or are expected to be in the future, subject to other liquidity standards, including liquidity stress-testing and associated liquidity reserve requirements.
3 | December 2018 Form 10-K |
For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Liquidity Framework.”
Systemic Risk Regime. The Dodd-Frank Act, establishedas amended by the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”), establishes a systemic risk regime to which certain large BHCs, with $50 billion or more in consolidated assets, such asincluding Morgan Stanley, are subject. Under rules issued by the Federal Reserve to implement
certain requirements of the Dodd-Frank Act’s enhanced prudential standards, such large BHCs must conduct internal liquidity stress tests, maintain unencumbered highly liquid assets to meet projected net cash outflows for 30 days over the range of liquidity stress scenarios used in internal stress tests, and comply with various liquidity risk management requirements. InstitutionsThese large BHCs also must comply with a range of risk management and corporate governance requirements.
In March 2016, theThe Federal Reservere-proposed rules that would establish has adopted a framework to impose single-counterparty credit limits (“SCCL”) for large banking organizations (“covered companies”), with more stringent limits for the largest covered companies.organizations. U.S.G-SIBs, including the Firm, would beus, are subject to a limit of 15% of Tier 1 capital for aggregate net credit exposures to any “major counterparty” (defined asto include other U.S.G-SIBs, foreignG-SIBs, and nonbank systemically important financial institutions supervised by the Federal Reserve) and. In addition, we are subject to a limit of 25% of Tier 1 capital for aggregate net credit exposures to any other unaffiliated counterparty. We must comply with the SCCL framework beginning on January 1, 2020.
In addition, theThe Federal Reserve has proposed rules that would create a new early remediation framework to address financial distress or material management weaknesses. The Federal Reserve also has the ability to establish additional prudential standards, including those regarding contingent capital, enhanced public disclosures and limits on short-term debt, includingoff-balance sheet exposures. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Total Loss-Absorbing Capacity and Long-Term Debt Requirement.”
Under the systemic risk regime, if the Federal Reserve or the Financial Stability Oversight Council determines that a BHC with $50$250 billion or more in consolidated assets poses a “grave threat” to U.S. financial stability, the institution may be, among other things, restricted in its ability to merge or offer financial products and/or required to terminate activities and dispose of assets.
See also “Capital Standards” and “Liquidity Standards” herein and “Resolution and Recovery Planning” below.
Resolution and Recovery Planning. Pursuant to the Dodd-Frank Act, we are required to periodically submit to the Federal Reserve and the FDIC a resolution plan that describes our strategy for a rapid and orderly resolution under the U.S. Bankruptcy Code in the event of our material financial distress or failure. Our preferred resolution strategy, which is set out in our 2017 resolution plan, is an SPOE strategy. An SPOE strategy generally contemplates the provision of additional capital and liquidity by the Parent Company to certain of its subsidiaries so that such subsidiaries have the resources necessary to implement the resolution strategy after the Parent Company has filed for bankruptcy.
Certain of our domestic and foreign subsidiaries are also subject to resolution and recovery planning requirements in the jurisdictions in which they operate. For example the FDIC requires certain insured depository institutions (“IDIs”), including our U.S. Bank Subsidiaries, to submit an annual resolution plan that describes the IDI’s strategy for a rapid and orderly resolution in the event of material financial distress or failure of the IDI (an “IDI plan”).
Further, we are required to submit an annual recovery plan to the Federal Reserve that outlines the steps that management could take over time to generate or conserve financial resources in times of prolonged financial stress.
Certain of our domestic and foreign subsidiaries are also subjectIn December 2018, the OCC finalized revisions to resolution andits recovery planning requirements in the jurisdictions in which they operate. For example, MSBNA must submit to the FDIC an annual resolution plan that describes MSBNA’s strategyguidelines for a rapid and orderly resolution in the event of material financial distress or failure of MSBNA. In September 2016, the OCC issued final guidelines that establish enforceable standards for recovery planning by national banks and certain other institutions withthat increase the threshold at which the guidelines apply from $50 billion to $250 billion in total consolidated assets of $50 billion or more, calculated onassets. As a rolling four-quarter average basis, including MSBNA and MSPBNA. The guidelines were effective on January 1, 2017, and appliedresult, our U.S. Bank Subsidiaries are no longer required to MSBNA as of January 1, 2018. MSPBNA must be in compliance by October 1, 2018.prepare recovery plans.
In addition, certain financial companies, including BHCs such as the Firm and certain of its covered subsidiaries, can be subjected to a resolution proceeding under the orderly liquidation authority in Title II of the Dodd-Frank Act with the FDIC being appointed as receiver, provided that certain procedures are met, including certain extraordinary financial distress and systemic risk determinations by the U.S. Treasury Secretary in consultation with the U.S. President. The orderly liquidation authority rulemaking is proceeding in stages, with some regulations now finalized and others not yet proposed. If we were subject to the orderly liquidation authority, the FDIC would have considerable powers, including: the power to remove directors and officers responsible for our failure and to appoint new directors and officers; the power to assign our assets and liabilities to a third party or bridge financial company without the need for creditor consent or prior court review; the ability to differentiate among our creditors, including by treating certain creditors within the same class better than others, subject to a minimum recovery right on the part of disfavored creditors to receive at least what they would have received in bankruptcy
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liquidation; and broad powers to administer the claims process to determine distributions from the assets of the receivership. The FDIC has been developing an SPOE strategy that could be used to implement the orderly liquidation authority.
Regulators have also taken and proposed various actions to facilitate an SPOE strategy under the U.S. Bankruptcy Code, the orderly liquidation authority or other resolution regimes.
In September 2017,For example, the Federal Reserve issued a final rulehas established rules that would impose contractual requirements on certain QFCsqualified financial contracts (“covered QFCs”) to which U.S.G-SIBs, including us, and their subsidiaries are parties. The OCC issued a final rule in
November 2017has also established rules that imposesimpose substantively identical requirements on national banks that are subsidiaries of U.S.G-SIBs, including our U.S. Bank Subsidiaries, as well as certain other institutions (together with the entities covered by the Federal Reserve final rule,Reserve’s rules, the “covered entities”). Under the Federal Reserve’s and OCC’s finalthese rules, covered QFCs must generally expressly provide that transfer restrictions and default rights against covered entities are limited to the same extent as they would be under the Federal Deposit Insurance Act and Title II of the Dodd-Frank Act and their implementing regulations. In addition, covered QFCs may not, among other things, permit the exercise of any cross-default right against covered entities based on an affiliate’s entry into insolvency, resolution or similar proceedings, subject to certain creditor protections. There is aphased-in compliance schedule based on counterparty type, withand the first compliance date ofwas January 1, 2019.
For more information about our resolution plan-related submissions and associated regulatory actions, see “Risk Factors—Legal, Regulatory and Compliance Risk”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Regulatory Requirements—Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Developments—Requirements—Resolution and Recovery Planning.”
Cyber and Information Security Risk Management.Management
As a general matter, the financial services industry faces increased global regulatory focus regarding cyber and information security risk management practices. Many aspects of our businesses are subject to cybersecurity legal and regulatory requirements enacted by U.S. federal and state governments and othernon-U.S. jurisdictions in the Americas, Europe, the Middle East, Africa and Asia. These laws are aimed at codifying basic cybersecurity protections and mandating data breach notification requirements.
Certain of ourOur businesses are also subject to privacy and data protection information security legal requirements concerning the use and protection of certain customerpersonal information. For example, the General Data Protection Regulation (GDPR) is scheduled to become(“GDPR”) became effective in the E.U. on May 25, 2018 as a replacement for the E.U. Data Protection Directive. The GDPR imposes mandatory breach notification obligations, including significant fines for noncompliance, enhanced governance and accountability requirements and has extraterritorial impact. In addition, other jurisdictions have adopted or are proposing GDPR or similar standards, such as California, Australia, Singapore, Japan, Columbia,Colombia, Argentina, India, Turkey, Hong Kong, Brazil, Russia and Switzerland.
Protection of Client Information
Many aspects of our businesses are subject to legal requirements concerning the use and protection of certain customer information. These include those adopted pursuant to the Gramm-Leach-Bliley Act and the Fair and Accurate Credit Transactions Act of 2003 in the U.S., the GDPR and various laws in Asia, including the Japanese Personal Information Protection Law, the Hong Kong Personal Data (Protection) Ordinance and the Australian Privacy Act. We have adopted measures designed to comply with these and related applicable requirements in all relevant jurisdictions.
U.S. Bank Subsidiaries
U.S. Bank Subsidiaries. MSBNA, primarily a wholesale commercial bank, offers commercial lending and certain retail securities-based lending services in addition to deposit products, and also conducts certain foreign exchange activities.
MSPBNA offers certain mortgage and other secured lending products, including retail securities-based lending products, primarily for customers of our affiliate retail broker-dealer, Morgan Stanley Smith Barney LLC (“MSSB LLC”). MSPBNA also offers certain deposit products and prime brokerage custody services.
Both MSBNA and MSPBNA are FDIC-insured national banks subject to supervision, regulation and examination by the OCC. They are both subject to the OCC’s risk governance guidelines, which establish heightened standards for a large national bank’s risk governance framework and the oversight of that framework by the bank’s board of directors.
Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 provides a framework for regulation of depository institutions and their affiliates, including parent holding companies, by their federal banking regulators. Among other things, it requires the relevant federal banking regulator to take prompt corrective action
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with respect to a depository institution if that institution does not meet certain capital adequacy standards. These regulations generally apply only to insured banks and thrifts such as MSBNA or MSPBNA and not to their parent holding companies. The Federal Reserve is, however, separately authorized to take appropriate action at the holding company level, subject to certain limitations. Under the systemic risk regime, as described above, we also would become subject to an early remediation protocol in the event of financial distress. In addition, BHCs, such as Morgan Stanley, are required to serve as a source of strength to their U.S. bank subsidiaries and commit resources to support these subsidiaries in the event such subsidiaries are in financial distress.
Transactions with Affiliates. Our U.S. Bank Subsidiaries are subject to Sections 23A and 23B of the Federal Reserve Act, which impose restrictions on “covered transactions” with any affiliates. Covered transactions include any extension of credit to, purchase of assets from, and certain other transactions by insured banks with an affiliate. These restrictions limit the total amount of credit exposure that our U.S. Bank Subsidiaries may have to any one affiliate and to all affiliates. Sections 23A and 23B also set collateral requirements and require all such transactions to be made on market terms. Derivatives, securities borrowing and securities lending transactions between our U.S. Bank Subsidiaries and their affiliates are subject to these restrictions. The Federal Reserve has
indicated that it will propose a rulemaking to implement changes to these restrictions made by the Dodd-Frank Act.
In addition, the Volcker Rule generally prohibits covered transactions between (i) us or any of our affiliates and (ii) covered funds for which we or any of our affiliates serve as the investment manager, investment adviser, commodity trading advisor or sponsor, or other covered funds organized and offered by us or any of our affiliates pursuant to specific exemptions in the Volcker Rule. See also “Financial Holding Company—Activities Restriction under the Volcker Rule” above.
FDIC Regulation. An FDIC-insured depository institution is generally liable for any loss incurred or expected to be incurred by the FDIC in connection with the failure of an insured depository institution under common control by the same BHC. As commonly controlled FDIC-insured depository institutions, each of MSBNA and MSPBNA could be responsible for any loss to the FDIC from the failure of the other. In addition, both institutions are exposed to changes in the cost of FDIC insurance. Under the Dodd-Frank Act, some of the restoration of the FDIC’s reserve fund must be paid for exclusively by large depository institutions, including MSBNA.
Institutional Securities and Wealth Management
Broker-Dealer and Investment Adviser Regulation. Our primary U.S. broker-dealer subsidiaries, Morgan Stanley & Co. LLC (“MS&Co.”) and MSSB LLC, are registered broker-dealers with the SEC and in all 50 states, the District of
Columbia, Puerto Rico and the U.S. Virgin Islands, and are members of various self-regulatory organizations, including FINRA, and various securities exchanges and clearing organizations. Broker-dealers are subject to laws and regulations covering all aspects of the securities business, including sales and trading practices, securities offerings, publication of research reports, use of customers’ funds and securities, capital structure, risk management controls in connection with market access, recordkeeping and retention, and the conduct of their directors, officers, representatives and other associated persons. Broker-dealers are also regulated by securities administrators in those states where they do business. Violations of the laws and regulations governing a broker-dealer’s actions could result in censures, fines, the issuance ofcease-and-desist orders, revocation of licenses or registrations, the suspension or expulsion from the securities industry of such broker-dealer or its officers or employees, or other similar consequences by both federal and state securities administrators. Our broker-dealer subsidiaries are also members of the Securities Investor Protection Corporation, which provides certain protections for customers of broker-dealers against losses in the event of the insolvency of a broker-dealer.
MSSB LLC is also a registered investment adviser with the SEC. MSSB LLC’s relationship with its investment advisory clients is subject to the fiduciary and other obligations imposed on investment advisers under the Investment Advisers Act of 1940, and the rules and regulations promulgated thereunder as well as various state securities laws. These laws and regulations generally grant the SEC and other supervisory bodies broad administrative powers to addressnon-compliance, including the power to restrict or limit MSSB LLC from carrying on its investment advisory and other asset management activities. Other sanctions that may be imposed include the suspension of individual employees, limitations on engaging in certain activities for specified periods of time or for specified types of clients, the revocation of registrations, other censures and significant fines.
The Firm is subject to various regulations that affect broker-dealer sales practices and customer relationships. For example, under the Dodd-Frank Act, the SEC is authorized to impose a fiduciary duty rule applicable to broker-dealers when providing personalized investment advice about securities to retail customers. The SEC released for public comment a package of proposed rulemaking on the standards of conduct and required disclosures for broker-dealers and investment advisers. One of the proposals, entitled “Regulation Best Interest,” would require broker-dealers to act in the “best interest” of retail customers althoughat the time a recommendation is made without placing the financial or other interests of the broker-dealer ahead of the interest of the retail customer. Additionally, the SEC has not yet acted on this authority.
Asproposed a separate matter, the U.S. DOL’s conflict of interest rule under ERISA went into effect on June 9, 2017. The rule, which broadens the circumstances under which a firm and/or financial adviser is considered a fiduciary when providing certain recommendations to retirement investorsnew requirement for both broker-dealers and requires that such recommendations be in the best interests of clients, is subject tophased-in compliance. As of June 9, 2017, we and our financialinvestment advisers are considered ERISA fiduciaries under the rule when providing investment advice for a fee to retirement investors. Full compliance with the rule’s related exemptions is currently scheduled to be required by July 1, 2019. In addition, the U.S. DOL is undertaking an examination of the rule that may result in changes to the rule or its related exemptions or a change in the full compliance date. Given the breadth and scale of our platform and continued investment in technology and infrastructure, we believe that we will be able to provide compliant solutionsa brief
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relationship summary to meet our clients’retail investors with information intended to clarify the relationship between the parties. The SEC issued a proposed interpretation regarding the fiduciary duty that investment needs. However,advisers owe their clients. None of these developments may impact the manner in which affected businesses are conducted, decrease profitability and increase potential litigation or enforcement risk.proposals have yet been finalized.
Margin lending by broker-dealers is regulated by the Federal Reserve’s restrictions on lending in connection with customer and proprietary purchases and short sales of securities, as well as securities borrowing and lending activities. Broker-dealers are also subject to maintenance and other margin requirements imposed under FINRA and other self-regulatory organization rules. In many cases, our broker-dealer subsidiaries’ margin policies are more stringent than these rules.
As registered U.S. broker-dealers, certain of our subsidiaries are subject to the SEC’s net capital rule and the net capital requirements of various exchanges, other regulatory authorities and self-regulatory organizations. These rules are generally designed to measure the broker-dealer subsidiary’s general financial integrity and/or liquidity and require that at least a minimum amount of net and/or liquid assets be maintained by the subsidiary. See also “Financial Holding Company—Consolidated Supervision” and “Financial Holding Company—Liquidity Standards” above. Rules of FINRA and other self-regulatory organizations also impose limitations and requirements on the transfer of member organizations’ assets.
Research. Research-related regulations have been implemented in many jurisdictions, including in the U.S., where FINRA has adopted rules that cover research relating to both equity and debt securities. In addition, European regulators have introduced new requirements in the Markets in Financial Instruments Directive II (“MiFID IIII”) relating to the unbundling of research services and execution services, which may affect the way we conduct our activities.services. Both U.S. andnon-U.S. regulators continue to focus on research conflicts of interest and may impose additional regulations.
Regulation of Futures Activities and Certain Commodities Activities. MS&Co., as a futures commission merchant, and MSSB LLC, as an introducing broker, are subject to net capital requirements of, and certain of their activities are regulated by, the CFTC, the NFA, CME Group, and various commodity futures exchanges. MS&Co. and MSSB LLC and certain of their affiliates are registered members of the NFA in various capacities. Rules and regulations of the CFTC, NFA and commodity futures exchanges address obligations related to, among other things, customer protections, the segregation of customer funds and the holding of secured amounts, the use by futures commission merchants of customer funds, recordkeeping and reporting obligations of futures commission merchants and introducing brokers, risk disclosure, risk management and discretionary trading.
Our commodities activities are subject to extensive and evolving energy, commodities, environmental, health and safety, and other governmental laws and regulations in the U.S. and abroad. Intensified scrutiny of certain energy markets by U.S. federal, state and local authorities in the U.S. and abroad and by the public has resulted in increased regulatory and legal enforcement and remedial proceedings involving companies conducting the activities in which we are engaged.
Derivatives Regulation. Under the U.S. regulatory regime for “swaps” and “security-based swaps” (collectively, “Swaps”) implemented pursuant to the Dodd-Frank Act, we
are subject to regulations including, among others, public and regulatory reporting, central clearing and mandatory trading on regulated exchanges or execution facilities for certain types of Swaps. The CFTC has completed the majority of its regulations in this area, most of which are in effect. The SEC has also finalized many of its Swaps regulations, although a significant number are not yet in effect. The Dodd-Frank Act also requires the registration of “swap dealers” with the CFTC and “security-based swap dealers” with the SEC. Certain of our subsidiaries have registered with the CFTC as swap dealers and will in the future be required to register with the SEC as security-based swap dealers. Such Swaps Entities are or will be subject to a comprehensive regulatory regime with new obligations for the Swaps activities for which they are registered, including capital requirements, margin requirements for uncleared Swaps and comprehensive business conduct rules. Each of the CFTC and the SEC have proposed rules to impose capital standards on Swaps Entities subject to its respective jurisdiction, which include our subsidiaries, but these rules have not yet been finalized.
The specific parameters of some of these requirements for Swaps have been and continue to be developed through the CFTC, SEC and bank regulator rulemakings. In 2015, the federal banking regulators and the CFTC separately issued final rules establishing uncleared swap margin requirements for Swaps Entities subject to their respective regulation, including MSBNA, Morgan Stanley Capital Services LLC and Morgan Stanley & Co. International plc (“MSIP”), respectively. The variation margin requirements under these rules were effective as of March 1, 2017. The rulesphase-in initial margin requirements from September 1, 2016 through September 1, 2020, depending on the level of OTC derivatives activity of the swap dealer and the relevant counterparty. Margin rules with the same or similar compliance dates have been adopted or are in the process of being finalized by regulators outside the U.S., and certain of our subsidiaries may be subject to such rules.
Although important areas within the global derivatives regulatory framework have been finalized in recent years, additional
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changes are expected. For example, in November 2018, the CFTC proposed revisions to the rules governing swap execution facilities. As the derivatives regulatory framework evolves, we expect to continue to face increased costs and regulatory oversight. Complying with registration and other regulatory requirements has required, and is expected to require in the future, systems and other changes. Compliance with Swaps-related regulatory capital requirements may also require us to devote more capital to our Swaps business.
Our Institutional Securities and Wealth Management business segment activities are also regulated in jurisdictions outside the U.S. See“Non-U.S. Regulation” herein.
Investment Management
Many of the subsidiaries engaged in our asset management activities are registered as investment advisers with the SEC. Many aspects of our asset management activities are also subject to federal and state laws and regulations primarily intended to benefit the investor or client. These laws and regulations generally grant supervisory agencies and bodies broad administrative powers, including the power to limit or restrict us from carrying on our asset management activities in the event that we fail to comply with such laws and regulations. Sanctions that may be imposed for such failure include the suspension of individual employees, limitations on our engaging in various asset management activities for specified periods of time or specified types of clients, the revocation of registrations, other censures and significant fines. In order to facilitate our asset management business, a U.S. broker-dealer subsidiary of ours, Morgan Stanley Distribution, Inc., acts as distributor to the Morgan Stanley mutual funds and as placement agent to certain private investment funds managed by our Investment Management business segment.
Our asset management activities are subject to certain additional laws and regulations, including, but not limited to, additional reporting and recordkeeping requirements (including with respect to clients that are private funds) and restrictions on sponsoring or investing in, or maintaining certain other relationships with, “covered funds,” as defined in the Volcker Rule, subject to certain limited exemptions. Many of these requirements have increased the expenses associated with our asset management activities and/or reduced the investment returns we are able to generate for us and our asset management clients. See also “Financial Holding Company—Activities Restrictions under the Volcker Rule.”
In addition, certain of our affiliates are registered as commodity trading advisors and/or commodity pool operators, or are operating under certain exemptions from such registration pursuant to CFTC rules and other guidance, and have certain responsibilities with respect to each pool they advise. Violations of the rules of the CFTC, the NFA or the
commodity exchanges could result in remedial actions, including fines, registration restrictions or terminations, trading prohibitions or revocations of commodity exchange memberships. See also “Institutional Securities and Wealth Management—Broker-Dealer and Investment Adviser Regulation,” “Institutional Securities and Wealth Management—Regulation of Futures Activities and Certain Commodities Activities,” and “Institutional Securities and Wealth Management—Derivatives Regulation” above and“Non-U.S. Regulation,” below for a discussion of other regulations that impact our Investment Management business
activities, including among other things, the Department of Labor’s conflict of interest rule and MiFID II.
Our Investment Management business activities are also regulated outside the U.S. For example, the FCAU.K. Financial Conduct Authority (“FCA”) is the primary regulator of our business in the U.K.; the Financial Services Agency regulates our business in Japan; the Securities and Futures Commission of Hong Kong regulates our business in Hong Kong; and the Monetary Authority of Singapore regulates our business in Singapore. See also“Non-U.S. Regulation” herein.
Non-U.S. Regulation
All of our businesses are regulated extensively bynon-U.S. regulators, including governments, securities exchanges, commodity exchanges, self-regulatory organizations, central banks and regulatory bodies, especially in those jurisdictions in which we maintain an office. Certain regulators have prudential, conduct and other authority over us or our subsidiaries, as well as powers to limit or restrict us from engaging in certain businesses or to conduct administrative proceedings that can result in censure,censures, fines, the issuance ofcease-and-desist orders, or the suspension or expulsion of a regulated entity or its affiliates.
Some of our subsidiaries are regulated as broker-dealers and other regulated entity types under the laws of the jurisdictions in which they operate. Subsidiaries engaged in banking and trust activities outside the U.S. are regulated by various government agencies in the particular jurisdiction where they are chartered, incorporated and/or conduct their business activity. For instance, the PRA, the FCA and several securities and futures exchanges in the U.K., including the London Stock Exchange and ICE Futures Europe, regulate our activities in the U.K.; the Bundesanstalt für Finanzdienstleistungsaufsicht (the Federal Financial Supervisory Authority) and the Deutsche Börse AG regulate our activities in the Federal Republic of Germany; the Financial Services Agency, the Bank of Japan, the JapaneseJapan Securities Dealers Association and several Japanese securities and futures exchanges and ministries regulate our activities in Japan; the Securities and Futures Commission of Hong Kong, the Hong Kong Monetary Authority and the Hong Kong Exchanges and Clearing Limited regulate our operations in Hong Kong; and the
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Monetary Authority of Singapore and the Singapore Exchange Limited regulate our business in Singapore.
Our largestnon-U.S. entity, MSIP, is subject to extensive regulation and supervision by the PRA, which has broad legal authority to establish prudential and other standards applicable to MSIP that seek to ensure its safety and soundness and to minimize adverse effects on the stability of the U.K.
financial system. MSIP is also regulated and supervised by the FCA with respect to business conduct matters.
Non-U.S. policymakers and regulators, including the European Commission and European Supervisory Authorities (among others, the European Banking Authority and the European Securities and Markets Authority), continue to propose and adopt numerous reforms, including those that may further impact the structure of banks or subject us to new prudential requirements, and to formulate regulatory standards and measures that will be of relevance and importance to our European operations.
In November 2016, the European Commission published a package of proposals including various risk reduction measures. These include proposed amendments to the Capital Requirements Directive and Regulation providing updates to risk-based capital, liquidity, leverage and other prudential standards on a consolidated basis, consistent with final Basel standards. In addition, the proposals would require certain large,non-E.U. financial groups with two or more institutions established in the E.U. to establish a singlean E.U. IHC. The proposals would require E.U. banks and broker-dealers to be held below the E.U. IHC; until more specific regulations are proposed, it remains unclear which other E.U. entities would need to be held beneath the E.U. IHC. The E.U. IHC would be subject to direct supervision and authorization by the European Central Bank or the relevant national E.U. regulator. Further amendments were also proposed to the E.U. bank recovery and resolution regime under the E.U. Bank Recovery and Resolution Directive (“BRRD”). TheIt is expected that the proposals will now be considered by the European Parliament and the Council of the E.U. Theadopted in early 2019, however their final form, of the proposals, as well as the date of their adoption, is not yet certain.
The amendments to the BRRD build on previous proposals by regulators in the U.K., E.U. and other major jurisdictions to finalize recovery and resolution planning frameworks and related regulatory requirements that will apply to certain of our subsidiaries that operate in those jurisdictions. For instance, the BRRD established a recovery and resolution framework for E.U. credit institutions and investment firms, including MSIP. In addition, certain jurisdictions, including the U.K. and other E.U. jurisdictions, have implemented, or are in the process of implementing, changes to resolution regimes to provide resolution authorities with the ability to recapitalize a failing entity organized in such jurisdictions by
writing down certain unsecured liabilities or converting certain unsecured liabilities into equity.
Regulators in the U.K., E.U. and other major jurisdictions have also finalized other regulatory standards applicable to certain of our subsidiaries that operate in those jurisdictions. For instance, the European Market Infrastructure Regulation introduced new requirements regarding the central clearing and reporting of derivatives, as well as margin requirements
for uncleared derivatives. MiFID II, which took effect on January 3, 2018, introduced comprehensive and new trading and market infrastructure reforms in the E.U., including new trading venues, enhancements topre- and post-trading transparency, and additional investor protection requirements, among others. Although the full impact of these changes remains unclear, weWe have had to make extensive changes to our operations, including systems and controls in order to comply with MiFID II.
Financial Crimes Program
Our Financial Crimes program is coordinated on an enterprise-wide basis and supports our financial crime prevention efforts across all regions and business units with responsibility for governance, oversight and execution of our AML, economic sanctions (“Sanctions”) and anti-corruption programs.
In the U.S., the Bank Secrecy Act, as amended by the USA PATRIOT Act of 2001, imposes significant obligations on financial institutions to detect and deter money laundering and terrorist financing activity, including requiring banks, BHCs and their subsidiaries, broker-dealers, futures commission merchants, introducing brokers and mutual funds to implement AML programs, verify the identity of customers that maintain accounts, and monitor and report suspicious activity to appropriate law enforcement or regulatory authorities. Outside the U.S., applicable laws, rules and regulations similarly require designated types of financial institutions to implement AML programs.
We have implemented policies, procedures and internal controls that are designed to comply with all applicable AML laws and regulations. Regarding Sanctions, we have implemented policies, procedures and internal controls that are designed to comply with the regulations and economic sanctions programs administered by the U.S. Treasury’s OFAC,Office of Foreign Assets Control (“OFAC”), which target foreign countries, entities and individuals based on external threats to U.S. foreign policy, national security or economic interests, and to comply, as applicable, with similar sanctions programs imposed by foreign governments or global or regional multilateral organizations such as the United Nations Security Council and the E.U. Council.
We are also subject to applicable anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, in the jurisdictions in which we operate. Anti-corruption
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laws generally prohibit offering, promising, giving or authorizing others to give anything of value, either directly or indirectly, to a government official or private party in order to influence official action or otherwise gain an unfair business advantage, such as to obtain or retain business. We have implemented policies, procedures and internal controls that are designed to comply with such laws, rules and regulations.
Protection of Client Information
Many aspects of our businesses are subject to legal requirements concerning the use and protection of certain customer information, including those adopted pursuant to the Gramm-Leach-Bliley Act and the Fair and Accurate Credit Transactions Act of 2003 in the U.S., the E.U. Data Protection Directive and various laws in Asia, including the Japanese Personal Information (Protection) Law, the Hong Kong Personal Data (Protection) Ordinance and the Australian Privacy Act. We have adopted measures designed to comply with these and related applicable requirements in all relevant jurisdictions.
Executive Officers of Morgan Stanley
The executive officers of Morgan Stanley and their age and titles as of February 27, 201826, 2019 are set forth below. Business experience for the past five years is provided in accordance with SEC rules.
Jeffrey S. Brodsky (53)(54). Executive Vice President and Chief Human Resources Officer of Morgan Stanley (since January 2016). Vice President and Global Head of Human Resources (January 2011 to December 2015).Co-Head of Human Resources (January 2010 to December 2011). Head of Morgan Stanley Smith Barney Human Resources (June 2009 to January 2010).
James P. Gorman (59)(60). Chairman of the Board of Directors and Chief Executive Officer of Morgan Stanley (since January 2012). President and Chief Executive Officer (January 2010 to December 2011) and member of the Board of Directors (since January 2010).Co-President (December 2007 to December 2009) andCo-Head of Strategic Planning (October 2007 to December 2009). President and Chief Operating Officer of Wealth Management (February 2006 to April 2008).
Eric F. Grossman (51)(52). Executive Vice President and Chief Legal Officer of Morgan Stanley (since January 2012). Global Head of Legal (September 2010 to January 2012).
Global Head of Litigation (January 2006 to September 2010) and General Counsel of the Americas (May 2009 to September 2010). General Counsel of Wealth Management (November 2008 to September 2010). Partner at the law firm of Davis Polk & Wardwell LLP (June 2001 to December 2005).
Keishi Hotsuki (55)(56). Executive Vice President (since May 2014) and Chief Risk Officer of Morgan Stanley (since May 2011). Interim Chief Risk Officer (January 2011 to May 2011) and Head of Market Risk Department (March 2008 to April 2014). Director of Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (since May 2010). Global Head of Market Risk Management at Merrill Lynch (June 2005 to September 2007).
Colm Kelleher (60)(61). President of Morgan Stanley (since January 2016). Executive Vice President (October 2007 to January 2016). President of Institutional Securities (January 2013 to January 2016). Head of International (January 2011 to January 2016).Co-President of Institutional Securities (January 2010 to December 2012). Chief Financial Officer andCo-Head of Strategic Planning (October 2007 to December 2009). Head of Global Capital Markets (February 2006 to October 2007).Co-Head of Fixed Income Europe (May 2004 to February 2006). Director of Norfolk Southern Corporation (since January 2019).
Jonathan M. Pruzan (49)(50). Executive Vice President and Chief Financial Officer of Morgan Stanley (since May 2015) and Head of Corporate Strategy (since December 2016).Co-Head of Global Financial Institutions Group (January 2010 to April 2015).Co-Head of North American Financial Institutions Group M&A (September 2007 to December 2009). Head of the U.S. Bank Group (April 2005 to August 2007).
Daniel A. Simkowitz (52)(53). Head of Investment Management of Morgan Stanley (since October 2015).Co-Head of Global Capital Markets (March 2013 to September 2015). Chairman of Global Capital Markets (November 2009 to March 2013). Managing Director in Global Capital Markets (December 2000 to November 2009).
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For a discussion of the risks and uncertainties that may affect our future results and strategic objectives, see “Forward-Looking Statements” immediately preceding “Business” and “Return on Equity and Tangible Common Equity Targets” and “Effects of Inflation and Changes in Interest and Foreign Exchange Rates” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Market Risk
Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, volatilities, correlations or other market factors, such as market liquidity, will result in losses for a position or portfolio owned by us. For more information on how we monitor and manage market risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Market Risk.”
Our results of operations may be materially affected by market fluctuations and by global and economic conditions and other factors, including changes in asset values.
Our results of operations have been in the past and may, in the future, be materially affected by market fluctuations due to global financial markets, economic conditions, changes to the global trade policies and tariffs and other factors, including the level and volatility of equity, fixed income and commodity prices, the level and term structure of interest rates, inflation and currency values, and the level of other market indices.
The results of our Institutional Securities business segment, particularly results relating to our involvement in primary and secondary markets for all types of financial products, are subject to substantial market fluctuations due to a variety of factors that we cannot control or predict with great certainty. These fluctuations impact results by causing variations in new business flows and activity and in the fair value of securities and other financial products. Fluctuations also occur due to the level of global market activity, which, among other things, affects the size, number and timing of investment banking client assignments and transactions and the realization of returns from our principal investments.
During periods of unfavorable market or economic conditions, the level of individual investor participation in the global markets, as well as the level of client assets, may also decrease, which would negatively impact the results of our Wealth Management business segment.
In addition, fluctuations in global market activity could impact the flow of investment capital into or from AUM and the way customers allocate capital among money market, equity, fixed
income or other investment alternatives, which
could negatively impact our Investment Management business segment.
The value of our financial instruments may be materially affected by market fluctuations. Market volatility, illiquid market conditions and disruptions in the credit markets may make it extremely difficult to value and monetize certain of our financial instruments, particularly during periods of market displacement. Subsequent valuations in future periods, in light of factors then prevailing, may result in significant changes in the values of these instruments and may adversely impact historical or prospective fees and performance-based fees (also known as incentive fees, which include carried interest) in respect of certain business.businesses. In addition, at the time of any sales and settlements of these financial instruments, the price we ultimately realize will depend on the demand and liquidity in the market at that time and may be materially lower than their current fair value. Any of these factors could cause a decline in the value of our financial instruments, which may have an adverse effect on our results of operations in future periods.
In addition, financial markets are susceptible to severe events evidenced by rapid depreciation in asset values accompanied by a reduction in asset liquidity. Under these extreme conditions, hedging and other risk management strategies may not be as effective at mitigating trading losses as they would be under more normal market conditions. Moreover, under these conditions, market participants are particularly exposed to trading strategies employed by many market participants simultaneously and on a large scale. Our risk management and monitoring processes seek to quantify and mitigate risk to more extreme market moves. However, severe market events have historically been difficult to predict and we could realize significant losses if extreme market events were to occur.
Holding large and concentrated positions may expose us to losses.
Concentration of risk may reduce revenues or result in losses in our market-making, investing, block trading, underwriting and lending businesses in the event of unfavorable market movements, or when market conditions are more favorable for our competitors. We commit substantial amounts of capital to these businesses, which often results in our taking large positions in the securities of, or making large loans to, a particular issuer or issuers in a particular industry, country or region. For further information regarding our country risk exposure, see also “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Country Risk Exposure.”
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Credit Risk
Credit risk refers to the risk of loss arising when a borrower, counterparty or issuer does not meet its financial obligations to us. For more information on how we monitor and manage credit risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk.”
We are exposed to the risk that third parties that are indebted to us will not perform their obligations.
We incur significant credit risk exposure through our Institutional Securities business segment. This risk may arise from a variety of business activities, including, but not limited to,to: extending credit to clients through various lending commitments; entering into swap or other derivative contracts under which counterparties have obligations to make payments to us; providing short- or long-term funding that is secured by physical or financial collateral whose value may at times be insufficient to fully cover the loan repayment amount; posting margin and/or collateral and other commitments to clearing houses, clearing agencies, exchanges, banks,securities firms and other financial counterparties; and investing and trading in securities and loan pools, whereby the value of these assets may fluctuate based on realized or expected defaults on the underlying obligations or loans.
We also incur credit risk in our Wealth Management business segment lending to mainly individual investors, including, but not limited to, margin- and securities-based loans collateralized by securities, residential mortgage loans and HELOC.HELOCs.
While we believe current valuations and reserves adequately address our perceived levels of risk, adverse economic conditions may negatively impact our clients and our credit exposures. In addition, as a clearing member of several central counterparties, we finance our customer positions and could be held responsible for the defaults or misconduct of our customers. Although we regularly review our credit exposures, default risk may arise from events or circumstances that are difficult to detect or foresee.
A default by a large financial institution could adversely affect financial markets.
The commercial soundness of many financial institutions may be closely interrelated as a result of credit, trading, clearing or other relationships among the institutions. Increased centralization of trading activities through particular clearing houses, central agents or exchanges as required by provisions of the Dodd-Frank Act may increase our concentration of risk with respect to these entities. As a result, concerns about, or a default or threatened default by,
one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other institutions.
This is sometimes referred to as “systemic risk” and may adversely affect financial intermediaries, such as clearing houses, clearing agencies, exchanges, banks and securities firms, with which we interact on a daily basis and, therefore, could adversely affect us. See also “Systemic Risk Regime” under “Business—Supervision and Regulation—Financial Holding Company.”
Operational Risk
Operational risk refers to the risk of loss, or of damage to our reputation, resulting from inadequate or failed processes or systems, from human factors or from external events (e.g.(e.g., fraud, theft, legal and compliance risks, cyber attacks or damage to physical assets). We may incur operational risk across the full scope of our business activities, including revenue-generating activities (e.g.(e.g., sales and trading) and support and control groups (e.g.(e.g., information technology and trade processing). Legal, regulatory and compliance risk is included in the scope of operational risk and is discussed below under “Legal, Regulatory and Compliance Risk.” For more information on how we monitor and manage operational risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Operational Risk.”
We are subject to operational risks, including a failure, breach or other disruption of our operationaloperations or security systems or those of our third parties (or third parties thereof), which could adversely affect our businesses or reputation.
Our businesses are highly dependent on our ability to process and report, on a daily basis, a large number of transactions across numerous and diverse markets in many currencies. We may introduce new products or services or change processes or reporting, including in connection with new regulatory requirements, resulting in new operational risk that we may not fully appreciate or identify.
The trend toward direct access to automated, electronic markets and the move to more automated trading platforms has resulted in usingthe use of increasingly complex technology that relies on the continued effectiveness of the programming code and integrity of the data to process the trades. We rely on the ability of our employees, consultants, our internal systems and systems at technology centers maintained by unaffiliated third parties to operate our different businesses and process a high volume of transactions. Additionally, we are subject to complex and evolving laws and regulations governing cybersecurity, privacy and data protection, which may differ and potentially conflict, in various jurisdictions.
As a major participant in the global capital markets, we face the risk of incorrect valuation or risk management of our trading positions due to flaws in data, models, electronic trading systems or processes or due to fraud.fraud or cyber attack.
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We also face the risk of operational failure or termination of any of the clearing agents, exchanges, clearing houses or other financial intermediaries we use to facilitate our lending, securities and derivatives transactions. In the event of a breakdown or improper operation of our or a direct or indirect third party’s systems (or third parties thereof) or processes or improper or unauthorized action by third parties, including consultants and subcontractors or our employees, we could suffer financial loss, an impairment to our liquidity position, a disruption of our businesses, regulatory sanctions or damage to our reputation. In addition, the interconnectivity of multiple financial institutions with central agents, exchanges and clearing houses, and the increased importance of these entities, increases the risk that an operational failure at one institution or entity may cause an industry-wide operational failure that could materially impact our ability to conduct business. Furthermore, the concentration of financial institution company and personal information held by a handful of third parties increases the risk that a breach at a key third party may cause an industry-wide data breach that could significantly increase the cost and risk of conducting business.
Despite the business contingency and security response plans we have in place, there can be no assurance that such plans will fully mitigate all potential risks to us. Our ability to conduct business may be adversely affected by a disruption in the infrastructure that supports our business and the communities where we are located, which are concentrated in the New York metropolitan area, London, Hong Kong and Tokyo, as well as Mumbai, Budapest, Glasgow and Baltimore. This may include a disruption involving physical site access, cyber or information securitycybersecurity incidents, terrorist activities, disease pandemics, catastrophic events, natural disasters, extreme weather events, electrical outage, environmental hazard, computer servers, communications or other services we use, our employees or third parties with whom we conduct business.
Although we employ backup systems for our data, those backup systems may be unavailable following a disruption, the affected data may not have been backed up or may not be recoverable from the backup, or the backup data may be costly to recover, which could adversely affect our business.
A cyber attack, information or security breach or a technology failure could adversely affect our ability to conduct our business, manage our exposure to risk or result in disclosure or misuse of confidential or proprietary information and otherwise adversely impact our results of operations, liquidity and financial condition, as well as cause reputational harm.
We maintain a significant amount of personal information on our customers, clients, employees and certain counterparties that we
are required to protect under various state, federal and international data protection and privacy laws. These laws
may be in conflict with one another, or courts and regulators may interpret them in ways that we had not anticipated or that adversely affect our business.
Cybersecurity and information risks for financial institutions have significantly increased in recent years in part because of the proliferation of new technologies, the use of the internet and mobile telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists and other external extremist parties, including foreign state actors, in some circumstances as a means to promote political ends. In addition to the growing sophistication of certain parties, the commoditization of cyber tools which are able to be weaponized by less sophisticated actors has led to an increase in the exploitation of technological vulnerabilities. Any of these parties may also attempt to fraudulently induce employees, customers, clients, vendors or other third parties or users of our systems to disclose sensitive information in order to gain access to our data or that of our employees or clients. Cybersecurity and information security risks may also derive from human error, fraud or malice on the part of our employees or third parties, including third party providers, or may result from accidental technological failure. In addition, third parties with whom we do business, their service providers, as well as other third parties with whom our customers do business, may also be sources of cybersecurity risks, particularly where activities of customers are beyond our security and control systems. There is no guarantee that the measures we take will provide absolute security or recoverability given the techniques used in cyber attacks are complex and frequently change, and may not be able to be anticipated.
Like other financial services firms, the Firm and its third party providers continue to be the subject of unauthorized access attacks, mishandling or misuse of information, computer viruses or malware, cyber attacks designed to obtain confidential information, destroy data, disrupt or degrade service, sabotage systems or cause other damage, denial of service attacks, data breaches and other events. There can be no assurance that such unauthorized access, mishandling or misuse of information, or cyber incidents will not occur in the future, and they could occur more frequently and on a more significant scale.
A cyber attack, information or security breach or a technology failure of ours or of a third party could jeopardize our or our clients’, employees’, partners’, vendors’ or counterparties’ personal, confidential, proprietary or other information processed and stored in, and transmitted through, our and our third parties’ computer systems. Furthermore, such events
could cause interruptions or malfunctions in our, our clients’, employees’, partners’, vendors’, counterparties’ or third parties’ operations, as well as the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other
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information of ours, our employees, our customers or of other third parties. Any of these events could result in reputational damage with our clients and the market, client dissatisfaction, additional costs to us to maintain and update our operational and security systems and infrastructure, regulatory investigations, litigation or enforcement, or regulatory fines or penalties, any of which could adversely affect our business, financial condition or results of operations.
Given our global footprint and the high volume of transactions we process, the large number of clients, partners, vendors and counterparties with which we do business, and the increasing sophistication of cyber attacks, a cyber attack, information or security breach could occur and persist for an extended period of time without detection. We expect that any investigation of a cyber attack would be inherently unpredictable and that it would take time before the completion of any investigation and before there is availability of full and reliable information. During such time we would not necessarily know the extent of the harm or how best to remediate it, and certain errors or actions could be repeated or compounded before they are discovered and remediated, all or any of which would further increase the costs and consequences of a cyber attack.
While many of our agreements with partners and third party vendors include indemnification provisions, we may not be able to recover sufficiently, or at all, under such provisions to adequately offset any losses.losses we may incur. In addition, although we maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber and information security risks, such insurance coverage may be insufficient to cover all losses.
The cost of managing cyber and information security risks and attacks along with complying with new and increasingly expansive regulatory requirements could adversely affect our results of operations and business.
Liquidity Risk
Liquidity risk refers to the risk that we will be unable to finance our operations due to a loss of access to the capital markets or difficulty in liquidating our assets. Liquidity risk also encompasses our ability (or perceived ability) to meet our financial obligations without experiencing significant business disruption or reputational damage that may threaten our viability as a going concern. Liquidity risk also encompasses the associated funding risks triggered by the market or idiosyncratic stress events that may negatively affect our liquidity and may impact our ability to raise new funding. For
more information on how we monitor and manage liquidity risk, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and
Capital Resources” and “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Liquidity Risk.”
Liquidity is essential to our businesses and we rely on external sources to finance a significant portion of our operations.
Liquidity is essential to our businesses. Our liquidity could be negatively affected by our inability to raise funding in the long-term or short-term debt capital markets or our inability to access the secured lending markets. Factors that we cannot control, such as disruption of the financial markets or negative views about the financial services industry generally, including concerns regarding fiscal matters in the U.S. and other geographic areas, could impair our ability to raise funding.
In addition, our ability to raise funding could be impaired if investors or lenders develop a negative perception of our long-term or short-term financial prospects due to factors such as an incurrence of large trading losses, a downgrade by the rating agencies, a decline in the level of our business activity, if regulatory authorities take significant action against us or our industry, or we discover significant employee misconduct or illegal activity.
If we are unable to raise funding using the methods described above, we would likely need to finance or liquidate unencumbered assets, such as our investment portfolios or trading assets, to meet maturing liabilities. We may be unable to sell some of our assets or we may have to sell assets at a discount to market value, either of which could adversely affect our results of operations, cash flows and financial condition.
Our borrowing costs and access to the debt capital markets depend on our credit ratings.
The cost and availability of unsecured financing generally are impacted by our long-term and short-term credit ratings. The rating agencies continue to monitor certain issuer specific factors that are important to the determination of our credit ratings, including governance, the level and quality of earnings, capital adequacy, liquidity and funding, risk appetite and management, asset quality, strategic direction, and business mix. Additionally, the rating agencies will look at other industry-wide factors such as regulatory or legislative changes, including, for example, regulatory changes, macro-economic environment, and perceived levels of third party support, and it is possible that they could downgrade our ratings and those of similar institutions.
Our credit ratings also can have a significant impact on certain trading revenues, particularly in those businesses where longer term counterparty performance is a key consideration, such as OTC and other derivative transactions,
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including credit derivatives and interest rate swaps. In connection with certain OTC trading agreements and certain other agreements associated with our Institutional Securities business segment, we may be required to provide additional collateral to, or immediately settle any outstanding liability balance with, certain counterparties in the event of a credit ratings downgrade.
Termination of our trading and other agreements could cause us to sustain losses and impair our liquidity by requiring us to find other sources of financing or to make significant cash payments or securities movements. The additional collateral or termination payments which may occur 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. and S&P Global Ratings. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Ratings—Incremental Collateral or Terminating Payments upon Potential Future Rating Downgrade.”
We are a holding company and depend on payments from our subsidiaries.
The Parent Company has no operations and depends on dividends, distributions and other payments from its subsidiaries to fund dividend payments and to fund all payments on its obligations, including debt obligations. Regulatory, tax restrictions or elections and other legal restrictions may limit our ability to transfer funds freely, either to or from our subsidiaries. In particular, many of our subsidiaries, including our bank and broker-dealer subsidiaries, are subject to laws, regulations and self-regulatory organization rules that limit, as well as authorize regulatory bodies to block or reduce, the flow of funds to the Parent Company, or that prohibit such transfers or dividends altogether in certain circumstances, including steps to “ring fence” entities by regulators outside of the U.S. to protect clients and creditors of such entities in the event of financial difficulties involving such entities.
These laws, regulations and rules may hinder our ability to access funds that we may need to make payments on our obligations. Furthermore, as a BHC, we may become subject to a prohibition or to limitations on our ability to pay dividends.The OCC, the Federal Reserve, the OCC, and the FDIC have the authority, and under certain circumstances the duty, to prohibit or to limit the payment of dividends by the banking organizations they supervise, including us and our U.S. Bank Subsidiaries.
Our liquidity and financial condition have in the past been, and in the future could be, adversely affected by U.S. and international markets and economic conditions.
Our ability to raise funding in the long-term or short-term debt capital markets or the equity markets, or to access
secured lending markets, has in the past been, and could in the future be, adversely affected by conditions in the U.S. and international markets and economies. Global market and economic conditions have been particularly disrupted and volatile in the last several years and may be in the future.
In particular, our cost and availability of funding in the past have been, and may in the future be, adversely affected by illiquid credit markets and wider credit spreads. Significant turbulence in the U.S., the E.U. and other international markets and economies could adversely affect our liquidity and financial condition and the willingness of certain counterparties and customers to do business with us.
Legal, Regulatory and Compliance Risk
Legal, regulatory and compliance risk includes the risk of legal or regulatory sanctions, material financial loss including fines, penalties, judgments, damages and/or settlements, or loss to reputation we may suffer as a result of our failure to comply with laws, regulations, rules, related self-regulatory organization standards and codes of conduct applicable to our business activities. This risk also includes contractual and commercial risk, such as the risk that a counterparty’s performance obligations will be unenforceable. It also includes compliance with AML, anti-corruption and terrorist financing rules and regulations. For more information on how we monitor and manage legal, regulatory and compliance risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Legal and Compliance Risk.”
The financial services industry is subject to extensive regulation, and changes in regulation will impact our business.
Like other major financial services firms, we are subject to extensive regulation by U.S. federal and state regulatory agencies and securities exchanges and by regulators and exchanges in each of the major markets where we conduct our business. These laws and regulations significantly affect the way we do business and can restrict the scope of our existing businesses and limit our ability to expand our product offerings and pursue certain investments.
The regulation of major financial firms, including the Firm, as well as of the markets in which we operate, is extensive and subject to ongoing change. We are, or will become,
subject to (among other things) wide-ranging regulation and supervision, intensive scrutiny of our businesses and any plans for expansion of those businesses, limitations on new activities, a systemic risk regime that imposes heightened capital and liquidity and funding requirements and other enhanced prudential standards, resolution regimes and resolution planning requirements, requirements for maintaining minimum amounts of external TLAC and external long-term debt, restrictions on activities and investments imposed by the Volcker Rule, comprehensive derivatives regulation, market structure regulation, tax regulations, antitrust laws, trade and transaction reporting obligations, and broadened fiduciary obligations.
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In some areas, regulatory standards are subject to final rulemaking or transition periods or may otherwise be revised in whole or in part. Ongoing implementation of, or changes in, laws and regulations could materially impact the profitability of our businesses and the value of assets we hold, expose us to additional costs, require changes to business practices or force us to discontinue businesses, adversely affect our ability to pay dividends and repurchase our stock or require us to raise capital, including in ways that may adversely impact our shareholders or creditors.
In addition, regulatory requirements that are being imposed by foreign policymakers and regulators may be inconsistent or conflict with regulations that we are subject to in the U.S. and may adversely affect us. We expect legal and regulatory requirements to be subject to ongoing change for the foreseeable future, which may result in significant new costs to comply with new or revised requirements as well as to monitor for compliance on an ongoing basis.
The application of regulatory requirements and strategies in the U.S. or other jurisdictions to facilitate the orderly resolution of large financial institutions may pose a greater risk of loss for our security holders, and subject us to other restrictions.
Pursuant to the Dodd-Frank Act, we are required to periodically submit to the Federal Reserve and the FDIC a resolution plan that describes our strategy for a rapid and orderly resolution under the U.S. Bankruptcy Code in the event of material financial distress or failure. If the Federal Reserve and the FDIC were to jointly determine that our resolution plan submission was not credible or would not facilitate an orderly resolution, and if we were unable to address any deficiencies identified by the regulators, we or any of our subsidiaries may be subject to more stringent capital, leverage, or liquidity requirements or restrictions on our growth, activities, or operations, or after atwo-year period, we may be required to divest assets or operations.
In addition, provided that certain procedures are met, we can be subject to a resolution proceeding under the orderly liquidation authority under Title II of the Dodd-Frank Act with the FDIC being appointed as receiver. The FDIC’s power under the orderly liquidation authority to disregard the priority of creditor claims and treat similarly situated creditors differently in certain circumstances, subject to certain limitations, could adversely impact holders of our unsecured debt. See “Business—Supervision and Regulation” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements.”
Further, because both our resolution plan contemplates an SPOE strategy under the U.S. Bankruptcy Code and the FDIC
has proposed an SPOE strategy through which it may apply its orderly liquidation authority powers, we believe that the application of an SPOE strategy is the reasonably likely outcome if either our resolution plan were implemented or a resolution proceeding were commenced under the orderly liquidation authority. An SPOE strategy generally contemplates the provision of additional capital and liquidity by the Parent Company to certain of its subsidiaries so that such subsidiaries have the resources necessary to implement the resolution strategy, and the Parent Company has entered into a secured amended and restated support agreement with its material entities, as defined in our 2017 resolution plan, pursuant to which it would provide such capital and liquidity.
Under the secured amended and restated support agreement, upon the occurrence of a resolution scenario, including one in which an SPOE strategy is used, the Parent Company will be obligated to contribute or loan on a subordinated basis all of its contributable material assets, other than shares in subsidiaries of the Parent Company and certain intercompany payables, to provide capital and liquidity, as applicable, to our material entities, as defined in our 2017 resolution plan.entities. The obligations of the Parent Company under the secured amended and restated support agreement are in most cases secured on a senior basis by the assets of the Parent Company (other than shares in subsidiaries of the Parent Company). As a result, claims of our material entities against the assets of the Parent Company (other than shares in subsidiaries of the Parent Company) will beare effectively senior to unsecured obligations of the Parent Company. Such unsecured obligations would beare at risk of absorbing losses of the Parent Company and its subsidiaries.
In further development of our SPOE strategy, we have created a wholly owned, direct subsidiary of the Parent Company, MS Holdings LLC (“Funding IHC”), to serve as a resolution funding vehicle. We expect that, prior to the submission of our 2019 resolution plan by July 1, 2019, the Parent Company will contribute certain of its assets to the Funding IHC and enter into an updated secured amended and restated support agreement with the Funding IHC as well as certain other subsidiaries to facilitate the execution of our SPOE strategy. Similar to the existing secured amended and restated support agreement, the updated secured amended and restated support agreement will obligate the Parent Company to transfer capital and liquidity, as revised, to the Funding IHC, and that the Parent Company and/or the Funding IHC will recapitalize and provide liquidity to material entities in the event of our material financial distress or failure.
Although an SPOE strategy, whether applied pursuant to our resolution plan or in a resolution proceeding under the orderly liquidation authority, is intended to result in better outcomes for creditors overall, there is no guarantee that the application of an SPOE strategy, including the provision of support to the Parent Company’s material entities pursuant to the secured
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Parent Company’s material entities pursuant to the secured amended and restated support agreement, will not result in greater losses for holders of our securities compared to a different resolution strategy for us.
Regulators have taken and proposed various actions to facilitate an SPOE strategy under the U.S. Bankruptcy Code, the orderly liquidation authority or other resolution regimes. For example, the Federal Reserve has issued a final rule that requirestop-tier BHCs of U.S.G-SIBs, including Morgan Stanley, to maintain minimum amounts of equity and eligible long-term debt TLAC in order to ensure that such institutions have enough loss-absorbing resources at the point of failure to be recapitalized through the conversion of debt to equity or otherwise by imposing losses on eligible TLAC where the SPOE strategy is used. The combined implication of the SPOE resolution strategy and the TLAC final rulerequirement is that our losses will be imposed on the holders of eligible long-term debt and other forms of eligible TLAC issued by the Parent Company before any losses are imposed on the holders of the debt securities of our operating subsidiaries or before putting U.S. taxpayers at risk.
In addition, certain jurisdictions, including the U.K. and other E.U. jurisdictions, have implemented, or are in the process of implementing, changes to resolution regimes to provide resolution authorities with the ability to recapitalize a failing entity organized in such jurisdiction by writing down certain unsecured liabilities or converting certain unsecured liabilities into equity. Such“bail-in” powers are intended to enable the recapitalization of a failing institution by allocating losses to its shareholders and unsecured creditors.Non-U.S. regulators are also considering requirements that certain subsidiaries of large financial institutions maintain minimum amounts of TLAC that would pass losses up from the subsidiaries to the Parent Company and, ultimately, to security holders of the Parent Company in the event of failure.
We may be prevented from paying dividends or taking other capital actions because of regulatory constraints or revised regulatory capital standards.
We are subject to comprehensive consolidated supervision, regulation and examination by the Federal Reserve, which requires us to submit, on an annual basis, a capital plan describing proposed dividend payments to shareholders, proposed repurchases of our outstanding securities and other proposed capital actions that we intend to take. The Federal Reserve may object to, or otherwise require us to modify, such plan, or may object or require modifications to a resubmitted capital plan, any of which would adversely affect shareholders.
In addition, beyond review of the plan, the Federal Reserve may impose other restrictions or conditions on us that prevent
us from paying or increasing dividends, repurchasing securities or taking other capital actions that would benefit shareholders.
Finally, the Federal Reserve may change regulatory capital standards to impose higher requirements that restrict our ability to take capital actions or may modify or impose other regulatory standards that increase our operating expenses and reduce our ability to take capital actions.
The financial services industry faces substantial litigation and is subject to extensive regulatory and law enforcement investigations, and we may face damage to our reputation and legal liability.
As a global financial services firm, we face the risk of investigations and proceedings by governmental and self-regulatory organizations in all countries in which we conduct our business. Investigations and proceedings initiated by these authorities may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. In addition to the monetary consequences, these measures could, for example, impact our ability to engage in, or impose limitations on, certain of our businesses.
The number of theseThese investigations and proceedings, as well as the amount of penalties and fines sought, has increased substantially in recent years with regardcontinue to many firms inimpact the financial services industry including the Firm, and certain U.S. and international governmental entities have increasingly brought criminal actions against, or have sought criminal convictions, pleas or deferred prosecution agreements from, financial institutions. Significant regulatory or law enforcement action against us could materially adversely affect our business, financial condition or results of operations or cause us significant reputational harm, which could seriously harm our business.
The Dodd-Frank Act also provides compensation to whistleblowers who present the SEC or CFTC with information related to securities or commodities law violations that leads to a successful enforcement action. As a result of this compensation, it is possible we could face an increased number of investigations by the SEC or CFTC.
We have been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, as well as investigations or proceedings brought by regulatory agencies, arising in connection with our activities as a global diversified financial services institution. Certain of the actual or threatened legal or regulatory actions include claims for substantial compensatory and/or punitive damages, claims for indeterminate amounts of damages, or may result in penalties, fines, or other results adverse to us.
In some cases, the issuers that would otherwise be the primary defendants in such cases are bankrupt or are in financial distress. In other cases, including antitrust litigation, we may be subject to claims for joint and several liability with other defendants for treble damages or other relief related to
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alleged conspiracies involving other institutions. Like any large corporation, we are also subject to risk from potential employee misconduct, includingnon-compliance with policies and improper use or disclosure of confidential information, or improper sales practices or conduct.
We may be responsible for representations and warranties associated with residential and commercial real estate loans and may incur losses in excess of our reserves.
We originate loans secured by commercial and residential properties. Further, we securitize and trade in a wide range of commercial and residential real estate and real estate-related whole loans, mortgages and other real estate and commercial assets and products, including residential and CMBS. In connection with these activities, we have provided, or otherwise agreed to be responsible for, certain representations and warranties. Under certain circumstances, we may be required to repurchase such assets or make other payments related to such assets if such representations and warranties were breached. We have also made representations and warranties in connection with our role as an originator of certain commercial mortgage loans that we securitized in CMBS. For additional information, see also Note 12 to the financial statements.
We currently have several legal proceedings related to claims for alleged breaches of representations and warranties. If there are decisions adverse to us in those legal proceedings, we may incur losses substantially in excess of our reserves. In addition, our reserves are based, in part, on certain factual and legal assumptions. If those assumptions are incorrect and need to be revised, we may need to adjust our reserves substantially.
Our commodities activities and investments subject us to extensive regulation, and environmental risks and regulation that may expose us to significant costs and liabilities.
In connection with the commodities activities in our Institutional Securities business segment, we execute transactions involving the storage, transportation and market-making of several commodities, including metals, natural gas, electric power, environmental attributes and other commodity products. In addition, we are an electricity power marketer in the U.S. and own a minority interest in Heidmar Holdings LLC, which owns a group of companies that provide international marine transportation and U.S. marine logistics services.
These activities subject us to extensive energy, commodities, environmental, health and safety and other governmental laws and regulations.
Although we have attempted to mitigate our environmental risks by, among other measures, limiting the scope of activities
involving storage and transportation, adopting appropriate policies and procedures, and implementing emergency response programs, these actions may not prove adequate to address every contingency. In addition, insurance covering some of these risks may not be available, and the proceeds, if any, from insurance recovery may not be adequate to cover liabilities with respect to particular incidents. As a result, our financial condition, results of operations and cash flows may be adversely affected by these events.
During the past several years, intensified scrutiny of certain energy markets by federal, state and local authorities in the U.S. and abroad and by the public has resulted in increased regulatory and legal enforcement, litigation and remedial proceedings involving companies conducting the activities in which we are engaged. In addition, enhanced regulation of OTC derivatives markets in the U.S. and the E.U., as well as similar legislation proposed or adopted elsewhere, will impose significant costs and requirements on our commodities derivatives activities.
We may incur substantial costs or loss of revenue in complying with current or future laws and regulations and our overall businesses and reputation may be adversely affected by the current legal environment. In addition, failure to comply with these laws and regulations may result in substantial civil and criminal fines and penalties.
A failure to address conflicts of interest appropriately could adversely affect our businesses and reputation.
As a global financial services firm that provides products and services to a large and diversified group of clients, including corporations, governments, financial institutions and individuals, we face potential conflicts of interest in the normal course of business. For example, potential conflicts can occur when there is a divergence of interests between us and a client, among clients, between an employee on the one hand and us or a client on the other, or situations in which we may be a creditor of a client.
We have policies, procedures and controls that are designed to identify and address potential conflicts of interest, and we utilize various measures, such as the use of disclosure, to manage these potential conflicts. However, identifying and mitigating potential conflicts of interest can be complex and challenging and can become the focus of media and regulatory scrutiny. Indeed, actions that merely appear to create a conflict can put our reputation at risk even if the likelihood of
an actual conflict has been mitigated. It is possible that potential conflicts could give rise to litigation or enforcement actions, which may lead to our clients being less willing to enter into transactions in which a conflict may occur and could adversely affect our businesses and reputation.
December 2018 Form 10-K | 18 |
Our regulators have the ability to scrutinize our activities for potential conflicts of interest, including through detailed examinations of specific transactions. For example, our status as a BHC supervised by the Federal Reserve subjects us to direct Federal Reserve scrutiny with respect to transactions between our U.S. Bank Subsidiaries and their affiliates. Further, the Volcker Rule subjects us to regulatory scrutiny regarding certain transactions between us and our clients.
Uncertainties and ambiguities as to the interpretation and application of the Tax Cuts and Jobs Act could adversely affect us.
The Tax Act, enacted on December 22, 2017, significantly revised U.S. corporate income tax law by among other things, reducing the corporate income tax rate to 21%, and implementing a modified territorial tax system that includes aone-time transition tax on deemed repatriated earnings ofnon-U.S. subsidiaries; imposes a minimum tax on global intangiblelow-taxed income (“GILTI”) and an alternative base erosion and anti-abuse tax (“BEAT”) on U.S. corporations that make deductible payments tonon-U.S. related persons in excess of specified amounts; and broadens the tax base by partially or wholly eliminating tax deductions for certain historically deductible expenses (e.g., FDIC premiums and executive compensation).implementing a modified territorial tax system. The enactmentmodified territorial tax system includes a one-time transition tax on deemed repatriated earnings of non-U.S. subsidiaries and also imposes a minimum tax on GILTI and an alternative BEAT on U.S. corporations with operations outside of the Tax Act resulted in an aggregate net discrete tax provision of approximately $1.2 billion for the year ended December 31, 2017 as described further underU.S. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Supplemental Financial Information and Disclosures—Income Tax Matters.”
ThereThe U.S. Treasury Department has issued proposed regulations on certain provisions in the Tax Act, some of which are not yet finalized and are therefore subject to change. In addition, there continue to be a number of uncertainties and ambiguities as to the interpretation and application of many of the provisions in the Tax Act, including the provisions relating to the modified territorial tax system, theone-time transition tax, GILTI, and the BEAT. In the absence of further guidance on these issues, we use what we believe are reasonable interpretations and assumptions in applying the Tax Act for purposes of determining our tax balances and results of operations, which may change as we receive additional clarification and implementation guidance and as the interpretation of the Tax Act evolves over time. We expect that the U.S. Treasury Department will continue to issue additional guidance on the application of various provisions in the Tax Act. It is possible that such additional guidance or positions taken by the IRS in an audit could differ from the interpretations and assumptions that we previously made,
which could have a material adverse effect on our results of operations and financial condition.
Risk Management
Our risk management strategies, models and processes may not be fully effective in mitigating our risk exposures in all market environments or against all types of risk.
We have devoted significant resources to develop our risk management capabilities and expect to continue to do so in the future. Nonetheless, our risk management strategies, models and processes, including our use of various risk models for assessing market exposures and hedging strategies, stress testing and other analysis, may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk, including risks that are unidentified or unanticipated.
As our businesses change and grow, and the markets in which we operate evolve, our risk management strategies, models and processes may not always adapt with those changes. Some of our methods of managing risk are based upon our use of observed historical market behavior and management’s judgment. As a result, these methods may not predict future risk exposures, which could be significantly greater than the historical measures indicate.
In addition, many models we use are based on assumptions or inputs regarding correlations among prices of various asset classes or other market indicators and therefore cannot anticipate sudden, unanticipated or unidentified market or economic movements, which could cause us to incur losses.
Management of market, credit, liquidity, operational, model, legal, regulatory and compliance risks requires, among other things, policies and procedures to record properly and verify a large number of transactions and events, and these policies and procedures may not be fully effective. Our trading risk management strategies and techniques also seek to balance our ability to profit from trading positions with our exposure to potential losses.
While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application cannot anticipate every economic and financial outcome or the timing of such outcomes. For example, to the extent that our trading or investing activities involve less liquid trading markets or are otherwise subject to restrictions on sales or hedging, we may not be able to reduce our positions and therefore reduce our risk associated with such positions. We may, therefore, incur losses in the course of our trading or investing activities. For more information on how we monitor and manage market and certain other risks and related strategies, models and processes, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Market Risk.”
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Expected replacement of London Interbank Offered Rate and replacement or reform of other interest rates could adversely affect our business, financial condition and results of operations.
Central banks around the world, including the Federal Reserve, have commissioned working groups of market participants and official sector representatives with the goal of finding suitable replacements for LIBOR and replacements or reforms of other interest rate benchmarks, such as EURIBOR and EONIA (collectively, the “IBORs”). It is expected that a transition away from the widespread use of such rates to alternative rates based on observable market transactions and other potential interest rate benchmark reforms will occur over the course of the next few years. For example, the FCA, which regulates LIBOR, has announced that it has commitments from panel banks to continue to contribute to LIBOR through the end of 2021, but that it will not use its powers to compel contributions beyond such date. Accordingly, there is considerable uncertainty regarding the publication of LIBOR beyond 2021.
On April 3, 2018, the Federal Reserve Bank of New York commenced publication of three reference rates based on overnight U.S. Treasury repurchase agreement transactions, including the Secured Overnight Financing Rate, which has been recommended as an alternative to U.S. dollar LIBOR by the Alternative Reference Rates Committee. Further, the Bank of England is publishing a reformed Sterling Overnight Index Average, comprised of a broader set of overnight Sterling money market transactions, which has been selected by the Working Group on Sterling Risk-Free Reference Rates as the alternative rate to Sterling LIBOR. Central bank-sponsored committees in other jurisdictions, including Europe, Japan and Switzerland, have, or are expected to, select alternative reference rates denominated in other currencies.
The market transition away from IBORs to alternative reference rates is complex and could have a range of adverse impacts on our business, financial condition and results of operations. In particular, any such transition or reform could:
Adversely impact the pricing, liquidity, value of, return on and trading for a broad array of financial products, including any IBOR-linked securities, loans and derivatives that are included in our financial assets and liabilities;
Require extensive changes to documentation that governs or references IBOR or IBOR-based products, including, for example, pursuant to time-consuming renegotiations of existing documentation to modify the terms of outstanding securities and related hedging transactions;
Result in inquiries or other actions from regulators in respect of our preparation and readiness for the replacement of IBOR with one or more alternative reference rates;
Result in disputes, litigation or other actions with counterparties regarding the interpretation and enforceability of provisions in IBOR-based products such as fallback language or other related provisions, including in the case of fallbacks to the alternative reference rates, any economic, legal, operational or other impact resulting from the fundamental differences between the IBORs and the various alternative reference rates;
Require the transition and/or development of appropriate systems and analytics to effectively transition our risk management processes from IBOR-based products to those based on one or more alternative reference rates in a timely manner, including by quantifying value and risk for various alternative reference rates, which may prove challenging given the limited history of the proposed alternative reference rates; and
Cause us to incur additional costs in relation to any of the above factors.
Depending on several factors including those set forth above, our business, financial condition and results of operations could be materially adversely impacted by the market transition or reform of certain benchmarks. Other factors include the pace of the transition to replacement or reformed rates, the specific terms and parameters for and market acceptance of any alternative reference rate, prices of and the liquidity of trading markets for products based on alternative reference rates, and our ability to transition and develop appropriate systems and analytics for one or more alternative reference rates.
Competitive Environment
We face strong competition from other financial services firms, which could lead to pricing pressures that could materially adversely affect our revenue and profitability.
The financial services industry and all aspects of our businesses are intensely competitive, and we expect them to remain so. We compete with commercial banks, brokerage firms, insurance companies, exchanges, electronic trading and clearing platforms, financial data repositories, sponsors of mutual funds, hedge funds, energy companies, financial technology firms and other companies offering financial or ancillary services in the U.S., globally and digitally or through the internet. We compete on the basis of several factors, including transaction execution, capital or access to capital, products and services, innovation, technology, reputation, risk appetite and price.
Over time, certain sectors of the financial services industry have become more concentrated, as institutions involved in a broad range of financial services have left businesses, been acquired by or merged into other firms, or have declared bankruptcy. Such changes could result in our remaining
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competitors gaining greater capital and other resources, such as the ability to offer a broader range of products and services and geographic diversity, or new competitors may emerge.
We have experienced and may continue to experience pricing pressures as a result of these factors and as some of our competitors seek to obtain market share by reducing prices.prices or providing more favorable terms of business. In addition, certain of our competitors may be subject to different, and, in some cases, less stringent, legal and regulatory regimes, than we are, thereby putting us at a competitive disadvantage. Some new competitors in the financial technology sector have sought to target existing segments of our businesses that could be susceptible to disruption by innovative or less regulated business models. For more information regarding the competitive environment in which we operate, see “Business—Competition” and “Business—Supervision and Regulation.”
Automated trading markets may adversely affect our business and may increase competition.
We have experienced intense price competition in some of our businesses in recent years. In particular, the ability to execute securities, derivatives and other financial instrument trades electronically on exchanges, swap execution facilities, and other automated trading platforms has increased the pressure onbid-offer spreads, commissions, markups or comparable fees. The trend toward direct access to automated, electronic markets will likely continue and will likely increase as additional markets move to more automated trading plat-
forms.platforms. We have experienced and it is likely that we will continue to experience competitive pressures in these and other areas in the future as some of our competitors may seek to obtain market share by reducingbid-offer spreads, commissions, markups or comparable fees.
Our ability to retain and attract qualified employees is critical to the success of our business and the failure to do so may materially adversely affect our performance.
Our people are our most important resource and competition for qualified employees is intense. If we are unable to continue to attract and retain highly qualified employees, or do so at rateslevels or in forms necessary to maintain our competitive position, or if compensation costs required to attract and retain employees become more expensive, our performance, including our competitive position, could be materially adversely affected.
The financial industry has experienced and may continue to experience more stringent regulation of employee compensation, including limitations relating to incentive-based compensation, clawback requirements and special taxation, which could have an adverse effect on our ability to hire or retain the most qualified employees.
International Risk
We are subject to numerous political, economic, legal, tax, operational, franchise and other risks as a result of our international operations which could adversely impact our businesses in many ways.
We are subject to political, economic, legal, tax, operational, franchise and other risks that are inherent in operating in many countries, including risks of possible nationalization, expropriation, price controls, capital controls, exchange controls, increased taxes and levies, and other restrictive governmental actions, as well as the outbreak of hostilities or political and governmental instability. In many countries, the laws and regulations applicable to the securities and financial services industries are uncertain and evolving, and it may be difficult for us to determine the exact requirements of local laws in every market.
Our inability to remain in compliance with local laws in a particular market could have a significant and negative effect not only on our business in that market but also on our reputation generally. We are also subject to the risk that transactions we structure might not be legally enforceable in all cases.
Various emerging market countries have experienced severe political, economic or financial disruptions, including significant devaluations of their currencies, defaults or potential defaults on sovereign debt, capital and currency exchange
controls, high rates of inflation and low or negative growth rates in their economies. Crime and corruption, as well as issues of security and personal safety, also exist in certain of these countries. These conditions could adversely impact our businesses and increase volatility in financial markets generally.
The emergence of a disease pandemic or other widespread health emergency, or concerns over the possibility of such an emergency as well as natural disasters, terrorist activities or military actions, could create economic and financial disruptions in emerging markets and other areas throughout the world, and could lead to operational difficulties (including travel limitations) that could impair our ability to manage our businesses around the world.
As a U.S. company, we are required to comply with the economic sanctions and embargo programs administered by OFAC and similar multi-national bodies and governmental agencies worldwide, as well as applicable anti-corruption laws in the jurisdictions in which we operate, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act. A violation of a sanction, embargo program, or anti-corruption law could subject us, and individual employees, to a regulatory enforcement action as well as significant civil and criminal penalties.
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The U.K.’s anticipated withdrawal from the E.U. could adversely affect us.
It is difficult to predict the future of the U.K.’s relationship with the E.U., the uncertainty of which uncertainty may increase the volatility in the global financial markets in the short- and medium-term. medium-term and may negatively disrupt regional and global financial markets. Additionally, depending on the outcome, such uncertainty may adversely affect the manner in which we operate certain of our businesses in Europe.
On June 23, 2016, the U.K. electorate voted to leave the E.U. On March 29, 2017, the U.K. invoked Article 50 of the Lisbon Treaty, which triggered atwo-year period, subject to extension (which would need the unanimous approval of the E.U. Member States), during which the U.K. government is expected to negotiate itsnegotiated a form of withdrawal agreement with the E.U. Absent any changes to this time schedule, the U.K. is expected to leave the E.U. inby March 29, 2019. The termsproposed withdrawal agreement includes a transition period until December 2020 and conditions of the anticipated withdrawal from the E.U., and which of the several alternative models of relationship that the U.K. might seek to negotiate with the E.U., remain uncertain. However, the U.K. government has statedprovides that the U.K. will leave the E.U. single market and will seek a phased period of implementation for thea newU.K.-E.U. relationship that may cover the legal and regulatory framework applicable to financial institutions with significant operations in Europe, such as the Firm. Since any transition or implementation periods
The withdrawal agreement was rejected by the U.K. Parliament on January 15, 2019, and the eventual successor arrangements requireU.K. Government is in the process of negotiating changes to the withdrawal agreement of boththat would be acceptable to the U.K. Parliament and the E.U., As a result, the terms and conditions of the anticipated withdrawal from the E.U. remain uncertain.
The ongoing political uncertainty in relation to the proposed withdrawal agreement in the U.K. means there is a risk that these arrangements may not be agreedready for implementation by March 2019.
29, 2019 or that there will be no transition period. Potential effects of the U.K. exit from the E.U. and potential mitigation actions may vary considerably depending on the timing of withdrawal, and the nature of any transition, implementation or successor arrangements. Wearrangements, and the future trading arrangements between the U.K. and the E.U.
If the withdrawal agreement (or any alternative agreement) is not agreed and as a result no transition period applies, our U.K. licensed entities may be unable to rely on E.U. passporting rights to provide services in a number of E.U. jurisdictions beginning March 29, 2019, absent further regulatory relief. Even if a transition period is agreed, our U.K. licensed entities may lose their rights to provide services in a number of E.U. jurisdictions after such transition period unless the newU.K.-E.U. relationship provides for such rights.
In order to prepare for this risk, we are taking steps to make changes to our European operations in an effort to ensure that we can continue to provide cross-border banking and investment and other services in E.U. Member States without the need for separate regulatory authorizations in each member state. These changes must be approved bySee also “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Regulatory Developments.” However, as a result of the relevant regulatory authorities and thereforepolitical uncertainty described above, it is currently unclear what the final post-Brexit structure of our European operations will be. DependingGiven the potential negative disruption to regional and global financial markets, and depending on the extent to which we may be required to make material changes to our European operations beyond those currently planned, our results of operations and business prospects could be negatively affected.
Acquisition, Divestiture and Joint Venture Risk
We may be unable to fully capture the expected value from acquisitions, divestitures, joint ventures, minority stakes or strategic alliances.
In connection with past or future acquisitions, divestitures, joint ventures, minority stakes or strategic alliances (including with MUFG), we face numerous risks and uncertainties combining, transferring, separating or integrating the relevant businesses and systems, including the need to combine or separate accounting and data processing systems and management controls and to integrate relationships with clients, trading counterparties and business partners. In the case of joint ventures and minority stakes, we are subject to additional risks and uncertainties because we may be dependent upon, and subject to liability, losses or reputational damage relating to systems, controls and personnel that are not under our control.
In addition, conflicts or disagreements between us and any of our joint venture partners may negatively impact the benefits to be achieved by the relevant joint venture.
There is no assurance that any of our acquisitions or divestitures will be successfully integrated or disaggregated or yield all of the positive benefits anticipated. If we are not able to integrate or disaggregate successfully our past and future acquisitions or dispositions, there is a risk that our results of operations, financial condition and cash flows may be materially and adversely affected.
Certain of our business initiatives, including expansions of existing businesses, may bring us into contact, directly or indirectly, with individuals and entities that are not within our traditional client and counterparty base and may expose us to new asset classes and new markets. These business activities expose us to new and enhanced risks, greater regulatory scrutiny of these activities, increased credit-related, sovereign and
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expose us to new and enhanced risks, greater regulatory scrutiny of these activities, increased credit-related, sovereign and operational risks, and reputational concerns regarding the manner in which these assets are being operated or held.
For more information regarding the regulatory environment in which we operate, see also “Business—Supervision and Regulation.”
We, like other well-known seasoned issuers, from time to time receive written comments from the staff of the SEC regarding our periodic or current reports under the Exchange Act. There are no comments that remain unresolved that we received not less than 180 days before the end of the year to which this report relates that we believe are material.
We have offices, operations and data centers located around the world. Our properties that are not owned are leased on terms and for durations that are reflective of commercial standards in the communities where these properties are located. We believe the facilities we own or occupy are adequate for the purposes for which they are currently used and are well- maintained. Our principal offices include the following properties:
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In addition to the matters described below, in the normal course of business, the Firm has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the entities that would otherwise be the primary defendants in such cases are bankrupt or are in financial distress.
The Firm is also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding the Firm’s business, and involving, among other matters, sales and trading activities, financial products or offerings sponsored, underwritten or sold by the Firm, and accounting and operational matters, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief.
The Firm contests liability and/or the amount of damages as appropriate in each pending matter. Where available information indicates that it is probable a liability had been incurred at the date of the financial statements and the Firm can reasonably estimate the amount of that loss, the Firm accrues the estimated loss by a charge to income. The Firm’s future legal expenses may fluctuate from period to period, given the current environment regarding government investigations and private litigation affecting global financial services firms, including the Firm.
In many proceedings and investigations, however, it is inherently difficult to determine whether any loss is probable or even possible, or to estimate the amount of any loss. The Firm cannot predict with certainty if, how or when such proceedings or investigations will be resolved or what the eventual settlement, fine, penalty or other relief, if any, may be, particularly for proceedings and investigations where the factual record is being developed or contested or where plaintiffs or government entities seek substantial or indeterminate damages, restitution, disgorgement or penalties. Numerous issues may need to be resolved, including through potentially lengthy discovery and determination of important factual matters, determination of issues related to class certification and the calculation of damages or other relief, and by addressing novel or unsettled legal questions relevant to the proceedings or investigations in question, before a loss or additional loss or range of loss or additional loss can be reasonably estimated for a proceeding or investigation. Subject to the foregoing, the Firm believes, based on current
knowledge and after consultation with counsel, that the outcome of such proceedings and investigations will not have a material adverse effect on the financial condition of the Firm, although the outcome of such proceedings or investigations could be material to the Firm’s operating results and cash flows for a particular period depending on, among other things, the level of the Firm’s revenues or income for such period.
Over the last several years, the level of litigation and investigatory activity (both formal and informal) by government and self-regulatory agencies has increased materially in the financial services industry. As a result, the Firm expects that it will continue to be the subject of elevated claims for damages and other relief and, while the Firm has identified below certain proceedings that the Firm believes to be material, individually or collectively, there can be no assurance that additional material losses will not be incurred from claims that have not yet been asserted or are not yet determined to be material.
Residential Mortgage and Credit Crisis Related Matters
On July 15, 2010, China Development Industrial Bank (“CDIB”) filed a complaint against the Firm, styledChina Development Industrial Bank v. Morgan Stanley & Co. Incorporated et al., which is pending in the Supreme Court of the State of New York, New York County (“Supreme Court of NY”). The complaint relates to a $275 million CDS referencing the super senior portion of the STACK2006-1 CDO. The complaint asserts claims for common law fraud, fraudulent inducement and fraudulent concealment and alleges that the Firm misrepresented the risks of the STACK2006-1 CDO to CDIB, and that the Firm knew that the assets backing the CDO were of poor quality when it entered into the CDS with CDIB. The complaint seeks compensatory damages related to the approximately $228 million that CDIB alleges it has already lost under the CDS, rescission of CDIB’s obligation to pay an additional $12 million, punitive damages, equitable relief,pre- and post-judgment interest, fees and costs. On February 28, 2011, the court denied the Firm’s motion to dismiss the complaint.
On August 8, 2012, U.S. Bank, in its capacity as trustee, filed a complaint on behalf of Morgan Stanley Mortgage Loan Trust 2006-14SL, Mortgage Pass-Through Certificates, Series 2006-14SL, Morgan Stanley Mortgage Loan Trust2007-4SL and Mortgage Pass-Through Certificates, Series2007-4SL against the Firm styledMorgan Stanley Mortgage Loan Trust 2006-14SL, et al. v. Morgan Stanley Mortgage Capital Holdings LLC, as successor in interest to Morgan Stanley Mortgage Capital Inc. in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trusts, which had original principal balances of approximately $354 million and
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$305 million respectively, breached various representations and warranties. The complaint seeks, among other relief, rescission of the mortgage loan purchase agreements underlying the transactions, specific performance and unspecified damages and interest. On August 16, 2013, the court granted in part and denied in part the Firm’s motion to dismiss the complaint. On December 1, 2017, the parties reached an agreement in principle to settle the litigation.
On December 14, 2012, Royal Park Investments SA/NV filed a complaint against the Firm, certain affiliates, and other defendants in the Supreme Court of NY, styledRoyal Park Investments SA/NV v. Merrill Lynch et al. On October 24, 2013, plaintiff filed a new complaint against the Firm in the Supreme Court of NY, styledRoyal Park Investments SA/NV v. Morgan Stanley et al., alleging that defendants made material misrepresentations and omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by the Firm to plaintiff was approximately $597 million. The complaint raises common law claims of fraud, fraudulent inducement, negligent misrepresentation, and aiding and abetting fraud and seeks, among other things, compensatory and punitive damages. The plaintiff filed an amended complaint on December 1, 2015. On April 12, 2017, the Supreme Court of the State of New York granted the Firm’s motion to dismiss the amended complaint. On May 12, 2017, plaintiff filed a notice of appeal from that decision.
On May 3, 2013, plaintiffs inDeutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al.filed a complaint against the Firm, certain affiliates, and other defendants in the Supreme Court of NY. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by the Firm to plaintiff was approximately $634 million. The complaint alleges causes of action against the Firm for common law fraud, fraudulent concealment, aiding and abetting fraud, negligent misrepresentation, and rescission and seeks, among other things, compensatory and punitive damages. On June 10, 2014, the court granted in part and denied in part the defendants’ motion to dismiss the complaint. The Firm perfected its appeal from that decision on June 12, 2015. On June 20, 2017, the Appellate Division, First Department (“Appellate Division”), affirmed the order granting in part and denying in part the Firm’s motion to dismiss. On October 3, 2017, the Appellate Division denied the Firm’s motion for leave to appeal that decision.
On May 17, 2013, plaintiff inIKB International S.A. in Liquidation, et al. v. Morgan Stanley, et al. filed a complaint against the Firm and certain affiliates in the Supreme Court of NY. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by the Firm to plaintiff was approximately $133 million. The complaint alleges causes of action against the Firm for common law fraud, fraudulent concealment, aiding and abetting fraud, and negligent misrepresentation, and seeks, among other things, compensatory and punitive damages. On October 29, 2014, the court granted in part and denied in part the Firm’s motion to dismiss. All claims regarding four certificates were dismissed. After these dismissals, the remaining amount of certificates allegedly issued by the Firm or sold to plaintiff by the Firm was approximately $116 million. On August 11, 2016, the Appellate Division affirmed the trial court’s order denying in part the Firm’s motion to dismiss the complaint.
On July 2, 2013, Deutsche Bank, in its capacity as trustee, became the named plaintiff inFederal Housing Finance Agency, as Conservator for the Federal Home Loan Mortgage Corporation, on behalf of the Trustee of the Morgan Stanley ABS Capital I Inc. Trust, Series2007-NC1 (MSAC2007-NC1) v. Morgan Stanley ABS Capital I Inc., and filed a complaint in the Supreme Court of NY under the captionDeutsche Bank National TrustCompany, as Trustee for the Morgan Stanley ABS Capital I Inc. Trust, Series2007-NC1 v. Morgan Stanley ABS Capital I, Inc. On February 3, 2014, the plaintiff filed an amended complaint, which asserts claims for breach of contract and breach of the implied covenant of good faith and fair dealing and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $1.25 billion, breached various representations and warranties. The amended complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, unspecified damages, rescission and interest. On April 12, 2016, the court granted in part and denied in part the Firm’s motion to dismiss the amended complaint, dismissing all claims except a single claim alleging failure to notify, regarding which the motion was denied without prejudice. On December 9, 2016, the Firm renewed its motion to dismiss that notification claim. On January 17, 2017, the First Department affirmed the lower court’s April 12, 2016 order. On April 13, 2017, the Appellate Division denied plaintiff’s motion for leave to appeal to the New York Court of Appeals.
On July 8, 2013, U.S. Bank National Association, in its capacity as trustee, filed a complaint against the Firm styledU.S. Bank National Association, solely in its capacity as
Trustee of the Morgan Stanley Mortgage Loan Trust2007-2AX (MSM2007-2AX) v. Morgan Stanley Mortgage Capital Holdings LLC,Successor-by-Merger to MorganStanley Mortgage Capital Inc. and GreenPoint Mortgage Funding, Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $650 million, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, unspecified damages and interest. On November 24, 2014, the court granted in part and denied in part the Firm’s motion to dismiss the complaint.
On November 6, 2013, Deutsche Bank, in its capacity as trustee, became the named plaintiff inFederal Housing Finance Agency, as Conservator for the Federal Home Loan Mortgage Corporation, on behalf of the Trustee of the Morgan StanleyABS Capital I Inc. Trust, Series2007-NC3 (MSAC2007-NC3) v. Morgan Stanley Mortgage Capital Holdings LLC, and filed a complaint in the Supreme Court of NY under the captionDeutsche Bank National Trust Company, solely in its capacity as Trustee for Morgan Stanley ABS Capital I Inc. Trust, Series2007-NC3 v. Morgan Stanley Mortgage Capital Holdings LLC, asSuccessor-by-Merger to Morgan Stanley Mortgage Capital Inc. The complaint asserts claims for breach of contract and breach of the implied covenant of good faith and fair dealing and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $1.3 billion, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, unspecified damages, rescission, interest and costs. On April 12, 2016, the court granted the Firm’s motion to dismiss the complaint, and granted the plaintiff the ability to seek to replead certain aspects of the complaint. On January 17, 2017, the First Department affirmed the lower court’s order granting the motion to dismiss the complaint. On January 9, 2017, plaintiff filed a motion to amend its complaint. On April 13, 2017, the Appellate Division denied plaintiff’s motion for leave to appeal to the New York Court of Appeals.
On December 30, 2013, Wilmington Trust Company, in its capacity as trustee for Morgan Stanley Mortgage Loan Trust2007-12, filed a complaint against the Firm styledWilmington Trust Company v. Morgan Stanley Mortgage Capital Holdings LLC et al., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $516 million, breached various representations and warran-
ties. The complaint seeks, among other relief, unspecified damages, attorneys’ fees, interest and costs. On June 14, 2016, the court granted in part and denied in part the Firm’s motion to dismiss the complaint. On July 11, 2017, the Appellate Division affirmed in part and reversed in part an order granting in part and denying in part the Firm’s motion to dismiss. On September 26, 2017, the Appellate Division denied plaintiff’s motion for leave to appeal to the New York Court of Appeals.
On April 28, 2014, Deutsche Bank National Trust Company, in its capacity as trustee for Morgan Stanley Structured Trust I2007-1, filed a complaint against the Firm styledDeutsche Bank National Trust Company v. Morgan Stanley Mortgage Capital Holdings LLC, pending in the United States District Court for the Southern District of New York (“SDNY”). The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $735 million, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, unspecified compensatory and/or rescissory damages, interest and costs. On April 3, 2015, the court granted in part and denied in part the Firm’s motion to dismiss the complaint. On January 10, 2018, the court reinstated plaintiff’s breach of contract claim based on failure to notify, which had been dismissed in its April 3, 2015 order. On January 25, 2018, the court denied the Firm’s motion for summary judgment. On February 5, 2018, the Firm filed a motion for judgment on the pleadings and a renewed motion for summary judgment.
On September 19, 2014, Financial Guaranty Insurance Company (“FGIC”) filed a complaint against the Firm in the Supreme Court of NY, styledFinancial Guaranty Insurance Company v. Morgan Stanley ABS Capital I Inc. et al.relating to a securitization issued by Basket of Aggregated Residential NIMS2007-1 Ltd. The complaint asserts claims for breach of contract and alleges, among other things, that the net interest margin securities (“NIMS”) in the trust breached various representations and warranties. FGIC issued a financial guaranty policy with respect to certain notes that had an original balance of approximately $475 million. The complaint seeks, among other relief, specific performance of the NIMS breach remedy procedures in the transaction documents, unspecified damages, reimbursement of certain payments made pursuant to the transaction documents, attorneys’ fees and interest. On November 24, 2014, the Firm filed a motion to dismiss the complaint, which the court denied on January 19, 2017. On February 24, 2017, the Firm filed a notice of appeal of the denial of its motion to dismiss the complaint and perfected its appeal on November 22, 2017.
On September 23, 2014, FGIC filed a complaint against the Firm in the Supreme Court of NY styledFinancial GuarantyInsurance Company v. Morgan Stanley ABS Capital I Inc. et al. relating to the Morgan Stanley ABS Capital I Inc. Trust2007-NC4. The complaint asserts claims for breach of contract and fraudulent inducement and alleges, among other things, that the loans in the trust breached various representations and warranties and defendants made untrue statements and material omissions to induce FGIC to issue a financial guaranty policy on certain classes of certificates that had an original balance of approximately $876 million. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, compensatory, consequential and punitive damages, attorneys’ fees and interest. On January 23, 2017, the court denied the Firm’s motion to dismiss the complaint. On February 24, 2017, the Firm filed a notice of appeal of the denial of its motion to dismiss the complaint and perfected its appeal on November 22, 2017.
On January 23, 2015, Deutsche Bank National Trust Company, in its capacity as trustee, filed a complaint against the Firm styledDeutsche Bank National Trust Company solely in its capacity as Trustee of the Morgan Stanley ABS Capital I Inc. Trust2007-NC4 v. Morgan Stanley Mortgage Capital Holdings LLC asSuccessor-by-Merger to Morgan Stanley Mortgage Capital Inc., and Morgan Stanley ABS Capital I Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $1.05 billion, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, compensatory, consequential, rescissory, equitable and punitive damages, attorneys’ fees, costs and other related expenses, and interest. On December 11, 2015, the court granted in part and denied in part the Firm’s motion to dismiss the complaint. On February 11, 2016, plaintiff filed a notice of appeal of that order, and the appeal was fully briefed on August 19, 2016.
On April 1, 2016, the California Attorney General’s Office filed an action against the Firm in California state court styledCalifornia v. Morgan Stanley, et al., on behalf of California investors, including the California Public Employees’ Retirement System and the California Teachers’ Retirement System. The complaint alleges that the Firm made misrepresentations and omissions regarding RMBS and notes issued by the Cheyne SIV, and asserts violations of the California False Claims Act and other state laws and seeks treble damages, civil penalties, disgorgement, and injunctive relief. On September 30, 2016, the court granted the Firm’s demurrer, with leave to replead. On October 21, 2016, the
California Attorney General filed an amended complaint. On January 25, 2017, the court denied the Firm’s demurrer with respect to the amended complaint.
Currency Related Matters
The Firm is responding to a number of regulatory and governmental inquiries both in the U.S. and abroad related to its foreign exchange business. In addition, on June 29, 2015, the Firm and a number of other financial institutions were named as respondents in a proceeding before Brazil’s Council for Economic Defense related to alleged anticompetitive activity in the foreign exchange market for the Brazilian Real.
European Matters
On October 11, 2011, an Italian financial institution, Banco Popolare Societá Cooperativa (“Banco Popolare”), filed a civil claim against the Firm in the Milan courts, styledBanco Popolare Societá Cooperativa v Morgan Stanley & Co. International plc & others, related to its purchase of €100 million of bonds issued by Parmalat. The claim asserted by Banco Popolare alleges, among other things, that the Firm was aware of Parmalat’s impending insolvency and conspired with others to deceive Banco Popolare into buying bonds by concealing both Parmalat’s true financial condition and certain features of the bonds from the market and Banco Popolare. Banco Popolare seeks damages of €76 million (approximately $91 million) plus damages for loss of opportunity and moral damages. The Firm filed its answer on April 20, 2012, and the hearing on the parties’ final submissions is scheduled for March 20, 2018.
On June 22, 2017, the public prosecutor for the Court of Accounts for the Republic of Italy filed a claim against the Firm styled Case No. 2012/00406/MNV, which is pending in the Regional Prosecutor’s Office at the Judicial Section of the Court of Auditors for Lazio, Italy. The claim relates to certain derivative transactions between the Republic of Italy and the Firm. The transactions were originally entered into between 1999 and 2005, and were restructured (and certain of the transactions were terminated) in December 2011 and January 2012. The claim alleges, inter alia, that the Firm effectively acted as an agent of the state in connection with these transactions and asserts claims related to, among other things, whether the Ministry of Finance was authorized to enter into these transactions, whether the transactions were appropriate and whether the Firm’s conduct related to the termination of certain transactions was proper. The prosecutor is seeking damages through an administrative process against the Firm for €2.76 billion (approximately $3.3 billion). A hearing regarding this matter has been scheduled for April 19, 2018.
In matters styledCase number 15/3637andCase number 15/4353, the Dutch Tax Authority (“Dutch Authority”) is
challenging in the District Court in Amsterdam the priorset-off by the Firm of approximately €124 million (approximately $149 million) plus accrued interest of withholding tax credits against the Firm’scorporation tax liabilities for the tax years 2007 to 2013. TheDutch Authority alleges that the Firm was not entitled toreceive the withholding tax credits on the basis, inter alia, thata Firm subsidiary did not hold legal title to certain securitiessubject to withholding tax on the relevant dates. The Dutch Authority has also alleged that the Firm failed to providecertain information to the Dutch Authority and keep adequate books and records. A hearing in this matter took place on September 19, 2017.
On October 5, 2017, various institutional investors filed a claim against the Firm and another bank in a matter styledCase number BS99-6998/2017,in the City Court of Copenhagen, Denmark concerning their roles as underwriters of the initial public offering (“IPO”) in March 2014 of the Danish company OW Bunker A/S. The claim seeks damages of DKK 534,270,456 (approximately $86 million) plus interest in respect of alleged losses arising from investing in shares in OW Bunker, which entered into bankruptcy in November 2014. Separately, on November 29, 2017, another group of institutional investors joined the Firm and another bank as defendants to pending proceedings in the High Court of Eastern Denmark against various other parties involved in the IPO in a matter styledCase numberB-2073-16. The investors claim damages of DKK 767,235,885 (approximately $124 million) plus interest, from the Firm and the other bank on a joint and several basis with the Defendants to these proceedings. Both claims are based on alleged prospectus liability; the second claim also alleges professional liability of banks acting as financial intermediaries.
Other Litigation
On October 20, 2014, a purported class action complaint was filed against the Firm and other defendants styledGeneseeCounty Employees’ Retirement System v. Bank of America Corporation et al. in the SDNY. The action was later consolidated with four similar actions in SDNY under the lead case styledAlaska Electrical Pension Fund v. Bank of America Corporation et al. A consolidated amended complaint was filed on February 2, 2015 asserting claims for alleged violations of the Sherman Act, breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, and tortious interference with contract. The consolidated amended complaint alleges, among other things, that the defendants engaged in antitrust violations with regards to the process of setting ISDAfix, a financial benchmark and seeks treble damages, injunctive relief, attorneys’ fees and other relief. On March 28, 2016, the court granted in part and denied in part the defendants’ motion to dismiss the consolidated amended complaint. On February 7, 2017, the
plaintiffs filed a second consolidated amended complaint. On February 2, 2018, the court denied a partial motion to dismiss that complaint. On November 3, 2017, the Firm filed its opposition to plaintiffs’ motion for class certification.
Beginning in February of 2016, the Firm was named as a defendant in multiple purported antitrust class actions now consolidated into a single proceeding in the United States District Court for the SDNY styledInRe: Interest Rate Swaps Antitrust Litigation. Plaintiffs allege, inter alia, that the Firm, together with a number of other financial institution defendants violated U.S. and New York state antitrust laws from 2008 through December of 2016 in connection with their alleged efforts to prevent the development of electronic exchange-based platforms for interest rates swaps trading. Complaints were filed both on behalf of a purported class of investors who purchased interest rates swaps from defendants, as well as on behalf of two swap execution facilities that allegedly were thwarted by the defendants in their efforts to develop such platforms. The consolidated complaints seek, among other relief, certification of the investor class of plaintiffs and treble damages. On July 28, 2017, the court granted in part and denied in part the defendants’ motion to dismiss the complaints.
The following matters were terminated during or following the quarter ended December 31, 2017:
On August 26, 2013, a complaint was filed against the Firm and certain affiliates in the Supreme Court of NY, styledPhoenix Light SF Limited et al. v. Morgan Stanley et al., which was amended on April 23, 2015 and June 15, 2017. The amended complaint alleges that defendants made untrue statements and material omissions in the sale to plaintiffs, or their assignors, of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly issued by the Firm and/or sold to plaintiffs or their assignors by the Firm was approximately $344 million. The amended complaint raises common law claims of fraud, fraudulent inducement, aiding and abetting fraud, negligent misrepresentation and rescission based on mutual mistake and seeks, among other things, compensatory damages, punitive damages or alternatively rescission or rescissionary damages associated with the purchase of such certificates. On July 7, 2017, the courtso-ordered a stipulation of partial discontinuance dismissing claims relating to certificates having an original face value of approximately $76 million. On January 3, 2018, the parties reached an agreement in principle to settle the litigation.
On June 2, 2015, the Firm submitted to the Environmental Protection Agency (“EPA”) a self-disclosure that certain reformulated blendstock the Firm blended and sold during
2013 and 2014 potentially did not meet the applicable volatile organic compound reduction standards of the EPA’s Phase II Reformulated Gasoline standard. On December 1, 2017, the parties reached an agreement to settle the litigation. On December 18, 2017, the final settlement of approximately $1 million was approved by the District Court for the Southern District of Texas.
Not applicable.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Morgan Stanley’s common stock trades under the symbol “MS” on the New York Stock Exchange. As of February 15, 2018, we had 61,442 holders of record; however, we believe the number of beneficial owners of our common stock exceeds this number.
The table below sets forth, for each of the last eight quarters, the high and low sales prices per share of our common stock and the amount of dividends declared per common share by our Board of Directors for such quarter.
2017 | 2016 | |||||||||||||||||||||||||||
High | Low | Dividend Declared per Common Share | High | Low | Dividend Declared per Common Share | |||||||||||||||||||||||
First quarter | $ | 47.33 | $ | 40.06 | $ | 0.20 | $ | 31.70 | $ | 21.16 | $ | 0.15 | ||||||||||||||||
Second quarter | 45.98 | 40.43 | 0.20 | 28.29 | 23.11 | 0.15 | ||||||||||||||||||||||
Third quarter | 48.90 | 43.84 | 0.25 | 32.44 | 24.57 | 0.20 | ||||||||||||||||||||||
Fourth quarter | 54.25 | 47.42 | 0.25 | 44.04 | 30.96 | 0.20 |
The table below sets forth the information with respect to purchases made by or on behalf of the Firm of its common stock during the fourth quarter of the year ended December 31, 2017.
Issuer Purchases of Equity Securities
$ in millions, except per share data | Total Number of Shares Purchased | Average Paid Per | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs1 | Approximate Dollar Shares That May or Programs | ||||||||||||
Month #1 (October 1, 2017-October 31, 2017) | ||||||||||||||||
Share Repurchase Program2 | 4,810,000 | $ | 50.55 | 4,810,000 | $ | 3,507 | ||||||||||
Employee transactions3 | 312,377 | $ | 48.66 | — | $ | — | ||||||||||
Month #2 (November 1, 2017-November 30, 2017) | ||||||||||||||||
Share Repurchase Program2 | 11,310,000 | $ | 49.29 | 11,310,000 | $ | 2,949 | ||||||||||
Employee transactions3 | 189,235 | $ | 49.63 | — | $ | — | ||||||||||
Month #3 (December 1, 2017-December 31, 2017) | ||||||||||||||||
Share Repurchase Program2 | 8,531,166 | $ | 52.67 | 8,531,166 | $ | 2,500 | ||||||||||
Employee transactions3 | 194,165 | $ | 52.78 | — | $ | — | ||||||||||
Quarter ended December 31, 2017 | ||||||||||||||||
Share Repurchase Program2 | 24,651,166 | $ | 50.71 | 24,651,166 | $ | 2,500 | ||||||||||
Employee transactions3 | 695,777 | $ | 50.08 | — | $ | — |
|
|
|
Stock Performance Graph
The following graph compares the cumulative total shareholder return (rounded to the nearest whole dollar) of our common stock, the S&P 500 Stock Index and the S&P 500 Financials Sector Index for the last five years. The graph assumes a $100 investment at the closing price on December 31, 2012 and reinvestment of dividends on the respective dividend payment dates without commissions. This graph does not forecast future performance of our common stock.
Cumulative Total Return
December 31, 2012 – December 31, 2017
At December 31, | ||||||||||||||||||||||||
2012 | 2013 | 2014 | 2015 | 2016 | 2017 | |||||||||||||||||||
Morgan Stanley | $ | 100.00 | $ | 165.33 | $ | 206.81 | $ | 172.16 | $ | 234.24 | $ | 296.60 | ||||||||||||
S&P 500 Stock Index | 100.00 | 132.37 | 150.48 | 152.55 | 170.78 | 208.05 | ||||||||||||||||||
S&P 500 Financials Sector Index | 100.00 | 135.59 | 156.17 | 153.73 | 188.69 | 228.59 |
Income Statement Data
$ in millions | 2017 | 2016 | 2015 | 2014 | 2013 | 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||||||||||
Totalnon-interest revenues | $ | 34,645 | $ | 30,933 | $ | 32,062 | $ | 32,540 | $ | 31,715 | ||||||||||||||||||||||||||||||
Totalnon-interest revenues1 | $ | 36,301 |
| $ | 34,645 |
| $ | 30,933 |
| $ | 32,062 |
| $ | 32,540 |
| |||||||||||||||||||||||||
Interest income | 8,997 | 7,016 | 5,835 | 5,413 | 5,209 |
| 13,892 |
|
| 8,997 |
|
| 7,016 |
|
| 5,835 |
|
| 5,413 |
| ||||||||||||||||||||
Interest expense | 5,697 | 3,318 | 2,742 | 3,678 | 4,431 |
| 10,086 |
|
| 5,697 |
|
| 3,318 |
|
| 2,742 |
|
| 3,678 |
| ||||||||||||||||||||
Net interest | 3,300 | 3,698 | 3,093 | 1,735 | 778 |
| 3,806 |
|
| 3,300 |
|
| 3,698 |
|
| 3,093 |
|
| 1,735 |
| ||||||||||||||||||||
Net revenues | 37,945 | 34,631 | 35,155 | 34,275 | 32,493 |
| 40,107 |
|
| 37,945 |
|
| 34,631 |
|
| 35,155 |
|
| 34,275 |
| ||||||||||||||||||||
Non-interest expenses | ||||||||||||||||||||||||||||||||||||||||
Compensation and benefits | 17,166 | 15,878 | 16,016 | 17,824 | 16,277 |
| 17,632 |
|
| 17,166 |
|
| 15,878 |
|
| 16,016 |
|
| 17,824 |
| ||||||||||||||||||||
Non-compensation expenses | 10,376 | 9,905 | 10,644 | 12,860 | 11,658 | |||||||||||||||||||||||||||||||||||
Non-compensation expenses1 |
| 11,238 |
|
| 10,376 |
|
| 9,905 |
|
| 10,644 |
|
| 12,860 |
| |||||||||||||||||||||||||
Totalnon-interest expenses | 27,542 | 25,783 | 26,660 | 30,684 | 27,935 |
| 28,870 |
|
| 27,542 |
|
| 25,783 |
|
| 26,660 |
|
| 30,684 |
| ||||||||||||||||||||
Income from continuing operations before income taxes | 10,403 | 8,848 | 8,495 | 3,591 | 4,558 | 11,237 | 10,403 | 8,848 | 8,495 | 3,591 | ||||||||||||||||||||||||||||||
Provision for (benefit from) income taxes | 4,168 | 2,726 | 2,200 | (90 | ) | 902 | 2,350 | 4,168 | 2,726 | 2,200 | (90 | ) | ||||||||||||||||||||||||||||
Income from continuing operations | 6,235 | 6,122 | 6,295 | 3,681 | 3,656 | 8,887 | 6,235 | 6,122 | 6,295 | 3,681 | ||||||||||||||||||||||||||||||
Income (loss) from discontinued operations, net of income taxes | (19 | ) | 1 | (16 | ) | (14 | ) | (43 | ) | (4 | ) | (19 | ) | 1 | (16 | ) | (14 | ) | ||||||||||||||||||||||
Net income | $ | 6,216 | $ | 6,123 | $ | 6,279 | $ | 3,667 | $ | 3,613 | $ | 8,883 | $ | 6,216 | $ | 6,123 | $ | 6,279 | $ | 3,667 | ||||||||||||||||||||
Net income applicable to redeemable non-controlling interests | — | — | — | — | 222 | |||||||||||||||||||||||||||||||||||
Net income applicable to nonredeemable non-controlling interests | 105 | 144 | 152 | 200 | 459 | |||||||||||||||||||||||||||||||||||
Net income applicable to noncontrolling interests | 135 | 105 | 144 | 152 | 200 | |||||||||||||||||||||||||||||||||||
Net income applicable to Morgan Stanley | $ | 6,111 | $ | 5,979 | $ | 6,127 | $ | 3,467 | $ | 2,932 | $ | 8,748 | $ | 6,111 | $ | 5,979 | $ | 6,127 | $ | 3,467 | ||||||||||||||||||||
Preferred stock dividends and other | 523 | 471 | 456 | 315 | 277 | 526 | 523 | 471 | 456 | 315 | ||||||||||||||||||||||||||||||
Earnings (loss) applicable to Morgan Stanley common shareholders | $ | 5,588 | $ | 5,508 | $ | 5,671 | $ | 3,152 | $ | 2,655 | ||||||||||||||||||||||||||||||
Earnings applicable to | $ | 8,222 | $ | 5,588 | $ | 5,508 | $ | 5,671 | $ | 3,152 | ||||||||||||||||||||||||||||||
Amounts applicable to Morgan Stanley | Amounts applicable to Morgan Stanley |
|
Amounts applicable to Morgan Stanley |
| ||||||||||||||||||||||||||||||||||||
Income from continuing operations | $ | 6,130 | $ | 5,978 | $ | 6,143 | $ | 3,481 | $ | 2,975 | $ | 8,752 | $ | 6,130 | $ | 5,978 | $ | 6,143 | $ | 3,481 | ||||||||||||||||||||
Income (loss) from discontinued operations | (19 | ) | 1 | (16 | ) | (14 | ) | (43 | ) | (4 | ) | (19 | ) | 1 | (16 | ) | (14 | ) | ||||||||||||||||||||||
Net income applicable to Morgan Stanley | $ | 6,111 | $ | 5,979 | $ | 6,127 | $ | 3,467 | $ | 2,932 | $ | 8,748 | $ | 6,111 | $ | 5,979 | $ | 6,127 | $ | 3,467 | ||||||||||||||||||||
Effective income tax rate from continuing operations | 40.1 | % | 30.8 | % | 25.9 | % | (2.5 | )% | 19.8 | % | 20.9 | % | 40.1 | % | 30.8 | % | 25.9 | % | (2.5 | )% |
Per Share Data
in millions, except per share amounts | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
Earnings (loss) per basic common share1 |
| |||||||||||||||||||
Income from continuing operations | $ | 3.15 | $ | 2.98 | $ | 2.98 | $ | 1.65 | $ | 1.42 | ||||||||||
Income (loss) from discontinued operations | (0.01 | ) | — | (0.01 | ) | (0.01 | ) | (0.03 | ) | |||||||||||
Earnings (loss) per basic common share | $ | 3.14 | $ | 2.98 | $ | 2.97 | $ | 1.64 | $ | 1.39 | ||||||||||
Earnings (loss) per diluted common share1 |
| |||||||||||||||||||
Income from continuing operations | $ | 3.08 | $ | 2.92 | $ | 2.91 | $ | 1.61 | $ | 1.38 | ||||||||||
Income (loss) from discontinued operations | (0.01 | ) | — | (0.01 | ) | (0.01 | ) | (0.02 | ) | |||||||||||
Earnings (loss) per diluted common share | $ | 3.07 | $ | 2.92 | $ | 2.90 | $ | 1.60 | $ | 1.36 | ||||||||||
Book value per common share | $ | 38.52 | $ | 36.99 | $ | 35.24 | $ | 33.25 | $ | 32.24 | ||||||||||
Common shares outstanding at December 31st | 1,788 | 1,852 | 1,920 | 1,951 | 1,945 | |||||||||||||||
Dividends declared per common share | 0.90 | 0.70 | 0.55 | 0.35 | 0.20 | |||||||||||||||
Average common shares outstanding |
| |||||||||||||||||||
Basic | 1,780 | 1,849 | 1,909 | 1,924 | 1,906 | |||||||||||||||
Diluted | 1,821 | 1,887 | 1,953 | 1,971 | 1,957 |
Balance Sheet and Other Operating Data
Trading assets | $ | 298,282 | $ | 262,154 | $ | 239,505 | $ | 278,117 | $ | 301,252 | ||||||||||
Loans2 | 104,126 | 94,248 | 85,759 | 66,577 | 42,874 | |||||||||||||||
GLR3 | 192,660 | 202,297 | 203,264 | 193,169 | 201,842 | |||||||||||||||
Total assets | 851,733 | 814,949 | 787,465 | 801,510 | 832,702 | |||||||||||||||
Deposits | 159,436 | 155,863 | 156,034 | 133,544 | 112,379 | |||||||||||||||
Borrowings | 192,582 | 165,716 | 155,941 | 155,033 | 155,717 | |||||||||||||||
Morgan Stanley shareholders’ equity | 77,391 | 76,050 | 75,182 | 70,900 | 65,921 | |||||||||||||||
Common shareholders’ equity | 68,871 | 68,530 | 67,662 | 64,880 | 62,701 | |||||||||||||||
ROE4 | 8.0% | 8.0% | 8.5% | 4.8% | 4.3% |
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
ROE2, 3 |
| 11.8 | % |
| 8.0 | % |
| 8.0 | % |
| 8.5 | % |
| 4.8 | % | |||||
ROTCE2, 3 |
| 13.5 | % |
| 9.2 | % |
| 9.3 | % |
| 9.9 | % |
| 5.7 | % |
Common Share-Related Data
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Per common share | ||||||||||||||||||||
Earnings (basic)4 | $ | 4.81 |
| $ | 3.14 |
| $ | 2.98 |
| $ | 2.97 |
| $ | 1.64 |
| |||||
Earnings (diluted)4 |
| 4.73 |
|
| 3.07 |
|
| 2.92 |
|
| 2.90 |
|
| 1.60 |
| |||||
Book value5 |
| 42.20 |
|
| 38.52 |
|
| 36.99 |
|
| 35.24 |
|
| 33.25 |
| |||||
Tangible book value3, 5 |
| 36.99 |
|
| 33.46 |
|
| 31.98 |
|
| 30.26 |
|
| 28.26 |
| |||||
Dividends declared |
| 1.10 |
|
| 0.90 |
|
| 0.70 |
|
| 0.55 |
|
| 0.35 |
| |||||
Common shares outstanding in millions | ||||||||||||||||||||
At December 31 |
| 1,700 |
|
| 1,788 |
|
| 1,852 |
|
| 1,920 |
|
| 1,951 |
| |||||
Annual average: | ||||||||||||||||||||
Basic |
| 1,708 |
|
| 1,780 |
|
| 1,849 |
|
| 1,909 |
|
| 1,924 |
| |||||
Diluted |
| 1,738 |
|
| 1,821 |
|
| 1,887 |
|
| 1,953 |
|
| 1,971 |
|
Balance Sheet Data
$ in millions | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
GLR6 | $ | 249,735 |
| $ | 192,660 |
| $ | 202,297 |
| $ | 203,264 |
| $ | 193,169 |
| |||||
Loans7 |
| 115,579 |
|
| 104,126 |
|
| 94,248 |
|
| 85,759 |
|
| 66,577 |
| |||||
Total assets |
| 853,531 |
|
| 851,733 |
|
| 814,949 |
|
| 787,465 |
|
| 801,510 |
| |||||
Deposits |
| 187,820 |
|
| 159,436 |
|
| 155,863 |
|
| 156,034 |
|
| 133,544 |
| |||||
Borrowings |
| 189,662 |
|
| 192,582 |
|
| 165,716 |
|
| 155,941 |
|
| 155,033 |
| |||||
Morgan Stanley shareholders’ equity |
| 80,246 |
|
| 77,391 |
|
| 76,050 |
|
| 75,182 |
|
| 70,900 |
| |||||
Common shareholders’ equity |
| 71,726 |
|
| 68,871 |
|
| 68,530 |
|
| 67,662 |
|
| 64,880 |
| |||||
Tangible common shareholders’ equity3 |
| 62,879 |
|
| 59,829 |
|
| 59,234 |
|
| 58,098 |
|
| 55,137 |
|
|
The calculation of ROE and ROTCE equal net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity and average tangible common equity, respectively. |
3. | Represents anon-GAAP measure. See “Executive Summary—SelectedNon-GAAP Financial Information.” |
4. | For the calculation of basic and diluted earnings (loss) per common share, see Note 16 to the financial statements. |
Book value per common share and tangible book value per common share equal common shareholders’ equity and tangible common shareholders’ equity, respectively, divided by common shares outstanding. |
6. | For a discussion of the GLR, see “Liquidity and Capital Resources—Liquidity Risk Management Framework—Global Liquidity Reserve” herein. |
7. | 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 balance sheets (see Note 7 to the financial statements). |
|
|
December 2018 Form 10-K |
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Morgan Stanley an FHC, 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. We define the following as part of our consolidated financial statements (“financial statements”): consolidated income statements (“income statements”), consolidated balance sheets (“balance sheets”), and consolidated cash flow statements (“cash flow statements”). See the “Glossary of Common Acronyms” for definitionsthe definition of certain acronyms used throughout the 20172018 Form10-K.
A description of the clients and principal products and services of each of our business segments is as follows:
Institutional Securitiesprovides 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, prime brokerage and market-making activities in equity and fixed income products, including prime brokerage services, global macro, creditforeign exchange and commodities products.commodities. Lending servicesactivities include originating and/or purchasing corporate loans, commercial and residential mortgage lending, asset-backed lending, and financing extended to equitiessales and commodities customerstrading customers. Other activities include investments and municipalities. Other services include investment and research activities.research.
Wealth Managementprovides a comprehensive array of financial services and solutions to individual investors and small tomedium-sized businesses/businesses and institutions covering brokerage and investment advisory services,services; financial and wealth planning services,services; annuity and insurance products, creditproducts; securities-based lending, residential real estate loans and other lending products,products; banking and retirement plan services.
Investment Managementprovides 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 servicedserved through intermediaries, including affiliated andnon-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,” “Business—Competition” andCompetition,” “Business—Supervision and Regulation,” “Risk Factors” and “Liquidity and Capital Resources—Regulatory Requirements” herein.
December 2018 Form 10-K |
Management’s Discussion and Analysis |
Overview of Financial Results
Consolidated Results
Net Revenues1
($ in millions)
Net Income Applicable to Morgan Stanley1
($ in millions)
Earnings per Common Share21, 2
Financial ResultsNet Income Applicable to Morgan Stanley and Diluted EPS on a U.S. GAAP and Adjusted Basis
$ in millions, except per share data | 2017 | 2016 | 2015 | |||||||||
Net revenues | ||||||||||||
U.S. GAAP | $ | 37,945 | $ | 34,631 | $ | 35,155 | ||||||
Adjusted3 | 37,945 | 34,631 | 34,537 | |||||||||
Net income applicable to Morgan Stanley |
| |||||||||||
U.S. GAAP1 | $ | 6,111 | $ | 5,979 | $ | 6,127 | ||||||
Adjusted3 | 7,079 | 5,911 | 5,164 | |||||||||
Earnings per diluted common share | ||||||||||||
U.S. GAAP1 | $ | 3.07 | $ | 2.92 | $ | 2.90 | ||||||
Adjusted3 | 3.60 | 2.88 | 2.41 |
$ in millions, except per share data | 2018 | 2017 | 2016 | |||||||||
Net income applicable to Morgan Stanley |
| |||||||||||
U.S. GAAP | $ | 8,748 |
| $ | 6,111 |
| $ | 5,979 |
| |||
Adjusted—Non-GAAP3 |
| 8,545 |
|
| 7,079 |
|
| 5,911 |
| |||
Earnings per diluted common share |
| |||||||||||
U.S. GAAP2 | $ | 4.73 |
| $ | 3.07 |
| $ | 2.92 |
| |||
Adjusted—Non-GAAP3 |
| 4.61 |
|
| 3.60 |
|
| 2.88 |
|
1. |
|
2. | For the calculation of basic and diluted EPS, see Note 16 to the financial statements. |
3. | Represents anon-GAAP measure, see “Selectednon-GAAP Financial Information” herein. Adjusted amounts exclude intermittent net discrete tax provisions (benefits) |
2018 Compared with 2017
We reported net revenues of $40,107 million in 2018 compared with $37,945 million in 2017. For 2018, net income applicable to Morgan Stanley was $8,748 million, or $4.73 per diluted common share, compared with $6,111 million, or $3.07 per diluted common share, in 2017.
Results for 2018 include intermittent net discrete tax benefits of $203 million, or $0.12 per diluted common share, primarily associated with the remeasurement of reserves and related interest due to the resolution of multi-jurisdiction tax examinations. In addition, the effective tax rate in 2018 is lower than in 2017, Comparedprimarily as a result of the enactment of the Tax Cuts and Jobs Act (“Tax Act”).
Results for 2017 included an intermittent net discrete tax provision of $968 million, or $0.53 per diluted common share, primarily related to the impact of the Tax Act, partially offset by net discrete tax benefits related to the remeasurement of reserves and related interest due to new information regarding the status of multi-year IRS tax examinations. For a discussion of the Tax Act and the net discrete tax benefits, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.
December 2018 Form 10-K | 26 |
Management’s Discussion and Analysis |
Excluding the intermittent net discrete tax items, net income applicable to Morgan Stanley was $8,545 million, or $4.61 per diluted common share, compared with $7,079 million, or $3.60 per diluted common share, in 2017 (see “SelectedNon-GAAP Financial Information” herein).
2017 compared with 2016
We reported net revenues of $37,945 million in 2017 compared with $34,631 million in 2016. For 2017, net income applicable to Morgan Stanley was $6,111 million, or $3.07 per diluted common share, compared with $5,979 million, or $2.92 per diluted common share, in 2016.
ResultsRefer to the 2018 compared with 2017 commentary above for the 2017 included an intermittent net discrete tax provision of $968 million, or $0.53 per diluted common share, primarily related to the impact of the Tax Cuts and Jobs Act (“Tax Act”), partially offset by net discrete tax benefits related to the remeasurement of reserves and related interest due to new information regarding the status of multi-year IRS tax examinations.impact. Results for 2016 included intermittent net discrete tax benefits of $68 million, or $0.04 per diluted common share, primarily related to the remeasurement of reserves and related interest due to new information regarding the status of multi-year IRS tax examinations, partially offset by adjustments for other tax matters. For a further discussion of the
|
Excluding the intermittent net discrete tax items, net income applicable to Morgan Stanley was $7,079 million, or $3.60 per diluted common share, in 2017 compared with $5,911 million, or $2.88 per diluted common share, in 2016 (see “SelectedNon-GAAP Financial Information” herein).
Non-interest Expenses1, 2
($ in millions)
1. | The percentages on the bars in the chart represent the contribution of compensation and benefits expenses andnon-compensation expenses to the total. |
2. | Effective January 1, 2018, the Firm adopted new accounting guidance related toRevenue from Contracts with Customers, which among other things, requires a gross presentation of certain costs that were previously netted against net revenues. Prior periods have not been restated pursuant to this guidance. Refer to note 21 to the financial statements for further information on the full impact of adoption of this new accounting guidance. |
2018 Compared with 2017
Compensation and benefits expenses of $17,632 million in 2018 increased 3% from $17,166 million in 2017. The 2018 results reflected increases in discretionary incentive compensation mainly driven by higher revenues and a reduction in the portion of discretionary incentive compensation subject to deferral (“compensation deferral modification”), as well as salaries across all business segments, the formulaic payout to Wealth Management representatives, and amortization of deferred cash and equity awards. These increases were partially offset by a decrease in the fair value of investments to which certain deferred compensation plans are referenced.
• | Non-compensation expenses were $11,238 million in 2018 compared with $10,376 million in 2017, representing an 8% increase. This increase was primarily a result of higher volume-related expenses, the gross presentation of certain expenses due to the adoption of the accounting updateRevenue from Contracts with Customers (see Notes 2 and 21 to the financial statements for further information) and increased investment in technology, partially offset by lower litigation expenses. |
2017 Compared with 2016
Compensation and benefits expenses of $17,166 million in 2017 increased 8% from $15,878 million in 2016. The 2017 results primarily reflected increases in the formulaic payout to Wealth Management representatives linked to higher revenues, the fair value of investments to which certain deferred compensation plans are referenced, discretionary incentive compensation mainly driven by higher revenues and deferred compensation associated with carried interest in the Investment Management business segment.
Non-compensation expenses were $10,376 million in 2017 compared with $9,905 million in 2016, representing a 5% increase. This increase was primarily a result of higher volume-related expenses and litigation costs.
2016 Compared with 2015
We reported net revenues of $34,631 million in 2016, compared with $35,155 million in 2015. For 2016, net income applicable to Morgan Stanley was $5,979 million, or $2.92 per diluted common share, compared with $6,127 million, or $2.90 per diluted common share, in 2015.
Results for 2016 included intermittent net discrete tax benefits of $68 million, or $0.04 per diluted common share, primarily related to the remeasurement of reserves and related interest due to new information regarding the status of multi-year IRS tax examinations, partially offset by adjustments for other tax matters. Results for 2015 included intermittent net discrete tax benefits of $564 million, or $0.29 per diluted common share, primarily associated with the repatriation ofnon-U.S. earnings at a cost lower than originally estimated and positive revenues due to the impact of DVA of $618 million, or $0.20 per diluted common share. For a further discussion of the net discrete tax benefits, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.
|
Net revenues were $34,631 million in 2016 compared with net revenues of $34,537 million excluding DVA in 2015. Excluding the intermittent net discrete tax benefits, net income applicable to Morgan Stanley was $5,911 million, or $2.88 per diluted common share, in 2016 compared with $5,164 million, or $2.41 per diluted common share, excluding both DVA and the intermittent net discrete tax benefits in 2015 (see “SelectedNon-GAAP Financial Information” herein).
Compensation and benefits expenses of $15,878 million in 2016 decreased 1% from $16,016 million in 2015, primarily due to a decrease in salaries, severance costs, discretionary incentive compensation and employer taxes, partially offset by an increase in the fair value of investments to which certain deferred compensation plans are referenced.
Non-compensation expenses were $9,905 million in 2016 compared with $10,644 million in 2015, representing a 7% decrease, primarily due to lower litigation costs and expense management.
December 2018 Form 10-K |
Management’s Discussion and Analysis |
Expense Efficiency Ratio
Return on Average Common Equity1, 3
Return on Average Tangible Common Equity1, 3
|
|
|
Business Segment Results
Net Revenues by Segment1, 2, 3
($ in millions)
Net Income Applicable to Morgan Stanley by Segment1, 34
($ in millions)
1. | The percentages on the bars in 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. |
2. | The total amount of Net Revenues by Segment |
3. | Effective January 1, 2018, the Firm adopted new accounting guidance related toRevenues from Contracts with Customers, which had the effect of increasing the revenues reported in the Institutional Securities and Investment Management business segments. For further information, see “Business Segments––Institutional Securities” and “Business Segments—Investment Management.” |
4. | The total amount of Net Income Applicable to Morgan Stanley by Segment |
2018 Compared with 2017
Institutional Securities net revenues of $20,582 million in 2018 increased 9% from 2017, primarily reflecting higher revenues from both sales and trading and Investment banking.
Wealth Management net revenues of $17,242 million in 2018 increased 2% from 2017, primarily reflecting growth in Asset management revenues, partially offset by reduced Trading revenues.
Investment Management net revenues of $2,746 million in 2018 increased 6% from 2017, primarily reflecting higher Asset management revenues, partially offset by lower investment gains.
2017 Compared with 2016
Institutional Securities net revenues of $18,813 million in 2017 increased 8% from 2016, primarily reflecting higher revenues from Investment banking.
Wealth Management net revenues of $16,836 million in 2017 increased 10% from 2016, primarily reflecting growth in Asset management revenues and Net interest income.
Investment Management net revenues of $2,586 million in 2017 increased 22% from 2016, primarily reflecting higher revenues from Investments and Asset management.
2016 Compared with 2015
Institutional Securities net revenues of $17,459 million in 2016 decreased 3% compared with $17,953 million in 2015. The decrease was primarily a result of lower Investment banking and sales and trading revenues, which included DVA gains in 2015, partially offset by higher Other revenues.
Wealth Management net revenues of $15,350 million in 2016 increased 2% from $15,100 million in 2015, primarily as a result of growth in Net interest income, partially offset by lower Commissions and fees and Investment banking revenues.
Investment Management net revenues of $2,112 million in 2016 decreased 9% from $2,315 million in 2015, primarily reflecting weaker investment performance compared with 2015. This was partially offset by carried interest losses in 2015 associated with Asia private equity that did notre-occur in 2016. Asset management fees in 2016 were relatively unchanged from 2015.
Net Revenues by Region1, 21
($ in millions)
1. | For a discussion of how the geographic breakdown for net revenues is determined, see Note 21 to the financial statements. |
2. | The percentages on the bars in the charts represent the contribution of each region to the total. |
Capital Ratios
December 2018 Form 10-K | 28 |
Management’s Discussion and Analysis |
Selected Financial Information and Other Statistical Data
At December 31, 2017 | At December 31, 2016 | |||||||
Common Equity Tier 1 capital ratio1 | 16.5% | 16.9% | ||||||
Tier 1 capital ratio1 | 18.9% | 19.0% | ||||||
Total capital ratio1 | 21.7% | 22.0% | ||||||
Tier 1 leverage ratio | 8.3% | 8.4% |
$ in millions | 2018 | 2017 | 2016 | |||||||||
Expense efficiency ratio1 |
| 72.0% |
|
| 72.6% |
|
| 74.5% |
| |||
ROE2 |
| 11.8% |
|
| 8.0% |
|
| 8.0% |
| |||
Adjusted ROE2,3 |
| 11.5% |
|
| 9.4% |
|
| 7.9% |
| |||
ROTCE2 |
| 13.5% |
|
| 9.2% |
|
| 9.3% |
| |||
Adjusted ROTCE2, 3 |
| 13.2% |
|
| 10.8% |
|
| 9.1% |
| |||
Worldwide employees |
| 60,348 |
|
| 57,633 |
|
| 55,311 |
|
At December 31, | At December 31, | |||||||
Capital ratios4 | ||||||||
Common Equity Tier 1 capital |
| 16.9% |
|
| 16.5% |
| ||
Tier 1 capital |
| 19.2% |
|
| 18.9% |
| ||
Total capital |
| 21.8% |
|
| 21.7% |
| ||
Tier 1 leverage |
| 8.4% |
|
| 8.3% |
| ||
SLR5 |
| 6.5% |
|
| 6.5% |
|
1. |
|
2. | Represents anon-GAAP measure. See “SelectedNon-GAAP Financial Information” herein. |
3. | Adjusted amounts exclude intermittent net discrete tax provisions (benefits). Beginning in 2017, income tax consequences associated with employee share-based awards are recognized in Provision for income taxes in the income statements but are excluded from the intermittent net discrete tax provisions (benefits) adjustment as we anticipate conversion activity each year. For further information on the net discrete tax provisions (benefits), see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein. |
4. | Beginning in 2018, our risk-based capital ratios are based on the Standardized Approach |
5. | ||||
The SLR became effective as a capital standard on January 1, 2018; the SLR for 2017 | was anon-GAAPpro-forma estimate. For a discussion of the SLR, see “Liquidity and Capital Resources—Regulatory Requirements” herein. |
SelectedNon-GAAP Financial Information
We prepare our financial statements using 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 thenon-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 withnon-GAAP financial measures used by other companies. Whenever we refer to anon-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 thenon-GAAP financial measure.
The principalnon-GAAP financial measures presented in this document are set forth below.
Reconciliations from U.S. GAAP toNon-GAAP Consolidated Financial Measures
$ in millions, except per share data | 2017 | 2016 | 2015 | |||||||||
Net revenues | $ | 37,945 | $ | 34,631 | $ | 35,155 | ||||||
Impact of adjustments1 | — | — | (618) | |||||||||
Adjusted netrevenue—non-GAAP | 37,945 | 34,631 | 34,537 | |||||||||
Net income applicable to Morgan Stanley | $ | 6,111 | $ | 5,979 | $ | 6,127 | ||||||
Impact of adjustments1 | 968 | (68) | (963) | |||||||||
Adjusted net income applicable to MorganStanley—non-GAAP | 7,079 | 5,911 | 5,164 | |||||||||
Earnings per diluted common share | $ | 3.07 | $ | 2.92 | $ | 2.90 | ||||||
Impact of adjustments1 | 0.53 | (0.04) | (0.49) | |||||||||
Adjusted earnings per diluted commonshare—non-GAAP | $ | 3.60 | $ | 2.88 | $ | 2.41 | ||||||
Effective income tax rate | 40.1% | 30.8% | 25.9% | |||||||||
Impact of adjustments1 | (9.3)% | 0.8% | 6.4% | |||||||||
Adjusted effective income taxrate—non-GAAP | 30.8% | 31.6% | 32.3% |
At December 31, 2017 | At December 31, 2016 | Average Monthly Balance Twelve Months Ended | ||||||||||||||||||
December 31, | ||||||||||||||||||||
$ in millions | 2017 | 2016 | 2015 | |||||||||||||||||
Tangible Equity | ||||||||||||||||||||
U.S. GAAP | ||||||||||||||||||||
Common equity | $ | 68,871 | $ | 68,530 | $ | 69,787 | $ | 68,870 | $ | 66,936 | ||||||||||
Preferred equity | 8,520 | 7,520 | 8,443 | 7,520 | 7,174 | |||||||||||||||
Morgan Stanley shareholders’ equity | $ | 77,391 | $ | 76,050 | $ | 78,230 | $ | 76,390 | $ | 74,110 | ||||||||||
Junior subordinated debentures issued to capital trusts | — | — | — | 1,753 | 3,640 | |||||||||||||||
Less: Goodwill and net intangible assets | (9,042 | ) | (9,296 | ) | (9,158 | ) | (9,410 | ) | (9,661 | ) | ||||||||||
Morgan Stanley tangible shareholders’equity—non-GAAP | $ | 68,349 | $ | 66,754 | $ | 69,072 | $ | 68,733 | $ | 68,089 | ||||||||||
U.S. GAAP | ||||||||||||||||||||
Common equity | $ | 68,871 | $ | 68,530 | $ | 69,787 | $ | 68,870 | $ | 66,936 | ||||||||||
Less: Goodwill and net intangible assets | (9,042 | ) | (9,296 | ) | (9,158 | ) | (9,410 | ) | (9,661 | ) | ||||||||||
Tangible commonequity—non-GAAP | $ | 59,829 | $ | 59,234 | $ | 60,629 | $ | 59,460 | $ | 57,275 |
ConsolidatedNon-GAAP Financial Measures
$ in millions, except per share data | 2018 | 2017 | 2016 | |||||||||
Net income applicable to Morgan Stanley | $ | 8,748 |
| $ | 6,111 |
| $ | 5,979 |
| |||
Impact of adjustments |
| (203 | ) |
| 968 |
|
| (68 | ) | |||
Adjusted net income applicable to MorganStanley—non-GAAP1 | $ | 8,545 |
| $ | 7,079 |
| $ | 5,911 |
| |||
Earnings per diluted common share | $ | 4.73 |
| $ | 3.07 |
| $ | 2.92 |
| |||
Impact of adjustments |
| (0.12 | ) |
| 0.53 |
|
| (0.04 | ) | |||
Adjusted earnings per diluted common share—non-GAAP1 | $ | 4.61 |
| $ | 3.60 |
| $ | 2.88 |
| |||
Effective income tax rate |
| 20.9% |
|
| 40.1% |
|
| 30.8% |
| |||
Impact of adjustments |
| 1.8% |
|
| (9.3)% |
|
| 0.8% |
| |||
Adjusted effective income taxrate—non-GAAP1 |
| 22.7% |
|
| 30.8% |
|
| 31.6% |
|
$ in billions | 2017 | 2016 | 2015 | |||||||||
Average common equity | ||||||||||||
Unadjusted | $ | 69.8 | $ | 68.9 | $ | 66.9 | ||||||
Adjusted1, 2 | 69.9 | 68.9 | 67.1 | |||||||||
ROE | ||||||||||||
Unadjusted | 8.0% | 8.0% | 8.5% | |||||||||
Adjusted1, 2 | 9.4% | 7.9% | 7.0% | |||||||||
Average tangible common equity | ||||||||||||
Unadjusted | $ | 60.6 | $ | 59.5 | $ | 57.3 | ||||||
Adjusted1, 2 | 60.7 | 59.5 | 57.5 | |||||||||
ROTCE | ||||||||||||
Unadjusted | 9.2% | 9.3% | 9.9% | |||||||||
Adjusted1, 2 | 10.8% | 9.1% | 8.2% | |||||||||
Expense efficiency ratio3 | 72.6% | 74.5% | 77.2% |
At December 31, | At December 31, | |||||||
Tangible book value per common share4 | $ | 33.46 | $ | 31.98 |
$ in millions | At | At | ||||||
Tangible equity | ||||||||
U.S. GAAP | ||||||||
Morgan Stanley shareholders’ equity | $ | 80,246 |
| $ | 77,391 |
| ||
Less: Goodwill and net intangible assets |
| (8,847 | ) |
| (9,042 | ) | ||
Tangible Morgan Stanley | $ | 71,399 |
| $ | 68,349 |
| ||
U.S. GAAP | ||||||||
Common equity | $ | 71,726 |
| $ | 68,871 |
| ||
Less: Goodwill and net intangible assets |
| (8,847 | ) |
| (9,042 | ) | ||
Tangible commonequity—non-GAAP | $ | 62,879 |
| $ | 59,829 |
|
December |
Management’s Discussion and Analysis |
Average Monthly Balance Twelve Months Ended | ||||||||||||
December 31, | ||||||||||||
$ in millions | 2018 | 2017 | 2016 | |||||||||
Tangible equity | ||||||||||||
U.S. GAAP | ||||||||||||
Morgan Stanley shareholders’ equity | $ | 78,497 |
| $ | 78,230 |
| $ | 76,390 |
| |||
Junior subordinated debentures issued to capital trusts |
| — |
|
| — |
|
| 1,753 |
| |||
Less: Goodwill and net intangible assets |
| (8,985 | ) |
| (9,158 | ) |
| (9,410 | ) | |||
Tangible Morgan Stanley shareholders’equity—non-GAAP | $ | 69,512 |
| $ | 69,072 |
| $ | 68,733 |
| |||
U.S. GAAP | ||||||||||||
Common equity | $ | 69,977 |
| $ | 69,787 |
| $ | 68,870 |
| |||
Less: Goodwill and net intangible assets |
| (8,985 | ) |
| (9,158 | ) |
| (9,410 | ) | |||
Tangible commonequity—non-GAAP | $ | 60,992 |
| $ | 60,629 |
| $ | 59,460 |
|
ConsolidatedNon-GAAP Financial Measures
$ in billions | 2018 | 2017 | 2016 | |||||||||
Average common equity | ||||||||||||
Unadjusted | $ | 70.0 |
| $ | 69.8 |
| $ | 68.9 |
| |||
Adjusted1 |
| 69.9 |
|
| 69.9 |
|
| 68.9 |
| |||
ROE2 | ||||||||||||
Unadjusted |
| 11.8% |
|
| 8.0% |
|
| 8.0% |
| |||
Adjusted1, 3 |
| 11.5% |
|
| 9.4% |
|
| 7.9% |
| |||
Average tangible common equity | ||||||||||||
Unadjusted | $ | 61.0 |
| $ | 60.6 |
| $ | 59.5 |
| |||
Adjusted1 |
| 60.9 |
|
| 60.7 |
|
| 59.5 |
| |||
ROTCE2 | ||||||||||||
Unadjusted |
| 13.5% |
|
| 9.2% |
|
| 9.3% |
| |||
Adjusted1, 3 |
| 13.2% |
|
| 10.8% |
|
| 9.1% |
|
Non-GAAP Financial Measures by Business Segment
$ in billions | 2017 | 2016 | 2015 | 2018 | 2017 | 2016 | ||||||||||||||||||
Pre-tax profit margin5 | ||||||||||||||||||||||||
Pre-tax margin4 | ||||||||||||||||||||||||
Institutional Securities | 30% | 29% | 26% |
| 30% |
|
| 30% |
|
| 29% |
| ||||||||||||
Wealth Management | 26% | 22% | 22% |
| 26% |
|
| 26% |
|
| 22% |
| ||||||||||||
Investment Management | 18% | 14% | 21% |
| 17% |
|
| 18% |
|
| 14% |
| ||||||||||||
Consolidated | 27% | 26% | 24% |
| 28% |
|
| 27% |
|
| 26% |
| ||||||||||||
Average common equity6 | ||||||||||||||||||||||||
Average common equity5 | ||||||||||||||||||||||||
Institutional Securities | $ | 40.2 | $ | 43.2 | $ | 34.6 | $ | 40.8 |
| $ | 40.2 |
| $ | 43.2 |
| |||||||||
Wealth Management | 17.2 | 15.3 | 11.2 |
| 16.8 |
|
| 17.2 |
|
| 15.3 |
| ||||||||||||
Investment Management | 2.4 | 2.8 | 2.2 |
| 2.6 |
|
| 2.4 |
|
| 2.8 |
| ||||||||||||
Parent Company | 10.0 | 7.6 | 18.9 | |||||||||||||||||||||
Parent |
| 9.8 |
|
| 10.0 |
|
| 7.6 |
| |||||||||||||||
Consolidated average common equity | $ | 69.8 | $ | 68.9 | $ | 66.9 | $ | 70.0 |
| $ | 69.8 |
| $ | 68.9 |
| |||||||||
ROE2, 7 | ||||||||||||||||||||||||
Average tangible common equity5 | Average tangible common equity5 |
| ||||||||||||||||||||||
Institutional Securities | $ | 40.1 |
| $ | 39.6 |
| $ | 42.6 |
| |||||||||||||||
Wealth Management |
| 9.2 |
|
| 9.3 |
|
| 7.1 |
| |||||||||||||||
Investment Management |
| 1.7 |
|
| 1.6 |
|
| 2.0 |
| |||||||||||||||
Parent |
| 10.0 |
|
| 10.1 |
|
| 7.8 |
| |||||||||||||||
Consolidated average | $ | 61.0 |
| $ | 60.6 |
| $ | 59.5 |
| |||||||||||||||
ROE2, 6 | ||||||||||||||||||||||||
Institutional Securities | 7.8% | 7.6% | 9.9% |
| 11.0% |
|
| 7.8% |
|
| 7.6% |
| ||||||||||||
Wealth Management | 12.9% | 13.3% | 16.9% |
| 20.0% |
|
| 12.9% |
|
| 13.3% |
| ||||||||||||
Investment Management | 10.1% | 7.7% | 15.8% |
| 14.2% |
|
| 10.1% |
|
| 7.7% |
| ||||||||||||
Consolidated | 8.0% | 8.0% | 8.5% |
| 11.8% |
|
| 8.0% |
|
| 8.0% |
| ||||||||||||
ROTCE2, 6 | ||||||||||||||||||||||||
Institutional Securities |
| 11.2% |
|
| 7.9% |
|
| 7.7% |
| |||||||||||||||
Wealth Management |
| 36.6% |
|
| 23.8% |
|
| 28.5% |
| |||||||||||||||
Investment Management |
| 22.2% |
|
| 14.8% |
|
| 10.7% |
| |||||||||||||||
Consolidated |
| 13.5% |
|
| 9.2% |
|
| 9.3% |
|
1. |
|
2. |
|
3. | The |
4. |
|
Pre-tax |
Average common equity and average tangible common equity for each business segment |
The calculation of the ROE and ROTCE by segment uses the net income applicable to Morgan Stanley by segment less preferred dividends allocated to each segment as a percentage of average common equity and average tangible common equity, respectively, allocated to each segment. |
December 2018 Form 10-K | 30 |
Management’s Discussion and Analysis |
Return on Equity and Tangible Common Equity Targets
We previouslyhave established an ROE Target of 9%10% to 11%13% and an ROTCE Target of 11.5% to be achieved by 2017.14.5%. Excluding the impact of intermittent net discrete tax items, primarily related to the Tax Act, we generated an 11.5% ROE and a 9.4% ROE13.2% ROTCE for 2017.
In January 2018, we established an ROE Target of 10% to 13% for the medium term. This is equivalent to an ROTCE Target range of 11.5% to 14.5%.2018.
Our ROE and ROTCE Targets 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; outsizeoutsized legal expenses or penalties and the ability to maintain a reduced level of expenses; and capital levels; and intermittent discrete tax items. Given the uncertainties surrounding these and other factors, there are significant risks that our ROE and ROTCE Targets may not be realized. Actual results may differ from our objectives and the differences may be material and adverse. Accordingly, we caution that undue reliance should not be placed on any of these forward-looking statements.levels. See “Forward-Looking Statements” and “Risk Factors” for additional information regarding these forward-looking statements.information.
Fornon-GAAP measures (ROE and ROTCE), see “SelectedNon-GAAP Financial Information” herein. For information on the impact of intermittent net discrete tax items, including the Tax Act, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.
Substantially all of our operating revenues and operating expenses are directly attributable to our 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. See Note 21 to the financial statements for further information.
Net Revenues
Investment Banking.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.
Trading.Trading revenues include revenues from customers’ purchases and sales of financial instruments in which we act as a market maker, as well as gains and losses on our related positions and other positions carried at fair value. Trading revenues include the realized gains and losses from sales of cash instruments and derivative settlements, unrealized gains and losses from ongoing fair value changes of our positions related to market-making activities, and gains and losses related to investments associated with certain employee deferred compensation plans and other positions carried at fair value. In many markets, the realized and unrealized gains and losses
from the purchase and sale transactions will include any spreads between bids and offers. Certain fees received on loans carried at fair value and dividends from equity securities are also recorded in Trading revenues since they relate to positions carried at fair value.
As a market maker, we stand ready to buy, sell or otherwise transact with customers under a variety of market conditions and to provide firm or indicative prices in response to customer requests. Our liquidity obligations can be explicit in some cases, and in others, customers expect us to be willing to transact with them. In order to most effectively fulfill our market-making function, we engage in activities across all of our trading businesses that include, but are not limited to:
(i) | taking positions in anticipation of, and in response to, customer demand to buy or sell and—depending on the liquidity of the relevant market and the size of the position—to hold those positions for a period of time; |
(ii) | building, maintaining and rebalancing inventory through trades with other market participants; |
(iii) | managing and assuming basis risk (risk associated with imperfect hedging) between customized customer risks and the standardized products available in the market to hedge those risks; |
(iv) | trading in the market to remain current on pricing and trends; and |
(v) | engaging in other activities to provide efficiency and liquidity for markets. |
Interest income and expense are also impacted by market-making activities, as debt securities held by us earn interest and securities are loaned, borrowed, sold with agreements to repurchase and purchased with agreements to resell.
We invest in investments or other financial instruments to economically hedge our obligations under certain deferred compensation plans. Changes in the value of such investments are recorded in either Trading revenues or Investments revenues. Expenses associated with the related deferred compensation plans are recorded in Compensation and benefits. See “Compensation Expense” herein for more details.
Investments.Our investments are generally are held for long-term appreciation, or, as discussed above, for hedging purposes, and generally are subject to significant sales restrictions. Estimates of the fair value of the investments may involve significant judgment and may fluctuate significantly over time in light of business, market, economic and financial conditions generally or in relation to specific transactions. In some cases, such investments are required or are a necessaryas part of offering other products.related products or services.
Typically, there are no fee revenues from these investments. The revenues recorded are the result of realized gains and losses from sales and unrealized gains and losses from ongoing fair value changes of our holdings,positions, as well as from investments associated with certain employee deferred compensation andco-investment plans. Estimates of the fair value of the investments may involve significant judgment
31 | December 2018 Form 10-K |
Typically, there
Management’s Discussion and Analysis |
and may fluctuate significantly over time in light of business, market, economic and financial conditions generally or in relation to specific transactions.
Certain investments are no fee revenues from these investments. Thesubject to sales restrictions on the investments relate primarilyor are required to redemption and withdrawal restrictions on investmentsbe held in certain Investment Management funds, which include investments made in connection with certain employee deferred compensation plans (see Note 3order to the financial statements). Restrictions on interests in exchanges and clearinghouses generally include a requirement to hold those interests for the period of time where we are clearing trades on that exchange or clearinghouse. Additionally, there are certain sponsored Investment Management funds consolidated by us primarilycarry out related to holders of noncontrolling interests.activities.
Commissions and Fees.Commission and fee revenues primarily arise from agency transactions in listed and OTC equity securities, services related to sales and trading activities, and sales of mutual funds, futures, insurance products and options. Commissions received for purchasing and selling listed equity securities and options are recorded in Commissions and fees. Other cash and derivative instruments typically do not have fees associated with them, and fees for any related services are recorded in Commissions and fees.
Asset Management.Asset management revenues include fees associated with the management and supervision of assets, account services and administration, performance-based fees relating to certain funds, separately managed accounts, shareholder servicing and the distribution of certain open-ended mutual funds.
Net Interest.Interest income and Interest expense are a functionfunctions of the level and mix of total assets and liabilities, including Trading assets and Trading liabilities, Investment securities (which include AFS securities and HTM securities), Securities borrowed or purchased under agreements to resell, Securities loaned or sold under agreements to repurchase, Loans, Deposits and Borrowings. In addition, Net interest is a function of trading strategies, customer activity in the prime brokerage business, and the prevailing level, term structure and volatility of interest rates.
Other.Other revenues include revenues from equity method investments, realized gains and losses on AFS securities, gains and losses on loan commitments and loans held for sale, provision for loan losses, and other miscellaneous revenues.
Net Revenues by Segment
Institutional Securities
Net revenues are composed of Investment banking revenues, sales and trading net revenues, Investments and Other revenues.
For information about the composition of Investment banking revenues, see “Net Revenues” herein.
Sales and trading net revenues are composed of Trading revenues, Commissions and fees, Asset management revenues and Net interest. In assessing the profitability of our sales and trading activities, we view these net revenues in the aggregate. In addition, decisionsDecisions relating to trading are based on an overall review of
aggregate revenues and costs associated with each transaction or series of transactions. This review includes, among other things, an assessment of the potential gain or loss associated with a transaction, including any associated commissions and fees, dividends, the interest income or expense associated with financing or hedging our positions and other related expenses.
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.
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. 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 OTC transactions. We make markets for our clients in equity-related securities and derivative products, including providing liquidity and hedging products. Market-makingMarket making also generates gains and losses on inventory positions, 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 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. We undertake lending activities, which include commercial |
December 2018 Form 10-K | 32 |
Management’s Discussion and Analysis |
• | 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 primarily include |
Other sales and trading revenues include impacts from certain central treasury functions, such as liquidity costs and gains (losses) on economic hedges related to certain borrowings, as well as certain activities associated with corporate lending.
For information about revenuerevenues from Investments, see “Net Revenues” herein.
Other revenues include revenues from equity method investments, gains and losses on loans held for sale loans and loanlending commitments, fees earned in association with lending activities, provision for loan losses and other miscellaneous revenues.
Wealth Management
Net revenues are composed of Transactional, Asset management, Net interest and Other revenues.
Transactional revenues include Investment banking, Trading, and Commissions and fees. Investment banking revenues include revenues from the distribution of equity and fixed income securities, including initial public offerings, secondary offerings,closed-end funds and unit trusts. Trading revenues primarily include revenues from customers’ purchases and sales of fixed income financial instruments, in which we act as principal, and gains and losses associated with certain employee deferred compensation plans. Revenues from Commissions and fees primarily arise from agency transactions in listed and OTC equity securities and sales of mutual funds, futures, insurance products and options.
Asset management revenues includeprimarily consist of revenues from individual and institutional investors electing afee-based pricing arrangement and fees from Investment Management. Mutualarrangement. Wealth Management also receives mutual fund distribution fees, which are based on either the average daily fund net asset balances or average daily aggregate net fund sales and are affected by changes in the overall level and mix of AUM.
Net interest income includes interest related to bank deposits,on lending activities, interest on AFS securities and HTM securities, interest on lending activitiesrelated to Deposits and other net interest. Interest income and Interest expense are a functionfunctions of the level and mix of total assets and liabilities. Net interest is driven by securities-based lending, mortgage lending, margin loans, securities borrowed and securities loaned transactions, bank deposit activity,brokerage sweep deposits, time deposits and savings deposits.other funding sources.
Other revenues include revenues from realized gains and losses on AFS securities, provision for loan losses, referral fees and other miscellaneous revenues.
Investment Management
Net revenues are composed of Investments and Asset management revenues.
Investments revenue isrevenues are primarily earned onderived from investments inmade as part of our product offerings. In certainclosed-end funds that generally cases these investments are held for long-term appreciation and generally subject to sales restrictions. Estimates ofIn addition to the fair value of the investments involve significant judgmentgains and may fluctuate materially over time in light of business, market, economic and financial conditions generally or in relation to specific transactions.losses discussed previously, Investments revenuerevenues for Investment Management also containscontain performance fees from fund management activities in the form of carried interest, that area portion of which is subject to reversal. Additionally, there are certain sponsored Investment Management funds consolidated by us where revenues are primarily related to holders of noncontrolling interests.
Asset management revenues include revenues from investment management services we provide to investment vehicles pursuant to various contractual arrangements. We receive
fees primarily based upon mutual fund daily average net assets or based on monthly or quarterly invested equity for other vehicles. Performance-based fees, not in the form of carried interest, are earned on certain products as a percentage of appreciation earned by those products and, in certain cases, are based upon the achievement of performance criteria. These fees are normally earned annually and aregenerally recognized on a monthly or quarterly basis.annually.
Compensation Expense
Compensation and benefits expense includes accruals for base salaries and fixed allowances, formulaic programs, discretionary incentive compensation, amortization of deferred cash and equity awards, changes in the fair value of investments to which certain deferred compensation plans are referenced, carried interest, severance costs, and other items such as health and welfare benefits.
The factors that drive compensation for our employees vary from quarter to quarter, from segment to segment and within a segment. For certain revenue-producing employees in the Wealth Management and Investment Management business segments, compensation is largely paid on the basis of formulaic payouts that link employee compensation to revenues. Compensation for certainmost other employees, including revenue-producing employees in the Institutional Securities business segment, may also include incentive compensation that is determined following the assessment of the Firm,Firm’s, business unitunit’s and individualindividual’s performance. Compensation for our remaining employees is largely fixed in nature (i.e., base salary and benefits).
33 | December 2018 Form 10-K |
Management’s Discussion and Analysis |
Compensation expense for deferred cash-based compensation plans is calculated based on the notional value of the award granted, adjusted for upward and downward changes in fair value of the referenced investment, and is recognized ratably over the prescribed vesting period for the award. However, there may be a timing difference between the immediate revenue recognition of gains and losses on our investments and the deferred recognition of the related compensation expense over the vesting period.
Income Taxes
The income tax provision for our business segments is generally determined based on the revenues, expenses and activities directly attributable to each business segment. Certain items have been allocated to each business segment, generally in proportion to its respective net revenues or other relevant measures.
December 2018 Form 10-K |
Management’s Discussion and Analysis |
Institutional Securities
Income Statement Information
% Change | % Change | |||||||||||||||||||||||||||||||||||||||
$ in millions | 2017 | 2016 | 2015 | 2017 | 2016 | 2018 | 2017 | 2016 | 2018 | 2017 | ||||||||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||||||||||
Investment banking | $ | 5,537 | $ | 4,476 | $ | 5,008 | 24% | (11)% | $ | 6,088 |
| $ | 5,537 |
| $ | 4,476 |
|
| 10% |
|
| 24% |
| |||||||||||||||||
Trading | 10,295 | 9,387 | 9,400 | 10% | —% |
| 11,191 |
|
| 10,295 |
|
| 9,387 |
|
| 9% |
|
| 10% |
| ||||||||||||||||||||
Investments | 368 | 147 | 274 | 150% | (46)% |
| 182 |
|
| 368 |
|
| 147 |
|
| (51)% |
|
| 150% |
| ||||||||||||||||||||
Commissions and fees | 2,433 | 2,456 | 2,616 | (1)% | (6)% |
| 2,671 |
|
| 2,433 |
|
| 2,456 |
|
| 10% |
|
| (1)% |
| ||||||||||||||||||||
Asset management | 359 | 293 | 281 | 23% | 4% |
| 421 |
|
| 359 |
|
| 293 |
|
| 17% |
|
| 23% |
| ||||||||||||||||||||
Other | 630 | 535 | 221 | 18% | 142% |
| 535 |
|
| 630 |
|
| 535 |
|
| (15)% |
|
| 18% |
| ||||||||||||||||||||
Totalnon-interest revenues | 19,622 | 17,294 | 17,800 | 13% | (3)% |
| 21,088 |
|
| 19,622 |
|
| 17,294 |
|
| 7% |
|
| 13% |
| ||||||||||||||||||||
Interest income | 5,377 | 4,005 | 3,190 | 34% | 26% |
| 9,271 |
|
| 5,377 |
|
| 4,005 |
|
| 72% |
|
| 34% |
| ||||||||||||||||||||
Interest expense | 6,186 | 3,840 | 3,037 | 61% | 26% |
| 9,777 |
|
| 6,186 |
|
| 3,840 |
|
| 58% |
|
| 61% |
| ||||||||||||||||||||
Net interest | (809 | ) | 165 | 153 | N/M | 8% |
| (506 | ) |
| (809 | ) |
| 165 |
|
| 37% |
|
| N/M |
| |||||||||||||||||||
Net revenues | 18,813 | 17,459 | 17,953 | 8% | (3)% |
| 20,582 |
|
| 18,813 |
|
| 17,459 |
|
| 9% |
|
| 8% |
| ||||||||||||||||||||
Compensation and benefits | 6,625 | 6,275 | 6,467 | 6% | (3)% |
| 6,958 |
|
| 6,625 |
|
| 6,275 |
|
| 5% |
|
| 6% |
| ||||||||||||||||||||
Non-compensation expenses | 6,544 | 6,061 | 6,815 | 8% | (11)% |
| 7,364 |
|
| 6,544 |
|
| 6,061 |
|
| 13% |
|
| 8% |
| ||||||||||||||||||||
Totalnon-interest expenses | 13,169 | 12,336 | 13,282 | 7% | (7)% |
| 14,322 |
|
| 13,169 |
|
| 12,336 |
|
| 9% |
|
| 7% |
| ||||||||||||||||||||
Income from continuing operations before income taxes | 5,644 | 5,123 | 4,671 | 10% | 10% |
| 6,260 |
|
| 5,644 |
|
| 5,123 |
|
| 11% |
|
| 10% |
| ||||||||||||||||||||
Provision for income taxes | 1,993 | 1,318 | 825 | 51% | 60% |
| 1,230 |
|
| 1,993 |
|
| 1,318 |
|
| (38)% |
|
| 51% |
| ||||||||||||||||||||
Income from continuing operations | 3,651 | 3,805 | 3,846 | (4)% | (1)% |
| 5,030 |
|
| 3,651 |
|
| 3,805 |
|
| 38% |
|
| (4)% |
| ||||||||||||||||||||
Income (loss) from discontinued operations net of income taxes | (19 | ) | (1 | ) | (17 | ) | N/M | 94% | ||||||||||||||||||||||||||||||||
Income (loss) from discontinued operations, net of income taxes |
| (6 | ) |
| (19 | ) |
| (1 | ) |
| 68% |
|
| N/M |
| |||||||||||||||||||||||||
Net income | 3,632 | 3,804 | 3,829 | (5)% | (1)% |
| 5,024 |
|
| 3,632 |
|
| 3,804 |
|
| 38% |
|
| (5)% |
| ||||||||||||||||||||
Net income applicable to noncontrolling interests | 96 | 155 | 133 | (38)% | 17% |
| 118 |
|
| 96 |
|
| 155 |
|
| 23% |
|
| (38)% |
| ||||||||||||||||||||
Net income applicable to Morgan Stanley | $ | 3,536 | $ | 3,649 | $ | 3,696 | (3)% | (1)% | $ | 4,906 |
| $ | 3,536 |
| $ | 3,649 |
|
| 39% |
|
| (3)% |
|
Investment Banking
Investment Banking Revenues
% Change | % Change | |||||||||||||||||||||||||||||||||||||||
$ in millions | 2017 | 2016 | 2015 | 2017 | 2016 | 2018 | 2017 | 2016 | 2018 | 2017 | ||||||||||||||||||||||||||||||
Advisory | $ | 2,077 | $ | 2,220 | $ | 1,967 | (6)% | 13% | $ | 2,436 |
| $ | 2,077 |
| $ | 2,220 |
|
| 17% |
|
| (6)% |
| |||||||||||||||||
Underwriting: | ||||||||||||||||||||||||||||||||||||||||
Equity | 1,484 | 887 | 1,398 | 67% | (37)% |
| 1,726 |
|
| 1,484 |
|
| 887 |
|
| 16% |
|
| 67% |
| ||||||||||||||||||||
Fixed income | 1,976 | 1,369 | 1,643 | 44% | (17)% |
| 1,926 |
|
| 1,976 |
|
| 1,369 |
|
| (3)% |
|
| 44% |
| ||||||||||||||||||||
Total underwriting | 3,460 | 2,256 | 3,041 | 53% | (26)% |
| 3,652 |
|
| 3,460 |
|
| 2,256 |
|
| 6% |
|
| 53% |
| ||||||||||||||||||||
Total investment banking | $ | 5,537 | $ | 4,476 | $ | 5,008 | 24% | (11)% | ||||||||||||||||||||||||||||||||
Total Investment banking | $ | 6,088 |
| $ | 5,537 |
| $ | 4,476 |
|
| 10% |
|
| 24% |
|
Investment Banking Volumes
$ in billions | 2017 | 2016 | 2015 | |||||||||
Completed mergers and acquisitions1 | $ | 733 | $ | 1,021 | $ | 664 | ||||||
Equity and equity-related offerings2, 3 | 65 | 45 | 67 | |||||||||
Fixed income offerings2, 4 | 260 | 236 | 254 |
$ in billions | 2018 | 2017 | 2016 | |||||||||
Completed mergers and acquisitions1 | $ | 1,098 |
| $ | 749 |
| $ | 1,023 |
| |||
Equity and equity-related offerings2, 3 |
| 64 |
|
| 65 |
|
| 45 |
| |||
Fixed income offerings2, 4 |
| 223 |
|
| 268 |
|
| 236 |
|
Source: Thomson Reuters, data atas of January 2, 2018.2019. 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.
1. |
|
2. |
|
3. |
|
4. |
|
2018 Compared with 2017
Investment banking revenues of $6,088 million in 2018 increased 10% from 2017. The adoption of the accounting updateRevenue from Contracts with Customers had the effect of increasing the revenues reported in investment banking by approximately $283 million in 2018 compared with 2017 (see Notes 2 and 21 to the financial statements for further information). The drivers of the increase in our Investment banking revenues, other than the effect of the above accounting update, were:
Advisory revenues increased primarily as a result of higher volumes of completed M&A activity (see Investment Banking Volumes table), partially offset by lower fee realizations.
Equity underwriting revenues increased as a result of higher fee realizations. Revenues increased in IPOs and convertible offerings, partially offset by lower revenues from secondary block share trades.
35 | December 2018 Form 10-K |
Management’s Discussion and Analysis |
Fixed income underwriting revenues decreased primarily as a result of lower volumes, partially offset by the effect of higher fee realizations. Revenues decreased in bond underwriting fees, partially offset by higher loan fees.
2017 Compared with 2016
Investment banking revenues of $5,537 million in 2017 increased 24% from 2016 due to higher underwriting revenues, partially offset by lower advisory revenues.
Advisory revenues decreased reflecting the lower volumes of completed M&A (see Investment Banking Volumes table), partially offset by the positive impact of higher fee realizations.
Equity underwriting revenues increased as a result of higher global market volumes in bothfollow-on and initial public offerings (see Investment Banking Volumes table) combined with a higher share of fees.
Fixed income underwriting revenues increased due to higher bond fees andnon-investment grade loan fees.
2016 Compared with 2015
Investment banking revenues of $4,476 million in 2016 decreased 11% from 2015 due to lower underwriting revenues, partially offset by an increase in advisory revenues in 2016.
Advisory revenues increased reflecting the higher dollar volume of completed M&A activity (see Investment Banking Volumes table). As the number of completed transactions decreased in 2016 versus 2015, the 2016 revenue increase was at a lower rate than the percentage increase in dollar volume.
Equity underwriting revenues decreased as a result of lower equity-related offerings in 2016 (see Investment Banking Volumes table). Fixed income underwriting revenues decreased in 2016, primarily due to lower bond and loan fees.
Sales and Trading Net Revenues
By Income Statement Line Item
% Change | % Change | |||||||||||||||||||||||||||||||||||||||
$ in millions | 2017 | 2016 | 2015 | 2017 | 2016 | 2018 | 2017 | 2016 | 2018 | 2017 | ||||||||||||||||||||||||||||||
Trading | $ | 10,295 | $ | 9,387 | $ | 9,400 | 10% | — 0⁄0 | $ | 11,191 |
| $ | 10,295 |
| $ | 9,387 |
|
| 9% |
|
| 10% |
| |||||||||||||||||
Commissions and fees | 2,433 | 2,456 | 2,616 | (1)% | (6)% |
| 2,671 |
|
| 2,433 |
|
| 2,456 |
|
| 10% |
|
| (1)% |
| ||||||||||||||||||||
Asset management | 359 | 293 | 281 | 23% | 4% |
| 421 |
|
| 359 |
|
| 293 |
|
| 17% |
|
| 23% |
| ||||||||||||||||||||
Net interest | (809 | ) | 165 | 153 | N/M | 8% |
| (506 | ) |
| (809 | ) |
| 165 |
|
| 37% |
|
| N/M |
| |||||||||||||||||||
Total | $ | 12,278 | $ | 12,301 | $ | 12,450 | N/M | (1)% | $ | 13,777 |
| $ | 12,278 |
| $ | 12,301 |
|
| 12% |
|
| N/M |
|
By Business
% Change | ||||||||||||||||||||
$ in millions | 2017 | 2016 | 2015 | 2017 | 2016 | |||||||||||||||
Equity—U.S. GAAP | $ | 7,982 | $ | 8,037 | $ | 8,288 | (1)% | (3)% | ||||||||||||
Impact of DVA1 | — | — | (163 | ) | —% | N/M | ||||||||||||||
Equity—non-GAAP | $ | 7,982 | $ | 8,037 | $ | 8,125 | (1)% | (1)% | ||||||||||||
Fixed Income— U.S. GAAP2 | $ | 4,928 | $ | 5,117 | $ | 4,758 | (4)% | 8% | ||||||||||||
Impact of DVA1 | — | — | (455 | ) | —% | N/M | ||||||||||||||
Fixedincome—non-GAAP | $ | 4,928 | $ | 5,117 | $ | 4,303 | (4)% | 19% | ||||||||||||
Other—U.S. GAAP | (632 | ) | (853 | ) | (596 | ) | 26% | (43)% | ||||||||||||
Total—U.S. GAAP | $ | 12,278 | $ | 12,301 | $ | 12,450 | — 0⁄0 | (1)% | ||||||||||||
Total—Impact of DVA | — | — | (618 | ) | —% | N/M | ||||||||||||||
Total | $ | 12,278 | $ | 12,301 | $ | 11,832 | — 0⁄0 | 4% |
% Change | ||||||||||||||||||||
$ in millions | 2018 | 2017 | 2016 | 2018 | 2017 | |||||||||||||||
Equity | $ | 8,976 |
| $ | 7,982 |
| $ | 8,037 |
|
| 12% |
|
| (1)% |
| |||||
Fixed income |
| 5,005 |
|
| 4,928 |
|
| 5,117 |
|
| 2% |
|
| (4)% |
| |||||
Other |
| (204 | ) |
| (632 | ) |
| (853 | ) |
| 68% |
|
| 26% |
| |||||
Total | $ | 13,777 |
| $ | 12,278 |
| $ | 12,301 |
|
| 12% |
|
| N/M |
|
Sales and Trading Revenues—Equity and Fixed Income
|
|
2018 | ||||||||||||||||
$ in millions | Trading | Fees1 | Net | Total | ||||||||||||
Financing | $ | 4,841 |
| $ | 394 |
| $ | (661 | ) | $ | 4,574 |
| ||||
Execution services |
| 2,362 |
|
| 2,376 |
|
| (336 | ) |
| 4,402 |
| ||||
Total Equity | $ | 7,203 |
| $ | 2,770 |
| $ | (997 | ) | $ | 8,976 |
| ||||
Total Fixed income | $ | 4,793 |
| $ | 322 |
| $ | (110 | ) | $ | 5,005 |
|
2017 | ||||||||||||||||
$ in millions | Trading | Fees1 | Net Interest2 | Total | ||||||||||||
Financing | $ | 4,140 | $ | 363 | $ | (762 | ) | $ | 3,741 | |||||||
Execution services | 2,294 | 2,191 | (244 | ) | 4,241 | |||||||||||
Total Equity | $ | 6,434 | $ | 2,554 | $ | (1,006 | ) | $ | 7,982 | |||||||
Total Fixed income | $ | 4,453 | $ | 238 | $ | 237 | $ | 4,928 | ||||||||
2016 | ||||||||||||||||
$ in millions | Trading | Fees1 | Net Interest2 | Total | ||||||||||||
Financing | $ | 3,668 | $ | 347 | $ | (283 | ) | $ | 3,732 | |||||||
Execution services | 2,231 | 2,241 | (167 | ) | 4,305 | |||||||||||
Total Equity | $ | 5,899 | $ | 2,588 | $ | (450 | ) | $ | 8,037 | |||||||
Total Fixed income | $ | 4,115 | $ | 162 | $ | 840 | $ | 5,117 |
2015 | 2017 | |||||||||||||||||||||||||||||||
$ in millions | Trading | Fees1 | Net Interest2 | Total | Trading | Fees1 | Net | Total | ||||||||||||||||||||||||
Financing | $ | 3,300 | $ | 322 | $ | 126 | $ | 3,748 | $ | 4,140 |
| $ | 363 |
| $ | (762 | ) | $ | 3,741 |
| ||||||||||||
Execution services | 2,210 | 2,437 | (270 | ) | 4,377 |
| 2,294 |
|
| 2,191 |
|
| (244 | ) |
| 4,241 |
| |||||||||||||||
Impact of DVA3 | 163 | — | — | 163 | ||||||||||||||||||||||||||||
Total Equity | $ | 5,673 | $ | 2,759 | $ | (144 | ) | $ | 8,288 | $ | 6,434 |
| $ | 2,554 |
| $ | (1,006 | ) | $ | 7,982 |
| |||||||||||
Fixed Income | $ | 3,333 | $ | 139 | $ | 831 | $ | 4,303 | ||||||||||||||||||||||||
Impact of DVA3 | 455 | — | — | 455 | ||||||||||||||||||||||||||||
Total Fixed income | $ | 3,788 | $ | 139 | $ | 831 | $ | 4,758 | $ | 4,453 |
| $ | 238 |
| $ | 237 |
| $ | 4,928 |
|
2016 | ||||||||||||||||
$ in millions | Trading | Fees1 | Net | Total | ||||||||||||
Financing | $ | 3,668 |
| $ | 347 |
| $ | (283 | ) | $ | 3,732 |
| ||||
Execution services |
| 2,231 |
|
| 2,241 |
|
| (167 | ) |
| 4,305 |
| ||||
Total Equity | $ | 5,899 |
| $ | 2,588 |
| $ | (450 | ) | $ | 8,037 |
| ||||
Total Fixed income | $ | 4,115 |
| $ | 162 |
| $ | 840 |
| $ | 5,117 |
|
1. | Includes Commissions and fees and Asset management revenues. |
2. |
|
|
As discussed in “Net Revenues by Segment” herein, we manage each of the sales and trading businesses based on its aggregate net revenues, which are comprisedcomposed of the 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 421 to the financial statements.
2018 Compared with 2017
Equity
Equity sales and trading net revenues of $8,976 million in 2018 increased 12% from 2017, reflecting higher results in both our financing and execution services businesses.
Financing increased from 2017, primarily due to higher average client balances and changes in client balance mix, which resulted in increased Trading and Net interest revenues.
December 2018 Form 10-K | 36 |
Management’s Discussion and Analysis |
Execution services increased from 2017, primarily reflecting higher Commissions and fees due to higher client activity in cash equities products. Trading revenues increased due to effective inventory management in derivatives products. Net interest revenues declined due to increased funding costs.
Fixed Income
Fixed income net revenues of $5,005 million in 2018 were 2% higher than in 2017, primarily driven by higher results in commodities products and other, partially offset by lower results in credit products.
Global macro products revenues remained relatively unchanged as revenues from higher client activity in foreign exchange products were offset by unfavorable inventory management results in both rates and foreign exchange products. These results were driven by significant movements in interest rates in the fourth quarter of 2018 with a breakdown of historical correlations, which increased basis risk in the portfolio. Net interest revenues declined due to increased funding costs.
Credit products Trading revenues decreased in both corporate credit and securitized products, driven by significant credit spread widening in the fourth quarter of 2018, partially offset by growth in lending products.
Commodities products and Other Trading revenues increased primarily due to increased Commodities client flow and structured transactions, as well as positive results from a reduction in derivative counterparty credit risk.
Other
Other sales and trading net losses of $204 million in 2018 decreased from 2017, primarily due to improved results from hedge accounting applied to our long-term borrowings, lower net funding costs reflecting changes in the balance sheet and lower losses associated with corporate loan hedging activity, partially offset by a decrease in the fair value of investments to which certain deferred compensation plans are referenced.
2017 Compared with 2016
Equity
Equity sales and trading net revenues of $7,982 million in 2017 decreased 1% from 2016, reflecting lower results in execution services.
Financing revenues remained relatively unchanged from 2016. The results reflected higher client activity in equity swaps reflected in Trading revenues, offset by a decline in Net
Gains (Losses) Due to Changes in Instrument-Specific Credit Risk
$ in millions | Trading Revenues | OCI | ||||||
2018 | ||||||||
Borrowings | $ | (24 | ) | $ | 1,962 | |||
Loans and other debt1 | 165 | — | ||||||
Lending commitments2 | (3 | ) | — | |||||
Other | (32 | ) | 41 | |||||
2017 | ||||||||
Borrowings | $ | (12 | ) | $ | (903 | ) | ||
Loans and other debt1 | 159 | — | ||||||
Lending commitments2 | (2 | ) | — | |||||
Other | — | (7 | ) | |||||
2016 | ||||||||
Borrowings | $ | 31 | $ | (460 | ) | |||
Loans and other debt1 | (71 | ) | — | |||||
Lending commitments2 | 4 | — | ||||||
Other | — | — |
$ in millions | At December 31, 2018 | At December 31, 2017 | ||||||
Cumulativepre-tax DVA gain (loss) recognized in AOCI | $ | 172 | $ | (1,831 | ) |
1. | Loans and other debt instrument-specific credit gains (losses) were determined by excluding thenon-credit components of gains and losses. |
2. | Gains (losses) on lending commitments were generally determined based on the difference between estimated expected client yields and contractual yields at each respectiveperiod-end. |
Excess of Contractual Principal Amount Over Fair Value
The previous tables excludenon-recourse debt from consolidated VIEs, liabilities related to failed sales of financial assets, pledged commodities and other liabilities that have specified assets attributable to them. Fair Value Loans on Nonaccrual Status
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Gains (Losses) from Nonrecurring Fair Value Remeasurements1
|